From Department of Education

Teaching Guide for Senior High School

FUNDAMENTALS OF
Accountancy,
Business, &
Management 1
Future Accountants, Businessmen,
and Managers Organization
Foreword
Learning and understanding Fundamentals
of Accountancy, Business, and Management
can be very challenging. It requires the right
amount of effort, knowledge, skills and
attitude. The Future Accountants,
Businessmen, and Managers Organization
(FABMO) takes initiative to help ABM
students in this particular subject through
creating a textbook PDF wherein each lesson
is presented and organized in graphics for
students to easily digest the information and
complex accounting concepts. With the
proper use of visual data, information is
transformed to be more appealing and
memorable. It is with great hope that this
textbook pdf will be of help to the ABM
students.

The information and data presented in this

textbook are aligned to the DepEd SHS
Curriculum and credited to the Commission
on Higher Education.
Acknowledgment

Future Accountants, Businessmen, and Managers

Organization (FABMO) would like to extend their
heartfelt and deepest gratitude to the following people
for their indispensable guidance and assistance
towards building this textbook PDF about Fundamentals
of Accountancy, Business, and Management 1:

Leilanie D. Anonuevo, Subject Group Head - ABM, for

her utmost cooperation to the club’s movement towards
success.
Rhodora Anuod O. Adarlo, FABMO Adviser, for her
unwavering support for this organization, its officers
and activities.
FABMO Officers S.Y. 2020-2021, who collaboratively
manage to curate an educational textbook for all ABM
students.
Loren Julia F. Manalo, President
Ma. Patricia M. Bajado, Vice President
Jephone Rizal A. Baroga, Secretary
Alyssa Joy M. Aboboto, Treasurer
Angel Myles L. Baltazar, Auditor
Carmen N. Agnes, Business Manager
Juerllain Rosh S. Madrigal, Business Manager
Mercylyn C. Adeva, PIO
Above all, to the Great Almighty Father and Creator, the
author of knowledge and wisdom.
 #AccounTalks
- FABMO Officers -

Hello, ABM! I hope you are ready because

the journey you chose is challenging and
Accounting can be overwhelming. But while
you are doing and giving your best
performance, please don’t forget to take a
rest and give yourself a gentle pat. Taking a
break is part of the learning process and is
beneficial to your health. Always remember
that rest is productive too, and learning
takes time, so don’t be too hard on yourself.
Do whatever works best for you. I believe
that with enough amount of discipline and
perseverance, you can definitely make it.
Loren Julia Manalo
Pre
Presid
sident
ent

Hello, ABM students! Welcome to the world

of Debit & Credit. This will be a challenging
journey that will turn into a love-hate
relationship with the subject and within
yourself, but I know you’ll do great. Also,
don’t be overwhelmed with what you see;
instead, focus on the small details
because this matters. It’s best to take the
long process rather than advancing to
other topics while not yet fully grasping the
basics. Remember to take it easy since
basic accounting is all you need to master
for now. Good luck; it will pay off soon. Ma. Patricia Bajado
Vice
Vic e Pre entt
siden
Presid
 #AccounTalks
- FABMO Officers -

"Patience is a virtue." This is what an

ABM student should value and
uphold the most upon learning this
subject. Understanding the bigger
picture on how different topics
relate with one another, as well as
attaining a deeper apprehension will
consequently help you comprehend
and internalize the accounting
subject (Baroga, 2021).
Jephone Rizal Baroga
Sec
Secret
retary
ary

Hi mga ka-ABM! First of all, I want to

congratulate everyone as you finished
the first semester of Grade 11. You still
have a long way to go. The golden
rule is to "Don't give up" because we
have our dreams with us that we want
to be and achieve. Patience is a
virtue. Always believe in yourself and
don't forget to seek for help if needed.
Good luck on your journey and may
God's grace and presence be with
you. God bless! Alyssa Joy Aboboto
Tre asurer
Treasu rer
 #AccounTalks
- FABMO Officers -

In ABM strand, you will be needing

a set of other metrics that are more
about measuring quality not just
quantity. Whenever you feel
discouraged because of the
hardships you may encounter, think
why you have chosen this career
path, and from that, you will gain
motivation to continue. Always
know your purpose and value and
Angel Myles Baltazar never forget to believe in yourself.
Au
Audit
ditor
or

ABM is not all about Math. Yes, there

are still some solving to be done, but
it needs a thorough understanding. If
you're scared because you're not
good at math, please don't be. Learn
to understand the numerous
terminologies, especially in FABM,
because you will undoubtedly come
across several unfamiliar words. If
you are unsure, don't hesitate to ask.
Be optimistic, you should always think
positively, don't lose hope when you
fail to balance a transaction, try
again, and eventually, you will
succeed. Mercylyn Adeva
blicc Inf
Publi
Pu ormati
Inform on Of
ation ficer
Offic er
 #AccounTalks
- FABMO Officers -

Life with downfalls, sleepless nights, and

failures wouldn't be a hindrance for a
person who's aiming for more, but these will
be his motivation to be the better version of
himself. As you tackle the specialized
subjects in ABM strand, you should expect
that it would be difficult, and you will need
a lot of time to study before you understand
a topic. Despite of it, always remember that
there's a room for improvement. If you can't
make it today, I believe that you can do it
tomorrow. In God's grace, we will see each
other working in a prestigious Accounting
firms, and we'll realize that success are for
Carmen Agnes those who believed.
Bu
Busin
siness
ess Ma
Manag
nager
er

Always think about what you want to

do in your life, and when you see
yourself doing it without any negative
feeling towards it, then the job or
task is really for you. You can' t force
yourself on doing things you don't
want to do in the first place. If your
heart and mind is already set on the
ABM path, then please enjoy
the journey. Juerllain Rosh Madrigal
Busin
Bu ess Ma
siness gerr
nage
Mana
 #AccounTalks
- teacher -

Accountancy, Business and Management as your

chosen strand may not just be the start of your
untiring endeavor, but also be a challenging and an
exciting preparation of what you want to be
someday. As the saying goes, “No pain, No gain”.
Just like in engaging in business industry, all
business investors want to gain profit, but you
cannot achieve such success or reach the top
without any hardships. You really need to work hard
for it. You have to look for something unique to make
your business different from others, that’s why you
have to be more acquainted and innovative by
focusing on what you are studying. Keep in mind that
whatever struggles or difficulty you may encounter
today, soon you’ll harvest the fruit of your labor.

Leilanie Anoñuevo
Sub
Subjec
jectt Gro
Group
up He
Head,
ad, AB
ABMM
 #AccounTalks
- teacher -

My dearest ABM Students, Accounting may be

one of the most boring subjects for some, may
be one of the most confusing subjects for
others, and may be one of the hardest
subjects for many, but when it comes to giving
you a life changing career and opportunities,
accounting may be one of the most important.
Do your part, read often, study harder, pray
always, ask for guidance, and be grateful!
You're on the right track, all you need to have
is the right mindset. You can do it future CPAs
and BUSINESS TYCOONS!

Rhodora Anoud Adarlo

BMO
FABM
FA viser
Advis
O Ad er
 TABLE OF
CONTENTS

LESSON 1: INTRODUCTION TO ACCOUNTING

LESSON 2: BRANCHES OF ACCOUNTING
LESSON 3: USERS OF ACCOUNTING
INFORMATION
LESSON 4: FORMS OF BUSINESS ORGANIZATION
LESSON 5: TYPES OF BUSINESS ACCORDING TO
ACTIVITIES
LESSON 6: ACCOUNTING CONCEPTS AND
PRINCIPLES
LESSON 7: THE ACCOUNTING EQUATION
LESSON 8: TYPES OF MAJOR ACCOUNTS
LESSON 9: BOOKS OF ACCOUNTS
LESSON 10: BUSINESS TRANSACTIONS AND
THEIR ANALYSIS AS APPLIED TO THE
ACCOUNTING CYCLE OF A SERVICE
BUSINESS PART 1
LESSON 11: BUSINESS TRANSACTIONS AND
THEIR ANALYSIS AS APPLIED TO THE
ACCOUNTING CYCLE OF A SERVICE
BUSINESS PART 2
LESSON 12: ACCOUNTING CYCLE OF A
MERCHANDISING BUSINESS
 :
P
r

s
e t
s e n

FUN
~da~
BOOK
FUNDAMENTALS OF
ACCOUNTANCY, BUSINESS,
AND MANAGEMENT 1
FUNDAMENTALS OF ACCOUNTANCY,
BUSINESS AND MANAGEMENT 1

LESSON 1

INTRODUCTION
TO ACCOUNTING
FUTURE ACCOUNTANTS, BUSINESSMEN AND
MANAGERS ORGANIZATION
 FUNDAMENTALS OF
FUNDAMENTALS OF ACCOUNTANCY,
ACCOUNTANCY,
BUSINESS, AND
BUSINESS, AND MANAGEMENT
MANAGEMENT 11
LESSON 11
LESSON
DEFINITION OF
ACCOUNTING

?
accounting
what
what is
is
accounting?
accounting?
noun
ac·count·ing ə-ˈkau̇ ̇ n-tiŋ
ac·count·ing || \\ ə-ˈkau n-tiŋ
:: the
the process
process of of identifying,
identifying, recording,
recording, and
and communicating
communicating
economic events
economic events of of anan organization
organization toto interested
interested users.
users.
(Weygant ,, J.
(Weygant J. et.
et. Al)
Al)

identifying
identifying
01 this involves selecting economic
events that are relevant to a particular
business transaction. The economic
events of an organization are referred
to as transactions.

recording
recording
02 this involves keeping a
chronological diary of events that are
measured in pesos. The diary referred
to in the definition of journals and
ledgers.

03
communicating
communicating
occurs through the preparation and
distribution of financial and other
accounting reports.
 s o n 1
Le s
a t
t u
u r
ree g
a
N ounti
N n
f Ac c
o fea t u re s
g a s i c ttiinng
h e b co
o u
u n
n
T off a
a ccc
o
service
service art &
art &
process
process discipline
discipline
activity
activity
It provides It performs the It is an art of
assistance to specific task of recording, classifying,
decision makers by collecting, summarizing and
providing them processing, and finalizing financial
financial reports data. And because it
communicating follows certain
that will guide financial standards and
them in information. professional ethics, it
coming up with is also a discipline.
sound
decisions.

accounting
financial
financial
information
information information
information
and transaction
and transaction system
system
It records financial It is recognized and
transaction and characterized as a
data, classifies storehouse of
these and information as it
finalizes their collects processes
results given for a and communicates
specified period of financial infor-
time, as needed by mation of any
their users. entity.
 L E S S O N 1

history of
accounting
Fra Luca Bartolomeo
de Pacioli
(Father of Accounting)
cradle of
civilization
(3600 B.C.,) Summa
Record-keeping was already
double-entry de Arithmetica
common from Mesopotamia, bookkeeping Luca Pacioli wrote
China, and India to Central (14th century) Summa de Arithmetica,
and South America wherein the first book
"clay tablet" was used in The dissemination of double-
published that
dealing with commercial entry bookkeeping by Luca
contained a detailed
transactions Pacioli (The Father of
chapter on double
Accounting) in Italy.
entry bookkeeping.

industrial french revolution

revolution (1700s)
(1760-1830) Social upheveals affecting
Mass production and the great government, finances, laws,
importance of fixed assets were customs and business had greatly
given attention during this influences the development of
period. accounting.

beginnings of modern development of

accounting in europe modern accounting
and america standards and
(19th century) commerce
Accounting standards to be observed by
(present)
accounting professionals were promulgated. Social upheveals affecting
Notable practices such as mergers, government, finances, laws, customs
acquisitions, and growth of multinational and business had greatly influences
corporations were developed. the development of accounting.
 exercises
exercises
lesson 1
introduction
introduction to
to
accounting
accounting
1. It is the process of identifying, recording, and communicating
economic events of an organization to interested users.
2. The nature of accounting that performs the specific tasks of
collecting, processing, and communicating financial
information.
3. He is the father of accounting and the one who disseminated
the double-entry bookkeeping.
4. The nature of accounting is recognized and characterized as
a storehouse of information.
5. This involves keeping a chronological diary of events that are
measured in pesos.
6. It happened around 3600 B.C., and the oldest evidence was
the clay tablet of Mesopotamia which dealt with commercial
transactions at the time such as the listing of accounts
receivable and accounts payable.
7. The nature of accounting is behavioral knowledge involving
certain creativity and skill to help us attain some specific
objectives. Also, it follows certain standards and professional
ethics,
8. It occurs through the preparation and distribution of financial
and other accounting reports.
9. This period had greatly influenced the development of
accounting as socials upheavals affect the government,
finances, laws, customs, and business.
10. The period where mass production and the great importance
of fixed assets were given attention during this period.
11. This involves selecting economic events that are relevant to a
particular business transaction.
12. The nature of accounting that records financial data,
classifies these, and finalizes their results given for a specified
period of time, as needed by their users.
13. The period where the accounting profession had developed
around state requirements for financial statement audits.
14. The nature of accounting assists decision-makers by
providing them financial reports that will guide them in coming
up with sound decisions.
15. It is the first book published by Luca Pacioli that contained a
detailed chapter on double-entry bookkeeping.
 answer key
answer key

lesson 1
introduction
introduction to
to
accounting
accounting
1. Accounting
2. Process
3. Luca Pacioli
4. Information System
5. Recording
6. Cradle of Civilization
7. Art and discipline
8. Communicating
9. French Revolution
10. Industrial Revolution
11. Identifying
12. Financial information and transaction
13. Development of Modern Accounting
Standards and Commerce
14. Service Activity
15. Summa de Arithmetica
 BRANCHES OF
ACCOUNTING
LESSON 2

FINANCIAL ACCOUNTING

⦿ The broadest branch and is focused

on the needs of external users.
⦿ Primarily concerned with the recognition,
measurement and communication of economic
activities. This information is communicated in a
complete set of financial statements.
⦿ It is assumed under this branch that the users
have one common information need.
⦿ Conforms with accounting standards
developed by standard-setting bodies. In the
Philippines, there is a Council created to set
these standards.
⦿ Primarily concerned with processing historical
data.
 MANAGEMENT ACCOUNTING

⦿ Emphasizes the preparation and

analysis of accounting information
within the organization.
⦿ The objective of managerial
accounting is to provide timely and
relevant information for those internal users of
accounting information, such as the managers
and employees in the decision-making needs.
⦿ Involves financial analysis, budgeting and
forecasting, cost analysis, evaluation of business
decisions, and similar areas.

GOVERNMENT ACCOUNTING

⦿ The process of recording, analyzing,

classifying, summarizing, communicating
and interpreting financial information
about government in aggregate and in
detail reflecting transactions and other
economic events involving the receipt, spending,
transfer, usability, and disposition of asset and
liabilities.
 AUDITING

INTERNAL AUDITING

⦿ Refers to the examination of financial

statements by with an independent
CPA (Certified Public Accountant) with
the purpose of expressing an opinion as to
fairness of presentation and compliance
with the generally accepted accounting
principles (GAAP). The audit does not cover
100% of the accounting records but the CPA
reviews a selected sample of these records and
issues an audit report.

EXTERNAL AUDITING

⦿ Deals with determining the operational

efficiency of the company regarding the
protection of the company’s assets, accuracy
and reliability of the accounting data, and
adherence to certain management policies.
⦿ It focuses on evaluating the adequacy of a
company’s internal control structure by testing
segregation of duties, policies and procedures,
degrees of authorization, and other controls
implemented by management.
 TAX ACCOUNTING

⦿ Helps clients follow rules set by tax

authorities.
⦿ It includes tax planning and
preparation of tax returns.
⦿ It also involves determination of income tax
and other taxes, tax advisory services such as
ways to minimize taxes legally, evaluation of the
consequences of tax decisions and other tax-
related matters.

COST ACCOUNTING

⦿ Sometimes considered as a subset of

management accounting.
⦿ Refers to the recording, presentation,
and analysis of manufacturing costs.
⦿ It is very useful in manufacturing businesses
since they have the most complicated costing
process.
⦿ Cost accountants also analyze actual and
standard costs to help managers determine
future courses of action regarding the
company’s operation.
 ACCOUNTING EDUCATION

⦿ This branch of accounting deals with

developing future accountants by
creating relevant accounting
curriculum.
⦿ Accounting professionals can become faculty
members of educational institutions.
⦿ Accounting educators contribute to the
development of the profession through their
effective teaching, publications of their research
and influencing students to pursue careers in
accounting.
⦿ Accounting teachers share their knowledge
on accounting so that students are informed of
the importance od accounting and its use in our
daily life.
 ACCOUNTING RESEARCH

⦿ It focuses on the search for new

knowledge on the effects of economic
events on the process of summarizing,
analyzing, verifying, and reporting
standardized financial information, and on the
effects of reported information on economic
events.
⦿ Researchers typically choose a subject area
and a methodology on which to focus their
efforts. The subject matter of accounting
research may include information systems,
auditing and assurance, corporate governance,
financials, managerial, and tax.
⦿ It plays an essential part in creating new
knowledge.
⦿ Academic accounting research “addresses all
aspects of the accounting profession” using a
scientific method.
⦿ Practicing accountants also conduct
accounting research that focuses on solving
problems for a client or group of clients.
⦿ It helps standard-setting bodies around the
world to develop new standards that will address
recent issues or trend in global business.
 QUIZ

1. Financial accounting is primarily concerned with

processing current data.
2. The branches of accounting sometimes overlap and they
are often closely intertwined.
3. Management accounting emphasizes the preparation
and analysis of accounting information within the
organization.
4. Government accounting is the process of recording,
analyzing, classifying, summarizing, communicating and
interpreting financial information about the government in
aggregate and in detail reflecting transactions and other
economic events.
5. There are three types of auditing: external, others and
internal auditing.
6. Tax accounting helps clients follow rules set by tax
authorities.
7. Sometimes considered as a subset of management
accounting.
8. Accounting Education deals with developing future
accountants by creating relevant accounting curriculum.
9. Accounting research focuses on the search for new
knowledge on the effects of economic events on the process
of summarizing, analyzing, verifying, and reporting
standardized financial information, and on the effects of
reported information on economic events.
10. Accounting research helps standard-setting bodies
around the world to develop new standards that will address
recent issues or trend in global business.
 ANSWER KEY

1. FALSE - Historical data

2. TRUE
3. TRUE
4. TRUE
5. FALSE - two, (others)
6. TRUE
7. TRUE
8. TRUE
9. TRUE
10. TRUE
 Lesson 3

USERS OF
ACCOUNTING
INFORMATION

Internal
Users
➤ Primary users
➤ Individuals inside a company who
plan, organize, and run the business.
➤ These users are directly involved in
managing and operating the business.
➤ These include marketing managers,
production supervisors, finance
directors, company officers and owners.
➤ Those who are involved in planning,
organizing and running the business.
They need more detailed information on
a timely basis in order to support their
decisions. Examples of these internal
users are: managers, employees and
owners.
Internal Users includes:

Management
Information need:
Income/earnings for the
period, sales,
available cash, and
production cost.

Decisions supported:
Analyze the
organization’s
performance and
position and take
appropriate measures to
improve the company
results sufficiency of
cash to pay dividends
to stockholders;
pricing decisions.
Employees
Information need:
Profit for the
period, salaries paid
to employees.

Decisions supported:
Job security,
consider staying in
the employ of the
company or look for
other employment
opportunities.
Owners
Information need:
Profit or income for
the period, resources
or assets of the
business, and
liabilities of the
business.

Decisions supported:
Considerations
regarding additional
investment, expanding
the business,
borrowing funds to
support any expansion
plans.
 USERS OF
ACCOUNTING
INFORMATION

External
Users

➤ Secondary users.
➤ External users are individuals and
organizations outside a company who
want financial information about the
company.
➤ These users are not directly involved in
managing and operating the business.
➤ External users are those individuals or
organizations outside a company who
are interested in its financial
information. Examples of these eternal
users are: potential investors, suppliers
and government agencies.
 Most Common Types of
External User:

Potential Investors
Use accounting
information to make
decisions to buy shares
of a company.

Creditors
Use accounting
information to evaluate
the risks of granting
credit or lending money.
External Users of Accounting
information include the
following:

Creditors
For determining the credit
worthiness of an
organization.

Terms of credit are set by

creditors according to the
assessment of their
customers’ financial
health.

Creditors include
suppliers as well as
lenders of finance such as
banks.
Tax Authorities (BIR)
For determining the
credibility of the tax
returns filed on behalf of
a company.

Investors
For analyzing the
feasibility of investing
in a company. Inventors
want to make sure they can
earn a reasonable return
on their investment before
they commit any financial
resources to a company.
Customers
For assessing the
financial position of its
suppliers which is
necessary for them to
maintain a stable source
of supply in the long
term.
Regulatory
Authorities
(SEC, DOLE)
For ensuring that a
company’s disclosure of
accounting information is
in accordance with the
rules and regulations set
in order to protect the
interests of the
stakeholders who rely on
such information in
forming their decisions.
 QUIZ

DIRECTION:
Identify what is being asked
in the statement.

1. Who may need accounting

information to decide
which products to buy
from which companies?
2. It helps users to make
better financial
decisions.
3. Who utilize accounting
information to make
lending decisions?
4. These are the individuals
inside a company who
plan, organize, and run
the business.
5. Tax authorities use
accounting information to
 ANSWER KEY

1. Customers
2. Accounting
information
3. Creditors
4. Internal users
5. To determine the
credibility of the
tax returns filed
on behalf of a
company.
 FUTURE ACCOUNTANTS, BUSINESSMEN,
AND MANAGERS ORGANITION

FUNDAMENTALS OF
ACCOUNTANCY BUSINESS AND
MANAGEMENT
LESSON 6: ACCOUTING CONCEPTS AND
PRINCIPLES 1

Counting

Business

Organization Operation

Manufacturing
Sole Proprietorship
Corporation
Service
Merchandising
Partnership

Accounting Principles
 BUSINESS ENTITY
PRINCIPLE
A business enterprise is separate and distinct
from its owner or investor.
EXAMPLES:
If the owner has a barber shop , the cash of the
barber shop should be reported separately
from personal cash.
The owner had a business meeting with a
prospective client. The expenses that come
with that meeting should be part of the
company's expenses. if the owner paid for gas
for his personal use, it should not be included
as part of the company's expenses.
 GOING CONCERN
PRINCIPLE
Business is exppected to continue
indefinitely.

EXAMPLES:

When preparing financial

statemnets, you should assume that
the entity will continue indefinitely.
 TIME PERIOD
PRINCIPLE
Financial statements are to be divided into
specific time intervals.

EXAMPLES:

Philippine companies are required to

report financial statements annually.
The salary expenses from January to
December 2015 should only be
reported in 2015
 MONETARY UNIT
PRINCIPLE
Amounts are stated into a single monetary
unit
EXAMPLES:
Jollibee should report financial
statements in pesos even if they have
store in the United States.
IHOP should report financial
statements in dollars even if they have
a branch here in the Philippines.
OBJECTIVE PRINCIPLE

Financial statements must be presented

with supporting evidence.

EXAMPLES:

When the customer paid Jollibee for

their order, Jollibee should have a
receipt to represent as evidence.
 COST PRINCIPLE

Accounts should be recorded initially at

cost..
EXAMPLES:
When Jollibee buys a cash register, it
should record the cash register at its
price when they bought it.
When a company purchases a laptop,
it should be recorded at the price it
was purchased.
 ACCRUAL ACCOUNTING
PRINCIPLE
Revenue should be recognized when earned
regardless of collection and expenses should be
recognized when incurred regardless of payment.
on the other hand, the cash basis principle in which
revenue is recorded when collected and expenses
should be recorded when paid. Cash basis is not
the generally accepted principle today.

EXAMPLES:
When a barber finishes performing his
services he should record it as revenue.
When the barber shop receives an electricity
bill, it should record it as an expense even if it
is unpaid.
 MATCHING PRINCIPLE

Cost should be matched with the revenue

generated.

EXAMPLES:

When you provide tutorial services to

a customer and there is a
transportation cost incurred related to
the tutorial services, it should be
recorded as an expense for that
period.
 DISCLOSURE
PRINCIPLE
All relevant annd material information
should be reported.

EXAMPLES:

The company should report all

relevant information.
CONSERVATISM PRINCIPLE

Also known as prudence. In case of doubt,

assets and income should not be overstated
while liabilities and expenses should not be
understand.

EXAMPLES:

In case of doubt, expenses should be

recorded at a higher amount.
Renevenue should be recorded at a
lower amount.
 MATERIALITY PRINCIPLE

In case of assets that are immaterial to make

a difference in the financial statements, the
company should instead record it as an
expense.
EXAMPLES:

A school purchased an eraser with an

estimated useful life of three years.
Since an eraser is immaterial relative
to assets, it should be recorded as an
expense.
 PRACTICE TEST
A. Use the following mulitiple choice questions
for practice.
1. The accounting guideline that requires
financial statement information to be supported
by independent, unbiased evidenced other than
someone's belief or opinion is the:
a. Business entity principle
b. Monetary unit principle
c. Cost principle
d. Objectivity principle

2. The principle that requires every business

to be accounted for separately and distinctly
from its owner or owners is known as the:
 a. Objectivity principle
b Business entity principle
c. Going- concern principle
d. Revenue recognition principle
e. Cost principle

3. The rule that requires financial statments to

reflect the assumption that the business will
continue operating instead of being closed or
sold, unless evidence shows that it will not
continue, is the:
a. Going concern principle
b. Business entity principle
c. Objectivity principle
d. Cost principle
e. Monetary unit principle
 4. To include the personal assets and
transactions of a business's owner in the records
and reports of the business would be in conflict
with the:
a. Objectivity principle
b Realization principle
c. Business entity principle
d. Going-concern principle
e. Revenue recognition principle
5. The objectivity principle:
a. means that informaton is supported by
independent, umbiasedevidence
b. means that information can be based on what
the preparer thinks is true
c. means that financial statement should contain
information that is optimistic
d. means that a business may not re-organize
revenue until cash is received.
 6. Marian Mosely is the owner of Mosely
Accounting Services. Which accounting principle
requires Marian to keep her personal financial
information separate from the financial
information of Mosely Accounting Services?
a. Monetary principle
b Going-concern principle
c. Business entity principle
d. Cost principle
e. Business entity principle

7. Which of the following accounting principles

would require that all goods and services
purchased be recorded at cost?
a. Going-concern principle
b. Continuing- concern principle
c. Cost principle
d. Business entity principle
 ANSWER KEY:
1. E. Objectivity principle
2. B. Business entity priciple
3. A. Going- concern principle
4. B. Realization principle
5. A. means that information is
supported by independent,
unbiased evidence.
6. D. Business entity principle
7. C. Cost principle
B. Match the following words with
their definition:
A. Going- concern principle
B. Objectivity principle
C. Matching principle
D. Materiality principles
E. Time period principle
F. Cost principle
G. Disclosure principle
H. Monetary unit principle
I. Accrual accounting principle
J. Conservatism principle
1. All relevant informaton should be
included in the financial reports.
2. Incase of dout, assets and icome
should not be overstated.
3 .Assume that the company will continue
indefinitely.
4. All transations should be supported
by unbiased evidence.
5. Expenses should be recorded in the
period when the revenue is generated.
6. Minimal costs incurred should be
recorded as an expense.
7. A Philippine company should report
financial statements in pesos.
8. A barber who performs services for a
client should record revenue.
9. Statement of Financial position
should be recorded as of December 31,
2015
10. A company that purchases furniture
should record it at its acquisition price.
 ANSWER KEY
1. G. Disclosure principle
2. J Conservatism principle
3. A Going- concern principle
4. B Objectivity principle
5. C Matching principle
6. D Materiality principle
7.H Monetary unit principle
8. I Accrual accounting principle
Time period principle
9. E
Cost principle
10. F
 Enrichment
Provide local examples. You can use the
activity below.

1.The owner- manager bought a computer

for personal use. The invoice was given to
the accountant who recorded it as an
asset of the business.
2. The statment of financial position of a
company included an equipment
purchased from Japan for 350,000 yen. It
was reported at that amount in the
statement of financial position while all
the other assets were reported in
Philippine pesos.
3. No financial statements were prepared
by Michael Go for his business. He
explained that he will prepare the
statement when he closes the business,
which he predicts to take place after
years.
4. Aside from owning a shoe store, Albert
operates a canteen. The assets of the
canteen are reported in the statement of
financial position of the shoe store.
5. Purchased a hammer at a cost PHP 500.
This was recorded as an asset and
expense to decrease its value by PHP500
per year for 10 years.
6. A food company ordered a machine
neede in the assembly line of its
production department. Upon order, the
,machine was immediately listed as one of
its assets.
ANSWER KEY:
1. Business entity principle
2. Monetary unit principle
3. Time period principle
4. Business entity
principles
5. Materiality principle
6. Objectivity principle
 FABMO presents:

LESSON
10
Business Transactions and Their Analysis
as Applied to the Accounting Cycle of a
Service Business

FUTURE ACCOUNTANTS,
BUSINESSMEN,
MANAGERS
ORGANIZATION

ORIENTAL MINDORO NATIONAL HIGH SCHOOL

Curated by: Patricia Bajado
 TOPICS: A
C
C
B MAJOR ACCOUNTS
O
A SERVICE BUSINESS
U
N
S ACCOUNTING CYCLE
T
I I
STEPS 1-4 N
C G
QUIZ
 ACT. COUNT. THINK
Solve Activities A=L+OE Analyze

how to get through this?

R e m i n d e r s :

To learn Accounting better, you After assessing yourself, Balance is

first need to know your reason. the next one. There’s time for
Why are you doing this? leisure and for studying.

I know it’s hard to be motivated all the time. It’s okay to take a break from
the numbers and business transactions but make sure to get back to it
afterward. It would help if you got through this, little by little. And constantly
be reminded to be gentle with yourself and your humble beginnings.

To grasp lessons easily and analyze concepts, you need to prioritize:

Eating healthy foods Sleep

having a Healthy Mindset Exercise

This is the beginning of your love-hate relationship with numerical figures.

Stand firm. Have motivation. Surround yourself with people that can help
you. Dream high and Pray.

Lots of love,
Ate Yesha <3
 LET’S DO THIS

RECAP:
FIVE MAJOR ACCOUNTS:
ASSETS ARE RESOURCES OWNED BY A BUSINESS.
LIABILITIES ARE CLAIMS AGAINST THE ASSETS OF THE BUSINESS.
EQUITY (CAPITAL) IS THE CLAIM OF THE OWNER OR OWNERS.
INCOME ARE INCREASES IN THE EQUITY OR CAPITAL RESULTING FROM
BUSINESS ACTIVITIES ENTERED INTO.
EXPENSES ARE DECREASES IN THE EQUITY OR CAPITAL RESULTING FROM
BUSINESS ACTIVITIES. IT MAY INCLUDE ASSETS OR SERVICES CONSUMED
IN THE PROCESS OF EARNING INCOME

~nature of a~
SERVICE BUSINESS
- provides a needed service for a fee.
- services are designed to facilitate the work of clients and in return are paid.
- the service business does not maintain a high level of inventory as compared
to merchandising and manufacturing businesses.
examples:
Service businesses include salons or barbershops, laundry services, car
repairs, medical centers and services of professionals like lawyers and
addeddoctors.
information:
The revenue of a service business is usually realized once the service has
been substantially completed.
In relatively small service businesses, all transactions are on cash payments. This
means sales are collected immediately while most expenses are paid outright in the
form of cash or checks

ACCOUNTING CYCLE:

THANK YOU FOR STILL READING THIS CHAPTER!

LEARNING ACCOUNTANING IS A PROCESS

The accounting cycle is a continuous process of accumulating,

summarizing and reporting financial information.
Step 1 - Transactions and/or Events

- Identification and measurement of external transactions and internal events

- Documents used by the business are analyzed whether it has financial impact or effect
- Financial transactions are those activities that change the value of an asset, liability or an equity.
Examples of Financial Examples of Non-Financial
Transactions: Transactions:
Receipt of cash from a client as hiring and termination of employees
advance payment to repair a computer recognition from the government as
Payment of electric bill most outstanding business
death of owner
The information needed when recording transactions are
taken from forms used to document these transactions.
BUSINESS DOCUMENTS USED:
1. Official Receipt or Cash Receipt
This document is used when a business receives money or a check. An Official Receipt or
Cash Receipt is a document that acknowledges that money or a check have been
received
2. Charge Invoice or Sales Invoice
A charge invoice is a document used when a service has been rendered, but the client will
be billed only after a certain number of days from the date of service.
3. Check or Cash Voucher
The check voucher is a document used when a check is issued to pay a certain supplier or
vendor. This document will serve as a record of payment and as proof that payment has
been made by the company.

Step 2 - Preparation of Journal Entries

(journalization)

Through the use of specialized journals (such as those for sales, purchases, cash receipts, and cash
disbursements) and the general journal, transactions and events are entered into the accounting records.
GENERAL JOURNAL = BOOK OF ORIGINAL ENTRY
Debits and Credits are an integral part of the journalization process.
DEBITS = DR // CREDITS = CR
An increase in an asset account is called a debit
If we decrease an asset account we credit that account
An increase in a liability or equity account is called a credit
If we decrease a liability or equity account we debit those accounts

IT REQUIRES EFFORT AND WILLINGNESS

 YOUR HARDWORK WILL BE WORTH IT.

The accounting cycle is a continuous process of accumulating,

summarizing and reporting financial information.
Rules on Debits and Credits:
The name of the account to be debited is always listed first. The debited account is
listed on the first line with the amount in the left side of the register.
The credited account is listed on the second line and is usually indented. The
credited amount is recorded on the right side of the register.
The total amount of debit should always equal the total amount of credit.

CHART OF ACCOUNTS
a listing of all account titles used in the business to record all the transactions. It is arranged according
to the order of their appearance in the financial statements.

Example Problems; A Constructive Scenario

DON’T BE EASILY DISCOURAGED WHEN YOU CAN’T SEE YOUR PROGRESS

 KEEP MOVING

PADAYON, FUTURE CPA!!

 ONE STEP AT A TIME, FOLLOW YOUR OWN PACE.

Step 3- Posting

The summary (in specialized journals) or individual transactions (in the general journal) are
then posted from the journals to the general ledger (and subsidiary ledgers).
Nothing should ever get posted to the ledgers without first being entered in a journal.
 Step 4 - Unadjusted Trial Balance

Working trial balance is prepared at the end of an accounting period.

This involves copying each account name and account balance to a worksheet (working
trial balance).
The resulting first two columns of the worksheet are called the unadjusted trial
balance.
In the preparation of the unadjusted trial balance the balances in all the general
ledgers at the end of the reporting date are forwarded to the appropriate column.
example:

REVIEW THE BASIC ACCOUNTING EQUATION

The basic accounting equation is what drives double-entry bookkeeping. The equation
reflects the accounts reported in the balance sheet. The basic accounting equation is as
follows:
ASSETS = LIABILITIES + OWNERS' EQUITY
This is a very simple algebraic equation that reflects how the assets of an entity must be
supported by either debt or equity.
As in algebra, if we add or subtract something from one side of the equation we must add or
subtract the same amount from the other side.
For example, if we were to increase cash (an asset) we might have to increase note payable
(a liability account) so that the basic accounting equation remains in balance.
ASSETS = LIABILITIES + OWNERS' EQUITY
PHP 500 = PHP 500

TRY TO MASTER THE BASIC AND TAKE IT EASY!

 Applying, the formula to our transactions in Step 3 above, the effects of these transactions
to the equation are shown below:

Fill up the missing amount for each.

QUIZ:
Indicate in each independent case 1. Asset = 120,000
whether the account is to be debited (DR) Liabilities = 15,000
or to be credited (CR) Equity = ?

1. Increase in Accounts Payable 2. Asset = ?

2. Decrease in Capital account Liabilities = 18,250
3. Increase in Service Revenue Equity = 98,360
4. Increase in Cash 3. Asset = 1,000,000
5. Decrease in Accounts Receivable Liabilities = 370,000
6. Increase in Salaries Expense Equity = ?
7. Increase in Office Equipment
8. Increase in unpaid Salaries 4. Asset = 780,508
9. Increase in Owner’s drawing account Liabilities = ?
10. Increase in Interest Income Equity = 619,000
BE HONEST 000,916 = ytiuqE
805,161 = seitilibaiL
SUGGESTED ANSWERS: 805,087 = tessA .4
RC = emocnI tseretnI ni esaercnI .01 000,036 = ytiuqE
RD = tnuocca gniward s’renwO ni esaercnI .9 000,073 = seitilibaiL
RC = seiralaS diapnu ni esaercnI .8 000,000,1 = tessA .3
RD = tnempiuqE eciffO ni esaercnI .7
RD = esnepxE seiralaS ni esaercnI .6 063,89 = ytiuqE
RC = elbavieceR stnuoccA ni esaerceD .5 052,81 = seitilibaiL
RD = hsaC ni esaercnI .4 016,611 = tessA .2
RC = euneveR ecivreS ni esaercnI .3
RD = tnuocca latipaC ni esaerceD .2 000,501 = ytiuqE
RC = elbayaP stnuoccA ni esaercnI .1 000,51 = seitilibaiL
)RC( detiderc eb ot ro )RD( detibed eb ot si tnuocca 000,021 = tessA .1
eht rehtehw esac tnednepedni hcae ni etacidnI .hcae rof tnuoma gnissim eht pu lliF

MORE STEPS IN THE NEXT CHAPTER, YOU CAN DO IT!

 s s
s
e ion

B
s
u
s i
s
e
n t
a
s
c
sh
in d Ts sis th
a on
e
ir
a
s
e 11
Bu r in ly to g
t
Taca eir n
s a ed t a ss i
n T h
a
n d n la i s n f e
a Asis u o in
y p oe
a l p tc h le s
An Atoc c g u
ie d A iy n B
pl n tC e
p o u f ica 2
c e ov s T
Ac c l r es R
C y en A
S
s i P
B u
e
vic T 2
P A R
worksheet

adjusting
entries preparation of
financial
statements
Journalize the
Closing Journal
Entries curated by:
ALYSSA JOY M. ABOBOTO
 step 5:
WORKSHEET
It is used to check whether e t is a la rge
Workshe f p aper
ledger accounts are balanced r sh e et o
columna s ig n ed to
and adjusted. lly d e
specifica r a n g e all
ntly a r
convenie
e a cc o u nting
th d at
It is used to check whether r e q u ir e
ion
ledger accounts are balanced informat er iod.
o f a p
the end
and adjusted.
 step 6:
adjusting entries

Adjusting entries are made

at the end of each
accounting period. It make it
possible to report correct
amounts on the statement of
financial position and on the All adjusting entries
affect at least one
income statement.
income statement
account and one
statement of financial
position account.
Thus, an adjusting
There are five basic sources of entry will always
adjusting entries: involve an income or
an expense account
1. Depreciation expense
and an asset or a
2. Deferred expenses or
liability account.
prepaid expenses
3. Deferred Income or
unearned income
4. Accrued expenses or
accrued liabilities
5. Accrued income or
accrued assets
 Depreciation is a

on
method of allocating

ti
the cost of an asset to
ia
ec
an expense over the
pr

accounting periods
De

that make up the

asset’s useful life.

Examples of
Take note: Land is assets subject to
not subject to depreciation are:
depreciation Store, Office,
because the value Building, and
of land mostly Transportation
increases as time equipment.
passes.
 ns s
pe se
es
These are items that

Ex n
pe
have been initially
ai Ex recorded as assets but
ep d
are expected to become
Pr re

d
r

expenses over time or

or fe

through the
De

EXAMPLE: operations of the

February 19, 2016 business.
Matapang purchased
PHP5,000 worth of office
supplies on account. By the
end of the month,
PHP2,000 worth of these
supplies are still unused.
 me r
co o
In me
These are items that

ed co
have been initially
rn In recorded as liabilities
ea ed
but are expected to
Un rr

become income over

fe

time or through the

De

operations of the
business.
EXAMPLE:
On February 15, 2016
Matapang entered into a
contract with Makisig to
maintain the computers of
Makisig for two months starting on February 15,2016 up to
April 15, 2016. On the same date, Makisig paid the total
contract amount of PHP40,000 in full.
 ie r
lit o
These are items of

bi ses
s
expenses that have

Lia n
pe been incurred but
ue Ex
have not been
cr ed

recorded and paid.

d
Ac u
cr
Ac

EXAMPLE:
On February 29, 2016, Matapang received the electric
bill for the month of February amounting to PHP3,800.
Matapang will pay this bill on March 2016.
ts r
se o
As me
d co
ue In
cr ed
Ac u
cr
Ac
 ts r
These are income

se o
As me
items that have been

d co earned but have not

ue In
been recorded and
cr ed
Ac u

paid by the customer.

cr

In short, these are

Ac

receivables of the
business.
EXAMPLE:
On February 28, 2016,
Matapang repaired the
computer of Pedro for
PHP15,000. Pedro was on
an outof-town trip so he
could not pay Matapang . He told Matapang that he will pay
for their services on March 1, 2016.
ts r
se o
As me
d co
ue In
cr ed
Ac u
cr
Ac
 step 7:
Preparation of the
Financial Statements
Using the information from the
worksheet, the financial e fo llo wing are
Th
statements are prepared. cial
the finan
a t em en ts to be
st
:
prepared

The income statement is Statement of Financial Position

prepared first so that net income (SFP)
can then be recorded in the
statement of changes in equity. Statement of Comprehensive
Income (SCI)

Statement of Changes in
Once the ending
Equity (SCE)
balance is determined,
the statement of
Cash Flow Statement
financial position is
prepared. The cash
flow statement is
prepared last.
The statement of changes in
equity is then prepared to
determine the ending balance of
equity or capital account.
 financial Statement of Financial Position

Statements (SFP) - Also known as the

balance sheet. This statement
includes the amounts of the
company’s total assets, liabilities
and owner’s equity which in
totality provides the financial
position of the company on a
Statement of Comprehensive
specific date.
Income (SCI) – Also known as
the income statement.
Contains the results of the
company’s operations for a
specific period of time. This
can be prepared on a monthly,
quarterly or yearly basis

• Statement of Changes in
Equity (SCE) - This statement is
prepared prior to preparation
of the Statement of Financial
Position in order to obtain the
ending balance of the equity to
be used in the SFP. All changes,
• Cash Flow Statement - whether increases or decreases
Provides an analysis of to the owner’s interest on the
inflows and/or outflows company during the period, are
of cash from/to reported here.
operating, investing and
financing activities.
 financial
Statements
Statement of Financial Position

Statement of Comprehensive Income

 step 8:
Journalize the Closing
Journal Entries
Temporary Accounts The income, expense,
also called as Nominal withdrawal (equity)
Accounts accounts. They are
called temporary
because they
Closing the books is the accumulate the
process of transferring the transactions of only
balances of the temporary one accounting period.
accounts to the owner’s
permanent capital account.
 PRACTICE:
1. Pedro Reyes purchased a delivery
vehicle on January 1, 2016 amounting to
PHP250,000. It is estimated that the
vehicle will be useful for 10 years. The
vehicle can be sold for PHP10,000 at the
end of its useful life. If the accounting
period being reported by Pedro is one (1)
year from January – December 2016, how
much is the depreciation expense?

3. Pedro Reyes purchased a delivery vehicle

on January 1, 2016 amounting to
PHP250,000. It is estimated that the vehicle
will be useful for 10 years. The vehicle can be
sold for PHP10,000 at the end of its useful
life. If the accounting period being reported
by Pedro is one (1) month (January 2016),
how much is the depreciation expense for the
month?
 answers:
1. Solution: 

Annual Depreciation = (Acquisition Cost – Salvage or
Residual Value) / Useful Life

= (250,000 -10,000) / 10

= PHP 24,000

2. Solution: 

Annual Depreciation = (Acquisition Cost – Salvage or
Residual Value) / Useful Life

= (250,000 -10,000) / 10
= PHP24,000 / 12
= PHP2,000 for January 2016
 FABMO presents:

LESSON
12
Accounting Cycle of a
Merchandising Business

FUTURE ACCOUNTANTS,
BUSINESSMEN,
MANAGERS
ORGANIZATION

ORIENTAL MINDORO NATIONAL HIGH SCHOOL

Curated by: Patricia Bajado
 ACT. COUNT. THINK
Solve Activities A=L+OE Analyze

how to get through this?

R e m i n d e r s :

To learn Accounting better, you After assessing yourself, Balance is

first need to know your reason. the next one. There’s time for
Why are you doing this? leisure and for studying.

I know it’s hard to be motivated all the time. It’s okay to take a break from
the numbers and business transactions but make sure to get back to it
afterward. It would help if you got through this, little by little. And constantly
be reminded to be gentle with yourself and your humble beginnings.

To grasp lessons easily and analyze concepts, you need to prioritize:

Eating healthy foods Sleep

having a Healthy Mindset Exercise

This is the beginning of your love-hate relationship with numerical figures.

Stand firm. Have motivation. Surround yourself with people that can help
you. Dream high and Pray.
Lots of love,
Ate Yesha <3
 LET’S DO THIS

RECAP:
ACCOUNTING CYCLE:

~nature of a~
MERCHANDISING BUSINESS
- is an enterprise that buys and sells goods to earn a profit.
- Merchandise (or merchandise inventory) refers to goods that are held for sale to
customers in the normal course of business. This includes goods held for resale.
examples:
Candies, canned goods, noodles sold at a grocery stores
Juice, biscuits sold in a grocery store
Medicines sold in a pharmacy
added information:
A merchandiser’s primary source of revenue is sales revenue or sales.
Expenses for a merchandising company are divided into
two categories:
1. Cost of goods sold (COGS) – the total cost of merchandise sold during the period
2. Operating expenses (OP) - expenses incurred in the process of earning sales revenue
that are deducted from gross profit in the income statement. Examples are sales
salaries and insurance expenses.
GROSS PROFIT (GP) = SALES REVENUE - COST OF GOODS SOLD
Income measurement process for a merchandiser follows as:
SALES - COST OF GOODS SOLD = GROSS PROFIT - OPERATING EXPENSE =
NET INCOME (LOSS)
The Operating Cycles for a merchandiser: Merchandising Company
operating cycle (cash to cash) involves:
1. buy merchandise inventory
2. sell inventory
3. obtain Accounts Receivable
4. receive cash
THANK YOU FOR STILL READING THIS CHAPTER!
LEARNING ACCOUNTANING IS A PROCESS

JOURNALIZING THE TRANSACTIONS IN A

MERCHANDISING BUSINESS

Step 1 - Transactions and/or Events

In step 1, transactions are identified and measured.

The documents used by the business are analyzed to see whether these transactions have
financial impact or effect.
Only financial transactions are recorded and that the amount can be measured.
Financial transactions are those activities that change the value of an asset, liability or equity.

Step 2 - Preparation of Journal Entries

(journalization)

A merchandising company may use special and general journals to record its transactions.
SPECIAL JOURNALS:
Some businesses encounter voluminous quantities of similar and recurring transactions.
The use of special journals will eliminate this problem.
1. Cash Receipts Journal –used to record all cash that had been received
2. Cash Disbursements Journal –used to record all transactions involving cash payments
3. Sales Journal (Sales on Account Journal) –used to record all sales on credit (on account)
4. Purchase Journal (Purchase on Account Journal) –used to record all purchases of inventory
on credit (or on account)
INVENTORY SYSTEMS
Maintaining inventory items is a unique set-up in a merchandising business. There are two methods of
accounting for inventory, namely: Perpetual Inventory System and Periodic Inventory System.
Merchandising entities may use either of the following inventory systems:
1. Perpetual System — Detailed records of the cost of each item are maintained, and the cost of
each item sold is determined from records when the sale occurs.
For example, a car dealership has separate inventory records for each vehicle.
Record purchase of Inventory.
Record revenue and record cost of goods sold when the item is sold.
At the end of the period, no entry is needed except to adjust inventory for losses, etc.
2. Periodic System — Cost of goods sold is determined only at the end of an accounting period.
This system involves:
Record purchase of Inventory.
Record revenue only when the item is sold.
At the end of the period, you must compute cost of goods sold (COGS):
1. Determine the cost of goods on hand at the beginning of the accounting period (Beginning
Inventory = BI)
2. Add it to the cost of goods purchased (COGP)
3. Subtract the cost of goods on hand at the end of the accounting period
4. (Ending Inventory = EI) illustrated as follows:
BI + COGP = COST OF GOODS AVAILABLE FOR SALE - EI = COGS
IT REQUIRES EFFORT AND WILLINGNESS
 YOUR HARDWORK WILL BE WORTH IT.

ADDITIONAL CONSIDERATIONS:
Perpetual systems have traditionally been used by companies that sell merchandise with high
unit values such as automobiles, furniture, and major home appliances. With the use of
computers and scanners, many companies now use the perpetual inventory system.
The perpetual inventory system is named because the accounting records continuously —
perpetually —show the quantity and cost of the inventory that should be on hand at any time.
The periodic system only periodically updates the cost of inventory on hand.
A perpetual inventory system provides better control over inventories than a periodic
inventory, since the records always show the quantity that should be on hand. Then, any
shortages from the actual quantity and what the records show can be investigated immediately.

PERIODIC INVENTORY SYSTEM

Recording purchases and related transactions under the Periodic Inventory System
PURCHASES OF MERCHANDISE: PERIODIC SYSTEM
1. When merchandise is purchased for resale to customers, the account, Purchases, is debited for the
cost of goods purchased.
2. Like sales, purchases may be made for cash or on account (credit).
3. The purchase is normally recorded by the purchaser when the goods are received from the seller.
Each credit purchase should be supported by a purchase invoice.
A purchase invoice received by the buyer is actually a sales invoice or a charge invoice
prepared by the supplier or vendor.
Note that only purchases of merchandise are debited to the ‘Purchase’ account. Acquisition
(purchases) of other assets: supplies, equipment, and similar items are debited to their
respective accounts.
TO ILLUSTRATE:
Magaling Computer Store started its operations on January 2, 2016. The store is located in Sikat
Mall in Bicol. The owner invested PHP500,000 to start the business. On January 3, 2016,
Magaling purchased 20 units of computers on account for PHP10,000 each. Upon delivery of the
units, the supplier, Delta, Inc., issued Charge Invoice No. 145 to Magaling.
ENTRY:

DON’T BE EASILY DISCOURAGED WHEN YOU CAN’T SEE YOUR PROGRESS

 KEEP MOVING

PURCHASE RETURNS AND ALLOWANCES

The Purchase Returns and Allowances account is a “contra purchases” account when
merchandise is returned to a supplier.
A purchaser may find the merchandise received to be unsatisfactory
because the goods are:
damaged or defective
of inferior quality
not in accord with the purchaser’s specifications
The purchaser initiates the request for a reduction of the balance due through the issuance
of a debit memorandum
The debit memorandum is a document issued by a buyer to inform a seller that the seller’s
account has been debited because of unsatisfactory goods.
— A return of the merchandise (a deduction from the purchase price when unsatisfactory goods
are kept) is shown by the entry where Accounts Payable is debited and Purchase Returns and
Allowances is credited to show that the purchases was reduced with a return or an allowance.
TO ILLUSTRATE:
Out of the 20 computer units purchased last January 3, 2016, it was found after inspection on the same day
that one unit was damaged during shipment. Magaling issued a debit memorandum (DM 01) and informed
the supplier that it will return the one damaged item.
ENTRY:

ACCOUNTING FOR FREIGHT COSTS

The sales agreement should indicate whether the seller or the buyer is to pay the cost of
transporting the goods to the buyer’s place of business.
The two most common arrangements for freight costs are
FOB SHIPPING POINT AND FOB DESTINATION.

FOB Shipping Point: FOB DESTINATION

Goods placed free on board (FOB) the carrier by Goods placed free on board (FOB) at buyer’s
seller. business.
Buyer pays freight costs. Seller pays freight costs.
Freight-In is debited if buyer pays freight. Delivery Expense is debited if seller pays
Cash is credited if the goods come on cash on freight on outgoing merchandise to a buyer.
delivery (COD), For example, and was paid This is an operating expense to the seller.
immediately. Accounts Payable would be Ownership over the goods is transferred to
credited if on account. the buyer once the goods are delivered and
Ownership over the goods is transferred to the received by the buyer.
buyer once it is out of the premises of the seller.
PADAYON, FUTURE CPA!!
 ONE STEP AT A TIME, FOLLOW YOUR OWN PACE.

TO ILLUSTRATE:
Assume the supplier of Magaling is based in Manila. In order to bring the 20 computer units to
Bicol, it will cost PHP3,000 to deliver the goods.
If the terms is FOB Shipping Point, the entry to record, assuming Magaling paid the
common carrier in cash on January 4, 2016 is :
ENTRY:

If the terms is FOB Destination, no entry is recorded in the books of Magaling. The PHP3,000
will be paid by the seller, in this case Delta, Inc.

PURCHASE DISCOUNTS
Credit terms (specify the amount of cash discount and time period during which a discount is
offered) may permit the buyer to claim a cash discount for the prompt payment of a balance
due.
If the credit terms show 2/10, n/30 means a 2% discount is given if paid within 10 days (called
the discount period); otherwise, the invoice is due in 30 days.
The buyer calls this discount a purchase discount.
A purchase discount is normally based on the invoice cost less returns and allowances, if any.
TO ILLUSTRATE:
The credit terms for the purchase of 20 computer units (total cost PHP200,000) is 2/10, n/30. This
means that if Magaling pays on or before January 13, 2016, it is entitled to a 2% discount,
otherwise Magaling will have to pay the full amount on or before February 4, 2016 (30 days after
purchase). On January 10, 2016, Magaling paid the account in full with Delta.
ENTRY:

Assuming that instead of paying on January 10, 2016, Magaling paid on February 4, 2016, thus
forfeiting the 2% discount, the entry to record is:
 Recording of sales and related transactions
under the Periodic Inventory System

SALES TRANSACTIONS: REVENUE ENTRIES FOR

A MERCHANDISER
Revenues are reported when earned in accordance with the revenue recognition principle,
and in a merchandising company, revenues are earned when the goods are transferred
from seller to buyer.
All sales should be supported by a document such as a cash register tape (to provide
evidence of cash sales) or cash receipt, or office receipt for cash sales, and charge invoice
for credit sales, or sales on account.
One entry is made with each sale:
Debit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which increases
assets for the sales amount
Credit — Sales which increases revenues
The sales account is credited only for sales of goods held for resale. Sales of assets not
held for resale (such as equipment, buildings, land, etc.) are credited directly to the asset
account.
TO ILLUSTRATE:
For the month of January, Magaling made the following sale:
1/10/2016 Official Receipt (OR) No. 001 Sold two units for cash to Marie Cruz for
PHP36,000 (PHP18,000 per unit), FOB Destination
1/15/2016 Charge Invoice (ChI) No. 001 Sold five units on account to Rafael Reyes for
PHP97,500 (PHP19,500 per unit) with terms 3/10, n/ 30, FOB Shipping Point
ENTRY:

FREIGHT TERMS: FOB DESTINATION — SELLER PAYS FREIGHT

An entry is made when seller pays the freight to deliver goods to a customer or
buyer. If the buyer will pay for the freight, no entry is made.
Debit — Delivery Expense and credit — Cash or Accounts Payable
TO ILLUSTRATE:

On January 10, 2016 Magaling paid MM Express, PHP500 to deliver the two units to Marie Cruz.

TRY TO MASTER THE BASIC AND TAKE IT EASY!

 ENTRY:

Take note that no entry will be made regarding the sale to Rafael Reyes since the term is
FOB Shipping Point.

SALES RETURNS AND ALLOWANCES:

Sales Returns result when customers are dissatisfied with merchandise and are allowed
to return the goods to the seller for credit or a refund.
Sales Allowances result when customers are dissatisfied, and the seller allows a
deduction from the selling price.
To grant the return or allowance, the seller prepares a credit memorandum to inform
the customer that a credit has been made to the customer’s account receivable.
Sales Returns and Allowances is a contra revenue account to the Sales account. A
contra account is a reduction to a particular account.
A contra account is used, instead of debiting sales, to disclose the amount of sales
returns and allowances in the accounts.
This information is important to management as excessive returns and allowances
suggest inferior merchandise, inefficiencies in filling orders, errors in billing customers,
and mistakes in delivery or shipment of goods.
The normal balance of Sales Returns and Allowances is a debit.
One entry is made with each sales return and allowance: The entry to record the sales
return or allowance:
Debit — Sales Return and Allowances which decreases revenues for the amount of
the sale
Credit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which
decreases assets
TO ILLUSTRATE:
On January 16, 2016, Rafael Reyes returned one unit of the computers purchased last January
15, 2016 under Charge Invoice 001. The unit returned was in good condition. However, Rafael
Reyes returned the unit because it is one unit more than what they need. The return was
approved and accepted by Magaling. The price will be deducted from the account of Rafael
Reyes. ENTRY:

SALES DISCOUNTS:
1. A sales discount is the offer of a cash discount to encourage customers to pay the balance at
an earlier date.
2. An example of a discount term is commonly expressed as: 2/10, n/30, which means that the
customer is given 2% discount if payment is made within 10 days. After 10 days there is no
discount, and the balance is due in 30 days.
3. Sales Discounts is a contra revenue account with a normal debit balance.

LAST CHAPTER, YOU CAN DO IT!

 To illustrate
Assume that Magaling purchased on cash, five units of computers at PHP10,000 per unit from a
supplier on January 17, 2016. These units were subsequently sold to Jun Cruz on January 18, 2016
under Charge Invoice (ChI) No. 002 amounting to PHP90,000 (PHP18,000 per unit) with terms 2/10,
n/30, FOB Shipping Point. On January 23, 2016, Cruz paid the said account in full.
entry

Notice in the entry on January 23, 2016 that the cash received from Jun Cruz was net of the 2% discount
because he made the payment within the discount period. Take note that the discount period in this case
was from January 19, 2016 to January 28, 2016 (10 days).
What If Jun Cruz paid the account on January 30, 2016 instead of January 23, 2016? The entry would be:

Determining Cost of Goods Sold under

Periodic Inventory System
The Cost of Goods Sold under the periodic inventory system is determined at the end of the period (monthly or
yearly) by a short computation, as follows:

In a periodic inventory system, separate ledger accounts are maintained for various items composing the
cost of goods sold (Purchases, Purchase Returns & Allowances, Freight-In, Purchase Discounts). At the end
of the accounting period, a physical count of inventory is necessary to establish the ending balance of the
inventory.
 Step 3 – Posting to the General Ledger

From the summary of transactions in the special journals and general journals, the entries will
now be posted in each general ledger account:
 AGILA MERCHANDISING
Worksheet
For the month ending January 30, 2016

Step 4 & 5 – Prepare the

unadjusted trial
balance and preparation
of worksheet

The balances in the general

ledger for each account will be
extended to the first two money
columns of the worksheet. The
unadjusted trial of Agila is:
 Step 6:
Recall in Chapter 11, the five basic
Prepare sources of adjusting entries:

1. Depreciation expense
adjusting 2. Deferred expenses or prepaid expenses
3. Deferred income or unearned Income
entries 4. Accrued expenses or accrued liabilities
5. Accrued income or accrued assets

Step 7:
Preparation of
- The first statement
prepared is the income
Financial
statement. All income
statement accounts are
Statements
extended to the
The statement of financial position is then
appropriate column.
prepared. All assets, liabilities and equity
accounts are extended. The ending
merchandise inventory is extended to the
debit side.
 Step 8:
Closing Entries

Once the closing journal entries have

been entered into the general journal,
the information should be posted to the
general ledger. When this is
accomplished, all of the nominal
accounts in the general ledger should
have zero balances.
 PERPETUAL
INVENTORY SYSTEM
-Recording Purchases and related transactions under the Perpetual Inventory
System.

PURCHASES OF MERCHANDISE: PERPETUAL SYSTEM

When merchandise is purchased for resale to

customers, the account, Merchandise Inventory, is
debited for the cost of goods purchased.
Like sales, purchases may be made for cash or on
account (credit).

PURCHASE RETURNS AND ALLOWANCES

A purchaser may be dissatisfied with merchandise

received because the goods are:
- damaged or defective
- of inferior quality
- not in accordance with the purchaser’s
specifications

PURCHASE DISCOUNTS
Credit terms may permit the buyer to claim a
cash discount for the prompt payment of a
balance due.
-The buyer records this discount as a reduction to
Merchandise Inventory.
ACCOUNTING FOR
FREIGHT COSTS
The sales agreement should indicate whether the
seller or the buyer is to pay the cost of
transporting the goods to the buyer’s place of
business.

FOB SHIPPING POINT

Goods placed free on board (FOB) the carrier by

seller.
Buyer pays freight costs.
Ownership over the goods is transferred to the
buyer once it is out of the premises of the seller

FOB DESTINATION

Goods placed free on board (FOB) at buyer’s

business.
Seller pays freight costs.
-Ownership over the goods is transferred to the
buyer once the goods are delivered and received
by the buyer.
SALES TRANSACTIONS
For a merchandiser under the Perpetual Inventory
System

REVENUE ENTRIES
Revenues are reported when earned in accordance
with the revenue recognition principle; and in a
merchandising company, revenues are earned when
the goods are transferred from seller to buyer.
All sales should be supported by a document such as
a cash register tape (provide evidence of cash sales)
or cash receipt or office receipt for cash sales, and
charge invoice for credit sales or sales on account
The sales account is credited only for sales of good
held for resale.

SALES RETURNS AND ALLOWANCES

Sales Returns result when customers are dissatisfied

with merchandise and are allowed to return the
goods to the seller for credit , a refund or a deduction
from the selling price.
Sales Returns and Allowances is a contra revenue
account to the Sales account. A contra account is a
reduction to a particular account.
The normal balance of Sales Returns and Allowances
is a debit.
 Cost of Goods Sold
under the Perpetual
Inventory System
The Cost of Goods Sold under the perpetual
inventory system is determined by getting the
running balance in the general ledger of the account.

At any point in time, you can determine the

cumulative cost of goods sold under the perpetual
inventory system because in this system a separate
general ledger for “Cost of Goods Sold” is
maintained.

THE FLOW OF
INVENTORY COSTS
Under the periodic inventory system, physical
count is necessary to determine the ending balance
of merchandise inventory
After the count, the costs of these inventory items
will be computed.

There are instances that the unit prices for

merchandise purchased are different.