Shuta Auq Na Pi

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LJ’S CLOSET GARMENT

TRADING
Financial
Statements
JUVY STEPHANIE A. MARTINEZ, CPA

Accountant
Disclaimer: This report is for the partial fulfilment with the requirements of the subject Enhancement Review Program in Intermediate Accounting,
Part 4 (GEN 010) in PHINMA UPANG College Urdaneta for the school year 2022-2023. The presented company is not a legal and registered
company in the Philippines. The said accountant is not yet also a licensed CPA. The CPA title was only used as a motivational tool for the student
to aspire and claim that someday he/she will gain the title in God’s chosen time.
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STATEMENT OF MANAGEMENT’S RESPONSIBILITY

FOR THE FINANCIAL STATEMENTS
The Management of LJ’s Closet Garment Trading is responsible for all information and
representations contained in the Financial Statements for the year ended December 31, 2021.
Management is likewise responsible for all the information and representations contained in the
Financial Statements accompanying in the Annual Income Tax Return covering the same reporting
period. Furthermore, the Management is responsible for all information and representations
contained in all other tax returns field for the reporting period, including but not limited to the
value added tax and/or percentage tax returns, withholding tax return, documentary stamp tax
returns and/or other tax returns.
In this regard, the management affirms that the attached financial statement for the year then ended
December 31, 2021, and the accompanying Annual Income Tax Return are in accordance with the
books and records of LJ’s Closet Garment Trading, complete and correct in all material respect.
Management likewise affirms that:
A. The Annual Income Tax Return has been prepared in accordance with the provisions of the
Tax Reform for Acceleration and Inclusion Law, as amended and pertinent tax regulations
and other issuances of the Department of Finance and the Bureau of Internal Revenue;
B. Any disparity of figures in the submitted reports arising from the preparation of financial
statements pursuant to financial accounting standards and the preparation of the income
tax return pursuant to tax accounting rules has been reported as reconciling items and
maintained in the company books and records in accordance with the requirements of
Revenue Regulation No. 6 - 2007 and other revenue issuances.
C. LJ’s Closet Garment Trading has filled all applicable tax returns, reports and statements
required to be filed under Philippine Tax Laws for the reporting period, and all taxes and
other impositions shown there on to be due and payable have been paid for the reporting
period, excepts those contested in good faith.
LOVELY JOY BERNAL

Owner
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LJ's Closet Garment Trading

Statement of Financial Position
As of December 31, 2021
ASSETS
Notes 2021
Current Assets:
Cash (2, 3) P 414,500.00
Trade and Other
Receivables (2, 3, 4) 20,900.00
Merchandise Inventory (2, 3) 25,000.00
Other Current Assets (2, 3, 5) 11,000.00
Total Current Assets 471,400.00
Non-Current Assets:
Property and Equipment (2, 3, 6) 59,000.00
Total Assets P 530,400.00
LIABILITIES & OWNER'S EQUITY
Current Liabilities:
Trade and Other Payables (2, 3, 7) P 39,025.00
Non-Current Liabilities
Notes Payable (2, 3) 180,000.00
Total Liabilities 219,025.00
Owner's Equity:
Lovely, Capital (2,3) 311,375.00
Total Liabilities and Owner's

Equity P 530,400.00
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Statement of Financial Performance
For the Year Ended December 31, 2021
Notes 2021
Net Sales (2, 3, 8) P 10,000.00
Cost of Sales (2, 3) (6,000.00)
Gross Profit 4,000.00
Expenses:
Distribution Expenses (2, 3, 9) (16,100.00)
General and Administrative
Expenses (2, 3, 10) (44,500.00)
Interest Expense (2, 3) (2,025.00)
Net Loss P (58,625.00)
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Statement of Changes in Owner's Equity
For the Years Ended December 31, 2021
2021
Lovely, Capital - January 1 P 180,000.00
Add: Additional Investment 200,000.00
Total 380,000.00
Less: Lovely, Withdrawals (10,000.00)
Net Loss (58,625.00)
Lovely, Capital - December 31 P 311,375.00
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Statement of Cash Flows
For the Year Ended December 31, 2021
2021
Cash Flows from Operating Activities:
Net Loss P (58,625.00)
Adjustments for:
Decrease (Increase) in Prepaid Rent P (45,000.00)
Decrease (Increase) in Office Supplies (2,500.00)
Decrease (Increase) in Freight Out (2,000.00)
Decrease (Increase) in Advertising Expense (2,000.00)
Decrease (Increase) in Utilities Expense (3,000.00)
Decrease (Increase) in Rent Expense (2,000.00)
Decrease (Increase) in Salaries Expense (5,000.00)
Net Cash Used in Operating Activities (61,500.00)
Cash Flows from Investing Activities:
Cash Payment for Acquisition of Equipment P (33,000.00)

Cash Used in Investing Activities (33,000.00)
Cash Flow from Financing Activities:

Additional Investment P 200,000.00
Cash Withdrawal (10,000.00)
Notes Payable 90,000.00
Cash Used in Financing Activities 280,000.00
Net Increase (Decrease) in Cash Balance P 185,500.00

Add: Cash Balance - January 1 229,000.00
Cash Balance - December 31 P 414,500.00
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LJ’s Closet Garment Trading

NOTES TO FINANCIAL STATEMENTS
December 31, 2021
Note 1 - Business information

LJ’s Closet Garment Trading was organized as a sole-proprietorship in accordance with the laws
of the Republic of the Philippines on December 31, 2020 with Bureau of Internal Revenue (BIR)
Registration No. 4CR0000421994 and DTI Registration No.123344. The enterprise is engaged in
the sale of all merchandises with clothes.
The registered office address and place of business of the enterprise is San Vicente, Urdaneta City.
The accompanying financial statements as of December 31, 2021 were authorized for issue by the
Proprietor/Manager on February 15, 2020. The management is empowered to make revisions even
after the date of issue.
Note 2 - Summary of significant accounting policies

The principal accounting policies applied in the preparation of these financial statements are set
out below. These policies have been consistently applied to all the years presented unless otherwise
stated.
Basis of preparation
The financial statements of the entity have been prepared on a historical cost basis. The financial
statements are presented in Philippine pesos, which is the entity’s functional currency. All amounts
are rounded to the nearest Philippine centavo, except when otherwise indicated.
The accompanying financial statements have been prepared on a going concern basis, which
contemplate the realization of assets and settlement of liabilities in the normal course of business.
Statement of compliance
The accompanying financial statements have been prepared in accordance with the Philippine
Financial Reporting Standards for Small and Medium-sized Enterprises (PFRS for SMEs).
Accounting policies adopted

The following sections that have been published by the International Accounting Standards Board
(IASB) and adopted by the FRSC which became effective for accounting periods beginning on or
after January 1, 2010 were adopted by the entity:
Section 3 - Financial Statement Presentation

Section 4 - Statement of Financial Position
Section 5 - Statement of Comprehensive Income and Income Statement
Section 6 - Statement of Changes in Equity
Section 7 - Statement of Cash Flows
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Section 8 - Notes to the Financial Statements

Section 10 - Accounting Policies, Estimates and Errors
Section 11 - Basic Financial Instruments
Section 13 - Inventories
Section 17 - Property and Equipment
Section 20 - Leases
Section 21 - Provisions and Contingencies
Section 22 - Liabilities and Equity
Section 23 - Revenue
Section 27 - Impairment of Assets
Section 28 - Employee Benefits
Section 29 - Income Tax
Section 32 - Events after the End of the Reporting Period
The adoption of the above sections, upon which the entity has opted to adopt early, did not have
any significant effect on the entity’s financial statements. These, however, require additional
disclosures on the entity’s financial statements.
Section 3, “Financial Statement Presentation”, explains fair presentation of financial statements,

what compliance with the PFRS for SMEs requires, and what a complete set of financial statements
is. This section prescribes the basis for presentation of general purpose financial statements for
SMEs to ensure comparability both with the entity’s financial statements of previous periods and
with the financial statements of other entities. It sets out overall requirements for the presentation
of financial statements, guidelines for their structure and minimum requirements for their content.
Section 4, “Statement of Financial Position”, sets out the information that is to be presented in a
statement of financial position and how to present it. The statement of financial position
(sometimes called the balance sheet) presents an entity’s assets, liabilities, and equity as of a
specific date—the end of the reporting period and provides the minimum line items that should be
included in the statement of financial position. However, additional line items, heading and
subtotals shall be presented if they will be relevant to an understanding of the entity's financial
position.
Section 5, “Statement of Comprehensive Income and Income Statement” requires an entity to

present its total comprehensive income for a period—i.e. its financial performance for the period—
in one or two financial statements. It sets out the information that is to be presented in those
statements and how to present it.
Section 6, “Statement of Changes in Equity”, sets out requirements for presenting the changes in
an entity’s equity for a period, either in a statement of changes in equity or, if specified conditions
are met and an entity chooses, in an income statement.
Section 7, “Statement of Cash Flows”, sets out the information that is to be presented in a statement
of cash flows and how to present it. The statement of cash flows provides information about the
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changes in cash and cash equivalents of an entity for a reporting period, showing separately
changes from operating activities, investing activities and financing activities.
Section 8, “Notes to the Financial Statements”, sets out the principles underlying information that
is to be presented in the notes to the financial statements and how to present it. Notes provide
narrative descriptions or disaggregation of items presented in those statements and information
about items that do not qualify for recognition in those statements. In addition to the requirements
of this section, nearly every other section of this PFRS requires disclosures that are normally
presented in the notes.
Section 10, “Accounting Policies, Estimates and Errors”, provides guidance for selecting and
applying the accounting policies used in preparing financial statements. It also covers changes in
accounting estimates and corrections of errors in prior period financial statements.
Section 11, “Basic Financial Instruments”, deals with recognizing, measuring and disclosing basic
financial instruments and is relevant to all entities. An entity shall recognize a financial asset or a
financial liability only when the entity becomes a party to the contractual provisions of the
instrument. When a financial asset or financial liability is recognized initially, an entity shall
measure it at the transaction price unless the arrangement constitutes, in effect, a financing
transaction.
Section 13, “Inventories”, prescribes policies for recognizing and measuring inventories and
provides guidance in determination of cost and subsequent recognition as expense. An entity shall
measure inventories at the lower of cost and net realizable value (estimated selling price less costs
to complete and sell). The write-down of inventory cost to net realizable value shall be included
in profit or loss.
Section 17, “Property and Equipment”, prescribes the accounting treatment for property and
equipment so that users of the financial statements can discern information about an entity’s
investment in its property and equipment and the changes in such investment. The principal issues
in accounting for property and equipment are the recognition of the assets, the determination of
their carrying amounts and the depreciation charges and impairment losses to be recognized in
relation to them. An entity shall measure an item of property and equipment on initial recognition
at its cost. The cost of an item of property and equipment is the cash price equivalent at the
recognition date. If payment is deferred beyond normal credit terms, the cost is the present value
of all future payments.
Section 20, “Leases”, outlines principles for classifying leases as either: (a) operating leases; or
(b) finance leases or capital leases. In an operating lease, the lessor maintains the ownership of the
asset being leased. The lessor recognizes rent income periodically for the proceeds received from
the lessee; the lessee, in turn, recognizes rent expense. In a finance or capital lease, the lessor
transfers the ownership of the leased asset to the lessee at the end of the lease term. The periodic
lease payments of the lessee acts, therefore, as a payment for the purchase of the leased property.
A finance lease is thus considered to be a specialized form of asset acquisition.
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Section 21, “Provisions and Contingencies”, outlines the recognition of provision only when: (a)
the entity has an obligation at the reporting date as a result of a past event; (b) it is probable (i.e.,
more likely than not) that the entity will be required to transfer economic benefits in settlement;
and (c) the amount of the obligation can be estimated reliably. Its objective is to ensure that
appropriate recognition criteria and measurement bases are applied to provisions, contingent
liabilities and contingent assets and that sufficient information is disclosed in the notes to enable
users to understand their nature, timing, and amount.
Section 22, “Liabilities and Equity”, establishes principles for classifying financial instruments as
either liabilities or equity and addresses accounting for equity instruments issued to individuals or
other parties acting in their capacity as investors in equity instruments (i.e. in their capacity as
owners).
Section 23, “Revenue”, prescribes the accounting treatment of revenue arising from certain types
of transactions and events. The primary issue in accounting for revenue is determining when to
recognize revenue. Revenue is recognized when it is probable that future economic benefits will
flow to the entity and these benefits can be measured reliably. This section identifies the
circumstances in which these criteria will be met and, therefore, revenue will be recognized. It also
provides practical guidance on the application of these criteria. An entity shall measure revenue at
the fair value of the consideration received or receivable.
Section 27, “Impairment of Assets”, prescribes the procedures that an entity applies to ensure that
its assets are carried at no more than their recoverable amount if its carrying amount exceeds the
amount to be recovered through use of or sale of the asset. If this is the case, the asset is described
to be impaired, and the standard requires the entity to recognize an impairment loss. Impairment
loss is to be included in profit or loss.
Section 28, “Employee Benefits”, deals with accounting and reporting by the plan to all
participants as a group. It does not deal with reports to individual participants about their retirement
benefit rights. An entity shall recognize the cost of all employee benefits to which its employees
have become entitled as a result of service rendered to the entity during the reporting period: (a)
as a liability (b) as an expense.
Section 32, “Events after the End of the Reporting Period”, defines events after the end of the
reporting period and sets out principles for recognizing, measuring and disclosing those events.
Events after the end of the reporting period are those events, favorable and unfavorable, that occur
between the end of the reporting period and the date when the financial statements are authorized
for issue. Its objective is to prescribe: (a) when an entity should adjust its financial statements for
events after the reporting period; and (b) the disclosures that an entity should give about the date
when the financial statements were authorized for issue and about events after the reporting period.
It also requires that an entity should not prepare its financial statements on a going concern basis
if events after the reporting period indicate that the going concern assumption is not appropriate.
In 2014, it is the opinion of management that assets and liabilities were recognized at fair value;
hence, these were considered deemed cost.
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The significant sections and practices of the entity are set forth to facilitate the understanding of
the financial statements:
Financial Assets
Financial assets include cash, and trade receivables.
Cash
Cash includes cash on hand, and cash in bank. Cash on hand as of the end of the period were
deposited the next banking day. Cash in bank are deposits held at call with banks. The entity
reconciles the books and bank balances regularly as part of its cash monitoring and internal control
measures.
Trade receivables
Trade receivables represent accounts receivable and are non-interest bearing measured initially
at invoice transaction price and subsequently measured at their fair value as reduced by
appropriate allowances for doubtful accounts and impairment, if any. The allowance for doubtful
accounts is the estimated amount of probable losses arising from non-collection based on past
collection experience and management’s review of the current status of the long-outstanding
receivables. The doubtful accounts expense, if any, is recognized in the income statement.
Other receivables
Other receivables include short-term notes receivable and accrued interest on notes receivable. The
accrual of interest is included in profit or loss. Interest income shall be included in other income.
In the cash flow statement the payment of interest could be included as either: (a) operating; (b)
investing; or (c) financing activity. The choice of the entity shall be applied consistently from
period to period.
Merchandise inventories
Inventories are stated at the lower of cost and net realizable value (NRV). Cost of inventories is
determined using the first-in, first-out method. NRV is the selling price in the ordinary course of
business, less the estimated cost of marketing and distribution.
Other current assets

Other current assets include store supplies and prepaid insurance. Store supplies are valued at the
lower of cost and net realizable value while prepaid insurance is measured initially at transaction
cost and subsequently measured at cost less any impairment or amortization.
Property and equipment

Property and equipment are measured initially at their cost. Property and equipment, after initial
recognition are stated at cost less any accumulated depreciation and any accumulated impairment
losses.
The initial cost of property and equipment, comprises its purchase price and any cost directly
attributable to bringing the asset to the location and condition necessary for it to be capable of
operating in the manner intended by management. These can include the costs of initial delivery
and handling, installation, and assembly, and testing of functionality.
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The following costs are not costs of an item of property and equipment, and the entity shall
recognize them as expenses when they are incurred: costs of opening a new facility, costs of
introducing a new product or service (including costs of advertising and promotional activities),
costs of conducting business in a new location or with a new class of customer (including costs of
staff training), administration and other general overhead costs and borrowing costs.
Duties and taxes related to the acquisition of property and equipment are capitalized.
Depreciation and amortization commence once the assets are available for use. It ceases when the
asset is derecognized.
Depreciation does not cease when asset becomes idle or is retired from active use unless the asset
is fully depreciated.
Depreciation is computed on a straight-line method over the estimated useful lives of the assets as
follows:
Years
Equipment 3
If there is an indication that there has been a significant change since the last annual reporting date
in the pattern by which an entity expects to consume an asset’s future economic benefits, the entity
shall review its present depreciation method and, if current expectations differ, change the
depreciation method to reflect the new pattern. The entity shall account for the change as a change
in an accounting estimate.
Factors such as a change in how an asset is used, significant unexpected wear and tear,
technological advancement, and changes in market prices may indicate that the residual value or
useful life of an asset has changed since the most recent annual reporting date. If such indicators
are present, an entity shall review its previous estimates and, if current expectations differ, amend
the residual value, depreciation method or useful life. The entity shall account for the change in
residual value, depreciation method or useful life as a change in an accounting estimate.
An item of property and equipment is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal at which time the cost, appraisal increase, and their
related accumulated depreciation are removed from the accounts. Any gains or losses on disposals
are determined by comparing the proceeds with the carrying amount and are recognized in the
income statement.
The item of property and equipment held for sale is not separately presented in the face of the
statement of financial position.
Impairment of Non-Financial Assets

The entity assesses as at reporting date whether there is an indication that an asset may be impaired.
If any such indication exists, or when annual impairment testing for an asset is required, the entity
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makes an estimate of the asset’s recoverable amount. An asset’s recoverable amount is calculated
as the higher of the asset’s or cash-generating unit’s fair value less costs to sell and its value in use
or its net selling price and is determined for an individual asset, unless the asset does not generate
cash inflows that are largely independent of those assets or groups of assets. Where the carrying
amount of an asset exceeds its recoverable amount, the asset is considered impaired and is written
down to its recoverable amount. In assessing value in use, the estimated future cash flows are
discounted to their present value using a pre-tax discount rate that reflects current market
assessment of the time value of money and the risks specific to the asset. Impairment losses are
recognized in the income statement in those expense categories consistent with the function of the
impaired asset.
An assessment is made at each reporting date as to whether there is an indication that previously
recognized impairment losses may no longer exist or may have decreased. If such indication exists,
the recoverable amount is estimated. A previously recognized impairment loss is reversed only if
there has been a change in the estimates used to determine the asset’s recoverable amount since
the last impairment loss was recognized. If that is the case, the carrying amount of the asset is
increased to its recoverable amount. That increased amount cannot exceed the carrying amount
that would have been determined, net of depreciation and amortization, had no impairment loss
been recognized for the asset in prior years. Such reversal is recognized in the income statement
unless the asset is carried at revalued amount, in which case the reversal is treated as revaluation
increase. After such a reversal, the depreciation charge is adjusted in future periods to allocate the
asset’s revised carrying amount, less any residual value, on a systematic basis over its remaining
useful life.
Financial Liabilities
Financial liabilities are recognized initially at fair value.
Financial liabilities are recognized when the entity becomes a party to the contractual provisions
of the instrument.
Financial liabilities include trade payables.
Trade payables
Trade payables are liabilities to pay for goods or services that have been received or supplied and
have been invoiced or formally agreed with the supplier.
Trade and other payables are initially recorded at transaction price and subsequently measured at
their cost less settlement payments.
Other current liabilities

Other current liabilities include statutory obligations as of the end of the period such as withholding
tax payable.
Financial Instruments
Date of Recognition
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The entity recognizes a financial asset or a financial liability in the statement of financial positions
when it becomes a party to the contractual provisions of the instrument.
Initial Recognition of Financial Instruments

All financial assets are initially recognized at fair value.
Determination of Fair Value

For all other financial instruments not listed in an active market, the fair value is determined by
using appropriate valuation techniques. Valuation techniques include net present value techniques,
comparison to similar instruments for which market observable prices exist, options pricing
models, and other relevant valuation models.
Impairment of Financial Assets

The entity assesses at each balance sheet date whether there is objective evidence that a financial
asset or group of financial assets is impaired. A financial asset or a group of financial assets is
deemed to be impaired if, and only if, there is objective evidence of impairment as a result of one
or more events that has occurred after the initial recognition of the asset (an incurred ‘loss event’)
and that loss event (or events) has an impact on the estimated future cash flows of the financial
asset or the group of financial assets that can be reliably estimated. Evidence of impairment may
include indications that they borrower or a group of borrowers is experiencing significant financial
difficulty, default or delinquency in interest or principal payments, the probability that they will
enter bankruptcy or other financial reorganization and where observable data indicate that there is
measurable decrease in the estimated future cash flows, such as changes in arrears or economic
conditions that correlate with defaults.
If there is objective evidence that an impairment loss has been incurred, the amount of the loss is
measured as the difference between the asset’s carrying amount and the present value of the
estimated future cash flows (excluding future credit losses that have not been incurred). The
carrying amount of the asset is reduced through use of an allowance account and the amount of
loss is charged to the statement of income. Interest income continues to be recognized based on
the original effective interest rate of the asset. Loans, together with the associated allowance
accounts, are written off when there is no realistic prospect of future recovery, and all collateral
has been realized. If, in a subsequent year, the amount of the estimated impairment loss decreases
because of an event occurring after the impairment was recognized, the previously recognized
impairment loss is reversed. Any subsequent reversal of an impairment loss is recognized in profit
or loss, to the extent that the carrying value of the asset does not exceed its amortized cost at the
reversal date.
For the purpose of a collective evaluation of impairment, financial assets are grouped on the basis
of such credit risk characteristics as industry, past-due status, and term.
Future cash flows in a group of financial assets that are collectively evaluated for impairment are
estimated on the basis of historical loss experience for assets with credit risk characteristics similar
to those in the group. Historical loss experience is adjusted on the basis of current observable data
to reflect the effects of current conditions that did not affect the period on which the historical loss
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experience is based and to remove the effects of conditions in the historical period that do not exist
currently. The methodology and assumptions used for estimating future cash flows are reviewed
regularly by the entity to reduce any differences between loss estimates and actual loss experience.
The entity first assesses whether objective evidence of impairment exists individually for financial
assets that are individually significant. If it is determined that no objective evidence of impairment
exists for an individual asset with similar credit risk characteristics and that group of financial
assets is collectively assessed for impairment. Assets that are individually assessed for impairment
and for which an impairment loss is on continues to be recognized are not included in a collective
assessment or impairment.
If, in a subsequent period, the amount of the impairment loss decreases and the decrease can be
related objectively to an event occurring after the impairment was recognized, the previously
recognized impairment loss is reversed. Any subsequent reversal of an impairment loss is
recognized in the statements of income, to the extent that the carrying value of the asset does not
exceed its amortized cost at the reversal date.
Derecognition of Financial Assets and Financial Liabilities

Financial assets
A financial asset (or, where applicable a part of financial asset or part of a group of similar financial
assets) is derecognized when:
● the rights to receive cash flows from the asset have expired;
● the entity retains the right to receive cash flows from the asset, but has assumed an obligation
to pay them in full without material delay to a third party under a pass-through arrangement;
or
● the entity has transferred its rights to receive cash flows from the asset and either (a) has
transferred substantially all the risks and rewards of the asset, or (b) has neither transferred nor
retained substantially all the risks and rewards of the asset but has transferred control of the
asset.
Financial Liabilities
A financial liability is derecognized when the obligation under the liability is discharged, cancelled
or expired. Where an existing financial liability is replaced by another from the same lender on
substantially different terms, or the terms of an existing liability are substantially modified, such
an exchange or modification is treated as a derecognition of the original liability and the
recognition of a new liability, and the difference in the respective carrying amounts is recognized
in the income statement.
Offsetting Financial Instruments

Financial assets and financial liabilities are offset, and the net amount reported in the statement of
financial position if, and only if, there is a currently enforceable legal right to offset the recognized
amounts and there is an intention to settle on a net basis, or to realize the asset and settle the liability
simultaneously. This is not generally the case with master netting agreements, and the related
assets and liabilities are presented gross in the statement of financial position.
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Provisions and contingencies

Provisions are recognized when the entity has a present obligation, either legal or constructive, as
a result of a past event, it is probable that an outflow of resources embodying economic benefits
will be required to settle the obligation, and the amount of the obligation can be estimated reliably.
When the entity expects reimbursement of some or all of the expenditure required to settle a
provision, the entity recognizes a separate asset for the reimbursement only when it is virtually
certain that reimbursement will be received when the obligation is settled.
The amount of the provision recognized is the best estimate of the consideration required to settle
the present obligation at the balance sheet date, taking into account the risks and uncertainties
surrounding the obligation. When a provision is measured using the cash flows estimated to settle
the present obligation, its carrying amount is the present value of those cash flows.
Provisions are reviewed at each reporting date and adjusted to reflect the current best estimate.
Contingent liabilities and assets are not recognized because their existence will be confirmed only
by the occurrence or non-occurrence of one or more uncertain future events not wholly within the
control of the entity. Contingent liabilities, if any, are disclosed, unless the possibility of an outflow
of resources embodying economic benefits is remote. Contingent assets are disclosed only when
an inflow of economic benefits is probable.
Employees’ compensation and other benefits

The entity recognizes a liability net of amounts already paid and an expense for services rendered
by employees during the accounting period. Short-term benefits given by the entity to its
employees include salaries and wages, social security contributions, short-term compensated
absences, bonuses, and other non-monetary benefits, if any.
Total equity
Total equity comprises of contributed capital, drawings, and earnings of the entity for the period.
Contributed capital is determined by the actual contributions of the owner.
Revenue and cost recognition

Revenue is recognized to the extent that it is probable that the economic benefits will flow to the
entity and the amount of revenue can be reliably measured. However, when an uncertainty arises
about the collectability of an amount already included in the revenue, the uncollectible amount, or
the amount in respect of which recovery has ceased to be probable, is recognized as an expense,
rather than as an adjustment of the amount of revenue originally recognized.
Revenue from merchandise sales is recognized when the significant risks and rewards of
ownership of the goods have passed to the buyer. Revenue is measured at the fair value of the
consideration received, excluding discounts and returns, if any, and sales taxes.
Costs of merchandise sold are recognized in profit or loss at the point of sale. Expenses are
recognized in profit or loss upon utilization of the services or when they are incurred.
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Income taxes
Current tax assets and liabilities for the current and prior periods are measured at the amount
expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used
to compute the amount are those that are enacted or substantively enacted by the balance sheet
date.
Value-added tax (VAT)

Input VAT is the 12% indirect tax paid by the entity in the course of the entity’s trade or business
on local purchase of goods or services from a VAT-registered entity.
Output VAT pertains to the 12% tax due on the sale of merchandise and exchange of taxable goods
by the entity.
If at the end of any taxable month the output VAT exceeds the input VAT, the excess shall be paid
by the entity. Any outstanding balance is included under “Other current liabilities” account in the
statement of financial position. If the input VAT exceeds the output VAT, the excess shall be
carried over to the succeeding month or months. Excess input VAT, if any, is included under
“Other current assets” account in the statement of financial position. Revenue is recognized net of
the amount of VAT.
Events after the end of the reporting period

Post-year-end events up to the date of the auditor’s report that provide additional information about
the entity’s position at the balance sheet date (adjusting events) are reflected in the financial
statements. Post-year-end events that are not adjusting events are disclosed in the notes to financial
statements when material.
Note 3 - Management’s significant accounting judgments and estimates
The preparation of the entity’s financial statements in conformity with Financial Reporting
Framework (in reference to the Philippine Financial Reporting Standards for Small and Medium-
sized Entities) requires management to make estimates and assumptions that affect the amounts
reported in the entity’s financial statements and accompanying notes. The estimates and
assumptions used in the entity’s financial statements are based upon management’s evaluation of
relevant facts and circumstances as of the date of the entity’s financial statements. Actual results
could differ from such estimates. Judgments and estimates are continually evaluated and are based
on historical experience and other factors, including expectations of future events that are believed
to be reasonable under the circumstances.
Judgments
In the process of applying the entity’s accounting policies, management has made the following
judgments, apart from those involving estimations, which have the most significant effect on
amounts recognized in the financial statements:
Page | 18
Determining functional currency

Based in economic substance of underlying circumstances relevant to the entity, the functional
currency has been determined to be the Philippine peso, which is the currency of the primary
economic environment in which the entity operates and is the currency that mainly influences the
prices of the products and services and the cost of providing such products and services.
Repairs and maintenance

Repairs and maintenance incurred by the entity have not resulted in an increase in the future
economic benefit of its property and equipment, therefore charged to operations.
Estimates
In the application of the entity’s accounting policies, management is required to make judgments,
estimates and assumptions about the carrying amounts of assets and liabilities that are not readily
apparent from other sources. The estimates and associated assumptions are based on historical
experience and other factors that are considered to be relevant. Actual results may differ from
these estimates.
The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to
accounting estimates are recognized in the period in which the estimate is revised if the revision
affects only that period or in the period of the revision and future periods if the revision affects
both current and future periods.
The following represents a summary of the significant estimates and judgments and related impact
and associated risks in the entity’s financial statements:
Estimated allowance for doubtful accounts

An allowance for doubtful accounts, if any, shall be maintained at a level considered adequate to
provide for potential uncollectible receivables. The level of this allowance is evaluated by
management on the basis of factors that affect the collectability of the accounts. These factors
include, but are not limited to, the length of the entity’s relationship with the customer, the
customer’s payment behavior and known market factors. The entity reviews the age and status of
receivables and identifies accounts that are to be provided with allowances on a continuous basis.
The amount and timing of recorded expenses for any period would differ if the entity made
different judgments or utilized different estimates. An increase in allowance for doubtful accounts
would increase the recorded operating expenses and decrease current assets.
Evaluation of asset impairment

The entity assesses the impairment of assets whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The factors that the entity considers
important which could trigger an impairment review include significant changes in asset usage,
significant decline in assets’ market value and obsolescence or physical damage of an asset. If such
indications are present and where the carrying amount of the asset exceeds its recoverable amount,
the asset is considered impaired and is written down to its recoverable amount.
Page | 19
The recoverable amount is the higher of an asset’s net selling price and value in use. The net selling
price is the amount obtainable from the sale of an asset in an arm’s length transaction while value
in use is the present value of estimated future cash flows expected to arise from the continuing use
of an asset and from its disposal at the end of its useful life. Recoverable amounts are estimated
for individual assets or, if it is not possible, for the cash-generating unit to which the asset belongs.
In determining the present value of estimated future cash flows expected to be generated from the
continued use of the assets, the entity is required to make estimates and assumptions that may
affect property and equipment.
Estimating useful lives of property and equipment

The entity estimates the useful lives of its property and equipment based on a period over which
the assets are expected to be available for use.
Financial assets and liabilities

The entity requires certain financial assets and liabilities to be at fair value, which requires use of
extensive accounting estimates and judgments. While significant components of fair value
measurement were determined using verifiable objective evidence (i.e. interest and volatility
rates), the amount of changes in fair value would differ if the entity utilized different valuation
methodologies. Any changes in fair value of these financial assets and liabilities would affect
directly the income statement and equity, as appropriate.
Revenue recognition
The entity’s revenue recognition policies require the use of estimates and assumptions that may
affect the reported amounts of revenues and receivables. Differences between the amounts initially
recognized and actual settlements are taken up in the accounts upon reconciliation. However, there
is no assurance that such use of estimates may not result to material adjustments in future periods.
Note 4 - Trade and Other Receivables 2021

This account consists of the following:
Accounts Receivable P 21,500.00

Allowance for Doubtful Accounts (600.00)
P 20,900.00
Note 5 - Other Current Assets

Office Supplies P 3,500.00

Prepaid Rent 7,500.00
P 11,000.00
Page | 20
Note 6 - Property and Equipment

Equipment P 66,000.00
Accumulated Depreciation (7,000.00)
P 59,000.00
Note 7 - Trade and Other Payables

Accounts Payable P 37,000.00

Interest Payable 2,025.00
P 39,025.00
Note 8 - Net Sales

Sales P 11,500.00
Sales Return and Allowances (1,500.00)
P 10,000.00
Notes 9 - Distribution Cost

Freight Out P 2,000.00

Advertising Expense 2,000.00
Utilities Expense 3,000.00
Bad Debt Expense 600.00
Supplies Expense 1,500.00
Depreciation Expense 7,000.00
P 16,100.00
Notes 10 - General and Administrative Expense

Rent Expense P 39,500.00

Salaries Expense 5,000.00
P 44,500.00
Page | 21
Name: Lovely Joy Bernal
1. LJ’s Closet Garment Trading

2. Sole Proprietor
3. Merchandising Business
4. Post-Closing Trial Balance

Post-Closing Trial Balance
As of January 1, 2021
ACCOUNT TITLES DEBIT CREDIT

Cash P 229,000.00
Accounts Receivable 11,500.00
Merchandise Inventory 12,500.00
Office Supplies 2,500.00
Equipment 33,000.00
Accounts Payable P 18,500.00
Notes Payable 90,000.00
Lovely, Capital 180,000.00
TOTAL P 288,500.00 P 288,500.00
The following were the transactions completed during the year.
1. January 7: Mrs. Lovely invested P200,000 in her own business.

2. February 28: Paid rent for one year worth P45,000.
3. April 13: Purchased merchandise from Mrs. Murillo on account, P18,500 terms 2/10, n/30.
4. May 5: Purchased P33,000 of computer equipment paid thru cash.
5. June 21: Purchased office supplies cost P2,500 on cash.
6. July 23: Sold merchandise on account, P11,500, FOB Destination, terms 2/10, n/30. The
cost of merchandise sold was P6,000.
7. August 25: Paid P2,000 freight on the sale of merchandise to Mrs. Bernal
8. September 27: Borrowed money from Mrs. Ramos as evidenced by promissory note
amounting to P90,000, one year, 9%.
9. October 21: Mrs. Lovely withdrew P10,000 cash for personal use.
10. November 17: Made refund to Mrs. Aquino for defective merchandise, P1,500.
11. December 30: Paid the following: Advertising, P2,000; Utilities, P3,000; Rent P2,000 and
a Salaries of P5,000.
Page | 22
Additional Information
• In the month of December 31, the estimated life of the equipment is 3 years with a residual
value of P1,500.
• The remaining office supplies amounted to P1,000. Asset method was used.
• Accrued interest on the notes payable.
• Six percent of the total receivable is not refundable.
• The remaining prepaid rent is 7,500. Asset method was used.

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Page | 1

LJ’S CLOSET GARMENT

JUVY STEPHANIE A. MARTINEZ, CPA

STATEMENT OF MANAGEMENT’S RESPONSIBILITY

LOVELY JOY BERNAL

LJ's Closet Garment Trading

Total Assets P 530,400.00

LIABILITIES & OWNER'S EQUITY

Total Liabilities 219,025.00

Total Liabilities and Owner's

LJ's Closet Garment Trading

LJ's Closet Garment Trading

LJ's Closet Garment Trading

Cash Flows from Investing Activities:

Cash Payment for Acquisition of Equipment P (33,000.00)

Cash Flow from Financing Activities:

Net Increase (Decrease) in Cash Balance P 185,500.00

LJ’s Closet Garment Trading

Note 1 - Business information

Note 2 - Summary of significant accounting policies

Accounting policies adopted

Section 3 - Financial Statement Presentation

Section 8 - Notes to the Financial Statements

Section 3, “Financial Statement Presentation”, explains fair presentation of financial statements,

Section 5, “Statement of Comprehensive Income and Income Statement” requires an entity to

Other current assets

Property and equipment

Impairment of Non-Financial Assets

Financial liabilities include trade payables.

Other current liabilities

Initial Recognition of Financial Instruments

Determination of Fair Value

Impairment of Financial Assets

Derecognition of Financial Assets and Financial Liabilities

Offsetting Financial Instruments

Provisions and contingencies

Employees’ compensation and other benefits

Revenue and cost recognition

Value-added tax (VAT)

Events after the end of the reporting period

Note 3 - Management’s significant accounting judgments and estimates

Determining functional currency

Repairs and maintenance

Estimated allowance for doubtful accounts

Evaluation of asset impairment

Estimating useful lives of property and equipment

Financial assets and liabilities

Note 4 - Trade and Other Receivables 2021

Accounts Receivable P 21,500.00

Note 5 - Other Current Assets

Office Supplies P 3,500.00

Note 6 - Property and Equipment

Note 7 - Trade and Other Payables

Accounts Payable P 37,000.00

Note 8 - Net Sales

Notes 9 - Distribution Cost

Freight Out P 2,000.00

Notes 10 - General and Administrative Expense