Fundamentals of Financial Accounting
and Reporting
Overview of Accounting and
Accounting Concepts and
principles
Different Definition and Roles of
Accounting
Ø Accounting is a service activity.its
function is to provide quantitative
information,primarily financial in
nature,about economic entities
that is intended to be useful in
making economic decisions.
Ø Accounting serves as the
language of business which is
helpful in the business decision.
Types and Forms of Business Organization
Ø Sole Proprietorship - consists of
one individual doing business
called the proprietor. The manager
is usually the owner also. All
profits belong to the proprietor.
Ø Partnership - consists of two or
more persons who bind
themselves to contribute money,
property, or industry to a common
fund, with the intention of dividing
the profits among themselves. The
co-owners are called partners.
Ø Corporation - is an artificial being
created by operation of law,
having the rights of succession
and the powers, attributes and
properties expressly authorized by
law or incident to its existence.
The owners in a corporation are
called stockholders, evidenced by
their holdings of shares of stocks.
Ø Business entities are usually
engaged in business operations
that increase the value of the
enterprise and earn a profit. These
activities are performed daily to
generate sufficient revenues. See
below table for the list of business
operations type
Common Branches of Accounting
Ø Auditing - Independent
examination that ensures the
fairness and reliability of the
reports that the management
submits to users outside the entity.
Ø Bookkeeping - A mechanical task
that involves collecting financial
data, recording business
transactions and preparing
financial statements.
Ø Government Accounting -
Concerned with the identification
of the sources and uses of
resources consistent with the
provisions of city, municipal,
provincial, and national laws.
Ø Financial Accounting - Focused
on the recording of business
transactions and the
periodic preparation of financial
reports. Information is primarily
intended for external use.
Ø Management Accounting -
Incorporates cost accounting data
and adapts them for specific
decisions which management may
be called upon to make.
Information is intended for internal
use.
 Ø Taxation/Tax Accounting -
Includes the preparation of tax
returns and the consideration of
the tax consequences of proposed
transactions or alternative courses
of action.
Generally Accepted Accounting Principles
Ø Relevance is the ability of the
given information to provide a
meaningful and useful result.
Relevant information must be
useful, understandable, timely,
and needed for decision making.
Ø Objectivity is the extent that the
resulting information is not
influenced by the personal bias or
judgments of those who provides
it. Objective information must be
based on solid evidence and facts.
Ø Feasibility is the ability that the
principle can be implemented
without undue complexity to cost.
Feasible principle is practical.
Basic Accounting Assumptions and Principles
of Accounting
Ø Objectivity principle - accounting
records and statements are based
on reliable data and supported by
verifiable documentation.
Ø Historical cost - acquired assets
should be recorded at their actual
cost and not at what management
thinks they are worth as at
reporting date.
Ø Revenue recognition principle -
revenue is to be recognized in the
accounting period when goods are
delivered or services are rendered
or performed.
Ø Expense recognition principle -
expenses should be recognized in
the accounting period in which
goods & services are used to
produce revenue and not when
entity pays for those goods &
services.
Ø Adequate disclosure - requires
that all relevant information that
would affect the
user's understanding and
assessment of the accounting
entity be disclosed in the financial
statements.
Ø Materiality - dictates that financial
reporting should only be
concerned with information that is
significant to affect evaluations
and decisions.
Ø Consistency - dictates that firms
should use the same accounting
method from period to period to
achieve comparability over time
within a single enterprise.
Ø Matching Principle - the costs of
doing business are recorded in the
same period as the revenue they
help to generate.
Ø Integrity - being straightforward
and honest.
Ø Objectivity - not allowing bias,
conflict of interest, or undue
influence to others to override
professional business judgements.
Ø Professional competence and
due care - accountants has a
continuing duty to maintain
professional knowledge and skill
at level required.
Ø Confidentiality - respect of
confidentiality of information
acquired.
Ø Professional behaviour -
accountants are required to
comply with relevant laws and
regulations.
 The Accounting Equation and
Double – entry System

Basic Accounting Equation

Ø Assets = Liabilities + Equity.

Expanded Accounting Equation

Ø Assets = Liabilities + Contributed

Ø Capital + Beginning Retained
Earnings + Revenue - Expenses
– Dividends
Application of Accounting Equation
Normal Balances of accounts;Contra and
Adjunct Account

Rules of Debit and Credits ; Ending Balance

of Account
Ø A debit side entry must have a
The book of Accounts : journal and ledger corresponding credit side entry
Ø Each transaction affescts at least
Format of the book of account two accounts.
Ø the total debit for a transaction
Double – entry system
must always equal the credits.
Recording Business Transaction
of a Service business
The Accounting cycle
1. Identification of events to be
Recorded
2. Transactions are recordes in the
Journal
3. Journal entries are posted to the
Ledger
4. Preparation of a Trial Balance
5. Preparation of the Worksheet
Including Adjusting Entries
6. Preparation of the Financial
Statement
7. Adjusting Journal Entries are
Journalized and Posted
8. Closing Journal Entries are
Journalized and Posted
9. Preparation of Post-Closing Trial
Balance
10. Reversing Journal Entries
are Journalized and Posted
Identifying and Analyzing Transcations
and Events
1. Identify the transaction From
the source documents.
2. Indicate the accounts – either
assets,liabilities,equity,income
or expenses – affected by the
transaction.
3. Ascertain whether each the
account is increased or
deacreased by the transaction.
4. Using the rules of the debit and
credit,determine whether to
debit or credit the account to
record its increase or decarease.
Journalizing
Summarizing the Effect of
Business Transaction
Adjusting The Accounts
Types of adjusting journal entries
Ø Accrual –recognize income
earned regardless of when it is
collected and record expense
incurred whether paid or not.
1. Accrued Revenue – income
already earned nut not yet
collected (asset)
Account receivable xx
Receivable xx
2. Accrued Expense –
Expense already incurred
but not yet paid (liability)
Expenses xx
Liability xx
Ø Defferals – Recording advance
collection of income (unearned
income) or recording advance
payment of expenses (prepaid
expense).
Ø Doubtful Accounts – Prosion of
uncollectible accounts
 Ø Depreciation – Allocation of the Asset Method
cost of an asset to expense
Sept.1 Prepaid insurance 3,000
Adjusting Journal Entries for Accruals 2021 Cash
A building owned by Modesto Hotel 3,000
Services was partly rented by Perez Dec.31, Insurance Expense 1,000
Company for P50,000 per month 2021 Prepaid Insurance
payable every 5th day of the following 1,000
month.The rental fro the month of
December will be paid on January 5, A business prepays one year insurance
2022 for P120,000 on October 1,20x1

ACCRUED INCOME : BOOKS OF Asset Method

MODESTO Oct.1 Prepaid Insurance 120,000
20x1 Cash
Dec.31,2021 120,000
Rent Receivable 50,000 Dec.31 Insurance Expense 30,000
20x1 Prepaid Insurance
Rent Income 50,000 30,000
Expense Method
ACCRUED EXPENSES
Oct.1 Insurance Expense 120,000
Dec.31,2021 20x1 Cash
120,000
Rent expenses 50,000 Dec.31 Prepaid Insurance 90,000
Rent Payable 50,000 20x1 Insuranse Expense
90,000
Asset and Expense Method of Adjustment
for Prepayment
Income and Liability Method of
On September 1,2021,Adam Realty paid Adjustment for Advanced Collections
an insurance premium covering period
from September 1,2021 to September On October 1,202,Adam Realty
1,2022 in the amount of P3,000.The collected P24,000from a tenant
accounting period ends December representing an advance collection from
31,2021. building rentalsfro one year.The
Accounting period ends on December
Expense Method
31,2021.
Sept.1, Insurance Expense 3,000
2021 Cash Income Method
3,000 Oct.1, Cash 24,000
Dec.31, Prepaid Expense 2,000 2021 Rent Income
2022 Insurance Expense 24,000
2,000 Dec.31, Rent Income 18,000
2021 Unearned Rent Income
18,000
 Liability Method Dec.31, Depreciation Expense
Oct.1, Cash 24,000 2016 250
2021 Unearned Rent Income Accumulate Depreciation
24,000 250
Dec.31, Unearned Rent Income DOUBTFUL
2021 6,000
Rent Income business brought in $60,000 worth of
6,000 sales during the accounting period.
April 1,20x1,Business Receive 1 year Based on historical trends, you predict
rent in advance of P120,000 rent per that 2% of your sales from the period will
month is 10,000 be bad debts ($60,000 X 0.02). Debit
your Bad Debts Expense account
Liability Method $1,200 and credit your Allowance for
Apr.1 Cash 120,000 Doubtful Accounts $1,200 for the
20x1 Unearned Rent Income estimated default payments.
120,000
Dec.31 Unearned Rent 90,000 Bad dept expenses 1,200
Allowance for doubtful accounts
20x1 Rent Income 1,200
90,000
Income Method
Contracting Worksheet and
Apr.1 Cash 120,000
20x1 Rent Income Financial Statements
120,000
Dec.1 Rent Income 30,000 Illustrating and Preparing worksheet
20x1 Unearned Rent Income
30,000

Adjusting Journal Entries for Depreciation &

Doubtful accounts
DEPRECIATION
K & Co. purchased
furniture costing $2,500 on 1 January
2016. The furniture’s salvage value is
zero, and it is decided to provide
depreciation @ 10% p.a. on the original
cost.
Make an adjusting entry for depreciation
expense on 31 December 2016. Also,
how will the purchase be shown as a
fixed asset on the balance sheet on 31
December 2016 and 31 December
2017?
 in equity of the company over a
stated period.
Ø A cash flow statement reports on
a company's cash flow activities,
particularly its
operating, investing and financi
ng activities over a stated period.
Completing the Accounting
Cycle

Journalizing and posting closing journal

entries

1. Close the Income accounts

Preparing the Financial Statements Mar. Repair income 80,000
31 Income Summary
80,000
Demonstrating the relationship among 2. Close the Expense accounts
financial statements
Mar. Income Summary 57,850
31 Salaries Expense
Ø A balance sheet or statement of
10,000
financial position, reports on a
Rent Expenses
company's assets, liabilities,
5,000
and owners equity at a given
Utilities Expense
point in time.
12,000
Ø An income statement—or profit Taxes and licences
and loss report (P&L report), 4,000
or statement of comprehensive Interest Expense
income, or statement of revenue 1,000
Uncollectible Accounts Expense
& expense—reports on a 350
company's income, expenses, Repair Supplies Expense
and profits over a stated period. 20,000
A profit and loss statement Depreciation Expense
provides information on the 2,500
operation of the enterprise. These Advertising Expense
include sales and the various 3,000
expenses incurred during the 3. Close the Income Summary
stated period. Account
Ø A statement of changes in Mar. Income Summary 22,150
equity or statement of equity, 31 L.Jean Capital
or statement of retained 22,150
earnings, reports on the changes
4. Close the Withdrawal Ø When certain items are needed,
Account the user department fills in a
Mar. L.Jean Capital 10,000 purchase requisition form and
31 L.Jean Withdrawal sends it to the purchasing
10,000 department.
Ø The purchasing department then
Preparing Post-closing Trial Balance
prepares a purchase order after
Ø The post-closing Trial balance checking with the price lists,
verifies that all the debits equal quotations, or catalogs of
to credits in the trial balance . approved vendors. The purchase
Ø The trial balance contains only the order, addressed to the selected
balance sheet items such as vendor, indicates the quantity,
assets,liabilities and ending description, and price of the
capital because all income and merchandise ordered. It also
expense account ,as well as the indicates expected payment terms
withdrawal account,have zero and transportation arrangements.
balances . Ø After receiving the purchase order,
the seller forwards an invoice to
Journalizing and posting reversing journal the purchaser upon shipment of
entries the merchandise. The invoice-
called a sales invoice by the seller
Ø Reversing Entry is the journal and a purchase invoice by the
which is the exact opposite of a buyer-defines the terms of the
related adjusting entry made at the transaction.
end of the period. Ø Upon receiving the shipment of
Adjusting Entry to record Advertising merchandise, the purchaser's
Expenses receiving department sees to it
Mar.31 Advertising Expense that the terms in the purchase
3,000 order are complied with, and
Accrued Advertising prepares a receiving report.
3,000 Ø Before approving the invoice for
Closing Entry payment, the accounts payable
Mar.31 Income Summary 3,000 department compares copies of
Advertising Expense the purchase requisition, purchase
3,000 order, receiving report and invoice
Reversing Entry to ensure that quantities,
Mar.31 Accrued Advertising 3,000 descriptions, and prices agree.
Advertising Expense
3,000 Terms of Transaction

Merchandising Operations 2/10 net 30 is the Trade Credit

extranded to the buyer from the seller.A
buyer will receive a 2% discount on the
Steps in Purchase Transaction net amount if they pay the invoice in full
within the first ten days of the invoice
date.Otherwise,the full invoice amount is Less:Puchase Return and
due in 30 days without a discount. Allowances
Inventory System Purchase Discount
PERPETUAL INVENTORY SYSTEM Value - Added Tax Entries
Ø Inventory / Merchandise Inventory On May 13,2021,remedios
Ø Inventory accounting shows a Palaganas Feeds purchased on
continuing or running balance of account specialty feeds with a total
the goods on hand. amount payable of P784,000.A
Ø Cost of good sold / COGS is also wholesaler operating in the region
updated each time a sale or sales bought for cash all of the available
returned is made feeds on May 25,2021;amount of
cash received was
PERIODIC INVENTORY SYSTEM P1,120,000.Remedios Palaganas
Ø Inventory is only updated when Feeds paid the value-added tax due
physical count is performed. by month end not minding the actual
deadline.
Net Sales
May Purchases 700,000
Net sales 13, Input Tax 84,000
2021 Account Payable
Gross Sales
784,000
Less:Sales Return and allowances May Cash 1,120,000
13, Sales
Sales Discounts 2021 1,000,000
Net sales Output Tax
120,000
May Output Tax 120,000
31 Input Tax
Cost of Sales 2021 84,000
Cost of Sales VAT Payable
36,000
Beginning inventory 1/1/20x1 May VAT Payable 36,000
31, Cash in Bank
Add:Net Purcheses
2021 36,000
Less:Ending Inventory 1/31/20x1
Cost of Good Sold Completing the Cycle for a
Net Purchases Merchandising Business
Purchases
Merchandise Inventory at the end of
Add:Freight In the Period
 Ø Remove the BEGINNING balance inv.system after physical count is
from the merchandise inventory made.
account and to and to transfer it to Post-closing Trial Balance
the income summary;
Ø Enter the ENDING balance in the
merchandising inventory account
and to establish it in the income Special and Combination
symmary Journal and Voucher System
Merchandise Inventory
Jan.1 Beginning Balalance De Effect A
528,000 c.3 (beginning
1 balance)
528,000
Dec.31 Effect B
(ending balance)
483,000
Income Summary
Dec.31 Effect A 528,000 De Effect B
c.3 483,000
1

Preparing the Worksheet

Ø beginning inventory balance is
extended to the debit column of
income statement.
• beg.inventory + net cost of
purchase
Ø ending inventory balance which is
not in the trial balance is entered
in the credit column of the income
statement.
• end.inventory – goods
available for sale
Ø ending inventory is also entered in
the debit column of the balance
sheet.
Preparing the Financial Statement
Ø all expense is under the label of
OPERATING EXPENSES in the
statement of financial
performance.
Adjusting and Closing Entries
Ø Merchandising entity set up the
ending inventory under the periodic
 Manufacturing Operation
Comparing Merchandising and
Manufacturing Activities
Ø both selling goods
Ø Merchandising entity buys product
that is ready to resale.
Ø Manufacturing entity buys raw
materials and process them into
finished goods.
Elements of Mnufacturing cost
Ø Direct Materials – Physical part of
a finished product.Their cost can
conveniently and economically
traceable to finished product
Ø Direct Labor – Employee or
worker who physically convert raw
materials into finished goods.
Ø Manufacturing Overhead – All
manufacturing costs that cannot
be classified sa direct materials or
direct labor.
• Indirect material and
supplies –
Glue,thread,nails,rivets,lubri
cants and small tools.
• Indirect labor cost –
Salaries of plant mangers
and engineers,wages of
forklift operators
• Other indirect
manufacturing costs –
building,machinery and tools
maintenance,real property
taxes,property
insurance,rent
expense,utilities expense
and depreciation on property
and equipment
Manufacturing Inventory Accounts
Ø Finished Goods Inventory – It as
the cost of completed goods that
are remained unsold at the end of
accounting perion.This inventory is
what the manufacturers sell to the
merchandisers.
Ø Work in Process Inventory –
This account gives the cost of the
goods that are in the
manufacturing process but are not
yet complete at the end of the
accounting period.
Ø Raw Materials Inventory – This
account holds the cost direct
materials on hand that is intended
for use of manufacturing process.
Ø Factory Supplies Inventory – It
is the cost of unused indirect
materials at period end.
Accounting for Manufacturing
Activities
Ø Cost System – Keep the
perpetual records of the cost of
raw materials,work in process
and punished good inventories.
Ø Non-cost System – Produces
a manufacturing accounting
system based on the periodic
inventory system.The cost of
raw materials,work in process
and finished goods inventories
 are based on physical counts at
the end of each period.
Statement of Cost of Goods
Manufactured
Raw materials Inventory beg.
Net Purchases
Raw Materials Available for Use
Less : Raw Materials end.
RMIP / Direct Material
Direct Labor
Factory Overhead
Total Manufacturing Cost
Work in Process beg.
Total Cost of Goods Placed in
Process
Less : Work in Process end.
COST OF GOODS MANUFACTURED
Statement of Cost of Goods Sold
Raw materials Inventory beg.
Net Purchases
Raw Materials Available for Use
Less : Raw Materials end.
RMIP / Direct Material
Direct Labor
Factory Overhead
Total Manufacturing Cost
Work in Process beg.
Total Cost of Goods Placed in
Process Less : Work in Process
end. Cost of Goods
Manufactured Finished Goods
beg. Total
Goods Available for Sold
Finished Goods end.
COST OF GOOD SOLD
Accounting for Payroll
1. Employee - recipient of salaries and
wages.
2. Employer - for whom the employee
works for.
3. Payroll - amount paid to employees
for their provision of service.
4. Payroll Period - period when
employer pays for wages and/or salaries
to the employees.
5. The Payroll System - used by an
entity to make accurate and timely
accounting for payroll.
6. Time Cards - record and maintain
employees’ work hours; daily arrival and
departure time.Biometrics are used
nowadays (e. g. fingerprint).
7. .Payroll Register - special journal
showing payroll data in each pay period.
8. Employee Earning Record – contains
detailed records of earnings and
withholdings for each employee;
cumulative gross pay column and
additional data on employment specifics.
Contains all remuneration ever since the
employee’s first pay.
9. Pay Slip - prepared when payment is
for cash. Contains relevant payroll
figures found inpayroll register. You can
find pay slips online nowadays.
10. Check - employers with many
employees use special bank accounts to
disburse paychecks. Disburse means to
release; give; something related to an
outflow of cash or other resources.
11. Automated Teller Machine (ATM) –
bank is notified of the amounts to be
credited to the account of each
employee. This is mandatory for payroll
nowadays.
12. Gross Pay - total earnings of an
employee before deductions for payroll
period.
13. Salaries/Wages - remunerations
paid for services of employees; includes
any cash value of all remuneration paid
in any medium other than cash.
14. Employee Benefits - private
employees who’s not over 60 years old
is subject to compulsory coverage under
SSS, NHIP and Pag-IBIG.
15. Social Security System (SSS) -
provided replacement of income lost or
account of the contingencies: sickness,
maternity, disability, retirement and
death benefits.
16. National Health Insurance Program
(NHIP) - formerly Medicare; health
insurance program for SSS members
and their dependents whereby the
healthy subsidize the sick who may find
themselves in need of financial
assistance when they get hospitalized.
PhilHealth is its mandated administrator
of the Medicare Program under National
Health Insurance Act of 1995.
17. Pag-IBIG Fund - promotes home
ownership through establishing
affordable and adequate housing credit
system for its members.
18. Contributions - monthly contributions
are based on the compensation (basic
monthly salary plus cost of living
allowance) of the member and payable
under the different programs.
19. Withholding Taxes - applied on
gross pay after deducting the mandatory
employee contributions of other non-
taxable benefits.
20. Net Pay (take home pay) - amount
to be paid to the employee.