INTRODUCTION TO BUSINESS C.

ACCOUNTING IS AN ART AND

DISCIPLINE
FLOW OF ACCOUNTING INFORMATION
WHY ARE EXTERNAL USERS INTERESTED
IN ACCOUNTING?
1. INVESTORS
2. CUSTOMER
3. EMPLOYEES
4. CREDITORS
5. GOVERNMENT
6. PUBLIC

WHO ARE THE INTERNAL USERS?

AREAS OF ACCOUNTING
1. PUBLIC ACCOUNTING
2. PRIVATE ACCOUNTING
3. GOVERNMENT ACCOUNTING
4. RESEARCH & EDUCATION
INTRODUCTION
● ACCOUNTING VS. BOOKKEEPING
● ACCOUNTING VS. ACCOUNTANCY
● FINANCIAL ACCOUNTING VS.
MANAGEMENT ACCOUNTING
FUNCTIONS OF ACCOUNTING
1. RECORDING BOOKKEEPING
2. CLASSIFYING
3. SUMMARIZING
4. INTERPRETING
TYPES OF BUSINESS ACTIVITY
1. SERVICE BUSINESS
2. MERCHANDISING TYPE
3. MANUFACTURING TYPE
FORMS OF BUSINESS ORGANIZATION
1. SINGLE OR SOLE PROPRIETORSHIP
2. PARTNERSHIP
3. CORPORATION
ACCOUNTING PERIOD
● CALENDAR YEAR OR PERIOD
● FISCAL YEAR OR PERIOD
INTRODUCTION TO ACCOUNTING
PART 2
NATURE OF ACCOUNTING
A. ACCOUNTING IS A SERVICE ACTIVITY
B. ACCOUNTING IS THE LANGUAGE OF
BUSINESS
1. MANAGEMENT
2. OWNERS
ACCOUNTING CYCLE
1. IDENTIFYING
2. MEASURING
3. COMMUNICATING
RECORDING PHASE OF ACCOUNTING
1. DOCUMENTATION
2. RECORDING
A. GENERAL JOURNAL
B. LEDGER
1. ADJUSTING ENTRIES
2. CLOSING ENTRIES
3. REVERSING ENTRIES
SUMMARIZING PHASE OF ACCOUNTING
1. PREPARATION OF TRIAL BALANCE
2. PREPARATION OF WORKING PAPER
3. PREPARATION OF POST-CLOSING TRIAL
BALANCE
4. PREPARATION OF FINANCIAL
STATEMENTS
CHAPTER 2 FINANCIAL STATEMENTS
FINANCIAL REPORTS
1. INCOME STATEMENT- a statement
showing the result of the business
operation for a certain period. It shows the
income received by the business and the
costs and expenses incurred in realizing
that income.
NOMINAL ACCOUNTS.
STATEMENT OF COMPREHENSIVE INCOME
2. BALANCE SHEET OR STATEMENT OF
FINANCIAL POSITION- a statement that
gives the financial condition of the business
as of a given date. It shows the assets or
the things owned by the business, the
liabilities or the debts owed by the business
to persons other than the owner and the
investment or equity of the owner of the
business. PERMANENT ACCOUNTS.
3. STATEMENT OF CASH FLOWS-
provides information about the cash
receipts payments of an entity during a
period. It is a formal statement that
classifies cash receipts and payments into
operating, investing, and financing
activities.
4. STATEMENT OF CHANGES IN
EQUITY- this summarizes the changes that
occurred in owner’s equity. It reflects the
increase or decrease in the net assets of
the business. Increases may come from the
initial capital, additional capital & net profit
of the business during a period. Decreases
may come from withdrawals by the owner
or net loss of the business for a period.

FORMS OF INCOME STATEMENT

1. SINGLE STEP INCOME STATEMENT-
when all expenses are deducted from the
total income. This form is used by service
business.
2. MULTI-STEP INCOME STATEMENT-
is one which shows the different sections of
the statement like the total sales, cost of
sales, the operating expenses, other
income and other expenses.This form is
used by merchandising business footing.

FORMS OF BALANCE SHEET

A. ACCOUNT FORM - when the assets are
placed at the left side of the liabilities and
the owner’s equity at the right side of the
statement.
B. REPORT FORM- the arrangement will
be from top to bottom. The assets are
listed first followed by the liabilities and
then the owner’s equity.
C. FINANCIAL POSITION FORM.- shows
the working capital position of the business.
The current assets less the current liabilities
equal the net working capital. To this you
add the other assets then deduct the long-
term liabilities to arrive at the owner’s
equity.
ACCOUNTING TERMINOLOGIES
CURRENT ASSETS- refers to cash & other
assets that are easily converted into cash
or consumed during the accounting period
usually one year.
PROPERTY AND EQUIPMENT- refers to
assets that have the following
characteristics:
a. More or less permanent in nature
b. Possess physical existence
c. Not for sale d. Not intended for use in
the operation.
CASH ON HAND- refers to cash & other
items which are not yet deposited in the
banks. It includes coins, currencies, check,
money orders, and other money
equivalents.
CASH IN BANK- money deposited in the
bank.
MARKETABLE SECURITIES- this refers
to company securities, usually stocks that
are sold for cash.
NOTES RECEIVABLE- are claims of the
business from anyone evidenced by a note.
PROMISSORY NOTE.
INTEREST RECEIVABLE- interest earned
on an interest-bearing note not yet
collected.
ACCRUED INTEREST INCOME-
synonymous with interest receivable.
ACCOUNTS RECEIVABLE- claims of the
business from anyone for sales made or
services rendered on account.
ESTIMATED UNCOLLECTIBLE
ACCOUNT- sometimes called allowance for
bad debts. It refers to the provision for
accounts that may not be collected in the
future.
ADVANCES TO OFFICERS &
EMPLOYEES- it refers to amounts given to
officers & employees usually deductible
from their salaries.
MERCHANDISE INVENTORY- refers to
goods unsold at the end of the accounting
period or on hand at the beginning of the
year.
PREPAID EXPENSES- expenses paid in
advance or items that are bought which will
be used during the accounting period.
TOOLS- refer to small items of equipment
like pliers, hammer, etc.
LAND- refers to land space owned by the
business.
BUILDING- refers to the building or
edifice constructed, owned and intended
for use by the business.
FURNITURE & FIXTURES- term used for
tables and chairs, cabinets, counters &
other pieces of furniture.
DELIVERY EQUIPMENT- term that
includes cars, jeeps,trucks, vans and other
transportation vehicles owned by the
business.
ACCUMULATED DEPRECIATION- is a
contra-asset account which is a deduction
to a specific fixed asset.
INTANGIBLE ASSETS- assets that do not
have physical existence owned by the
business.
INCOME- is a general term to mean
anything made by the business.
SERVICE INCOME- refers to earnings
derived from services rendered whether in
cash or on account.
FEES- another term used to designate
income.
LEGAL FEE- income from rendering legal
services.
SALES- term to denote income from selling
goods.
COMMISSION INCOME- income received
by selling anything on a commission basis.
OTHER INCOME- earnings received other
than the main source of income.
COST & EXPENSES
a. Taxes & licenses
b. Salaries expense
c. delivery expense
d. bad debts expense
e. Depreciation expense
f. Insurance expense.
g. rent expense
h. Interest expense
i. Advertising expense.
j. utilities expense
k. Repairs & maintenance expense
l. salesmen salaries expense
m. Cost of Goods Sold.
LEASEHOLD as a guide in recording business
IMPROVEMENTS/RENOVATIONS- transactions.
DEPRECIATED/amortized

DEPRECIATION EXPENSE- STORE EQUIPMENT

(IS) P 9,900
ACCUMULATED DEPRECIATION- STORE
EQPT. (BS) P 9,900

Chapter 3 & 4
ELEMENTS OF ACCOUNTING & BUSINESS
DOCUMENTS

ELEMENTS OF ACCOUNTING:

ASSETS- things that a business owns.

This may come from the owner or the
creditors. The Conceptual framework
for Financial Reporting defined this
as present economic resource
controlled by the entity as a result
of past events.
LIABILITIES- things that the business
owes. It is the present obligation of
an entity to transfer an economic
resource as a result of past events.
Elements of accounting
EQUITY- residual interest in the
assets of the enterprise after
deducting all its liabilities.
INCOME- increases in assets or
decreases in liabilities, that results
in increases in equity.
EXPENSES- decreases in assets or
increases in liabilities that results
in decreases in equity Elements of
accounting
T-ACCOUNT- record for each asset,
liability, owner’s equity, income &
expenses items.It shows the changes in
each of these item. It also shows the
total additions, subtractions, and the
balance of an asset, liability or
WHAT DO WE DEBIT & CREDIT?
owner’s equity account. An account
maybe expressed in the form of a T-
We debit:
account.It has two sides. The DEBIT
a. Assets received
SIDE and the CREDIT SIDE. The Debit
b. Liabilities paid
side is abbreviated as Dr and Elements
c. Withdrawals or drawings
of accounting The credit side as CR.
d. Cost or losses
The debit side is the left side of an
account and the credit side is the
We Credit:
right side of an account.
A. assets given away
CHART OF ACCOUNTS- is a list of
B. liabilities incurred
account titles used by the bookkeeper
C. investment or capital
D. Income or gain 5. Decrease in one form of liability
and increase in another form of
Debit and credit liability.
6. Decrease in asset and decrease in
ITEMS THAT INCREASE ASSETS: owner’s equity.
1. Investment or capital
2. Additional investment
3. Acquisition of things of value
4. Claims or receivable
5. Donation of assets
ITEMS THAT DECREASE ASSETS:
1. Payment of cash
2. Withdrawal of assets
3. Sale of assets
4. Assets given away for donations

ITEMS THAT INCREASE LIABILITIES:

1. Acquisition of things on account
2. Incurrence of other liabilities
3. Assumption of a liability
ITEMS THAT DECREASE LIABILITIES
1. Payment of accounts
2. Return of things bought
3. Incurrence of another form of
liability to extinguish a former
liability

ITEMS THAT INCREASE OWNER’S EQUITY:

1. Original capital
2. Additional capital
3. Income
4. Gain on sale of other assets
ITEMS THAT DECREASE OWNER’S EQUITY:
1. Expenses
2. Withdrawals
3. Losses

COMPONENTS OF OWNER’S EQUITY

1. Original capital
2. Additional capital
3. Income
4. Drawing or withdrawal BUSINESS DOCUMENTS
5. Expenses CASH VOUCHER- a document which
evidences payment. It contains
How Do Transactions Affect The information about the transaction, the
Accounting Equation? payee and the approving official.
1. Increase in asset and increase in
owner’s equity OFFICIAL RECEIPT- a document which
2. Increase in asset and increase in evidences receipt of cash. It contains
liability information as to payor and the
3. Increase in one form of asset and transaction involved.
decrease in another form of asset.
4. Decrease in asset and decrease in
liability.
CASH SALES INVOICE- a business
document which evidences sale of
service or merchandise.
ACCOUNT SALES INVOICE- where sales on
account is recorded. Business
documents
ACCOUNT SALES INVOICE- It contains
information about the buyer, the
description of things bought and the
terms and conditions surrounding the
transaction.
CHECK- issued when payment is made
from the cash deposited from the
bank.A checkbook will be given when a
checking account is kept with any
bank.
PURCHASE INVOICE- a business document
which shows the name of supplier, the
items bought and other conditions
surrounding the purchase.
DEBIT MEMORANDUM- a business paper
showing that your account has been
reduced by the items that are charged
against you.
DEPOSIT SLIP- a document evidencing
the deposit of money in a bank.
PROMISSORY NOTE- a written promise
made by the maker to pay the payee a
sum certain in money at a fixed
determinable future time.
POSTING AND TRIAL BALANCE
THE POSTING PROCESS
POSTING- is the process of transferring information from
the journal to the ledger.
LEDGER - called the book of final entry because entries
are summarized in this book. This also pertains to a
group of accounts.
TWO KINDS OF LEDGER
GENERAL LEDGER- a group of controlling accounts
SUBSIDIARY LEDGER
- record showing the details of the General Ledger.
Accounts Receivable Subsidiary Ledger
- for customers
Accounts Payable Subsidiary Ledger
- creditors account
PROCEDURES IN POSTING
1. The bookkeeper should examine the chart
of accounts to help him in recording the
transactions.
2. Open the accounts in the ledger
a. Write the account title at the center
b. Place the number on the upper right hand
corner of the page.
c. Fill the columns with Date, Items, F, Debit
and also Credit side.
3. Transfer the information from the journal
to the ledger by copying the date and the
debit entry on the debit side of the ledger
and so with the credit entry on the credit
side of the ledger.
4. Write the page of the journal in the “Folio” or
reference column of the ledger and also place
the account number in the F column of the
journal. This is called REFERENCING.
5. Follow the same steps until all the entries in
the journal are transferred to the ledger.
SUBSIDIARY LEDGERS
THE TYPE OF LEDGER THAT SUPPLEMENTS THE
GENERAL LEDGER.
CONTROLLING ACCOUNTS- DETAILS OF THE
INFORMATION FOUND IN THE GENERAL LEDGER
THE SUM OF THE BALANCES IN THE SUBSIDIARY
LEDGER MUST BE IN AGREEMENT WITH THE
BALANCE OF THE RELATED C
ONTROLLING ACCOUNT.
TRIAL BALANCE & HOW TO PREPARE A TRIAL
BALANCE
A STATEMENT SHOWING THE OPEN ACCOUNTS IN
THE LEDGER. IT PROVES THE EQUALITY OF THE
DEBIT AND THE CREDIT TOTALS AFTER POSTING TO
THE LEDGER.
HOW TO PREPARE A TRIAL BALANCE
1. The heading is placed at the center of the
paper.
2. Determine the balance of each account in
the ledger. The balance of an account is the
difference between the debit and the credit
totals.
 3. Using the Trial Balance of Balances, an
account may either have a debit or a credit
balance. Assets usually result to debit
balances while liabilities and capital will
have credit balances.
4. The account title are arranged in the
following order: Assets, Liabilities, owner’s
equity, income and expenses. The peso sign
is written before the first debit and credit
amounts and in the totals.
5. Add the debit and credit columns by pencil.
If the pencil footings of the debit and credit
columns are already equal, double rule the
totals in ink.
TYPES OF TRIAL BALANCE
TRIAL BALANCE OF BALANCES
- SHOWS ACCOUNTS WITH OPEN BALANCES. THEY
MAY EITHER HAVE A DEBIT OR A CREDIT BALANCE.
AN ACCOUNT IS CLOSED IF THE DEBIT TOTAL
EQUALS THE CREDIT TOTAL.IN OTHER WORDS, THE
BALANCE IS ZERO.
AN ACCOUNT IS SAID TO HAVE A DEBIT BALANCE IF
DEBIT IS MORE THAN CREDIT AND A CREDIT
BALANCE IF THE ACCOUNT’S CREDIT IS MORE THAN
ITS DEBIT.
TRIAL BALANCE OF TOTALS
- A TYPE OF TRIAL BALANCE WHICH SHOWS THE
DEBIT TOTALS AND THE CREDIT TOTALS OF ALL THE
ACCOUNTS IN THE GENERAL LEDGER. BOTH OPEN &
CLOSED ACCOUNTS ARE SHOWN.
SIGNIFICANCE OF A TRIAL BALANCE &
TYPES OF ERRORS IN MAKING A TRIAL BALANCE
THE TRIAL BALANCE SHOWS THE BALANCE OF AN
ACCOUNT BROUGHT ABOUT BY THE BUSINESS
TRANSACTIONS. IT DOES NOT GUARANTEE ITS
ACCURACY. IT ONLY SHOWS THE EQUALITY OF THE
DEBITS AND CREDITS. IF THE DEBITS AND CREDITS
ARE NOT THE SAME, IT MAY BE DUE TO THE
FOLLOWING ERRORS:
1. WRONG ADDITION OR FOOTING - THE
VERTICAL ADDITION OF A MONEY COLUMN
2. WRONG POSTING
a. POSTING TO THE WRONG SIDE OF AN
ACCOUNT
b. POSTING AN ITEM TWICE
3. OMISSION OF POSTING
4. ERROR IN TRANSFERRING THE ACCOUNT FROM
THE LEDGER TO THE TRIAL BALANCE.
ERRORS THAT DO NOT AFFECT THE EQUALITY OF
THE TOTALS OF THE DEBIT & CREDIT
1. OMISSION OF A COMPLETE ENTRY
2. POSTING OF THE SAME TRANSACTION
TWICE
3. POSTING THE AMOUNT ON THE CORRECT
SIDE BUT TO A WRONG ACCOUNT.
STEPS TO LOCATE THE ERRORS IN THE TRIAL
BALANCE
1. ADD AGAIN THE DEBIT AND THE CREDIT
COLUMNS. IT MAY BE AN ERROR IN
FOOTING.
2. THE AMOUNT OF DIFFERENCE IN THE
TOTALS MAY GIVE YOU THE NATURE OF
THE ERROR.
A. IF THE DIFFERENCE IS 10,000 OR 1,000 THE
DIFFERENCE MAY BE IN THE ADDITION OR
SUBTRACTION.
B. IF THE DIFFERENCE IS DIVISIBLE BY 2, THE
ERROR MAY BE AN ERROR IN POSTING AN
ITEM ON THE WRONG SIDE OF THE
ACCOUNT.
C. TRANSPOSITION OR SLIDE- IS THE
INTERCHANGE OF DIGITS EXAMPLE 628 AS
682. IN A SLIDE, THE NUMBER IS MOVED
ONE OR MORE SPACES TO THE RIGHT OR
LEFT. EXAMPLE 628 AS 62.80 IN THESE
CASES, THE DIFFERENCE OF THE DEBIT AND
CREDIT TOTALS WILL BE DIVISIBLE BY 9.
THE ACCOUNTING CYCLE
1. ANALYZING TRANSACTIONS- check the
nature of the transactions
2. JOURNALIZATION- the process of recording
the business transaction in the journal
3. POSTING to the ledger- the process of
transferring the information from the
journal to the ledger.
4. PREPARING THE TRIAL BALANCE- the
process of taking the balances of open
accounts from the ledger,
5. ADJUSTING THE BOOKS- entries prepared at
the end of the accounting period to update
the records.
6. PREPARING THE FINANCIAL STATEMENTS-
refers to the preparation of accounting
reports, the Income Statement, Balance
 Sheet, Statement of Owner’s Equity and
Statement of Cash Flows.
7. CLOSING THE BOOKS- refers to the
preparation of closing entries at the end of
the accounting period to bring the income
and expense accounts to zero balance.
8. PREPARING A POST-CLOSING TRIAL BALANCE-
refers to the preparation of a Trial Balance after
closing the income and expense accounts. The
post closing trial balance shows only the assets,
liabilities and owner’s equity.
9. REVERSING ENTRIES- are prepared at the
beginning of the next accounting period to
reverse certain adjustments that were made at
the end of the accounting period.
JOURNALIZATION
- THE RECORDING OF BUSINESS TRANSACTIONS
IN TERMS OF DEBIT AND CREDIT IN A JOURNAL.
THE SIMPLEST FORM OF JOURNAL IS CALLED
THE GENERAL JOURNAL.
- A JOURNAL IS A CHRONOLOGICAL RECORD OF
THE ENTITY’S TRANSACTIONS.IT IS THE BOOK OF
ORIGINAL ENTRY.
HOW TO JOURNALIZE A TRANSACTION
1. ENTER THE DATE AND THE YEAR IN THE
DATE COLUMN
2. THE DEBIT ENTRY IS PLACED IN THE “
EXPLANATION” COLUMN.
3. THE CREDIT ENTRY IS PLACED ON THE NEXT
LINE AFTER THE DEBIT ENTRY, INDENTED
ABOUT ONE HALF INCH.
4. A BRIEF EXPLANATION IS WRITTEN ON THE
THIRD LINE WHICH IS ALSO INDENTED.
5. LEAVE THE NEXT LINE BEFORE ENTERING
THE SECOND JOURNAL ENTRY.
6. A COMPLETE JOURNAL ENTRY IS COMPOSED OF
A DEBIT AND A CREDIT PLUS A BRIEF
EXPLANATION.
7. THE AMOUNTS ARE ENTERED IN THE IN THE
DEBIT AND CREDIT COLUMN IN THEIR PROPER
MONEY COLUMN.
8. THE F IN THE “F” COLUMN STANDS FOR FOLIO
OR REFERENCE.
TYPES OF JOURNAL ENTRY
1. SIMPLE JOURNAL ENTRY- when there is one
debit and one credit
2. COMPOUND JOURNAL ENTRY - when the
journal entry has two or more debit or two or
more credit. It may take any of the following
form:
a. One debit and two or more credits
b. Two or more debits and one credit
c. Two or more debits and two or more credits
DISCOUNTS
TWO KINDS OF DISCOUNTS:
1.TRADE DISCOUNT - ARE DEDUCTIONS FROM THE
LIST PRICE TO ENCOURAGE BUYERS TO BUY MORE.
THIS IS IMMEDIATELY DEDUCTED FROM THE LIST
PRICE. THIS IS NOT RECORDED IN THE BOOKS.
3. CASH DISCOUNTS - ARE DEDUCTIONS
FROM THE INVOICE COST TO ENCOURAGE
CUSTOMERS TO PAY EARLY.THIS IS
RECORDED IN THE BOOKS AS EITHER SALES
DISCOUNT OR PURCHASE DISCOUNT.
HOWEVER PURCHASE DISCOUNT ON FIXED
ASSETS ARE DIRECTLY DEDUCTED TO THE
COST OF THE ASSET.
METHODS OF ACCOUNTING FOR INCOME &
EXPENSES
1. ASSET METHOD AND EXPENSE METHOD FOR
EXPENSES
2. INCOME METHOD AND LIABILITY METHOD FOR
INCOME
EXPENSE METHOD- IS USED WHEN AN EXPENSE
ACCOUNT IS DEBITED AT THE TIME OF PAYMENT
ASSET METHOD- IS USED WHEN THE ASSET ACCOUNT IS
DEBITED AT THE TIME OF PAYMENT
WHEN THE PROBLEM IS SILENT, THE EXPENSE METHOD
IS ALWAYS USED.
INCOME METHOD- WHEN MONEY IS RECEIVED AN
INCOME ACCOUNT IS CREDITED
LIABILITY METHOD- WHEN MONEY IS RECEIVED, A
LIABILITY IS CREDITED. WHEN THE PROBLEM IS SILENT
THE INCOME METHOD IS ALWAYS USED.
INTEREST
INTEREST IS THE AMOUNT PAID FOR THE USE OF MONEY
EITHER BE AN INCOME OR EXPENSE. IT IS EXPENSE TO
THE BORROWER AND AN INCOME TO THE LENDER.
INTEREST IS COMPUTED ON AGREED RATE OF INTEREST
ON THE SUM BORROWED OR LENT.
A PROMISSORY NOTE EVIDENCES THE INDEBTEDNESS. IT
IS A WRITTEN PROMISE MADE BY A MAKER PROMISING
TO PAY A PERSON CALLED PAYEE A SUM CERTAIN IN
MONEY AT A FIXED OR DETERMINABLE FUTURE TIME. IT
CAN BE INTEREST BEARING NOTE OR NON-INTEREST
BEARING NOTE.
PARTS OF A PROMISSORY NOTE
1. DATE OF THE NOTE IS THE DATE WHEN THE
NOTE IS DRAWN.
2. FACE OF THE NOTE IS THE AMOUNT
BORROWED OR LENT.
3. DATE OF MATURITY IS THE DATE ON
WHICH THE NOTE IS TO BE PAID.
4. PAYEE IS THE PERSON TO WHOM PAYMENT
IS TO BE MADE.
5. MAKER IS THE PERSON WHO PROMISES TO
PAY THE NOTE.
6. MATURITY VALUE IS THE AMOUNT TO BE
PAID AT MATURITY DATE.
PARTS OF A PROMISSORY NOTE
1. IN THE EXAMPLE THE BORROWER (MAYLIN
GUTIEREZ IS THE MAKER OF THE NOTE.
2. THE LEDGER (ERLINDA HERNANDEZ) IS THE
PAYEE.
3. AUGUST 1, THE DATE OF THE NOTE.
4. P5,000 IS THE FACE OF THE NOTE.
5. AUGUST 31, THE MATURITY DATE.
6. 3O DAYS IS THE TERM OF THE NOTE.
WE RECEIVE NOTES WHEN:
1. WHEN THE BUSINESS SELLS ON ACCOUNT
2. WHEN AN OPEN ACCOUNT CANNOT BE
SETTLED ON THE DATE OF PAYMENT.
3. WHEN THE BUSINESS LENDS MONEY.
HOW TO COMPUTE INTEREST
FORMULA:
INTEREST= PRINCIPAL X RATE X TIME
PRINCIPAL- THE ORIGINAL AMOUNT
RATE= RATE OF INTEREST
TIME- EXPRESSED IN YEARS
THE 60 DAY 6% RULE
Under the rule, we can say that the interest on any
principal at 6% fo 60 days is the quotient of itself
divided by 100. From this, we can say that:
1. The interest on any sum of 60 days at 6%,
move the decimal point two places to the
left.
2. The interest on any sum for 6 days at 6%,
simply move the decimal point three places
to the left.
3. The interest on any sum for 600 days at 6%,
simply move the decimal point one place to
the left.
Determining the maturity date
Step 1 - Determine the number of days in June-30
days;
Step 2 - Deduct the date of the note, june 30-1 = 29
Step 3 - Count forward until you get 120 days.
30 days in june
31 days in july
-1 date of the note
29 days needed in september
to complete 120 days
29 days left in june
120 days
The maturity date is September 29.
If the two dates, date of the note and date of
maturity are given, the same procedures may be
followed.
Discounting of notes
Another source of cash is by discounting a note. A
business may borrow from banks or lending
institutions by issuing a note. When a note is
discounted, the interest is deducted in advance.
The cash received is lower than the face of the
note. When the note is paid at maturity, there is no
more interest to be paid but simply the face of the
note.
MERCHANDISING
Definition of terms
Sales
-Is an account used to refer to gross receipts of the
business from the sale of merchandise
Sales returns
-Is a term used to designate the return of goods
sold due to defects on the merchandise, wrong
specifications, and others.
Sales allowance
-Refers to a reduction in price due also to wrong
specification or defects on the goods, and others,
without returning the goods.
Sales returns and allowances
-Is a term to donate either an allowance or a return
or goods sold. The reason for combining them is
that the amount involved is not material or -Is the difference between the gross profit on sales and
significant. the operating expenses

Sales Discount Other income

-Refers to revenues or income received other than the
-refers to deductions from invoice cost due to
sale of goods or merchandise
prompt payment. This is a cash discount.
Other expenses
Net Sales -Refers to expenditures or expenses incurred not in
-Is the difference between gross sales(without connection with the selling operation
deductions yet) and the sales returns and
allowances and the sales discount.
INTRODUCTION TO PARTNERSHIP
Cost of Goods sold or cost of sales
-refers to the price or cost paid for the goods sold. DEFINITION OF PARTNERSHIP

Merchandise inventory, beginning TWO OR MORE PERSONS BIND THEMSELVES

-Refers to goods on hand at the beginning of the TOGETHER TO CONTRIBUTE MONEY, PROPERTY OR
period. INDUSTRY TO A COMMON FUND, WITH THE
INTENTION OF DIVIDING THE PROFITS AMONG
THEMSELVES.

Merchandise inventory, end IT HAS A JURIDICAL PERSONALITY SEPARATE AND

-Refers to the unsold goods at the end of the DISTINCT FROM THAT OF EACH OF THE PARTNERS.
period. You will notice sometimes that dates are IT RESEMBLES SOLE PROPRIETORSHIP EXCEPT THAT
used instead of words, beginning and ending. THERE ARE TWO OR MORE OWNERS.

Purchases CHARACTERISTICS OF PARTNERSHIP

-A term that refers to goods or items bought for
resale. Things bought by the business for use in its 1. MUTUAL CONTRIBUTION
operation and not for sale will not fall under this 2. DIVISION OF PROFITS OR LOSSES
term. 3. CO-OWNERSHIP OF CONTRIBUTED CAPITAL
4. MUTUAL AGENCY
Purchases returns and allowances 5. LIMITED LIFE
-Refers to goods returned after the purchase due to 6. UNLIMITED LIABILITY
some defects, wrong specification, or other 7. PARTNER’S EQUITY ACCOUNT
reasons.
ADVANTAGES OF PARTNERSHIP
Purchase discount
-Refers to deductions from the invoice cost due to 1. BRINGS GREATER FINANCIAL CAPABILITY TO
prompt payment. THE BUSINESS
2. COMBINES SPECIAL SKILLS, EXPERTISE AND
Freight in EXPERIENCES OF PARTNERS.
-Refers to the transportation cost of the goods 3. OFFERS RELATIVE FREEDOM AND
bought for sale. FLEXIBILITY OF ACTION IN DECISION-
MAKING
Total goods available for sale 4. EASIER AND LESS EXPENSIVE TO ORGANIZE
-Is the total cost of the merchandise inventory beginning THAN CORPORATION
and net cost of purchases
5. MORE PERSONAL AND INFORMAL
(Purchases less purchase returns and allowances and
purchase discount) and freight in if there is any. DISADVANTAGES OF PARTNERSHIP

Operating expenses 1. EASILY DISSOLVED AND THUS UNSTABLE

-Is a term to include all expenses incurred in connection THAN A CORPORATION.
with the business operation

Net income from operation

 2. MUTUAL AGENCY AND UNLIMITED 5. THE RIGHTS & DUTIES OF EACH PARTNER
LIABILITY MAY CAUSE PERSONAL 6. THE ACCOUNTING PERIOD TO BE ADOPTED,
OBLIGATIONS TO PARTNERS. NATURE OF ACCOUNTING RECORDS & FS
3. LESS EFFECTIVE THAN A CORPORATION IN 7. THE METHOD OF SHARING PROFITS AND
RAISING LARGE AMOUNTS OF MONEY. LOSSES
8. THE DRAWINGS OR SALARIES TO BE
TYPES OF PARTNERSHIP ALLOWED FOR PARTNERS
9. THE PROVISION FOR ARBITRATION OF
1. ACCORDING TO OBJECT DISPUTES, DISSOLUTION & LIQUIDATION.
A. UNIVERSAL PARTNERSHIP OF ALL PRESENT
PROPERTY. OTHER MATTERS
B. UNIVERSAL PARTNERSHIP OF PROFITS. 1. SEC REGISTRATION
C. PARTICULAR PARTNERSHIP 2. ACCREDITATION TO PRACTICE PUBLIC
ACCOUNTANCY
2. ACCORDING TO LIABILITY 3. PARTNER’S CAPITAL ACCOUNT
A. GENERAL 4. LOANS RECEIVABLE FROM OR PAYABLE TO
B. LIMITED PARTNERS

3. ACCORDING TO DURATION
A. PARTNERSHIP WITH A FIXED TERM
B. PARTNERSHIP AT WILL

4. ACCORDING TO PURPOSE PARTNERSHIP FORMATION

A. COMMERCIAL OR TRADING PARTNERSHIP
B. PROFESSIONAL OR NON-TRADING VALUATION OF INVESTMENTS BY PARTNERS
PARTNERSHIP
 PARTNERS MAY INVEST CASH OR NON-
5. ACCORDING TO LEGALITY OF EXISTENCE
A. DE JURE PARTNERSHIP CASH ASSETS IN THE PARTNERSHIP.
B. DE FACTO PARTNERSHIP  WHEN A PARTNER INVESTS NON-CASH
ASSETS, THE VALUES OF THE ASSETS ARE
KINDS OF PARTNERS RECORDED ON THE AGREED VALUES BY THE
PARTNERS.
1. GENERAL PARTNER  IN THE ABSENCE OF AGREEMENT, THE
2. LIMITED PARTNER ASSETS ARE RECORDED AT THE FAIR
3. CAPITALIST PARTNER MARKET VALUE AT THE DATE OF TRANSFER
4. INDUSTRIAL PARTNER TO THE PARTNERSHIP.
5. MANAGING PARTNER
6. LIQUIDATING PARTNER HE FAIR MARKET VALUE OF THE ASSET-
7. DORMANT PARTNER REFERS TO THE ESTIMATED AMOUNT THAT A
8. SILENT PARTNER WILLING SELLER WOULD RECEIVE FROM A
9. SECRET PARTNER FINANCIALLY CAPABLE BUYER FOR THE SALE OF
10. NOMINAL PARTNER OR PARTNER BY ASSET IN A FREE MARKET.
ESTOPPEL
ADJUSTMENT OF ACCOUNTS PRIOR TO
ARTICLES OF PARTNERSHIP FORMATION
IN CASE THE PARTNERS HAVE THEIR OWN
1. THE PARTNERSHIP NAME, NATURE, BUSINESSES, THEIR ACCOUNTS MUST BE ADJUSTED
PURPOSE & LOCATION TO ITS FAIR MARKET VALUE TO CORRECT
2. THE NAMES, CITIZENSHIP AND RESIDENCES MISSTATEMENTS IN THEIR ACCOUNTS. THEIR
OF PARTNERS INVESTMENT WILL BE RECORDED AT THE
3. THE DATE OF FORMATION AND THE CORRECTED AMOUNTS.
DURATION OF PARTNERSHIP
4. THE CAPITAL CONTRIBUTION OF EACH PARTNERSHIP BETWEEN TWO INDIVIDUALS
PARTNER
RULE ON INVESTMENTS: ALL NONCASH ASSETS
CONTRIBUTED TO THE PARTNERSHIP OR IN ANY
ORGANIZATION FOR THAT MATTER, SHOULD BE
RECORDED AT FMV ALWAYS. IN CASE THE
PROBLEM STATED AGREE VALUE INSTEAD OF FMV,
THE AGREED VALUE SHOULD BE RECORDED. IN
CASE WHERE BOTH FMV AND AGREED VALUE ARE
GIVEN, THE AGREED VALUE WILL BE RECORDED.
PARTNERSHIP BETWEEN TWO SOLE
PROPRIETORSHIPS
PROCEDURE:
1. RECORD THE ADJUSTING ENTRIES IN EACH
BOOK ACCORDING TO AGREEMENT.
2. PREPARE THE ADJUSTED TRIAL BALANCE OF
EACH BOOK.
3. CLOSE EACH PARTNER’S BOOK.
4. RECORD THE INVESTMENT OF BOTH
PARTNERS IN THE NEW BOOK.
5. PREPARE THE STARTING BALANCE OF THE
NEW BOOK.
NET REALIZABLE VALUES
EXPECTED CASH VALUE OF COLLECTIBLE. IT
IS THE VALUE OF RECEIVABLE LESS ALLOWANCE
FOR BAD DEBTS OR ALLOWANCE FOR IMPAIRMENT
LOSS.
BOOK VALUE
PROPERTIES & EQUIPMENT THAT ARE
SUBJECT TO WEAR AND TEAR OR DEPRECIATION
AND ARE STATED AT B OOK VALUE. THE BOOK
VALUE OF AN ASSET IS THE COST OF THE ASSET
LESS ACCUMULATED DEPRECIATION
ALLOWANCE FOR IMPAIRMENT LOSS
THIS IS ALSO KNOWN AS ALLOWANCE FOR
DOUBTFUL ACCOUNTS OR ALLOWANCE FOR BAD
DEBTS. IT SHOWS THE ESTIMATED UNCOLLECTIBLE
ACCOUNTS OF CUSTOMERS BASED ON EXPERIENCE
AND AGING OF ACCOUNTS RECEIVABLE.

TAKE NOTE OF THE FOLLOWING:

PROFITS & LOSSES
1. RULE ON REVALUATION OF ACCOUNTS
PARTNER’S EQUITY IN ASSETS CONTRASTED WITH
RECEIVABLE. THE ADJUSTMENTS SHOULD
SHARE IN PROFITS OR LOSSES
BE MADE USING THE ACCOUNT
“ALLOWANCE FOR DOUBTFUL ACCOUNTS”
 A MATTER OF AGREEMENT
OR ALLOWANCE FOR IMPAIRMENT LOSS’
 MAY NOT BE THE SAME WITH THEIR
ALWAYS, AND THE CORRESPONDING
CAPITAL CONTRIBUTION
CAPITAL ACCOUNT. IF IT IS A LOSS, THE
 MUST CONSIDER MONEY, PROPERTY OR
ALLOWANCE FOR DOUBTFUL ACCOUNT IS
INDUSTRY
CREDITED AND THE CAPITAL ACCOUNT IS
DEBITED. IF IT IS GAIN, THE ALLOWANCE
FOR DOUBTFUL ACCOUNTS IS DEBITED AND
RULES FOR THE DISTRIBUTION OF PROFITS OR
THE CAPITAL ACCOUNT IS CREDITED.
LOSSES
2. RULE ON REVALUATION OF DEPRECIABLE
PROFITS
PROPERTIES & EQUIPMENT: ANY
ADJUSTMENT TO DEPRECIABLE PROPERTIES
1. AGREEMENT
AND EQUIPMENT OR FIXED ASSETS
2. ACCORDING TO ORIGINAL CAPITAL
SHOULD BE MADE THROUGH THE CONTRA
INVESTMENT
ASSET TITLE “ACCUMULATED
3. RATIO OF CAPITAL BALANCES AT THE
DEPRECIATION”, ALWAYS. THE BASIS OF
BEGINNING OF THE YEAR
RECORDING IS THE FMV OR THE AGREED
VALUE AND NOT THE BOOK VALUE. IF IT IS
INDUSTRIAL PARTNERS ARE NOT LIABLE TO LOSSES
A GAIN THE ACCUMULATED DEPRECIATION
IF 2 OR 3 PREVAILS.
IS DEBITED AND THE CAPITAL ACCOUNT IS
CREDITED. IF IT IS A LOSS, THE
LOSSES
ACCUMULATED DEPRECIATION IS CREDITED
AND THE CAPITAL ACCOUNT IS DEBITED.
1. AGREEMENT
2. IF THERE IS NO AGREEMENT ON LOSSES,
IMPORTANT TERMINOLOGIES
THE LOSSES SHALL BE DISTRIBUTED
ACCORDING TO THE PROFIT RATIO
 3. FOR CAPITALIST PARTNERS, ACCORDING TO
THE RATIO OF THE OF THE ORIGINAL
INVESTMENT OR ACCORDING TO THE
RATIO OF THE BALANCES AT THE
BEGINNING OF THE YEAR.
FOR INDUSTRIAL PARTNERS, THEY WILL NOT BE
LIABLE FOR ANY LOSSES IN THE ABSENCE OF
AGREEMENT.
DISTRIBUTION OF PROFITS OR LOSSES
BASED ON PARTNER’S AGREEMENT
1. EQUALLY OR IN AGREED RATIO
2. BASED ON PARTNER’S CAPITAL
CONTRIBUTION
A. RATIO OF ORIGINAL CAPITAL INVESTMENT
B. RATIO OF CAPITAL INVESTMENT AT THE
BEG. OF THE YEAR
C. RATIO OF CAPITAL BALANCES AT THE END
OF THE YEAR
D. RATIO OF AVERAGE CAPITAL BALANCES
Equally or in other Agreed Ratio Partnership
contracts may provide that profit or loss be divided
equally.
Based on Partners' Capital Contributions
- Division of partnership profits in proportion
to the capital invested by each partner is
most likely to be found in partnerships in
which substantial investments is the
principal Ingredient for success. It is
essential that the partnership contract be
specific with respect to the concept of
capital.
Ratio of Original Capital Investments.
Assume that the partnership agreement provides
for the division of profits in the ratio of original
capital investments
Ratio of Capital Balances at the Beginning of the
Year.
Assume that the partnership agreement provided
for the division of profits in the ratio of capital
balances at the beginning of the year.
Ratio of Capital Balances at the End of the Year.
Assume that the profit is divided in the ratio of
capital balances at the end of the year before
drawings and the distribution of profit.
Ratio of Average Capital Balances.
Division of profits or losses on the basis of the three
preceding capital concepts-original capital
investments; capital balances at the beginning of
the year, or capital balances at the end of the year-
may prove inequitable if there are material changes
in the capital accounts during the year.
if ending capital balances are used, year-end
investments are encouraged, but there is no
incentive for partner to make any investments
before year end. In addition, amounts earlier
withdrawn may be reinvested before year-end.
These considerations suggest that using average
balances as a basis for distributing profits or losses
is preferable because it reflects the capital actually
available for use by the partnership during the year.
The agreement should also state the amount of
drawings each partner may make. These drawings
are considered temporary and are recorded as
debits to the partner's drawing account. Drawings
within the allowable amount will not affect the
computation of the average capital balance. On the
contrary, drawings in excess of allowable amount
are considered permanent reductions in capital;
hence, computation of the average capital balance
is affected
By Allowing Interest on Capital and the Balance in
an Agreed Ratio in the preceding section, the plan
for dividing the total profits in the ratio of partners’
capital balances was based on the assumption that
capital investments were the controlling factor in
the success of the partnership. However, it is not
always the case Consequently, partnerships may
choose to allocate a portion of the total profits in
the capital ratio and the balance equally or in other
agreed ratio after due consideration of the partners
other contributions. To allow interest on partners’
capital account balances is almost similar to
dividing part of profits in the ratio of partners'
capital balances. If the partners agree to allow
interest on capital as a first step in the division of
profit, they should specify the interest rate to be
used it should also state whether interest is to be
computed on capital balances on specific dates or
on average capital balances during the year.
Partners invested in a partnership for profits, not
for interest. The interest on partners’ capital, along
with the other profit-sharing plans to be discussed
in the remainder of the chapter, are to be
considered as mere techniques to share partnership
profits or losses equitably and not as expenses of
the partnership. On the other hand, the interest on
loans from partners is recognized as expense and a
factor in the measurement of profit or loss of the
partnership. Similarly, interest earned on loans to
partners is recognized as partnership income.
Comparison of distribution based solely on capital
ratios as against distribution with Interest on capital
balances. There will be a significant difference
between the two distribution plans if the
partnership is operating at a loss. Under the copitol
ratio plan, the partner who invested more capital
will ultimately shoulder a bigger share of the loss.
This result may be considered inequitable because
the investment of capital presumably is not the
cause of the loss. Under the interest plan, the
partner who invested more capital is credited
(increased) for an interest on his capital and is
ultimately debited (decreased) with a lesser share
of the loss; in some cases, the result may even be a
net credit (increase).
By Allowing Salaries to Partners and the Balance in
an Agreed Ratio
The sharing agreement may provide for variations
in compensating the personal services contributed
by partners. Even among partners who devote
equal service time, one partner's superior
experience and knowledge may command a greater
share of the profit. To acknowledge the harder
working or more valuable partner, the profit-
sharing plan may provide for salary allowances. The
partnership agreement should be clear on the
treatment of salary allowances when losses are
incurred. In the absence of an agreement to govern
this situation, salary allowances will be provided
even when operations yielded losses. This
allowance should not be confused with salaries
expense or with the partner's drawing account
which is debited for periodic salary allowances. The
cash withdrawals will in no way affect the division
of profits; the division of profits is governed by the
sharing agreement. Partners are the partnership's
owners; they are not employees of the business. If
partners devote their time and services to the
affairs of the partnership, they are understood to
do so for profit, not for salary. Therefore, when the
partners calculate the profit of the partnership,
salaries to the partners are not deducted as
expenses in the statement of recognized income
and expense.
By Allowing Salaries, Interest on Capital, Bonus to
the Managing Partner and the Balance in an Agreed
Ratio The service contributions and capital
contributions of the partners are often not equal. If
the service contributions are not equal, salary
allowances can compensate for the differences. Or,
when capital contributions are not equal, interest
allowances can make up for the unequal
investments. When both service and capital
contributions are unequal, the allocation of profits
or losses may include salary allowances, interest on
their capital balances, bonus to the managing
partner, and the balance to be divided in an agreed
ratio. Note that the provisions for salaries and
interest in the partnership agreement are called
allowances. These allowances are not reported in
the statement of recognized income and expense as
salaries and interest expense; they are merely
means of allocating profit to the partners.
FINANCIAL REPORTING
Purpose of Financial Statements Financial
statements are a structured representation with
the objective of providing information about the
financial position, financial performance and cash
flows of an entity that is useful to a wide range of
users in making economic decisions. Financial
statements also show the results of the
management's stewardship of the resources
entrusted to it. To meet the objective, financial
statements provide information about an entity's
assets, liabilities, equity, income and expenses,
other changes in equity and cash flows.
Complete Set of Financial Statements Per revised
International Accounting Standards (IAS) No. 1,
Presentation of Financial Statements, a complete
set of financial statements comprises:
a. a statement of financial position as at the end of
the period;
b. a statement of comprehensive income for the
period;
c. a statement of changes in equity for the period;
d. a statement of cash flows for the period;
e. notes, comprising a summary significant
accounting policies and other explanatory
information; and
F. a statement of financial position as at the
beginning of the earliest comparative period when
an entity applies an accounting policy
retrospectively or makes a retrospective
restatement of items in its financial statements, or
when it reclassifies items in its financial statements
As a minimum, the statement of comprehensive
income shall include line items that present the
following amounts for the period:
a. Revenue;
b. Finance costs;
c. Share of profit or loss of associates and joint
ventures accounted for using the equity method;
d. Tax expense;
e. A single amount comprising the total of:
L The post-tax profit or loss of discontinued
operations; and
H. The post-tax gain or loss recognized on the
measurement to fair value less costs to sell on the
disposal of the assets or disposal group(s)
f. Profit or loss;
8. Each component of other comprehensive income
classified by nature (excluding amounts in (h)
below);
h. Share of the other comprehensive income of
associates and joint ventures accounted for using
the equity method; and
constituting the discontinued operations;
i. Total comprehensive income.
Statement of Changes in Equity An entity shall
present a statement of changes in equity, showing
in the statement:
a. total comprehensive income for the period
showing separately the total amounts attributable
to owners of the parent and to minority interests;
b. for each component of equity, the effects of
retrospective restatement recognized in
accordance with 1AS No. 8, Accounting Policies,
Changes in Accounting Estimates and Errors;
c. the amounts of transactions with owners in their
capacity as owners, showing separately
contributions by and distributions to owners; and
d. for each component of equity, a reconciliation
between the carrying amount at the beginning and
the end of the period, separately disclosing each
change.
The components of equity referred to above
include for example, each class of contributed
equity, the accumulated balance of each class of
other comprehensive income and retained earnings
(these are applicable to corporations). The amount
of dividends recognized as distributions to owners
during the period, and the related amount per
share, shall be presented either in the statement of
changes in equity or in the notes.
Statement of Financial Position
After all the components of the statement of
comprehensive income along with the changes in
partners' equity for the period have been properly
presented, the preparation of the statement of
financial position will present no major difficulty.
The assets and liabilities will be presented in the
statement of financial position as those of a sole
proprietorship but the owners' equity section
should exhibit separately the capital balance
Though some of the items are not as familiar yet,
per revised International Accounting
Standards (IAS) No. 1, Presentation of Financial
Statements, as a minimum, the face of the
statement of financial position shall include line
items that present the following amounts:
a. Property, plant and equipment;
b. Investment property;
c. Intangible assets;
d. Financial assets (excluding amounts shown
under e, h and I)
; e. Investment accounted for using the equity
method;
f. Biological assets;
g. Inventories;
h. Trade and other receivables;
i. Cash and cash equivalents;
j. The total of assets classified as held for sale and
assets included in disposal groups classified as held
for sale in accordance with IFRS 5;
k. Trade and other payables;
1. Provisions;
m. Financial liabilities (excluding amounts shown
under k and I);
n. Liabilities and assets for current tax, as defined in
IAS 12;
o. Deferred tax liabilities and deferred tax assets,
as defined in IAS 12;
p. Liabilities in disposal groups classified as held for
sale in accordance with IFRS 5;
q. Minority interest, presented within equity; and
r. Issued capital and reserves attributable to equity
holders of the parent. IAS No. 1 (revised 2007) does
not prescribe the order or format in which an entity
presents items.
The above enumeration (from Paragraph 54 of IAS
No. 1, revised 2007) simply provides a list of items
that are sufficiently different in nature or function
to warrant a separate presentation in the
statement of financial position.
Note that an entity makes the judgment about
whether to present additional items. separately on
the basis of an assessment of:
a. the nature and liquidity of assets;
b. the function of assets within the entity; and
c. the amounts, nature and timing of liabilities.
Current and noncurrent assets and liabilities should
be separately classified on the face of the
statement of financial position except when a
presentation based on liquidity provides more
reliable and relevant information.
An entity shall classify an asset as current asset
when it satisfies any of the following criteria: it
expects to realize the assets, intends to sell or
consume it, in its normal operating cycle; or
it holds the asset primarily for the purpose of
trading; or it expects to realize the asset within 12
months after the end of the reporting period; or the
asset is cash or a cash equivalent as defined in IAS
No. 7. All other assets are noncurrent. Operating
cycle is the time between the acquisition of assets
for processing and their realization in cash or cash
equivalents. A liability should be classified as a
current liability when it: is expected to be settled in
the normal operating cycle; or is held primarily for
the purpose of trading; or is due to be settled
within 12 months after the end of the reporting
period; . does not have an unconditional right to
defer settlement of the liability for at least 12
months after the reporting period. All other
liabilities should be classified as non-current
liabilities.
Cash Outflows
 payments to owners in the form of
withdrawals
 payments to settle notes payable
The use of internal controls over cash receipts and
disbursements was already discussed in Basic
Accounting Made Easy 2013 Edition by Prof. WIN
Ballada. The establishment and maintenance of a
petty cash fund and the control of cash through a
bank account were also illustrated lengthily.
Statement of Cash Flows
The cash flow statement serves as a basis for
evaluating the entity's ability to generate cash and
cash equivalents and the needs to utilize these cash
flows.
The statement of cash flows provides information
about the cash receipts and cash payments of an
entity during a period. It is a formal statement that
classifies cash receipts (inflows) and cash payments
(outflows) into operating, investing and financing
activities.
This statement shows the net increase or decrease
in cash during the period and the cash balance at
the end of the period; it also helps project the
future net cash flows of the entity. The discussion
below gives an overview of some important
concepts involved in the preparation of the cash
flow statement. Cash Flows from Operating
Activities Operating activities generally involve
providing services, and producing and delivering
goods. Cash flows from operating activities are
generally the cash effects of transactions and other
events that enter into the determination of profit or
loss. This cash flow can be presented using either
the direct or the indirect method. Using the direct
method, the entity's net cash provided by (used in)
operating activities is obtained by adding the
individual operating cash inflows and then
subtracting the individual operating cash outflows.
The indirect method derives the net cash provided
by (used in) operating activities by adjusting profit
for income and expense items not resulting from
cash transactions.
The adjustment begins with profit followed by the
addition of expenses and charges (e.g.
depreciation) that did not entail cash payments.
Then, increases in current assets and decreases in
current liabilities involved in the determination of
profit but which did not actually increase or
decrease cash, are subtracted from profit. Finally,
decreases in current assets and increases in current
liabilities are added to profit to obtain net cash.
provided by (used in) operating activities. Profit
Adjustments for: Non-Cash Expenses (e.g.
Depreciation)" Increases in Current Asset Accounts
Decreases in Current Liability Accounts Decreases in
Current Asset Accounts Increases in Current
Liability Accounts Cash Flows from Operating
Activities.
meant that the entity did not pay the full amount of
salaries expense for the period. The expense in the
income statement, for cash flow purposes, is
overstated by the amount of unpaid salaries. If
expense is overstated, then profit is understated by
the same amount; hence, the increase in current
liability is added to profit. Per International
Accounting Standards (IAS) No. 7, Cash Flow
Statements, enterprises are encouraged to report
cash flows from operating activities using the direct
method but the indirect method is acceptable. Only
the direct method is illustrated here using assumed
amounts. The following are the major classes of
operating cash flows using the direct method: Cash SENT A BILL TO MS. LOSCOS IN THE
Inflows receipts from sale of goods and AMOUNT OF P10,000 FOR SERVICES
performance of services receipts from royalties, RENDERED
fees, commissions and other revenues Cash Increase in asset and increase in owner’s
Outflows payments to suppliers of goods and equity
services payments to employees payments for
taxes payments for interest expense payments for
other operating expenses Cash Flows from
Investing Activities Investing activities include
making and collecting loans; acquiring and PAID ADVERTISING EXPENSE
disposing of investments in debt or equity Decrease in asset and decrease in owner’s
equity.
securities; and obtaining and selling of property and
equipment and other productive assets. Cash
MR. RIVERA WITHDREW MONEY
Inflows receipts from sale of property and
AMOUNTING TO
equipment receipts from sale of investments in
Decrease in asset and decrease in owner’s
debt or equity securities receipts from collections equity.
on notes receivable
WHAT ARE THE TWO-FOLD EFFECT OF
Cash Outflows payments to acquire property and THE FF. TRANSACTIONS? D. RIVERA
equipment payments to acquire debt or equity INVESTED p 40,000 WHICH WAS
securities payments to make loans to others DEPOSITED IN THE BANK
generally in the form of notes receivable Cash Flows Increase in asset and increase in owner’s
from Financing Activities Financing activities include equity
obtaining resources from owners and creditors.
Cash Inflows receipts from investments by owners’ PAID SALARIES 30,000 FOR THE FIRST
receipts from issuance of notes payable HALF OF THE MONTH
Decrease in asset and decrease in owner’s
PERMANENT ACCOUNTS- Asset equity.
NOMINAL ACCOUNTS – Expense
UNEARNED INCOME-Liabilities CASH WHEN YOU PAY EXPENSES
MARKETABLE SECURITIES- Asset CREDIT
WITHDRAWALS- Owner’s equity
JOURNALIZING- Accounting cycle VEHICLE WHEN YOU BOUGHT IT ON
ACCRUED INTEREST INCOME- Asset ACCOUNT
PREPAID EXPENSE- Assets DEBIT
NET LOSS- Owner’s equity
SALARIES EXPENSES WHEN THE
RECEIVED CASH FOR SERVICES EMPLOYEES ARE PAID FOR THEIR
RENDERED= Increase in asset and increase in SALARIES
owner’s equity DEBIT

PAID RENT OF Php FURNITURE & FIXTURE WHEN YOU BUY

Decrease in asset and decrease in owner’s FOR CASH
equity. DEBIT
PAID TAXES AND LICENSES Php SERVICE INCOME (REVENUE) WHEN YOU
Decrease in asset and decrease in owner’s RENDER SERVICE ON ACCOUNT
equity. CREDIT
PAID SALARIES OF WORKERS Php CAPITAL WHEN THE OWNER MAKES AN
Decrease in asset and decrease in owner’s ADDITIONAL INVESTMENT
equity. CREDIT
BOUGHT COMPUTER FOR CASH CASH IN BANK WHEN YOU DEPOSIT
Increase in one form of asset and decrease in MONEY IN THE BANK
another form of asset.
DEBIT Transaction are recorded chronologically in the
=journal
ACCOUNTS RECEIVABLE WHEN YOU
COLLECT AN ACCOUNT At the end of the accounting period, the
CREDIT equation assets= liabilities + owner’s equity
does not balance
ACCOUNTS PAYABLE WHEN YOU PAY = add to the difference between revenues and
YOUR ACCOUNT expenses to owner’s equity
DEBIT
Balance sheet account are
SUPPLIES YOU BOUGHT ON ACCOUNT = Permanent accounts
DEBIT
The purpose of a ledger is to
CAPITAL FOR THE NET INCOME EARNED =Maintain a separate account sheet and
FOR THE YEAR income statement accounts
CREDIT
A journal entry that contains more than two
ACCOUNTS PAYABLE WHEN THE
accounts is called
= A compound journal entry
SUPPLIER ISSUED A DEBIT MEMO FOR
DEFECTIVE GOODS
If the furniture is overvalued by 1000 in the trial
DEBIT
balance,
= the total debit side is the same as the total
DRAWING WHEN THE OWNER
credit balance in the trial balance
WITHDRAWS MONEY FROM THE
BUSINESS The accounting cycle is
DEBIT = the length of time it takes to complete a set of
financial statement after the books are closed
SERVICE INCOME (REVENUE) WHEN YOU
RENDER SERVICE FOR CASH Of the following errors, the one that will cause
CREDIT an inequality in the trial balance totals is
= incorrectly computing an account balance
ACCOUNTS RECEIVABLE WHEN YOU
RENDER SERVICE ON ACCOUNT The normal balance of an account is on the
DEBIT = side represented by increases in the account
balance
NOTES PAYABLE WHEN YOU GAVE IT IN
REPLACEMENT FOR YOUR ACCOUNTS A ledger is define as a collection of
PAYABLE =account tittles – asset, liability, equity, income
CREDIT and expense accounts

CAPITAL WHEN THE OWNER INVESTED What function do accounting journals serve in
MONEY the accounting process
CREDIT = recording

CASH ON HAND WHEN YOU RENDER A chart of accounts is a (an)

SERVICES FOR CASH =list of names of all account tittles
DEBIT

NOTES RECEIVABLE WHEN IT IS PAID

CREDIT

ACCOUNTS PAYABLE WHEN YOU BUY

EQUIPMENT ON ACCOUNT
CREDIT

The term footing refers to the

=addition of a column of figures