PRELIMS: CHAPTER 1 - 19th century = modern accounting in
Europe and America
ACCOUNTING
- Process of identifying, recording, and
communicating economic events of an
organization to interested users
- A service activity
- The function is to provide quantitative
information about economic entities
that is intended to be useful in making
economic decisions (AICPA)
- Language of business
● Identifying - selecting relevant
events (transactions)
● Recording - chronological diary
(journals or ledgers)
● Reporting - communicating /
distribution of reports
- Systematic recording of financial
transactions and the presentation of the
related information to appropriate
persons
- Provides assistance to decision-makers
by providing them financial reports that
guide them with decision making
- Accounting is a process
- Accounting is both an art and a
discipline
- Accounting deals with financial
information and transaction
- Accounting is an information system
- Language of business
HISTORY OF ACCOUNTING
- Around 3600bc
- 14th century = double-entry
bookkeeping
- 1700s french revolution = theories of
accounting
- 1760 - 1830 industrial revolution =
importance of fixed assets
- 1854 = queen victoria granted a royal
charter to the institute of accountants
- 1887 = first us accountancy society
- Present 20th century = regulatory
bodies
BRANCHES OF ACCOUNTING
1. AUDITING
● INTERNAL
- Auditors employees of
the company to ensure
accuracy of records
● EXTERNAL
- Independent
examination to express
fairness and reliability
for outside users
2. BOOKKEEPING
- Collection of basic financial data
- Recording, classifying,
organizing financial transactions
3. COST BOOKKEEPING/COSTING/COST
ACCOUNTING
- Recording of cost data
4. FINANCIAL ACCOUNTING
- Recording of transactions and
periodic reparation of reports
on the financial position
available for public use
5. FINANCIAL MANAGEMENT
- Setting financial objectives
- making plans based on them
- obtaining the finance needed to
achieve plans
- Safeguarding financial resources
 6. MANAGEMENT ACCOUNTING - Minimal
- incorporates cost accounting requirements
data and all types of financial - Decisions are
and non-financial information made faster
- Adapts them for specific - Easy tax
decisions management is called reporting
upon to make - Low start-up
7. TAXATION cost
- Preparation of tax returns ● Disadvantages
8. GOVERNMENT ACCOUNTING - Unlimited
- Identification of sources and liability
uses of resources consistent - Difficult to raise
with provisions of the city, funds
municipality, provincial, or 2. PARTNERSHIP
national laws - Owned by two or more
USERS OF ACCOUNTING INFORMATION - bind ed to contribute money,
- owners/shareholders property, or industry with the
- Mangers intention of dividing profits
- Prospective investors ● Advantages
- creditors /bankers - Easy to organize
- Government and regulatory agencies than a
- Employees corporation
- Customers - Combined
- researchers expertise
- Better decisions
1. EXTERNAL - Distributed
- Users that have current workload
potential interest in the ● disadvantages
reporting entity but are not - Full liability
involved in the daily operations - Difficulty in
of the entity transferring
2. INTERNAL ownership
- Board of directors, CEO, CFO, - Possibility for
VP, managers, supervisors disagreements
3. CORPORATION
FORMS OF BUSINESS ORGANIZATION - Artificial being created by
1. SOLE PROPRIETORSHIP operation of law
- One owner only and manager - Rights of succession etc
- Mostly service or retail - Owned by
● Advantages shareholders/stockholders
- Easy to organize
 ● INFRASTRUCTURE - buying and
● Advantages operating large assets; selling
- A large number occupancy in combination with services
of resources ● FINANCIAL - accepting cash from
through shares depositors and paying them interest
of stock ● INSURANCE - premiums of many to
- Owners are not meet few claims
responsible for
corporation’s ACTIVITIES IN BUSINESS ORGANIZATIONS
debts 1. FINANCING
- Perpetual - Obtain financial resources and
- Ownership can obtain them
easily be - Primary sources mostly are
transferred owners and creditors (banks,
- Tax benefits suppliers)
● Disadvantages 2. INVESTING
- Annual record - Selection and management to
- Owners are less have effective and efficient
involved operations
- Double taxation ● Efficient - provides
- Expensive goods at low cost
formation relative to the selling
price
● Effective - successful in
TYPES OF BUSINESS ACCORDING TO ACTIVITIES providing goods
1. SERVICE - renders service demanded by
2. MERCHANDISE - buy and sell customers
3. MANUFACTURING - from raw materials 3. OPERATING
- Use of resources to design,
produce, distribute goods
- Research and develop

FUNDAMENTAL CONCEPTS
1. ENTITY CONCEPT - separate from
personal
2. PERIODICITY CONCEPT - timely
information
● RAW MATERIALS - Buying blocks of land
3. STABLE MONETARY CONCEPT - peso
and using them to provide raw
materials
CRITERIA FOR GENERAL ACCEPTANCE OF AN
ACCOUNTING PRINCIPLE
 ● GENERALLY ACCEPTED ACCOUNTING
PRINCIPLE
- conventions, rules, procedures
necessary to define accepted
accounting practice at a particular time
- Depends on how well it meets three
criteria:
1. RELEVANCE - Meaningful and
useful result to users
2. OBJECTIVITY - results are not
influenced by biases (reliability
and truthfulness, verifiability)
3. FEASIBILITY - may be
implemented without costing
too much
- 2001
- Formed as a non-profit corporation
- The parent entity of IASBoard and
IASSetter in the UK
INTERNATIONAL ACCOUNTING STANDARD
BOARD (IASB)
- 2001
- Independent private sector body
- The objective is to achieve convergence
in the accounting principles
IASB STRUCTURE

BASIC PRINCIPLES
1. OBJECTIVITY PRINCIPLE -most reliable
data to be accurate and useful
2. HISTORICAL COST - acquired assets
should be recorded at actual costs and ● MONITORING BOARD
not the management thinks they are Primary purpose: serve as a
worth mechanism for formal
3. REVENUE RECOGNITION PRINCIPLE - interaction between capital
revenue is recognized after goods are market authorities and IFRS
delivered or service is rendered foundation
4. EXPENSE RECOGNITION PRINCIPLE - Responsibilities:
recognize expenses when used up to - Participate in
produce revenue not when it is paid for appointing trustees and
5. ADEQUATE CLOSURE - all relevant approving
information must be disclosed in the appointments of
financial statements trustees accordion to
6. MATERIALITY - depends on the size and the guidelines set by
nature of the item the IFRS constitution
7. CONSISTENCY PRINCIPLE - use sam - Review and provide
accounting method from period to advice to the trustees
period to achieve comparability (may on their fulfillment of
change but make sure to disclose in responsibilities set out
financial statements) in the IFRS
● IFRS FOUNDATION
INTERNATIONAL ACCOUNTING STANDARDS
COMMITTEE (IASC)
 - Formerly known as IASC
Foundation
- Independent non-profit private
sector organization working for
public interest
Principal objectives
1. Develop a single set of
high quality,
understandable,
enforceable, and
globally accepted
international reporting
standards (IFRS)
through its
standard-setting body
IASB
2. Promote the use and
rigorous application of
those standards
3. To take account of the STANDARDS
financial reporting
needs of emerging
economies and small
and medium-sized
entities (SME)
4. Bring about the
convergence of national
accounting standards
and IFRS to high-quality
solutions
● INTERNATIONAL ACCOUNTING
STANDARDS BOARD (IAS) ACCOUNTING STANDARDS
- Independent standards-setting
body of the IFRS foundation.
- Members are responsible for
the development and
publication of IFRS including the
IFRS for SMEs and for approving
interpretations of IFRS as
developed by IFRIC (IFRS
interpretations committee)
● IFRS ADVISORY COUNCIL
- Formerly known as standards
advisory council
- Has 40 members
- Provides a forum for
organizations and individuals
with an interest in international
financial reporting to
participate in the
standard-setting process
● IFRS INTERPRETATIONS COMMITTEE
- Formerly called the IFRIC
- Interpretative body of the IASB
- The mandate is to review on a
timely basis widespread
accounting issues that have
arisen within the context of
current IFRSs and to provide
authoritative guidance (IFRICs)
on those issues
- IASB publishes its standards in a series
of pronouncements called international
financial reporting standards (IFRS)
- Has also adopted the body of standards
issued by the board of the international
accounting standards committee (B
IASC)
- Pronouncements continue to be
designated as international accounting
standards (IAS)
- Authoritative statements of how
particular types of transaction and
other events should be reflected in
financial statements
- Compliance with accounting standards
will normally be necessary for the fair
presentation of financial statements
NEED FOR INTERNATIONAL ACCOUNTING
STANDARDS
- Financial reports prepare involves
principles and procedures that can vary
widely from country to country
- Accounting reports may lack
comparability
- It Will be useful for developing
countries or other countries that don’t
have yet national standard-setting body
or the resources for it
PHILIPPINE ASC MOVES TO IAS
● ASC considered the following in
deciding to move to IAS
1. Support of IAS by philippine
organizations
2. Increasing internationalization
of business
3. Improvement of IAS
4. Increasing recognition of IASB
standards
5.
DEVELOPMENT IN PHILIPPINE ACCOUNTING
STANDARDS
1. ASC approves re-issuance as PASs of
previously issued SFASs
- To update these for
consequential amendments
arising from adopted new
international financial reporting
standards (IFRS) and revised
IASs which resulted from the
Improvements Project of the
international accounting
standards board (IASB) and for
editorial amendments made to
all existing IASs
- To maintain consistency of
format and designation of
standards issued by the ASC
2. ASC approves issuance of new and
revised accounting standards
- Accounting standards issued by
the ASC were renamed to
correspond better with the
insurances of the IASB
- Philippine accounting standards
(PAS) correspond to the
adopted International
Accounting Standards (IAS)
- Philippine financial reporting
standards (PFRS) correspond to
the adopted International
Financial Reporting Standards
(IFRS)
- SFASs/IASs are not superseded
by revised IASs and new IFRSs
will be reissued as PASs
3. SEC adopts PFRS for SMEs
- (Dec 3, 2009) SEC En Banc
resolved to adopt the philippine
financial reporting standards for
small and medium entities
(PFRS for SMEs) as part of the
rules and regulations
- This PFRS was adopted on oct
13, 2009 by Philippine Financial
Reporting Standards Council
from the IFRS for SMEs issued
by the IASB
IASB’S CONCEPTUAL FRAMEWORK FOR
FINANCIAL REPORTING 2010 (IFRS framework)
- IFRS framework describes the basic
concept that underlies the preparation
and presentation of financial
statements for external users
- IFRS addresses
1. The objective of financial
reporting
2. Qualitative characteristic of
useful financial information
 3. Reporting entity
4. Definition, recognition, and
measurement of the elements
from the financial statements
are constructed
5. Concepts of capital and capital
maintenance
OBJECTIVE OF GENERAL PURPOSE FINANCIAL
REPORTING
- Provide financial information about the
reporting entity that is useful to the
present and potential investors, lenders,
and other creditors
Primary users need information about
the resources and claims against
resources of an entity not only to assess
an entity’s prospects for future net cash
inflows but also how effectively and
efficiently management has discharged
its responsibilities to use the entity’s
existing resources
ECONOMIC RESOURCES AND CLAIMS
- Information on the nature and amounts
of a reporting entity’s economic
resources and claims assists users to
assess that entity’s financial strengths
and weaknesses
- To assess liquidity and solvency
- To assess its need and ability to obtain
financing
- Reported in the statement of financial
position
CHANGES IN ECONOMIC RESOURCES AND
CLAIMS
● Financial performance reflected by
accrual accounting
- Accrual accounting depicts the effect of
transactions and other events and
circumstances on a reporting entity’s
economic resources and claims in the
periods in which those effects occur
- Information on an entity’s financial
performance useful in assessing past
and future ability to generate cash is
presented in the statement of
comprehensive income
● Financial performance reflected by
past cash flows
- Information on entity’s cash
flows
- Assists users to assess the
ability to generate future net
cash inflows
- Changes in claims are presented
in the statement of cash flows
● Changes in economic resources and
claims not resulting from financial
performance
- Information about changes in
an entity’s economic resources
resulting from events and
transactions other than
financial performance
- Presented in the statement of
changes in equity
1. her claim account decreases.
- Increase in Liabilities =
Decrease in Owner’s Equity (EC)
- Increase in Owner’s Equity =
Decrease in Liabilities (EC)
- Increase in one Liability =
Decrease in another Liability
(EC)
- Increase in one Owner’s Equity
= Decrease in another Owner’s
Equity
- (EC)
TYPICAL ACCOUNT TTLES USED
Statement of financial position
● Assets
 A. Current
- Expects to realize, sell, or
consume in its normal
operating cycle / after
reporting period (if not stated,
assumed 12months)
- Holds the asset primarily for the
purpose of trading
1. Cash - medium of exchange
banks will accept for deposits at
face value
2. Cash equivalents - short term
highly liquid investments that
are readily convertible to
known amounts of cash and
which are subject to an
insignificant risk of changes in
value (PAS 7)
3. Notes receivable - written
4. Accounts receivable - claims
against customers
5. Inventories - assets that are
held for sale in an ordinary
course of business, in the
process of such production or
sale, in form of materials to be
consumed in the production
process (PAS 2)
6. Prepaid expenses - advanced
payments by the business
B. Non-current
- Those not classified as
current assets
1. PPE - tangible assets that are
held by an enterprise for use in
the production of supply of
goods or services or for rental
to others which are expected to
be used for more than one
period (PAS 16)
2. Accumulated depreciation -
contra account that contains
the sum of periodic
depreciation charges
3. Intangible asset - identifiable,
non-monetary assets without
physical substance held for use
in the production or supply of
goods for rental or for
administrative purposes (PAS
38)
● Liabilities
A. Current
- Expected to settle the
liability in its normal
operating cycle
- Holds liability primarily
for the purpose of
trading
- The entity does not
have an unconditional
right to defer
settlement of the
liability for at least
twelve months
1. Accounts payable - the
reverse relationship of
accounts receivable
2. Notes payable - written
promise to pay
3. Accrued liabilities -
amounts owed for
unpaid expenses
4. Unearned revenue -
receives payment
before providing service
5. Current portion of long
term debt - portions of
mortgage notes, bonds,
and other long term
indebtedness to be paid
 within one year from
the balance sheet date
B. Non-Current
- All others that are not
current
1. Mortgage payable -
pledged certain assets
as security to the
creditor
2. Bonds payable - contact
between issuer and
lender specifying terms
of repayment and the
interest to be charged
● Equity
1. Capital - original and additional
investments
2. Withdrawals - reducing capital
3. Income summary - temporary
accounts used at the end of the
accounting period to close
income and expenses (shows
profit or loss before closing to
capital account)
Income statement
● Income
1. Service income - revenues from
service
2. Sales - revenues from
merchandise
● expenses
1. Cost of sales - cost incurred to
purchase or product products
(COGS)
2. Salaries and wages expense -
payments to employees
3. telecommunications,
electricity, fuel, and water
expense
4. Rent expense - space,
equipment, or other asset
rentals
5. Supplies expense
6. Insurance expense - portion of
premiums paid that has expired
7. Depreciation expense
8. Uncollectible accounts expense
9. Interest expense
RECORDING BUSINESS TRANSACTIONS
1. Identify transactions from source
documents
2. Indicate the accounts affected (assets,
loans, eq, exp, inc)
3. Ascertain if the account increases or
deceases
4. Determine debit credit
SOURCE DOCUMENTS
- Identify and describe transactions
- Originally written evidence on nature
and amounts f transactions
- Bases for journal entries
- Sales invoices, cash register tapes,
official receipts, bank deposit slips, etc.
ACCOUNTING CYCLE
- Series of steps to accomplish accounting
process
1. Identification of events to be
recorded
2. Journal (facilitates the transfer
of account)
3. Ledger (for classification)
4. Trial balance (verify equality)
5. Worksheet with adjusting
entries
6. Financial statements
(information to
decision-makers)
 7. Journalize and post adjusted
balances
8. Close journal entries (transfer
to owner’s equity)
9. Prepare post-closing rial
balance
10. Reverse
SOURCE DOCUMENTS
1. Sales invoice
- SI
- Used for the sale of GOODS
- * grocery
2. Official receipts
- OR
- Rendering of SERVICE
- * Tuition fee
3. Purchase orders
- Issued by a buyer to the seller
- Indicating types, quantities, and
agreed prices that the buyer
intends to purchase
- Prepared as internal control
over purchases
- To prevent unnecessary
purchases
4. Delivery receipts
- Document signed by the
receiver acknowledging the
receipt of the goods
5. Bank deposit slip
- Evidence a deposit to a bank
account
- Shows the date of deposit, bank
acc name, and amount
6. Bank statements
- Report issued by the bank
- Monthly basis
- Shows deposits and
withdrawals during the period
7. Checks
- An instrument that orders a
bank (drawee) to pay the
person named on the check or
the bearer thereof (payee) from
the drawer’s bank acc
8. Statements of account
- Report a business sends to its
customer listing the
transactions with the customer
during a period
- Payments made and remaining
balance
- Serves as a notice of billing
- * upaid tuition fee
JOURNAL
- Book of original entry
- Shows all effects of transactions
regarding debits and credits
- A chronological record of the entity
transaction
- The general journal is the simplest
journal
● Date - month and year are not
written unless changes
● PR - posting reference
SIMPLE ENTRY
- Only two accounts are affected
COMPOUND ENTRY
- Three or more accounts are affected
LEDGER
- POSTING
- PURPOSE: classify effects of
transactions on specific asset, liability,
equity, income, and expense=to get
refined information
- Grouping of accounts
- Classify and summarize transactions
- Prepare data for basic financial
statements
- Grouping of entity’s amount
- General ledger = reference book
 - Organizes information by account

CHART OF ACCOUNTS
- Listing of all the accounts and their
account numbers
- Arranged in the financial statement
order
- Should be numbered in a flexible order
to permit indexing and
cross-referencing

TRIAL BALANCE
- List of all accounts with their credits
debits and balances
- Control device
- Helps minimize accounting errors
- Prepared to verify the equality of debits
BALANCE SHEET
and credits in the ledger
- Permanent accounts
● FOOTING - adding all debits and credits

INCOME STATEMENT
- Temporary accounts
- Nominal accounts
- Used to gather information for a
particular accounting period
- At the end of the period, transferred to
a permanent account or ower’s equity

ERRORS CANNOT BE REVEALED BECAUSE IT CHAPTER 4: ADJUSTING ENTRIES

DOES NOT CAUSE INEQUALITY
- OMITTING THE ENTIRE TRANSACTION
- JOURNALIZING OR POSTING TWICE
- USING WRONG ACCOUNT WITH THE
SAME NORMAL BALANCE OF THE
CORRECT ACCOUNT
- WRONG COMPUTATION ON BOTH
DEBIT AND CREDIT
- - Inform users of past transactions
ACCRUAL BASIS
- Financial statements are prepared on an
accrual basis
- Effects of transactions are recognized
when they occur and not as cash
received or paid
- Revenues when earned
- Expenses when incurred
involving payment and receipt of cash
and obligations to pay cash in the future
CASH BASIS
 - Records only when cash is received or
paid
- Cash receipts are treated as revenue
- Cash payments as expenses
- Cash basis income = operating cash
receipts - disbursements
- Cash flows exclude investments by and
distributions to the owner
PERIODICITY CONCEPT
- To provide timely information
- Divided economic life into artificial time
periods
- Month, quarter, year
- Most basic = 1year
- Ensures acctng info is reported at
regular intervals
- Interacts with the recognition and
derecognition principles to underlie the
use of accruals
● Fiscal year
- Any 12 consecutive
months
● Calendar year
- Annual period ending
on Dec 31
● Interim period
- Period less than a year
➔ Liquidation
- Going out of the business
- Sell assets pay loans and give
the excess to owners
RECOGNITION
- Process of capturing for inclusion in the
statement of financial position or
statements of financial performance
- Carrying amount (amount recognized)
- The aim is to provide useful information
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
- Normally occurs when it no longer
meets the definition of an asset or
liability
ADJUSTMENTS
- Record those that have occurred but
have not yet been recorded
- Assign revenues to the period when
they are earned and expenses when
they were incurred
- Needed for recognition and
derecognition
- Involve changing account balances at
the end of the period from the current
balance to the correct balance
- To fairly show the solvency of the entity
DEFERRALS
- Recognition of expenses already paid
but not yet incurred
- Revenue already collected but not yet
earned
- The amount already recorded in the
balance sheet
- Decreases balance sheet
ACCRUALS
- Recognition of an expense already
incurred but unpaid
- Revenue earned but uncollected
- Adjustment deals with any amount
unrecorded in any account
- Increases both a balance sheet and an
income statement account
ADJUSTMENTS FOR DEFERRALS
1. PREPAID EXPENSES
- Expenses paid in advance
- Supplies, rent, insurance
- Assets
 - A portion of asset expired -
Receives cash for goods before
becomes an expense services are rendered
● If not recorded - liability
- Assets = ADJUSTMENTS FOR ACCRUALS
overstated 4. ACCRUED EXPENSES
- Expense = - Incurs expenses before paying
understated them
- Balance sheet = - Salaries payable/accrued
overstated salaries
- Income - Liabilities
statement = - Interest exp dr, interest payable
overstated cr
2. DEPRECIATION OF PROPERTY AND
EQUIPMENT
- Allocation of cost of an asset
over its estimated useful life
- Estimated amount allocated to
5. ACCRUED REVENUES
any accounting period (
- An entity may provide services
depreciation)
during the period that are
- Book value (less depreciation)
neither paid nor billed
● Asset cost - the amount
ACCRUAL FOR UNCOLLECTIBLE ACCOUNTS
of an entity paid to
6. UNCOLLECTIBLE ACCOUNTS
acquire a depreciable
- Accounts receivable never
asset
collected
● Salvage value - amount
- Bad debts, doubtful accs,
that an asset can
Uncollectible accs
probably be sold for at
the end of its estimated
useful life
● Useful life - estimated
number of periods that
an entity can make use
of the asset (estimate,
not exact)

Partnership
3. UNEARNED REVENUE
 ● A partnership is an unincorporated ● A bonus exists when the capital account
association of two or more individuals of a partner is credited for an amount
to carry on, as co-owners, a business, greater than or less than the fair value
with the intention of dividing the profits of his contributions.
among themselves. ● The bonus is treated as an adjustment
to the capital accounts of the other
Characteristics of a partnership
partners
1. Ease of formation 
THE CONCEPT OF IMMEDIATE RECOGNITION
2. Separate legal personality  
3. Mutual agency - Cost/asset that has no future economic
4. Co-ownership of property benefit = expense
5. Co-ownership of profits - Bad debts expense
6. Limited life
EXPENSE RECOGNITION PRINCIPLES
7. Transfer of ownership
8. Unlimited liability (this is applicable to a 1. Matching
general partnership) - Costs directly associated with
earning rev = exp in d same
Accounting for partnerships
period (CGS)
● The following are the major 2. Systematic and rational allocation
considerations in the accounting for the - Costs not directly associated w
equity of a partnership: earning rev = exp over d period
1. Formation – accounting for (depreciation)
initial investments to the 3. Immediate recognition
partnership - Costs that do not provide future
2. Operation – division of profits economic benefits = exp (bad
or losses debts exp)
3. Dissolution – admission of a
REAL NOMINAL AND MIXED ACCOUNTS
new partner and withdrawal,
retirement or death of a ● Real accounts (permanent accounts)
partner - Not closed at the end of the
4. Liquidation – winding-up of period
affairs - Extended to next period
- All bal sheet accs except
Valuation of contributions of partners
drawings
● All assets contributed to (and related ● Nominal Accounts (temporary)
liabilities assumed by) the partnership - Closed at the end of period
shall be measured at fair value. - Inc statements, drawing accs,
clearing accs, suspense accs
Partners’ ledger accounts
1. Clearing account
1. Capital accounts - Account used
2. Drawing accounts temporarily to
3. Receivable from/ Payable to a partner store amounts
taht will
Bonus on initial investments eventually be
 transferred to - Financial information are
another acc communicated to the users
- Income - To be able to arrive at sound economic
summary decisions
2. Suspense account
- Account used
temporarily to COMPLETE SET OF FINANCIAL STATEMENTS
store
discrepancies in 1. Statement of financial position
the accs - Shows financial condition of an
pending their entity
analysis and - Balance sheet
permanent - To evaluate entity’s liquidity,
classification financial flexibility, and ability to
- Cash shortage generate profit and solvency
or overage = ● Liquidity
used to record - Availability of
cash shortage cash in the
or overage future
- Closed to ● Financial flexibility
receivable (loss - Ability to take
acc for effective
shortage) or actions
payable (gain - To respond to
acc or overage) unexpected
● Mixed accounts endeds and
- Accs that have both real and opportunities
nominal accounts ● solvency
- Subject to adjustment - Availability of
- Unadjusted payments cash over a long
+defferals period
- Prepaid assets and unearned Format (may use any - most
income taht have both expired used report form)
(nominal) and unexpired (real
acc) a. Report form
- vertical
WORKSHEET b. Account form
- Helps transfer data from unadjusted - horizontal
trial balance to financial statements 2. Statement of financial performance
- Multi column document - Income and expenserecognized
- Efficient way to summarize data for in a aperiod
financial statements ● Single statement
- One only
Essence of financial statements ● Two statement
 - Components of - Net
profit or loss cash is
- Separate obtaine
income d by
statement adding
- Second individu
statement with al
profit or loss in operati
te beginning ng cash
3. Statement of changes in equity inflows
- Summarizes changes that and
occurred in OE subtrac
- Increase and decrease in net ting
assets during the period individu
4. Statement of cash flows al
- Provides info about cash operati
receipts and cash payments ng cash
duing the period outflow
- Formal statement that classifies s
ash receipts (infows) and cash ● indirect
payments (outflow) into - Derives
operating, investing, and net
financing activities cash by
a. Operating adjustin
- Involve g profit
providing for
services and income
producing and and
delivering expens
goods e items
- Cash effects of not
transactionsand resultin
other events tat g from
enter cash
intodeterminati transac
on of profit or tions
loss
● Direct
*examples of inflows: receipts from the sale of *examples of outflows: payment to owners in
goods and services, receipts from royalties, fees, the form of withdrawal, payment to settle notes
commission nd other rev. payable

*examples of outflows: payment to suppliers of 5. Notes to financial statements

goods and services, payment to employees, - Summary of significant
payment for taxes, payment for interest accounting policies and
expense, payment for other operating expenses explanatory information
6. Statement of financial position
b. Investing
- At the beginning of the period
- Include
- Reclassified financial statement
collecting loans,
acquiring and
disposing of
investments in
debt or equity
securities and
obtaining and
selling ppe nd
other assets

*examples of inflows: receipts from sale of

properties, sale of investment in debt or equity
securities, and from collections on notes
receivable
*examples of outflows: payment to acquire
ppe, acquire debt and equity securities, loans to
others generally in the form of notes receivable
c. financing
- Obtaining
resources from
owners and
creditors
*examples of inflows: receipts from investment
by owners, from cash issuance of notes payable
RELATIONSHIP AMONG FINANCIAL
STATEMENTS
1. Income statement reports all income
and expenses=final figure is profit or
loss
2. Statement of changes in equity
considers profit or loss from income
statement as a determining factor that
explains the change in owner’s equity
3. Statement of financial position reports
ending owner’s equity taken directly
from changes in equity statement
4. Cash flow report reports the net
increase or decrease in cash during the
period and ends with cash balance
reported in balance sheet (based on
balance sheet and income statement)