ACCA101 Study Guide: Exams 1.

1 Edited

AccoUntiNg Materiality
- a service activity - depends on the size or nature
- provides quantitative 2inancial information useful - information should be signi5icant enough for
in making economic decisions. evaluation and decisions.
- process of identifying, measuring, and Consistency Principle
communicating economic information. - comparability
- art of recording, classifying and summarizing in a - same accounting methods should be used from
signi5icant matter 5inancially. period to period.
- 4 phases: recording, classifying, summarizing, and - changes are still permitted if justi2ied.
analyzing.
ACCOUNT
FORMS OF BUSINESS ORGANIZATIONS - basic summary device of accounting.
Sole Proprietorship - a detail record of the increases, decreases and
- Has a single owner, solely responsible for the balance of each element that appears in an entity’s
business and establishment. f/s.
Partnership - T-account: simplest account
- operated by two or more people who bind
themselves to share the cost and pro2its alike. ACCOUNTING EQUATION
Corporation - Assets = Liabilities + Owner’s Equity
- owned by stockholders and created by operation of - most basic tool of accounting
law, having the rights of succession, powers, - resources controlled by the enterprise
attributes, and properties.
- stockholders are liable DEBIT AND CREDIT (Double Entry System) 2-11
- a separate legal entity • debit entry must have a corresponding credit entry.

FUNDAMENTAL CONCEPTS Debit or Dr.

Entity Concept - left side of the account
- owner and 5irm are two separate entities. - Increase in: assets, withdrawal, expenses
Periodicity Concept Credit or Cr.
- equal time period for purposes of reporting. - right side of the account
Stable Monetary Unit Concept - Increase in: liabilities, capital, income
- ignores the effects of in5lation in accounting records.
Going Concern FINANCIAL ELEMENTS
- business is assumed to be ongoing unless proven Assets
otherwise. - an economic resource: has the potential to
produce economic bene2its.
BASIC PRINCIPLES - current and
Objectivity Liability
- data is reliable, useful, and accurate. - a present obligation of the entity to transfer an
Historical Cost economic resource.
- recording the acquired assets at its actual cost. Equity
Revenue Recognition Principle - residual interest in the assets deducting its
- recognizing revenue when goods are delivered or liabilities.
services are rendered. Income
Expenses Recognition Principle - Increase in assets, decrease in liabilities,
- recognized when goods/services are used to increase in equity.
produce revenue and not when paid. Expenses
Adequate Disclosure - Decreases in assets, increase in liabilities,
- all relevant information that may affect the user’s decrease in equity.
decisions must be disclosed in the f/s.
ACCA101 Study Guide: Exams 1.1 Edited

USERS OF F/S CASH BASIS

1. Owners - does not record a transaction unless cash is
2. Government Regulators, BIR, SEC , Banks received or paid.
3. Investors - cash 2lows necessarily exclude investments by and
4. Employees and Other stakeholders. distributions to the owner in the computation of
income.
ACCOUNTING EVENTS AND TRANSACTIONS
TYPES AND EFFECTS OF TRANSACTIONS PERIODICITY CONCEPT
1. Source of Assets (SA): one asset increases; L or OE - going out of business is called liquidation. (not a
increases. practical way of measuring a business)
2. Exchange of Assets (EA): One asset account - this concept divides the economic life of a business
increases; another asset account increases. into arti2icial time periods. (to price timely infos
3. Use of Assets (UA): One asset account decreases; L and can be used to make right economic decisions)
or OE decreases. - Accounting periods:
4. Exchange of Claims (EC): L or OE increases; L or • Fiscal year - 12 consecutive months.
OE decreases • Calendar year - annual period ending on Dec. 31
• Natural Business Year - 12 month period that
FINANCIAL STATEMENTS ends at the lowest level of the annual cycle.
Balance Sheet (permanent accounts) - • Interim Period - Less than a year
Assets: debit/increases • Some has an annual reporting period of 52
Liabilities and Owner’s Equity: credit/increases weeks.
Income Statement (temporary accounts) - - ensures that accounting information is reported at
Expenses: debit/decreases for owner’s equity regular intervals.

ACCOUNTING CYCLE RECOGNITION

• A series of sequential steps or procedures are
performed to accomplish the accounting process. - Process of capturing for inclusion in the statement
of 2inancial position or performance an item that
BasiC FinaNciaL AccoUntiNg aNd RepoRtinG: meets the de2inition of the 2inancial elements.
AdjuStinG aMounTs - Carrying Amount: the amount at which an A, L, E is
recognized at the statement of 2inancial position.
ACCRUAL BASIS - The recognized elements are in structured
- the effects of transactions and other events are summaries that are designed to make 2inancial
recognized when they occur and not as cash is information comparable and understandable.
received. - Statements are linked because the recognition of
- records: one item requires the recognition or derecognition
• revenues as they are earned of one or more items.
• expense as they are incurred
- 2inancial statements except for cash 2low statement • Recognition of income occurs as:
is not prepared. I. initial recognition or increase in asset.
- informs users: II. derecognition or decrease of a liability.
• of past transactions involving the payment and • Recognition of expense occurs as:
receipt of cash I. initial recognition or increase of a liability.
• of obligations to pay cash in the future. II. derecognition or decrease of an asset.
• of resources that represent cash to be received
in the future. - MATCHING CONCEPT:
- GAAP requires businesses the use of accrual basis. • The simultaneous recognition of income and
related expenses.
• initial recognition of assets or liabilities =
recognition of income and related expenses.
ACCA101 Study Guide: Exams 1.1 Edited

- The recognition is appropriate when information - Adjusting entries: changing account balances at the
about Assets, Liabilities, Equity, Income, and end of the period; current
Expenses are relevant and faithfully represented for balance to correct balance.
information to be useful for primary users. • assigns revenues to period in which they are
earned.
DERECOGNITION • assigns expenses to which they are incurred.
- removal of a recognized Assets or Liabilities from - adjustments are needed for recognition and
statement of 2inancial position. derecognition to be followed for 2inancial
- occurs when item no longer meets de2inition of statements to report the effects of transactions.
assets or liabilities:
• Derecognition for assets: DEFERRALS
I. occurs when entity loses control of all or part - Postment of the recognition:
of the recognized asset. • expense already paid but not yet incurred.
• Derecognition for liabilities: • revenue already collected but not yet earned.
I. occurs when entity no longer has a present - Decreases balance sheet account and increases
obligation of the recognized liability. income statement.
- Deferrals occur:
REVENUE FROM CONTRACTS WITH CUSTOMERS I. Assets to expenses (to re2lect expenses
- Contract: and agreement between 2 or more incurred)
parties creating rights and obligations. II. Revenues received in advance to revenue (to
- an asset-liability approach: re2lect revenues earned)
• basis for revenue recognition. ACCRUALS
• recognizes and measures revenue based on - recognition of:
changes in assets and liabilities. • expense already incurred but unpaid.
- contracts initiate revenue transactions. • revenue earned but uncollected.
- contracts contain: - deals with an unrecorded amount in any entry.
• terms of transactions - Increases both balance sheet account and income
• measurement of conditions statement.
• speci2ies promises of parties - Accruals occur:
- contracts recognizes revenue when performance is I. Accruing expenses: re2lect expenses incurred
satis2ied. that are unpaid and unrecorded.
- an entity recognizes revenue at an amount that II. Accruing revenues: re2lect revenues earned
re2lects the consideration to which the entity that are uncollected and unrecorded.
expects to be entitled in exchange for transferring
goods or services to customers. (earned but not ADJUSTMENTS FOR DEFERRALS
paid) Allocating Assets to Expenses
- Performance obligation: a promise in a contract • Prepaid Expenses
to provide goods or services to a customer; PO is - expenses paid in advance or expenditures
satis2ied when customer obtains control of goods - at the end of an accounting period, all or a part may
or services. be expired which then: asset becomes an expense.
- Transaction Price: amount of consideration an - if not adjusted:
entity expects to be entitled in exchange for • assets will be overstated and expenses will be
transferring goods and services. (excluding understated
collected amounts on behalf of third parties) Prepaid Rent
Rent Expense (OE:E) Dr.
THE NEED FOR ADJUSTMENTS Prepaid Rent (A) Cr.
- to re2lect in the accounts information on economic Prepaid Insurance
activities that have occurred but have not yet been Insurance Expense (OE:E) Dr.
recorded. Prepaid Insurance (A) Cr.

ACCA101 Study Guide: Exams 1.1 Edited

Supplies • Accrued Expenses

Supplies Expense (OE:E) Dr. - entities often incurs expenses before paying for
Supplies (A) Cr. them.
• Depreciation of PPE Accrued Salaries
- depreciation or dep. expense: estimated amount Salaries Expense (OE:E) Dr.
allocated to any one accounting period. Salaries Payable (L) Cr.
- factors involved in computing depreciation Accrued Interest
expense: Interest = Principal x Interest Rate x Length of Time
1. Asset cost: the amount to acquire the Interest Expense (OE:E) Dr.
depreciable asset Interest Payable (L) Cr.
2. Salvage Value: amount the asset can be sold at • Accrued Revenues
the end of estimated useful life. - provide services during the period that are neither
3. Estimated useful life: estimated number of paid for or billed at then end of the period.
periods that can make use of the asset. Accrued Consulting Revenues
- Straight-line method: Accounts Receivable (A) Dr.
Consulting Revenues (OE:I) Cr.
Asset Cost xx
ACCRUAL FOR UNCOLLECTIBLE ACCOUNTS
Less: Estimated Salvage Value xx - some clients purchase on credit and some accounts
Depreciable cost xx will never be collected. Thus there is a need to
re2lect these charges against income.
Divided by: Estimated Useful Life xx
- has a normal credit balance and is shown as a
Depreciation expense for each time period xx deduction in the balance sheet from Accounts
- the reduction is recorded in a contra account called Receivable.
accumulated depreciation Uncollectible Accounts Expenses (OE:E) Dr.
- contra account: records reductions in a related Allowance for Uncollectible Accounts (A) Cr.

account; its normal balance is opposite of the

related account. EFFECTS OF OMITTING ADJUSTMENTS
- balance of contra account is deducted from the cost
- the resulting 2inancial statements will not
to obtain the book value of PPE. accurately re2lect the 2inancial position and
Service Vehicle and OfXice Equipment performance of the entity.
Depreciation Expense - Service Vehicle(OE:E) Dr. - Inaccuracies will happen on succeeding accounting
Accumulated depreciation - Service Vehicle (A) Cr. periods
ANALYSIS USING T-ACCOUNTS
Depreciation Expense - Of2ice Equip.(OE:E) Dr.
Accumulated depreciation - Of2ice Equip. (A) Cr.

After adjustments:
Property and equipment (Net):
Service Vehicle 420,000
Less: Accumulated Depreciation 4,000 416,000

Of2ice Equipment 60,000

Less: Accumulated Depreciation 1,000 59,000
475,000

Allocating Revenues Received in Advance to

Revenues
• Unearned Referral Revenues
Unearned Referral Revenue (L) Dr.
Referral Revenue (A) Cr.

ASJUSTMENTS FOR ACCRUALS