FINANCIAL ACCOUNTING AND
REPORTING
 Grading System (Refer to course plan)
o Class Participation (20%)
 Assignment
 Uncoordinated quiz
departmentalized)
 Attendance is not included
 Seldom recitation
o Book Requirement
 Fundamentals of Accounting
 Basic Accounting made easy
 Instructions in Quizzes/Exams
o Call the attention of the contact person
if ever na hindi align ‘yung instructions
ng general insurrections sa specific
instructions
 Follow the specific instructions if
ever hindi siya ma-contact.
Introduction to Accounting
 Business
o An organization engaged in the trade of
goods, services, or both to consumers
o Enterprise or firm
o Generally administered for profit in
order to increase the wealth of owners
 Forms of business enterprise
 Services
 rendering of lawful services
for a fee
 Ex. services provided by
professionals, and those
rendered by individuals
possessing technical skills
 Merchandising/Trading
 engages in buying goods and
sells them in their original
form
 Manufacturing
 engages in buying raw
materials for conversion into
finished products
o Forms of business
 Sole proprietorship
 one owner, the proprietor;
(Not  no legal personality
 Partnership
 formed by the two or more
persons who bind themselves
to contribute money, property
or industry into a common
fund with the intention of
dividing the profit among
themselves
 has a legal personality
separate from the partners
composing it
 governed by RA 386 (New
Civil Code of the Philippines)
 Corporation
 artificial being created by
operation of law, having the
right of succession and the
powers, attributes, and
properties expressly
authorized by law or
incidental to its existence.
(Sec. 2, RA 11232, Revised
Corporation Code of the
Philippines
 has a legal personality
 owners are called
shareholders, stockholders
(for stock corporations) or
members (for non-stock
corporation)
 Accounting
o art of recording, classifying and
summarizing in a significant manner in
terms of money, transactions and events
which are in part at least of a financial
character and interpreting the results
thereof. – American Institute of
Certified Public Accountants (AICPA)
o the process of identifying, measuring
and communicating economic
 information to permit informed  Standardization and
judgment and decision by users of the regulation of accounting
information – American Accounting education;
Association (AAA)  Examination for registration
o a service activity – to provide of certified public
quantitative information, primarily accountants; and
financial in nature about economic  Supervision, control and
entities that is intended to be useful in regulation of the practice of
making economic decisions. – accountancy in the
Accounting Standards Council (ASC) Philippines.
o Basic purpose o Scope of the practice of accountancy
 to supply information to users to under Sec. 4 of RA 9298
help them make informed  Practice of Public Accountancy
judgments and better decisions  Practice in Commerce and
o Language of business Industry
 Since it is used to communicate  Practice in Education/Academe
financial information to interested  Practice in the Government
parties, business owners, o State policy as regards practice of
management, investors and accountancy in the Philippines
creditors among others  The State recognizes the
importance of accountants in
nation building and development.
Hence, it shall develop and nurture
competent, virtuous, productive
o Accounting vs Bookkeeping and well-rounded professional
accountants whose standards of
Bookkeeping Accounting
 the procedural or  conceptual and practice and service shall be
mechanical aspect of goes beyond excellent, qualitative, world class
accounting; bookkeeping; and globally competitive through
 Includes the
inviolable, honest, effective, and
 Involves the set-up, interpretation of
update and information credible licensure examinations
maintenance of recorded under and through regulatory measures,
accounting records; bookkeeping; programs that foster their
 Practice can
 May be done by non- only be done by professional growth and
accountants Certified Public development. (Sec. 2, RA 9298)
Accountants o Constitute practice of public
(CPAs).
accountancy
 shall constitute in a person, be it
o Republic Act 9298 (Philippine his/her individual capacity, or as a
Accountancy Act of 2004) partner or as a staff member in an
 regulates the practice of accounting or auditing firm,
accountancy in the Philippines holding out himself/herself as:
 Objectives (Section 3 of RA 9298  one skilled in the knowledge,
shall provide the following science and practice of
objectives:) accounting, and as a qualified
person to render professional
 services as a certified public
accountant; or
 offering or rendering, or both,
to more than one client on a
fee basis or otherwise,
services such as the audit or
verification of financial
transaction and accounting
records; or
 the preparation, signing, or
certification for clients of
reports of audit, balance sheet,
and other financial,
accounting and related
schedules, exhibits,
statements or reports which
are to be used for publication
or for credit purposes, or to be
filed with a court or PRC
government agency, or to be
used for any other purpose; or
 the design, installation, and
revision of accounting
system; or
 the preparation of income tax
returns when related to
accounting procedures; or
when he/she represents clients
before government agencies
on tax and other matters
related to accounting or
renders professional
assistance in matters relating
to accounting procedures and
the recording and presentation
of financial facts or data.
o Constitute practice in commerce and
industry
 shall constitute in a person
involved in decision making
requiring professional knowledge
in the science of accounting, or
when such employment or position
requires that the holder thereof
must be a certified public
accountant
o Constitute practice in education and
academe
 shall constitute in a person in an
educational institution which
involve teaching of accounting,
auditing, management advisory
services, finances, business law,
taxation and other technically
related subjects: Provided that
members of the Integrated Bar of
the Philippines may be allowed to
teach business law and taxation
subjects
o Constitute practice in the
government
 shall constitute in a person who
holds or is appointed to, a position
in an accounting professional
group in government or in a
government-owned and/or
controlled corporation including
those performing proprietary
functions, where decision making
requires professional knowledge in
the science in accounting, or where
a civil service eligibility as a
certified public accountants is a
prerequisite.
HISTORY OF ACCOUNTING
 Luca Pacioli
o In 1494, he described double-entry
bookkeeping in his “Summa de
Arithmetica, Geometria, Proportini et
Proportonalita”
 included a twenty-seven-page
treatise on bookkeeping titled,
Particularis de Computis et
Scripturis (Details of Calculation
and Recording) on the subjects of
record keeping and double-entry
accounting
 became the reference text and
teaching tool on the subjects of
bookkeeping and accounting for
the next several hundred years.
  the first time that symbols for plus
and minus appeared in a printed
book.
 the first known published work on
the topic of double-entry
bookkeeping
 the first known book printed in
Italy to contain algebra
 Accounting basics are also mentioned in the
New Testament of the Bible in the Book of
Matthew as well as in other religious texts
such as the Qur’an.
 The first record of accounting occurred
thousands of years ago in Mesopotamia
(https://fremont.edu/history-of-accounting/)
 Earliest record of Accounting
o 7,000 years ago, in the ruins of
Mesopotamia
o People relied on accounting techniques
which are still utilized today to
determine if surplus or shortage
occurred in the crops that are harvested
each season
 Roman Empire
o “The Deeds of the Divine Augustus” is
an account of Emperor Augustus’
financial dealings
 listed such quantities as
distributions to the people, grants
of land, building of temples,
money to military veterans,
religious offerings, and money
spent on theatrical shows and
gladiator events. This discovery
hints at the scope of accounting
information available to the
emperor, which he then probably
used for planning and decision-
making purposes.
 Roman historians also recorded
public revenues, the amount of
money in the state treasury, taxes,
slaves, freedmen, and more.
  Middle Ages
o bartering was the primary form of
money-changing, but when Europe
changed to a monetary economy is the
13th Century, merchants began relying
on bookkeeping to keep a record of
multiple transactions.
 This is when double-entry
bookkeeping got its start, which is
when a debit and credit value is
entered for each transaction by the
accountant.
o Merchants at the time used accounting
as an ad-hoc ordering system
 provided them with constant
information about their businesses
that they could use in decision-
making to grow their business as
they saw fit.
Fields of Accounting
 Financial Accounting
o involves recording and classifying
business transactions, and preparing
and presenting financial statements to
be used by internal and external users
 In the preparation of financial
statements, strict compliance
with generally accepted
accounting principles or GAAP is
observed
o primarily concerned in
processing historical data
 Managerial Accounting
o focuses on providing information for
use by internal users, the management
o deals with the needs of the management
rather than strict compliance with
GAAP
o involves financial analysis, budgeting
and forecasting, cost analysis,
evaluation of business decisions, and
similar areas
 Cost Accounting
o Often times considered as a subset of
management accounting
o recording, presentation, and analysis
of manufacturing costs since this type
 of business enterprise have the most
complicated costing process
o Cost accountants also analyze actual
costs versus budgets or standards to
help determine future courses of action
regarding the company's cost
management
 Auditing
o External auditing
 examination of financial
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 international accounting
 standards issued by the International
Accounting Standards Board (IASB)
o consists of a chairman and 14
members are appointed by the BOA
and include representatives from the
Board of Accountancy (BOA),
Securities and Exchange Commission
(SEC), Bangko Sentral ng Pilipinas
(BSP), Financial Executives Institute of
the Philippines (FINEX), Commission
on Audit (COA) and Philippine
Institute of Certified Public
Accountants (PICPA)
o monitors the technical activities of the
IASB and invites comments on
exposure drafts of proposed IFRSs as
these are issued by the IASB
 When finalized, these are adopted
as Philippine Financial Reporting
Standards (PFRSs)
o similarly monitors issuances of the
International Financial Reporting
Interpretations Committee (IFRIC) of
the IASB, which it adopts as Philippine
Interpretations–IFRIC
o PFRSs and Philippine Interpretations–
IFRIC approved for adoption are
submitted to the BOA and PRC for
approval.
 Philippine Interpretations Committee
(PIC)
o Was formed by the FRSC in August
2006 to assist them in establishing and
improving financial reporting standards
in the Philippines
o Issues the implementation guidance on
PFRS
o PIC members are appointed by the
FRSC and include accountants in public
practice, the academe and regulatory
bodies and users of financial statements
o replaced the Interpretations Committee
created by the ASC in 2000
Basic Concepts and Principles of Accounting
 Accounting Concepts (Accounting
Postulates/Assumptions)
o relevant notions which accountants
consider as proper and appropriate in
recording business transactions
 Business Entity
Concept/Assumption
 business is viewed as a person
or entity with identity and
personality distinct, separate
and apart from that of its
owner/s
 Going Concern
 business is viewed to operate
indefinitely for a period
carrying out its perceived
objectives
 elements in the financial
statements should be valued
based on the accounting
conventions of objectivity and
historical cost
 Time Periods/Periodicity
 life of the enterprise is
divided into several periods in
which financial statements are
prepared and presented for
each 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, there also arises the
recognition of revenue
 results to recognition of a
right to receive cash also
known as 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
 Accounting Conventions
o customary accounting practices resorted
to by accountants because of their long
existence and use
 Accounting Principles
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 the items, factors and
improve the processes that circumstances that might
were used to make those affect their quality and
previous predictions. nature, and the process
 Effect of Materiality Concept on used to determine the
the Relevant financial numerical depiction
information  Neutral
 Information is material if  no bias in the selection or
omitting, misstating or presentation of financial
obscuring it could reasonably information
be expected to influence  not manipulated to
decisions that the primary increase the probability
users of general-purpose that financial information
financial reports make based will be received
on those reports, which favorably or unfavorably
provide financial information by users
about a specific reporting  opposite of relevant
entity which affects decisions
 the Board cannot specify a of the users
uniform quantitative threshold  supported by the exercise
for materiality or of prudence
predetermine what could be  exercise of caution
material in a situation when making
o Faithful Representation judgements under
 Financial information must not conditions of
only represent relevant uncertainty
phenomena, but it must also  Assets & Income are
faithfully represent the substance not overstated
of an economic phenomenon and  Liabilities and
its legal form are the same. If not, expenses are not
providing only the legal form understated
would not faithfully represent the  These misstatements
economic phenomenon could lead to the
 Ingredients: To be a perfectly overstatement and
faithful representation, a depiction understatement of
would have three characteristics income or expenses
 Complete in the future periods
 includes all information  Free from error
necessary for a user to  there are no errors or
understand the omissions in the
phenomenon being description of the
depicted phenomenon, and the
 Ex. a complete depiction process used to produce
may also entail the reported information
explanations of has been selected and
significant facts about applied with no errors in
the quality and nature of the process. In this
 context, free from error
does not mean perfectly
accurate in all respects
 Ex. an estimate of an
unobservable price or
value cannot be
determined to be
accurate or inaccurate;
However, a understand similarities in, and
representation of that
estimate can be faithful if
the amount is described
clearly and accurately as
being an estimate, the
nature and limitations of
the estimating process
are explained, and no
errors have been made in
selecting and applying an
appropriate process for
developing the estimate
 When monetary amounts
in financial reports
cannot be observed
directly and must instead
be estimated,
measurement uncertainty
arises. The use of
reasonable estimates is
an essential part of the
preparation of financial
information and does not
undermine the usefulness
of the information if the
estimates are clearly and
accurately described and
explained. Even a high
level of measurement
uncertainty does not
necessarily prevent such
an estimate from
providing useful
information.
 Enhancing qualitative characteristics
(enhances the usefulness of financial
information)
o also help determine which of two ways
should be used to depict a phenomenon
if both are considered to provide
equally relevant information and an
equally faithful representation of that
phenomenon
o Comparability
 enables users to identify and
differences among, items
 requires at least two items
 does not make unlike things look
alike
o Verifiability
 helps assure users that information
faithfully represents the economic
phenomena it purports to represent
 different knowledgeable and
independent observers could reach
consensus, although not
necessarily complete 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
 Occurrences of events/activities undertaken
o objective of financial statements is to
provide financial information about the
reporting entity’s assets, liabilities,
 Will only be recorded if any of the five
equity, income and expenses that is
useful to users of financial statements
in assessing the prospects for future net
 Normally supported by source documents
cash inflows to the reporting entity and
in assessing management’s stewardship
of the entity’s economic resources
 Elements of Financial Statements
 Presence of documents means that business
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
controlled by the entity as a result
of past events
o Economic Resource
 a right that has the potential to
produce economic benefits
o Liability
 present obligation of the entity to
transfer an economic resource as a
result of past events
o Equity
 residual interest in the assets of the
entity after deducting all its
liabilities
o 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
o Expenses
 decreases in assets, or increases in
liabilities, that result in decreases
in equity, other than those relating
to distributions to holders of equity
claims
Business Transactions
by the entity that affect any of the elements
of financial statements
elements on financial statements are
included
like Official Receipts (OR), Sales Invoices
among others which are a basis in recording
business transactions
transactions occurred
 Official Receipts
o Evidences a particular amount of cash
has been received by the company
o Proof of business transaction
 Sales Invoice
o Evidence that a particular transaction,
specifically sale transactions, has taken
place
o Usual to business that sells goods and
property
o For service business, official receipts
are given
 How are business transactions analyzed?
o Is recorded, by analyzing its effect
(increase or decrease) on the elements
of financial statements taking into
consideration the dual effect of a
transaction
o Under the double entry bookkeeping
system, a business transaction has a
dual effect (increase or decrease), an
effect in one account with
corresponding effect on the other
o After analyzing the dual; effect, the
amount of increase or decrease will be
assigned to specific account
representing the elements of financial
statement affected
 The transaction will be recorded in
the books of accounts
o Different Possible Effects of a
Transaction
 Buying of equipment
account/Issuing a bank loan –
mortgage payable
 Increase in cash (asset), increase in
service revenue (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 equity)
 Accrual of expenses (Increase in
liabilities, decrease in equity) –
Utilities payable and Accrued
Expense
 Unearned Revenue – Entity has
recorded unearned revenue pero
(May advanced payment ni
customer, but hindi pa nar-render
si service) (In, E and De, L)
 Promissory Notes: Paying
accounts payable using 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, 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
o Cheque should be a good one, can be
converted into cash
o Accounts receivable has no evidence
unlike notes, sales invoice lang
on
 Examples of Liability Accounts

 Examples of Owner’s Equity Accounts
 Examples of Revenue Accounts
 Examples of Expense Accounts
 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
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.
 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
o Uses general journal
o The book of original entry
o Provides the following columns: (1) date,
(2) account titles and brief explanation,
Note: May error daw dito, ie-edit pa daw: (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
o Equal amount of debit and credit does
not guarantee that no error in recoding
the transactions have been encountered
o Presentation of accounts should be in the
following order:
 Assets
 Liabilities
 Owner’s Equity
 Revenues
 Expenses
 Posting
o Transferring of amounts from the journal
to the appropriate column (debit/credit)
in the general ledger (T-accounts)
o General Ledger
 Book where entries from the journal
are transferred or posted
 Book of final entry
 A T-account is prepared for the
purposes of solving problems
 At the end of each reporting period,
postings made in each ledger
account must be summarized in ADJUSTING ENTRIES
order to determine the account
 Journal entries that need to be prepared at
balance and eventually facilitate the
the end of the reporting period to update the
preparation of trial balance
balance of some accounts
 If not adjusted, effects such as the following
will occur:
o Overstatement of assets resulting to
understatement of expenses; or
(prepayments under the asset method)
o Overstatement of expenses resulting to
understatement of assets; or
(prepayments involving expense method)
o Understatement of expenses resulting to
understatement of liabilities; or (Accrued
expenses)
o Understatement of income/revenue
resulting to understatement of assets; or
(accrued income)
 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
income/revenue method)
 Prepaid expenses
o Expenses paid but not yet incurred, used
or utilized at the end of the 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 asset account like
“Supplies”, or “Prepaid Rent” and
credit to “Cash” or “Accounts
Payable” as the case may be.
 At the end of the reporting period,
an adjusting entry will be prepared
to recognize the used or expired
portion of an asset as an expense,
thereby debiting an expense account
and crediting an asset account equal
to the amount used or expired.
 SAMPLE: On October 1, 2019,
Office Supplies amounting to
P80,000 were purchased for cash.
At December 31, 2019, the end of
the reporting period, the amount
of supplies used was P30,000.
 JOURNAL ENTRY
 ADJUSTING ENTRY
 ADJUSTED BALANCE
o Expense Method
 The transaction will be recorded by
debiting an expense account and
crediting “Cash” or “Accounts
Payable” as the case may be.
 At the end of the reporting period,
adjusting entry will be prepared to
recognize the unused or unexpired
portion of the previously recorded
expense, thereby debiting an asset
account and crediting the expense
account equal to the amount of
unused or unexpired.
 SAMPLE: On October 1, 2019,
Office Supplies amounting to
P80,000 were purchased for cash.
At December 31, 2019, the end of
the reporting period, the amount
of supplies used was P30,000.The
journal entry to record this
transaction and the necessary
adjusting journal entry that
should be made at December 31,
2019 would be:
 JOURNAL ENTRY
 ADJUSTING ENTRY
  ADJUSTED BALANCE
 Unearned revenue
o Nauna bayad ni customer kesa sa
services
o Revenue or income already received
from the customers but not yet earned
o Deferred revenue/income or pre-
collected revenue/income
o Portion of cash received in advance is
recognized as income when earned while
the portion still unearned must be
reported as a liability.
o Liability Method
 Receipt of advanced payment from
the customer will be credited to a
liability account.
 The transaction will be debited to
“Cash” and a credit to “Unearned
Revenue” account.
 At the end of the reporting period,
adjusting entry will be prepared to
recognize the earned portion of an
unearned revenue as an income or
revenue, thereby debiting an
“unearned revenue” account and
crediting the “revenue”.
 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
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
a
 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
 Bad debts/Doubtful Accounts
o Amount of accounts receivable that
becomes worthless or estimated to be
uncollectible.
o Also known as doubtful accounts,
uncollectible accounts, or impairment
loss.
o Accounts receivable must be reported at
amortized cost (Net Realizable Value) –
refers to End amount of Accounts
Receivable minus (-) amount of
Allowance for 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 removed from
the books. However, this method is
not acceptable in financial
accounting though the only
acceptable method as far as the
Bureau of Internal Revenue
regulations is concerned.
o Allowance Method (Under this is the
percentage of sales, percentage of
accounts receivable and aging of
receivables)
 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 accounts, it signals the
readers of the financial statements
that portion of the accounts
receivable reported may not be
collected.
 In estimating the amount of doubtful
accounts, surrounding circumstances
like, past experiences, economic
condition, among others, must be
considered
 COMPARISON
 Percentage of Sales
 Percentage of Accounts
Receivable
 In the percentage of accounts
receivable method, the doubtful
accounts expense is determined
by computing first the required
balance of the allowance for
doubtful accounts to be reported
in the statement of financial
position. The required balance
of the allowance for doubtful
accounts is computed by
multiplying a predetermined
rate to balance of accounts
receivable at the end of the
period. The doubtful accounts
expense would now be
computed by getting the
difference between the required
balance of the allowance for
doubtful accounts and the
balance of allowance for
doubtful accounts before
adjustment. Because of this
approach, this method is also
known as balance sheet
approach.
 SAMPLE:
 QUESTIONS
 Aging of Receivables
 Under the aging of accounts
receivable method, doubtful
accounts expense is computed
with due consideration of the
age of the receivable. The age of
a receivable starts from the
moment it is created, meaning,
from the time the contract of
sale is perfected, and that is,
generally, when the goods are
delivered by the seller to the
buyer. However, it does not
necessarily follow that once a
receivable is created, it is
already due because the seller
may grant the buyer certain
period of time (usually in terms
of days) to make payment, or
the so-called credit terms. It is
only after the lapse of the credit
term without the receivable
being collected it is considered
as past due. Logically, the
longer the time the receivables
remain uncollected or
outstanding, the higher the 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:
 QUESTIONS