Accounting

Business is an undertaking whereby one sells goods or services in exchange for money or its
equivalent.

From this definition, one would understand that basically the motive of business is to earn
profit. The profit of the business is the measure of its success in its operations. As profit
increases, the business is able to survive in the industry, as a consequence it could expand its
operations, raise the standards of living of the owner or owners and even the labor force, and it
could contribute to the country's economic state through payment of taxes.

Forms of Business Organization

1. Sole Proprietorship - "sole" means one, hence only one person owns this type of business
organization. The owner controls all the operations and management of the business. All the
profits will go to the owner himself and in the event of losses he will solely suffer. This type of
business is established for simple and small businesses, which need small capital to survive.

Example: Beauty Salon, Dress Shops, and Sari-sari Store

2. Partnership - is the type of business organization whereby a contract or agreement is made

by two or more persons who bind themselves to contribute money, property, or industry
(services) to a common fund, with the intention of dividing the profits among themselves. The
owners are called partners. They contribute capital and divide profits for themselves. There is
no prohibition on the maximum number of partners that may constitute a partnership.
Obviously, this type must be organized by at least two persons.

Example: Consultancy firm, Law firm, Accounting firm, Auditing firm

3. Corporation - is an artificial being (not natural, like human being) created by operation of
law, having the rights of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence. The corporation is a juridical entity, i.e., created
by virtue of law, separate from the owners who are called the stockholders. Hence, it is the
corporation which enters into a contract, sue and being sued, responsible to all its obligations
and earns profits or suffers losses.

Example: San Miguel Corporation, RFM Corporation, and Sara Lee Philippines, Inc. Unilever
Philippines, Inc.

4. Cooperative - is a business organization owned by a group of individuals and is operated for

their mutual benefit. The persons making up the group are called members. It is a legal entity
owned and democratically controlled by its members. Members often have a close association
with the enterprise as producers or consumers of its products or services, or as its employees.
Cooperatives may be incorporated or unincorporated.
Examples: Water and electricity (utility) cooperatives, Cooperative banking, Credit unions, and
Housing cooperatives.

Types of Business Operations

1. Service Business - an undertaking for profit whereby one renders service to a client or
customer for a fee. (Sale of services)

Examples: schools, airlines, parlors, barbershops, repair services, exercise of professions like
accountancy, consultancy, counseling and law.

2. Merchandising/Trading Business - buy goods or commodities and sell them at a profit. (Sale
of goods: Buy - Sell)

Examples: Bookstore, SM Department Stores, Drug Stores

3. Manufacturing Business - raw materials are processed into finished product, then sells the
finished products for a price higher than the cost in order to earn profit. (Sale of goods: Buy -
Produce - Sell)

Examples: shoe factory, Unilever Philippines, Inc., Procter and Gamble Phils., soap factory and
the like.

Definitions of Accounting

- is a service activity. Its function is to provide quantitative information, primarily financial in

nature, about economic entities that is intended to be useful in making economic decisions.
(Financial Reporting Standard Council)

- is the art of recording, classifying, summarizing in a significant manner and in terms of money,
transactions, and events which are in part at least of a financial nature, and interpreting the
result thereof. (American Institute of Certified Public Accountants)
• Accounting is the art of recording, classifying and summarizing in a significant
manner and in terms of money, transactions and events which are, in part at
least, of a financial character, and interpreting the results thereof. 

- is the art of measuring, communicating, and interpreting the financial activity of a business.

From the above definitions of accounting the student must understand that accounting is both
a process and an art. Its ultimate objective is to provide the users of financial information that
may be used in their decision making.

The Role of Accounting in Business

The functions of accounting in business are very important because of the need to make
business decisions. Before the management of a business can arrive at a reasonable and
effective decision, it needs financial information regarding the business operations and its
results for a period of time and its financial position as of a given date. Likewise, other users of
financial information will rely on the financial report in almost all their undertakings concerning
the business. Some of these undertakings are the investments of prospective owners, credit
standing evaluation, registration with government agencies and payment of taxes.

Because of essential role of accounting in measuring the standing of the business whether it is
viable or not, earning or losing, capable of expansion or susceptible to closure and etc.,
accounting is acknowledged as the language of business.

Business Transactions

Business transaction refers to activity or event taking place in business, which is expressed in
terms of money. The business transactions are economic activities that are measured and
finally reported by accountants through financial reports or statements.
• Business transactions are economic activities of a business.

BASIC FINANCIAL STATEMENTS

1. Income Statement / Statement of Comprehensive Income

2. Statement of Changes in Equity
3. Balance Sheet / Statement of Financial Position
4. Statement of Cash Flows
5. Notes to Financial Statements

ELEMENTS OF ACCOUNTING

1. Assets
2. Liabilities
3. Equity
4. Income/Revenue
5. Expenses

THE BASIC ACCOUNTING EQUATION

The basic or the fundamental accounting equation is as follows:

Assets (A) = Liabilities (L) + Owner's Equity (OE)

Characters:
a. Business - ikaw
b. Asset - pag-aari ng business
c. Liability - utang ng business sa iba (ex. bank)
d. Owner’s Equity - utang ng business sa may-ari (owner)

Note: 
Magkaiba/hiwalay ang business at owner. Business, as if an artificial being (our pov) and
owner, human being.

Ex:
Business (ikaw) = buy and sell ng damit. Kung ikaw si business, kailangan mo ng pera pambili
ng damit.
Q: Saan manggagaling ang pera?
A:
- Mangungutang sa iba (ex. bank), P60
- Mangungutang sa may-ari or owner, P40
Ang pera na ngayon ni business ay P100.
Business:
A = P100 (pera/asset)
L = P60 (utang sa bank)
OE = P40 (utang sa owner)

Tinawag po nating utang/obligation ang owners’s equity/capital dahil ang pov natin ay si
business. Na kay business ang mga ininvest/contributions/puhunan ni owner, parang may
utang si business dahil may obligation siyang ibalik ang mga yan sa may-ari/owner.

Note: In form, parang isa lang ang business at owner. Pero in substance, ikaw lang si business
at parang pinautang ka lang ng sarili mo.

Equity/Capital = Investment + Revenue - Expenses - Drawings 

The elements of the accounting equation are discussed as follows:

1. Assets - are resources controlled by the enterprise as a result of past transactions and events
and from which future economic benefits are expected to flow to the enterprise. In simple
terms, these are properties owned by the business.
• Assets — physical things (tangible or intangible) or rights which have
monetary value and are owned by the business entity.

Requirements in recognition/Essential Characteristics of an Asset:

a. It is probable that the future economic benefits will flow to the enterprise.
b. The asset has a cost or value that can be measured reliably.
a. Controlled by the entity- control is the ability to obtain the economic benefits
and to restrict the access of others. 
b. Result of past transactions or events- the event must be past before an
asset can arise. 
c. Provides future economic benefits- evidenced by the prospective receipt of
cash. 
d. The cost of an asset can be measured reliably 

2. LiabilitY - is a present obligation of the enterprise arising from past transactions and events,
the settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits. In simple terms, these are the financial obligations or debts of
the business. It is also described as claim of the creditors on the assets of the enterprise.
 — debts or obligations owed by the business
Requirements in recognition of a Liablility:

a. It is probable that an outflow of resources embodying economic benefits will result from the
settlement of a present obligation.
b. The amount at which the settlement will take place can be measured reliably.
Essential characteristics: 

a. Present obligation 
b. Result of past transactions or events 
c. Requires an outflow of resources embodying economic benefits. 

How may a liability be settled?

- by payment of cash
- by transfer of non-cash asset
- by providing service/s

3. Owner’s Equity - the interest of an owner in an enterprise, which is the excess of an

enterprise's assets over its liabilities. Mathematically, owner's equity can be computed as:
Equity is the residual interest of the entity after deducting all its liabilities. 

 • Owner's Equity or Capital — claim held by the owner against the assets after
the total liabilities are deducted. 

A – L = OE
The owner's equity represents the residual interest of the owner over the enterprise or
business's economic resources after deducting economic obligations. It is the interest of those
who bear the ultimate risks and uncertainties and receive the ultimate benefits of enterprise
operations.

e. Owner’s Equity/Capital - represents the claim of the owner on the assets

of the business. It is the residual interest in the assets of the business after
deducting all its liabilities.

ECONOMIC RESOURCES - ECONOMIC OBLIGATIONS = "RESIDUAL INTEREST"

4. Income/Revenue – is the gross inflow or increases in economic benefits during the

accounting period in the form of inflows or enhancements of assets or decreases of liabilities
that result in increases in equity, other than those relating to contributions from equity
participants. In the service type business operation which is the major concern of this course,
Accounting 1, the revenue recognized is termed as "Service Income". The earnings (revenues)
of a service business is generated upon the rendering of services for a fee. Other service
entities used the general term "Professional Fees" to denote income received from rendering
professional services to a client.
Income

• Revenues are the increases in the owner's equity as a result of the

performance of services or sales by the business. 
REVENUE 
Revenue is the income in the course of the ordinary activities of an enterprise. 
GAINS 
Gains represent other items that may, or may not arise in the course of  the
ordinary activities of an enterprise. 

5. EXPENSES – gross outflow/decreases in economic benefits during the accounting period in

the course of ordinary activities, the form of outflows or depletions of assets or incurrences of
liabilities that result in decreases in equity, other than those relating to distributions to equity
participants. In simple terms, these are costs incurred to produce income/revenue.
• Expenses are the decreases in the owner's equity caused by the revenue
generating activities of the business. 
LOSSES 
Losses represent other items that may, or may not arise In the course of the
ordinary activities of an enterprise.

Components of Financial Statements

1. Income Statement - shows the changes in the financial position of the company. It shows
the results of operation of the business or enterprise for a period of time. It presents the
revenue, expenses, gains, losses, and net income or net loss recognized during the period. It
reflects the profitability of the business.

The Income Statement reflects the elements that are directly related to the performance, these
are the income and expenses.

Net Income (Net Loss) - the excess (deficit) of revenue over expenses for an accounting period.
• Net Income - amount by which total revenues exceeds total expenses. 
•  Net Loss - amount by which total expenses exceeds total revenues. 

REVENUE - EXPENSES = NET INCOME (NET LOSS)

1.) If Revenue > Expenses = Net Income

2.) If Revenue < Expenses = Net loss

2. Statement of Changes in Equity - shows the additional investments made by the owners or
stakeholders, as well as their withdrawals for the period. It complements the balance sheet by
showing the changes in financial position, and the income statement by describing the total
changes in owner's equity during the period.

The Statement of Changes in Equity serves as a proof of the amount of equity appearing in the
Balance Sheet.

3. Balance Sheet - shows the financial position of the company. The financial position of an
enterprise 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. It
presents three (3) major categories:

a) Assets
b) Liabilities, and
c) Owner's Equity.

It presents the financial status of business or enterprise at a particular point in time.

The Balance Sheet reflects the elements that are directly related to financial position, these are
the assets, liabilities and owner’s equity.

4. Statement of Cash Flows - provides information in assessing how well the enterprise is able
to generate cash and cash equivalents and how it uses those cash flows. It analyses changes in
cash and cash equivalents during a period. It has three categories of information: operating,
investing and financing activities.
"Operating activities" are the main revenue-producing activities of the enterprise that are not
investing or financing activities and includes cash received from customers and cash paid to
suppliers and employees.

"Investing activities" are the acquisition and disposal of long-term assets and other investments
that are not considered to be cash equivalents.

"Financing activities" are activities that alter the equity capital and borrowing structure of the
enterprise.

The Statement of Cash Flow serves as a proof of the amount of cash appearing in the Balance
Sheet.

5. Notes to Financial Statement - explains the items in the four financial statements above and
discloses any information that does not qualify for presentation in the balance sheet and
income statement. These may also be in the form of supplementary schedules and other
information that,
(a) explains items in the balance sheet and income statement,
(b) discloses the risks and uncertainties affecting the enterprise, and
(c) explains any resources and obligations not recognized in the balance sheet .

DOUBLE-ENTRY BOOKKEEPING

In accounting each transaction affects at least two items in the financial accounting records.
The double entry system of recording is based on this principle of duality.
DEBITS AND CREDITS 
Double Entry System — means that the dual effect of business transactions
must be recorded. A debit side entry must have a corresponding credit side
entry. Each transaction affects at least 2 accounts. The total debits must
always equal to total credits. 

ILLUSTRATION OF DOUBLE-ENTRY SYSTEM IN CONSONANCE WITH THE BASIC ACCOUNTING

EQUATION

The effects of each accounting transaction in the basic accounting equation may be any of the
following:

ASSETS = LIABILITIES + OWNER'S EQUITY

1. ⬆⬇ = no effect + no effect

2. ⬆ = ⬆ + no effect
3. ⬆ = no effect+ ⬆

4. ⬇ = no effect+ ⬇

5. no effect= ⬆⬇ + no effect

6. no effect = ⬆ + ⬇

7. no effect= ⬇ + ⬆

8. no effect= no effect+ ⬆⬇

Note that each transaction affects at least two items in the equation (all items may be affected)
and the combination varies. These notwithstanding, the equality of the equation must be
maintained always. In accounting, when the "equality" is maintained it is said to be in
"balance".

SUMMARY OF THE EFFECTS OF TRANSACTIONS TO THE ELEMENTS OF THE FINANCIAL

STATEMENTS

INCREASES IN ASSETS ARISE FROM:

1) exchanges in which assets are acquired,

2) investments of assets in the enterprise by owners,

3) nonreciprocal transfers of assets to an enterprise by other than owners,

4) shifts of costs to different asset categories in production, and occasionally,

5) increases in amounts ascribed to produced assets.

- Increases in assets sometimes arise from external events other than transfers.
- In exchanges asset increases may be accompanied by decreases in other assets (e.g., purchase
for cash), increases in liabilities (e.g., purchase on account), or recognition of revenue (e.g., sale
for cash, service for cash)

Increase in Asset
Nagkakaroon ng asset ang business kasi pwedeng:
-nanggaling sa inutang niya (ito ang pautang or investment ng creditors)
-nanggaling sa owner (ito ang initial or additional investment ng owner)
-galing sa serbisyo/benta

DECREASES IN ASSETS ARISE FROM:

1) exchanges in which assets are disposed of,

2) withdrawals of assets from the enterprise,

3) nonreciprocal transfers of assets from the enterprise other than to owners,

4) certain external events other than transfers that reduce the market price or utility of assets,

5) shifts or allocations of costs of different asset categories or to expenses in production, and

6) casualties
- In exchanges, asset decreases may be accompanied by increases in other assets (e.g., a
purchase for cash), decreases in liabilities (e.g., payment of debt), or increases in expenses.
Decrease in Asset
Nawawalan naman ng asset ang business kasi pwedeng:
-nagbayad siya ng utang
-ibinalik na yung capital sa owner (withdrawal by the owner)
-may mga gastusin o expenses

INCREASES IN LIABILITIES ARISE FROM:

1) exchanges in which liabilities are incurred,

2) transfers between an enterprise and its owners,

3) nonreciprocal transfers with other than owners in which liabilities arise.

- In exchanges, liabilities increases may be accompanied by decreases in other liabilities (e.g., a
note given on an account payable), increases in assets (e.g., purchase on account), or an
expense (e.g., officers salaries incurred but unpaid).

DECREASES IN LIABILITIES ARISE FROM:

1) exchanges in which liabilities are reduced,

2) transfers between an enterprise and its owners (e.g., debt converted into capital stock),

3) nonreciprocal transfers with other than owners in which liabilities are reduced (e.g.,
forgiveness of indebtedness)
- In exchanges, liability decreases may be accompanied by increases in other liabilities (e.g., a
note given on an account payable), or revenue (e.g., goods delivered or services rendered to
satisfy a customer prepayment).

INCREASES IN OWNER'S EQUITY ARISE FROM:

1) investments in an enterprise by its owners,

2) the net result of all revenue and expenses recognized during a period (net income)

3) nonreciprocal transfers to an enterprise from other than owners (e.g., gifts and donations),
and

4) external events other than transfers (e.g., revaluation of property, plant and equipment)
Increase in Equity
 - tumataas ang equity pag mas malaki ang kita (revenue) kaysa sa gastos (expenses). Ang
tawag dito ay "net income".
- pwede rin tumaas ang equity pag nadadagdagan ang capital (pera o gamit) ng business.

DECREASES IN OWNER'S EQUITY ARISE FROM:

1) transfers from an enterprise to its owners,

2) net losses for a period.

Decrease in Equity
- bumababa ang equity pag mas malaki ang gastos (expenses) kaysa sa revenue or kita. Ang
tawag dito ay "net loss".
-pwede rin bumaba ang equity pag ibinalik na ang capital (pera o gamit) sa may-ari.
(withdrawal by the owner)

REVENUE ARISES FROM:

1) exchanges accompanied by increases in assets

2) exchanges accompanied by decreases in liabilities (e.g., unearned revenue)

EXPENSES ARISE FROM:

1) exchanges

2) nonreciprocal transfers with other than owners,

3) external events other than transfers,

4) production

5) casualties
ASSETS

The current assets are presented in the order of "liquidity". Liquidity means the characteristic
of an asset to be easily converted into cash.

2 Classification of Assets: 

• Current Assets - short-term. Generally, 1 year or less.

Note: pag sinabing "general", may exception. Ibig sabihin, pwedeng hindi masunod yung guide
na 1 year dahil may tinatawag tayong "normal operating cycle".

• It expects to realize the asset, or intends to sell or consume it, in its normal
operating cycle.
• It holds the asset primarily for the purpose of trading.
• It expects to realize the asset within twelve months after reporting period.
• The asset is cash or a cash equivalent unless the asset is restricted from
being exchanged or used to settle a liability for at least twelve months after the
reporting period.
b. Non—current assets— residual definition

1. Cash on Hand - is any medium of exchange that a bank will accept at face value. Such as
coins, currencies, money orders, bank drafts/deposits, and customer's checks awaiting
deposits that are kept in a safe deposit box or in a cash box within the enterprise. These cash
items must be available for use in the current operations. Current asset siya kasi pwede mo
gastusin anytime, 1 year or less.

Si business (ikaw) ay may perang P100 ngayon. P60, utang sa bank and P40, utang sa owner. 
Q: Ano ang tawag sa P100?
A: Yan po ay cash. 
Current asset siya kasi pwede mo gastusin anytime, 1 year or less.

2. Cash in Bank - money deposited in a bank which may be a savings or demand deposits.

3. Accounts Receivable - consist of open accounts with customers for uncollected revenues,
unbilled services already rendered or accrued as long as the revenue has been earned.
- are claims against debtors/customers arising from services rendered on account and sale of
merchandise on account.
b. Accounts Receivable- claims against customers arising from sale of
services or goods. 
• Accounts Receivable — a promise to pay by customers 

Assume na ang line of busines mo ay pagpapautang. Ngayon, si business ay nilapitan ng isang

kaibigan. Ang sabi niya sayo ay, “business, pwedeng "pautang?”.

Dahil may P100 cash ka, ang sabi mo ay, “sige, pauutangin kita.” At yun ang nangyari. Inabot mo
ang P100 sa kanya at walang natira sa iyo.

Q: Magkano na ang asset mo? 0 or P100 pa rin?

A: P100 pa rin. Nawala yung P100 kaya parang walang asset. Pero nagkaroon ka naman ng
pautang. Ang pautang ay hindi nahahawakan pero asset mo pa rin siya.

Note: Ang accounts receivable ay pwede ring manggaling sa services rendered na hindi mo pa
nakokolekta yung bayad ng client/customer mo.

4. Allowance for Bad debts - also termed as "Allowance for Doubtful Accounts". This is a
contra-asset account that is deducted from a principal asset account which is accounts
receivable. All the outstanding accounts from the customers are not certain to be collected
fully, hence the business usually provide for uncollectible portion of the accounts receivable as
bad debts or doubtful accounts. In simple terms, it relates to the company's receivables which
might not be collected.

c. Allowance for doubtful accounts (ADA) (allowance for bad debts) -

relates to the company's receivables which might not be collected. (Contra-
Asset)

Note: Contra Asset account is the opposite of adjunct account. In layman's term, contra means
deducted and adjunct means added. (Ex: Freight In)

May experience ka dati na laging kalahati lang kung magbayad itong kaibigan mo. Take note,
hindi pa siya nagbabayad sa inutang niyang P100. Pero iaanticipate mo na yung hindi niya
mababayaran. Ang tawag dito ay "allowance for doubtful accounts". Iaanticipate/ire-record mo
nang "allowance for doubtful accounts" yung kalahati na P50 (P100/2 = P50).

Summary:
Pautang (AR), P100
Anticipated na di babayaran (ADA), P50
P100 (AR) - P50 (ADA) 
= P50 (ito na lang ang sa tingin mong makokolekta mo sa future). In Accounting, Net Realizable
Value (NRV) ang tawag dito.
Accounts Receivable P xxx
Less: Allowance for Bad Debts (xxx)
Net Realizable Value P xxx

5. Notes Receivables - are collectible amounts from the customer that are supported by written
formal promises to pay a certain amount on demand or at a certain future time.
c. Notes Receivable- written pledge that the customer will pay the business a
fixed amount of money on a certain date. 

P100, pinautang pero may kasulatan (promissory note) at kumikita ng interest.

f. Prepaid Expense -  are expenses paid in advance by the business (paid but not yet incurred).

a. Supplies/Office Supplies/Store Supplies - are being used by the business like papers,
pens, pencils, folders, staplers, etc

6. Office Supplies Unused - refers to the portion of office supplies purchased that are still
capable of utilization by the enterprise in the immediately succeeding accounting period. This
is classified as "prepayments" or "prepaid expense" because the cost has already been paid and
has future benefits.

b. Prepaid Rent, Prepaid Salaries, etc. - ang keyword ay "prepaid".

Si business (ikaw), ay may P100. Pumunta ka sa 7eleven at pinambili mo ng load. Nung mga oras
na inabot mo yung bayad sa cashier, nawalan ka ng P100 cash. Pero nagkaroon naman ng P100
load ang cellphone mo.

Q: Ano yung tawag sa P100 load?

A: Prepaid Expense (bayad na pero "di pa nagagamit")
Q: Paano kung nagtext ako at nabawasan ng Piso?
A: Ang prepaid expense mo ay P99 na lang. In short, ang prepaid expense ang yung amount ng
load na "hindi mo pa nagamit".

Ganun din pag bumili ka ng ballpen, pencil, or yung mga nabibiling supplies sa National
Bookstore, prepaid expense din ang tawag dun.

7. Prepaid Rent - refers to advance rental payment/s that will benefit the business.
d. Trading Securities (Marketable Securities) (Fair value through Profit or Loss) (Short-term
Investment) - are debt and equity securities that are purchased with the intent of selling them
in the near term or very soon.

Si business (ikaw) ay may P100 ngayon. Ang P100 ay ininvest. Pag sinabing ininvest, parang
pautang din yan. Ipapahawak mo muna sa iba yung pera mo para kumita or madagdagan
(pwede rin na mabawasan). Pwede ka mag-invest/magpautang sa dalawang ito.

a. Debt Securities (dito, pwede madagdagan ang pera mo ng tinatawag na "interest").

b. Equity Securities (dito, pwede madagdagan ang pera mo ng tinatawag na "dividend" and
“price appreciation”)

Ex:
Nag-invest ka ng P100. So nawalan ka ng P100. After ng ilang buwan, binawi mo na yung pera at
naging P120. Magkano po ang sobra?

P120 - P100 = P20

Ang tawag po sa sobrang P20 ay interest (pag debt security), or dividend/price appreciation
(pag equity security).

Q: Kailan siya naging trading securities? 

A: Yun ay nung time na nag-invest ka.

Nag-invest ka at nawalan ka ng pera. Pero nagkaroon ka naman ng "short-term investment"

(parang pautang din).

e. Merchandise Inventory - are goods on hand and are available for sale.

Si business (ikaw), ay may P100. Pinambili mo ng damit (assuming ang business mo ay "buy and
sell" or "merchandising") para ibenta sa mas mahal na halaga.

Buy: Damit P100

Sell: P120
P120 - P100 = P20
Kumita ka ng P20.
Q: Ano ang tawag dun sa damit na binibenta mo?
A: Merchandise Inventory

g. Advances to Employees (advances to suppliers)- cash received by employees to be deducted

from their salaries in the future.

P100, pinautang sa empleyado. Ang pambayad ay ibabawas na lamang sa kanyang sweldo.

i. Accrued income - earned but not yet received/collected.

Nagpapaupa ka (ikaw ang may-ari) ng isang room for rent. Ang paupa mo ay P100 per month.
Walang ka pang natatanggap na pera kahit magkano (advance man or deposit).

Lumipas ang isang buwan. May kinita ka nang P100 para sa isang buwang upa. 

Pero hindi mo pa natatanggap yung pera.

Kumita ka na, Pero hindi pa natatanggap yung pera.

Ito ay isang uri din ng receivable (parang accounts receivable) dahil may mare-receive kang
pera.

• Cash equivalents — short term investments ( 3 months or less) 

• Inventory — a.) Held for sale b.) In the process of production for such sale c.)
To be consumed in the production of goods and services to be available for
sale. 

• Non-current Assets - long term. Generally, more than 1 year. Kaya siya "long-term" kasi
matagal ang buhay niya and/or matagal mo siya pwedeng magamit or mapakinabangan.

Note: Appreciate means increase in value. While Depreciate means lumiliit ang value habang
tumatagal.

PROPERTY, PLANT AND EQUIPMENT- include all tangible assets with an estimated useful life
beyond one year, are used in the conduct of the business, and are not intended for sale in the
ordinary course of business. Property, plant and equipment are generally carried at cost less
allowance for depreciation.

a. Property, plant and equipment- Land, Building, Machinery and Equipment,

Furniture and Fixtures, Motor vehicles. 

1. LAND - is an asset that is not subject to depreciation. It appreciates (value increases) as

time goes by.

Bumili ka ng land sa probinsya niyo for P100. After 10 years, ang value ay naging P500. Tumaas
yung value. From P100, naging P500. Tumaas, nag-appreciate. Kaya ang land ay isang klase ng
ppe nag-aappreciate.
 2. Office Equipment - refers to tangible assets that are to be used by the business in the
office like computers, typewriters, facsimile, and the like. These assets must be for use
by the business for a period of time beyond one year.

c. Machinery and Equipment - includes computers, air-conditioning units, electric fans, freezers,
refrigerators, truck, etc.

3. Accumulated Depreciation - Office Equipment - refers to the accumulated portion of the cost
of the equipment that has already of service to the company. All property, plant and
equipment accounts except land are subject to depreciation.

Depreciation is the systematic allocation of the cost of the depreciable asset over its useful life.
Accumulated depreciation account is a contra-asset account because it is deducted from the
cost of Depreciable asset in order to get the Net Book Value.

Office Equipment P xxx

Less: Acc. Depreciation - Office Equipment ( xxx)
NET BOOK VALUE P xxx

4. Office Furniture/Furniture and Fixtures - refers to tangible assets that are necessary
furnishings of an office such as office tables, chairs, counters, and cabinets.

d. Furniture & Fixtures - includes tables, chairs, filing cabinets, wall decorations, etc.

5. Accumulated Depreciation - Office Furniture - is a contra - asset account that is deducted

from the cost of Office Furniture. It represents the expired allocated cost that already served
the enterprise.

6. Building - can be acquired by PURCHASE or by means of CONSTRUCTION. Construction costs

may include materials, labor, overhead, permit or license, Architect fee, Excavation cost, etc.

7. Accumulated Depreciation - Building - refers to the accumulated portion of the cost of the
building that has already of service to the company.

*e. Accumulated Depreciation - total depreciated cost of a depreciable asset. (Contra-asset)

Building
Cost: P100
Life: 10 years
P100 / 10 years = P10 (Depreciation or pagliit ng value)
End of:
Year 1 100-10 = 90 (remaining value)
Year 2 90-10 = 80
Year 3 80-10 = 70
Year 4 70-10 = 60
Year 5 60-10 = 50
Year 6 50-10 = 40
Year 7 40-10 = 30
Year 8 30-10 = 20
Year 9 20-10 = 10
Year 10 10-10 = 0 (remaining value)

Kung napansin mo, naubos or naging zero ang value sa Year 10. Kaya ang tawag na sa building
ay "fully depreciated" or simply, wala nang value.

Q: Nasaan yung Accumulated Depreciation?

A: Ito yung naipon or na-aacumulate na pagbaba ng value.

End of

Year 1 Accumulated Depreciation = 10

(P100-90)
Year 2 Accumulated Depreciation = 20
(100-80) or (10+10)
Year 3 Accumulated Depreciation = 30
(100-70) or (10+10+10)
Year 4 Accumulated Depreciation = 40
(100-60) or (10+10+10+10)
Year 5 Accumulated Depreciation = 50
Year 6 Accumulated Depreciation = 60
Year 7 Accumulated Depreciation = 70
Year 8 Accumulated Depreciation = 80
Year 9 Accumulated Depreciation = 90
Year 10 Accumulated Depreciation = 100

Intangible Asset - is an identifiable non-monetary asset "without physical substance" or have no

physical appearance but are expected to provide future economic benefits to the company.
B. Intangible assets- assets without physical substance. These include
patents, copyrights, and brand names. 
• Inthngibles— patents, copyrights, licenses, franchises, trademarks and non-
competition agreements 

Ex:
1. Patent (inventions)
2.Copyright (Books, musical composition)
3.Trademark(Logo, Brand name)
4. Franchise (Jollibee, Mcdo, Starbucks, 7eleven, etc)
5. Others

LIABILITIES

2 Classification of Liabilities 

CURRENT LIABILITIES are those to be settled within the enterprise's normal operating cycle or
due within 12 months, or those held for trading, or those for which the entity does not have an
unconditional right to defer payment beyond 12 months. Other liabilities are NONCURRENT
LIABILITIES.

• Current Liabilities - babayaran within 1 year o less.

• It expects to settle the liability in its normal operating cycle. 
• It holds the liability primarily for the purpose of trading. 
• The liability is due to be settled within twelve months after the end of reporting
period. 
• The entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after reporting period. 
b. Non-current liabilities- residual definition 

1. Accounts Payable - liability representing the amount owed to a creditor usually arising from
the purchase of goods, materials or supplies.
-  are amounts due to creditors for assets acquired on account.
 a. Accounts Payable- represents reverse relationship of accounts receivable. 

Accounts- utang
Payable - babayaran pa (hindi pa bayad)
Accounts Payable - utang na hindi pa bayad

Utang ng business sa mga tinatawag na “trade creditors”.

B. Notes Payable (short-term) - are amounts due to creditors within one year, evidenced by
written promise to pay.

b. Notes Payable - represents reverse relationship of notes receivable. 

Notes- utang na may kasulatan (promissory note)

Payable- babayaran pa (hindi pa bayad)
Note: In paying notes payable, may dagdag-bayad na interest (Interest Expense).

3. Unearned Service Fees - payments for services that are received in advance from the client's
but the enterprise or business has not yet rendered the services.
D. Unearned "_____" Income (Advances from Customers) - is revenue collected by the business
in advance. Received/ collected in advance, but not yet earned.

d. Unearned Revenues- when the business entity receives payment before

providing its customers goods or services, the amounts received are recorded
in the unearned revenue account. 
• Unearned Revenues — payments received before providing customers with
goods or services.

Story (new)

Pumasok si customer sa salon mo para magbayad ng P100. Pero bukas pa siya magpapagupit.

Business (Ikaw):
Nakatanggap ng cash pero hind pa income kasi bukas pa magpapagupit.

Note: May pagkakaiba ang unearned income (general term) at advances from customers
(specific for customers)

4. Salaries Payable - obligation of the enterprise to pay its employees for their services already
rendered to the business.

5. SSS, PHILHEALTH, Withholding taxes Payable - these are obligations due to different agencies
or institutions of the government such as the Social Security System and Bureau of Internal
Revenue.

6. Rent Payable - obligation of the enterprise as the lessee of the premises to pay the lessor, the
owner of the place being rented.
C. Accrued "_______" Expense/liability - are amounts owed to others for unpaid expenses.
c. Accrued Liabilities- unpaid expenses
salaries payable, utilities payal interest payable, and taxes payable. 

Accrued- hindi pa bayad

Expense- gastusin
Accrued Expense - hindi pa bayad na gastusin
Ex:
Meralco Bill. Hindi ka pa bayad sa gastusin (electricity) na nagamit or na-consume ng business
mo

Current Portion of long-term debt are portions of mortgage, notes, bonds and other long-term
indebtedness which are to be paid "within one year" from the Balance Sheet date (or end of
Reporting Period).

7. Other Payables - other obligations of the business that must be settled within one year.

NONCURRENT LIABILITIES – are liabilities which do not qualify as current ones, or those debts
and obligations that are due to be settled beyond one year and/or to be settled by payment of
non-current assets.

• Non-current Liabilities - babayaran more than 1 year

1. Long-term Notes Payable - notes payable that are due after one year.

E. Notes Payable (long-term)- are amounts due to creditors beyond 1 year, evidenced by
written promise to pay.

F. Bonds Payable (long-term)- is a liability owed by a company to obtain substantial sums of

money from lenders to finance the acquisition of equipment and other needed assets.

Pangmatagalang kontrata ng pagkakautang. Mga 5-10 years bago bayaran.

 • Bonds Payable— bond is a contract between the issuer and the lender
specifying the terms of repayments and interest to be charged. 

2. Mortgage Payable - obligations which are secured by a mortgage of a real estate (land and/or
building).
G. Mortgage Payable long-term debt of the business for which the business entity has pledged
certain assets as security to the creditor. In the event that the debt payments are not made, the
creditor can foreclose or cause the mortgaged asset to be sold to enable the entity to settle the
claim.

Mortgage- utang na may sanla

Payable: babayaran pa (hindi pa bayad)
Story:
Bumili ka ng land pero di pa bayad (utang-Mortgage Payable). Pero yung land ay nakasanla
(Collateral)

Anong meaning ng nakasanla (Collateral)?

A: Pag hindi nakabayad sa utang na Mortgage Payable, yung land (Collateral) ay ibebenta. Yung
pera galing sa benta ay gagamitin para mabayaran na yung Utang na Mortgage Payable.

*Kung halimbawang nag-loan naman sa bangko, pwede ring gawing Collateral ang other real
properties ng business.

OWNER'S EQUITY

1. Owner's Equity - is the account used to reflect the equity of the proprietor in the
business. It refers to the owner's investment in the enterprise.

2. Owner's Drawings - this account is used to refer to withdrawals by the proprietor of some
earnings of the business for personal use.

3. Income and Expense Summary - is a temporary account used to summarize the effects of
revenues/income and expenses to the equity accounts of the proprietor.

Capital - this account is used to record the "original and additional investments" of the owner of
the business entity. It is increased by the amount of profit earned during the year or is
decreased by a loss.

Note: This account is also used to record the permanent withdrawal of the owner.

(Permanent withdrawal means withdrawal of invested capital)

Drawings/Temporary Withdrawals. Charged to this account are cash or other assets withdrawn
by the owner from the business for personal use (represented by the owner's share in profit).

Income Summary. It is a temporary account used at the end of the accounting period to close
income and expenses. This account shows the profit or loss for the period before closing to the
capital account.

Basic Accounting Equation 

Assets = Liabilities + Owner's Equity
P100 = P60 + P40

Ibahin natin ang equation

Assets (A) - Liabilities (L) = Owner's Equity (OE)
P100 - P60 = P40

Ang ibig sabihin nito ay:

Sa assets na P100, priority na mabayaran muna ang liabilities sa creditors na P60. Kaya ang
matitira na lang para sa owner ay P40.

Kung hahatiin or ibi-break down natin yung natira sa owner na P40, ito po ay ang mga
sumusunod (1 to 5):

(but this time, let us change our pov, isipin mo naman ngayon na ikaw ang owner. Gagawin lang
natin 'to para mas madali mong maunawaan)

Kung ikaw si owner, tanungin mo lang ang sarili mo, “Kung ihihinto ko na ang business ko, ano
kaya ang mababawi ko galing sa business ko?”

1. Initial Investment by the owner.

Nang magtayo ka ng negosyo, yan ang kauna-unahang binigay mong puhunan. Pwedeng pera,
pwedeng gamit, etc. Investments or contributions mo ito "before operations".

2. Additional Investment by the owner.

Dagdag-puhunan. Binigay mo ito "during operations".

Maaaring sa unang taon ay sobrang dami agad ng customers mo kaya naman nagdagdag ka ng
puhunan. Yung dagdag-puhunan na yan ay ginawa mo "during operations" ng business mo.

3. Revenue/Income - kita ng business mo

4. Expenses- gastusin ng business mo.
Sa 3 & 4, ang dapat na goal ay mas malaking revenue kaysa expense.

Ex:
a) Revenue - Expense = Net Income
20 - 15 = 5
b) Revenue - Expense = Net Loss
15 - 20 = -(5)

5. Drawings/Withdrawal of the owner

Parang sa ATM card. Pag nagwithdraw ka, may kinuha ka.

Drawings or Temporary withdrawal - ito ang tawag pag ang kinuha mo ay yung kita ng business
mo (Net Income)

Permanent Withdrawal - ito ang tawag pag ang kinuha mo ay ang investment mo (yung 1 & 2)
Ex:
Initial investment P50
Additional investment P30
Revenue 20
Expenses 15
Drawings 45

Q: How much ang Net Income?

A: Revenue - Expenses = Net Income
20 - 15 = 5

Q: How much ang Owner’s Equity?

A: Beginning Capital (Initial investment) + Additional investment + Net income - Drawings =
Ending Capital (Owner's equity)

50 + 30 + 5 - 45 = P40

Yung P40, yan na lang ang portion ng asset na pwedeng mabawi ng owner.

Supposedly, ang "mababawi" niya dapat ay yung initial and additional investment niya (50+30)
at yung net income ng business (5).
50 + 30 + 5 = 85
Kaya lang, may "actual" drawings siyang P45. Kaya ang natira na lang is P40 (85-45).

If ever mag-decide ang owner na ihinto na ang business ngayon, P40 na lang ang mababawi
niya. Pero pwede pang mabago ang amount na yan pag, "na-convert into cash" ang mga assets
bago ibalik sa owner. Yan ay dahil sa tinatawag na fair value and net realizable ng assets (in
simple words, "today’s value").

Ex:
Let's go back to the pov of the business.
A = L + OE
Panindang damit = Liabilities + Owner's equity

100 = 60 + 40.

Yung halaga ng panindang damit ay P100.

Q: Pwede bang ipambayad yung damit (P100) sa liabilities (P60) at sa owner (P40)?

A: Pwede. Ang gagawin mo ay ibebenta yung damit para maging pera or cash at yung cash na
yun ang ibabayad sa liabilities at sa owner.

Cost ng Damit: P100

A. Nabenta for P100 cash.
Ibabayad sa liabilities = P60
Ibabayad sa owner: P40
B. Nabenta for P110 cash
Ibabayad sa liabilities = 60
Ibabayad sa owner = 50
C. Nabenta for P80 cash
Ibabayad sa liabilities = 60
Ibabayad sa owner = 20

Priority munang mabayaran ang liabilities, bago ang owner.

Note these Formulas:

1. Revenue and Income - Expenses = Net Income or (Net Loss)

2. Beginning Capital + Additional Investment - Permanent Withdrawal + Net Income - Drawings
= Ending Capital
3. Beginning Capital + Additional Investment - Permanent Withdrawal - Net Loss - Drawings =
Ending Capital
4. Beginning Capital + Additional Investment - Permanent Withdrawal + Revenue and Income -
Expenses - Drawings = Ending Capital

*Capital = Owner's Equity

Revenue/Income vs Expense

A. Income - earnings or kita

Story 1:
Ang business ay "salon". May isa kang empleyado, si "Alma". Nang mag-open ang salon mo,
may pumasok na isang customer at nagpa-haircut. Nang matapos ay nakakolekta ang
"business" ng P100 dahil sa haircut.
Q: Ano ang tawag sa P100?
A: Income

B. Expense - cost or gastos 

Story 2:
Dahil nagtatrabaho si "Alma" sa business mo, kailangan siyang swelduhan. Ang "binayad" kay
Alma ay P70.

Q: Ano ang tawag sa P70?

A: Expense 
Summary:
Income: P100
Expense: P70
Net Income: P30

REVENUES

1. Service Income - refers to revenue account in a service-type business organization. It reflects

the gross earnings of the enterprise before all expenses of operations are deducted.

1. Other Income - other income earned by the business which is not directly related with
its main operations such as interest income, rental income, and commission income.

II.

The Revenue Accounts

Revenue represents the earnings of the business from sales of goods or service rendered.
Revenue accounts have normal credit balance.

Common revenue accounts:

a. Sales – an account used to summarize sale of goods of a trade or merchandising business.

This includes cash sales and sales on account.

b. Service Income – the earning derived from service rendered by a servicing business to its
customers. This includes cash and on account service.

c. Professional Fees – the earning derived from services rendered by a professional or

professional servicing firm which could be in cash or in collectibles to its clients.

d. Interest Income – the earning representing the time value of money derived from promissory
notes received by the business, whether in cash or collectibles in the future.

e. Rent Income – the income earned from allowing others to use property or facility of the
business.

f. Gain on Sales of other Assets – the income derived from the sales of assets used in the
business operation. There is a gain on sale if the proceeds exceed the book value or cost of
disposed asset. Examples are gain on equipment, gain on sale investments, gain on sale of land,
etc.
g. Others

EXPENSES

The caption "Operating Expenses" is often used. The operating expenses for service-type
business operations include all costs of services that are used or consumed in the operations of
the business.

1. Salaries Expense - refers to the cost of service rendered by the employees of the business. It
may include the cost of living allowances, 13th month pay, and other employee fringe benefits.

2. Rent Expense - refers to the cost of renting office space used by the business in its
operations.

3. Supplies Expense - refers to the cost of office stationery, coupon bond, envelopes, ball pens
and other office supplies that are already used by the business.

4. Utilities Expense - refers to the cost of light and water and telephone services consumed in
the business operations.
 • Telecommunication, Electricity, Fuel and Water Expenses

5. Taxes and Licenses - refers to payments that are required by the Bureau of Internal Revenue
and the local Municipality or City where the business is located. Payments to different
government instrumentality as regards the proper registration of the business are also included
in this account.

6. Transportation Expenses - refers to cost incurred by officers and employees for

transportation in line with the operations, e.g., meeting with the clients.

7. Representation and Entertainment - costs incurred in accommodating the customers or

clients. Also included are the costs when officers or employees represent the business in official
transactions.

8. Depreciation Expense - refers to the portion of the cost of depreciable property that is
charged against current operations.

9. Doubtful Accounts Expense - refers to the amount of account receivables that is estimated to
be uncollectible and is charged against current year's operations.

10. Insurance Expense - refers to the premium chargeable to current year's operation on fire
insurance coverage, motor vehicles insurance coverage and other insurance plans.
11. SSS, PHILHEALTH, EC Expenses - refers to the contribution of the enterprise as the employer
of the employees in the Social Security System, PHILHEALTH and Employees Compensation.

12. Miscellaneous Expenses - refers to other costs in relation to the conduct of the business
operations that are normally incurred but each of the amounts is not significant enough to be
given accounting recognition individually. These amounts are grouped together and are called
"miscellaneous expenses".

• Interest Expense — expenses related to the use of borrowed funds

The Expenses Account

Expenses are cost incurred in conducting the business activities. Expense accounts have normal
DEBIT balances. 

Common expense accounts:

a. Cost of Sales – the value of merchandise sold

- Cost OF goods sold

b. Supplies Expense – the amount of supplies consumed or used by the business during the
period. Examples: used in papers, inks, ballpoint pens, etc.

c. Salaries and Wages Expenses – the amount paid to service rendered by the employees in the
operation of the business.

d. Insurance Expense – the amount of insurance policy incurred during the current period.
Examples: premiums on building insurance, life insurance, plant insurance, etc. 

d. Taxes and Licenses Expenses – the cost of local as well as national taxes that are incurred and
required to be paid in connection with the conduct of the business.

Example: Cost to acquire mayor’s permit, registration cost of the building, percentage tax on
sales, etc.

e. Others

"Estimated Expense"

f. Doubtful Account Expenses – the estimated amount of losses the uncollectible accounts
arising from credit sales of the current period. This is also called the debt expense or
uncollectible account expense.
 • Uncollectible Accounts Expense — amount of receivables estimated to be
doubtful of collection. 

g. Depreciation Expense – represents the current periodic cost for using depreciable plant
assets. In accordance with the systemic cost of depreciable asset should be allocated as
expense over its useful life.
• Depreciation Expense— portion of the cost of tangible asset allocated as
expense

h. Others

CLASSIFICATION OF ACCOUNTS

Definitions, Classifications and Examples of Accounts

I. Real accounts (or Permanent accounts)

-Assets
-Liabilities and
-Owner’s Equity/Capital
Real accounts are reported in the Statement of Financial Position(or "balance sheet"). They are
not "closed" at the end of accounting period.

-Nominal accounts (or temporary accounts)

-Income/revenues
-Expenses and
-Owner’s Drawing
Nominal Accounts are those that comprise the elements of the Statement of Financial
Performance (or income statement) – the revenue and expenses accounts.

These accounts are called temporary because they are "closed", or put into zero balance, at the
end of the accounting period.

Note: Owner’s drawing is not an income statement account, but must also be closed, or put
into zero balance, at the end of the accounting period.

A. According to Financial Statement Presentation

1. REAL ACCOUNTS
(Balance Sheet accounts)

a. Assets
b. Liabilities
c. Capital
2. NOMINAL ACCOUNTS
(Income Statement accounts)

a. Revenues/income
b. Expenses

(Drawing account)
a. Owner's drawing

B. Whether Principal or Auxiliary

1. PRINCIPAL ACCOUNTS - accounts that can stand alone.

e.g., cash, accounts receivable, service income, sales

2. AUXILIARY ACCOUNTS - accounts that are aids or subsidiary to the main or principal
accounts.

a. Adjunct account - added to the principal account.

Ex. Freight in

b. Contra account - deducted from the principal account.

Ex. Allowance for doubtful accounts, accumulated depreciation

C. Whether Permanent or Temporary

1. PERMANENT - accounts that are not closed at the end of the accounting period

2. TEMPORARY - accounts that are closed at the end of the accounting period.

SUMMARY OF THE RULES OF DEBIT AND CREDIT

A summary of the rules of debit and credit follows:

Rule 1: A debit entry increases an asset.

Rule 2: A credit entry decreases an asset.
Rule 3: A credit entry increases a liability.
Rule 4: A debit entry decreases a liability.
Rule 5: A credit entry increases owner's equity.
Rule 6: A debit entry decreases owner's equity.

The terms debit and credit are not synonymous with increase or decrease. They simply refer to
the position that the entries take in an account, which is either the left side or the right side.
BUSINESS PAPERS

The bases of recording transactions in books of accounts are documents called business papers.
Some common business papers are the official receipts, invoices, cash vouchers, checks,
statements of accounts, and promissory notes.

1.) OFFICIAL RECEIPTS - An official receipt is a document which gives evidence to a transaction
involving a receipt of cash. The document gives information on the amount of cash received,
the person from cash was received, the date of receipt and the reason for such receipt.

2.) INVOICE - An invoice is a document which gives evidence to a transaction involving the
rendering of sales or services giving information as to the name and address of the customer or
client, the date the sales or services were made, the terms of sales or service, the amount and
other particulars about such sales or services. An invoice is called a sales invoice from the point
of view of the seller and a purchase invoice from the point of view of the buyer.

3.) CASH VOUCHER - A cash voucher is a document which gives evidence to a transaction
involving payment of cash. This document gives information as to the name and address of the
payee, the date of payment, the amount paid, and an explanation for such payment.

4.) CHECK - A check is prepared whenever payment is to be made from cash in bank.

5.) STATEMENT OF ACCOUNT - A statement of account is a bill presented by a creditor

requesting payment for sales or services.

6.) PROMISSORY NOTE - A promissory note is a written promise made by a maker (debtor)
promising to pay the payee (creditor) a certain sum in money at a fixed or determinable future
time.

Accounting Cycle

The accounting cycle refers to a series of sequential steps or procedures performed to

accomplish the accounting process. It is referred to as a "cycle" because this is repeated each
accounting period.

The accounting period may be any of the following:

1. Calendar-period - the accounting period starts on January 1 and ends December 31 of the
same year.

2. Fiscal year - the accounting period starts at any date except the first calendar date and end
one year thereafter.

THE DIFFERENT STEPS IN THE ACCOUNTING CYCLE ARE:

1. IDENTIFICATION OF THE MEASURABLE ACCOUNTING EVENTS OR TRANSACTIONS. This is the
first and foremost step in the accounting cycle which consists the gathering of financial
information through business papers or documents and measuring the recordable amounts
thereof.

2. JOURNALIZING. This is the process of recording transactions in a book of original entry called
the journal.

3. POSTING TO THE LEDGER. This is the process of transferring the accounts from the journal to
a book of final entry called the ledger.

4. PREPARING A TRIAL BALANCE. This is the process of taking account balances from the ledger
and preparing a list of the debit and credit balances of all accounts. The purpose of preparing a
trial balance is simply to check the arithmetic accuracy of the accounts in the ledger.

5. PREPARATION OF THE WORKSHEET AND ADJUSTMENTS. A worksheet is prepared in order to

facilitate the preparation of the financial statements, i.e., the Balance Sheet, Income Statement
and Statement of Changes in Capital and other Financial Report.

6. PREPARING THE FINANCIAL STATEMENTS. From the data recorded, classified, and
summarized in the above steps, the financial reports are prepared to include a balance sheet,
an income statement, and a statement of changes in financial position.

7. JOURNALIZATION AND POSTINGS OF ADJUSTING JOURNAL ENTRIES. This involves a review of

all ledger accounts and the recording of journal entries and postings of adjustments in order to
bring all accounts to correct balances.

8. CLOSING THE BOOKS. This the process of bringing all income and expense accounts to a zero
balance at the end of the year by transferring their balances to summary account called the
income and expense summary.

9. PREPARING A POST-CLOSING TRIAL BALANCE. This is a trial balance prepared after the
income and expense accounts have been closed. Therefore, the post- closing trial balance is a
listing only of the balances of assets, liabilities, and capital accounts.

10. REVERSING ENTRIES. This is the process of reversing certain adjusting entries made so that
accounting methods used in the previous years will be maintained in the next year. These
reversing entries are recorded at the beginning of the next accounting period and are optional.

IDENTIFYING TRANSACTIONS TO BE RECORDED

From the source documents identify the transactions that call for an accounting treated, that is,
needed to be recorded in the business books. Evaluate if the transaction affects the assets,
liabilities, capital, revenue or expenses accounts of the enterprise. Take note that we follow the
double entry system of accounting; hence at least two accounts are affected by each recordable
transaction.

JOURNALIZING

The first step in the bookkeeping process is journalization. Bookkeeping refers to the
systematic recording of transactions in the books of the enterprise.

JOURNALIZING is the process of recording transactions and events in a chronological order in

the book of original entry called the journal.

A general journal is a two-column journal with the following columnar headings: date,
particular, F, debit and credit. These columnar headings are used to provide the following
information about the transaction:

1. Date - This refers to the date when the transaction occurred.

2. Particulars - This refers to the names or titles of accounts where changes have been caused
by the transaction. A brief explanation of the event is also recorded.

3. P/R (Posting reference) or F - F which stands for 'folio' and is used as a reference guide to
indicate the ledger account to which an entry has been posted.

4. Debit - This is a money column used to record the debit amount of the entry.

5. Credit - This is also a money column used to record the credit amount of the entry.

GUIDELINES ON JOURNALIZING:

The following guidelines will be useful in recording transactions in a two-column general

journal.

1. A complete journal entry includes the following data: the date, debit and credit accounts,
debit and credit amounts, and a brief explanation of the transaction. When an entry has two or
more debits or credits, the entry is a compound journal entry.

2. The date in a general journal includes the year, month, and day when the transaction
occurred. These complete data are recorded on the first entry of every journal page. Unless
there is a new- year or month on the journal page, it is sufficient to record only the day for
subsequent entries.

3. The debit account is recorded at the extreme left of the particulars column. If there are two
or more debit accounts, these are all placed alongside the extreme left margin.
4. The credit account is recorded with a half-inch indention from the extreme left margin of the
particulars column to distinguish it from the debit account. All credit accounts are similarly
placed. It is important to note that all debit accounts are recorded before the credit accounts.

5. The explanation of the transaction must be brief and concise. This is also placed with an
indention of one inch from the extreme left margin of the particulars column.

6. Usually a line is left free between journal entries.

7. When recording the peso amounts in the money columns no commas or period need to be
used. The journal money columns are designed with specific boxes for each amount. To
illustrate P 1,234,567.89 will be recorded in the money column as:

8. A peso sign may be placed before the first amount in a money column. No other peso sign in
necessary as all numbers in money columns are presumed to be in pesos.

9. When transactions do not include centavos, the centavo column may be left in blank. Dashes
(-) or ciphers (00) may also be used.

POSTING PROCEDURES

1. Based on the first debit entry in the journal, look for the account in the general ledger.

2. On the debit side date column, copy the date.

3. Copy the amount in the debit column.

4. Insert the journal page number in the folio column of the ledger.

5. Insert the ledger account number in the folio column of the journal.

6. Repeat steps 1 to 5 until all the accounts have been posted or transferred from the journal to
the ledger.
Steps number 4 and 5 is called cross reference. It facilitates the tracing of an entry to and from
the journal and ledger. Also, if the F columns are both filled up, it signifies that an entry has
already been posted. The folio column in the journal will be gradually filled up as the postings
are made.

TRIAL BALANCE
At this point we should test the accuracy of our journalizing and posting process by preparing a
trial balance. A trial balance is a list of accounts with ledger balances. The following are the
steps in determining the balances of the ledgers:

1. Total the debit column and record it in small figures in pencil directly underneath the last
debit amount. This is called pencil footing. It is done in pencil and the figure is small to
distinguish it from the regular entry and to permit erasures if the figure is not correct.

2. Total the credit column and record it in small pencil figures directly under the last credit
column amount.

3. Extract the balance: if a debit balance, place it in the explanation column debit side in line
with the last debit posting in small pencil figure (see cash ledger); and if a credit balance, place
it in the explanation column credit side in line with the last credit posting.

4. You may not pencil foot if there is a single debit or credit amount only.

The trial balance gives the data needed in preparing the financial statements.

OBSERVE THE FOLLOWING RULES IN PREPARING THE TRIAL BALANCE:

1. Heading consists of three lines:

First line - Name of the business
Second line - Title of the report
Third line - Date

2. Account titles are arranged in the following order: Assets, Liabilities, Capital, Revenues and
Expenses.

3. Only accounts with balances appear in the trial balance.

4. The peso sign is placed only in the first debit amount, first credit amount and on the totals.

5. The totals are ruled (one horizontal line drawn under the last amounts of the debit and credit
columns) and double ruled (two horizontal lines are drawn under the total figures).

6. If the total debits do not equal the total credits, then errors must have been committed.
These should be located before ruling and double ruling the totals. It is therefore advisable that
the totals should be in pencil figures first and if correct then write over in ink.
See to it that the debit totals is equal to the credit totals. If it is not so, then errors like
transferring from the journal to the ledger on the wrong side (cash debit was posted to the cash
credit) or wrong amount (cash debit 40,000 was posted to the debit of the cash ledger 400,000)
or wrong footings or wrong balances were copied in the trial balance.
*

ADJUSTING THE ACCOUNTS

Adjusting entries are made in order to reflect in the accounts the information on economic
activities that have occurred during the period covered but have not yet been recorded.

These entries are needed for proper measurement of revenues and expenses for the period
and the related assets and liability accounts.

PRINCIPLES SUPPORTING THE NEED FOR ADJUSTMENTS

The following are the accounting principles that form the bases for adjusting the accounts:

1.) GOING CONCERN - the entity is presumed to continue to exist unless evidence to the
contrary is shown. If management has significant concerns about the entity's ability to continue
as a going concern, the uncertainties must be disclosed.

2.) ACCRUAL BASIS OF ACCOUNTING - revenue is recognized when they are earned regardless
of the time when cash was received, and expenses are recognized when they are incurred
regardless of the time when cash was paid.

3.) REPORTING PERIOD - there is a presumption that financial statements will be prepared at
least annually.

4.) REVENUE RECOGNITION PRINCIPLE - revenues must be recognized when earned. Revenues
are earned in the accounting period when the services are rendered or goods sold are
delivered.

5.) EXPENSE RECOGNITION PRINCIPLE - the principle governing the recording of expenses. All
the expenses incurred during the accounting period must be recorded.

6.) MATCHING PRINCIPLE - the expenses of the period must be associated directly or indirectly
with the revenue of the period.

ITEMS FOR ADJUSTMENTS

In a service-type business there are at most six items for adjustments. The number of adjusting
entries of course depends on the volume of transactions of a particular enterprise. These are
the following: (1.) Adjustment for Prepaid Expenses; (2) Adjustment for Accrued Income or
Revenue; (3) Adjustment for Accrued Expense; (4) Adjustment for Depreciation; (5) Adjustment
for Bad Debts; (6) Adjustment for Unearned Revenues/ Deferred Income.
THE WORKSHEET

Worksheet is a tool that facilitates the preparation of the financial statements. It is the device
that efficiently summarizes the data in the unadjusted trial balance and the adjustments to
come up with the financial statements on time.

STEPS IN PREPARING A WORKSHEET

1.) Write the Worksheet Heading: First line, the name of the enterprise; second line,
"Worksheet", and the third line, the period covered.

2.) Make the column headings: Account Title; first and second money columns, Unadjusted Trial
Balance; third and fourth money columns, Adjustments; fifth and sixth money columns,
Adjusted Trial Balance; seventh and eight money columns, Income Statement; and ninth and
tenth money columns, Balance Sheet. Each money column for each heading is identified as
debit or credit.

3.) Enter the account balances in the unadjusted trial balance columns and total the amounts.
Total debits must equal total credits.

4.) Enter the adjusting entries in the adjustments columns and total the amounts. As each
adjustment is entered, a letter or a number is used to identify the debit entry and the
corresponding credit entry. Note that the adjustments are not journalized until after the
worksheet is completed and the financial statements are prepared.

5.) Compute each account's adjusted balance by combining the unadjusted trial balance and
the adjustment figures. Enter the adjusted amounts in the adjusted trial balance columns.
This procedure of combining horizontally, line by line, the amount of each account in the
unadjusted trial balance columns with the corresponding amount in the adjustments columns is
called cross footing.

a.) ADD - when the unadjusted balance is the same as the adjustment (debit and debit, or credit
and credit).
b.) SUBTRACT - when the unadjusted balance is not the same as the adjustment (debit and
credit, or credit and debit)

6.) Extend the asset, liability and owner's equity amounts from the adjusted balance columns to
the balance sheet columns. Extend the revenue and expense amounts to the income
statement columns. Total the balance sheet and income statement columns.

7.) Note that the initial totals of the income statement and balance sheet columns are not
equal. The difference between the total credits and the total debits in the income statement is
the net income or net loss of the period.
a.) NET INCOME - total credits is greater than total debits. (Revenues > Expenses)

b.) NET LOSS - total debits is greater than total credits. (Revenues < Expenses)

Enter the net income in the DEBIT column of the income statement and compute the final
column totals. The income statement now has an equal total debits and credits.

Enter the net loss in the CREDIT column of the income statement and compute the final column
totals. The income statement now has an equal total debits and credits.

8.) Enter the net income in the credit column of the balance sheet and compute the final
column totals. The balance sheet must now have equal total debits and credits. If the result is
net loss, enter the amount of net loss in the debit column of the balance sheet and get the final
column totals.

9.) Double rule the column totals.

PREPARING THE FINANCIAL STATEMENTS

The financial statements of the enterprise can now be easily prepared. By looking at the
Income Statement column of the worksheet copy the balances of the revenues/income and
expenses accounts. In making the Balance Sheet, copy all the assets and liabilities, but before
one can complete the Balance Sheet it is necessary to prepare first the Capital Statement. The
Capital Statement will show the changes in the Owner's Equity section of the balance sheet.

ADJUSTING ENTRIES ARE JOURNALIZED AND POSTED

To meet the timeliness objective in financial statements preparation, it has been customary to
the accountants to prepare the financial statements immediately after completing the
worksheet. The adjustments which are directly entered in the worksheet are recorded in the
general journal and posted to the ledger only after the financial statements have been finalized.

CLOSING ENTRIES

Closing entries are done at the end of the accounting period in order to bring the temporary
accounts into zero balances. TEMPORARY accounts are the nominal accounts or the income
statement accounts. These are cleared of all outstanding balances in the general ledger so that
at the start of the next accounting period the revenue and expense accounts will be opened for
recording of new transactions covering the new accounting period.

Aside from income statement accounts other temporary accounts are: (1) owner's drawing
account, (2) Income and Expense Summary account.
Permanent accounts or the balance sheet accounts are not closed because their balances will
be carried over to the next accounting period.

PROCEDURES IN CLOSING THE BOOKS

1.) Refer to the worksheet and look at the Income Statement columns.

2.) All credit accounts must be debited and use "Income and Expense Summary" account as
credit.

3.) All debit accounts must be credited and use "Income and Expense Summary" account as
debit.

4.) All the income statement accounts are now closed. Get the balance of the "Income and
Expense Summary" account.

a.) DEBIT balance = Net Loss

b.) CREDIT balance = Net Income

5.) Close the "Income and Expense Summary" account to "Owner's, capital" account.

a.) Net Loss = Debit Owner's, capital

b.) Net Income = Credit Owner's, capital

6.) Close the "Owner's, drawing" account to "Owner's, capital" account. Credit owner's,
drawing and debit owner's, capital.

THE POST CLOSING TRIAL BALANCE

In order to prove the equality of debits and credits after recording and posting the adjustments
and closing entries, the post closing trial balance is prepared. This trial balance contains only
balance sheet accounts. The account balances in the Post Closing Trial Balance must be the
same as in the Balance Sheet.

The procedure in preparing Post Closing Trial Balance is to copy all accounts with balances from
the general ledger.

REVERSING ENTRIES

This is the last step in the accounting cycle. On the first day of the next accounting period, some
adjusting entries need to be reversed. This is called reversing entries simply because the debit
entries are credited while the credit entries are debited.
PURPOSES OF REVERSING ENTRIES

1.) So that the method used in recording for prepayments and deferrals will be consistently
applied.

2.) For simplification of entries to be made in the succeeding accounting period, i.e., entry for
payments.

REVERSIBLE ADJUSTING ENTRIES

1. Accrued Expense
2. Accrued Income
3. Prepaid Expenses under expense method
4. Unearned or Deferred Income under income method

1. CPA Board Exams

2. Career Fields in Accounting
3. Different Accounting Areas
4. Different Regulatory Bodies

1. CPA Board Exams

Q: Sino ang allowed mag-take ng Philippine CPA Board Exam?
A:
- Yung mga graduate sa course na Bachelor of Science in Accountancy (BSA)
- Yung may Good Moral Character
- Yung hindi napatunayang guilty ng "Moral Turpitude" (like Adultery or
Concubinage - pakikiapid)
- Filipino citizen

Q: Tuwing kailan ginaganap ang CPA Board Exam?

A: Twice a year: May and October.

Q: Ilan at ano ang mga subjects sa CPA board exam ?

A: 6 subjects
- Regulatory Framework for Business Transactions (RFBT)
- Taxation (TAX)
- Management Advisory Services (MAS)
- Auditing theory and Auditing problems (AUDITING)
- Financial Accounting and Reporting (FAR)
- Advanced Financial Accounting and Reporting (AFAR)
Q: Paano makapasa sa CPA board exam?
A: General weighted average of 75% and above with no grades below 65% in
any subject.

Q: Anong mangyayari pag ang general average ay above 75%, ngunit may
grade na below 65% sa ibang subject(s)?
A:
- Conditional if 75% and above ang at least 4 subjects (at ang uulitin na lang ay
yung subjects na may grade below 75%)
-Failed if 3 subjects and below lamang ang 75% and above.
Masasabing conditional ang status ng isang examinee kapag 75% and above
ang grade niya sa at least 4 subjects (kahit na zero pa ang grade sa natitirang
2 subjects).
Ang conditional examinee ay kailangang mag-exam ulit para kunin ang di
naipasang subject(s) within 2 years mula sa exam kung saan siya na-
conditional.

2. Career Fields in Accounting

A. Public Accounting
B. Commerce and Industry / Private Accounting
C. Academe (Education)
D. Government Accounting

3. Different Accounting Areas

A. Basic Accounting / Bookkeeping
B. Financial Accounting
C. Managerial Accounting
D. Auditing
E. Cost Accounting
F. Government Accounting

4. Different Regulatory Bodies

A. Professional Regulation Commission (PRC)
B. Professional Regulatory Board of Accountancy (PRBOA)
C. Philippine Institute of Certified Public Accountants (PICPA)
D. Financial Reporting Standards Council (FRSC)
E. International Accounting Standards Board (IASB)