FINANCIAL ACCOUNTING AND REPORTING

ASSETS
FOUR FUNDAMENTAL CONCEPTS  the economic resources you control that have
resulted from past events and can provide you
1. ENTITY CONCEPT with economic benefits.
 The transactions of different entities should not be  Right, potential to produce economic benefits,
accounted for together. Each entity should be control.
evaluated separately. CURRENT ASSETS
2. PERIODICITY CONCEPT  REALIZED
 An entity’s life can be meaningfully subdivided into - Collected, consumed, intend
equal time periods for reporting purposes. - To sell operating cycle
3. STABLE MONETARY UNIT CONCEPT  PURPOSE OF TRADING
 It is the basis for ignoring the effects of inflation in - Buy and sell
the accounting records.  CASH OR CASH EQUIVALENT
4. GOING CONCERN - Not restricted for current use
 It is assumed that the entity has neither the - No restriction
intention nor the need to enter liquidation or to - EXPECTED TO BE REALIZED WITHIN 12
cease trading. MONTHS

BASIC PRINCIPLES LIABILITIES

 It is a present obligation of the entity to transfer an
1. OBECTIVITY PRINCIPLE economic resource as result of past events.
 Without this principle, accounting records would  Expected to be settles within 12 months.
be based on whims and opinions and is therefore
subject to disputes. EQUITY
2. HISTORICAL COST  It Is the residual interest in assets of the enterprise
 It acquired assets should be recorded at their after deducting all its liabilities.
actual cost and not at what management thinks  They are claims against the entity that do not
they are worth as at reporting date. meet the definition of a liability.
3. REVENUE RECOGNITION PRINCIPLE
 Revenue is to be recognized in the accounting FINANCIAL PERFORMANCE
period when goods are delivered or services are INCOME
rendered or performed.  It is increases in assets, or decreases in liabilities,
4. EXPENSE RECOGNITION PRINCIPLE that result in increases in equity, other than those
 Expenses should be recognized in the accounting relating to contributions from holders of equity
period when goods and services are used up to claims.
produce revenue and not when the entity pays for EXPENSES
those goods and services.  It decreases in assets, or increases in liabilities,
5. ADEQUATE DISCLOSURE that result in decreases in equity, other than those
 Requires that all relevant information that would relating to distributions from holders of equity
affect the user’s understanding and assessment of claims.
the accounting entity be disclosed in the financial
statements.
6. MATERIALITY
 It depends on the size and nature of the item
judged in the particular circumstances of its
omission.
7. CONSISTENCY PRINCIPLE
 The firms should use the same accounting
method from period to achieve comparability over
time within a single enterprise.
8. ACCRUAL BASIS
 Income is recognized in the period when it is
earned rather than when it is collected, while
expense is recognized in the period when it is
incurred rather than when it is paid.

CHART OF ACCOUNTS

BALANCE SHEET ACCOUNTS

THE ACCOUNTING EQUATION ACCT. NO.
ASSETS
ASSETS = LIABILITIES + EQUITY 110 Cash
120 Accounts Receivable  Determine whether to debit or credit the
125 Allowance for bad debts account to record its increase or decrease.
130 notes Receivable
140 Inventory THE GENERAL JOURNAL
150 Prepaid Supplies  Shows all the effects of a transaction in
155 Prepaid Rent terms of debits and credits
160 Prepaid Insurance POSTING
170 Building  Transferring the amounts from the general
180 accumulated Depreciation- Bldg. journal to appropriate accounts in the ledger.
190 Equipment THE LEDGER
195 Accumulated depreciation- Equipment  A grouping of accounts. Used to classify and
summarize transactions and to prepare data
LIABILITIES for basic financial statements.
210 Accounts payable TRIAL BALANCE
220 Notes payable  Listing all ledger account, in order, with their
230 Interest payable perspective debit or credit.
240 Salaries Payable
250 Utilities payable STEP 2: TRANSACTIONS ARE JOURNALIZED
260 Unearned income  After the transactions or event has been
identified and measured, it is recorded in the
EQUITY journal. This process of recording a
310 Owner’s capital transaction is called journalizing.
320 Unearned income
STEP 3: POSTING
 Posting means transferring the amounts
INCOME STATEMENT ACCOUNTS from the journal to the appropriate accounts
ACCT. NO. in the journal.
INCOME STEP 4: TRIAL BALANCE
410 Service fees  It is a list of accounts with their respective
420 Sales debit or credit balances.
430 Interest income STEP 5: ADJUSTED TRIAL BALANCE
440 Gains 1. DEFERRAL
 It is the postponement of the recognition of
EXPENSES “an expense already paid but not yet
510 Cost of sales incurred” or of “revenue already collected but
515 Freight-out not yet earned.” (recorded)
520 Salaries Expense  Decreases the balance sheet account and
525 Rent Expense increases an income statement account.
530 Utilities Expense 2. ACCRUAL
535 Supplies Expense  It is the recognition of “an expense already
540 Bad Dept expense incurred but unpaid”, or, “revenue earned but
545 Depreciation Expense uncollected” (unrecorded)
550 Advertising expense  Increases both a balance sheet and an
555 Insurance Expense income statement account.
560 Taxes and licenses
565 Transportation and travel expense
570 Interest expense
575 Miscellaneous expense
580 Losses

BASIC FINANCIAL ACCOUNTING & REPORTING

STEP 1: TRANSACTION ANALYSIS

 Identify the transaction from source
documents.
 Indicate the accounts affected by the
transactions.
 Ascertain whether each account is
increased or decreased by the transactions.