FINANCIAL ACCOUNTING AND REPORTING  Accounting is playing a major role in the attainment

of the company’s goals and objectives

CHAPTER ONE: DEVELOPMENT AND BASIC  Accounting system generates the needed financial
CONCEPTS OF ACCOUNTING information for decision making

WHAT IS ACCOUNTING? USERS OF FINANCIAL INFORMATION

Accounting – is the process of identifying, measuring, and Primary Users – parties to whom general purpose financial
communicating economic information to permit informed reports are primarily directed
judgement and decision by users of the information
(American Accounting Association, AAA) a. Existing and potential investors – providers of risk
capital concerned with the risk inherent in and return
Three Important Activities in the Accounting Process provided by their investments
 Identifying – recognition and non-recognition of b. Lenders and other creditors – interested in the
business activities as accountable expenses information that enables them to determine whether
- Involves the analysis of transactions before their loans as well as related interest can be collected
they can be recorded in the books of by them when due
accounts
- Analytical component of accounting Other Users – users of financial information other than the
primary users
 Measuring – assigning monetary amounts to the
accountable economic transactions and events a. Employees – interested in information about the
- Technical component of accounting stability and profitability of their employers
- Unit of measure is usually the currency of a
country b. Customers – interested in the continuance of the
- Historical cost (common measure of enterprise, especially when they have long-term
financial transactions) and current value involvement or dependent on the enterprise

 Communicating – preparation and distribution of c. Governments and their agencies – need information
accounting reports to potential users of accounting to regulate the activities of the enterprise and
information determine appropriate policies
- Formal component of accounting
- Through this, accounting is considered as the d. Public – providing information about the trends and
language of business range of activities of organizations

Accounting – art of recording, classifying, summarizing, in a Business Organizations

significant manner and in terms of money, transactions and 1. Sole Proprietorship – simplest form of business
events which are in part, at least, of a financial character, and organization
interpreting the results thereof (Committee on Accounting - Owned by one person and may be solely
Technology of the American Institute of Certified Public financed by the owner or may be partially
Accountants, AICPA) financed by a creditor
- Dependent on the will of one person
Four Mechanical Phases - Unlimited liability
1. Recording – journalizing, routine and mechanical - Term of existence: dependent on the will or
process of committing to writing business life of the owner
transactions and events on the books of accounts in - No requirement by SEC/CDA
chronological order
2. Partnership – formed by two or more person who
2. Classifying – sorting or grouping of similar items agreed to contribute money, property, or industry into
into their respective kinds a common fund (Art 1767 of the New Civil Code)
- Process of posting the information from - Created by mere agreement of the partners
journal to ledger - Unlimited liability
- Term of existence: dependent on the life set
3. Summarizing – determination of the balances of by the partners, the will or life of partners
each account in the ledger and the preparation of - Articles of Co-Partnership – requirement
financial statements (Income Statement, Statement by the SEC/CDA
of Financial Position, Statement of Changes in
Equity, and Statement of Cash Flows) 3. Corporation – an artificial being created by
operation of law having the right of succession and
4. Interpreting – analytical phase of accounting and the powers, attributes and properties expressly
involves giving meanings to the amounts, ratios, authorized by law or incidental to its existence (RA
trends, and other information derived from the 11323 – Revised Corporation Code of the
financial statements Philippines)
- Greater source of capital compared to the
Accounting – function is to provide quantitative information, sole proprietorship and the partnership
primarily financial in nature, about economic entities, that is - Limited liability
intended to be useful in making economic decision - Term of existence: perpetual existence,
(Philippine Accounting Standards Council, ASC) unless specified in the Articles of
Incorporation
VENETIAN APPROACH TO RECORD KEEPING
- Articles of Incorporation – requirement by
the SEC/CDA
Luca Pacioli – Father of Accounting and only described the
double entry bookkeeping in his book, “Summa de
4. Cooperative – autonomous and duly registered
Arithmetica, Geometria, Proportioni et Proportionalita”
association of persons, with a common bond of
interest, who have voluntarily joined together to
IMPORTANCE OF ACCOUNTING
achieve their social, economic, and cultural needs and
 aspirations by making equitable contributions to the d. National Association of Certified Public Accountants
capital required in Education (nACPAE)
- RA 9529 – Cooperative Code of the
Philippines 2008 ACCOUNTING PRINCIPLES
- Limited liability
- terms of existence: maximum life is 50 1. Cost principles – assets should be recorded initially
years and renewable for another 50 years for at original acquisition cost
any given instance 2. Liability recognition principle – a liability is
- Articles of Cooperation – requirement by recognized when it is probable that an outflow of
SEC/CDA resources embodying economic benefits will be
required for the settlement of a present obligation
BUSINESS FIRMS 3. Income recognition principle – income should be
recognized when earned rather than when cash is
1. Service concern – render services to clients received
2. Merchandising – derive their income from the sale 4. Matching Principle – all costs and expenses
of merchandise and concerned with the buying and incurred in earning revenue should be reported in the
selling of goods in the same form same period
3. Manufacturing – purchase raw materials, convert 5. Accrual – income is recognized when earned
them into finished products and sell these finished regardless of when received and expense is
products at a profit recognized when incurred regardless of when paid
4. Agriculture – concerned with the planning of crops
or raising animals, and selling of their products either ACCOUNTANCY PROFESSION
in raw or finished form at a profit  Accountancy is a noble and a prestigious profession
Three main areas of practice:
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP) 1. Public Accounting – accounting services on a fee
- Represent the rules, procedures, practice and basis
standards followed in the preparation and 2. Private Accounting – employed by a particular
presentation of financial statements business firm or not-for-profit organizations
- Securities and Exchange Commission (SEC), 3. Government Accounting - ;large number of
Financial Executives of the Philippines (FINEX), accountants are employed by the Commission of
Bangko Sentral ng Pilipinas (BSP), Board of Audit, Bureau of Internal Revenue, Local
Accountancy (BOA) Government Unit or National Government
- Conventional in the sense that these principles
have been developed on the basis of experience, CERTIFIED PUBLIC ACCOUNTANTS AND THE
reason and practical necessity BOARD EXAMINATIONS

FINANCIAL REPORTING STANDARD COUNCIL CPA – a person who holds a valid Certificate of Registration
(FRSC) and a valid Professional Identification Card issued by the
- Replaced Accounting Standards Council Commission upon recommendation by the Board to those who
(ASC) as the accounting standard setting body have satisfactory complied with all the legal and professional
- Function to establish and improve accounting requirement for such issuance (Philippine Accountancy Act
of 2004)
standards that will generally accepted in the
Philippines - General average of seventy-five (75%) and a
- Issues standards in a series of pronouncements: rating of at least sixty-five percent (65%)
Philippine Financial Reporting Standards
BASIC PROFESSIONAL VALUES AND ETHICS
(PFRS) and Philippine Accounting Standards
(PAS)
1. Integrity – accountant should be straightforward and
 Composed of 15 members
honest in performing professional service
1. Chairman
2. Board of Accountancy
2. Objectivity – accountant should not allow bias,
3. Securities and Exchange Commission
conflict of interest or undue influence of others to
4. Bangko Sentral ng Pilipinas
override professional or business judgments
5. Bureau of Internal Revenue
6. Commission on Audit
3. Profession Competence or Due Care – accountant
7. Major organization of preparers and users of
has a continuing duty to maintain professional
financial statements
knowledge and skill at the level required to ensure
8. Public practice (2)
that a client or employer receives competent
9. Commerce and Industry (2)
professional service
10. Academe and Education (2)
11. Government (2)
4. Confidentiality – accountant should respect the
confidentiality of information acquired as a result of
INTERNATIONAL ACCOUNTING STANDARDS
professional and business relationships and should
BOARD (IASB)
not disclose any such information to third parties
- Replaced the International Accounting Standards
without proper and specific authority
Committee (IASC)
- Adopted the body of standards issued by the 5. Professional Behavior – accountant should comply
Internal Accounting Standards Council with relevant laws and regulations and should avoid
anu action that discredits the profession
Philippine Institute of Certified Public Accountants
(PICPA) SPECILIZED ACCOUNTING FIELDS
a. Association of Certified Public Accountants in Public
Practice (ACPAPP) 1. General or Financial Accounting – recording of
b. Government Association of Certified Public transactions for an economic unit and the periodic
Accountants (GACPA) preparation of reports
c. Association of Certified Public Accountants in
Commerce and Industry (ACPACI)
 2. Auditing – involving an independent review of the 3. Monetary unit – requires entities to include in their
accounting records and examination of financial accounting records only transaction data that can be
statements by an independent CPA for purposes of measured in terms of money
expressing an opinion as to the fairness with which
the financial statements are prepared 4. Time period or periodicity – concept behind the
preparation of financial statements for a specified
3. Management Advisory Services or Management time period
Accounting a. Calendar year – twelve-month period that starts
- Management Advisory Services – refer to January 1 and ends December 31
services to clients on matters of accounting, b. Fiscal year – twelve-month period that starts at any
finance, business policies, procedures, and month of the year
administration and many other phases of
business operations
- Management Accounting – application of
appropriate techniques and concepts in
processing the historical and projected economic
data or an entity to assist management

4. Tax Accounting – preparation of tax returns and

determination of tax consequences of certain
proposed business transactions

5. Accounting System – design and the implementation

of procedures for the accumulation of financial data

6. Government Accounting – principles and

procedures associated with accounting for the
national and local government

7. Accounting Education or Instruction – education

of students of accounting principles, methods and
their applications

8. Cost Accounting – emphasizes the determination

and control of costs particularly in manufacturing
companies

ACCOUNTING VS AUDITING
 Accounting is constructive in nature and involves
the preparation and presentation of financial
statements using the generally accepted accounting
principles as bases
 Auditing is analytical and involves the examination
of financial statements to ascertain their conformity
with the generally accepted accounting principles and
the expression of an opinion as to the fairness of the
presentation of financial statements

[The work of an auditor starts when the work of an

accountants ends]

ACCOUNTING VS BOOKKEEPING

Bookkeeping – systematic and chronological recording of

business transactions and events (recording phase of
accounting)

ACCOUNTING ASSUMPTIONS OR POSTULATES

- Basic notions or fundamental premises on which
the accounting process is based
- Foundation or bedrock of accounting in order to
enhance understanding and usefulness of the
financial statements

1. Going concern or continuity – continuing in

operation indefinitely and assumed that the business
is going to operate for an indefinite period of time
- Assets are normally recorded at cost

2. Economic Entity or Accounting Entity – business

is treated as a separate entity from that of its owners,
managers, and employees who constitute the firm
- Business is considered as an accounting entity
and is therefore considered as a unit separate and
distinct from that of its owners
CHAPTER 2: BUSINESS TRANSACTIONS AND THE d. The entity expects to realize the asset or intends to
RELATED ACCOUNTING VALUES OR ELEMENTS sell or consume it within the entity’s normal
operating cycle
 An enterprise performs various activities in order to
earn profit Operating Cycle – time between acquisition of assets for
processing and their realization in cash or cash equivalents
Business Activities/Transactions – economic activities that
are accountable and involves the exchange of monetary values Operating Cycle of a Trading enterprise – average period of
between two or more parties time that it takes for an enterprise to acquire the merchandise
- should be authenticated by genuine business inventory, sell the inventory to customers and ultimately
forms like sales, invoices, purchase invoice and collect cash from sale
official receipts
 Entity shall present current and noncurrent assets and
 For every value received, there is a corresponding current and noncurrent liabilities as separate
value parted classifications in the statement of financial position

Value – expression of monetary worth applied to a particular  Entity shall present all assets and liabilities in the
asset, group of assets, business entity, or services rendered order of liquidity when such presentation provide
information that is faithfully represented and more
1. External transactions – are economic events relevant because such entity does not supply goods or
involving the enterprise and other entities and involve services within a clearly identifiable operating cycle
transfer of resources or obligation to or from the
entities 1. Cash – currency or cash items on hand

2. Internal transactions – economic events in which 2. Cash Equivalent – short term highly liquid
only the enterprise participates investments that are readily convertible to known
a. Production – process by which resources amounts of cash and so near their maturity
are combined or transformed into products
b. Casualties – sudden substantial, 3. Trading Securities – investments which are readily
unanticipated reduction in enterprise marketable and represent temporary investments of
resources not caused by other entities funds available for current operations and intended to
meet working capital requirements
ACCOUNTING ELEMENTS
- Quantitative information reported in the 4. Accounts Receivable – open accounts or those that
statement of financial position and financial are not supported by promissory note
performance
5. Allowance for doubtful accounts – contra asset
Assets, Liabilities, and Equity – elements directly related to account and is provided for possible losses from
the measurement of financial position uncollected accounts
 Real Accounts (permanent accounts) – their
usefulness continues throughout the life of the 6. Notes Receivable – amount collectible are evidenced
business and their year-end balances are forwarded to by a promissory note
the next accounting period
7. Merchandise inventory or inventory – goods held
Income and Expenses – elements directly related to the for sale by trading concern
measurement of financial performance
 Nominal Accounts (temporary accounts) – 8. Finished goods in process, raw materials and
usefulness is limited to the year when they are factory or manufacturing supplies – inventories
incurred and year-end balance are closed and not held by manufacturing firms
forwarded to the next accounting period
9. Prepaid rent – rent paid in advance
ASSETS
- Properties or rights on properties owned by the 10. Prepaid insurance – insurance paid in advance
business
- Present economic resource controlled by the 11. Unused supplies – stationary and other supplies
entity as a result of past events (Revised purchased for use and are still unused
Conceptual Framework)
Characteristics of an Asset II. Non-Current Assets – all other assets except current
a. The asset is a present economic resource assets
b. The economic resource is a right that has the A. Property, Plant and Equipment or Fixed Assets
potential the produce economic benefits - Tangible assets which are held by the enterprise
c. The economic resource is controlled by the entity as a in production or supply of goods of services
result of past events (PAS No.16)

I. Current Assets 1. Land – piece of lot or real estate used by the

Under revised PAS 1, asset shall classify as current when it business
satisfies the following:
2. Building – structure or a building owned or
a. The asset is cash or cash equivalent unless the asset controlled
is restricted from being exchanged or used to settle a
liability for at least twelve months after the reporting 3. Office Equipment
period
b. The entity holds the asset primarily for the purpose 4. Store Equipment
of trading
c. The entity expects to realize the asset within twelve 5. Delivery Equipment
months after the reporting period
6. Machineries
 7. Furniture and fixtures 3. Accrued expenses – expenses incurred but not yet
paid
8. Accumulated Depreciation – contra account to
accumulate expired cost of fixed assets 4. Interest payable – unpaid interest on borrowings

B. Long-term investments 5. Salaries payable – services rendered by employees

but still unpaid
Investments – assets are held by an enterprise for the
accretion of wealth through capital distribution for capital 6. Bank loans payable – obligations due to banks for
appreciation or for other benefits to the investing enterprise loans obtained

Current Investments – readily realizable and is intended to 7. Deferred revenue – income received but not yet
be held for not more than one year earned

Long-term investment – intended to be held for more than 8. SSS premiums payable – amount due and payable
one year by the enterprise to SSS

C. Intangibles – identifiable non-monetary assets 9. Philhealth premium payable – amount due and
without physical substance payable by the enterprise to PHIC

1. Copyright – right granted to authors, 10. Withholding tax payable – amount due and payable
composers, playwrights, artists, publishers, or by the enterprise to BIR
distributors to publish and dispose of their
works for a limited time II. Non-Current Liabilities – all liabilities that do not
fit into the definition of current liabilities
2. Franchise – rights granted to operate a utility or
to manufacture or to market a product of another 1. Mortgage payable – economic obligations secured
company by collateral

3. Patent – right granted to an inventor to 2. Notes payable – debts supported by notes and
manufacture or produce his inventions or payable beyond one year
products
3. Deferred revenue – income received in advance but
4. Trademark or Brand name – symbol, sign, not yet earned
slogan or name used to mark a product or to
distinguish it from other products

5. Computer softwares, fishing rights, leasehold EQUITIES

rights - Represents residual interest in the assets of the
enterprise after deducting all liabilities
Goodwill – unidentifiable intangible assets - a.k.a net assets or net worth

D. Other Non-Current Assets – assets that do not fit in 1. Owner’s capital – capital contribution of the owner
into the definition of the above mentioned non- made at the formation of the business or subsequent
current assets thereto

LIABILITIES 2. Owner’s drawing – recording the withdrawal of

- Debts or obligations of the business capital by the owner
- Defined as the present obligation of an entity to
transfer an economic resource as a result of past INCOME
events - Earnings of the enterprise
- Sales of merchandise, income due to
Characteristics of a Liability performance of services or other type of income
a. The entity has an obligation realized in the operations of the business
b. The obligation is to transfer an economic resource - Increases in assets or decreases in liabilities that
c. The obligation is a present obligation that exists as a results in increase in equity, other than those
result of past events relating to contributions from equity holders

I. Current Liabilities Revenue – arises in the ordinary regular activities of the

A liability shall be classified as current when it satisfies any of enterprise
the following criteria:
Gain – income that do not arise in the course of the ordinary
a. The entity expects to settle the liability within the regular activities
entity’s normal operating cycle
b. The entity holds the liability primarily for the purpose Income Accounts:
of trading
c. The liability is due to be settled within twelve months 1. Service Income – charges to clients or customers for
after the reporting period services rendered
d. The entity does not have an unconditional right to
defer settlement of the liability for at least twelve 2. Professional income or professional fees – charges
months after the reporting period to clients by professionals for services rendered

1. Accounts payable – amounts due to suppliers for the 3. Rent Income – charges for the use of assets like
purchase of goods or services on credit equipment and spaces in building

2. Notes payable – amount due to other parties when it 4. Repair Income – charges to customers for repair
is evidenced by a promissory note services rendered
 5. Laundry Income – chargers to customers for 5. Transportation Expense – paid for services of
laundry services rendered conveyance or means of transportation of goods and
services
6. Transportation income or fares earned – chargers
to passengers for transportation services rendered 6. Taxes and licenses – amount of taxes and other
licenses paid to the government
7. Ticket Sales – amount of tickets sold to watchers of
games, shows or movies 7. Depreciation Expense – portion of the cost of a
fixed asset that is charged or allocated as expense for
8. Miscellaneous Income – income coming from other the period
sources which is not the main line of business and
could not be clearly identified 8. Insurance Expense – premiums on insurance
policies
For the merchandising firm, the account titles are:
9. Supplies Expense – the amount of supplies used
1. Sales – income from the sale of merchandise
10. Utilities Expense – cost of light and water consumed
2. Sales returns – deduction from sales due to by the business
merchandise returned by customers
11. Representation and Entertainment – value placed
3. Sales allowances – deductions from selling price of on activities that will promote goodwill and increase
goods with defects or goods sent to customers but not customers’ patronage
as ordered
12. Postage and Entertainment – amount paid for
4. Sales discount – deductions from the selling price postage, telephone and other forms of communication
due to payments of the customers within the discount
period 13. SSS Premiums – contributions of employer to the
Social Security System
EXPENSES
- Costs of the merchandise bought and sold and 14. Miscellaneous Expense – small amount paid for
other spendings incident to the operations of the items or services which do not fall under the above
business will normally reduce income accounts
- Decrease in assets or increase in liabilities that
results in decreases in equity, other than those
relating to distributions to equity holders

Losses – expense do not arise in the ordinary regular activities

and losses from disasters

Cost Accounts – represent the value of the goods sold

1. Purchases – original acquisition price of the goods

for resale

2. Purchase returns – cost of the goods purchased but

returned to suppliers because they are either
damaged, defective, or unacceptable

3. Purchase allowances – reduction in the cost of

defected or damaged goods bought but nor returned
to the supplier

4. Purchase returns and allowances – used for

purchases returns and purchase allowance

5. Purchase discounts – reduction in the amount to be

paid to the supplier due to payment within the
discount period

6. Freight-in – cost of transporting goods purchased

from the suppliers to the store or the warehouse of the
business

Expense Accounts other than cost accounts:

1. Salaries and Wages – value of services rendered by

employees and laborers

2. Advertising Expense – advertising and promotional

expenses

3. Rent Expense – amount paid or incurred for the use

of properties

4. Repairs and Maintenance – paid to maintain

company assets
 CHAPTER 3: THE ACCOUNTING EQUATION, 7. Paid 50% of the liability
THEORY OF DEBITS AND CREDITS AND 8. Withdrew cash for personal use, P5,000
FINANCIAL STATEMENTS 9. Issued promissory note for the liability on account

THE ACCOUNTING EQUATION Assets Liabilities Equity

- Relationship between assets and equities Cash Equip. Off. A/P N/P WC,
- Assets are properties owned or controlled by the Sup. Cap.
business 100,000 100,000
- Equities are rights or claims against the assets 50,000 50,000
(25,000) 25,000
ASSETS = EQUITIES
2,000 2,000
Equities divided into two types: 25,000 25,000
1) Liabilities – equity of creditors (3,000) (3,000)
2) Capital or owner’s equity – the equity of the owner (1,000) (1,000)
ASSETS = LIABILITIES + OWNER’S EQUITY (5,000) (5,000)
(1,000) 1,000
Owner’s equity or capital is the excess of total assets over 141,000 25,000 2,000 - 1,000 167,000
total liabilities 168,000 168,000

ASSETS – LIABILITIES = OWNERS EQUITY Transactions:

1. Increase in asset = increase in owner’s equity
TRANSACTIONS AND THEIR EFFECTS ON THE 2. Increase in asset = increase in owner’s equity
ACCOUNTING EQUATION 3. Decrease in asset = increase in another form of asset
4. Increase in asset = increase in liabilities
1. Increase in assets accompanied by an increase in 5. Increase in asset = increase in owner’s equity
owner’s equity: (income)
a. Original investment and additional investment 6. Decrease in asset = decrease in owner’s equity
b. Receipt in income (expenses)
7. Decrease in asset = decrease in liabilities
2. Increase in assets accompanied by increase in 8. Decrease in asset = increase in withdrawal
liabilities 9. Increase in asset = decrease in another form of
liabilities
3. Decrease in asset because of a decrease (payment)
of liabilities THE THEORY OF DEBITS AND CREDITS
- Theory to facilitate the recording of the effects of the
4. Decrease in asset because of a decrease in owner’s transactions on the accounting equation has been
equity as: developed
a. Withdrawal by owner
b. Expenses paid or incurred Account – accounting device used in summarizing the
changes in the assets, liabilities, revenue and expenses due to
5. Increase in one asset with a corresponding decrease the occurrence of business transactions
in another asset account
T-Account – simplest form of account
6. Increase in one liability account with a
corresponding decrease in another liability account Assets = Liabilities + Owner’s Equity
Debits = Credits
7. Increase in liability accompanied by a decrease in Value received (debits) = Value parted (credits)
owner’s equity
Double-entry bookkeeping – minimum of two accounts are
8. Decrease in liability accompanied by an increase in affected in every business transaction and the sum of the
owner’s equity debits is always equal to the sum of the credits

9. Increase in some forms of owner’s equity accounts

accomplished by a decrease in other forms of
owner’s equity accounts

EXPANDED ACCOUNTING EQUATION

Assets = Liabilities + [Original Investment + Additional

Investment + (Income – Expenses) – Withdrawal]

The capital account is affected by the following:

a. Capital originally invested – increase owner’s equity

b. Additional investment – increase owner’s equity
c. Withdrawal – decrease in owner’s equity
d. Revenue or income – increase in owner’s equity
e. Expenses – decrease owner’s equity

1. Will Cruz established “Will TV Repairs” with an

investment of P100,000
2. Will Cruz invested additional investment of P50,000 cash
3. Purchased equipment (cash basis) worth P25,000
4. Purchased office supplies on account P2,000
5. Received P25,000 for repairing television sets
6. Paid electricity, P3,000
 Statement of Financial Position
ACCOUNT NORMAL DEBIT CREDIT - Formal statement showing the financial position
BALANCE of an enterprise as of a particular date
Asset debit increase decrease - Called Balance Sheet, Statement of Assets,
Liability credit decrease increase Liabilities, and Equity and Statement of
OE or credit decrease increase Financial Condition
Capital Liquidity – ability of the company to meet currently maturing
Drawing debit increase decrease obligations
Income credit decrease increase Solvency – availability of cash over the longer term to meet
Expenses debit increase decrease maturing obligations
Financial structure – how much is the equity of the creditors
 Business transactions are analyzed on the viewpoint and how much is the equity of the owners
of the business
Statement of Cash Flows
FINANCIAL STATEMENTS - Shows the sources and uses of cash of an entity
- End results of the accounting process for a given period of time
- Shows the net increase or decrease in cash during
Old Term New Term the period and the cash balance at the end of the
Balance sheet Statement of Financial period
Position a. Operating activities – sources or inflows, and uses
Income Statement Income Statement/Statement or outflows of cash and cash equivalents from the
of Comprehensive Income normal operating activities of the enterprise
Statement of Changes in Statement of Changes in - Principal revenue producing activities,
Equity Equity collections from customers or rentals, payments
Cash Flows Statement Statement of Cash Flows of purchases and expenses
Notes, compromising a Notes, compromising a
b. Investing activities – cash flows derived from the
summary of significant summary of significant
acquisition and disposal of long-term assets and other
accounting policies and accounting policies and
investments not included in cash equivalent
other explanatory notes other explanatory notes
- Cash receipts and cash disbursements (non-
operating assets)
Income Statement
- Statement of Operations or Statement of Income
c. Financing activities – cash flows derived from the
and Expenses
equity capital and borrowings of the enterprise
- Formal expenses showing the performance of an
- Result from transactions between the enterprise
entity for a period of time
and its owners (equity financing) and between
- Presents income, expenses, gains, losses and
the enterprise and its creditors (debt financing)
profit or loss during the period
- Involve non-trade liabilities and equity of an
- Shows whether the business is earning, losing, or
enterprise
breakeven
Notes to Financial Statements
Total Income – Total Expenses = Profit or loss for the period
- Footnotes are used to report information that
could not fit in into the body of the statements
Net Income: total income greater than total expenses
but are necessary to enhance the
Net Loss: total expenses greater than total income
understandability of these statements
Breakeven: total income equal total expenses
a.) Statement of compliance with PFRS
b.) Statement of significant accounting policies used
The period covered may be presented as:
c.) Supporting information or computation of line items
presented and aggregated in the financial statements
a. One year period
d.) And other disclosures such as contingent liabilities,
- For the year ended December 31, 2020
unrecognized contractual commitments and
- Year ended December 31, 2020 nonfinancial disclosures
- For the fiscal year ended May 31, 2020

b. For a period of less than one year

- For the month ended January 31, 2020
- For the three months ended March 31, 2020 QUALITATIVE CHARACTERISTICS OF FINANCIAL
INFORMATION
Statement of Comprehensive Income
- Formal statement showing the changes in equity A. Fundamental Qualitative Characteristics – relate to
during a period resulting from transactions and the content or substance of financial information
other events, other than changes resulting from
transactions with owners in their capacity as  Relevance – capacity of information to make a
owners difference in a decision by helping users form
prediction
Statement of Changes in Equity - Affected by its nature and materiality
- Summarizes the changes in equity for a given
period of time
a. Predictive value – it can help users predict or
 Sole proprietorship: the beginning equity of the
forecasts outcome of events
owner is increased by additional investment and net
income or profit and is decreased by withdrawal and
b. Feedback value – enables users to confirm or
loss
correct earlier expectations
 Partnership: similar to sole proprietorship but there
are many capital accounts and drawing accounts as
 Faithful representation – actual effects of the
there are partners
transactions are properly accounted for and reported
 Corporation: involves changes in share capital, in the financial statements
reserves, retained earnings, and treasury shares
 a. Completeness
b. Neutrality
c. Free from errors

B. Enhancing Qualitative Characteristics – relate to

presentation or form of the financial information

 Comparability
 Understandability
 Verifiability
 Timeliness

FINANCIAL STATEMENTS AND THEIR

RELATIONSHIPS

 Financial statements are interrelated. Income

statement shows the results of operation for the
period. The final amount in this statement which
could either be profit or loss is reported in the
Statement of Changes in Equity and in the Statement
of Cash Flows when the indirect method for the
computation of cash flows
CHAPTER 4: ACCOUNTING CYCLE FOR A SERVICE - List of all accounts with open balances in the
COMPANY general ledger
- Proves the equality of the debit and credit in the
Accounting cycle – sequence of operations used to account general ledger but does not check or vouch the
business transactions during a specific period accuracy of the report

11 Steps in the Accounting Cycle Significance of the Trial Balance

1. Analysis of transactions 1. Error in preparing the trial balance
2. Recording of transactions in the journal 2. Error in determining the account balances
3. Posting of journal entries to the ledger 3. Error in recording a transaction in the ledger
4. Preparation of trial balance
5. Compilation of data needed to adjust the accounts Transposition – interchange in the order of digits of a number
6. Preparation of a work sheet or an erroneous rearrangement of digits
7. Preparation of financial statements
8. Journalizing and posting of adjustment entries Transplacement or slide – the entire number is erroneously
9. Journalizing and posting of closing entries moved one or more spaces to the right or to the left
10. Preparation of post-closing trial balance
11. Journalizing and posting of reversing entries

ANALYSIS OF TRANSACTIONS

Transactions – evidenced by business documents and are

analyzed using the rules of the debit and credit

THE JOURNAL
- Accounting book wherein business transactions
are recorded for the first time
- Called the book of original entry

(purchases journal, sales journal, cash receipts journal, cash

payments journal)

General journal – simplest form of journal has only two

money columns and may be used for recording all transactions
in chronological order

Journalizing – process of recording transactions in a journal

Journal entry – record of the transaction or event

Two types of journal entries:
1. Simple entry – one debit, one credit
2. Compound entry which contains
a. One debit and two credits
b. Two more debits and one credit
c. Two or more debits and two or more credits

Advantages of the Journal

1. Complete record of transactions is provided in one
place
2. A chronological order of transactions and events
3. Explanation given to each journal entry permits the
omission of repetitive explanation in the ledger
4. Easy check on the proper implementation of rules of
debits and credits
5. Journal facilitates the discovery of errors

THE LEDGER
- Group of related accounts
- Called the book of final entry
Two-column account – used under manual accounting system
Three-column account – used under the computer-based
system

Posting – process of transferring to the ledger the same

information recorded in the journal
 No fixed rule of procedure in posting, it is well to
bear in mind that to minimize error, any procedure
selected should be followed consistently
CHART OF ACCOUNTS
- List of accounts titles classified or arranged
according to the financial statements wherein
they appear
- Agree with the order of the items in the
statement of financial position and income
statement

TRIAL BALANCE
CHAPTER 5: THE ADJUSTMENT PROCESS - used to accumulate the total past depreciation on
a specific long-lived asset
Adjusting entries – entries made at the end of the accounting - represents a balance that is subtracted from the
period to update or correct the accounts in order to portray balance of an associated account
realistic financial statements
- Need at least one statement of financial position Contra Account is used for two very good reasons:
account entry and one income statement account 1.) recognizes depreciation is an estimate
entry 2.) preserves the fact of the original cost of the asset and
shows how much of the asset has been allocated to
Deferral – postponement of the recognition of an expense expense as well as the balance left to be depreciated
already paid or of a revenue already received
Two cases of deferral: Net book value or carrying amount – difference between the
a. Costs recorded that must be apportioned between cost of fixed assets and the related accumulated depreciation
two or more accounting periods
b. Revenues recorded that must be apportioned Apportioning Recorded Revenues Between Two or More
between two or more accounting periods Accounting Periods

Accrual – recognition of an expense that has been incurred Unearned or Deferred Revenue – payment for revenue
but not yet paid or revenue that has been earned but not yet received in advance
collected - liability account
a. Unrecorded revenues - adjusting entry needed is to transfer unearned
b. Unrecorded expenses revenue to earned revenue

DEFERRALS Two methods of recording unearned revenue:

Apportioning Recorded Costs Between Two or More A. Liability method – amount of adjusting entry is the
Accounting Periods earned portion of the amount initially received
- a liability account is used to record the
 Most important kinds of adjustments are prepaid amount in advance
expenses and depreciation of plant and equipment B. Revenue method – the amount of the adjusting entry
is the unearned portion of the amount initially
Prepaid Expenses received
- Expenses are paid in advance and not yet - revenue account is used
incurred but already paid
 Expense of the period: part of the expenditure that has On March 1, 2021, the company received P48,000 as advance
benefited current operations payment for a two-year rental of an office space
 Asset: part not consumed or expired Date Description Debit Credit
2021 LIABILITY
Two methods of recording prepaid expenses: METHOD
A. Asset method – debited for the advance payment of March 1 Cash 48,000
expenses Unearned Rent 48,000
- The amount of the adjusting journal entry is
the expired or used up portion of the amount
initially paid Dec 31 Unearned Rent 20,000
B. Expense method – expense account is used Rent Income 20,000
- the amount of the adjusting journal entry is the
unexpired or unused portion of the amount Date Description Debit Credit
initially paid 2021 INCOME METHOD
On June 1, 2021, the company paid P30,000 for a two-year March 1 Cash 48,000
insurance premium Rental Income 48,000
Date Description Debit Credit
2021 ASSET METHOD Dec 31 Rental Income 28,000
June 1 Prepaid Insurance 30,000 Unearned Rent 28,000
Cash 30,000
ACCRUALS
Dec 31 Insurance Expense 8,750 Unrecorded or accrued revenues
- revenues for which the services have been
Prepaid Insurance 8,750
performed or the goods delivered but for which
no entry has been recorded in the account since
Date Description Debit Credit no payment has been received yet
2021 EXPENSE
METHOD On December 1, 2020, the company received a 90-day, 6%
June 1 Insurance Expense 30,000 note in the amount P90,000. The adjusting entry on December
Cash 30,000 31, 2020 would be:

Interest Receivable 450

Dec 31 Prepaid Insurance 21,250
Interest Revenue 450
Insurance Expense 21,250 (Interest = P90,000 x 6% x 30/360 = P450)

Depreciation of Plant and Equipment Unrecorded or accrued expenses

- requires the allocation of the cost of the asset - expenses that have been incurred but not
over its estimated useful life recorded in the account since payment has not
Depreciation or depreciation expense – amount allocated to been made yet
any one accounting period - as the expense and the corresponding liability
accumulate, they are said to accrue
Accumulated Depreciation – A Contra Account
Provision for Doubtful Accounts
Bad debts expense/doubtful accounts – uncollectible
accounts
- reduces the amount of accounts of accounts
receivable but instead of crediting accounts
receivable, we credit allowance for doubtful
accounts or allowance for bad debts (contra
asset account)

Net Realizable Value or Carrying Amount – difference

between the accounts receivable and the allowance for bad
debts