Introduction to Accounting

Accounting and double-entry bookkeeping; financial and managerial accounting; basic financial statements (income
statement, statement of cash flows, statement of changes in owners' equity and balance sheet); permanent (real) and
temporary (nominal) accounts; four types of accounting transactions.
1. Definition of accounting
What is accounting? People in the business world consider it to be quite important. When you plan to invest in McDonald's stock,
buy new equipment, or forecast future sales and expenditures, you almost certainly use accounting information. Why? Because,
accounting provides information for decision-making in the business world.
Accounting is a service-based profession that provides reliable and relevant financial information useful in making decisions.

Financial information may include sales, expenses, taxes and other figures.
There are three steps to preparing financial information:identification, recording and communication.
First, economic events are identified. A sale at a gas station, payment of taxes by a commercial enterprise, or purchase of
insurance are all examples of economic events.
Next, all economic events are recorded. Recording provides a history of a company's financial activities. In this step, economic
events are also classified and summarized.
Finally, information about classified and summarized economic events is communicated to interested parties. Such communication
may take several forms. One such form is a financial statement which you will read about later in this tutorial.
2. Users of accounting information
There are two broad categories of interested parties, or accounting information users:

• external users

• internal users
External users are parties outside the reporting entity or company who are interested in the accounting information.

Types of external users include:

• Investors (i.e., owners), who use accounting information to make buy, sell or keep decisions related to shares, bonds, etc.
• Creditors (i.e., suppliers, banks), who utilize accounting information to make lending decisions.
• Taxing authorities (i.e., Internal Revenue Service), who need accounting information to determine a company's tax liabilities.
• Customers, who may need accounting information to decide which products to buy from which companies.
Internal users are parties inside the reporting entity or company who are interested in accounting information.

Types of internal users include:

• A company's senior and middle management, who use accounting information to run the business.
• Employees who use accounting information to determine a company's profitability and profit sharing.
Financial accounting provides information that is designed to satisfy the needs of external users. Such reporting is usually done in
the form of financial statements.
Managerial accounting provides information that is useful in running a company by internal users. Such reporting is usually
accomplished through custom-designed (or managerial) reports.

The illustration below shows relationships between the types of accounting and accounting information users.
Illustration 1: Types of accounting and accounting information users

3. Generally Accepted
Accounting Principles
(GAAP)

People and organizations make

decisions based on financial
information prepared by accountants.
That is why it is important for people
and organizations to understand the
ways in which accounting information
is measured. To ensure consistency,
rules are established that business
people can use to make sure they are
comparing oranges to oranges.
 For example, assume a store sells goods. Should the store's accountant record the sale at the moment the goods are shipped
(accrual accounting) or at the time cash for these goods is received (cash accounting)?

Whether the store owner applies accrual or cash accounting is not important to interested parties, as long as the owner follows a
rule requiring him to disclose the chosen accounting method for the reporting purposes.
Accounting rules such as these are grouped together and called Generally Accepted Accounting Principles(GAAP).
Generally Accepted Accounting Principles (GAAP) are common standards that guide accountants in reporting economic events.

The Financial Accounting Standards Board (FASB) regularly issues Statements of Financial Accounting Standards (SFAS) that
comprise a large portion of GAAP. You can find more information about SFAS, their issuance process and current projects
on FASB's website.
In 2009, all SFAS statements and other pronouncements were included in the Accounting Standards Codification (ASC), which is
the single source of authoritative U.S. accounting and reporting standards, other than guidance issued by the Securities and
Exchange Commission (SEC).
Other organizations playing a significant role in regulating the accounting profession are the Securities and Exchange
Commission and the Public Company Accounting Oversight Board (PCAOB). The SEC and PCAOB mostly regulate public
companies, while the FASB establishes standards for private companies.
4. Financial reporting and financial statements
Businesses communicate accounting information to the public through a process known as financial reporting.
Financial reporting is the process through which companies communicate information to the public.

The central means of external financial reporting is a set of financial statements. There are four general-purpose financial
statements:

• Income Statement

• Statement of Changes in Equity

• Balance Sheet

• Statement of Cash Flows

An income statement presents revenues and expenses and resulting net income or net loss for a period of time. An income
statement is also called a Statement of Operations, an Earnings Statement, or a Profit and Loss Statement (P/L).
A statement of changes in equity shows all changes in owners' equity for a period of time. This statement is also called an
Owners' Equity Statement.
A balance sheet presents assets, liabilities and owners' equity on a specific date. A balance sheet is also called a Statement of
Financial Position.
A cash flow statement summarizes information about cash outflows (payments) and inflows (receipts). This statement may also
include certain information not related to actual cash flows.

Notes to the financial statements are another important aspect of reporting. Notes can be found in most financial statements and are
required to be included in the financial statements of publicly traded companies. Notes include, among other things, addition al
information about the financial condition and performance of a company. The information presented in the notes may differ greatly
from one company to another.
4.1. Elements of financial statements
All financial statements consist of classes or categories known as elements. There are ten elements: assets, liabilities, equity,
contributed capital, revenue, expenses, distributions, net income, gains, and losses. These elements are explained later in this
tutorial or are covered in other tutorials.
Assets are the economic resources a business uses to accomplish its main goal (i.e., increasing the owners' wealth).

Formally recognized assets must meet the following two conditions:

• they must represent a potential economic benefit that is assignable to a particular entity, and

• an event giving rise to the assignment must have occurred (i.e., a transaction resulting in an asset has already occurred).

For example, if a company has purchased a piece of equipment and uses it to generate profits, it is considered as an asset.
However, if the company just considers buying new equipment, it can't be deemed or recorded as an asset.
5. Basic accounting equation
Before we can proceed with the basic accounting equation we need to understand claims:
A company's assets belong to the resource providers who are said to have claims on the assets.

In other words, each asset has its own source provided by an owner or creditor. So, there can't be a claim without an appropriate
asset and vice versa. Based on this statement, we can define the basic accounting equation as:

Assets = Claims
 Claims are divided into two categories:
• Creditors' claims that are called liabilities
• Owners' claims that are called equity

Taking this into account, the basic accounting equation can also be presented as follows:

Assets = Claims

Assets = Liabilities + Equity

Liabilities are debts and obligations of a company.

Equity is what the company "owes" to owners. Equity is also called net assets or residual equity.

The amount of total assets minus total liabilities equals equity. Because equity equals the difference between assets and liabilities, it
is also called net assets.
If a company goes bankrupt, liabilities are paid off first to creditors, while equity is the last to be distributed. Therefore, owners'
equity is also called residual equity.

Let us look at an example of the basic accounting equation. Suppose a company has assets of $800, liabilities of $300, and equity
of $500. These amounts will be shown in the basic accounting equation as follows:
Illustration 2: Example of basic accounting equation
Assets = Claims

Assets = Liabilities + Equity

$800 = $300 + $500

6. Effects of transactions on the basic accounting equation

Let us know examine how different transactions affect the basic accounting equation. We will take a look at several transactions
separately.

1) Friends Company is created when the owners pool $5,000 into the business. The effect of the contributions on the accounting
equation is as follows:
Illustration 3: Effect of cash contribution
Claims

Assets = Liabilities + Equity

+$5,000 = + +$5,000

Note that the amount of this single transaction is recorded twice. The first time it is recorded as an asset and the second time it is
recorded as equity (the asset source). In accounting any transaction is recorded at least twice, as a rule. This rule is known
as double-entry bookkeeping.
The double-entry bookkeeping rule states that any transaction is recorded at least twice.

Because this transaction provided assets to the company, it is called an asset source transaction. An asset source transaction is
one of the four types of accounting transactions.
Asset source transactions result in an increase in an asset account and in one of the claim accounts (liability or equity accounts).

2) Next, assume that Friends Company acquires an additional $2,000 of assets by borrowing cash from creditors (e.g., taking a loan
from a bank). This is also an asset source transaction. In the table below the beginning balances are derived from the ending
balances of the previous transaction:
Illustration 4: Effect of borrowing
Claims

Assets = Liabilities + Equity

Beginning balance $5,000 = + $5,000

Effect of borrowing +$2,000 = +$2,000

Ending balance $7,000 = $2,000 + $5,000

Equity is usually viewed as a source of assets, and that's why it is necessary to subdivide the owner's interest into two components.
First, owners' claims are established when a business acquires assets from owners. These claims result from the contributions of
capital resources by the owners; therefore, they are frequently called contributed capital.
Contributed capital is a component of equity resulting from contributions of capital resources by owners.

The second source of assets associated with equity occurs when a business obtains assets through its earnings activities. This
source is called retained earnings.
Retained earnings are a component of equity resulting from earnings activities.
Taking into account the definitions above, the basic accounting equation can be presented like this:

Equity

Contributed Retained
Assets = Liabilities + +
Capital Earnings

7. Effects of transactions on the basic accounting equation, cont.

3) An increase in assets resulting from rendition of goods or services to customers is called revenue.

Earning revenue can be an asset source transaction. To illustrate the effect of a revenue transaction, let's assume that Friends
Company received $3,000 cash for services it provided to customers. Note in the illustration below that both assets and retained
earnings increase which is a characteristic of an asset source transaction.
Illustration 5: Effect of revenue transaction
Equity

Contributed Retained
Assets = Liabilities + +
Capital Earnings

Beginning balance $7,000 = $2,000 + $5,000 + $0

Effect of revenue +3,000 = + + +3,000

Ending balance $10,000 = $2,000 + $5,000 + $3,000

4) Assets acquired through operating activities are called revenues. Assets used in the process of generating revenues are
called expenses. Expenses decrease retained earnings.
Assume Friends Company used $1,000 in assets to earn the $3,000 (see above) in revenues. This is an example of an asset use
transaction.
Asset use transactions result in a decrease in an asset account and in one of the claim accounts (liability or equity accounts).

The effect of an asset use transaction (assets and claims decrease) on the basic accounting equation is as follows:
Illustration 6: Effect of expense recognition
Equity

Retained
Assets = Liabilities + Contributed Capital +
Earnings

Beginning balance $10,000 = $2,000 + $5,000 + $3,000

Effect of expenses (1,000) = + + (1,000)

Ending balance $9,000 = $2,000 + $5,000 + $2,000

Take a note of how decreases or negative amounts are shown in accounting records. Instead of prefixing a minus sign ("-"), a
number is taken into parenthesis. This is a common way of showing a decrease in accounting.
5) If a business chooses to transfer part of its assets (particularly its retained earnings) to the owners, the transfer is
called distribution. Assume Friends Company transfers $500 of assets to its owners. This is an asset use transaction:
Illustration 7: Effect of cash distribution
Equity

Contributed Retained
Assets = Liabilities + +
Capital Earnings

Beginning balance $9,000 = $2,000 + $5,000 + $2,000

Effect of distribution (500) = + + (500)

Ending balance $8,500 = $2,000 + $5,000 + $1,500

Both distributions and expenses result in decreases in retained earnings and thus, in equity.

The table below is a summary of the effects of the three asset source transactions (events 1 through 3) and two asset use
transactions (events 4 and 5):
Illustration 8: Summary of transaction effects
Equity

Contributed Retained
Assets = Liabilities + +
Capital Earnings

Beginning balance $0 = $0 + $0 + $0
Effect of contribution +5,000 = + +5,000 +
Effect of borrowing +2,000 = +2,000 + +
Effect of revenue +3,000 = + + +3,000
 Effect of expenses (1,000) = + + (1,000)
Effect of distribution (500) = + + (500)

Ending balance $8,500 = $2,000 + $5,000 + $1,500

8. Closing the books: permanent and temporary accounts

At the end of an accounting period, all accounts are prepared for the next period. In this regard, it is important to distinguish
between permanent and temporary accounts. Balance sheet accounts (i.e., assets, liabilities, and equity) have a continual
nature; therefore, they are not closed after each period. That's why they are called permanent accounts.
Permanent accounts are balance sheet accounts. They are not closed after each period. Their balances are carried forward into
the next period. Permanent accounts are also called real accounts.

In contrast, revenue, expense, and distribution accounts are used to collect information about a single accounting peri od. At the end
of a period, amounts in revenue, expense, and distribution accounts are transferred to the Retained Earnings account. Accordingly,
the revenue, expense, and distribution accounts must have zero balances after closing the books at the end of one accounting
period and at the beginning of the next period.
Temporary accounts are closed at the end of each period. These are mostly income statement accounts, except for a distribution
account that is an equity statement account. Temporary accounts are also called nominal accounts.

The process of transferring the balances from the temporary accounts to the permanent account (i.e., the Retained Earnings
account), is referred to as closing the accounts or closing the books.

9. Financial statements description

Using the five transactions described above, we can now prepare the company financial statements for the period. Recall that there
are four general-purpose financial statements:
• Income Statement
• Statement of Changes in Equity
• Balance Sheet
• Statement of Cash Flows
9.1. Presentation of the income statement
An income statement is presented below. (We will not go into detail on the preparation of financial statements process in this
tutorial. That topic will be covered in future tutorials. The financial statements below are presented to give you an idea of what an
income statement looks like.)
Illustration 9: Income statement for Friends Company

Friends Company
Income Statement
For the Period Ended 20X6

Revenue (i.e., assets increase) 3,000

Expenses (i.e., assets decrease) (1,000)

Net Income (i.e., change in net assets) $ 2,000

The income statement measures the change in net assets or the difference between asset increases and asset decreases from
operating activities. The asset increases from the operating activities are labeled revenues. The asset decreases from the operating
activities are called expenses. The difference between revenues and expenses is called net income if revenue is greater than
expenses or a net loss if vice versa.

Note: At this point we don't consider liabilities in the determination of revenues and expenses. Liabilities and how they impact
revenues and expenses are covered in other tutorials.
Net income is the excess of revenues over expenses for an accounting period.
Net loss is the opposite of net income. Net loss results from the excess of expenses over revenues for an accounting period.

9.2. Presentation of the statement of changes in equity

The statement of changes in equity has the following format:
Illustration 10: Statement of changes in equity for Friends Company

Friends Company
Statement of Changes in Equity
Period Ended 20X6

Beginning Contributed Capital $0

Plus: Capital Acquisition 5,000

Ending Contributed Capital 5,000

 Friends Company
Statement of Changes in Equity
Period Ended 20X6

Beginning Retained Earnings $0

Plus: Net Income 2,000

Less: Distribution (500)

Ending Retained Earnings 1,500

Total Equity $ 6,500

The statement of changes in equity explains the effects of transactions on owner's equity during an accounting period. The
statement includes the beginning and ending balances of contributed capital and reflects any new capital acquisitions made during
the accounting period in the contributed capital section. The statement also shows the portion of net earnings retained in the
business in the retained earnings section.

9.3. Presentation of the balance sheet

Illustration 11: Balance sheet for Friends Company

Friends Company
Balance Sheet
Period Ended 20X6

Assets $8,500

Total Assets 8,500

Liabilities 2,000

Equity

Contributed Capital 5,000

Retained Earnings 1,500

Total Equity 6,500

Total Liability and Equity (Claims) 8,500

The balance sheet lists assets and corresponding claims (liabilities and equity). Any asset has a source, so assets balance w ith
claims. That is why total assets equal the sum of total liabilities and equity.
9.4. Presentation of the statement of cash flows
The statement of cash flows has the following format:
Illustration 12: Statement of cash flows for Friends Company

Friends Company
Statement of Cash Flows
For the Period Ended 20X6

Cash Flows from Operating Activities

Cash Receipts from Customers $3,000

Cash Payments for Expenses (1,000)

Net Cash Flow from Operating Activities 2,000

Cash Flows from Investing Activities 0

Cash Flows from Financing Activities

Cash Receipts from Borrowing 2,000

Cash Receipts from Capital Acquisitions 5,000

Cash Payments for Distributions (500)

Net Cash Flow from Financing Activities 6,500

 Friends Company
Statement of Cash Flows
For the Period Ended 20X6

Net Increase in Cash 8,500

Plus: Beginning Cash Balance 0

Ending Cash Balance $8,500

The statement of cash flows explains how the company obtained and used cash during a period. Sources of cash are called cash
inflows, and uses of cash are known as cash outflows.
Cash inflows are sources of cash; for example, payments from customers, capital acquisitions, etc.
Cash outflows are uses of cash; for example, payments to vendors, paying off bank loans, etc.

The statement classifies cash inflows and outflows into three categories:
• Operating activities explain cash generated through revenue and cash spent for expenses.
• Investing activities include cash received or spent on productive assets and investments in the debt or equity of other companies.
• Financing activities describe cash transactions associated with resource providers (i.e., owners and lenders.)
Illustration 13: Cash flow categories

10. Financial statements model

To better understand the effects of transactions on financial statements and see the relationships between a financial statement's
elements, a statements model can be created. There are two forms of a statements model: vertical and horizontal. As its name
implies, the vertical model arranges financial statement elements from top to bottom on a page.
The horizontal model arranges financial statement elements horizontally across a page. In the horizontal model, the balance
sheet is presented to the left, followed by the income statement, and the statement of cash flows.
Let us demonstrate the usefulness of the horizontal model and apply it to the five transactions we covered earlier. Note that if a
transaction does not affect the model, a related cell in the table below shows "n/a". In the statement of cash flows, FA means cash
flows from financing, IA means cash flows from investing, and OAmeans cash flows from operating activities.

1. Obtained capital acquisition: $5,000

2. Borrowed cash: $2,000

3. Received cash revenue: $3,000

4. Paid expenses with cash: $1,000

5. Distributed cash to owners: $500

Illustration 14: Horizontal statements model for Friends Company

Balance Sheet Income Statement

Event
Net Cash Flow
No Cash = Liabilities + Equity Rev. - Exp. =
Income

1 5,000 = n/a + 5,000 n/a - n/a = n/a 5,000 FA

2 2,000 = 2,000 + n/a n/a - n/a = n/a 2,000 FA

3 3,000 = n/a + 3,000 3,000 - n/a = 3,000 3,000 OA

 Balance Sheet Income Statement
Event
Net Cash Flow
No Cash = Liabilities + Equity Rev. - Exp. =
Income

4 (1,000) = n/a + (1,000) n/a - (1,000) = (1,000) (1,000) OA

5 (500) = n/a + (500) n/a - n/a = n/a (500) FA

Totals 8,500 = 2,000 + 6,500 3,000 - (1,000) = 2,000 8,500

With respect to Events 1 and 2, it is clear that only the balance sheet and the statement of cash flows are affected. There is no
effect on the income statement. Furthermore, you can see that Event 1 increases assets and equity and that the cash inflow is
defined as a financing activity. Event 2 has a similar effect, except that liabilities increase instead of equity.

Event 3 affects three financial statements. Assets and equity increase on the balance sheet. The revenue recognition causes net
income to increase, and the cash inflow is shown as an operating activity on the statement of cash flows.

Event 4 is the opposite of Event 3. Assets, equity and net income decrease. Cash flow statement shows this decrease as an
operating activity.

Finally, Event 5 shows a decrease in cash and equity. The cash distribution is not shown anywhere in the income statement. That's
because distribution is not an expense and thus, it is not included in the determination of net earnings. The cash distributi on is
categorized as a financing activity in the cash flow statement.

Using the horizontal model helps in understanding the effects produced by each event, so it is advisable to use it as often as
possible while learning the principles of financial accounting.

3. Second illustration of accrual accounting

Let us expand the example with Candely Services to the next accounting period. We will introduce a few more transactions that
apply to 20X7. The transactions are listed below:

1. During 20X7 revenue of $2,700 was recognized on account.

2. $3,000 of accounts receivable was collected in cash from customers.

3. Salary expense of $1,400 was incurred.

4. $1,200 cash was paid to settle salaries payable.

5. $500 cash was distributed to the owner.

6. On May 1, 20X7 Mr. Candely's business invested into a $1,000 certificate of deposit (CD). The CD carries a 6% annual
interest and 1-year maturity term.

7. On December 31, 20X7 the company adjusted the books to recognize interest revenue earned on the CD.

The table below summaries the effects of the 20X7 transactions on the accounting equation.
3.1. Summary of transactions for the second illustration of accrual accounting
Illustration 2-12: Effects of transactions for Candely Services for 20X7

Assets = Liab. + Equity

Accounts Salaries Cont. Retained

# Cash + + % Rec. + CD = + +
Receivable Payable Capital Earnings

BB $4,500 $800 $ 0 $ 0 = $500 $3,500 $1,300

1) + 2,700 + 2,700

2) + 3,000 (3,000)

3) 1,400 (1,400)

4) (1,200) (1,200)

5) (500) (500)

6) (1,000) +1,000

7) 40 40

EB $4,800 + $500 + $40 + $1,000 = $700 + $3,500 + $2,140

The first five transactions are familiar to us (see explanations of 20X6 transactions earlier), so we will go straight to Event No. 6 and
No. 7.
4.5. Analysis of taking a loan transaction
Event No. 5: On June 1, 20X6, due to liquidity concerns, Huske's Consultants decided to borrow $4,000 from Local Business Bank.
The company issued a note that had a 1-year term and carried 7% annual interest rate. The transaction increases assets (Cash)
and liabilities (Note Payable). The asset increase is recorded as a debit and the liability increase is recorded as a credit:
Illustration 10: Effect of taking a loan in T accounts
Assets = Liabilities + Equity

Cash Note Payable

Debit Credit
(5) + 4,000 (5) + 4,000

This is an asset source transaction:

Illustration 11: Effect of taking a loan in the horizontal model

Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow

4,000 = 4,000 + n/a n/a - n/a = n/a 4,000 FA

There is a cash inflow of $4,000 from financing activities in this transaction because the company received cash from the bank.
4.6. Analysis of rent prepayment transaction
Event No. 6: On June 1, 20X6 Mrs. Huske realized that the business was growing and in this connection rented a larger office.
$2,400 cash was paid in advance for a 1-year rent of the new office. The transaction decreases one asset account (Cash) and
increases another (Prepaid Rent). To increase the Prepaid Rent account it is debited and to decrease the Cash account it is
credited:
Illustration 12: Effect of rent payment in T accounts
Assets = Claims

Cash + Prepaid Rent

Credit Debit
(6) - 2,400 (6) + 2,400

This is an asset exchange transaction.

Illustration 13: Effect of rent payment in the horizontal model

Assets

Cash + Prepaid Rent = Claims Rev. - Exp. = Net Inc. Cash Flow

(2,400) + 2,400 = n/a n/a - n/a = n/a (2,400) OA

There is a cash outflow of $2,400 from operating activities because the company paid cash for the rent.

4.7. Analysis of cash collection transaction

Event No. 7: On June 15, 20X6 Huske's Consultants received $1,500 cash from Mandy Food Store for the services provided before
(see Event No. 3). Cash collection increases one asset account (Cash) and decreases the other (Accounts Rec eivable). The Cash
account is debited and the Accounts Receivable account is credited:
Illustration 14: Effect of cash collection in T accounts
Assets = Claims

Cash + Accounts
Receivable

Debit Credit
(7) + 1,500 (7) - 1,500

This is an asset exchange transaction:

Illustration 15: Effect of cash collection in the horizontal model

Assets

Accounts
Cash + = Claims Rev. - Exp. = Net Inc. Cash Flow
Receivable

1,500 + (1,500) = n/a n/a - n/a = n/a 1,500 OA

Note the $1,500 cash inflow from operating activities in this transaction. This cash collection resulted in cash inflow from the
customer.

4.8. Analysis of cash advance receipt transaction

Event No. 8: On June 30, 20X6 Mrs. Huske signed a contract with Mining Company to perform consulting services. The services
are to be provided during the 12 months starting on July 1, 20X6. Huske's Consultants received an advance cash payment in
amount of $3,600 for services to be performed under this contract. The transaction acts to increase assets (Cash) and liabilities
(Unearned Revenue). The asset is debited and the liability is credited:
Illustration 16: Effect of cash advance receipt in T accounts
Assets = Liabilities + Equity

Cash Unearned Revenue

Debit Credit
(8) + 3,600 (8) + 3,600

This is an asset source transaction:

Illustration 17: Effect of cash advance receipt in the horizontal model

Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow

3,600 = 3,600 + n/a n/a - n/a = n/a 3,600 OA

The $3,600 cash received is shown as a cash inflow from operating activities.

4.10. Analysis of cash investment transaction

Event No. 10: On August 1, 20X6, Huske's Consultants provided a loan to Jak Building Company in amount of $3,000. Jak Building
Company issued a 1-year, 8% note. The transaction acts to increase one asset (Notes Receivable) and decrease another asset
(Cash). An increase in the Notes Receivable account is recorded as a debit, and a decrease in the Cash account is recorded as a
credit:
Illustration 20: Effect of cash investment in T accounts
Assets = Claims

Cash + Notes Receivable

Credit Debit
(10) - 3,000 (10) + 3,000

This is an asset exchange transaction:

Illustration 21: Effect of cash investment in the horizontal model

Assets

Notes Cash
Cash + = Claims Rev. - Exp. = Net Inc.
Receivable Flow

(3,000) + 3,000 = n/a n/a - n/a = n/a (3,000) IA

Note the decrease in cash from this transaction. This cash outflow represents an investing activity.
4.11. Analysis of furniture purchase transaction
Event No. 11: New furniture was required for the recently rented office (Event No. 6). On August 1, 20X6 Mrs. Huske paid $2,000
cash to purchase a new office table and chairs. The office equipment is expected to have a useful life of 2 years and a salvage
value of $400. The purchase acts to increase one asset account (Office Equipment) and to decrease another (Cash). The Office
Equipment account is debited and the Cash account is credited:
Illustration 22: Effect of furniture purchase in T accounts
Assets = Claims

Cash + Office Equipment

Credit Debit
(11) - 2,000 (11) + 2,000

This is an asset exchange transaction:

Illustration 23: Effect of furniture purchase in the horizontal model

Assets

Office Cash
Cash + = Claims Rev. - Exp. = Net Inc.
Equipment Flow

(2,000) + 2,000 = n/a n/a - n/a = n/a (2,000) IA

4.15. Analysis of interest payable and expense adjusting entry

Adjustment No. 1: On June 1, 20X6 Huske's Consultants borrowed $4,000 cash from the bank and agreed to repay the loan in a
year and pay 7% annual interest (see Event No. 5). For the current accounting period, the interest expense amounted to $163 =
$4,000 x 7% x (7 months ÷ 12 months), rounded. The adjustment acts to increase liabilities and decrease equity. The increase in
liabilities (Interest Payable) is recorded as a credit, and the decrease in equity (by increasing Interest Expense) is recorded as a
debit:
Illustration 30: Effect of interest expense in T accounts
Assets = Liabilities + Equity

Interest Payable Interest Expense

Credit Debit
(A1) + 163 + Expense
[- Equity]
(A1) - 163

This is a claims exchange transaction:

Illustration 31: Effect of interest expense in the horizontal model

Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow

n/a = 163 + (163) n/a - (163) = (163) n/a

4.16. Analysis of prepaid rent adjusting entry
Adjustment No. 2: On June 1, 20X6 Huske's Consultants prepaid rent for 12 months in amount of $2,400 (see Event No. 6). The
rent expense to be recognized at the end of the period is calculated as follows: $1,400 = $2,400 x (7 months ÷ 12 months).
Recognition of the rent expense acts to decrease assets and equity. The decrease in assets (Prepaid Rent) is recorded as a credit,
and the decrease in equity (by increasing Rent Expense) is recorded as a debit:
Illustration 32: Effect of rent expense in T accounts
Assets = Liabilities + Equity

Prepaid Rent Rent Expense

Credit Debit
(A2) - 1,400 + Expense
[- Equity]
(A2) - 1,400

This is an asset use transaction:

Illustration 33: Effect of rent expense in the horizontal model

Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow

(1,400) = n/a + (1,400) n/a - (1,400) = (1,400) n/a

4.17. Analysis of unearned and earned revenue adjusting entry

Adjustment No. 3: On June 30, 20X6 Huske's Consultants received a $3,600 advance cash payment for services to be performed
within a year starting on July 1, 20X6 (see Event No. 8). By December 31, 20X6 the company had provided 6 months of service, so
the amount to be recorded as revenue is $1,800 = $3,600 x (6 months ÷ 12 months). This amount is transferred from liabilities
(Unearned Revenue) to equity (Consulting Revenue). This revenue recognition acts to decrease liabilities and increase equity. The
decrease in liabilities is recorded as a debit and the increase in equity is recorded as a credit:
Illustration 34: Effect of revenue recognition in T accounts
Assets = Liabilities + Equity

Unearned Revenue Consulting Revenue

Debit Credit
(A3) -1,800 + Revenue
[+ Equity]
(A3) + 1,800

This is a claims exchange transaction:

Illustration 35: Effect of revenue recognition in the horizontal model

Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow

n/a = (1,800) + 1,800 1,800 - n/a = 1,800 n/a

4.18. Analysis of interest receivable and revenue adjusting entry
Adjustment No. 4: On August 1, 20X6 Huske's Consultants loaned $3,000 to Jak Building Company. In return, Huske's
Consultants received a one-year, 8% note (see Event No. 10). In this connection, Huske's Consultants should record $100 = $3,000
x 8% x (5 months ÷ 12 months) as interest revenue for the year ending December 31, 20X6. The adjustment acts to increase assets
and equity. The increase in assets (Interest Receivable) is recorded as a debit, and the increase in equity (Interest Revenue) is
recorded as a credit:
llustration 36: Effect of interest revenue in T accounts
Assets = Liabilities + Equity

Interest Receivable Interest Revenue

Debit Credit
(A4) +100 + Revenue
[+ Equity]
(A4) +100

This is an asset source transaction:

Illustration 37: Effect of interest revenue in the horizontal model

Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow

100 = n/a + 100 100 - n/a = 100 n/a

4.19. Analysis of fixed assets depreciation adjusting entry

Adjustment No. 5: On August 1, 20X6 office equipment costing $2,000 was purchased (see Event No. 11). The useful life of these
assets is expected to be 2 years with a salvage value of $400. Huske's Consultants has to recognize the office equipment cost used
during 20X6 as a depreciation expense. The amount to be recorded is $800 = ($2,000 - $400) ÷ 2 years. The adjustment acts to
decrease assets and equity. The decrease in assets (Accumulated Depreciation) is recorded as a credit, and the decrease in equity
(by increasing Depreciation Expense) is recorded as a debit:
Illustration 38: Effect of depreciation expense in T accounts
Assets = Liabilities + Equity

Accumulated Depreciation Depreciation Expense

Credit Debit
+ Acc. Depr. + Expense
[ - Assets] [ - Equity]
(A5) - 800 (A5) - 800

This is an asset use transaction:

Illustration 39: Effect of depreciation expense in the horizontal model

Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow

(800) = n/a + (800) n/a - (800) = (800) n/a

4.20. Analysis of salaries payable and expense adjusting entry

Adjustment No. 6: At the end of the period, Huske's Consultants accrued $600 salaries that will be paid to employees in the next
accounting period (20X7). The adjustment acts to increase liabilities and decrease equity. The increase in liabilities (Salaries
Payable) is recorded as a credit, and the decrease in equity (by increasing Salaries Expense) is recorded as a debit:
Illustration 40: Effect of salaries expense in T accounts
Assets = Liabilities + Equity

Salaries Payable Salaries Expense

Credit Debit
(A6) +600 + Expense
[ - Equity]
(A6) - 600

This is a claims exchange transaction:

Illustration 41: Effect of salaries expense in the horizontal model

Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow

n/a = 600 + (600) n/a - (600) = (600) n/a

4.21. Analysis of supplies expense adjusting entry

Adjustment No. 7: On May 15, Huske's Consultants acquired supplies for $400 (see Event No. 2). At the end of the accounting
period $100 of supplies remained on hand. The difference of $300 (i.e., $400 - $100) shows the amount of supplies used during
 the year that should be recognized as a supplies expense. The adjustment decreases assets and equity. The decrease in assets
(Supplies) is recorded as a credit, and the decrease in equity (by increasing Supplies Expense) is recorded as a debit:
llustration 42: Effect of supplies expense in T accounts
Assets = Liabilities + Equity

Supplies Supplies Expense

Credit Debit
(A7) - 300 + Expense
[ - Equity]
(A7) - 300

This is an asset use transaction:

Illustration 43: Effect of supplies expense in the horizontal model

Assets = Liabilities + Equity Rev. - Exp. = Net Inc. Cash Flow

(300) = n/a + (300) n/a - (300) = (300) n/a

What are the qualities of accounting information?

Discover the qualities of accounting information such as relevance, reliability, comparability and consistency.
1. Qualitative characteristics of accounting information

There are four (4) qualitative characteristics of accounting information that serve as the basis for decision making purposes in
accounting:
• Relevance: information makes a difference in decision making
• Reliability: information is verifiable, factual, and neutral
• Comparability: information can be used to compare different entities
• Consistency: information is consistently presented from year to year
These qualities make accounting information understandable and useful for decision and reporting purposes: the goal of financial
reporting is to provide useful information to current and potential investors, creditors, and other users of accounting information (e.g.,
government, standard-setting bodies) to make investment, credit, and other decisions.

Accounting information qualitative characteristics are summarized below:

 In addition to the aforementioned characteristics (i.e., relevance, reliability, comparability, and consistency), the following qualities of
accounting information affect its usefulness: understandability, materiality, and conservatism.
Understandability allows the users of accounting information to comprehend (understand) accounting information, given they
spend the necessary time.
Materiality refers to a relative significance or importance of an item - dependent on individual’s judgment - to the overall financial
condition of a company. Information materiality and cost-benefit relationship (i.e., whether information benefits outweigh its costs)
impose constraints on the usefulness of accounting information.
Conservatism (i.e., accounting practice of prudence when there is business uncertainty) can also affect the usefulness of
accounting information.

2. Accounting information characteristics

Relevance:
Relevant accounting information makes a difference in a decision making process and might have the following characteristics:
• It is predictive: relevant accounting information can be used to predict future events
• It provides feedback: relevant accounting information confirms or corrects prior expectations
• It is timely: relevant accounting information is current and can influence the accounting choice (i.e., is available before the decision
is made).
Relevance is related to the concept of materiality (for further reference, see this accounting materiality article).
Reliability:
Reliable accounting information is faithfully presented and has the following qualities:
• It is verifiable: reliable accounting information is unbiased and free from errors
• It is factual: reliable accounting information is complete
• It is neutral: reliable accounting information doesn’t target interests of specific users of accounting information (i.e., doesn’t favor
certain users of accounting information over the others) and presents the actual position of the entity
ation characteristics

Comparability:
Comparable accounting information allows comparison between or among different entities.

Accounting information is comparable if the same accounting principles and methods are used by different entities. However,
different entities might use the same accounting principles (e.g., revenue recognition, matching principle, historical cost) but different
accounting methods (e.g., straight-line vs. declining-balance depreciation method, LIFO vs. FIFO).

To ensure the comparability of accounting information, companies are required to disclose their accounting methods (policies).
Consistency:

Consistency is related to comparability. While comparability allows a comparison between and among different entities, consistency
allows a comparison within a single entity.
Accounting information is consistent when an entity uses the same accounting principles and methods from one accounting
period to the next: this quality allows external users of accounting information to analyze the entity over time (e.g., analyze trends).
Nevertheless, organizations are allowed to change their accounting methods. When a new accounting method is adopted, the
organization must disclose the change in the notes to financial statements. The change doesn’t make the comparison impossible,
but it makes the analysis more difficult to perform.
 What are basic accounting principles and
assumptions?
1. Reasons principles and assumptions are important

Accounting principles and assumptions are the essential guidelines under which businesses prepare their financial statements.
These principles guide the methods and decisions for a business over a short and long term. For both internal and external reporting
purposes, it is important to understand the concepts presented below because they serve as a guideline to the analysis of financial
reporting issues.

2. Principles of accounting

Revenue Recognition Principle – Under this principle revenue is to be recorded when it is realized (or realizable), and when it is
earned and not when it is received. Revenue is realized when goods or services are exchanged, is realizable when assets recei ved
can be converted to cash, and is earned when all necessary requirements are met entitling the company to the benefits represented
by the revenue (e.g. services performed).

For example, suppose a neighborhood coffee house orders 100 coffee mugs from a coffee wholesaler in June. The coffee house
takes delivery of the new mugs in July and pays for the order in August. The wholesaler does not recognize the revenue from this
sale in June, when the order was placed, or in August, when the cash was received. For recording purposes, the revenue is
recognized by the wholesaler in July, when the coffee mugs were delivered to the coffeehouse.

This principle is used for the recognition of revenue for both goods and services. For example, if an attorney is hired with an agreed
upon retainer fee of $2,500 in May, and the services are not performed until July, the attorney does not recognize the revenue until
July. The attorney must earn the income before it can be recorded as such, even though he/she received cash for the service at an
earlier date.
Historical Cost Principle – The historical cost principle deals with the valuation of both assets and liabilities. The value at the time
of acquisition is used to value most assets and liabilities. For example, say the coffee wholesaler purchased an office building in
1990 for $1.2 million. Over time this asset has most likely appreciated in value. However, in accordance with the cost principle, the
original (historical) price of the building is what is recorded as the cost of the building in the books of the business.

Note that another basis for valuing elements of financial statements is coming into play. The new basis is fair value. With the
convergence of global standards, fair value is used more in the United States to value elements of financial statements.
Matching Principle – This principle mandates that the expenses of a business need to line up with its revenue. The expense or
cost of doing business is recorded in the same period as the revenue that has been generated as the result of incurring that cost. In
the case of the coffee wholesaler, when the 100 coffee mugs were delivered in July they changed from being a part of inventory
(asset) to a cost of goods sold entry (expense) in the month that the revenue from the sale was recognized. At this point, the
difference between the revenue and expense is determined as the gross profit from the sale.
Full Disclosure Principle – This principle states that all past, present and future information that may have had an impact on the
financial performance of the company needs to be fully disclosed. The historical performance of a company is readily available, but
examining the numbers does not always provide the entire financial picture of a company. Sometimes there are alternative
situations that need to be reported. Pending or current lawsuits are one example of a transaction that could severely impact a
company’s bottom line. In addition, incomplete financial transactions or any other conditions that could impact the company’s
performance must also be disclosed. Most of these transactions are disclosed in the footnotes to the financial statements.
3. Assumptions of accounting

Economic Entity Assumption – Under the economic entity assumption, an economic activity can be identified to a separate entity
accountable for that activity. In other words, this assumption states that businesses must keep their transactions separate from their
owners’, business units’ or other businesses’ transactions. For example, the business activities of the neighborhood coffee house
are to be kept separate from the financial activities of its owners or managers. The financial statements for the coffee house will
only reflect the revenue and expenses for the coffee house. Thus, it is possible to compare the financial statements of this
coffeehouse with its competitors’ reports, since these statements should be reported separately under the economic entity
assumption. Important to note, a separate entity does not necessary mean a legal entity. For example, financial statements for a
parent company and its subsidiaries (i.e. separate legal entities) can be presented together (i.e. consolidated financial statements).

Going Concern Assumption – For accounting purposes, the going concern assumption states that the financial activities of a
business are assumed to be in operation for an indefinite period of time. This allows a business to operate with a view towards a
long term. This is a very critical assumption as it provides that there is no short term end point in which all assets need t o be sold
and all debt must be paid off. Thus, the going concern assumption makes it possible to depreciate or amortize assets because we
assume that businesses will have a long life. For example, if the coffee house was going to be sold, its assets would be valued at
their disposal or liquidation value (sales price less expense of disposal). Under the going concern assumption, the coffee house
values its assets at their original cost. As we can see, the going concern assumption is only inapplicable when business liquidation
is imminent, and it should be used in all other business situations.
Monetary Unit Assumption – This assumption states that information in the financial statements must be expressed in monetary
units. The reason is that economic activity is expressed in monetary unit, and thus, it makes sense to apply the same basis for
accounting purposes. Monetary units are relevant, universally available, and understandable. Using the neighborhood coffeehouse
as an example, the intrinsic value of the best coffee server cannot be valued in the financial statements, regardless of how many
customers frequent the coffeehouse due to this individual. The inherent value of this person cannot be quantified in the financial
statements as an asset.

The monetary unit assumption also states that a stable unit of currency is to be used as the unit of record. In the United States, the
US Dollar is typically the currency of choice. Important to note, accounting ignores inflation or deflation and assumes that US Dollar
remains reasonably stable. For instance, no adjustments are necessary when adding 1990 dollars to 2010 dollars, unless economic
conditions change dramatically (e.g. hyperinflation).
Time Period Assumption – This assumption allows for the division of businesses operational activities into artificial time periods for
reporting purposes as determined by the business owners. The coffeehouse can record information on a daily, weekly, monthly,
quarterly and yearly basis during a time frame they deem relevant. However, there is a trade-off between the accuracy (reliability)
and relevancy in preparing financial statements: the more quickly a company presents financial data, the more likely such data
contains errors (i.e. less reliable information).

Perpetual Inventory System

Perpetual inventory system updates inventory accounts after each purchase or sale.

Inventory subsidiary ledger is updated after each transaction.

Inventory quantities are updated continuously.

Periodic Inventory System

Periodic inventory system records inventory purchase or sale in "Purchases" account.

"Purchases" account is updated continuously, however, "Inventory" account is updated on a periodic basis, at the end of each acc
(e.g., monthly, quarterly)

Inventory subsidiary ledger is not updated after each purchase or sale of inventory.
Inventory quantities are not updated continuously.
Inventory quantities are updated on a periodic basis.

Example 1 (Company A)

On May 1, 2016: Purchased 1,000 units of merchandise at $30 per unit.

Under Perpetual inventory system

5/1/2016 Debit Credit

Merchandise Inventory 30,000

Accounts payable 30,000

Under Periodic inventory system

5/1/2016 Debit Credit

Purchases 30,000

Accounts payable 30,000

Under periodic inventory system, all purchases during the accounting period are

recorded in the "Purchases" account.

On May 6, 2016: Sold 200 units of merchandise at $50 per unit on credit.

Under Perpetual inventory system

5/1/2016 Debit Credit

Accounts Receivable 10,000

Sales 10,000

5/1/2016 Debit Credit

 Cost of goods sold 6,000

Merchandise inventory 6,000

Under perpetual inventory system, changes in merchandise inventory account are

recorded after each transaction.

Under Periodic inventory system

5/1/2016 Debit Credit

Accounts Receivable 10,000

Sales 10,000

Under periodic inventory system, the following journal entry is recorded at the end of

accounting period.

5/31/2016 Debit Credit

Merchandise Inventory 24,000

Purchases 24,000

Quantity of merchandise inventory

= 1,000 units purchased - 200 units sold = 800 units left

Cost of merchandise inventory

= 800 units x $30 per unit cost = $24,000

5/31/2016 Debit Credit

Cost of goods sold 6,000

Purchases 6,000

Cost of goods sold

= Total purchases - Ending balance of merchandise inventory
= 1,000 units x $30 per unit cost - 800 units x$30 per unit cost
= $30,000 - $24,000 = $6,000

Ending Inventory and Cost of goods sold (Company A)

Ending inventory
= Beginning inventory + Purchases during the period - Cost of goods sold
= $0 + $30,000 - $6,000 = $24,000

Cost of goods sold

= Beginning inventory + Purchases during the period - Ending inventory
= $0 + $30,000 - $24,000 = $6,000

Example 2 (Company B)

On June 5, 2016: Purchased 600 units of merchandise at $35 per unit.

Under Perpetual inventory system

6/5/2016 Debit Credit

Merchandise Inventory 21,000

Accounts payable 21,000

Under Periodic inventory system

6/5/2016 Debit Credit

Purchases 21,000

Accounts payable 21,000

Under periodic inventory system, all purchases during the accounting period
are recorded in the "Purchases" account.

On June 16, 2016: Sold 400 units of merchandise at $55 per unit on credit.

Under Perpetual inventory system

6/16/2016 Debit Credit

Accounts Receivable 22,000

Sales 22,000

6/16/2016 Debit Credit

Cost of goods sold 14,000

Merchandise inventory 14,000

Under perpetual inventory system, changes in merchandise inventory account are

recorded after each transaction.

Under Periodic inventory system

6/16/2016 Debit Credit

Accounts Receivable 22,000

Sales 22,000

Under periodic inventory system, the following journal entry is recorded at the end

of accounting period.

6/30/2016 Debit Credit

Merchandise Inventory 7,000

Purchases 7,000

Quantity of merchandise inventory

= 600 units purchased - 400 units sold = 200 units left

Cost of merchandise inventory

= 200 units x $35 per unit cost = $7,000

6/30/2016 Debit Credit

Cost of goods sold 14,000

Purchases 14,000

Cost of goods sold

= Total purchases - Ending balance of merchandise inventory
= 600 units x $35 per unit cost - 200 units x$35 per unit cost
= $21,000 - $7,000 = $14,000

Ending Inventory and Cost of goods sold (Company B)

Ending inventory
= Beginning inventory + Purchases during the period - Cost of goods sold
= $0 + $21,000 - $14,000 = $7,000

Cost of goods sold

= Beginning inventory + Purchases during the period - Ending inventory
= $0 + $21,000 - $7,000 = $14,000

2. Ac

counting information characteristi

 Bank Reconciliation

A company's cash balance at bank and its cash balance according to its accounting records usually do not match. This is due t o the
fact that, at any particular date, checks may be outstanding, deposits may be in transit to the bank, errors may have occurred etc.
Therefore companies have to carry out bank reconciliation process which prepares a statement accounting for the difference
between the cash balance in company's cash account and the cash balance according to its bank statement.

Following are the transactions which usually appear in company's records but not in the bank statement:

▪ Deposits in Transit: Deposits which have been sent by the company to the bank but have not been received by the bank at
proper time before the issuance of bank statement.
▪ Checks Outstanding: Checks which have been issued by the company but were not presented or cleared before the issuance of
bank statement.

Following are the transactions which usually appear in bank statement but not in company's cash account:

▪ Service Charges: Service charges may have been deducted by the bank. Such charges are usually not known to the company
before the issuance of bank statement.
▪ Interest Income: If any interest income has been earned by the company on its bank account, it is not usually entered in
company's cash account before the issuance of bank statement.
▪ NSF Checks: NSF stands for "not sufficient funds". These are the checks deposited by the company in bank account but the bank is
unable to receive payment on those checks due to insufficient funds in the payer's account.

Example

Company A's bank statement dated Dec 31, 2011 shows a balance of $24,594.72. The company's cash records on the same date
show a balance of $23,196.79. Following additional information is available:

1. Following checks issued by the company to its customers are still outstanding:
No. 846 issued on Nov 29 $320.00
No. 875 issued on Dec 26 49.21
No. 878 issued on Dec 29 275.00
No. 881 issued on Dec 31 186.50
2. A deposit of $400.00 made on Dec 31 does not appear on bank statement.
3. An NSF check of $850 was returned by the bank with the bank statement.
4. The bank charged $50 as service fee.
5. Interest income earned on the company's average cash balance at bank was $1,237.22.
6. The bank collected a note receivable on behalf of the company. Amount received by the bank on the note was $550. This
includes $50 interest income. The bank charged a collection fee of $10.
7. A deposit of $430 was incorrectly entered as $340 in the company's cash records.

8. Prepare a bank reconciliation statement using the above information.

9. Solution:
Company A
Bank Reconciliation
December 31, 2011

Balance as per Bank, Dec 31 $24,594.72

Add: Deposit in Transit 400.00
$24,994.72
Less: Outstanding Checks:
No. 846 issued on Nov 29 $320.00
No. 875 issued on Dec 26 49.21
No. 878 issued on Dec 29 275.00
No. 881 issued on Dec 31 186.50
830.71
Adjusted Bank Balance $24,164.01

Balance as per Books, Dec 31 $23,196.79

Add:
Interest Income from Bank $1,237.22
Note Receivable Collected by Bank 500.00
Interest Income from Note Receivable 50.00
Deposit Understated 90.00
1,877.22
$25,074.01
Less:
NSF Check 850.00
Bank Service Fee 50.00
Bank Collection Fee 10.00
910.00
Adjusted Book Balance $24,164.01

Eto ang formula:

Pero, syempre, let us explain the reason behind that formula, hindi kasi straight-line rule yan, marami kasi variations depende sa
kung anong mga information/data ang available sayo.

Deposits in Transit and Outstanding Checks

Ano ba ang Deposit in Transit?
Ang mga deposit in transit ay ang cash ng kumpanya na idedeposito na sana sa banko kaso lang, hindi agad syempre nagclear.

Ano naman ang Outstanding Checks?

Ang mga outstanding checks naman ay ang mga babayarin ng kumpanya na ibinayad na sa mga pinagkakautangan ng kumpanya
ngunit sa kung ano mang dahilan ay hindi pa ito nababayaran ng banko. Let’s start by discussing what a Bank Statement is.

Ang Bank Statement

Pag nagtatrabaho na kayo, sa kumpanya tuwing end of the month, nakakareceive tayo ng tinatawag na “Bank Statement” kung
saan inirereflect doon yung lahat ng naging transaksyon mo sa pera mo sa bank, both receipts and disbursement. Nakalista doon
lahat ng idiniposito mo, lahat ng binabayad mo, mga bank charges, pati narin bank errors. So full-disclosure talaga ang ginagawa
ng bank para ipakita sayo kung papaano nag-move yung balanse ng Cash mo.

Sa mga hindi pa nakakakita nito sa totoong buhay, eto ang isang example ng isang aktwal na bank statement, para makita nyo
yung sinasabi ko:

Diba andaming sulat? Usually ganyan ang mangyayari sa bank statement nyo pag nagsimula na kayo gumawa ng recon. Maraming
klase ng format ng bank statement – may hiwalay ang bank credits sa debits, may magkakasama lahat lahat, may nakaayos
according sa transactions. Wala kasing standard sa presentation ng Bank Statement kaya nagkaka-iba iba.

Kung papansinin nyo, maraming “check marks” (as in yung mark na check hindi cheke) at sulat-sulat ang bank statement. Iyan ay
sa kadahilanang sa totoong buhay, ikaw mismo ang magbibilang kung anong deposito ba ang in-transit pa, kung anong check ba
ang hindi pa naeencash.

Both Deposits in Transits (DIT) and Outstanding Checks (OS) are caused by the timing difference between transactions mo sa
books at pagrereflect nito sa bank. Syempre wala naman tayo telekinetic powers para malaman agad ng bank kung anong pinag-
gagagawa mo sa cash mo at maireflect nya agad. Lahat ng ginagawa mo sa pera mo sa bank, nag-uundergo ng proseso which
usually takes a couple of days bago mai-post sa account mo sa bank.

Paano nagkakaroon ng DIT at OS

Gaya ng sinabi ko, ang lahat ng transaksyon na ginagawa mo sa bank usually takes a couple of days bago mag”clear” at maipost sa
account mo (yung records mo sa bank) habang ikaw naman sa loob ng kumpanya mo, as transaction occurs, nagrerecord ka na
agad. IDEALLY, dapat kung ano ang balanse mo sa Cash mo sa book mo, equal dapat sa balanse mo sa Cash mo sa Bank kasi
iisang pera lang naman ang pinag-uusapan natin dito eh, diba? Pero, since tao nga lang tayo at kailangan natin ng oras para
maiproseso ang mga bagay-bagay, nagkakaiba madalas (if not everytime) ang balanse mo sa Bank Statement mo at sa Cash mo
sa libro mo at a particular period of time (which is usually the end of the month).

Syempre, magtataka ka, saan nanggaling ang diperensya? Paano nagkaroon ng diperensya. Kaya ang kumpanya gumagawa ng
“Bank Reconciliation”. Yun ang silbi noon – para ipakita sa users kung paano nagkaiba ang balanse sa Bank Statement at sa Book
records mo.

Madalas, ang mga DIT at OS ay mga deposito at cheke na ginawa during the last couple of days of the month – kasi matatapos ang
processing nito sa bank next month na at sa next month narin ito na bank statement ma-rereflect. Usually ito yung mga dated at
the end of the month.

NEVER will you see these items (DIT and OS) in the bank – sa book nanggagaling ang mga difference na ito kaya book adjustments
ang mga ito.

So, paano ginagawa ang pacocompute ng DIT at OS sa totoong buhay? Usually manual ito (as in iisa-isahin mo lahat ng nakalista
sa bank statement mo at ikukumpara mo sa records mo). Pero, due to technological advancements, pede mo na madownload ang
mga bank statement mo in an excel format tapos i-uupload mo nalang sa system nyo at yung computer nyo nalang gumagawa.
Kaso ako, para makasiguro talaga (kasi minsan may glitches sa computer), Dino-download ko nalang yung records namin from the
system into an excel file tapos sa Excel ko nalang sya pagkukumparahin. Para-paraan nalang sa mga formula para maging
automatic yung computation mo sa DIT at OS mo for the month (teka, computer subject na to, ehhehe) using Excel.

Anong logic ng Formula?

DIT:
Kung i-aadd mo yung DIT mo last month sa mga total deposits mo ngayon, eto yung amount na nagrerepresent ng total deposits
na ineexpect mong ma-cclear ng banko. Kaso, since hindi lahat yan magcclear, ibabawas mo yung na-clear lang sa bank (Receipts
for the Month, per bank). So yung matitira, yung mga deposito mo na hindi nagclear or the so-called Deposit in Transit. Etong
amount na ito, hindi lang para sa mga deposito sa buwan na ito. This amount may inlude those old old deposits from previous
months na for some reason, hindi parin nagcclear hanggang sa ngayon. Isa pa ito sa function ng bank recon – namomonitor mo
yung mga DIT at OS na matagal nang hindi pa nagcclear.

OS:
Same din ang logic. Kung pagsasama-samahin mo lahat ng cheke na hindi pa nagclear last month sa lahat ng cheke na isinulat at
ibinayad mo this month, ang makukuha mong amount is yung pera na ineexpect mo na binayaran ng bank sa 3rd parties. However,
this will not be the case. Hindi lahat yun mababayaran sa buwan na it0. Kaya, ibabawas mo yung amount na nabayaran lang ng
bank (Checks paid, per bank). So ang matitira sayo ay ang outstanding checks mo.
TIPS:
Sa discussion ko na ito, tulad nga ng sinabi ko nung simula, hindi yan straight-cut rule sa pagcompute ng DIT at OS. Ipinaliwanag
ko lamang ang logic kung bakit may at saan nanggagaling ang deposit in transit at outstanding checks. Ang importante pag
nagsasagot kayo sa school, intindihin nyo yung hinahanap at kung anong data lang ang available sa inyo. Tapos iapply nyo iton g
tinalakay ko.

IFRS Title

IFRS 1 First-time Adoption of International Financial Reporting Standards

IFRS 2 Share-based Payment
IFRS 3 Business Combinations
IFRS 4 Insurance Contracts
IFRS 5 Non-current Assets Held for Sale and Discontinued Operations
 IFRS 6 Exploration for and Evaluation of Mineral Resources
IFRS 7 Financial Instruments: Disclosures
IFRS 8 Operating Segments

IAS Title

IAS 1 Presentation of Financial Statements

IAS 2 Inventories
IAS 7 Cash Flow Statements
IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors
IAS 10 Events After the Balance Sheet Date
IAS 11 Construction Contracts
IAS 12 Income Taxes
IAS 14 Segment Reporting (Superseded by IFRS 8 on January 1, 2008)
IAS 16 Property, Plant and Equipment
IAS 17 Leases
IAS 18 Revenue
IAS 19 Employee Benefits
IAS 20 Accounting for Government Grants and Disclosure of Government Assistance
IAS 21 The Effects of Changes in Foreign Exchange Rates
IAS 23 Borrowing Costs
IAS 24 Related Party Disclosures
IAS 26 Accounting and Reporting by Retirement Benefits Plans
IAS 27 Consolidated and Separate Financial Statements
IAS 28 Investments in Associates
IAS 29 Financial Reporting in Hyperinflationary Economies
IAS 31 Financial Reporting of Interests in Joint Ventures
IAS 32 Financial Instruments: Presentations
IAS 33 Earnings per Share
IAS 34 Interim Financial Statements
IAS 36 Impairment of Assets
IAS 37 Provisions, Contingent Liabilities and Contingent Assets
IAS 38 Intangible Assets
IAS 39 Financial Instruments: Recognition and Measurement
IAS 40 Investment Property
IAS 41 Agriculture
PAS Title
PAS 1 Presentation of Financial Statements 1/1/05
Amendment to PAS 1: Capital Disclosures 1/1/07
PAS 1 Presentation of Financial Statements 1/1/09
(revised)
PAS 2 Inventories 1/1/05
PAS 7 Cash Flow Statements 1/1/05
PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors 1/1/05
PAS 10 Events after the Balance Sheet Date 1/1/05
PAS 11 Construction Contracts 1/1/05
PAS 12 Income Taxes 1/1/05
PAS 14 Segment Reporting 1/1/05
PAS 16 Property, Plant and Equipment 1/1/05
PAS 17 Leases 1/1/05
PAS 18 Revenue 1/1/05
PAS 19 Employee Benefits 1/1/05
Amendments to PAS 19: Actuarial Gains and Losses, Group Plans and Disclosures 1/1/06
PAS 20 Accounting for Government Grants and Disclosure of Government Assistance 1/1/05
PAS 21 The Effects of Changes in Foreign Exchange Rates 1/1/05
PAS 23 Borrowing Costs 1/1/05
PAS 23 Borrowing Costs 1/1/09
(revised)
PAS 24 Related Party Disclosures 1/1/05
PAS 26 Accounting and Reporting by Retirement Benefit Plans 1/1/05
PAS 27 Consolidated and Separate Financial Statements 1/1/05
PAS 28 Investments in Associates 1/1/05
PAS 29 Financial Reporting in Hyperinflationary Economies 1/1/05
PAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions 1/1/05+
PAS 31 Interests in Joint Ventures 1/1/05
PAS 32 Financial Instruments: Disclosures and Presentation 1/1/05++
PAS 32 Financial Instruments: Presentation 1/1/07
PAS 33 Earnings per Share 1/1/05
PAS 34 Interim Financial Reporting 1/1/05
PAS 36 Impairment of Assets 1/1/05
PAS 37 Provisions, Contingent Liabilities and Contingent Assets 1/1/05
PAS 38 Intangible Assets 1/1/05
PAS 39 Financial Instruments: Recognition and Measurement 1/1/05
Amendments to PAS 39: Transition and Initial Recognition of Financial Assets and 1/1/05
Financial Liabilities
Amendments to PAS 39: Cash Flow Hedge Accounting of Forecast Intragroup 1/1/06
Transactions
Amendments to PAS 39: The Fair Value Option 1/1/06
Amendments to PAS 39 and PFRS 4: Financial Guarantee Contracts 1/1/06
PAS 40 Investment Property 1/1/05
PAS 41 Agriculture 1/1/05
PAS 101 Financial Reporting Standards for Non-publicly Accountable Entities 1/1/05
Amendment to PAS 101: Change in Effective Date 1/1/05