FINANCIAL ACCOUNTING AND ▪ Merchandising/Trading

REPORTING ❖ engages in buying goods

and sells them in their
• Grading System (Refer to course
original form
plan)
▪ Manufacturing
o Class Participation (20%)
❖ engages in buying raw
▪ Assignment
materials for conversion
▪ Uncoordinated quiz (Not
into finished products
departmentalized)
o Forms of business
▪ Attendance is not included
▪ Sole proprietorship
▪ Seldom recitation
❖ one owner, the
o Book Requirement
proprietor;
▪ Fundamentals of Accounting
❖ no legal personality
▪ Basic Accounting made easy
▪ Partnership
• Instructions in Quizzes/Exams
❖ formed by the two or
o Call the attention of the contact
more persons who bind
person if ever na hindi align ‘yung
themselves to contribute
instructions ng general
money, property or
insurrections sa specific
industry into a common
instructions
fund with the intention of
▪ Follow the specific
dividing the profit among
instructions if ever hindi siya
themselves
ma-contact.
❖ has a legal personality
Introduction to Accounting separate from the
partners composing it
• Business ❖ governed by RA 386
o An organization engaged in the (New Civil Code of the
trade of goods, services, or both Philippines)
to consumers ▪ Corporation
o Enterprise or firm ❖ artificial being created
o Generally administered for profit by operation of law,
in order to increase the wealth of having the right of
owners succession and the
• Forms of business enterprise powers, attributes, and
▪ Services properties expressly
❖ rendering of lawful authorized by law or
services for a fee incidental to its
❖ Ex. services provided by existence. (Sec. 2, RA
professionals, and those 11232, Revised
rendered by individuals Corporation Code of the
possessing technical skills Philippines
❖ has a legal personality
❖ owners are called
shareholders,
 stockholders (for stock o Accounting vs Bookkeeping
corporations) or
Bookkeeping Accounting
members (for non-stock • the procedural or • conceptual
corporation) mechanical and goes
• Accounting aspect of beyond
accounting; bookkeeping;
o art of recording, classifying and • Includes the
summarizing in a significant • Involves the set- interpretation
manner in terms of money, up, update and of information
maintenance of recorded
transactions and events which accounting under
are in part at least of a financial records; bookkeeping;
character and interpreting the • Practice can
results thereof. – American • May be done by only be done
non-accountants by Certified
Institute of Certified Public Public
Accountants (AICPA) Accountants
(CPAs).
o the process of identifying,
measuring and communicating
economic information to permit
o Republic Act 9298 (Philippine
informed judgment and decision
Accountancy Act of 2004)
by users of the information –
▪ regulates the practice of
American Accounting
accountancy in the
Association (AAA)
Philippines
o a service activity – to provide
▪ Objectives (Section 3 of RA
quantitative information,
9298 shall provide the
primarily financial in nature about
following objectives:)
economic entities that is
❖ Standardization and
intended to be useful in making
regulation of accounting
economic decisions. –
education;
Accounting Standards Council
❖ Examination for
(ASC)
registration of certified
o Basic purpose
public accountants; and
▪ to supply information to users
❖ Supervision, control and
to help them make informed
regulation of the
judgments and better
practice of accountancy
decisions
in the Philippines.
o Language of business
o Scope of the practice of
▪ Since it is used to
accountancy under Sec. 4 of RA
communicate financial
9298
information to interested
▪ Practice of Public
parties, business owners,
Accountancy
management, investors and
▪ Practice in Commerce and
creditors among others
Industry
▪ Practice in
Education/Academe
▪ Practice in the Government
o State policy as regards practice transaction and
of accountancy in the Philippines accounting records; or
▪ The State recognizes the ❖ the preparation, signing,
importance of accountants or certification for clients
in nation building and of reports of audit,
development. Hence, it shall balance sheet, and other
develop and nurture financial, accounting
competent, virtuous, and related schedules,
productive and well-rounded exhibits, statements or
professional accountants reports which are to be
whose standards of practice used for publication or for
and service shall be credit purposes, or to be
excellent, qualitative, world filed with a court or PRC
class and globally government agency, or
competitive through to be used for any other
inviolable, honest, effective, purpose; or
and credible licensure ❖ the design, installation,
examinations and through and revision of
regulatory measures, accounting system; or
programs that foster their ❖ the preparation of
professional growth and income tax returns when
development. (Sec. 2, RA related to accounting
9298) procedures; or when
o Constitute practice of public he/she represents clients
accountancy before government
▪ shall constitute in a person, agencies on tax and
be it his/her individual other matters related to
capacity, or as a partner or accounting or renders
as a staff member in an professional assistance in
accounting or auditing firm, matters relating to
holding out himself/herself as: accounting procedures
❖ one skilled in the and the recording and
knowledge, science and presentation of financial
practice of accounting, facts or data.
and as a qualified person o Constitute practice in commerce
to render professional and industry
services as a certified ▪ shall constitute in a person
public accountant; or involved in decision making
❖ offering or rendering, or requiring professional
both, to more than one knowledge in the science of
client on a fee basis or accounting, or when such
otherwise, services such employment or position
as the audit or requires that the holder
verification of financial
 thereof must be a certified Particularis de Computis et
public accountant Scripturis (Details of
o Constitute practice in education Calculation and Recording)
and academe on the subjects of record
▪ shall constitute in a person in keeping and double-entry
an educational institution accounting
which involve teaching of ▪ became the reference text
accounting, auditing, and teaching tool on the
management advisory subjects of bookkeeping and
services, finances, business accounting for the next
law, taxation and other several hundred years.
technically related ▪ the first time that symbols for
subjects: Provided that plus and minus appeared in a
members of the Integrated printed book.
Bar of the Philippines may be ▪ the first known published
allowed to teach business work on the topic of double-
law and taxation subjects entry bookkeeping
o Constitute practice in the ▪ the first known book printed in
government Italy to contain algebra
▪ shall constitute in a person • Accounting basics are also
who holds or is appointed to, mentioned in the New Testament of
a position in an accounting the Bible in the Book of Matthew as
professional group in well as in other religious texts such as
government or in a the Qur’an.
government-owned and/or • The first record of accounting
controlled corporation occurred thousands of years ago in
including those performing Mesopotamia
proprietary functions, where (https://fremont.edu/history-of-
decision making requires accounting/)
professional knowledge in • Earliest record of Accounting
the science in accounting, or o 7,000 years ago, in the ruins of
where a civil service eligibility Mesopotamia
as a certified public o People relied on accounting
accountants is a prerequisite. techniques which are still utilized
today to determine if surplus or
HISTORY OF ACCOUNTING
shortage occurred in the crops
• Luca Pacioli that are harvested each season
o In 1494, he described double- • Roman Empire
entry bookkeeping in his “Summa o “The Deeds of the Divine
de Arithmetica, Geometria, Augustus” is an account of
Proportini et Proportonalita” Emperor Augustus’ financial
▪ included a twenty-seven- dealings
page treatise on ▪ listed such quantities as
bookkeeping titled, distributions to the people,
 grants of land, building of o involves recording and classifying
temples, money to military business transactions, and
veterans, religious offerings, preparing and presenting
and money spent on financial statements to be used
theatrical shows and by internal and external users
gladiator events. This ▪ In the preparation of
discovery hints at the scope financial statements, strict
of accounting information compliance with generally
available to the emperor, accepted accounting
which he then probably used principles or GAAP is
for planning and decision- observed
making purposes. o primarily concerned in
▪ Roman historians also processing historical data
recorded public revenues, • Managerial Accounting
the amount of money in the o focuses on providing information
state treasury, taxes, slaves, for use by internal users, the
freedmen, and more. management
• Middle Ages o deals with the needs of the
o bartering was the primary form of management rather than strict
money-changing, but when compliance with GAAP
Europe changed to a monetary o involves financial analysis,
economy is the 13th Century, budgeting and forecasting, cost
merchants began relying on analysis, evaluation of business
bookkeeping to keep a record of decisions, and similar areas
multiple transactions. • Cost Accounting
▪ This is when double-entry o Often times considered as a
bookkeeping got its start, subset of management
which is when a debit and accounting
credit value is entered for o recording, presentation, and
each transaction by the analysis of manufacturing costs
accountant. since this type of business
o Merchants at the time used enterprise have the most
accounting as an ad-hoc complicated costing process
ordering system o Cost accountants also analyze
▪ provided them with constant actual costs versus budgets or
information about their standards to help determine
businesses that they could future courses of action
use in decision-making to regarding the company's cost
grow their business as they management
saw fit. • Auditing
o External auditing
Fields of Accounting ▪ examination of financial
• Financial Accounting statements by an
independent party with the
 purpose of expressing an
opinion as to fairness of
presentation and
compliance with GAAP
o Internal auditing
▪ evaluates the adequacy of a
company's internal control
structure by testing
segregation of duties,
policies and procedures,
degrees of authorization, and
other controls implemented
by management
• Tax Accounting
o includes tax planning and
preparation of tax returns
o determines income tax and other
taxes, tax advisory services such
as ways to minimize taxes legally,
evaluation of the consequences
of tax decisions, and other tax-
related matters
o helps clients follow rules set by tax
authorities
• Accounting Information Systems (AIS)
o involves the development,
installation, implementation, and
monitoring of accounting
procedures and systems used in
the accounting process
o includes the employment of
business forms, accounting
personnel direction, and software
management
• Fiduciary Accounting
o handling of accounts managed
by a person entrusted with the
custody and management of
property of or for the benefit of
another person
o Ex. trust accounting, receivership,
and estate accounting
• Forensic Accounting
o involves court and litigation
cases, fraud investigation, claims
and dispute resolution, and other
areas that involve legal matters
o popular trends in the accounting
today
Generally Accepted Accounting
Principles (GAAP)
• sets of accounting standards and
procedures established and
developed by recognized
professional accounting body,
adherence to which would achieve
the objectives of accounting
• Financial Reporting Standards
Council (FRSC)
o Main function: to establish GAAP
in the Philippines
o the standard-setting body
comprising generally accepted
accounting principles in the
Philippines
o Currently, these standards are
called Financial Reporting
Standards (PFRS) which are lifted
from the International Financial
Reporting Standards (IFRS)
o established by the Professional
Regulatory Commission under
the Implementing Rules and
Regulations of the Philippine
Accountancy of Act of 2004 to
assist the Board of Accountancy
o successor of the Accounting
Standards Council (ASC)
▪ created in November 1981
by the Philippine Institute of
Certified Public Accountants
(PICPA) to establish GAAP in
the Philippines
o carries on the decision made by
the ASC to converge Philippine
 accounting standards with o PIC members are appointed by
international accounting the FRSC and include
standards issued by the accountants in public practice,
International Accounting the academe and regulatory
Standards Board (IASB) bodies and users of financial
o consists of a chairman and 14 statements
members are appointed by the o replaced the Interpretations
BOA and include representatives Committee created by the ASC
from the Board of Accountancy in 2000
(BOA), Securities and Exchange
Commission (SEC), Bangko Basic Concepts and Principles of
Sentral ng Pilipinas (BSP), Accounting
Financial Executives Institute of • Accounting Concepts (Accounting
the Philippines (FINEX), Postulates/Assumptions)
Commission on Audit (COA) and o relevant notions which
Philippine Institute of Certified accountants consider as proper
Public Accountants (PICPA) and appropriate in recording
o monitors the technical activities business transactions
of the IASB and invites comments ▪ Business Entity
on exposure drafts of proposed Concept/Assumption
IFRSs as these are issued by the ❖ business is viewed as a
IASB person or entity with
▪ When finalized, these are identity and personality
adopted as Philippine distinct, separate and
Financial Reporting apart from that of its
Standards (PFRSs) owner/s
o similarly monitors issuances of the ▪ Going Concern
International Financial Reporting ❖ business is viewed to
Interpretations Committee (IFRIC) operate indefinitely for a
of the IASB, which it adopts as period carrying out its
Philippine Interpretations–IFRIC perceived objectives
o PFRSs and Philippine ❖ elements in the financial
Interpretations–IFRIC approved statements should be
for adoption are submitted to the valued based on the
BOA and PRC for approval. accounting conventions
• Philippine Interpretations Committee of objectivity and
(PIC) historical cost
o Was formed by the FRSC in ▪ Time Periods/Periodicity
August 2006 to assist them in ❖ life of the enterprise is
establishing and improving divided into several
financial reporting standards in periods in which financial
the Philippines statements are prepared
o Issues the implementation and presented for each
guidance on PFRS period covered
 ➢ The period is called as
accounting/reporting
period (may be
monthly, quarterly,
semi-annually but
generally annually
✓ Annual: May be
calendar year
(covers 12
months; January
1 – December
31) or fiscal year
(any twelve-
month period)
▪ Accrual
❖ revenue is recognized
and reported when it is
earned without regard as
to whether the cash is
already recorded
❖ as long as the service has
been performed and
therefore a claim to
received cash is created, • Accounting Conventions
there also arises the
recognition of revenue
➢ results to recognition
of a right to receive
cash also known as • Accounting Principles
receivable
❖ an expense is recognized
and reported when it is
incurred without regard
as to whether or not cash
is already paid
➢ as a result of an
accrual of an
expense, a liability is
created.
▪ Cash Basis
❖ requires cash collection
before a revenue is
recognized whether or
not the service has been
performed
❖ receipt of cash
associated with the
rendering of service that
would give rise to the
recognition of revenue
❖ an item of expense is
recognized when it is
paid irrespective of
whether or not it is
incurred
❖ not a generally
accepted accounting
principle in financial
accounting
▪ Monetary Unit
❖ transactions and
economic events are
measured by a stable
monetary unit without
regard to the fluctuation
of its value
o customary accounting practices
resorted to by accountants
because of their long existence
and use
o define actions that will best
accomplish the objectives of
accounting
o a doctrine which is the basis of all
other rules, procedures and
methods used in the accounting
practice
o Measurement Principle
▪ Cost Principle
❖ requires that assets and
liabilities are initially
recorded and reported
at acquisition cost or
historical cost
▪ Fair Value Principle
 ❖ certain assets and
liabilities be initially
recorded and reported
at Fair Value
❖ refers to an asset’s sales
price agreed upon by a
will buyer and seller,
assuming both parties
are knowledgeable and
enter the transaction
freely
❖ represents the estimated
worth of various assets
and liabilities that must
be listed on a company’s
books
o Revenue recognition Principle
▪ complements the accrual
accounting
▪ revenue or income must be
recognized when it is earned,
that is when the services
have been performed or
rendered already or the
goods are sold and delivered
to the buyer
o Expense Recognition Principle
o Full Disclosure Principle
▪ requires that all relevant
information must be made
available to the users either
by recognition or by showing
it the notes to the financial
statements since the
objective of accounting is to
provide information to be
used in decision-making
• Accounting Constraints
o pertains to the limitations or
challenges in providing financial
information
o Cost Constraint
▪ Cost-benefit analysis
provides that the benefit that
will be derived should not be
outweighed by the cost of a
particular undertaking
❖ Under the cost constraint,
an accounting
information may be
withheld if the benefit
that will be deriving in
providing such
information tilt the scale
in favor of the cost
associated
o Materiality Constraint
▪ pertains to the level of
significance of financial
information such that
omission of which would
affect the decision of the
users
▪ To determine whether an
item is material or not, a
threshold must be set
▪ Ex. A company may adopt a
policy that all items of
equipment that will be
purchased with a cost of
P5,000 and below may be
charged to an expense
• Conceptual Framework for Financial
Reporting
o describes the objective of, and
the concepts for, general
purpose financial reporting
o Purpose
▪ assist the International
Accounting Standards Board
(Board) to develop IFRS
Standards (Standards) that
are based on consistent
concepts;
▪ assist preparers to develop
consistent accounting
policies when no Standard
applies to a particular
 transaction or other event, or
when a Standard allows a
choice of accounting policy;
and
▪ assist all parties to understand
and interpret the Standards
_______________________________________
Qualitative Characteristics of
Accounting Information
• Fundamental qualitative
characteristics
o Relevance
▪ capability of the financial
information to make a
difference in the decisions
made by users; even if some
users choose not to take
advantage of it or are
already aware of it from
other sources, it can make a
difference in a decision
▪ Ingredients - Financial
information is relevant if it has
predictive value,
confirmatory value or both.
❖ Predictive value
➢ if financial
information can be
used as an input to
processes employed
by users to predict
future outcomes
➢ Financial information
need not be a
prediction or
forecast to have
predictive value
➢ Financial information
with predictive value
is employed by users
in making their own
predictions
❖ Confirmatory value
➢ Financial information
has confirmatory
value if it provides
feedback about
(confirms or
changes) previous
evaluations.
▪ The predictive value and
confirmatory value of
financial information are
interrelated. Information that
has predictive value often
also has confirmatory value.
❖ Ex. Revenue information
for the current year,
which can be used as the
basis for predicting
revenues in future years,
can also be compared
with revenue predictions
for the current year that
were made in past years.
The results of those
comparisons can help a
user to correct and
improve the processes
that were used to make
those previous
predictions.
▪ Effect of Materiality Concept
on the Relevant financial
information
❖ Information is material if
omitting, misstating or
obscuring it could
reasonably be expected
to influence decisions
that the primary users of
general-purpose
financial reports make
based on those reports,
which provide financial
 information about a ➢ no bias in the
specific reporting entity selection or
❖ the Board cannot specify presentation of
a uniform quantitative financial information
threshold for materiality ➢ not manipulated to
or predetermine what increase the
could be material in a probability that
situation financial information
o Faithful Representation will be received
▪ Financial information must favorably or
not only represent relevant unfavorably by users
phenomena, but it must also ➢ opposite of relevant
faithfully represent the which affects
substance of an economic decisions of the users
phenomenon and its legal ➢ supported by the
form are the same. If not, exercise of prudence
providing only the legal form ✓ exercise of
would not faithfully represent caution when
the economic phenomenon making
▪ Ingredients: To be a perfectly judgements
faithful representation, a under conditions
depiction would have three of uncertainty
characteristics ✓ Assets & Income
❖ Complete are not
➢ includes all overstated
information ✓ Liabilities and
necessary for a user expenses are not
to understand the understated
phenomenon being ✓ These
depicted misstatements
➢ Ex. a complete could lead to the
depiction may also overstatement
entail explanations of and
significant facts understatement
about the quality of income or
and nature of the 
 expenses in the
items, factors and future periods
circumstances that ❖ Free from error
might affect their ➢ there are no errors or
quality and nature, omissions in the
and the process used description of the
to determine the phenomenon, and
numerical depiction the process used to
❖ Neutral produce the
 reported information financial information
has been selected and does not
and applied with no undermine the
errors in the process. usefulness of the
In this context, free information if the
from error does not estimates are clearly
mean perfectly and accurately
accurate in all described and
respects explained. Even a
➢ Ex. an estimate of an high level of
unobservable price measurement
or value cannot be uncertainty does not
determined to be necessarily prevent
accurate or such an estimate
inaccurate; from providing useful
However, a information.
representation of • Enhancing qualitative characteristics
that estimate can be (enhances the usefulness of financial
faithful if the amount information)
is described clearly o also help determine which of two
and accurately as ways should be used to depict a
being an estimate, phenomenon if both are
the nature and considered to provide equally
limitations of the relevant information and an
estimating process equally faithful representation of
are explained, and that phenomenon
no errors have been o Comparability
made in selecting ▪ enables users to identify and
and applying an understand similarities in, and
appropriate process differences among, items
for developing the ▪ requires at least two items
estimate ▪ does not make unlike things
➢ When monetary look alike
amounts in financial o Verifiability
reports cannot be ▪ helps assure users that
observed directly information faithfully
and must instead be represents the economic
estimated, phenomena it purports to
measurement represent
uncertainty arises. ▪ different knowledgeable and
The use of independent observers could
reasonable estimates reach consensus, although
is an essential part of not necessarily complete
the preparation of
 agreement, that a depiction
is a faithful representation
o Timeliness
▪ having information available
to decision-makers in time to
be capable of influencing
their decisions
▪ older the information is the
less useful it is (but some
information may continue to
be timely long after the end
of a reporting period
because, for example, some
users may need to identify
and assess trends)
o Understandability
▪ classifying, characterizing
and presenting information
clearly and concisely make it
understandable
▪ excluding complex
information about an
economic phenomenon
from financial reports might
be understood easily but
could possibly be misleading
Financial Statements
• periodic reports generated through a
series of systematic steps in the
accounting process
• these financial statements are
mutually interrelated
o Statement of Comprehensive
Income/Income Statement
▪ provides information about
an entity’s performance or
results of operations
▪ the amount of profit or loss
generated or suffered is the
core of this financial
statement.
o Statement of Financial
Position/Balance Sheet
▪ shows the entity’s assets,
liabilities and owner’s equity
which help to assess liquidity,
solvency and financial
flexibility
o Statement of Changes in Equity
▪ provides information on the
factors that have changed
the capital of the entity
o Statement of Cash Flows
▪ shows the ability of the entity
to generate a positive cash
flow.
▪ shows in detail the inflows
and outflows of cash from
operating activities, investing
activities and financing
activities
o Notes to the Financial Statements
▪ support additional
information to complement
the data presented on the
financial statements
• Objective and Scope of Financial
Statements
o objective of financial statements
is to provide financial information
about the reporting entity’s
assets, liabilities, equity, income
and expenses that is useful to
users of financial statements in
assessing the prospects for future
net cash inflows to the reporting
entity and in assessing
management’s stewardship of
the entity’s economic resources
• Elements of Financial Statements
o assets, liabilities and equity, which
relate to a reporting entity’s
financial position; and
o income and expenses, which
relate to a reporting entity’s
financial performance
o Asset
 ▪ present economic resource • Presence of documents means that
controlled by the entity as a business transactions occurred
result of past events • Official Receipts
o Economic Resource o Evidences a particular amount of
▪ a right that has the potential cash has been received by the
to produce economic company
benefits o Proof of business transaction
o Liability • Sales Invoice
▪ present obligation of the o Evidence that a particular
entity to transfer an transaction, specifically sale
economic resource as a transactions, has taken place
result of past events o Usual to business that sells goods
o Equity and property
▪ residual interest in the assets o For service business, official
of the entity after deducting receipts are given
all its liabilities • How are business transactions
o Income analyzed?
▪ increases in assets, or o Is recorded, by analyzing its
decreases in liabilities, that effect (increase or decrease) on
result in increases in equity, the elements of financial
other than those relating to statements taking into
contributions from holders of consideration the dual effect of a
equity claims transaction
o Expenses o Under the double entry
▪ decreases in assets, or bookkeeping system, a business
increases in liabilities, that transaction has a dual effect
result in decreases in equity, (increase or decrease), an effect
other than those relating to in one account with
distributions to holders of corresponding effect on the
equity claims other
o After analyzing the dual; effect,
Business Transactions the amount of increase or
• Occurrences of events/activities decrease will be assigned to
undertaken by the entity that affect specific account representing
any of the elements of financial the elements of financial
statements statement affected
• Will only be recorded if any of the five ▪ The transaction will be
elements on financial statements are recorded in the books of
included accounts
• Normally supported by source o Different Possible Effects of a
documents like Official Receipts (OR), Transaction
Sales Invoices among others which
are a basis in recording business
transactions
 Owner’s Equity…) has increased
or decreased
• Chart of Accounts
o List of accounts by the business in
recording business transactions
o Each element is broken down
into different accounts
• Examples of Asset Accounts
▪ Buying of equipment on
o Cheque should be a good one,
account/Issuing a bank loan
can be converted into cash
– mortgage payable
o Accounts receivable has no
▪ Increase in cash (asset),
evidence unlike notes, sales
increase in service revenue
invoice lang
(equity)/Owner investing in
business capital
▪ Buying of supplies by paying
in cash
▪ Payment of accounts
payable in cash
▪ Withdrawals (Decrease in
cash, and decrease in • Examples of Liability Accounts
equity)
▪ Accrual of expenses
(Increase in liabilities,
decrease in equity) – Utilities
payable and Accrued
Expense
▪ Unearned Revenue – Entity
has recorded unearned
revenue pero (May • Examples of Owner’s Equity Accounts
advanced payment ni
customer, but hindi pa nar-
render si service) (In, E and
De, L)
▪ Promissory Notes: Paying
accounts payable using • Examples of Revenue Accounts
promissory note (In & De in
Liab)
▪ Last: Usual transactions wala
• What is an account?
o A device used to summarize the
effect pf transaction
o To identify what a particular
element (Assets, Liabilities,
• Examples of Expense Accounts
o The following worksheets illustrate
how a transaction is being
analyzed. Take note that the
transaction worksheet is not the
formal way of transactions but
merely facilitates the analysis.

• Elements of Financial Statements:

Assets, Liabilities, Equity, Income,
Expense
• Transaction Analysis Worksheet
o Determining its effect (increase or
decrease) on the elements of
financial statements and
identifying the specific accounts
involve under such elements
affected
o Basic accounting equation and
expanded accounting equation
• Basic Accounting Equation:
o Assets = Liabilities + Owner’s Equity
o Assets = Liabilities + Owner’s Equity
+ Revenues – Expenses
o The sources of assets of the
business entity are those provided
by the owners (OE) and those
provided by the creditors
(Liabilities)
o In claims of assets, there are 2, the
owner and the creditors
• Expanded Accounting Equation
o Revenue is added to OE so OE
increases
o Expenses is deducted from OE so
OE decreases (or capital)
o In sum, Profit increases OE, Loss
decreases OE
o Profit (Loss) is the difference
between the Revenue and
Expense
o Profit: R > E, Loss R < E
• Illustration
• Financial Statements
 JOURNALIZING, POSTING, and TRIAL
BALANCE

• Journalizing
o Process of recording business
transactions and accounting
events in chronological order
o At least one debit and credit entry
o One entry = simple entry
o More than one = compound entry
Note: May error daw dito, ie-edit pa o Uses general journal
daw: o The book of original entry
o Provides the following columns: (1)
date, (2) account titles and brief
explanation, (3) posting reference,
(4) debit and credit amount
o PR – General Ledger Account
Number (Once done na tayo sa
posting)
• Debit and Credit Steps:
o Identify the normal balance of an
account.
▪ Debit – Left Side
▪ Credit – Right Side
▪ Asset, Expense, and Owner’s
Drawing has debit normal
balance. The rest should be
credited.
 o Identify the effect (whether
increase or decrease) of the
transaction on the elements of
financial statement (Asset for
example) and specifically to the
particular amount (Cash for
example) involved.
▪ All increases should be on the
debit.
▪ All decreases should be on the
credit. (Opposite of normal
balance, e.g. cash)
Note: Check journal book for journal entries
of some
 • Trial Balance
o Listing of all the accounts and the
corresponding balances
o Ensures the equality of debit and
credit after all the transactions
have been journalized and posted
• Posting o Equal amount of debit and credit
o Transferring of amounts from the does not guarantee that no error in
journal to the appropriate column recoding the transactions have
(debit/credit) in the general ledger been encountered
(T-accounts) o Presentation of accounts should
o General Ledger be in the following order:
▪ Book where entries from the ▪ Assets
journal are transferred or ▪ Liabilities
posted ▪ Owner’s Equity
▪ Book of final entry ▪ Revenues
▪ A T-account is prepared for ▪ Expenses
the purposes of solving
problems
▪ At the end of each reporting
period, postings made in each
ledger account must be
summarized in order to
determine the account
balance and eventually
facilitate the preparation of
trial balance

ADJUSTING ENTRIES

• Journal entries that need to be

prepared at the end of the reporting
period to update the balance of
some accounts
• If not adjusted, effects such as the ▪ At the end of the reporting
following will occur: period, an adjusting entry will
o Overstatement of assets resulting be prepared to recognize the
to understatement of expenses; or used or expired portion of an
(prepayments under the asset asset as an expense, thereby
method) debiting an expense account
o Overstatement of expenses and crediting an asset
resulting to understatement of account equal to the amount
assets; or (prepayments involving used or expired.
expense method) ▪ SAMPLE: On October 1, 2019,
o Understatement of expenses Office Supplies amounting to
resulting to understatement of P80,000 were purchased for
liabilities; or (Accrued expenses) cash. At December 31, 2019,
o Understatement of the end of the reporting period,
income/revenue resulting to the amount of supplies used
understatement of assets; or was P30,000.
(accrued income) ❖ JOURNAL ENTRY
o Overstatement of liabilities,
resulting to understatement of
income/ revenue; or (unearned
income using the liability method)
o Overstatement of
income/revenue, resulting to
understatement of liabilities.
(Unearned income using the ❖ ADJUSTING ENTRY
income/revenue method)
• Prepaid expenses
o Expenses paid but not yet incurred,
used or utilized at the end of the ❖ ADJUSTED BALANCE
reporting period
o Deferred expense
o Portion of the assets like supplies
and prepaid rent actually used
must be recognized as expense
while portion unused must be
shown as an asset
o Asset Method
▪ The transaction will be
recorded as a debit to an o Expense Method
asset account like “Supplies”, ▪ The transaction will be
or “Prepaid Rent” and credit to recorded by debiting an
“Cash” or “Accounts Payable” expense account and
as the case may be. crediting “Cash” or “Accounts
Payable” as the case may be.
▪ At the end of the reporting • Unearned revenue
period, adjusting entry will be o Nauna bayad ni customer kesa sa
prepared to recognize the services
unused or unexpired portion of o Revenue or income already
the previously recorded received from the customers but
expense, thereby debiting an not yet earned
asset account and crediting o Deferred revenue/income or pre-
the expense account equal to collected revenue/income
the amount of unused or o Portion of cash received in
unexpired. advance is recognized as income
▪ SAMPLE: On October 1, 2019, when earned while the portion still
Office Supplies amounting to unearned must be reported as a
P80,000 were purchased for liability.
cash. At December 31, 2019, o Liability Method
the end of the reporting period, ▪ Receipt of advanced
the amount of supplies used payment from the customer
was P30,000.The journal entry will be credited to a liability
to record this transaction and account.
the necessary adjusting ▪ The transaction will be debited
journal entry that should be to “Cash” and a credit to
made at December 31, 2019 “Unearned Revenue”
would be: account.
❖ JOURNAL ENTRY ▪ At the end of the reporting
period, adjusting entry will be
prepared to recognize the
earned portion of an
unearned revenue as an
❖ ADJUSTING ENTRY income or revenue, thereby
debiting an “unearned
revenue” account and
crediting the “revenue”.
❖ ADJUSTED BALANCE ▪ SAMPLE: On October 1, 2019,
received P120,000 from
customer as advanced
payment for rent of an office
space for 12 months beginning
October 1, 2019.
❖ JOURNAL ENTRY

❖ UNADJUSTED BALANCE

❖ ADJUSTING ENTRY
❖ ADJUSTED BALANCE
o Revenue/Income Method
▪ Receipt of advanced
payment from the customer
will be credited to an income
or revenue account.
▪ The transaction will be debited
to “Cash” and a credit to
“Revenue” account.
▪ At the end of the reporting
period, an adjusting entry will
be prepared to recognize the
unearned portion of the
previously recorded revenue
as a liability, thereby debiting
an “revenue” account and
crediting the “unearned
revenue” account.
▪ SAMPLE: On October 1, 2019,
received P120,000 from
customer as advanced
payment for rent of an office
space for 12 months beginning
October 1, 2019.
❖ JOURNAL ENTRY
❖ UNADJUSTED BALANCE
❖ ADJUSTING ENTRY
❖ ADJUSTED BALANCE
• Accrued expense
o Apply accrual basis of accounting
o Expenses are already incurred but
not yet paid
o Assets or services which have been
already used or consumed by the
business entity during the reporting
period but unpaid as of the end of
the reporting period
o GAAP requires the application of
accrual basis rather than cash
basis
o expenses incurred even though
unpaid must be recognized in the
period of incurrence. Being unpaid
a corresponding liability must also
be recognized.
o Examples: accrued salaries
expense, accrued interest
 expense, accrued utilities
expense, etc.
o Accrued utility expense
o SAMPLE: At the end of the
reporting period, the following
items have been incurred during
the year but not yet paid: (a)
Salaries of the employees,
P100,000, (b) MERALCO bill,
P24,000, (c) PLDT bill, P6,000, and
(d) Interest on loans with the Bank
of PI, P12,000
▪ ADJUSTING ENTRY
• Accrued income
o Services performed, but customer
haven’t paid yet
o Revenue or income already
earned but not yet received or
collected.
o Income is earned when the
services are already rendered to
the customer during the reporting
period but the corresponding
payment for such services has not
yet been received at the end of
the reporting period
o GAAP requires the application of
accrual basis rather than cash
basis.
o Example: accrued interest income
o SAMPLE: On August 1, 2019, RCBC
Co. received a oneyear, 10%,
P100,000 face value notes from
customer for services rendered.
The journal entry to record the
receipt of the note as well as the
adjusting entry at the end of the
calendar year reporting period
would be:
▪ JOURNAL ENTRY
• Depreciation
o Allocating the cost depreciable
tangible assets used in the business
over its estimated useful life in years
in accordance with the systematic
and rational allocation principle of
accounting.
o The cost depreciable property,
plant and equipment must be
periodically charged to expense
through a systematic and rational
allocation method.
o Such periodic allocation is called
depreciation expense.
o Depreciation method: Straight-line
method
o Formula: – Annual Depreciation
Expense = (Cost - Salvage Value) ÷
Estimated Useful Life in Years
o Pro-forma Entry
o SAMPLE: On April 1, 2019, RCBC
Company acquired a brand new
delivery truck with acquisition cash
price of P1,400,000. The truck has
an estimated useful life of 10 years
after which it can be sold for
P200,000.
▪ JOURNAL ENTRY
 ▪ Under the allowance method,
recognition of doubtful
accounts expense is by way of
estimation. The accounts
receivable are not written-off
or removed from the books,
instead, an allowance is set-up
against the accounts
receivable. By setting up an
allowance of doubtful
• Bad debts/Doubtful Accounts accounts, it signals the readers
o Amount of accounts receivable of the financial statements
that becomes worthless or that portion of the accounts
estimated to be uncollectible. receivable reported may not
o Also known as doubtful accounts, be collected.
uncollectible accounts, or ▪ In estimating the amount of
impairment loss. doubtful accounts,
o Accounts receivable must be surrounding circumstances
reported at amortized cost (Net like, past experiences,
Realizable Value) – refers to End economic condition, among
amount of Accounts Receivable others, must be considered
minus (-) amount of Allowance for ▪ COMPARISON
uncollectible Accounts
o Direct Write-off Method (Not
GAAP)
▪ Under the direct write-off
method, doubtful accounts
expense is recognized when
specific accounts receivable
have been ascertained to be
worthless. Such worthless
accounts are thereby
▪ Percentage of Sales
removed from the books.
▪ Percentage of Accounts
However, this method is not
Receivable
acceptable in financial
❖ In the percentage of
accounting though the only
accounts receivable
acceptable method as far as
method, the doubtful
the Bureau of Internal Revenue
accounts expense is
regulations is concerned.
determined by computing
o Allowance Method (Under this is
first the required balance
the percentage of sales,
of the allowance for
percentage of accounts
doubtful accounts to be
receivable and aging of
reported in the statement
receivables)
of financial position. The
 required balance of the the receivable. The age of
allowance for doubtful a receivable starts from the
accounts is computed by moment it is created,
multiplying a meaning, from the time the
predetermined rate to contract of sale is
balance of accounts perfected, and that is,
receivable at the end of generally, when the goods
the period. The doubtful are delivered by the seller
accounts expense would to the buyer. However, it
now be computed by does not necessarily follow
getting the difference that once a receivable is
between the required created, it is already due
balance of the allowance because the seller may
for doubtful accounts and grant the buyer certain
the balance of allowance period of time (usually in
for doubtful accounts terms of days) to make
before adjustment. payment, or the so-called
Because of this approach, credit terms. It is only after
this method is also known the lapse of the credit term
as balance sheet without the receivable
approach. being collected it is
❖ SAMPLE: considered as past due.
Logically, the longer the
time the receivables
remain uncollected or
outstanding, the higher the
❖ QUESTIONS risk that these would not be
collected. This method of
estimating doubtful
accounts expense is more
accurate and reliable as
compared to the other two
previously discussed.
❖ SAMPLE:

▪ Aging of Receivables
❖ Under the aging of
accounts receivable
method, doubtful
accounts expense is
computed with due
consideration of the age of
❖ QUESTIONS