Integrated

Accounting
Fundamentals
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THE ACCOUNTING ENVIRONMENT AND ACCOUNTING FRAMEWORK

1. BUSINESS
A business is an economic unit that engages in the buying and selling of goods or services. A major
concern of business is how best to use its resources: machines, raw materials, labor skills, number of
men to employ. The primary reason for putting up a business is to earn a profit.

LEGAL FORMS OF BUSINESS OWNERSHIP

A business may be organized and may take one of the following three legal forms:

1. Sole Proprietorship
A sole proprietorship is the most basic legal form of business. It is managed by one person which is
called a proprietor.

Advantages
a. Needs only a small amount of capital.
b. The operation can be managed easily.
c. The owners get all the profits.
d. Easy to form since only minimum requirements to legally operate are needed.
e. The owner has full control over everything.
f. Quick decision-making since all the decision-making is made by a single person.

Disadvantages
1. Difficult to expand because of low capital.
2. It has no indefinite life.
3. The owner has unlimited liability. The owner’s personal properties are attached to the business.

2. Partnership
The Philippine Civil Code provides for a definition of a partnership. According to Article 1767, a
Partnership is a contract between two or more persons who bind themselves to contribute money,
property, or industry to a common fund with the intention of dividing the profit among themselves.

Partnership is a legal form of business operation between two or more parties to manage and operate
a business and share its profits.
Advantages
a. Ease in managing the business because two or more owners are involved.
b. Efficient management because of the division of responsibilities.
Disadvantages
a. No indefinite life because disagreement can arise easily.
b. Partners also have unlimited liability.

3. Corporation
A business is organized as a separate legal entity from the owners. It means that it can conduct
business by itself. An investor simply buys shares of stocks in a corporation and becomes a
shareholder. It is managed by a Board of Directors elected by the shareholders among themselves.

If the shareholders owned 20% - 50% of shares, they have significant influence while more than 50%
have significant control. Republic Act 11232 signed in February 2019 revised some laws affecting
corporate organization and conduct, its existence, pre-incorporation requirement, one-man
corporation, etc. Formation requirements are filed with the Securities and Exchange Commission (SEC)
and can be accessed through the Internet.
 Advantages:
a. More capital can be raised because of the large number of shareholders
b. Can afford to hire experts who can efficiently manage and operate the business
c. Has perpetual existence, meaning the business can exist forever
d. More stable than a partnership as a withdrawing shareholder may sell his shares
e. Higher amounts of profit may be obtained because of its large resources
f. One-man corporation is permitted, making it easy for small-time entrepreneurs to enter
the corporate playing field

Disadvantages:
a. A shareholder, unlike a sole proprietor or a partner, has no unlimited liability. There is
therefore a higher risk involved on corporate debts since these can only be paid out of
corporate funds, and the personal properties cannot be subject to attachment
b. It is subject to more legal and tax requirements
c. Abuse of power by the Board of Directors could adversely affect the welfare of the
corporation and its shareholders

FORMS OF BUSINESS OPERATION

1. Service
A service type of business is one that provides services, for a fee, to clients or customers. Examples are
legal consultation, dental clinics, travel agencies, and airlines.
2. Merchandising
Merchandising type of business engages in the buying and selling of goods or merchandise.
Examples are grocery stores, bookstores, and department stores.
3. Manufacturing
Manufacturing is the one that buys raw materials, converts them to finished goods, and then sells
them to customers. Examples are shoe factories and food processors.

ACCOUNTING
According to the American Institute of Certified Public Accountants (AICPA); “Accounting is the art of
recording, classifying, and summarizing in a significant manner and terms of money, transactions, and
events, which are, in part at least, of a finance character and interpreting the result thereof”.

According to the American Accounting Association (AAA); Accounting refers to the process of
identifying, measuring, and communicating economic information to permit informed judgments and
decisions by the users of the information”. In the simplest definition, accounting is the process of
identifying, recording, summarizing, and interpreting of financial information.

ACCOUNTING AS A PROFESSION
Mastery of a particular skill. Adhere to a common code of values or conduct administered by BOA.
Accept responsibility to society.

REPUBLIC ACT OF 9298 (R.A 9298)

R.A 9298 otherwise known as the Philippine Accountancy Act of 2004 is the law that governs the
accountancy profession in the Philippines.

OBJECTIVES OF R.A. 9298

➢ Standardization of Accountancy education
➢ Registration for CPA Licensure Examination
➢ Supervision, regulation, and control of Accountancy practice in the Philippines
BOARD OF ACCOUNTANCY
Board of Accountancy (BOA) is under the jurisdiction of the Professional Regulatory
Commission (PRC) and is tasked to set up and promulgate a set of professional standards
and ethics in the practice of the accounting profession. They enforced the R.A 9298. BOA is
composed of a chairman and six members which are appointed by the president.
PHILIPPINE INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANT (PICPA)
PICPA is the integrated national professional organization of certified public
accountants in the Philippines having the basic authority of setting up and implementing
rules vital to the accounting profession.
REQUIREMENTS FOR CPALE
➢ Filipino Citizen
➢ Good moral character
➢ Bachelor of Science in Accountancy degree
 ➢ Should not be convicted of any crimes involving moral turpitude
CPALE SUBJECTS
1. Management Advisory Services
2. Financial Accounting and Reporting/ Practical Accounting 1
3. Advance Financial Accounting and Reporting/ Practical Accounting 2
4. Taxation
5. Regulatory Framework for Business Transactions (Business law)
6. Auditing
PASSING GRADE FOR CPALE
General average > 75%
Grade per subject should not be less than 65
SECTORS IN ACCOUNTING PROFESSION
1. Public Practice
a. Auditing (External Auditors)
b. Tax Services
c. Management Consultancy Services
2. Industry/Commerce
3. Academe
4. Government
AREAS OF ACCOUNTING
1. Financial Accounting
Involves the preparation and interpretation of financial statements primarily intended for
external users such as investors, lenders, suppliers, government, and customers.
2. Management Accounting
Management Accounting deals with special-purpose financial statements primarily for
the use of internal users such as managers. It assists them in planning, directing, and
controlling the affairs of the business.
3. Cost Accounting
Cost accounting deals with recording, classifying, and summarizing the details of
materials, labor, and overhead necessary to produce and sell a product or service. It also
deals with controlling expenses.
1. Government Accounting
Government accounting deals with the proper custody and disposition of public funds.
Its objective is more on how the funds are used to service the people rather than to earn
profit. It uses the Government Accounting Manual (GAM)
2. Auditing
Auditing deals with the independent examination and verification of the financial
statement if it is prepared and presented fairly
FINANCIAL REPORTING STANDARD COUNCIL (FRSC)
● In charge of making accounting standards.
● Was called before as the Accounting Standard Council and the standards were
called PAS.
● Standard is called PFRS (Philippine Financial Reporting Standard) PFRS includes: PFRS,
PAS, Interpretation (made by the PIC or Philippine Interpretation Committee
INTERNATIONAL ACCOUNTING STANDARD (IASB)
International Committee
The Standard is called IFRS (UK) and PFRS is based on IFRS
MEMBER OF FRSC
1 chairman
14 representatives
BOA – 1
BSP – 1
COA – 1
BIR – 1
SEC – 1
Major preparers or users of F.S – 1
PICPA – 8
Public practice – 2
Commerce/Industry – 2
Academe – 2
Government – 2
DIFFERENT USERS OF FINANCIAL STATEMENT
1. Investor
2. Creditors
 3. Customers
4. Employees
5. Government
6. Suppliers
7. Managers
Users of financial statements are called stakeholders. A stakeholder is a person or entity who has a stake
or interest in the business.

ACCOUNTING INFORMATION SYSTEM (AIS)

Processing of the transactions or activities to produce information must be done in an orderly and
efficient manner. Accounting Information System (AIS) can be classified into two:
1. Measurement System (processing phase)
- This involves analyzing, measuring, recording, classifying, and summarizing
2. Communication System ( reporting and recording phase)
- This involves the presentation of formal reports which are communicated to decision
makers

ACCOUNTING INFORMATION SYSTEM (AIS) PRINCIPLES

An AIS must be efficient and effective. To be efficient, the information must be timely and must be
processed at the least cost and effort. To be effective or relevant, the information must be able to
answer the needs of decision-makers. To make these possible five principles must be considered.

1. Cost-Benefit Principle
Prescribed that the advantages enjoyed from installing the system must outweigh its cost. For
example, installing a computerized system may be costly but it can reduce the number of
employees which in turn will reduce the cost of salaries, wages, and allowances. Additionally,
recording will be more accurate with fewer or no errors committed making the reports more
reliable.
2. Relevance Principle
Prescribes that the information must be reported promptly and must be useful to enable
statement users to reach a conclusion and make the right decisions.
3. Compatibility Principle
Prescribes a system designed to fit the unique characteristics of the company- its personnel,
activities, and structure. A sole proprietor-owned business operating only within a mall will require
a simple AIS. A multinational company with diverse products and offshore operations will require
a more complicated AIS.
4. Flexibility Principle
Prescribes that the company’s system should allow for changes to come up with timely and
updated
information in response to industry demand, government promulgations, technological
advances, and competitive pressures.
5. Control Principle
Prescribes that the AIS of the firm must have good internal control

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES

Generally accepted accounting principles refer to a common set of accounting principles,
standards, and procedures in preparing financial statements. It aims to improve clarity,
consistency, and comparability of the communication of financial information.

1. Business Entity Principle

The owner is separated and distinct from the business
2. Going Concern Principle
The business continuously operating without the intention to liquidate
3. Matching Principle
The expenses should be matched to the related revenue
4. Accrual Basis
Income – recognized when earned regardless of cash collection Expenses –
recognized when incurred regardless of cash payment

5. Periodicity Principle
Divide the life of the operating of the business.
Calendar (Jan – Dec) or fiscal (any time of the year at least one year) Interim
financial statement – covers less than one year
 6. Stable Monetary Unit
Uniform currency

TYPES OF FINANCIAL STATEMENT

1. Statement of Financial Position/ Balance sheet
The Statement of Financial Position is a list of assets, liabilities, and owner’s equity of a
business. It shows the present condition of a business at a current or certain point in time. It
informs the users of the wealth and obligations accumulated by the business and is used to
determine the liquidity or solvency of the business. It also shows the capacity for
adaptation in times of change and emergencies
2. Statement of Comprehensive Income/ Income Statement
The Statement of Comprehensive Income (PAS 1.81) is a statement that requires an entity
to present income and expenses. It shows the profitability of the business over a period of
time.

3. Statement of Changes in Equity

It shows the activities for a period that caused the owner’s equity to change. Activities
affecting owner’s equity are investment, withdrawal, net income/loss
4. Statement of Cash Flow
Statement of cash flow shows what caused the change in cash. It shows three kinds of
activities which is the operating, financing, and investing activities
*Responsible for the preparation and presentation of financial statements is the management
QUALITATIVE CHARACTERISTICS OF FINANCIAL INFORMATION OR FINANCIAL STATEMENT
1. Understandability
The information must be readily understandable to users of the financial statements.
This means that information must be clearly presented, with additional information supplied
in the supporting footnotes as needed to assist in clarification.
2. Relevance
The information must be relevant to the needs of the users, which is the case when the
information influences their economic decisions. This may involve reporting particularly
relevant information, or information whose omission or misstatement could influence the
economic decision of the users.
3. Reliability
The information must be free of material error and bias, and not misleading. Thus, the
information should faithfully represent the transactions and other events, reflect the
underlying substance of events, and prudently represent estimates and uncertainties
through proper disclosure.
4. Comparability
The information must be comparable to the financial information presented for other
accounting periods so that the users can identify trends in the performance and financial
position of the reporting entity.
THE ACCOUNTING EQUATION
ASSETS = LIABILITIES + EQUITY

Assets – resources owned and controlled by the business, and arise from past transactions
Liabilities – present obligations of the business and claims of the creditors
Equity – claims of the owners and assets invested by the owners
ACCRUAL CONCEPT OF RECOGNIZING REVENUE AND EXPENSE
1. Realization of Revenue – revenue is recognized when it is earned regardless of collection.
2. Recognition of Expense – expense is recognized when it is incurred regardless of whether cash
is paid or not.

ACCOUNTING PERIOD
The accounting period is a period that covers certain accounting functions, which can be either a
calendar or a fiscal but also a week, month, or quarter.
OPERATING CYCLE
The operating cycle is the average period required for a business to make an initial outlay of cash to
produce goods, sell the goods, and receive cash from customers in exchange for the goods.
ACCOUNTING FOR SERVICE BUSINESS
ACCOUNTING CYCLE
Accounting cycle is a collective process of identifying, analyzing, and recording the accounting
events of a company. It is a methodical set of rules to ensure the accuracy and conformity of
financial statements.
STEPS IN ACCOUNTING CYCLE
1. Analyzing the business transactions
An organization begins its accounting cycle with the identification and analysis of business
transactions through the source documents.
2. Journalizing business transactions in the general journal
General Journal is the book of original accounts. It uses double-entry bookkeeping, which originated
by Friar Luca Pacioli, the Father of Accounting. It is stated in the book Summa de Arithmetica
Geometria Proportioni et Proportionalita.

Rules of Double Entry Bookkeeping

1. For every debit there is a corresponding credit
2. For every transaction there are at least two accounts affected
3. Total debit shall always be equal to total credit
4. Normal balances of Assets, Liabilities and Equity
1. Posting
Once a transaction is recorded as a journal entry, it should be posted to an account in
the general ledger. The general ledger provides a breakdown of all accounting activities
by account.

Footing – adding the total debit and credit

2. Unadjusted Trial Balance
After the company posts journal entries to individual general ledger accounts, an
unadjusted trial balance is prepared. The trial balance ensures that the total debits are
equal to the total credits in the financial records.
3. Adjusting Journal Entries
At the end of the period, adjusting entries are made. These are the result of corrections
made on the worksheet and the result from the passage of time.
4. Financial Statements
Upon doing the unadjusted trial balance, it was followed by the actual formalized
financial statements.
5. Closing Entries
At the end of the accounting period, the company will close all the temporary
accounts which include that revenues and expenses
SOURCE DOCUMENTS
Source documents are the evidence that the transaction occurs in the business.
1. Invoice
Invoice is issued when service or merchandise is given to a customer or client.
2. Official Receipt
Official Receipt is issued when cash is received by the entity.

3. Cash or Check Voucher

Cash or check voucher is a document used when cash is paid, or check is issued. It is
signed by the employee preparing it and the officer authorizing the payment. It is also
signed by the payee or the person who received cash payment.
4. Check
Check is a negotiable instrument used as a substitute for cash, the payment for which
Is drawn against the entities or individual’s current account.
5. Promissory Note
Promissory note is a written promise to pay a certain sum of money at a future date.
The maker is the debtor who makes the promise, addressing it to the payee or creditor.
6. Statement of Account
Statement of Account is a bill presented to a customer for service rendered or
merchandise given for which payment is demandable.
THE CHART OF ACCOUNTS

Account is a device used to record the increases and decreases of each of the
different assets, liabilities, and owner’s equity.

The Chart of Accounts is a listing of account titles that guides the bookkeeper in the
recording of the transactions. The number and nature of accounts depend on the type of
operation. The accounts are properly arranged with the assets listed first, followed by the
liabilities, and lastly by the owner’s equity. Account numbers are assigned for each account
for easy reference.

Figure 1.
Happy Tour and Travel
Chart of Accounts
Current Assets – 101 to 105
101 Cash
102 Accounts Receivable
103 Allowance for Doubtful Accounts
104 Notes Receivable
105 Office Supplies
Non-current Assets – 201 to 204
201 Equipment
202 Accumulated Depreciation – Equipment 203
Furniture and Fixtures
204 Accumulated Depreciation – Furniture and Fixtures 205 Cars
Current Liabilities – 301 to 303
301 Accounts Payable
302 Loans Payable
303 Utilities Payable
Non-current Liabilities – 401 to 402
401 Notes Payable
402 Mortgage Payable
Equity – 501 to 502
501 Abejero, Capital
502 Abejero, Drawing
Revenues – 601
601 Service Income

Expenses – 701 to 705

701 Rent
702 Utilities
703 Supplies
704 Salaries
705 Cars
THE T-ACCOUNT
T-account is the simplest tool to use to analyze the effects of the transactions on each
account. It has two side: one side is for the recording of increases and the other side is the
recording of decreases

Rules for debit and credit

1. Increases in assets are recorded on the debit side of the account while decreases in assets
are recorded on the credit side of the account.
2. Increases in liabilities are recorded on the credit side of the account while decreases in
liabilities are recorded on the debit side of the account. 3. Increases in owner’s equity are
recorded on the credit side of the account while decreases in assets are recorded on the
debit side of the account.
GENERAL JOURNAL
The general journal is part of the accounting record keeping system. When an event occurs
that must be recorded, it is called a transaction, and may be recorded in a specialty journal or in the
general journal.
Journal Entry Format
Transactions are recorded in all the various journals in a debit and credit format, and
are recorded in order by date, with the earliest entries being recorded first. These entries
are called journal entries (since they are entries into journals). Each journal entry includes
the date, the amount of the debit and credit, the titles of the accounts being debited and
credited (with the title of the credited account being indented), and a short narration of
why the journal entry is being recorded.
General Journal Accounting Example
An example of a journal entry that would be recorded in the general journal is (Figure 2):
 Date Account Debit Credit

June 30 Depreciation Expense 10,000

Accumulated Depreciation 10,000

To record depreciation for the

month of June

General Ledger Account

A general ledger account is an account or record used to sort, store, and summarize a
company's transactions. These accounts are arranged in the general ledger (and in the chart of
accounts) with the balance sheet accounts appearing first followed by the income statement
accounts.

The general ledger contains a debit and credit entry for every transaction recorded within it so
that the total of all debit balances in the general ledger should always match the total of all credit
balances. If they do not match, the general ledger is said to be out of balance and must be
corrected before reliable financial statements can be compiled from it.

Figure 3: Example of General Ledger

General Ledger Example Account

General Ledger Sheet Sheet No: 21

Account: Electricity Expense Account No.: 640

Date Details Ref. Debit Credit Balance

2018

Mar 15 To Accounts J1 4,000 4,000

Payable

June 17 To Accounts J3 3,640 7,640

Payable

Sept 14 To Accounts J5 430 7,210

Payable

TRIAL BALANCE
`A trial balance is a bookkeeping worksheet in which the balance of all ledgers is
compiled into debit and credit account column totals that are equal. A company prepares
a trial balance periodically, usually at the end of every reporting period. The general
purpose of producing a trial balance is to ensure the entries in a company's bookkeeping
system are mathematically correct.

Preparing a trial balance for a company serves to detect any mathematical errors that
have occurred in the double-entry accounting system. If the total debits equal the total
credits, the trial balance is considered balanced, and there should be no mathematical
errors in the ledgers. However, this does not mean there are no errors in a company's
accounting system. For example, transactions classified improperly or those simply missing
from the system could still be material accounting errors that would not be detected by the
trial balance procedure.
 Figure 4: Example of Trial Balance

ABC Company
Unadjusted Trial Balance
31 December, 2017

Account Name Ref Debit Credit

Cash 400,000

Accounts 30,000
Receivable

Office Suppliers 45,000

Office Equipments 15,000

Vehicle 40,000

Building 300,000

Accounts Payable 100,000

Notes Payable 50,000

Common Stock 500,000

Retained Earnings 20,000

Sales Revenue 700,000

Cost of Goods Sold 400,000

Salaries Expenese 50,000

Rent Expense 20,000

Supplies Expense 10,000

Advertising 30,000

Insurance 30,000

Total 1,370,000 1,370,000

ANALYZING BUSINESS TRANSACTION

Business Transactions – economic events that should be recorded in the accounting records. The concepts
of recognition, valuation, and classification.

Recognition – refers to a decision as to when to record a business transaction.

Valuation – is the process of assigning a monetary amount to business transactions and resulting
assets and liabilities.
Classification – a process of assigning all the transactions in which a business engages to
appropriate categories or accounts.
Accounts – An accounting system has a separate account for each asset, liability, and component of
owner’s equity, including revenues and expenses.
Chart of Accounts – each account is kept on a separate page or card. These pages or cards are placed
together in a book or file called the general ledger.
T-Account – A tool used to analyze transactions and is not part of the accounting records.
Rules of Double-Entry Accounting
● Every transaction affects at least two accounts
● Total debits must equal total credits

The Accounting cycle – is a series of steps that measure and communicate useful information to
decision-makers.

Step 1. Analyze business transactions from source documents.

Step 2. Record the transactions by entering them in the general journal.
Step 3. Post the journal entries to the ledger, and prepare a trial balance.
Step 4. Adjust the accounts, and prepare an adjusted trial balance.
Step 5. Prepare financial statements.
Step 6. Close the accounts, and prepare a post-closing trial balance.

Asset – is a resource obtained and controlled by the enterprise as a result of a past event and from which
probable future economic benefits are expected to flow to the entity.
Asset has three features:
1. It is a resource obtained from a past event,
2. The enterprise has control over it, and
3. Future economic benefits will be received from its use.
Liabilities – as a present obligation arising from past events, the settlement of which is expected to result in
an outflow of resources from the enterprise.
Liability has three features:
1. There is a present obligation,
2. Which arose from past events, and
3. Settlement is expected to be made in the future in the form of an outflow of resources.
Owner’s Equity - a residual right or interest of the owner(s) in the entity’s net assets.
The Accounting Equation
Assets = Liabilities + Equity

Business Transactions and Accounting Elements

● The Accounting elements are affected by the business transactions or economic activities of a
business.
● A transaction is defined as an exchange of values between two parties expressed in monetary terms.
It has three characteristics:
a. Exchange of values
b. Between two parties
c. In terms of money

Statement of Financial Position - is a list of assets, liabilities, and owner’s equity of a business.
Accrual Concept of Recognizing Revenues and Expenses.
- Accrual concept is supported by the Realization Principle and Expense Recognition Principle.
• Realization of Revenue – The principle recognizes revenue when it is earned regardless of
collection.
• Recognition of Expense – The principle recognizes expenses follows the same rule as recognizing
revenues, that is payment in cash or in property is generally not a requirement
Accrual Assumption
The Accrual Assumption as provided in PAS 1 par. 25-26 requires that revenues and expenses be
recognized based on the time period they relate or based on the occurrence of the revenue and expenses
rather than on whether cash is received or paid.
Cash Concept
The Cash Concept recognizes revenue only when cash is collected and expenses only when
cash is paid.
Expanded Structure of a Business

Income
Revenue is income coming from the normal course of business. Income is an increase in economic
benefits during the period that results in an increase in equity.
Expenses
An expense will decrease an asset or increase a liability with a corresponding decrease in owner’s
equity.
Profit or Loss
 The difference between the total income earned and the total expenses incurred spells the success or
failure of the organization. If income is greater than expenses, the result is profit. The relationship of these items,
using the illustrated figures for revenues and expenses, may be expressed as follows:

Statement of Cash Flows – It shows the changes in the cash activities starting with the operating activities found
in the income statement and the investing and financing activities found in the statement of financial position.
1. For evaluating the cash stewardship of the finance officer,
2. Used as a guide in planning future cash flows, and
3. For assessing the ability to generate cash from operating activities.
Classification of Assets
Current Assets – include cash and cash equivalents which are not restricted in use, as well as other assets
expected to be realized into cash, or sold or consumed within the normal operating cycle of the business or
one year, whichever is longer.
Non-current assets – are in the form of plant, property and equipment.

Classification of Liabilities
Current Liabilities – are those debts or obligations reasonably expected to be liquidated in the normal course of
the enterprise’s operating cycle or paid within a period of one year by the use of current assets or the creation
of other current liabilities.
Non-current liabilities – are long-term liabilities or obligations which are payable longer than one year such as
Mortgage Payable and Bonds Payable.

Business Transaction Examples

Owner’s Investment to Form the Business
Transaction: On July 1, Joan Blue invested 40,000 in cash to form Blue Design Studio.

Prepayment of Expenses in Cash

Transaction: On July 3, Joan orders 5,200 of office supplies for Blue Design Studio.

Purchase of an Asset on Credit

Transaction: On July 5, Blue Design Studio receives the office supplies ordered on July 2 and an invoice for
5,200

Purchase of an Asset Partly in Cash and Partly on Credit

Transaction: On July 6, Joan purchases office equipment totaling 16,320 for Blue Design Studio. Joan pays
13,320 in cash and agrees to pay the rest next month.

Payment of Liability
Transaction: On July 9, Blue Design Studio made a partial payment of 2,600 for the amount owed for the office
supplies received on July 5.

Revenue in Cash
Transaction: On July 10, Blue Design Studio performs a service for an investment advisor by designing a series of
brochures and collects a 2,800 fee in each.

Revenue on Credit
Transactions: On July 15, Blue Design Studio performs a service for a department store by designing a TV
commercial. The company bills for the 9,600 fee now but will collect it later.

Revenue Collected in Advance

Transaction: On July 19, Blue Design Studio accepted a 1,400 advance fee as a deposit on a series of
brochures to be designed.
Collection on Account
Transaction: On July 22, Blue Design Studio received 5,000 cash from customers previously billed on July15.

Expenses Paid in Cash

Transaction: On July 26, Blue Design Studio pays 4,800 for four weeks of employee wages.

Expenses to be Paid Later

Transaction: On July 30, Blue Design Studio receives but does not play the utility bill that is due next month for
680.

Withdrawals
Transaction: On July 21, Blue Design Studio withdrew 2,800 cash.
 ACCOUNTING FOR SERVICE BUSINESS

ACCOUNTING CYCLE
Accounting cycle is defined as a series of steps taken in gathering, processing and summarizing
data to produce meaningful information, communicated to users using financial reports. Hence, the first
four steps of the accounting cycle for service business are stated below:
1. Collecting data based on various documents or business papers.
2. Analyzing and recording of the documents in a book called the journal.
3. Classifying and posting from the journal to another book called the ledger.
4. Extracting the balances of each of the accounts found in the general ledger and preparing a
trial balance.
BUSINESS PAPERS
These are documents evidencing transactions of a business. The following are some of the business
papers usually used in business:
A. Invoice
- Issued when service is rendered to a customer or client.
B. Official Receipt
- Issued when cash is received by the entity.
C. Cash or Check Voucher
- A document used, signed by the payee or the person who received the cash payment
and the payee or the person who received the cash payment, when cash is paid, or a
check is issued.
D. Check
- A negotiable instrument used as a substitute for cash, of which is drawn against the entities
or individual’s current or savings account.
E. Promissory Note
- A written promise by the debtor/payor to the creditor/payee to pay a certain amount of
money at a future date.

F. Statement of Account
- A bill presented to a customer for service rendered for which payment is demandable.
THE CHART OF ACCOUNTS
- An account is a device used to record the increase and decrease affecting each of the
different assets, liabilities, and owner’s equity.
- A chart of accounts consists of accounts titles which serves as a guide in recording business
transactions.
- All of the accounts must be properly arranged with the assets listed first, followed by the
liabilities and lastly by the owner’s equity.

THE T ACCOUNT
- T Account is the simplest form used to analyze the effects of the transaction on each account.
- It has two sides: (1) for recording increases and (2) for recording decreases.

Debit is an accounting term meaning left side of an account. While credit means the right
 side of an account.

To summarize:
1. Increases in assets and expenses are recorded on the debit side (+) of the account, while
decreases are recorded on the credit side (-) of the account.
2. Increases in liabilities, capital, and income are recorded on the credit side (+) of the
account, while decreases are recorded on the debit side (-) of the account.
3. Increases in equity are recorded on the credit side (+) of the account, while decreases are
recorded on the debit side (-) of the account.

Demonstration Problem

*Note: The Cash T Account has now two entries.

THE VENETIAN MODEL
- Every transaction recorded there must have a debit equal to a credit no matter how many accounts
are affected. This is called the Double Entry Bookkeeping System or Venetian Model, which was
introduced by Luca Pacioli.
- Each transaction must always affect two accounts (i.e., cash and capital) and at least one or
two accounting elements (i.e., assets only or assets and owner’s equity).
- The reason is that a transaction is an exchange of value: one value received, and another
value parted with.
THE JOURNAL
- Transactions are initially recorded chronologically by day in the journal, also called the book of original
entry.
- Each journal entry contains the following items:
1. Date
2. The account title and the amount to be debited.
3. The account title and the amount to be credited.
4. Explanation
Demonstration Problem

DATE ACCOUNTS AND EXPLANATION REF DEBIT CREDIT

2020
March
1 Cash 100,000
Cars 1,500,000
Gomez, Capital 1,600,000
Investments of Gomez to open the
business

3 Cash 150,000
Loans Payable 150,000
Cash loan from Citibank

6 Furniture & Fixture 60,000

Cash 60,000
Bought furniture from Blink’s

10 Equipment 65,000
Accounts Payable 65,000
Bought equipment from Sumsung on
account

15 Accounts Payable 65,000

Cash 65,000
Paid account due to Sumsung

21 Cash 25,000
Service Income 25,000
Cash received from Baguio tour

POSTING TO THE LEDGER

- The general ledger is a formal book of accounts used in actual practice wherein a
separate page is maintained for each account. Each page is called a ledger.
 - Each ledger carries a particular account, so we have the cash ledger, accounts receivable
ledger, supplies ledger, and so on. These ledgers are filed in the general ledger which is also
called the book of final entry.
- The process of transferring the debits and credits from the journal to the ledger is called
posting.

General Journal

Date Explanation Post. Debit Credit

Ref.

2014 xx Accounts Receivable 5 15,000

Jan.

Membership Revenue 40 15,000

Sold 300 membership as $50 each

xx Cash 1 5,000

Court Fee Revenue 44 5,000

Collected court fees

General Ledger
Cash

Date Explanation Post. Debit Credit Balance

Ref.

2014 xx GJ1 100,000 100,000

Jan.

xx GJ1 5,000 105,000

Court Fee Revenue

Date Explanation Post. Debit Credit Balance

Ref.

2014 xx GJ1 5,000 5,000

Jan.

TRIAL BALANCE
- The double entry bookkeeping rule extends to the trial balance – ensure that the debit is the
same as the credit total. A trial balance is a list of accounts with ledger balances.

NORMAL BALANCES

Debit Credit

Assets Liabilities
Owner’s Drawing Owner’s Capital
Expenses Revenue

LOCATING ERRORS
If the total debit amount does not tally with the total credit amount, the difference usually
gives a clue to the kind of error committed:
✔ A difference of ten would probably indicate an error in addition. Add the debit and credit
columns of the trial balance again. If the error is not there, go further and re-add the debit
and credit columns of the ledgers.
✔ If the difference is divisible by two, then the probable error is in posting to the wrong side, like
a debit balance in the ledger is copied on the credit side of the trial balance or a debit entry
in the journal was posted to the credit side of the ledger.
✔ If the difference is divisible by 9 or a multiple of 9, the probable error is in transposition, that is
the order of the digits are interchanged, say an amount of 29,560 was copied as 29,650. Or
an error in transplacement, that is the decimal point is misplaced, say an amount of 290,000
 was copied as 29,000.

However, even if the trial balance proves the duality of the totals, it does not necessarily
mean that errors were not committed. The following errors could have been made which the trial
balance would not be able to identify:
✔ Failure to record a transaction.
✔ A transaction is journalized but not posted.
✔ An erroneous amount is debited and credited for an entry, for example a P2,500 rental
payment is debited to rent expense and credited to cash as P2,000.
✔ A recorded transaction is posted twice.
✔ An amount is posted to the correct side but to the wrong account. For example, a
debit to insurance expense was posted to the debit side of salary expense.
✔ Wrong account title in recording the transaction. For example, a purchase on account
was credited to notes payable.
You must therefore exercise care in recording transactions and posting them to the
ledger.
SUBSIDIARY LEDGERS AND CONTROL ACCOUNTS
- The accounts receivable and accounts payable in the general ledger are called control
accounts.
- An individual record is kept for each one of them called subsidiary ledger or customer’s card
and creditor’s card, where the details of their accounts are entered.
General Ledger (updated monthly)

Subsidiary Ledgers (updated daily & reconciled monthly to general ledger)

ANALYZING BUSINESS TRANSACTIONS

CASH VERSUS ACCRUAL BASIS OF ACCOUNTING
The cash basis of accounting recognizes revenue when cash is received and recognizes
expenses when cash is paid. For instance, under cash basis, services rendered in the year 2020,
for which cash is collected in 2021 would be treated as revenue in the year 2020. Likewise, under
cash basis, expenses incurred in the year 2020 for which cash is paid in 2021 would be treated as
2016 expenses. Due to these improper assignments of revenues and expenses, the cash basis of
accounting is generally considered unacceptable. There is no need to adjust entry under the
cash basis of accounting.
The accrual basis of accounting recognizes revenues when services are rendered and
sales are made, regardless of when the cash is received. It also recognizes expenses when
incurred whether or not the cash is disbursed or paid out. For instance, when a company
rendered a service for a customer on account, the revenue is recorded at that time even though
that cash has not been received. When the time comes that the customer paid and the
company received cash, no revenue is recorded because it has already been recorded. Under
the accrual basis, adjusting entries are needed to be prepared to bring the accounts up to date
for economic activities that occurred but have not been recorded.
THE ADJUSTING PROCESS
After the preparation of the trial balance, the next step in the accounting cycle is the
compilation of data for adjustments. Compiling and adjusting data is the process of gathering
and putting together data necessary to update the balances of some accounts. After the trial
balance is completed, financial statements cannot be prepared yet due to there still being
transactions of the business that are not yet recorded, hence there is a need for adjustments.

THE NEED FOR ADJUSTING ENTRIES

Adjusting Entries are entries prepared at the end of an accounting period to update or
adjust the balances of accounts. It is very important that adjustments be recorded correctly so
that the company’s profit for the period to be measured properly and its related assets and
liabilities be brought to correct balances for financial statements.
All adjusting entries affect at least one income statement account and one balance
sheet account. Adjusting entries ensure the application of the accrual basis of accounting and
the matching principle.
TYPES OF ADJUSTING ENTRIES
1. Accrued Expenses
2. Accrued Revenue
3. Prepaid Expenses or Deferred Expenses
4. Unearned Revenues or Deferred Revenues
5. Depreciation of Property, Plant and Equipment
6. Uncollectible Accounts of Bad Debts
7. Merchandise Inventory
ADJUSTING ENTRIES
1. Accrued Expenses - expenses incurred but not yet paid at the end of the accounting
period. These are also called accrued liabilities and accrued payable. Examples of Accrued
Expenses are: Salaries/Wages Payable, Utilities Payable, Interest Payable, Taxes Payable,
Rent Payable

Interest/Finance Costs – these are the cost of borrowing

Interest = Principal x Rate x Time
Time = annual, semi-annual, quarterly, monthly
Maturity Date – is the date when the principal and interest will be paid

Illustration:
ACT201 borrowed P500, 000 by issuing a note with an interest rate of 12% on August 01, 2020. The
note plus the interest will be paid on July 31, 2021.
August 01, 2020
Cash 500,000
Notes Payable 500,000
December 31, 2020
Interest Expense 25,333.33
Interest Payable 25,333.33
Interest = 500,000 x 12% x 152/360 = 25,333.33
August - 30
September - 30
October - 31
November - 30
December - 31
152 Days
2. Accrued Income - these are income already earned but not yet collected as of the
accounting period.
Example: Accounts Receivable, Rent Receivable, Interest Receivable Illustration:
 (Creditor’s point of view)
ACT201 borrowed P500, 000 by issuing a note with an interest rate of 12% on August 01,
2020. The note plus the interest will be paid on July 31, 2021.
August 01, 2020
Notes Receivable 500,000
Cash 500,000
December 31, 2020
Interest Payable 25,333.33
Interest Revenue/Income 25,333.33
3. Prepaid/ Deferred Expenses - expenses paid in advance but not yet incurred as of the end
of the accounting period.
Example: Prepaid Rent, Prepaid Insurance, Office Supplies
Illustration:
ACT201 paid P120, 000 for a 12-month-rent starting on October 01, 2020
Asset Method
October 01, 2020
Prepaid Rent 120,000
Cash 120,000
December 31, 2020 (recognized the “used” portion)
Rent Expense 30,000
Prepaid Rent 30,000
Expense Method
October 01, 2020
Rent Expense 120,000
Cash 120,000
December 31, 2020 (recognized the “unused portion”)
Prepaid Rent 90,000
Rent Expense 90,000
120,000 / 12 = 10,000 monthly
4. Unearned Income - cash already collected but not yet
earned as of the end of the accounting period. This is a
liability account.
Illustration:
ACT201 received P180, 000 cash in advance payment of 12-month rent on November
01, 2020.
Liability Method
November 01,2020
Cash 180,000
Unearned Rent Income 180,000
Income Method
November 01, 2020
Cash 180,000
Rent Income 180,000
December 31, 2020 (recognized the “unearned” portion)
Rent Income 150,000
Unearned Rent Income 150,000
180,000 / 12 = 15,000 monthly
5. Depreciation of Property, Plant and Equipment - systematic
allocation of the depreciable cost of the PPE to its estimated
useful life.
PPE are tangible assets that are used for: (PAS 16)
A. production/supply of goods
B. rental to others ex. land and building
C. administrative purposes ex. xerox machines, furnitures - can be used for a longer period of time normally
more than one year.

Example: Land, Building, Furnitures and Fixtures, Land improvement.

NOTE: LAND DOES NOT DEPRECIATE
Annual Depreciation Expense = Cost – Salvage Value
Estimated Useful Life
There are several methods of computing depreciation, the most common are:
1. Straight Line Method
2. Sum-of-the-years digit method (SYD)
3. Declining Balance Method
 4. Units of Production Method

Factors to be considered in computing depreciation (using the straight-line method):

1. Asset Cost - This includes its purchase price plus other direct costs incurred in acquiring and
bringing the asset to its intended use. Examples of these other costs are freight cost and
installation costs.
2. Estimated Residual Value - is the estimated amount the fixed asset can be sold at the end
of its useful life. Other terms used are salvage value, scrap value, or trade in value.
3. Estimated Useful Life - This may be expressed in years or number of units, or hours that the
asset can be used.
Annual Depreciation Expense = Cost – Salvage Value
Estimated Useful Life
Illustrated below is the straight-line method being the simplest method. The other methods are
discussed in higher accounting subjects. Entry:
Depreciation Expense xxx
Accumulated Depreciation xxx
Accumulated Depreciation is a contra account.
Equipment xx
Accumulated Depreciation (xx)
Book Value / Carrying Value xx
A. On June 01, 2020, ACT201 Company bought equipment for a total cost of P500,000. Its
estimated useful life is 10 years, and the estimated residual value is 50,000.
June 01, 2020
Equipment 50,000
Cash 500,000
Adjusting Entry – December 31, 2021
Depreciation Expense 26,250
Accumulated Depreciation 26,250
Computation:
Depreciable Cost 450,000
Divide by the Estimated Useful life 10 years
Annual Depreciation 45,000
Divide by number of months in a year 12 months
Monthly Depreciation 3,750
Multiply by no. of mos. in a year 7
Depreciation expense for 7 months 26,250
Non-Current Asset
Equipment 500,000
Less: Accumulated Depreciation (26,250)
Carrying Value as of Dec. 31, 2020 473,750
Adjusting Entry - December 31, 2021
Depreciation Expense 45,000
Accumulated Depreciation 45,000
Accumulated Depreciation as of December 31, 2021: 71,250 (26,250+45,000)
Non-Current Asset
Equipment 500,000
Less: Accumulated Depreciation (17,250)
Carrying Value as of Dec. 31, 2021 428,750
If equipment was purchased in the first half of the month (1-15), the depreciation will start on
that certain month. If equipment was purchased in the second half of the month (16-30) the
depreciation will start in the next month.
Equipment was purchased on June 12. (The counting will start in June) Equipment
was purchased on June 25. (The counting will start in July)
6. Bad Debts – These are uncollectible accounts from customers as of the end of the
accounting period.
• Bad Debts Expense – cost of selling on credit

• Sales:
Cash Sales
Credit Sales – on account
METHODS:
1. Direct Method/Direct Write-off Method
Recognition: Bad Debts expense is recognized when the customer account is
definitely uncollectible.
 • the uncollectible account is directly deducted to the accounts receivable.
Adjusting Entry:
Bad Debts Expense xx
Accounts Receivable xx
Recovery of previously written-off accounts Receivable
Reinstate the previously written of Accounts Receivable
Accounts Receivable xx
Bad Debts Expense xx
• Bad debts expense is used if recovery is in the same year. Accounts
Receivable xx
Bad Debts Recovery xx
• Bad debts recovery is used if recovery is on the following year (income
account)
Cash Collection
Cash xx
Bad Debts Expense xx
• Bad debts expense is used if recovery is in the same year. Cash xx
Bad Debts Recovery xx
• Bad debts recovery is used if recovery is on the following year (income
account)
Example:

2. Allowance Method - Bad Debts Expense is recognized even if the customer account is not
sure to be uncollectible.
An allowance for doubtful accounts or Bad Debts is a contra-account of Account
Receivable. It has a normal balance of credit. Presentation:
At net realizable value/amortized cost
Outstanding Accounts Receivable at the end of the year xx Less: Allowance for
Bad Debts (xx) Amortized Cost/NRV xx
Alternatively, doubtful accounts expense may also be used instead of uncollectible accounts
expense or bad debts expense. Further, the allowance account should also depend on the
expense account used to record doubtful accounts. The allowance account may be
Allowance for Doubtful Accounts or Allowance for Bad Debts or Allowance for Uncollectible
Accounts. Consistency as to the use of accounts must be applied.
Illustration:
On December 31, 2020, the end of the ACT201 Company’s annual accounting period, the
company had an outstanding Accounts Receivable of P400, 000. The company estimates that
4% of these receivables might not be collected. The Allowance for Bad Debts account has no
balance.
The adjusting entry that will be prepared by the company on December 31, 2020 is:
Bad Debts Expense 16,000
Allowance for Uncollectible Accounts 16,000
to take up provision for uncollectible accounts.
On December 31, 2020, the bad debts expense of 16,000 will be reported on ACT201’s
company’s income statement. On the same date, the balance of Accounts Receivables on
the Statement of Financial Position (also known as Balance Sheet) will be presented as
follows:
Accounts Receivable 400,000
Less: Allowance for Uncollectible Accounts 16,000
Expected or Net Realizable Value 384,000
Using the same illustration, if the Allowance for Bad Debts has a balance of P10, 000 The
 adjusting entry that will be prepared by the company on December 31, 2020 is:
Bad Debts Expense 6,000
Allowance for Uncollectible Accounts 6,000
to take up provision for uncollectible accounts.

FINANCIAL STATEMENTS PREPARATION, CLOSING ENTRIES, AND REVERSING ENTRIES

Income Statement
- usually presented first because this one can determine the profit that is needed to be able to prepare
the capital statement
- a summary of income earned and expenses incurred for a certain period

There are 2 presentation forms for cost and expenses:

1. Based on its Nature
2. Based on its Function

Nature of Expense
- first form presents the expenses according to their nature: depreciation, advertising, transportation, and
employee benefits. This is normally used for a simple business such as that of a service provider

Function of Expense
- the second form of the Income statement, presents the expenses according to its function or use: cost
of sales, distribution cost, administrative cost and financial cost.

Statement of Changes in Equity

- explains what happened to the capital or claim of the owner.

Statement of Financial Position

- this statement lists the details of the asset and liabilities of the business and shows the residual interest of
the owner as of specific date.

CURRENT & NON-CURRENT CLASSIFICATION

ASSETS:

CURRENT ASSETS:
1. Cash - Includes currencies or coins or negotiable instruments such as bank checks or a postal
money order used as a medium of exchange.

Two account titles could be used for cash: Cash on Hand cash items in the custody of the officer-in-charge,
Cash in Bank cash deposited in the bank under a current or savings account.

2. Marketable Securities - these are highly traded in securities such as the stock and bonds
purchased by the enterprise that are to be held for a short-term duration. Like the Cash Equivalents a
highly liquid investment such as three month time deposit or a three month government treasury bill

3. Receivables - these are collectibles from customers, clients and other persons for the goods,
services or money given by the business.
Examples:
Accounts Receivable, Notes Receivable, Interest Receivable, Rent Receivable and Dividend
Receivables
 4. Merchandise Inventory - an account title used to represent the stock of goods available for sale
by the business

5. Prepaid Expense - advance payments made for benefits or services to be received by the
business in the future

6. Deductions from current assets called Contra Asset Accounts - an example of this is the
Allowance for Bad Debts which represents customers’ accounts doubtful of collection

NON-CURRENT ASSETS:

Long-term Investments - held for wealth accretion, regular income, capital appreciation, and control.
1. Investment in Securities - such as stocks or bonds
2. Investment in Subsidiaries/Associates - equity method

Property, Plant, and Equipment (PPE) or Plant Assets - assets that are not intended for sale but are acquired
since they are needed to operate the business

1. Land - lot or real estate owned and used by the business on which a building could be
constructed
2. Building - structure used to house the office, store or factory
3. Equipment - Office Equipment, Store Equipment, and Delivery Equipment. Air conditioner,
Typewriter, Computer, Cars etc.
4. Furniture & Fixtures - table, chairs, curtains, lighting fixtures and wall decors
5. Leasehold or Lease Right - for a fee, the lessee is given the right to use the property of a lessor
over a long period of time. Most often improvements are made herein such as painting, walling,
fencing, hence it is usually called Leasehold Improvements
6. Accumulated Depreciation - contra asset or off-set account representing expired cost of the
PPE because of usage or passage of time.

Intangibles - identifiable non-monetary assets, no physical substance, with future economic benefits, separable
or capable of being sold or transferred such as Patents or it may arise from contractual or legal rights such as
Franchise or Copyright

LIABILITIES:

CURRENT LIABILITIES

1. Accounts Payable - to trade creditors for purchase of goods or services on credit supported by the oral
or implied promise of the business.
2. Note Payable - a liability supported by a promissory note issued by the business to the creditor (Could
be current if within 12 months and noncurrent if beyond 12 months it depends on the note)
3. Loan Payable - a liability to pay a bank or a financing institution for amount of money borrowed by the
business
4. Utilities Payable - a liability to pay utilities companies like PLDT, Meralco, Manila Water for telephone,
electricity and water services received from them
5. Other Payables - such as Interest Payable, Salaries Payable, and Taxes Payable

NON-CURRENT LIABILITIES:

1. Note Payable
2. Mortgage Payable - an obligation secured by the real property of the business
3. Bond Payable - a long-term promise usually from five to ten or twenty years supported by a formal
contract containing face value of the bond, the interest rate, the interest payment date and maturity date

Statement of Cash Flow

Closing Entries
- After all the adjustments have been journalized and posted and the financial statements prepared, the
income and expense accounts of the owner’s drawing must be closed.
- Closing books means bringing the temporary or nominal accounts to zero balance by transferring them
to a capital account or owner’s equity
- Profit or loss goes to the owner
- After closing entries, the books are cleared of these accounts so that in the next reporting period, the
books are ready for a new set of temporary or nominal accounts.
- Income statements are called nominal or temporary accounts. However, we carry forward the balances
of assets, liabilities, and owner’s equity to the next accounting period since these are real or permanent
accounts and we don’t close these accounts unless the assets are disposed of, the liabilities are paid
and the capital is returned to the owner.

* The title Income Summary is an account used to close the nominal values and bring to the capital account

The following are the steps in making the closing entries:

1. The revenue accounts such as Repair Income and Interest Income which is normally are credit
balance should be closed on the debit side and credited to the Income summary
2. The expense accounts such as Salaries Expense and Taxes Expense which normally are debit
balances should be closed on the credit side and debited to the Income Summary
3. Determine the balance of the Income Summary account which is a net income or a net loss. If a
credit balance, representing a net income, closes by debiting the Income Summary account and
credit to increase the Owner’s Capital account. If a debit balance, representing a net loss, close by
crediting the Income Summary account and debit to Increase the owner’s capital account
4. Drawing account which normally is a debit balance is credited to close the and debited to the
capital account to bring a reduction.

PREPARING A POST CLOSING TRIAL BALANCE

- after accomplishing so many accounting steps, there is a need to prepare another trial balance to
prove the equality of debits and credits.
- it is prepared after closing the books and contains only real accounts with balances. It has the same
accounts as those found in the SFP

OPENING ENTRY
- to bring forward the accounts with balances to the next accounting period an opening entry should be
prepared based on the post closing trial balance

REVERSING ENTRIES
 - These are the opposite of adjusting entries and are prepared on the first day of the succeeding
reporting period. Prepaid expenses under the expense method and Deferred Income under the income
method are the only items being reversed.

The reasons for making for reversing entries are the following:
1. To close out the accounts created when adjusting entries were prepared such as the prepaid
expense (under the expense method) and the unearned income (under the income method)
2. To recognize the expired/income portion applicable for the succeeding period
3. To simplify the bookkeeping in the following accounting period

Example of Reversing Entry for expense method:

Example of Reversing Entry for income method:

ACCOUNTING FOR MERCHANDISING BUSINESS AND SPECIAL TOPICS

Measuring Net Income

A merchandiser is an enterprise that buys and sells goods to earn a profit. Merchandisers that purchase
and sell directly to consumers are retailers, and those that sell to retailers are known as wholesalers.

The primary source of revenue for a merchandiser is sales revenue. Expenses are divided into two
categories: (1) cost of goods sold (or cost of sales) and (2) operating expenses.

Sales less the cost of goods sold is called the gross profit (or gross margin) on sales. For example, if sales
are P5,000 and cost of goods sold is P3,000, gross profit is P2,000.

After gross profit is calculated, operating expenses are deducted to determine net income (or loss).

Operating expenses are expenses incurred in the process of earning sales revenue.

Inventory Systems

A merchandiser may use either a perpetual or a periodic inventory system in determining the cost of goods
sold.
 a. In a perpetual inventory system, detailed records of the cost of each inventory item are maintained
and the cost of each item sold is determined from the records when the sale occurs.
b. In a periodic inventory system, detailed inventory records are not maintained and the cost of goods
sold is determined only at the end of an accounting period.

Purchase Transactions

Under the perpetual inventory system, purchases of merchandise for sale are recorded in the
Merchandise Inventory account. For a cash purchase, Cash is credited; for a credit purchase, Accounts
Payable is credited.

A purchaser may be dissatisfied with the merchandise received because the goods may be damaged
or defective, of inferior quality, or not in accord with the purchaser's specifications. The purchaser may return
the merchandise, or choose to keep the merchandise if the supplier is willing to grant an allowance
(deduction) from the purchase price. When merchandise is returned, Merchandise Inventory is credited.

When the credit terms of a purchase on account permits the purchaser to claim a cash discount for the
prompt payment of a balance due, this is called a purchase discount. If a purchase discount has terms 3/10,
n/30, then a 3% discount is taken on the invoice price (less any returns or allowances) if payment is made within
10 days. If payment is not made within 10 days, then there is no purchase discount, and the net amount of the
bill is due within 30 days.

When an invoice is paid within the discount period, the amount of the discount is credited to the
Merchandise Inventory. When an invoice is not paid within the discount period, then the usual entry is made
with a debit to Accounts Payable and a credit to Cash.

FOB shipping point means that goods are placed free on board the carrier by the seller, and the buyer
must pay the freight costs.

FOB destination means that goods are placed free on board at the buyer's place of business, and the
seller pays the freight.

When the buyer pays the freight, the Merchandise Inventory is debited. When the seller pays the freight,
Delivery Expense or Freight-out is debited. This account is classified as an operating expense by the seller

Sales Transactions

In accordance with the revenue recognition principle, sales revenues are recorded when earned.
Typically sales revenues are earned when the goods are transferred from the seller to the buyer.

All sales transactions should be supported by a business document. Cash register tapes provide
evidence of cash sales; sales invoices provide support for credit sales.

A cash sale is recorded by a debit to Cash and a credit to Sales, and a debit to Cost of Goods Sold and
a credit to Merchandise Inventory.

Sales Returns and Allowances

A sales return results when a customer is dissatisfied with merchandise and is allowed to return the goods
to the seller for credit or for a cash refund.

A sales allowance results when a customer is dissatisfied with merchandise and the seller is willing to
grant an allowance (deduction) from the selling price. To give the customer a sales return or allowance, the
seller normally makes the following entry if the sale was a credit sale (the second entry is made only if the goods
are returned

The seller prepares a business document known as a credit memorandum to inform the customer that a
credit has been made to the customer's account receivable.

For a sales return or allowance on a cash sale, a cash refund is made and Cash is credited instead of
Accounts Receivable. The second entry is the same as above.

Sales Returns and Allowances is a contra-revenue account and the normal balance of the account is a
debit.

Sales Discounts
A sales discount is the offer of a cash discount to a customer for the prompt payment of a balance due.
If a credit sale has terms 2/10, n/30, then a 2% discount is taken on the invoice price (less any returns or
allowances) if payment is made within 10 days. If payment is not made within 10 days, then there is no sales
discount, and the net amount of the bill, without discount, is due within 30 days. Sales Discounts is a
contra-revenue account and the normal balance of this account is a debit.

Sales Returns and Allowances and Sales Discounts are subtracted from Sales in the income statement to
arrive at net sales.

The Accounting Cycle

Each of the required steps in the accounting cycle applies to a merchandising company.

Adjusting Entries and Closing Entries

A merchandising company generally has the same types of adjusting entries as a service company but
a merchandiser using a perpetual inventory system will require an additional adjustment to reflect the
difference between a physical count of the inventory and the accounting records. In addition, like a service
company, a merchandising company makes closing entries to and from the Income Summary.

Gross Profit and Operating Expenses

Gross profit is net sales less the cost of goods sold. The gross profit rate is expressed as a percentage by
dividing the amount of gross profit by net sales. Operating expenses are the third component in measuring net
income for a merchandising company.

Classified Balance Sheet

A merchandiser generally has the same type of balance sheet as a service company except
merchandise inventory is reported as a current asset.

Pro Forma Income Statement

Subsidiary Ledgers

A subsidiary ledger is a group of accounts with a common characteristic, assembled together to

facilitate the recording process by freeing the general ledger from details concerning individual balances.

Two common subsidiary ledgers are:

a. The accounts receivable (or debtors’) subsidiary ledger which collects transaction data of individual
customers.

b. The accounts payable (or creditors') subsidiary ledger which collects transaction data of individual
creditors.

The summary account in the general ledger is called a control account and the balance in the control
account must equal the composite balance of the individual accounts in the subsidiary ledger at the end of
the period.

The advantages of using subsidiary ledgers are that they:

a. Show transactions affecting one customer or one creditor in a single account, thus providing up-todate
information on specific account balances.
b. Free the general ledger of excessive details. As a result, a trial balance of the general ledger does not
contain vast numbers of individual account balances.
c. Help locate errors in individual accounts by reducing the number of accounts in one ledger and by
using control accounts.
d. Make possible a division of labor in posting by having one employee post to the general ledger while a
different employee(s) posts to the subsidiary ledgers.

Special Journals

To expedite journalizing and posting transactions, most companies use special journals in addition to the
general journal. A special journal is used to group and record similar types of transactions, such as all sales of
inventory on account or all cash receipts.

The following are types of special journals:

a. Sales journal—all sales of inventory on account.

b. Cash receipts journal—all cash received (including cash sales).
c. Purchases journal—all purchases of inventory on account.
d. Cash payments journal—all cash paid (including cash purchases).

If a transaction cannot be recorded in a special journal, it is recorded in the general journal. Special
journals permit greater division of labor and reduce the time necessary to complete the posting process.
Sales Journal

For the sales journal,

a. Each entry results in a debit to Accounts Receivable and a credit to Sales at selling price; and a debit to
Cost of sales and a credit to Inventory at cost.
b. Only one line is needed to record each transaction.
c. All entries are made from sales invoices.
d. Postings are made daily to the individual accounts receivable in the subsidiary ledger and monthly, in
total, to Accounts Receivable, Sales, Cost of sales and Inventory in the general ledger.

Cash Receipts Journal

The cash receipts journal is a multicolumn journal with debit columns for cash and sales discounts, and
credit columns for accounts receivable, sales, and "other" accounts. In addition there is a separate column for
a debit to Cost of sales and a credit to Inventory. In journalizing cash receipts transactions:

a. Only one line is needed for each entry.

b. Each sale entry is accompanied by another entry that debits Cost of sales and credits Inventory for cost.

The posting of a multicolumn journal such as the cash receipts journal involves the following procedures:

a. All column totals except the total for the Other Accounts column are posted once at the end of the
month to the account title or titles specified in the column heading.
b. The total of the Other Accounts column is not posted: instead, the individual amounts comprising the
total are posted separately to the general ledger accounts specified in the Account Credited column.
c. The individual amounts in a column, posted in total to a control account, are posted daily to the
subsidiary ledger account specified in the Account Credited column

Purchases Journal

For the purchases journal,

a. Each entry results in a debit to Inventory and a credit to Accounts Payable.
b. Only one line is needed to record each transaction.
c. All entries are made from purchase invoices.
d. Postings are made daily to the individual creditor accounts in the accounts payable subsidiary ledger
and monthly, in total, to Inventory and Accounts Payable in the general ledger. The purchases journal
can be expanded into a multicolumn journal by adding columns for office supplies, store supplies and
other accounts.

Effects of Special Journals on General Journal

Only transactions that cannot be entered in a special journal are recorded in the general journal. When
the entry involves both control and subsidiary accounts the following modifications are required:

a. In journalizing, both the control and subsidiary accounts must be identified.

b. In posting, there must be a dual posting: once to the control account and once to the subsidiary
account.

ACCOUNTING FOR MANUFACTURING BUSINESS

Manufacturing
- consists of activities and processes that convert raw materials into finished goods.

Manufacturing Costs:

1. Raw Materials
- are the basic materials and parts used inmanufacturing process.

a. Direct Materials
- are raw materials that arephysically and direct associated in the product that was being
manufactured.
b. Indirect Materials
 - are the raw materials that cannotbe easily traced in the finished products.

2. Labor
- are the cost of human labor incurred in manufacturing a product.
.
a. Direct Labor
- refers to the work of the employees that can be physically and direct associated with
converting the raw materials into finished goods.
b. Indirect Labor
- refers to the cost of human labor that was not associated nor traced to the finished
goods.

3. Overhead
- are the cost of manufacturing a product that was not classified as materials and labor.

Non-manufacturing Costs:

Selling (marketing expenses)

- are those costs incurred in getting the products from the factory to the consumer. Examples are salaries
of sales personnel, advertising, promotions, depreciation of delivery trucks.

Administrative expenses
- are those costs incurred by a company not directly related to producing or marketing the product.
Examples are salaries of office staff, depreciation of building, rent, insurance and other office expenses.

Manufacturing Costs

Prime costs Conversion costs

equals direct materials equals direct labor plus

plus direct labor manufacturing
overhead.

Costs

Product costs Period costs

are costs that are capitalized as part of the finished are expenses as incurred and are not capitalized as
goods inventory and become part of the cost of part of the finished goods inventory.
goods sold. This is also called as Inventoriable cost.

Costs

Direct costs Indirect costs

are ones that can be associated with a particular are ones that cannot be associated with a particular
cost object in an economically feasible way. cost object in an economically feasible way.

Manufacturing Costs Flows

1. Raw materials – are the items used to produce a product.

2. Work-in-process – are partially completed goods.
3. Finished goods – are goods that are manufactured and ready to sell.

Standard Journal Entry

1. Purchase of Raw Materials

 Raw Materials xxx
Accounts Payable/ Cash xxx

2. Direct Materials Used in Production

Work-in-process xxx
Raw Materials xxx

3. Direct Labor Used in Production

Work-in-process xxx
Wages Payable xxx

4. Manufacturing Overhead Cost

Work-in-process xxx
Manufacturing Cost xxx

5. Transfer of Partially completed goods to Finished Goods

Finished Goods xxx

Work-in-process xxx

6. Transfer of costs when products are sold.

Cost of Goods Sold xxx

FInished Goods xxx

Cost of Goods Sold Statement

Beginning Raw Materials XXX

Add: Purchases/Freight-in XX
Less: Purchase return & discount (X)
Raw Materials Available for Use XXX
Less: Ending Raw Materials (x)
Raw Materials used XXX
Direct Labor Cost XX
Manufacturing Overhead Cost XXX
Total Manufacturing Cost XXX
Add: Beginning, Work-in-process XX
Cost of the goods put into process XXX
Less: Ending, Work-in-Process (XX)
Cost of Goods Manufactured XXX
Add: Beginning Finished Goods XX
Goods Available for Sales XXX
Less: Ending Finished Goods (XX)
Cost of Goods Sold XXX
==========
Income Statement Statement of Financial Position

Statement of Changes in Owner’s Equity

PAYROLL ACCOUNTING

Payroll
- compensation paid to employees and its workers.

Payroll Sheet
- tabular form prepared by the Accounting Dept. to determine the take-home pay of employees.

● Employee’s name
● Gross pay (compensation, semi-monthly or monthly)
● Deduction
● Net pay or take-home pay
● Signature or bank account number

Salaries
- based on monthly or semi-monthly rate

Wages
- based on a daily, hourly, or piece rate

Payroll Accounting
- Involves maintaining records of its employees and workers where their personal data and work
experience, among others, are noted
- Firms are required to abide by the law; pay taxes and premiums contribution.

Deductions from Gross Pay:

Income Tax (paid on BIR)
- Every employee is required to pay taxes to the government
- The amount withheld from their salaries/wages is based on the taxable income
- Tax Reform for Acceleration and Inclusion (TRAIN)

Social Security (SSS)

- Membership in this agency is required for employees and pay monthly contribution
- Benefits are education loan, salary loan, disability benefit, maternity benefit, calamity loan, pension
and retirement pay
- 13% total on salaries not exceeding 20,000; 8.5% from employer, and 4.5% from employee

Health Insurance (PhilHealth)

- Sickness and hospitalization benefits
- Advisory No. 2022-0010 released May 11, 2022
- Based on RA No. 11223, premium rates should increase at .5% annually.
- 4% at 2022; income floor 10,000, income ceiling 80,000
- 2% from both employees and employers
- Income of 10,000 and below, 400

Home Development Mutual Fund (Pag-IBIG: Pagtutulungan sa kinabukasan: Ikaw, Bangko, Industriya at
Gobyerno)
- RA 9679 also known as HDMF Law 2009 requires many mandatory coverage of all employees,
effective January 1, 2022
- 1,500 or less: 1% from employee, 2% from employers
- 1,500 to 5,000, 2% from employees, 2% from employer
- Employer’s share is fixed at 2% *Statutory deductions (1st to 4th)

Union Dues (Membership Dues)

- Employees may be a member of the union, required to pay contribution to the union

Advances
- Employees are allowed to draw a cash advance against their compensation
- Account Title: Advances to employees: treated as prepaid expense
- refers to salaries that are received earlier than scheduled. These are considered as part of the gross
pay when taxes are computed but are deducted to arrive at the net pay for a specific payroll
period.

Payroll Period
- period or duration covered by the payroll computation
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