LS 1.

00: ACCOUNTING & ITS ENVIRONMENT

Accounting is the language of business. Accounting is a Process

-​ analyzing, recording, summarizing
Accounting is a service activity. financial data of business
-​ provide quantitative information -​ transactions are supported by
primarily financial in nature, about certain source documents, which are
economic analyzed and are used as a basis to
record transactions.
Statement of Financial Accounting
Standards No. 1, Accounting Standards ●​ Management Accounting - used
Council, 1983, par. 1 for internal
●​ Financial Accounting - used for
Accounting is an information system. external & internal
-​ measures, process, and ●​ Tax Accounting - used for
communicate financial information business/individuals
about an economic entity

Statement of Financial Accounting

Concepts No.1, Accounting
Standards Board, 1978, p. 9

Accounting is a process.
-​ identifying, measuring & *Business - legal forms of business
communicating economic organizations (sole proprietorship,
information to permit informed partnership, corporation, cooperative)
judgements & decisions by users of
the information *Various Users - decision makers
●​ Internal User - management group
Statement of Financial Accounting (own manage & control the business
Concepts No. 1, AICPA, 1970, par. 40 entity)
●​ External Users - financing group and
Accounting is an art of recording, public group (do not own, manage &
classifying, and summarizing in a control the business entity)
significant manner and in terms of money,
transactions & events which are, in part at MRA Framework on Accountancy
least, of a financial character, and Services
interpreting the results thereof. ●​ education
●​ license
●​ competencies
●​ experience
●​ compliance with International
Federal of Accountants (IFAC)
standards and guidelines

1
 LS 1.00: ACCOUNTING & ITS ENVIRONMENT

ASEAN MRA Objectives 6.​ IAS is for uniformity in the

●​ facilitate mobility of practitioners accounting principles across the
within ASEAN world and thereby to have a fair
●​ exchange information and enhance analysis and comparison of
cooperation in respect of mutual performance of different companies
recognition of practitioners
●​ promote adoption of best practices International Accounting Standards
on standards and qualifications Board (IASB)
●​ provide opportunities for capacity
building and training of practitioners ●​ IAS – standards issued by the IASC
from 1973 - 2001; dictates how
The Two “Levels” of Harmonization events and transactions should
-​ in accounting standards, which is reflect on a company’s financial
increased agreement in accounting statements.
rules ●​ IFRS (International Financial
-​ in practice, which is increased Reporting Standards) – current and
agreement in actual accounting updated version of the IAS; issued
practices by IASB
-​ Harmonization in standards may or ●​ if there are any contradictions in the
may not result in harmonization in IFRS with the old IAS, the IFRS
practice should be followed

1.​ GAAP - Generally Accepted

Accounting Principles;
IAS - International Accounting
Standards

2.​ Both GAAP & IAS are accounting

principles that are used to record,
summarize, analyze financial results
of companies

3.​ GAAP is specific to a country; IAS is

an internationally accepted standard

4.​ IAS is an initiative of International

Accounting Standards Committee
(ISAC)

5.​ GAAP may differ from country to

country, but most countries try to
incorporate changes adopted by
ISAC in their GAAP

2
 LS 1.00: ACCOUNTING & ITS ENVIRONMENT

Standards Setting Boards Philippine Institute of Certified Public

●​ IAASB - International Auditing & Accountants (PICPA)
Assurance Standards Boards -​ the Accredited Professional
●​ IAESB - International Accounting Organization (APO) of CPAs by the
Education Standards Board Professional Regulation Commission
●​ IESBA - International Ethics (PRC)
Standards Board for Accountants -​ founded in 1929
●​ IPSASB - International Public Sector -​ registered as non-stock corporation
Accounting Standards Board
Objectives:
HISTORY OF ACCOUNTING IN THE ●​ to protect and enhance the credibility
PHILIPPINES of the CPA certificate in the service
of the public
●​ AD 980s - accounting with our ●​ to maintain high standards in
trading partners, the Malays, accounting education
Chinese, and Indians were as simple ●​ to instill ideals of professionalism,
as exchanging cash or goods. ethics, and competence among
accountants
●​ 1700s - the British colonizers ●​ to foster unity and harmony among
established the first accounting firms members

●​ 1890s - Americans greatly ➢​ PICPA National President Lope

influences the accounting practice “Jun” Bato, Jr.
➢​ Don Vicente Fabella, first Filipino
●​ 1923 - the Accountancy Act 1967 CPA in the US 1915
was passed ➢​ Dr. Nicanor Reyes, founder of the
Institute of Accountancy
●​ 1929 - PICPA was established
Famous filipino CPAs
●​ 1967 - the Accountancy Act 1967 ➢​ Belen Enrile-Gutierrez: first
was passed Filipina CPA 1933
➢​ Jaime Hernandez: first
●​ 1975 - the Revised Accountancy Filipino-Auditor General of the COA
Law 1975 was passed. PD 692 ➢​ Manuel Villar: Filipino tycoon
➢​ Washington SyCip: only Filipino
●​ 2004 - the Philippine Accountancy who has held the position of
Act of 2004 registered the Revised President of the International
Accountancy Law. RA 9298 Federation of Accountants

3
 LS 1.00: ACCOUNTING & ITS ENVIRONMENT

Board of Accountancy (BOA) Members: educational institution involves

➢​ Noe G. Quiñanola - Chairman decision-making requiring professional
➢​ Samuel B. Padilla - V. Chairman knowledge in the science of accounting or
when he represents his private employer
Members: Gloria T. Baysa, Thelma S. before any government agency on tax
Cuidadano, Rosalinda D. Evangelista, matters related to accounting, and such
Gervacio I. Piator, Ma. Teresita employment or position requires that the
Zuñiga-Dimaculangan holder thereof must be a Certified Public
Accountant; or if he holds or is appointed to
Practice of Accountancy, Defined a position in the accounting occupational
Practice of accountancy shall constitute in a group in the government or in
person, be it in his individual capacity, or as government-owned or controlled
a partner or staff member in an accounting corporations, including those performing
or auditing firm, holding out himself as one proprietary functions, where a civil service
skilled in the knowledge, science, and eligibility as a Certified Public Accountant is
practice of accounting, and as qualified to a prerequisite.
render professional services as a certified
public accountant; or offering or rendering, What governs the Accountancy Profession
or both, to more than one client on a fee in the Philippines?
basis or otherwise, services such as the
audit or verification of financial transactions -​ Republic of the Philippines
and accounting records; the preparation, Professional Regulation
signing, or certification for clients of reports Commission Manila - Board of
of audit, balance sheets, and other financial Accountancy
accounting and related schedules, exhibits,
statements, or reports which are to be used -​ Rules and regulations implementing
for publication or for credit purposes, or to RA 9298 otherwise known as the
be filed with a court or government agency, Philippine Accountancy Act of
or to be used for any other purpose; the 2004 and for other purposes
installation and revision of accounting
system, the preparation of income tax
returns when related to accounting
procedures; or when he represents clients
before government agencies on tax matters
related to accounting or renders
professional assistance in matters relating
to accounting procedures and the recording
and presentation of financial facts or data.

A Certified Public Accountant shall be

considered in the practice of his profession,
if the nature and character of his
employment whether as an officer or
employee in a private enterprise or

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 LS 1.00: ACCOUNTING & ITS ENVIRONMENT

The Professional Regulatory Board of

Accountancy (BOA) has come up with a
package of proposed revisions of Republic
Act 9298 (Phil. Accountancy Act of 2004)

-​ In the span of more than 12 years

since the passage of law, there have
been several changes and
developments in the accountancy
sector, locally and globally, that have
arisen. Thus, the need for the
revision of the archaic law of the
accountants.

Former BOA Chairman: Joel

Tan-Torres

Functions of BOA as Regulatory Board

-​ to exercise administrative,
quasi-legislative, and quasi-judiciary
powers over the practice of
accountancy

●​ Prepare the Contents of Licensure

Examinations. Determine,
prescribe, and revise the course
requirements.
●​ Recommend Measures necessary
to for advancement in their fields
●​ Visit/Inspect Schools and
establishments for feedback
●​ Adopt & Enforce a Code of Ethics
for the practice of their respective
professions
●​ Administer Oaths & Issue
Certificate of Registration
●​ Investigate Violations of set
professionals standards and
adjudicate administrative and other
cases against erring registrants
●​ Suspend, Revoke, or Reissue
Certificate of Registration for causes
provided by law

5
 LS 1.01: ACCOUNTING & BUSINESS ORGANIZATION

Fundamental Business Model Types of Business Organizations

●​ Services – provides skills, expertise,

advice and other similar products
○​ hiring skilled staff and selling
their time

●​ Trading or Retailing – buy and sell

products
○​ buying a range of raw
materials & manufactured
products, and consolidating
them, making it available for
sale in specific locations or
1.​ Investors provide the required
online for delivery
capital.
○​ wholesaler/retailer
​ – cash, property, goods, etc.

●​ Manufacturing - designing
2.​ Cash can be converted into
products, aggregating components
another type of asset.​
and assembling finished products
– inventory, building, land, furniture
○​ purchasing raw materials,
& fixtures, equipment for use, etc.
convert them to finish
products using
3.​ Combination business resources
equipment-machineries and
provides the basis for producing
people
the products or services.

●​ Raw Materials - growing or

4.​ Selling of products/inventory or
extracting raw materials
rendering of services generates
○​ buying blocks of land and
an “Asset”
using them to provide raw
– cash/receivables
materials
– collections of receivables means
increase in Cash inflow
●​ Infrastructure - selling the utilization
of infrastructure
5.​ Cash inflow from collections will
be available to be used for
●​ Financial - receiving deposits,
operations, payments of loans,
lending and investing money
taxes, etc. Remaining cash can be
○​ accepting cash from
reinvested or paid out to owners
depositors & paying them
as returns of their
interest; using the money to
investments/dividends
provide loans to borrowers
charging them fees and a
higher interest rates than the
depositors

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 LS 1.01: ACCOUNTING & BUSINESS ORGANIZATION

-​ least common; widely used for

●​ Insurance - pooling premiums of professional practices
many to meet claims of a few
○​ collecting cash from General Partnerships
customers; investing the Each partner may withdraw assets from the
money to pay claims of business at will.
insured customers.
○​ high risk is involved Partnerships That Limit Personal Liability
●​ Limited Partnerships - has a
Forms of Business Organization general partner who has the right to
make managerial decisions and has
Sole Proprietorship unlimited liability for the obligations
-​ unincorporated business of the partnership. In addition, the
-​ owned by one person partnership has limited partners who
-​ most common; easy to start are basically passive investors
-​ owner is personally liable for the ●​ Limited Liability Partnerships -
debts of the business each partner has unlimited personal
-​ no income taxes liability for his or her own
-​ business assets belong to the professional services, but not for the
proprietor actions of other partners
-​ pays no salary to the owner
Income and losses are divided equally
Adequacy of Net Income among the partners.

The net income of a sole proprietorship Evaluating the Financial Statements of a

should be sufficient to compensate the Partnership
owner for:
1.​ personal services rendered to the Partnership net income should be sufficient
business to compensate the partners for:
2.​ capital invested 1.​ the value of personal services
3.​ the degree of financial risk that the rendered
owners is taking 2.​ capital invested
3.​ the degree of financial risk that the
In evaluating liquidity of a sole partner is taking
proprietorship, creditors must look beyond
the balance sheet to the ability of the owner ●​ all partners have unlimited personal
to pay any debt. liability
●​ in a general partnership, the general
Partnership partner(s) has personal liability
-​ unincorporated business ●​ in a limited liability partnership,
-​ owned by 2 or more partners liability extends to partner(s) directly
-​ a partner may be either an individual involved
or a corporation

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 LS 1.01: ACCOUNTING & BUSINESS ORGANIZATION

Corporations Factors to Consider in Selecting an

-​ legal entity Appropriate Form of Business
-​ having an existence separate and Organization
distinct from that of its owners ●​ personal liability of owners
-​ may be publicly owned or closely ●​ income tax considerations
held ●​ need to raise large amounts of
capital
*Publicly Owned - shares traded on the ●​ owners’ need to withdraw assets
NYSE or NASDAQ from the business
*Closely Held - shares of stocks not ●​ owners need for managerial
publicly traded authority
●​ ease and cost of forming the
business
●​ need for continuity of business
operations

Allocating Partnership Net Income

among Partners

Partners may divide income or loss in any

Retained Earnings manner agreed upon.
-​ represent the stockholders’ equity 1.​ a fixed ratio
created through profitable operation 2.​ salary allowances with remainder in
of the business. a fixed ratio
-​ net income causes the retained 3.​ interest allowance with remainder in
earnings account to increase and a fixed ratio
the payment of dividends causes the 4.​ salary and interest allowance with
account to decrease remainder in a fixed ratio

Evaluating the Financial Statements of a MSME

Corporation -​ any business activity or enterprise
engaged in industry, agri-business,
Stockholder and/or services that has:
-​ service rendered: paid a salary ●​ asset size (less land) of up to
-​ risk taken: limited to amount of PhP 100 Million;
investment ●​ an employment size with less
-​ taxes paid: only on dividends not net than 200 employees
income

When lending funds to a corporation,

creditors generally look only to the business
entity for repayment

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 LS 1.01: ACCOUNTING & BUSINESS ORGANIZATION

●​ Micro Generally Accepted Accounting

○​ below 3 million Principles (GAAP)
○​ 1-9 employees
●​ Small Fundamental Concepts (EPSG):
○​ 3-15 million 1.​ Entity Concept
○​ 10-99 employees – the entity is separate from the
●​ Medium owners, managers, and employees
○​ 15-100 million who constitute the entity
○​ 100-199 employees
●​ Large 2.​ Periodicity or Time Period
○​ above 100 million Concept
○​ 200 above employees – the “indefinite life of the entity” is
subdivided into time periods or
Activities in Business Organization accounting periods which are usually
●​ Financing Activities of equal length for the purpose of
-​ primary & secondary preparing financial reports
sources/uses of financial
resources 3.​ Stable Monetary Unit Concept
●​ Investing Activities – the purchasing power of the peso
-​ involve disposal & is stable or constant and that its
replacement of long-term instability is insignificant and
resources that will be used to therefore may be ignored
develop, produce, and sell
goods and services 4.​ Going Concern
●​ Operating Activities – the absence of evidence to the
-​ involve the use of resources contrary, the accounting entity is
to design, produce, distribute viewed as continuing in operation
and market goods and indefinitely
services
Criteria for GAAP (ROF):
These 3 activities are the same activities -​ Relevance
reflected in the Statement of CASH FLOWS -​ Objectivity
-​ Feasibility
+​ sources of funds
-​ uses of funds

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 LS 1.01: ACCOUNTING & BUSINESS ORGANIZATION

Basic Principles (HOCREAM): Accounting for Service Concern

1.​ Historical Cost
– acquired assets should be ●​ Accrual Accounting - the entity
recorded at their actual cost & not at recognizes revenue when earned
what the entity thinks they are worth regardless if when received &
as at reporting date expense is recognized when
incurred regardless of when paid
2.​ Objectivity
– to the extent that the information is ●​ Cash Accounting - the entity
not influence by the personal bias or recognize revenue when cash is
judgment of those who furnish it received or expenses is incurred
when cash is paid for goods and
3.​ Consistency services
– entity should use the same
accounting method from period to Core Competencies that are Expected
period to achieve comparability over from CPAs
time within a single enterprise
Knowledge
4.​ Revenue Recognition ●​ General Knowledge
– to be recognized in the accounting ●​ Organizational & Business
period when goods are delivered or Knowledge
services are rendered ●​ Information Technology (IT)
Knowledge
5.​ Expense Recognition ●​ Accounting Knowledge
– to be recognized in the accounting
period in which goods or services Skills
are used up to produce revenue & ●​ Intellectual
not when the entity pays for those ●​ Interpersonal
goods or services ●​ Communication

6.​ Adequate Disclosure Values Must Concentrate on:

– all relevant information that would ●​ Professional
affect the user’s understanding & ●​ Ethics
assessment of the accounting entity ●​ Moral Values
be disclosed in the notes to financial
statements Ethics
-​ moral principles that govern a
7.​ Materiality person’s behavior or the conducting
– financial reporting is only of an activity
concerned with information that is -​ concerned with knowing what is
significant enough to affect good or bad and separating them
evaluations & decisions

10
 LS 1.01: ACCOUNTING & BUSINESS ORGANIZATION

Business Ethics - organization’s policies & Fundamental Ethical Principles

standards established to ensure certain ●​ Integrity
kinds of behavior by its members ●​ Objectivity
●​ Professional
Individual Ethics - principles of conduct ●​ Competence
expected to be followed by individuals ●​ Due Care
●​ Confidentiality
Basic Ethical & Legal Principles: ●​ Professional Behavior
●​ Due Process - individual is treated
fairly & uniformly at all times with Code of Ethics for Professional CPAs in
basic rights protected the Philippines (Section 16)
●​ Due Care - reasonable care that
promotes the common good Foundation of Information Systems in
●​ Duty of Due Care - legal obligation Business
that each persona has to others not
to cause any unreasonable harm or System
risk of harm resulting from careless -​ an interrelated set of business
acts procedures used within one
business unit working together for a
Fraudulent Financial Reporting purpose
– intentional preparation of misleading -​ has nine characteristics
financial statements -​ exists within an environment
-​ a boundary separates a system from
Career Opportunities its environment
●​ public practice
●​ commerce
●​ government service
●​ government service
●​ education/academe

Branches of Accounting
●​ Auditing
●​ Bookkeeping
●​ Cost Accounting Characteristics of a System:
●​ Financial Accounting ●​ components
●​ Financial Management ●​ interrelated components
●​ Management Accounting ●​ boundary
●​ Taxation ●​ purpose
●​ Government Accounting ●​ environment
●​ interfaces
●​ input
●​ output
●​ constraints

11
 LS 1.01: ACCOUNTING & BUSINESS ORGANIZATION

Information Concepts: and provide a feedback mechanism

to meet an objective
Data - streams of raw facts representing
events occurring in organizations or the Components of an IS
physical environment before they have been
organized and arranged into a form that
people can understand and use

Information - clusters of facts meaningful

and useful to human beings in the
processes such as making decisions

Knowledge - data and/or information

organized and processed to convey
understanding, experience, accumulated
learning and expertise as they apply to a
current problem or activity
People Resources
Characteristics of Information: -​ specialists
●​ Timely - has it arrived in time to -​ end users
affect a decision-making process?
●​ Relevant - does it pertain to the Hardware Resources
problem at hand? -​ machines
●​ Concise - is it to the point? -​ media
●​ Accurate - is it “correct enough” to
be used? Software Resources
●​ Complete - is it thorough and not -​ programs
lacking any components? -​ procedures

Information System (IS) Data Resources

-​ an organized combination of -​ product descriptions, customer
➢​ people records, employee files, inventory
➢​ hardware and software databases
➢​ communication networks
➢​ data resources Network Resources
➢​ policies and procedures -​ communications media,
-​ stores, retrieves, transforms, and communications processors,
disseminates information in an network access and control software
organization
-​ a set of interrelated elements or Information Resources
components that collect (input), -​ management reports and business
manipulate (process), and documents using text and graphic
disseminate (output) data and info displays, audio responses, and
paper forms

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 LS 1.01: ACCOUNTING & BUSINESS ORGANIZATION

Formal System
-​ system resting on accepted and
fixed definitions of data and
procedures, operating with
predefined rules

Computer Based Information System

●​ Management Information Systems
●​ Decision Support Systems
●​ The Virtual Office
●​ Knowledge Based Systems

-​ the fundamental work of CBIS is to

manage information in an efficient
way such that it can be utilized by
the managers effectively to solve
problems

Information System
-​ all the components and resources
necessary to deliver information and
functions to the organization
-​ could be paper based

Information Technologies
-​ hardware, software, networking,
data management
Activities in an Information System
Computer-Based Information System
(CIBS)
-​ to provide managers (and
employees) with appropriate kind of
information to help them make
decisions
-​ used to collect and analyze data Input
from all departments -​ the capturing or collection of raw
-​ designed to provide an data from within the organization or
organization's management with up from its external environment for the
to date information anytime processing in an information system

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 LS 1.01: ACCOUNTING & BUSINESS ORGANIZATION

Processing ●​ Transformation of the Enterprise

-​ the conversion, manipulation and ○​ flattening
analysis of raw input into a form that ○​ decentralization
is more meaningful to humans ○​ flexibility
○​ location independence
Output ○​ low transaction and
-​ the distribution of processed coordination costs
information to the people who will us ○​ empowerment
it or to the activities from which it will ○​ collaborative work teamwork
be used
●​ Emergence of the Digital Firm
Feedback ○​ digitally enabled relationship
-​ output that is returned to the with customers, suppliers,
appropriate members of the and employment
organization to help them evaluate ○​ core business processes
or correct input accomplished via digital
networks
Why Information Systems? ○​ digital management
○​ rapid sensing and
●​ Globalization responding to environment
○​ management and control in a changes
global marketplace
○​ competition in world markets Functions of an IS
○​ global work groups ➢​ a major functional are of business
○​ global delivery systems ➢​ an important contributor to
operational efficiency, employee
●​ Transformation of Industrial productivity, morale, customer
Economics service and decision making
○​ Knowledge and ➢​ a major source of information and
information-based economics support for decision making
○​ new products and services ➢​ a vital ingredient in developing
○​ knowledge: a central competitive products and services in
productive and strategic the global marketplace
assets ➢​ a dynamic and challenging career
○​ time-based competition opportunity
○​ shorter product life ➢​ a key component of today’s
○​ turbulent or disordered networked business
environment
○​ limited employment
knowledge

14
 LS 1.01: ACCOUNTING & BUSINESS ORGANIZATION

Business professionals must identify: A Business as a System

●​ the people, hardware, software,
data, and network resources they
use
●​ type of information products they
produce
●​ the way they perform input,
processing, output, storage, and
control activities

Information Systems Framework

Fundamental Roles of IS in Business

●​ achieving operational excellence
●​ developing new products and
services
●​ attaining customer intimacy and
service
●​ improving decision making
●​ promoting competitive advantage
●​ ensuring survival

Foundation Concepts
Business Information
-​ about the components and roles of
-​ study of office suites, object oriented
information systems
programming, database
management, and multimedia
Information Technologies
decision
-​ major concepts, developments, and
-​ understanding and mobilizing
management issues in information
technology in business
technology
-​ applying analytical techniques to
business problems
Business Applications
-​ understanding business concepts,
-​ for operations, management, and
terminology, and culture
competitive advantage

Development Processes
-​ plan, develop, and implement
information systems

Management Challenges
-​ managing ethically and effectively

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 LS 1.01: ACCOUNTING & BUSINESS ORGANIZATION

Systems Development Life Cycles Five Parts of Information System

1.​ People
2.​ Procedures
3.​ Software
4.​ Hardware
5.​ Data

Measuring IT Success:
●​ Efficiency
○​ minimize cost, time, and use
of information resources
●​ Effectiveness
○​ support business strategies
○​ enable business processes
○​ enhance organizational
structure and culture
○​ increase customer and
business value

16
 LS 1.02: ACCOUNTING EQUATION & DOUBLE ENTRY SYSTEM

The Accounting Equation 1.​ a debit (Dr) - asset;

a credit (Cr) - liability/capital
resources in the business = resources
supplied by owners 2.​ increase in asset = debit the asset
account;
Capital - the amount of the resources decrease in asset = credit the asset
supplied by the owner account

Assets - actual resources that are in the 3.​ increase liability/capital = credit the
business account;
Assets = Capital decrease liability/capital account =
debit the capital/liability account
Liabilities - represent the amounts owing to
people other than the owner(s) in relation to 4.​ for every transaction, a debit will
supply of the assets have a corresponding credit and vice
versa

Transactions and Accouting System

Accounting System
-​ manages the income, expenses, and
Double-Entry Principle
other financial activities of a
– every business transaction has a twofold
business
aspect
-​ organize financial information
– both sides must be recorded
-​ either manual or computerized
– the double-entry system has an account
for every asset, every liability, and capital
Business Transaction
-​ an event wherein there is a transfer
of something of value between two
or more parties in an arms’ length
transaction

Accounting Event
-​ causes changes in the account
balances
-​ only accounting event or monetary
transaction is recorded or
Debit the Receiver recognized in the entity’s books
Credit the Giver
●​ Monetary - related to money’s worth
cash flow, or future obligations
●​ Non-Monetary - not related to
money

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 LS 1.02: ACCOUNTING EQUATION & DOUBLE ENTRY SYSTEM

Elements of Financial Statements Owner’s Equity is strictly a business

(ALEREx): accounting term, Net Worth can also be
●​ Asset (A) referred to the owner’s personal value which
-​ present economic resource may include business equity as well as
controlled by the entity as a home equity, investments, bank accounts,
result of past events valuable items like jewelry and other
-​ an economic resource is a collections
right that has the potential to
produce economic benefits Retained earnings mean cumulative net
earnings
●​ Liabilities (L)
-​ a present obligation of the ●​ Revenue/Income (R/I/S)
entity to transfer an -​ increases in assets or
economic resource as a decreases in liabilities that
result of past events result in increases in equity,
other than those relating to
●​ Equity (E) contributions from the
-​ residual interest in the assets holders of equity claims
of the entity after deducting
the liabilities (A - L = C) ○​ Merchandising,
-​ a part of the total value of a Manufacturing: Sales
company’s assets which is
claimable by the owners ●​ Expenses (Ex)
-​ decreases in assets, or
○​ Proprietorship: Owner’s increases in liabilities, that
Equity result in the decreases in
○​ Partnership: Partners’ Equity equity, other those relating to
○​ Stock Corporation: distribution to holders of
Shareholder’s Equity equity claims
○​ Non-Stock Corp: Fund
Balances ○​ Operating and
Non-Operating Expenses
Accounting Equations ○​ Merchandising,
➢​ Owner’s Equity = Assets + Liabilities Manufacturing: Cost of
➢​ Owner’s Equity = Available Capital + Goods Sold or Sales
Retained Earnings
➢​ Owner’s Equity = Equity (Previous Operating Expense - the money a company
Year Balance) + Capital Added spends on a day-to-day basis
During the Year + Retained Earnings
+ Present Year Net Profit -
Withdrawals

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 LS 1.02: ACCOUNTING EQUATION & DOUBLE ENTRY SYSTEM

Financial Statements T-Account

-​ use to summarize the
increases & decreases of an
account

(1)​ account title

(2)​ left side or debit side
(3)​ right side or credit
side

Expanded form of the T-Account is the

Ledger

Accounting Equation - the most basic 1.​ Record the transaction on both
accounting tool to record the business sides of the balance sheet
transactions 2.​ Record the transaction twice on
the same side of the balance sheet
Assets = Liabilities + Owner’s Equity as both positive and negative
number
Expanded Equation:
A = L + OE (+Income- Expenses) Normal Debit Balance = Asset
Normal Credit Balance = Liabilities &
Double-Entry System Owner’s Equity
-​ in every business transaction, there
is a dual effect or at least 2 accounts
Assets = Liabilities + Equity
will be affected
-​ the value received and value parted Increase an Asset Increase a
with are recorded applying the Liabilities
accounting equation & using the
accounts of the ALEREx Increase an Equity
-​ an entity has to part away something
of value in order to receive Rules of Debit and Credit
something 1.​ debit goes left, credit goes right
2.​ total sum of debits must equal total
Debit (Left Side) - value received sum of credits
Credit (Right Side) - value parted with 3.​ it depends on the account if a
debit/credit will increase/decrease its
Account balance
-​ the basic summary device use in the
recording of business transactions
-​ may be defined as detailed record of
the increases, decreases & balances
of each ALEREx
-​ Account Titles

19
 LS 1.02: ACCOUNTING EQUATION & DOUBLE ENTRY SYSTEM

Debit
●​ assets
●​ dividends
●​ expenses

Credit
●​ liabilities
●​ equity
●​ revenue

Owner’s Equity is directly affected by the

income and expenses

A = L + OE + Income - Expenses

Equity account is directly affected by

income & expenses

20
 LS 1.03: ANALYZING BUSINESS TRANSACTIONS

Business Transactions Types of Business Transactions

-​ event that has some effects on the
resources of a firm or on the source Source of Assets (SA)
of the firm’s assets increase in assets = increase in
-​ when an account is recorded for liabilities/equity
accounting purposes, a “source
document” is required to verify the Use of Assets (UA)
dollar amount. this document is the decrease in assets = decrease in
original record of the transaction liabilities/equity

●​ External Transactions - between Exchange of Assets (EA)

business and outsider increase in assets = decrease in
●​ Internal Transactions - within the another form of asset
business that do not involve outsider
Exchange of Claims (EC)
1.​ determine the particular accounts decrease in liabilities/equity =
affected decrease in another form of
2.​ determine the effect of the liabilities/equity
transactions on the accounts
involved

Source documents are kept on file for

reference purposes and are proof of
transactions.

Objectivity Principle:
accounting will be recorded on the basis of
objective evidence

Accounting Transactions
-​ process of identifying the specific
effects of economic events of the
accounting equation

Steps in Transaction Analysis

1.​ identify the transactions from source
documents
2.​ indicate the accounts affected:
​ A - L - OE - I/R - E
3.​ ascertain whether each account is
increased or decreased by the
transaction
4.​ apply the rules of debit & credit to
record its increase or decrease

21
 LS 1.04: FRAMEWORK OF FINANCIAL ACCOUNTING AND REPORTING

Source Documents CONCEPTUAL FRAMEWROK FOR

-​ source of accounting information FINANCIAL REPORTING
which provides evidence that the
transaction exists. Purpose:
-​ shows the nature of transaction and ●​ assist IASB to develop IFRS
includes all the details of the standards
transaction needed for accounting ●​ assist preparers to develop
consistent account policies
●​ Cash Sales Slip - showing the ●​ assist all parties to understand and
details of a transaction in which interpret the standards
goods or services are sold to a
customer for cash Status:
●​ conceptual framework is not a
●​ Sales Invoice - showing the details standard
of a transaction in which goods or ●​ standards may depart form the
services are sold on account conceptual framework
●​ conceptual framework may change
●​ Point of Sale (POS) Summaries - with no automatic changes to the
creates a point of sale summary of standards
the debit and credit card ●​ conceptual framework contributes to
transactions at the end of the day the mission of the IFRS Foundation
○​ transparency
●​ Purchase Invoice - representing a ○​ accountability
purchase of a good or service on ○​ efficiency
account
Objectives of Financial Reporting:
●​ Cheque Copy - supports the – provide financial information about the
accounting entry for a payment by reporting entity that is useful to existing and
cheque potential investors, lenders, and other
creditors in making decisions relating to
●​ Cash Receipts Daily Summary - providing resources to the entity
lists the money coming in from
customers Usefulness and Limitations:
●​ many users only rely on General
●​ Bank Debit Advice - informing the Purpose Financial Reports
business of a decrease made in the ●​ cannot provide all information, such
business’s bank account as economic conditions
●​ not designed to show the value of
the entity, but help users to estimate
its value
●​ internal users need not rely on
General Purpose Financial Reports
●​ other users may find it useful

22
 LS 1.04: FRAMEWORK OF FINANCIAL ACCOUNTING AND REPORTING

●​ based on estimates, judgements, b.​ Faithful Representation - represent

and models (to large extent) what it purports to represent
i.​ complete
Information About Resources, ii.​ neutral - supported by
Claims, and Changes thereto: prudence
iii.​ free-from-error
a.​ Economic resources and
claims Enhancing Characteristics - presentation
○​ identify strengths and of financial reports
weaknesses a.​ Verifiability - knowledgeable &
○​ assess liquidity, independent observers reach a
solvency, flexibility consensus
○​ assess management b.​ Comparability - identify &
stewardship understand similarities and
b.​ Changes in resources and dissimilarities; assisted by
claims provide information consistency
about c.​ Understandability - clear and
○​ changes in resources concise for users with reasonable
and claims provide knowledge of business and
information about economic activities
-​ Financial d.​ Timeliness - available to be capable
Performance (accrual of influencing decisions
basis, cash flows)
help users to Pervasive Constraint:
understand and Cost Constraint - we cannot provide
predict future returns all information because information
○​ other changes give costs
complete
understanding Financial Statement and Reporting Entity

Qualitative Characteristics: Objective of Financial Statements:

“to provide financial information about the
Fundamental Characteristics - contents of reporting entity’s assets, liabilities, equity,
financial reports income and expenses that is useful to users
a.​ Relevance - affects the decisions of financial statements in assessing the
i.​ predictive value prospects for future net cash inflows to the
ii.​ confirmatory value reporting entity and in assessing
iii.​ materiality - entity-specific management's stewardship of the entity’s
relevance economic resources.”

23
 LS 1.04: FRAMEWORK OF FINANCIAL ACCOUNTING AND REPORTING

Financial Statements Elements of FS

●​ Statement of Financial Position
●​ Statement of Financial Financial Position
Performance ●​ Economic Resource: Asset
●​ Statement of Changes in Equity ​ — presently controlled as a
●​ Statement of Cash Flows result of past event
●​ Notes to Financial Statements a.​ Right
○​ obligation of another party
➢​ comparative FS ■​ receive cash
➢​ may include phenomena after the ■​ receive
end of reporting period goods/services
■​ exchange on
Reporting Period favorable terms
-​ specified period of time that FS are ■​ benefit from others if
prepared for specified uncertain
future occurs
Perspective ○​ not an obligation of another
-​ POV of the reporting entity party
■​ physical objects such
Going Concern Assumption as PPE or Inventories
-​ continue to operate for the ■​ use intellectual
foreseeable future property

Reporting Entity b.​ Potential to produce

-​ required, or chooses to prepare FS economic profit
○​ does not need to be certain,
●​ Single Entity or even likely
○​ Unconsolidated FS (Parent ○​ present right that contains
Only) the potential, not the future
○​ Separate FS (Subsidiary economic benefit
Only)
c.​ Control
●​ A Portion of an Entity ○​ direct the use and obtain the
○​ Segment Financial Reporting economic benefit
○​ prevent others from directing
●​ More than One Entity the use and obtaining the
○​ Consolidated FS (Parent & economic benefit
Subsidiary) ○​ if one party controls an asset,
○​ Combines Financial no other party controls that
Statements (Not linked by resource
Parent-Subsidiary ○​ control usually arises from
Relationship) legal rights
○​ being and agent of the
principle having the control

24
 LS 1.04: FRAMEWORK OF FINANCIAL ACCOUNTING AND REPORTING

does not give the agent to Financial Performance

control the resource ●​ Income - increases in assets or
decreases in liabilities
●​ Claim: Liabilities & Equity
Liability — present obligation to ●​ Expenses - decreases in assets or
transfer as a result of past event increases in liabilities

a.​ an obligation - unavoidable Both do not arise from transactions with

responsibility owners.
○​ may arise from legal or
constructive obligation ●​ Other Changes in Economic
○​ identity of obligee is not Resources and Claims
necessary ○​ Contributions from
○​ may be conditional or Distributions to owners
uncertain ○​ Exchanges that do not
○​ counterpart asset need not increase or decrease equity
be at the same amount
Other considerations for Assets & Liabilities:
b.​ transfer an economic resource a.​ Unit of Account - to which
○​ does not need to be certain, recognition and measurement is
or even likely applied
○​ pay cash ●​ aggregation of accounts into
○​ deliver goods or services one
○​ exchange on unfavorable ●​ separation of one account
terms from single source
○​ transfer an asset if specified ●​ different from offsetting
uncertain future occurs
b.​ Executory Contract
c.​ present obligation that exist as a ●​ parties have equally
result of past events unfulfilled or partially fulfilled
○​ obtained economic benefits obligations
○​ exist even if transfer is at ●​ interdependent and
future inseparable

​ Equity — residual interest c.​ Substance of Contractual Rights

○​ shares/capital & Obligations
○​ obligation to issue equity ●​ financial statements report
claims their substance

25
 LS 1.04: FRAMEWORK OF FINANCIAL ACCOUNTING AND REPORTING

Recognition and Derecognition Measurement

Recognition - capturing for inclusion in the Historical Cost

FS -​ cost on acquisition/creation +
transaction cost
-​ consideration received when
incurred - transaction cost

-​ if unidentifiable, current value is the

initial recognition
-​ updated to depict
Carrying Amount - the amount at which an a.​ asset
element is recognized ➢​ consumption (such as
depreciation)
Criteria: ➢​ payments received that
●​ Meets the definition of elements extinguishes it
●​ Relevance ➢​ no longer recoverable
●​ Faithful Representation (impairment)
➢​ accrual of interest
* if not, proceed to Notes, if we do not
recognize the entity b.​ liability
➢​ fulfillment
Derecognition - removal of all or part of a ➢​ become onerous
recognized asset or liability from Statement ➢​ accrual of interest
of Financial Position
measurement of financial asset or liability at
Occurs when: Amortized Cost
●​ [asset] lost control
●​ [liability] no more present obligation Current Value
-​ updated to reflect conditions at
Aims to faithfully represent: measurement date
●​ change in assets/liabilities
●​ assets/liabilities retained ●​ Fair Value
○​ transferred components ○​ price to sell
○​ retained component ○​ price to pay

➢​ reflects perspective of market

participants
○​ Direct (active market)
○​ Indirect (Cash-flow based
techniques)

➢​ transaction costs are not considered

expensed

26
 LS 1.04: FRAMEWORK OF FINANCIAL ACCOUNTING AND REPORTING

●​ Value in Use & Fulfillment Value Measurement Basis:

○​ present value of cash flows a.​ Relevance
●​ characteristics of the
➢​ entity-specific assumptions, rather asset/liability
than market participants' ●​ contribution to future cash
○​ indirect (cash-flow based flows
techniques)
○​ b.​ Faithful Representation
➢​ includes transactions costs at ●​ different measurement basis
disposal or fulfillment to related assets and
liabilities may create
inconsistencies (accounting
●​ Current Cost mismatch)
○​ cost to be paid
○​ consideration to be received c.​ Ending Characteristics & Cost
Constraint
➢​ includes transaction costs ●​ consistent measurement
basis make it more
*Entry Value: Historical cost & Current cost comparable
*Exit Value: Fair Value & Value in Use & ●​ change in measurement
Fulfillment Value basis make it less
understandable
Information Provided: ●​ enhanced verifiability if
measures can be
a.​ Historical Cost independently corroborated
●​ cost to be recovered or fulfilled ●​ some measurement basis
may be costly
b.​ Current Value ●​ unaffected by timeliness
●​ fair value
○​ efficiency & effectiveness of
management

●​ value in use & fulfillment value

○​ assessing prospects of future
cash flows

●​ current cost
○​ predicting future margins by
showing holding gains and
losses

27
 LS 1.04: FRAMEWORK OF FINANCIAL ACCOUNTING AND REPORTING

Presentation and Disclosure Capital & Capital Maintenance

I.​ Communication Tools Capital

-​ financial statements a.​ Financial Concept
-​ pertains to the invested money (Net
●​ effective communication Asset/Equity)
○​ more relevant & faithfully -​ adopted by most entites in the
represented preparation of FS
○​ enhances understandability
& comparability b.​ Physical Concept
-​ pertains to the operating capability
a.​ focus on objectives and principles or productive capacity on the entity
rather than rules
➢​ objectives helps to identify Selection of appropriate concept depends
useful information to on users’ needs
communicate information
effectively Capital Maintenance
➢​ principles – profit determination
➔​ entry-specific information >
standardized description
(“boilerplate”)
➔​ duplication of information
usually make FS less
understandable

b.​ classify information (group similar

and separate dissimilar items) a.​ Financial Capital Maintenance
➢​ sorting elements based on: ●​ nominal monetary amounts
○​ nature ○​ profit includes all price level
○​ rules of function changes, but are not
○​ measurement recognized until disposed of
➢​ offsetting - classifying similar in an exchange transaction
and dissimilar items together;
not appropriate ●​ constant peso amount
➢​ income and expenses ○​ profit includes only the price
○​ profit or loss level changes exceeding the
○​ other comprehensive general level price changes.
income (as classified ○​ general level price changes
by the board are accounted as capital
maintenance adjustments,
equity

28
 LS 1.04: FRAMEWORK OF FINANCIAL ACCOUNTING AND REPORTING

b.​ Physical Capital Maintenance

●​ current cost basis
●​ all price changes are accounted as
capital maintenance adjustments

29
 LS 2.00: SERVICE CONCERN: COMPLETE ACCOUNTING CYCLE W/O ADJUSTMENTS

Accounting Cycle 4.​ Interpreting - extracts the

-​ series of sequential steps or significance of the results of the
procedures performed to accomplish business operationsL profitability,
the accounting process & repeated liquidity, solvency, and stability
each accounting period
-​ complete sequence in accounting ACCOUNTING CYCLE
procedures in appropriate order
-​ combination of a series of activities Recording
that begins when a transaction takes 1.​ identifying transactions and events –
place and ends with its inclusion in source documents
the FS at the end of the accounting 2.​ journalizing transactions – the
period journal

Periodicity Concept - specific accounting Classifying

periods 3.​ posting to the ledger – general
●​ Calendar Year - 12-month period; ledger
begins Jan 1, ends Dec 31 4.​ trial balance preparation
●​ Fiscal Year - 12-month period;
starts at any date of the year except Summarizing
Jan 1, end at any date of the year 5.​ adjusting journal entries
except Dec 31 6.​ preparing the worksheet
●​ Natural Business Year - peak/slack 7.​ preparing financial statements
period 8.​ closing entries
9.​ post-closing trial balance
Phases of Accounting 10.​reversing

1.​ Recording - each transaction is Interpreting

initially recorded in the record book ●​ Profitability - how much is the
called journal increase in capital as a result of
business operation?
2.​ Classifying - means what was ●​ Liquidity - are there available funds
recorded in the journal, all similar to finance the business operation?
accounts are put together in ledger ●​ Solvency - can the business pay its
& summarized initially in the Trial long-term obligations
Balance

3.​ Summarizing - from Trial Balance,

the accounts are subjected to
adjustments, and the FS are
prepared: Financial Position,
Performance, Statements of
Changes in Equity and Cash Flow

30
 LS 2.00: SERVICE CONCERN: COMPLETE ACCOUNTING CYCLE W/O ADJUSTMENTS

Chart of Accounts
-​ numbering system to organize each Journal
account. assets, liabilities, and -​ a chronological record of the entity’s
equity will all have their own set of transactions
numbers to identify each account -​ shows the effects of business
-​ listing of all accounts (A, L, OE, I, E) transactions in terms of debits &
with corresponding account titles & credits
numbers (code)
-​ arranged in the financial statement General Journal
order -​ shows all the effects of a transaction
-​ must be prepared before proceeding in terms of debit & credit and reflects
to the first step of the accounting the increases or decreases of the
cycle accounts
-​ book of original entry
Accounting Cycle
Standard Contents:
1.​ Identification of Accounting 1.​ Date - actual transaction date
Events to be Recorded 2.​ Account Titles & Explanation
-​ to gather information about 3.​ P. R. - Posting Reference (ledger
transactions or events generally page)
through the source documents 4.​ Debit - value received/left side of a
-​ analyze its effect to the accounting T-account
equation & what are the elements 5.​ Credit - value parted with/right side
affects (A, L, OE, Income or of a T-account
Expense) 6.​ Journal Page

2.​ Transactions are Recorded in the 3.​ Journal Entries are Posted to the
General Journal (GJ) General Ledger (GL)
-​ GL is a book of final entry
-​ to record the economic impact of -​ to transfer the information from the
transactions on the firm in a journal, journal to the ledger for classification
which is a form that facilitates -​ sort all the entries & put all the same
transfer to the accounts item or account title together

●​ Simple Journal Entry - one debit Posting in the Ledger - transferring each
entry and one credit entry entry from the general journal to the
●​ Compound Journal Entry - 2 or more appropriate accounts in the ledger
debit entries and 2 or more credit
entries

31
 LS 2.00: SERVICE CONCERN: COMPLETE ACCOUNTING CYCLE W/O ADJUSTMENTS

T-Account Matching Principle

-​ can also be used to transfer or sort -​ requires that the expenses incurred
the journal entries instead of GL during a period be recorded in the
-​ simplest structure of letter T to same period in which the related
present the changes the changes in revenues are earned
the debits & credits of an account
Periodicity Concept Principle
4.​ Preparatory of the Trial Balance -​ assumes that the operating life of a
(TB) business may be divided into
-​ to provide a listing to verify the time-periods so that timely and
equality of debits & credits in the regular financial reports will be
ledger available for the use of the decision
-​ if the TB is not balance, then makers.
something went wrong in the -​ annual, quarterly, and monthly
recording financial statements
-​ listing of all ledger accounts, in
order, with their respective debit or At the end of the accounting period, some of
credit balances the accounts may contain both ‘real’ or
-​ TB uses the journal sheet for easy ‘permanent’ accounts such as A, L, and OE,
identifcation of the debits & credits or nominal/temporary accounts such as
-​ NO account code & totals in the TB Income & Expenses.

5.​ Preparation of the Worksheet These accounts must be separated to avoid

(option) an over or understatement of certain
-​ to aid in the preparation of the FS accounts which will lead to incorrect
presentation of FS
Why do we adjust?
●​ Accrual Basis Adjustments make the data updated &
●​ Periodicity Concept correctly presented.
●​ Matching Principle
●​ Revenue/Expense Recognition Adjusting Entries
-​ journal entries made at the end of
Revenue Principle the accounting period to allocate
-​ Revenue is recognized when the income & expenditure to the period
earning process is complete or on which they actually occurred
almost complete.
-​ Revenue is recognized in the period ●​ Accrual Basis
when there is a measurable increase -​ accepted by PFRS (Philippine
in future economic benefits related Financial Reporting Standards)
to either an increase in an asset or a -​ Income is recognized when earned
decrease in a liability -​ Expense is recognized when
incurred
-​ NOT when cash is received/paid

32
 LS 2.00: SERVICE CONCERN: COMPLETE ACCOUNTING CYCLE W/O ADJUSTMENTS

●​ Cash Basis ●​ Income Method

-​ income is recognized when cash is -​ solve for what is left unearned
collected ○​ cash received is initially
-​ expense is recognized when cash is recorded as income
paid ○​ debit: income
○​ credit: unearned income
Types of Adjusting Entries
●​ Liability Method
Deferral -​ solve for what is actually earned
Prepaid Expense (A) ○​ cash received is initially
-​ expenses paid for the business in recorded as liability
advance ○​ debit: unearned income
-​ cash involved ○​ credit: income

●​ Asset Method Accrual

-​ what is used -​ recognizing revenues and expenses
first adjustment: when earned or incurred not when
○​ debit: expense cash is received or paid
○​ credit: prepaid expense
Matching Principle
●​ Expense Method -​ matching expenses to revenues
-​ what is left
first adjustment: Accrued Revenues (A)
○​ debit: prepaid expense -​ revenue is already earned but cash
○​ credit: expense is not yet received

Depreciation Expense Accrued Expense (L)

-​ systematic allocation of expenses of -​ expense is already incurred but cash
particular assets sue to wear and is not yet paid
tear -​ supplier invoices or bills have not
-​ accumulated depreciation is a been received
contra-asset account -​ amounts are estimates
vs. accounts payable
Straight-Line Method (SLM) -​ supplier invoices have been
Periodic Depreciation =(Cost - Salvage received and recorded
Value)/Useful Life -​ amounts are exact

Unearned Revenue (L) Doubtful Accounts/Bad Debts

-​ when company received payment
before providing the goods or
services to its customer
-​ cash is received in advance for
revenues not yet rendered

33
 LS 2.00: SERVICE CONCERN: COMPLETE ACCOUNTING CYCLE W/O ADJUSTMENTS

6.​ Adjusting Journal Entries are

Journalized & Posted
-​ to record the accruals (receivables &
payables), expiration of deferrals
(prepayments & unearned),
estimations (allowance for
uncollectible accounts &
depreciation), and other events from
the worksheet
Statement of Financial Position (Balance
Principles Supporting Adjustments: Sheet)
●​ Accrual Basis - recognize -​ presents the entity’s assets,
revenue/expense whether cash is liabilities, and capital as of the period
not received or paid as long as
goods are delivered & services are
rendered
●​ Matching Principle - match income
with expenses
●​ Periodicity Concept - accounting
information is useful & relevant to
economic decisions when it is timely
or reported properly
●​ Recognition Concept - revenue &
expense

7.​ Preparation of the Financial

Statements
-​ To provide useful information to
decision-makers
-​ are structured representation of the
entity’s financial position, financial
performance, and cash flows of an
entity that is useful to a wide range
of users in making economic
decisions

34
 LS 2.00: SERVICE CONCERN: COMPLETE ACCOUNTING CYCLE W/O ADJUSTMENTS

Statement of Comprehensive Income ●​ Operating activities - include cash

(Income Statement) activities related to net income
-​ presents the entity’s revenues and ●​ Investing activities - include cash
expenses during an accounting activities related to noncurrent
period that tells users in whether the assets
entity enjoyed profit or suffered a ●​ Financing activities - comes from
loss during the period conducting financing activities for the
business; financing cash flow
includes obtaining or repaying
capital, be it equity or long term debt

Direct Method

Statement of Owner’s Equity (Capital

Statement)
-​ presents the changes in the equity of
the owner due to investments, ●​ Net Income of the SCI is placed in
additional contributions, net income the SCE
or loss, and personal withdrawals ●​ Capital of the SCE is placed in the
SFP
●​ Cash of the SFP is placed in the
SCF

Notes to FS (Disclosures)

Statement of Cash Flows (Investing,

Financing, and Operating)
-​ presents the entity’s cash inflows
and outflows on three major
activities: operating, investing, and
financing

35
 LS 2.00: SERVICE CONCERN: COMPLETE ACCOUNTING CYCLE W/O ADJUSTMENTS

-​ the debit in adjusting entry is

credited while the credit in adjusting
entry id debited
-​ applies to any adjusting entry that
increased an asset or liability
account
8.​ Closing Journal Entries are
Recorded (Journal) & Poster
(Ledger)
-​ to close all nominal or temporary
accounts of income, expenses to
income summary & drawing or
withdrawals & at the end, all these
accounts will end in owner’s equity

9.​ Preparation of a Post-Closing

Trial Balance
-​ to check the equality of debits &
credits (A = L + OE) after the closing
entries of temporary accounts
-​ only real or permanent accounts
remain (A = L & OE)
-​ ending balances of A, L, & OE
become the beginning balances of
the next accounting period

●​ Trial Balance - after the worksheet

is done
●​ Adjusted Trial Balance - with
adjustments
●​ Post-Closing Trial balance - only
real accounts (Assets = Liabilities &
Owner’s Equity)

10.​Reversing Journal (optional)

Entries are Journalized & Posted
-​ to simplify the recording of certain
regular transactions in the next
accounting period

Reversing Entry
-​ journal entry which is the exact
opposite of related adjusting entry
made at the end of the period

36
 LS 2.01: ACCOUNTING PROCESS & TRANSACTION ANALYSIS

Revenues
Accounting Process -​ gross increases in OE resulting from
1.​ Identification business activities entered into for
-​ select economic events the purpose of earning income
(transactions) -​ may result from sale of
merchandise, performances of
2.​ Recording services, rental or property, or
-​ record, classify, and summarize lending of money
-​ usually result in an increase in an
3.​ Communication asset
-​ prepare accounting reports
-​ analyze and interpret for users Expenses
-​ decreases in owner’s equity that
Basic Accounting Equation result from operating the business
-​ cost of assets consumed or services
Assets = Liabilities + Owner’s Equity used in the process of earning
​ ​ ​ Capital revenue

Owner’s Equity
3 Basic Accounting Elements + Revenue & -​ OE = A - L
Expenses -​ represents the ownership claim on
total assets
Assets -​ increase by capital
-​ resources owned by the business -​ decrease by drawings
-​ things of value used in carrying out -​ increase by revenues
such activities as production and -​ decrease by expenses
exchange
Basic Accounting Equation
Liabilities
-​ claims against assets Account - an individual accounting record
-​ existing debts and obligations of the movements (increases & decreases
in a specific accounts
Investments
-​ assets put into the business by the T-Account - basic accounting device used
owner to summarize the increases & decreases
-​ increase owner’s equity

Drawings
-​ withdrawals of cash or other assets
by the owner for personal use
-​ decrease owner’s equity

37
 LS 2.01: ACCOUNTING PROCESS & TRANSACTION ANALYSIS

Transaction Analysis Before the formal FS presentation, a

working paper (WP) is prepared to assist
In every business transaction, there is the bookkeeper in FS. The WP gives
always a value received and value parted assurance that the net income/loss is
with. correctly computed

In order for a business to receive Terms Used for Corrections:

something, it must be willing to give
something in return. Understated - means that records showed
that “the amount recorded is lacking”; add to
Trial Balance - shows the equality of all the account
debits & credits; listed according to the
elements (A-L-OE-R-E) according to the Overstated - means that records showed
chart of accounts that “the amount recorded is greater than
what it should be”; deduct to the account
Financial Statements
Error in the Use of Accounts - consider
1.​ Statement of Comprehensive the accounts affected
Income (Income Statement) -
presents the revenues and Unrecorded - no records to support the
expenses and resulting net income claims; add or record the transactions
or net loss of a company for a through a journal
specific period of time
Trial Balance is Footed Incorrectly -
2.​ Statement of Owner’s Equity - retrace the accounts from ledger to journal
summarizes the changes in owner’s or journal to the ledger
equity (increases & decreases) for a
specific period of time​ ledger - book of final entry
journal - temporary book of accounts
3.​ Statement of Financial Position
(Balance Sheet) - reports the Correcting Entry is through:
assets, liabilities, and owner’s equity ●​ Sole proprietorship - Owner’s Equity
of a business at a specific date ●​ Partnership - Partner’s Equity
●​ Corporation - Retained Earnings
4.​ Cash Flow Statement -
summarizes information concerning
the cash inflows (receipts) and
outflows (payments) for a specific
period of time

38
 LS 2.02: SERVICE CONCERN: ADJUSTMENTS CONCEPTS, METHODS, AND ENTRIES

Adjusting Entries Adjusting Journal Entries:

-​ journal entries which are to be
recorded in the general journal and ●​ Accruals
are usually prepared at the end of -​ recognize revenue earned
the accounting period of one year regardless of when it was collected,
following the preparation of a trial and to record expenses incurred
balance whether paid or not
-​ usually prepared at the end of the ○​ Accrued Expense
accounting period of one year -​ expense already incurred by
following the preparation of a trial the business but not yet paid
balance when the accounting period
-​ each adjusting entry affects a ends
balance sheet account (an asset or -​ recognizing an incurred and
liability account) and an income unrecorded expense that
statement account (income or remains unpaid because
expense account) payment is not yet due
-​ connotes “payable”
Adjusting entries are prepared for the
following reasons: ​ debit: expense
​ credit: accrued expense
1.​ to bring records or balances of
accounts updated (or to bring the ○​ Accrued Income
assets, liabilities, revenues & -​ income already earned by
expenses up-to-date at the end of the business but not yet
the accounting period) collected when the
accounting period ends
2.​ to properly match revenues against -​ bringing into existence an
expenses during the period. income that is already
(Revenues to be recognized within earned but not yet received
the period they are earned and -​ current asset
expenses to be recognized within -​ connotes “receivables”
the period they are incurred.)
​ debit: accrued income
accounting utilizes “adjusting entries” at the ​ credit: income
end of an accounting period to split mixed
accounts

mixed accounts - have components of asset

and expense, or liability and income at the
end of the accounting period

39
LS 2.02: SERVICE CONCERN: ADJUSTMENTS CONCEPTS, METHODS, AND ENTRIES

●​ Deferrals ●​ Depreciation
-​ postponement of the recognition of ​ Property & Equipment
“an expense already paid but not yet -​ tangible assets held by an
incurred,” or of “a revenue already enterprise for use in the
collected but not yet earned production or supply of
goods or services for rental
○​ Prepayment of Expense to others, or for
-​ advanced payments of administrative purposes
business expenses or -​ are expected to be used
supplies to be used in a during more than one year
business operation period
-​ deferred revenues or
unearned revenues *Land is not a depreciable asset
because it is expected to be useful
Prepaid Expense - an expense to the business enterprise for an
already paid but not yet incurred indefinite period of time

➢​ Expense Method - expense is -​ cost of property and

debited upon payment of the prepaid equipment is not being
expense. Nominal Approach. treated as an expense but
rather an asset and generally
➢​ Asset Method - asset account is carried at cost less
debited upon payment of the prepaid accumulated depreciation
expense. Real Approach. equals Net Book Value
-​ Depreciation Expense
○​ Precollection of Income
-​ advanced collections of Method: Straight Line Method
business revenues from
customers ➢​ Acquisition Cost - amount an entity
-​ income already collected but paid to acquire the depreciable
not yet earned asset; amount paid or liability
incurred when the asset is bought
➢​ Income Method - an income
account is credited upon collection ➢​ Scrap Value/Salvage
or receipt of cash. Nominal Value/Residual Value - estimated
Approach. value of the asset at the end of its
economic or useful life; amount that
➢​ Liability Method - liability account is the asset can probably be sold for at
credited upon collection or receipt of the end of its estimated useful life
cash. Real Approach.
➢​ Estimated Useful Life - estimated
length of time usually stated in years
that the asset can be of use; useful
life is an estimate.

40
 LS 2.02: SERVICE CONCERN: ADJUSTMENTS CONCEPTS, METHODS, AND ENTRIES

Straight-Line Method: Fundamental Concepts of Adjustments

Annual Depreciation Expense = (Cost of

the Asset - Salvage Value)/Estimated Life
of the Asset in Years

●​ Estimated Uncollectible Accounts

or Estimated Doubtful Accounts
(Bad Debts)

Accounts Receivable - represents

the amount collectible arising from
rendering of services to clients or
customers and sale of merchandise
to customers on account
The Adjusting Process
Bad Debts/Doubtful Accounts - -​ analysis and updating of accounts at
accounts receivable that are already the end of the period before the
long overdue financial statements are prepared

●​ Correction of Erroneous Journal Adjusting Entries

Entries -​ journal entries that bring the
○​ wrong charging of account accounts up to date at the end of the
○​ correct charging of accounts accounting period
but amounts are in error
Periodicity Concept
Adjusting Entries -​ to provide timely information the
economic life of business are divided
Principles: into time periods or accounting
periods
Time Period Assumption - requires that
revenues & expenses be reported in the Process of Liquidation
same period -​ only way to know how successfully a
business has operated is to close
Revenue Recognition Principle - requires doors or do the process of
that revenue be recognized or recorded liquidation
when services are rendered or goods are
already delivered whether cas is received or
not

Matching Principle - requires to match

income & expenses as a result of business
operations. expenses are consequences in
producing the income

41
 LS 2.02: SERVICE CONCERN: ADJUSTMENTS CONCEPTS, METHODS, AND ENTRIES

Types of Accounts Requiring Adjustment Nature of the Adjusting Process

Deferrals Under the cash basis of accounting,

1.​ Prepaid Expense ●​ revenues and expenses are reported
-​ expenses paid in cash and recorded on the income statement in the
as assets before they are used or period in which cash is received or
consumed paid; revenue recognized when
-​ advance payment of future received
expenses and are recorded as
assets when cash is paid Under the accrual basis of accounting,
●​ revenues are reported on the
2.​ Unearned Revenues income statement in which they are
-​ revenues received in cash and earned; revenue recognized when
recorded as liabilities before they are earned and realizable.
earned ●​ some of the accounts need updating
-​ advance receipt of future revenues at the end of the accounting period
and are recorded as liabilities when for the following reasons:
cash is received ○​ some expenses are not
recorded daily
If the asset or liability appears in the original ○​ some revenues and
entry, then the method is applied as an expenses are incurred as
Asset/Liability Method. Otherwise, it will time passes rather than as
apply the Expense/Revenue Method. separate transactions
○​ some revenues and expense
SPLIT THE MIXED ACCOUNTS may be unrecorded

Asset/Liability Method Accruals

Financial Position 3.​ Accrued Revenues
Real Accounts -​ revenues earned but not yet
Permanent Accounts received in cash or recorded
Not Closed but Forward From Year to Year -​ unrecorded revenues that have been
Note: Statement of Financial Position earned and for which cash has yet to
(Balance Sheet) shows the financial be received
conditions of the business as presented in
A = L&OE 4.​ Accrued Expenses
-​ expenses incurred but not yet paid in
Expense/Revenue Method cash or recorded
Income Statement -​ unrecorded expenses that have
Nominal Accounts been incurred and for which cash
Temporary Accounts has not yet been paid
Closed Yearly
Note: Income Statement shows the result of
operations in one accounting period and will
begin again by next period

42
LS 2.02: SERVICE CONCERN: ADJUSTMENTS CONCEPTS, METHODS, AND ENTRIES

5.​ Depreciation Expense

-​ fixed assets, or plant assets, are
physical resources that are owned
and used by a business and are
permanent or have a long life
-​ As time passes, a fixed asset loses
its ability to provide useful services.
-​ depreciation - decrease in
usefulness
-​ depreciation expense - as a fixed
asset depreciates, a portion of its
cost should be recorded as an
expense
-​ a fixed asset account is not
decreased (credited) when making
the related adjusting entry. This is
because both the original cost of a
fixed asset and the depreciation
recorded since its purchase are
reported on the balance sheet.
Instead, an accounts entitled
Accumulated Depreciation is
increased (credited)
-​ Contra Accounts/Contra Asset -
accumulated depreciation accounts

6.​ Uncollectible Accounts

-​ Bad Debt Loss - uncollectible
accounts/doubtful accounts
-​ when there is positive evidence that
a specific accounts receivable is
definitely uncollectible, the
appropriate amount is written off
against the contra asset account

43
 LS 2.03: RECAP, WORKSHEET, AND FINANCIAL STATEMENTS

IAS 1: Presentation of Financial International Financial Reporting

Statements Standards (IFRS) - Standards and
Interpretations issued by the International
Objectives: Accounting Standards Board (IASB)
●​ presentation of general purpose ●​ International Financial Reporting
financial statements Standards
●​ ensure comparability both with the ●​ International Accounting standards
entity’s financial statements of ●​ IFRIC Interpretations
previous periods and with the ●​ SIC Interpretations
financial statements of other entities
●​ sets out overall requirements for the Material - omitting, misstating or obscuring
presentation of financial statements it could reasonably be expected to influence
●​ guidelines for their structure and decisions that the primary users of general
minimum requirements for their purpose financial statements make on the
content. basis of those financial statements, which
provide financial information about a
Scope: specific reporting entity
●​ an entity shall apply IAS 1 in
preparing and presenting financial Notes - contain information in addition to
general purpose financial statements that presented in the SFP, SCI, SCE, and
in accordance with IFRS SCF; provides narrative descriptions or
●​ other IFRs set out recognition, disaggregations of items presented in those
measurement and disclosure statements and information about items that
requirements for specific do not qualify for recognition in those
transactions and other events statements

Definitions: Other Comprehensive Income -

comprises items of income and expense
General Purpose Financial Statements (including reclassification adjustments) that
(financial statements) - meet the needs of are not recognized in profit or loss as
users who are not in a position to require an required or permitted by other IFRS
entity to prepare reports tailored to their
particular information needs. Owners - holders of instruments classified
as equity
Impracticable - when the entity cannot
apply it after making every reasonable effort Profit or Loss - total income less
to do so expenses, excluding the components of
other comprehensive income

Reclassification Adjustments - amounts

reclassified to profit or loss in the current
period that were recognized in OCI in the
current or previous periods

44
 LS 2.03: RECAP, WORKSHEET, AND FINANCIAL STATEMENTS

Purpose: Complete Set of FS:

●​ Financial Statements are a ●​ Statement of Financial Position
structures representation​ of the ●​ Statement of Profit or Loss and
financial position and financial Other Comprehensive Income
performance of an entity ●​ Statement of Changes in Equity
●​ Statement of Cash Flows
●​ the objective of financial statements ●​ Notes, comparing significant
is to provide information about the accounting policies and other
financial position, financial explanatory information
performance, and cash flows of
an entity that is useful to a wide Comparative Information should also be
range of users in making economic presented in respect of the preceding period
decisions
Minimum comparative information
●​ financial statements also show the Except when IFRS permit or require
results of the management’s otherwise, an entity shall present
stewardship of the resources comparative information in respect of the
entrusted to it preceding period for all amounts reported in
the current period’s financial statements. An
Financial statements provide information entity shall include comparative information
about an entity’s: for narrative and descriptive information if it
➢​ assets is relevant to understanding the current
➢​ liabilities period’s financial statements
➢​ equity
➢​ income and expenses, including an entity shall present, as a minimum, 2
gains and losses SFPs, 2 SCIs + OCI, 2 separate SCIs (if
➢​ contributions by and distributions to presented), 2 SCF and 2 SCE, and related
owners in their capacity as owners notes.
➢​ cash flows
an entity should also include a SFP as at
●​ this information, along with other the beginning of the preceding period when
information in the notes, assists an entity applies an accounting policy
users of financial statements in retrospectively or makes a retrospective
predicting the entity’s future cash restatement of items in its financial
flows and their timing and certainty statements, or when it reclassifies items in
its financial statements.

45
 LS 2.03: RECAP, WORKSHEET, AND FINANCIAL STATEMENTS

an entity shall present a third statements of ●​ when management is aware of

financial position as at the beginning of the material uncertainties related to
preceding period in addition to the minimum events or conditions that may cast
comparative financial statements if: significant doubt upon the entity’s
ability to continue as a going
(a)​ it applies an accounting policy concern, the entity shall disclose
retrospectively, makes a those uncertainties
retrospective restatement of items in ●​ when an entity does not prepare FS
its financial statements or on a going concern basis, it shall
reclassifies items in its FS disclose that fact, together with the
basis on which it prepared the FS
(b)​ the retrospective application, and the reason why the entity is not
retrospective restatement or the regarded as going concern
reclassification has a material effect
on the information in the SFP at the Accrual Basis
beginning of the period ●​ FS, except cash flow information,
must be prepared using the accrual
an entity shall present 3 SFPs at the: basis
(a)​ end of the current period ●​ an entity recognizes accounts when
(b)​ end of the preceding period they satisfy the definitions and
(c)​ beginning of the preceding period recognition criteria for the elements
in the Conceptual Framework
an entity shall present with equal
prominence all of the financial statements in Materiality and Aggregation
a complete set of financial statements ●​ shall present separately each
material class of similar items
General Features ●​ shall present separately items of a
dissimilar nature or function unless
Fair presentation and compliance with they are immaterial
IFRS
●​ Faithful representation of the events Offsetting
●​ Elements of the FS are recognized ●​ shall not offset assets and liabilities
using the definition and conceptual or income and expenses, unless
framework required or permitted by an IFRS
●​ followed rules of IFRS

Going Concern
●​ management shall make an
assessment of an entity’s ability to
continue as going concern
●​ unless management either intends
to liquidate the entity or to cease
trading, or has no realistic alternative
but to do so

46
 LS 2.03: RECAP, WORKSHEET, AND FINANCIAL STATEMENTS

Frequency of Reporting regard to the criteria for the

●​ shall present a complete set of FS selection and application of
(including comparative information) accounting policies in IAS 8
at least annually ○​ an IFRS requires a change in
●​ when an entity changes the end of presentation
its reporting period and presents FS
for a period longer or shorter than Identification of the FS
one year, and entity shall disclose, in An entity shall clearly identify each FS and
addition to the period covered by the the notes. In addition, an entity shall display
FS: the following information prominently, and
a)​ the reason for using a longer repeat it when necessary for the information
or shorter period presented to be under understandable:
b)​ the fact that amounts
presented in the FS are not a)​ name of the reporting entity or
entirely comparable other means of identification, and
any change in that information form
Comparative Information the end of the preceding reporting
●​ except when IFRSs permit or require period
otherwise, an entity shall present b)​ whether the FS are of an individual
comparative information in respect entity or a group of entities
of the preceding period for all c)​ date of the end of the reporting
amounts reported in the current period or the period covered by
period’s FS. the set of FS or notes
●​ entity shall include comparative d)​ presentation currency
information for narrative and e)​ level of rounding used in
descriptive information if it is presenting amounts in the FS
relevant to understanding the current
period’s FS. Statement of FInancial Position
●​ shall present, as a minimum, 2 – reports the financial condition of an entity
SFPs, 2 SPL and OCIs, 2 SPIs (if as at a particular date
presented), 2 SCFs and 2 SCEs, – presents the entity’s economic resources,
and related notes economic obligation, and equity
– detailed representation of the accounting
Consistency of Information equation: assets, liabilities, equity
●​ entity shall retain the presentation
and classification of items in the FS ●​ Property, plant and equipment
from one period to the next unless: ●​ Investment property
○​ it is apparent, following a ●​ Intangible assets
significant change in the ●​ Financial assets
nature of the entity’s ●​ Groups of contracts within the scope
operations or a review of its of IFRS 17 that are assets
FS, that another presentation ●​ Investments accounted for using the
or classification would be equity method
more appropriate having

47
 LS 2.03: RECAP, WORKSHEET, AND FINANCIAL STATEMENTS

●​ Biological assets within the scope of Current Assets

IAS 41 Agriculture a)​ expects to realize the asset, or
●​ inventories intends to sell or consume it, in its
●​ trade and other receivables normal operating cycle
●​ cash and cash equivalents b)​ holds the asset primarily for the
●​ the total assets classified as held for purpose of trading
sale and assets included in disposal c)​ expects to realize the asset within 12
groups classified as held for sale in months after the reporting period
accordance with IFRS 5 Non-current d)​ the asset is cash or a cash
Assets Held for Sale and equivalent unless the asset is
Discontinued Operations restricted from being exchanged or
●​ trade and other payables used to settle a liability of at least 12
●​ provisions months after the reporting period
●​ financial liabilities
●​ groups of contracts within the score all other assets are classified as
of IFRS 17 that are liabilities non-current.
●​ liabilities and assets for current tax,
as defined in IAS 12 Income Taxes Current Liabilities
●​ Deferred tax liabilities and deferred a)​ expects to settle the liability in its
tax assets, as defined in IAS 12 normal operating cycle
●​ liabilities included in disposal groups b)​ holds the liability primarily for the
classified as held for sale in purpose of trading
accordance with IFRS 5 c)​ liability is due to be settled within 12
●​ Non-controlling interests, presented months after the reporting period
within equity d)​ it does not have an unconditional
●​ Issued capital and reserves right to defer settlement of the
attributable to owners of parent liability that could, at the option of
the counterparty, result in its
an entity shall present additional line items settlement by the issue of equity
(including by disaggregating the line items instruments do not affect its
listed in paragraph 54), headings, and classification
subtotals in the SFP when such
presentation is relevant to an understanding all other liabilities are classified as
of the entity’s financial position non-current

when an entity presents current and

non-current assets and liabilities, as
separate classifications in its SFP, it shall
not classify deferred tax assets (liabilities)
as current assets (liabilities).

48
 LS 2.03: RECAP, WORKSHEET, AND FINANCIAL STATEMENTS

Refinancing a Currently Maturing Obligation -​ show the results of the

if an entity expects, and has the discretion, management’s stewardship of the
to refinance or roll over an obligation for at resources entrusted to it
least 12 months after the reporting period -​ provides information about an
under an existing loan facility, it classifies entity’s:
the obligation as non-current, even if it a.​ assets
would otherwise be due within a shorter b.​ liabilities
period. c.​ equity
d.​ income and expenses,
However, when refinancing or rolling over including gains and losses
the obligation is not at the discretion of the e.​ contributions of owners in
entity, the entity does not consider the their capacity as owners
potential to refinance the obligation and f.​ cash flows
classifies the obligation as current.
Statement of Comprehensive Income
The Balance Sheet and the Accounting
Equation Income Statement
-​ reports the company’s financial
performance through presenting the
entity’s revenues, gains, expenses,
and losses for the period ended

Revenues - Expenses = Net Income before

Tax - Income Tax Expense = Net Income

Elements of Financial Performance

Income
-​ increases in economic benefits
Account Form - assets on the right side; during the accounting period in the
liabilities and equity on the left form of inflows or enhancements of
assets or decreases of liabilities that
Report Form - assets on the upper portion; results in increases in equity, other
liabilities and capital on the bottom than those relating to contributions
from equity participants
Financial Statements -​ encompasses both revenue and
-​ structured representation of the gains
financial position and financial
performance of an entity ●​ Revenue arises in the course of
-​ objective of FS is to provide ordinary regular activities
information about the financial ●​ Gains other items that represents
position, financial performance and increases in economic benefits but
cash flows of an entity that is useful does nor regularly arise in ordinary
to a wide range of users in making business operations
economic decisions

49
 LS 2.03: RECAP, WORKSHEET, AND FINANCIAL STATEMENTS

*a merchandising company who sells their a.​ two-statement format

inventories earn sales revenue. if that
company, however, decided to sell their
equipment at a price higher than its carrying
value, it is a gain on sale of equipment.

Expense
-​ decreases in economic benefits
during the accounting period in the
form of outflows or depletions of
assets or incurrences of liabilities
that result in decreases in equity, b.​ single-statement format
other than those relating to
distributions to equity participants
-​ expense encompasses both
expenses and losses

●​ Expenses are decreases in

economic benefits due to, for
example, salaries, rent, and
Statement of Financial Position (Balance
depreciation
Sheet) - shows the financial position or
●​ Losses do not arise in regular
condition by listing its assets, liabilities, and
business operations such as loss
equity (owner’s equity) of the entity as at a
from fire, loss from disasters, or loss
given date. (A = L + E/OE)
from sale of assets

Statement of Financial Performance

Income Statement vs. SCI
(Income Statement) - shows the results of
operations as at a given date. (profit or loss)
Income Statement - presents the results of
the entity’s operations and financial
Statement of Changes in Equity -
performance through the reporting of the
summarizes the changes that occurred in
entity’s revenues and expenses
owner's equity. (capital & drawing)
Statement of Comprehensive Income -
Statement of Cash Flows - provides
presents the entity’s net income, alongside
information about the cash receipts and
the effects of other comprehensive income
cash payments of the entity during a period.
leading to comprehensive income
(operations, investing & financing activities)

Notes to F/S - comprises a summary of the

significant accounting policies and other
explanatory information. (disclosures)

50
 LS 2.03: RECAP, WORKSHEET, AND FINANCIAL STATEMENTS

The financial statements are based on the Indirect Method - derives the net cash
same underlying data and are provided by (used in) operating activities by
fundamentally related. the following shows adjusting profit for income and expense
the basic relationships among the financial items not resulting from cash transactions;
statements.
1)​ the adjustment begins with profit
followed by the addition of expenses
and charges that did not entail cash
payments
2)​ increases in current assets and
decreases in current liabilities
involved in the determination of profit
but which did not actually increase
or decrease cash, are subtracted
from profit
Statement of Cash Flows 3)​ decreases in current assets and
– provides information about the cash increases in current liabilities are
receipts and cash payments of an entity added to profit to obtain net cash
during a period provided by (used in) operating
– formal statement that classifies cash activities
receipts (inflows) and cash payment
(outflows) into operating, investing, and if the expense is overstated, then profit is
financing activities. understated by the same amount; hence,
– shows the net increase or decrease in the increase in current liability is added to
cash during the period and the cash profit
balance of the period
per Philippine Accounting Standards (PAS)
Cash Flows from Operating Activities No. 7, enterprises are encouraged to report
cash flows from operating activities using
Operating Activities – provide services, the direct method but the indirect method is
producing and delivering goods acceptable.

cash flows from operating activities are the Cash Inflows:

cash effects of transactions and other ●​ receipts from sale of goods and
events that enter into the determination of performance of services
profit or loss ●​ receipts from royalties, fees,
commissions, and other revenues
Direct Method - entity’s net cash provided
by (used in) operating activities is obtained
by adding the individual operating cash
inflows and then subtracting the individual
operating cash outflows

51
 LS 2.03: RECAP, WORKSHEET, AND FINANCIAL STATEMENTS

Cash Outflows: Cash Outflows:

●​ payments to suppliers of goods and ●​ payments to owners in the form of
services withdrawals
●​ payments to employees ●​ payments to settle notes payable
●​ payment for taxes
●​ payment for interest expense Working Papers
●​ payments for other operating — data collected
expenses — help accountants organize their work and
avoid omitting important data or steps
Cash Flows from Investing Activities — provide evidence of past work so that
– include making and collecting loans; accountants or auditors can retrace their
acquiring and disposing of investment in steps and support the information in the FS
debt or equity securities; and obtaining and
selling of property and equipment and other worksheets are never published and are
productive assets rarely seen by management because they
are a preliminary step in preparing FS.
Cash Inflows:
●​ receipts from sale of property and
equipment
●​ receipts from sale of investments in
debt or equity securities
●​ receipts from collections on notes
receivable

Cash Outflows:
●​ payments to acquire property and
equipment
●​ payments to acquire debt or equity
securities
●​ payments to make loans to others
generally in the form of notes
receivable

Cash Flows from Financing Activities

– include obtaining resources from owners
and creditors

Cash Inflows:
●​ receipts from investments by owners
●​ receipts from issuance of notes
payable

52
 LS 2.04: CLOSING ENTRIES, REVERSING, POST-CLOSING TRIAL BALANCE

Closing Procedures
1.​ Debit all revenue accounts and
1.​ Journalize and post adjusting credit the total to the profit or loss
entries summary account
-​ adjusting entries were already 2.​ Credit all expenses accounts and
prepared and its effects were debit the total to the profit or loss
included in the worksheet and summary account
ultimately, in the financial 3.​ The net effect of the profit or loss
statements. summary account will be closed to
-​ however, these adjusting entries are the capital account
not yet journalized and posted 4.​ Any balance of the drawing account
formally in the book of accounts will be charged against the capital
-​ after these adjusting entries are account
journalized and posted formally, the
updated balances in the ledger After journalizing and posting the closing
should be equal to the adjusted trial entries:
balance column of the worksheet
1.​ Assets and liabilities should maintain
2.​ Journalize and post closing their updated balances
entries 2.​ Drawing, revenue, and expenses
-​ closing entries — entries that close should be zero
the balances of drawing, revenue, 3.​ The capital account should be
and expense accounts to zero to updated with the amount equal to
prepare them for the next accounting what is reported in the Statement of
period Changes in Equity

Real Accounts 3.​ Prepare a Post-Closing Trial

-​ balances continue; cumulative Balance
●​ assets -​ trial balance prepared after all
●​ liabilities closing procedures
●​ capital -​ since all nominal accounts have
already been closed, the PCTB only
Nominal Accounts includes assets, liabilities, and
-​ balance should be brought back to 0 capital
because new set of revenue is
needed for the next accounting
period
●​ drawing
●​ revenue
●​ expenses
●​ income summary

53
 LS 2.04: CLOSING ENTRIES, REVERSING, POST-CLOSING TRIAL BALANCE

After all these process, make sure that: transferred to the owner’s capital
1.​ the journal shall include the normal account
journal entries, adjusting entries, -​ the balance of the owner’s drawing
closing entries, and reversing entries account is also transferred to the
2.​ the ledger balances are updated as owner’s capital account
to assets, liabilities, and capital, and -​ closing entries — entries that
zero as to drawing, revenue, and transfer balances
expenses
3.​ the post-closing trial balance had 1.​ Revenues are transferred to Income
been prepared Summary
2.​ Expenses are transferred to Income
Reversing Entries Summary
-​ optional 3.​ Net Income or Net Loss is
-​ useful in facilitating the recording of transferred to Owner’s Capital
asset, liabilities, revenues, and 4.​ Drawings are transferred to
expenses in the usual manner Owner’s Capital
-​ journalized and posted at the
beginning of the new accounting -​ income summary — temporary
period account that is only used during the
closing process
Adjusting entries that are recommended to -​ at the end of the closing process, the
undergo Reversing Entries Income Summary account will have
1.​ Prepayments under expense a zero balance
method -​ clearing account — income
2.​ Deferrals under revenue method summary
3.​ Accrued revenues
4.​ Accrued Expenses Permanent Accounts or Real Accounts
-​ used to accumulate information from
Closing Entries one accounting period to the next
-​ journal entries which are made at
the end of an accounting year to Temporary Accounts or Nominal
transfer the balance from temporary Accounts
to permanent accounts -​ accounts that report amounts for
-​ to report amounts for only one only one period
period, temporary accounts should -​ not carried forward because they
have zero balances at the beginning relate to only one period
of the next period -​ accumulate information until it is
-​ to achieve this, the revenue and transferred to the owner’s capital
expense account balances are account
transferred to Income Summary at
the end of the period
-​ the balance of Income Summary
(net income or net loss) is then

54
 LS 2.04: CLOSING ENTRIES, REVERSING, POST-CLOSING TRIAL BALANCE

Temporary accounts must be reduced to

ZERO at the end of each accounting period. 4.​ Close the withdrawal account

Purpose of Income Summary Account

-​ summarizes the revenue and
expense accounts
-​ the balance in the account before it
is closed is either the net income or
the net loss for the period
Closing Procedure -​ the Income Summary account could
1.​ Close the income statement have a debit balance when the
income statement accounts are
closed to it if a net loss has been
incurred

Post-Closing Trial Balance

-​ prepared after the closing entries
have been posted
-​ to verify that the ledger is in balance
2.​ Close the expense accounts at the beginning of the next period
-​ shows only assets, liabilities, and
capital

1.​ Identify
2.​ Analyze
3.​ Record
4.​ Post
5.​ Prepare

Reversing Journal Entry

-​ general journal entry made on the
first day of a new accounting period
3.​ Close the income summary account that is the exact reverse of an
adjusting entry made at the end of
the previous period
-​ optional

55
 LS 2.04: CLOSING ENTRIES, REVERSING, POST-CLOSING TRIAL BALANCE

-​ simplify bookkeeping for accrued

revenues and accrued expenses
-​ Deferrals
●​ Income Method (increase
liability)
●​ Expense Method (increase
asset)

Reversing Entry
-​ undo an adjusting entry
-​ nullifies the accounting impact of the
original entry
-​ should be made for any adjusting
entry that increased an asset or
liability
-​ enable the bookkeeper to continue
preparing routine journal entries in
the new accounting period

Accrued Income
Interest Receivable​ xx
Interest Income​ ​ xx

Accrued Expense
Interest Expense​ xx
Interest Payable​ ​ xx

Deferred Expense - Expense Method

Prepaid Expense/Deferred Expense
Expense

Deferred Revenue - Income Method

Service Income
Unearned Income/Deferred Income

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 LS 3.00: BASIC CONCEPTS OF MERCHANDISING CONCERN

Service Concern
Revenues - Operating Expenses = Net
Income

Merchandising Concern
Net Sales - COGS - Selling Expenses,
Administrative Expenses, Operating
Expenses = Net Income

Merchandising Operations
Gross Invoice Price
-​ always record in the books in
Merchandising
accounting for merchandising
-​ a business activity of buying and
operations
selling of goods

List Price - original prices where

Merchandise Inventory/Inventory
merchandises are always quoted in
-​ goods that a merchandising
company sells to customers
Trade Discounts - deduction that are given
-​ reported in the FS as a current asset
by the seller to encourage to buy more
Goods
List Price - Trade Discount = Gross Invoice
-​ what the enterprise buys and sells to
Price
earn a profit

Sales
Sales
-​ legal ownership of goods is
-​ primary source of revenue for
transferred from the seller of the
Merchandising
goods to the buyer of the
merchandise
Operating Cycle
-​ transfer the ownership
-​ Revenue is earned each time a sale
is made
-​ can be in cash or account

Credit Term - the terms of payment

specified on the invoice when goods are
sold on account

Sales Returns - merchandise returned to

the seller; cancellation of sale

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 LS 3.00: BASIC CONCEPTS OF MERCHANDISING CONCERN

Sales Allowances - granted if customers Forms of FS

keep the merchandise although unsatisfied ●​ Multiple-step Income Statement
with the product; (Sales Returns and ●​ Single-step Income Statement
Allowances) ●​ Classified Balance Sheet
●​ Determining Cost of Goods Sold
Purchases under a periodic system
-​ cash collected by the merchandising
entity will then be used to purchase
goods that will be selling by the firm
-​ purchase inventory in order to be
able to sell and gain profit
-​ the company is the buyer of the
merchandise
-​ Purchase Returns and
Allowances

Accounting for Merchandising Operations

Merchandising Operations
●​ Operating Cycles Inventories
●​ Inventory Systems — perpetual and -​ assets which are held for sale in
periodic merchandising
-​ in the process of production
Recording Purchases of Merchandise (manufacturing) for such sale or in
●​ Freight Costs the form of materials in the
●​ Purchase Returns and Allowances production process or supplies to be
●​ Purchase Discounts consumed (supplies on hand) in the
●​ Summary of Purchasing rendering of services
Transactions -​ inventories are vulnerable to theft or
misuse
Recording Sales of Merchandise -​ Merchandise Inventory for trading
●​ Sales Returns and Allowances concern is one that buys and sells
●​ Sales Discounts goods in the same form purchased

Completing the Accounting Cycle 2 Inventory Accounting Systems

●​ Adjusting Entries ●​ Perpetual - continuously updates
●​ Closing Entries accounting records for merchandise
●​ Summary of Merchandising Entries transactions - specifically for those
records of inventory available for for
sale & inventory sold
●​ Periodic - updates merchandise
inventory records only at the end of
the period

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 LS 3.00: BASIC CONCEPTS OF MERCHANDISING CONCERN

Inventory Systems Sales Discount

-​ contra-income - IS
-​ debit
-​ to account for discounts (cash)
offered to clients for prompt payment
within the discounting period

Transportation Out/Freight Out/Delivery

Expense
-​ selling expenses - IS
-​ debit
-​ to account for the cost of
transporting the goods sold to the
clients
Inventory Ending - unsold portion; current
asset Account Titles Applied to Purchases for
Merchandising Business (Periodic)
Cost of Sales - sold portion composed of
inventory beginning + freight costs - Purchases (Periodic Inventory System)
discounts & allowances - inventory ending; Merchandise Inventory (Perpetual
expense Inventory System)
-​ cost/expense
Accounts Titles Applied to Sales for -​ cost of goods sold section - IS
Merchandising Business -​ debit
-​ to account the purchase of
Merchandise Inventory merchandise or goods from the
-​ current asset - FP supplier at the invoice price (gross
-​ debit price method)
-​ to account the value of merchandise
or goods held or available for sale Purchases Returns and Allowances
-​ contra-cost
Sales -​ cost of goods sold section - IS
-​ income/revenue - IS -​ credit
-​ credit -​ to account for for the return or
-​ to account for the sale of damaged merchandise sent back to
merchandise at selling price (cost + the supplier
gross profit)
Purchases Discounts
Sales Returns and Allowances -​ contra-cost
-​ contra-income - IS -​ cost of goods sold section - IS
-​ debit -​ credit
-​ to account the returns or damaged -​ to account for the discounts availed
merchandise received from the from the supplier for paying within
clients the discount period

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 LS 3.00: BASIC CONCEPTS OF MERCHANDISING CONCERN

Cost of Sales/Goods Sold (Perpetual

Inventory System)
-​ contra-merchandise inventory
(perpetual inventory)
-​ debit/credit
-​ to account for the deductions of
Merchandise (debit) for every sale or
additions (credit) every returns of
merchandise

Freight In/Transportation In
-​ additional-cost
-​ cost of goods sold section - IS
-​ debit
-​ to account for the added cost of
transporting goods from the supplier

Purchase Order - an authorization made by

the buyer to the seller to deliver the
merchandise as detailed in the form

[Link]

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