THM 10 Entrepreneurship in H and T - Final

Issue No.
1 Page 67 of 96
ST. THERESE- MTC COLLEGES THM10
E
S E
MT
C Iloilo, Philippines ENTREPRENEURSHIP IN
R TOURISM AND HOSPITALITY
C
E
OL
. T H
LEGES
Revision No. 1 Effectivity Date: STUDENT LEARNING MODULE
ST
Reviewed by: Approved by:

01 September 2021
QMR President
Lesson 8
Financial Statement Analysis (6 hours)
Competence, Course Outcomes and Learning Outcomes
Competence:
Apply Financial Analysis
Course Outcome/s:
By the end of the course, the student is able to:
1. Use financial information in the operation of the business.
2. Demonstrate the relevance of entrepreneurship inn tourism and hospitality industry.
Learning Outcomes:
At the end of the lesson, the students must be able to:
1. Define Financial Statement Analysis;
2. Identify the different users of financial statement;
3. Generate and analyze financial reports in the business;
4. Recognize the different financial statement analysis methods.
Overview
Financial Statement provides an information of

the company’s past performance, a picture of its current
strength and an idea into the future potential of the firm.
Financial analysis identifies the company’s strengths
and weaknesses suggest actions to take advantage of
the strengths and correct its weaknesses. Thus, the
lesson gives insights to students on what is a financial
statement analysis, the users of financial statements
and the methods of financial state analysis.
©All Rights Reserved

Issue No. 1 Page 68 of 96
E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Discussion
Learning Module 8.1 Financial Statement Analysis

Financial Statement Analysis is a method of reviewing and analyzing a company's accounting
reports (financial statements) to gauge its past, present, or projected future performance. This
process of reviewing the financial statements allows for better economic decision making.
Globally, publicly listed companies are required by law to file their financial statements with
the relevant authorities. For example, publicly listed firms are required to submit their financial
statements to the Securities and Exchange Commission (SEC). Firms are also obligated to provide
their financial statements in the annual report that they share with their stakeholders. As financial
statements are prepared to the meet requirements, the second step in the process is to analyze
them effectively so that future profitability and cash flows can be predicted.
Therefore, the main purpose of financial statement analysis is to utilize information about the
past performance of the company to predict how it will fare in the future. Another important purpose
of the analysis of financial statements is to identify potential problem areas and troubleshoot those.
8.2 Users of Financial Statement Analysis

There are different users of financial
statement analysis. These can be classified
into internal and external users. Internal
users refer to the management o' the
company who analyzes financial statements
to make decisions related to the operations
of the company. On the other hand, external
users do not necessarily belong to the
company but still hold some sort of financial interest. These include owners, investors, creditors,
government, employees, customers, and the general public. These users are elaborated on below:

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
1. Management
The managers of the company use their financial statement analysis to make intelligent
decisions about their performance. For instance, they may gauge cost per distribution channel,
or how much cash they have left, from their accounting reports and make decisions from the
analysis results.
2. Owners
Small business owners need financial information from their operations to determine
whether the business is profitable. It helps in making decisions like whether to continue
operating the business, whether to improve business strategies or whether to give up on the
business altogether.
3. Investors
People who have purchased stock or shares in a firm, need financial information to
analyze the way the company is performing. They use financial statement analysis to determine
what to do with their investments in the company. So depending on how the company is doing,
they will either hold onto their stock, sell it, or buy more.
4. Creditors
Creditors are interested in knowing if a company will be able to honor its payments as they
become due. They use cash flow analysis of the company's accounting records to measure the
company's liquidity, or its ability to make short-term payments.
5. Government
Governing and regulating bodies of the state look at financial statement analysis to
determine how the economy is performing in general so they can plan their financial and
industrial policies. Tax authorities also analyze a company's statements to calculate the tax
burden that the company has to pay.
6. Employees
Employees need to know if their employment is secure and if there is a possibility of a
pay raise. They want to be abreast of their company's profitability and stability. Employees may
also be interested in knowing the company's financial position to see whether there may be
plans for expansion and hence, career prospects for them.

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
7. Customers
Customers need to know about the ability of the company to service its clients in the
future. The need to know about the company's stability of operations is heightened if the
customer (i.e. a distributor or procurer of specialized products) is dependent wholly on the
company for its supplies.
8. General Public
Anyone in the general public, like students, analysts, and researchers, may be interested
in using a company's financial statement analysis. They may wish to evaluate the effects of the
firm on the environment, or the economy, or even the local community. For instance, if the
company is running corporate social responsibility programs for improving the community, the
public may want to be aware of the future operations of the company.
8.3 Methods of Financial Statement Analysis

There are two main methods of analyzing financial statements: horizontal or trend analysis,
and vertical analysis. These are explained below along with the advantages and disadvantages of
each method.
1. Horizontal Analysis
Horizontal analysis is the comparison of
financial information of a company with historical
financial information of the same company over
several reporting periods. It could also be based on the
ratios derived from the financial information over the same time span. The main purpose is to see
if the numbers are high or low in comparison to past records, which may be used to investigate
any causes for concern. For example, certain expenditures that are high currently, but we're well
under budget in previous years may cause the management to investigate the cause for the rise in
costs; it may be due to switching suppliers or using better quality raw material.
This method of analysis is simply grouping all information, sorting them by time period:
weeks, months, or years. The numbers in each period can also be shown as a percentage of the

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
numbers expressed in the baseline (earliest/starting) year. The amount given to the baseline year
is usually ioe. This analysis is also called dynamic analysis or trend analysis.
Horizontal analysis car' be performed in one of the following two different methods i.e.
absolute comparison or percentage comparison.
• Absolute Comparison
One way of performing horizontal analysis is comparing the absolute currency amounts of
some items over a period of time. For example, cash in hand at the end of an accounting period
can be compared to other accounting periods. This method helps identify the items which are
changing the most.
• Percentage Comparison
In the second method of horizontal analysis, percentage differences in certain items are
compared over a period of rime. The absolute currency amounts are converted into percentages
for comparison. For example, a change in cash from PHP 5,000 to PH P 5,500 will be reported as
io% ([PHP 5,500 — PHP 5,000] ÷ PHP 5,000) increase in cash. It can also be reported as -io`t,
(PHP 5,500 # PHP 5,000), which means that the cash is 110% of the cash at the end of a previous
accounting period. This method is useful when comparing the performance of two companies of
different scales and sizes.
Advantages and Disadvantages of Horizontal Analysis
When the analysis is conducted for all financial statements at the same time, the complete
impact of operational activities can be seen on the company's financial condition during the period
under review. This is a clear advantage of using horizontal analysis as the company can review its
performance in comparison to the previous periods and gauge how it's doing based on past results.
A disadvantage of horizontal analysis is that the aggregated information expressed in the
financial statements may have changed over time and therefore will cause variances to creep up
when account balances are compared across periods.
Horizontal analysis can also be used to misrepresent results. It can be manipulated to show
comparisons across periods which would make the results appear stellar for the company. For
instance, if the profits for this month are only compared with those of last month, they may appear

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
outstanding but that may not be the case if compared with the same month the previous year. Using
consistent comparison periods can address this problem.
2. Vertical Analysis
Vertical analysis is conducted on
financial statements for a single time period only.
Each item in the statement is shown as a base
figure of another item in the statement, for a
given time period, usually for a year. Typically,
this analysis means that every item on an
income and loss statement is expressed as a percentage of gross sales, while every item on a
balance sheet is expressed as a percentage of total assets held by the firm.
Vertical analysis is also called static analysis because it is carried out for a single time
period.
Advantages and Disadvantages of Vertical Analysis
The vertical analysis only requires financial statements for a single reporting period. It is
useful for inter-firm or inter-departmental comparisons of performance as one can see relative
proportions of account balances, no matter the size of the business or department.
Because basic vertical analysis is constricted by using a single time period, it has the
disadvantage of losing out on comparison across different time periods to gauge performance. This
can be addressed by using it in conjunction with timeline analysis, which shows what changes have
occurred in the financial accounts over time, such as a comparative analysis over a three-year
period. For instance, if the cost of sales comes out to be only 30 percent of sales each year in the
past, but this year the percentage comes out to be 45 percent, it would be a cause for concern.
8.4 Key Financial Statements & How They Are Analyzed

The main types of financial statements are the balance sheet, the income statement, and the
statement of cash flows. These accounting reports are analyzed to aid the economic decision-
making of a firm and also to predict profitability and cash flows.

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
I. The Balance Sheet

The balance sheet shows the current financial position of the firm, at a given single point in
time. It is also called the statement of financial position. The structure of the balance sheet is laid out
such that on one side assets of the firm are listed, while on the other side liabilities and
shareholders' equity is shown. The two sides of the balance sheet must balance as follows:
Assets = Liabilities + Shareholders' Equity
The main items on the balance sheet are explained below:
Current Assets
Current assets held by the firm refer to cash and cash equivalents. These cash equivalents
are assets that can be easily converted into cash within one year. Current assets include marketable
securities, inventory, and accounts receivable.
Long-term Assets
Long-term assets are also called non-current assets and include fixed assets like plant,
equipment and machinery, and property, etc.
A firm records depreciation of its fixed, long-term assets every year. It is not an actual
expense of cash paid but is only a reduction in the book value of the asset. The book value is
calculated by subtracting the accumulated depreciation of prior years from the price of the assets.
Total Assets = Current Assets + Book Value of Long-Term Assets
Current Liabilities
Current liabilities of the firm are obligations that are due in less than one year. These include
accounts payable, deferred expenses, and also notes payable.
Long-term Liabilities
Long-term liabilities of the firm are financial payments or obligations due after one year. These
include loans that the firm has to repay in more than a year, and also capital leases which the firm
has to pay for in exchange for using a fixed asset.
Shareholders' Equity
Shareholders' equity is also known as the book value of equity or net worth of the firm. It is
the difference between total assets owned by a firm and total liabilities outstanding. It is different

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
from the market value of equity (stock market capitalization) which is calculated as follows: the
number of shares outstanding multiplied by the current share price.
Example of Balance Sheet:
Hotel & Restaurant
Balance Sheet
As of December 31, 2019
ASSETS LIABILITIES & SHAREHOLDER'S EQUITY
CURRENT ASSETS LIABILITIES
Cash 250, 00.00 Accounts Payable 250,000.00
Accounts Receive 15,000.00 Notes Payable 15,000.00
Office Supplies 6,000 00 Bonds Payable 6,000.00
Hotel Supplies 560,000.00 Salaries & Wages Payable 560,000.00
TOTAL CURRENT ASSETS 831,000.00 Taxes Payable 258 000.00
TOTAL LIABILITIES 1,089,000.00
NON-CURRENT ASSETS
Building 3,000,000_00
Property, Plant &
2,150,000.00 SHAREHOLDER'S EQUITY
Equipment
Long-Term Investment 505.000.00 Common Shares 4,256,000.00
TOTAL NON-CURRENT
ASSETS 5,655,000.00 Preferred Shares 991,000.00
Retained Earnings 150 000.00
TOTAL SHAREHOLDER'S
TOTAL ASSETS 6,486,000.00 5,397,000.00
EQUITY
TOTAL LIABILITIES & SHAREHOLDER'S
EQUITY 6 486 000.00
Balance Sheet Analysis

The balance sheet is analyzed to obtain some key ratios that help explain the health of the
firm at a given point in time. These metrics are as follows:

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Debt-Equity Ratio
Debt-Equity Ratio = Total Debt Total Equity
The debt-equity ratio is also called a leverage ratio. It is calculated to assess the leverage, o
gearing, of a firm to show how much it relies on debt to finance its activities. This ratio has pertinent
implications for the financial health of the firm and the risk and return of its shares.
On the example balance sheet, the total Liabilities (Debt) of the company is Php 1,089,000
and the Total Shareholder's Equity is Php 5,397,000. Thus:
Debt-Equity Ratio = Php 1,089,000 / Php 5,397,000
Debt-Equity Ratio = 20.18%
Current Ratio
Current Ratio = Current Assets / Current Liabilities
The current ratio helps investors and creditors understand the liquidity of a company and hour
easily that company will be able to pay off its current liabilities.
For example, the total current assets of the company are Php 831, 000 and the total current
liabilities of the company is Php 825,000. Thus:
Current Ratio = Php 831,000 / Php 825,000
Current Ratio = 1.01 times
Quick Ratio
The quick ratio measures a company's ability to meet its short-term obligations with its most
liquid assets and therefore excludes inventories from its current assets. It is also known as the "acid-
test ratio":
Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Current Liabilities
Example, consider the following:
Cash Php 120,000
Marketable Securities 50,000
Accounts Receivable 58,000
Current Liabilities 63,500

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Quick Ratio =(120,000 +50,000 + 58,000; - 63,500

Quick Ratio = 3.59 times
II. The Income Statement

The purpose of an income statement is to report the revenues and expenditures of a firm over
a specific period of time. It was previously also called a profit and loss account. The general
structure of the income statement with major components is as follows:
Sales revenue
- Cost of goods sold (COGS) = Gross profit
- Selling, general and administrative costs (SG&A)
- Research and development (R&D)
= Earnings before interest, taxes, depreciation, and amortization (EBITDA)
- Depreciation and amortization
=Earnings before interest and taxes (EBIT)
- Interest expense
= Earnings before taxes (EBT)
- Taxes
= Net income
The net income on the income statement, if positive, shows that the company has made a
profit. If the net income is negative, it means the company incurred a loss.
ABC Hotel & Restaurant

Income Statement
For the year ended December 31, 2019
Sales revenue 25,000,000.00
Cost of goods sold (COGS) (19,568,000.00)
Gross profit 5,432,000.00
Selling, general and (1,256,800.00)
administrative costs (SG&A)

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Research and development (R&D) (112,300.00)

Earnings before interest, taxes, 4,062,900.00
depreciation and amortization (EBITDA)
Depreciation and amortization (1,980,560.00)
Earnings before interest and taxes (EBIT) 2,082,340.00
Interest expense (359,660.00)
Earnings before taxes (EST) 1,722,680.00
Taxes (516,804,00)
Net income 1 205 876.00
Earnings per share can be derived from knowing the total number of shares outstanding of
the company:
Earnings per Share
Earnings per Share = Net Income / Shares Outstanding
Income statement Analysis

Some useful metrics based on the information provided in the income statement and the
balance sheets are as follows:
Profitability Ratios:
1. Net profit margin: This ratio calculates the amount of profit that the company has earned
after taxes and all expenses have been deducted from net sales.
Net profit Margin =Net Income I Net Sales
2. Return on assets (ROA): This ratio shows the percentage of profit a company earns in
relation to its overall resources.
Return on assets = Net Income / Average Total Assets
3. Return on Equity: This ratio is used to calculate company profit as a percentage of total
equity.
Return on Equity = Net Income / Book Value of Equity

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Valuation Ratios:
Price to earnings ratios (PIE ratio)
The P/E ratio is used to evaluate whether the value of a stock is proportional to the level of
earnings it can generate for its stockholders. It assesses whether the stock is overvalued or
undervalued.
(P/E) Ratio = Market Capitalization / Net Income = Share Price I Earnings per Share
Ill. The Statement of Cash Flows

The statement of cash flows shows explicitly the sources of the firm's cash and where the
cash is utilized. It is essentially a statement whereby the net income is adjusted for non-cash
expenses and any changes to the networking capital. It also reflects changes in cash coming from or
being used by, investing, and financing activities of the firm. The structure and main components of
the cash flow statement are as follows:
 Cash from operating activities = Net income Depreciation ± Changes in net working capital
 Cash from financing activities = New debt + New shares - Dividends - shares repurchased
 Cash from investment activities = Capital expenditure - Proceeds from sales of long-term
assets
All three of the above determine the bottom line: changes in cash flows.
Cash Flows Statement Analysis
To measure how much cash is available to the company for investments without outside
financing or money diverting from operations, it is useful to conduct a simple cash flow statement
analysis. The free cash flow, as the name suggests, allows a company to be able to pay dividends,
repay its debts, buy back its stock, and also make new investments to facilitate future growth. The
excess cash produced by the company, free cash flow, is calculated as follows:
Net Income
+ Amortization/Depreciation
- Changes in Working Capital
- Capital Expenditures

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
= Free cash Flow

= Free Cash Flow
Some analysts also study the cash flow from operating activities to see if the company is
earning "quality" income. For the company to be doing extremely well, the cash from operating
activities must be consistently greater than the net income earned by the company.
8.5 Other Financial Statement Information

Apart from the key financial statements, complete financial reporting statements also include
the following:
Business and Operating Review
The business and operating review are also called ''management discussion and analysis". It
serves as a preface to all the complete reporting statements in which the management talks about
recent events, discloses essential information regarding expansion and plans, and discusses
significant developments in the business industry.
The business and operating review is a good place for the company to share any good news
with the general public. They have room to elaborate on plans that would help enhance the
company's image and address any unpleasant events that may have occurred, to show the
customers that they truly care about talking openly to their customers.
Statement of Change in Shareholders' Equity
The statement of change in shareholders' equity is also known as equity analysis. It provides
information about all the changes in the company's equity value over a certain time period. It
reconciles the opening balances of the equity accounts with the closing balances. There are two
types of changes expressed in the statement of change in shareholders' equity:
1. Changes arising from any transactions conducted with shareholders of the company. For
example, issuing new shares, paying dividends, purchasing treasury stock, and issuing
bonus shares, etc.

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
2. Changes that are a result of alterations in the comprehensive income of the company.
These changes might include revaluation of fixed assets, net income for the period and fair
value of for-sale investments, etc.
Sample Statement of Changes in Shareholders' Equity:
Statement of Changes in Shareholders' Equity
Common Stock, Paid•in Capital Retained Treasury Shareholders
in Excess of
Earnings Stock Equity
Php 1 Par Par
Balance on January 1 20,000,000.00 25,000,000.00 11,000,000.00 -5,000,000.00 51,000,000.00
Issued Shares for Cash 3,000,000.00 12,000,000.00 15,000,000.00
Purchase of Treasury
Stock -2,000,000.00 -2,000,000.00
4,000,000.00
Net Income -1,500,000.00 4,000,000.00
Cash Dividends -1,500,000.00
Stock Dividends 1,150,000.00 4,600.000.00 -5,750,000.00
Balance on December 31 24,150,000 41,,600,,000.00 7,750,,0000.,00 (7,000,000.00 66,500,000.00
Notes to the Financial Statements

Notes to the financial statements are basically additional information provided in a company's
financial statements. These notes provide details and information that are left out of the main
reporting documents. They are important for the sake of clarity on many points as they outline the
accounting methodology used for recording certain transactions. The notes to the financial
statements are essentially footnotes because if included in the main statements, they would obscure
the important information, as they are generally quite elaborate and detailed.
The following notes are usually used to impart important disclosures for explaining the
numbers on the financial statements:
1. Notes that show the basis for presentation
2. Notes that advise on significant accounting policies
3. Notes about valuing inventory

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
4. Notes about depreciating assets

5. Notes about intangible assets
6. Notes that disclose subsequent events
7. Notes about employee benefits
8. Notes that reveal contingency plans
Problems with Financial Statement Analysis

Financial statement analysis is a brilliant to )1 to gauge the past performance of a company
and predict future performance, but there are several issues that one should be aware of before
using the financial statement analysis results blindly, as these issues can interfere with how the
results are interpreted. Some of the issues are:
Comparability between Companies
This is a big issue for analysts because they can seemingly compare financial statement
analyses between different companies based on ratios used, but in reality, it may not paint an
accurate picture. The financial ratios of two different companies may be compared to see how they
match up against each other, but each company may aggregate all their information different from
each other to draw up their accounting statements. This may lead to incorrect conclusions drawn
about a company in relation to other companies in the industry.
Comparability between Periods
The change in accounts where financial information is stored may skew the results of the
financial statement analysis, from one period to the next. For example, a company records an
expense in one period as the cost of goods sold, while in another period, it is recorded as a selling
and distribution expense, the analysis between those two periods would not be comparable.
Operational Information
Analysts do not take into account the operational information of a company, as only financial
information is analyzed and reviewed. There may be several indicators in operational information of
the company which may be predictors of future performance, for example, the number of backlogged
orders, any changes in-licenses or warranty claims submitted to the company, or even changes in

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
the culture and work environment. Therefore, analysis of financial information may only relay half the
story.
References
T1 - Arenas, C.D, 2020, Entrepreneurship in Tourism and Hospitality Industry
Checkpoint It is now time to use those

skills you have learned so
far. Goodluck!
Activity 13
Identification
Analyze the following items, and give the correct answer.
1. Shows the financial position of the company, at a certain point in time.
2. It is also called station analysis because it is carried out for a single time period.
3. These are assets that can be easily converted to cash within one year.
4. Comparison of financial information of a company with historical financial information of the
same company over several reporting period.
5. A method of reviewing and analyzing a company’s accounting reports.
6. They are interested in knowing if the company will be able to honor its payments as they
become due.
7. Percentage differences in certain items are compared over a period of time.
8. These are called non-current assets which include fixed assets.
9. Obligations that is due in the less than one year.
10. It refers to the difference between total assets owned by the firm and total liabilities
outstanding.

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Do this
Activity 14
Computation
The following financial information is presented to you:
Balance Sheet
ASSETS LIABILITIES & SHAREHOLDER'S EQUITY

CURRENT ASSETS LIABILITIES
Cash 250,000.00 CURRENT LIABILITIES
Accounts Receivable 15.000.00 Accounts Payable 225000.00
Marketable Securities 57,000.00 Notes Payable 40,000.00
Office Supplies 6,000.00 Salaries & Wages Payable 100,000.00
Hotel Supplies 560,000.00 Taxes Payable 200 000 00
TOTAL CURRENT
ASSETS 888,000.00 TOTAL CURRENT LIABILITIES 565,000.00
NON-CURRENT ASSETS NON-CURRENT LIABILITIES

Building 3,000.000 Mortgage Payable 466.000 00
Property, Plant &
Equipment 2.150;000.00 Bonds Payable 90.000.00
Long-Term Investment 450.000 00 TOTAL NON-CURRENT 556,000.00
TOTAL NON-CURRENT LIABILITIES
ASSETS 5,600.000 00 TOTAL LIABILITIES 1,121,000.00
TOTAL ASSETS 6,411_000M SHAREHOLDER'S EQUITY

Common Shares 4,156,000.00
Preferred Shares 1,091,000.00
Retained Earnings 120.000 00
TOTAL SHAREHOLDER'S EQUITY 5,367,000.00
TOTAL LIABILITIES &
SHAREHOLDER'S EQUITY 6,488,900.00

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
On December 31, 2019, the company reported a Net Sales of Php 34,525,000.00 and a Net
Income of Php 4,143,000.00.
Compute for the following:

1. Current Ratio
Solution:
Final Answer
2. Quick Ratio
Solution:
Final Answer
3. Debt to Equity Ratio

Solution:
Final Answer

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Assessment
Activity 8
Essay
Answer the following questions:
1. What is financial statement analysis? Explain its importance.
2. What are other ratios or methods that can be used in analyzing financial statements.
3. Explain the two methods of Analyzing financial statements.
4. Who are the main users of financial statements?
For handwritten output:

a. Write your output in an A4 size bond paper
b. Write legibly
For computerized output (online/physical submission)

a. Use A4 size bond paper
b. Font style/size: Arial Narrow 12
c. Spacing: 1.5
d. Alignment: Justified
e. Margin: 1 inch in all sides

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Lesson 9
Introduction to Bookkeeping (9 hours)
Competence, Course Outcomes and Learning Outcomes
Competence:
Develop understanding in the concept of entrepreneurship.
Course Outcome/s:
By the end of the course, the student is able to:
1. Demonstrate the relevance of entrepreneurship in tourism and hospitality industry.
2. Develop a business plan
3. Critically assess factors that influence the operation and development of hospitality and
tourism industry.
4. Use financial information in the operation of the business
Learning Outcomes:
At the end of the lesson, the students must be able to:
1. Understand what is bookkeeping and Business Accounts.
2. Identify the different types of accounts.
3. Understand the double-entry bookkeeping system; so Perform key bookkeeping tasks.
Overview
Bookkeeping is important to promise a paper trait

which tells you exactly where your money is going and when
it is coming in. Without bookkeeping, you won’t be able to
determine your break-even point. Investors and leaders such
as banks require financial records to finance a venture.
Without those records it is unlikely that investors/lenders will
offer to finance a start-up.

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Discussion
Learning Module 9.1 What is Bookkeeping?

Basically, bookkeeping is the process of recording and organizing a business’s financial
transactions, and a bookkeeper is a person responsible for that process. Bookkeeping is the primary
way business owners can figure out if their business is profitable: keeping an eye on your numbers
lets you identify financial challenges early on and address them before they blossom into full-fledged
crises. Bookkeeping also helps you identify areas of profit expansion—areas you might not have
noticed without clear financial reports you can interpret easily.
In general, a bookkeeper records transaction sends invoices, makes payments, manages
accounts, and prepares financial statements. Bookkeeping and accounting are similar, but
bookkeeping lays the basis for the accounting process—accounting focuses more on analyzing the
data that bookkeeping merely collects.
9.2 Business Accounts

In the world of bookkeeping, an account doesn’t refer to an individual bank account. Instead,
an account is a record of all financial transactions of a certain type, like sales or payroll.
Account Account type

Accounts payable Liability
Accounts receivable Asset
Cash Asset
Dividends Equity
Equipment Asset
Insurance expense Expense
Interest expense Expense
Interest income Revenue
Interest payable Liability
Inventory Asset
Owner’s capital Equity
Real estate Asset
Rent expense Expense

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Service income Revenue

Retained earnings Equity
Salaries and wages Expense
Sales income Revenue
Supplies Asset
Supplies expense Expense
Unearned service revenue Liability
Utilities expense Expense
There are five basic types of accounts:

 Assets, which are the cash and resources owned by the
business (e.g., accounts receivable, inventory)
 Liabilities, which are the obligations and debts owed by
the business (e.g., accounts payable, loans]
 Revenues or income, which is the money earned by the
business, usually through sales
 Expenses or expenditures, which is the cash that flows
out from the business to pay for some item or service
(e.g., salaries, utilities)
 Equity, which is the value remaining after liabilities are
subtracted from assets, representing the owner*s held
interest in the business (e.g., stock, retained earnings)
Bookkeeping begins with setting up each necessary account so you can record transactions
in the appropriate categories. You likely won't have the same accounts as the business next door,
but many accounts are common. The table below shows some frequently used small-business
accounts and their types.
9.3 Setting Up Business Accounts

Knowing the accounts, you need to track for your business is one thing; setting them up is
another. Back in the day, charts of accounts were recorded in a physical book called the general

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
ledger (GL). But now, most businesses use computer software to record accounts. It might be a
virtual record rather than a hard copy, but the overall file is still called the general ledger.
There are three main methods for creating a GL:
 Spreadsheet software (e.g., Excel)
 Desktop accounting bookkeeping software (e.g., QuickBooks Desktop)
 Cloud-based bookkeeping software (e.g., QuickBooks Online, Wave)
Spreadsheet software is the cheapest option; Google Sheets doesn't cost a monthly fee, but
trying to craft your own general ledger in a spreadsheet program can spiral quickly into disaster.
Desktop bookkeeping software usually requires a high up-front fee, but the software is then
yours to keep. With online, cloud-based bookkeeping software, you have to pay a monthly fee to
keep your online subscription, but it’s a much lower cost than that of desktop software.
Alternatively, you can pay an accountant, bookkeeper, or outsourced accounting company
to manage your accounts and ledger for you.
9.4 Bookkeeping Method

If you plan to do your own books in the house instead of outsourcing to an accounting or
bookkeeping firm, you need to make one crucial choice before you start setting everything up: Are
you going to use single-entry bookkeeping or double-entry bookkeeping?
With single-entry bookkeeping, you enter each transaction only once. If a customer pays you
a sum, you enter that sum in your asset column only. Makes sense, right? This method can work if
your business is simple—as in, very, very simple. If you work out of your home, don’t have any
equipment or inventory to offer, and don’t venture too frequently into the realm of cash transactions,
you might consider single-entry bookkeeping.
However, most bookkeeping is done using the double-entry accounting system, which is sort
of like Newton’s Third Law of Motion, but for finances. Newton’s law holds that "for every action (in
nature), there is an equal and opposite reaction." Likewise, in double-entry accounting, any
transaction in one account requires an equal and opposite entry in another account. It isn’t physics,
but for managing a business, it’s just as important.

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
In the double-entry bookkeeping system, you'll record two entries for each transaction: a
debit(Dr) and a credit(Cr). Debits and credits are recorded as journal entries in the ledger. The debit
is usually recorded first (on the left), followed by the credit (on the right).
Lookout
A debit doesn't necessarily mean cash is flowing out; likewise,
credit isn’t necessarily money you’ve earned. The type of account defines
whether a transaction either debits or credits that account.
Double-entry bookkeeping is definitely more challenging than single-entry bookkeeping, but

don’t let the difficulty deter you. Double-entry ensures your books are always balanced, which
means you'll be tipped off immediately if profits start dipping. Plus, most accounting software starts
you off with double-entry bookkeeping anyway. With the software all ready to go, you can tackle
double- entry bookkeeping with no sweat.
9.5 Record Financial Transaction

You’ve created your set of financial accounts and picked a bookkeeping system—now it’s
time to record what’s actually happening with your money.
Each debit and credit transaction must be recorded correctly and in the right account.
Otherwise, your account balances won’t match and you won’t be able to close your books.
Account type Debit recorded for... Credit recorded for...
Asset Increase Decrease
Liability Decrease Increase
Revenue Decrease Increase
Expense Increase Decrease
Equity Decrease Increase
To record a transaction, first determine the accounts that will be debited and credited. For
example, imagine that you've just purchased a new point-of-sale system for your retail business.
You paid for the system, which cost PHP 2,000, in cash.
The transaction will affect two accounts: cash (an asset account) and equipment (also an
asset). Because you’re decreasing your cash and increasing your equipment, you would record a

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
PHP 2,000 debit (on the left] for the equipment account and a PHP 2,000 credit for the cash account
(on the right).
Note that journal entries don't include specific details about the item, vendor, or biller; you just
track debits and credits by account.
The General Journal
The general journal is a chronological record of the entity’s transactions. A journal entry
shows all the effects of a business transaction in terms of debits and credits. Each transaction is
initially recorded in a journal rather than directly in the ledger. A journal is called the book of original
entry. The nature and volume of transactions of the business determine the number and type of
journals needed. The general journal is the simplest.
Format
1. Date - The year and month are-not month changes or a new page is needed. written
2. Account Titles and Explanation. - The account to be debited is entered at the V extreme left
of the first line while the account to be credited is entered slightly indented on the next line.
A brief description of the transaction is usually made on the line below the credit. Generally,
skip a line after each entry.
3. P. R. (posting reference) - This will be used when the entries are posted, that is until the
amounts are transferred to the related ledger accounts. The posting process will be
described later.
4. Debit - The debit amount for each account is entered in this column.
5. Credit - The credit amount for each account is entered in this column.
Assume that Angelica Punzalan established its restaurant with an initial investment of Php
200,000.00 OF June 1.
The journal entry is shown below:
Date Account Titles and Explanation P.R. Debit Credit

1 2013
2 June 1 Cash 200,000
3 Punzalan, Capital 200,000
4 Initial Investment.

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Chart of Accounts
A listing of all the accounts and their account numbers in the ledger is known as the chart of
accounts. The chart is arranged in the financial statement order, that is, assets first, followed by
liabilities, owner’s equity, income, and expenses. The accounts should be numbered flexibly to
permit indexing and cross-referencing.
When analyzing transactions, the accountant refers to the chart of accounts to identify the
pertinent accounts to be increased or decreased. If an appropriate account title is not listed in the
chart, an additional account may be added. Presented below is the chart of accounts for the
illustration:
Punzalan Restaurant
Chart of Accounts
Balance Sheet Accounts Income Statement Accounts
Assets Income
110 Cash 410 Service Income
120 Accounts receivable 420 Interest Income
130 Inventory
140 Supplies
150 Equipment
160 Real estate
Liabilities Expenses
210 Accounts Payable 510 Insurance expense
220 Interest payable 520 Interest expense
230 Unearned Service revenue 540 Rent expense
540 Salaries and wages
550 Supplies expense
560 Utilities expense

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Owner’s Equity
310 Punzalan, Capital
320 Punzalan, Withdrawal
330 Income Summary
5. Balance the books

The last step in basic bookkeeping is to balance and close the books. When you tally up
account debits and credits—often at the end of the quarter or year—the totals should match. This
means that your books are "balanced."
You have been recording journal entries to accounts as debits and credits. At the end of the
period, you’ll "post*’ these entries to the accounts themselves in the general ledger and adjust the
account balances accordingly.
For example, if over the course of the month your cash account has had PHP 3,ooo in debits
(increases] and PHP 2,000 in credits (decreases), you would adjust the cash account balance by a
total of PHP 2,000 (as a decrease).
Follow this method to adjust the balances for each account in your ledger. At the end of this
process, you'll have what’s called an "adjusted trial balance." When you combine accounts types,
the adjusted balances should meet the accounting equation:
Assets = Liabilities + Equity
If two sides of the equations don’t match, you’ll need to go back through the ledger and
journal entries to find errors. Post corrected entries in the journal and ledger, then follow the process,
again until the accounts are balanced. Then you're ready to close the books and prepare financial
reports.
The General Ledger
The general ledger is the principal book in which the commercial transactions of a company
are recorded. Before the days of accounting software, bookkeepers and accountants actually kept
physical books, and each ledger was a separate physical book.

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
However, times have changed. And a simpler definition is probably more appropriate now
too, especially with regards to ledgers and T-accounts.
So nowadays, one could say that; A ledger is simply a whole bunch of T-accounts grouped.
9.7 Prepare Financial Reports

Now that you’ve balanced your books, you need to take a closer look at what those books
mean. Summarizing the flow of money in each account creates a picture of your company’s financial
health. You can then use that picture to make decisions about your business’s future.
Here are some of the most common financial reports created in bookkeeping:
 Balance sheet. This document summarizes your business’s assets, liabilities, and equity
at a single period of time. Your total assets should equal the sum of all liabilities and
equity accounts. The balance sheet provides a look at the current health of your
business and whether it has the ability to expand or needs to reserve cash.
 Profit and loss (P&L) statement. Also called an income statement, this report breaks
down business revenues, costs, and expenses over a period of time (e.g., quarter). The
P&L helps you compare your sales and expenses and make forecasts.
 Cash flow statement. The statement of cash flow is similar to the P&L, but it doesn't
include any non-cash items such as depreciation. Cash flow statements help show
where your business is earning and spending money and its immediate viability and
ability to pay its bills.
Bookkeeping software helps you prepare these financial reports, many in real-time. This can
be a lifeline for small-business owners who need to make quick financial decisions based on the
immediate health of their business.
References
T1 — Arenas, C.D, 2020, Entrepreneurship in Tourism and Hospitality Industry.

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
It is now time to use those

Check point skills you have learned so
far. Goodluck!
Activity 15
Identification
Analyze the following items and give the correct answer
1. __________A process of recording and organizing a business is financial transactions.
2. __________Money earned by the business.
3. __________The values remaining after liabilities are deducted.
4. __________Cash and resources owned by the company.
5. __________obligations and debts.
6. __________Cash that flows out in the business.
7. __________Entering Transactions only case.
8. __________Ensures that your books are always balanced.
9. __________Chronological record of the entity.
10. __________Listing of all the accounts and their numbers.
Do this
Activity 16
Journalizing
Record the following transactions in the general journal.
1. Mr. X established its restaurant with an initial investment of Php. 300,000 on Aug. 1, 2019.
2. Purchase supplies 10,000 on Aug. 3, 2019
3. On Aug. 6 purchase utensils on account, Php.15, 000

E
S E
MT
C
E
OL
. T H
LEGES
ST

01 September 2021
QMR President
Assessment
Activity 9
Essay
Answer the following questions:
1. Why do you have to keep business records?
2. What is bookkeeping*
3. What are the five basic types of accounts? Explain each.
4. Briefly explain the double-entry bookkeeping system.
For handwritten output:

a. Write your output in an A4 size bond paper
b. Write legibly
For computerized output (online/physical submission):
a. Use A4 size bond paper
b. Font style/size: Arial Narrow 12
c. Spacing: 1.5
d. Alignment: Justified
e. Margin: 1 inch in all sides

THM 10 Entrepreneurship in H and T - Final

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

THM 10 Entrepreneurship in H and T - Final

Uploaded by

Copyright:

Available Formats

Issue No.

Reviewed by: Approved by:

Competence, Course Outcomes and Learning Outcomes

Financial Statement provides an information of

©All Rights Reserved

Reviewed by: Approved by:

Learning Module 8.1 Financial Statement Analysis

8.2 Users of Financial Statement Analysis

©All Rights Reserved

Reviewed by: Approved by:

©All Rights Reserved

Reviewed by: Approved by:

8.3 Methods of Financial Statement Analysis

©All Rights Reserved

Reviewed by: Approved by:

©All Rights Reserved

Reviewed by: Approved by:

8.4 Key Financial Statements & How They Are Analyzed

©All Rights Reserved

Reviewed by: Approved by:

I. The Balance Sheet

©All Rights Reserved

Reviewed by: Approved by:

TOTAL LIABILITIES & SHAREHOLDER'S

EQUITY 6 486 000.00

Balance Sheet Analysis

©All Rights Reserved

Reviewed by: Approved by:

©All Rights Reserved

Reviewed by: Approved by:

Quick Ratio =(120,000 +50,000 + 58,000; - 63,500

II. The Income Statement

ABC Hotel & Restaurant

©All Rights Reserved

Reviewed by: Approved by:

Research and development (R&D) (112,300.00)

Income statement Analysis

©All Rights Reserved

Reviewed by: Approved by:

Ill. The Statement of Cash Flows

©All Rights Reserved

Reviewed by: Approved by:

= Free cash Flow

8.5 Other Financial Statement Information

©All Rights Reserved

Reviewed by: Approved by:

Notes to the Financial Statements

©All Rights Reserved

Reviewed by: Approved by:

4. Notes about depreciating assets

Problems with Financial Statement Analysis

©All Rights Reserved

Reviewed by: Approved by:

T1 - Arenas, C.D, 2020, Entrepreneurship in Tourism and Hospitality Industry

Checkpoint It is now time to use those

©All Rights Reserved

Reviewed by: Approved by:

ASSETS LIABILITIES & SHAREHOLDER'S EQUITY

NON-CURRENT ASSETS NON-CURRENT LIABILITIES

TOTAL ASSETS 6,411_000M SHAREHOLDER'S EQUITY

©All Rights Reserved

Reviewed by: Approved by:

Compute for the following: