FINANCIAL ACCOUNTING and

REPORTING
(First Semester)

COURSE OUTLINE
1. Introduction to Accounting
2. Accounting Concepts and Principles
3. The Elements of Accounting
4. The Accounting Equation
5. Business Transactions and their Analysis
6. Posting to the Ledger and Trial Balance
7. Preparation of Adjusting Entries
8. Preparation of Financial Statements
9. Closing Entries and Posting Trial Balance
10. Accounting Cycle for Merchandising
11. Special Journals
 CHAPTER 1 terms of money, transactions and events
INTRODUCTION TO ACCOUNTING which are in part at least of a financial
character and interpreting the results
LEARNING OBJECTIVES: thereof.
- AICPA - organization of CPAs in
At the end of this chapter, the student should be
able to: USA
- PICPA - organization of CPAs in
1. Define and understand the nature of Philippines, orgs in the Phil have
Accounting strict membership, dapat mapasa
2. Trace the history of Accounting muna yung licensure exams nila
- ACCTG - recording, classifying,
3. Determine the Functions of Accounting summarizing, and interpreting
● The American Accounting Association in
4. Identify the users of Accounting Information
its Statement of Basic Accounting Theory
5. Enumerate and explain the branches and defined “Accounting” as the process of
areas of Accounting identifying, measuring, and
communicating economic information to
DEFINITION OF ACCOUNTING permit informed judgment and decision by
● The Accounting Standards Council users of the information.
defined “Accounting” as a service activity. - (a) Identifying, (b) measuring, (c)
Its function is to provide quantitative communicating
information, primarily financial in nature, - (a) identifying - identify is the
about economic entities, that is intended to financial transaction is personal or
be useful in making economic decisions. business related
- Accounting Standards Council - - (b) measuring - all are measured
Standards setting body in the with currency; Valuation - record
Philippines based on the with new or old price
International Accounting Standards - (c) communicating - comm to the
- ASC is renamed as Financial users through submission of
Reporting Standard Council financial statements
- International Accounting - Accounting is a process with the basic
Standards - used in the whole world purpose of providing information about
- ASC & IAS may differ from economic activities that is intended to be
terminologies, tax standards. useful in making economic decisions
- Service - because we render
accounting services ACCOUNTING AS SCIENCE AND ART
- Quantitative - In accounting we deal ● As a social SCIENCE, accounting is a body
with money of knowledge which has been
- Entities / Company - to whom we systematically gathered, classified and
provide these quantitative organized
informations - May sistema na sinusunod =
- Decision making - use these quanti Acctg process, cycle
info to make economic decisions - Science - there is a step or
● The Committee on Accounting Terminology procedure to be followed
of the American Institute of Certified ● As a Practical ART, accounting requires the
Public Accountants defined “Accounting” use of creative skills and judgment
as the art of recording, classifying, and (Millan, 2019)
summarizing in a significant manner in - In Acctg we give judgement
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 - Creative skills and judgement are are all business activities but such events
mostly used in auditing - (1) examine are not accountable, because they cannot
records; if complying in internal be quantified or expressed in terms of a
control or committing fraud, (2) after unit of measure.
auditing; auditors give opinions / - Accountable Events / economic events -
audit findings that are based on their are those that affect the assets, liabilities,
judgements equity, income or expenses of a business.
Sociological and psychological matters are
WHAT IS A BUSINESS TRANSACTION? outside the scope of accounting
● It is an event that has a direct effect on the - (1) Is it considered a business transaction?
operation of the economic unit and can be - Payment of salaries = yes
expressed in terms of money. - sell of personal car to client = no
- Directly related to the operation of - (2) Is it accountable or not?
the business - effect in journal entries; not accountable =
- May effect sa Acctg Equation / no journal entry
transaction - (3) Is it external or internal?
● Ex. Buying and Selling of goods, renting a - External - 1 + 1; one entity and another
building, paying employees, buying new entity
office equipment, buying new office - Internal - one entity only
equipment and any other activity of a
business that involves exchanges of values ECONOMIC ACTIVITIES
in monetary items ● may be classified as external and internal.
● External Transactions or exchange
ACCOUNTING HAS A NUMBER OF transactions are those economic events
COMPONENTS (to know if a transaction is a involving one entity and another entity
business transaction): - Examples: Purchase of
1. Identifying as the analytical component merchandise from a
- Analytical - business or personal supplier, borrowing money
from a bank, sale of
transaction; accountable or not;
merchandise to customer
external or internal
and payment of salaries to
2. Measuring as the technical component
employees.
- Technical - measurement bases
● Internal Transactions are economic events
3. Communicating as the formal component involving the entity only.
- Formal - financial reports are - Examples: Production and Casualty
formatted = financial statements Loss
- Not verbal but still communicable
PRODUCTION
1. IDENTIFYING ● is the process by which resources are
● This accounting process is the recognition transferred into products.
or non-recognition of business activities
as “Accountable events” or “non- CASUALTY
accountable events”. ● is any sudden and unanticipated loss from
● Only “Accountable events” are recorded in fire, flood, earthquake and other event
the books of accounts ordinarily termed as an act of God.
● Not all business activities are
accountable. For example, the hiring of
employees, The death of the entity
president and the entering into a contract

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2. MEASURING reports
● is the assigning of peso amounts to the - This is important because information
accountable economic transactions and processed in the accounting system is
events. Financial statements without useless unless it is communicated to
monetary amounts would be largely interested users
unintelligible or incomprehensible. The - Accounting information is
Philippines peso is the unit of measuring communicated to interested users
accountable economic transactions. through accounting reports, the most
- Assigning of peso amounts = put currency common form of which is the financial
- Proper way of doing acctg is putting statements
currency; Philippines = ₱ - Communicate to the user
- Accountants exist to help in formulation
FOUR MEASUREMENT BASES OR FINANCIAL reports to the users through financial
ATTRIBUTES statements
● Historical Cost - this is identified as the - Record, classify, summarize = need
original acquisition cost. tapusin yang 3 before magpass
● Current Cost - this is identified as
replacement cost or the current purchase RECORDING OR JOURNALIZING
price ● is the process of systematically
● Realizable Value - this is identified as maintaining a record of all economic
current selling price or the amount that business transactions after they have been
could currently be obtained by selling the identified and measured.
asset in an orderly disposal. - The accountant recognizes the identified
● Present Value - This is the discounted “accountable events”, this process is
value of the future net cash inflows that called journalizing
the asset is expected to generate in the - After journalizing, the accountant then
normal course of business. classifies the effects of the event on the
- Ex. Bought land 2 years ago for “accounts” this process is called posting
₱1,000,000 - Account - the basic storage of information
- HC - 1M / Original acquisition cost in accounting; e.g. cash, land, sales, etc.
- CC - 1.2M / Current price today; land
appreciates over time CLASSIFYING
- RV - Magkano natanggap / Magkano ● is the sorting or grouping of similar and
narealize; 1.15M = RV; 50k = Bad debts interrelated economic transactions into their
- PV - if 1.1M is invested; value of the respective classes.
investment today
SUMMARIZING
3. COMMUNICATING ● is the preparation of financial statements
● is the process of preparing and which include the statement of financial
distributing accounting reports to position, income statement, statement of
potential users of accounting comprehensive income, statement of
information. Implicit in the changes in equity and statement of cash
communication process are the flows.
recording, classifying and summarizing - Make trial balance
aspects of accounting.
- At the end of each accounting period,
the accountant summarizes the
information processed in the accounting
system in order to produce meaningful
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INTERPRETING http://EzineArticles.com/456988)
● The accountant‟s interpretation on the - Barter system
financial statement is needed. Analysis ● Other ancient civilizations keeping
reports are submitted together with the account records are Babylonia (4,500 BC),
financial statements. Egypt (2,250BC), China and Greece.
- Use of financial measurement ● In the Middle ages (13th and 15th
centuries), trades flourished in places
TYPES OF INFORMATION PROVIDED BY such as Florence, Venice and Genoa)
ACCOUNTING this has brought advancement in account
1. Quantitative Information – Information keeping methods. In 1211 A.D, one of the
expressed in numbers, quantities, or units systems in accounting was kept by a
- Expressed in numbers Florentine Banker. However the system
2. Qualitative Information- Information was primitive as the concept of equality
expressed in words or descriptive form. for entries was absent. Double Entry
Qualitative information is found on the records first came out during 1340 AD in
notes to financial statements as well on Genoa.
the face of the other components of the - 13th - 15th centuries trading is
financial statements. absolutely present; as well as
- Expressed in words importing and exporting that started
- Reports are descriptive explanation in Florence, venice, and Genoa
3. Financial Information- Information - Nagstart ang concept ng debtor and
expressed in money, financial information credit
is also quantitative information because Debtor = Debit
monetary amounts are normally expressed Creditor = Credit
in numbers (Millan, 2019) - Accounting actually started in LATIN
- Financially in nature DEBERE - Debit - Dr.
- Expressed in money CREDERE - Credit - Cr.
- Not just number but can be - F. Banker - tried to equalize; used
converted to money debit and credit but failed to balance
● In 1494, the first systematic record
BRIEF HISTORY OF ACCOUNTING keeping dealing with the “double entry
● Accounting can be traced as far back as the recording system” was formulated by Fr.
prehistoric times. Since the dawn of Luca Pacioli, a Franciscan monk and
civilization when mankind began to engage mathematician. The double entry recording
in trade, perhaps more than 10,000 years system was included in Pacioli‟s book titled
ago, methods of record keeping and “Summa di Arithmetica Geometria
accounting have been invented. Proportioni et Proportionalita” published
● As early as 8500B.C, accounting has on November 10, 1494 in Venice.
already existed. Archaeologists have found ● In this book, Pacioli introduced three
clay tokens as old as 8500 B.C. In important books of records, namely:
Mesopotamia which were usually cones, A. Memorandum Entry- For all
disks spheres, and pellets. These tokens information on a transaction
B. Journal Book- For the original entry
correspond to commodities like sheep,
C. Ledger Book- For the final entry
clothing, or bread. They were used in the ● The concept of Double Entry Recording is
Middle West in keeping records. After being used up to this day. Thus, FR. LUCA
some time, the tokens were replaced by PACIOLI is considered as the Father of
wet clay tablets. During such time, Modern Accounting. (Millan, 2019 and
experts concluded this to be the start of the Roxas, Valencia, 2018)
art of writing (Source: - L. Pacioli - introduced the double entry;
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 dapat equal ang debit and credit all Employees, Customers, Public.
throughout the acctg. cycle (Millan, 2019)
- Existing and Potential Investors - to
FUNCTION OF ACCOUNTING IN BUSINESS know kung tama yung kita na ibibigay
● Accounting is often referred to as the sakanila; interested in their probable
“Language of Business” because it is earnings and the safety of their
fundamental to the communication of investments
financial information. - Lenders and Creditors - to identify if
- Business cannot exists without all loaned funds and related interest
accounting charges will be repaid
- F. reports tells what really happens - Non-managerial- part ng company but
in the business hindi nagdedecide; to know potential
- Accounting will not survive without promotion, incentives, salary increase
business - Public - possible investor or employee
● Accounting has the following two broad in the future; may demand to calculate
functions in a business: the effect of the company on the
1. To provide external users with economy
information that is useful in making - Government - taxes; In the Philippines,
among others, investment and the Bureau of Internal Revenue (BIR)
credit decisions also uses financial statements as a
2. To provide internal users with basis for assessing the amount of tax
information that is useful in payable by a business.
managing the business (Millan, - Customer - Lifeblood ng business;
2019). hanggat may customer buhay ang
business; to ascertain that a company
USERS OF ACCOUNTING INFORMATION can keep on supplying them into the
1. INTERNAL USERS - Those who are future
directly involved in managing the
business. TYPES OF ACCOUNTING INFORMATION
- Examples: Business Owners who are CLASSIFIED AS TO USER’S NEEDS
directly involved in managing the 1. GENERAL PURPOSE ACCOUNTING
business, Board of Directors, INFORMATION - It is an information
Managerial Personnel designed to meet the common needs of
- The ones who manage and decide for most statement users, it is provided by
the business financial accounting and is prepared
- Business owners - to primarily know if primarily for external users
they are profiting or not - Lahat ng information anjan
- BOD - decision makers; to know what - Provided by financial accounting for
to decide external users
- MP- in charge of operations; to know if - Common needs or user / lahat
what they‟re doing in the operation is gumagamit
effective and profitable - Financial accounting follows the
2. EXTERNAL USERS - Those who are Accounting Standards
not directly involved in managing the 2. SPECIAL PURPOSE ACCOUNTING
business. INFORMATION - Is information designed
- Examples: Existing and Potential to meet the specific needs of particular
Investors, Lenders, Government statement users. It is provided by
Agencies, Non Managerial E management accounting or other

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 branches and is prepared primarily for
3. Internal Whether or Analysis of
internal users. (Millan, 2019) User not to the effects
- Specific people use (Manager) increase of sales
- Prepared by management accounting for the sale volume and
internal users price of a sales prices
- Management accounting do not follow the product to earnings
accounting standards (Special
How much Purpose
capital is Information)
EXAMPLES OF DECISIONS AND TYPES OF
INFORMATION NEEDED TO MAKE THOSE needed to
manufactur Budget
DECISIONS (Millan, 2019)
e a new Report
Users Example of Example of (Special
product?
Decision/s to Information Purpose
make needed Information)

1. External Existing Audited

User Investor: Financial
(Investor) Whether to Statements GENERALLY ACCEPTED ACCOUNTING
hold or sell of the PRINCIPLES
investment business to ● Accounting rules, procedures, and
in stocks aid in
practices came to be known as Generally
analysing
Potential the value of Accepted Accounting Principles
Investor the (GAAP).
Whether or company ● Simply stated, Generally Accepted
not to buy (General Accounting Principles/ Accounting
shares of Purpose Standards represent the rules,
stocks Information)
procedures, practice and standards
2. External Lender: Audited followed in the preparation and
User Whether or Financial presentation of financial statements.”
(Lender or not to Statements ● Generally Accepted Accounting Principles
Supplier) extend of the are like Laws that must be followed in
loan to a business to financial reporting.
business aid in - During ASC its called GAAP
analysing
(Generally Accepted Accounting
Supplier: the
Whether or company‟s Principles)
not to ability to - During FRSC its called PFRS
extend pay its (Philippine Financial Reporting
credit to a debts Standards) and PAS (Philippine
business (General Accounting Standards)
Purpose
Information)
FINANCIAL REPORTING STANDARDS
COUNCIL (Replaces the ASC)
● On November 18, 1981, The Philippine
Institute of Certified Public Accountants,
the national professional body of CPA‟s in
the Philippines, created the Accounting
Standards Council as the accounting
standard body in the Philippines, to
establish and improve accounting
standards that will be generally accepted
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 in the Philippines. business enterprise. The auditor
● In 2004, The Philippine Regulations evaluates the accounting
Commission (PRC) created the Financial system of business enterprise
Reporting Standard Council (FRSC) and carefully examines the
replacing the ASC. The FRSC was records to see to it that
created to assist the Board of transactions have been properly
Accountancy (BOA) to carry out its recorded. After conducting his
powers and functions provided under examination, the auditor issues
Republic Act No. 9298, The Philippine a report expressing an opinion
Accountancy Act of 2004 as to the fairness of the financial
● The approved accounting standards of statements.
the FRSC are known as the Philippine - Most public accountants are
Financial Reporting Standards (PFRS) in auditing
and Philippine Accounting Standards - Auditing is the examination
(PAS) which fully took effect on January of records
1, 2005, statements of the FRSC are - Examining all the available
known as “Philippine Accounting
source documents (e.g.
Standards or PAS and Philippine
receipts) of the company and
Financial Reporting Standards or PFRS.”
recording it in the book of
accounts
CAREER FIELDS IN ACCOUNTING
- The work of the Accountant
1. PUBLIC ACCOUNTING
ends when the work of the
● composed of individual practitioners,
Auditor begins
accounting firms and large
- Magstart lang trabaho ng
multinational organizations that
auditor pag natapos trabaho
render independent expert financial
ng accountant since ang
services to the public in a
unang documents na hihingin
professional fee basis. (Dean Ester
ng auditor ay Financial
F Ledesma)
Statements
- Not working for the government
- External Auditors in Public
- You are on the public practice
Acctg. Hence they are not
(commonly on accounting and
part of the company‟s
auditing firms)
employees; all audit findings
- Public Acctg. is a good start
are accepted and matters
because it applies most of what
- External Auditing is also
were taught in college
called Independent
● Professional Accountants who
Auditing; Independent
work in public accounting firms are
Auditor
usually Certified Public
Accountants (CPA‟s). A Public b. Management Advisory
Accountant may perform one or Services - includes the design,
more of the following services: installation and improvement
(Arenas T, Chua, M. & Villarina F. of firm‟s general accounting
(2018) system and other system
deemed necessary for
controlling and distributing
a. Auditing- In performing an manufacturing costs. Individuals
Audit, the accountant makes an who provide management
independent examination of advisory services need not be
the financial statements of a CPA’s. in fact they need not be
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 Accountants at all. The area of business enterprise is called
Management Advisory CONTROLLER.
Services includes financial - Chief Accountant
planning and control, the - Head of the entire accounting
development or improvement department (Usually CPA)
of an accounting or computer - Control all the accounting operations
system, financial forecasting, ● The Chief Financial Officer is called
and advice on mergers and FINANCE MANAGER.
consolidations. - Responsible of the entire finance
- Becomes a consultant of department
the company; you are the - CFO/ FM/ Finance Head
business consultant ● TASKS IN PRIVATE ACCOUNTING
- Give advice to the a. General Accounting- performing
management regarding to
the entire accounting process,
various services like
accounting, finance, and from identifying to recording
other aspects transactions and the preparation of
- Commonly, people in MAS financial statements for the use of
are experts; tackles and management.
reviews the business - Practices everything; have to work
problems
- Management Accounting and know everything
and MAS are almost the - Handles the entire accounting
same department

c. Tax Services- It includes giving b. Cost Accounting- it has something

advice in the possible tax to do with controlling, determining
consequences of a certain
financial decisions, preparing and controlling costs particularly
income tax returns and those costs in producing a
representing clients before product or service.
government agencies such as - Focuses on Manufacturing cost of
BIR during a tax audit. the companies
- Determination of tax
- Costing of products ng companies
consequences of certain
proposed business
endeavors c. Budgeting- Provides management
- Compute and file taxes of a plan for future operations after
clients this plan has been applied,
- Represents their clients to summaries and reports comparing
BIR the actual accomplishments with the
- Called External Tax plan are provided.
Experts - Budgeting Officer
- Tax is a complex and - Difficult task since with the limited
difficult topic budget you need to effectively
allocate to all the departments
2. PRIVATE ACCOUNTING - Normally, finance function ang
budgeting
● An accounting job done in private
business enterprises. The accountant
works as an employee of a business d. Internal Auditing- Establishes
enterprise. They may be employed in accounting procedures are being
various capacities. (Arenas T, Chua, M. & followed throughout the year. The
Villarina F. (2018) task of conducting a review of the
- Most of the accountants and CPAs work in company‟s operations to determine
Private Accounting
adherence to management
- Private practices; private companies
● The Chief Accounting Officer of a
8
 policies and measuring efficiency
of operations. 4. ACCOUNTING EDUCATION
- Internal Auditor - employee of the ● is another Professional field where the
company accountant assumes the role of
- Checks the entire operation of the researcher, teacher and reviewer. (Vera
company not just its financial Cruz- Manuel, Z. (2018)
statements of its abiding to quality - Refers to teaching accounting and
product and services accounting-related subjects in an organized
- Internal auditor are commonly the learning environment.
company departments‟s enemy; - It is a process of facilitating the acquisition
since you audit all the departments of knowledge and skills regarding one or
moore of the other branches of accounting
e. Accounting / Management a. Researcher- investigates and makes a
Information System- task of study creating, applying, relating or
designing and setting up a manual improving accounting theories and
or computerized accounting business concepts that suit the changes
system taking place in a particular business or
- IT accountants; both good at IT and industry.
Accounting - People who works at ASC;
- Proficient of different accounting prepares and researches our
softwares. accounting standards
b. Accounting Professor- is responsible
for the formation of competitive
3. GOVERNMENT ACCOUNTING accountants and consultants and
● Accounting for the national government teaching subjects such as accounting,
and its instrumentalities such as auditing, management advisory services
provinces, towns and cities. They are of and other subjects
concerned with public funds. (Arenas T, - Teach accounting in colleges.
Chua, M. & Villarina F. (2018) c. Accounting Reviewer- helps prepare
● Example of government agencies the candidates for the CPA Licensure
requiring the services of professional Examination.
accountants are the Commission on - Professors in review centers;
Audit (COA), Bureau of Internal Revenue normally the authors of the books
(BIR), Bangko Sentral ng Pilipinas, GSIS,
and Bureau of Custom. AREAS OF SPECIALIZATION:
- COA - auditor; called Government Auditor; - (Vera Cruz- Manuel, Z. (2018), (Dean Ester
assigned to different gov’t department F. Ledesma)
agencies; mabigat yung task since you are ● Basic Accounting or Bookkeeping - is
to seek findings and corruption the routine activity of recording, classifying
- BIR - collection of taxes in the Phil.; and summarizing business transactions in
collect national (Percentage Tax, VAT, and a systematic manner. It is the procedural
Income tax) and local taxes aspect of accounting.
- BOC - focuses on parcels (imports and - Procedural / procedures
exports) e.g.custom duty tax, import tax ● Financial Accounting - involves the
- BIR, BOC, and Bureau of Treasury are all preparation and interpretation of
under Department of Finance (employees Financial Statements primarily for external
are usually CPA) users.
- BSP - gumagawa ng pera - Preparation and presentation of

9
 financial statements those funds are committed, and the
- Follows the accounting standards responsiblity and accountability of the
- Focuses on general purpose financial individuals entrusted with those funds.
statements - Usually iba terminologies sa government
● Cost Accounting- deals with the ● Fiduciary Accounting (Trust Accounting,
recording, classifying and summarizing the Estate Accounting, Receivership
details of material, labor and overhead Accounting)- Handling of accounts
necessary to produce and sell a product managed by a person entrusted with the
or service. custody and management of property for
- Focuses on costing of the business‟ the benefit of another. (Examples: Banks,
products Insurance Companies, Mutual Trust,
- Products are costed one-by-one Pension Plans)
● Managerial Accounting- is the - More on estate, trust funds, mutual funds,
presentation of accounting data primarily investments, cash surrender value
for management who are considered the (Magano magiging value ng pera mo after
internal users. The special reports will years)
assist managers in planning, directing ● Environment Accounting- The area of
and controlling the operation of the accounting that focuses on programs,
business as well as in managing activities and projects that are focused on
enterprise resources. care for Mother Earth.
- Focuses on management consultancy or - Tackles about biological assets (e.g.
advisory services living animals and plants)
- Ano yung mga pwede mong gawing reports ● Social Responsibility Accounting-
na pwedeng makatulong sa company pag Reporting of programs and projects that
nagpapa consult in financials (e.g. have to do with the upliftment of the
budgeting, capital budgeting,, finance, welfare of the people of a community or
financial managing, and financial analysis) nation.
- Interpreting part - Focuses more on foundations; NGOs
- Follows no standards - Companies commonly establishes
● Auditing- deals with independent foundations (Social Responsibility)
verification and examination of the
accounting records for the purpose of PHILIPPINE REGULATORY AGENCIES
giving an opinion on the fairness of its ● The practice of the accounting profession,
presentation. among others, is governed by regulatory
- Invloves the inspection of an entity‟s bodies such as the Professional
financial statements or business processes Regulation Commission, Board of
to ascertain their correspondence with the Accountancy and the Philippine Institute of
established criteria Certified Public Accountants. The financial
- External and internal reports prepared are also affected by the
- BSA = external; BSAIS = internal rulings and promulgations issued out by the
- Public Acctg - External Auditors Securities and Exchange Commission,
- Private Acctg - Internal Auditors Bangko Sentral ng Pilipinas, and the
- Government Acctg - Government Auditors Bureau of Internal Revenue.
● Government Accounting- deals with the
administration or uses of public funds, PROFESSIONAL REGULATION COMMISSION
to bring about service to the community.
● This is a government body in charge of
- Accounting in government
regulating and licensing the practice of a
- Focusing attention on the custody of public
profession like accounting, medicine,
funds, the purpose or purposes to which

10
 engineering, nursing and others. Among its franchise to operate, and foreign companies
primary functions are the following: doing business in the country.
a. Maintaining and enforcing - Companies are required to submit
professional examinations financial statements to SEC
b. Promulgating and implementing
standards and ethics in the practice BANGKO SENTRAL NG PILIPINAS (BSP)
of profession ● BSP Regulates the operations of all
c. Providing legal and other regulatory banks, as well as all importations (goods
services such as hearing formal coming into the country) and exportations
complaints (goods going out to other countries) of
d. Acting on valid complaints by goods. It also closely monitors foreign
suspending and revoking license of currency transactions and the Philippine
an erring professional. Peso exchange rate ensuring its stability
- Nagbibigay ng license sa CPA board exam through a series of measures it undertakes.
passers - Tasked in regulating banks and other
entities performing banking functions
BOARD OF ACCOUNTANCY - Responsible for fiscal and monetary
● Republic Act 3105 regulated on March 17, policies of the government
1978, the practice of accounting by - Gumagawa ng pera
creating the Board of Accountancy. It is
under the jurisdiction of the PRC and is BUREAU OF INTERNAL REVENUE (BIR)
tasked in setting up and promulgating a ● BIR ensures compliance of tax and license
set of professional standards and ethics requirements by all businesses. People and
in the practice of the accounting profession. business entities earning income are
It is composed of a chairman and six required to fill up and submit periodic tax
members appointed by the President of returns and pay for licenses, fees and
the Philippines upon the taxes.
recommendation of the PRC. It constantly - Tasked in collecting national taxes and
monitors the practice of accountancy in the administering the provisions of the Tax
Philippines by conducting exams to CPA Code
candidates, granting certificates to board - Taxes - tayo gumagawa ng taxes ng clients
passers, registering and suspending kaya may connection tayo sa BIR
members, conducting dialogues with
accountancy students, examinees, and PROFESSIONAL EXAMINATIONS, TITLES
accountants. AND ORGANIZATIONS RELATED TO
- Group of experienced CPAs ACCOUNTING IN THE PHILIPPINES AND
- Constructs the CPA Board Exam INTERNATIONAL
- Nagdedecide ng number ng papasa NAME OF NAME OF TITLES
EXAMINATIO PROFESSIONAL
NS ORGANIZATIONS
SECURITIES AND EXCHANGE COMMISSION
(SEC) Certified Philippine Institute
● SEC was established on October 26, 1936 Public Of Certified Public
Accountant Accountants CPA
under C.A 83. Its task is to safeguard
public interest. It regulates business Licensure (PICPA)
operations specifically of partnerships and Examination
corporations, entities granted license/

11
Certified Association Of Certified Chartered Institute
Accounting Accounting Payroll Of Payroll
Technician Technicians- CAT Professional Professionals CPP
(Cat Level 3) Canada (CPP) (CIPP UK)

Institute Of National Institute

MAAT
Certified Of Accounting
Management Technicians
Accountants (NIAT)
Australia (ICMA)
Certified Tax National Institute Of CTB
National Institute Bookkeeper Accounting
Of Accounting Technicians (NIAT)
Technicians
(NIAT) Certified Institute Of Internal
Internal Auditors
Certified Institute Of Auditor CIA
Accounting Certified
Technician Management RCA
(CAT Level 2) Accountants Certified Institute Of
-Registered Australia (ICMA- Management Management
Cost Australia) Accountant Accountants CMA
Accountant
(RCA) National Institute
Of Accounting Note: There are also other Local and International
Technicians Certifications available for Business and
(NIAT)
Accounting Professionals.
Certified Institute Of
Accounting Certified REFERENCES:
MICB Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals
Technician Bookkeepers-
of Accounting. Manila , Philippines: Education_Online, Inc.
(CAT Level 1) London, United Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of
-Certified Kingdom Accounting Principles. Quezon City: National Book Store
Bookkeeper Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015).
National Institute Accounting Principles. USA: Courier Kendallville
Of Accounting Millan, Zeus Vernon. (2019). Financial Accounting and
Technicians Reporting. Baguio City: Bandolin Enterprise
Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic
(NIAT) Accounting. Baguio City: Valencia Educational Supply
Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017).
Certified Tax Philippine Accounting for Partnership and Corporation. Manila: Millenium
Technician Association Of Books, Inc.
(CTT) Certified Tax CTT Vera Cruz- Manuel, Z. (2018). 21st Century Accounting
Technicians Inc. Process 16th Edition. Quezon City: Raintree Trading &
Publishing Inc.
(PACTT, Inc.)

12
 CHAPTER 2 - As the 1st stage is identifying if the
ACCOUNTING CONCEPTS AND PRINCIPLES transaction is personal or business
transactions
LEARNING OBJECTIVES: - Segregate personal and business
At the end of this chapter, the student should be transactions
able to: - Commonly violated in sole proprietorship
1. Define Accounting Concepts and Principles
2. Explain the different Basic Accounting 2. HISTORICAL CONCEPT PRINCIPLE
Concepts ● Under this concept, assets are initially
3. Enumerate and explain the various recorded at their acquisition cost.
Qualitative Characteristics of Financial - Initially recording assets based on the
Statements amount paid to acquire them: PPE, supplies

DEFINITION OF ACCOUNTING CONCEPTS AND 3. GOING CONCERN

PRINCIPLES ● it means that the accounting entity is viewed
● Set of logical ideas and procedures that as continuing in operation indefinitely in
guide the accountant in recording and the absence of evidence to the contrary.
communicating economic information. ● It is also known as CONTINUITY
● They provide a general framework by which ASSUMPTION
accounting practice can be evaluated and ● In other words, financial statements are
they serve as guide in development of new prepared normally on the assumption that
practices and procedures. the entity shall continue in operation for the
- Standards we follow in doing accounting foreseeable future.
and preparation of financial reports ● The opposite of going concern is
- Criteria; concepts we use in the actual Liquidating Concern. If the business
practice intends to end its operations or if it has no
- Guides in doing the accounting cycle other choice but to do so
- Application of the general framework - Continuous preparation of financial
- General Framework - skeletal or the statements
backbone
4. MATCHING CONCEPT
BASIC ACCOUNTING CONCEPTS ● Under this concept, some costs are initially
recorded as assets and charged as
1. SEPARATE ENTITY CONCEPT expenses only when the related revenue is
● the business is viewed as as a separate recognized.
person, distinct from its owners. - Match all expenses over revenue
● Only the transactions of the business are - Initially recording assets as an asset
recorded in the books of accounts. account when not in use however, when
● The personal transactions of the business used; its is now recorded as an expense
owner(s) are not recorded - Pag binili at hindi pa nagagamit, wag muna
● The application of the separate entity i-record as expense
concept is necessary so that the financial - Unused = ASSET
position and financial performance of a Used = EXPENSE
business can be measured properly, by
applying the separate entity concept, you 5. ACCRUAL BASIS OF ACCOUNTING
can objectively know if the business is really ● (Philippine Accounting Standard) PAS 1
earning profits, or if it has the ability to requires that an entity prepares its financial
do so.
13
 statements,except for cash flow information, ● THE STABILITY OF THE PESO
using the accrual basis of accounting. ASSUMPTION means that the purchasing
● Under the accrual basis of accounting, power of the peso is stable or constant
economic events are recorded in the and that its instability is insignificant and
period in which they occur rather than at therefore may be ignored.
the point in time when they affect cash. - Dapat stable or constant ang
● Thus, income is recognized in the period exchange rate ng peso to dollar;
when it is earned rather than when it is increasing dollar value = decreasing
collected, while expense is recognized in peso value
the period when it is incurred rather than
when it is paid. 8. MATERIALITY AND AGGREGATION
- INCOME = recorded or recognized kahit di ● This concept guides the accountant when
pa received applying accounting principles. This is
- EXPENSE = Recognize bills as expenses because accounting principles are
kahit di pa bayad since gamit na applicable only to material items.
● An item is considered material if its
6. TIME PERIOD omission or misstatement could influence
● It requires that the indefinite life of an entity economic decisions. Materiality is a matter
is subdivided into time periods or of professional judgment and is based on
accounting periods which are usually of the size and nature of an item being judged.
equal length for the purpose of preparing ● The relevance of information is being
financial reports on financial position, affected by its nature and materiality
financial performance and cash flows. ● Materiality of an item depends on relative
● The accounting period may be a calendar size rather than absolute size, what is
year or a natural business year (fiscal material for one entity may be immaterial
year) for another.
● A calendar year is a twelve month period ● Very often, materiality is dependent on
that starts on January 1 and ends on good judgment, professional expertise
December 31. and common sense.
● A natural year or fiscal year is a twelve
month period that starts on a date other 9. COST - BENEFIT (COST CONSTRAINT)
than January 1 and ends on any month. ● under this concept, the costs of processing
● An accounting period that is shorter than and communication information should not
12 months is called an “Interim Period” an exceed the benefits to be derived from the
interim period can be a month or quarter (3 information‟s use.
months) or a semiannual period (6 months). - Expenses should not exceed income
- Following a certain period; equal length
10. FULL DISCLOSURE PRINCIPLE
7. STABLE MONETARY UNIT ● The concept is related to both the concepts
● the monetary unit assumption has two of materiality and cost-benefit.
aspects, namely Quantifiability and ● Under the full disclosure principle,
stability of the peso, information communicated to users reflect a
● THE QUANTIFIABILITY ASPECT means series of judgmental trade-offs that strive
that the assets, liabilities, equity, income for:
and expenses should be stated in terms of a. Sufficient detail to disclose matters
a unit of measure which is the peso in the that make a difference to users
Philippines b. Sufficient condensation to make the
- Measured using one (1) currency information understandable,
14
 keeping in mind the costs of ● The fundamental qualitative characteristics
preparing and using it. are Relevance and Faithful
- There are corresponding items that needs Representation
to be disclosed ● Information must be both relevant and
- Often show in Notes to Financial faithfully represented if it is to be useful.
Statement - Talks about the primary characteristics of
- Breakdown of other details na wala financial statements
sa Financial Statements - Relates to the content and substance
- Dapat yung Relevance and faithful
QUALITATIVE CHARACTERISTICS OF Representation is pasok sa content and
FINANCIAL STATEMENTS substance ng financial data
- Para magamit and useful we make sure that
DEFINITION OF QUALITATIVE it is relevant and faithfully represented; pag
CHARACTERISTICS hindi = hindi siya useful
● Are the qualities or attributes that make
financial accounting information useful to A. RELEVANCE
the users ● It means the capacity of information to
● In deciding which information should be make a difference in a decision made by
included in financial statements, the users
objective is to ensure that the information is ● Relevance is the capacity of the information
useful to the users in making economic to influence a decision
decisions. ● Relevance requires that the financial
● Qualitative Characteristics are classified information should be related or pertinent
into: to economic decision
a. Fundamental Qualitative ● Information does not bear on an economic
Characteristics decision is useless.
b. Enhancing Qualitative ● To be relevant, the financial information
Characteristics must be capable of making a difference in
- There are standards in order to prepare the decisions made by users
Financial statements credibly and reliable; ● Examples: The statement of Financial
in the conceptual framework we call it Position is relevant in determining the
Qualitative characteristics of financial financial status of the business or the
statements income statement is relevant in determining
- Qualities and attributes that makes financial the performance of the business
accounting information useful to the users - Important, essential, vital
- With these, we can assure or justify that - Important information are only included
these financial statements are of quality since they are needed in making economic
before arriving to the internal or external decisions
users - Capable of differential analysis; compare
- Criteria, guide, or attitudes that is needed in the differences of the decisions
preparation of financial statements - Capable of knowing the business‟
performance and financial position the use
FUNDAMENTAL QUALITATIVE of SFP and SCI
CHARACTERISTICS
● Characteristics that relate to the content MAJOR INGREDIENTS OF RELEVANCE
or substance of financial information ● The ingredients of relevance are predictive
value and confirmatory value.

15
 ● Information has PREDICTIVE VALUE when - Like in auditing, what is in the receipt should
it can help users increase the likelihood of be consistently shown in the books and
correctly predicting or forecasting financial statements
outcome of events. - Tracing and vouching to track
- If prediction is not possible with the help of consistency of information
financial statements thus it is not relevant
- Not relevant = fault or violation in the INGREDIENTS OF FAITHFUL
qualitative characteristics REPRESENTATION
- Example: information about financial ● B.1 COMPLETENESS
position and financial performance is ○ It requires the relevant information
frequently used in predicting should be presented in a way that
dividend and wage payments and facilitates understanding and
the ability of the entity to meet avoids erroneous implication.
maturing commitments. ○ Completeness is the result of
● Financial information has CONFIRMATORY adequate disclosure standard or
VALUE if it provides feedback about the principle of full disclosure
previous evaluations. In other words, ○ The standard of adequate
financial information has confirmatory value disclosure means that all
when it enables users to confirm or significant and relevant
correct earlier expectations. information leading to the
- Through financial statements corrections preparation of financial statements
can be identified from the past reports shall be clearly reported.
- Example: a net income measure has ○ To be complete, the financial
confirmatory value if it can help statements shall be accompanied
shareholders confirm or revise their by Notes to Financial Statements.
expectation about an entity‟s ability ○ The purpose of the notes is to
to generate earnings. provide the necessary
● The predictive and confirmatory roles of disclosures required by Philippine
information are interrelated. Financial Reporting Standards.
- Sufficient details of information
B. FAITHFUL REPRESENTATION about the transaction are needed
● Under the conceptual framework for ● B.2 NEUTRALITY
financial reporting, the term faithful ○ It means that the financial
representation is used instead of the term statements should not be prepared
reliability. so as to favour one party to the
● Faithful Representation means that the detriment of another party
financial reports represent economic ○ To be neutral, the information
phenomena or transactions in words and contained in the financial statements
numbers. The descriptions and figures must be free from bias.
match what really existed or happened. ○ Neutrality is synonymous with the
● Simply stated, faithful representation means all- encompassing “Principle of
that the actual effects of the transactions Fairness”. To be neutral is to be
shall be properly accounted for and fair.
reported in the financial statements. ○ The information is directed to the
- Financial statements must be reliably common needs of many users and
expressed in words and numbers not to the particular needs of specific
- Properly accounted entries users.
- Walang bias
16
 - Wag ilagay na kumikita just to ● An essential quality of the information
appear na may good performance provided in the financial statements is that it
- Fair presentation of financial is readily understandable by users
statements ● Classifying, characterizing and presenting
- Commonly used in financial information “clearly and concisely” make
accounting it understandable.
● B.3 FREE FROM ERROR ● Financial reports are prepared for users
○ It means there are no errors or who have a reasonable knowledge of
omissions in the description of the business and economic activities and who
phenomenon and the process used review and analyse the information
to produce the reported information diligently.
has been selected and applied with - Comprehensive pagkakagawa = detalyado
no errors in the process. - Intelligible = understandable kahit di
○ In this context, free from error does knowledgeable sa accounting
not mean perfectly accurate in all
respects. B. COMPARABILITY
- Perfect financial statements are rare, ● It means the ability to bring together for the
there is always room for adjustments purpose of noting points of likeness and
= adjusting entries difference.
● It enables users to identify and
ENHANCING QUALITATIVE CHARACTERISTICS understand similarities and
● Intended to increase the usefulness of the dissimilarities among items.
financial information that is relevant and ● Comparability may be made within an entity
faithfully represented. or between and across entities (2
● The enhancing qualitative characteristics classification ng pagcocompare).
relate to the presentation or form of ● COMPARABILITY WITHIN AN ENTITY - it
financial statements is the quality of information that allows
● It relates to the presentation or form of comparisons within a single entity through
financial information time or from one accounting period to
● The enhancing qualitative characteristics the next.
are comparability, understability, ○ Comparability within an entity is also
verifiability, and timeliness known as Horizontal Comparability
● Relevant and faithfully represented financial or Intracomparability
information is useful but the information ○ Jollibee lang pero 2 years ng
would be most useful if it is comparable, Jollibee
understandable, verifiable, and timely ● COMPARABILITY ACROSS ENTITIES it is
- Financial statements must be enhanced in the quality of information that allows
presentation comparison between two or more entities
engaged in the same industry.
A. UNDERSTANDABILITY ○ This comparability is also known as
● Requires that financial information/ intercomparability or dimensional
statement must be comprehensible or comparability
intelligible if it is to be useful ○ Jollibee and Mcdo, BDO and BPI
● The information should be presented in a ● The financial statements of different entities
form and expressed in terminology that a are compared in order to evaluate their
user understands relative financial position, financial
performance and cash flows.

17
 - Financial statements can be compared with REFERENCES:
Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals of Accounting. Manila ,
the use of two or more financial statements Philippines: Education_Online, Inc.

Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of Accounting Principles. Quezon

C. VERIFIABILITY City: National Book Store

● It means that different knowledgeable and Covid 19 Project for Accountants: Basic Concepts –Presentation of Financial Statements
(PAS 1)
independent observers could reach
Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting Principles. USA:
consensus that a particular depiction is a Courier Kendallville

faithful representation. Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City: Bandolin
● The information is verifiable in the sense Enterprise

that is supported by evidence so that an Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City: Valencia
Educational Supply
accountant that would look into the same
Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for Partnership and
evidence would arrive at the same Corporation. Manila: Millenium Books, Inc.

decision or conclusion. Valix Conrado T & Valix Christian Aris M. (2018). Theory Financial Accounting. Manila: GIC

● DIRECT VERIFICATION - means verifying Enterprises & Co. Inc.

an account or other representation through Vera Cruz- Manuel, Z. (2018). 21st Century Accounting Process 16th Edition. Quezon City:
Raintree Trading & Publishing Inc.
direct observation.
- Example: cash count or inventory The harder you work for something, the greater
count you’ll feel when you achieve it.
- Evidence acquired directly
● INDIRECT VERIFICATION - Checking the
inputs to a formula or recalculations..
- Example: Checking the carrying
amount of inventory by checking the
inputs or records of quantities and
costs or recalculation of ending
inventories
- Can be done by recomputation of
evidences given

D. TIMELINESS
● It means having information available to
decision makers in time to influence their
decisions.
● Timeliness requires that financial
information must be available or
communicated early enough when a
decision is to be made.
● Relevant information may lose relevance if
there is undue delay in the reporting.
- Reports are ready
- Reports must be done quickly and reported
on time

18
 CHAPTER 3 4. STATEMENT OF CASH FLOW
THE ELEMENTS OF ACCOUNTING - Know if the cash account is correct
- Cash inflows and outflows
LEARNING OBJECTIVES: 5. NOTES TO FINANCIAL STATEMENTS
● At the end of this chapter, the student - Breakdown / descriptive
should be able to: - Details that can't be seen in the F.S.
1. Define and Enumerate Financial Statements that are relevant
2. Explain and illustrate various financial
statements A COMPLETE SET of BASIC FINANCIAL
STATEMENTS includes the following
FINANCIAL STATEMENTS components.
● Are the means by which the information
accumulated and processed in financial A. INCOME STATEMENT (STATEMENT OF
accounting is periodically communicated COMPREHENSIVE INCOME)
to the users ● is a report which describes how the
● These statements show the financial business operated over a given period of
effects of transactions and other events time.
that are grouped into broad classes ● (Usually one year).
according to their economic characteristics ● This accounting report shows the operating
● Are the end products or main output of performance of the business entity for a
the financial accounting process given period of time
- Collecting financial information or data - Financial performance of the business
- Everything starts or accounting starts with - NET INCOME / LOSS =
collecting receipts or information Revenue 一Expenses
- We process financial statements to
communicate to the users
SERVICE BUSINESS
- informations should automatically have
2 ELEMENTS:
financial affect to the business,
1. INCOME - (Income Earned)
- An accountant‟s job end with financial
increase in economic benefits during
statements
the accounting period in the form of
inflow or increase in asset or
Based on PAS 1, the following are the BASIC
decrease in liability that results in
FINANCIAL STATEMENTS
increase in equity other than
1. INCOME STATEMENT
contribution from equity participants/.
(Statement of Comprehensive Income)
- INCOME (Revenues, Fes, and
(Statement of Financial Performance)
Gains)
- Know the company‟s financial
- Deferred Income / Unearned
performance
Revenue - not an income but a
- Focuses on the financial
liability; advanced payment; not yet
operations of the business
earned
2. STATEMENT OF CHANGES IN EQUITY
- Sole proprietorship (Owner‟s Equity) - ↑ Assets
- Partnership (Partner‟s Equity) - ↑ Equity
- Corporation (Shareholder‟s Equity)
3. STATEMENT OF FINANCIAL POSITION - ↓ Liability
(Balance Sheet) 2. EXPENSES - (Incurred by the
- If its balanced or not in the problem business) Decrease in economic
or business benefits during the accounting
19
 period in the form of outflow or j. Transportation and Travel
decrease in asset or increase in Expense - represent the necessary
liability that results in decrease in and ordinary cost of employees
equity other than contribution from getting from one workplace to
equity participants. another which are reimbursable by
- Considered as expense; already the business. Travel Expenses
used represent the costs incurred when
- ↓ Assets travelling on business trips.
k. Interest Expense - represents the
- ↓ Equity cost of borrowing money. It is the
- ↑ Liability price that a lender charges a
borrower for the use of lender‟s
● VARIOUS EXPENSES:
money. Other terms for interest
a. Salaries Expense - represents the
expense are Finance and Borrowing
salaries earned by employees for
Costs.
the services they have rendered
l. Miscellaneous Expense -
during the accounting period.
represents various small
b. Rent Expense - represents the
expenditures which do not warrant
rentals that have been used up
separate presentation
during the accounting period.
c. Utilities Expense - represents the
NOTE: January - November = Month Ended
cost of utilities that have been used
December = Year Ended
during the accounting period ( water,
Expenses are arranged based on the chart
electricity and telephone)
of accounts; temporarily, arranged based
d. Supplies Expense - represents the
appearance or first come first serve
cost of supplies that have been used
Withdrawals = Personal ; drawings
during the period.
e. Bad Debt Expense - the amount of
● EQUATION:
estimated losses from uncollectible
○ Revenue – Expenses = Net Income
accounts receivable during the
(Loss)
period (Other term is Doubtful
● SAMPLE FORMAT of an INCOME
Accounts Expense, Uncollectible
STATEMENT for a SERVICE TYPE of
Accounts Expense)
business:
f. Depreciation Expense - the portion
of the cost of a depreciable asset
that has been allocated to the
current accounting period
g. Advertising Expense - represents
the cost of promotional or marketing
activities during the period.
h. Insurance Expense - represents
the cost of insurance pertaining to
the current accounting period
i. Taxes and Licenses Expense -
represents the cost of business and
local taxes required by the
government for the conduct of
business (Mayor‟s Permit, Other
Percentage Tax, Community Taxes)
20
 a deduction from sales and is debited when
defective goods are returned by the buyer.
- Returned items due to reasons, such as
wrong item received or damaged item
3. Sales Discount - a sales discount is an
account off the regular price of goods that is
granted for early payment. This is debited
when an amount of discount is granted to
the buyer. This account can be deducted
from sales or may be considered as other
expense.
- Discount given to customers
- Deduct to sales
TWO (2) REVENUES: 4. Revenue from Sales or Net Sales -
consists of gross sales less returns and
allowances and discounts.
- Sales
less: Sales Returns and Allowances
Sales Discount
Net Sales
5. Gross Profit from sales - gross profit from
sales is divided by subtracting cost of sales
from net sales.
- Palaging (+) positive ang Gross Profit
- Sales
less: Cost of goods sold
Gross Profit
MERCHANDISING BUSINESS 6. Purchases - Purchases account is the
● 2 Characters = Buyer and Seller accumulated cost of all merchandise bought
● PROCEDURE IN MERCHANDISING for resale during an accounting period. It is
1. Starts with buying the inventory; debited when goods or merchandise are
lalagay unsold goods sa warehouse bought either on account or on cash basis.
2. Sell inventory; pull out unsold goods - Purchase items to be sold
Mode of Payment: Cash Accounts - Gagamitin lang word na “purchases” for
Receivable items na ibebenta; if not, use the item‟s
3. Collection of Accounts Receivable ∴ account title
7. Purchase Returns and Allowances - this
acquired cash
is a deduction from purchases. This is
4. Repurchase of inventory credited when defective merchandise is
● The following are the trading accounts used returned to the supplier.
by a merchandising concern: - Ibinalik na items na binili due to reasons
1. Sales - Sale is an income account which is 8. Purchase Discount - this account is
credited when the goods or merchandise credited when the supplier granted the
are sold either by cash or on account basis. buyer an amount of discount. This can be
- income treated as deduction from purchase or other
2. Sales Returns and allowances - Returns income.
and allowances result from the return of any - Discounts na hinihingi or binigay ni seller
unsatisfactory merchandise; this account is

21
9. Freight In - this is debited if the business TYPE Of Business:
shoulders the payment for the delivery of
goods bought. This is added to purchases
and a part of cost of sales.
- “Transportation Charges / Expenses”
- Buyer to shoulder the fee
- FOB Shipping Point = buyer ang nag
shoulder
- Purchases
add: Freight In
less: Purchase Returns & Allowances
Purchase Discounts
Net Purchase
10. Freight Out - this is one of the operating
expenses of the business. This is debited
upon payment of the delivery of the goods
sold.
- Seller to shoulder the fee
- FOB Destination
- Not a part of Cost of Goods Sold but with
OPERATING EXPENSES
11. Merchandise Inventory - Goods for sales
- Unsold goods
- Ending inventory
12. Cost of Goods Sold - cost of goods sold
consists of the cost of merchandise on hand
at the beginning of the accounting period,
net cost of merchandise purchased
including cost of transporting of goods
bought during the period.
- Statement of Cost of Goods Sold is not a
Financial Statement; supports the F.S.
- Expect the Cost of Goods sold to be always
lower than the Net Purchase
- Beg. Inventory
add: Net Purchase
Total Goods Available for Sale
less: End, Inventory
Cost of Goods Sold
● SAMPLE FORMAT of an INCOME
STATEMENT for a MERCHANDISING

22
 ● SAMPLE FORMAT of a STATEMENT OF
OWNER‟S EQUITY for a
MERCHANDISING TYPE of business:

B. STATEMENT OF OWNER'S EQUITY

● it explains the activities for a period of time
that led to a change in the owner‟s share
over the net assets of the business.
● represents the claim of the owner over the
assets of the business after the liabilities
have been deducted (Net Assets)
● OWNER’S EQUITY = Assets 一 Liabilities
● Summary of changes in an entity‟s owner;s
equity during a specific period
Beginning owner‟s equity
add: Owner‟s / additional investment
add: Net Income C. STATEMENT OF FINANCIAL POSITION
less: Net loss (BALANCE SHEET)
less: Owner‟s withdrawals ● gives information about the financial
ENDING OWNER’S EQUITY position of the business by showing the list
● SAMPLE FORMAT of a STATEMENT OF of its assets (Cash and properties) and
OWNER‟S EQUITY for a SERVICE TYPE Liabilities (debts or obligations to pay) and
of business: from which the net worth of the business
representing equity or share of the owner
could be determined.
● Provides a snapshot of the firm‟s financial
position at a specific point in time
● ACCOUNTING EQUATION
- ASSETS = LIABILITIES +
OWNER‟S EQUITY
- Merchandising type of business uses
merchandise inventory
- Balance sheet

23
 - Information about the financial position, 4. ACCRUED INTEREST
status, or condition of the business RECEIVABLE - The interest earned
- Assets, Liabilities, and Owner‟s Equity on notes receivable but not yet
- Most critical financial statement received in Cash
5. INVENTORIES - Assets held for
NOTE: to classify whether current or non-current; sale in the normal operation of the
operating cycle whichever is longer business in the process of
production for sale, or in the form of
ASSETS materials or supplies to be
● are economic resources controlled by the consumed in the production process
enterprise resulting from past events from or rendering of services. Examples:
which future economic benefits are Merchandise Inventory, Work in
expected to flow to the enterprise. Process Inventory, and Raw
- Something we buy that is being controlled Materials Inventory
by the organization 6. PREPAID EXPENSES - this
- Bought due to benefit represent advance payments made
- Assets should be equal to the liabilities plus for benefits or services to be
owner‟s equity received by the business in the
● CURRENT ASSETS “CRIP” future. Examples: Prepaid Supplies,
- includes cash and cash equivalents which Prepaid Insurance and Prepaid
are not restricted in use, as well as other Rent.
assets readily convertible into cash, or to be 7. ALLOWANCE FOR BAD DEBTS -
sold or consumed within the normal Contra Asset Account, which
operating cycle of the business or one year. represents customer, accounts
- The following are the current assets: (Edwin doubtful of collection. (Other terms:
G. Valencia and Gregorio Roxas, Basic Allowance for Doubtful Accounts,
Accounting 2018 edition) Allowance for Uncollectible
1. CASH – Any item on hand with accounts)
monetary value that a bank will ● NON- CURRENT ASSETS
accept for deposit and all amounts - are those assets not included as current
currently on deposit with the bank in assets such as the property, plant and
the name of the business. This equipment.
includes coins and currencies, - The following are the non-current assets:
personal checks, money orders, 1. LAND - the site owned by the
travellers check made payable to the business on which the business
business. building is constructed. This plant
- Cash in bank or cash on hand asset is not subject to depreciation.
2. ACCOUNTS RECEIVABLE - the 2. BUILDING - structure owned by the
amounts collectible on open business to be use to house the
accounts of the customers. These office, store or factory.
represent debtor‟s oral promise to 3. EQUIPMENT - typewriter, air-
pay a certain amount to the conditioner, calculator computer,
business. electric fan, trucks, cars used in the
3. NOTES RECEIVABLE - A business. Specific titles may be used
promissory note received by the such as: Office Equipment, Store
business from its debtors/customers. Equipment and Delivery
- Pautang with promissory notes / Equipment
written contract
24
 4. FURNITURE AND FIXTURE - Current Liabilities if it is
tables, chairs, curtains, filing cabinet, payable beyond 1 year.
lighting fixtures and wall decors: - If the problem is silent:
Specific titles may be used such as: Current
Office Furniture and Fixtures and 4. ACCRUED INTEREST PAYABLE -
Store Furniture and Fixtures. The Interest incurred in the current
5. ACCUMULATED DEPRECIATION - period but not yet paid
contra asset account representing 5. UTILITIES PAYABLE - is a liability
expired cost of the property, plant to pay utility companies like PLDT.
and equipment as a result of usage Meralco, Telephone, electricity and
and passage of time. water services received from them.
6. OTHER PAYABLES - Salaries
LIABILITIES Payable, SSS Premium Payable,
● are present obligations resulting from past Withholding Tax Payable, Pag-IBIG
events and whose settlement will cause an Premium Payable
outflow from the resources of the enterprise. ● NON- CURRENT LIABILITIES
● CURRENT LIABILITIES - are long term liabilities or obligations which
- are those debts or obligations reasonably are payable longer than one year.
expected to be liquidated in the normal - The following are the non-current liabilities:
course of the enterprise‟s operating cycle or 1. MORTGAGE PAYABLE - which is
paid within 1 year. an obligation secured by real
- The following are the current liabilities: property of the debtor-business.
1. ACCOUNTS PAYABLE - Purchase - Collateral - real property
of goods and services on credit 2. BOND PAYABLE - which is a long
supported by the oral or implied term promise usually five to ten
promise of the business. years supported by a formal contract
- Debts / obligations of the business to containing the face value of the
other entities bond.
2. LOAN PAYABLE - is a liability to
pay a bank or a financing institution OWNER’S EQUITY
for amount of money borrowed by ● represents the claim of the owner over the
the business assets of the business after the liabilities
- Note: Loans Payable can be have been deducted.
classified as part of Non- ● Residual claim
Current Liabilities if it is
payable beyond 1 year. SAMPLE FORMAT of a STATEMENT OF
Example: Housing Loan, Car FINANCIAL POSITION for a SERVICE TYPE of
Loan business:
- If the problem is silent:
Current
3. NOTES PAYABLE - a promissory
note issued by the business to its
creditors for money borrowed or
merchandise and other assets
bought on credit
- Note: Note Payable can be
classified as part of Non-

25
SAMPLE FORMAT of a STATEMENT OF
FINANCIAL POSITION for a MERCHANDISING
type of business:

26
 ASSETS LIABILITIES CAPITAL
(EQUITY)

Increase Decrease Increase

Decrease Increase Decrease

D. STATEMENT OF CASH FLOW

● is a basic component of the financial
statements which summarizes the
operating, investing and financing activities
of an entity.

E. NOTES TO FINANCIAL STATEMENTS

● are used to report information that does not
fit into the body of the statements in order to
enhance the understandability of the
statements

REFERENCES:
Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals of Accounting. Manila ,
Philippines: Education_Online, Inc.

Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of Accounting Principles. Quezon City:
National Book Store

Covid 19 Project for Accountants: Basic Concepts –Presentation of Financial Statements (PAS
1)

Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting Principles. USA:
Courier Kendallville

Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City: Bandolin
Enterprise

Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City: Valencia
Educational Supply

Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for Partnership and
Corporation. Manila: Millenium Books, Inc.

27
Valix Conrado T & Valix Christian Aris M. (2018). Theory Financial Accounting. Manila: GIC
Enterprises & Co. Inc.

Vera Cruz- Manuel, Z. (2018). 21st Century Accounting Process 16th Edition. Quezon City:
Raintree Trading & Publishing Inc.

PADAYON FUTURE CPAs

28
 CHAPTER 4
12 Office Supplies
THE ACCOUNTING EQUATION
20 Furniture and Fixtures
LEARNING OBJECTIVES:
● At the end of this chapter, the student 30 Accounts Payable
should be able to: 60 Legal Fees
1. Analyse the effects of Business
Transactions 70 Taxes and License Expense
2. Use the accounting equation in solving
accounting problems ILLUSTRATIVE PROBLEM 1:
● To illustrate the effect of the transactions in
THE ACCOUNT the accounting elements
● An account is a device used in recording
the effects of business transactions. ATTY. CARREON registered a sole
● It also means to verify record, process proprietorship business as a lawyer under the
and report the effects of business name “CARREON LEGAL SERVICES”. He
transactions in organized, accurate, and experienced the following events during the
verifiable manner. organizing phase of his business in its first month of
● It is also used to authenticate process, operations
summarize, and verify the occurrence and
effects of a business transaction. June 1 Sold his personal car for P 840,000 in
● Each account is to be segregated to cash
maintain details of accounting records and
to track down accuracy. ASSETS = LIABILITIES EQUITY
● As such, there are specific account titles NO EFFECT NO EFFECT NO EFFECT
for each significant assets, liabilities, equity,
● Note: No effect in the accounting equation
income and expenses.
since the car is a personal asset and not
● The names of the account titles are the
related to the business. Apply the principle
ones included in the chart of accounts of
of Business Entity Concept that personal
an enterprise.
assets should be separated from your
business assets.
THE ACCOUNTING EQUATION
● The assets, liabilities and owner‟s equity are
June 6 : Carreon registered the business and
always expressed in an equation.
incurred P 18,300 on its registration.
● ASSETS = LIABILITIES + EQUITY
- Note: Other terms for Equity are “Capital”, ASSETS = LIABILITIES EQUITY
“Net Assets” and “Net Worth”
(18,300) NO EFFECT (18,300)
Cash Taxes and
License
Expense
Using the following account titles in this ● Note: The asset will decrease by 18,300
illustrative problem: due to the payment of registration, no
Code Account Title effect in the liabilities since no obligation
has been created, and the equity/capital will
10 Cash decrease by 18,300 since expenses has
been incurred
11 Accounts Receivable

29
June 11 Purchased furniture for his law office, June 19 Rendered Legal Services in Cash, P
P 155,100, paying P 18,000 and the 84,200
balance on account
ASSETS = LIABILITIES EQUITY
ASSETS = LIABILITIES EQUITY
84,200 NO 84,200
(18,000) 137,100 NO Cash EFFECT Legal Fees
Cash Accounts EFFECT ● Note: The asset will increase by 84,2 00
Payable
because Atty Carreon will render services to
155,100
Furniture and clients in cash for legal services rendered ,
Fixtures the Equity will also increase by 84,2 00
because of the Income that will be
● Note: The asset will decrease by 18,000
recognized. No effect in the Liabilities.
due to the partial payment o f the purchase
of furniture, on the other hand , the asset
June 28 Collected 40% of its account from
will also increase by 155,100 with the
Dahon Tea
acquisition of furniture and fixtures , in
addition, the Liabilities will Increase by ASSETS = LIABILITIES EQUITY
137,1 00 to account for the balance that is
340,000 NO EFFECT NO EFFECT
not yet paid . No effect in the Equity
Cash

June 15 Billed DAHON TEA for legal services, (340,000)

P850,000 Accounts
Receivable
ASSETS = LIABILITIES EQUITY
● Note: The asset will increase by 340,000 in
850,000 NO 850,000 cash because of the 40% of the 850,000
Accounts EFFECT Legal Fees billed to Dahon Tea last June 15 and at the
Receivable
same time will decrease by 340,00 0 i n its
● Note: The asset will increase by 850,000 Accounts Receivable or collectibles. No
because Atty Carreon will bill Dahon Tea for effect in the Liabilities and Equity.
legal services rendered , the Equity will also
increase by 850,000 because of the To summarize the entire problem into the
Income that will be recognized. No effect in worksheet:
the Liabilities.

June 17 Bought Office Supplies in Cash, P3,280

ASSETS = LIABILITIES EQUITY

(3,280) NO NO EFFECT
Cash EFFECT

3,280
Office Supplies
● Note: The asset will decrease by 3,280 in
cash because of the payment for the
purchase of office supplies and at the same
time will Increase by 3,280 in Office
Supplies due to the acquisition . No effect
in the Liabilities and Equity.
ILLUSTRATIVE PROBLEM 2:
30
 ● Using the following account titles in this
790,330 NO 790,330
illustrative problem: Cash EFFECT Service Income
CODE ACCOUNT TITLE ● Note: The asset will increase by 790,330
because the company will render services
10 Cash
to clients in cash for transport services
11 Accounts Receivable rendered , the Equity will also increase by
790,330 because of the Income that will be
12 Office Supplies recognized. No effect in the Liabilities.
20 Office Equipment
October 11 Bills received and paid
30 Accounts Payable P 15,890 utilities, P9, 800 gas and
oil, P 9, 500 repair of cars.
50 Mokona, Capital
ASSETS = LIABILITIES EQUITY
51 Mokona, Withdrawal
(35,190) NO (15,890)
60 Service Income Cash EFFECT Utilities Expense

70 Utilities Expense (9,800)

Gas and Oil
71 Gas and Oil Expense Expense
72 Repair Expense
(9,500)
Repair Expense
The following transactions were completed by ● Note: The asset will decrease by 35,190
MOKONA TRANSPORT SERVICES as of the due to the payment of expenses; the Equity
month of October, 2020 will also decrease by 35,190 as an outflow
of capital. No effect in the Liabilities
October 1 Mokona will invest P 1,000,000 cash
in this business. October 14 Charged LOVE KO TO
ASSETS = LIABILITIES EQUITY COMPANY for transport services
rendered P164,339
1,000,000 NO 1,000,000
Cash EFFECT Mokona, Capital ASSETS = LIABILITIES EQUITY
● Note: The asset will increase by 1,000,000 164,339 NO 164,339
in cash because of the cash investment the Accounts EFFECT Service Income
company made , the Equity will also Receivable
increase by 1,000,000 to record the ● Note: The asset will increase by 164,339
establishment of capital . No effect in the because Mokona will charge the client for
Liabilities transport services rendered , the Equity will
also increase by 164,339 because of the
Income that will be recognized. No effect in
the Liabilities

October 17 Bought Office Supplies

October 8 Received Cash on account, P 19,600
amounting to P 790,330 for
ASSETS = LIABILITIES EQUITY
transport services rendered
ASSETS = LIABILITIES EQUITY 19,600 19,600 NO EFFECT

31
 Office Accounts Payable
Supplies Payable 87,500
Office
● Note: The asset will increase by 19,6 00
Equipment
because of the purchase of office supplies,
the Liabilities will Increase by 19,600 to ● Note: The asset will decrease by 30,625
account for the balance that is not yet paid . due to the partial payment of the purchase
No effect in the Equity of office equipment, on the other hand , the
asset will also increase by 87,500 with the
October 21 Received cash from acquisition of office equipment, in addition,
LOVE KO TO COMPANY, P 45,800 the Liabilities will Increase by 56,875 to
as partial payment of its account account for the balance that is not yet paid .
No effect in the Equity.
ASSETS = LIABILITIES EQUITY

45,800 NO EFFECT NO EFFECT October 31 Paid the Salaries of

Cash Employees for the month of
October, P 48,500
(45,800)
Accounts ASSETS = LIABILITIES EQUITY
Receivable
(48,500) NO EFFECT (48,500)
● Note: The asset will increase by 45,800 in Cash Salaries
cash because of the partial payment from Expense
Love Ko to Company and at the same time ● Note: The asset will decrease by 48,500
will decrease by 45,800 in its Accounts due to the payment of expenses ; the Equity
Receivable or collectibles. No effect in the will also decrease by 48,500 as an outflow
Liabilities and Equity of capital. No effect in the Liabilities.

October 25 MOKONA made cash To summarize the entire problem into the
withdrawals in the business worksheet:
amounting to P 194,000
ASSETS = LIABILITIES EQUITY

(194,000) NO (194,000)
Cash EFFECT Mokona,
Withdrawal
(45,800)
Accounts
Receivable

October 26 Purchased Office

Equipment, P 87,500, terms: 35%
down payment and 65% on account
ASSETS = LIABILITIES EQUITY

(30,625) 56,875 NO
Cash Accounts EFFECT

32
 CHAPTER 5 something received as
Business Transactions and their Analysis money or goods.
(Journalizing Process) ○ CHECK VOUCHER - is a
document that serves to
LEARNING OBJECTIVES: recognize a liability and
● At the end of this chapter, the student authorize the disbursement
should be able to: of cash.
1. Identify the uses of the two books of ○ CHECK - is a draft upon a
accounts bank and payable on
2. Explain the rules of debits and demand, signed by the
credits maker or drawer, containing
3. To analyse business transactions an unconditional promise
to pay a certain sum of
STEPS IN THE ACCOUNTING CYCLE money to the order of the
1. Analysing the business documents or payee.
transactions ○ PROMISSORY NOTE - is a
2. Journalizing- this is the process of promise or engagement in
recording the transactions in a journal writing to pay a specified
3. Posting - transactions as classified and sum at a time therein,
recorded in the journal are transferred to limited, or on demand, or at
appropriate accounts in the general ledger. sight to a person therein
4. Preparing the unadjusted trial balance named, or to his order, or
5. Preparing the adjusting entries bearer
6. Preparing the financial statements ○ COMMERCIAL INVOICE - is
7. Preparing the closing entries a written statement of
8. Preparing the Post- Closing Trial Balance merchandise sold to the
9. Preparing the Reversing Entries buyer, together with the
prices and charges of
1. ANALYZING THE BUSINESS DOCUMENTS merchandise sent or to be
● One basic accounting principle is the sent to him.
verifiability of accounting records. ○ BANK DEPOSIT SLIP - is a
● The truthfulness and the accuracy document which serves as
of the source documents will an evidence of an act of
assure the user of financial placing money in the
information that is free from bias custody of a bank or
and error and faithfully represents banker, for safety or
what it purports to represent. convenience, to be
● SOURCE DOCUMENTS - are the withdrawn at the will of the
forms, evidences or legal/ official depositor or under rules or
papers that serve as supports to regulations agreed upon.
the underlying economic ○ DEBIT MEMORANDUM - is
transactions. These evidential a written notice which
matters support the objectivity of informs client of reducing
accounting records his account.
● Examples: ○ CREDIT MEMORANDUM -
○ OFFICIAL RECEIPT - is a informs the client of
written acknowledgement of increasing his account.

33
 ○ BILLING OR STATEMENT
Title
OF ACCOUNT - is a report
issued periodically by a Lef Rig
bank or creditor to a t ht
sid side
customer setting forth the
e
amounts billed, credits Cre
given and balance due. De dit
bit
2. ANALYZING AND RECORDING
● Amounts entered on the left side of an
TRANSACTIONS (JOURNALIZING)
account, regardless of the account title are
● THE CHART OF ACCOUNTS - is a
called debits to the account. When debits
listing of account titles which
are entered in the account, the account is
guides the bookkeeper in the
said to be debited. Amounts entered on the
recording of the transactions. The
right side of an account are called credits,
number and the nature of accounts
and the account is said to be credited.
depend on the type of business
Debits and Credits are sometimes
operations.
abbreviated as Dr. and Cr.
● Example:
THE RULES ON T - ACCOUNTS
ASSETS
DEBITS CREDITS

INCREASES DECREASES

LIABILITIES
DEBITS CREDITS

DECREASES INCREASES

CAPITAL
CHARACTERISTICS OF AN ACCOUNT
● An ACCOUNT in its simplest form has three CREDITS
parts.
INCREASES
● First, each account has a title, which is the
name of the item recorded in the account. WITHDRAWAL
● Second, each account has a space for DEBITS
recording increases in the amount of the
item. INCREASES
● Third, each account has a space for
recording decreases in the amount of the REVENUE
item.
CREDITS
● The account form presented below is called
a T ACCOUNT because it resembles the INCREASES
letter T.
● The left side of the account is called the
EXPENSES
debit side, and the right side is called the
credit side. DEBITS

34
 SAMPLE ILLUSTRATIVE PROBLEM 1:
INCREASES

May 2 UP opened a service shop. She deposited

Or P 270,500 in a bank account in the name
of the business
THE RULES ON DEBIT CREDIT
T ACCOUNTS Date Particulars F Debit Credit

AWE INCREASE DECREASE 2019

LCRAAD DECREASE INCREASE May 2 Cash 11 P 270,500

UP, Capital 51 P 270,500

THE JOURNAL
Investments made by
● The accounting record in which the UP
economic transactions and events are
initially recorded is called a “Journal”. May 5 Bought Chairs and Tables on
● It is known as the “BOOK OF ORIGINAL Account, P18,645
ENTRY” because it is the book where the
economic transactions are first recorded. Date Particulars F Debit Credit
● Recording Transactions in the Journal is
2019
called “JOURNALIZING”
● Simultaneously or after analyzing the effects May 5 Furniture & Fixtures 22 P 18,645
of the transaction on the accounting
Accounts Payable 31 P 18,64
elements, accountants record the
transactions in the books of accounts; first Purchased Furniture
on account
in the Journal and then in the Ledger
● The Journal provides a chronological
record of transactions with explanations May 10: Purchased Office Supplies P 7,800, 20%
and clear references to their supporting on account and the balance paid in cash.
documents with corresponding debits and Date Particulars F Debit Credit
credits, while Ledger provides a classified
record of accounts with their respective 2019
running balances.
May 10 Laundry Supplies 14 P 7,800
● Each Entry made is called a Journal
Entry. Cash 11 P 6,240
● Each Journal Entry contains the following Accounts Payable 31 1,560
items:
Purchased Office
1. Date Supplies
2. The Account title and the amounts to
be debited
May 13 Paid Rent for the month used,
3. The Account title and the amount to
P10,000
be credited
4. Explanation Date Particulars F Debit Credit
● A Journal Entry with one debit and one
credit is called a Simple Journal Entry. 2019
● A Journal Entry which has more than one May 13 Rent Expense 73 P 10,000
debit or more than one credit is called a
Compound Journal Entry. Cash 11 P 10,000

35
 Paid Rent 2019

May 28 Accounts Payable 31 P 8,075

Cash 11 P 8,075
May 15 Bought washing machine from
WAG SUKUAN CENTER, P 21,850, Paid its account
paying P5,700 and the balance on credit
Date Particulars F Debit Credit SAMPLE ILLUSTRATIVE PROBLEM 2:
JAGIYA COMPUTER SERVICES
2019 POST-CLOSING TRIAL BALANCE
JUNE 30, 2021
May 15 Laundry Equipment 21 P 21, 850
Account Account Title Debit Credit
Cash 11 P 5,700 No.
Accounts Payable 31 16,150
1110 Cash P 255,900
Purchased Laundry
Equipment 1111 Accounts 181, 820
Receivable

May 16: Paid Salaries, P 15,550, Utilities, 1112 Computer 27, 975
Supplies
P7,100, and other miscellaneous
expenses, P 4,221 1113 Office Supplies 98, 260

Date Particulars F Debit Credit 2110 Computer 100, 240

Equipment

2019 3110 Accounts Payable P 71, 200

May 16 Salaries Expense 71 P 15,550
3111 Unearned 74, 890
Revenue
Utilities Expense 74 7,100

Miscellaneous Expense 75 4,221 5110 Jagiya, Capital 518,105

Cash 11 P 26,871 TOTAL P 664,195 P 664,195

Paid Expenses

May 20 Revenues Earned from

The following are the transactions for the
customers who availed of services on
month of July 2021
account, P 106,890
July 3 Jagiya signed a contract of lease for a
Date Particulars F Debit Credit monthly rental of P 12,000.
July 6 Bought additional Computer Equipment
2019 amounting to 20% of the beginning
May 20 Accounts Receivable 12 P 106,890 Computer Equipment on account
July 9 Received P 2,500 cash from customers on
Laundry Revenue 61 P 106,890
account
Charged Pandora for July 16 Paid Salaries of employees, P 18, 800
services rendered
July 20 Received P 8,200 for services rendered in
cash
May 28 Paid the 50% due to WAG July 23 Purchased additional computer supplies,
SUKUAN CENTER P13, 990 in cash
Date Particulars F Debit Credit July 24 Purchased Office Supplies on account
P850

36
July 25 Billed customers for services performed
P13,200
July 27 Paid monthly rent
July 28 Paid 5,200 to creditors on account
July 29 Paid expenses: Water, P 10,200,
Advertisement, P 29,500, Repair, P 12,
447
July 30 Rendered Services to clients worth 86, 700
in cash
July 30 Jagiya made cash withdrawals from the
business worth P 3,100

Other Information:
Use 5111- Jagiya, Personal, 6110- Service Income,
7110- Salaries Expense 7111- Rent Expense,
7112- Utiltities Expense,
7113- Advertising Expense, 7114- Repair Expense

REFERENCES:
Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals of Accounting. Manila ,
Philippines: Education_Online, Inc.
Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of Accounting Principles. Quezon City:
National Book Store
Covid 19 Project for Accountants: Basic Concepts –Presentation of Financial Statements (PAS
1)
Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting Principles. USA:
Courier Kendallville
Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City: Bandolin
Enterprise
Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City: Valencia
Educational Supply
Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for Partnership and
Corporation. Manila: Millenium Books, Inc.
Valix Conrado T & Valix Christian Aris M. (2018). Theory Financ ial Accounting . Manila: GIC
Enterprises & Co. Inc.
Vera Cruz- Manuel, Z. (2018). 21 st Century Accounting Process 16 th Edition. Quezon City:
Raintree Trading & Publishing Inc.

“STOP FEELING TOO STRESSED BY LOVING YOUR BUSY LIFE…

THE BEST KIND OF EXISTENCE IS ONE THAT IS JAM-PACKED: A
CHALLENGING JOB, ROMANCE, FRIENDS, and PASSION… THEY
ALL FORCE YOU TO MAXIMIZE OUT YOUR PERSONALITY…
BEING TIRED SOMETIMES IS A SMALL PRICE TO PAY FOR
LIVING A FULL LIFE.”

37
 CHAPTER 6 1. Items of similar items are grouped
POSTING TO THE LEDGER AND TRIAL together
BALANCE PREPARATION 2. It is easier to locate the item if
information about it is needed
LEARNING OBJECTIVES:
● At the end of this chapter, the student
should be able to:
1. Post transaction in the general
ledger
2. Prepare unadjusted trial balance

3. POSTING FROM THE GENERAL JOURNAL

TO THE GENERAL LEDGER
● The T - Account Form is used in the
classroom for preliminary analysis of
transactions.
● In actual practice, a formal book of account
is used containing not only the account
title, date and amount but also the page
reference (to identify the entry source), the
account number and the balance of the
SAMPLE FORMAT:
account.
● All accounts are compiled in one book
called the General Ledger wherein a
separate page is maintained for each
account. Each page is called a Ledger. To illustrate the General Ledger of NEVER GIVE
● Posting is the process of transferring UP SERVICING COMPANY
figures from the journal to the ledger
accounts GENERAL LEDGER
● General Ledger is the collection of all
ASSET, LIABILITY, OWNERS’ EQUITY,
REVENUE, and EXPENSE accounts. This
is a book of accounts in which data from
transactions recorded in journals are
posted and thereby classified and
summarized also called ledger.
● Ledger is a tool used for classifying and
summarizing information about increases,
decreases, and balances of items in the
chart of accounts.
- Ledger - individual; per account
- General ledger - collection of all ledger
● A ledger format may be used where after
the date column; there is a debit and credit
column. The last column gives a running
balance after every posting made.
● NEED FOR A LEDGER

38
 ● A Trial Balance is a list of accounts with
open balances in the general ledger. It
proves the equality of the debits and the
credits in the general ledger.
● The trial balance consists of two
classifications: the TRIAL BALANCE OF
BALANCES and the TRIAL BALANCE OF
TOTALS.
● The trial balance of balances contains
account with open balances.
● An account is said to have a debit balance
if the debit total is more than the credit total
and is said to have a credit balance if the
credit total is more than the debit total.
● If the debit side and credit side are equal,
the account is a zero balance or closed
account.
● The other form of trial balance is the
balance of totals. In this form, the total of
the debits and the total of the credits of
each account are listed.

PROCEDURES IN TRIAL BALANCE

PREPARATION
1. Write the heading of the trial balance. The
heading of the trial balance includes the
following:
a. The name of the business or the
owner
b. Title of the list or trial balance
c. Date of the trial balance
2. Provide a column for the accounts and
two money columns- a debit and a credit
3. The accounts should be written in just one
column arranged in the following
sequence:
a. Assets
b. Liabilities
c. Capital
d. Income
e. Expenses
4. Write the amounts opposite the
corresponding accounts under the debit
Note: For Problem No. 2, see the solution template money column, if the account is a debit
for GENERAL LEDGER. balance and under the credit money
column, if the account is a credit balance.
4. PREPARATION OF TRIAL BALANCE 5. Foot the money columns. Double rule the
totals.
39
 GENERAL LEDGER
DEBIT CREDIT

AWE ➕ ➖
(Normal Balance)

LCRAAD ➖ ➕
(Normal Balance)

Using the Ledger balances of NEVER GIVE UP

SERVICING COMPANY, , the trial balance will
appear as follows:

NEVER GIVE UP SERVICING COMPANY

TRIAL BALANCE
MAY 31, 2020

GENERAL JOURNAL

40
 TRIAL BALANCE

Note: For Problem No. 2, see the solution template

for TRIAL BALANCE.

REFERENCES:
Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals of Accounting.
Manila , Philippines: Education_Online, Inc
Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of Accounting Principles.
Quezon City: National Book Store
Covid 19 Project for Accountants: Basic Concepts –Presentation of Financial
Statements (PAS 1)
Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting
Principles. USA: Courier Kendallville
Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City:
Bandolin Enterprise
Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City:
Valencia Educational Supply
Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for
Partnership and Corporation. Manila: Millenium Books, Inc.
Valix Conrado T & Valix Christian Aris M. (2018). Theory Financial Accounting.
Manila: GIC Enterprises & Co. Inc.
Vera Cruz- Manuel, Z. (2018). 21st Century Accounting Process 16th Edition.
Quezon City: Raintree Trading & Publishing Inc.

PERSEVERANCE IS FAILING 19 TIMES AND

SUCCEEDING THE 20TH.”- JULIE ANDREWS

41
 CHAPTER 7 ADJUSTING ENTRIES IN ACCRUAL BASIS OF
PREPARATION OF ADJUSTING ENTRIES ACCOUNTING
 ADJUSTING ENTRIES are entries that are
LEARNING OBJECTIVES: prepared in order to generate correct
 At the end of this chapter, the student data at the END of the accounting period.
should be able to:  These are then recorded in the general
1. Enumerate the accounts needed to be journal and posted to the ledger
adjusted accounts so that information in the
2. Prepare adjusting entries for each accounts will then be brought to correct
transactions balances.
 Adjusting entries are done to be able to
5. PREPARATION OF ADJUSTING ENTRIES depict sensible financial statements.
 Some of the common adjusting entries
CLASSIFICATION OF ACCOUNTS that need to be done at the end of the
 “The accounts may be classified into real, accounting period are the following:
nominal and mixed before the books of 1. Adjusting entry for prepaid expenses /
accounts are adjusted at the end of the deferred expense
accounting period. 2. Adjusting entry for accrued expenses /
 Asset, liability and capital accounts are accrual of expenses
known as REAL ACCOUNTS / 3. Adjusting entry for deferred revenue /
PERMANENT ACCOUNTS unearned income / unearned revenue
- Matitira at the end of the accounting 4. Adjusting entry for accrued revenue
period 5. Adjusting entry for bad debts expense /
- Never ma-zero (0) sa accounting cycle doubtful accounts expense /
- Carried over to the next accounting uncollectible account expense
period; as the beginning balance 6. Adjusting entry for depreciation
 While expense and income accounts are expense
called NOMINAL ACCOUNTS / - 6 if service business
TEMPORARY ACCOUNTS. - 7 if merchandising business
- Include: all expenses, income, and (merchandise inventory)
withdrawals
- Pagdating ng closing entries; ma-zero ADJUSTING ENTRY FOR PREPAID EXPENSES
(0) sila  PREPAID EXPENSE is an expense
- Temporarily they will stay; but later on already paid for in advance but not yet
they‟ll become zero used or incurred, thus their benefit will not
- Hindi na ma-carried over sa next be derived in the relevant accounting
accounting period period.
 If the accounts contain both real and - Also called DEFERRED EXPENSE
nominal elements, these are known as - (Pre)(paid) Expense – before maging
MIXED ACCOUNTS. Mixed accounts are expense binayaran na
adjusted at the end of the period so that - Other term for advanced payment
their balances become either purely real - Asset pa sa view ng nagbayad
accounts or purely nominal accounts. - Pag prepaid expense ang problem;
- Mixed accounts are created during automatic cr. Cash since nagbayad ka
adjusting entries = isang side real - Ang dr. and cr. ay iikot lang sa dalawa:
accounts; isang side nominal accounts either asset or expense
-  ASSET METHOD (expired)
 It should be noted that only real and - Assuming the advanced payment is still
nominal accounts exist after the an asset
accounts have been adjusted while the - Dahil di pa nagagamit di pa siya
real and nominal elements in the mixed expense
accounts have been recorded in separate - Correct na recorded as asset however,
accounts.” may nagamit na kaya need ng adjusting
entries

42
 o Example of an Asset method. an accounting period and thus, still to be
Assume MR. QUEEN issued a paid in the next accounting period.
check on November 1, 2021 for - Also called ACCRUAL OF EXPENSES
P18,000 as payment of store rent for - Nagamit na pero „di pa bayad;
six months. babayaran next accounting period
- Pag asset method, dapat ang dr. asset - Dr. Expense – already incurred
account Cr. Payable – not yet paid
 Vera Cruz Manuel (2020, p169) illustrated
another example of an accrued expense.
Assume Healthway Clinic issued a 60 day,
25% (per annum) note for a P350,000 cash
loan extended by RP Finance. The note is
dated December 1, 2018 and since it has
run for 30 days. Interest charge should be
o In the preparation of the Financial recognized on December 31 as an expense
Statements for December 31, 2021, (interest expense) and as a liability
adjusting entry will be as follow: (interest payable) since no payment was
- Cr. what is previously dr. in the initial as yet made.
recording
- Record the expense (expired portion)

 EXPENSE METHOD (unexpired)  COMPUTATION: Determine the period that

- Assuming that the item will still be used has transpired from the date of the note
eventually, so recorded as already an (December 1) to the end of the accounting
expense prior to usage; but is actually period (December 31) which is 30 days.
incorrect o Principal x Interest Rate x Time =
o Example of an Asset Method. INTEREST
Assume MR. QUEEN issued a o 350,000 x .25 x 30/360 = P7,291.67
check on November 1, 2021 for - /360 – banker‟s rule
P18,000 as payment of store rent for - Automatic rounded off
six months. ADJUSTING ENTRY FOR DEFERRED REVENUE
 DEFERRED REVENUE or UNEARNED
REVENUE refers to revenue already
received but not yet earned, and thus
represents revenue of future periods.
- Also called UNEARNED INCOME
 INCOME METHOD (unearned)
o Ricafrente (2020, p163) illustrated
o In the preparation of the Financial an example of a Deferred Revenue.
Statements for December 31, 2021, Pinoy Komiz Enterprises is an E-
adjusting entry will be as follow: commerce magazine publication
- Record the asset (unexpired portion) house with operations in Manila. On
August 1, 2021, the business
received advance subscription fees
worth Php 250,000. To recognize
the receipt of advance payment, the
journal entry on August 1 should be:
ADJUSTING ENTRY FOR ACCRUED EXPENSES
 ACCRUED EXPENSE are expenses
already incurred but not yet paid during
43
 only received Php 135,000 from Banco
Loco. To recognize revenue and to set up
an appropriate receivable account to the
amount to be collected, the accountant of
Media Associates Enterprises prepared the
following adjusting entries.
o “On August 31, 2021, the
company‟s accountant had to
prepare financial statements. When
an accountant review the
subscriptions income account, he
noticed that only Php 150,000 were
actually earned and thus, Php
100,000 (Php 250,000- Php
150,000) is still unearned. To set up ADJUSTING ENTRY FOR BAD DEBTS
a liability account (with the title EXPENSE / DOUBTFUL ACCOUNTS EXPENSE
deferred revenue), the accountant
 The following accounting information is part
then prepared the following adjusting
of the trial balance of ACC Enterprise
entries:
ending May 31, 2021
- Also called UNCOLLECTIBLE
ACCOUNT EXPENSE
ACC ENTERPRISE
Trial Balance
May 31, 2021

 LIABILITY METHOD (earned)

 Using the percentage of revenue in

provisioning the allowance for bad debts,
we‟ll assume that the expected uncollectible
o The Adjusting Entry on the above account during the year would be equal to
transaction will be: 2% of the Service Revenue account during
the period. Therefore, the following
adjustment should be made:

ADJUSTING ENTRY FOR ACCRUED REVENUE

 ACCRUED REVENUE or ACCRUED
INCOME arises when the business renders
services or delivers goods to its clients but
collections have not yet been received.
 Ricafrente (2020, p165-166) illustrated an
example of an Accrued Revenue. Banco ADJUSTING ENTRY FOR DEPRECIATION
Gilas has a Credit Commission Program. In EXPENSE
this program, an agent simply offers credit  The simplest method in computing the
cards to his prospect clients and a depreciation is the straight line method:
commission from Banco Loco will be COST SALVAGE VALUE SCRAP VALUE
received after the clients confirmed to get

USEFUL LIFE
such. Last June 5, 2021, Media Associates  Example: Assume HAPPINESS REPAIR
Enterprises, an agent company, earned SERVICE has the following selected trial
commission revenue of Php 184,000 but balances as of June 30, 2021
44
  Additional Information:
1. Furniture and Fixtures were acquired
January 1, 2020 with an estimated life
of 5 years with a scrap value of P50,000

 120,000 ─ 50,000 = 70,000 ÷ 5 x 1 ½ years

= P21,000

REFERENCES:
Agamata, Franklin T & Berbano Alfred. (2020) . Fundamentals of Accounting.
Manila , Philippines: Education_Online, Inc.
Arenas T, Chua, M. & Villarina F. (2020). Fundamentals of Accounting Principles.
Quezon City: National Book Store
Covid 19 Project for Accountants: Basic Concepts –Presentation of Financial
Statements (PAS 1)
Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting
Principles. USA: Courier Kendallville
Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City:
Bandolin Enterprise
Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City:
Valencia Educational Supply
Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for
Partnership and Corporation. Manila: Millenium Books, Inc.
Valix Conrado T & Valix Christian Aris M. (2018). Theory Financial Accounting.
Manila: GIC Enterprises & Co. Inc.
Vera Cruz- Manuel, Z. (2020). 21st Century Accounting Process 16th Edition.
Quezon City: Raintree Trading & Publishing Inc.

All skills are perfected through the process of

failure. Embrace loss as a necessary part of
improvement.
- Jerry Lynch
PADAYON FUTURE CPAs!

45
 CHAPTER 8 an outflow of cash goes for payment of
PREPARATION OF FINANCIAL STATEMENTS expenses.
 From Investing Activities, an inflow of
LEARNING OBJECTIVES: cash comes from sale of Property, Plant &
1. Enumerate the basic financial statements Equipment while an outflow of cash goes to
2. Illustrate the preparation of the financial acquisition of Property, Plant & Equipment.
statements  From Financing Activities, cash inflow will
come from loans extended by creditors, or
6. PREPARATION OF FINANCIAL STATEMENTS cash contributions made by investors or
owners while cash outflow will mean cash
BASIC FINANCIAL STATEMENTS paid to creditors or withdrawn by the owner.
1. Income Statement
2. Statement Of Owner's Equity
3. Statement Of Financial Position
4. Statement Of Cash Flows
5. Notes To Financial Statements

STATEMENT OF CASH FLOWS

 It is a basic component of the financial
statements which summarizes the
operating, investing and financing activities
of an entity
 The statement of Cash flow will enlighten
one on how cash is being managed. A 
business should be able to generate
positive net cash flow especially from
operation so that the obligations may be
paid including extinguishments of loans and
cash withdrawals of owners.
 Cash flows are vital to the financial health of
the business. Too little cash or too much
cash will affect the smooth flow of financial
operation. Revenues should easily be
converted into cash so that disbursements
could easily be paid. 
 Some businesses fail because of its inability
to maintain a proper balance between
receipts and disbursements. It is good for
business to be able to generate cash from
operation much more than from financing or
from investing activities.
 For short-run planning, management strictly
monitors the cash to ensure that cash inflow
from operating activities is always more
than its cash outflow.
 Cash flow activities are either an inflow
(source or receipt) which increases cash or
an outflow (uses or disbursement) which
decreases cash.
 These cash activities are classified as:
Operating Activities, Investing Activities
and Financing Activities.
 From operating activities, an inflow of
cash comes from revenue collections and

46
 CHAPTER 9 4. Close the Owner‟s Withdrawal or Drawing
PREPARATION OF THE CLOSING ENTRIES Account to the Capital Accounts
AND
POST-CLOSING TRIAL BALANCE 8. PREPARATION OF THE POSTCLOSING
TRIAL BALANCE
7. PREPARATION OF THE CLOSING ENTRIES
POST- CLOSING TRIAL BALANCE
CLOSING ENTRIES  To test that the general ledger account
 At the end of the accounting period, all are in balance sheet before the
nominal or temporary accounts (revenues transactions of the next accounting period
and expenses) need to be closed so that are posted, a post-closing trial balance
there will be a fresh start for the next should be prepared.
accounting period.  A trial balance, which is prepared after the
 Their balances are not carried from one temporary or nominal accounts (revenues,
period to another unlike the real or expenses, and drawings) have been closed,
permanent accounts. is referred to as Post Closing Trial
 The balance of each revenues and Balance.
expenses accounts are transferred by a  The accounts that are listed in this trial
journal entry to a temporary account called balance are only permanent or real
Income & Expense Summary or Income accounts.
Summary.  The purpose of preparing this trial balance
 Since revenues have credit balances, these is to prove that the remaining permanent
accounts are debited and Income and accounts are in balance as a fresh start
Expense Summary is credited. for the next accounting period.
 In contrast, since expenses have debited
balances, these are to be credited and
Income & Expense Summary is debited.
 Ultimately, the balance of the Income
Summary account is then transferred to
the owner's capital account.
 The process of closing the nominal
accounts and to transfer its balance to the
capital account is referred to as closing
entries.
 After the closing entries are posted to the
general ledger accounts, all nominal
accounts will have zero balance.
 Closing entries are recorded to the
general journal and posted to the general
ledger accounts.
 It is to be noted that only the balances of
nominal or temporary accounts need to
be closed.
 The balances of real or permanent
accounts are carried over to another
period: hence they are not to be closed.

PROCEDURES IN CLOSING ENTRIES

1. Close the Revenue accounts and transfer
its balance to the Income Summary Account
2. Close the Expense accounts and transfer its
individual balances to the Income Summary
Account
3. Close the Income Summary Account and
transfer its balance to capital accounts
47
 CHAPTER 10.1
ACCOUNTING FOR MERCHANDISING,
JOURNALIZING AND POSTING TO THE
LEDGER

NATURE OF A MERCHANDISE CONCERN

 Vera Cruz Manuel (2019) A business
organization that deals with buying and
selling of goods is called a merchandising
or trading concern.
 A merchandising concern earns revenue by
selling goods or merchandise on
wholesale or retail basis.
 Merchandise refers to goods or
commodities bought by the business for PERPETUAL INVENTORY SYSTEM
resale at a certain amount of profit.  Under the Perpetual Inventory System, a
 There are two methods, The Perpetual company maintains a continuous record of
Inventory Method and the Periodic the changes of the physical quantities of
Inventory Method. inventory on hand.
 Under the Perpetual Inventory Method,  In this system, all purchases recorded are
cost of goods sold and ending inventory debited and credited respectively to
may be determined from the accounting Merchandise Inventory
records without a physical counting of Cash or Accounts Payable
goods. To record the purchases
 When a Periodic Inventory Method is
used, cost of goods sold and the ending COMPARING PERIODIC AND PERPETUAL
inventory is determined by physically INVENTORY SYSTEM:
counting the items and multiplying the
number of items counted by its costs.
 Valencia & Roxas (2019, p480) the amount
of inventory on hand and the cost of
inventory sold can be determined by either
the Periodic Inventory System or the
Perpetual Inventory System.

PERIODIC INVENTORY SYSTEM

 Under the Periodic Inventory System, a
company does not maintain a continuous
record of the physical quantities of inventory
on hand.
 In this system, all purchases recorded are
debited and credited respectively to
Purchases
Cash or Accounts Payable
To record the purchases
 In order to arrive at the ending inventory, a
physical counting to be conducted by any of
the staff or whoever is in charge.
 The Cost of Goods Sold then is computed
using the following formula: MERCHANDISING ACCOUNTS
 The following are the trading accounts used
by a merchandising concern:

48
 1. Sales - Sale is an income account which is
credited when the goods or merchandise
are sold either by cash or on account basis.
2. Sales Returns and allowances - Returns
and allowances result from the return of any
unsatisfactory merchandise; this account is
a deduction from sales and is debited when
defective goods are returned by the buyer. SALES DISCOUNTS
3. Sales Discount - a sales discount is an  Two common discounts granted to
account off the regular price of goods that is customers are (1) Trade Discounts and (2)
granted for early payment. This is debited Cash Discounts
when an amount of discount is granted to 1. TRADE DISCOUNTS - Merchandise offers
the buyer. This account can be deducted their goods using a catalog where the goods
from sales or may be considered as other are listed with their prices. A trade discount
expense. which is a percentage reduction from a
4. Revenue from Sales or Net Sales - published list price may be granted to
consists of gross sales less returns and retailers or wholesalers for buying large
allowances and discounts. quantities or for regularly patronizing the
5. Gross Profit from sales - gross profit from business.
sales is divided by subtracting cost of sales - Illustration:
from net sales. Assuming that Furniture and Fixtures with a
6. Purchases - Purchases account is the list price of P 30,000 was given a trade
accumulated cost of all merchandise bought discount of 4% and 3%
for resale during an accounting period. It is List Price P 30,000
debited when goods or merchandise are Less: 4% of P 30,000 1,200
bought either on account or on cash basis. P 28,800
7. Purchase Returns and Allowances- this is a Less 3% of P 28,800 864
deduction from purchases. This is credited Gross Invoice Price P 27,936
when defective merchandise is returned to 2. CASH DISCOUNTS - when goods are sold
the supplier. on credit, terms of payment depend on the
8. Purchase Discount - this account is custom of the industry.
credited when the supplier granted the - The usual credit terms which appear on
buyer an amount of discount. This can be the invoices are:
treated as deduction from purchase or other - n/30 (which means that the gross amount is
income. payable within 30 days from the date of
9. Freight In - this is debited if the business sale), or
shoulders the payment for the delivery of - 2/10, n/30 (which means that the account is
goods bought. This is added to purchases payable within 30 days with a 2% discount
and a part of cost of sales. given if the account is paid within 10 days
10. Freight Out - this is one of the operating from the date of sale),
expenses of the business. This is debited - 3/EOM, n/60 (which means that the account
upon payment of the delivery of the goods is payable within 60 days with a 3%
sold. discount given if the account is paid until the
11. Merchandise Inventory - Goods for sales end of the month from the date of sale) and
12. Cost of Goods Sold - cost of goods sold - 2/10, 1/15, n/30 (which means that the
consists of the cost of merchandise on hand account is payable within thirty days with a
at the beginning of the accounting period, 2% discount given if the account is paid
net cost of merchandise purchased within ten days from date of sale, but only a
including cost of transporting of goods 1 % discount if the account is paid after ten
bought during the period. days but within fifteen days from date of
sale)
THE RULES ON T- ACCOUNTS FOR A
MERCHANDISING CONCERN (PERIODIC STEPS IN THE ACCOUNTING CYCLE
INVENTORY METHOD) 1. Analyzing the business documents or
transactions
49
 2. Journalizing - this is the process of 7. Debit Memorandum - is a written notice
recording the transactions in a journal which informs client of reducing his account.
3. Posting - transactions as classified and 8. Credit Memorandum - informs the client of
recorded in the journal are transferred to increasing his account.
appropriate accounts in the general ledger. 9. Billing or Statement of Account - is a
4. Preparing the unadjusted trial balance report issued periodically by a bank or
5. Preparing the adjusting entries creditor to a customer setting forth the
6. Preparing the financial statements amounts billed, credits given and balance
7. Preparing the closing entries due
8. Preparing the Post- Closing Trial Balance
9. Preparing the Reversing Entries 2. ANALYZING AND RECORDING
TRANSACTIONS ( JOURNALIZING)
1. ANALYZING THE BUSINESS DOCUMENTS  The Chart of Accounts - is a listing of
 One basic accounting principle is the account titles which guides the bookkeeper
verifiability of accounting records. in the recording of the transactions. The
 The truthfulness and the accuracy of the number and the nature of accounts depend
source documents will assure the user of on the type of business operations.
financial information that is free from bias
and error and faithfully represents what it SAMPLE PROBLEM: (PERIODIC METHOD)
purports to represent  The following are the CHART OF
ACCOUNTS for Journalizing, Posting, Trial
SOURCE DOCUMENTS Balance, Closing Entries and Post Closing
 Are the forms, evidences or legal/ official Trial Balance of THOR General
papers that serve as supports to the Merchandise
underlying economic transactions. These
evidential matters support the objectivity of
accounting records
 Examples
1. Official Receipt - is a written
acknowledgement of something received as
money or goods.
2. Check Voucher - is a document that serves
to recognize a liability and authorize the  Use the following CHART OF ACCOUNTS
disbursement of cash. for Financial Statement Preparation
3. Check - is a draft upon a bank and payable
on demand, signed by the maker or drawer,
containing an unconditional promise to pay
a certain sum of money to the order of the
payee.
4. Promissory Note - is a promise or
engagement in writing to pay a specified
sum at a time therein, limited, or on
demand, or at sight to a person therein
named, or to his order, or bearer
5. Commercial Invoice - is a written CHARACTERISTICS OF AN ACCOUNT
statement of merchandise sold to the buyer,  An account in its simplest form has three
together with the prices and charges of parts.
merchandise sent or to be sent to him.  First, each account has a title, which is the
6. Bank Deposit Slip - is a document which name of the item recorded in the account.
serves as an evidence of an act of placing  Second, each account has a space for
money in the custody of a bank or banker, recording increases in the amount of the
for safety or convenience, to be withdrawn item.
at the will of the depositor or under rules or
 Third, each account has a space for
regulations agreed upon.
recording decreases in the amount of the
item.
50
  The account form presented below is called  It is known as the “Book of Original Entry”
a T account because it resembles the letter because it is the book where the economic
T. transactions are first recorded.
 The left side of the account is called the  Recording Transactions in the Journal is
debit side, and the right side is called the called “Journalizing”
credit side.  Simultaneously or after analyzing the effects
of the transaction on the accounting
elements, accountants record the
transactions in the books of accounts; first
in the Journal and then in the Ledger.
 The Journal provides a chronological
 Amounts entered on the left side of an
record of transactions with explanations and
account, regardless of the account title are
clear references to their supporting
called debits to the account. When debits
documents with corresponding debits and
are entered in the account, the account is
credits, while Ledger provides a classified
said to be debited.
record of accounts with their respective
 Amounts entered on the right side of an
running balances.
account are called credits, and the account
 Each Entry made is called a Journal Entry.
is said to be credited.
 Each Journal Entry contains the following
 Debits and Credits are sometimes
items:
abbreviated as Dr. and Cr.
1. Date
2. The Account title and the amounts to
THE RULES ON T- ACCOUNTS
be debited
ASSETS
3. The Account title and the amount to
DEBITS CREDITS be credited
INCREASES DECREASES 4. Explanation
 A Journal Entry with one debit and one
LIABILITIES credit is called a Simple Journal Entry
DEBITS CREDITS  A Journal Entry which has more than one
DECREASES INCREASES debit or more than one credit is called a
Compound Journal Entry.
CAPITAL
CREDITS On the month of September, 2017, THOR
GENERAL MERCHANDISE has the following
INCREASES
Trial Balance.
WITHDRAWAL
DEBITS
INCREASES

REVENUE/ SALES
CREDITS
INCREASES

EXPENSES/ COST OF GOODS SOLD

DEBITS
INCREASES

THE JOURNAL
 The accounting record in which the
economic transactions and events are
initially recorded is called a “Journal”.

51
52
 increases, decreases, and balances of
items in the chart of accounts.
 A ledger format may be used where
after the date column; there is a debit
and credit column. The last column
gives a running balance after every
posting made.
 NEED FOR A LEDGER
1. Items of similar items are
grouped together
2. It is easier to locate the item if
information about it is needed

On the month of September, 2017, THOR

GENERAL MERCHANDISE has the following Trial
Balance.

To illustrate the General Ledger of THOR

GENERAL MERCHANDISE
3. POSTING FROM THE GENERAL
JOURNAL TO THE GENERAL LEDGER
 The T- Account Form is used in the
classroom for preliminary analysis of
transactions. In actual practice, a formal
book of account is used containing not
only the account title, date and amount
but also the page reference (to identify
the entry source), the account number
and the balance of the account. All
accounts are compiled in one book
called the General Ledger wherein a
separate page is maintained for each
account. Each page is called a Ledger.
 Posting is the process of transferring
figures from the journal to the ledger
accounts
 General Ledger is the collection of all
ASSET, LIABILITY, OWNER‟S EQUITY,
REVENUE, and expense accounts. This
is a book of accounts in which data from
transactions recorded in journals are
posted and thereby classified and
summarized also called ledger.
 Ledger is a tool used for classifying and
summarizing information about

53
54
 CHAPTER 10.2
PREPARATION OF TRIAL BALANCE AND
FINANCIAL STATEMENT PRESENTATION

4. PREPARATION OF TRIAL BALANCE

 A Trial Balance is a list of accounts with
open balances in the general ledger. It
proves the quality of the debits and the
credits in the general ledger.
 The trial balance consists of two
classifications: the trial balance of balances
and the trial balance of totals.
 The trial balance of balances contains
account with open balances.
 An account is said to have a debit balance if
the debit total is more than the credit total
and is said to have a credit balance if the
credit total is more than the debit total.
 If the debit side and credit side are equal,
the account is a zero balance or closed
account.
 The other form of trial balance is the
balance of totals. In this form, the total of
the debits and the total of the credits of
each account are listed.
EXERCISES
PROCEDURES IN TRIAL BALANCE PROBLEM 1:
PREPARATION  Note: Use the following CHART OF
1. Write the heading of the trial balance. The ACCOUNTS for Journalizing, Posting, Trial
heading of the trial balance includes the Balance, Closing Entries and Post Closing
following: Trial Balance
a) The name of the business or the
owner
b) Title of the list or trial balance
c) Date of the trial balance
2. Provide a column for the accounts and two
money columns - a debit and a credit
3. The accounts should be written in just one
column arranged in the following sequence:
a) Assets
 Use the following CHART OF ACCOUNTS
b) Liabilities
for Financial Statement Preparation
c) Capital
d) Income
e) Expenses
4. Write the amounts opposite the
corresponding accounts under the debit
money column, if the account is a debit
balance and under the credit money
column, if the account is a credit balance.
5. Foot the money columns. Double rule the
totals.
FINANCIAL STATEMENTS
Using the Ledger balances of THOR GENERAL  A complete set of basic financial statements
MERCHANDISE, the trial balance will appear as includes the following components.
follows:
55
a) Income Statement (Statement of
Comprehensive Income) - is a
report which describes how the
business operated over a given
period of time. (Usually one year).
This accounting report shows the
operating performance of the
business entity for a given period of
time

c) Statement of Financial Position

(Balance Sheet)- gives information
about the financial position of the
business by showing the list of its
assets (Cash and properties) and
Liabilities (debts or obligations to
pay) and from which the net worth of
the business representing equity or
share of the owner could be
determined.
 Provides a snapshot of the
firm‟s financial position at a
specific point in time

ACCOUNTING EQUATION
 ASSETS =
LIABILITIES + OWNER‟S EQUITY

b) Statement of Owners Equity - it

explains the activities for a period of
time that led to a change in the d) Statement of Cash Flow - is a
owner‟s share over the net assets of basic component of the financial
the business. statements which summarizes the
operating, investing and financing
activities of an entity.
 The statement of Cash flow
will enlighten one on how
cash is being managed.
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  A business should be able to loans extended by creditors,
generate positive net cash or cash contributions made
flow especially from by investors or owners while
operation so that the cash outflow will mean cash
obligations may be paid paid to creditors or withdrawn
including extinguishments of by the owner
loans and cash withdrawals
of owners.
 Cash flows are vital to the
financial health of the
business.
 Too little cash or too much
cash will affect the smooth
flow of financial operation.
 Revenues should easily be
converted into cash so that
disbursements could easily
be paid.
 Some businesses fail
because of its inability to
maintain a proper balance
between receipts and
disbursements.
 It is good for business to be
able to generate cash from e) Notes to Financial Statements -
operation much more than are used to report information that
from financing or from does not fit into the body of the
investing activities. statements in order to enhance the
 For short-run planning, understandability of the statements.
management strictly monitors
the cash to ensure that cash EXERCISES:
inflow from operating
activities is always more than
its cash outflow.
o Cash flow activities are either an
inflow (source or receipt) which
increases cash or an outflow (uses
or disbursement) which decreases
cash.
o These cash activities are classified
as: Operating Activities, Investing
Activities and Financing Activities.
 From operating activities,
an inflow of cash comes from
revenue collections and an
outflow of cash goes for
payment of expenses.
 From Investing Activities,
an inflow of cash comes from
sale of Property, Plant &
Equipment while an outflow
of cash goes to acquisition of
Property, Plant & Equipment.
 From Financing Activities,
cash inflow will come from

57
 CHAPTER 11
SPECIAL JOURNALS

SPECIAL JOURNALS
 A business may encounter large quantities
of similar and recurring transactions which
may create congestion and confusion of
recorded repeatedly in a single day or a
month in the general journal.
 In merchandising business, for example, 2. CASH RECEIPTS JOURNAL
sales transactions occur a thousand times o Used to record transaction resulting
in a day so it would be unnecessary and from receipts of cash either from the
impractical to credit the sales account collections of receivables or from other
repeatedly. sources
 Consequently, a special journal must be
prepared to facilitate efficient and practical
recording of similar and recurring
transactions.

KINDS OF SPECIAL JOURNALS

 The use of special journals with the
inclusion of the two column general journal, 3. PURCHASE JOURNAL
several persons and five at most can do the o Used to record transactions pertaining
journals and the general journal as well as to purchase of merchandise/ goods on
the specific type of transactions for which account
they are intended for:
Special Journal Specific Transactions
Journals Symbol Recorded
1. Sales Journal SJ Sales of merchandise on
account
2. Purchase PJ Purchases of
Journal merchandise on account
3. Cash Receipt CRJ Receipt of cash from all
Journal sources
4. Cash CDJ Payment of cash for any 4. CASH DISBURSEMENT/ PAYMENT
Disbursement/ purpose JOURNAL
Payment Journal o Used to record transactions pertaining
5. General GJ All other transactions that to disbursement of cash either as
Journal do not fit in the four payment of account to creditors or
special journals payments of expenses
 There can only be one original journal.
 Therefore, these special journals become
the books of original entry.
 Any transactions recorded in these journals
shall not anymore be recorded in the
general journal.
 Accordingly, if special journals are used, the
general journal shall only be used for entries
5. GENERAL JOURNAL
of other transactions not recorded in the
o When special journal are used, a
special journals, including adjusting and
general journal must be provided for
closing entries.
transactions which cannot be recorded
in the special journals. Among these
FORMS OF SPECIAL JOURNALS
transactions are sales returns, purchase
1. SALES JOURNAL
returns and allowances, adjusting
o This is used to record sales
entries and closing entries.
transaction on account or on credit
58
Note: See Excel special journal templates for the
sample illustrative problems

REFERENCES:
Agamata, Franklin T & Berbano Alfred. (2018) . Fundamentals of Accounting.
Manila Philippines: Education_Online, Inc.

Arenas T, Chua, M. & Villarina F. (2018). Fundamentals of Accounting Principles.

Quezon City: National Book Store

Covid 19 Project for Accountants: Basic Concepts –Presentation of Financial

Statements (PAS 1)

Kieso, Donald E., Kimmel Paul & Weygandt, Jerry J. (2015). Accounting
Principles. USA: Courier Kendallville

Millan, Zeus Vernon. (2019). Financial Accounting and Reporting. Baguio City:
Bandolin Enterprise

Roxas, Gregorio, F. & Valencia Edwin G. (2018). Basic Accounting. Baguio City:
Valencia Educational Supply

Tolentino, Gloria J. & Lupisan Ma. Concepcion Y. (2017). Accounting for

Partnership and Corporation. Manila: Millenium Books, Inc.

Valix Conrado T & Valix Christian Aris M. (2018). Theory Financial Accounting.
Manila: GIC Enterprises & Co. Inc.

Vera Cruz- Manuel, Z. (2018). 21st Century Accounting Process 16th Edition.
Quezon City: Raintree Trading & Publishing Inc.

“The first step to getting what you want is

having the courage to get rid of what you
don’t.”

“PADAYON FUTURE CPAs”

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