PORTFOLIO IN

BASIC ACCOUNTING REVIEW

Accounting 1

Submitted by:

MELODY DC. CRISTOBAL

BSA-1A

Submitted to:

MR. WARREN E. MUNCAL, CPA

Instructor
II. TABLE OF CONTENTS

I. TITLE PAGE
II. TABLE OF CONTENTS
III. COVER LETTER
IV. TOPICS

TOPICS FOR MIDTERM

Chapter 1: DEFINITIONS OF ACCOUNTING
Chapter 2: RECORDING BUSINESS TRANSACTIONS
Chapter 3: ADJUSTING THE ACCOUNTS
Chapter 4: WORKSHEET AND FINANCIAL STATEMENTS
Chapter 5: COMPLETING THE ACCOUNTING CYCLE
Chapter 6: MERCHANDISING OPERATIONS

TOPICS FOR FINALS

Chapter 7: COMPLETING THE CYCLE FOR A MERCHANDISING
BUSINESS
Chapter 8: MANUFACTURING OPERATIONS
Chapter 9: ACCOUNTING FOR PAYROLL
Chapter 10: PARTNERSHIPS: BASIC CONSIDERATIONS AND
FORMATION
Chapter 11: PARTNERSHIPS: OPERATIONS AND FINANCIAL
REPORTING
Chapter 12: CORPORATIONS: BASIC CONSIDERATIONS
Chapter 13: CORPORATION: SHARE CAPITAL, RETAINED EARNINGS AND
FINANCIAL REPORTING

V. GENERAL REFLECTION
VI. GRADING RUBRICS (from the teacher and to be scored by the
teacher)
III. COVER LETTER

I am Melody DC. Cristobal, a 1st year student taking Bachelor of Science

in Accountancy (BSA). This paper show the development of different lesson
implemented for the contents acquired during the current semester. This portfolio
is a representation of what I’ve learned and accomplished so far in the subject
Basic Accounting Review. It is all about the compilation of summary of topics, the
activities we made after discussing the lesson and also my reflection on how it
influence in my life. Being a student, who want to learn more by keeping things
positive, I believe that we will end up getting more of each in every lesson. And in
this case I’ve learned a lot that enhance and improve my skills especially when
I’m was a professional in the future.
IV. TOPICS
MIDTERM
Chapter 1: DEFINITIONS OF ACCOUNTING
 Keywords / Key concepts
This chapter will introduce some of the main terms used in discussions about
accounting.
Accounting is a service activity. Its function is to provide quantitative
information, primarily financial in nature, about economic entities that is intended
to be useful in making economic decisions.
Types of Business
 Services
 Trading
 Manufacturing
Forms of Business Organization
 Sole proprietorship
 Partnership
 Corporation
Fundamental Concepts
Several fundamental concepts underlie the accounting process. In recording
business transactions, accountants should consider the following:
 Entity Concept
 Periodicity Concept
 Stable Monetary Unit Concept
 Going Concern Concept
Elements of Financial Statements
Relate to a reporting entity’s financial position.
 Asset – a present economic resource controlled by the entity as a result of
past events.
 Liability – a present obligation of the entity to transfer an economic
resource as a result of past events.
 Equity – a residual interest in the assets of the enterprise after deducting
all its liabilities.
Relate to a reporting entity’s financial performance.
 Income – increases in assets, or decreases in liabilities, that result in
increases in equity, other than those relating to contributions from holders
of equity claims.
 Expenses – decreases in assets, or increases in liabilities, that result in
decrease in equity, other than those relating to distributions to holders of
equity claims.
The basic summary device of accounting is the account. A separate account is
maintained for each element that appears in the balance sheet (assets, liabilities
and equity) and in the income statement (income and expenses).

The most basic tool of accounting is accounting equation.

Assets = Liabilities + Owner’s Equity
NORMAL BALANCE OF AN ACCOUNT

Types and Effects of Transactions

Although business entities engage in numerous transactions, all transactions can
be classified into one of four types, namely;
1. Source of Assets (SA)
2. Exchange of Assets (EA)
3. Use of Assets (UA)
4. Exchange of Claims (EC)
The four types of transactions above may be further expanded into nine types of
effects as follows;
1. Increase in Assets = Increase in Liabilities (SA)
2. Increase in Assets = Increase in Owner’s equity (SA)
3. Increase in in one = Decrease in another Asset (EA)
4. Decrease in Assets = Decrease in Liabilities (UA)
5. Decrease in Assets = Decrease in Owner’s Equity (UA)
6. Increase in Liabilities = Decrease in Owner’s equity (EC)
7. Increase in Owner’s equity = decrease in Liabilities (EC)
8. Increase in one Liability = Decrease in another liabilities (EC)
9. Increase in one Owner’s equity = Decrease in another Owner’s equity (EC)
Statement of Financial Position
ASSETS are should be classified only into two: current assets and non-current
assets.
Current assets (Cash, Cash equivalents, Notes Receivable, Accounts
Receivable, Inventories, Prepaid expenses )

Non-current assets ( Property, Plant, and Equipment, Accumulated

 depreciation, Intangible assets )
LIABILITIES
Current Liabilities ( Accounts payable, Notes payable, Accrued liabilities,
Unearned revenues, Current portion of long-term debt )
Non-current Liabilities ( Mortgage Payable, Bonds payable )
OWNER’S EQUITY ( Capital, Withdrawals, Income Summary )
Income Statement
INCOME ( Service income, Sales )
EXPENSES ( Cost of sales, Salaries or wages expense, Telecommunications,
electricity, fuel and water expenses, Rent expense, Supplies expense, Insurance
expense, Depreciation expense, Uncollectible account expense, Interest
expense )
Accounting for Business Transactions
A business transaction is the occurrence of an event or a condition that affects
Financial position and can be reliably recorded.
Financial Transaction Worksheet
The financial transactions will be analyzed by means of a financial transaction
worksheet which is a form used to analyze increases and decreases in the
assets, liabilities or owner’s equity of a business entity.

 Activities

Chapter 2: RECORDING BUSINESS

TRANSACTIONS
 Keywords / Key concepts
Transaction Analysis ( Step 1 )
The analysis of transactions should follow these four basic steps:
1. Identify the transaction from source documents.
2. Indicate the accounts – either assets, liabilities, equity, income or
expenses – affected
by the transaction.
 3. Ascertain whether each account is increased or decreased by the
transaction.
4. Using the rules of debit and credit, determine whether to debit or credit
the account to record its increase or decrease.
Source Documents
Transactions and events are the starting points in the accounting cycle.
Accounting Cycle
The accounting cycle refers to a series of sequential steps or procedures
performed to accomplish the accounting process.
Step 1. Identification of Events to be recorded
Step 2. Transactions are recorded in the Journal
Step 3. Journal Entries are Posted to the Ledger
Step 4. Preparation of a Trial Balance
Step 5. Preparation of the Worksheet including Adjusting Entries
Step 6. Preparation of the Financial Statements
Step 7. Adjusting Journal Entries are Journalized and Posted
Step 8. Closing Journal Entries are Journalized and Posted
Step 9. Preparation of a Post-Closing Trial Balance
Step 10. Reversing Journal Entries are Journalized and Posted
The Journal
The journal is a chronological record of the entity’s transactions. A journal entry
shows all the effects of a business transaction in terms of debits and credits.
Format
1. Date
2. Account titles and explanation
3. P.R.(posting reference)
4. Debit
5. Credit
Simple and Compound Entry
 a simple entry, only two accounts are affected – one account is debited
and the other account credited.
 Three or more accounts are required in a journal entry, the entry is
referred to as a compound entry.

Transactions are Journalized ( step 2 )

The process of recording a transaction is called journalizing.
The Ledger
 A grouping of the entity’s accounts is referred to as ledger.
 A general ledger is the “reference book”.
The accounts in the general ledger are classified into two general groups:
1. Balance sheet or permanent accounts (assets, liabilities and owner’s
equity).
2. Income statement or temporary accounts (income and expenses).
CHART OF ACCOUNTS
 The chart is arranged in the financial statement order, that is, assets first,
followed by liabilities, owner’s equity, income and expenses. The accounts
should be numbered in a flexible manner to permit indexing and cross-
referencing.

Posting ( Step 3 )
Posting means transferring the amounts from the journal to the appropriate
accounts in the ledger.
Ledger Accounts After Posting
At the end of an accounting period, the debit or credit balance of each account
must be determined to enable us to come up with a trial balance.
 Each account balance is determined by footing (adding) all the debits
and credits.
 If the sum of an account’s debits is greater than the sum of its credits,
that account
has a debit balance.
 If the sum of its credits is greater , that account has a credit balance.

Trial Balance ( Step 4 )

 The trial balance is a list of all accounts with their respective debit or
credit.
 The trial balance is a control device that helps minimize accounting errors.
 Activities

Chapter 3: ADJUSTING THE ACCOUNTS

 Keywords / Key concepts
Accrual Basis
The effects of transactions and other events are recognized when they occur and
not as cash is received or paid.
Periodicity Concept
This process of going out of business is called liquidation.
Accounting information
It is valued when it is communicated early enough to be used for economic
decision-making.
Accounting periods
Generally a month, a quarter or a year.
 Fiscal year is a period of any twelve consecutive months.
 Calendar year is an annual period ended December 31.
 Natural business year is a twelve-month period that ends when business
activities are at their lowest level of the annual cycle.
 Period of less than a year is an interim period.
Recognition and Derecognition
  Recognition provide information that is useful to investors, lenders and
other creditors.
 Derecognition removal of all or part of a recognized asset or liability from
an entity’s statement of financial position.
The need for adjustments
Accountants make adjusting entries to reflect in the accounts information on
economic activities that have occurred but have not yet been recorded.

Adjusting entries
Involve charging account balances at the end of the period from what is the
current balance of the account to what is the correct balance for proper financial
reporting.
Deferrals and Accruals
 Deferral is the postponement of the recognition of “an expense
already paid but not yet incurred, “ or of “ revenue already collected
but not yet earned”.
 Allocating assets
 Allocating revenues
 Accrual is the recognition of “an expense already incurred but
unpaid”, or “revenue earned but uncollected”.

Adjustments for Deferrals ( Step 5 )

 Allocating Assets to Expenses. Entities often make expenditures
that benefit more than one period
 Prepaid Expense. Some expenses are customarily paid in advance.
 Depreciation of Property and Equipment. When an entity acquires
long-lived assets such as buildings, service vehicles, computers or
office furnitures, it is basically buying or preparing for the
usefulness of that asset.
 Contra account is used to record reductions in a related account
and its normal balance is opposite that of the related account.
 Allocating revenues Received in Advance to Revenues. There are
times when an entity receives cash for services or goods even
before service is Rendered or goods are delivered. The liability
referred to is unearned revenues.

Adjustments for Accruals ( Step 5 )

 Accrued expenses. An entity often incurs expenses before paying
for them.
 Accrued Salaries. Entities pay their employees at regular intervals.
  Accrued Revenues. An entity may provide services during the
period that are neither paid for by clients nor billed at the end of the
period.
 Accrual for Uncollectible Accounts. Entities often allow clients to
purchase goods or avail of services on credit.

 Activities

Chapter 4: WORKSHEET AND FINANCIAL STATEMENTS

 Keywords / Key concepts
The Worksheet
Accountants often use a worksheet to help transfer data from the unadjusted trial
balance to the financial statements.

Preparing the Worksheet ( Step 5 )

 Enter the account balances in the unadjusted trial balance columns and
total the amounts.
 Enter the adjusting entries in the adjustment columns and total the
amounts.
 Compute each account’s adjusted balance by combining the unadjusted
trial balance and the adjustment figures. Enter the adjusted amounts in the
adjusted trial balance columns.
 Extend the asset, liability and owner’s equity amounts from the adjusted
trial balance columns to the balance sheet columns. Extend the income
and expense amounts to the income statement columns. Total the
statement columns.
  Compute profit or loss as the difference between total revenues and total
expenses in the income statement. Enter profit or loss as a balancing
amount in the income statement and in the balance sheet, and compute
the final column totals.
Essence of Financial Statements
The financial statements are the means by which the information accumulated
and
processed in financial accounting is periodically communicated to the users.

Preparing the Financial Statements ( Step 6 )

Statement of Financial Performance
The income statement is a statement showing the performance of the enterprise
for a given period of time.

Statement of Changes in Equity

The statement of changes in equity summarizes the changes that occurred in
owner’s equity.
Statement of Financial Position
The statement of financial position is a statement that shows the financial
position or condition of an entity by listing the assets, liabilities and owner’s
equity as at a specific date. This statement is also called the balance sheet.
 Format. The balance sheet can be presented in either the report format or
the account format.
 Classification. Assets can be presented current then non-current, or vise
versa. Liabilities and equity can be presented current liabilities then non-
current liabilities then equity, or vice versa.
Statement of Cash Flows
The statement of cash flows provides information about the cash receipts and
cash payments of an entity during a period.
 Cash Flows from Operating Activities. Operating activities generally
involve providing services, and producing and delivering goods.
 Direct method. obtained by adding the individual operating cash inflows
and then subtracting the individual operating cash outflows.
 Indirect method. adjusting profit for income and expense items not
resulting from cash transactions.
Cash Inflows
 Receipts from sale of goods and performance of services
 Receipts from royalties, fees, commissions and other revenues
Cash Outflows
 Payments to suppliers of goods and services
 Payments to employees
 Payments for taxes
 Payments for interest expense
  Payments for other operating expenses
 Cash Flows from Investing Activities. Include making and collecting loans;
acquiring and disposing of investments in debt or equity securities; and
obtaining and selling or property and equipment and other productive
assets.
Cash Inflows
 Receipts from sale of property and equipment
 Receipts from sale of investments in debt or equity securities
 Receipts from collections on notes receivable
Cash Outflows
 Payments to acquire property and equipment
 Payments to acquire debt or equity securities
 Payments to make loans to others generally in the form of notes
receivable
 Cash Flows from Financing Activities. Include obtaining resources from
owners and creditors.
Cash Inflows
 Receipts from investment by owners
 Receipts from issuance of notes payable
Cash Outflows
 Payments to owners in the form of withdrawals
 Payments to settle notes payable
 Activities

Chapter 5: COMPLETING THE ACCOUNTING CYCLE

 Keywords / Key concepts
Adjustments are Journalized and Posted ( Step 7 )
 The adjustment process is a key element of accrual basis accounting.
 The adjustments are journalized and posted as the closing entries are
made.
Closing Entries are Journalized and Posted ( Step 8 )
  Income, expense and withdrawal accounts are temporary accounts that
accumulate information related to a specific accounting period.
 This phase of the cycle is called the closing procedure.
The steps in closing the accounts of an entity ;
 Close the income accounts. Income accounts have credit balances before
the closing entries are posted.
 Close the expense accounts. Expense accounts have debit balances
before the closing entries are posted.
 Close the income summary account. The balance of the income summary
account will be equal to the profit or loss for the period. The income
summary account, regardless of the nature of its balance, must be closed
to the capital account.
 Close the withdrawals account. The withdrawals account shows the
amount by which capital is reduced during the period by withdrawals of
cash or other assets of the business by the owner for personal use.
Preparation of a Post-Closing Trial Balance ( Step 9 )
This final trial balance is called a post-closing trial balance.
 The post-closing trial balance verifies that all the debits equal the credits in
the trial balance.
 The trial balance contains only balance sheet items such as assets,
liabilities, and ending capital because all income and expense accounts,
as well as the withdrawals account, have zero balances.
Reversing Entries ( Step 10 )
A reversing entry is a journal entry which is the exact opposite of a related
adjusting
entry made at the end of the period.
Sequence of transactions :
 Adjusting Entry
 Closing Entry
 Reversing Entry
 Payment Entry

 Activities
Chapter 6: MERCHANDISING OPERATIONS
 Keywords / Key concepts
Comparison of Income Statements

The difference between net sales and cost of sales is called gross profit.
Operating Cycle of a Merchandising business
The merchandising entity purchases inventory, sells the inventory and uses the
cash to purchase more inventory –and the cycle continues.
Source documents
These source documents contain vital information about the nature and amount
of the transactions.
1. sales invoice
2. bill of lading
3. statement of account
4. official receipt
5. deposit slip
6. check
7. purchase requisition
8. purchase order
9. receiving report
10. credit memorandum
Terms of Transactions
Merchandise may be purchased and sold either on credit terms or for cash on
delivery.
 Cash Discounts. Some businesses gives discounts for prompt payment
called cash discounts. Cash discount is computed on the net amount after
the trade discount.
 Trade Discounts. Encourage the buyers to purchase products because of
markdowns from the list price.
 Transportation Costs. Freight collect when the terms are FOB shipping
point; and freight prepaid when the terms are FOB destination.
Inventory Systems
Merchandise inventory is the key factor in determining cost of sales.
 Perpetual Inventory System. The inventory account is continuously
updated.
 Periodic Inventory System. Primarily used by businesses that sell relatively
inexpensive goods and that are not yet using computerized scanning
systems to analyze goods sold.
  Net Sales
 Gross Sales
 Sales Discounts
 Sales Returns and Allowances
 Transportation Out
 Cost of Sales
Merchandise Inventory
 The inventory of a merchandising entity consists of goods purchased for
resale.
 The merchandise inventory at the beginning of the accounting period is
called the beginning inventory.
Net Cost of Purchases
Under the periodic inventory method, net cost of purchases consist of gross
purchases minus purchases discounts and purchases returns and allowances
equals net purchases; plus transportation costs.
 Purchases
 Purchases Returns and Allowances
 Purchases Discounts
 Transportation In
Operating expenses
Operating expenses make up the third major part of the income statement for a
merchandising entity.
 Distribution costs or selling expenses are those expenses related directly
to the entity’s efforts to generate sales.
 Administrative expenses are those expenses related to the general
administration of the business.

 Activities
FINALS
Chapter 7: COMPLETING THE CYCLE FOR A MERCHANDISING BUSINESS
 Keywords / Key concepts
Preparing the Worksheet
The worksheet of a merchandising business is the same as that of a service
business except that it has to deal with the new accounts related to
merchandising transactions.
 Trial Balance Columns
 Adjustment Columns
 Omission of Adjusted Trial Balance Columns
 Income Statement and Balance Sheet Columns
Preparing the Financial Statements
 Income Statement
 Nature of Expense Method
 Function of Expense Method
 Statement of Changes in Equity
 Balance Sheet
 Adjusting and Closing Entries
 Post Closing Trial Balance

 Activities

Chapter 8: MANUFACTURING OPERATIONS

 Keywords / Key concepts
Accounting Manufacturing Activities
Two accounting systems may be used in accounting for manufacturing activities
–cost and non-cost.
  The cost system keeps perpetual records of the costs of raw material,
work in process and finished goods inventories.
 The non-cost system produces a manufacturing accounting system based
on the periodic inventory system.

Statement of Cost of Goods Manufactured

The cost of goods manufactured consists of the total manufacturing costs related
to the products completed during an accounting period. This statement is also
called the manufacturing statement.
Statement of Cost of Goods Sold
The difference in the income statement of a merchandising and a manufacturing
entity lies in the cost of goods sold section.
Worksheet for Manufacturing Entity
The worksheet for a manufacturing entity is basically the same as that for a
merchandising entity except that it includes a pair of columns for cost of goods
manufactured.

 Activities

Chapter 9: ACCOUNTING FOR PAYROLL

 Keywords / Key concepts
Definition of Terms
 Employee. Refers to any individual who is a recipient of salaries or wages.
 Employer. Means a person for whom an individual performs or performed
any service, of whatever nature, as the employee of such person.
 Payroll. Refers to the total amount paid to employees for services provided
during a period.
 Payroll period. Means a period for which an employer ordinarily makes
payment of salaries or wages to the employees.
 Gross pay. Salaries or wages means all remuneration paid for services
performed by an employee for his employer, including the cash value of all
remuneration paid in any medium other than cash.
  Employee Benefits. Private employees, whether permanent, temporary or
provisional, who is not over 60 years old, is subject to compulsory
coverage under the Social Security System (SSS) and the National Health
Insurance Program (NHIP) and the Pag-IBIG fund.
 Employee’s Payroll Deductions and Employer’s Payroll Espenses
1. Contributions
2. Withholding Taxes
 Net Pay. Amount to be paid to the employee.
 The Payroll System. Expenditures for labor costs and related payroll
expenses are usually significant for most business entities.
The components of the payroll system follow:
 Time Cards
 Payroll Register
 Employee Earnings Record
 Pay slip, Check or ATM
 Payroll Entries
 Remittances

Chapter 10: PARTNERSHIPS: BASIC CONSIDERATIONS AND FORMATION

 Keywords / Key concepts
In a contract of partnership, two or more persons bind themselves to
contribute money, property, or industry to a common fund, with the intention
of dividing the profit among themselves.
Characteristics of a Partnership
 Mutual Contribution
 Division of Profits or Losses
 Co-Ownership of Contributed Assets
 Mutual Agency
 Limited Life
 Unlimited Liability
 Income Taxes
Advantages and Disadvantages of a Partnership
Advantages versus Proprietorships
1. Brings greater financial capability to the business.
2. Combines special skills, expertise and experience of the partners.
3. Offers relative freedom and flexibility of action in decision-making.
Advantages versus Corporations
1. Easier and less expensive to organize.
2. More personal and informal.
Disadvantages
1. Easily dissolved and thus unstable compared to a corporation.
2. Mutual agency and unlimited liability may create personal obligations to
partners.
 3. Less effective than a corporation in raising large amounts of capital.
Partnership Distinguished from Corporation
 Manner of Creation
 Number of Persons
 Commencement of Juridical Personally
 Management
 Extent of Liability
 Right of Succession
 Terms of Existence
Classifications of Partnerships
1. According to object
A. Universal partnership of all present property
B. Universal partnership of profits
C. Particular partnership
2. According to liability
A. General
B. Limited
3. According to duration
A. Partnership with a fixed term or for a particular undertaking
B. Partnership at will
4. According to purpose
A. Commercial or trading partnership
B. Professional or non-trading partnership
5. According to legality of existence
A. De jure partnership
B. De facto partnership
Kinds of Partners
1. General partner. One who is liable to the extent of his separate property
after all the assets of the partnership are exhausted.
2. Limited partner. One who is liable only to the extent of his capital
contribution.
3. Capitalist partner. One who contributes money or property to the common
fund of the partnership.
4. Industrial partner. One who contributes his knowledge or personal service
to the partnership.
5. Managing partner. One whom the partners has appointed as manager of
the partnership.
6. Liquidating partner. One who is designated to wind up or settle the affairs
of the partnership after dissolution.
7. Dormant partner. One who does not take active part in the business of the
partnership and is not known as a partner.
8. Silent partner. One who does not take active part in the business of the
partnership though may be known as a partner.
 9. Secret partner. One who takes active part in the business but is not known
to be a partner by outside parties.
10. Nominal partner or partner by estoppel. One who is actually not a partner
but who represents himself as one.
Accounting for Partnership
 Owner’s Equity Accounts
 Loans Receivable from or Payable to Partners
Partnership Formation
 Valuation of investments by Partners
 Adjustment of Accounts Prior to Formation
 Opening Entries of a Partnership Upon Formation
 A Sole Proprietor and Another Individual Form a Partnership
 Two or More Sale Proprietors Form a Partnership

 Activities

Chapter 11: PARTNERSHIPS: OPERATIONS AND FINANCIAL REPORTING

 Keywords / Key concepts
Partners’ Equity in Assets Contrasted with Share in Profits or Losses
The basis on which profits or losses are shared is a matter of agreement among
the partners and may not necessarily be the same as their capital contribution
ratio. The equity of a partner in the net assets of the partnership should be
distinguished from a partner’s share profits or losses.
 Money, Property or Industry
 Performance Methods
Rules for the Distribution of Profits or Losses
The profits or losses shall be distributed in conformity with the agreement. If only
the share of each partner in the profits has been agreed upon, the share of each
in the losses shall be in the same proportion.
Correction of Prior Period Errors
The effect of the error correction will be divided based on the applicable profit
and loss ratio.
Distribution of Profits or Losses Based on Partners’ Agreement
The ratio in which profits or losses from partnership operations are distributed is
recognized as the profit and loss ratio.
 Equally or in other Agreed Ratio. Partnerships contracts may provide that
profit or loss be divided equally.
 Based on Partners’ Capital Contributions. Division of partnership profits in
proportion to the capital invested by each partner is most likely to be found
in partnerships in which substantial investments is the principal ingredient
for success. Capital may refer to either of the following:
 Ratio of Original Capital Investments
  Ratio of Capital Balances at the Beginning of the year
 Ratio of Capital Balances at the End of the Year
 Ratio of Average Capital Balances
 By Allowing Interest on Capital and the Balance in an Agreed Ratio
 By Allowing Salaries to Partners and the Balance in an Agreed
Ratio
 By Allowing Bonus to the Managing Partner Based on Profit and
the Balance in an Agreed Ratio
 By Allowing Salaries, Interest on Capital, Bonus to managing
Partner and the balance in an Agreed Ratio
Financial Reporting
 Purpose of Financial Statements
 Overall Considerations
 Going Concern
 Accrual Basis of Accounting
 Materiality and Aggregation
 Offsetting
 Frequency of Reporting and Comparative Information
 Consistency of Presentation
 Identification of the Financial Statements
 Complete Set of Financial Statements
 Statement of Financial Performance
 Statement of Changes in Equity
 Statement of Financial Position

Chapter 12: CORPORATIONS: BASIC CONSIDERATIONS

 Keywords / Key concepts
A corporation is an artificial being created by operation of law, having
the right of succession and the powers, attributes and properties expressly
authorized by law or incident to its existence (The Corporation Code of the
Philippines, sec. 2)
Attributes of a Corporation
1. A corporation is an artificial being with a personally separate and apart
from its individual shareholders or members
2. It is created by operation of law
3. It enjoy the right of succession
4. It has the powers, attributes and properties expressly authorized by law or
incident to its existence.
ADVANTAGES OF A CORPORATION
1. The corporation has the legal capacity to acts as a legal entity.
2. Shareholders have limited liability.
3. It has continuing of existence.
4. Shares of stock can be transferred without the consent of the other
shareholders.
5. Its management is centralized in the board of directors.
6. Shareholders are not general agents of the business.
7. Greater ability to acquire funds.
DISADVANTAGES OF A CORPORATION
1. A corporation is relatively complicated in formation and management.
2. There is a greater degree of government control and supervision.
3. It requires a relatively high cost of formation and operation.
4. It is subject to heavier taxation than other forms of business organizations.
5. Minority shareholders are subservient to the wishes of the majority.
6. In large corporations, management and control have been separated from
ownership.
7. Transferability of shares permits the uniting of incompatible and conflicting
elements in one venture.
Classes of Corporations
 Stock corporation. Corporations which have share capital divided into
shares and are authorized to distribute to the holders of such shares
dividends or allotments of the surplus profits on the basis of the shares
held.
 Non-stock corporation. A non-stock corporation is one where no part of its
income is distributable as dividends to its members, trustees or officers.
Other Classifications of Corporations
1. According to number of persons
A. Corporation aggregate
B. Corporation sole or a special form of corporation usually associated
with the clergy.
2. According to nationality
A. Domestic corporation
B. Foreign corporation
3. According to whether for public or private purpose
A. Public corporation
B. Private corporation
4. According to whether for charitable purpose or not
A. Ecclesiastical corporation
B. Eleemosynary corporation
C. Civil corporation
5. According to their legal right to corporate existence
 A. De jure corporation
B. De facto corporation
6. According to degree of public participation with regard to share ownership
A. Close corporation
B. Open corporation
C. Publicly-held corporation
7. According to their relation to another corporation
A. Parent or holding corporation
B. Subsidiary corporation
Steps in the Creation of a Corporation
1. Promotion
2. Incorporation
3. Formal organization and commencement of business operations
By Laws
These are the rules of action adopted by the corporation for its internal
government and for
the government of its officers, shareholders or members.
RIGHTS OF A SHAREHOLDER
The following are some of the rights of a shareholder:
1. Right to be issued certificate of stock or other evidence of share
ownership and to transfer such shares.
2. Right to attend and vote in person or by proxy at shareholders’ meeting.
3. Right to elect and remove directors.
4. Right to adopt, amend or repeal the by-laws.
5. Right to purchase a portion of any new shares issued to maintain the
same percentage of stock ownership. This right is known as the pre-
emptive right. However, this right is not absolute and may be denied.
6. Right to receive dividends when declared.
7. Right to inspect corporate books and records, and to receive financial
reports of the corporation’s operations.
8. Right to participate in the distribution of corporate assets upon dissolution.
Components of a Corporation
1. Corporators are those who compose a corporation whether as
shareholders or members, at anytime.
2. Incorporators are shareholders or members mentioned in the articles of
incorporation as originally forming and composing the corporation and are
signatories to said articles of Incorporation.
3. Shareholders or stockholders are corporators in a stock corporation.
4. Members are corporators of a non-stock corporation.
5. Subscribers are persons who have agreed to take and pay for original,
unissued shares of a corporation formed or to be formed.
 6. Promoters are persons who bring about or cause to bring about the
formation and organization of a corporation.
7. Underwriters are usually investment bankers.
8. Independent director is a person who apart from his fees and
shareholdings is independent of management and free from any business
or other relationship
Classes of Shares in General
1. Par value shares
2. No-par value shares
3. Voting shares
4. Non-voting shares
5. Ordinary shares
6. Preference shares
7. Promotion shares
8. Treasury shares
9. Convertible shares
Minimum Subscription and Paid - In Capital
Basic Corporate Organizational Structure
The ultimate control of the corporation rests with the shareholders. They are the
owners of the corporation.

Corporate Books And Records

1. Minutes book
2. Stock and transfer book
3. Books of accounts
4. Subscription book
5. Shareholders’ ledger
6. Subscribers' ledger
7. Stock certificate book

 Activities
Chapter 13: CORPORATION: SHARE CAPITAL, RETAINED EARNINGS AND
FINANCIAL REPORTING
 Keywords / Key concepts
Overview of Shareholders’ Equity
The owners’ equity section of a corporation’s statement of financial position is
called shareholders’ equity. Shareholders equity has two major components –
share capital (contributed or paid –in capital) and retained earnings.
 SHARE CAPITAL reflects the amount of resources received by a
corporation as a result of investment by shareholders, donation or other
share capital transactions.
The share, contributed or paid-in capital is further divided into the
following:
 Legal Capital. Capital contributed by shareholders comes from
the sale of shares of stock.
 Share Premium. ( or additional Paid-In Capital). It is the portion
of the paid –in capital representing amounts paid by
shareholders in excess of par.
Two Basic Types of Shares
 Ordinary Share. This share represents the basic ownership class of the
corporation.
 Ordinary Share. This share represents the basic ownership class of the
corporation.
Terms Related to Share Capital
 Authorized Share Capital
 Issued Share Capital
 Subscribed Share Capital
 Outstanding Share Capital
 Treasury Stock
Accounting for Issuance of Share Capital
The entry to record the issuance of share capital depends on whether the stock
is with or without par value.
Section 65 of the Corporation Code prohibits the original issue of share capital
(or capital stock) for a consideration less than the par or stated value (i.e. issued
at a discount).
CONSIDERATIONS FOR ISSUANCE OF SHARES
Share capital may be issued in exchange for any of the following considerations:
1. Actual cash paid to the corporation.
2. Tangible or intangible properties actually received by the
corporation.
3. Labor already performed for or services actually rendered to the
corporation.
4. Previously incurred indebtedness by the corporation.

Share Issuance for Cash

Most share issues are for cash since the primary reason for issuing shares is to
raise capital for a corporation’s operating activities.
 Issuing Share Capital at Par
 Issuing No-Par Share Capital
Subscription of Shares
The subscription contract is a legally binding contract which provides for the
number of shares subscribed, the subscription price, the terms of payment and
other conditions of the transaction.
Subscriptions Receivable is a shareholders’ equity account.
Treasury stocks are shares of stock which have been issued and fully paid for,
but
subsequently reacquired by the issuing corporation either by purchase,
redemption, donation or through other lawful means.
 Purchase of Treasury Stock
 Reissuance of Treasury stock
 Retirement of Treasury Stock
 With Gain on Retirement.
 With loss on Retirement.
SUMMARY OF THE EFFECT ON ASSETS, LIABILITIES AND EQUITY
At this point, it is useful to summarize the effects of the basic shareholders’
equity transactions on the elements of the statement of financial position:

 RETAINED EARNINGS (or accumulated profits or losses) is the amount of

capital accumulated and retained through the profitable operations of the
business.
OVERVIEW OF RETAINED EARNINGS
Retained earnings represent the component of the shareholders’ equity arising
from the retention of assets generated from the profit-directed activities of the
corporation.
DIVIDENDS in GENERAL
Retained earnings is not a cash fund waiting to be distributed as dividends.
The declaration and payment of dividends involve three important dates and they
are:
 Date of Declaration
On the date of declaration, the board of directors will adopt a resolution
declaring that a dividends is to be paid.
 Date of Record
A list of shareholders entitled to the declared dividends is prepared at the
date of record.
 Date of Payment
The corporation settles its liability on this date.
CASH DIVIDENDS
Majority of dividends distributed by corporations is paid in cash.
SHARE DIVIDENDS
A corporation may distribute to shareholders additional shares of the entity’s own
share as share dividends.
 Small Share Dividends
Small share dividends are dividends in which the additional shares issued
are less than 20% of the previously outstanding shares.
 Large Share Dividend
If the share dividend is 20% or more of the previously outstanding shares
such that the effect is to reduce materially the market value per share,
STATEMENT OF RETAINED EARNINGS
A retained earnings statement is normally divided into two major sections:
 Appropriated. This section presents the beginning balance of the retained
earnings appropriated account, any additions or deductions during the
period, and ending balance.
 Unappropriated. This section shows the beginning balance of the retained
earnings unappropriated account, correction of prior period error, profit or
loss for the period, dividends, transfers to and from the appropriated and
unappropriated accounts, and the ending balance.

V. GENERAL REFLECTION
 This accounting course provided me a great opportunity to
understand the various important aspects of accounting that I believe will
be helpful in my future practical life. It is a good subject to learn just like
my instructor said that "accounting knowledge is always in demand”. I had
learned was the definition of the “Accounting Equation”, I can conclude
that the most important thing you must master is you should try to
distinguish the meaning of the assets, liability and owner's equity. Assets
are economic resources of the business that are expected to bring
benefits for the business in the future, the important point is it can bring
you benefits in the future instead of consuming at the end of the year,
liability which is the name given to the amounts owing to these people or
organizations for these assets and the capital we can also called owners’
equity is the economic resources that was contributed by the owners of
the business to the business. So far, I am on a good path learning the
basics of accounting. I like the subject so much. Lecturer teaches us in a
simple and straight forward way which I appreciate a lot. In fact, these all
make me as a newbie to get a very great experience in discovering fun in
accounting. In addition, accountancy helps to track our personal finance,
we have to meet our daily living expenses, and it is a good practice to
keep a record of the daily expenditure, and it is always good to understand
the difference between Needs and Wants. I came to a conclusion that our
whole life follows a simple rule that for every debit entry there is a credit
entry, or for every give there is a take, or for each action (positive or
negative) there is reaction, means this double entry accounting system is
to be followed till the end of our lives. I do hope I will have more classes
like this in my future study life so that I can really learn more things.

VI. GRADING RUBRICS

Completeness 1 All the needed 1 of the evidences 2 or more
evidences are needed is not evidences needed
provided. presented. are not presented.
Relevance 3 All the learning 1 of the learning 2 or more of the
experiences cited experiences cited on learning
on the reflection the reflection is experiences cited
are concrete and vague and quite on the reflection
are relevant to related to their future are vague and are
their future profession; 1 not related to their
profession; the recommendation future profession;
recommendations given is not suited to 2 or more
given can be used the difficulties. recommendations
as the solutions to given are not
the difficulties. suited to the
difficulties.
Understanding 2 Summary of the Summary of the Summary of the
the topic topic is explained topic is not topic is vague and
thoroughly, and is explained not substantial.
extremely thoroughly, and is
substantial. quite substantial.

Presentation and 1 The ideas are The ideas are The ideas are
Organization presented in an presented with some presented with lots
exemplary inconsistencies/error of
English s in the inconsistencies/err
structure/gramma structure/grammar ors in the
r and are well- and are quite structure/grammar
organized. organized. and are not
organized.
Promptness 1 Submitted on the Submitted after
deadline. the deadline.
Total