Accounting MSMEs (Micro, Small and Medium Enterprises) Fundamental Concepts

- is a service activity Micro Entity Concept - separate entities

- is an information system that measures, processes - enterprises with assets of ₱3.0 million or less
and communicates financial information about an - employ not more than 9 workers Periodicity Concept - divided into periods
economic entity Going Concern – a business will continue to
- is the process of identifying, measuring and Small
operate indefinitely in the future
communicating economic information to permit - enterprises with assets of above ₱3.0 million to
informed judgments and decisions by users of the ₱15 million Stable Monetary Unit Concept – single
information - employ 10 – 99 workers monetary unit
- is the art of recording, classifying and
Medium
summarizing in a significant manner and in terms - enterprises with assets of above ₱15 million to
of money, transactions and events which are, in ₱100 million Basic Principles
part at least of a financial character and
- employ 100-199 workers
interpreting the results thereof Objectivity Principle – reliable/verifiable
information
Forms of Business Organizations
Activities in Business Organizations
Historical Cost – actual cost
Sole Proprietorship
Revenue Recognition Principle – revenue is
- has a single owner called the proprietor recognized once goods are delivered and services are
- owner receives all profits and absorbs all losses performed
- solely liable for the business
Financing Activities Expense Recognition Principle – expense is
Partnership recorded once incurred
- are methods to obtain financial resources from
- owned and operated by two or more persons financial markets and how it is managed Adequate Disclosure – relevant information;
- owners divide profit transparency
- each partner is personally liable Investing Activities
Materiality – records information that is significant
Corporation - involve the selection and management including to the business
disposal and replacement of long-term resources
- owned by stockholders Consistency Principle – consistent methods of
- artificial being created by operation of law Operating Activities accounting over periods of time
- stockholders are nor personally liabl
- involve the use of resources to design, produce,
-
distribute, and market goods and services.
Account – basic summary device of accounting FOUR TYPES OF TRANSACTIONS NINE TYPES OF EFFECTS

T- account 1. Source of Assets (SA) 1. Increase in Assets = Increase in Liabilities

SA
Account Title - An asset account increases and a corresponding 2. Increase in Assets = Increase in Owner’s Equity
liabilities or owner’s equity increases.
Debit Credit EA 3. Increase in one Asset = Decrease in another Asset
↑ Assets
↑ Liabilities/Owner’s Equity
Accounting Equation 4. Decrease in Assets = Decrease in Liabilities
UA
2. Exchange of Assets (EA) 5. Decrease in Assets = Decrease in Owner’s Equity
- most basic tool of accounting - One asset account increases, and another asset
account decreases 6. Increase in Liabilities = Decrease in Owner’s Equity
Assets = Liabilities + Owner’s Equity 7. Increase in Owner’s Equity = Decrease in Liabilities
↑ Assets EC 8. Increase in one Liability = Decrease in another
↓ Assets Liability
Double-Entry System 9. Increase in one Owner’s Equity = Decrease in
3. Use of Assets (UA) another Owner’s Equity
- a debit side entry must have a corresponding
- An asset account decreases and a corresponding
credit side entry
claims (liabilities or equity) account decreases
Normal Balance Operating Cycle
↓ Assets
- refers to the side of the account (debit or credit) ↓ Liabilities/Owner’s Equity - Is the time between the acquisition of assets for
where increases are recorded processing and their realization in cash or cash
equivalents
Accounting event 4. Exchange of Claims (EC)
- One claims account (liabilities or owner’s equity)
- an economic occurrence that causes changes in an increases and another claims account decreases
enterprise’s assets, liabilities, and/or equity
↑ Liabilities/ Owner’s Equity
Transactions ↓ Liabilities/ Owner’s Equity

- involves the transfer of something of value

between two entities.
ASSETS INCOME

Current Assets - Service Income ACCOUNTING CYCLE

- Sales
- Cash
- Cash equivalents EXPENSES
Step 1. Identification of Events to be Recorded
- Notes receivables
- Cost of Sales Step 2. Transactions are Recorded in the Journal
- Accounts receivables
- Salaries or Wages Expense
- Inventories Step 3. Journal Entries are Posted to the Ledger
- Telecommunications, Electricity, Fuel and Water
- Prepaid Expenses
Expenses Step 4. Preparation of Trial Balance
Non-current Assets - Rent Expense
Step 5. Preparation of the Worksheet including Adjusting
- Supplies Expense Entries
- Property, Plant and Equipment (PPE)
- Insurance Expense
- Accumulated Depreciation Step 6. Preparation of the Financial Statements
- Depreciation Expense
- Intangible Assets
- Uncollectible Account Expense Step 7. Adjusting Journal Entries are Journalized and Posted
LIABILITIES - Interest Expense
Step 8. Closing Journal Entries are Journalized and Posted
Current Liabilities Step 9. Preparation of a Post-Closing Trial Balance
Business Transaction
- Accounts Payable Step 10. Reversing Journal Entries are Journalized and
- Posted
- Notes Payable Is the occurrence of an event of a condition that
- Accrued Liabilities affects financial position and can be reliably
- Unearned Revenues recorded.
ACCOUNTING CYCLE
- Current Portion of Long-Term Debt
Financial Transaction Worksheet STEP 1.
Non-current Liabilities
- A form used to analyze increases and decreases in Identification of Events to be Recorded
- Mortgage payable the assets, liabilities or owner’s equity of a
- Bonds Payable business entity. Source Documents

OWNER’S EQUITY - Identify and describe transactions and events

entering the accounting process
- Capital
- Withdrawals
- Income Summary
 STEP 2. DEFERRALS
▪ Temporary/Nominal Accounts - Amount already recorded
Transactions are Recorded in the Journal
- income statement accounts - Decreases a balance sheet account and increases
JOURNAL an income statement account
- income and expenses
Prepaid Expenses (Prepayments)
- The Book of Original Entry CHART OF ACCOUNTS
- A chronological record of the entity’s transactions - expenses paid in advance but not ye incurred
- a listing of all the accounts and their account
GENERAL JOURNAL numbers in the ledger Unearned Revenues (Pre-collections)

- Simplest journal POSTING - income collected in advance but not yet

earned
▪ Simple Entry - only 2 accounts are affected - means transferring the amounts from the journal
▪ Compound Entry - 3 or more accounts are to the appropriate accounts in the ledger Account Debited Account
Credited
required
Prepaid Expense
JOURNALIZING Asset Method Expense Asset
STEP 4. Expense Method Asset Expense
- The process of recording a transaction Preparation of Trial Balance Unearned Revenue
Liability Method Liability Income
- TRIAL BALANCE Income Method Income Liability
STEP 3. - is a list of all accounts with their respective debit
and credit balances. ACCRUALS
Journal Entries are Posted to the Ledger

LEDGER ERRORS - amount unrecorded

- increases both a balance sheet and an income
- The Book of Final Entry ▪ Transposition - reversing the order of numbers statement account
▪ Slide - moving of the decimal point.
- A grouping of entity’s accounts Accrued Expenses
▪
GENERAL LEDGER - expenses incurred but not yet paid
STEP 5.
- reference book Accrued Revenues
Preparation of the Worksheet including Adjusting
- is used to classify and summarize transaction, and Entries - revenues earned but not yet received
to prepare data for basic financial statements.
ADJUSTING ENTRIES Account Debited Account
▪ Permanent Accounts Credited
Each adjusting entry affects a balance sheet account and Accruals
- balance sheet accounts income statement account Accrued Expense Expense Liability
- assets, liabilities, owner’s equity Accrued Asset Income
Revenues
 Depreciation Expense (Dr)
Accumulated Depreciation (Cr)
LIQUIDITY
- Refers to the availability of cash in the near future
UNCOLLECTIBLE ACCOUNTS (Doubtful Accounts) WORKSHEET after taking account of the financial commitments
- A summary device used to summarize the data for over this period.
- an account receivable that might become a bad financial statements.
debt at some point in the future. - FINANCIAL FLEXIBILITY
- Is the ability to take effective actions to alter the
Dec 31 Doubtful Accounts Expense xx STEP 6. amounts and timings of cash flows so that it can
Allowance for Doubtful Accounts xx respond to unexpected needs and opportunities.
Preparation of the Financial Statements
SOLVENCY
Doubtful Accounts Expense (Dr) FINANCIAL STATEMENTS - The availability of cash over the longer term to
Allowance for Doubtful Accounts (Cr) - Are the means by which the information meet financial commitments as they fall due.
accumulated and processed in financial
REPORT FORMAT
DEPRECIATION accounting is periodically communicated to the
- Lists the assets, followed by the liabilities then the
users.
owner’s equity in vertical sequence
- the allocation of the cost over its estimated useful
life. ACCOUNT FORMAT
COMPLETE SET OF FINANCIAL STATEMENTS
Cost – Salvage Value - A statement of financial position at the end of the - Lists the assets on the left and the liabilities and
𝑑𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = period owner’s equity on the right.
useful life
- A statement of financial performance for the
Cost Assets are listed based on liquidity. Liabilities are listed based
period on time of maturity.
- is the amount an entity paid to acquire the - A statement of changes in equity for the period
depreciable asset - A statement of cash flows for the period
- Notes, comprising a summary of significant
Salvage Value accounting policies and other explanatory STATEMENT OF FINANCIAL PERFORMANCE
information (Income Statement)
- is the amount that the asset can probably be sold - A statement of financial position at the beginning - Presents a summary of the revenues and expenses
for at the end of its estimated useful life. of the earliest comparative period when an entity of an entity for a specific period

Useful Life reclassifies items in financial statements.

▪ Single statement of comprehensive income
▪ Two statements: a statement displaying
- is the estimated number of periods that an entity
STATEMENT OF FINANCIAL POSITION components of profit or loss and a second
- can make use of the asset
(Balance Sheet) statement beginning with profit or loss and
- Lists all assets, liabilities of an entity at a specific displaying components of other comprehensive
Dec 31 Depreciation Expense xx date. income.
Accumulated Depreciation xx
 The balance of the owner’s capital account represents the All accruals are reversed but only deferrals initially
cumulative net result of income, expense, and withdrawal recorded in income statement accounts (income or
STATEMENT OF CHANGES IN EQUITY transactions. expense) are reversed.
- Presents a summary of the changes in capital such
as investments, profit/loss, and withdrawals 1. Close the income accounts
during a specific period. Income (Dr), Income Summary (Cr)

2. Close the expense accounts

STATEMENT OF CASH FLOWS Income Summary (Dr), Expenses (Cr)
- Reports the amount of cash received and
disbursed during the period. 3. Close the income summary accounts
- If there is profit,
Income Summary (Dr), Capital (Cr)
ACCOUNTING POLICIES - If there is loss,
Capital (Dr), Income Summary (Cr)
- Are the specific principles, bases, conventions,
rules and practices adopted by an enterprise in 4. Close the withdrawal account
preparing and presenting financial statements. Capital (Dr), Withdrawals (Cr)

NOTES TO FINANCIAL STATEMENTS STEP 9.

- Provide narrative description or disaggregation of Preparation of a Post-Closing Trial Balance

items presented in the statements and
POST-CLOSING TRIAL BALANCE
information about items that do not qualify for
recognition in the statements. - Tests the equality of the accounts
- Only contains accounts with nonzero balances
STEP 7.

Adjusting Journal Entries are Journalized and Posted STEP 10.

Reversing Journal Entries are Journalized and Posted

STEP 8. REVERSING ENTRIES
Closing Journal Entries are Journalized and Posted
- Is a journal entry which is the exact opposite of a
CLOSING PROCEDURE related adjusting entry made at the end of the
period.
- At the end of each period, the balances of -
temporary accounts are transferred to the capital A reversing entry should be made for any adjusting entry
account. that increased an asset or a liability account.