affects, and what monetary value is to be
FABM1 Reviewer
Lesson 1: Nature of business
transactions
Accounting Process
-Core of accounting
-It outlines the various procedures accountants
carry out that lead to the preparation of
financial statements.
-It begins with the identification of an event, the
analysis of the effects of that event, and the
measurement of the impact of that event to the
business' financial statements.
Business transaction
-also called as simple transaction -Transactions
are businesses' economic events that are
recorded by accountants. -For an event to be
recognized as a transaction and be recorded in
the boos, it has to satisfy the requirements that
we have already outlined. -The exact terms for
"transactions" is "business transactions."
-Ensure that the accounts affected are the
businesses' own accounts and not the owner's
personal account.
Characteristics
-These transactions are measurable in monetary
terms.
-It involves an event occurring between the
organization and a third party. -It is on behalf of
the business entity, and it is not for an individual
purpose. -The transaction is recorded by
authorized legitimate documents like an invoice,
sale order, receipt, etc. that supports the
transaction.
Source Documents
-Whenever a transaction is to be recorded, the
accountant has to ascertain what accounts of
assets, liabilities, equity, revenue, or expense it
assigned to that effect. -The various transaction
details we need in order to proceed with the
analyzing, identifying, and measuring phase, are
found in a document called source document.
-These documents are critical to the accounting
process as they provide an accountant with an
objective basis for the date, amount, and
purpose of the transaction.
Types of Business Transactions
1. Cash Transaction- -Payment was
received or paid in cash at the time the
transaction occurred.
2. Credit Transaction- -Payment is made
after a set amount of time, also called
the credit period.
3. Internal Transaction-When a business
transaction occurs, and there is no
external party involved, it is called an
internal transaction.
4. External Transaction-Sometimes called
exchange transactions and occur when
two or more parties are involved in the
transaction.
Examples of Business Transactions
Borrowing Money from a Bank- - This
transaction will affect two accounts one is
Cash/bank Account (Assets), and the second is
Loan Account (Liability).
Purchase Goods from Vendor - This transaction
will have an effect on two accounts one is
Purchase Account, and the second is Vendor
Account (Liability); this transaction will also
affect the inventory as the inventory stock will
increase (Assets).
Paying Rent and Other Utilities - This transaction
will affect two accounts, one is Cash/bank
Account (Assets), and the second is the Rent
and electricity Account (Expenses).
Cash Sales of Goods-This transaction will affect
two accounts; one is Cash/bank Account
(Assets), and the second is a Sale Account
(Income); this transaction will also affect
inventory as inventory stock will decrease
(Assets).
EXTERNAL BUSINESS FORMS
-are used both inside and outside the company.
These forms are used by both selling and buying
companies.
1. Purchase Order -used by buyer to
communicate his exact orders to seller.
2. Delivery Receipt -evidence of delivery
and is issued by the seller.

Interest Paid- This transaction will affect two

3. Sales Invoice- communication from the
accounts, one is Cash/bank Account (Assets),
seller to the buyer. It documents the
and the second is an interest Account
amount of payment that the seller is
(Expenses).
claiming.

Lesson 2: types of 4. Provisional Receipt-proves that a sale

has been made, even if the payment
business documents has not yet been received.

Business Forms: the 5. Official Receipt - evidence of payment,

evidence of the the BIR has an approved format of the
OR.
occurrence of a 6. Bills and Statement of Accountant-
transaction issued by a vendor to a client.

2 types of business forms:

INTERNAL BUSINESS FORMS

-are used only within the company. These forms
may be used by the seller only or the buyer only.

1. Purchase Request - used by an

employee to purchase goods or services on
behalf of their firm.
2. Receiving Report- prepared by buyer ' s
personnel in charge of receiving deliveries.
3. Check voucher- documents process for
the preparation, verification, and authorization
of check payments.
Lesson 3: Rules of

debit and credit

Account - record of all
the movements in a
particular item of

asset, liability, or
equity during a period.
T-account - basic visual
representation of an
account.
What is debit and credit?
- Whenever an accounting transaction is
created, at least two accounts are
always impacted, with a debit entry
being recorded against one account and
a credit entry being recorded against
the other account.
- A debit is an accounting entry that
either increases an asset or expense
account, or decreases a liability or
equity account. It is positioned to the
left in an accounting entry.
- A credit is an accounting entry that
either increases a liability or equity
account, or decreases an asset or
expense account. It is positioned to the
right in an accounting entry.
Remember:
- Every journal entry requires at least one
debited account and also one credited
account. This means following the
definition that at the very least one
account has to have a movement in the
left side or the debit side of its T
account, and another account has to
have a movement in the right side or
the credit side of its T account.
- The terms left and right are used to
refer to the debit and credit side of the
account.
- When an account is debited, its value is
increased or conversely, that when an
account is credited, its value is
decreased.
- A debit does not mean that a profitable
event has happened and that the
opposite is true for a credit.
List of Rules of Debits and
Credits:
- Increases in assets are recorded as
debits; decreases are recorded as
credits.
- increases in liabilities are recorded as
credits; decreases are recorded as
debits
- Increases in equity are recorded as
credits; decreases are recorded as
debits
contra-assets, contra-liabilities,
and contraequity:
- These are simply accounts that are
reported in the financial statements
together with assets, liabilities, and
equity, respectively, but follow the exact
opposite rules of debit and credit
as their positive counterparts
Increases in contra-asset accounts are recorded
as credits
//An example is accumulated
depreciation, which is presented against
machinery, equipment, vehicle, or some other
assets subject to depreciation.
Increases in contra-liability accounts are
recorded as debits
//An example is discount on bonds
payable, used to report a liability at the required
measurement basis. Bond valuation is the
subject of a higher accounting course. For now,
it is enough for you to know that contraliability
accounts do exist.
Increases in contra-equity accounts are recorded
as debits
 //An example is treasury stock, used
when a corporation buys back shares of its stock
previously issued to shareholders. This is also
the subject of another accounting course when
you move out of proprietorships and into
corporations.
Normal Balance:
- The side on which increases in an
account are recorded
- When an asset is increased, we record a
movement on its debit side. In short, we
debit the asset. When a liability or
equity is increased, we credit the
liability or equity
- The normal balance of an asset account
is a debit, and that of liabilities and
equity, credit
Lesson 4: simple problems and exercises in the
analysis of business transaction
//WHAT IS ACCOUNTING EQUATION?
- The relationship between three basic
accounting elements namely, ASSETS,
LIABILITIES, AND OWNER'S EQUITY
- Asset = Liabilities + Owner's Equity
Lesson 5: nature of transactions in a service
business
Service- any intangible product, which is
essentially a transaction and is transferred from
the buyer to the seller in exchange for some
consideration (or no consideration).
Service business- a service provider to
customers that exchanges work performed for
payment.
Types of Service Business
1. Business Services (Business-to-Business
Services)
- Services used by businesses to conduct
their business activities. This could
banking, insurance, transportation, etc.
2. Personal Services (Business-
toConsumer Services)
- are commercial activities that are
provided to individuals according to
their individualistic needs. The service
here is extremely personalised to the
customer.
3. Social Services
- are essential public services. They are
provided by the government or other
non-profit organisations. The service is
not provided for a profit motive but as a
social cause.
Characteristics of a Service
1. Intangibility- A service is not a physical
product that you can touch or see. A
service can be experienced by the buyer
or the receiver. Also, you cannot judge
the quality of the service before
consumption.
2. Inconsistency (Heterogeneity
/Variability)- There can be no perfect
standardization of services. Even if the
service provider remains the same, the
quality of the service may differ from
time to time.
3. Perishability- Services cannot be stored,
saved, returned or resold once they
have been used. Once rendered to a
customer the service is completely
consumed and cannot be delivered to
another customer.
4. Inseparability- One unique characteristic
of services is that the service and the
 service provider cannot be separated.
Unlike with goods/products the
manufacturing and the consumption of
services cannot be separated by
storage.
Nature of Transactions in a Service Business
❑ A service business provides a needed
service for a fee.
❑ In general, service businesses actually
have no physical product sold to clients.
❑ Their services are designed to facilitate
the work of clients and in return are
paid.
• Service businesses include
salons or barbershops, laundry
services, car repairs, medical
centers and services of
professionals like lawyers and
doctors.
❑ Accounting includes a balance of all
revenue and profits that a business
generates. Service revenue is one line
item on the income statement that
accounts for revenue from any services
that a business provides.
❑ Service revenue is the income that a
business generates in return for
completing a service. It includes any
service that the business provides,
whether or not the customer submits
payment. Service revenue doesn't
include things like a shipment of goods
or interest. It focuses primarily on the
services of the business.
❏ How To Record Service Revenue?
✔ The accounting method recognizes and
records the service revenue in a
business entity’s accounting books and
financial statements.
✔ The revenue of a service business is
usually realized once the service has
been substantially completed.
✔ Under the accrual system, revenue or
expense is recognized and recorded
when the services have been received
or provided. The recognition is
irrespective of when cash is received or
paid.
● Is Service Revenue a Debit or Credit? The
normal balance of service revenue is credit.
It means that when a business entity has
earned the service revenue, it’s recorded on
the credit side of the trial balance, in
journal entry and ledger. Besides, the
nature of revenue is also credit.
➔ Journal Entries
The following general entry will be passed in
the accounting books when a company will
earn service revenue(operating or
nonoperating):
● What If Service Revenue Received But
Services Not Provided?
✔ Since the accrual system of accounting
is followed by business entities, the
revenue will only be recognized when
the services have been provided to the
client.
✔ Therefore, if the service revenue is
received in advance, but services are yet
to be provided, it will be the company’s
liability.
➔ Journal Entries
The journal entry to record the transaction will
be as follow:
● What If Services Provided But Revenue
Not Received?
✔ The revenue that has been earned but
not received is called accrued revenue
in the language of accounting. Such
revenue is recorded and recognized
under the accrual system of accounting.
✔ However, the company’s account
receivables are increased as the cash
collection will be made in the future.
➔ Journal Entries
The journal entry for the accrued revenue is as
follows:
✔ Aside from the minor supplies, the
service business does not maintain a
high level of inventory as compared to
merchandising and manufacturing
businesses.
✔ In relatively small service businesses, all
transactions are on cash payments. This
means sales are collected immediately
while most expenses are paid outright
in the form of cash or checks. The
typical financial transactions recorded
for a service company include collecting
a deposit from the customer, providing
the service and receiving payment.
Lesson 6: providing transactions of a service
business in the general journal
Service Business
- Like Merchandise Business, Service
companies also deal in products.
However, their products are usually
intangible. Service companies provide
services for their customers. This type
of company includes health, legal
services, salons and spas, among others.
For example, a product for a salon could
include a haircut or manicure. Typically,
service companies have only expenses
relating to the daily operations of the
business.
HOW IS SERVICE BUSINESS DIFF FROM
MERCHANDISING BUSINESS (BALANCE SHEET)
- service business do not have an asset
for inventory
- Other differences can include the types
of accounts payable a merchandising
company has. For example, a
merchandising company may have a
standing account payable to a wholesale
company for the purchase of its
products. A service company may have
a service revenue receivable account for
expected payment for services
provided.
Recording:
Done in a book called the journal
Journalizing- process The journal is a
chronological record of the entity's transactions.
A journal entry shows all the effects of a
business transactions in terms of debits and
credits. Each transaction is initially recorded in a
journal rather than directly in the ledger.
//FORMAT o DATE o ACCOUNTING TITLES
AND EXPLANATION - account to be debited
is entered at the left,
while credited accounts is indented on the next
line
o POSTING REFERENCE - a code that can guide
in looking at a specific account ledger to the
corresponding entry in the journal. o DEBIT o
CREDIT
//NORMAL BALANCE (INCREASE SIDE)
ASSET----------DEBIT
LIABILITY----------CREDIT
DRAWING ----------DEBIT
CAPITAL----------CREDIT
REVENUE/INCOME----------CREDIT
EXPENSE----------DEBIT
//HOW TO EASILY RECALL NORMAL BALANCE
DEBIT
DRAWING
EXPENSE
DEBIT CARD-owns the money deposited in the
bank= ASSET
CREDIT
CAPITAL
REVENUE
CREDIT CARD-loans money from the
bank/borrowing money= LIABILITY
Remember:
- Every journal entry must have at least
one debited account and at least one
credited account
- The total debit must always equal the
total credit
- Rendering or performing service =
revenue or income
- Receiving or using up of service=
expense
//ACCRUAL PRINCIPLE OF REVENUE
RECOGNITION:
- Revenue or Income is recognized when
earned regardless of whether cash has
been received or not
Sent a bill - acc receivable
Received a bill - acc payable
Issued a promisory note = note payable
Received a promisory note= note receivable
Lesson 7: Posting transactions of a service
business to a ledger //What is posting?
- Posting is the process of transferring
information from the journal or book of
original entry to the ledger or book of
final entry
Journal- records transaction in a chronological
order
Ledger- group movements cause by transactions
on a per-account basis
- A ledger is a means of accumulating in
one place all the information about
changes in an asset, liability, equity,
income, and expense accounts
Steps in posting:
• In the ledger, copy the account title of
the first journal entry in the general journal. •
Enter the account number of the account title
(refer to the chart of accounts)
• Copy the date of the journal and enter
the date on the date column of the ledger.
• Copy the explanation of the journal or
make a short explanation out of it and enter
under the explanation column of the ledger
• Transfer the amount of debit and credit
to its corresponding column in the ledger.
• Place the page of the journal where
journal entry is located in the post reference
(PR) • In the journal, place the number of the
account as indicated in the ledger in the post-
reference (PR), folio or reference column of the
journal.
Lesson 8: Preparing trial balance Trial
balance:
- An accounting report showing the
closing balances of all accounts in the
GENERAL LEDGER at a point in time.
- It is prepared to verify the equality of
debits and credits in the ledger at the
end of each accounting period or
anytime the postings are update.
- An internal documents to check for
errors, and assist in producing of
FINANCIAL STATEMENTS
- Also used by auditors in deciding which
accounts to review
D-dividends
E- expenses
A- assets
L-liabilities
E-equity
R-revenue
Errors in trial balance:
- switching the debits and credits.
- posting the same journal twice
- not posting it at all
- posting a journal to the wrong accounts
- getting the number values wrong
Lesson 9: Preparing adjusting entries
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.
- It is prepared at the end of an
accounting period to unrecorded
revenue that has been earned and
unrecorded expenses that have been
incurred during the accounting period.
//Six Classifications of Adjusting Entries
Depreciation
Bad Debts
Prepaid Expenses
Accrued Expenses
Deferred Revenues
Accrued Revenues
Each adjusting entry has the following
characteristics:
1.Each entry is recorded at the end of an
accounting period.
2. Each entry has at least one balance
sheet account (e.g, asset or liability) and at least
one income statement account (e.g, revenue or
expense); and
3. Each entry has no cash account in either
the debit or the credit side
Depreciation:
- applied to components of property,
plant and equipment (PPE).
- these are assets held by an entity and
expected to benefit more than one
accounting period. In other words,
these are assets held for long term
purposes.
- done to allocate the the cost, less
residual of the PPE over its useful life.
- represent how much of an asset's value
has been used up.
- "When there is gain, there is pain.
//Depreciation is an income statement account
while Accumulated Depreciation is a balance
sheet account.
//Accumulated Depreciation is a deduction from
a PPE account.
//The difference between a PPE accounts and its
related Accumulated Depreciation is called book
value.
Depreciation Expense = Cost of the PPE -
Estimated Residual Value / Estimated Useful
Life
Bad Debts:
- also called as "Doubtful Accounts".
- represents the estimates uncollectible
amount for credit sales or revenue.
- the most common method of
estimating bad debts is by multiplying
the amount of accounts receivable by a
certain percentage, which is determined
through years of experience of the
entity in business. The resulting figure is
the required balance of allowance for
doubtful accounts
//Bad Debts is an income statement account
while Allowance for Doubtful Accounts is a
balance sheet account.
//Allowance for Doubtful Accounts is a
deduction from Accounts Receivable.
//The difference between Accounts Receivable
and the Allowance for Doubtful Accounts is
called the Net Realizable Value of the Accounts
Receivable.
Prepaid Expenses:
- these expenses are paid even before
they are incurred.
- usually periodic expenses which are
paid at the beginning of a certain period
of time.
- most prepaid expenses are incurred
every month.
Accrued Expense
- refers to the expense that are already
incurred but not yet paid
Unearned Revenue
- cash is received before the services are
rendered
Accrued Revenue
- are receivables that are already been
earned but not yet collected.
Lesson 10: The accounting cycle In financial
reporting, there are several financial statements
which serve different purposes. Some of which
are: income statement, balance sheet,
statement of cash flows, statement of changes
in equity, among others
Income Statement
- The first financial statement to be
prepared is the income statement.
Balance Sheet
- Also known as the statement of
financial position, the balance sheet
provides the amounts for the various
assets, liabilities, and owner’s capital
accounts. The assets are presented first,
followed by the liabilities and equity
- To show that the accounting equation is
satisfied, the total assets and the total
liabilities and owner’s capital should be
highlighted to be of equal amount.
Owner’s Capital
- Cash, being the most liquid asset, is
presented first, followed by receivables,
inventories, and PPE accounts. Basically,
the shorter the time an asset is
expected to be converted into cash, the
more liquid it is, and this is the reason
why cash is presented first. The same is
followed in the presentation of
liabilities. Those liabilities expected to
be paid first are presented before those
that will be paid later.
Closing entries
 - All nominal or temporary accounts are
closed out to the owner’s capital
account, through the income summary
account. Closing entries reduce the
balances of the temporary accounts to
zero to prepare them for accumulating
amounts for another accounting period
Close revenue accounts
- Clear the balance of the revenue
account by debiting revenue and
crediting income summary
Close expense accounts
- Clear the balance of the expense
accounts by debiting income summary
and crediting the corresponding
expenses
Clos income summary
- Close the income summary account by
debiting income summary and crediting
retained earnings.
Close dividends
- Close the dividends account by debiting
retained earnings and crediting
dividends.
Lesson 11: Merchandising business
Merchandising
- Merchandising is the presentation and
promotion of goods that are available
for purchase for both wholesale and
retail sales. This includes marketing
strategies, display design, and
competitive pricing, including
discounting. Merchandising is important
for retailers looking to cultivate their
brand, improve the experience of
customers, compete with others in the
sector, and ultimately, drive sales.
Merchandising Business
- A merchandising business (or a trading
business) is a company that buys goods
and resells these goods, without making
any modifications, at a price higher than
its purchase price for the purpose of
making a profit. This type of business is
much more common in the Philippines
and can range from small- to large-sized
entities. Examples would be the
neighborhood sari-sari stores,
department stores, grocery shops, and
those selling in wholesale.
Types of Merchandising business:
1. Product merchandising- Both in-store
and online stores use these promotional
activities to increase products sales. It
deals with presenting physical or digital
products in a way that customers will
spend money on them. This method
could involve correctly packaging the
product or featuring product
photographs on the website.
2. Retail Merchandising- It refers to
promotional and marketing strategies
used for the presentation of products in
brick-and mortar stores. When it comes
to displaying products within a retail
store, arranging them orderly is crucial
besides the behavior of
salespersons
3. Digital/E-Commerce/Online
Merchandising- Products on
ecommerce websites, unlike those in
traditional stores, are hard to assess. As
a result, online retailers focus on the
performance of their website and put
the necessary information on display
alongside products. Also, they have an
efficient and instant customer care
service to manage customer inquiries.
Other promotional efforts may include
social media and email marketing. With
this, digital platforms gain the trust of
consumers and a devoted consumer
base
 4. Visual merchandising- Stores display the
product design, packaging, benefits, and
related information, such as pricing and
discount, to encourage consumers to
buy instantly. Advertisement banners
and signage are the best ways to make
this approach impactful for increased
product sales. Other presentation
elements used by physical and digital
stores can include spacing, color
selection, lighting, web design, online
videos, etc.
5. Omnichannel merchandising- It includes
providing robust customer support to
customers across all platforms
(brickand-mortar and online). It, thus,
helps them decide whether to purchase
a particular product or look for
something else.
Similarities and Differences of Merchandising
and Service Business: //merchandising:
- Tangible
- Merchandising businesses sell goods to
customer.
- merchandising company engages in the
purchase and resale of tangible goods.
//service business: -
Intangible
- Whereas service-based businesses do
not.
- Service companies primarily sell
services rather than tangible goods
Similarities:
- Various costs are incurred by both
merchandising and service businesses.
Both may hire employees;
- Both may need equipment to be in
business;
- Both types of business structures have
customers who pay for goods or
services
Common sequences of events:
Buyer:
(1) purchase product on account; (2)
return product; and
(3) pay for the product.
Seller:
(1) sell product on account and reduce
the inventory balance;
(2) accept returns and increase the
inventory balance; and (3) receive payment for
sales.
RETAILERS: Purchase and sell directly to
consumers WHOLESALERS: Sell to
retailers
Sales revenue/sales:
- The primary source of revenue for
merchandising businesses is the sale of
merchandise.
Nature of merchandising business: Cost price
(Buying) - Anything from a stationary material,
food products, to clothing are a merchandise.
A shopkeeper, merchant, or a seller buys a
product in wholesale from a
manufacturer or a distributor at a price
Retail price/ Selling price (Selling) - makes it
available to the customers at a price greater
than that of the cost price, which is called the
retail price/ selling price.
//The difference between the selling price and
the cost price is the margin or profit made by
the shopkeeper. This profit helps him to keep his
business intact.
Operating cycle:
The operating cycle describes the process by
which a merchandising business takes place.
The size of the operating cycle may vary based
on the type of business. It includes the basic five
steps involved in every merchandise business
from the distributor to the customer
Cash: The shopkeeper arranges money and lists
down the products to be purchased from a
wholesaler at an affordable price.

Purchase: Then, the money is used to buy the

necessary goods in bulk at a discounted price.
Once transported, the purchased products are
packed in a presentable way and required
quantities by the customers.

Inventories: The inventories or merchandise are

the goods that are held for sales to acquire a
profit it. This profit can be used to buy more
inventories to enhance the business.

Sales: The customer buys the inventory at a

price specified by the shopkeeper, which is
eventually greater than the wholesaler ’s price.

Receivables: If the merchant sells the goods at a

credit instead of cash, the amount that has to
be received comes under receivables

Lesson 12: Special journals

Lesson 13: Posting transactions in the general

and subsidiary ledger

Lesson 14: Posting trial balance: merchandising

business

Lesson 15: closing entries

Lesson 16: preparing cogs and gross profit