FINANCIAL ACCOUNTING AND 2.
Qualitative information- expressed in words or
REPORTING (FAR)
Midterm Exam Reviewer
Chapter 1
Introduction to Accounting
ACCOUNTING – process of identifying, recording, and
communicating economic information that is useful in
making economic decisions.
ESSENTIAL ELEMENRTS OF THE DEFINITION OF
ACCOUNTING
a. Identifying- analyzes each business transaction and
identifies whether the transaction is an accountable
event or non-accountable. ONLY ACCOUNTABLE EVENTS
ARE RECORDED IN THE BOOK OF ACCOUNTS.
 accountable event- those that affect the assets,
liabilities, equity, income, or expenses of a
business.
b. Recording- accountant recognizes the identified
accountable events. This process is called journalizing.
 After the journalizing, it classifies the effects of
the event on the “accounts”. The process is
called posting.
 Account- basic storage of information in
accounting
c. Communicating- at the end of each accounting period,
the accountant summarizes the information processed in
the accounting system in order to produce meaningful
reports.
 Information processed in the accounting system
is useless unless it is communicated.
 Most common form of accounting reports is
financial statements
NATURE OF ACCOUNTING
Accounting is a process with a basic purpose of providing
information about economic activities that is intended to
be useful in making economic decisions.
TYPES OF INFORMATION PROVIDED BY ACCOUNTING
1. Quantitative information- expressed in numbers,
quantities, or units.
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descriptive form. It is found in the notes to financial
statements and in the face of other components of
financial system.
3. Financial information- expressed in money. It can also
be a quantitative information because monetary
amounts are expressed in numbers.
ACCOUNTING AS SCIENCE AND ART
1. Social science, accounting is a body of knowledge
which has been systematically gathered, claassified and
organized.
2. Practical art, accounting requires the use of creative
skills and judgment.
ACCOUNTING AS AN INFORMATION SYSTEM
*A system is one that consists of an input, process, and
output.
In accounting system, the inputs are the identified
accountable events; the process are recording,
classifying and summarizing; the output is the
accounting report that is communicated to others.
BOOKKEEPING refers to the process of recording the
accounts or transactions of an entity.
 Ends with trial balance
 Does not require interpretation of the
significance of the information processed.
ACCOUNTING- covers the whole process of identifying,
recording and communicating information to interested
users.
FUNCTIONS OF ACCOUNTING IN BUSINESS
Accounting is the language of business because it is
fundamental to the communication of financial
information.
FUNCTIONS:
1. TO PROVIDE EXTERNAL USERS WITH INFORMATION
THAT IS USEFUL IN MAKING INVESTMENT AND CREDIT
DECISIONS
2. TO PROVIDE INTERNAL USERS WITH INFORMATION
THAT IS USEFUL IN MANAGING THE BUSINESS.
USERS OF ACCOUNTING INFORMATION
1. INTERNAL USERS- DIRECTLY INVOLVED IN MANAGING
THE BUSINESS
2. EXTERNAL USERS- NOT DIRECTLY INVOLVED IN
MANAGING THE BUSINESS
TYPES OF ACCOUNTING INFORMATION
1. GENERAL PURPOSE ACCOUNTING INFORMATION-
DESIGNED TO MEET THE COMMON NEEDS OF MOST
STATEMENT USERS.
 PROVIDED BY FINANCIAL ACCOUNTING AND
PREPARED PRIMARILY FOR EXTERNAL USERS
2. SPECIAL PURPOSE ACCOUNTING INFORMATION-
DESIGNED TO MEET THE SPECIFIC NEEDS OF
PARTICULAR STATEMENT USERS.
 PROVIDED BY MANAGEMENT ACCOUNTING
AND PREPARED PRIMARILY FOR EXTERNAL
USERS.
(EXAMPLES NAA SA BOOK DAGHAN KAAYO. SCAN
NALANG. HEHE)
BRIEF HISTORY OF ACCOUNTING
 SINCE THE DAWN OF CIVILIZATION WHEN
MANKIND BGEAN TO ENGAGE IN TRADE, MORE
THAN 10,000 YEARS AGO, METHODS OF
RECORD KEEPING AND ACCOUNTING HAVE
BEEN INVENTED.
 8500 BC, ACCOUNTING HAS ALREADY EXISTED
 TOKENS: CONES, DISKS, SPHERES, PELLETS,
WET CLAY TABLETS
 MESOPOTAMIA, BABYLONIA, EGYPT, CHINA
AND GREECE WERE PLACES THAT WERE
KEEPING ACCOUNT RECORS.
 1211 AD, ONE OF THE SYSTEMS IN
ACCOUNTING WAS KEPT BY A FLORENTINE
BANKER. HOWEVER, CONCEPT OF EQUALITY
FOR ENTRIES WAS ABSENT.
 DOUBLE ENTRY RECORDS FIRST CAME OUT
DURING 1340 A.D. IN GENOA.
 FRA LUCA PACIOLO (FATHER OF MODERN
ACCOUNTING) FORMULATED THE “DOUBLE
ENTRY RECORDING SYSTEM” IN 1494 AND WAS
INCLUDED IN HIS BOOK “SUMMA DI
ARITYHMETICA GEOMETRIA PROPORTIONI AND
PROPORTIONISTA”
COMMON BRANCHES OF ACCOUNTING
1. FINANCIAL ACCOUNTING- FOCUSES ON GENERAL
PURPOSE FINANCIAL STATEMENTS
 GOVERNED BY PFRS
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 GENERAL PURPOSE FINANCIAL STATEMENTS-
CATER TO THE COMMON NEEDS OF EXTERNAL
USERS, PRIMARILY THE POTENTIAL AND
EXISITNG INVESTORS, LENDERS AND OTHER
CREDITORS
FINANCIAL ACCOUNTING VS. FINANICAL REPORTING
- BOTH FOCUS ON GENERAL PURPOSE FINANCIAL
STATEMENTS. HOWEVER, FINANCIAL
REPORTING ENDEAVORS TO PROMOTE
PRINCIPLES THAT ARE USEFUL TO “OTHER
FINANCIAL REPORTING”
“OTHER FINANCIAL REPORTING”- COMPRISES
INFORMATION PROVIDED OUTSIDE THE FINANCIAL
STATEMENTS THAT ASSISTS IN THE INTERPRETATION OF
A COMPLETE SET OF FS.
FINANCIAL STATEMENTS VS. FINANICAL REPORT
 FINANCIAL STATEMENTS- STRUCTURED
REPRESENTATION OF AN ENTITY’S FINANCIAL
POSITION AND RESULTS OF ITS OPERATIONS. IT
IS THE END PRODUCT OF THE ACCOUNTING
PROCESS.
 FINANICAL REPORT- INCLUDES THE FINANCIAL
STATEMENTS PLUS OTHER INFORMATION
PROVIDED OUTSIDE THE FINANCIAL
STATEMENTS
FINANICAL REPORTING
- PROVISION OF FINANCIAL INFORMATION
ABOUT AN ENTITY THAT IS USEFUL TO EXTERNAL
USERS
PRIMARY OBJECTIVE OF FR
- PROVIDE INFORMATIOON ABOUT AN ENTITY’S
ECONOMIC RESOURCES (ASSETS), CLAIMS TO
THOSE RESOURCES (Liabilities and equity), AND
CHANGES IN THOSE RESOURCES (INCOME,
EXPENSES, AND OTHER CHANGES)
SECONDARY OBJECTIVE OF FR
- PROVIDE INFORMATION USEFUL IN ASSESSING
THE ENTITY’S MANAGEMENT STEWARDSHIP
2. MANAGEMENT ACCOUNTING- INVOLVES IN THE
ACCUMULATION AND COMMUNICATION OF
INFORMATION FOR USE BY INTERNAL USERS. AN
OFFSHOOT OF MANAGEMENT ACCOUNTING IS
MANAGEMENT ADVISORY SERVICES.
3. GOVERNMENT ACCOUNTING0 ACCOUNTING FOR THE
GOVERNMENT AND ITS INSTRUMENTALITIES, FOCUSING
ATTENTION ON THE CUSTODY OF PUBLIC FUNDS,
PURPOSE TO WHICH THOSE FUNDS ARE COMMITTED,
AND THE RESPONSIBILITY AND ACCOUNTABILITY OF THE
INDIVIDUALS ENTRUSTED WITH THOSE FUNDS.
4. AUDITING- INVOLVES THE INSPECTION OF AN ENTITY’S
FINANCIAL STATEMENTS TO ASCERTAIN THEIR
CORRESPONDENCE WITH AN ESTABLISHED CRITERIA.
5. TAX ACCOUNTING- PREPARATION OF TAX RETURNS
AND RENDERING OF TAX ADVICE
6. COST OF ACCOUNTING- SYSTEMATIC RECORDING AND
ANALYSIS OF THE COSTS OF MATERIALS, LABOR, AND
OVERHEAD INCIDENT TO THE PRODUCTION OF GOODS
OR RENDERING OF SERVICES.
7. ACCOUNTING EDUCATION- TEACHING ACCOUNTING
AND ACCOUNTING-RELATED SUBJECTS IN AN
ORGANIZED LEARNING ENVIRONMENT. THE PROCESS OF
FACILITATING THE ACQUISITION OF KNOWLEDGE AND
SKILLS.
8. ACCOUNTING RESEARCH- PERTAINS TO THE CAREFUL
ANALYSIS OF ECONOMIC EVENTS AND OTHER VARIABLES
TO UNDERSTAND THEIR IMPAQCT ON DECISIONS.
FORMS OF BUSINESS ORGANIZATIONS
- A BUSINESS IS AN ACTIVITY WHERE GOODS OR
SERVICES ARE EXCHANGED FOR MONEY. A
PERSON WHO IS ENGAGED IN BUSINESS IS
CALLED AN ENTREPRENUER OR BUSINESSMAN.
1. SOLE OR SINGLE PROPRIETORSHIP- BUSINESS THAT IS
OWNED BY ONLY ONE INDIVIDUAL. IT IS THE MOST
COMMON AND SIMPLEST FORM OF BUSINESS
ORGANIZATION. THE OWNER IS CALLED “SOLE
PROPRIETOR.”
 REGISTERED IN DEPARTMENT OF TRADE AND
INDUSTRY
2. PARTNERSHIP- BUSINESS OWNED BY TWO OR MORE
INDIVIDUALS WHO ENTERED IN A CONTRACT TO CARRY
ON THE BUSINESS AND DIVIDE AMONG THEMSELVES
THE AERNINGS THEREFROM. OWNERS ARE CALLED
“PARTNERS.”
 REGISTERED IN SECURITIES AND EXCHANGE
COMMISSION
3. CORPORATION- OWNED BY MORE THAN ONE
INDIVIDUAL. HOWEVER, IT IS CREATED BY OPERATIONS
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OF LAW. OWNERSHIP IN A CORPORATION IS
REPRESNTED BY SHARES OF STOCKS. OWNERS ARE
CALLED “STOCKHOLDERS/SHAREHOLDERS.”
 AN ARTIFICIAL BEING OR JURIDICIAL PERSON,
MEANING IN THE EYES OF THE LAW, A
CORPORATION IS LIKE A PERSON, SEPARATE
FROM ITS OWNERS. THEREFORE, A
CORPORATION CAN TRANSACT ON ITS OWN,
HAVE ITS OWN PROPERTIES, INCUR ITS OWN
OBLIGATIONS, AND SUE OR BE SUED.
 THE INCORPORATORS OF A CORPORATION
SHALL NOT BE LESS THAN 5 BUT MORE THAN 15
INDIVIDUALS.
 CAN HAVE AS MANY STOCKHOLDERS AS ITS
AUTHORIZED CAPITALIZATION PERMITS.
 REGISTERED IN SECURITIES AND EXCHANGE
COMMISSION
4. COOPERATIVE- OWNED BY MORE THAN ONE
INDIVIDUAL. IT IS FORMED IN ACCORDANCE WITH THE
PROVISIONS OF THE PHILIPPINE COOPERATIVE CODE OF
2008. OWNERS ARE CALLED “MEMBERS.”
 A COOPERATIVE IS AN ASSOCIATIO OF
INDIVIDUALS WHO JOINED TOGETHER TO
CONTRIBUTE CAPITAL AND COOPERATE IN ORDER
TO ACHIEVE CERTAIN GOALS.
 MEMBERS NEED TO PATRONIZE THE
COOPERATIVE’S GOODS OR SERVICES.
 IF COOPERATIVE EARNS PROFIT, A MEMBER CAN
RECOVER HIS COSTS THROUGH PATRONAGE
FUNDS.
 FOUNDING MEMBERS OR A COOPERATIVE SHALL
NOT BE LESS THAN 15 INDIVIDUALS BUT CAN HAVE
AS MANY MEMBERS AS ITS BY-LAWS PERMIT.
 REGISTERED IN COOPERATIVE DEVELOPMENT
AUTHORITY
PATRONAGE FUNDS- PERTAIN TO THE
PROFIT THAT A COOPERATIVE RETURNS TO
ITS OWNERS.
TYPES OF BUSINESS ACCORDING TO ACTIVITIES
1. SERVICE BUSINESS- ONE THAT OFFERS SERVICES AS ITS
MAIN PRODUCT RATHER THAN PHYSICAL GOODS. IT MAY
OFFER PROFESSIONAL SKILLS, EXPERTISE, ADVICE,
LENDING SERVICE, AND SIMILAR SERVICES.
2. MERCHANDISING BUSINESS (TRADING BUSINESS)-
ONE THAT BUYS AND SELLS GOODS WITHOUT
CHANGING THEIR PHYSICAL FORM.
3. MANUFACTURING BUSINESS- ONE THAT BUYS RAW
MATERIALS AND PROCESSES THEM INTO FINAL
PRODUCTS. IT CHANGES THE PHYSICAL FORM OF THE
GOODS IT HAS PURCHASED IN A PRDUCTION PROCESS.
 SOME BUSINESSES, CALLED HYBRID
BUSINESSES, ENGAGE IN MORE THAN ONE TYPE
OF ACTIVITY.
Chapter 2
ACCOUNTING CONCEPTS AND PRINCIPLES
ACCOUNTING CONCEPTS AND PRINCIPLES
(ASSUMPTIONS OR POSTULATES)- SET OF LOGICAL IDEAS
AND PROCEDURES THAT GUIDE THE ACCOUNTANT IN
RECORDING AND COMMUNICATING ECONOMIC
INFORMATION. THEY PROVIDE A GENERAL FRAME OF
REFERENCE BY WHICH ACCOUNTING PRACTICE CAN BE
EVALUATED AND THEY SERVE AS GUIDE IN THE
DEVELOPMENT OF NEW PRACTICES AND PROCEDURES.
 PROVIDE REASONABLE ASSURANCE THAT
INFORMATION COMMUNICATED TO USERS IS
PREPARED IN A PROPER WAY.
BASIC ACCOUNTING CONCEPTS
- CONCEPTS AND PRINCIPLES ARE SOURCED
FROM THE STANDARDS (PFRS), THE
CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING, OR GENERAL ACCEPTANCE IN THE
PROFESSION DUE TO LONG-TIME USE. BELOW
ARE THE BASIC AND COMMON ACCOUNTING
CONCEPTS AND PRINCIPLES:
1. SEPARATE ENTITY CONCEPT- BUSINESS IS VIEWED AS
A SEPARATE PERSON, DISTINCT FROM ITS OWNERS.
ONLY THE TRANSACTIONS OF THE BUSINESS ARE
RECORDED IN THE BOOKS OF ACCOUNTS.
 THE APPLICATION OF THE SEPARATE ENTITY
CONCEPT IS NECESSARY SO THAT THE FINANCIAL
POSITION AND FINANCIAL PERFORMANCE OF A
BUSINESS CAN BE MEASURED PROPERLY.
2. HISTORICAL COST CONCEPT- ASSETS ARE INITIALLY
RECORDED AT THEIR ACQUISITION COST.
3. GOING CONCERN ASSUMPTION- BUSINESS IS
ASSUMED TO CONTINUE TO EXIST FOR AN INDEFINITE
PERIOD OF TIME. THIS IS NECESSARY FOR ACCOUNTING
MEASUREMENTS TO BE MEANINGFUL.
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 OPPOSITE OF THIS IS LIQUIDATING CONCERN.
THE ASSETS OF A LIQUIDATING CONCERN ARE
MEASURED AT NET SELLING PRICE.
4. MATCHING (ASSOCIATION OF CAUSE AND EFFECT)-
SOME COSTS ARE INITIALLY RECOGNIZED AS ASSETS AND
CHARGED AS EXPENSES ONLY WHEN THE RELATED
REVENUE IS RECOGNIZED.
5. ACCRUAL BASIS OF ACCOUNTING- ECONOMIC EVENTS
ARE RECORDED IN THE PERIOD IN WHICH THEY OCCUR
RATHER THAN AT THE POINT IN TIME WHEN THEY
AFFECT CASH.
6. PRUDENCE OR CONSERVATISM- ACCOUNTANT
OBSERVES SOME DEGREE OF CAUTION WHEN
EXERCISING JUDGMENTS NEEDED IN MAKING
ACCOUNTING ESTIMATES UNDER CONDITIONS OF
UNCERTAINTY.
7. TIME PERIOD (PERIODICITY, ACCOUNTING PERIOD,
REPORTING PERIOD CONCEPTS)- THE LIFE OF THE
BUSINESS IS DIVIDED INTO SERIES OF REPORTING
PERIODS.
 THE LIFE OF THE BUSINESS IS DIVIDED INTO
SERIES OF EQUAL SHORT PERIODS CALLED
REPORTING PERIOD OR ACCOUNTING PERIOD.
 A REPORTING PERIOD IS USUALLY 12 MONTHS,
CAN EITHER BE A CALENDAR YEAR PERIOD OR A
FISCAL YEAR PERIOD.
 AN ACCOUNTING PERIOD THAT IS SHORTER
THAN 12 MONTHS IS CALLED “INTERIM PERIOD”
CALENDAR YEAR PERIOD- STARTS ON JANUARY 1 AND
ENDS ON DECEMBER 31 OF THE SAME YEAR
FISCAL YEAR PERIOD- COVERS 12 MONTHS BUT STARTS
ON A DATE OTHER THAN JANUARY 1
8. STABLE MONETARY UNIT- ASSETS, LIABILITIES,
EQUITY, INCOME, AND EXPENSES ARE STATED IN TERMS
OF A COMMON UNIT OF MEASURE, WHICH IS THE PESO
IN THE PHILIPPINES. PURCHASING POWER OF THE PESO
IS REGARDED AS STABLE.
9. MATERIALITY CONCEPT- THIS GUIDES THE
ACCOUNTANT WHEN APPLYING ACCOUNTING
PRINCIPLES. THIS IS BECAUSE ACCOUNTING PRINCIPLES
ARE APPLICABLE ONLY TO MATERIAL ITEMS.
 AN ITEM IS CONSIDERED MATERIAL IF ITS
OMISSION OR MISSTATEMENT COULD
INFLUENCE ECONOMIC DECISIONS.
 MATERIALITY IS A MATTER OF PROFESSIONAL
JUDGMENT AND IS BASED ON SIZE AND NATURE
OF AN ITEM.
  ACCOUNTING PRINCIPLES DO NOT SPECIFY A
CERTAIN AMOUNT THAT IS CONSIDERED
MATERIAL
10. COST-BENEFIT (COST CONSTRAINT)- THE COSTS OF
PROCESSING AND COMMUNICATING INFORMATION
SHOULD NOT EXCEED THE BENEFITS TO BE DERIVED
FROM THE INFORMATION’S USE.
11. FULL DISCLOSURE PRINCIPLE- RELATED TO BOTH THE
CONCEPTS OF MATERIALITY AND COST-BENEFIT. UNDER
THIS, INFORMATION COMMUNICATED TO USERS
REFLECT A SERIES OF JDGMENTAL TRADE-OFFS THAT
STRIVE FOR:
A. SUFFICIENT DETAIL TO DISCLOSURE MATTERS THAT
MAKE A DIFFERENCE TO USERS, YET
B. SUFFICIENT CONDENSATION TO MAKE THE
INFORMATION UNDERSTANDABLE, KEEPING IN MIND
THE COSTS OF PREPARING AND USING IT.
12. CONSISTENCY CONCEPT- THIS CONCEPT REQUIRES A
BUSINESS TO APPLY ACCOUNTING POLICIES
CONSISTENTLY, AND PRESENT INFORMATION
CONSISTENTLY, FROM ONE PERIOD TO ANOTHER.
 ACCOUNTING POLICIES CAN BE CHANGED IF IT IS
REQUIRED BY A STANDARD OF THE CHANGE
WOULD RESULT IN MORE RELEVANT AND MORE
RELIABLE INFORMATION.
ACCOUNTING STANDARDS
- ACCOUNTING CONCEPTS AND PRINCIPLES ARE
EITHER EXPLICIT OR IMPLICIT.
EXPLICIT- THOSE THAT ARE SPECIFICALLY MENTIONED IN
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING AND IN THE PHILIPPINE FINANCIAL
REPORTING STANDARDS (PFRS).
IMPLICIT- NOT SPECIFICALLY MENTIONED IN THE
FOREGOING BUT ARE CUSTOMARILY USED BECAUSE OF
THEIR GENERAL AND LONGTIME ACCEPTANCE WITHIN
THE ACCOUNTANCY PROFESSION.
- THE TERMS “CONCEPTS”, “PRINCIPLES”,
“STANDARDS”, “ASSUMPTIONS”, AND
“POSTULATES” ARE USED INTERCHANGEABLY IN
PRACTICE.
- “STANDARDS” USED TO REFER TO THE PFRS.
TRADITIONALLY, ACCOUNTING STANDARDS
WERE REFERRED TO AS THE GAAP.
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PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRS)
- THESE ARE STANDARDS AND INTERPRETATIONS
ADOPTED BY THE FINANCIAL REPORTING
STANDARDS COUNCIL. THEY CONSIST OF THE
FOLLOWING:
A. PFRS
B. PAS
C. INTERPRETATIONS
STANDARDS SERVE AS GUIDE WHEN RECORDING AND
COMMUNICATING ACCOUNTING INFORMATION. IT
PROVIDES A MORE DETAILED APPLICATION OF
CONCEPTS. THEY ALSO PRESCRIBE THE MOST
APPROPRIATE PRINCIPLE FOR SPECIFIC ECONOMIC
TRANSACTIONS.
THE PFRS ARE ISSUED BY THE FINANCIAL REPORTING
STANDARDS COUNCIL, WHICH IS THE OFFICIAL
ACCOUNTING STANDARD-SETTING BODY OF THE
PHILIPPINES.
THE PFRS ARE PATTERNED FROM THE INTERNATIONAL
FINANCIAL REPORTING STANDARDS WHICH ARE
ISSUED BY THE INTERNATIONAL ACCOUNTING
STANDARDS BOARD.
GENERALLY ACCEPTABLE MEANS:
A. THE STANDARD HAS BEEN ESTABLISHED BY AN
AUTHORITATIVE ACCOUNTING STANDARD-SETTING
BODY
B. THE PRINCIPLE HAS GAINED GENERAL ACCEPTANCE
DUE TO PRACTICE OVER TIME AND HAS BEEN PROVEN
TO BE MOST USEFUL.
- THE PROCESS OF ESTABLISHING ACCOUNTING
STANDARDS IS A DEMOCRATIC PROCESS.
RELEVANT REGULATORY BODIES
1. SECURITIES AND EXCHANGE COMMISSION-TASKED TO
REGULATE CORPORATIONS, INCLUDING PARTNERSHIP.
IT REQUIRES BOTH TO FILE AUDITED FINANCIAL
STATEMENTS.
2. BUREAU OF INTERNAL REVENUE- TASKED IN
COLLECTING NATIONAL TAXES AND ADMINISTERING THE
PROVISIONS OF THE TAX CODE.
3. BANGKO SENTRAL NG PILIPINAS- TASKED IN
REGULATING BANKS AND OTHER ENTITIES PERFORMING
BANKING FUNCTIONS. IT INFLUENCES THE SELECTION
AND APPLICATION OF ACCOUNTING POLICIES BY THESE
BUSINESSES.
4. COOPERATIVE DEVELOPMENT AUTHORITY- TASKED IN
REGULATING COOPERATIVES. IT INFLUENCES THE
SELECTION AND APPLICATION OF ACCOUNTING POLICIES
BY COOPERATIVES.
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL
REPORTING
- ALSO PRESCRIBES ACCOUNTING CONCEPTS
THAT ARE RELEVANT TO THE PREPARATION OF
FINANCIAL STATEMENTS.
- IT IS NOT A STANDARD. IT SERVES AS A GENERAL
FRAME OF REFERENCE DEVELOPING THE
STANDARDS.
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL
INFORMATION
QUALITATIVE CHARACTERISTICS- TRAITS THAT
DETERMINE WHETHER AN ITEM OF INFORMATION IS
USEFUL TO OTHERS. WITHOUT THESE, INFORMATION
MAY BE DEEMED USELESS. THESE ARE BROADLY
CLASSIFIED INTO TWO:
A. FUNDAMENTAL QUALITATIVE CHARACTERISTICS-
MAKE INFORMATION USEFUL TO OTHERS. CONSIST OF
THE FOLLOWING:
1. RELEVANCE- CAN AFFECT THE DECISIONS OF
USERS. WITHOUT THIS TRAIT, INFORMATION IS
DEEMED USELESS. THREE ASPECTS:
 FREE FROM ERROR- INFROMATION IS NOT
MATERIALLY MISSTATED. THIS DOES NOT MEAN
THAT INFORMATION MUST BE PREFECTLY
ACCURATE. THIS MEANS THAT THERE ARE NO
ERRORS IN THE DESCRIPTION AND IN THE PROCESS
BY WHICH THE INFORMATION IS SELECTED AND
APPLIED.
B. ENHANCING QUALITATIVE CHARACTERISTICS-
SUPPORT THE FUNDAMENTAL CHARACTERISTICS. THEY
ENHANCE THE USEFULNESS OF INFORMATION. CONSIST
OF THE FOLLOWING:
1. COMPARABILITY- IF IT CAN HELP USERS
IDENTIFY SIMILARITIES AND DIFFERENCES BETWEEN
SETS OF INFORMATION.
2. VERIFIABILITY- IF DIFFERENT USERS COULD
REACH A GENERAL AGREEMENT AS TO WHAT THE
INFORMATION INTENDS TO PRESENT.
3. TIMELINESS- IF IT IS AVAILABLE TO USERS IN
TIME TO BE ABLE TO INFLUENCE THEIR DECISIONS.
4. UNDERSTANDABILITY- IF IT IS PRESENTED IN
A CLEAR AND CONCISE MANNER.
Chapter 3
The Accounting Equation
The Basic Accounting Equation

 PREDICTIVE VALUE- IF IT CAN HELP USERS TO Assets= Liabilities + Equity

MAKE PREDICTIONS ABOUT FUTURE OUTCOMES
 CONFIRMATORY VALUE (FEEDBACK VALUE)- IF IT
CAN HELP USERS CONFIRM THEIR PAST Assets
PREDICTIONS
 MATERIALITY- IS AN ENTITY-SPECIFIC ASPECT OF -economic resources you control that have resulted
RELEVANCE, MEANING IT DEPENDS ON THE FACTS from past events and can provide you with economic
AND CIRCUMSTANCES SURROUNDING A SPECIFIC benefits.
ENTITY.
2. FAITHFUL REPRESENTATION- IF IT IS
FACTUAL, MEANING IT REPRESENTS THE ACTUAL Control
EFFECTS THAT HAVE TAKEN PLACE. THREE ASPECTS:
-ownership is not necessary to have control.
 COMPLETENESS- ALL INFORMATION FOR USERS TO
-what is important is that you control the right over the
HAVE A COMPLETE UNDERSTANDING OF THE FS IS
economic benefits that the resource may produce.
PROVIDED
 NEUTRALITY- INFORMATION IS SELECTED WITHOUT -control means you have the exclusive right to enjoy
BIAS, NOT MANIPULATED. those benefits and the ability to prevent others from
enjoying those.

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Past events Giving up of economic resources

-the control ever an economic resource have resulted
from a past event or transaction.
-resources for which control is yet to be obtained in the
future do not qualify as assets in the present.
-settling the obligation necessarily would require you to
pay cash, to transfer other non-cash assets or render a
service.

-physical possession is also not necessary for control to Present obligation

exist. (ex. Money in the bank)
-a present obligation exists as a result of past events if

1. you have already obtained economic benefits or

Economic Benefits taken an action;

-to be an asset, the economic resource must have the 2. as a consequence, you are a required to transfer an
potential to provide you with economic benefits in at economic resource.
least one circumstance.
-examples: the economic resource can be
Equity
1. sold, leased, transferred or exchanged for other
-assets minus liabilities
assets
-capital, net assets, net worth
2. used singly or In combination with other assets to
produce goods or provide services

3. used to enhance the value of other assets
4. used to promote efficiency and cost savings
5. used to settle a liability
Liabilities
-present obligations that have resulted from past events
and can require you to give up economic resources
when settling them.
*liabilities represent the creditors’ claim while equity
represents the owners’ claim, against the total assets of
the business.
*the quality of the accounting equation must be
maintained in all the accounting processes of recording,
classifying and summarizing.
The expanded accounting equation
-shows all the financial statement elements

Assets= Liabilities +Equity +Income – Expenses

Obligation

-obligation means a duty or responsibility. It can either

Income
be:
-increases in economic benefits during the period in the
a. Legal obligation- an obligation that results a from a
form of increases in assets, or decreases in liabilities
contract, legislation or other operation of law
that result in increases in equity.
b. Constructive obligation- an obligation that results
from your past actions (past practice or published
policies) that have created a valid expectation on others Expenses
that you will accept and discharge certain
responsibilities. -are decreases in economic benefits during the period in
the form of decreases in assets or increases in liabilities,

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that result in decreases in equity, excluding those
relating to distributions to the business owners.
*the difference between income and expense
represents PROFIT OR LOSS
-If income is greater than expenses, the difference is
profit.
-if income is less than expenses, the difference is loss.
Chapter 4
Types of Major Accounts
The Account
-basic storage of information in accounting
-record of increases and decreases in a specific item of
asset, liability, equity, income or expense
-it can be depicted through a “T-account”
-the T account has three parts
a. Account title- describes the specific item of asset
liability, equity, income or expense
b. Debit side- left side of the account
c. Credit side- right side of the account
Debit (Dr.)- value received
Credit (Cr.)- value parted with
Balance- difference between the total debits and
credits
The Five Major Accounts
-elements of financial statements
1. Assets- are the economic resources you control that
have resulted from past events and can provide you
with future economic benefits.
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2. Liabilities- are your present obligations that have
resulted from past events and can require you to give
up resources when settling them.
3. Equity- assets minus liabilities
4.Income- increases in economic benefits during the
period in the form of increases in assets, or decreases in
liabilities, that result in increases in equity, excluding
those relating to investments by the business owner.
-includes both revenue and gains
a. Revenue- arises in the course of the ordinary
activities of a business (sales, service fees)
b.Gains- represent other items that meet the definition
of income and may or may not arise in the course of the
ordinary activities of the entity.
-Carrying amount- net amount to which an item is
carried or recorded in the books of accounts
5. Expenses- are decreases in economic benefits during
the period in the form of decreases in assets or
increases in liabilities that result in decreases in equity
excluding those relating to distributions to the business
owner.
-include both expenses and losses
a. Expenses- arise in the course of the ordinary activities
of a business
b. Losses- represent other items that meet the
definition of expenses and may or may not arise in the
course of the ordinary activities of the entity.
Classification of the Five major Accounts
Balance Sheet Accounts
-Assets, Liabilities, Equity
Income Statement Accounts
-Income and Expenses
Balance Sheet/Statement of Financial Position- one of
the components of a complete set of FS. It shows the
financial position of the business.
Income Statement- a sub-component of the statement
of comprehensive income (also a component of
complete FS), it shows the profit or loss of the business.
Chart of Accounts- list of all accounts used by a
business
Account numbers- assigned to the accounts to facilitate
recording, cross-referencing, and retrieval of
information.
-First digit: major type of accounts
Assets -1
Liabilities-2
Equity- 3
Income-4
Expense-5
-Second digit: account titles and the sequence on how
they are listed in the chart of accounts
-Third digit: if not zero, signifies that the account is a
contra or adjunct account
**To promote comparability, a business shall use
account titles that conform to the PFRSs and industry
practices. Regulated businesses should have chart of
accounts and/or account numbering system that
conform to relevant regulations
a. Bank- Bangko Sentral ng Pilipinas
b. Cooperative- Cooperative Development
Authority
c. National Government Agency- Revised chart of
accounts issued by Commission on Audit
Common Account Titles
Balance Sheet Accounts
Assets
1. Cash- money or equivalent readily available for
unrestricted use (on hand or in bank)
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2. Accounts Receivable- receivables supported by
oral informal promises to pay
3. Allowance for bad debts- estimated losses from
uncollectible accounts receivable (allowance for
doubtful accounts)
4. Notes Receivable- supported by written or
formal promises to pay (promissory notes)
5. Inventory- goods held for sale, undergoing the
process of production and raw materials
6. Prepaid Supplies- unused office and other
supplies
7. Prepaid Rent- rent paid in advance
8. Prepaid Insurance- insurance paid in advance
9. Land- lot on which the building of the business
is constructed
10. Building- structure owned by a business
11. Accumulated depreciation-building- total
amount depreciation expenses recognized since
the building was acquired and used
12. Equipment- Machineries, Transportation
equipment, office equipment, computer
equipment, furniture and fixtures
13. Accumulated depreciation-equipment- total
amount of depreciation expenses recognized since
the equipment was acquired and made available
for use
*collectively, land, building and equipment are referred
to as “Property, Plant, Equipment,” “Capital Assets,” or
“Fixed Assets”
Liabilities
1. Accounts Payable- obligations supported by oral
or informal promises to pay
2. Notes Payable- supported by promissory notes
3. Interest Payable- interest incurred but not yet
paid
4. Salaries Payable- earned by employees but not
yet paid by the business
5. Utilities Payable- utilities (electricity, water,etc)
already used but not yet paid
6. Unearned income- collected in advance before
they are earned.
Equity
 1. Owner’s capital (or owner’s equity)- the residual
amount after deducting liabilities from assets.
Increased by contributions, profits. Decreased
by withdrawals, distributions, losses.
2. Owner’s drawings- temporary withdrawals of
the owner. Closed to owner’s capital account.
Income Statement Accounts
Income
1. Service Fees- earned from rendering services
2. Sales- earned from sale of goods
3. Interest income- earned from issuance of
interest- bearing receivables
4. Gains- earned from sale of assets of
enhancement of assets or decreases in liabilities
that are not classified as revenue.
Expenses
1. Cost of Sales/Cost of goods sold- value of
inventories sold during the period
2. Freight-out- sellers’ cost of delivering goods.
Delivery expense, transportation-out, carriage
outwards
3. Salaries expense- salaries earned by employees
4. Rent expense- rentals used up during the period
5. Utilities expense- cost of utilities earned during
the period
6. Supplies expense- cost of supplies used up
7. Bad debt expense- estimated losses from
uncollectible accounts (doubtful accounts
expense)
8. Depreciation expense- depreciation for the
period
9. Advertising expense- cost promotional or
marketing activities
10. Insurance expense- cost of insurance during the
period
11. Taxes and licenses- cost of business and local
taxes required by the government (Partnerships
and Corporations- income tax expense)
12. Transportation expenses- cost of employees
getting from one workplace to another
(reimbursable)
13. Travel expenses- business trips
14. Interest expense- cost of borrowing money
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15. Miscellaneous expense- small expenditures
16. Losses- expenses which may or may not arise
from the ordinary course of the business (selling
assets less than the carrying amount, decrease
in value of assets because of destruction,
damages,etc.)
Chapter 5
Boks of Accounts and Double Entry System
The Books of Accounts
Journal – “book of original entries”, the accounting
record where business transactions are first recorded.
The recording process is called journalizing.
1. Special Journal – to record transactions of a
similar nature. It simplifies the recording
process, an efficient way of recording and
retrieving information.
Examples:
a. Sales Journal – is used to record sales on
account
b. Purchases journal – to record purchases of
inventory on account
c. Cash receipts journal – to record all
transactions involving receipts of cash
d. Cash disbursements journal – to record
transactions involving payments of cash
2. General journal – if it can’t be recorded in the
special journal then record it in the general
journal
Ledger – “book of secondary entries” or “book of final
entries”
a. General Ledger – all accounts appearing in the
trial balance
b. Subsidiary Ledger – provides a breakdown of
the balances of the controlling accounts
Controlling account – one that consists of a group of
accounts with similar nature. Not all accounts in the
general ledger though are controlling accounts. Only
those whose balances necessarily need a breakdown
are considered controlling accounts.
Double-entry – under this system, each transaction is 1. Identifying and analyzing – the accountant
recorded in two parts – debit and credit. This is in order gathers information from source documents
for accounting equation to be balance at all times. and determines and determines the effect of
the transactions of the accounts.
Concepts of Duality and Equilibrium
2. Journalizing – The identified accountable events
a. Concept of Duality – views each transaction as are recorded in the journals.
having a two-fold effects on values – a value 3. Posting – information from the journal are
received and a value parted with, and each transferred to the ledger
transaction is recorded using at least two 4. The unadjusted trial balance – the balances of
accounts. the general ledger accounts proved as to
b. Concept of Equilibrium – requires that each equality of debits and credits. Serves as a basis
transaction is recorded in terms of equal debits for adjusting entries.
and credits. 5. Adjusting entries – the accounts are updated as
of the reporting date on an accrual basis by
recording accruals, expiration of deferrals,
Normal Balances of accounts estimations, and other events often not
signaled by new source documents.
Type of Normal balance decrease 6. Adjusted trial balance – the equality of debits
account (increase) and credits are rechecked after adjustments are
Asset Debit Credit made. Serves as basis for the preparation of the
Liabilities Credit Debit financial statements.
Equity Credit Debit 7. Financial statements – these are the means by
Income Credit Debit
which the information processed is
Expenses Debit Credit
communicated to users.
8. Closing the books – this involves journalizing
Assets + Expenses = Liabilities + Equity + Income and posting closing entries and ruling the
ledger. Temporary accounts are closed and the
*Dr - Left side; Cr- right side
resulting profit or loss is transferred to an
equity account.
9. Post-closing trial balance – the equality of
Contra and Adjunct accounts debits and credits are again rechecked after the
a. Contra accounts are presented in the financial closing process.
statement as deduction to their related 10. Reversing entries – reversing entries are usually
accounts. made at the beginning of the beginning of the
b. Adjunct accounts are presented in the financial next accounting period to simplify the recording
statements as addition to their related of certain transactions in that period.
accounts.

Net Carrying amount – the sum of the balances of an Source Documents

account and its related contra or adjunct account.
a. Sales invoices – are used for the sale of goods
b. Official receipts – are used for the rendering of
Chapter 6 services
c. Purchase orders – a document issued by a
Business transactions and their analysis buyer to a seller indicating the types, quantities
and agreed prices for products and services that
The accounting cycle – represents the steps or
the buyer intends to purchase. Purchase orders
procedures used to record transaction and prepare
are prepared as internal control over purchases.
financial statements.

Steps:

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 d. Delivery receipts – is a document signed by the Overview of the Recording Process
receiver of a shipment acknowledging the Example: On March 31, 20x1, the business pays employee
receipt of the goods. salaries for the current month amounting to P30,000.
e. Bank deposit slips – evidences a deposit to a Step 1: Transaction analysis
bank account it shows the date of deposit, the
Identify the accounts affected by the transaction
bank account name and number, and amount
and the effects of the transaction on these accounts
deposited
(increase or decrease)
f. Bank statements – a report issued by the bank
that shows the deposits and withdrawals during Accounts “Salaries expense” (expense) and
the period and the cumulative balance of a Affected “Cash” (asset)
depositor’s bank account. Effects on Expense is increased. Cash is
g. Checks - Accounts decreased.
h. Statements of account – a report a business Debit/Credit Expense is increased through debit.
Asset is decreased through credit.
sends to its customer listing the transactions
with the customer during the period, the
payments made by the customer and any Step 2: Journalizing
remaining balance due from the customer. It Transaction is recorded in debit/credit form
also serves as a notice of billing. (journal entry) in the journal.
Mar. Salaries expense 30,000
31, Cash 30,000
Types of events 20x1 To record
salaries expense
External events – are transactions that involve the
business and another external party.

Internal events – are events that do not involve an

external party. “the business only”

Simple and compound journal entries

a. Simple journal entry – one that contains a

single debit and a single credit
b. Compound journal entry – one that contains
two or more debits or credits.

CHAPTER 7: POSTING TO THE LEDGER

Posting
- The third step in the accounting cycle
- The process of transferring data from the journal
to the appropriate accounts in the ledger
o Done by transferring to amounts of debits
and credits in a recorded journal entry to the
ledger accounts
Purpose: Classify the effects of transactions on specific
asset, liability, equity, income and expense accounts to
provide more meaningful information.
Note: Accounts in the ledger resemble a “T-account”
 The ending balance of an account is the
difference between the total debits and credits
in that account.

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Step 3: Posting
The debit(s) and credit(s) of the journal entry
are transferred to the affected accounts in the ledger.
Cash Salaries
expense
Dr. Cr. Dr. Cr.
30,000 Mar. Mar. 30,000
31 31
Trial Balance
- A list of general ledger accounts and their
balances
- Checks the equality of total debits and credits in
the ledger
o Created a starting point for the preparation
of the financial statements
o Although optional, a trial balance shall be
prepared because it helps in revealing some
errors
Types:
a) Unadjusted trial balance – prepared before
adjusting entries are made
Note: Adjusting entries and financial statements
can’t be prepared unless total debit and credit is equal
b) Adjusted trial balance – prepared after
adjusting entries but before the financial
statements are prepared
c) Post-Closing trial balance – prepared after the
closing process
Errors Revealed by a Trial Balance
The trial balance can reveal errors that caused the total
debits and total credits to be unequal
1. Journalizing or posting one-half of an entry (i.e.
a debit w/o a credit or vice versa)
2. Recording one part of an entry for a different
amount than the other part
3. Transplacement error on one side of an entry.
- Transplacement/Slide error is committed when
the number of digits in an amount is incorrectly
increased or decreased (ex. ₱1000 is recorded
as ₱100 or ₱10000)
4. Transposition error on one side of an entry
- Transposition error is committed when
digits in an amount are interchanged (ex.
₱15,652 is recorded as ₱15,625 or ₱15,265)
Errors not Revealed by a Trial Balance
The trial balance cannot reveal errors that do not cause
the debits and credits to be unequal
1. Omitting entirely the entry for a transaction
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2. Journalizing or posting an entry twice
3. Using the wrong account with the same normal
balance as the correct amount
4. Wrong computation with same erroneous
amount posted to both debit and credit sides
Another way of setting up the “Owner’s capital”
and “Owner’s drawings” accounts is by using
the name of the business owner.
Heading of trial balance
1. Name of business (Who?)
2. Title of the report (What?)
3. Date of the report (When?)
 Order of account titles in the unadjusted trial
balance
o Assets, Liabilities, Equity, Income,
Expenses
CHAPTER 8: ADJUSTING ENTRIES
Adjusting Entries
- Entries made before the preparation of financial
statements to update certain accounts so that they
reflect correct balances as of the designated time
Purpose:
1. Take up unrecorded income and expense of the
period
2. Split mixed accounts into their real and nominal
elements
Accruals of Income and Expenses (NO CASH INVOLVED)
 Accrual means to recognize an
o Income that is already earned but not yet
collected
o Expense that is already incurred but not yet
paid
 Gives rise to both income and receivable (or both
payable and expense)
Note: (1) All adjusting entries involve at least one balance
sheet account and one income statement/statement of
comprehensive income account
(2) All adjusting entries affect the profit or loss (or
comprehensive income) for the period
Recognition of Depreciation Expense
The Concept of Systematic and Rational Allocation
- States that costs that provide economic benefits over
several accounting periods but cannot be directly
associated with the earning of revenues are
 recognized as expenses over the periods where the
economic benefits are consumed
- Example is the recognition of depreciation expense.
The equipment is initially recorded as asset. But
since the expense can’t be directly associated with
sales (as opposed to the cost of inventories sold), the
expense is recorded over the periods the equipment
is used.
The Concept of Immediate Recognition
- States that a cost that produces no future economic
benefits or an asset that ceases to provide future
economic benefits is recognized immediately as
expense
- Example is the recognition of bad debts expense
since accounts receivables that are doubtful for
collection will not provide future economic benefits
anymore.
The Concept of Matching
- Costs that are directly associated with the earning of
revenue are recognized as expenses in the same
period in which the related revenue is recognized
- Example: The cost of inventory is initially recognized
as asset and charged as expense (COGS) when
inventory is sold.
Real, Nominal, and Mixed Accounts
1. Real/Permanent accounts – not closed at the end of
the accounting period. These are extended to the next
accounting period. Includes all balance sheet
accounts except Owner’s drawings
2. Nominal/Temporary accounts – closed at the end of
the accounting period. Includes all income statement
accounts, drawings account, clearing accounts,
and suspense accounts.
- Clearing account – used temporarily to store
amounts that will eventually be transferred to
another account. Example is income
summary -> closed to Owner’s capital
account
- Suspense account – used temporarily to
store discrepancies in the accounts pending
their analysis and permanent classification.
Example is cash shortage (closed to
receivable/loss account) or overage (closed
to payable/gain account)
3. Mixed accounts – have both real and nominal
account components. Subject to adjustment.
- Include unadjusted prepayments (prepaid
assets) and deferrals (unearned income) that
have both expired and unexpired
components
 The expired portion is the nominal account component while
the unexpired portion is the real account component
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These are separated because the nominal account should
be in income statement wile the real account is in balance
sheet
Methods of Initial Recording of Income and Expenses
Income
1. Liability Method – advanced collections of income
are initially credited to a liability account. At end of
period, the “earned portion” is recognized as income
while the “unearned” remains as liability
2. Income Method – advanced collections of income
are initially credited to an income account. At end
of period, the “unearned portion” is recognized as
liability while the “earned” remains as income.
*Earned (‘used up’) portion is recognized as income for the
period
*Unearned (‘unused’) portion is recognized as liability. Will
be recognized as income in the next accounting period.
Expenses
1. Asset Method – prepayments of expenses are
initially debited to an asset account. At end of
period, the incurred (expired or used up) portion is
recognized as expense while unused portion remains
as asset
2. Expense Method – prepayments of expenses are
initially debited to an expense account. At end of
period, the unused (not yet incurred/ unexpired)
portion is recognized as assets while the expired
portion remains as expense
*Incurred portion is recognized as expense for the period.
*Not yet incurred portion is recognized as asset. Will be
recognized as expense in the next accounting period.
Note: The recording of items of income that were collected in
advance and items of expense that were paid in advance is
referred to as deferrals. (defer means to postpone the
recognition)
Accrual Deferral
- To recognize income - To postpone the income
that is already earned recognition of an
but not yet collected advance collection. It is
- To recognize expense treated as liability until
that is already incurred earned
but not yet paid - To postpone the expense
recognition of the
prepayment. It is treated
as asset until incurred.
Accruals and Deferrals are opposites 😊
 CHAPTER 9
Accounting Cycle of a Service Business
Service Business- one that offers services as its main
product rather than physical goods.
Worksheet- an analytical device used to facilitate the
gathering of data for adjustments, the
preparation of financial statements and closing entries.
Heading of the worksheet
1. Name of the business
2. Title of the report
3. Date discovered by the report (i.e. for the
period ended Dec. 31, 20x2)
Consistency Concept- applying the policy consistently in
the current and succeeding accounting periods
Adjusting entries (identifying the needed adjustments)
1. Accruals of income and expenses
2. Recognition of depreciation expense and bad
debts expense
3. Deferrals of income and expenses (splitting of
‘mixed accounts’)
Adjustments columns - where you place the debits and
credits of the adjusting entries
Rules of debits and credits
1. Debit and Debit- Add
2. Credit and Credit- Add
3. Debit and Credit or vice versa- Subtract
Cross-footing – adding or subtracting amounts
horizontally in accounting reports.
- Procedure to compute for the
adjusted balances of accounts in the
adjusted trial balance.
Footing- adding or subtracting amounts vertically in
accounting reports.
- Procedure to compute for the “total” of the
columns.
Double Rule- two lines underneath an amount.
- Use to connote a total or the end of a
computation.
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Financial Statements- end products of the accounting
process.
- means by which information are
summarized and communicated to users.
Statement of Financial Position (Balance Sheet)- shows
the assets, liabilities and equity of a business.
Statement of Profit or Loss (Income Statement)- shows
the income and expenses, and consequently,
the profit or
loss, of a business.
*Income Statement*
 Profit- credits exceeds debit
 Loss- debits exceeds credit
 Profit or Loss is closed to the “Owner’s Capital”.
*Balance Sheet*
 Profit- debits exceeds credit
 Loss- credits exceeds debit
Profit or Loss for the period - Balancing figure in the
Income Statement and Balance Sheet
*Closing Entries- entries prepared at the end of the
accounting period to “zero out” all nominal accounts
in the ledger. Also referred to as “closing the
books.”
 Income Summary- clearing account
 Credit Balance- profit
 Debit balance- loss
 Income summary is closed to the “owner’s Capital”
 Owner’s Drawings is closed to the “Owner’s
Capital”
Post-Closing Trial Balance- prepared to check the
equality of the of debits and credits in the general
ledger after the closing
entries are made. Contains real accounts.
 Closed account- an account that has no balance
 Open account- an account that has a balance.
*Reserving Entries- entries usually made on the first day
of the next accounting period to reverse certain Purchases – the account used to record purchases of
adjusting entries in the immediately preceding period. inventory under the periodic system

Freight–In (Transportation-In) – the account used to

 Adjusting entries that may be reversed
1. Accruals for income or expense
2. Prepayments (expense method)
3. Advance collections (income method)
record the shipping costs incurred on purchases of
inventory under the periodic system
Purchase Returns - the account used to record returns
of purchased goods to the supplier

Purchase Discounts – the account used to record cash

discounts availed of on the purchased goods

Chapter 10: Accounting Cycle of a

Merchandising Business

Merchandising Business – buys and sells goods without

changing their physical form

The main difference between a merchandising business

and service business is that a merchandising business
necessarily holds inventory of physical goods for sale

Inventory - refers to the goods that a merchandising

business has purchased and primarily intended for
resale

2 types of Inventory Systems:

1. Perpetual Inventory System – “continuing

forever” and is called as such because the
Inventory account is updated each time a
purchase or sale is made thus the Inventory
account shows a continuing or running balance
Sales – includes both cash sales and credit sales
of the goods on hand
2. Periodic Inventory System – “occurring or Sales Returns – the account used to record goods
recurring” and is called such because the retuned by customers
Inventory account is updated only when a
Sales Discounts - the account used to record cash
physical count of inventory is performed
discounts given to customers

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 Chapter 11 h. Unlimited Liability – each partner, including industrial ones
may be held personally liable for partnership debt after all
Partnership Formation
partnership assets have been exhausted. If a partner is
Partnership - An unincorporated association of two or more personally insolvent, his share in the partnership debt shall
individuals to carry on, as co-owners, a business, with the intention be assumed by the other solvent partners.
of dividing the profits among themselves. - A partnership in which all partners are individually liable is
called a general partnership.
Characteristics - A partnership in which at least one partner is personally
a. Ease of formation – as compared to corporations, the liable is called a limited partnership. A limited partnership
formation of a partnership requires less formality. includes at least one general partner who maintains
b. Separate legal personality – the partnership has judicial unlimited liability. The others, called limited partners, may
personality separate and distinct from the partners. The limit their liability up to the extent of their contributions to
partnership can transact ad acquire properties in its name. the partnership. A limited liability partnership usually has
c. Mutual agency – the partners are agents of the partnership “LLP” in its name.
for the purpose of its business. As such, a partner may
legally bind the partnership to contract or agreement that is Advantages Disadvantages
in line with the partnership’s operations. Ease of formation Easily dissolved/limited life
d. Co-ownership of property – each partner is a co-owner of
the properties invested in the partnership and each has an Shared responsibility of running Unlimited liability
equal right with his partners to possess specific partnership the business.
property for partnership purposes. However, a partnership
Flexibility in decision making Conflict among partners
has no right to possess a partnership property for any other
purpose without the consent of his partners. Greater capital compared to Lesser capital compared to a
e. Co-ownership of profits – a partnership is created as a sole partnership corporation
business, as such, each partner is entitled to his share in the
partnership profit. A stipulation which excludes one or more Relative lack of regulation by A partnership is taxed like a
partners form any share in the profits or losses I void. the government as compared to corporation
f. Limited life – the creation of a partnership is basically corporations
consensual. A partnership can be dissolved.
g. Transfer of ownership – in case of dissolution, the transfer
of ownership, whether to a new or existing partner,
requires the approval of the remaining partners.

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 Accounting for partnership

The accounting for assets and liabilities remains the same When measuring the contributions of partners, the following
regardless of the form of a business organization. What changes additional guidance from the PFRSs shall be observed:
is the accounting for equity.
Type of Contribution Measurement
Cash and cash equivalents Face amount of cash or cash
equivalent contributed.
The following are the major considerations in the accounting for (PAS7;Statement of cash
the equity of a partnership: flows)
a. Formation – accounting for initial investments to the Inventory Net realizable value
(estimated selling price less
partnership
costs to complete and sell), if
b. Operations – division of profits of losses
lower than cost. (PAS2;
c. Dissolution – admission of a new partner and withdrawal, Inventories)
retirement or death of a partner
d. Liquidation – winding-up of affairs
Each partner’s capital account is credited for the fair value of
his net contribution (i.e., fair value of contribution less any liability
Formation assumed by the partnership). No contribution shall be valued at an
amount greater than its fair value.
A contract of partnership is consensual. It is created by the
agreement of the partners which may be constituted in any form, A partner’s subsequent share in profits (losses) shall also be
such as oral or written. A partnership’s legal existence begins from credited (debited) to his capital account. Likewise, permanent
the moment the contract is executed, unless otherwise stipulated. withdrawals of capital are debited to the partner’s capital account.
Temporary withdrawals may be debited to the partner’s drawings
account. The sum of the balances in the partners’ individual capital
Valuation of contributions of partners accounts represents the total equity of the partnership

Capital contributions of partners to the partnership are initially Partners’ ledger accounts
measured at fair value. The partners’ ledger accounts are:
Fair value is “the price that would be received to sell an assets a. Capital accounts
or paid to transfer a liability in an orderly transaction between b. Drawings accounts
market participants at the measurement date.” c. Receivable from/Payable to a partner

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 Capital and Drawings accounts The drawings account is a nominal account that is closed to the
related capital account at the end of the period. This account is a
Each partner has his or her own capital and drawings account,
contra equity account and has a normal debit balance.
e.g., “Juan dela Cruz, Capital” and “Juan dela Cruz, Drawings.” These
accounts are equity accounts and are used to record the following
transactions:
Receivable form/ Payable to a partner
Juan dela Cruz, Capital
The partnership may enter into a loan transaction with a
Permanent Xxx Xxx Initial partner. A loan extended by the partnership to partner is recorded
withdrawals of investment as a receivable from the partner, while a loan obtained by the
capital partnership from a partner is recorded as a payable to partner.
Additional
Share in losses Xxx Xxx
investments
Debit balance of xxx xxx Bonus on initial investments
Share in
drawings profits An accounting problem exists when a partner’s capital account
account
is credited for an amount greater than the fair value of his
contributions.
The partner’s capital account is a real account and has a normal
credit balance. For instance, a partnership agreement may allow a certain
partner who is bringing in expertise or special skill to the
Juan dela Cruz, Drawings partnership to have a capital credit greater than the fair value of his
Temporary Recurring contributions. In such case, the additional credit to the partner’s
Xxx Xxx capital (i.e., the ‘bonus’) is accounted for as a deduction from the
withdrawals reimbursable
during period costs paid the capital of the other partners. This accounting method is called the
partner “bonus” method.
Temporary funds Xxx
held to be Although, the credit to the partner’s capital may vary due to a
remitted to the ‘bonus,’ the corresponding debit to the asset account must still be
partnership equal to the fair value of the contribution. The difference between
the amounts credited and debited is treated as adjustment to the
capital accounts of the other partners.

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Variations to the bonus method
A partnership agreement may stipulate a certain ratio to be
maintained by the partners representing their specific interests in
the equity of the partnership. This stipulation may give rise to
adjustments to the initial contributions to partners. Since
technically there is no “bonus” being given to a certain partner, any
increase or decrease to the capital credit of a partner is not
deducted from his co-partners’ capital accounts. Instead, the capital
adjustment is accounted for is either:
a. Cash settlement among the partners; or
b. Additional investment or withdrawal of investment of a
partner
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Chapter 12
Partnership Operations
Division of profits and losses
The partners share in partnership profits or losses in accordance
with their partnership agreement.
If only the share of each partner in the profits has been agreed
upon, the share of each in the losses shall be in the same
proportion.
In the absence of stipulation, the share of each partner in the
profits and losses shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances. If
besides his services he has contributed capital, he shall also receive
a share in the profits in proportion to his capital.
➢ An industrial partner is one who contributes services to the
partnership rather than cash or other non-cash assets.
➢ A capitalist partner is one who contributes cash or other
non-cash assets to the partnership.
➢ A partner that contributes both services and cash or other
non-cash asset is both a capitalist and an industrial partner.
The designation of losses and profits cannot be entrusted to one
of the partners. A stipulation that excludes one or more partners
from any share in the profits or losses is void.
 In addition to profit or loss sharing, the partnership agreement Chapter 13
may also stipulate any of the following:
Partnership Dissolution
a. Salaries
Dissolution
Normally, an industrial partner receives salary in addition to his
As mentioned earlier, one of the characteristics of a partnership
share in the partnership’s profits as compensation for his services to
is that it has a “limited life,” in the sense that the partnership
the partnership.
agreement can be easily dissolved.
b. Bonuses
Dissolution is the change in the relation of the partners caused by
The managing partner may be entitled to a bonus for excellent any partner being disassociated from the business.
management performance. Unlike or salaries, a partner is entitled
Dissolution is different from liquidation. Liquidation is the
to a bonus only if the partnership earns profit. The partner is not
termination of business operations or the winding up of affairs.
entitled to any bonus if the partnership incurs loss.
Partnership dissolution does not necessarily terminate the business.
c. Interest on capital contributions The business continues until the remaining partners decide to
liquidate the business. If the business is continued after dissolution,
The partnership agreement may stipulate that capitalist
new articles of partnership should be drawn up.
partners are entitled to an annual interest on their capital
contributions. The following are major considerations in the accounting for
partnership dissolutions:

a. Admission of a partner
The items above are normally provided first to the respective
b. Withdrawal, retirement or death of a partner
partners and any remaining amount of the profit or loss is shared
among the partners based on their stipulated profit or loss ratio.

The admission of a new partner or the withdrawal, retirement

or death of an existing partner dissolves the original partnership
agreement because it creates a change in the relation of the
partners (e.g., a change in the number of the partners in a
partnership).

It should be noted that the admission of a new partner requires

the consent of all existing partners.

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Admission of Partner
The admission of a new partner may be affected either through:
a. Purchase of interest in the partnership, or
b. Investment in the partnership
Purchase of interest
A new partner may be admitted when he purchases part or all
of the interest of one or more of the existing partners.
This transaction is a personal transaction between and among
the partners. As such, any consideration paid or received is not
recorded in the partnership books. The only entry to be made in
the partnership books is a transfer within equity. A new capital
account is established for the new partner and a corresponding
decrease is made on the capital account(s) of the selling partner(s).
No gain or loss is recognized in the partnership books.
Revaluation of assets
When a partnership is dissolved, but not liquidated, a new
partnership is created. The assets and liabilities carried over to the
new partnership are restated to fair values.
The adjustment to the assets and liabilities is allocated first to
the existing partners before recording the admission of the new
partner.
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Investment in the partnership
Instead of purchasing interest from the existing partners, a new
partner may be admitted by investing directly in the business.
This transaction is a transaction between the new partner and
the partnership. As such, any consideration paid by the incoming
partner is recorded in the partnership books. However, because
this a transaction with an owner, no gain or loss is recognized
Two things may happen when a new partner invests in a
partnership:
1. The new partner’s capital account is credited at an amount
equal to the fair value of his investment; or
2. The new partner’s capital account is credited at an amount
greater than or less than the fair value of his investment.
The second scenario is accounted for under the “bonus
method” similar to what we have already discussed under
partnership formation. That is, any increase (or decrease) in the
capital of the new partner is a reduction (or addition) to the capital
of the existing partners. The corresponding debit to the asset
account must still be equal to the fair value of the contribution.
The second scenario may occur, for example, when:
a. The credit to the new partner’s capital account is greater
than his contribution because he is bringing in expertise to
the business.
b. The credit to the new partner’s capital account is less than
his contribution in order to compensate for the past efforts
of the existing partners in establishing the business.
 Purchase of interest
The incoming partner’s
contribution is not recorded in contribution is recorded in the
the partnership books
Partnership capital remains
the same before and after the
admission of the incoming
partner
NO gain or loss is recognized
in the partnership books
Investment in the partnership
The incoming partner’s
partnership books
Partnership capital is
increased by the incoming
partner’s contribution
No gain or loss is recognized
in the partnership books
Purchase by one or all of the remaining partners
One or all of the remaining partners may purchase the interest
of the retiring, withdrawing, or deceased partner. This is a
transaction between and among the partners (or deceased
partner’s estate). As such, the settlement amount is not recorded in
the partnership books the only entry to be made is a transfer within
equity. However, the above-mentioned adjustments (i.e., shares in
profits or losses and revaluation gains or losses) are recorded first
before the settlement.

Under the “bonus method,” any decrease (or increase) in the
capital of the new partner is treated as an addition (or deduction) to
the capital of the existing partner’s, allocated based on their old
profit or loss sharing ratio.
Withdrawal, retirement or death of a partner
Purchase by the partnership
The partnership may purchase the interest of the retiring
withdrawing, or deceased partner. This is a transaction between the
retiring or withdrawing partner (or deceased partner’s estate) and
the partnership. As such, the settlement amount is recorded in the
partnership books, alongside any other necessary adjustments.

When a partner withdraws, retires or dies, his interest may be

purchased by (a) one or all of the remaining partners or (b) the Bonus method
partnership. In case of death, the deceased partner’s estate is
entitled to the value of the partner’s interest at the date of his When the retiring, withdrawing, or deceased partner’s interest
death. is settled at an amount greater than or less than the value of his
interest, the bonus method is used. Under the bonus method, any
The interest of the withdrawing, retiring, or deceased partner is excess (or deficiency) in the payment is accounted for as a
adjusted for the following: deduction (or addition) to the remaining partners’ capital accounts.
a. His share of any profit or loss during the period up to the
date of his withdrawal, retirement, or death; and
b. His share of any revaluation gains or losses as at the date
of his withdrawal, retirement, or death.

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 Purchase by remaining
partners
The payment to the outgoing
partner is not recorded in the
partnership books
Partnership capital remains
the same before and after the
withdrawal, retirement or
death of the outgoing partner
No gain or loss is recognized in
the partnership books
Purchase by partnership
The payment to the outgoing
partner is recorded in the
partnership books
Partnership capital is
decreased by the payment for
the outgoing partner’s capital
balance.
No gain or loss is recognized in
the partnership books
Withdrawal, retirement or death of partner
Purchase by remaining partners Purchase by partnership
The transaction is recorded as a The transaction is recorded in
transfer within equity: the regular manner:
Outgoing partner’s capital (Dr) Outgoing partner’s capital (Dr)
Purchasing partner’s capital (Cr) Payment made (Cr)

Incorporate of a partnership

Another instance that causes partnership. When a partnership is

converted into a corporation, the partners’ relation changes – they
cease to be partners (i.e., agents of the business) and become
stockholders.

Admission of a partner: Journal entries

Purchase of interest Investment in the partnership

The transaction is recorded as The transaction is recorded in
a transfer within equity: the regular manner:

Selling partner’s capital (Dr) Asset invested (Dr)

Incoming partner’s capital (Cr) Incoming partner’s capital (Cr)

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 Chapter 14
PARTNERSHIP LIQUIDATION
Liquidation- is the termination of business
operations or the winding up of affairs.
- a process by which
1. Assets are converted into cash,
2. Liabilities are settles,
3. Any remaining amount is distributed to owners
Liquidation may either be:
>Voluntary - per agreement of partners of a
solvent partnership
>Involuntary - bankruptcy
Realization- the conversion of assets into cash
Liquidation - settlement of claims of creditors and
owners
Methods of Liquidation
1. Lump-sum Liquidation - all of the non cash
assets of the partnership are sold simultaneously
or within a very short period of time.
-is possible when there is a contracted buyer
of all the non-cash assets of the partnership
-the assets are sold on a “package deal” basis.
2. Installment Liquidation - it would take some
time before all the assets of a business are
converted into cash.
-partner’s claims are settled on an installment
basis
Settlement of Claims following this order of
priority:
1. Outside Creditors
2. Inside Creditors
3. Owner’s Capital Balances
Statement of Liquidation- a financial report that
highlights the realization and the liquidation of a
partnership.
-a formal report prepared on a liquidation
Marshalling of Assets
The legal doctrine of marshalling of assets is
applied when the partnership and some of the
partners are insolvent.
The following are the rules when applying this
doctrine:
1. First, any available assets of the partnership are
used to settle the partnership’s liablities.
2. Second, in case the assets of the partnership are
insuffecient to pay all liabilities (Insolvency), the
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solvent general partners are required to provide
additional funds from their personal assets.
The claims to the personall assets of a partner
are ranked in the ff order:
A. Personal creditors
B. Partnership creditors
C. Partners
3. Third, in case some partners are insolvent, their
capital deficiency is offset to the capital balances
of other partners. If after allocating the capital
deficiency of an insolvent partner, a solvent
partner’s capital balance becomes negative
amount, the solvent partner is required to provide
additional contribution.
The computations presented for installment
liquidation may be presented in formal manner
through either:
1. Safe payments schedule, or
2. Cash priority program
*its basic purpose is to prevent overpaymentys
to partners during installment liquidation.
Safe Payment Schedule- shows how much cash
can be “safely” paid to the partners during
installment liquidation, which avoids any
overpayment.
The preparation of this schedule requires
application of the same concepts as those we have
applied earlier, namely:
a. Unsold non-cash assets are treated as loss;
and
b. Expected future liquidation costs and potential
unrecorded liabilities are recognized immediately
as losses.
Maximum Loss Possible- the sum of a and b above.
Cash Priority Program- determines which partner
should be paid first and which partner should be
paid last, after all the liabilities are settles. This
schedule can be prepared even prior to the sale of
any asset.
The preparation of this schedule requires the
application of the same concepts as those we have
applied earlier, namely:
A. Unsold non-cash assets are treated as loss;
and
B. Expected future liquidation costs and potential
unrecorded liabilities are recognized immediately
as losses.
Maximum Loss Absorption Capacity- basis for the
rank on who would be paid first.
The partner with highest MLAC shall be paid
first. The partner with the lowest MLAC shall be
paid last.
The maximum loss absorption capacity is
computed as follows:
MLAC= Total partner’s interest in the partnership ÷
Partner’s P/L Percentage

Cash Priority Program is prepared as follows:

>First, the MLAC of the partners are determined.
This will be the basis in ranking the partners
according to their priority over cash payments.

>Second, the partners’ MLAC are equalized. This

will be the basis in preparing the cash priority
program.
>Third, the cash priorities are computed by
multiplying the differences above by the respective
partners’ P/L ratio.

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 CHAPTER 15- ACCOUNTING FOR
CORPORATIONS
Intro: As said before, the accounting for assets and
liabilities remains the same regardless of the form
of a business organization- what changes is the
accounting for equity.
 Corporation- an artificial being created by
operation of law, having the right of succession and
the powers, attributes and properties expressly
authorized by law or incident to its existence.
- A separate legal entity distinguished from
its owners.
- Right to succession: it continues to exist
notwithstanding the withdrawal, death,
insolvency or incapacity of the individual
owners and only dissolved again through an
operation of law.
Organization of a Corporation
 Formed at leasdt 5 but not exceeding 15
natural person, all of legal age and a
majority of whom are residents of the
Philippines.
 Articles of incorporation must be
authorized by SEC.
 Authorized capital stock- the maximum number of
shares that the corporation can issue. Excess shares
issued is deemed illegal.
 To amend there must be a majority vote of
the board plus a vote by shareholders
representing at least 2/3 of the
outstanding share capital.
 At least 25% of the corporation’s
authorized capitalization must be
subscribed and 25% of the total
subscription must be paid upon
subscription. Cannot be less P5000.
 Shareholder’s equity- the residual interests in the
assets of a corporation after deducting all its
liabilities. Equivalent to the “Owner’s equity.”
Accounting for Share capital
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1. Memorandum method- only a
memorandum is made for the authorized
capitalization. Subsequent issuance of
shares are credited to the share capital
account.
2. Journal entry method- the authorized
capitalization is recorded by crediting
“authorized share capital” and debiting
“unissued share capital.”
The difference between the two represents
the issued share capital.
The more commonly used method in practice
is the memo. Method.
 Unissued share capital- represents the portion of
the authorized share capital not yet issued is still
available for subscription and issuance.
 Subscription- a contract between the purchaser of
shares (ex. Investor) and the issuer (ex.
Corporation) in which the purchaser promises to
buy shares of the issuing company’s stocks.
 Subscription receivable- represents the unpaid
portion of the subscription price.
 Subscription share capital- represents the portion
of the authorized share capital that is subscribed
but not yet issued.
 Share capital- represents the portion of the
authorized share capital that is already issued.
 Share certificate- is a document that evidences the
ownership of a share.
*Read notes p. 540
Classes of Share capital
1. Ordinary share capital (Common stock)-
represent the residual corporate interest that
bears the ultimate risk of loss and receive the
benefits of success. Not guaranteed of
dividends or any assets upon dissolution but
generally control the mgt. of corporation and
tend to profit the most if it’s successful.
2. Preference share capital (Preferred stock)-
shares that give holders thereof certain
preferences over other shareholders.
 Four basic rights of ordinary shareolders:
1. Right to attend and vote in shareholder’s
meetings
2. Right to purchase additional shares
(preemptive rights)
3. Right to share in corporate profit (right to
dividends)
4. Right to share in the net assets of the
corporation upon liquidation
Share premium arises from the ff:
1. Excess of subscription price over par value
or stated value
2. Excess of reissuance price over cost of
treasury cost of treasury shares issued.
3. Distribution of “small“ stock dividends.
*Note:
-Share capital and subscribed share capital are
credited at par value regardless of the subscription
price
-Share premium is credited at the subscription date
even for subscriptions that are not yet paid;
provided that it is probable that the total
subscription price will be collected.
 Par value share- one with a peso value fixed in the
articles of incorporation. It appears on each share
certificate issued
 No-par value share- one without a peso value fixed
in the articles of incorporation. It has a stated value
(issued value) which is also indicated in the articles
but not on the share certificate issued.
 Legal capital- portion that cannot be distributed to
the owners during the lifetime of the corporation
unless the corporation is dissolved and all of its
liabilities are settled first.
 Trust fund doctrine- where the legal capital is
based. States that the share capital of a
corporation is a trust fund held for the protection
of its creditors.
Legal capital is computed as follows:
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a. For par value shares, legal capital is the
aggregate par value of shares issued and
subscribed.
b. For no-par value shares, legal capital is the
total consideration received or receivable
from share issued or subscribed/ the
subscription price inclusive of any amount
in excess of stated value.
*Notes:
-In case of n-par value shares, legal capital includes
the share premium of ordinary shares.
-Preference shares can only be issued as par value
shares. Thus, the share premium of the preference
shares is not included.
 Treasury shares (treasury stocks) – are an entity’s
own shares that were previously issued but are
subsequently reacquired but not retired. Under the
Corporation Code, an entity may reacquire its
previously issued shares only if it has sufficient,
unrestricted retained earnings.
Accounted for using the cost method: The
reacquisition and subsequent reissuance of
treasury shares are recorded at cost.
Presented as deduction in the shareholders’ equity
 Retained earnings- represent the cumulative
profits that are retained in the business and not yet
distributed o the shareholders. May consist of:
a. Unrestricted- portion of retained earnings that is
available for future distribution to the shareholders
b. Appropriated (Restricted)- not available for
distribution unless the restriction is subsequently
reversed.
 Donated capital- arises from gifts received by the
corporation from nonreciprocal transactions. May
arise from the ff:
a. Donations from shareholders- credited to
share premium.
b. Donations from the government – these are
recognized as government grants
c. Donations from other sources- recognized
as income.
Donations may be in the form:
a. Cash
b. Noncash assets
c. Entity’s own shares

Pro-forma entries for treasury share transactions:

a. Acquisition of treasury shares:
Treasury shares (at cost) xx
Cost
xx
____________________________________
b. Reissuance of treasury shares at above cost
Cash xx
Treasury shares (at cost)
xx
Share premium- TS
xx
____________________________________
c. Reissuance of treasury shares below cost
Cash xx
(1) Share premium- TS xx
(2) Retained earnings xx
Treasury shares (at cost)
xx
Pro- forma entries for retirement of shares:
a. Retirement at below original issuance
Share capital (at par or stated value)
xx
Share premium- original issuance
xx
Treasury shares (at cost)/Cash
xx
Share premium- retirement
xx
____________________________________
b. Retirement at above original issuance price
Share capital (at par or stated value)
xx
Share premium- original issuance
xx
(1) Share premium- TS
xx
(2) Retained earnings
xx
Treasury shares (at cost)/ Cash
xx

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 Chapter 16 – Accounting for Dividends
 Retained Earnings – where profits or losses and
distributions to owners of the corporation are
recorded
- Represent the
cumulative profits that are retained in the
business and not yet distributed to the
shareholders
Retained earnings may consist of:
 Unrestricted – portion of retained earnings
available for future distribution to the
shareholders
 Appropriated (Restricted) – portion that is not
available for distribution unless the restriction is
subsequently reversed (does not mean that cash
fund has been set aside)
*When retained earnings account has a negative balance,
it is described in the FS as deficit.
*When total shareholders equity has a negative balance, it
is described in the FS as capital deficiency
(Liablities>Assets).
Dividends-distributions to shareholders
1. Cash Dividends – in the form of cash
2. Property Dividends – in the form of noncash
assets (not included pa ni siya kay buotan si Millan
😊)
3. Share Dividends – in the form of entity’s own
shares
Dates relevant to the accounting for dividends
a. Date of declaration – date when the board of
directors formally announces the distribution of
dividends
b. Date of record – date on which the stock and
transfer book of the corporation is closed for
registration (closing). Only those who are listed as of
this date are entitled to receive dividends
c. Date of distribution – date when dividends
declared are distributed to shareholders
***NOTE:EXAMPLES ON LAST PAGE***
Accounting for cash dividends
- Most common form of distribution to owners
- May be declared as certain amount per share or
percentage of the par value of shares
- Only outstanding shares are entitled to
dividends .
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(OS=Issued shares + Subscribed shares - Treasury
Shares)
Accounting for share dividends (accounted as
follows)
a. “Small” – if share dividends declared is less than
20% of the outstanding shares (accounted at FV)
* difference of Par value and FV is credited to
share premium
b. “Large” – share dividends declared is 20% or
more of the outstanding shares (accounted at par
value)
*Retained earnings – debit on declaration date
**Account titles (declaration date): Retained earnings,
share premium (for “small”), and stock dividends payable
**Account titles (distribution date): Share dividends
payable and share capital
Treasury shares declared as dividends
- “small” or “large” share dividends DO NOT
APPLY
- Cost method is used (Retained earnings is debited
for the cost of treasury shares declared)
Preference shares have one or both of the following
preferences over ordinary shares:
1. Preference in the distribution of assets in case of
corporate liquidation (preferred to as assets)
2. Preference in the distribution of dividends
(preferred to as dividends)
Preference over Assets
 Upon corporate liquidation and after
creditors’ claims are settled, preference
shares preferred to as assets are settled first
and any remaining amount is paid to the
ordinary shareholders
 If preference shares are NOT referred to as
assets, the remaining amount after
settlement of liabilities is shared
proportionately by the preference and
ordinary shareholders
 Preference shares preferred to as assets are
normally entitled to a liquidation value
(amount that preference shareholders are entitled
to receive in case of corporate liquidation; usually
more than par value)
 If net assets after settlement of creditors’
claims are insufficient to pay the liquidation
value, the preference shares will be entitled
 only to the remaining net assets. None wll be Liquidating dividends
paid to ordinary shareholders but are also NOT -dividends declared out of capital rather than from
obliged to provide additional capitallimited retained earnings
liability - declared upon corporate liquidation
Preference over Dividends - dividends declared in excess of the balance of
When dividends are declared, preference shares that unrestricted retained earnings are considered
are “preferred to as dividends” are paid first before liquidating dividends.
ordinary shareholders. Liquidating dividends are charged to the capital
Types: liquidated account which is the deduction from
1. Noncumulative – dividend entitlement for a year shareholders’ equity
is forfeited when dividends are NOT DECLARED in Wasting asset doctrine – permits wasting asset
that year corporations to declare dividends out of capital during
2. Cumulative – dividend entitlement accumulates their existence
each year until paid. Accumulated unpaid
dividends are disclosed in dividends in arrears but Share Split
not accrued as liability unless the dividends are Forms:
declared 1. Split up or share split
3. Nonparticipating – entitled only to a fixed 2. Split down or reverse share split
amount of dividends Split up – occurs when old shares are cancelled and
4. Participating – entitled to a amount in excess of replaced by a larger number of new shares but with
the fixed amount of dividends a reduced par value per share
*Amount of participation is computed after both the Split down – opposite of split up whereby old shares
preference and ordinary shares are allocated with are cancelled and replaced by a smaller number of
their basic dividends. Any excess of the dividends new shares but with an increased par value per share
declared after deducting the basic dividends is the ***Share splits affect only the number of outstanding
amount subject to participation which is allocated shares are par value per share and are also recorded
depending on the nature of participation of the through memo entry
preference shares
Types of Participating preferences shares:
a. Fully Participating – participates on a pro rata
basis (based on aggregate par values of outstanding
shares) with ordinary shareholders
b. Partially Participating – participates only up to
certain amount/percentage
--- preference shares may have more than one dividend
preference (ex. Cumulative and Participating)
Dividend entitlement of preference shares:
a. Percentage of par value – fixed rate based on par
value
b. Specific monetary amount per share
***In the absence of evidence to the contrary,
preference shares are assumed to be “preferred as to
dividends” with preference of “noncumulative and
nonparticipating”

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 Example See Problem 2 Page 585

Case 3: "Large" Share Dividends (#3)

Problem 2
Case 1: Cash Dividends (#1)
Shares issued (1M/P10 par ) 100,000 Outstanding shar es 110,000
Sub scr ibed issues (200k/P10 par ) 20,000 Multiply by: Dividends declar ed 1/4
Shares issued (1M/P10 par) 100,000 Outstanding shares 110,000 Treasur y shar es (150k/P15 cost ) (10,000) Numbe r of sha re s de clare d as divide nds 27,500
Sub scribed issues (200k/P10 par) 20,000 Multiply by : Dividends per share ₱ 2.00 Outstanding shar es 110,000 Mult iply by : Par value per shar e ₱ 10.00
Treasury shares (150k/P15 cost) (10,000) Total cash dividends 220,000 Total cash dividends 275,000
Outstanding shares 110,000

Septemb er 15, Retained earnings 220,000

Septemb er 15, Retained ear nings 275,000
20x1 Cash dividends payable 220,000
20x1 Stock dividends payable 275,000
Septemb er 21,
no entry Septemb er 21,
20x1 no entry
20x1
Septemb er 30, Cash dividends payab le 220,000
Septemb er 30, Stock dividends payab le 275,000
20x1 Cash 220,000
20x1 Share capital 275,000
Case 2: "Small" Share Dividends (#2)
Case 4: Treasury Shares shared as Share Dividends (#4)
Shares issued (1M/P10 par) 100,000 Outstanding shares 110,000
Sub scribed issues (200k/P10 par) 20,000 Multiply by : Dividends declared 1/20 Shares issued (1M/P10 par ) 100,000 Outstanding shar es 110,000
Numbe r of s hare s de clare d as divide nds
Sub scr ibed issues (200k/P10 par ) 20,000 Multiply by: Dividends declar ed 1/20
Treasury shares (150k/P15 cost) (10,000) 5,500
Treasur y shar es (150k/P15 cost ) (10,000) Numbe r of sha re s de clare d as divide nds 5,500
Outstanding shares 110,000 Multiply by : Fair value per share ₱ 14.00
Outstanding shar es 110,000 Mult iply by : Cost per tr easury shar e ₱ 15.00
Total cash dividends 77,000
Total cash dividends 82,500

Retained earnings 77,000 Septemb er 15, Retained ear nings 82,500

Septemb er 15, 20x1 Stock dividends payable 82,500
Stock dividends payable 55,000
20x1 Septemb er 21,
Share premium 22,000 no entry
20x1
Septemb er 21,
no entry Septemb er 30, Stock dividends payab le 82,500
20x1
20x1 Treasury sha res 82,500
Septemb er 30, Stock dividends pay ab le 55,000 Septemb er 30, Retained ear nings- appr opriat ed 82,500
20x1 Share ca pital 55,000 20x1 Retained earnings-unrestricted 82,500

Case 1: Noncumulative and Nonparticipating (#5) Case 2: Cumulative and Nonparticipating (#6)
Total dividends declared 600,000 Total dividends declared 600,000
Allocation: Allocation:
1) Allocation to preference shares (500kx10%) 50,000 1) Allocation to preference shares (500kx10%x3 yrs) 150,000
2) Excess allocated to ordinary shares (600k-50k) 550,000 2) Excess allocated to ordinary shares (600k-150k) 450,000
As allocated - As allocated -

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Case 3: Noncumulative and Fully Participating (#7)
Total dividends declar ed 600,000 Preference shar es: (50,000 Basic + 150,000 Par ticipation) 200,000
Allocat ion: Ordinar y Shares: (100,000 Basic + 300,000 Par ticipation) 400,000
1) Basic allocat ion to prefer ence shar es (500kx10%) 50,000 Total Dividends 600,000
2) Basic allocat ion to ordinary shar es (1Mx10%) 100,000
Excess sub ject t o part icipat ion 450,000
3) Part icipat ion of preference shar es (450kx500k/1.5M) 150,000
3) Part icipat ion of ordinar y shar es (450kx1M/1.5M) 300,000
As allocat ed -
Case 4: Cumulative and Fully Participating (#8)
Total dividends declar ed 600,000.00 Preference shares: (150,000 Basic + 116,666.67 Par ticipat ion) 266,666.67
Allocat ion: Ordinary Shar es: (100,000 Basic + 233,333.33 Par ticipat ion) 333,333.33
1) Basic allocat ion to prefer ence shar es (500kx10%x3yr s) 150,000.00 Tot al Dividends 600,000.00
2) Basic allocat ion to ordinary shar es (1Mx10%) 100,000.00
Excess sub ject t o part icipat ion 350,000.00
3) Part icipat ion of preference shar es (450kx500k/1.5M) 116,666.67
3) Part icipat ion of ordinar y shar es (450kx1M/1.5M) 233,333.33
As allocat ed -
Case 5: Cumulative and Participating up to 18% (#9)
Total dividends declar ed 600,000 Preference shar es: (150,000 Basic + 40,000 Par ticipation) 190,000.00
Allocat ion: Ordinar y Shares: (100,000 Basic + 310,000 Par ticipation) 410,000.00
1) Basic allocat ion to prefer ence shar es (500kx10%x3yr s) 150,000 Total Dividends 600,000.00
2) Basic allocat ion to ordinary shar es (1Mx10%) 100,000
Excess sub ject t o part icipat ion 350,000
3) Part icipat ion of preference shar es [(18%- 10%)xP500k] 40,000
3) Excess allocated to ordinary shar es (350k-40k) 310,000
As allocat ed -
More than one class of preference shares (10%)
Total dividends declar ed 1,200,000.00 10% PS Par ticipation: (150,000 Basic + 252,222.22 Par ticipation 402,222.22
Allocat ion: 14% PS Par ticipation: (42,000 Basic + 151,333.33 Par ticipation) 193,333.33
1) Basic allocat ion to 10% PS cumulat ive (500kx10%x3y rs) 150,000.00 Ordinar y Shares: (100,000 Basic + 504,444.44 Par ticipat ion) 604,444.45
2) Basic allocat ion to 14% PS noncumulative(300kx14%) 42,000.00 Total Dividends 1,200,000.00
3) Basic allocat ion to ordinary shar es (1Mx10%) 100,000.00
Excess sub ject t o part icipat ion 908,000.00
4) Part icipat ion of 10% PS (308kx500k/1.8M) 252,222.22
4) Part icipat ion of 14% PS (308kx300k/1.8M) 151,333.33
4) Part icipat ion of ordinar y shar es (308kx1M/1.8M) 504,444.45
As allocat ed -

Liquidating Dividends (#11) only date of declaration

Capital liquidated 375,000
December 31, 20x1 Retained earnings 125,000
Cash dividends payable 500,000

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