JPIA-HAU

FUNDAMENTALS OF F. Functions of Accounting in

Business
ACCOUNTING  Provide external users with
Introduction and Adjusting Entries information that is useful in
making, among others,
Overview of the Handouts: investment and credit
1. Introduction to Accounting decisions; and
2. Accounting Concepts and Principles  Provide internal users with
3. Adjusting Entries information that is useful in
managing the business.

I. Introduction to Accounting G. Users of Accounting Information

A. Definition 1) Internal Users – those who are
“Accounting is the process of directly involved in managing the
identifying, measuring, and business.
communicating economic information • Business Owners
to permit informed judgment and • Board of Directors
decision by users of the information.” – • Managerial Personnel
American Accounting Association 2) External Users – those who are
not directly involved in managing
B. Important Points the business.
1) Accounting is about quantitative • Existing and potential investors
information. • Existing and potential creditors
2) The information is financial in • Government agencies (BIR
nature. and SEC)
3) The information should be useful in • Nonmanagerial employees
decision making. • Customers
• Public
C. Components of Accounting
 Identifying – process of H. Types of Accounting Information
recognition or non-recognition of  General Purpose Accounting
business activities as accountable Information – information
events. designed to meet the common
 Measuring – process of assigning needs of the information users.
peso amounts to the accountable  Special Purpose Accounting
economic transactions and events Information – information
 Communicating – process of designed to meet the specific
preparing and distributing needs of particular statement users
accounting reports to potential
users of financial information. I. Common Branches of Accounting
 Financial Accounting – focuses
D. Objective of Accounting on general purpose financial
“The overall objective of accounting is statements
to provide quantitative financial  Management Accounting –
information about a business that is involves the accumulation and
useful to statement users, particularly communication of information for
owners and creditors, in making use by internal users only
economic decisions.”  Government Accounting – refers
to the accounting for the
E. Bookkeeping vs. Accounting government and its
 Bookkeeping – process of instrumentalities, focusing attention
recording the accounts or on the custody and administration
transactions of an entity. It normally of public funds
ends with the preparation of the  Auditing – involves the inspection
trial balance. of an entity's financial statements
 Accounting – covers the whole or business processes to attain
process of identifying, measuring, their correspondence with
and communicating information to established criteria
potential users.  Tax Accounting – refers to the
preparation of tax returns and
rendering of tax advice

Fundamentals of Accounting Handout #1 – Introduction to Accounting & Adjusting Entries

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 Cost Accounting – systematic  Materiality Concept – this
recording and analysis of the costs concept guides the accountant
of materials, labor, and production when applying accounting
of goods principles
 Accounting Education – refers to  Cost Benefit – the costs of
teaching accounting and processing and communicating
accounting related subjects information should not exceed
 Accounting Research – pertains the benefits to be derived from
to careful analysis of economic the information's used
events and other variables that has  Full Disclosure Principle –
an effect economic entities information communicated to users
reflects a series of judgmental
J. Forms of Business Organizations tradeoffs
 Sole or single proprietorship –  Consistency Concept – requires a
owned by only one individual business to apply accounting policies
 Partnership – owned by two or consistently
more individuals who entered into
a contract to carry on business III. Adjusting Entries
 Corporation – owned by more - is the process of gathering and putting
than one individuals; owners or together various data necessary to update
shareholders are separate entity balances of certain accounts in the books
on the management of the company. The most common types
of adjusting data are the following:
K. Types of Business Activities a) Accrued Expense – an expense
 Service incurred but not yet paid. The entry for
 Merchandising an accrued expense is: (DR. expense
 Manufacturing CR. payable)

II. Accounting Concepts and Principles Example 1: Accrued Expense

A. Basic Accounting Concepts
 Separate Entity Concept – the The J&J Company has an outstanding
business is viewed as a legal entity, 90-day, 12% note payable dated
separate from its owners; also called December 01, 2019 amounting to PhP
as accounting entity principle 200, 000.00. The interest is payable
 Historical Cost Concept – assets upon maturity of the note. What is the
are initially recorded at their adjusting entry to be recorded on
acquisition costs; also called as cost December 31, 2019 for the accrued
principle interest?
 Going Concern Concept – the
business is assumed to continue to Solution:
exist for an indefinite period of time
 Matching Concept – some costs The company’s accounting period or
are initially recognized as assets and financial year is the calendar year, that
charged as expenses only when the is January 01 to December 31. Interest
related revenue is recognized for thirty days has accrued on the note
 Accrual Basis of Accounting – as of December 31, 2019 (that is
economic events are recorded in the December 01 to December 31). The
period which they occur rather than adjusting entry to record the accrued
at the point where they are paid or interest is as follows:
received
 Prudence – accountant should Interest Expense 2, 000
observe some degree of caution Interest Payable 2, 000
when existing judgments needed in 200,000 × 12% × 30/360
making accounting estimates
 Time Period – life of the business is b) Accrued Income – an income earned
divided into series of reporting but not yet received or collected. The
periods entry for an accrued income is: (DR.
 Stable Monetary Unit – assets, receivable CR. income)
liabilities, income, and expenses are
stated in common unit of measure Example 2: Accrued Income
which is pesos in the Philippines

Fundamentals of Accounting Handout #1 – Introduction to Accounting & Adjusting Entries

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JMT Holdings, Inc. received a 3- Under the asset method, the
month, 12% note dated December 01, prepayment is recorded as an
2019 amounting to PhP 100, 000. asset. The entry to record the
Prepare the adjusting entry for the prepayment is:
year end December 31, 2019.
Prepaid Insurance 30, 000
Solution: Cash 30, 000

As of December 31, 2019, interest for And for the adjustment, the expense
1 month (that is December 1 to for the year is recognized and is
December 31) is already earned but deducted from the prepayment. The
not yet collected. The adjusting entry adjusting entry to record is:
to record the accrual of interest
income is as follows: Insurance Expense 20, 000
Prepaid Insurance 20, 000
Interest Receivable 1, 000 30, 000 × 8/12
Interest Income 1, 000
100,000 × 12% × 30/360 Under the expense method, the
prepayment is recorded as an expense.
c) Prepaid Expense or Prepayments – The entry to record the prepayment
this is an expense paid or acquired in under the expense method is:
advance such as premiums. There are
two ways in recording prepayments, Insurance Expense 30, 000
namely: Cash 30, 000
 Asset method – the prepayment is
initially debited to an asset And for the adjustment, the remaining
account; records the expired balance of the prepaid insurance for the
amount year is recognized and is deducted from
Pro-forma: the prerecorded expense amount. The
Prepaid Expense xxx adjusting entry to record is:
Cash xxx
Adjusting Entry: Prepaid Insurance 10, 000
Expense xxx Insurance Expense 10, 000
Prepaid Expense xxx 30, 000 × 4/12

 Expense method – the d) Unearned Income – this is income

prepayment is initially debited to an already collected but not yet earned.
expense account; records the The unearned income may be
unexpired amount recorded in using the liability method
Pro-forma: or income method.
Expense xxx  Liability Method – collection is
Cash xxx initially credited to a liability
Adjusting Entry: account. At the end of the
Prepaid Expense xxx accounting period, the earned
Expense xxx portion of the income is transferred
to an income account.
Example 3: Prepaid Expense or Pro-forma:
Prepayments Cash xxx
Unearned Income xxx
On May 01, 2019, Photo Printing Adjusting Entry:
Stations paid insurance premium of Unearned Income xxx
PhP 30, 000 covering a period of one Income xxx
year beginning on the mentioned date.
Prepare the entries for the prepayment  Income Method – collection is
and their corresponding adjusting initially credited to an income
entries under asset and expense account. At the end of the
method. accounting period, the unearned
portion of the income is transferred
Solution: to a liability account.
Pro-forma:
Cash xxx
Income xxx
Fundamentals of Accounting Handout #1 – Introduction to Accounting & Adjusting Entries
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Adjusting Entry: Formula:
Income xxx Depreciation = (Cost – Residual
Unearned Income xxx Value) / Useful Life

Example 4: Unearned Income Example 5: Depreciation of PPE

On September 01, 2019, Darwin Gardner Brokerage Firm acquired

Holdings Co. received PhP 240, 000 an office equipment on October 01,
representing rental of an office space 2018 for PhP 310, 000. The asset
for one year beginning on the has an estimated useful life of 5
mentioned date. Prepare the advance years and an estimated residual value
payments made and their of PhP 10, 000. What are the entries
corresponding adjusting entries under to record depreciation expense in
liability and income method. 2018 and 2019?

Solution: Solution:

Under the liability method, the For the year 2018, only 3 months will
advance payment is recorded as a be recorded since it was purchased on
liability. The entry to record the October 2018. The entry to record is:
advance payment is:
Depreciation Expense 15, 000
Cash 240, 000 Accumulated Depreciation 15, 000
Unearned Rent 240, 000 (310, 000 – 10, 000)/5 yrs × 3/12

And for the adjustment, the earned For the year 2019, the depreciation
income for the year is recognized and is expense will be for the whole year.
deducted from the unearned income The entry to record is:
account. The adjusting entry to record
is: Depreciation Expense 60, 000
Accumulated Depreciation 60, 000
Unearned Rent 80, 000 (310, 000 – 10, 000)/5 yrs
Rent Income 80, 000
240, 000 × 4/12 f) Uncollectible Accounts/Bad Debts –
these represents customers' accounts
Under the income method, the that may no longer be collected or that
advance payment is recorded as an may possibly become bad debts.
income. The entry to record the Pro-forma:
prepayment under the expense method Bad Debts Expense xxx
is: Allowance for Bad Debts xxx

Cash 240, 000 Example 6: Uncollectible

Rent Income 240, 000 Accounts/Bad Debts

And for the adjustment, the remaining ILY Company’s trial balance dated
balance of the unearned income for the December 31, 2019 contains the
year is recognized and is deducted from following information:
the income amount. The adjusting entry
to record is: Accounts Receivable 350, 000
Allowance for Bad Debts 2, 000
Sales 1, 850, 000
Rent Income 160, 000
Unearned Rent 160, 000 Estimated uncollectible accounts
240, 000 × 8/12 amounted to PhP 6, 050. Prepare the
adjusting entry for the allowance for
e) Depreciation of PPE – a systematic bad debts.
allocation of the depreciable amount of
an item of PPE over its useful life Solution:
(PAS 16).
Adjusting Entry: Required Allowance 6, 050
Depreciation Expense xxx Allowance, before adjustment 2, 000
Accumulated Depreciation xxx Uncollectible accounts for the year 4, 050

Fundamentals of Accounting Handout #1 – Introduction to Accounting & Adjusting Entries

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Bad Debts Expense 4, 050
Allowance for Bad Debts 4, 050

g) Inventory – adjustment for inventory

is necessary if the periodic inventory
system is used.
Pro-form:
Inventory xxx
Income Summary xxx

Fundamentals of Accounting Handout #1 – Introduction to Accounting & Adjusting Entries