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Bsa 1st Term Lessons Iaf

The document outlines the accounting environment, business forms, and their roles in society, emphasizing the importance of efficient resource management for business success. It details various business structures such as sole proprietorships, partnerships, and corporations, along with their advantages and disadvantages. Additionally, it covers the history of accounting, accounting information systems, and the regulatory framework governing the accounting profession in the Philippines.

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0% found this document useful (0 votes)
9 views45 pages

Bsa 1st Term Lessons Iaf

The document outlines the accounting environment, business forms, and their roles in society, emphasizing the importance of efficient resource management for business success. It details various business structures such as sole proprietorships, partnerships, and corporations, along with their advantages and disadvantages. Additionally, it covers the history of accounting, accounting information systems, and the regulatory framework governing the accounting profession in the Philippines.

Uploaded by

Laroshi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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THE ACCOUNTING ENVIRONMENT AND ACCOUNTING

FRAMEWORK
BUSINESS
ITS MOTIVE AND ROLE IN SOCIETY
 Business is an economic unit that engages in buying and selling of FORMS OF BUSINESS
goods and services. A major concern of a business is how best its SOLE PROPRIETORSHIP
resources: machines, raw materials, labor skills, number of men to  This is a business set up is th most basic legal form and managed
employ. by one person which is called proprietor. Most small businesses
 In a business endeavor, success is possible when money, machines, such as beauty parlors, dress shops, barbershops, and bakers are
men and materials are used efficiently at the least possible cost. sole proprietor owned.
Most often success is measured in terms of profit and increase Advantages Disadvantages
in funds. Only a small amount of capital is Difficult to expand the business
needed. and sell different products or
MINIMIZING BUSINESS RISK Its operation can be managed by services because of low capital
 Any money-making venture is risky. The higher profit you desire, the the proprietor and it is and only one owner manager.
more risky the venture is. Risk is the element of uncertainty in an managed easily. It has no indefinite life. Owner
outcome. The owner or proprietor gets all may just one day want to close it or
 An endeavor like a business has always an element of uncertainty – it the profits. become incapacitated or die
is not certain that the operation of the business will turn out well, nor Easy to form since only a Owner has unlimited liability. It
is it certain that the owner will recover what was invested nor is it minimum requirement to legally means that if the business is
certain that creditors will be paid. But there are ways of reducing operate is needed. unable to pay its debt, the bank or
risks such as: The owner has full control over creditor can attach the owner’s
1. Careful planning and control by the manager. everything. personal properties.
2. Making a business plan and carefully assessing the business Quick decision-making since all
you want to put up. the decision-making is made by a
single pereson.
3. Having adequate knowledge about the product or service.
4. Choosing the right form of business and the right type of
PARTNERSHIP
operation.
 A partnership, as defined by Article 1767 of the Philippine Civil
Code, is a contract between two or more individuals who
agree to contribute money, property, or skills to a common
fund with the intention of dividing the profit among
themselves.
 In this business structure, the partners not only invest resources but
often take on management roles. Partnerships are frequently
established by professionals—such lawyers, accountants, engineers,
and doctors —who join forces in a consultancy or firm to benefit
mutually from their combined expertise and shared profits.
Advantages Disadvantages
Ease in managing the business No indefinite life since obtained because of its large
and in attracting clients because of disagreement could easily arise amount of resources used.
more owners involved. because of owners involved and One-man corporation is permitted,
Management is more efficient Partners like sole proprietor have making it easy for smal-time
because of division of unlimited liability. entrepreneurs to enter the
responsibilities among partners. corporate playing field

CORPORATION
 A business organized as a separate legal entity from the owners. It
means that it can conduct business by itself – enter contracts,
buys and sells properties and stocks. An investor simply buys shares FORMS/TYPES OF BUSINESS OPERATION
of stocks in a corporation and become a shareholder. It is managed Service Intangible/provides services
by a Board of Directors elected by the shareholders from among Business (ex. legal consultation, dental clinics, travel agencies,
themselves. and airlines.)
 If the shareholders owned 20%- 50% of shares, they have
significant influence while more than 50% have significant Merchandisi Buying and selling of goods
control. Republic Act 11232 signed in February 2019 revised some ng Business (ex. grocery stores, bookstores, and department stores)
laws affecting corporate organization and conduct, its existence, pre-
incorporation requirement, one-man corporation, etc. Formation Manufacturi Buys raw materials, converts them to finished
requirements are filed with the Securities and Exchange Commission ng Business goods, and then sells them
(SEC) and can be accessed through the Internet. (ex. shoe factories and food processors)

Advantages Disadvantages
TYPES OF BUSINESS ACTIVITIES
More capital can be raised A shareholder, unlike a sole
because of the large number of proprietor or a partner, has no Operating Day-to-day actions.
shareholders. unlimited liability. There is
Can afford to hire experts who therefore a higher risk involved Financing Involve transations with the company’s owners owners or
can efficiently manage and operate on a corporate debt since these creditors to fund the business and manage the company's
the business can only be paid out of corporate capital structure.
More stable than a partnership funds.
Investing Involve the purchase and sale of long-term assets and
because it is not affected by the It is subjects to more legal and
other investments not related to the company's main
withdrawal of a shareholder. A tax requirements.
operations.
shareholder who wants to withdraw Abuse of power by the Board of
from the corporation simply sells Directors could certainly affect the
the shares owned to others or can welfare of the corporation and its MANAGING THE BUSINESS
even sell the shares back to the shareholders.
Planning It starts with determining the goals of the business and
corporation.
lining activities to accomplish these goals.
Higher amounts of profit may be
Organizin It involves creating divisions, appointing managers,
g hiring and defining the roles of duties of each one.
(managers and staffs).

Directing It means overseeing the daily operations of carrying


out the planned activities – managers must act, decide,
agree, argue, question approve, solve.

Controllin It means guarding and guiding people to ensure tasks


g and activities are done according to plans and some
standard of performance. It prevents commission of
error or if error is detected then it must be corrected and
the product or service reworked.

HISTORY OF ACCOUNTING
ACCOUNTING INFORMATION SYSTEM PRINCIPLES
 The earliest bookkeeping records were used to keep track of
 An AIS must be efficient and effective.
pyramids and palaces being constructed especially in Babylonia and  To be efficient, the information must be timely and must be
Egypt. processed at the least cost and effort.
 The first accounting book was written by Cotrugli in Naples and the  To be effective or relevant, the information must be able to answer
modern double entry bookkeeping system could be traced from the the needs of decision-makers.
book prepared in 1494 by an Italian mathematician, fr. Luca Pacioli,  To make these possible five principles must be considered:
entitled Summa de Arithmetica. Cost- Prescribed that the advantages enjoyed from
 In the Philippines, bookkeeping was introduced by the Spaniards and Benefit installing the system must outweigh its cost. For
the bookkeeper was called Tenedor de Libro. But even before the example, installing a computerized system may be costly
Spaniards came, trade was already flourishing between the but it can reduce the number of employees which in turn
Philippines and the other Asian countries. will reduce the cost of salaries, wages, and allowances.
Additionally, recording will be more accurate with fewer
ACCOUNTING INFORMATION SYSTEM or no errors committed making the reports more reliable.
 It refers to processing of the transactions or activities to
produce information that must be done in an orderly and Relevance Prescribes that the information must be reported
efficient manner. Accounting Information System (AIS) can be promptly and must be useful to enable statement
classified into two: users to reach a conclusion and make the right decisions.
1. Measurement System - This involves analyzing, measuring,
recording, and classifying, and summarizing. Compatibili Prescribes a system designed to fit the unique
2. Communication System - This involves the presentation of ty characteristics of the company- its personnel,
formal reports which are communicated to decision makers. activities, and structure. A sole proprietor-owned
business operating only within a mall will require a simple
AIS. A multinational company with diverse products and
offshore operations will require a more complicated AIS.
Flexibility Prescribes that the company’s system should allow Interim financial statement– covers less
for changes to come up with timely and updated than one year
information in response to industry demand,
government promulgations, technological advances, and Stable Monetary Uniform currency
competitive pressures. Unit

Control Prescribes that the AIS of the firm must have good
REPUBLICT ACT OF 9298 (R.A 9298)
internal control.
 RA 9298 otherwise known as the Philippine Accountancy Act of
2004 is the law that governs the accountancy profession in the
Philippines.
 Objectives of RA 9298 are the following:
a. Standardization of Accountancy Education
b. Registration for CPA Licensure Examination
c. Supervision, Regulation, and Control of Accountancy
practice in the Philippines
BOARD OF ACCOUNTANCY
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES  It is under the jurisdiction of the Professional Regulatory Commission
 It refers to a common set of accounting principles, standards, and (PRC) and it is tasked to set up and promulgate a set of
procedures in preparing financial statements. It aims to improve professional standards and ethics in the practice of the accounting
clarity, consistency, and comparability of the communication of profession. They enforced the R.A 9298. They are composed of a
financial information. chairman and six members which are appointed by the
 The following are the principles: president.
Business Entity The owner is separated and distinct from the PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANT
 PICPA is the integrated national professional organization of
Principle business
certified public accountants in the Philippines having the basic
Going Concern The business continuously operating without authority of setting up and implementing rules vital to the
Principle the intention to liquidate accounting profession.

Matching Principle The expenses should be matched to the CPALE


related revenue
REQUIREMENTS:
 Filipino Citizen
Accrual Basis Income – recognized when earned regardless
 Good moral character
of cash colection Expenses – recognized when
 Bachelor of Science in Accountancy degree
incurred regardless of cash payment
 Should not be convicted of any crimes involving moral turpitude
Periodicity Principle Divide the life of the operating of the business.
SUBJECTS:
Calendar (Jan– Dec) or Fiscal (any time of the
1. Management Advisory Services
year at least one year)
2. Financial Accounting and Reporting/Practical Accounting
3. Advance Financial Accounting and Reporting/ Practical managers. It assists them in planning, directing, and
Accounting controlling the affairs of the business.
4. Taxation
5. Regulatory Framework for Business Transactions (Business law) Cost It deals with recording, classifying and summarizing the
6. Auditing Accounting details of materials, labor, and overhead
necessary to produce and sell a product or service. It
PASSING GRADE also deals with the controlling expense.
 General average > 75%
 Grade per subject should not be less than 65 Government accounting - It deals with the proper
custody and disposition of public funds. Its
objective is more on how the funds are used to service
ACCOUNTING AS APROFESSION
the people rather than to earn profit. It uses the
Mastery of a particular skill. Adhere to a common code of values or
Government Accounting Manual (GAM).
conduct administered by BOA. Accept responsibility to society.
Auditing - It deals with the independent
SECTORS IN ACCOUNTING PROFESSION examination and verification of the financial
1. Public Accounting statements if it is prepared fairly.
a. a. Auditing (External Auditors)
b. Tax Services
c. Management Consultancy Services SCOPE OF PRACTICE (RA 9289) ACCOUNTANCY ACT OF 2004
2. Industry Accounting  Practice in public accountancy (auditing firms providing service for
3. Government and not for profit Accounting the public, i.e. Deloitte, SVG, KPMG, PwC)
4. Research and Education  Practice in Commerce and Industry (Private Companies, i.e. SMC, SM)
 Practice in Education/Academe
SCOPE OF PRACTICE (RA 9289) ACCOUNTANCY ACT OF 2004  Practice in Government (i.e. BIR or COA)
 Practice in public accountancy (auditing firms providing service for
the public, i.e. Deloitte, SVG, KPMG, PwC)
 Practice in Commerce and Industry (Private Companies, i.e. SMC, SM)
 Practice in Education/Academe FRAMEWORK OF ACCOUNTING
 Practice in Government (i.e. BIR or COA)  The framework is a pervasive structure which sets the
boundaries of the accounting practice with its basic rules,
AREAS OF ACCOUNTING objectives and assumptions. The framework provides formation of
accounting standards which prescribe the nature of financial
Financial It involves the preparation and interpretation of reporting. The framework serves as a guide to:
Accounting financial statements primarily intended for external  Financial Reporting Standard Council (FRSC) (Now FSRSC
users such as investors, lenders, suppliers, — Financial Sustainability Reporting Standards Council) -
government, and customers. In charge of making accounting standards. Standard is called
Philippine Financial Reporting Standard (PFRS) and it includes:
Management It deals with special-purpose financial statements
PFRS, PAS, Interpretation (made by the Philippine Interpretation
Accounting primarily for the use of internal users such as
Committee).
1 chairman
14 representatives STATEMENT OF FINANCIAL POSITION
 List of assets, liabilities, and owner’s equity of a business.
BOA–1  It shows the present condition of a business at a current or
BSP– 1 certain point in time. It informs the users of the wealth and
COA–1 obligations accumulated by the business and is used to
MEMBER OF BIR– 1 determine the liquidity or solvency of the business. It also
FRSC SEC– 1 shows the capacity for adaptation in times of change and
emergencies
Major preparers or users of F.S– 1  It shows a listing of the accumulated resources (cash and
PICPA – 8 properties) owned a listing of the accumulated liabilities (debts or
Public practice – 2 obligations to pay) owned by the enterprise. After deducting the
Commerce/Industry – 2 liabilities from the assets, the net asset shows the net value or net
Academe – 2 worth of the firm which belongs to the owner. Hence, it is also called
the owner’s equity.
 Comprises of Real Accounts:
PROFESSIONAL REGULATORY BODIES
(ALE – Assets, Liabilities and Owner’s Equity).
 The practice of the accounting profession, among others, is governed
by regulatory bodies such as PICPA, BOA and PRC. The financial
reports prepared are also affected by the rulings and promulgations
issued out by the SEC, BSP, and BIR.
1. Professional Regulation Commission (PRC)
2. Board of Accountancy (BOA)
3. Philippine Institute of Certified Public Accountants (PICPA)
4. Securities and Exchange Commission (SEC)
5. Bangko Sentral ng Pilipinas (BSP)
6. Bureau of Internal Revenue (BIR)

ACCOUNTING AND BUSINESS INCOME STATEMENT


All businesses have one thing in  A statement that requires an
common: they need financial entity to present income and
information before making expenses. A performance
decisions. Responsible for the report of revenues against
preparation and presentation of costs and expenses.
financial statements is the  It reports the financial
management. The accountant performance of the business
provides the information by and is also called profit or
preparing the following financial loss statement or
statements: statement of earnings. It
lists down the income (revenues and gains) earned as well as the  There are four activities affecting owner’s equity: investment,
expenses incurred by the business. A favorable operation called profit withdrawal or recovery of capital, profit or loss.
or net income results when income exceeds expense.
 Comprises of Temporary Accounts: STATEMENT OF COMPREHENSIVE INCOME (PAS 1.81)
(IE – Income and Expenses)  Summarizes both standard
net income and other
STATEMENT OF CASH FLOW comprehensive income
 A cash report showing (OCI).
where the money came  The net income is the
from and where the result obtained by
money was used. preparing an income
 The Statement of Cash statement.
Flows shows what caused  OCI consists of all
the change in the cash. unrealized gains and
This statement shows three losses on assets that are
kinds of activities: not reflected in the income
financing (investment of statement. It is a more
the owner and cash loan), robust document that often is used by large corporations with
investing (acquisition and investments in multiple countries.
sale of properties) and  It shows the profit or loss items and OCI items.
operating (revenues and  It is another report prepared by the accountant which explains the
expenses). activities for a period of time that caused the owner’s equity
to change. There are four activities affecting owner’s equity:
investment, withdrawal, or recovery of capital, profit or loss.

NOTES TO FINANCIAL STATEMENTS


STATEMENT OF CHANGES IN OWNER’S EQUITY  It shows the explanatory notes regarding the accounts.
 It shows the movement of  Notes are used as additional information by individuals reading
Owner’s Equity. financial statements. Otherwise known as “explanatory notes or
 Statement of Owner’s Equity notes to the financial statements”, the footnotes help add
is another report prepared supplementary information to help further explain the related
by the accountant which information in the financial statements without clouding the primary
explains the activities for a information that the statements are trying to convey.
period of time that caused
the owner’s equity to
change.
Relevance The information must be relevant to the needs of
the users, which is the case when the information
influences their economic decisions. This may
involve reporting particularly relevant information, or
information whose omission or misstatement could
influence the economic decision of the users.

Reliability The information must be free of material error


Accounting may also be defined as a process of recording, and bias, and not misleading. Thus, the
classifying, and summarizing transactions and events which are information should faithfuly represent the
financial in nature and interpreting the results thereof. transactions and other events, reflect the
underlying substance of events, and prudently
represent estimates and uncertainties through proper
disclosure.

Comparability The information must be comparable to the


Basis financial information presented for other
accounting periods so that the users can identify
trends in the performance and financial
position of the reporting entity.
USERS OF FINANCIAL INFORMATION
1. Owner or Investor
ACCOUNTING PERIOD
2. Manager
 It is a period that covers certain accounting functions, which can be
3. Lender or Creditor
either a calendar or a fiscal but also a week, month, or quarter.
4. Government
5. Supplier
6. Employee OPERATING CYCLE
 It is the average period required for a business to make an initial
7. Customer
outlay of cash to produce goods, sell the goods, and receive cash
from the customers in exchange for the goods.
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION OR
FINANCIAL STATEMENT
Understandab The information must be readily understandable
ility to users of the financial statements. This means that
FORMULAS TO REMEMBER:
information must be clearly presented, with
additional information supplied in the Asset = Liabilities + Equity (ALE)
supporting footnotes as needed to assist in Liabilities = Asset - Equity (LAE)
clarification. Equity = Asset - Liabilities (EAL)
EXTENDED ACCOUNTING EQUATION FUNDAMENTALS OF (AICPA) which are in the part at least of a financial
ACCOUNTING character and interpreting the result thereof.
Asset = Liabilities + Capital - Drawings + Revenue - Expenses
Equity = Capital - Drawings + Revenue – Expenses Philippine Institutes It is a service activity, and its function is to
of Certified Public provide quantitative information, primarily in
Accountants nature, about economic entities.
(PICPA)

American It refers to the process of identifying,


Accounting measuring, and communicating economic
Association information to permit informed judgments and
(AAA) decisions by the users of the information.
In the simplest definition, accounting is the
process of identifying, recording,
summarizing, and interpreting of
financial information

NATURE OF ACCOUNTING

Systematic Process It is a series of actions that produce


something or that lead to a particular result.

Art It is a skill required by experience, study, or


observation

Service It is the occupation of the function of


servicing

THE ACCOUNTING EQUATION


Assets = Liabilities + Equity

THE ACCOUNTING PROCESS


ACCOUNTING
Accounting Institute It is the art of recording, classifying and
ASSETS
of Certified Public summarizing in a significant manner and in
Accountants terms of money, transaction, and events,  Resources owned and controlled by the business, and arise from
past transactions.
Analyzing An organization begins its accounting cycle with the
LIABILITIES identification and analysis of business transactions
 Present obligations of the business and claims of the creditors. through the source documents.

EQUITY Journalizing General Journal is the book of original accounts. It uses


 It is the claims of the owners and assets invested by the double-entry bookkeeping, which originated by Friar
owners. Luca Pacioli, the Father of Accounting. It is stated in the
book Summa de Arithmetica Geometria Proportioni et
Proportionalita.
ACCRUAL CONCEPT OF RECOGNIZING REVENUE AND EXPENSES
 Accrual concept is supported by the realization principle and
Posting Once a transaction is recorded as a journal entry, it
expense recognition principle.
should be posted to an account in the general ledger.
The general ledger provides a breakdown of all
REALIZATION OF REVENUE accounting activities by account.
 The principle recognizes revenue when it is earned regardless of
collection. Footing - It is the process of adding the total debit and
credit.
REALIZATION OF EXPENSE
Unadjusted After the company posts journal entries to individual
 The principle recognizes expenses follows the same rule as
Trial general ledger accounts, an unadjusted trial balance is
recognizing revenues, that is payment in cash or in property is
Balance prepared. The trial balance ensures that the total debits
generally not a requirement.
are equal to the total credits in the financial records.

RULES OF DOUBLE ENTRY BOOKKEEPING Adjusting At the end of the period, adjusting entries are made.
1. For every debit, there is a corresponding credit. Journal These are the results of corrections made on the
2. For every transaction there are at least two accounts affected. Entries worksheet and the result from the passage of time.
3. Total debit shall always be equal to total credit. Compiling and adjusting data is the process of gathering
4. Normal balances of Assets, Liabilities, and Equities. and putting together data necessary to update the
balances of some accounts. After the trial balance is
completed, financial statements cannot be prepared yet
due to there still being transactions of the business that
are not yet recorded, hence there is a need for
adjustments.

Financial Upon doing the unadjusted trial balance, it was followed


Statements by the actual formalized financial statements.

Closing At the end of the accounting period, the company will


ACCOUNTING CYCLE Entries close all the temporary accounts which include that
revenues and expenses
T-ACCOUNTS
CHART OF ACCOUNTS
 T-account is the simplest tool to use to
 Account is a device used to record the increases and decreases of
analyze the effects of the transactions
each of the different assets, liabilities, and owner’s equity.
on each account. It has two side: one
 The Chart of Accounts is a listing of account titles that guides the
side is for the recording of increases
bookkeeper in the recording of the transactions. The number and
and the other side is the recording of
nature of accounts depend on the type of operation. The accounts
decreases
are properly arranged with the assets listed first, folowed by the
 A tool used to analyze transactions
liabilities, and lastly by the owner’s equity. Account numbers are
and is not part of the accounting
assigned for each account for easy reference.
records.
 Each account is kept on a separate page or card. These pages
or cards are placed together in a book or file called the
general ledger.
RULES FOR DEBIT AND CREDIT
Happy Tour and Travel Debit Increases in Assets are recorded on the debit side of the
Charts of Accounts account, while decreases in Liabilities and Owner’s
Equity are recorded on the credit side of the account.
Current Assets — 101 to 103
101 Cash
102 Accounts Receivable Credit Increases in Liabilities and Owner’s Equity are recorded
103 Allowance for Doubtful Accounts on the credit side of the account, while decreases in
Non-Current Assets — 201 to 204 Assets are recorded on the debit side of the account.
201 Equipment
202 Accumulated Depreciation – Equipment
203 Furniture and Fixtures GENERAL JOURNAL
204 Accumulated Depreciation - Furniture and Fixtures  It is part of the accounting record keeping system wherein when an
Current Liabilities — 301 to 303 event occurs that must be recorded, it is called a transaction, and
301 Accounts Payable may be recorded in a specialty journal or in the general journal.
302 Loans Payable
303 Utilities Payable JOURNAL ENTRY
Non-Current Liabilities — 401 to 402
 These are recorded in all the various journals in debit and credit
401 Notes Payable
format and are recorded in order by date, with the earliest entries
402 Mortgage Payable
being recorded first. Each includes the date, the amount of the debit
Equity — 501 to 502
and credit, the titles of accounts being debited and credited (with the
501 Happy Tour and Travel, Capital
title of the credited account being indented), and a short narration of
502 Happy Tour and Travel, Drawing
why the journal entry is being recorded.
Revenues — 601
601 Service Income
Expenses — 701 to 703 DATE ACCOUNT DEBIT CREDIT
701 Rent
702 Utilities June 30 Depreciation Expense 10,000
703 Supplies
Accumulated 10,000
Depreciation

GENERAL LEDGER
 A general ledger account is an account or record used to sort, store,
and summarize a company's transactions. These accounts are
arranged in the general ledger (and in the chart of accounts) with the TRIAL BALANCE
balance sheet accounts appearing first followed by the income  A trial balance is a bookkeeping worksheet in which the balance of all
statement accounts. ledgers is compiled into debit and credit account column totals that
 The general ledger contains a debit and credit entry for every are equal. A company prepares a trial balance periodically, usually at
transaction recorded within it so that the total of all debit balances in the end of every reporting period. The general purpose of producing
the general ledger should always match the total of all credit a trial balance is to ensure the entries in a company's bookkeeping
balances. If they do not match, the general ledger is said to be out of system are mathematically correct.
balance and must be corrected before reliable financial statements  Preparing a trial balance for a company serves to detect any
can be compiled from it. mathematical errors that have occurred in the double-entry
accounting system. If the total debits equal the total credits, the trial
General Ledger Sheet Sheet No: 21 balance is considered balanced, and there should be no
mathematical errors in the ledgers. However, this does not mean
Account: Electricity Expense Account No.: 640 there are no errors in a company's accounting system. For example,
transactions classified improperly or those simply missing from the
Date Details Ref. Debit Credit Balanc system could still be material accounting errors that would not be
e detected by the trial balance procedure.

2018

Mar 15 To Accounts J1 4,000 4,000


Payable
BUSINESS TRANSACTIONS
June 17 To Accounts J3 3,640 7,640 Economic events that should be recorded in the accounting records. The
Payable
concepts of recognition, valuation, and classification.
Sept 14 To Accounts J5 430 7,210
Payable

Classificatio It is a process of assigning all the transactions in which


n a business engages to appropriate categories or
accounts.
RULES OF DOUBLE-ENTRY ACCOUNTING
 Every transaction affects at least two accounts
 Total debits must equal total credits

ACCOUNTING PROCESS
1. Identifying and analyzing the events to be recorded
2. Recording transactions in the Journal
3. Posting Journal Entries to the Ledger
ABC Company 4. Preparing the Trial Balance
Unadjusted Trial Balance 5. Preparing the Worksheet and Adjusting Entries
31 December, 2017 6. Preparing the Financial Statements
Account Name Ref Debit Credit 7. Journalizing and posting of adjusting journal entries
Cash 400,000 8. Journalizing and posting of closing journal entries
Accounts Receivable 30,000 9. Preparing the post-closing trial balance
Office Suppliers 45,000 10. Journalizing and posting of reversing journal entries
Office Equipments 15,000
Vehicle 40,000
ASSET
Building 300,000
 A resource obtained and controlled by the enterprise as a result of
Accounts Payable 100,000
a past event and from which probable future economic benefits
Notes Payable 50,000
are expected to flow to the entity.
Common Stock 500,000
Asset has three features:
Retained Earnings 20,000
1. It is a resource obtained from a past event,
Sales Revenue 700,000
2. The enterprise has control over it, and
Cost of Goods Sold 400,000
3. Future economic benefits will be received from its use.
Salaries Expenese 50,000
Rent Expense 20,000
Supplies Expense 10,000
LIABILITIES
Advertising 30,000
Insurance 30,000  A present obligation arising from past events, the settlement of
which is expected to result in an outflow of resources from the
Total 1,370,000 1,370,000
enterprise.
Liability has three features:
1. There is a present obligation,
2. Which arose from past events, and
3. Settlement is expected to be made in the future in the form of an
outflow of resources.
OWNER’S EQUITY  The Accrual Assumption as provided in PAS 1 par. 25-26 requires that
 A residual right or interest of the owner(s) in the entity’s net assets. revenues and expenses be recognized based on the time period they
relate or based on the occurrence of the revenue and expenses
rather than on whether cash is received or paid.

CASH CONCEPT
 It recognizes revenue only when cash is collected and expenses
only when cash is paid.

EXPANDED STRUCTURE OF A BUSINESS


THE ACCOUNTING EQUATION INCOME
Assets = Liabilities + Equity  Revenue is income coming from the normal course of business.
Income is an increase in economic benefits during the period that
BUSINESS TRANSACTIONS AND ACCOUNTING ELEMENTS results in an increase in equity.
 The Accounting elements are affected by the business transactions
or economic activities of a business. EXPENSES
 It is defined as an exchange of values between two parties expressed  An expense will decrease an asset or increase a liability with a
in monetary terms. It has three characteristics: corresponding decrease in owner’s equity.
1. Exchange of values
2. Between two parties PROFIT OR LOSS
3. In terms of money  The difference between the total income earned and the total
expenses incurred spells the success or failure of the organization. If
STATEMENT OF FINANCIAL POSITION income is greater than expenses, the result is profit. The relationship
of these items, using the illustrated figures for revenues and
 A list of assets, liabilities, and owner’s equity of a business.
expenses, may be expressed as follows:
ACCRUAL CONCEPT OF RECOGNIZING REVENUES AND EXPENSES.
 Accrual concept is supported by the Realization Principle and
Expense Recognition Principle.

REALIZATION OF REVENUE
 The principle recognizes revenue when it is earned regardless of
collection. STATEMENT OF CASH FLOWS
 It shows the changes in the cash activities starting with the operating
RECOGNITION OF EXPENSE activities found in the income statement and the investing and
 The principle recognizes expenses follows the same rule as financing activities found in the statement of financial position.
recognizing revenues, that is payment in cash or in property is 1. For evaluating the cash stewardship of the finance officer,
generally not a requirement 2. Used as a guide in planning future cash flows, and
ACCRUAL ASSUMPTION 3. For assessing the ability to generate cash from operating
activities.
ASSET 3. Settlement is expected to be made in the future in the
 These are resources owned and controlled by the business, and form of an outflow of resources.
arise from past transactions.
 It is a source obtained and controlled by the enterprise as a KINDS OF LIABILITIES
result of a past event and from which probable future economic
Current These are those debts or obligations reasonably
benefits are expected to flow to the entity. It has three features:
expected to be liquidated in the normal course of the
1. It is a resource obtained from a past event enterprise’s operating cycle or paid within a period of
2. The enterprise has control over it one year by the use of current assets or the creation of
3. Future economic benefits will be received from its use other current liabilities.

Non These are long-term liabilities or obligations which are


KINDS OF ASSETS
Current payable longer than one year such as Mortgage Payable
Current These include cash and cash equivalents which are not and Bonds Payable.
PAS 1 restricted in use, as well as other assets expected to
be realized into cash, or sold or consumed within REFINANCING
the normal operating cycle of the business or one
CURRENT IF
year, whichever is longer.
 Less than 12 months
 Primarily holds the asset primarily for the purpose of
 Agreement to refinance/reschedule payment on a long term basis
“Trading”
after the reporting period and before the Financial Statements are
 Expects to realize the asset within twelve months
authorized for issue.
after the reporting period.
 Entity expects to realize the asset or intends to sell
or consume it within the entity’s “Normal COVENANTS
Operating Cycle” (i.e. Wine)  It is usually non current liabilities. If breached, it requires immediate
 Usually, listed in order of liquidity. Note: “Usually payment.
but not required by standard”
OWNER’S EQUITY
Non  It cannot be realized (collected, sold, used up)  It claims the owners and assets invested by the owners. It is a
Current one year after the year-end date. These are in residual right or interest of the owners in the entity’s net assets.
the form of plants, property, and equipment.  It increases due to contribution and income. It decreases due to
( ex. Land, Building, Machinery) withdrawal and expenses.
 Residual interest in the assets of the entity after deducting all of the
liabilities
 Can be called as “Net Assets”
LIABILITIES
FORMULA
 It is a present obligation arising from past events, the settlement
of which is expected to result in an outflow of resources from the Owners Equity = Asset - Liabilities
enterprise. It has three features: BUSINESS TRANSACTION EXAMPLES
1. There is a present obligation
2. Which arose from past events Owner’s Investment to Form the Business
Transaction: On July 1, Joan Blue invested 40,000 in cash to form Blue
Purchase of an Asset Partly in Cash and Partly on Credit
Transaction: On July 6, Joan purchases office equipment totaling 16,320
for Blue Design Studio. Joan pays 13,320 in cash and agrees to pay the

Design Studio.

Prepayment of Expenses in Cash


Transaction: On July 3, Joan orders 5,200 of office supplies for Blue

rest next month.

Payment of Liability
Transaction: On July 9, Blue Design Studio made a partial payment of
2,600 for the amount owed for the office supplies received on July 5.
Design Studio.

Revenue in Cash
Transaction: On July 10, Blue Design Studio performs a service for an
investment advisor by designing a series of brochures and collects a
Purchase of an Asset on Credit
Transaction: On July 5, Blue Design Studio receives the office supplies
ordered on July 2 and an invoice for 5,200

2,800 fee in each.


Expenses Paid in Cash
Revenue on Credit Transaction: On July 26, Blue Design Studio pays 4,800 for four weeks of
Transactions: On July 15, Blue Design Studio performs a service for a employee wages.
department store by designing a TV commercial. The company bills for
the 9,600 fee now but will collect it later.

Expenses to be Paid Later


Transaction: On July 30, Blue Design Studio receives but does not play
the utility bill that is due next month for 680.

Revenue Collected in Advance


Transaction: On July 19, Blue Design Studio accepted a 1,400 advance
fee as a deposit on a series of brochures to be designed.

Withdrawals
Transaction: On July 21, Blue Design Studio withdrew 2,800 cash.

Collection on Account
Transaction: On July 22, Blue Design Studio received 5,000 cash from
customers previously billed on July 15.

A
C
C
OUNTING FOR SERVICE BUSINESS
ACCOUNTING CYCLE
 It is a collective process of identifying, analyzing, and
recording the accounting events of a company. It is a methodical
set of rules to ensure the accuracy and conformity of financial
Account customer for service rendered or merchandise given
statements. for which payment is demandable.
 It is defined as a series of steps taken in gathering, processing,
and summarizing data to produce meaningful information,
communicated to users using financial reports. Hence, the first INCOME
four steps of the accounting cycle for service business are stated  Income coming from the normal course of business.
below:
1. Collecting data based on various documents or business EXPENSES
papers.  It is an increase in economic benefits during the period that results in
2. Analyzing and recording of the documents in a book called the an increase in equity.
journal.
3. Classifying and posting from the journal to another book called CHART OF ACCOUNTS
the ledger.  It is a listing of account titles that guides the bookkeeper in
4. Extracting the balances of each of the accounts found in the the recording of the transactions. The number and nature of
general ledger and preparing a trial balance. accounts depend on the type of operation. The accounts are properly
arranged with the assets listed first, followed by the liabilities,
BUSINESS PAPERS and lastly by the owner’s equity. Account numbers are assigned
These are documents evidencing transactions of a business. for each account for easy reference.
SOURCE DOCUMENTS  Each account is kept on a separate page or card. These pages or
Invoice It is issued when service or merchandise is given to cards are placed together in a book or file called the general
a customer or client. ledger.

Official It is issued when cash is received by the entity. T-ACCOUNT


Receipt  A tool used to analyze transactions and is not part of the accounting
records.
Cash or Check is a document used when cash is paid, or a check is  It has two sides: (1) for recording increases and (2) for recording
Voucher issued. It is signed by the employee preparing it and decreases.
the officer authorizing the payment. It is also signed
by the payee or the person who received cash
payment

Check It is a negotiable instrument used as a substitute for


cash, the payment for which Is drawn against the
entities or individual’s current account.

Promissory Promissory note is a written promise to pay a certain


Note sum of money at a future date. The maker is the Debit is an accounting term meaning left side of an account. While
debtor who makes the promise, addressing it to the credit means the right side of an account.
payee or creditor.
To summarize:
Statement of Statement of Account is a bill presented to a
 Increases in assets and expenses are recorded on the debit side (+) of the
account, while decreases are recorded on the credit side (-) of the account.
 Increases in liabilities, capital, and income are recorded on the credit side (+)
of the account, while decreases are recorded on the debit side (-) of the
account.
 Increases in equity are recorded on the credit side (+) of the account, while
decreases are recorded on the debit side (-) of the account.
ACCOUNTING PROCESS
1. Identifying and analyzing the events to be recorded
2. Recording transactions in the Journal
3. Posting Journal Entries to the Ledger
4. Preparing the Trial Balance
5. Preparing the Worksheet and Adjusting Entries
6. Preparing the Financial Statements
7. Journalizing and posting of adjusting journal entries
8. Journalizing and posting of closing journal entries
9. Preparing the post-closing trial balance
10. Journalizing and posting of reversing journal entries

RULES FOR DEBIT AND CREDIT

Debit Increases in Assets are recorded on the debit side of the


account, while decreases in Liabilities and Owner’s
Equity are recorded on the credit side of the account.

Credit Increases in Liabilities and Owner’s Equity are recorded


DOUBLE ENTRY BOOKKEEPING SYSTEM (VENETIAN MODEL) on the credit side of the account, while decreases in
 This is also known as the Venetian System which was introduced by Assets are recorded on the debit side of the account.
Luca Pacioli. Every transaction recorded there must have a debit
equal to a credit no matter how many accounts are affected. Each
transaction must always affect two accounts and at least one or two  On July 1, 1991, Orlando Reyes engaged in business with a cash
accounting elements. The reason is that a transaction is an exchange capital investment of ₱100,000.00.
of value: one value and another value parted with.
Asset Liabilities Equity
RULES OF DOUBLE ENTRY BOOKKEEPING
100,000 100,000
 For every debit, there is a corresponding credit.
 For every transaction there are at least two accounts affected.
 Total debit shall always be equal to total credit.
Suppose you buy a car for ₱500,000.00, borrow ₱400,000.00 from the
 Normal balances of Assets, Liabilities, and Equities.
bank and pay the rest yourself.

Asset Liabilities Equity

500,000 - 100,000 400,00

The economic resources of a business amounting to ₱2,900,000.00 and


DEBIT CREDIT
its economic obligations amounting to ₱2,200,000.00. What would be its
residual interest? • Increase in Assets • Decrease in Assets
• Decrease in Liabilities • Increase in Liabilities
Asset Liabilities Equity • Decrease in Owner’s Equity • Increase in Owner’s Equity
(Owner’s Withdrawal, (Initial Investment, Additional
2,900,000 2,200,000 700,000 Expenses) Investment, Revenue/Income)

EXAMPLES OF TRANSACTIONS (JOURNAL ENTRY)


How much is the total liabilities of the business if the owner’s equity is
Initial Investment:
₱250,000.00 which is 40% of the total assets.
On May 1, 2024, Kobe Decided to Open a Basketball Court. Kobe Invested
P500,000 in this initial endeavor.
Asset Liabilities Equity
Cash 500,000
625,000.00 375,000.00 250,000.00 Kobe, Capital 500,000
Issuance of Note for Cash:
On May 3 ,2024. Kobe issued a promissory note for a P200,000 loan from
If the owner’s equity is twice the total liabilities which is ⅓ of total BDO. The note carries a 12% interest per annum. The interest and the
assets of ₱900,000.00. How much is the owner’s equity? principal are payable after one year.
Cash 200,000
Asset Liabilities Equity Notes Payable 200,000

900,000.00 300,000.00 600,000.00 Acquisition of Office Equipment for Cash:


On May 5, 2024, Kobe acquired equipment for the basketball court
paying 190,000 in cash.
1. Identifying and analyzing the events to be recorded.
Equipment 190,000
 It is the process of identifying and analyzing the transactions to be
Cash 190,000
recorded through the business documents.
Acquisition of Furniture Paying Down Payment and the Balance
2. Recording transactions in the Journal. on Account:
 This is known as “Journalizing”. On May 6 ,2024. Kobe acquired Furniture from Lebron Costing P50,000,
 It is the process of recording the transaction in the first book of paying 10,000 as downpayment and the balance at the end of the
account as the journal. month.
 Journal is also called “Book of Original Entry” Furniture 50,000
 A Journal Entry should contain the following: Cash 10,000
1. Date Accounts Payable 40,000
2. Account Titles and Explanation
3. Posting Reference
4. Debit
5. Credit Advance Payment of Rental:
RULES FOR DEBIT & CREDIT On May 7 ,2024. Kobe rented a condominium unit and paid two months’
rent in advance. 9,000 per month is the rental cost.
Prepaid Rent 18,000
Cash 18,000

Payments of Insurance Premiums:


On May 8 ,2024. Kobe paid Sun Insurance Co. P200,000 for one year
insurance of the basketball court.
Prepaid Insurance 200,000 Date Accounts and Explanation Debit Credit
Cash 200,000 2020
March 1 Cash 100,000
Called Toby’s Sports for the Ring and Ball Equipment
costing P10,000: 1,500,00
Cars
On May 9, 2024. Kobe ordered Ring and Ball Equipment from Toby’s 0
Sports. 1,600,00
Gomez, Capital
NO ENTRY! (walang transaction & accounts na nagalaw, wala pang 0
actual transaction, nag-order palang) Investments of Gomez to open the
business
Purchase a Court Supplies on Account:
March 3 Cash 150,000
On May 10 ,2024. Kobe ordered Ring and Ball Equipment amounting to
10,000 from Toby’s Sports and were delivered on Account. Loans Payable 150,000
Supplies 10,000 Cash loan from Citibank
Accounts Payable 10,000 March 6 Furniture & Fixture 60,000
Cash 60,000
Income Earned on Account:
Bought furniture from Blink’s
On May 12 ,2024. Kobe earned income from the rentals of basketball
court amounting to P5,000 on account. March
Equipment 65,000
Accounts Receivable 5,000 10
Rental Revenue 5,000 Accounts Payable 65,000
Bought equipment from Sumsung on
account
March
Accounts Payable 65,000
15
Cash 65,000
Paid account due to Sumsung
March
Cash 25,000
21
Service Income 25,000
Cash received from Baguio tour
3. Posting Journal Entries to the Ledger.
 Once a transaction is recorded as a journal entry, it should be posted GENERAL LEDGER SHEET
to an account in the general ledger. The general ledger provides a
breakdown of all accounting activities by account. Date Details Debit Credit Balance
 This is known as “posting”. It is the process of transferring the
information found in the journal into the BOOK OF FINAL ENTRY 03- To A/P 4,000 4,000
known as the LEDGER. 15

STEPS IN POSTING 06- To A/P 3,640 7,640


17
1. From the journal, copy the date of transaction to the ledger.
2. Under the Journal Reference column of the ledger, copy the page 09- To A/P 430 7,210
number of the journal. 14
3. Under the debit column in the ledger, transfer the debit amount
from the journal similarly, under the credit column, transfer the
credit amount from the journal.
4. After posting the amount to the ledger, write the account number
in posting reference (P.R.) column of the journal
5. Add all the debit amount in the ledger and do the same with SUBSIDIARY LEDGER SHEET — ACCOUNTS
credit amount RECEIVABLE
6. Deduct the total debits and total credits and put the difference in
the side that it is greater in amount. 01-01 5,000

01-31 8,000

01-20 3,000

01-31 10,000
SALES JOURNAL
● All sales of inventory on account. Each entry results in a debit
to Accounts Receivable and a credit to Sales at selling price; and
a debit to Cost of Sales and a credit to Inventory at cost.
● Only one line is needed to record each transaction and all entries
are made from sales invoices.
● Posting are made daily to the individual accounts receivable in
GENERAL LEDGER ACCOUNT the subsidiary ledger and monthly, in total, to Accounts
 A general ledger account is an account or record used to sort, store, Receivables, Sales, Cost of Sales, and Inventory in the General
and summarize a company's transactions. These accounts are Ledger.
arranged in the general ledger (and in the chart of accounts) with the ○ Cash Sales are not recorded in the sales journal but are in
balance sheet accounts appearing first followed by the income
the cash receipts books.
statement accounts.
 The general ledger contains a debit and credit entry for every
transaction recorded within it so that the total of all debit balances in
the general ledger should always match the total of all credit
balances. If they do not match, the general ledger is said to be out of
balance and must be corrected before reliable financial statements
can be compiled from it.

SPECIAL JOURNAL
 It is used to group and record similar types of transactions,
such as sales of inventory on account or all cash receipts. There are
several types of special journals: Sales Journal, Cash Receipts Journal, CASH RECEIPTS JOURNAL
Purchase Journal, and Cash Payments Journal. ● It is a multicolumn journal wherein all cash received (including
 All transactions involving amount of money receivable from
cash sales) are recorded. All transactions involving cash
customers are posted under: Accounts Receivable and Accounts
Payable to Creditor. inflows or receipts of cash. It has debit columns for cash and
 This is only applicable if the business has a few customers or sales discounts and credit columns for Accounts Receivable,
creditors. However, if the business has hundreds of customers or Sales, and other accounts. In addition, there is a separate column
creditors, a Subsidiary Ledger is prepared. for a debit to Cost of Sales and a credit to Inventory. In
 These are columnar for recording similar transactions or Books of journalizing cash receipts transaction:
Original Entry. Their design depends on the needs of a specific a. Only one line is needed for each entry.
business entity.
b. Each sale entry is accompanied by another entry that
debits Cost of Sales and credits Inventory for cost.
● The posting of a multicolumn journal such as the cash receipts
journal involves the following procedure:
a. All column totals except the total for the other accounts
column are posted once at the end of the month to the
account title or titles specified in the column heading.
b. The total of the other accounts column is not posted;
instead, the individual amounts comprising the total are
posted separately to the general ledger accounts specified
in the Account Credited column.
c. The individual amounts in a column, posted in total to a
control account, are posted daily to the subsidiary ledger
account specified in the Account Credited column.
● Sundry Accounts — Other accounts affected by the receipt of
cash not related to sales transactions or collection of account
sales. CASH PAYMENTS OR DISBURSEMENT
● F — Folio where account no. of the account under the sundry ● It records all transactions involving cash outflow or
column is written. payment of cash or whether there is a decrease of cash. It
includes the following:
○ Cash withdrawal of owner, Simultaneous cash with a non-
cash withdrawal of owner, Purchase of merchandise and
other asset on cash basis, Purchase of merchandise with
down payment, SRA Cash Basis, Payment of A/P, N/P,
Expenses and Freight, Payment of promissory notes
including dishonored notes and issuance, and
replenishment of petty cash fund.
● Sundry Accounts — Other accounts affected by the receipt of
cash not related to sales transactions or collection of account
sales.
PURCHASES JOURNAL
● F — Folio where account no. of the account under the sundry
● All purchases of inventory on account or with a promissory
column is written.
note. Each entry results in a debit to inventory and a credit to
Accounts Payable. Only one line is needed to record each
transaction. All entries are made from purchase invoices.
● Postings are made daily to the individual creditor accounts in
the Accounts Payable Subsidiary ledger and monthly, in total, to
Inventory and Accounts Payable in the general ledger. The
purchases journal can be expanded into a multicolumn journal by
adding columns for Office Supplies, Store Supplies, and other
accounts.
○ Cash Purchases are not recorded in the purchase journal
but in the cash disbursement book.
EFFECTS OF SPECIAL JOURNAL TO GENERAL JOURNAL
● Only transactions that cannot be entered in a special journal are
recorded in the general journal. When the entry involves both
control and subsidiary accounts, the following modifications are ADVANTAGES OF USING SUBSIDIARY LEDGERS
required: 1. It shows transactions affecting one customer or one creditor in a
a. In journalizing, both the control and subsidiary accounts single account, thus providing up to date information on specific
must be identified. account balances.
b. In posting, there must be a dual posting: one to the control 2. Free the general ledger of excessive details. As a result, a trial
account and one to the subsidiary account. balance of the general ledger does not contain vast numbers of
individual account balances.
LEDGER 3. It help locate errors in individual accounts by reducing the
● It is the process of transferring information found in the journal. number of accounts in one ledger and by using control accounts.
● It is also called the book of final entry because all the balances 4. Makes possible a division of labor in posting by having one
in the ledger are used in preparation of financial statements. employee post to the general ledger while a different employee/s
post to the subsidiary ledger.
GENERAL LEDGER
● It is an account or record used to sort, store, and summarize a T-Accounts
company’s transactions. These accounts are arranged in the
general ledger with the balance sheet accounts appearing first T-account is the simplest tool to use to analyze the effects of the
followed by the income statement accounts. transactions on each account. It has two side: one side is for the
● It contains a debit and credit entry for every transaction recorded recording of increases and the other side is the recording of
within it so that the total of all debit balances in there should decreases
always match the total of all credit balances. If they do not
match, it is out of balance and must be corrected before reliable
financial statements can be compiled from it.

SUBSIDIARY LEDGER
● A group of like accounts that contains the independent date of a
specific general ledger. An individual record is kept for each one
of them and customer’s card or creditor’s card, where the details
of their accounts are entered. This is arranged alphabetically
in chronological order. There are two common subsidiary
ledgers: RULES FOR DEBIT & CREDIT
1. The accounts receivable (or debtors’) subsidiary ledger DEBIT CREDIT
which collects transaction data of individual customers • Increase in Assets • Decrease in Asset
2. The accounts payable (or creditors’) subsidiary ledger • Increase in Asset • Increase in Lability
which collects transaction data of individual balances. • Decrease in Liability • Increase in Owner’s Equity
• Decrease in Owner’s Equity (investment, additional
CONTROL ACCOUNTS (Withdrawals) investment)
● The accounts receivable and accounts payable in the general • Expenses and Losses • Income and Gains
ledger.
2. Get the account balance of each ledger account and write them
under their corresponding debit or credit column
3. Foot or add the debit and credit columns of the trial balance
4. Check whether the debit totals and credit totals are equal. They
must be equal.

4. Preparing the Trial Balance.


 The Trial balance is list of accounts found in the ledger together with ACCOUNTS DEBIT CREDIT
account’s balance or total.
 This is a proof that for every debit, there is a corresponding credit. Cash 26,300
 It is also a proof that the ledger is in balance.
A/R 3,200
● It is a bookkeeping worksheet in which the balance of all ledgers
is compiled into debit and credit account column totals that are Land 15,000
equal. Companies prepare a trial balance periodically, usually at
A/P 500
the end of every reporting period. It aims to ensure the entries in
a company’s bookkeeping system.
N/P 10,000
● The double entry bookkeeping rule extends to the trial balance —
ensure that the debit is the same as the credit total. It is a list of Service
accounts with ledger balances. 12,000
Revenue

NORMAL BALANCES Capital Stock 25,000


DEBIT Assets
Adv. Expense 2,000
Owner’s Drawing
Expenses Utilities
1,000
Expense
CREDIT Liabilities
Owner’s Capital TOTAL 47,500 47,500
Revenue

STEPS IN TRIAL BALANCE


1. In their proper numerical order, make a listing of all account titles
T-ACCOUNTS the Financial Statements, adjusting entries, closing entries, and the
● It is the simplest form used to analyze the effects of the Post-Closing Trial Balance.
transactions on each account. It has two sides: recording increase
and recording decrease. LOCATING ERRORS
Error in A difference of ten would probably indicate an error
TO SUMMARIZE Addition in addition. Add the debit and credit columns of the
1. Increases in assets and expenses are recorded on the debit side trial balance again. If the error is not there, go further
(+) of the account, while decreases are recorded on the credit and re-add the debit and credit columns of the
side (-) of the account. ledgers.
2. Increases in liabilities, capital, and income are recorded on the
credit side (+) of the account, while decreases are recorded on Error is in If the difference is divisible by two, then the probable
the debit side (-) of the account. posting to error is in posting to the wrong side, like a debit
3. Increases in equity are recorded on the credit side (+) of the the wrong balance in the ledger is copied on the credit side of
account, while decreases are recorded on the debit side (-) of the side the trial balance or a debit entry in the journal was
account. posted to the credit side of the ledger.

Error is in If the difference is divisible by 9 or a multiple of 9, the


transpositio probable error is in transposition, that is the order
n of the digits are interchanged, say an amount of
29,560 was copied as 29,650.

Error in If the difference is that the decimal point is misplaced,


Transplacem say an amount of 290,00 was copied as 29,000 the
ent probable error is in transplacement.

CASH BASIS OF ACCOUNTING


 The cash basis of accounting recognizes revenue when cash is
received and recognizes expenses when cash is paid. For instance,
under cash basis, services rendered in the year 2020, for which cash
is collected in 2021 would be treated as revenue in the year 2020.
Likewise, under cash basis, expenses incurred in the year 2020 for
5. Preparing the Worksheet and Adjusting Entries which cash is paid in 2021 would be treated as 2016 expenses. Due
to these improper assignments of revenues and expenses, the cash
 The worksheet is a
basis of accounting is generally considered unacceptable. There is no
common tool used
need to adjust entry under the cash basis of accounting.
by Accountants to
assemble on a
ACCRUAL BASIS OF ACCOUNTING
sheet of paper all
 It recognizes revenues when services are rendered and sales are
the information
made, regardless of when the cash is received. It also recognizes
needed to prepare
expenses when incurred whether or not the cash is disbursed or paid
Illustration 1: On April 30, 2024, Illustration 1: On April 30,
out. For instance, when a company rendered a service for a customer
Kyrie paid 36,000 insurance 2024, Kyrie paid 36,000
on account, the revenue is recorded at that time even though that
premium for two years. Give the insurance premium for two
cash has not been received. When the time comes that the customer
Adjusting Journal Entry on June 30. years. Give the Adjusting Journal
paid and the company received cash, no revenue is recorded
Entry on June 30, 2024.
because it has already been recorded. Under the accrual basis,
Upon Payment on April 30,
adjusting entries are needed to be prepared to bring the accounts up
2024: Upon Payment on April 30,
to date for economic activities that occurred but have not been
Prepaid Insuranc 36,000 2024:
recorded.
Cash Insurance Expense 36,000
36,000 Cash
ADJUSTING ENTRIES 36,000
● These are entries prepared at the end of an accounting period to Adjusting Journal Entry
update or adjust the balances of accounts. It is very important Insurance Expense 3,000 Adjusting Journal Entry
that adjustments be recorded correctly so that the company’s Prepaid Insurance 3,000 Prepaid Insurance 33,000
profit for the period to be measured properly and its related (36,000 / 24 x 2) Insurance Expense
assets and liabilities be brought to correct balances for financial 33,000
statements. (36,000 / 24 x 22)

THE ADJUSTING PROCESS Illustration 2: Illustration 2:


● After the preparation of the trial balance, the next step in the On August 1, 2024 Lebron Paid a On August 1, 2024 Lebron Paid a
accounting cycle is the compilation of data for adjustments. one-year advance rent for one-year advance rent for
Compiling and adjusting data is the process of gathering and P30,000. P30,000.
putting together data necessary to update the balances of some Give the Adjusting Journal Entry Give the Adjusting Journal Entry
accounts. After the trial balance is completed, financial on December 31, 2024 on December 31, 2024
statements cannot be prepared yet due to there still being
transactions of the business that are not yet recorded, hence Upon Payment on August 1, 2024: Upon Payment on April 30, 2024:
there is a need for adjustments. Prepaid Rent 30,000 Rent Expense 30,000
Cash 30,000 Cash
TYPES OF ADJUSTING ENTRIES 30,000
Adjusting Journal Entry
Prepayments These are expenses already paid but
Rent Expense 12,500 Adjusting Journal Entry
not yet incurred or used . There are two
Prepaid Rent Prepaid Rent 17,500
methods of prepayments —
12,500 Rent Expense
Asset Method (Expired Portion)
(30,000 / 12 x 5) 17,500
Expense Method (Unexpired Portion)
(30,000 / 12 x 7)

Asset Method (Expired Portion) Expense Method (Unexpired


Deferrals Deferred income is income already
Portion)
received but not yet earned. There are
two methods in deferrals — (48,000 / 6 x 2)
Liability Method (Expired Portion)
Income Method (Unexpired Portion)
Accrued Expense These are kind of expenses that are
already incurred or used but not yet
Liability Method (Expired Income Method (Unexpired paid. These are also called accrued
Portion) Portion) liabilities or accrued payable.

Illustration 1: On August 1, Dr. J Illustration 1: On August 1, Dr. The company received a Maynilad Bill in
received 90,000 for dental fees to J received 90,000 for dental fees the amount of P9,800 on December 28,
be rendered in the next 6 months. to be rendered in the next 6 2024. The company intends to pay on
months. January 8, 2025.
Upon Receipt of cash on
August 1, 2024: Upon Receipt of cash on Adjusting Journal Entry
Cash 90,000 August 1, 2024: Salaries Expense 9,800
Unearned Income 90,000 Cash 90,000 Salaries Payable 9,800
Income 90,000
Adjusting Journal Entry Accrued Income These are kinds of income that are
Unearned Incom 30,000 Adjusting Journal Entry already earned but not yet received.
Income 60,000
Income 30,000 Unearned Income 60,000 Illustration 1: Accounts Receivable
(90,000 / 6 x 2) (90,000 / 6 x 4) shows a balance of P150,000. It is
estimated that 12% of this is Doubtful to
Illustration 2: On September 1, Illustration 2: be collected because of the financial
2024. AntMan Company received On August 1, 2024 Lebron Paid a position of the debtor.
P48,000 amount of advanced one-year advance rent for
rentals for 6 months. Give the P30,000. Adjusting Journal Entry
Adjusting Journal Entry on Give the Adjusting Journal Entry Interest Receivable 18,000
December 31, 2024. on December 31, 2024 Interest Income 18,000

Upon Receipt of cash on Upon Receipt of cash on Principal x Rate x Time (PRT)
August 1, 2024: August 1, 2024: 150,000 x 12 % = 18,000
Cash 48,000 Cash 48,000
Unearned Income 48,000 Income 48,000 Illustration 2: One year 6% note
receivable in the amount of P200,000 was
Adjusting Journal Entry Adjusting Journal Entry received on January 1, 2024. the interest
Unearned Income 32,000 Income 16,000 and the principal are payable on maturity
Income 32,000 date. Give the Adjusting Entries on
(48,000 / 6 x 4) Unearned Income 16,000 September 30, 2024.
three factors in computing the
Adjusting Journal Entry depreciation expense:
Interest Receivable 12,000 a. Cost - The purchase of the
Interest Income 12,000 depreciable asset.
b. Salvage Value - The estimated
Principal x Rate x Time (PRT) value of the asset at the end of its
200,000 x 6 % x 9/12 = 12,000 useful life.
c. Estimated Useful Life - Not the
exact measurement but merely an
Bad Debts These are losses due to uncollectible estimation of the number of years
accounts. There are two methods: an asset can be useful to the entity.
1. Direct Method/Write-off - Bad All assets Depreciate Except Land and
Debts expense is recognized when Intangible Assets
the customer account is definitely
uncollectible. It is then deducted to FORMULA:
the accounts receivable. Cost - Salvage Value = Depreciation Cost
2. Allowance Method - It is Cost – Salvage Value = Depreciable Cost
recognized even if the customer’s or Amount
account is not sure to be Cost – Accumulated Depreciation =
uncollectible. Carrying Amount of the Asset

Accounts Receivable shows a balance of A building with an estimated useful life of


P150,000. It is estimated that 12% of this 30 years finished construction on July 1,
is Doubtful to be collected because of the 2024. The cost of the building is
financial position of the debtor. P4,800,000 million pesos with an
estimated useful salvage value P300,000.
Doubtful Accounts Expense 18,000 Give the adjusting journal entry on
Allowance for Bad Debts 18,000 December 31, 2024 to record the
depreciation of the building

Depreciation Expense It is the allocation of plant assets over its Adjusting Journal Entry
estimated useful life. This is the expense Depreciation Expense 80,000
allotted for the wear and tear of property, Accumulated Depreciation 80,000
plant, and equipment due to passage of (4,800,000 - 300,000)/30 x 6/12
time. There are several methods of
computing depreciation, the most common
are: Straight Line Method, Sum-of-the- 6. Preparing the Financial Statements.
years digit method (SYD) and  A statement of Financial Position, Income Statement, Statement of
Declining Balance Method. There are Changes in Owner’s Equity and a Statement of Cash Flows are
prepared to provide useful information parties interested in the
financial information of the business. CURRENT AND NON-CURRENT CLASSIFICATION
INCOME STATEMENT CURRENT ASSETS
● It is usually presented first because this can determine the
Cash It includes currencies or coins or negotiable
profit that is needed to be able to prepare the capital instruments such as bank checks or a postal money
statement. It is a summary of income earned and expenses order used as a medium of exchange.
incurred for a certain period. There are 2 presentation forms for
cost and expenses: Cash on Cash items in the custody of the officer-in-charge
a. Based on its nature Hand
b. Based on its function
● Income statements are called nominal or temporary accounts. Cash in Cash deposited in the bank under a current or savings
However, we carry forward the balances of assets, Bank account.
liabilities, and owner’s equity to the next accounting period
since these are real or permanent accounts and we don’t Marketable These are highly traded in securities such as the stock
close these accounts unless the assets are disposed of, the Securities and bonds purchased by the enterprise that are to be
liabilities are paid and the capital is returned to the owner. held for a short-term duration. Like the Cash
Equivalents a highly liquid investment such as a three
INCOME SUMMARY month time deposit or a three month government
● It is an account used to close the nominal values and bring treasury bill.
to the capital account.
Receivables These are collectibles from customers, clients, and
other persons for the goods, services or money given
NATURE OF EXPENSE
by the business.
● The first form presents the expenses according to their nature:
depreciation, advertising, transportation, and employee benefits. Merchandis An account title used to represent the stock of goods
This is normally used for a simple business such as that of a e Inventory available for sale by the business.
service provider
Prepaid Advance payments made for benefits or services to be
FUNCTION OF EXPENSE Expense received by the business in the future.
● It is the second form of the Income statement, presents the
expenses according to its function or use: cost of sales, Contra- An example of this is the Allowance for Bad Debts
distribution cost, administrative cost and financial cost. Asset which represents customers’ accounts doubtful of
Accounts collection.
STATEMENT OF CHANGES IN EQUITY
● It explains what happened to the capital or claim of the owner.
NON-CURRENT ASSETS

STATEMENT OF FINANCIAL POSITION Long-term Held for wealth accretion, regular income, capital
● This statement lists the details of the assets and liabilities of the Investment appreciation, and control.
business and shows the residual interest of the owner as of s
specific date.
Securities These are stocks and bonds.
CURRENT LIABILITIES
Subsidies These are equity methods. Accounts To trade creditors for purchase of goods or services on
Payable credit supported by the oral or implied promise of the
Property, Advance payments made for benefits or services to be business.
Plan, and received by the business in the future.
Equipment Notes A liability supported by a promissory note issued by the
or Plant Payable business to the creditor – it could be current if within 12
Assets months and non-current if beyond 12 months
depending on the note.
Land An example of this is the Allowance for Bad Debts
which represents customers’ accounts doubtful of Loan A liability to pay a bank or a financing institution for the
collection. Payable amount of money borrowed by the business.

Building These are structures used to house the office, store, or Utilities A liability to pay utilities companies like Meralco and
factory. Payable PLDT.

Equipment Office Equipment, Store Equipment, and Delivery Other These are Interest payable, Salaries Payable, and Taxes
Equipment. Payables Payable.

Furniture Table, chairs, curtains, lighting fixtures and wall decors


and Fixture CURRENT LIABILITIES
Note
Leasehold For a fee, the lessee is given the right to use the Payable
property of a lessor over a long period of time. Most
often improvements are made here. Mortgage An obligation secured by the real property of the
Payable business.
Accumulate Contra asset or off-set account representing expired
d cost of the PPE because of usage or passage of time. Bond A long-term promise usually from five to ten or twenty
Depreciatio Payable tears supported by a formal contract containing the face
n value of the bond, the interest rate, the interest payment
and maturity date.
Intangibles Identifiable non-monetary assets, no physical
substance, with future economic benefits, separable or
capable of being sold or transferred such as Patents or 7. Journalizing and posting of adjusting journal entries.
it may arise from contractual or legal rights such as  Adjusting Entries are prepared at the end of the Accounting period to
Franchise or Copyright. update the accounts for internal transactions because they affect
more than one accounting period.
 AJE are Prepayments, Deferrals, Accruals, Depreciation, Bad Debts
Expense
8. Journalizing and posting of closing journal entries. 2. The expense accounts such as Salaries Expense and Taxes
 Closing Entries are prepared at the end of the accounting period to Expense which normally are debit balances should be closed on
update owner’s capital account. the credit side and debited to the Income Summary.
 This will also eliminate the balances of the nominal accounts so that 3. Determine the balance of the Income Summary account which is
they may be ready for the next period. a net income or a net loss. If a credit balance, representing a net
Procedures of Closing Entries: income, closes by debiting the Income Summary account and
 Established an Income Summary Account credit to increase the Owner’s Capital account. If a debit balance,
Income: representing a net loss, close by crediting the Income Summary
Debit Income, account and debit to Increase the owner’s capital account.
Credit Income Summary Account (to close the Income) 4. Drawing account which normally is a debit balance is credited to
Expense: close the and debited to the capital account to bring a reduction.
Debit Income Summary Account
Credit Expense
(to close the expense account)
Net Income/Net Loss
If Net Income
Debit Income Summary
Credit Capital (Added to Capital)
If Net Loss,
Debit Capital
Credit Income Summary

CLOSING BOOKS
● It means bringing the temporary or nominal accounts to zero
balance by transferring them to a capital account or owner’s
equity. Profit or loss goes to the owner. After all the adjustments
have been journalized and posted and the financial statements
prepared, the income and expense accounts of the owner’s
drawing must be closed.
● After closing entries, the books are cleared of these accounts so
that in the next reporting period, the books are ready for a new
set of temporary or nominal accounts.

STEPS IN MAKING THE CLOSING ENTRIES


1. The revenue accounts such as Repair Income and Interest Income
which are normally credit balances should be closed on the debit 9. Preparing the post-closing trial balance.
side and credited to the Income summary.  After the closing entries have been posted, the post-closing trial
balance is prepared from the general ledger accounts.
 This is necessary to assure that these entries have been correctly period. Not all adjusting entries are reversed, only Accruals and
posted. This will also check the equality of the Debits and Credits Deferrals that use the nominal accounts.
after closing entries. ● These are the opposite of adjusting entries and are prepared on
POST CLOSING TRIAL BALANCE the first day of the succeeding reporting period. Prepaid expenses
● This is prepared after the closing entries have been posted. This under the expense method and Deferred Income under the
is necessary to assure that these entries have been correctly income method are the only items being reversed.
posted. This will also check the equality of the debits and credits
after closing entries. REASON FOR MAKING REVERSING ENTRIES
● It is prepared after closing the books and contains only real 1. To close out the accounts created when adjusting entries were
accounts with balances. It has the same accounts as those found prepared such as the prepaid expense (under the expense
in the SFP. method) and the unearned income (under the income method.
2. To recognize the expired/income portion applicable for the
succeeding period.
3. To simplify the bookkeeping in the following accounting period.

DATE ACCOUNT DEBIT CREDI


T

12-31 Prepaid Supplies 200


Supplies 200
Expense
Adjust for the
unused portion
01-01 200
Supplies Expense 200
Prepaid
Supplies
OPENING ENTRY Reverse
● To bring forward the accounts with balances to the next prepaid
accounting period an opening entry should be prepared based on supplies
the post closing trial balance.

NOTE: Not all adjusting entries are reversed, ONLY “ACCRUALS (INCOME
10. Journalizing and posting of reversing journal entries.
AND EXPENSE) and DEFERRALS that use the nominal accounts.
 Reversing entries are prepared to simplify the accounting process.
 Adjusting entries are simply reversed on the first day of the
accounting period (Usually January 1).
● These are prepared to simplify the accounting process. Adjusting
entries are simply reversed on the first day of the accounting
Flow of Costs
Companies use either a perpetual inventory system or a periodic
MERCHANDISING inventory system to account for inventory.
MERCHANDISING COMPANIES

Consignor – Consignee Relationship

The primary source of revenue is referred to as


sales revenue or sales. PERIODIC SYSTEM
→ Do not keep detailed records of the goods on hand.
Income Measurement → Cost of goods sold determined by count at the end of the accounting
Sales Revenue - Cost of Goods Sold = Gross Profit -Operating Expenses period.
= Net Income (Loss)
Trade Discount
Cost of goods sold is the total cost of merchandise sold during the Deductions from the list price or catalog price. (Purpose: To encourage
period. trading/increase sales. Also includes volume/quantity of the product. Ex:
3 for 100)
Operating Cycles
The operating cycle of a merchandising company ordinarily is longer NOTE: This is NOT RECORDED or shown in the buyer’s or seller’s
than that of a service company. EXAMPLE: 10%, 5%, 15% deduction from the LIST PRICE
SELLING PRICE/PURCHASE PRICE = List Price – Trade Discount. = Purchase Price 90,000

Invoice Price Journal Entry:


The amount charged to the buyer. Purchase 90,000
Example: A/P 90,000
List Price 1,000
Invoice Price 500

If the buyer buys on account, here’s the J.E


Buyer POV Seller POV
January 1
Purchases xxx A/R xxx
A/P xxx Sales xxx

Example
Kobe Co. Sold merchandise to Kyrie Co. with a list price of P50,000
Terms: 10%, 10%,
Cash Discount
List Price P50,000
Less T.D (5,000) (50,000 x 10%) Deductions from the invoice price when payment is made within discount
= Balance 45,000 period. (Purpose: To encourage prompt payment)
Less T.D (4,500) (45,000 x 10%) ● Purchase Discount - POV of buyer
= Sale Price 40,500 ● Sales Discount - POV of seller

Journal Entry: Credit Period


A/R 40,500 Period of time allowed for payment. n/30
Sales 40,500
Discount Period
Jayle Co. bought goods from Elcca Inc. With a list price of P125,000. Period of time covered by the discount. 2/10 (2% disc. within 10 days.)
Terms 20%, 10% Rule: Exclude the first day but include the last day. (If bought Jan. 1,
List Price: P125,000 discount is until Jan. 11)
Less: T.D (25,000) (125,000 x 20%) Buyer POV Seller POV
= Balance 100,000 January 1
Less: T.D (10,000) A/P 500 Cash 490
Cash 490 S. Discount 10 Beginning inventory xxx,xxx
P. Discount 10 A/P 500 Add: Purchases xxx,xxx
Note: (Less – Purchase Disc/ (xxx,xxx)
Purchases = expense (buyer, debit) Returns & Allowances)
Purchase Discount (contra-expense - credit) Add: Freight in xxx,xxx
Sales = income (seller, credit) Goods available for sale xxx,xxx
Sales Discount - (contra-income, debit) Less: Ending inventory (xxx,xxx)
Cost of goods sold xxx,xxx
Discounts
2/10, n/30 Advantages of the Perpetual System
2% discount if paid within 10 days, otherwise net amount due within 30 → Traditionally used for merchandise with high unit values.
days. → Shows the quantity and cost of the inventory that should be on hand
1/10 EOM at any time.
1% discount if paid within first 10 days of next month. → Provides better control over inventories than a periodic system.
n/10 EOM
Indicate whether the following statements are true or false.
Net amount due within the first 10 days of the next month.
False - A merchandising company's primary revenue source results from
performing services for customers.
Example
True - The operating cycle of a service company is usually shorter than
Assume Sauk Stereo pays the balance due of 3,500 (gross invoice price that of a merchandising company.
of 3,800 less purchase returns and allowances of $300) on May 14, the True - Sales revenue less cost of goods sold equals gross profit.
last day of the discount period. Prepare the journal entry Sauk Stereo False - Ending inventory plus the cost of goods purchased equals cost
makes on May 14 to record the payment. of goods available for sale.

May 14 Accounts Payable 3,500


Record purchases under a perpetual inventory system.
Inventory 70
→ Made using cash or credit (on account).
Cash 3,430
→ Normally record when goods are received from the seller.
(Discount = 3,500 x 2% = 70)
→ Purchase invoices should support each credit purchase.
Should discounts be taken when offered?
Discount of 2% on $3,500 70.00
$3,500 invested at 10% for
20 days 19.18 Example
Savings by taking the
Sauk Stereo (the buyer) uses as a purchase invoice the sales invoice
discount 50.82
prepared by PW Audio Supply, Inc. (the seller). Prepare the journal entry
for Sauk Stereo for the invoice from PW Audio Supply.
Example: 2% for 20 days = Annual rate of 36.5%
3,500 x 36.5% x 20 ÷ 365 = 70
May 4 Inventory 3,800
Accounts Payable 3,800
Calculation of Cost of Goods Sold:
FOB - Free on Board
May 6 Inventory 150
Cash 150

FOB Shipping Point


Ownership of goods purchased is transferred upon shipment of the goods
and therefore the goods in transit are the property of the buyer.
Returns and Allowances
FOB Destination Buyers may be dissatisfied with the merchandise received.
(damaged or defective, of inferior quality or not in accordance with their
Ownership of goods purchased is transferred upon shipment of the goods
specifications)
and therefore the goods in transit are the property of the seller.

Returns
Freight Prepaid
→ Return goods for credit if the sale was made on credit, or for a
This means that the freight charge on the goods shipped is already paid
cash refund if the purchase was for cash.
by the seller.
→ Decreases the amount and physical volume of the goods sold.

Freight Collect
Allowance
This means that the freight charge on the goods shipped is not yet paid.
→ May choose to keep the merchandise if the seller will grant a
The common carrier shall collect freight from the buyer.
reduction of the purchase price.
 Freight is not included in discounted payables because the discount
→ Decreases the amount but not the physical volume of the goods
only applies to the merchandise.
sold.
 Freight in/out can also be referred to as transportation in/out, but it is
different from transportation expenses.
“Sales Returns and Allowances" is typically used as the account title, as
 Freight costs incurred by the seller are an operating expense.
both are combined into a single account to track reductions in sales due
to product returns and allowances granted to customers.
Example
Assume upon delivery of the goods on May 6, Sauk Stereo pays Public
Freight Company $150 for freight charges, the entry on Sauk Stereo’s
books is:
Sales Return / Sales Allowances
Example = (contra-income - sales , debit)
Assume Sauk Stereo returned goods costing $300 to PW Audio Supply on
May 8.

May 8 Accounts Payable 300


Inventory 300
Summary of Purchasing Transactions
Buyer POV Seller POV
Purchases xxx A/R xxx
A/P xxx Sales xxx

A/P xxx S. Return xxx


P. Return xxx Sales xxx

A/P xxx S. Allow xxx


P. Allow xxx Sales xxx Example
On September 5, De La Hoya Company buys merchandise on account
In a perpetual inventory system, a return of defective merchandise by a from Junot Diaz Company. The selling price of the goods is $1,500, and
purchaser is recorded by crediting: the cost to Diaz Company was $800. On September 8, De La Hoya
→ Inventory returns defective goods with a selling price of $200. Record the
The cost of goods sold is determined and recorded each time a sale transactions on the books of De La Hoya Company.
occurs in:
→ a perpetual inventory system only. Sept. 5Inventory 1,500
Accounts Payable 1,500
Credit Memorandum Sept. 8 Accounts Payable 200
Formal acknowledgement that the seller has reduced the amount owed Inventory 200
by the customer.
● Buyer: Debit Cash, Credit Purchase R & A
● Seller: Debit Sales R & A, Credit Cash Record sales under a perpetual inventory system.
→ Made using cash or credit (on account).
Rule: To issue a credit memo, the transaction typically starts as accounts → Sales revenue, like service revenue, is recorded when the
payable. However, if the transaction was paid using cash, the account performance obligation is satisfied.
titles will still depend on the original entry made at the time of the → Performance obligation is satisfied when the goods are
transaction. transferred from the seller to the buyer.
→ Sales invoice should support each credit sale.
Note:
Purchase Return / Purchase Allowances Recording Sales of Merchandise
= (contra-expense - buyer, credit)
Example
PW Audio Supply records the sale of 3,800 on May 4 to Sauk Stereo on
account (Illustration 5-6) as follows (assume the merchandise cost PW
Audio Supply 2,400).

May 4 Accounts Receivable 3,800


Comparison of Entries – Perpetual vs. Periodic Sales Revenue 3,800
Cost of Goods Sold 2,400
Inventory 2,400

Adjusting Entries
→ Generally the same as a service company.
→ One additional adjustment to make the records agree with the actual
inventory on hand.
→ Involves adjusting Inventory and Cost of Goods Sold.

Example
Suppose that PW Audio Supply has an unadjusted balance of $40,500 in
Merchandise Inventory. Through a physical count, PW Audio determines
that its actual merchandise inventory at year-end is $40,000. The
company would make an adjusting entry as follows.
Cost of Goods Sold 500
Inventory 500

Closing Entries
Rent Expense 8,800
Salaries and Wages Expense 22,000

Multiple-Step Income Statement


→ Shows several steps in
determining net
income.
→ Two steps relate to
principal operating
activities.
→ Distinguishes between
operating and non-
operating activities.

The multiple-step income


statement for a
merchandiser shows each
Example of the following features except:
The trial balance of Celine’s Sports Wear Shop at December 31 shows → investing activities section.
Inventory 25,000, Sales Revenue 162,400, Sales Returns and Allowances
4,800, Sales Discounts 3,600, Cost of Goods Sold 110,000, Rent Revenue Single-Step Income Statement
6,000, Freight-Out 1,800, Rent Expense 8,800, and Salaries and Wages Subtract total expenses from
Expense 22,000. Prepare the closing entries for the above accounts. total revenues

Dec. 31 Sales Revenue 162,400 Two reasons for using the


Rent Revenue 6,000 single-step format:
Income Summary 168,400 1. Company does not
realize any profit until
The trial balance of Celine’s Sports Wear Shop at December 31 shows total revenues exceed
Inventory 25,000, Sales Revenue 162,400, Sales Returns and Allowances total expenses.
4,800, Sales Discounts 3,600, Cost of Goods Sold 110,000, Rent Revenue 2. Format is simpler and
6,000, Freight-Out 1,800, Rent Expense 8,800, and Salaries and Wages easier to read.
Expense 22,000. Prepare the closing entries for the above accounts.
Classified Balance Sheet
Dec. 31 Income Summary 151,000
Cost of Goods Sold 110,000
Sales Returns and Allowances 4,800
Sales Discounts 3,600
Freight-Out 1,800
 VAT is included in the amount payable to the seller but should not
be recorded as an addition by the buyer.
 Tax Rate: 12% based on Amount Billed or Sales (whether selling
goods or services).

Input VAT
The VAT paid on the domestic purchases or VAT paid on the importation
of goods and services by the taxpayer.
 Point of View (POV): Buyer
 Tax Base: Purchases
 Increase in A/P or Cash (Payment)
 Recorded as a debit
Worksheet for merchandising company
—periodic inventory system Output VAT
The VAT passed on to customers or clients by a VAT taxpayer on
his/her sales to customers.
 POV: Seller
 Tax Base: Sales
 Increase in A/R or Cash (Receipt)
 Recorded as a credit

Note:
 If Output VAT > Input VAT = VAT Payable
 If Input VAT > Output VAT = Creditable Input VAT
 Formula for Exclusive VAT: Multiply by 12%.
 Formula for Inclusive VAT: Divide by 1.12, then multiply by 12% or
by 3/28.

Things to Remember:
Value Added Tax
 Output VAT - Input VAT = VAT Payable
A tax on the value added to the purchase price or cost in the sale or  Output VAT + Input VAT = Creditable Input VAT
lease of goods, property, or services in the course of the trade or
business. It is imposed on the value added in each stage of distribution.
Note:
It is an indirect tax that may be shifted or passed on to the buyer
 Creditable Input VAT is deducted from future Output Tax.
transferee or lessee of the goods, property or services.
 VAT Payable is treated as a current liability payable to the BIR.
 VAT stands for Value-Added Tax, a tax imposed on the purchase
and sale of goods. Sample Pro-forma Transactions:
1. Sale of Merchandise (Seller's POV):
o Debit: Cash/AR 3. Record VAT Payable (Output VAT > Input VAT):
o Credit: Output Tax, Sales o Debit: Output VAT P3,000
2. Merchandise Returns (Seller's POV): o Credit: Input VAT P2,400, VAT Payable P600
o Debit: SRA, Output Tax 4. Payment of VAT Payable:
o Credit: Cash/AR o Debit: VAT Payable P600
3. Collection of Account within the Discount Period: o Credit: Cash P600
o Debit: Cash
o Credit: SD, Output Tax, A/R Periodic System Example 2:
1. Zoro purchased merchandise on account (P224,000 inclusive of
Sample Pro-forma Transactions (Buyer's POV): VAT):
1. Purchase of Merchandise: o Debit: Purchases P200,000, Input VAT P24,000
o Debit: Purchases, Input VAT o Credit: A/P P224,000
o Credit: Cash/AP 2. Zoro returned defective merchandise (P56,000 inclusive of VAT):
2. Return of Defective Merchandise: o Debit: A/P P56,000
o Debit: Cash/AP o Credit: Input VAT P6,000, PRA P50,000
o Credit: Input VAT, PRA 3. Zoro sold merchandise (P201,600 inclusive of VAT):
3. Payment of Account within Discount Period: o Debit: Cash P201,600
o Debit: A/P, PD, Input VAT o Credit: Output Tax P21,600, Sales P180,000
o Credit: Cash 4. Zoro received returns from Sanji Corp (P22,400 inclusive of VAT):
o Debit: SRA P20,000, Output Tax P2,400
Recording VAT Payable & Creditable Input VAT: o Credit: Cash P22,400
1. To Record VAT Payable (Output VAT > Input VAT):
o Debit: Output VAT Final Example Transactions:
o Credit: Input VAT, VAT Payable 1. Zoro settled its account with Rolex Corp:
2. To Record Creditable Input VAT (Input VAT > Output VAT): o Debit: A/P P168,000, PD P3,000, Input VAT P360
o Debit: Output VAT o Credit: Cash P164,640
o Credit: Creditable Input VAT, Input VAT 2. Record VAT Payable:
3. Payment of VAT Payable: o Debit: Output VAT P19,200
o Debit: VAT Payable o Credit: Input VAT P17,640, VAT Payable P1,560
o Credit: Cash 3. Payment of VAT Payable:
o Debit: VAT Payable P1,560
Periodic System Example 1: o Credit: Cash P1,560
1. NU Corp made a credit purchase (P20,000 plus 12% VAT):
o Debit: Purchases P20,000, Input VAT P2,400
o Credit: A/P P22,400
2. NU Corp sold merchandise (P25,000 plus 12% VAT):
o Debit: Cash P28,000
o Credit: Output Tax P3,000, Sales P25,000
;

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