Business These are the basic forms of business

ownership:
 A person or organization
engaged in the regular conduct of 1. Sole Proprietorship
commercial, industrial or a. a business owned by only
professional activities, whether one person
for profit or not, in order to fulfill a b. usually adopted by small
purpose, goal, mission or cause. business entities
 The regular conduct or pursuit of c. easy to set-up and
a commercial activity or an requires low capital
economic activity, including d. owner faces unlimited
transactions incidental thereto, by liability
any person regardless of whether e. not easy to transfer
or not the person is engaged ownership
therein is a non-stock, non-profit
private organization or 2. Partnership
government entity. (Sec 105, a. a business owned by two
NIRC – Tax Code of the or more persons
Philippines) b. the partners contribute
resources into the entity
c. the partners divide the
Business profits among themselves
d. generally, all partners
 Person or organization – natural have unlimited liability
person or juridical entity/artificial (general partnership). In
being limited partnerships,
 Regular conduct – activity creditors cannot go after
engagements the personal assets of the
 Commercial, industrial or limited partners.
professional activities
 Lawful transactions – in 3. Corporation
accordance with law, public a. a business organization
policy, morals, and public orders that has a separate legal
 Whether for profit or not personality from its
 To fulfill a purpose, goal, mission owners
or cause – reason why b. usually adopted by large
businesses are established; business organizations
serves as the foundation of the c. can generate large
business amounts of capital from
investments
d. not easy to set-up and
Forms of Business Organization organize
e. ownership is usually
represented by shares of
 stockowners a. a business that buys
(stockholders) materials and converts
f. enjoy limited liability but them into a new product.
have limited involvement in b. combines raw materials,
the company's operations labor, and overhead costs
g. easy to transfer ownership in its production process,
and sells the manufactured
goods to customers.
Basic Types of Business
There are major types of businesses: 4. Mixed/Hybrid Business
a. companies that can be
1. Service Business classified in more than one
a. a business that provides type of business.
intangible products b. Example: A restaurant,
(products with no physical combines ingredients in
form) for a fee making a fine meal
b. offers professional skills, (manufacturing), sells a
expertise, advice, and cold bottle of wine
other similar products. (merchandising), and fills
c. Examples are: repair customer orders (service).
shops, beauty care, health
and recreation,
transportation, Not considered engaged in business:
communication,
 Government agencies and
consulting, professional,
instrumentalities
medical and other service
 Pure compensation employment
companies.
(local or abroad, private or
government)
2. Merchandising Business
 Directorship in a corporation
a. a business that buys
 Gratuitous transfer of properties
products and sells the
by succession or donation
same at a higher price for
 Isolated or casual transactions by
a profit.
persons not engaged in trade or
b. known as "buy and sell"
business
businesses.
c. sells a product without
changing its form. Considered engaged in business:
d. Examples are: grocery
 Freelancers, agents and
stores, convenience
consultants
stores, distributors, and
 Broadcast media talents and
other resellers.
artists
3. Manufacturing Business
 Tax Receipt - from
the City or
Legal Requirements in Organizing a
Municipal
Business (requisites)
Government Unit
1. Register Business Name and ii. Fire Safety
Entity Inspection
a. Depending on the form of Certificate - from
the business, it must the Bureau of Fire
register with the following Protection
government agencies: iii. Barangay
i. Sole Clearance and
Proprietorship - Community Tax
Department of Certificate - from
Trade and Industry the barangay where
(Business Name the business is
Registration) operating
ii. Partnership or iv. Employer
Corporation - Registration - SSS,
Securities and HDMF, PHIC,
Exchange DOLE (if
Commission applicable)
(Registration
System) 3. Comply with BIR Requirements:
iii. Cooperative - a. The business entity must
Cooperative also comply with the
Development following requirements of
Authority the Bureau of Internal
(Registration Revenue:
System); similar to i. Business
corporation registration
ii. Issuance of receipts
2. Secure Business Permits and and invoices
Licenses iii. Keeping of tax and
a. Depending on the nature accounting records
of its activities, the iv. Withholding of taxes
business must secure its on certain payments
permits and licenses in the v. Filing and payment
city or municipality of taxes
where it conducts its
business. Generally, the
However profitable or noble the purpose
following will be obtained:
of the business may be, the failure of the
i. Business Permit
business entity to comply with any of
or Professional
these requirements might lead to
penalties, fines, surcharges or, at worst, financial information about an
closure of the business. identifiable economic entity.
After the registration and securing all
the necessary certificates and permits, Accounting
the company needs to maintain its
 a service activity, a process
accounting records.
 to provide financial information
 about economic entities
 for the use of interested users
Definition of Accounting
 Accounting is the art of
Purpose of Accounting
recording (journalizing),
classifying (JE are being  to provide financial information
classified into accounts or about the business that will be
“posting to the ledger”), and useful in making economic
summarizing (TB and FS decisions of the users of the
preparation) in a significant information
manner and in terms of money,
transactions and events which
Financial Statements
are, in part at least of a financial
character, and interpreting the 1. Statement of Financial Position
results thereof (American (Balance Sheet)
Institute of Certified Public 2. Statement of Financial
Accountants). Performance (Income Statement)
 Accounting is a service 3. Statement of Changes in Owner's
(performed by a person) Equity
activity. Its function is to provide 4. Statement of Cash Flows
quantitative information, primarily 5. Notes to the Financial Statements
financial in nature, about
economic entities that is intended
to be useful in making economic Users of Accounting Information
decisions (Accounting Standards 1. Internal Users (within the
Council). business organization)
 Accounting is the process of a. Owners
identifying, measuring and b. Managers
communicating economic c. Employees
information to permit informed d. Officers
judgment and decision by users e. Internal Auditors
of the information (American 2. External Users (outside the
Accounting Association). business organization)
 Accounting is an information a. Customers
system that measures, b. Suppliers
processes and communicates c. Creditors
 d. Investors b. Verify petty cash
e. External Auditors disbursements
f. Government Agencies c. Prepare bank
g. Industrial Organizations reconciliation
h. Public d. Record transactions in the
journals
e. Post to the subsidiary and
Branches of Accounting
general ledgers
1. Financial Accounting – general f. Reconcile general and
purpose reporting generation subsidiary ledgers
2. Management Accounting – g. Prepare a draft of the Trial
internal purposes of generating Balance
reports h. Assist the Accountant in
3. Tax Accounting the closing of the accounts
4. Auditing and finalization of the
financial statements.
i. Maintain proper filing and
Bookkeeping (within accounting) retrieval of accounting
 Bookkeeping is the recording of records
financial transactions and is part
of the process of accounting in 2. Accounts Receivable
business (Financial Accounting a. Record sales invoices
2003, Weygandt; Kieso; Kimmel). b. Record cash receipts
 It is largely concerned with the from customers
implementation of the accounting c. Record sales returns,
procedures manual and account adjustments and
maintenance of the accounting credit memos from
records. suppliers (mga bawas)
 Bookkeeping is the procedural d. Issue Statement of
implementation of accounting. Accounts to customers
e. Reconcile accounts
receivable ledger balance
Bookkeeper is the person who keeps with unpaid customer
and maintains the books of accounts of invoices.
the business organization. The f. Maintain Accounts
bookkeeper is responsible for recording Receivable Subsidiary
the transactions of the business. Ledger
g. Prepare Accounts
Receivable reports
Functions of a Bookkeeper
1. General Accounting 3. Accounts Payable
a. Verify deposit of cash a. Record purchase invoices
collections
 b. Record payments to  Audit assistance
suppliers  Managerial and administrative
c. Record purchase returns, functions.
account adjustments and
The scope and variety of functions
debit memos from
depends on the nature, type, size,
suppliers (mga bawas)
organization structure of the business
d. Receive Statement of
and other factors.
Accounts from suppliers
e. Reconcile accounts
payable ledger balance
with unpaid customer Due to the importance of his or her
invoices. functions, the Bookkeeper must possess
f. Maintain Accounts the knowledge, abilities and
Payable Subsidiary Ledger temperaments required to properly fulfill
g. Prepare Accounts Payable his or her duties and functions. One of
reports the knowledge requirements would be
the basic knowledge in accounting.
4. Inventory Accounting
a. Record receipts of
inventory from suppliers. The Accounting Cycle
b. Record release of
inventory to customers
c. Record inventory returns
and adjustments
d. Prepare purchase
requests and inventory
issuance slips
e. Reconcile physical count
of inventory to ledger
balances
f. Maintain inventory
subsidiary ledgers
g. Prepare Inventory reports

The Bookkeeper may also be assigned

to handle other functions, such as:
 Property control and monitoring Recording
 Payroll preparation
 Remittance of statutory 1. Identification of Accountable
deductions and reports Transactions. Business
 Tax bookkeeping transactions or events are
 Treasury and banking
 analyzed and identified whether cash flows and the notes to the
they are accountable or not. financial statements. These
2. Journalizing. The accountable financial statements provide
transactions are recorded in the useful information to interested
book of original entry known as parties for their decision-
the journal. The transactions are making.
recorded chronologically (by 7. Closing Entries. The temporary
date) using the appropriate nominal accounts are
accounts and amounts. eliminated from the accounts by
3. Posting. The transactions from recording and posting the closing
the journal are classified in the entries. This will prepare the
book of final entry known as the accounting records for the next
ledger. The ledger classifies the accounting period.
transactions effecting the 8. Post-Closing Trial Balance.
increases and decreases for each After the closing entries are
account. posted, the post-closing trial
balance is prepared to check
that the debit and credit
Summarizing
balances of the remaining
4. Trial Balance. The summary of accounts are correct.
accounts balances from the
ledger is prepared in the list of
Optional
accounts known as the trial
balance. This is the proof that the 9. Recording of Reversing
ledger debit balances and Entries. At the beginning of the
credit balances are equal and is next accounting period, selected
in balance. adjusting journal entries made at
5. Adjusting Entries. Adjusting the previous accounting period
journal entries are made at the are reversed to “normalize” the
end of the accounting period to recording of the related actual
assign revenues to the period in transactions.
which they are earned and
expenses to the period in which
they are incurred. The Chart of Accounts
The specific account titles and codes
Reporting to use in recording transactions are
maintained in a Chart of Accounts. It is a
6. Financial Statements. The
list of the account codes and titles that
following financial statements are
are used in recording entries in the
prepared: statement of financial
Journal. It shall be maintained and
position, statement of financial
updated for necessary changes, like
performance, statement of
additions of new accounts, change of
changes in equity, statement of
titles and codes and removal of Business Documents
accounts that will no longer be used.
The business documents forms serve as
evidence to support the accountable
transactions or events. These
The accounts are normally listed in the
documents provide the data concerning
order in which they appear in the
the parties involved, the exchange
financial statements. An account code
made, the date and the money value of
identifies the account which will serve as
the exchange made. Some of the
its cross-reference in the journal and
common business documents include
ledger.
the following:
a. Sales Invoice – document issued
to customer for specific materials
or supplies furnished or services
rendered. It is called Purchase
Invoice from the point of view of
the customer.
b. Delivery Receipt – document
signifying delivery of goods and
receipt of inventory.
c. Official Receipt – document
issued to acknowledge receipt of
cash.
d. Deposit Slip – document used to
deposit cash and cheques to a
Business transactions or events are
bank.
analyzed whether they are accountable
e. Purchase Invoice – a bill from a
or not. Only transactions which are
vendor for specific materials or
identified to be accountable
supplies furnished or services
transactions are recorded in the
rendered. It is called Sales
accounting records. A transaction or
Invoice from the point of view of
event is accountable when it meets the
the supplier.
following criteria:
f. Disbursement Voucher – a
 It involves the business entity. written, approved record of
 It can be measured in terms of payment of cash.
money. g. Withdrawal Slip – document
 It occurred on a specific date or used to withdraw cash from a
for a specific period. bank.
 It affects the assets, liabilities or h. Cheque Issuance Record – a
equity of the business. record of cheques issued by the
 It is supported by a document company.
(source documents). i. Promissory Notes – a written
promise to pay a certain sum of
 money to the payee. It may 4. The posting reference code of the
sometimes bear an interest over destination ledger account
a period of time. 5. A brief and clear explanation of
j. Bank Statement – a document the transaction
listing the bank transactions of
the depositor.
k. Billing Statement or Statement The accountable transactions are
of Account – document listing recorded in the general journal following
the unpaid invoices of a the Basic Accounting Equation:
customer. Oftentimes, it lists
chronologically the invoices, Assets = Liabilities + Equity
payments and adjustments to the
account of the company.
l. Business Letters – This equation will guide the bookkeeper
correspondences to other in recording the transaction. Under the
companies, organizations or double-entry accounting system, at
government entities which may least two accounts will be recorded for
serve as a basis in recording an each accountable transaction. After the
accountable transaction or event. recording of each transaction using a
journal entry, the accounting equation
will maintain its equality.
Recording Transactions in the
General Journal
Business transactions are
chronologically recorded in the
General Journal. The transactions are
recorded through a journal entry. A
journal entry shows the record of the
effects of a transaction or an event
expressed in terms of debit and credit.
An entry with one debit and one credit is
a simple journal entry, while an entry
with one or more debits and credits is a
compound journal entry. The General Journal is the books of
original entry. The journal entries
A journal entry has the following transactions are recorded
elements: chronologically with the appropriate
1. The date of the transaction accounts and amounts. It contains
2. The accounts debited and
credited
3. The monetary values of the
accounts debited and credited
columns to contain the five elements of  It serves as the basis in the
journal entries. preparation of the financial
statements.

Posting to the General Ledger

After the entries are recorded in the
journal, the entries are posted into the Errors in The Accounting Process
ledger. A ledger is a collection of all of
When the total debits and total credits
the accounts of the company. It is the
are not equal, this automatically signify
book of final entry. Each account has
that there is an error in the recording or
an assigned account number and the
posting of entries.
individual accounts are properly
arranged. Some of the errors that could occur are
the following:
 Journal entry with unequal debit
Each journal entry is posted into the
and credit.
related ledger account, indicating the
 Posting to the incorrect debit or
date, description debits and credits, and
credit of an account.
the posting reference. The posting
 Incorrectly footing the account
reference serves as the cross-
balance, or trial balance.
reference between the journal entry and
 Forwarding the wrong amount
the ledger account posting.
from the ledger to the trial
balance.
 Listing the account balance to the
Trial Balance
wrong side of the trial balance.
The trial balance is a listing of all the
balances of the different accounts as of
The following errors will not be detected
a given date. The total of all accounts
by the preparation of a trial balance, but
with debit balances must equal to the
on a careful review of the records:
total of all accounts with credit
balances.  Failing to record a transaction or
event.
 Multiple recording and posting of
Purpose of Trial Balance: a transaction or event.
 Entries or posting to the wrong
 To check the accuracy of posting
account.
in the ledger by testing the
 Reversed entries and posting.
equality of the debits and credits.
 Recording and posting of
 It aids in locating errors in
amounts with transposition and
posting.
trans-placement errors.
Types of Trial Balance a depreciable asset is systematically
allocated over its estimated useful life.
1. Unadjusted Trial Balance
The estimated scrap value at the end of
2. Adjusted Trial Balance
the life of the asset is not included in the
3. Post-Closing Trial Balance
amount expensed over the periods of
depreciation.

Purpose of Adjusting Entries

The purpose of adjusting entries is to The simplest method of depreciation
match costs against revenues. The is the straight-line method. Under this
expenses incurred during the period, method, the depreciation expense is
whether paid or not, are matched calculated by allocating the depreciable
against the revenue earned for the same amount equally over the estimated
period, whether collected or not, for the useful life in years of the property. The
correct determination of the profit for the formula for the computation of
period. depreciation using the straight-line
method is as follows:

Adjusting entries are recorded at the

end of an accounting period.

The depreciable value of the asset is

Most common transactions requiring the difference between its cost and
adjusting entries: estimated residual value at the end of
its useful life. The cost of the asset is
 Depreciation of property, plant the amount paid to purchase the
and equipment asset, including the incidental costs in
 Allowance for uncollectible bringing the asset to the location and
accounts condition intended for its use. The
 Accrued and prepaid expenses residual value, sometime called scrap
 Accrued and unearned revenues or salvage value, is the amount
 Other adjustments, like unused or estimated to be recovered at the end
unsold Inventory at the end of the of the useful life of the property. The
period estimated useful life is the estimated
length of time, normally in years, when
A. Depreciation the property is expected to be used.
Depreciation is the decrease in value of
a property due to usage, passage of
time, action of natural elements, or B. Uncollectible Accounts
decay. As it is difficult to measure the Methods of accounting for bad debts:
actual decrease in value of the property,
the accounting of depreciation is done 1. Direct write-off
through a systematic basis. The cost of 2. Allowance method
 a. Percent of sales The “Allowance for Bad Debts” account
b. Percent of receivables is a deduction from the accounts
c. Aging of accounts receivable account.

1. Direct Write-Off
When an account is proven to be
uncollectible and worthless, it is
written-off. The write-off is recorded by
crediting the receivables and debiting an
expense account, such as bad debts
expenses, uncollectible accounts
expense, etc.
C. Accrued Expenses

The proforma entry to record the write- Accrued expenses are expenses
off is as follows: already incurred but not yet paid.
These expenses create an obligation to
pay in the future.
Bad Debts Expense xxx
Accounts Receivable xxx The proforma entry to record an accrued
expense is as follows:

2. Allowance Method
The allowance method of recognizing Expense xxx
uncollectible accounts expenses is Accounts Payable or
recommended for the better matching of
costs against revenues. This method Accrued expense payable xxx
requires recording of the bad debts
expense if the accounts are doubtful of
collection. Common examples of accrued
expenses are salaries, utilities and
interest expenses. Employee services
The proforma entry to record the that have been rendered to the company
recognition of bad debts is as follows: but not yet paid are accrued salaries
expenses. Electricity, water and
telephone services that have been
Bad Debts Expense xxx
Allowance for Bad Debts xxx
consumed but not yet paid are also
accrued expenses.
D. Prepaid Expenses
Prepaid expenses are expenses
already paid but not yet incurred.
During the accounting period, the
portion that is already consumed is
recorded as expense.

There are two methods in accounting

prepaid expenses: the asset method
and the expense method.

E. Accrued Revenues
Accrued revenues are revenues
already earned but not yet collected.
These require recognition of both the
revenue and the receivable for the
amount earned.

The proforma entry to record an accrued

revenue is as follows:

Accounts Receivable xxx

Sales or Service Income or
 Accrued Revenue xxx

F. Unearned Revenues
Unearned revenues are revenues
already collected but not yet earned.
During the accounting period, the Adjusted Trial Balance
portion that is already earned is
recorded as income. After recording the adjusting journal
entries, the Adjusted Trial Balance is
prepared. It will serve as the basis for
There are two methods in accounting the preparation of the financial
deferred revenues: the liability method statements.
and the revenue method.
  Employees, customers
 Government agencies
 The general public

As different groups of users will use the

financial statements, it should be useful
and understandable to someone who
has a reasonable understanding of
accounting and business and who is
willing to study and analyze the
information presented. The financial
statements must be relevant, reliable
and comparable. Most of all, it must
follow the applicable Philippine
Financial Reporting Standards.

The financial statements are prepared at

least once a year and can be presented
as frequent as monthly or quarterly. A
complete set of Financial Statements
comprises the following:
 Income Statement or Statement
of Financial Performance
 Statement of Changes in Equity
 Balance Sheet or Statement of
Purpose and Users of Financial
Financial Position
Statements
 Statement of Cash Flows
The financial statements are the  Notes to the Financial Statements
financial reports of the business entity in
order to provide information that is
useful for the decision-making of its A. Income Statement
users.
The Income Statement, also called
Statement of Financial Performance,
presents the financial results of a
The users of the financial statements
business for a given period of time. The
include the following:
statement presents the amount of
 Owners, investors and revenue generated and expenses
prospective investors incurred by the business during a
 Lenders and suppliers and reporting period, as well as the
prospective creditors resulting net income or net loss.
 • Representation expenses
• Losses
Revenues are increases in economic
B. Statement of Changes in
benefits during the accounting period in
Equity
the form of inflows or enhancements of
assets or decreases of liabilities (or a The statement of changes in equity
combination of both) from the delivery or presents a reconciliation of the
production of goods, rendering of beginning and ending balances in a
services, or other activities that company’s equity during a reporting
constitute the entity’s ongoing major or period. The statement starts with the
central operations. beginning equity balance, and then adds
or subtracts such items as profits,
capital investments or reductions, and
Examples of revenues are as follows: dividend payments to arrive at the
ending balance.
• Sales
• Professional fees earned
• Service revenues
Changes in equity over an accounting
• Interest revenue
period include the following elements:
• Dividend revenue
• Rent income  Net income or loss during the
• Subscription revenue accounting period
 Increase or decrease in capital
 Capital withdrawals or dividend
Expenses are decreases in economic
payments to shareholders
benefits during the accounting period in
the form of outflows or using up of
C. Balance Sheet
assets or incurrences of liabilities (or a
combination of both) from the delivery or A Balance Sheet, also referred to as
production of goods, rendering of Statement of Financial Position,
services, or other activities that presents a company’s financial position
constitute the entity’s ongoing major or as of a given date. It shows the assets,
central operations. liabilities and equity of the business
entity.

Examples of expenses are as follows:

An asset is a resource controlled by the
• Cost of sales
entity as a result of past events and from
• Depreciation expense
which future economic benefits are
• Salaries and wages
expected to flow to the entity (IASB
• Utility costs
Framework). Examples of assets include
• Insurance expense
the following:
• Permits, taxes and
licenses a. Cash – includes coins,
• Repair and maintenance currencies, checks, bank deposits
 and other cash items ready for c. Loans Payable - obligations due
use in the operations of the to lenders as a result of
business. borrowing of funds.
b. Accounts Receivable – amounts d. Lease Payable – obligations due
collectible from customers for to lessors for property and
goods provided and services equipment used for business
rendered on credit. operations.
c. Merchandise Inventory – unsold e. Utilities Payable - obligations
goods for sale to customers. due to utility companies for
d. Prepaid Expenses – expenses services rendered.
paid but not yet used. f. Accrued liabilities - obligations
e. Investments – assets for the due to others for expenses
accretion of wealth through already incurred but not yet paid.
capital returns or capital g. Unearned Revenues -
appreciation or for other benefits obligations due to customers for
to the business. goods and services paid but not
f. Property, Plant and Equipment yet delivered.
– tangible assets used in the
production or supply of goods
Equity is the residual interest in the
and services, or for business
assets of the entity after deducting all
administration purposes.
the liabilities (IASB Framework). It
g. Intangible Assets – includes
represents the capital investments, net
identifiable, non-monetary
of the capital withdrawals of the owner in
properties without physical
the entity, and the net income or loss in
substance, like licenses,
the operation of the business. Equity
copyrights, patents, trademarks
accounts include the following:
and others.
a. Capital account –the equity
investment of the owner (in a
A liability is a present obligation of the
single proprietorship) or for
enterprise arising from past events, the
each partner (in a partnership),
settlement of which is expected to result
and the cumulative effect of the
in an outflow from the enterprise of
withdrawals of capital and
resources embodying economic benefits
business net profits and losses.
(IASB Framework). Examples of
b. Drawing – the equity withdrawals
liabilities include the following
of the owner or for each partner.
a. Accounts Payable – obligations c. Common Stock, Preferred
due to suppliers of goods and Stock – the equity of the owners
services purchased on credit. of a corporation
b. Notes Payable - obligations due d. Retained Earnings – the
to suppliers of goods and cumulative balance of the net
services evidenced by a income or losses of the
promissory note. corporation, investments of the
 owners, less the distribution to Examples of investing activities
the owners. are
a. Cash payments in purchasing
land, constructing a building,
buying furniture and equipment,
D. Statement of Cash Flows acquiring intangible and other
long-term assets.
The Statement of Cash Flows shows the b. Cash receipts in selling property
cash receipts and cash payments and equipment, intangible and
from the business activities of the other long-term assets.
enterprise during the period. The c. Cash payments in investing in
business activities are classified into equity and debt instruments of
operating, investing and financing other companies.
activities. d. Cash receipts from selling
investments in equity and debt
instruments of other companies.
Activities of Business Organizations
1. Operating activities are the 3. Financing activities include
principal activities of the equity transaction of the business
enterprise. They are the and the owners, as well as
transactions and events that borrowing of funds from financial
enter into the determination of institutions. Examples are:
profit or loss. Operating a. Investment and withdrawal of
Activities include the following: capital of the owners
a. Cash receipts from sales of b. Cash proceeds from bank loans
goods and rendering of services. and repayment of the loans.
b. Cash receipts from interests,
royalties, commissions, fess and
other sources. Closing Entries
c. Cash payments to suppliers of Types of Accounts
goods and services.
d. Cash payments to employees for  Permanent or Real Accounts
salaries and other employee  Asset accounts
expenses.  Liability accounts
e. Cash payments for operating  Equity accounts
expenses such as advertising,
supplies, utilities, taxes, and
Temporary or Nominal Accounts
others.
 Revenue accounts
2. Investing activities include the  Expense accounts
acquisition and disposal of non-  Gains and Losses accounts
current assets of the business.  Equity drawing accounts
  Income and Expense summary their balances. This provides the
account starting balances for the next
accounting period.
Mixed Accounts
A service business provides services
to clients for a fee. Typically, the
At the end of the accounting period, the
temporary or nominal accounts are
closed. The following entries are
recorded and posted:
a. Revenue accounts are closed
(debited) against the Income and
Expense Summary account.
b. Cost of goods sold accounts
are closed (credited) against the
Income and Expense Summary
account.
c. Expense accounts are closed
business provides intangible products
(credited) against the Income and
Expense Summary account.
d. The resulting balance of the
Income and Expense Summary
account is closed to the Equity
account.
e. Any drawing account is closed
against the Equity account.

Post-Closing Trial Balance

A Post-Closing Trial Balance is
prepared after the recording and posting such as:
of the closing entries. The remaining
Permanent/Real accounts of assets,  repairing
liabilities and equity are presented with  beauty care
 health and recreation
 transportation
 communication
 consulting
 professional
 medical, and
 other services.
The accounting for a service business is Transactions of Merchandising
simpler, in contrast to a merchandising Businesses
business, because the business does
The focus of this chapter is bookkeeping
not involve accounting for
for the transactions of merchandising
inventories.
businesses. The business purchases
products from its suppliers which it sells
to its customers for a profit. Businesses
In rendering services, the business
in this type includes the following:
earns revenues, which it eventually
collects. The focus of the Sari-sari stores, groceries and market
bookkeeping is on recording the stalls
revenues and collections.
Hardware
Appliance store
Major activities involved in a service
Gadgets and electronics store
business
Fashion and dress shop
1. Rendering of services
2. Collection of payments Sports equipment store
3. Incurrence and payment of
expenses Online product sellers
In contrast to a service business, a
merchandising business is more
Sample Journal entries: complex due to the presence of
inventory. The inventory items needed
to be purchased, transported, kept and
then sold to the customers.

In purchasing merchandise inventory,

the company pays for the purchase
price of the goods. There could be an
agreement for credit terms between the
buyer and seller. The buyer might be
offered discounts within a certain period
to encourage early or prompt payments.
This is also true in selling the
merchandise inventory. The company
might also offer credit terms and
discounts to its customers.
In buying and selling the merchandise
inventory, there might be some returns
Items related to Purchases and Sales of
of goods that needed to be accounted
Merchandise Inventory:
for. Also, in buying and selling, the
inventory items need to be transported Returns and Allowances
and thus, freight costs are incurred.
These freights costs may be charged to Payment Terms
the buyer or to the seller depending on Discounts
their agreement.
Freight or Shipping Costs
Value-Added Tax
Purchasing and keeping merchandise
inventory requires some internal control Inventory System
procedures in order to maintain the right
quantity or level of goods on hand. One
of the basic internal control is the Payment Terms
recording and monitoring of the cost and Examples of payment terms:
quantity of merchandise inventory.
Purchases should be properly recorded
on a timely basis in the books of Cash
accounts. Also regular physical counting
is done to match the recorded quantity COD
and amount of inventory with the actual
n/30
quantity and amount of inventory. This
need for the proper recording and n/EOM
control of the movement of inventory
2/10, n/30
that two systems of inventory were
being commonly used: the periodic 3/5, 2/10, n/30
inventory system and the perpetual
3/EOM, n/45
inventory system. We will study these
inventory systems on this chapter. 4/10 EOM, n/60

The study of this chapter is very Discounts

important in your professional growth
and development as an accountant. The Types of discounts:
topic is not complicated nor intricate, but Trade Discount
requires a careful focus and attention so
that you can comfortably include this in Payment Discount
your competencies for your exams, in Accounting Methods for Discounts:
your work, in your public practice or in
your own business. Discount Taken Method
Discount Not Taken Method
Discount Offered Method Owner of the merchandise: Seller
Freight Charges Freight should be paid by: Seller

In purchasing and selling, merchandise

inventory needs to be shipped from the
Account to be used for freight charges:
seller to the buyer. The costs of shipping
the goods may be charged to the buyer Buyer: Freight in
or the seller depending on their
agreement. There are two most Seller: Freight out
common freight charge agreement:
Free on board, Shipping point (FOB- Periodic and Perpetual
SP), and Inventory Methods
Free on board, Destination (FOB-D)
There are two methods of
To easily understand these terms, just accounting for the inventory of
take note that this is the transfer of merchandising businesses, namely
ownership to the goods: periodic inventory method and
perpetual inventory method.
In FOB shipping point, the ownership of
the goods is being transferred from the
seller to the buyer from the seller's Periodic Inventory Method
shipping point. Therefore, the buyer
shoulders the freight charges. The Periodic Inventory Method is
generally used when the individual
In FOB destination, the ownership of the inventory items have small peso
goods is being transferred from the values.
seller to the buyer upon the arrival of the
goods to the destination (buyer). And Under this method, the business
therefore, the seller shoulders the freight maintains temporary accounts like
charges. purchases, purchase returns, and
sales returns. At the end of the
accounting period, these temporary
accounts are used to determine the
amount of inventory available for
FOB Shipping Point: sale.
Owner of the merchandise: Buyer The value of the ending balance of
Freight should be paid by: Buyer inventory is determining by
conducting a physical count
multiplied by the corresponding
unit costs. Physical inventory count
at the period end is mandatory
FOB Destination: under the periodic inventory
system. Without such count, cost of
sales (or cost of goods sold) cannot 2. To record purcha
be determined therefore, se freight costs:
businesses have to conduct this Freight-in xxxx
activity at least once a year or at Cash xxxx
every end of an accounting period.
3.
Perpetual Inventory Method To record purchase
discount:
This inventory method is generally Accounts Payable xxxx
used when the individual inventory Purchase
xxxx
items have relatively large values. Discounts
This method requires the use and
maintenance of stock cards. 4.
To record purchase
Under this method, the inventory return:
account is continually updated for Accounts Payable xxxx
each inventory transaction. For Purchase
every journal entry of sales, a Returns and xxxx
corollary journal entry for the cost Allowances
of inventory sold is also recorded.
Purchases and returns are recorded SALES
in directly in the Merchandise
1. To record sales to
Inventory account. Physical count
customer:
of inventory is conducted to
Cash/Accounts
confirm the balances in the stock xxxx
Receivables
cards.
Sales xxxx

2. To record freight
costs:
PERIODIC INVENTORY Freight Out xxxx
SYSTEM Cash xxxx

Typical Journal Entries 3. To record sales

discount:
PURCHASES Sales Discount xxxx
1. To record Accounts
xxxx
purchase goods from Receivable
a supplier:
Purchases 4. To record sales
xxxx return:
Cash/Accounts Sales Returns and
Payable xxxxx xxxx
Allowances
 Cash/Accounts
xxxx
Cash/Accounts xxxx Receivables
Receivable Sales xxxx
Cost of Goods Sold xxxx
Merchandise
xxxx
Inventory

PERPETUAL INVENTORY 2. To record freight

SYSTEM costs:
Freight Out xxxx
Typical Journal Entries Cash xxxx

PURCHASES
3. To record sales
1. To record discount:
purchase goods from
Sales Discount xxxx
a supplier:
Accounts
Merchandise xxxx
Receivable
Inventory xxxx
Cash/Accounts
4. To record sales
Payable xxxxx
return:
Sales Returns and
2. To record purcha xxxx
Allowances
se freight costs:
Merchandise
xxxx Cash/Accounts xxxx
Inventory
Receivable
Cash xxxx
Merchandise
xxxx
Inventory
3. Cost of
To record purchase xxxx
Goods Sold
discount:
Accounts Payable xxxx
Merchandise
xxxx
Inventory

4.
To record purchase
return:
Accounts Payable xxxx
Merchandise
xxxx
Inventory

SALES
1. To record sales to
customer: