ABRAHAM, Daisy Jane ACCT1A&B Reviewer

Introduction to Accounting Disadvantages

Business – An organization engaged in the trade of
goods, services or both, to consumers.
 Profit-oriented – administered to earn profit
to increase the wealth of owners
 Non-profit oriented – uses surplus revenues
- Limited ability to raise capital
- No second opinion
- Proprietor bears the risks and losses of the
enterprise
- Unlimited personal liability
 Partnership - an association of two or more

to achieve its goals (ex. charity) persons, the partners, who bind themselves to
contribute money, property or industry to a

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

1494 – Friar Luca Pacioli wrote a book which contains  Tax Accounting – has two aims: compliance

discussions on the double-entry bookkeeping entitled with the tax laws and minimizing the company’s tax

Summa De Arithmetica Geometria, Proportioni bill through legal means. Accountants provide tax

Et Proportionalita (Everything about Arithmetic, planning and tax consultancy services, such as giving

Geometry, Proportions and Proportionality). This is a advice to clients on what type of investments to

summary of the existing mathematical knowledge at make and on how to structure business transactions

that time. He was considered the “Father Of Double-  Government Accounting –the focus is the

Entry Bookkeeping” because of this. proper custody, disposition and accounting for
public funds
The Industrial Revolution

Mid 18th to mid 19th century – from craftsmen

method to assembly-line method; overhead costs
became problematic. To solve this, cost accounting
was developed.
 Basic Accounting Concepts & The Financial SEC – 1
Statements Accredited Nat’l Professional Organization of CPAs
in Commerce and Industry – 2
Financial Statements – are the means by which the
Public Practice – 2
information accumulated and processed in financial
Academe – 2
accounting is communicated to users on a timely
Government – 2
basis.
Total – 14
Accountants/ Bookkeepers accumulate financial
information thru the preparation of financial Chair and members – serve a term of 3 years which
statements is renewable

GAAP “Generally Accepted Accounting Principles”

Philippine Financial Reporting Standards( FRSC) -
-comprises the conventions, rules, processes,
pursuant to its task, issues accounting standards called
principles, standards, and underlying assumptions that
Philippine Financial Reporting Standards
are used in preparing financial statements

-not rigid or unchanging – accounting principles
continue to evolve as a response to the changes in the
financial information needs of business stakeholders
 Financial Reporting Standards Council
FRSC – is the official accounting standard setting
body in the Philippines
Upon recommendation of BoA, the PRC created
FRSC
Primary Task: – improve and establish accounting
standards that will be generally accepted in the
Philippines
Structure: – has a chairman and 14 representatives
BSP – 1
PFRS - constitute the generally accepted accounting
standards observed in the Philippines
PFRS includes the following:
- PAS – Philippine Accounting Standards
- PFRS
- Philippine Interpretations developed by the
Philippine Interpretations Committee
 Basic Accounting Concepts
-Accounting calls for scientific approach toward the
recording of innumerable business transactions
 Business Entity Principle –the business is
considered distinct and separate from the owners
of the business; business is a separate accounting
entity
 Accounting Entity – is an organization that is

BOA – 1 accounted for as a separate economic unit

BIR – 1  Matching Principle- profit or loss is computed

COA – 1 by deducting the expenses incurred from the

Major organization of preparers and users of income earned during an accounting period.

financial statements – 1
 - This means that the income recorded and reported
in one accounting period should be matched against
the expenses that directly
 Accrual Basis – income is recognized when it is
earned, regardless of when cash is received.
Expenses are recognized when incurred, regardless
of when cash is paid
 Cash Basis Of Accounting – income is
recognized when cash is received, and expenses are
recognized when cash is paid
 Stable Monetary Unit – business transactions
must be expressed in terms of a uniform means of
measurement
- Transactions which do not involve cash are
assigned values according to acceptable bases for
measurement
- Accounting assumes that the peso is not materially
affected by inflation
 Periodicity (Time Period Concept) – assumes
that the operating life of an enterprise may be
conveniently divided into time periods of equal
length, called accounting period
Types: Calendar and Fiscal Accounting Period
 Going Concern (Continuity Assumption)
– The financial statements are normally prepared
on the assumption that an enterprise is a going
concern and will continue in operation for the Scope of the Framework
foreseeable future. It is assumed that the enterprise
has neither the intention nor the need to liquidate or
curtail materially the scale of its operation
 The Accounting Framework
-sets out the concepts that underlie the preparation
and presentation of financial statements for external
users
Purposes Of The Framework
a) Assist the FRSC in developing accounting
standards that represent GAAP in the Philippines
b) Assist the FRSC in its review and adoption of
existing International Financial Reporting Standards
c) Assist preparers of financial statements in applying
FRSC Philippine Financial Reporting Standards and
in dealing with topics that have yet to from the
subject of an FRSC Statement
d) Assist auditors in forming an opinion as to
whether financial statements conform with
Philippine GAAP
e) Assists users of financial statements in interesting
the information contained in financial statements
prepared in conformity with Philippine GAAP
f) Provide those who are interested in the work of
the FRSC with information about its approach to the
formulation of Philippine Financial Reporting
Standards
Is The Framework Part Of Accounting
Standards?
– The Framework is not a PFRS and hence does not
define standards for any particular measurement or
disclosure issue. In case of CONFLICT,
requirements of PFRS shall prevail.
a) Objective of financial statements
b) Underlying assumptions in the preparation of
financial statements
c) Qualitative characteristics that determine the
usefulness of information in financial statements
d) Definition, recognition and measurement of the
elements of the financial statements
e) Concepts of capital and capital maintenance
 Financial Statements – are the means by which
the information accumulate in and processed by
financial accounting is communicated to users on a
periodic basis; the END-PRODUCT of the
financial accounting process
Complete set:
a) Statement of Financial position or balance sheet
b) Statement of comprehensive income
c) Statement of changes in equity
d) Statement of cash flows
e) Notes to the financial statements
Users Of Financial Statements
1. Investors
- “providers of risk capital”;
- Concerned with the risk inherent and in return
provided by, their investments;
- Need information to help them determine whether
they should buy, hold, or sell their investments
-In the case of corporations, shareholders are also
interested in information, which enables them to
assess the ability of the enterprise to pay dividends
2. Employees
-Interested in information about the stability and
profitability of their employers
- Interested in information which enables them to
assess the ability of the enterprise to provide
remuneration, retirement benefits and employment
opportunities
3. Lenders - Interested in information that enables
them to determine whether their loans and the interest
attaching to them, will be paid when due
4. Suppliers And Other Trade Creditors
- Interested in information that enables them to
determine whether amounts owing to them will be
paid when due
-Trade creditors are likely to be interested in an
enterprise over a shorter period than lenders unless
they are dependent upon the continuation of the
enterprise as a major customer
5. Customers - Interest in information about the
continuance of an enterprise especially when they
have a long term involvement with, or are dependent
to the enterprise
6. Government And Their Agencies
- Interested in the allocation of resources, and
therefore the activity of the enterprise
- Require information in order to regulate the
activities of enterprises, determine taxation policies
and as the basis for national income and similar
statistics
7. The Public - Providing information about the
trends and developments in the prosperity of the
enterprise and the range of its activities
Main Users Of Financial Statements –for the use
of INVESTORS and CREDITORS
Information Provided By Financial Statements –
aim to provide information about the FINANCIAL
POSITION, FINANCIAL PERFORMANCE,
AND CASH FLOWS of an entity that is useful to a
wide range of users in making economic decisions
Financial Position
- the condition of a business, in monetary terms, as
of a given date or point in time
- Information about this is primarily provided in a
statement of financial position or BALANCE
SHEET
-Financial position is affected by the economic
resources it controls, its financial structure, its
liquidity and solvency, and its capacity to adapt to
changes in the environment in which it operates
Liquidity – availability of cash in the near future to
cover currently maturing liabilities or obligations
 Solvency – is the availability of cash over the long
term to meet obligations when they fall due
Capacity For Adaptation - is the ability of the
enterprise to use its available cash for unexpected
requirements and investment opportunities
Performance Or Profitability
– refers to whether a company is able to generate
profit or incur a loss during a particular accounting
period; this is usually provided in a STATEMENT
OF COMPREHENSIVE INCOME; it has two
parts
 Profit/loss portion
 Other comprehensive income portion
 Income Statement/ Result Of Operation/
Statement Of Performance/– is a useful tool for
evaluating management’s stewardship of
resources of the enterprise; also useful in assessing
the inflow and outflow of cash
Changes In Financial Position
- useful in order to assess its investing, financing and
operating activities during the reporting period.
 Statement of Changes in Equity - shows the
balance of the owner’s investment in the business
at the beginning of the accounting period,
additional investments made by the owner,
withdrawals by the owner for personal use, the
profit or loss for the period and the balance of the
owner’s investment at the end of the accounting
period.
 Statement of Cash Flows - summarizes cash
activity (inflow and outflow) for the period,
classified according to the nature of activity
(Operating, Investing Or Financing)
Frequency Of Preparation Of Financial Statements
-Financial statements are prepared at least annually
-Financial statements for periods of less than one
year may also be prepared, such as monthly,
quarterly or semi-annually
-Shorter-period financial statements are called
Interim Financial Statements
-The frequency of preparation depends on the
needs of users and the cost-benefit consideration
-The cost of preparing financial statements more
frequently must not exceed the benefits obtained
from the use of these financial statements
Responsibility For Financial Statements
-The management of an enterprise has the primary
responsibility for the preparation and presentation
the
of the financial statements of the enterprises
-Management is also responsible for selecting and
applying the accounting policies and principles
which are appropriate for the company
 The Elements Of The Financial Statements
- Financial statements portray the financial effects of
transactions and other events by grouping them into
broad classes(“Elements Of Financial Statements”)
according to their economic characteristics
 Assets, liabilities, equity – elements directly
related to the measurement of financial position
 Income, expense – elements directly related to
the measurement of performance
 Statement of changes in equity and statement
of cash flows – reflect a combination of all these
elements
Elements Pertaining To Financial Position
 Assets – resources owned and/or controlled by
the enterprise
-Expected to provide future economic benefits to the
enterprise
Examples:
 Cash – money on hand, or in banks, and other
items considered as medium of exchange in
business transactions
 Accounts Receivable – valid claims from
customers or clients arising from the provision
of services or delivery of goods in the ordinary
course of business, where the price for these
services or goods have not yet been paid (on
account or on credit)
 Supplies On Hand – refers to supplies
purchased by an enterprise which are unused
as of the reporting date
 Merchandise Inventory – goods which have
been bought from suppliers for resale to
customers at a price higher than cost
 Property, Plant And Equipment – long lived
assets that have been acquired for use in
operations. Land, building, machinery,
furniture, fixtures, equipment, transportation
or delivery vehicles are examples of PPE.
 Liabilities – present obligation of the enterprise
arising from past events, which are to be settled in
the future; debts of the business
Examples:
 Accounts Payable – amounts due, or payable
to, suppliers for goods purchased on account or for
services received on account
 Salaries Payable – salaries due to employees
which are unpaid as of reporting date
 Utilities Payable – amounts due, or payable
to, utility companies for electricity, heat, light, and
water changes
 Advances From Customers – amounts
received from customers, in advance, for the delivery
of goods or provision of services
 Loans Payable – obligations of an enterprise
to lenders to be paid on demand or at a specified
future date agreed between the enterprise and the
lender
 Equity – means a claim; technically, creditors and
owners both have claims on the assets of the
enterprise
- residual interest in the assets of the enterprise after
deducting all its liabilities
Elements Pertaining To Performance Or Profitability
 Income – refers to increases in economic benefits
during the accounting period in the form of inflows
or enhancements of assets or decrease of liabilities
that result in increase in equity, other than those
relating to contributions from equity participants.
 Revenue arises in the course of the ordinary
activities of an enterprise and is referred to by a
variety of different names including sales, fees,
interest, dividends, royalties, and rent
 Gains represent other items that meet the
definition of income and may, or may not arise
in the course of the ordinary activities of an
enterprise
 Expenses - refer to decreases in economic benefits
during the accounting period in the form of
outflows, or depletion of assets or incidences of
liabilities that result in decrease in equity, other
than those relating to distributions to equity
participants.
 Losses represent other items that meet the
definition of expenses and may or may not
 arise in the course of the ordinary activities of
the enterprise
 Recognition Of The Elements Of The Financial
Statements
Recognition – process of incorporating in the
 Measurement Of The Elements Of The Financial
statement of financial position or statement of
comprehensive income an item that meets the
definition of an element and satisfies the criteria
for recognition
Criteria For Recognition
An item that meets the definition of an element
Measurement Bases
should be recognized if:
1. It is probable that any future economic benefit
associated with the item will flow to or from the
enterprise
2. The item has a cost or value that can be
measured with reliability
Following these two main criteria, we can
summarize the recognition principles for each
element, as follows:
-An asset is recognized in the statement of financial
position when it is probable that the future
economic benefits will flow to the enterprise and
the asset has a cost or value that can be measured
reliably.
-A liability is recognized in the statement of
financial position when it is probable that an
outflow of resources embodying economic benefits
will result from the settlement of a present
obligation and the amount at which the settlement
will take place can be measured reliably.
-Income is recognized in the statement of
comprehensive income when increase in future
economic benefits related to an increase in an asset
or a decrease of a liability has arisen that can be
measured reliably.
-Expenses are recognized in the statement of
comprehensive income when a decrease in future
economic benefits related to a decrease in an asset
or an increase of a liability has arisen that can be
measured reliably.
Statements
-measurement is the process of determining the
monetary amounts at which the elements of the
financial statements are to be recognized and carried
in the financial statements
 Historical Cost
– Assets are recorded at the amount of cash or cash
equivalents paid or the fair value of the
consideration given to acquire them at the time of
their acquisition
-Liabilities are provided at the amount of proceeds
received in exchange for the obligation or in some
circumstances (ex, income taxes), at the amounts of
cash or cash equivalents expected to be paid to
satisfy the liability in the normal course of business
-Most commonly used measurement basis in
accounting because it is deemed as the most
objective basis
 Current Cost
-Assets are carried at the amount of cash or cash
equivalents they would have to be paid if the same
or an equivalent asset was acquired currently.
-Liabilities are carried at the undiscounted amount
of cash or cash equivalents that would be required
to settle the obligation currently
 Realizable (Settlement) Value
-Assets are carried at the amount of cash or cash
equivalents that could currently be obtained by
selling the asset in an orderly disposal.
 -Liabilities are carried at their settlement values; that
is the undiscounted amounts of cash or cash
equivalents expected to be paid to satisfy the
liabilities in the normal course of business
 Present Value
-Assets are carried at the present discounted value
of the future net cash inflows that the item is
expected to generate in the normal course of
business
- Liabilities are carried at the present discounted
value of the future net cash outflows that are
expected to be required to settle the liabilities in the
normal course of business
 Qualitative Characteristics Of Financial Statements
- attributes that make the information provided in
financial statements useful to users
-Relevance and reliability – refer to content of FS
-Understandability and comparability – refer to
the way FS are presented
2 Fundamental or Primary Qualitative Characteristics
(1) Relevance -Information has the quality of relevance
when it influences the economic decisions of users by
helping them evaluate past, present, or future events, or
confirming or correcting their past evaluations
decisions of users taken on the basis of the financial
statements; there is no clear-cut amount considered
to be material – what is material to one company
may be immaterial to another
(2) Faithful Representation –information must
represent faithfully the transactions and other events it
either purports to represent or could be reasonably
expected to represent; this means that the actual effects
of transactions should be properly accounted for and
reflected in the financial statements
 Completeness - includes all information,
including all necessary descriptions and
explanations necessary for a user to understand
the phenomenon being depicted.
 Neutral – one without bias in the selection or
presentation of financial information
 Free from error - no error or omissions
4 Enhancing or Secondary Qualitative Characteristics
(1) Comparability – enables users to identify and
understand similarities in, and differences among items
(2) Verifiability – helps assure that information
faithfully represents the economic phenomena that it
purports to depict

Ingredients of Relevance (3) Timeliness – information is available to decision-

makers in time to be capable of influencing their
 Predictive Role (Value)– information is
decisions
relevant if it is used to make predictions of, say,
future cash inflows or income in future periods (4) Understandability – information is made
 Confirmatory Role (Feedback Value) – understandable by classifying, characterizing and
information is relevant if it used to confirm or presenting it clearly and concisely
correct the earlier expectations of a financial
statement user

Materiality – information is material if its omission

or misstatement could influence the economic
The Accounting Equation And The Double-Entry
Bookkeeping System
Business Transaction – an exchange of values
(expressed in terms of money) involving two parties
(for external transactions) or within the enterprise; it is
an economic activity that causes increases and/or
decreases in the elements of the financial statements
 External Transactions – include the
sale of goods to customers or the
provision of services to clients
 Internal Transactions – include the
manufacture of goods for sale and
incurrence of losses by the company
resulting from fire or flood (casualty
losses)
-Not all events in business enterprise are considered
accountable; only if it has an effect on the elements of
the financial statements
Source Documents – is the original record of a
business transaction; at a minimum, source documents
contain the following: date of transaction, nature of
transaction, and the amount involved; also contains
names of parties involved Control Over Source
Documents
-All business transactions that are taken up in the
accounting records of the enterprise should have
supporting source documents
-Usually, the source documents supporting the
transactions for the day are collected, classified, and
filed in CHRONOLOGICAL ORDER
SEQUENTIAL ORDER
Examples Of Source Document:
 Sales Invoice – a cash sales invoice is issued to
evidence a sale for cash; a charge sales invoice or
credit sales invoice is issued to evidence a sale
where goods are sold on account or on credit
 Delivery Receipt – a document prepared by the
enterprise and signed by the customer to
evidence the acceptance/ receipt of the goods
delivered to the customer
 Official Receipt – issued by the business to
evidence the receipt of cash from customers, the
proprietor, and other parties
 Vendor’s Invoice – this is actually a “Sales
Invoice”, except that it is issued to the enterprise
by the enterprise’s suppliers or vendors; a bill for
goods purchased or services availed
 Purchase Requisition Forms – source
document which evidences an employee’s
request for the purchase of needed goods or
supplies; purchase requests must be approved by
the company management before an actual
purchase is made
 IOUs – a note acknowledging indebtedness to
the enterprise; usually prepared, signed, and
issued by employees who request and receive
cash advances from the enterprise
 Promissory Notes – an unconditional promise
in writing made by one person (called the maker)
to another, signed by the maker, engaging to pay
on demand, or at a fixed or determinable future
time, a sum certain in money to order or to
bearer
 Bank Statements – a summary of all financial
or transactions occurring over a certain period
(usually a month) on a bank account; it shows
the beginning balance of the account, any
 increases or decreases (with brief explanation)
and the ending balance of the account
 Minutes Of Meetings – written record of a
meeting
 Business Letters – business correspondence
with government agencies, customers, suppliers
or other parties
 Job Time Tickets – forms containing
information on time spent working at a particular
customer order (job)
 Certificates Of Stock – documents evidencing
ownership of shares in a corporation
 Time Records/ Timesheets – a detailed record
showing time-in and time-out of employees for a
particular period of time (usually every half-
month)
 Check Voucher – form used to facilitate the
authorization of cash disbursement transactions;
a voucher contains the name of the payee, the
reason for disbursement, and the amount
involved; management affixes its signature on the
voucher, evidencing approval of the cash
disbursement
 Journal Voucher – document used for
transactions and journal entries for which there is
no other source document; usually prepared in
connection with year-end adjustments to the
accounting records and for correcting errors in
the records
 The Basic Accounting Equation
Assets = Liabilities + Equity
Business Transactions And The Accounting Equation
In analyzing business transactions for purposes of
recording, remember the following
-In every transaction, VALUE RECEIVED = VALUE
PARTED WITH. The two values must always be equal
-The basic accounting equations must always be
maintained
Business transactions, therefore, have the following
possible effects on the accounting equation:
a) Increase Assets= Increase Liabilities
b) Increase Assets= Increase Equity
c) Increase Asset = Decrease Asset
d) Decrease Assets = Decrease Liabilities
e) Decrease Asset = Decrease Equity
f) Increase Liabilities = Decrease Equity
g) Increase Equity = Decrease Liability
h) Increase Liability = Decrease Liability
i) Increase Equity = Decrease Equity
Expanded Accounting Equation – includes the elements
of income and expense
Assets = Liabilities + Equity + Income – Expenses
The Account – This is the basic summary device
of accounting; separate accounts are maintained for
each element; an account records the increases,
decreases, and balance of each element of the
financial statements
Debit – left side of an account
Credit – right side of an account
Common Examples Of Account Titles Used
Asset Accounts
 Cash – the medium of exchange for business
transactions; it is accepted by a bank for deposit and
immediate credit at face value; cash includes:
currency and coins, checks, money orders, bank
drafts, and demand deposit accounts
  Held For Trading Securities – Temporary
investments of excess cash which are primarily held
for short-term gain; technically, this account is
known as “Investments At Fair Value Through
Profit Or Loss”
 Loans And Receivables – loans and
receivables include trade receivables and non-trade
receivables; trade receivables are claims against
others which arise in the ordinary course of doing
business;
Examples:
 Trade Accounts Receivable – these are
claims against customers arising from the
provision of services or delivery of goods
on credit
 Trade Notes Receivables – a note
receivable is a written promise from the
customer to pay a fixed amount of money
on a certain future date; being a formal and
written document, it offers more security
than accounts receivable
 Non-Trade Receivables – represent all
other claims which are not trade; they may
be nontrade accounts receivable or non-
trade notes receivable
 Inventories – these are assets which are (a) held
for sale in the ordinary course of business; (b) in
the process of production for such sale; or (c) in
the form of materials or supplies to be consumed
in the production process or in the rendering of
services
 Prepaid Expenses – these are expenses paid
for by the business in advance; prepaid expenses
are assets when they are paid for. Subsequently,
they become expenses.
 Long-Term Investments – an investment as
an asset held by an enterprise for the accretion of
wealth through capital distribution, such as interest,
royalties, dividends and rentals, for capital
appreciation or for other benefits to the investing
enterprise such as those obtained through trading
relationships
 Property, Plant And Equipment – these are
tangible assets held by an enterprise for use in the
production or supply of goods and services, or for
rental to others, or for administrative purposes and
which are expected to be used during more than
one accounting period; examples: land, building,
transportation and delivery vehicles, furnitures and
fixtures, machinery and equipment
 Intangible Assets – these assets are
identifiable, non-monetary assets without physical
substances; examples: patents, copyrights, licenses,
franchises, and trademarks
Liability Accounts
 Accounts Payable – this account is the
opposite of accounts receivable
 Notes Payable – note payable is like a note
receivable, except that this time the enterprise is
the one who promises to pay
 Accrued Liabilities – these are amounts owed
to others for unpaid expenses; they are similar to
accounts payable, except that accounts payable are
for items which have already been consummated,
while accrued expenses are for items which are
continuing in nature (such as utility services);
examples are: salaries payable, interest payable,
taxes payable, accruals for utility expenses
 Unearned Revenues – sometimes the
enterprise receives payments before providing its
customers with goods or services; this creates an
obligation on the part of the enterprise to deliver
goods or provide services; once the enterprise
complies with what is required of it, the advance
collections from customers are already earned and
become part of income
 Mortgage Payable –used for recording long-
term debt of an enterprise for which the company
has pledged certain assets as security for the debt
(collateral). In the event that the debtor could not
pay the obligation, the creditor can FORECLOSE
or cause the mortgaged asset to be sold and the
proceeds are used to settle the debt.
 Bonds Payable – large sums of money are
often required by a business for working capital
and expansion purposes. An enterprise often
obtains the needed funds by issuing (floating)
bonds. A bond is a contract between the issuer
and the lender specifying the terms of repayment
as well as the interest to be paid. Interest is
normally paid on an annual, semi-annual or
quarterly basis Equity Accounts
 Equity – “capital”, is used to record the
original and additional investments of the owner
of the business entity. Capital is increased by net
income earned during the year. Conversely, a net
loss decreases capital.
 Withdrawals – when the proprietor withdraws
cash or other assets for non-business use, such
withdrawals are reflected in the Withdrawals
account.
 Income Summary – it is a temporary account
used to summarize all income and expenses for a
given period.
 Service Income Or Fees Income – revenues
earned by performing services for customers
 Sales – revenues earned as a result of sale of
merchandise
Expense Accounts
 Cost Of Sales – the cost incurred to purchase
or to produce the products sold to customers
during the period. For a service business, any
expense which could be directly attributed to
the provision of services is called cost of
services
 Salaries And Wages Expense – includes all
payments as a result of an employer-employee
relationship such as salary or wages, 13th
month pay, and other related employee
benefits. Salaries are normally paid for workers
who use analytical skills (white-collar
employees) on the other hand, wages are paid
to workers who use manual labor (blue-collar
employees)
 Utilities Expense (Telephone, Electricity,
Fuel And Water Expense) – expenses related
to use of communication facilities, the
consumption of electricity and water
 Rent Expense – expense for leased office
space, equipment or other assets rented from
other
 Supplies Expense –used for recording the
usage of supplies in the normal course of
business
 Insurance Expense – portion of premiums
paid on insurance coverage which has expired
 Depreciation Expense – the portion of the
cost of a tangible asset allocated or charged as
expense during an accounting period
  Bad Debts Expense – the amount of
receivables estimated to be uncollectible and
charged as expense during an accounting
period.
 Interest Expense – an expense related to use
of borrowed funds. This is also known as
“Finance Cost”.
c. Income increases equity, hence, income is
recorded in the same manner as equity (credit to
increase, debit to decrease)
d. Expense decreases equity, hence, increases in
expenses are debited, while decreases are credited
T-Account – is a simplified form of an account.

 The Double-Entry Accounting System Using this, the rules of debit and credit are
presented as follows:
Under the double-entry accounting system the DUAL
EFFECTS of a business transaction is recorded (both
the value received and the value parted with). The
following summary would prove useful in applying the
system:
Account Balances
1. For every debit (Dr.) entry, there must be a
-The difference between the total debits and the
corresponding credit (Cr.) entry. The accounting
total credits of each account is called an account
equation must always be maintained
balance
2. Each transaction affects at least two accounts
-If the total debits are greater that the total credits,
(one debited, one credited)
the account balance is called a Debit Balance
3. Total debits for a transaction must equal total
-If the total credits are greater that the total debits,
credits
the account balance is called a Credit Balance
4. An account is debited when an amount is
Normal Balances – is the usual balance of an
entered on the left side of the account and
account assuming proper accounting has been
credited when the amount is entered on the right
made
side
Normal Debit Balances – assets and expenses
5. The account type determines how increases or
Normal Credit Balances – liabilities, equity, and
decreases in it are recorded. Increases are
income
recorded on the side of an account based on its
position in the accounting equation If an account has an abnormal balance, it is usually an
a. Since assets are on the left side of the indication of possible errors in the recording of business
accounting equation, increases in assets are transactions. Abnormal balances require investigation by
recorded as debits (left side), while decreases are the company regarding the cause of the abnormality,
recorded as credits (right side) followed by adjustments or corrections to bring the
b. Since liabilities and equity are on the right side account into normal balance.
of the accounting equation, increases in liabilities
and equity are recorded as credits (right side) and
decreases are entered as debits (left side)
 Accounting Cycle – Service Business
 Steps In The Accounting Cycle
I. Analyzing business transactions through source
documents
II. Journalizing, or the recording of transactions in
a journal
III. Posting or transferring of the entries from the
journal to the ledger
IV. Preparing the trial balance
V. Preparing a 10-column worksheet and making
the necessary adjusting journal entries
VI. Preparing the financial statements based on
adjusted account balances
VII. Recording adjusting entries to the journal and
posting the same to the ledger
VIII. Recording and posting of closing entries
IX. Ruling and balancing real and nominal
accounts
X. Preparing a post-closing trial balance
XI. Preparing reversing entries
 Book Of Accounts
The Journal
-the book where transactions are initially
recorded in a systematic and chronological order
(hence, journals are called the “books of original
entry”)
-For each transaction, a journal shows the debit
and the credit effect of transactions on specific
accounts
General Journal – the most basic form of a
journal; the journal may be part of either a
manual accounting system or a computerized
accounting system
Procedures For Recording Journal Entries
The following procedures are used when recording
journal entries in a two-column general journal,
assuming a manual accounting system is in place:
1. Analyze The Business Transactions – the
entry to be made should reflect a transaction’s
economic substance rather than its legal form.
Proper analysis of a transaction can only be done
by reviewing the source documents that support
the transaction
2. Write The Date Of The Entry In The Date
Column – the date can be readily determined
based on the date per source document
 Write the year in small figures at the top
of the column. The month is written
below the year, on the first line.
 Write the day of the month on the first
line in the second column immediately
after the name of the month
 The date is written only once for each
entry. The month need not be repeated
for other entries within the same month
3. Record The Debit Part Of The Entry
 Write the account title at the extreme
left edge of the Account Title column. Write
the amount of the amount in the Debit column
4. Record The Credit Part Of The Entry
 Indent each account title about one-half
inch from the left edge of the Account Title
column. Write the amount of the credit item in
the Credit column.
 5. Provide A Brief Description Of The
Transaction To Explain The Journal Entry
Made
 Indent each line of the description about one
inch from the left edge of the Account Title
column.
Other Things To Remember When Recording Entries
1. The accountant should have a clear
understanding of what the transaction is all about in
order to permit the selection of the appropriate
accounts to debit and to credit
2. If there is only one account debited and one
account credited, the entry is known as a Simple
Journal Entry. Where more than one account is
involved in a single entry, it is known as a
Compound Journal Entry
3. Using peso signs in columnar books of accounts
is NOT REQUIRED – unless otherwise stated, the
amounts are assumed to be in Philippine peso
4. Sometimes, the accountant makes an entry in
narrative format – there are no accounts debited or
credited. An entry which has no debit or credit
which shows only the date and a brief explanation
or reminder, is known as a Memorandum Entry
5. If an error is made in writing any part of the
entry, the entry is corrected by drawing a line
through the incorrect part and writing the
correction immediately above it
The Chart Of Accounts
-list of all the accounts of the business and their
respective account numbers.
-Using this would reduce confusion as to the choice
of account titles and permits uniformity in recording
routine transactions
-The accounts are arranged in the following
order: Assets, Liabilities, Equity, Income,
Expenses.
-Ordinarily, the chart of accounts is prepared
by the accountant who set up the accounting
system of the business
-The group of accounts is called a Ledger
-It is also known as the book of Final Entry
-A general ledger contains the entire set of
accounts used by a business
-The effects of business transactions are
summarized in individual accounts and each
account has an individual record in the ledger
Procedures For Posting Journal Entries
-The process of transferring the entries from the journal
to the accounts in a ledger is called Posting
-Normally, posting is done at the end of the month,
when all journal entries for the month have been
recorded
The following steps are observed during posting:
1. Using the ACCOUNT NUMBER (as provided
for in the chart of accounts) locate the account
title in the ledger
2. Write the DATE of the journal entry in the date
column of the ledger
3. Write in the REFERENCE COLUMN
(JOURNAL REFERENCE OR JR) of the ledger
the page of the journal where the journal entry
came from
4. Transfer the DEBIT AMOUNT from the journal
entry to the DEBIT COLUMN per ledger, and
the CREDIT AMOUNT per journal entry to the
CREDIT COLUMN per ledger
 5. Enter the account number in the REFERENCE
COLUMN (POSTING REFERENCE OR PR)
the account number once the figure has been
posted to the ledger
Trial Balance
-After all transactions for the period have been
posted to the ledger accounts, the balance for each
account is determined
-Every account will either have a debit balance, a
credit balance, or a zero balance
-A trial balance is a list of all accounts and their
balances
-It indicates whether total debits equal total credits
-This only proves, however, that all entries
recorded have equal debits and credits; it does not
guarantee that all transactions have been recorded
Footing The Accounts
Footing – adding all the debits and the credits; this
is done after all the entries are posted from the
journal to the ledger
Trial Balance – is a summary of accounts with
open balances (accounts with a debit/ credit
balance); commonly taken every MONTH-END
(after posting procedures) to check the equality of
debits and credits
Open Account – if it has a balance, either on the
debit or credit side
Closed Account – if the debits equal the credits
 Procedures For Preparing A Trial Balance
1. On a separate sheet of paper, indicate the
HEADING. The heading is composed of
three items, namely, the NAME OF THE
COMPANY, THE TITLE OF THE
REPORT AND THE DATE
2. Review the general ledger and note all open
accounts
3. Immediately below the heading, transfer the
account numbers, account titles, and
account balances of all accounts with open
balances. List down the accounts in the
following order: Assets, Liabilities, Equity,
Income, Expenses
4. Determine the total debits and the total
credits. Both totals should be equal.
When The Trial Balance Is Not Balanced
If total debits and credits do NOT balance, it signifies
that there was an error committed along the process,
which may be any of the following:
a) Error in footing the debit and credit
columns
b) Error in transferring from the ledger to the
trial balances
c) Errors in posting, say posting a debit entry
to the credit side of an account
d) Error in journalizing, for example, if the
debit side is not equal to the credit side of an
entry
e) Error of omission, when the debit is posted
but the credit is not posted
The Working Back Method proves effective in
locating the error. This means that you start re-checking
the correctness of the accounting procedures you
performed in REVERSE chronological order, i.e., start
with the trial balance and work backwards towards the
entries in the general journal
Working-Back Method
1. Recheck the footing of the debit columns and credit
columns of the trial balance If the footings are correct
and totals are not equal, determine the difference
between debit and credit columns. A possible reason
for the difference would be erroneously listing a debit
balance account as part of the credit column, or vice
versa. An error of this type would cause a difference
between debits and credits which is twice of the
amount involved.
2. If the error is still not located, check if the difference
between debit and credit columns is divisible by 9. If it
is divisible by 9, this suggests either a transplacement
error, or a transposition error.
3. Where the error is still not located, perform the
following:
a. Compare the amounts and accounts in the
trial balance with those in the ledger and
correct any discrepancies or omissions
b. Recheck the footing of the accounts in the
general ledger
c. Trace the postings from the journal to the
ledger. Be alert for possible omissions
d. Recheck the entries made in the journal and
ensure that total debit amounts are equal to
total credit amounts
Adjusting Journal Entries
Accrual basis accounting – recognizes transactions
as they occur. Income is recognized when earned and
expenses are recognized when incurred, regardless of
the inflow or outflow of cash.
Cash basis accounting – recognizes income only
when cash related to income is collected and expenses
are recognized only when paid.
Adjusting process is made in order to comply with the
GAAP regarding revenue recognition and matching
principles.
Adjusting entries – adjustments used to bring the
assets, liabilities, revenues and expenses up-to-date at
the end of accounting period.
-They are usually made at the end of the accounting
period.
-Necessary to properly report the truthful net income or
loss at the end of the accounting and to appropriately
report assets, liabilities, and equity.
Why is there a need to adjust the accounts at the end of the period?
Because, during the reporting period, cash receipts and
cash payments primarily serve as the bases for recording
income and expenses, the accounting records need to be
updated for revenues and expenses earned and incurred
but not yet collected or paid and for cash receipts and
cash payments made during the period but are not yet
earned or incurred.
Journalizing and Posting Adjusting Entries
-Follows the principle of accrual basis of accounting.
-Follows the principles of matching (properly match
revenues earned for the period with expenses incurred
for same period) and going concern (the entity is
assumed to continue its operations for an indefinite
future period of time, unless liquidation appears
imminent).
-The going concern assumption provides the basis for
the recognition of depreciation and deferrals.
-An adjusting entry affects both real and a nominal
account.
Calendar year – one where the period ends in AJE:
December 31. Asset(Receivable) xx
Income(Revenue) xx
Fiscal year – a period of 12 months that ends at any
time except December 31.
JE: (following year)
Types of adjusting entries: Cash xx
Revenue xx
1. Accruals – means to recognize revenue earned and
Receivable xx
expenses incurred, regardless of inflow or outflow
2. Deferrals - receipts of assets or payments of cash in
of cash.
advance of revenue or expense recognition.
 Accrued expenses – expenses incurred during
 Prepayments – cash paid not but not yet
the accounting period but has not been paid and
incurred.
is still unrecorded at year-end.
- Opposite of accrued expense.
-Affects 3 concepts: (1) Expense recognition principle
-3 concepts are involved: (1) expense
(2) liability recognition principle (3) accrual basis
recognition principle (2) asset recognition
assumption
principle (3) accrual basis assumption
-If not adjusted, expenses will be understated, profit
Asset Method
will be overstated, Liabilities will be understated,
OJE: xx
Equity will be overstated.
Prepaid asset xx
Cash xx
AJE:
Recognize the used portion
Expense xx
AJE:
Liability(Payable) xx
Expense xx
Prepaid Asset xx
JE: (following year)
Expense method
Expense xx
OJE:
Liability xx
Expense xx
Cash xx
Cash xx
 Accrued revenues – revenue earned during
Recognize the unused portion
the accounting period for which no cash has
AJE:
been collected yet.
Prepaid Asset xx
-If not adjusted, income will be understated, profit will
Expense xx
be understated, assets will be understated, Equity will
 Deferred revenues – cash received but not yet
be understated.
earned.
-Affects 3 concepts: (1) income recognition (2) asset
-Opposite of accrued income.
recognition principle (3) accrual basis assumption
-3 concepts are involved: (1) income recognition -The use of the contra account allows the disclosure of
principle (2) liability recognition principle (3) accrual the original cost of the asset in the statement of
basis assumption. financial position.
Liability Method -Carrying value of PPE is computed as the difference
OJE: of the cost and the accumulated depreciation account.
Cash xx 2. Bad Debts Expense
Unearned income xx -Estimating uncollectible accounts on receivable
Recognize the earned portion accounts.
AJE: -Also known as “Impairment of Receivables”.
Unearned income xx -The total amount of uncollectible accounts is an
Revenue xx expense that arises by selling on credit.
Income Method -Net realizable value of Accounts receivable is equal
OJE: to the difference of Accounts receivable ending balance
Cash xx and Allowance for doubtful accounts balance.
Revenue xx
Recognize the unearned portion Two methods of recording bad debts:
AJE: 1. Direct Writeoff – directly removes the estimated
Revenue xx uncollectible amount from receivables whether it is
Unearned income xx probable or not that the amount will not be
 Adjusting entries involving estimates collected.
o The only method allowed for income
1. Depreciation
tax purposes.
-The concept of depreciation involves the systematic
and rational allocation of the cost of long-lived assets
(write-off AR/ Recognition of bad debts)
over multiple accounting periods it is used to generate
Bad Debts Expense xx
revenue (cost allocation, not valuation concept).
Accounts Receivable xx
-Follows the matching principle.
-PPE, with the exception of land, are subject to
(Bad debts recovery)
depreciation.
Accounts receivable xx
Bad debts recovery xx
Straight-Line method of depreciation: (the simplest
Cash xx
and most widely used method of depreciation)
Accounts receivable xx
AJE:
Depreciation Expense xx
Bad debts recovery - other income account
Accumulated Depreciation xx
2. Allowance Method – a more prudent method of
estimating uncollectible accounts. It sets up first an
Annual Depreciation= allowance account for the estimation of
 uncollectible accounts. Once it is probable that the Completing The Accounting Cycle
account is uncollectible, derecognize the allowance
Adjusted trial balance is prepared
and remove the amount from receivables.
-The accounts receivable account is not directly -After journalizing and posting the adjusting entries,
credited, adjusted trial balance can be prepared. The amounts
-If the base used for estimating uncollectible account here are all adjusted and updated. A worksheet is
is: necessary to complete this step.
o A balance sheet account, the amount estimated is
the required balance of the allowance account. Closing entries -Journal entries that bring temporary
o An income statement account, the amount accounts to zero balance and transfer their balances to
estimated is an addition to the balance of the the permanent capital account at the end of the
allowance account. accounting period.
-In contrast to the direct write-off method, recording -Temporary accounts include all Statement of
write-offs and recoveries under the allowance method Comprehensive Income accounts and withdrawal
does not affect profit. account. They are known as nominal accounts.
(Recognition of bad debts) -Permanent accounts carry forward their ending
Bad debts expense xx balances to the next accounting period. They are known
Allowance for bad debts xx as real accounts. They comprise items in the Statement
of Financial Position.
(write-off of AR) Income summary account – used as another
Allowance for bad debts xx temporary account in which the revenue and the
Accounts receivable xx expense accounts are closed to determine whether the
business operations results to income or loss. Also
(recovery of accounts written-off) known as Revenue and Expense Summary
Accounts receivable xx
-There is net income if the resulting balance of the
Allowance for bad debts xx
Income summary account (after closing revenues and
Cash xx
expenses) is credit balance (Revenues > Expenses)
Accounts receivable xx
otherwise, there is net loss.

Aging analysis of receivables – bad debt expense is

computed under the premise that the longer an amount Procedures in closing the nominal accounts:
is past due, the more likely it is to be uncollectible.
1. Close all revenue accounts by debiting the
- Higher percentage (%) will be assigned to older
amount and crediting income summary account.
receivables and the lowest percentages to new
2. Close all expense accounts by crediting the
receivables or to those which are not yet due.
amount and debiting income summary account.
 3. Close the balance of the income summary
account to the capital account, which balance
represents profit (credit balance) or loss (debit
balance) for the period.
4. Close the drawing account to the capital
account.
Post-closing trial balance is prepared
-The purpose is to check the equality of debits and
credits in the ledger after the adjusting and closing
entries are recorded and posted.
-At this point, the only accounts with balances are
assets, contra accounts, liabilities, and capital.
Reversing entries
- Optional because it does not change the
amount reported in the financial statements.
- Journal entries made at the beginning of the
next accounting period and are exactly the
reverse of some adjusting entries.
- They are made after the preparation of FS and
closing the books of accounts, but before the
recording of the regular transactions for the
next accounting period.
- Purpose: Not to correct the AJE but to
simplify the recording of recurring transactions
of the next accounting period.
- Also for consistency in the recording of
income and expenses.
Rules in reversing journal entries
 General rule: a reversing entry is made if an
adjustment previously entered increases the
SFP account totals.
Reversing entries are prepared for:
1. Accrued expenses
2. Accrued income
3. Prepayments under expense method
4. Deferred income under income method
The rest will not need any reversing entry.
Merchandising Business
Merchandise inventory – goods intended for sale;
asset (unsold)
Sales - revenue from selling merchandise
Cost of Goods Sold - cost of buying and preparing the
merchandise; expense(sold)
Operating expenses – merchandiser’s expenses
Point of Sale – most common point of income
recognition
Beginning Inventory – “opening stock”
- represents the cost of goods that are still unsold as of
the start of the period
Net purchases – cost of acquiring inventories during
the period
Ending inventories – “closing stock”
-inventory at the end of the period
 Inventory system used for merchandising
transactions
Periodic Inventory System - CGS is determined only
at the end of an accounting period
Cash/AR xx
Sales xx
Sales returns – customers who may return all or a
portion of the goods that they purchased, due to wrong
specifications, poor quality of the merchandise, or
erroneous merchandise being delivered
 Sales allowance - customer is willing to accept the
goods despite certain defects, in exchange for an
allowance or price adjustments granted by the seller.
Sales returns & allowances – only one account title;
contra-revenue accounts
Credit memorandum – document which informs a
customer that a credit has been made to the customer’s
account receivable for a sales return or allowance
Sales returns & allowances xx
Cash/AR xx
Sales discounts – contra-revenue account
- If payments are received within a certain number of
days from the date of sale, the seller reduces the amount
to be paid by the buyer
Example:
2/10, n/30
2% may be deducted from the amount due if the
customer pays within 10 days from the date of sale.
If customer doesn’t pay within 10 days, he/she must
pay the full price within 30 days from the date of sale.
Cash xx
Sales discount xx
Accounts receivable xx
Trade discount – used to reduce the list price to
actual sales price which may be due to the volume of
transactions
-not recorded; the amount recorded is always net of the
trade discount
Purchases – goods purchased for resale
Purchases xx
Cash/AR xx
Purchase return – if a buyer decides to return
purchased goods
Purchase allowances – when the company is still
willing to accept the said goods, but with a reduction
price
Debit memorandum – a document the purchaser
issues to inform the supplier of a debit made to the
supplier’s account including the reason for the return
of allowance
AP/cash xx
Purchases return & allowances xx
Purchase discount – sales discounts from the buyer’s
viewpoint
-contra account having a normal credit balance
3 alternative methods:
(1) Gross Price Method – purchases and AP are
recorded at gross; Purchase discount are recorded
only when taken.
(2) Net Price Method – purchases and AP are
recorded at net of the discounts offered; Purchase
discounts lost is used to record purchase discounts
which have been forfeited.
(3) Allowance Method – purchases are recorded at net
and AP at gross.
 Shipping Charges on Merchandise Purchased or
Sold
point of passage title – point of transfer of
ownership
freight terms:
(1) Free on board(FOB) destination
- seller has agreed to pay all the shipping costs and the
purchaser receives title to the goods at the point of
destination.
Freight out/transportation cost xx
Cash xx
 FOB destination, freight prepaid
- freight cost is chargeable to the seller who pays the
shipping company
 Seller’s book: Buyer’s book  Perpetual Inventory System
AR/cash xx Purchases xx - records are kept of the quantity and cost of each item
Sales xx AP/cash xx as it is bough, held in inventory and sold.
Freight out xx (No JE for the freight cost) - the cost of each item is debited to the merchandise
Cash xx inventory account upon purchase
 FOB Destination, freight collect - at the time of sale, the cost of each item is transferred
-freight cost is chargeable to the seller but the buyer from the merchandise inventory account to the cost of
has to pay the shipping company upon receipt of the goods sold account
goods CGS xx
Seller’s book: Buyer’s book Merch. Invty. xx
AR/cash xx Purchases xx
Sales xx AP xx End of Period Adjustments and Completion of
Freight out xx AP xx Accounting Cycle
AR/cash xx cash xx
 Adjusting Entries
(2) FOB Shipping Point
Cost of goods method - method of adjusting
- purchaser has agreed to shoulder all the shipping merchandise inventory
costs and the purchaser receives title to goods at 1. Removing the beginning inventory from the
shipping point merchandise inventory account
CGS xx
 FOB shipping point, freight collect
Merch invty, beg xx
Seller’s book: Buyer’s book 2. Closing the purchases account and purchase-related
AR/cash xx Purchases xx accounts
Sales xx AP/cash xx CGS xx
(No JE for freight) Freight-in xx Purch R&A xx
Cash xx Purch disc xx
 FOB shipping point, freight prepaid Purchases xx
Freight-in xx
- all the shipping cost is for the account of the buyer but
3. Setting up the ending inventory figure
the seller advanced the payment to the shipping
Merch invty xx
company
CGS xx
Seller’s book: Buyer’s book
AR/cash xx Purchases xx  Preparation of a worksheet
Sales xx AP/cash xx (1) CGS method
AR xx Freight-in xx (2) Direct extension method
Cash xx AP/cash xx
Filling up the worksheet of a merchandising business  Preparation of AJE and CE
(1) Unadjusted Trial Balance Columns CGS method – purchases and purch related
CGS DE accounts have already been closed to CGS
Transfer the unadjusted ledger balances to the CE:
columns of the worksheet Sales xx
Sales R&A xx
(2) Adjustment Columns Sales discount xx
Expenses xx
CGS DE
CGS xx
CGS xx
Inc summary xx
Merch invty, end xx No AJE to set up CGS
Purch R&A xx
Inc summary xx
Purch disc xx
Drawing xx
MI, beg xx
Purchases xx
Drawing xx
Freight-in xx
Capital xx
(3) Adjusted Trial Balance Columns
DE method – “closing entry method”
CGS DE
MI, end xx
MI – contains ending no CGS account
Sales xx
balance MI – beginning bal
PR&A xx
Purch and Purch R&A Purch and PurchR&A
PD xx
are closed are still open
Inc summary xx
MI and CGS –
Remaining open
Inc summary xx
MI, beg xx
(4) Income statement and Balance sheet columns
Sales R&A xx
CGS DE Sales disc xx
CGS – debit bal sheet Purch and Freight-in Purchases xx
- debit inc statement - debit inc statement Freight-in xx
MI – debit bal sheet Contra-purch – credit OPex xx
inc statement
MI, beg – debit inc Inc summary xx
statement Drawing xx

MI, end – credit inc

Drawing xx
statement, DE to debit
Capital xx
bal sheet
Remember: Special Journals and Subsidiary Ledgers
Freight-in – account debited by the buyer
- added to purchases Purchase Journal – use to record purchases on
Freight-out – account debited by the seller account
- selling expenses Sales Journal – use to record sales on account
FOB Shipping Point – buyer Cash Receipt Journal - record all receipt of cash from
FOB Destination – seller any source
Freight Prepaid - seller paid cash to shipping Cash Disbursement Journal - record all disbursement
company of cash
Freight collect – buyer paid cash to shipping company Subsidiary Ledgers – group of accounts with common
Credit memorandum – sales R&A characteristics
Debit memorandum – purch R&A -frees the general ledger from the details of individual
balances
Income statement: Controlling account – summary account in the general
Purchase ledger
+ Freight –In
Gross Purchases Manufacturing Business
- Purchase Returns&Allowances
- Purchase Discounts 3 Departments:
Net Purchases (1)Production Department(production area) - in
+ Merchandise Inventory, Beginning charge of manufacturing the finished products of the
Cost Of Goods Avabilable for Sale company
- Merchandise Inventoty, Ending (2) Administrative Department(non-production area)
Cost of Goods Sold (3) Sales Department(non-production area)

Sales  Classifications of Manufacturing costs

- Sales Returns & Allowances Direct materials – essential part of finished product
- Sales Discount -easily traced to the product
Net Sales Direct labor – directly incurred in manufacturing the
- Cost of Goods Sold product
Gross Profit -easily traced to specific product
- Operating Expenses Manufacturing Overhead – “factory overhead”
Operating Income – all manufacturing costs or expenses incurred in the
+Other Income manufacturing or production department.
-Other Expense -excludes direct materials and direct labor
Net Income -cannot be easily traced
  Indirect materials – raw materials that are Indirect raw materials used in the production:
part of finished product; cannot be easily FOH xx
traced Raw Materials xx
 Indirect labor costs – cannot be directly
traced to the production of the products Direct labor incurred in the production:
Work in Process xx
 Classifications of Non-Manufacturing costs Cash/salaries and wages payable xx
(1) Selling Costs - all costs to sell the finished
products Indirect labor incurred in the production:
(2) Administrative costs - organizational and FOH xx
executive costs related with the administration of an Cash/ salaries and wages payable xx
organization
Expenses incurred in the manufacturing or production
Product costs – “inventoriable cost” department other than direct material, indirect material,
– all the costs that are incurred in manufacturing a direct labor, indirect labor:
product FOH xx
-includes direct materials, direct labor and Various accounts xx
manufacturing overhead
Period costs - includes administrative and selling Administrative expenses:
expenses Expenses-G&A xx
- recognized as expense in the period incurred Various accounts xx
Prime cost – sum or total of direct materials and direct
labor Selling expenses:
Conversion cost - sum or total of direct labor and Expenses-selling xx
factory overhead costs Various accounts xx

Journal Entries for a Manufacturing Company Raw Materials Inventory- goods a company acquires
Purchase of raw materials: to use in making products
Raw materials xx -direct and indirect materials
Cash/AP xx Goods In Process Inventory – “Work In Process
Inventoy”
Direct raw materials used in the production: - products in the process of being manufactured but not
Work in proces xx yet complete.
Raw materials xx Finished Goods Inventory – completed products
ready for sale
 Formulas: Direct Materials
+ Direct Labor
Purchases Prime Cost
+ Freight-In
Gross Purchases Direct Labor
- Purchase Return&Allowances + Factory OverHead
- Purchase Discounts Conversion Cost
Net Purchases
+ Raw Materials, Beginning
Total Raw Materials Available For Production
- Raw Materials, End
Total Raw Materials Used
+ Direct Labor
+ Factory Overhead
Total Manufacturing Cost
+ Work In Process, Beginning
Total Goods Put Into Production
- Work In Process, End
Cost of Goods Manufactured
Finished Goods, Beginning
Cost Of Goods Available for Sale
+ Finished Goods, End
Cost of Goods Sold

Sales
- Sales Returns & Allowances
- Sales Discount
Net Sales
- Cost of Goods Sold
Gross Profit
- Operating Expenses
Operating Income
+ Other Income
- Other Expense
Net Income