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Prepared by:
Laron Yvette Vicente de Ocampo


I. Introduction to Accounting
1.1 Financial Statements
Financial Statements provide management, owners and other interested parties with
relevant financial data. These are:
Statement of Comprehensive Income presents income and expenses and
resulting profit or loss for a specific period of time. As permitted by the
International Accounting Standards, an entity may present all items of income
and expense recognized in a period in either a single statement of
comprehensive income or in two statements:
a. a separate Income Statement/Profit of Loss Statement displays
income and expenses resulting in a profit or loss
- revenue is listed first followed by expenses before determining
profit (or loss) for the period
- expenses are listed in order or magnitude
b. a Statement of Comprehensive Income displays components of
other comprehensive income which comprises other income and
expenses that are not recognized in profit or loss
Statement of Changes in Equity summarizes the changes in owners equity for
a specific period of time
- time period is the same as that covered by the income statement
- information in this statement indicated the reasons why owners equity has
increased or decreased
a. owners additional investments assets that the owner
puts into the business
b. profits (or loss) gross increase (decrease) in owners
equity which is equal to the difference of revenue arises
in the course of the ordinary activities of the business and
gains include gains on disposal of non-current asses and
unrealized gains on revaluing assets (expenses) over the
expenses the cost of assets consumes or services used in
the process of earning income (revenue and gains)
c. owners drawings withdraw cash or other assets for
personal use
Statement of Financial Position reports the assets, liabilities and owners
equity at a specific date or point in time
- assets are listed at the top, followed by liabilities and owners equity
- total assets must equal total liabilities and owners equity (capital)
- snapshot of business financial condition at a specific moment in time
usually month-end or year-end
Statement of Cash Flows summarizes information about the cash inflows
(receipts) and outflows (payments) for a specific period of time
- reports the cash effect of the following activities of an entity during a
a. operating activities include transactions that create
income and expenses
b. investing activities include (a) acquiring and disposing of
investments and plant, property and equipment and (b)
lending money and collecting loans
c. financing transactions include (a) obtaining cash from
issuing debt and repaying the amounts borrowed and (b)
obtaining cash from shareholders and providing them with a
return on their investment
- reports the net increase or decrease in cash and the cash amount at the end
of the period
- this report is useful of investors and creditors because they would want to
know what is happening to the companys most liquid resource
- answers the following questions:
a. Where did cash come from?
b. What was the cash used for?
c. What was the change in the cash balance?
Notes to Financial Statements include summary of significant accounting
policies used to prepare financial statements, and other explanatory notes and
supporting schedules
1.2 Definition, Nature and Scope of Accounting
Accounting is an information system that identifies, records and communicates the
economic events of an entity to interested users
Identifying selecting the economic activities/transactions relevant to a
particular entity
Recording provide a history of the entitys financial activities
- consists of keeping a systematic, chronological diary of events
- classifies and summarizes economic events
Communicating through accounting reports of which the most common are
the financial statements, financial information is communicated to interested
a. Internal managers who plan, organize and run a business
1. Marketing Managers
2. Production Supervisors
3. Chief Financial Officers
4. Other Employees
b. External there are types of external users and these are:
1. Investors (Owners) use accounting information to
make decisions to buy, hold or sell shares
2. Creditors (such as Supplier and Bankers) use
accounting information to evaluate risks of granting
credit or lending money
3. Tax Authorities - want to know whether the
company complies with the tax laws
4. Regulatory Agencies want to know whether the
entity is operating within the prescribed rules
5. Customers interested in whether an entity will
continue to honor product warranties and support
its product lines
6. Employees and Labor Unions want to know
whether the entity can pay increased wages and
7. Economists use accounting information to
forecast economic activity
Analyzing- involves the use of ratios, percentages, graphs and charts to highlight
significant financial trends and relationships
Interpreting involves explaining the uses, meaning and limitations of reported
- often referred to as the language of business means of communication
as it provides information that assist users to understand where the entity
has been by looking at its past performance, to understand where it is now
by looking at its current financial position, and to provide insight into what
is likely future prospects are
- its purpose is to assist people, whether internal or external to an entity, to
make decisions about the allocation of scarce resources
- means of measuring business activity and processing this information into
reports to communicate results to decision makers
- may be divided into:
a. Financial Accounting provides economic and financial
information for external users
b. Management Accounting provides economic and financial
information for internal users
- has three major fields:
a. Public Accounting would offer expert services to the
general public
- involves the following major area/work:
1. Auditing public accountants such as Certified
Public Accountant (CPA) or Chartered Accountant
(CA) examine the financial statements of entities
and express on opinion as to the fairness/reliability
of presentation
2. Taxation includes tax advice and planning,
preparing tax returns and representing clients
before government agencies
3. Management Consulting ranges from installing of
basic accounting systems to helping entities
determine whether they should use the space
shuttle for high-tech research and development
- also include activities such as developing business financial
plans and outsourcing requirements for clients
b. Private (or Management) Accounting includes the
following activities:
1. General Accounting recording daily transactions
and preparing financial statements and related
2. Cost Accounting determining the cost of
producing specific products
3. Budgeting assisting management in quantifying
goals concerning revenue, costs of goods sold and
operating expenses
4. Accounting Information Systems - designing both
manual and computerized data processing systems
5. Tax Accounting preparing tax returns and doing
tax planning for the business
6. Internal Auditing reviewing the business
operations to see if they comply with the
management policies and evaluating the efficiency
of operations
c. Not-for-Profit Accounting non-profit entities also need
sound financial reporting and control because donors to
such entities would want information about how well the
entity has met its financial objectives and whether
continued support is justified
- entities must also make decisions about allocating funds
- one area of Not-for-Profit Accounting is Government
1.3 Brief History of Accounting
The origins of accounting are generally attributed to the work of Luca Pacioli, an Italian
renaissance mathematician. In his 1494 text Summa de arithmetica, geometria,
proportione et proportionalite, he described a system to ensure that financial
information was recorded efficiently and accurately.
The advent of the industrial age in the 19
century and later, the emergence of large
entities, a separation of the owners from the managers of business took place. As a
result, the need to report the financial status of the entity became more important, to
ensure that the managers acted in accord with the owners wishes. Also, transactions
between entities became more complex, making necessary improved approaches for
reporting financial information
Our economy has now evolved into a post-industrial age the information age in
which many products are information services. The computer had been the driver of
this age
1.3.1 Double-Entry Bookkeeping
Double-Entry Bookkeeping suggests that for every credit entered into a
ledger, there must be corresponding debit.
- one of the most beautiful discoveries of the human spirit
1.3.2 Harmonization of Accounting Reports
Generally Accepted Accounting Principles (GAAP) set of standards and
rules for financial reporting
- these principles, since they are Generally Accepted, have a substantial
authoritative support from
1.3.3 International Accounting Standards
International Accounting Standards Board (IASB) national accounting
standard-setting bodies and/or regulatory and enforcement agencies
1.4 Relationship of Accounting to Other Fields of Discipline
How will the study of accounting help me?
General Management make wise business decisions
Marketing develops strategies to help the sales
Finance examine and analyze statements
Real Estate agents must understand the numbers involved
1.5 Forms of Business Organization as to Ownership and Activity
Proprietorship a business owned by one person
- owner is often the manager/operator of the business, which is usually a small
service-type one
- only relatively small amount of money is necessary
- owner receives any profits, suffers any losses and is personally liable for all debts of
the business
- although there is no legal distinction between the business and the owner,
accounting records of the business activities are still kept separate from the
personal records of the owner
Partnership business owned by two or more persons
- like a proprietorship in most cases expect that there are more than one owner
- partnership agreement which may either be oral or in writing sets forth terms such
as initial investment, duties of each partner, division of profit (or loss) and
settlement to be made upon death or withdrawal of a partner
- each partner has unlimited personal liability for the debts of the partnership
- partnership affairs must be kept separate from the personal activities of the
- often used to organize retail and service-type business, including professional
Company/Corporation business organized as a separate legal entity under the
corporation law and having ownership divided into transferable shares
- shareholders enjoy limited liability or they are not personally liable for the debts of
the company
- shareholders may transfer all or part of their shares to other investors at any time
- ease with ownership
- has unlimited life since the ownership may be transferred without dissolving the
1.6 Basic Professional Values and Business Ethics
Ethics standards of conduct which encompasses principles such as:
a. acting in the public interest
b. acting with integrity (i.e. with honesty, fairness and sincerity)
c. avoiding conflicts of interest
d. independence
e. respect for confidentiality
f. maintaining technical competence
g. acting with due care
h. behaving ethically

II. Measuring and Reporting Financial Position
2.1 Nature and Forms of Statement of Financial Position
Statement of Financial Position presents:
Current Assets cash and other resources that are reasonably expected to be realized
in cash or sold or consumed in the business within 1 year of the reporting date or the
business operating cycle - is the average time that is required to go from cash to cash in
producing revenue whichever is longer
- Important in assessing the businesss short-term dept-paying ability
Financial Assets cash and accounts receivables are example of these. Financial Assets
may also be:
a. Current
b. Non-Current are long-term assets and are given meaningful
descriptions, such as:
1. Property, Plant and Equipment tangible resources of a
relatively permanent nature that are used in the business
and not intended for sale
2. Intangible Assets are non-current resources that do not
have physical substance and are recorded at cost which is
expensed over the useful life of the intangible asset
3. Investment Property investment of non-current assets
other than financial assets
Current Liabilities are liabilities that are (1) expected to be settled in the business
operating cycle, (2) held primarily for the purpose of trading, (3) due and to be settled
within 12 month after the end of the reporting period. Liabilities are also current when
the entity does not have an unconditional right to defer settlement of the liability for at
least 12 months after the reporting period
Non-Current Liabilities obligations expected to be paid after 1 year or after an
operating cycle
Owners Equity/Capital this varies with the form of business entity.
a. Proprietorship: one capital account
b. Partnership: capital for each partner
c. Company: divided into three accounts which when combined
comprise the shareholders equity
1. Share Capital investment of assets
2. Reserves increases in equity from sources other
than contributed capital from the owners and
retained earnings
3. Retained Earnings profit retained for the use in
the company
Presentation of Financial Statements, as prescribed by the IAS that must at least include
the following line items: (a) property, plant and equipment, (b) investment property, (c)
intangible assets, (d) financial assets, (e) investments accounted for using equity
method, (f) biological assets, (g) inventories, (h) trade and other receivables, (i) cash and
cash equivalents, (j) the total assets classified as held for sale, and assets included in
disposal groups classified as held for sale, (k) trade and other payables, (l) provisions,
(m) financial liabilities, (n) liabilities and assets for current tax, (o) deferred tax liabilities
and deferred tax assets, (p) liabilities included in disposal groups classified as held for
sale, (q) minority interest, presented within the equity and (r) issued capital and
reserves attributable to owners of the parent may be presented in either:
2.1.1 Report Form assets are presented above the liabilities and equity
2.1.2 Account Form assets and liabilities and equity are presented side by side
with assets at the left and liabilities and equity at the right
2.2 Related Accounting Concepts/Principles
2.2.1 Entity activities of the company be kept separate and distinct from the
activities of the owner
2.2.2 Monetary only transaction data that can be expressed in terms of money
may be included in the accounting records
2.2.3 Cost assets should be recorded at cost the value exchange at the time
something is acquired
Market (or Fair) Value value determined by the market at the time
2.2.4 Objectivity or Reliability - information is free of error and bias
2.2.5 Going Concern assumes that the entity will continue in operation long
enough to carry out its existing objectives
2.2.6 Materiality relates to an items impact on an entitys overall financial
condition and operations
- an item is said to be material when it is likely to influence users
2.2.7 Disclosure circumstances and events that make a difference to financial
statement users be disclosed
2.3 Accounting Equation
The two basic elements of a business are what it owns and what it owes.
Assets resources controlled by an entity
Liabilities claims against assets or existing debts and obligations
Owners Equity ownership claim on total assets
At all times, Assets of the entity MUST equal to its Liabilities and Owners Equity
(Capital) A=L+C
2.4 Transactional Analysis: Assets, Liabilities and Owners Equity
Transactions are the economic events of an entity that are recorded, which may be
identified as external entity and some outside entity, or internal within one entity
2.5 Preparation of Statement of Financial Position

III. Measuring and Reporting Financial Performance
3.1 Nature and Forms of Income Statement
3.1.1 Natural Form format where expenses are classified according to the
nature of expense
3.1.2 Functional Form expenses are subdivided into:
c. Selling or Distribution Expenses making sales
d. Administrative Expenses (General Expenses) general
operating activities
e. Finance Cost associated with the financing of the business
operations and debt collection
f. Other Expense
3.2 Related Accounting Concepts/Principles
3.2.1 Time Period division of economic life of a business into artificial time
d. Interim Periods monthly and quarterly time periods
e. Annual Basis
1. Financial (or Fiscal) Year starts months between
January and December
2. Calendar Year starts January
3.2.2 Income Recognition revenue be recognized in the accounting period when
an increase in future economic benefits has occurred
3.2.3 Matching or Expense Recognition expenses be recognized in the
accounting period when a decrease in future economic benefits has
3.2.4 Accrual determine profits means recognizing revenue when earned rather
when cash is received and recognizing expenses when incurred rather than
when paid
3.2.5 Consistency entity uses the same accounting principles
3.2.6 Conservatism (Prudence) not overstating assets and income and
understating liabilities and expenses
3.2.7 Disclosure
3.3 Expanded Accounting Equation
Assets = Liabilities + Owners Capital - Owners Drawings + Revenue - Expenses
3.4 Transactional Analysis: Revenues and Expenses
3.5 Preparation of Natural Form Income Statement

IV. Measuring and Reporting Changes in Equity
4.1 Nature and Form of Statement of Changes in Owners Equity
4.2 Transaction Analysis: Investments, Withdrawals, Net Income (Loss)
4.3 Preparation of Statement of Changes in Owners Equity

V. Measuring and Reporting Cash Flows
5.1 Nature and Forms of Statement of Cash Flows
Statement of Cash Flows which helps creditors and investors to assess (a) the entitys
ability to generate future cash flows, (b) ability to pay dividends and meet obligations,
(c) the reasons for the difference between profit and net cash provided (used) by
operating activities and (d) the cash investing and financing transaction during the
period may be presented using two methods:
5.1.1 Direct Method provides major classes of gross cash receipts and gross
cash payments which are determined from the accounting records of the
entity or by adjusting sales, cost of sales and other items in the income
statement for:
a. changes during the period in inventories and operating
receivables and payables
b. other non-cash items, and
c. other items for which the cash effects are investing or
financing cash flows
5.1.2 Indirect Method net cash from operating activities is determined by
adjusting profit for the effect of:
a. changes during the period in inventories and operating
receivables and payables
b. non-cash items such as depreciation, provisions, deferred
taxes, unrealized foreign currency gains and losses,
undistributed profits of associates, and minority interest,
c. all other items for which the cash effects are investing and
financing cash flows
5.2 Components of Statement of Cash Flows
5.2.1 Operating Activities
5.2.2 Investing Activities
5.2.3 Financing Activities
5.3 Preparation of Statement of Cash Flows Direct Method

VI. The Accounting Cycle
6.1 Accounting Cycle and Business Documents Used
Documents provide evidence that transactions and events have occurred. Examples
a. Official Receipts
b. Sales Invoice
c. Shipping Document
d. Check Butt
e. Cash Register Tape
6.2 Analyzing Business Transactions in Terms of Debits and Credits
Account an individual accounting record of increases and decreases in a specific asset,
liability and owners equity item.
T-Account standard shorthand in accounting that helps make clear the effects of
transactions on individual accounts.
Debit indicates left
Credit indicate right
Double-Entry System equality of debits and credits
6.3 Recording of Business Transactions in the Journal
Journal referred to as book of original entry on which transactions are recorded in
chronological order
6.3.1 Rendering of Service, with Output VAT
6.3.2 Purchase of Supplies and Equipment, with Input VAT
6.3.3 Remittance of VAT
6.4 Accounting for Payroll
6.4.1 Definition of Payroll Terms
Payroll pertains to both:
a. Salaries are paid managerial, administrative and sales personnel
b. Wages are based on a rate per hour or on a piecework basis paid
to sales assistants, factory employees and manual laborers
Bonus agreements for management personnel and employees which may
be based on such factors as increased sales or profit
- may be paid in cash and/or by granting executives and employees to
acquire company shares at favorable prices called share option plans
6.4.2 Calculation of Net Pay or Take Home Pay
Net Pay determined by subtracting payroll deductions from gross earnings
is total remuneration earned by an employee
6.4.3 Payment with Deductions (SSS, Philhealth, PAG-Ibig, Withholding Tax,
Advances to Employees)
6.4.4 Subsequent Remittance to Government Agencies of Amount Withheld from
Salaries and Corresponding Employers Contribution
6.5 Accounting for Promissory Notes
Promissory Note is a written promise to pay a specified amount of money on demand
or at a definite time.
- may be used (a) when individuals and businesses lend or borrow money, (b) when
the amount of the transaction and the credit period exceed normal limits or (c)
settlement of accounts receivable
- may be transferred to another party by endorsement
Issuer party making the promise to pay
Payee party to whom payment is made
Basic issues in accounting for notes are:
a. recognizing notes
b. valuing notes
c. selling notes
Honored Note paid in full at its maturity date
Dishonored Note not paid in full at maturity and is no longer negotiable
6.5.1 Determination of Maturity Date, Interest, Maturity Value, Discounts and
Cash Proceeds
6.5.2 Recording of Transactions Involving Promissory Notes Receipts and Issuance Collection and Payment at Maturity Dishonor by the Maker Renewal of Note Discounting of Notes Receivable with Recourse (Separate Recording
of Interest Expense and Income) Honor or Dishonor of Discounted Note Discounting Own Note Honor or Dishonor of Discounted Own Note Amortization of Discount on Note Payable (Straight-Line
6.6 Posting to the General Ledger (T-Account Form of Ledger)
Ledger keeps in one place all the information about the changes in specific account
Chart of Accounts lists the accounts and the account numbers that identify their
location in the ledger
6.7 Preparing the Trial Balance
Trial Balance list of accounts and their balances at a given time which is prepared at
the end of the accounting period.
6.7.1 Use and Limitations of a Trial Balance
a. primary purpose is to prove (check) that the debits and credits are
equal after posting
b. may be used to correct errors in journalizing and posting
c. useful in preparation of financial statements
a. does not guarantee freedom from recording errors
b. does not prove that all transactions have been recorded or that the
ledger is correct
6.7.2 Locating Errors in the Trial Balance
Correcting Errors
a. If the error is 1, 10, 100, 1000 re-add and recalculate
b. If the error is divisible by 2, scan trial balance to see whether a
balance equal to half the error has been recorded in the wrong
c. If the error is divisible by 9, retrace the account balances to see
whether they have been correctly copied to the ledger. Usually
occurs when theres transposition error reversing order of
d. If the error is not divisible by 2 or 9scan everything
6.7.3 Preparing Correcting Entries
Errors should be corrected as soon as they are discovered through
correcting entries
6.7.4 Preparing Corrected Trial Balance
6.8 Journalizing and Posting Year-End Adjustments (Accrual Basis)
Adjusting Entries are needed to ensure that the revenue and expense recognition
principles are followed
6.8.1 Accrued Expenses (Expenses Payable) expenses incurred but not yet paid
6.8.2 Accrued Income (Receivables) revenue earned but the yet received in
6.8.3 Prepaid Expenses expenses paid in cash and recorded as assets before
they are used or consumed
6.8.4 Amortization of Discounts of Notes Payable (Straight-Line Method)
6.8.5 Unearned Income cash received and recorded as liabilities before revenue
is earned
6.8.6 Depreciation (Straight-Line Method) allocation of the cost of an asset to
expense over its useful life in a rational and systematic manner and
represents the future economic benefit that has been used in the period
6.8.7 Doubtful Accounts (Allowance Method) estimating receivables not
expected to be collectible at the end of each period
6.8.8 Direct Write-Off Method when a particular account is determined to be
uncollectible and the loss is charged to Bad Debts Expense and the carrying
amount of Accounts Receivable is reduced in the Statement of Financial
Position Balance Sheet Approach Percentage of Accounts Receivable management
estimates what percentage of receivables will result to
losses from uncollectible accounts Percentage of Sales Method management estimate
what percentage of credit sales will be uncollectible Aging of Accounts Receivable customer balances are
classified by length of time they have been unpaid
6.9 Preparing Financial Statements
6.9.1 Statement of Comprehensive Income Income Statement
6.9.2 Statement of Financial Position
6.9.3 Statement of Changes in Equity
6.9.4 Statement of Cash Flows
6.9.5 Notes to Financial Statements
6.10 Closing the Books
Closing the Books accounts are made ready for the next period
Temporary or Nominal Accounts are the accounts that are closed which relate to only
given accounting period and they include all income statement and drawing accounts
Permanent or Real Accounts relate to one or more future accounting periods and
they consist of all statement of financial position accounts which are not closed but
rather forwarded to the next accounting period
6.10.1 Journalizing Closing Entries
6.10.2 Posting Closing Entries
6.10.3 Ruling Nominal Accounts and Balancing Real Accounts
6.10.4 Preparing and Post-Closing Trial Balance
Post-Closing Trial Balance lists of permanent accounts and their balances
after closing entries have been journalized and posted
6.11 Journalizing and Posting Reversing Entries
Reversing Entries made at the beginning of the next accounting period which is the
exact opposite of the adjusting entry made in the previous accounting period


I. Introduction to Merchandising Business
1.1 Nature and Operating Cycle
Operating cycle of a merchandising business is ordinarily longer than that of a service
1.2 Business Documents Used
Purchase Invoice documents that indicates the total purchase price and other relevant
Sales Invoice provides support for a credit sale
II. Accounting Cycle of a Merchandising Business
2.1 Recording Purchase and Sale of Merchandise in General Journal
2.1.1 Perpetual Inventory System (Gross Method Only) detailed records of the
cost of each inventory purchase and sale are maintained and continually
shows the inventory that should be on hand
- cost of sales is determined each time a sale occurs
2.1.2 Periodic Inventory System (Gross Method Only) detailed inventory
records of the goods on hand are not kept throughout the period and the
cost of sales is only determined at the end of the accounting period
- cost of goods on hand are determined through physical count
- in determining cost of sales (1)determine inventory beginning, (2) add
the cost of goods purchased and (3) subtract inventory end
2.1.3 Freight Terms
Freight Cost cost of delivering goods
Freight-In considered part of the cost or purchasing inventory
Freight-Out delivery expense
FOB Shipping Point goods are placed free on board the carrier by the
seller, and the buyer pays the freight cost
FOB Destination goods are placed free on board to the buyers place of
business and the seller pays the freight
Collect the buyer pays
Prepaid the seller pays FOB Shipping Point, Collect buyer pays FOB Shipping Point, Prepaid buyer has to pay but the seller pays FOB Destination Point, Collect seller has to pay but the buyer
pays FOB Destination Point, Prepaid seller pays
2.1.4 With Value-Added Tax
2.2 Recording Purchase and Disposal of Property, Plant and Equipment
PPE Assets/Fixed Assets are resources that (1) have physical substance, (2) are used in
the operations of the business and (3) are not intended for sale to customers
- are expected to provide services to the entity for a number or years
- with exception of land, PPE Assets decline in service potential over their useful lives
Cost consists of all expenditures necessary to acquire the asset and make it ready for
its intended use, including import duties and non-refundable taxes after deducting trade
discounts and rebates
Useful Life/Service Life is an estimate of the assets expected productive life which
may be expressed in terms of (1) time period over which the asset is expected to be
available for use or (2) the number of units of production or the output expected to be
obtained from the asset
Residual Value the current estimate of the assets disposal value, net of disposal costs,
if the asset is already of the age and in the condition expected at the end of its useful
Carrying Amount cost of the PPE less its accumulated depreciation
Depreciable Cost is the cost of the asset less its residual value
Depreciation is the allocation of the depreciable amount of PPE to expense over its
useful life which may be calculated using the following methods:
a. Straight-line Method depreciation is the same for each year of the
assets useful life and is measured solely by the passage of time
b. Units-of-Activity or Production Method useful life is expressed in
terms of total units of production or expected from asset, rather than as
time period
c. Reducing-Balance/Accelerated-Depreciation Method produces a
decreasing annual depreciation expense over the assets useful life
2.2.1 Revenue vs. Capital Expenditures
Capital Expenditures addition and improvements incurred to increase the
operating efficiency, productive capacity or useful life of a PPE which are
usually material in amount and occur infrequently
Revenue Expenditures are expenditures during useful life or the costs
incur for ordinary repairs, additions or improvements with the purpose of
maintaining the operating efficiency and productive life of the PPE Asset
2.2.2 Journal Entries Related to Purchase (Net Method)
2.2.3 Disposal of Property, Plant and Equipment through Sale
In a disposal by sale, the carrying amount of the asset is compared with the
net proceeds received from the sale
Gain on Disposal occurs if the net proceeds of the sale exceed the carrying
amount of the PPE and is reported as income on the income statement
Loss on Disposal occurs if the net proceeds of the sale are less than the
carrying amount of the PPE and is reported on the income statement among
expense items
2.3 Preparing Functional-Form Income Statement (Including Computation of Missing
Income Statement begins by presenting Sales Revenue. The contra revenue accounts
Sales Returns and Allowances and Sales Discounts are deducted from Sales to arrive at
Net Sales
Gross Profit the difference of sales over cost of sales which represents the inventory
profit of a business
Other Income revenue items other than sales revenue
Other Expenses are the third component in measuring profit for a retailer
2.4 Recording of Business Transactions using Special Journals and the General Journal
Special Journal is used to record similar types of transactions
2.4.1 Sales Journal used to record sales of inventory on account
a. journalizing credit sales
b. posting the sales journal
c. proving the ledgers
1. the total of the general ledger debit balances
must equal the total of the general ledger credit
2. the sum of the subsidiary ledger balances must
equal the balance in the control account
Advantages include:
a. one-line entry for each sales transaction saves time because
it is not necessary to write out the four account titles for
each transaction
b. only totals, rather than individual entries, are posted to the
general ledger which saves posting
c. division of labor because one individual can takes
responsibility for the sales journal
2.4.2 Cash Receipts Journal used to record all receipts of cash
a. journalizing cash receipts transactions
b. posting the cash receipts journal
c. proving the ledgers
2.4.3 Purchase Journal used to record all purchases on inventory on account
a. journalizing credit purchases of inventory
b. posting the purchase journal
c. expanding the purchases journal
2.4.4 Cash Payments Journal used to record all payments of cash
a. journalizing cash payments transactions
b. posting the cash payments journal
2.4.5 General Journal - is used if a transaction cannot be recorded in a special
- includes credit sales of assets other than inventory and other types of
purchases on account
- may be used to record such transactions as granting credit to a
customers for a sales return or allowance, granting or to record such
transactions as granting credit to a customers for a sales return or
allowance, granting of credit from a supplier for purchases returned,
acceptance of note receivable from a customer and purchase of
equipment by issuing note payable
- also used for correcting, adjusting and closing entries
2.5 Posting from the General and Special Journals to the General and Subsidiary Ledgers
Subsidiary Ledger is a group of accounts with a common characteristics
a. show transactions affecting one customer or one creditor in a single
account, thus providing up-to-date information on specific account balances
b. free the general ledger of excessive details resulting to the trial balance of
the general ledger to not contain vast numbers of individual account
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
2.5.1 Accounts Receivable/Customer Subsidiary Ledger which collects
transaction data of individual customers
2.5.2 Accounts Payable/Creditor Subsidiary Ledger which collects transaction
data of individual creditors
2.5.3 General Leger/Control Account summarizes the subsidiary ledger
2.6 Preparing Scheduled of Accounts Receivable and Payable
2.7 Manual vs. Computerized Accounting Systems
2.8 Completion of the Accounting Cycle
2.8.1 Journalizing and Posting Year-End Adjustments (Accrual Basis) Review: Accrued Expenses Review: Accrued Revenues Review: Prepaid Expenses Review: Unearned Income Review: Amortization of Discount Depreciation (Straight-Line Method) Doubtful Accounts (Allowance Method) Estimation: Balance Sheet Approach Write-off and Recovery
- bad debts is not increased when the write-off
occurs using the Allowance Method
- write-off only affects the Statement of Financial
Position accounts and not the Income Statement
- two entries are required to record the recovery of a
receivable written-off: (1) the entry made in writing
off the account is reversed to reinstate the
customers account and (2) the collection is
journalized in the usual manner Merchandise Inventory (Periodic Inventory System)
2.8.2 Bank Reconciliation Statement
- the use of bank account contributes significantly to good internal
control over cash
- the asset account Cash maintained by the depositor is the reciprocal of
the banks liability account for each depositor and it should be possible
that these accounts agree at any time
Bank Statement shows the depositors bank transactions and balances. It
a. checks paid and other debits and transfers that reduce the
balance in the depositors accounts
b. deposits and other credits and transfers the increase the
balance in the depositors account
c. the account balance after each days transactions
Check a written order signed by the depositor directing the back to pay a
specified sum of money to a designated recipient Preparing a Simple Bank Reconciliation Statement (Adjusted
Balance Method)
Reconciling Items of the Depositor:
a. Direct Debits
1. Bank Fee - monthly fee charged by bank for
its services
2. Dishonored Check/Bouncing Check- a
deposit check from customer which
bounces because of insufficient fund
b. Direct Credits
1. Notes Receivables collected by bank in
behalf of the depositor
c. Transfers
1. Transfers from Electronic Fund Transfer
(EFT) are payment systems that use wire,
telephone or internet to transfer cash from
one location to another
d. Errors
Reconciling Items of the Bank
a. Outstanding Deposits deposits recorded by the depositor
that have not been recorded by the bank
b. Unpresented Checks issued checks recorded by the
business that have not been presented by the recipient to
the bank for payment
c. Errors Recording Adjusting Entries for Reconciling Items
2.8.3 Preparing a Work Sheet
2.8.4 Preparing Financial Statement Functional-Form Income Statement Report-Form Statement of Financial Position Statement of Changes in Equity Direct-Method Statement of Cash Flows Notes to Financial Statements
2.8.5 Journalizing and Posting Closing Entries
2.8.6 Preparing Post-Closing Trial Balance
2.8.7 Journalizing and Posting Reversing Entries
2.9 Introduction to Voucher System
Voucher System is a network of approvals by authorized individuals acting
independently to ensure that all payment by check are proper
Voucher is an authorization from prepared for each expenditure and is required for all
types of cash payments except those from petty cash fund
2.10 Establishment and Replenishment of Petty Cash Fund under the Imprest System
Petty Cash Fund is a cash fund used to pay relatively small amount but still satisfactory
Imprest System operation of petty cash fund which involves three steps:
a. establishing the fund
3. appointing a petty cash custodian/cashier
4. determining the size of the fund
b. making payments from fund
c. replenishing the fund


I. Introduction to Partnership as a Business Organization
1.1 Forms of Business Organization
1.2 Definition and Special Features of a Partnership
Partnership is an association of two or more persons carrying on a business in
common with a view to making a profit
- each partner is required to have his or her own capital account
Characteristics of Partnership:
a. Association of Individuals easy formation because two or more
individuals may form a partnership by a simple act as a handshake
b. Mutual Agency each partner may act in behalf of the partnership when
engaging in partnership business
c. Limited Life it may be ended voluntarily at any time through acceptance
of a new partner or the withdrawal of a partner and/or death or incapacity
of a partner
d. Unlimited Liability each partner is personally and individually liable for all
partnership liabilities
e. Co-Ownership of Property partnership assets are owned jointly by the
partners. If the partnership is dissolved, the assets do not legally revert to
the original contributor. Each partner has a claim on total assets equal to
the balance in his or her respective capital account
f. Co-Ownership of Profit (or Loss) if the partnership contract does not
specify to the contrary, all profit or loss is shared equally by the partners
1.3 Kinds of Partnership and Kinds of Partners
Kinds of Partnership:
a. Limited Partnership one or more partners have unlimited liability and one
or more partners have limited liability for the debts of the business
b. Incorporated Limited Partnership is a special type of partnership primarily
used for people engaged in high-risk venture-capital projects
Kinds of Partners:
a. General Partners those who have unlimited liability
b. Limited Partners/Special Partners/Sleeping Partners are responsible for
the debts of the partnership up to the limit of their investment in the
1.4 Advantages and Disadvantages of a Partnership
a. combining skills and resources of two or more individuals
b. ease of formation
c. not subject to as much government regulation as companies
d. ease of decision making
e. no taxation or partnership profits
a. mutual agency
b. limited life
c. unlimited liability
d. partners must be able to work together
II. Accounting for Partnership Formation
2.1 Opening Entries of a Partnership upon Formation
2.1.1 Organization of a New Partnership
Each partners initial investment in a partnership is entered in the
partnership records. These investments should be recorded at the fair value
of the assets at the date of their transfer to the partnership that is, the fair
market value at the time the partnership is formed
2.1.2 Conversion of Sole Proprietorship(s) into a Partnership using New Set of
III. Accounting for Division of Profits and Losses
3.1 Methods of Dividing Profits and Losses
Partnership profit or loss is shared equally unless the partnership contract or
partnership agreement indicates otherwise or the Profit-and-Loss Ratio used to
identify the basis for dividing profit and loss
3.2 Accounting for Interest on Capital Balances, Salary Allowance, and Bonuses as Part of
Profit Distribution
Salaries to partners and interest on partners capital are not expenses of the partnership
Salaries Expense pertains to the cost of services performed by employees
Interest Expense relates to the cost of borrowing from creditors
Partners, as owners of the business, are not considered either employees or creditors,
thus salary to partners and interest on partners capital do not enter into the
determination of profit or loss
3.3 Preparation of Financial Statements
The financial statements of a partnership are similar to those of a proprietorship. The
only difference is due to the number of owners involved
Statement of Changes in Partnerships Equity used to explain the changes in each
partners capital or current account and in total partnership equity during the year
IV. Partnership Dissolution without Liquidation
4.1 Distinction between Dissolution and Liquidation
Partnership Dissolution occurs whenever a partner withdraws or a new partner is
admitted but does not necessarily mean that then business ends
Partnership Liquidation ends the economic life of the entity
4.2 Accounting for Admission of New Partner(s) using Bonus Method
Admission of new partner results in the dissolution of the existing partnership and the
beginning of a new one
The new partner may be admitted either by:
a. Purchasing the Interest of an Existing Partner personal transaction
between one or more existing partners and the new partner
b. Investing Assets in the Partnership is transaction between the
partnership and the new partner which increases both the net assets and
total equity of the partnership
Bonus to Old Partners results when the new partners investment in the partnership is
greater than the capital credit on the date of admittance
Bonus to New Partner results when the new partners investment in the business is
less than his or her capital credit
4.3 Withdrawal or Retirement of a Partner
A partner may withdraw from the partnership voluntarily be selling his or her equity in
the partnership. He or she may also withdraw involuntarily by reaching mandatory
retirement age or by dying. Like admission of new partner, withdrawal also dissolves
existing partnership
Withdrawal may be accomplished by:
4.3.1 Purchase of Interest by Other Partners or by an Outsider is a personal
transaction between partners
4.3.2 Settlement of Interest by the Partnership is a transaction that involves
the partnership
Bonus to Retiring Partner may be paid to a retiring partner when (1) there is
unrecorded goodwill resulting from the partnerships superior earnings record and (2)
the remaining partners are anxious to remove the partner from the partnership
Bonus to Remaining Partners the retiring partner may give bonus to the remaining
partner when (1) the partnership has a poor earnings record and (2) the partner is
anxious to leave the partnership
V. Partnership Dissolution with Liquidation: General Partnership
5.1 Introduction to the Two Kinds of Liquidation
5.1.1 Lump-Sum Method
5.1.2 Installment Method
5.2 Accounting for the Liquidation of a General Partnership under the Lump-Sum Method
To liquidate partnership, it is necessary to:
a. sell non-cash assets for cash and recognize a gain or loss on realization
b. allocate gain/loss on realization to the partners based on their profit-and-
loss ratio
c. pay partnership liabilities in cash
d. distribute remaining cash to partners on basis of their capital balances
No Capital Deficiency when a partnership is liquidated and all partners have credit
balances in their capital accounts
Capital Deficiency at least one partners capital account has a debit balance
5.2.1 Deficient Partner is Solvent the partner with capital deficiency pays the
amount owed to the partnership
5.2.2 Deficient Partner is Insolvent the partner with capital deficiency is unable
to pay the amount owed to the partnership thus the partners with credit
balances absorb the loss or the deficiency
5.3 Accounting for the Liquidation of a General Partnership under the Installment Method
5.3.1 Preparation of Schedule of Safe Payments
Schedule of Cash Payments is used to determine the distribution of cash
to the partners in liquidation of partnership
VI. Accounting for Corporate Formation and Operation
6.1 Introduction to Corporation
6.1.1 Definition of a Corporation
Company/Corporation is a legal entity that has most of the rights and
privileges of a person such as:
a. the right to vote
b. the right to hold public office
- is subject to the same duties and responsibilities as a person
- it may be classified by:
a. Purpose
1. Profit
2. Non-profit
b. Ownership
1. Publicly Held Company may have thousands of
2. Privately Held Company often referred to as a
proprietary limited company, usually has only few
Company Constitution regulates companys internal management
Preliminary Expenses costs incurred in the formation of a company which are
capitalized as the definition of an asset since it is expected to provide future economic
benefits to the entity
Preference Shares have contractual provisions that give them preference or priority
over ordinary shares in certain areas as (1) distribution of profits (dividends), (2) assets
in the event of liquidation
Ordinary Shares common class of share which have the right to:
a. vote in the election of BOD
b. share the companys profits through receipt of dividends
c. Preemptive Right keep the same percentage ownership when new shares
are issued
d. Residual Claim share in assets upon liquidation in proportion to their
Shareholders Certificate/Stock Certificate proof of share ownership
Issued Shares shares on the hands of the shareholders
Par Value arbitrary amount assigned to each share
Share Capital total amount of cash and other assets paid in to the company by
Retained Earnings profit retained in a company
Issue Price the price that the company receives from the issue of shares
Forfeited Shares/Treasury Shares shares lost by a person due to failure to pay his or
her share when the call is due, which may later be re-issued
Prior-Period Error corrected by reinstating comparative amounts and opening
retained earnings as soon as the error has been discovered
6.1.2 Characteristics of a Corporate Form of Business Organization
Separate Legal Entity the company acts under its own name rather that in
the name of its shareholders
No Mutual Agency acts of shareholders do not bind the company unless
such shareholders are duly appointed agents of the corporation
Limited Liability of Shareholders creditors have recourse only to the
company assets to satisfy their claim because the liability of the
shareholders is normally limited to their investments in the company
Transferable Ownership Rights ownership of a company is held in shares
which are transferable units
Ability to Acquire Capital easy to obtain capital through the issue of
Continuous Life its continuance as a going concern is not affected by the
withdrawal, death or incapacity of a shareholder, employee or senior
Separation of Ownership and Management the owners who are the
shareholders of the company are not the same ones who manage it rather,
it is the Board of Directors (BOD) who does
Government Regulations subject to numerous state and federal
Company Taxation owners share of profits from corporations is reported
on his or her personal income tax return
6.1.3 Distinction between Partnership and Corporation
6.1.4 Types of Corporation
6.1.5 Legal Requirements for the Formation of a Corporation
6.1.6 Definition of Terms
VII. Accounting for Share Capital Transactions
7.1 Accounting for Par Value Shares
7.1.1 Journal Entry Method
7.1.2 Memorandum Method
7.2 Accounting for Preference Shares and Ordinary Shares
7.3 Accounting for No-Par Value Shares
7.4 Incorporating a Partnership
7.5 Accounting for Delinquent Shares
7.6 Accounting for Treasury Share
7.6.1 Reacquired through Purchase
7.6.2 Reacquired through Donation (Memo Entry)
7.6.3 Subsequent Sale At Cost, Below Cost, or Above Cost
7.7 Shareholders Equity Presentation Contributed Capital
VIII. Accounting for Accumulated Profits/Loss (Retained Earnings)
8.1 Definition of Retained Earnings
8.2 Appropriation from Retained Earnings for Legal, Contractual or Voluntary Reasons
Retained Earnings Restrictions are portion of the retained earnings balance currently
unavailable for dividends due to the following causes:
a. Contractual the restriction that limits the use of company assets for
payment of dividends
b. Voluntary made voluntarily for specific purposes
8.3 Kinds of Dividends
Dividend distribution by a company to its shareholders on a pro rata (proportional)
basis which can take four forms:
a. Cash pro rata distribution of cash to shareholders
For a company to pay cash dividend, it must have:
1. Retained Earnings
2. Adequate Cash
3. A Declaration of Dividends
b. Property
c. Scrip a promissory note to pay cash
d. Shares/Bonus Shares pro rata distribution to shareholders of the
companys own shares
- may be expressed in two ways as (1) as a percentage of the stated value of the
share or (2) as dollar (peso) amount per share
8.4 Accounting for Cash and Bonus Issue upon Declaration and Distribution of Dividends
Declaration Date when the company formally declares the cash dividend and
announces it to the shareholders
Record Date when ownership of the issued shares is determined for dividend
Payment Date dividends are paid and payment is recorded
8.5 Preparation of Statement of Changes in Shareholders Equity
IX. Special Topics
9.1 Book Value Per Share
9.2 Basic Earnings Per Share indicates the profit earned per issued ordinary share