YEAR 1

THE ACCOUNTING ENVIRONMENT SY. ’21 - ‘22

DEFINITIONS OF ACCOUNTING
 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 (Accounting
Standards Council, 1983).
 Accounting is an information system that measures, processes, and communicates financial information
about an economic entity (Financial Accounting Standards Board, 1978).
 Accounting is the process of identifying, measuring, and communicating economic information to permit
informed judgements and decisions by users of the information (American Institute of Certified Public
Accountants, 1970).
 Accounting is the art of recording, classifying, and summarizing in a significant manner and in terms of
money, transactions, and events which are, in part at least, of a financial character, and interpreting the
results thereof (American Institute of Certified Public Accountants, 1953).

USERS OF ACCOUNTING INFORMATION

 PRIMARY USERS / EXTERNAL USERS
 The parties to whom general purpose financial reports are primarily directed.
 Such users cannot require reporting entities to provide information directly to them and
therefore must rely on general purpose financial reports for much of the financial information
they need.
1. Existing And Potential Investors – They are concerned with the risk inherent in and
return provided by their investments. The investors need the information to determine
whether they should buy, hold, or sell. The shareholders are interested in the
information which enables them to assess the ability of the entity to pay dividends.
2. Lenders and Other Creditors – They are interested in information which enables them to
determine whether their loans, interest thereon and other amounts owing to them will
be paid when due.
 OTHER USERS / INTERNAL USERS
 They are users of financial information other than the existing and potential investors, lenders,
and other creditors.
 Other users are so called because they are parties that may find the general purpose financial
reports useful but the reports are not directed to them.
1. Employees – They are interested in information about the stability and profitability of
the entity. It enables them to assess the ability of the entity to provide remuneration,
retirement benefits, and employment opportunities.
2. Customers – They have an interest in information about the continuance of an entity
especially if they have long term involvement or dependent on the entity.
3. Governments and their Agencies – They are interested in the allocation of resources and
therefore the activities of the entity. They require information to regulate the activities
of the entity, determine taxation policies, and as a basis for national income and similar
statistics.
4. Public – Financial statements may assist the public by providing information about the
trend and the range of its activities.

FORMS OF BUSINESS ORGANIZATIONS

 SOLE PROPRIETORSHIP
 It is a business owned only by an individual called the proprietor, who generally is also the
manager. It is the form of business easiest to organize since there are only minimal requirements
 to follow. It is less complicated to operate and decisions are made faster since only one owner
decides.
 The owner receives all profits, absorbs all losses, and is solely responsible for all debts of the
business. However, accounting records of the sole proprietorship do not include the proprietor’s
personal financial records.
 PARTNERSHIP
 It is an association of two or more persons who bind themselves to contribute money, property or
industry to a common fund, with the intention of dividing the profits among themselves. A
partnership is easier to organize than a corporation. Better decisions are made since there are two
or more owners.
 CORPORATION
 A corporation is a business owned by its stock holders. It is an artificial being created by
operations of law having the rights of succession and the powers, attributes and properties
expressly authorized by law or incident to its existence.
 A corporation gets its capital from issuing shares of stock to individuals and to other businesses
who become owners or stockholders of the corporation.
 The primary advantage of the corporate form is the ability to obtain a large amount of resources
by issuing shares of stock. For this reason, most companies that require large investments in
equipment and facilities, like those into construction of high-rise buildings, are organized as a
corporation.

TYPES OF BUSINESS OPERATIONS

 SERVICE BUSINESS
 This business renders services to customers or clients for a fee.
 Public Transport Companies, Beauty Parlors, Security Agencies, Repair Shops, Laundry
Shops, Schools, Medical Or Health Clinics, Event Coordinators, Law Offices, Accounting
Advertising Firms
 MERCHANDISING BUSINESS
 This kind of business buys goods or commodities and sells them at profit.
 Grocery Stores, Supermarkets, Hardware Stores, Drugstores, Car Dealers, Real Estate
Dealers, Appliance Stores
 MANUFACTURING BUSINESS
 This type makes finished goods from raw materials or unassembled parts. A manufacturing
business produces the goods that it sells.
 Shoe Factories, Garment Factories, Car Assemblers, Food Processing Plant

ACCOUNTING ASSUMPTIONS
 Entity Concept – This is the concept that the transactions of a business should be kept separate from
those of its owners and other businesses.
 Periodicity Concept – An entity’s life can be meaningfully subdivided into equal time periods for reporting
purposes.
 Stable Monetary Unit – The Philippine peso is a reasonable unit of measure and that its purchasing power
is relatively stable.
 Going Concern – This is the concept that a business will remain in operation for the foreseeable future.

ACCOUNTING PRINCIPLES
 Historical Cost Principle – The principle states that acquired assets should be recorded at their actual cost
and not at what management think they are worth as at reporting date.
 Full Disclosure Principle – The full disclosure principle states that all information should be included in an
entity's financial statements that would affect a reader's understanding of those statements.
 Matching Principle – This is the concept that, when you record revenue, you should record all related
expenses at the same time. INCOME
  Revenue Recognition Principle – Recognize revenue when goods are sold or services are rendered,
regardless of cash receipt.
 Expense Recognition Principle – Expenses should be recognized in the accounting period in which goods
and services are used up to produce revenue and not when the entity pays for those goods and services.
 Materiality – In accounting, materiality refers to the impact of an omission or misstatement of
information in a company’s financial statements on the user of those statements. If it is probable that
users of the financial statements would have altered their actions if the information had not been omitted
or misstated, then the item is considered to be material.
 Conservatism – This is the concept that you should record expenses and liabilities as soon as possible, but
to record revenues and assets only when you are sure that they will occur. ASSETS
 Objectivity - Recording and reporting process should be performed with independence which is free from
bias.
 Adequate Disclosure – Requires that all relevant information that would affect the user’s understanding
and assessment of the accounting entity must be disclosed in the financial statements.
 Consistency Principle – The firms should use the same accounting method from period to period to
achieve comparability over time within a single enterprise.

THE ACCOUNTING EQUATION

 A mathematical expression which shows that the assets and liabilities of a firm are equal.
 It is based on the dual aspect concept of accounting meaning, every transaction has two aspects: debit
and credit. That further means in every business transaction for every debit there is a credit of equal
amount and vice versa.

ASSETS = LIABILITIES + EQUITY

Economic Resources Owned By The Financial Obligations On Debts Owner’s Claims On The
= +
A Business Of A Business Assets Of A Business

Example: The owner’s capital is P150,000. The creditors have 60% claims on total assets. What is the correct
amount of total assets?
- Yung given na 60% is yung equity
- Yung given na 150,000 is yung liability, which means na 40% yun ng kabuohan na amount
- Para makuha yung total nila, kailangan mo buohin yung 100%. Dahil alam mon a yung amount at
percentage ng liability, pwede mon a syang idivide (150,000/40%). Yung sagot doon ay yung kabuohan ng
100% = total assets.
Answer: 375,000
 YEAR 1
THE ACCOUNTANCY PROFESSION SY. ’21 - ‘22

CHARACTERISTICS
Accountancy qualifies as a profession because it possesses the ff attributes:
 All members of the accountancy profession are Certified Public Accountancy, which means that they have
earned a Bachelor of Science in Accountancy degree and have passed the CPA Licensure Examination.
 CPAs have their own body of language. They use terminologies peculiar to the profession.
 CPAs adhere to the Code of Ethics. This code upholds the CPA’s responsibility to serve the public with
competence and integrity. The public, in return, expresses its confidence to CPA by relying on the financial
statements they audit.
 Like other professions, CPA’s are members of a national organization, the PICPA, whose role is to ensure
the continued improvement of the accountancy profession to meet the demands of the times.

CAREER OPPORTUNITIES
 PUBLIC PRACTICE
- Accountants who render services on a fee basis and staff accountants employed by them are
engaged in public practice. Public accountants, who practice individually or as members of public
accounting firms should be certified public accountants.
- In the United States, some of the largest accounting firms are: Deloitte & Touche, Ernst & Young,
KMPG, and PriceWaterhouse Coopers. Arthur Andersen & Co. is now history.
- In the Philippines, the biggest firm with eight offices across the country is Sycip Gorres Velayo &
Co. (SGV &Co.).
 COMMERCE AND INDUSTRY
- Accountants employed in this area vary widely in their scope of activities and responsibilities.
 GOVERNMENT SERVICE
- Accountants may be hired by the ff: Congress of the Philippines, Commission on Audit, Bureau of
Internal Revenue, Department of Finance, Department of Budget and Management, Bangko
Sentral ng Pilipinas, and the local government units.
 EDUCATION/ACADEME
- This area guarantees the continued development of the profession by endeavoring to clarify and
address emerging issues through research and sharing the results obtained with their colleagues.

BRANCHES OF ACCOUNTING
 AUDITING
- Auditing deals with independent verification and examination of the accounting records for the
purpose of giving an opinion on the fairness of its operation. It is required that an auditor must
first pass the licensure examination given by the board of accountancy.
 BOKKEEPING
- It is the routine activity of recording, classifying, and summarizing business transactions in a
systematic manner. It is the procedural aspect of accounting.
- The data are first entered in the accounting records, and then extracted, classified, and
summarized in the form of income statement, balance sheet, and cash flow statement.
 COST BOOKKEEPING, COSTING, AND COST ACCOUNTING
- Cost bookkeeping is the process that involves the recording of cost data in books of accounts.
- Cost accounting deals with the recording, classifying, and summarizing the details of materials,
labor, and overhead necessary to produce and sell a product or service. The emphasis is on cost
determination, cost analysis, and cost control.
 FINANCIAL ACCOUNTING
- Financial Accounting involves the preparation and interpretation of financial statements primarily
for external users.
 FINANCIAL MANAGEMENT
 - Financial managers are responsible for setting financial objectives, making plans based on those
objectives, obtaining the finance needed to achieve plans, and generally safeguarding all the
financial resources of the entity.
 MANAGERIAL ACCOUNTING
- It is the presentation of accounting data primarily for internal users. The special reports will assist
managers in planning and controlling the operation of the business and in managing enterprise
resources.
 TAXATION
- It includes the preparation of tax returns and the consideration of the tax consequences of
proposed business transactions or alternative courses of action. They are r4esponsible for
computing the amount of tax payable by both business entities and individuals.
 GOVERNMENT ACCOUNTING
- It uses fund accounting, which deals with the administration or use of funds to bring about
service to the community. Its objective is more on how the funds are used to service the people
rather than to earn profit. Aside from the government, fund accounting is also applicable to non-
profit organizations such as charitable institutions.
 YEAR 1
CONCEPTUAL FRAMEWORK FOR FINANCIAL REPORTING SY. ’21 - ‘22

OBJECTIVE AND STATUS OF CONCEPTUAL FRAMEWORK

 The Conceptual Framework for Financial Reporting (Conceptual Framework) describes the objective of,
and the concepts for, general purpose financial reporting. The Conceptual Framework is not a Standard.
Nothing in the Conceptual Framework overrides any Standard or any requirement in a Standard. In case of
conflict between the framework and the standard, the standard shall prevail.

The purpose of the Conceptual Framework is to:

 assist the International Accounting Standards Board (Board) to develop IFRS (Standards) that are based on
consistent concepts;
 assist preparers to develop consistent accounting policies when no Standard applies to a particular
transaction or other event, or when a Standard allows a choice of accounting policy; and
 assist all parties to understand and interpret the Standards.

The Conceptual Framework contributes to the stated mission of the IFRS Foundation and of the Board which is to
develop Standards that bring transparency, accountability and efficiency to financial markets around the world.

QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION

FUNDAMENTAL CHARACTERISTICS ENHANCING CHARACTERISTICS
Relevance Faithful Rep. Comparability
Predictive Complete Verifiability
Confirmatory Neutral Timeliness
Free from Error Understandability

FUNDAMENTAL CHARACTERISTICS
 Essential to the usefulness of information
 An information must be both relevant and faithfully represented for it to be useful.
 For example, neither a relevant information that is erroneous nor a correct information that is relevant
helps users make good decisions.

1. Relevance – information is relevant if it can make a difference in the decisions of users. Relevant
information has the ff:
 Predictive Value – information can help users in making predictions about future outcomes.
 Confirmatory Value (Feedback Value) – the information can help users in confirming their
previous predictions.
2. Faithful Representation – information provides a true, correct, and complete depiction of the economic
phenomena (eg. Substance over form) that it purports to represent. Faithfully represented information
has the ff characteristics:
 Completeness – all information necessary for users to understand the phenomenon being
depicted is provided. These include description of the nature of the item, numerical depiction.
 Neutrality – information is selected or presented without bias. Information is not manipulated to
increase probability that users will receive it favorably or unfavorably.
 Free from Error – it means that there are no errors in the description and in the process by which
the information is selected and applied.

ENHANCING CHARACTERISTICS
 Only enhance the usefulness of information that is both relevant and faithfully represented but cannot
make information that is irrelevant or erroneous to be useful.
 1. Comparability – the qualitative characteristic that enables users to identify and understand similarities in,
and differences among, items.
2. Verifiability – information is verifiable if different users could reach a general agreement as to what the
information purports to represent.
3. Timeliness – information is timely if it is available to users in time to be able to influence their decisions. If
it’s not timely, it’s not relevant.
4. Understandability – information is understandable if it is presented in a clear and concise manner.
Understandability does not mean that complex matters should be excluded to make information
understandable to users because this would make information incomplete and potentially misleading.
Accordingly, financial reports are intended for users:
 Who have reasonable knowledge
 Who are willing to analyze information diligently

ELEMENTS OF FINANCIAL STATEMENT

 ASSET – A present economic resource* controlled by the entity as a result of past events.
 LIABILITY – A present obligation of the entity to transfer an economic resource as a result of past events.
 EQUITY – The residual interest in the assets of the entity after deducting all its liabilities.
 INCOME – Increases in assets, or decreases in liabilities, that result in increases in equity, other than
those relating to contributions from holders of equity claims.
 EXPENSES – Decreases in assets, or increases in liabilities, that result in decreases in equity, other than
 those relating to distributions to holders of equity claims

RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS

 Recognition is appropriate if it results in both relevant information about assets, liabilities, equity, income
and expenses and a faithful representation of those items, because the aim is to provide information that
is useful to investors, lenders and other creditors
 Is the process of including in the statement of financial position or the statement of financial performance
an item that meets the definition of one of the financial statement elements (ie. Asset, liabilities, equity,
income, or expense). This involves recording the item in words and in monetary amount.
 The amount at which a asset, a liability, or equity is recognized in the statement of financial position is
referred to as its "carrying amount" or "book value".

 An asset is recognized on the financial statement when:

a. It is probable that future economic benefits will flow to the entity.
b. The cost or value of the asset can be measured reliably.
 A liability is recognized on the financial statement when:
a. It is probable that an outflow of economic benefits will be required for the settlement of a
present obligation.
b. The amount of obligation can be measured reliably.
 Income shall be recognized when earned. When is income considered to be earned?
a. It is probable that future economic benefits will flow to the entity as a result of an increase in an
asset or a decrease in a liability.
b. The economic benefits can be measured reliably.
 A revenue is recognized when:
a. The entity has transferred to the buyer the significant risks and rewards of ownership of the
goods.
b. The entity retains neither continuing managerial involvement nor effective control over the
goods sold.
c. The amount of revenue can be measured reliably.
d. It is probable that economic benefits associated with the transactions will flow to the entity.
e. The costs incurred or to be incurred in respect of the transaction can be measured reliably.
 Expenses are recognized in the income statement when:
a. It is probable that a decrease in future economic benefits has occurred.
 b. The decrease in economic benefits can be measured reliably.

DERECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS

 Is the opposite of recognition. It is the removal of a previously recognized asset or liability from the
entity's statement of financial position.
 Derecognition occurs when the item no longer meet the definition of an asset or liability, such as when
the entity loses control of all or part of the asset, or no longer has a present obligation for all or part of the
liability.

MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENT

 Measurement is the process of determining the monetary amounts at which the elements of financial
statements are to be recognized and carried in the statement of financial position and income statement.

 HISTORICAL COST
 Also known as “past purchase exchange price”.
 The amount of cash or cash equivalent paid or the fair value of the consideration given to
acquire an asset at the time of acquisition.
 CURRENT COST
 Also known as current purchase exchange price”.
 The amount of cash or cash equivalent that would have to be paid if the same or an equivalent
asset was acquired currently.
 REALIZABLE VALUE
 Also known as “current sale exchange price”.
 The amount of cash or cash equivalent that could currently be obtained by selling the asset in
an orderly disposal.
 PRESENT VALUE
 Also known as “future exchange price”.
 The discounted value of the future net cash inflows that the item is expected to generate in the
normal course of business.

CONCEPTS OF CAPITAL AND CAPITAL MAINTENANCE

 FINANCIAL CAPITAL MAINTENANCE – Under this concept a profit is earned only if the financial (or money)
amount of the net assets at the end of the period exceeds the financial (or money) amount of net assets
at the beginning of the period, after excluding any distributions to, and contributions from, owners during
the period. Financial capital maintenance can be measured in either nominal monetary units or units of
constant purchasing power.

 PHYSICAL CAPITAL MAINTENANCE – Under this concept a profit is earned only if the physical productive
capacity (or operating capability) of the entity (or the resources or funds needed to achieve that capacity)
at the end of the period exceeds the physical productive capacity at the beginning of the period, after
excluding any distributions to, and contributions from, owners during the period.

The concept of capital maintenance is concerned with how an entity defines the capital that it seeks to maintain. It
provides the linkage between the concepts of capital and the concepts of profit because it provides the point of
reference by which profit is measured; it is a prerequisite for distinguishing between an entity’s return on capital
and its return of capital; only inflows of assets in excess of amounts needed to maintain capital may be regarded as
profit and therefore as a return on capital. Hence, profit is the residual amount that remains after expenses
(including capital maintenance adjustments, where appropriate) have been deducted from income. If expenses
exceed income the residual amount is a loss.
 YEAR 1
ANALYZING BUSINESS TRANSACTIONS SY. ’21 - ‘22
THE FINANCIAL STATEMENTS
 STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
 Is the financial statement which shows the list of company’s asset, liabilities, and owner’s equity
as of a specific date, usually at the close of the last day of the month or year
 It shows the financial position of an enterprise as of a particular date.

 STATEMENT OF COMPREHENSIVE INCOME (INCOME STATEMENT)

 Is the financial statement that shows the summary of the company’s revenue and expenses for
the given period
 The results of company’s operation is reported in this financial statement.
 “Did the company make profit? Or did it incur a loss? How much?”
 STATEMENT OF CASH FLOW
 Is the financial statement that provides information about the cash receipts and cash payments
of an entity for a given period of time
 Reported in the cash flow statement are the sources of cash and the uses or disbursements made
by the company.
 STATEMENT OF CHANGES IN EQUITY
 Is the summary of changes in owner’s equity that have occurred during a specific period of time,
such as a month or year
 NOTES TO FINANCIAL STATEMENTS
 To make the financial statements more useful and meaningful to those who might have an
interest in the business, the notes to financial statements are added as one of the basic financial
statement companies are required to prepare.
 This statement presents a narrative form the significant accounting policies and other related
explanatory notes.
 BALANCE SHEET Assets Liabilities Equity
INCOME STATEMENT Income Expense
STATEMENT OF CASH FLOW Cash Collect Cash Payment
STATEMENT OF CHANGES IN EQUITY Increase In Equity Decrease In Equity
NOTES TO FINANCIAL STATEMENT Explanatory Notes

THE CHART OF ACCOUNTS

ASSETS LIABILITIES
Cash Notes Receivable Accounts Payable Notes Payable
Accounts Receivable Merchandise Inventory Mortgage Payable Salaries Payable
Office Supplies Store Supplies Interest Payable Utilities Payable
Office Equipment Furniture and Fixture Taxes Payable Unearned Revenue
Store Equipment Automobiles EQUITY
Machineries Land Owner’s Equity Owner’s Drawing
Building Prepaid Expense
EXPENSE
INCOME Salaries Expense Rent Expense
Service Fees Sales Insurance Expense Supplies Expense
Professional Fees Rent Income Transportation Expense Repair and Maintenance
Interest Income Commissions Earned Depreciation Expense  
TRANSACTION ANALYSIS AND DOUBLE ENTRY BOOK KEEPING
Mr. John started his own business by investing Cash Increase Debit Cash
P500,000 cash. Equity Increase Credit Equity

Purchased for cash office supplies worth P5,000 Office Supplies Increase Debit Office
Supplies
Cash Decrease Credit Cash
Returned office supplies because of defects Office Supplies Decrease Credit Office
receiving a cash refund. Supplies
Cash Increase Debit Cash
Purchased office equipment on account. Office Equip Increase Debit Office
Equipment
Account Payable Increase Credit Accounts
Payable
Paid for the office equipment previously purchased Cash Decrease Credit Cash
Account Payable Decrease Debit Accounts
Payable
Paid office rental for the month. Rent Expense Increase Debit Rent Expense
Cash Decrease Credit Cash
Mr. John, the owner withdrew cash from the Equity Decrease Debit Equity
business for his personal use. Cash Decrease Credit Cash

ASSET LIABILITY EQUITY INCOME EXPENSE

INCREASE Debit Credit Credit Credit Debit
DECREASE Credit Debit Debit Debit Credit

PHASES OF ACCOUNTING
1. Analyzing – A=L+C : Source Document
2. Recording – Debit vs Credit : Journal
3. Classifying – T Accounts : Ledger
4. Summarizing – Trial Balance to Financial Statements
5. Interpreting

THE ACCOUNTING CYCLE

1. Gathering Of Supporting Documents

 Only the events measurable in terms of money and make change in financial position/accounting
equation are identified as transaction- it should be recorded and in the next stage accounts are
maintained for these.
 Bank Statements.
 Payroll Reports.
 Invoices.
 Leases & Contracts.
 Check Registers.
 Purchase Orders
2. Journalizing The Transaction
 Debit and Credit
 Also called the “Book of Original Entry”
 This takes analyzed data from step 1 and organizes it into a comprehensive record of every
company transaction.
3. Posting From The Journals To General Ledger
 T Accounts
 Also called as the “Book of Final Entry”
 Kapag itototal mo sila per column, footing ang tawag. Kapag imiminus mon a yung credit side sa
debit side, cross-footing na ang tawag doon.

4. Preparing The Unadjusted Trial Balance (OPTIONAL

 Double check the previous steps

5. Preparation Of Work Sheet (OPTIONAL)

 Unadjusted Trial Balance ay ilalagay mo sa first 2 columns (debit and credit side).
 Sunod-sunod dapat yung accounts (assets,liabs, equity, income, expense). Then, total mo sa
baba.
6. Journalizing And Posting Of Adjustments
 Ilalagay mo sa column 3 and 4 yung adjusting entry mo, skip mo yung accs na walang adjusting.
 Sa column 5 and 6 naman ilalagay yung adjusted trial balance. Sa adjusted trial balance,
kokopyahin mo lang yung amount sa trial balance ng mga accounts na hindi mo naadjust.
 Sa mga accounts na inadjust mo at nagkaroon ng magkaibang entry (debit sa trial balance at
credit sa adjusting entry), ipagmiminus mo sila at ilalagay mo sa column kung saan may mas
malaking amount.
 Sa mga accounts na inadjust mo at pareho ang entry side sa trial balance at adjusting entry
(credit at credit side sa parehong step), ipag aadd mo lang sila.
7. Preparing Financial Statements.
 Sa column 7 and 8 ilalagay yung income statement, sa column 9 and 10 naman yung balance
sheet.
 Sa income statement, kokopyahin mo lang yung income and expenses galling sa columns ng
adjusted trial balance. Sa balance sheet naman, kokopyahin mo lang yung assets, liabilities, and
equity galling sa adjusted trial balance.

8. Journalizing And Posting Of Closing Entries.

 Ilalagay mo sa column 11 at 12 yung closing entries mo. Irereverse mo lang yung equity, income,
and expense.
 Mapapansin mo na hindi equal yung debit at credit ng closing entry mo. Kasi hindi mo pa naentry
yung net profit (REVENUE – EXPENSES = NET PROFIT), ito yung kinita ng company mo. Kaya
ieentry mo sya as Credit Income Summary.
 Dahil nag closing ka sa capital ng credit at debit, imiminus mo sila.

9. Preparing A Post-Closing Trial Balance. (OPTIONAL)

 Ilalagay mo yung post closing trial balance sa column 13 at 14. Itetake effect mo lang yung
adjusted trial balance at closing entries (kung pareho ng entry, add at kung magkaiba ay minus).
10. Journalizing And Posting Reversing Entries.
 A reversing entry is a journal entry made in an accounting period, which reverses selected entries
made in the immediately preceding period.
 The entries that need to be reversed are:
a. accrued income,
b. accrued expense,
c. unearned revenue using the income method, and.
d. prepaid expense using the expense method.
SPECIAL JOURNALS
1. SALES JOURNAL
 The sales journal lists all credit sales made to customers. This means the customer has not paid
but we will receive payment in the future.
 Sales returns and cash sales are not recorded in this journal. Entries in the sales journal typically
include the date, invoice number, customer name, and amount.
2. PURCHASE JOURNAL
 The purchases journal lists all credit purchases of merchandise. This means purchases we have
not paid for but will pay for in the future.
 Entries in this journal usually include the date of the entry, the name of the supplier, and the
amount of the transaction.
3. CASH RECEIPTS JOURNAL
 Transactions that increase cash are recorded in a multi‐column cash receipts journal. If sales
discounts are offered to customers, the journal includes a separate debit column for sales
discounts.
 Anytime money comes into the company, the cash receipts journal should be used.
4. CASH DISBURSEMENT JOURNAL
 The cash disbursement journal is used to record all payments of cash regardless of the reason.
Anytime cash leaves the company, it should be recorded in the cash disbursement journal.
 The cash disbursements journal to the right has one debit column for accounts payable and
another debit column for all other types of cash payment transactions. It has credit columns for
purchases discounts and for cash.
5. GENERAL JOURNAL
 When using special journals, the general journal is used to record all adjusting entries, closing
entries and anything else that doesn’t fit into the other special journals. An example of this
would be any returns or allowances coming from either the sales or purchase side.

To summarize:
 a sales journal to record ALL CREDIT SALES
 a purchases journal to record ALL CREDIT PURCHASES
 a cash receipts journal to record ALL CASH RECEIPTS
 a cash disbursements journal to record ALL CASH PAYMENTS; and
 a general journal to record adjusting and closing entries and any other entries that do not fit in one of the
special journals
 YEAR 1
ADJUSTING ENTRIES SY. ’21 - ‘22

ADJUSTING ENTRIES
 Prepared at the end of the accounting period to update or adjust the balances of account.
- Calendar Year – January 1 to December 1
- Fiscal Year – any year as long as it is 12 months

ACCRUALS DEFERRALS
DEFERRAL OF EXPENSES / PREPAID EXPENSES
ACCRUED EXPENSE
 Expenses paid in advanced but not yet
 Expense already incurred but not yet paid.
incurred or consumed.
- Utilities Payable
- Prepaid Rent
- Rent Payable
- Prepaid Insurance
- Salaries Payable
- Supplies
- Advertising Payable
- Prepaid Interest
- Interest Payable
- Prepaid Advertisement
ACCRUED INCOME DEFERRAL OF INCOME / UNEARNED INCOME
 Income earned but not yet received.  Income received in advance but not yet
- Rent Receivable earned.
- Interest Receivable - Unearned Income
- Commission Receivable - Unearned Ret
- Accounts Receivable - Unearned Interest

ACCRUED ASSET
INCOME
DEFFERED LIABILITY

ACCRUED LIABILITY
EXPENSE
DEFERRED ASSET

ADJUSTMENTS FOR ACCRUALS

ACCRUED INCOME ACCRUED EXPENSE
 You are the lessor.  You are the lessee.
 The amount is the earned/expired portion.  The amount is the earned/expired portion.
ADJUSTING ENTRY
Dr. Receivable XX Dr. Expense XX
Cr. Income XX Cr. Payable XX
Example: AAA lease out its office space to BBB Co. for Example: On Dec 31, 2021 the company has unpaid
P5,000 per month after each month. The term of the utilities amounting to P10,000.
lease contract is 6 months starting Dec. 15.
Dr. Rent Receivable 2,500 Dr. Utilities Expense 10,000
Cr. Rent Income 2,500 Cr. Utilities Payable 10,000
Example: On October 1, 2021, AAA lend cash to BBB Example: AAA Company started leasing an office space
amounting to P120,000. BBB issued a promissory note for P30,000 a month payable after each month on
to AAA for the said amount. The note bears an interest December 15, 2021.
of 10% per year.
Dr. Interest Receivable Dr. Rent Expense 15,000
(120K x 10% x 3/12) 3,000 Cr. Rent Payable 15,000
Cr. Interest Income 3,000
 ADJUSTMENTS FOR DEFERRALS
DEFERRALS OF INCOME / UNEARNED INCOME
Liability Method Income Method
 Initially recorded as liability, and adjusting  Initially recorded as income and adjusting
entry is for the earned portion. entry is for the unearned portion.
JOURNAL ENTRY
Dr. Cash XX Dr. Cash XX
Cr. Unearned Income XX Cr. Income XX
ADJUSTING ENTRY
Dr. Unearned Income XX Dr. Income XX
Cr. Cash XX Cr. Unearned Income XX
Example: On August 1, 2021, a sole proprietor received a P60,000 from a tenant for one year rent.
Dr Cash 60,000 Dr. Cash 60,000
Cr. Unearned Rent 60,000 Cr. Rent Income 60,000
Dr. Unearned Rent Dr. Rent Income
(5k x 5 months) 25,000 (5k x 7 months) 35,000
Cr. Cash 25,000 Cr. Unearned Income 35,000
Example: On December 15, 2021, a sole proprietor received P48,000 from Jollibee Company in exchange for
cleaning services of air conditioning unit of 12 branches of Jollibee in Bacolod. As of Dec. 31, the sole proprietor
was able to service only 8 branches.
Dr. Cash 48,000 Dr. Cash 48,000
Dr. Unearned Revenue 48,000 Cr. Revenue 48,000
Dr. Unearned Revenue 32,000 Dr. Revenue 16,000
Cr. Cash 32,000 Cr. Unearned Income 16,000

ADJUSTMENTS FOR DEFERRALS

DEFERRALS OF EXPENSES / PREPAID EXPENSE
Asset Method Expense Method
 Initially recorded as asset and adjusting entry  Initially recorded as expense and adjusting
is for the expired portion. entry is for the unexpired portion.
JOURNAL ENTRY
Dr. Prepaid Expense XX Dr. Expense XX
Cr. Cash XX Cr. Cash XX
ADJUSTING ENTRY
Dr. Expense XX Dr. Prepaid Expense XX
Cr. Prepaid Expense XX Cr. Expense XX
Example: On April 1, 2021 a sole proprietor paid P240,000 for one year rent.
Dr. Prepaid Rent 240,000 Dr. Rent Expense 240,000
Cr. Cash 240,000 Cr. Cash 240,000
Dr. Rent Expense Dr. Prepaid Rent
(20k x 9 months) 180,000 (20k x 3 months) 60,000
Cr. Prepaid Rent 180,000 Cr. Rent Expense 60,000
Example: On January 1, 2021 a sole proprietor bought office supplies amounting to P100,000. On December 31,
P25,000 worth of supplies was still unused.
Dr. Office Supplies 100,000 Dr. Supplies Expense 100,000
Cr. Cash 100,00 Cr. Cash 100,000
Dr. Supplies Expense 75,000 Dr. Supplies 25,000
Cr. Supplies 75,000 Cr. Supplies Expense 25,000
DEPRECIATION
 Systematic allocation of cost in recognition of the exhaustion of the useful life of an item.
 In order to properly compute the amount of depreciation, three factors are necessary:
 1. Depreciable Amount – is the cost of an asset less residual value
2. Residual Value / Salvage Value– estimated net amount currently obtainable if the asset is at the
end of its useful life
3. Useful Life – either the period over which an asset is expected to be available for use or the
number of production/units expected to be obtained from the asset

STRAIGHT LINE METHOD

Depreciable Cost
( Cost−Residual Value )
=Depreciation per period
Estimated Useful Life
Example: An equipment acquired at the beginning of the year costs P100,000 with a residual value of P10,000
and a useful life of 5 years. The depreciation table for the equipment will look like this:
1. Write the cost and the depreciation (from your calculation) on its respective rows.
2. Add the depreciation by itself until makarating sa last year.
3. Subtract the cost from the accumulated depreciation of each year to get the book/carrying value.
Year 1 Year 2 Year 3 Year 4 Year 5
Cost 100,000 100,000 100,000 100,000 100,000
Accum. Depreciation 18,000 36,000 54,000 72,000 90,000
Book Value (BS) 82,000 64,000 46,000 28,000 10,000
Depreciation (IS) 18,000 18,000 18,000 18,000 18,000

How To Get The Expired Portion (AD) How To Get The Unexpired Portion (BV)

AD=Depreciable Cost ×
Expired
Useful Life (
BV = DepCost ×
Unexpired
Useful Life )
+ Residual

2
AD=90,000 × =36,000
5 (
BV = 90,000×
3
5 )
+10,000 = 64,000
The accumulated depreciation for the expired portion The book value for the unexpired portion (3 years)
(2 years) would be 36,000. would be 64,000.
If the asset was sold, and you need to compute the gain or loss: (a) look for its book value (b) subtract it to the
amount sold. If the book value is larger, then it is a loss, but is the sold amount is larger then, it is a gain.
If sold:
Adjusting Entry:
 Debit Cash (Sold amount)
 Debit Depreciation Expense (Depreciation x
 Debit Accumulated Depreciation
expired/useful life)
 Credit Asset (Cost)
 Credit Accumulated Depreciation
 Credit Gain (Book value – Sold amount)
JOURNAL ENTRY
If Sold
Dr. Equipment XX
Dr. Cash XX
Cr. Cash XX
Dr. Accum Depreciation XX
ADJUSTING ENTRY
Cr. Asset XX
Dr. Depreciation Expense XX Cr. Gain XX
Cr. Accum Dep XX
BAD DEBTS
 Also called “Doubtful Accounts”
 Bad debt refers to loans or outstanding balances owed that are no longer deemed recoverable and must
be written off.

ALLOWANCE METHOD DIRECT WRITE-OFF METHOD

JOURNAL ENTRY
Dr. Accs Receivable XX Dr. Accs Receivable XX
Cr. Sales XX Cr. Sales XX
DURING THE PERIOD
WRITING OFF OF RECEIVABLES
Dr. Allowance for DA XX Dr. Bad Debts Expense XX
Cr. Accs Receivable XX Cr. Accs Receivable XX
RECOVERY
– collection of account previously written-off
Dr. Accs Receivable XX Dr. Accs Receivable XX
Cr. Allowance for DA XX Cr. Bad Debts Expense XX
Dr. Cash XX Dr. Cash XX
Cr. Accs Receivable XX Cr. Accs Receivable XX
ADJUSTING ENTRY
Dr. Bad Debts Expense XX
No Adjusting
Cr. Allowance for DA XX

Which should be computed first?

If the given is: First Second
Percentage of Accounts Receivable Allowance for Doubtful Accs Bad Debt Expense
Percentage of Sales Bad Debt Expense Allowance for Doubtful Accs
Aging of Accounts Receivable Allowance for Doubtful Accs Bad Debt Expense

T – ACCOUNT TECHNIQUE
Accounts Receivable Allowance for Doubtful Accounts
XX Beginning Ending/AR Gross XX XX Ending Beginning XX
XX Sales Collection XX XX Write-Off Recovery XX
XX Recovery Write-Off XX XX Adjusted/BDE XX
 If included yung recovery sa collection, then maglalagay ka ng recovery sa debit side. Kapag excluded,
hindi ka maglalagay. Collection includes recovery if silent on the question. Pero lagging may recovery sa
ADA.
 Sa technique na ito, uunahin lang ilagay yung ending balance para maging equal yung total, para madali
kunin yung yung missing.

Example:
  Sa ending ng AR, tyaka lang minultiply yung 1%. Yun din yung magiging ending ng ADA.
 Yung sa credit side ng ADA, yung adjusting ay kapareho lang ng Bad Debt Expense.

Kapag tinatanong yung AR@NRV, kailangan mo isubtract yung gross ng AR (ending balance ng AR) sa ADA.

Example: Percentage of AR 1%

 Yung beginning sa AR ay imumultiply mo sa percentage para mailagay sa beginning ng ADA.

 Kapag ang given ay NRV lang at gross ng AR yung hinahanap paano mo sya icocompute?
a. Yung given na percentage ay 1%, which means yung amount ng ADA ay galling sa 1% na kinuha
mo sa end ng AR.
b. Which means, yung gross ng AR is equivalent to 100% at yung ADA ay 1% non. Dahil imiminus mo
sila (based sa formula), ibig sabihin ang NRV mo ay 99% ng gross ng AR.
c. Therefore, idivide mo yung NRV sa 99% para makuha mo yung 100% (amount ng AR gross).

Example: Percentage of Sales 3%

 Sa percentage of sales, una mong kukunin is bad debt expense. Imumultiply mo yung 3% sa sales na
1,000,000 then ilalagay mo sa BDE yung amount na makukuha mo. From there, iwork back mo na.
 YEAR 1
INVENTORIES SY. ’21 - ‘22

ACCOUNTING STANDARDS:
 PAS/IAS 2

INVENTORIES
 are assets:
1. Held for sale in the ordinary course of business:
 Dapat may regularity yung tinitinda mo bago sya ma classify as inventory
 Finished Goods = Manufacturing Entity
 Merchandise Inventory = Merchandising Entity
2. In the process of production for such sale (Work In Process)
 Raw Materials Used
 Direct Labor Applied
 Manufacturing (Factory) Overhead Applied
3. In the form of materials or supplies to be consumed in the production process or in rendering services
 Raw Materials Unused
 Factory Supplies
– Marketing and office supplies are excluded because it is not consumed in the production process. It can
be included as prepaid asset or other-current asset.
– It is important to note that the entity has the ownership over the items of inventory, and it should be
probable that the company’s investment on it is recoverable through using it in production or through
sale of such item.
– Inventories shall be measured at the lower of cost and net realizable value.
– Inventories are presented on the face of the balance sheet under current assets.

NET REALIZABLE VALUE

– It is the estimated selling price in the ordinary course of business less the estimated costs of
completion and the estimated costs necessary to make the sale. It refers to the net amount that an
entity expects to realize from the sale of inventory in the ordinary course of business.
– Fair value reflects the price at which an orderly transaction to sell the same inventory in the principal (or
most advantageous) market for that inventory would take place between market participants at the
measurement date. The former is an entity-specific value; the latter is not. Net realizable value for
inventories may not equal fair value less costs to sell.

INCLUSION TO INVENTORY
GENERAL RULE / RULE OF POSSESSION
When the entity has the title to the goods. If the entity possess the goods, it is assumed that the entity has the
title to the goods. (Kung sino ang may hawak, sya ang may ari ng finished goods)

EXCEPTIONS TO THE GENERAL RULE

GOODS ON CONSIGNMENT
Included to Consignor
- Shipped Out
(Consignor – the party who delivers goods (that they own) to another party to hold
- Sent Out
and sell them on their behalf)
Excluded to Consignee - Held On
(Consignee – the party receiving goods to be sold; para syang magiging reseller) - Received On
 GOODS IN TRANSIT
TRANSFER TITLE
- Shipping Point WITHOUT TRANSFER
- Seller TITLE
BUYER SELLER BUYER SELLER
- Origin - Destination
Include Exclude Exclude Include
- FAS (Free Along Side) - Buyer
- CIF (Cost Insurance and - Ex-ship
Freight)

GOODS SOLD UNDER SPECIAL TERMS

WITH TRANSFER TITLE
1. Bill and Hold
 Sales agreement where the seller already billed the buyer but the
goods is still undelivered for the convenience of the buyer.
 Binayaran na ni buyer pero hindi pa nya gusto matanggap at the
moment.
2. Special Order
 Sales where the seller produced a specially made inventory for a
BUYER SELLER
certain buyer.
Include Exclude
 Ex. Cake sa Goldilocks na may dedication; it is especially made for
the buyer at hindi na maibebenta sa iba’
 Production Method = once the goods are produced, automatic
with transfer of title
3. Installment Sale
 Sales agreement where the seller delivers immediately the goods
and the buyer pays for the goods on installment basis.
 Shiniship muna yung goods kahit hindi pa fully paid.
WITHOUT TRANSFER TITLE
1. Lay-away Sale
 Sales agreement where the seller will collect installment payment
from customer. Once fully paid, the company delivers the goods.
 Dapat mauna munang ma fully paid bago madeliver yung goods.
2. Sale on Approval
 Sales where the buyer can return the goods if not satisfied.
 Bibigyan ni seller si buyer ng palugit na araw para itest yung
goods. Pag hindi pa approve si buyer, si seller parin ang owner.
BUYER SELLER
3. Sale with Buy Back Agreement
Exclude Include
 Sales agreement where the seller agreed to repurchase the sold
inventory. The substance of transaction is loan where inventory
was used as collateral.
 Magdedeliver si seller ng goods kay buyer pero, bibilhin nya ulit
ito in the future. Therefore, hindi nya pwedeng ibenta sa iba.

SUBSTANCE OVER FORM

FORM = SALE
SUBSTANCE = LOAN WITH COLLATERAL

SHIPPING TERMS
 Shipping Terms Who Should Pay? Who Actually Paid?
FOB Shipping Point Freight Prepaid
(Freight Prepaid, binayaran na ni seller yung courier bago pa sya Buyer Seller
makarating kay buyer.)
FOB Shipping Point Freight Collect
Buyer Buyer
(Freigh collect, kinolekta pagkarating sa bahay ni buyer.)
FOB Destination Freight Prepaid Seller Seller
FOB Destination Freight Collect Seller Buyer
Accounting Treatment Buyer Seller
Additional Receivable And
Fob Shipping Point Freight Prepaid Freight In And Additional Payable
Deduction To Cash
Fob Shipping Point Freight Collect Freight In And Deduction To Cash Ignore
Freight Out And Deduction To
Fob Destination Freight Prepaid Ignore
Cash
Deduction To Payable And Freight Out And Deduction To
Fob Destination Freight Collect
Deduction To Cash Receivable

FREE ALONG SIDE (Special Treatment)

The Seller Freight Out of Seller The Port Freight In of Buyer The Buyer

ACCOUNTING FOR INVENTORIES

PERIODIC
Requires physical counting of the goods to
determine quantities
- Wala kang gagawin kahit pa may lumabas
at pumasok na inventory. Malalaman mo
lang pag nag physical count ka.
- Once a year or kung kelan kailangan.
Use for individually small value inventories
Cost of goods sold is computed at the end of the
period as follows:
PERPETUAL
Requires stock cards that contains the inflow and outflow
and balance of inventory
- Stock Cards – document na naglalaman ng info
abt the inflow, outflow, and running balance. Dito
ka titingin pag gusto mo malaman yung inventory.
- Araw-araw mo ito ginagawa
Use for individually large value inventories
Cost of goods sold is computed every time goods are sold:

Inventory Beg (Physical) XX

Selling price XX
Net Purchases XX
Cost ratio *XX
Inventory End (Physical) (XX)
Cost of goods sold XX
Cost Of Goods Sold XX
- Cost ratio = ilang percent ng selling price yung
- Kailangan mo mag physical count ng beg
cost ng goods na naitinda mo
and end para malaman mo yung CGS
- Hindi ka magcocompute ng CGS at the end, kundi
- Once lang magcocompute
very time na may tinda ka
Net Purchases = Purchases + Freight – Discounts - Returns

ACCOUNTING SYSTEMS FOR INVENTORIES

 PERIODIC SYSTEM PERPETUAL SYSTEM
Dr. Purchases XX Dr. Inventory XX
Purchases On Account
Cr. Accounts Payable XX Cr. Accounts Payable XX
Payment For Freight Dr. Freight-In Xx Dr. Inventory XX
(Transportation Cost) Cr. Cash Xx Cr. Cash XX
Upon Payment Dr. Accounts Payable XX Dr. Accounts Payable XX
(If Payment Is Within Discount (Cr. Purchase Discount) XX (Cr. Inventories) XX
Period) Cr .Cash XX Cr. Cash XX
Purchase Return Dr. Accounts Payable Xx Dr. Accounts Payable XX
(Return To Supplier) Cr. Purchase Return Xx Cr. Inventory XX
Dr. Accounts Receivable XX
Dr. Accounts Receivable XX Cr. Sale XX
Sale Of Goods On Account
Cr. Sales XX Dr. Cost Of Goods Sold XX
Cr. Inventory XX
Upon Collection Cash XX Dr. Cash XX
(If Collection Is Within Discount (Dr. Sales discounts ) XX Dr. (Sales discounts xxx) XX
Period) Cr. Accounts receivable XX Cr. Accounts receivable XX
Dr. Sales Return XX
Sales Return Dr. Sales Return XX Cr. Accounts Receivable XX
(Return By Customer) Cr. Accounts Receivable XX Dr. Inventory XX
Cr. Cost Of Goods Sold XX
Dr. Cost Of Goods Sold
XX
Cr. Inventory Beginning
XX
(To close the beg
inventory)
Dr. Inventory Ending
XX
Cr. Cost Of Goods Sold No Entry
XX
Physical Count At (To establish end (Ending Inventory Account
Year End inventory) Represents The Physical Count
Dr. Cost Of Goods Sold Already)
XX
Dr. Purchase Return
XX
Cr. Purchases
XX
Cr. Freight-In
XX
(To close the related net
purchase accounts)

ANALYSIS
PERIODIC SYSTEM PERPETUAL SYSTEM
Optional
Requires Physical Count Yes (Short/Over; If Normal – COGS, If
Not Normal – OPEX)
Volume Of Inventories Large Small
Price Of Inventories Low High
Turnover Of Inventories Fast Slow
Uses Of Stock Cards No Yes
Uses Moving Average No Yes
Internal Control Effectiveness Inferior Superior

TYPES OF DISCOUNTS
List Price XX
Trade Discount (XX)
Invoice Price XX - Pag invoice price, wag na bawasan ng trade discount.
Cash Discount (XX) - Pag cash price, wag na bawasan ng cash discount at trade
discount kasi bawas na yun.
Cash Price XX
TRADE DISCOUNT CASH DISCOUNT
Reason other than prompt payment
Encourage prompt payment
- Reasons na walang
- Para mapabilis yung pag
kinalaman sa bilis ng
kolekta ng pera
REASONS OF DISCOUNT pagbabayad
- Ex. Bibigyan kita ng 10%
- Ex. Bibigyan kita ng 25%
discount pag nagbayad ka
discount pag nag avail ka ng
within 10 days
100 pcs of items
Not recorded separately
(Purchases /Sales is recorded net of
trade discount) Record using either Gross or Net
ACCOUNTING TREATMENT
- Bawas na agad sa list price, Method
kaya yung list price na lang
irerecord.

ANALYSIS OF ACCOUNTS

GROSS PROFIT RATE

BASED ON SALES BASED ON COST
100% Sales 120%
(80%) (Cost of Sales) (100%)
20% Gross Profit 20%
 If the problem is silent (hindi sinabi kung saan base), we assume that it is BASED ON SALES.
 Kapag sinabi sa problem na MARK UP, ibig sabihin based on cost yun.
METHODS OF RECORDING PURCHASES
GROSS METHOD NET METHOD

INITIAL RECORDING
WHEN DISCOUNT IS TAKEN
WHEN DISCOUNT IS NOT
TAKEN
Purchase is initially recorded at invoice
price (gross of discount)
Debit Purchase at Invoice Price
Credit Accounts Payable at Invoice Price
Discount is deducted to the purchases
- Gagawa ka ng Purchase discount
account (contra purchase
account)
No adjustment – discount foregone
already included in purchases
Purchase is initially recorded at cash
price (net of discount)
- Bawas na yung discount
No adjustment – deducted already
Discount foregone is reported as
“discount loan” included as other
expense
- Yung discount nanawala ay
magiging discount loss
(expense)

GROSS METHOD NET METHOD

Purchase of good on account for Dr. Purchases 200 Dr. Purchases 196
P200, terms 2/10, n/30 Cr. Accounts Payable 200 Cr. Accounts Payable 196
Dr. Accounts Payable 200
Dr. Accounts Payable 196
Paid within the discount period Cr. Cash 196
Cr. Cash 196
Cr. Purchase Discount 4
Dr. Discount Lost 4
Dr. Accounts Payable 200
Paid beyond the discount period Dr. Accounts Payable 196
Cr. Cash 200
Cr. Cash 200

THE COST OF INVENTORY SHARE COMPRISE

1. Cost of Purchase
 Purchase price, import duties (pag galling sa abroad, babayaran mo sa customs), irrecoverable
taxes (kung hindi ka registered), freight handling (binayad mo sa barko pag transport; to load and
unload), and other cost attributable to acquisition
2. Cost of Conversion
 Direct materials, direct labor, and factory overhead
 Gastos para maconvert ang raw materials to products
3. Other cost incurred in bringing the inventory into its present location and condition
 Cost of designing the product for specific customer

 Interest on Non Routine

INVENTORIABLE COST
EXPENDITURES  Non Recoverable Taxes
 Freight in and to consignee
 Freight  Professional Fee related to
 Insurance on Delivery
 Insurance purchase
 Storage of Work in Process
 Storage  Damaged goods on Salable
 Normal Waste
 Waste RW/DL/OH Condition
 Interest NOT INVENTORIABLE COST  Interest on Routine
 Taxes  Freight Out  Recoverable Taxes
 Professional Fees  Insurance After Delivery  Professional Fee related to sale
 Damaged Goods  Storage of RW and FG  Damaged Goods on Unsalable
 Abnormal Waste Condition

LOWER COST NET REALIZABLE VALUE

– Inventories shall be subsequently measured at the lower cost or net realizable value (NRV). NRV is the
estimated selling price less the estimated cost of completion and the estimated cost of disposal.
 – Initially measured at cost pero yung subsequently ay measured lower of cost.

SUBSEQUENT MEASURE = LCNRV

For computation purposes:

Estimated Selling Price XX
Estimated Cost To Repair (XX)
FINISHED GOODS
Estimated Cost To Sell (XX)
NRV XX
Estimated Selling Price XX
Estimated Cost To Complete (XX)
WORK IN PROCESS
Estimated Cost To Sell (XX)
NRV XX
Replacement Cost / Current Purchased Price XX
RAW MATERIALS - Kung magkano mo mabibili yung brand new raw
materials, yun ang replacement cost.
LCNRV should be computed on an item per item basis or individually and not on a total basis. The cost of each item
is compared to the NRV and select the lower amount. Each lower amount should be totaled to obtain the LCNRV of
the whole inventory.

ITEM BY ITEM NOT TOTAL BY TOTAL

- Icocompare mo muna yung NRV bago mo itotal.
Item 1 Item 2 Item 3 Item 4 Total
COST P XX P XX P XX P XX
NRV P XX P XX P XX P XX
LCNRV P XX P XX P XX P XX P XX
- Piliin mo yung cost at NRV, tapos piliin mo kung ano ang mas mababa ang value.
- Then, tyaka mo itotal yung LCNRV.

COST FORMULAS
 Determining the cost of goods that was retained and cost of goods that was sold from multiple purchase
with different cost.

Goods 1 = P10
VENDOR Goods 2 = 12 COMPANY Goods Sold = ?? CUSTOMER
Goods 3 = 17
RETAINED:
Goods = ??

COST FORMULA / METHODS FOR COST DETERMINATION

SPECIFIC IDENTIFICATION FIRST IN, FIRST OUT (FIFO) WEIGHTED AVERAGE
Not Interchangeable (required) Inter Changeable (by policy) Inter Changeable (by policy)

SPECIFIC IDENTIFICATION
 Required for inventory items that are not interchangeable and goods that are produced and segregated
for specific projects.
Goods 1 = P10
VENDOR Goods 2 = 12 COMPANY Goods 2 = 12 CUSTOMER
Goods 3 = 17
RETAINED:
Goods 1 = P 10
Goods 3 = P 17
- Sasabihin ng problem kung saan kukunin yung inventory na natinda.
- EX. Yung goods 1 mo ay kotse, yung goods 2 ay motor, at yung goods 3 ay bike. Gusto bumili ni customer
ng bike, pwede mo ba ibigay sa kanya yung goods 2? Hindi. Therefore, not interchangeable sila.
- Meaning to say, sasabihin ni customer kung ano yung gusto nyang bilhin gaing sa yo. Yung hindi mo
nabenta, yun yung mareretain.

FIRST IN, FIRST OUT (FIFO)

 The FIFO formula assumes that the items of inventory that were purchased or produced first are sold first,
and consequently the items remaining in inventory at the end of the period are those latest purchased or
produced.
Goods 1 = P10
VENDOR Goods 2 = 12 COMPANY Goods 2 = 10 CUSTOMER
Goods 3 = 17
RETAINED:
Goods = P 12
Goods = P 17
- Mostly, same goods with different goods.
- EX. Bumili ka nng tricycle for goods 1, 2, and 3 pero magkakaiba yung presyo. Yung customer gusto bumili
ng tricycle, pwede mo ibigay kahit alin sa nabili mo kasi pare pareho lang silang tricycle. Therefore, they
are interchangeable. However, kung ano yung una mong nabili, yun din yung una mong ititinda.

Objective:
- To determine cost of goods sold
- To determine the cost of the ending inventory

FIFO – PERPETUAL INVENTORY SYSTEM

Inventory Stock Card:
Receipt Issuance Balance
Date
Unit Cost Total Unit Cost Total Unit Cost Total
00/00 XX P XX P XX XX P XX P XX XX P XX P XX
00/00 XX P XX P XX XX P XX P XX XX P XX P XX

In Units Unit Cost In Peso

Inventory, beginning XX XX P XX
Purchases XX XX XX
Total Goods Available For Sale XX XX XX
Goods Sold (XX) XX XX
Inventory, ending XX XX PXX
 Under FIFO Perpetual – you have to trace each unit cost of goods sold from the earliest purchase then to
the next earliest purchase.
 Hinahanap mo yung unit cost ng nabenta. Hindi mo hahanapin yung ending. Yung number of units sold,
hinahanap mo yung unit cost. Hahanapin mo ito mula sa una tapos macoconvert mo into peso amount.

FIFO – PERIODIC INVENTORY SYSTEM

In Units Unit Cost In Peso
Inventory, beginning XX XX P XX
 Purchases XX XX XX
Total Goods Available For
XX XX XX
Sale
Goods Sold (XX) XX XX squeeze
Inventory, ending XX XX P XX
 Under FIFO PERIODIC – you have to trace each unit cost of ending inventory from the latest purchase
 Aalamin mo kung saan galling yung naiwan
 Ending inventory ay imumultiply mo sa unit cost ng last purchase para maconvert mo sa peso amount.
 Hahanapan mo ng unit cost yung natira, manggagaling ito sa huli mong binili tapos mag ssqueeze ka na
lang ng COGS by deducting the ending inventory sa COGS

WEIGHTED AVERAGE
 Under the weighted average formula, the cost of each item is determined from weighted average of the
cost of similar items at the beginning of a period and the cost of similar items purchased or produced
during the period.
[10 + 12 + 17]
Goods 1 = P10
3
VENDOR Goods 2 = 12 COMPANY CUSTOMER
Goods 3 = 17
Goods B = 13
RETAINED:
Goods = P 13
Goods = P 13
 Average unit cost
In Units Unit Cost In Peso
Inventory, beginning XX XX P XX
Purchases XX XX XX
Total Goods Available For Sale XX XX XX
Goods Sold (XX) XX XX
Inventory, ending XX XX P XX

- Icocompute yung unit cost ng goods sold at ending inventory = Average Unit Cost

TGAS IN PESO = AVERAGE UNIT COST

TGAS IN UNITS
 YEAR 1
CASH AND CASH EQUIVALENTS SY. ’21 - ‘22

No specific accounting standard that deals with cash.

APPLICABLE ACCOUNTING STANDARDS
 Philippine Financial Reporting Standards (PFRS 9) – Financial Instruments
 Philippine Accounting Standards 32 (PAS 32) – Financial Instruments: Disclosure and Presentation
 Philippine Accounting Standards 1 – Presentation of Financial Statements
 Philippine Accounting Standards 7 – Statement of Cash Flows

CASH CASH EQUIVALENTS

 Immediately available for use  Are short term, highly liquid investments that
 Item should be UNRESTRICTED for use are readily convertible to known amounts of
 Comprises cash on hand and demand cash and which are subject to an insignificant
deposits risk of changes in value (PAS 7)
 Items of cash and cash equivalents are measured at face value:
Initial Measurement – kung kelan na acquired
Subsequent Measurement
 Disclosed as one and first-line item in the current asset section on the face of the balance sheet.

CASH
1. Cash on Hand 2. Cash in Bank 3. Cash Funds

ITEMS INCLUDED AS CASH ON HAND

1. CURRENCIES AND COINS
2. BANK DRAFTS
3. MONEY ORDER ALL ARE AVAILABLE FOR USE
4. CHECKS (SOME)

CHECKS INCLUDED CHECKS EXCLUDED CHECKS DRAWN BY THE COMPANY

When check is drawn (by the company), it
should be removed from our record since it
is not our cash anymore. Unless it is:

 Company’s Undelivered Check

 Customer’s Post Dated  Company’s Post Dated Check
 Customer’s Check Check
 Cashier’s Check  Customer’s No Sufficient
 Certified Check Fund
 Customer’s Stale Add back to Cash
 Personal Check
 Manager’s Check
 Traveler’s Check These will be treated as Assumed entry when drawn:
ACCOUNTS RECEIVABLE. Dr. Accounts Payable
Cr. Cash

Since not yet available to payee:

Dr. Cash
Cr. Accounts Payable
TERMS:
 Customer’s PDC – the date on the check effectively postpones the underlying accounting transaction
 Customer’s NSF – there is not enough money in the account to pay the check written against it
 Customer’s Stale – expired check (mostly 6 months)
  Company’s Undelivered Check – cash is still on our possession. However, when drawn, assume that the
company already did journal entry so add back to cash
 Company’s PDC – voucher system; add back to cash
 Postal Money Orders – credit instrument issued and payable by a post office
 Bank Drafts – written order addressed to the bank to pay an amount of money to the order of the maker

 PDC RECEIVED = EXCLUDED

 PDC DRAWN = INCLUDED

ITEMS INCLUDED AS CASH IN BANK

 Checking Account
 Demand Deposit
 Current Account Included as Cash
 Commercial Deposit
 Savings Account
Excluded from Cash
Time Deposit
Included from Cash Equivalents
Not Legally Restricted Included as Cash
Excluded from Cash (OCR– Short
 Compensating Balance Legally Restricted
term or ONCR – Long term)
Silent Included as Cash
Other Current Asset or Trade and
Deposit in Closed Bank Excluded from Cash
Other Receivable
 Deposit in Foreign Bank Not Restricted Included as Cash
 To convert into peso: Restricted Excluded from Cash (ONCA)
multiply using closing
foreign exchange rate Silent Included from Cash
Different Bank Excluded from Cash (CL)
 Bank Overdraft Same Bank Included Deduction to Cash
Silent Excluded from Cash
TERMS:
 Checking Account – needs check in order to be withdrawn
 Savings Account – over the counter/ATM
 Time Deposit – can be withdrawn after a specific time only
 Compensating Balance – money restricted by the bank to serve as a security from your loan
 Deposit in Closed Bank – commonly bankrupt
 Deposit in Foreign Bank – commonly shown as foreign currency (dollars, yen, euro, etc.), therefore, you
have to convert into peso.
 Bank Overdraft – over withdraw of money
 Different Bank – no other bank account in one bank
 Same Bank – you have other bank account in one bank, so if one bank account has overdraft, you have to
deduct to cash

ITEMS INCLUDED AS CASH FUNDS

FOR OPERATION  Petty Cash Fund Always Included as Cash
 Payment of Operating Expenses  Revolving Cash Fund
 Payment of Current Liabilities  Change Fund
 Payroll Fund
 Travel Fund
  Tax Fund
 Interest Fund
 Dividend Fund

NOT FOR OPERATION

Beyond Excluded from Cash

 Bond Sinking Fund 12 mos. (NCA)
 For Payment of Non-Current  Pension Fund Within
Included from Cash
Liabilities (Long Term Liabilities)  Preference Share 12 mos.
Redemption Fund Excluded from Cash
Silent
(NCA)
 PPE Acquisition Fund
Always Excluded from Cash
 For Payment of Non-Current  Depreciation Fund
[regardless of expected
Asset  Insurance Fund
disbursement]
 Contingency Fund
TERMS:
 Payment of Operating Expenses – payment for salaries, interests, miscellaneous expenses
 Payment of Current Liabilities – interest payable, taxes payable, dividends payable
 Bond Sinking Fund – payment for bonds payable
 Pension Fund – employee’s pension
 PS Redemption Fund – buy back

CASH EQUIVALENTS
 Time Deposit [Certificate of Deposit] Included as Cash
Within 3 Months
 Money Market [Commercial Paper] Equivalents
 Treasury Bills Excluded from Cash
- Bills = 0-1 year
Beyond 3 Months
- Notes = 1 – 10 years 3 mos 1 year = OCA
- Bonds = 10 years onwards 1 year onwards = ONCA
 Investment in Preference Shares with Included as Cash
Silent
Redemption Date Equivalents
TERMS:
 Time Deposit – also called as Certificate of Deposit
 Money Market – also called as Commercial Paper; are investment portfolios of short-term
securities.
 Treasury Bills – you are lending money to government agencies with intention to gain interest
 Investment in PS – you bought a preference shares
 Investment in Shares/Stocks = no maturity date therefore the duration of investment is infinity;
except when it has a redemption date
 Redemption Date – is the maturity date

3 MONTH RULE:
Counting 3 months should be from date of purchase to date of maturity and NOT from year end to
maturity date.

EXAMPLE: February 1 – AAA Company invested P1,000,000 T-bills with maturity of 1 year. How much is
the cash equivalents of AAA Company on December 31, Year 1?
 Feb 1 Feb 1
Jan. 1 Purchase Dec. 31 Maturity

Year 1 Year 2

12 months = NOT CASH EQUIVALENTS

ANSWER: Zero

EXAMPLE: Assume on Feb 1, AAA Company purchase 1 year T-Bills. But on Dec 1, AAA sold it to BBB.
How much should BBB report as Cash Equivalents at Dec 31?

Purchase by AAA Co. Purchase by BBB from AAA Feb 1 – Maturity

trade

2 months = CASH EQUIVALENTS

ANSWER: P 1,000,000

OTHER ITEMS EXCLUDED FROM CASH AD CASH EQUIVALENTS

 IOUs – Receivable from employee
 Postage Stamps – Supplies
 Credit Memo – Purchase Return
 Cash Surrender Value – Investment
 Investment in Equity Securities – Investment
 YEAR 1
PETTY CASH SY. ’21 - ‘22

PETTY CASH
 Funds set aside for petty expenses that are not practical to pay using check.

IMPREST FUND SYSTEM FLUCTUATING FUND SYSTEM

 Periodic  Perpetual
Dr. Petty Cash Fund XX Dr. Petty Cash Fund XX
Establishment
Cr. Cash in Bank XX Cr. Cash in Bank XX
Dr. Various Expenses XX
Disbursements No Entry
Cr. Petty Cash Fund XX
Dr. Various Expenses XX Dr. Petty Cash Fund XX
Replenishments
Cr. Cash in Bank XX Cr. Cash in Bank XX
Dr. Various Expenses
Year-end XX
No Entry (already updated)
Adjustments XX
Cr. Petty Cash Fund

The amount debited to various expense = vouchers. The amount credited to Cash in Bank upon replenishment is
equal to the amount necessary to bring back the remaining balance of PCF to its imprest balance.

Imprest balance of PCF P XX

Remaining balane of PCF ( XX)
Amount of replenishment P XX
Para malaman mo yung amount na ilalagay mo sa cash in bank, iminus mo yung imprest balance at remaining
balance ng petty cash. Yung nakuha mong amount, yun ang pera na idadagdag mo para sa replenishment (para
mabuo ulit yung imprest balance), hindi ito palaging sakto. Either may shortage at overage.
 Debit Cash Short or Over – shortage
 Credit Cash Short or Over – overage

EXAMPLE: On Jan. 1, 2022, Bernadette Corp established a petty cash fund of 400. On Dec. 31, 2022, the pcf was
examined and found to have receipts and documents for miscellaneous expenses amounting to 364. In addition,
there was cash amounting to 44. What entry would be required to record the replenishment for the petty cash
fund on Dec 31, 2022?

Imprest balance of PCF P 400 Dr. Miscellaneous Expense 364

Remaining balane of PCF ( 44) Cr. Cash Short or Over 8
Amount of replenishment Cr. Cash in Bank 356
P 356
 Yung miscellaneous expense ay equal sa voucher. Pinag minus yung 400 (imrest balance) at 44 (remaining
balance) para malaman kung magkano yung cash in bank (perang kulang para mabuo yung petty cash).
 Then, yung 8 ay overage kaya nasa credit. Kasi pag pinag add mo yung misc expense at remaining balance,
sosobra sya ng 8.

ACCOUNTABILITY
 Responsibility of the custodian in the petty cash box.

Items included as accountability:

1. Imprest Balance Of Petty Cash Fund 4. Undeposited Collect Currency
2.Undeposited Collect Check 5. Unclaimed Salaries
3. Employee Contributions 6. Excess Of Advance Travel
ACCOUNTED
 Evidence or proof of accountability; where the accountability went
Items included as accounted:
Remain in the Box Expenditures To Employee
1. Remaining Currencies
1. Vouchers 1. IOUs
2. Undeposited Check
2. Replenishment Check 2. Accommodation Check
3. Employee Contributions - Closed
The difference between accountability and accounted is the shortage or overage.

TERMS:
 Vouchers – included regardless of the date
 IOUs – loan money to employee
 Remaining Currencies – no need of evidence since it is on the box
 Employee Contribution – included if the envelope is closed containing the money; if the envelope is open
assume that it is combined with the remaining currencies
 Accommodation Check – if the drawer/maker is an employee
 Replenishment Check – if drawer/maker is the company (payable to custodian)
 Undeposited Check – if maker is the customer

ACCOUNTABILITY ACCOUNTED
Imprest Balance XX XX Remaining Currencies
Undeposited Check XX XX Undeposited Check
Undeposited Currencies XX XX Employee Contributions - Close
Unclaimed Salary XX XX Vouchers
Excess of Advance Travel XX XX Replenishment Check
Employee Contributions – Open and Close XX XX IOUs
XX Accommodation Check

Total Accountability XX XX Total Accounted

ADJUSTED PETTY CASH BALANCE

Add: Currencies and Coins on Count Date XX
Add: Disbursements after December 31 XX
Currencies and Coins at December 31 P XX
Less: Undeposited Collections of Currencies (XX)
Less: Unclaimed Salaries (XX)
Less: Excess of Advance Travel (XX)
Less: Employee Contribution - Open (XX)
Currencies and Coins Belonging to PCF P XX
Add: Replenishment Check XX
Add: Accommodation Check (withdrawable at Dec. 31) XX
Adjusted PCF P XX
 YEAR 1
FORMATION OF PARTNERSHIP BUSINESS SY. ’21 - ‘22

STAGES IN PARTNERSHIP BUSINESS

 Formation
 Operation
 Dissolution
 Liquidation

PARTNERSHIP
– ARTICLE 1767, TITLE IX PARTNERSHIP, BOOK IV OBLIGATIONS AND CONTRACTS, RA NO. 386 OF THE CIVIL
CODE OF THE PHILIPPINES
– By the contract of partnership two or more persons bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.

CHARACTERISTICS OF A PARTNERSHIP
1. Mutual Agency – Any partner may act as agent of the partnership in conducting its affairs.
2. Unlimited Liability – The personal assets of any partner may be used to satisfy the partnership creditors’
claims upon liquidation, if partnership asset are not enough to settle the liabilities to outsiders.
3. Limited Life – A partnership may be dissolved at any time by action of the partners or by operation of law.
4. Mutual Participation In Profits – A partner has the right to share in partnership profits.
5. Legal Entity – A partnership has legal personality separate and distinct from that of each of the partners.
6. Co-Ownership Of Contributed Assets – Property contributed to the partnership are owned by the
partnership by virtue of its separate legal personality.
7. Income Tax – Partnerships, except general professional partnerships (ie. those organized for the exercise
of professions like CPAs, lawyers, engineers, etc.) are subject to the 30% income tax.

KINDS OF PARTNERSHIPS
1. As to activity:
a. Trading Partnership – One whose main activity is the manufacture and sale or the purchase and
sale of goods.
b. Non-trading Partnership – One which is organized for the purpose of rendering services.
2. As to object:
a. Universal Partnership
 Universal Partnership Of All Present Property – One in which the partners contribute, at
the time of the constitution of the partnership, all the properties which actually belong
to each of them into a common fund with the intention of dividing the same among
themselves as well as the profits which they may acquire therewith. All assets
contributed to the partnership and subsequent acquisitions become common
partnership assets.
 Universal Partnership Of All Profit – One which comprises all that the partners may
acquire by their industry or work during the existence of the partnership and the
usufruct of movable or immovable property which each of the partners may possess at
the time of the institution of the contract.
b. Particular Partnership – One which has for its object determinate things, their use or fruits, or a
specific undertaking or the exercise of a profession r vocation.
3. As to liability of partners:
a. General Co-Partnership – One consisting of general partners who are liable prorata and
sometimes solidarily with their separate property for partnership liabilities.
b. Limited Partnership – One formed by two or more persons having as members one or more
general partners and one or more limited partners, who as such are not bound by the obligations
of the partnership. The word “limited” or “LTD.” Is added to the name of the partnership to
inform the public that it is a limited partnership.
 4. As to duration:
a. Partnership At Will – One for which no term is specified and is not formed for a particular
undertaking or venture and which may be terminated any time by mutual agreement of the
partners of the will of one partner alone.
b. Partnership With A Fixed Term – One in which the term or period for which the partnership is to
exist is agreed upon. It may also refer to a partnership formed for a particular undertaking and
upon the expiration of that term or completion of the particular undertaking the partnership is
dissolved; unless continued by the partners.
5. As to representation to others:
a. Ordinary Partnership – One which actually exists among the partners and also as to third persons
b. Partnership By Estoppel – One which in reality is not a partnership but is considered as one only
in relation to those who, by their conduct or omission are precluded to deny or disprove the
partnership’s existence.
6. As to legality of existence:
a. De Jure Partnership – One which has complied with all the requirements for its establishment.
b. De Facto Partnership – One which failed to comply with one or more of the legal requirements
for its establishment.
7. As to publicity:
a. Secret Partnership – One wherein the existence of certain persons as partners is not made
known of the public by any of the partners.
b. Open Partnership – One wherein the existence of certain persons as partners is made known to
the public by the members of the firm.

CLASSES OF PARTNERS
1. As to contribution:
a. Capitalist Partner – One who contributes capital in cash or property.
b. Industrial Partner – One who contributes industry, labor, skill, talent, or service.
c. Capitalist-Industrial Partner – One who contributes cash, property, and industry.
2. As to liability:
a. General Partner – One whose liability to third persons extends to his separate (private) property.
b. Limited Partner – One whose liability to third persons is limited only to the extent of his capital
contribution to the partnership.
3. As to management:
a. Managing Partner – One who manages actively the business of the partnership.
b. Silent Partner – One who does not participate in the management of the partnership affairs.
4. Other classifications:
a. Liquidating Partner – One who takes charge of the winding up of partnership affairs upon
dissolution.
b. Nominal Partner – One who is not really a partner, not being a party to the partnership
agreement, but is made liable as a partner for the protection of innocent third persons.
c. Ostensible Partner – One who takes active part in the management of the firm as is known to
the public as a partner in the business.
d. Secret Partner – One who takes active part in the management of the business but whose
connection with the partnership is concealed or unknown to the public.
e. Dormant Partner – One who does not take part in the management of the business and is not
known to the public as a partner; he is both a silent and a secret partner.

FORMATION OF PARTNERSHIP
– Individual and Individual
– Sole Proprietor and Sole Proprietor
– Individual and Sole Proprietor
Valuation of Contributions
– Partners’ contributions shall be recorded at AGREED VALUE (General Rule).
– If specific:
- Cash contributions – at face value
- Non-cash contributions – at fair market value on the date of contribution

In case of a contribution with an attached liability:

– It must be explicitly stated that partnership is assuming the attached liability for it to be recorded in the
partnership book.

Example: Yung building na inambag ni partner A sa partnership ay naka bank financing pa (may utang pa si partner
A doon sa binilhan nya dati), which means may MORTGAGE LIABILITY pa sya sa banko. Kapag ganon, antayin mong
sabihin sa problem na inaako ng partnership yung liability bago mo irecord. If inako nila, irerecord mo as:

Partner A – Building Partner B – Cash

Dr. Building 250,000 Dr. Cash 250,000
Cr. A Capital 250,000 Cr. B Capital 250,000
Partnership
(If the partnership assumes the liability)
500,000
Dr. Building 250,000
Cr. Mortgage Payable 30,000
Cr. A Capital 220,000

Investment of an existing business:

 Update the books by recognizing unrecorded items
 Close nominal accounts to the sole proprietor’s capital (if the books will be used as partn4ership books)
 Adjust the assets to their agreed value and take effect those adjustments to the sole proprietor’s capital
account

TIIC = TAC TIC ≠ TAC

PIC = PAC
As is Not Possible
(Both Partners)
Goodwill (TIC<TAC)
1 Partner: PIC = PAC
Not Possible Additional Investment (TIC<TAC)
1 Partner: PIC ≠ PAC
Withdrawal (TIC>TAC)
Bonus Combination of Bonus, Goodwill,
PIC ≠ PAC
Additional Investment and Additional Investment or
(Both Partners)
Withdrawal Withdrawal
 Partner’s Invested Capital (PIC)
 Partner’s Agreed Capital (PAC)
 Total Invested Capital (TIC)
 Total Agreed Capital (TAC)
 Goodwill was outlawed by IFRS 3 Business Combinations.
 Bonus method is used when the problem is silent.
 Capital Ratio is not the same as profit and Loss Ratio, unless otherwise stated.
 TAC yung pinaka credited sa capital mo.

TIC TAC TIC TAC

Partner A 250,000 250,000 (50%) 150,000 150,000 (30%)
Partner B 250,000 250,000 (50%) 350,000 350,000 (70%)
500,000 500,000 500,000 500,000
  Para masabi mo na equal sila (TIC = TAC), dapat yung amount na ininvest ng partner, yun din yung
magiging agreed capital nya kahit ano pa yung percentage.
 Hindi porket hindi equal yung percentage, ay hindi na equal yung TAC.

BONUS METHOD
TIC TAC
Partner A 250,000 (100,000) 150,000 (30%)
Partner B 250,000 100,000 350,000 (70%)
500,000 500,000
 What if hindi equal yung tic at tac? Dahil napagkasunduan nila na 30% lang yung kay partner a at 70%
yung kay partner b, kahit na pareho sila ng invested capital?
 Ibig sabihin, yung kulang kay partner b ay kukunin from the invested capital ni partner a, para mameet
yung percentage.

Dr. Cash 250,000  Irerecord mo sila na parang

Cr. A Capital 250,000 normal lang pero mag rerecord
Dr. Cash 250,000 ka ulit para maipakita mon a
Cr. B Capital 250,000 yung isang partner ay binawasan
Dr. A Capital 100,000 mo ng certain amount at yung
Cr. B Capital 100,000 isang partner ay dinagdagan mo
ng certain amount.
 BONUS to B (Dahil kay B mo dinagdag)

ADDITIONAL INVESTMENT METHOD

TIC TAC
Partner A 250,000 250,000 (40%)
Partner B 250,000 100,000 375,000 (70%)
500,000 625,000
 Kapag may additional investment, magbabago yung total ng TAC.
 Example nawawala yung TAC ni partner B.
 Una, ilalagay mo yung percentage nilang dalawa. Then, ididivide mo yung TAC ni partner A sa percentage
nya para makuha yung total (250,000/40%). Kapag nakuha mo na yung total, iminus mo na lang kay A.
 Therefore, magaadd si B ng 100,000.

WITHDRAWAL METHOD
TIC TAC
Partner A 250,000 166,667 (40%)
Partner B 250,000 (83,333) 250,000 (70%)
500,000 416,667
 Kapag withdrawal method naman, ang nawawala is yung may mas mababang percentage.
 Tulad lang din sa additional investment yung process pero mag wiwithdraw si partner B para magalign
yung TIC nya sa TAC.

Minsan hindi mo malalaman sa problem kung sino yung partner na mag aadd. Kapag ganon, magttrial and error ka.

For example, sinabi sa problem na may mag cocontribute ng

additional cash. Therefore, hindi bonus method yung gagamitin mo
kundi additional investment method.
Dito, tinry nya if si partner a ang hindi mag aadd, kaya kinopya lang yung initial capital divided by the given
percentage. Pero yung kinalabasan na total ay mas mababa kesa sa total initial investment.

Dito naman, tinry nya kung si partner b ang hindi mag aadd kaya as is
lang yung capital nya divided by 40% para makuha yung kabuohan.
Lumabas na mas mataas yung total ngayon kaysa sa initial which
means si partner a ay mag aadd ng 75,000.
 YEAR 1
OPERATION OF PARTNERSHIP BUSINESS SY. ’21 - ‘22

PARTNERSHIP OPERATION
 Division of Profit and Losses
 General Rule: AGREEMENT
 If there is no agreement (silent), you proceed with the original capital.

Ig agreement is only for:

Actual Result
PROFIT LOSS
PROFIT Agreement Original Capital
LOSS Agreement Agreement

POSSIBLE AGREEMENTS:
 Equally
Profit: 250,000 Partner A: 150,000 Partner B: 100,000

 Unequal Ratios/Arbitrary Ratios

60 40
Given: 60:40
100 100
Profit: 250,000
Partner A: 150,000 Partner B: 100,000

Given: 80:40 80 40
Profit: 250,000 120 120
80 + 40 = 120 Partner A: 166,667 Partner B: 83,333
 250,000 * 80/120 = 166,667

 Based on Capital Balances

1. Beginning
2. Ending
3. Original
4. Average
a. Simple Average
b. Weighted Average
- Months Outstanding
- Running Balance

2nd Year Partner A Partner B

Jan 1 300,000 100,000
Mar 1 50,000
Apr 1 80,000
Apr 30 (30,000)
Jul 31 (20,000)
Oct 1 100,000 100,000
Dec 1 (60,000)
Dec 31 360,000 260,000
Original
100,000 100,000
Capital
 1. Beginning – 300,000 and 100,000
300 100
400 400
Partner A: 187,500 Partner B: 62,500
2. Ending – 360,000 and 260,000
360 260
620 620
Multiply to 250,000
Partner A: 145,161 Partner B: 104,839

3. Original – 100,00 and 100,000

100 100
200 200
Multiply to 250,000
Partner A: 125,000 Partner B: 125,000

4a. Simple Average

B+E
2
300,000 + 360,000 = 330,000 100,000 + 260,000 = 180,000
2 2
Yung answer ang magiging numerator sa fraction.
330 180
510 510
Multiply to 250,000
Partner A: 330,000 Partner B: 62,500

4b. Weighted Average: Outstanding

Beginning and Changes x Months Outstanding Total
1/1 300,000 12 3,600,000
3/1 50,000 10 500,000
4/30 (30,000) 8 (240,000)
10/1 100,000 3 300,000
12/1 (60,000) 1 (60,000)
4,100,000
12
341,667
 Sa months outstanding, bibilangin mo yung layo ng month sa Dec 31. For the first given – January
1, tanungin natin sarili natin kung gaano sia kalayo sa dulo – December, it is 12 months. Next,
March 1 (gaano siya kalayo sa dulo) – 10 months, and so on.

4b. Weighted Average: Running Balance

Running Balance x Months Unchanged Total
1/1 300,000 2 600,000
3/1 350,000 2 700,000
4/30 320,000 5 1,600,000
10/1 420,000 2 840,000
12/1 360,000 1 360,000
4,100,000
12
341,667
  Kapag running balance yung ginagamit, ang imumultiply naman yung months unchanged. Yung
hindi naman gumalaw.
 For the table above, January to March (2 months hindi gumalaw), March to August (5 months
hindi gumalaw), etc.

 With Provision About

1. Salary
2. Interest – Principal x Rate x Time
3. Bonus
Given:
Salary = 60,000 to Partner A
Interest = 6% of Weighted Average Capital
Remainder = 60:40
Partner A Partner B Total
Salary 60,000 - 60,000
Interest 20,500 10,600 31,100
Bonus - -
Remainder 95,340 63,560 158,900
175,840 74,160 250,000
 Kukuin mo yung interest from weighted average method kasi yun yung sinabi sa given.
 Nakuha mo yung 158,900 kasi inadd yung total salary at total interest then minus 250,000. Tyaka mo sya
imumultiply sa given ratio na 60:40.

POSSIBLE COMPUTATIONS FOR BONUS

 Bonus is a percent of income pero it depends on income kung ano yung basehan

1. Before Salary, Interest, Bonus

- Yung profit ay imumultiply mo lang sa percentage ng bonus.
2. Before Salary, Interest, but After Bonus
 - Kapag Profit before salary and interest, derecho ka na sa profit minus bonus.
- Kapag Profit after salary and interest, imiminus mo yung profit, salary, and interest.

Note: If silent, income is treated as an amount before salary, interest, and bonus.