Review of Basic Accounting Partnership

Definitions ➢ A contract between two or more persons

who bind themselves to contribute
Accounting Standards Council (ASC)
money, property, or industry to a
➢ Accounting is service activity. Its common fund, with the intention of
function is to provide quantitative dividing the profits among themselves.
information, primarily financial in
Corporation
nature, about the economic entities, that
is intended to be useful in making ➢ An artificial being created by operation of
economic decisions. law, having the right of succession and
the powers, attributes, and properties
American Institute of Certified Public
expressly authorized by law or incidental
Accountants (AICPA)
to its existence.
➢ Accounting is the art of recording,
classifying, and summarizing in a
significant manner and in terms of Types of Business Operations
money, transactions, and events which
Service
are in and part at least of a financial
character interpreting the results thereof. ➢ Offers services (professional or non-
professional) to clients in exchange for a
American Accounting Association (AAA)
fee.
➢ Accounting is a process of identifying,
Merchandising
measuring, and communicating
economic information to permit ➢ Buys and resells goods without changing
informed judgement and decisions by its substance.
users of the information.
Manufacturing
*Accounting is about quantitative information.
➢ Buys raw materials and converts them,
*The information is likely to be financial in through the application of labor and
nature. incurrence of overhead, into finished
products for sale.
*The information should be useful in the
decision making.
Warren Buffet (Chairman/CEO of Berkshire Practice Fields/Areas of the Accountancy
Hathaway) Profession
➢ Accounting is the language of business. ➢ Private accounting- controller, employed
➢ Government Accounting- accounting for
public
Business ➢ Public Accounting- audit, taxation,
advisory, client support, independent
➢ The term “business” refers to the
➢ Education/Academe- teachers
organized efforts and activities of
individuals to produce and sell goods and
services either to generate a profit, fulfill
Generally Accepted Accounting Principles
a charitable mission or further a social
(GAAP)
cause.
➢ GAAPs represent rules, procedures,
practice, and standards followed in the
Forms of Business Organizations preparation and presentation of financial
statements.
Sole Proprietorship
Philippine Financial Reporting Standards
➢ A form of business organization that is
(GAAP in the PH) include
owned and “usually managed” by an
individual known as the £Sole ➢ Philippine Financial Reporting Standards
Proprietor” – International Financial Reporting
Standards
 ➢ Philippine Accounting Standards –
International Accounting Standards
➢ Philippine Interpretations –
Interpretations of IFRIC & Philippine
International Committee. *Ledger- group of accounts which are
systematically categorized into asset,
liability, equity, revenue, and expense
Business Transactions accounts.
➢ A transaction is an exchange of values Summarizing
(money, goods, services) between two or
➢ Preparation of financial
more parties expressed in terms of
statements: statement of financial
money.
position, income statement, statement
of comprehensive income, statement
of changes in equity, and statement of
Accounting Process
cash flows.
Identifying
➢ the recognition or nonrecognition of
Objective of Accounting
business activities as “accountable
events” ➢ To provide quantitative financial
➢ An event is accountable or qualifiable information, about a business useful
when it has effect on assets, liabilities, to statement users particularly
and equity. owners and creditors in making
economic decisions.
Measuring
➢ Accounting is an information
➢ Assigning of peso amounts to the system, that measures business
accountable economic transactions and activities, process information into
events. financial reports and communicates
➢ Financial statements without monetary the reports to decision makers.
amounts would be unintelligible or ➢ Primary task of accountant – to
incomprehensible. supply financial information so that
➢ Historical cost- original acquisition cost the statement users could make
and most common measure of financial informed judgement and better
transaction decisions.
➢ Current value- fair value, value in use,
*Financial reports tell us how well an entity is
fulfillment value, and current cost
performing in terms of profit and loss and
Communicating where it stands in financial terms.
➢ Process of preparing and distributing
accounting periods to potential users of
accounting information.
➢ Universal language of business Accounting Cycle
➢ Identifying and measuring are pointless
Analysis of business transactions
if information in the accounting records
cannot be communicated to users. ➢ Business documents
o Official receipts – evidence of
Recording/Journalizing
collection/sale of service
➢ Systematically maintaining a record of o Sales invoice – evidence of sale of
all economic business transactions after goods
identifying and measuring. o Check vouchers – authorization
for the preparation and eventual
Classifying
payment of checks
➢ Sorting or grouping of similar and o Checks – evidence of payment
interrelated economic transactions into ➢ Dual – effect of every transaction; value
their respective classes. received, and value given.
➢ Accomplished by posting to the ledger. ➢ Effects on the accounting elements
 ➢ Basic Accounting Equation (BAE) – Posting
Assets =Liabilities+Owner’s Equity
➢ Classifying/grouping of journal entries.
➢ Ledger – book of final entry
Types of Journals
➢ General Journal – ledger for control
accounts.
➢ Subsidiary Ledger - ledger for sub-
accounts supporting the control accounts
(AR subsidiary ledgers, AP subsidiary
ledgers)

Preparation of Unadjusted Balance

Journalizing ➢ List of ledger accounts with open balance
➢ Chronological recording of transactions ➢ To check the equality of debits and
➢ Journal – book of original entry credits
➢ Assets (including contra-assets),
Types of Journals liabilities, capital, drawing/personal,
➢ General Journal – 2 column (debit & income, expense
credit) journal

Preparation of Working Paper with

Adjustments
➢ Working paper is a financial tool that
facilitates the preparation of financial
statements.

Types of Adjustments
➢ Special Journal
o Cash receipts journal – collections Accruals (Accrued income/ expense)
o Cash disbursements journal – ➢ Accrued income – items already earned
disbursements but remain uncollected as at the end of
o Sales journal – sales on account the accounting period.
(AR) ➢ (1) uncollected fees on services already
o Purchases journal – purchase on rendered
account (AP) ➢ (2) uncollected accounts from customers
on goods already delivered
➢ (3) uncollected rent on premises or assets

already occupied or used by the lessee.

➢ A receivable account is debited since
the item remains uncollected as at the
end of accounting period
➢ An income account is credited since the
item has already been earned (service has
➢ All other transactions shall be recorded in been rendered/goods have been
the General Journal (sales and purchases delivered)
supported by a promissory note, sales and
purchases returns, noncash investment of
the owner, adjusting entries, closing
entries, and reversing entries.
 Prepayments (prepaid expense)
➢ Items already paid but not yet incurred
as at the end of the period.
➢ (1) unused supplies
➢ (2) prepaid rent
➢ (3) prepaid advertising
Methods of Accounting for Prepayments
Expense method of accounting
➢ Expense account is debited at the time
➢ Accrued expense – items already of payment.
incurred (used) but remain unpaid as at
the end of the accounting period.
➢ (1) unpaid fees on services already
incurred by the business
➢ (2) unpaid salaries of employees
➢ (3) unpaid rent on premises or assets
already occupied or used by the lessee.

➢ An expense account is debited since

the item has already been incurred
during the accounting period.
➢ A payable account is credited since
the item remains unpaid as at the end ➢ The adjusting entry involving
of the accounting period. prepayments accounted for under the
expense method include debit to an
asset account and a credit to an expense
account equal to the unexpired (unused)
portion of the prepayment.
➢ Adjustment only involves two accounts:
asset and expense account. The debit in
the adjusting entry is always opposite the
method. Hence, if the method used is
expense method, the debit in the entry is
always an asset account. The credit is the
same as the method (expense account)
Asset method of accounting
➢ An asset is debited at the time of payment.
 unearned portion of the advance
collection.

➢ The adjustment involves only, liability

and income accounts. The debit in the
adjusting entry is always the same as the
method. Hence, if the method used is
income method, the debit in the entry is
➢ The adjusting entries involving always an income account. The credit is
prepayments accounted for under the the opposite of the method (liability
asset method includes a debit to an account).
expense account and a credit to an asset Liability method of accounting
(prepaid/unused) account equal to the
expired (used) portion of the prepayment. ➢ A liability account is credited at the time
➢ The adjustment involves only, asset and of collection.
expense accounts. The debit in the
adjusting entry is always opposite the
method. Hence, if the method is asset
method, the debit in the entry is always
an expense account. The credit is the
same as the method (asset account).

Unearned Income (Deferred Income)

➢ Items already collected but remain
unearned as at the end of the period.
➢ (1) unearned rent income
➢ (2) unearned interest income
➢ (3) advance collections from customers
for the future delivery of goods/services
➢ The adjusting entry involving unearned
Methods of accounting for Unearned Income
income accounted for under the liability
Income method of accounting method includes a debit to a liability
(unearned) account and a credit to an
➢ Income account is credited at the time of
income account equal to the earned
collection.
portion of the advance collection.
➢ The adjustment involves only, liability
and income account. The debit in the
adjusting entry is always the same as the
method. Hence, if the method used is
liability method, the debit in the entry is
always a liability (unearned) account.
The credit is the opposite of the method
(income account).

Doubtful Accounts
➢ Accounts that are estimated to be
uncollectible as at the end of the
accounting period.

➢ The adjusting entry involving unearned Methods of accounting for doubtful accounts
income accounted for under the income Allowance method (GAAP)
method includes a debit to an income
account and a credit to a liability Direct write – off method (BIR Approach)
(unearned income) account equal to
 % of Accounts Receivable (AR) method
➢ Allowance for doubtful accounts is
estimated as a certain per cent of the
outstanding balance of accounts
receivable as at end of the accounting
period.

Methods of Estimating doubtful accounts

% of Income method
Adjustments:
➢ Provision for doubtful accounts is
estimated as a certain per cent of the
income generated during the accounting
period.

Aging of Accounts Receivable (AR) method

➢ Allowance for doubtful accounts (AFDA)
is estimated based on the age of the
accounts comprising the outstanding
balance of accounts receivable as at end
of the accounting period.
Adjustments:
 Methods of computing for depreciation
Straight line method of depreciation

Adjustments:

Depreciation
➢ Refers to the systematic and rational
allocation of the cost of a depreciable
asset over the periods benefitted by its
intended use.
Elements of Depreciation
Cost
➢ The cost of acquisition of the depreciable
asset which includes the cost of purchase
or construction (fair value at the time of
receipt is acquisition is by way of
donation or grant) plus all incidental costs
necessary in bringing the asset to its
present location and in preparing the
same for its intended use. Other methods (covered under Intermediate
Acctg)
Residual value
➢ Other uniform methods
➢ Refers to the amount expected to be o Composite method
recovered or salvaged from the asset at o Group method
the end of its estimated useful life. ➢ Variable methods
Estimated useful life o Output method
o Production/machine hours
➢ The estimated period where benefits from method
the use of the depreciable asset are ➢ Accelerated method
expected to flow to the Company. o Sum-of-year’s digits method
Depreciable cost o Declining balance method

➢ The amount that is left after deducting the

residual value from the cost of the asset. Ending Inventories
It is the portion of the cost that is
subjected to depreciation. ➢ Pertain to the cost of unsold goods as at
the end of the period is applicable only to
 merchandising and manufacturing Journalizing and posting of adjusting entries
business.
➢ The adjusting entries entered in the
➢ Adjustment to set up the ending inventory
worksheet are not yet formally recorded
as at end of the period is applicable only
in the books of accounts of the business.
to merchandising and manufacturing
➢ The same were informally entered in the
businesses.
worksheet to affect the adjustments of
assets, liabilities, income, and expenses
prior to the preparation of the financial
statements which must be prepared based
on adjusted balances.
➢ Immediately after the preparation of the
financial statement, the adjustments are
formally journalized, and the effects
posted to the respective ledgers of the
affected accounts (assets, liabilities,
income, and expense)

Journalizing and posting of closing entries

➢ Closing entries are prepared at the end of
the year to bring the balances of nominal
accounts to zero (to close the balance)
➢ Nominal accounts (temporary accounts)-
include expenses, income & expense
summary, and personal (drawing)
accounts. Assets, liabilities, and capital ae
balances are not closed at year end and
are carried forward from one accounting
period to the next are called real account
(permanent accounts). An account is
closed by recording an amount equal to
Preparation of the financial statements
its adjusted balance opposite its normal
➢ The financial statements are how side (income account, whose normal side
financial information is communicated to is on the credit is closed by a debit entry).
the decision makers.
➢ The objective of financial statements is to
provide financial information about the
reporting entity’s assets, liabilities,
equity, income, and expense that is useful
to users of financial statements in
assessing the prospects for future net
stewardship of the entity’s economic
resources.
Basic set of financial statements
➢ Statement of financial position
➢ Statement of financial performance
(income statement)
➢ Statement of changes in equity
➢ Statement of cash flows
➢ Notes to financial statements
 applies to a particular transaction or other
event, or when a Standard allows a choice
of accounting policy
➢ assist all parties to understand and
interpret the Standards
The objective of general-purpose financial
reporting
➢ to provide financial information about the
reporting entity that is useful to existing
and potential investors, lender, and
other creditors in making decisions
relating to providing resources to the
entity.
Decisions relating to providing resources to
entity
➢ buying, selling, or holding equity and
Preparation of the post-closing balance debt instruments
➢ Prepared immediately after posting the ➢ providing or settling loans and other
closing entries. Since closing entries have forms of credit
the effect of closing out nominal ➢ exercising rights to vote on, or otherwise
accounts, the post-closing trial balance influence, management’s actions that
contains only real accounts (assets, contra affect the use of the entity’s economic
assets, liabilities, and adjusted capital). resources
Information needs of decision makers

Journalizing and posting of reversing entries ➢ the economic resources of the entity,
claims against the entity (financial
➢ the only step in accounting cycle that is position) and changes in those resources
not mandatory and claims (financial performance and
➢ reversing entries are based on adjusting other activities such as issuance of debt or
entries and are usually prepared at the equity securities)
start of the immediately succeeding ➢ how efficiently and effectively the
period to: entity’s management and governing
o eliminate the accounts that board have discharged their
resulted from the preparation of responsibilities to use the entity’s
adjusting entries (accrued economic resources.
income/expense, prepaid
expense, unearned income) Qualitative characteristics of useful financial
o facilitate the usual recording of information
transactions (debit expense for ➢ if financial information is to be useful, it
payments and credit income for must be relevant and faithfully
collection. represent what it purports to represent.
The usefulness of financial information is
enhanced if it is comparable, verifiable,
Conceptual framework for financial reporting timely, and understandable.
➢ describes the objective of, and concepts Fundamental qualitative characteristics
for, general purpose financial reporting.
➢ relevance
Purpose of the conceptual framework o predictive value
o confirmatory value *materiality
➢ assist the International Accounting
➢ faithful representation
Standards Board to develop IFRS
o complete
Standards that are based on consistent
o neutral
concepts
➢ assist preparers to develop consistent o free from error
accounting policies when no Standard
Enhancing qualitative characteristics Reporting Period
➢ comparability ➢ financial statements are prepared
o consistency specified period of time (reporting
➢ verifiability period) and provide information about:
o direct o assets and liabilities – including
o indirect unrecognized assets and liabilities
➢ timeliness - and equity that existed at the end
➢ understandability of the reporting period, or during
the reporting period
*The cost constraint on useful financial
o income and expenses for the
reporting: Cost-benefit Analysis
reporting period

Financial statements and the reporting entity

Perspective adopted in Financial Statements
Objective and scope of financial statements
➢ financial statements provide information
➢ to provide financial information about the about transactions and other events
reporting entity’s assets, liabilities, viewed from the perspective of the
equity, income, and expenses that is reporting entity as a whole, not from the
useful to users of financial statements in perspective of any particular group of the
assessing the prospects for future net cash entity’s existing or potential investors,
inflows to the reporting entity and in lender, or other creditors.
assessing management’s stewardship of
the entity’s economic resources.
Going Concern Assumption
That information is provided:
➢ financial statements are normally
➢ in the statement of financial position, by
prepared on the assumption that the
recognizing assets, liabilities, and equity
reporting entity is going concern and will
➢ in the statements of financial
continue in operation for the foreseeable
performance, by recognizing income and
future.
expenses
➢ in other statements and notes, by
presenting and disclosing information
The Reporting Entity
about:
o recognized assets, liabilities, ➢ A reporting entity is an entity that is
equity, income, expenses, required, or chooses, to prepare financial
including information about their statements. A reporting entity can be a
nature and about the risks arising single entity or portion of an entity or can
from those recognized assets and comprise more than one entity. Aa
liabilities reporting entity is not necessarily legal
o assets and liabilities that have not entity.
been recognized including
information about their nature and Financial statements of a reporting entity may be
about the risks arising from them referred to as:
o cash flows ➢ Consolidated financial statements
o contributions from holders of ➢ Unconsolidated financial statements
equity claims and distribution to ➢ Combined financial statements
them
o the methods, assumptions and
judgements used in estimating the Elements of financial statements
amounts presented or disclosed,
and changes in those method, ➢ Assets, liabilities, and equity, which
assumptions, and judgements. relate to a reporting entity’s financial
position
 ➢ Income and expenses, which related to a ➢ Current value - measures provide
reporting entity’s financial performance monetary information about assets,
liabilities, and related income, and
expenses, using information updated to
reflect conditions at the measurement
date
o Fair value – the price that would
be received to sell an asset, or paid
to transfer a liability, in an orderly
transaction between market
participants at the measurement
Recognition
date.
➢ The process of capturing for inclusion in o Value in use (for assets) /
the statement of financial position or the fulfillment value (for liabilities) –
statements of financial performance an value in use is the present value of
item that meets the definition of one of the cash flows, or other economic
the elements of financial statements – an benefits, that n entity expects to
asset, liability, equity, income, or derive from the use of an asset and
expense. from its ultimate disposal.
Fulfillment value is the present
Relevance value of the cash, or other
➢ Existence uncertainty economic resources, that an entity
➢ Low probability of an inflow or outflow expects to be obliged to transfer as
of economic benefits it fulfills a liability.
o Current cost – the cost of an
Faithful representation equivalent asset at the
➢ Measurement uncertainty measurement date, comprising
the consideration that would be
Derecognition paid at the measurement date plus
➢ The removal of all part of a recognized the transaction costs that would be
assets ort liability from n entity’s incurred at that date. The current
statement of financial position. cost of a liability is the
➢ Normally occurs when that item no consideration that would be
longer meets the definition of an asset of received for an equivalent liability
a liability. at the measurement date minus
the transaction costs that would be
Measurement incurred at that date.
➢ Elements recognized in financial
statements are quantified in monetary
terms. Presentation and disclosure
➢ This requires the selection of a ➢ A reporting entity communicates
measurement basis. information about its assets, liabilities,
➢ A measurement basis is n identified equity, income, and expenses by
feature – for example, historical cost, fair presenting and disclosing information in
value, or fulfillment value – of an item its financial statements.
being measured.
Classification
Measurement basis
➢ Sorting of assets, liabilities, equity,
➢ Historical cost - measures provide income, or expenses based on shared
monetary information about assets, characteristic for presentation and
liabilities, and related income, and disclosure purposes. Such characteristics
expenses, using information derived, at include – but are not limited to the nature
least in part, from the price of the of the item, its role (or function) within
transaction or other event that gave rise to the business activities conducted by the
them. entity, and how it is measured.
➢ Classification is applied to the unit of
account selected for an asset or liability.
 o Offsetting - occurs when an entity at the end of the period exceeds
recognizes and measures both an the financial amount of net assets
asset and liability separate units of at the beginning of the period,
account, but groups them into a after excluding any distribution
single net amount in the statement to, and contribution form, owners
of financial position. during the period. Financial
➢ To provide useful information, it may be capital maintenance can be
necessary to classify equity claims measured in either nominal
separately if those equity claims have monetary units or units of
different characteristics. Similarly, to constant purchasing power
provide useful information, it may be ➢ Physical capital maintenance
necessary to classify components of o A profit is earned only if the
equity separately if some of those physical productive capacity (or
components are subject to particular operating capability) of the entity
legal, regulatory, other requirements. (or the resources or funds needed
➢ Classification of income and expenses in to achieve that capacity) at the end
applied to of the period exceeds the physical
o Income and expenses resulting productive capacity t the
from the unit of account selected beginning of the period, after
for an asset or liability excluding any distributions to,
o Components of such income and and contributions form, owners
expenses if those components during the period.
have different characteristics and
*Return on Capital VS Return of Capital
are identified separately. For
example, a change in the current
value of an assets can include the
effects of value changes and the Capital maintenance adjustment
accrual of interest. It would be ➢ The revaluation or restatement of assets
appropriate to classify those and liabilities gives rise to increases or
components separately if doing so decreases in equity.
would enhance the usefulness of ➢ While these increases or decreases mee
the resulting financial the definition of income and expenses,
information. they are not included in the income
➢ Income and expenses are classified and statement under certain concepts of
included after capital maintenance.
o In the statement of profit and loss ➢ Instead these items are included in equity
o Outside the statement of profit or as capital maintenance adjustments or
loss, in other comprehensive revaluation reserves.
income

Concepts of capital
➢ Under a financial concept of capital, such
as invested money or invested purchasing
power, capital is synonymous with the net
assets or equity of the entity
➢ Under a physical concept of capital, such
as operating capability, capital is
regarded as the productive capacity of the
entity, based on, for example, units of
output per day.
Concepts of capital maintenance and the
determination of profit
➢ Financial maintenance
o A profit is earned only if the
financial amount of the net assets