LESSON 9:

FINANCIAL

x xxx xxx
ACCOUNTING AND

xxx
MANAGEMENT
GROUP 9: SOMIL, SUMANDE,

SUPREMO, VELASCO, YASAY

 THE RESOURCES YOU NEED, TO RUN YOUR

INTRODUCTION BUSINESS AND PRODUCE THE GOODS OR

SERVICES, OUR PEOPLE, METHODS, MATERIALS,

MACHINE, AND MANAGEMENT. TO HAVE ALL

THESE RESOURCES, YOU NEED MONEY.

FINANCIAL MANAGEMENT:
IMPORTANCE OF FINANCIAL MANAGEMENT:
How to gather, organize, coordinate,

and record the money or financial

Recording, analyzing, and making decisions

resources of your business. about the finances of the business are basic

functions of the entrepreneur who owns the

IMPORTANCE OF FINANCIAL
business.
MANAGEMENT:

Managing the finances of the

company is a prime important since

without funds, the business will not

be able to operate.
 Keeping good records is very important to your

business. Good records will help you do

the following:

1. MONITOR THE PROGRESS OF YOUR

BUSINESS
2. PREPARE YOUR FINANCIAL STATEMENTS
3. IDENTIFY SOURCES OF YOUR INCOME
4. KEEP TRACK OF YOUR DEDUCTIBLE

BOOKKEEPING EXPENSES
5. KEEP TRACK OF YOUR BASES IN PROPERTY
It is the physical recording of someone's 6. PREPARE YOUR TAX RETURNS
transactions as they relate to assets,
7. SUPPORT ITEMS REPORTED ON YOUR TAX

liabilities, income, and expenses (Stern,

RETURNS
1993).
BOOKKEEPING TYPES OF BUSINESS

Also refers to the process of accumulating,

ACTIVITIES
organizing, storing, and accessing the
1. SERVICE BUSINESS
financial information base of an entity,

A type of business engaged in rendering or

which is needed for basic purposes:

providing services to clients for a fee.
facilitating the day-to-day operations of

2. MERCHANDISING BUSINESS
the entity, and preparing financial

statements, tax returns, and internal

A type of business engaged in buying and selling

reports to the manager. Bookkeeping can

of products for a profit.

be thought of as the financial information

3. MANUFACTURING BUSINESS
infrastructure of an entity. Every record-
A type of business engaged in the manufacturing

keeping system needs quality control built

or processing of raw materials into finished

into it, which are called internal records. products which are then sold for a profit.
 USES OF FINANCIAL INFORMATION

01
INTERNAL OWNERS
1. Owners- owner(s) need to

know hoe much return is

ACCOUNTING earned on their investment.

2. Management- to know if their

It is the medium of
policies are effective and in

communication through which

using available resources.
financial information is provided

to interested parties for

economic decision-making. It is

also called the "language of

02 1. Banks, creditors, and

lenders-to determine the

business." ability of borrowers to pay

their loans on maturity.
2. Government (such as BIR,

SEC, DTI)- to determine

compliance of tax and

reporting requirements.
 USES OF FINANCIAL INFORMATION

02 1. Banks, creditors, and

lenders-to determine the

ACCOUNTING ability of borrowers to pay

their loans on maturity.
2. Government (such as BIR,

It is the medium of

SEC, DTI)- to determine

communication through which

compliance of tax and

financial information is provided

reporting requirements.
to interested parties for

3. Prospective investors- to

economic decision-making. It is
know if the money they are

also called the "language of

going to invest will be places

business." in good hands.

PHASES OF ACCOUNTING SYSTEM
1. 2. 3. 4.
Recording business
Classifying which
Summarizing involves
Interpreting is

financial transactions
involves sorting &
compiling and
concerned with

in a systematic &
grouping similar
summing up dat into
analyzing financial

chronological manner
items under the
financial information
data & is a critical tool

in the apporpriate
designated name,
after each accounting
for decision making.
books or databases,. category or account. period.
 FINANCIAL

STATEMENTS

Financial statements are accounting, or financial reports prepared periodically to

inform the owner, creditors, and other interested parties as to the financial condition

and operating results of the business. Financial statements provide the users and

other interested parties with useful information that may affect the decision they

are confronted with.

 CAPITAL STATEMENT
(STATEMENT OF EQUITY)
BASIC TYPES OF FINANCIAL
This first customer is a sign that our
business is acceptable by the market and is
STATEMENTS the start of great achievement..

OWNER'S BEGINNING CAPITAL:

INCOME STATEMENT (STATEMENT OF

Contains the capital balance at the beginning

PERFORMANCE): : of the period.

It is the financial statement that shows the
NET INCOME/NET LOSS:
operating results of a business for a specific

Contains the final calculation of profit or loss

period of time, usually a month, a quarter, or a

as derived from the income statement.

year.
DRAWINGS:
REVENUE-EXPENSES = NET INCOME OR NET LOSS Contains the owner’s total drawings as

derived from the trial balance.

If revenue is larger than expense, the result is

CAPITAL BALANCE:
net income.
If revenue is lesser than expense, the result is
Contains the final calculation of the capital

a net loss. balance at the end of the period.

 STATEMENT OF CASH FLOWS
It's the financial statement that shows the
BASIC TYPES OF FINANCIAL
movement of cash in and out of the business. It
presents cash inflows (receipts) and outflows
STATEMENTS (payments) in the three activities of a business:
operating, investing, and financing.

BALANCE SHEET(STATEMENT OF
QUALITATIVE CHARACTERISTICS OF

FINANCIAL POSITION) FINANCIAL STATEMENTS:

It is the financial statement that shows the
UNDERSTANDABLE
amount and nature of a business's assets,
liabilities, and owner's equity (capital) as of a Accounting information must be comprehensible.
specific point in time. It shows the current financial RELEVANT
position or condition of a business at a specific
Information must not only be timely but should

point in time.
also possess feedback value and/or predictive

value for it to be effective in business decisions.

Assets-– properties used in the operation or
investment activities of a business. Feedback Value-refers to information about

Liabilities-claims by creditors to the assets of what has happened in the future.

a business until they are paid. Predictive Value-refers to information that will

Owner's Equity/Capital-the owner's rights or help guide the user in predicting what will

occur in the future.

claims to the assets of the business
QUALITATIVE CHARACTERISTICS OF
COMPARABLE
FINANCIAL STATEMENTS: Financial reports should be consistent, which
means that the procedures and methods
used in preparing the report should remain
RELIABLE unchanged from period to period.
This allows users to compare financial
In order to be reliable, information must be
statements of different entities (businesses)
• Complete
or to compare the same entity (business)
• Free from material error
over different periods. Comparisons over
• Neutral and unbiased
time are difficult unless there is consistency
• Faithfully represents the information contained therein.
in preparing financial reports across
periods. An exception to this concept is
when a change would present a better
presentation of economic activity. However,
when a change occurs, the reason for the
change must be disclosed and well-
explained in the financial statements.
 ACCOUNTING
- its foundation to avoid misconceptions and

PRINCIPLES
enhance the understanding and usefulness

of the financial statements.

Accounting principles are important 1. REVENUE REALIZATION PRINCIPLE

concepts, assumptions, ideas, rules, 2. MATCHING PRINCIPLE
procedures, methods, and/or accepted
3. COST CONCEPT
practices which accountants observe in
4. BUSINESS ENTITY CONCEPT
recording business transactions and in
reporting financial information. These are 5. MONETARY UNIT ASSUMPTION
set of rules that govern the accounting 6. GOING CONCERN ASSUMPTION
process and can serve as 7. ACCOUNTING PERIOD ASSUMPTION
REVENUE REALIZATION PRINCIPLE
Requires companies to record revenue at the time the goods are actually

sold, or the services are rendered even if no cash has been received.
 MATCHING PRINCIPLE
Requires companies to “match” (or offset) the revenues with the expenses
incurred in generating this revenue during the same period. This principle

prevents the understatement of expenses in one period and the

overstatement of expenses in another period.

 COST CONCEPT
Requires that most assets are recorded at their original acquisition cost and

no adjustment is made for increases in market value.

 BUSINESS ENTITY CONCEPT
Requires every business to be accounted for separately from the
owner. Personal and business-related transactions are kept apart from each

other. In other words, the separate personal transactions of owners and

others are not commingled with the reporting of the economic activity of the

business.
 MONETARY UNIT ASSUMPTION
Assumes that business transactions and events are measured
in money and only transactions that can be monetized (stated in a monetary

unit such as the peso) are recorded and presented in financial statements.

Simply stated, money is the common denominator or measurement used for

reporting financial information.

 GOING CONCERN ASSUMPTION
Assumes that a business will continue operating for a long time
and will not close or be sold in the foreseeable future. If a business is viewed

to be closing in the near future for some reason, there is no point in preparing

its financial statements as it will not be useful to users anymore.

 ACCOUNTING PERIOD ASSUMPTION
Assumes that business operations can be recorded and separated into different time periods such as

months, quarters, and years. This is required in order to provide timely information that is used to compare

present and past performances.

• Calendar Year – is a twelve-month period that starts on January 1 and ends on December 31.
• Fiscal Year – also a twelve-month period that starts from the first day of any month, except January, and

ends 12 months thereafter.

• Interim Period – is a business period within an accounting period. Some businesses
prepare financial reports at any date even if the 12-month period is still not due, e.g.,
monthly, quarterly, or semi-annually.
 DOUBLE ENTRY

BOOKKEEPING SYSTEM

The double-entry system is a type of accounting/bookkeeping system that

requires every transaction to be recorded in at least two places (or two accounts)
using a debit and a credit. Every transaction is recorded in a "formal" journal as a
debit entry in one account, and as a credit entry in another account.

The double entry system also has built-in checks and balances. Due to the use of
debits and credits, the double-entry system is self-balancing, i.e., the total of the
debit values recorded must equal the total of the credit values recorded
 Accounting Equation

ASSETS = LIABILITIES + OWNER'S

EQUITY (OR STOCKHOLDER'S
EQUITY)
 $
CLASSIFICATION
$
OF ACCOUNTS
1. Real or Permanent Accounts- also called Balance
Sheet accounts, they are the Assets, Liabilities, and
Equity Accounts. They are called permanent
accounts because their balances are forwarded to
the next accounting period and beyond.

2. Nominal or Temporary Accounts- also called Income

Statement accounts, they are the Revenue and
Expense Accounts. The accounts are called
$
temporary due to the fact that their balances are
closed or set to zero at the end of an accounting
period.
 $

BASIC TYPES OF FINANCIAL

STATEMENTS $
1. Assets 2. Liabilities
$
Current Assets Current Liabilities
- Cash - Accounts Payable
- Accounts Receivable - Notes Payable
- Notes Receivable - Unearned Revenue
- Prepaid Expenses - Accrued Expenses
* Supplies * Salaries Payable
* Prepaid Rent * Rent Payable
* Prepaid Insurance * Utilities Payable
Non-current (Fixed) Assets * Interest Payable
- Equipment - Buildings Long Term Liabilities
- Furniture - Land - Mortgage Payable
- Vehicles - Long-Term Notes Payable
 BASIC TYPES OF FINANCIAL

STATEMENTS

3. Owner's Equity (or Capital) 4. Expense (or Cost)

Owner's Drawing Salaries Expenses
Revenue (or Income) Rent Expenses
- Sales Supplies Expenses
- Service Income Utilities Expenses
- Professional Fees Advertising Expenses
- Rent Income Maintenance Expenses
- Interest Income Miscellaneous Expenses
CHART OF ACCOUNTS
FUNDAMENTALS OF DEBITS AND CREDITS
• Debit amounts are always added together. 1. DEBIT
• Likewise, Credit amounts are always added together. an entry (amount) recorded on the left side (column) of
• But when a debit amount and credit amount are involved, an account that increases an asset, drawing or an
they are subtracted from each expense, or an entry that decreases a liability, owner's
other. equity (capital) or revenue. It is also referred to as the
• All Accounts have a Normal Balance which is either a value received (VR) by a business.
Debit Balance or a Credit Balance.
• Since Asset, Drawing and Expense accounts increases on
2. CREDIT
its Debit side (left side), they an entry (amount) recorded on the right side (column) of
will normally have a DEBIT Balance. an account that increases a liability, owner's equity
• And since Liabilities, Owner’s Equity and Revenue (capital) or revenue, or an entry that decreases an asset,
Accounts increases on its Credit side, drawing, or an expense. It is also referred to as the value
they will normally have a CREDIT Balance. parted with (VPW) by a business.
DEFINITION OF AN ACCOUNT’S NORMAL BALANCE
1. NORMAL DEBIT BALANCE
is the amount on the left side (debit side) of an account that is larger than the amount on its right
side (credit side) or the amount that increases the LEFT side (DEBIT) of an account.

2. NORMAL CREDIT BALANCE

is the amount on the right side (credit side) of an account that is larger than the amount on its left side
(debit side) or the amount that increases the RIGHT side (CREDIT) of an account.

PREPARING A POST-CLOSING TRIAL BALANCE

the post-closing trial balance is only a listing of the balances of the real or permanent accounts (assets,
liabilities, and capital).
DEBIT AND
CREDIT

RULES
NEXT SLIDE
 RELATIONSHIP BETWEEN THE ACCOUNTING
EQUATION AND THE DEBIT & CREDIT RULES

• A debit increases the balances on the left side of the accounting equation (assets) and has the
opposite effect and decreases the balances on the right side of the equation (liabilities and
owner's equity).
• Conversely, a credit decreases the balances on the left side of the accounting equation
(assets) and has the opposite effect and increases the balances on the right side of the
accounting equation (liabilities and owner's equity).
RELATIONSHIP BETWEEN THE ACCOUNTING
EQUATION AND THE DEBIT & CREDIT RULES

*A contra account is an account which is

contrary to the expected or normal balance
of a related main account. It offsets the
normal balance of the related main account.
 RELATIONSHIP BETWEEN THE ACCOUNTING
EQUATION AND THE DEBIT & CREDIT RULES

• Asset, Drawing and Expense Accounts have all normal debit balances.
• Liabilities, Owner’s Equity and Revenue accounts have all normal credit
balances.
RELATIONSHIP BETWEEN THE ACCOUNTING
EQUATION AND THE DEBIT & CREDIT RULES
RELATIONSHIP BETWEEN THE ACCOUNTING
EQUATION AND THE DEBIT & CREDIT RULES
RELATIONSHIP BETWEEN THE ACCOUNTING
EQUATION AND THE DEBIT & CREDIT RULES
RELATIONSHIP BETWEEN THE ACCOUNTING
EQUATION AND THE DEBIT & CREDIT RULES
 ANALYZING BUSINESS TRANSACTIONS

Business transaction, also called a business deal or agreement, is

any event or condition that must be recorded in a company’s books
of account because of its effect on the financial condition of the
business.

It can also be defined as a barter or exchange of a thing of value

from another thing of value. Thus, in every transaction, if there is a
“value received” (VR) there is a corresponding “value parted with”
(VPW)
 ANALYZING BUSINESS TRANSACTIONS
When analyzing a business transaction, it would greatly help a
bookkeeper if he could determine some factors affecting the accounting
elements.

He should mentally answer the following questions:

What should be the debit entry or value received (VR)?
What should be the credit entry or value parted with (VPW)?
What appropriate account title will describe the effect of
transaction?
What accounting elements are affected (Assets, Liabilities, or OE)
and what are the effects? (Is it an increase or decrease)?
 SAMPLE ANALYSIS OF
BUSINESS TRANSACTIONS

The following accounts will be used for recording the debit and credit entries:

OWNER'S EQUITY
ASSETS LIABILITIES Owner, Equity
Cash Accounts Payable Owner, Drawing
Accounts Receivable Notes Payable Service Income
Office Supplies
Salaries Expense

Utilities Expense

 SAMPLE ANALYSIS OF
BUSINESS TRANSACTIONS
 SAMPLE ANALYSIS OF
BUSINESS TRANSACTIONS
 ACCOUNTING CYCLE

Accounting Cycle is the name given to the collective

process of recording the business transactions or
accounting events of a company. It consists of the
following processes:
 ACCOUNTING CYCLE
1. Journalizing 2. Posting to the ledger
the process of recording the process of transferring the accounts
transactions in a “book of from the journal to a “book of final entry”
original entry” called a journal. called the ledger.
a chronological listing of all the
firm's business transactions.
 ACCOUNTING CYCLE
3. Preparing a Trial Balance 4. Adjusting the Books
the process of taking account balances from the the process of reviewing the ledger
ledger and preparing a list of the debit and balances and making adjusting entries
credit balances of all accounts. to bring some accounts to their
the purpose of preparing a trial balance is simply correct balances.
to check the mathematical accuracy of the its purpose is for the financial
accounts in the ledger. statements to present more fairly the
financial position and results of
operations of a business
ACCOUNTING CYCLE

3 Steps in Adjusting the Books

a. Journalizing adjusting entries
b. Posting adjusted entries to the ledger
c. Preparing an Adjusted Trial Balance
 ACCOUNTING CYCLE

5. Preparing Financial Statements 6. Closing the Books

the process of generating the accounting reports the process of bringing the nominal or
or financial information to inform interested temporary accounts (the Revenue
users as to the performance and financial and Expense accounts) to a zero
position of the business. balance at the end of an accounting
period.
 ACCOUNTING CYCLE
3 Steps in Closing the Books
a. Journalizing the closing entries
b. Posting the closing entries to the ledger
c. Preparing a Post-closing Trial Balance
the post-closing trial balance is only a listing of the
balances of the real or permanent accounts (assets,
liabilities, and capital).
 EXAMPLES
BUSINESS
1. OFFICIAL RECEIPT
PAPERS OR A document which gives evidence to a transaction
involving receipt of cash.

SOURCE 2. INVOICE
A written itemized statement of service rendered or

DOCUMENTS goods sold to a client, which include the amount and

other particulars of the transaction, such as the name
and address of a client, the date of transaction, the
These are the basis for recording terms of the transactions, etc.
transactions in books of account. These
3. PROMISSORY NOTE (PN)
sources of information provide
A written promise made by a debtor (maker) promising
documentary proofs that a business
to pay the creditor (payee) a certain sum of money at a
transaction has occurred.
fixed or determinable future time.
 EXAMPLES
BUSINESS
4. CASH VOUCHER
PAPERS OR A document which gives evidence to a transaction
involving payment of cash.

SOURCE 5. CHECK
A document prepared whenever payment is to be made

DOCUMENTS from cash in bank.

6. BANK DEPOSIT SLIP

These are the basis for recording
A document which serves as an evidence of placing
money in the custody of a bank.
transactions in books of account. These

sources of information provide

7. STATEMENT OF ACCOUNT
documentary proofs that a business
A bill presented by a creditor requesting payment for
transaction has occurred. sales or services.
 EXAMPLES
BUSINESS
8. PAYROLL SHEET
PAPERS OR A written list of salaries to be paid to employees of a firm.

SOURCE 9. DEBIT MEMORANDUM (DM)

A written notice which informs a client of a reduction in

DOCUMENTS his account.

Ex.: bank service charges or bounced check fees.

These are the basis for recording 10. CREDIT MEMORANDUM (CM)
transactions in books of account. These A written notice which informs a client of an increase in
sources of information provide his account.
documentary proofs that a business Ex.: when a customer was overcharged, or when a
transaction has occurred. customer returned defective merchandise.
 A general journal is a two-column journal with
the following columnar headings:
1. Date – refers to the date when the
transaction occurred.
2. Particulars – refers to the debit and
credit accounts affected by the
transaction. A brief explanation of the
transaction is also recorded here.
3. Posting Reference (P/R) – refers to the

JOURNALIZING account # of the ledger to which an entry

has been posted.
Journalizing is the process of recording
4. Debit – the money column where the
transactions in a “book of original entry” called a
debit amount is recorded.
general journal. It is a chronological listing of all
5. Credit – the money column where the
the firm’s business transactions.
credit amount is recorded.
 GUIDELINES IN JOURNALIZING
TRANSACTIONS
1. A complete journal entry should include the following 6 elements:
a. Date of the transaction
b. Debit entry (account)
c. Debit amount
d. Credit entry (account)
e. Credit amount
f. A brief explanation of the transaction
When an entry has only one debit and one credit, the entry is called a
simple journal entry.
When an entry has two or more debits or credits, the entry is called a
compound journal entry.
2. The date in a general journal includes the year, month, and day when the
transaction occurred. These complete data are recorded on the first
entry of every journal page. Unless there is a new year or month on the
journal page, it is sufficient to record only the day for subsequent
entries.
 GUIDELINES IN JOURNALIZING
TRANSACTIONS
3. The debit account is recorded at the extreme left margin of the
particulars column. If there are two or more debit accounts, these are all
placed alongside the extreme left margin.

4.
The credit account is recorded with a half-inch indentation from the
extreme left margin of the particulars column to distinguish it from the
debit account. All credit accounts are similarly placed. It is important to
note that all debit accounts are recorded before the credit accounts.

5. The explanation of the transaction must be brief and concise. This

is also placed with an indentation of one inch from the extreme
left margin of the particulars column.
6. Usually, a line is left free between transaction entries.

7. When recording the peso amounts in the money columns, no

commas or period need to be used. The journal money columns
are designed with specific boxes for each amount.
 GUIDELINES IN JOURNALIZING
TRANSACTIONS
8. A peso sign may be placed before the first amount in a money
column. No other peso sign is necessary as all numbers in money
columns are presumed to be in pesos.

9. When transactions do not include centavos, the centavo column

may be left blank. Dashes (-) or ciphers (00) may also be used.
 EACH LEDGER IS DIVIDED INTO SIX
COLUMNS WITH THE FOLLOWING
COLUMN TITLES:
a. Date – date of transaction as
recorded in the journal.
POSTING TO b. Remarks – brief explanation of the
transaction (optional for our
THE LEDGER purposes, except when
there is a beginning balance, then a
Posting to the ledger is the process of “Balance” remark should be written).
transferring the account balances from c. Posting Reference (P/R) –
the journal to a “book of final entry” indicating the journal page in which
called the ledger. the transaction was first
The ledger or general ledger consists of all recorded.
the individual accounts maintained by a d. Debit – amount of the debit entry.
company. Each ledger account is identified e. Credit – amount of the credit entry.
by an account name and an account number f. Balance – a running balance of the
which are written on top of each ledger. transaction.
SAMPLE LEDGER
TEMPLATE
 GUIDELINES IN POSTING TO THE
LEDGER
Posting may be done daily, weekly, or even monthly depending on the needs of a
business. The procedures to follow in posting to the ledger are:

1.
Locate the ledger account where the first debit in the journal is to be
posted.
Transfer to the pertinent columns in the ledger information on date,
2.
explanation (optional), and debit amount.
In the posting reference column of the ledger, write down the page
3.
number of the journal from which the debit entry is being posted.*

4.
In the posting reference column of the journal, write down the account
number of the ledger to which the debit entry has been posted.*
5. Post the running balance of each transaction.

Follow the same procedures for the next entry to be posted. If the next
6. entry is a credit, apply the same procedures but post the amount on the
credit side of the account.
ILLUSTRATION FOR POSTING TO
THE LEDGER
* The process of entering the journal
page on the ledger and the ledger
account on the journal is called “cross-
referencing”, to enable anyone to
trace an entry from the journal to the
ledger and vice-versa.
 PREPARING THE
TRIAL BALANCE
Preparing the trial balance is the process of taking account balances from the
ledger and preparing a list of the debit and credit balances of all accounts.

The purpose of preparing a trial balance is To verify if the total debits and the total
simply to check the mathematical accuracy of credits of the ledger accounts are equal;
the amounts in the ledger.
and

Trial Balance is a statement that shows the

To provide the necessary information
balances of all the ledger accounts presented
in their debit and credit balances which are required for the preparation of the
then totaled. The trial balance has two main financial statements.
functions:
THE PROCEDURES IN PREPARING A TRIAL BALANCE:

1. 2. 3.
Place the heading at Copy the accounts from the general Rule the bottom of the
the top center of the ledger in the order in which they money columns, add the
report. The heading appear (or alternatively, in the order in balances in each column and
should include the which they appear from the chart of “pencil foot”* the totals. If
name of the company, accounts), writing the account number, the debit and credit totals
the name of the account title and the account balances are equal, write down the
statement, and the in the appropriate debit and credit final totals in ink and
date of the statement. money columns. double-rule them.
SAMPLE
ILLUSTRATION
OF A TRIAL
BALANCE
As per the trial balance prepared for
NSBHandicraft as of March 31st, 2019, we can see
that the total of the Debit side is the same as the
total of the credit side in the trial balance
ADJUSTING

THE BOOKS
NEXT SLIDE
 ADJUSTING

THE BOOKS Recording adjusting

entries in the journal.

customer .

It is an accounting process made at the end of an

accounting period that involves adjusting and
Posting the adjusted

updating certain accounts to their correct

entries to the ledger.
balances. These are entries made at the end of an
accounting period to adjust and update certain
accounts to their correct balances.
Preparing an adjusted trial

It involves three steps: balance.

 They are non-cash
They will always

They are internal

transactions - the
involve at least

transactions - no

Cash account will

one income

new source

never be used in an
statement

document exists for

adjusting account and one

the adjustment.
entry. balance sheet
account.

CHARACTERISTICS OF

ADJUSTING ENTRIES
COMMON ADJUSTING

ENTRIES
Bad Debts/ Doubtful

Depreciation Prepaid Expenses

Accounts

Accrued Unearned Accrued

Expenses Revenues Revenues

 DEPRECIATION
It's usually calculated using the straight-
line method to determine the asset's
accumulated depreciation and net
carrying value at the end of accounting
period.

Depreciation is the allocation of the cost When using the straight-line method for
calculation, 3 factors are considered:
of property over its period of use. It is the
decrease in value of a fixed asset, such The cost of the property
The salvage value
as property, plant, and equipment over The estimated useful life of the
its useful life. property

Salvage value- estimated resale value of as asset at the end

of its useful life.
DEPRECIATION
Example Transaction:
On January 1, 2012, Company A bought
an equipment for P160, 000. The Depreciation is recognized at the end of
equipment is estimated to have a useful the accounting period by recording a
journal entry with a debit to Depreciation
life of 10 years and a salvage value of Expense and a credit to Accumulated
P40, 000. What is the accumulated Depreciation.

depreciation at the end of December Accumulated Depreciation is a contra-

2012? asset account that is deducted to an
asset
 DEPRECIATION Accumulated Depreciation is a contra-
asset account that is deducted to an
asset's cost value to determine its
Depreciation is recognized at the end of carrying value.
the accounting period by recording a
Fractional Depreciation-refers to a
journal entry with a debit to Depreciation proportionate amount of depreciation
Expense and a credit to Accumulated for less than one year.
Depreciation.
 Allowance for Doubtful Account is a

BAD DEBTS/DOUBTFUL
contra-asset account to the Accounts
Receivable Account and is therefore

ACCOUNTS always credited in the journal book. The

difference between Accounts Receivable
and the Allowance for Bad Debts
It is an estimate of the percentage of accounts is the Net Realizable Value of
the Accounts Receivable.
accounts receivable that are expected to
be uncollectible from the credits a The amount of bad debts is usually
estimated on the basis of the following:
company gave to its customers. Company's own experience based on
historical uncollected receivables;
Experience of similar companies
Bad Debts Expense is an Income Management decision
Statement account (an expense) and is
debited in the journal book.
BAD DEBTS/DOUBTFUL

ACCOUNTS
Example Transaction:
Suppose Company Y has an account
receivable of P 500, 000 at the end of
March, and it was determined that 5% of
these receivables may not be collected,
i.e., 500,000 x 5%=25,000. The adjusting
entry at the end of the year is:
 PREPAID

EXPENSES Some common examples:

Supplies-Unused supplies at the end
of an accounting period.
They are also called 'deferred expenses'. Prepaid Rent-Advance payment paid
in cash to the lessor for building or
These expenses are already paid in cash office space.
during the period, but not yet incurred or Prepaid Insurance-Insurance
premium paid at the beginning or
spent at the end of an accounting period. during an accounting period.
Prepaid expenses are asset accounts as
they are amounts owned by a company
that has economic value.
 PREPAID

EXPENSES
At the end of January, an inventory showed
Example 1:
that P300 worth od supplies is still unused.
On January 3, Company A bought supplies
The supplies that were consumed will be
costing 1, 200. analyzed as follows:
Original Journal Entry:
Supplies bought 1200
Less: Actual supplies on hand 300
Supplies consumed 900
 On January 31, one-month rent has

PREPAID
been consumed, so the Rent Expense
for the month should be:

EXPENSES
Example 2:
Adjusting Entry:
On January 2, Company B paid P30,000 as
advane payment for 6 months rent of office
space from Spcaious Realty.

Original Journal Entry:

 ACCRUED

EXPENSES Some common examples:

Employees' salaries for the current
month, but still unpaid as of the end
Accrued expenses are expenses already of that month.
Utility expenses for the current month
incurred, but not yet paid as of the end of but are still to be paid the following
the reporting period. Accrued expenses month.
Loan interest incurred for the
(which are liability accounts) are accounting period but will not be paid
recorded as adjusting entries at the end in the current accounting period.

of accounting period by debiting an

expense account and crediting a liability
account.
 ACCRUED

EXPENSES
Example 1:
Assuming that salaries worth P15,000 due to the employees were not
paid at the end of March, an adjusting entry should be made as follows:
 ACCRUED

EXPENSES
Example 1:
On January 3, Company A made a bank loan of P100,000 from National Piggy Bank covered by a note
payable that carries an annual interest rate of 12%. The agreement with the bank is that the principal
amount plus interest will be paid in 6 months. If the company prepares financial statements on a
monthly basis, at the end of each month the accrued monthly interest should be recorded. To calculate:
 UNEARNED

REVENUES Some common examples:

Advance payment of cash by clients
for services yet to be rendered.
Also known as 'deferred revenues', Advance rental payments for the next
accounting period, but already
'deferred income', 'unearned income'. received in cash during the period.
They are pre-payments or advanced
payments for future services to be
rendered or products that has yet to be
delivered. It is a liability account.
 UNEARNED

REVENUES
At the end of January, Company A has
already provided P3,000 worth of services.

Example 1:
On January 10, Company A received
P5,000 cash in advance for services yet
to be provided.
 ACCRUED

REVENUES
They are also called 'accrued income', are revenues already
earned during the accounting period but have not yet been
billed to the customer as at the end of an accounting period.
ACCRUED

REVENUES
CREDIT TERMS
The terms which indicate when payment is due for purchases or sales made on

account or on credit. Example of a credit term is:

2/10, N/30
Which means, a 2% discount will be given to the buyer if the full amount is

paid within 10 days, otherwise the net amount is due in 30 days.

NOTE:
For purchases of fixed assets with credit terms, if the full amount is paid

within the discount period, the discounted amount is credited to the

particular fixed assets

EXAMPLE
 $
PREPARING FINANCIAL
$
STATEMENTS
financial Statements are accounting, or financial reports

prepared periodically to inform the owner, creditors, and

other interested parties as to the financial condition and

operating results of the business. Financial statements

provide the users and other interested parties with

useful information that may affect the decisions they

are confronted with.

$
 $
BASIC TYPES OF FINANCIAL STATEMENTS
Income Statement

It is the financial statement that summarizes revenues and expenses for

a specific period of time, usually a month, a quarter, or a year. It is also

called Statement of Profit and Loss because it shows the profit or loss

$ $
of a business at the end of an accounting period.

2 Formats of Income Statement:

Single-Step Form- a form of income statement usually prepared for a

service business.
Multiple-Step Form- a form of income statement usually prepared for

a merchandising business or a corporation.

 MAJOR SECTIONS OF A SINGLE-STEP

INCOME STATEMENT
1. Heading- contains the name of company, title of statement, and the period covered by the

statement.
2. Revenue section- contains the type of revenue accounts earned by the business.
3. Expense section- contains the type of expense accounts incurred by the business.
4. Net Income/Net Loss section- contains the final calculation of a profit or loss or the

difference between the total revenue and the total expense. If the total revenue exceeds

the total expense, a net income or net profit is reported. However, if the total expense

exceeds the total revenue, it is reported as a net loss.

 GUIDELINES USED IN PREPARING AN

INCOME STATEMENT
1. Place the heading at the center of the statement.
2. Arrange the accounts according to the magnitude (big amounts first) or according to the
relative importance of the information to the user.
3. Place all miscellaneous accounts, whether income or expense accounts, as the last account in

every section.
4. Put a peso sign on the first amount in every money column and after every ruling.
5. Single rule after every arithmetic operation. Double-rule the final net income or loss.
 SAMPLE FORMAT OF AN INCOME

STATEMENT (SINGLE STEP FORMAT)

 $
BASIC TYPES OF FINANCIAL STATEMENTS
Capital Statement

It is the financial statement that summarizes all the changes in owner's

equity that occured during a specific period, usually a month or a year.

Also called Statement of Owner's Equity.

$ $
The capital statement serves as the bridge between the income

statement and balance sheet. It uses the net income/loss from the income

statement in addition to the owner's drawing as derived from the ledger

to determine the Owner's Capital balance.

 MAJOR COMPONENTS OF A CAPITAL

STATEMENT
1. Heading- contains the name of company, title of statement, and the period covered by the

statement.
2. Owner's Beginning Capital- contains the capital balance at the beginning of the period.
3. Expense section- contains the type of expense accounts incurred by the business.
4. Net Income/Net Loss- contains the final calculation of a profit or loss as derived from the

Income Statement.
5. Drawings-contains the owner's total drawings as derived from the trial balance.
6. Capital Balance-contains the final calculation of the capital balance at the end of the

period.
SAMPLE FORMAT OF A CAPITAL

STATEMENT
 $
BASIC TYPES OF FINANCIAL STATEMENTS
Balance Sheet

$
It is the financial statement which shows the amount and nature of a business'

assets, liabilities, and owner's equity (capital) as of a specific point in time.

This is also called the Statement of Financial Position, as it shows the current

$
financial position or condition of a business as of a specific point in time. This is

also the statement that represents the accounting equation:

Assets=Liabilities + Owner's Equity
Key Elements:
Asset- properties used in the operation or investment activities of a business
Liabilities- claims by the creditors to the assets of a business until they are

paid.
Owner's Equity (Capital)- the owner's rights/claims to the assets of the

business
MAJOR COMPONENTS OF A BALANCE SHEET
1. Heading- contains the name of company, title of statement, and the period covered by the

statement.
2. Assets Section- contains current assets and non-current assets.
a. Current Assets- cash and other properties normally expected to be converted to cash

or used up usually within a year. The current assets are presented in the order of

liquidity or based on how quickly they can be converted into cash.

b. Non-current Assets (Fixed Assets)- assets or properties that are more or less

permanent in nature and are intended for use in business operations.

3. Liabilities & Owner's Equity section- contains the current and long-term liabilities and the

owner’s ending capital.

MAJOR COMPONENTS OF A BALANCE SHEET
3. Liabilities & Owner's Equity section- contains the current and long-term liabilities and the

owner’s ending capital.

a. Current Liabilities- debts or obligations of the business that are expected to be paid

within one year of using current resources.

b. Owner's Ending Capital-the total investment of the owner as taken from the capital

statement.
 BALANCE SHEET FORMATS
Account Form- is like a T-account listing Assets on the left side (debit side) and Liabilities

and Equity on the right side (credit side).

Report Form- list Assets followed by Liabilities and Equity in vertical format.
 GUIDELINES USED IN PREPARING AN

BALANCE SHEET IN REPORT FORM

1. Place the heading at the center of the statement.
2. Place major categories of the balance sheet (in bold letters, if possible) at the center of the

statement.
3. Place sub-categories (e.g., current assets, fixed assets, etc.) at the left margin.
4. All other accounts comprising each category are indented away from the left margin.
5. Place peso amounts of major classifications on the outer right money column. Individual

amounts are placed in in inner money columns.

6. Place a peso sign on the first amount in each column and after every ruling.
 GUIDELINES USED IN PREPARING AN

BALANCE SHEET IN REPORT FORM

7. Single rule every operation of addition, then pencil-foot the Assets total and the Liabilities

&Owner’s Equity total.

8. If both totals are balanced or equal, double rule the final totals.
SAMPLE FORMAT OF A BALANCE SHEET

(REPORT FORM)
 $
BASIC TYPES OF FINANCIAL STATEMENTS
Statement of Cash Flows or Cash Flow Statement

It is the financial statement which shows the movement of money in and out of

the business. It presents cash inflows (receipts) and outflows (payments) in

$ $
the 3 activities of business: operating, investing, and financing.
Operating activities evaluates cash movements from the main operations

of the company such as rendering of professional services, sales of good,

collection of accounts, purchases of merchandise and supplies, payment of

accounts to suppliers, and others. Generally, operating activities refer to

those that involve current assets and current liabilities.

 $
BASIC TYPES OF FINANCIAL STATEMENTS
Statement of Cash Flows or Cash Flow Statement

Investing activities reports movement of cash from purchases and sales

of fixed assets such as property, plant, and equipment. Selling these

$ $
assets is also considered investing activities. In general, investing

activities include transaction that involve non-current assets. This

section may also be summed up as: "where the company puts its money for

long-term purposes".
 $
BASIC TYPES OF FINANCIAL STATEMENTS
Statement of Cash Flows or Cash Flow Statement

Financing activities refer to cash flow trends of all money related to

financing the business, such as investment of the owner/s, and cash

$ $
proceeds from bank loan, owner’s drawing, payment of loans and other

long-term payables. Generally, financing activities include those that

affect non-current liabilities and capital. This section may also be summed

up as: "where the company gets its funds".

 $
BASIC TYPES OF FINANCIAL STATEMENTS
Statement of Cash Flows or Cash Flow Statement

To sum that up: Generally, operating activities refer to transactions

that affect current assets and current liabilities; investing activities to

$ $
non-current assets; and financing activities to long-term liabilities and

capital.
All inflows are presented in positive figures while all outflows in negative

(or enclosed in parentheses).

After all inflows and outflows are presented, the net increase or

decrease in cash is computed. Then it is added to the beginning balance of

cash to get the balance at the end. In simple sense, this report presents

the cash balance before, the changes to the balance, and the resulting

balance thereafter.
 $
BASIC TYPES OF FINANCIAL STATEMENTS
Statement of Cash Flows or Cash Flow Statement

To verify that the resulting cash balance at the end is correct, it should

be the same amount as the cash balance presented in the company's

$ $
Balance Sheet.
SAMPLE FORMAT OF STATEMENT OF

CASH FLOWS
BASIC TYPES OF

FINANCIAL

STATEMENTS

INCOME STATEMENT The major components of capital statement are

the:
financial statement that summarizes revenues
and expenses for a specific period of time, • Heading – contains the name of company, title
usually a month, a quarter, or a year. It is also of statement, and the period covered by the
called Statement of Profit and Loss because it statement.
shows the profit or loss of a business at the • Owner's Beginning Capital – contains the capital
end of an accounting period. balance at the beginning of the period.
• Net Income/Net Loss – contains the final
There are 2 formats of Income Statement: calculation of profit or loss as derived from the
• Single-Step Form – a form of income income statement.
statement usually prepared for a service • Drawings – contains the owner’s total drawings
business. as derived from the trial balance.
• Multiple-Step Form – a form of income • Capital Balance – contains the final calculation
statement usually prepared for a of the capital balance at the end of the period.
merchandising business or a corporation.
SAMPLE FORMAT OF AN
INCOME STATEMENT
(SINGLE STEP FORMAT)
BASIC TYPES OF

FINANCIAL

STATEMENTS

CAPITAL STATEMENT The major components of capital statement are

the:
is the financial statement that summarizes all
the changes in owner's equity that occurred • Heading – contains the name of company, title
during a specific period, usually a month or a of statement, and the period covered by the
year. Also called Statement of Owner’s Equity. statement.
• Owner's Beginning Capital – contains the capital
The capital statement serves as the bridge balance at the beginning of the period.
between the income statement and balance • Net Income/Net Loss – contains the final
sheet. It uses the net income/loss from the calculation of profit or loss as derived from the
income statement in addition to the owner's income statement.
drawings as derived from the • Drawings – contains the owner’s total drawings
ledger to determine the Owner's Capital as derived from the trial balance.
balance. • Capital Balance – contains the final calculation
of the capital balance at the end of the period.
SAMPLE FORMAT OF A

CAPITAL STATEMENT
 The key elements of a balance sheet are:
BASIC TYPES OF

FINANCIAL
Assets – properties used in the operation or investment activities of
STATEMENTS a business.
Liabilities – claims by creditors to the assets of a business until they
are paid.
Owner’s Equity (Capital) – the owner's rights or claims to the assets
BALANCE SHEET of the business The major components of a balance sheet are the:
Heading – contains the name of company, title of statement, date
is the financial statement which shows the amount of statement.
and nature of a business’ assets, liabilities, and Assets section – contains current assets and non-current assets.
owner's equity (capital) as of a specific point in - Current Assets – are cash and other properties normally
time. This is also called the Statement of Financial expected to be converted to cash or used up usually within a year.
The current assets are based on how quickly they can be converted
Position, as it shows the current financial position
into cash.
or condition of a business as of a specific point in - Non-current Assets (Fixed Assets) – are assets or properties that
time (i.e., end of an accounting period). This is also are more or less permanent in nature and are intended for use in
the statement that represents the accounting business operations.
Liabilities & Owner’s Equity section – contains the current and
equation.
long-term liabilities and the owner’s ending capital.
Assets = Liabilities + Owner’s Equity - Current Liabilities – debts or obligations of the business that are
The key elements of a balance sheet are: expected to be paid within one year using current resources.
• Assets – properties used in the operation or - Owner’s Ending Capital – the total investment of the owner as
taken f rom the capital statement. A b balance sheet has two formats:
investment activities of a business.
Account Form and Report Form.
• Liabilities – claims by creditors to the assets of a Account Form – is like a T-account listing Assets on the left side
business until they are paid. (debit side) and Liabilities and Equity on the right side (credit side).
• Owner’s Equity (Capital) – the owner's rights or Report Form – list Assets followed by Liabilities and Equity in
vertical format.
claims to the assets of the business
SAMPLE FORMAT OF A

CAPITAL STATEMENT
 The key elements of a balance sheet are:
BASIC TYPES OF

FINANCIAL
Assets – properties used in the operation or investment activities of
STATEMENTS a business.
Liabilities – claims by creditors to the assets of a business until they
are paid.
Owner’s Equity (Capital) – the owner's rights or claims to the assets
BALANCE SHEET of the business The major components of a balance sheet are the:
Heading – contains the name of company, title of statement, date
is the financial statement which shows the amount of statement.
and nature of a business’ assets, liabilities, and Assets section – contains current assets and non-current assets.
owner's equity (capital) as of a specific point in - Current Assets – are cash and other properties normally
time. This is also called the Statement of Financial expected to be converted to cash or used up usually within a year.
The current assets are based on how quickly they can be converted
Position, as it shows the current financial position
into cash.
or condition of a business as of a specific point in - Non-current Assets (Fixed Assets) – are assets or properties that
time (i.e., end of an accounting period). This is also are more or less permanent in nature and are intended for use in
the statement that represents the accounting business operations.
Liabilities & Owner’s Equity section – contains the current and
equation.
long-term liabilities and the owner’s ending capital.
Assets = Liabilities + Owner’s Equity - Current Liabilities – debts or obligations of the business that are
The key elements of a balance sheet are: expected to be paid within one year using current resources.
• Assets – properties used in the operation or - Owner’s Ending Capital – the total investment of the owner as
taken f rom the capital statement. A b balance sheet has two formats:
investment activities of a business.
Account Form and Report Form.
• Liabilities – claims by creditors to the assets of a Account Form – is like a T-account listing Assets on the left side
business until they are paid. (debit side) and Liabilities and Equity on the right side (credit side).
• Owner’s Equity (Capital) – the owner's rights or Report Form – list Assets followed by Liabilities and Equity in
vertical format.
claims to the assets of the business
ADDITIONAL ACCOUNTS FOR MERCHANDISING BUSINESS
1. MERCHANDISE INVENTORY
2. SALES INVENTORY
3. SALES RETURNS AND ALLOWANCES
4. SALES DISCOUNTS
5. PURCHASES
6. PURCHASE RETURNS AND ALLOWANCES
7. PURCHASE DISCOUNTS
8. FREIGHT-IN
9. COST OF GOODS SOLD (COGS)
10. FREIGHT-OUT
 OWNERSHIP OF GOODS IN TRANSIT

1. FOB, Shipping Point - means the ownership of the goods is transferred to the buyer upon
shipment. In short, the buyer pays the transportation or freight cost because the buyer
practically owns the goods while in transit.
2. FOB, Destination – means the ownership of the goods is transferred to the buyer only
upon reaching the buyer’s place or destination. In short, the seller pays the transportation
or freight cost because the seller still owns the goods while in transit.
*FOB = Freight on Board or Free on Board
INVENTORY ACCOUNTING SYSTEMS
1. Periodic Inventory System
in this system, a physical or manual count of the inventory on hand is done at the
end of an accounting period (hence the term “periodic”) to determine the cost of
goods sold for the period. In this system:
When goods are bought, Purchases account is debited and Cash or Accounts
Payable is credited.
When goods are sold, Cash or Accounts Receivable is debited, and Sales is
credited.
INVENTORY ACCOUNTING SYSTEMS
2. Perpetual Inventory System
In this system, a company maintains a continuous record of the physical
quantities (or costs) of inventory on hand. In this system:
When goods are bought, Merchandise Inventory is debited and Cash or
Accounts Payable is credited.
When goods are sold, two journal entries are required:
Cash or Accounts Receivable is debited, and Sales is credited.
Cost of Goods Sold is debited and Merchandise Inventory is credited.
 COST OF GOODS SOLD (COGS)
Cost of goods sold, or COGS, is the total cost of merchandise sold during the
accounting period.
Cost of Goods Sold is reported on the income statement and is considered as an
expense for the accounting period. By matching the cost of the goods sold with the
revenues from the goods sold, the matching principle of accounting is achieved.
When using the Periodic Inventory System in recording business transactions, the
Cost of Goods Sold is calculated after preparing the trial balance and before
preparing the Income Statement.
In Perpetual Inventory System, Cost of Goods Sold is not calculated as it has its
own ledger account.
The formula for calculating Cost of Goods sold is:
COGS = Beginning Inventory + Net Purchases – Ending Inventory
 COST OF GOODS SOLD (COGS)

Sample Format for Reporting Cost of Goods Sold

COST OF GOODS SOLD (COGS)
COMPARATIVE
JOURNAL
ENTRIES
CLOSING

THE
BOOKS
NEXT SLIDE
 To close an account, you
CLOSING THE make a journal entry for

BOOKS
the exact opposite of that
account's balance.

The process of journalizing and

Income Summary account
posting the Closing Entries, which
means bringing all income and acts as a temporary
expense accounts. This is done by holding area, to give a spot
transferring their balances to a to park the balances you
temporary, single-use account called intend to close while you
the Income Summary. sum them up.
Illustration of Closing Entries
 PREPARING THE POST-

CLOSING TRIAL BALANCE

The Post-closing Trial Balance is a trial balance prepared after

the nominal or temporary accounts (revenue and expense
accounts) have been closed. It is only a listing of the balances
of the real or permanent accounts (assets, liabilities, and
owner’s capital account). A post-closing trial balance is
prepared to prove that the general ledger is in balance before
you begin the next accounting period.
POST-CLOSING TRIAL

$
$
BALANCE
The procedure in preparing the post-closing trial

balance is the same as with other balances

(Unadjusted and Adjusted Trial Balances) but

tiwthout the nominal accounts:

Place the heading at the top center of the report. The heading
1.
should include the name of the company, the name of the
statement, and the date of the statement.

List down only the permanent accounts in the order in which they
2.
appear in the general ledger, writing down the account number,
account title, and the account balance in the appropriate debit and
credit money columns.

Rule the bottom of the money columns, add the balances in each

$
3.
column, and "pencil foot" the totals. If the debit and credit totals are
equal, write down the final totals in ink and double rule them to

indicate that the statement is current and complete.

Sample Illustration of a Post-closing Trial Balance
Sample Closing Journal Entries