BASIC FINANCIAL

ACCOUNTING AND
REPORTING
(BUJPIA
MENTORSHIP
PROGRAM)
Date Prepared by: Remarks
September 13, 2020 Roy Kenneth Lingat Initial Issue
and Renchy Gonzales
BASIC ACCOUNTING (PART 1)
FUNDAMENTAL CONCEPTS

1. Entity Concept - the most basic concept in accounting is the entity concept. An accounting
entity is an organization that stands apart from other organizations and individuals as a separate
economic unit. Each entity should be evaluated separately.

2. Periodicity Concept- an entity’s life can be meaningfully subdivided into equal time periods for
reporting purposes. This concept allows the user to obtain timely information to serve as a basis on
making decisions about future activities.

3. Stable Monetary Unit Concept- the Philippine peso is reasonable unit of measure and that its
purchasing power is relatively stable. It allows accountants to add and subtract peso amounts as
those each peso has the same purchasing power as any other peso at any time. This is the basis
for ignoring the effects of inflation in accounting records.

4. Going Concern- financial statements are normally prepared on the assumption that the reporting
entity is a going concern and will continue in operation for the foreseeable future.

BASIC PRINCIPLES

1. Objectivity Principle- accounting records and statements are based on the most reliable data
available so that they will be as accurate and as useful as possible. Reliable data are verifiable
when they can be confirmed by independent observers. Ideally, accounting records are based on
information that flows from activities documented by objective evidence. Without this principle,
accounting records would be based on whims and opinions and is therefore subject to disputes.

2. Historical Cost- this principle states that acquired assets should be recorded at their actual cost
and not at what management thinks they are worth as at reporting date.

3. Revenue Recognition Principle- revenue is to be recognized in the accounting period when

goods are delivered or services are rendered or performed.

4. Expense Recognition Principle- expenses should be recognized in the accounting period in

which goods and services are used up to produce revenue and not when the entity pays for those
goods and services.

5. Adequate Disclosure- Requires that all relevant information that would affect the user’s
understanding and assessment of the accounting entity be disclosed in the financial statements.
6. Materiality- financial reporting is only concerned with information that is significant enough to
affect evaluations and decisions.

7. Consistency Principle- the firms should use the same accounting method from period to period
to achieve comparability over time within a single enterprise. However, changes are permitted if
justifiable and disclosed in the financial statements.

FUNDAMENTAL QUALITATIVE CHARACTERISTICS

1. Relevance- is the capacity of the information to influence a decision. Information that does
not bear on an economic decision is useless.

2. Faithful Representation- means that the actual effects of the transactions shall be properly
accounted for and reported in the financial statements. It has three characteristics namely,
Completeness, Neutrality and Free from Error.

ACCOUNTANCY ACT OF 2004

-it is otherwise known as Republic Act 9298

- it was signed into law by President Gloria Macapagal Arroyo on May 13, 2004.

(SEC. 4) Scope of Practice

o Practice of Public Accountancy
o Practice in Commerce and Industry
o Practice in Education/Academe
o Practice in Government
(SEC. 5) The Professional Regulatory Board of Accountancy and its Composition
(SEC. 6) Qualifications of Members of the Professional Regulatory Board
SEC. 13) The Certified Public Accountant Examinations
(SEC. 14) Qualifications of Applicants for Examinations
(SEC. 15) Scope of Examinations
(SEC. 16) Rating in the Licensure Examination
(SEC. 17) Report of Ratings
(SEC. 18) Failing Candidates to Take Refresher Course

FORMS OF BUSINESS ORGANIZATION

1. Sole Proprietorship (Owner's Equity)

2. Partnership (Partner's Equity)
3. Corporation (Shareholder's Equity)
Accounting Equation and the Double – Entry System
Elements of the Financial Statements

 Assets, Liabilities, and Equity – relate to entity’s financial position (permanent accounts)
 Income and Expenses – relate to entity’s financial performance (temporary or nominal
accounts)

1. ASSETS
DEFINITION Economic resources owned by the business

Recognition a. It is probable that the future economic benefits will flow to the enterprise
b. It has a cost or value that can be measured reliably
Classification General requirements: Current asset or Non-current asset
Exception: entity assesses that the presentation based on liquidity is more
relevant

2. LIABILITIES
DEFINITION Economic obligations or debts of the business
Recognition a. It is probable that an outflow of resources embodying economic benefits
will result from the settlement of a present obligation
b. Amount at which the settlement will take place can be measured reliably
Classification General requirements: Current liabilities and Non-current liabilities
Exception: entity assesses that the presentation based on liquidity is more
relevant

3. EQUITY
- the residual interest in the assets of the enterprise after deducting all its
liabilities

4. INCOME
- It includes both revenue and gain. The gross inflow of economic benefits
during the period in the form of inflows or enhancements on assets or decrease
in liabilities that result in increase in equity, other than those relating to
contributions from the owner/s.
5. EXPENSES
- It includes both expenses and losses. It is the gross outflow of economic
benefits during the period in the course of ordinary activities when this outflow
result in decrease in equity other than those relating to the contribution to
owner/s.
Contra Accounts
Contra-asset accounts (e.g. allowance for bad debt expense, accumulated depreciation)
Contra-sales accounts (e.g. sales discount, and sales returns and allowances)
Contra-purchase accounts e.g. purchase discounts, and purchase returns and allowances)

NORMAL BALANCE OF ACCOUNT

Account Normal Balance Increase Decrease

Assets Debit Debit Credit
Expense
Withdrawal
Liabilities Credit Credit Debit
Equity
Income

THE ACCOUNTING EQUATION

= +

ASSET = LIABILITIES + OWNER’S EQUITY

Accounting Events - an economic occurrence that causes changes in an enterprise’s assets,
liabilities, and/or equity.
Transaction - a particular kind of event that involves the transfer of something of value between
two entities.

Types and Effects of Transaction

Source of Asset - one asset account increase; corresponding claims (liabilities or equity) increase
Exchange of Asset – one asset account increase; another asset account decrease
Use of Asset – one asset account decrease; corresponding claims (liabilities or equity) decrease
Exchange of Claims – one claim account (liabilities or equity) increase; another claim account
(liabilities or equity) decrease

RECORDING BUSINESS TRANSACTION

The Accounting Cycle: Series of Sequential Steps
Step 1: Identification of events to be recorded
Step 2: Transactions are recorded in the journal
Step 3: Journal Entries are posted to the ledger
Step 4: Preparation of Trial Balance
Step 5: Preparation of Worksheet including adjusting entry
Step 6: Preparation of the Financial Statements
Step 7: Adjusting journal entries are journalized and posted
Step 8: Closing journal entries are journalized and posted
Step 9: Preparation of Post-Closing Trial Balance
Step 10: Reversing journal entries are journalized and posted

THE JOURNAL (STEP 2)

Journal – a chronological record of the entity’s transactions. It shows all the effects of a
business transaction in terms of debits and credits. It is called the book of original entry.
Format
1. Date
2. Account Titles and Explanation
3. P.R. (Posting Reference)
4. Debit
5. Credit
Simple and Compound Entry
1. Simple Entry – only two accounts are affected (one debit and one credit)
2019 Jan. 1 Cash Php 250,000
Manalo, Capital Php 250,000
2. Compound Entry - three or more accounts are affected
Jan. 10 Office Equipment Php 60,000
Cash Php 20,000
Accounts Payable 40,000

THE LEDGER (STEP 3)

Ledger – grouping of the entity’s accounts

General Ledger – reference book of the accounting system and used to classify and summarize
transactions, and to prepare data for basic financial statements.
TWO GENERAL GROUPS OF LEDGERS
1.) Permanent Accounts – balance sheet accounts (assets, liabilities, owner’s equity)
2.) Temporary Accounts – income statement accounts (income and expenses)
Each account has its own record in the ledger. Every account in the ledger maintains the basic
format of the T-account but offers more information. Compared to the journal, a ledger organizes
information by account.
Cash Office Equipment Accounts Payable
01/01 P 250,000 01/10 P20,000 01/10 P 60,000 01/10 P 40,000
P 230,000

CHART OF ACCOUNTS

- Listing of all the accounts and their account numbers in the ledger.
- It is arranged in the financial statement order, that is, assets first, followed by liabilities, owner’s
equity, income and expenses.
TRIAL BALANCE (STEP 4)

- List of all accounts with their respective debit or credit balances.

- It is prepared to verify the equality of debits and credits in the edger at the end of each accounting
period or at any time the postings are updated.
Procedures in the preparation of a trial balance:
1. List the account titles in numerical orders.
2. Obtain the account balance of each account from the ledger and enter the debit balances in the debit
column and the credit balances in the credit column.
3. Add the debit and credit columns.
4. Compare the totals (when the totals are equal, the trial balance is in balance)

ADJUSTING ENTRIES (STEP 5)

Deferral- is the postponement of the recognition of “an expense already paid but not yet
incurred,” or of “revenue already collected but not yet earned”.
Accrual- is the recognition of “an expense already incurred but unpaid”, or “revenue earned but
uncollected”
Doubtful Accounts
Depreciation of Property, Plant and Equipment
ADJUSTMENTS FOR DEFERRALS
Deferred Income- income collected but not yet earned
Deferred Expense- expense paid but not yet incurred

Account Method Original Entry Adjusting Entry

Deferred Income Income Method Dr. Cash Dr. Income
Cr. Income Cr. Unearned Income
Liability Method Dr. Cash Dr. Unearned Income
Cr. Unearned Income Cr. Income

Deferred Expense Expense Method Dr. Expense Dr. Prepaid Expense

Cr. Cash Cr. Expense
Asset Method Dr. Prepaid Expense Dr. Expense
Cr. Cash Cr. Prepaid Expense

ADJUSTMENTS FOR ACCRUALS

Accrued Income- income earned but not yet received.
Accrued Expenses- expense incurred but not yet paid

Account
Receivable Dr. Receivable/Accrued Income
Cr. Income
Payable Dr. Expense
Cr. Accrued Expense/Payable

Receivables are financial assets that represent a contractual right to receive cash or another
financial asset from other entity.
For retailers and manufacturers, receivables are classified into trade and non-trade receivables.
For banks and other financial institutions, receivables result primarily from loans to customers.
(loan receivable)
Methods of estimating bad debt loss
a. Allowance Method- accepted by IFRS because it conforms with Matching Principle.
b. Direct Write off Method- for BIR it is accepted but not permitted by IFRS.

Allowance Method
Transaction Journal Entry
Doubtful of Collection Dr. Doubtful Accounts Expense
Cr. Allowance for Doubtful Accounts
Writeoff Dr. Allowance for Doubtful Account
Cr. Accounts Receivable
Recovered Dr. Accounts Receivable
Cr. Allowance for Doubtful Accounts
Collection Dr. Cash
Cr. Accounts Receivable

Direct Write off Method

Doubtful of Collection No entry
Write off Dr. Bad debts expense
Cr. Accounts Receivable
Recovered Dr. Accounts Receivable
Dr. Bad debts expense
Collection Dr. Cash
Cr. Accounts Receivable

Methods of estimating doubtful accounts

a. Aging the accounts receivable
b. Percent of accounts receivable
c. Percent of sales
Note! Be careful with the questions.
If the question is the accounts receivable “balance”, contra accounts (allowance for doubtful accounts,
allowance for discount and returns) are not deducted to get the answer.

If the question is the NRV, amortized cost, carrying amount, carrying value, book value of accounts receivable,
contra accounts are deducted to get the answer.

Depreciation of Property and Equipment- when an entity acquires long-lived assets such as
buildings, service vehicles, computers or office furnitures, it is basically buying or prepaying for
the usefulness of that asset. These assets help generate income for the entity. Therefore, a portion
of the cost of the assets should be reported as expense in each accounting period. Proper
accounting requires the allocation of the cost of the asset over its estimated useful life. The
estimated account allocated to any one accounting period is called depreciation or depreciation
expense. Three factors are involved in computing depreciation expense:
1) Asset cost
2) Salvage value
3) Useful life
Straight-line method- simplest procedure.
Asset cost Xx
Less: Estimated salvage value Xx
Depreciable cost Xx
Divided by: Estimated useful life Xx
Depreciation Expense for each time period Xx

Contra Account- is used to record reductions in a related account and its normal balance is
opposite that of the related account. The balance of the contra asset account is deducted from the
cost to obtain the book value of the property and equipment.

Dr. Depreciation Expense

Cr. Accumulated Depreciation

Statement of Financial Performance

ABC Company
Statement of Financial Performance
For the month ended May 31,2019

Revenue
Delivery Service Revenue xx
Interest Revenue xx
Total Revenue Xx

Expenses
Salaries Expense xx
Utilities Expense xx
Rent Expense xx
Depreciation Expense – Service Vehicle xx
Interest Expense xx
Supplies Expense xx
Insurance Expense xx
Total Expense (xx)
Profit/Loss xx

Statement of Changes in Equity

ABC Company
Statement of Changes in Equity
For the month ended May 31,2019

Beginning Capital xx
Additional Investment xx
Withdrawal (xx)
Profit xx
Ending Capital xx

Statement of Financial Position (Report Form)

ABC Company
Statement of Financial Position
For the month ended May 31,2019
Assets

Current Assets
Cash xx
Accounts Receivable xx xx
Total Current Assets
Non-Current Assets
Service Vehicle Xx
Less: Accumulated Depreciation (xx) xx
Equipment xx
Total Non-Current Assets xx
Total Assets xx

Liabilities
Current Liabilities
Accounts Payable xx
Notes Payable xx
Total Liabilities xx
Owner’s Equity
Capital, 05/31/2019 xx
Total Liabilities and Owner’s Equity xx

Statement of Cash Flows

ABC Company
Statement of Cash Flows
For the month ended May 31,2019
Cash Flows from Operating Activities
Cash received from clients xx
Payments to suppliers (xx)
Payments to employees (xx)
Payments to office rent (xx)
Payments to insurance (xx)
Payments to utilities (xx)
Net cash provided by (used in) operating activities Xx
Cash Flows from Investing Activities
Payments to acquire service vehicle (xx)
Payments to acquire office equipment (xx)
Net Cash provided by (used in) investing activities (xx)
Cash Flows from Financing Activities
Cash received as investment by owners xx
Cash received from borrowings xx
Payments for withdrawal by owner (xx)
Net Cash provided by (used in) financing activities Xx
Net Increase (decrease) in cash Xx
Cash Balance at the beginning of the period Xx
Cash balance at the end of the period Xx

Interest

Paid: Operating Activities

Received: Operating Activities

Dividends

Paid: Financing Activities

Received: Operating Activities

Tax

Paid: Operating Activities

Received: Operating Activities

COMPLETING THE ACCOUNTING CYCLE

Closing entries:
1. Close the income accounts
2. Close the expense accounts
3. Close the income summary accounts
4. Close the withdrawal accounts
Preparation of Post – Closing Trial Balance
It is possible to commit an error in posting the adjustments and closing entries to the
ledger account, thus, it is necessary to test the equality of the accounts by preparing a new trial
balance. The final trial balance is called post – closing trial balance.
o Verifies that all the debits equal the credits in the trial balance
o Contains only balance sheet items such as asset, liability and ending capital because all
income and expenses account, as well as the withdrawal account, have zero balance
Reversing Entries
- A journal entry which is the exact opposite of a related adjusting entry made at the end
of the reporting period
- Bookkeeping technique made to simplify the recording of regular transactions in the next
accounting period.
Adjustments that can be reversed are as follows:
o Prepaid Expenses (expense method)
o Unearned Revenue (Income method)
o Accrues expenses
o Accrues revenues
MERCHANDISING AND MANUFACTURING (PART 2)

Merchandising entity- purchases inventory, sells the inventory and uses the cash to purchase
more inventory and the cycle continues.
a. Cash sales- the cycle is from cash to inventory and back to cash
b. Credit Sales- the cycle is from cash to inventory to accounts receivable and back to
cash.

Manufacturing entity- is any business that uses components, parts or raw materials to make a
finished good. These finished goods can be sold directly to consumers or to other manufacturing
businesses that use them for making a different product.
Elements of Manufacturing Costs:
a. Direct Materials
b. Direct Labor
c. Manufacturing Overhead

MERCHANDISING

Terms of Transaction:

Cash Discount – discounts give for prompt payment. It is also called purchase discount in the
buyer’s viewpoint and sales discount in the seller’s viewpoint.
Trade Discount – it encourages the buyers to purchase products because of markdowns from the
list price.
Transportation Costs
Freight Terms Who Shoulders? Who Pays?
FOB Destination Seller Seller
Freight Prepaid
FOB Shipping Point Buyer Buyer
Freight Collect
FOB destination Seller Buyer
Freight Collect
FOB Shipping Point Buyer Seller
Merchandising Company
Income Statement (Partial)

Cost of Sales
Merchandise Inventory, Beg. Xx
Cost of Goods Purchased Xx
Goods Available for Sale Xx
Less: Merchandise Inventory, End. Xx
Cost of Sales Xx

Merchandising Company
Income Statement
For the year ended Dec 31, 20xx

Net Sales Xx
Less: Cost of Sales Xx
Gross Profit Xx
Less: Operation Expenses Xx
Operating Profit Xx
Less: Finance Costs Xx
Profit Xx

Transactions Periodic Perpetual

Purchase Merhandise on Account Dr. Purchases Dr. Merchandise Inventory
Cr. Account Payable Cr. Accounts Payable
Payment of Freight on the Purchase Dr. Freight In Dr. Merchandise Inventory
Cr. Cash Cr. Cash
Return of Merchandise Purchased to
Supplier Dr. Accounts Payable Dr. Accounts Payable
Cr. Purchase Return Cr. Merchandise Inventory
Sale of Merchandise on Account Dr. Accounts Receivable Dr. Accounts Receivable
Cr. Cash Cr. Sales
Dr. Cost of Goods Sold
Cr. Merchandise Inventory
Return of Merchandise Sold from
Customer Dr. Sales Return Dr. Sales Return
Cr. Accounts Receivable Cr. Accounts Receivable
Dr. Merchandise Inventory
Cr. Cost of Goods Sold
Adjustment of Ending Inventory Dr. Merchandise Inventory, End NO ENTRY
Cr. Income Summary
COMPLETING THE CYCLE FOR MERCHANDISING

Adjusting and Closing Entries

1. Close Temporary accounts with credit balances and establish ending merchandise inventory
2. Close inventory accounts with debit balances and remove beginning inventory.
3. Close income summary accounts.
4. Close the withdrawal accounts.
2 Acceptable Methods in Completing the cycle for merchandising
a. Adjusting Entry Method
b. Closing Entry Method

Adjusting Entry Method Closing Entry Method

Dr. Income Summary Dr. Income Summary
Cr. Merchandise Inventory, Beg. Cr. Merchandise Inventory, Beg
Cr. Temporary Accounts with Debit Balances
Dr. Merchandise Inventory, End Dr. Merchandise Inventory, End
Cr. Income Summary Dr. Temporary Accounts with Credit Balances
Cr. Income Summary

Post-Closing Trial Balance- a final

MANUFACTURING

BUJPIA MANUFACTURERS
Statement of Cost of Goods Manufactured
For the year ended December 31, 2015

Direct Materials Used:

Raw Materials Inventory, beginning P xxx
Add: Net Cost of Purchases:
Purchases – Raw Materials P xx
Less: Purchase Returns and Allowanceas P xx
Purchase Discounts xx xx
Net Purchases P xx
Add: Transportation In xx xxx
Raw Materials Available for use P xxx
Less: Raw Materials Inventory, end xxx P xxx
Direct Labor xxx
Manufacturing Overhead
Indirect labor P xxx
Depreciation Expense – Factory Bldg. xxx
Amortization of Patents xxx
Real Property Taxes xxx
Factory Utilities xxx
Tools Used xxx
Employer’s Payroll Contributions – Factory xxx
Factory Supplies Expense xxx
Miscellaneous Factory Expense xxx xxx
Total Manufacturing Costs P xxx
Add: Work in Process, beginning xxx
Total Cost of Goods Placed in Process P xxx
Less: Work in Process, end xxx
Cost of Goods Manufactured P xxx

Manufacturing Entity
Finished Goods Inventory, beginning P xx
Add: Cost of Goods Manufactured xx
Goods Available for sale P xx
Less: Finished Goods Inventory, end xx
Cost of Goods Sold Pxx

References
Valix, C. T., Peralta, J. F., & Valix, C. M. (2019). Intermediate Accounting. Recto Avenue,
Sampaloc, Manila, Philippines: GIC Enterprises & CO., INC.
Valix, C. T., Peralta, J. F., & Valix, C. M. (2019). Conceptual Framework and Accounting
Standards. Recto Avenue, Sampaloc, Manila, Philippines: GIC Enterprises & CO., INC.
Ballada, W., & Ballada, S. (2018). Basic Financial Accounting and Reporting. Manila,
Philippines: DomDane Publishers.
De Leon et al. (2019). Cost Accounting and Control. Claro M. Recto, Manila, Philippines: GIC
Enterprises & CO., INC.
(Cayetano, 2020, p. 6 & 7)

---Your hardest times often lead to the greatest moments of your life. Keep the
faith. It will all be worth it in the end.---