PPT SUMMARY 2  Accounting cycle- refers to a series of
August 20, 2021
Module #2. A
Accounting for Servicing Business (Introduction)
 Accounting
- Is a service activity. Its function is to
provide quantitative information, primarily
financial in nature about economic entities
that is intended to be useful in making
economic decisions.
 Types of Business
1. Service- it sells people’s time.
EX: LBC, Western union, Accounting firm, law firm,
medical services and other professional firms.
2. Merchandising- it involves buying and
selling products.
EX: variety stores, savemore, Robinsons
supermarket.
3. Manufacturing- refers to conversion of
raw materials to into finished products.
EX: Toyota, proctor and gamble, and abott
laboratories.
 Forms of Business Organization
1. Sole Proprietorship- a business formed and
owned by one person called the owner or
sole proprietor.
2. Partnership- a business owned and
operated by two or more persons, bind
themselves, to contribute money, property or
industry into a common fund with the
intention of dividing profits among
themselves. The owners are called partners.
3. Corporation- is a business owned by its
stockholders. It is an artificial being created
by operation of law, having the right of
succession and the powers, attributes and
properties expressly authorized by law or
incident to its existence.
 Based on intended learning outcome
(ILO) of Financial Accounting Part 1, the
students will understand the
1. Accounting for Sole Proprietorship doing
servicing business
2. Accounting for sole proprietorship doing
merchandising business
 Financial accounting and reporting part 2
covers accounting for partnership and
corporation doing servicing, merchandising
and introduction to manufacturing type of
business.
 How to attain the intended learning
outcome (ILO) for financial accounting and
reporting part 1?
- By applying the accounting cycle for sole
proprietorship doing servicing business
(until Midterm) and applying the accounting
cycle doing merchandising business (until
finals).
sequential steps or procedures to
accomplish the accounting process.
When we apply the accounting cycle we
will produce the financial statements.
 Complete Set Financial Statements
1. Income statement/state of comprehensive
income/statement of financial position.
2. Statement of changes in equity
3. Balance sheet/ statement of financial
position
4. Statement of cash flows
5. Notes, comprising a summary of significant
accounting policies and other explanatory
information.
 Complete Set of Financial Statements
1. Income Statement/State of Comprehensive
Income/Statement of Financial Performance.
- Summary of Income and Expenses for a
given period of time.
- Income- Expenses= Profit (loss)
2. Statement of Changes in Equity
- Summarizes the changes (increase or
decrease) that occurred in owner’s equity.
3. Balance Sheet/ Statement of Financial
Position
- it shows the financial position or condition
of the business entity by listing the Assets,
Liabilities, and Owner’s Equity for a given
point of time.
- A= L+OE
4. Statement of Cash Flows
- it provides information about cash receipts
(inflows) and cash payments (outflows) of an
entity during a period relating to operating,
investing and financing activities.
5. Notes
- Comprising a summary of significant
accounting policies and other explanatory
information.
 Fundamental Concepts
- in recording business transactions,
accountants should consider the following
fundamental concepts that underlie the
accounting process.
1. Entity Concept
- an accounting entity is an organization or a
section of an organization that stands apart
from other organizations and individuals as a
separate economic unit.
- This concept states that the transactions of
different businesses or entities should not be
accounted for together. Even businesses of
one single proprietor need to be accounted
for separately.
2. Periodicity Concept
- This concept allows users to acquire timely
information that will serve as a basis on
arriving at economic decisions about future
activities.
- An entity’s life can be meaningfully
subdivided into equal time intervals for
reporting purposes. Waiting for the actual
last day of operations will not be necessary to
perfectly measure the entity’s profit.
3. Stable Monetary Unit Concept
- This concept is the basis for ignoring the
effects of inflation in the accounting records
of the organization.
- A reasonable unit of measure that is
considered in accounting is the Philippine
Peso. Its purchasing power is assumed to be
relatively stable meaning it allows
accountants add and subtract peso amounts
as though each peso has the same
purchasing power as any other peso at any
time.
4. Going Concern
- This concept pertains to the preparation of
financial statements considering the
assumption that the reporting entity is a
going concern and will continue in operation
for the foreseeable future.
- With this concept, it is assumed that the
entity has neither the intention nor the need
to enter liquidation or to cease operations.
- This concept underlies the depreciation of
assets over their useful lives.
 Criteria for General Acceptance of an
Accounting Principle
- certain guidelines need to be followed in
accounting practice. Generally accepted
accounting principle (GAAP) encompass the
conventions, rules and procedures necessary
to define accepted accounting practice at a
particular time.
 Basic Principles
- In order to generate information that is
useful to the users of financial statements,
accountants rely upon the following
principles:
1. Objectivity Principle
- Accounting records and statements are
based on the most reliable data available so
that they will be as accurate and as useful as
possible.
- Reliable data are verifiable when they can be
confirmed by independent observers. Ideally,
accounting records are based on information
that flows from activities documented by
objective evidence.
- Without his principle, accounting records
would be based on whims and opinions and
is therefore subject to disputes.
2. Historical Cost
- This principle stated that acquired assets
should be recorded at their actual cost and
not at what management thinks they are
worth as at reporting date.
3. Revenue recognition principle
- Under this principle, revenue is to be
recognized in the accounting period when
goods are delivered or services are rendered
or performed. This is regardless of whether
there is an actual collection on the date of
sale.
4. Expense Recognition Principle
- Expenses should be recognized in the
accounting period in which goods and
services are used up or incurred to produce
revenue and not when the entity pays for
those goods and services.
5. Adequate Disclosure
- Under this principle, it requires all relevant
information that would affect the user’s
understanding and assessment of the
accounting entity to be disclosed in the
financial statement.
6. Materiality
- Under this principle, financial reporting is
only concerned with information that is
significant enough to affect evaluations and
decisions.
- Depends on the size and nature of the item
judged in the particular circumstances of its
omission.
7. Consistency Principle
- The firms should use the same accounting
method from period to period to achieve
comparability over time within a single
enterprise. However, changes are permitted
if justifiable are disclosed in the financial
statements.
 Elements of Financial Statements
- As defined in March 2018 Conceptual
Framework for Financial reporting, these
elements of financial statements are:
1. Assets
- Refers to the resources controlled by the
entity as a result of past events and from
which future economic benefits are expected
to flow to the entity.
- In simple terms, assets are properties owned
and controlled by the business.
- An economic resource is a right that has
potential to produce economic benefits for
the entity which has the sole control or
ability to prevent other parties to direct the
use of that economic resource.
 Cash- refers to any medium for exchange
that a bank will accept for deposit at face
value including coins, currency, check,
money orders, bank deposits and drafts.
 Cash equivalents- Per PAS No. 7, these are
short-term, highly liquid investments that
are readily convertible to known amount of
cash and which are subject to insignificant
risk of changes in value.
 Notes Receivable- a written pledge that the
customer will pay the business a fixed
amount of money on a certain date.
 Accounts Receivable- these are claims
against customers arising from sale of
services or goods on credit. This type or
receivable offers less security than a
promissory note.
 Inventories- per PAS No. 2, these assets (a)
which are held for sale in the ordinary course
of business; (b) in the process of production
for such sale; or (c) in the form of materials
or supplies to be consumed in the
production process or in the rendering of
services.
 Prepaid Expenses- these are expenses paid
for by the business in advance. It is classified
as an asset because the business avoids
having to pay cash in the future for a specific
expense.
 Property, Plant & Equipment- Per PAS No.
16, these are tangible asset that are held by
an enterprise for use in the production or
supply of goods and services, or for rental to
others, or for administrative purposes and
which are expected to be used during more
than one period.
 Intangible Assets- Per PAS No. 38, these are
identifiable non-monetary assets without
physical substance held for use in the
production or supply of goods or services, for
rental to others, or for administrative
purposes.
2. Liabilities
- Refers to the present obligations of an entity
arising from past events, the settlement of
which is expected to result in an outflow
from the entity of resources embodying
economic benefits.
- Simply stated, liabilities are the debts
incurred by the business for the transfer of
an economic resource as a result of past
events.
- An obligation of the entity, owed to another
party.
 Accounts Payable- it denotes obligations or
debts of the business arising from services
received, merchandise, supplies or property,
plant and equipment acquired on account. It
is an “open account” obligation because it is
not supported by a promissory note.
 Notes Payable- the treatment is similar to
accounts payable however; this account is
supported with a promissory note executed
by the debtor in favor of the creditor.
 Accrued Liabilities- amounts owed to
others for unpaid expenses. This account
includes salaries payable, utilities payable,
interest payable and axes payable.
 Unearned Revenues- the business entity
receives payment before providing the
customers with goods or services, the
amount received is reorder to unearned
revenue account. When the goods or services
are provided to the customer, the unearned
revenue account is reduced and income is
recognized.
 Mortgage Payable- this account is used to
record long-term debt that is supported or
backed up by a collateral or has pledged
certain assets as security to the creditor.
 Bonds Payable- is a contract between the
issuer and the lender specifying the terms
and conditions of repayment and the
amount of interest to be charged. It is a long-
term obligation e3videnced by certificate of
indebtedness. Business obtain funds to
finance acquisition of equipment and other
needed assets by issuing bonds.
3. Equity
- Refers to the residual interest in the assets of
the entity after deducting all its liabilities.
- Equity represents owner’s capital and what is
left to the owner after deducting the entity’s
debts or obligation.
- It represents claim of the owner’s over the
assets of the business in the form of capital.
 Capital- this account is used to record the
original and additional investments of the
owner of the business. It is increased by the
amount of profit earned during the year or
decreased by a loss or by cash or other assets
that the owner may withdraw from the
business. This account bears the name of the
owner.
 Withdrawal- when the owner of a business
entity withdraws cash or other assets for
personal use, such is recorded in the
withdrawal account rather than directly
reducing the owner’s equity account.
4. Income
- Refers to the increase in economic benefits
during the accounting period in the form of
inflow or enhancement of assets or decrease
of liabilities resulting in an increase in equity
rather than those relating to equity claims
from equity participants or equity
contributors.
- The basic accounting principle is that
income increases the equity of the owners
while loss decrease the owner’s equity.
 Service Income- revenues earned by
performing services for a customer or client.
 Sales- revenues earned as a result of sale of
merchandise.
5. Expenses
- Refers to decreases in economic benefits
during the accounting period in the form of
outflow or depletion of assets or incurrence
of liabilities that result in decreases in equity
other than those relating to equity claims
from equity participants or equity
contributors.
 Cost of Sales- the cost incurred to purchase
or produce the products sold to customers
during the period. It is also known as the
cost of goods sold.
 Salaries and Wages Expense- all payments
that arise from services from
workers/employees in an employee-
employer relationship. It includes salaries
and wages, 13th month pay, cost of living
allowances and other related benefits.
 Rent Expense- expense for renting a space,
equipment or other asset rental.
 Supplies Expense- expense of using
supplies like office supplies, in the conduct
of daily business.
 Insurance Expense- portion of premium
paid on insurance coverage which has
expired.