Bsa 1st Term Lessons Iaf
Bsa 1st Term Lessons Iaf
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).
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.
NATURE OF ACCOUNTING
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.
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
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.
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.
Design Studio.
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
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.
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.
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
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.
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.
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
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
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.
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
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
;