Fundamentals of Accountancy, Business, and Management 2: Expectation

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS,
AND MANAGEMENT 2
WEEK 11 (Module 1)
INTRODUCTION
EXPECTATION
At the end of the one-week lesson, you are expected to differentiate the GENERAL JOURNAL
from the GENERAL LEDGER, determine the NORMAL BALANCE of an account, and prepare
JOURNAL ENTRIES to record basic business transaction.
LEARNING OBJECTIVES
Knowledge and skills on the preparation of basic business forms and documents including: two
major books of accounts which are the general journal and ledger.
OVERVIEW OF THE LESSON
For this week’s lesson, we will be discussing the topic on BOOKS OF ACCOUNT: GENERAL
JOURNAL AND GENERAL LEDGER. Specifically, the following will be tackled:
1. Difference between General Journal and General Ledger;

2. Determining the normal balance of an account;
3. Preparing the journal entries to record basic business transactions; and
4. Determining the balances of accounts using the T-account.
DEVELOPMENT
PREVIEW OF THE LESSON:

Good day learner.
Today we will begin our lesson on GENERAL JOURNAL AND GENERAL

LEDGER.
LESSON PROPER
General Journal and General Ledger
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Journalizing- refers to recording transactions through debit and credit entries to the appropriate
account titles in the journal.
Journal - called the book of original entry.
- is a detailed account that records all the financial transactions of a business, to be

used for future reconciling of and transfer to other official accounting records, such as the
general ledger.
Posting- means recording the journal entry as debit or credit to a specific account in the general
ledger.
General Ledger- called the book of final entry.
- (GL) is a set of numbered accounts a business uses to keep track of its

financial transactions and to prepare financial reports. Each account is a unique record
summarizing each type of asset, liability, equity, revenue and expense.
Accounting Equation: Assets = Liabilities + Owner’s Equity
Illustration on Accounting Equation
An understanding of the accounting equation is essential to the analysis and journalizing of a

business transaction. Study the following examples:
Example 1. Bentong invests P50, 000.00 in his janitorial services agency.
Assets (Cash) = Owner’s Equity (Bentong, Capital)
Here, the assets are recognized as claims of the owner.
Example 2.Bentong obtains a bank loan in the name of the janitorial services agency.
Assets (Cash) = Liabilities (Loans Payable)
The assets are recognized as claims of the creditor.
Only the accounts in the SFP are shown in the basic accounting equation. However, the
capital account is also affected by the revenue and expense accounts in the SCI. Revenue and
expense accounts are closed to the capital account at the end of the accounting period.
Example 3. Bentong’s janitorial services agency rendered services on cash basis to a client.
Assets (Accounts Receivable) = Owner’s Equity (Bentong, Capital – Service Fees)
Example 4. Bentong’s agency paid rental to the owner of the building.
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Owner’s Equity (Bentong, Capital Reduction – Rent Expense) = Assets (Cash -
Reduction)
Expanded Accounting Equation
Capital + Additional Investments
Assets = Liabilities + Revenue or Income – Withdrawals
- Expenses or Losses
Increase by
 Initial Investment/Capital
 Additional Investments
 Income/Revenue
Decreased by
 Permanent Withdrawals
 Temporary Withdrawals
 Losses/Expenses
Contra-asset accounts- are deductions from related asset accounts.
Examples: Allowance for bad debts and Accumulated depreciation.
Allowance for bad debts- is the provision for estimated uncollectible accounts. It is deducted
from total accounts receivable to derive the net realizable value which refers to net collectible
amount.
Accumulated depreciation- is allocated cost of property and equipment to the years that have
lapsed and is charged as expense to those years. It is presented as a reduction in property and
equipment to get the net book value.
Net book value of property and equipment- pertains to the balance of property and equipment
cost after deducting accumulated depreciation.
Normal Balance of an Account
You will understand the normal balance of an account by relating debit and credit to the
accounting equation.
Assets = Liabilities + Owner’s Equity
Debit (left side of the equation) = Credit (right side of the equation)
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Therefore, the normal balance of an asset is debit – asset increase is debited while a
decrease is credited. Meanwhile, the normal balance of a liability or owner’s equity account is
credit – increase in either liability or owner’s equity is credited while a decrease is debited.
Extend Your Knowledge

Learn more about Normal Balances of Accounts.
Normal Balances
When looking at an account in the general ledger, the following is the debit or credit balance you
would normally find in the account:
Account Classification Normal Balance

Assets Debit
Contra asset Credit
Liability Credit
Contra liability Debit
Owner’s Equity Credit
Stockholders’ Equity Credit
Owner’s Drawing or Debit
Dividends Account
Revenues (or Income) Credit
Expenses Debit
Gains Credit
Losses Debit
Revenues and Gains Are Usually Credited
Revenues and gains are recorded in accounts such as Sales, Service Revenues, Interest

Revenues (or Interest Income), and Gain on Sale of Assets. These accounts normally have
credit balances that are increased with a credit entry. In a T-account, their balances will be on
the right side.
The exceptions to this rule are the accounts Sales Returns, Sales Allowances, and Sales

Discounts—these accounts have debit balances because they are reductions to sales. Accounts
with balances that are the opposite of the normal balance are called contra accounts; hence
contra revenue accounts will have debit balances.
Let's illustrate revenue accounts by assuming your company performed a service and was
immediately paid the full amount of $50 for the service. The debits and credits are presented in
the following general journal format:
Account Name Debit Credit

Cash 50
Service Revenues 50
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Whenever cash is received, the asset account Cash is debited and another account will need to
be credited. Since the service was performed at the same time as the cash was received, the
revenue account Service Revenues is credited, thus increasing its account balance.
Let's illustrate how revenues are recorded when a company performs a service on credit (i.e.,
the company allows the client to pay for the service at a later date, such as 30 days from the
date of the invoice). At the time the service is performed the revenues are considered to have
been earned and they are recorded in the revenue account Service Revenues with a credit. The
other account involved, however, cannot be the asset Cash since cash was not received. The
account to be debited is the asset account Accounts Receivable. Assuming the amount of the
service performed is $400, the entry in general journal form is:

Accounts Receivable 400
Service Revenues 400
Accounts Receivable is an asset account and is increased with a debit; Service Revenues is
increased with a credit.
Expenses and Losses are Usually Debited
Expenses normally have debit balances that are increased with a debit entry. Since expenses
are usually increasing, think "debit" when expenses are incurred. (We credit expenses only
to reduce them, adjust them, or to close the expense accounts.) Examples of expense accounts
include Salaries Expense, Wages Expense, Rent Expense, Supplies Expense, and Interest
Expense. In a T-account, their balances will be on the left side.
To illustrate an expense let's assume that on June 1 your company paid $800 to the landlord for
the June rent. The debits and credits are shown in the following journal entry:

Rent Expense 800
Cash 800
Since cash was paid out, the asset account Cash is credited and another account needs to be
debited. Because the rent payment will be used up in the current period (the month of June) it is
considered to be an expense, and Rent Expense is debited. If the payment was made on June
1 for a future month (for example, July) the debit would go to the asset account Prepaid Rent.
As a second example of an expense, let's assume that your hourly paid employees work the
last week in the year but will not be paid until the first week of the next year. At the end of the
year, the company makes an entry to record the amount the employees earned but have not
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been paid. Assuming the employees earned $1,900 during the last week of the year, the entry in
general journal form is:

Wages Expense 1, 900
Wages Payable 1, 900
As noted earlier, expenses are almost always debited, so we debit Wages Expense, increasing
its account balance. Since your company did not yet pay its employees, the Cash account
is not credited, instead, the credit is recorded in the liability account Wages Payable. A credit to
a liability account increases its credit balance.
Continuation from the book:
Preparing Journal Entries to Record Basic Business Transactions
Another approach in analyzing transactions is obtaining the value received (debit) and value
parted with (credit). This is shown in the example below.
Illustration
Ruby’s Beauty Parlor was opened for business on 31 January. The transactions that transpired
during the month are shown below followed by an analysis as to value received (VR) and value
parted with (VP), the translation into journal entries, and the appropriate account titles to be
used.
Hint: Analyze transactions from the viewpoint of the business, VR, and VP and give the journal
entry.
Transaction 1. On 3 January, Ruby invested P50, 000.00 into the business.
Date VR and VP Account Debit (₱) Credit (₱)

3 January VR – Cash Cash 50, 000.00
VP – Owner’s capital Ruby, Capital 50, 000.00
Transaction 2. On 4 January, the parlor bought small equipment on account from Mr. Sese for
P10, 000.00.

4 January VR – Beauty Equipment 10, 000.00
salon equipment
Accounts 10, 000.00
Payable
Transaction 3. On 5 January, the salon bought mirrors, pre-fabricated counters, and stools
worth P4, 000.00 on cash basis.
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5 January VR – Mirrors, Furniture 4, 000.00
counters, and stools
VP – Cash Cash 4, 000.00
Transaction 4. On 9 January, the parlor paid 60% of its account in transaction 2.

9 January VR – Reduction in Accounts Payable 6, 000.00
debt
Transaction 5. On 14 January, the salon gave a promissory note to Mr. Sese to settle the
balance of its account.

14 January VR – Reduction in Accounts Payable 4, 000.00
debt to Mr. Sese
VP – Promissory Cash 4, 000.00
note
Transaction 6. On 18 January, Ruby, the owner, took P1, 000.00 cash from the parlor for her
personal USE.

18 January VR – Reduction in Ruby, Withdrawal 1, 000.00
Ruby’s capital
Transaction 7. On 18 January, the salon rendered hairstyling and makeup services to

customers for cash,
P2, 500.00.

18 January VR – Cash Cash 2, 500.00
VP – Services Service Income 2, 500.00
rendered
Transaction 8. On 20 January, the parlor paid salary of the beautician, P800.00.

20 January VR – Services of Salary 800.00
beautician, incur expense
VP – Cash Cash 800.00
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T-accounts and the General Ledger
T-account – which is a bookkeeping tool used as a simplified or shorthand form of the general
ledger.
Normal Balance Using T-account
The debit side of the T-account is used to record increases in assets and expenses, and
decreases in liability, capital, and revenue.
The credit side is used to record decreases in assets and expenses, and increases in
liability, capital, and revenue.
Account balance- is computed by getting the difference of debits and credits. The side which
has a greater total is the balance of the account.
Below is the T-account for Ruby’s Beauty Parlor.
Posting to T-accounts for Ruby’s Beauty Parlor
Cash
Debit (₱) Credit (₱)
3 January 50, 000.00 5 January 4, 000.00
18 January 2, 500.00 9 January 6, 000.00
18 January 1, 000.00
20 January 800.00
52, 500.00 11, 800.00
Ending 40, 700.00

Balance
Notes Payable
14 January 4, 000.00
Ruby, Withdrawal
18 January 1, 000.00
Equipment
4 January 10, 000.00
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Ruby, Capital
3 January 50, 000.00
Furniture
5 January 4, 000.00
Service Income
18 January 2, 500.00
Accounts Payable
9 January 6, 000.00 4 January 10, 000.00
14 January 4, 000.00
10, 000.00 10, 000.00
Ending 0.00
Balance
Salaries Expense
20 January 800.00
ENGAGEMENT
Now that you are equipped with the knowledge about the General Journal , General
Ledger or T-account,, accounting equation, and nominal balance of an account, let us
now attempt to do the following exercises.
A. Basic and Expanded Accounting Equations
Supply the missing amount for each case.
Exercise 1
Element Case 1 Case 2 Case 3 Case 4
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Assets ₱100, 000.00 ₱120, 000.00 100% ₱150, 000.00
Liabilities 45, 000.00 ₱ 55 000.00 25% 30%
Owner’s Equity ₱_55 000.00 ₱65, 000.00 75% ₱105 000.00
Exercise 2
Element Case 1 Case 2 Case 3

Revenue ₱100, 000.00 ₱60 000.00 100%
Expenses P45, 000.00 ₱85, 000.00 60%
Profit/(Loss) ₱55 000.00 ₱(25, 000.00) 40%
Exercise 3
Element Case 1 Case 2 Case 3

Capital, Beginning ₱350, 000.00 ₱260, 000.00 ₱450 000.00
Additional Investment ₱90, 000.00 ₱450 000.00 250, 000.00
Withdrawal 140, 000.00 170, 000.00 300, 000.00
Net Income (Loss) (60, 000.00) (280, 000.00) (10% of CB*)
Capital, Ending ₱240 000.00 ₱260, 000.00 ₱400, 000.00
Exercise 4
Element Case 1 Case 2 Case3

(In Peso Amount)
Asset 500, 000.00 680 000.00 700, 000.00
Liabilities 150 000.00_ 500, 000.00 300 000.00__
Capital, Beginning 100, 000.00 400, 000.00 580 000.00
Revenue 600, 000.00 500 000.00 ___ 420 000.00_
Expense 700, 000.00 600, 000.00 500, 000.00
Net Income (Loss) (100 000.00) (100, 000.00) (80, 000.00)
Additional 450 000.00 80, 000.00 0.00
Investment
Withdrawal 100, 000.00 200, 000.00 100, 000.00
Capital, Ending 350, 000.00 180 000.00 400, 000.00
B. Normal Balance of Accounts
Exercise: Indicate the normal balance of each account by writing Debit or Credit in the second
column. Then
Indicate the financial statement under which the account name should appear by
writing SFP or
SCI in the third column.
Account Name Debit or Credit SFP or SCI
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Example: Cash in Bank Debit SFP
1. Dividend Income
2. Owner, Drawings
3. Professional Fees
4. Accumulated Depreciation - Equipment
5. Miscellaneous Expense
6. Land
7. Depreciation Expense
8. Notes Receivable
C. Rules of Debit and Credit
Exercise: Study the list below. On the blank before each item, write DR for account to be
debited and CR
for account to be credited.
_______1. Accounts receivable was collected.
_______2. Accounts payable was paid.
_______3. Operating expenses were paid.
_______4. Promissory note was issued to pay accounts payable.
D. Accounting Elements with Debit and Credit
Exercise: Study each account below. Indicate the classification of the account by writing Asset,
Liabilities,
Capital, Revenue, or Expenses in the second column. If the account is a contra-

account, enclose in parenthesis the element from which it will be deducted. Then decide
whether each account is to be debited or credited. Write Debit or Credit in the third column to
indicate your answer.
Account Element Debit or Credit

Example: Increase in cash Asset Debit
1. Decrease in account receivable
2. Increase in office supplies
3. Increase in rent income
4. Decrease in notes payable
E. Normal Balance and Rules of Debit and Credit
Exercise: Indicate whether the normal balance of the account is debit or credit, and whether the
increase or decrease of the said account should be debit or credit.
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Particulars Normal Balance Change Debit/
Credit
Example: Sales discount decreased by P2, Debit Credit
000.00.
1. Equipment was sold for P50, 000.00.
2. Furniture was acquired for P20, 000.00.
3. Loans payable in bank was paid in full.
4. Notes receivable was collected in full.
Application of Transaction Analysis
A. Effect of Transaction on Cash Account

Exercise: Indicate the effect of the following transactions on cash Account by indication
whether it is a Debit or a credit. Put a check ( ) in the correct column. Then post the
amount in the same column.
Cash
Debit Credit
1. Deposited ₱100, 000.00 as initial investment
2. Issued official receipt for ₱5, 000.00 cash collected from a customer
3. Issued check as payment of accounts payable, ₱4, 000.00
4. Issued official receipt for ₱2, 000.00 check received from customer
as payment for services rendered
5. Filled up the deposit slip for the ₱2, 000.00 check in number 4, plus
₱1, 000.00 cash deposited in the bank
6. Issued ₱10, 000.00 promissory note for cash loan received from the
bank
ASSIMILATION
REFLECTIVE WRITING
1. How would you compare a journal in accounting (book of original entry) to a personal
journal (diary)?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
2. How do you think the T-account derived its name?
____________________________________________________________
____________________________________________________________
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____________________________________________________________
______________________.
References:
Averkamp, H. (2020). Debits and Credits. Retrieved August 12, 2020 from

https://www.accountingcoach.com/debits-and-credits/explanation/3
Chen, J. ( 2019). Journal. Retrieved August 12, 2020 from

https://www.investopedia.com/terms/j/journal.asp#:~:text=A%20journal%20is%20a
%20detailed,such%20as%20the%20general%20ledger.
Durana, M. (2017). Fundamentals of Accountancy, Business, and Management 2. Makati

City, Philippinesp: DIWA LEARNING SYSTEMS INC.
Rouse, M. (2015). general ledger (GL) Retrieved August 12, 2020 from
https://searcherp.techtarget.com/definition/general-ledger-GL#:~:text=A%20general
%20ledger%20(GL)%20is,%2C%20equity%2C%20revenue%20and%20expense.
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AND MANAGEMENT 2
WEEK 12 (Module 2)
INTRODUCTION
EXPECTATION
At the end of the one-week lesson, you are expected to describe the nature of a BANK
RECONCILIATION STATEMENT, analyze the effects of the identified reconciling items, and
prepare a BANK RECONCILIATION STATEMENT.
LEARNING OBJECTIVES
Dealing with the preparation of basic business forms and documents: including bank
transactions and a simple bank reconciliation statement.
This week’s lesson will focus on the Nature and Structure of a Bank Reconciliation Statement.
Specifically, it will tackle the following:
1. Describing the nature of a bank reconciliation statements;

2. Identifying common reconciling items and describe each of them;
3. Analyzing the effects of the identified reconciling items; and
4. Preparing a bank reconciliation statement.
Page 14 of 131
DEVELOPMENT

Good day learner.
Today we will begin our lesson on what is media.
LESSON PROPER
Nature and Structure of a Bank Reconciliation Statement
In this module, you must bear in mind that transactions are recorded in the books of
accounts based on business documents, or media. Media is banking terminology that refers to
the basis of the transaction as in posting media. Thus, the bank records the activities of the
depositor when actual deposits are made (media – deposit slips) and when checks (media) are
encashed or received from PCHC clearing. On the part of the depositor, he or she may adopt
the imprest cash system wherein collections are debited to cash in bank even if actual deposits
may be done on the following banking day. In addition, it takes up disbursements as credits to
cash in bank on issue date. Thus, there may be timing differences in the recording of cash in
bank transactions by the bank and the depositor.
In accounting tool used by businesses and individuals to know the true balance of cash
in a bank account is the bank reconciliation statement. Under the adjusted balances method
of bank reconciliation, the balance per bank is reconciled with the balance per depositor’s
books.
To understand a bank reconciliation, you must recall the learning you acquired in module6 in the
first quarter- the bank debits what the depositor credits such as check payments, and the bank
credits what the depositor debits such as collections deposited with the bank. Further, there are
transactions that are recorded by the bank ahead of the depositor such as proceeds of loan,
note collection, service charges, and daif (drawn against insufficient funds) check. The depositor
records these transactions when they receive the corresponding debit or credit memo from the
bank.
BIG IDEA
The bank and the depositor have opposite interests in a current or checking
account. The bank has a liability while the depositor has an asset.
Description of Common Reconciling Item
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You will be able to understand reconciling items, their nature, the analysis, and their treatment
by way of an illustration that includes bank statement, book forms, and preceding month’s bank
reconciliation as shown below.
XYZ Bank
Tanauan City, Batangas
Account No.: 1635-0121-40
Account Name: Good Cheers Repair Shop
Currency: Php
Account type: Regular current
Checks and Other Debits Credits Date Balance
Check No. Amount Check Amount Deposits
No.
29 May 9 500.00
931 650.00 938 750.00 1 685.00 1 June 9 785.00
939 555.00 940 735.00 2 100.00 4 June 10 595.00
941 580.00 942 545.00 1 790.00 7 June 11 260.00
943 850.00 944 650.00 3 800.00 8 June 13 560.00
945 530.00 5 200.00 CM 9 June 18 230.00
949 754.00 180.00 CM 9 June 17 656.00
50.00 SC 951 520.00 900.00 10 June 17 986.00
952 620.00 953 610.00 925.00 11 June 17 681.00
954 575.00 956 714.00 1 750.00 14 June 18 142.00
957 510.00 960 535.00 753.00 15 June 17 850.00
320.00 RT 950 627.00 15 June 16 903.00
100.00 SC 15 June 16 803.00
5 000.00 DM 15 June 11 803.00
Subtotals 9 810.00 6 970.00 19 083.00 11 803.00
Fig. 8.2 Bank statement for Good Cheers Repair Shop, 1 to 15 June 2019
CMs for ₱5 200.00 and ₱180.00 – Represents collection on note of the depositor; principal ₱5
200.00, interest ₱180.00.
SC for ₱50.00 – Bank charges for dishonored stp check
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RT for ₱320.00 and SC of ₱100.00 – Pertains to a check deposit from Ms. Cueto, a customer,
which was returned due to daif mark (Ms. Cueto will be rebilled plus service charges.)
DM for ₱5 000.00 – The amortization (principal portion) on loan granted to the depositor in April
by XYZ Bank (Interest was deducted in advance by the bank in April.)
Books of Good Cheers Repair Shop

Duplicate deposit slips: (These are debited to Cash in Bank.)
Details of date and amount of deposit slips in June:
Date Amount Date Amount Date Amount
1 June ₱2 100.00 9 June ₱900.00 14 June ₱753.00
4 June 1 790.00 10 June 925.00 14 June 850.00
7 June 3 800.00 11 June 1 750.00
Total deposits in June ₱12 868.00

Checks Issued: (These are credited to Cash in Bank.)
Check # Amount Check # Amount Check # Amount
940 ₱735.00 947* ₱10 000.00 954₱575.00
941 580.00 948 550.00 955 627.00
942 545.00 949 754.00 956 714.00
943 850.00 950 627.00 957 510.00
944 650.00 951 520.00 958 665.00
945 530.00 952 620.00 959 852.00
946 618.00 953 610.00 960 535.00
Total checks issued in June ₱12 667.00
*947 Lost check (stp)
It was not deducted from Cash in Bank, hence not included in

total checks issued₱12 667.00.
Fig. 8.2 Bank forms for the transactions of Good Cheers Repair Shop, 1 to 15 June 2019
Good Cheers Repair Shop

Bank Reconciliation
31 May 2019
Balance per bank statement, 31 May ₱9 500.00
Add deposit in transit, 31 May ₱1 685.00
Subtotal ₱11 185.00
Less outstanding checks:
No. 931 ₱650.00
936 500.00
938 750.00
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939 555.00 ₱2 455.00
Adjusted balance per bank, 31 May ₱8 730.00
Balance per depositor’s books, 31 May ₱9 030.00

Less bank charges ₱300.00
Adjusted balance per depositor’s books, 31 May ₱8 730.00
General ledger balance of Cash in Bank

Adjusted balance, 31 May ₱8 730.00
Add deposits ₱12 868.00
Total ₱21 598.00
Less checks issued ₱12 667.00
Balance per depositor’s books, 15 June ₱8 931.00
Fig. 8.3. Bank reconciliation for Good Cheers Repair Shop, May 2019 and balance per
depositor’s books as of 15 June 2019
To prepare the bank reconciliation for Good Cheers Repair Shop, study the guide that follows.
(Hint: We is for depositor and you is for the bank. Begin the analysis with the depositor’s books
since they list the entries in chronological order.)
a. Compare the details in deposit slips (book debits – we debit) with those in deposit
columns (credits – you credit) per bank statement. Put a tick mark, which is a mark from
a bookkeeper, accountant, or auditor indicating that he or she has reviewed the pertinent
accounting entry, on items that appear in both depositor’s book and the bank statement.
Findings:
 “We debited, you did not credit.”

(Look at the list of deposits. Pick the items without tick mark.)
“We debit (for the depositor)” should have a proper counterpart “you credit (for the
bank).” It means that the depositor debits Cash in Bank account while the bank
credits the current account when deposits are made. Depositor is the originating
party of the transaction.
Deposit of 14 June - ₱850.00 (figure 8.2)
Analysis: This is called deposit in transit. It refers to deposits of the company with
the
bank that did not reach the cut-off time for the bank statement.
We debited to Cash in Bank on the day of collection, 14 June, but
deposited to the bank after 15 June.
Treatment: We are correct, therefore in the June reconciliation, add to balance per
bank. Ultimately, the deposit in transit will be added to our balance per
bank statement.
 “You credited, we did not debit.”
(Look at the credit column of the bank statement. Pick the items without tick
mark.)
“You credit (for the bank)” should have a counterpart “we debit (for the
depositor).” It means that the bank credits the current account while the depositor
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debits the Cash in Bank account. The bank is the originating party of the transaction.
Examples are loan proceeds and collections on notes of the depositor.
i. Deposit of 1 June - ₱1 685.00 (per deposits column in the bank statement, 1 to 15
June 2019, figure 8.1)
Analysis: You will find it in the reconciliation statement in May as a deposit in
transit.
Treatment: It has been recorded by the depositor in May so do not include it in the
June reconciliation.
ii. CMs of ₱5 200.00 and ₱180.00 dated 9 June (figure 8.1)
Analysis: These are collections on customer’s note for appropriate credit to
depositor’s account.
Treatment: The bank statement is correct. So, in the June reconciliation
statement, add to balance per books.
b. Compare the checks issued (book credits – we credit) with the check columns (bank
debits – you debit) per bank statement. Put tick marks as you did in a.
Findings:
 “We credited, you did not debit.”
“We credit (for the depositor)” should have a counter part “you debit (for the
bank).” It means that the depositor credits the Cash in Bank account while the bank
debits the current account. Depositor is the originating party of the transaction.
Examples are checks issued by the depositor and cleared with the bank.
i. The following issued check (figure 8.2) were not debited in the bank
statement.
#946: ₱618.00 #958: ₱665.00
#948: ₱550.00 #959: ₱852.00
#955: ₱627.00
Analysis: It is safe to assume that these are not yet presented by the
depositor’s payees to the bank for encashment or clearing.
Treatment: These are called outstanding checks, which are checks issued by
the depositor but not yet paid by the bank and not presented for
payment. Sooner or later, these checks will be cleared with the
bank, therefore, we are correct to deduct them from Cash in Bank.
In the reconciliation, deduct them from balance per bank.
ii. Check in the May reconciliation which does not appear yet in June bank
statement: #936 amounting to ₱500.00 (figure 8.3)
Analysis: This check remain outstanding; not yet presented to the bank for
payment in June.
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Treatment: The check is still an outstanding one; deduct from balance per
bank.
 “You debited, we did not credit.”
“You debit, we credit” means that the bank debits the current account while the
depositor credits the Cash in Bank account. The bank is the originating party of the
transaction. Examples are debit memoranda on loan payment, daif check, and
service charges.
i. Checks in the bank statement without tick marks can be found in the May
reconciliation as outstanding checks: #931: ₱650.00, #938: ₱750.00, #939:
₱555.00 (figure 8.3).
Analysis: These checks are outstanding checks in May which are paid by the
bank in June.
Treatment: These checks were recorded by the depositor in May; do not
include in June reconciliation.
ii. SC - ₱50.00 on 10 June and ₱100.00 on 15 June (figure 8.1). Bank service
charge is a fee charged by the bank to the depositor and evidenced by a
debit advice.
Analysis: These charges are imposed by the bank for dishonored check on
10 June, ₱50.00 and daif check on 15 June, ₱100.00. These are
proper charges.
Treatment: Deduct these charges from balance per depositor’s books.
iii. RT check for ₱320.00 (figure 8.1)
Analysis: As a deposit, the customer’s check was previously credited to Good
Cheers Repair Shop’s current account. Since it was not honored by
the customer’s drawee bank, then it is proper for XYZ Bank to
deduct it from Good Cheers Repair Shop’s account.
Treatment: Deduct it from balance per depositor’s books.
iv. DM for ₱5 000.00 (figure 8.1)
Analysis: Good Cheers Repair Shop authorized XYZ Bank to deduct DM from
the current account as required by the loan agreement, hence it is
a proper debit.
Treatment: Deduct it from balance per depositor’s books.
The complete bank reconciliation statement for Good Cheers Repair Shop as of 15 June
2019 appears below.
Good Cheers Repair Shop

Bank Reconciliation Statement
15 June 2019
Balance per bank statement, 15 June ₱11 803.00
Add: Deposit in transit ₱850.00
Subtotal
Less: Outstanding checks
936 ₱500.00
946 ₱618.00
948 ₱550.00
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955 ₱627.00
958 ₱665.00
959 ₱852.00 ₱3 812.00
Adjusted balance per bank ₱8 841.00
Balance per depositor’s books ₱8 931.00
Add: Collection of customer’s note (principal + interest) ₱5 380.00
Subtotal ₱14 311.00
Less: service charges on stop payment and RT (DAIF) checks ₱150.00
DAIF check ₱320.00
Debit memo on loan amortization ₱5 000.00 ₱5 470.00
Adjusted balance per depositor’s books ₱8 841.00
Fig. 8.4 Bank reconciliation statement for Good Cheers Repair Shop, 15 June 2019
The deposit in transit belongs to the “We debit, you did not credit” category. Under the
imprest cash system, which automatically debits collections to Cash in Bank although actual
deposit is done on the next banking day, collections on the last day of the month becomes a
deposit in transit.
The CM falls under the “You credit, we did not debit” category. It originates from the
request of the depositor to the bank, arising from loans granted by the bank or collection of a
note of the depositor. Failure to record the CM understates the depositor’s Cash in Bank. The
depositor will be able to record the CM once he or she receives the posting media that are
enclosed in the bank statement. The CM is usually recorded by the depositor in the following
month.
Outstanding checks belong to the “We credit, you did not debit” category. These are
checks that are not yet paid by the bank. Checks issued during the month are posted by the
depositor as credits to Cash in Bank. However, not all payees encash or deposit their checks
immediately. In some instances, the checks are delayed in the mail. Checks for pickup may be
neglected by payees for varied reasons. Thus, these checks will be delayed in the process of
clearing with the depositor’s drawee bank making the balance per bank statement overstated.
The SC is under the “You debit, we did not credit” category. It is imposed by the bank on
the depositor for handling transactions such as returned inward clearing check or customer’s
returned check. The depositor will be able to record it when he or she receives the Dm. While
still unrecorded, the balance of Cash in Bank per depositor’s books is overstated.
The RT check is also included in the “You debit, we did not credit” category. Customers
may pay for their purchases in the form of checks. These are accepted by the
company/depositor to expedite sales transactions. However, some customers fail to cover their
check issues with funds, thus their checks become bouncing or dishonored checks. The bank
reverses (debits) its previous credit to the depositor’s account and sends back the check to the
depositor. The depositor will learn about the RT check when the DM is received together with
the bank statement usually in the following month. When the RT check is not yet recorded by
the depositor, his or her Cash in Bank is overstated.
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Similarly, the DM comes from the “You debit, we did not credit” category. This is usually
prepared by the bank to collect on the loan amortization of the depositor that is already due. The
depositor records this DM in his or her books when he or she receives the DM that is enclosed
in the bank statement, usually in the following month. The depositor’s Cash in Bank account is
overstated while the DM is not yet recorded.

Learn more about bank reconciliation statement.
In accounting, a company's cash includes the money in its checking account(s). To safeguard

this critical and tempting asset, a company should establish internal controls over its cash.
These controls include separating the accounting duties of its employees, depositing all receipts
into the company's checking account, paying all bills through the checking account, and having
an independent person routinely prepare a bank reconciliation (bank rec, bank statement
reconciliation), and more.
The purpose of the bank reconciliation is to be certain that the company's general ledger Cash
account is complete and accurate. With the true cash balance reported in the Cash account, the
company could prevent overdrawing its checking account or reporting the incorrect amount of
cash on its balance sheet. The bank reconciliation also provides a way to detect potential errors
in the bank's records.
The bank reconciliation process requires some tedious tasks. For example,
 Every check amount on the bank statement must be compared to the check amounts in
the company's general ledger Cash account. Any differences, such as the
company's outstanding checks and errors, will become part of the adjustments listed on
the bank reconciliation.
 Every deposit on the bank statement must be compared to the receipts recorded in the
company's Cash account. Any differences, such as a deposit in transit and/or errors, will
become part of the adjustments listed on the bank reconciliation.
 Other items on the bank statement must be compared to the other items in the
company's Cash account. Any differences, such as bank fees, checks returned because
of insufficient funds, collections made by the bank, etc., will be part of the adjustments
listed on the bank reconciliation.
The adjustments based on the above differences will be added or subtracted from one of the
following amounts:
 The unadjusted balance from the bank statement (or online banking information)
 The unadjusted balance from the company's general ledger Cash account
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A condensed version of our format for the bank reconciliation is shown here:
Notice the following items in the condensed bank reconciliation format:
 The left side is labeled Balance per BANK
 The right side is labeled Balance per BOOKS
 Adjustments to BANK (shown on the left side) are likely the items that are in the
company's general ledger Cash account, but they are not yet recorded in the bank's
records. Examples are outstanding checks and a deposit in transit. TIP: Put the item
where it isn't.
 Adjustments to BOOKS (shown on the right side) are likely the items that the bank has
recorded but the items are not yet recorded in the company's general ledger Cash
account. Examples include bank fees and a bank credit memo. TIP: Put the item where
it isn't.
 If the amounts on the bottom line of the bank reconciliation are identical (Adjusted
balance per Bank = Adjusted balance per BOOKS), the bank statement is reconciled.
 In order for the adjusted balance (which is the true cash balance) to appear in the
company's general ledger Cash account and reported on the company's balance sheet,
the items listed under Adjustments to BOOKS must be recorded in the company's
general ledger accounts.
In the past, it was common for a company to prepare the bank reconciliation after receiving the
monthly bank statement and before issuing the company's balance sheets. However, with
today's online banking a company can prepare a bank reconciliation throughout the month (as
well as at the end of the month). This allows the company to verify its checking account balance
more frequently and to make any necessary corrections much sooner.
Accounting for Cash at the Company
It is helpful for a company to have a separate general ledger Cash account for each of its
checking accounts. For instance, a company will have one Cash account for its main checking
account, a second Cash account for its payroll checking account, and so on. For simplicity, our
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examples and discussion assume that the company has only one checking account with one
general ledger account entitled Cash.
As you know, the balances in asset accounts are increased with a debit entry. Therefore, when
a company receives money (currency, checks), the company debits its general ledger asset
account Cash and credits another account using the date that the money was received (not the
date the money is deposited at its bank). For example, if a company receives $900 on Saturday,
June 29, the debit to the Cash account (and the credit to another account) will show the date of
June 29, even if the money is deposited in the bank account on Tuesday, July 2.
When a company writes a check, the company's general ledger Cash account is credited (and
another account is debited) using the date of the check. Therefore, a check dated June 29 will
be recorded in the company's accounts using the date of June 29, even if the check clears (is
paid through) the company's bank account one week later.
The above transactions are common occurrences that illustrate two important points:
 The unadjusted balance in the above company's general ledger Cash account on June
30 is likely to be different from the bank statement balance on June 30.
 Often, neither the June 30 unadjusted balance in the company's Cash account nor the
June 30 unadjusted balance on the bank statement is the true amount of the company's
cash. In that case, both unadjusted balances will need adjustments to arrive at the true,
corrected, adjusted cash balance.
Next, we look at how a bank uses debit and credit when referring to a company's checking

account transactions.
Accounting at the Bank
To appreciate a bank's use of the terms debit, debit memo, credit, and credit memo, let's take a
brief look at a few of the bank's assets and liabilities:
 The bank's assets include cash, investment securities, and loans receivable
 The bank's largest liability is customers' deposits
 Customers' deposits consist of its customers' checking accounts, savings accounts, and
certificates of deposit
 Since customers' accounts are liabilities of the bank, they will have credit balances
When a bank customer deposits $900 in its bank checking account, the bank's asset Cash is
increased with a debit entry, and the bank's liability Customers' Deposits is increased with a
credit entry. The bank's liability has increased because the bank has the liability/obligation to
return the customer's checking account balance to the customer on demand
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When the bank increases a customer's/depositor's checking account balance, the banker might
say that the depositor's checking account was credited. (The credit entry does indeed increase
both the depositor's checking account balance and the bank's liability.)
When the bank debits a depositor's checking account, the depositor's checking account balance
and the bank's liability to the customer/depositor are decreased.
Here are two examples to reinforce the bank's use of debit and credit with regards to its
customers' checking accounts.
Bank Example 1. Assume that a new company opens a checking account at Community Bank
with a deposit of $10,000. Community Bank records the deposit in the bank's general ledger as
follows:
 Debit of $10,000 to the bank's asset account Cash
 Credit of $10,000 to the bank's liability account Customers' Deposits
Note that Community Bank credits its liability account Customers' Deposits (which includes the
individual depositor's checking account balance). As a result, Community Bank's balance sheet
will report an additional $10,000 in assets and an additional $10,000 in liabilities.
Bank Example 2 Assume that a company pays its August rent of $1,000 by writing a check on
August 1. Three days later, the landlord cashes the check at Community Bank. While the
company had recorded the $1,000 check in its general ledger accounts with the date of August
1, Community Bank's transaction occurs on August 4. Therefore, using the date of August 4, the
bank will record this entry in the bank's general ledger:
 Debit of $1,000 to the bank's liability account Customers' Deposits
 Credit of $1,000 to the bank's asset account Cash
This transaction results in the bank's assets decreasing by $1,000 and its liabilities decreasing
by $1,000.
Comparing Accounting: Bank vs. Company
Bank Example 1 showed that the bank credits the depositor's checking account to increase
the depositor's checking account balance (since this is part of the bank's liability Customers'
Deposits).
However, the depositor/customer/company debits its Cash account to increase its checking

account balance.
Bank Example 2 showed that the bank debits the depositor's checking account to decrease
the checking account balance (since this is part of the bank's liability Customers' Deposits).
However, the depositor/customer/company credits its Cash account to decrease its checking

account balance.
Page 25 of 131
ENGAGEMENT
Now that you are equipped with the knowledge about Bank Reconciliation Statement,
let us now attempt to do the following exercises.
Exercise I
1. What are the common reconciling items? Describe each one and explain the effect on
the balance per bank and per depositor’s books. What is the proper treatment of each
item in the bank reconciliation statement?
_______________________________________________________
_______________________________________________________
_______________________________________________________
_____________________________________.
2. Explain the following approaches in analyzing and preparing the bank reconciliation
statement:
–“We debit, you credit.”
-“You debit, we credit.”
- “We credit, you debit.”
- “You credit, we debit.”
_______________________________________________________
_______________________________________________________
_______________________________________________________
_____________________________________.
Exercise II: Write T on the blank if the statement is true. Write F if not.
_________1. Any addition made by the bank to the account of a depositor other than deposits
made is evidenced by a bank credit memo.
_________2. If a business maintains a current account, all collections are deposited intact and
all payments are made by check.
_________3. A current or checking account does not earn interest unlike in the case of a
savings account.
_________4. The interest earned by a savings account is usually higher than the interest
earned by a current account.
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_________5. A business cannot open more than one type of account with a bank. Either it
opens a savings account or a checking account.
_________6. Bank reconciliation is prepared only at the end of the accounting period prior to
the preparation of financial statements.
_________7. Checks issued and already presented to the bank for payment are called
cancelled checks.
_________8. The checkbook provides additional record for all cash transactions as it shows all
the receipts and payments made together with the cash balance.
_________9. A bank usually requires a minimum balance in the current account to be

maintained by the depositor.
_________10. Errors committed by the bank need to be adjusted in the books to reconcile the
balance per bank and the balance per book.
ASSIMILATION
REFLECTIVE WRITING
1. What do you think are the advantages of depositing the total collections for the day
with the bank on the next banking day? Why do depositors monitor regularly their current
account with the bank?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
2. What do you think are the reasons why the payees of checks do not encash or clear
the checks with the bank immediately?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
3. Why do you think some banks exempt their depositors who have maintained their
accounts with the bank for 10 years or more from service charges on below minimum deposit
balance?
Page 27 of 131
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
References:
Averkamp, H. (2020). Bank Reconciliation. Retrieved August 12, 2020 from

https://www.accountingcoach.com/bank-reconciliation/explanation#:~:text=The%20purpose
%20of%20the%20bank,account%20is%20complete%20and%20accurate.&text=Every
%20check%20amount%20on%20the,company's%20general%20ledger%20Cash
%20account.

Page 28 of 131
AND MANAGEMENT 2
WEEK 12 (Module 3)
INTRODUCTION
EXPECTATION
At the end of our one-week lesson, you are expected to prepare the BANK RECONCILIATION
STATEMENT and the necessary ADJUSTING ENTRIES.
LEARNING OBJECTIVES
The knowledge and skill in the preparation of basic business forms and documents including:
accounting practice set that requires the application of learning in the first three accounting
courses.
This week’s lesson will focus on adjusting entries based on bank reconciliation statements.
Specifically, you shall learn to prepare a bank reconciliation statement and the necessary
adjusting entries.
DEVELOPMENT

Good day learner.
Today we will begin our lesson on adjusting entries based on Bank Reconciliation
Statements.
LESSON PROPER
ADJUSTING ENTRIES BASED ON BANK RECONCILIATION
STATEMENTS
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Illustrative problem
On 30 April 2019, the bank balance of Aniet Trading as per the checkbook is ₱97
830.00. During the month of April, total cash deposited amounted to ₱448 250.00 while
the total checks issued amounted to ₱454 410.00.
The bank statement for the month of April submitted by LMN Bank showed the
following entries:
Balance as of 30 April ₱84 100.00
Bank service charge for April 125.00
A customer’s check returned by the bank marked “daif” 12 000.00
Bank collection 4 165.00
The items below were discovered in the process of reconciling the balances.
 A deposit made on 30 April for ₱12 660.00 was not reflected in the bank statement.
 The following checks issued during the month remain outstanding:
Ck # 1245 ₱1 650.00
1256 8 400.00
1259 1 200.00
There were no outstanding checks for the previous month.
 Check # 1260 amounting to ₱200.00 in payment of supplies expense was

erroneously recorded as ₱2 000.00 in the books.
Requirement: Bank reconciliation statement and adjusting journal entries
Aniet Trading
Page 30 of 131
Bank Reconciliation Statement
30 April 2019
Balance per bank statement, 30 April ₱84 100.00
Add: Undeposited collection 12 660.00
Total ₱96 760.00
Less: Outstanding checks
Ck # 1245: ₱1 650.00
1256: 8 400.00
1259: 1 200.00 11 250.00
Adjusted bank balance, 30 April ₱85 510.00
Balance per books, 30 April ₱91 670.00*
Add: Bank collection ₱4 165.00
Book error (2 000 – 200) 1 800.00 5 965.00
Total ₱97 635.00
Less: Service charge ₱125.00
DAIF customer’s check 12 000.00 12 125.00
Adjusted book balance ₱85 510.00
*Computation of balance per books:
(₱97 830.00 + ₱448 250.00) - ₱454 410.00 = ₱91 670.00
Adjusting Entries
Date Account Debit (₱) Credit (₱)

Cash in Bank 4 165.00
Accounts Receivable 4 165.00
To take up bank collection
Supplies Expense 1 800.00
To correct error made on Ck # 1260
Miscellaneous Expense 125.00
Cash in Bank 125.00
To record bank charges
To take up returned customer’s check
Hint: Adjusting entries are prepared for all reconciling items in the balance per books only.
They are subsequently recorded in the depositor’s books of accounts.

Learn more about adjusting entries based on bank reconciliation statements.
Company's Process for Preparing its Bank Reconciliation
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The process for preparing the bank reconciliation of a company's checking account includes:
 Identifying and reviewing any difference between every amount on the bank statement
(or the online banking information) and every amount in the company's Cash account.
 Determining the true/correct/adjusted balance for the company's Cash. This is done by
listing the unadjusted balance from the bank statement, the unadjusted balance from the
company's Cash account, and then listing the adjustments (differences) that were
identified.
 Recording the pertinent adjustments to the company's Cash account.
We suggest the following five steps for preparing a bank reconciliation:
Step 1. Compare every amount on the bank statement (or in the bank's online
information) with every amount in the company's general ledger Cash account and note
any differences.
 Compare the amount of every check that was paid by the bank (cleared the bank
account) with the amount of every check in the company's Cash account. Any
differences, such as the outstanding checks and errors, must be shown on the bank
reconciliation.
 Compare every deposit processed by the bank with the receipts recorded in the
company's Cash account. Any differences, such as a deposit in transit and/or errors,
must be shown on the bank reconciliation.
 Compare other items on the bank statement with the other items in the company's Cash
account. Any differences, such as bank fees, checks returned because of insufficient
funds, collections made by the bank, etc., must be shown on the bank reconciliation.
Step 2. Complete the Balance per BANK side of the bank reconciliation format.
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The Balance per BANK side of the bank reconciliation requires the following:
 Enter the unadjusted balance from the bank statement (or online banking information).
 Add any deposits in transit. These are receipts in the company's Cash account that have
not been processed by the bank as of the date of the bank reconciliation.
 Subtract any outstanding checks. These are the checks the company had issued and
recorded in its Cash account, but they have not been paid by the bank (not cleared the
bank account) as of the date of the bank reconciliation.
 Add/subtract other items with amounts that were incorrectly recorded by the bank.
 Combine the above amounts and show the total amount on the bottom line, Adjusted
balance per BANK.
Step 3. Complete the Balance per BOOKS side of the bank reconciliation format.
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The Balance per BOOKS side of the bank reconciliation requires the following:
 Enter the unadjusted balance appearing in the company's general ledger Cash account.
 Add any increases (interest earned, bank credit memos) that are shown on the bank
statement but were not yet recorded in the company's Cash account.
 Subtract any decreases (such as bank services charges, return items, bank debit
memos) that are shown on the bank statement but are not yet recorded in the company's
Cash account.
 Add/subtract other items with amounts that were incorrectly recorded by the company.
 Combine the amounts on the right side and show the total on the bottom line, Adjusted
balance per BOOKS.
Step 4. Be certain that the bank reconciliation shows Adjusted balance per BANK =
Adjusted balance per BOOKS.
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The bottom line of both sides of the bank reconciliation must be the same amount. In other
words, Adjusted balance per BANK must equal Adjusted balance per BOOKS.
Note: Having the Adjusted balance per BANK = Adjusted balance per BOOKS does not
guarantee that the company's cash has been completely accounted for. For instance, if an
employee had stolen some of the company's cash receipts before the money was recorded in
the company's accounts (and obviously not deposited in the company's bank account) the
missing amount will not be detected by the bank reconciliation.
Step 5. Record in the company's general ledger the adjustments to the balance per
BOOKS.
Since the adjustments to the balance per the BOOKS have not been recorded as of the date of
the bank reconciliation, the company must record them in its general ledger accounts.
For example, if one of the adjustments to the balance per BOOKS is a $25 service charge (that
was on the bank statement on May 31, 2019 but not yet recorded in the company's general
ledger), the company must post the following entry:
Note: After recording/posting the adjustments to the general ledger accounts, it is important to

confirm that the company's general ledger Cash account balance is indeed equal to the
Adjusted balance per BOOKS shown on the bottom line of the bank reconciliation.
Page 35 of 131
Next, we will prepare a bank reconciliation for a hypothetical company by using
transactions that are commonly encountered.
Sample of a Company's Bank Reconciliation with Amounts
In this section we will prepare a June 30 bank reconciliation for Lee Corp using the five steps
discussed above.
Step 1. Compare every amount on the bank statement (or the bank's online information)
with every amount in the company's general ledger Cash account and note any
differences.
After comparing every item on the bank statement (checks paid, deposits processed, other
items) with every item in Lee Corp's general ledger Cash account (checks written, money
received, other items), we listed the differences and other pertinent information in the table that
follows.
(The letter in the "Item" column will be shown on the bank reconciliation next to the amount.)
Page 36 of 131
Keep in mind our TIP: Put the item where it isn't. This means:
 If an item appears on the bank statement (but isn't in the company's general ledger), put
the item on the bank reconciliation under Adjustments to BOOKS
 If an item is already in the company's general ledger Cash account (but it isn't on the
bank statement), put the item on the bank reconciliation under Adjustments to BANK
Step 2. Complete the Balance per BANK side of the bank reconciliation format.
Step 3. Complete the Balance per BOOKS side of the bank reconciliation format.
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Step 4. Be Certain the Adjusted Balance per BANK = Adjusted Balance per BOOKS.
Since the Adjusted balance per BANK of $1,719 is equal to Adjusted balance per BOOKS of
$1,719, the bank statement of August 31 has been reconciled.
Step 5. Record in the company's general ledger the adjustments to the balance per
BOOKS.
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Recall that the adjustments to the balance per BOOKS will require accounting entries for the
items to be posted to the company's general ledger accounts.
For each of the adjustments shown on the Balance per BOOKS side of the bank reconciliation,
a journal entry is required. Each journal entry will affect at least two accounts, one of which is
the company's general ledger Cash account.
[Note: The company does not make accounting entries for the adjustments to the bank's
records.]
The following are the necessary entries for the adjustments to the balance per BOOKS. We
reference each entry as E, F, B, D, G, C, or K, as indicated on the right side of the bank
reconciliation.
Adjustment E
The bank statement showed that on June 30, the bank added $8 of interest that had been
earned by Lee Corp. Assuming that this was not yet recorded in Lee Corp's general ledger, the
following journal entry is required:
Adjustment F
On June 29, the bank statement showed a bank credit memo of $1,000 which caused the
checking account balance to increase. We assume that Lee Corp had not yet recorded the
collection of the note in its general ledger accounts. Therefore, Lee Corp must increase its Cash
account balance and decrease the balance in its asset account Notes Receivable. This is
achieved by the following journal entry:
Adjustment B
The bank statement shows a service charge of $35 on June 30. Since this reduced the balance
in Lee Corp's checking account, Lee Corp must credit its Cash account and debit an expense
such as Bank Fees Expense. Lee Corp's entry is:
Adjustment D
On June 26, the bank statement showed that the bank processed a debit memo of $80 for the
Page 39 of 131
printing of Lee Corp's checks. While the bank debits its liability account Customers' Deposits to
reduce its credit balance, Lee Corp must credit its asset account Cash to reduce its debit
balance. Assuming that Lee Corp has not yet recorded the $80 printing cost, Lee Corp will
record this journal entry:
Adjustment G
On June 29, the bank statement showed a debit memo of $40 for the bank's fee for collecting a
note receivable for Lee Corp. Since this reduces Lee Corp's checking account balance, Lee
Corp will need to reduce the balance in its general ledger asset account Cash. Assuming this
has not yet been recorded, the following entry is needed:
Adjustment C
On June 28, the bank statement showed that Lee Corp's checking account balance was
decreased by $110 for a check that Lee Corp had deposited in its checking account. (The
deposited check was not paid by the bank on which it was drawn and was returned.) As a result,
Lee Corp must reduce its general ledger Cash account by $110. Assuming this was not yet
recorded by Lee Corp, it will record the following entry:
Adjustment K
On June 27 Lee Corp had increased its Cash account and its Sales account by $145. While
reconciling its August bank statement, Lee Corp learned that the correct amount was $154.
Therefore, Lee Corp must increase its Cash account balance by $9 and increase its Sales by
$9. (Instead of removing the $145 and then adding $154, Lee Corp is adding the difference of
$9 to the accounts.)
Page 40 of 131
Note: After the above entries are posted to the general ledger accounts, it is important to
confirm that the balance in the Cash account is equal to the Adjusted balance per BOOKS
shown on the bank reconciliation.
It is also necessary to contact the bank immediately for any bank errors that were discovered in
order for the bank account to be corrected.
ENGAGEMENT
Now that you are equipped with the knowledge about Bank Reconciliation Statement
Adjusting Entries, let us now attempt to do the following exercises.
Exercise I: The bank reconciliation statement of Marygold Company as of 30 April 2018

showed an unadjusted cash balance of ₱2 625.00 with a deposit in transit of ₱4 300.00
and three outstanding checks as follows: No. 634, ₱1 080.00; No. 635, ₱675.00; and No.
636, ₱275.00. No debit or credit memorandum was issued by the bank during the month.
Shown on the next page is the bank statement for May.
SOUTHEAST BANK
Current Account of Marygold Company
Lipa City
Period covered: May 2018
Check No. Amount (₱) Deposits (₱) Date Balance (₱)
1 May 2 625.00
634 1 080.00 4 300.00 2 May
638 8 500.00 8 000.00 3 May
637 900.00 4 000.00 9 May
735 1 650.00 10 May
640 2 250.00 10 May
4 000.00 10 May
7 000.00 16 May
641 2 625.00 5 800.00 23 May
100.00 SC 25 May
Page 41 of 131
643 6 920.00 3 400.00 25 May
639 4 350.00 31 May
59 700.00 CM 31 May 70 450.00
Additional information:
Check No. 735 is a check of Merigold Company erroneously charged to Marygold

Company by the bank. Deposit of 10 May per bank statement was erroneously recorded
by the depositor as ₱4 500.00 instead of ₱4 000.00. SC is service charge on a returned
inward clearing check. CM is credit memo for loan proceeds released to the depositor:
principal ₱60 000.00, interest ₱300.00.
Cash Receipts Book Cash Disbursements Book

Date Amount Date Check No. Amount
2 May ₱8 000.00 2 May 637 ₱900.00
6 May ₱4 000.00 3 May 638 ₱8 500.00
9 May ₱4 500.00 9 May 639 ₱4 350.00
15 May ₱7 000.00 10 May 640 ₱2 250.00
20 May ₱5 800.00 20 May 641 ₱2 625.00
24 May ₱3 400.00 24 May 642 ₱875.00
28 May ₱3 750.00 24 May 643 ₱6 920.00
Prepare a bank reconciliation statement as of 31 May 2018.
Exercise II: Application of Bank Reconciliation Concepts

A. Resilient Co. received the September bank statement that showed a balance of ₱77
620.00 as of 30 September. Other information is as follows:
Balance per checkbook ₱76 330.00
Checks outstanding:
No. 3406 ₱2 240.00
No. 3419 ₱14 481.00
No. 3416 ₱2 809.00
No. 3428 ₱990.00
Customer’s check returned marked “DAIF” ₱1 360.00
31 August deposit not recorded in the bank statement ₱16 860.00
Bank service charges for the month ₱1 100.00
Check No. 3431 in payment of electricity bill for ₱2 120.00
Had been recorded in the books as ₱2 210.00
Prepare the bank reconciliation statement on 30 September.
B. Wise Trading submitted to you the set of information below for October 2018.
Balance per bank statement ₱67 400.00
Page 42 of 131
Balance per checkbook ₱69 398.00
Check outstanding, No. 3660 ₱1 860.00
Deposit on 31 October not reflected in the statement ₱3 500.00
Returned checked marked “DAIF” ₱667.00
Service charge for the month ₱141.00
Meanwhile, the records below show the errors committed by the bookkeeper of
Wise Trading.
Check No. Recorded Amount (₱) Correct Amount (₱)

3665 Payment for rent 480.00 840.00
3671 Payment for advertising 900.00 90.00
Prepare the bank reconciliation statement and the necessary adjusting entries.
ASSIMILATION
REFLECTIVE WRITING
1. Why is there a need to prepare a bank reconciliation statement?

_______________________________________________________
_______________________________________________________
_______________________________________________________
_____________________________________.
2. Why is a bank reconciliation statement called as such?

_______________________________________________________
_______________________________________________________
_______________________________________________________
_____________________________________.
References:
Averkamp, H. (2020). Bank Reconciliation. Retrieved August 12, 2020 from

https://www.accountingcoach.com/debits-and-credits/explanation/3


AND MANAGEMENT 2
Page 43 of 131
WEEK 13 (Module 4)
INTRODUCTION
EXPECTATION
At the end of the one-week lesson, you are expected to perform the steps in the accounting
cycle, from preparation of documents to the preparation, analysis, and interpretation of financial
statements.
LEARNING OBJECTIVES
Dealing with the preparation of basic business forms and documents including the preparation
of an accounting practice set that requires the application of learning in the first three accounting
courses.
This week’s lesson will focus on ACCOUNTING PRACTICE SET.
Specifically, you shall learn to perform the steps in the accounting cycle, from the preparation of
documents to the preparation, analysis, and interpretation of financial statements.
DEVELOPMENT
Good day learner.
Today we will begin our lesson on Business Documents, Merchandising Terms, Chart of
Accounts, and Journal Entries.
LESSON PROPER
Business Documents, Merchandising Terms, Chart of Accounts, and Journal
Entries.
A snapshot of the business operations is simulated through a simple practice set.
Practice set allows you a hands-on experience in preparing and processing business
documents. It takes you through a journey on the accounting cycle of a single
proprietorship, from opening of the preparation of financial statements.
Page 44 of 131
In previous exercises, you were provided with narratives of transactions. With
practice set, however, you will encounter various business documents. The practice set
for this module presents business documents particularly for Dalisay Company, a
merchandising business. For example, sales refer to the invoice value (gross amount) of
the merchandise sold to customers either on cash or credit terms. The practice set shows
account sales invoice for sales on account and cash sales invoice for those on cash basis.
Other accounts related to sales are contra-sales accounts, sales returns, sales
allowances, and sales discounts.
Sales returns connote reduction in gross sales due to items returned by
customers for reasons such as defects and incorrect order specifications. Sales
allowances pertain to reduction in the amount due from customers because of complaints
such as unsatisfactory quality and incorrect color or size, but the goods are not returned.
The two are combined under the account sales returns and allowances because the
amounts are minimal. Sales returns and allowances are supported by the CM issued by
the seller. Sales discounts refer to reductions in the amounts collectible from customers
due to payment within the discount period. Sales discounts are computed based on the
credit terms cited in the sales invoice.
Cost of sales or cost of goods sold refers to the equivalent cost of the products
sold. (In the given practice set, cost is the amount paid by the seller, Dalisay Company, to
its supplier.) To understand this concept easily, recall the cost of goods sold section of the
multi-step statement of comprehensive income of a merchandising business in module 2.
The components of cost of goods sold are (a) initial merchandise inventory, (b) net
purchases comprising cost of goods available for sale, and (c) ending merchandise
inventory as a deduction to get cost of goods sold.
Details of the accounts under cost of goods sold are as follows:
 Merchandise inventory, beginning – This means goods that are still unsold at the
beginning of the accounting period. (For Dalisay Company, unsold goods as of 31 may
become the beginning inventory of 1 June.)
 Purchases – These pertain to products that are bought by the business and
intended for resale to customers. (The business document used in the practice set is the
sales invoice of the supplier of Dalisay Company.)
 Purchase returns and allowances – These are contra accounts to purchases,

referring to reductions in the obligations of the buyer to the supplier due to defective
goods, late delivery, and other valid reasons. (Example of a supporting document is a
credit memo issued by the supplier of Dalisay Company.)
 Freight-in – This is an addition to net purchases. It means transportation costs paid

to the common carrier (truck, ship, airplane) in delivering the goods to the place of
business of the buyer. (Example in the practice set is the waybill issued by Fast Trucking.)
 Ending inventory – This refers to the unsold goods at the end of the accounting
period. (In the case of Dalisay Company, ending inventory is given as additional
information with instruction on the needed adjusting entry.)
Page 45 of 131
BIG IDEA
For a merchandising business, sales, cost of goods sold, and gross profit
affect the net income/ (loss) while merchandise inventory has an effect on
its financial position. Quantity of products sold at selling price less quantity
sold at cost (cost of sales of cost of goods sold) will give the business gross
profit.
Dalisay Company is a registered value-added tax (VAT) taxpayer, hence it adds 12%
VAT to the sales invoice charged to customers. Similarly, it purchases merchandise and
supplies from VAT-registered suppliers. Below is the chart of accounts of Dalisay Company.
Account Account
No. No.
Current Assets Revenues
A – 101 Cash R – 501 Sales
A – 102 Accounts Receivable R – 501.1 Sales Returns and Allowances
A – 103 Notes Receivable R – 501.2 Sales Discounts
A – 104 Merchandise Inventory Costs
A – 105 Office Supplies C – 601 Purchases
A – 106 Prepaid Rent C – 601.1 Freight-in
C – 601.2 Purchase Returns and
Equipment
Allowances
A – 201 Equipment C – 601.3 Purchase Discounts
A – 201.1 Accumulated depreciation Expenses
– Equipment
Current Liabilities X – 701 Advertising
L – 301 Accounts Payable X – 702 Taxes and Licenses
L – 302 Net VAT Payable X – 703 Utilities
L – 302.1 Input VAT X – 704 Gasoline and Oil
L – 302.2 Output VAT X – 705 Salaries and Wages
L – 303 Withholding Tax Payable
L – 304 SSS Premiums Payable
L – 305 Pag-IBIG Contributions Y - 801 Income Summary
Payable
L – 306 PhilHealth Premiums
Payable
Owner’s Equity
E - 401 Dalisay, Capital
E - 402 Dalisay, Drawing
An illustration of the journal entries for a merchandising business, based on the

transactions of Dalisay Company, is given on the next page. The net VAT payable will be
computed for remittance to the BIR on the 20th day after the close of the current month by
Dalisay Company. If the total output VAT is higher than the total input VAT, the taxpayer will file
Page 46 of 131
payment return online and pay the tax at the bank. If the total input VAT is higher that the total
output VAT, the taxpayer will file no payment return online and download e-BIR Form Version
7.1. In addition, the excess input VAT will be carried over to the following month as an asset,
“Deferred Input Taxes.” The business tax VAT will be discussed further in module 10.
Meanwhile, the following are the journal entries for Dalisay Company.
a. Sales on account, collected within the discount period.
Note that output VAT is credited equivalent to 12% of invoice price. It is a tax payable to
the BIR.
5 May Dr. Accounts Receivable ₱5 376.00

Sold toiletries to Lorna’s Cr. Output VAT ₱576.00
Beauty Salon, Cr. Sales ₱4 800.00
₱5 376.00 (VAT inclusive); Output VAT is 12% value-
VAT is 12% on invoice price. added tax charged to the
(ASI#02) customer.
₱5 376.00/1.12=₱4 800.00
Legend:
Dr. – Debit
Cr. – Credit
Note VAT inclusive means that the amount of ₱5 376.00 includes ₱576.00 output VAT, hence
invoice price is only ₱4 800.00, credit to “Sales.” Output VAT is recorded separately.
15 May Dr. Cash ₱5 280.00

Collected in full from Lorna’s Dr. Sales Discount ₱96.00
Beauty Salon (ASI#02) Cr. Accounts Receivable ₱5 376.00
Net collection is invoice
Discount = invoice price price less cash discount.
x discount rate
₱4 800.00 x 2% = ₱96.00
₱5 376.00 – 96.00 = ₱5 280.00
Note: Cash discount is discussed lengthily in succeeding pages.
b. Sales returns and allowances
8 May Dr. Sales Returns and ₱670.00

Issued credit memo for Allowances
defective goods to Toti’s Dr. Output VAT ₱80.00
Beauty Parlor, ₱750.00 Cr. Account Receivable ₱750.00
(VAT inclusive). Sales returns and
allowance are debited and
₱750.00/1.12 = ₱670.00 output VAT is reversed for
the amount of return
c. Purchases on account, subsequent returns and full payment
Page 47 of 131
12 May Dr. Purchases ₱12 000.00
Purchased toiletries from Dr. Input VAT ₱1 440.00
Cattleya Store, Cr. Accounts Payable ₱13 440.00
₱13 440.00 (VAT inclusive) Input VAT is 12% value-
Terms: 2/10, n/30. added tax on top of the
(Inv. #1003) obligation to the supplier.
Note: “Purchases” is debited at the amount of the invoice price. Input VAT is recorded
separately.
18 May Dr. Account Payable ₱1 120.00

Received a credit memo Cr. Input VAT ₱120.00
(CM#238) from Cattleya Cr. Purchase Returns and ₱1 000.00
Store, for return of defective Allowances
merchandise, Purchase returns and
₱1 120.00 allowances are credited
and the corresponding
₱1 120.00/1.12 = ₱1 000.00 input VAT is reversed.
Note: “Accounts Payable” is reversed inclusive of VAT; input VAT is cancelled.
26 May Dr. Accounts Payable ₱12 320.00

Paid Cattleya Store, in full of Cr. Cash ₱12 320.00
Account Net payable is invoice
₱13 440.00 less ₱1 120.00 price less returns.
Return = ₱12 320.00
No discount for payment
Beyond discount period
d. Under the periodic inventory system, the ending inventory is set up based on the physical
count of unsold goods at the end of the accounting period.
Proforma entry:
Dr. Merchandise inventory xxx
Cr. Income summary xxx
BIG IDEA
VAT-registered businesses have the privilege of offsetting input VAT on
purchases from output VAT on sales when remitting net VAT payable to the
BIR. Moreover, the seller adds 12% VAT to the invoice price charged to
customer for every sale.
Trade Discount and Cash Discount
Page 48 of 131
Discounts are of two types, trade discount and cash discount. Trade discounts are
reductions in the list price to entice customers to buy in bulk. List price less trade discount gives
you the invoice price. Trade discount is not recorded in the books of accounts.
On the other hand, cash discounts are computed as reductions in the invoice price so
that customers will pay earlier than the due date. These are recorded in the books of accounts
as sales discounts or purchase discounts.
Comparison Chart
BASIS FOR
TRADE DISCOUNT CASH DISCOUNT
COMPARISON
Meaning A discount given by the A deduction in the amount of

seller to the buyer as a invoice allowed by the seller
deduction in the list price to the buyer in return for
of the commodity is trade immediate payment is cash
discount. discount.
Purpose To facilitate a bulk sales. To facilitate a prompt

payment.
Invopice It is shown in invoice as a It is not shown in invoice.

deduction itself.
When allowed? At the time of purchase. At the time of payment.
Allowed to all Yes No

customers
Entry in books No Yes
Vary with Time period, when Quantity of goods purchased

payment is made. or amount of purchases
made.
In the illustration below, the following are give: invoice date, list price, trade discount
rate, credit terms (or cash discount rate and discount period), and date of payment. Meanwhile,
the net amount for each entry due on payment date is to be computed. The final answers are
enclosed in boxes.
Page 49 of 131
Invoice Date List Price Trade Credit Terms Date of Net
Discount Rate Payment Amount
1. 15 September ₱4 000.00 6% 2/10, n/30 15 September ?
2. 21 July ₱2 500.00 25% n/30 30 August ?
3. 29 November ₱7 000.00 - 1/10, n/30 8 December ?
4. 27 June ₱6 000.00 20% 2/10, 1/15, n/30 12 July ?
5. 30 May ₱8 000.00 15% 2%, 10 EOM 10 June ?
1. Terms: 2% discount if paid within 10 2. Terms: No cash discount available

TD
days after invoice date, but account (n/30) but account should be paid
– trade
must be paid within 30 days within 30 days from 21 July, invoice
15 September TD = ₱4 000.00 date
X 6% = ₱240.00. 21 July TD = ₱2 500.00 x 25%

Invoice price = ₱4 000.00 = ₱625.00.
- ₱240.00 = ₱3 760.00 Invoice price = ₱2 500.00 - ₱625.00
CD = ₱3 760.00 x 2% = ₱75.00 = ₱1 875.00
15 September: NA = ₱3 760.00 Days lapsed from 21 July to
- ₱75.00 = ₱3 685.00 30 August = 40 days
30 August: NA = ₱1 875.00
discount
CD – cash discount
NA – net amount
3. Terms: 1% discount if paid within 4. Terms: 2% discount if paid within

10 days after invoice date, but 10 days, 1% discount if paid beyond
account must be paid within 30 days 10 days but within 15 days; account
8 December CD = ₱7 000.00 should be paid within 30 days from
5. Term: 2%Xdiscount if paid within 10
1% = ₱70.00. 27 June, invoice date 27 June TD
days after
NA =end-of-month
₱7 000.00 - (31 May)
₱70.00 = ₱6 000.00 x 20% = ₱1 200.00.
= ₱6 930.00 Invoice price = ₱6 000.00 - ₱1 200.00
30 May TD = ₱8 000.00 x 15% = ₱4 800.00
= ₱1 200.00 12 July days lapsed = 15 days
Invoice price = ₱8 000.00 NA = ₱4 800.00 - ₱48.00
- ₱1 200.00 = ₱6 800.00 = ₱4 752.00
10 June days lapsed = 10 days
CD = ₱6 800.00 x 2% = ₱136.00
NA = ₱6 800.00 - ₱136.00
= ₱6 664.00
Note: Cash discount is computed based on invoice price less returns.
Page 50 of 131
BIG IDEA
Trade discounts increase the volume of sales while cash discounts speed up
collections.

Learn more about VAT payable in the Philippines.
How to Compute VAT Payable in the Philippines
How to compute Value Added Tax (VAT) payable in the Philippines? Any person or entity who is
engaged in trade, business or in the practice of profession may be liable to business taxes.
Business taxes can be either a Percentage tax or a Value Added Tax. Furthermore, a taxpayer
can be a VAT registered or a Non-VAT registered taxpayer. In this article, we will tackle how to
compute VAT Payable and file the monthly and quarterly VAT returns.
What is a Value Added Tax?
Value-Added Tax is a business tax in the form of sales tax. It is a tax on consumption levied on
the sale, barter, exchange or lease of goods or properties and services in the Philippines and on
importation of goods into the Philippines. It is an indirect tax, which may be shifted or passed on
to the buyer, transferee or lessee of goods, properties or services.
Who Are Required To File VAT Returns
The following persons or entities are required to file VAT returns:
1. Any person or entity who, in the course of his trade or business, sells, barters, exchanges,
leases goods or properties and renders services subject to VAT, if the aggregate amount of
actual gross sales or receipts exceed P1,919,500 (RR 16-2011, RR 3 -2012), as amended.
2. A person required to register as VAT taxpayer but failed to register
3. Any person, whether or not made in the course of his trade or business, who imports goods
Who may opt to register as VAT and what will be his liability?
1. Any person who is VAT-exempt under Sec. 4.109-1 (B) (1) (V) not required to register for
VAT may, in relation to Sec. 4.109-2, elect to be VAT-registered by registering with the RDO
that has jurisdiction over the head office of that person, and pay the annual registration fee of
P500.00 for every separate and distinct establishment.
2. Any person who is VAT-registered but enters into transactions which are exempt from VAT
(mixed transactions) may opt that the VAT apply to his transactions which would have been
exempt under Section 109(1) of the Tax Code, as amended [Sec. 109(2)].
3. Franchise grantees of radio and/or television broadcasting whose annual gross receipts of
the preceding year do not exceed ten million pesos (P10,000,000.00) derived from the business
Page 51 of 131
covered by the law granting the franchise may opt for VAT registration. This option, once
exercised, shall be irrevocable. (Sec. 119, Tax Code).
4. Any person who elects to register under optional registration shall not be allowed to cancel
his registration for the next three (3) years.
What are the BIR forms used in filing VAT Returns?
VAT returns are filed monthly using the Monthly Value Added Tax Declaration Return BIR Form
2550M and quarterly using the Quarterly Value Added Tax Declaration Return BIR Form
2550Q. To download forms, you can go online: https://www.bir.gov.ph/index.php/bir-forms.html.
For modular students attach here is the form.
How to compute Value Added Tax Payable
Value Added Tax Payable is normally computed as follows:
1. Computing Net VAT Payable on VAT “exclusive” Sales/Receipts
Total Output Tax Due or Total Vatable Sales/Receipts x 12%

Less: Total Allowable Input Tax or Total Vatable Purchases x 12%
Equals: VAT Payable
Sample Computation of VAT Payable:
Let’s assume that,

Total Vatable Sales (VAT exclusive) = P100,000
Total purchases with VAT receipts (VAT exclusive) = P70,000
P100,000 x 12% or P12,000

– P70,000 x 12% or P8,400
VAT Payable = P3,600
2. Computing Net VAT Payable on VAT “inclusive” Sales/Receipts
Total Output Tax Due or Total Vatable Sales / 1.12 x 12%

Less: Total Allowable Input Tax or Total Vatable Purchases / 1.12 x 12%
Equals: VAT Payable
Sample Computation of VAT Payable:
Page 52 of 131
Example based on the above assumption:
Total Vatable Sales (VAT inclusive) = P112,000
Total purchases with VAT receipts (VAT inclusive) = P78,400
P112,000 /1.12 x 12% or P12,000

– P78,400 /1.12 x 12% or P8,400
Or an alternative computation:
P112,000 /9.333 or P12,000

– P78,400 /9.333 or P8,400
Output tax means the VAT due on the sale, lease or exchange of taxable goods or properties or
services by any person registered or required to register under Section 236 of the Tax Code.
Input tax means the VAT due on or paid by a VAT-registered on importation of goods or local
purchase of goods, properties or services, including lease or use of property in the course of his
trade or business. It shall also include the transitional input tax determined in accordance with
Section 111 of the Tax Code, presumptive input tax and deferred input tax from previous period.
Total Vatable Purchases are your total purchases from VAT registered suppliers. This should be
supported with VAT receipts.
Note:
VAT exempt sales, zero rated sales, purchases not qualified for input tax, and other input taxes
(if any) should also be shown in the VAT returns. See BIR Forms.
How, when and where to File VAT Returns?
Documentary Requirements
1. Duly issued Certificate of Creditable VAT Withheld at Source (BIR Form No. 2307), if
applicable
2. Summary Alphalist of Withholding Agents of Income Payments Subjected to Withholding Tax
At Source (SAWT), if applicable
3. Duly approved Tax Debit Memo, if applicable
4. Duly approved Tax Credit Certificate, if applicable
5. Authorization letter, if return is filed by authorized representative.
Procedures
1. Fill-up BIR Form No. 2550M (for monthly VAT declaration) or 2550Q (for quarterly VAT
declaration) in triplicate copies (two copies for the BIR and one copy for the taxpayer)
2. If there is payment: File the Monthly VAT declaration, together with the required attachments,
and pay the VAT due thereon with any Authorized Agent Bank (AAB) under the jurisdiction of
the Revenue District Office (RDO)/Large Taxpayers District Office (LTDO) where the taxpayer
(head office of the business establishment) is registered or required to be registered.
The taxpayer must accomplish and submit BIR-prescribed deposit slip, which the bank teller
shall machine validate as evidence that payment was received by the AAB. The AAB receiving
Page 53 of 131
the tax return shall stamp mark the word “Received” on the return and machine validate the
return as proof of filing the return and payment of the tax.
In places where there are no duly accredited agent banks, file the Monthly VAT declaration,
together with the required attachments and pay the VAT due with the Revenue Collection
Officer (RCO) or duly authorized Treasurer of the Municipality where such taxpayer (head office
of the business establishment) is registered or required to be registered.
The RCO or duly authorized Municipal/City Treasurer shall issue a Revenue Official Receipt
upon payment of the tax.
3. If there is no payment:
File the Monthly VAT Declaration, together with the required attachments with the
RDO/LTDO/Large Taxpayers Assistance Division, Collection Agent or duly authorized
Municipal/ City Treasurer of Municipality/City where the taxpayer (head office of the business
establishment) is registered or required to be registered.
Deadline
Monthly VAT returns BIR Form 2550M:
Not later than the 20th day following the end of each month (manual filing)
Quarterly VAT returns BIR Form 2550Q:
Within twenty five (25) days following the close of taxable quarter (manual filing)
For EFPS filing, please visit the BIR website for detailed and updated dates of deadlines.
Reference:
BIR Tax information on Value Added Tax
Sections 105 to 115 of the National Internal Revenue Code of 1997, as amended
Disclaimer: New and subsequent BIR rulings, issuances and or laws may render the whole or
part of the article obsolete or inaccurate. For more information, please inquire or consult with
the BIR.
ENGAGEMENT
Now that you are equipped with the knowledge about the Business Documents,
Merchandising Terms, Chart of accounts and Journal Entries, let us now attempt
to answer the following questions.
1. Why do you credit output VAT when recording a sale and debit input VAT when taking
up a purchase?
____________________________________________________________
____________________________________________________________
____________________________________________________________
___________________________________________.
2. What could be the reason for setting up ending inventory based on physical count of
unsold goods?
Page 54 of 131
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
3. Explain the journal entries for sales, sales returns and allowances, purchases, and
purchase returns and allowances.
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
ASSIMILATION
REFLECTIVE WRITING
1. What does the seller cancel the corresponding VAT when the customer returns goods
or claims sales allowance?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
2. What do you think is the rationale beyond shifting the task of VAT collection to the
seller of goods?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
3. What does a business ultimately achieve through increased sales volume and fast
account collections?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
Page 55 of 131
References:
Abrugar, V. (2011). How to Compute VAT Payable in the Philippines. Retrieved August 12,
2020 from https://businesstips.ph/how-to-compute-vat-payable-in-the-philippines/

Surbhi, S. (2014). Difference Between Trade Discount and Cash Discount. Retrieved August
12, 2020 from https://keydifferences.com/difference-between-trade-discount-and-cash-
discount.html#ComparisonChart
BIR Forms. (2020). Retrieved August 12, 2020, from https://www.bir.gov.ph/index.php/bir-

forms.html
Philippines VAT Calculator. (2020). Retrieved August 12, 2020, from

http://www.vatcalculatorplus.com/PH/VAT-Calculator-Philippines
AND MANAGEMENT 2
WEEK 13 (Module 5)
INTRODUCTION
EXPECTATION
At the end of the one-week lesson, you are expected to perform the steps in the accounting
cycle, from preparation of documents to the preparation, analysis, and interpretation of financial
statements.
LEARNING OBJECTIVES
Dealing with the preparation of basic business forms and documents in which students will
prepare an accounting practice set that requires the application of learning in the first three
accounting courses.
For this week’s lesson, we will begin with accounting practice set.
Specifically, we will be studying on how to perform the steps in the accounting cycle, from the
preparation of documents to the preparation, analysis, and interpretation of financial statements.
Page 56 of 131
DEVELOPMENT
Good day learner.
Today we will begin our lesson on Accounting Practice Set.
LESSON PROPER
Practice Set
With the basic skills in bookkeeping for a merchandising business, you may now work on
your practice set. The sample practice set in this module covers the transactions of Dalisay
Company, a distributor of toiletries. Toiletries include products for hygiene and beautification. As
a merchandising business, Dalisay Company purchases products either from manufacturers or
distributors, then resells them to customers as a retailer.
Accounting Policies and Procedures
You will record the transactions of Dalisay Company in the general journal and post
them to the general ledger. Maintain the following files of business source documents: journal
vouchers; cash vouchers; and duplicate copies of account sales invoice, cash sales invoice,
official receipt, deposit slips, and CM. Always keep the checkbook summary form up-to-date.
Directions
You will act as the cashier, the sales clerk, the bookkeeper and the manager for Dalisay
Company. As the cashier, you will fill up official receipts and deposit slips for cash collections,
prepare checks for approved cash vouchers, secure the signature of the manager on the
checks, and update the checkbook summary form. As a sales clerk, you will accomplish account
sales invoice, cash sales invoice, and credit memo. As the bookkeeper, you will fill up the cash
voucher, secure the approval of the manager, and forward the cash voucher to the cashier. You
will also prepare the journal entries in the general journal, post the entries to the general ledger,
get the account balances, and prepare the trial balance and the SFP, SCI, SCE, and CFS.
Narrative of Transactions
Dalisay Company began its business on 1 May 2019 with an initial investment of ₱400
000.00 (OR#01, DS). The transactions of the business are given below. Remember that all
sales on account to customers have terms of 2/10, n/30. All figures for sales and sales returns
and allowances are inclusive of VAT. All amounts for purchases of merchandise and purchase
returns and allowances are inclusive of VAT, except for the 2 May transaction with Active
Company. Indicated for each transaction are the related business source documents and the
journal voucher/check number for cash payments. For simplicity, withholding taxes are applied
only on salaries but not on services.
Page 57 of 131
1 May Paid for advertising costs, ₱1 100.00 (Inv#831, CV#01, CK#1001)
1 May Paid for taxes and licenses, ₱3 500.00 (OR#16012595, CV#02, CK#1002)
1 May Purchased equipment worth ₱70 000.00 exclusive of VAT from Office Sales
[Terms: 2/10, n/30 (Inv#1871)]
2 May Bought office supplies on cash terms, ₱1 792.00 inclusive of VAT (Inv#1025,
CV#03, CK#1003)
2 May Paid two months advance rental to Mrs. Ester Sanez, ₱7 000.00 (OR#245,
CV#04, CK#1004)
2 May Cash purchases of toiletries from Active Company, ₱60 000.00, exclusive of
VAT; the seller granted 5% trade discount (inv#185, CV#05, CK#1005)
3 May Cash purchases of toiletries from Kiddie Place Company, ₱50 400.00 inclusive of
VAT, n/30 (Inv#1002, CV#06, CK#1006)
4 May Sold toiletries to Toti’s Beauty Parlor, ₱6 720.00, on account (ASI#01)
5 May Sold toiletries, on account, to Lorna’s Beauty Salon, ₱5 376.00 (ASI#02)
6 May Sold products to Safari Grounds on account, ₱31 360.00 (ASI#03)
8 May Issued a CM for sales allowances on defective merchandise, to Toti’s Beauty
Parlor, ₱750.00 (CM#001)
10 May Sold toiletries to PR Salon, ₱3 360.00 [Terms: 50% down; balance on account
(OR#02, ASI#04)]
10 May Paid Office Sales in full (CV#07, CK#1007)
12 May Purchased toiletries from Cattleya Store on account, ₱13 440.00 [Terms: 2/10,
n/30 (Inv#2328)]
14 May Cash sales, ₱26 880.00 [(CSI#01, OR#03, DS)]
14 May Collected 50% on the account of Toti’s Beauty Parlor [Stamp partial payment,
date and amount on ASI#01.] (OR#04, DS)
15 May Collected in full from Lorna’s Beauty Salon [Stamp full payment, date and
amount on ASI#02.] (OR#05, DS)
15 May Cash refund given to Helen Ong, a cash customer, for complaints on deliveries,
₱3 000.00 inclusive of VAT (CRM#001, CV#008, CK#1008)
16 May Cash sales, ₱2 500.00 9CSI#02, OR#06, DS)
17 May Paid transportation expenses to Fast Trucking on shipments of purchases,
₱3 360.00, inclusive of VAT [Stamp paid on WB#36789.] (Waybill#36789,
CV#009, CK#1009)
Page 58 of 131
18 May Received a CM from Cattleya Store for return of defective merchandise,
₱1 120.00 (CM#238)
19 May Credit sales to Great Emporium, ₱20 160.00 (ASI#05)
20 May Collected in full from PR Salon [Stamp full payment, date and amount on
ASI#04.] (OR#07, DS)
24 May Sold toiletries on account to Lorna’s Beauty Salon, ₱2 240.00 (ASI#06)
25 May Toti’sBeauty Parlor issued a 10-day, 10% note for its account balance. (JV#01,
Promissory Note)
26 May Paid Cattleya Store in full of account [Stamp full payment, date and amount on
Inv#2328.] (CV#010, CK#1010)
29 May Collected from the account of Great Emporium [Stamp full payment, date and
amount on ASI#05.] (OR#08, DS)
30 May Paid for electric, water, and telephone bills, ₱5 000.00 (CV#011, CK#1011)
30 May Paid fuel bill from Pyramid Gas Station, ₱8 000.00 inclusive of VAT (Bill#365,
CV#012, CK#1012)
31 May Payroll for the month – gross of ₱12 000.00 less 5% withholding tax and
contributions to SSS at 3%, HDMF at 2%, and PhilHealth at 1% (CV#013,
CK#1013)
31 May Set up the ending inventory of ₱55 500.00 (JV#02)
31 May Recorded the ‘Deferred Input VAT” for the month (JV#03)
Business Source Documents from Suppliers of Dalisay Company
Creative Designs
Mataas na Lupa, Lipa City
Inv. No.831
Sold to: Dalisay Company Date: 1 May 2019
Address: No. 184 Junio Street, Poblacion Terms: Cash
Particulars Amount
Tarpaulins, flyers ₱1 100.00
Amount due ₱1 100.00
Malou Enriquez
Manager
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OFFICIAL RECEIPT
Republic of the Philippines
PROVINCE OF BATANGAS
OFFICE OF THE CITY TREASURER
CITY OF LIPA
Date: 1 May 2019 BAT 16012595
Payor: DALISAY COMPANY
Nature of collection
Licenses, permit, taxes ₱3 500.00
TOTAL
Amount: Three thousand five hundred pesos only ₱3 500.00
Office Sales
Balintawak Street, Lipa City
TIN 321-000-675-312 VAT
Sales Inv. No. 1871
Sold to: Dalisay CompanyDate:1 May 2019

Address No. 184 Junio Street, PoblacionTerms: 2/10, n/30
Qty. UnitDescription Unit Price

1 setDesktop
Computer with printer ₱70 000.00
VAT ₱8 400.00
Amount due ₱78 400.00
I have received the above items in good condition. Page 60 of 131

Makisig Dalisay
Customer’s signature
Laygo’s Bookstore
B. Morada Street, Lipa City
TIN 112-000-632-444 VAT
Cash Invoice No. 1025
Address: No. 184 Junio Street, Poblacion Terms: Cash
Qty. UnitDescription Amount
Various supplies₱1 600.00
VAT ₱192.00
Amount due₱1 792.00
I have received the above items in good condition.
Makisig Dalisay
ESTER SANEZ
No. 180 Junio Street, Poblacion, Lipa City
Official Receipt: 245

Received from: Dalisay Company Date: 2 May 2019
The sum of seven thousand pesos (₱7 000.00) only as two months advance
rental.
Ester Sanez
Page 61 of 131
ACTIVE COMPANY
21 P. Laygo Street, Lipa City
TIN 225-650-234-312 VAT
Sales Inv. No. 185
Sold to: Dalisay CompanyDate: 2 May 2019
Address: No. 184 Junio Street, PoblacionTerms: 5, cash
Qty.UnitDescriptionAmount
Various toiletries₱60 000.00
Less trade discount @ 5%₱3 000.00
Invoice price₱57 000.00
12% VAT₱6 840.00
Total amount due₱63 840.00

Makisig Dalisay
KIDDIE PLACE CO.

33 P. Torres St., Lipa City
TIN 302-102-576-336 VAT
Sales Inv. No. 1002
Address: No. 184 Junio Street, Poblacion Terms: n/30
Qty.UnitDescriptionTotal Amount
12% VAT₱5 400.00

Page 62 of 131
Makisig Dalisay
CATTLEYA STORE
143 St. Cristo, Divisoria, Manila
TIN 423-123-632-117 VAT
Sales Inv. No. 2328
Sold to: Dalisay CompanyDate: 12 May 2019
Address: No. 184 Junio Street, Poblacion, Lipa CityTerms: 2/10, n/30
Qty.UnitDescriptionTotal Amount
12% VAT ₱1 440.00
Makisig Dalisay
CATTLEYA STORE
143 Sto. Cristo, Divisoria, Manila
CREDIT MEMO No. 238

To: Dalisay Company Date: 18 May 2019
We have credited your account.
Invoice No. Particulars Amount
2328 Returned defective shirts

(VAT inclusive) ₱1 120.00
Approved by:
Page 63 of 131
Servando Yniguez
Manager
PROMISSORY NOTE
Amount: ₱2 985.00 Date: 25 May 2019
Place: Lipa City Interest Rate: 10%
We, Toti’s Beauty Parlor, promise to pay Dalisay Company on or before

4 June 2019.
Ralph Nielsen
Manager
Toti’s Beauty Parlor
175 Simeon Street, Lipa City
Fast Trucking
No 001 Juan Luna Street
Binondo, Manila
Shipper (From): Various CompaniesWaybill No. 36789

Consigned (To): Dalisay CompanyDate: 15 May 2019
Particulars
Freight on shipment of merchandise
Packages on various dates.
Shipping costs₱3 000.00
12% VAT 360.00
Total bill ₱3 360.00
Gerald Mabilis
Manager
Page 64 of 131
Pyramid Gas Station
125 Morada Street, Poblacion, Lipa City
Date: 28 May 2019
For: Dalisay Company
Bill for payment:

Charges for fuel for the period
1 to 25 May 2019 (inclusive of VAT)₱8 000.00
Invoice₱7 142.86
VAT (12%) 857.14
Total ₱8 000.00
Zandro Garcia
Manager
Page 65 of 131
Business Source Documents Prepared by Dalisay Company
a. Account Sales Invoice
Dalisay Company
Account Sales Invoice No. 01

Sold to: Toti’s Beauty Parlor Date: 4 May 2019
Terms: 2/10. n/30
Particulars Amount
Toiletries₱6 000.00
VAT ₱720.00
Makisig Dalisay
Manager
b. Cash Sales Invoice
Dalisay Company
Cash Sales Invoice No. 01

Sold to: various customers Date: 14 May 2019
ParticularsAmount
Toiletries₱24 000.00
VAT ₱2 880.00
Makisig Dalisay
Manager Page 66 of 131
c. Official Receipt
Dalisay Company
Official Receipt: 01
Received from Mr. MakisigDalisay Date: 1 May 2019
The sum of four hundred thousand pesos only in settlement of the following:
Particulars Amount
Initial investment by the owner ₱400 000.00
Received by: Nhica Gravamen Recorded by: Noel Areja

Cashier Bookkeeper
d. Deposit Slip
ABC BANK
Deposit slip
Date: 2 May 2019
Account Name: DALISAY COMPANY
Account number: 1423015321
Cash deposit
Denomination Pieces Amount
₱1 000.00 400 ₱400 000.00
Total cash deposit ₱400 000.00
Check deposits
Type of check: ___On-us ___Other banks
Bank/branch Check No. Amount
Total check deposit Page 67 of 131
This is your receipt when machine validated.
e. Credit Memo
Dalisay Company
CREDIT MEMO No. 001
To: Toti’s Beauty Parlor Date: 8 May 2019
We credit your account for the following:
Particulars Amount
Allowances on defective merchandise – ASI#01 ₱750.00
Approved by:
MakisigDalisay
Manager
f. Cash Refund Memo
Dalisay Company
CASH REFUND MEMO No. 001

Date: 15 May 2019
To: Helen Ong
We grant a cash refund in your favour for various complaints on deliveries.
Reductions in Cash Sales Invoice₱2 679.00
Reversal of VAT 321.00
Gross Amount₱3 000.00
Approved by:
Makisig Dalisay
Manager Page 68 of 131
g. Cash Voucher
Dalisay Company
CASH VOUCHER No. 01

Payee: Creative Designs Date: 1 May 2019
Invoice No. Due date Terms Particulars Amount
831 Cash Tarpaulins, flyers ₱1 100.00
Approved by:
Makisig Dalisay
Manager
h. Journal Voucher
Dalisay Company
Journal Voucher No. 001
Subject: Toti’s Beauty Parlor Date: 25 May 2019
Particulars:
The proprietor of Toti’s Beauty Parlor submitted a 10-day, 10% notes to cover its account
balance on ASI#01 dated 4 May 2019.
4 May Invoice₱6 720.00
Less credit memo dated 8 May ₱750.00
Partial payment 14 May₱2 985.00
Balance as of 25 May₱2 985.00
Accounts receivable balance of Toti’s Beauty Parlor is cancelled and notes receivable is
set up for the promissory note.
Prepared by: Approved by:
Noel Areja Makisig Dalisay
Bookkeeper Manager
Page 69 of 131
i. Check
Account No. Account Name Check No. BRSTN

1423015321 Dalisay Company 1001
Member: PDIC Date 1 May 2019
PAY TO THE ORDER OF Creative Designs ₱1 100.00____
PESOS: One thousand one hundred pesos only___________________
I/We allow the electronic clearing of this check and hereby waive the presentation for payment of this original to Bank.
Name of bank/branch ABC Bank

Address Makati
Makisig Dalisay__
MICR CODE
Page 70 of 131
Page 71 of 131
Trial Balance
The term trial balance indicates getting the balances of open accounts and testing the
equality of debits and credits. A trial balance starts with a heading consisting of the name of the
business, title of the report (i.e., Trial Balance), and date of the report (e.g., 31 December 2019).
The accounts are presented in the following order: assets, liabilities, owner’s equity, income,
and expenses.
There are two types of trial balance: a trial balance of balance and a trial balance of
totals. In the trial balance of balances, all open accounts are shown. This type is preferred by
most companies. Meanwhile, the trial balance of totals gives the total debits and total credits of
all accounts, regardless whether they are open or closed accounts.
The trial balance shows that the total of debits and the total of credits do not match, then
some errors might have been committed. Footing or addition of a column may be wrong.
Posting of an item may have been placed erroneously to debit instead of credit or vice versa.
Posting may have been done twice or not at all. Transferring figures from the ledger to the trial
balance may have been incorrect.
On the other hand, a trial balance may still seem to present a balanced list despite the
following errors: (a) a complete entry was omitted, (b) a transaction was posted twice, and (c)
an account was posted to the correct side (debit or credit) but not under the correct account.
Below is an illustrative example of a trial balance of balances.
Civil Enterprises
Trial Balance
31 December 2019
(In Peso Amount)
Debit Credit
Cash 70 530.00
Merchandise Inventory 15 750.00
Supplies 530.00
Prepaid Rent 950.00
Equipment 35 000.00
Accounts Payable 10 000.00
Aguirre, Capital 80 000.00
Aguirre, Drawing 10 000.00
Page 72 of 131
Sales 123 850.00
Purchases 54 600.00
Advertising 8 345.00
Transportation 650.00
Insurance 2 300.00
Miscellaneous Expense 1 320.00
Total 213 850.00 213 850.00
Accounting Trial Balance Example and Financial Statement Preparation

The last two steps in the accounting process are preparing a trial balance and then preparing
the balance sheet and income statement. This information is provided in order to communicate
the financial position of the entity to interested parties.
TRIAL BALANCE
A trial balance is a list and total of all the debit and credit accounts for an entity for a given
period – usually a month. The format of the trial balance is a two-column schedule with all the
debit balances listed in one column and all the credit balances listed in the other. The trial
balance is prepared after all the transactions for the period have been journalized and posted to
the General Ledger.
Key to preparing a trial balance is making sure that all the account balances are listed under the
correct column. The appropriate columns are as follows:
Assets = Debit balance

Liabilities = Credit balance
Expenses = Debit Balance
Equity = Credit balance
Revenue = Credit balance
Should an account have a negative balance, it is represented as a negative number in the

appropriate column. For example, if the company is $500 into the overdraft in the checking
account the balance would be entered as -$500 or ($500) in the debit column. The $500
negative balance is NOT listed in the credit column.
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Example Trial Balance:
The trial balance ensures that the debits equal the credits. It is important to note that just
because the trial balance balances, does not mean that the accounts are correct or that
mistakes did not occur. There might have been transactions missed or items entered in the
wrong account – for example increasing the wrong asset account when a purchase is made or
the wrong expense account when a payment is made. Another potential error is that a
transaction was entered twice. Nevertheless, once the trial balance is prepared and the debits
and credits balance, the next step is to prepare the financial statements.
Income Statement
The income statement is prepared using the revenue and expense accounts from the trial
balance. If an income statement is prepared before an entity’s year-end or before adjusting
entries (discussed in future lessons) it is called an interim income statement. The income
statement needs to be prepared before the balance sheet because the net income amount is
needed in order to fill-out the equity section of the balance sheet. The net income relates to the
increase (or in the case of a net loss, the decrease) in owner’s equity.
Page 74 of 131
Now that the net income for the period has been calculated, the balance sheet can be prepared
using the asset and liability accounts and by including the net income with the other equity
accounts.
Page 75 of 131
When preparing balance sheets there are two formats you can use. The format above is called
the Report form and the Account form lists assets on the left side and liabilities and equity on
the right side.
Page 76 of 131
ENGAGEMENT
Now that you are equipped with the knowledge about the Accounting Practice Set, let
us now attempt to do the following exercises.
Exercise I: Application on Practice Set
Prepare the following for Dalisay Company:
 Trial balance of balances  Financial analysis

 Recommendations
 Financial statements
Exercise II: What Have You Learned So Far?
1. What constitutes the entries in a trial balance of balances?
____________________________________________________________
____________________________________________________________
____________________________________________________________
___________________________________________.
2. Describe the format of a trial balance.
____________________________________________________________
____________________________________________________________
Page 77 of 131
____________________________________________________________
___________________________________________.
3. Cite the reasons why a balanced trial balance may still contain errors.
________________________________________________________________
________________________________________________________________
________________________________________________________________
_______________________________.
4. Explain the possible errors that result in unbalanced trial balance.
________________________________________________________________
________________________________________________________________
________________________________________________________________
_______________________________.
ASSIMILATION
REFLECTIVE WRITING
1. Based on your experience with the practice set, why do you think a trial balance is a
culminating output of the journalizing and posting process?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
2. What are the possible uses of a trial balance of totals that you can think of?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
References:

Department of Labor and Employment 2ndAccount Financial Accounting. (n.d.). Practice Set
Merchandise Accounting Logic Of Debits And Credits. Retrieved August 12, 2020, from
https://www.academia.edu/34885787/PRACTICE_SET_MERCHANDISE_ACCOUNTING_
LOGIC_OF_DEBITS_AND_CREDITS Page 78 of 131
Accounting Trial Balance Example and Financial Statement Preparation. (2018). Retrieved
August 12, 2020, from http://content.moneyinstructor.com/1499/trialbalance.html
AND MANAGEMENT 2
WEEK 14 (Module 6)
INTRODUCTION
EXPECTATION
At the end of the one-week lesson, you are expected to define income and business taxation
and explain the principles and processes of income taxation.
LEARNING OBJECTIVES
Knowledge and skills on the preparation of basic business forms and documents including:
Integration of information technology in accounting will also be introduced and the principles,
purposes of filing tax and its processes within the business.
For this week’s lesson, we will be discussing the topic on tax and taxation, principles of taxation
and its purposes.
Page 79 of 131
Specifically, the following will be tackled:
1. Meaning of tax and taxation

2. Explaining the principles, purposes, and general process of taxation;
3. Defining income and business taxation;
4. Explaining the principles and processes of income taxation;
DEVELOPMENT

Good day learner.
Today we will begin our lesson on what is tax and taxation.
LESSON PROPER
Tax and taxation
A tax is an imposition by the government upon person, property, or rights exercised
within its jurisdiction. Taxation, on the other hand, refers to the power of the state by which the
sovereign raises revenue to defray the necessary expenses of the government. The state refers
to the nation. Sovereign is an attribute of a nation which means it is independent. Necessary
expenses shouldered by the government pertain to the basic services it provides to its people,
such as food, clothing, shelter, and health services.
Public Services
Government People and Business Entities
Page 80 of 131
Taxes
Fig. 10.1 Rationale of taxation
Principles of Taxation
Taxation has guiding principles such as fiscal adequacy, equality or theoretical justice,
and administrative feasibility. Fiscal adequacy means that sources of revenue are sufficient to
meet government expenditures. Equality or theoretical justice requires that the tax imposed
must be proportionate to taxpayer’s ability to pay. Administrative feasibility demands that the law
must be capable of convenient, just, and effective administration.
BIG IDEA
Taxation equips the government with funds and enables it to provide public
services through collection of proportionate taxes from income earners.
Purposes of Taxation
Taxation has the primary purpose of revenue or the fiscal purpose. The goals of taxation
are (a) to take care of the basic needs of the citizens in the areas of health, education, safety,
and protection, and (b) to provide infrastructure for the conduct of commerce and industry.
Examples of this purpose are construction of schools, roads, bridges, public markets, and
hospitals.
The secondary purposes of taxation are regulatory and compensatory. Regulatory

purpose conveys that taxation is employed as a device for regulation or control by means of
which certain effects or conditions envisioned by the government may be achieved. Amusement
taxes imposed on night and day clubs and excise tax (specific tax) on cigarettes and alcohol
spring from the regulatory purpose of taxation. Meanwhile, compensatory purpose signifies
imposition or levying of taxes to attain some social and economic ends, irrespective of whether
the revenue is actually raised or not. An example of compensatory purpose is granting tax
incentives to promote new or pioneer industries.
General Process of Taxation
Business registration is a requirement for a business before the start of its activities. The
business entity (corporation, partnership, cooperative, association) is assigned a Tax
Identification Number (TIN) upon registration with BIR. The business shall accomplish BIR
Page 81 of 131
Form 1903 which shall be supported by (a) Securities and Exchange Commission (SEC)
registration and a copy of Articles of Incorporation or Articles of partnership and By-Laws and
(b) a mayor’s business permit. The certificate of registration should be renewed annually before
31 January. Authority to print is secured from the BIR before printing of invoice and official
receipt. Books of accounts of the business are also registered with the BIR before their use.
An individual taxpayer deriving income from compensation must also secure a TIN, In
addition, he or she fills up BIR Form 1902 supported by his or her birth certificate and those of
his or her declared dependents. The birth certificates should be certified by the National
Statistics Office (NSO). The income of the taxpayer is subject to withholding tax, deducted by
the employer from the regular payroll. If the employee receives additional income from business
or profession, other employment, or a casual income, he or she must file a consolidated income
tax return to include such items in the annual Income Tax Return (ITR). Total tax withheld on
compensation is deducted from the tax due per the annual ITR. However, if the taxpayer has no
other sources of income aside from compensation, he or she may avail the substituted filing of
tax return. Here, the employer files the ITR of the employee who is no longer required to file an
annual ITR.
The BIR launched the e-Services project so that taxpayers can do electronic filing (i.e.,
processing and transmission of tax return to the BIR) using the Internet. Payments of tax due
are done at the authorized agent banks.
Income and Business Taxation
Income taxation is the levying of taxes on income of the taxpayer based on his or her
residence, citizenship, or place where the income was earned. On the other hand, business
taxation is the imposition of taxes on an individual or business entity based on the place where
the business is being operated.
Principles of Income Taxation
Income is the metric of the taxpayer’s capability to pay tax. The government uses this
metric in apportioning funding for government expenditures.
Types of Income
n sale/exchange/other dispositions of real property in the Philippines

Gain from other capital assets
Business Income Income from properties
Inclusions in Gross Income
Page 82 of 131
CompensationIncome Income from profession
Gain on sale/exchange/other dispositions of domestic stocks directly to buyer
Fig. 10.2 inclusions in gross income
In income taxation, a taxable item is referred to as an item of gross income or inclusion

in gross income. Gross income is any inflow of wealth to the taxpayer that increases net worth
from any source, legal or illegal. It comprises income from employment, trade, business or
exercise of profession, properties, and other sources such as dealings in properties and other
regular or casual transactions.
Income from employment is called compensation income. All remunerations received

under an employment are included under compensation income. Examples are monthly salary
and incentives, which are also called fringe benefits.
Business income, in turn, arises from a regular conduct of any commercial activity
resulting in regular sales of goods or services by an individual or a business organization.
Business income, whether legal or illegal, registered or unregistered, is taxable.
Income from profession or income from the sale of services is also taxable.
Income from properties include rental income and forms of passive income which are
earned with very little amount of involvement by the taxpayer. Examples are interest or yield
from bank deposits or deposit substitutes; dividends from domestic corporations; dividend
income from real estate investment trust; share in the net income of a business partnership,
taxable association, joint venture, joint account or co-ownership; royalties, in general; prizes
exceeding ₱10 000.00; winnings; tax informer’s reward; and interest income on tax-free
corporate covenant bonds.
Also part of taxable income are gains on the sale, exchange, and other disposition of
real property in the Philippines; and gains from other capital assets.
BIG IDEA
Income from business and exercise of profession, compensation income, and
passive income constitute the income of the taxpayer.
Types of Income Taxpayers
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To help you remember how resident citizens and domestic corporations are taxed, refer
to figure 10.3 below.
Tax: Graduated Rates
Tax: 30% Domestic Corporation Resident Citizen
Flat Rate
Tax on income from (a) within

the Philippines and (b) outside
(without) the Philippines
Fig. 10.3 Basis of tax and tax rates of resident citizen and domestic corporation
Inasmuch as citizenship and residence are the basis of the tax rates, figure 10.4 is
shown to help you remember the rates and the tax base of each type of alien, nonresident, and
foreign entity.
15% Final Tax 30% Regular Tax
Graduated Rates
Special Alien Resident Foreign Corporation

Nonresident Citizen
Tax on Income from Nonresident Foreign Corporation

Resident Alien within the Philippines
Graduated Rates Nonresident Alien Not Engaged in Business

Nonresident Alien Engaged in Business 30% Final Tax
Graduated Rates 25% Final Tax
Fig. 10.4 Taxpayers taxed on income within the Philippines and their tax rates
Income taxpayers may be individuals or corporations.
Page 84 of 131
Individuals are classified as either citizens or aliens. Citizens are further categorized as
resident citizen and nonresident citizen. Aliens are sub classified into resident alien, nonresident
alien, and special alien.
Resident citizen refers to a Filipino citizen residing in the Philippines. He or she is taxed
on income from within and outside the Philippines at the graduated rates. Nonresident citizen is
a citizen of the Philippines who satisfactorily proves that he or she resides abroad intentionally
during the taxable year. BIR guidelines state 183 days as the threshold by which residence
abroad is deemed intentional, in order to classify a citizen as nonresident citizen. He or she is
taxed on income from within the Philippines at graduated rates.
Resident alien pertains to an individual who is residing in the Philippines but is not a
citizen thereof. He or she is taxed on income outside the Philippines at graduated rates.
Nonresident aliens are of two types: nonresident alien engaged in trade or business in
the Philippines and nonresident aliens not engaged in trade or business (NRA-NETB) in the
Philippines. An alien who stayed in the Philippines for an aggregate period of more than 180
days during the year is classified as a NRA-ETB in the Philippines. He or she is taxed on
income from within the Philippines at graduated rates. Meanwhile, NRA-NETB in the Philippines
include (a) aliens who come to the Philippines for a definite purpose that in its nature may be
promptly accomplished and (b) aliens who come to the Philippines and stay therein for an
aggregate period of not more than 180 days during the year. He or she is taxed on income from
within the Philippines at 25% final tax.
Special aliens refer to aliens, including qualified Filipinos, employed by (a) regional or
area headquarters or regional operating headquarters of multinational companies, (b) offshore
banking units, and (c) petroleum service contractors or subcontractors. He or she is subject to a
final tax of 15% on income from within the Philippines.
Below are some illustrative examples of individual taxpayers.
1. Fernando Marquez, a Brazilian movie director, is part of a movie production outfit of a film
being shot in Batangas, His arrival date was 1 April and on 25 April, he finished his contract and
returned to Rio de Janeiro.
Fernando Marquez is a NRA-NETB in the Philippines because he has a definite purpose

for staying here and left upon completion of that purpose. In addition, he stayed for not more
than 180 days.
2. Malakas Reyes, a Filipino, went to the United States (US) as a tourist on 1 May 2014 and
returned to the Philippines on 15 May 2015.
Malakas Reyes is a nonresident in 2014 because he was outside the Philippines for
more than 183 days. But for 2015, he is a resident citizen because he was outside for less than
183 days.
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3. Von Duke is a Dutch national who is a bike enthusiast. He toured Luzon from 1 February
2016 to 15 August 2016. His flight to the Hague was 20 August 2016.
Von Duke is a NRA-ETB is the Philippines because he stayed for more than 180 days.
4. Stephen Craig is the controller of a multinational company in the First Philippines Industrial
Park. He is in his 3rd year at its regional headquarters in the Philippines.
Mr. Craig is a special alien because he is connected with a company in the Philippines
which serves as the regional headquarters of a multinational company.
The preceding discussion dwelt on individual taxpayers. Now, you will learn about
corporate taxpayers.
In taxation, “corporations include partnership, joint stock companies, joint accounts,

association, or insurance companies except general professional partnerships…” (National
Internal Revenue Code). Corporate taxpayers are of two types: domestic corporation and
foreign corporation.
A domestic corporation is one that is organized in accordance with Philippine laws. It is

taxed at 30% flat rate on income within and outside the Philippines.
Meanwhile, a foreign corporation is one that is organized under a foreign law. There are
two types of foreign corporations: resident foreign corporation and nonresident foreign
corporation. A resident foreign corporation is a foreign corporation that operates and conducts
business in the Philippines through a permanent establishment, such as a branch. It is taxable
at 30% regular tax on Philippine taxable income. A nonresident foreign corporation does not
operate or conduct business in the Philippines. It is subject to 30% final tax on gross income
from within the Philippines.
Below are some illustrative examples of corporate taxpayers.
1. A corporation incorporated under Philippine law is a domestic corporation.
2. A foreign corporation operating business in the Philippines is a resident foreign corporation.
3. A taxable joint venture organized in the Philippines is a domestic corporation.
4. A joint venture organized under foreign law and is not operating in the Philippines is
nonresident foreign corporation.
Situs of Income
Situs of income is another principle of income taxation. It determines whether or not an

income is taxable in the Philippines. The following are the income situs rules (to be taken as
type of income and situs, respectively): interest income, debtor’s residence; royalties, where
the intangible is employed; rent income, location of the property; and service income, place
where the service is rendered.
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Below are some illustrative examples of location and situs of income. In each case, the
incomes earned within and outside (without) the Philippines are computed.
1. A bank earned ₱375 000.00 interest income; 30% is from nonresident depositors.
Within Without
₱375 000.00 x 70% = ₱262 500.00 ₱375 000.00 - ₱262 500.00
= ₱112 500.00
2. A fast-food chain earned ₱1 600 000.00 royalties from its franchise, 30% of which
were from overseas.
Within Without
₱1 600 000.00 x 70% = ₱1 120 000.00 ₱1 600 000.00 - ₱1 120 000.00
= ₱480 000.00
3. Jenny Maple earned ₱1 000 000.00 rental from her apartment in Miami, Florida. She
also received ₱350 000.00 from her tenants in Tagaytay.
Within Without
₱350 000.00 ₱1 000 000.00
4. Glen Patton, a resident citizen, prepares the financial statements of Dubai-based

companies and has gross receipts of ₱350 000.00 from these clients. From Manila-
based clients, he has gross receipts of ₱100 000.00.
Within Without
₱100 000.00 ₱350 000.00
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5. Lena Salen worked as an actress in a broadway musical in London. She was paid in
London an amount equivalent to ₱500 000.00.
Within Without
- ₱500 000.00
Processes of Income Taxation
Final income taxation is a system whereby the person making income payments is
responsible to withhold the tax. The taxpayer receives the net income of tax and there is no
need to file an income tax return to report the same. This is applied to passive income.
Items of passive income are enumerated in inclusions in gross income. The

corresponding final tax rates are given here. Interest income or yield from local currency bank
deposits or deposit substitutes are subject to final tax as follows: interest income from short-
term (less than five years) deposits is subject to 20% final tax for both individual and corporate
recipients. However, interest income on long-term (exceeding five years) deposits/investment
certificates is exempt from final tax if the recipient is an individual taxpayer, but is subject to
20% final tax if the recipient is a corporation.
Interest income, from foreign currency deposits under the foreign currency deposit
system or expanded foreign currency deposit system (EFCDS) under the local banking system,
is subject to a final tax of 7.5% for both resident individual and corporate taxpayers. These
include resident citizen, resident alien, domestic corporation, and resident foreign corporation.
Here, the government encourages the deposit of foreign currencies in local banks, because
these are intended for financing international trade. Hence, nonresident taxpayers are exempted
from the final tax. This includes nonresident citizens, nonresident aliens, and nonresident
foreign corporations.
Dividends refer to distribution of a corporation’s profits to its shareholders. Dividends

paid by a domestic corporation are subject to 10% final tax on individual recipients and exempt
for corporate recipients. For dividends paid by a foreign corporation, a regular tax is imposed on
both individual and corporate recipients. An NRA-ETB is subject to a 20% final tax on dividend;
an NRA-NETB is subject to a 25% final tax. A nonresident foreign corporation (NRFC) is subject
to the 30% general final tax rate.
Passive royalty income from sources within the Philippines is classified into two: (a)
books, literally works, and musical compositions, and (b) others. Passive royalty income from
books, literally works, and musical compositions is taxed at 10% final tax on individual recipients
and 20% final tax on corporate recipients. Royalties from other sources are subject to 20% final
tax on both individual and corporate recipients. However, royalties on cinematographic films and
similar works paid to NRA-ETB, NRA-NETB, or NFRC are imposed a 25% final tax.
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Prizes that are received without effort on the part of the winner to join the contest are
exempt from tax. An example is the Nobel prize award. Prizes from sports competitions that are
sanctioned by the pertinent national sport organization are also exempt. Prizes exceeding
₱10 000.00 are subject to 20% final tax on individual recipients and regular tax on corporate
recipients. Prizes not exceeding ₱10 000.00 are subject to regular tax for both individual and
corporate recipients.
PCSO or lotto winnings are exempt from tax. Other winnings, in general, are subject to
20% final tax on individual recipients and regular tax on corporate recipients.
Tax informer’s cash reward is taxed 10% final tax on whichever is lower of (a) 10% of
revenues, surcharges or fees recovered and/or fine/penalty imposed/collected, or (b)
₱1 000 000.00.
Final tax on interest income on tax-free corporate covenant bonds is at 30% on

individuals and at regular income tax rate on corporate recipients.
Other applications of final income tax are (a) compensation income of Filipinos qualified
as special aliens, (b) fringe benefits of managerial or supervisory employees, (c) income
payments of residents other than depository banks under the EFCDS to offshore banking units
and EFCD Units, and (d) income payments to oil exploration service contractors or sub-
contractors.
Creditable withholding tax is imposed on most items of regular income and is withheld at
source by customers or clients, but is not a final tax. It is deducted (creditable) from the annual
income tax due of the taxpayer. It includes withholding tax on compensation and expanded
withholding tax on passive income.
Regular income tax due is computed based on taxable income (gross income less
allowable deductions and personal exemptions).
BIG IDEA
An individual or business staying within the Philippines is imposed an
income tax depending upon the category as taxpayer.
Passive income is subjected to a final tax, qualified as creditable withholding

tax, which makes it convenient for the income earners.
PAL v. Edu, 164 SCRA 320

· The legislative intent and purpose behind the law requiring owners of vehicles to pay
for their registration is mainly to raise funds for the construction and maintenance of
highways and, to a much lesser degree, pay for the operating expenses of the
administering agency. It is possible for an exaction to be both a tax and a regulation.
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License fees are charges, looked to as a source of revenue as well as a means of
regulation. The fees may properly be regarded as taxes even though they also serve as
an instrument of regulation. If the purpose is primarily revenue, or if revenue is at least
one of the real and substantial purposes, then the exaction is properly called a tax.
Tio v. Videogram, 151 SCRA 208

· PD 1987 which created the Videogram Regulatory Board also imposed a 30% tax on
the gross receipts payable to the local government. SC upheld the validity of the law
ruling that the tax imposed is not only a regulatory, but also a revenue, measure
prompted by the realization that earnings of videogram establishments of around P600
million annually have not been subjected to tax, thereby depriving the government of an
additional source of revenue. It is a user tax imposed on retailers for every video they
make available for public viewing. The 30% tax also served a regulatory purpose: to
answer the need for regulating the video industry, particularly the rampant film piracy,
the flagrant violation of intellectual property rights, and the proliferation of pornographic
video tapes.
Caltex v. Commissioner, 208 SCRA 755

· Taxation is no longer a measure merely to raise revenue to support the existence of
government. Taxes may be levied with a regulatory purpose to provide means for the
rehabilitation and stabilization of a threatened industry which is affected with public
interest as to be within the police power of the State. The oil industry is greatly imbued
with public interest as it vitally affects the general welfare.
Sumptuary purpose of taxation

· More popularly known as the non-revenue or regulatory purpose of taxation. While the
primary purpose of taxation is to raise revenue for the support of the government,
taxation is often employed as a devise for regulation by means of which certain effects
or conditions envisioned by the government may be achieved.
· For example, government may provide tax incentives to protect and promote new and
pioneer industries. The imposition of special duties, like dumping duty, marking duty,
retaliatory duty, and countervailing duty, promote the non-revenue or sumptuary purpose
of taxation.
Theory and basis of taxation

· The power of taxation proceeds upon the theory that the existence of government is a
necessity; that it cannot continue without means to pay its expenses; and that for these
means, it has a right to compel all its citizens and property within its limits to contribute.
· The basis of taxation is found in the reciprocal duties of protection and support
between the State and its inhabitants. In return for his contribution, the taxpayer received
benefits and protection from the government. This is the so-called “benefits received
principle.”
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Life blood or necessity theory
· The life blood theory constitutes the theory of taxation, which provides that the
existence of government is a necessity; that government cannot continue without means
to pay its expenses; and that for these means it has a right to compel its citizens and
property within its limits to contribute.
· In Commissioner v. Algue, the Supreme Court said that taxes are the lifeblood of the
government and should be collected without unnecessary hindrance. They are what we
pay for a civilized society. Without taxes, the government would be paralyzed for lack of
motive power to activate and operate it. The government, for its part, is expected to
respond in the form of tangible and intangible benefits intended to improve the lives of
the people and enhance their moral and material values.
Illustrations of lifeblood theory

1. Collection of taxes cannot be enjoined by injunction.
2. Taxes could not be the subject of compensation or set off.
3. A valid tax may result in destruction of the taxpayer’s property.
4. Taxation is an unlimited and plenary power.
Benefit-received principle
· This principle serves as the basis of taxation and is founded on the reciprocal duties of
protection and support between the State and its inhabitants. Also called “symbiotic
relation” between the State and its citizens.
· In return for his contribution, the taxpayer receives the general advantages and
protection which the government affords the taxpayer and his property. One is
compensation or consideration for the other; protection for support and support for
protection.
· However, it does not mean that only those who are able to and do pay taxes can enjoy
the privileges and protection given to a citizen by the government.
· In fact, from the contribution received, the government renders no special or
commensurate benefit to any particular property or person. The only benefit to which
the taxpayer is entitled is that derived from the enjoyment of the privileges of living in an
organized society established and safeguarded by the devotion of taxes to public
purpose. The government promises nothing to the person taxed beyond what may be
anticipated from an administration of the laws for the general good. [Lorenzo v.
Posadas]
· Taxes are essential to the existence of the government. The obligation to pay taxes
rests not upon the privileges enjoyed by or the protection afforded to the citizen by the
government, but upon the necessity of money for the support of the State. For this
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reason, no one is allowed to object to or resist payment of taxes solely because no
personal benefit to him can be pointed out as arising from the tax. [Lorenzo v. Posadas]
TAX DIFFERENTIATED FROM OTHER TERMS

Tariff / Duties
· The term tariff and custom duties are used interchangeably in the Tariff and Customs
Code or PD No. 1464.
· Customs duties, or simply duties, are taxes imposed on goods exported from or
imported into a country. Custom duties are really taxes but the latter term is broader in
scope.
· On the other hand, tariff may be used in one of three senses:
1. A book of rates drawn usually in alphabetical order containing the names of
several kinds of merchandise with the corresponding duties to be paid for the
same; or
2. The duties payable on goods imported or exported; or
3. The system or principle of imposing duties on the importation or exportation of

goods.
License or regulatory fee v. tax

1. License fee is legal compensation or reward of an officer for specific services while a tax
2. License fee is imposed only on the right to exercise a privilege, while tax is imposed also
on persons and property.
3. Failure to pay a license fee makes the act or business illegal, while failure to pay a tax
does not necessarily make the act or business illegal.
Regulatory tax
· Examples: motor vehicle registration fee, sugar levy, coconut levy, regulation of non-
useful occupations
· PAL v. Edu: This involves the imposition of motor vehicle registration fees which the
Supreme Court ruled as taxes. Fees may be regarded as taxes even though they also
serve as instruments of regulation because taxation may be made the implement of the
State’s police power. But if the purpose is primarily revenue, or if revenue is, at least,
one of the real and substantial purposes, then the exaction is properly called a tax.
Criteria for determining license fees

Page 92 of 131
1. Imposition must relate to an occupation or activity which involves the health, morals,
safety and development of the people and which needs regulation for the protection and
promotion of the public interest.
2. Imposition must also bear a reasonable relation to the probable expenses of regulation,
taking into account the costs of direct regulation as well as the incidental expenses.
Instances when license fees could exceed cost of regulation, control or administration
1. When the collection or the license fee is authorized under both the power of taxation and
police power
2. When the license fee is collected to regulate a non-useful occupation
Special assessment v. tax

1. A special assessment is an enforced proportional contribution from owners of lands
specially or peculiarly benefited by public improvements.
2. A special assessment is levied only on land.
3. A special assessment is not a personal liability of the person assessed; it is limited to the
land.
4. A special assessment is based wholly on benefits, not necessity.
5. A special assessment is exceptional both as to time and place; a tax has general
application.
Republic v. Bacolod Murcia, 17 SCRA 632

· A special assessment is a levy on property which derives some special benefit from
the improvement. Its purpose is to finance such improvement. It is not a tax measure
intended to raise revenues for the government. The proceeds thereof may be devoted to
the specific purpose for which the assessment was authorized, thus accruing only to the
owners thereof who, after all, pay the assessment.
Some rules:
· An exemption from taxation does not include exemption from a special assessment.
· The power to tax carries with it the power to levy a special assessment.
Toll v. tax
1. Toll is a sum of money for the use of something. It is the consideration which is paid for
the use of a road, bridge, or the like, of a public nature. Taxes, on the other hand, are
enforced proportional contributions from persons and property levied by the State by
virtue of its sovereignty for the support of the government and all public needs.
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2. Toll is a demand of proprietorship; tax is a demand of sovereignty.
3. Toll is paid for the use of another’s property; tax is paid for the support of government.
4. The amount paid as toll depends upon the cost of construction or maintenance of the
public improvement used; while there is no limit on the amount collected as tax as long
as it is not excessive, unreasonable, or confiscatory.
5. Toll may be imposed by the government or by private individuals or entities; tax may be
imposed only by the government.
Tax v. penalty
1. Penalty is any sanction imposed as a punishment for violation of law or for acts deemed
injurious; taxes are enforced proportional contributions from persons and property levied
by the State by virtue of its sovereignty for the support of the government and all public
needs.
2. Penalty is designed to regulate conduct; taxes are generally intended to generate
revenue.
3. Penalty may be imposed by the government or by private individuals or entities; taxes
only by the government.
Obligation to pay debt v. obligation to pay tax

1. A debt is generally based on contract, express or implied, while a tax is based on laws.
2. A debt is assignable, while a tax cannot generally be assigned.
3. A debt may be paid in kind, while a tax is generally paid in money.
4. A debt may be the subject of set off or compensation, a tax cannot.
5. A person cannot be imprisoned for non-payment of tax, except poll tax.
6. A debt is governed by the ordinary periods of prescription, while a tax is governed by the
special prescriptive periods provided for in the NIRC.
7. A debt draws interest when it is so stipulated or where there is default, while a tax does
not draw interest except only when delinquent.
v.
1. It is an enforced contribution from persons or property by the law-making body by virtue

of its sovereignty and for the support of the government and all public needs.
2. License fee is imposed for regulation, while tax is levied for revenue.
3. License fee involves the exercise of police power, tax of the taxing power.
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4. Amount of license fee should be limited to the necessary expenses of inspection and
regulation, while there is generally no limit on the amount of the tax to be imposed.
ENGAGEMENT
Now that you are equipped with the knowledge about the tax and taxation, let us now
attempt to do the following exercises.
Exercise I: What Have You Learned So Far?
1. What are the inclusions in gross income?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
2. Describe the e-Services project of the BIR.
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
3. Discuss business income, income from profession, and compensation income.
________________________________________________________________
________________________________________________________________
________________________________________________________________
__________.
4. How do you relate (a) gains on the sale, exchange, and other disposition of domestic
stocks directly to buyer; (b) sale, exchange, and other disposition of real property in the
Philippines; and (c) gains from other capital assets to the enumerated inclusions in gross
income?
________________________________________________________________
________________________________________________________________
________________________________________________________________
__________.
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5. Give the income within and without in the following cases:
a. Mrs. Sanchez has a gift shop near Luneta Park. Her gross sales totaled ₱150 000.00,
15% of which were from foreign tourists.
b. Manny Paking sold to an American citizen staying in the US, a real estate property in
Tagaytay at a gain of ₱2 500 000.00.
c. Mr. Sam Pedrosa sold his shares of stocks in LMN Corporation to a foreign investor
for ₱500 000.00. Gain on sale is ₱15 000.00.
d. Jack Santos received dividends of ₱10 000.00 from a domestic corporation and ₱25
000.00 from a nonresident foreign corporation.
e. Molly received ₱30 000.00 from a resident foreign corporation, 40% of its historical
income is from the Philippines.
________________________________________________________________
________________________________________________________________
________________________________________________________________
__________.
ASSIMILATION
REFLECTIVE WRITING
1. Why do you think individuals earning purely compensation income assert that they
pay the highest amount of taxes among all taxpayers?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
2. What do you think is the effect of increasing taxes on alcohol and cigarettes?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
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3. Why do you think residence and citizenship are used as the basis of imposing tax on
domestic corporation and resident citizen on income within and outside (without) the
Philippines? Explain this concept as applied to aliens and foreign corporations.
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
References:

General Principles of Taxation. (n.d.). Retrieved August 12, 2020, from

http://www.angelfire.com/me4/francute/tax-gp2.htm

AND MANAGEMENT 2
WEEK 15 (Module 7)
INTRODUCTION
EXPECTATION
At the end of the one-week lesson, you are expected to explain the principles and processes of
business taxation, explain the procedure in the computation of gross taxable income and tax
due, and explain the principles and purposes of taxation.
LEARNING OBJECTIVES
Knowledge on the preparation of basic business forms and documents including: Integration of
information technology in accounting will also be introduced and the principles, purposes of
filing tax and its processes within the business.
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For this week’s lesson, our topic is all about principles of business taxation.
Specifically, our discussion will focus on the following:
1. Explaining the principles and processes of business taxation;

2. Distinguishing the individual taxation from business taxation;
3. Preparing the list of sources of gross income from compensation and gross income
from business and the corresponding personal and additional deductions;
4. Explaining the procedure in the computation of taxable income and tax due.
DEVELOPMENT

Good day learner.
Today’s lesson is about the Principles of Business Taxation.
LESSON PROPER
Principles of Business Taxation
The NIRC defines business or trade as the “regular conduct or pursuit of a
commercial or economic activity, including transactions incidental thereto, by any person
or government entity” (NIRC, 2016).
According to the NIRC, the three major business taxes are excise tax, VAT, and
percentage tax. Excise tax is imposed only on manufacturers or importers. Excise taxes
are of two kinds: a) specific tax and b) ad valorem tax. These two are differentiated in
terms of tax basis. Specific tax is based on weight or volume capacity or the physical unit
of measurement. On the other hand, ad valorem tax is based on the selling price or other
specified value of the article.
The second major business tax is the VAT, which you already encountered in
modules 2 and 9. According to the NIRC, VAT is a tax on consumption, levied on the sale,
barter, exchange, or lease of goods or properties and services in the Philippines and the
importation of goods into the Philippines. The seller is responsible for paying the tax, but it
may be passed on to the customer.
The following are the kinds of VAT transactions: (a) VAT-able transactions, (b)
zero-rated transactions, (c) exempt transactions, and (d) sale to government. The new
VAT threshold under Republic Act (RA) 9337 as amended is gross sales/receipts in one
year above ₱1 919 500.00. VAT exempt rental per month of residential dwellings is now
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₱10 000.00 a month (Revenue Regulations or RR 16-2005 as amended by RR 4-2007).
The VAT on every sale of a VAT-registered person shall always be separately billed
starting 1 November 2005 (RR 16-2005). The government or any of its political
subdivision, instrumentalities, or agencies including government-owned and –controlled
corporations (GOCCs) shall deduct and withhold final VAT at the rate of 5%. Starting 1
February 2006, the VAT rate has risen to 12%.
The last major business tax is percentage tax. It is based on gross sales of goods
or receipts from services, without any deduction. Except for taxpayers, who are taxable
under Section 116 to 127 of the NIRC, a 3% percentage tax is imposed on persons
exempt from VAT because their gross annual sales do not exceed ₱1 919 500.00. Other
non-VAT taxpayers required to pay percentage taxes are banks and pawnshops, 5%; and
common carriers, 3%.
To determine which business tax is due, the following rules of the NIRC (figure
10.5) apply:
1. That regardless of annual gross sales or receipts, those who are in paragraphs
(A) to (U) of Section 109 of the NIRC shall be exempt from the VAT and from
the 3% percentage tax.
2. That those who are not under paragraphs (A) to (U) of Section 109 of the NIRC:
a. Whose annual gross sales or receipts do not exceed ₱100 000.00 shall be
exempt from the VAT and any percentage tax.
b. Whose annual gross sales or receipts exceed ₱100 000.00 but do not exceed
₱1 919 500.00 shall be exempt from the VAT but shall be subject to the 3 %
percentage tax, unless a different percentage tax applies. However, if
subject to the 3% percentage tax, they may opt to register under the VAT
system.
c. Whose annual gross sales or receipts exceed ₱1 919 500.00 shall be subject
to the VAT, unless a percentage tax applies.
3. Manufacturers or importers of goods not subject to the excise taxes are subject
to the VAT.
4. Manufacturers or importers of goods subject to the excise taxes are also subject
to the VAT.
5. Sellers of goods not subject to excise taxes are subject to the VAT.
6. Sellers of services subject to any percentage tax are not subject to the VAT.
7. Sellers of service not subject to any percentage tax are subject to the VAT.
Figure 10.5 shows an easy guide to business taxes.

If gross sales or receipts of the preceding year:
Did not exceed ₱100 000.00 Not subject to the VAT and any
percentage tax
Subject to the 3% percentage

Exceeded ₱100 000.00 tax, unless another percentage
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tax applies
percentage tax applies
Fig. 10.5 Gross receipts or sales and the corresponding business taxes (updated
to NIRC provisions 2016)
Processes of Business Taxation
VAT and non-VAT (subject to percentage taxes) taxpayers submit a monthly VAT
or non-VAT return and pay the tax due through BIR-accredited banks. The monthly return
is filed on the 20th day after the close of month. A quarterly return is submitted on the 25 th
day after the close of the quarter. Submission of the quarterly summary list of sales and
summary list of purchases (SLS/SLP) is required to all VAT taxpayers and is due on the
25th day after the close of the quarter.
Sample Computations of VAT and Percentage Taxes

Manufacturing cost of certain articles by Alexis Company amounted to ₱100 000.00. An
excise tax of ₱10 000.00 is imposed on the articles. Upon production, the articles are
subject to excise tax but the tax will be collected upon removal from the place of
production. Allocated share in operating expenses is ₱12 000.00. Desired profit is ₱42
000.00. The selling price is computed as follows:
Recovery of:
Production cost ₱100 000.00
Operating expenses 12 000.00
Excise tax 10 000.00
Desired profit 42 000.00
Selling price 164 000.00
VAT at 10% 16 400.00
Total, to be paid by the buyer ₱180 400.00
The gross selling price is ₱164 000.00, which includes the excise tax but excludes
the VAT. For the removal of the goods from the place of production pursuant to a sale,
there will be two taxes, namely, the excise tax of ₱10 000.00 and the VAT of ₱16 400.00.
Distinction between Individual and Business Taxation

Individual taxation is the levying of direct taxes on persons who are intended or
bound by lay to pay tax. Examples of these direct taxes are community tax, income tax,
estate tax, and donor’s tax.
Meanwhile, business taxation is the imposition of taxes such as VAT, percentage
tax, and excise tax on businesses.
Page 100 of 131

Sources of Gross Income from Compensation
Gross compensation income includes regular compensation, supplemental
compensation, 13th month pay, and other benefits.
Regular compensation refers to the fixed remunerations received by the employee
every payroll period. It includes basic salary and fixed allowances such as cost of living
allowance, fixed housing allowance, representation, transportation, and other allowances
paid to an employee every payroll period.
Supplementary or additional compensation covers performance-based
remunerations to an employee in addition to the regular compensation with or without
regard to the payroll period. Examples are overtime pay, hazard pay, night shift differential
pay, holiday pay, commissions, fees including director’s fees (if director is an employee),
emoluments and honoraria, taxable retirement and separation pay, value of living quarters
or meals, gain on exercise of stock options (BIR Ruling 119-2012), and profit sharing and
taxable bonuses.
Thirteen month pay and other benefits includes 13th month pay, Christmas bonus,
cash gifts, additional compensation allowance, 14th month, 15th month, and other fringe
benefits of rank and file employees.
Sources of Gross Income from Business

For a trading business, gross income from sale of goods is computed as sales less
cost of goods sold. For a manufacturing business, gross income is computed similar to
that of a trading business. Gross from exercise of profession or gross income from the
sale of services is measured as revenues or gross receipts less cost of services.
Meanwhile, other sources of gross income, also called nonoperating income,
include (a) gains from dealings in properties; (b) income distributions from a general
professional partnership, taxable trust or estate, or an exempt joint venture; (c) casual
active income; and (d) passive income not subject to final tax.
Personal Exemptions
Personal exemptions refer to the theoretical personal, living, and family expenses
of an individual allowed to be deducted from gross income. The types of personal
exemptions are basic personal exemption, additional personal exemption, and premium
for health and hospitalization insurance.
Basic personal exemptions are ₱50 000.00 each for (a) single, including separated
spouse without a dependent, widow, or widower; (b) head of the family; and (c) married,
For a taxable estate or trust, personal exemption is ₱20 000.00. All individual taxpayers,
except NRA-NETB in the Philippines and special aliens who are subject to final tax, are
entitled to basic and additional personal exemptions. However, for NRA-ETB, entitlement
is subject to reciprocity conditions such as (a) the country to which the NRA-ETB is a
citizen must have an income tax law, (b) the income tax law of the country of the NRA-
ETB allows personal exemptions to citizens of the Philippines not residing therein, and (c)
the NRA-ETB files a true and accurate return of his or her income from all sources from
Page 101 of 131

within the Philippines. In addition, Section 35 (D) of the NIRC provides that such
entitlement shall not exceed the amount fixed as exemption for citizens or residents of the
Philippines.
Additional personal exemptions for every dependent (not exceeding four) is ₱25
000.00.
Deductions from Gross Income

Unlike the taxpayers who receive compensation income, taxpayers who earn
income from trading or manufacturing business, exercise of profession, or sale of
services, and those who receive nonoperating income are entitled to optional standard
deduction or itemized deductions.
Optional standard deduction (OSD) allows (a) the individual taxpayer to deduct
40% of gross sales, gross revenues, gross receipts, or gross fees, and (b) corporations to
deduct 40% of gross income. The OSD can be claimed by all taxpayers who are subject
to tax on taxable net income, except for (a) NRA-ETB and (b) taxpayers mandated to use
itemized deductions.
On the other hand, itemized deductions refer to business expenses incurred by a

taxpayer engaged in business or in the practice of profession. The taxpayer has to justify
the deduction by citing the provision of law authorizing the deduction. The deduction must
be supported by official receipts, payment vouchers, cancelled checks, or other adequate
records and documentations and must comply with any applicable deduction ceilings set
by law.
Tax reporting classification of deductions is as follows: (a) cost of sales or cost of
services, (b) regular allowable itemized deductions, (c) special allowable itemized
deductions, and (d) net operating loss carry over (NOLCO).
Cost of sales for a trading business is computed as explained in module 2. For a

manufacturing business, however, cost of sales is obtained by computing first the cost of
goods manufactured, then proceeding as in a trading or merchandising business (i.e.,
compute cost available for sale, deduct ending inventory, and get cost of sales). For a
service business, cost of services pertains to costs and expenses incurred which are
directly attributable in carrying on the development, management, operation and/or
conduct of the exercise of profession or rendering of services.
Regular allowable itemized deductions, on the other hand, are expenses that are
not directly related to the acquisition of goods or provision of services. Examples are
administrative and selling expenses. Specific regular allowable itemized deductions
include: interest expense taxes; losses; bad debts; depreciation; depletion; charitable and
other contributions; contributions to pensions and trusts; research and development costs;
and other ordinary and necessary trade, business, or professional expenses. Meanwhile,
special allowable itemized deductions are additional deductions allowed by the NIRC,
categorized into actual compliance expense and deduction incentives. Compliance
expenses are actual payments or transfers of funds. Deductions incentives are not actual
Page 102 of 131

expenses but are merely allowed by law to encourage the taxpayer to support government
programs.
The NOLCO pertains to the excess of deductions over gross income during a
taxable year that is allowed by the law to be deducted against net income of the next three
years.
BIG IDEA
Gross income can be derived from trading business, exercise of profession,
compensation, sale of services, and other nonoperating income.
For the rental business, optional standard deduction is preferred but for other
businesses that entail numerous necessary expenses, itemized deduction is
more advantageous to the taxpayers.
Computation of Gross Income, Taxable, Income, and Tax Due
This section will familiarize you with the formats of computation of gross income, taxable
income, and tax due from both individual and corporate taxpayers. You will also encounter
illustrative examples for both kinds of taxpayers.
Formats of Computation of Income Tax Due from Individual Taxpayers (Annual Return)
A. Pure Compensation Income
B. Pure Business or Professional Income
Page 103 of 131

C. Mixed Income
Gross compensation income ₱xxx
Less: Basic personal exemption xxx
Additional exemption xxx
Premium payment
for health and/or
hospitalization insurance xxx xxx
Taxable compensation income ₱xxx
Gross business income ₱xxx
Less: Allowable deductions xxx
Net income xxx
Total taxable income ₱xxx
Tax due [Sec. 24 (A)] ₱xxx
Less: Tax credits/payments
Prior years’ excess credits xxx
Tax payments for the first
Page 104 of 131

three quarters xxx
Creditable tax withheld for
the first three quarters xxx
Creditable tax withheld for
the fourth quarter xxx
Tax withheld on
compensation xxx
Foreign tax credits xxx xxx
Tax payable (overpayment) ₱xxx
Formats of Computation of Income Tax Due from Domestic Corporate Taxpayers

(Annual Return)
A. From Sale of Services
Service fees from Philippines clients ₱xxx

Service fees from foreign clients xxx
Interest income on bank deposits abroad xxx
Total service revenues xxx
Less: Direct cost of services xxx
Gross income xxx
Less: Allowable deductions
Necessary business expenses xxx
Interest expense xxx
Taxes xxx
Bad debts xxx
Losses xxx
Depreciation/depletion xxx
Charitable and other contributions xxx
Contributions to pensions and trusts xxx
Research and development costs xxx
Total allowed deductions xxx
Net taxable income ₱xxx
Tax due [@30%] ₱xxx
Prior years’ excess credits xxx
Tax payments for the first three xxx
Page 105 of 131

quarters
Creditable tax withheld for the first xxx
three quarters
Creditable tax withheld for the xxx
fourth quarter
B. From Sale of Goods
Sales ₱xxx
Less: Cost of sales xxx
Gross income xxx
Less: Allowable deductions
Necessary business
expenses xxx
Interest expense xxx
Taxes xxx
Bad debts xxx
Losses xxx
Depreciation/depletion xxx
Charitable and other
contributions xxx
Contributions to pensions
and trusts xxx
Research and
development costs xxx
Total allowed deductions xxx
Net taxable income ₱xxx
Tax due [@30%] ₱xxx
Prior years’ excess xxx
credits
Tax payments for the first
three quarters xxx
Creditable tax withheld xxx
for the first three quarters
Page 106 of 131

Creditable tax withheld xxx
for the fourth quarter
Types of Regular Income Tax

Individual income tax or progressive income tax is determined in reference to a tax
table of progressive or graduated tax rates.
Over But Not Over Basic Tax Plus Of Excess Over
₱0.00 ₱10 000.00 ₱0.00 5% ₱0.00
₱10 000.00 ₱30 000.00 ₱500.00 10% ₱10 000.00
₱30 000.00 ₱70 000.00 ₱2 500.00 15% ₱30 000.00
₱70 000.00 ₱140 000.00 ₱8 500.00 20% ₱70 000.00
₱140 000.00 ₱250 000.00 ₱22 500.00 25% ₱140 000.00
₱250 000.00 ₱500 000.00 ₱50 000.00 30% ₱250 000.00
₱500 000.00 ₱125 000.00 32% ₱500 000.00
The progressive income tax covers all individuals, including taxable estates and
trusts, except those subject to final income tax which are (a) NRA-NETB in the
Philippines, subject to 25% final tax on gross income, and (b) special aliens or special
employees, subject to 15% final tax on gross income from employment.
Meanwhile, corporate income tax is commonly referred to as the regular corporate

income tax {RCIT). It is a proportional or flat tax at a rate of 30% on taxable income. The
RCIT applies to any corporation other than those (a) subject to final tax, such as
nonresident foreign corporation and foreign currency deposit unit interest income not
subjected to final tax; (b) special corporations or those subject to special tax regimes,
such as Philippine Economic Zone Authority (PEZA)- and Tourism Infrastructure and
Enterprise Zone Authority (TIEZA)- registered enterprises; and (c) exempt corporations on
their exempt income.
Below are illustrative examples on computation of taxable income and tax due of
individual taxpayer.
Alan Bella Casey Duncan
(Amount in Pesos)
Compensation income (Note 1) 500 000.00 90 000.00 500 000.00
Gross business income 500 000.00 500 000.00 200 000.00
Deductions (Note 2) 330 000.00 330 000.00 330 000.00
Other gross income (Note 3) 50 000.00 50.000.00 50 000.00 50 000.00
Personal exemption 125 000.00 125 000.00 125 000.00 125 000.00
Income tax withheld 87 500.00
Note 1. Alan Basil and Duncan Logo:

Gross compensation income ₱543 425.00
Non-taxable/exempt compensation income ₱43 425.00
Note 2. Alan Basil
Page 107 of 131

Total sales/revenues/receipts ₱83 333.00
Optional standard deduction 33 333.00
Other gross income ₱50 000.00
Note 3: Bella Erlan, Casey Hedia, and Duncan Logo
Cost of sales ₱220 000.00
Operating expenses 120 000.00
Total allowable deductions ₱330 000.00
Computations:
A Compensation Earner with Other Gross Income
Alan
Compensation income ₱500 000.00
Less: Personal exemption 125 000.00
Taxable compensation income 375 000.00
Add: Other gross income 50 000.00
Taxable income ₱425 000.00
Tax due ₱102 500.00
Page 108 of 131

Supporting Computation of Tax Due for Alan
Less: Lower limit of income bracket ₱250 000.00 to ₱500 000.00 250 000.00
Excess over lower limit of taxable income bracket ₱175 000.00
Multiply by bracket marginal rate x 30%
Tax due on excess ₱52 500.00
Add: Tax due on base income of applicable bracket ₱250 000.00 50 000.00
Total income tax due ₱102 500.00
Page 109 of 131

A Business Income Earner with Other Gross Income
Bella
Gross business income ₱500 000.00
Add: Other gross income 50 000.00
Total gross income 550 000.00
Less: Allowable deductions 330 000.00
Net income 220 000.00
Page 110 of 131

Supporting Computation of Tax Due for Bella
Page 111 of 131

A Mixed Income Earner – Negative Taxable Compensation Income
Casey
Gross taxable compensation income ₱90 000.00
Taxable compensation income (35 000.00)
Other gross income 50 000.00
Less: Deductions 330 000.00 220 000.00
Page 112 of 131

Supporting Computation of Tax Due for Casey
Page 113 of 131

Mixed Income Earner – with Business/Professional Net Loss
Duncan
Gross taxable compensation income ₱500 000.00
Taxable compensation income 375 000.00
Other gross income 50 000.00
Less: Deductions 330 000.00
Net loss (NOLCO) (₱80 000.00)
Page 114 of 131

Supporting Computation of Tax Due for Duncan
Below are the illustrative examples on computation of taxable income and tax due of a
corporation. The given corporation earned income and incurred expenses during the year, as
detailed below.
Philippines Abroad Total

Gross income ₱2 200 000.00 ₱1 500 000.00 ₱3 700 000.00
Less: Business expenses 1 600 000.00 1 100 000.00 2 700 000.00
Net income from operation 600 000.00 400 000.00 1 000 000.00
Add: Interest from deposit 200 000.00 100 000.00 300 000.00
Net income ₱800 000.00 ₱500 000.00 ₱1 300 000.00
A. For a Domestic Corporation
Net income from operations ₱1 000 000.00

Other income not subject to final tax 1 600 000.00
Taxable net income ₱2 600 000.00
Multiply by corporate tax rate 30%
Regular Corporate Income Tax (RCIT) due ₱780 000.00
B. For a Resident Foreign Corporation
Taxable net income from Philippines only ₱600 000.00

Multiply by corporate tax rate 30%
RCIT due ₱180 000.00
Resident payors of the ₱2 200 000.00 gross income shall withhold 30% equivalent to
₱660 000.00 and remit the amount to BIR.
BIG IDEA
Regular income of corporations refers to income from operations and
other income that are not subject to final tax.
Page 115 of 131

Income Tax Description
Income Tax is a tax on a person's income, emoluments, profits arising from property,
practice of profession, conduct of trade or business or on the pertinent items of gross income
specified in the Tax Code of 1997 (Tax Code), as amended, less the deductions if any,
authorized for such types of income, by the Tax Code, as amended, or other special laws.
Who are required to File Income Tax Returns?
Individuals
 Resident citizens receiving income from sources within or outside the Philippines
o Employees deriving purely compensation income from two or more employers,

concurrently or successively at any time during the taxable year
o Employees deriving purely compensation income regardless of the amount,

whether from a single or several employers during the calendar year, the income
tax of which has not been withheld correctly (i.e. tax due is not equal to the tax
withheld) resulting to collectible or refundable return
o Self-employed individuals receiving income from the conduct of trade or business

and/or practice of profession
o Individuals deriving mixed income, i.e., compensation income and income from
the conduct of trade or business and/or practice of profession
o Individuals deriving other non-business, non-professional related income in

addition to compensation income not otherwise subject to a final tax
o Individuals receiving purely compensation income from a single employer,

although the income of which has been correctly withheld, but whose spouse is
not entitled to substituted filing
 Non-resident citizens receiving income from sources within the Philippines
 Aliens, whether resident or not, receiving income from sources within the Philippines
Non-Individuals
 Corporations including partnerships, no matter how created or organized.
 Domestic corporations receiving income from sources within and outside the Philippines
 Foreign corporations receiving income from sources within the Philippines
 Estates and trusts engaged in trade or business
Page 116 of 131

ENGAGEMENT
Now that you are equipped with the knowledge about the business taxation,
computation of gross taxable income and tax due, and the principles and purposes of
taxation, let us now attempt to answer the following questions
What have you learned so far?
1. What are the three major business taxes? Define each one.
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
2. What are the two types of excise tax? Define each.
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
3. Enumerate the four kinds of VAT transactions.
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
4. What is the new VAT exempt rental per month of residential dwellings?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
5. How much is the final withholding VAT rate by the government?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
6. How do you compute the tax due for a taxpayer with purely compensation income?
Page 117 of 131

____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
7. How does a resident foreign corporation compute its income tax due? How much tax
is withheld by its payors on income from the Philippines?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
ASSIMILATION
REFLECTIVE WRITING
1. With the higher threshold amount for VAT, business entities can enjoy the lower tax
rate- 3% percentage tax. What could be the reason why some companies opt to be VAT-
registered?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
References:

Bureau of Internal Revenue (BIR). (n.d.). Income Tax. (2020). Retrieved August 12, 2020,
from https://www.bir.gov.ph/index.php/tax-information/income-tax.html
Page 118 of 131

AND MANAGEMENT 2
WEEK 16 (Module 8)
INTRODUCTION
EXPECTATION
At the end of our one-week lesson, you are expected to prepare the BIR forms.
LEARNING OBJECTIVES
Knowledge and skills on the preparation of basic business forms and documents including: the
filing of BIR Forms with the help of Information Technology in accounting.
This week’s lesson will focus on Accomplishing BIR Forms.
Specifically, you shall learn to fill up the BIR forms either online or offline.
DEVELOPMENT

Good day learner.
Today we will begin our lesson on accomplishing BIR Form 1701.
LESSON PROPER
Accomplishing BIR Form 1701
To officially file for annual income tax return, you will have to fill up a BIR form. To
illustrate its use, visit http://www.bir.gov.ph/index.php/bir-forms/income-tax-return.html.
For modular students I will attach here the BIR Form 1701 printed PDF. For online
students: Click the portable document format of BIR Form 1701. Then fill up the form
using the computations of tax due for Alan Basil, Bella Erlan, Casey Hedia, and Duncan
Logo. Refer to the following table for other pertinent information.
Page 119 of 131

Item No. Information Alan Bella Casey Duncan
1 For the Year 12/2018 12/2018 12/2018 12/2018
2 Amended Return? No No No No
4 Alphanumeric Tax 013 Mixed 013 Mixed 013 Mixed 013 Mixed
Code Income Income Income Income
Part I – Background Information on Taxpayer/Filer
5 Taxpayer 133-723- 124-661- 132-231- 126-616-101-
Identification 022-000 002-000 055-000 000
Number (TIN)
6 RDO code 059 059 059 059
8 Tax Filer’s Name ALAN BELLA CASEY DUNCAN
BASIL ERLAN HEDIA LOGO
10 Registered Bolbok, Antipolo del Sampaguita Tanauan City,
Address Lipa City Sur, Lipa , Lipa City Batangas
City
11 Date of Birth 1 January 25 February 20 October 24 September
1971 1972 1972 1973
14 Civil Status Married Married Married Married
15 If Married, With No With No With No With No
indicate if spouse Income Income Income Income
has income
16 Filing Status Separate Separate Separate Separate filing
filing filing filing
20 Method of Optional Itemized Itemized Itemized
Deduction Standard
Deduction
21 Method of Accrual Cash Accrual Accrual
Accounting
22 Income Exempt No No No No
from Income Tax
23 Income subject to No No No No
Special/
Preferential
Rate?
24 Claiming Yes Yes Yes Yes
Additional
Exemptions?
25 If YES, enter 3 3 3 3
number of
Qualified
Dependent
Children
Page 120 of 131

To download click the link pointed by arrow online.
All about BIR form
Seeing a variety of forms available at the Bureau of Internal Revenue (BIR) offices, as well as
on its official web site is quite confusing at first and might leave you perplexed on what to do
with them all. There are some forms whose codes are almost the same except for one letter or
number. Aside from that, the submission frequency of some forms might give you a difficult time
since they are needed to be specifically submitted monthly, quarterly, yearly and even one-time
only. Forms can also be in the form of registration, certificates or those used for filing and
payment.
The dean of our university who is also in public practice has BSA student-trainees in his
accounting firm and, luckily, I am one of those selected to participate. I presume that the typical
orientation for BSA students are more on theories and solving tax problems (yes, either you
hate it or you love it) in preparation for the CPA Board exams. With regard to the familiarity and
usage of tax forms, however, it is something that is beyond the topics customarily discussed.
The dean requested me to go to the BIR office and request for copies of a certain tax return.
Inside the BIR office, people from all kinds of businesses are everywhere carrying documents
and forms, creating a war-like environment. Imagine this guy beside the Revenue District Office
Page 121 of 131

being busy photocopying stuff, taxpayers looking tired for queuing, waiting for their turn, some
wearing furious faces already because of new regulations or additional things to do. People are
too busy to entertain a student like me, so I just went to a section where copies of tax forms are
given out with no supervision. I grabbed them without checking (no eBIR forms at that time).
Then I returned to the office, carrying BIR forms that, unfortunately, were not the ones needed
by the client. Since then, I made a promise that I should familiarize myself with those BIR forms!
Through the years, I became more familiar with the forms, the so-called e-forms via eBIR forms
and electronic filing and payment system (EFPS)
for top 5,000 individuals and top 20,000 corporations. Finally, I created a simple guide.
To new graduates and neophytes in the field, I am handing you this simple guide as your starter
kit. Believe me, this will take you to greater heights and you will not be oblivious anymore to this
matter.
Below are the corresponding codes, their meaning, frequency of filing and some examples of
tax forms.
BIR form starts with:

25-Sales Tax
 2550M (VAT Registered)

2551 (Non-VAT Entity)
 Add Q for quarter return e.g., 2550Q and 2551Q.

17 – Income Tax
 1701 for individual’s annual income tax return

 1702 for partnerships and corporation’s annual income-tax return
 Add Q for quarter returns e.g., 1702Q and 1701Q

16-Withholding Tax
 1601C (01 means 1 month or monthly, while C means compensation)
 1601E (01 means 1 month or monthly, while E means

expanded)
 1601F (01 means 1 month or monthly, while F means final)
Page 122 of 131

 1603 (03 means 3 months or every quarter, this is Fringe
Benefit Tax)
 1604E (04 means 4 quarters [1 year] or Annual Return for E which is

expanded with tax)
 1604CF (04 means 4 quarters [1 year] or Annual Return for C-compensation and F-final tax)
23-Code used for certificates
 2303-Certificate of Registration
 2306-Certificate of Final Tax Withheld
 2307-Certificate of Taxes
Withheld at Source (Expanded Tax)
 2316-Certificate of Taxes
Withheld on Compensation
 19-Code used for application forms
 1900-Application for loose leaf/books of accounts
 1901-Application for registration self-employed, mix income & estates
 1902-Application for registration Purely Compensation Individuals
 1903-Application for registration Partnership and Corporations
2200-Excise Tax, the letters after the code indicate what kind of products will be taxed
 2200A-Alcohol Products
 2200AN-Automobiles
and Non-essentials
 2200M-Mineral Products
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 2200P-Petroleum
 2200T -Tobacco
18-Estate and Gift Taxes
 1800-Donor’s tax, 00 or no limit, file for every period that there are donations given
 1801-Estate tax, 01 or one time, upon the death of the taxpayer and payment of the
required tax
DS-Documentary Stamp Tax
 DS 2000-Recurring DST on lease agreement, sales of stocks, bonds, etc.
 DS 2000 OT-OT means One Time Payment.

I hope you have gained knowledge about this topic more than what you already know right now.
Jeffrey Galang Salazar is a Certified Public Accountant and a Master in Business

Administration (MBA) degree holder. He is currently connected with Tong Hsing Electronics
Phils Inc. as external tax cccountant and with Pamantasan ng Cabuyao as part-time
accountingprofessor both situated in Laguna.
eBIRFORMS
The Electronic Bureau of Internal Revenue Forms (eBIRForms) was developed primarily to
provide taxpayers with an alternative mode of preparing and filing tax returns that is easier and
more convenient. The use of eBIRForms by taxpayers will improve the BIR's tax return data
capture and storage thereby enhancing efficiency and accuracy in the filing of tax returns.
Through the use of the downloadable eBIRForms Software Package (also known as the Offline
Package), taxpayers and Accredited Tax Agents (ATAs) will be able to fill up tax returns offline
and submit it to the BIR through the Online eBIRForms System.
Offline eBIRForms Online eBIRForms

Package System
The Offline eBIRForms The Online eBIRForms

Package is a tax System is a filing
preparation software that infrastructure that
Page 124 of 131

allows taxpayers and accepts tax returns
ATAs to accomplish or fill submitted online and
up tax forms offline. automatically computes
Instead of the penalties for tax returns
conventional manual submitted beyond due
process of filling up tax date. The System creates
returns on pre-printed secure user accounts for
forms that is highly taxpayers, ATAs and Tax
susceptible to human Software Providers
error, taxpayers/ATAs (TSPs) for use of the
can directly encode data, online System, and
validate, edit, save, allows ATAs to file on
delete, view, print and behalf of their clients.
submit their tax returns. The System also has a
The package can do facility for TSPs to test
automatic computations and certify the data
and has the capability to generated by their tax
validate information preparation software
encoded by (certification is by form).
taxpayers/ATAs. After It is capable of accepting
filling out the forms in this returns data filed using
package, taxpayers/ATAs certified TSP tax
can submit it to the preparation software.
Online eBIRForms
System. You may eFILE your tax
returns using the
To download the Offline eBIRForms package.
eBIRForms Package Fill-up the required form,
v7.6.1 click here. validate and click the
“FINAL COPY” button..
Coverage
The eBIRForms is a package application covering thirty-six (36) BIR Forms comprised of
Income Tax Returns; Excise Tax Forms; VAT Forms; Withholding Tax Forms; Documentary
Stamp Tax Forms; Percentage Tax Forms; ONETT Forms and Payment Form, the list of which
is shown below.
Form No. Latest Revision Date Form Name
1 0605 July 1999 (ENCS) Payment Form
2 1600 September 2005 Monthly Remittance Return

(ENCS) of Value-Added Tax and
Other Percentage Taxes
Page 125 of 131

Withheld
3 1600WP January 2010 (ENCS) Remittance Return of Value-

Added Tax and Other
Percentage Taxes Withheld
by Race Track Operators
4 1601-C July 2008 (ENCS) Monthly Remittance Return

of Income Taxes Withheld
on Compensation
5 1601-E August 2008 (ENCS) Monthly Remittance Return

of Creditable Income Taxes
Withheld (Expanded)
6 1601-F September 2005 Monthly Remittance Return

(ENCS) of Final Income Taxes
Withheld
7 1602 August 2001 (ENCS) Monthly Remittance Return

of Final Income Taxes
Withheld on Interest Paid on
Deposits and Yield on
Deposits
Substitutes/Trusts/Etc.
8 1603 November 2004 Quarterly Remittance Return

(ENCS) of Final Income Taxes
Withheld on Fringe Benefits
Paid to Employees Other
than Rank and File
9 1604-CF July 2008 (ENCS) Annual Information Return

of Income Taxes Withheld
on Compensation and Final
Withholding Taxes
10 1604-E July 1999 (ENCS) Annual Information Return

of Creditable Income Taxes
Withheld
(Expanded)/Income
Payments Exempt from
Withholding Tax
11 1606 July 1999 (ENCS) Withholding Tax Remittance

Return For Onerous Transfer
of Real Property Other than
Capital Asset (Including
Taxable and Exempt)
12 1700 June 2013 (ENCS) Annual Income Tax Return

For Job Aid For Individuals Earning
click here. Purely Compensation
Page 126 of 131

Income (Including Non-
Business/Non-Profession
Income)
13 1701 June 2013 (ENCS) Annual Income Tax Return

For Job Aid For Self-Employed
click here. Individuals, Estates and
Trusts
14 1701Q July 2008 (ENCS) Quarterly Income Tax

Return For Self-Employed
Individuals, Estates and
Trusts (Including those w/
both Business and
Compensation Income)
15 1702-EX June 2013 (ENCS) Annual Income Tax Return

For Job Aid For Use ONLY by
click here. Corporation, Partnership and
Other Non-Individual
Taxpayer EXEMPT Under
the Tax Code, as Amended,
[Sec. 30 and those exempted
in Sec. 27(C)] and Other
Special Laws, with NO
Other Taxable Income
16 1702-MX June 2013 (ENCS) Annual Income Tax Return

For Job Aid For Corporation, Partnership
click here. and Other Non-Individual
with MIXED Income
Subject to Multiple Income
Tax Rates or with Income
Subject to
SPECIAL/PREFERENTIAL
RATE
17 1702-RT June 2013 (ENCS) Annual Income Tax Return

For Job Aid For Corporation, Partnership
click here. and Other Non-Individual
Taxpayer Subject Only to
REGULAR Income Tax
Rate
18 1702Q July 2008 (ENCS) Quarterly Income Tax

Return For Corporations,
Partnerships and Other Non-
Individual Taxpayers
19 1704 May 2001 Improperly Accumulated

Earnings Tax Return
20 1706 July 1999 (ENCS) Capital Gains Tax Return
Page 127 of 131

For Onerous Transfer of
Real Property Classified as
Capital Asset (both Taxable
and Exempt)
21 1707 July 1999 (ENCS) Capital Gains Tax Return for

Onerous Transfer of Shares
of Stock Not Traded
Through the Local Stock
Exchange
22 1800 July 1999 (ENCS) Donor's Tax Return
23 1801 July 2003 (ENCS) Estate Tax Return
24 2000 June 2006 (ENCS) Documentary Stamp Tax

Declaration/ Return
25 2000-OT June 2006 (ENCS) Documentary Stamp Tax

Declaration/ Return (One-
Time Transactions)
26 2200A April 2014 (ENCS) Excise Tax Return for

For Job Aid Alcohol Products
click here.
27 2200AN August 2003 (ENCS) Excise Tax Return for

Automobiles & Non-
Essential Goods
28 2200M September 2005 Excise Tax Return for

(ENCS) Mineral Products
29 2200P September 2005 Excise Tax Return for

(ENCS) Petroleum Products
30 2200T April 2014 (ENCS) Excise Tax Return for

For Job Aid Tobacco Products
click here.
31 2550M February 2007 Monthly Value-Added Tax

(ENCS) Declaration
32 2550Q February 2007 Quarterly Value-Added Tax

(ENCS) Return
33 2551M September 2005 Monthly Percentage Tax

(ENCS) Return
34 2551Q February 2002 Quarterly Percentage Tax

(ENCS) Return
35 2552 July 1999 (ENCS) Percentage Tax Return For
Page 128 of 131

Transactions Involving
Shares of Stock Listed and
Traded Through the Local
Stock Exchange or Through
Initial and/or Secondary
Public Offering
36 2553 July 1999 (ENCS) Return of Percentage Tax

Payable Under Special Laws
ENGAGEMENT
Now that you are equipped with the knowledge about BIR Forms, let us now attempt
to fill up some important forms to be filed by a sole proprietorship.
Visit: https://mydownloadsoftware.com/download-ebirforms-latest/ or the main
website of BIR https://www.bir.gov.ph/index.php/eservices/ebirforms.html and download
eBIRForms offline to fill up BIR forms such as: 1701Q, 2551Q, and 1601E.
Page 129 of 131

ASSIMILATION
REFLECTIVE WRITING
1. The BIR is making full use of technology so that it can check the veracity of tax
returns. How do you think the BIR can attain the principle of equality or theoretical justice in
carrying out its function?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
2. Do you have any plans in the future to set up your own business and file tax through e-
BIRforms? If yes, what kind of business it is?
____________________________________________________________
____________________________________________________________
____________________________________________________________
______________________.
Page 130 of 131

References:

Salazar, J. (December 7, 2015). All about BIR forms. Retrieved August 12, 2020, from
https://businessmirror.com.ph/2015/12/07/all-about-bir-forms/
Bureau of Internal Revenue (BIR). (n.d.). eBIRForms. Retrieved August 12, 2020, from
https://www.bir.gov.ph/index.php/eservices/ebirforms.html
Bureau of Internal Revenue (BIR). (n.d.). Income Tax Return. Retrieved August 12, 2020,
http://www.bir.gov.ph/index.php/bir-forms/income-tax-return.html
eBIRForms Download. (2020). Retrieved August 12, 2020, from

https://mydownloadsoftware.com/download-ebirforms-latest/
Page 131 of 131

Fundamentals of Accountancy, Business, and Management 2: Expectation

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Fundamentals of Accountancy, Business, and Management 2: Expectation

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FUNDAMENTALS OF ACCOUNTANCY, BUSINESS,

OVERVIEW OF THE LESSON

1. Difference between General Journal and General Ledger;

PREVIEW OF THE LESSON:

Today we will begin our lesson on GENERAL JOURNAL AND GENERAL

Journal - called the book of original entry.

- is a detailed account that records all the financial transactions of a business, to be

General Ledger- called the book of final entry.

- (GL) is a set of numbered accounts a business uses to keep track of its

Accounting Equation: Assets = Liabilities + Owner’s Equity

Illustration on Accounting Equation

An understanding of the accounting equation is essential to the analysis and journalizing of a

Example 1. Bentong invests P50, 000.00 in his janitorial services agency.

Assets (Cash) = Owner’s Equity (Bentong, Capital)

Here, the assets are recognized as claims of the owner.

Assets (Cash) = Liabilities (Loans Payable)

The assets are recognized as claims of the creditor.

Assets (Accounts Receivable) = Owner’s Equity (Bentong, Capital – Service Fees)

Example 4. Bentong’s agency paid rental to the owner of the building.

Expanded Accounting Equation

Capital + Additional Investments

Assets = Liabilities + Revenue or Income – Withdrawals

Contra-asset accounts- are deductions from related asset accounts.

Examples: Allowance for bad debts and Accumulated depreciation.

Normal Balance of an Account

Assets = Liabilities + Owner’s Equity

Extend Your Knowledge

Account Classification Normal Balance

Revenues and Gains Are Usually Credited

Revenues and gains are recorded in accounts such as Sales, Service Revenues, Interest

The exceptions to this rule are the accounts Sales Returns, Sales Allowances, and Sales

Account Name Debit Credit

Account Name Debit Credit

Expenses and Losses are Usually Debited

Account Name Debit Credit

Account Name Debit Credit

Continuation from the book:

Preparing Journal Entries to Record Basic Business Transactions

Transaction 1. On 3 January, Ruby invested P50, 000.00 into the business.

Date VR and VP Account Debit (₱) Credit (₱)

Date VR and VP Account Debit (₱) Credit (₱)

Transaction 4. On 9 January, the parlor paid 60% of its account in transaction 2.

Date VR and VP Account Debit (₱) Credit (₱)

Date VR and VP Account Debit (₱) Credit (₱)

Date VR and VP Account Debit (₱) Credit (₱)

Transaction 7. On 18 January, the salon rendered hairstyling and makeup services to

Date VR and VP Account Debit (₱) Credit (₱)

Transaction 8. On 20 January, the parlor paid salary of the beautician, P800.00.

Date VR and VP Account Debit (₱) Credit (₱)

Normal Balance Using T-account

Below is the T-account for Ruby’s Beauty Parlor.

Posting to T-accounts for Ruby’s Beauty Parlor

Ending 40, 700.00

A. Basic and Expanded Accounting Equations

Supply the missing amount for each case.

Element Case 1 Case 2 Case 3 Case 4

Element Case 1 Case 2 Case 3

Element Case 1 Case 2 Case 3

Element Case 1 Case 2 Case3

B. Normal Balance of Accounts

SCI in the third column.

Account Name Debit or Credit SFP or SCI

C. Rules of Debit and Credit