FABM1

Introduction to Accounting
ACCOUNTING DEFINED
* Accounting is a service activity. Its function is to provide quantitative information primarily financial in
nature, about economic activities, that is intended to be useful in making economic decisions. (ASC)
* Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of
money, transaction and events which are in part, at least of a financial character and interpreting the
results thereof. (AICPA)
* The process of identifying, measuring and communicating economic information to permit informed
judgements and decisions by users of the information. (AAA)
NATURE OF ACCOUNTING
* Accounting is a service activity.
* Accounting is a process.
* Accounting is both an Art and Science
* Accounting Information deals with financial transactions/information.
* Accounting is an Information System
* Accounting is a stewardship function.
FUNCTION OF ACCOUNTING
1. Formation and control of Financial Policies
2. Preparation of Budget
3. Cost Control
4. Analyzing, communcating, summarizing and classifying financial information.
5. Recording of Financial Transactions
HISTORY OF ACCOUNTING
*8500 BC- Use of “bulla” or bullae” for commercial and legal documentation. These hollow ball-like clay
envelopes were also used to identify the quantity and types of goods being recorded.
*3600 BC- “The clay of Mesopotamia” containing commercial transactions including accounts
receivables and payables
*2286- “Code of Hammurabi” required merchants to give buyers a sealed memorandum containing the
agreed price of goods
* 1000 BC- Phoenicians created an alphabet with accounting to trade with ancient Egyptians.
*500 BC- Egyptian Accounting records and the invention of Bead and Wire Abacus
* 63 BC- “Res Gestae Divi Augusti” or The Deeds of the Divine Augustus containing the expenditures of
the emperor, including distributions to people.
*10 AD- Emperor Wang Mang of Xin Dynasty implemented the first income tax of 10% of profits.
*1299- Giovanni Farolfi & Company a firm of Florentine Merchants that used the earliest evidence of full
double entry bookkeeping that appeared in the “Farolfi Ledger”
*1299 to 1300- Amatino Manucci kept the ledger accounts of Giovanni Farolfi & Company.
*1300- “Statute of Westminster” showed historical records of accountants
*1340- “Massari Ledgers of Commune of Genoa” displayed the perfect double-entry form of double
entry bookkeeping that shows different pages for debit and credit.
*1458- Benedetto Cotrugli an economist who wrote the first bookkeeping manuscript called “Della
mercatura e del mercante perfetto” but his work was only published in 1573. Pacioli credited Cotrugli for
the origination of the double entry bookkeeping system.
* 1494- Luca Pacioli the father of modern accounting who published the first ever book with detailed
chapter of double entry bookkeeping known as the “Summa de Arithmetica, Geometria, Proportioni et
Proportionalita”.
*1675- Jacques Savary published his book “The Perfect Merchant” with chapters describing accounting.
*1798- Income tax was implemented in Britain
*1804- “Code of Napoleon” a civil law that was enforced containing regulations on commercial
transactions.
*1861- Income tax was implemented in America
*1896- First CPA examination in the State of New York
*1898- Eugen Schmalenbach- quoted price level accounting
*1913- Income tax was implemented in the Philippines.
*1915- Vicente F. Fabella became the first Filipino CPA. He took the exam at Wisconsin USA.
*1932- First CPA Exam in the Philippines.

Branches of accounting
a. FINANCIAL ACCOUNTING
- field of accounting concerned with the summary, analysis and reporting of financial transactions related
to a business and the preparation of its related financial statements
b. MANAGEMENT/ MANAGERIAL ACCOUNTING
- the practice of analyzing and communicating financial data to managers for decision making
c. GOVERNMENT ACCOUNTING
- refers to all accounting processes related to the government
d. AUDITING
- examination of the financial statements of an entity
e. TAX ACCOUNTING
- providing tax services to entities
f. COST ACCOUNTING
- service provided to a manufacturing company in costing and analyzing their products and production
processes.
g. ACCOUNTING EDUCATION
- teaching accounting as a profession
h. ACCOUNTING RESEARCH
- conducting accounting related researches

Users of Accounting Information

1. INTERNAL USERS
a. Owners (proprietor, partners, BOD/BOT)
b. management
2. EXTERNAL USERS
a. Investors and Potential Investors
b. Lenders and Financing Institutions
c. Suppliers and Trade Creditors
d. Employees and Labor Unions
e. Customers
 f. Government Agencies, Regulatory
Agencies and Taxing Authorities
g. General Public

Forms of Business Organization

1. SOLE PROPRIETORSHIP
* Owned by a single person or a married couple
2. PARTNERSHIP
* 2 or more owners contributing money, property or industry to a common fund to earn profit.
3. CORPORATION
* A juridical entity created by the operation of law, separate and distinct from its owners and has rights,
duties, and privileges of an actual person
* Company has shares of stocks
4. COOPERATIVES
* an autonomous and duly registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve their social, economic and cultural needs and aspirations by
making equitable contributions to the capital required, patronizing their products and services and
accepting a fair share of risks and benefits of the undertaking in accordance with the universally
accepted cooperative principles. (CDA)

Types of Business According to Activities

1. SERVICE BUSINESS
- involves rendering of service to customers
2. MERCHANDISING BUSINESS
- involvles buy and sell of goods
3. MANUFACTURING BUSINESS
- involves transformation of raw materials to finished products

Accounting Concepts and Principles

a. BUSINESS/SEPARATE ENTITY PRINCIPLE
- the business is a different entity from the owner
b. GOING Concern PRINCIPLE
- that the firm is expected to continue to operate
c. TIME PERIOD PRINCIPLE/ PERIODICITY ASSUMPTION
- the business should report the financial results of its activities over a standard period of time
d. MONETARY PRINCIPLE
-all business transactions are reported in terms of one monetary unit
e. OBJECTIVITY PRINCIPLE
- all business transactions must be supported by objective evidence that the transaction really occurred
f. COST PRINCIPLE/ HISTORICAL COST PRINCIPLE
- most assets and liabilities should be recorded at their transaction price
g. ACCRUAL ACCOUNTING PRINCIPLES
- expenses are recorded on the period it was incurred and revenues are recorded in the period it was
earned
h. CASH ACCOUNTING PRINCIPLES
- business transactions are recorded only when cash was received or paid out
i. MATCHING PRINCIPLE
- all expenses should be matched on the period where its revenue was earned
j. DISCLOSURE PRINCIPLE
- Financial statements of an entity must be complete and should report sufficient economic information
to understand the FS
k. CONSERVATISM PRINCIPLE
- the accountant should select an alternative that is least favorable for the business to minimize
overstatements/ understatements
l. MATERIALITY PRINCIPLE
- all material events should be recorded according to accounting rules and immaterial events may not be
recorded

Accounting Equation
ASSET = Liability + Capital (A=L+C)
ASSET = Liability + Capital + Revenue - Expenses

5 Elements of Financial Statements

1. ASSET- resources owned and controlled by the entity
a. Current Asset- assets that can be sold, consumed or exhausted through the normal operating cycle
of a business usually yearly.
b. Noncurrent Asset- long term assets that is not expected to be sold, consumed or exhausted
through the normal operating cycle of a business.
2. LIABILITY- present obligation of the entity
a. Current Liability- short term obligations that are due within a year or within the normal operating
cycle of the business.
b. Noncurrent Liability- long term obligations that are not due for settlement within a year or within
the normal operating cycle of the business.
3. CAPITAL/ EQUITY- remaining interest after the liabilities was deducted from the assets.
4. REVENUE- increase in economic benefits during a period
a. Sales Revenue or Service Revenue- income earned from the ordinary course of business activities
b. Gains- income that does not arise from the core operations of the business.
5. EXPENSES- decrease in economic benefits during a period

Books of Accounts
a. GENERAL JOURNAL
- the book of original entries
b. SPECIAL JOURNAL
1. Cash Receipts Journal- for recording all cash inflows
2. Cash Disbursement Journal- for recording all cash outflows
3. Sales Journal- for recording all sales on credit
4. Purchases Journal- for recording all purchases on credit
c. GENERAL LEDGER
- a grouping of all accounts used in the preparation of financial statements
d. SUBSIDIARY LEDGER
- a group of similar accounts whose combined balances are equal to the balance of a specific general
ledger account

Accounting Cycle
TRANSACTIONS
Transaction is a transfer of resources (asset) and obligations (liability). A business can be involved in
many affairs and activities- when it pays electricity, hire employees, incur debts and even receiving
investments from investors a transaction occurs.
Below are some examples of common financial transactions.
1. Owner invested money in the business.
2. Purchase of office furniture and supplies
3. Purchase of a fire insurance for the office building.
4. Hiring and training employees.
5. Purchasing inventories.
6. Purchasing supplies on credit.
7. Getting a loan from the bank.
8. Paying bills and loan interest.
9. Depreciation of factory machine.
10. Paying government taxes.
In a transaction there is a value received and a value parted with. Let's try to analyze this transaction.
When a business pays the salary of an employee, the business gives cash in exchange of services from
the employee. So the value received by the business is the service provided by the employee and the
cash is the value parted with.
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NORMAL BALANCE
An account has 2 sides, the debit and the credit side. The normal balance of an account is the side where
the account increases.
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For Example:
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Take note that the normal balance of Cash(asset) is Debit, so everytime the business receives cash the
debit side increases and when it pays expenses the cash decreases on the credit side

Accounting Equation
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JOURNALIZING
Double Entry Bookkeeping
A method used in journalizing transactions where there is always a value received and a value parted
with, hence a debit and credit side.
Chart of Accounts
A list of accounts that a business use in journalizing transactions. The industry uses standard names for
common accounts; however a business may opt to adapt its own.
Now let’s try journalizing the following transactions.
1. Katrina invested 1 million to open a restaurant; the money was deposited in a savings account.
*Pic

2. She paid 100,000 to rent a space in a building.

*Pic

3. Purchased kitchen equipment amounting to 250,000.

*Pic

4. She acquired a loan of half a million from the bank.

*Pic

5. She paid her employees- 50,000.

*Pic

6. Paid utilities for the office- 20,000.

*Pic

7. Earned 50,000 for the 1st week of operations.

*Pic
In journalizing, remember that a transaction must occur; there should always be a value received and
value parted with. Otherwise you will not have a journal entry on your book.
POSTING
T-accounts- Has 3 main parts:
1. Account Title
2. Debit (left side)
3. Credit (right Side)
Now let’s try posting the following journal entries.
1. Katrina invested 1 million to open a restaurant; the money was deposited in a savings account.
*Pic

2. She paid 100,000 to rent a space in a building.

*Pic

3. Purchased kitchen equipment amounting to 250,000.

*Pic

4. She acquired a loan of half a million from the bank.

*Pic

5. She paid her employees- 50,000.

*Pic

6. Paid utilities for the office- 20,000.

*Pic

7. Earned 50,000 for the 1st week of operations.

*Puc
Same accounts from the journal entry will be posted in just one account. This is done in order to monitor
the amounts of a specific account. Remember that if the journal entry is on the debit side then it will
also be posted on the debit side of the t-account, same with the credit sides.
Totalling your Ledger Accounts
After posting all your journal entries to your t-accounts/ledger accounts, the next step is to total the
amounts. In doing this you need to identify if the acocunt is open or closed:
closed account: equal amounts in both debit and credit side
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open acount: amount in both sides are unequal

*Pic

on this example Cash in Bank has a debit balance of 1,130,000

*Pic
TRIAL BALANCE
A statement created to test the equality of the debit and the credit side. A correct trial balance is a proof
of accuracy in posting and journalizing your transactions.
Now let's try to make one using the amounts we posted from the previous part.
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The amounts of the accounts should be posted on their normal side.

*Pic

Take note that both sides should always be equal. If not, go ahead and check your journal entries and t-
accounts, you must have missed something, recorded a wrong amount, totalled incorrectly, posted to a
wrong account etc.
You sent
ADJUSTING ENTRIES
Adjusting entries are special journal entries done to update the amount of some accounts so that they
will reflect their correct amounts at the end of the accounting period.

5 Types of Adjusting Entries

a. Accruals
 1. Accrued Revenue- income that are already rendered but not yet collected
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2. Accrued Expense- expenses that were incurred/used and not yet paid
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b. Prepayments/ Prepaid Expense- Expenses that are already paid in advance but was not yet
used/incurred/consumed.
*Pic

c. Precollections/ Unearned Revenue/ Deferred Revenue- these are income that were received in
advance but the service was not yet rendered
*Pic

d. Bad debts/ Uncollectible Accounts/ Doubtful Accounts Expense- when business offers credit to its
customers, some may not be able to pay or fully pay their debts therefore the amount of accounts
receivable are reduced to reflect uncollectible debts.
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e. Depreciation and Amortization- A reduction of value due to the passage of time. As time passes, the
value of tangible assets depreciates, same as with intangible assets.
*Pic

Salvage value- the amount that you expect to recover at the end of the life of an asset.
*Pic

Adjusting entries are necessary before creating financial statements. Remember that this journal entries
are also being posted on the ledger.
ADJUSTED TRIAL BALANCE AND WORKSHEET
A working paper showing the account balances from the trial balance, adjustments, unadjusted trial
balance, income statement and balance sheet. Though this part is optional, it does facilitate the
preparation of financial statements.
Below is an example showing as a guide in preparing your working paper.

1st column: unadjusted trial balance

2nd column: all the amounts from the adjusting entries

3rd column: adjusted trial balance- a trial balance reflecting the amounts from the adjusting entries

4th column: Income Sheet- a column that will reflect all the revenue and expense account.
5th column: Balance Sheet- a column that will show all the balances of asset, liability and equity
accounts.
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FINANCIAL STATEMENTS

Formal records of all financial transactions of an entity presented according to Accounting Standards and
Principles.

5 Types of Financial Statements

a. Statement of Financial Performance/ Statement of Comprehensive Income/ Income Statement

- a formal statement containing all revenue and expense
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b. Statement of Changes in Owner’s Equity

- a formal statement containing the owner’s capital, withdrawal, income, and additional investments
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c. Statement of Financial Position/ Balance Sheet

- a formal statement containing all assets, contra- assets, liabilities and equity accounts.
*Pic

d. Statement of Cash Flows

- a formal statement containing records of all cash inflows and cash outflows
*Pic

e. Notes to the Financial Statement

- a formal statement containing necessary notes, descriptions or disclosures about the first four financial
statements
*Pic
CLOSING ENTRIES/CLOSING THE BOOKS
Journal entries necessary to close nominal accounts. Nominal Accounts are income and expenses, they
are being closed because their amounts were already transferred to the equity account.

1. Closing entries for Servicing

*Pic

2. Closing entries for Merchandising

*Pic

Merchandising business
INVENTORY SYSTEMS
* periodic inventory system- no continuous record of inventory
*perpetual inventory system- continuous record of inventory and cost of goods sold
*Pic

FREIGHT COSTS
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SPECIAL ACCOUNTS
a. Purchase Returns- deducted to purchases, represents goods that were returned to the supplier

b. Purchase Allowances- deducted to purchases, represents defective goods that will not be returned to
the supplier but will no longer be paid

c. Purchase Discounts- deducted to purchases

1. cash discount- recorded
2. trade discount- not recorded

d. Sales Returns- deducted to sales, merchandise that was returned by customers

e. Sales Allowances- deducted to sales, when the business deducts an amount from the selling price

f. Sales Discounts- deducted to sales

Determining The Cost Of Goods Sold

COSG Computation

*Pic

FABM2

Statement of Financial Position/ Balance Sheet

1. MEANING
- A formal statement showing the 3 elements of financial position- asset, liability and equity
- Used to evaluate liquidity, solvency and need for additional financing
2. PARTS OF THE STATEMENT OF FINANCIAL POSITION
a. Asset- a present economic resource controlled by the entity as a result of past events that has a
potential to produce economic benefit
1. Current Asset
2. Noncurrent Asset
b. Liability- present obligation of an entity to transfer an economic resource as a result of past events
1. Current Liability
2. Noncurrent Liability- residual definition
c. Equity- residual interest in the assets of the entity after deducting all of the liabilities
3. FORMS OF THE STATEMENT OF FINANCIAL POSITION
a. Report Form- downward sequence of assets, liabilities and equity
b. Account Form- assets on the left side and liabilities and equity on the right side

Statement of Financial Performance/ Statement of Comprehensive Income/ Income Statement

1. MEANING
a. Statement of Financial Performance- a formal statement showing the financial performance or profit
or loss of an entity for a period of time
b. Comprehensive Income- Profit or loss plus other comprehensive income
c. Profit or loss/ Net income or Net loss- total income less expenses excluding OCI
d. Other Comprehensive Income- other income and expenses required and permitted by PFRS grouped
into 2 groups
1. OCI to be classified to Profit or Loss
a. Unrealized gain or loss on debt
investments measured at FVTOCI
b. Gain or loss from currency translation
of a foreign FS
c. Unrealized gain or loss from derivative
contracts designated as cash flow hedge
2. OCI to be classified Retained Earnings
a. Unrealized gain or loss on equity investments measured at FVTOCI
b. Revaluation surplus
c. Remeasurements of defined benefit plan
d. Gain or loss attributable to credit risk of a financial liability designated at FVTPL
2. PRESENTATION OF COMPREHENSIVE INCOME
a. Two-statement approach- income statement showing the components of P/L and statement of
comprehensive income beginning with the components of P/L plus or minus the components of OCI
b. Single-statement approach- a single statement of comprehensive income showing the components
of P/L and OCI
3. FORMS OF INCOME STATEMENT
a. Functional Presentation/ Cost of Goods Sold Method- form that classifies expenses according to COS,
distributions cost, administrative cost and other activities
b. Natural Presentation/ Nature of Expense Method- form that aggregates expenses base on their
nature
4. APPROACHES IN NET INCOME COMPUTATION
a. Transaction approach
- traditional approach where total revenue is deducted to total expense and every transaction is
recorded in the general ledger
b. Capital maintenance approach/ Balance Sheet approach/ Net Assets Approach
- relying on the change of the owner’s equity to determine net income during the period
1. Partnership or Proprietorship
*Pic
2. Corporation
*Pic
5. Classification of Expenses
*Pic

Statement of Changes in Equity

1. MEANING
- Formal statement that shows the movements of the components of the owner’s equity
2. STATEMENT OF RETAINED EARNINGS
- Shows the changes that directly affects the retained earnings
- Part of the statement of changes in equity
3. Items Directly Affecting Retained Earnings
a. Net income- added to RE
b. Net Loss- deducted to RE
c. Prior period errors- understatement add to RE, overstatement deduct to RE
d. Dividends declared or paid- deducted to RE
e. Effect of changes in accounting policy- understatement add to RE, overstatement deduct to RE
f. Appropriation of RE

Statement of Cash Flows

1. MEANING
- Formal statement summarizing the operating, investing and financing activities of the entity
- Provides information about cash receipts and disbursements
2. PARTS OF THE STATEMENT OF CASH FLOWS
a. Cash Flows from Operating Activities- derived from principal revenue producing companies and other
transactions and events related to the determination of net income/loss
b. Cash Flows from Investing Activities- derived from acquisition and disposal of long-term assets and
other investments not included in cash equivalents
c. Cash Flows from Investing Activities- derived from cashflows from equity capital and borrowings
3. Forms of Statement of Cash Flows
a. Direct Method- shows in detail the major classes of gross cash receipts and gross cash payments
b. Indirect Method- involves the adjustment of net income with changes in balance sheet accounts to
arrive at the amount of cash generated by operating activities

Financial Statement Analysis

1. HORIZONTAL ANALYSIS
- Comparison of at least 2 financial statements
a. Increase- decrease (2 years)
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b. Trend analysis (5 years)
*Pic

2. VERTICAL ANALYSIS/ CROSS-SECTIONAL ANALYSIS

- Shows the relationship of all other accounts to a base account within the financial statement
a. Income Statement
- sales is the base account=100%
b. Balance Sheet
- total asset is the base account= 100%
3. RATIO ANALYSIS
a. Liquidity Ratio
1. Current Ratio
*Pic
2. Quick Ratio
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3. 5 Current Assets
a. cash
b. trade and other receivables
c. inventories
d. marketable securities
e. prepayments
b. Profitability Ratio
1. Margin
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2. Returns
*Pic

a. Return on sales
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b. Return on equity (profit on net worth)

*Pic

c. Return on total assets (profit on total asset)

*Pic

c. Asset Efficiency Ratio

1. Inventory
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2. Accounts Receivable
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3. Accounts Payable
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4. Total Asset Turnover

*Pic
d. Solvency/ Stability Ratio
1. Debt Ratio
*Pic

2. Equity Ratio
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3. Equity: Debt
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e. Marketability Ratio
1. Price: Earning Ratio
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2. Dividend Yield
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3. Dividend Payout Ratio

*Pic

4. Retention Rate/Plowback Ratio

*Pic

4. DuPont Analysis
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Basic Documents and Transactions Related to Bank Deposits

a. TYPES OF BANK ACCOUNTS
1. Savings Account
- mainly for saving money
2. Checking Account
- an account where money can be withdrawn by check
3. Time Deposit Account
- a savings account held for a fixed term that can only be withdrawn after the agreed period
b. DEPOSIT SLIP
- a slip used to deposit money over the counter
c. WITHDRAWAL SLIP
- a slip use to withdraw money over the counter
d. BANK STATEMENT
- a list of all transactions for a bank account over a set period of time

Bank Reconciliation
1. MEANING
- a statement which brings into agreement the cash balance per book and cash balance per bank
- usually prepared monthly
- only for demand deposit or checking account
2. 3 TYPES OF BANK DEPOSITS
a. Demand Deposit/ Checking Account
- deposits are covered by deposit slips and where funds are withdrawable on demand by drawing
checks against the bank
- noninterest bearing
b. Saving Deposit
- a depositor will have a passbook, which is required when making withdrawals and deposits
- interest bearing
c. Time Deposit
- a deposit that can be withdrawn on demand or after an agreed period
- the depositor will have a certificate of deposit
- interest bearing
3. BANK STATEMENT
- a monthly report by the bank to the depositor which includes the cash balance, deposits and checks
drawn
4. RECONCILING ITEMS
a. Book Reconciling Items – requires adjusting entries only on the depositor’s books
1. Credit Memos (increases cash balance)
- items other than deposits that was credited by the bank to the depositor’s account but not yet debited
on the depositor’s books
e.g.
a. notes receivable collected by the bank and was credited to the depositor’s account
b. matured time deposits transferred by the bank to the depositor’s current account
c. proceeds of bank loans credited to the depositors account
2. Debit Memos (decreases cash balance)
- items other than checks drawn that was debited by the bank to the depositor’s account but not yet
credited on the depositor’s books
e.g.
a. NSF checks
b. defective checks
c. bank service charges
d. reduction of loan
3. Errors
b. Bank Reconciling Items – requires changes only on the bank’s records
1. Deposits in Transits
- collections already debited by the depositor but does not reflect on the bank statement
2. Outstanding Checks
- checks already credited by the depositor but does not reflect on the bank statement
3. Errors
5. FORMS OF BANK RECONCILIATION
a. Adjusted Balance Method (preferred method)
- the book and bank balance are brought to a correct cash balance that must appear on the balance
sheet.
*Pic

b. Book to Bank Method - the book balance is adjusted to equal the bank balance
*Pic

c. Bank to Book Method - the bank balance is adjusted to equal the book balance
*Pic
6. PROBLEMS
a. Cash ledger- unadjusted book
b. Bank Statement- unadjusted bank
c. Assume Imprest Fund System

Income and Business Taxation

a. TAXATION DEFINITION
- When the government levies or imposes tax to its citizens in order to support government projects and
spending
b. INCOME TAX
- a tax imposed on income generated by businesses and individuals
c. INCOME Taxes Players
1. A citizen of the Philippines, living in the Philippines, is taxable on all income earned inside and outside
the country
2. A non-resident citizen is taxable only on income earned in the country;
3. An OFW is taxable only on income earned in the country.
4. A foreigner living in the Philippines is taxable only on income earned in the country
5. A domestic corporation is taxable on all income derived from sources inside and outside the country
6. A foreign corporation is taxable only on the income derived

Financial Statement Analysis

1. HORIZONTAL ANALYSIS
- Comparison of at least 2 financial statements
a. Increase- decrease (2 years)
*Pic
b. Trend analysis (5 years)
*Pic
2. VERTICAL ANALYSIS/ CROSS-SECTIONAL ANALYSIS
- Shows the relationship of all other accounts to a base account within the financial statement
a. Income Statement
- sales is the base account=100%
b. Balance Sheet
- total asset is the base account= 100%
3. RATIO ANALYSIS
a. Liquidity Ratio
1. Current Ratio
*Pic
2. Quick Ratio
*Pic
3. 5 Current Assets
a. cash
b. trade and other receivables
c. inventories
d. marketable securities
e. prepayments
b. Profitability Ratio
1. Margin
*Pic
2. Returns
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a. Return on sales
*Pic

b. Return on equity (profit on net worth)

*Pic

c. Return on total assets (profit on total asset)

*Pic

c. Asset Efficiency Ratio

1. Inventory
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2. Accounts Receivable
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3. Accounts Payable
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4. Total Asset Turnover
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d. Solvency/ Stability Ratio
1. Debt Ratio
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2. Equity Ratio
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3. Equity: Debt
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e. Marketability Ratio
1. Price: Earning Ratio
*Pic
2. Dividend Yield
*Pic
3. Dividend Payout Ratio
*Pic
4. Retention Rate/Plowback Ratio
*Pic
4. DuPont Analysis
*Pic

Basic Documents and Transactions Related to Bank Deposits

a. TYPES OF BANK ACCOUNTS
1. Savings Account
- mainly for saving money
2. Checking Account
- an account where money can be withdrawn by check
3. Time Deposit Account
- a savings account held for a fixed term that can only be withdrawn after the agreed period
b. DEPOSIT SLIP
- a slip used to deposit money over the counter
c. WITHDRAWAL SLIP
- a slip use to withdraw money over the counter
d. BANK STATEMENT
- a list of all transactions for a bank account over a set period of time

Bank Reconciliation
1. MEANING
- a statement which brings into agreement the cash balance per book and cash balance per bank
- usually prepared monthly
- only for demand deposit or checking account
2. 3 TYPES OF BANK DEPOSITS
a. Demand Deposit/ Checking Account
- deposits are covered by deposit slips and where funds are withdrawable on demand by drawing
checks against the bank
- noninterest bearing
b. Saving Deposit
- a depositor will have a passbook, which is required when making withdrawals and deposits
- interest bearing
c. Time Deposit
- a deposit that can be withdrawn on demand or after an agreed period
- the depositor will have a certificate of deposit
- interest bearing
3. BANK STATEMENT
- a monthly report by the bank to the depositor which includes the cash balance, deposits and checks
drawn
4. RECONCILING ITEMS
a. Book Reconciling Items – requires adjusting entries only on the depositor’s books
1. Credit Memos (increases cash balance)
- items other than deposits that was credited by the bank to the depositor’s account but not yet debited
on the depositor’s books
e.g.
a. notes receivable collected by the bank and was credited to the depositor’s account
b. matured time deposits transferred by the bank to the depositor’s current account
c. proceeds of bank loans credited to the depositors account
2. Debit Memos (decreases cash balance)
- items other than checks drawn that was debited by the bank to the depositor’s account but not yet
credited on the depositor’s books
e.g.
a. NSF checks
b. defective checks
c. bank service charges
d. reduction of loan
3. Errors
b. Bank Reconciling Items – requires changes only on the bank’s records
1. Deposits in Transits
- collections already debited by the depositor but does not reflect on the bank statement
2. Outstanding Checks
- checks already credited by the depositor but does not reflect on the bank statement
3. Errors
5. FORMS OF BANK RECONCILIATION
a. Adjusted Balance Method (preferred method)
- the book and bank balance are brought to a correct cash balance that must appear on the balance
sheet.
*Pic

b. Book to Bank Method - the book balance is adjusted to equal the bank balance
*Pic

c. Bank to Book Method - the bank balance is adjusted to equal the book balance
*Pic

6. PROBLEMS
a. Cash ledger- unadjusted book
b. Bank Statement- unadjusted bank
c. Assume Imprest Fund System

Income and Business Taxation

a. TAXATION DEFINITION
- When the government levies or imposes tax to its citizens in order to support government projects and
spending
b. INCOME TAX
- a tax imposed on income generated by businesses and individuals
c. INCOME Taxes Players
1. A citizen of the Philippines, living in the Philippines, is taxable on all income earned inside and outside
the country
2. A non-resident citizen is taxable only on income earned in the country;
3. An OFW is taxable only on income earned in the country.
4. A foreigner living in the Philippines is taxable only on income earned in the country
5. A domestic corporation is taxable on all income derived from sources inside and outside the country
6. A foreign corporation is taxable only on the income derived inside the country
d. SOURCES OF GROSS INCOME
1. income derived from the conduct of trade or business or the exercise of a profession
2. Gains derived from dealings in property
3. Interests Income
4. Rents Income
5. Royalties
6. Dividends
7. Annuities
8. Prizes and winnings
9. Partner's distributive share from the net income of the general professional partnership.
10. salaries, wages, compensation, commissions, emoluments, and honoraria
11. bonuses and other benefits with the threshold
12. allowances for transportation, representation, entertainment, and other similar items
13. taxable pensions
14. taxable retirement pay
15. other income of a similar nature, including compensation paid in-kind
e. COMPENSATION INCOME TAX
- Employed individuals that earn compensation income pay their income taxes monthly. Employers
withhold the income tax and remit it to BIR
f. Business Income Tax
- tax payments of a business