Actbas1 Study Guide

(1)

Study Guide in Introductory Accounting for Service Business Benedick Manalaysay Accountancy Department

De La Salle University Manila

Confidentiality Requirement

This material is prohibited for reproduction or distribution without prior conse nt from the author.

Created with novaPDF Printer (www.novaPDF.com). Please register to remove this m essage.

(2)

TABLE OF CONTENTS

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 38 7 Payroll Accounting 40

8 Accounting for Promissory Notes 43 9 Accrued Income 52 10 Accrued Expense 55 11 Prepaid Expense 58 12 Unearned Income 62 13 Depreciation 66 14 Doubtful Accounts 71

15 Closing Entries, Post-Closing Trial Balance 76 16 Reversing Entries 82

(3)

LESSON 1

INTRODUCTION TO ACCOUNTING

Study Objectives

After studying this lesson, you should be able to: Achievement of Objective

(Put a Check mark)

1 Learn the history of accounting 2 Define accounting

3 Know the difference between bookkeeping and accounting

4 Know the branches of accounting

5 Distinguish the forms of business organizations according to ownership and according to activity 6 Know the role of Certified Public Accountant in the society

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 statements

10 Explain the different basic accounting concepts or assumptions

11 Know other terms related to basic accounting Confidentiality Requirement

(4)

Objective 1

History of Accounting

Accounting has a long history. Some scholars claim that writing arose in order t o record

information. Account records date back to the ancient civilizations of China, Ba bylonia, Greece

and Egypt. The rulers of these civilizations used accounting to keep track of th e 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 ci ty-states of Italy

during the 1400s. In that commercial climate a monk, Luca Pacioli, a mathematici an and friend of

Leonardo da Vinci, published the first known description of double-entry bookkee ping entitled

Summa de Arithmetica, Geometria, Proportioni et Proportionalite, which means Eve rything about

Arithmetic, Geometry, and Proportion published in Venice in November 1494. This book

contained primarily principles of mathematics and incidentally a set of accounti ng procedures.

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 ra ilroad 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, governmen t 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 requi red strict

accountability in the business community.

At the beginning of the third millennium, there would still be significant devel opments in the

field 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 struct ure and pattern in this

(5)

field. More and better accounting information are now being required and therefo re, accounting,

being the means used in communicating business and financial information, must a lso 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 profits

2. To properly manage limited and scarce resources

With these objectives, a business must prepare financial reports and interpret t hese reports as an

aid in decision-making. In making decisions, accounting is used as a tool for co mmunication.

(6)

5

Objective 2

Definition of Accounting

1. Accounting is a service activity.

a. Its function is to provide quantitative information, primarily financial in n ature,

about economic entities that is intended to be useful in making economic decisions.

2. Accounting is the process of identifying, measuring and communicating economi c

information to permit informed judgments and decisions by users of the informati on.

a. Identifying this accounting process is the recognition or nonrecognition 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 signific ant 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 communicate s

financial information about an identifiable economic entity. Objective 3

Difference between Bookkeeping and Accounting Bookkeeping Accounting

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

(7)

6

Objective 4

Branches of Accounting

1. Financial Accounting is primarily concerned with the recording of business tr ansactions

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 differ ent costing

methods.

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

Examples of financial reports are Sales reports, Cost of Production reports, Bud gets etc.

Example of management research is evaluation of a business process and managemen t

consulting.

4. Taxation deals with the study of provisions of the law with regard to Philipp ine taxation

system and proper computation of taxes such as income tax, value-added tax, with holding

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 i n

conformity with Philippine Accounting Standards. Objective 5

Forms 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 6

Certified Public Accountant (CPA)

- is an accounting professional doing accounting, audit, tax, management consult ing,

education and research work. - Types of Accountants

(8)

7

o Public Accountant / Auditor

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

o Government Accountant

. is an accounting professional employed in a government agency o Accounting Educator and Researcher

. is an accounting professional employed in a university, college or research organization

Objective 7

Government Agencies and Professional Bodies

1. Bureau of Internal Revenue (BIR) agency in charge of proper collection of tax es from

the public

2. Securities and Exchange Commission (SEC) agency in charge of accumulating aud ited

financial statements of organizations, regulating companies issuing securities s uch as

stocks and bonds to the public, and monitoring companies in the insurance indust ry. 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 e tc.

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 regis tration 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 iss uing

licenses to successful examinees in board exams

9. Philippine Instititute 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.

(9)

8

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 expres sed in terms

of assets, liabilities, equity, income and expenses. - Six (6) Components

o Balance Sheet / Statement of Financial Position

. Presents the financial condition of the business through its assets, liabilities and capital / owner s equity

o Income Statement

. Presents the financial performance of the business through its income and expenses

o Statement of Changes in Owner s Equity

. Presents the changes in capital such as additional investments, withdrawals, net income and/or net loss

o Statement of Cash Flows

. Presents the cash inflows and outflows of the business through its operating, investing and financing activities

o Statement of Comprehensive Income

. Presents 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.

o Notes to the Financial Statements

. Presents 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 preparatio n and

presentation of financial statements (Valix, 2005). Financial Reporting and Standards Council (FRSC)

(10)

Users of the Financial Statements Internal Users External Users 1. Management 2. Employees 1. Investors 2. Creditors / Lenders 3. Suppliers / Vendors 4. Government 5. Public Objective 10

Basic Accounting Concepts / Assumptions 1.

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 period a.

This concept requires that the indefinite life of an enterprise is subdivided in to

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 unit a.

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

4. Cost a.

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

5.

Adequate disclosure a.

This concept requires that all significant and relevant information leading to t he

preparation of financial statements should be clearly reported (Valix, 2005) 6.

Materiality a.

This concept relates to the significance of an item to the overall presentation of

the financial statements. Information is material if its omission could influenc e

the economic decision of the users of the financial statements (Valix, 2005) 7.

Accrual a.

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

(11)

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 t o

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. Confidentiality Requirement

(12)

8.

Consistency a.

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 and Comparability 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. Matching

a.

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. Objectivity a.

This concept requires that financial transactions that were recorded be supporte d

by business documents Objective 11

Other Terms

Liquidity Solvency

-Refers to the ability of the organization to pay its short-term (current)

obligations

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

(13)

Stock Certificate evidence certifying the ownership of shares of stock of a shar eholder

(14)

Further Readings

Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th editio n. New Jersey:

John Wiley and Sons, Inc. pages2 11, 21, 25, 29 31, 92 94

Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC E nterprises &

Co., Inc. 3rd

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

Educational Supply.

Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accoun ting Vol.

1. Manila: GIC Enterprises & Co., Inc.

Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2 007). Principles

of Financial Accounting. John Wiley and Sons Australia, Ltd. Confidentiality Requirement

(15)

12

LESSON 2

TRANSACTION ANALYSIS Study Objectives

(Put a Check mark)

1 Define the accounting equation and know the effects of the financial transactions on the accounting equation 2 Familiarize with the types of accounts for assets, liabilities, capital, income and expenses

Objective 1

The Accounting Equation

Assets = Liabilities + Capital

The equation states that business assets are financed by two parties. They are t he 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 follow ing are the basic

financial transactions and the effects on the accounting equation. Transaction ASSETS LIABILITIES CAPITAL

Investment of the owner . .

Investment

Withdrawal of the owner . .

Withdrawal

Borrowed money by

issuing a promissory note . .

Payment of the principal and interest of the promissory note

(16)

13

Purchase of short-term investment for cash .. Sale of short-term investment at a gain .. . Gain on sale of investment in trading securities Sale of short-term investment at a loss .. . Loss on sale of investment in trading securities Cash advance to an employee ..

Purchase of supplies for cash

..

Purchase of supplies on account

. .

Purchase of a fixed asset for cash

..

Purchase of a fixed asset on account

. .

Partial / Full payment of accounts payable

. .

Sale of a fixed asset at a gain

.. .

Gain on sale of equipment

Sale of a fixed asset at a loss

.. .

Loss on sale of equipment

Rendered services for cash .

.

Service Income

(17)

account .

.

Service Income

(18)

14

Partial / Full collection of accounts receivable

..

Received cash for commission income .

.

Commission Income

Payment of expenses for cash . . Expense Objective 2 Types of Accounts

CATEGORY DEFINITION ACCOUNT TITLE DEFINITION / EXAMPLES

ASSETS

CASH This includes bills and coins, bank

check, bank accounts.

PETTY CASH FUND Cash used to pay petty or small amount of expenses.

CASH ON HAND Cash in the possession and

custody of the business.

CASH IN BANK Self-explanatory INVESTMENT IN

TRADING SECURITIES

This refers to shortterm, highly liquid

investment in securities such as stocks and bonds. TRADE AND OTHE RECEIVABLES These refer to amounts collectible from a person or a company ACCOUNTS RECEIVABLE Amount collectible from clients or customers for services rendered or sale of goods

(19)

(20)

ALLOWANCE FOR DOUBTFUL ACCOUNTS Is a Contra-asset account that represents provision for estimated doubtful accounts

NOTES RECEIVABLE Same with Accounts Receivable but is evidenced by a promissory note INTEREST RECEIVABLE Amount collectible in a loan transaction COMMISSION RECEIVABLE RENT RECEIVABLE ADVANCES TO EMPLOYEES

Cash advance given to employees

PREPAID EXPENSES These refer to expenses that are

paid in advance PREPAID RENT PREPAID INSURANCE PREPAID ADVERTISING PREPAID SUBSCRIPTIONS OFFICE SUPPLIES STORE SUPPLIES PROPERTY, PLANT AND EQUIPMENT

These refer to items that are useful for more than 1 year LAND

OFFICE EQUIPMENT Computer, Fax machine

STORE EQUIPMENT Cash register machine

(21)

TRANSPORTATION EQUIPMENT Delivery Van, Motorcycle, Cars, Trucks FURNITURE AND FIXTURES Cabinets, Tables, Chairs MACHINERY

BUILDING Office building, Factory plant ACCUMULATED DEPRECIATION Is a Contra-asset account that represents cumulative depreciation for depreciable fixed assets LIABILITIES TRADE AND OTHER PAYABLES These refer to amounts payable to a person or a company ACCOUNTS PAYABLE Amount payable to supplier, creditor or vendor for money, supplies, goods or property loaned

NOTES PAYABLE Same with Accounts Payable but is evidenced by a promissory note DISCOUNT ON NOTES PAYABLE Is a Contra-liability account that represents unamortized interest on the promissory note

INTEREST PAYABLE Amount payable in a loan transaction

TAXES AND

LICENSES PAYABLE Unpaid taxes and licenses to be remitted / paid to

(22)

nt from the author.

(23)

UTILITIES PAYABLE Unpaid communication,

light and water bills SALARIES AND

WAGES PAYABLE

Unpaid salaries and wages of the

employees

UNEARNED INCOME This refers to cash received in advance

but not yet earned UNEARNED RENT UNEARNED ADVERTISING UNEARNED SUBSCRIPTIONS UNEARNED COMMISSION MORTGAGE PAYABLE

This refers to bank loan with assets such as house and lot or vehicle as collaterals

BONDS PAYABLE This refers to loan that is evidenced by

a bond certificate or indenture

CAPITAL / OWNER S EQUITY

OWNER, CAPITAL This refer to claim or interest of the

owner

OWNER, DRAWING This refer to temporary

withdrawal of the owner of cash, supplies, goods or

(24)

property INCOME

SERVICE INCOME Income derived from rendering of

services

Primary income for service business

OTHER INCOME Secondary income for service business

INTEREST INCOME Income from loan transactions

DIVIDEND INCOME Income from stock investments

RENT INCOME GAIN ON SALE OF EQUIPMENT

Excess of selling price over the net book value of the fixed asset EXPENSES EMPLOYEE BENEFIT COST Expenses related to employee benefits SALARIES AND WAGES EXPENSE

Represents the total gross salary or wages of the employees SSS PREMIUMS EXPENSE Represents total SSS (health benefit) contributions of the employer and the employees PHILHEALTH CONTRIBUTIONS EXPENSE Represents total Philhealth (health benefit) contributions of the employer and the employees

(25)

PAG-IBIG CONTRIBUTIONS EXPENSE Represents total Pag-IBIG (housing benefit) contributions of the employer and the employees

RENT EXPENSE

PROFESSIONAL FEES Expense related to professional services of accountants, lawyers etc ADVERTISING EXPENSE COMMISSION EXPENSE Expense related to payment of commission to agents REPAIR AND MAINTENANCE EXPENSE SUPPLIES EXPENSE INSURANCE EXPENSE REPRESENTATION AND ENTERTAINMENT EXPENSE Expense related to cost of meetings with clients such as meals TRANSPORTATION EXPENSE Expense related to commuting from the office to client s office FUEL AND OIL EXPENSE

UTILITIES EXPENSE Expense related to communication

such as telephone, Internet, electricity and water

(26)

(27)

TAXES AND

LICENSES EXPENSE Expense related to business taxes and permits from the city hall CHARITABLE CONTRIBUTION EXPENSE Expense related to donations DEPRECIATION EXPENSE Noncash expense that represents the total depreciation of the depreciable fixed assets for the year

DOUBTFUL

ACCOUNTS EXPENSE Noncash expense that represents the total estimated doubtful accounts for the year BAD DEBTS EXPENSE

Noncash expense that represents the total accounts receivable that were written-off / removed from the financial books due to its proven

uncollectibility MISCELLANEOUS EXPENSE

OTHER EXPENSE LOSS ON SALE OF EQUIPMENT

Excess of net book value over the

selling price of the fixed asset

FINANCE COST INTEREST EXPENSE Expense from loan transactions

(28)

Further Readings

John Wiley and Sons, Inc. pages14 20, 26 27, 159 164

Co., Inc. 3rd

Educational Supply.

(29)

LESSON 3

GENERAL JOURNAL, GENERAL LEDGER TRIAL BALANCE

Study Objectives

(Put a Check mark)

1 Know the concept of double-entry bookkeeping and the appropriate accounting tool for financial transactions 2 Understand the concept of journalizing and prepare journal entries

3 Post journal entries to the general ledgers 4 Prepare the trial balance

Objective 1

Double-entry Bookkeeping

This concept uses the tools debit and credit to record financial transactions. F urther, 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 Credit Liability Credit Debit Capital Credit Debit Income Credit

Expense Debit Objective 2 Journalizing

This refers to the process of recording the financial transactions in the Genera l Journal. General

Journal is also known as Book of Original Entry . The following are examples of Journal Entries:

Adapted from Exercise 6-8 of Workbook in Introductory Accounting for Service Bus iness

(30)

(31)

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 P

100,000 which is to be assumed by the business

2 Purchased dry cleaning supplies from Wilson Cleaners for P 22,100, payable aft er 20

days

4 Bought cash register from Carter Equipment, P 45,800. Terms: 30% down payment, balance on account

7 Dry cleaning services rendered for the week totaled P 25,250 cash GENERAL JOURNAL Page xx

Date Particulars F Debit Credit 2010

Jun 01 Cash 101 250 000

Dry Cleaning Equipment 110 400 000 Accounts Payable 210 100 000

MJ Flores, Capital 320 550 000 Investment of the owner

02 Dry Cleaning Supplies 108 22 100 Accounts Payable 210 22 100

Purchase of supplies on account 04 Office Equipment 111 45 800 Cash 101 13 470

Accounts Payable 210 32 060 Purchase of cash register 07 Cash 101 25 250

Dry Cleaning Service Income 410 25 250 Rendered 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. Confidentiality Requirement

(32)

Objective 3 Posting

This refers to the process of transferring the debit and credit amounts to the a ppropriate 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-refere ncing .

Chart of Accounts

This chart lists the account titles to be used by the business and the related a ccount numbers. The

following is a typical example of chart of accounts. ASSETS 100 OWNER S EQUITY 300

Cash 101 MJ Flores, Drawing 310

Investment in Trading Securities 102 MJ Flores, Capital 320 Accounts Receivable 103

Allowance for Doubtful Accounts 104 Notes Receivable 105 INCOME 400 Advances to Employees 106

Prepaid Rent 107 Dry Cleaning Service Income 410 Dry Cleaning Supplies 108 Interest Income 420 Land 109

Dry Cleaning Equipment 110

Office Equipment 111 EXPENSES 500 Building 120

Accumulated 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 540

LIABILITIES 200 Dry Cleaning Supplies Expense 550 Insurance Expense 560

Accounts Payable 210 Transportation Expense 570 Notes Payable 220 Utilities Expense 580

Discount on Notes Payable 230 Taxes and Licenses Expense 590 Unearned Advertising 240 Depreciation Expense 591

Mortgage Payable 250 Interest Expense 592 Confidentiality Requirement

(33)

General Ledger Postings CASH 101

Date Particulars F Debit Date Particulars F Credit 2010 2010

Jun 01 GJ1 250 000 Jun 04 GJ1 13 470 07 GJ1 25 250

Totals 275 250 13 470 Balance 261 780

DRY CLEANING SUPPLIES 108

Date Particulars F Debit Date Particulars F Credit 2010

Jun 02 GJ1 22 100

DRY CLEANING EQUIPMENT 110

Jun 01 GJ1 400 000 OFFICE EQUIPMENT 111

Jun 04 GJ1 45 800 ACCOUNTS PAYABLE 210

Jun 01 GJ1 100 000 02 GJ1 22 100 04 GJ1 32 060

(34)

MJ FLORES, CAPITAL 320

Jun 01 GJ1 550 000

DRY CLEANING SERVICE INCOME 410

Jun 07 GJ1 25 250

Normal Balances of the Accounts Assets Debit Contra-assets Credit Liabilities Credit Contra-liabilities Debit Capital Credit Drawing Debit Income Credit Expenses Debit Confidentiality Requirement

(35)

Objective 4 Trial Balance

This 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 SERVICES

Trial Balance July 31, 2010 Debit Credit Cash P 56 300 Accounts Receivable 77 500 Office Supplies 2 100 Prepaid Insurance 2 200 Office Equipment 120 000 Accounts Payable P 23 020 Notes Payable 15 000

Simone Patrice, Capital 172 880 Simone Patrice, Drawing 2 000 Consulting Fees 253 000

Salaries and Wages Expense 168 200 Rent Expense 11 000 Transportation Expense 7 800 Utilities Expense 8 200 Advertising Expense 5 500 Miscellaneous 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 ledg er accounts are

properly balanced.

(36)

Further Readings

John Wiley and Sons, Inc. pages46 56, 57 73

Co., Inc. 3rd

Educational Supply.

(37)

LESSON 4

FINANCIAL STATEMENTS

Study Objectives

(Put a Check mark)

1 Understand the procedures 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 1 Income Statement

To recall, the Income Statement presents the financial performance of the busine ss through its

income 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 to nature. Secondary income such as interest income, dividend income etc are grouped under line item Other Income . On the other hand, expenses are arranged from highest to lowest, except for Miscellaneous Expense, Other Expense 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 4 classification of expenses are:

i. Distribution cost ii.

General and administrative expenses iii.

Other operating expenses iv.

(38)

(39)

Objective 2

Statement of Changes in Owner s Equity

To recall, this component presents the changes in capital such as additional inv estments,

withdrawals, net income and/or net loss.

The following are the effects to the capital or equity: EFFECTS

Investment Increase Withdrawal Decrease Income Increase Expense Decrease Net Income Increase Net Loss Decrease

The Income Statement is connected to this component through Net Income or Net Lo ss and this

component is connected to the Balance Sheet through the Ending balance of the ca pital account.

The equation for computing Ending Capital Balance is

Owner, Capital beginning + Additional Investments + Net Income Withdrawals Net Loss = Owner, Capital ending

Using the accounting equation, the equation for computing Beginning Capital Bala nce 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)

(40)

Objective 3

Balance Sheet or Statement of Financial Position

To recall, the Balance Sheet presents the financial condition of the business th rough 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 ri ght

side 2.

Report-form a.

This form presents assets on the upper side and liabilities and capital on the l ower

side Assets

Assets are classified into 2: 1.

Current Assets a.

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 Assets a.

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 i t is the most liquid

asset. Liabilities

Liabilities 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 notes payable.

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.

(41)

Liabilities are arranged in order of maturity. For Noncurrent liabilities, the o rder is usually Notes

Payable, Mortgage Payable and Bonds Payable. The reason is Notes Payable will no rmally

mature first before mortagage and bonds. Capital or Owner s Equity

This represents the ending balance of capital from the statement of changes in o wner s equity.

(42)

Objective 4

Notes to the Financial Statements

To recall, this component presents the details of the line items in the Balance Sheet and Income

Statement

Trade and Other Receivables

For this category, the first line item is Accounts Receivable followed by Allowa nce for Doubtful

Accounts. The difference between these two line items is called Net Realizable Va lue . Net

realizable value represents the estimated amount to be collected from the client s / customers after

deducting doubtful accounts.

After Allowance for Doubtful Accounts, the next line item is Notes Receivable th en followed by

account titles which have the word Receivable . They are arranged from highest to l owest since

their nature are the same. Receivable accounts are synonymous with Accrued Income . F or

example, Interest receivable is the same with Accrued Interest Income. The last line item is Advances to employees.

Prepaid Expenses

The items for this category are arranged from highest to lowest since their natu re are the same.

Property, Plant and Equipment

The tabular presentation for this note is as follows: Cost Accumulated Net Carrying Value

Depreciation

Land P 400,000 P 400,000

Transportation Equipment 530,000 P 30,000 500,000 Building 360,000 60,000 300,000

Equipment 240,000 40,000 200,000

Furniture 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 acqui sition cost. The

difference between the acquisition cost and accumulated depreciation is called t he Net carrying

value or Net book value. Confidentiality Requirement

(43)

(44)

Trade and Other Payables Line Item

1st Accounts Payable 2nd Notes Payable

3rd Discount on Notes Payable

4th nth Account with the word Payable Last Unearned income

For the 4th line item, the accounts are arranged from highest to lowest since th eir nature are the

same. Payable accounts are synonymous with Accrued Expense . For example, Rent payabl e

is the same with Accrued Rent expense. Objective 5

Problems 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 own er

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 durin g

the year totaled P 400,000, then expenses incurred during the year must have bee n

______________.

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 60,000 Income 400,000 Withdrawals (50,000) Ending capital (70,000) Expenses P 340,000 ======== Confidentiality Requirement

(45)

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 debts amounted P 95,000. During the six-month period, the proprietor withdrew cash of P 12,000 and supplies worth P 5,000. During the same period, he also made

additional investments of P 24,000 cash and a second-hand equipment originally costing P 45,000 but with a fair market value of P 20,000. The result of operati ons was a ___________ of ____________. Ending capital P 75,000 Beginning capital (70,000) Additional investments (44,000) Withdrawals 17,000 Net Loss P 22,000 ======== Confidentiality Requirement

(46)

Further Readings

John Wiley and Sons, Inc. pages21 24, 12 13

Co., Inc. 3rd

Educational Supply.

(47)

LESSON 5

STATEMENT OF CASH FLOWS

Study Objectives

(Put a Check mark)

1 Recall the definition of Statement of Cash Flows and classify the transactions as operating activity, investing activity and financing activity

2 Prepare the Statement of Cash Flows and connect the Ending cash balance to the Balance Sheet

Objective 1

Statement of Cash Flows

To recall, the Statement of Cash Flows presents the cash inflows and outflows of the business

through its operating, investing and financing activities. Business Activities

1. Financing activities

a. These activities pertain to transactions such as i. Investments of the owner

ii. Loans whether short term or long term iii. Withdrawal of the owner

iv. Payment of the principal of the loans 2. Investing activities

a. These activities pertain to transactions such as i. Sale of property, plant and equipment

ii. Purchase of property, plant and equipment 3. Operating activities

a. These activities pertain to transaction such as i. Payment of the interest of the loans

ii. Other transactions not enumerated above Objective 2

Connection of the Statement of Cash Flows to the Balance Sheet

The ending cash balance in the Statement of Cash Flows represents the cash balan ce in the

Balance Sheet.

(48)

Further Readings

John Wiley and Sons, Inc. pages 718 726

Co., Inc. 3rd

Educational Supply.

(49)

LESSON 6

CORRECTING ENTRIES

Study Objectives

(Put a Check mark)

1 Know the different accounting errors 2 Prepare correcting entries

Objective 1

Accounting Errors 1. Transposition error

a. Error in the position of figures. Example: 123 is written as 132 2. Transplacement error / Slide

a. Error in the placement of decimal point. Example: 1000.90 is written as 100.0 9

Objective 2

Correcting 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 to

Salaries and Wages Expense and a credit to Cash. The correcting entry was made a t month-end.

Recorded entry

Date Particulars Debit Credit 2009

Sep 15 Salaries and Wages Expense 12 000 Cash 12 000

Withdrawal of the owner Correct entry

Sep 15 X, Drawing 12 000 Cash 12 000

Withdrawal of the owner Correcting Entry

Sep 30 X, Drawing 12 000

Salaries and Wages Expense 12 000 Correcting entry

(50)

(51)

Further Readings

John Wiley and Sons, Inc. pages 68 69, 156 158

Co., Inc. 3rd

Educational Supply.

(52)

LESSON 7

PAYROLL ACCOUNTING

Study Objectives

(Put a Check mark)

1 Understand the concept of employee benefits and compensation and the related terms such as Payroll Register and payroll deductions

2 Prepare journal entries pertaining to payroll accounting Objective 1

Employee Compensation and Benefits

Organizations normally monitor the attendance of the employees through time cloc k cards. These

cards show the time in and time out of the employees. Further, organizations als o prepare and

distribute pay slips. These slips show the gross salary of an employee and the r elated deductions.

The normal deductions from the gross salary are SSS, Philhealth, Pag-IBIG, Withh olding tax and

Cash advances.

Organizations also prepare the Payroll Register which shows the summary of the e mployees pay

slips.

The following is the tabular format of the Payroll Register Employee Name Gross Salary Overtime, Bonus and Other Benefits Total Salary SSS Philhealth Pag-IBIG Withholding Tax Cash Advance Net Salary Alpha Beta Charlie TOTAL

(53)

Objective 2

Payroll Example and Journal Entries

Total Employee Contributions Total Employer Contributions SSS 30,000 60,000

Philhealth 10,000 10,000 Pag-IBIG 5,000 5,000

Assume Total gross salaries and wages is P 200,000, Total withholding taxes paya ble is P 20,000,

and Total advances to employees is P 10,000 Confidentiality Requirement

(54)

Salaries and Wages of the employees Date Particulars Debit Credit

2009

Sep 30 Salaries and Wages Expense 200 000 SSS Premiums Payable 30 000

Philhealth Contributions Payable 10 000 Pag-IBIG Contributions Payable 5 000 Withholding Tax Payable 20 000

Advances to Employees 10 000 Cash 125 000

Salaries and Wages of the employees Employer Contributions

Date Particulars Debit Credit 2009 SSS Premiums Expense 60 000

Sep 30 Philhealth Contributions Expense 10 000 Pag-IBIG Contributions Expense 5 000

SSS Premiums Payable 60 000

Philhealth Contributions Payable 10 000 Pag-IBIG Contributions Payable 5 000 Employer Contributions

Remmittance to the government agencies

Date Particulars Debit Credit 2009 SSS Premiums Payable 90 000

Sep 30 Philhealth Contributions Payable 20 000 Pag-IBIG Contributions Payable 10 000

Withholding Tax Payable 20 000 Cash 140 000

Remmittance to the government agencies

(55)

Further Readings

Co., Inc. 3rd

Educational Supply.

1. Manila: GIC Enterprises & Co., Inc. Confidentiality Requirement

(56)

LESSON 8

ACCOUNTING FOR PROMISSORY NOTES

Study Objectives

(Put a Check mark)

1 Understand the concept of promissory notes and its parts and prepare the journal entries in relation to issuance of promissory notes and payment on the maturity date

2 Understand the concept of discounting of customer s note and prepare the necessary journal entries

3 Understand the concept of discounting of own note and prepare the necessary journal entries

Objective 1 Promissory Notes

A promissory note is an unconditional promise in writing made by one person to a nother, signed

by the maker, engaging to pay on demand or at a fixed or determinable future tim e a sum certain

in money to order or to bearer (Valix, 2005). Parts of a Promissory note

March 24, 2009

I promise to pay X, P 5,000 on April 7, 2009 with 12% interest. (Sgd) Y

1. Date of the note March 24, 2009 2. Maturity date April 7, 2009 3. Maker Y

4. Payee X

5. Face value / Principal P 5,000 6. Interest rate 12%

Given the above promissory note, how much is the Maturity value? Confidentiality Requirement

(57)

Maturity value = Principal + Interest

Interest = Principal x Interest rate x Term / 360

Term refers to the period between the date of the note and the maturity date. 36 0 represents the

number of days in a year in accordance to Banker s rule.

In the above example the term is 14 days. 7 days in March (31-24) and 7 days in April.

For years 2000, 2004, 2008 and so on, remember that there are 29 days in Februar y.

Interest = 5,000 x 12% x 14/360 = 23

Maturity value = 5,000 Journal Entries

Date of the note Books of the Maker

Mar 24 Cash 5 000 Notes payable 5 000

Issuance of promissory note Books of the Payee

Mar 24 Notes receivable 5 000 Cash 5 000

Receipt of promissory note Confidentiality Requirement

(58)

Maturity Date Books of the Maker

Apr 07 Notes payable 5 000 Interest expense 23

Cash 5 023

Payment of promissory note Books of the Payee

Apr 07 Cash 5 023 Notes receivable 5 000 Interest income 23

Collection of principal and interest Dishonoring of promissory note

When the maker fails to pay the principal and interest on the maturity date, the n the promissory

note is considered dishonored. For the journal entry in the books of the maker, instead of

crediting Cash, Accounts payable is credited. On the other hand in the books of the payee, instead

of debiting Cash, Accounts receivable is debited. Maturity Date

Books of the Maker

Accounts payable 5 023 Payment of promissory note Books of the Payee

Apr 07 Accounts receivable 5 023 Notes receivable 5 000

Interest income 23

Collection of principal and interest Confidentiality Requirement

(59)

Discounting of promissory notes

When a promissory note is negotiable, the payee may obtain cash before maturity date by

discounting the note at a bank or other financing company. To discount the note, the payee must

endorse it. Thus, legally the payee becomes an endorser and the bank becomes an endorsee

(Valix, 2005).

Two types of discounting

1. Discounting of customer s note 2. Discounting of own note

Objective 2

Discounting of Customer s note

Using the above example, assume that the maker discounted the note on April 2 at a discount rate

of 15%.

The necessary equations for note discounting are as follows:

Interest on discounting = Maturity value x Discount rate x Discount period / 360 Cash proceeds = Maturity value Interest on discounting

Discount period refers to the period between the discount date and the maturity date.

For this example, the discount period is 5 days (April 7 2). Interest on discounting = 5,023 x 15% x 5 / 360

= 10

Cash proceeds = Maturity value Interest on discounting = 5,023 10

= 5,013

(60)

Discount Date Books of the Maker

Apr 02 No journal entry Books of the Payee

Apr 02 Cash 5 013 Interest expense 10

Notes receivable discounted 5 000 Interest income 23

Discounting of note

Notes receivable discounted is classified as a Contra-asset account and is prese nted as a

deduction from Notes receivable Notes receivable P xxx

Less: Notes receivable discounted xxx P xxx

On the discount date, the payee needs to inform the maker that the note is disco unted. On the

maturity date, the maker should directly pay to the bank or financing company. Maturity Date

Books of the Maker

Cash 5 023

Payment of promissory note Books of the Payee

Apr 07 Notes receivable discounted 5 000 Notes receivable 5 000

Cancellation of contingent liability Confidentiality Requirement

(61)

Types of endorsement 1.

Endorsement with recourse a.

This type requires the endorser to pay the endorsee if the maker dishonors the note. This is the contingent or secondary liability of the endorser.

2.

Endorsement without recourse a.

This type does not impose contingent liability on the endorser.

In the absence of any evidence to the contrary, endorsement is assumed to be wit h recourse

(Valix, 2005).

Assume that in the above example, the maker dishonored the note and the bank cha rged a

protest fee of P 500. Maturity Date

Books of the Maker

Miscellaneous expense 500 Accounts payable 5 523 Dishonoring of note Books of the Payee

Apr 07 Accounts receivable 5 523 Cash 5 523

Payment of promissory note plus protest fees in behalf of the maker Notes receivable discounted 5 000 Notes receivable 5 000

Cancellation of contingent liability Principal P 5,000 Interest 23 Protest fees 500 Total payment P 5,523 ====== Confidentiality Requirement

(62)

Objective 3

Discounting of own note

In this type of discounting, the maker issues a promissory note to obtain cash. Interest on

discounting is deducted in advance and is debited using the account title Discoun t on Notes

Payable .

Example 1:

On July 14, 2009, for money borrowed, X discounted its own 30-day, 12% P 10,000 note with Y.

Interest on discounting = Principal x Interest rate x Term / 360 = 10,000 x 12% x 30 / 360

= 100

Jul 14 Cash 9 900

Discount on notes payable 100 Notes payable 10 000

Discounting of note Maturity Date

Books of the Maker

Aug 13 Notes payable 10 000 Cash 10 000

Payment of promissory note Interest expense 100

Discount on note payable 100 Amortization of discount Confidentiality Requirement

(63)

Example 2:

On December 14, 2009, for money borrowed, X discounted its own 30-day, 12% P 10, 000 note

with Y. The accounting period ends on December 31.

Year-end amortization

Amortization = Discount x (Year-end date Discount date) / Discount period = 100 x (31-14) / 30

= 57

Dec 14 Cash 9 900

Discount on notes payable 100 Notes payable 10 000

Discounting of note Amortization at year-end Books of the Maker

Dec 31 Interest expense 57 Discount on note payable 57 Amortization of discount Presentation

Notes payable P 10,000

Less: Discount on notes payable 43 P 9,957 Maturity Date

Books of the Maker

Jan 13 Notes payable 10 000 Cash 10 000

Payment of promissory note Interest expense 43

Discount on note payable 43 Amortization of discount Confidentiality Requirement

(64)

Further Readings

John Wiley and Sons, Inc. pages 396 400, 473 474

Co., Inc. 3rd

Educational Supply.

(65)

LESSON 9

ACCRUED INCOME

Study Objectives

(Put a Check mark)

1 Understand the concept of adjusting entries and the reasons for providing adjusting entries at year-end 2 Recall the concept of accrued income and prepare adjusting entry in relation to accrued income Objective 1

Adjusting Entries

Adjusting entries refer to journal entries made at the end of the year for the f ollowing reasons:

1.

Accrued income a.

There may be unrecorded income and there is a need to accrue income or recognize receivables.

2.

Accrued expense a.

There may be unrecorded expenses and there is a need to accrue expenses or recognize payables.

3.

Prepaid expense a.

There may be a consumed or used portion in the recorded prepaid expense or there may be an unconsumed or unused portion in the recorded expense. 4.

Unearned income a.

There may be an earned portion in the recorded unearned income or there may be an unearned portion in the recorded income.

5.

Depreciation

a. There is a need to provide depreciation for depreciable fixed assets. 6.

Doubtful accounts a.

There is a need to provide estimated doubtful accounts in relation to accounts receivable.

Objective 2 Accrued income

(66)

Accrued commission income a.

It is possible that the company has already rendered the service pertaining to commission but it has not yet received the commission as of year-end.

2.

Accrued rent income

(67)

a.

It is possible that the company or lessor has already earned the rent but it has not

yet received the rent payment as of year-end. 3.

Accounts receivable a.

It is possible that the company has not yet recorded as of year-end the service rendered.

4.

Accrued interest income a.

It is possible that the company has not yet recorded the interest that is earned in

relation to notes receivable from the date of the promissory note until year-end date.

Accrued income is the same with receivable. For example, accrued interest income is the same with interest receivable. Pro-forma Entry

Date Particulars Debit Credit xxxx

Dec 31 _____ receivable xxx _____ income xxx

Recognition of accrued income Example 1:

A company leases an office space for P 14,000 per month. As of December 31, 2009 , company s

year-end, the tenant has not yet paid its rent for two months.

Adjusting entry

Dec 31 Rent receivable 28,000 Rent income 28,000

(14, 000 x 2)

Recognition of accrued rent Example 2:

As of December 31, 2009, ABC Hotel has generated lodging revenue of P 127,000 fr om guests

whose payments are not yet received until they check out.

Adjusting entry

Dec 31 Lodging receivable 127,000 Lodging income 127,000