FINANCIAL ACCOUNTING and

REPORTING
(First Semester)

COURSE OUTLINE
1. Introduction to Accounting
2. Accounting Concepts and Principles
3. The Elements of Accounting
4. The Accounting Equation
5. Business Transactions and their Analysis
6. Posting to the Ledger and Trial Balance
7. Preparation of Adjusting Entries
8. Preparation of Financial Statements
9. Closing Entries and Posting Trial Balance
10. Accounting Cycle for Merchandising
11. Special Journals
 CHAPTER 1
INTRODUCTION TO ACCOUNTING
LEARNING OBJECTIVES:
At the end of this chapter, the student should be
able to:
1. Define and understand the nature of
Accounting
2. Trace the history of Accounting
3. Determine the Functions of Accounting
4. Identify the users of Accounting Information
5. Enumerate and explain the branches and
areas of Accounting
DEFINITION OF ACCOUNTING
● The Accounting Standards Council
defined “Accounting” as a service activity.
Its function is to provide quantitative
information, primarily financial in nature,
about economic entities, that is intended to
be useful in making economic decisions.
- Accounting Standards Council -
Standards setting body in the
Philippines based on the
International Accounting Standards
- ASC is renamed as Financial
Reporting Standard Council
- International Accounting
Standards - used in the whole world
- ASC & IAS may differ from
terminologies, tax standards.
- Service - because we render
accounting services
- Quantitative - In accounting we deal
with money
- Entities / Company - to whom we
provide these quantitative
informations
- Decision making - use these quanti
info to make economic decisions
● The Committee on Accounting Terminology
of the American Institute of Certified
Public Accountants defined “Accounting”
as the art of recording, classifying, and
summarizing in a significant manner in
terms of money, transactions and events
which are in part at least of a financial
character and interpreting the results
thereof.
- AICPA - organization of CPAs in
USA
- PICPA - organization of CPAs in
Philippines, orgs in the Phil have
strict membership, dapat mapasa
muna yung licensure exams nila
- ACCTG - recording, classifying,
summarizing, and interpreting
● The American Accounting Association in
its Statement of Basic Accounting Theory
defined “Accounting” as the process of
identifying, measuring, and
communicating economic information to
permit informed judgment and decision by
users of the information.
- (a) Identifying, (b) measuring, (c)
communicating
- (a) identifying - identify is the
financial transaction is personal or
business related
- (b) measuring - all are measured
with currency; Valuation - record
with new or old price
- (c) communicating - comm to the
users through submission of
financial statements
- Accounting is a process with the basic
purpose of providing information about
economic activities that is intended to be
useful in making economic decisions
ACCOUNTING AS SCIENCE AND ART
● As a social SCIENCE, accounting is a body
of knowledge which has been
systematically gathered, classified and
organized
- May sistema na sinusunod =
Acctg process, cycle
- Science - there is a step or
procedure to be followed
● As a Practical ART, accounting requires the
use of creative skills and judgment
(Millan, 2019)
- In Acctg we give judgement
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 - Creative skills and judgement are
mostly used in auditing - (1) examine
records; if complying in internal
control or committing fraud, (2) after
auditing; auditors give opinions /
audit findings that are based on their
judgements
WHAT IS A BUSINESS TRANSACTION?
● It is an event that has a direct effect on the
operation of the economic unit and can be
expressed in terms of money.
- Directly related to the operation of
the business
- May effect sa Acctg Equation /
transaction
● Ex. Buying and Selling of goods, renting a
building, paying employees, buying new
office equipment, buying new office
equipment and any other activity of a
business that involves exchanges of values
in monetary items
ACCOUNTING HAS A NUMBER OF
COMPONENTS (to know if a transaction is a
business transaction):
1. Identifying as the analytical component
- Analytical - business or personal
transaction; accountable or not;
external or internal
2. Measuring as the technical component
- Technical - measurement bases
3. Communicating as the formal component
- Formal - financial reports are
formatted = financial statements
- Not verbal but still communicable
1. IDENTIFYING
● This accounting process is the recognition
or non-recognition of business activities
as “Accountable events” or “non-
accountable events”.
● Only “Accountable events” are recorded in
the books of accounts
● Not all business activities are
accountable. For example, the hiring of
employees, The death of the entity
president and the entering into a contract
are all business activities but such events
are not accountable, because they cannot
be quantified or expressed in terms of a
unit of measure.
- Accountable Events / economic events -
are those that affect the assets, liabilities,
equity, income or expenses of a business.
Sociological and psychological matters are
outside the scope of accounting
- (1) Is it considered a business transaction?
- Payment of salaries = yes
- sell of personal car to client = no
- (2) Is it accountable or not?
- effect in journal entries; not accountable =
no journal entry
- (3) Is it external or internal?
- External - 1 + 1; one entity and another
entity
- Internal - one entity only
ECONOMIC ACTIVITIES
● may be classified as external and internal.
● External Transactions or exchange
transactions are those economic events
involving one entity and another entity
- Examples: Purchase of
merchandise from a
supplier, borrowing money
from a bank, sale of
merchandise to customer
and payment of salaries to
employees.
● Internal Transactions are economic events
involving the entity only.
- Examples: Production and Casualty
Loss
PRODUCTION
● is the process by which resources are
transferred into products.
CASUALTY
● is any sudden and unanticipated loss from
fire, flood, earthquake and other event
ordinarily termed as an act of God.
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2. MEASURING
● is the assigning of peso amounts to the
accountable economic transactions and
events. Financial statements without
monetary amounts would be largely
unintelligible or incomprehensible. The
Philippines peso is the unit of measuring
accountable economic transactions.
- Assigning of peso amounts = put currency
- Proper way of doing acctg is putting
currency; Philippines = ₱
FOUR MEASUREMENT BASES OR FINANCIAL
ATTRIBUTES
● Historical Cost - this is identified as the
original acquisition cost.
● Current Cost - this is identified as
replacement cost or the current purchase
price
● Realizable Value - this is identified as
current selling price or the amount that
could currently be obtained by selling the
asset in an orderly disposal.
● Present Value - This is the discounted
value of the future net cash inflows that
the asset is expected to generate in the
normal course of business.
- Ex. Bought land 2 years ago for
₱1,000,000
- HC - 1M / Original acquisition cost
- CC - 1.2M / Current price today; land
appreciates over time
- RV - Magkano natanggap / Magkano
narealize; 1.15M = RV; 50k = Bad debts
- PV - if 1.1M is invested; value of the
investment today
3. COMMUNICATING
● is the process of preparing and
distributing accounting reports to
potential users of accounting
information. Implicit in the
communication process are the
recording, classifying and summarizing
aspects of accounting.
- At the end of each accounting period,
the accountant summarizes the
information processed in the accounting
system in order to produce meaningful
reports
- This is important because information
processed in the accounting system is
useless unless it is communicated to
interested users
- Accounting information is
communicated to interested users
through accounting reports, the most
common form of which is the financial
statements
- Communicate to the user
- Accountants exist to help in formulation
reports to the users through financial
statements
- Record, classify, summarize = need
tapusin yang 3 before magpass
RECORDING OR JOURNALIZING
● is the process of systematically
maintaining a record of all economic
business transactions after they have been
identified and measured.
- The accountant recognizes the identified
“accountable events”, this process is
called journalizing
- After journalizing, the accountant then
classifies the effects of the event on the
“accounts” this process is called posting
- Account - the basic storage of information
in accounting; e.g. cash, land, sales, etc.
CLASSIFYING
● is the sorting or grouping of similar and
interrelated economic transactions into their
respective classes.
SUMMARIZING
● is the preparation of financial statements
which include the statement of financial
position, income statement, statement of
comprehensive income, statement of
changes in equity and statement of cash
flows.
- Make trial balance
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INTERPRETING
● The accountant‟s interpretation on the
financial statement is needed. Analysis
reports are submitted together with the
financial statements.
- Use of financial measurement
TYPES OF INFORMATION PROVIDED BY
ACCOUNTING
1. Quantitative Information – Information
expressed in numbers, quantities, or units
- Expressed in numbers
2. Qualitative Information- Information
expressed in words or descriptive form.
Qualitative information is found on the
notes to financial statements as well on
the face of the other components of the
financial statements.
- Expressed in words
- Reports are descriptive explanation
3. Financial Information- Information
expressed in money, financial information
is also quantitative information because
monetary amounts are normally expressed
in numbers (Millan, 2019)
- Financially in nature
- Expressed in money
- Not just number but can be
converted to money
BRIEF HISTORY OF ACCOUNTING
● Accounting can be traced as far back as the
prehistoric times. Since the dawn of
civilization when mankind began to engage
in trade, perhaps more than 10,000 years
ago, methods of record keeping and
accounting have been invented.
● As early as 8500B.C, accounting has
already existed. Archaeologists have found
clay tokens as old as 8500 B.C. In
Mesopotamia which were usually cones,
disks spheres, and pellets. These tokens
correspond to commodities like sheep,
clothing, or bread. They were used in the
Middle West in keeping records. After
some time, the tokens were replaced by
wet clay tablets. During such time,
experts concluded this to be the start of the
art of writing (Source:
http://EzineArticles.com/456988)
- Barter system
● Other ancient civilizations keeping
account records are Babylonia (4,500 BC),
Egypt (2,250BC), China and Greece.
● In the Middle ages (13th and 15th
centuries), trades flourished in places
such as Florence, Venice and Genoa)
this has brought advancement in account
keeping methods. In 1211 A.D, one of the
systems in accounting was kept by a
Florentine Banker. However the system
was primitive as the concept of equality
for entries was absent. Double Entry
records first came out during 1340 AD in
Genoa.
- 13th - 15th centuries trading is
absolutely present; as well as
importing and exporting that started
in Florence, venice, and Genoa
- Nagstart ang concept ng debtor and
credit
Debtor = Debit
Creditor = Credit
- Accounting actually started in LATIN
DEBERE - Debit - Dr.
CREDERE - Credit - Cr.
- F. Banker - tried to equalize; used
debit and credit but failed to balance
● In 1494, the first systematic record
keeping dealing with the “double entry
recording system” was formulated by Fr.
Luca Pacioli, a Franciscan monk and
mathematician. The double entry recording
system was included in Pacioli‟s book titled
“Summa di Arithmetica Geometria
Proportioni et Proportionalita” published
on November 10, 1494 in Venice.
● In this book, Pacioli introduced three
important books of records, namely:
A. Memorandum Entry- For all
information on a transaction
B. Journal Book- For the original entry
C. Ledger Book- For the final entry
● The concept of Double Entry Recording is
being used up to this day. Thus, FR. LUCA
PACIOLI is considered as the Father of
Modern Accounting. (Millan, 2019 and
Roxas, Valencia, 2018)
- L. Pacioli - introduced the double entry;
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 dapat equal ang debit and credit all
throughout the acctg. cycle
FUNCTION OF ACCOUNTING IN BUSINESS
● Accounting is often referred to as the
“Language of Business” because it is
fundamental to the communication of
financial information.
- Business cannot exists without
accounting
- F. reports tells what really happens
in the business
- Accounting will not survive without
business
● Accounting has the following two broad
functions in a business:
1. To provide external users with
information that is useful in making
among others, investment and
credit decisions
2. To provide internal users with
information that is useful in
managing the business (Millan,
2019).
USERS OF ACCOUNTING INFORMATION
1. INTERNAL USERS - Those who are
directly involved in managing the
business.
- Examples: Business Owners who are
directly involved in managing the
business, Board of Directors,
Managerial Personnel
- The ones who manage and decide for
the business
- Business owners - to primarily know if
they are profiting or not
- BOD - decision makers; to know what
to decide
- MP- in charge of operations; to know if
what they‟re doing in the operation is
effective and profitable
2. EXTERNAL USERS - Those who are
not directly involved in managing the
business.
- Examples: Existing and Potential
Investors, Lenders, Government
Agencies, Non Managerial E management
Employees, Customers, Public.
(Millan, 2019)
- Existing and Potential Investors - to
know kung tama yung kita na ibibigay
sakanila; interested in their probable
earnings and the safety of their
investments
- Lenders and Creditors - to identify if
all loaned funds and related interest
charges will be repaid
- Non-managerial- part ng company but
hindi nagdedecide; to know potential
promotion, incentives, salary increase
- Public - possible investor or employee
in the future; may demand to calculate
the effect of the company on the
economy
- Government - taxes; In the Philippines,
the Bureau of Internal Revenue (BIR)
also uses financial statements as a
basis for assessing the amount of tax
payable by a business.
- Customer - Lifeblood ng business;
hanggat may customer buhay ang
business; to ascertain that a company
can keep on supplying them into the
future
TYPES OF ACCOUNTING INFORMATION
CLASSIFIED AS TO USER’S NEEDS
1. GENERAL PURPOSE ACCOUNTING
INFORMATION - It is an information
designed to meet the common needs of
most statement users, it is provided by
financial accounting and is prepared
primarily for external users
- Lahat ng information anjan
- Provided by financial accounting for
external users
- Common needs or user / lahat
gumagamit
- Financial accounting follows the
Accounting Standards
2. SPECIAL PURPOSE ACCOUNTING
INFORMATION - Is information designed
to meet the specific needs of particular
statement users. It is provided by
accounting or other
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 branches and is prepared primarily for
3. Internal Whether or Analysis of
internal users. (Millan, 2019) User not to the effects
- Specific people use (Manager) increase of sales
- Prepared by management accounting for the sale volume and
internal users price of a sales prices
- Management accounting do not follow the product to earnings
accounting standards (Special
How much Purpose
capital is Information)
EXAMPLES OF DECISIONS AND TYPES OF
INFORMATION NEEDED TO MAKE THOSE needed to
manufactur Budget
DECISIONS (Millan, 2019)
e a new Report
Users Example of Example of (Special
product?
Decision/s to Information Purpose
make needed Information)

1. External Existing Audited

User Investor: Financial
(Investor) Whether to Statements GENERALLY ACCEPTED ACCOUNTING
hold or sell of the PRINCIPLES
investment business to ● Accounting rules, procedures, and
in stocks aid in
practices came to be known as Generally
analysing
Potential the value of Accepted Accounting Principles
Investor the (GAAP).
Whether or company ● Simply stated, Generally Accepted
not to buy (General Accounting Principles/ Accounting
shares of Purpose Standards represent the rules,
stocks Information)
procedures, practice and standards
2. External Lender: Audited followed in the preparation and
User Whether or Financial presentation of financial statements.”
(Lender or not to Statements ● Generally Accepted Accounting Principles
Supplier) extend of the are like Laws that must be followed in
loan to a business to financial reporting.
business aid in - During ASC its called GAAP
analysing
(Generally Accepted Accounting
Supplier: the
Whether or company‟s Principles)
not to ability to - During FRSC its called PFRS
extend pay its (Philippine Financial Reporting
credit to a debts Standards) and PAS (Philippine
business (General Accounting Standards)
Purpose
Information)
FINANCIAL REPORTING STANDARDS
COUNCIL (Replaces the ASC)
● On November 18, 1981, The Philippine
Institute of Certified Public Accountants,
the national professional body of CPA‟s in
the Philippines, created the Accounting
Standards Council as the accounting
standard body in the Philippines, to
establish and improve accounting
standards that will be generally accepted
6
 in the Philippines.
● In 2004, The Philippine Regulations
Commission (PRC) created the Financial
Reporting Standard Council (FRSC)
replacing the ASC. The FRSC was
created to assist the Board of
Accountancy (BOA) to carry out its
powers and functions provided under
Republic Act No. 9298, The Philippine
Accountancy Act of 2004
● The approved accounting standards of
the FRSC are known as the Philippine
Financial Reporting Standards (PFRS)
and Philippine Accounting Standards
(PAS) which fully took effect on January
1, 2005, statements of the FRSC are
known as “Philippine Accounting
Standards or PAS and Philippine
Financial Reporting Standards or PFRS.”
CAREER FIELDS IN ACCOUNTING
1. PUBLIC ACCOUNTING
● composed of individual practitioners,
accounting firms and large
multinational organizations that
render independent expert financial
services to the public in a
professional fee basis. (Dean Ester
F Ledesma)
- Not working for the government
- You are on the public practice
(commonly on accounting and
auditing firms)
- Public Acctg. is a good start
because it applies most of what
were taught in college
● Professional Accountants who
work in public accounting firms are
usually Certified Public
Accountants (CPA‟s). A Public
Accountant may perform one or
more of the following services:
(Arenas T, Chua, M. & Villarina F.
(2018)
a. Auditing- In performing an
Audit, the accountant makes an
independent examination of
the financial statements of a
business enterprise. The auditor
evaluates the accounting
system of business enterprise
and carefully examines the
records to see to it that
transactions have been properly
recorded. After conducting his
examination, the auditor issues
a report expressing an opinion
as to the fairness of the financial
statements.
- Most public accountants are
in auditing
- Auditing is the examination
of records
- Examining all the available
source documents (e.g.
receipts) of the company and
recording it in the book of
accounts
- The work of the Accountant
ends when the work of the
Auditor begins
- Magstart lang trabaho ng
auditor pag natapos trabaho
ng accountant since ang
unang documents na hihingin
ng auditor ay Financial
Statements
- External Auditors in Public
Acctg. Hence they are not
part of the company‟s
employees; all audit findings
are accepted and matters
- External Auditing is also
called Independent
Auditing; Independent
Auditor
b. Management Advisory
Services - includes the design,
installation and improvement
of firm‟s general accounting
system and other system
deemed necessary for
controlling and distributing
manufacturing costs. Individuals
who provide management
advisory services need not be
CPA’s. in fact they need not be
7
 Accountants at all. The area of
Management Advisory
Services includes financial
planning and control, the
development or improvement
of an accounting or computer
system, financial forecasting,
and advice on mergers and
consolidations.
- Becomes a consultant of
the company; you are the
business consultant
- Give advice to the
management regarding to
various services like
accounting, finance, and
other aspects
- Commonly, people in MAS
are experts; tackles and
reviews the business
problems
- Management Accounting
and MAS are almost the
same
c. Tax Services- It includes giving
advice in the possible tax
consequences of a certain
financial decisions, preparing
income tax returns and
representing clients before
government agencies such as
BIR during a tax audit.
- Determination of tax
consequences of certain
proposed business
endeavors
- Compute and file taxes of
clients
- Represents their clients to
BIR
- Called External Tax
Experts
- Tax is a complex and
difficult topic
2. PRIVATE ACCOUNTING
● An accounting job done in private
business enterprises. The accountant
works as an employee of a business
enterprise. They may be employed in
various capacities. (Arenas T, Chua, M. &
Villarina F. (2018)
- Most of the accountants and CPAs work in
Private Accounting
- Private practices; private companies
● The Chief Accounting Officer of a
business enterprise is called
CONTROLLER.
- Chief Accountant
- Head of the entire accounting
department (Usually CPA)
- Control all the accounting operations
● The Chief Financial Officer is called
FINANCE MANAGER.
- Responsible of the entire finance
department
- CFO/ FM/ Finance Head
● TASKS IN PRIVATE ACCOUNTING
a. General Accounting- performing
the entire accounting process,
from identifying to recording
transactions and the preparation of
financial statements for the use of
management.
- Practices everything; have to work
and know everything
- Handles the entire accounting
department
b. Cost Accounting- it has something
to do with controlling, determining
and controlling costs particularly
those costs in producing a
product or service.
- Focuses on Manufacturing cost of
the companies
- Costing of products ng companies
c. Budgeting- Provides management
a plan for future operations after
this plan has been applied,
summaries and reports comparing
the actual accomplishments with the
plan are provided.
- Budgeting Officer
- Difficult task since with the limited
budget you need to effectively
allocate to all the departments
- Normally, finance function ang
budgeting
d. Internal Auditing- Establishes
accounting procedures are being
followed throughout the year. The
task of conducting a review of the
company‟s operations to determine
adherence to management
8
 policies and measuring efficiency
of operations.
- Internal Auditor - employee of the
company
- Checks the entire operation of the
company not just its financial
statements of its abiding to quality
product and services
- Internal auditor are commonly the
company departments‟s enemy;
since you audit all the departments
e. Accounting / Management
Information System- task of
designing and setting up a manual
or computerized accounting
system
- IT accountants; both good at IT and
Accounting
- Proficient of different accounting
softwares.
3. GOVERNMENT ACCOUNTING
● Accounting for the national government
and its instrumentalities such as
provinces, towns and cities. They are of
concerned with public funds. (Arenas T,
Chua, M. & Villarina F. (2018)
● Example of government agencies
requiring the services of professional
accountants are the Commission on
Audit (COA), Bureau of Internal Revenue
(BIR), Bangko Sentral ng Pilipinas, GSIS,
and Bureau of Custom.
- COA - auditor; called Government Auditor;
assigned to different gov’t department
agencies; mabigat yung task since you are
to seek findings and corruption
- BIR - collection of taxes in the Phil.;
collect national (Percentage Tax, VAT, and
Income tax) and local taxes
- BOC - focuses on parcels (imports and
exports) e.g.custom duty tax, import tax
- BIR, BOC, and Bureau of Treasury are all
under Department of Finance (employees
are usually CPA)
- BSP - gumagawa ng pera
4. ACCOUNTING EDUCATION
● is another Professional field where the
accountant assumes the role of
researcher, teacher and reviewer. (Vera
Cruz- Manuel, Z. (2018)
- Refers to teaching accounting and
accounting-related subjects in an organized
learning environment.
- It is a process of facilitating the acquisition
of knowledge and skills regarding one or
moore of the other branches of accounting
a. Researcher- investigates and makes a
study creating, applying, relating or
improving accounting theories and
business concepts that suit the changes
taking place in a particular business or
industry.
- People who works at ASC;
prepares and researches our
accounting standards
b. Accounting Professor- is responsible
for the formation of competitive
accountants and consultants and
teaching subjects such as accounting,
auditing, management advisory services
and other subjects
- Teach accounting in colleges.
c. Accounting Reviewer- helps prepare
the candidates for the CPA Licensure
Examination.
- Professors in review centers;
normally the authors of the books
AREAS OF SPECIALIZATION:
- (Vera Cruz- Manuel, Z. (2018), (Dean Ester
F. Ledesma)
● Basic Accounting or Bookkeeping - is
the routine activity of recording, classifying
and summarizing business transactions in
a systematic manner. It is the procedural
aspect of accounting.
- Procedural / procedures
● Financial Accounting - involves the
preparation and interpretation of
Financial Statements primarily for external
users.
- Preparation and presentation of
9
 financial statements
- Follows the accounting standards
- Focuses on general purpose financial
statements
● Cost Accounting- deals with the
recording, classifying and summarizing the
details of material, labor and overhead
necessary to produce and sell a product
or service.
- Focuses on costing of the business‟
products
- Products are costed one-by-one
● Managerial Accounting- is the
presentation of accounting data primarily
for management who are considered the
internal users. The special reports will
assist managers in planning, directing
and controlling the operation of the
business as well as in managing
enterprise resources.
- Focuses on management consultancy or
advisory services
- Ano yung mga pwede mong gawing reports
na pwedeng makatulong sa company pag
nagpapa consult in financials (e.g.
budgeting, capital budgeting,, finance,
financial managing, and financial analysis)
- Interpreting part
- Follows no standards
● Auditing- deals with independent
verification and examination of the
accounting records for the purpose of
giving an opinion on the fairness of its
presentation.
- Invloves the inspection of an entity‟s
financial statements or business processes
to ascertain their correspondence with the
established criteria
- External and internal
- BSA = external; BSAIS = internal
- Public Acctg - External Auditors
- Private Acctg - Internal Auditors
- Government Acctg - Government Auditors
● Government Accounting- deals with the
administration or uses of public funds,
to bring about service to the community.
- Accounting in government
- Focusing attention on the custody of public
funds, the purpose or purposes to which
those funds are committed, and the
responsiblity and accountability of the
individuals entrusted with those funds.
- Usually iba terminologies sa government
● Fiduciary Accounting (Trust Accounting,
Estate Accounting, Receivership
Accounting)- Handling of accounts
managed by a person entrusted with the
custody and management of property for
the benefit of another. (Examples: Banks,
Insurance Companies, Mutual Trust,
Pension Plans)
- More on estate, trust funds, mutual funds,
investments, cash surrender value
(Magano magiging value ng pera mo after
years)
● Environment Accounting- The area of
accounting that focuses on programs,
activities and projects that are focused on
care for Mother Earth.
- Tackles about biological assets (e.g.
living animals and plants)
● Social Responsibility Accounting-
Reporting of programs and projects that
have to do with the upliftment of the
welfare of the people of a community or
nation.
- Focuses more on foundations; NGOs
- Companies commonly establishes
foundations (Social Responsibility)
PHILIPPINE REGULATORY AGENCIES
● The practice of the accounting profession,
among others, is governed by regulatory
bodies such as the Professional
Regulation Commission, Board of
Accountancy and the Philippine Institute of
Certified Public Accountants. The financial
reports prepared are also affected by the
rulings and promulgations issued out by the
Securities and Exchange Commission,
Bangko Sentral ng Pilipinas, and the
Bureau of Internal Revenue.
PROFESSIONAL REGULATION COMMISSION
● This is a government body in charge of
regulating and licensing the practice of a
profession like accounting, medicine,
10
 engineering, nursing and others. Among its
primary functions are the following:
a. Maintaining and enforcing
professional examinations
b. Promulgating and implementing
standards and ethics in the practice
of profession
c. Providing legal and other regulatory
services such as hearing formal
complaints
d. Acting on valid complaints by
suspending and revoking license of
an erring professional.
- Nagbibigay ng license sa CPA board exam
passers
BOARD OF ACCOUNTANCY
● Republic Act 3105 regulated on March 17,
1978, the practice of accounting by
creating the Board of Accountancy. It is
under the jurisdiction of the PRC and is
tasked in setting up and promulgating a
set of professional standards and ethics
in the practice of the accounting profession.
It is composed of a chairman and six
members appointed by the President of
the Philippines upon the
recommendation of the PRC. It constantly
monitors the practice of accountancy in the
Philippines by conducting exams to CPA
candidates, granting certificates to board
passers, registering and suspending
members, conducting dialogues with
accountancy students, examinees, and
accountants.
- Group of experienced CPAs
- Constructs the CPA Board Exam
- Nagdedecide ng number ng papasa
SECURITIES AND EXCHANGE COMMISSION
(SEC)
● SEC was established on October 26, 1936
under C.A 83. Its task is to safeguard
public interest. It regulates business
operations specifically of partnerships and
corporations, entities granted license/
franchise to operate, and foreign companies
doing business in the country.
- Companies are required to submit
financial statements to SEC
BANGKO SENTRAL NG PILIPINAS (BSP)
● BSP Regulates the operations of all
banks, as well as all importations (goods
coming into the country) and exportations
(goods going out to other countries) of
goods. It also closely monitors foreign
currency transactions and the Philippine
Peso exchange rate ensuring its stability
through a series of measures it undertakes.
- Tasked in regulating banks and other
entities performing banking functions
- Responsible for fiscal and monetary
policies of the government
- Gumagawa ng pera
BUREAU OF INTERNAL REVENUE (BIR)
● BIR ensures compliance of tax and license
requirements by all businesses. People and
business entities earning income are
required to fill up and submit periodic tax
returns and pay for licenses, fees and
taxes.
- Tasked in collecting national taxes and
administering the provisions of the Tax
Code
- Taxes - tayo gumagawa ng taxes ng clients
kaya may connection tayo sa BIR
PROFESSIONAL EXAMINATIONS, TITLES
AND ORGANIZATIONS RELATED TO
ACCOUNTING IN THE PHILIPPINES AND
INTERNATIONAL
NAME OF NAME OF TITLES
EXAMINATIO PROFESSIONAL
NS ORGANIZATIONS
Certified Philippine Institute
Public Of Certified Public
Accountant Accountants CPA
Licensure (PICPA)
Examination
11
Certified Association Of Certified Chartered Institute
Accounting Accounting Payroll Of Payroll
Technician Technicians- CAT Professional Professionals CPP
(Cat Level 3) Canada (CPP) (CIPP UK)

Institute Of National Institute

MAAT
Certified Of Accounting
Management Technicians
Accountants (NIAT)
Australia (ICMA)
Certified Tax National Institute Of CTB
National Institute Bookkeeper Accounting
Of Accounting Technicians (NIAT)
Technicians
(NIAT) Certified Institute Of Internal
Internal Auditors
Certified Institute Of Auditor CIA
Accounting Certified
Technician Management RCA
(CAT Level 2) Accountants Certified Institute Of
-Registered Australia (ICMA- Management Management
Cost Australia) Accountant Accountants CMA
Accountant
(RCA) National Institute
Of Accounting Note: There are also other Local and International
Technicians Certifications available for Business and
(NIAT)
Accounting Professionals.
Certified Institute Of
Accounting Certified REFERENCES:
MICB Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals
Technician Bookkeepers-
of Accounting. Manila , Philippines: Education_Online, Inc.
(CAT Level 1) London, United Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of
-Certified Kingdom Accounting Principles. Quezon City: National Book Store
Bookkeeper Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015).
National Institute Accounting Principles. USA: Courier Kendallville
Of Accounting Millan, Zeus Vernon. (2019). Financial Accounting and
Technicians Reporting. Baguio City: Bandolin Enterprise
Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic
(NIAT) Accounting. Baguio City: Valencia Educational Supply
Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017).
Certified Tax Philippine Accounting for Partnership and Corporation. Manila: Millenium
Technician Association Of Books, Inc.
(CTT) Certified Tax CTT Vera Cruz- Manuel, Z. (2018). 21st Century Accounting
Technicians Inc. Process 16th Edition. Quezon City: Raintree Trading &
Publishing Inc.
(PACTT, Inc.)

12
 CHAPTER 2
ACCOUNTING CONCEPTS AND PRINCIPLES
LEARNING OBJECTIVES:
At the end of this chapter, the student should be
able to:
1. Define Accounting Concepts and Principles
2. Explain the different Basic Accounting
Concepts
3. Enumerate and explain the various
Qualitative Characteristics of Financial
Statements
DEFINITION OF ACCOUNTING CONCEPTS AND
PRINCIPLES
● Set of logical ideas and procedures that
guide the accountant in recording and
communicating economic information.
● They provide a general framework by which
accounting practice can be evaluated and
they serve as guide in development of new
practices and procedures.
- Standards we follow in doing accounting
and preparation of financial reports
- Criteria; concepts we use in the actual
practice
- Guides in doing the accounting cycle
- Application of the general framework
- General Framework - skeletal or the
backbone
BASIC ACCOUNTING CONCEPTS
1. SEPARATE ENTITY CONCEPT
● the business is viewed as as a separate
person, distinct from its owners.
● Only the transactions of the business are
recorded in the books of accounts.
● The personal transactions of the business
owner(s) are not recorded
● The application of the separate entity
concept is necessary so that the financial
position and financial performance of a
business can be measured properly, by
applying the separate entity concept, you
can objectively know if the business is really
earning profits, or if it has the ability to
do so.
- As the 1st stage is identifying if the
transaction is personal or business
transactions
- Segregate personal and business
transactions
- Commonly violated in sole proprietorship
2. HISTORICAL CONCEPT PRINCIPLE
● Under this concept, assets are initially
recorded at their acquisition cost.
- Initially recording assets based on the
amount paid to acquire them: PPE, supplies
3. GOING CONCERN
● it means that the accounting entity is viewed
as continuing in operation indefinitely in
the absence of evidence to the contrary.
● It is also known as CONTINUITY
ASSUMPTION
● In other words, financial statements are
prepared normally on the assumption that
the entity shall continue in operation for the
foreseeable future.
● The opposite of going concern is
Liquidating Concern. If the business
intends to end its operations or if it has no
other choice but to do so
- Continuous preparation of financial
statements
4. MATCHING CONCEPT
● Under this concept, some costs are initially
recorded as assets and charged as
expenses only when the related revenue is
recognized.
- Match all expenses over revenue
- Initially recording assets as an asset
account when not in use however, when
used; its is now recorded as an expense
- Pag binili at hindi pa nagagamit, wag muna
i-record as expense
- Unused = ASSET
Used = EXPENSE
5. ACCRUAL BASIS OF ACCOUNTING
● (Philippine Accounting Standard) PAS 1
requires that an entity prepares its financial
13
 statements,except for cash flow information,
using the accrual basis of accounting.
● Under the accrual basis of accounting,
economic events are recorded in the
period in which they occur rather than at
the point in time when they affect cash.
● Thus, income is recognized in the period
when it is earned rather than when it is
collected, while expense is recognized in
the period when it is incurred rather than
when it is paid.
- INCOME = recorded or recognized kahit di
pa received
- EXPENSE = Recognize bills as expenses
kahit di pa bayad since gamit na
6. TIME PERIOD
● It requires that the indefinite life of an entity
is subdivided into time periods or
accounting periods which are usually of
equal length for the purpose of preparing
financial reports on financial position,
financial performance and cash flows.
● The accounting period may be a calendar
year or a natural business year (fiscal
year)
● A calendar year is a twelve month period
that starts on January 1 and ends on
December 31.
● A natural year or fiscal year is a twelve
month period that starts on a date other
than January 1 and ends on any month.
● An accounting period that is shorter than
12 months is called an “Interim Period” an
interim period can be a month or quarter (3
months) or a semiannual period (6 months).
- Following a certain period; equal length
7. STABLE MONETARY UNIT
● the monetary unit assumption has two
aspects, namely Quantifiability and
stability of the peso,
● THE QUANTIFIABILITY ASPECT means
that the assets, liabilities, equity, income
and expenses should be stated in terms of
a unit of measure which is the peso in the
Philippines
- Measured using one (1) currency
● THE STABILITY OF THE PESO
ASSUMPTION means that the purchasing
power of the peso is stable or constant
and that its instability is insignificant and
therefore may be ignored.
- Dapat stable or constant ang
exchange rate ng peso to dollar;
increasing dollar value = decreasing
peso value
8. MATERIALITY AND AGGREGATION
● This concept guides the accountant when
applying accounting principles. This is
because accounting principles are
applicable only to material items.
● An item is considered material if its
omission or misstatement could influence
economic decisions. Materiality is a matter
of professional judgment and is based on
the size and nature of an item being judged.
● The relevance of information is being
affected by its nature and materiality
● Materiality of an item depends on relative
size rather than absolute size, what is
material for one entity may be immaterial
for another.
● Very often, materiality is dependent on
good judgment, professional expertise
and common sense.
9. COST - BENEFIT (COST CONSTRAINT)
● under this concept, the costs of processing
and communication information should not
exceed the benefits to be derived from the
information‟s use.
- Expenses should not exceed income
10. FULL DISCLOSURE PRINCIPLE
● The concept is related to both the concepts
of materiality and cost-benefit.
● Under the full disclosure principle,
information communicated to users reflect a
series of judgmental trade-offs that strive
for:
a. Sufficient detail to disclose matters
that make a difference to users
b. Sufficient condensation to make the
information understandable,
14
 keeping in mind the costs of
preparing and using it.
- There are corresponding items that needs
to be disclosed
- Often show in Notes to Financial
Statement
- Breakdown of other details na wala
sa Financial Statements
QUALITATIVE CHARACTERISTICS OF
FINANCIAL STATEMENTS
DEFINITION OF QUALITATIVE
CHARACTERISTICS
● Are the qualities or attributes that make
financial accounting information useful to
the users
● In deciding which information should be
included in financial statements, the
objective is to ensure that the information is
useful to the users in making economic
decisions.
● Qualitative Characteristics are classified
into:
a. Fundamental Qualitative
Characteristics
b. Enhancing Qualitative
Characteristics
- There are standards in order to prepare
Financial statements credibly and reliable;
in the conceptual framework we call it
Qualitative characteristics of financial
statements
- Qualities and attributes that makes financial
accounting information useful to the users
- With these, we can assure or justify that
these financial statements are of quality
before arriving to the internal or external
users
- Criteria, guide, or attitudes that is needed in
preparation of financial statements
FUNDAMENTAL QUALITATIVE
CHARACTERISTICS
● Characteristics that relate to the content
or substance of financial information
● The fundamental qualitative characteristics
are Relevance and Faithful
Representation
● Information must be both relevant and
faithfully represented if it is to be useful.
- Talks about the primary characteristics of
financial statements
- Relates to the content and substance
- Dapat yung Relevance and faithful
Representation is pasok sa content and
substance ng financial data
- Para magamit and useful we make sure that
it is relevant and faithfully represented; pag
hindi = hindi siya useful
A. RELEVANCE
● It means the capacity of information to
make a difference in a decision made by
users
● Relevance is the capacity of the information
to influence a decision
● Relevance requires that the financial
information should be related or pertinent
to economic decision
● Information does not bear on an economic
decision is useless.
● To be relevant, the financial information
must be capable of making a difference in
the decisions made by users
● Examples: The statement of Financial
Position is relevant in determining the
financial status of the business or the
income statement is relevant in determining
the performance of the business
- Important, essential, vital
- Important information are only included
since they are needed in making economic
decisions
- Capable of differential analysis; compare
the differences of the decisions
- Capable of knowing the business‟
performance and financial position the use
of SFP and SCI
MAJOR INGREDIENTS OF RELEVANCE
● The ingredients of relevance are predictive
value and confirmatory value.
15
 ● Information has PREDICTIVE VALUE when - Like in auditing, what is in the receipt should
it can help users increase the likelihood of be consistently shown in the books and
correctly predicting or forecasting financial statements
outcome of events. - Tracing and vouching to track
- If prediction is not possible with the help of consistency of information
financial statements thus it is not relevant
- Not relevant = fault or violation in the INGREDIENTS OF FAITHFUL
qualitative characteristics REPRESENTATION
- Example: information about financial ● B.1 COMPLETENESS
position and financial performance is ○ It requires the relevant information
frequently used in predicting should be presented in a way that
dividend and wage payments and facilitates understanding and
the ability of the entity to meet avoids erroneous implication.
maturing commitments. ○ Completeness is the result of
● Financial information has CONFIRMATORY adequate disclosure standard or
VALUE if it provides feedback about the principle of full disclosure
previous evaluations. In other words, ○ The standard of adequate
financial information has confirmatory value disclosure means that all
when it enables users to confirm or significant and relevant
correct earlier expectations. information leading to the
- Through financial statements corrections preparation of financial statements
can be identified from the past reports shall be clearly reported.
- Example: a net income measure has ○ To be complete, the financial
confirmatory value if it can help statements shall be accompanied
shareholders confirm or revise their by Notes to Financial Statements.
expectation about an entity‟s ability ○ The purpose of the notes is to
to generate earnings. provide the necessary
● The predictive and confirmatory roles of disclosures required by Philippine
information are interrelated. Financial Reporting Standards.
- Sufficient details of information
B. FAITHFUL REPRESENTATION about the transaction are needed
● Under the conceptual framework for ● B.2 NEUTRALITY
financial reporting, the term faithful ○ It means that the financial
representation is used instead of the term statements should not be prepared
reliability. so as to favour one party to the
● Faithful Representation means that the detriment of another party
financial reports represent economic ○ To be neutral, the information
phenomena or transactions in words and contained in the financial statements
numbers. The descriptions and figures must be free from bias.
match what really existed or happened. ○ Neutrality is synonymous with the
● Simply stated, faithful representation means all- encompassing “Principle of
that the actual effects of the transactions Fairness”. To be neutral is to be
shall be properly accounted for and fair.
reported in the financial statements. ○ The information is directed to the
- Financial statements must be reliably common needs of many users and
expressed in words and numbers not to the particular needs of specific
- Properly accounted entries users.
- Walang bias
16
 - Wag ilagay na kumikita just to
appear na may good performance
- Fair presentation of financial
statements
- Commonly used in financial
accounting
● B.3 FREE FROM ERROR
○ It means there are no errors or
omissions in the description of the
phenomenon and the process used
to produce the reported information
has been selected and applied with
no errors in the process.
○ In this context, free from error does
not mean perfectly accurate in all
respects.
- Perfect financial statements are rare,
there is always room for adjustments
= adjusting entries
ENHANCING QUALITATIVE CHARACTERISTICS
● Intended to increase the usefulness of the
financial information that is relevant and
faithfully represented.
● The enhancing qualitative characteristics
relate to the presentation or form of
financial statements
● It relates to the presentation or form of
financial information
● The enhancing qualitative characteristics
are comparability, understability,
verifiability, and timeliness
● Relevant and faithfully represented financial
information is useful but the information
would be most useful if it is comparable,
understandable, verifiable, and timely
- Financial statements must be enhanced in
presentation
A. UNDERSTANDABILITY
● Requires that financial information/
statement must be comprehensible or
intelligible if it is to be useful
● The information should be presented in a
form and expressed in terminology that a
user understands
● An essential quality of the information
provided in the financial statements is that it
is readily understandable by users
● Classifying, characterizing and presenting
information “clearly and concisely” make
it understandable.
● Financial reports are prepared for users
who have a reasonable knowledge of
business and economic activities and who
review and analyse the information
diligently.
- Comprehensive pagkakagawa = detalyado
- Intelligible = understandable kahit di
knowledgeable sa accounting
B. COMPARABILITY
● It means the ability to bring together for the
purpose of noting points of likeness and
difference.
● It enables users to identify and
understand similarities and
dissimilarities among items.
● Comparability may be made within an entity
or between and across entities (2
classification ng pagcocompare).
● COMPARABILITY WITHIN AN ENTITY - it
is the quality of information that allows
comparisons within a single entity through
time or from one accounting period to
the next.
○ Comparability within an entity is also
known as Horizontal Comparability
or Intracomparability
○ Jollibee lang pero 2 years ng
Jollibee
● COMPARABILITY ACROSS ENTITIES it is
the quality of information that allows
comparison between two or more entities
engaged in the same industry.
○ This comparability is also known as
intercomparability or dimensional
comparability
○ Jollibee and Mcdo, BDO and BPI
● The financial statements of different entities
are compared in order to evaluate their
relative financial position, financial
performance and cash flows.
17
 - Financial statements can be compared with REFERENCES:
Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals of Accounting. Manila ,
the use of two or more financial statements Philippines: Education_Online, Inc.

Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of Accounting Principles. Quezon

C. VERIFIABILITY City: National Book Store

● It means that different knowledgeable and
independent observers could reach
consensus that a particular depiction is a
Covid 19 Project for Accountants: Basic Concepts –Presentation of Financial Statements
(PAS 1)
Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting Principles. USA:
Courier Kendallville

faithful representation. Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City: Bandolin
● The information is verifiable in the sense Enterprise

that is supported by evidence so that an
accountant that would look into the same
evidence would arrive at the same
Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City: Valencia
Educational Supply
Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for Partnership and
Corporation. Manila: Millenium Books, Inc.

decision or conclusion. Valix Conrado T & Valix Christian Aris M. (2018). Theory Financial Accounting. Manila: GIC

● DIRECT VERIFICATION - means verifying Enterprises & Co. Inc.

an account or other representation through Vera Cruz- Manuel, Z. (2018). 21st Century Accounting Process 16th Edition. Quezon City:
Raintree Trading & Publishing Inc.
direct observation.
- Example: cash count or inventory The harder you work for something, the greater
count you’ll feel when you achieve it.
- Evidence acquired directly
● INDIRECT VERIFICATION - Checking the
inputs to a formula or recalculations..
- Example: Checking the carrying
amount of inventory by checking the
inputs or records of quantities and
costs or recalculation of ending
inventories
- Can be done by recomputation of
evidences given

D. TIMELINESS
● It means having information available to
decision makers in time to influence their
decisions.
● Timeliness requires that financial
information must be available or
communicated early enough when a
decision is to be made.
● Relevant information may lose relevance if
there is undue delay in the reporting.
- Reports are ready
- Reports must be done quickly and reported
on time

18
 CHAPTER 3 4. STATEMENT OF CASH FLOW
THE ELEMENTS OF ACCOUNTING - Know if the cash account is correct
- Cash inflows and outflows
LEARNING OBJECTIVES: 5. NOTES TO FINANCIAL STATEMENTS
● At the end of this chapter, the student - Breakdown / descriptive
should be able to: - Details that can't be seen in the F.S.
1. Define and Enumerate Financial Statements that are relevant
2. Explain and illustrate various financial
statements A COMPLETE SET of BASIC FINANCIAL
STATEMENTS includes the following
FINANCIAL STATEMENTS components.
● Are the means by which the information
accumulated and processed in financial A. INCOME STATEMENT (STATEMENT OF
accounting is periodically communicated COMPREHENSIVE INCOME)
to the users ● is a report which describes how the
● These statements show the financial business operated over a given period of
effects of transactions and other events time.
that are grouped into broad classes ● (Usually one year).
according to their economic characteristics ● This accounting report shows the operating
● Are the end products or main output of performance of the business entity for a
the financial accounting process given period of time
- Collecting financial information or data - Financial performance of the business
- Everything starts or accounting starts with - NET INCOME / LOSS =
collecting receipts or information Revenue 一Expenses
- We process financial statements to
communicate to the users
SERVICE BUSINESS
- informations should automatically have
2 ELEMENTS:
financial affect to the business,
1. INCOME - (Income Earned)
- An accountant‟s job end with financial
increase in economic benefits during
statements
the accounting period in the form of
inflow or increase in asset or
Based on PAS 1, the following are the BASIC
decrease in liability that results in
FINANCIAL STATEMENTS
increase in equity other than
1. INCOME STATEMENT
contribution from equity participants/.
(Statement of Comprehensive Income)
- INCOME (Revenues, Fes, and
(Statement of Financial Performance)
Gains)
- Know the company‟s financial
- Deferred Income / Unearned
performance
Revenue - not an income but a
- Focuses on the financial
liability; advanced payment; not yet
operations of the business
earned
2. STATEMENT OF CHANGES IN EQUITY
- Sole proprietorship (Owner‟s Equity) - ↑ Assets
- Partnership (Partner‟s Equity) - ↑ Equity
- Corporation (Shareholder‟s Equity)
3. STATEMENT OF FINANCIAL POSITION - ↓ Liability
(Balance Sheet) 2. EXPENSES - (Incurred by the
- If its balanced or not in the problem business) Decrease in economic
or business benefits during the accounting
19
 period in the form of outflow or j. Transportation and Travel
decrease in asset or increase in Expense - represent the necessary
liability that results in decrease in and ordinary cost of employees
equity other than contribution from getting from one workplace to
equity participants. another which are reimbursable by
- Considered as expense; already the business. Travel Expenses
used represent the costs incurred when
- ↓ Assets travelling on business trips.
k. Interest Expense - represents the
- ↓ Equity cost of borrowing money. It is the
- ↑ Liability price that a lender charges a
borrower for the use of lender‟s
● VARIOUS EXPENSES:
money. Other terms for interest
a. Salaries Expense - represents the
expense are Finance and Borrowing
salaries earned by employees for
Costs.
the services they have rendered
l. Miscellaneous Expense -
during the accounting period.
represents various small
b. Rent Expense - represents the
expenditures which do not warrant
rentals that have been used up
separate presentation
during the accounting period.
c. Utilities Expense - represents the
NOTE: January - November = Month Ended
cost of utilities that have been used
December = Year Ended
during the accounting period ( water,
Expenses are arranged based on the chart
electricity and telephone)
of accounts; temporarily, arranged based
d. Supplies Expense - represents the
appearance or first come first serve
cost of supplies that have been used
Withdrawals = Personal ; drawings
during the period.
e. Bad Debt Expense - the amount of
● EQUATION:
estimated losses from uncollectible
○ Revenue – Expenses = Net Income
accounts receivable during the
(Loss)
period (Other term is Doubtful
● SAMPLE FORMAT of an INCOME
Accounts Expense, Uncollectible
STATEMENT for a SERVICE TYPE of
Accounts Expense)
business:
f. Depreciation Expense - the portion
of the cost of a depreciable asset
that has been allocated to the
current accounting period
g. Advertising Expense - represents
the cost of promotional or marketing
activities during the period.
h. Insurance Expense - represents
the cost of insurance pertaining to
the current accounting period
i. Taxes and Licenses Expense -
represents the cost of business and
local taxes required by the
government for the conduct of
business (Mayor‟s Permit, Other
Percentage Tax, Community Taxes)
20

TWO (2) REVENUES:
MERCHANDISING BUSINESS
● 2 Characters = Buyer and Seller
● PROCEDURE IN MERCHANDISING
1. Starts with buying the inventory;
lalagay unsold goods sa warehouse
2. Sell inventory; pull out unsold goods
Mode of Payment: Cash Accounts
Receivable
3. Collection of Accounts Receivable ∴
acquired cash
4. Repurchase of inventory
● The following are the trading accounts used
by a merchandising concern:
1. Sales - Sale is an income account which is
credited when the goods or merchandise
are sold either by cash or on account basis.
- income
2. Sales Returns and allowances - Returns
and allowances result from the return of any
unsatisfactory merchandise; this account is
a deduction from sales and is debited when
defective goods are returned by the buyer.
- Returned items due to reasons, such as
wrong item received or damaged item
3. Sales Discount - a sales discount is an
account off the regular price of goods that is
granted for early payment. This is debited
when an amount of discount is granted to
the buyer. This account can be deducted
from sales or may be considered as other
expense.
- Discount given to customers
- Deduct to sales
4. Revenue from Sales or Net Sales -
consists of gross sales less returns and
allowances and discounts.
- Sales
less: Sales Returns and Allowances
Sales Discount
Net Sales
5. Gross Profit from sales - gross profit from
sales is divided by subtracting cost of sales
from net sales.
- Palaging (+) positive ang Gross Profit
- Sales
less: Cost of goods sold
Gross Profit
6. Purchases - Purchases account is the
accumulated cost of all merchandise bought
for resale during an accounting period. It is
debited when goods or merchandise are
bought either on account or on cash basis.
- Purchase items to be sold
- Gagamitin lang word na “purchases” for
items na ibebenta; if not, use the item‟s
account title
7. Purchase Returns and Allowances - this
is a deduction from purchases. This is
credited when defective merchandise is
returned to the supplier.
- Ibinalik na items na binili due to reasons
8. Purchase Discount - this account is
credited when the supplier granted the
buyer an amount of discount. This can be
treated as deduction from purchase or other
income.
- Discounts na hinihingi or binigay ni seller
21
9. Freight In - this is debited if the business TYPE Of Business:
shoulders the payment for the delivery of
goods bought. This is added to purchases
and a part of cost of sales.
- “Transportation Charges / Expenses”
- Buyer to shoulder the fee
- FOB Shipping Point = buyer ang nag
shoulder
- Purchases
add: Freight In
less: Purchase Returns & Allowances
Purchase Discounts
Net Purchase
10. Freight Out - this is one of the operating
expenses of the business. This is debited
upon payment of the delivery of the goods
sold.
- Seller to shoulder the fee
- FOB Destination
- Not a part of Cost of Goods Sold but with
OPERATING EXPENSES
11. Merchandise Inventory - Goods for sales
- Unsold goods
- Ending inventory
12. Cost of Goods Sold - cost of goods sold
consists of the cost of merchandise on hand
at the beginning of the accounting period,
net cost of merchandise purchased
including cost of transporting of goods
bought during the period.
- Statement of Cost of Goods Sold is not a
Financial Statement; supports the F.S.
- Expect the Cost of Goods sold to be always
lower than the Net Purchase
- Beg. Inventory
add: Net Purchase
Total Goods Available for Sale
less: End, Inventory
Cost of Goods Sold
● SAMPLE FORMAT of an INCOME
STATEMENT for a MERCHANDISING

22
 ● SAMPLE FORMAT of a STATEMENT OF
OWNER‟S EQUITY for a
MERCHANDISING TYPE of business:

B. STATEMENT OF OWNER'S EQUITY

● it explains the activities for a period of time
that led to a change in the owner‟s share
over the net assets of the business.
● represents the claim of the owner over the
assets of the business after the liabilities
have been deducted (Net Assets)
● OWNER’S EQUITY = Assets 一 Liabilities
● Summary of changes in an entity‟s owner;s
equity during a specific period
Beginning owner‟s equity
add: Owner‟s / additional investment
add: Net Income
less: Net loss
less: Owner‟s withdrawals
ENDING OWNER’S EQUITY
● SAMPLE FORMAT of a STATEMENT OF
OWNER‟S EQUITY for a SERVICE TYPE
of business:
C. STATEMENT OF FINANCIAL POSITION
(BALANCE SHEET)
● gives information about the financial
position of the business by showing the list
of its assets (Cash and properties) and
Liabilities (debts or obligations to pay) and
from which the net worth of the business
representing equity or share of the owner
could be determined.
● Provides a snapshot of the firm‟s financial
position at a specific point in time
● ACCOUNTING EQUATION
- ASSETS = LIABILITIES +
OWNER‟S EQUITY
- Merchandising type of business uses
merchandise inventory
- Balance sheet

23
 - Information about the financial position,
status, or condition of the business
- Assets, Liabilities, and Owner‟s Equity
- Most critical financial statement
NOTE: to classify whether current or non-current;
operating cycle whichever is longer
ASSETS
● are economic resources controlled by the
enterprise resulting from past events from
which future economic benefits are
expected to flow to the enterprise.
- Something we buy that is being controlled
by the organization
- Bought due to benefit
- Assets should be equal to the liabilities plus
owner‟s equity
● CURRENT ASSETS “CRIP”
- includes cash and cash equivalents which
are not restricted in use, as well as other
assets readily convertible into cash, or to be
sold or consumed within the normal
operating cycle of the business or one year.
- The following are the current assets: (Edwin
G. Valencia and Gregorio Roxas, Basic
Accounting 2018 edition)
1. CASH – Any item on hand with
monetary value that a bank will
accept for deposit and all amounts
currently on deposit with the bank in
the name of the business. This
includes coins and currencies,
personal checks, money orders,
travellers check made payable to the
business.
- Cash in bank or cash on hand
2. ACCOUNTS RECEIVABLE - the
amounts collectible on open
accounts of the customers. These
represent debtor‟s oral promise to
pay a certain amount to the
business.
3. NOTES RECEIVABLE - A
promissory note received by the
business from its debtors/customers.
- Pautang with promissory notes /
written contract
4. ACCRUED INTEREST
RECEIVABLE - The interest earned
on notes receivable but not yet
received in Cash
5. INVENTORIES - Assets held for
sale in the normal operation of the
business in the process of
production for sale, or in the form of
materials or supplies to be
consumed in the production process
or rendering of services. Examples:
Merchandise Inventory, Work in
Process Inventory, and Raw
Materials Inventory
6. PREPAID EXPENSES - this
represent advance payments made
for benefits or services to be
received by the business in the
future. Examples: Prepaid Supplies,
Prepaid Insurance and Prepaid
Rent.
7. ALLOWANCE FOR BAD DEBTS -
Contra Asset Account, which
represents customer, accounts
doubtful of collection. (Other terms:
Allowance for Doubtful Accounts,
Allowance for Uncollectible
accounts)
● NON- CURRENT ASSETS
- are those assets not included as current
assets such as the property, plant and
equipment.
- The following are the non-current assets:
1. LAND - the site owned by the
business on which the business
building is constructed. This plant
asset is not subject to depreciation.
2. BUILDING - structure owned by the
business to be use to house the
office, store or factory.
3. EQUIPMENT - typewriter, air-
conditioner, calculator computer,
electric fan, trucks, cars used in the
business. Specific titles may be used
such as: Office Equipment, Store
Equipment and Delivery
Equipment
24
 4. FURNITURE AND FIXTURE -
tables, chairs, curtains, filing cabinet,
lighting fixtures and wall decors:
Specific titles may be used such as:
Office Furniture and Fixtures and
Store Furniture and Fixtures.
5. ACCUMULATED DEPRECIATION -
contra asset account representing
expired cost of the property, plant
and equipment as a result of usage
and passage of time.
LIABILITIES
● are present obligations resulting from past
events and whose settlement will cause an
outflow from the resources of the enterprise.
● CURRENT LIABILITIES
- are those debts or obligations reasonably
expected to be liquidated in the normal
course of the enterprise‟s operating cycle or
paid within 1 year.
- The following are the current liabilities:
1. ACCOUNTS PAYABLE - Purchase
of goods and services on credit
supported by the oral or implied
promise of the business.
- Debts / obligations of the business to
other entities
2. LOAN PAYABLE - is a liability to
pay a bank or a financing institution
for amount of money borrowed by
the business
- Note: Loans Payable can be
classified as part of Non-
Current Liabilities if it is
payable beyond 1 year.
Example: Housing Loan, Car
Loan
- If the problem is silent:
Current
3. NOTES PAYABLE - a promissory
note issued by the business to its
creditors for money borrowed or
merchandise and other assets
bought on credit
- Note: Note Payable can be
classified as part of Non-
Current Liabilities if it is
payable beyond 1 year.
- If the problem is silent:
Current
4. ACCRUED INTEREST PAYABLE -
The Interest incurred in the current
period but not yet paid
5. UTILITIES PAYABLE - is a liability
to pay utility companies like PLDT.
Meralco, Telephone, electricity and
water services received from them.
6. OTHER PAYABLES - Salaries
Payable, SSS Premium Payable,
Withholding Tax Payable, Pag-IBIG
Premium Payable
● NON- CURRENT LIABILITIES
- are long term liabilities or obligations which
are payable longer than one year.
- The following are the non-current liabilities:
1. MORTGAGE PAYABLE - which is
an obligation secured by real
property of the debtor-business.
- Collateral - real property
2. BOND PAYABLE - which is a long
term promise usually five to ten
years supported by a formal contract
containing the face value of the
bond.
OWNER’S EQUITY
● represents the claim of the owner over the
assets of the business after the liabilities
have been deducted.
● Residual claim
SAMPLE FORMAT of a STATEMENT OF
FINANCIAL POSITION for a SERVICE TYPE of
business:
25
SAMPLE FORMAT of a STATEMENT OF
FINANCIAL POSITION for a MERCHANDISING
type of business:

26
 ASSETS LIABILITIES CAPITAL
(EQUITY)

Increase Decrease Increase

Decrease Increase Decrease

D. STATEMENT OF CASH FLOW

● is a basic component of the financial
statements which summarizes the
operating, investing and financing activities
of an entity.

E. NOTES TO FINANCIAL STATEMENTS

● are used to report information that does not
fit into the body of the statements in order to
enhance the understandability of the
statements

REFERENCES:
Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals of Accounting. Manila ,
Philippines: Education_Online, Inc.

Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of Accounting Principles. Quezon City:
National Book Store

Covid 19 Project for Accountants: Basic Concepts –Presentation of Financial Statements (PAS
1)

Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting Principles. USA:
Courier Kendallville

Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City: Bandolin
Enterprise

Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City: Valencia
Educational Supply

Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for Partnership and
Corporation. Manila: Millenium Books, Inc.

27
Valix Conrado T & Valix Christian Aris M. (2018). Theory Financial Accounting. Manila: GIC
Enterprises & Co. Inc.

Vera Cruz- Manuel, Z. (2018). 21st Century Accounting Process 16th Edition. Quezon City:
Raintree Trading & Publishing Inc.

PADAYON FUTURE CPAs

28
 CHAPTER 4
12 Office Supplies
THE ACCOUNTING EQUATION
20 Furniture and Fixtures
LEARNING OBJECTIVES:
● At the end of this chapter, the student 30 Accounts Payable
should be able to: 60 Legal Fees
1. Analyse the effects of Business
Transactions 70 Taxes and License Expense
2. Use the accounting equation in solving
accounting problems ILLUSTRATIVE PROBLEM 1:
● To illustrate the effect of the transactions in
THE ACCOUNT the accounting elements
● An account is a device used in recording
the effects of business transactions. ATTY. CARREON registered a sole
● It also means to verify record, process proprietorship business as a lawyer under the
and report the effects of business name “CARREON LEGAL SERVICES”. He
transactions in organized, accurate, and experienced the following events during the
verifiable manner. organizing phase of his business in its first month of
● It is also used to authenticate process, operations
summarize, and verify the occurrence and
effects of a business transaction. June 1 Sold his personal car for P 840,000 in
● Each account is to be segregated to cash
maintain details of accounting records and
to track down accuracy. ASSETS = LIABILITIES EQUITY
● As such, there are specific account titles NO EFFECT NO EFFECT NO EFFECT
for each significant assets, liabilities, equity,
● Note: No effect in the accounting equation
income and expenses.
since the car is a personal asset and not
● The names of the account titles are the
related to the business. Apply the principle
ones included in the chart of accounts of
of Business Entity Concept that personal
an enterprise.
assets should be separated from your
business assets.
THE ACCOUNTING EQUATION
● The assets, liabilities and owner‟s equity are
June 6 : Carreon registered the business and
always expressed in an equation.
incurred P 18,300 on its registration.
● ASSETS = LIABILITIES + EQUITY
- Note: Other terms for Equity are “Capital”, ASSETS = LIABILITIES EQUITY
“Net Assets” and “Net Worth”
(18,300) NO EFFECT (18,300)
Cash Taxes and
License
Expense
Using the following account titles in this ● Note: The asset will decrease by 18,300
illustrative problem: due to the payment of registration, no
Code Account Title effect in the liabilities since no obligation
has been created, and the equity/capital will
10 Cash decrease by 18,300 since expenses has
been incurred
11 Accounts Receivable

29
June 11 Purchased furniture for his law office, June 19 Rendered Legal Services in Cash, P
P 155,100, paying P 18,000 and the 84,200
balance on account
ASSETS = LIABILITIES EQUITY
ASSETS = LIABILITIES EQUITY
84,200 NO 84,200
(18,000) 137,100 NO Cash EFFECT Legal Fees
Cash Accounts EFFECT ● Note: The asset will increase by 84,2 00
Payable
because Atty Carreon will render services to
155,100
Furniture and clients in cash for legal services rendered ,
Fixtures the Equity will also increase by 84,2 00
because of the Income that will be
● Note: The asset will decrease by 18,000
recognized. No effect in the Liabilities.
due to the partial payment o f the purchase
of furniture, on the other hand , the asset
June 28 Collected 40% of its account from
will also increase by 155,100 with the
Dahon Tea
acquisition of furniture and fixtures , in
addition, the Liabilities will Increase by ASSETS = LIABILITIES EQUITY
137,1 00 to account for the balance that is
340,000 NO EFFECT NO EFFECT
not yet paid . No effect in the Equity
Cash

June 15 Billed DAHON TEA for legal services, (340,000)

P850,000 Accounts
Receivable
ASSETS = LIABILITIES EQUITY
● Note: The asset will increase by 340,000 in
850,000 NO 850,000 cash because of the 40% of the 850,000
Accounts EFFECT Legal Fees billed to Dahon Tea last June 15 and at the
Receivable
same time will decrease by 340,00 0 i n its
● Note: The asset will increase by 850,000 Accounts Receivable or collectibles. No
because Atty Carreon will bill Dahon Tea for effect in the Liabilities and Equity.
legal services rendered , the Equity will also
increase by 850,000 because of the To summarize the entire problem into the
Income that will be recognized. No effect in worksheet:
the Liabilities.

June 17 Bought Office Supplies in Cash, P3,280

ASSETS = LIABILITIES EQUITY

(3,280) NO NO EFFECT
Cash EFFECT

3,280
Office Supplies
● Note: The asset will decrease by 3,280 in
cash because of the payment for the
purchase of office supplies and at the same
time will Increase by 3,280 in Office
Supplies due to the acquisition . No effect
in the Liabilities and Equity.
ILLUSTRATIVE PROBLEM 2:
30
 ● Using the following account titles in this
790,330 NO 790,330
illustrative problem: Cash EFFECT Service Income
CODE ACCOUNT TITLE ● Note: The asset will increase by 790,330
because the company will render services
10 Cash
to clients in cash for transport services
11 Accounts Receivable rendered , the Equity will also increase by
790,330 because of the Income that will be
12 Office Supplies recognized. No effect in the Liabilities.
20 Office Equipment
October 11 Bills received and paid
30 Accounts Payable P 15,890 utilities, P9, 800 gas and
oil, P 9, 500 repair of cars.
50 Mokona, Capital
ASSETS = LIABILITIES EQUITY
51 Mokona, Withdrawal
(35,190) NO (15,890)
60 Service Income Cash EFFECT Utilities Expense

70 Utilities Expense (9,800)

Gas and Oil
71 Gas and Oil Expense Expense
72 Repair Expense
(9,500)
Repair Expense
The following transactions were completed by ● Note: The asset will decrease by 35,190
MOKONA TRANSPORT SERVICES as of the due to the payment of expenses; the Equity
month of October, 2020 will also decrease by 35,190 as an outflow
of capital. No effect in the Liabilities
October 1 Mokona will invest P 1,000,000 cash
in this business. October 14 Charged LOVE KO TO
ASSETS = LIABILITIES EQUITY COMPANY for transport services
rendered P164,339
1,000,000 NO 1,000,000
Cash EFFECT Mokona, Capital ASSETS = LIABILITIES EQUITY
● Note: The asset will increase by 1,000,000 164,339 NO 164,339
in cash because of the cash investment the Accounts EFFECT Service Income
company made , the Equity will also Receivable
increase by 1,000,000 to record the ● Note: The asset will increase by 164,339
establishment of capital . No effect in the because Mokona will charge the client for
Liabilities transport services rendered , the Equity will
also increase by 164,339 because of the
Income that will be recognized. No effect in
the Liabilities

October 17 Bought Office Supplies

October 8 Received Cash on account, P 19,600
amounting to P 790,330 for
ASSETS = LIABILITIES EQUITY
transport services rendered
ASSETS = LIABILITIES EQUITY 19,600 19,600 NO EFFECT

31
 Office Accounts Payable
Supplies Payable 87,500
Office
● Note: The asset will increase by 19,6 00
Equipment
because of the purchase of office supplies,
the Liabilities will Increase by 19,600 to ● Note: The asset will decrease by 30,625
account for the balance that is not yet paid . due to the partial payment of the purchase
No effect in the Equity of office equipment, on the other hand , the
asset will also increase by 87,500 with the
October 21 Received cash from acquisition of office equipment, in addition,
LOVE KO TO COMPANY, P 45,800 the Liabilities will Increase by 56,875 to
as partial payment of its account account for the balance that is not yet paid .
No effect in the Equity.
ASSETS = LIABILITIES EQUITY

45,800 NO EFFECT NO EFFECT October 31 Paid the Salaries of

Cash Employees for the month of
October, P 48,500
(45,800)
Accounts ASSETS = LIABILITIES EQUITY
Receivable
(48,500) NO EFFECT (48,500)
● Note: The asset will increase by 45,800 in Cash Salaries
cash because of the partial payment from Expense
Love Ko to Company and at the same time ● Note: The asset will decrease by 48,500
will decrease by 45,800 in its Accounts due to the payment of expenses ; the Equity
Receivable or collectibles. No effect in the will also decrease by 48,500 as an outflow
Liabilities and Equity of capital. No effect in the Liabilities.

October 25 MOKONA made cash To summarize the entire problem into the
withdrawals in the business worksheet:
amounting to P 194,000
ASSETS = LIABILITIES EQUITY

(194,000) NO (194,000)
Cash EFFECT Mokona,
Withdrawal
(45,800)
Accounts
Receivable

October 26 Purchased Office

Equipment, P 87,500, terms: 35%
down payment and 65% on account
ASSETS = LIABILITIES EQUITY

(30,625) 56,875 NO
Cash Accounts EFFECT

32
 CHAPTER 5
Business Transactions and their Analysis
(Journalizing Process)
LEARNING OBJECTIVES:
● At the end of this chapter, the student
should be able to:
1. Identify the uses of the two books of
accounts
2. Explain the rules of debits and
credits
3. To analyse business transactions
STEPS IN THE ACCOUNTING CYCLE
1. Analysing the business documents or
transactions
2. Journalizing- this is the process of
recording the transactions in a journal
3. Posting - transactions as classified and
recorded in the journal are transferred to
appropriate accounts in the general ledger.
4. Preparing the unadjusted trial balance
5. Preparing the adjusting entries
6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing the Post- Closing Trial Balance
9. Preparing the Reversing Entries
1. ANALYZING THE BUSINESS DOCUMENTS
● One basic accounting principle is the
verifiability of accounting records.
● The truthfulness and the accuracy
of the source documents will
assure the user of financial
information that is free from bias
and error and faithfully represents
what it purports to represent.
● SOURCE DOCUMENTS - are the
forms, evidences or legal/ official
papers that serve as supports to
the underlying economic
transactions. These evidential
matters support the objectivity of
accounting records
● Examples:
○ OFFICIAL RECEIPT - is a
written acknowledgement of
something received as
money or goods.
○ CHECK VOUCHER - is a
document that serves to
recognize a liability and
authorize the disbursement
of cash.
○ CHECK - is a draft upon a
bank and payable on
demand, signed by the
maker or drawer, containing
an unconditional promise
to pay a certain sum of
money to the order of the
payee.
○ PROMISSORY NOTE - is a
promise or engagement in
writing to pay a specified
sum at a time therein,
limited, or on demand, or at
sight to a person therein
named, or to his order, or
bearer
○ COMMERCIAL INVOICE - is
a written statement of
merchandise sold to the
buyer, together with the
prices and charges of
merchandise sent or to be
sent to him.
○ BANK DEPOSIT SLIP - is a
document which serves as
an evidence of an act of
placing money in the
custody of a bank or
banker, for safety or
convenience, to be
withdrawn at the will of the
depositor or under rules or
regulations agreed upon.
○ DEBIT MEMORANDUM - is
a written notice which
informs client of reducing
his account.
○ CREDIT MEMORANDUM -
informs the client of
increasing his account.
33
 ○ BILLING OR STATEMENT
Title
OF ACCOUNT - is a report
issued periodically by a Lef Rig
bank or creditor to a t ht
sid side
customer setting forth the
e
amounts billed, credits Cre
given and balance due. De dit
bit
2. ANALYZING AND RECORDING
● Amounts entered on the left side of an
TRANSACTIONS (JOURNALIZING)
account, regardless of the account title are
● THE CHART OF ACCOUNTS - is a
called debits to the account. When debits
listing of account titles which
are entered in the account, the account is
guides the bookkeeper in the
said to be debited. Amounts entered on the
recording of the transactions. The
right side of an account are called credits,
number and the nature of accounts
and the account is said to be credited.
depend on the type of business
Debits and Credits are sometimes
operations.
abbreviated as Dr. and Cr.
● Example:
THE RULES ON T - ACCOUNTS
ASSETS
DEBITS CREDITS

INCREASES DECREASES

LIABILITIES
DEBITS CREDITS

DECREASES INCREASES

CAPITAL
CHARACTERISTICS OF AN ACCOUNT
● An ACCOUNT in its simplest form has three CREDITS
parts.
INCREASES
● First, each account has a title, which is the
name of the item recorded in the account. WITHDRAWAL
● Second, each account has a space for DEBITS
recording increases in the amount of the
item. INCREASES
● Third, each account has a space for
recording decreases in the amount of the REVENUE
item.
CREDITS
● The account form presented below is called
a T ACCOUNT because it resembles the INCREASES
letter T.
● The left side of the account is called the
EXPENSES
debit side, and the right side is called the
credit side. DEBITS

34
 SAMPLE ILLUSTRATIVE PROBLEM 1:
INCREASES

May 2 UP opened a service shop. She deposited

Or P 270,500 in a bank account in the name
of the business
THE RULES ON DEBIT CREDIT
T ACCOUNTS Date Particulars F Debit Credit

AWE INCREASE DECREASE 2019

LCRAAD DECREASE INCREASE May 2 Cash 11 P 270,500

UP, Capital 51 P 270,500

THE JOURNAL
Investments made by
● The accounting record in which the UP
economic transactions and events are
initially recorded is called a “Journal”. May 5 Bought Chairs and Tables on
● It is known as the “BOOK OF ORIGINAL Account, P18,645
ENTRY” because it is the book where the
economic transactions are first recorded. Date Particulars F Debit Credit
● Recording Transactions in the Journal is
2019
called “JOURNALIZING”
● Simultaneously or after analyzing the effects May 5 Furniture & Fixtures 22 P 18,645
of the transaction on the accounting
Accounts Payable 31 P 18,64
elements, accountants record the
transactions in the books of accounts; first Purchased Furniture
on account
in the Journal and then in the Ledger
● The Journal provides a chronological
record of transactions with explanations May 10: Purchased Office Supplies P 7,800, 20%
and clear references to their supporting on account and the balance paid in cash.
documents with corresponding debits and Date Particulars F Debit Credit
credits, while Ledger provides a classified
record of accounts with their respective 2019
running balances.
May 10 Laundry Supplies 14 P 7,800
● Each Entry made is called a Journal
Entry. Cash 11 P 6,240
● Each Journal Entry contains the following Accounts Payable 31 1,560
items:
Purchased Office
1. Date Supplies
2. The Account title and the amounts to
be debited
May 13 Paid Rent for the month used,
3. The Account title and the amount to
P10,000
be credited
4. Explanation Date Particulars F Debit Credit
● A Journal Entry with one debit and one
credit is called a Simple Journal Entry. 2019
● A Journal Entry which has more than one May 13 Rent Expense 73 P 10,000
debit or more than one credit is called a
Compound Journal Entry. Cash 11 P 10,000

35
 Paid Rent 2019

May 28 Accounts Payable 31 P 8,075

Cash 11 P 8,075
May 15 Bought washing machine from
WAG SUKUAN CENTER, P 21,850, Paid its account
paying P5,700 and the balance on credit
Date Particulars F Debit Credit SAMPLE ILLUSTRATIVE PROBLEM 2:
JAGIYA COMPUTER SERVICES
2019 POST-CLOSING TRIAL BALANCE
JUNE 30, 2021
May 15 Laundry Equipment 21 P 21, 850
Account Account Title Debit Credit
Cash 11 P 5,700 No.
Accounts Payable 31 16,150
1110 Cash P 255,900
Purchased Laundry
Equipment 1111 Accounts 181, 820
Receivable

May 16: Paid Salaries, P 15,550, Utilities, 1112 Computer 27, 975
Supplies
P7,100, and other miscellaneous
expenses, P 4,221 1113 Office Supplies 98, 260

Date Particulars F Debit Credit 2110 Computer 100, 240

Equipment

2019 3110 Accounts Payable P 71, 200

May 16 Salaries Expense 71 P 15,550
3111 Unearned 74, 890
Revenue
Utilities Expense 74 7,100

Miscellaneous Expense 75 4,221 5110 Jagiya, Capital 518,105

Cash 11 P 26,871 TOTAL P 664,195 P 664,195

Paid Expenses

May 20 Revenues Earned from

The following are the transactions for the
customers who availed of services on
month of July 2021
account, P 106,890
July 3 Jagiya signed a contract of lease for a
Date Particulars F Debit Credit monthly rental of P 12,000.
July 6 Bought additional Computer Equipment
2019 amounting to 20% of the beginning
May 20 Accounts Receivable 12 P 106,890 Computer Equipment on account
July 9 Received P 2,500 cash from customers on
Laundry Revenue 61 P 106,890
account
Charged Pandora for July 16 Paid Salaries of employees, P 18, 800
services rendered
July 20 Received P 8,200 for services rendered in
cash
May 28 Paid the 50% due to WAG July 23 Purchased additional computer supplies,
SUKUAN CENTER P13, 990 in cash
Date Particulars F Debit Credit July 24 Purchased Office Supplies on account
P850

36
July 25 Billed customers for services performed
P13,200
July 27 Paid monthly rent
July 28 Paid 5,200 to creditors on account
July 29 Paid expenses: Water, P 10,200,
Advertisement, P 29,500, Repair, P 12,
447
July 30 Rendered Services to clients worth 86, 700
in cash
July 30 Jagiya made cash withdrawals from the
business worth P 3,100

Other Information:
Use 5111- Jagiya, Personal, 6110- Service Income,
7110- Salaries Expense 7111- Rent Expense,
7112- Utiltities Expense,
7113- Advertising Expense, 7114- Repair Expense

REFERENCES:
Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals of Accounting. Manila ,
Philippines: Education_Online, Inc.
Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of Accounting Principles. Quezon City:
National Book Store
Covid 19 Project for Accountants: Basic Concepts –Presentation of Financial Statements (PAS
1)
Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting Principles. USA:
Courier Kendallville
Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City: Bandolin
Enterprise
Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City: Valencia
Educational Supply
Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for Partnership and
Corporation. Manila: Millenium Books, Inc.
Valix Conrado T & Valix Christian Aris M. (2018). Theory Financ ial Accounting . Manila: GIC
Enterprises & Co. Inc.
Vera Cruz- Manuel, Z. (2018). 21 st Century Accounting Process 16 th Edition. Quezon City:
Raintree Trading & Publishing Inc.

“STOP FEELING TOO STRESSED BY LOVING YOUR BUSY LIFE…

THE BEST KIND OF EXISTENCE IS ONE THAT IS JAM-PACKED: A
CHALLENGING JOB, ROMANCE, FRIENDS, and PASSION… THEY
ALL FORCE YOU TO MAXIMIZE OUT YOUR PERSONALITY…
BEING TIRED SOMETIMES IS A SMALL PRICE TO PAY FOR
LIVING A FULL LIFE.”

37
 CHAPTER 6 1. Items of similar items are grouped
POSTING TO THE LEDGER AND TRIAL together
BALANCE PREPARATION 2. It is easier to locate the item if
information about it is needed
LEARNING OBJECTIVES:
● At the end of this chapter, the student
should be able to:
1. Post transaction in the general
ledger
2. Prepare unadjusted trial balance

3. POSTING FROM THE GENERAL JOURNAL

TO THE GENERAL LEDGER
● The T - Account Form is used in the
classroom for preliminary analysis of
transactions.
● In actual practice, a formal book of account
is used containing not only the account
title, date and amount but also the page
reference (to identify the entry source), the
account number and the balance of the
SAMPLE FORMAT:
account.
● All accounts are compiled in one book
called the General Ledger wherein a
separate page is maintained for each
account. Each page is called a Ledger. To illustrate the General Ledger of NEVER GIVE
● Posting is the process of transferring UP SERVICING COMPANY
figures from the journal to the ledger
accounts GENERAL LEDGER
● General Ledger is the collection of all
ASSET, LIABILITY, OWNERS’ EQUITY,
REVENUE, and EXPENSE accounts. This
is a book of accounts in which data from
transactions recorded in journals are
posted and thereby classified and
summarized also called ledger.
● Ledger is a tool used for classifying and
summarizing information about increases,
decreases, and balances of items in the
chart of accounts.
- Ledger - individual; per account
- General ledger - collection of all ledger
● A ledger format may be used where after
the date column; there is a debit and credit
column. The last column gives a running
balance after every posting made.
● NEED FOR A LEDGER

38
 ● A Trial Balance is a list of accounts with
open balances in the general ledger. It
proves the equality of the debits and the
credits in the general ledger.
● The trial balance consists of two
classifications: the TRIAL BALANCE OF
BALANCES and the TRIAL BALANCE OF
TOTALS.
● The trial balance of balances contains
account with open balances.
● An account is said to have a debit balance
if the debit total is more than the credit total
and is said to have a credit balance if the
credit total is more than the debit total.
● If the debit side and credit side are equal,
the account is a zero balance or closed
account.
● The other form of trial balance is the
balance of totals. In this form, the total of
the debits and the total of the credits of
each account are listed.

PROCEDURES IN TRIAL BALANCE

PREPARATION
1. Write the heading of the trial balance. The
heading of the trial balance includes the
following:
a. The name of the business or the
owner
b. Title of the list or trial balance
c. Date of the trial balance
2. Provide a column for the accounts and
two money columns- a debit and a credit
3. The accounts should be written in just one
column arranged in the following
sequence:
a. Assets
b. Liabilities
c. Capital
d. Income
e. Expenses
4. Write the amounts opposite the
corresponding accounts under the debit
Note: For Problem No. 2, see the solution template money column, if the account is a debit
for GENERAL LEDGER. balance and under the credit money
column, if the account is a credit balance.
4. PREPARATION OF TRIAL BALANCE 5. Foot the money columns. Double rule the
totals.
39
 GENERAL LEDGER
DEBIT CREDIT

AWE ➕ ➖
(Normal Balance)

LCRAAD ➖ ➕
(Normal Balance)

Using the Ledger balances of NEVER GIVE UP

SERVICING COMPANY, , the trial balance will
appear as follows:

NEVER GIVE UP SERVICING COMPANY

TRIAL BALANCE
MAY 31, 2020

GENERAL JOURNAL

40
 TRIAL BALANCE

Note: For Problem No. 2, see the solution template

for TRIAL BALANCE.

REFERENCES:
Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals of Accounting.
Manila , Philippines: Education_Online, Inc
Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of Accounting Principles.
Quezon City: National Book Store
Covid 19 Project for Accountants: Basic Concepts –Presentation of Financial
Statements (PAS 1)
Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting
Principles. USA: Courier Kendallville
Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City:
Bandolin Enterprise
Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City:
Valencia Educational Supply
Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for
Partnership and Corporation. Manila: Millenium Books, Inc.
Valix Conrado T & Valix Christian Aris M. (2018). Theory Financial Accounting.
Manila: GIC Enterprises & Co. Inc.
Vera Cruz- Manuel, Z. (2018). 21st Century Accounting Process 16th Edition.
Quezon City: Raintree Trading & Publishing Inc.

PERSEVERANCE IS FAILING 19 TIMES AND

SUCCEEDING THE 20TH.”- JULIE ANDREWS

41
 CHAPTER 7
PREPARATION OF ADJUSTING ENTRIES
LEARNING OBJECTIVES:
 At the end of this chapter, the student
should be able to:
1. Enumerate the accounts needed to be
adjusted
2. Prepare adjusting entries for each
transactions
5. PREPARATION OF ADJUSTING ENTRIES
CLASSIFICATION OF ACCOUNTS
 “The accounts may be classified into real,
nominal and mixed before the books of
accounts are adjusted at the end of the
accounting period.
 Asset, liability and capital accounts are
known as REAL ACCOUNTS
PERMANENT ACCOUNTS
- Matitira at the end of the accounting
period
- Never ma-zero (0) sa accounting cycle
- Carried over to the next accounting
period; as the beginning balance
 While expense and income accounts are
called NOMINAL ACCOUNTS
TEMPORARY ACCOUNTS.
- Include: all expenses, income, and
withdrawals
- Pagdating ng closing entries; ma-zero
(0) sila
- Temporarily they will stay; but later on
they‟ll become zero
- Hindi na ma-carried over sa next
accounting period
 If the accounts contain both real and
nominal elements, these are known as
MIXED ACCOUNTS. Mixed accounts are
adjusted at the end of the period so that
their balances become either purely real
accounts or purely nominal accounts.
- Mixed accounts are created during
adjusting entries = isang side real
accounts; isang side nominal accounts
-  ASSET METHOD (expired)
 It should be noted that only real and
nominal accounts exist after the
accounts have been adjusted while the
real and nominal elements in the mixed
accounts have been recorded in separate
accounts.”
ADJUSTING ENTRIES IN ACCRUAL BASIS OF
ACCOUNTING
 ADJUSTING ENTRIES are entries that are
prepared in order to generate correct
data at the END of the accounting period.
 These are then recorded in the general
journal and posted to the ledger
accounts so that information in the
accounts will then be brought to correct
balances.
 Adjusting entries are done to be able to
depict sensible financial statements.
 Some of the common adjusting entries
that need to be done at the end of the
accounting period are the following:
1. Adjusting entry for prepaid expenses /
deferred expense
2. Adjusting entry for accrued expenses /
accrual of expenses
/ 3. Adjusting entry for deferred revenue /
unearned income / unearned revenue
4. Adjusting entry for accrued revenue
5. Adjusting entry for bad debts expense /
doubtful accounts expense /
uncollectible account expense
6. Adjusting entry for depreciation
expense
/ - 6 if service business
- 7 if merchandising business
(merchandise inventory)
ADJUSTING ENTRY FOR PREPAID EXPENSES
 PREPAID EXPENSE is an expense
already paid for in advance but not yet
used or incurred, thus their benefit will not
be derived in the relevant accounting
period.
- Also called DEFERRED EXPENSE
- (Pre)(paid) Expense – before maging
expense binayaran na
- Other term for advanced payment
- Asset pa sa view ng nagbayad
- Pag prepaid expense ang problem;
automatic cr. Cash since nagbayad ka
- Ang dr. and cr. ay iikot lang sa dalawa:
either asset or expense
- Assuming the advanced payment is still
an asset
- Dahil di pa nagagamit di pa siya
expense
- Correct na recorded as asset however,
may nagamit na kaya need ng adjusting
entries
42
 o Example of an Asset method.
Assume MR. QUEEN issued a
check on November 1, 2021 for
P18,000 as payment of store rent for
six months.
- Pag asset method, dapat ang dr. asset
account
o In the preparation of the Financial
Statements for December 31, 2021,
adjusting entry will be as follow:
- Cr. what is previously dr. in the initial
recording
- Record the expense (expired portion)
 EXPENSE METHOD (unexpired)
- Assuming that the item will still be used
eventually, so recorded as already an
expense prior to usage; but is actually
incorrect
o Example of an Asset Method.
Assume MR. QUEEN issued a
check on November 1, 2021 for
P18,000 as payment of store rent for
six months.
o In the preparation of the Financial
Statements for December 31, 2021,
adjusting entry will be as follow:
- Record the asset (unexpired portion)
ADJUSTING ENTRY FOR ACCRUED EXPENSES
 ACCRUED EXPENSE are expenses
already incurred but not yet paid during
an accounting period and thus, still to be
paid in the next accounting period.
- Also called ACCRUAL OF EXPENSES
- Nagamit na pero „di pa bayad;
babayaran next accounting period
- Dr. Expense – already incurred
Cr. Payable – not yet paid
 Vera Cruz Manuel (2020, p169) illustrated
another example of an accrued expense.
Assume Healthway Clinic issued a 60 day,
25% (per annum) note for a P350,000 cash
loan extended by RP Finance. The note is
dated December 1, 2018 and since it has
run for 30 days. Interest charge should be
recognized on December 31 as an expense
(interest expense) and as a liability
(interest payable) since no payment was
as yet made.
 COMPUTATION: Determine the period that
has transpired from the date of the note
(December 1) to the end of the accounting
period (December 31) which is 30 days.
o Principal x Interest Rate x Time =
INTEREST
o 350,000 x .25 x 30/360 = P7,291.67
- /360 – banker‟s rule
- Automatic rounded off
ADJUSTING ENTRY FOR DEFERRED REVENUE
 DEFERRED REVENUE or UNEARNED
REVENUE refers to revenue already
received but not yet earned, and thus
represents revenue of future periods.
- Also called UNEARNED INCOME
 INCOME METHOD (unearned)
o Ricafrente (2020, p163) illustrated
an example of a Deferred Revenue.
Pinoy Komiz Enterprises is an E-
commerce magazine publication
house with operations in Manila. On
August 1, 2021, the business
received advance subscription fees
worth Php 250,000. To recognize
the receipt of advance payment, the
journal entry on August 1 should be:
43

o “On August 31, 2021, the
company‟s accountant had to
prepare financial statements. When
an accountant review the
subscriptions income account, he
noticed that only Php 150,000 were
actually earned and thus, Php
100,000 (Php 250,000- Php
150,000) is still unearned. To set up
a liability account (with the title
deferred revenue), the accountant
then prepared the following adjusting
entries:
 LIABILITY METHOD (earned)
o The Adjusting Entry on the above
transaction will be:
ADJUSTING ENTRY FOR ACCRUED REVENUE
 ACCRUED REVENUE or ACCRUED
INCOME arises when the business renders
services or delivers goods to its clients but
collections have not yet been received.
 Ricafrente (2020, p165-166) illustrated an
example of an Accrued Revenue. Banco
Gilas has a Credit Commission Program. In
this program, an agent simply offers credit
cards to his prospect clients and a
commission from Banco Loco will be
received after the clients confirmed to get
such. Last June 5, 2021, Media Associates
Enterprises, an agent company, earned
commission revenue of Php 184,000 but
only received Php 135,000 from Banco
Loco. To recognize revenue and to set up
an appropriate receivable account to the
amount to be collected, the accountant of
Media Associates Enterprises prepared the
following adjusting entries.
ADJUSTING ENTRY FOR BAD DEBTS
EXPENSE / DOUBTFUL ACCOUNTS EXPENSE
 The following accounting information is part
of the trial balance of ACC Enterprise
ending May 31, 2021
- Also called UNCOLLECTIBLE
ACCOUNT EXPENSE
ACC ENTERPRISE
Trial Balance
May 31, 2021
 Using the percentage of revenue in
provisioning the allowance for bad debts,
we‟ll assume that the expected uncollectible
account during the year would be equal to
2% of the Service Revenue account during
the period. Therefore, the following
adjustment should be made:
ADJUSTING ENTRY FOR DEPRECIATION
EXPENSE
 The simplest method in computing the
depreciation is the straight line method:
COST SALVAGE VALUE SCRAP VALUE

USEFUL LIFE
 Example: Assume HAPPINESS REPAIR
SERVICE has the following selected trial
balances as of June 30, 2021
44
  Additional Information:
1. Furniture and Fixtures were acquired
January 1, 2020 with an estimated life
of 5 years with a scrap value of P50,000

 120,000 ─ 50,000 = 70,000 ÷ 5 x 1 ½ years

= P21,000

REFERENCES:
Agamata, Franklin T & Berbano Alfred. (2020) . Fundamentals of Accounting.
Manila , Philippines: Education_Online, Inc.
Arenas T, Chua, M. & Villarina F. (2020). Fundamentals of Accounting Principles.
Quezon City: National Book Store
Covid 19 Project for Accountants: Basic Concepts –Presentation of Financial
Statements (PAS 1)
Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting
Principles. USA: Courier Kendallville
Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City:
Bandolin Enterprise
Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City:
Valencia Educational Supply
Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for
Partnership and Corporation. Manila: Millenium Books, Inc.
Valix Conrado T & Valix Christian Aris M. (2018). Theory Financial Accounting.
Manila: GIC Enterprises & Co. Inc.
Vera Cruz- Manuel, Z. (2020). 21st Century Accounting Process 16th Edition.
Quezon City: Raintree Trading & Publishing Inc.

All skills are perfected through the process of

failure. Embrace loss as a necessary part of
improvement.
- Jerry Lynch
PADAYON FUTURE CPAs!

45
 CHAPTER 8
PREPARATION OF FINANCIAL STATEMENTS
LEARNING OBJECTIVES:
1. Enumerate the basic financial statements
2. Illustrate the preparation of the financial
statements
6. PREPARATION OF FINANCIAL STATEMENTS
BASIC FINANCIAL STATEMENTS
1. Income Statement
2. Statement Of Owner's Equity
3. Statement Of Financial Position
4. Statement Of Cash Flows
5. Notes To Financial Statements
an outflow of cash goes for payment of
expenses.
 From Investing Activities, an inflow of
cash comes from sale of Property, Plant &
Equipment while an outflow of cash goes to
acquisition of Property, Plant & Equipment.
 From Financing Activities, cash inflow will
come from loans extended by creditors, or
cash contributions made by investors or
owners while cash outflow will mean cash
paid to creditors or withdrawn by the owner.

STATEMENT OF CASH FLOWS

 It is a basic component of the financial
statements which summarizes the
operating, investing and financing activities
of an entity
 The statement of Cash flow will enlighten
one on how cash is being managed. A 
business should be able to generate
positive net cash flow especially from
operation so that the obligations may be
paid including extinguishments of loans and
cash withdrawals of owners.
 Cash flows are vital to the financial health of
the business. Too little cash or too much
cash will affect the smooth flow of financial
operation. Revenues should easily be
converted into cash so that disbursements
could easily be paid. 
 Some businesses fail because of its inability
to maintain a proper balance between
receipts and disbursements. It is good for
business to be able to generate cash from
operation much more than from financing or
from investing activities.
 For short-run planning, management strictly
monitors the cash to ensure that cash inflow
from operating activities is always more
than its cash outflow.
 Cash flow activities are either an inflow
(source or receipt) which increases cash or
an outflow (uses or disbursement) which
decreases cash.
 These cash activities are classified as:
Operating Activities, Investing Activities
and Financing Activities.
 From operating activities, an inflow of
cash comes from revenue collections and

46
 CHAPTER 9 4. Close the Owner‟s Withdrawal or Drawing
PREPARATION OF THE CLOSING ENTRIES Account to the Capital Accounts
AND
POST-CLOSING TRIAL BALANCE 8. PREPARATION OF THE POSTCLOSING
TRIAL BALANCE
7. PREPARATION OF THE CLOSING ENTRIES
POST- CLOSING TRIAL BALANCE
CLOSING ENTRIES  To test that the general ledger account
 At the end of the accounting period, all are in balance sheet before the
nominal or temporary accounts (revenues transactions of the next accounting period
and expenses) need to be closed so that are posted, a post-closing trial balance
there will be a fresh start for the next should be prepared.
accounting period.  A trial balance, which is prepared after the
 Their balances are not carried from one temporary or nominal accounts (revenues,
period to another unlike the real or expenses, and drawings) have been closed,
permanent accounts. is referred to as Post Closing Trial
 The balance of each revenues and Balance.
expenses accounts are transferred by a  The accounts that are listed in this trial
journal entry to a temporary account called balance are only permanent or real
Income & Expense Summary or Income accounts.
Summary.  The purpose of preparing this trial balance
 Since revenues have credit balances, these is to prove that the remaining permanent
accounts are debited and Income and accounts are in balance as a fresh start
Expense Summary is credited. for the next accounting period.
 In contrast, since expenses have debited
balances, these are to be credited and
Income & Expense Summary is debited.
 Ultimately, the balance of the Income
Summary account is then transferred to
the owner's capital account.
 The process of closing the nominal
accounts and to transfer its balance to the
capital account is referred to as closing
entries.
 After the closing entries are posted to the
general ledger accounts, all nominal
accounts will have zero balance.
 Closing entries are recorded to the
general journal and posted to the general
ledger accounts.
 It is to be noted that only the balances of
nominal or temporary accounts need to
be closed.
 The balances of real or permanent
accounts are carried over to another
period: hence they are not to be closed.

PROCEDURES IN CLOSING ENTRIES

1. Close the Revenue accounts and transfer
its balance to the Income Summary Account
2. Close the Expense accounts and transfer its
individual balances to the Income Summary
Account
3. Close the Income Summary Account and
transfer its balance to capital accounts
47
 CHAPTER 10.1
ACCOUNTING FOR MERCHANDISING,
JOURNALIZING AND POSTING TO THE
LEDGER

NATURE OF A MERCHANDISE CONCERN

 Vera Cruz Manuel (2019) A business
organization that deals with buying and
selling of goods is called a merchandising
or trading concern.
 A merchandising concern earns revenue by
selling goods or merchandise on
wholesale or retail basis.
 Merchandise refers to goods or
commodities bought by the business for PERPETUAL INVENTORY SYSTEM
resale at a certain amount of profit.  Under the Perpetual Inventory System, a
 There are two methods, The Perpetual company maintains a continuous record of
Inventory Method and the Periodic the changes of the physical quantities of
Inventory Method. inventory on hand.
 Under the Perpetual Inventory Method,  In this system, all purchases recorded are
cost of goods sold and ending inventory debited and credited respectively to
may be determined from the accounting Merchandise Inventory
records without a physical counting of Cash or Accounts Payable
goods. To record the purchases
 When a Periodic Inventory Method is
used, cost of goods sold and the ending COMPARING PERIODIC AND PERPETUAL
inventory is determined by physically INVENTORY SYSTEM:
counting the items and multiplying the
number of items counted by its costs.
 Valencia & Roxas (2019, p480) the amount
of inventory on hand and the cost of
inventory sold can be determined by either
the Periodic Inventory System or the
Perpetual Inventory System.

PERIODIC INVENTORY SYSTEM

 Under the Periodic Inventory System, a
company does not maintain a continuous
record of the physical quantities of inventory
on hand.
 In this system, all purchases recorded are
debited and credited respectively to
Purchases
Cash or Accounts Payable
To record the purchases
 In order to arrive at the ending inventory, a
physical counting to be conducted by any of
the staff or whoever is in charge.
 The Cost of Goods Sold then is computed
using the following formula: MERCHANDISING ACCOUNTS
 The following are the trading accounts used
by a merchandising concern:

48
 1. Sales - Sale is an income account which is
credited when the goods or merchandise
are sold either by cash or on account basis.
2. Sales Returns and allowances - Returns
and allowances result from the return of any
unsatisfactory merchandise; this account is
a deduction from sales and is debited when
defective goods are returned by the buyer.
3. Sales Discount - a sales discount is an
account off the regular price of goods that is
granted for early payment. This is debited
when an amount of discount is granted to
the buyer. This account can be deducted
from sales or may be considered as other
expense.
4. Revenue from Sales or Net Sales -
consists of gross sales less returns and
allowances and discounts.
5. Gross Profit from sales - gross profit from
sales is divided by subtracting cost of sales
from net sales.
6. Purchases - Purchases account is the
accumulated cost of all merchandise bought
for resale during an accounting period. It is
debited when goods or merchandise are
bought either on account or on cash basis.
7. Purchase Returns and Allowances- this is a
deduction from purchases. This is credited
when defective merchandise is returned to
the supplier.
8. Purchase Discount - this account is
credited when the supplier granted the
buyer an amount of discount. This can be
treated as deduction from purchase or other
income.
9. Freight In - this is debited if the business
shoulders the payment for the delivery of
goods bought. This is added to purchases
and a part of cost of sales.
10. Freight Out - this is one of the operating
expenses of the business. This is debited
upon payment of the delivery of the goods
sold.
11. Merchandise Inventory - Goods for sales
12. Cost of Goods Sold - cost of goods sold
consists of the cost of merchandise on hand
at the beginning of the accounting period,
net cost of merchandise purchased
including cost of transporting of goods
bought during the period.
THE RULES ON T- ACCOUNTS FOR A
MERCHANDISING CONCERN (PERIODIC
INVENTORY METHOD)
SALES DISCOUNTS
 Two common discounts granted to
customers are (1) Trade Discounts and (2)
Cash Discounts
1. TRADE DISCOUNTS - Merchandise offers
their goods using a catalog where the goods
are listed with their prices. A trade discount
which is a percentage reduction from a
published list price may be granted to
retailers or wholesalers for buying large
quantities or for regularly patronizing the
business.
- Illustration:
Assuming that Furniture and Fixtures with a
list price of P 30,000 was given a trade
discount of 4% and 3%
List Price P 30,000
Less: 4% of P 30,000 1,200
P 28,800
Less 3% of P 28,800 864
Gross Invoice Price P 27,936
2. CASH DISCOUNTS - when goods are sold
on credit, terms of payment depend on the
custom of the industry.
- The usual credit terms which appear on
the invoices are:
- n/30 (which means that the gross amount is
payable within 30 days from the date of
sale), or
- 2/10, n/30 (which means that the account is
payable within 30 days with a 2% discount
given if the account is paid within 10 days
from the date of sale),
- 3/EOM, n/60 (which means that the account
is payable within 60 days with a 3%
discount given if the account is paid until the
end of the month from the date of sale) and
- 2/10, 1/15, n/30 (which means that the
account is payable within thirty days with a
2% discount given if the account is paid
within ten days from date of sale, but only a
1 % discount if the account is paid after ten
days but within fifteen days from date of
sale)
STEPS IN THE ACCOUNTING CYCLE
1. Analyzing the business documents or
transactions
49
 2. Journalizing - this is the process of
recording the transactions in a journal
3. Posting - transactions as classified and
recorded in the journal are transferred to
appropriate accounts in the general ledger.
4. Preparing the unadjusted trial balance
5. Preparing the adjusting entries
6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing the Post- Closing Trial Balance
9. Preparing the Reversing Entries
1. ANALYZING THE BUSINESS DOCUMENTS
 One basic accounting principle is the
verifiability of accounting records.
 The truthfulness and the accuracy of the
source documents will assure the user of
financial information that is free from bias
and error and faithfully represents what it
purports to represent
SOURCE DOCUMENTS
 Are the forms, evidences or legal/ official
papers that serve as supports to the
underlying economic transactions. These
evidential matters support the objectivity of
accounting records
 Examples
1. Official Receipt - is a written
acknowledgement of something received as
money or goods.
2. Check Voucher - is a document that serves
to recognize a liability and authorize the
disbursement of cash.
3. Check - is a draft upon a bank and payable
on demand, signed by the maker or drawer,
containing an unconditional promise to pay
a certain sum of money to the order of the
payee.
4. Promissory Note - is a promise or
engagement in writing to pay a specified
sum at a time therein, limited, or on
demand, or at sight to a person therein
named, or to his order, or bearer
5. Commercial Invoice - is a written
statement of merchandise sold to the buyer,
together with the prices and charges of
merchandise sent or to be sent to him.
6. Bank Deposit Slip - is a document which
serves as an evidence of an act of placing
money in the custody of a bank or banker,
for safety or convenience, to be withdrawn
at the will of the depositor or under rules or
regulations agreed upon.
7. Debit Memorandum - is a written notice
which informs client of reducing his account.
8. Credit Memorandum - informs the client of
increasing his account.
9. Billing or Statement of Account - is a
report issued periodically by a bank or
creditor to a customer setting forth the
amounts billed, credits given and balance
due
2. ANALYZING AND RECORDING
TRANSACTIONS ( JOURNALIZING)
 The Chart of Accounts - is a listing of
account titles which guides the bookkeeper
in the recording of the transactions. The
number and the nature of accounts depend
on the type of business operations.
SAMPLE PROBLEM: (PERIODIC METHOD)
 The following are the CHART OF
ACCOUNTS for Journalizing, Posting, Trial
Balance, Closing Entries and Post Closing
Trial Balance of THOR General
Merchandise
 Use the following CHART OF ACCOUNTS
for Financial Statement Preparation
CHARACTERISTICS OF AN ACCOUNT
 An account in its simplest form has three
parts.
 First, each account has a title, which is the
name of the item recorded in the account.
 Second, each account has a space for
recording increases in the amount of the
item.
 Third, each account has a space for
recording decreases in the amount of the
item.
50
  The account form presented below is called  It is known as the “Book of Original Entry”
a T account because it resembles the letter because it is the book where the economic
T. transactions are first recorded.
 The left side of the account is called the  Recording Transactions in the Journal is
debit side, and the right side is called the called “Journalizing”
credit side.  Simultaneously or after analyzing the effects
of the transaction on the accounting
elements, accountants record the
transactions in the books of accounts; first
in the Journal and then in the Ledger.
 The Journal provides a chronological
 Amounts entered on the left side of an
record of transactions with explanations and
account, regardless of the account title are
clear references to their supporting
called debits to the account. When debits
documents with corresponding debits and
are entered in the account, the account is
credits, while Ledger provides a classified
said to be debited.
record of accounts with their respective
 Amounts entered on the right side of an
running balances.
account are called credits, and the account
 Each Entry made is called a Journal Entry.
is said to be credited.
 Each Journal Entry contains the following
 Debits and Credits are sometimes
items:
abbreviated as Dr. and Cr.
1. Date
2. The Account title and the amounts to
THE RULES ON T- ACCOUNTS
be debited
ASSETS
3. The Account title and the amount to
DEBITS CREDITS be credited
INCREASES DECREASES 4. Explanation
 A Journal Entry with one debit and one
LIABILITIES credit is called a Simple Journal Entry
DEBITS CREDITS  A Journal Entry which has more than one
DECREASES INCREASES debit or more than one credit is called a
Compound Journal Entry.
CAPITAL
CREDITS On the month of September, 2017, THOR
GENERAL MERCHANDISE has the following
INCREASES
Trial Balance.
WITHDRAWAL
DEBITS
INCREASES

REVENUE/ SALES
CREDITS
INCREASES

EXPENSES/ COST OF GOODS SOLD

DEBITS
INCREASES

THE JOURNAL
 The accounting record in which the
economic transactions and events are
initially recorded is called a “Journal”.

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52
 increases, decreases, and balances of
items in the chart of accounts.
 A ledger format may be used where
after the date column; there is a debit
and credit column. The last column
gives a running balance after every
posting made.
 NEED FOR A LEDGER
1. Items of similar items are
grouped together
2. It is easier to locate the item if
information about it is needed

On the month of September, 2017, THOR

GENERAL MERCHANDISE has the following Trial
Balance.

To illustrate the General Ledger of THOR

GENERAL MERCHANDISE
3. POSTING FROM THE GENERAL
JOURNAL TO THE GENERAL LEDGER
 The T- Account Form is used in the
classroom for preliminary analysis of
transactions. In actual practice, a formal
book of account is used containing not
only the account title, date and amount
but also the page reference (to identify
the entry source), the account number
and the balance of the account. All
accounts are compiled in one book
called the General Ledger wherein a
separate page is maintained for each
account. Each page is called a Ledger.
 Posting is the process of transferring
figures from the journal to the ledger
accounts
 General Ledger is the collection of all
ASSET, LIABILITY, OWNER‟S EQUITY,
REVENUE, and expense accounts. This
is a book of accounts in which data from
transactions recorded in journals are
posted and thereby classified and
summarized also called ledger.
 Ledger is a tool used for classifying and
summarizing information about

53
54
 CHAPTER 10.2
PREPARATION OF TRIAL BALANCE AND
FINANCIAL STATEMENT PRESENTATION

4. PREPARATION OF TRIAL BALANCE

 A Trial Balance is a list of accounts with
open balances in the general ledger. It
proves the quality of the debits and the
credits in the general ledger.
 The trial balance consists of two
classifications: the trial balance of balances
and the trial balance of totals.
 The trial balance of balances contains
account with open balances.
 An account is said to have a debit balance if
the debit total is more than the credit total
and is said to have a credit balance if the
credit total is more than the debit total.
 If the debit side and credit side are equal,
the account is a zero balance or closed
account.
 The other form of trial balance is the
balance of totals. In this form, the total of
the debits and the total of the credits of
each account are listed.
EXERCISES
PROCEDURES IN TRIAL BALANCE PROBLEM 1:
PREPARATION  Note: Use the following CHART OF
1. Write the heading of the trial balance. The ACCOUNTS for Journalizing, Posting, Trial
heading of the trial balance includes the Balance, Closing Entries and Post Closing
following: Trial Balance
a) The name of the business or the
owner
b) Title of the list or trial balance
c) Date of the trial balance
2. Provide a column for the accounts and two
money columns - a debit and a credit
3. The accounts should be written in just one
column arranged in the following sequence:
a) Assets
 Use the following CHART OF ACCOUNTS
b) Liabilities
for Financial Statement Preparation
c) Capital
d) Income
e) Expenses
4. Write the amounts opposite the
corresponding accounts under the debit
money column, if the account is a debit
balance and under the credit money
column, if the account is a credit balance.
5. Foot the money columns. Double rule the
totals.
FINANCIAL STATEMENTS
Using the Ledger balances of THOR GENERAL  A complete set of basic financial statements
MERCHANDISE, the trial balance will appear as includes the following components.
follows:
55
a) Income Statement (Statement of
Comprehensive Income) - is a
report which describes how the
business operated over a given
period of time. (Usually one year).
This accounting report shows the
operating performance of the
business entity for a given period of
time
ACCOUNTING EQUATION
 ASSETS =
LIABILITIES + OWNER‟S EQUITY
b) Statement of Owners Equity - it
explains the activities for a period of
time that led to a change in the
owner‟s share over the net assets of
the business.
c) Statement of Financial Position
(Balance Sheet)- gives information
about the financial position of the
business by showing the list of its
assets (Cash and properties) and
Liabilities (debts or obligations to
pay) and from which the net worth of
the business representing equity or
share of the owner could be
determined.
 Provides a snapshot of the
firm‟s financial position at a
specific point in time
d) Statement of Cash Flow - is a
basic component of the financial
statements which summarizes the
operating, investing and financing
activities of an entity.
 The statement of Cash flow
will enlighten one on how
cash is being managed.
56
  A business should be able to loans extended by creditors,
generate positive net cash or cash contributions made
flow especially from by investors or owners while
operation so that the cash outflow will mean cash
obligations may be paid paid to creditors or withdrawn
including extinguishments of by the owner
loans and cash withdrawals
of owners.
 Cash flows are vital to the
financial health of the
business.
 Too little cash or too much
cash will affect the smooth
flow of financial operation.
 Revenues should easily be
converted into cash so that
disbursements could easily
be paid.
 Some businesses fail
because of its inability to
maintain a proper balance
between receipts and
disbursements.
 It is good for business to be
able to generate cash from e) Notes to Financial Statements -
operation much more than are used to report information that
from financing or from does not fit into the body of the
investing activities. statements in order to enhance the
 For short-run planning, understandability of the statements.
management strictly monitors
the cash to ensure that cash EXERCISES:
inflow from operating
activities is always more than
its cash outflow.
o Cash flow activities are either an
inflow (source or receipt) which
increases cash or an outflow (uses
or disbursement) which decreases
cash.
o These cash activities are classified
as: Operating Activities, Investing
Activities and Financing Activities.
 From operating activities,
an inflow of cash comes from
revenue collections and an
outflow of cash goes for
payment of expenses.
 From Investing Activities,
an inflow of cash comes from
sale of Property, Plant &
Equipment while an outflow
of cash goes to acquisition of
Property, Plant & Equipment.
 From Financing Activities,
cash inflow will come from

57
 CHAPTER 11
SPECIAL JOURNALS

SPECIAL JOURNALS
 A business may encounter large quantities
of similar and recurring transactions which
may create congestion and confusion of
recorded repeatedly in a single day or a
month in the general journal.
 In merchandising business, for example, 2. CASH RECEIPTS JOURNAL
sales transactions occur a thousand times o Used to record transaction resulting
in a day so it would be unnecessary and from receipts of cash either from the
impractical to credit the sales account collections of receivables or from other
repeatedly. sources
 Consequently, a special journal must be
prepared to facilitate efficient and practical
recording of similar and recurring
transactions.

KINDS OF SPECIAL JOURNALS

 The use of special journals with the
inclusion of the two column general journal, 3. PURCHASE JOURNAL
several persons and five at most can do the o Used to record transactions pertaining
journals and the general journal as well as to purchase of merchandise/ goods on
the specific type of transactions for which account
they are intended for:
Special Journal Specific Transactions
Journals Symbol Recorded
1. Sales Journal SJ Sales of merchandise on
account
2. Purchase PJ Purchases of
Journal merchandise on account
3. Cash Receipt CRJ Receipt of cash from all
Journal sources
4. Cash CDJ Payment of cash for any 4. CASH DISBURSEMENT/ PAYMENT
Disbursement/ purpose JOURNAL
Payment Journal o Used to record transactions pertaining
5. General GJ All other transactions that to disbursement of cash either as
Journal do not fit in the four payment of account to creditors or
special journals payments of expenses
 There can only be one original journal.
 Therefore, these special journals become
the books of original entry.
 Any transactions recorded in these journals
shall not anymore be recorded in the
general journal.
 Accordingly, if special journals are used, the
general journal shall only be used for entries
5. GENERAL JOURNAL
of other transactions not recorded in the
o When special journal are used, a
special journals, including adjusting and
general journal must be provided for
closing entries.
transactions which cannot be recorded
in the special journals. Among these
FORMS OF SPECIAL JOURNALS
transactions are sales returns, purchase
1. SALES JOURNAL
returns and allowances, adjusting
o This is used to record sales
entries and closing entries.
transaction on account or on credit
58
Note: See Excel special journal templates for the
sample illustrative problems

REFERENCES:
Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals of Accounting.
Manila Philippines: Education_Online, Inc.

Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of Accounting Principles.

Quezon City: National Book Store

Covid 19 Project for Accountants: Basic Concepts –Presentation of Financial

Statements (PAS 1)

Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting
Principles. USA: Courier Kendallville

Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City:
Bandolin Enterprise

Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City:
Valencia Educational Supply

Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for

Partnership and Corporation. Manila: Millenium Books, Inc.

Valix Conrado T & Valix Christian Aris M. (2018). Theory Financial Accounting.
Manila: GIC Enterprises & Co. Inc.

Vera Cruz- Manuel, Z. (2018). 21st Century Accounting Process 16th Edition.
Quezon City: Raintree Trading & Publishing Inc.

“The first step to getting what you want is

having the courage to get rid of what you
don’t.”

“PADAYON FUTURE CPAs”

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