BBINTA2L- INTEGRATED ACCOUNTING

Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

ACCOUNTING A. Functional Accounting

1. Financial Accounting
• The art of recording, classifying and
2. Management Accounting
summarizing in a significant manner and in
3. Auditing
terms of money, transactions and events which
4. Tax Accounting
are in part at least of a financial character, and
5. Cost Accounting
interpreting the results thereof.
6. Accounting Systems Installation
• It is the process of identifying, measuring and
B. Occupational Accounting
communicating economic information to
1. Public Practice – Independent auditor/s
permit informed judgment and decision by
2. Private Practice (Commerce and Industry)
users of information.
3. Government Accounting
BOOKKEEPING 4. Research and Education

• Primarily concerned with the mechanical and

KINDS OF BUSINESS
the routine functions of accounting involving
A. As to Operation or Source of Income
recording and preparation of financial
1. Service business
statements.
e.g. Law, Accounting firms, hospitals, and
• Accounting is broader than bookkeeping as it
apartments.
includes not only the preparation of financial
2. Merchandising or Trading Business
statements but also the analysis and
e.g. book, department, sari-sari stores, hardware
interpretation of the generated accounting
3. Manufacturing Business
information.
e.g. food, car, machinery, paper factory, etc.
AUDITING
B. As to Organization
• The examination of the financial statements to
1. Sole or Single Proprietorship – one owner
determine whether they conform to established
2. Partnership- 2 or more partners/ owners
standards (GAAP: Generally Accepted
a. General Partnership
Accounting Principles). Now called Philippine
b. Limited Partnership
Standards of Accounting (PSA) & Philippine
3. Corporation - 5-15 original/initial owners
Financial Reporting Standards (PFRS).
a. Stock Corporation
Kinds of audit: i. Close Corporation
ii. Public Corporation
1. External or Independent Audit
b. Non-stock Corporation
2. Internal Audit
4. Cooperative - Special type of Corporation;
Note: Luca Pacioli - father of Modern Accounting
many; consumers
and published the book “Summer de Arithmetica,
Geometrica, Proportionali et Proportionalita.
GAAP (Generally Accepted Accounting Principles)
• First introduced the double entry bookkeeping • These are fundamental principles being
system. followed in preparing financial statements
adopted by a group of practitioners. Now
FIELDS OF ACCOUNTING
called Philippine Standards of Accounting (PSA)

Pauline Ganarial
BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

& Philippine Financial Reporting Standards accountability or entity, separate from the records
(PFRS). of the owners, managers, employees, and others
who constitute the business enterprise.
USERS OF ACCOUNTING INFORMATION
2. Going Concern Assumption- Assumes that
1. The owners; management - Need information for businesses are established with the intention that
them to improve the business the business will survive and continue indefinitely.

2. Investors (present and potential) - Need 3. Monetary Unit Assumption

information for them to determine if they should
a. Quantifiability – The elements of accounting
buy, hold or sell their investments in the
should be stated in a uniform unit of measure
business/enterprise.
or currency.
3. Employees - Need information for them to
b. Stability of Peso – It assumes that the
determine the profitability and ability of the
purchasing power of peso is stable and
business to provide remuneration, benefits and
constant, and its instability is insignificant and
employment.
therefore can be ignored.
4. Lenders - Need information for them to
• We use the historical cost as a basis for
determine whether they should grant loans or if
recording transactions and we don’t restate
their loans, including interest (of the business) will
them later due to inflation or changes in the
be paid on due.
purchasing power of peso.
5. Suppliers and other trade creditors - Need
4. Periodicity Assumption/Time period Assumption-
information for them to determine whether they
The economic activities of an entity are divided into
should deliver goods or if the amounts owing to
various artificial uniform time periods for financial
them will be paid when due.
reporting purposes. This time period is usually one
6. Customers - Need information about the year or the accounting cycle whichever is longer.
continuance of the enterprise especially when they
a. Calendar Year – Jan. 1 to Dec. 31
are dependent from it.
b. Fiscal Year – Starts any time of the year and
7. Government and other Agencies- Need
ends 12 months after
information about the activities of the enterprise
and also for them to regulate the activities of the 5. Accrual (related to MATCHING PRINCIPLE) - The
enterprise, determine taxation policies and as a effects of transactions and events are recorded
basis for national income. when they occur (not when cash is received or
disbursed) and recorded in the accounting records
8. Public - Information helps public by informing
and reported in the financial statements of the time
them about recent trends and developments as
period to which they relate.
well as employment opportunities. Also, the
contribution of the business to the economy. a. Revenues are recorded when they are
earned not when they are
BASIC UNDERLYING ACCOUNTING ASSUMPTIONS
received/collected.
1. Accounting Entity Assumption- Accounting b. Expenses are recorded when they are
records must focus on a particular unit of incurred not when they are paid/disbursed.

Pauline Ganarial
BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

TRANSACTION
ACCOUNTING CONSTRAINTS
• is an accomplished event or condition, the
1. Timeliness - Accounting information must be recognition of which results in a change in the
made available when needed and communicated accounting elements.
early enough before a decision is to be made. Characteristics:
(Again, because it will help make better decisions.)
1. It must be for a sum certain in money
2. Cost-Benefit - The benefit derived from obtaining
2. It must be supported by a genuine source document
information should exceed the cost incurred in
obtaining the information. 3. It must have two parts:

3. Materiality- A particular rule in accounting a. Value received (Debit)

which states that strict adherence with GAAP is not
b. Value parted with (Credit)
required when the items are not significant enough
to affect the valuation, decision, and fairness of the 4. It must have a two-fold effect on the elements of
Financial Information. accounting:

PHASES OF ACCOUNTING a. Assets- economic resources of an

enterprise.
1. Recording
b. Liabilities- economic obligations of an
• The translation of financial events and transactions
enterprise.
into written accounting data.
• Journalizing c. Capital- ownership interest in an enterprise.

2. Classifying ELEMENTS OF ACCOUNTING

• Similar and interrelated transactions are grouped 1. Assets- These are resources controlled by the
together in their respective classes (accounts). enterprise as a result of past transactions and events
• posting to the ledger and from which future economic benefits are expected
to flow into the enterprise.
3. Summarizing
2. Liabilities- These are present obligations of the entity
• At the end of an accounting period, data regarding
arising from past transactions and events, the
the business are grouped and summarized through
settlement of which is expected to result in an outflow
the preparation of financial statements.
from the entity of resources embodying economic
• Preparing Financial Statements from the ledger or
benefits.
trial balance
3. Capital/Equity- This is the residual interest in the
4. Interpreting
assets of the entity after deducting all its liabilities. That
• This is the analysis phase where in the financial portion or amount of assets financed by the owner/s of
statements are utilized by various users specially the firm.
the management in decision making, planning and
4. Revenues/Income- Inflow of future economic benefits
determining the status of the business.
that increases equity other than contributions or
investments from owners. It is the income generated
from sale of goods or services, or any other use of

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BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

capital or assets, associated with the main operations

of an organization before any costs or expenses are
deducted

5. Expenses- Consumptions or outflow of future

economic benefits that decreases equity other than
▪ The normal balance/side of an account is the side
distributions or dividends paid to owners. Money spent
where you record the INCREASE.
or cost incurred in an organization's efforts to generate
revenue, representing the cost of doing business. • Another way of illustrating the accounts which
will highlight their normal balances/sides is
BASIC ACCOUNTING FORMULA: ASSETS= LIABILITIES shown below:
+ EQUITY
THE ACCOUNT

• An accounting device used to record increases and

decreases in the different elements of accounting
(assets, liabilities, capital, revenues and expenses)
caused by the business transactions that have
transpired.
• The T-Account is the simplest form of account and
is illustrated below:

RULES OF DEBIT AND CREDIT

• A transaction always affects 2 sides of an
account (either increase or decrease). This
BASIC FINANCIAL STATEMENT
is known as the Double entry bookkeeping
1. BALANCE SHEET (STATEMENT OF FINANCIAL
system.
POSITION)
• A formal statement showing the financial
position of an entity as of a particular date.
It is called a balance sheet simply because
assets are balanced with equity.

Contains the following:

a. Assets
b. Liabilities
c. Capital/Equity

Financial Position components:

a) Liquidity – Capacity to pay short-term

obligations/liabilities.

Pauline Ganarial
BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

b) Solvency - Capacity to pay long-term receivable), cash receipts from customers for sale of
obligations/liabilities. goods and services
c) Capacity for adaptation – Capability of the
and cash payments for various expenses.
enterprise to generate cash for unexpected
requirements/ emergencies and investment b. Investing Activities: Receipts and disbursements of
opportunities. cash arising from purchases of assets other than
inventories or other assets intended for sale as well as
2. INCOME STATEMENT (STATEMENT OF sale of assets other than inventories or other assets
COMPREHENSIVE INCOME) intended for sale.

• A formal statement showing the performance c. Financing Activities: Receipts of cash arising from
of the entity for a certain period. borrowings (loans) and investments from owners. Cash
• A formal report that shows the result of outflows for subsequent payments of loans and returns
operations/profitability of a firm for a specific on investment (interest for loans and dividends for
period of time. owners/stockholders).

Contains the following: 4. STATEMENT OF CHANGES IN OWNER’S EQUITY

a. Revenues
• Bridge between the balance sheet and income
b. Expenses
statement that shows the changes in the capital
account due to contributions, withdrawals, and net
FORMS:
income or net loss for a period. It contains the
a) Natural Presentation- nature of Expense Method. following:
Applicable to a service business.
a. Beginning Capital
b) Functional Presentation- Function of Expense b. Net Income/Loss
Method or Sales Method. c. Additional Investments
d. Withdrawals
Performance is synonymous with Results of operations
e. Ending Capital
(The difference between total revenues and total
expenses is net income/net loss or profit/loss for the
COMPONENTS OF THE BASIC FINANCIAL STATEMENTS
period)

• Profitability – Capacity of the firm to generate 1. BALANCE SHEET (STATEMENT OF FINANCIAL

income from its operations. POSITION)
I. ASSETS
3. CASH FLOW STATEMENT
A. Current Assets – Assets readily convertible to cash or
A formal statement showing the receipts and consumable within one year from the Balance Sheet
disbursements of cash of the entity for a certain date or the normal operating cycle whichever is longer.
1. Cash – Coins and currencies as well as bank
period.
current, savings and time deposits.
Components: 2. Receivables – short-term collectibles from
suppliers, employees, officers, and other parties
a. Operating Activities: Receipts and disbursements of
(Opposite of Payables)
cash related to payments of liabilities (accounts
payable), collection of receivables (accounts

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BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

i. Accounts Receivable – represents amounts - A contra asset account representing the usage
owed by customers/clients arising from sale of of the PPE or expired cost of the asset up to the
goods or conduct of service without any formal present.
written promise to pay.
ii. Notes Receivable – represents amounts 2. Intangible assets – Are long lived assets
collectible from customers/clients arising from without physical substance and whose value lies in
sale of goods or conduct of service services rights, privileges and competitive advantages that they
with a formal written promise to pay. give the owner.
iii. Other Receivables – Advances to officers TYPES:
and employees or Due from officers and i. Intangible Assets with indefinite life (e.g.
employees; dividends receivable, etc. Goodwill)
ii. Intangible Assets with finite life – subject to
NOTE: A formal written promise to pay may take the amortization over estimated/expected useful
form of a promissory note or a contract. life. (e.g. Patent, copyright, trademark,
franchise, etc.)

Allowance for doubtful accounts/Allowance for bad Accumulated Amortization

debts - A contra asset account representing the usage
- A Contra Asset Account used to record of a finite lived Intangible Asset or expired cost
estimates of possible uncollectible accounts of the asset up to the present.
receivable. (defaulted accounts).
3. Long Term Investments – Are assets held by
3. Inventories – Assets held in the ordinary the enterprise for accretion of wealth through
course of business which is primarily held for sale or as the receipt of interest, royalties, dividends as well as
raw material components or work-in-process goods for capital appreciation.
production of other products. i. Investment in stocks (of other companies)
4. Prepaid Expenses – Expenses paid in ii. Investment in bonds
advance but not yet used up or consumed. (Advance iii. Other investments. E.g. investment in real
payment of an expense). E.g. prepaid rent, prepaid estate and other long-term investments
supplies, prepaid advertising, etc. –
Opposite of Accrued expenses 4. Other non-current assets – e.g. cash in
5. Other Current Assets. E.g. Short-term closed banks, non productive property (abandoned
investments, security deposit, etc. property no longer in use, and other long term
receivables.
B. Non-current Assets – Assets which are long term in
nature Accumulated Impairment loss
1. Fixed assets/Property plant and equipment - A contra asset account representing the partial
(PPE) – Are tangible assets held by the business for use decline in value of an asset due to various
and expected to be used for more than 1 year. E.g. reasons such as obsolescence, damage,
Building, Land, Machineries, market value decline, negative effects of
Equipment, Furniture and Fixtures.) technology, market, economy or laws, etc.
- In case of a total decline in value for instance
Accumulated Depreciation due to destruction, the asset affected should be

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BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

re-recognized or removed from the books and 3. Bonds payable – These are long-term
recorded as an immediate expense (e.g. loss). obligations as a result of issuing bonds
II. LIABILITIES (certificates of indebtedness)
A. Current Liabilities – Obligations of the company 4. Other Non-current liabilities. E.g. fidelity
which are expected to be settled within one year from bond payable, retirement benefits payable, etc.
the balance sheet date.
1. Payables – short-term obligations to III. CAPITAL
suppliers, employees, officers and other parties - called Owner’s Equity for a sole proprietorship
(Opposite of Receivables). - called Partners’ Equity for a partnership
i. Accounts Payable – represent amounts owed - called Stockholder’s/Shareholder’s Equity for a
to suppliers for various purchases without corporation
written promise 1. (Name of the Owner), Capital – The total initial and
ii. Notes Payable (short term) – represent additional contribution/investments made by the
amounts owed to suppliers for various owner, which is further increased by profits and
purchases with written promise, payable within decreased by losses and owner’s withdrawals.
1 year or less. 2. (Name of the Owner), Drawing/Withdrawal –
iii. Other Payables – Advances to officers and Represent assets (cash or property) taken by the owner
employees (Vales), dividends payable, for personal use (in effect, this means taking back the
Withholding tax payable, mandatory fruits of investment or return on investment)
contributions payable (for SSS, Phil-Health,
PAGIBIG contributions), etc. INCOME STATEMENT (STATEMENT OF COMPREHENSIVE
INCOME)
2. Unearned/Deferred Revenue – Obligations I. REVENUE
for goods and services that a company must provide or 1. Service Revenue/Professional Fees – Revenue
deliver in the future in return for advance payment earned from providing services. Appropriate
from customers (e.g. Unearned service revenue, accounts may be used depending on the
unearned interest revenue, unearned rent income). industry where the business belongs for
instance:
3. Accrued expenses/Accrued liabilities – a. Tuition fees for rendering of educational
Expenses incurred but not yet paid (e.g. accrued services as in the case of schools and
salaries payable, accrued interest payable. – Opposite universities;
of Prepaid expenses. b. Medical fees for rendering of medical
services as in the case of clinics and hospitals;
4. Other current liabilities – e.g. Current portion c. Legal fees for rendering legal services as in
of a long term debt (loans of bonds payable), etc. the case of law firms;
d. Room revenue, Room service revenue,
B. Non-current Liabilities – All those not classified as Events revenue, Activities revenue, Spa fees
current liabilities shall fall as non-current liabilities. and Parking fees for the services rendered in
1. Long-term notes payable - with written the hospitality industry
promise, payable after one year or the non- e. Theme Park Admissions for theme parks;
current portion of a long-term debt. Ticket Sales for theaters; and others
2. Loans payable – These are long-term 2. Rent revenue – those earned from renting out
obligations for loans acquired by the company commercial space or land to other parties.

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BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

3. Interest revenue – those earned for lending invoice price by reason of the company’s early
money. payment.
4. Commission revenue – those earned by b. Freight-in/Transportation-in – the cost of
brokers and travel agencies. transporting items bought for resale from the
5. Sales – revenue earned by both merchandising and supplier
manufacturing companies for selling goods to to the company.
customers. The account may be further classified into
more specific types such as Restaurant sales, 2. Operating Expenses
Bar sales, Gift shop sales for hotels with restaurants or a. Advertising expense – cost of advertising the
simply restaurants. company or its products in any form or media.
• Sales Returns and Allowances – A contra- b. Delivery expense/Freight-out/Transportation
revenue account that refers to the sales price out – cost of delivering the items ordered/
adjustments due to customer returns by purchased to the buyer
reasons of defect, inferior quality or not in c. Communication expense – mobile
accord with customer specifications. phone/telephone/fax/internet charges, mail,
• Sales Discount - A contra-revenue account that etc.
refers to the reductions in the invoice price by d. Salaries expense – cost of labor rendered by
reason of customer’s early payment. E.g. 2/10, employees
1/20, n/30. This means that if the customer e. Supplies expense – cost of paper, pen, ink,
settles his/her account balance within 10 days, folder, stationery, soap, etc. It may be termed
he/she will get a discount of 2%, 1% if within 20 differently based on its nature such as Office
days and the due date of the account is 30 Supplies Expense, Janitorial Supplies Expense,
days (no discount). Medical Supplies Expense, etc.
• Trade Discount - A trade discount is the f. Rent expense – cost of renting or leasing
reduction in price a seller gives a buyer when space on a building or on a land for the
they buy a product or group of products. This is business.
given for promotional reasons and is not g. Repairs and Maintenance – cost of repairs
recorded in the books. Only the net amount and maintenance of company assets which
(amount less trade discount) is recorded. includes the materials used and labor.
h. Utilities – electricity and water consumption
II. EXPENSES i. Taxes, permits and licenses – those paid to
1. Cost of Sales/Cost of Goods Sold secure business permit, regulatory fees and
a. Purchases – The cost of the merchandise license to do business or practice a profession.
inventory/raw materials bought which is resold j. Insurance - is the cost of insurance (on
or converted to finished goods before it is sold. properties, personnel. Etc.) that has been
• Purchase Returns and Allowances – A contra- incurred or has expired.
expense account that refers to the purchase k. Finance costs/Interest expense – cost of
price adjustments due to customer returns by loans/borrowings
reasons of defect, inferior quality or not in l. Doubtful Account expense/bad debts
accord with the company specifications. expense
• Purchase Discounts – A contra-expense m. Depreciation expense
account that refers to the reductions in the n. Amortization of intangible assets
o. Impairment Loss

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BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

p. Other miscellaneous expense • Business Forms/Papers and Documents – Are

original source materials evidencing transactions,
3. Other Expense – E.g. Losses due to calamities used as a basis for recording.
or loss on sale of assets, etc.
• Expenses may be also classified TYPES OF BUSINESS FORMS AND DOCUMENTS:
according to function of expense 1. Official Receipt (OR) – This is issued as
depending on the industry the business evidence when cash is received by the business
belongs. For instance: Room Cost for sale of goods and services. It is also called
(cleaning, laundry, supplies, others); F Collection Receipt, Acknowledgment Receipt or
& B (payroll, food cost, beverage cost, Cash Invoice.
others) for hotels 2. Disbursement Voucher (DV) – This is used
when cash/check is paid by the business for
CONTRA ACCOUNT – An account used to reduce the purchases and payments for other expenses.
value of its related account. Examples are as follows: 3. Checks – This is a written order to a bank
1. Contra Account in the Balance Sheet (Statement of (drawee) by a depositor (drawer) to pay a
Financial Position) specified amount from the account of the
a. Allowance for doubtful accounts (contra- person named in the check (payee).
asset against Accounts Receivable) 4. Sales Invoice (or just plain Invoice) – a
b. Accumulated Depreciation (contra-asset commercial document that itemizes and
against Fixed Assets) records a transaction between a buyer and a
c. Accumulated Amortization (contra-asset seller. It identifies both the trading parties and
against Intangible Assets) lists, describes, and quantifies the items sold,
d. Accumulated Impairment loss (contra-asset shows the date of shipment and mode of
against assets) transport, prices and discounts (if any), and
e. Owner, Drawing (contra capital against delivery and payment terms.
Capital account) 5. Statement of Account (SOA) – Also called a
bill, presented to a client or customer showing
2. Contra Account in the Income Statement (Statement the billings to and payments from the customer
of Comprehensive Income) during a specific time period, resulting in an
a. Sales Returns and Allowances (contra ending balance.
revenue against Sales) 6. Promissory Note – A written promise to pay
b. Sales Discounts (contra revenue against a certain sum of money at a future date signed
Sales) by the maker who is debtor. The Payee is the
c. Purchase Returns and Allowances (contra creditor.
expense against Purchases) 7. Purchase Order – A document which is the
d. Purchase Discounts (contra expense against first official offer issued by a buyer to a seller
Purchases) indicating types, quantities, and agreed prices
for products or services.
8. Delivery Receipt – A document evidencing
the delivery of goods ordered.
I. RECORDING PHASE 9. Bank Statement – It is a record, typically sent
to the account holder every month,
summarizing all the transactions in an account

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BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

throughout the time from the previous 2. Compound – One debit and More than one
statement to the current one. credit or Vice Versa
3. Complex – More than one debit and more than
JOURNAL one credit.
• It is one of the books of accounts where 2. Determine the types of accounts identified
business transactions are recorded for the first Classify the accounts identified based on what major
time that is why it is known as the Book of original account (A, L, C, E, R, W) they belong.
entry. 3. Apply the rules of Debit and Credit to determine
• Its function is to provide a permanent and which account/s is to be debited and credited.
complete record arranged in chronological order 4. Check the equality between the total debit and the
(based on date) of all accountable transactions. total credit entry amounts
• The routine and mechanized process of 5. Complete the journal entry by placing the date and a
recording transactions in the journal is called short explanation of the transaction. Computation, if
Journalizing. necessary is also placed under the explanation.

NOTE: The explanation which consists of a short TYPES OF JOURNALS:

description of the transaction and computation of the 1. General Journal
amounts when necessary. For uniformity purposes, the • “A catch all journal.” It is where transactions
following infinitives are used to start the explanation for that cannot be recorded in any special journal
the different types of transactions: is recorded. It is also where correcting,
▪ To record/recognize… (for regular journal adjusting, reversing and closing entries are
entries) recorded.
▪ To adjust… (for adjusting entries)
▪ To reverse… (for reversing entries) 2. Special Journals – Journals used to record repetitive
▪ To correct… (for correcting entries) or high volume of specific type of transactions that
▪ To close… (for closing entries) would otherwise
overwhelm the general journal. It aids in the manual
recording of transactions. Special journals are not
mandatory. They may be used depending on the
STEPS/PROCEDURE IN RECORDING A JOURNAL ENTRY specific needs of a company.
(in the General Journal)
TYPES OF SPECIAL JOURNALS:
1. Determine if the transaction/event is accountable a. Purchases Journal – Used to record purchases of
(see characteristics of an accountable transaction). If it merchandise for sale and acquisition of fixed assets or
is, identify the accounts involved in the transaction. supplies on account or on credit. Any transaction
There should be a minimum of 2 accounts following the entered into the purchases journal involves a credit to
double entry bookkeeping system. The account the accounts payable account column and a debit to
names/titles are found in the Chart of Accounts. No the appropriate account column to which the purchase
account name/title should be used relates.
if it is not found in the chart of accounts. b. Cash Payments Journal – Used to record payments
3 types of journal entry: of various expenses and liabilities on cash. Any
1. Simple – One debit and one credit transaction entered into the cash payments journal
involves a credit to the cash account column and

Pauline Ganarial
BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

purchase discount, if any, and a debit to the • A group of ledgers containing the names of
appropriate account column to which the payment company customers and amounts
relates. collectible/receivable from them as well as
c. Sales Journal – Used to record sales/revenue current balances.
transactions on account or credit. Any transaction • The total of all the balances for all these ledgers
entered into the sales journal involves a debit to the should equal with the amount in its related
accounts receivable account column and a credit to the controlling account (Accounts Receivable)
appropriate revenue account column to which the
sale/revenue relates b. Inventory Subsidiary ledger
d. Cash Receipts Journal– Used to record receipt of • A group of ledgers containing the different
cash arising from sales or services rendered, settlement types of inventory of the company yet to be
of accounts, rebates and refunds from suppliers, loan sold or processed and their corresponding
from banks and investment of owners. Any transaction amounts.
entered into the cash receipts journal involves a debit • The total of all the balances for all these ledgers
to the cash account column and sales discount, if any, should equal with the amount in its related
and a credit to the appropriate account column to controlling account (Inventory). Merchandise
which the cash collection relates. Inventory for a merchandising business or Raw
Materials Inventory, Goods in Process
II. CLASSIFYING PHASE Inventory and Finished Goods Inventory for a
Chart of Accounts Manufacturing Business
• Contains the list as well as codes used for all
the accounts being used by the company. c. Fixed Asset or Property Plant and Equipment Ledger
LEDGER • A group of ledgers containing the different
• A record of the entire group of accounts classes of Fixed Assets or PPE that the
maintained by a company. company maintains and their corresponding
Posting - The process of transferring the amounts.
information from the journal to its appropriate • The total of all the balances for all these ledgers
accounts in the ledger in a systematic manner. should equal with the amount in its related
Footing - The process of totaling the ledger account controlling account (Fixed Assets or PPE).
balances.
1. General Ledger d. Accounts Payable Subsidiary ledger/ Creditor’s
• The main ledger used to summarize amounts ledger
from the general journal. • A group of ledgers containing the names of
2. Special / Subsidiary Ledger company suppliers and the amounts owed or
• Ledgers used to break down an account with payable to them as well as current balances.
many details such as Accounts payable • The total of all the balances for all these ledgers
(names of creditors), accounts receivable should equal with the amount in its related
(names of customers), fixed assets (types of controlling account (Accounts Payable)
fixed assets), etc.
e. Other Accounts which the company may find
Examples of special ledgers: necessary to further classify into details.
a. Accounts Receivable Subsidiary ledger/ Customer’s
ledger Trial Balance

Pauline Ganarial
BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

• A document which is used to test and ensure not brought to zero at the end of the
the equality between total debits and credits accounting period but carried forward to the
after transactions have been posted. The trial next period.
balance is not a mandatory report as its mere 2. Nominal/Temporary Accounts – Includes all
function is to check equality but it cannot income statement accounts including owner’s
determine other errors such as: drawing/withdrawal. They are called temporary
1. Failure of recording 1 or more transactions accounts because they only relate to the
2. Failure to post 1 or more journal entries current accounting period and their balances
3. Recording a transaction more than once are eventually transferred to capital accounts
4. Posting 1 or more journal entry more than once thus bringing their balances to zero at the end
5. Recording an erroneous amount on both Dr and of the accounting period.
Cr side of the journal 3. Mixed Accounts – Composed partly of real and
6. Posting part of an entry as Dr or Cr but to the temporary accounts.
wrong account a. Asset and expense accounts (prepayment of
expense & accrual of expense)
TYPES OF TRIAL BALANCE b. Liability and income accounts (pre-collection
1. Pre-closing trial balance of revenue & accrual of revenue)
• It includes balances of both nominal/temporary
and real/permanent accounts. It is prepared ADJUSTING ENTRIES
prior to the preparation of closing entries. • Ideally, all transactions must be recorded on
a. Unadjusted Trial Balance – Prepared before the day of occurrence. However, there are
adjusting entries are recorded in the general accountable events that are not immediately
journal and posted in the general ledger. journalized. For instance, use of supplies and
b. Adjusted Trial Balance – Prepared after all earning of wages by employees are not
adjusting entries are recorded in the general journalized daily because it is inexpedient to do
journal and posted in the general ledger. so. Some costs are not journalized during the
accounting period because these costs expire
2. Post-closing trial balance with the passage of time rather than as a result
• It is a listing of all balance sheet (statement of of recurring daily transactions, also, due to
financial position) accounts containing non- numerous transactions in a day, the record
zero balances at the end of a reporting period. keeper may have unintentionally failed to
It contains only real/permanent accounts as record certain business transactions. To include
the nominal/ temporary accounts have already these transactions in the books of accounts
been closed. before financial statements are finally
• Prepared after all closing entries are recorded prepared, adjusting entries are necessary. This
in the general journal and posted in the general is to ensure that the revenues are recorded in
ledger. the period when they are earned and all
expenses are recognized in the period when
CLASSIFICATION OF ACCOUNTS: they are incurred. This is in accordance with
1. Real/Permanent Accounts – Includes all the accrual and periodicity assumptions. Its
balance sheet accounts except owner’s purpose is summarized as follows:
drawing/withdrawal. They are called real
accounts because their ending balances are

Pauline Ganarial
BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

a. Break down Mixed accounts into their factors like wear and tear and exposure to
real/permanent and nominal/temporary components wind, rain sun and other elements and also
at the functional or economic factors including
accounting period cut-off date. (Last day of the obsolescence and inadequacy, the value and
accounting period). usefulness of fixed assets decrease as time
b. Segregate portion of Expense incurred for the current passes. It will reach a point when it becomes no
accounting period and the next. longer useful, thus its life is said to have ended.
c. Segregate portion of Revenue/income earned for the Because of the limited life of these tangible
current accounting period and the next. assets, their costs should be distributed as
expenses over the years they benefit. It should
• Adjusting entries are general journal entries done be noted that all fixed assets depreciate except
at the end of the accounting period to split mixed for land and art collections whose value and
accounts and to bring the accounts up to date for usefulness generally does not decrease. The
the purpose of measuring the Results of operations adjusting entry to record depreciation expense
and financial position as fair and accurate as is:
possible. All adjusting entries affect at least one Depreciation Expense
balance sheet account and one income statement XXX
account. The easiest way to know when an Accumulated Depreciation
adjusting entry is needed is by familiarizing oneself XXX
with the six instances that normally require
adjustments: • There are many ways of computing for
1. Prepayment of Expenses depreciation expense but the simplest is the
2. Precollection of Income straight-line method with its formula given
3. Accrual of Expenses below as:
4. Accrual of Income
5. Provision for Depreciation Expense
6. Provision for Doubtful Accounts Expense
Provision for Amortization of Intangible Asset (similar
Provision for Depreciation Expense to depreciation expense for intangible assets)
• When an enterprise purchases a fixed asset, it • The cost of long term assets such as Intangible
is in effect paying for the usefulness of that assets are spread to its estimated useful life
non-current asset in advance for as long as it also using the straight line method similar with
benefits the business organization. Thus, the that used in computing depreciation expense.
amount paid to acquire this kind of asset must
be deferred and allocated over the period Provision for Doubtful Accounts Expense
benefited or its estimated useful life. The cost of • Doubtful Accounts Expense (also known as Bad
a fixed asset allocated to a certain period is Debts Expense and Uncollectible Accounts
known as Depreciation Expense. Like any other Expense) are expenses incurred for the failure
expense, depreciation expense is incurred to collect accounts receivable. The estimation
during an accounting period to generate the amount to be recorded as doubtful
revenue. Here's another way of viewing accounts expense is normally based on the
depreciation: Generally, Nothing lasts forever experience of the company or of the industry to
even for fixed assets. Due to certain physical

Pauline Ganarial
BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

which the company belongs. Indicators like

declaration bankruptcy of a customer; closure CLOSING ENTRIES
of business; the customer's and failure of • These are general journal entries used to close
repeated attempt to collect are also taken into nominal/temporary accounts at the end of the
consideration. The adjusting entry to provide accounting period. These entries can be
for Doubtful Accounts Expense is: prepared after all adjusting entries are
Doubtful Accounts Expense XXX recorded and are dated as of the last day of
Allowance for Doubtful Accounts XXX the accounting period (Dec. 31 for calendar
CORRECTING ENTRIES year accounting period). After the closing
• These are general journal entries used to entries have been posted, these temporary
correct erroneous journal entries made in the accounts (All revenues and expense accounts,
past. They are prepared only when errors are including owners’ drawings/withdrawals and
discovered. Income and Expense Summary Account) have
zero balances, thus they are said to be closed
1. Correcting entries affecting PERMANENT/REAL and ready to accumulate data in the next
ACCOUNTS – Corrections on permanent/real accounting period.
accounts could be made even if they refer to current or 4 BASIC CLOSING ENTRIES:
prior period/s since the ending balances of these 1. An entry to close all income statement
accounts are not closed at the year end and are carried accounts with credit balances (revenues) to the income
forward to the next year. and
2. Correcting entries affecting NOMINAL/TEMPORARY expense summary account.
ACCOUNTS. 2. An entry to close all income statement
a. Nominal/Temporary accounts affected are accounts with debit balances (expenses) to the income
within the current year – Corrections can still be made and
on the appropriate revenue/expense accounts since the expense summary account.
books are still open they have 3. An entry to close the income and expense
yet to be closed. summary account to the capital account.
b. Nominal/Temporary accounts affected are in 4. An entry to close the Owner’s
the prior year/s – The corrections should be drawing/withdrawal account to the capital account.
booked using the account Prior Period Adjustment, • An entry to close the Prior Period Adjustment, if
since the prior year/s nominal/ temporary accounts are any, to the capital account.
already closed. Another option is to close it directly to • The Income and expense summary account is
the Owner’s capital account, since the Prior Period a temporary/suspense account used only to
Adjustment account will eventually be closed to the summarize all income and expense accounts. It
Owner’s is eventually closed to the Capital account.
capital account. After all closing entries are made, it should
• Prior Period Adjustment is a have a zero balance.
temporary/suspense account used to • Closing Entries are also posted in the general
accumulate data for corrections of ledger just like other journal entries. After all
nominal/temporary accounts from prior closing entries are made, all
periods. It is eventually closed to the Owner’s temporary/nominal accounts should have zero
capital account. After all closing entries are balances.
made, it should have a zero balance.

Pauline Ganarial
BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

WORKSHEET 5. Prior Period Adjustment account, if any

• It is a working paper that can be used to
organize the work done at the end of the PREPARING THE FINANCIAL STATEMENTS
accounting periodparticularly in summarizing • After the Post-closing Trial Balance has been
adjusting entries and the account balances for prepared, the financial statements can now be
the eventual preparation of financial prepared based on the Worksheet.
statements.
• It is prepared at the end of an accounting THE FOUR BASIC FINANCIAL STATEMENTS ARE AS
period and usually includes a list of accounts, FOLLOWS:
account balances, adjustments to each 1. Statement of Financial Position (Balance Sheet):
account, and each account’s adjusted balance Assets= Liabilities + Equity
all sorted in financial statement order. 2. Statement of Comprehensive Income (Income
• Sometimes additional columns for closing Statement): Revenue- OPEX
entries and Post-closing Trial Balance may also 3. Statement of Changes in Capital: Beg. Capital+ Net
be added. It is not really required to be done income+ Addt’l investments- Withdrawals= Ending
but it merely facilitates the preparation of the Capital
financial statements. 4. Statement of Cash Flow or Cash Flow Statement:
Outflow of Operating expense, investing activities,
PREPARE POST-CLOSING TRIAL BALANCE financing activities.
• It is prepared to check the equality of total
debits and credits of all accounts REVERSING ENTRIES
(real/permanent) after posting all closing • A general journal entry made at the beginning
entries to the general ledger. (first day) of the next accounting period that is
• Once the worksheet has been prepared, the the exact reverse of the closing entry made at
post-closing trial balance would be easy to the end of the previous accounting period.
prepare based from it. • They are OPTIONAL entries intended to simplify
the bookkeeping process for transactions
RULING THE LEDGER ACCOUNTS involving certain types of adjustments. Not all
• After posting all the closing entries, all closing entries are reversed, only the following
nominal/temporary leger accounts, which closing entries made could be reversed:
should have equal debit and credit balances or 1. Pre-payment of Expense or Deferred charges using
zero ending balances, are double ruled. The the Expense method.
purpose of ruling them is to segregate the 2. Pre-collection of revenue or Unearned/Deferred
entries of the old accounting period with that of revenue using Revenue method.
the new accounting period. Once double ruled, 3. Accrual of expenses.
no more posting can be made to the ledger. 4. Accrual of revenue.
• Ruling of ledger accounts are done at the end of
the accounting period. The ledger accounts that ACCOUNTING FOR MERCHANDISING TYPE OF
should be double ruled are as follows: BUSINESS
1. All Expense accounts. • The accounting system for a merchandising
2. All Revenue/income accounts. business is very much similar to that of a
3. Income and Expense Summary account. service business.
4. Owner’s Drawing account.

Pauline Ganarial
BBINTA2L- INTEGRATED ACCOUNTING
Lesson 1- Basic Accounting 2nd Year- First Semester (Midterms)

• The difference lies only on the revenue accounts b. Purchase returns & allowances – Purchase
and expenses related to it. Below are some returns is used to record the value of those
important terms: items bought (partly or wholly) but returned to
1. Payment terms – In some industries, credit terms the seller for some reason (e.g. with defects or
include a cash discount of 1% to 3% to encourage early not in accordance with specifications) while
payment of an amount due. A cash discount is a purchase allowances is used to record the
deduction from the invoice price that can be taken only value of those items bought with defects or not
if the invoice is paid within a specified time. Sellers call in accordance with specifications but not
a cash discount a sales discount and buyers call it a returned instead, a price reduction was
purchase discount. An example of this term is: 2/15, availed.
1/30, n/60. This means that there is a 2% discount if 2. Sales – This account is used to record the value
payment is made after 15 days, a 1% discount after 30 of merchandise sold to customers. Contra-
days and the entire invoice is due after 60 days with no revenue account related to purchases are as
discount. Another type of discount is the trade discount follows:
(e.g. 10% off or 20% sale). This is not a. Sales discounts – This account is used to record
recorded in the books. Only the net amount is recorded. discounts granted to customers for
2. Shipping terms – Shipping terms are used to show merchandise sold, deducted from gross
who is responsible for paying for shipping and when the amount of the sale.
title of the goods passes from seller to buyer. To b. Sales returns & allowances – Sales returns is
understand how to account for transportation costs, used to record the value of those items sold
you must know the meaning of the following terms: (partly or wholly) to a customer but returned
a. FOB shipping point - means “free on board for some reason (e.g. with defects or not in
at shipping point”. The buyer incurs all transportation accordance with specifications) while sales
costs after the merchandise has been loaded on a allowances is used to record the value of those
railroad car or truck at the point of shipment. Thus, the items sold with defects or not in accordance
buyer is responsible for ultimately paying the freight with customer specifications but not returned
charges. instead, a price reduction was availed.
b. FOB destination - means “free on board at 3. Inventory – This account is used to record the
destination”. The seller ships the goods to their value of merchandise that remained unsold as
destination without charge to the buyer. Thus, the seller of the last day of the accounting cycle which is
is ultimately responsible for paying the freight charges. determined through an inventory count. It is
used to determine the cost of goods sold or
ACCOUNTS UNIQUE TO A MERCHANDISING TYPE OF cost of sales for a period.
BUSINESS 4. Freight-in – This account is used to record
1. Purchases – This account is used to record the delivery expenses incurred by the business in
price of merchandise bought for resale from bringing the merchandise bought to the
suppliers. business premises.
Contra-expense account related to purchases are as 5. Freight-out – This account is used to record
follows: delivery expenses incurred by the business in
a. Purchase discount – This account is used to delivering the merchandise sold to the
record discounts availed when purchasing customer.
merchandise, deducted from gross amount of
the purchase.

Pauline Ganarial