CHAPTER SIX: FINANCIAL ACCOUNTING AND MANAGEMENT

CHAPTER SIX: FINANCIAL ACCOUNTING AND MANAGEMENT

Lesson 1. BOOKKEEPING

A Personal Record keeping for your business as an owner, should also establish a record keeping system for your personal
information.
The term “record keeping” refers to orderly and disciplined practice of storing business record. Record keeping is one of
your most important responsibilities of a small business owner.
Record keeping ranges from simple folder filings systems to complex on-line electronic systems. Whether simple or
complex, a record keeping system must be easy to use.
Most importantly, the record keeping system you choose must fit your business needs. The type, size, and complexity of your
business, as well as your available resources, will help to determine the record keeping system that is best for your business.

Importance of the business record keeping with its Top Reasons:

1. Better financial analysis and management. You can arrange it from up-to-date follow-ups, invoicing, and on-time payment
for suppliers.
2. Fulfillment of Tax Obligations. You can keep track on any information and documents for taxes.
3. The reporting to Investors is Easy. You can provide to yourself as the investor the important information about the financial
status of the business.
4. Business Planning is Easy. You can monitor if the company is on the right track financially and decide the next thing to be
done.
5. Proper Record Keeping is Required by Law. You can prepare for legal requirements.

TOP THREE (3) KEY POINTS TO REMEMBER ON BUSINESS RECORDING

First is that, as a small business owner you still need to track a significant amount of information. No matter the type, size, or
complexity of your business, establish, and maintain a proper record keeping system that is suited to your business needs.
Second is, regardless of whether you use a computer system, you will need to think about a business record system. There are
many software products to help you keep records for your business.
Third is, you must do a record keeping system or use a combination and you must start now.
Businesspeople do serious record keeping.

Bookkeeping is a process to record every financial transaction in the business, from the opening to the closing. Each
financial transaction is recorded with a supporting document.

Bookkeeping Terms and Phrases

 BOOKKEEPER: make sure that every entry is correct while logging all the transactions in the books. In simple terms,
bookkeepers record and organize all financial data.
 ACCOUNTANT: responsible for generally overseeing accounts then producing financial statements and tax returns that
comply with the law. Adjust entries made by bookkeepers at the end of each period to help make more informed business
decisions.
 SINGLE-ENTRY BOOKKEEPING: This is a cash-based bookkeeping method that tracks incoming and outgoing cash in
a journal.
A typical cash book will have the following information:
 Date: The date on which the transaction takes place
 Description: A brief note on the transaction
 Transaction value: The value can be either incoming (debit) or outgoing (credit)
 Balance: Running total of how much cash you have in hand
Example:

 DOUBLE-ENTRY BOOKKEEPING: The recording for every business transaction, means an entry in at least two
accounts as a debit or credit. In a double-entry system, the amounts recorded as debits must be equal to the amounts recorded
as credits. The debits and credits should always be equal. Put simply, whenever you add or subtract money from an account,
you are using debits and credits. A DEBIT may mean money that is coming IN to the account, while a CREDIT may mean
money that is taken OUT.

The double-entry bookkeeping system works on the basic accounting equation:

THERE ARE FIVE 5 BASIC CATEGORIES OF ACCOUNTS:

 Asset: Something a business has or owns
 Liability: Something a business owes to a non-owner
 Equity: Something a business owes to the owners or the value of the investment to the owner
 Revenue: Value of the goods the business has sold or the services we have performed
 Expenses: Costs of doing business

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You should always remember that each side of the equation must balance out. This is how we arrive at the term
“balancing the books.” Balance is a standard in bookkeeping.
Look at the transactions, observe how the total credit and total debit are equal.
Example: General Journal Template

 Assets - are something you own or have, and they are resources you expect to gain a benefit from in the future.
Some examples of assets are:
 Cash (refers to the business cash available but can also be a checking or savings account)
 Office Supplies or other prepaid expenses (any expenses the business pays in advance)
 Accounts receivable (amount we will receive from customers at a later date)
 Inventory (items we intend to sell later)
 Equipment (value of equipment purchased)
 Building (value of building purchased)
 Land (value of land purchased)
 Liabilities - are something that business owes to a non-owner (debt and business obligations). Liabilities account
will most often end in the word “payable”. Some examples of liabilities are:
 Accounts Payable (bills the company must pay)
 Sales Tax Payable (sales tax obligations)
 Unearned Revenue (down payments received on work to be completed in the future)
 Notes Payable (business financial obligations from signing a promissory note).

 Equity - Equity accounts represent the value of the owner’s investment in the company. The Equity accounts are
different based on the type of company.
1. For sole-proprietorship and partnership, a Capital account is used to record the investment of the owners
and income earned by the company. A Withdrawal (or drawing) account is used when the owner takes
money out for personal use.
2. For corporations, a Common Stock account is used to record the investment of the owners. A Retained
Earnings account is used to record the earnings of a corporation and to record when earnings are given back
to the owners in the form of dividends.
 Income/Revenues - represent the value of the goods or services provided. Examples of revenue accounts include:
 Service Revenue (revenue from completing a service, could be specific like plumbing service revenue,
accounting service revenue, photography service revenue, etc.)
 Sales Revenue (value of products you sell)
 Interest Revenue (value of interest earned on investments or bank accounts)
 Expenses - these are costs or the outflow of money. These expenses represent all costs of doing business to
generate the revenue. Examples of expenses accounts include (notice how most expense accounts end in the word
“expense”):
 Cost of Goods Sold (what we paid for inventory we have sold)
 Utilities Expense (cost of utilities)
 Wages Expense (cost of employee’s earnings)
 Rent Expense (cost of renting office space or equipment)
 Supplies Expense (cost of supplies used)
 Insurance Expense (cost of insurance used)
 Advertising Expense (cost of advertising)
 Bank Fees Expense (cost of bank fees charged by the bank)

LESSON 2. COSTS, REVENUE, PROFIT and PROFIT MARGIN

COSTS
 refers to the purchase price of the product including the total outlay required in producing it.
Start Up Costs
 The start-up capital is the amount of money that is needed to buy facilities and equipment, to register and license the
business and get the necessary certificates. Working capital includes the costs of raw materials, packaging, staff training,
product promotion, etc. that have to be made before the business begins to generate income from sales of the product.
Operating Costs
 There are two types of operating (or production) costs namely – fixed costs and variable costs. Those expenses that have to
be paid even if no production takes place are called fixed costs. On the other hand, those expenses that depend on the amount
of production are called variable costs.
Total Costs
 All the costs incurred in producing something or engaging in an activity.
 Is made up of variable costs + fixed costs.
 A business may also want to work out average costs, ex. cost per unit or unit costs. This is calculated by:
Unit cost =total costs/number of units.
REVENUE
 is the amount of money that a company receives during a specific period, including discounts and deductions for returned
merchandise.
 is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold.
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 other terms related to revenue include Sales and Service Income. Sales Income is used especially when the nature of
business is merchandising or retailing, while Service is used to record revenues earned by rendering services.
PROFIT
 Refers to the money a business can keep after it has paid for its costs and can be thought of as revenue minus total costs
 Gross Profit
o is the difference between the expected income and the total operating costs over the first year, including any loan
repayments.
o income is therefore calculated as revenue minus cost of sales
 Operating Profit
o Shows the amount of revenue remaining after both direct costs and other costs have been subtracted.
o Gross profit minus other operating expenses
 Net Profit
o Is also known as profit of the year
o operating profit + profit from other activities – net finance costs – tax
PROFIT MARGIN
 is a common measure of the degree to which a company or a particular business activity makes money. Expressed as a
percentage, it represents the portion of a company's sales revenue that it gets to keep as a profit, after subtracting all of its
costs.
 Gross profit margin - rate measures the percentage of gross profit to sales, indicating the profit that the business
realizes from the sale of the product.
gross profit
o gross profit margin= x 100
revenue
 Operating profit margin - is a profitability or performance ratio that reflects the percentage of profit a company
produces from its operations before subtracting taxes and interest charges. It is calculated by dividing the operating profit
by total revenue and expressing it as a percentage.
operating profit
o operating profit margin= x 100
revenue
 Net profit margin - is the percentage of total income you get to keep after all expenses and taxes are paid.
net profit
o net profit margin= x 100
revenue

Lesson 3. FORECASTING REVENUES, COSTS and PROFIT

How to Forecast Revenue

1. Choose between Judgement Forecasting or Quantitative Forecasting;
2. Start with last year’s revenue and cost statements for a basis of prediction;
3. Consider any changes in personnel, products, pricing, competition and other factors which could impact your future revenue
and cost;
4. Calculated anticipated revenue;
5. Separate individual income sources to get a clear picture of potential ups and downs from each revenue and cost stream; and
6. Constantly review and update the forecast to reflect changes in your business.
(Source: Wood, Meredith (2020). “Revenue Forecasting Methods 101”, last modified December 22, 2020, https://www.fundera.com/blog/revenue-forecasting-2)

Factors in Forecasting Revenues and Costs of the Business

1. The economic condition of the country. When the economy grows, its growth is experienced by the consumers. Consumers
are more likely to buy products and services. A healthy economy makes good business.
2. The competing businesses or competitors. Observe how your competitors are doing business. This will give you a benchmark
on how much products you need to stock in order to cope up with customer’s demand. This will also give you a better
estimate as to how much market share is available for you to exploit.
3. The changes happening in the community. Customer’s demographic profile, lifestyle and buying behaviors give the
entrepreneur a better perspective in the changes in the community. Entrepreneurs must always be keen in adapting these
changes in order to thrive in the marketplace.
4. The internal aspect of the business. Another factor that affects forecasting costs and revenues is the business itself. Plant
capacity often plays a crucial role in forecasting.

Forecast the Revenues of the Business

Example: Take Note: Mark up refers to the amount added to the cost
Mr. JB recently opened his dream business and to come up with the selling price. The
named it Just Wear Online Selling Business, which formula for getting the mark-up price is as follows:
specializes online ready to wear clothes for teens and Mark Up Price = (Cost x Desired Mark up Percentage)
young adults. Based on his initial interview among Mark Up for T-shirt = (100.00 x 0.50)
online selling businesses, the average number of t-shirts Mark Up for T-shirt = 50.00
sold everyday is 15 and the average pair of fashion
shorts sold everyday is 10 pieces. From the information In calculating the selling price, the formula is as follows:
gathered, Mr. JB projected the revenue of his Just Wear Selling Price = Cost + Mark up
Online Selling Business. Selling Price = 100.00 + 50.00
Selling Price for T-shirt = 150.00
He gets his supplies from a local RTW dealer in
3 the city. The cost per piece of t-shirt is 100.00, while a ENTREPRENEURSHIP
pair of
fashion shorts costs 250.00 per piece. Then, he adds 50
percent mark up to every piece of RTW sold.
 CHAPTER SIX: FINANCIAL ACCOUNTING AND MANAGEMENT

Table 1. shows the Projected Daily Revenue of Just Wear Online Selling Business. Computations regarding the projected revenue are
presented in upper case A, B, C,D and E.
Table 1. Projected Daily Revenue
Just Wear Online Selling Business

Therefore, the projected monthly and annual revenues of Just Wear Online Selling Business will be computed as follows:
Table 2. Projected Daily, Monthly, and Annual Revenue
Just Wear Online Selling Business
Forecast the Costs to be Incurred of the Business
 Cost of Goods Sold / Cost of Sales - refers to the In a merchandising business such as Just Wear Online
amount of merchandise or goods sold by the business for Selling Business, the formula to compute for Cost of Goods
a given period of time. This is computed by adding the Sold (CGS) is as follows:
Beginning Inventory to the Net Amount of Purchases to Just Wear Online Selling Business
arrive with Cost of Goods Available for Sale from which Cost of Goods Sold
the Merchandise Inventory, End is subtracted. For the month ended, Jan. 20XX
 Merchandise Inventory, beg. refers to goods and
merchandise at the beginning of the business operation Merchandise Inventory, beginning PXX.XX
or accounting period. Add: Net Cost of Purchases XX.XX
 Purchases refer to the merchandise or goods purchased Freight-in XX.XX XX.XX
for resale. Cost of Goods Available for Sale P XX.XX
 Freight-in refers to transportation cost incurred by the Less: Merchandise Inventory, end XX.XX
buyer in transferring the merchandise from the seller. COST OF GOODS SOLD P XX.XX
Let’s calculate the Cost of Goods Sold of Just Wear Online
Selling Business for the month of January.
• Cost of goods is calculated by simply multiplying the
number of items sold every month (15 t-shirts per day x
30 days in a month = 450 pieces and 10 pairs of shorts
per day x 30 days in a month = 300 pieces) to its
corresponding cost per unit (100.00 pesos for every t-
shirt and 250.00 for every pair of shorts). The cost of
transporting the goods from the supplier to the seller or Freight-in is then be added to Net Cost of Purchase.
• There is no Merchandise Inventory, beginning and Merchandise Inventory, ending because Just Wear items purchased online
from the supplier are then sold as soon as they arrived.
Table 3. shows the Projected Cost of Goods Sold (Monthly) of Just Wear Online Selling Business. Computations regarding the
Projected Cost of Goods Sold (Monthly) are presented in upper case A, D, F, and J.

Table 3. Projected Cost of Goods Sold (Monthly)

Just Wear Online Selling Business

Table 4. shows how Freight-in is calculated. It is assumed that an average payment of transporting the merchandise to the buyer is
270.00 pesos for every 12 items delivered the buyer. Since, the average order is 750 pieces every month, he pays:
750 pcs. / 12 pcs. = 63
63 x 270.00 = 17, 010.00
Table 4. Assumed Freight (Monthly)
Just Wear Online Selling Business

Let us now substitute the values from tables 2 and 3. Since, there is no Merchandise Inventory, beginning and Merchandise Inventory,
ending, let’s add Cost of Purchases and Freight-in to get the Cost of Goods Sold.
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Just Wear Online Selling Business
Cost of Goods Sold
For the month ended, Jan. 20XX

Merchandise Inventory, beginning P 0.00

Add: Net Cost of Purchases P 120, 000.00
Freight-in P 17, 010.00 P 137, 010.00
Cost of Goods Available for Sale P 137, 010.00
Less: Merchandise Inventory, end 0.00
COST OF GOODS SOLD P 137, 010.00

Now that the Cost of Goods Sold is calculated already, let us now identify expenses incurred in the business operation. Operating
expenses such as Internet connection, Utilities Expense (Water and Electricity), Rent Expense and Miscellaneous expense are
important to keep the business operating. These expenses are part of the total costs incurred in its day-to-day operation and are paid
every end of the month. The assumed operating expenses and its amounts are presented below:
Operating Expenses
Add: Internet Connection P 1, 499.00
Utilities Expense 1, 500.00
Rent Expense 5, 000.00
Miscellaneous Expense 1, 000.00
TOTAL OPERATING EXPENSES P 8, 999.00

Now that the total operating expenses are calculated already, we can now solve the Income Statement to get the Net Profit (Net Loss)
of Just Wear Online Selling Business.

Just Wear Online Selling Business

Income Statement
For the month ended, Jan. 20XX

Sales P 180, 000.00

Less: Cost of Goods Sold 137, 010.00
Gross Profit P 42, 990.00
Less: Operating Expenses
Internet Connection P 1, 499.00
Utilities Expense 1, 500.00
Rent Expense 5, 000.00
Miscellaneous Expense 1, 000.00 8, 999.00
NET INCOME/PROFIT P 33,991.00

Table 5. shows the projected monthly revenues, costs, and income covering the first year operation of Just Wear Online Selling
Business. Important Assumptions:
1. For the month of January, the projected revenue -180, 000.00; cost of goods sold 137, 010.00, operating expenses – 8,
999.00;
2. For the months of February and March, the projected revenue, cost of goods sold, and operating expenses have an increase of
10% from the previous month;
3. For the months of April to August, it has the same projected revenue, cost of goods sold and operating expenses;
4. For the months of September to October, it has a loss of 5% from previous revenue and cost of goods sold and operating
expenses have the same amounts from the previous month;
5. For the month of November, it has an increase of 10% from previous revenue, 5% increase of cost of goods sold and
operating expenses; and
6. For the month of December, it has 15% increase from the previous revenue, 5% increase of cost of goods sold and operating
expenses.

Table 5. Projected Monthly Revenue, Cost, and Income

Just Wear Online Selling Business

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FOR TEACHERS
SAMPLE PROBLEMS (Costs, Revenue, Profit and Profit Margin)
COST
a. A business has ₱ 1,000,000.00 fixed costs per month and ₱ 177.50 variable costs per unit. The business produces 15,600
units in a month.
i. What are the firm’s total cost?
ii. What is the firm’s average cost per unit?
b. A gym has ₱ 900,000.00 fixed cost per year. Variable costs per person, per visit are ₱ 12.50.
i. If there are 1000 visits made to the gym in July, what are the total costs of running the gym that month?
ii. Calculate the average cost per visit for the gym, in July.

REVENUE
a. A theme park has a busy Bank Holiday Monday selling 2000 adult tickets and 800 children’s tickets. Adult tickets are ₱
600.00 and children's tickets are ₱ 350.00. Calculate the theme park’s revenue.
b. Chery manages a group of swimming pools. She is monitoring the financial performance of three pools last month. Use the
table to answer the questions.
Branch Price Charged Number of Visits made by Total Venue
Customers
Sherffield ₱ 225.00 4,700
Rotherham ₱ 250.00 ₱ 1,040,000.00
Chapeltown 4,159 ₱ 1,247,700.00

i. What is Sheffield’s total revenue last months?

ii. Calculate the number of visits made by costumers, last month, in Rotherham.
iii. What price did Chapeltown charge, per customers, last month?
PROFIT
a. A business sell 5500 units one month. The price charged was ₱ 325.00 per unit. Cost of sales was ₱ 1,050,000.00. Calculate
this firm’s gross profit.
b. A business has gross profit of ₱ 792,500.00. Calculate this firm's operating profit.
c. A business has an operating profit of ₱ 192,500.00 net finance cost. It must pay ₱ 38,500.00 in corporation tax.
PROFIT MARGIN
a. The data table is taken from a company’s income statement for this year. Using this, calculate the firm’s gross, operating and
net profit margins.
Sales revenue ₱ 5M
Gross profit ₱ 3M
Operating profit ₱ 1.5M
Net profit ₱ 0.8M
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SAMPLE PROBLEMS (Forecasting Costs, Revenue, Profit)
A. Forecast the revenue of Jurattan Business and fill in the necessary figures to complete the table below based on the given
scenario.
Mang Juan is operating a buy and sell rattan business. He named his business, Jurattan Business. He sells rattan tables
and chairs in his stall in a local market. He gets his rattan table for 1,500.00 each and chair for 500.00 each from a local
supplier. He then adds 50 percent mark up for the rattan products. Mang Juan can sell everyday 10 tables and 10 chairs.

Projected Daily Revenue

Name of the Business: _________________________________
Types of products Cost per Unit (A) Mark-up ____ % (B) Selling Price (C) Projected Volume Projected Revenue
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 CHAPTER SIX: FINANCIAL ACCOUNTING AND MANAGEMENT
(D) Ave. No. of (E) Daily
Items Sold (Daily)
A B = (A x 0.50) C= (A + B) D E=(C x D)
Table 1,000.00 2,250.00 22,500.00
10
TOTAL 3,000.00 20

B. Using the scenario on Activity 1, use the template and fill in the necessary figures below:
Projected Daily, Monthly, and Annual Revenue
Name of the Business: ________________________________________
Projected Daily Revenue Projected Monthly Revenue (30 days in a Projected Annual Revenue (365 days in a
month) year)
30,000.00 ___________ x 30 days = ___________ ____________ x 365 days = _________

Resources / References:
Online:
https://www.collegesidekick.com/study-docs/1466933
https://pea-journal.eu

Books:
Edralin,D.M. Entrepreneurship. Quezon City: Vibal Group Inc.
Kawasaki, G. (2004). Art of start: The time-tested, battle-hardened guide for anyone starting anything. USA: Penguin Group
Skripak, S. J. (2016). Fundamentals of business. USA: Pamplin College of Business and Virginia Tech Libraries

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