Bookkeeping and

Income Statement
Preparation

Reca Rose E. Tuban, MAN, MIB

Objectives:
Within 45 minutes;
1. Define what is bookkeeping;
2. Identify the methods of
bookkeeping;
3. Differentiate Assets,
Liabilities and Equity.
4. Illustrate how to prepare a
Financial Statement.
 Bookkeeping
• It the process of
recording day-to-day
financial transactions in a
consistent manner.
Bookkeeping
• Recording transaction.
• Process of recording
and organizing.
 What is the
difference between
Bookkeeping and
Accounting?
 Difference between
Bookkeeping and Accounting
Bookkeeping:
Past
Bookkeeping: Past
Special Journals or Daybook:
• Sales Journals
• Purchases Journals
• Cash Receipts Journals
• Cash Payment Journals
 • Company's transactions were written in the
Bookkeeping: Past journals in date order.

Amounts in the journals would be posted to

the designated accounts located
in the general ledger.

Preparation of a Trial Balance

Start of the Accounting Phase

•Adjusting Entries
•Financial Statement
Bookkeeping:
Today
 Bookkeeping: Today

Preparation of sales

Update the relevant general ledger accounts (Sales, Accounts

Receivable, Inventory, Cost of Goods Sold)

Update the customer's detailed information.

Store the information for the financial statements as well as other reports.
Bookkeeping:
Today
 Bookkeeping: Today
Adjusting Entries:
• Revenues and assets that were
earned, but not yet entered into the
software
• Expenses and liabilities that were
incurred, but not yet entered into the
software
• Prepayments that are no longer
prepaid
• Recording depreciation expense,
bad debts expense, etc.
Bookkeeping: Today

After the financial

statements for the year
are released, the software
will transfer the balances
from the income
statement accounts to the
sole proprietor's capital
account or to the
stockholders' retained
earnings account.
Two Main Methods of Bookkeeping

Accrual method Cash method

1. Cash Method
• It is an accounting system that
recognizes revenues and
expenses only when cash is
exchanged.
• Payment receipts are recorded
during the period in which they
are received, and expenses are
recorded in the period in which
they are actually paid.
2. Accrual Method
• Revenue and expenses are
recognized and recorded
when they occur.
• Records revenue when a
product or service is
delivered to a customer
with the expectation that
money will be paid in the
future.
Categories of Accrual Method
Categories of Accrual
Method
1. Accrued Revenues
• Are either income or
assets (including non-
cash assets) that are yet
to be received. In this
case, a company may
provide services or
deliver goods, but does
so on credit.
Categories of Accrual Method
2. Accrued Expenses
• It refers to when a
company makes
purchases on credit and
enters liabilities in its
general ledger,
acknowledging its
obligations to its
creditors.
Categories of Accrual Method
Common Accrued
Expenses:
• Interest expense accruals
• Suppliers accruals
• Wage or salary accruals
The accrual method of accounting
is the preferred method because
it provides:
1. a more complete reporting of
the company's assets, liabilities,
and stockholders' equity at the
end of an accounting
period, and
2. a more realistic reporting of a
company's revenues, expenses,
and net income for a specific
time interval such as a month,
quarter or year.
 50 hats (P50
each) =2, 500
Plates Selling price
(100pcs) (P70)= 3,500
25 each = Profit = 1000
2500
Selling
price
(P30) =
3000
Profit =
500

100 plates
50 hats
Cash = P4400
Investment = 2500
Profit = 1, 900

Is this Correct?
Accrual Method Cash Method
Financial Statement

1.Trial Balance
2.Statement of Changes
in Equity
3.Balance Sheet
4.Income Statement
5.Cash Flow
General Ledger
Accounts
• The accounts that are used to
sort and store transactions are
found in the
company's general ledger.
• Represents the record-
keeping system for a
company’s financial data, with
debit and credit account
records validated by a trial
balance.
 Assets (Cash, Accounts Receivable, Land,
Equipment)
Liabilities (Loans Payable, Accounts Payable, Bonds
The general Payable)
ledger is often Stockholders' equity (Common Stock, Retained
Earnings)
arranged
Operating revenues (Sales, Service Fees)
according to
the following Operating expenses (Salaries Expense, Rent
Expense, Depreciation Expense)
seven
Non-operating revenues and gains (Investment
classifications: Income, Gain on Disposal of Truck)
Non-operating expenses and losses (Interest
Expense, Loss on Disposal of Equipment)
Double Entry,
Debit and
Credit
 Double Entry
• A fundamental concept underlying
present-day bookkeeping and
accounting, states that every
financial transaction has equal and
opposite effects in at least two
different accounts.
• Every transaction will involve at
least two accounts.
Debit
• Refers to an entry on the
left side of an account
ledger.
• It comes from the
word debitum, meaning
"what is due".
Credit
• Refers to an entry on the
right side of an account
ledger.
• It comes from creditum,
meaning "something
entrusted to another or a
loan."
Debit = Credit

Assets Liabilities
Withdrawals Equity/Capital
Expenses Revenues

AWE LER
Asset Cash (Equipment) = P 100, 000
Equipment = P 100,000 Accounts payable = P 5,000
Office supplies = P 5,000
Revenue
Service rendered = P 50,000 Service rendered =P 50,000
Expenses Cash (Salaries) =P 20, 000
Salaries of employees = P 20, 000
Accounts payable =P 5, 000 Cash (Accounts paid) =P 5, 000
Total = P 180, 000

1. Bought equipment for cash

2. Purchased office supplies on credit
3. Received cash from clients for the
service rendered.
4. Paid salaries of employee.
5. Paid cash to creditors on account.
 RCF Children’s World Drop-In Center
December 31, 2020
Particulars Debit Credit
Equipment P 100, 000
Cash P 100, 000
Office Supplies P 5000, 000
Accounts Payable P 5000, 00
Service Rendered P 50, 000
Revenue P 50, 000
Expenses P 20, 000
Salaries of Employees
Cash (Salaries) P 20, 000
Accounts Payable P 5000
Cash (Accounts paid) P 5000
Total P 180, 000 P 180, 000
 Assets,
Liabilities and
Equities
 Assets
• It is a resource with
economic value that an
individual, corporation, or
country owns or controls
with the expectation that it
will provide a future
benefit.

Assets = liabilities + equity

 Assets

• Cash • Patents
• Marketable Securities • Copyrights
Liabilities
• An obligation between
one party and another not
yet completed or paid for.
Ex:
• Bills due to vendors or
suppliers, payments due
to consultants, credit card
bills, and bank loans.
Liabilities = asset - equity
 Equities
• Represents the amount of
money that would be
returned to a company’s
shareholders if all of the
assets were liquidated
and all of the company's
debt was paid off in the
case of liquidation.
 Statement of
Changes in Equity
Statement of Changes in Equity
• It summarizes the changes
that occurred in the owner’s
equity.
• Beginning equity + Net
income – Dividends +/-
Other changes = Ending
equity
Format
Company’s Name
Statement of Changes in Equity
Period Ended
Owner’s Capital, Beginning (amount)
Add: Additional Investment (amount)
Profit
Total:
Less: Withdrawals
Owner’s Capital, Ending
 Balance Sheet
• Assets
• Liabilities
• Stockholders' (or Owner's)
equity
 Balance Sheet
• It is financial statement
that reports a
company's assets,
liabilities and
shareholders' equity.
Formula Used for a
Balance Sheet

Assets= Liabilities +
Shareholders’ Equity
What's On the Balance Sheet?
1. Asset Current Asset Long Term Asset
1.Cash and cash 1.Long term
equivalents investments
2.Marketable 2.Fixed asset
securities 3.Intangible asset
3.Accounts
receivable
4.Inventory
5.Prepaid expenses
 What's On the Balance Sheet?
2. Liabilities
Current Liabilities Long-term Liabilities
•Current portion of long-term debt 1. Long-term debt
•Bank indebtedness 2. Deferred tax liability
•Interest payable
•Wages payable
•Customer prepayments
•Dividends payable and others
•Earned and unearned premiums
•Accounts payable
What's On the Balance Sheet?
3. Equity
• The money attributable to a
business' owners.
• It is also known as "net assets,"
since it is equivalent to the
total assets of a company
minus its liabilities, that is, the
debt it owes to non-
shareholders.
Income
Statement
Income Statement
• One of the three (along with
balance sheet and statement
of cash flows) major financial
statements that reports a
company's financial
performance over a specific
accounting period.
• It focused on the company’s
revenues and expenses during
a particular period.
Income Statement
• Net Income = (Total
Revenue + Gains) – (Total
Expenses + Losses)
• Four key items:
1. Revenue
2. Expenses
3. Gains
4. Losses
1. Revenues and Gains
a. Operating revenue
• Revenue realized through
primary activities.
b. Non-Operating Revenue
• Revenues realized through
secondary, non-core
business activities.
c. Gains
• The net money made from
other activities.
2. Expenses and Losses
a. Primary expenses
• All expenses incurred for earning the
normal operating revenue linked to
the primary activity of the business.
o Cost of goods sold (COGS)
o Selling, general and
administrative expenses (SG&A)
o Depreciation or amortization,
and
o Research and development
(R&D) expenses.
 2. Expenses and Losses
b. Secondary Activity
Expenses
• All expenses linked to non-
core business activities.
c. Losses as Expenses
• All expenses that go
towards a loss-making sale
of long-term assets, one-
time or any other unusual
costs, or expenses towards
lawsuits.
Income Statement Structure
• Net Income = (Revenue +
Gains) – (Expenses + Losses)
a. Single-Step Income
Statement
• It is based on the simple
calculation that sums up
revenue and gains and
subtracts expenses and losses.
Income Statement
Structure
b. Multiple-Step Income
Statement
Cash Flow
Statement
 Cash Flow Statement
• It is a financial statement that
provides aggregate data regarding all
cash inflows a company receives from
its ongoing operations and external
investment sources.
• It also includes all cash outflows that
pay for business activities and
investments during a given period.
3 Sections of Cash Flow

1. Cash flow from

operations

2. Cash flow from

investing

3. Cash flow from

financing
1. Cash Flows From
Operations
• It covers cash flows from
operating activities (CFO) and
includes transactions from all
operational business activities.
• Begins with net income, then
reconciles all noncash items to
cash items involving operational
activities.
1. Cash Flows From
Operations
• This section reports cash inflows
and outflows that stem directly
from a company's main business
activities.
• Buying and selling inventory and
supplies, along with paying its
employees their salaries.
1. Cash Flows From
Operations
1. Cash Inflows
• Sale of goods and service performed.
• From royalties, fees, commissions and
other revenues.
2. Cash Outflow
• Payment to suppliers of goods and
services.
• Payment to employees.
• Payment to taxes.
• Payment for interest expense.
• Payment for other operating expenses.
2. Cash Flows From Investing

The result of investment

gains and losses.

This section also includes

cash spent on property,
plant, and equipment.
2. Cash Flows From Investing
1. Cash Inflows
• Sale of property and equipment.
• Sale of investments in debt or equity securities.
• Collection on notes receivables in investment.
2. Cash Outflows
• Payment to acquire property and equipment
(Ex: Car, computer equipment)
• Payment to acquire debt or equity securities.
• Payment to notes receivable in investment.
3. Cash Flows From Financing
• It provides an overview of
cash used in business
financing.
3. Cash Flows From Financing
• When the cash flow from
financing is a positive
number, it means there is
more money coming into the
company than flowing out.
• When the number is
negative, it may mean the
company is paying off debt,
or is making dividend
payments and/or stock
buybacks.
3. Cash Flows From Financing
1. Cash Inflow
• Investment by owners.
• Issuance of notes payables

2. Cash Outflow
• Payment of owners in the
form of withdrawals.
• Payment to settle notes
payable financing.