Module 008 Analysis and Interpretation of Financial Statements Different accounting information helps

users make decisions depending on the purpose for which they are reviewing the financials of the
company. These internal and external users depend on the financial analysis in order to make sound
decisions for the business. At the end of this module, you will be able to: 1. Enumerate the different
categories of financial information. 2. Differentiate the different techniques of financial analysis. 3. Apply
the concepts of Vertical and Horizontal analysis on the given financial data. User of Financial Information
Internal Users – people or entities inside the organization who are interested in the company’s financial
information (ex. Management, Employees, Owner) External Users – people or entities outside the
organization who are interested in the company’s financial information (ex. Regulatory bodies, lenders,
investors, suppliers, public) There are different analytical techniques that can be used to review financial
statements. The most common of these are: horizontal analysis, vertical analysis, and ratio analysis.
Horizontal Analysis Horizontal analysis is the comparison of a company’s financial statements from one
period to another (e.g. annually, quarterly). Analysis based on the changes on the amounts from one
period to another are usually expressed either in absolute numbers or percentages. Let’s look at the
tables below for an example: The first step in coming up with the increase or decrease on the company’s
books is to determine the company’s base year. The company’s base year will be the denominator in the
computation of the changes in the company’s financial statements. The formula can be computed for
either the (1) amount of change or (2) the percentage change from one period to another. Notice that
both figures 1 and 2 Fundamentals of Accountancy, Business, and Management 2 Analysis and
Interpretation of Financial Statements 3 Course Module expressed changes by both amounts and
percentages in positive (increase) and in negative (decrease) forms. Formula for changes in the
company’s financial amounts would be the Amount in the New Year minus the Amount in the base year.
By dividing the amount that you arrive at with the amount in the base year, it will show the percentage
change for the item that you are analyzing. Upon applying the stated formula, the answer shall be
50,000 or 20% increase in current assets from 2012 to 2013. Vertical Analysis Also known as static
analysis as it only looks at financial statement information one period at a time. Vertical analysis makes
use of common size financial statements to convert each financial statement item to its base year. It
analyzes the financial statements of a firm for a given date or period as to the relative importance of an
item in relation to others or to a total as it appears in a statement (Padilla, 2000). Vertical analysis, as
compared to horizontal, confines itself in a period of time (ex. a year) and compares its components
with a base item in the financial statement. In Figure 3, the base item is total assets (expressed in the
financial statement as the 100%). We then compute how each of the total asset’s components
composes the base item. Ratio Analysis The most commonly- used technique among all three is the
analysis. It is the method of financial evaluation that interprets the relationship among the different
accounts found in the financial statements. It highlights computations that allow the reader to
understand how the company performs and positions itself financially. Types of Financial Ratios
Liquidity: These ratios will demonstrate a company's ability to pay their debts and liabilities. If they do
not have enough short-term assets to cover short-term obligations, or they do not generate enough
cash flow to cover costs, they may face financial problems. Liquidity ratios are of extra importance with
penny stocks specifically, since the tinier and newer companies have tremendous difficulties paying all
the bills before their businesses become established. Some liquidity ratios include the current ratio,
quick ratio, cash ratio, and operating cash flow. Activity: These demonstrate how efficiently the business
operates. There are a few great activity ratios investors should apply in their research; inventory
turnover; receivables turnover; payables turnover; working capital turnover; fixed asset turnover; total
asset turnover. Fundamentals of Accountancy, Business, and Management 2 Analysis and Interpretation
of Financial Statements 5 Course Module Leverage: These ratios will demonstrate a company's ability to
pay their long-term debt. Leverage ratios are also referred to as debt ratios; debt ratio; debt to equity;
interest coverage. Performance: Performance ratios are all about profit, which might explain why they
are frequently referred to as profitability ratios. Performance ratios tell a clear picture of how profitable
a business is at various stages of their operations; gross profit margin; operating profit margin; net profit
margin; return on assets; return on equity. Valuation: Since valuation ratios are based on the current
share price, they provide a picture of whether or not the penny stock is a compelling investment at
current levels. There are three (3) main categories of financial information that are mainly assessed
when we use analytic techniques in these financial statements, namely: 1. Liquidity or solvency 2.
Profitability 3. Stability All three of these are being reviewed depending on the user’s perspective. A
lender would be interested as to how liquid the company is, that is, if it is capable to pay its expenses
when it becomes due. On the other hand, employees and long-term customers are more interested on
the stability of the company. Prospective investors or partners are looking at the profitability while
management or the Board of Directors maybe looking as to the company’s capacity to expand or grow.
Glossary Horizontal analysis: the comparison of a company’s financial statements from one period to
another. Vertical analysis: makes use of common size financial statements to convert each financial
statement item to its base year. Ratio analysis: the method of financial evaluation that interprets the
relationship among the different accounts found in the financial statements. Liquidity or solvency:
liquidity means having cash, as well as the ability to quickly convert assets into cash. Solvency is the
ability of the business to pay all legal debts, even if it means converting assets to cash for long term
liability coverage. Profitability: it is the primary goal of all businesses to survive in the long run. Stability:
refers to the ability of the business to pay overhead expenses, pare down debt and return capital to
investors

Module 009Accounting books - Journal The General Journal is known as the “book of original entry”
since all transactions are initially recorded in this document.At the end of this module, you will be able
to: 1. Differentiate the general journal from the general ledger. 2. Identify the normal balance of the
various accounts. 3. Journalize the different transactions Accounting Equation You were told of the
importance of the accounting equation since business transactions affects the assets, liabilities and
proprietorship of the business in Fundamentals of Accounting 1. We can express this in the accounting
equation as: Asset = Equities (Liability + Equity) or Asset = Liability + Equity or Asset = Liability + Equity +
Income - Expense Equity comprises the claims of the owners on the assets of the firm after deducting
the claims of the creditors, known as their liabilities. Journalizing After analyzing the business
transaction, it is now time to record or journalize them. Journalizing is the second step in the accounting
cycle. It is called journalizing because we use a book called journal in recording the transaction. A journal
is the book of original entry. A small business entity makes use of the simplest form of journal which is
the general journal in recording their transactions. It contains the following columns: 1. Date of the
transaction. 2. Account titles and explanations 3. Folio or the reference number 4. Debit for the amounts
to be debited 5. Credit for the amounts to be credited Sample of journal: General Journal Page No.
________ Date Explanation F Debit Credit Fundamentals of Accountancy, Business, and Management 2
Accounting books - Journal 3 Course Module How to journalize transactions?  The date of the
transaction is written on the date column containing the year, month and the day of each transaction.
The dates are written in systematic manner and in a chronological order.  The account to be debited is
written first at the left margin of the account titles and explanation column. The account to be credited
is written indented below the debit account. A short explanation is written indented next below the
credit account.  The folio or reference number column is written to indicate the page number of the
ledger in which the entry is transferred.  The amount to be debited is written at the debit column
opposite the debit account.  Lastly, the amount to be credited is written at the credit column opposite
the credit account. Let us take the previous examples to illustrate journalizing a. On September 31,
2014, Mr. ISH ISH invested ₱1,370,000 to open up a laundry shop. Debit Credit Cash ₱1,370,000 ISH ISH
capital ₱1,370,000 To effect increase in equity we credit ISH ISHcapital in the amount of ₱1,370,000 and
to effect increase in asset we debit cash in the same amount. b. On October 1, 2014 Mr. ISH ISH
purchased laundry equipment for cash, ₱1,000,000. Debit Credit Laundry equipment ₱1,000,000 Cash
₱1,000,000 To effect increase in asset we credit laundry equipment in the amount of ₱1,000,000 and to
effect decrease in asset we credit cash in the same amount. c. On October 18, 2014 laundry supplies
were purchased on credit, ₱30,000. Debit Credit Laundry supplies ₱30,000 Accounts payable ₱30,000 To
effect increase in asset we credit laundry supplies in the amount of ₱30,000 and to effect increase in
liability we credit accounts payable in the same amount. Fundamentals of Accountancy, Business, and
Management 2 Accounting books - Journal 5 Course Module Debit – normal balance of Asset and
Expense accounts Credit – normal balance of Liabilities, Equity, and Income Glossary Account: an
accounting device used to summarize the increases and decreases in the asset, liability and
proprietorship of the business. Journal: the book of original entry. General ledger: known as the book of
final entry and composed of a group of accounts. Trial balance: the key in the preparation of financial
statements. It contains a list of accounts with open balances in the general ledger for a given period.
Debere : latin term for Debit which means left Credere: latin term for Credit which means right

Module 010Accounting books - Ledger After initial transactions in the General Journal, these
transactions are further classified into different accounts. The General ledger serves as a document
consolidating daily transactions into different individual account titles. At the end of this module, you
will be able to: 1. Understand the contents of the general ledger. 2. Post transactions to the general
ledger from the general journal. 3. Know the parts of the unadjusted and adjusted trial balance. Posting
The third step in the accounting cycle is posting. When we post, we transfer the information from the
journal to general ledger. A general ledger is known as the book of final entry and composed of a group
of accounts. Sample of ledger: (Account Title) Account No. ________ Date Explanation F Debit Date
Explanation F Credit How to post transactions?  From the journal, look for the corresponding account
title in the ledger then transfer the date, explanation and amount to the ledger. Debit accounts are
posted on the debit side of the ledger and credit accounts are posted on the credit side of the ledger. 
The page number of the journal in which the information was taken from is placed in the folio or
reference column of the ledger then the page number of the ledger where the information was posted is
placed in the folio or reference column of the journal.  The accounts should be footed first before the
preparation of the trial balance. Foot or add first the debit side then the credit side of the account. Take
the difference between the totals of the debits and credits. If the debit total is more than the credit
total, the difference is placed on the debit side and if the difference is a credit, the amount is written on
the credit side. Let us take the previous examples to illustrate posting. CASH Account No. ________ Date
Explanation F Debit Date Explanation F Credit 9-31 Cash investment ₱1,370,000 10-1 Purchase laundry
equipment ₱1,000,000 Fundamentals of Accountancy, Business, and Management 2 Accounting books -
Ledger 3 Course Module LAUNDRY EQUIPMENT Account No. ________ Date Explanation F Debit Date
Explanation F Credit 10-1 Purchase laundry equipment ₱1,000,000 LAUNDRY SUPPLIES Account No.
________ Date Explanation F Debit Date Explanation F Credit 10-18 Purchase laundry supplies ₱30,000
ACCOUNTS PAYABLE Account No. ________ Date Explanation F Debit Date Explanation F Credit 10-18
Purchase laundry supplies ₱30,000 ISH ISH CAPITAL Account No. ________ Date Explanation F Debit
Date Explanation F Credit 9-31 Cash investment ₱1,370,000 After posting the transactions to the ledger,
we are now ready to prepare the unadjusted trial balance, which is the fourth step in the accounting
cycle. A trial balance is the key in the preparation of financial statements. It contains a list of accounts
with open balances in the general ledger for a given period. How to prepare the trial balance?  In
preparing the trial balance, first, write the heading which includes the name of the business or the
owner, the title of the list or trial balance, and the date of the trial balance.  Next, provide a column for
the accounts and two money columns for debit and credit.  The accounts should be written in a straight
line on the left side and should be arranged according to liquidity, or how easily can you convert an asset
to cash. You are to follow the accounting equation in arranging this: Assets, Liabilities, Equity, Income,
and Expense accounts.  The amounts are written on the opposite side corresponding to the account
under the debit money column if the balance is debit and under the credit money column if the balance
is credit.  Foot or total the money columns and double rule the totals. Fundamentals of Accountancy,
Business, and Management 2 Accounting books - Ledger 5 Course Module Sample Trial Balance
Adjusting entries, adjusted trial balance and worksheet We mentioned in our last topic the preparation
of UNADJUSTED TRIAL BALANCE precisely because there are still items in the trial balance which needs
to be adjusted. Why do we need to Adjust? Adjusting entries are necessary in order to put the accounts
up to date. This is done to charge the proper amounts of revenues earned and expenses incurred during
the period. Adjusting entries also show a fairly measure of assets, liabilities and owner’s equity.
Fundamentals of Accountancy, Business, and Management 2 Accounting books - Ledger 7 Course
Module Glossary Generalledger: known as the book of final entry and composed of a group of accounts.
Trial balance: the key in the preparation of financial statements. It contains a list of accounts with open
balances in the general ledger for a given period. Adjusting entries: show the fair measure of assets,
liabilities and owner’s equity.

Module 011 Basic Documents and Transactions Related to Bank Deposits After initial transactions in the
General Journal, these transactions are further classified into different accounts. The General ledger
serves as a document consolidating daily transactions into different individual account titles. At the end
of this module, you will be able to: 1. Discuss the activities of a bank and its different types of accounts.
2. Understand the purpose and parts of a check. 3. Understand the contents of a bank statements. Bank
Transactions Deposits and withdrawals are the common types of transactions that an individual or entity
may conduct with the bank. The Bank, being in a business of Financial Intermediation, serves as a middle
man between depositors and borrowers. Depositors have deposits and withdrawals. Deposits are the
amounts placed in the bank to earn interest. Withdrawals, on the other hand, are the amounts removed
from the amount that you deposited. These deposits are placed in a deposit account. A deposit account
is the fund maintained by an individual or an entity in a bank that allowed money to be
deposited/placed or withdrawn/removed by the account holder. Once you deposit money in a bank, you
are considered its account holder. Types of Deposit Account However, before opening a deposit account
in your bank, you should know which type of account you would like to open. The most common of all is
the savings account. Savings account is the type of account that we have discussed at the early part of
this chapter – you open it with the bank and earn interest out of it. It can be supported by an
Automated Teller Machine (ATM) card, which is used to withdraw from ATMs or a passbook, which is a
booklet showing you the details of your deposits and withdrawals in the bank. Here is how the content
of a bank pass book savings account looks like: It has the date and time of the transactions, the type of
transaction (deposit or withdrawal) and the corresponding amount of transaction, which can either
increase (through deposits) or decrease (through withdrawals). The second type of bank account is
checking account also known as current account. Before we further discuss what a checking account is,
we need to Fundamentals of Accountancy, Business, and Management 2 Basic Documents and
Transactions Related to Bank Deposits 3 Course Module understand what a check is. Remember in
Chapter 5, we discussed that check is also a form of cash. This is so since our laws consider checks to
have the functions of cash. It can be used in exchange for goods, debt, or services. A sample of a check
from the Philippine National Bank (PNB) is as follows: At the top part of every check, you will see the
account number where the amount in the check shall be deducted from. You will also see the account
name, or the owner/s of the deposits in the bank account. If a check is newlyissued, the account name
may not be indicated yet. There is also a check number. Since this is just a sample, the check number is
not written. Checks are pre-numbered to ensure that they can easily be accounted for and what is lost
can easily be identified. Bank Statement A bank statement or a statement of account (SOA) provides the
details of the deposits and withdrawals to the account. It is the same as the contents found in a
passbook account. However, a SOA is a document that is issued monthly by the bank. Though if the
account holder requests an interim copy of the SOA (example, the middle of the month), the bank may
produce the same. Documents on Deposit and Withdrawals Deposits to any type of accounts require
that the account holder fill out the deposit slip. Each bank has its own format. This one is a sample of a
cash deposit slip from Banco De Oro (BDO) in depositing to account holders web.com.ph. Though banks
have different formats, any deposit slip shall always require the (a) account number to identify the
owner of the account, (b) account name, to ensure the account to receive cash, (c) date when the
deposit is made, (d) type of account of the account holder (savings or current), and (e) the amount to be
deposited. Although issuing a check in order to pay purchases or expenses, or settle liabilities is a form
of withdrawal, usual withdrawing of amounts from the deposit accounts requires withdrawal slips.
Fundamentals of Accountancy, Business, and Management 2 Basic Documents and Transactions Related
to Bank Deposits 5 Course Module Withdrawal slips almost looks like a deposit slips, except that they
may require additional identification for safety since you are not depositing money in the bank but
withdrawing. This is a way for the bank personnel to establish the KYC procedure to individuals who
withdraw. Here is a Bank of Commerce withdrawal slip sample: The details required in a check shall also
be the same information that are required in filling out a withdrawal slip except for the name of the
payee. Glossary Savings accounts are evidenced by either ATMs or passbooks. Checking accounts are
also known as current accounts and allow account holders to issue checks against their deposits. Checks
are considered cash because they have the same functions. Cash maybe deposited or encashed.
Deposits in the bank require deposit slips while withdrawals require withdrawal slips. Bank statements
provide the account holder of the details of the deposits and withdrawals in their account

Module 013Bank Reconciliation Statement To ensure that the items in the cash in bank account
maintained by the depositor is the same as those found in the current account maintained by the bank,
a reconciliation statement is prepared every month. At the end of this module, you will be able to: 1.
Know the basic bank transactions. 2. Define Cash in Bank and Current Accounts. 3. Understand Bank and
Book reconciling items. Bank Deposits A major principle of good cash control is maintaining a bank
account where receipts are deposited and where payments, except petty cash payments, are drawn
from. When a depositor open an account with a bank, the relationship existing between the parties is a
lender (the depositor), and a borrower (the bank) relationship. This is the reason why the depositor will
keep an asset, and the bank will keep a liability account. These two accounts are reciprocal accounts.
The Asset Account: Cash in Bank The depositor will record bank transactions in a Cash in Bank Account.
This account shows the cash balance at the beginning of the month, cash receipts and deposits (debits),
cash payments and withdrawals (credits), and the new balance at the end of the month. The Liability:
Current Account The bank on the other hand keeps record of the depositor’s transactions in a Current
Account. This account shows the balance at the beginning of the month, the deposits and other
additions (credits), the checks paid and other deductions (debits) during the month, and the ending
balance. Every month the bank will send a depositor a bank statement. This statement shows is an exact
copy of the Current Account being maintained by the bank. Bank Reconciliation Statement The
transactions recorded in the Cash in Bank should also be reflected in the Current Account, and vice
versa. Whenever the book debits a transaction, for example, the same should be recorded by the bank
as a credit, both parties increasing the cash balance. Likewise, when the book credits a transaction, the
bank will correspondingly debit, both decreasing the cash balance. This will be true also in cases when
the bank initiates the transactions. However, because of timing differences and errors done by either
the depositor or the bank, there can be differences in the Cash in Bank and the Current Account. The
bank reconciliation is a schedule explaining the differences between the two accounts. Each month, the
depositor should prepare a bank reconciliation to verify that these independent set of records are in
agreement. This reconciliation may disclose delay in recording events usually initiated near the end of
the month, or failures in internal controls such as unauthorized cash disbursements, failures to deposit
receipts, or errors Fundamentals of Accountancy, Business, and Management 2 Bank Reconciliation
Statement 3 Course Module made either by the bank or depositor. The statement also helps to
determine transactions that must be recorded to update or correct the depositor’s accounting records
and to determine the actual amount of the cash deposit balance at the end of the month. Reconciling
between Bank Records and Accounting Records The balances between the Cash in Bank and the Current
AccountDepositor accounts seldom equal. The most common transactions recorded by the depositor
and have not yet been recorded by the bank include:  Outstanding checks which are issued and
recorded by the depositor but not yet presented to the bank for encashment.  Deposits in transit are
receipts by the depositor that reached the bank too late to appear in the bank statement for the current
month. Also, the following transactions may be appearing in the bank statement and which have been
recorded by the bank and may not have been recorded by the depositor:  Service charges usually
representing fees for handling small accounts. Other miscellaneous bank charges like fees for printing
checks, handling collections of notes receivable, and processing NSF checks. Usually the depositor is
notified of these charges by including a debit memorandum in the bank statement or simply explaining
these charges as a footnote in the statement.  Charges for NSF (Not Sufficient Funds) checks. Usually a
bank will credit the depositor’s account once a check from customers is deposited. If the check is
uncollectible, the bank will reduce (debit) the account of the depositor and return the check marked
“NSF”. In the Philippines, banks usually credit the depositor’s account once the check is cleared. 
Credits for interest earned. Current or checking accounts may earn interest which at month end is
credited to the depositor’s account and reported in the bank statement. Other miscellaneous bank
credits include notes receivable collected by the bank in behalf of the depositor. This is credited by the
bank in the depositor’s account and issues a credit memorandum. The balances shown in the bank
statement and in the accounting records are both adjusted for any unrecorded transactions. Errors
discovered are also corrected as adjustments in the bank statement or in the accounting records where
the errors were committed. Fundamentals of Accountancy, Business, and Management 2 Bank
Reconciliation Statement 5 Course Module Glossary Cash in Bank account: the asset account maintained
by the depositor to record deposits and withdrawals in the bank. Current Account: the liability account
maintained by the bank in behalf of the depositor. Bank statement: a report prepared by the bank
describing the activities in a depositor’s account. Deposits in transit and outstanding checks are
adjustments in the unadjusted bank balance. Credit and debit memoranda are adjustments in the
unadjusted book balance.

Module 016 Business Taxation Business, specifically corporations, are run by businessmen. However,
accounting for the income of the business is not the same as accounting of the income of the employees
in the organization. This module shall focus on the accounting for the taxes of the business.At the end of
this module, you will be able to: 1. Identify the different types of Business taxation. 2. Be familiar with
common forms used in BIR. Business Taxation There are three business taxes: (1) Value-added Tax also
known as Vat, (2) Percentage Tax, and (3) Excise Tax. VAT is the most common type of business tax as
you always pay for it – when you eat in a restaurant, watch a movie, or buy a gadget. It is because
indirect business tax imposed on every (i) sale, barter, or exchange of goods, (ii) sale of services, (iii)
lease of goods or commodities in the normal course of trade or business and (iv) importation. In
accounting, VAT is also a common transaction. Let’s look at this example: Under VAT, there is the input
and output taxes. Input tax is the tax shouldered by the buyer whenpurchasing the goods while output
tax is the one recorded by the seller upon the sale of the good or service. Take the case of Zosee Jewelry
Shop. If Zosee sells each bracelet for P10, 000, an additional 12% should be added on the selling price to
include her output tax. Thus, the P10, 000selling price is what we call VAT-exclusive(which means no
VAT is factored in the price yet) while P11,200 (12% VAT of 1,200) selling price is known as VAT-
inclusive, meaning, VAT is already includedin the selling price. If Zosee sells to Madam Lenie, a jewelry
retailer, the P10,000 worth of jewelry for cash VAT-exclusive, theirentries shall be Seller Buyer Cash
11,200 Inventory 10,000 Sales 10,000 Input Tax 1,200 Output Tax 1,200 Cash 11,200 Percentage taxes
are almost the same as VAT in such a way that just like the latter, percentage taxes are imposed on the
privilege to sell products and services. However, percentage taxes are applied only on certain businesses
and transactions, which are as follows: a. Tax on small business enterprises b. Tax on domestic carriers
and keepers of garage c. Tax on international carriers d. Tax on franchise grantees e. Overseas
communications tax f. Tax on banks and non-bank financial intermediaries performing quasibanking
functions g. Tax on other non-bank financial intermediaries h. Tax on life insurance companies and
agents of foreign insurance companies. i. Amusement taxes j. Sale, barter or exchange of shares of stock
Fundamentals of Accountancy, Business, and Management 2 Business Taxation 3 Course Module As
defined in the tax code, Excise tax are taxes imposed on certain specified goods or articles manufactured
or produced in the Philippines for domestic sale or consumption or for any other disposition and to
things imported into the Philippines (Sec. 129). Excise taxes imposed by the Tax Code are fixed levies
subjecting directly certain produce or goods to tax. They are, therefore, taxes on property. Generally,
goods subject to excise tax are also subject to VAT. Excise tax in the Philippines is also known as “sin tax”
as these are taxes imposed on “sinful” products or services, such as: a. Alcohol products b. Tobacco
products c. Petroleum products d. Mineral products e. Miscellaneous products (such as jewelry, precious
metals, perfumes and yachts, and imitations of all these) The computation of percentage taxes and
Excise taxes shall be discussed in higher accounting. The different BIR forms BIR Form 2306: Certificate
of Final Income Tax Withheld Fundamentals of Accountancy, Business, and Management 2 Business
Taxation 5 Course Module BIR Form 0605: Payment Form BIR Form 2307: Certificate of Creditable Tax
Withheld at Source Fundamentals of Accountancy, Business, and Management 2 Business Taxation 7
Course Module BIR Form 2316: Certificate of Compensation Payment / Tax Withheld For Compensation
Payment With or Without TAx Withheld Glossary Business taxes are taxes imposed on the earnings of
businesses deriving income in the country. VAT, also known as Value Added Tax, is the most common
business tax in the country set at 12%. VAT Inclusive: meaning, VAT is already included in the selling
price. VAT Exclusive: means no VAT is factored in the price yet

Module 016 Income Taxation The center of any business is its profit. They may sell their products or
render services depending on the type of their business. This applies to any organization even to our
government.At the end of this module, you will be able to: 1. Know the contents of the Philippine Tax
table. 2. Compute for an individual’s income tax. 3. Enumerate the different types of taxes. Computing
Income Tax The table below provides the updated computation of our income taxes incurred in the
Philippines. Personal deductions Before computing a taxpayer’s due, tax deductions such as amounts
paid to Pag-ibig, Philhealth, and SSS should first be removed from the total annual income. Additionally,
the corresponding personal exemption (see table below) should also be deducted to arrive at the
taxable income. Thus, if you are a married employee earning 500,000 annually with two children
(qualified dependents), with the following deductions: Philhealth – 9,000 SSS – 10,000 Pag-ibig -- 5,000
Fundamentals of Accountancy, Business, and Management 2 Income Taxation 3 Course Module Based
on the above computation, deductions and personal exemptions were deducted from the total income
of the individual to arrive at the total taxable income. The total taxable income becomes the basis of the
computation of tax (amounting to 401,000 pesos). Looking at the tax table, Php 401,000 is over Php
250,000 but not over Php 500,000. Thus, there is an initial tax due of Php 50,000 plus 30% of the
difference between Php 401,000 and Php 250,000, resulting to Php 151,000. This remaining amount is
multiplied by 30% to arrive at Php 45,300. The initial tax due of Php 50,000 plus the Php 45,300 is the
total tax due of this individual for the year amounting to Php 95,300. Deducting your tax due of Php
95,300 and compulsory payments of Php 24,000 from your total income of Php 500,000, your disposable
income or net income for the year is Php 380,700. Types of Taxes Tax has three different types
depending on who bear the burden of paying it and as to how it is structured. First of these types is
Income Tax. As defined by the Bureau of Internal Revenue, “Income Tax is a tax on a person's income,
emoluments, profits arising from property, practice of profession, conduct of trade or business or on the
pertinent items of gross income specified in the Tax Code of 1997 (Tax Code), as amended, less the
deductions and/or personal and additional exemptions, if any, authorized for such types of income, by
the Tax Code, as amended, or other special laws.” So income tax, needless to say, pertains to an
individual’s personal earnings. For computation purposes, income tax has its own tax table (check out
the last part of this chapter). The second type of tax, the Transfer tax is divided into two: (1) Donor’s Tax
and (2) Estate tax. Transfer taxes are imposed on properties or rights transferred by one entity to
another entity. Yes, the government taxes you for your right to transfer your ownership to another. If
you are still alive and you transfer or donate something to someone (other people call it gift), you pay
Donor’s tax. From the name itself, the one who donates would be the one to pay this by default. On the
other hand, if you transfer properties or ownership after your death, you – or rather, your beneficiaries
– shall pay your Estate tax. Beneficiaries are the recipients of the properties and rights that you shall
transfer upon death. They are also known as your heirs. The book will not discuss this in detail and
would cover only the fundamentals of income and business taxes. Last of these types would be Business
Taxes. Business taxes are those paid by entities that conduct business. Here is where percentage taxes,
corporate taxes, and Value-added taxes fall. Details of the computation, application, and payment of
business taxes are not discussed in this book. Fundamentals of Accountancy, Business, and Management
2 Income Taxation 5 Course Module Glossary Tax is the amount of required contributions from the
persons and property charged by the government to sustain the needs of its territory. The inherent
power to tax brought about by the government’s law is what we call taxation. Tax systems can either be
progressive, regressive, or proportional. Personal deductions and exemptions are removed from an
individual’s annual income tax in order to compute for his or her taxable income for the year.

Module 013Practice Set Practice makes perfect. This is a common adage in inspirational quotations and
movies. It is definitely true in accounting. In advancing your knowledge, practice set pertains to a higher
level of learning – understanding the Merchandising business of accounting. At the end of this module,
you will be able to: 1. Understand basic accounting in the Merchandising business. 2. Practice
journalizing and posting under the Merchandising business. Accounting in a Merchandising Business A
service business is one that offers services as its main income-generating activity. These include salons,
spas, and schools. The product that they offer are intangible and the inputs to produce them are
composed almost entirely of time, effort, and skills. On the other hand, both merchandising and
manufacturing businesses have tangible products, known to us as inventory. The difference between the
merchandising and manufacturing business is that the former buys and sells products and does not alter
it to produce a new one while the latter converts raw materials to finished goods. Examples of a
merchandising business include dealers of cars, retail shops, and sarisari stores. Additional concrete
examples are shoe retail shops that buy their ready-made shoes from Marikina, placed them on boxes
with their company names, and sell them to the public. A manufacturing business needs to alter
completely the materials they purchased before selling it to the public. The manufacturing business will
be discussed further on the next chapter. Transactions in a Merchandising Business Income generated
from a service business is known as service revenue or service income. These are rendered by the
company to its clients. Since the merchandising business has tangible products that it previously
purchased, income being generated by them has a corresponding cost. Income from a merchandising
business is entered in the journal entries as sales, which has a normal balance of credit (just like service
revenue) and is also closed to the capital account at the end of the accounting period. Periodic Inventory
System A merchandising business makes use of two different systems in accounting for their sales and
purchases. The periodic inventory system is the accounting for goods that require a physical count at the
end of the period. This is used by high volume businesses such as grocery stores. This is why we usually
see grocery staff conducting inventories; the staff records the number of sold and unsold products after
a given period, after this, a closing entry to determine the cost of goods sold or the ending inventory is
recorded in a periodic entry system. Purchases The purchases account is only seen in the periodic
inventory system. Debit is the normal balance of purchases (the same as inventory) since these are
assets that shall produce income for the benefit of the seller. Purchases, just like sales, have discounts.
Purchase discounts are discounts received by companies for the early payment of goods. Thus, there are
two things that need to be understood here: (a) purchase discounts are present on goods Fundamentals
of Accountancy, Business, and Management 2 Practice Set 3 Course Module purchased on
credit/account, and (b) the purpose for which they are granted is to elicit early payment. Another
account in the periodic inventory method is the purchase returns and allowances. These are almost the
same as sales discount and allowances but instead of being at the seller side, purchase discounts and
allowances are those that are recorded on the purchaser’s side. Freight When a company buys a
merchandised inventory, they may incur costs for transportation. This is known as freight in or
transportation in. This cost is capitalized and is included as part of the total cost of inventory purchased.
This should be differentiated from freight out or costs incurred in transporting inventory that are sold.
Freight out is not included in the cost of goods but are considered selling expenses, which are closed to
the income account at year end. If Degz Retail Shop purchases another set of inventory worth ₱20,000
on credit and pays the cost of transportation worth ₱1,500 the entry is an additional amount to
contribute to the total value of the asset.At the end of the accounting period, data on the total
purchases, purchase discounts, purchases returns and allowances, and freight in are gathered and are
combined with the results of the physical count of the goods (the assumed cost of ending inventory at
the end of the year). This information will help the company determine the value of the inventory that
was sold for the year also known as the cost of goods sold. An important thing to consider related to
freight transactions is the ownership of the goods while it is in transit. This will depend on the
understanding between the buyer and the seller. This can either be FOB Shipping point or FOB
destination. The term FOB shipping point means that the goods are already owned by the buyer from
the moment the goods leave the side of the seller (at shipping point). Therefore, if something happens
to the good while in transit (lost, damaged, etc.), such shall be borne by the buyer. FOB destination
retains the ownership with the seller until the goods reach the destination (the buyer). Therefore,
anything that happens on the goods while in transit shall still be the liability of the seller. Fundamentals
of Accountancy, Business, and Management 2 Practice Set 5 Course Module Glossary Merchandising
business:a type of business that sells inventory that it previously purchased. Periodic inventory system:
the accounting for goods that require a physical count at the end of the period. Purchases: inventories
bought and recorded using the periodic inventory system. Purchase discounts: is a deduction that may
be available to a buyer if the buyer pays as invoice within a prescribe time. Purchase returns and
allowances: refers to the amount of merchandise that were returned to suppliers and the amount
allowed as deductions by the suppliers for goods not returned. Freight in: costs for transporting a
purchased item, which are included in the value of the merchandise. Freight out: costs of transporting
an item sold, which are part of selling expenses.