FOCUS NOTES

in

ACCOUNTING
Karl A. Caramat

BSBA 2-A
Business

- It is an activity of making, buying, or selling goods or providing services

in exchange for money
- Something makes profit

Forms of Business (Classified according to their capital structure)

 Sole Proprietorship
- Business that own by single individual
- The owner is personally liable for financial obligations
 Partnership
- Business that owns by two or more persons to contributes their own assets
- Much bigger capital than Sole Proprietorship
 Corporation
- A large business or organization that exist under the law and follows
specific purpose
- The owners of a corporation are its shareholders.
- Shareholder has limited liability for the corporation’s debts or judgments
against the corporation.

Nature/ Activities of the Business

1. Servicing – Performing a work that is something needed by a customer in

exchange of money.
Example
Hotel, Accounting Firm, Laundry Shop
2. Merchandising – Business that involve “Buying and Selling” products.
Example
Sari-Sari Store, Furniture Shop.
3. Manufacturing – Business that buy raw materials to create goods.
Example
Bakery Shop,
4. Agri-business – engage in the producing operations of farm equipment,
supplies and the processing storage and distribution of farm commodities
5. Hybrid – any combination of 2 nature of business.

The Purpose of Business Organization

- Business exit to serve costumers

- To serve and satisfy its customers
- The organization’s vision statement provides the future state of the
organization to strive to reach.

Accounting

American Accounting Association (AAA)

- Accounting is the process of identifying, measuring and communicating

economic information to permit informed judgment and decision by users
of the information.

American Institute of Certified Public Accountant (AICPA)

- Accounting is the art of recording, classifying and summarizing in a

significant manner and in terms of money, transactions and events which
are, in part at least, of financial character and interpreting the results
thereof.

Accounting Standard Council (ASC) succeeded by Financial Reporting Standards

Council (FRSC).

- Accounting is a service activity. Its function is to provide quantitative

information primarily financial in nature, about economic entities that is
intended to be useful in making economic decision.

Accounting

 As a science because it follows systematize procedures and rules.

 As an art because it uses creative recording.
 As an information system because it provide quantitative information.
Purpose of Accounting

- To provide Quantitative, Qualitative, Financial information intended to be

useful in economic decision making.

Users of Accounting

 Investors
 Employees
 Customers
 Public
 Government
 Creditors
 Owners
 Lenders

Branches of Accounting

 Financial Accounting
 Auditing Accounting
 Management Accounting
 Government Accounting
 Tax Accounting
 Environment Accounting

Generally Accepted Accounting Principles (GAAP)

- Uniform set of accounting rules, procedures, practices and standards that is

followed in preparing Financial Statements.
Principles of Accounting

1. Cost Principle – Assets should be recorded at acquisition cost.

2. Objectivity Principle – records should be based on reliably and verification
data.
3. Consistency Principle – Accounting method and procedures should be applied
on a uniform basis to achieve comparability.
4. Materiality Principle – Dictates practicability to rule over theory in
determining the valuation of an item.
5. Matching Principle – Combined concepts of revenue recognition (regardless
when it is received) and expense recognition principles (recognize when
incurred).
6. Adequate Disclosure – should be free from any misstatements.

Basic Accounting Assumptions

 Economic/ Accounting Entity

- Business keeps transactions separate from their owner business units and
other personal transactions.
 Going Concern Assumptions
- States that a financial activities of the business are assumed to be on
operation for an indefinite period of time.
 Unit of measure
- States that information in financial statements must be expressed in
monetary-units
 Time Period
- Allows for the division of business operational activities into artificial time
periods for reporting purposes as determined by the business owners.
2 Basis of Accounting

Accrual Basis

1. Revenues/ Income
- Are reported on the income statement when they are earned.
- Revenues are reported when earned regardless when cash is received.
2. Expenses
- Reported or recorded when incurred regardless of when paid.

Cash Basis

- Cash to cash transaction.

Financial Statement

- Structured representation of an entities financial position, performance and

cash flows.

Component

1. Statement of Financial Position – Shows the financial condition of the

business (Assets, Liabilities, Owner’s Equity)
2. Statement of Comprehensive Income – Shows the performance of the business.
3. Statement of Cash Flows – Shows the movement of the money.
4. Statement of Changes in Owner’s Equity – Shows the Capital end of the
business.
5. Notes to Financial Statements

Basic Accounting Equation

Assets = Liabilities + Owner’s Equity

Assets - refers to the resources owned and control by the entity

“ How much the business owns”

Examples

 Cash
 Furniture and fixtures
 Land/ Building
 Accounts receivables
 Notes Receivables

Liabilities – refers to the obligation of the company, it is also the weakness of the
company “How much the Business Owes”

Examples

 Notes payable
 Taxes payable
 Mortgage
 Accounts payable

Owner’s Equity – Capital of the company. ”How much is left for the Business”

Examples

 Capital
 Stocks

Basic accounting equation example

Assets (100,000) = Liabilities (30,000) + Owner’s Equity (70,000)

(The total of Liabilities and owner’s equity must be the same amount of Assets)

Phases of Accounting

Recording

- Involves the routine and mechanical process of writing down business

transactions and events in a chronological order called “Journalizing”

Classifying

- Involves sorting/ graphing of similar transactions

- Process of transferring entries from the from the journal to the ledger
called “posting”
Summarizing

- Involves the completion of the Financial Statements

- Start from preparing Trial Balance, Adjusting entries in worksheet, closing
entries, post-closing trial balance and reversing entries

Interpreting

- Involves analytical and interpretative works

- Financial Statements are analyzed, interpreted, communicated

Business Transactions

- Economic events/ condition that directly changes an entitys financial

condition directly affects its results of operation

Business Transaction Flow

Source Document - Business papers (Invoice, official

receipts, memorandum, etc.)
Journal Entries - Recording

Ledger Accounts
- Classifying
Trial Balance

Financial Statements

Recording Business Transactions

 For every Value Received another value is given away as an exchange

 These values are measured in terms of money which are presumed to be equal

Example of business transactions

1. Bu.ak an invested 200,000php to start an auto-repair business
In this transaction, the value you parted with is the cash amounted to 200,000
for the exchange of an auto-repair business which is the value you received.

Accountable events

1. Probability criterion – must affect a financial element of accounting

2. Measurability criterion – it can be measured reliability

The Difference between Bookkeeping and Accounting

Bookkeeping

- Process of recording systematically the business transactions in a

”chronologically manner”
- It assumes the responsibility of recording functions

Accounting

- Requires complete and accurate bookkeeping records necessary in analysis

and interpretation of financial reports.
- Analytical/ Interpretative

Accounting is based on Double-Entry Bookkeeping system

- Fra luca Pacioli introduced Double- Entry Bookkeeping System “Dual

effect of business transactions”
Debit (Latin term Debere) Credit (Latin term Credere)
 Value Received  Value Parted with
 Assets Normal Balance  Liabilities and Owners Equity
Normal Balance
Account Title Account Title
Debit Credit Debit Credit
(Increase) (Decrease) (Decrease) (Increase)

Normal Balance – Shows the increases in account

T-Account Shows the increase and decrease of the account cause of transaction

Assets, Expenses, Drawings are debited

Liabilities, Capital/ Owner’s Equity, Income/ Revenue are credited

Accounting Cycle

- Refers to a series of sequential steps or procedures performed to

accomplish the accounting process.
1. Identification of events to be recorded
2. Transactions are recorded to the journal
3. Journal entries are posted to the ledger
4. Preparation of a Trial Balance
5. Preparation of the worksheet including Adjusting Entries
6. Preparation of Financial Statements
7. Adjusting Journal Entries are journalized and statements
8. Closing journal entries are journalized and Statements
9. Preparation of a Post-Closing Trial Balance
10. Reversing Journal entries are journalized and Posted
Source Documents

- Original written evidences containing information about the nature and

amounts of transactions

Journals

- Chronologically record of entity’s transactions

- Where each transaction is initially recorded
- Book of Original Entry
- General Journal is the simplest form of journal

Ledger

- Provides a complete record of entity’s transactions

- Holds account information that is needed to prepare financial statements.

Trial Balance

- List of all accounts with their respective Debit or Credit balances

- Prepared to verify the equality of debits and credits in the ledger at the end
of each accounting period

Procedures in preparing Trial Balance

1. List all account titles in numerical order

2. Obtain the account balance in each account from the ledger and enter the balances
in their respective columns
3. Add the debit and credit columns
4. Compare the total
Name of the Company

Trial Balance

May 2020

Debit Credit

110- Cash 110,000

220- Accounts Receivable 60,000

330- Accounts Payable 80,000

440- Withdrawals 10,000

550- Capital 100,000

Total 180,000 180,000

ADJUSTMENTS

Revenue and Expense Recognition Principle

Revenue is recognize when it is probable that economics benefits will flow to the
enterprise and the economic benefits can be measured reliably.

Expense is recognize when it is probable that a decrease in future economic benefits

related to a decrease in an asset or an increase of a liability has arisen and the decrease
in economic benefits can be measured reliable.

1. Accruals
1.1 Accrued Income – Already earned but not yet collected
1.2 Accrued Expenses – Expense already incurred but not yet paid
2. Deferrals – Postponement of recognition of expense already paid but not yet
incurred
2.1 Pre-collection of Income
2.2 Prepayment of expenses
3. Provision for Uncollectible Accounts
4. Provision for Depreciation of Property, Plant and Equipment/ Fixed
Accounts.

Deferrals

- Postponement of recognition of expense already paid but not yet incurred

- Revenue already collected but not yet earned

2.1 Pre-Collection of Income

Income Method Liability Method

- Credited upon collection or - Income account is credited
receipt of cash upon collection or receipt of
Initial Recording cash
Cash xx Initial Recording
Income/Revenue xx Cash xx
Unearned Income xx

Adjusting Entry Adjusting Entry

Income/Revenue xx Unearned Revenue xx
Unearned Income xx Income/Revenue xx

2.1 Prepayment of expense

- Already paid but not yet incurred
Expense Method Asset Method
- An expense account is debited - Debited Upon payment
upon payment of prepaid expense of the prepaid expense
Initial Recording Initial Recording
Prepaid Insurance xx Prepaid Insurance xx
Cash xx Cash xx
Adjusting Entry Adjusting Entry
Prepaid Insurance xx Insurance Expense xx
Insurance Expense xx Prepaid Insurance xx

Depreciation of Property, Plant, and Equipment Fixed Accounts

- According to the Philippine Accounting Standard Council #16, P.P.E are

tangible assets which are held by enterprise for use in production or supple
of goods and services for rental to others or for administrative purposes
and are expected to be used during more than one year period.

Acquisition Cost

- Refers to the all-in-cost to purchase an asset.

Salvage Value/Residual Value

- Estimated value of the asset at the end of economic/useful life.

Estimated/Useful Life

- Estimated length of time usually stated in years that the asset can be used.

Cost of Asset – Salvage Value

Annual Depreciation =
Estimated Useful life
Entry:

Depreciation expense xx
Accumulated Depreciation xx
Provision for Uncollectible Accounts

Expenses

 Doubtful accounts
 Uncollectable Account Expense
 Bad Debts
Contra Account of Accounts Receivable

 Allowance for Doubtful expense/account

 Allowance for Uncollectible account expense
 Allowance for Bad Debts

Worksheet

- Helps transfer data from the unadjusted Trial Balance to Financial

Statements
- Provides an efficient way to summarize the data for Financial Statements
- Simplifies the adjusting and closing process

Unadjusted Trial Balance Adjustments Adjusted Trial Balance F.S

Income Statement

- Shows the performance of entity/ business

- Nominal Account
- Summarizes the revenues earned and expenses incurred for the period of
time
- Also known as “Statement of Comprehensive Income”

Name of Business

Income Statement

For the year ended

Income/Revenues xx

Less: Expenses _xx_

Profit xx

Balance Sheet

- Shows the financial position/condition of an entity by listing all assets,

liabilities, and owner’s equity at a specific date
- Used to evaluate liquidity, flexibility and ability to generate profits and
solvency
- Can be presented in “report form’ or “account for”
Name of Business

Balance Sheet

As of (Year)

Assets

Current assets 800,000

Non-current assets 400,000

Total Assets 1,200,000

Liabilities

Current Liabilities 600,000

Non-current Liabilities 200,000

TOTAL LIABILITIES 800,000

Owner’s Equity

Capital end 400,000

Total Liabilities and Owners Equity 1,200,000

Statement of Changes in Owner’s Equity

- Summarizes the changes incurred in owner’s equity

Name of Company

Statement of change in owner’s equity

For the year ended

Capital, Beg. Xx

+ Additional investments xx

+ Profit xx
Less: Withdrawals xx

Less: Loss ______xx_____

Capital, End xx

Closing Entries

- Prepared at the end of the accounting period

- Made to zero-out all temporary accounts.

Accounts needed to be closed

1. Close Revenue accounts

2. Close Expenses accounts
3. Close Income Summary account
4. Close Withdrawal account

Income summary account is used to close the revenue, expense, and withdrawal
account and capital account are used to close the income summary account.

Statement of Cash Flows

- Provides info about the cash receipts and cash payments of an entity
during a period.
- Formal statement that classifies cash receipts (inflows) and cash payments
(outflows)
- Helps project the future net cash flows of the entity

Activities in Cash Flows

1. Cash Flow from Operating Activities

Cash Inflows
- Cash receipts from sale of goods and performance of services
- Receipts from royalties, fees, commissions and other revenues
Cash Outflows

- Payments to suppliers of goods and service

- Payments to employees
- Payment for Taxes
- Payment for interest expense
- Payment for other operating expenses

Total cash provided by/used in operating activities

2. Cash Flows from Investing Activities

Cash Inflows

- Receipts from sale of property and equipment

- Receipts from collection of notes receivable

Cash outflows

- Payments to acquire the Property, Plant, and Equipment

- Payments to make loans to other generally
- Payments in the form of Notes Receivable

Total cash provided by/ used in Investing Activities

3. Cash Flows from Financing Activities

Cash Inflows
- Receipts from investment (Capital
- Receipts from issuance of Notes payable

Cash Outflows

- Payment to owner in the form of Withdrawals

- Payment to settle Notes Payable
Statement of Cash flows

As of the year ended

Net (Cash flows operating) xx

Net (Cash flows investing) xx

Net (Cash flows financing) _xx_

Net increase (decrease) in cash xx

Add: Cash beg. _xx_

Cash end xx

Merchandising

- Buying and selling goods

- Have an inventory account

Cash Sales

Cash Purchases

Cash Sales
Inventory
Initial entry

Cash xx
Sales xx

Sales on Account

Cash

Collections Purchases

Accounts
Inventories
Receivable

Initial Entry

Accounts Receivable xx

Sales xx
Income Statement of Merchandising

Net Sales xx

Less: Cost of Sales xx

Gross Profit xx

Less: Expenses xx

Profit before interest xx

Less: Finance cost xx

Profit before tax xx

Less: Tax expense xx

NET PROFIT xx

_____________________________________________________________________

Net Sales

Gross Sales xx

Less: Sales Discount xx

Sales returns and allowances xx (_xx_)

NET SALES xx

Cost of Sales

Merchandise inventory, beg. xx

Purchases xx

Less: Purchase returns and allowances xx

Purchase Discount xx

Net Purchases xx
Freight in xx

Net cost of purchases xx

Goods Available for sale xx

Merchandise inventory, end xx

Cost of Sales xx

GROSS PROFIT xx

Expenses (xx)

PROFIT xx

Transportation Cost

Who Shoulders?

 Free on board (FOB) Shipping Point (Freight Collect) Buyer

 Free on board (FOB) Destination (Freight Prepaid) Seller

Cost of Sales/ Cost of Goods Sold

- Largest single expense of the merchandising business

- It is the cost of inventory that the entity has sold to customers.

Accounts that needed to be close in merchandising

Purchase Account, Sales account, Withdrawals, Merchandise Inventory end& Beg.

Transportation in& out, Income summary, Expenses accounts.
Special and Combination Journal

Special Journals

 Sale Journal – Sale of merchandise on account

 Cash Receipts – Receipts of cash
 Purchases Journal – Credit purchase of merchandise
 Cash Disbursements Journal – Payments of Cash
 General Journal – Entries that do not fit on the other journal

Advantages of Special Journal

- Permits division of labor

- Reduces recording time

Controlled accounts and Subsidiary ledger

One of control account is Account Receivable

Example

Account Receivable – Apple xx

Account Receivable – Gwapo xx

Account Receivable – Pangit xx

Account Receivable is the control account and Apple, Gwapo, Pangit are called
Subsidiary ledgers.