MODULE 4 BUSINESS AND REQUIREMENTS, Business - a person of organization engaged in the regular conduct of commercial, industrial or professional activities, whether for profit_or ‘ot in order to fulfil a purpose, goal, mission, or cause. = regular conduct_or_pursuit_of commercial activity or_an_economic activity, including transactions incidental thereto by any Person regardless of whether or not the person is engaged therein is a non-stock, non-profit private organization or government entity (NIRC, Sec. 105). = rendering certain activities not only for profit. Characteristics - Person of Organization (natural or artificial) = Regular Conduct - Commercial, Industrial or Professional Activities - Lawful transactions - Whether for profit or not (‘profit is not a basis to know if it’s a business) - To fulfil a purpose, goal, mission, or cause. Forms of Business Organization 1. SolesiProprietorship - usually adopted by small business entities; not easy to transfer ownership. 2. (Partnership - formed by two or more SONS. 3. Corporation - usually adopted by large entities, limited liability, limited involvement in the company’s operations; easy to transfer ownership Types of Business : - Provides intangible products - Offers professional skills, expertise, advice, and other similar products. 2 ~ Buys products and sell it for higher price for profit - Sells a product without changing its fom. (Ex: Grocery Store, Distributors, and Resellers) - Buys materials _and_convert_them into new products, - Combines RM, L, and OH 4 - Ex Restaurants Not Considered Business = Government - Employment = Dictatorship - Gratuitous Transfer - Isolated or Casual Transactions by persons not engaged in trade or business Considered Engaged in Business - Freelancers, agents, and consultants - Broadcast media talents and artists 1. Register Business Name and Entity ~ Sole Proprietorship ( OT!) Business. Name Registration = Partnership and Corporation ( SEC ) Registration System - Cooperative (Cooperative Development Authority) Registration System 2. Secure Business Permits and Licenses - Business Permit or Professional Tax Receipt ( of Municipal Government Unit) - Fire Safety Inspection Certification (BFP) - Barangay _ Clearance and ‘Community Tax Certificate (Barangay where it operates) - Employer Registration - SSS, HDMF, PHIC, DOLE (if applicable) 3. Comply with BIR Requirements a. Business Registration b. Issuance of receipts and invoices ©. Keeping of tax and accounting records d. Withholding of taxes on certain payments e. Filing and payment of taxes ACCOUNTING Definition - art__of recording, classifying, _and summanzing in a significant manner and in Terms of money, transactions and events which are, in part at least of a financial character, and {nlerpreting the results thereof. (AICPA) - is a service activily. Its function is to provide quantitative information, primarily financial in nature, about economic entries that is intended to be useful in making economic decisions. (Ass. Std. Council) ~ is the process of identifying, measuring, and communicating economic information to permit informed judgement and decisions by users by the information (American Acctg Association) - |s an information system _that_measures, processes, and communicates financial information about an identifiable economic entity. * Service activity, a process * To provide financial Information * About economic entries * For the use of interested users Purpose of Accounting ~ To_provide financial information about the business_thal_will he useful in_making economic decisions for the users of the information Financial Statements 1. Statement of Financial Position (BS) 2. Statement of Financial Performance (|S) 3. Statement of Changes in Owners Equity 4. Statement of Cash Flows 5. Notes to the Financial Statements 1. Intemal users (within the business) - Owners, managers, employees, officers, internal auditors - To help make decisions in operating, investing, and financing activities of the companies2, External users (outside the business) - Customers, suppliers, creditors, investors, extemal auditors, goverment agencies, _ industrial organizations, and public. Branches of Accounting — 1. Financial Accounting = For public 2. Management Accounting - For internal users 3. Tax Accounting - Determination of tax to be paid 4. Auditing = Opinion on financial statements BOOKKEEPING Definition - Within accounting Recording of financial transactions is part of the process of accounting in business. - It is largely concemed with __the implementation of __ the accounting procedures manual and maintenance of the accounting records - Procedural implementation of accounting Bookkeeper - Is @ person who keeps and maintains the books of accounts of _the _business organization - Responsible for recording the transactions Of the business. Functions of a Bookkeeper © General Accounting © Verify deposit of cash collections Verify petty cash disbursements Prepare bank reconciliation Records transactions in the journal Post to the subsidiary and general ledger Prepare a draft of the trial balance © Assist the accountant in the closing of the accounts. and finalization of the Financial Statements © Maintain proper filing and retrieval of accounting records © Accounts Receivables (AR Clerk/Accountant) © Record sales invoice © Record cash receipts. from customers © Record sales returns, account adjustments and credit memos from suppliers © Issue statement of accounts to customers © Reconcile AR ledger balance with unpaid customer invoice © Maintain AR subsidiary ledger © Prepare AR reports © Accounts Payable © Record purchase invoices © Record payments to suppliers © Record purchase retums, accounts adjustments and debit memos from suppliers © Reconcile AP ledger balance with unpaid customer invoices © Maintain AP subsidiary ledger © Prepare AP reports * Inventory Accounting © Record receipts of inventory from suppliers © Record release of inventory to ‘customers © Record returns and adjustments © Prepare purchase request and inventory issuance slips © Reconcile physical count of inventory to ledger balances © Maintain inventory subsidiary ledgers © Prepare inventory reports © Others: ‘© Property control and monitoring © Payroll preparation © Remittance of statutory deductions and reports, Tax bookkeeping Treasury and banking Audit assistance Managerial and administrative ‘THE ACCOUNTING CYCLE Steps: - Recording: Business Documents Analyzed - Identified whether accountable_or not 2. Transactions recorded in journals - JOURNALIZING: transactions are recorded inthe _ book/journal, transactions are recorded chronologically (posted to ledger) 3. Transactions posted to ledgers - POSTING: transactions from the journal are classified in the ledger 4. Trial balance - TRIAL BALANCE: summary _of accounts from the ledger. This 15 a proof that_Debit = Credit 5. Adjustments - ADJUSTING ENTRIES: made at the end of accounting period Reporting: 6. Financial statements - Financial statements are prepared 7. Closing entries - Temporary nominal accounts are eliminated 8. Post-closing trial balance - Prepared to check that Debit and Credit balances are correct 9. Recording of reversing entries (optional) THE CHART OF ACCOUNTS Definition ~ itis a listof the account codes and tiles. - It shall_be maintained _and_updated for necessary changes like additions of new accounts, change of titles and codes, and temoval of accounts that will no longer be used. - Listed in order. IDENTIFYING ACCOUNTABLE TRANSACTIONS - Business transactions or events _are ‘analyzed whether they are accountable or not.- Only accountable transactions are recorded in accounting records. Example of Accountable Transactions: = Itinvolves business entity - Itcan be measured in terms of money - It acquired on a specific date or for specific period - Itaffects the A, L, and E of the business - It is supported by a document (source document) Source Document 1. Sales Invoice = Document issued to customer for specific materials or supplies. furnished or services rendered. - PURCHASE INVOICE: from the POV of the customer. 2. Delivery Receipt = Document signifying delivery of goods and receipt of inventory. 3. Official Receipt - Document issued to acknowledge receipt of cash 4. Deposit Slip = Document issued to deposit cash and cheques to a bank. 5. Purchase Invoice - A bill from a vendor for specific materials or supplies furnished or service rendered. - SALES INVOICE: from the POV of the supplier. 6. Disbursement Voucher - A written approved record of payment of cash. 7. Withdrawal Slip = Document used to withdraw cash from the bank 8. Cheque Issuance Record - A record of cheques issued by the company. 9. Promissory Notes - A written promise to pay a certain sum of money to the payee. It bears interest sometimes. 10. Bank Statements - Document listing the bank transactions of the depositor. 11. Billing Statement or Statement Account ~ Document listing the unpaid invoices of a customer. 12. Business Letters - Correspondences to the other companies, organizations or goverment entities which may serve as a basis in recording on accountable transactions or events * Business Transactions are chronologically recorded in the GENERAL JOURNAL. © Transactions are recorded through journal entry. ¢ Journal Entry shows the record of the effects of a transaction or an event expressed in terms of Debit and Credit. ‘* Simple Journal Entry: 1 debit and 1 credit * Compound Journal Entry: 2 or more debit and 2 or more credits * Basic Accounting Equation: A=L +E Entries to the Accounts. TRIAL BALANCE - Is a listing of all the balances of the different accounts. - DEBIT = CREDIT Purpose of Trial Balance - To check the accuracy of posting in the oe by testing the equality of the debit . Haaeint locating errors in posting - It serves as the basis in the preparation of the financial statements. Errors in the Accounting Process - Journal Entry with unequal debit and credit - Posting to the incorrect debit and credit - Incorrectly footing the account balance or trial balance - Forwarding the wrong amount from the ledger to the trial balance - Listing the account balance to the wrong side of the trial balance. Errors not Detected ig to record a transaction or event Multiple recording and posting of a transaction or event Entries or posting to the wrong account Reversed entries and posting Recording and posting of amounts with transposition and trans-placement errors. ‘Types of Trial Balance 1. Unadjusted Trial Balance 2. Adjusted Trial Balance 3. Post-Closing Trial Balance PURPOSE OF ADJUSTING ENTRIES ‘* Match cost against revenues ‘* Adjusting entries are recorded at the end of the period Most Common Transactions Depreciation of PPE Allowance for Uncollectible Accounts Accrued and Prepaid Expenses Accrued and Uneamed Revenues Other adjustments, like unused or unsold inventory at the end of the period. peeps DEPRECIATION Decrease in value of a property due - Done through systematic basis. - The cost of a depreciable asset _is a is useful life - The estimated scrap value at the end of the life of the asset is not included in theamount expensed over the periods of depreciation - Straight-line method: Simplest method Depreciation Expense = Depreciable Value / Estimated Useful Life. © Depreciable Value - difference between its cost and estimated residual value at the end of its useful life. * Cost - amount paid to purchase the asset. ¢ Residual Value (scrap or salvage value) - amount estimated to be recovered at the end of the useful life of the property. © Estimated useful life - estimated length of time, normally in YEARS, when the property is expected to be used ‘* Methods of accounting for bad-debts: C? Duvet wite-of = When accounts is proven to ‘AR agad ang be uncollectible and naka-credit worthless = Recorded by crediting the receivables and debiting an expense account. Bad debts expense xx Accounts Receivable xx i? Allowance method m= Recommended for the better Slowmnee for matching of cost against accounts ong revenues. pakaered @ = This method requires fest recording of the bad debts expense if the accounts are doubtful of collection Bad debts expense x Allowance for bad debts xx - The “Allowance for Bad Debis" account is a deduction from the AR Account. = Percentage of sales = Percent of receivables = Aging of accounts ACCRUED AND PREPAID EXPENSES Accrued. \istiley ~ Expenses already incurred but nat yet paid. - These expenses create an obligation to pay in the future: ACCRUED AND UNEARNED REVENUE Acorued s::[Link] Recsvoble - Revenues already earned but not yet collected = Require recognition of both the revenue and the receivable for the amount earned. Accounts Receivable xx Sales/Service income/Accrued Revenue xx Unearned Revenue a:counts Payable - Revenues already collected but not yet eamed - The portion that is already eared is recorded as income. - 2methods in accounting deferred revenues: 1. Liability Method 2. Revenue Method MODULE 4 PURPOSE AND USERS OF FINANCIAL ‘STATEMENTS - Ginancial_Statements _are_the Financial Reporting of the business entity in order to provide information that is useful for the decision-making of its users = Owners, investors and prospective investors - Lenders and suppliers and prospective creditors - Employees, customers - Government agencies - The general public The Financial Statements. ~ Should be relevant, reliable and comparable = Must follow PFRS - Should be useful and understandable - Prepared@ once a year > Presented iy or quarterly 1S or SFPerformance BS or SFPosition ‘Statement of changes in equity Statement of cash flows Notes to the FS eee Statement of Financial Performance - Presents the financial results of a business for a given period of time - Presents the amount of revenue generated and expenses incurred by the business during reporting period - Resulting net income or net loss. Revenues = Increase _in economic benefits during the Expense xx AP or Accrued Exp. Payable xx - Examples: Salaries, utilities and interest expense. (Employee services that have been rendered to the company but not yet paid are accrued salaries expense) Prepaid Expenses ass: - Expenses already paid but not yet inourred - The portion that is already consumed is recorded as EXPENSE. - 2 methods in accounting prepaid expenses: 1. Asset Method sired ~ recorded 2, Expense Method unexpired ~ recorded accounting period in the form of inflows or enhancements of assets or decreases of ifabilties_(or_both) from the delivery of ‘roduston oF goods, ‘goods, rendering of services, or other activities that constitute the entity's ‘ongoing major or central operations. - Ex: Sales, professional fees earned, service revenues, interest revenues, dividend revenues, rent income, and subscription revenue. Expenses ~ Decrease in economic benefits during the accounting period in the form of outflows or using up assets or incurrences of liabilities {er bot) Rom the delvery or production of goods, rendering of services, or otheractivities that constitute the entity's ongoing major or central operations. Ex: cost of sales, depreciation expense, salaries and wages, utility cost, insurance expense, permits, taxes, and licenses, repair and maintenance, representation expenses, losses. STATEMENT OF CHANGES IN EQUITY Presents a reconciliation of the beginning nd_ending balan mpany' during a reporting period. The statement starts with the beginning equity balance, then adds or subtracts such items as profits, capital investments or reductions, and dividend payments to arrive at the ending balance. Includes: - Net_income_or_loss during the accounting period - locrease or decrease. in capital - Capital_withdrawals__or dividend payments to shareholders. BALANCE SHEET Asset Liabil Presents a company’s financial position as of a given date, It shows the assets, liabilities, and equity. Resource controlled by the entity as a result Of past events and from which future economic benefits are expected to flow to the entity (|ASB Framework) Ex © CASH - includes coins, currencies, checks, bank deposits and other cash items ready for use in the operations of the business ¢ AR - amounts collectible from customers for goods provided and services rendered on credit * Merchandise Inventory - unsold goods for sale to customers © Prepaid Expenses - expenses paid but not yet used © Investinients - asset for the accretion of wealth through capital appreciation or for other benefits to the business. * PPE - tangible assets used in the Production or supply of goods and services, or for business administration purposes. © Intangible Assets - — includes identifiable non-monetary properties without physical substance, like licenses, copyright, patents, trademarks and others ity Present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow fro the enterprise of resources embodying economic benefits (IASB Framework) Ex © Accounts Payable - obligations due to suppliers of goods and services purchased on credit. * Notes Payable - due to suppliers of goods and services evidenced by a Promissory note. ‘* Loans Payable - obligations due to lenders as a result of borrowing of funds. © Lease Payable - obligations due to lessors for PPE used for business operations. * Utilities Payable - obligations due to utility companies for service rendered. ‘* Acoruied Liability - obligations due to others for expenses already incurred but not yet paid. © Unearned Liability - obligations due to customers for goods and services paid but not yet delivered. Equity ~The residual interest in the asset of the entity after deducting all the liabilities (ASB Framework) - It represents the capital investments, net of in the entity, and the net income or loss in the ‘operation of the business. - & * Capital Account - the equity investment of the owner (sole proprietorship) or for each partner (partnership) and the cumulative effect of the withdrawals of capital and business net profits and losses. ‘* Drawings - the equity withdrawals of the owner or for each partner. © Common Stock / Preferred Stock - the equity of the owners of a corporation. ‘* Retained Earnings - the cumulative balance of the net income or losses ‘of the corporation, investments of the owners, less the distribution to the owners. STATEMENT OF CASH FLOWS - Shows the _cash_receip's _and_cash payments from the business activities of the enterprise during the period - The business activities are classified as: ‘© Operating © Are the principal activities of the enterprise © Are transactions and events that__enter__into__the determination of profit or loss, © includes: = Cash receipts from sales_of goods and Tendering services. = Cash receipts from interest___ royalties commissions, fees and other sources. = Cash payments to suppliers _of _goods and services = Cash payments to salaries and _ other employee expenses. = Cash payments for operating _ expenses such as advertising,supplies, utilities, taxes and others. © Investing © Include the acauisition_and disposal_of_non-cash assets of the business. o Ex = Cash payments in purchasing land, constructing a building, buying furniture and equipment, acquiring intangible and other long-term assets. = Cash receipts in selling PPE and other long-term assets. = Cash payments in investing in equity and debt instruments of other companies. © Financing © Include equity transactions of the business and the owners, a8 well as borrowing of funds from financial institutions. o Ex = Investment and withdrawals of capital of the owners = Cash proceeds from POST CLOSING TRIAL-BALANCE - Prepared after the recording and posting of the closing entries. - The remaining permanent or real accounts of assets, liabilities, and equity are presented with their balances. - This provides the starting balances for the next accounting period MODULE 6 ‘SERVICE BUSINESS (INTRODUCTION) ~ Provides services to clients for a fee - Provides intangible products such as: © Repairing Beauly care Health and recreation Transportation ‘Communication Consulting Professional Medical, and Other services - The accounting for a service business is simpler, in contrast to a merchandising business, because the business does not involve accounting for inventories _ irrenenng sewces the Bosh Tendering services, the business eams revenues, which it eventually collects. - The focus of the bookkeeping is on recording the revenues and collections. eee ecoee Major activities involved in a service business bank loans and 1. Rendering of services repayment of the 2. Collections of payments loans. 3. Incurrence an payment of expenses 4 MODULE 5 ‘Sample Journal Entries: CLOSING ENTRIES Cash/AR Xx Types of Accounts: Service Revenue x 4. Permanent or real accounts) a=L+€ a. Asset accounts Cash x { b. Liability account AR Xx . Equity account 2. Temporary or nominal accounts wee ee Expenses x ‘a. Revenue accounts or uty ‘Cash/AP xx b. Expense accounts cc. Gains and losses accounts x d. Equity drawings account Cash x e. Income and expense summary account MODULE 7 3. Mixed accounts TRANSACTIONS OF MERCHANDISING BUSINESS ¢ At the end of the accounting period, the = The business purchases products from the temporary or nominal accounts are closed. suppliers which it also sells to its customers © The following entries are recorded and fora profi. posted: - Ex 1. Revenue Accounts are closed © Sati-Sari stores, groceries and (Debit) against the Income and market stalls Expense Summary Accounts © Hardware (Crecit) ‘© Appliance Store 2. COGS Accounts are closed (Credit) Gadgets and electronics store against the Income and Expense ‘Fashion and dress shop Summary Accounts (Debit. ‘© Sports equipment store 3. Expense Accounts are closed (Credit) against the income and expense summary accounts. 4. The resulting balance of the income and Expense summary accounts is closed to the Equity account. 5. Any Drawing Account is closed against the Equity Account. es 8 UES a rats Baie ss SaOTT oom reon/tsserseSunnery * Online products sellers - In contrast to a service business, a merchandising business is more complex due to the presence of inventory. - The inventory items needed _to_be purchased. iransporied, kept and then sold tothe customers. In PURCHASING merchandise inventory, the company pays for the purchase price of goods, There could be an argument for2/10, 0/30 credit terms between the buyer and the seller. The buyer might be offered discounts within_a certain period to encourage early or jayments. This is also true in selling the merchandise inventory. The company might also offer credit terms and discounts to its customers. - In the BUYING & SELLING merchandise inventory, there might be some returns of Freight Charges 1. FOB - Shipping Point - Buyer shoulders the freight and also the owner of the merchandise. 2. FOB - Destination - Seller shoulders the freight and also the owner of the merchandise. Account to be used: goods that_needed to be accounted for. Also, in buying and selling, the inventory items need to be transported and thus, freight cost may be charged to the buyer or the seller depending on their agreement. * Purchasing and keeping merchandise inventory requires some internal control Procedure in order to maintain the right quantity or level of goods on hand. * One of the basic internal controls is the recording and monitoring of the cost and quantity of merchandise inventory. ¢ Purchases should be properiy recorded on a timely basis in the book of accounts. Also, Tegular physical counting is done to match the recorded quantity and amount of inventory, * This need for proper recording and control of the movement of inventory that 2 systems of inventory were being commonly used: © Periodic © Perpetual Items related to Purchases and Sales of merchandise inventory: - Returns and allowances - Payment terms - Discounts ~ Freight or shipping cost VAT - Inventory systems Payment Terms and Discounts - Payment Terms is also known as Credit Terms or Transaction Terms - Discount is used in Sales and purchases Example of Payment Terms: © Cash cop 730 rVvEOM 2110, n/30 ¥, 2/10, n/30 3/EOM, n/45 4/10EOM, nv60 Trade ~ Buyand sell - Reduction from the list / catalog price 2. Payment - Topay ~ Reduction from the invaice price Accounting Methods: 1. Discount taken method 2. Discount not take method 3. Discount offered method BUYER SELLER Freight In Freight Out PERIODIC AND PERPETUAL INVENTORY METHODS. Periodic - Generally used when the individual inventory items have small peso values. - Business maintains temporary accounts like: (these temporary accounts are used to determine the amount of inventory available for sale) ‘Purchases * Purchase Returns and Sales Returns - The value of the ending balance of inventory is determined by conducting a physical count multiplied by the corresponding unit cost. ~ Physical inventory count at the period end is mandatory under the PERIODIC SYSTEM. Without such a count, COGS cannot be determined therefore, businesses have to conduct this activity at least once a year or at every end of an accounting period. Perpetual - Generally used when the _ individual inventory items have relatively large values. - Requires the use and maintenance of stock bards - The inventory account is continually updated for each inventory transaction. - For every journal entry of sales, a corollary journal entry for the cost of inventory sold is also recorded. - Purchase and returns are recorded directly in the merchandise inventory account. - Physical count of inventory is conducted to ‘confirm the balances in the stock cards.