10-Step Accounting Cycle

1. Analyzing and classifying data from an economic event

2. Journalizing - Recording the entries of the transactions in the journal
3. Posting – summarizing the entries in the account ledgers
4. Preparing the Unadjusted Trial Balance
5. Recording the Adjusting journal entries and posting to the ledger
6. Preparing the Adjusted TB
7. Preparing the Financial Statements
8. Recording and posting Closing Entries
9. Preparing the Post-Closing TB
10. Recording Reversing Entries

1
Basic Accounting Concepts and Principles
NEW CONCEPTUAL FRAMEWORK FOR
FINANCIAL ACCOUNTING

1. Fundamental and enhancing qualitative characteristics

2. Elements of Financial Statements: Assets, Liabilities,
Equity, Income, and Expense
3. Complete set of financial statements
4. Concept of capital and capital maintenance
Fundamental and enhancing
qualitative characteristics

3
 Fundamental Qualitative Characteristics

1. Relevance (incl. Materiality)

2. Faithful Representation

4
Fundamental Qualitative Characteristics
 Fundamental Qualitative Characteristics

1. Relevance
- Financial information (that has predictive
value, confirmatory value or both) that is
capable of making a difference in a decision of
the user of FS.

5
Fundamental Qualitative Characteristics
 Fundamental Qualitative Characteristics

1. Relevance
- Financial information is material if omitting,
misstating or obscuring it could
reasonably be expected to influence decisions
made on the reports.

6
Fundamental Qualitative Characteristics
 Fundamental Qualitative Characteristics

2. Faithful Representation
- financial information is presented as
“substance over form”
- it must be complete, neutral and free
from error
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Fundamental Qualitative Characteristics
 Fundamental Qualitative Characteristics

2. Faithful Representation
- financial information is complete when all
information necessary for a user to understand
the phenomenon being depicted, including all
necessary descriptions and explanations.

8
Fundamental Qualitative Characteristics
 Fundamental Qualitative Characteristics

2. Faithful Representation
- financial information is neutral when it is without bias
in the selection or presentation.
- Neutrality is supported by the exercise of prudence.
Prudence is the exercise of caution when making
judgements under conditions of uncertainty.
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Fundamental Qualitative Characteristics
 Fundamental Qualitative Characteristics

2. Faithful Representation
- financial information is free from error when there
are no errors or omissions in the description of the
phenomenon, and the process used to produce the
reported information has been selected and applied
with no errors in the process (i.e. reasonable estimate).
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Fundamental Qualitative Characteristics
 Enhancing Qualitative Characteristics

1. Comparability
2. Verifiability
3. Timeliness
4. Understandability

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Enhancing Qualitative Characteristics
 Enhancing Qualitative Characteristics

1. Comparability
- enables users to identify and understand
similarities in, and differences among, items
- Comparability is the goal; consistency helps to
achieve that goal.

12
Enhancing Qualitative Characteristics
 Enhancing Qualitative Characteristics

1. Comparability
- Consistency, although related to comparability,
is not the same. It refers to the use of the same
methods for the same items, either from period
to period within a reporting entity or in a single
period across entities.
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Enhancing Qualitative Characteristics
 Enhancing Qualitative Characteristics

2. Verifiability
- different knowledgeable and independent
observers could reach consensus, although not
necessarily complete agreement, that a particular
depiction is a faithful representation.

14
Enhancing Qualitative Characteristics
 Enhancing Qualitative Characteristics

2. Verifiability
- Direct verification - through direct observation
- Indirect verification - checking the inputs to a
model, formula or other technique and
recalculating the outputs using the same
methodology.
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Enhancing Qualitative Characteristics
 Enhancing Qualitative Characteristics

3. Timeliness
- having information available to decision-makers
in time to be capable of influencing their
decisions

16
Enhancing Qualitative Characteristics
 Enhancing Qualitative Characteristics

4. Understandability
- Classifying, characterising and presenting
information clearly and concisely
- may need to seek the aid of an adviser to
understand information about complex
economic phenomena
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Enhancing Qualitative Characteristics
Elements of Financial
Statements

18
 Elements of Financial Statements

Financial Position Financial Performance

- Assets - Income (incl. Gains)

- Liabilities - Expenses (incl. Losses)
- Equity / Capital

19
Basic Accounting Concepts and Principles
 Elements of Financial Statements

ASSET
- a present economic resource controlled by the
entity as a result of past events.
- An economic resource is a right that has the
potential to produce economic benefits.

20
Elements of Financial Statements
 Elements of Financial Statements

RIGHT
- rights that correspond to an obligation of another
party (i.e. to receive cash, exchange resources)
- rights that do not correspond to an obligation of
another party (i.e. over physical objects, use intellectual
property)
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Elements of Financial Statements - Asset
 Elements of Financial Statements

POTENTIAL TO ECONOMIC BENEFITS

- the right already exists and that, in at least one
circumstance, it would produce for the entity economic
benefits beyond those available to all other
parties.
- can be contractual cash flows or another economic
resource, extinguish liabilities by transferring the economic
resource, etc.
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Elements of Financial Statements - Asset
 Elements of Financial Statements

CONTROL
- the present ability to prevent other parties from
directing the use of the economic resource and from
obtaining the economic benefits that may flow from it.

- arises from an ability to enforce legal rights.

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Elements of Financial Statements - Asset
 Elements of Financial Statements

LIABILITY
- a present obligation of the entity to transfer an
economic resource as a result of past events.

24
Elements of Financial Statements
 Elements of Financial Statements

OBLIGATION
- a duty or responsibility that an entity has no
practical ability to avoid. An obligation is always
owed to another party (or parties).

25
Elements of Financial Statements
 Elements of Financial Statements

TRANSFER OF ECONOMIC RESOURCE

- require the entity to transfer an economic
resource to another party (or parties)

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Elements of Financial Statements
 Elements of Financial Statements

RESULT OF PAST EVENTS

- the entity has already obtained economic
benefits or taken an action; and
- as a consequence, the entity will or may have to
transfer an economic resource that it would not
otherwise have had to transfer.
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Elements of Financial Statements
 Elements of Financial Statements

EQUITY
- claims on the residual interest in the assets of
the entity after deducting all its liabilities
- claims against the entity that do not meet the
definition of a liability.

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Elements of Financial Statements
 Elements of Financial Statements

INCOME
- increases in assets, or decreases in liabilities,
that result in increases in equity, other than those
relating to contributions from holders of equity
claims.

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Elements of Financial Statements
 Elements of Financial Statements

EXPENSE
- decreases in assets, or increases in liabilities,
that result in decreases in equity, other than those
relating to distributions to holders of equity
claims.

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Elements of Financial Statements
Concept of Capital and
Capital Maintenance

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 Capital Capital Maintenance
• Financial
- net assets or - net assets at the end of the
equity of the period exceeds the financial (or money) amount of
entity net assets at the beginning of the period
- invested money
• Physical
or invested - physical productive capacity (or operating
purchasing capability) of the entity (or the resources or funds
power; operating needed to achieve that capacity) at the end of the
capability period exceeds the physical productive capacity at
the beginning of the period
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Concept of Capital and Capital Maintenance
Complete Set of Financial
Statements

33
 Complete Set of Financial Statements

1. Statement of Financial Position / Balance Sheet

2. Statement of Financial Performance / Income Statement or
Profit and Loss Statement
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes to Financial Statements

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Complete Set of Financial Statements
 Statement of Financial Position / Balance Sheet

Assets (Current & Non-Current)

Liabilities (Current & Non-Current)

Capital / Equity

35
Complete Set of Financial Statements
 Statement of Financial Position / Balance Sheet
• Corporation

Share capital Pxxxx

Share premium Pxxxx
Retained Earnings Pxxxx
Total Equity Pxxxx

36
Complete Set of Financial Statements
 Statement of Financial Performance / Income Statement
or Profit and Loss Statement

Sales/Revenue & Cost of Sales

Operating Expenses

Income tax expense

Net Income/Net Loss
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Complete Set of Financial Statements
 Statement of Changes in Capital / Equity
• Partnership (Statement of Changes in Partners’ Capital)
Capital 1 Capital 2 Total
Beginning Balances, Jan. 1, 20x2 P xxxx P xxxx P xxxx
Add: Additional capital contribution P xxxx P xxxx P xxxx
Add: Net Income for the year P xxxx P xxxx P xxxx
Add: Salary, Bonus, Interest to Partner P xxxx P xxxx P xxxx
Less: Partner’s withdrawal (xxxx) (xxxx) (xxxx)
Less: Net loss for the year (xxxx) (xxxx) (xxxx)
Ending Balances, Dec. 31, 20x2 P xxxx P xxxx P xxxx

• Sole Proprietorship (Statement of Changes in Owner’s Capital)

The format and contents are just the same. But only one capital account.

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Complete Set of Financial Statements
 Statement of Changes in Capital / Equity
• Corporation (Statement of Changes in Equity)

Share Retained Total

Capital Earnings
Beginning Balances, Jan. 1, 20x2 P xxxx P xxxx P xxxx

Add: Issuance of share capital P xxxx P P xxxx

Add: Net Income for the year P P xxxx P xxxx

Less: Dividends declared for the year (xxxx) (xxxx)

Less: Retirement of shares (xxxx) (xxxx)
Less: Net loss for the year (xxxx) (xxxx)

Ending Balances, Dec. 31, 20x2 P xxxx P xxxx P xxxx

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Complete Set of Financial Statements
 Statement of Cash Flows

Operating Activities

Investing Activities
Financing Activities
Net Increase/Decrease in Cash

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Complete Set of Financial Statements
 Statement of Cash Flows
Operating Activities
- Cash flows derived primarily from the principal revenue producing
activities of the entity.
- Cash effects of transactions or other events that enter into the
determination of net income/loss.

Examples:
• Cash receipts from sale of goods and rendering of services
• Cash receipts from royalties, rental and other revenue
• Cash payments to suppliers
• Cash payments for other operating expenses
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Complete Set of Financial Statements
 Statement of Cash Flows
Investing Activities
- Cash flows derived from the acquisition and disposal of long-term or
non operating assets (investments, PPE, intangible assets, and other
non current assets) and other investments.

Examples:
• Cash sale or purchase of PPE, intangibles and other long-term assets
• Cash sale or purchase of equity or debt instruments of other entities
• Cash advances and loans to other parties other than those made by
financial institutions

42
Complete Set of Financial Statements
 Statement of Cash Flows
Financing Activities
- Cash flows derived from the equity capital and borrowings (non-trade
liabilities and equity) of the entity.
- Cash transactions between entity and owners (equity financing) and
between entity and creditors (debt financing).

Examples:
• Cash receipts from issuing ordinary and preference shares
• Cash receipts from issuing loans, debentures, notes, bonds,
mortgages, and other borrowings
• Cash payments for amounts borrowed and for finance lease liability
43
Complete Set of Financial Statements
 Statement of Cash Flows
Treatment of Interest and Dividends Paid and Received

• Both as operating activity since included in computation of net

income/ loss

• Interest paid as financing activity since it is cost of obtaining

financial resources.

• Interest received as investing activity because it is a return of

investment.

44
Complete Set of Financial Statements
 Notes to Financial Statements
- These provide:
a. narrative description;
b. disaggregation of items presented in the financial statements; and
c. information about items that do not qualify for recognition.

- Used to report information that do not fit into the body of the financial
statements in order to enhance understandability (help clarify items
presented) of the statements.

45
Complete Set of Financial Statements
 Notes to Financial Statements
Order of the Notes to FS:
1. Statement of compliance with the accounting standards used
2. Summary of significant accounting policies used
3. Supporting information or computation for line items presented
in the FS
4. Other disclosures, such as contingent liabilities, unrecognized
contractual commitments and non-financial disclosures
(narratives).

46
Complete Set of Financial Statements
Differences of Sole
Proprietorship, Partnership
& Corporation

47
 SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION

- A corporation is an artificial
- Only 1 owner (the - By the contract of being created by operation
proprietor) partnership two or more of law, having the right of
- Most basic legal form persons (called partners) succession and the powers,
of business bind themselves to attributes, and properties
FORMATION & - The business is contribute money, expressly authorized by law
OWNERSHIP treated as a separate property, or industry to a or incident to its existence.
entity from the common fund, with the (Section 2, Revised Corporation Code of
the Philippines)
proprietor intention of dividing the
- Easier to establish profits among
- Incorporators vs
themselves. (Article 1767, New
Civil Code of the Philippines) Stockholder vs Board of
Directors

48
Differences of Sole Proprietorship, Partnership & Corporation
 SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION

- Proprietor has sole - Board of directors makes

CONTROL OF - Partners need to make a
control over the the decisions of the
OPERATIONS joint decision
operations company

- Unlimited Personal - Partners assume - Stockholders have limited

PERSONAL
Liability on the unlimited personal liability (up to extent of
LIABILITY
Proprietor liability capital contribution only)

- Corporations declares and

ALLOCATION OF - N/A. All profits and - Partners share in the
issued dividends to
PROFITS/ losses to the profits and losses based
stockholders, upon board
LOSSES proprietor on the agreed sharing
resolution

49
Differences of Sole Proprietorship, Partnership & Corporation
 SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION

- Partners need to dissolve

- Unlimited
the partnership for
change in ownership
LIFE SPAN & - Ownership is easily
- Dependent on the
OWNERSHIP OF transferrable without need
proprietor’s life - Liquidation of
THE BUSINESS to dissolve the business and
partnership is based on
without consent of the
agreement of the
other stockholders
partners

AVAILABILITY - More investment capital - Can raise most investment

- Limited/difficult
OF CAPITAL is available capital

50
Differences of Sole Proprietorship, Partnership & Corporation
 SOLE PROPRIETORSHIP PARTNERSHIP CORPORATION

- Only 1 capital - One capital account for - Share Capital and Retained
account (Owner’s each partner (Partners’ Earnings
Equity/Capital) Equity/Capital)
- Net income/loss closed to
- Net income/loss all - Net income/loss is the Retained Earnings.
ITEMS IN closed the proprietor allocated to the partner Dividends declared for
FINANCIAL capital account capital accounts based distribution of profits to
STATEMENTS on agreed split/share. stockholders
- Capital account
affected by - Capital accounts affected - Share capital account
investments/ by investments/ affected by
withdrawal of the withdrawal of the issuance/redemption of
proprietor partners shares of stock

51
Differences of Sole Proprietorship, Partnership & Corporation
Accounting for Formation &
Operations of Business

52
 At the creation of the business, the owner/s invest to the
business:
• If Cash = The amount of cash invested

• If Non-Cash Assets = Order of Priority: Fair market value of the asset. If

no available FV, the agreed value determined the partners based on
agreement. If no FV or Agreed Value, then net book value is used

• If Liability of the owner/partner will be assumed by the business = fair

value or present value of the liability

• Memorandum entry only if industrial partner has no cash or non cash asset
to invest with.
53
Complete Set of Financial Statements
 Income statement:
Net Sales xxx
Cost of Sales or Cost of Goods Sold (xxx)
Gross profit xxx
Gross profit % (GP / Net sales) %

Operating expenses (xxx)

Net income or net loss xxx or (xxx)

Net sales = Gross Sales – Sales discounts – Sales return & allowances
Cost of sales = Beginning Invty + Net Purchases – Ending Invty
Total Goods Available for Sale = Beginning Invty + Net Purchases
54
Complete Set of Financial Statements
 Income statement:
Net Sales xxx
Cost of Sales or Cost of Goods Sold (xxx)
Gross profit xxx
Gross profit % (GP / Net sales) %

Operating expenses (xxx)

Net income or net loss xxx or (xxx)

Net purchases = Gross Purchases + Freight in – Purchase discounts

– Purchase return & allowances

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Complete Set of Financial Statements
 During the operations of the business, the transactions are
posted as normal and same across types of businesses.
• Division of Profit/Loss for Partnerships: Order of Priority is

1. Based on the agreed profit and loss ratio in the partnership agreement

2. In the absence of agreement as to loss sharing ratio, it shall be based

on their profit-sharing ratio.

3. In the absence of profit-sharing ratio, based on the ratio of the

investment in the partnership.
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Complete Set of Financial Statements
 During the operations of the business, the transactions are
posted as normal and same across types of businesses.
• Division of Profit/Loss for Partnerships

Sample computation:
P1 P2 Total
• Salaries, bonus, interest to partner xxx xxx xxx
• Add: Share on remaining net income xxx xxx xxx
• Less: Share on remaining net loss
less salaries, bonus, and interest (xxx) (xxx) (xxx) - based on ratio
Net income/Net loss for the period xxx xxx xxx - total should
agree to the net
Complete Set of Financial Statements income/loss 57
 During the operations of the business, the transactions are
posted as normal and same across types of businesses.
• Example: Net income is 150,000. Salaries for P1 and P2 are 10,000 and
20,000 respectively. Split of remaining profits is P1 & P2 are 60:40

Sample computation:
P1 P2 Total
• Salaries to partner 10k 20k 30k
• Add: Share on remaining net income 72k 48k 120k
Net income/Net loss for the period 82k 68k 150k - added to
capital accounts
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Complete Set of Financial Statements
 During the operations of the business, the transactions are
posted as normal and same across types of businesses.
• Example: Net loss is 40,000. Salaries for P1 and P2 are 10,000 and 20,000
respectively. Split of remaining profits is P1 & P2 are 60:40

Sample computation:
P1 P2 Total
• Salaries to partner 10k 20k 30k
• Less: Share on remaining net loss (42k) (28k) (70k)
Net income/Net loss for the period (32k) (8k) (40k) - deduct from
capital accounts
59
Complete Set of Financial Statements
 Partnership Dissolution vs Liquidation

• Dissolution – change in the relation of the parties caused by partner

ceasing to be associated in the carrying on the business.
– business activities still continue until partners agree to liquidate
the business.

• Liquidation – winding up of the business affairs; termination of the

partnership agreement.

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Complete Set of Financial Statements
Common Causes of Partnership Dissolution
1. Without Violation of Agreement:
• Upon express will of any partner
• Termination/expiration of term of specific undertaking

2. In Violation of Agreement
• Retirement of any partner/partners
• Death of any partner
• Insolvency of any partner or of the partnership
• By civil interdiction of any partner
• By degree of court (i.e. partner declared insane, misconduct of partner, persistent breach
of partnership agreement)
• Becomes unlawful for the partnership to carry on the business or partner to carry on his
role
• When the specific thing is contributed and before deliver, it is lost
61
Complete Set of Financial Statements
 For the creation of corporations, the 3 steps are followed:

1. Promotion
2. Incorporation (i.e. corporation name, AoI, SEC filing and
certification)
3. Formal Organization & Commencement of Business Operations

62
Complete Set of Financial Statements
 Shareholders’ Equity
1. Share Capital (Capital Stock) – paid in capital representing total
amount or par or stated value of shares issued. Portion of the
authorized share capital that has been subscribed and fully paid by
stockholders.
a. Ordinary Share (Common Stock) – general; with voting rights
b. Preference Share (Preferred Stock) – no voting rights; at par only

Authorized Share Capital – maximum number of shares allowed by

SEC that a corporation may issue.

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Complete Set of Financial Statements
 Shareholders’ Equity
2. Subscribed Share Capital – portion of authorized share capital
subscribed but not yet fully paid and still unissued.

3. Share premium – portion of the paid in capital in excess of the par or

stated value.

4. Retained Earnings (Accumulated Profits) - cumulative balance of

periodic profits or losses, dividend distributions, prior period errors and
other capital adjustments

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Complete Set of Financial Statements
 Shareholders’ Equity
5. Treasury Share – issued shares that were reacquired but not retired by
the corporation. Deducted from the share capital.

6. Revaluation Reserve – excess of revalued amount of PPE over its

carrying amount.

Contributed Capital - portion of subscribed / outstanding share capital

that is paid.

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Complete Set of Financial Statements