General journal Statement of cash flows- summarizes cash flows as operating,

- book of original entry investing, and financing; ability to generate cash

- chronological record of transactions 1. operating- derived from revenue producing activities
Journalizing- recording transactions into a journal 2. investing- derived from long term assets and investments
Opening entry- recording of initial investments 3. financing- derived from equity and borrowing
Simple entry- only two accounts Ways to present:
Compound entry- more than two accounts 1. direct method- cash receipts listed on by one
General Ledger 2. indirect method- net income/loss is adjusted for the effects of
- book of final entry transactions
- group of accounts needed to prepare the financial statements General features of financial statements
Posting- transferring journal entry information to the ledger 1. fair presentation and compliance- faithful representation of the
Chart of accounts- listing of all the accounts and their account effects of transactions
numbers in the ledger 2. going concern- continue in operation
Unadjusted trial balance 3. accrual basis- shall prepare financial statements except cash
Trial balance- list of accounts and their balances flow
Trial balance of totals- total debut footings and total credit footings 4. materiality and aggregation- entities shall present separately
Trial balance of balances- only the balance of each account 5. offsetting- assets, liabilities, income, and expenses shall not be
Balanced but erroneous- failure to record or post a transaction, offset
double recording, correct accounts but wrong amount, correct 6. frequency of reporting- financial statements shall be prepared
debit/credit but wrong account annually
Not balanced and erroneous- wrong addition, wrong column, wrong 7. comparative information- entity shall disclose comparative
entry, correct entry but wrong posting, omissions, transposition information in respect of previous period
error, slide error 8. consistency of presentation- uniform basis
Bookkeeping- recording phase Measurement of elements- determining monetary amounts
Single-entry- only the value received will be recorded carried in balance sheet and income statement
Double-entry- two fold effect of transaction 1. historical cost- past purchase exchange price
Historical cost- value when originally purchased/transacted 2. current cost- current purchase exchange price
Fair value- value where buyer and seller meet 3. realizable value- current sale exchange price
Underlying assumptions- postulates, basic notions on which 4. present value- future exchange price
accounting process is based Worksheet- multicolumn paper used to facilitate adjusting entries
1. going concern- continuing in operation indefinitely and financial statements; optional step; normally prepare after UTB
2. accrual basis- transactions recognized when they occur Closing entries- entries that transfer the balance of one account to
3. accounting entity- separate juridical entity; economic entity another to prepare for the next accounting period; all temporary
assumption; entity is separate from owners accounts are close to the income summary account; income
4. time period- periodicity assumption; life of an entity is subdivided summary account, closed to capital account; drawings account,
into time periods or accounting periods; fiscal (calendar year and closed to capital account
business year); interim period Post-closing trial balance- shows equality of permanent account
5. monetary unit- transactions measured in stable monetary units balances that are carried forward into the next cycle
New conceptual framework- summery of consistent terms and Reversing entries- optional step; eliminates the balance of the
concepts balance sheet; simplifies next cycle transaction
General purpose financial reporting- communicating financial - not all entries are reversed (only entries that increase on asset or
information to stakeholders based on their common needs liability)
1. primary users Inventory systems
2. secondary users Periodic
Objective of gpfr- provide financial information for its existing and - low value, high volume inventory
potential investors - physical count
Qualitative characteristics- qualities that makes it useful - requires adjusting entry
Fundamental - cost is not recognized
1. relevance- capacity to influence a decision; predictive value, Perpetual
confirmatory value, materiality - high value inventories
2. Faithful representation- faithfully represent the substance; - stock cards are kept to reflect inventory
completeness, neutrality, free from error - adjusting entry only if there is overage/shortage
Enhancing: - cost is recognized
1. comparability- likeness and differences Comparison
2. understandability- must be comprehensible 1. purchased merchandise on account
3. verifiability- observers could reach a consensus Periodic- Debit: purchases, credit: AP
4. timeliness- available or communicated in time Perpetual- debit: merchandise inv, credit: AP
Constraints of financial reporting- cost, materiality, prudence, 2. paid freight on purchase
industry practices periodic- debit: freight in, credit: cash
Elements of financial statements- assets, liability, equity, income, perpetual- debit merch inv, credit: cash
expense 3. returned merchandise
Forms of business organizations- sole proprietorship, partnership, periodic- debit: AP, credit: purch returns
corporation, one person corporation (natural person, trust, or state) perpetual- debit: AP, credit: merch inv
Adjusting entries- brings accounts up to date at the end of the 4. sold merchandise on account
accounting period; affects income statement (nominal) and periodic- debit: AR, credit: sales
balance sheet (permanent) perpetual- debit: AR, credit: sales; debit: COGS, credit: merch inv
Transactions that should be adjusted- supplies, deferrals (prepaid 5. customer returned merchandise
expenses, unearned income), accruals, depreciation periodic- debit: sales returns, credit: AR
Deferrals: perpetual- debit: sales returns, credit: AD; debit: merch inv, credit:
Prepaid expenses COGS
1. asset method- record asset; recognize expense, adjust asset; 6. physical count
expired periodic- debit: merch inv, credit: income summary
2. expense- record expenses; recognize asset, adjust expense; perpetual- none
unexpired 7. physical count show shortage
Unearned Income periodic- none
1. liability method- record liability; recognize income, adjust perpetual- debit: inventory shortage, credit: merch inv; debit:
liability; earned COGS, credit: merch inv
2. income method- record income; recognize liability, adjust Discounts
income; unearned 1. trade- deductions from catalog price to get net invoice price
Straight line depreciation- (og cost - salvage value) / estimated (amount actually charged); encourage/increase sale; not recorded;
useful life list price - trade discount = invoice price
Adjusted trial balance 2. cash- deductions from invoice price when payment made within
Financial statement- means information is accumulated and discount period to get net amount payable; encourage prompt
processed is periodically communicated to users payment; invoice price - cash discount= amount payable
General purpose finc statement- intended to meet the needs of Freight accounting
users not required to prepare reports 1. FOB destination- seller’s obligation (transfer of ownership at
Financial reporting- provision of financial information to external destination)
users 2. FOB selling point- buyer’s obligation (transfer of ownership at
Income statement- financial performance point of shipment)
1. two statement approach- showing profit or loss; showing other Payment of freight
comprehensive income 1. freight prepaid- paid by seller
2. single statement approach- shows both 2. freight collect- paid by buyer
Forms: Defaults
1. functional presentation- cost of sales method; classifies 1. FOB shipping = freight collect
expenses according to function 2. FOB destination = freight prepaid
2. natural presentation- nature of expense method; aggregates Value Added Tax (VAT)- tax on consumption levied on the sale,
expenses according to nature barter, exchange, or lease of goods
Statement of changes in equity- shows the movements VAT rate- 0% and 12%
(income/loss, withdrawals) in the elements Indirect tax- seller is liable but may be passed on to the buyer
computed using the Tax credit method- output VAT - less: input VAT=
VAT payable
Statement of financial position (balance sheet)- shows the three
elements: assets, liabilities and equity
1. liquidity- meet current obligations
2. solvency- meet non-current obligations
Form:
1. report form- three major sections in a downward sequence
2. account form- assets on the left, L and OE on the right