Fundamentals of Accounting

First Semester Midterms Reviewer

Transcript By: Justin Lloyd Laxamana
Note: This reviewer only contains theories and • Starting January 2018 – 2.75% of
explanations. Thus, problem example and explanations
on how to solve it is not included…
monthly salary with a floor of Php.
10,000 and ceiling of Php. 40,000
LESSON 6: PAYROLL ACCOUNTING AND • Equally shared by employee and
OTHER SELECTED TRANSACTION employer

Payroll Withholding Tax

• Compensation paid to employees • The basis for the amount to be

and workers withheld for income tax purposes.
• A tabular form prepared by the
Employer Contributions
Accounting Dept. to determine how
much salaries and wages are to be • Treatment of the employer's share in
paid to employees and workers. SSS (Social Security System), EC
(Employees' Compensation), NHIP
Gross Pay
(National Health Insurance Program),
• Represents the total compensation and HDMF (Home Development
earned by an employee or worker Mutual Fund) contributions.
for a certain period of time.
Other Deduction
Salaries
• Union Dues
• Monthly or semi-monthly rate • Advances

Wages Other Terms

• Daily Rate • Cash on Hand and Cash in Bank

• Hourly Rate • Investment of Owner
• Piece Rate Investment in property with an
attached liability.
Deduction from Gross Pay
Investing of an already existing
• Income tax business.
• Social Security (SSS) • Drawing of Owner
• Health Insurance (PhilHealth) Withdrawal of property (Cost
• Home Development Mutual Fund less accumulated
(PagIbig) Depreciation)
• Membership dues • Acquisition cost of Properties
Cost or Exchanged price +
Income Tax
incidental Expenses (Capital
• Based on Earnings expenditures)
• Tax table based on TRIAL Law • Sale of Properties
(Effective January 2018 – December Close the asset at its cost price
2023) Close the related
accumulated depreciation
Social Security
Compare cash proceeds
• 14% of monthly salary not exceeding Record Gain or Loss on Sale
Php. 20,000.00 • Promissory Notes
• Shared by employers (9.5%) and Non-Interest-Bearing note
employee (4.5%) Interest Bearing Note

PhilHealth

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 Fundamentals of Accounting
First Semester Midterms Reviewer
Transcript By: Justin Lloyd Laxamana
Determining Due Date Internal Control Procedure

No. of Days for November 30 • Internal control procedure for cash

transactions.
Less: Issue Date 2
Checking Account
Remaining Days for November 28
• A bank account withdrawal of
No. of Days for December 31
which is made through checks.
No. of Days for January 1
Fair Market Value
To make it total of 60
• Represents an amount for which an
asset could be sold or bought in its
Discounting The Note present condition.

• Interest is immediately deducted on Savings Account

the borrowed money • Account used for cash deposited in
• Computation a savings account.
➢ Face of the Note – Interest
(P × R × T ÷ 360) Historical Cost

Interest Fund System • A property invested by the owner is

recorded at this amount.
• All receipts are deposited
• Disbursements Book Value

Gain on Sale • Represents the unexpired cost or

remaining utility value of the asset.
• Increase in Cash Proceeds
• Decrease in Book Value Incidental Costs

Loss on Sale • Also known as incidental expenses

purchasing an asset.
• Decrease in Cash Proceeds
• Increase in Book Value Cash Discount

Cash Proceeds xxxx • A discount granted for prompt

payment.
Less: Book Value xxxx
Purchase Allowance
Gain/Loss on Sale xxxx
• A reduction in the purchase price
given to the buyer to cover defects
Cost of Asset xxxx or spoilage on the asset purchased
without returning the asset.
Less: Accumulated Depreciation xxxx
Gain or Losee on Sale of Asset
Book Value xxxx
• The difference between the selling
To Compute for Depreciation
price and the book value of an asset
• Straight Line Method being sold.

Formula: Cost of Asset - Salvage Value ÷ Non-Interest Bearing Note

Life in Years
• A note whose face value is the same
as its maturity value.

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 Fundamentals of Accounting
First Semester Midterms Reviewer
Transcript By: Justin Lloyd Laxamana
CHAPTER 7: Completing the Accrual Basis Accounting
Accounting Cycle for a Service Provider • Under accrual basis accounting,
revenues are recognized when
During the Accounting Period:
earned (regardless of whether cash
1. Gather the Documents has been received) and expenses
2. Analyze and Record are recognized when incurred
3. Post the Ledger (regardless of cash payment).
4. Prepare a Trial Balance

Matching Principle
End of the Accounting Period:
• The Matching Principle states that
5. Prepare a worksheet for adjustments expenses should be “matched”
and Financial Statements together with the income they
6. Journalize and Post the Adjusting produced in the same time period.
Entries
7. Prepare Financial Statements
8. Journalize and Post the Closing Adjustment
Entries
• Adjusting entries are required when
9. Journalize and Post the Closing
changes in certain accounts have
Entries
not been recorded in the
10. Prepare a Post Closing Trial Balance
accounting records.
• Adjustments are necessary for items
that have either been deferred or
Start of Succeeding Period:
accrued.
11. Journalize and Post the Revising
Entries
Reason for Adjustments

• It can be inefficient and costly to

Adjusting Entries
account for certain types of
• Adjusting Entries bring certain transactions on a daily basis.
account balances up to date at the
end of the accounting period.
• Entries used to update the accounts Characteristics of Adjustments
prior to the preparation of financial
• Adjusting entries are internal
statements because they affect
transactions — no new source
more than one accounting period.
document exists for the adjustment.
• Bring certain account balances up
• Adjusting entries are non-cash
to date at the end of the
transactions — the Cash account will
accounting period.
never be used in an adjusting entry.
• Required when changes in certain
• Adjusting entries will always involve
accounts have not been recorded
at least one income statement
in the accounting records
account and one balance sheet
• Adjusting Entries are necessary when
account.
accrual basis accounting is used.
• Adjusting entries allow businesses to
adhere to the Matching Principle.

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 Fundamentals of Accounting
First Semester Midterms Reviewer
Transcript By: Justin Lloyd Laxamana
• Adjusting entries are needed for Bad Debts/Doubtful Accounts/ Uncollectible
revenues and expenses covering Accounts
two accounting periods.
• Client accounts that may not be
collected anymore or are doubtful
of collection. Losses due to
Accrued Income
uncollectible accounts.
• income already earned but were ➢ Allowance Method
not collected nor recorded ▪ provides for bad debts
or doubtful accounts
Accrued Expense
during the period the
• expenses already incurred but were sale of service is
not collected nor recorded recorded.
➢ Direct Write-off Method
▪ recognizes bad debts
Unearned Income/Deferred Income/ Deferrals expense only when it is
certain that the
• Advance collection recorded as a
company will not be
liability, but a portion of which has
able to collect the
already been earned. Income
account anymore.
already received but not yet
earned. Note: Net Realizable Value
➢ Liability Method
• difference of accounts receivable
▪ advance collection is
and its uncollectible account.
credited to a liability
account (Unearned Depreciation Expense
Revenue or Deferred
• transfer of asset cost to expense
Revenue).
based on its declining utility value.
➢ Income Method
Allocation of plant asset cost over its
▪ record the advance
estimated useful life. Expense
collection immediately
allotted for the wear and tear of
with a credit to an
property, plant, and equipment due
income account
to passage of time.
Prepaid Expense ❖ Market Value – realizable
value if the asset is to be sold.
• Advance payment recorded as an
❖ Book Value – difference
asset but a portion of which has
between the cost and the
already expired. Expenses already
accumulated depreciation
paid but not yet incurred or used.
which represents the
➢ Asset Method
unexpired cost or the net utility
▪ prepaid expense
value of the asset.
represents advance
❖ Cost - purchase price of the
payment for service to
depreciable asset.
be received
❖ Salvage Value - Estimated
➢ Expense Method value of the asset at the end
▪ immediately debit a of its useful life.
prepaid expense to an ❖ Estimated Useful Life - An
expense account estimation of the number of

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 Fundamentals of Accounting
First Semester Midterms Reviewer
Transcript By: Justin Lloyd Laxamana
years an asset can be useful to Worksheet
the entity.
• Needed to gather and workout the
Accounts to be Updated/Adjusted adjustments.
• First two columns: Unadjusted Trial
• Accrued Income
Balance.
➢ Debit: Receivable
• Second two columns: Adjustments
➢ Credit: Income
from which adjusted balances are
determined.
• Accrued Expenses
• Third two columns: Adjusted Trial
➢ Debit: Expense
Balance.
➢ Credit: Payable
• Fourth two columns: Income
statement.
• Unearned Income
• Fifth two columns: Financial position
• Liability Method
➢ Debit: Liability
➢ Credit: Income

• Income Method
➢ Debit: Income
➢ Credit: Liability
Steps in Worksheet Preparation
• Prepaid Expenses 1. Enter the worksheet heading.
• Asset Method 2. Enter the column headings as listed
➢ Debit: Expense above.
➢ Credit: Asset 3. Copy the unadjusted trial balance in
the first two money columns.
• Expense Method 4. Enter the adjustments in the next two
➢ Debit: Asset money columns.
➢ Credit: Expense 5. Take the adjusted balances of all
accounts and extend to the
• Bad Debts adjusted trial balance column.
• Allowance Method a. Accounts with no
➢ Debit: Bad Debts adjustments are
Expense(Doubtful extended in their
Accounts Exp.) original amounts.
➢ Credit: Allowance for Bad 6. Extend all income and expenses
Debts from the adjusted balances to the
• Direct write-off income statement.
➢ Debit: Bad Debts a. Total the debit and credit
Expense(Doubtful columns.
Accounts Exp.) i. Debit – Expenses
➢ Credit: Accounts ii. Credit – Income
Receivable b. If the credit total is more than
• Depreciation Expense the debit total, the difference
➢ Debit: Depreciation Expense represents a net income and
➢ Credit: Accumulated should be placed on the debit
Depreciation side of the income statement.

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 Fundamentals of Accounting
First Semester Midterms Reviewer
Transcript By: Justin Lloyd Laxamana
7. Extend all assets, liabilities, capital, Income Statement (Also Known As Result of
and drawing accounts to the operation of an entity)
financial position column.
• Provides information regarding the
a. Sub-total the debit and credit
financial performance of the
columns.
business or its profitability which is
b. Enter the net income on the
important as this will enhance the
credit side of the balances.
resources of the business and its
capacity to generate cash and cash
How to Analyze an Adjusting Entry equivalents.
• Presented first to enable one to
• When analyzing an adjusting entry, determine the profit needed to be
look for the item that has not been able to prepare the capital
recorded but should have been. This statement.
information is often not explicit and • Summary of income earned, and
must be inferred from the data expenses incurred for a certain
given. period. Operating/regular income
• For expenses, look for the amount and other income Presentation of
used. For revenue, look for the cost and expenses based on:
amount earned ➢ Nature – used for simple
business such as service
providers. (Depreciation,
CHAPTER 8: Financial Statement advertising, and the like.) This
Presentation, Closing the Books can be used in a single-step
and Financial Analysis income statement.
➢ Function – presents the
General Purpose Financial Statements expense according to its
function (cost of sales,
• Intended to meet equally the needs
distribution cost, and others.)
of all users and provide information
Commonly used for a
about the financial position, financial
merchandising business.
performance, and changes in the
financial position, and cash flows. Rules in preparing income statement:

1. The income statement consists of

four parts:
The International Accounting Standards states
a) Heading
that:
b) Revenues Earned
• The face of financial statements c) Expenses Incurred
(Income Statement and Financial d) Net Income or Profit
Position) should only include line 2. The third line in the heading must
items – Items that are similar in always be for a period. (For the Year
economic characteristics should be Ended)
aggregated in the face of the 3. Margin on the left side:
report. a) Extreme margin – major
✓ Disaggregated in the sections
supporting note to financial b) Inner margin – accounts
statement. contained in the major
sections.

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 Fundamentals of Accounting
First Semester Midterms Reviewer
Transcript By: Justin Lloyd Laxamana
4. Money columns on the right side: • Where liquidity and solvency are
a) Extreme margin – major determined
amounts • Shows the residual interest of the
b) Inner money column – owner as of a specific date (Month,
amounts of the described day, year)
amounts. • Shows how much of the assets of the
firm are being funded by the
5. Peso sign in the final money column creditors and by the investors
is placed on the first and last • Helps in predicting the ability of the
amounts. form to pay for its obligations
6. A single rule is placed under the last
Account Form
figure to be added or subtracted.
7. A double rule is placed under the • Assets are listed on the left-hand
final figure. column whilst liabilities and owner’s
8. Operating revenue is presented first equity are on the right-hand column
followed by other income.
9. Expenses may be presented in
descending order, or alphabetically.
Interest expense is always presented
last. (The rule is the same with the
notes).
Report Form

Statement of Changes in Owner’s Equity • Shows in one straight column the

assets followed by the liabilities and
• Shows the changes in the interest of
owner’s equity.
the owner/s
• Summarizes what happened to the
capital or claim of the owner.
• Presented for a period of one year
(For the Year Ended)
• Sole proprietorship: Owner’s Equity
• Partnership: Partner’s Equity
• Corporation: Shareholder’s Equity

Note: Add Net Income to Capital or

Subtract net loss to Capital

Statement of Financial Position

• Lists down the economic resources

being controlled by the firm (assets
and liabilities)

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 Fundamentals of Accounting
First Semester Midterms Reviewer
Transcript By: Justin Lloyd Laxamana
Rules in presenting the Statement of ➢ Outflow – cash use or
Financial Position: disbursements

1. The heading must include the: Activities Inflow Outflow

a) Name of the business Operating Revenue Payment for
b) Title of the report Collections expenses
c) Date Investing Sales if Acquisition
Securities, securities,
2. Margin on the left side:
PPEs PPEs
a) Extreme left margin – major Financing Original and Cash
classifications (e.g., current Additional withdrawal
assets, current liabilities) investment of owner
b) Inner margin – for specific by the
accounts (e.g., cash, owner. Payment of
loan
accounts receivable)
Proceeds of
3. Money columns on the right side loan
a) Extreme right money column – • Amounts with parentheses are
major amounts following the outflows or disbursements and are
major classification. subtracted to the balance.
b) Inner money column – • If the net cash for an activity is
amounts of the described positive, there is a Net Cash Inflow. If
accounts in the inner margin. the net cash for an activity is
4. Peso sign negative, there is a Net Cash
a) laced on the first and last Outflow.
amounts per accounting • If the sum of the net cash for the
value. three activities is positive, there is an
b) Inner money column – peso Increase in Cash. If it turns out
sign placed on the first negative, there is a Decrease in
amount of every column of Cash.
figures.
5. Single rule and double rule
a) Single rule – placed under the Current and Non-Current Classification
last figure to be added or
subtracted. Current Asset
b) Double rule – placed under • Cash and cash equivalents which
the final figure. are not restricted in use
Statement of Cash Flows • Other assets expected to be realized
into cash
• Shows how cash was affected by • Sold or consumed within normal
the operating, investing, and operating cycle of the business or
financing activities of the business. one year
• Helps assess ability of the business to 1. Cash - currencies or coins or
generate or manage cash od the negotiable instruments such as bank
entity. check or a postal money order used
• Ensures adequacy of cash through as a medium of exchange
proper timing between inflows and ➢ Cash on Hand – cash items in
outflows of cash the custody of the officer-in-
➢ Inflow – source or receipt of charge or the owner.
cash

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 Fundamentals of Accounting
First Semester Midterms Reviewer
Transcript By: Justin Lloyd Laxamana
➢ Cash in Bank – cash deposited ➢ Office Furniture and Fixtures,
in the bank under a current or Store Furniture and Fixtures
savings account. 5. Leasehold or Lease Right – a lessee is
Note: Cash equivalents are given the right to use the property of
short term, highly liquid a lessor over a long period of time.
investments 6. Accumulated Depreciation – a
2. Marketable Securities – highly traded contra-asset account representing
in securities (stocks and bonds). the expired cost of the PPE as a
Purchased when the enterprise has result of usage and passage of time.
excess cash. Deducted from the PPE account
3. Receivables – collectibles from
customers (Accounts Receivables
and Notes Receivable) Non-Current Liabilities
4. Other Receivables
1. Note Payable – issued to a creditor
➢ Interest Receivable
and evidenced by a promissory note
➢ Rent Receivable
2. Mortgage Payable – obligation
➢ Dividends Receivable
secured by the real property of the
5. Merchandise Inventory – stock of
business
goods available for sale by the
3. Bond Payable – long term promise
business (applicable for
usually from five to ten or twenty
merchandising business)
years supported by a formal
6. Prepaid Expenses – advance
contract containing the face value
payments made for benefits or
of the bond, interest rate, interest
services to be received by the
payment, and maturity date
business in the future
➢ Prepaid Insurance, Prepaid
Rent, Supplies
Adequate Disclosure Principle
7. Contra-Asset Accounts – deductions
from current assets (normal balance • Requires the inclusion of significant
on credit) information that will help enhance
➢ Allowance for Bad Debts the firm’s financial statements.
• States that users are informed of
additional facts that will aid them
Non-Current Assets properly interpreting the financial
statements
• Long-terms investments, property,
plant and equipment and intangible
assets Closing Entries
1. Land – lot or real estate owned and
• Income and Expense Accounts must
used by the business ibn which a
be closed.
building could be constructed.
• Entries used to bring temporary or
2. Building – structure used to house the
nominal accounts (income
office, store, or factory
statement accounts) to zero
3. Equipment – typewriter, air
balance by transferring them to the
conditioner, calculator, filing
capital account.
cabinet, computer, electric fan,
• Real accounts (balance sheet
trucks, cars
accounts) are not closed but are
4. Furniture and Fixtures – tables, chairs,
curtains, lighting fixtures, wall decors

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 Fundamentals of Accounting
First Semester Midterms Reviewer
Transcript By: Justin Lloyd Laxamana
carried forward to the next Post-Closing Trial Balance
accounting period.
• Prepared from the general ledger
➢ Income Summary – account
accounts after the closing entries
used to close the nominal
have been posted.
values and bring them to the
• Confirms the equality of debits and
capital account
credits of the balances of assets,
Steps in closing entries liabilities, and ending capital.
• Does not include temporary
1. Close the income accounts.
accounts.
• Do not include accounts whose
amounts are zero.
• For contra-asset accounts, list them
following their partner asset (e.g.,
2. Close the expense accounts. Accounts Receivable to Allowance
for Bad Debts).
• List the accounts in the order of:
➢ Current Asset
➢ Non-current Assets
➢ Current Liabilities
3. Close the profit to capital.
➢ Non-current Liabilities
➢ Capital

Opening Entries

• Used to carry forward the balance of

real accounts to the next
accounting period.
Preparing the ledger

Capital Account

• Credit the net income.

• Debit the drawings.

Income Summary Reversing Entries

• Post all entries including the income • Entry opposite of an adjusting entry
summary account. and is made on the first day of the
next accounting period. ▪ Accounts
Income Accounts reversed:
• Since the normal balance of income ➢ Prepaid expenses (adjusted
is credit, debit the closing entry to using expense method)
have a balance of zero. ➢ Deferrals (adjusted using
income method)
Expense Accounts
Accruals:
• Since the normal balance of
expense is debit, credit the closing • Reversing entries need not be
entries to have a balance of zero. prepared for these.
• Will be brought forward with an
opening entry.

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 Fundamentals of Accounting
First Semester Midterms Reviewer
Transcript By: Justin Lloyd Laxamana
Intracomparability Solvency

• Comparative financial statements • Long term liquidity and is measured

by presenting side by side the data based on ability of the business to
for two periods pay for long-term obligations
• Debt Ratio & Equity Ratio
Intercomparability or benchmarking
➢ Debt Ratio = Total
• Comparison made between two Liabilities/Total Assets
companies Note: shows the proportion of
the assets provided by the
Profitability
creditors
• Ability of the company to enhance ➢ Equity Ratio = Total Owner’s
owner’s equity through profit Equity/Total Assets
• Owner/s will be interested in Profit Note: shows the proportion of
Margin, Return on Assets and Return the assets invested by the
on Equity owner
➢ Profit Margin = Net
Income/Revenues
Note: The higher the ratio, the
more profitable the business is
➢ Return on Assets = Net Income
/Average Total Assets
Note: High rate means assets Good Luck @Everyone!
are being used profitably by
the business
➢ Return on Equity = Net
Income/Average Owner’s
Equity
Note: Shows the earnings of
the owner on their investment

Liquidity

• Ability of the business to pay for its

short-term obligations.
• Suppliers and lenders are interested
in working capital, current ration,
and quick assets ratio
➢ Working Capital = Current
Assets – Current Liabilities
➢ Current Ratio = Current
Assets/Current Liabilities
➢ Quick Ratio or Acid Test Ratio
= Quick Assets/Current
Liabilities
Note: Quick Assets are Cash
and Accounts Receivable

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