legal accounting

Lesson Number Topic Starting Page

1 Introduction to Accounting

3

2 Transaction Analysis

12

3 General Journal, General Ledger,

Trial Balance

22

4 Financial Statements

29

5 Statement of Cash Flows

36

6 Correcting Entries 387 Payroll Accounting 408 Accounting for

Promissory Notes43

9 Accrued Income 5210 Accrued Expense 5511 Prepaid Expense 5812 Unearned Income 6213 Depreciation 6614 Doubtful Accounts 7115 Closing Entries,

Post-Closing Trial Balance

76

16 Reversing Entries 82TABLE OF CONTENTS

LESSON 1INTRODUCTION TO ACCOUNTING

Study ObjectivesAfter studying this lesson, you should be able to:

Achievement of Objective(Put a Check mark)

1 Learn the history of accounting2 Define accounting3 Know the difference between

bookkeeping andaccounting

4 Know the branches of accounting5 Distinguish the forms of business

organizationsaccording to ownership and according

to activity6 Know the role of Certified Public

Accountant in thesociety

7 Know the functions of different government agencies and

professional bodies relevant to the accounting profession

8 Know the purposes of the business documents

9 Define financial statements and its components, generally

accepted accounting principles (GAAP), Financial

Reporting Standards Council (FRSC), and users of the

financial statements10 Explain the different basic accounting

concepts orassumptions

11 Know other terms related to basic accounting

Objective 1

History of Accounting

Accounting has a long history. Some scholars claim that writing arose in order to record information. Account records date back to the ancient civilizations of China, Babylonia, Greece and Egypt. The rulers of these civilizations used accounting to keep track of the cost of labor and materials used in building structures like the great pyramids. (Source: Horngren, Harrison and Robinson, 1995) Accounting developed as a result of the information needs of merchants in the city-states of Italy during the 1400s. In that commercial climate a monk, Luca Pacioli, a mathematician and friend of Leonardo da Vinci, published the first known description of double-entry bookkeeping entitled Summa de Arithmetica, Geometria, Proportioni et Proportionalite, which means Everything about Arithmetic, Geometry, and Proportion published in Venice in November 1494. This book contained primarily principles of mathematics and incidentally a set of accounting procedures.N The pace of accounting development increased during the Industrial Revolution as the economies of developed countries began to mass produce goods. Until that time, merchandise was priced based on managers’ hunches about cost but increased competition required merchants to adopt more sophisticated accounting system. In the nineteenth century, the growth of corporations especially those in the railroad and steel industries, spurred the developed of accounting. Corporate owners were no longer necessarily the managers of their business. Managers had to create accounting systems to report to the owners how well their businesses were doing.Government played a role in leading more development in the field of accounting when it started using the income tax. Accounting supplied the concept of income. Also, government at all levels has assumed expanded roles in health, education, labor and economic planning. To ensure that the information that it uses to make decisions is reliable, the government has required strict accountability in the business community. At the beginning of the third millennium, there would still be significant developments in thefield of accounting. The great challenge of globalization and the effects of new technologies (e.g. super computers, robotics, inter and intra-net, etc.) pose a shift in the structure and pattern in this field. More and better accounting information are now being required and therefore, accounting, being the means used in communicating business and financial information, must also evolve into a more efficient level.

Reference: Workbook in Introductory Accounting for Service Business

Accounting as “Language of Business”The primary objectives of the business are:1. To generate profits2. To properly manage limited and scarce resources

With these objectives, a business must prepare financial reports and interpret these reports as an aid in decision-making. In making decisions, accounting is used as a tool for communication.

Objective 2Definition of Accounting1. Accounting is a service activity.a. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.

2. Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information.a. Identifying – this accounting process is the recognition or non recognition of business activities as “accountable events” (Valix, 2005). There are 3 types of transactions:i. Business transaction – 1. Transactions which are recorded in the financial books. Example is investment of the owner.

ii. Personal transaction – 1. Transactions which are not recorded in the financial books. Example is purchase of house and lot of a business owner using his personal money.

iii. Neither business nor personal transaction – 1. Business events that are not recorded in the financial books. Examples are hiring of employees, death of the owner, entering into a contract etc.

b. Measuring – this accounting process is the assigning of Peso amounts to the accountable economic transactions and events (Valix, 2005)

c. Communicating – is the process of preparing financial statements and interpreting the results thereof

3. Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.

4. Accounting is an information system that measures, processes, and communicates financial information about an identifiable economic entity.

Objective 3Difference between Bookkeeping and Accounting

Bookkeeping Accounting Recording of transactions Preparing financial reports

Recording of transactions Preparing financial reports Analyzing financial reports Decision-making

Objective 4Branches of Accounting

1. Financial Accounting – is primarily concerned with the recording of business transactions and the eventual preparation of financial statements (Valix, 2005).

2. Cost Accounting – is primarily concerned with proper accumulation of costs such as materials, labor and overhead, proper costing of inventories and study of different costing methods.

3. Management Accounting – is the preparation of financial reports and management research intended for management use and interpretation of these reports and researches.

Examples of financial reports are Sales reports, Cost of Production reports, Budgets etc.

Example of management research is evaluation of a business process and management consulting.

4. Taxation – deals with the study of provisions of the law with regard to Philippine taxation system and proper computation of taxes such as income tax, value-added tax, withholding tax and other taxes.

5. Auditing – basically deals with the examination of the financial statements by an independent party (auditor) to ascertain whether such financial statements are in conformity with Philippine Accounting Standards.

Objective 5Forms of Business Organizations

1. According to ownership

a. Sole-proprietorship – owned by only one person called sole-proprietor

b. Partnership – owned by 2 or more persons called partners

c. Corporation – owned by 5 or more persons called shareholders

2. According to activity

a. Service – renders services to the public such accounting firms, law firms, consulting firms, SPA, medical clinics, dental clinics, schools etc

b. Merchandising – buys and sells merchandise to the public

c. Manufacturing – buys raw materials and converts them into finished goods to be sold to the public

Objective 6Certified Public Accountant (CPA)

- is an accounting professional doing accounting, audit, tax, management consulting, education and research work.- Types of Accountants

Private Accountant / Management Accountant is an accounting professional employed in a private company or organization

Public Accountant / Auditor is an accounting professional independent from the private organizations and is usually employed in an auditing firm.

Government Accountant is an accounting professional employed in a government agency

Accounting Educator and Researcher is an accounting professional employed in a university, college or research organization

Objective 7Government Agencies and Professional Bodies1. Bureau of Internal Revenue (BIR) – agency in charge of proper collection of taxes from the public.

2. Securities and Exchange Commission (SEC) – agency in charge of accumulating audited financial statements of organizations, regulating companies issuing securities such as stocks and bonds to the public, and monitoring companies in the insurance industry. This agency also facilitates the registration of partnerships and corporations.

3. Bangko Sentral ng Pilipinas (BSP) / Central Bank of the Philippines – agency in charge of regulating Philippine bank operations, setting Philippine monetary policies etc.

4. Philippine Stock Exchange (PSE) – agency in charge of monitoring securities transactions of companies listed in the stock exchange.

5. Department of Trade and Industry (DTI) – agency in charge of facilitating registration of sole-proprietorship businesses and regulating consumer commodity transactions.

6. Commission on Audit (COA) – agency in charge of auditing government-related transactions

7. Board of Accountancy (BOA) - is an accounting body in charge of administering licensure examination for accountants

8. Professional Regulation Commission (PRC) - government agency in charge of issuing licenses to successful examinees in board exams

9. Philippine Institute of Certified Public Accountants (PICPA) - Professional organization of accountants in the Philippines

10. City Hall and Baranggay – these political subdivisions issues business permits and collects business taxes.

Objective 8

Business Documents

1. Purchase Order – shows items to be ordered by the business

2. Delivery Receipt – shows items to be delivered in the business

3. Sales Invoice – shows items that were sold to the business

4. Statement of Account – shows the summary of sales invoices

5. Cash Voucher – shows the liability of the business to be paid in the future

6. Official Receipt – shows the amount received by the business

Objective 9

Financial Statements

- Shows the results of the recording of the business transactions and are expressed in terms of assets, liabilities, equity, income and expenses.- Six (6) Components

Balance Sheet / Statement of Financial PositionPresents the financial condition of the business through its assets, liabilities and capital / owner’s equity

Income StatementPresents the financial performance of the business through its income and expenses

Statement of Changes in Owner’s EquityPresents the changes in capital such as additional investments, withdrawals, net income and/or net loss

Statement of Cash FlowsPresents the cash inflows and outflows of the business through its operating, investing and financing activities

Statement of Comprehensive IncomePresents gains and losses that were not presented in the income statement. Examples are unrealized gain on sale of trading securities, Foreign exchange gain on translation etc.

Notes to the Financial StatementsPresents the details of the line items in the Balance Sheet and Income Statement

Generally Accepted Accounting Principles (GAAP)- Refers to rules, procedures, practice and standards followed in the preparation and presentation of financial statements (Valix, 2005).

Financial Reporting and Standards Council (FRSC)- The council establishes and improves accounting standards that will be generally accepted in the Philippines (Valix, 2005)

Users of the Financial Statements

Internal Users External Users

1. Management2. Employees

1. Investors2. Creditors / Lenders3. Suppliers / Vendors4. Government5. Public

Objective 10

Basic Accounting Concepts / Assumptions1. Entity

a. Under this concept, the business enterprise is viewed as separate from the owners, managers, and employees of the business (Valix, 2005)

2. Time perioda. This concept requires that the indefinite life of an enterprise is subdivided into time periods which are usually of equal length (Valix, 2005)

b. Calendar year is a 12-month period that ends on December 31, otherwise it is called Natural business year or Fiscal year (Valix, 2005)

3. Monetary unita. This concept assumes that financial transactions be measured in terms of money or currency of the Philippines

4. Costa. This concept requires that assets should be recorded initially at original acquisition cost (Valix, 2005)

5. Adequate disclosurea. This concept requires that all significant and relevant information leading to the preparation of financial statements should be clearly reported (Valix, 2005)

6. Materialitya. This concept relates to the significance of an item to the overall presentation of the financial statements. Information is material if its omission could influence the economic decision of the users of the financial statements (Valix, 2005)

7. Accruala. This concept requires the income earned must be recognized in the financial statements whether cash is received or not.

b. This concept also requires the expenses incurred must be recognized in the financial statements whether cash is paid or not.

c. Because of this concept, organizations are preparing adjusting journal entries to recognize accrued income and accrued expenses.

d. Accrued income refers to income earned but not yet received.

e. Accrued expense refers to expense incurred but not yet paid.

8. Consistencya. This concept requires that the accounting methods and practices should be applied on a uniform basis from one time period to another (Valix, 2005).

9. Comparability

a. There are 2 kinds of comparability: Comparability within an enterprise andComparability between enterprises (Valix, 2005)

b. Comparability within an enterprise is the quality of information that allows comparisons within a single enterprise from one time period to the next (Valix, 2005)

c. Comparability between enterprises is the quality of information that allows comparisons between two or more enterprises engaged in the same industry (Valix, 2005)

10. Going Concern

a. This concept assumes that business will operate indefinitely and there is no intention of liquidating or closing down the business

11. Revenue recognition

a. Same as accrued income concept

12. Expense recognition

a. Same as accrued expense concept

13. Matchinga. This concept requires that costs and expenses incurred in earning a revenue should be reported in the same period when the revenue or income is earned (Valix, 2005)

14. Conservatism

a. Under this concept, when alternatives exist, the alternative which has the least effect on net income or owner’s equity should be chosen (Valix, 2005)

b. Conservatism is synonymous with Prudence. Prudence is the desire to exercise care and caution when dealing with the uncertainties in the measurement process such as assets or income are not overstated and liabilities or expenses are not understated (Valix, 2005)

15. Objectivitya. This concept requires that financial transactions that were recorded be supported by business documents

Objective 11Other Terms

Liquidity Solvency- Refers to the ability of the organizationto pay its short-term (current)obligations

- Refers to the ability of the organizationto pay its long-term (noncurrent)obligations

Stock Certificate – evidence certifying the ownership of shares of stock of a shareholder.Further ReadingsKieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 2 – 11, 21, 25, 29 – 31, 92 – 94

Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &Co., Inc.

Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia

Educational Supply.

Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.1. Manila: GIC Enterprises & Co., Inc.

Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principlesof Financial Accounting. John Wiley and Sons Australia, Ltd.

LESSON 2TRANSACTION ANALYSIS



1 Define the accounting equation and know the effects ofthe financial transactions on the accounting equation

2 Familiarize with the types of accounts for assets,liabilities, capital, income and expenses

Objective 1The Accounting Equation

Assets = Liabilities + Capital

The equation states that business assets are financed by two parties. They are the creditors or vendors (liabilities) and the owner (capital). Income will increase assets as well as capital and expenses will decrease assets as well as capital. Business transactions will have an effect on the accounting equation. The following are the basic financial transactions and the effects on the accounting equation.

Transaction ASSETS LIABILITIES CAPITALInvestment of the owner

▲ ▲ Investment

Withdrawal of the owner

▼ ▼ Withdrawal

Borrowed money byIssuing a promissory note

▲ ▲

Payment of the ▼ ▼ ▼ Interestexpense

principaland interest of thepromissory note

Purchase of short-terminvestment for cash

▲▼

Sale of short-terminvestment at a gain

▲▼ ▲ Gain on saleof investment

in tradingsecurities

Sale of short-terminvestment at a loss

▲▼ ▼ Loss on saleof investment

in tradingsecurities

Cash advance to anemployee

▲▼

Purchase of supplies forcash

▲▼

Purchase of supplies onaccount

▲ ▲

Purchase of a fixed assetfor cash

▲▼

Purchase of a fixed asset onAccount

▲ ▲

Partial / Full ▼ ▼

payment ofaccounts payable

Sale of a fixed asset at again

▲▼ ▲ Gain on saleof equipment

Sale of a fixed asset at aloss

▲▼ ▼ Loss on saleof equipment

Rendered services for cash

▲ ▲ ServiceIncome

Rendered services onaccount

▲ ▲ ServiceIncome

Partial / Full collection ofaccounts receivable

▲▼

Received cash forcommission income

▲ ▲ CommissionIncome

Payment of expenses forcash

▼ ▼ Expense

Objective 2Types of Accounts

CATEGORY DEFINITION ACCOUNT TITLE DEFINITION /EXAMPLES

ASSETS

CASH

This includes billsand coins, bankcheck, bankAccounts.

PETTY CASH FUND Cash used to paypetty or smallamount ofExpenses.

CASH ON HAND Cash in thepossession andcustody of theBusiness.

CASH IN BANK Self-explanatory

INVESTMENT INTRADING

SECURITIES

This refers to short term,highly liquidinvestment insecurities such asStocks and bonds.

TRADE AND OTHERECEIVABLES

These refer toamounts collectiblefrom a person or acompany

ACCOUNTSRECEIVABLE

Amount collectiblefrom clients orcustomers forservices rendered or

sale of goodsALLOWANCE FORDOUBTFULACCOUNTS

Is a Contra-assetaccount thatrepresents provisionfor estimateddoubtful accounts

NOTES RECEIVABLE Same withAccountsReceivable but isevidenced by apromissory note

INTERESTRECEIVABLE

Amount collectiblein a loan transaction

COMMISSIONRECEIVABLE

RENT RECEIVABLE

ADVANCES TOEMPLOYEES

Cash advance givento employees

PREPAID EXPENSES These refer toexpenses that arepaid in advance

PREPAID RENT

PREPAIDINSURANCE

PREPAIDADVERTISING

PREPAIDSUBSCRIPTIONS

OFFICE SUPPLIES

STORE SUPPLIES

PROPERTY, PLANTAND EQUIPMENT

These refer to itemsthat are useful formore than 1 year

LAND

OFFICE EQUIPMENT Computer, Faxmachine

STORE EQUIPMENT Cash registermachine

TRANSPORTATIONEQUIPMENT

Delivery Van,Motorcycle, Cars,Trucks

FURNITURE ANDFIXTURES

Cabinets, Tables,Chairs

MACHINERY

BUILDING Office building,Factory plant

ACCUMULATEDDEPRECIATION

Is a Contra-assetaccount thatrepresentscumulativedepreciation for

depreciable fixedassets

LIABILITIES

TRADE AND OTHERPAYABLES

These refer toamounts payable toa person or acompany

ACCOUNTSPAYABLE

Amount payable tosupplier, creditor orvendor for money,supplies, goods orproperty loaned

NOTES PAYABLE Same withAccounts Payablebut is evidenced bya promissory note

DISCOUNT ONNOTES PAYABLE

Is a Contra-liabilityaccount thatrepresentsunamortizedinterest on thepromissory note

INTEREST PAYABLE Amount payable ina loan transaction

TAXES ANDLICENSES PAYABLE

Unpaid taxes andlicenses to beremitted / paid tothe government

UTILITIES PAYABLE Unpaidcommunication,light and water bills

SALARIES ANDWAGES PAYABLE

Unpaid salaries andwages of theemployees

UNEARNED INCOME This refers to cashreceived in advancebut not yet earned

UNEARNED RENT

UNEARNEDADVERTISING

UNEARNEDSUBSCRIPTIONS

UNEARNEDCOMMISSION

MORTGAGEPAYABLE

This refers to bankloan with assetssuch as house andlot or vehicle ascollaterals

BONDS PAYABLE This refers to loanthat is evidenced bya bond certificateor indenture

CAPITAL / OWNER’S EQUITY

OWNER, CAPITAL This refer to claimor interest of theowner

OWNER, DRAWING This refer totemporarywithdrawal of theowner of cash,supplies, goods or property

INCOME

SERVICE INCOME Income derivedfrom rendering ofservicesPrimary income forservice business

OTHER INCOME Secondary incomefor service business

INTEREST INCOME Income from loantransactions

DIVIDEND INCOME Income from stockinvestments

RENT INCOME

GAIN ON SALE OF Excess of selling

EQUIPMENT price over the netbook value of thefixed asset

EXPENSES

EMPLOYEE BENEFITCOST

Expenses related toemployee benefits

SALARIES ANDWAGES EXPENSE

Represents the totalgross salary orwages of theemployees

SSS PREMIUMSEXPENSE

Represents totalSSS (health benefit)contributions of theemployer and theemployees

PHILHEALTHCONTRIBUTIONSEXPENSE

Represents totalPhilhealth (healthbenefit)contributions of theemployer and theemployees

PAG-IBIGCONTRIBUTIONSEXPENSE

Represents totalPag-IBIG (housingbenefit)contributions of theemployer and theemployees

RENT EXPENSE

PROFESSIONAL FEES Expense related toprofessionalservices ofaccountants,lawyers etc

ADVERTISINGEXPENSE

COMMISSIONEXPENSE

REPAIR ANDMAINTENANCEEXPENSE

Expense related topayment ofcommission to agents

SUPPLIES EXPENSE

INSURANCEEXPENSE

REPRESENTATIONANDENTERTAINMENTEXPENSE

Expense related tocost of meetingswith clients such asmeals

TRANSPORTATIONEXPENSE

Expense related tocommuting fromthe office toclient’s office

FUEL AND OILEXPENSE

UTILITIES EXPENSE Expense related tocommunicationsuch as telephone,Internet, electricityand water

TAXES ANDLICENSES EXPENSE

Expense related tobusiness taxes andpermits from thecity hall

CHARITABLECONTRIBUTIONEXPENSE

Expense related todonations

DEPRECIATIONEXPENSE

Noncash expensethat represents thetotal depreciationof the depreciablefixed assets for theyear

DOUBTFULACCOUNTS EXPENSE

Noncash expensethat represents thetotal estimateddoubtful accountsfor the year

BAD DEBTSEXPENSE

Noncash expensethat represents thetotal accountsreceivable thatwere written-off /removed from thefinancial books due

to its provenun collectability

MISCELLANEOUSEXPENSE

OTHER EXPENSE LOSS ON SALE OFEQUIPMENT

Excess of net bookvalue over theselling price of thefixed asset

FINANCE COST INTEREST EXPENSE Expense from loantransactions

Further ReadingsKieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 14 – 20, 26 – 27, 159 – 164

Kim well, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &Co., Inc.

Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: ValenciaEducational Supply.


Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principlesof Financial Accounting. John Wiley and Sons Australia, Ltd.Created with

LESSON 3GENERAL JOURNAL, GENERAL LEDGER TRIAL BALANCE



1 Know the concept of double-entry bookkeeping and theappropriate accounting tool for financial transactions

2 Understand the concept of journalizing and preparejournal entries

3 Post journal entries to the general ledgers4 Prepare the trial balance

Objective 1Double-entry Bookkeeping

This concept uses the tools debit and credit to record financial transactions. Further, this concept dictates that “for every debit, there is at least one credit and vice-versa”.

Appropriate Accounting Tool

The table shows the appropriate accounting tool for the effects of the financial transactions on assets, liabilities, capital, income and expenses.

Increase Decrease

Asset Debit CreditLiability Credit DebitCapital Credit DebitIncome Credit

Expense Debit

Objective 2Journalizing

This refers to the process of recording the financial transactions in the General Journal. General Journal is also known as “Book of Original Entry”. The following are examples of Journal Entries:

Journalize the following selected transactions of MJ Dry Cleaning. The following transaction occurred during June 2010.

1 MJ Flores invested in the business the following: P 250,000 cash and P 420,000 worth of

dry cleaning equipment with fair value of P 400,000 but with existing liability of P100,000 which is to be assumed by the business 2 Purchased dry cleaning supplies from Wilson Cleaners for P 22,100, payable after 20days 4 Bought cash register from Carter Equipment, P 45,800. Terms: 30% down payment,balance on account7 Dry cleaning services rendered for the week totaled P 25,250 cash

GENERAL JOURNAL Page xx

Date Particulars F Debit Credit2010Jun 01 Cash 101 250 000

Dry Cleaning Equipment 110 400 000Accounts Payable 210 100 000MJ Flores, Capital 320 550 000Investment of the owner

02 Dry Cleaning Supplies 108 22 100Accounts Payable 210 22 100Purchase of supplies on account

04 Office Equipment 111 45 800Cash 101 13 470Accounts Payable 210 32 060Purchase of cash register

07 CashDry Cleaning Service IncomeRendered dry cleaning service

for cash

Simple entry and Compound entry

Simple entry is a journal with only one debit and one credit. Compound entry is a journal entry with at least two debits or at least two credits.

Objective 3

Posting

This refers to the process of transferring the debit and credit amounts to the appropriate ledger accounts. Ledger accounts are placed in a financial book called General Ledger. This is also known as “Book of Final Entry”. After the amounts have been posted, one should post the ledger account number back to the general journal. This process is known as “cross-referencing”.

Chart of Accounts

This chart lists the account titles to be used by the business and the related account numbers. The following is a typical example of chart of accounts.

ASSETS 100 OWNER’S EQUITY 300

Cash 101 MJ Flores, Drawing 310Investment in Trading Securities 102 MJ Flores, Capital 320Accounts Receivable 103Allowance for Doubtful Accounts 104Notes Receivable 105 INCOME 400Advances to Employees 106

Prepaid Rent 107 Dry Cleaning Service Income 410Dry Cleaning Supplies 108 Interest Income 420Land 109Dry Cleaning Equipment 110Office Equipment 111 EXPENSES 500Building 120Accumulated Depreciation –Dry Cleaning Equipment

130 Salaries and Wages Expense 510

Accumulated Depreciation –Office Equipment

131 Rent Expense 520

Accumulated Depreciation – Building

140 Advertising Expense 530

Commission Expense 540LIABILITIES 200 Dry Cleaning Supplies Expense 550

Insurance Expense 560Accounts Payable 210 Transportation Expense 570Notes Payable 220 Utilities Expense 580Discount on Notes Payable 230 Taxes and Licenses Expense 590Unearned Advertising 240 Depreciation Expense 591Mortgage Payable 250 Interest Expense 592

General Ledger Postings

CASH 101

Date Particulars F Debit Date Particulars F Credit2010 2010Jun 01 GJ1 250 000 Jun 04 GJ1 13 470 07 GJ1 25 250

Totals 275 250 13 470Balance 261 780

DRY CLEANING SUPPLIES 108

Date Particulars F Debit Date Particulars F Credit2010Jun 02 GJ1 22 100

DRY CLEANING EQUIPMENT 110


OFFICE EQUIPMENT 111


ACCOUNTS PAYABLE 210

Date Particulars F Debit Date Particulars F Credit2010Jun 01 GJ1 100 000 02 GJ1 22 100 04 GJ1 32 060

MJ FLORES, CAPITAL 320


DRY CLEANING SERVICE INCOME 410


Normal Balances of the Accounts

Assets DebitContra-assets CreditLiabilities CreditContra-Liabilities DebitCapital CreditDrawing DebitIncome CreditExpenses Debit

Objective 4Trial BalanceThis refers to the summary of balances in the ledger accounts. The accounts are arranged in the order of assets, liabilities, equity, income and expenses.

PATRICE CONSULTING SERVICESTrial BalanceJuly 31, 2010

Debit Credit

Cash P 56 300Accounts Receivable 77 500

Office Supplies 2 100Prepaid Insurance 2 200Office Equipment 120 000Accounts Payable P 23 020Notes Payable 15 000Simone Patrice, Capital 172 880Simone Patrice, Drawing 2 000Consulting Fees 253 000Salaries and Wages Expense 168 200Rent Expense 11 000Transportation Expense 7 800Utilities Expense 8 200Advertising Expense 5 500Miscellaneous Expense 3 100

Totals P 463 900 P 463 900

Adapted from Workbook in Introductory Accounting for Service Business

A balanced trial balance means that journal entries are properly posted and ledger accounts are properly balanced.

Further Readings

Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 46 – 56, 57 – 73





LESSON 4FINANCIAL STATEMENT


Achievement of Objective (Put a Check mark)

1 Understand the procedure in preparing the income statement

2 Understand the procedures in preparing the statement of changes in owner’s equity

3 Understand the procedures in preparing the balance sheet

4 Understand the procedures in preparing the notes to the financial statements

5 Compute the missing amounts in relation to changes in capital

Objective 1Income StatementTo recall, the Income Statement presents the financial performance of the business through itsincome and expenses.

Net Income refers to the excess of income over expenses, otherwise it is called Net Loss.

There are two types of presentation for income statement.1. Natural form

a. In this presentation, income and expense accounts are grouped according tonature. Secondary income such as interest income, dividend income etc aregrouped under line item “Other Income”. On the other hand, expenses arearranged from highest to lowest, except for Miscellaneous Expense, OtherExpense and Finance Cost. These line items are the last 3 line items in the

expense section.2. Functional form

a. In this presentation, expenses are grouped according to function. The 4classification of expenses are:

i. Distribution costii. General and administrative expensesiii. Other operating expenses

iv. Finance cost

Objective 2Statement of Changes in Owner’s EquityTo recall, this component presents the changes in capital such as additional investments,withdrawals, net income and/or net loss.

The following are the effects to the capital or equity:

EFFECTS

Investment IncreaseWithdrawal DecreaseIncome IncreaseExpense DecreaseNet Income IncreaseNet Loss Decrease

The Income Statement is connected to this component through Net Income or Net Loss and thiscomponent is connected to the Balance Sheet through the Ending balance of the capital account.

The equation for computing Ending Capital Balance is

Owner, Capital – beginning + Additional Investment + Net Income-Withdrawals – Net Loss = Owner, Capital - ending

Using the accounting equation, the equation for computing Beginning Capital Balance is

Assets, beginning – Liabilities, beginning = Owner, Capital (beginning)

On the other hand, the alternative equation for Ending Capital Balance is

Assets, ending – Liabilities, ending = Owner, Capital (ending)

Objective 3Balance Sheet or Statement of Financial PositionTo recall, the Balance Sheet presents the financial condition of the business through its assets,liabilities and capital / owner’s equity

There are 2 forms of Balance Sheet:1. Account-form

a. This form presents assets on the left side and liabilities and capital on the right side

2. Report-forma. This form presents assets on the upper side and liabilities and capital on the lower

side

AssetsAssets are classified into 2:

1. Current Assetsa. These refer to assets that are useful to the business within one year. Examples are

Cash, Investment in Trading Securities, Trade and Other Receivables, Merchandise Inventory and Prepaid Expenses.

2. Noncurrent Assetsa. These refer to assets that are useful to the business for more than one year.

Examples are Property, Plant and Equipment, Long-term investments and Intangible assets.

Assets are arranged in order of liquidity. Cash is the first line item because it is the most liquidAsset.

LiabilitiesLiabilities are classified into 2:

1. Current liabilities a. These refer to liabilities that are payable and will mature within one year.

Examples are Trade and Other Payables and Current-portion of long-term notespayable.

2. Noncurrent liabilities a. These refer to liabilities that are payable and will mature beyond one year.

Examples are Noncurrent-portion of long-term notes payable, Mortgage Payable,and Bonds Payable.

Liabilities are arranged in order of maturity. For Noncurrent liabilities, the order is usually NotesPayable, Mortgage Payable and Bonds Payable. The reason is Notes Payable will normallymature first before mortagage and bonds.

Capital or Owner’s EquityThis represents the ending balance of capital from the statement of changes in owner’s equity.

Objective 4Notes to the Financial StatementsTo recall, this component presents the details of the line items in the Balance Sheet and IncomeStatement

Trade and Other ReceivablesFor this category, the first line item is Accounts Receivable followed by Allowance for DoubtfulAccounts. The difference between these two line items is called “Net Realizable Value”. Netrealizable value represents the estimated amount to be collected from the clients / customers afterdeducting doubtful accounts.

After Allowance for Doubtful Accounts, the next line item is Notes Receivable then followed byaccount titles which have the word “Receivable”. They are arranged from highest to lowest sincetheir nature are the same. “Receivable” accounts are synonymous with “Accrued Income”. Forexample, Interest receivable is the same with Accrued Interest Income.

The last line item is Advances to employees.

Prepaid ExpensesThe items for this category are arranged from highest to lowest since their nature are the same.

Property, Plant and EquipmentThe tabular presentation for this note is as follows: Cost Accumulated Net Carrying Value Depreciation

Land P 400,000 P 400,000Transportation Equipment 530,000 P30,000 500,000Building 360,000 60,000 300,000Equipment 240,000 40,000 200,000Furniture and Fixtures 110,000 10,000 100,000 ___________ ________ _________

Total P 1,640,000 P 140,000 P 1,500,000 ======== ======= =========

Adapted from the exhibits of the Workbook

The fixed asset items are arranged from highest acquisition cost to lowest acquisition cost. Thedifference between the acquisition cost and accumulated depreciation is called the Net carryingvalue or Net book value.

Trade and Other Payables

Line item1st Accounts Payable2nd Notes Payable3rd Discount on Notes Payable4th- nth Account with the word “Payable”Last Unearned income

For the 4th line item, the accounts are arranged from highest to lowest since their nature are thesame. “Payable” accounts are synonymous with “Accrued Expense”. For example, Rent payableis the same with Accrued Rent expense.

Objective 5Problems in connection to Statement of Changes in Owner’s Equity

1. A firm has just completed its first year of operations. During the year, the owner Withdrew P 50,000 and by the end of the year his equity stood at P 70,000, which Was a P 10,000 increase from his initial investment. If revenues generated during t he year totaled P 400,000, then expenses incurred during the year must have been ______________.

Owner, Capital – beginning + Additional Investments + Income– Withdrawals – Expense = Owner, Capital – ending

Expense = Owner, Capital – beginning + Additional Investments + Income– Withdrawals – Owner, Capital – ending

Solution in good accounting form

Beginning capital P 60,000Income 400,000 Withdrawals (50,000)Ending capital (70,000)Expenses P 340,000

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2. A business had assets of P 210,000 and liabilities of P 140,000 on January 1,2008. Six months later, the assets totaled P 170,000 while outstanding debtsAmounted P 95,000. During the six-month period, the proprietor withdrew cash ofP 12,000 and supplies worth P 5,000. During the same period, he also madeadditional investments of P 24,000 cash and a second-hand equipment originallycosting P 45,000 but with a fair market value of P 20,000. The result of operationswas a ___________ of ____________.

Ending capita l P 75,000Beginning capita l (70,000)Additional investments (44,000)Withdrawals 17,000Net Loss P 22,000

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Further Readings





Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principlesof Financial Accounting. John Wiley and Sons Australia, Ltd.Created

LESSON 5STATEMENT OF CASH FLOWS



1 Recall the definition of Statement of Cash Flows andclassify the transactions as operating activity, investing

activity and financing activity2 Prepare the Statement of Cash Flows and connect the

Ending cash balance to the Balance Sheet

Objective 1Statement of Cash FlowsTo recall, the Statement of Cash Flows presents the cash inflows and outflows of the businessthrough its operating, investing and financing activities.

Business Activities 1. Financing activities a. These activities pertain to transactions such as

i. Investments of the ownerii. Loans whether short term or long termiii. Withdrawal of the owneriv. Payment of the principal of the loans

2. Investing activitiesa. These activities pertain to transactions such as

i. Sale of property, plant and equipmentii. Purchase of property, plant and equipment

3. Operating activitiesa. These activities pertain to transaction such as

i. Payment of the interest of the loansii. Other transactions not enumerated above

Objective 2Connection of the Statement of Cash Flows to the Balance SheetThe ending cash balance in the Statement of Cash Flows represents the cash balance in the Balance Sheet.

Further Readings

Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:John Wiley and Sons, Inc. pages 718 – 726





LESSON 6CORRECTING ENTRIES



1 Know the different accounting errors

2 Prepare correcting entries

Objective 1Accounting Errors

1. Transposition errora. Error in the position of figures. Example: 123 is written as 132

2. Transplacement error / Slidea. Error in the placement of decimal point. Example: 1000.90 is written as 100.09

Objective 2Correcting journal entries

- entries to correct incorrect journal entries

On September 15, a temporary withdrawal of P 12,000 by X, the owner was recorded as a debit toSalaries and Wages Expense and a credit to Cash. The correcting entry was made at month-end.

Recorded entry

Date Particulars Debit Credit2009Sep 15 Salaries and Wages Expense 12 000

Cash 12 000Withdrawal with the owner

Correct Entry

Date Particulars Debit Credit2009Sep 15 X, Drawing 12 000

Cash 12 000Withdrawal with the owner

Correct Entry

Date Particulars Debit Credit2009Sep 30 X,Drawing 12 000

Salaries and Wages Expense 12 000Correcting Entry