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Accounting Is A Process of Identifying, Recording and Communicating Economic Information That Is Useful
Accounting Is A Process of Identifying, Recording and Communicating Economic Information That Is Useful
l DEFINITION OF ACCOUNTING
Accounting is a process of identifying, recording and communicating economic information that is useful
in making economic decisions.
1. Identifying - The accountant analyzes each business transaction and identifies whether the transaction
is an accountable event" or "non-accountable event." This is because only "accountable events" are
recorded in the books of accounts. "Non-accouhtable events" are not recorded in the books of accounts.
"Accountable events" (or 'economic events') are those that affect the assets, liabilities, equity, income
and expenses of a business. Sociological and psychological matters are outside the scope of accounting.
2. Recording - The accountant recognizes (i.e., records) the "accountable events" he has identified. This
process is called "journalizing."
After journalizing, the accountant then classifies the effects of the event on the "accounts." This process
is called "posting."
Account is the basic storage of information in accounting, e.g, "cash," "land," "sales," etc.
3. Communicating - At the end of each accounting period, the accountant summarizes the information
processed in the accounting system in order to produce meaningful reports. This is important because
information processed in the accounting system is useless unless it is communicated to interested users.
Accounting information is communicated to interested users through accounting reports, the most
commmon form of which is the financial statements.
l NATURE OF ACCOUNTING
Accounting is a process with the basic purpose of providing information about economic activities
intended to be useful in making economic decisions.
2. As a Pratical art, accounting requires the use of creative skills and judgement.
Accounting system:
Bookkeeping - process of recording the accounts or transactions of an entity. Does not require the
interpretation of the significance of the information processed.
Accounting - covers the whole process of identifying, recording, and communicating information to
interested users.
1. To provide external users with information that is useful in making, among others, investment and
credit decisions.
2. To provide internal users with information that is useful in managing the business.
Examples: a. Existing and potential investors b. Lenders and Creditors c. Government agencies
2. Special purpose accounting information - designed to meet the specific need of particular statement
users. Provided by management accounting or other branches of accounting and prepared for internal
users.
Accounting can be traced as far back as the prehistoric times. Since the dawn of civilization when
mankind began to engage in trade, Perhaps more than 10,000 years ago, methods of record keeping and
accounting have been invented.
As early as 8500 B.C., accounting has already existed. Archaeologists have found clay tokens as old as
8500 B.C. in Mesopotamia which were usually cones, disks, spheres and pellets. These tokens
correspond to commodities like sheep, clothing or bread. They were used in the Middle West in keeping
records. After some time, the tokens were replaced by wet clay tablets. During such time, experts
concluded this to be the start of the art of writing.
Other ancient civilizations keeping account records are Babylonia (4500 B.C.), Egypt (2250 B.C.), China
and Greece.
In the middle ages (13th and 15th centuries), trade flourished in places such as Florence, Venice and
Genoa. This has brought advancement in account keeping methods. In 1211 A.D., one of the systems in
accounting was kept by a Florentine banker. However, the system was primitive as the concept of
equality for entries was absent. Double entry records first came out during 1340 A.D. in Genoa.
In 1494, the first systematic record keeping dealing with the "double entry recording system" was
formulated by Fra Luca Pacioli, a Franciscan monk and mathematician. The "double entry recording
system" was included in Pacioli's book titled "Summa di Arithmetica Geometria Proportioni and
Proportionista," published on November 10, 1494 in Venice.
The concept of "double entry recording" is being used to this day. Thus, Fra Luca Pacioli is considered as
the father of modern accounting.
1. Financial accounting — is the branch of accounting that focuses on general purpose financial
statements.
* General purpose financial statements are those that cater, to the common needs of a wide range of
external users.
The scope of this book is the fundamentals of financial accounting and reporting.
Financial accounting vs. Financial reporting
The terms "financial accounting" and “financial reporting” are often used interchangeably. Although,
both focus on general purpose financial statements, financial reporting endeavors to promote principles
that are also useful to "other financial reporting."
"Other financial reporting" comprises information provided outside the financial statements that assists
in the interpretation of a complete set of financial statements or improves users' ability to make
efficient economic decisions.
Ø Financial statements are the structured representation of an entity's financial position and
results of its operations. They are the end product of the accounting process and the means by
which information gathered and processed are periodically communicated to users.
Ø A financial report includes the financial statements plus other information provided outside the
financial statements that assists in the interpretation of a complete set of financial statements
or improves users' ability to make efficient economic decisions.
2 Statement of profit or loss and other 2 Statement of profit or loss and other
comprehensive income comprehensive income
5 Notes 5 Notes
7 Other information
Ø Financial reporting - involves the provision of financial information about an entity that is
useful in making economic decisions by external users and assessing management's
stewardship.
A. To provide information about an entity's economic resources, claims to these resources, and
changes in these resources.
B. To provide information that is useful in making investment and credit decisions, as well as
assessing the amounts and timing of future cash flows of an entity.
(The term 'entity' refers to the 'reporting entity.' A reporting entity is the one whose financial
statements are being prepared, for example a 'business.' However, not only businesses prepare financial
statements. Other types of organizations, for example, non-profit organizations, the government, or
even a private individual, may also prepare financial statements. Yes, even you can prepare your own
personal financial statements. t,C) As a matter of fact, government employees are required to prepare
and submit their personal financial statement called the `SALN' or Statement of Assets, Liabilities and
Net Worth.)
2. Management accounting - involves the accumulation and communication of information for use by
internal users. An offshoot of management accounting is management advisory services which includes
services to clients on matters of accounting, finance, business policies, organization procedures, product
costs, distribution, and many other phases of business conduct and operations.
3. Government accounting - refers to the accounting for the government and its instrumentalities,
focusing attention on the custody of public funds, the purpose or purposes to which those funds are
committed, and the responsibility, and accountability of the individuals entrusted with those funds.
5. Tax accounting — is the preparation of tax returns and rendering of tax advice, such as the
determination of tax consequences of certain proposed business endeavors.
6. Cost accounting — is the systematic recording and analysis of the costs of materials, labor, and
overhead incident to the production of goods or rendering of services.
8. Accounting research — pertains to the careful analysis of economic events and other variables to
understand their impact on decisions. Accounting research includes a broad range of topics, which may
be related to one or more of the other branches of accounting, the economy as a whole, or the market
environment.
A business is an activity where goods or services are exchanged for money. A person who is engaged in
business is called an entrepreneur or businessman.
1. Sole or single proprietorship - is a business that is owned by one individual. It is the most common and
simplest form of business organization. The business owner is called a "sole proprietor"
A sole proprietorship is registered with the Department of trade and industry (DTI).
2. Partnership — is a business that is owned by two or more individuals who entered into a contract to
carry on the business and divide among thernSelves the earnings therefrom. The business owners are
called partners.
3. Corporation — a corporation is also owned by more than one individual. However, unlike a
partnership, a corporation is created by operation of law rather than a contract. Ownership in a
corporation is represented by shares of stocks. The owners are called stockholders or shareholders.
A corporation is an artificial being or a juridical person, meaning in the eyes of the law, a corporation is
like a person, separate from its owners. Therefore, a corporation can transact on its own, have its own
properties, incur its own obligations, and sue or be sued.
For example, when you buy goods from a corporate business, you are actually transacting with the
corporation and not its owners. If you get sick from consuming the goods, you will sue the corporation
and not its owners.
A partnership also has a juridical personality. However, unlike for corporations, the partners are viewed
as agents of the partnership. Meaning, the partners transact on behalf of the partnership.
For example, if you transact with a partner of a business: you are transacting with the partnership
through the partner while if you transact with a stockholder, this does not necessarily mean that you are
transacting with corporation.
The incorporators (i.e., founders) of a Corporation shall not be less than 5 but not more than 15
individuals. However a corporation can have as many stockholders as its authorized capitalization
permits.
From the root word "cooperate," a cooperative is an association of individuals who joined together to
contribute capital and cooperate in order to achieve certain goals.
For example, a group of farmers may forma cooperative to acquire delivery trucks to be used in
transporting their produce to the market. In here, the farmers voluntarily join together to achieve a
common goal, which is to address their need to get their produce to the market.
Another concept of a cooperative is that members need to patronize the cooperative's goods or
services. In the example above, the member farmers shall hire delivery trucks from the cooperative
rather than from other businesses. If the cooperative earns profit (net surplus), a farmer can recover his
costs through patronage refunds. Patronage refund pertains to the profit that a cooperative returns to
its owners. It should be noted that a member who has not patronized any of the services of the
cooperative for an unreasonable period of may be removed from the cooperative upon the majority
vote vote of the board of directors.
The founding members of a cooperative shall not than 15 individuals. However, a cooperative can have
be less ave as many members as its by-laws permit.
The following are the major types of business according to the activities they undertake:
A. Service business - A service business is one that offers services as its main product rather than
physical goods. A service business may offer professional skills, expertise, advice, lending
service, and similar services.
a. Schools b. Professionals (accounting firm, law firm, electrician, etc.) c. Hospitals and clinics
a. General merchandise resellers (grocery stores, department stores, hardware stores, pharmacies,
online stores, sari-sari stores, etc.)
b. Distributors and dealers (rice wholesalers, vegetable dealers, 2nd-hand cars dealers, etc.)
C. Manufacturing business - A manufacturing business is one that buys raw materials and
processes them into final products. Unlike a merchandising business, a manufacturing business
changes the physical form of the goods it has purchased in a production process. For example,
a business that buys and sells eggs is a merchandising business. On the other hand, a business
that buys eggs and uses the eggs as ingredient in making cakes for sale is a manufacturing
business.
d. Factories (clothing factories, animal feeds factory, plastic wares factories, etc.)
Some businesses, called hybrid businesses, engage in more than one type of activity. For example, a
restaurant uses gredients to cook a meal (manufacturing), sells Coca-Cola drinks (merchandising), and
serves food to customers (service). Nevertheless, a hybrid business is classified into one of the major
types based on the activity that is most in line with the business' purpose. Restaurants are expected to
fill-in customer orders and provide dining services, thus, they are more of a service-type business.
l INTRODUCTION
Accounting concepts and principles (assumptions or postulates) are a set of logical ideas and procedures
that guide the accountant in recording and communicating economic information. They provide a
general frame of reference by which accounting practice can be evaluated and they serve as guide in the
development of new practices and procedures.
Accounting concepts and principles provide reasonable assurance that information communicated to
users is prepared in a proper way. For example, doctors have a proper way of performing surgery on a
patient; engineers have a proper way of constructing a bridge; accountants too have a proper way of
recording and communicating economic information. This is to maximize the usefulness of accounting
information to the users.
l BASIC ACCOUNTING CONCEPTS
1. Separate entity concept — Under this concept, the business is viewed as a separate person, distinct
from its owner(s). Only the transactions of the business are recorded in the books of accounts. The
personal transactions of the business owner(s) are not recorded.
For example, you started a business. Under the separate entity concept, you will view your business as a
separate person like a friend maybe (your business can also have its own facebook account).
Therefore, the money you invested to the business is now owned by the business. It is not your personal
money anymore. Also, the business owns any money that it earns. If you take money from the business
for your personal use it would be recorded in the book of accounts as a withdrawal of your investment
from the business. Similarly, when you take goods from the business for your personal consumption
which you don't intend to pay, this would also be recorded as a withdrawal of your investment.
Your personal transactions (i.e, those that do not involve the business) must not be recorded in the
books of accounts. For example, if you use your personal money to buy groceries for home
consumption, this will not be recorded in the books of accounts.
The application of the separate entity concept is necessary so that the financial position and
performance of a business can be measured properly. By applying the separate entity concept, you can
objectively know if the business is really earning profits, or if it has the ability to do so.
Many business les have failed because they did not apply the seperate entity concept. Take for example
an owner of a sari-sari store who regards the store's cash register as an extension of his pocket. He takes
money from the business for personal use and consumes the store's goods without recording them. The
business then suffers from lack of working capital. It runs out of goods to sell without any money to
replenish them. Eventually, the business becomes bankrupt. Unknowingly this guy has caused his own
business to fail. If this guy had applied the separate entity concept, he would have had better accounting
information that could have led him to make better business decisions.
2. Historical cost concept (Cast principle) - Under this concept, assets are initially recorded at their
acquisition cost.
3. Going concern assumption - Under this concept, the business is assumed to continue to exist for an
indefinite period of time. This is necessary for accounting measurements to be meaningful. For example,
measuring assets at historical cost (historical cost concept) is appropriate only when the business is a
going concern.
The opposite of going concern is liquidating concern. This is the case if the business intends to end its
operations or if it has no other choice but to do so, (e.g., the business is bankrupt). The assets of a
liquidating concern are measured at net selling price rather than at historical cost. (Going concerm good,
Liquidating concern - bad).
4. Matching (or Association of cause and effect) - Under this concept, some costs are initially recognized
as assets and charged as expenses only when the related revenue recognized
5. Accrual Basis of accounting - Under the accrual basis of accounting, economic events are recorded in
the period in which they ocour rather than at the point in time when they affect cash.
Thus, income is recorded in the period when it is earned rather than when it is collected, while expense
is recognized in the period when it is incurred rather than when it is paid.
6. Prudence (or Conservatism) - Under this concept, the accountant observes some degree of caution
when exercising judgments needed in making accounting estimates under conditions of uncertainty.
Such that, if the accountant needs to choose between a potentially unfavorable outcome versus a
potentially favorable outcome, the accountant chooses the unfavorable one. This is necessary so that
assets or income are not overstated and liabilities or expenses are not understated.
7. Time Period (Periodicity or Accounting period concept) - Under this concept, the life of the business is
divided into series of reporting periods.
Thus, instead of waiting until the life of the business ends before profit is determined, the life of the
business is divided into series of equal short periods called reporting periods (or accounting periods).
A reporting period is usually 12 months, although it can be longer or shorter. A 12-month accounting
period is either a calendar year period or a fiscal year period. A calendar year period starts on January 1
and ends on December 31 of the same year. A fiscal year period also covers 12 months but starts on a
date other than January 1, e.g.. July 1, 2017 to June 30, 2018.
An accounting period that is shorter than 12 months is called an "interim period." An interim period can
be a month, a quarter (3 months) or a semiannual period (6 months).
8. Stable monetary unit - Under this concept, assets, liabilities, equity, income and expenses are stated
in terms of a common unit of measure, which is the peso in the Philippines.
Moreover, the purchasing power of the peso is regarded as stable. Therefore, changes in the purchasing
power of the peso due to inflation are ignored.
9. Materiality concept - This concept guides the accountant when applying accounting principles. This is
because accounting principles are applicable only to material items. An item is considered material if its
omission or misstatement could influence economic decisions. Materiality is a matter of professional
judgment and is based on the size and nature of an item being judged.
For example, material items are communicated to users in a more detailed manner as compared to
immaterial item.
10. Cost-benefit (Cost constraint)-Under this concept, the cost of processing and communicating
information should not exceed the benefits to be derived from it.
Il. Full disclosure principle -This concept is related to both the concepts of materiality and cost-benefit.
Under the full disclosure principle, information communicated to users reflect a series of judgmental
trade-offs. The trade-offs strive for:
b. Sufficient condensation to make the information understandable, keeping in mind the costs of
preparing and using it.
12. Consistency concept - Under this concept, a business shall apply accounting policies consistently, and
present information consistently, from one period to another. This means that like transactions must be
accounted for in like manner.
Accounting policies used this year shall be the same accounting policies used last year. This, however,
does not mean that a business cannot change its accounting policies. Accounting policies can be
changed if it is required by a standard or the change would result in more relevant and more reliable
information. Any change in accounting policy must be disclosed.
l ACCOUNTING STANDARDS
Accounting concepts and principles are either explicit or implicit. Explicit concepts and principles are
those that are specifically mentioned in the Conceptual Framework for Financial Reporting and in the
Philippine Financial Reporting Standards (PFRSs). Implicit concepts and principles are those that are not
specifically mentioned in the foregoing but are customarily used because of their general and longtime
acceptance within the accountancy profession. The terms "concepts," "principles," "standards,"
"assumptions" and "postulates" are used interchangeably in practice. However, the term "standards" is
used to specifically refer to the Philippine Financial Reporting Standards (PFRSs). Traditionally,
accounting standards were referred to as •the generally accepted accounting principles (GAAP).
Philippine Financial Reporting Standards (PFRSs) The Philippine Financial Reporting Standards (PFRSs)
are Standards and Interpretations adopted by the Financial Reporting Standards Council (FRSC). They
consist of the following: a. Philippine Financial Reporting Standards (PFRSs); b. Philippine Accounting
StandardÅ (PASS); and c. Interpretations Just like the basic accounting concepts, the standards serve as
guide when . recording and communicating accounting information. The difference is that the standards
provide a more
rom reportihe th, le "Miscellan ?nts, xpensing outr below. You 'nsistency) 'licit or implicit are specifically'
I Reporting and CRSs). Implicit Ot specifically because of accountancy "standards," hangeably in o
specifically trds (PFRSs). to as •the Standards Standards dards serve ting Accoun re Accounting Concepts
and Principles 61 detailed application of concepts. They also prescribe which principle is most
appropriate for specific economic transactions. They also require certain information that should be
included in financial reports and how this information is presented. you may think of the difference
between basic concepts and standards this way — a basic concept would be like "you need to brush
your teeth three times a day." On the other hand, a standard would prescribe a proper way of brushing
your teeth. It may even suggest a proper time to brush your teeth or even prescribe a certain
toothbrush that is best for you. 00 The PFRSs are issued by the Financial Reporting Standards Council
(FRSC), which is the official accounting standard setting body in the Philippines. The PFRSs are patterned
from the International Financial Reporting Standards (IFRSs) which are issued by the International
Accounting Standards Board (IASB). This means that the accounting standards used here in the
Philippines are similar to those used in other countries. But why do we need to have uniform accounting
standards? Well, this is because, for financial statements to be useful, they must be prepared using
reporting standards that are generally acceptable(a). Otherwise, each business would have to develop
its own standards. If that is the case, every business may just present any asset or income it wants and
omit any liability or expense it does not want to present. Financial statements would not be comparable,
the risk of fraudulent reporting is heightened, and economic decisions based on these financial
statements would be grossly incorrect For this reason, entities should follow a uniform set of reporting
standards when preparing and presenting financial statements. Imaginé a basketball game with no rules
- the players would be like a bunch of monkeys jumping and running around; or a society with no laws
everything would be in chaos. (a)The term "generally acceptable" means that either:
1. The standard has been established by an authoritative accounting standard setting body; or 2. The
principle has gained general acceptance due to practice over time and has been proven to be most
useful. The process of establishing accounting standards is a democratic process in that a majority of
practicing accountants must agree with a standard before it becomes implemented. Relevant regulatory
bodies Other than the Financial Reporting Standards Council (FRSC), the following also affect the
accounting policies used by businesses and their financial reporting: 1. 2. 3. 4. Securities and Exchange
Commission (SEC) The SEC is tasked with regulating corporations, including partnerships. The SEC
requires corporations and partnerships to file audited financial statements. Bureau• of Internal Revenue
(BIR) — The BIR is tasked in collecting national taxes and administering the provisions the Tax Code.
Although the provisions of the Tax Code do not always reflect the goals of financial reporting, they do at
times influence the choice of accounting methods and procedures tasked ill Bangko Sentral tig Pilipinas
(BSP) The BSP is banking regulating banks and other entities performing . of functions. The BSP
influences the selection and application accounting policies by these businesses. tasked Cooperative
Development Authority (CDA) — the CDA is in regulating cooperatives. The CDA influences the tives. and
application of accounting policies by coopera The COI Just liki Reporting accounta However Conceptua
applicatio Qualitative Among the qualitative c} Qum information information For e. buy a pair. If you
see. You you prefer. acteristics qualities make dwell, then th Sithilarled VVi certain Y With users.
qualitatit foil
The Conceptual
like the standards, the Conceptual Framework for
Reporting
accountant in
t in preparing and
to guide the
r, the Conceptual
buy a pair. If you get to the store, you don't just buy the first pair
you see. You look around and try some until you find the pair that
characteristics of the shoes, e.g, how well it fits on your foot, its
well, then they are useless. If you buy low-quality shoes that get
users.
namely:
following:
a. Relevance
b. Faithful representation
following
a. Comparability
b. Verifiability
c. Timeliness
d. Understandability
Relevance
Elements of relevance:
outcomes of events.
is material
c.
Faithful representation
the users.
Comparability
Verifiability
users
intends to depict.
For example, you and your friend are watching live news
you and your friend look out the window and see zombies
coming and you both agree that those are actually zombies, then
that those are zombies but your friend tells you, "Nope, those are
is not verifiable.
Timeliness
Understandability
financial statements.
67
a. Relevance
i. Predictive Value
i. Confirmatory Value
b. Faithful Representation
i. Completeness
ii. Neutrality
i. Comparability
ii. Verifiability
ili. Timeliness
iv. Understandability
Chapter 2 Summary:
4. Matching
10. Cost-benefit
"
Chapter 3
Learning Objectives
1.
2 Us
problems.
AssetsLiabilities Equity
ASSETS are the resources you control thaf have resulted from
past events and can provide you with future economic benefits.
However, every time you visit the building, the security guard
En
Example 2: Resource
You acquired a cellphone from
a telecommunications
the
our
yet until
you
cellphone next year. Right now, the cellphone is not yet your
means
is
accounting period. If it
ng
no
he resource to
1.
iv.
from past events and can require you to give up resources when
settling them.
a. a contract
b., a law; or
Assets
2,000
Liabilities
1,200
Equity
800
Notes:
Your total assets are now P2
resources that you control (800 from Mr. Piggy plus P1,200
b. P800
liabilities).
- Liabilities+ Equity
Assets
2,000
1,200
800
Variation #1:
AssetsLiabilities
2,000
Equity
800
1,200
Variation #2:
Equity Liabilities
Assets
2,000
800
1,200
e can expand
more
loss.
'lugi' in Filipino).
>
P400
Your expanded accounting equation is as follows:
40080010,0006,200
above:
+ 80010,000
5,0006.200400
expenses
5,000.
400
800+
3,800
Equity, beginning
Add: Income
800
10,000
(6,200)
4,600
dLess:
Expenses
Equity, ending
OR
Equity, beginning
Add: Profit
Equity, ending
800
3,800
4,600
period is as follows:
Assets
= Liabilities
Equity
4,600
5,000
400
drills:
Solution:
+Equity
AssetsLiabilities+
800
1,200
how much is
Solution
Assets
2,000
Equity
800
Liabilities
Equity
800
Liabilities
Assets
Solution
LiabitiiesEguity
2,000
-1,200
Equit
Assets
2,000
Liabilities
1,200
Total income
Profit
5,000
2,000
3,000
If you
Solution:
Total income
Loss
6,000
(5,000)
Solution:
Total income
Profit
? (squeeze)
(2,000)
3,000 (start)
follows:
Rechecking
Total income
5,000 (start)
nses(2.000)v
Profit
3,000 (squeeze)
>
Solution
Total income
Total expenses
Profit
5,000
(squeeze)
3,000
Rechecking
Total income
Profit
5,000
(2,000)
3,000
Case #7: Income
You
1,000 and beginning' equity is P800. If your total expenses for the
pe
/in accounting parlance, the term 'beginning' means'at the start' of an accounting
riod amount
rl
Solution:
Assets
4,800
abilities EquityIncome
1,000
Expenses
2,000
48001,000800 5,000
2,000
P1,000 and beginning equity of P800. If your total income for the
period amounts to P5,000, how much is your total expenses?
Solution:
Total expenses-(4,800-1,000-800-5000-2000
+ Income Expenses
Assets Liabilities
4,800
ull
1,000 005002,00
fo
Solution:
5,000
8,000
(6,000)
7,000
Equity, beginning
Add: income
Less: Expenses
Equity, ending
OR
Equity, beginning
Equity, ending
5,000
2,000
7,000
period is P5,000 while your total expenses are P8,000, how much
Solution:
uit
12,000
5,000
(8,000)
9,000
Less: Expenses
OR
uity, beginning
s: Profit or Loss (5,000-8,000)(3,000)
12,000
dending
9,000
Solution:
Equity, beginning
Equity, ending
5,000
(squeeze)
7,000
Rechecking:
Equity, beginning
Equity, ending
5,000
2,000
7,000
Solution:
Equity, beginning
Equity, ending
6,000
? (squeeze)
2,000
Rechecking:
Equity, beginning
Equity, ending
6,000
(4,000)
2,000
Solution:
Assets Liabilities + Fai
10,000# 7,000 + 3
guity
End
4,000) 5,000
23,000 +8,000
end.)- 11,000
AssetsLiabilities +Equity
11,0003,000 8,000
End.
Solution:
Irrelevant 3,000
-IFrelevant 5,000
irrelevant (a)
Beg.
Profit
End
4,000 b) 8,000
(irelevant: These amounts are not needed in computing for the requirement
the problem.)
e) The phrase
end.) - 12,000
End.
Chapter 3 Summary:
Th
benefits
Liabilities are present obligations of an entity resulting from
benefits.
there is loss.
decreases equity
Chapter 4
Learning Objectives
The Account
2.
3.
Cash
→ Debit |Credit
Balance 700
1-Jan 500
sometimes referred to as
credere (Cr.).
countin
items
from past events and can provide you with future econ
benefits.
rces
3.
Example 1:
activity).
109
P2,000 in
ng price of P2,200
period in
a.
business
Example 2:
gain.
l Notes:
fin
BALANCE SHEET
ACCOUNTS
INCOME STATEMENT
ACCOUNTS
1. INCOME
1. ASSETS
2. LIABILITIES
3. EQUITY
2. EXPENSES
business
this book.
Chart of Accounts
Chart of Accounts
SHEET A
nt
ACCOUNTS
Account
No ASSETS
No.
INCOME
110 Cash
Accounts receivable
Allowance for bad debts
420 Sales
430
125
Interest income
440 Gains
Inventory
EXPENSES
170 Land
180 Building
185 Accumulated
515 Freight-out
depreciation - Bldg.
190 Equipment
195 Accumulated
depreciation -
Equipment
Depreciation
540
545 expense
LIABILITIES
travel expense
575 Miscellaneous
expense
580 Losses
EQUITY
at
of
re
types of accounts:
ASSETS
LIABILITIES
EQUITY
INCOME
EXPENSES
Assigned number
110
Cash
113
accounts.
num
12
Accounts receivable
a related account.
uildin
185A
account.
example:
114
chart
(BSP)
conform to the
ooperative Developr
ment
b. The char
of a
(COA)
descriptions.
their
ASSETS
bank.
has beer
co
operations.
laptops
partitions
(tems 'c' and 'e' are used interchangeably in practice because they may refer
to similar assets. However, the term office equipment' may be used to strictly
refer to those that are being used in the office. For example, a shelf used in
the office may be included in 'office equipment while a shelf used to display
goods for sale may be included in 'furniture and fixture.' Furthermore, items
included in furniture and fixtures' are normally those that are movable.
improvement' account.)
to
assets."
LIABILITIES
that you have an account payable to me. This is also true for
pakilista).
other hand, you have a note payable to the bank. This time, 1
a "note" rather than an "account' because your promise top
Interest
payable - salaries al
Salaries payable
by employees but
'internet, cable TV, etc.) already used but not yet paid.
be noted that future interest, salaries and utilities are not reco
interest
been
used.)
shou
rendered by employees; and for utilities, these items must have been
Hints:
118
DECREASED by:
INCREASED by:
Investments or
contributions by the
Withdrawals or
distributions to the
owners.
owners.
by the business.
the
INCOME
e.g
interest-bearing receivables.
..
EXPENSES
.
t
119
to customers
8oods
Salaries
employees for
accounting period.
for the
salaries earned by
the
ch
type
accounting period
120
taxes
ess
some
ng
is the price that a lender charges a borrower for the use of the
from Mr. Bombay. On the other hand, Mr. Bombay will earm
interest income.
various small
ise from:
121
b.
damage, obsolesce
and othe
cal
ess
ity
de Notes:
"incurred" relates to
expenses.
used" po
ASSET ACCOUNTS
Accounts receivable
receivable.
have estimated that you can only collect 420 from him.
business
Notes receivable
The P1,000 collectible from your friend is recorded as
receivable
Inventory
barbecue
Prepaid supplies
barbecue operations.
> The table napkins, while still unused, are assets recorded as prepaid
Prepaid rent
You are renting a space for your barbecue stand. The lease
up)
Equipment
123
of equipment or similar item that is expected to be
ul
he
e periods in which
ent period is
total
the
depreciation account.
since the
The cost of the barbecue grill will be allocated over the 5-year
period that you will be using it. The amount allocated each year is
LIABILITY ACCOUNTS
Porky's Meat Shop to buy pork. You don't have the available
cash, so you promised orally that you will be paying for the
Accounts payable
124
Notes payable
Interest payable
date.
Salaries payable
salaries payable.
Utilities payable
rThe unpaid utility already used but not yet paid is recorded us
utilities payable.
125
Unearned income
pa
next week.
Right now, the sale price collected is not yet earned (ie, nearned)
hecause the barbecue is not yet delivered. Thus, the cash collection is
delivered.
EQUITY ACCOUNTS
Owner's capital
>
Owner's drawings
barbeque business
account.
INCOME ACCOUNTS
Sales
126
The sale is
receivable'.)
Interest income
ot
EXPENSE ACCOUNTS
The cost of the barbecue that was sold for P500 is P300.
Freight-out
Salaries expense
At the end of each month, you will record the P8,000 earned by the
>
ent expense
At the
Utilities expense
Supplies expense
>
Depreciation expense
The P1,000 cost of the barbecue grill will be allocated over the 5
years that you will be using it. The amount allocated each year
depreciation'.)
At the end of the year, you will record the allocated cost of the
business
Advertising expense
Insurance expense
expense
>
Interest expense
expense
Loss
>
hapter 4 Summary:
An
has three parts, namely: (1) account title, (2) debit side, and (3)
credit side.
side.
It
Th
The
business.
Chapter 5
System
Objectíves
Learning Objectives
oks of accounts.
1. Journal; and
2. Ledger
Journal
Types of Journals
information.
on account.
journal," etc.
Examples
sale price.
143
therefore,
he special journals;
Ledger
nsa
Kinds of ledgers
a.
balance.
controlling accounts.
accounts.
Example
You sell barbecue on credit. The balance of credit sales not yet
which customers owe you money and the amount each customer
However, knowing only the total balance is insufficient.
143
p148
Double-entry system
error.
simply refers to the left side of an account while credit (Cr.) refers
a.
versa.
of accounts:
Type of Account
Asset
Liability
Equity
Income
Expense
Normal balance
Debit
Credit
Credit
Credit
Debit
all
Assets
Notes:
debit balance.
as follows:
DEBITS
CREDITS
table below.
To credit an account with a normal credit balance means to
Debit
Credit
Credit
Credit
Debit
Increase
Decrease
Decrease
Decrease
Increase
Credit
Decrease
Increase
Increase
Increase
Decrease
Asset
Liability
Equity
Income
Expense
t Recall the following concepts:
account is increased.
LIABILITY ACCOUNTS
Debit for
ASSET ACCOUNTS
Credit for
Credit for
Debit for
decreases (increases(+)
EQUITY ACCOUNTS
Credit for
Debit for
EXPENSE ACCOUNTS
INCOME ACCOUNTS
Debit for
decreases (-) increa
or Credit for
Credit for
increases(+decreases () decreaseincrease
decreases (
151
an (
En
cre
that is a credit, meaning the total amount of debits is less than the
below:
ASSET ACCOUNT
Debit
1.
Credit
20
100
Ending Balance
80
debits is greater than the total credits (i.e., 100 > 20).
ASSET ACCOUNT
Credit
2.
Debit
100100
Ending Balance
153
hen
Solution:
Cash
Dr.
2,000
10,000
Cr.
Beginning balance
Cash collections
Ending balance
10000 8000
Notes:
balance.
The 2,000 and 10,000 amounts are added because they are both
and credit."
notes payable
Chapter 5
Solution:
Notes payable
Cr.
r.
Payments on the
loan
500
Notes:
The 1,200 and 800 amounts are added because they are both
adjunct account.
155
Thus:
>
. Accounts receivable
RELATED ACCOUNT
ACCOUNT
ACCOUNT
e Building
Building
ACCOUNT
Accumulated depreciation -
Equipment
Equipment
ACCOUNT
Example 1:
balance
Solution:
Accounts receivable
P100,000
(20,000)
P80,000
Example 2:
Solution:
P1,000,000
Building
Building-net
P700,000
Chapter
Summary
The two books of accounts are the Journal and the Ledger
entries')
recorded
account.
Decrease
Type of Account
ASSET
LIABILITY
EQUITY
INCOME
EXPENSE
Increase
(NORMAL BALANCE)
Debit
Credit
Credit
Credit
Debit
Credit
Debit
Debit
Debit
Credit
Chapter 6
Analysis
Learning Objectives
1.
Describe the nature, and give examples, of business
transactions.
transactions
in the journals.
ledger.
3.
4.
process.
made at th
made to simplify
2. Journalizing
3. Posting
5. Adjusting entries
7. Financial statements
8. Closing entries
ts
ould
be prepared.
of the business.
books of accounts.
various forms which include, but not limited to, the followin
come in
Sales invoices,
173
a.
Official receipts,
b.
Purchase orders
d. Delivery receipts,
f. Bank statements
g. Checks
C.
sales invoices (SI) are used for the sale of goods while Offcial receipts
are used for the sale of services. For example, if you buy
(OR)
your tuition fee in school, the school will issue you an official
receipt.
Purchase order
Delivery receipt
delivery receipt is a document signed by the receiver of a
de
the
amount deposited
Bank statement
Check
of billing.
tuition fee.
Types of events
al
ses (e
Journalizing
Journal entry
PXx
Pxx
recorded.
181
simpl
A journal entry
have
debits or credits.
In
(equity)
increased.
> Accounts
affected:
> Effect on
accounts:
Debit Credit
DJOURNAL
Account titles
Date
800
800
Owner's capital
ASSETS
LIABILITIES
EQUrTY
1) Cash
800
+ Owner's capital 00
Transaction #2: Loan
affected
Effect on
accounts
(liability)
increased
JOURNAL
Date
Jan. 1, 20x1
Account titles
Debit Credit
1,200
Cash
Notes payable
1,200
183
ASSETS
LIABILITIES
800
n Cash
EQUITY
Cash
Totals 2,000
1,200
800
Item description
Barbecue grill
Cooking accessories
Beach umbrella
Cost
P1,000
120
400
(or "capital assets") because they will be used for a period longer
than one year (i.e, they provide future economic benefits). Thus,
>Accounts
affected:
> Effect on
accounts:
The
JOURNAL
Date
Account titles
1,000
120
400
Equipment-Cooking accessories
1,520
equipment
Additional analyses:
umbrella) is debited because these are the assets that the business
1) Cash
2) Cash
ASSETS
LIABILITIES+
EQUITY
800
Owner's
capital800
payable 1,200+
3)Equipment:
- Cooking
accessories
-Beach
umbrella
Cash
Totals
120
400
(1,520)
2,000 I
1,200+
800
of cash did not affect the total assets. This is because the
is recorded as an increase in
equpment)
decrease in cash).
> Accounts
affected:
> Effect on
accounts:
JOURNA
Account titles
Date
Debit Credit
480
Cash
480
Additional analyses:
inventory.
When you paid for the inventory purchased, your cash decreased.Your
follow
Trans
Total
the b
ASSETS
=| LIABILITIES
EQUITY
St
1) Cash
Owner's
capital
800
800
Note
2) Cash
payable 1,200+
Equipment:
3)
BBQ grill
- Cooking
accessories
- Beach
umbrella
Cash
1,000
120
400
(1,520)
4) Inventory 480
(480)
2,000
Cash
Totals
1,200+
800
187
Accounts
affected:
"Inventory" (asset)
Cash is increased; Sales is increased.
decreased
Effect on
accounts:
JOURNAL
Date
Account titles
Debit Credit
700
Sales
700
JOURNAL
Debit Credit
DateAcc
Jan. 2, 20xl Cost of goods sold
Account titles
280
280
Inventory
Additional analyses:
"Cash" is debi
customers.
sale of inventory
to sale.
Recall that under this concept, costs that are directly associated
p189
Chapter 6
Accounts
affected:
Effect on
accounts:
Debit/Credit:
(asset) is
increased
Debit Credit
Date
Account titles
20
Cash
20
Additional analyses:
used as expense
supplies.
p191
Chapter 6
Accounts
affected:
Effect on
accounts
Debit/Credit: None
None
accountable.
Accounts
affected:
None
> Effect on
accounts:
Debit/Credit: None
Step #2: Journal entry
accountable.
cording drills:
pe
businesS.
The journal
Jan. Cash
Owner's capital
100,000
1,
20x1
100,000
to the business
save space, we will use the above format for journal entries in this illustration and
in
The effect of the transaction on the basic accounting equation
is analyzed as follows:
. ASSET = LIABILITIES +
EQUITY
Owners
capital 100,000
Cash 100,000
Accounts
affected
(equity)
increased.
. Effect on
accounts:
Jan. Building
1,000,000
500,000
20x1
Owner's capital.
1,500,000
1,000,000
Jan. Building
20,
20x1
1,000,000
Owner's capital
to the business
500,000
a. Transportation equipment
20,
500,000
0 Owner's capital
20x1
ASSET
= LIABILITIES
EQUITY
Building
Transportation
equipment OO000
1,000,000
Owner's
capital
1,500,000
Total
1,500,000 =
+ Total
1,500,000
* To save space again, we will present only the effect of the current transaction on the
accounting equation. We will not re-illustrate the analyses of the effects of the previous
transáctions
e for P20,000
The journal
Jan. Machinery a)
25,
Cash
20,000
20,000
20x7
ASSET
Machinery 20,000
Cash(20,000)0
Totals
LIABILITIES EQUITY
0
0
cash.
Jan. Inventory
26, Cash
50,000
50,000
20
cash basis
ntin
ASSET
EQUITY
= LIABILITIES
Inventory
Cash
Totals
50,000
(50,000)
worth
payable" (liability)
is increased.
70,000
Jan. Inventory
27,
Accounts payable
70,000
20x1
credit
ASSETS
LIABILITIES
Accounts
payable 70,000
+EQUITY
Inventory 70,000
Totals
70,000
70,000 +
# 1: Transaction analysis
Accounts
affected:
y Effect on
accounts:
31, Cash
20x1
70,000
70,000
payable
ASSETS
LIABILITIES
+ EQUITY
Cash(70,000)Accounts
Totals
payable (70,000)+
(70,000) +
(70,000)
Feb. Cash
1 Notes payable
800,000
800,000
20x1
LIABILITIES
+EQUITY
ASSETS
sAccounts
asset)
affected:
Effect on
accounts:
decreased
400,000
400,000
20x1 Cash
payable
ASSETS
LIABILITIES
+EQUITY
Cash
(400,000)
MSale
199
20x1
lar
100,000
Inventory
100,000
30,000
20x7
expense
30,000
The
Cash
100,000-
+ Sales 100,000
70,000
70,000
&
is analyzed as follows:
100,000 =
+ 100,000
(30,000)
70,000
- 30,000
+ 100,00030,000
> Accounts
"Sales" (income)
affected:
"Cost of sales" (expense)
Inventory" (asset)
is increased.
decreased
Effect on
accounts:
es
80,000
4,
20x1
Sale
80,000
20,000
Inventory
20,000
20x1
expense
ASSETS
LIABILITIES +
EQUITY
Accounts
80,000
80,000
(20,000)
60,000
+ Sales
receivable
Inventory(20,000)
Totals
t Cost of
sales
60,000
receivable.
201
#1:Transaction analysis
Accounts
affected:
(asset
decreased.
2 Effect on
accounts
Credit:
Mar. Cash
80,000
Accounts receivable
80,000
20x1
20x1 (i.e., date of sale) rather than on March 8, 20xl (i.e, date of
accounting.
is analyzed as follows:
LIABILITIES EQUITY
ASSETS
80,000
Cash
Totals
p202
#1 :Transaction analysis
Accounts
affected:
"Cash" (asset)
decreased
Effect on
accounts:
/tonpuiy is
cotn
, Cash
20x1
10,000
10,000
EQUITY
IABILITIES+
Owner's
t drawings (10,000
ASSETS
Cash -(10,000)-=
Chapter 6 Summary:
statements.
2. Journalizing
3. Posting
5. Adjusting entries
7. Financial statements
8. Closing entries
A journal entry has the following parts: (a) Date, (b) Accounts
and Amounts debited and credited, and (c) Short description f tht
transaction.
which
p205 206
Chapter7
Learning Objectives
Introduction
2. Journalizing
3. Posting
5. Adjusting entries
7. Financial statements
8. Closing entries
Finished
Now
Later
Posting
ledger accounts.
of
of
the following:
>
rma
on, for ex
during the we
ed durino We
ek?
sP
the week?
p218
p219-221
p222-223
2 Journalizing
3. Posting
5. to 10.
Now showing
Coming soon @s
process.
The trial balance can reveal errors that caused the total debits
and
nalizing
or posting one-half of an
225
wit
other part.
4. Error
P15,625 or P15,265.
The trial balance cannot reveal errors that do not cause the total
correct account
4.
the total debits and total credits in the ledger are equal.
If total debits and credits are not equal, an error surely exists in
the accounts.
However, if total debits equal total credits, it does not mean that
question "When?"
following order:
1. Assets;
2. Liabilities;
3. Equity;
4. Income; and
5. Expenses
DEBIT
hapter 7 Summary:
The steps in the accounting cycle a
re:
2. Journalizing
3. Posting;
5. Adjusting entries;
7. Financial statements;
8. Closing entries
nadjusted trial balance, (2) Adjusted trial balance, and (3) Post-
Chapter 8
Adjusting Entries
Learning Objectives
en
Introduction
2. Journalizing
3. Posting
5. Adjusting entries
6. to 10.
Now!
Later 3
Adjusting entries
yed
accounts').
e and Expenses
of Incom
Is
nize an
accrue) means to
paid.
ding illustrations:
All adju
income account).
ABC Co. is preparing its financial statements for the period ended
April 1, 20x1. ABC uses a calendar year period. The principal and
Concepts:
b.
Given information:
Analysis
ng period
Pe is already
there is alread
> Conclusion:
Formula:
Where:
i interest
P principal
r rate
t = time
income" (income)
affected:
241
income is increased.
Effect on
accounts
Debit/Credit:
31,
20x7
Interest income
9,000
9,000
is recorded as follows:
12,000
April Cash a
Interest receivable b
Interest income c
9,000
3,000
the
follo
241
income is increased
Effect on
accounts
Debit/Credit:
The
Interest receivable
Interest income
9,000
31,
20x1
9,000
Notes:
is recorded as follows:
12,000
April Cash a
Interest receivable b
Interest incomec
9,000
3,000
the
h interest
9-mo. interest:
recognized in 20a
1-yr. interest:
12,000
3-mo. Interest:
the concepts of time period and accrual basis of accounting (ee Chaper
ABC Co. rents out its building to a tenant for a monthly rent of
P50,000 As of December 31, 20x1, the tenant has not yet paid the
Given information:
The
tena
>Conclusion:
t inco
y Accounts
affected:
Effect on
accounts:
income" (income)
is increased.
50,000
50,000
20x1
50,000
Jan. Cash
20x2
2Rent receivable
50,000
20x1 rent
20x2.
on October,
> Concepts:
Given information:
.e., in
b.
> Analysis:
time
Conclusion:
Formula:
. Rate (r)-12%
. Time () expired time of 3 months (i.e, October 1to
t: Transaction analysis
> Accounts
payable" (liability)
affected
Effect on
accounts
Debit
lpayable is increased
Gtep
3,000
1. Interest payable
20xl
to accrue interest expense incurred but
3,000
Notes:
period.
is recorded as follows:
3,000
9,000
12,000
Cash (c)
x2,
mputed
3-mo. interest:
recognized in 20x
1-yr. interest
P12,000
9-mo. Interest:
P4,000. The electricity bill was received and paid in January 20x
> Concep
Given information:
Conclusion:
ansaction analysis
attected
Effect on
acounts:
Debit/Credit:
,Accounts
payable is increased
Utilities expense
4,000
Ulities payable
4,000
4,000 4000
m.Utilities payable
2 Cash
electricity bill
1: Transaction analysis
Accounts
affected:
Effect on
accounts
Debit/ Credit:
payable" (liability)
payable is increased
100,000
Dc Salaries expense
31 Salaries payable
20x1
100
to accrue
salaries expense
ues are
econom
The business expects to use the equipment over the next 4 years
Jan. Equipment
follows:
20,000
1,Cash
20x1
20,
efits, i.e, th
initi
f the
equipment
is initially recorded as an as
set
rather than
eounreaP
st of a ass
gn
is called depreciation
05
December 31, 20x1, the equipment has already been used for 1
On
Cost
P20,000
P5,000
of each of the next four years (i.e., every December 31) as adjusting
entries.
Depreciation = Allocation
the useful life of a depreciable asse
set
Year 1 depreciation
expense P5,000
Year 2 depreciation
Cost of equipment
life is initially
recognized as
asset: P20,000.
7expense: P5,000.
Year 3 depreciation
expense: P5,000.
Year 4 depreciation
expense: P5,000.
asset)
s Accounts
affected:
> Effect on
accounts
> Debit/Credit:
31,
20x1
Accumulated depreciation
5,000
the period
t is determined as follows
Equipment
251
ccumulated depreciation
Equipment -net
P20,000
5,000
P15,000
31,
> Accounts
affected:
> Effect on
accounts:
500
500
20x1
period
After recording the adjusting entry, the carrying amount
of
amount of P1,500.
P2,000
Accounts receivable
(500)
P1,500
ses to
ecognition of bad
receivable is
1. Matching
inventory is initially
inventory is sold.
allocation
economic benefits a
consumed.
recognized as a
charged as
Deciationexpense (ie,
periods the
used.
sset and
pense i.e.
over the
equipment is
mmediate recognition
recognized immediately as
expenses
- Application: An account
doubtful of collection is
immediately recognized as
expense)
Now, let's move on to the third type adjusting entries which is the
drawings" account.
accounts
These accour
are prepared.
period. The
th
closed t
en
temporarily tb
and
adjustment.
Re
After adjustments:
Real account
(presented in the
Balance sheet)
Mixed account
Real &Nominal
Account
Adjusting entry
two components)
Components)
Nominal account
(presented in the
Income statement)
ncome
1. Liability method
liability while
Income method
Liability method
Cash
120,000
120,000
120,000
120,000
Unearned rent
200sh
in advance
rent in advance
eceived in
31, 20x1, both the "unearned rent" (liability method) and the ret
follows:
The earned
for the
nearned
ed
portion
mputed as follows:
10,
December
Before adjustments
Mixed account
P120,000
follows:
Income method
Liability method
Unearned rent
90,000
Rent income
90,000
the
Notes
entry is
is needed
ас
acce
below:
the Tac
LIABILITY METHOD
Rent income
unearned rent
120,000 4/1/x1
90,000 AJE
AJE 90,000
INCOME METHOD
Unearned rent
Rent income
120,000 4/1/x1
Expenses
t.
used up or
portion
remains as asset.
259
the
count
portion ('not yet incurred
on remains as expense
d busi
Asset method
Expense method
Cash
120000 Cash
120,000
l-year imsurance
1-year insurance
31, 20x1, both the "prepaid insurance" (asset method) and the
and not yet incurred portions. The "ncurred" portion relates to the
income statement
portion relates to the balance sheet (real account). These portions are
nalyzed as follows:
ncurred
follows:
- pertai
Before adjustments
Mixed account
P120,000
Asset)
insurance
Expense method
Asset method
Insurance expense
r Under
Under
Bo
ASSET METHOD
expense
Prepaid insurance
Insurance expense
101x 120,000
EXPENSE METHOD
Prepaid insuranc
Insurance expense
10/1/x1 120,000
90,000 AJE
AJE 90,000
recognition. Thus:
Deferral
Accrual
Dance
collected
paid
prepayment. The
prepayment is treated as
Chapter 8 Summary:
mixed accounts').
either
. Prepayments of expenses may be recorded using either the t