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Financial Statement

Preparation, Analysis, & Interpretation

Course Facilitator: Miss Viverlyn Anne Gerona CPA


Agenda
You will be able to identify &
explain the basics of the
accounting process
(accounting cycle)
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1

The Accounting Equation


Assets = Liability + Equity
the whole assets of the company comes from
● liability, or debt of the company
● capital of the owner of the biz.

● income it generated from the biz. operations

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Double Entry Bookkeeping
if we add something from the one side,
which is asset, we must add the same
amount to the other side to keep them in
balance

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Normal Balance
the side where a specific account
increases
either a Debit Normal Balance (Asset) or a
Credit Normal Balance (Liability & Equity)

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Let’s Try
Indicate the normal balance of the five types of accounts

Account Type Normal Balances


Assets
Liabilities
Capital
Revenues
Expenses

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Let’s Try
Indicate the normal balance of the five types of accounts

Item Yes No
Coins & Bills
Checks
IOU from a friend
Automobile
Property for rent
Jewelry

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Let’s Try
Indicate the normal balance of the five types of accounts

Item Yes No
Scanner/Printer
Shopping List
Library Books
Computer software
Clothing

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Let’s Try
Assign the following specific assets
Cash Furniture & Delivery Office Office
Item Fixture Equipment Equipment Supplies

Tables
Trucks
Laser Printer
Calculator
Pencils
Stationary
Automobiles
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Let’s Try
Assign the following specific assets
Cash Furniture & Delivery Office Office
Item Fixture Equipment Equipment Supplies

Money in bank
Fax Machine
Coins
Office Supplies
Showcases
Cash Register

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2

T- Acount Analysis
In double-entry bookkeeping, the terms
debit (left side) & credit (right side) are
used to identify which side of the ledger
account an entry is to be made
It does not matter what type of account is
involved
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Real (Permanent Accounts)
these accounts remain open & active for
the life of the enterprise
Nominal (Temporary Accounts)
accounts that reflect activities for a specific
accounting period
after the end of the specific period & the start of a
new period, the balance of the nominal accounts are
zero
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All nominal accounts will be then
closed to a Retained Earnings account
at the end of the period, which is an
owner’s equity account

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Let’s Try
Label each of the following transactions as increasing
owner’s equity (+), decreasing (-) or as having no effect on
owner’s equity (0)

Revenue Transaction Cash Payment on account


Investment by owner Withdrawal by owner
Purchase of supplies on Borrowing money on a note
credit payable
Expense transaction Sale of Service on account

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Let’s Try
Pinagtibay Consulting Service engaged in the following
transactions during March 2018, its first month of operations:
Mar 1 Pinagtibay invested P59,000 of cash to start the business
2 He purchased office supplies of P200 on account
4 He paid P40,000 cash for a building to use as a future office
6 he performed service for customers & received cash, P2,000
9 He paid P100 on accounts payable
17 He performed service for customers on account P1,600
23 he received P 1,200 cash from a customer on account.
31 He paid the following expenses: salary, P1,200; rent, P5,000
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Let’s Try

Required:
Record the preceding transactions in the journal of Pinagtibay
Consulting Service. Key transaction by the date & include
explanation of each entry. Use the following accounts. Cash, AR,
Office Supplies, building, AP, Pinagtibay Capital; Service
Revenue; Salary Expense, Rent Expense

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Let’s Try
Makisig Delivery Service is owned & operated by
Makisig Ramos. The following selected transactions
were completed by MDS during February
A. Received cash from owner as additional investment, P 35, 000
B. Paid creditors on account, P 1,800
C. Billed customers for delivery services on account, P 11, 250
D. Received cash from customers on account, P 6,740

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3

Nominal Accounts
Expense Account
● a resource that has been used for the current
period
● At the end of each accounting period, expenses
are closed out to the Retained Earnings
Account which decreases the Owners’ Equity
● Since expenses decrease the owners’ equity,
those expense accounts carry a normal debit
balance
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Revenue Account
● reflect the accumulation of potential additions to
retained earnings during the current accounting
period
● At the end of the accounting period accumulation of
revenues during the period are closed to the Retained
Earnings Account which increases Owners’ Equity
● carry a normal credit balance meaning the same
balance as the Retained Earnings Account
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Let’s Try
J.F. Cruz M.D., has been a practicing cardiologist for
three years. During April 2009, Cruz completed the
following transactions in her practice of cardiology.
Mar 1 Provide medical services to clients for cash P35,000.
Mar 2 Paid rent for the month, P3,000.
Paid advertising expense, P1,800.
Mar 6 Purchased office equipment on account, P12,300.
Mar 15 Paid creditor on account, P1,200.
Mar 27 Paid cash for repairs to office equipment, P500.
Mar 30 Paid telephone bill for the month, P180.
Mar 31 Paid electricity bill for the month, P315.
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4

The Accounting Cycle


Because accounting is all about
getting data and putting them into
the accounting equation, the end
products are financial statements
such as a balance sheet and
income statements, the process of
accounting follows a cycle called
the Accounting Cycle
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1. Analyze Business Transactions
*a transaction is analyzed to find out if it affects the
company and if it needs to be recorded
*personal transactions of the owners & managers that
do not affect the company should not be recorded
*a decision may have to be made to identify if a
transaction needs to be recorded in special journals
such as a sales or purchases journal
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1. Analyze Business Transactions
*a transaction is analyzed to find out if it affects the
company and if it needs to be recorded
*personal transactions of the owners & managers that
do not affect the company should not be recorded
*a decision may have to be made to identify if a
transaction needs to be recorded in special journals
such as a sales or purchases journal
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What you should do!!
● Carefully read the description of the transaction to
determine whether an asset, a liability, an owner’s
equity, a revenue, an expense, or a drawing account is
affected
● For each account affected by the transaction, determine
whether the account increases or decreases
● Determine whether each increase or decrease should be
recorded as a debit or a credit, following the rules of
debit and credit
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Let’s Try

A. N. Juna resigned from Company 7.


B. Cano purchased PHP500 cash worth of supplies at
Ace Hardware

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2. Record this in the Journal
*Using the rules of debit and credit, transactions are
initially entered in a record called a Journal and the
entry made is called a Journal Entry
*journal serves as a record of when transactions
occurred and were recorded
*For repetitive transactions or high volume transactions, Special
Journals are made. (include sales journal, purchases journal, cash
receipts journal, & cash disbursements journal)
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What you should do!!
● The Source Document is the file or document
(i.e. official receipt, purchase order, contract)
that will provide a basis or reason for a journal
entry

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Let’s Try

A. M. Jaya resigned from Company 7.


.
B. Cano purchased PHP500 cash worth of supplies at
Ace Hardware

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3. Post the Transactions on a Ledger

*A transaction is first recorded in a journal. Periodically,


the journal entries are transferred to the accounts in the
ledger
*Posting -process of transferring the debits & credits
from the journal entries to the accounts

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● Ledger - provides chronological details as to
how transactions affect individual accounts

The general ledger is a summary of the


different Subsidiary Ledgers & can serve as
a control account

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Let’s Try
J. Gibbs, a CPA, is an independent auditor with only two
clients. The Accounts Receivable ledger account has a
balance of PHP100,000. His two clients are A. Rania,
.
and X. Campos. The subsidiary ledger of A. Rania has a
balance of PHP25,000. X. Campos’s ledger balance is
PHP75,000. The sum of subsidiary ledgers must total
the general ledger or else there must be an investigation
to identify the source of discrepancies.

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4. Prepare An Unadjusted Trial Balance
*Errors may occur in posting debits and credits from the
journal to the ledger. One way to detect such errors is
by preparing a trial balance.

*Double-entry accounting requires that debits must


always equal credits. The trial balance verifies this
equality.

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Preparing Trial Balance
● List the name of the company, the title of the trial
balance, & the date the trial balance is prepared
● List the accounts from the ledger & enter their debit or
credit balance in the Debit or Credit column of the trial
balance
● Total the Debit and Credit columns of the trial balance
● Verify that the total of the Debit column equals the
total of the Credit column.
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5. Make Adjustments.
Journalize Adjusting Entries

At the end of the accounting period, many of the


account balances in the ledger can be reported
in the financial statements without change

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The updating is required for the
following reasons
● Some expenses are not recorded daily
i.e, the daily use of supplies would require many entries with small
amounts. Also, managers usually do not need to know the amount
of supplies on hand on a day-to-day basis.
● Some revenues and expenses are earned as time
passes rather than as separate transactions.
i.e, rent received in advance (unearned rent) expires and becomes
revenue with the passage of time. Likewise, prepaid insurance
expires and becomes an expense with the passage of time .
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The updating is required for the
following reasons
● Some revenues and expenses may be unrecorded
i.e. a company may have provided services to customers that
are has not billed or recorded at the end of the accounting period.
Likewise, a company may not pay its employees until the next
accounting period even though the employees have earned their
wages in the current period

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5. Make Adjustments.
Journalize Adjusting Entries
Adjusting Process - the analysis & updating of
accounts at the end of the period before the
financial statements
Adjusting Entries - the journal entries that bring
the accounts up to date at the end of the
accounting period
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The following are normally adjusted
at the end of a period
● Accruals - includes unpaid salaries for the accounting
period, unpaid interest expense, or unpaid utility
expenses
● Prepayments - If a company has prepaid expenses
such as prepaid rent or prepaid insurance then the
correct balances for these accounts have to be
established at the end of each accounting period to
reflect their correct balances
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The following are normally adjusted
at the end of a period
● Depreciation & Amortization Expenses. Depreciation
expenses are recognized at the end of each
accounting period through adjusting entries.
Amortization Expense - intangible assets such as
franchise, the allocation of their costs
● Allowance for uncollectible accounts - Bad debt
expense from accounts receivable

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6. Prepare An Adjusted Trial Balance

prepared after taking into consideration the


effects of the adjusting entries
this is to ensure that the total debit balances
equal the credit balances after posting and
journalizing adjusting entries made

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7. Prepare the Financial Statements

From the adjusted trial balance, the financial


statements can then be prepared
These are the statement of financial position,
statement of profit or loss, and the statement of
cash flow

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8. Make the Closing Entries

nominal accounts (revenue and expense


accounts) are closed to retained earnings, or an
owner’s capital account because these accounts
refer only to a specific accounting period.
these accounts to be closed are accounts that
can be seen in the income statement

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What you should do upon closing!!
● If the revenues exceed expenses during an
accounting period, retained earnings will
increase
● The reverse is true which means that if the
expenses exceed revenues, the retained
earnings will decrease.

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What you should do upon closing!!
Temporary Accounts
● Revenue account balances are transferred to an account
called Income Summary Account (sometimes profit or loss
summary)
● Expense account balances are also transferred to the
Income Summary Account
● The balance of the Income Summary (net income or net
loss) is transferred to the owner’s capital account
● The balance of the owner’s drawing account is transferred
to the owner’s capital account
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9. Make A Post-Closing Trial Balance

*shows the accounts that are permanent or real


*the accounts that can be seen in your balance
sheet
*post-closing trial balance is prepared to test if
the debit balances equal the credit balances
after closing entries are considered

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