Fundamentals of Accountancy, Business and

Governor Pack Road, Baguio City, Philippines 2600 Management 2

Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268 Grade Level/Section: Grade 12- ABM
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph

MODULE 1 – FABM 2 Subject Teacher: John Paul M. Lagao

REVIEW OF BASIC ACCOUNTING

Learning objectives:
At the end of this module, students must be able to:
1. define accounting and explain its role in the business;
2. explain the fundamental accounting concepts and principles;
3. explain double-entry accounting system in relation to the rules of the accounting equation;
4. identify the accounting books to be used in the business operation;
5. perform the whole accounting process.

Definition of Terms:
1. Accounting
It is a service activity, its function is to provide quantitative information, primarily financial in
nature, about economic entities, that is intended to be useful in making economic decisions
(Accounting Standards Council- ASC).

“Accounting as an Art”- Accounting is the art of recording, classifying, and summarizing in a

significant manner and in terms of money, transactions and events which are in part at least of
a financial character and interpreting the results thereof (American Institute of Certified Public
Accountants- AICPA).

Accounting is the process of identifying, measuring and communicating economic

information to permit informed judgment and decision by users of financial information
(American Accounting Association- AAA).

Figure 1. Accounting Cycle:

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Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 2
Grade Level/Section: Grade 12- ABM

MODULE 1 – FABM 2 Subject Teacher: John Paul M. Lagao

Financial Statements (PAS 1):

a) Statement of Financial Position (Balance Sheet)
b) Statement of Comprehensive Income (Income Statement)
c) Statement of Changes in Equity
d) Statement of Financial Position-Beginning
e) Notes to Financial Statements
f) Statement of Cash Flows (PAS 7)

Pro-forma general purpose financial statements:

XYZ Corporation
Statement of Financial Position
As of December 31, 20xx

ASSETS
Current Assets:
Cash P xxx
Accounts Receivable xxx
Marketable Securities xxx
Inventories xxx Total Current Assets
Prepaid expenses xxx xxxx

Non-Current Assets:
Land P xxx
Building P xxx
Less: Accu. Dep.-Bldg. (xxx) xxx
Equipment P xxx Total Non-Current Assets
Less: Accu. Dep.-Equip. (xxx) xxx xxx
TOTAL ASSETS: P XXXX

LIABILITIES
Current Liabilities:
Accounts Payable P xxx
Accrued Expenses xxx Total Current Liabilities
Interest Payable xxx
Taxes Payable xxx xxx

Non-Current Liabilities:
Bonds Payable P xxx Total Non-Current Liabilities
Long-term Notes xxx xxx
TOTAL LIABILITIES: P xxx

STOCKHOLDERS' EQUITY
Capital Stock
Common Stock (at Par Value) P xxx
Preferred Stock (at Par Value) xxx xxx
Share Premium xxx
Retained Earnings xxx
TOTAL STOCKHOLDERS' EQUITY: P xxx
TOTAL LIABILITIES and STOCKHOLDERS' EQUITY: P XXXX

Figure 2: Statement of Financial Position (SFP)

Statement of Financial Position (SFP) - Shows the financial position (Liquidity or Solvency) of the
business through its economic resources which may be brought about by debts or equity accounts:
Asset = Liability + Capital.

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Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 2
Grade Level/Section: Grade 12- ABM

MODULE 1 – FABM 2 Subject Teacher: John Paul M. Lagao

XYZ Corporation
Statement of Comprehensive Income
For the period ended December 31, 20xx

Sales: P xxx
Sales Returns and Allowances P xxx
Sales Discount xxx (xxx)
Net Sales P xxx
Cost of Goods Sold (COGS/COS):
Inventories-Beg. P xxx
Purchases P xxx
Purchase Returns & Allowances (xxx) Net Purchases
Purchase Discount (xxx) xxx
Total Goods Avail. For Sale (TGAS) P xxx COGS/COS
Inventories-End. (xxx) (xxx)
Gross Profit xxx
Less: Operating Expenses (OPEX)
Selling and Administrative expenses P xxx
Salaries and Wages xxx
Utilities expense xxx
Depreciation expense xxx Total OPEX
Miscellaneous expense (xxx) (xxx)
Net Profit (Earnings before Interest and Taxes) P xxx
Add: Interest Income xxx
Less: Interest Expense (xxx)
Earnings Before Taxes) P xxx
Less: Income Tax (xxx)
NET INCOME P XXX
Other Comprehensive Income: xxx
COMPREHENSIVE INCOME FOR THE YEAR P XXX
Figure 3: Statement of Comprehensive Income (SCI)

Statement of Comprehensive Income (SCI)- Shows the financial information related to the operations
of the business: Income, Other Comprehensive Incomes, Expense, Other Comprehensive Expenses,
and Net income/ Net Loss.

XYZ Corporation
Statement of Changes in Equity
For the period ended December 31, 20xx

Retained
Share Capital Reserves Earnings
Balances-January 1, 20xx P xxx P xxx P xxx
Net Income xxx
Correction of prior period (if any)
Dividend payment (xxx)
Issuance of stocks xxx
Balances-December 31, 20xx P xxx P xxx P xxx

Figure 4: Statement of Changes in Owner’s Equity (SCOE)

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Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 2
Grade Level/Section: Grade 12- ABM

MODULE 1 – FABM 2 Subject Teacher: John Paul M. Lagao

Statement of Changes in Owners’ Equity (SCOE)- Shows the changes in the capital or equity account
through: Investments by the owner, Withdrawals by the owner, Net Income, and Net Loss.

XYZ Corporation
Statement of Cash Flows
For the year ended December 31, 20xx

Cash flows from operating activities:

Cash sales P xxx
Collections from customers xxx
Other income xxx
Payment of salaries (xxx)
Payment to suppliers (xxx)
Other operating expenses (xxx)
Net Cash Flow from operating activities P xxx

Cash flows from investing activities:

Disposal of fixed assets P xxx
Acquisition of fixed assets (xxx)
Investment in stocks/bonds (xxx)
Net Cash Flow from investing activities P xxx

Cash flows from financing activities:

Receipt of bank loans P xxx
Issuance of stocks/bonds xxx
Payment of bank loans (xxx)
Net Cash Flow from financing activities P xxx
Net Cash Flow (Increase/Decrease in Cash) P xxx
Add: Cash-Beginning balance xxx
CASH-Ending balance P XXXX
Figure 4: Statement of Cash Flows (SCF)

Fundamental Concepts:
a. Entity Concept
b. Periodicity Concept
c. Stable Monetary Unit Concept
d. Accrual Basis
e. Going Concern

Basic Principles:
a. Objectivity principle
b. Historical Cost principle
c. Revenue Recognition principle
d. Expense Recognition principle
e. Adequate Disclosure
f. Materiality Principle
g. Consistency Principle
h. Duality Principle

Accounting Equation:
In Figure no. 2, the accounting equation was mentioned which states that Assets = Liabilities + Equity.
The owners’ equity is affected by the result of the business’ operation or the SCI. This equation is to be
maintained in recording all accountable transactions and events.

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Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 2
Grade Level/Section: Grade 12- ABM

MODULE 1 – FABM 2 Subject Teacher: John Paul M. Lagao

Accounting Cycle:
In Figure no. 1, the accounting cycle was illustrated to give learners a bird’s eye view of the entire
accounting process that normally happens in a business. The Accounting Cycle is divided into three
(3) phases of the business operation or accounting period namely:
a. During the accounting period
b. At the end of the accounting period
c. At the start of the next accounting period

The Rules of Debit and Credit

1. The Debits must always EQUAL Credits. The two-fold effect of a transaction or an event is
always recorded in accounting as a debit and credit. For every debit, there must be a
matching credit. Hence, this recording method is called the “double entry system”.

2. An increase in asset and expense must be recorded as a debit (normal balance). An increase
in liability, capital, and revenue must be recorded as a credit (normal balance).

3. A decrease in asset and expense must be recorded as a credit. A decrease in liability, capital,
and revenue must be recorded as a debit.

Recording and Classifying of Transactions

The recording and classifying of transactions presented here is only to complete your understanding
of the rules of debit and credit and it’s connection to the accounting equation. Classifying phase
involves the posting of journal entries into the ledger accounts to determine the unadjusted balance
of accounts. The entries made in the journal are to be transferred to the same debits and credits in
the respective ledger of each account. To check the accuracy of the posting, a Trial Balance is to
be prepared.

Measurement of Accountable Transactions:

In accounting, measurement of accountable transaction is guided by this maxim:
“ Value received = Valued parted with ”

Rules in measurement:
A. If entity gives asset – use Historical Cost Principle
GR: Value of the asset received is measured at the book value of asset given up, if the entity
doesn’t receive assets in return.
Exception to the GR: If the entity receives another asset in exchange.
a) Non-Cash asset received is valued at the fair value of asset given up (FVAGU)
b) Cash received is always measured at its fair value which is equal to its face value.
B. In cases where entity doesn’t give asset – use the Fair Value Principle
a) Only rule – Value received shall be measured at the fair value of the item received since
there is no Value parted with.

Fair value, also known as the fair market value is the price at which an independent and
willing buyer and willing seller exchange items in arm’s length transaction. According to IFRS
13, it is the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.

Book values, also known as the carrying value, is defined as the recorded value of an asset in
the accounting books of the entity.

The order of priority in using measurement values should be fair value of asset given up
(FVAGU), fair value of asset received (FVAR) if this is more evident than the FVAGU, then book
value of asset given up (BVAGU) if FVAGU and FVAR can’t be determined or the exchange
has no commercial substance.

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Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 2
Grade Level/Section: Grade 12- ABM

MODULE 1 – FABM 2 Subject Teacher: John Paul M. Lagao

Adjusting phase in the Accounting Cycle

There are events that cause silent or gradual changes on the elements of financial statements but
they are not directly observable and not usually captured by the accountant or bookkeeper during
the accounting process. Accountants need to record these accountable events in the accounting
books thru adjustment called “adjusting entries”. Adjusting entries are made at the end of the
accounting period in order to have fairly presented financial statements. Each adjusting entry affects
a balance sheet account and an

Adjusting entries are required for the following items:

1) Accrual of income
2) Accrual of expense
3) Deferral of expense or prepayments
a. Asset method
b. Expense method
4) Deferral of pre-collection
a. Liability method
b. Income method
5) Bad debts expense/Doubtful accounts expense ☺
a. Based on revenue
b. Based on accounts receivable
c. Aging of accounts receivable
6) Depreciation expense (systematic allocation) ☺

Deferral – is the postponement of the recognition of “an expense already paid but not yet incurred”
or of “a revenue already collected but not yet earned”.

Accrual – is the recognition of “an expense already incurred but not yet paid”, or “revenue earned
but not yet collected”.

Illustration no. 4: Accrual of Income and expense

ECQ Co. gave GCQ Inc. a ₱100,000 promissory note which pays 12% interest P.A. on October 1,
2019. The note has a maturity of 6 months.
To analyze this problem, draw a timeline as your guide. Determine the important dates, the date of
the note, the maturity date of the note, the cut-off date (end of year or end of accounting period),
then mark these on the timeline.

Analysis: The amount of ₱6,000 will

be collected and recorded on
March 31, 2020. However, Under
the accrual basis of accounting
and realization concept, a portion
of the interest is already earned
from October 1 to December 31,
2019 that is called “accrued
income”. On the part of the
borrower, that portion is referred to
as “accrued expense”.

The adjusting entry to record accrual of income would be:

Dec. 31 Accrued Interest Income 3,000
Interest Income 3,000
To record accrued interest income

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Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 2
Grade Level/Section: Grade 12- ABM

MODULE 1 – FABM 2 Subject Teacher: John Paul M. Lagao

The lender (GCQ Inc.) should recognize an income due to passage of time. The account title
“Interest Receivable” can be used in lieu of Accrued Interest Income which is an asset account.

The adjusting entry to record accrual of expense would be:

Dec. 31 Interest expense 3,000
Accrued Interest expense 3,000
To record accrued interest expense
The borrower (ECQ Co.) should recognize an expense due to passage of time. The account title
“Interest Payable” can be used in lieu of Accrued Interest expense which is a liability account.

Illustration: Deferral of pre-payment and pre-collection.

ECQ Co. paid GCQ Inc. an amount of ₱60,000 on October 1, 2019 as payment for Office Rental
covering a 6-month period.
Analysis: The amount of ₱60,000
was already collected and
recorded on October 1, 2019.
However, Under the accrual basis
of accounting and realization
concept, a portion of the rent
income is not yet earned
representing the rental from
January 1 to March 31, 2020 that is
called “deferred income”. On the
part of the lessee, that portion is
referred to as “pre-paid expense”.

Under liability method, the adjusting entry to record deferral of pre-collection would be:
Dec. 31 Deferred rent income 30,000
Rent income 30,000
To record deferred rent income
The lessor (GCQ Inc.) should adjust the liability account at the end of the accounting period. The
account title “Unearned rent income” can be used in lieu of Deferred rent income which is a liability
account.

Under income method, the adjusting entry to record deferral of pre-collection would be:
Dec. 31 Rent income 30,000
Deferred rent income 30,000
To record deferred rent income
The lessor (GCQ Inc.) should adjust the income account at the end of the accounting period. The
account title “Unearned rent income” can be used in lieu of Deferred rent income which is a liability
account.

Under asset method, the adjusting entry to record deferral of pre-payment would be:
Dec. 31 Rent expense 30,000
Pre-paid rent 30,000
To record deferral of pre-payment
The lessee (ECQ Co.) should adjust the expense account at the end of the accounting period.

Under expense method, the adjusting entry to record deferral of pre-payment would be:
Dec. 31 Pre-paid rent 30,000
Rent expense 30,000
To record deferral of pre-payment

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Governor Pack Road, Baguio City, Philippines 2600
Tel. Nos.: (+6374) 442-3316, 442-8220; 444-2786;
442-2564; 442-8219; 442-8256; Fax No.: 442-6268
Email: email@uc-bcf.edu.ph; Website: www.uc-bcf.edu.ph
Fundamentals of Accountancy, Business and
Management 2
Grade Level/Section: Grade 12- ABM

MODULE 1 – FABM 2 Subject Teacher: John Paul M. Lagao

The lessee (ECQ Co.) should adjust the expense account at the end of the accounting period.

References:
a. Ballada, Win (2019). Fundamentals of Accountancy, Business and Management 2. Sampaloc,
Manila : DomDane Publishers, 2018
b. Ferrer, Rodiel and Millan, Zeus Vernon.(2017). Fundamentals of Accountancy, Business and
Management 2. Baguio City : Bandolin Enterprise, 2017

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