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176 views51 pagesFABM2 Q1 Textbook (P. 1-52)
Uploaded by
Spencer Marvin P. EsguerraCopyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF or read online on Scribd
/ 51
~ Financial Position
a
E In this chapter, you should be able to
1. identify and describe the elements of
the Statement of Financial Position
(SFP) or Balance Sheet (BS);
2. classify the accounts of the
Statement of Financial Position into
current and noncurrent items;
8. prepare the Statement of Financial
Position of a sole proprietorship;
4. prepare Statement of Financial
Position report form; and
5. prepare Statement of Financial
Position account form. Financial Statements
In this second accounting subject, the first four chapters shall deal
with the preparation of the basic financial statements and their analysis
and interpretation. The bookkeeper starts with the (1) analysis of business
transactions and economic events, followed by the (2) recording in the
general journal and special journals, and (3) classifying in the general ledgers.
The general ledger accounts are summarized as assets, liabilities, owner's
equity, revenue, cost, and expenses. Financial statements are prepared from
these summarized accounts.
‘The financial statements are as follows:
1. Statement of Financial Position or Balance Sheet
2. Statement of Income or Statement of Results of Operation
8. Statement of Cash Flows
The statement of changes in owner's equity is also prepared to
connect the Statement of Income with the Statement of Financial Position 8.
The financial statement analysis and interpretation is the last step in the c
accounting process. ;
The accounting cycle covers a period of usually one calendar year,
starting on January 1 and ending on December 31. This accounting period
is called a calendar year. A period of twelve months ending on a date other
than December 31 is called fiscal year.
In the
Contents of Statement of Financial Position accounting
The Statement of Financial Position, also called Balance Sheet, reports basrenee
the permanent accounts as of the end of an accounting period. For example, Heart
on this specific date, December 31, 20X5, the statement of financial Position
reports the assets, liabilities, and owner's equity.
\ Xe
ost
Liabilities are what the business owes or claims against assets. - e'""
Assets are what the business owns. ¢
Owner's equity is what the business is worth.
The accounts in the balance sheet are called permanent accounts or
real accounts. Their balances are forwarded as beginning balances in the
next accounting period.
The ste
1. Jou
2. Pos
IIE one scorns suse od Maagenen Terk a hcg? The Statement of Financial Position or Balance Sheet contains the
apters shall deal following:
nd their analysis, A. The Heading
lysis of business
Name of th
Seeding inte 1. Name of the Business
2 generalledgers. 2. Title of the Report
iabilties, owner's 3. Date of the Report (specific date)
se prepared from Be Cifencs
Example
OMT Trading
‘Statement of Financial Position
peration
December 81, 20X5
in Phil
Iso prepared to fe Eietporre eee)
inancial Position. B. The Asset Section
last step in the C. The Liability Section
D. The Owner's Equity Section
e calendar year,
Scounting period
J on a date other Accounting Process
In the accounting cycle, the accountant is guided by the company's
accounting policies. These accounting policies are the specific principles,
chet reports bases, conventions, rules, and practices adopted by an enterprise in
Pel es oaio Preparing and presenting financial statements. The accounting process
ate ear involves the following:
* INPUT ‘ oy
ws Meee or Sr
tassets. - Ms" eu ee Reese iat] Sees
Classifying enw
Cray eee
Interpretatio
ent accounts or
balances in the
The steps in the accounting cycle are the following
1. Journalizing — Journalize the economic transactions and events.
2. Posting - Post the journal entries in number 1 to the general ledgers.
3. Trial Balance ~ Prepare the trial balance from the general ledgers.
& . The su
4, Adjusting — Adjust the ledger balances.
owner
Financial Statements ~ Make income statement and balance sheet
from the adjusted trial balance. To
6. Closing — Close or transfer the income and expense accounts to be pref
income and expense summary account and the latter account to Ei 9
owner's drawing, and the owner's drawing to owner's equity Pane
7. Post-Closing Trial Balance - Make a trial kalance of all assets, cts:
liabilities, and owner's equity. ane
liability
e Documents —_Journalize in Books ee | and th
of Original Entry of Final Ent | or net
where
Th
1 debits
incom
credit
| Th
incom
staten
Bes aie
trees
Cc
a
‘As discussed in Accounting 1, the accounting cycle starts with (1) the
analysis of source documents, followed by (2) the journalizing in general
journal and special journals, and (3) the posting in the general ledgers.
NMI cares os koto, Busnes, ad Mansgenet& Tete a Sst Acoutng gE ance sheet
counts to
account to
ity.
all assets,
with (1) the
g in general
sral ledgers.
The summarized postings in the general ledgers consist of asset, liability,
‘owner's equity, income, and expenses accounts.
To facilitate the preparation of the financial statements, a worksheet
is prepared. The worksheet consists of a listing of all account titles from
the general ledgers with their debit or credit balances. The total of debit
balances should equal the total of credit balances. There may be a need to
make some adjustments. These are posted in the adjustments columns. The
adjusted balances are extended to income statement columns for income
and expense accounts, and to the balance sheet columns for the asset,
liability, and owner's equity accounts. The difference between the debit total
and the credit total of the income statement columns is the net income
or net loss. The excess of credit total over debit total is the net income,
whereas the excess of debit total over credit total is the net loss.
‘The net income, which is the excess of the total credits over the total
debits of the income statement columns, is posted on the debit side of the
income statement to balance the income statement columns, and on the
credit side of the balance sheet to balance the balance sheet columns.
The net loss is the excess of the total debits over the total credits of the
income statement columns. It is posted on the credit side of the income
statement to balance the income statement columns, and on the debit side
of the balance sheet to balance the balance sheet columns.
ac}
Eerie
(olan
ai
Statement J Statement The income statement and the statement of financial position are
prepared from the worksheet. The statement of owner's equity shows the
beginning equity increased by net income, and additional owner's investment
and/or decreased by net loss and withdrawals by the owner.
‘The components of the accounting equation are (1) assets, (2) liabilities,
and (8) owners’ equity. Asset is any itern owned by the entity; abilities are
‘amounts owed by the entity to third parties; and owners’ equity is the share
cof the owners in the entity. The accounting equation as follows:
Assets =|
ilties + Owner's Equity
‘The analysis of transactions and events will always yield results in at
least two effects in the accounting equation.
The assets, liabilities, and owner’s equity are presented in the balance
sheet. The balance sheet is the report of the financial position or financial
condition. Further, there are two other elements affecting owner's equity
other than what the owners contribute to or withdraw from the entity. The
two other elements are the revenue, and cost and expenses. Revenue refers
to the sales or gross income. Cost means the cost of products sold or
services rendered, and expenses are those incurred to run the entity. In
fa car repair business, revenue is the amount that customers need to pay
for repair services. Cost includes payments and obligations to be paid to
the mechanics, Expenses include the Meralco electric bills, telephone bills,
clerk's salaries, among others.
‘When revenue exceeds cost and expenses, the result is a net income,
and when revenue is less than cost and expenses, the result is a net loss.
Net income increases owner's equity and net loss decreases owner's
equity. The revenues, and cost and expenses are summarized in the income
statement. position are General ledger accounts have their natural balances.
y shows the
s investment
Assets Debit Balance
Liabilities Credit Balance
Owner's Equity Credit Balance
Revenue or Income Credit Balance
(2) liabilities, Cost and Expenses Debit Balance
liabilities are
‘is the share
To determine whether an account is to be debited or credited, the rules
of debits and credits should serve as guidelines,
Debits Credits
|. Debit asset account for . Credit asset account for
increase in asset. decrease in asset.
results in at 2. Debit liability account for 2. Credit liability account for
decrease in liability. increase in liability.
1. Debit owner's equity Credit owner's equity
_ account for decrease in account for increase in
estos Serna Sark cae,
ner
:; cto Debit income account for Credit income account for
ee es decrease in income. increase in income.
fiestokier . Debit expense account for . Credit expense account
the entity In increase in expense. for decrease expenst
need to pay
to be paid to Z
Eos bills, a Assets (ee none Uabliy eee ce
Debit Credit Debit Credit
forincrease | for decrease for decrease | for increase
2 net income,
Ec sticae @) ‘Owner's Equity
Debit Credi
in the income
fordecrease | forincrease
@), Income ©), Expense
Debit Credit Debit Credit
for decrease | for increase forincrease | for decrease
Chapter 1: Statement of Financia Postion I ‘The general ledger account looks like a letter T, hence it is termed as
T account. This is a diagram that represents the general ledger account.
‘There is a left side of the letter T and a right side. The left side is for debits
and the right side is for credits. The ledger balance of an account is the
difference between the total of debit entries and the total of the credit
entries. To compute for the balance of an account, compute for the total
postings on the left. Do the same on the right side. The sum on the left minus
the sum on the right is the debit balance. The sum on the right minus the
sum on the left is the credit balance. Stated another way, when debit total
exceeds credit total in an account, the balance has a debit balance. When
the credit total exceeds debit total, the account has a credit balance.
Elements of Financial Statements
Itis a resource controlled by the enterprise as
‘a result of past events and from which future
‘economic benefits are expected to flow to the
“enterprise.
Itis @ present obligation of the enterprise arising
from past events. The settlement of which is
‘expected to result in an outflow of resources from
the enterprise embodying economic benefits.
Its the residual interest or remainder of the asset
of the enterprise after deducting all its liabilities.
“These are increases in economic benefits during
‘the accounting period in the form of inflows or
‘enhancements of assets or decreases of liabilities |
that result in increases in equity; other than those
relating to contributions from equity participants.
| gee cee a
‘These are decreases in economic benefits during
the accounting period in the form of outflows or
depletions of assets or incidences of liabilities
that result in decreases in equity; other than those
relating to distribution to equity participants.
Th
and di
Th
noncu
sheet
Curren
Ar
follow
ih tis termed as
dger account.
Je is for debits
account is the
| of the credit
e for the total
the left minus
ight minus the
hen debit total
nalance. When
balance.
srprise as
h future
ow to the
prise arising
which is
sources from
enefits during
F outflows or
ofliabilities
her than those
jicipant
}
‘The Statement of Financial Position or Balance Sheet shall be identified
and distinguished from other statements.
The entity shall present current and noncurrent assets and current and
.s, as separate classifications on the face of the balance
‘An asset shall be classified as current when it satisfies any of the
following criteria:
1. Itis expected to be realized, or is intended for sale or consumption
within the entity's normal operating cycle.
2. Its held primatily for the purpose of being traded.
3. It is expected to be realized within the twelve months after the
balance sheet date.
4. tis cash or a cash equivalent unless it is restricted from being
exchanged or used to settle a liability for at least twelve months
after the balance sheet date.
IFRS, 2007
All other assets shall be classified as noncurrent.
tions of
The operating cycle of an entity is the time between the act
assets for processing and their realization into cash or cash equivalents.
When the entity's normal operating cycle is not clearly identifiable, its
duration is assumed to be twelve months.
Current Liabilities
A liability shall be classified as current when it satisfies any of the
following criteria:
4. Its expected to be settled in the entity's normal operating cycle.
itis held primarily for trading.
It is due to be settled within twelve months after the balance sheet
date.
4, The entity does not have an unconditional right to defer settlement
of the liability for at least twelve months after the balance sheet
date.
All other liabilities shall be classified as noncurrent.
hope tater of Financial Postion
ERT ‘As a minimum, the face of the balance sheet of a sole proprietorship
shall include amounts for the following:
Assets
cash and cash equivalents
trade and other receivables
inventories
biological assets
investments Total As
=e aog8
financial assets
g._ investment property
h. property, plant and equipment
Liabilities
Ace
a. trade and other payables
b. provisions
c. financial liabilities
4d. liabilities for taxes
Owner's Equity
‘Statement of Financial Position
‘There are two forms of Statement of Financial Position or Balance Sheet,
the report form and the account form.
Report Form
(Vertical Form)
Assets
Total Assets
Liabilities
‘Owner's Equity
Total Liabilities
and Owner's Equity proprietorship
Balance Sheet,
Account Form
(Horizontal Form)
Liabilities
F ‘Owner's Equity
E Total Liabilities
and Owner's Equity
‘Account Form Statement Financial Position or Balance Sheet
(Prepared from the Post-Ciosing Trial Balance)
‘Angel Service Company
Statement of Financial Position
December 31, 20X1
Lables and Owner's Equity
‘Curent Assets Curent Labites
(Cash on Hand and in Barks P 52000 Account Payable-Tado 50900
‘Accounts Recsvabl (nto P15,000 580000 Account Payable-Orhers 30,000
—aaehpbecaamad Twes/SSSIPhiHeath/ECIHOMF Payable 20000
oo 100000 Teal Curent Labities 1,200,000
Unused Suppies 38000
oe $3000 encurert ibites
; “otal Curent Assets 625,000
FOO Lane Payable 138000
‘Total Lables 77388;600
Ona?’ Equity
‘Net Equipment 27850000 Angel Reyes, Capital 2198,000
"etl bits and Ones Eqaty
‘Chapter: Statement of Francial Poston RT Report Form Statement of Financial Position or Balance Sheet
(Prepared from the Post-Closing Trial Balance)
$$$
Angel Service Comy
‘Statement of Financial Position
December 31, 20X1
Assets
Current Assets
Cash on Hand and in Banks P 52,000
Accounts Receivable (net of P15,000 allowance for bad debts) $90,000
Notes Receivable 100,000
Unused Supplies 38,000
Prepaid Expenses 43,000
Total Current Assets 823,000,
Noncurrent Assets
Equipment 2,800,000
Less: Accumulated Depreciation 150,000
Net Equipment 2,650,000,
Total Assets P 3,473,000
Liabilties and Owner's Equity
Current Liabilities
‘Accounts Payable Trade P 850,000
‘Accounts Payable—Others 380,000
Taxes/SSS/PhiHealth/EC/HDMF Payable 20,000
Total Current Liabities 1,200,000
Noncurrent Liabilities
Loans Payable
Total Liabilities
‘Owner's Equity
‘Angel Reyes, Capital 2,135,000
Total Liabilities and Owner's Equity 3,473,000) e)
P 52,000
's) 590,000
100,000
38,000
43,000
823,000,
2,800,000
150,000
2,650,000
P 3,473,000
P 850,000
330,000
20,000
1,200,000
138,000
1,838,000
2,185,000,
P.3,473,000
In an ongoing business, the accounting period starts with the cary
forward balances of the real accounts or the balance sheet accounts. The
nominal accounts or income statement accounts start with zero balances.
Within the accounting period, transactions and events are recorded. An
adjusted trial balance is prepared from the general ledgers at the end of the
‘accounting period. This is called post-closing trial balance. To demonstrate
this, the following is the post-closing Trial Balance of Angel Service Company
‘as of December 31, 20X1. Note that the accounts and amounts in the post-
closing trial balance are the same as those in the statement of financial
position.
‘Angel Service Company
Post-Closing Trial Balance
December 31, 20X1
Dr.
‘Cash on Hand and in Banks P 52,000
‘Accounts Receivable 605,000
Allowance for Bad Debts
Notes Receivable 100,000
Unused Supplies 38,000
Propaid Expenses 43,000
Equipment 2,800,000
‘Accumulated Depreciation
~ Equipment 150,000
‘Accounts Payable~Trade 850,000
‘Accounts Payable-Others 330,000
Taxes/SSS/EC/PhilHealth/ HDMF Payable 20,000
Loans Payable 198,000
Angel Reyes, Capital 2,135,000
Totals 3,638,000 3,638,000
(Chapter: Statement of Financial Poston ff] R 1. What elements are included in the Statement of Financial
Position (SFP)? What is the heading for SFP?
2. What are the components of the accounting equation? Explain
‘each of the components.
3. Whatis the left side and the right side of an account? Would the
placement be the same for any kind of account?
4. Assets less liabilities equals residual interest. What is meant by
“residual interest?”
5. Explain why net income increases owner's equity, whereas net
loss decreases owner's equity.
6. Of what value are source documents in the recording of
transactions? Bring samples to olass.
Write the accounting equation from the post-closing trial balance of
Leyes Service Grafix.
Assets = Liabilities + Owner's Equity
Requirement 2
From the post-closing trial balance of Leyes Service Grafix as of
December 31, 20X1, prepare a Statement of Financial Position.
A. Report Form
B. Account Form
MIRE esr ns uss sec ete aie a ,
Post-Closing Trial Balance
i December 31, 20X1
Financial
Dr. cr.
2 Explain _ Cash in Bank P 100,000
Accounts Receivable 480,000
Nould the Allowance for Bad Debts P 5,000
i Prepaid Rent 10,000
meant by g
Office Equipment 660,000
eee ‘Accumulated Depreciation
Office Equipment 60,000
ording of Salaries Payable 30,000
‘Account Payable 240,000
Fred Leyes, Capital 915,000
Total P 1,250,000 P_ 1,250,000 Pinklane Company
Post-Closing Trial Balance
December 31, 20X1
(in Philippine Peso)
ACCT TITLE Dr. cr.
1110. Cash in Bank P 123,153
1120 Petty Cash Fund 10,000
1130 Accounts Receivable 659,340
1181. Allowance for Bad Debts P 15,000
1140 Notes Receivable 132,200
1150. Merchandise Inventory, Dec. 31, 20X1 774,307
1160 Prepaid Expenses 3,200
1210 Fumiture and Fixture 900,000
1211. Accumulated Dep'n-Fur/Fix 45,000
1220 Transportation Equipment 1,400,000
1221 Accumulated Dep'n-Trans Equipment 140,000
2110 Account Payable Trade 960,300
2120 Note Payable-Noncurrent 234,000
2180 SSS, PhilHealth, HDMF Payable 4,000
2140 Withholding Taxes Payable 2,600
2150 Accrued Expenses Payable 1,300
8110 Pinky Ramos, Capital 2,600,000
Totals 4002200 P 4,002,200
28,002,200 F4002,209
Requirement 1: Compute the accounting equation for the above post:
closing trial balance of Pinkiane Company as of December 31, 20X1
Assets = Liabilities + Capital
Requirement 2: Prepare Statement of Financial Position as of
December 31, 20X1.
B1 ~ Account Form
B2 - Report Form 45,000
140,000
960,300
234,000
4,000
2,600
1,300
2,600,000
4,002,200
bove post:
20X1.
pital
tion as of
Mavic Enterprises
Post-Closing Trial Balance
December 31, 20X1
(in Philippine Peso)
TILE Dr.
Petty Cash Fund 5,000
Cash in Bank 146,400
Accounts Receivable 175,000
‘Allowance for Bad Debts
Unused Supplies 135,000
Prepaid Insurance 2,000
Rental Deposit 150,000
Office Equipment 70,000
Accumulated Depreciation
Office Equipment
Laboratory Equipment 400,000
Accumulated Depreciation
Laboratory Equipment
Expenses Payable
‘Accounts Payable
Loans Payable
Withholding Taxes Payable
SSS/EC Premiums Payable
HOMF Premiums Payable
PhillHealth Premiums Payable
Mavic Perez, Capital
Mavic Perez, Drawings
Totals
Required: Statement of Financial Position
{@) Report Form
(6) Account Form
Chapter 1: Statement of Financial Postion Tae)
~ Statement of Income and
Statement of Owner's Equity
E In this chapter, you should be able to
1. identify the elements of the statement
of income for a service business
and merchandising business;
2. prepare statement of income for a service
business using the single-step approach;
8. prepare statement of income for
‘a merchandising business using
the multistep approach;
4, discuss the different forms of
business organization; and
5. prepare statement of changes in
equity fora single proprietorship. Income Statement
The income statement, also called profit and loss statement, presents an
entity's result of operations for a period of time. For example, the following
should be displayed prominently
1. the name of the reporting entity DM Trading
2. title of the report Income Statement
8, the period of time covered by the report For the Year Ended
Dec. 31, 20X5
4. the currency (in Philippine Peso)
The income statement of a sole proprietorship shall include the following
1. revenue
2. costs and expenses
a. cost of services or
b. cost of goods sold
c. selling expenses
d. administrative expenses; and
3. net income or net loss.
‘A common form of presenting the income statement is classifying
expenses according to functions. The form starts with the revenue for the
reporting period, then deducting the cost of sales to arrive at the gross
profit.
Ilustration
DM Trading
Income Statement
For the Year End December 31, 20X5
Revenue 3,000,000
Less: Cost of Sales 1,800,000
Gross Profit 7,200,000
Less: Distribution Costs or Selling Expenses P 300,000
Administrative Expenses 400,000
Operating Income
‘Add: Other Income
Less: Other Expenses
Net Income for the Year
Lg nent, presents an
Ie, the following
‘These are revenues or gross income’
ading from sale of company products and
2 Statement services,
» Year Ended
1, 20X5.
ippine Peso) ‘of Sales or Cost of Services | These are direct costofthe products
ude the following: sold or the sennces rendered:
Salaries Expense This includes salaries of employees
for services rendered.
This includes telephone, water, and
electricity used.
This includes rentals for the use of
equipment, office, building, and land
spaces owned by others.
ies Expense This includes laboratory, medical,
‘ and office supplies used.
ent is classifying
e revenue for the
rrive at the gross
This includes fare for trips and
travels; cost of gasoline and oil
used for company vehicles.
includes portion of the cost of
building and equipment allocated to
‘one accounting period.
ntation Expense This includes the amount paid to
restaurants and hotels for treating
customers and others.
P3,000,000
4,800,000
7,200,000
0. 700,000
Expense This includes interest on debts or
monetary obligations.
500,000
‘Chapter 2: Statement of Income and Statement of Owner's Equity A] Single-Step Income Statement (Service Business)
To illustrate a single-step income statement, here are the nominal
accounts.
Liberty Medical Services
Nominal Accounts
For the Year Ended December 31, 20X1
Debits Credits
Service Income P 9,660,000
Cost of Services P 6,030,000
Salaries Expense 41,200,000
Employees’ Benefits 200,000
Professional Fees 180,000
Usiities Expense 360,000
Rent Expense 480,000
Taxes and Licenses 120,000,
Supplies Expense 178,000
Advertising Expense 132,000,
Transportation Expense 240,000
Depreciation Expense 60,000
Representation Expense 180,000
Interest Expense 20,000
Subtotals 3,377,000 9,660,000
Net Income 283,000
P 9,660,000 9,660,000
These are the steps in preparing the single-step income statement.
1. Start with a clean paper by writing the heading.
a. Name of the Company
b. Income Statement
©. Forthe ended (period maybe a year or less)
2. List the income account, and on rightmost section of the paper,
the amounts.
8. List the cost and expense accounts on another amounts column
on the left of (2).
4, Compute the total cost and expenses.
8. Deduct total cost and expenses from the income to arrive at the
net income or net loss. Write net income on the debit column or
the net loss on the credit column to balance Debits and Credits.
6. Write the peso sign on the first amount in the amounts column.
and on the totals. Draw double lines below the totals.
UMMA crest scr ers Magn A Tstik Ba enti?
Service |
Less: Cc
Net incor
Mul
To illu
statement
Sales
Sales Dis
Sales Ret
Purchase:
Purchases
Purchase:
Freight in
Salaries E
Rent Expo
Uniities Ex
Bad Debs:
Depreciat
Traneport
Insurance
Supplies E
Taxes and
Merchandi
Merchandis 3usiness)
> are the nominal
Liberty Medical Services
‘Statement of Income
For the Year End December 31, 20X1
"| Service Income P
_} Less: Cost of Service P 6,030,000
| Salaries Expense 1,200,000
Employees’ Benefits 200,000
Professional Fees 180,000
Utilities Expense 360,000
Rent Expense 480,000
Taxes and Licenses 120,000
‘Supplies Expense 178,000
‘Advertising Expense 132,000,
Transportation Expense 240,000
Depreciation Expense 60,000
Representation Expense 180,000
Interest Expense 20,000
Cost and Expenses 9,377,000
9,660,000
Income 289,000
Multistep Income Statement (Merchandising Business)
To illustrate multistep income statement, listed here are the income
ent accounts of Karel Trading Company as of December 31, 20X1.
ome statement.
jing.
yoe a year or less)
section of the paper,
ther amounts column
come to arrive at the
n the debit column or
e Debits and Credits.
the amounts column
v the totals. a Here i
Karel Trading Company
Income Statement
For the Year Ended December 31, 20X1
The Statement of Comprehensive Income (SCI) presents the statement
statement
subjects.
Sales P 875,000
Less: Sales Discount P 16,000
Sales Returns and Alowances 101,000 112000
Net Sales, 8,758,000 Net Incom
Less: Cost of Sales spees.con
Merchandise Inventory, Jan 1 P 728,000 Fairy
‘Add: Purchases P 4,125,000
Less: Dscounts P115:00, Fair v
Retuns and Alowances 118,000 __ 299,000 ae
3,892,000 Curre
|Add: Freightin 206,000 _ 4,098,000
Com,
Total Goods Avail or Sales 4,826,000
Less: Mecchandie Invertry, Dec 31 810000 _ 4016000
Gross Prot 4742,000 Statem
Less: Selling and Administrative Expenses To she
Salaries Expense 1,218,000 Foancial F
Rent Expense {600,000 Exuity
Uiites Expense 840,000
Bad Dedts Expense 116,000 Inaso
Depreciation Expense 50,000 setes refle
Transportation Expense 360,000 Seating fr
Insurance Expense 60,000
Supplies Expense 240,000 the
Tare and Licenses 180,000 _ 9,664.00 ine
Net come
ati 2 ad
of income information with information as required by the Financial This s¢
‘Accounting Standard Board (FASB) and the Intemational Accounting tree form:
Standards Board (IASB). The SCI can be presented separately or in coxporatior
combination with the statement
come. When presented separately, the
statement of comprehensive income starts with the net income, plus or Foams of Bt
minus comprehensive income items on certain value change on investment “=
securities.
WNIT Frees scone unr nd Margen: Trike At —____——— Here is an example of statement of comprehensive income. Note that the
nt of comprehensive income is discussed in advanced accounting
P.8876,000
6,000 For the Year Ended December 31, 20X4
117,000
000 eo Income P 5,000.000
ex comprehensive (loss)/income
28,000 Fair value change on available-for-sale (400,000)
Fair value change on cash flow hedge 550,000
Actuarial loss from defined benefit pension plans (6,000)
‘Currency translation differences (75,000)
i pee NE
‘Comprehensive Income
070,000
326,000
310,000 _ 4,016,000
4.742,000 ent of Changes in Owner's Equity (Sole Proprietorship)
To show the link of the statement of income with the statement of
218,000 Position, there is a need to discuss the Statement of Changes in
600,000 ty (SCE).
840,000 F i
116,000 Ina sole proprietorship, changes in equity between two balance sheet
50,000 reflect the increases and decreases in its net assets during the period
360,000 ting from
60,000 é A Is
240,000 the net of income and expenses for the reporting period (the net
180,000 __3,684,000 income or the net loss);
P 1,078,000 Boe
_ 2. additional investment of the owners; and
Ee iivanemant distribution of owner's equity in the form of owner's drawings.
by the Financial This section presents the statements of changes in equity for the
tional Accounting e forms of business organization: sole proprietorship, partnership, and
J separately or in poration.
ied separately, the 2
et income, plus or of Business Organizations
ange on investment __ An organization is defined as having two or more individuals working
er toward the attainment of a goal or goals. A business is an
ion formed in any of the following:
Sole Proprietorship—is the simplest form of business organization.
‘Only one individual owns the business.
Hi:
= ‘Chapter 2: Statement f income and Statement of Owner’ Equity PS (RIE 02 sony rs ann Tenn tis eres
2. Partnership—is an association of two or more persons to carry on as
co-owners of a business for profit. The partnership is bound by this
contract: ‘By the contract of partnership, two or more persons bind
themselves to contribute money, property or industry to a common
fund with the intention of dividing the profits among themselves”
(Article 1767, New Civil Code)
3, Corporations a separate body consisting of at least five individuals
and treated by law as a unit. It is “an artificial being created by
operation of law, having the right of succession and the powers,
attributes and properties exoressly authorized by law or incident to
its existence” (Sec. 2, The Corporation Code of the Philippines).
Statement of Owner's Equity
The statement of financial position or balance sheet shows the same
components of the assets and liabilities for the three forms of business
organization. The accounting equation is applied in the same manner for
sole proprietorship, partnership, and corporation.
‘The Accounting Equation
Comparative Owner's Equity
‘A. Sole Proprietorship - Sole Proprietor ~ Delia Jona
P 700,000
200,000
(30,000)
140,000
(40,000)
Capital, beginning of accounting period
Net income for the accounting period (Year 1)
This is
bbe presen
‘Standards
Net (loss) for the accounting period (Year 2)
Additional investment by the sole proprietor
Asset withdrawals or drawings by the sole proprietor srsons to carry on as
ship is bound by this
1 more persons bind
dustry to a common
‘among themselves”
B. Partnership
In a partnership, there are more than one owner. Assume the
partners are Marko Reynes and Jose Canlas, and the following
changes happened within the accounting period:
Marko Reynes Jose Canlas
ares Capital Accounts changes due to
: = Initial investment P 900,000 P 600,000
: is x .
z eee - Additional investment 400,000 150,000
ae aa - Permanent decrease in capital 100 80,000
by law or incident to
of the Philippines).
‘Subtotal
Drawing accounts changes due to
eet shows the same - Share in losses 240,000 -60,000
se forms of business - Share in incomes 190,000 190,000
the same manner for - Withdrawal of cash or other assets 30,000 30,000
‘Subtotal. 80,000 — 100,000
Net partners’ Equity at end of period © P_880,000 P_770,000
3. Corporation
In a corporation, there are many owners or stockholders. The
equity is not shown per individual stockholders, instead, the owners!
equity is shown as a group of stockholders.
From the general ledger, the following are the usual accounts
representing owners’ equity
‘Common stock P 10,000,000
Additional contributed capital 2,000,000
Retained earnings (Profits not yet declared as dividends
or not yet distributed to stockholders ) 1,500,000
a Jona Total Stockholders’ Equity at the end of
P.700,000 Accounting period P 13,500,000
) 200,000 a
(80,000) This is a simplified illustration for a corporation. Other information will
) (30, jidelines of the International Financial Reporting
; 140,000
proprietor (40,000)
sie Acountng 2. From the information in A, B, and C, the owner's or owners’ equity will
appear as follows in the balance sheet:
A. Delia Jona owner's equity P-970,000
B, Reynes and Canlas Partnership
Partners’ Equity
Marko Reynes
Capital P 960,000
Drawings Dr. Balance (80,000) P 880,000
Jose Canlas
Capital P 670,000
Drawings Cr. Balance 100,000 770,000
Total Partners’ Equity 1,650,000
C. Stockholders’ Equity
Share Capital
Common Stock
‘One milion shares at P10 par value per share P10,000,000
Additional Paid-in capital 2,000,000
Total share capital 12,000,000
Retained Earnings 1,500,000
Total Stockholders’ Equity P13,500,000
‘Statement of Changes in Owner's Equity - Sole Proprietorship
Expanded illustrations of owner's equity for a sole proprietorship
iustrating (A) net income and (8) net loss are as follows:
‘The equity of the owner of the business in a sole proprietorship is the
balance in the balance sheet account, Owners’ Capital. The latter is given
this name. For example, Greg Templo: Capital in Templo Trading) is expected
to have a natural credit balance. It is forwarded as a beginning balance
in the succeeding accounting period. If Greg Templo: Capital has a credit
balance of P800,000 on December 31, 20X1, the carry forward balance on
January 1, 20X2 is P900,000. For the accounting period 20X2, the
900,000 will change as a result of transactions and events in 20X2.
IMlustration
1, Net Ir
or
Net L
Addit
Cash
. Result of
Wher
the state
Greg Templo
Add: _ Net In
Addit
Subtotal
Less: Withd
Greg Templo
On Dece
Templo Tradi
Greg Templo ners’ equity will
970,000
| P 880,000
) 770,000
1,650,000
re P10,000,000
2,000,000
12,000,000
1,500,000
13,500,000
ip
le proprietorship
sprietorship is the
The latter is given
ading) is expected
yeginning balance
apital has a credit
orward balance on
period 20X2, the
nts in 20X2,
Mlustration
1. Net Income for 20X2 750,000
or
2. Net Loss for 20X2 (280,000)
8. Additional investment by Greg Templo 200,000
Cash withdrawals by Greg Templo 80,000
Result of Operation Is a Net Income
When the result of 20X2 operation has a net income of P750,000,
the statement of changes in equity will appear as follows:
‘Templo Trading
Statement of Changes in Owner's Equity
For the Year Ended December 31, 20X2
g Templo, Capital, January 1, 20X2 900,000
i: Net Income for 20X2 750,000
200,000
Additional Investment 950,000
1,850,000.
80,000
P 1,770,000
: Withdrawals by Propreitor
g Templo, Capital December 31, 20X2
3g Templo, Capital
Chapter 2: Statement of Income and Statement of Owners aut IP B. Result of Operation Is a Net Loss
When the result of 20X2 operation has a net loss of P280,000,
instead of net profit, the statement of changes in equity will appear as
follows:
Templo Trading
Statement of Changes in Owner's Equity
For the Year Ended December 31, 202
900,000
Greg Templo, Capital, January 1, 20X2
Add: Additional Investment 200,000
Subtotal 1,100,000
Less: Net Loss for 20X2. P 280,000
Withdrawals by Propreitor 80,000 360,000
Greg Templo, Capital December 31, 20X2 740,000
1, How often should income statements be prepared?
2. Which is more important
a. statement of financial position (balance sheet) or
b. statement of results of operation (income statement)?
3. Explain the following:
‘a. balance sheet for a specific date (for example, December
31, 20X1)
b. income statement is for a period of time (for example: For
the Year Ended December 31, 20X1)
4, What are the advantages of multistep income statement over a
single-step income statement?
6. Relate accounts in the income statement with those in the
balance sheet. Discuss with your classmate how the income
statement accounts affect balance sheet accounts. oss of P280,000,
ity will appear as
P 900,000
200,000
1,100,000
360,000
1,050,000
280,000
70,000
60,000
9,000
5,000
6,000
60,000
P_2,790,000_ 2,790,000
P 740,000
sred?
eet) or
statement)?
ple, December
(for example: For
statement over a
vith those in the
how the income
bunts.
Chapter 2: Statement of income ad Statement of Owners Equity IE Income Statement Accounts December 31, 20X1
Sales
Sales Returns and Allowances
Purchases
Purchase Returns and Allowances
Advertising
Sales Salaries
Commission Expense
Miscellanoous Selling Expense
Rent Expense
Office Salaries
Light and Water
Insurance Expense
Taxes and Licenses
Interest Expense
Bad Debts Expenses
Merchandise Inventory, Jan 1, 20X1
Depreciation Expense - Furn. & Equip.
Merchandise Inventory, Dec. 31, 20X1
Fill in the blanks.
1. Net Sales
2, Net Purchases
8. Cost of Goods Sold
4. Gross Profit
5. Selling and Administrative Expenses
Net Income
Reporting Period
Dr
5,000
220,000
10,000
30,000
15,000
3,000
15,000
20,000
2,000
4,000
5,000
4,000
20,000
87,000
10,000
cr.
478,000
3,000
60,000 Accounts obtained from the books of accounts LMN Trading
any on December 31, 20X1 will enable you to make a multistep
statement.
jn Bank
ounts Receivable
ciation Expense
Expense
Expense
P_2,285,000
"Merchandise Inventory Dec. 31, 20X1 is P180,000.
What is the reporting period?
{
:
.
Chapter 2:Statement of income ad Statement of One's Eouty ER] de Exercise 2-4
Compute the owner's equity for Norman Gonzales on December
31, 20X1 based on the following data:
; Norman Gonzales, Capital January 1, 20X1 P 450,000 Cr.
i Norman Gonzales, Cash Drawings for 20X1 120,000 Dr.
: Norman Gonzales, Additional Investment 20X1 80,000 Cr.
Net Income 20X1 90,000 Cr.
& B Exercise 2-5
Prepare a statement of equity for Darwin Enterprise.
Darwin Enterprise
December 31, 20X1
Dr. cr.
Darwin, Capital P 3,000,000
Darwin Additional Investment 500,000
Darwin, Drawing P 600,000
Net Income P 200,000
I ne tse. nore rete ae on December
> 450,000 Cr.
120,000 Dr.
80,000 Cr.
90,000 Cr.
cr.
P 3,000,000
500,000
200,000
Pp
ELE
In this chapter, you should be able to
1. discuss the elements of statement of cash flows;
' 2. distinguish among operating activities, investing
| activities, and financing activities; and
i 8. prepare statement of cash flows using
{a) indirect method and (b) direct method.
ecourting 2 The Intemational Financial Reporting Standards of the International
‘Accounting Standards Board has its objective to require the provision of
information about the historical changes in cash and cash equivalents of an
entity by means of a cash flow statement.
‘The statement of cash flows is a basic financial statement. It provides Higt
information about cash receipts and cash payments of an entity during a High sa
more the
period, I classifies the information into operating, investing, and financing
atiities.It reconciles the cash balance beginning with the cash balance
ending. ‘Bement
The cash flow statement, when used with the income statement and
balance sheet, provides information on the effect on cash, of changes in the
aseets (other than cash), liabilities, and owner's equity accounts ofthe entity.
It provides the users
1. abasis to evaluate the ability ofthe entity to generate cash;
2. an information on how the entity generates cash from some or all of
the following:
from operations oe
. from ope aye
from borrowings
from investors
|. from sales of noncurrent assets
an information on how the entity uses cash which may be for some
orall ofthe folowing:
a
b,
c
4,
a. for operations
b. for payment of borrowed money ee ont
c. for income to investors
sale of
d._ purchase of noncurrent assets
s : payment
4, an information to determine the liquidity and solvency of the entity;
5. an information for estimating future cash inflow and cash outflow; tee
and
6. an information for evaluating the relationship between cash flow and
ity.
The primary purpose of
information about the cash receipts and cash payments of an entity,
period. The secondary objective is to group the information as to operating,
gg ee sence tr ett ng
profi
the statement of cash flows is to provide
during a actvte: the International
the provision of
equivalents of an
ment. It provides
n entity during a
9, and financing
he cash balance
@ statement and
of changes in the
unts of the entity.
ate cash;
om some or all of
| may be for some
¢ncy of the entity;
and cash outflow;
een cash flow and
ows is to provide
fan entity during a
on as to operating,
‘evesting, and financing activities. Use statement of cash flows to assess
Eauidiy, solvency, and proftabiity of an entity.
“sale of goods, services, as well as other revenues. The outflows are for
‘eayments to suppliers of goods and services, taxes, and other expenses.
‘pient and equipment, intangibles, and other long-term assets. The inflow
‘Eom investing activities consists of cash receipts from sale of property, plant
‘eed equipment, intangibles, and other long-term assets.
Liquidity is the ability to pay current obligations; solvency is the ability
‘ef 2 company to survive over a long term; and profitability is the ability to
tte reasonable return on investments.
High sales but low cash may indicate bad debts on sales on account.
sales with high cash indicates profitable operation, where sales are
than cash outlays for operations.
ents of Cash Flows
Cash flows from operating activities — These are cash flows that are
directly related to earning the net income or suffering the net loss.
2. Cash flows from investing activities ~ These are cash flows for the
acquisition or disposition of plant, equipment, and investments.
3. Cash flows from financing activities ~ These are cash flows for
financing the entity through cash receipts from and cash payments
to investors or creditors other than to, or from suppliers.
“Operating Activities are the principal revenue-producing activities ofthe
and other activities that are neither investing nor financing activities,
ing activities include the cash effects of transactions that enter into
determination of net income.
Investing Activities are the acquisition and disposal of long-term assets
J other investments.
Financing Activities are activities that result in changes in the size and
ion of the equity investments of owners and long-term liabilities of
The inflow from operating activities comes from cash receipts from the
Seaman
The outflow for investing activities consists of payments for property,
The inflow from financing activities consists of cash from equity investors
‘er owners of the entity and cash from borrowings. The outflow for financing
‘ctivties consists of cash back to equity investors or owners of the entity
‘22d cash for repayments of cash borrowed.
Chater 3: Statement of Cash Flows OR gD ne nets stn ent ty
Not all cash receipts are revenues and not all cash payments are
expenses. It is also common to earn revenue prior to receiving cash and to
incur expenses prior to paying cash. For these reasons, to better understand
the relationship of cash flow and profitability, itis important to review the
accrual basis of accounting.
The book now introduces the difference between the two methods of
ithe cash basis of accounting and the accrual basis of accounting.
account
jes revenue or income when cash is
The cash basis of accounting recognizs
received and recognizes expenses only when cash is paid. On the other
hand, the accrual basis of accounting recognizes revenue or income in
the accounting period in which itis earned, whether or not cash has been
reeeived, and recognizes expenses in the accounting period in which itis
sthods, it is
incurred, whether or not cash has been paid. Between the two met
the accrual basis of accounting that sin accordance-with generally accepted
‘aevounting principles. The objective of accounting is to fairly measure the
results of the operation for a given period of time, and the financial position
ts of a certain or specific date. The results of operation are shown in the
income statement, and the financial position is shown in the balance sheet
‘statement of financial position. Rarely does the cash basis of accounting
fairly measures results of operation and financial position, thusits limited use:
Whether the business is service, trading, or manufacturing, there is a need
to always employ a system of fair measurement. Fair measurement does not
mean accurate measurement, but rather, measurement within acceptable
range. At the end of the accounting or reporting period, adjusting entries are
made to correct certain accounts.
“The following are indications that the accrual basis of accounting isin
use:
1. recognition of accounts receivable
2.. recognition of accounts payable
3, recognition of bad debts expense or uncollectible accounts
receivable
44, recognition of depreciation of property and plant and equipment
5. recognition of prepaid expenses
6. recognition of accrued expenses or expenses payable
7. recognition of cash receipts for income not yet earned
= sosi - TE When service or goods are delivered to customers, whether physically
re r :
era ‘constructively, it brings revenue or income and the right to collect from
Eee oa ‘customer. The revenue or income is recognized as a credit to sales or
ce income, and a debit to accounts receivable; sales is the account for
view the
“alg g business; and service income for a service business.
wo methods of For such transaction, this is the journal entry.
sof accounting.
@ when cash is Accounts Receivable PXXX
|, On the other 5 a
Seer comel in Sales or Service Income PXXX qe
cash has been To record income i,
xd in which it is
yo methods, itis
erally accepted
rly measure the
nancial position
This is an entry made when the sale is on account or on credit. At a later
‘ash is collected from the customer at which time the journal entry for
ection is as follows:
:
re shown in the Cash PXXX {
ppsencasiet Accounts Receivable PXXX i
is of accounting ;
us its limited use. To record collection from customer s
uihere 6 feeh When cash is received on the date of sale of the product or service, this ‘
ithin acceptable B journal entry.
sting entries are an ne
Sales or Service Income PXXX
Cee To record sales on cash basis.
‘of Accounts Payable
When goods or supplies are bought, and the entity does not pay cash
the time of purchase, the entity makes a promise to pay at a future date.
transaction, called a purchase on account or on credit, is recorded as
ek MAnannemntehane
ectible accounts
1d equipment
oe Purchase or Merchandise Inventory
Accounts Payable PXXX
able
; To record purchase of goods on credit
ned
Chapter 3: Statement of Cash Flows [CYS] for uncoll
the balan
an allowé
an estim:
becomes
receivabl
accounts
2. Laboratory Supplies PXXX
‘Accounts Payable
To record supplies bought on credit
PXXX,
Payments of accounts payable is recorded as follows:
‘Accounts Payable PXXX
Cash
To record payment
PXXX The j
,
Purchase of goods and supplies on cash basis is recorded as follows:
1. Purchases or Merchandise Inventory PXXX
Cash
To record purchase of goods on cash
PXXX R na
Plan
the year
2. Laboratory Supplies PXXX He ser
Cash PXXX Sand
To record supplies bought on cash should 2
through
is the pr
periods
are bul
vehicles
Lan
since it
The
Recognition of Bad Debts Expense
Before the income statements are prepared, there is a need to recognize
that portion of the accounts receivable from customers that may net be
collected. These are called bad debts. The amounts due from customers
fre recorded as gross amounts with the debits to accounts receivable, For
the entity may not be able to collect from all the customers,
full the amount collectible from them. The entity
probable uncollectible amounts
varying reasons,
‘ora customer may not pay in
will find the best way of determining the
from customers.
The journal entry is as follows:
Bad Debts Expense PXXK
PXXX To.
value, 2
physica
replace
at the ¢
Allowance for Bad Debts
To adjust for estimated uncollectible accounts
The bad debts expense is one of those accounts listed as expenses in the
income statement. The journal entry recognizes bad debts or uncollectible
accounts receivable. There is a credit allowance for bad debts or allowance
RE ons reins esr crn nc ‘uncollectible accounts. Either one of these two ‘accounts is shown in
balance sheet as a deduction from accounts receivable. Meanwhile,
‘allowance account is used to indicate that the non-collectibilty is still
“ee estimate. Once a particular or specific amount due from a customer
es definitely uncollectible, the same is written off the accounts
ble. To write off is to take out the bad accounts receivable from the
its receivable and from the allowance for bad debts.
POX
ws:
x
PXAX The journal entry is as follows:
Allowance for Bad Debts PXXX
ded as follows: ‘Accounts Receivable PXXX
To adjust for the write-off of receivables which are definitely |
uncollectible
cognition of Depreciation of Plant and Equipment
Piant and equipment are those assets with useful lives extending beyond
: syear when they were purchased. They are assets with physical existence.
XX se the assets (plant and equipment) will help create revenue over a period
PXXX ond the year they are acquired, the application of their costs to revenue
also be over a period beyond their year of acquisition. This is done
ough a process called depreciation accounting. Depreciation accounting
“he process of allocating the cost of plant and equipment to the years or |
sods expected to benefit from their use. Examples of plant and equipment
ing, furniture, office equipment, laboratory equipment, and motor
sicles or transportation equipment.
XX
PXXK
, need to recognize
s that may not be
ue from customers
ints receivable. For
nll the customers,
om them. The entity
collectible amounts
Landis also a long-lived asset. Itis generally not subject to depreciation
it practically has an indefinite number of years of existence.
The depreciation expense is journalized this way:
Depreciation Expense PXXX z
‘Accumulated Depreciation PXXX F
XXX To record depreciation
PXXX To compute for depreciation, determine the cost of the asset, its scrap
and its estimated useful life. The estimated useful life is based on
ssical wear and tear, obsolescence, and company policy on repairs and
‘placements. The scrap value is the estimated selling price of the asset
“st the end of its useful life. Depreciable cost is cost less scrap value. It is
counts,
sd as expenses in the
ebts or uncollectible
d debts or allowance IED newton mtn bn
the cost of the plant and equipment that is allocated over a period of time,
in which allocated amounts are the debits to depreciation expense. A
common method of determining depreciation expense is the straight line
method. The straight line method of depreciation determines the cost of
the asset, and from this cost, the scrap value is subtracted. The net, called
depreciable cost, is divided by its estimated useful life.
The formula is as follows:
Cost of Plant and Equipment ~ Sorap Value
Example
Cost of Delivery Truck 1,250,000
Scrap Value 250,000
Estimated Life 5 years
‘The computation is as follows:
P1,250,00 - 250,000
5 Years
= 200,000 depreciation expense per year
The journal entry is as follows:
Depreciation Expense - Delivery Equipment 200,000
‘Accumulated Depreciation - Delivery Equipment 200,000
To adjust depreciation for the year
‘Such is the formula as there is an increase in expense and a decrease in
asset. According to the rules of debits and credits, an increase in expense
is a debit to an expense account, and a decrease in asset is a credit to
the asset account. In the case of the latter, instead of directly crediting
Delivery Equipment, the credit is to the contra-delivery equipment account,
with the title, Accumulated Depreciation ~ Delivery Equipment. The account
‘Accumulated Depreciation — Delivery Equipmentis a deduction from Delivery when presented in the balance sheet. In the balance sheet these
period of time, ts will appear among the other assets, as follows:
expense. A
the straight line Delivery Equipment P 1,250,000
nes the cost of
“The net, called Less: Accumulated Depreciation 200,000
Net P 1,050,000
“When the depreciable cost of P1,000,000 has been fully recorded as
no more expense is recorded. If the estimate of the five-year life is
to reality, most likely the delivery equipment is no longer serviceable
sseller, and therefore has to be sold as scrap. It is also possible to
zero scrap value for certain depreciable assets.
‘of Prepaid Expenses
‘Certain expenses are paid in advance of actual use. There are two
of recording such advance payments: the asset method and the
method. When the asset method is used, an asset account is
d upon payment, and for the expense method, an expense account
Under the asset method, the adjusting entry at the end of the
period (or reporting period) is the recognition of the expense
by debiting the expense account for the increase in expense, and
St to the asset account for the decrease in asset. On the other hand,
the expense method, the end of period adjustment is a debit to the
Renee per eet ‘sccount for the unused portion, and a credit to the expense account.
Examples
A The company paid a one year comprehensive insurance on the
90,000 ‘company car. Payment on February 1, 20X1 is P12,000. The journal
maaan ‘entries for the payment and the yearend adjustments are as follows:
‘Asset Method Expense Method
Prepaid insurance 12,000 Insurance Expense 12,000
oe Cash 12,000 | Cash 12,000
jcrease in expense To record payment of To record payment of
sset is a credit to insurance premium. insurance premium.
{ directly crediting
et Insurance Ext 11,000 | Prepaid ti 41,000
= et ance Expense 11\ paid Insurance 1,
Psat Prepaid Incurance 11,000 | Insurance Expense 1,000
To adjust for the 11-month To adjust for the one month
expenee. Unused insurance premium.
Chapter 3: Statement of Cash Flows B. On December 16, 20X1, the company purchased office supplies The
from Goodwill Trading amounting to P10,000. By December 31, credit to
20X1, the consumed office supplies amounted to P4,000 leaving ability
an unused portion of P6,000.
Recording of the purchase and the year-end adjustment are as
follows:
Se a
‘Asset Method Expense Method
20X1
Dec. 16 Unused Office Supplies 10,000 | Office Supplies Expense 10,000
Cash 40,000 | Cash 10,000
To record purchase of office To record purchase of office
supplies supplies
20x1
Dec. 31 Office Supplies Expense 4,000 | Unused Office Supplies 6,000
Unused Office Supplies 4,000 | Insurance Expense 6,000
To adjust for used office To adjust for the unused office
supplies supplies
eee ee an
Recognition of Accrued Expenses or Expenses Payable at the End of the
‘Accounting Period
A company may have availed of or has incurred some expenses,
payments for which have not been made. The expenses that usually fll in
this category are salaries to employees, professional fees to contractors,
electric bills, telephone bills, and water bills.
Example
On December 31, 20X1, the unpaid Meralco electric bill amounts
to P20,000.
The following is a journal entry adjustment:
20x1
Dec. 31 Utilities Expense
Utilities Payable or
Accrued Expenses Payable 20,000
To adjust for unpaid electric bill for the month of
Dec. 20X1
om titre usenet Terbook Nes fice supplies The debit to utilities expense is for the increase in the expense, and the
ecember 31,