FAR

(Session 2)

Presentation by 3rd year students

W H AT I S
FINANCIAL
ACCOUNTING

specific branch of accounting

involving a process of recording,
summarizing, and reporting the
myriad of transactions resulting
from business operations over a
period of time

WHY ARE WE
STUDYING THIS?

serves as an introduction to
financial accounting, introducing FINANCIAL
the basic terminology, purpose and ACCOUNTING
different types of accounting.
&
REPORTING
accounting

RECAP
WHAT IS
ACCOUNTING
 ACCOUNTI NG
E QUAT ION

A=L+E
The accounting equation is considered to
be the foundation of the double-entry
accounting system.

shows on a company's balance that a

company's total assets are equal to the
sum of the company's liabilities and
shareholders' equity.
 ASSETS LIABILITIES EQUITIES

resource with economic financial obligation of a

remaining value of an
value that an individual, company that results in the
owner’s interest in a
corporation, or country owns company’s future sacrifices
company, after all
or controls with the of economic benefits to
liabilities have been
expectation that it will other entities or businesses
deducted.
provide a future benefit.
Accounting for
service business

Recording business transaction

and
Adjusting entries
 Accounting cycle
• Identification of events to be recorded
• Transactions are recorded in JOURNAL
• Journal entries are posted to the LEDGER
• Preparation of a TRIAL BALANCE
• Preparation of the WORKSHEET include the
ADJUSTING ENTRIES
• Preparation of FINANCIAL STATEMENTS
• Adjusting journal entries are journalized and posted
• Closing journal entries are journalized and posted
• Preparation of a POST-CLOSING trial balance
• Reversing journal entries are journalized and posted
ADJUSTING ENTRIES
entry in a company's general ledger that occurs
at the end of an accounting period to record any
unrecognized income or expenses for the
period.

most common types of adjusting

journal entries are accruals,
deferrals, and estimates.
WORKSHEET
 WHAT IS
WORKSHEET
An accounting worksheet is a spreadsheet
used to prepare accounting information and
reports. Accounting worksheets are most
often used in the accounting cycle process to
draft an unadjusted trial balance, adjusting
journal entries, adjusted trial balance, and
financial statements.
 1. Enter the account balances in the UNADJUSTED
TRIAL BALANCE columns and the total the
amounts

2. Enter the ADJUSTING ENTRIES in the

adjustments columns and total the amounts
WORKSHEET

3. Compute each account's adjusted balance by

combining the unadjusted trial balance and the
adjustment figures. Enter the adjusted amounts in
the ADJUSTED TRIAL BALANCE columns.

4. Extend the asset, liability and owner's equity

amounts from adjusted trial balance columns to the
BALANCE SHEET columns. Extend income and
expense amounts to the INCOME STATEMENT
preparing

columns. Total the statement columns.

5. Compute profit or loss as the difference between

tool revenues and total expenses in the income
statement. Enter profit or loss as a balancing
amount in the income statement and in the balance
sheet, and compute the final column totals.
Financial
Statements

Definition and
its Objectives
Financial
Statements

Financial statements are written

records that convey the business
activities and the financial
performance of a company.
OBJECTIVES
The objective of financial statements is to provide information about the
financial position, performance and changes in financial position of an
enterprise that is useful to a wide range of users in making economic
decisions.

P R O V I D E S I N F O R M AT I O N
ABOUT

• assets
• liabilities
• equity
• income and expenses
• contributions by and
distributions by owner
• Cash flow
Does the FS provides all the
information needed for
economic decision?
 It only reflects financial
effects of past events and does
not provide nonfinancial
information.
COMPONENTS OF
THE FINANCIAL
S TAT E M E N T S

• Statement of financial position

• Income Statement
• Statement of comprehensive income
• Statement of changes in equity
• Statement of cash flow
• Notes to financial statement
S TAT E M E N T O F 2 WAY S O F
FINANCIAL PERFORMANCE P R E S E N TAT I O N
PERFORMANCE

a statement of financial level of income earned by

performance is an Functional Method
the entity through efficient
accounting summary that and effective use of its Natural Method

details a business resources.

organization's revenues,
expenses and net income
Which form of income statement should
be used?
PA S 1 D O E S N O T P R E S C R I B E A N Y
F O R M AT
 COMPREHENSIVE
INCOME
Change on equity during a period resulting form transaction and other
events other than changes resulting from transactions with owners in their
capacity as owners

OTHER
COMPREHENSIVE
INCOME
item of income and expenses including PROFIT OR LOSS
reclassification adjustments that are not income less expenses
recognized in profit or loss

examples:
• Remeasurements of define benefit
plan
• Revaluations surplus
 SOURCES OF COMPONENTS
INCOME OF EXPENSES
a. Sales of merchandise to customer
a. Cost of Sales
b. Rendering of service
b. Selling expenses
c. Use of entities resources.
c. Administrative Expenses
d. Disposal of resources other than d. Other expenses
product e. Income tax expenses
 CLASSIFICATION OF EXPENSE

D I S T R I B U T I O N C O S T- C O S T A D M I N I S T R AT I V E
D I R E C T LY R E L AT E D T O EXPENSES- ALL
S E L L I N G A D V E RT I S I N G A N D O P E R AT I N G E X P E N S E S
D E L I V E RY O F G O O D S T O N O T R E L AT E D T O S E L L I N G
CUSTOMER. AND COST OF GOODS
SOLD.
-Salemen's salaries - Office salaries
-Advertising - Office supplies used
- Depreciation
S TAT E M E N T O F C H A N G E S I N
EQUITY

The statement of changes in equity is a reconciliation of the beginning and ending

balances in a company’s equity during a reporting period.

So in the case of sole proprietorship, increases in owners equity arise from

additional investments by the owner and profit during the period. Decreases result
from withdrawals by the owner and from loss during the period
 To Compute Statement of Changes in
Owner’s Equity

Owner’s Equity, beginning xxx

Add: Additional Investments xxx
Profit xxx
Total xxx
Less: Withdrawal xxx
Loss xxx
Owner’s Equity, ending xxx
 C ASH FL OW
S TAT EM E NTS
A cash flow statement is a financial
statement that provides aggregate data
regarding all cash inflows a company
receives from its ongoing operations and
external investment sources.
CLAS SIFI CAT ION OF
CASH FLO WS
The statement of cash flow shall
report cash flows during the period
classified as operating, investing
and financing.

User’s of entity’s financial statements

are interested in how the entity
generates and uses cash to conduct
their operations, to pay their
obligations and to provide returns to
their investor

Cash Flow information is useful in

assessing the ability of the entity to
generate cash and cash equivalents.
OPERATING ACTIVITIES
CASH FLOWS
D E R I V E D P R I M A R I LY
F R O M T H E P R I N C I PA L
REVENUE PRODUCING
ACTIVITIES OF THE
ENTITY

Examples:
a. Cash receipts from rental fees, commission
and other revenue
b. Cash receipts from Sale of Goods and
rendering services
c. Cash receipts from selling, administrative
and other expenses
INVESTING ACTIVITIES
CASH FLOWS DERIVED FROM
THE ACQUISITION AND
DISPOSAL OF LONG-TERM
ASSETS AND OTHER
INVESTMENTS NOT INCLUDED
I N C A S H E Q U I VA L E N T S

Example:
a. Cash payments to acquire property, plant and
equipment, intangible assets and other long term assets
b. Cash receipts from sales of property, plant and
equipment, intangible assets and other long term assets
c. Cash payments for future contract, forward contract,
option contract and swap contract
d. Cash receipts for future contract, forward contract,
option contract and swap contract
FINANCING ACTIVITIES
CASH FLOW DERIVED
F R O M E Q U I T Y, C A P I TA L
AND BORROWINGS OF
THE ENTITY

Example:

a. Cash receipts from issuing shares or other equity

instruments (example issuance of ordinary and
preference shares)
b. Cash payments from amounts borrowed.
c. Cash payments by a lessee for the reduction of
the outstanding liability relating to a finance lessee.
TIME FOR 15 MINS BREAK
C OMPLET ING THE AC C OUNT I NG
C Y C LE

STEP 7 & 8
80%
1.Prepaid Expense- Expenses paid for by
the business in advance.

RENT EXPENSE

PREPAID EXPENSE

INSURANCE EXPENSE

PREPAID EXPSENSE

SUPPLIES EXPENSE

SUPPLIES
2. Unearned Revenue- When a company
receives payment before providing the
goods or rendering services to its
customers.

UNEARNED REVENUE
REVENUE
3. Accrued Revenue- are receivables that
are already been earned but not yet
collected.

ACCOUNTS RECEIVABLE

REVENUE
4. Accrued Expense- refers to expenses
that are already incurred but not yet paid.

UTILITIES EXPENSE

UTILITIES PAYABLE
5. Depreciation Expense- represents how much of
an asset’s value has been used up.

DEPRECIATION EXPENSE

ACCUMULATED DEPRECIATION
CLOSING ENTRIES ARE JOURNALIZED AND POSTED
(STEP 8)

INCOME, EXPENSE AND WITHDRAWAL ACCOUNTS

ARE TEMPORARY ACCOUNTS THAT ACCUMULATE
INFORMATION RELATED TO A SPECIFIC ACCOUNTING
PERIOD. CLOSING SIMPLY TRANSFERS THE BALANCE
OF TEMPORARY ACCOUNTS TO THE CAPITAL
ACCOUNT. A SUMMARY ACCOUNT “INCOME
SUMMARY” IS USED TO CLOSE THE INCOME AND
EXPENSE ACCOUNTS.
1. Close the income accounts

CONSULTING REVENUES
REFERRAL REVENUES

INCOME SUMMARY
 2. Close the expense accounts

INCOME SUMMARY

SALARIES EXPENSE

SUPPLIES EXPENSE

RENT EXPENSE

INSURANCE EXPENSE

UTILITIES EXPENSE

DEPRECIATION EXPENSE

INTEREST EXPENSE
3. Close the income summary account
INCOME SUMMARY

PEREZ-MANALO, CAPITAL
4. Close the withdrawal account

PEREZ-MANALO, CAPITAL

PEREZ-MANALO, WITHDRAWALS
C OMPLET ING THE AC C OUNT I NG
C Y C LE

STEP 9 & 10
100%
S T E P 9 P R E PA R AT I O N O F P O S T-
CLOSING TRIAL BALANCE
A post-closing trial balance is a listing of all balance sheet accounts
containing non-zero balances at the end of a reporting period. The post-
closing trial balance is used to verify that the total of all debit balances
equals the total of all credit balances, which should net to zero. The post-
closing trial balance contains no revenue, expense, gain, loss, or summary
account balances, since these temporary accounts have already been closed
and their balances moved into the retained earnings account as part of the
closing process.

It is possible to commit an error in posting the adjustments and closing

entries to the ledger accounts; thus it is necessary to test the quality of the
accounts by preparing a new trial balance
 PROCEDURES IN THE
PREPARATION OF
TRIAL BALANCE

1.List the account titles in numerical order.

2.Obtain the account balance from the ledger

3.Add the debt and credit columns

4.Complete the totals

 STEP 10 REVERSING ENTRIES
A reversing journal entry is a journal entry which is the exact opposite of
a related adjusting entry made at the end of the period. It is basically a
bookkeeping technique made to simplify the recording of regular
transaction in the next accounting period.

It should be emphasized that reversing entries are optional. Generally, a

reversing entry should be made for any adjusting entry that increased in
asset or liability account.
QUESTIONS

1. A type of working paper frequently used by accountants

prior to the preparation of financial statements is called a
post-closing trial balance.

2. It is the liability created by collecting income in advance.

A. advanced income B. unearned income

C. prepaid income D. all of these

3. When an asset is purchased on account, the credit

is to:

A. an owner’s equity account B. a revenue

account

C. a liability account D. an expense

account
 QUESTIONS

4. A business paid ₱6,000 to a creditor in payment of an amount owed. The

effect of the transaction on the accounting equation was:

A. an increase in an asset and a decrease in another asset

B. a decrease in an asset and an increase in a liability
C. a decrease in an asset and a decrease in a liability
D. an increase in an asset and an increase in owner’s equity
 SUCCESS DOESNT COME
FROM WHAT YOU DO
OCCASIONALY. IT COMES
FROM WHAT YOU DO
CONSISTENLY
TH A N K Y O U

ANONYMOUS