ACCTG 1 - INTRODUCTION TO Note: Both bodies are the same in regulations and

FINANCIAL ACCOUNTING content but just in a different name

Cara Nicole G. Maminta VI. MEASUREMENT PRINCIPLES
2023-04675 ● Measurement: process of determining the
cgmaminta@up.edu.ph amount that should be recognized in the records
○ Either a transaction is first measured at
the amount of cash that was paid or will
[LECTURE 1] be paid at the value exchanged
● Measurement Principles
○ Historical cost
I. DEFINITION OF ACCOUNTING
■ Recording the transaction at
● The language of business
their original value
○ The medium for communication for
■ Relevant if the business is going
stakeholders, companies, and investors
to operate into the foreseeable
● Indicates business performance through
future and the resource will
financial statements
continue to be used in the
● Provides principles and standards in
business
determining the business's financial position
○ Fair value
● Basis for economic decision-making
■ Recording the amount of
resources that could be sold in
II. THE ACCOUNTING PROCESS
the market
Identifying → Recording, Classifying → Communicating
■ Usually a marked-up price
III. USERS OF FINANCIAL INFORMATION
VII. ASSUMPTIONS
● Monetary unit/value concept/assumption
External Internal ○ Only transactions that can be reliably
- Measures the success of the expressed as an amount of money can
company
be included in the accounting records
○ Transactions that leave a monetary
Investors, lenders, Directors, management,
impact on the record
creditors, government, employees
○ Ex.: withdrawing cash/use of cash
customers, suppliers,
public

IV. TYPES OF ACCOUNTING

Financial Managerial

Intended for external Intended for internal

decision makers, presents decision-makers, offers the
the financial position of the managerial perspective of ● Economic entity/reporting entity
company, general yet strict financial position, internal
○ The company is a separate entity from
yet specific
the owner or operator
Historical, standards and Future-oriented, timely and ○ Only record and report a business’s
rules-based, general predictive, special purpose, economic activities separate and apart
purpose assumption, measures effectiveness and from the economic activities of its owner
usefulness through efficiency and other reporting entities
explanation ● Going concern assumption
○ The reporting entity will continue to
V. ACCOUNTING STANDARDS operate in the foreseeable future
● International Financial Reporting Standards ○ The company will operate long enough
○ Standard setting body: International to use its resources for their intended
Accounting Standards Board, IFRS purpose
Interpretation Committee ○ The company will not close down
● Philippine Financial Reporting Standards
○ Standard setting body: Financial and VIII. FORMS OF BUSINESS ORGANIZATIONS
Sustainability Reporting Standards
Council
 ● Present economic resource controlled by the
entity as a result of past events and have the
potential to produce economic benefits
● Used to carry out activities, i.e. production and
distribution of merchandise
● Ari-arian
● Sole proprietorship
○ Owned by one person; usually small
service businesses, farms, and small Common Assets
retail stores ● Accounts receivable: asset created when a
○ Relatively small amount of capital to company sells goods or services to customers
start who promise to pay cash in the future
○ Unlimited liability: the owner/proprietor ● Prepaid expense: created when a business pays
receives any profits, suffers any losses, cash in advance for goods or services that will
and is personally liable for all debts of be used over time
the business ● Investment, land, buildings, patents, copyrights
○ Since no legal distinction between the
business as an economic unit and the Liabilities
owner, the life of the proprietorship is ● Claims to economic resources and are the
limited to the life of the owner present obligations arising from past events, the
○ Profits of the business are reported and settlement of which will include the transfer an
taxed on the owner’s personal income economic resource
tax return ● Cash outflows/payments
● Partnership
○ Two or more persons; service-type Common Liabilities
businesses ● Accounts payable: obligation to pay cash to
○ Partnership agreeement regarding initial supplies in the future
investments, duties, division of ● Notes payable: when a business borrows money
profit/loss, and settlements to purchase equipment
○ Partners’ share of the profit must be ● Unearned revenue: arises when a customer pays
reported and taxed on the partners’ a business in advance of being provided with a
personal income tax returns service or product; liability since the business
○ Unlimited liability has an obligation to provide the service
● Corporations
○ Organized as a separate legal entity Owner’s Equity
under federal/provincial/territorial ● The residual interest in the assets of the entity
corporate law after deducting all its liabilities
○ One or many owners; ownership is ● Owner’s claim on the assets of the company
divided into transferable shares
○ Easy changes of ownership due to When does equity increase?
selling shares ● Investments by the owner: contributions of cash
○ Unlimited life since ownership can be or assets, increase in asset and increase in
transferred through the sales of shares owner’s equity
without dissolving the corporation ● Revenue: the gross increase in owner’s equity
○ Limited liability: stakeholders are not resulting from business activities entered into
personally liable for the debts of the the purpose of earning income
corporation and risk only losing the ○ Revenue increases owner’s equity; if
amount they invested profit, equity increases | if loss, equity
○ Responsible for its own debts and for decreases
paying taxes on tis profit
When does equity decrease?
● Drawings: withdrawal of cash or other assets for
[LECTURE 2]
personal use; decrease in asset and decrease in
owner’s equity
I. THE ACCOUNTING EQUATION
● Expenses
ASSETS = LIABILITIES + OWNER’S EQUITY

Assets
 Expanded Equation:

ASSETS = LIABILITIES + OWNER’S CAPITAL -

OWNER’S DRAWINGS

→ Cash inflow of $15,000 also increases the owner’s

equity as the capital

II. FINANCIAL STATEMENTS

Income statement
● Statement of comprehensive income/profit or
loss statement
● Reports the economic performance of the → There is a decrease in cash assets but an increase in
business’s operations over a specified period the equipment assets.
● Profit results when revenues are greater than
expenses
● Loss results when expenses are greater than
revenues

NET INCOME = REVENUE - EXPENSES

Statement of Changes in Equity

● Movements of equity

OWNER’S CAPITAL, ENDING = OWNER’S CAPITAL, → Since the payment is made through a purchase on
BEGINNING + INVESTMENTS - DRAWINGS + NET account or a credit purchase, it increases the liability of
INCOME the company, and the supply asset increases
→ Assets are increased because the use of paper and
Statement of Financial Position supplies can produce economic benefits.
● Snapshot of the business's financial condition or → Paying the bill next month/time period: indicates
position credit
● Balance sheet
● Use of the accounting equation → ALOE

III. TRANSACTION ANALYSIS

How do we analyze transactions?

● Identify the specific accounts that are affected
● Identify the amount of change in each account

→ Each transaction must have a dual effect on the

equation for the two sides of the accounting equation to
remain equal. → Cash assets increases, thus owner’s equity increases
due to the revenue
→ For example, if an asset is increased, there must be a
corresponding decrease in another asset, an increase in
liabilities, or an increase in owner’s equity.

LEARN THROUGH CASES.

→ Advertising is not an asset because the benefits have
ALREADY been used. Advertising is an EXPENSE, thus,
the owner’s equity decreases and liabilities increase
since it is on account/credit
 → Decrease in accounts receivable and increase in cash
assets
→ The collection for an accounts receivable and
increase in cash assets does NOT increase the owner’s
equity since it was recorded as a revenue earlier

→ Increase in cash assets and amounts receivable +

increase in revenue, thus increasing the owner’s equity
→ The assets from earning revenues do not have to be
in cash
→ RMMBR! Owner’s equity is increased when revenues
are recognized; revenues are recognized when the
service/performance obligations are provided and → No entry since it is still September and the contract
complete takes effect when it is October; thus, it has no entry.
→ NOTE! When the accounts are received at a later
date, cash assets will increase and accounts receivable
will decrease

→ Decrease in cash assets and decrease in owner’s

equity, particularly, drawings
→ NOTE! Owner’s drawings are not expenses but they
are disinvestments
→ There is a decrease in cash assets and a decrease in
owner’s equity due to expenses, i.e. rent, salaries, and
utilities
→ Must reflect a negative number because expenses
decrease owner’s equity

→ Decrease in cash assets since it is paid in cash and a

decrease in liabilities (accounts payable)
→ NOTE! There is no decrease in owner’s equity since it
has already been noted as an expense when it was paid
through credit
 [LECTURE 3] ● Debit (Dr.)– left; Credit (Cr.) – right
● Debit and credit are directional signals that
I. ACCOUNTING CYCLE describe where entries are made in the accounts
● The sequence of accounting procedures used to ● Entering an amount on the left side of an
record, classify, and summarize accounting account is called debiting/debit entry
information ● Entering an amount on the right side is called
crediting/credit entry

Normal Balance
● Credit or debit that is normally expected from a
certain account

How do we determine which is credit or debit?

ASSETS = LIABILITIES + INVESTMENT + REVENUE -

II. ANALYZING AND JOURNALIZING BUSINESS
EXPENSES - DRAWINGS
TRANSACTIONS

Terms and Concepts Accounts Normal Increase Decrease

● Charts of accounts – list of accounts and the Balance
account numbers that identify their location in
the ledger; usually has a numbering system. Assets Dr. Dr. Cr.

Liabilities Cr. Cr. Dr.

Owner’s Equity Cr. Cr. Dr.

Revenue Cr. Cr. Dr.

Investment Cr. Cr. Dr.

Expenses Dr. Dr. Cr.

Drawings Dr. Dr. Cr.

● When Cash Accounts increases, it is always

● Account – an individual accounting record of debit.
increases and decreases in a specific asset,
liability or equity item
○ Example: cash assets, accounts
receivables, accounts payable, etc.

→ The primary objective of accounting is to provide

useful information for economic decision-making Examples
processes.
Determine whether each transaction has debit or credit.
Double-entry accounting system
● Every debit entries and credit entries should be On April 1, RK Travel Agency was established. The
equal in amount to record every transaction following transactions were completed during the
● Records of credit and debit transactions month.

Debit and Credit

 ● Invested $15,000 cash to start the agency
○ Increase in cash, increase in OE (capital)
○ Cash Account: Debit, Capital: Credit
● Paid $600 cash for April office rent
○ Decrease in cash, increase in expenses
○ Cash Account: Credit, Rent: Debit Guide on Posting
● Purchased equipment for $3,000 cash ● Follow a chronological order
○ Increase in equipment, decrease in cash ● All debit and credits of one entry should be
○ Equipment: Debit, Cash Account: Credit posted before proceeding to the next journal
● Incurred $700 of advertising costs for Facebook entry
ads, on account ● Timely basis to ensure that the ledger is
○ Increase in Accounts Payable, Increase up-to-date
in Expenses
○ AP: Credit, Expenses: Credit IV. PREPARE AN UNADJUSTED TRIAL ABALNCE
● Performed services worth $10,000. $3,000 cash
is received from customers, and the balance of Terms and Concepts
$7,000 is billed to customers on account ● Trial Balance – list of accounts and their
○ Increase in service revenue, increase in balance on a given time
cash, increase in AR ○ Main purpose: prove/check that the
○ Cash Account: Debit, Revenue: Credit, debits equal the credits after posting
AR: Debit
● Withdrew $600 cash for personal use Limitations of a trial balance
○ Increase drawings, decrease cash ● Although a trial balance can reveal many types
○ Cash Account: Credit, Drawings: Debit of bookkeeping errors, it does not prove that all
● Paid Facebook $500 of the amount due in transactions have been recorded or that the
transaction (4) ledger is correct.
○ Decrease AP, decrease in cash ○ A transaction is not
○ Cash: Credit, AP: Debit journalized/completely omitted
● Paid employees’ salaries $2,500 ○ An incorrect entry was posted
○ Decrease cash, Increase expenses ○ The journal entry was posted twice
○ Cash: Credit, Expenses: Debit ○ Incorrect accounts are used in
● Purchased bags (for personal use) using cash in journalizing or posting
transaction (5) ○ Offsetting records that are made in
○ To not be recorded recording the amount of a transaction
● Received $4,000 in cash from customers who
have previously been billed in transaction (5) V. MAKE END-OF-PERIOD ADJUSTMENTS
○ Decrease in AR, increase in cash
○ Cash Account: Debit, AR: Credit Terms and Concepts
● Three period assumption – division of the
III. POST EACH JOURNAL ENTRY TO THE economic life of a business into artificial periods
APPROPRIATE LEDGER ACCOUNT ● Periods used
○ Calendar year – January to December
Terms and Concepts ○ Fiscal/Financial year – operating cycle
● Ledger – summary of changes in the balance of ○ Interim period – shorter amount of time,
each account; contains accounts for all the i.e. monthly, quarterly, weekly
asset, liability, equity, revenue, and expense
accounts Recognition of Revenue and Expenses
● General Ledger – accounting record that ● Accrual basis accounting
includes all ledger accounts ○ Transactions and other events are
recorded in the period when they occur,
and not when the cash is paid or
received
○ Ex.: service revenue, goods/supplies are
used
● Cash basis accounting
○ Revenue is recorded when cash is
received and expenses are recorded
● T-account – explains the debits and credits of when cash is paid
the transactions
Adjusting entries
Initial Entry Prepaid Supplies (Dr.) 950
● Ensure that recognition principles are followed
Cash (Cr.) 950
since the trial balance may not be up-to-date
● It is not up-to-date when: Adjusting Supplies Expenses (Dr.) 900
○ Not journalized daily since Entry Prepaid Supplies (Cr.) 900
time-consuming
○ When they expire with time, e.g.
depreciation expense
○ When items are unrecorded, e.g. interest
payables, etc.

Initial Entry Cash (Dr.) 3000

Unearned Rev. (Cr.) 3000

Adjusting Unearned Rev. (Dr.) 1000

Entry Revenue (Cr.) 1000

PREPAYMENTS — cash is received or paid first before

earning the revenue or incurring the expense

ACCRUALS – revenue is earned or expense is incurred

before receipt or disbursement of cash
Initial Entry Equipment (Dr.) 2400
Cash (Cr.) 2400

Adjusting Depreciation exp. (Dr.) 40

Entry Acc. depreciation (Cr.) 40

● No initial entry for accruals

Examples

Initial Entry NONE

Adjusting Accounts Receivable (Dr.) 400

Entry Service Revenue (Cr.) 400

→ “finished an engagement”: service done by the

company
 Adjusting Unearned Rev. (Dr.) 1025
Entry Revenue (Cr.) 1025

Initial Entry NONE

Adjusting Interest expense (Dr.) 20

Entry Interest payable (Cr.) 20

1.
Initial Entry NONE

Adjusting Insurance expense (Dr.) 1050 Initial Entry Prepaid Rent Exp. (Dr.) 6300
Entry Cash (Cr.) 1050 Cash (Cr.) 6300

Adjusting Rent Expenses (Dr.) 2100

2. Entry Prepaid Rent Exp. (Cr.) 2100
Initial Entry Prepaid rent (Dr.) 6500
Cash (Cr.) 6500

Adjusting Rent exp (Dr.) 5200

Entry Prepaid rent (Cr.) 5200

3.
Initial Entry Cash (Dr.) 3600
Service Revenue (Cr.) 3600

Adjusting Service Revenue (Dr.) 1600

Entry Revenue (Cr.) 1600
Initial Entry Prepaid DAE (Dr.) 300
Cash (Cr.) 300
4.
Initial Entry Prepaid CS Expense (Dr.) 2000 Adjusting Dues and expenses (Dr.) 50
Cash (Cr.) 2000 Entry Prepaid DAE (Dr.) 50

Adjusting CS Expense (Dr.) 1000

Entry Prepaid CS Expense (Dr.) 1000

5.
Initial Entry Cash (Dr.) 1500
Unearned Rev. (Cr.) 1500
Initial Entry Equipment (Dr.) 36000
Cash (Cr.) 36000

Adjusting Depreciation exp. (Dr.) 600

Entry Acc. depreciation (Cr.) 600

Initial Entry NONE

Adjusting Interest expense (Dr.) 100

Entry Interest payable (Cr.) 100
Initial Entry Cash (Dr.) 2850
Initial Entry Income tax payable (Dr.) 5000
Unearned revenue (Cr.) 2850
Cash (Cr.) 5000
Adjusting Unearned revenue (Dr.) 2850
Adjusting Income tax expense (Dr.) 5000
Entry Service Revenue (Cr.) 2850
Entry Income tax payable (Cr.) 5000

[LECTURE 4]

I. JOURNALIZE AND POST CLOSING ENTRIES

Basic financial statements

● Income statement
REVENUE - EXPENSES = NET INCOME
● Statement of Changes in Equity
OWNER’S CAPITAL, BEGINNING +
INVESTMENTS - DRAWINGS + NET
INCOME = OWNER’S CAPITAL, ENDING
Initial Entry NONE ● Balance Sheet
ASSETS = LIABILITIES + OWNER’S
Adjusting Consulting fees RC (Dr.) 11000
CAPITAL, EDNING
Entry Service Revenue (Cr.) 11000

Worksheet
● Multiple-column form used in the
adjustment process and in preparing
financial statements
● Working tool only (not permanent AR)
● Optional

Initial Entry Salaries Payable (Dr.) 1700

Cash (Cr.) 1700

Adjusting Salaries Expense (Dr.) 1700

Entry Salaries Payable (Cr.) 1700
→ Remember that expenses are debit and revenue → Totals all assets, liabilities, and owner’s equity
is credit
Using of time period in the statements
● Income statement – for the period ended
● Statement of changes in equity – for the
period
● Balance sheet – as of

→ Do we carry over the balances on the accounts

for the next period?

II. PREPARE AN AFTER-CLOSING TRIAL

BALANCE

Types of accounts
● Temporary – accounts that only relate to a
→ From the income statement part given period; closed-out at the end of the
period
● Permanent – relate to one or more future
accounting periods; not closed from period
to period

→ From the equity (investments, revenue,

expenses, drawings, etc.) Closing entries
● Formally closes net income (loss) and
drawings account to owner’s capital
● Produces zero balance in each temporary
account
 [LECTURE 4]: ACCOUNTING FOR
MERCHANDISING ACTIVITIES

MERCHANDISING COMPANIES

Merchandising vs Service Companies

● Merchandising: sale of goods
● Service: sale of service
● Manufacturing: process and sale of goods

– Why is income summary credit? Why does the Operating Cycle of Merchandising and Service
income summary becomes debit after and the Companies
expenses become credit?

Post-closing trial balance

● Inventory – recorded items with purpose for +

selling
○ Ex.: Fashion items, i.e. pants, shirts,
etc.; Real estate, i.e. apartments,
buildings
● Accounting issues faced in a merchandising
company
○ Three parts of an AC: purchase of
inventory, selling of inventory, collecting
cash
○ Issues: inventory and revenues and
expenses
● How do we recognize inventory and
expenses in our books

Inventory and Flow of Costs: Merchandising Cycle

 ● First transaction; when purchasing something,
you receive a purchase invoice

Purchase Invoice – indicates the total purchase price

and other relevant information
● Indicates the date, quantity, supplier, address

● Beginning inventory – start of business, assets;

if started business → 0
○ Current Asset
● Buy more inventory → goes up
● Beginning inventory + purchases = Goods
Available for Sale
○ Not an account
Shipping Terms – particularly for businesses importing
○ Amount of product that the business
goods
currently holds
● FOB Shipping Point or Delivery Point
● Possible outcomes for Goods Available for Sale
○ FOB – free on-board
○ Costs of Goods Sold – sold items from
○ Goods are placed free on board the
the inventory; in the Account, Income
carrier by the seller and the buyer pays
Statement
the freight cost
○ Ending Inventory – items that were not
○ At the shipping point, the buyer already
sold from the inventory
owns the goods; buyer will pay for the
● Since this is a cycle, the ending inventory is the
delivery fee
beginning inventory of the next period
○ Buyer’s responsibility on any damages
INVENTORY SYSTEMS
→ How do we track inventory systems

● FOB Destination
○ Goods are placed free on board to the
buyer’s place of business and the seller
pays the freight cost
○ Seller pays for freight; buyer owns the
goods once it reached the destination

Journal Entry of Inventory

Perpetual
● Every time that there was a sale made, record
the sale made already
● Usually for high-value inventory items, i.e.
jewelry, houses, phones, etc.
● Better controls and real-time update

Periodic
● Record sales at the end of the period ● At freight costs, using the Perpetual System,
● Can’t specify when the sold was made cash decreases because you have to pay for
● Less clerical work shipping but your inventory already increases

PURCHASES AND SALES Returns and allowances

Recall: for accruals, cash increases and is debit; for ● Purchase returns
purchases and sales, follow inventory ○ Goods are returned to the seller for
credit or for cash refund
Purchases ○ For broken/incorrect order
○ Less liability, less inventory
 ● Purchase allowances PERPETUAL
○ Purchaser may choose to keep the
merchandise if the seller is willing to
Inventory (DR) 19000
grant an allowance/deduction from the
Accounts Payable (CR) 19000
purchase price
■ No need to return items but the Inventory (DR) 800
seller will give allowances Accounts Payable (CR) 800
○ Less inventory, less liability
Accounts Payable (DR) 4000
Inventory (CR) 4000

Discounts Accounts Payable (DR) 15000

● Cash Discount Inventory (CR) 300
○ Usually offered to encourage prompt Cash (CR) 14700
payment
○ Negotiation to pay earlier to get cash PERIODIC
discount
● Trade Discount/Quantity Discount
○ Offered to purchasers or buyers who Purchase (DR) 19000
purchase large quantities of inventory Accounts Payable(CR) 19000

Freight-in (DR) 800

Accounts Payable (CR) 800

Accounts Payable (DR) 4000

Purcase R&A (CR) 4000

Accounts Payable (DR) 15000

● Time period until you can have a discount Purchases (CR) 300
Cash (CR) 14700

SALES
AT NORMAL BALANCE:
● Inventory – increases → debit Sales
● Purchases – increases → debit ● Selling a good; transaction document: sales
● Purchase Returns and Allowance – increases invoice
→ credit
● Purchase Discount – increases → credit Sales invoice – written evidence of the sale that shows
the date of the sale, customer name, total sales price,
etc.

● Also record inventory for a perpetual system

○ Follow inventory → inventory decreases;
becomes credit
Returns and Allowance
● Sales returns
○ Seller accepts goods back from the
buyer
○ Refund/provide credit
● Sales allowances
○ Seller grants a reduction in the purchase
price so the buyer will keep the goods
○ Don’t return the goods, we will give you
allowance → lessen price

→ Whenever something is returned, when putting an

inventory entry, follow the lower of cost or net realizable
value
Ex.: I bought a shirt for PHP 100.00 and I sold it for PHP
300.00; the customer returned it be of damage. I can sell
it for PHP 60.00
– Record PHP 60.00 for inventory

What if I sell it for PHP 150.00? ZONT! Record PHP

100.00 not 150.00 if it is more than the price when
purchased
PERPETUAL
Sales Discount Accounts Receivables (DR) 570000
● Cash Discount Sales (CR) 570000
○ Usually offered to encourage prompt
payment Cost of Goods Sold (DR) 350000
● Trade Discount/Quantity Discount Inventory (CR) 350000
○ Offered to purchasers or buyers who
purchase large quantities of the Freight-out (DR) 30000
inventory Cash/AP (CR) 30000

SRA (DR) 20000

Cash/AP (CR) 20000

Inventory (DR) 10000

COGS (CR) 10000

Cash (DR) 539000

Sales Discount (DR) 11000
Accounts Receivables (CR) 550000
● Determine first the cash and accounts
receivable before the sales discount
PERIODIC
Freight-out (Delivery to customers) Accounts Receivables (DR) 570000
● If the shipper pays for the delivery to customers, Sales (CR) 570000
then it is recorded as an additional expense
● Don’t put in inventory Freight-out (DR) 30000
Cash/AP (CR) 30000

SRA (DR) 20000

Accounts Receivables (CR) 20000

Cash (DR) 539000

Sales Discount (DR) 11000
Accounts Receivables (CR) 550000
 AP (CR) 447000
● Accounts receivable, end = Accounts receivable,
beginning – SRA – discount Inventory (DR) 5600
Cash (CR) 5600
ADJUSTING AND CLOSING
Accounts Payable (DR) 12000
Perpetual System Inventory (CR) 12000

● There is no COGS in periodic system Accounts Payable (DR) 6400

Inventory (CR) 6400

Accounts Receivables (DR) 725000

Sales (CR) 725000

COGS (DR) 474000

Inventory (CR) 474000

Inventory (DR) 104100

COGS (CR) 104100

→ The last cell was derived from a ledger. Determine

how much credit balance there is and add them to the
ending merchandise inventory (OVERAGE)

What is adjusted in the perpetual system?

Periodic System

● Immaterial differences with the inventory

shortage and overage
● Perpetual inventory needs adjustment

EXERCISES
● Net Purchases: purchases – return and
allowances
● Add: Freight-in
● Adding Costs of Goods Purchased and
Beginning Inventory

Purchases(DR) 447000
AP (CR) 447000

Freight-in(DR) 5600
Cash (CR) 5600

Perpetual Accounts Payable (DR) 12000

Purchase Discount (CR) 12000
Inventory (DR) 447000
Accounts Payable (DR) 6400
PRA (CR) 6400

Accounts Receivables (DR) 725000

Sales (CR) 725000

Inventory (DR) 104100

COGS (CR) 104100
What do we adjust in the Periodic System?

● Transfer all items made under inventory ● Selling/Distribution Expense

depending if it is credit or debit ○ Marketing, Promotion, etc.
● Zero-out to close inventory ● Administrative Expenses
● PRA, PD, COGS – DEBIT ○ Office expense, salaries
● PURCHASES, FREIGHT – CREDIT ● Finance Costs
● After determining the COGS, the beginning ○ Funding
inventory will be from the difference of debit and ○ Interest expense, loans, etc.
credit ● Other income/expenses
○ Revenues, gains, expenses, and losses
not related to the company’s main line
of business
○ Selling equipment, etc.

FORMS OF PRESENTATION: INCOME STATEMENT

● Higher cost of goods sold – lesser gross profit

 [LECTURE 5]: INVENTORY ○ Last In, First Out

→ Recall that: ■ Latest purchased are the first

● BI + P - EI = COGS to be sold
● Purchases = P - PRA - PD + Freight
● EI = BI + P - COGS Dealing with Errors

→ Inventory, Cash, AR as current assets > Income Statement

BI + P - COGS = EI
INVENTORY ● Lacking Ending Inventory, COGS will
Classifying Inventory increase/sobra/overstated → Net income
● Merchandising will decrease/understated
○ Merchandise Inventory ● For the next period, the BI will be
● Manufacturing understated, COGS understated → Net
○ Raw Materials income overstated
○ Work-in-Process
○ Finished Goods > Balance Sheet
● EI error overstated, assets overstated,
Determining Inventory Quantities equity overstated
● Physical Count ● EI error understated, assets understated,
○ Usually done at the end of the equity overstated
period
○ Ex.: Adding all inventory HOW TO GET AWAY W FRAUD
○ Issues: goods that did not arrive at ● Breaking Bad
the warehouse yet/goods that were ● Story book
not counted/naiwan na goods/under ● Old McDonald Had A Farm
consignment
○ If naiwan sa ship, if FOB SP, the ● Connection and Sponsorships
good is already yours
○ If consignment, the inventory is not 1. Take an accounting class
yours 2. Have connections + be part of the will
● Determining Ownership 3. Have a high ROI farm, PREF. RICE/DRUGS
○ Do all the goods included in the 4. SELL IT FOR MORE THAN ITS COGS
count belong to the company? 5. Storybook – INVESTMENT
■ Consignment
○ Does the company have any goods FRAUD, INTERNAL CONTROL, AND CASH
that are not in the warehouse?
■ If FOB SP, yes Fraud
● Act of deceiving or misrepresenting to
→ Don’t include the sold inventory in totaling the obtain an unjust or illegal advantage
ending inventory ● Fraud Triangle
○ Opportunity
Inventory Costing ○ Financial Pressure, pressure to steal
● Specific Identification ○ Rationalization
● Cost Flow Assumption
○ First In, First Out Internal Control
■ Earliest goods purchased are ● System or processes or policies that are put
the first to be sold in place to prevent fraud
○ Average Cost
■ Allocates the cost of goods Components
available for sale on the basis ● Control environment
of the weighted average unit ○ Ex.: government offices, private
cost incurred businesses, etc.
■ Just get the average ● Risk assessment
 ○ Ex.: low in family businesses ● Becomes ineffective as a result of various
● Control activities human elements
○ Effectivity of control ● Circumvented
● Information and communication ● Overriden by management
● Monitoring ● Size of business
● Changing conditions
Six Principles of Internal Control
Cash
● Establishment of Responsibility ● Standard medium of exchange in business
○ Control is most effective when only transactions
one person is responsible for a given ● Most liquid and acceptable currency
task ● Easily concealed and transported; most
○ Monitoring of compliance susceptible to fraudulent activities
● Segregation of Duties ● Readily available and unrestricted to use
○ Related activities should be
assigned to different individuals What is considered cash?
○ Separation of authorization, custody, ● Cash on hand – currency, coins
and recording ● Cash in bank – demand deposit accounts
○ Ex.: Different holds cash, different ○ Current account
releases cash, different records ○ Savings account
cash, different approves expenses ● Negotiable instruments – checks, bank
● Documentation Procedures drafts, money orders
○ Documents provide evidence that
transactions and events have Cash equivalents
occurred ● Short-term, highly liquid investment
○ In corruption, cash is not recorded ○ Readily convertible to amounts of
or tracked properly cash
○ Prenumbered documents and ○ Near maturity that their market value
accounted documents is relatively insensitive to changes in
○ Ex.: three-way matching of purchase IR
order (quantity ordered), goods ○ Three months or less before maturity
receipt note (quantity delivered), ○ Ex.: Bonds, commercial paper,
supplier’s invoice (quantity billed) treasury
● Physical Controls Other Cash Items
○ Relate to the safeguarding of assets ● Manager’s check, cashier’s check, and
and enhance the accuracy and certified check
reliability of the accounting records ○ Bank guarantees that the check is
● Independent Internal Validation funded; bank provides the check
○ Review of data prepared by ○ Credibility from the bank
employees ○ Payor = entity paying the money
○ Companies should verify records ○ Payee = entity receiving the money
periodically or on a surpise basis ● Post-Dated Check
○ If operations are operating properly ○ Check that has been released to the
○ Independent of the personal payee but bears a subsequent date,
responsible for the information meaning payee cannot withdraw the
should make the verification check yet
● Human Resource Control ○ Three dates: issurance, at the first
○ People control date, second date
○ Background checks ● Stale Check
○ Check has been delivered to payee
Limitations of Internal Control but not presented for payment within
a reasonable time; not encashed
● Internal control provides reasonable ○ Do not put the already recorded if
assurance it has been recorded
 ● Undelivered/unreleased check
○ Check drawn but not yet released to Bank Statement
the payee before the end of ● Bank records of the movement of the
reporting period entity’s cash in bank
● Cash Fund ● Deposit, collections (CREDIT)
○ Cash set aside/restricted for a ● Check disbursements/transfers (debit),
particular purpose charges
○ Not cash anymore if set aside for
activities Bank reconciliation
○ Classify if noncurrent or current ● The process of reconciling the cash book
balance and bank balance due to
● Bank Overdraft differences
○ Checking account has been ● Balance as per books vs/ Balance as per
overdrawn and shows a negative bank statement
amount
● Compensating Balance Steps in Bank Reconciliation
○ Minimum demand depositing ● Credit Memoranda – direct deposit to the
balance or any time bank of the person; not found in Bank
deposit/certificate of deposit Balance
maintained by a borrower as ○ Interest
required by the financial institution ● Debit memoranda
○ If legally binding, the maintaining
balance is not cash anymore Example
● Deposit 56,000 – mostly from last period;
PRESENTATION add to bank balance
● Check 23531: deduct
● 72000: deposit in transit
PETTY CASH ● Outstandign checks: mga hindi nawithdraw
● Fund used to pay relatively small amounts from the bank, deduct from the bank
that cannot be economically and ● Bank error – check check number → debit;
conveniently paid through check bank balance
● Daily use ● CM: CREDIT MEMO
● Three transcations
○ Establishing the fund 1. Check all debits then credits then the other
○ Making payments from the fund parts of the accounts
■ Don’t make an entry when
making purchasing from the
PCF
■ Voucher/receipt goes in for
the amount of money
○ Replenishing the fund
■ Account for the expenses
when it is replenished’
● After replenishment, cash on hand should
equal the total established of the fund
○ Shortage: PCF > Accounted for
○ Overage: PCF < Accounted for

WHY DO ENTITIES USE BANKS?

● Entities use banks to have good internal

control
● Minimizes cash on hand
● Double record of al bank transactions
 [LECTURE 6]: ACCOUNTING FOR ● If the estimated cash flow is less than the
RECEIVABLES AR, the receivables are impaired
● End of reporting period
Receivables
● Amounts due from individuals or Bad Debts Expense
companies; claims expected to be ● Expense in income statement; selling
colleccted in cash expense
● When some receivables will become
Different types of receivables uncollectible
● Accounts receivables ● Normal balance – debit
○ Source: sales of goods/serivces
○ Collection: 30-60 days Methods:
● Notes receivables ● Direct write-off
○ Formal instrument of credit; ○ Based on sales revenue
promissary note ○ Write-off accounts receivable when
○ 60-90 days longer AR is actually deemed uncollectible
○ Has interest ○ Actual losses
● Other receivables ○ Recognize BDE only when AR
○ Non-trade; not part of sale deemed uncollectible regardless of
operations period
○ Interest receivables, loans to ■ Automatically write-off AR
company officers, advances to ○ Matching corporation: BDE ←>
employees Sales Revenue
○ Debit: BDE, Credit: AR → Direct
write-off
Account Receivables Recording Process ○ If able to pay maliit: Debit: Cash,
● Initial recognition Credit: BDE
● Subsequent measurement ● Allowance method
● Disposal ○ Recognize BDE: creates allowance
for doubtful accounts at end of each
Initial recognition period
● Measure at fair value or at point of sale ○ Allowance for Doubtful Accounts
● Expectation on how much cash you will (ADA) → Estimating uncollectible
receive; record how much was loaned amounts
● Follow merchandising and sale return and ■ Normal balance – credit
allowance journal entries ■ When it’s not really paid,
write-off: Debit: ADA, Credit:
Scenarios in collecting AR AR
● Early – recognize sales discount ■ What if it was paid: reinstate
● Within term – normal AR deemed collectible,
● Late payment – include charging of interest record cash collected
income ● Reinstate: Debit: AR,
Credit: ADA
Subsequent Measurement ● Collection: Debit:
● After recording, adjustment for accounts Cash, Credit: AR
receivable
● Accounts receivable – net In practice, how do we estimate uncollectible AR?

Net realizable value – the estimate of how much ● % Sales

cash we receive from AR; the value for which AR is ○ Emphasis on income statement
expected to be collected in Cash ○ Base: total credit sales
○ For BDE, based on experience
Impairment loss ○ % x SALES = BDE
● % Receivables
 ○ Emphasis on the balance sheet sidewalks, pavements, and
○ Aging method – longer period underground sprinklers
receivables might not be able to ● Building
collect ○ If not constructed
○ Classifies AR by age: the older, ■ Purchase price and stamp
unlikelier to collect → ADA taxes
■ Settlement costs such as
Disposal attorney’s fees
● Why would companies sell their AR? ■ Real estate agent’s
○ When the company liquidity is low commission
■ Costs necessary to ready it
Discounting for its intended use such as
● The company receives cash immediately by remodeling and replacing or
obtaining a loan against company AR repairing of roof, floors,
● Receivable is collateral for loan electrical wiring, and
plumbing
Factoring ○ If constructed
● The company receives cash immediately by ■ Contract price
selling AR to a financing company (factor) ■ Architects’ fee
● The bank/finance company receives the AR ■ Building permits
■ Excavation costs
Accounting for Credit Card Sales ■ Interest expense to finance
the project limited to the
Accounting for Notes Receivable construction period
● Equipment
Computing for Interest ○ Cash purchase price
Face value x time factor x interest rate ○ Freight charges
○ Insurance during transit paid by the
[LECTURE 7]: NON-CURRENT ASSETS purchaser
○ Expenditures required in assembling,
Property, plant, and equipment installing, and testing the unit
● Criteria: physical substance, used in
operations, not intended for sale Subsequent Measurement
● Measured at cost, less accumulated
Land depreciation, less impairment
Land improvements
Building Terms
Equipment ● Cost
● Useful life
Initial Measurement ○ Estimate of the expected productive
● Measured at cost; necessary costs to make life, service life; assets of its owner
the asset ready for intended use ○ Expressed in time, units of activity or
● Costs inclusion, when is it ready to use? units of output
○ Cash purchase price + stamp taxes ● Salvage value
○ Settlement costs, title and lawyer’s ○ Estimate of the assets’s value at the
feed end of its useful life
○ Real estate agents’ commissions
○ Accrued property taxes and other Methods of depreciation
liens on the land assumed by the ● Straight line
purchaser ○ Depreciate it equally along a period
● Land improvements costs based on time
○ Driveways, car spaces, fences, ● Units of activity
landscaping, sewage system, ○ Depreciate based on usage
● Declining balance
 ○ Depreciation is not equal, ● Trademark
acceleration ○ Word, phrase, jingle or symbol that
○ If double declining – multiplying 2 x identifies a particular business,
n product, service, or entity
● Franchises and licenses
Revising periodic depreciation ○ Contractual arrangement under
● Determine the new depreciable cost which the franchisor grants the
● Use the new depreciable cost in your franchisee the right to sell certain
calculations products, provide specific services,
○ Use the changed depreciation or use certain trademarks or trade
valued names
○ If in the middle of the year, do it ● Research and development costs
midyear ○ Expenditures that may lead to
patents, copyrights, new processes,
Expenditures during useful life and new products
● Ordinary repairs = expense ○ Gateway: technical feasibility →
● Additions and improvements = PPE recognize as an asset
○ Should increase operating efficiency, ● Goodwill
productive capacity or useful life of ○ Arises from the acquisition of
PPE another business, when the
purchase price exceeds the fair
Disposal value of the net assets acquired
● Sale ○ Sobra
● Retirement ○ Not identifiable and cannot be
● Exchange separated from the business
purchased and sold separately
Intangible assets
● Without physical susbtance Look for the useful life but if useful life < legal life,
● It must be capable of being separated from use legal life
the entity and sold, rented, exchanged, or
transferred or arise from contractual or Mineral resources
other legal rights ● Consist of underground deposits of
non-regenerating resources such as oil and
Types gas
● Patent, copyright, trademark, research and ● Physically extracted in operations;
development, goodwill replaceable only by an act of nature
● Depletion expense
Initial recognition
● Patent > 10 pages of yellow pad + calculator
○ Exclusive right issued by a patent > 100 points + theories + problems
office that enables to control an
invention
○ Cost: purchase price, taxes,
licensing, and other legal feed to
secure the patent and any directly
attributable cost of preparing the
asset tool for its intended use
■ Record for the cost
○ Legal life: 20 years but extendable
○ Amortization: useful for legal life
● Copyright
○ Gives the owner the exclusive right
to reproduce and sell an artistic,
creative, or service/entity