Service Entity

Derecognition – removal of recognized  Expense – decreases economic

asset/liability in FS, occurs when it no benefit & equity other than
longer meets the definition. withdrawals, result from
 Provides services rather than ordinary activities. Cost of
tangible objects sales, Salaries, Utilities, Rent &
ELEMENTS OF FINANCIAL Supplies Expense.
Accounting Cycle o Losses – arising from
STATEMENTS:
unordinary activities.
 Process of identifying,
 Asset- controlled resources that  Income – increase in economic
analyzing & recording
could bring future economic benefit & equity, decrease in
accounting events of company.
benefit. liability. Service Income &
Assets = Liabilities + Owner’s Equity o Current Asset –held for Sales
trade, within a year. o Revenue – arise from
 Assets = Current Asset + Non- o Non-current Assets – ordinary activities of
current Asset used for more than a enterprise
 Liabilities = Current Liabilities year. o Gains – other items that
+ Non-current liabilities  Liabilities – present obligations do not meet the
 Owner’s Equity = Beg. Capital arising from past events definition.
+ Income + Addt’l Investment – o Current Liabilities –  Owner’s Equity – net
Withdrawal obligation due within a assets/equity, left to owner after
year at the end of BS all liabilities are settled.
Double Bookkeeping System – every
transaction affects 2 accounts, debit & date. AP, Tax, Salaries, o Capital – record original
Notes, Provisions & additional investment
credit.
o Non-current liabilities – o Withdrawals- withdraws
Recognition & Derecognition obligation that would be cash or asset, reduces
paid for more than a equity
Recognition – capturing for inclusion
year. Mortgage & Bonds o Income summary –
in the FS when it meets the definition
Payable nominal account, used to
of A, L, E, I or E.
close income & expense
 Accounting Cycle: o Subsidiary ledger – Note: if discrepancy is divisible by 9, it
intermediary accounts could be a transposition or sliding
 Analyzing – accountable error.
linked as a supporting
(recorded) or non-accountable document, amount
(not recorded) in ournal Errors not detected in trial balance:
computed is used.
o Classifying – should
 Preparation of Unadjusted  Omission
affect 2 or more Trial Balance – list of debit &
accounts  Recording a transaction more
credit, done after posting to the than once
o Measuring- monetary ledger.
value  Recording debit & credit that
o Human Error – has wrong amount
 Journalizing – recording unintentional wrong
events in the journal.  Posting right amount in wrong
entries account
Chronological order, book of  Sliding – wrong
original entry.  Transposition, sliding,
decimal places omission in the journal
o Special Journal – (267.58 as 26.75)
specific transactions  Transposition – Unbalance trial balance means there’s
o General Journal – record interchanged an error to be corrected
transactions not figures (1574 as
recorded in special 1475) Balance trial balance doesn’t mean
journal  Omission – not that there’s no error occurred.
 Posting or Accumulating – recorded at all  Preparation of Adjustments –
transferring amounts from  Transaction end of reporting period,
journal to ledger. Ledger is recorded more Adjusted Trial balance.
book that computes balance of than once o Reclassifying – correct a
each accounts, book of final  Wrong account
wrong account title.
entry. title
o Correcting – correcting
o General Ledger - set of o Fraud – intentional
error aside from wrong
master accounts that are wrong entries
account title
accumulated
 o Adjusting – done to  Accrued Interest Expense – recognized in adjusting entry. Used
update books with when payment doesn’t fall in if the problem is silent
transactions that the end year for unpaid interest.
Expense Method – pre-payment is
occurred but not yet P x R x T = Interest Expense
recorded as expense, asset is
recorded. Involves a IS
recognized in adjusting entry.
account & a BS account. Interest Expense xx
Need for adjustments: Interest Payable xx  Date of transaction – date of
- Assign revenues earned &  Accrual for Uncollectible the prepayment.
expenses incurred Account – credit sales that will  Date of adjustments – end of
- Recognition & never be collected. reporting period
derecognition principle Doubtful Account Expense xx  Expiration of contract – last
Allowance for Doubtful day that covers the prepayment
Recognition of Income
Accounts xx
- Increase in Asset, Decrease  Accrued Interest Income- Transaction to Expiration = total life
in Liability you’re to extend credit to other of prepayment
entity.
Recognition of Expense Transaction to adjustments = expired
Interest Receivable xx
portion
Interest Income xx
- Decrease in Asset, Increase
in Liability Adjustment to Expiration =
Note: Adjusting entries for accruals
Unexpired portion
increases both BS & IS account.
ADJUSTING ENTRIES FOR
ACCRUALS Proforma Entry:
ADJUSTING FOR DEFERRALS
 Accrued Salaries – to record  Asset Method
 Prepaid Expenses – records the
unpaid salaries at the end of the Jan 1. Prepaid Insurance xx
expired portion of the advance
period. Cash xx
payment.
Dec. 31 Insurance Expense xx
Salaries Expense xx Asset Method – pre-payment is Prepaid Insurance xx
recorded as asset, expense is
Salaries Payable xx
 Expense Method Transaction to Expiration = total life of  Depreciation – allocating cost
pre-collection of asset over useful life
Jan. 1 Insurance Expense xx o Cost – amount paid for
Transaction to adjustments = expired
Cash xx asset
portion
o Estimated Useful life - #
Dec.31 Prepaid Insurance xx Adjustment to Expiration = Unexpired of period that entity can
portion make use of asset
Insurance Expense xx
o Salvage Value – amount
Proforma Entry of asset that can be sold
 Advance Collection –
adjustments of income earned in  Liability Method for the end of useful life
the period already. o Depreciable Cost –
o Liability method- pre- Jan. 1 Cash xx amount subject to
collection is recorded ad depreciation
Unearned Rent income xx
liability & income as o Depreciation Expense –
adjustment. Used if the Dec. 31 Unearned Rent income xx recorded as expense
problem is silent. every year
o Income method – pre- Rent Income xx o Accumulated
collection is recorded as Depreciation – total
 Income Method
income & liability as depreciation, BS
adjustment. Jan.1 Cash xx account.
 Date of transaction – date of the o Carrying Amount –
Rent Income xx
pre-collection. value of asset after
 Date of adjustments – end of Dec.31 Rent Income xx deducting accumulated
reporting period depreciation.
 Expiration of contract – last day Unearned Rent Income xx
Pro-forma Entry:
that covers the pre-collection.
Depreciation Expense xx

Accumulated Depreciation xx
 PREPARATION OF FS/ COMPONENTS OF FINANCIAL and other comprehensive
ADJUSTED TRIAL BALANCE STATEMENTS: income.
 Statement of Changes in
Worksheet  Statement of Comprehensive Equity – summarizes the
Income – called as Statement of changes occurred in OE.
- Used as a tool to transfer the Financial Performance or
balance of Unadjusted TB to - Beg. Balance, additional
Income Statement investments, withdrawals,
FS. - Records change in equity,
- Not required in the process Net income or Net loss
follows matching principle
of making the FS.  Statement of Cash flow –
- First statement to be done
- Summary used for information about cash receipts
- Expense, Losses, Revenue
convenience & payments of an entity
& Gains
- Composed of ten columns. - Classifies inflows &
 Statement of Other outflows of cash into
Preparing the Worksheet: Comprehensive Income – not Operating, Investing &
recognized in profit or loss as Financing activities
- Input balances in required by PFRS. - Computed by direct &
Unadjusted trial balance & - Revaluation, unrealized indirect method
total amounts gain/loss, gain/loss from o Operating Activities
- Enter adjusting entries & foreign operation, change in
– Current Asset &
total amounts fair value, re-measurements,
Current Liabilities
- Compute adjusted balance unrealized gain/loss from
o Investing Activities
by combining unadjusted & derivatives
– Non-current assets
adjustments. - Two statements: IS
o Financing Activities
- Extend the amounts in showing profit or loss, IS
– Equity & Non-
balance sheet & income begins with profit or loss
current liabilities
statement columns. combining other
comprehensive income
Profit – balancing figure for IS and BS
- Single Statement –
account in the Worksheet.
combination of profit & loss
DIRECT METHOD:  Closing Entries  Post-closing Trial Balance
- Transferring all nominal - Done to check equality of
 Operating Activities –
account to capital account after closing
Cash inflow less Cash - Putting nominal accounts in - Optional, only BS account
outflow their opposite normal are left after closing
 Investing Activities – same balances  Reversing Entries
for indirect, Cash inflow - Expense, Income, Income - Exact opposite of adjusting
less cash outflow summary & withdrawals entry made at the end of
 Financing Activities- no period
difference with indirect, Steps:
- For previous adjusting
cash inflow less cash entries only
 Close income accounts to
outflow - All accruals can be
income summary
INDIRECT METHOD: Income xx reversed, and only deferrals
Income Summary xx which used the income &
Net Income xx expense method.
 Close expenses to income
summary - Done at beginning of next
Add: Non-cash expense xx
Income Summary xx period
Less: Non-cash income (xx) Expense xx - Optional, not required by
 Close income summary to standard.
Equal to: Cash basis Net income xx
capital (debit)
Add: Decrease in Current Assets xx Capital xx
Income Summary xx
Increase in Current Liability xx If income summary has a credit
Less: Increase in Current Assets (xx) balance:
Income summary xx
Decrease in Current Liability (xx) Capital xx
 Close withdrawal account
Cash flow from Operating Activities xx
Capital xx
Withdrawals xx
 Merchandising
- Inventory count is still  Purchase Return &
needed at year end for Allowances
accuracy
- Goods purchase for resale. - Low-volume, high-priced Perpetual:
goods AP xx
Procedures to Purchase
Periodic Inventory System
Inventory: Merchandise Inventory xx
- Not updated continuously Periodic:
 User departments fills in a - Inventory count is required
purchase requisition form to to know the end balance Accounts Payable xx
purchasing department - High volume, low value
 Purchasing Departments Purchase Returns/allowances xx
- Used if the problem is silent
prepares a purchase order to the
 Recording Sales
supplier
 Supplier forwards an invoice Perpetual:
Pro-forma Entries:
upon shipment of goods
 Purchaser’s receiving Accounts Receivables xx
 Recording of Purchase
department prepares a receiving Sales xx
report if goods are already Perpetual:
received. Cost of Goods Sold xx
Merchandise Inventory xx
 Accounts payable department
Merch. Inventory xx
compares all documents and AP xx
ensure that quantity, description Periodic:
Periodic:
& prices agrees with each other.
Accounts Receivables xx
Purchases xx
Perpetual Inventory System
Sales xx
AP xx
- Continuously updated
- Stock cards are used to
make inventory updated
 Freight Collect – buyer is the one who sales return, sales
paid the freight allowances, and sales
 Sales Return discount.
Pro-forma Entry:
Perpetual Discounts – reduction to the
FOB shipping point price given to customer for a
Sales return xx
Buyer: reason.
A/R xx
Purchases xx Trade discounts – encourage
Merch. Inventory xx the customer to avail or buy
A/P xx product, not recorded.
COGS xx
Freight In xx List Price – original selling
Periodic:
price
Cash xx
Sales return xx
Invoice price – price agreed by
Seller:
A/R xx buyer & seller
Sales xx
Freight Terms:  Cash discounts – encourage
A/R xx immediate or prompt payment
FOB destination – seller shoulders the from the customer
freight, ownership is to seller up onto
its destination Credit Terms – 2/10; 2% discount rate
STATEMENT OF when paid within 10 days discount
FOB shipping point – buyer shoulders COMPREHENSIVE INCOME period, n/30; buyer is allowed to pay
the freight, ownership is transferred to within 30 days
 Gross Sales – total amount of
buyer upon shipment
sales of inventory, cash & on
Freight Prepaid – seller is the one credit
who paid the freight - Only sales held for resale
o Contra Sales- happens when
buyer is unsatisfied could be
  Net Sales – amount computed  Gross Profit – deducting COGS are silent, rent, no
after deducting contra sales from Net Sales, initial profit designation expenses.
account to gross sales. o Other expense- not
Gross Sales xx Net Sales xx related to central
Less: Sales Return (xx) COGS (xx) operations of business,
Sales Allowances (xx) losses from transactions.
Sales Discount (xx) Gross Profit xx  Other Income – resulting from
Net Sales xx incidental transaction, selling
 Cost of Goods Sold – largest equipment or building, those
single expense of  Operating Expense – expense aside from inventory.
merchandising entity incurred to generate profit SPECIAL JOURNAL
- Cost that has been sold o Selling Expense – also  Sales Journal – record sales of
- Recorded at cost called as distribution merchandise on account; date of
expense. Expenses transaction, invoice number,
COGS STATEMENT
incurred inside the store; customer account.
Beginning Balance xx
Salaries, Delivery - Data are posted daily into
Net Purchases xx Truck, Depreciation, subsidiary ledger, posting
Freight out, Adv. reference is S, total amount
Add: Freight in xx Expense, Doubtful is posted in the general
Net Cost of Purchases xx Account in authority of ledger at the end of period.
Sales manager,  Cash Receipts Journal – all
Goods Available for Sale xx depreciation. transactions involving cash,
o Administrative cash sales are in this journal for
Less: Ending Inventory (xx)
Expense – general cash to be best controlled.
COGS xx expense, expenses  Purchase Journal – records
incurred inside the purchase of inventory, supplies
office. Office salaries, that are on account
doubtful accounts that  Cash Disbursement Journal –
purchases in all cash payments
 Inventories
ADJUSTMENTS: Closing Entries:
 Ending Inventory & Closing Sales related account:
Beginning Inventory - Assets held for sale in
Sales xx ordinary course of business
Ending Inventory xx
Sales return xx - In process of production
Income Summary xx - In the form of
Sales allowances xx materials/supplies to be
Income Summary xx consumed
Sales Discounts xx
Beginning Inventory xx CLASSES OF INVENTORIES:
Income Summary xx
 Shortage or Overage  Trading Concern
- Buy & sell of goods;
Perpetual:
Post-Closing Trial Balance – done to merchandise inventory
Inventory Shortage xx ensure that after closing & adjusting  Manufacturing Concern
debits & credits are still equal - Buy of goods to alter and
Merchandise Inventory xx
convert to another form
Reversing Entries – done at beginning o Finished goods –
Merchandise Inventory xx
of next period, same with service
completed products
Inventory Overage xx entity.
o Goods in Process –
partially completed
o Raw Materials – to be
used in the production
process
o Factory or
Manufacturing Supplies
– indirect relationship to
the finished product
Included goods in the Inventory: will be transferred as the  Cost of Conversion – cost
latter will sell the product in directly related to units of
- Owned & on hand behalf. Included in the production like labor and fixed
- In transit & sold FOB inventory. & variable allocation overhead
destination
 Other cost – included when the
- In transit & purchased FOB Periodic System
cost is needed to bring the
shipping point
- Physical count at the end of inventory to its location
- Out on consignment
- In the hands of sales/agents the period, quantities are
EXCLUDED COST:
- Held by customers multiplied by corresponding
unit cost for balance sheet  Abnormal amounts
Maritime Shipping Terms: purposes  Storage costs except storage
costs on goods in process
 Free alongside (FAS) – buyer Perpetual System
 Administrative overhead not
bears the cost of loading &
- Maintenance of records or related to inventory
shipments, passed when carrier
stock cards; summary of  Distribution/selling costs
takes the goods
inventory inflow & outflow.
 Cost, insurance & freight – INVENTORY COST FORMULAS
seller bears the freight, title Methods to record Purchases:
passed to buyer upon delivery  First in, first out method
 Ex-ship – seller bears all  Gross Method – purchases & o FIFO Periodic
expenses & loss until goods are A/P recorded at gross o FIFO Perpetual
unloaded only the time the title  Net Method – purchases & A/P  Weighted Average
will be passed to the buyer recorded at net. o Weighted Average –
Cost of Inventories: Periodic
CONSIGNMENT:
o Weighted Average –
- Method of marketing goods  Cost of Purchase – purchase Perpetual
between the consignor price, import duties &  Last In, first out
(owner) & consignee irrecoverable tax, freight, o LIFO Periodic
( agent) wherein possession handling & other DAC o LIFO Perpetual
PAS 2, par 25; the standard doesn’t
permit LIFO to be used in measuring
cost of inventories.

Specific Identification – attributed to

identified items of inventory, those
specific project & not ordinarily
interchangeable

Standard Costs – predetermined

product costs, used for convenience

Relative Sales Price Method –

allocation of common cost based on
lump sum price

LOWER OF COST AND NET

REALIZABLE VALUE

 If the cost is lower than NRV,

inventory is measured at cost
 If the cost is higher than NRV,
inventory is measured at NRV.

Estimated Selling Price

- Estimate Cost of Completion

Net Realizable Value