Teacher: Mark Almario

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XPACOAC - A101
CHAPTER 5: DOUBLE ENTRY against the entity's or individual's current
BOOKKEEPING FOR A SERVICE account.
PROVIDER
Promissory Note–is a written promise to pay
ACCOUNTING CYCLE a certain sum of money at a future date. The
maker is the debtor who makes the promise,
First four steps in an Accounting Cycle:
addressing it to the payee or creditor.
1st: collecting data based on various
A Statement of Account–is a bill presented to
documents
a customer for service rendered or
2nd: analyzing and recording these merchandise given for which payment is
documents demandable.

3rd: classifying and posting from the THE CHART OF ACCOUNTS

journal to another book
4th: extracting balances of each of the
accounts found in the ledger and prepare
trial balance
Account–this is a device used to record the
increases and decreases affecting each of
the different assets, liabilities, and owners'
equity.

BUSINESS PAPERS Chart of Accounts–is a listing of account

Invoice–is issued when services
merchandise is given to a customer or
client.
Official Receipt–is issued when cash is
received by the entity.
Cash or Check Voucher–is a document used
when cash is paid pr a check is issued.
Check–is a negotiable instrument used as a
substitute for cash, the payment for which
is drawn
titles which guides the bookkeeper in the
or
recording of thetransactions. (The number
and the nature of accounts depend on the
type of business operation.)
THE T ACCOUNT
T account–is the simplest tool used to
analyze the effects of the transactions on
each account, hence it has two sides: one
side for recording increases and the other
side for recording decreases.
⁃its shape comes from the letter T, hence it Capital→ Debit decreases and Credit For
is called a T account increases

⁃used by accountants to analyze • And because Drawing accounts decrease

transactions and immediately determine Owner’s Equity, they are affected by debits
balances of accounts. and credits as follows:

Debit side–the left part of the T account
Credit side–the right part of the T account
The T- Account
• Increases to the T-account are recorded
on one side of the T-account, and decreases
are recorded on the other side.
• Debit refers to the LEFT and Credit to the
RIGHT side of the T-Account.
TYPES OF ACCOUNTS
• Assets
Drawing → Debit for Increase and Credit
for Increases
• Because Revenue accounts increase
Owner’s Equity, they are affected by debits
and credits as follows:
Revenue → Debit for decreases and Credit
for increases
Stockholders’ Equity A Closer Look
• And because Expense accounts decrease
Owner’s Equity, they are affected by debits
and credits as follows:

• Liabilities Expenses→ Debit for Increase and Credit

for decrease
• Owner’s Equity
Recording Transactions
• Revenue or Income
• Initially, all transactions are recorded in
• Expense
the General Journal,
Owner’s Equity A Closer Look
• Each transaction always affects at least
• Recall that Owner’s Equity consists of the two different accounts.
following components:
• One account has a debit effect.
Capital – Drawings + Revenues –
• The second account has a credit effect.
Expenses
• This methodology was named “double
• Because Capital accounts increase
entry” accounting by whom? Luca Pacioli
Owner’s Equity, they are affected by debits
and credits as follows: POSTING to the General Ledger
• General Ledger (GL) is a complete
collection of all the accounts of a company
• Accounts are individually numbered for
easy reference
• It is used to collect the information about
all of the transactions affecting a specific
account
- Nominal account balances are closed out
to zero at the end of the fiscal year
Real Accounts
- This category includes Assets, Liabilities,
and Owner’s Equity (i.e., Balance Sheet
accounts)
- Accounts are permanent.
- Account balances are carried forward from
one
- fiscal year to the next
THE VENETIAN MODEL
Double Entry Bookkeeping System or Venetian
Model
⁃Was introduced by Luca Pacioli
⁃The transactions must always affect two
accounts and at least one or two accounting
elements.
Account balance–the difference between the
debit total and the credit total
Debit balance–if the debit total is higher
than the credit total
Credit balance–if the credit total is higher
than the debit total
THE LEDGER
General ledger
–also called the book of final entry
–a formal book of accounts which is used in
actual practice wherein a separate page is
maintained for each account. Each page is
called a ledger
Three Column General Ledger- there are
three money columns involved
Two Column General Ledger- a ledger format
where there are only two money columns,
one for the debit postings and another for
the credit postings.
THE JOURNAL
Book of Original Entry - the transactions are
initially recorded chronologically by day.
Two-column general journal - simplest form
of journal
Journalization - the process of recording
Simple journal entry - a journal entry with
one debit and one credit
Compound journal entry - when an entry has
more than one debit or more than one credit
Note: (F) reference column is not filled up
since this part of the posting procedure
which is the next step.
POSTING TO THE LEDGER - Payroll accounting involves
maintaining records of its employees
“The journal does not replace the ledger”
and workers where their personal
Journal - complete recording; chronological data and work experience, among
order others, are noted.
- A payroll sheet is a tabular form
Ledger - shows in one page all the changes
prepared by the Accounting
TRIAL BALANCE Department to determine take-home
pay of employees and workers. It
is a list of accounts with balances in the
consists of five columns listing the
ledger at the end of an accounting period
following:
and divided with debit balances and credit
1. Employee’s or worker’s name
balances.
2. Gross pay representing

SUBSIDIARY LEDGERS AND CONTROL compensation (salary/wages) earned

ACCOUNTS for a certain period.

3. Deductions for payroll liabilities
Control Accounts - the accounts receivable
4. Net pay or take-home pay
and accounts payable in the general ledger.
5. Signature signifying receipt of

Subsidiary Ledger or Customer’s card and salary/wage by the employee/worker

creditor’s card - an individual record is kept

Firms are required by the law to act as the
for each one of them.
government’s collection agent requiring

CHAPTER 6: PAYROLL ACCOUNTING them to file and pay taxes and premium

AND OTHER SELECTED TRANSACTIONS contributions for and on behalf of their

employees and workers (BIR, SSS,
Payroll Sheet - document shows the take PhilHealth, HDMF or Pag-Ibig)
home pay of employees and workers from
which a voucher.

Tax Reform for Acceleration and Inclusion DEDUCTIONS FROM GROSS PAY

(TRAIN Act)
The gross pay is not the actual amount to be

Payroll - compensation paid to employees received by an employee or worker because

and workers of the following payroll liabilities which are

deducted from their pay as required by law:
Salaries - monthly or semi-monthly rate
1. Income Tax
Wages - daily, hourly or piece rate 2. Social Security
 member of SSS must make a monthly
contribution to this agency.

-The employee enjoys benefits such as

education loan, salary loan, disability
benefit, maternity benefit, calamity loan,
pension and retirement pay as an SSS
member.
3. Health Insurance
4. Home Development Mutual Fund - Contribution rate 13%

5. Membership Due (if the employee is - Credit not exceeding P20,000

a member of a labor union or - Employer 8.5%

association. ) - Employee 4.5%

Income Tax - Based on earnings made, every Philippine Health Insurance (Philhealth) -

employee or worker is required to pay taxes employees or workers are required to be

to the government. (BIR) members of the Philippine Health Insurance

and enjoy sickness and hospitalization
-The amount withheld from their benefits.
salaries/wages is based on the taxable
income computed using a tax table and a 2020

- 3% Premium rate
- Monthly Salary P10,000 below (P300
fixed rate)

list of exemptions provided by the BIR.

Social Security System (SSS) - it is required

that an employee or worker who is a
 - Monthly Salary P60,000 above
(P1,800 fixed rate)
HDMF/Pag-IBIG - (Pagtutulungan sa
kinabukasan: Ikaw, Bangko, Industriya at
Gobyerno) requires mandatory coverage of
all employees.
EMPLOYER’S CONTRIBUTION
-The law also requires the employer
(business) to make corresponding
contributions for SS, PhilHealth, HDMF or
Pag-Ibig and EC Premiums for and in behalf
of their employees and workers.

Monthly Employer Employee -EC Premiums or employees’ compensation

Compensation contributes contributes

P1,500 or less 1% 2%

Over P1,500 to 2% 2%
P5,000

Maximum - P,500 x 2% = P100 each

employee & employer total of P200

How are these agencies paid? On a

monthly basis.

Union Dues - an employee or worker may

be a member of a labor union and as such is
also required to make contribution to the
union.
Advances - In case of emergency or
necessity, employees or workers are
sometimes allowed to draw a cash advance
against their compensation.
insurance which is paid ONLY by the
employer is a requirement contribution
mandated by law which entitles employees
to additional benefits with regard work
connected sickness or injury resulting to
disability or death of an employee

-From the viewpoint of the business, the The law requires that tax should be
asset cash will decrease with a withheld from payroll every payroll period.
corresponding increase in another asset For the other contributions, there are two
account - ADVANCES TO ways of deducting the contributions:
EMPLOYEES/WORKERS.
1. These are withheld only once from
Advances to Employees/Workers XX the payroll nearest the end of the
month on the basis of the monthly
Cash XX
gross compensation or
 2. These are deducted every time a CASH ON HAND AND IN BANK
payroll sheet is prepared so that the
Usually, entities uses 3 cash account titles:
take home pay will be of the same
(1) cash on hand (2) cash in bank-current
amount and the employees will find
and (3) cash in bank-savings
it easy to prepare a budget of daily
expenditures. Cash in bank may either be (1) Current
account or (2) Savings accounts
Internal Control for payroll
Current Account - used by a business when it
Internal Control - is a procedure intended
pays using a bank check.
to protect the assets of the business and to
ensure compliance not only with company Imprest System - is an internal control
policies but also contracts and government procedure for cash transactions.
regulations.
- internal control procedure wherein
The following are some of the internal all cash received are deposited intact
control procedures being implemented by in a bank and all cash disbursements
business entities for payroll: are made by checks except for petty
cash expenses
a. A record is maintained by the
Human Resource Department for Savings Account - where a business deposits
each employee or worker. Pertinent all extra cash which earns interest.
information is always updated for
- Cash in Bank-Currrent
evaluation and promotion proposes.
- Cash in Bank-Savings
b. Time in and out is better controlled
- Cash on Hand
using a computerized timekeeping
machine using either employee’s CASH ON HAND AND IN BANK
thumb mark or identification card.
Cash is not always in the form of paper
c. The payroll sheet is also a control
money and coins. Negotiable instruments
device that is reviewed by
like bank check, government’s treasury
authorized personnel and signed as
warrant and the postal money order are
approved by the Finance Officer
accepted also as medium of exchange and
before payment can be made.
considered as cash.
d. Payment should be made by check
rather than cash or should be To illustrate:
withdrawn through the ATM
machine.
June 1: For service rendered, the firm To illustrate: On May 1, Bert de Leon
received Php 50,000 cash and a postal invested land which he bought for Php
money order for Php 100,000 200,000 in 2003 but with current market
value of Php 500,000
June 1 Cash on Hand 150,000
May 1 Land 500,000
Service Income 150,000
De Leon, Capital 500,000
Received cash for services rendered
Initial investment of the owner
June 2: Opened a current account with PNB
and deposited the check received (Php Market Value - represents the amount for
100,000) which the asset could be sold or bought in
its present condition.
June 2 Cash in bank 100,000
Exchange Price or Cost Concept - state that
Cash on Hand 100,000
acquired assets should be recorded at the
Cash deposits made actual price established on acquisition date
which is measured in cash or its equivalent
July 1: Issued a check for Php 15,000 in
amount. Acquisition date from the
payment of an account
viewpoint of the business is the date when
July 1 Accounts Payable 15,000 the land is invested.

Cash in bank 15,000 If investment in the form of property with

an attached liability
Payment of account
Investment in Property with an attached
July 15: Paid the salary of the secretary, Php
liability - the liability will be recognized in
5,000 in cash
the books of the business and the capital

July 15 Salaries Expense 5,000 account will be credited at the net amount.

Cash on Hand 5,000 To illustrate: On May 8 Marvin Aquino

invested land with a previous cost of Php
Payment for salary
300,000 and a current market value of Php

Investment of owner 500,000. The land was mortgaged to

Metrobank for Php 200,000 but Php 150,000
- Cash is still due.
- Property (current market value)
- An already existing business May 08 Land 500,000
 Mortgage Payable 150,000 increase in owner’s equity by Php 208,000
which is the amount paid by Roces
Aquino, Capital 350,000

Owner’s investment net of mortgage Drawings of the owner - if the withdrawal of

The land was valued at its current value of the owner is in the form of property, it
Php 500,000. The capital account was should be recorded at its original cost or at
credited only for Php 350,000 (the amount
book value (cost less accumulated
net of the mortgage amount assumed by the
depreciation).
business)
To illustrate: On May 12, the owner of
Karen Gil transferred to her house a
Investment of owner may be in the form of: computer unit owned and being used in the
business with a cost of Php 40,000,
Investment of an already existing business -
accumulated depreciation of Php 6,000 and
the assets and liabilities must also be
current market value of Php 25,000.
recorded at the current market value of the
old business.

To illustrate: On May 12, Ferdie Venecia

has a business called Ferdie’s Store which
Mark Roces wants to buy. On May 12,
Ferdie offered to sell it for Php 208,000 after
agreeing to decrease the value of the
merchandise inventory and the office May 12 Gill, Drawing 34,000
furniture and equipment. The assets and
Accumulated Depreciation 6,000
liabilities of the store are listed below at
book values and current market values on Equipment 40,000
the investment date:
To record the computer withdrawn by the
owner
Decrease in owner’s equity and decrease in
assets in the form of equipment.
Gil drawing was debited based on the BOOK
VALUE of the equipment withdrawn.

Book value - represents the unexpired cost

Assets were increased by Php 358,000,
or remaining utility value of the asset.
increase liabilities by Php 150,000 and

ACQUISITION COST OF PROPERTIES

Acquired property, plant and equipment
should be recorded at its COST ( the price
established in an exchange transaction and
based on Cost or Exchange Price Principle).
Aside from the purchase price, the following
costs must also be considered:
1. Incidental expenses incurred in
transporting the asset to the place of
the buyer such as taxes, import
duties, storage, insurance while in
transit and freight. These costs form
part of the asset cost as the
acquisition of the asset would not be
possible without these incidental
expenses. These cash outlays are
called capital expenditures.
2. Additional expenditures needed to
set up and test the property to make
it ready for use are also capitalized
such as installation cost, expenses for
the test runs, salary of hired expert, if
needed.
Deducted from the purchase price
- trade discounts, rebates, returns
and allowances are deducted from
the purchase price of the acquired
property.
Discount - given for large quantities
bought
Rebate - is a discount granted for
paying an account promptly
Allowance - is a reduction on the
price given to the buyer to cover up
for defects or soilage on the asset
purchased without returning the
asset.
To illustrate: On June 01, a machine was
purchased for Php 150,000 less a 5% trade
discount. Taxes of Php 7,250, freight of Php
5,000 and insurance of Php 15,000 were also
incurred. A check was issued for all the
payments made. Upon receipt of the
machine additional cost was incurred for
assembly, installation and test runs all
amounting to Php 20,000 which was paid in
cash.
June 01 Machinery 169,750
Cash in Bank 169,750
To record purchase of machine plus incidental
expenses
Machinery 20,000
Cash on Hand 20,000
Cash paid for assembly, installation and test
run
Computation:
150,000 x 0.05 = Php 7,500
150,000 - 7,500 + 7,250 + 5,000 + 15,000 =
Php 169,750
RETURN OF ASSET PURCHASED
if the asset, because of a defect or not the
right specification, is returned, the effects
are;
 1. Value of the asset will decrease
2. Cash will increase if there is a refund
or liability will decrease if the asset
was purchased on credit.
Without returning the asset, the buyer may
just ask for an allowance on the cost price
which is also a decrease on the value of the
asset with a corresponding asset increase in
cash or decrease in liability if the asset was
purchased on account.
To illustrate:
June 01 Bought tables and chairs from
Alpha Furniture Store and paid cash Php
15,000
June 01 Furniture & Fixtures 15,000
Cash on Hand 15,000
Cash purchase of furniture
June 04 A defective table was returned and a
cash refund for Php 2,500 was received
June 04 Cash on Hand 2,500
Furniture & Fixtures 2,500
Cash refund for returns made
June 07 Bought an Acer computer on
account Php 70,500
June 07 Equipment 70,500
Accounts Payable 70,500
Equipment bought on account
June 08 Complained of a slight defect
in the Acer computer purchased and was
given a price adjustment of Php 1,000
June 08 Accounts Payable 1,000
Equipment 1,000
Allowance received for defect in purchase
made
Sale of Properties
If the asset, like machine or equipment
becomes obsolete or inadequate to meet the
demands of an expanding business, this
may be sold and replaced with a new or
better model.
Obsolescence - occurs when a better model
is invented or produced than what was
originally acquired.
Inadequacy - result when the asset can no
longer meet the demands of the business.
The following rules should be observed:
1. Close the asset at its cost price (what was
recorded in the books at the acquisition
date)
2. Close the related accumulated
depreciation.
Accumulated depreciation represents the
expired cost of using the equipment. Once
the asset is sold, the equipment account is
closed on the credit side so with its related
accumulated depreciation on the debit side.
3. Compare the cash proceeds against the
book value of the asset sold to determine
the gain or loss from the sale.

Gain on sale of asset = cash proceeds >

book value Promissory Note - is a written promise
made by the maker or debtor promising to
Loss on sale of asset = cash proceeds <
pay the payee or creditor a sum certain in
book value
money due at a fixed or determinable future

To illustrate: Assume the following time.

transactions:
2 Types of Promissory Note:

March 01, 2017 Bought an equipment for

Non-interest bearing note - is one which
cash of Php 15,000
face value is the same as its maturity value.

July 01, 2018 The equipment had to be

1. Issue date
replaced and so it was sold for cash Php
2. Face value
6,500. On this date, the accumulated
3. Maturity date or due date
depreciation was Php 7,000

July 05, 2018 A similar type of equipment

but with a larger capacity to produce was
acquired. A check was issued for Php 50,000
for the purchase price plus Php 5,000
incidental fees for freight, insurance and
4. Payee
taxes
5. Maker or debtor

From the viewpoint of the maker-debtor,

there is an increase in liabilities credit to
Notes Payable, while from the viewpoint of
payee-creditor, there is an increase in assets
debit to Notes Receivable.

The following are the transactions giving

rise to promissory notes

1. Services rendered or received

2. Assets acquired or sold
 3. Accounts due but debtor cannot pay
4. Money borrowed or lent
To illustrate:
1. Mike Santos owns a medical clinic. He
received a 30-day note for Php 6,000 from
Susan Co, owner of Susie Doll, for medical
services given to her employees.
ENTRY (MEDICAL CLINIC)
Notes Receivable 6,000
Medical Income 6,000
Received note for service rendered
ENTRY (SUSIE’S DOLLS)
Medical Expense 6,000
Notes Payable 6,000
Issued note for medical services of employees
To illustrate:
2. On May 16, Mike Santos rendered
medical services to Co’s employees on
account, Php 6,000. After 15 days, Co
issued a note for the account
ENTRY (MEDICAL CLINIC)
May 16 Accounts Receivable 6,000
Medical Income 6,000
Rendered service on account
May 31 Notes Receivable 6,000
Accounts Receivable 6,000
Received note for account due
Interest bearing note - is one where the
maturity value (amount to be paid on the
due date) is higher than its face value or
principal (the amount stated in the
promissory note) because of the interest
charge.
Interest = Principal x Interest Rate x Time
Maturity Value = Principal + Interest
Determining the Due Date
- A promissory note has a term or
period of time within which a debtor
is required to pay.
- Subtract the issue date from the
total number of days said issue
month to get the remaining number
of days.
- Add the number of days of the
succeeding months until you arrive
at the due date or maturity date.
To compute, subtract the issue date from
the total number of days of said issue month
to get the remaining number of days. From
this, add the number of days of the
succeeding months until you arrive at the
due date or maturity date
To illustrate: assume the note is for a Collected noted plus interest
period of 60 days dated November 2:
ENTRY (DAVE MENDIOLA)
No of days for November 30
Jun 30 Notes Payable 5,000

Interest Expense 75

Cash on Hand 5,075

Paid for note

Less Issue Date (2) BORROWING FROM BANK OR FINANCING

COMPANY
Remaining days for November 28
To iilustrate: On May 31, John Dimalanta,
No of days for December 31
owner-manage of Speedy Delivery Service,

No of days needed in January 1 borrowed Php 50,000 for business use from
Manila Bank and issued a 60-day 18%
To make it a total of 60
promissory note. On July 30, John

The due date is JANUARY 01 Dimalanta issued a check to Manila bank in

payment of the note
INTEREST BEARING PROMISSORY NOTE
ENTRY (SPEEDY)
Interest = Principal X Interest Rate X Time
MAY 31 Cash on Hand 50,000
Php 5,000 X 18% X 30/360
Notes Payable 50,000
Interest = Php 75.00
Borrowed cash from Makati bank
Maturity Value = Principal + Interest
July 30 Notes Payable 50,000
5,000 + 75.00
Interest Expense 1,500
Maturity Value = Php 5,075.00
Cash in bank 51,500
ENTRY (EDDIE MANALO)
Paid for note with interest
Jun 30 Cash on Hand 5,075
ENTRY (MANILA BANK)
Notes Receivable 5,000
MAY 31 Notes Receivable 50,000
Interest Income 75
Cash 50,000
 Cash loan to J.Dimalanta - Registering the business name with
the Department of Trade and
July 30 Cash 51,500
Industry;
Notes Receivable 50,000 - Registering the business with the
bureau of Internal Revenue;
Interest Income 1,500
- Getting a mayor’s permit to operate
Collected note and interest within a certain locality.

Discounting the note Percentage Tax - businesses are subject to

Most often, when cash is borrowed from
banks or financing companies, the note is
discounted which means that interest is
immediately deducted so that the cash
received is lower than the face of the note. On
maturity date, the borrower pays at face
value.
To iilustrate: On July 01, Precy Cruz of
Precy Electronic Mart had its own note of
Php 20,000 discounted with Makati Finance
Services for 45 days at 18%.
a 3% percentage tax based on annual gross
sales/receipts on sale or lease of services,
goods and properties provided that it does
not exceed the P3,000,000 threshold.
Not exceeding P250,000 Exempt from
paying tax
Section 109 exempts some service
providers such as educational institutions,
printing and publication of newspapers,
magazines, bulletins, books, agricultural
contract growers or millers, to name a few.

ENTRY (PRECY) TRAIN Law (RA No. 10963) the

percentage tax return shall be filled and
JUL 01 Cash on Hand 19,550
paid quarterly within 25 days from the close

Interest Expense 450 of each quarter- April, July October.

Note Payable 20,000 Value Added Tax (VAT) - if the annual

sales/receipts of services, goods, or
Discounted note With Makati Finance
properties exceed the threshold of

AUG 15 Notes Payable 20,000 P3,000,000, the business or professional

practitioner is subject to 12% VAT.
Cash in bank 20,000
CHAPTER 7: COMPLETING THE
Paid for note ACCOUNTING CYCLE FOR A SERVICE

Business Taxes, Permits and Licenses PROVIDER

Accounting cycle can be described as the Timing Issues
series of steps performed during the
*Time period assumption
accounting process from the time a
transaction is analyzed, recorded, and *Fiscal and calendar years
summarized, up to the preparation and
*Accrual- vs. cash-basis accounting
presentation of financial statements. The
accounting process of bookkeeping and *Recognizing revenues and expenses
financial statements preparation can only
The Basics of Adjusting Entries
be done efficiently through observing the
accounting cycle. *Types of adjusting entries

The series of steps in the accounting cycle are *Adjusting entries for accruals
the following:
*Adjusting entries for deferrals
1 Gather business documents and analyze the
*Summary of journalizing and posting
transaction.

The Adjusted Trial Balance and Financial

2 Record the transaction in the journal. This
Statements
step is also called journalizing.

*Preparing the adjusted trial balance

3 Transfer the entries from journal to the
ledger. This step is also called posting. *Preparing financial statements

4 Prepare the unadjusted trial balance.
5 Prepare a worksheet for adjustments and
Financial Statement
6 Record the adjusting journal entries.
7 Prepare an adjusted trial balance.
8 Prepare the financial statements.
Timing Issue Also known as the Time
Period Principle
The economic life of a business is divided
into time periods (monthly, quarterly or
yearly):
*If it starts January 1 and ends on December
31, it is called a calendar period.

9 journalize and Post the closing entries. *It may start on a month other than January
1 in which case it is called a fiscal period.
10 Prepare a post-closing trial balance.

Objective A-Timing Issues

11 Journalize and Post the reversing entries.

It cannot be helped that sometimes

Adjusting the Accounts
revenues and expenses transcend more than
one accounting period. A one year
insurance paid in advance on March 1, 2019,
should be expensed only for ten months in
2019 (March to December) and for two
months in 2020 (January to February). Or a
consultancy firm received an advance fee of
P30,000 good for three months starting
December 1, 2020. Only one month revenue
of P10,000 should be recognized in 2020 and
the remaining P20,000 in 2021.
Adjusting Entries - are entries prepared at
the end of the accounting period to update
some accounts and ensure their accuracy
before preparing the financial statements.
1. Accrued income - income already
earned but were not collected nor
recorded.
2. Accrued expenses - expenses already
expired but were not paid nor
recorded.
3. Unearned income - advance
collection recorded as a liability, but
a portion of which has already been
earned.
4. Prepaid expense - advance payment
recorded as an asset but a portion of
which has already expired.
5. Bad debts - clients accounts that
may not be collected anymore or are
doubtful of collection.
6. Depreciation Expense - transfer of
asset cost to expense based on its
declining utility value.
A number of these transactions will occur
repeatedly during the year or accounting
period. Rather than make several
adjustments, the accountant gathers all the
data and makes the adjustments only at the
end of the year or accounting period before
the financial statements are prepared.
Accrual Principle
- Revenue Recognition Principle
- Expense Recognition Principle
Cash basis - cash was collected after 1 year.
Accrual basis - income is recognized as
earned at the time service is rendered and
this is recorded regardless of when cash is
collected.
Expense - recognized as incurred at the time
service is received or used up regardless of
when cash is paid.
Matching Principle - the expense
representing the effort of the business
should be matched against the income
representing the accomplishment of the
business during the period it was earned.
Referral Fee Receivable - increase assets
Referral Fee Income - increase owner’s
equity
Referral Fee Expense - decrease owner’s Adjusting entry results in:
equity
Expense Recorded BEFORE Cash Payment
Referral Fee Payable - increase liability
Accrued expenses often occur in regard to:
Accrued Income - Referral Fee Receivable
*rent *taxes
which is a current asset representing an
account to be collected. *interest *salaries

Accrued Expense - Referral Fee Payable
which is a current liability representing an
account to be paid.
Prepaid Expense -represent advance
payment for service to be received expense
to be incurred in the future.
Adjusting entries for accrued expenses
*Increases (debits) an expense account and
*Increases (credits) a liability account.
Adjusting Entries for “Accrued Revenue and
Accrued Expense”

Prepayment opposite of Accrual A client, Cruz Consultancy, signed a lease

Accrued Revenue - often occur for services
performed, or for rent or interest. The
adjustment for accrued revenue gives rise
to an asset with a debit to a receivable and a
credit to an income account.
Adjusting entries for accrued revenues
*Increases (debits) an asset account and
contract with Asia Real Estate, requiring a
monthly rental of P50,000 for an office
space that it had rented. Cruz Consultancy
received a statement of account on January
5, 2021 charging it for December rental.
The following adjustments should be
prepared by the 2 entities:

*Increases (credits) a revenue account. Asia Real Estate

12/ 31 Accrued Rent Income 50,000

Accrued Expense - often occur for utility

services such as light, water, rent. The
adjustment for accrued expense gives rise to
a liability account with a credit to a payable
and a debit to an expense account.

Rent Expense 50,000

Expenses incurred but not yet paid in cash or
recorded. Cruz Consultancy
12/31 Rent Income 50,000
Accrued Rent Expense 50,000
Statement of Financial Position:
Current Asset: Accrued Rent Income
Current Liability: Accrued Rent Expense
Income Statement:
Service Income: Rent Income
Operating Expense: Rent Expense
ASSET METHOD
- The advance payment is recorded as
an asset Prepaid Expense.
- Represents a right to receive service
for cash already paid.
What if no adjustment is made? Rent
expense will be understated. Which
overstate net income and owner’s equity.
EXPENSE METHOD
- An alternative method to record the
advance payment is to immediately
debit it to an expense account.
What if accountant fails to make an
adjusting entry? Rent expense will be
overstated. Which in turn will understate net
income and owner’s equity.
PREFERABLE METHOD
The asset method is preferable since it
follows the conceptual flow of the cost.
Deferred or Unearned Revenue
Deferrals are either:
Prepaid Expenses or Unearned Revenues
A prepaid expense is a payment of cash,
that is recorded as an asset because service
or benefit will be received in the future. This
occurs most often for insurance, lease,
supplies, advertising.
An unearned revenue is a receipt of cash,
that is recorded as a liability because service
or benefit will be rendered or given in the
future.
Adjusting Entries for “Prepaid Expenses”
Payment of cash (advance payment) that is
recorded as an asset because the expense
has not been incurred.
Cash Payment BEFORE Expense was
incurred
Prepaid expense often occur in regard to:
*rent *magazine subscriptions
*airline tickets *utility deposits
Adjust the prepaid to decrease and
recognize an expense for the expired
portion. Cost will expire because of the
passage of time. The unexpired balance is
shown as a current asset in the statement of
financial position while the expired portion
is shown in the income statement.

Entry on payment date:

Adjusting Entries for “Unearned Revenues”
Dec 1 Prepaid Insurance 12,000
Unearned Revenues

*Company makes an adjusting entry to

record the revenue that has been earned
and to show the liability that remains.

*The adjusting entry for unearned revenues

results in a decrease (a debit) to a liability
account and an increase (a credit) to a
Cash 12,000
revenue account.
Paid for a 12-month insurance.
Adjusting Entries for “Unearned Revenues”
Adjusting Entries for “Unearned Revenues”
Example: On Nov 1, Asia Real Estate
Receipt of cash (advance collection) that is received P24,000 from Arcadia Flower Shop
recorded as a liability because the revenue for 3 months rent in advance. Show the
has not yet been earned. journal entry to record the receipt on Nov.
1st.
Cash Receipt BEFORE Revenue Recorded
Nov. 1 Cash 24,000
Unearned revenues often occur in regard to:
Unearned Rent Revenue 24,000
*rent *magazine subscriptions
LIABILITY METHOD
*airline tickets *customer deposits
- The advance collection is credited to
Adjust the unearned revenue to decrease
a liability account called Unearned
the liability account and recognize an
or Deferred Revenue.
income for the earned portion. The
- It is a liability of the company to
unexpired balance is shown as a current
render service for cash that was
liability in the statement of financial
advanced by the client.
position while the earned portion is shown
in the income statement.
What if no adjustment is made? Unearned
rent will be overstated, rent income will be
understated and so will owner’s equity.
INCOME METHOD
- An alternative method is to record
the advance collection immediately
with a credit to an income account.
PREFERABLE METHOD
The liability method is preferred, again
because it follows the conceptual flow of
recognizing first the liability until the
amount is earned.
Asset Method - Prepayment
Liability Method - Pre-collection
Bad Debts - refers to loans or outstanding
balances owed that are no longer deemed
recoverable and must be written off.
Allowance for Doubtful accounts - is a
contra asset account which is deducted from
the principal account.
Net realizable value - is the difference
between the accounts receivable and the
allowance for doubtful accounts.
Depreciation - often occur for fixed assets
such as furniture and fixtures and
equipment when their costs are adjusted
from “new” to “use”. The adjustment gives
rise to a contra asset account credited to
accumulated depreciation and a debit to a
depreciation expense account.
Depreciation
*Buildings, equipment, and vehicles (long-
lived assets) are recorded as assets, rather
than an expense, in the year acquired.
*Companies report a portion of the cost of a
long-lived asset as an expense
(depreciation) during each period of the
asset’s useful life (applying the Matching
Principle- costs and expenses are matched
against revenues earned).
Adjusting Entries for “Depreciation
Expenses”
On Dec. 1st, Asia Consulting paid P24,000
for equipment that has an estimated useful
life of 10 years. Show the adjusting journal
entry required at Dec. 31st.
(P24,000 / 10 yrs. / 12 months = P200)
Dec. 31 Depreciation Expense 200
Accumulated Depreciation 200
Depreciation (Statement Presentation)
*Accumulated Depreciation is a contra asset
account.
*Appears just after the account it wants to
decrease in value (Equipment) on the
statement of financial position or balance
sheet.
*Net equipment is called book value.
Adjusting Entries for “Doubtful bad account is recognized as an expense and
Accounts” the account is written off from the record.

Adjusting Entries for “Doubtful

It is possible that some customers’ accounts
Accounts- allowance Method”
may not be collected. Using the principle of
prudence and proper valuation of assets, a On Dec. 31st, Asia Consulting showed,
provision for bad debts or doubtful accounts among others, amounts due from customers
should be made. This way, the accounts of P24,000. Past experience show that 5% is
receivables (representing customers’ estimated to be uncollectible. Show the
accounts) are shown at realizable value in adjusting journal entry required at Dec. 31st.
the statement of financial position.There (P24,000 x .05 = P1,200)
are two methods used:
Dec. 31 Doubtful Accounts 1,200
1) Allowance Method- provides for
Allowance for Doubtful Accounts
doubtful accounts during the period the sale
1,200
of service is recorded. How can this be
possible if one does not know who among Statement of Financial Position:
the customers will not be able to pay? The
doubtful accounts are determined by
Current Assets: Accounts
estimation based on the company's past
ReceivableP24,000 Less:
experience or the experience of other
Allowance for Doubtful Accounts1,200
companies within the same business
Realizable Value P22,800
industry. To arrive at an estimate, a certain

Income Statement:

Operating Expenses:

Doubtful Accounts Expense P1,200

percentage or ratio is derived between the
Adjusting Entry for “Doubtful Accounts-
bad debts expense of the company and its
Direct Write Off ”
outstanding receivable for the previous
year. A contra asset is created for this
On Dec. 31st, Asia Consulting showed,
purpose. among others, amounts due from customers
of P24,000. It was discovered that Patrick
2) Direct Write Off Method- This method
Delivery Service has folded up and was
recognizes bad debts expense only when it is
declared bankrupt by the court. It owes Asia
certain that the company will not be able to
Consulting P5,000. Show the adjusting
collect the account anymore. As such, the
journal entry required at Dec. 31st.
Dec. 31 Bad Debts Expense 5,000 Expense Method

Accounts Receivable 5,000 (Initial) Insurance Expense

Statement of Financial Position: Cash

Current Assets:
(Initial) Prepaid Insurance
Accounts Receivable 19,000
Insurance Expense
Income Statement:
*Using the Income Method, when a
Operating Expenses:
company receives payment for future
Bad Debts Expense P5,000 services, it credits the amount to a revenue
account.
The realizable value is immediately shown at
the net amount since the bad account is
Liability Method
certain to be worthless.

Again, include bad debts as one of the (Initial) Cash

operating expenses. The appropriate title is
Unearned Rent Income
bad debts not doubtful expense.
(Adjusting) Unearned Rent Income

Rent Income

Alternative Treatment of Prepaid

Expenses and Unearned Revenues Income Method

*Some companies use an alternative (Initial) Cash

treatment for prepaid expenses and
Rent Income
unearned revenues.

(Adjusting) Rent Income

*Using the Expense Method, when a
company prepays an expense, it debits that Unearned Rent Income
amount to an expense account.
Alternative Treatment for “Prepaid
Asset Method Expenses”
(Initial) Prepaid Insurance
Example (Insurance): On Dec. 1st, Asia
Cash Consulting paid P12,000 for 12 months of
insurance coverage. Show the journal entry
(Adjusting) Insurance Expense
to record the payment on Dec. 1st.
Prepaid Insurance
Dec. 1 Insurance Expense 12,000
Cash 12,000
Example (Insurance): Show the adjusting
journal entry required at Dec. 31
Dec. 31 Prepaid Insurance 11,000
Insurance Expense 11,000
Alternative Treatment for “Unearned
Revenues”
Using the Income Method, the cash is
recorded as income, and then at the end of
the period the income is adjusted for the
unearned portion and recorded as a liability.
Example: On Dec. 1st, Asia Realtor received
P24,000 from Arcadia Consultancy for 3
months rent in advance. Show the journal
entry to record the receipt on Dec. 1st.
Dec. 1 Cash 24,000
Rent Revenue 24,000
Alternative Treatment for “Unearned
Revenues”
Example: Show the adjusting journal entry
required on Dec. 31
Dec. 31 Rent Revenue 16,000
Unearned Rent Revenue 16,000
Provision for Bad Accounts - sometimes
occur for customers’ accounts which are
doubtful of collection. The adjustment
gives rise to a contra asset account with a
credit to allowance for bad debts and a debit
to a bad debt expense account.
Market value - is the realizable value if the
asset is to be sold.
Book value - the unexpired cost or the net
utility value of the asset.
Accumulated Depreciation - which is a
contra-asset account is deducted from the
cost price to arrive at net book value
Asset - Accumulated Depreciation = Net Book
Income
Cost−Scrap Value ,if any
=Depreciation
Usefullife stated ∈no . of years
The following rules should be observed in
depreciation accounting:
1. Start depreciating the asset from
acquisition date.
2. Like bad debts, whatever is the
provision is also the amount
presented in the income statement
as an operating expense.
3. Accumulated depreciation, from the
title itself, means that the
depreciation amount is increasing as
additional provisions are recorded
every year. Only in the first year of
acquisition will the depreciation
expense in the income statement
and the accumulated depreciation in
the Statement of Financial Position
be of the same amount.
 4. The scrap value is deducted from
cost in determining the depreciable
cost of the asset. Scrap value is not
recorded unless it is sold for that
amount nor is it presented in the
Statement of Financial Position
until the end of the useful life of the
asset when the book value will then
be equal to the scrap value of the
asset.
Worksheet - is a columnar paper where the
first two columns are provided for the trial
balance, which is the starting point for the
preparation of the financial statements.
CHAPTER 8: FINANCIAL STATEMENT
PRESENTATION, CLOSING THE BOOKS
AND FINANCIAL ANALYSIS
PAS 1- GENERAL PURPOSE FINANCIAL
STATEMENTS
General purpose financial statements are
those intended to meet “equally” the needs
of all users. Its objective is to provide
information about the financial position,
financial performance and changes in the
financial position of an enterprise, as well as
its cash flow.
LIMITATIONS OF THE FINANCIAL
STATEMENTS
It is emphasized at this point that the
financial statements carry certain
limitations such as 1) the information
contained herein are largely financial in
nature, 2) they do not contain non-
financial information such as
competitiveness of the enterprise products,
company’s leading market position, or that
the head of the enterprise is a genius
(example: Microsoft’s Bill Gates or Apple’s
Steve Jobs) which may be relevant and may
influence stakeholders’ decisions. Added to
this, some information are not factual and
objective but a result only of the preparer’s
estimation and use of judgment. Of course
preparer makes the estimation only after a
careful study and a thorough analysis.
What consists the Financial Statements
Income Statement - provides information
regarding the financial performance of the
business or its profitability which is
important as this will enhance the resources
of the business and its capacity to generate
cash and cash equivalents. A high
profitability is marked by a high ROE (net
income divided by owner’s equity.
Statement of Changes in Equity - shows the
changes in the interest of the owner(s) for a
sole-proprietor owned business, partners in
a partnership and shareholders in a
corporation.
Statement of Financial Position - lists down
the economic resources being controlled by
the firm, and from which liquidity and
solvency are determined. It shows how
much of the assets of the firm are being
funded by the creditors and by the
investors. It helps predict ability of the of
the firm to pay for its obligations.
Statement of Cash flows - Show how cash
was affected by the operating, investing and
financing activities of the business. It also
helps assess ability of the business to disaggregated in the supporting note to the
generate or manage cash of the entity and financial statement. Following this, in the
ensures adequacy of cash through proper
timing between inflows and outflow of cash.

Preparing Financial Statements:

Two forms of income statement

Nature of Expense. The first form presents

the expenses according to their nature:
depreciation, advertising, transportation,
employee benefits. This is normally used for
a simple business such as that of a service
provider. To simplify the format, only two
sections are presented, one for revenues
and the other for expenses. This form which
is called the single step form makes a single
step of deducting the total expenses from
the total revenues to arrive at the profit or
loss.
Function of Expense. This second form of
income statement called Function of
Expense presents the expenses according to above report, three line items are presented:
its function or use: cost of sales, other income, depreciation and other
distribution cost, administrative cost and
expenses with three supporting notes.
financial cost, to name a few. (PFRS 1.54-.73).

Preparing Financial Statements from a Observe the following rules in preparing the
Worksheet income statement:

Function of Expense Format of Income
Statement
The International Accounting Standards
states that as a minimum, the face of the
income statement should include only line
items. It means that items that are more or
less similar in economic characteristics should
be aggregated in the face of the report and
1. Note that the statement consists of four
parts: heading, revenues earned, expenses
incurred and net income or profit.
2. The third line in the heading must always
be for a time period.
3. Margin on the left side - the extreme
margin is used to describe the major
sections and the inner margin is used to *There are two forms used: Account Form
describe the accounts contained in the and Report Form.
major section.

4. Money columns on the right side - the

extreme margin is for the major amounts
and the inner money column is for the
amounts of the described accounts.

5. Peso signs in the final money column

(extreme right) are placed on the first and
last amounts.

6. A single rule is placed under the last

figure to be added or subtracted and a
double line or rule is placed under the final
figure.

7. Income from the principal line of

operation called operating revenue is always
presented first followed by other income.
8. Expenses may be presented from the
highest amount to the lowest amount
(descending order) in which case other
expenses may be presented first in the
expense section of the income statement.
The Classified Statement of Financial
Position
Assets are classified into Current Assets and
Non-Current Assets
1.Current Assets include cash and cash

Or these may be arranged alphabetically. equivalents which are not restricted in use,

Interest expense being a financial cost is as well as other assets expected to be

always presented last. The rule is also the realized into cash, or sold or consumed

same in the arrangement of the expenses in within the normal operating cycle of the

the supporting notes. business or one year, whichever is longer

Statement of Financial Position 2.Non Current Assets are those assets not
included as current assets.
*Lists in detail the assets and liabilities of
the business and shows the residual interest Current Assets

of the owner as of a specific date. 1. Cash

2.Marketable Securities *Currently used in operations.

3.Receivables *Depreciation - allocating the cost of

assets to a number of years.
4.Other Receivables
*Accumulated depreciation - total
5.Merchandise Inventory
amount of depreciation expensed thus far in
6.Prepaid Expenses the asset’s life.

7.Deductions from current assets are called Current Liabilities

Contra-Asset Accounts *Obligations the company is to pay within

the coming year.
(e.g. Allowance for Bad Debts)
*Usually list notes payable first, followed by
Non-Current Assets
accounts payable. Other items follow in
1. Land order of magnitude.

2.Building *Liquidity - ability to pay obligations

expected to be due within the next year.
3.Equipment
Owner’s Equity
4.Furniture and Fixtures
*Proprietorship - one capital and drawing
5.Leasehold or Lease Right
account.

6.Accumulated Depreciation (is a contra

*Partnership - capital and drawing account
asset account)
for each partner.

The Classified Balance Sheet

*Corporation - Capital Stock and Retained

Long-Term Investments Earnings.

*Investments in stocks and bonds of other Adequate Disclosures

companies.
This principle requires the inclusion of

*Investments in long-term assets such as significant information that will help

land or buildings that a company is not enhance the firm’s financial statements. It

currently using in its operating activities. also means that the users are informed of
additional facts that will aid them in
Property, Plant, and Equipment
properly interpreting the financial

*Long useful lives. statements. PFRS 1/PAS 1.97-98 describes

and enumerates the significant information
that must be disclosed either in the body of
the financial statements or in
notes/supporting schedules to the financial
statements.
Other information that should be disclosed
include major liabilities and their due dates,
contingent assets and liabilities, subsequent
events that may affect the resources that
were presented in the statement of financial
position. PAS 1 states that an entity should
disclose any information that a reasonably
informed person would consider necessary
for the proper interpretation of the financial
statements.
Closing the Books
After all the adjustments have been
journalized and posted and the financial
statements prepared, the income and
expense accounts and owner’s drawing
account have to be closed
Closing the books means bringing the
temporary or nominal accounts to zero
balance by transferring them to the capital
account or owner’s equity. After the closing
entries, the books are “cleared” of these
accounts so that in the next accounting
period, the books are ready for a new set of
temporary or nominal accounts
On the other hand, we carry forward the
balances of the assets, liabilities and
owner’s equity to the next accounting
period since these are real or permanent
accounts and we don’t close these accounts
unless the assets are disposed, the liabilities
are paid and the capital is returned to the
owner.
Closing the Books
At the end of the accounting period, the
company makes the accounts ready for the
next period.
In making the closing entries, the income
statement column of the worksheet should
be used as a guide. The title Income
Summary is an account used to close the
nominal values and bring them to the
capital account. The following are the steps debited to the capital account to bring a
in making the closing entries: reduction.

1.The revenue accounts which normally are

credit balances should be closed on the
debit side and credited to the Income
Summary.

2.The expense accounts which normally are

debit balances should be closed on the
credit side and debited to the Income
Summary account

3.Determine the balance of the Income

Summary account which is a net income or
a net loss. If credit balance, representing a
net income, close by debiting the income
summary account and credit to increase in
Owner’s Capital account. If a debit balance,
representing a net loss, close by crediting
the Income Summary account and debit to
increase the Owner’s Capital account.
Preparing a Post Closing Trial Balance
After accomplishing so may accounting
steps, there is a need to prepare another
trial balance to prove the equality of the
debits and credits. The Post Closing Trial
Balance is prepared after closing the books
and contains only real accounts with
balances. It has the same accounts as those
found in the Statement of Financial
Position.

Opening Entry

4.The drawing account which normally is a To bring forward the accounts with balances
to the next accounting period an opening
entry should be prepared based on the Post
Closing Trial Balance.

debit balance is credited to close and Reversing Entries


These are the opposite of adjusting entries
and are prepared on the first day of the
succeeding reporting period. Prepaid
Expenses under the expense method and
Deferred Income under the income method
are the only items being reversed. The
reason for making reversing entries are the
following:
1.To close out the accounts created when
the adjusting entries were prepared such as
the prepaid expense (under the expense
method) and the unearned income (under
the income method)
2.To recognize the expired/income portion
applicable for the succeeding period
3.To simplify the bookkeeping entries in the
following accounting period.
Reversing Entries - Examples
Financial Analysis
•To give the whole/complete picture of the
company’s financial position and operating
performance, it has to be converted into
ratios, turnovers and percentages.
•An analysis of the previous year financial
statements is a stepping stone to
forecasting the company’s future financial
position and performance. The financial
data contained in the financial statements
should be evaluated primarily to assess the
strength in financial position and success in
the operating performance of the business
based on liquidity, profitability and
solvency.
•Financial Analysis becomes a powerful and
effective tool in obtaining meaningful
knowledge and in making informed
judgment and decision.
Comparative Financial Statements
•Intracomparability – comparison of data
between two periods of a company
(e.g. year 2020 current year vs year 2019
previous year
•Intercompany/Benchmarking – comparison
made between two companies
Profitability
•The ability of the company to enhance
owner’s equity through profit.
•
a. Profit Margin = Net Income/Revenues
= Shows the adequacy of the revenue to
earn profit
 = the higher the ratio, the more a. Debt Ratio = Total Liabilities/Total
profitable the business is Assets

b. Return on Total Assets = Net = Shows the proportion of the assets

Income/Average Total Assets provided by the creditors

= Shows the income earned by the

business based on assets invested
b. Equity Ratio = Total Owner’s Equity /
= A high rate means the assets are being Current Liabilities
used profitably by the business
= Shows the proportion of the assets
c. Rate of Return on Equity = Net invested by the owner
Income/Average Owner’s Equity
MODULE 9: ACCOUNTING FOR A
Liquidity MERCHANDISER

•The ability of the business to pay for its Compare profit of a Service Provider and a
short-term obligations. Merchandiser

a. Working Capital = Current Assets – CRUZ DELIVERY SERVICE

Current Liabilities

b. Current Ratio = Current Assets / Service Fees Revenue P 30,000

Current Liabilities
Operating Expenses ( 12,000)
c. Quick Ratio/Acid Test Ratio = Quick
Assets/Current Liabilities Operating Profit 18,000

Quick Asset = current assets Other Revenues and 3,000

that can be readily convertible to cash Gains

Solvency Other Expenses and ( 2,000)

Losses

Net Profit P 19,000

•Long Term liquidity and is measured based
on ability of the business to pay for long Sales Revenue P 54,000
term obligations when they fall due.
Less Cost of Sales 30,000
•
 Gross Profit 24,000 Operating Expenses – expenses incurred
necessary to support the operation of the
Operating Expenses ( 16,000) business (e.g. rent, utilities, salaries, etc)

Non-Operating Activities – are minor

Operating Profit
income and expenses not recurring and not
8,000 part of the regular operation.

a.Other Revenues and gains – such as rent

Other Revenues and 5,000
income, interest income and gain from sale
Gains
of capital asset
Other Expenses and ( 2,000)
Losses b.Other Expenses and Losses – such as

Net Profit P 11,000 interest expense and loss from sale of

equipment
SUPER BOOKSTORE
Merchandising Business
SERVICE PROVIDER
•Carries a stock of goods called Merchandise
1.Uses Service Fees Revenue
Inventory
2.In general, does not need to maintain
• Computes for profit by putting a mark up
merchandise inventory
on the cost of merchandise
3.Does not have Cost of Sales account
• Determines gross profit by deducting from
MERCHANDISER sales the cost of sales or the cost of goods
sold.
1. Sales Revenue for receipts coming from
goods sold • Classifies operating expenses into two:
selling and administrative
2. Must maintain a stock of goods held for
merchandise called Merchandise Inventory • Determines net profit by deducting from
gross profit the operating expenses.
3. Recognizes the Cost of Sales account in
the Income statement once the goods Business Documents
were sold

4. Gross Profit – represents the amount of

mark-up on the cost price and indicates
adequacy of margin of profit set up by the
merchandiser