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Definitions of Accounting
Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money,
transactions and events, which are in part at least of a financial character and interpreting the results thereof.
Accounting is a service activity. Its function is to provide quantitative information, primarily financial in
nature about economic entities that is intended to be useful in making economic decisions.
*Board of Accountancy (BOA) prepares and administers the CPA licensure examination
*Professional Regulation Commission (PRC) issues licenses to successful examinees of the CPA licensure
examination
*Financial Reporting Standards Council (FRSC) body that formulates the Accounting standards (we now
adopt the International Accounting Standards and International Financial Reporting Standards)
4 Functions of Accounting Work:
Recording
Classifying
Summarizing
Interpreting
-This assumption requires that the indefinite life of an enterprise is subdivided into time periods or
accounting periods which are usually of equal length to ensure reports at regular intervals
-There are 3 kinds of accounting period namely: Calendar year(Jan1-Dec31), Fiscal year(any 12
months), and Natural Business year(any 12 months but the end of the period is during a slack
season)
Monetary Unit
-This principle requires that money is used as the unit of measure
Disclosure
-This principle means that all significant and relevant information leading to the preparation of
financial statements should be clearly reported so as not to make the financial statements misleading
Materiality
-Also known as the Doctrine of Convenience
-This principle is a practical rule in accounting which dictates that strict adherence to the Generally
Accepted Accounting Principles(GAAP) is not required especially when the items are not significant
enough to affect the fairness of the financial statements.
Consistency
-This Principle requires that the accounting methods and practices should be applied on a uniform
basis from period to period.
Conservatism
-This principle resolves uncertainties in accounting. When alternatives exist, the alternative which
has the least favorable effect on owners equity should be chosen.
-This principle is synonymous with Prudence, which is the desire to exercise care and caution in
dealing with the uncertainties in the measurement process such that assets or income are not
overstated and liabilities and expenses are not understated.
Financial Statements
Financial statements are the means by which the information accumulated and processed in financial
accounting is periodically communicated to the users. Four financial statements are prepared from the
summarized accounting data. Each statement provides management, owners and other interested parties
with relevant financial information.
5 Major Accounts
1.
2.
3.
Assets
Liabilities
Owners Equity
4.
5.
Income
Expenses
*** Assets, Liabilities and Owners Equity are also known as Balance Sheet Accounts, Real Accounts or
Permanent Accounts
*** Income and Expenses are also known as Income Statement Accounts, Nominal Accounts or
Temporary Accounts
1. Statement of Financial Position
-A formal statement showing the financial condition of an entity as of a particular date by summarizing its
assets, liabilities and owners equity.
Assets
-are resources controlled by the entity as a result of past transactions and events and from which future
economic benefits are expected to flow to the entity.
-Characteristics of Assets:
Controlled by the entity
Result of a past transaction or event
Provides future economic benefits
Its cost can be measured
-An asset shall be classified as CURRENT when it satisfies any of the following criteria:
It is cash
It is held primarily for the purpose of being traded
It is expected to be realized within 12 months after date of statement of financial position
It is expected to be realized or intended for sale or consumed within the entitys normal operating
cycle *operating cycle average time period to convert cash back to cash
-The caption NON-CURRENT assets is a residual definition. All other assets not classified as current.
Current Asset Accounts
Cash includes coins, currency, chekcs
Investment in Trading Securities debt ad equity securities purchased with the intention of selling
them in the near future in order to generate short term gains or profits
Notes Receivable claims from customers evidenced by formal promises to pay usually in the form of
notes
Accounts Receivable claims from customers arising from sale of goods/services in the ordinary
course of business
Accrued Income income already earned but not yet collected
Advances to Employees cash advance given to employee
Prepaid Expenses expenses already paid but not yet incurred
Non-Current Asset Account
Property, Plant and Equipment includes land, building, office equipment, furniture & fixtures,
transportation equipment, tools, machineries
*Properties of Non-Current Assets include physical existence, more or less permanent in nature, not for
sale, used in business operations, and must undergo depreciation except land
Liabilities
-are defined as present obligations of an entity arising from past transactions and events, the settlement of
which is expected to result in an outflow from the entity of resources embodying economic benefits.
-Characteristics of Liabilities:
A present obligation of a particular entity
Arises from past transactions or events
Its settlement requires an outflow of resources embodying economic benefits
-A liability shall be classified as CURRENT when it satisfies any of the following assumptions:
It is expected to be settled in the entitys operating cycle
It is held primarily for the purpose of being traded
It is due to be settled within 12 months after the date of the statement of financial position
-The term NON-CURRENT liabilities is also a residual definition.
-Sources of Income:
Sale of merchandise to customers
Rendering of services
Use of entity resources
Disposal of resources other than products
Expense
-decrease in economic benefit during the accounting period in the form of outflow or decrease in asset or
increase in liability that results in decrease in equity other than withdrawals by the owners
-Expenses include:
Cost of sales
Distribution costs/selling expenses
General administrative expenses ( salary, utilities, rent, taxes, transportation, supplies, repairs &
maintenance, depreciation, etc)
Other expenses
Finance cost
Credit
-Decrease in Asset
-Increase in Liabilities
-Increase in Capital
Credit
-Increase in Revenue
Payroll Accounting
Gross Pay total earnings of an employee for a payroll period before taxes and other deductions which comprise of
salaries, wages, commissions, bonuses, cost of living allowance and fringe benefits are deducted
Employee Benefits
The Social Security System (SSS) administers two programs namely: the Social Security Program and the
Employees Compensation Program.
SSS benefits provide for a replacement of income to members and covers the ff: sickness benefits, maternity
benefits, disability benefits, retirement benefits, death benefits.
The Employees Compensation (EC) Program aims to assist employees who suffer work related sickness or
injury resulting in disability or death. The benefits under this program are as follows: Medical services and
supplies, Rehabilitation services, Income cash benefits for temporary total disability or sickness, permanent
total or partial disability and death.
The National Health Insurance Program (formerly known as Medicare) is a health insurance program for
SSS members and their dependents who may find themselves in need of financial assistance when they get
hospitalized.
The PAG-IBIG Fund offers its members the ff benefits: Savings, Short term loans, Access to housing programs.
Net Pay gross pay less the payroll deductions (SSS, Philhealth, PAG-IBIG contributions, withholding taxes and other
deductions). Also known as take-home pay.
The employer is mandated by the law to collect contributions of members through payroll deductions and is required
to remit the employees contributions along with his counterpart contributions and remitted to respective agencies.
Receipt of Work
a. Rendering of Services
Notes Receivable xxx
Service Revenue xxx
b. Lending of Money
Notes Receivable xxx
Cash
c. Settlement of an Account
Notes Receivable xxx
Accounts Receivable
I.
Issuance of Note
a. Purchase of asset
Asset
Notes Payable
b. Borrowing of Money
Cash
Notes Payable
c. Settlement of an Account
Accounts Payable
Notes Payable
xxx
xxx
xxx
xxx
xxx
xxx
xxx
xxx
***Example: On July 1, Company B received a 36000 pesos 90-day 6% note from customer A on
account.
July 1
II.
36000
Payment of Note
Non-interest Bearing
Sept 29 Notes Payable 36000
Cash
b. Interest Bearing
Sept 29 Notes Payable 36000
Interest Expense 540
Cash
a.
36000
36540
III.
IV.
Renewal of Note
a. Non-interest Bearing
Sept 29 Notes Receivable(new) 36000
Notes Receivable(old) 36000
b. Interest Bearing
Sept 29 Notes Receivable(new) 36540
Notes Receivable(old) 36000
Interest Income
540
V.
36000
36000
V.
VI.
Oct 30
Cash
Discount on Notes Payable
Notes Payable
23640
360
Notes Payable
Cash
24000
Interest Expense
360
Discount on Notes Payable
24000
24000
360
Required Entry
Correcting Entry
1.
Ang, Drawing
Cash
12000
12000
Ang, Drawing
12000
Salaries Expense 12000
2.
Cash
1600
Accounts Payable 1600
Office Supplies
Cash
Cash
850
Accounts Receivable 850
Cash
1700
Accounts Payable
850
Accounts Receivable
850
1600
Adjusting Entries
When: At the end of the Accounting period
Why: To update the books of accounts
What: Accrued Expense, Accrued Revenue, Prepaid Expense, Unearned Revenue, Depreciation and
Allowance for Doubtful Accounts
Accrued Expense an expense already incurred but not yet paid, eg. taxes, salaries, interest, rent
Accrued Revenue revenue already earned but not yet collected, eg. service rendered on account,
rent(landlord), interest(payee), commission
1600
36000
Cash
36540
Notes Receivable 36000
Interest Income 360
Interest Receivable
180
MAKER
Cash
36000
Notes Payable
36000
Interest Expense
180
Interest Payable
180
Notes Payable
Interest Expense 360
Interest Payable 180
Cash
36000
36540
Prepayments/Deferrals
Prepaid Expense expense already paid but not yet incurred
***Example: On January 1, 2010 paid a 3-year insurance premium for
36000.
ASSET METHOD
Jan 1
EXPENSE METHOD
Prepaid Insurance
Cash
36000
Jan 1
36000
Insurance Expense
Cash
36000
36000
INCOME METHOD
Nov 1 Cash
Rent Income
24000
60000
60000
Depreciation is the systematic allocation of the cost of an asset over the accounting period making up its
useful life.
The formula to be used in computing the annual depreciation is:
Where:
C = Cost of the asset
S = Salvage value/ Scrap value/ Residual value
n = estimated useful life of the asset
*note that the amount that you will get from using this equation is the annual depreciation. If the asset was
bought in the middle of the year, and you want to solve for the depreciation expense of the asset in that year,
you should divide the annual depreciation amount by 12 and multiply it by the number of months that the
asset was used.
***Example: On Jan 1, 2010, a building is acquired at a cost of 220000 pesos with an
estimated useful life of 10 yrs and estimated scrap value of 20000 pesos.
Solution:
Adjusting Journal Entry:
Dec 31 Depreciation Expense Building 20000
Accumulated Depreciation Building
Doubtful Accounts / Bad Debts
There are 2 methods of accounting for doubtful accounts/bad debts:
1. Direct Write-off method (used in tax acctg)
2. Allowance method (used in financial acctg)
*Allowance method will be used in Actbas1
20000
Example:
Assume the following account balances at year end.
DR
CR
Accounts Receivable
10000
Allowance for Doubtful Accounts
300
The company estimates that 1% of outstanding Accounts Receivable may not be collected.
Solution:
Required allowance for doubtful accounts(1% x 100000)
Less: Existing balance in Allowance for Doubtful Accounts
Required increase in Allowance for Doubtful Accounts
P1000
300
P 700
Example:
Dec 1 Cash
Notes Payable
36000
36000
Interest Payable
180
Interest Expense
Reversing Entry
(Maturity Date)
Mar 1 Notes Payable
Interest Expense 540
Cash
180
36000
36540
* This reviewer was based from the lectures of Ms. Elsie Velasco.
Prepared By:
The Academics Committee
Economics Organization