Far Module Prelim Complete Chapter 1 To 5docx Compress

CARD-MRI Development Institute, Inc.
Course Title Financial Accounting and Reporting 1

Course This course provides a reinforcement of basic accounting, within the
Description context of business and business decisions. Students obtain additional
knowledge of the principles and concepts of accounting as well as their
application that will enable them to appreciate the production of
accounting data. Emphasis is placed on understanding the reasons
underlying basic accounting concepts and providing students with an
adequate background on the recording of transactions, their
classifications and reporting function of accounting in a service and
trading concerns through the preparation of Statement of Financial
Position, Income Statement, Statement of Changes in Equity, and Cash
Flow Statement . Exposure through the use of practice sets, either
manual or computerized system in recording and reporting transactions
for service or trading firm is a requirement in this course. Toward the
end of the course covering financial statements for corporation, there
must be an introduction to regulatory reporting in the Philippines for
Corporations
Course At the end of the course, the students should be able to:
Learning
 Define accounting.
Outcomes
 Describe the nature and purpose of accounting.
 Give examples of branches of accounting.
 State the function of accounting in a business.
 Differentiate between external and internal users of accounting
information.
 Narrate the history/origin of accounting.
 State the forms of business organization.
 State the types of business according to their activities.
 Give examples of accounting concepts and principles.
 Apply the concepts in solving accounting problems.
 Illustrate the accounting equation.
 Perform operations involving simple cases with the use of
accounting equation.
 Identify the uses of the two books of accounts.
 Explain the rules of debits and credits.
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TABLE OF CONTENTS
CHAPTER I - INTRODUCTION TO ACCOUNTING.................................................................3
WEEK 1 (Allotted time: 3.0 hours).............................................................................................3
Activate Prior Knowledge........................................................................................................3
Acquire New Knowledge.........................................................................................................4
Application............................................................................................................................15
Assessment..........................................................................................................................15
CHAPTER II - ACCOUNTING CONCEPTS AND PRINCIPLES.............................................16
Week 2 (Allotted time: 3.0 hours)............................................................................................16
Activate Prior Knowledge.....................................................................................................16
Acquire new Knowledge.......................................................................................................16
Application............................................................................................................................13
Assessment..........................................................................................................................13
CHAPTER III - THE ACCOUNTING EQUATION....................................................................14
Week 3 (Allotted time: 3.0 hours)...........................................................................................14
Acquire New Knowledge.......................................................................................................14
Application............................................................................................................................20
Assessment..........................................................................................................................20
CHAPTER IV - TYPES OF MAJOR ACCOUNTS...................................................................21
Week 4 (Allotted time: 3.0 hours)...........................................................................................21
Application............................................................................................................................27
Assessment..........................................................................................................................27
CHAPTER V - BOOKS OF ACCOUNTS AND DOUBLE-ENTRY SYSTEM...........................28
Week 5 (Allotted time: 3.0 hours)............................................................................................28
Application............................................................................................................................31
Assessment..........................................................................................................................31
Prepared by: Lorenz Nicole R. Casas FB: Nicole Casas

Email: nicole.cardamg@gmail.com Contact number: 0946-6393-212
Financial Accounting and Reporting by Zeus Vernon Millan
1
CHAPTER I - INTRODUCTION TO ACCOUNTING
WEEK 1 (ALLOTTED TIME: 3.0 HOURS)
ACTIVATE PRIOR KNOWLEDGE

Self Assessment on knowledge on Basic Accounting
Answer the assessment tool below to know your level of preparedness in Financial
Accounting & Reporting. Please check on the box that best describes your skill level. Use the
box under the “Before” column to enter your skill level before proceeding to the activities in
the module. You answer the “After” Column after finishing the module. Use the following
scale for your guide
4 - Able to train others 3 - Comfortable doing
2 - Some knowledge 1 - No knowledge
SN Areas 4 3 2 1
Before After Before After Before After Before After
1. Framework of Accounting
2. Basic Accounting Equation
3. Classification of Accounting
Elements
4. Rules of Debit and Credit
5. Account Titles
6. Books of Account
Learning Objectives
 Define accounting.
 Describe the nature and purpose of accounting.
 Give examples of branches of accounting.
 State the function of accounting in a business.
 Differentiate between external and internal users of accounting information.
 Narrate the history/origin of accounting.
 State the forms of business organization.
 State the types of business according to their activities.

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ACQUIRE NEW KNOWLEDGE
DEFINITION
Accounting is a process of identifying, recording and communicating economic
information that is useful in making economic decisions.
Essential elements of the definition of accounting

Identifying – The accountant analyzes each business transaction and identifies
whether the transaction is an “accountable event” or “non-accountable event.” This is
because only “accountable events” are recorded in the books of accounts. “Non-
accountable events” are not recorded in the books of accounts.
Recording – The accountant recognizes (i.e., records) the “accountable events” he
has identified. This process is called “journalizing.” After journalizing, the accountant
then classifies the effects of the event on the “accounts.” This process is called
“posting.”
Communicating – At the end of each accounting period, the accountant summarizes
the information processed in the accounting system in order to produce meaningful
reports. Accounting information is communicated to interested users through
accounting reports, the most common form of which is the financial statements.
Nature of accounting
Accounting is a process with the basic purpose of providing information about
economic activities intended to be useful in making economic decisions.
Types of information provided by accounting
 Quantitative information
 Qualitative information
 Financial information
Functions of Accounting in Business
 To provide external users with information that is useful in making investment
and credit decisions; and
 To provide internal users with information that is useful in managing the
business.

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Brief history of accounting
Accounting can be traced as far back as the prehistoric times, perhaps more than
10,000 years ago.
Archaeologists have found clay tokens as old as 8500 B.C. in Mesopotamia which
were usually cones, disks, spheres and pellets. These tokens correspond to commodities
like sheep, clothing or bread. They were used in the Middle West in keeping records.
After some time, the tokens were replaced by wet clay tablets. During such time, experts
concluded this to be the start of the art of writing. (Source:
http://EzineArticles.com/456988)
Double entry records first came out during 1340 A.D. in Genoa.
In 1494, the first systematic record keeping dealing with the “double entry recording
system” was formulated by Fra Luca Pacioli, a Franciscan monk and mathematician. The
“double entry recording system” was included in Pacioli’s book titled “Summa di
Arithmetica Geometria Proportioni and Proportionista,” published on November 10, 1494
in Venice.
The concept of “double entry recording” is being used to this day. Thus, Fra Luca
Pacioli is considered as the father of modern accounting.
Common Branches of Accounting

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Users of Accounting Information
1. Internal users – those who are directly involved in managing the business.
Examples:
 Business owners who are directly involved in managing the business
 Board of directors
 Managerial personnel
2. External users – those who are not directly involved in managing the business.
Examples:
 Existing and potential investors (e.g., stockholders who are not directly
involved in managing the business)
 Lenders (e.g., banks) and Creditors (e.g., suppliers)
 Non-managerial employees
 Public
Forms of Business Organizations
Advantages and Disadvantages of Forms of Business Organizations

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Types of Business According to Activities
1. Service business
2. Merchandising (Trading)
3. Manufacturing

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APPLICATION
Quiz # 1.1
ASSESSMENT
Assignment #1.1

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CHAPTER II - ACCOUNTING CONCEPTS AND PRINCIPLES

Preliminary Activity - Think of a business owner you know and discuss the form of his/her
business, type of business activity and discuss the nature of his/her products or services.
Learning Objectives
 Give examples of accounting concepts and principles.
 Apply the concepts in solving accounting problems.
DEFINITION
Accounting concepts and postulates are a set of logical ideas and procedures that
guide the accountant in recording and communicating economic information.
It provide reasonable assurance that information communicated to users is prepared
in a proper way.
ACCOUNTING ASSUMPTIONS
Accounting assumptions are basic notions or fundamental premises on which the
accounting process is based.
It serve as the foundation or bedrock of accounting in order to avoid misunderstanding
but rather enhance the understanding and usefulness of financial statements.
BASIC ACCOUNTING CONCEPTS

1. Separate entity concept 7. Time Period
2. Historical cost concept 8. Stable monetary unit
3. Going concern assumption 9. Materiality concept
4. Matching 10. Cost-benefit
5. Accrual Basis 11. Full Disclosure principle
6. Prudence (or Conservatism) 12. Consistency concept

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Separate entity concept – The business is viewed as a separate entity, distinct from its owner(s).
Only the transactions of the business are recorded in the books of accounts. The personal
transactions of the business owner(s) are not recorded.
Historical cost concept (Cost principle) – assets are initially recorded at their acquisition cost.
Going concern assumption – The business is assumed to continue to exist for an indefinite
period of time.
Matching – Some costs are initially recognized as assets and charged as expenses only when the
related revenue is recognized.
Accrual Basis of accounting – income is recorded in the period when it is earned rather than
when it is collected, while expense is recorded in the period when it is incurred rather than when it
is paid.
Prudence – The observance of some degree of caution when exercising judgments under
conditions of uncertainty. Such that, if there is a choice between a potentially unfavorable outcome
and a potentially favorable outcome, the unfavorable one is chosen. This is necessary so that
assets or income are not overstated and liabilities or expenses are not understated.
Reporting Period – The life of the business is divided into series of reporting periods.
Stable monetary unit – Assets, liabilities, equity, income and expenses are stated in terms of a
common unit of measure, which is the peso in the Philippines. Moreover, the purchasing power of
the peso is regarded as stable. Therefore, changes in the purchasing power of the peso due to
inflation are ignored.
Materiality concept – An item is considered material if its omission or misstatement could
influence economic decisions. Materiality is a matter of professional judgment and is based on the
size and nature of an item being judged.
Cost-benefit – The costs of processing and communicating information should not exceed the
benefits to be derived from the information’s use.
Full disclosure principle – Information communicated to users reflect a balance between detail
and conciseness, keeping in mind the cost-benefit principle.
Consistency concept – Like transactions are accounted for in like manner from period to period.
ACCOUNTING STANDARDS
Accounting concepts and principles are either explicit or implicit. Explicit concepts and
principles are those that are specifically mentioned in the Conceptual Framework for
Financial Reporting and in the Philippine Financial Reporting Standards (PFRS). Implicit
concepts and and principles are those that are not specifically mentioned in the foregoing
but are customarily used because of their general and longtime acceptance within the
accountancy profession.
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PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRSs)
The PFRSs are Standards and Interpretations adopted by the FRSC. They consist of the
following:
a. Philippine Financial Reporting Standards (PFRSs);
b. Philippine Accounting Standards (PASs); and
c. Interpretations
RELEVANT REGULATORY BODIES
Other than the Financial Reporting Standards Council (FRSC), the following also affect the
accounting policies used by businesses and their financial reporting:
a. Securities and Exchange Commission (SEC);
b. Bureau of Internal Revenue (BIR);
c. Bangko Sentral ng Pilipinas (BSP); and
d. Cooperative Development Authority (CDA).
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION
Qualitative characteristics are the traits that determine whether an item of information is
useful to users. Without this characteristics, information may be deemed useless.
The qualitative characteristics are broadly classified into two, namely:
1. Fundamental qualitative characteristics - these are the characteristics that make
information useful to others. They consist of the following:
a) Relevance b) Faithful representation
2. Enhancing qualitative characteristics - these characteristics support the fundamental
characteristics. They enhance the usefulness of information. As such, they must be
maximized. The enhancing qualitative characteristics consist of the following:
a) Comparability c) Timeliness
b) Verifiability d) Understandability
RELEVANCE
Information is relevant if it can affect the decisions of users. Relevant information has the following:
1. Predictive value – the information can be used in making predictions
2. Confirmatory value – the information can be used in confirming past predictions
Financial Accounting and Reporting by Zeus Vernon Millan 16

 Materiality – is an ‘entity-specific’ aspect of relevance

FAITHFUL REPRESENTATION
Faithful representation means the information provides a true, correct and complete depiction of
what it purports to represent. Faithfully represented information has the following:
1. Completeness – all information necessary for users to understand the phenomenon
being depicted is provided.
2. Neutrality – information is selected or presented without bias.
3. Free from error – there are no errors in the description and in the process by which the
information is selected and applied.
COMPARABILITY
the information helps users in identifying similarities and differences between different sets of
information.
VERIFIABILITY
Different users could reach consensus as to what the information purports to represent.
TIMELINESS
The information is available to users in time to be able to influence their decisions.
UNDERSTANDANBILITY
Users are expected to have:
 reasonable knowledge of business activities; and
 willingness to analyze the information diligently.
APPLICATION
Graded Recitation (if online)- Imagine you are a business owner. Discuss how you can
apply the basic accounting concepts listed below to grow your business:
 Separate entity concept
 Time Period
 Historical cost concept
 Materiality Concept
 Matching
 Accrual Basis of Accounting
 Going Concern
Essay (if modular)

ASSESSMENT
Quiz # 2.1
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CHAPTER III - THE ACCOUNTING EQUATION

Recitation - Discuss all the basic accounting concepts
Learning Objectives
 Illustrate the accounting equation.
 Perform operations involving simple cases with the use of accounting equation.
THE ACCOUNTING EQUATION

Assets = Liabilities + Equity
DEFINITION
ASSETS – are the economic resources you control that have resulted from past events and
can provide you with economic benefits.
Control
You don't necessarily need to own the economic resource for it to be considered your asset. What
is important is that you control the right over the economic benefits that the resource may produce.
"Control" means you have the exclusive right to enjoy those benefits and the ability to prevent
others from enjoying those benefits.
Example 1: Resource owned but not considered an asset

You own a building. However, you do not have the right to use, sell, lease, or transfer (or other
similar rights over) the building- another party does.
Analysis: The building is not your asset because you do not control the right over the economic
benefits from it, even if you are the legal owner/
Example 2: Resource not owned but considered an asset
You acquired a cellphone from a telecommunications Company on a 2-year installment plan. The
agreement states that if you miss an installment payment, the telecommunications company can
get the cellphone back.
Analysis: Upon taking possession, the cellphone becomes your asset even if you do not
actually own it yet until you have fully paid the installment price.This is because you control
the right over the economic benefits of the cellphone through exclusive use.

Past events
The control over an economic resource have resulted from a past event or transaction. Therefore,
resources for which control is yet to be obtained in the future do not quality as assets in the
present.
For example, you have an intention of purchasing a cellphone next year. Right now, the cellphone
is not yet your asset. The cellphone becomes your asset only after you have purchased it and have
taken possession over it.
Physical possession, however, is not always necessary for Control to exist. For example, the
money that you have deposited to a bank remains your asset despite the transfer of physical
possession. This is because you still control the right over the money by withdrawing it or
spending it through electronic means.
Economic benefits
To be an asset, the economic resource must have the potential to provide you with economic
benefits in at least one circumstance.
For example, the economic resource can be:
a. Sold, leased, transferred or exchanged tor other assets;
b. Used singly or in combination with other assets produce goods or provide services;
c. Used to enhance the value of other assets,
d. Used to promote efficiency and cost saving; or
e. Used to settle a liability
LIABILITIES – are your present obligations that have resulted from past events and can
require you to give up economic resources when settling them.
Obligation
Obligation means a duty or responsibility. An obligation is either
a. Legal obligation -an obligation that results from a contract, legislation, or other operation of
law; or
b. Constructive obligation - an obligation that results from your past actions (e.g. past practice
or published policies) that have created a valid expectation on others that you will accept
and discharge certain responsibilities.
Giving up of economic resources
Settling the obligation necessarily would require you to pay cash, to transfer other non-cash assets,
or to render a service.

Present obligation as a result of past events
A present obligation exists as a result of past events if:
a. you have already obtained economic benefits or taken an action; and
b. as a consequence, you are required to transfer an economic resource.
Examples:
You have an intention to purchase a cellphone in the future.
Analysis:
You have no present obligation, and hence no liability, because you have not yet
purchased and received the cellphone, and therefore, you are not required to pay for the
purchase price.
You purchased a cellphone on credit. You took possession over the cellphone but
have not yet paid the purchase price.
Analysis:
You have a present obligation, and hence a liability, because:
a. you have already purchased and received the cellphone; and
b. as a consequence, you are required to pay tor the purchase price.
Your obligation is a legal obligation because it arises from a contract.
You earned taxable income during the period but have not yet paid the tax due to
the government.
Analysis:
You have a present obligation because:
a. you earned taxable income; and
b. as a consequence, you are required to pay the corresponding tax due.
Your obligation is a legal obligation because it arises from legislation (i.e., tax law).
Although not stated in the sales contract you have a publicly-known policy of
providing free repair services tor the goods your business sells. You have
consistently honored this implied policy in the past.

Analysis:
You have a present obligation to provide free repair services for the goods you have already
sold because:
a. you nave already taken an action by creating valid expectation on your customers that
you will provide free repair services; and
b. as a consequence, you will have to provide those free services.
Your obligation is a constructive obligation.
EQUITY – is simply assets minus liabilities.Other terms for equity are “capital”, “net assets”, and
“net worth”.
Illustration 1:
You decided to put up a barbeque stand and have estimated that you will be needing
P2,000 as start-up capital.
You then went to your closet and broke Mr. Piggy Bank which you have been saving for
quite some time now. Alas! You only have P800. You went to your Mama and asked her to
give you P1,200 but she told you that she has been feeding you for far too long. But don't
give up hope yet, Mr. Bombay is just around the corner.
As of this point, your accounting equation is as follows:

800 = 0 + 800
Assets
Notes:
 Your total assets are P800 - the amount of economic resources that you control.
 You don't have any liability yet because you are still negotiating with Mr. Bombay.
 Your equity is also P800. (800 assets-0 liabilities = 800 equity)
After a lengthy negotiation, Mr. Bombay agreed to lend you 1,200.

As of this point, your accounting equation is as follows:
2,000 = 1,200 + 800
Notes:
 Your total assets are now 2,000 - the total amount of economic resources that you
control (P800 from Mr. Piggy plus P1,200 from Mr. Bombay).

 Of your total assets of P2,000:
a. P1,200 represents your liability, the amount you are obligated to pay Mr. Bombay in
the future.
b. P800 represents your equity (i.e., P2,000 assets -P1,200 liabilities).
 Liabilities represent the Creditors' claim, while equity represents the owner's claim,
against the total assets of the business.
Notice that from Piggy to Bombay, the accounting equation remains balanced. The
equality of the accounting equation must be maintained in all the accounting
processes of recording, classifying and summarizing. If the accounting equation
doesn't balance, there is something wrong.
THE EXPANDED ACCOUNTING EQUATION

We can expand the basic accounting equation by including two more elements -income and
expenses, The expanded accounting equation shows all the financial statement elements. The
expanded accounting equation is as follows:
Assets = Liabilities + Equity + Income - Expenses
Notice that income is added while expenses are deducted in the equation. These are because
income increases equity while expenses decrease equity.
INCOME - is increases in economic benefits during the period in the form of increases in assets,
or decreases in liabilities, that result in increases in equity, excluding those relating to investments
by the business owner.
EXPENSES - are decreases in economic benefits during the period in the form of decreases in
assets, or increases in liabilities, that result in decreases in equity, excluding those relating to
distributions to the business owner.
The difference between income and expenses represents profit or loss.

 If income is greater than expenses, the difference is profit.
 If income is less than expenses, the difference is loss.
Illustration 2: (Continuation of Illustration 1)

During the period, you earned income of P10,000 and incurred expenses of P6,200. At the
end of the period, your total assets increased from P2,000 to P5,000 and your total liabilities
decreased from P1,200 to P400.
Your expanded accounting equation is as follows:
Assets = Liabilities + Equity + Income - Expenses

5,000 = 400 + 800 + 10,000 - 6,200

Your profit for the period is P3,800 (P10,000 income minus P6,200 expenses). There is profit
because income is greater than expenses.
A variation of the expanded accounting equation is shown below:

Assets = Liabilities + Equity + Profit
5,000 = 400 + 800 + 3,800
Income and expenses (or profit or loss) are closed to equity at the end of each accounting
period. Thus, the adjusted balance to equity is computed as follows:
Equity, beginning 800
Add: Income 10,000
Less: Expenses (6,200)
Equity, Ending 4,600
Your basic accounting equation at the end of the accounting period is as follows:

5,000 = 400 + 4,600

APPLICATION
Answer the following cases:
1. If you have total liabilities of P1,200 and equity of P800, how much are your total assets?
2. If you have total assets of P2,000 and equity of P800, how much are your total liabilities?
3. If you have total assets of P2,000 and total liabilities of P1,200, how much is your total
equity?
4. If your total income of P5,000 and total expenses of P2,000, how much is your profit (or
loss)?
5. If your total income of P6,000 and total expenses of P11,000, how much is your profit (or
loss)?
6. If you have a total expenses of P2,000 and a profit of P3,000, how much is your total
income?
7. If you have a total income of P5,000 and a profit of P3,000, how much is your total expenses
for the period?
8. You have ending total assets of P4,800, ending total liabilities of P1,000 and beginning
equity is P800. If your total expenses for the period amounts to P2,000, how much is your total
income?
9. You have ending total assets of P4,800, ending total liabilities of P1,000 and beginning
equity is P800. If your total income for the period amounts to P5,000, how much is your total
expenses?
10. Your beginning equity is P5,000. If your total income for the period is P8,000, while your
total expenses are P6,000, how much is the ending balance of your equity?
11. Your beginning equity is P12,000. If your total income for the period is P5,000, while your
total expenses are P8,000, how much is the ending balance of your equity?
12. If your beginning equity is P5,000, while your ending equity P7,000, how much is your
profit or loss for the period?
13. If your beginning equity is P6,000, while your ending equity P2,000, how much is your
profit or loss for the period?
14. You had total assets, liabilities, and equity of P10,000, P7,000 and P3,000, respectively,
at the beginning of the period. During the period, your total liabilities decreased by P4,000,
while your profit was P5,000. How much are your ending total assets?
15. You had total assets, liabilities, and equity of P10,000, P7,000 and P3,000, respectively,
at the beginning of the period. During the period, your total liabilities decreased to P4,000,
while your profit was P5,000. How much are your ending total asset?

ASSESSMENT
Long Quiz# 3.1
CHAPTER IV - TYPES OF MAJOR ACCOUNTS


Preliminary Activity - Discuss the Accounting Equation.
Learning Objectives
 Discuss the five major accounts.
 Cite examples of each type of account.
 Prepare a Chart of Accounts.
THE ACCOUNT
An account is the basic storage of information in accounting. It is a record of the increases and
decreases in a specific item of asset, liability, equity, income or expense.
An account may be depicted through a “T-account” with three parts namely:
1. Account Title - describes the specific item of asset, liability, equity, income or expense.
2. Debit side - the left side of the account
3. Credit side - the right side of the account

THE FIVE MAJOR ACCOUNTS
1. ASSETS – are the resources you control that have resulted from past events and can provide
you with economic benefits.
2. LIABILITIES – are your present obligations that have resulted from past events and can require
you to give up economic resources when settling them.
3. EQUITY – is assets minus liabilities.
4. INCOME – are increases in economic benefits during the period in the form of inflows or
enhancements of assets or decreases of liabilities that result in increases in equity, other than
those relating to investments by the business owners.
Income includes both revenue and gains.
A. Revenue arises in the course of the ordinary activities of a business, e.g., sales and
service fees.
B. 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 entity.
5. EXPENSES – are decreases in economic benefits during the period in the form of outflows or
depletions of assets or increases of liabilities that result in decreases in equity, other than those
relating to distributions to the business owners.
Expenses include both expenses and losses.
A. Expenses arise in the course of the ordinary activities of a business.
B. Losses represent other items that meet the definition of expenses and may or may not
arise in the course of ordinary activities of the entity.
CLASSIFICATION OF THE FIVE MAJOR ACCOUNTS
 The balance sheet shows the financial position of a business.

 The income statement shows the profit or loss of a business.

CHART OF ACCOUNTS
A chart of accounts is a list of all the accounts used by a business.
Account numbers are assigned to the accounts to facilitate recording, cross-referencing, and
retrieval of information. Although there is no standard way of assigning account numbers, account
numbers should be assigned in a manner that accounts are categorized logically.

COMMON ACCOUNT TITLES
Balance Sheet
ASSETS
1. Cash - includes money or its equivalent that is readily available for unrestricted use, e.g., cash
on hand and cash in bank.
2. Accounts receivable- receivables supported by oral or informal promises to pay.
3. Allowance for bad debts- the aggregate amount of estimated losses from uncollectible
accounts receivable. Another term is "allowance for doubtful accounts."
4. Notes receivable- receivables supported by written or formal promises to pay in the form of
promissory notes.
5. Inventory- represents the goods that are held for sale by a business. For a manufacturing
business, inventory also includes goods undergoing the process of production and raw
materials that will be consumed in the production process.
6. Prepaid supplies - represents the cost of unused office and other supplies.
7. Prepaid rent - rent paid in advance.
8. Prepaid insurance-cost of insurance paid in advance
9. Land - the lot on which the building of the business has been constructed or a vacant lot which
is to be used as future plant site. Land is not depreciable.
10. Building - the structure owned by a business for use in its operations.
11. Accumulated depreciation - building - the total amount of depreciation expenses recognized
since the building was acquired and made available for use.
12. Equipment - consists of various assets such as:
a) Machineries and other factory equipment
b) Transportation equipment, e.g., vehicles, delivery trucks
c) Office equipment, c.g, desks, cabinets, chairs
d) Computer equipment, eg., server, personal computers, laptops
e) Furniture and fixtures, e.g, desks, cabinets, movable partitions
13. Accumulated depreciation - equipment - the total amount of depreciation expenses
recognized since the equipment was acquired and made available for use.

LIABILITIES
1. Accounts payable - obligations supported by oral or informal promises to pay by the debtor.
2. Notes payable - obligations supported by written or formal promises to pay by the debtor in the
form of promissory notes.
3. Interest payable - interest incurred but not yet paid. Interest payable arises from interest-
bearing liabilities. For example you will incur interest on your bank loan.
4. Salaries payable -salaries already earned by employees but not yet paid by the business.
5. Utilities payable - utilities (e.g, electricity, water, telephone internet, cable TV, etc.) already
used but not yet paid.
6. Unearned income - Items related to income that were collected in advance before they are
earned. After the earning process is completed, these 1tems are transferred to income.
EQUITY (Capital, Net assets or Net worth)

The Owner's Capital account is
INCREASED BY: DECREASED BY:
Investments or contributions by the owner. Withdrawals or distributions to the owner.
Income or Profit earned by the business. Expenses or Loss incurred by the business.
1. Owner's capital (or Owner's equity) - the residual amount after deducting liabilities from
assets.
2. Owner’s drawings - this account is used temporary withdrawals of the owner during the
period. At the end of the accounting period, any balance in this account is closed to the
'Owner's capital account.

Income Statement
INCOME
1. Service fees - revenues earned from rendering services (e.g. services of a spa, services of a
beauty salon, etc.).
2. Sales - revenues earned from the sale of goods (e.g, sale of barbecue, souvenir items, etc.).
3. Interest income - revenues earned from the issuance of interest-bearing receivables.
4. Gains - income earned from the sale of assets (except inventory) or from enhancements of
assets or decreases in liabilities that are not classified as revenue.
EXPENSES
1. Cost of sales (or Cost of goods sold) - represents the value of inventories that have been
sold during the accounting period.
2. Freight-out - represents the sellers costs of delivering goods to customers. Other terms for
freight-out are "delivery expense, "transportation-out," and "carriage outwards”.
3. Salaries expense - represents the salaries earned by employees for the services they have
rendered during the accounting period.
4. Rent expense - represents the rentals that have been used up during the accounting period.
5. Utilities expense - represents the cost of utilities (e.g.electricity, water, telephone, internet,
cable TV, etc.) that have been used during the accounting period.
6. Supplies expense - represents the cost of supplies that have been used during the period.
7. Bad debt expense - the amount of estimated losses from uncollectible accounts receivable
during the period. Other term is "doubtful accounts expense”.
8. Depreciation expense- the portion of the cost of depreciable asset (e.g., building or
equipment) that has been allocated to the current accounting period.
9. Advertising expense - represents the cost of promotional or marketing activities during the
period.
10. Insurance expense - represents the cost of insurance pertaining to the current accounting
period.
11. Taxes and licenses- represents the cost of business and local taxes required by the
government for the conduct of business (e.g mayor s permit, other percentage taxes,
community taxes).
12. Transportation and travel expense - transportation represent the necessary and ordinary
cost of employees getting from one workplace to another which are reimbursable by the
business.

13. Interest expense - represents the cost of borrowing money. It is the price that a lender
charges a borrower for the use of the lender's money. Other terms for interest expense are
finance costs and borrowing costs.
14. Miscellaneous expense -represents various small expenditures which do not warrant
separate presentation.
15. Losses - expenses which may or may not arise from the ordinary course of business activities.
Losses may arise from:
a) Sale of assets, other than inventory, at a sale price that is less than the carrying amount.
b) Decreases in the value of assets due to destruction, damage, obsolescence and other
changes in values caused by market factors, e.g, loss on tire, earthquake, storm, and other
calamities, decrease in the value of foreign currencies held due to changes in exchange
rates.
APPLICATION
Identify the account title affected in each scenario.

1. You are renting a space for your BBQ stand. The lease contract required you to pay
P10,000 rent in advance.
2. Your electricity bill for the month of January amounted to P2,000. This bill is not yet paid.
3. After a month of operations, your business received electricity bill of P2,000 and water bill of
P200.
4. You paid Justin Bieber P5,000 to endorse your BBQ business.
5. The customer with the 500 account receivable is broke. You have estimated that you can
only collect P420 from him.
6. You purchased a BBQ grill worth 1,000.
7. You expect to use the BBQ grill for 5 years.
8. The cost of the BBQ that was sold for P500 is 300.
9. You purchased pork worth P1,000 to be marinated and sold as BBQ.
10. Your BBQ grill is stolen.
ASSESSMENT
Long Quiz 4.1

CHAPTER V - BOOKS OF ACCOUNTS AND DOUBLE-ENTRY SYSTEM
Pre-quiz 5.1 (should be recorded)
Learning Objectives
 Identify the uses of the two books of accounts.
 Explain the rules of debits and credits.
THE BOOKS OF ACCOUNT

A business maintains two books of accounts, namely:
1. Journal; and
2. Ledger
JOURNAL
The journal, also called the “book of original entries,” is the accounting record where business
transactions are first recorded.
Types of Journal
1. Special Journal – is used to record transactions with similar nature.
a) Sales Journal - used to record sales on account
b) Purchases Journal - used to record purchases on account
c) Cash receipts Journal - used to record all transactions involving receipts of cash
d) Cash disbursement Journal - used to record all transactions involving payments of cash
2. General Journal – All other transactions that cannot be recorded in the special journals are
recorded in the general journal.

LEDGER
The ledger is used to classify the effects of business transactions on the accounts. It is also called
the “book of final entries.” The process of recording in the ledger is called posting. Ledgers can be
classified into the following:
a. General ledger – contains all the accounts appearing in the trial balance.
b. Subsidiary ledger – provides a breakdown of the balances of controlling accounts.
Summary:
Format of the General Journal

Format of Ledgers
DOUBLE ENTRY SYSTEM

 Concept of duality – each transaction is recorded in two parts – debit and credit
 Concept of equilibrium – each transaction is recorded in terms of equal debits and credits.
NORMAL BALANCES OF ACCOUNTS

The normal balance of an account is on the side where an increase in that account is recorded.
The following are the normal balances of accounts:

RULES OF DEBITS AND CREDITS
 To debit an account with a normal debit balance means to increase that account. To credit it
means to decrease it.
 To credit an account with a normal credit balance means to increase that account. To debit it
means to decrease it.
The previous concepts are integrated in the following situation:
Contra and Adjunct accounts

Contra accounts are presented in the financial statements as deduction to their related accounts.
Adjunct accounts are presented in the financial statements as addition to their related accounts.
APPLICATION
Assignment #5.2
ASSESSMENT
Long Quiz # 5.3

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CARD-MRI Development Institute, Inc.

Course Title Financial Accounting and Reporting 1

Prepared by: Lorenz Nicole R. Casas FB: Nicole Casas

ACTIVATE PRIOR KNOWLEDGE

2. Basic Accounting Equation

4. Rules of Debit and Credit

Financial Accounting and Reporting by Zeus Vernon Millan

Essential elements of the definition of accounting

Financial Accounting and Reporting by Zeus Vernon Millan

Common Branches of Accounting

Financial Accounting and Reporting by Zeus Vernon Millan

Advantages and Disadvantages of Forms of Business Organizations

Financial Accounting and Reporting by Zeus Vernon Millan

Financial Accounting and Reporting by Zeus Vernon Millan

ACTIVATE PRIOR KNOWLEDGE

ACQUIRE NEW KNOWLEDGE

BASIC ACCOUNTING CONCEPTS

Financial Accounting and Reporting by Zeus Vernon Millan

Financial Accounting and Reporting by Zeus Vernon Millan 16

Financial Accounting and Reporting by Zeus Vernon Millan 17

Essay (if modular)

ACTIVATE PRIOR KNOWLEDGE

ACQUIRE NEW KNOWLEDGE

THE ACCOUNTING EQUATION

Example 1: Resource owned but not considered an asset

Financial Accounting and Reporting by Zeus Vernon Millan 14

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Financial Accounting and Reporting by Zeus Vernon Millan 16

As of this point, your accounting equation is as follows:

Assets = Liabilities + Equity

After a lengthy negotiation, Mr. Bombay agreed to lend you 1,200.

Financial Accounting and Reporting by Zeus Vernon Millan 17

THE EXPANDED ACCOUNTING EQUATION

Assets = Liabilities + Equity + Income - Expenses

The difference between income and expenses represents profit or loss.

Illustration 2: (Continuation of Illustration 1)

Your expanded accounting equation is as follows:

Assets = Liabilities + Equity + Income - Expenses

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A variation of the expanded accounting equation is shown below:

Assets = Liabilities + Equity

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Financial Accounting and Reporting by Zeus Vernon Millan 20

CHAPTER IV - TYPES OF MAJOR ACCOUNTS

ACTIVATE PRIOR KNOWLEDGE

ACQUIRE NEW KNOWLEDGE

Financial Accounting and Reporting by Zeus Vernon Millan 21

CLASSIFICATION OF THE FIVE MAJOR ACCOUNTS

 The balance sheet shows the financial position of a business.

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EQUITY (Capital, Net assets or Net worth)

Financial Accounting and Reporting by Zeus Vernon Millan 25

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Identify the account title affected in each scenario.

Long Quiz 4.1

Financial Accounting and Reporting by Zeus Vernon Millan 27

ACQUIRE NEW KNOWLEDGE

THE BOOKS OF ACCOUNT

Financial Accounting and Reporting by Zeus Vernon Millan 28

Format of the General Journal

Financial Accounting and Reporting by Zeus Vernon Millan 29