FAR Notes
© Gwyneth P. Malaga
Definition of Accounting
1. Accounting is an art
2. Accounting is a process
3. Accounting is a service activity
Accounting is an art
 Art of recording, classifying and
summarizing in terms of money, the
financial transactions and events and
interpreting results thereof (Committee
on Accounting Terminology of the
American Institute of Certified Public
Accountants)
Accounting is a process
 process of identifying, measuring, and
communicating economic information
 to permit informed judgment and
decisions by users of the information.
(American Accounting Association )
Accounting is a service activity
Function
 To provide quantitative information
primarily financial in nature, about
economic entities
 intended to be useful in making
economic decisions (Accounting
Standards Council)
Basic Purpose of Accounting
 to supply financial information to users
 to help them make informed judgments
and better decisions
o For example, a company is considering
obtaining a loan from the bank in order
to finance the operations of the business
Relevant to this decision, accounting provides
the following information
 The resources and obligations of the
business
 Interest is paid on the current
debt/liabilities of the business.
 Cash inflows and outflows resulting from
business operations
1. If management sees other resources (land)
 may decide instead to sell the land
 use the resulting cash to finance business
operations
2. Analyzes existing debts/liabilities of the
business
 to check if it could still handle additional
debt as a result of borrowing from the
bank
3. Analyzes Cash inflows and outflows
to see other possible sources of financing
to determine how the business would repay the
bank loan if it ever materializes
If decided to apply for a loan,
 bank’s loan officer and lending
personnel will require the company to
submit financial information
Financial information
 will be used to determine whether to
approve or reject the loan application
Accounting – The Language of Business
Accounting
 language used to communicate
financial information to interested parties
 Through accounting, different users of
financial information understand what is
happening in the business enterprise
Business
 organization engaged in the trade of
goods, services, or both to consumers
(Wikipedia)
Service Business
 offers services and typically generates a
profit by charging a fee
 simplest among the three
Educational Institutions
 charge tuition and miscellaneous fees
for educational services rendered to
students
Accountants, doctors, lawyers, architects

Profit-oriented  give professional advice

 earn profit by charging professional fees
 administered to earn profit to increase
the wealth of owners
food manufacturers
Merchandising or Trading Concern
gas stations
bookstores  buys goods and sells them without any
alteration
Non-profit oriented
Examples:
 uses surplus revenues to achieve its
goals rather than to distribute them as Sari-sari stores,
profit or dividends bookstores
hardware stores (typical
Revenue
merchandising businesses)
 must be retained by the organization for
Manufacturing Business
its self-preservation, expansion, or plans
Charitable organizations  buys goods called raw materials, then
Educational institutions converts them into finished products

Most complex

Types of Business Enterprises - According to  because of the conversion of the raw

Activity materials into finished goods
Shoe manufacturing business
According to the nature of their business

1. Service Business
2. Merchandising Business
3. Manufacturing Business
Legal Forms of Business - Business Ownership
Business enterprises may be organized either as
 sole proprietorship,
 partnership
 corporation
A. Sole Proprietorship
 has only one owner, the proprietor
 may operate on his/her own
 may employ others as business
operations expand
 most basic legal form of business
Examples:
Mobile phone repair services
gravel-and-sand enterprises
cottage industries
Advantages of Sole Proprietorship over other
business forms
1. easiest to form
2. Has less complex business transactions
3. Has minimal regulatory requirements
4. With only one owner, decisions can be
made and implemented faster
5. Proprietor enjoys all the profits earned by
the business
Disadvantages of Sole Proprietorship over other
business forms
1. Faces financing problems because of the
enterprise’s limited ability to raise capital
2. Business can only expand in proportion to
the increase in resources contributed by the
proprietor
3. When it expands, the expansion focuses
on areas within the expertise of the proprietor.
4. Decision-making
 proprietor does not receive the
benefit of a second opinion
5. Bears the risks and losses of the enterprise
6. Has unlimited personal liability
 His/her personal property may be
used to satisfy the obligations due to
creditors of the proprietorship
Partnership
 an association of two or more persons
 partners bind themselves to contribute
money, property, or industry to a
common fund, with the intention of
dividing the profits among themselves
 governed by the Civil Code of the
Philippines
Partners agree on
1. How the business will be managed
2. Amount of capital contributions from
each partner
3. Division of profits/losses
4. Form and mode of settlement in case of
withdrawal by, or death of, any of the partners
Advantages over Corporation
1. Easier to organize compared to a
corporation
2. Less complex than a corporation
Advantages over Sole Proprietorship
1. Burden of management is shared among
partners
2. More ideas are exchanged and
brainstormed, resulting in better decision-
making
3. Can raise more capital
Disadvantages over Sole Proprietorship
1. Plurality of owners
 may result in disagreements
regarding ideas and
management style
2. Fragile life of a partnership
 may be dissolved by mere agreement,
or by the withdrawal of, or the death
of, or incapacity of a partner
3. Partners have unlimited personal
C. Corporation
 most complex form of business
organization
 may exist for a period not longer than 50
years, subject to renewal
Stockholders
 may transfer shares without the consent
of other stockholders
Major advantage of corporations over other
legal forms of business
1. Limited liability of owners
 liability limited only to the amount of the
stockholder’s investments
Disadvantage
1. Relatively high cost of formation
2. Subject to greater scrutiny, regulation,
control, and supervision by the government
3. More complex management of
corporations

Corporation Code 4. Has limited powers, as expressly stated in

the Corporation Code of the Philippines and its
 defines a corporation as an artificial
own Articles of Incorporation
being created by law
5. Subject to a higher income tax rate
Stockholder
 person who invests and becomes an Sole Proprietorships and Partnerships
owner of the corporation
Advantages Disadvantages
Certificate of stock
 Issued for every share purchased - Ease of Formation - Difficult to raise capital
- Subject to a few - Unlimited Liability
Regulations - Limited Life
Corporation - No corporate income
 has standardized procedures for its taxes
creation, organization, management,
and liquidation as specified in the Corporation
Corporation Code
Advantages Disadvantages
Management
 centralized in the corporation’s board of - Unlimited life - Double taxation
directors - Easy transfer of - Cost of set-up and
ownership report filing
- Limited liability
Has the greatest capacity to raise capital - Ease of raising capital
 can raise capital by selling shares of
stock to the public as a whole
Activities of the Different Forms of Business Users of Accounting Information/Financial
Statements

I. Financial Accounting - External Users

1. Investors
2. Creditors
3. Regulators
4. Customers
5. Competitors

II.Managerial Accounting - Internal Users

1. Employees (part of the administrative

Economic Decisions requires
process)
1. Use of reliable financial information 2. Owners
2. Great skill and timing 3. Managers
3. Sound professional judgment

Users of Financial Statements

Financial Information
1. Investors
 summary of all the transactions of the 2. Owners
business over a period of time 3. Employees
4. Lenders/Creditors
Accounting 5. Suppliers and other trade creditors
6. Customers
 be viewed as a service function to
7. Government
management
8. Public
 basically processes raw data and
converts them into meaningful
information that will be useful for
decision-making 1. Investors

Accounting — An Information Process  providers of risk capital

 concerned with the risk inherent in and
return provided by their investments
 need the information to help them
determine whether they should buy, hold,
or sell their investments

o In the case of corporations, shareholders

are also interested in information, which
enables them to assess the ability of the
enterprise to pay dividends.
2. Owners
 To determine if the business is profitable
 Whether to continue, improve, or drop it
3. Employees
 interested the stability and profitability of
their employers
 Interested in information which enables
them to assess the ability of the
enterprise to provide remuneration,
retirement benefits, and employment
opportunities
4. Lenders/Creditors
 Determine whether their loans and the
interest will be paid when due
5. Suppliers and other trade creditors
 Determine whether amounts owing to
them will be paid when due
Trade creditors
 likely to be interested in an enterprise
over a shorter period than lenders
 unless they are dependent upon the
continuation of the enterprise as a major
customer
6. Customers
 have interest about continuance of an
enterprise
 especially when they have a long-term
involvement with, or are dependent on,
the enterprise
7. Government and their agencies/ Regulators.
interested in the allocation of resources and,
activities of enterprises
 require information in order to regulate
the activities of enterprises
 determine taxation policies
7. The public
Enterprises
 affect members of the public in a variety
of ways
For example, enterprises may make a
substantial contribution to the local
economy in many ways including the
employment and their patronage of
local suppliers
Financial statements
 providies information about the trends
and developments in the prosperity of
the enterprise and the range of its
activities
The Accountancy Profession
Accounting is a profession because it has the
attributes required of a profession:
1. Mastery of a particular intellectual skill,
acquired by training and education
 requires to finish a degree in Bachelor of
Science in Accountancy
 requires to pass a very rigorous
government examination administered
by the Professional Regulatory Board of
Accountancy
 Once passed, he/she use the title
“Certified Public Accountant” (CPA)
2. Adherence by its members to a common
code of values and conduct established by its
administrating body, including maintaining an
outlook which is essentially objective.
Code of Ethics
 mandatory for all CPAs
 provides guidance for CPAs whenever
they encounter “what is the right thing to
do” situations
3. Acceptance of a duty to society as a whole
(usually in return for restrictions in the use of a
title or in the granting of a qualification)
Accounting
1. Gives sound financial accounting and
reporting
2. Enables effective financial management
3. Provides competent advice on a variety
of business and taxation matters
The Philippine Act of 2004
Republic Act No. 9298
 the Philippine Accountancy Act of 2004
Signed into law with the following objectives:
 The standardization and regulation of
accounting education
 The examination for registration of
certified public accountants
 The supervision, control, and regulation
of the practice of accountancy in the
Philippines
Professional Regulatory Board of Accountancy
 Created by the Article II of the Republic
Act No. 9298
 tasked to enforce the provisions of the
Philippine Accountancy Act
 granted the right to issue, suspend,
revoke, or reinstate CPA certificates for
the practice of the profession
The Board
 composed of a chairman and six (6)
members
 all of whom are appointed by the
President of the Republic of the
Philippines
The CPA Board Exams
Passing the CPA Board Exams
 requirement in order to join the
accountancy profession
Any person applying for examination shall
establish the following requisites to the
satisfaction of the Board that he/she:
 a Filipino citizen;
 of good moral character;
 a holder of the degree of Bachelor of
Science in Accountancy conferred by a
school, college, academy or institute
duly recognized and/or accredited by
the CHED or other authorized
government offices; and
 Has not been convicted of any criminal
offense involving moral turpitude
Subjects for the licensure examination
1. Management Services
2. Regulatory Framework for Business
Transactions (RFBT)
3. Auditing
4. Financial Accounting and Reporting
(FAR)
5. Advance Financial Accounting and
Reporting (AFAR)
6. Taxation
To be qualified as having passed the licensure
examination for accountants,
1. must obtain a general average of seventy-
five percent (75%)
2. with no grades lower than sixty-five percent
(65%) in any given subject.
 o In the event a candidate obtains the
rating of seventy-five percent (75%) and
above in at least a majority of subjects as
provided for in this Act, he/she
1. Shall receive a conditional credit for the
subjects passed
2. Shall take an examination in the remaining
subjects within two years from the preceding
examination
3. If failed to obtain at least a general average
of seventy-five percent (75%) and a rating of at
least sixty-five percent (65%) in each of the
subjects reexamined, he/she shall be
considered as failed in the entire examination
Candidates who fail two (2) complete
examinations
 shall be disqualified from taking another
set of examinations
 unless he/she submits evidence to the
satisfaction of the Board that he/she
enrolled in and completed at least
twenty-four (24) units of the subject given
in the licensure examination
Sectors of Accounting practice
CPAs generally practice their profession in four
sectors:
A. public practice,
B. commerce and industry
C. education or the academe
D. government
A. Public Practice
 Includes individual practitioners, small
accounting firms, medium-sized and
multinational accounting firms
 render independent professional
accounting services to the public
Services provided by CPAs:
1. Auditing
 most common service rovided by CPAs
 involves the independent examination of
financial statements for the purpose of
expressing an opinion on the fairness of
these statements
Users of audited financial statements
 have reasonable assurance
 that information is free from material
misstatements due to fraud or error
2. Tax services
 preparation of tax returns for various
clients
 provision of advice on tax matters
 representation of clients in tax cases
CPAs
 have a reputation for being experts in
accounting and taxation
3. Management consulting services
involves providing advisory/ consulting services
to clients on matters of
1. accounting 5. budgeting
2. finance 6. product costing
3. business policies 7. conduct of operations
4. organization procedures
B. Commerce and Industry D. Government

Accountants are employed in various positions, Accountants may be hired as

such as:
 staff
1. vice-presidents for finance,  auditor
2. chief accountant (controller),  budget officer
3. cost accountant  consultant in government units like the
4. internal auditor
5. budget officer 1. Commission on Audit
2. Bureau of Internal Revenue
Comptroller 3. Department of Finance
 highest accounting officer in a business 4. Department of Budget and Management
organization 5. Securities and Exchange Commission

Accountants in commerce and industry

 private accountants Accounting Vs. Bookkeeping

 assist management in planning and
Accounting Bookkeeping
controlling a company’s operations
conceptual and goes procedural or
beyond bookkeeping mechanical aspect of
accounting
C. Education
interpretation of Involves set-up,
 Accountants as professors, reviewers, or information recorded update, and
researchers under bookkeeping maintenance of
 take steps to clarify and address accounting records
emerging accounting issues
encountered by accountants in other can only be done by may be done even by
sectors certified public properly trained non-
 share the results of discussion and accountants accountants
research with colleagues in other sectors
 Educators also prepare aspiring CPAs for
the Licensure Examinations Brief History of Accounting

1. Early as 8500 BC

 Middle East region

Tradesmen

 use clay objects to represent

commodities

Unearthed clay tablets marred with symbols

and other writings

 interpreted as records of goods sold

and other statistics
2. In later years Industrial Revolution

 Ancient civilizations of Babylon, Greece,  Mid-18th to the mid-19th century

and Egypt  Production of goods are altered the
 also used clay tablets way
 Large volumes of commodities were
Papyri produced in factories
 used as the medium for record-keeping  Commerce boomed
and records
Cost accounting
1. document wage payments
2. material requisitions  specialized field of accounting
3. costs of labor  deals with the allocation of costs to
products
3. 13th to 15th centuries,

With the growth of trade and commerce,

Corporate form of business organization
 more systematic record-keeping
methods were developed  created to accommodate the need for
 Florentine, Venetian, and Genoan increasingly large amounts of funds
merchants
Funds accumulated
 used these methods to keep track of
their business  used mainly to acquire machinery, build
Double-entry records factories, and streamline manufacturing
methods and processes
 first appeared in Genoa in 1340 AD
Because of business hiring people,

o there was a need for those who manage

Fra Luca Pacioli and the Summa the business to periodically account for
the performance of the corporation
Summa de Arithmetica, Geometria, Proportioni
et Proportionalita Managers Owners

 Written by Friar Luca Pacioli in 1494 may be too optimistic in want a true and fair
 contains discussions on the double-entry reporting view of the status of the
bookkeeping system business
 Everything about Arithmetic, Geometry,
Proportions, and Proportionality
 summary of the existing mathematical
Conflict of interest
knowledge at the time
 led to the demand for financial
Friar Pacioli
statement audits
 Father of Double-Entry Bookkeeping
Fields of Accounting 4. Tax Accounting

Standards Has two aims

 developed to promote uniformity in the 1. Compliance with the tax laws

selection and application of accounting 2. Minimizing the company’s tax bill
policies and procedures through legal means

1. Financial accounting providing tax planning and tax consultancy

services
2. Management accounting

3. Cost accounting 5. Government Accounting

4. Tax Accounting  encompasses the process of analyzing,

classifying, summarizing, and
5. Government Accounting communicating all transactions involving
the receipt and disposition of
6. Accounting and Information Technology
government funds and property and
interpreting the results thereof
 proper custody, disposition, and
1. Financial accounting accounting for public funds
 focuses on the preparation and
presentation of general-purpose 6. Accounting and Information Technology
financial statements
The advent of Information Technology (I.T.)
 with the aim of meeting most of the
revolutionized accounting
needs of external users
 gave it a big boost in terms of efficiency
2. Management accounting and timeliness

 concerned primarily with financial Accounting applications

reporting for internal users, such as
management  have been written to suit different kinds
Internal users of business organization

 have control over the accounting system Computers

 can specify precisely the type of reports
 can take over most of the clerical
needed for use in decision-making
aspects of accountin
 can never replace the professional
3. Cost accounting
judgment of an accountant
 measures a business’s costs to help
management in controlling expenses
 guide managers in setting prices for their
products and services to achieve greater
profits
Accounting is a dynamic profession.
 continues to grow and serve the needs
of users of financial information
CPA
 one of the most sought-after
professionals in the business world today
CHAPTER SUMMARY
Accounting Profession mainly because of three
attributes
1. mastery of a particular
intellectual skil
2. adoption of a common code of
values or conduct
3. acceptance of a duty or
responsibility to society
Sectors of 1. public practice
accounting
2. commerce and industry

Accounting Information system that provides 3. education or academe

quantitative information for use by 4. government
decision-makers

process of identifying, measuring,

and communicating economic
information
to permit informed judgment and
decisions by users of the
information
Basic to supply financial information to
purpose of users of the information
accounting
to help them make informed
judgments and better (economic)
decisions

Accounting language used to communicate

financial information
Bookkeeping procedural or mechanical aspect
of accounting
Businesses 1. service businesses
according to
2. merchandising businesses
nature of
operations 3. manufacturing businesses
Businesses 1. sole proprietorships
according to
2. partnerships
legal form or
ownership 3. corporations
CHAPTER 2: FINANCIAL ACCOUNTING AND The FRSC has a Chairman and 14
REPORTING OVERVIEW representatives from

Generally Accepted Accounting Principles Bangko Sentral ng Pilipinas 1

Board of Accountancy 1
 Basic concepts or underlying principles
to follow for its proper use Bureau of Internal Revenue 1
 comprises the conventions, rules,
Commission on Audit 1
processes, principles, standards, and
underlying assumptions that are used in
preparing financial statements Major organization of preparers and users of
financial statements
 Agreed on by the members of the
accounting profession Securities and Exchange 1
 Accepted on the basis of experience, Commission
reason, custom, usage, and practical
necessity
Accredited national professional organization
Although the term “principles” is used, of CPA
Commerce and Industry 2
 GAAP is not rigid or unchanging
Public Practice 2
Accounting principles
Academe or Education 2
o continue to evolve as a response to the Government 2
changes in the financial information
needs of business stakeholders Chairman and the members of the FRSC

 serve a term of three years renewable for

another term
Financial Reporting Standards Council (FRSC)
Philippine Financial Reporting Standards
 official accounting standard-setting
body in the Philippines  accounting standards issued by the FRSC
 Upon the recommendation of the Board  constitutes the generally accepted
of Accountancy, the Professional accounting standards observed in the
Regulation Commission created the Philippines
FRSC
PFRS include the following:
Primary task of FRSC
1. Philippine Accounting Standards (PAS)
 to improve and establish accounting 2. Philippine Financial Reporting Standards
standards that will be generally (PFRS)
accepted in the Philippines 3. Philippine Interpretations developed by
the Philippine Interpretations Committee
The Accounting Framework
 Framework for the Preparation and
Presentation of Financial Statements
 sets out the concepts that underlie the
preparation and presentation of
financial statements for external users
Purposes of the Framework
 Assist the FRSC in developing accounting
standards that represent GAAP in the
Philippines
 Assist the FRSC in its review and adoption
of existing International Financial Reporting
Standards
 Assist preparers for financial statements in
applying FRSC Philippine Financial
Reporting Standards and in dealing with
topics that have yet to form the subject of
an FRSC Statement
 Assist auditors in forming an opinion as to
whether financial statements conform with
Philippine GAAP
 Assists users of financial statements in
interpreting the information contained in
financial statements prepared in
conformity with Philippine GAAP
 Provide those who are interested in the
work of the FRSC with information about its
approach to the formulation of Philippine
Financial Reporting Standards.
Is the Framework part of the Accounting
Standards?
 The Framework is not a Philippine
Financial Reporting Standard (PFRS)
 hence does not define standards for any
particular measurement or disclosure
issue
In case of conflict,
 PFRS prevail over the Framework
Scope of the Framework
Deals with the following matters
1. The objective of financial statements
2. Underlying assumptions in the
preparation of financial statements
3. Qualitative characteristics that
determine the usefulness of the
information in financial statements
4. Definition, recognition, and
measurement of the elements of the
financial statements
5. Concepts of capital and capital
maintenance
Basic Accounting Concepts
1. Business entity principle
2. Dual-effect of business transactions
3. Matching principle
4. Accrual Basis
5. Periodicity (Time Period Concept)
6. Going Concern (Continuity Assumption)
1. Business Entity Principle
 business is considered distinct and a
separate accounting entity from the
owner(s) of the business
Personal transactions of owners
 not included in the records of the
business
Accounting entity
 an organization accounted for as a
separate economic unit
Clear-cut distinctions
 made between entities to avoid
confusion
2. Dual-Effect of Business Transactions Accounting periods

For a new business, assets originate from two  Periods of equal length
possible sources:
Periodicity Concept
1. Owners
 allows accounting to provide information
2. Creditors who extend loans to the business on a timely basis
 enables users to assess the condition and
Effects of Transactions performance of the business across time
periods
 Must be seen on both sides of the
equation 6. Going Concern (Continuity Assumption)
ASSETS = LIABILITIES + EQUITY
Financial statements

 normally prepared on the assumption

3. Matching Principle
that an enterprise is a going concern
Profit or loss and will continue in operation for the
foreseeable future
 computed by deducting the expenses
incurred from the income earned Enterprise

Income recorded and reported in one  has neither the intention nor the need to
accounting period liquidate or curtail materially the scale of
its operations
 should be matched against the expenses
that directly or indirectly contributed to
the generation of the income
Other accounting concepts

7. Cash Basis of Accounting

4. Accrual Basis
 Another method used in accounting
Income recognized when earned  income is recognized when cash is
regardless of when cash is received received
 expenses are recognized when cash is
Expenses recognized when incurred
paid
regardless of when cash is paid
8. Stable Monetary Unit

5. Periodicity (Time Period Concept) Transaction

 Timely financial information must be must be expressed in terms of a uniform means

made available to make economic of measuremen
decisions
 operating life of an enterprise may be Philippines, the monetary unit is the
conveniently divided into time periods of Philippine peso
equal length
 For multinational companies, financial
statements distributed worldwide are
usually expressed in U.S. dollars.
Accounting
 assumes that the peso is not materially
affected by inflation
Because of this assumption
Complete set of financial statements
o peso values already recorded in the
financial records of an enterprise are not
normally revised to consider changes in
the purchasing power of the peso
Cash Basis Vs. Accrual Basis
Financial Statements
 Means by which the information
accumulated and processed in financial
accounting
 is communicated to users on a timely
basis
 end-product of the financial accounting
process
1. Statement of financial position or
balance sheet
2. Statement of comprehensive income
3. Statement of changes in equity
4. Statement of cash flows
5. Notes to the financial statements

Transaction:

On January 2, 2012, Flowers Galore received an
order for flowers to be delivered to ABC
Company on January 10. The delivery of the
flowers was made on January 10. The collection
of the P5,000 was made on January 15.
Cash Basis Accrual Basis
Jan 15 Jan 10
The Elements of the Financial Statements
Financial statements
 portray the financial effects of by
grouping them into broad classes
according to their economic
characteristics
Elements for the measurement of financial
position

1. assets
Transaction: On January 2, 2012, Flowers Galore 2. liabilities
received a billing statement for P6,500 from the 3. equity
Meralco Electric Company for the electricity
charges of December 2011. The company paid Elements for the measurement of performance
the bill on January 5, 2012. 1. Revenue/income
Cash Basis Accrual Basis 2. expenses

Jan 5 December 2011 Elements in the statement of changes in equity

and the statement of cash flows

 Assets
 liabilities
 equity
 Revenue/income
 expenses
Elements Pertaining to Financial Position
Assets
 a resource owned and/or controlled by
the enterprise
 expected to provide future economic
benefits to the enterprise
Characteristics of assets
o owned and/or controlled by the
enterprise.
o acquired by an enterprise as a result of a
past transaction or event
Enterprise
o should have the capacity to restrict or
prevent other entities from enjoying the
economic benefits arising from the use of
the resource or item
Examples of Assets:
money on hand, or in banks,
other items considered as a
1. Cash
medium of exchange in business
transactions
valid claims from customers or
clients
2. Accounts arising from the provision of
receivable services or delivery of goods in the
ordinary course of business
on account or on credit
supplies purchased by an
3. Supplies enterprise
on hand
unused as of the reporting date
goods bought from suppliers
4. Merchandise
inventory for resale to customers at a price
higher than cost
long-lived assets acquired for use
5. Property, in operations
plant, and Land, building, machinery,
equipment furniture, fixtures, equipment,
transportation, or delivery vehicles
Liabilities
 debts of the business
Characteristics of liabilities are
 present obligation arising out of a past
event
Examples:
1. purchase transaction
2. borrowing transaction
 required to be settled in the future
Examples of Liabilities:
amounts due to suppliers
1. Accounts for goods purchased on account
payable or for services received on
account
2. Salaries due to employees
payable unpaid as of reporting date
payable to utility companies
3. Utilities
payable for electricity, heat, light and water
charges
amounts received from customers,
4. Advances in advance
from
customers for the delivery of goods or
provision of services.
obligations of an enterprise to
lenders (banks and finance
5. Loans companies)
payable to be paid on demand or at a
specified future date agreed
between enterprise and lender
Equity Revenue Vs. Gain

 Means claim Revenue Gain

 residual interest in the assets of the
arises in the course of other items that meet
enterprise after deducting all its liabilities
the ordinary activities of the definition of
claim of creditors an enterprise income
Creditor’s equity
liabilities may, or may not, arise
in the course of the
Owners’ equity Capital ordinary activities of an
enterprise
 Sales Sale of Land
Partners’ equity or Shareholders’ equity  Fees
Sale of equipment
 claim of the owner(s) of the enterprise to  Interest
the assets of the business after all the  Dividends
 Royalties
claims of creditors have been settled or
paid  rent
Examples of business transactions
Equity
A dentist earns fees for Land owned by a
 arises from the original investment by an
providing dental care to plastics manufacturer is
owner (proprietor, partner, or
clients. sold at a price higher
shareholder) into the business
than its acquisition
Repair services are cost.
Capital
rendered for customers,
(+) (-)
either for cash or on Sale of a company’s
net income net loss
credit. transportation vehicle
Additional investments withdrawals for a price higher than
the recorded value
(carrying
Elements Pertaining to Performance or
Profitability

The elements of performance or profitability Expenses

are:
 decreases in economic benefits during
1. income the accounting period
2. expenses  outflows or depletions of assets or
incidences of liabilities that result in
Income
decreases in equity
 increases in economic benefits during  encompasses losses and expenses that
the accounting period arise in the course of the ordinary
 inflows or enhancements of assets or activities of the enterprise
decreases of liabilities
 encompasses both revenue and gains
Examples of expenses:
 Salaries and other employee benefits
paid to employees
 Rent expense
 Utilities
 Cost of used supplies
 Taxes, business permits, and licenses paid
 Professional fees
 Commissions paid to company
salespersons
 Advertising and promotion expenses
Losses
 other items that meet the definition of
expenses
 may, or may not, arise in the course of
the ordinary activities of the enterprise
Examples of transactions and events that give
rise to losses are
Land is sold at a price lower than
acquisition cost.
Natural disasters (earthquake, flood)
cause damage to the company’s
building, machinery, and equipment.
The company’s inventory was destroyed
by fire due to faulty electrical wiring
Determination as an expense or loss
 depends on the nature of the
transaction and the nature of the
company
Recognition of the Elements of the Financial
Statements
Recognition
 process of incorporating in the statement
of financial position or statement of
comprehensive income an item that
meets the definition of an element and
satisfies the criteria for recognition
Criteria for Recognition
An item that meets the definition of an element
should be recognized if:
 probable that any future economic
benefit associated with the item will flow
to or from the enterprise
 item has a cost or value that can be
measured with reliability
recognized in the SFP
when it is probable that the future
Asset economic benefits will flow to the
enterprise
asset has a cost or value that can
be measured reliably
recognized in the SFP
when it is probable that an outflow
of resources embodying economic
Liability benefits will result from the
settlement of a present obligation
settlement value that will take
place can be measured reliably
Income recognized in the SCI
when an increase in future
economic benefits related to an
increase in an asset or a decrease
of a liability has arisen that can be
measured reliably
Expenses recognized in the SCI
when a decrease in future
economic benefits related to a
decrease in an asset or an increase
of a liability has arisen that can be
measured reliably
Measurement of the Elements of the Financial Liabilities
Statements  carried at the undiscounted amount of
Measurement cash
 process of determining the monetary  cash equivalents that would be required
amounts at which the elements of the to settle the obligation currently
financial statements are to be
recognized and carried in the financial 2. Realizable (settlement) value
statements
Assets
 involves the selection of the particular
basis of measurement  carried at the amount of cash or cash
equivalent
Measurement bases include  could currently be obtained by selling
1. historical cost the asset in an orderly disposal
2. current cost
3. realizable or settlement value Liabilities
 carried at their settlement values
4. present value
 undiscounted amounts of cash
expected to be paid to satisfy the
1. Historical cost liabilities in the normal course of business

Assets
 recorded at the amount of cash paid Users of Financial Information (Refer to previous
 fair value of the consideration given to pages)
acquire them at the time of their
acquisition
Information Provided by Financial Statements
Liabilities
Summary of Information Provided by Financial
 provided at the amount of proceeds
Statements and Elements of Financial
received in exchange for the obligation
Statements
or in some circumstances
 at the amounts of cash or cash Information Financial Performance/ Changes
equivalents expected to be paid to Provided Position Profitability in
satisfy the liability in the normal course of Financial
business Position

Historical cost Financial SFP SCI SCE

Statements
 most commonly used measurement
basis in accounting SCF
 deemed as the most objective basis Elements Assets Income All
involved Liabilities Expenses elements
2. Current cost Equity
Assets
 carried at the amount of cash or cash
equivalents they would have to be paid
if the same or an equivalent asset was
acquired currently
A. Financial Position B. Financial Performance
 refers to the condition of a business, in Performance or profitability
monetary terms  Ability to generate profit or incur a loss
 as of a given date or points in time during a particular accounting period.
 provided in a statement of financial  provided in a statement of
position or balance sheet comprehensive income
affected by: SCI has two parts
1. economic resources it controls,  the profit/loss portion (income
2. financial structure statement) and
3. liquidity and solvency,  the other comprehensive income portion
4. capacity to adapt to changes in the
environment in which it operates
Income statement
 also called the statement of
Liquidity, Solvency and Capacity
performance, profit/loss statement, or
statement of earnings
Liquidity availability of cash in the near future  useful tool for evaluating management’s
to cover currently maturing liabilities stewardship of the resources of the
or obligations enterprise
Solvency availability of cash over the long  useful in assessing the inflow and outflow
term to meet obligations when they of cash
fall due
Capacity ability of the enterprise to use its
for available cash
adaptation for unexpected requirements and
investment opportunities

Sample SFP:
C. Changes in Financial Position
 useful in order to assess its investing,
financing, and operating activities
during the reporting period.
 provides financial statement users with a
basis to assess the ability of the enterprise
to generate cash and cash equivalents
and the needs of the enterprise to utilize
those cash flows
Statement of changes in equity shows
1. balance of the owner’s investment in the
business at the beginning of the accounting
period
2. additional investments made by the
owner
3. withdrawals (drawings) by the owner for
personal use
4. profit or loss for the period,
5. Balance of the owner’s investment at the
end of the accounting period
General-Purpose Financial Statements
 Financial statements that meet most of
the needs of other users
As investors are providers of risk capital to the
enterprise, the provision of financial statements
that meet their needs,
o will also meet most of the needs of other
users that financial statements can
satisfy
Special-purpose financial statements
 covered by management accounting
and auditing
Frequency of Preparation of Financial
Statements
Financial statements
 prepared at least annually
Interim financial statements
 prepared monthly, quarterly, or semi-
annually
Frequency of preparation
 depends on the needs of users and the
cost-benefit consideration
Cost-benefit consideration
 cost of preparing financial statements
more frequently must not exceed the
benefits obtained from the use of these
financial statements
Responsibility for Financial Statements
Management
 has the primary responsibility for the
preparation and presentation of FS
 responsible for selecting and applying
the accounting policies and principles
which are appropriate for the company
Underlying Assumption in the Preparation of Predictive Confirmative
Financial Statements Relevant if used to make relevant if it is used to
 concepts that are assumed to have predictions of future confirm or correct the
been applied in preparing financial cash inflows or income earlier expectations of
statements a financial statement
There are two underlying assumptions user

1. accrual basis Example: Example:

2. going concern
MNO Company’s GHI Corporation
Qualitative Characteristics of Financial management is manufactures and sells
Statements preparing the annual two hair products, A
company budget for and B. Then, they
 attributes that make the information
2012. One of the decided to introduce
provided in financial statements useful to
relevant sources of new product, C.
users
information for making
Four principal qualitative characteristics: the budget would be
GHI Financial
A. Relevance prior period financial
Statements
B. Reliability statements.
C. Understandability can be used to
D. Comparability confirm, whether the
decision to
manufacture and
Relevance market product C is in
Content
Reliability accordance with
expectation
Understandability
Presentation
Comparability
3. Materiality
Information is material
A. Relevance
 if its omission or misstatement could
 Relevant when it influences the
influence the economic decisions of
economic decisions of users
users taken on the basis of the financial
 by helping them evaluate past, present,
statements
or future events
 no clear-cut amount considered to be
 or by confirming or correcting, their past
material
evaluations

Ingredients of relevance:
1. Predictive Role
2. Confirmative Role
B. Reliability For example, land owned by RST
Information is Company was sold to XYZ Company on
an installment basis
 Free from material error and bias
The title is to be retained by RST (seller) until
 can be depended to represent faithfully
all installment payments have been
that which it either purports to represent
received from XYZ (buyer)
or could reasonably be expected to
represent
Legal Viewpoint Accounting Viewpiont
RST is the owner of the XYZ is already the
Elements that enhance reliability
land owner
1. Faithful representation
(because RST still holds (because the
2. Substance over form
the title) economic substance of
3. Neutrality
only retains title as a the transaction
4. Prudence
security measure transfers control of the
5. Completeness
land to XYZ)

1. Faithful representation
 represent faithfully the transactions and
other events
Actual effects
1. properly accounted for
2. reflected in the financial statements
If the statement of comprehensive
income of GHI Company shows sales of
P120,000, it means that the company
really sold goods for this amount.
2. Substance over form
Transactions and other accountable events
 are accounted for
 presented in accordance with their
substance and economic reality
 not merely their legal form
Substance of transactions
 not always consistent with that of their
legal form
3. Neutrality
 free from bias
not neutral if
o by the selection or presentation of
information, they influence the making
of a decision or judgment
o in order to achieve a predetermined
result or outcome
For example, ABC Company is applying for
a loan with BPI. One of the bank’s
requirements is for ABC to provide the bank
with its latest financial statements. In
preparing financial statements, ABC
intentionally omits some expenses from its
income statement, thus showing higher net
income and increasing its chances of
obtaining the loan.
Violation of neutrality
 Because it favors ABC Company
Omission of expenses
 also violates faithful representation
4. Prudence (Conservatism)
 inclusion of a degree of caution
 in the exercise of judgment needed in
making the estimates required under
conditions of uncertainty
Assets and income Not overstated
Liabilities or expenses Not understated
Information about complex matters which are
relevant to users,
 should not be excluded if too difficult for
to understand
Additional explanations
 need to be included in the financial
statements
 to facilitate understanding

Application of prudence
 requires the accountant to choose an D. Comparability
alternative or accounting method Intra-comparability Inter- comparability
 which results in ↑ expense or ↓income able to compare the able to compare the
financial statements financial statements of
Intentional understatement of income or across accounting different enterprises
overstatement of expenses periods
 not a proper application of prudence in order to evaluate
their financial position,
5. Completeness financial performance,
and cash flows
Information in financial statements
Example: Example:
 must be complete within the bounds of
materiality and cost 2012 FS can be A company comparing
compared with 2011 FS its performance against
Omission
and those of previous the performance of
 can cause the information to be false, years to determine competitors to
misleading and unreliable enterprise motivate itself to
improvements greater achievement
C. Understandability and address any
identified areas for
Financial statements
improvement
 should be understandable by its users
Accounting terminology
 expected to be known and understood
Constraints on Relevant and Reliable
by users of the financial statements
Information
Users
 may cause financial statement
 assumed to have a reasonable preparers to issue financial statements
knowledge of business and economic that are less relevant or less reliable
activities and accounting
 have willingness to study the information 1. timeliness
with reasonable diligence 2. cost-benefit
3. Balance between qualitative
characteristics
Constraints 3. Balance between Qualitative Characteristics.
Balancing, or trade-off

1.Timeliness  often necessary

a. Undue delay in the reporting of information Relevance and reliability

 lose relevance  not present simultaneously as desired

Aim
Management
 to achieve an appropriate balance
 may need to balance the relative merits
among the characteristics
of timely reporting and the provision of
 in order to meet the objective of
reliable information
financial statements
Providing timely info Relative importance of the characteristics
 to report before all aspects of a  is a matter of professional judgment in
transaction or other events are known, different cases
 impairing reliability
CHAPTER SUMMARY
b. Delayed reporting Accounting as a language has a set of basic
 all aspects are known accounting concepts
 highly reliable but of little use to users accounting principles and
who have had to make decisions in the processes, standards, and
interim underlying assumptions that are
used in preparing financial
GAAP statements
Overriding consideration
 Needed to achieve a balance between developed by the Financial
relevance and reliability Reporting Standards Council
 how best to satisfy the economic (FRSC)
decision-making needs of users Philippine GAAP in the Philippines
Financial
Reporting
2. Cost-benefit
Standards
Cost of providing financial information includes: (PFRS)
1. Cost of maintaining financial records means by which the information
2. Computerization accumulated in and processed
3. Salaries of accounting personnel Financial by financial accounting is
statements communicated to users
4. Supplies
end-product of the accounting
process
o Cost should not be greater than benefits
Information provided in a statement of
about financial financial position
position
Information statement of comprehensive
about income
performance
Information statement of cash flows Measurement process of determining the
about statement of changes in equity monetary amounts at which the
changes in elements are to be recognized
financial and carried in the FS
position Measurement historical cost, current cost,
Relevant Presented in the face of the bases realizable (settlement) value,
Additional financial statements or in the and present value)
information notes to the financial statements Qualitative attributes that make the
Users of investors, employees, lenders, characteristics information useful to users
financial suppliers and other trade 4 principal relevance, reliability,
statements creditors, customers, qualitative understandability, and
government and their agencies, characteristics comparability
and the public
ingredients of confirmatory value (role),
General- Financial statements that meet relevance predictive value (role), and
purpose most of the needs of other users materiality
financial
ingredients of faithful representation,
statements
reliability substance over form, prudence
Financial prepared at least annually (conservatism), neutrality, and
statements completeness
Framework sets out the concepts that Constraints on , balance between benefit and
underlie the preparation and relevant and cost, and balance between
presentation of financial reliable qualitative characteristics
statements for external users information
Two 1. accrual basis of accounting
underlying 2. going concern
assumptions
Accrual basis effects of transactions are
recognized when they occur not
as cash is received
financial normally prepared on the
statements assumption that an enterprise is
a going concern
Other basic Business entity principle,
concepts periodicity, dual-effect of
business transactions, stable
monetary unit, and matching
principle
Broad classes elements of financial statements
Financial assets, liabilities, and equity
position
elements
Performance income and expenses
elements
III. The Accounting Equation and The Double- Account
Entry Bookkeeping System
● basic summary device of accounting
Separate accounts
Business transaction
 maintained for each element
 an exchange of values involving two
parties or within the enterprise o assets

 an economic activity that causes o liabilities

increases and/or decreases in the o equity
elements of the financial statements o income
o expense
External transactions Internal transactions
Records
sale of goods to manufacture of goods
customers for sale  Increases
 decreases
provision of services to incurrence of losses
clients  balance of each element of the FS

Casualty losses Debit Credit

Losses from fire or left side of an right side of an
flood account account

Not all events

 considered accountable Debits and Credits

Accountable event
 if it has an effect on the elements of the
financial statements
 assets, liabilities, equity, income and
expense

The Basic Accounting Equation

ASSETS = LIABILITIES + EQUITY

Normal Balance of an Account

Net Assets
Asset Debit
Accounting equation Liability Credit
 most basic tool of accounting Owner’s Equity Credit
Accounting equation focusing on equity Revenue Credit
EQUITY = ASSETS – LIABILITIES Expense Debit

Equity Debit > Credit Debit balance

 also called net assets Credit > Debit Credit balance
 Trade accounts receivable

 claims against customers

 arising from the provision of services or

delivery of goods on credit

4. Trade notes receivable

Note receivable
 written promise from the customer to
pay a fixed amount of money on a
certain future date
Being a formal and written document.
 offers more security than accounts
receivable
Common Examples of Account Titles Used

Asset Accounts 5. Non-trade receivables

1. Cash  represent all other claims which are not
2. Held for trading securities traded
3. Loans and receivables non-trade accounts receivable
4. Trade Notes Receivable non-trade notes receivable
5. Non-trade receivables
6. Inventories 6. Inventories
7. Prepaid Expenses  held for sale in the ordinary course of
8. Long term Investments business
9. Property, Plant and Equipment  in the process of production for such
sale in the form of materials or supplies
10. Intangible Assets
 to be consumed in the production
process or in the rendering of services
1. Cash
 medium of exchange for business
transactions 7. Prepaid Expenses
 accepted by a bank for deposit and  expenses paid for by the business in
immediate credit at face value advance
currency and coins prepaid insurance
checks prepaid rent
money orders  assets when they are paid for
bank drafts o Subsequently, they become expenses
demand deposit accounts
8. Long-term Investments
2. Held for trading securities  An investment as an asset held by an
 Temporary investments of excess cash enterprise
 primarily held for short-term gain  for the accretion of wealth
o known as investments at fair value Through capital distribution
through profit or loss Interest
3. Loans and Receivables Royalties
 trade receivables dividends
 non-trade receivables rentals
 Done for capital appreciation or for
Trade receivables other benefits to the investing
enterprise
 claims against others which arise in the
o such as those obtained through
ordinary course of doing business
trading relationships
Trade accounts receivable
Investments classified as long-term,
 when intended to be held for long
periods of time (i.e., more than one
year).
3. Accrued Liabilities
amounts owed to others for unpaid expenses
Similar to accounts payable

9. Property, Plant and Equipment Accounts Payable Accrued Expenses

 tangible assets held by an enterprise items already been items which are
consummated continuing in nature
Used for
purchase of goods salaries payable
1. for use in the production or supply of
goods or services interest payable
2. for rental to others taxes payable
3. for administrative purposes accruals for utility
land expenses

building
transportation
4. Unearned Revenues
delivery vehicles
 Received payments before provision of
furniture and fixtures goods or services.
machinery and equipment  creates an obligation on the part of
the enterprise to deliver goods or
provide services
10. Intangible Assets
 identifiable, non-monetary assets Once the enterprise complies,
without physical substance  advance collections from customers
are already earned and become part
patents
of income
copyright
licenses
franchises 5. Mortgage Payable
trademarks
 used for recording long-term debt(s) of
an enterprise for which the company
Liability Accounts
 pledged certain assets as security for
1. Accounts Payable the debt (collateral)
2. Notes Payable In the event that the debtor could not pay
3. Accrued Liabilities the obligation, creditor
4. Unearned Revenues 1. foreclose
5. Mortgage Payable 2. cause the mortgaged asset to be sold
6. Bonds Payable o The proceeds are used to settle the
debt

1. Accounts Payable 6. Bonds Payable

 opposite of accounts receivable
 purchasing goods or receiving services
 for which the buyer agrees to pay in
the near future (usually within 30 to 60
days)
2. Notes Payable
 like a note receivable
 the enterprise is the one who promises
to pay (not the one who receives the
promise)
Enterprise
 often obtains the needed funds by
issuing (floating) bonds
Bond
 a contract between the issuer and the
lender
 specifying the terms of repayment as
well as the interest to be paid
Interest
 normally paid on an annual, semi-
annual or quarterly basis
Equity Accounts  cost incurred to purchase or to
1.Equity produce the products sold to
2. Withdrawals customers during the period
3. Income Summary Cost of services
 For a service business
1. Equity  expense directly attributed to the
 used to record the original and provision of services
additional investments of the owner of
the business entity 2. Salaries and Wages Expense
Capital  all payments as a result of an
(+) (-) employer-employee relationship
net income net loss salaries or wages
13th month pay
other related employee benefits
Names of Capital
Sole proprietorship Capital
and a partnership Salaries Wages
Bear names of owners Share Capital for workers who use paid to workers who
analytical skills use manual labor
Premium on Share
white-collar blue-collar employees
Capital employees

Income Accounts
1. Service Income or Fees Income 3. Utilities Expense
2. Sales  Expenses related to use of
communication facilities, the
1. Service Income or Fees Income
consumption of electricity and water
 Revenues earned by performing Telephone
services for customers Electricity
2. Sales Fuel and Water Expenses
 Revenues earned as a result of sale of
merchandise
Sale of building materials 4. Rent Expense
 Expense for leased office space,
Expense Accounts equipment
 Expense for other assets rented from
1. Cost of Sales
others
2. Salaries and Wages Expense
3. Utilities Expense
5. Supplies Expense
4. Rent Expense
 used for recording the usage of
5. Supplies Expense
supplies in the normal course of
6. Insurance Expense business
7. Depreciation Expense office supplies
8. Bad Debts Expense
9. Interest Expense 6. Insurance Expense
 Portion of premiums paid on insurance
coverage which has expired
motor vehicle, health, life, fire, typhoon
or flood

7. Depreciation Expense
 portion of the cost of a tangible asset
allocated or charged as expense
during an accounting period
1. Cost of Sales buildings and equipment
8. Bad Debts Expense
  amount of receivables estimated to be Double Entry Accounting
uncollectible o each party in a business transaction
 charged as expense during an will receive something and give
accounting period something in return
Uncollectible Accounts Expense In bookkeeping terms,
Impairment Loss on Receivables what is received is a debit
what is given credit
9. Interest Expense
 expense related to use of borrowed T account
funds  representation of a scale or balance
 known as finance cost
Earl Garcia
Aug 1 - ERG invested P400,000 in the business
Identifying and Recording Transactions
Recognize as item in FS if Assets Liabilities Equity
400,000 400,000
 an element of the financial statements
 is measurable
Effect:
 relevant
 a faithful representation  Asset (Cash) increases 400,000 (debit)
 Equity(Capital)increases 400,000
In analyzing business transactions for (credit)
purposes of recording

In every transaction,

 value received = value parted with

 two values must always be equal

Basic accounting equation

 must always be maintained

Possible Effects of Business Transaction

1. Increase in Assets = Increase in Aug 2 - ERG invested land and building
Liabilities valued at P400,000 and P3,600,000
respectively in the business.
2. Increase in Assets = Increase in Equity
3. Increase in One Asset = Decrease in Assets Liabilities Equity
Another Asset 400,000 400,000
4. Decrease in Assets = Decrease in
3,600,000 3,600,000
Liabilities
5. Decrease in Assets = Decrease in
 Assets (Land and Building) increase
Equity
400,000 (debit) 3,600,000 (debit)
6. Increase in Liabilities = Decrease in  Equity(Capital)increases 4,000,000
Equity
(credit)
7. Increase in Equity = Decrease in
Liabilities
8. Increase in One Liability = Decrease in
Another Liability
9. Increase in One Equity = Decrease in
Another Equity

Aug 4 - ERG Borrowed P500,000 from GJ

Company
 Assets Liabilities Equity
500,000 500,000 Effect:
 Asset (Cash) decreases 6,000 (credit)
 Equity (decreases - due to an
Effect: expense) 6,000 (debit)
 Assets (Cash) increases 500,000 (debit)
 Liability (Accounts payable) increases Aug 9 ERG rendered Tax compliance services
500,000 (credit) to EDT Company for P500,000. EDT promises to
pay him on August 20
Assets Liabilities Equity
Aug 5 - ERG purchased office equipment
from ABC Merchandising costing for P100,000 500,000 500,000

Assets Liabilities Equity

Effect:
100,000
 Asset (Accounts Receivable) increases
-100,000 500,000 (debit)
 Equity (increases due to
Service Revenue) 500,000
Effect:
(credit)
 Asset (Office Equipment) increases
100,000 (debit)
 Asset (Cash) decreases 100,000 Aug 12 - ERG rendered Management
(credit)
advisory services to LEAD Review School for
P600,000
Aug 6 - ERG purchased office supplies from
RCBC General Merchandising costing P10,000 Assets Liabilities Equity
on account.
10,000 10,000
Assets Liabilities Equity
10,000 10,000
Effect:
Effect:  Asset (Cash) increases 600,000 (debit)
 Asset (office supplies) increases 10,000  Equity (increases due to Service
(debit) Revenue) 600,000 (credit)
 Liability (Accounts payable) increases
10,000 (credit)

Aug 20 - ERG collected P500,000 receivable

Aug 7 - Paid P6,000 to the contractor for
repairs of the building. from EDT. Company

Assets Liabilities Equity Assets Liabilities Equity

-6,000 -6,000 500,000
(expense) - 500,000

Aug 8 - ERG was billed for P15,000 by the the Effect:

contactor for painting services done in his  Asset (Cash) decreases 30,000 (credit)
building  Equity(decreases due to
Assets Liabilities Equity salaries expense)30,000 (debit)
15,000 -15,000
(expense)

Effect:
 Liabilities increases 15,000 (credit)
 Equity (decreases due to an expense)
10,000 (debit)

Aug 7 - Paid P6,000 to the contractor for

repairs of the building
Assets Liabilities Equity
-6000 -600,000
The Accounting Cycle 8/10 Supplies 13,500
Accounts 13,500
Payable

Garcia Solution earns fee of 75,000 receiving

cash
Date Description Debit Credit
8/10 Cash 75,000
Fees Earned 75,000

1. Journalization
2. Posting Garcia Solutions paid: wages, P21,250; rent,
3. Trial Balance P8,000; utilities, P4,500; and miscellaneous,
4. Adjustments P2750
5. Adjusted Trial balance Date Description Debit Credit
6. Financial Statements 8/10 Wages Expense 21,250
7. Closing entries Rent Expense 8,000
8. Post-closing trial balance Utiities Expense 4,500
9. Reversing entries Misc. Expense 2,750
Cash 36,500
Journal, Ledger, Trial Balance

1. Journal Garcia Solutions pays 9,500 to creditors on

 Where transactions are analyzed and account
recorded
Date Description Debit Credit
8/30 Accounts Payable 9,500
o On August 1, 2020, Earl Garcia started a
business called Garcia Solutions. He plan Cash 9,500
to use his knowledge in Taxation and
Accounting by offeringconsulting services
for a fee. The following double-entry
transactions show how amounts received At the end of the month, the cost of supplies
(debits) always equal amounts given on hand is P5,500
(credits) Date Description Debit Credit
8/30 Supplies Expense 8,000
Earl Garcia deposits P250,000 in a bank
account for Garcia Solutions SUpplies 8,000

Date Description Debit Credit

8/1 Cash 250,000
Earl Garcia withdrew P20,000.
Earl Garcia, 250,000
Capital Date Description Debit Credit
8/30 Dividends 20,000
Cash 20,000
Garcia Solutions buys land for P200,000
Date Description Debit Credit
8/5 Land 200,000
Cash 200,000
Ledger
 Where transactions are posted

Earl Garcia deposits P25,000 in a bank

Garcia Solutions buys supplies for P13,500, account for Garcia Solutions
agreeing to pay in the near future
Gene;ral Journal
Date Description Debit Credit
Date Description Debit Credit
 8/1 Cash 250,000 3. Trial balance is prepared
Earl Garcia, 250,000
Capital

Steps:
1. Enter transaction date
2. Enter debit amount in the debit
column
3. Update ledger account balance
4. Enter journal page in the ledger
account
5. Enter the ledger account number in
the journal

General Ledger
Account: Cash Account No. 11
Balance
Date Item Post. Debit Credit Debit Credit
Ref
8/1 1 250,000 250,000

o *P250,000 is not yet the amount to be

presented in the Balance Sheet
o Net income will still be added and
drawings will also be deducted from
this balance

T – Accounts
 Used to summarize transactions

Example:
At the end of the month, the cost of supplies
on hand is P5,500
Date Description Debit Credit
8/30 Supplies Expense 8,000
SUpplies 8,000

Supplies beg = 13,500

On hand = 5,500
Supplies used = 8,000