BASIC FINANCIAL ACCOUNTING and REPORTING (BFAR): PHILIPPINE BASED(Summary and Class Notes)

I. Introduction to AccountingII. The Accounting Equation and the Double- Entry SystemIII. BFAR: The
Accounting Cycle A. Identification of events to be recorded.B. Journal EntryC. Posting in the ledgerD.
Preparation of Trial BalanceE. Adjusting Journal EntriesF. Preparation of WorksheetG. Preparation of
Financial StatementsH. Closing Journal entriesJ. Preparation of Post-Closing Trial BalanceK. Reversing
Journal EntriesIV. Types of Business Organization: Application of Accounting A. Service BusinessB.
Merchandising Business1. Perpetual Inventory System2. Periodic Inventory Systemi. Special Journalii.
Combination Journaliii. Voucher SystemC. Manufacturing BusinessD. Comparisons between the three
types of business organizationV. Special Topic: Payroll

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Chapter IITHE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEMInformation System

It is thecollection of people(competent ends of the users working),procedures (manuals and

Accounting Information System

Combination of personnel, records and proceduresthat a business uses to meetits need for financial
information.

Elements of Financial StatementsElements for Statement of Financial Position (SFP)

I. Assets

It is apresent economic resource controlled by entityas a result of past event.

Aneconomic resourceis a right that has the potential to produce economicbenefits and that economic
benefits are no longer need to be expected to flow tothe entity.
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Classification of Assets:

It is apresent economic resource.

The economic resource is aright that has potential to produce economicbenefits.

The economic resource is alsocontrolled by the entityas a result of pastevents.

A. Right (may take the following forms)

1. Rights that correspond to an obligation of another entityi. Right to receive cashii. Right to receive
goods or servicesiii. Right to exchange economic resources with another party on favourable

termsiv. Right to benefit from an obligation of another party if a specified uncertainfuture event
occurs.2. Rights that do not correspond to an obligation of another entityi. Right over physical objects,
such as property, plant and equipment orinventoriesii. Right to intellectual property3. Rights established
by contract or legislationi. Right in owning a debt or equity instrument or registered patent.

B. Potential to produce economic benefits

1. For the potential to exist, it is only necessary that the right already exists eventhe economic benefit is
low.2. The economic resource is the present right that contains potential and notfuture economic
benefits that the right may produce.3. The entity would produce economic benefits if it is entitled to:i.
Receive contractual cash flowsii. Exchange economic resources with another party on favourable
terms.iii. Produce cash inflows or avoid cash outflowsiv. Receive cash by selling the economic resourcev.
Extinguish a liability by transferring an economic resource

C. Control of an economic resource

1. An entitycontrolsan asset if it has present ability to direct the use of theasset and obtain the economic
benefits that flow from it.i. Control includes the ability to prevent others from using such asset
andtherefore preventing others from obtaining the economic benefits from theasset.ii. Control may
arise if an entity enforces legal rights.

Note:

No legal rights, control can still exist if an entity has other means ofensuring that no other part can
benefits from an asset.
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II. Liability

It is defined aspresent obligations of an entityto transfer an economic resourceas a result of past

Classification of liability:

The entity has anobligation.

The obligation is totransfer an economic resource.

Its obligation is a present obligation that exists as aresult of past events.

A. Obligation

1. An obligation is theduty or responsibilitythat an entity hasno practical abilityto avoid. It can belegal or
constructive obligations.2.Legal obligationsmay be legally enforceable as a consequence of a
bindingcontract or statutory requirement.3.Constructive Obligations which arise from normal business
practice, customand a desire to maintain good business relations or act in an equitablemanner.

B. To transfer of an economic resource

Obligations to transfer an economic resource include:1. Obligation to pay cash2. Obligation to deliver
goods or noncash resources.3. Obligation to provide services at some future time.4. Obligation to
exchange economic resources with another party onunfavourable terms.

C. Past event

An obligation exists as a result of past event if both of the following conditionsare satisfied.1. An entity
already obtained economic benefits.2. An entity must transfer an economic resource.

III. Equity


It is the residual interest in the assets of the enterprise after deducting all itsliabilities.

Accounting Formula

Assets = Liabilities + EquityLiabilities = Assets

EquityEquity = Assets

Liabilities

Elements of Income Statement (IS)

I. Income ( Assets or Liabilities, Equity)

It is defined asincreases in assets or decreases in liabilitiesthat result inincreasesin equity, other than
those relating to contributions from equity holders.

Its definitionencompasses both revenue and gains.

Revenue are theinflows of ordinary course of businessand is referred to by varietyof different names
including sales, fees, interest, dividends, royalties and rent.

Note: Essence of Revenue isregularity .

Gains represent other items that meet the definition of income anddo not arise inthe course of the
ordinary regular activities.

Gains include from disposal of noncurrent asset, unrealized gain on tradinginvestment and gain from
expropriation (public).II. Expenses ( Assets or Liabilities, Equity)

It is defined asdecreases in assets or increases in liabilitiesthat result indecreases in equity, other than
those relating to distributions to equity holders.

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Its definitionencompasses those expenses that arise in the course of the ordinaryregular activities and
as well as losses.

Expenses are theoutflows of ordinary course of businessand it include cost ofgoods sold (COGS), wages,
maintenance, utilities and depreciation.

Losses do not arise in the course of ordinary regular activitiesand it include lossesresulting from
disasters (i.e. hurricane, floods, earthquakes etc. that is

Act fromGod).

Accounting Formula

Income = Profit + ExpensesIncome = Revenue

ExpensesExample:

Income Expenses Profit

840K

480K

360K1.3M 860K

440K2.720M

2M 720K

1.4M

1.8M (400K)If: Revenue

>

Expenses = Net Income (p+)Revenue

<

Expenses = Net Loss (

)To get:Revenue = Net Income or Net Loss + ExpensesExpenses = Revenue - Net LossNet Income =
Revenue

ExpensesExample: Revenue = Expenses + Net Loss= 153 000 + (27 500)= 153 000

27 500= 125 000

Account

Thebasic summary device of accountingand it is the records of increases, decreasesor balances of each
element that appears in financial statements.

T- Account

Thesimplest form of the accountand can be illustrate into: Account TitleDebit Credit

Accounting Equation

The mostbasic tool of accounting.

Debits and Credits

DOUBLE ENTRY SYSTEMDouble entry system

Business transactions havedual effects.

Debit sidemust havecorresponding credit sideentry.

Each transactionaffect two or more accounts.

The total debitequals to the total credit.

Debit

A term fromLatin word,

debere(DR)

meaning an amountentered on the left side(value received).

Credit

A term fromLatin word,

credere(CR)

meaning an amountentered on the right side(value parted with).

Rules of Debit and CreditNormal BalanceBalance Sheet Accounts Income Statement Accounts

Assets = DR CR Expenses = DR CRLiabilities = DR CR Income = DR CREquity = DR CRWithdrawals = DR

Investments

deducted from owner to its business.

Withdrawals

Deducted from business to its owners.

To summarize together:

Debit Credit Assets LiabilitiesWithdrawals CapitalExpenses Income

Accounting Event
It is aneconomic occurrencethat

causes changes in an enterprise’s Assets,

Liabilities and Equity.

Transaction

A particular kind of event that involves thetransfer of something value between twoentities.

Classification of Transactions

1.

Source of Assets (SA) -

Assets and Liabilities or Equity (other claims)Example:

Purchase of supplies on account (JE: Supplies (Dr); Accounts Payable (Cr))

Sold of goods or cash (JE: Cash (Dr); Revenue (Cr))

2.

Exchange of Assets (EA) -

Assets and other AssetsExample:

Acquired equipment for cash (JE: Equipment (Dr); Cash (Cr))

Collection of receivables (JE: Cash (Dr); Accounts Receivable (Cr))3.

Use of Assets (UA) -

Assets

and Liabilities or Equity (other claims)Example:

Settled accounts payable (JE: Accounts Payable (Dr); Cash (Cr))

Paid salaries to employees (JE: Salary Expense (Dr); Cash (Cr))4.

Exchange of Assets (EA) -

Liabilities or Equity and other Liabilities or EquityExample:

Received utility bill but did not pay (JE: Utility Expense (Dr);Utility Payable (Cr))

Typical Account Titles UsedOperating Cycle

It is thetime between acquisitions of assetsfor processing and their realization incash or cash
equivalents.1.

Assets

It is aneconomic resource controlled by an entityas a result of past event.

Classified into:Current Assetsand Noncurrent Assets Current AssetsPAS 1, paragraph 66, provides that
an entity shall classify an asset ascurrent when: A. The asset iscash or cash equivalentunless the
restricted to settle aliability for more than twelve months after the reporting period.B. The entity holds
the asset primarily for thepurpose of trading.

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C. The entity expects torealize the asset within twelve months after thereporting period.D. The entity
expects torealize the asset or intends to sell or consume it

within the entity’

s normal operating cycle.

Presentation of Current Assets are usually listed in the order ofliquidity.

PAS, paragraph 54, the line items of current assets:

CFTIP


ash and equivalents

inancial assets at fair value such as trading securities and other investmentsin quoted equity
instruments.

rade and other receivables.

nventories

repaid expenses

Typical account title used:

Cash

is themedium of exchange. Cash comprises cash on hand, pettycash fund, cash in bank and demand
deposits.


Cash equivalents

areshort-term highly liquid investmentsthat arereadily convertible to known amount of cash andwhich
are subject to an insignificant risk of changein value such example is treasury bill and timedeposit.

Notes Receivables

it is awritten pledge that the customer will pay in acertain date.

Accounts Receivable

theclaims against customersarising from salesof services or goods on credit. The contra-account of
accounts receivable is Allowance fordoubtful accounts (ADA) or also known asallowance for bad debts,
or allowance foruncollectible accounts;

creditor side.

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Inventories

assets held for salein the ordinary course of business.

Prepaid Expenses

theexpenses paid in advance.Noncurrent Assets

PAS 1, paragraph 66, states that “an entity sh

all classify all other assets

not classified as current as noncurrent”.

Line items of noncurrent assets:

PLIDO

roperty, plant and equipment

ong-term investments

ntangible assets

eferred tax assets

ther noncurrent assets

Typical account title used:

Property, Plant and Equipment

–
aretangible assets(without physicalsubstance) that are held by enterpriseforuse in production or supply
goodsand services, for rental to others, orfor administrative purposes and areexpected to be used
during more thanone period.

Accumulated Depreciation

acontra-account of all tangible assetsexcept land. It contains the sum of theperiodic depreciation
charges.

Intangible Assets

anon-monetary assets without physical substanceand can be identified asidentifiable intangible

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2.

Liabilities

It is apresent obligation of an entity to transfer an economic resourceas result ofpast event.

Classified ascurrent liabilitiesandnoncurrent liabilities.Current LiabilitiesPAS 1, paragraph 69, provides

settle the liability within the entity’s normal operating

cycle.B. The entity holds the liability primarily for thepurpose of trading.C. The liability is due to
besettled within twelve months after the reportingperiod.D. The entity does not have an unconditional
right to defer settlement of theliability for at least twelve months after the reporting period.

PAS 1, paragraph 54, provides the items presented as current liabilities:

TCSCC


rade and other Payables

urrent provisions

hort-term borrowing

urrent porting of long-term debt

urrent tax liability

Typical account titles used:

Account Payable

thereverse relationship of accounts receivable.

Notes Payable
–

thebusiness entity is the maker of the note;

debtor side.

Accrued Liabilities

amounts owed to othersfor unpaid expenses.

Unearned Revenues

receive payments but not yet rendered.

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Current portion of Long-term debt

portions of mortgage notes, bonds andother long-term indebtedness with paidwithin one
year.Noncurrent LiabilitiesPAS 1, paragraph 69, provides that all liabilities not classified as currentare
classified as noncurrent.

Noncurrent assets are presented in

NFDLL

strategy.

oncurrent portion of long-term debt.

inance lease liability

eferred tax liability

ong-term obligations to company officers

ong-term deferred revenue.

Typical account titles used:

Mortgage Payable

along-term debt of business entityfor which businessentity had pledged certain assets as security to
thecreditor also known as collateral.

Bonds Payable

business organizationobtain substantial sums of moneyfrom lenders to finance the acquisition of

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Bond

is thecontract between the issuer and the lenderspecifying theterms of repayment and interest to be
charged.3.

Equity

The term equity is theresidual interestin the assets of the entity after deductingall of its liabilities.

The terms used in reporting the equity of an entity depending on the form of thebusiness organization
are:

A. Owner’s equity in a proprietorship

B. Partner’s equity in a partnership

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C. Stockholder’s equity or shareholders’ equity in a corporation.

PAS 1, paragraph 7, theholders of instrumentsclassified as equity are simplyknown asowners.

Typical account titles used:

Capital

a term from Latin word

capitalis

meaningproperty. It is a recordsof the original and additional investment of the owner.

Withdrawals

owner whosimply withdraw cash.

Income summary

atemporary accountused at the end of accountingperiod toclose income and expenses.