FINANCIAL ACCOUNTING AND REPORTING

ACCOUNT TITLES AND

DEFINITION AND THEIR
NORMAL BALANCES
INCOME – CREDIT
ASSET – DEBIT
1. SERVICE FEES (REVENUE)
1. CASH 2. SALES (SALES REVENUE)
2. ACCOUNTS RECEIVABLE 3. INTEREST INCOME
3. ALLOWANCE FOR BAD DEBTS
– Contra Asset Account
- Credit EXPENSES – DEBIT
4. NOTES RECEIVABLE
5. PREPAID SUPPLIES 1. COST OF SALES (COST OF
6. PREPAID RENT GOOD SOLD)
7. PREPAID INSURANCE 2. FREIGHT-OUT – Expense to the
8. LAND seller
9. BUILDING 3. FREIGHT-IN – Expense to the
10. ACCUMULATE buyer
DEPRECIATION -BLDG 4. SALARIES EXPENSE
11. EQUIPMENT 5. RENT EXPENSE
12. ACCUMULATED 6. UTILITIES EXPENSE
DEPRECIATION – EQUIPMENT 7. SUPPLIES EXPENSE
- Contra asset Account 8. BAD DEBT EXPENSE
13. INVENTORIES 9. DEPRECIATION EXPENSE
10. ADVERTISING EXPENSE
11. INSURANCE EXPENSE
LIABILITIES – CREDIT 12. TAXES & LICENSES
13. TRANSPORTATION & TRAVEL
1. ACCOUNTS PAYABLE EXPENSE
2. NOTES PAYABLE 14. INTEREST EXPENSE
3. INTEREST PAYABLE 15. MISCELLANEOUS EXPENSE
4. SALARIES PAYABLE 16. LOSSES
5. UTILITIES PAYABLE
6. UNEARNED INCOME

EQUITY – CREDIT
1. OWNER’S EQUITY
2. OWNER’S DRAWINGS
– Contra equity Account
- Drawing minus Equity
 FINANCIAL ACCOUNTING AND REPORTING
CHAPTER 1: INTRODUCTION TO
ACCOUNTING
Accounting – Process of identifying,
recording, and communicating economic
information that is useful in making
economic decision.
ESSENTIAL ELEMENTS OF THE
DEINITION OF ACCOUNTING
1. IDENTIFYING
- Identify only accountable
events
Accountable Events
- Affects the 5 major accounts
- Should be business related
- Economic events – entail money
IDENTIFICATION – Non-accountable
events are not recorded into post.
5 MAJOR ACCOUNTS
1. ASSET
2. LIABILITIES
3. EQUITY
4. INCOME
5. EXPENSE
2. RECORDING
- Journalizing accountable events
then posting T-Accounts or
General Ledger.
3. COMMUNICATING
- After doing posting, summarize
using T-Accounts and the trial
balances. Adjust them using
Adjusting Entries. Output of
the accounting which is the
Financial Statements.
FINANCIAL STATEMENTS
1. STATEMENT OF
COMPREHENSIVE INCOME
2. STATEMENT OF CHANGES
INEQUITY
3. STATEMENT OF FINANCIAL
POSITION
4. STATEMENT OF CASHFLOWS
5. NOTES TO FINANCIAL
STATEMENTS
TYPES OF INFORMATION
PROVIDED BY ACCOUNTING
1. QUANTITATIVE
INFORMATION
2. QUALITATIVE INFORMATION
3. FINANCIAL INFORMATION
NATURE OF ACCOUNTING IN
BUSINESS
- Accounting is a process which
the basic purpose of providing
information about economic
activities intended to be useful
in making economic decisions.
FUNCTIONS OF ACCOUNTING IN
BUSINESS
1. EXTERNAL USERS
2. INTERNAL USERS
 FINANCIAL ACCOUNTING AND REPORTING
FORMS OF BUSINESS
ORGANIZATION
1. SOLE PROPRIETORSHIP
- Registered with DTI.
2. PARTNERSHIP
- Formed by contractual
agreement.
- Registered with SEC.
3. CORPORATION
- Formed by operation of Law.
- Registered with the SEC.
4. COOPERATIVE
- Accordance with the
cooperative code.
- Registered with the CDA.
 FINANCIAL ACCOUNTING AND REPORTING
CHAPTER 2: ACCOUNTING
CONCEPTS AND PRINCIPLES
BASIC ACCOUNTING CONCEPT
1.SEPARATE ENTITY CONCEPT
- Separation dealings of the owner and the
separation of the business dealings of the
business.
- Only the transaction of the business are
recorded in the books of accounts.
2.HISTORICAL COST CONCEPT
(COST PRINCIPLE)
Acquisition Cost – gastos – expose when
you paid for it.
-How much did you pay for it.
- When did you acquired it?
- Should record/ report this kind of assets
at acquisition cost/
3.GOING CONCERN ASSUMPTION
-You do not see the business as going
bankrupt in 5 years or 10 years. You see it
to be operating indefinitely.
4.MATCHING
- Match the expenses when related revenue
is recognized.
- Match the cost with the related revenue.
5.ACCRUAL BASIS OF
ACCOUNTING
-Heart and Soul of Accounting
- Income is recorded in the period when it
is earned, rather than when it is collected.
-When you render the service, you have
the income.
- When you recognize an income, you
have to record it. Earned in Income have to
record or recognize it.
EXPENSE
Accrual Basis – It is recognized when it is
incurred.
Cash Basis – When you earn the cash.
Outflows of Cash – Expense
Inflows of Cash - Income
6.PRUDENCE (CONSERVATISM)
- Do not expect positive outcome.
7.REPORTING PERIOD
- Basic accounting period is one year
2 TYPES OF ACCOUNTING PERIOD
Calendar Period/Year – January 1 – December 31
Fiscal Period/Year – January 2 – December 30
Interim Period – Less than one year
(Monthly, Quarterly, Semi-Annually)
8.STABLE MONETARY UNIT
- The purchasing power of the peso is
regarded as stable.
- We have to use peso in accounting for
business and transactions in the
Philippines.
- Disregard the downfall or rising of the
purchasing power of the peso.
 FINANCIAL ACCOUNTING AND REPORTING
-Do not take effect of the inflation and Philippine Interpretations Committee – in
deflation. charge of questions of standard that needs
to be set out properly.

9. MATERIALITY CONCEPT
QUALITATIVE CHARACTERISTICS
- Matter of professional judgment.
Fundamental Qualitative
- Something is significant – necessary or
Characteristics
important.
-Financial statement because there are
-Omission – Omitted it – Hindi sinama.
relevant to my decision-making activities.
Omitted it – sinama kaso it misstated it.
-Free from errors
“If the omission or misstatement could
-Relevance (Productive Value,
influence economic decisions.
Confirmatory Value, Materiality)
-Faithful Representation (Completeness,
10. COST-BENEFIT Neutrality, Free from errors)

- Accounting-deal with the output –

provision of information.
Enhancing Qualitative Characteristics
- Cost of “processing” and
- Comparability
“communicating” information.
- Verifiability
- Timeliness
- Understandability
11. FULL DISCLOSURE PRINCIPLE
- Qualitative information / Narrative
information. FUNDAMENTAL VS. ENHANCING

12. CONSISTENCY CONCEPT Fundamental Qualitative

- Accounted for in like manner from
period to period.
Philippine Financial Reporting
Standards (PFRS’s)
-The PFRSs are standard, and
interpretations adopted by the PFRS
GAAP – PFRS, PAS, and the
Interpretations
Characteristics
-Relevance and Faithful representation
without these 2 fundamentals qualitative
characteristics the information will not be
useful to the users.
Enhancing Qualitative Characteristics
-Enhance the usefulness.
-mas pinapaganda yung usefulness.

Standards – rules that needs to be

interpreted
 FINANCIAL ACCOUNTING AND REPORTING
RELEVANCE Enhancing Qualitative Characteristics
-It can affect the decision of the users. 1. Comparability
- Identifying similarities and
differences between different
PREDICTIVE VALUE sets of information.
2. Verifiability
-Future - Consensus – same conclusion
- 2 independent users reach
similar consensus.
CONFIRMATORY VALUE 3. Timeliness
-Past experiences - Information is available to
users in time to be able to
-past confirming the past prediction. influence their decision.
4. Understandability
- Reasonable knowledge of
MATERIALITY business activities.
-Entity-specific aspect of relevance - Willingness to analyze the
information diligently.
-An item is material if the omission or
misstatement of it will affect your
decision.

FAITHFUL REPRESENTATION
-True, Correct and collect depiction.
a. Completeness
- All information are complete they are
depicted as provided
b. Neutrality
- Fair, not giving bias.
c. Free from error
- for it to be faithfully represented
-avoid mislead
 FINANCIAL ACCOUNTING AND REPORTING
CHAPTER 3: THE ACCOUNTING
EQUATION
ASSET= LIABILITY + EQUITY
Asset
- Economics resources you
control that have resulted from
past events can provide you
economic benefits.
Liability
- Present obligations that have
resulted from past events.
- Present obligation require you
to give up economic resources.
Equity
- Asset minus Liability
- Net Asset/ Net Worth
- Real accounts are not closed at
the end of the reporting period.
Economic Benefits
- Increases your resources –
economic resources.
- Pertains to money.
Expenses
- Decreases in economic benefits
during the period in the form of
decreases in asset, increases in
liability, decreases in equity
except drawings.
- Profit or Loss / Net Income or
Net Loss.
EXAMPLE:
Changes in Equity
Beginning Balance Equity P6,000 Equity before P/L

Income 10,000

Expense (8,000)
EXPANDED ACCOUNTING
EQUATION Investment

Ending Balance P8,000 equity after

Asset = Liability + Equity + Income –
Expenses
Income P10,000 Beginning Equity P6,000

Expense (8,000) Profit 2,000

Income
2,000 Ending Equity: P8,000
- Increases in economic benefits
during the period.
- Increases in asset.
- Decreases in liability.
- Increases in equity except
investment.
Closing Entries
- All nominal accounts are being
closed.
 FINANCIAL ACCOUNTING AND REPORTING
CHAPTER 4: TYPES OF MAJOR CLASSIFICATION OF THE
ACCOUNTS FIVE MAJOR ACCOUNTS
Account
Balance Sheet Accounts
- Basic storage of information in 1. Asset
accounting 2. Liability
- Record of the increases and 3. Equity
decreases in a specific item of
Real Accounts
asset, liability, equity, income,
or expense. - Permanent accounts
- They will not be close every
THE T-ACCOUNT
end of the reporting period.
CASH Account Title
Debit simply
Dr Cr
refers to the The term credit Income Statement Accounts
left side of simply refers to
1-Jan 500
the account. the right side of 1. Income
the account.
-Sometimes 3- Jan 1,000 800 4-Jan 2. Expenses
referred to as -sometimes
the “value referred to as the Nominal Accounts
received.” “value parted
Balance 700 with.” - Temporary Accounts
- Being close at the end of the
The differences between the total debits and credits in the reporting period.
account represents the balance of the account. - Subject to closing entries.
-If total debits exceed total credits, the account has a debit
balance, the account has a credit balance.

Latin Words

Debere (Dr) Credere (Cr)

Income
- Increases in economic benefits
in the form of inflows, or
enhancements or increases in
asset/decreases in liability.
- Will result into an increase in
equity.
Expense
- Form of outflow/depletion of
asset/ decreases in asset/
increases in liability.
- Result to a decrease in equity.
 FINANCIAL ACCOUNTING AND REPORTING
CHART OF ACCOUNTS Expenses
1. Cost of Sales (Cost of Good Sold)
2. Freight-out
Asset
3. Salaries Expense
1. Cash 4. Rent Expense
2. Accounts Receivable 5. Utilities Expense
3. Allowance for Bad debts 6. Supplies Expense
4. Notes Receivable 7. Bad debt Expense
5. Prepaid supplies 8. Depreciation Expense
6. Prepaid rent 9. Advertising Expense
7. Prepaid insurance 10. Insurance Expense
8. Land 11. Taxes & Licenses Expense
9. Building 12. Transportation and Travel Expense
10. Accumulated Depreciation-Bldg. 13. Interest Expense
11. Equipment 14. Miscellaneous Expense
12. Accumulated Dep.-Equipment 15. Losses

Liability
1. Accounts Payable
2. Notes Payable
3. Interest Payable
4. Salaries Payable
5. Utilities Payable
6. Unearned Income

Equity
1. Owner’s Capital
2. Owner’s Drawings

Income
1. Services Fees
2. Sales
3. Interest Income
4. Gains
 FINANCIAL ACCOUNTING AND REPORTING
CHAPTER 5: BOOKS OF ACCOUNTS
AND DOUBLE – ENTRY SYSTEM
DOUBLE-ENTRY SYSTEM

THE BOOKS OF ACCOUNTS

Concept of Duality
- Each transaction is recorded in
1. Journal two parts.
- The book of journal entries - One transaction in debit and
another in credit.
Special Journal
Concept of Equilibrium
- Record transactions with
similar nature. - Equal of Debit and Credit.
a. Sales Journal
- Used to record sales on
account. NORMAL BALANCE OF ACCOUNTS
b. Purchase Journal
- Used to record purchases of Types of Accounts Normal Balance
inventory. Asset Debit
c. Cash Receipts Journal
- Used to record all transactions Liability Credit
involving receipts of cash. Equity Credit
d. Cash Disbursement Journal
- Used to record all transactions Income
involving payments of cash. Credit

General Ledger Expense Debit

- All other transaction that can

not be recorded in the Special Contra Accounts
Journal are recorded in the
General Journal. - Deduction to their related
2. Ledger accounts.
- “Books of final entries.”
1. General Ledger
-Controlling Accounts – All
accounts appearing in the trial
balance.
2. Subsidiary Ledger
- Details
- Breakdown of the balances of
controlling accounts.
 FINANCIAL ACCOUNTING AND REPORTING

CHAPTER 6: BUSINESS TYPES OF EVENTS

TRANSACTIONS AND THEIR
ANALYSIS
1. External Events
- Transactions that involve the
10 Steps in the Accounting Cycle business and another external
party.
1. Analyzing
2. Internal Events
2. Journalizing
- Transactions that do not
3. Posting
involve an external party.
4. Unadjusted Trial Balance
- Employee, Officers,
5. Adjusting Entries
Shareholders
6. Adjusted Trial Balance
7. Financial Statement
8. Closing Entries
JOURNALIZING
9. Post – Closing Trial Balance
10. Reversing Entries - Refers to recording an
identified accountable event in
the journal by means of a
Identifying and Analyzing Transactions journal entry.
and Events - Chronological manner.
-Only accountable events are recorded
-Affects the 5 major type of account. DATE ACCOUNT TITLE DEBIT CREDIT
-Are normally identified from source Account title to be debited. Pxxx
documents, such as sales invoice, official
receipts, delivery receipts. Account title to be credited. Pxxx

Short description of the

Sales Invoice Transaction.

- Credit (Merchandising,
Manufacturing,) (Goods)
Official Receipt SIMPLE AND COMPOUND
JOURNAL ENTRIES
- (Service business) – (Multiple
copies)
Delivery Receipt Single Journal Entry
- Document signed by the - Contains single debit and
receiver of a shipment credit.
acknowledging the receipt of
the goods. Compound Journal Entry
 FINANCIAL ACCOUNTING AND REPORTING
- Contains two or more debits or - Prepared to check the equality
credits. of total debits and total credits.

CHAPTER 7: POSTING TO THE TYPES OF TRIAL BALANCE

LEDGER

Unadjusted Trial Balance

Posting
- Prepared before adjusting
- Process of transferring data entries are made.
from the journal to the
Adjusted Trial Balance
appropriate accounts in the
ledger. - Prepared after adjusting entries
but before the financial
Examples of Posting
statements are prepared.
Transaction: January 8 – Services worth
Post – Closing Trial Balance
P30,000 were rendered for cash.
- Prepared after the closing
process.
\ Journal BASIC PRO-FORMA ENTRIES
Date Account Titles Debit Credit

Jan 8 Cash P30,000

1. Owner’s Investment – Owner’s
Service Fees P30,000 Capital

To record service fees Cash xxx

Owner’s Capital xxx

General Ledger 2. Owner’s Drawings (Cash -

Owner’s Drawings)
Cash Service Fees Owner’s Drawings xxx
Date Dr Cr Dr Cr Cash xxx
Jan 8 P30,000 P30,000

3. Obtaining loan from bank or other

lenders (Formal with promissory
note)
Trial Balance Cash xxx
- List of general ledger accounts Note Payable xxx
and their balances.
 FINANCIAL ACCOUNTING AND REPORTING

4. Acquisition of Inventory on Cash 8. Sales of Inventory on Cash Basis

Basis (With charging COGS)
Perpetual
Perpetual
Cash xxx
Inventory xxx
Sales xxx
Cash xxx
#
COGS xxx
PERIODIC
Inventory xxx
Purchases xxx
Periodic
Cash xxx
Cash xxx
Sales xxx
5. Acquisition of equipment on Cash
Basis #
Equipment xxx No Entry
Cash xxx

9. Sale of Inventory on Credit/ on

account (with charging COGS)
6. Acquisition of Inventory on Credit/
on account Perpetual
Perpetual Accounts Receivable xxx
Sales xxx
Inventory xxx #
Accounts Payable xxx COGS xxx
Periodic Inventory xxx
Purchases xxx Periodic
Accounts Payable xxx Accounts Receivable xxx
Sales xxx
7. Payments of Accounts Payable / #
Supplier’s account
No Entry
Perpetual
Accounts Payable xxx
10. Collection of Accounts
Cash xxx Receivable / Customer’s Account
 FINANCIAL ACCOUNTING AND REPORTING
Cash xxx
Accounts Receivable xxx
11. Payment of expenses (Advertising /
Utilities / miscellaneous / etc.)
Advertising Expense xxx
Cash xxx
Utilities Expense xxx
Cash xxx
Miscellaneous Expense xxx
Cash xxx

NOTE:
Periodic – Purchases
Perpetual – Inventory
Obtaining Loan – Notes Payable
Periodic – Charging to COGS – (No
entry)
- End of the month
- End of the reporting period.
 FINANCIAL ACCOUNTING AND REPORTING

CHAPTER 8: ADJUSTING ENTRIES

Purpose of Adjusting Entries EXPENSE METHOD
1. Take up unrecorded income and 08/1/20x1: Insurance Expense 360,000
expense of the period. Cash 360,000
2. Split mixed accounts into their real
and nominal elements.
Accrual of Income and Expense
Accrual 08/01/20x1 to 12/31/20x1 07/31/20x1 =360,000

- Income that is already earned 5 months 7 months

but not yet collected. (Used portion) (unused)
- Expense that is already incurred
but not yet paid.
- Rise to both income and 12/31/20X1: Prepaid Insurance 210,000
receivable, expense and
payable. Insurance Prepaid 210,000

LIABILITY = INCOME
EXPENSE = ASSET INSURANCE EXPENSE PREPAID INSURANCE

360,000 210,000

210,000 210,000
PREPAID EXPENSE
150,000
Asset Method
08/01/20x1: Prepaid Insurance 360,000
Cash 360,000

(Insurance Exp.)
Expired/Used x 5/12 = 15000
360,000
Unexpired/Unused x 7/12 = 210,000
(Prepaid Exp.)
360,000

12/31/20x1: Insurance Expense 150,000

Prepaid Expense 150,000
PREPAID INSURANCE INSURANCE EXPENSE
360,000 150,000
 FINANCIAL ACCOUNTING AND REPORTING

BAD DEBTS UNEARNED INCOME

ALLOWANCE METHOD
LIABILITY METHOD
Accounts Receivable – 890,000
05/01/20X1 Cash 480,000
Allowance for Bad Debts – (45,000)
Unearned Rent Income 480,000
Net Realization Value – 845,000
#

12/31/20x1 Unearned Rent Income 320,000

12/31/20x1 Bad Debt Expense 45,000
Rent Income 320,000
Allowance of Bad Debts 45,000

UNEARNED RENT INCOME RENT INCOME

480,000 320,000

320,000 320,000
DEPRECIATION EXPENSE
160,000
(Property, Plant, Equipment) Except in
Land (Depreciable Assets)
Unearned (rent income) x 8/12 = 320,000
11/30/20x1 Machine 420,000
480,000
Cash 420,000
Unearned (Unearned Inc) x 4/12 = 160,000

480,000
Depreciation Expense =
COST −RESIDUAL VALUE 420,000−0 INCOME METHOD
= = 52,500 Per
USEFUL LIFE 8
year x 1/12 = 4,375
05/12/20x1 Cash 480,000

HISTORICAL COST Rent Income 480,000

Machinery – 420,000 #

Accumulated Dep – (4,375) 12/31/20x1 Rent Income 160,000

Carrying Amount 415,625 Unearned Rent Income 160,000

Or book value
RENT INCOME UNEARNED RENT INCOME

12/31/20x1 Depreciation Expense 4,375 480,000 160,000

Accumulated Dep-Machinery 4,375 160,000 160,000

320,000

May 1, 20x1 – December 31, 20x1 (Earned) 8 mos.

December 31, 20x1 – April 30, 20x2 (Prepaid Exp.) 4 mos.

 FINANCIAL ACCOUNTING AND REPORTING

ACCRUED INCOME
10/31/20X1 Notes Receivable 180,000

Sales 180,000

COGS xxx

Inventory xxx

12/31/20x1 Interest Receivable 3000

Interest Income 3000

ACCRUED EXPENSE
Sept 1 – Oct 1

Oct 1 – Nov 1 Interest Receivable 200,000

Nov 1 – Dec 1 Interest Income 200,000

(Dec 1-31) Jan 1, 20x2

12/31/20x1 Rent Expense 200,000

Rent Payable 200,000