Diane B.

Garcia BSA-1C

Financial Accounting and Reporting

Business organization
- organizations that are engaged in business.
- sole proprietorship, partnership, corporation and cooperatives.
Business- an economic activity(source of income) which involves a major part of time,
effort and money in rendering useful or desirable services for profit. An activity where
goods or services are exchanged for money. An entrepreneur or a businessman is the
person engaged in the business.
Creditor=lender Debtor=borrower
Incorporators-(5 to 15 persons) pioneers, founders (stockholder/shareholder)
Business activities:
1. Service
2. Merchandising- buying and selling
3. Manufacturing- raw materials to new form. (Raw materials, working process, finished
goods/products).
Chart of Account- list of account titles. Listing of all accounts used by business entity.
Accounting- is the art of recording, classifying, summarizing in a significant manner
and in terms of money, transactions and events which are in part of at least a financial
character and interpreting the results thereof. (American Institute of Certified Public
Accountants).
4 Phases of Accounting:
1. Recording- bookkeeping is the chronological recording of business transactions
expressed in financial terms.
2. Classifying
3. Summarizing- final output.
4. Interpreting
Book of Accounts:
1. Journal- original entry
2. Ledger- final entry

Business transaction- something with one gives in exchange of another thing of equal
value.
Recording Phases:
Journal- the book
Journalizing- the process of recording transactions in the journal.
Journal entry- entries found in the journal
Accounting elements:
1. Assets
2. Liabilities
3. Equity
4. Income/Revenue
5. Expenses
Summarizing Phases:
1. Statement of Comprehensive Income(Income Statement)
2. Statement of Owner's Equity
3. Statement of Financial Position(Balance Sheet)
4. Statement of Cash flow
Equity:
1. Owner's equity- for sole proprietorship
2. Partners' equity- for partnership
3. Shareholder's equity- for a corporation
Accounting- is a process of identifying, recording and communicating economic
information that is useful in making economic decisions. It is the language of business.
Accountable events- those that affect financial decisions and should be recorded.
2. Communicating- information from the summarizing phase.
SCI elements: income/revenue and expenses. Profit or loss. Financial performance,
32% of the profit goes to the government as tax.
I>E= profit
I<E= loss
I=Ex Break-even Point(BeP)
SFP- assets, liabilities and equity (A=L+E)
Liquidity- capacity of the business to meet current obligations, and the availability of
cash.
Solvency- capacity of the business to meet long term obligations.
Net worth- talks about capital.
 SOE:
Capital beginning __________________________________ Pxx
Add: additional investment__________ Pxx
Profit________________________Pxx xx
Total_____________________________________________ xx
Less: withdrawal (xx)
Capital ending______________________________________Pxx
SCF- shows the details of the balance sheet.
Chart of Accounts
l Assets
l Liabilities
l Equity
l Income
l Expenses
l Costs
Cash- is any medium of exchange that a bank will accept for deposit at phase value. It
includes coins, currency, checks, money orders, bank deposits and drafts (e.g. cash in
bank and cash on hand). It is considered as the most liquid asset.
Notes receivable- is a written pledge that the customer will pay the business a fixed
amount of money on a certain date. It is much secured than accounts receivable.
Interest=P×r×T
Accounts receivable- are claims against customers arising from sale of services or
goods on credit.
1. Sold merchandise on cash
Cash xx
Sales xx
2. Sold merchandise on account
Accounts receivable xx
Sales xxx

Allowance for bad debts- estimated uncollectible accounts.

Inventory- represents the goods that are held for sale by a business. Raw materials
inventory, working process inventory, finish goods inventory.
Prepaid expense- expenses paid in advance.
Property, Plant and Equipment- non-current assets, tangible assets.
Accumulated depreciation- asset, contra-asset account.
Intangible assets- these are identifiable, nonmonetary asset without physical
substance held for use in the production or supply of goods or services, for rental to
others or for administrative purposes (e.g. trademark, patent and franchise).
Liabilities- financial obligations of a business classified as current or non-current.
Notes payable- is like notes receivable in a reversed sense.
Accrued liabilities/expenses- unpaid liabilities or expenses. Expenses already
incurred but not yet paid considered as current liability (e.g. salaries expense, utilities
payable).
Unearned revenues- pre-collections of income, revenue collected in advance.
Equity- capital, withdrawal, drawing/personal, income summary (used to close nominal
accounts).
Income/Revenue
Merchandising- sales
Service business- service fees, service income, service revenue
Expenses
*Cost of sales/Cost of goods sold
*Supplies expense
*Salaries expense: Compensation/Remuneration
-Salaries: White collar job, professionals
-Wages: Blue collar job, laborers.
Accounting equation: A=L+E
Income/Revenue- will increase equity
Expenses- decrease equity
Investment- will increase equity
Withdrawals- decrease equity (specifically the capital account)
Financial Transaction Worksheet- is a form used to analyze increases and decreases
of assets, liabilities and owner's equity of a business entity. Focuses on the 3 elements.

Theory of Debits and Credits

Account Category Increases Recorded by Normal Balance
Debit Credit Debit Credit
Assets  
Liabilities  
Owner’s Equity;  
Owner’s Capital  
Income/Revenue  
Expenses  
Withdrawals  
 Assets Liabilities Owner's Equity
Debit Credit Debit Credit Debit Credit
+ - - + - +

Income/Revenue Expenses
Debit Credit Debit Credit
- + + -

The normal balance of any account refers to the side of the account- debit or credit-
where increases are recorded.

Account- basic summary device in accounting.

T-account- has 3 parts, device used in accounting.
1. Account title- element
2. Left side- debit side
3. Right side- credit side

Transaction Accounts Type of Increase or Debit or Credit

Affected Account Decrease
1. Acquired a. Supplies A I Debit
supplies on b. Accounts L I Credit
account. Payable
2. Payment of a. Accounts L D Debit
accounts. Payable Credit
b. Cash A D
3. Cash a. Cash A I Debit
investment. b. Owner's OE I Credit
Capital
4. Perform a. Accounts A I Debit
service on receivable. Credit
account. b. Service fees I I
5. Collection a. Cash A I Debit
of account. b. Accounts A D Credit
receivable

Footing- getting the total debit and credit.

A trial balance is a list of all accounts with their respective debit or credit balances. It
is prepared to verify the equality of debits and credits.

Steps in Preparing a Trial Balance:

1. List the account titles in numerical order.
2. Obtain the account balance of each account from the ledger and enter as debit
or credit balances in the debit column and credit column respectively.
3. Add the debit and credit columns.
4. Compare the totals and double rule the balances.

Accounting cycle - sequential steps to compose accounting process.

1. Identifying and analysing
2 Journalizing
3. Posting to the general ledger
4. Unadjusted trial balance (so as to check the equality of debits & credits)
5. Adjusting entries
6. Adjusted trial balance
7. Financial statements
8. Closing the books
9. Post-closing trial balance
10. Reversing entries
Journal entries :
l Simple journal entry 1:1:1
l Compound journal entry

Common errors :
1. Transposition 175- 157 =18 divisible by 9.
2. Slide 1000- 100
1. Real accounts- accounts found in the balance sheet (A=L+E).
2. Nominal accounts- temporary accounts found in the income statement
(Income/Revenue and Expenses)
3. Mixed- partly real and partly nominal.

Income statement

Service revenue Pxx

Less: Expenses
Salaries Expense Pxx
Miscellaneous expense xx xx
Profit (loss) Pxx

Balance sheet: account form(horizontal), report form(vertical)

A credit balance in the income summary represents profit.

Items to be adjusted Proforma entry

Debit Credit
1. Depreciation Expense Contra-asset
2. Accrued expenses Expense Accrued expense(L)
3. Accrued income Accrued income Income/Revenue
4. Prepaid expenses
a. Asset method Expense Prepaid expense(A)
b. Expense method Prepaid expense(A) Expense
5. Unearned revenues
a. Income method Income/Revenue Unearned revenue(L)
b. Liability method Unearned revenue(L) Income/Revenue
6. Bad debts Expense Contra-asset
7. Merchandise inventory direct extension method
*closing entry method

Accrued income- earned but not yet collected.

Depreciation- is the systematic allocation of the depreciable amount of an asset over
the useful life.
Kinds of depreciation:
1. Physical depreciation
2. Functional/Economic depreciation

Causes of physical depreciation

1. Wear and tear - because of frequent use.
2. Passage of time- due to nonuse
3. Action of the elements - sunshine, wind, water, dust, smoke
4.Casualty or accident - force majure(inevitable circumstances)
5. Disease or decay
*Physical depreciation results to the ultimate retirement of the property or
termination of the service life of the asset.
Causes of Functional/Economic depreciation
1. Inadequacy- arises when the asset is no longer useful to the entity because of
voluminous operations.
2. Supersession- arises when a new asset becomes available performing the same
functions with a lesser cost.
3. Obsolescence- no future demand(has-been)

Factors of depreciation
1. Depreciable amount
2. Residual value/scrap value
3. Useful life/Economic life
*Depreciation vs. Depletion vs. Amortization
Depletion- wasting assets
Amortization- intangible assets

D= HC-RV Historical cost

UL Residual value
Useful life

Accounting for Merchandising concerns

Jan. 2 The business purchased goods 10,000PhP terms COD.

4 The business purchased goods 10,000PhP terms 2/10, n/30.
6 The business returned 2,000PhP worth of goods purchased on Jan. 2.
8 The business returned 2,000PhP worth of goods purchased on Jan. 1.
10 The business paid transportation cost amounting to 1,000PhP.
14 The business settled its account.
16 The business sold merchandise 5,000PhP terms:cash.
18 The business sold merchandise 5,000PhP terms 2/10, n/30
20 The business paid 1,000PhP for the transportation cost.
22 The business received 500PhP worth of returned goods sold on Jan. 18.
25 The business collected accounts from the customer.
Required: Journal entries.

Jan 2 Purchases 10,000

Cash 10,000
To record cash purchases.

4 Purchases 10,000
Accounts payable 10,000
2/10, n/3
6 Cash 2,000
Purchases returns and allowances 2,000
To record returned goods purchased on cash.

8 Accounts payable 2,000

Purchases returns and allowances 2,000
To record goods returned purchased on account.

10 Transportation in 1,000
Cash 1,000
To record transportation cost.

14 Accounts payable 8,000

Cash 7,840
Purchases discount(8000 x 0.02) 160
To record settlement of accounts.

16 Cash 5,000
Sales 5,000
To record cash sales.

18 Accounts receivable 5,000

Sales 5,000
2/10, n/30.

20 Transportation out 1,000

Cash 1,000
To record payment for transportation cost.

22 Sales returns and allowances 500

Accounts receivable 500
To record sales returns.

25 Cash 4,410
Sales discount(4,500 x 0.02) 90
Accounts receivable 4,500

Kinds of discounts:
1. Cash discounts
a. Purchases discount- to the point of view of the buyer
 b. Sales discount- to the point of view of the seller.
2. Trade discounts
*no special entry
*based on the invoice price
IP= LP-TD E.g. 10,000 x .2(TD) = 2,000
where: IP- Invoice price LP= 10,000
LP- List price IP= 10,000 - 2,000
TD- Trade discount = 8,000

Freight Terms Who shoulders the Who pays the shipper?

transportation cost?
1. FOB Destination, Seller Seller
freight prepaid
2. FOB Shipping point, Buyer Buyer
freight collect
3. FOB Destination, Seller Buyer
freight collect
4. FOB Shipping point, Buyer Seller
freight prepaid

Transportation in- the business is the buyer

Transportation out- to the point of view of the seller, transportation cost is
chargeable to the seller.
FOB- Free On Board

Freight prepaid -the seller paid the transportation cost before the shipment took
place.
Freight collect- the buyer will pay the cost of transporting the goods at the time they
are received.

Case 1: Mario traders sold merchandise 17,000PhP FOB destination, freight prepaid,
terms: 2/10, n/30. The transportation cost amounted to 1,900PhP.

Accounts receivable 17,000

Sales 17,000
To record sale of merchandise on account.

Transportation out 1,900

Cash 1,900
To record transportation cost.

Entry upon collection:

Cash 16,660
Sales discount 340
Accounts receivable 17,000
To record collection of accounts receivable.
Case 2: Mario traders sold merchandise 17,000PhP FOB shipping point, freight
collect, terms: 2/10, n/30. The transportation cost amounted to 1,900PhP.
 Accounts receivable 17,000
Sales 17,000
To record sale of merchandise on account.

Cash 16,660
Sales discount 340
Accounts receivable 17,000
To record collection of accounts receivable.

Case 3: Mario traders sold merchandise 17,000PhP FOB destination, freight collect,
terms: 2/10, n/30. The transportation cost amounted to 1,900PhP.

Transportation out 1,900

Accounts receivable 15,100
Sales 17,000
To record sale of merchandise on account and transportation cost.

Entry upon collection:

Cash 14,760
Sales discount 340(17,000 x 0.02)
Accounts receivable 15,100
To record collection of accounts receivable.

Case 4: Mario traders sold merchandise 17,000PhP FOB shipping point, freight
prepaid, terms: 2/10, n/30. The transportation cost amounted to 1,900PhP.

Accounts receivable 18,900

Sales 17,000
Cash 1,900
To record sale of merchandise on account.

Entry upon collection:

Cash 18,560
Sales discount 340
Accounts receivable 18,900

Case 1: Mario traders purchased merchandise 8,500PhP FOB destination, freight

prepaid, terms: 2/10, n/30. The transportation cost amounted to 950PhP.
Purchases 8,500
Accounts payable 8,500
2/10, n/30

Accounts payable 8,500

Purchases discount 170
Cash 8,330

Case 2: Mario traders purchased merchandise 8,500PhP FOB shipping point

,freight collect 2/10 n/30. The transportation costamounted to 950PhP .

Purchases 8,500
 Transportation in 950
Accounts Payable 8,500
Cash 950

Accounts payable 8,500

Purchases discount 170
Cash 8330

Case 3: Mario traders purchased merchandise worth 8,500PhP FOB destination,

freight collect 2/10 n/30. The transportation cost amounted to 950PhP.

Purchase 8,500
Cash 950
Accounts Payable 7,550

Accounts Payable 7,550

Purchases discount 170
Cash 7,380
Case 4: Mario traders purchased merchandise worth 8,500 FOB shipping point,
freight prepaid terms 2/10 n/30. The transportation cost amounted to 950PhP.

Purchases 8,500
Transportation in 950
Accounts payable 9,450

Accounts payable 9,450

Purchases discount 170
Cash 9,280

Proforma entry
Debit Credit
1. Provision for bad debts Expense Contra-asset
2. Merchandise inventory Direct extension method
*closing entry method

Accounts receivable 100,000PhP

Allowance for bad debts 2,000

Additional information (Independent cases)

1. Allowance for bad debts is estimated to be 10% of outstanding accounts
receivable.
Bad debts expense 98,000
Allowance for bad debts 98,000
2. Allowance for bad debts is to be increased by 10% of accounts receivable.
Bad debts expense 12,000
Allowance for bad debts 12,000
3. Allowance for bad debts is to be increased to 10% of accounts receivable.
Bad debts expense 8,000
 Allowance for bad debts 8,000
Bad debts- uncollectible accounts
Beginning inventory is extended debit in your adjusted trial balance and income
statement. Ending inventory is credited in your income statement and debited in the
balance sheet of your worksheet.