Accounting

Accounting Equation The T-Account

Assets = liabilities + equity
 The representation of an account universally
A=L+E
used to illustrate the effects of transactions.
Assets  Large “T” under the account name separating
the debit side and credit side.
 Economic resources controlled by a Company
which arise from past transactions and are The Rules of Debit and Credit
expected to provide future benefits
 Not necessarily Owned, Control over assets is  Debit = simply means left side
enough  Credit = simply means right side
 Not necessarily tangible, it could also be  The normal balance of an account is always on
intangible where they’re increase

Acctg Normal
Account Increase Decrease
Current Assets Non-Current Intangible equation balance
Assets Assets
Cash PPE Good will Assets Left Debit Credit Debit
Receivables (Accumulated Trade
Libilities Right Credit Debit Credit
Depreciation) marks
(Allowance for Furnitures Copy Equity Right Credit Debit Credit
Doubtful Accounts) Right
Inventory Buildings Patents Revenue Right Credit Debit Credit
Prepayments Brand
Expenses Left Debit Credit Debit
Supplies
Accrued Revenue

Liabilities Preparing Trial Balance

 Obligations of an entity resulting from past  A listing of all accounts and their balances in the
transactions of which future benefits will be ledger that aids in the proving of equality of the
expected to outflow debits and credits.
 Must be arrange according to its liquidity
Current Liabilities Non-Current Liabilities  Cash – Receivables – Prepaid – Supplies ...
Payables Notes Payable
Unearned Service Errors in Trial Balance
Revenue
Deferred Income  If the difference between the debit and credit is
Accrued Expenses equal to a certain amount in the ledger, there is
a probability that an ommission of a specific
account balance from the ledger was occured,
Equity
or such amount was not posted to the trial
 Interests or claims of owners from the business balance.
 Reflects all investments made by owner and  If the difference between the debit and credit is
results of operations of the business divided into two and it corresponds to a specific
amount in the general ledger, there is a
Equity Contra-Account probability that such account was erroneously
Owner’s equity Owner’s Drawings posted to the wrong balance.
 Slide – error resulting from adding or deleting
Revenue zeros in writing numbers, example P417.50
instead of P4,175.00.
 The amount a business charges customers for  Transposition-accidental rearrangement of
products sold or services performed numbers. For example, P1,050.00 instead of
 Service & Interest Revenue P1,500.00
 Gain on sales
 Sales Returns, Discounts, and Allowance

Expenses

 Represents the decrese in assets (or increase

on liabilities) as a result of efforts to produce
revenues
 All expenses accounts except ccrued Expenses
 Purchases
 Purchases Returns, Discounts, and Allowance
 Adjusting entries  Accrued Income
 Refers to income earned but not yet received or
 Entries made at the end of the accounting period collected. These are considered as an asset
to assign revenues to the period in which they (receivable)
are earned and expense to the period in which  I=Prt
they are incurred  Banker’s rule – 30 days in one month if the
 These entries are necessary in order for the problem is silent
Company to reflect the actual revenues,  Maturity Value = Principal + interest
expenses, assets, liabilities and equity for a
given period Accrued Income xx
 Prepaid expenses Income xx
 Unearned revenues or deferred income  Depreciation Expense
 Accrued expenses  Refers to the systematic allocation of the cost of
 Accrued revenues the property over it estimated useful life.
 Depreciation  Annual depreciation is computed using the
 Doubtful accounts following formula

Cost of the property xx

 Prepaid Expenses
Less: salvage value xx
 Refers to expenses paid but not yet incurred. Depreciable cost xx
These are expenses paid in advance Divide by: EUL xx
 Normal balance of accounts is debit Annual depreciation xx
 Prepaid account and prepaid expense
 Kung ano ang ginamit mong account yun ang  Salvage value is the amount that an asset is
method expected to be sold at the end of its estimated
 Kung ano yung binawasan mo sa adjusting yung useful life. This is also called “scrap value”
method na ginamit mo  Depreciation expense is shown in the income
 Unused portion – Post in balance sheet statement as part of expenses.
 Used potion – asset method (Adjusting)  Accumulated depreciation is shown in the
 Unused portion – expense method (Adjusting) balance sheet as a reduction from the
corresponding asset to get its net book value.
 Expense method (-adjustment)
Depreciation Expense xx
 Asset method (+ adjustment)
Accumulated depreciation xx
 Adjustments (ALWAYS EXPENSES)
 Deferred income
 Refers to income collected but not yet earned.
These are income received in advance
 Normal Balance of accounts is Credit
 Deferred revenue /accrued Income and Income
 Kung ano ang ginamit mong account yun ang
method
 Kung ano yung binawasan mo sa adjusting yung
method na ginamit mo
 Earned portion – Post in income statement
 Earned potion – Liability method ( Dr, Adjusting)
 Unearned portion –Income method (Cr,
Adjusting)
 Income method (-adjustment)
 Liability method (+ adjustment)
 Adjustments (ALWAYS INCOME)
 Accrued expenses
 These are expenses that has been incurred but
not yet paid in cash considered as liability
 I=Prt
 Banker’s rule – 30 days in one month if the
problem is silent
 Maturity Value = Principal + interest

Expense xx
Accrued Expense xx
 Doubtful Accounts
 An estimate of the amount of receivables that is  BASED ON Accounts Receivable
doubtful as to collection. Also called uncollectible  On the other hand, if it is computed based on
accounts or bad debts receivables, the resulting amount will be the
allowance for doubtful accounts.
 Doubtful accounts expense is shown in the
 We have to consider the beginning balance of
income statement as part of expenses AFDA to arrive at the DAE
 Allowance for doubtful accounts is shown in the
balance sheet as a deduction from the accounts 2012 2013 2014
receivable to get the net realizable value. Accounts
receivable 100,000 150,000 500,000
 AFDA – dumadagdag yung amount every year
(recorded kasi sa balance sheet) Sales 500,000 400,000 600,000
 Doubtful accounts may be estimated based on
sales, or based on receivables.
Doubtful accounts estimated at:
 DAE – Pag nag eend yung accounting period,
b. 5% accounts receivable
bumabalik sya sa 0
Depreciation Expense xx 2012 Doubtful accounts expense 5,000
Accumulated depreciation xx Allowance for doubtful accounts 5,000

 BASED ON SALES 2013 doubtful accounts expense 2,500

 If it is computed based on sales, the resulting Allowance for doubtful accounts 2,500
amount will be the doubtful accounts expense for
the current period 2014 doubtful accounts expense 17,500
 Kung ano yung DAE na lumabas yun na rin yung Allowance for doubtful accounts 17,500
afda mo (adjusting)
2012 2013 2014
Allowance
2012 2013 2014 beginning
0 5,000 7,500
Accounts
100,000 150,000 500,000 Add: doubtful
receivable accts exp
5,000 2,500 17,500
Sales 500,000 400,000 600,000
Allowance ending 5,000 7,500 25,000
Doubtful accounts estimated at: Balance sheet
a. 1% sales
Balance sheet 2012 2013 2014
2012 Doubtful accounts expense 5,000 Accounts
100,000 150,000 500,000
Allowance for doubtful accounts 5,000 receivable
Less: AFDA 5,000 7,500 25,000
2013 doubtful accounts expense 4,000 Net Realization
Allowance for doubtful accounts 4,000 95,000 142,500 475,000
Value

2014 doubtful accounts expense 6,000

Allowance for doubtful accounts 6,000
FINANCIAL STATEMENTS

2012 2013 2014  Provides supporting schedules (computations)

Allowance for all accounts presented in the previous
0 5,000 9,000
beginning
financial reports.
Add: doubtful
accts exp
5,000 4,000 6,000  It also shows additional information that are
necessary for users / decision-makers.
Allowance ending 5,000 9,000 15,000
 Statement of Profit or Loss
Balance sheet  Also known as “Income Statement”
Balance sheet 2012 2013 2014  The balances of NOMINAL ACCOUNTS are
Accounts forwarded to the Statement of Profit or Loss
100,000 150,000 500,000
receivable columns
Less: AFDA 5,000 9,000 15,000
 Shows the financial performance or the results
Net Realization of the operations of a Company at a given
95,000 141,000 485,000
Value
period.
 It reports all revenues (sales) and expenses of
the Company.
 Contains the result of the Company’s
performance from its operations:
 SALES > EXPENSES = NET INCOME
 SALES<EXPENSES = NET LOSS
 List all Revenue accounts and compute the
Total Revenue of the Company
 List all the operating expenses of the Company
and compute for its total
 Subtract the total revenue from total expenses to
get the Net income / loss of the Company
 For the year ended (Headings)
 Statement of Financial Position  This concept that the business enterprise is
 Also known as “Balance Sheet” separate and distinct from its owner or investor.
 The balances of REAL ACCOUNTS are  The accountant keeps all of the business
forwarded to the Statement of Financial Position transactions of a sole proprietorship separate from
Columns the business owner's personal transactions
 Shows the financial condition of a Company at a  For legal purposes, a sole proprietorship and its
given period. owner are considered to be one entity, but for
 It reports all assets, liabilities and owner’s equity accounting purposes they are considered to be
of the business. two separate entities
 Arranged based on accounting element (Assets,
Liabilities & Equity) Exchange Price or Cost Principle
 Accounts are arranged based on Liquidity
 Assets, Liabilities, revenues and expenses should
 Assets and Liabilities are classified into
be recorded base on cost.
CURRENT and NONCURRENT portion
 "cost" refers to the amount spent (cash or the cash
 The NET INCOME(Loss) must be added to the
equivalent) when an item was originally obtained,
Capital Account of the Company
whether that purchase happened last year or thirty
 As of (Headings)
years ago
 Statement of Changes in Owners’ Equity
 Cost price now may be not the cost price
 Shows all changes in Owners’ Equity
yesterday and tomorrow. It means that constantly
+ Additional Investment
changing the amount will make our asset value
- Withdrawals
unreliable.
+ Net Income
 Supported by Going Concern Principle
- Net Loss
 Statement of Cash Flows Measurement in terms of money
 Summarizes the cash receipts (inflows) and
cash disbursements (outflows) of the Company  All business transactions are measured and
based on Activity: recorded using only one measurement
Operating = performance  Economic activity is measured in Pesos, and only
Financing = loans transactions that can be expressed in Pesos are
Investing = investments recorded.

Journalizing Closing Entries Accrual Assumption

 All NOMINAL or TEMPORARY ACCOUNTS are  Assets, liabilities, revenues or expenses should be
subjected to Closing every end of the recognized based on the period they relate or
Accounting period. This is necessary to prepare based on the occurrence of the transaction/event
the beginning balances of REAL accounts in the rather than based on cash received or paid.
next accounting period.  For example, sales commission expense should
 The balances of REVENUE and EXPENSES are be reported in the period when the sales were
being CLOSED to the CAPITAL account of the made (and not reported in the period when the
Company using the INCOME SUMMARY commissions were paid).
account  Wages to employees are reported as an expense
 The procedure in journalizing closing entries in the week when the employees worked and not
include: in the week when the employees are paid.
 Close all nominal accounts with credit balance to
INCOME AND EXPENSE SUMMARY Objectivity
 Close all nominal accounts with debit balance to
 Requires that assets acquired must be verifiable
INCOME AND EXPENSE SUMMARY
and sustainable by documents such as invoices.
 Close all income and expense summary TO
 This compliments the cost principle since valuation
CAPITAL
of sources at cost is definite as it represents the
 Close drawings to CAPITAL
actual price acquiring them.

Reporting Period
BASIC PRINCIPLES
 Its life has to be divided into specific time intervals
Going Concern Principle called accounting period.
 The basic accounting period is one year with
 This principle is the Primary guide in preparing the interim reports prepared for shorter periods of time
financial statements. such as monthly, quarterly or semi-annually.
 This accounting principle assumes that a company  It is imperative that the time interval (or period of
will continue to exist long enough to carry out its time) be shown in the heading of each income
objectives and commitments and will not liquidate statement, statement of stockholders' equity,
in the foreseeable future. and statement of cash flows.

Business Entity Concept