FINANCIAL STATEMENTS

PREPARATION
 BASIC ACCOUNTING ASSUMPTIONS
1. ACCOUNTING ENTITY – assumes that from the accounting point of view, the business is
considered as “an entity that is separate and distinct from the owner or management”
2. GOING CONCERN ASSUMPTION – the business assumed to have a continuous life of existence
3. TIME PERIOD ASSUMPTION – Due to the duration, the life of the business is divided into equal
periods wherein at the end of each period the accountant prepares the financial statements. (i.e
accounting periods)

Monthly
Quarterly
Semiannual/Semestral
Yearly/Annual
BASIC ACCOUNTING ASSUMPTIONS
4. UNIT OF MEASURE – to account for the unit of measure and not for changes in its purchasing
power
5. ACCRUAL BASIS – income is recognized when earned regardless of when received and
expensed is recognized when incurred regardless of when paid.
Cash Basis – recognizes income and expenses only when actual cash is paid
ELEMENTS OF FINANCIAL STATEMENTS
1. BALANCE SHEET:
•Assets – resources controlled by the enterprise as a result of past transactions and events and
from which future economic benefits are expected to flow the enterprise.
•Liabilities – present obligations of the enterprise arising from of past transactions or events , the
settlement of which is expected to result in an outflow from the enterprise embodying
economic benefits
•Equity – residual interest in the assets of the enterprise after deducting all its liabilities
EQUITY = ASSETS - LIABILITIES
ELEMENTS OF FINANCIAL STATEMENTS
2. INCOME STATEMENT:
•Revenue and Gains – gross inflow of economic benefits during the period arising in the course of
ordinary activities of an enterprise when those inflows result in increase in equity, other than
those relating to contributions from owners.
•Expenses and Losses – gross outflow of economic benefits during the period arising in the
course of ordinary activities of an enterprise when those outflows result in decrease in equity,
other than those relating to d from distributions to owners.
Profit = REVENUE > EXPENSE
Loss = REVENUE < EXPENSE
Breakeven = REVENUE = EXPENSE
QUALITIES THAT FINANCIAL STATEMENTS
SHOULD POSSESS
1. Understandability – prepared and presented in a way that it can be understood by the users
2. Reliability – financial information should carry the degree of “confidence”
Faithful presentation – the information shows what it purports to show
Neutrality – fairly presented and free from bias
Conservatism – when alternative exist, the one which has least effect on owner’s equity
Completeness – contains full disclosure of significant information (not to mislead)
Substance over form – emphasizes economic substance of events even though the legal form may differ
from economic substance and suggest different treatment
QUALITIES THAT FINANCIAL STATEMENTS
SHOULD POSSESS
3. Relevance – financial statements are prepared intended to help users make informed
economic decisions.

Materiality – no strict rule, depends on judgment and common sense

Predictive value – enables the users to forecast and make predictions about the outcome of the future
events
Feedback value – the financial information enables the users to confirm past predictions or correct
earlier presentation
Timeliness – financial value must be available at the time of the need or else it will defeat the purpose
QUALITIES THAT FINANCIAL STATEMENTS
SHOULD POSSESS
4. Comparability – financial statements prepared are worth comparing for with other
companies of the same line of business by pointing out similarities and differences
5. Consistency – once a method or practice is selected from alternatives, it should be followed
from period to period.
Accounting Cycle

1. Analyze and record

transactions
2. Post transactions to the ledger
3. Prepare unadjusted trial
balance
4. Prepare adjusting entries at the
end of the period
5. Prepare adjusted trial balance
6. Prepare financial Statements
GENERAL JOURNALS AND SPECIAL
JOURNALS
SPECIAL JOURNAL:
1. SALES BOOKS OR SALES JOURNAL – Sale of Merchandise in account or credit terms
Proforma JE:

◦ Account Receivable XX
Sales XX
OUTPUT TAX XX

◦ Account Receivable XX
Sales XX
GENERAL JOURNALS AND SPECIAL
JOURNALS
SPECIAL JOURNAL:
2. PURCHASE JOURNAL – Purchases of Merchandise on account or credit terms
Proforma JE:

◦ Purchases XX
Input Tax XX
Accounts Payable XX

◦ Purchases XX
Accounts Payable XX
GENERAL JOURNALS AND SPECIAL
JOURNALS
SPECIAL JOURNAL:
3. CASH RECEIPTS JOURNAL – receipts of cash

◦ Cash XX
Various Credits XX

From sale of merchandise:

◦ Cash XX
Sales XX
Output Tax XX
GENERAL JOURNALS AND SPECIAL
JOURNALS
SPECIAL JOURNAL:
3. CASH RECEIPTS JOURNAL – receipts of cash

Refund from merchandise:

◦ Cash XX
Purchase Return & Allowance XX
Input Tax XX

Collection with a discount:

◦ Cash XX
Sales Discount XX
Output Tax XX
Accounts Receivable XX
GENERAL JOURNALS AND SPECIAL
JOURNALS
SPECIAL JOURNAL:
4. CASH DISBURSEMENT JOURNAL – cash payments

Purchase Merchandise on account with a discount:

◦ Accounts Payable XX
Purchase discounts XX
Input Tax XX
Cash XX

Refund for merchandise returned:

◦ Sales Return and Allowance XX
◦ Output Tax XX
Cash XX
GENERAL JOURNALS AND SPECIAL
JOURNALS
SPECIAL JOURNAL:
4. CASH DISBURSEMENT JOURNAL – receipts of cash

◦ Various Debits XX
Cash XX

Purchase Merchandise in cash:

◦ Purchases XX
Input Tax XX
Cash XX
GENERAL JOURNALS AND SPECIAL
JOURNALS
GENERAL JOURNAL:

EXAMPLES:
1. Investments of the owner not involving cash
2. Return of merchandise bought on account
3. Return of merchandise by a customer that were sold on account
4. Adjusting and correcting journal entries
5. Closing and reversing entries
ACCOUNTING CYCLE - IDENTIFYING
TRANSACTIONS
SOURCE DOCUMENTS:
1. SALES INVOICE (SI) – Goods
2. OFFICIAL RECEIPT (OR) – Service
3. DELIVERY RECEIPT (DR) – Accompanies sales invoice , proof that goods have been delivered
and acknowledged by the customer
4. PURCHASE ORDER (PO) – Used in ordering goods
5. RECEIVING REPORT (RR) – Internal control purposes, goods delivered are physically checked
against what is indicated in SI and DR
ACCOUNTING CYCLE - IDENTIFYING
TRANSACTIONS
SOURCE DOCUMENTS:
6. CASH/CHECK VOUCHER – Accompany “cash” or “check” in payment of account
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
CHART OF ACCOUNT POST CLOSING TRIAL BALANCE, December 31, 20A

◦ COMPREHENSIVE EXAMPLE
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS

SCHEDULE OF ACCOUNTS RECEIVABLE SCHEDULE OF ACCOUNTS PAYABLE

No adjusting entries that were prepared on December 31, 20A that requires Reversing entries on Jan. 1, 20B
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
Narrative transaction during the month of January 20B
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
Narrative transaction during the month of January 20B
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
Narrative transaction during the month of January 20B
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
Narrative transaction during the month of January 20B
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
Narrative transaction during the month of January 20B
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
Narrative transaction during the month of January 20B
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
Narrative transaction during the month of January 20B
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
SPECIAL JOURNALS
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
SPECIAL JOURNALS
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
SPECIAL JOURNALS
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
SPECIAL JOURNALS
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
GENERAL JOURNAL
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
POSTING TO THE LEDGER
ACCOUNTING CYCLE - IDENTIFYING TRANSACTIONS
POSTING TO THE LEDGER