Accounting: Bullae - First Bills of Lading

ACCOUNTING
INTRODUCTION
Accounting is the system that measures business activities, processes that information into reports and
communicates the results to decision-makers. Accounting is called the language of business. No business could
operate very long without knowing how much it was earning and how much it was spending. Accounting
provides the business with these information and more. Accountants are the scorekeepers of the business. Without
accounting, a business couldn’t function optimally, it wouldn’t know where it stands financially, whether it’s
making a profit or not, and it wouldn’t its financial situation.
DEVELOPMENT OF ACCOUNTING
Primitive Accounting
- The origin of keeping accounts has been traced as far back as 8500 B.C., the date archaeologists have
established for certain clay tokens (cones, disks, spheres, and pellets) found in Mesopotamia
- Symbols impressed on  Represented such commodities (sheeps, jugs of oil, bread or clothing)
wet clay tablets replaced and were used in the Middle East to keep records
the tokens
 Often sealed in clay balls, Bullae, which were broken on delivery so the
- Some experts consider shipment could be checking against the invoice
this stage of record *Bullae – first bills of lading
keeping the beginning of
the art of writing, which spread rapidly along the trade routes and took hold throughout the known civilized
world
- Account records date back to the ancient civilizations of China, Babylonia, Greece and Egypt
- 1st Dynasty in Babylonia (2286 – 2242 B.C)
 Its law was based on the Code of Hammurabi – requires merchants trading goods to give buyers a
sealed memorandum containing the agreed price before it can be considered enforceable
 The Scribe (modern accountant) recorded the transactions on a small mound of clay with the parties
affixing their signatures on it
Served as the record of the transaction
- 3500 B.C in Babylonia
 Clay tablets – record payments of wages
 The rulers of the civilizations used accounting to keep track of the costs of labor and materials used in
building structures as in the case of the pharaohs of Egypt in building their great pyramids
- The earliest collections of understandable writing track is how many bushels of grain came into the king’s
warehouse
 Tablets – recorded who brought in the grain and how much the king tool as his share
- Abacus – ancient calculator developed by the Sumerians in 5000 BCE
- Papyrus
 Developed by ancient Egyptians in 4000 BCE
 Writing material allows for the recording of business transactions
Middle Ages
- Fra Luca Pacioli (1984)
 First described the system of double- Three Books about bookkeeping in Summa:
entry bookkeeping in 1494 used by 1. Memorandum
Venetian Merchants in his book - Where all transactions are recorded at the time they
“Summa De Arithmetica, Geometria, are conducted
Proportioni Et Proportionalita” - Prepared in chronological order
(Everything About Arithmetic, - A narrative description of the business’s economic
Geometry, Proportions And events
- Necessary because there are no documents to
support transactions
Proportionality) which include a chapter “Particularis De Computis Et Scripturis” (Details Of
Calculation And Recording)
o Became known as the method of 2. Journal
Venice or the Italian method - A private book
o He states that to be a successful, - The entries made are in chronological order and in
every merchant needs three narrative form
essential things: 3. Ledger – alphabetical listing of all the business’s
1. Sufficient cash or credit accounts along with the running balance of each
2. A good bookkeeper particular account
3. An accounting system to view
the business affairs at a glance
 “Father of Double-Entry Accounting” because he introduces the double-entry booking system
o For every debet dare (should give) there exists a debet habere (should have or should receive)
- Nicolas Petri – first person to group similar transactions in a separate record and enter the monthly totals in
the journal
ROLES OF ETHICS IN BUSINESS

Business Ethics – tells what is right or wrong in a
business situation Ethics
- Concerned with right or wrong
Profession Ethics – tells what is right or wrong in
- How conduct should be judged to be good or bad
a profession
- How we should live our lives
Ethical Dilemmas - How we should behave towards people
1. White collar crime – big sums of money are
lost annually due to fraud, embezzlement, Business
theft of equipment and supplies, false - Good source of ethical dilemmas
insurance claims, bribery, kickbacks, and - Constant search for potential advantage over others
other schemes such that business persons are under pressure to do
2. Whistle-blowing – going to the authorities whatever yields such advantages
or the media with proof that a company is - Should apply ethical rules in its decision process to
engaged in wrong-doing avoid potentially undesirable situations
3. Conflicts of Interests – when a person must
play two conflicting roles in a situation
4. Fiduciary Responsibilities
- Typically those that an attorney, CPA, financial advisor, or executor of an estate have toward a client
- The professional must put the client’s interests ahead of his own because the client has placed
significant trust in him and his professional abilities
5. Sexual harassment – unwanted repeated or aggressive sexual commentary or advances of a sexual nature
toward another person
6. Discrimination – based on race, religion, ethnicity, gender, age, marital status, or sexual preference is to be
avoided on both legal and ethical grounds
Sarbanes-Oxley Act or SOX

- In the USA signed into law by Pres. George W. Bush on July 30, 2002
- A legislation, which resulted from the widespread disillusionment about corporate integrity
- A more far reaching attempt to protect investors since Pres. Franklin Delano Roosevelt’s 1933 Securities
Act following the Great Depression
- This law applies to all companies that are required to file periodic reports to the US SEC. This Act is
significant because of its international dimension
FORMS OF BUSINESS ORGANIZATIONS

Coded by: Nathalie Claire Villena
Sole Proprietorship
- Has a single owner, proprietor, who generally is also the manager
- Tend to be in small service-type businesses and retail establishments
- The owner receives all the profits, absorbs all losses and is solely responsible for all debts of the business
- Accounting records of the sole proprietorship do not include the proprietor’s personal financial records
ADVANTAGES DISADVANTAGES
1. Easy to set-up and discontinue Unlimited personal liability
2. Requires a small amount of capital to start Limited management skills
3. Profits all accrue to the owner Limited access to capital
Lacks continuity in case of death or incapacity of
4. Total control on the part of the owner
the owner
Partnership
- Business owned and operated by two or General Professional Partnership – partnership
more persons who bind themselves to generally associated with the practice of law, public
contribute money, property, or industry to a accounting, medicine and other professions
common fund, with the intention of dividing
the profits among themselves
- Each partner is personally liable for any Disadvantages of a Partnership
debt incurred by the partnership  Profits are shared
- A separate organization, distinct from the  Easily dissolved and thus unstable compared to a
personal affairs of each partner corporation
Characteristics:  Mutual agency and unlimited liability may create
1. Mutual contribution – money, property or personal obligations to the partners
industry  Less effective than a corporation in raising large
2. Division of Profits or Losses – each sums of capital
partner shares in the profits or loss
3. Co-Ownership of Contributed Assets – all assets contributed in the partnership are owned by the
partnership by virtue of its separate and distinct personality
4. Mutual Agency – any partner can bind the other partners to a contract if he is acting within his express or
implied authority
5. Limited Life – a partnership may be dissolved by the admission, death, insolvency, incapacity, withdrawal
of a partner or expiration of the term specified in the partnership agreement
6. Unlimited Liability
 All partners (except a limited partner), including industrial partners, are personally liable for all debts
incurred by the partnership
 If the partnership cannot settle its obligations, creditors’ claim will be satisfied from the personal assets
of the partners but without prejudice to the rights of the separate creditors of the partners
7. Income Taxes – partnerships, except general professional partnerships, are subject to tax at the rate of 30%
(currently)
8. Partners’ Equity Accounts
 The difference lies in the number of partners’ equity accounts
 Each partner has a capital account and a withdrawal account
over PROPRIETORSHIP CORPORATION
Relative freedom and flexibility in
1. Easier and less expensive to organize
decision-making
Combines special skills, expertise and
ADVANTAGES 2. More personal and informal
experience of the partners
3. Risks are shared
4. Greater financial capability
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Corporation
- Business owned by stockholders
- An artificial being created by operation of law, having the rights of succession and the powers, attributes
and properties expressly authorized by law or incident to its existence
- The stockholders are not personally liable for the corporation’s debts
- Corporation is a separate identity
Relatively complicated in formation and
1. Has the legal capacity to act as a legal entity
management
Shareholders have limited liability (up to the shares Greater degree of government control and
2.
of stocks only) supervision
3. Continuity of existence High cost of formation and operation
Shares of stocks can be transferred without the
4. Heavier taxation than other forms of businesses
consent of the other stockholders
Minority shareholders are subservient to the wishes
5. Centralized management – Board of Directors
of the majority
6. Shareholders are not general agents of the business
7. Greater ability to acquire funds
Cooperatives
- An autonomous and duly registered association of persons, with a common bond of interest, who have
voluntarily joined together to achieve their social, economic and cultural needs and aspirations by making
equitable contributions to the capital required
- Patronizing their products and services and accepting a fair share of risks and benefits of the undertaking in
accordance with universally accepted cooperative principles (registered with the Cooperative Development
Authority CDA)
Purposes:
1. Encourage thrift and savings mobilization 9. Establish, own, lease or operate cooperative
among members banks, cooperative wholesale and retail
2. Generate funds and extend credit to members for complexes, insurance and agricultural/industrial
productive and provident purposes processing enterprises, and public markets
3. Encourage among members systematic 10. Coordinate and facilitate the activities of
production and marketing cooperatives
4. Provides goods and services and other 11. Advocate for the cause of cooperative movements
requirements to the members 12. Ensure the viability of cooperatives through the
5. Develop expertise and skills among the utilization of new technologies
members 13. Encourage and promote self-help or self-
6. Acquire lands and provide housing benefits to employment as an engine for economic growth
the members and poverty alleviation
7. Insure against losses of the members 14. Undertake any and all activities for the effective
8. Promote and advance the economic, social and and efficient implementation of the provisions of
educational status of the members the Cooperative Code
1. Unlimited life Shared control
2. Equality of members One member, one vote
3. Tax benefits
4. Limited liability
5. Greater ability to attract capital
Greater business volume resulting in bigger profits,
6.
which will be shared by more people
PURPOSE OF BUSINESS ORGANIZATIONS
The forms of business organizations are classified according to the ownership structure of the business
entity. Any of these types of activities may be performed by a business organization be it sole proprietorship,
partnership or a corporation.
Service – companies perform services for a fee (law firms, accounting and audit firms, stock brokerage, beauty
salons, and recruitment agencies)
Merchandising – companies purchased goods that are ready for sale and then sell these to customers (car dealers,
clothing stores, and supermarkets)
Manufacturing – companies buy raw materials, convert them into products and then sell the products to other
companies or to final consumers (paper mills, steel mills, car manufacturers, and drug manufacturers)
MICRO, SMALL AND MEDIUM ENTERPRISES
Micro Enterprises - Employ 10 to 99 workers

- Those with assets, before financing, of P 3.0
(before 1.5 million) or less Medium Enterprises
- Employ not more than nine workers - Have assets, before financing, of above P 15
Small Enterprises to 100 million
- Those with assets, before financing, of above - Employ 100 to 199 workers
P 3.0 (before 1.5 million) to 15 million
ACTIVITIES IN BUSINESS ORGANIZATIONS

Financing Activities
- Organizations require financial resources to Primary Sources
obtain other resources used to produce  Owners and Creditors
goods and services * Repaying the creditors and paying a return
- They compete for these resources in to the owners
financial markets  Banks and Suppliers
- The methods an organization uses to obtain
financial resources from financial markets and how it manages these resources
Investing Activities
- Managers use capital from financing
activities to acquire other resources used in Transformation process – to transform resources from
the transformation process one form to a different form, which is valuable, to meet
- Having the right mix of resources is the needs of the people
essential to efficient and effective
operations
- Involve the selection and management including disposal and replacement of long-term resources that will
be used to develop, produce, and sell goods and services
- Includes buying land, equipment, buildings
Efficient Business – one that provides goods and services
and other resources that are needed in the at low costs relative to their selling price
operation of the business, and selling these
resources when they are no longer needed Effective Business – one that is successful in providing
goods and services demanded by customers
Operating Activities
- Involve the use of resources to design, produce, distribute and market goods and services
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- Include research and development, design and engineering, purchasing, human resources, production,
distribution, marketing and selling, and servicing
- Organizations compete in supplier and labor markets for resources used in these activities
 Compete in product markets to sell goods and services created by operating activities
WHAT IS ACCOUNTING?
Accounting
- 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 (AICPA)
- An information system that measures, processes and communicates financial information about an
identifiable economic entity
Basic Function:
 The four aspects of accounting can be summed up into one basic function - the generation of relevant and
timely financial information for interested parties
Nature of Accounting
1. A Systematic Process
- A series of actions that produce something or leads to a particular result
- Process of identifying, measuring and communicating economic information to permit informed
judgements and decisions by users of the information
2. An Art – a skill acquired by experience, study or observation
3. A Service Activity
- The occupation or function of serving
- Its function is to provide quantitative information, primarily financial in nature, about economic entities
that is intended to be useful in making economic decisions
Purposes of Accounting
- The accounting function is part of business, Business Transactions – economic activities of a business
it does not operate in isolation
Transaction – must be measured in terms of money in
- Handles financial operations of a business,
order for it to be recorded
providing information and advice to other
department
- The accountant must decide when the transaction occurred (recognition), what value to place on the
transaction (valuation), and how the components of the transaction should be classified (classification)
- Provides the decision-makers with information to make reasoned choices among alternative uses of scarce
resources in the conduct of business and economic activities
Aspects/ Phases of Accounting

1. Recording – chronological writing of business transactions in the books of account as they happen
2. Classifying
- Sorting similar and related business transactions
- Reduces the effects of numerous transactions into useful groups or categories
3. Summarizing
- Preparing the periodic financial statements
- Summarizes the effects of all business transactions that occurred during some period
4. Interpreting
- Representing the quantitative and qualitative financial information about the business in a language
comprehensible to all users of financial information
- Analyzed to evaluate the liquidity, profitability and solvency of the business organization
Accounting Specialization
1. Financial Accounting – concerned with the supply of information to the owners of and entity
2. Management Accounting – concerned with the supply of information to the managers of an entity
DOUBLE ENTRY BOOKKEEPING AND ITS EVOLUTION

Why has a recording system devised in medieval times lasted for so long?
- It provides an accurate record of what has happened to a business over a specified period of time
- Information extracted from the system can help the owner of the manager operate the business much more
effectively
The bookkeeping system provides the answers to the questions:

1. What profit has the business made? 3. How much is owed to it?
2. How much does the business owe?
FUNDAMENTAL CONCEPTS
Entity Concept
- Most basic concept in accounting
- The transactions of different entities should not be accounted for together and should be evaluated
separately
- An organization or a section of an organization that stands apart from other organizations and individuals as
a separate economic unit
Periodicity Concept
- An entity’s life can be subdivided into equal time periods for reporting purposes
- Allows the users to obtain timely information to serve as a basis on making decisions about future activities
- Accounting period can either be following:
1. Calendar year – starts in January and ends in December
2. Fiscal year – a twelve-month period that starts at any month other than January and ends after twelve
months
Going Concern – assumes that a business enterprise will continue to operate indefinitely
Stable Monetary Unit Concept

- The currency of the country is unit of measure and that its purchasing power is relatively stable
- Allows accountants to add and subtract peso amounts as though each peso has the same purchasing power
as any other peso at any time
- Basis for ignoring the effects of inflation in the accounting records
GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE (GAAP)

General Acceptance of an Accounting Principle (GAAP) are rules that serve as guides in the
practice of accounting. They are the standards, assumptions, and concepts with general acceptability.
They are measurement techniques and standards used in the presentation and preparation of financial
statements. GAAP is a set of guidelines and procedures that constitute acceptable accounting practice at a
given time.
Criteria of GAAP
1. Relevance – principles result in information that is meaningful and useful to those who need to know
something about a certain organization
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2. Objectivity
- Information is not influenced by the personal bias or judgment of those who furnish it
- Connotes reliability and trustworthiness
- Connotes verifiability, which means that there is some way of finding out whether the information is
correct
3. Feasibility – it can be implemented without undue complexity or cost
Basic Principles
1. Objectivity
- Business transactions that will be recorded in the accounting books must be duly supported by
verifiable evidence (supporting documents)
- Accounting records and statements are based on the most reliable data available so that they will be as
accurate and as useful as possible
- Reliable data are verifiable when they can be confirmed by independent observers
2. Historical Cost or Cost Principle
- All properties and services acquired by the business must be recorded in their original cost
- States that acquired assets should be recorded at their actual cost and not at what management thinks
they are worth as at reporting date
3. Revenue Recognition Principle – revenue is to be recognized in the accounting period when goods are
delivered or services are rendered or performed
4. Expenses Recognition Principle – expenses should be recognized in the accounting period in which goods
and services are used up to produce revenue and not when the entity pays for those goods or services
5. Adequate Disclosure
- Requires that all relevant information that would affect the user’s understanding and assessment of the
accounting entity be disclosed in the financial statements
- All material facts that will significantly affect the financial statement must be indicated
6. Materiality
- Financial reporting is only concerned with information that is significant enough to affect evaluation
and decision
- Depends on the size and nature of the item being judged in the particular circumstances of its omission
7. Consistency Principle
- Approaches used in reporting must be uniformly employed from period to period to allow comparison
of results between time periods
- Any changes must be clearly explained
- The firms should use the same accounting method from period to period to achieve comparability over
time within a single entity
- Changes may be permitted if justifiable and disclosed in the financial statement
FUNDAMENTAL PRINCIPLES
Integrity
- Should be straightforward and honest in all professional and business relationships
- Implies fair dealing and truthfulness
- Should not be associated with reports, returns, communications or other information where they believe that
the information:
a. Contains a materially false or misleading statement
b. Contains statement or information furnished recklessly
c. Omits or obscures information required to be included where such omission or obscurity would be
misleading
Objectivity – should not allow bias, conflict of interest or undue influence of others to override professional or
business judgments
Professional Competence and Due Care

- Has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a
client or employer receives competent professional service based on current developments in practice,
legislation and techniques
- Should act diligently and in accordance with applicable technical and professional standards when
providing professional services
- They should conform with the technical and professional standards:
a. Board of Accountancy (BOA)/ Professional Regulation Commission (PRC)
b. Securities and Exchange Commission (SEC)
c. Financial Reporting Standards Council (FRSC)
d. Auditing and Assurance Standards Council (AASC)
e. Relevant Legislation
- Competent professional service – requires the exercise of sound judgment in applying professional
knowledge and skill in the performance of such service
a. Attainment of Professional Competence – the normal pattern of development starts initially with a
high standard of general education followed by specific education, training and examination in
professionally relevant subjects and whether prescribed or not, a period of work experience
b. Maintenance of Professional Competence
 Requires a continuing awareness and an understanding of relevant technical professional and
business developments
 Continuing professional development develops and maintains the capabilities that enable a
professional accountant to perform competently within the professional environments
Diligence
- Encompasses the responsibility to act with the requirements of an assignment, carefully, thoroughly and on
a timely basis
- Should take steps to ensure that those working under the professional accountant’s authority in a
professional capacity have appropriate training and supervision
- Should make clients, employers or other users of the professional services aware of limitations inherent in
the services to avoid the misinterpretation of an expression of opinion as an assertion of fact
Confidentiality
- Should respect the confidentiality of information acquired as a result of professional and business
relationships
- Should not disclose any such information to third parties without proper and specific authority unless there
is a legal or professional right or duty to disclosure
- Confidential information acquired should not be used for the personal advantage of the professional
accountant or third parties
Professional Behavior
- Should comply with relevant laws and regulations and should avoid any action that discredits the profession
- Should not bring the profession into disrepute
- Should be honest and truthful
- Should not make exaggerated claims for the services they are able to offer, the qualifications they possess,
or experience they have gained or make disparaging references or unsubstantiated comparisons to the work
of others
FUNDAMENTAL BUSINESS MODEL
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In the normal course of the business, this whole process will earn profits on which tax will have to be paid.
Any profit after tax can continue to be invested in the cycle or paid to the owners as a ‘return’ on their
investments.
1. The investor/s provide the required capital for the business. Cash invested should be held in a bank account
2. The cash in the business can be:
a. Converted into another type of asset that will be used in the business (e.g. equipment) or sold (e.g.
inventory)
b. Spent on operating costs such as salaries, rentals and utilities
1. The combination of business resources provides the basis for producing goods (products) or services
2. The sale of a product or service generates an asset called receivable. This asset once collected produces a cash
inflow
3. Cash inflow from collections will be used to pay debts including interest. The rest of the cash can be sent
back to the cycle by converting it into other assets or spent on operating costs
ACCOUNTANCY IN THE PHILIPPINES

The seeds of Philippines Accountancy as a recognized profession were planted on March 17, 1928, when
the Sixth Legislature approved Act No. 3105. From 43-registered accountant in 1923, the number of CPAs has
grown over throughout the years. Around 2,500 new CPAs are added to the roster every year.
Some Roster of Philippine CPAs
1. Don Vicente Fabella 5. Manuel Villar – former speaker of the House
- First Filipino Certified Public Accountant of Representatives
- Founder of Jose Rizal University in 1919 6. Washington SyCip – past president of the
2. Dr. Nicanor Reyes – founder and first International Federation of Accountants
President of the Far Eastern University 7. Jose W. Diokno
3. Belen Enrile-Guiterrez – first Filipino CPA 8. Wenceslao Lagumbay
4. Jaime Hernandez and Paciano Dizon – the 9. Alberto Romulo
first and second Filipino Auditor Generals of 10. Andres Soriano
the Commission on Audit 11. Manuel Moral
RA 9298, “Public Accountancy Act of 2004”

- Signed by Pres. Gloria Macapagal-Arroyo on May 13, 2004
- Regulates the practice of accountancy in the Philippines
- The state recognizes the importance of accountants in nation building and development
- The Board of Accountancy has taken the lead in raising the standards of the profession to a very high level
of excellence, as evidenced by the following developments
1. Full computerization of the CPA licensure examination
2. Upgrading of the quality of accounting education
3. Regulation of CPA firms and partnerships
4. Requirement of CPAs in civil service
Characteristics of the Profession CPAs by relying on the financial statement

1. All members of the accountancy profession they audit
are CPAs meaning they have passed the CPA 4. CPAs are members of a national organization
Licensure Examinations whose role is to ensure the continued
2. CPAs have their own body of language. They improvement of the profession to meet the
use terminology peculiar to the profession demands of the time
(e.g. Debits and Credits) Career Opportunities
3. CPAs adhere to a Code of Ethics. This code 1. Accountancy is a lucrative field, ideally suited
upholds the CPA’s responsibility to serve the to those who are self-motivated, team-
public with competence and integrity. The oriented, good communicators, with high
public, in return, expresses confidence to integrity and sees the big picture but has an
eye for the details. A high level of business 3. The professional accountant is presented with
and professional ethics is expected because a myriad of opportunities, locally and
CPAs have access to sensitive financial globally. Accounting is integral in any
information and large sums of money business endeavor
2. AICPA dubbed accounting as “1 degree with 4. The demand for accountants is ever increasing
360 degree of possibilities.”
Scope of Practice
1. Practice of Public Accountancy
- Constitute in a person, be it in his/her individual capacity (or as a partner or as a staff member) in an
accounting or auditing firm
- Holding out himself as one skilled in the knowledge, science and practice of accounting, and as a
qualified person to render professional services as a CPA
- Offering or rendering or both, to more than one client on a fee basis
Services:
a. Audit or verification of financial transaction and accounting records
b. Preparation, signing, or certification for clients of reports of audit, balance sheet and other financial,
accounting and related schedules, exhibits, statements or reports which are to be used for publication or
for credit purposes, or to be filed with a court or government agency, or to be used for any other
purpose
c. Design, installation and revision of accounting system
d. Preparation of income tax returns when related to accounting procedures
e. Represents clients before government agencies on tax and other matters related to accounting
f. Renders professional assistance in matters relating to accounting procedures and the recording and
presentation of financial facts or data
2. Practice in Commerce and Industry – constitute in a person involved in decision making requiring
professional knowledge in the science of accounting or when such employment or position requires that the
holder must be a certified public accountant
3. Practice in Education/Academe
- Constitute a person in an educational institution, which involve teaching of accounting, auditing,
management advisory service, finance, business law, taxation, and other technically related subjects
- The primary goal is “to produce competent professional accountants capable of making a positive
contribution over their lifetimes to the profession and society in which they work.”
4. Practice in Government – constitute in a person who holds (or is appointed to) a position in an accounting
professional group in government or in a government-owned and/or controlled corporation (GOCC),
including those performing proprietary functions, where decision making requires professional knowledge
in the science of accounting, or where a civil service eligibility as a CPA is a prerequisite
Professional Organization
- All registered CPAs whose names appear in the roster of CPAs shall be united and integrated through their
membership in a one and only registered and accredited national professional organization of registered and
licensed CPAs, which shall be registered with SEC as a nonprofit corporation and recognized by the Board
of Accountancy subject to the approval of the Professional Regulation Commission
- Philippine Institute of Certified Public Accountants (PiCPA)
 Integrated national professional organization of CPAs in the Philippines accredited by the BOA and the
PRC
 Founded in 1929
 Registered non-stock corporation
Objectives of the Institution:
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a. To protect and enhance the credibility of the CPA certificate in the service of the public
b. To maintain high standards in accounting education
c. To instill ideals of professionalism, ethics and competence among accountants
d. To foster unity and harmony among members
 Adheres to the highest ideals of professionalism and commitment to service and upholds such values as:
integrity, professional excellence, innovation, discipline, teamwork, social responsibility and
commitment
Accounting Standards
1. Accounting Standards Council (ASC)
- Created by PICPA to establish and improve accounting standards that will be generally accepted in the
Philippines
- Composed of 8 members – 4 from PICPA including the designated Chairman, and 1 each from SEC,
CB, PRC and FINEX
- The standards would general based on:
a. Existing practices in the Philippines
b. Research or studies by the Council
c. Locally or internationally available literature on the topic or subject
d. Statements, recommendations, studies or standards issued by other standard setting bodies such as
the International Accounting Standards Boards (ASB) nad the Financial Accounting Standards
Board (FASB)
2. Financial Reporting Standards Council (FRSC)
- New accounting standard setting body
- Composed of 15 members – with a Chairman, who had been or presently a senior accounting
practitioner in any of the scope of accounting practice and 14 each from BOA, SEC, BSP, BIR, COA
and a major organization composed of preparers and users of financial statements – 2 representatives
each from the accredited national professional organization
Core Competencies Framework for Accountants

- Where the competencies, and skill sets required of a newly admitted professional are identified through a
formal process and are later validated by business and industry and subject matter experts
- The strategic goal is to produce technically competent and ethnical professional accountants ready to
compete internationally
1. Knowledge
a. General Knowledge
 Gaining an understanding of the different cultures in the world and developing an international
perspective
 Generally believed that the traits will make Filipino CPAs prominent in the global marketplace:
1. Competency in the English language
2. Adaptability to Western business practices
3. Level of trainability
4. Good capabilities in dealing with foreign partners
b. Organizational and Business Knowledge
 CPA must be conversant of international business and have an understanding of how the global
business system works
 Must demonstrate competence in the:
1. Administrative capability and 3. Risk analysis and management
efficiency 4. Measurement
2. Decision modeling 5. Industry and sector perspective
c. Information Technology (IT) Knowledge – not only being conversant with IT concepts for business
systems but sound knowledge on internal control in computer-based systems, development standards
and practices for business systems, management of the adaptation, implementation and use of IT,
evaluation of computer business systems and managing the security of information
d. Accounting Knowledge
 Includes core knowledge related to accounting and related areas and must include proficiency in the
international accounting and auditing standards, cost management and the latest concepts in
management accounting, recent tax laws and business and commercial laws
 Includes knowledge of corporate finance and the Philippine capital markets, professional ethics and
environmental accounting and reporting
 Should demonstrate competence in the:
1. Basic Accounting and Preparation 5. Management Accounting – Information for
of Financial Statements Planning, Decision-Making and Control
2. The Accounting Profession and 6. Taxation
International Accounting Standards 7. Business and Commercial Laws
3. Advanced Financial Accounting 8. Auditing – Fundamentals
Practices and Reporting Principles 9. Auditing – Advanced Concepts
4. Management Accounting – Basic 10. Business Finance and Financial Management
Concepts
2. Skills
a. Intellectual
 Includes the ability to carry out abstract logical thinking and understand critical thinking
 Includes creative thinking or the generation of new ideas
 Visualization or ‘seeing things in the mind’s eye’
 Reasoning skills or the discovery of a rule or principle underlying the relationship between two or
more objects and applying it when solving a problem
 Must demonstrate the following:
1. Analysis
2. Problem Solving
3. Strategic/Critical Thinking
b. Interpersonal
 Involves developing the ability of CPAs to work in groups and being a team player
 Includes skills to participate as member of a team and contributing to group effort
 Teaching others new skills
 Working to satisfy clients’ expectations
 Negotiation skills and working with diversity or working well with men and women from diverse
backgrounds
 Must demonstrate attributes:
1. Being a team player 3. Discreetness, open mind and patience
2. Persuasion, confidence and 4. Capability for work and ability to respond well
diplomacy to pressure
c. Communication
 Refers to active listening skills and the ability to communicate effectively one’s points of view,
both orally and in writing, at all organization levels
 Being able to justify one’s position, deliver powerful presentations and to persuade and convince
others
 Must demonstrate skills:
1. Verbally and/or in writing explain financial/statistical/administrative matters/policies/
procedures/ regulatory matters/audit results at a level appropriate to the audience
2. Ask clear, concise and relevant questions to obtain desired information to perform a task
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3. Negotiate effectively
3. Values
a. Professional Ethics – include integrity, objectivity and independence, professional competence and
due care, confidentiality and professional behavior
b. Moral Values – to be able to discern between what is morally right or wrong
BRANCHES OF ACCOUNTING
Bookkeeping – mechanical task involving the Tax Accounting – preparation of tax returns and
collection of basic financial data consideration of tax consequences of business
transactions
Financial Accounting – recording of business
transactions, preparation of reports (general Accounting Education/Academe – formal teaching
purpose statements) of the profession in an educational institution
Management or Managerial Accounting – Accounting Research – continued development of
management decision-making, planning and the profession by endeavoring to clarify and
performance management address emerging issues through research and
sharing the results obtained with their colleagues
Cost Accounting – collection, determination,
allocation, assessment, interpretation and control Forensic Accounting (or fraud examination) – fraud
of cost data detection, fraud prevention, litigation support,
business valuations, expert witness services and
Financial Management – management of finances
other investigation services
of an organization to achieve financial objectives
International Accounting – the study of standards,
Government Accounting – identification of the
guidelines and rules of accounting, auditing and
sources and uses of government funds and
taxation that exist within each country as well as
property
comparison of those items across countries
Auditing – examination and review of accounting
reports to ascertain fairness, propriety and
reliability
FRAMEWORK
Users of Financial Information
1. External Users
- Secondary users of financial information outside the entity
- Not directly involved in the operations but decisions significantly affect the business entity
a. Financial Institutions/Creditors – determine the capacity of the business to pay obligations and
interests
b. Government – for tax purposes (BIR) and checking compliance (Securities and Exchange Commission
(SEC))
c. Potential Investors/Creditors – to make investment or to extend credit. Interested in the entity’s
financial health; be assured that investment will yield a reasonable rate of return
2. Internal Users
- Who are inside the reporting entity
- Directly involved in the managing of daily operations
- Decision makers who make strategic and operational decisions for the entity
a. Investors/Owners/Stockholders – invest or not
b. Management – set goals, evaluate progress
c. Employees – interested to determine stability and job security
Objective of Financial Statements

Classical Notion of Stewardship
- The primary users need information about the resources and claims against the resources of the entity not
only to assess the entity’s prospects for future net cash inflows but also how effectively and efficiently
management has discharged their responsibilities in using the entity’s resources (i.e. stewardship)
- Focused on how money and other assets entrusted to the steward by the owner were used, and how much
money or other assets are present at the end of the reporting period
- Financial statements show the results of stewardship of management, that is, the accountability of
management for resources entrusted to it by the owners of the business
Underlying Assumptions
- The financial statements are normally prepared on the assumption that an enterprise is a going concern and
“will continue to operate for the foreseeable future”
- It is assumed that the enterprise “has neither the intention nor the necessity of liquidation or curtailing
materially the scale of its operations”
Fundamental Qualitative Characteristics Enhancing Qualitative Characteristics

1. Relevance – Predictive value, Confirmatory 1. Comparability
Value, Materiality 2. Verifiability
2. Reliability – Faithful Representation, 3. Timeliness
Completeness, Neutrality, Freedom from Error
4. Understandability
ELEMENTS OF FINANCIAL STATEMENTS

Financial Position (Balance Sheet)
- At regular intervals the business will review the Assets, Liabilities and Equity – measurement of
status of the film’s assets, liabilities, and owner’s financial position in the Balance Sheet
equity in a formal report
Income and Expenses – measurement of
- Prepared to show the financial position on a given
performance in the Income Statement
date
1. Assets
 A resource controlled by the enterprise as a result of past events and from which future economic
benefits are expected to flow to the enterprise
 Owned by the entity
 Cash, cash equivalents, notes receivables, accounts receivables, inventories, prepaid expenses, property,
plant and equipment, investments, intangible assets and other assets
2. Liability
 Present obligation of the entity arising from the past events, the settlement (payment) of which is
expected to result in an outflow from the resources (assets) of the enterprise
 Obligations of an entity to outside parties who have furnished resources. Everything the entity owes
 Notes payable, accounts payable, accrued liabilities, unearned revenues and mortgage payable
3. Equity – the residual value in the assets after deducting all liabilities of the enterprise
Performance (Income Statement)

- A firm’s accounting records show not only increases or decreases in assets, liabilities, and owner’s equity
but the detailed results of all transactions involving REVENUES and EXPENSES
- Profit – if there is an excess of revenues over expenses
1. Income – increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decreases of liabilities resulting in increase in equity
a. Revenue
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 Arises in the course of ordinary activities of the entity
 Sales, Fees, Interest, Dividends, Royalties and Rent
b. Gains – represent increases in economic benefits and as such are not different in nature from revenue
2. Expenses – decreases in economic benefits during the accounting period in the form of outflows or
depletions of assets or incurrence of liabilities that result in decrease of equity
a. Losses – represent other items meeting the definition of expense and may or may not arise in the course
of ordinary activities of the entity
Recognition of the Elements of Financial Statements

- Process of incorporating in the balance sheet or the income statement an item that meets the definition of an
element and satisfies the criteria for recognition
- An item that meets the definition of an element should be recognized if:
a. It is probable that any future economic benefit associated with the item will flow to or from the
enterprise
b. The item has a cost or value that can be measured with reliability
Measurement of the Elements of Financial Statements

- Process of determining the monetary amounts at which the elements of the financial statement are to be
recognized and carried in the balance sheet and income statement
1. Historical Cost
a. Assets – recorded at the amount of cash or cash equivalents paid or the fair value of the consideration
given to acquire them at the time of their acquisition
b. Liabilities – recorded at the amount of proceeds received in exchange for the obligation (debt), or in
some circumstances, at the amount of cash or cash equivalents expected to be paid to satisfy the liability
(e.g. income tax)
2. Current Cost
a. Assets – carried at the amount of cash or cash equivalents that would have to be paid if the same or an
equivalent asset was acquired currently
b. Liabilities – carried at the undiscounted amount of cash or cash equivalents that would be required to
settle the obligation currently
3. Present Value
a. Assets – carried at the present discounted value of the future net cash inflows that the item is expected
to generate in the normal course of business
b. Liabilities – carried at the present discounted value of the future net cash outflows that are expected to
be required to settle the obligation in the normal course of business
4. Realizable Value
5. Settlement Value
ACCOUNTING EQUATION AND DOUBLE ENTRY SYSTEM

Account
- The basic summary device of accounting ACCOUNT TITLE
- Detailed record of the increases, decreases, and DEBIT CREDIT
balance of each element that appears in an entity’s
financial statements
Fundamental Accounting Equation

- The most basic tool in accounting ASSETS = Liabilities + Owner’s Equity
- It presents the resources controlled by Assets, LIABILITIES = Owner’s Equity – Assets
OWNER’S EQUITY = Liabilities – Assets
Liabilities and Equity
Double – Entry Booking – transaction has dual effect; every transaction affects at least two accounts (Debit (Dr.)
– left side, Credit (Cr.) – right side)
Rules of Debit and Credit – the account category or type determines how increases and decreases are recorded
Credit
Debit 1. To decrease assets
1. To increase assets 2. To increase liabilities
2. To decrease liabilities 3. To increase owner’s equity
3. To decrease owner’s equity - Credit initial investment
- Debit withdrawals - Credit additional investment
- Debit expenses - Credit revenue/income
Accounting Event – an economic occurrence that causes changes in an enterprise’s assets, liabilities and/or
equity
1. Internal Events – the use of equipment for the production of goods or services
2. External Events – the purchase of raw materials from a supplier
TRANSACTIONS
Transactions – a particular kind of event that involves the transfer of something of value between two entities
Types of Transactions
1. Source of Assets – an asset account increases and a corresponding claims (liabilities or owner’s equity)
account increase (Purchase of supplies on account and sold goods on cash on delivery basis)
2. Exchange of Assets – one asset account increases and another asset account decreases (Acquired
equipment for cash)
3. Use of Assets – an asset account decreases and a corresponding claims (liabilities or equity) account
decreases (Settled accounts payable and paid salaries of employees)
4. Exchange of Claims – one claims account increases and another claims account decreases (Received
utilities bill but did not pay)
Types of Effects
1. Increase in Assets = Increase in Liabilities (Dr. A; Cr. L)
2. Increase in Assets = Increase in Owner’s Equity (Dr. A; Cr. C)
3. Increase in One Assets = Decrease in another Assets (Dr. A; Cr. A)
4. Decrease in Assets = Decrease in Liabilities (Dr. L; Cr. A)
5. Decrease in Assets = Decrease in Owner’s Equity (Dr. C; Cr. A)
6. Increase in Liabilities = Decrease in Owner’s Equity (Dr. C; Cr. L)
7. Increase in Owner’s Equity = Decrease I Liabilities (Dr. L; Cr. C)
8. Increase in one Liability = Decrease in another Liability (Dr. L; Cr. L)
9. Increase in one Owner’s Equity = Decrease in another Owner’s Equity (Dr. C; Cr. C)
Typical Account Titles Used

1. Assets
a. Current Assets
- Expected to be realized in, or is intended for sale or consumption in the normal operating cycle
 To be realized within 12 months of the Balance Sheet
- Held primarily for being traded
- Cash or Cash equivalent unless it is restricted from being exchanged or used to settle a liability for
at least 12 months after the Balance Sheet date
(Cash, Cash equivalents, Notes Receivables, Accounts Receivables, Inventories and Prepaid Expenses)
b. Non- Current Assets – assets that will be used longer than 12 months
1. Property and Equipment (Property, Plant and Equipment)
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 Tangible assets that are held by an enterprise for use in the production or supply of goods or
services, or for rental to others, or for administrative purposes
 Expected to be used during more than one period
(Land, Building, Machinery and Equipment, Furniture and Fixtures, Motor Vehicles and
Equipment)
2. Accumulated Depreciation
 Contra account that contains the sum of the periodic depreciation charges
 The balanced of this account is deducted from the cost of the related asset
3. Intangible Assets – identifiable, nonmonetary assets without physical substance held for use in the
production or supply of goods or services, for rental to others, or for administrative purposes
2. Liabilities
a. Current Liabilities – expected to be settled in the entity’s normal operating cycle; held primarily for
the purpose of being traded
(Notes Payable, Accounts Payable, Accrued Liabilities, Unearned Revenues, and current portion of
Long – Term Debt)
b. Non – Current Liabilities – long term liabilities or obligations which are payable for a period longer
than one year
(Mortgage Payable and Bonds Payable)
3. Owner’s Equity or Capital
a. Capital – account used to record the original and additional investments of the owner of the business
entity
b. Drawing/Withdrawals – permanent withdrawal of cash or other assets by the owner of the business
c. Income Summary
- Temporary account used at the end of the accounting period to close income and expense accounts
- Shows the net income or the net loss for the period before it is closed to the capital account
4. Income Statement – accounts used are nominal or temporary
a. Revenue Or Income – inflow of money or other assets that results from sales of goods or services or
from the sum of money or property
b. Service Income – revenues earned or generated by the business in performing services for a customer
or client
c. Expense Accounts
- Expense involves the outflow of money, the use of other assets, or the incurring of a liability
- Includes cost of any material, labor, supplies, and service used in an effort to produce revenue
(Salaries Expense, Utilities Expense, Supplies Expense, Insurance Expense, Depreciation Expense,
Uncollectible Accounts Expense, Doubtful Accounts Expense, Interest Expense)
RECORDING BUSINESS TRANSACTIONS

(1) TRANSACTION ANALYSIS
Analysis of Transactions Four Basic Steps
1. Identify the transaction from source documents
2. Indicate the accounts – either assets, liabilities, equity, income or expenses – affected by the transaction
3. Ascertain whether each account is increased or decreased by the transaction
4. Using the rules of debit and credit, determine whether to debit or credit the account to record its
increase or decrease
Accounting Cycle – refers to a series of sequential steps or procedures performed to accomplish the
accounting process
1. Identification of Events to be recorded – to Step 1 to Step 3 – during the accounting period
gather information about transactions or events
generally through the source documents Step 4 to Step 9 – at the end of the accounting
period
Step 10 – at the start of the next period
2. Transactions are recorded in the journal – to record the economic impact of transactions on the firm
in a journal, which is a form that facilitates transfer to the accounts
3. Journal Entries are posted to the Ledger – to transfer the information from the journal to the ledger
for classification
4. Preparation of a Trial Balance – to provide a listing to verify the equality of debits and credits in the
ledger
5. Preparation of the Worksheet including
Adjusting Entries – to aid in the preparation Output of the Accounting Cycle – the generation
of financial statements or preparation of financial reports
6. Preparation of the Financial Statements – to 1. Internal Reports – used by those directly
provide useful information to decision-makers involved in the managing and operating of the
7. Adjusting Journal Entries are Journalized business
and Posted – to record the accruals, expiration 2. External Reports – used by individuals and
of deferrals, estimations and other events from organizations that have an economic interest in
the worksheet the business but are not part of its management
8. Closing Journal Entries are Journalized and
posted – to close temporary accounts and transfer profit to owner’s equity
9. Preparation of Post-Closing Trial Balance – to check the equality of debits and credits after the
closing entries The General Journal – shows all the effects of a
10. Reversing Journal Entries are Journalized transaction in terms of debits and credits (book of
and Posted – to simplify the recording of original entry)
certain regular transactions in the next
accounting period Posting – transferring the amounts from the general
journal to appropriate accounts in the ledger
Source Documents
- Identify and describe transactions and events Ledger
entering the accounting process - Grouping of accounts
- Original written evidences contain information - Used to classify and summarize transactions
about the nature and the amounts of the Trial Balance – listing of all ledger accounts, in
transactions order, with their respective debit or credit
- Bases for the journal entries balances
Journal
- Chronological record of the entity’s transactions
- Shows all the effects of a business transaction in
terms of debits and credits
- Each transaction is initially recorded in a journal
rather than directly in the ledger
- Book of the original entry
- General journal = simplest journal
Format:
1. Date – the year and month are not rewritten for every entry unless the year or month changes or a new
page is needed
2. Account Titles and Explanation
 Skip a line after each entry
 The account to be debited is entered at the extreme left of the first line while the account to be
credited is entered slightly indented on the next line
 A brief description of the transaction is usually made on the line below the credit
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3. P.R (Posting Reference) – will be used when the entries are posted, that is, until the amounts are
transferred to the related ledger accounts
4. Debit – the debit amount for each account is entered in this column
5. Credit – the credit amount for each account is entered in this column
Simple and Compound Entry

1. Simple Entry – only one debit account and one credit account
2. Compound Entry – an entry using three or more accounts (Total Debits = Total Credits)
(2) TRANSACTIONS ARE JOURNALIZED

Journalizing (See Appendix A)
- Process of recording a transaction
- Rules of double-entry are observed in each transaction:
1. Two or more accounts are affected by each transaction
2. The sum of the debts for every transaction equals the sum of the credits
3. The equality of the accounting equation is always maintained
Ledger
- Group of the entity’s accounts
- The reference book of the accounting system and is used to classify and summarize transactions and to
prepare data for basic financial statements
- Each account has its own record
- Every account maintains the basic format of the T-account but offers more information
- Organizes information by account
Classified into 2 groups:
1. Balance sheet or permanent accounts (assets, - Temporary or nominal accounts are used to
liabilities and owner’s equity)
gather information for a particular
2. Income statement of temporary accounts
accounting period
(income and expenses)
- At the end of the period, the balances of
Chart of Accounts (See Appendix A) these accounts are transferred to a
- Listing of all the accounts and their account permanent owner’s equity account
numbers in the ledger
- Arranged in the financial statement order, that is, assets first, followed by liabilities, owner’s equity,
income and expenses
- Should be numbered in a flexible manner to permit indexing and cross-referencing
- Where the accountant refers when analyzing transactions to identify the pertinent accounts to be
increased or deceased
Normal Balance of an Account

- Refers to the side of the account – debit or credit – where increases are recorded
- Debit – assets, owner’s withdrawal and expense accounts
- Credit – liability, owner’s equity and income accounts
- This result occurs because increases in an account are usually greater than or equal to decreases
(3) POSTING
Posting (See Appendix B)
- Transferring the amounts from the journal to the appropriate accounts in the ledger
- Debits in the journal are posted as debits in the ledger and credits in the journal as credits in the ledger
Steps:
1. Transfer the date of the transaction from the journal to the ledger
2. Transfer the page number from the journal to the journal reference (J.R) column of the ledger
3. Post the debit figure from the journal as a debit figure in the ledger and the credit figure from the
journal as a credit figure in the ledger
4. Enter the account number in the posting reference column of the journal once the figure has been posted
to the ledger
Ledger Account after Posting (See Appendix B)

- At the end of the accounting period, the debit or credit balance of each account must be determined to
come up with a trial balance
- Each account balance is determined by footing (adding) all the debits and credits
- If the sum of an account’s debits is greater than the sum of its credits, that account has a debit balance
- If the sum of its credits is greater, that account has a credit balance
(4) TRIAL BALANCE
Trial Balance (See Appendix C)
- List of all accounts with their respective debit or credit balance
- Prepared to verify the equality of debits and credits in the ledger at the end of each accounting period or
at any time the postings are updated
- Control device that helps minimize accounting errors
- The equality of the trial balance provides an interim proof of the accuracy of the records but it does not
signify the absence of errors
Preparation of a Trial Balance:
1. List the account titles in numerical order
2. Obtain the account balance of each account from the ledger and enter the debit balances in the debit
column and the credit balance in the credit column
3. Add the debit and credit columns
4. Compare the totals
Locating Errors
- An inequality in the totals of the debits and credits would automatically signal the presence of an error
1. Error in posting a transaction to the ledger
 An erroneous amount was posted to the account
 A debit entry was posted as a credit or vice versa
 A debit or credit posting was omitted
2. Error in determining the account balances
 A balance was incorrectly computed
 A balance was entered in the wrong balance column
3. Error in preparing the trial balance
 One of the columns of the trial balance was incorrectly added
 The amount of an account balance was incorrectly recorded on the trial balance
 A debit balance was recorded on the trial balance as a credit or vice versa, or balance was omitted
entirely
ADJUSTING THE ACCOUNTS

Periodicity Concept
- To provide timely information, accountants have divided the economic life of a business into artificial time
periods
- Assess financial condition and performance
21
- Ensures that accounting inf9ormation is reported at regular intervals
- Interacts with the revenue recognition and expense recognition principles to underlie the use of accruals
- To measure profit in a fair manner, entities update the income and expense accounts immediately before the
end of the period
Revenue and Expense Recognition Principles

- The process of measuring the performance of an entity requires that certain income and expense
transactions be allocated over several accounting period
- The adjustment process relies on the revenue and expense recognition principles
Revenue Recognition Principle
- Revenue should be recognized when earned
- Revenue is earned in the accounting period when the services are rendered or the goods sold are delivered
- Revenue is recognized when it is profitable that economic benefits will flow to the enterprise and these
economic benefits can be measure reliably
- Revenue shall be measured at the fair value of the consideration received or receivable
Expense Recognition Principle
- The basis for recording expenses
- Expenses are recognized in the income statement when it is probable that a decrease in future economic
benefits related to a decrease in asset or an increase in a liability has arisen
- Directs accountants to identify all expenses incurred during the accounting period, to measure the expenses
and to match these expenses against the revenues earned during that span of time
Applications:
1. Direct Association – expenses are recognized in the income statement on the basis of a direct association
between the costs incurred and the earning of specific items of income
2. Systematic and Rational Allocation
 When economic benefits are expected to arise over several accounting periods and the association with
income can only be broadly or indirectly determined, expenses are recognized in the income statement
on the basis of systematic and rational allocation procedures
 Often necessary in recognizing the expenses associated with the using up of assets such as property and
equipment, and allocation of prepaid rent and insurance
 These expenses are incurred regardless of the revenues earned during the period
3. Immediately – an expense is recognized immediately in the income statement when an expenditures
produces no future benefits
The Need for Adjustments

- Accountants make adjusting entries to reflect in the accounts information on economic activities that have
occurred but have not yet been recorded
- Adjusting entries assign revenues to the period in which they are earned, and expenses to the period in
which they are incurred
 These entries are needed to measure properly the profit for the period ad bring related assets and
liability accounts to correct balances
- Needed to ensure that the revenue recognition and expense recognition principles are followed thus
resulting to financial statements reporting the effects of all transactions at the end of the period
- Adjusting entries involve changing account balances at the end of the period from what is the current
balance of the account to what is the correct balance for proper financial reporting
Deferrals and Accruals

- Each adjusting entry affects a balance sheet account (an asset or a liability account) and an income
statement account (income or expense account)
Deferrals
- Postponement of the recognition of ‘an expense already paid but not yet incurred’ or of ‘a revenue already
collected but not yet earned’
- Deals with an amount already recorded in a balance sheet account
- The entry, in effect, decreases the balance sheet account and increases an income statement account
Needed in cases like:
1. Allocating assets to expense to reflect expenses incurred during the accounting period
2. Allocating revenues received in advance to revenue to reflect revenues earned during the accounting period
Accruals
23
- Recognition of an ‘expense already incurred but unpaid’, or ‘revenue earned but uncollected’
- Deals with an amount unrecorded in any account
- The entry, in effect, increases both a balance sheet and an income statement account
Required in cases like:
1. Accruing revenues to reflect revenues earned during the accounting period that are uncollected and
unrecorded
2. Accruing expenses to reflect expenses incurred during the accounting period that are unpaid and unrecorded
(5) ADJUSTMENTS FOR DEFERRALS (See Appendix E for alternative methods of recording deferrals)
Allocating Assets to Expenses (See Appendix D)
- Entities often make expenditures that benefit more than one period
 These expenditures generally debited to an asset account
- At the end of the accounting period, the estimated amount that has expired during the period or that has
benefited the period is transferred from the asset account to an expense account
(Prepaid expenses and depreciation of property and equipment)
1. Prepaid Expenses (See adjustments A to C)
 Expenses customarily paid in advance
 An asset not expenses
 At the end of the accounting period, a portion or all of these prepayments may have expired
o The portion of an asset that has expired becomes an expense
o Prepaid expenses expire either with the passage of time or through use and consumption
 Flow of costs from the balance sheet to the income statement:
Cost of Balance Sheet Income Statement

As insurance policies
insurance
Assets expire and supplies Revenues
policies and
Prepaid used Expenses
supplies that
Insurance Insurance Expense
will benefit
Supplies Supplies Expense
future periods
 If adjustments for prepaid expenses are not made at the end of the period, both the balance sheet
and the income statement will be misstated
a. The assets of the entity will be overstated
b. The expenses of the company will be understated
c. Owner’s equity in the balance sheet and profit in the income statement will both be overstated
2. Depreciation of Property and Equipment (See adjustments D and E)
 When an entity acquires long-lives assets such as buildings, service vehicles, computers or office
furniture
 Basically buying or prepaying for the usefulness of that asset
 Help generate income for the entity
 A portion of the cost of the assets should be reported as expense in each accounting period
 Proper accounting requires the allocation of the cost of the asset over its estimated useful life
 Depreciation or Depreciation Expense – estimated amount allocated to any one accounting period
Computing Depreciation Expense:
a. Asset cost – the amount an entity paid to acquire the depreciable asset
b. Estimated salvage value – amount that the asset can probably be sold for at the end of its
estimated useful life
c. Estimated useful life
o Estimated number of periods that an entity can make use of the asset
o An estimate, not an exact measurement
Balance Sheet Income Statement
Cost of a As the asset’s useful

depreciable Assets life expires Revenues
Service Vehicle Expenses
asset
Office Equipment Depreciation
 Straight-line Method – formula for determining the amount of depreciation expense for each
period
Asset Cost xx
Less: Estimated salvage value xx
Depreciation cost xx
Divided by: Estimated useful life xx
Depreciation Expense for each time period xx
 When recording depreciation expense, the asset account is not directly reduced
o Use of the contra account–accumulated Accumulated Depreciation – reduction is recorded
depreciation–allows the disclosure of in a contra account
the original cost of the related asset in
the balance sheet Contra Account – used to record reductions in a
o The balance of the contra account is related account and its normal balance is opposite
deducted from the cost to obtain the that of the related account
book value of the property and
equipment
Allocating Revenues Received in Advance to Revenues (See Appendix D)

Unearned revenues (See adjustment F)
- A liability
- When an entity receives cash for services or goods even before service is rendered or goods are
delivered
- When such is received in advance, the entity has an obligation to perform services or deliver goods
Balance Sheet Income Statement

Value of goods
As the goods or
or services to be Liabilities Revenues
services are provided
provided in Unearned Revenues from
future periods Revenues ____________
(5) ADJUSTMENTS FOR ACCRUALS (See Appendix E)

Accrued Expenses (See adjustments g and h)
- An entity often incurs expenses before paying for them
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- Cash payments are usually made at regular intervals of time such as weekly, monthly, quarterly or
annually
- If the accounting period ends on a date that does not coincide with the scheduled cash payment date, an
adjusting entry is needed to reflect the expense incurred since the last payment
- Helps the entity avoid the impractical preparation of hourly or daily journal entries just to accrue
expenses
(Salaries, interest, utilities and Taxes)
Accrued Revenues (See adjustment i)

- An entity may provide services during the period that are neither paid for by clients nor billed at the end
of the period
- The value of these services represents revenue earned by the entity
- Any revenue that has been earned but not recorded during the accounting period calls for an adjusting
entry that debits an asset account and credits an income account
Accrual for Uncollectible Accounts (See Appendix E)

- Entities often allow clients to purchase goods or avail of services on credit
- Some of these accounts will never be collected, hence, there is a need to reflect these as charges against
income
- An expense is recognized for the estimated uncollectible accounts in the current period, rather than
when specific accounts actually become uncollectible
 Produces a better matching of income and expenses
- Estimates may be based on credit sales for the period or on the accounts receivable balance
- A journal entry at the end of the period recognizes the bad debts as a debit to expense and a credit to
allowance for bad debts
Effects of Omitting Adjustments (See Appendix E for illustration)

- When an accountant failed to include the proper adjusting entries, the resulting financial statements will
not accurately reflect the financial position and the performance of the entity
- Inaccuracies in one accounting period can cause further inaccuracies in the statements of subsequent
periods
WORKSHEET AND FINANCIAL STATEMENTS

(5) PREPARING THE WORKSHEET (See Appendix F)
Steps: The Worksheet
1. Enter the account balances in the unadjusted - A multi-column document that provides an
trial balance columns and total the amounts efficient way to summarize the date for
- The accounts are listed in the order they financial statements
appear in the ledger - Generally prepared when it is time to adjust the
- Total debits must equal total credits accounts and prepare financial statements
- Accounts with zero balances are also - Simplifies the adjusting and closing process and
presented reveal errors
- Listing all the accounts with their balances - Not part of the ledger or the journal, nor is it a
helps identify the accounts that need financial statement
adjustments - A summary device used by the account for their
- Helps ensure the achievement of convenience
completeness and accuracy in the
adjustment process
2. Enter the adjusting entries in the adjustments columns and total the amounts
- When a worksheet is used all adjustments are first entered in the worksheet
- The same adjustments are entered in the adjustments columns of the worksheet
- As each adjustment is entered, a letter is used to identify the debit entry and the corresponding
credit entry
 The adjustments are not journalized until after the worksheet is completed and the financial
statements prepared
3. Compute each account’s adjusted trial balance by combining the unadjusted trial balance and the
adjustment figures. Enter the adjusted amounts in the adjusted trial balance columns
- Cross-footing – the adjusted trial balance prepared by combining horizontally, line by line, the
amount of each account in the unadjusted trial balance columns with the corresponding amounts in
the adjustment columns
- A simple convention to observe when extending amounts from the trial balance to the adjusted trial
balance follows:
 Add when the type of adjustment (debit or credit) is the same as the unadjusted balance
 Subtract when the type of adjustment (debit or credit) is different from the unadjusted balance
4. Extend the asset, liability and owner’s equity amounts from the adjusted trial balance columns to the
balance sheet columns. Extend the income and expense amounts to the income statement columns.
Total the statement columns
- Every account is either a balance sheet amount or an income statement account
 Asset, Liability, Capital and Withdrawal accounts are extended to the balance sheet columns
 Income and Expense accounts are moved to the income statement columns
 Debits in the adjusted trial balance remains as debits in the statement columns while credits as
credits
- Each account’s adjusted balance should appear in only one statement column
- The initial totals of the income statement and balance sheet columns are not equal
5. Compute profit/loss as the difference between total revenues and total expenses in the income
statement. Enter profit/loss as a balancing amount in the income statement. Enter profit/loss as a
balancing amount in the income statement and in the balance sheet and compute the final column totals
(See Appendix F)
- Profit/loss is equal to the difference between the debit and credit columns of the income statement
- The profit/loss should always be the amount by which the debit and credit columns for income
statement, and the debit and credit columns for balance sheet differ
- After completion, total debits and total credits in the income statement and balance sheet columns
must equal
- The profit figure is extended to the credit column of the balance sheet because profit increases
owner’s equity and increases in owner’s equity are recorded as credits
- Profit must be added and withdrawals subtracted to arrive at the ending capital balance; this is done
when the statement of changes in equity is prepared
Essence of Financial Statements

- Means by which the information accumulated Financial Statements – show the results of
and processed in financial accounting is management’s stewardship of the resources
periodically communicated to the users entrusted to it
 Without accounting information embodied
in the financial statements, users may not be able to arrive at sound economic decisions
- Objective: to provide information about financial position, financial performance, and cash flows of an
entity that is useful to a wide range of users in making economic decisions
- An entity shall present with equal prominence all of the financial statements in a complete set of
financial statements
Overall Considerations
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1. Fair presentation and Compliance with IFRS (International Financial Reporting Standards)
- The financial statement shall present fairly the financial position, financial performance and cash
flows of an entity
- Requires faithful representation of the effects of transactions, other events and conditions in
accordance with the definitions and recognition criteria for assets, liabilities, income and expenses
set out by the International Accounting Standards Board’s (IASB) Framework
- Under the International Accounting Standards (IAS) No. 1 (revised), entities are required to make
an explicit and unreserved statement of compliance with IFRS in the notes
2. Going Concern – financial statements should be prepared on a going concern basis unless management
has an intention to liquidate the entity or cease trading or has no realistic option but to do so
3. Accrual Basis of Accounting – an entity shall prepare its financial statement except for cash flow
information, using the accrual basis
4. Materiality and Aggregation
- An entity shall present separately each material class of similar items
- Material items that are dissimilar in nature or function should be separated
5. Offsetting – an entity shall not offset assets and liabilities, income and expenses unless required or
permitted by an IFRS
6. Frequency of Reporting and Comparative Information – at least annually, an entity shall present
with equal prominence each financial statement in a complete set of financial statements including
comparative information in respect of the previous period of all amounts reported in the current
period’s financial statements
7. Consistency of Presentation – shall retain the presentation and classification of items in the financial
statements in successive periods unless an alternative would be more appropriate or an IFRS requires a
change in presentation
8. Identification of the Financial Statements
- Shall clearly identify the financial statement and distinguish them from other information in the
same published document
- IFRS apply only to the financial statements and not necessarily to other information presented in an
annual report, a regulatory filing or another document
9. An entity shall clearly identified each financial statement and notes. An entity shall display
prominently the following:
a. Name of the reporting entity (company name)
b. Whether the financial statement are of the individual entity or a group of entities
c. The date of the end of the reporting period or period covered by the set of financial statements or
notes
d. The presentation currency
e. The level of rounding used in presenting amounts in the financial statement
Complete Set of Financial Statements

1. A statement of financial position as at the end of the period – lists all the assets, liabilities and equity
of an entity as at a specific date
2. A statement of comprehensive income for the period – presents a summary of the revenues and
expenses of an entity for a specific period
3. A statement of changes in equity for the period – presents a summary of the changes in capital such as
investments, profit/loss, and withdrawals during a specific period
4. A statement of cash flows for the period – reports the amount of cash received and disbursed during the
period
5. Notes, comprising a summary of significant accounting policies and other explanatory information –
the specific principles, bases, conventions, rules and practices adopted by an enterprise in preparing and
presenting financial statements
6. A statement of financial position as at the beginning of the earliest comparative period when an entity
applies an accounting policy retrospectively or makes a retrospective restatement of items in its (Notes
to) financial statements or when it reclassifies items in its financial statements – provides narrative
descriptions or disaggregation of items presented in the statements and information about items that do
not qualify for recognition in the statements
(6) PREPARING THE FINANCIAL STATEMENTS

(NOTE: Financial statements shall be presented at least annually)
Statement of Comprehensive Income (Income Statement) (See Appendix G)
- Shall present all items of income and expense recognized in a period:
1. In a single statement of comprehensive income
2. In two statements:
a. Statement displaying components or profit/loss (separate income statement)
b. Second statement beginning with profit/loss and displaying components of other
comprehensive income (statement of comprehensive income)
- Statement showing the performance of the enterprise for a given time period
- Summarizes the revenues earned and expenses incurred for that period of time
- Useful in predicting the capacity of the enterprise to generate cash flows from its existing resource base
Statements of Changes in Equity (See Appendix G)

- Summarizes the changes that occurred in owner’s equity
- Changes in an enterprise’s equity between two balance sheet dates reflect the increase or decrease in its
net assets during the period
Statement of Financial Position (Balance Sheet) (See Appendix G)

- Statement that shows the financial position or condition of an entity by listing the assets, liabilities and
owner’s equity as at a specific date
- The information needed are the net balances at the end of the period, rather than the total for the period
as in the income statement
- The interim balance for owner’s equity must be revised to include profit/loss and owner’s withdrawals
for the accounting period Liquidity – the availability of cash in the near future
Format: after taking account of the financial commitments
1. Report Format – lists the assets, followed by over this period
the liabilities then by the owner’s equity in
vertical sequence Financial Flexibility
2. Account Format – lists the assets on the left - The ability to take effective actions to alter the
and the liabilities and owner’s equity on the amounts and timings of cash flows so that it can
right respond to unexpected needs and opportunities
Classification: - Includes the ability to raise new capital or tap
 The revised PAS No. 1 does not prescribe the into unused lines of credit
order or format in which an entity presents Solvency – the availability of cash over the longer
items in the statement of financial position term to meet financial commitments as they fall
 The current and non-current distinction for due
assets and liabilities are required
 Classifying a balance sheet aids in the analysis of financial statement data
 When presentation based on liquidity provides accounting information that is reliable and more relevant
to decision-makers then an entity shall present all assets and liabilities of liquidity
1. Assets are classified and presented in decreasing order of liquidity, Cash is the most liquid, Assets
that are least likely to be converted to cash are listed last
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2. Liabilities are generally classified and presented based on time of maturity such that obligations
which are currently due are listed first
Statement of Cash Flows ((See Appendix G)

- Provides information about the cash receipts and cash payments of an entity during a period
- A formal statement that classifies cash receipts (inflows) and cash payments (outflows) into operating,
investing and financing activities
- Shows the net increase or decrease in cash during the period and the cash balance at the end of the
period
- Helps project the future net cash flows of the entity
Cash Flows from Operating Activities
 Generally the cash effects of transactions Operating Activities – generally involve providing
and other events that enter into the services, and producing and delivering goods
determination of profit/loss
Presentation:
1. Direct Method – the entity’s net cash provided by (used in) operating activities is obtained by
adding the individual operating cash inflows and the subtracting the individual operating cash
outflows
Classes:
a. Cash Inflows
o Receipts from sale of goods and performance of services
o Receipts from royalties, fees, commissions and other revenues
b. Cash Outflows
o Payments to suppliers of o Payments for taxes
goods and services o Payments for interest expense
o Payments to employees o Payments for other operating expenses
o Payments for taxes
2. Indirect Method (See Appendix G)
o Derives the net cash provided by (used in) operating activities by adjusting profit for income
and expense items not resulting from cash transactions
o The adjustment begins with profit followed by the addition of expenses and charges that did not
entail cash payments
o Increases in current assets and increases in current liabilities involved in the determination of
profit but which did not actually increase or decrease cash, are subtracted from profit
o Decreases in current assets and increases in current liabilities are added to profit to obtain net
cash provided by (used in) operating activities
Cash Flows from Investing Activities
Cash Inflows Investing Activities – includes making and collecting
1. Receipts from sale of property and loans, acquiring and disposing of investments in
equipment debt or equity securities, and obtaining and selling
2. Receipts from sale of investments in of property and equipment and other productive
debt or equity securities assets
3. Receipts from collections on notes
payable
Cash Outflows
1. Payments to acquire property and equipment
2. Payments to acquire debt or equity securities
3. Payments to make loans to others generally in the form of notes receivable
Cash Flows from Financing Activities
Cash Inflows Financing Activities – include obtaining resources
from owners and creditors
1. Receipts from investments by owners
2. Receipts from issuance of notes payable
Cash Outflows
1. Payments to owners in the form of withdrawals
2. Payments to settle notes payable
Relationships among the Financial Statements

- The financial statements are based in the same underlying data and are fundamentally related
Interrelationships:
Date at Beginning Date at End
of Period of Period
Time
Statement of Income Statement Statement of

Financial Position Statement of Cash Flows Financial Position
1. The income statement reports all
income and expenses during the period. The profit/loss is the final figure in this statement
2. The statement of changes in equity considers the profit or loss figure from the income statement as one
of the determining factors that explains the change in owner’s equity
3. The statement of financial position reports the ending owner’s equity, taken directly from the statement
of changes in equity
4. The statement of cash flows reports the net increase/decrease in cash during the period and ends with
the cash balance reported in the balance sheet. This statement is prepared based on information from the
income statement and the balance sheet
COMPLETING THE ACCOUNTING CYCLE

(7) ADJUSTMENTS ARE JOURNALIZED AND POSTED (See Appendix H)
- The adjustment process is a key element of accrual basis accounting
- The worksheet helps in the identification of the accounts that need adjustments
- This step in the accounting cycle brings the ledger into agreement with the data reported in the financial
statements
- The adjustments are journalized and posted as the closing entries are made
(8) CLOSING ENTRIES ARE JOURNALIZED AND POSTED

Closing procedure
- Temporary accounts (income, expense and withdrawal accounts) facilitate income statement
preparation
- At the end of each year the balances of these temporary accounts are transferred to the capital account
 The balance of the owner’s capital Income Summary (summary account) – used to
account represents the cumulative net close the income and expense accounts
result of income, expense and
withdrawal transactions
 A temporary account is said to be closed when an entry is made such that its balance becomes zero
- Closing simply transfers the balance of one account to another account
Steps:
1. Close the income account (See Appendix I)
 Income accounts have credit balances before the closing entries are posted
 An entry debiting each revenue account in the amount of its balance is needed to close the account
 The credit is made to the income summary account
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
The dual effect of the entry is to make the balances of the income accounts equal to zero, and to
transfer the balances in total to the credit side of the income summary account
2. Close the expense account (See Appendix I)
 Expense accounts have debit balances before the closing entries are posted
 A compound entry is needed crediting each expense account for its balance and debiting the income
summary for the total
 The effect of posting the closing entry is to reduce the expense account balances to zero and to
transfer the total of the account balances to the debit side of the income summary account
3. Close the income summary account (See Appendix I)
 After posting the closing entries involving the income and expense accounts, the balance of the
income summary account will be equal to the profit/loss for the period
 The income summary account, regardless of the nature of its balance, must be closed to the capital
account
 The effect of posting this closing entry is to close the income summary account balance and to
transfer the balance to Yacapin’s capital account for the profit
4. Close the withdrawal account (See Appendix I)
 The withdrawal account shows the amount by which capital is reduced during the period by
withdrawals of cash or other assets of the business by the owner for personal use
 The debit balance of the withdrawal account must be closed to the capital account
 The effect of posting this closing entry is to close the withdrawal account and to transfer the
balance to the capital account
(9) PREPARATION OF POST-CLOSING TRIAL BALANCE (See Appendix J)

- It is possible to commit and error in posting the adjustments and closing entries to the ledger accounts,
thus, it is necessary to test the equality of the accounts by preparing a new trial balance (Post-closing
trial balance)
- Verifies that all the debits equal the credits in the trail balance
- Contains only balance sheet items such as assets, liabilities and ending capital because all income and
expense accounts, as well as the withdrawal account, have zero balances
- Only the balance sheet accounts have balances because all the income statement accounts have been
closed
(10) REVERSING ENTRIES (See Appendix K)

- A journal entry which is exact opposite of a related adjusting entry made at the end of the period
- Basically a bookkeeping technique made to simplify the recording of regular transactions in the next
accounting period
- Reversing entries are optional (Reversal of the adjusting entry made)
- The act of reversing a previously recorded adjusting entry should not lead us to the conclusion that the
entries reversed are unnecessary or inaccurate
- A reversing entry should be made for any adjusting entry that increased an asset or a liability account
 All accruals reversed but only deferrals initially recorded in income statement–income or expense–
accounts are reversed
- An accounting procedure that helps to solve difficult problem
MERCHANDISING OPERATIONS
Service Business - Profit is measured as the difference between
- Service companies perform services for a fee revenues from services and expenses
- In ascertaining profit, a basic income statement Merchandising Business
is all that is needed - Merchandising companies earn profit by buying
and selling goods
- Net sales arise from the sale of goods while cost of inventory the entity has sold to customers
of sales or cost of goods sold represents the cost
Comparison of Income Statements (See Appendix L)

- These entities use the same basic accounting methods as service companies, but the process of buying and
selling merchandise requires some additional accounts and concepts
- This process results in a more complex income statement
- To provide a better measure of performance, the income statement of a merchandising business is presented
with additional items
Service Company Merchandising Company
Income Statement Income Statement
Revenues from Services Net Sales
minus
Cost of Sales
minus equals
Gross Profits
add or minus
Expenses Income or Expenses
equals equals
Profit Profit
Operating Cycle of a Merchandising Business

- The merchandising entity purchases inventory,
sells the inventory and uses the cash to
purchase more inventory – and the cycle
continues
- For cash sales, the cycle is form cash to
inventory and back to cash
- For sales on account, the cycle is from cash to
inventory to accounts receivable and back to
cash
- The faster the sale of inventory and the collection of cash, the higher the profits
Source of Documents
- Merchandising businesses use various business forms and documents to help identify the transactions that
should be recorded in the books
- Contain vital information about the nature and amount of the transactions
1. Sales Invoice
 Prepared by the seller of goods and sent to the buyer
 Contains information such as amount sales, payment terms, transportation, buyer’s info, etc
2. Bill of Lading – issued by the carrier-trucking, shipping, airline-that specifies contractual conditions and
terms of delivery such as freight terms, time, place, and person named to receive the goods
3. Statement of Account – a formal notice to the debtor detailing the accounts already due
4. Official Receipt
 Evidences the receipt of cash by the seller or the authorized representatives
 Notes the invoices paid and other details of payment
5. Deposit Slips – printed forms with the depositor’s name, account number and space for details of the
deposit
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6. Check – a written order to a bank by a depositor to pay the amount specified in the check from his checking
account to the person named in the check
7. Purchase Requisition – written request to the purchaser of an entity from an employee or user department
of the same entity that goods be purchased
8. Purchase Order – an authorization made by the buyer to the seller to deliver the merchandise as detailed in
the form
9. Receiving Report
 A document containing information about goods received from a vendor
 Formally records the quantities and description of the goods deliver
10. Credit Memorandum – form used by the seller to notify the buyer that his account is being decreased due
to errors or other factors requiring adjustments
11. Debit Memorandum – form used the buyer to inform the seller that it wants a refund or discount on its
purchase
Steps in Purchase Transaction

- When the goods are received or when title has passed, the entity should record purchases and a liability
account or cash payment
- Generally, seller recognizes sales transaction in the records when the goods have been shipped
1. When certain items are needed, the user department fills in a purchase requisition from and sends it to the
purchasing department
2. The purchasing department then prepares a purchase order after checking with the price lists, quotations,
or catalogs or approved vendors - Indicates the quantity, description, and price of the
3. After receiving the purchase order, the seller merchandise ordered
forwards an invoice to the purchaser upon - Indicates expected payment terms and transportation
shipment of the merchandise arrangements
 Invoice (Sales invoice – seller; Purchase
invoice – buyer) – defines the terms of the transaction
4. Upon receiving the shipment of merchandise, the purchaser’s receiving department sees to it that the terms
in the purchase order are complied with, and prepares a receiving report
5. Before approving the invoice for payment, the accounts payable department compares copies of the
purchase requisition, purchase order, receiving report and invoice to ensure that quantities, descriptions and
prices agree
Terms of Transaction
- Merchandise may be purchased and sold either on credit terms or for cash on delivery
Credit Period
 When goods are sold on account
 The length varies across industries and may even vary within an entity, depending on the product
 When goods are sold on credit, both parties should have an understanding as to the amount and time of
payment
o Usually printed on the sales invoice and constitute part of the sales agreement
o If the credit period is 30 days, then payment is expected within 30 days from the invoice date
 Usually described as the net credit period or net terms
Cash Discounts (See Appendix L for illustration)
 Discounts for prompt payment
 If a trade discount is also offered, cash discount is computed on the net amount after the trade discount
o Improves the seller’s cash position by reducing the amount of money in accounts receivable
 Discount Period – period covered by the discount
 Designated by such notation as “2/10” – the Purchase Discount – from the buyer’s viewpoint
buyer may avail of a 2% discount if the invoice Sales Discount – seller’s viewpoint
is paid within ten days from the invoice date
 It is usually worthwhile for the buyer to take a discount if offered although it may be necessary to borrow
the money to make the payment
Trade Discounts
 Encourage the buyers to purchase products because of markdowns from the list price
 Should not be confused with cash discounts
 Enables the suppliers to vary prices periodically without the inconvenience of revising price lists and
catalogs
 There is no trade discount account and there is no special accounting entry for this discount
 All accounting entries are based on the invoice price which is obtained by subtracting the trade discount
from the list price
Transportation Cost
o The shipping costs borne by the buyer using the periodic inventory system are debited to transportation
in account
 Cost of an asset–merchandise inventory–includes all costs incurred to bring the asset to its intended
use
 In the cost of sales section of the income statement, the balance in this account is added to purchases
in computing for the net cost of purchases for the period
o Shipping costs borne by the seller are debited to transportation out account
 This account which is also called delivery expense is an operating expense in the income statement
1. FOB Shipping Point 2. FOB Destination
 Free on board  The seller’ bears the selling costs
 The buyer shoulders the shipping  Ownership of the goods passes to the buyer
costs when the goods are received at the point of
 Ownership over the goods passes from destination
the seller to the buyer when the
inventory leaves the seller’s place
Who shoulders
Freight Terms Who pays the Shipper?
Transportation cost?
FOB Destination, Freight Prepaid Seller Seller
FOB Shipping Point, Freight Collect Buyer Buyer
FOB Destination, Freight Collect Seller Buyer
FOB Shipping Point, Freight Prepaid Buyer Seller
Inventory Systems
1. Perpetual System
- Inventory account is continuously updated
- Perpetually updating the inventory account requires that at the time of purchase, merchandise
acquisitions be recorded as debits to the inventory account
- At the time of sale, the cost of sales is determined and recorded by a debit to the cost of sales account
and a credit to inventory account
- Both the inventory and cost of sales accounts receive entries throughout the accounting period
- POS – point of sale system
- The ending inventory should reconcile with the actual physical count at the end of the period assuming
that no theft, spoilage, or error has occurred
 The count provides an independent check on the amount of inventory that should be reported at the
end of the period
2. Periodic System
- Primarily used by businesses that sell relatively inexpensive goods and that are not yet using
computerized scanning systems to analyze goods sold
35
- Only at the end of the period when the goods are counted will entries be made at the inventory account
to establish proper balance
- No entries are made to the inventory account as the merchandise is bought or sold
Net Sales (See Appendix L)

- Gross sales less sales returns and allowances and sales discounts
Gross Sales (See Appendix L)
 Consists of total sales for cash and on credit during an accounting period
 Although the cash for the sale is uncollected, the revenue is recognized as earned at the time of the sale
 The sales account is credited whenever sales on account or cash sales are made
 Only sales of merchandise held for resale are recorded in the sales account
Sales Discounts (See Appendix L)
 At the end of the accounting period, the sales discounts account has accumulated all the sales discounts
for the period
 The account is considered a contra-income account and deducted from gross sales in the income
statement
Sales Returns and Allowances (See Appendix L)
 The buyer may return the goods to the seller for credit if the sale was made in account or for cash refund
if the sale was for cash
 The seller may grant an allowance or deduction from the selling price
 A high sales returns and allowances figure is not commendable because it may signal poor quality of
goods and thus may result to dissatisfied customer
 Each return or allowance is recorded as a debit to an account sales returns and allowances
 The seller usually issues the customer a credit memorandum
 A contra-income account and is accordingly deducted from gross sales in the income statement
Transportation Out (Delivery Expense) (See Appendix L)
 When the freight term is FOB Destination, the seller shoulders the transportation costs
 When the term is FOB Shipping Point, the buyer bears the shipping costs
 Part of operating expense
Cost of Sales (Cost of Goods Sold) (See Appendix L)
 Largest single expense of the merchandising Cost of Sales – merchandise inventory at the end of
business the period is subtracted from the goods available
 Cost of inventory that the entity has sold to for sale
customers
 The goods available for sale during the year is the sum of two factors – merchandise inventory at the
beginning of the year and net cost of purchases during the period
 If an entity is able to sell all the goods available for sale during a given accounting period, the cost of
sales would then equal goods that had been available for sale
Goods Available for Sale
o Goods available for sale during a period come from beginning inventory and net cost of purchases
o The goods are either sold during the period or remain unsold at the end of the period
o Will eventually turn to expense for the period–as cost of sales or to asset–as merchandise inventory
Beginning Inventory Net Cost of Purchases
Goods Available for Sale
Ending Inventory Cost of Goods Sold

Merchandising Inventory
- Consist of goods purchased for resale
- Merchandising entities purchased their inventories from manufacturers, wholesalers and other suppliers
- Beginning and ending inventories are used in Beginning Inventory – inventory at the beginning of
calculating cost of sales in the income statement the accounting period
- The ending inventory shown in the income
statement will be the merchandise inventory to be Ending Inventory – inventory at the end of the
reported in the balance sheet accounting period
- Effectively the ending inventory of the current
period will be the beginning inventory of the next period
Net Cost of Purchases

- Consist of gross purchases minus purchases discounts and purchases returns and allowance equals net
purchases plus transportation costs
Purchases (See Appendix L)
 The purchases account (temporary account) – used only for merchandise purchased for resale
 Its sole purpose is to accumulate the total cost of merchandise purchased during an accounting period
 Purchases of other assets such as equipment should be recorded in the appropriate asset accounts
 Recording merchandise purchases at invoice is known as the gross price method of recording purchases
Purchases returns and Allowances (See Appendix L) There are costs that cannot be recovered
 Sales returns and allowances in the seller’s (ordering costs, accounting costs, transportation
books are recorded as purchases returns and costs, and interest) on the money invested in the
allowances in the books of the buyer goods. There may also be sales resulting from poor
 A contra-account and is accordingly deducted ordering or unsaleable goods. Frequent returns may
from purchases in the income statement call for new purchasing procedures or suppliers
 It is important that a separate account be used to
record purchases returns and allowances because management needs the information for decision making
Purchases Discounts (See Appendix L)
 A contra-account that is deducted from purchases on the income statement
 If the entity makes a partial payment on an invoice, most creditors will allow the company to take the
discount applicable to the partial payment
 The discount does not apply to transportation or other charges that might appear on the invoice
Transportation In (See Appendix L)
Value-Added Tax Entries (See Appendix L for illustrations)

- The value of goods or properties sold and subsequently returned or for which allowances were granted by a
VAT-registered person may be deducted from the gross sales or receipts for the quarter in which the refund
is made or a credit memorandum is issued
- Sales discounts granted or indicated in the invoice at the time of sale may be excluded from the gross sales
within the same quarter it was given
1. Input Tax – increased the amount to be paid but has no effect on the cost of the purchases
2. Output Tax – increased the amount collected but not necessarily, the sales figure
Operating Expenses
- Make up the third major part of the income statement for a merchandising entity
- Expenses, other than cost of sales, which are incurred to generate profit from the entity’s major line of
business–merchandising
- Customary to group operating expenses into useful categories
37
1. Distribution Costs or Selling Expense – expenses related directly to the entity’s efforts to generate sales
(sales salaries and commission, related payroll expenses, advertising and store displays, traveling
expenses, store supplies used, depreciation of store property and equipment, and transportation out)
2. Administrative Expense – expenses related to the general administration of the business (officers and
office salaries, related employer payroll expenses, office supplies used, depreciation of office property and
equipment, business taxes, professional services, uncollectible accounts expense and other general office
expense)
3. Other Operating Expenses – other expenses that are not related to the central operations of the business
(expenses and losses from peripheral or incidental transactions of the enterprise)
COMPLETING THE CYCLE FOR A MERCHANDISING BUSINESS

Need for a Physical Count
- During the accounting period, no entry is made to Ending Inventory
the merchandise inventory account such that its - Deducted from goods available for sale to obtain
balance at the end of the period, before adjusting cost of sales
and closing entries, is the same as the beginning - Will appear as a deduction in the cost of sales
inventory section of the income statement and as current
asset in the balance sheet
- The ending inventory amount is needed in the
computation of the cost of sales
- With no perpetual record of the cost of sales during the period, the only way to obtain the cost of the ending
inventory is to make a physical account (made at/near the balance sheet date)
1. All merchandise owned by the entity is counted
2. The quantity counted is multiplied by the cost per unit for each inventory item
3. The costs of various items are added to determine the total cost of inventory
- A reliable physical count is very significant because the ending inventory amount affects both the income
statement and the balance sheet
Merchandise Inventory at the end of the period (See Appendix M)

- At the end of the period, entries are made to reflect in the inventory account the ending balance
a. To remove the beginning balance from the merchandise inventory account and to transfer it to income
summary
b. To enter the ending balance in the merchandise inventory account and to establish it in the income
summary
- Beginning merchandise inventory and purchases are debits to income summary
- Ending merchandise inventory is a credit to income summary
1. Adjusting Entry Method (See Appendix M)
2. Closing Entry Method (See Appendix M)
Preparing the Worksheet (See Appendix M)

- Same as the service business except that it has to deal with the new accounts related to merchandising
transactions (sales, sales returns and allowances, sales discounts, purchases, purchases returns and
allowances, purchases discounts, transportation in, merchandise inventory and transportation out)
1. Trial Balance Columns
 The merchandise inventory account balance of P528,000 is the cost of beginning inventory
 The first step in the preparation of the worksheet is to enter the balances from the ledger accounts into
the trial balance columns
2. Adjustment Columns
 Under the closing entry method of handling merchandise inventory, the adjusting entries are entered the
same way of service entities (a. insurance expired during the period, b. & c. sore and office supplies, d.
& e. depreciation of building and office equipment, f. accrual of interest expense
 No adjusting entry is made for merchandise inventory because the closing entry methods was used
3. Omission of Adjusted Trial Balance Columns – used when there are many adjusting entries to be
considered
4. Income Statement and Balance Sheet Columns
a. The extension of the beginning and ending inventory balances requires some new procedures
 The beginning inventory balance of P528,000 is extended to the debit column of the income
statement
 This procedure has the effect of adding beginning inventory to net cost of purchases
b. The ending inventory balance P483,000, which is not in the trial balance is entered in the credit column
of the income statement
 This procedure has the effect of subtractiong the ending inventory from goods available for sale
 Two inventory amounts appeared in the income statement columns
o Both the beginning and ending inventory are needed in the computation of cost of sales
c. The ending inventory is also entered in the debit column of the balance sheet
Worksheet in a Perpetual Inventoy System
 The inventory amount in the trial balance is the year-end balance since the inventory account is
perpetually updated
o There will be no merchandise inventory adjusting or closing entry unlike when the periodic system is
used
o The year-end invnetoory balance will simply be extended to the debit columns of the balance sheet
 The cost of sales accounts is a ledger account in the perpetual system
o There will be no accounts for purchases, purchases returns and allowances, purchases discounts and
transportation in because information related to these items is recorded wdirectly in the inventory
account
o When the closing entries are made, cost of sales will be closed with the other temporary accounts
with debit balances
 The adjustments are handled in exactly the same way as they are handled in the periodic worksheet
 An adjusting entyr is necessary when the year-end inventory account balance does not tally with the
physical inventory amount
Preparing the Financial Statements (See Appendix M)

Income Statement Gross Profit – difference between net sales and cost
- Per revised PAS No. 1, an enterprise should of sales
present an analysis of expenses using a Operating Profit – operating income is added and
classification based on either the nature of operating expenses (like distribution costs,
expenses or their function within the entity, administrative expenses and other operating
whichever provides information that is reliable expenses) are deducted from gross profit
and more relevant Profit from continuing operations – investment
- Entities are encouraged to present the analysis revenues, other gains and losses, and finance costs
of expenses on the face of the income statement (interest expense_ are considered to arrive at profit
1. Nature of Expense Method before tax then income tax expense is deducted
 Expenses are aggregated or combined in the Profit for the period – profit from discontinued
income statement according to their nature operations (net of tax) is taken to account
and are not reallocated among various
functions within the entity
 Simple to apply in many smaller enterprises because no allocation of operating expenses between
functional classificatiosn is necessary
(Raw materials and consumables used, employee benefits expense, depreciation and amortization
expense, transportation costs, advertising costs and other operating expenses)
2. Function of Expense Method
39
 Also referred to as the “cost of sales” method, classifies expenses according to their function as part
of cost of sales, distribution/selling, administrative and other operating activities
 Often provides information that is more relevant to users than the nature of expense method but the
allocation of costs to functions can be arbitrary and involves judgement
 Provides multiple classifications and intermediate difference to highlight significant relationship
Statement and Changes in Equity (See Appendix M)
Balane Sheet (See Appendix M)
Adjusting and Closing Entries (See Appendix M)

- Except for the closing of the temporary accounts typical of a merchnadising business, the closing
procedures are the same with that of a service business
- The adjusting entries are journalized and posted to the ledger as they would be in a service entity
Post-closing Trial Balance (See Appendix M)

- Prepared to test the equaality of the accounts after posting the adjusting and closing entries
- Similar to the one discussed un the srvie business except for the addition of the merchandise inventory
account
SPECIAL AND COMBINATION JOURNALS, AND VOUCHER SYSTEM
This type of accounting system would be inadequate for a business having even a moderate volume of
transactions for some reasons:
- Only a limited number of transactions can be processed daily because only one person at any one time can
introduce entries into the general journal
- Transactions recorded in the general journal must be posted individually in the general ledger, resulting to a
great deal of posting labor
Entities adopt an accounting system that incorporates either the use of the usual special journals (non-
voucher) or the voucher system. Entities adopt an accounting systemm that uses control accounts in the general
ledger and separate subsidiary ledgers to record and control the accounts of individual customers and creditors
Control Accounts and Subsidiary Ledgers
41

Accounting: Bullae - First Bills of Lading

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ACCOUNTING

ROLES OF ETHICS IN BUSINESS

Sarbanes-Oxley Act or SOX

FORMS OF BUSINESS ORGANIZATIONS

MICRO, SMALL AND MEDIUM ENTERPRISES

Micro Enterprises - Employ 10 to 99 workers

ACTIVITIES IN BUSINESS ORGANIZATIONS

Aspects/ Phases of Accounting

DOUBLE ENTRY BOOKKEEPING AND ITS EVOLUTION

The bookkeeping system provides the answers to the questions:

Stable Monetary Unit Concept

GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE (GAAP)

Professional Competence and Due Care

FUNDAMENTAL BUSINESS MODEL

ACCOUNTANCY IN THE PHILIPPINES

RA 9298, “Public Accountancy Act of 2004”

Characteristics of the Profession CPAs by relying on the financial statement

Core Competencies Framework for Accountants

Objective of Financial Statements

Fundamental Qualitative Characteristics Enhancing Qualitative Characteristics

ELEMENTS OF FINANCIAL STATEMENTS

Performance (Income Statement)

Recognition of the Elements of Financial Statements

Measurement of the Elements of Financial Statements

ACCOUNTING EQUATION AND DOUBLE ENTRY SYSTEM

Fundamental Accounting Equation

Typical Account Titles Used

RECORDING BUSINESS TRANSACTIONS

Simple and Compound Entry

(2) TRANSACTIONS ARE JOURNALIZED

Normal Balance of an Account

Ledger Account after Posting (See Appendix B)

ADJUSTING THE ACCOUNTS

Revenue and Expense Recognition Principles

The Need for Adjustments

Deferrals and Accruals

Cost of Balance Sheet Income Statement

Balance Sheet Income Statement

Cost of a As the asset’s useful

Allocating Revenues Received in Advance to Revenues (See Appendix D)

Balance Sheet Income Statement

(5) ADJUSTMENTS FOR ACCRUALS (See Appendix E)

Accrued Revenues (See adjustment i)

Accrual for Uncollectible Accounts (See Appendix E)

Effects of Omitting Adjustments (See Appendix E for illustration)

WORKSHEET AND FINANCIAL STATEMENTS

Essence of Financial Statements

Complete Set of Financial Statements

(6) PREPARING THE FINANCIAL STATEMENTS

Statements of Changes in Equity (See Appendix G)

Statement of Financial Position (Balance Sheet) (See Appendix G)

Statement of Cash Flows ((See Appendix G)

Relationships among the Financial Statements

Statement of Income Statement Statement of

COMPLETING THE ACCOUNTING CYCLE

(8) CLOSING ENTRIES ARE JOURNALIZED AND POSTED

(9) PREPARATION OF POST-CLOSING TRIAL BALANCE (See Appendix J)

(10) REVERSING ENTRIES (See Appendix K)

Comparison of Income Statements (See Appendix L)