Accounting
Accounting Equation The T-Account
Assets = liabilities + equity The representation of an account universally
A=L+E
used to illustrate the effects of transactions.
Assets Large “T” under the account name separating
the debit side and credit side.
Economic resources controlled by a Company
which arise from past transactions and are The Rules of Debit and Credit
expected to provide future benefits
Not necessarily Owned, Control over assets is Debit = simply means left side
enough Credit = simply means right side
The normal balance of an account is always on
Not necessarily tangible, it could also be where they’re increase
intangible
Acctg Normal
Account Increase Decrease
Current Assets Non-Current Intangible equation balance
Assets Assets
Cash PPE Good will Assets Left Debit Credit Debit
Receivables (Accumulated Trade
Depreciation) marks Libilities Right Credit Debit Credit
(Allowance for Furnitures Copy
Equity Right Credit Debit Credit
Doubtful Accounts) Right
Inventory Buildings Patents Revenue Right Credit Debit Credit
Prepayments Brand
Supplies Expenses Left Debit Credit Debit
Accrued Revenue
Liabilities
Preparing Trial Balance
Obligations of an entity resulting from past
A listing of all accounts and their balances in the
transactions of which future benefits will be
ledger that aids in the proving of equality of the
expected to outflow
debits and credits.
Current Liabilities Non-Current Liabilities Must be arrange according to its liquidity
Cash – Receivables – Prepaid – Supplies ...
Payables Notes Payable
Unearned Service Errors in Trial Balance
Revenue
Deferred Income If the difference between the debit and credit is
Accrued Expenses equal to a certain amount in the ledger, there is
a probability that an ommission of a specific
Equity account balance from the ledger was occured,
or such amount was not posted to the trial
Interests or claims of owners from the business balance.
Reflects all investments made by owner and If the difference between the debit and credit is
results of operations of the business divided into two and it corresponds to a specific
amount in the general ledger, there is a
Equity Contra-Account probability that such account was erroneously
Owner’s equity Owner’s Drawings posted to the wrong balance.
Slide – error resulting from adding or deleting
Revenue zeros in writing numbers, example P417.50
instead of P4,175.00.
The amount a business charges customers for Transposition-accidental rearrangement of
products sold or services performed numbers. For example, P1,050.00 instead of
Service & Interest Revenue P1,500.00
Gain on sales
Sales Returns, Discounts, and Allowance
Expenses
Represents the decrese in assets (or increase
on liabilities) as a result of efforts to produce
revenues
All expenses accounts except ccrued Expenses
Purchases
Purchases Returns, Discounts, and Allowance
Adjusting entries Accrued Income
Refers to income earned but not yet received or
Entries made at the end of the accounting period collected. These are considered as an asset
to assign revenues to the period in which they (receivable)
are earned and expense to the period in which I=Prt
they are incurred Banker’s rule – 30 days in one month if the
These entries are necessary in order for the problem is silent
Company to reflect the actual revenues, Maturity Value = Principal + interest
expenses, assets, liabilities and equity for a
given period Accrued Income xx
Prepaid expenses Income xx
Unearned revenues or deferred income Depreciation Expense
Accrued expenses Refers to the systematic allocation of the cost of
Accrued revenues the property over it estimated useful life.
Depreciation Annual depreciation is computed using the
Doubtful accounts following formula
Cost of the property xx
Prepaid Expenses
Less: salvage value xx
Refers to expenses paid but not yet incurred. Depreciable cost xx
These are expenses paid in advance Divide by: EUL xx
Normal balance of accounts is debit Annual depreciation xx
Prepaid account and prepaid expense
Kung ano ang ginamit mong account yun ang Salvage value is the amount that an asset is
method expected to be sold at the end of its estimated
Kung ano yung binawasan mo sa adjusting yung useful life. This is also called “scrap value”
method na ginamit mo Depreciation expense is shown in the income
Unused portion – Post in balance sheet statement as part of expenses.
Used potion – asset method (Adjusting) Accumulated depreciation is shown in the
Unused portion – expense method (Adjusting) balance sheet as a reduction from the
corresponding asset to get its net book value.
Expense method (-adjustment)
Depreciation Expense xx
Asset method (+ adjustment)
Accumulated depreciation xx
Adjustments (ALWAYS EXPENSES)
Deferred income
Refers to income collected but not yet earned.
These are income received in advance
Normal Balance of accounts is Credit
Deferred revenue /accrued Income and Income
Kung ano ang ginamit mong account yun ang
method
Kung ano yung binawasan mo sa adjusting yung
method na ginamit mo
Earned portion – Post in income statement
Earned potion – Liability method ( Dr, Adjusting)
Unearned portion –Income method (Cr,
Adjusting)
Income method (-adjustment)
Liability method (+ adjustment)
Adjustments (ALWAYS INCOME)
Accrued expenses
These are expenses that has been incurred but
not yet paid in cash considered as liability
I=Prt
Banker’s rule – 30 days in one month if the
problem is silent
Maturity Value = Principal + interest
Expense xx
Accrued Expense xx
Doubtful Accounts
An estimate of the amount of receivables that is BASED ON Accounts Receivable
doubtful as to collection. Also called uncollectible On the other hand, if it is computed based on
receivables, the resulting amount will be the
accounts or bad debts
allowance for doubtful accounts.
Doubtful accounts expense is shown in the We have to consider the beginning balance of
income statement as part of expenses AFDA to arrive at the DAE
Allowance for doubtful accounts is shown in the
balance sheet as a deduction from the accounts 2012 2013 2014
receivable to get the net realizable value. Accounts
receivable 100,000 150,000 500,000
AFDA – dumadagdag yung amount every year
(recorded kasi sa balance sheet) Sales 500,000 400,000 600,000
Doubtful accounts may be estimated based on
sales, or based on receivables. Doubtful accounts estimated at:
DAE – Pag nag eend yung accounting period, b. 5% accounts receivable
bumabalik sya sa 0
Depreciation Expense xx 2012 Doubtful accounts expense 5,000
Accumulated depreciation xx Allowance for doubtful accounts 5,000
BASED ON SALES 2013 doubtful accounts expense 2,500
If it is computed based on sales, the resulting Allowance for doubtful accounts 2,500
amount will be the doubtful accounts expense for
the current period 2014 doubtful accounts expense 17,500
Allowance for doubtful accounts 17,500
Kung ano yung DAE na lumabas yun na rin yung
afda mo (adjusting)
2012 2013 2014
Allowance
2012 2013 2014 beginning
0 5,000 7,500
Accounts
100,000 150,000 500,000 Add: doubtful
receivable accts exp
5,000 2,500 17,500
Sales 500,000 400,000 600,000
Allowance ending 5,000 7,500 25,000
Doubtful accounts estimated at: Balance sheet
a. 1% sales
Balance sheet 2012 2013 2014
2012 Doubtful accounts expense 5,000 Accounts
100,000 150,000 500,000
Allowance for doubtful accounts 5,000 receivable
Less: AFDA 5,000 7,500 25,000
2013 doubtful accounts expense 4,000 Net Realization
Allowance for doubtful accounts 4,000 95,000 142,500 475,000
Value
2014 doubtful accounts expense 6,000
Allowance for doubtful accounts 6,000
FINANCIAL STATEMENTS
2012 2013 2014
Provides supporting schedules (computations)
Allowance
beginning
0 5,000 9,000 for all accounts presented in the previous
financial reports.
Add: doubtful
accts exp
5,000 4,000 6,000 It also shows additional information that are
necessary for users / decision-makers.
Allowance ending 5,000 9,000 15,000
Statement of Profit or Loss
Balance sheet Also known as “Income Statement”
Balance sheet 2012 2013 2014 The balances of NOMINAL ACCOUNTS are
Accounts forwarded to the Statement of Profit or Loss
100,000 150,000 500,000
receivable columns
Less: AFDA 5,000 9,000 15,000
Shows the financial performance or the results
Net Realization of the operations of a Company at a given
95,000 141,000 485,000
Value
period.
It reports all revenues (sales) and expenses of
the Company.
Contains the result of the Company’s
performance from its operations:
SALES > EXPENSES = NET INCOME
SALES<EXPENSES = NET LOSS
List all Revenue accounts and compute the
Total Revenue of the Company
List all the operating expenses of the Company
and compute for its total
Subtract the total revenue from total expenses to
get the Net income / loss of the Company
For the year ended (Headings)
Statement of Financial Position Business Entity Concept
Also known as “Balance Sheet”
The balances of REAL ACCOUNTS are This concept that the business enterprise is
forwarded to the Statement of Financial Position separate and distinct from its owner or investor.
Columns The accountant keeps all of the business
Shows the financial condition of a Company at a transactions of a sole proprietorship separate from
given period. the business owner's personal transactions
It reports all assets, liabilities and owner’s equity For legal purposes, a sole proprietorship and its
of the business. owner are considered to be one entity, but for
Arranged based on accounting element (Assets, accounting purposes they are considered to be
Liabilities & Equity) two separate entities
Accounts are arranged based on Liquidity
Exchange Price or Cost Principle
Assets and Liabilities are classified into
CURRENT and NONCURRENT portion Assets, Liabilities, revenues and expenses should
The NET INCOME(Loss) must be added to the be recorded base on cost.
Capital Account of the Company "cost" refers to the amount spent (cash or the cash
As of (Headings) equivalent) when an item was originally obtained,
Statement of Changes in Owners’ Equity whether that purchase happened last year or thirty
Shows all changes in Owners’ Equity years ago
+ Additional Investment Cost price now may be not the cost price
- Withdrawals yesterday and tomorrow. It means that constantly
+ Net Income changing the amount will make our asset value
- Net Loss unreliable.
Statement of Cash Flows Supported by Going Concern Principle
Summarizes the cash receipts (inflows) and
cash disbursements (outflows) of the Company Measurement in terms of money
based on Activity:
Operating = performance All business transactions are measured and
Financing = loans recorded using only one measurement
Investing = investments Economic activity is measured in Pesos, and only
transactions that can be expressed in Pesos are
Journalizing Closing Entries recorded.
All NOMINAL or TEMPORARY ACCOUNTS are Accrual Assumption
subjected to Closing every end of the
Accounting period. This is necessary to prepare Assets, liabilities, revenues or expenses should be
the beginning balances of REAL accounts in the recognized based on the period they relate or
next accounting period. based on the occurrence of the transaction/event
The balances of REVENUE and EXPENSES are rather than based on cash received or paid.
being CLOSED to the CAPITAL account of the For example, sales commission expense should
Company using the INCOME SUMMARY be reported in the period when the sales were
account made (and not reported in the period when the
The procedure in journalizing closing entries commissions were paid).
include: Wages to employees are reported as an expense
Close all nominal accounts with credit balance to in the week when the employees worked and not
INCOME AND EXPENSE SUMMARY in the week when the employees are paid.
Close all nominal accounts with debit balance to
Objectivity
INCOME AND EXPENSE SUMMARY
Close all income and expense summary TO Requires that assets acquired must be verifiable
CAPITAL and sustainable by documents such as invoices.
Close drawings to CAPITAL This compliments the cost principle since valuation
of sources at cost is definite as it represents the
actual price acquiring them.
BASIC PRINCIPLES
Reporting Period
Going Concern Principle
Its life has to be divided into specific time intervals
This principle is the Primary guide in preparing the called accounting period.
financial statements. The basic accounting period is one year with
This accounting principle assumes that a company interim reports prepared for shorter periods of time
will continue to exist long enough to carry out its such as monthly, quarterly or semi-annually.
objectives and commitments and will not liquidate It is imperative that the time interval (or period of
in the foreseeable future. time) be shown in the heading of each income
statement, statement of stockholders' equity,
and statement of cash flows.
