FINANCIAL

ACCOUNTING AND
REPORTING

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What is Accounting?
 Accounting is...
▪ is a service activity.

▪ is an information system.

▪ is the process of identifying, measuring,

and communicating information.

▪ is an art of recording, classifying and

summarizing.
Accounting Information
▪ It is the information that is collected is
primarily numerical.

▪ This information is presented to various

people to help them make business
decisions.

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To account..
▪ To account for something means to
keep a record of something in your
business by using the accounting
system.

An accountant (or bookkeeper) collects

documentation and records this
information, categorizes it, and
presents it in specific formats.

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Financial Statements
▪ Accounting information is finally presented in
the form of financial statements – the key
reports of a business.

Bookkeepers
▪ Bookkeepers are involved in data collection
and entry.

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 Accountants
▪ Accountants prepare and
present financial statements
and fulfill an advisory or
consulting role.

▪ Accountants have even

become business strategists,
intimately involved in guiding
the operations of a business.

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Functions of Accounting
Recording
▪ Is a process in which transactions are recorded
in the books of original entries. Example in
journal books.
Journal Books
▪ Is sub-divided into subsidiary books according
to the number of transactions of particular
category.

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Classifying
▪ Means transactions or entries of one nature are
grouped under one head of account.

▪ The transactions recorded in ‘Journal’ or the

‘Subsidiary Books’ are classified or posted to the
‘Ledger Account’.

▪ Ledger is the book that contains individual

account heads under which all financial
transactions of a similar nature are collected.
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Summarizing
▪ Is presenting the classified data
in a from that is understandable
and useful to users of accounting
information.

▪ It means preparation of Trial

Balance, leading to preparation of
financial statements example
trading and profit and loss
account, and balance sheet.
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Communicating

▪ the accounting function is to

communicate the financial data to
the users.
Analysis and Interpretation
▪ Means analyzing and then interpreting the
financial data.
▪ To make a meaningful judgment of the
profitability and financial position of the
business.
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Accounting
Cycle
▪ Refers to the series of sequential steps
or procedures performed to
accomplish the accounting process
Step 1: Identifying and Analyzing
Business Transactions

▪ Aim : To Gather information about

transactions or events generally through
source documents.

▪ To Identify and analyze the accounts affected

and the amounts to be recorded.
The Accounting Equation
▪ Basic tool of accounting
▪ States that Assets must be equal
liabilities and owner’s equity
ASSETS
▪ Controlled by Enterprise
▪ Result of past events
▪ Future Economic Benefit
▪ Assets should be classify into current and
non-current assets.
What is CURRENT ASSETS ?
▪ Expects to realize the asset, or intends to sell
or consume it , in its normal operating cycle
▪ Primarily for the purpose of trading
▪ Expects to realize within 12 months after the
reporting period
▪ Asset is cash or cash equivalent from being
exchanged or used to settle a liability for at
least 12 months after the reporting period
▪ All other assets should be classified as non-
current assets.
Typical Asset Accounts
Current Assets Non-Current Assets
▪ Cash ▪ Property, Plant and
▪ Cash Equivalents Equipment (PPE)
▪ Notes Receivable ▪ Accumulated Depreciation
▪ Accounts Receivable ▪ Intangible Assets
▪ Inventories
▪ Prepaid Expenses
Liabilities
▪ OBLIGATION
▪ Transfer economic benefits
▪ Results from past transaction or events
▪ Mirror images of Asset
▪ Liabilities should be classify into current and
non-current liabilities.
What is CURRENT
LIABILITIES?
▪ Expects to settle the liability in its normal
operating cycle
▪ Primarily for purpose of trading
▪ Due to be settled within 12 months after the
reporting period
▪ The entity will settle the liability at least
twelve months after the reporting period
▪ All other liabilities should be classify as non-
current liabilities
Typical Liability Accounts
Current Liabilities Non-Current Liabilities
▪ Accounts Payable ▪ Mortgage Payable
▪ Notes Payable ▪ Bonds Payable
▪ Accrued Liabilities
▪ Unearned revenues
▪ Current Portion of long
term-debt
Owner’s Equity
▪ Residual interest in the assets of the
enterprise after deducting its liabilities
▪ Consist of Income accounts, Expense
accounts, Gains and losses accounts, Capital
and Withdrawal accounts.
Owner’s Equity
▪ Capital Account
▪ Withdrawal Account
▪ Income Summary Account
▪ Expense Accounts
▪ Income Accounts
 Typical Income and Expense
Accounts
Income Expenses
▪ Service Income ▪ Cost of Sales
▪ Sales ▪ Salaries or Wages Expense
▪ Utilities Expense
▪ Rent Expense
▪ Supplies Expense
▪ Insurance Expense
▪ Depreciation Expense
▪ Interest Expense
▪ Bad Debts Expense
Normal Balance of an Account
▪ Refers to the normal balance of an account – debit or
credit – where increases are recorded
Transaction Analysis
▪ First, Identify the transaction from source
documents
Ex. From source document ,The company bought
an Equipment costing P10, 000 on account
▪ Second, Indicate the Accounts affected by
the transaction
Equipment(Asset) account and the Accounts
Payable(Liability) account is affected by the
transaction
Transaction Analysis
▪ Third, Ascertain whether each account is
increased or decreased by the transaction.
Equipment(Asset) increased because of the acquisition and
Accounts Payable(Liability) increased because a new
obligation arises.
▪ Finally, determine whether to debit or credit the
account to record its increased or decreased
Increase in assets are recorded by debits. Increased in
Liabilities are recorded by credits.

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 STEP 2: Recording in the
Journals
▪ Aim : To record the economic impact of
transactions on the firm in a journal, which is
a form that facilitates the transfer to
accounts.
▪ Journal - are also known as Books of Original
Entry . It is a book – paper or electronic – in
which transactions are recorded.
▪ Journalizing- Process of recording a
transaction
Journal
▪ Chronological record of the entity’s
transaction.
▪ General Journal – Simplest Journal
Format of Journal
▪ Date
▪ Account Title and Explanation
▪ P.R. (Posting Reference)
▪ Debit
▪ Credit
Rules of Double Entry
System
▪ Two or more accounts area affected by each
transaction.

▪ The sum of the debits for every transaction

equals the sum of the credits.

▪ The equality of accounting equation is always

maintained.
Journalizing
▪ Pia invested P250 000 in the business.
Entry:
Cash(A) 250 000
Pia, Capital(OE) 250 000
To record the owner’s initial Investment
Analysis: Assets Increased, Owner’s Equity Increased
Rules: Increase in assets are recorded by debits. Increase in Owner’s Equity is
recorded by credits
Entry: Increase in cash (A) is recorded by debit. Increase in Diaz, Capital(OE) is
recorded by credit.
Journalizing
▪ Rented office space and paid two months’
rent in advance. P8 000

Entry: Prepaid Rent (A) 8 000

Cash (A) 8 000
To record the rent paid in advance
Analysis: Assets Increased, Assets Decreased
Rules: Increase in assets are recorded by debits. decrease in Assets is
recorded by credits
Entry: Increase in Prepaid rent (A) is recorded by debit. Decrease in Cash
(A) is recorded by credit
Journalizing
▪ Purchase supplies on credit for P18 000 from
SJDM Merchandising

Entry: Supplies(A) 18 000

Accounts Payable(L) 18 000
To record the supplies purchased on account
Analysis: Assets Increased, Liability Increased
Rules: Increase in assets are recorded by debits. Increase in Liabilities is
recorded by credits
Entry: Increase in Supplies (A) is recorded by debit. Increase in Accounts
Payable (L) is recorded by credit
Simple Entry and Compound
Entry
▪ Simple Entry – 2 accounts are affected by the transaction.
Ex. Paid the Accounts Payable, P10 000.
Accounts Payable P 10 000
Cash P 10 000

▪ Compound Entry – 3 or more accounts are affected by the

transaction
Ex. Purchased Supplies for P 60,000 paying P15 000 Cash and the balance on
Account.
Supplies 60 000
Cash 15 000
Accounts Payable 45 000
A + 60000 net + A = 45000
Mr. A invested P300,000 cash and land
with a value of P1,500,000 that is
mortgaged for P200,000.
Asset – Cash - 300,000 – increase
Asset – Land - 1,500,000 – increase
Liability – Mortgage Payable - 200,000 – increase

Capital – 1,600,000 – increase

Entry:
Cash 300,000
Land 1,500,000
Mortgage Payable 200,000
Mr. A, Capital 1,600,000
To record the initial investment of Mr. A
Step 3: Posting to the Ledger
▪ Aim: To Transfer the Information from the
journal to the ledger for classification.
▪ Ledger - a collection of accounts that shows
the changes made to each account as a result
of past transactions, and their current
balances.
▪ Posting – transferring the amounts from the
journal to the ledger
 Sample Format of the Ledger
▪ Account Name
▪ Account No.
▪ Date
▪ Explanation
▪ J.R. (Journal reference)
▪ Debit
▪ Credit
Sample Chart Of accounts
▪ A listing of all the accounts and their account
numbers in the ledger.
▪ 100 – Asset
▪ 200 – Liabilities
▪ 300 – Owner’s Equity
▪ 400 – Income
▪ 500 – Expense
Ledger Accounts After
Posting

▪ Footing – each
account balance is
determined by adding
all debits and credits
 Step 4: Unadjusted Trial
Balance

▪ Aim: to verify the equality of the debits and

credits
▪ Trial Balance - prepared to test the equality of
the debits and credits
Procedures
▪ List the account title in numerical order

▪ Obtain the account balance of each account

from the ledger and enter the balances

▪ Add the debit and credit columns

Sample Trial Balance
ABC COMPANY
TRIAL BALANCE
FOR THE PERIOD ENDED DECEMBER 31, 2021
Step 5: Worksheet including
Adjusting Entries
▪ Aim: To Aid in Preparation of the Financial
Statements

▪ Worksheet – simplifies the adjusting and

closing entries
Adjusting Entries
▪ Deferred Expense
▪ Deferred Income
▪ Accrued Expense
▪ Accrued Income
▪ Depreciation
▪ Allowance for Uncollectible Accounts
Deferred Expense
▪ An expense already paid but not yet incurred
▪ Allocating the assets to reflect expenses
incurred during the accounting period
Ex. On May 8 , ABC Company purchased supplies P18 000. At the end
of the accounting period P15 000 worth of supplies are still on hand.

Supplies Expense 3 000

Supplies 3 0000
Deferred Income
▪ Revenue already collected but not yet earned
▪ Allocating Revenues received in advance to
revenue to reflect revenues earned during the
accounting period
Ex. On May 15, ABC Company received P10 000 an advance payment for
referrals made. Assume at the end of the month P4 000 has been realized.

Unearned Referral Revenues 4 000

Referral Revenues 4 000
Accrued Expense
▪ Expense already incurred but unpaid
▪ Accruing Expense to reflect expense incurred
during the accounting period that are unpaid
and unrecorded
Ex. On May 2, ABC Company borrowed P210 000 by issuing
a promissory not the earned 20 % interest. Compute the
Expense in the end of the month of May.
Interest Expense 3 500
Interest Payable 3 500
Accrued Revenues
▪ Revenues already earned but uncollected
▪ Accruing Revenues to reflect revenues earned
during the accounting period that are unpaid
and unrecorded
▪ On May 31, unbilled revenues but earned amounted to
P10 000.
Accounts Receivable 10 000
Consulting Revenues 10 000
Depreciation
▪ Straight Line Method-Allocating the cost of
the asset over the estimated usefulness of
that asset. This would be the depreciation for
1 year.
Depreciation
▪ Ex. On January 1, fixed asset was purchased
costing P 13 000 has a salvage value of P1 ooo an
a useful life of 5 years.
▪ Computation of December 31 depreciation using
straight line basis would be:
▪ Annual Depreciation= (13,000-1,000)/5
Annual Depreciation= 2,400

Entry: Depreciation Expense 2 400

Accumulated Depreciation 2 400
Step 6. Financial Statements
1) Statement of Comprehensive Income
-- An entity shall present income and expense
recognized during a period.

a)In Single statement of comprehensive income, or

a)In Two statements ; a statement displaying

components of profit or loss (separate income
statement) and a second statement beginning with
profit and loss (statement of comprehensive income.
2) Statement of Changes in Equity
--- it summarizes the changes that occurred
in owners equity.

Changes in an enterprise’s equity between two

balance sheet dates reflect the increase or
decrease in its net assets during the period.
 SAMPLE STATEMENT OF CHANGES IN EQUITY
ABC COMPANY
Statement of Changes in Equity
For the Month Ended July 31, 2021

Pia, Owner’s equity, 7/1/2021 P250,000

Add: Additional investments by Pia P0
Profit P35,000 P 35,000
Total P
285,000
Less: Withdrawal
(14,000)
Pia, Owner’s Equity, 7/31/2021 P 271,000
3) Statement of Financial Position
--- statement that shows the financial
condition or condition of an entity by listing the
assets, liabilities and owners equity as at a
specific date.

--- the information needed here is the net

balances at the end of the period

--- also known as balance sheet

4) Statement of Cash Flow
--- it provides information about the cash
receipts and cash payments of an entity during
the period.
Step 7: Adjustment are
Journalized and Posted

-- the Adjustment process is a key element of

accrual basis accounting. The worksheet helps
in the identification of the accounts that need
adjustment.
Step 8: Closing Entries are
Journalized and Posted

▪ --- Income, Expense and Withdrawal

Accounts are temporary accounts that
accumulate information related to specific
accounting period.
 1) Close the Income Accounts
2021
May 31 Consulting Revenues 410 P 67, 700
Referral Revenues 420 4, 000
Income Summary 330 P 71, 700

2) Close the Expense Account

2021
May 31 Income Summary 330 P 36, 700
Salaries expense 510 15,600
Supplies expense 520 3,000
Rent Expense 530 4,000
Insurance Expense 540 1,200
Utilities Expense 550 4,400
Depreciatiom Expense- Serv. Vehicle 560 4,000
Depreciation Expense- Off.Equipt. 570 1,000
Interest Expense 590 3,500
3) Close the Income Summary Account
2021
May 31 Income Summary 330 P 35,000
Pia, Capital 310 P 35,000

4) Close the Withdrawal Account

2021
May 31 Pia, Capital 310 P14,000

Pia, Withdrawals 320 P14,000

Step 9:Preparation of a Post-
Closing Trial Balance

▪ --- The post – closing trial balance verifies that

all debits equal the credits in the trial balance.
 ABC COMPANY
POST-CLOSING TRIAL BALANCE
DECEMBER 31, 2021
Step 10: Reversing Entries
--- A reversing entry is a journal entry which is
the exact opposite of a related adjusting
entry made at the end of the period.
---Reversing entry is to simplify the accounting
record upon occurrence of the adjusting
entries on the next period.
---Technically reversal is done for those
adjustments that increases assets and
increases liabilities.