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CHAPTER 2 SLIDE 1

Accounting for Partnership


Formation
CHAPTER 2
CHAPTER 2 SLIDE 2

Learning Objectives

• Identify accounting problems peculiar to a partnership;


• Enumerate the different ways of forming a partnership;
• Record in the books of accounts the journal entries and capital
adjustments required to be reflected in the capital accounts; and
• Prepare properly the partnership balance sheet after the
formation of the partnership.
CHAPTER 2 SLIDE 3

Accounting Principles for a Partnership

Single General principles for


Proprietorship
ordinary transactions Partnership
common to both
CHAPTER 2 SLIDE 4

Differences in Accounting Procedure


• Single proprietorship – for only one person
Sharing of
profits and
• Partnership – distributed among the partners
losses
• Single Proprietorship – contains only one capital account and one
withdrawal account
Presentation of • Partnership – two or more capital accounts and two or more
owner’s equity withdrawal accounts

• Single Proprietorship – liquidation process is not required


Liquidation • Partnership – liquidation is necessary
procedures
CHAPTER 2 SLIDE 5

Division of Profits
• Specified by the partnership agreement. If there is no
agreement, the Philippine laws on partnership shall govern.

• It is necessary to have separate partners’ capital and drawing


accounts to have an accurate record of their investments,
withdrawals, and share in the net income or loss of the
partnership.
CHAPTER 2 SLIDE 6

Recording a Partner’s Investment


• Investment may be cash or non-cash assets.
• In case of non-cash asset, the valuation should be the fair market
value at the date of transfer to the partnership and must be
agreed upon by all the partners.
• Only increases or decreases on the value of such assets taking place
during the term of partnership will be allocated among the partners.
CHAPTER 2 SLIDE 7

Ways of Forming a Partnership


1. Two or more individuals
a. Two or more capitalist partners
b. A capitalist partner and an industrial partner
2. One sole proprietor and an individual
3. Two or more sole proprietorships
CHAPTER 2 SLIDE 8

Capital Adjustment Rules in Recording


the Capital Accounts of the Partners

• For individual partners


All non-cash assets that are to be invested in the partnership should
be recorded at agreed value or fair market value, not at cost or book
value.
CHAPTER 2 SLIDE 9

• For sole proprietor partners


 Only capital accounts will be used in recording any gain or loss on
valuation of non-cash assets. Capital account is used in place of
income or loss account. Examples of capital accounts are: Cruz,
Capital; Reyes, Capital; and Aquino, Capital.
 In adjusting the value of Account Receivable account, use the
contra-asset account "Allowance for doubtful account" or
“Allowance for impairment loss” and not "Account Receivable"
account.
 In adjusting the value of depreciable assets, use the contra-asset
account “Accumulated Depreciation” and not the specific fixed
asset account.
CHAPTER 2 SLIDE 10

Two or More Individuals Form a


Partnership
When partners to a newly formed trading firm invest for
the first time, the opening entry will simply be to debit the
assets contributed and to credit the capital accounts of each
of the contributing partners. If one of the partners is an
industrial partner, then a memorandum entry is made in
the general journal and noted in the general ledger.
CHAPTER 2 SLIDE 11

ILLUSTRATION
1. Two Individual Partners
a. Both are capitalist partners
On September 1, of the current year, Rody and Lorie formed a
partnership with cash contributions of P300,000 and P200,000
respectively. In addition to Rody's cash contribution, he also
contributed an office equipment costing P10,000, but with an agreed
valuation of P7,500. Lorie contributed a piece of land costing P100,000,
but with an agreed valuation of P150,000. The land was mortgaged in a
bank for P 50,000, and it was agreed that the partnership will absorb
the mortgage liability in the bank.
CHAPTER 2 SLIDE 12

The opening entry in the partnership book will be;


Using single entry for each partner:
Sept. 1 Cash 300,000
Rody, Capital 300,000
Office Equipment 7,500
Rody, Capital 7,500
Initial investment of Rody.

Rule on investment of non-cash assets. The amount to be


recorded should be the agreed valuation or fair market value, in this
case P 7,500.
CHAPTER 2 SLIDE 13

Lorie’s Contribution

Sept. 1 Cash 200,000


Lorie, Capital 200,000
Land 150,000
Mortgage Payable 50,000
Lorie, Capital 100,000
Initial investment of Lorie.
CHAPTER 2 SLIDE 14

Rule on investment of non-cash assets under mortgaged with a


bank. If the liability is to be absorbed by the business, the
amount to be recorded should be the current market value and the
liability should be recorded in the book. As in the previous slide,
the land is P150,000, the mortgage payable is P50,000 and the
capital account to be credited is P100,000 (P150,000 – P50,000),
the fair market value less mortgage payable.
CHAPTER 2 SLIDE 15

Assuming liability will not be absorbed


If the mortgage liability will not be absorbed by the partnership but
will be paid personally by the investing partner, the journal entry
shall be:

Sept. 1 Land 150,000


Lorie, Capital 150,000
Investment in the form of land.

Take note that the mortgage payable is not recorded; therefore, the
capital is P150,000.
CHAPTER 2 SLIDE 16

b. One is an industrial partner


On September 1, this year, Dong and Yong formed a partnership with the
agreement that Dong will contribute only his services for a 20% share in the
profit and thatYong will contribute P50,000 cash and a typewriter worth P3,000.

The opening entry will be:

Sept. 1 Cash 50,000


Office Equipment 3,000
Yong, Capital 53,000
To record the initial investment of Yong
CHAPTER 2 SLIDE 17

Sept. 1 (Memorandum Entry) (Recorded in the General Journal and in the


General Ledger)
“In accordance with the partnership agreement, Dong is an industrial partner
in this partnership and shall earn a 20% share in the partnership's profit.”

Rule on investment of labor, skill, knowledge. The investment of


partners that contribute labor, skill, or knowledge shall be recorded as
memorandum journal entry . According to the law on partnership, if there is
no agreement on the distribution of profit and losses, an industrial partner
shall share in the profit of the business but not in it's losses.
CHAPTER 2 SLIDE 18

c. Both are capitalist partners who contributed cash and non-


cash assets.

Aga and Hap agreed to form a partnership with a profit and loss ratio
of 50/50. On May 1, Aga contributed cash − P200,000, office equipment
with a fair market value of P20,000 and a second hand delivery vehicle
bought last year for P50,000 but now with a fair market value of
P30,000. On May 2, Hap contributed cash − P36,000, merchandise
bought 3 months ago for P200,000 but now with a fair market value of
P210,000 and an antique furniture with a cost of P5,000, an
accumulated depreciation of P3,000 and a fair market value of P4,000.
CHAPTER 2 SLIDE 19

The journal entries are:


May 1 Cash P 200,000
Office Equipment 20,000
Delivery Equipment 30,000
Aga, Capital P 250,000
To record the investment of Aga in the partnership.

May 2 Merchandise Inventory P 210,000


Furniture and Fixtures 4,000
Cash 36,000
Hap, Capital P 250,000
To record the investment of Hap in the partnership.
CHAPTER 2 SLIDE 20

Rule on investments. All non-cash assets contributed in the


partnership or in any organization for that matter, should always be
recorded at fair market value.

In case the problem stated agreed value instead of fair market value,
then the agreed value should be recorded.

In case both the fair market value and agreed value are stated in the
problem, the agreed value will prevail and should be recorded.
CHAPTER 2 SLIDE 21

Partnership between a Sole Proprietorship


Business and an Individual
Opening Entry

New Book will be


or old set of books of the
opened sole proprietorship will
be used
normally used for
practicality and to
avoid confusion
*These books shall also be registered to BIR.
CHAPTER 2 SLIDE 22

ILLUSTRATION

Allan Ta has been in business for quite sometime as a sole


proprietor. He is in need of working capital to undertake business
expansion, so he decided to invite his friend, Berta Hwa, to join him
in the new partnership. The new partnership will be called “Ta-Hwa
Comedy Bar and Restaurant" and will assume the assets and
liabilities of Ta's business.
CHAPTER 2 SLIDE 23

On January 2, 2014, Berta Hwa accepted the offer and will invest cash
equivalent to 40% of the capital of Allan after the revaluation of his assets.
Both agreed to revalue the assets of Allan's business as follows:
Revalued at
Accounts Receivable P 40,000
Restaurant Inventory 45,000
Office Equipment 25,000
Land 100,000
Building 120,000
CHAPTER 2 SLIDE 24

Financial Position of Allan's business at the time of the formation of the partnership
with Berta: ALLAN’S RESTAURANT
Statement of Financial Position
January 2, 2014
ASSETS
Current Assets
Cash P14,000
Accounts Receivable P45,000
Less: Allowance for doubtful accounts 1,500 43,500
Restaurant Inventory 60,000
Supplies 5,000
Total Current Assets P122,500

Plant, Property and Equipment


Land P 80,000
Building P150,000
Less Accumulated Depreciation 25,000 125,000
Office Equipment P30,000
Less: Accumulated Depreciation 8,000 22,000
Total Plant Property and Equipment 227,000
Total Assets P 349,500
CHAPTER 2 SLIDE 25

LIABILITIES AND OWNER'S EQUITY


Current Liabilities
Accounts Payable P 22,000
Notes Payable 16,000 P
38,000
Owner's Equity
Allan, Capital 311,500
Total Liabilities and Capital P349,500
CHAPTER 2 SLIDE 26

Case 1. The old books of the sole proprietorship


will be used
CHAPTER 2 SLIDE 27

Step 1. Prepare capital adjustments based on their agreement.


Record the capital adjustments in the books of Allan Enterprise:

1.To revalue the accounts receivable from the net realizable value of P43,500 to P40,000 or a loss of
P3,500.
Allan, Capital P 3,500
Allowance for doubtful accounts P 3,500

Rule on revaluation of Account Receivable. The adjustments should always be made using the
account "allowance for doubtful account" or “allowance for impairment loss” and the corresponding
capital account.

•If it is a loss, the allowance for doubtful account is credited and capital account is debited.
•If it is a gain, the allowance for doubtful account is debited and capital account is credited.
CHAPTER 2 SLIDE 28

2. To record the loss due to the revaluation of restaurant inventory from P60,000
to P45,000.

Allan, Capital P 15,000


Restaurant Inventory P 15,000
To record the loss due revaluation of restaurant inventory.

Per record P 60,000


Revalued at 45,000
Loss P 15,000
CHAPTER 2 SLIDE 29

3. To record the increase in value of office equipment from book value of P22,000
to P25,000 (gain).

Accumulated Depreciation - Office Equipment P 3,000


Allan, Capital P 3,000

To revalue the office equipment from the book value of P 22,000 to P 25,000 or a
gain of P3,000.
CHAPTER 2 SLIDE 30

Rule on revaluation of depreciable Properties and Equipment.


"Accumulated depreciation“ – the contra
The basis of recording is the fair
asset account title for Any adjustment to
market value or agreed value and
any depreciable properties and equipment
not the book value.
or fixed assets.

• If it is a gain, the accumulated depreciation is debited and the corresponding capital


account credited.
• If it is a loss, accumulated depreciation is credited and the corresponding capital
account debited.

*Book value is the net of cost and accumulated depreciation.


CHAPTER 2 SLIDE 31

4. To record the increase of land value from P80,000 to P100,000 (gain).

Land P 20,000
Allan, Capital P 20,000

To record the revaluation of land.


Per balance sheet P 80,000
Revalued at P 100,000
Gain 20,000
CHAPTER 2 SLIDE 32

5. To record the decrease in value of building from book value of P125,000 down
to P120,000 (loss).

Allan, Capital P5,000


Accumulated Depreciation - Building P 5,000

To revalue the building.


Building P 150,000
Acc. Depreciation ( 25,000)
Book value 125,000
Revalued at P 120,000
Loss P 5,000
CHAPTER 2 SLIDE 33

After all adjusting entries are posted compute the balance of Allan, Capital:

Allan, Capital*

3,500 311,500 beginning balance


15,000 20,000
5,000 3,000
Total 23,500 334,500
311,000* ending balance
CHAPTER 2 SLIDE 34

Step 2. Record the Investment of Berta

6. To record the investment of Berta

Cash P 124,400
Berta, Capital P 124,400

According to their agreement, Berta will invest cash equivalent to 40% of the capital of
Allan, therefore:

Capital of Allan after adjustments P 311,000*


Interest of Berta x 40%
Share of Berta P 124,400
CHAPTER 2 SLIDE 35

Case 2. A New Set of Books will be Used for the


Partnership
CHAPTER 2 SLIDE 36

Step 1. Prepare capital adjustments based on their agreement

In the books of Allan Enterprise, prepare the capital adjustments:

1.To adjust the accounts receivable account of Allan

Allan, Capital P 3,500


Allowance for doubtful accounts P 3,500

To revalue the Account Receivable from net realizable value of P43,500 to P40,000
or a capital loss of P3,500.
CHAPTER 2 SLIDE 37

Rule on revaluation of Account Receivable.


The adjustments should always be made using the account "allowance for
doubtful account" or “allowance for impairment loss” and the corresponding
capital account.
•If it is a loss, the allowance for doubtful account is credited and capital
account is debited.
•If it is a gain, the allowance for doubtful account is debited and capital
account is credited.
CHAPTER 2 SLIDE 38

2. To adjust the value of restaurant inventory

Allan, Capital P 15,000


Restaurant Inventory P 15,000
To record the loss due revaluation of restaurant inventory.

Per record P 60,000


Revalued at 45,000
Loss P 15,000
CHAPTER 2 SLIDE 39

3. To adjust the value of office equipment from P22,000 to


P25,000 (gain)

Accumulated Depreciation - Office Equipment P 3,000


Allan, Capital P 3,000
CHAPTER 2 SLIDE 40

Rule on revaluation of depreciable Properties and Equipment

"Accumulated depreciation“ – the contra The basis of recording is the


asset account title for any adjustment to fair market value or agreed
any depreciable properties and equipment value and not the book value.
or fixed assets

• If it is a gain, the accumulated depreciation is debited and the corresponding,


capital account credited.
• If it is a loss, accumulated depreciation is credited and the corresponding capital
account debited.
CHAPTER 2 SLIDE 41

4. To adjust the value of the land

Land P 20,000
Allan, Capital P 20,000
To record the revaluation of land.

Per balance sheet P 80,000


Revalued at P 100,000
Gain 20,000
CHAPTER 2 SLIDE 42

5. To adjust the value of the building

Allan, Capital P5,000


Accumulated Depreciation - Building P 5,000
To revalue the building.

Building P 150,000
Acc. Depreciation ( 25,000)

Book value 125,000


Revalued at P 120,000
Loss P 5,000
CHAPTER 2 SLIDE 43

Step 2. Prepare the adjusted trial balance


Trial Balance Adjustments Adj. T-Balance
Debit Credit Debit Credit Debit Credit
Cash 14,000 14,000
Accounts Receiv able 45,000 45,000
Allowance for doubtful accounts 1,500 3,500 5,000
Restaurant I nv entory 60,000 15,000 45,000
Supplies 5,000 5,000
Land 80,000 20,000 100,000
Building 150,000 150,000
Accumulated Depreciation 25,000 5,000 30,000
Office Equipment 30,000 30,000
Accumulated Depreciation 8,000 3,000 5,000
Accounts Payable 22,000 22,000
Notes Payable 16,000 16,000
Allan, Capital 311,500 500* 311,000
Total 384,000 384,000 23,500 23,500 389,000 389,000
*SeeT- account of Allan, capital on page 23. Net of capital adjustments.
CHAPTER 2 SLIDE 44

Step 3. Close the books of Allan


Close the books of Allan Enterprise by debiting all accounts with credit balances and crediting all
accounts with debit balances in the Adjusted Trial Balance above.

Allowance for doubtful accounts 5,000


Accumulated Depreciation - Bldg. 30,000
Accumulated Depreciation - O. Equipt. 5,000
Accounts Payable 22,000
Notes Payable 16,000
Allan, Capital 311,000
Cash 14,000
Accounts Receivable 45,000
Restaurant Inventory 45,000
Supplies 5,000
Land 100,000
Building 150,000
Office Equipment 30,000
To close the books of Allan Enterprise.
CHAPTER 2 SLIDE 45

Step 4. In the New Book of the Partnership, record the


investments of the partners
New book of the partnership

1. Record the investment of Allan in the partnership.

Cash 14,000
Accounts Receivable 45,000
Restaurant Inventory 45,000
Supplies 5,000
Land 100,000
Building 120,000
Office Equipment 25,000
Allowance for Doubtful Accounts 5,000
Accounts Payable 22,000
Notes Payable 16,000
Allan, Capital 311,000
Initial investment of Allan
CHAPTER 2 SLIDE 46

Rules in recording in the new books of the partnership from the book of
the sole proprietorship

a.For Account Receivable – record account receivable at total amount and


also record the allowance for doubtful account

a.For depreciable assets such as building, office equipment, furniture and


fixtures, delivery equipment and others – record only the book value. Book
value means cost less accumulated depreciation
CHAPTER 2 SLIDE 47

2. Record the investment of Berta

Cash 124,400
Berta, Capital 124,400

Initial investment of Berta equivalent to 40% of Allan's capital. (P311,000 x


40% )
CHAPTER 2 SLIDE 48

Partnership between Two or More


Existing Sole Proprietorships
A sole proprietorship business may join with another sole
proprietorship business to form a partnership. The assets and
liabilities of both businesses are transferred to the account of the
newly formed partnership.
ILLUSTRATION

Assume that Robo and Kap agreed to combine their businesses and will call their
new partnership as "Robo-Kap Traiding." The partnership will use a new book.
CHAPTER 2 SLIDE 49

The Financial Position of Robo’s business before Partnership formation


Robo
Statement of Financial Position
June 30, 2014

Assets
Current Assets
Cash P48,600
Accounts Receivable P 60,000
Allowance for doubtful accounts 3,600 56,400
Merchandise Inventory 64,200
Supplies Inventory 4,800
Total Current Assets P 174,000

Property and Equipment


Furniture and Fixtures 36,000
Less: Accumulated Depreciation 16,800 19,200
Total Assets P 193,200

Liabilities and Capital


Current Liabilities
Accounts Payable P24,000
Notes Payable 48,000
Total Current Liabilities P 72,000
Capital
Robo, Capital 121,200
Total liabilities and Capital P193,200
CHAPTER 2 SLIDE 50

The Financial Position of Kap’s business before Partnership formation


Kap
Statement of Financial Position
June 30, 2014
Assets
Current Assets
Cash P13,400
Accounts Receivable P24,000
Allowance for doubtful accounts 2,700 21,300
Merchandise Inventory 60,500
Total Current Assets P95,200

Property and Equipment


Office Equipment P40,500
Less: Accumulated Depreciation 7,500 33,000
Total Assets P 128,200

Liabilities and Owner's Equity


Current Liabilities
Accounts Payable P25,000
Notes Payable 15,000
Total Current Liabilities 40,000
Capital
Kap Capital 88,200
Total Liabilities and Capital P 128,200
CHAPTER 2 SLIDE 51

Agreement for the Adjustment of


the Asset Values
Robo’s business:
Kap’s business:
1.Bad accounts of P3,000 are to be written off. A 4%
allowance for doubtful accounts is to be recognized on the 1.Only 10% allowance for doubtful accounts is
remaining accounts receivable after write off. to be recognized on the outstanding accounts
receivable as of June 30, 2014.

2.Merchandise inventory's present market value is


P70,800. 2.The office equipment should be depreciated
further by 8%.

3.Furniture and Fixtures' account should be adjusted to


replacement value of P45,000. After adjustment to 3.The fair market value of the merchandise is
replacement value, the asset should be considered as 50% P46,450.
depreciated.
CHAPTER 2 SLIDE 52

In Robo’s Book

Requirement No. 1 − Record the capital adjusting entries

June 30 1. Allowance for doubtful accounts 3,000


Accounts Receivable 3,000
Write off of bad debt accounts.

2. Robo, Capital 1,680


Allowance for doubtful accounts 1,680
Set up 4% allowance for doubtful account.
CHAPTER 2 SLIDE 53

After the adjustment in no. 1, the balance of allowance for doubtful account is
credit balance P600 and the Accounts Receivable balance is P 57,000. Four percent
(4%) of Accounts Receivable is P2,280. Therefore:

Should be allowance for doubtful account P 2,280


After write off, the balance of allowance for
doubtful account is 600
Adjustment (additional) P 1,680
CHAPTER 2 SLIDE 54

3. Merchandise Inventory 6,600


Robo, Capital 6,600
Revaluation of merchandise inventory from P64,200 to P70,800.

4. Furniture and Fixtures 9,000


Robo, Capital 9,000
Revaluation of furniture and fixtures from P36,000 to P45,000.

5. Robo, Capital 5,700


Accumulated depreciation - Fur. & Fixtures 5,700
To adjust accumulated depreciation to 50% of the agreed value.

Agreed value of furniture and fixtures is P45,000 x 50% = P 22,500


Per balance sheet the accumulated depreciation is 16,800
Adjustment P 5,700
CHAPTER 2 SLIDE 55

Requirement Number 2 − The Adjusted Trial Balance


Trial Balance Adjustments Adj. T-Balance
Debit Credit Debit Credit Debit Credit
Cash 48,600 48,600
Accounts Receivable 60,000 3,000 57,000
Allowance for doubtful accounts 3,600 1,320 2,280
Merchandise Inventory 64,200 6,600 70,800
Supplies Inventory 4,800 4,800
Furniture and Fixtures 36,000 9,000 45,000
Accumulated Depreciation 16,800 5,700 22,500
Accounts Payable 24,000 24,000
Notes Payable 48,000 48,000
Robo, Capital 121,200 8,220* 129,420
TOTAL 213,600 213,600 16,920 16,920 226,200 226,200
CHAPTER 2 SLIDE 56

Requirement Number 3 − Closing the books of Robo

Closing Entries Debit Credit


Allowance for doubtful account 2,280
Accumulated Depreciation 22,500
Accounts Payable 24,000
Notes Payable 48,000
Robo, Capital, 129,420
Cash 48,600
Accounts Receivable 57,000
Merchandise Inventory 70,800
Supplies Inventory 4,800
Furniture and Fixtures 45,000
To close the books of Robo.
CHAPTER 2 SLIDE 57

In Kap’s Book
Requirement Number 1 − Record the capital adjusting entries
1. Allowance for doubtful accounts 300
Kap, Capital 300
To reduce the allowance for doubtful account from P2,700 to P 2,400.

2. Kap, Capital 3,240


Accumulated Depreciation - Office Equipment 3,240
To record the additional 8% depreciation. P40,500 x 8% = P3,240.

3. Kap, Capital 14,050


Merchandise Inventory 14,050
To adjust merchandise inventory account from P60,500 down to P
46,450 or a loss of P14,050.
CHAPTER 2 SLIDE 58

Requirement Number 2 − Prepare the adjusted trial balance


Trial Balance Adjustments Adj. T-Balance
Debit Credit Debit Credit Debit Credit
Cash 13,400 13,400
Accounts Receivable 24,000 24,000
Allowance for doubtful accounts 2,700 300 2,400
Merchandise Inventory 60,500 14,050 46,450
Office Equipment 40,500 40,500
Accumulated Depreciation 7,500 3,240 10,740
Accounts Payable 25,000 25,000
Notes Payable 15,000 15,000
Kap, Capital 88,200 16,990 71,210
TOTAL 138,400 138,400 17,290 17,290 124,350 124,350
CHAPTER 2 SLIDE 59

Requirement Number 3 – Closing the books of Kap

Closing Entries Debit Credit


Allowance for doubtful account 2,400
Accumulated Depreciation 10,740
Accounts Payable 25,000
Notes Payable 15,000
Kap, Capital 71,210
Cash 13,400
Accounts Receivable 24,000
Merchandise Inventory 46,450
Office Equipment 40,500
To close the books of Kap.
CHAPTER 2 SLIDE 60

New Partnership Book

Requirement Number 4 – Record the investments of the partners in the new partnership book.

To record Robo's investment

Cash 48,600
Account Receivable 57,000
Merchandise Inventory 70,800
Supplies Inventory 4,800
Furniture and Fixtures (book value) 22,500
Allowance for doubtful accounts 2,280
Accounts Payable 24,000
Notes Payable 48,000
Robo, Capital 129,420
CHAPTER 2 SLIDE 61

Requirement Number 4 – Record the investments of the partners in the new partnership
book.

To record Kap's investment

Cash 13,400
Account Receivable 24,000
Merchandise Inventory 46,450
Office Equipment (book value) 29,760
Allowance for doubtful account 2,400
Accounts Payable 25,000
Notes Payable 15,000
Kap, Capital 71,210
CHAPTER 2 SLIDE 62

Requirement Number 5 – Starting Balance Sheet of Robo-Kap Trading


CHAPTER 2 SLIDE 63

Important Terminologies

Net Realizable Value


Accounts Receivable should be stated
at net realizable value. Net realizable
value is the expected cash value
collectible. Net realizable value is the Book Value
value of receivable less allowance for Properties and Equipment that are
doubtful accounts. subject to wear and tear or
depreciation should be stated at book
value. Book value of an asset is its cost
less its accumulated depreciation.
CHAPTER 2 SLIDE 64

Accumulated Depreciation
All fixed assets, except land, that are used in
business are subject to economic wear and
tear. A portion of the cost is charge to an
expense periodically because of reduction in
value and is called depreciation expense. The
cumulative total of depreciation expense
Cost from the time the fixed assets was used in
All acquisitions should be recorded at cost. operation to the current period is called
Cost is the amount in the invoice (net of accumulated depreciation.
discount) plus insurance, freight,
installation cost, and other cost necessary
in bringing the asset in good working
condition for its intended use.
CHAPTER 2 SLIDE 65

Statement of Financial Position


Fair Market Value
This financial statement is popularly known as
It is the amount, in money, the
the Balance Sheet. It shows the total assets,
seller is willing to sell and the
total liabilities, and the owners’ equity. It is
buyer is willing to buy an item. It is
used to analyze the business liquidity,
also called the current market
stability, and together with the Income
value.
Statement, shows its profitability and
operating efficiency.

Allowance for Impairment Loss


This account is popularly known as Allowance for doubtful
accounts and Allowance for bad debts. It shows the estimated
uncollectible accounts of customers based on experience and
ageing of accounts.