1st Semester | A.Y.

2022-2023

MODULE 2

ACCOUNTING EQUATION , ACCOUNTING CYCLES IN

DIFFERENT BUSINESS OPERATIONS

BEACTG 03
FINANCIAL ACCOUNTING &
REPORTING

JESUSA N. CALMA CPA, MBA

Instructor

Institute of Business and Computing Education

BSA-2A
BSA-2B
BSA- 2C
BSA- 2D

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 MABALACAT CITY COLLEGE
Institute of Business and Computing Education
1st Semester, Academic Year 2022-2023

BEACTG 03 – FINANCIAL ACCOUNTING & REPORTING

MODULE 2: ACCOUNTING EQUATION, ACCOUNTING CYCLES IN DIFFERENT
BUSINESS OPERATIONS

I. LEARNING OBJECTIVES:
II. displayed thorough understanding of the basic accounting equation;
III. outlined and defined the basic elements of accounting;
IV. prepared the chart of accounts;
V. shown the ability to analyze the effects of business transactions on the accounting
equation;
VI. identified the relationships of accounts vis-à-vis with other accounts within the
context of debit and credit.

VII. TOPIC OUTLINE:

1. ACCOUNTING EQUATION
2. ACCOUNTING CYCLES
3. BUSINESS TRANSACTIONS

VIII. LESSON PROPER

1. ACCOUNTING EQUATION
 The relationship of assets, liabilities and owner’s equity of a business enterprise
is expressed in this equation:

Assets = Liabilities + Owner’s Equity

This equation shows that the ownership of the assets is divided between the rights of the
creditors (liabilities) and the rights of the owners (owner’s equity).

The Account
 The basic summary device of accounting
 A detailed record of increases, decreases and the balance of each element that
appears in the financial statements (the final product of the accounting process).
 “T” account – the simplest form of account

T – Account
ACCOUNT TITLE
_____________________________________

DEBIT SIDE CREDIT SIDE

Rules of Debit and Credit

Debit signifies:
Increase in Assets
Decrease in Liabilities
Decrease in Owner’s Equity
Credit signifies:
Decrease in Assets
Increase in Liabilities
Increase in Owner’s Equity

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Normal balance
Whatever it takes to increase the account.
Assets - Debit
Liabilities - Credit
Equity - Credit
Income - Credit
Expense - Debit
Drawings - Debit
- Accounting Events and Transactions

Types and Effects of Transactions

- Typical Account Titles Used
- Accounting for Business Transactions
- Distinction Between Revenue and Receipts
Elements of Financial Statements
Income Statement (Nominal Accounts) this are temporary accounts which are required to be
close ate the end of the accounting year. As per IFRS (International Financial Reporting
Standard) this known as Statement of Financial Performance
1. Income
2. Expenses

Balance Sheet (Real Accounts) these

1. Assets
2. Liabilities
3. Owner’s Equity

ACCOUNTING CYCLE

Phase 1 – Recording and Classifying Process

1. Analyze transactions using source documents and chart of accounts

2. Journalize or record the transactions
3. Post each journal entry to the appropriate ledger accounts
4. Prepare a Trial Balance

Phase 2 – Summarizing and Reporting Process

5. Gather data for adjustment
6. Prepare a worksheet
7. Prepare the financial statement
8. Journalize and post adjusting entries

Phase 3 – Closing Process

9. Journalize and post closing entries
10. Rule and balance the ledger accounts
11. Prepare a post-closing trial balance
12. Reversing Entries (optional)

THE ACCOUNTING CYCLE

The following are the complete accounting cycle:

1. Journalizing is the process of recording business transactions in the Journal.
2. Posting to the ledger is the process of transferring the information from the journal to the
ledger.
3. Preparing a trial balance is the process of taking the balances of open accounts from
the ledger.
4. Adjusting the books is an entry prepared at the end of the accounting period to update
the records.

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5. Preparing the financial statement refers to the preparation of accounting reports, the
income statement, and the balance shee.t
6. Closing the books refers to the preparation of the closing entries at the end of the
accounting period to bring the income and expense accounts to zero balance.
7. Preparing the post-closing trial balance refers to the preparation of a trial balance after
closing the income and expense accounts. The post-closing trial balance shows only the
assets, liabilities and the owner’s equity.\
8. Reversing entries are prepared at the beginning of the next accounting period to reverse
certain adjustments that were made at the end of the accounting period.

ADJUSTING THE BOOKS

Adjusting entries are journal entries prepared at the end of the accounting period to
update the records in order to present a fairly accurate financial report. These are needed
because there are other transactions which are not recorded during the accounting period.
They may be called “hidden transactions”. The following are adjusted at the end of the
accounting period.

1. Additional income or expense may not be recorded yet.

2. Recorded income or expense might include amounts not belonging to the
current period.
3. Asset accounts might include expired cost; and
4. Liability accounts might include income already earned.

TWO METHODS OF ACCOUNTING

1. Cash method. In this method, income is recorded only when cash is received
and expense is considered incurred only when paid in cash.

2. Accrual method. In this method, income is recorded when goods are delivered
or services are rendered whether paid in cash or not; and expenses are recorded at the
time they are incurred even if not yet paid for. More businesses use the accrual method
because it gives an accurate result of the business operations. Under this method, the
following adjustments are made at the end of the accounting period.
a. Adjustment for unrecorded income or accrued income.
b. Adjustment for unrecorded expense or accrued expense.
c. Adjustments for bad debts.
d. Adjustments for depreciation
e. Adjustments for prepaid expenses
f. Adjustments for recollected income.
g. Setting up the ending inventory for merchandising.

CLOSING THE BOOKS

Closing entries are prepared at the end of the accounting period to close the nominal
accounts or bring them to zero balance.

Steps in closing the nominal accounts are the following:

a. Debit the credit accounts in the Income statement and credit the income and expense
summary.
b. Debit the income and expense summary and credit all the debit accounts in the income
statement.
c. Post to T – accounts all the income and expense summary entries and get the balance.
If the debit is more than the credit, there is loss.
d. Close the balance of the income and expense summary to the drawing accoun

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 e. Get the balance of the drawing account including the amount in the Trial balance and
then close to capital.
Note: If there is no drawing, close
the income and expense summary direct to the capital.

BUSINESS TRANSACTIONS

Three types of business operations

1. Service Business - business enterprises that render personal services

ex. Beauty parlors, barbershops, tailoring shops, optical clinics, auditing firms, etc.

2. Trading or merchandising- those that buy and sell merchandise

ex. Drugstores, department stores, bookstores, groceries.

3. Manufacturing firms – those that engage in the production of goods or the conversion of
raw materials into finished goods.
ex. Car manufacturer, food processor, pharmaceutical companies, etc.

SERVICE TRANSACTION is a business which derives its revenue principally in delivering

services needed by client according to permit provided by the government body. Services may
be render in cash or credit and acquisitions of supplies and services may also in cash or credit.
The entity can follow either cash or accrual method of recording transactions and must follow
the rules of debit and credit in the accounting equation Documents such official receipts ,
vouchers , payroll sheets statements of accounts , contracts, business permit and etc., are all
necessary in the operation of the business

MERCHANDISING BUSINESS
-is a business which derives its revenue principally from the resale of merchandise it originally
procures from suppliers.
-“is a business enterprise which buys and sells merchandise without altering the
form thereof.”

OPERATING CYCLE
-is the series of transactions through which a business generates its revenue and its cash
receipts from customers.
*Operating cycle of a company that sells on credit is generally longer than that of an entity that
sells exclusively on a cash basis.

CASH
Purchase or Merchandise.

ACCOUNTS INVENTORY
RECEIVABLE Sale of
Collection of the Merchandise on
receivables account.

SELLING PROCEDURES

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 STEPS OR PROCEDURES BUSINESS FORMS USED
Customer orders merchandise direct or through SALES ORDER prepared by the salesman or
a salesman purchase order from the customer.
Merchandise are packed and checked ready for A copy of SALES ORDER is used in
shipment determining the goods for packing and
shipment.
Merchandise is shipped by freight, express or SALES INVOICE prepared by the seller and
truck. mailed to the customer showing description,
quantity and amount charged for the
merchandise.
DELIVERY RECEIPT prepared authorizing the
transportation of the merchandise.
Adjustments are sometimes required for: CREDIT MEMORANDUM is issued and mailed
 Clerical errors to customer advising him that his account has
 Damaged merchandise been adjusted.
 Shortages
 Returned merchandise
Customer is asked to pay if he has not yet STATEMENT OF ACCOUNT is prepared and
remitted. mailed to customer showing the amount he
owes for merchandise sold to him.
Remittance received from customer. Customer’s Check or other instruments is
entered in the cash book and the issuance of
OFFICIAL RECEIPT to evidence collection.

PURCHASING PROCEDURES
STEPS OR PROCEDURES
Request from a certain department that
additional merchandise or other assets are
needed.
After the approval of the requisition, the PR is
forwarded to the purchasing department.
The seller processes the order.
Upon arrival of the merchandise, the Receiving
Department counts and inspects the goods if
they are in accordance with the provisions of
the PO.
The quantities and item descriptions indicated
in the RR are compared with the invoice and/or
discrepancies as well as reports of damage or
substitutions are investigated and appropriate
action is taken.
Payment of purchase on account.
BUSINESS FORMS USED
PURCHASE REQUISITION is prepared by the
originating department.
PURCHASE ORDER is prepared sent to the
following; seller(original), Receiving
Department(duplicate), maintained in the
booklet(triplicate).
The sales invoice sent by the seller is term as a
purchase invoice of the buyer.
RECEIVING REPORT is prepared distributed to
the following: Accounting Department(original),
Warehousing Section(duplicate), Maintained in
the Booklet(triplicate)
>The Accounting Department uses its copy of
the RECEIVING REPORT, DELIVERY
REPORT, PURCHASE ORDER and
PURCHASE INVOICE for the comparisons of
documents.
>A DEBIT EMORANDUM is prepared and sent
to the teller to inform adjustment on the account.
A BANK CHECK together with a REMITTANCE
ADVICE is sent to the seller.

BUSINESS FORMS USED

-forms used by business differ from one another largely because of peculiarity in product
lines, some specific method of shipping and granting of credit, etc. in carrying out its business.
-those essential features are mostly common like the DATE, NAMES OF CUSTOMERS,
DESCRIPTION OF MERCHANDISE, QUANTITY, TERMS, and SHIPPING INSTRUCTIONS.

1. SALES ORDER (S.O)

-document used to record the purchase order made by a customer
-as a general rule, no entries in books of original entry(general journal) are made from sales
order since there is no transfer of ownership of merchandise from the seller to the customer and
there is still uncertainty as to the availability of all merchandise ordered.

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2. SALES INVOICE (S.I)
-one of the most important business papers, in that it forms the basis of practically all
settlements made
between the buyer and the seller. (Evidence of sales transaction)
-prepared by the seller and mailed to the customer showing description, quantity, amount and
terms of discounts as well as freight and other items charged for the merchandise.
-duplicated or triplicated and many are quadruplicated

TWO TYPES OF SALES INVOICES

1. CASH SALES INVOICE-source document for recording cash sales in the

CASH RECEIPT JOURNAL.
2. CHARGE SALES INVOICE-document for recording credit sale in the
SALES JOURNAL.

3. DELIVERY RECEIPT (DR)

-This form generally contains the same information as the sales invoice.
-It is an important document to ascertain that the customer receives the merchandise in
good condition.

4. SALES TICKETS
-Is one form of a written memorandum whether for cash sale or charge sale.
-prepared authorizing the transportation of the merchandise.
-normally constitutes the basis for an entry at the close of each day by debiting CASH and
crediting SALES OR CASH SALES.

5. CREDIT MEMORANDUM (CM)

-business paper sent to the customer for the purpose of notifying him that his account is
credited because of some merchandise which he has returned, or for some other
reason.
-issued and mailed to the customer advising him that his account has been adjusted.
-use as a basis for the entries affecting the SALES ALLOWANCE and on SALES
RETURNS AND ALLOWANCES.

6. STATEMENT OF ACCOUNT (SA)

-lists of the several charges and credit made to the account of the customers during the
period, showing usually the date and nature of each item.
-usually sent to each customer at the close of each month showing the amount he owes
for merchandise sold to him, or more frequently if the relationship between volume of
sales to a customer and his credit rating seems to justify it.

7. OFFICIAL RECEIPT (OR)

-prepared to document all cash collections from any source.
-It is usually prepared in triplicate; distributed to the customer(original), bookkeeper as a
basis in recording in the cash receipts journal(duplicate), maintained in the
booklet(triplicate).
*NOTE: Post-dated check collections are issued with OFFICIAL RECEIPT only when the check
becomes due for encashment.

8. PURCHASE REQUISITION
-form used to request supplies or merchandise or a certain item that falls minimum
quantity or when it is seen that additional quantities should be ordered.

9. PURCHASE ORDER
-form used to order commodities.
-usually prepared by the purchasing department and provides space for showing all
essential information.

10. DEBIT MEMORANDUM

-used by the purchaser to notify a creditor that his account is being debited for some
reason,

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 -Accounts Payable (Dr) and Purchase Returns, Purchase Allowance, Cash for the cost
of transportation that should be shouldered by the seller(Cr).

11. RECEIVING REPORT

-A record made by the receiving department who is authorized to receive all purchases
as they are delivered, in order that better control may be secured over the purchasing
function.

12. REMITTANCE ADVICE

-form prepared by the party issuing the check to indicate where the check is to be
applied as payment especially if there are numerous settlements to be made at frequent
intervals.
-this avoids the difficulty of determining what goods are paid, some of which may have
discounts and allowances, and facilitates the entry for the amount of the check in
question.

SOME ADDITIONAL ACCOUNT TITLES USED IN MANUFACTURING BUSINESS

1. Sales
-used in recording sales of merchandise, whether sale is made for cash or on credit.
-always CREDITED
*If sale is made for cash:
Cash XX
Sales XX

*If sale is on account/credit:

Cash XX
Accounts Receivable XX

2. Sales Returns and Allowances

-the business may allow the customer to return defective or unsatisfactory item for a cash
refund or credit to customer’s accounts (sales return), or it may give the customer an allowance
off the sales price (Sales allowance).
-contra revenue account and always DEBITED

*To record a return or allowance on defective merchandise sold on account:

Sales Return and Allowances XX
Accounts Receivable XX

*To record a return or allowance on defective merchandise sold for cash:

Sales Return and Allowances XX
Cash XX

3. Sales Discount
-incentive given for early payment.
-reduction from the invoice price and recorded only at the date of payment.
-Always DEBITED
*To record collection less discount:
Cash XX
Sales Discount XX
Accounts Receivable XX

4. Purchases
-used to record merchandise purchased under periodic inventory method.
*Purchase is for cash:
Purchases XX
Cash XX
*Purchase is on account/credit:
Purchases XX
Accounts Payable XX

5. Purchase Returns and Allowances

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 -contra purchase account
-Always CREDITED.
*To record return/allowances for cash purchases:
Cash XX
Purchase Return and Allowance XX

*To record return/allowances for purchases on account/credit:

Accounts Payable XX
Purchase Return and Allowance XX

6. Purchase Discount
-is also a contra purchase account and always CREDITED.

Accounts Payable XX
Purchase Discount XX
Cash XX

7. Freight-In out (review)

-if the purchaser or buyer is the one responsible in paying for the freight charges on the goods
purchased, the charges are considered addition to the cost of merchandise purchased.
Purchases XX
Freight-In XX
Accounts Payable XX

8. Merchandise Inventory
-the inventory goods on hand and available for sale to customers.
-it is also used to record purchases of good as under the perpetual inventory method.

DISCOUNTS

1. TRADE DISCOUNTS (Bulk Discount/Quantity Discount)

-used by sellers to attract customers to buy in large quantity.
-not included in the journal entry, deducted immediately from the supplier’s pricelists (suggested
retail price/SRP) to arrive at the invoice price.

2. CASH DISCOUNT
-given by some industries to encourage prompt payment.
- journalized in the books of accounts,
-cash discount is deducted from the accounts receivable (seller) or accounts payable
(buyer), if availed.
-the account title use to describe is SALES DISCOUNT (seller) and PURCHASE
DISCOUNT (buyer).
***Meaning of the pricing symbols used in P100, 000 30, 10, 2/15, n/30
P100,000 –the list price. It is the suggested retail price (SRP).
30 –thirty percent (30%). IT is the first trade discount deductible from the list price of P100, 000.
10 –ten percent (10%). It is the second trade discount deductible from the balance net of the
first discount.
2/15 –two percent(2%) cash discount is given based on the invoice price if paid within fifteen
(15) days from the the date of purchase.
2/15, EOM –two percent (2%) cash discount is given based on the invoice price if paid within
fifteen days from the end on the month.
n/30 –if not paid within 15 days, net amount (n) without the 2% discount must be paid within 30
days.

GROSS METHOD AND NET METHOD OF RECORDING CASH DISCOUNT

Transactions GROSS METHOD NET METHOD
Sale of merchandise for P100, Accounts Receivable Accounts Receivable 95,000
000, terms 5/10 n/30. 100,000 Sales 95,000
Sales
100,000
Assume collection is made Cash 95,000 Cash 95,000
within the discount period. Sales Discount Accounts Receivable

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 5,000 95,000
Accounts Receivable
100,000
Assume collection is made Cash Cash 100,000
beyond the discount period. 100,000 Accounts Receivable
Accounts Receivable 95,000
100,000 Sales Discount Forfeited
5,000

METHOD OF ACCOUNTING FOR MERCHANDISE INVENTORY

1. PERIODIC INVENTORY METHOD

-The count of inventory takes place periodically, usually at the end of the year and no detailed
records of inventory are maintained during the period.
-a business records the purchase of merchandise in an expense account, Purchases.
-Freight charges that will be recorded by the buyer are debited to Freight-in account, which is
shown in the income statement as an addition to Purchases.

2. PERPETUAL INVENTORY METHOD

-records are kept of the quantity, and usually, the cost of individual item of inventory as they are
bought and sold. (Costs of Goods Sold is updated as they sell the item)

COST METHODS
1. Specific Identification Method (SIM)
-Merchandiser will identify the unsold products at the end of the period and determine the
specific acquisition costs. Flow of costs follows the actual or physical movements of the goods.
-it is suitable for a merchandising enterprise that deals with:
>slow moving products;
>products that have serial numbers, with definite specifications such as model, color or style,
and/or without unit interchangeability.

2. First-in, First-out Method

-It is assumed that the units sold came from the earlier acquisitions, and the unsold goods came
from the attest purchase or purchases.

3. Weighted Average Method (under the periodic inventory method)

-Cost method which assumes that the units on hand and units sold are made up of the mix of all
the available products during the period.

Weighted Average Cost Per Unit= Total Costs of Goods Available for Sale
Total Number of Units Available for Sale
4. Moving Average Method (under Perpetual Inventory Method)
-an average unit price is determined each time a purchase is made.

FACTORS INFLUENCING CHOICE OF INVENTORY METHOD

FACTORS SUGGESTING A PERIODIC FACTORS SUGGESTING A PERPETUAL

INVENTORY METHOD
>A small company, run by owner
>Accounting records of inventories and specific
product sales not needed in daily operations; such
information developed primarily for use in annual
income tax return
>Inventory with many different kinds of low-cost
items.
>High volume of sales transactions and a manual
accounting system.
>All merchandise stored at the sales site(for
example, in the store)
INVENTORY METHOD
> Large company with professional
management
>Management and employees wanting
information about items in inventory and
the quantities of specific products that are
selling.
>Items I inventory with high per-unit costs
>Low volume of sales transactions of a
computerized accounting system.
>Merchandise stored at multiple locations
or in warehouses separate from the sales
sites.

COMPARISON OF PERIODIC AND PERPETUAL INVENTORY METHODS

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 Transactions PERIODIC METHOD PERPETUAL METHOD
Purchase of Purchases XX Merchandise Inventory XX
Merchandise Accounts Payable Accounts Payable XX
XX
Return of Accounts Payable XX Accounts Payable XX
Merchandise to Purchase Return Merchandise Inventory XX
supplier and Allowance
XX
Settlement of Accounts Payable XX Accounts Payable XX
Account to Suppliers Purchase Discount Merchandise Inventory XX
with discount XX Cash XX
Cash
XX
Sale of Merchandise Accounts Receivable XX Accounts Receivable XX
Sales Sales XX
XX
Cost of Goods Sold XX
Merchandise Inventory XX
Return of Sales Returns and Allow Sales Returns and Allow. XX
Merchandise from XX Accounts Receivable XX
Customer Accounts Receivable
XX Merchandise Inventory XX
Costs of Goods Sold XX
(for actual returned merchandise)
Collections from Sales XX Sales XX
Customers with Sales Discount XX Sales Discount XX
discount Accounts Receivable Accounts Receivable XX
XX
Creating year-end Merchandise Inventory XX No entry necessary. Costs of Goods Sold
balance for inventory Income Summary and Inventory Accounts should reflect
accounts XX year-end balances in a perpetual method.
If a year-end physical count reveals less
Income Summary XX inventory on hand than reported in the
Purchase Returns inventory account, the following entry is
and Allowances XX needed to record inventory
Purchase Discounts XX shortage/shrinkage:
Purchase Inventory, beg
XX Costs of Goods Sold XX
Purchases Merchandise Inventory XX
XX

CLOSING PROCEDURES

1. To set-up the ending inventory: (used under periodic inventory method only)

Merchandise inventory, end XX

Income Summary XX

2. To close the beginning inventory, purchases, and other related accounts: (used under
periodic inventory method only)
Income Summary XX
Purchase Returns and Allowances XX
Purchase Discounts XX
Merchandise Inventory, beg. XX
Purchases XX
Freight-In XX

3. To close all revenue accounts:

Sales XX
Other Income (itemized) XX
Income Summary XX
To close revenues.

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4. To close expenses
Income Summary XX
Operating Expenses (itemized) XX
Other Expenses (itemized) XX
To close expenses
5. To close net income
Income Summary XX
Owner’s Capital XX
To close net income

6. To close net loss

Owner’s Capital XX
Income Summary XX
To close net loss

7. To close owner’s withdrawal

Owner’s Capital XX
Owner’s Drawings XX
To close owner’s withdrawals

REVERSING ENTRIES

1. Reversing Entry for Accrued Income

Insurance Expense
2. Reversing Entry for Accrued Income
3. Reversing Entry for Unearned Income/Pre-collected Income, If the income method of
recording pre-collections I used.
4. Reversing Entry for Prepaid Expenses, if the expense method is used of recording pre-
payments.

Accruesd income and expense

INCOME STATEMENT FOR A MERCHANDISING BUSINESS
ALPHA MERCHANDISE
INCOME STATEMENT
For the Period Ended December 31, 2021

REVENUE FROM SALES XX

Less: Sales Allowances XX
Sales Returns XX
Sales Discount XX XX
Net Sales XX
Less: COST OF GOODS SOLD/COST OF SALES
Merchandise Inventory, beg. XX
Add: Net Purchases XX
Purchases XX
Add: Freight-in XX
Total XX
Less: Purchase Discounts XX
Purchase Returns and Allowances XX XX
Total Goods Available for Sale XX
Less: Merchandise Inventory, end. XX
Costs of Sales XX
Gross Profit
XX
Add: Other Income XX
Total Income XX
Less: OPERATING EXPENSES
Salaries Expenses XX
Rent Expense XX
Miscellaneous Expense XX

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Total Operating Expense XX
NET INCOME/NET LOSS XX(XX)

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STATEMENT OF FINANCIAL POSITION

ALPHA MERCHANDISE
STATEMENT OF FINANCIAL POSITION
As of December 31, 2021

ASSET
Current Asset:
Cash XX
Accounts Receivable XX
Less: Allowance for Bad Debts XX XX
Merchandise Inventory, end XX
Total Current Asset XX
Non-Current Asset:
Office Equipment XX
Less: Accumulated Depreciation-OE XX
Total Non-Current Asset XX
TOTAL ASSET XX

LIABILITIES AND OWNER’S EQUITY

Current Liability:
Accounts Payable XX
6% Notes Payable XX
Accrued Interest Payable
Total Current Liabilities
XX

Non-Current Liability:
Bonds Payable XX
Total Non-Current Liability
XX

Owner’s Equity:
Alpha, Capital XX
Add: Net Income XX
Less: Net Loss XX
Total Owner’s Equity
XX
TOTAL LIABILITIES AND OWNER’S EQUITY XX

Special Journals

These are accounting records that are used to record a specific type of transaction.

The special journals are used to speed up the processing, make it more efficient, and accurate.

The recording saves time and effort since only the transaction amounts are entered in the
appropriate money column.

The posting is minimized since only the totals of the specific money columns are entered in the
general ledger.

Examples of Journals
1. Sales journal
2. Cash receipts journal
3. Purchases journal
4. Cash disbursement journal
5. Other transactions in general journal

General Ledger

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An accounting record used to sort, store, and summarize a company’s transactions.

It provides the tools for analysis of all accounts and transactions.

It is the record used to summarize the entries made in the journal and logs and tallies up all
transactions that affect a specified account.

The general ledger account that summarizes a subsidiary ledger’s account balances is called a
control account or master account

An accounting record used to sort, store, and summarize a company’s transactions.

It provides the tools for analysis of all accounts and transactions.

It is the record used to summarize the entries made in the journal and logs and tallies up all
transactions that affect a specified account.

The general ledger account that summarizes a subsidiary ledger’s account balances is called a
control account or master account
Subsidiary Ledger

Group of similar accounts whose combined balances equal the balance in a specific general
ledger account.

Subsidiary ledgers contain the information about a specific individual account.

Two common types of subsidiary ledger:

1. Customers’ Subsidiary Ledger

Control Account: Accounts Receivable

2. Creditors’ Subsidiary Ledger

Control Account: Accounts Payable

Sales Journal

A special journal used to record the sales transactions. Sales of merchandise are usually either
on cash or on account basis.

Cash sales are rung on Cash Register Tapes (CRT) which are summarized in a cash summary
report and entered in the sales journal based on the total amount only.

Sales on account are evidenced by invoices and are recorded individually in the sales journal.

Sales Journal

Record the following transactions using sales journal, subsidiary ledgers, and general ledger:

January 2 Sold goods to Union Store, P5,000.

4 Sold goods to Lopez Trading, P7,500.

5 Sold goods to Chaves Store, P8,000.

6 Cash sales for the week, P8,000

Cash Receipts Journal

Book of original entry where all cash receipt transactions are recorded such as:
1. Cash investment
2. Loans
3. Cash sales
4. Collection of customers’ account
5. Cash refund.

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Cash Receipts Journal

Record the following transactions in the cash receipt journal

January 1 The owner made a cash investment of P50,000.

2 Borrowed from PNB P50,000 and issued a 90-day 18% note.

6 Cash sales summary for the week, P8,000.

8 Collected P5,000 from Lopez Trading.

10 Collected in full from Chavez Store
Cash Sales

Both a sales transaction and cash receipts transaction therefore must be recorded twice.

Cash sales is a suspense account that is:

1. Debited in the sales journal when crediting sales

2. Credited in the cash receipt journal when debiting cash.

The debit to cash sales in the sales journal is offset to the credit to cash sales in the cash
receipt journal.

Alternative method:

Record the cash sales only in the cash receipts journal

Record the account sales in the sales journal.

Sales with a down payment, balance on account

Record this as if there are two transactions:

1. Account Sales in the sales journal.

2. Down payment as partial collection in the cash receipts journal
Sales with a down payment, balance on account

Example:

Goods were sold to Union Store worth P5,000 by receiving P2,000 down payment and the
balance on account.

Entries in respective special journals are as follows:

Sales Journal

Accounts Receivable 5,000

Sales 5,000

Cash Receipts Journal

Cash 2,000

Accounts Receivable 2,000

Sales with a down payment, partly with a note and balance on account

Record this as if there are two transactions:

1. Account Sales in the sales journal.

2. Down payment as partial collection in the cash receipts journal.

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 3. Promissory note in the general journal

Sales with a down payment, partly with a note and balance on account

Example:

Goods were sold worth P10,000 by receiving P2,000 down payment, 30 day note for P5,000
and the balance on account.

Entries in respective special journals are as follows:

Sales Journal

Accounts Receivable 10,000

Sales 10,000

Cash Receipts Journal

Cash 2,000

Accounts Receivable 2,000

General Journal

Notes Receivable 5,000

Accounts Receivable 5,000

Purchases Journal

A special journal used to record the purchases transactions. Purchase of merchandise are
usually either on cash or on account basis.

Purchases are supported by invoices given by the suppliers. Any cash payment is supported by
a cash voucher.
Purchases Journal

Record the following transactions using purchases journal, subsidiary ledgers, and general
ledger:

January 5 Bought goods from Mon Trading, P9,000. 2/5,1/10, n/30.

8 Bought goods from Rex Trading, P5,000. 2,000 down payment

balance 2/10, n/30.

10 Bought good from Sphere Trading by paying P2,500 cash.
. Cash Disbursement Journal

Book of original entry where all cash payments are recorded such as:
1. Cash purchases of merchandise and other assets.
2. Payments of accounts and other liabilities.
3. Payments of expenses.
4. Cash withdrawal of the owner.
5. Cash refunds to customers.
Cash Disbursements Journal

Record the following transactions in the cash disbursements journal

January 8 Paid a down payment of P2,000 from Rex Trading.

10 Cash purchases amounted to 2,500 from Sphere.

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 11 Pasco withdrew P500 cash.

15 Paid the account due to Mon in full.

20 Cash refund to Margie Tan amounted to P1,000.

Cash Purchases

Both purchase transaction and cash payment transaction therefore must be recorded twice.

Cash purchase is a suspense account that is:

1. Debited in the cash disbursements journal when crediting cash

2. Credited in the purchases journal when debiting purchases.

The debit to cash purchase in the cash disbursements journal is offset to the credit to cash
purchase in the purchases journal.

Alternative method:

Record the cash purchases only in the cash disbursements journal

Record the on-account purchases in the purchases journal.

Purchases with a down payment, balance on account

Record this as if there are two transactions:

1. On account purchases in the purchases journal.

2. Down payment as partial payment in the cash disbursements

journal.

Purchases with a down payment, balance on account

Example:

Bought goods from Rex Trading, P5,000. 2,000 down payment balance 2/10, n/30.

Entries in respective special journals are as follows:

Purchase Journal

Purchases 5,000

Accounts Payable 5,000

Cash Disbursements Journal

Accounts Payable 2,000

Cash 2,000
. General Journal

Book of original entry where all transactions which cannot be recorded in special journals are
recorded such as:
1. Non-cash investment of the owner.
2. Note issued for merchandise or other assets purchased or sold.
3. Credit memo for returns or allowances.
4. Other assets sold or brought on account.
5. Assets withdrawn by owner other than cash.

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Imprest System and Bank Reconciliation

What is an imprest system of petty cash?

Definition of Petty Cash

Petty cash refers to a small amount of currency and coins that a company uses to pay small
amounts without writing a check. The amount of petty cash (also known as the petty cash fund)
varies by company or organization. For now, let's assume that the amount is $100.
One person is designated as the petty cash custodian. This person is responsible for disbursing
the small amounts
and for documenting each payment with a petty cash receipt.

Definition of an Imprest System of Petty Cash

An imprest system of petty cash means that the general ledger account Petty Cash will remain
dormant at a constant amount. If the amount of petty cash is P100, then the Petty Cash account
will always report a debit balance of P100. This P100 is the imprest balance.
As long as P100 is adequate for the organization's small disbursements, then the general ledger
account Petty Cash will never be debited or credited again.

When the currency and coins on hand gets low, the petty cash custodian will request a check to
replenish the coins and currency that were disbursed. Since the requested check is drawn on
the organization's checking account, the Cash account (not the Petty Cash account) will
be credited. The debits will go to the expense accounts indicated by the petty cash receipts,
such as postage expense, supplies expense. In other words, the general ledger account Petty
Cash is not involved in the replenishment. (Replenishment means getting the total of the
currency and coins back to the imprest amount.)

The petty cash custodian will cash the check and add the amount to the other cash.
Under the imprest system, the petty cash custodian should at all times have a combination of
currency, coins, and petty cash receipts that equals P100 (the imprest petty cash balance).

Control over the petty cash occurs during the replenishment process. The person approving the
check for the petty cash custodian to cash should review the petty cash receipts and attach
them to the check request. Control can also occur when an independent person confirms that
the petty cash custodian's cash and receipts adds up to the imprest amount.

Imprest System

An internal control procedure which aims to protect the cash receipts and disbursements of a
business.

Requires that no one person should be allowed to handle all aspects of cash transactions. Cash
custodian function should be separate from the recording function. Those handling cash should
not have access to the books or records and vice versa.
The recording function should be divided among employees such that the work of one is
checked and verified by another

Cash Receipts
Additional internal control procedures for cash receipts are:

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 a. The cash register should show visibly to the customers the amount to be
recorded.
b. Cash invoices should be prepared at least in duplicate. The copy retained in the
company will by compared against the cash register at the end of the day.
c. If cash received is through the mail, an employee who opens it must list down the
checks received and give a copy to the accounting department. Cash invoices
should equal cash receipts at the end of the day.
d. All cash receipts should immediately deposited.

Cash in Bank xx
Cash on Hand xx

Cash disbursements may also be susceptible to the theft and manipulation. Preventive
measures must therefore be adopted like:
a. No direct payment of cash should be made except by check.
b. Before payment is to be made, the expenditure should be vouchered and
verified. Three persons must be responsible for the voucher, the preparer,
recorder, and approver. Signatures must be affixed in the voucher.
c. After payment, the voucher and its supporting paper should be stamped paid
across its face to avoid double payment.
d. Persons approving the voucher should not be the ones signing the check.
Signatories must be at least two responsible officers.

Accounts Payable xx
Cash in Bank xx

Petty Cash Fund

Small amount of fund used for small amount of expenses such as supplies, transportation fare,
postage, and other petty costs instead of using checks.The fund should be sufficient to cover
the small expenses over a specific period of time. Usually two weeks or a month.

Steps in Petty Cash Fund Operation:

1. Establishment
2. Disbursements
3. Replenishment

Establishment

To start the fund, a voucher is prepared and a check is drawn payable to the Petty Cashier. The
check is encashed and placed in a box ready for disbursement.

Petty Cash Fund xx

Cash in Bank xx

Disbursements

When cash is taken from the petty cash box, a petty cash voucher has to be prepared and
approved by a disbursing officer and then signed by the person receiving the cash.

These vouchers are kept by the Petty Cashier as evidences that cash has been paid out of the
petty cash fund.

These vouchers should be equal to the petty cash fund established. An authorized personnel
may make a surprise count to prove the petty cash fund.

Expenses xx

Petty Cash Fund xx

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Replenishment

When the petty cash fund reaches the minimum balance which may be insufficient to take care
of the small expenses, then it is time for a replenishment.

Procedures:
1. The petty cash vouchers are totaled and the petty cash fund is proved.
2. A voucher is prepared for the replenishment.
3. The petty cash vouchers are attached to the voucher as its supporting document.
4. A check is drawn payable to the petty cashier then the voucher will be stamped
paid.
5. The check is encashed and placed in the petty cash box ready for
disbursements.

Petty Cash Fund xx

Cash in Bank xx

Bank Statement

Shows the balance of the depositor’s account at the beginning of the month, the deposits
made in one column and the checks paid during the month in another column as well as other
bank transactions supported by the bank’s debit memo or credit memo.

Bank Reconciliation

Usually the balance per bank statement does not tally with the cash balance maintained in the
company’s record.

There are times that the transaction recorded by the depositor is not immediately picked up by
the bank before its cut off date. Also, some transactions are already recorded by the bank but
not yet recorded by the company.

A monthly reconciliation is prepared to tally the balance in the books of the company and in the
bank statement.

Formula in Bank Reconciliation

Balance per book xx

Add: Credit Memo xx

Less: Debit Memo (xx)

Errors x(x)

Adjusted book balance xx

Balance per bank xx

Add: Deposit in Transit xx

Less: Outstanding Check (xx)

Errors x(x)

Adjusted bank balance xx

Reconciling Items

1. Debit Memo
2. Credit Memo
3. Deposit in Transit
4. Outstanding Checks

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 5. Errors

Debit Memo

Prepared by the bank by decreasing the cash balance for the following reasons:

1. Customer’s NSF Check

2. Bank Service Charge

3. Bank Loan

Debit Memo

Entries to record the debit memo:

1. Customer’s NSF Check

Accounts Receivable xx

Cash in Bank xx

2. Bank Service Charge

Bank Service Charge xx

Cash in Bank xx

3. Bank Loan

Loan Payable xx

Cash in Bank xx

Credit Memo

If a company applies for a loan which is approved by the bank, a communication is made by the
bank through a credit memorandum. This is shown under the deposit column increasing the
depositor’s bank balance.

Entry to record the credit memo:

Cash in Bank xx

Interest Expense xx

Loans Payable xx

Deposit in Transit

Deposits made by the company and received too late by the bank to be recorded on the same
day.

Checks deposited after the cut off time are recorded on the next banking day which may be the
start of another month.

This will understate the balance in the bank statement

Outstanding Checks

Checks issued by the company to a payee but the payee has not presented the check to the
bank for encashment.

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Bank has not yet deducted the amount of these checks issued from the company’s cash
account.

This will overstate the balance in the bank statement.

Errors

Another reason why the balance per books will not tally with the balance per bank is when
errors are committed by either party.

Example:
1. Company error

The company erroneously recorded the amount of check issued to

payee.
1. Bank error

The bank erroneously recorded the company’s deposit on the other

customer account.

Bank Reconciliation

Prepare a bank reconciliation statement for May 2018 with the following information:

Balance per book 22,250

Balance per bank 23,030

Debit memo 1,120

Credit Memo 3,950

Deposit in Transit 5,000

Outstanding check 2,950

PAYROLL ACCOUNTING & OTHER SELECTED TRANSACTION

WHAT IS PAYROLL ACCOUNTING
 Involves maintaining reords of its employees & worker where personal data and
personal experience among others are noted.
 Payroll represents compensation paid to employees and workers.
 Firms are required by law to act as government’s collection agent, filing & paying tax
(BIR) and remit collected premiums (SSS, Philheath & Pag IBIG).

DEDUCTIONS FROM GROSS PAY

 Social security
 Health insurance
Pag-ibig (HDMF)
 Union dues
 Advances
 Withholding Tax

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SSS PREMIUM
 12% of monthly salary credit (8% ER’s share & 4% EE’s share)
 Salary credit not exceeding P20,000
HEALTH INSURANCE (PHILHEALTH PREMI 3.0% of monthly basic salary

 With a floor of P10,000 and a ceiling of P60,000

 Shared by ER & EE equally
HDMP (PAG IBIG PREMIUM)
1.0% EE & 2.0% ER on P1,500 or less
 2.0% EE share & 2.0% ER share on over P1,500 to P5,000
 Maximum monthly compensation set at P5,000
WITHOLDING TAX
 Taxable amount is after deduction of SSS, Phil health & Pag–ibig contribution.
 The following are tax exempt:
13h
• month pay . Night shift differential
• Holiday pay . Hazard pay
• Overtime pay . Other benefits provided by law

Download Premium Table from the following government Agencies for computation of Payroll
http//www. sss gov.ph, http//www philhealh.gov.ph, http//www.bir.gov.ph

“A man who asks is a fool for five minutes. A man who never asks is a fool for life

IX. REFERENCES

Books :
1.Financial Accounting and Reporting for Services and Merchandisers – International Edition 2019 by
Zenaida Vera Cruz-Manuel
2. Basic Accounting – 2019 issue – by Win Ballada, and Susan Ballada, DomDane Publishers and Made
Easy Books.
3. Fundamentals of Accounting – Part 1, By:Tulio, VillaBlanca, Abon, Abdon, Albay and Inigo
4. Worktext in Basic Accounting (Service and Merchandising) by:Cecilia Hugo – Macapilit
5.Fundamentals of Basic Accounting, By: Leonardo E. Aliling
6. Fundamentals of Accounting – Voume 1, By: Patricia M. Empleo
7. Intermediate Accounting Part 1-3 by Zeus Vernon B. Millan 2018 edition

Online Resources:

Open Education Resources – Accounting and Finance /Principles of Accounting (Textbook, Modules,
Tests and Video presentation of lectures)

https://guides.library.sc.edu/OER

Corporate Financia Institute -Free Accounting Course – Introduction to Accounting

https://course.corporatefinanceinstitute.com

https://www.indeed.com/career-advice/career-development/cash-vs-accrual
https://www.accountingcoach.com/blog/what-is-the-statement-of-financial-position
http://www.accountingmcqs.com/Statement-of-Financial-Position

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YouTube Channels:

https://www.youtube.com/playlist?list=PLuXyIbtL4zN-21X2xN7roYVaIDTIMfRHu
Filipino Accounting Tutorial
CPA Strength
Executive Finance
Corporate Finance Institute

X. DISCLAIMER

OFFICIAL MCC MODULE DISCLAIMER

It is not the intention of the author/s nor the publisher of this module to have monetary gain in
using the textual information, imageries, and other references used in its production. This module
is only for the exclusive use of a bona fide student of Mabalacat City College.

In addition, this module or no part of it thereof may be reproduced, stored in a retrieval system,
or transmitted, in any form or by any means, electronic, mechanical, photocopying, and/or
otherwise, without the prior permission of Mabalacat City College.

Prepared by:

JESUSA N. CALMA ,CPA, MBA

Instructor

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