Nc3 Bookkeeping Training Material

1
The
TESDA NATIONAL CERTIFICATION III
in
BOOKKEEPING
REVIEWER
[BOOKKEEPING TRAINING MANUAL FOR THE CITY COLLEGE

OF ANGELES – Institute of Business and Management]
Compiled and Reviewed by:

LOVELL M. ABELLO, CPA, DBA, LPT, IP, CrFA, TESDA NC III (Bookkeeping) Certified, FRIRes, RIIVPF,
Xero (Advisor, Payroll and Migration) Certified
Board of Editors:
ANTONIETA P. TUNGCAB, CPA, DBM, SPBE
LEONARDO M. PALO, CPA, DBA, LPT, TESDA NC III (Bookkeeping) Certified
MA. CRISTINA R. BONDOC, MBA, LPT, TESDA NC III (Bookkeeping) Certified
LENNARD J. DE LUNA, BSAT
Board of Consultants:
CCA VICE PRESIDENT FOR ADMINISTRATION - JEAN PAOLO G. LACAP, DBM, RMP, AMEd, FBE, FRIRes, FRIEdr, DBE
DEAN AMOR I. BARBA, MM, TESDA NC III (Bookkeeping) Certified
DEAN ELIZABETH E. DAVID, MBA
2
Foreword
This material is dedicated to accounting and business students/graduates who aspire to
obtain the TESDA National Certification III (Bookkeeping). The topics included herein are usually
being tested (in theory and application) in the aforesaid professional certification. Moreover, CPA
examinees, as well, may find this manuscript a useful reference.
-The Author
February 2019
3
It's attention to detail that

makes the difference
between average and
stunning.
- Francis Atterbury (1663–1732)
4
Table of Contents
Introduction to Business 5
Accounting vis-a-vis Bookkeeping 10
The Accounting Cycle 17
Internal Control Concepts 130
Simulated Examination 136
References 152
Appendices 162
5
Introduction to Business
The term business may be described as the organized efforts of enterprise to provide consumers
with goods (merchandising/manufacturing types) and services for a profit (may be derived from
the equation: revenues minus costs and expenses and also minus pertinent income tax).
Moreover, the purpose of business goes beyond earning profit. These are, but not limited to the
following: it is an important institution in society; be it for the supply of goods and services;
creation of job opportunities; offer of better quality of life; and contributing to the economic
growth of the country. In a nutshell, this is the concept of business social responsibility. To wit:
Social responsibility is the obligation of decision-makers to take actions, which protect and
improve the welfare of society as a whole along with their own interests. Every decision the
businessman takes and every action he contemplates have social implications.
There are several types of ownership of the business enterprises, organized under Philippine laws
that an investor can choose from in establishing operations. (1) Sole Proprietorship - it is a business
structure owned by an individual who has full control/authority of its own and owns all the assets;
personally owes and answers all liabilities or suffers all losses but enjoys all the profits to the
exclusion of others. A sole proprietorship must apply for a Business Name and be registered with
the Department of Trade and Industry (DTI). (2) Partnership - by the contract of partnership two
or more persons bind themselves to contribute money, property or industry to a common fund,
with the intention of dividing the profits among themselves (The New Civil Code of the
Philippines). It is treated as juridical person, having a separate legal personality from that of its
members. Partnerships may either be general partnerships, where the partners have unlimited
liability for the debts and obligation of the partnership, or limited partnerships, where one or more
general partners have unlimited liability and the limited partners have liability only up to the
amount of their capital contributions. A partnership may be constituted in any form except when
real property or real rights are contributed thereto, in which case a public instrument is necessary.
Furthermore, a contract of partnership having a capital of three thousand pesos (PHP3,000.00) or
more, in money or property, must register with the Securities and Exchange Commission (SEC).
(3) Corporation - an artificial being created by operation of law, having the right of succession and the
powers, attributes and properties expressly authorized by law or incident to its existence (Batas Pambansa
Bilang 68, also known as The Corporation Code of the Philippines). Corporations are juridical
persons with personality separate and distinct from that of its stockholders. The liability of the
shareholders of a corporation is limited to the amount of their share capital. It consists of at least
five (5) to fifteen (15) incorporators each of who must hold at least one share and must be
registered with the SEC.
6
The minimum paid up capital required is not less than five thousand pesos (PHP5,000.00). A
corporation can either be stock (this is a corporation with a capital stock dividend into shares and
authorized to distribute to the holders of such shares dividends or allotments of the surplus profits
on the basis of the shares held) or non-stock (a corporation organized principally for public
purposes such as charitable, religious, educational, professional, cultural, fraternal, literary,
scientific, social, civic service, or similar purposes, like trade, industry, agricultural and like
chambers, or any combination thereof; no part of its income is distributable as dividends to its
members, trustees, or officers; likewise, any profit which a non-stock corporation may obtain as
an incident to its operations shall, whenever necessary or proper, be used for the furtherance of the
purpose or purposes for which the corporation was organized) company regardless of nationality.
Such company, if 60% Filipino and 40% foreign-owned, is considered a Filipino corporation. If
more than 40% foreign-owned, it is considered a domestic foreign-owned corporation. (4) We
have also Cooperatives. A cooperative is a duly registered association of persons, with a common
bond of interest, who have voluntarily joined together to achieve a lawful common social or
economic end, making equitable contributions to the capital required and accepting a fair share of
the risks and benefits of the undertaking in accordance with universally accepted cooperative
principles (REPUBLIC ACT NO. 6938, AN ACT TO ORDAIN A COOPERATIVE CODE OF
THE PHILIPPINES, 1990 – as amended by Republic Act No. 9520,
AN ACT AMENDING THE COOPERATIVE CODE OF THE PHILIPPINES TO BE KNOWN
AS THE “PHILIPPINE COOPERATIVE CODE OF 2008”).
Business entities can also be grouped by the type of business activities they perform: service
companies, merchandising companies, and manufacturing companies. Any of these activities can
be performed by companies using any of the three forms of business organizations. (1) Service
companies perform services for a fee. This group includes accounting firms, law firms, and dry
cleaning establishments, etc.; (2) Merchandising companies purchase goods that are ready for sale
and then sell them to customers. Merchandising companies include auto dealerships, clothing
stores, supermarkets and the like; (3) Manufacturing companies buy materials, convert them into
products, and then sell the products to other companies or to the final consumers. Manufacturing
companies include steel mills, auto manufacturers, clothing manufacturers, among others. And it
is worth mentioning that all of these companies produce financial statements as the final end
product of their accounting process [infra]. These financial statements provide relevant financial
information both to those inside the company (the management) and to those outside the company
(creditors, stockholders, and other interested parties) – the stakeholders.
It is similarly a plus factor to mention in this material about ‘Business process outsourcing (BPO)’.
BPO is defined by the Department of Trade and Industry (DTI) as the “delegation of service‐type
business processes to a third‐party service provider”. The BPO industry in the Philippines is
generally divided into the following sectors: contact centers, back-office services, data
transcription, animation, software development, engineering development and game development.
7
Figure 1, is an excerpt from the Philippine Statistics Authority (PSA) [thru LABSTAT updates],
about BPO in the country.
Figure 1: 2015/2016 INDUSTRY PROFILE: Business Process Outsourcing (First of a series)

(Source: PSA)
Additionally, doing business in the Philippines, either as single proprietorship, partnership or

corporation, calls for licenses or permits from government. An investor or businessman needs to
obtain a business license in the locality where he will establish his business, as well as register his
business with the Department of Trade and Industry in case of sole proprietorship, or with the
Securities and Exchange Commission in the case of partnerships and corporations. For your read-
through, refer to Appendix 1 - SECURING BUSINESS PERMITS AND BUSINESS
REGISTRATION (Board of Investment and Department of Trade and Industry).
8
Finally, on the aspect of taxation – prior to the effectivity of the TRAIN Law, individual pure-
income earners/self-employed/professionals are being taxed on their respective income, as:
Figure 2: Old Tax Schedule – For Compensation Income Earners & Self-employed and
Professionals (Source: Department of Finance - National Tax Research Center)
Now, upon TRAIN’s effectivity – income taxation for Self-employed and Professionals becomes:
Figure 3: New Tax Schedule – For Self-employed and Professionals (Source: Department of
Finance - National Tax Research Center)
Note: The first package of the Tax Reform for Acceleration and Inclusion (“TRAIN”), or Republic Act No. 10963,
was enacted into law in December 2017 and became effective on January 1, 2018. The TRAIN introduced amendments
to personal income taxation, transfer taxes, value-added tax, excise tax, taxation of sale of shares of stocks, and
documentary stamp tax, among others. For other pertinent information, refer to Appendix 2 – TAX CHANGES YOU
NEED TO KNOW (TRAIN) [by: Department of Finance - National Tax Research Center].
9
Figure 4: New Tax Schedule – For Compensation Income Earners (Source: Department of
Finance - National Tax Research Center)
10
Accounting vis-a-vis Bookkeeping
Accounting is the language of business. The American Institute of Certified Public Accountants (AICPA)
defines accounting as: 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 financial character, and interpreting
the results thereof. While the American Accounting Association (AAA) defines Accounting as: the
process of identifying, measuring and communicating economic information to permit informed
judgements and decisions by users of the information. Moreover, accounting has been used for
many centuries. While Luca Pacioli, an Italian monk is credited with the “formal” recognition of
the introduction of the double entry system (Summa de arithmetica, geometria, proportioni et
proportionalita - is a book on mathematics) [Note: under the double entry bookkeeping system,
business transactions are recorded with the premise that each transaction has a two-fold effect – a
value received and a value given] in the late fifteenth century, accounting can be traced back more
than 15,000 years and was used by the Mesopotamians from their trading activities and even
possibly from taxes. Early accounting dealt with the recording of transactions, controlling goods
and stocks. It was simply used for the purpose of recording, counting and managing money, basic
financial recording or more commonly known as single-entry book-keeping. It was also used for
decision-making and certainly the Romans used it quite effectively in setting goals for conquered
peoples, for planning, for payroll (its military) and for taxes. There was also record-keeping in
relation to the building of temples, land provisions for retired military personnel, even expenditure
for gladiatorial events, chariot races and other events. Military personnel of the Roman army were
employed to keep scrupulous records of cash, commodities, and transactions which would have
then been presented to the Roman emperor or other high-ranking officials on a regular basis. An
account of small cash sums received over a few days at the fort of Vindolanda, a Roman auxiliary
fort located in Northern England [circa AD 110] shows that the fort could calculate revenues in
cash on a daily basis, perhaps from sales of surplus supplies or goods manufactured in the camp,
items dispensed to slaves such as nails for boots, beer as well as commodities bought by individual
soldiers. The basic needs of the fort were met by a mixture of direct production, purchase and
requisition; in one letter, a request for money to buy 5,000 modii (measures) of braces (a cereal
used in brewing) shows that the fort bought provisions for a considerable number of people. This
was how early accounting was used for approximately 14,000 years. In the thirteenth century,
Europe moved from a barter economy [an act of trading goods or services between two or more
parties without the use of money (or a monetary medium such as a credit card] towards a monetary
economy and we see merchants along the Mediterranean countries using a bookkeeping system as
a result of carrying out multiple transactions and it was at this point that the introduction of the
double-entry accounting system using debits and credits had been recognized. Records still exist
today that were presented in the Farolfi’s ledger (1299-1300), Farolfi being a firm of Florentine
merchants who operated from Nimes. Amongst their business dealings was money-lending and
they acted for the Archbishop of Arles.
11
This was some 200 years prior to Luca Pacioli. Luca Pacioli did not invent double-entry
bookkeeping, however his 27-page paper on bookkeeping contained the first known published
work on that topic, and is said to have laid the foundation for double-entry bookkeeping as we
know it today. Pacioli saw accounting as an ad-hoc ordering system devised by the merchant. Its
regular use provides the merchant with continued information about the business, and allows the
owner to evaluate how things are going and to act accordingly. Pacioli recommended the Venetian
method of double-entry bookkeeping above all others. The three major books of account are the
direct basis of this system (the memorandum, the journal and the ledger). The ledger is the central
document and is accompanied by an alphabetical index [Institute of Public Accountants, 2018].
On a related context, bookkeeping is the skill or occupation of maintaining accurate records of

business transactions. The main responsibility of a bookkeeper is to accurately record financial
data, ensuring that entries in and out of the company’s accounts are correct on a daily basis. They
record and calculate income and expenses, and undertake activities in support of this. In a nutshell,
while both (accounting and bookkeeping) deal with the finances of a business, bookkeeping is
primarily concerned with accurately recording financial data on a routine basis, while accounting
involves interpreting and reporting on that data.
Finally, bookkeeping and accounting have considerable overlap because the first can be considered
a part of the second. Bookkeepers lay the groundwork for accountants, providing data that is
detailed and accurate, and essential to the performance of their role.
The Scope of Accountancy Work – The Branches of Accounting
Accounting can be divided into several areas of activity. Such areas include, but not limited to the
following (source: https://www.investopedia.com):
Financial Accounting: Financial accounting involves supplying information internally within the
organization and to external stakeholders including shareholders, creditors and
government/regulatory agencies as required. Periodic reporting of a company's financial position
and the results of operations to external parties through financial statements ordinarily includes
the balance sheet (statement of financial position), income statement (statement of comprehensive
income) and the statement of cash flows. A statement of changes in owners' equity is also often
prepared. Financial statements are relied upon by suppliers of capital such as shareholders,
bondholders and banks.
12
Customers, suppliers, government agencies and policymakers also use this information.
Regulators uses the information from financial statements as the basis of much of their analysis of
publicly-traded companies to determine if their stock is a good investment. Private companies,
including start-ups, also need accurate and compliant financial statements so potential investors
can assess whether they want to invest capital. When preparing financial statements, domestic
and/or foreign companies use Generally Accepted Accounting Principles or GAAP. The primary
source of GAAP is the rules published by the FASB (in the USA; PFRSC in the Philippines) and
its predecessors; but GAAP also derives from the work done by the SEC, as well standard industry
practices. [Refer to Appendix 3 for details of Philippine GAAP adopted by the Philippine SEC].
Management Accounting: Where financial accounting focuses on external users, management
accounting emphasizes the preparation and analysis of accounting information within the
organization. According to the Institute of Management Accountants (IMA), it includes
"…designing and evaluating business processes, budgeting and forecasting, implementing and
monitoring internal controls, and analyzing, synthesizing and aggregating information…to help
drive economic value." Reports are tailored to the needs of individual managers or functional areas
of the organization such as manufacturing, distribution, sales, marketing or others. The information
should be presented in a fashion that highlights relevant information that aids operational managers
in managing their operation. The discipline of management accounting arose out of what was
originally cost accounting, the allocation of costs to the proper area of the manufacturing and
distribution process at an industrial company. In recent years, management accountants have
developed new approaches like activity-based costing (ABC) and target costing, but they continue
to debate how best to provide and use cost information for management decision-making.
Auditing: Auditing is the examination and verification of company accounts and the firm's system
of internal control. There are both external and internal auditors. External auditors are independent
firms that inspect the accounts of an entity and render an opinion on whether its statements conform
to GAAP and present fairly the financial position of the company and the results of operations. In
the U.S., four huge firms known as the Big Four - PricewaterhouseCoopers, Deloitte Touche
Tomatsu, Ernst & Young, and KPMG - dominate the auditing of large corporations and
institutions. The external auditor's primary obligation is to users of financial statements outside the
organization. The internal auditor's primary responsibility is to company management. According
to the Institute of Internal Auditors (IIA), the internal auditor evaluates the risks the organization
faces with respect to governance, operations and information systems. Its mandate is to ensure (a)
effective and efficient operations; (b) the reliability and integrity of financial and operational
information; (c) safeguarding of assets; and (d) compliance with laws, regulations and contracts.
13
Tax Accounting: Tax accounting is based on laws enacted through the legislative process. In the
U.S.A., tax accounting involves the application of Internal Revenue Service (IRS) [Bureau of
Internal Revenue of the Department of Finance in the Philippines] rules at the Federal level and
state and city laws for the payment of taxes at the local level. Tax accountants help entities
minimize (as opposed to tax evasion/tax dodging – the illegal means to reduce taxes) their tax
payments. Within the corporation, they will also assist financial accountants with determining the
accounting for income taxes for financial reporting purposes. In large, multi-national corporations,
tax issues can drive business decisions such as where to domicile certain operations due to
differences in the tax rates paid in various countries around the globe versus those assessed in the
local country. At the state level, companies may decide to relocate operations in one state over
another due to differences in tax rates and tax-breaks provided as incentives by some states.
Fund Accounting: Fund accounting is used for nonprofit entities, including governments and not-
for-profit corporations. Rather than seek to make a profit, governments and nonprofits deploy
resources to achieve their objectives. It is standard practice to distinguish between a general fund
and special purpose funds. The general fund is used for day-to-day operations, like paying
employees or buying supplies. Special funds are established to fund specific objectives, like
building a new wing of a hospital. Segregating resources this way helps the nonprofit maintain
control of its resources and measure its success in achieving its various missions. While non-profits
don’t necessarily look to generate a profit, timely and accurate accounting information is needed
to ensure that often-scarce financial resources are properly managed and that cash shortfalls that
could cause the organization to scale back operations don’t occur. The accounting rules for federal
agencies are determined by the Federal Accounting Standards Advisory Board, while at the state
and local level the U.S.A. Governmental Accounting Standards Board (GASB) has authority.
In the Philippines - The Commission on Audit shall have the power, authority, and duty to examine,
audit, and settle all accounts pertaining to the revenue and receipts of, and expenditures or uses of
funds and property, owned or held in trust by, or pertaining to, the Government, or any of its
subdivisions, agencies, or instrumentalities, including government-owned or controlled
corporations with original charters, and on a post-audit basis: (a) constitutional bodies,
commissions and offices that have been granted fiscal autonomy under this Constitution; (b)
autonomous state colleges and universities; (c) other government-owned or controlled
corporations and their subsidiaries; and (d) such non-governmental entities receiving subsidy or
equity, directly or indirectly, from or through the Government, which are required by law or the
granting institution to submit to such audit as a condition of subsidy or equity. However, where
the internal control system of the audited agencies is inadequate, the Commission may adopt such
measures, including temporary or special pre-audit, as are necessary and appropriate to correct the
deficiencies. It shall keep the general accounts of the Government and, for such period as may be
provided by law, preserve the vouchers and other supporting papers pertaining thereto (The 1987
Philippine Constitution
Article IX-D The Commission On Audit).
14
Forensic Accounting: Finally, forensic accounting is the use of accounting in legal matters,
including litigation support, investigation and dispute resolution. There are many kinds of forensic
accounting engagements: bankruptcy, matrimonial divorce, falsifications and manipulations of
accounts or inventories, and so forth. Forensic accountants investigate and analyze financial
evidence, give expert testimony in court and quantify damages. Forensic accountants are key
players in the investigation of fraud and may be called in if any red flags are detected by a
company’s internal financial group or as a result of a routine audit.
The Accountancy Profession: Philippines
According to the Professional Regulation Commission-Board of Accountancy (PRC-BOA):
Although accounting has been practiced in the Philippines since the Spanish period and possibly
even before, the seeds of Philippine accountancy as a recognized profession were planted on
March 17, 1928, when Act No. 3105 was approved by the Sixth Legislature. Entitled 'An Act
Regulating the Practice of Public Accounting; Creating the Board of Accountancy; Providing for
Examination, for the Granting of Certificates, and the Registration of Certified Public
Accountants; for the Suspension or Revocation of Certificates; and for Other Purposes,' the law
paved the way for local accountants to do the work which, up to that time was performed by foreign
accountants in the country. Since then, both the profession and the body that directly regulates it
have grown rapidly.
From 43 registered accountants in 1923, the number of CPAs has grown to over 100,689 by 1999.
Many of these professionals have distinguished themselves not only in the field of accountancy
itself but in many other areas of human endeavor. To the roster of Philippine CPAs belong such
luminaries, past and present, as Jaime Hernandez and Paciano Dizon, the first and second Filipino
Auditor Generals of the Commission on Audit; Manuel Villar, Speaker of the House of
Representatives; Washington Sycip, past president of the International Federation of Accountants,
the only Asian who has held the position and Founder and Chairman of SGV & Co., the leading
accountancy firm in the country; Jose W. Diokno, former Senator of the Philippines and Secretary
of Justice; Wenceslao Lagumbay and Alberto Romulo, former senators; and Andres Soriano,
founder of one of the country’s leading conglomerates. Many others have been cabinet members,
heads of government agencies, chairmen and members of corporations and institutions, heads and
professors in the academe, and entrepreneurs.
Local accounting firms and partnerships have likewise entered the mainstream of international
practice, establishing tie-ups with the Big Five of the accounting world, namely, Arthur Andersen,
Price Waterhouse Coopers, Ernst & Young, KPMG, and Deloitte Tohmatsu International. The
biggest of the local firms, SGV & Co., was the first to offer services outside the country and
initiated the establishment of The SGV Group composed of leading national accounting firms in
East and Southeast Asia.
15
The increasing complexity of professional regulation and the developments in the practice of the
profession have occasioned the expansion of the Board of Accountancy – from three members
(president and two members) under Act No. 3105 in 1923, through six (chairman and five
members) under Republic Act No. 5166 ('The Accountancy Act of 1967') in 1967, to seven
(chairman and six members) under Presidential Decree No. 692 (The Revised Accountancy Law)
in 1975. Under the stewardship of the PRC, the Board of Accountancy discharges its mandate of
supervising, controlling and regulating the practice of accountancy with authority and distinction.
But over and above its regular functions of standardizing and regulating accounting education,
conducting examinations for registering CPAs, and maintaining the rules of the practice, the
Board has taken the lead in raising the standards of the profession to a very high level of
excellence, as evidenced by the following developments:
1. Full computerization of the CPA licensure examinations. The accounting profession was
the first among the professions to achieve this, paving the way for the current record two-
day release of examination results.
2. Upgrading of the quality of accounting education. With the PRC, the Board made
representations with the DECS for the adoption of standards for the organization and
operation of professional accounting programs leading to the prescription of a common
baccalaureate degree – Bachelor of Science in Accountancy. The Board periodically
reviews school curricula and syllabi to maintain their relevance, particularly in the area
of information technology. It also initiated the continued monitoring of schools’
performance in the CPA examinations and the recommendation of corrective measures, as
necessary.
3. Regulation of CPA firms and partnerships. To assure compliance of their staff and partners
with standards and regulations of the practice, the Board moved for the registration of
firms or partnerships of CPAs with both the PRC and the Board of Accountancy.
4. Requirement of CPAs in civil service. The Board made representations with the Civil
Service Commission to require that only CPAs be appointed as accountants and auditors
or to hold allied positions in government.
In 1975, with the accreditation by the PRC of the Philippine Institute of Certified Public
Accountants (PICPA) as the bona fide professional organization representing CPAs in the country,
the Board has coordinated with PICPA to further strengthen the profession. With PICPA, it has
worked for the passage of The Accountancy Act of 1967; the issuance of the Code of Professional
Ethics in 1978; the issuance of guidelines in 1987 for the mandatory continuing professional
education (CPE) program for CPAs; the integration of the accounting profession completed in
1987; the biennial oath-taking of new CPAs; standards setting for the profession through
membership in the Accounting Standards Council and the Auditing Standards Practices Council;
and the declaration of the Accountancy Week.
16
As the global professional environment unfolds, with the onset of the 21st century, accountancy
continues its trailblazing efforts. It is the first among the Philippine professions to be included
under the World Trade Organization’s (WTO) policy of liberalization of services. This means that
Philippine accountants will be freely competing with in the global playing field against
accountants from other parts of the world and will be able to hold their own. This is due, in no
small measure, to the long and distinguished careers of the country’s accountants, to the linkages
that local firms have forged with the world’s biggest accounting firms, and to the integrity with
which the Board of Accountancy and the Professional Regulation Commission are now
administering a profession that has acquired a global perspective.
Professional Careers – Accounting and Bookkeeping
Bookkeepers aren’t required by law to have any formal education, but the right qualifications can
certainly help demonstrate expertise. The Association of Accounting Technicians (AAT) provides
well regarded bookkeeping qualifications. Choosing a bookkeeper who is a member of the Institute
of Chartered Bookkeepers (ICB) is also a mark of expertise and experience.
Accordingly, accountants similarly need to prove their ability through qualifications. Those just
embarking on their accounting education often begin with AAT courses. The Association of
Certified Chartered Accountants (ACCA) courses, are internationally recognized qualifications
that demonstrate knowledge and expertise in a wide range of areas including financial law and
ethics. For those with an interest in management accounting, Chartered Institute of Management
Accountants (CIMA) qualifications are a popular choice. It is noteworthy that the Certified Public
Accountant (CPA) is the title of qualified accountants in numerous countries in the English-
speaking world, including the Philippines [supra].
17
The Accounting Cycle

An accounting cycle is the collective process of identifying, analyzing, and recording the
accounting events of a company. The series of steps begins when a transaction occurs and end with
its inclusion in the financial statements. An organization begins its accounting cycle with the
recording of transactions using journal entries. The entries are based on the receipt of an invoice
(a business document), recognition of a sale, or completion of other economic events. After the
company posts journal entries to individual general ledger accounts, an unadjusted trial balance
is prepared. The trial balance ensures that total debits equals the total credits in the financial
records. At the end of the period, adjusting entries are made. These are the result of corrections
made and the results from the passage of time. Upon the posting of adjusting entries, a company
prepares an adjusted trail balance followed by the financial statements (a worksheet may be
prepared to facilitate the preparation of the financial statements; preparing a worksheet is an
optional step in the accounting cycle). An entity closes temporary accounts, revenues and
expenses, at the end of the period using closing entries. These closing entries transfer profit/(loss)
into the capital account. Finally, a company prepares the post-closing trial balance to ensure debits
and credits match. Another optional step is prepared at the beginning of the new accounting period
(reversing entries) – these are entries associated with adjusting entries pertaining to: prepayments
(expense method), deferred revenues (income method) and accruals (accrued revenues and accrued
expenses) [https://www.investopedia.com]. Figure 5 illustrates the accounting process; and Figure
6 – The Accounting Cycle (reversing entries not shown).
Figure 5: Phases of Accounting (Source: https://slideplayer.com)

18
Figure 6: The Accounting Cycle (Source: https://slideplayer.com)
About Business Documents
Business documents evidence economic transactions. These are analyzed in terms of their effects
on the accounting equation: ASSETS = LIABILITIES + CAPITAL. Source document may
include, but not limited into the following:
• Sales invoice - used to record the goods/services details and the amount owing to the business by
a customer. The original goes to the customer with the copy held by the business.
• Purchase invoices - used to record the goods/services details and the amount owing by the
business to suppliers. The original is provided by the supplier to the business.
• Credit Note/Memo - used by a business/supplier to correct an overcharge in the invoice.
• Debit Note/Memo - used by a business/supplier to correct an undercharge in the invoice.
• Petty cash voucher - used as evidence of cash payment to another party.
• Cheque (or check) stubs - used to record the amount paid on a particular numbered cheque to the
payee.
• Cash receipts - used to acknowledge money received from customers and cash paid to suppliers.
• Bank statement - used as a summary of cash movements through the business bank account.
• Memorandum - used as a note explaining a transaction if no other documents exist.
• ATM receipts - used as evidence that money was taken from the business bank account via the
ATM.
19
• EFTPOS (Electronic Fund Transfer at Point of Sale) receipts - used as evidence of a purchase
from a supplier using the EFTPOS system.
• Suplier's Statements of Account - issued by suppliers in regard to invoices unpaid at a particular
date.
•Cash Register tapes - automatically generated by the cash register and provides an unbroken
sequence of cash transactions and events.
• Bank Deposit slips/forms - used to record amounts of money deposited to the bank. The original
is provided to the bank with the copy retained by the business.
• Credit Card receipts - used to verify transactions on a credit card statements that relate to the
business.
• Payroll Records - used to verify payments made to employees in the form of salaries and wages
and includes timesheets.
• Canceled checks - used as an internal control to ensure that all checks can be accounted for.
The Rules: Debit and Credit
Debits and credits are the opposing sides of an accounting journal entry. They are used to change
the ending balances in the general ledger accounts. The rules governing the use of debits and
credits in a journal entry are as follows:
 Rule 1: All accounts that normally contain a debit balance will increase in amount when a
debit (left column) is added to them, and reduced when a credit (right column) is added to
them. The types of accounts to which this rule applies are expenses, assets, and dividends.
 Rule 2: All accounts that normally contain a credit balance will increase in amount when a
credit (right column) is added to them, and reduced when a debit (left column) is added to
them. The types of accounts to which this rule applies are liabilities, revenues, and equity.
 Rule 3: Contra accounts reduce the balances of the accounts with which they are paired;
such as accumulated depreciation, allowance for doubtful/uncollectible accounts
(allowance for bad debts). Note: An adjunct account is an account in financial reporting
that increases the book value of a liability account. An adjunct account is a valuation
account from which credit balances are added to another account.
 Rule 4: The total amount of debits must equal the total amount of credits in a transaction.
Otherwise, a transaction is said to be unbalanced, and the financial statements from which
a transaction is constructed will be inherently incorrect.
20
Figure 7: Summary of Rules – Debits and Credits (Source: https://www.playaccounting.com)
Figure 8: Increase (Decrease) – Debit and Credit of an Account

(Source: https://guides.kendall.edu)
21
Figure 9: Normal Balance of Accounts (Source: https://www.accountingcoach.com)
Notes: The normal balance of the account is associated with increase. For instance: Revenues
and gains are recorded in accounts such as Sales, Service Revenues, Interest Revenues (or Interest
Income), and Gain on Sale of Assets. These accounts normally have credit balances that are
increased with a credit entry. The exceptions to this rule are the accounts Sales Returns, Sales
Allowances, and Sales Discounts - these accounts have debit balances because they are reductions
to sales. Accounts with balances that are the opposite of the normal balance are called contra
accounts; hence contra revenue accounts will have debit balances. Another, whenever cash is
received, the asset account Cash is debited and another account will need to be credited. Since the
service was performed at the same time as the cash was received, the revenue account Service
Revenues is credited, thus increasing its account balance. Similarly, expenses normally have their
account balances on the debit side (left side). A debit increases the balance in an expense account;
a credit decreases the balance. Since expenses are usually increasing, think "debit" when expenses
are incurred. (We credit expenses only to reduce them, adjust them, or to close the expense
accounts.) Examples of expense accounts include Salaries Expense, Wages Expense, Rent
Expense, Supplies Expense, and Interest Expense. Finally, in Figure 9 – the accounts
“stockholders’ equity (shareholders’ equity)” and “dividends” are accounts particular to stock
corporations.
22
The Chart of Accounts
The chart of accounts is a financial organizational tool that provides a complete listing of every
account in the general ledger of a company, broken down into subcategories. And, every account
under each accounting element is assigned an account number. For sole proprietorship business,
account numbers are simply coded meaning only few numbers are assigned unlike partnership and
corporation where accounts numbers are sometimes more than 10-digits. Normally, for sole
proprietorship, assets are assigned with numbers 1 and 2, liabilities with 3 and 4, capital with 5,
revenues with 6 and 7, and expenses with 8 and 9.
Moreover, each accounting element comprises of several accounts. These accounts are the name
or title assigned to the varied forms of values received and parted with. In order to have one name
for each similar values of one item only, an account title or account name is given--this is to
maintain the uniformity of account name being used for similar values with the same character or
quality. Finally, when journalizing and posting entries always refer to chart of accounts in order to
ensure which account title to debit or credit. Because the balances in the temporary accounts are
transferred out of their respective accounts at the end of the accounting year, each temporary
account will have a zero balance when the next accounting year begins. This means that the new
accounting year starts with no revenue amounts, no expense amounts, and no amount in the
drawing account.
23
Figure 10: Sample Chart of Accounts for a Service Concern

(Source: http://wbbbb-ams.blogspot.com)
24
Figure 11: Accounts Pertinent to Merchandising Concerns (Source: https://slideplayer.com)
Figure 12: Accounts Peculiar to Merchandising Business (Source: http://jeffboulton.ca)

25
About Permanent and Drawing Accounts
Asset, liability, and most owner/stockholders’ equity accounts are referred to as "permanent
accounts" (or "real accounts"). Permanent accounts are not closed at the end of the accounting
year; their balances are automatically carried forward to the next accounting year. "Temporary
accounts" (or "nominal accounts") include all of the revenue accounts, expense accounts, the
owner drawing account, and the income summary account. Generally speaking, the balances in
temporary accounts increase throughout the accounting year and are "zeroed out" and closed at the
end of the accounting year. Balances in the revenue and expense accounts are zeroed out by
closing/transferring/clearing their balances to the Income Summary account. The net amount in
Income Summary is then closed/transferred/cleared to an owner equity account (capital).
The Classifying Phase – Posting to the Ledgers
After journal entries are made, the next step in the accounting cycle is to post the journal entries
into the ledger. Posting refers to the process of transferring entries in the journal into the accounts
in the ledger. Posting to the ledger is the classifying phase of accounting. An accounting
ledger refers to a book that consists of all accounts used by the company, the debits and credits
under each account, and the resulting balances. While the journals - referred to as Books of
Original Entry; the ledgers - known as Books of Final Entry.
Consequently, a T-Account is a graphic representation of a general ledger account. The name

of the account is placed above the "T" (sometimes along with the account number). Debit
entries are depicted to the left of the "T" and credits are shown to the right of the "T". The
grand total balance for each "T" account appears at the bottom of the account. A number of T
accounts are typically clustered together to show all of the accounts affected by an accounting
transaction. The T account is a fundamental training tool in double entry accounting, showing
how one side of an accounting transaction is reflected in another account. It is also quite
useful for clarifying the more complex transactions. This approach is not used in single entry
accounting, where only one account is impacted by each transaction.
26
Finally, a subsidiary ledger is a group of similar accounts whose combined balances equal the
balance in a specific general ledger account. The general ledger account that summarizes a
subsidiary ledger's account balances is called a control account or master account. For example,
an accounts receivable subsidiary ledger (customers' subsidiary ledger) includes a separate account
for each customer who makes credit purchases. The combined balance of every account in this
subsidiary ledger equals the balance of accounts receivable in the general ledger. Posting a debit
or credit to a subsidiary ledger account and also to a general ledger control account does not violate
the rule that total debit and credit entries must balance because subsidiary ledger accounts are not
part of the general ledger; they are supplemental accounts that provide the detail to support the
balance in a control account. The accounts receivable subsidiary ledger is essential to most
businesses. Companies may have hundreds or even thousands of customers who purchase items
on credit, who make one or more payments for those items, and who sometimes return items or
purchase additional items before they finish paying for prior purchases. Recording all credit
purchases, returns, and subsequent payments in a single account would make an individual
customer's balance virtually impossible to calculate because the customer's transactions would be
interspersed among thousands of other transactions. But the accounts receivable subsidiary ledger
provides quick access to each customer's balance and account activity. Companies create
subsidiary ledgers whenever they need to monitor the individual components of a controlling
general ledger account. In addition to the accounts receivable subsidiary ledger, companies often
use an accounts payable subsidiary ledger (creditors' subsidiary ledger), which has separate
accounts for each creditor, an inventory subsidiary ledger, which has separate accounts for each
product, and a property, plant, and equipment subsidiary ledger, which has separate accounts for
each long‐lived asset.
Figure 13: A Sample Journal Entry (Source: https://www.accountingverse.com)
Transaction: On December 1, 2017, Mr. Donald Gray started Gray Electronic Repair Services by investing
PHP10,000.
Explanation: The journal entry should increase the company's Cash, and increase (establish) the capital account of
Mr. Gray.
27
Figure 14: Sample – General Ledger Format 1 [Cash Account]

(Source: http://www.leoisaac.com)
Figure 15: Sample – General Ledger Format 2 [Cash Account]

(Source: http://www.accountancyknowledge.com)
28
Figure 16: Sample T-Account (Source: https://www.accountingverse.com)
Transaction: On December 1, 2017, Mr. Donald Gray started Gray Electronic Repair Services by investing
PHP10,000.
Explanation: First, post the entry to Cash. Cash in the journal entry was debited so we placed the amount on the debit
side (left side) of the account in the ledger. For Mr. Gray, Capital, it was credited so the amount is placed on the credit
side (right side) of the account. And that's it. Posting is simply transferring the amounts from the journal to the
respective accounts in the ledger.
Figure 17: Subsidiary Ledgers (Source: https://www.cliffsnotes.com)

29
Illustrative Problem: Journal Entries to Posting Entries

30
Transactions – December 2019:
Transaction #1: On December 1, 2019, Mr. Donald Gray started Gray Electronic Repair Services
by investing PHP10,000.
Transaction #2: On December 5, Gray Electronic Repair Services paid registration and licensing
fees for the business, PHP370.
Transaction #3: On December 6, the company acquired tables, chairs, shelves, and other fixtures
for a total of PHP3,000. The entire amount was paid in cash.
Transaction #4: On December 7, the company acquired service equipment for PHP16,000. The
company paid a 50% down payment and the balance will be paid after 60 days.
Transaction #5: Also on December 7, Gray Electronic Repair Services purchased service
supplies on account amounting to PHP1,500.
31
Transaction #6: On December 9, the company received PHP1,900 for services rendered.
Transaction #7: On December 12, the company rendered services on account, PHP4,250.00. As
per agreement with the customer, the amount is to be collected after 10 days.
Transaction #8: On December 14, Mr. Gray invested an additional PHP3,200.00 into the
business.
Transaction #9: Rendered services to a big corporation on December 15. As per agreement, the
PHP3,400 amount due will be collected after 30 days.
Transaction #10: On December 22, the company collected from the customer in transaction #7.
Transaction #11: On December 23, the company paid some of its liability in transaction #5 by
issuing a check. The company paid PHP500 of the PHP1,500 payable.
Transaction #12: On December 25, the owner withdrew cash due to an emergency need. Mr. Gray
withdrew PHP7,000 from the company.
Transaction # 13: On December 29, the company paid rent for December, PHP1,500.
Transaction #14: On December 30, the company acquired a PHP12,000 short-term bank loan; the
entire amount plus a 10% interest is payable after 1 year.
Transaction #15: On December 31, the company paid salaries to its employees, PHP3,500.
Required:
1. Journalize the transactions;

2. Post the transactions using T-Accounts.
32
PROBLEM SOLUTION/ANSWER:
Journal Entries:
GENERAL JOURNAL
Date
PARTICULARS DEBIT CREDIT
2019
December 1 Cash 10,000.00
Mr. Gray, Capital 10,000.00
5 Taxes and Licenses 370.00

Cash 370.00
6 Furniture and Fixtures 3,000.00

Cash 3,000.00
7 Service Equipment 16,000.00

Cash 8,000.00
Accounts Payable 8,000.00
7 Service Supplies 1,500.00

9 Cash 1,900.00
Service Revenue 1,900.00
12 Accounts Receivable 4,250.00

14 Cash 3,200.00
15 Accounts Receivable 3,400.00

22 Cash 4,250.00
Accounts Receivable 4,250.00
23 Accounts Payable 500.00

Cash 500.00
25 Mr. Gray, Drawings 7,000.00

Cash 7,000.00
29 Rent Expense 1,500.00

Cash 1,500.00
30 Cash 12,000.00
Loans Payable 12,000.00
31 Salaries Expense 3,500.00

Cash 3,500.00
33
Posting Entries: T-Accounts:

34
The Trial Balance
A trial balance is a bookkeeping or accounting report that lists the balances in each of an
organization's general ledger accounts. (often the accounts with zero balances will not be listed.)
The debit balance amounts are listed in a column with the heading "Debit balances" and the credit
balance amounts are listed in another column with the heading "Credit balances." The total of each
of these two columns should be identical/equal. The trial balance is not a financial statement. If
the trial balance did not "balance" it signaled an error somewhere between the journal and the trial
balance. Often the cause of the difference was a miscalculation of an account balance, posting a
debit amount as a credit (or vice versa), transposing digits within an amount when posting or
preparing the trial balance, etc. Accordingly, a transposition occurs when the digits of an amount
are reversed, such as entering 61 dollars and 43 cents instead of 16 dollars and 43 cents. Moreover,
if the difference (between the debit and credit columns within the trial balance) is evenly divisible
by 9 you have a transposition error.
On the other hand, a slide error or transplacement error occurs when the decimal point has been
entered in the wrong position e.g. 172.34 instead of 1723.40. Note: if an error has already been
journalized and posted to the ledger, a correcting journal entry is normally prepared.
However, among the types of errors that will not cause the trial balance totals to be unequal are
the following: (1) Failing to record a transaction or to post a transaction; (2) Recording the same
erroneous amount for both the debit and the credit parts of a transaction; (3) Recording the same
transaction more than once; and (4) Posting a part of a transaction correctly as a debit or credit but
to the wrong account.
The trial balance continues to be useful for auditors and accountants who wish to show 1) the
general ledger account balances prior to their proposed adjustments, 2) their proposed adjustments,
and 3) all of the account balances after the proposed adjustments. The adjusted amounts make-up
the adjusted trial balance, and the adjusted amounts will be used in the organization's financial
statements.
35
Figure 18: Errors Causing Unequal Trial Balance (Source: https://www.cengage.com)
Illustrative Problem 2: Preparation of Trial Balance
36
Transaction #5: Also on December 7, Gray Electronic Repair Services purchased service supplies
on account amounting to PHP1,500.
Transaction #8: On December 14, Mr. Gray invested an additional PHP3,200.00 into the business.
Required: After journalizing and posting the December 2019 transactions – prepare the
unadjusted trial balance on December 31, 2019.
37
Gray Electronic Repair Services

Unadjusted Trial Balance
December 31, 2019
(all amounts in PHP)
Account Title Debit Credit

Cash 7,480.00
Accounts
3,400.00
Receivable
Service Supplies 1,500.00
Furniture and
3,000.00
Fixtures
Service Equipment 16,000.00
Mr. Gray, Drawing 7,000.00
Rent Expense 1,500.00
Salaries Expense 3,500.00
Taxes and Licenses 370
Totals 43,750.00 43,750.00
On Adjusting Entries
Adjusting entries, or adjusting journal entries, are made to update the accounts and bring them to
their correct balances. The preparation of adjusting entries is an application of the accrual
concept of accounting and the matching principle. At the end of the accounting period, some
income and expenses may have not been recorded, taken up or updated; hence, there is a need to
update the accounts. If adjusting entries are not prepared, some income, expense, asset, and
liability accounts may not reflect their true values when reported in the financial statements. For
this reason, adjusting entries are necessary. The accrual concept states that income is recognized
when earned regardless of when collected and expense is recognized when incurred regardless of
when paid. The matching principle aims to align expenses with revenues. Expenses should be
recognized in the period when the revenues generated by such expenses are recognized. Adjusting
entries affect at least one nominal account and one real account.
38
Generally, there are 6 types of adjusting entries. Adjusting entries are prepared for the following:
(1) Accrued Income/Revenue – income earned but not yet received (accrued revenues are asset
accounts); (2) Accrued Expense – expenses incurred but not yet paid (accrued expenses are liability
accounts); (3) Deferred Income/Deferred Revenue/Unearned Income [income method or liability
method] – income received but not yet earned (unearned revenues are liability accounts); (4)
Prepaid Expense [asset method or expense method] – expenses paid but not yet incurred (prepaid
expenses are asset accounts); (5) Depreciation [using straight-line method]; and (6) Doubtful
Accounts or Bad Debts [direct write-off method or allowance method]. And the golden rule: “cash”
is not part of adjusting entries.
About Accrued Income:
When a company has performed services or sold goods to a customer, it should be recognized as
income even if the amount is still to be collected at a future date. If no journal entry was ever made
for the above, then an adjusting entry is necessary. The pro-forma adjusting entry to record an
accrued revenue is:

Receivable account xxx
Income account xxx
Notes:
1. On the debit side - Appropriate receivable account such as Accounts Receivable, Rent Receivable, Interest
Receivable, etc.
2. On the credit side - Income account such as Service Revenue, Rent Income, Interest Income, etc.
39
About Accrued Expenses:
At the end of period, accountants should make sure that they are properly recorded in the books of
the company as an expense, with a corresponding payable account. Thus - if a company incurred,
used, or consumed all or part of an expense, that expense or part of it should be properly recognized
even if it has not yet been paid. If such has not yet been recognized [recorded], then an adjusting
entry is necessary. The pro-forma adjusting entry to record an accrued expense is:

Expense account xxx
Liability account xxx
Notes:
1. On the debit side - Appropriate expense account (such as Utilities Expense, Rent Expense, Interest Expense,
etc.).
2. On the credit side - Appropriate liability account (Utilities Payable, Rent Payable, Interest Payable, Accounts
Payable, etc.).
About Deferred Revenues – Income Method or Liability Method:
Deferred income is also known as advances from customers. It is to be noted that under the accrual
concept, income is recognized when earned regardless of when collected. And so, unearned
revenue should not be included as income yet; rather, it is recorded as a liability. This liability
represents an obligation of the company to render services or deliver goods in the future. It will be
recognized as income only when the goods or services have been delivered or rendered. At the end
of the period, unearned revenues must be checked and adjusted if necessary. The adjusting entry
for unearned revenue depends upon the journal entry made when it was initially recorded. There
are two ways of recording unearned revenue: (1) the liability method, or (2) the income method.
Under the liability method, a liability account is recorded (such as Unearned Revenue account is
credited) when the amount is collected. The common accounts used are: Unearned Revenue,
Deferred Income, and Advances from Customers. The pro-forma journal entry using this method
is:

Cash xxx
Liability Xxx
40
Consequently, the pro-forma adjusting journal entry using the liability method shall be:

Liability xxx
Revenue xxx
Notes:
1. The amount of the adjusting entry represents the amount earned at the end of the reporting period. The
revenue recognition principle states that one should only record revenue when it has been earned, not
when the related cash is collected. This is the opposite of cash basis of accounting – revenue is recorded
when a cash payment has been received. According to the matching principle, the revenue and its
associated costs must be reported in the same accounting period.
2. Earning process is equivalent to rendition of services by a service concern; for merchandising - usually occurs
when goods are transferred. The term revenue recognition at the point of sale refers to the process of
recording revenue from manufacturing and selling activities at the time of sale. The revenue recognition
principle states a company can record revenue when two conditions are met. They must be realized or
realizable, and earned. These requirements are typically met when a product is delivered or a service is
rendered to a customer. The term realized or realizable, which means the goods or services have been
exchanged for cash or claims of cash (credit), or realizable if the transaction involves an asset that can be
converted to a known amount of cash. They must also be earned, which means the company has substantially
completed what it needs to do in order to be entitled to payment. Thus, revenue can be recognized at the point
of sale, before, and after delivery, or as part of a special sales transaction. Most retail companies recognize
revenue at the point of sale, since the transaction typically involves the immediate exchange of cash or credit
for goods or services, as well as the immediate delivery of the goods or services.
3. According to the matching principle, the revenue and its associated costs must be reported in the
same accounting period.
Under the income method, a revenue account is recorded [such as Revenue account (Service
Income) is credited] when the amount is collected. The common accounts used are: Revenue,
Income, and Service Income. The pro-forma journal entry using this method is:

Cash xxx
Revenue Xxx
Consequently, the pro-forma adjusting journal entry using the revenue method shall be:

Revenue xxx
Liability xxx
Note: The amount of the adjusting entry represents the amount not yet earned at the end of the reporting period.
41
About Prepaid Expenses – Asset Method or Expense Method:
Prepayments represent payments made for expenses which have not yet been incurred [advanced
payments by a company for supplies, rent, utilities and others that are still to be consumed; hence,
they are included in the company's assets].
Expenses are recognized when they are incurred regardless of when paid. Expenses are
considered incurred when they are used, consumed, utilized or has expired. Because prepayments
they are not yet incurred, they are not recorded as expenses. Rather, they are classified as current
assets since they are readily available for use. Prepaid expenses may need to be adjusted at the end
of the accounting period. The adjusting entry for prepaid expense depends upon the journal entry
made when it was initially recorded.
There are two ways of recording (original journal entry) prepayments: (1) the asset method, and
(2) the expense method. Under the asset method, a prepaid expense account (an asset) is recorded
when the amount is paid. Prepaid expense accounts include: Office Supplies, Prepaid Rent, Prepaid
Insurance, among others. Under the expense method, the accountant initially records the entire
payment as expense (thus, the accounts to be debited may be - Office Supplies Expense, Prepaid
Rent Expense, Prepaid Insurance Expense, among others). And under both methods, the cash
account is credited, upon original entry.
Illustrative Pro-forma Entries – Prepayments [Case-in-point: Supplies]:
Pro-forma original journal entry – Prepayments (Asset Method):

Supplies xxx
Cash xxx
Pro-forma original journal entry – Prepayments (Expense Method):

Supplies Expense xxx
Cash xxx
42
Pro-forma adjusting journal entry – Prepayments (Asset Method):

Supplies xxx
Note: The amount of adjustment represents the expense (used) portion of the prepayment at the end of the reporting
period.
Pro-forma adjusting journal entry – Prepayments (Expense Method):

Supplies xxx
Note: The amount of adjustment represents the asset (unused) portion of the prepayment at the end of the reporting
period.
On Depreciation [Case-in-point: Straight-line Method]
The International Accounting Standard (IAS®) 16, Property, Plant and Equipment (PPE) - defines
PPE as tangible items that are:
 held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes and
 expected to be used during more than one accounting period.
IAS 16 requires that PPE should initially be measured at ‘cost’. The cost of an item of PPE
comprises:
 the cost of purchase, net of any trade discounts plus any import duties and non-refundable sales
taxes
 any costs directly attributable to bringing the asset to the location and condition necessary for it to
be capable of operating in the manner intended by management.
43
These are costs that would have been avoided if the asset had not been purchased or constructed.
General overhead costs cannot be allocated to the cost of PPE. Directly attributable costs include:
 employee benefits payable to staff installing, constructing, or initially testing the asset
 site preparation
 professional fees directly associated with the installation, construction, or initial testing of the asset
 any other overhead costs directly associated with the installation, construction, or initial testing of
the asset.
Where these costs are incurred over a period of time (such as employee benefits), the period for
which the costs can be included in the cost of PPE ends when the asset is ready for use, even if the
asset is not brought into use until a later date. As soon as an asset is capable of operating it is ready
for use. The fact that it may not operate at normal levels immediately, because demand has not yet
built up, does not justify further capitalization of costs in this period. Any abnormal costs (for
example, wasted material) cannot be included in the cost of PPE.
IAS 16 does not specifically address the issue of whether borrowing costs associated with the
financing of a constructed asset can be regarded as a directly attributable cost of construction. This
issue is addressed in IAS 23, Borrowing Costs. IAS 23 requires the inclusion of borrowing costs
as part of the cost of constructing the asset. In order to be consistent with the treatment of ‘other
costs’, only those finance costs that would have been avoided if the asset had not been constructed
are eligible for inclusion. If the entity has borrowed funds specifically to finance the construction
of an asset, then the amount to be capitalized is the actual finance costs incurred. Where the
borrowings form part of the general borrowing of the entity, then a capitalization rate that
represents the weighted average borrowing rate of the entity should be used.
The cost of the asset will include the best available estimate of the costs of dismantling and
removing the item and restoring the site on which it is located, where the entity has incurred an
obligation to incur such costs by the date on which the cost is initially established. This is a
component of cost to the extent that it is recognized as a provision under IAS 37, Provisions,
Contingent Liabilities and Contingent Assets. In accordance with the principles of IAS 37, the
amount to be capitalized in such circumstances would be the amount of foreseeable expenditure
appropriately discounted where the effect is material.
44
Depreciation of PPE:
IAS 16 defines depreciation as ‘the systematic allocation of the depreciable amount of an asset
over its useful life’. The ‘depreciable amount’ is the cost of an asset, cost less residual value, or
other amount (for example the revaluation of the asset). Depreciation does not provide for loss of
value of an asset, but is an accruals accounting technique that allocates the depreciable amount of
the asset to the periods expected to benefit from the use of the asset. Therefore, assets that are
increasing in value still need to be depreciated.
IAS 16 requires that depreciation should be recognized as an expense in the statement of profit or
loss, unless it is permitted to be included in the carrying amount of another asset. An example of
this practice would be the possible inclusion of depreciation in the costs incurred on a construction
contract that are carried forward and matched against future income from the contract, under the
provisions of International Financial Reporting Standard (IFRS®) 18, Revenue from Contracts with
Customers.
A number of methods can be used to allocate depreciation to specific accounting periods. Two of
the more common methods, specifically mentioned in IAS 16, are the straight line method, and the
reducing (or diminishing) balance method.
The assessments of the useful life and residual value/salvage value/book value of an asset are
extremely subjective. They will only be known for certain after the asset is sold or scrapped, and
this is too late for the purpose of computing annual depreciation. Therefore, IAS 16 requires that
the estimates should be reviewed at the end of each reporting period. If either changes significantly,
then that change should be accounted for over the remaining estimated useful life.
There are two types of depreciation – physical and functional depreciation.
Physical depreciation results from wear and tear due to frequent use and/or exposure to elements
like rain, sun and wind.
Functional or economic depreciation happens when an asset becomes inadequate for its purpose
or becomes obsolete. In this case, the asset decreases in value even without any physical
deterioration.
45
There are several methods in depreciating fixed assets. The most common and simplest is
the straight-line depreciation method. Under the straight line method, the cost of the fixed asset is
distributed evenly over the life of the asset.
Straight-line depreciation expense is computed using this formula:
Depreciable Cost – Residual Value/Salvage Value

Estimated Useful Life
Notes:
Depreciable Cost: Historical or un-depreciated cost of the fixed asset
Residual Value or Scrap Value: Estimated value of the fixed asset at the end of its useful life
Useful Life: Amount of time the fixed asset can be used (in months or years)
Illustrative Problem: Depreciation Expense using the Straight-line Method
Phoenix Company acquired a delivery van for PHP40,000 at the beginning of 2018. Assume that
the van can be used for 5 years.
Required: Prepare depreciation schedule and adjusting entry for year 2019, under the following
independent assumptions:
a. The van has zero (none) salvage value at the end of 5 years; acquired at the
beginning of 2018.
b. The van has PHP10,000 salvage value at the end of 5 years; and it was acquired on
January 1, 2018.
c. The van has PHP10,000 salvage value at the end of 5 years; and it was acquired on
June 30, 2018.
46
a. The van has zero (none) salvage value at the end of 5 years.
DEPRECIATION SCHEDULE
DEPRECIATION ACCUMULATED
DATE EXPENSE DEPRECIATION BOOK VALUE
1-Jan-18 40,000.00
31-Dec-18 8,000.00 8,000.00 32,000.00
31-Dec-19 8,000.00 16,000.00 24,000.00
31-Dec-20 8,000.00 24,000.00 16,000.00
31-Dec-21 8,000.00 32,000.00 8,000.00
31-Dec-22 8,000.00 40,000.00 -
DEPRECIATION PER YEAR = 40,000.00

5 YRS.
Adjusting entry on December 31, 2019:
Depreciation Expense-Delivery Van PHP8,000

Accumulated Depreciation-Delivery Van PHP8,000
47
b. The van has PHP10,000 salvage value at the end of 5 years; and it was
acquired on January 1, 2018.
DEPRECIATION ACCUMULATED BOOK

DATE EXPENSE DEPRECIATION VALUE
1-Jan-18 40,000.00
31-Dec-18 6,000.00 6,000.00 34,000.00
31-Dec-19 6,000.00 12,000.00 28,000.00
31-Dec-20 6,000.00 18,000.00 22,000.00
31-Dec-21 6,000.00 24,000.00 16,000.00
31-Dec-22 6,000.00 30,000.00 10,000.00
DEPRECIATION PER
YEAR = 40,000.00-10,000.00
5 YRS.

48
c. The van has PHP10,000 salvage value at the end of 5 years; and it was acquired
on June 30, 2018.
DATE DEPRECIATION EXPENSE ACCUMULATED DEPRECIATION BOOK VALUE
30-Jun-18 40,000.00
31-Dec-18 3,000.00 3,000.00 37,000.00
31-Dec-19 6,000.00 9,000.00 31,000.00
31-Dec-20 6,000.00 15,000.00 25,000.00
31-Dec-21 6,000.00 21,000.00 19,000.00
31-Dec-22 6,000.00 27,000.00 13,000.00
30-Jun-23 3,000.00 30,000.00 10,000.00
DEPRECIATION PER YEAR = 40,000.00-10,000.00

5 YRS.

Note: The depreciation for the first year and for June 30, 2023 is for 6 mos. each only (that is from July 1, 2018-
December 31, 2018 and from January 1, 2023-June 30, 2023, respectively). Thus, PHP6,000.00 x 6/12 =
PHP3,000.00.
49
About Doubtful Accounts (Allowance Method and Direct Write-off Method):
Companies provide services or sell goods for cash or on credit. Allowing credit tends to encourage
more sales. However, businesses that allow credit are faced with the risk that their receivables may
not be collected. Accounts receivable should be presented in the balance sheet at net realizable
value, i.e. the most probable amount that the company will be able to collect. Net realizable value
for accounts receivable is computed like this:
Accounts Receivable (Gross Amount) xxx

Less: Allowance for Bad Debts xxx
Accounts Receivable (Net Realizable Value) xxx
Allowance for Bad Debts (also often called Allowance for Doubtful Accounts) represents the
estimated portion of the Accounts Receivable that the company will not be able to collect. Take
note that this amount is an estimate. There are several methods in estimating doubtful accounts.
The estimates are often based on the company's past experiences. To recognize doubtful accounts
or bad debts, an adjusting entry must be made at the end of the period. The pro-forma adjusting
entry for bad debts looks like this:
Bad Debts Expense xxx

Allowance for Bad Debts xxx
Bad Debts Expense (Doubtful Accounts Expense): An expense account; hence, it is presented in
the income statement. It represents the estimated uncollectible amount for credit sales/revenues
made during the period. Allowance for Bad Debts (Allowance for Doubtful Accounts): A balance
sheet account that represents the total estimated amount that the company will not be able to collect
from its total Accounts Receivable.
Bad Debts Expense is an income statement account while the latter is a balance sheet account. Bad
Debts Expense represents the uncollectible amount for credit sales made during the period.
Allowance for Bad Debts (contra-asset account), on the other hand, is the uncollectible portion of
the entire Accounts Receivable.
50
The Allowance Method for Estimating Doubtful Accounts:
1. Bad Debts Expense as a Percent of Sales:
Another way sellers apply the allowance method of recording bad debts expense is by using the
percentage of credit sales approach. This approach automatically expenses a percentage of its
credit sales based on past history. The percentage of credit sales approach focuses on the income
statement and the matching principle. And, at some later date, the balance in the allowance account
must be reviewed and perhaps further adjusted, so that the balance sheet will report the correct net
realizable value. If the seller is a new company, it might calculate its bad debts expense by using
an industry average until it develops its own experience rate.
For example, let's assuming that a company prepares weekly financial statements. Past experience
indicates that 3% of its sales on credit will never be collected. Using the percentage of credit sales
approach, this company automatically debits Bad Debts Expense and credits Allowance for
Doubtful Accounts for 3% of each week's credit sales. Let's assume that in the current week this
company sells PHP500,000 of goods on credit. Sales revenues of PHP500,000 are immediately
matched with PHP1,500 of bad debts expense. It estimates its bad debts expense to be PHP15,000
(.03 x PHP500,000) and records the following journal entry:
Bad Debts Expense 15,000.00

Allowance for Bad Debts 1,500.00
2. Percentage of Receivables Method
The percentage of receivables method is used to derive the bad debt percentage that a business
expects to experience. The technique is used to populate the allowance for doubtful accounts,
which is a contra account that offsets the accounts receivable asset. At the most basic level, the
percentage of receivables method requires the following steps: (1) Obtain the ending trade
accounts receivable balance listed in the balance sheet; (2) Calculate the historical percentage of
bad debts to accounts receivable; (3) Multiply the ending trade receivables balance by the historical
bad debt percentage to arrive at the amount of bad debt to be expected [required balance of the
allowance account] from the ending receivables balance; (4) Compare this expected amount to the
ending balance in the allowance for doubtful accounts, and adjust the allowance as necessary for
it to match the latest calculation.
51
Example: A company estimates that 1 percent of accumulated receivables are usually uncollectible
and the receivables balance is PHP500,000. Under this method, the balance of the allowance for
doubtful accounts should be PHP5,000 (the required balance of the allowance account). If the
allowance for doubtful accounts has a PHP2,000 credit balance. The analysis for adjusting entry
would be:
Allowance for Uncollectible Accounts

beginning
2,000.00 balance
3,000.00 adjusting entry
5,000.00 required balance
Therefore, the adjusting entry is:
Uncollectible Accounts Expense 3,000.00
Allowance for Uncollectible Accounts 3,000.00
Note:
If in the given data the beginning balance is debit, the amount of adjusting entry shall be PHP7,000.00.
52
3. Accounts Receivable Aging Method (Balance Sheet Approach)
Accounts receivable aging is a periodic report that categorizes a company's accounts receivable
according to the length of time an invoice has been outstanding. It is used as a gauge to determine
the financial health of a company's customers. If the accounts receivable aging shows a company's
receivables are being collected much slower than normal, this is a warning sign that business may
be slowing down or that the company is taking greater credit risk in its sales practices.
Example:
The Fast company has divided its accounts receivable into five age groups by preparing the
following aging schedule (amounts in PHP):
53
On the basis of past experience and current economic conditions, the company has determined
the percentage of expected credit losses in each age group as follows:
 Not yet due: 1%

 1 – 30 days past due: 3%
 31 – 60 days past due: 10%
 61 – 90 days past due: 20%
 Over 90 days past due: 50%
At the end of the year 2016, the allowance for doubtful accounts account shows a credit balance
of PHP2,000
Required:
1. Compute the total amount of estimated uncollectibles (the required balance in the
allowance for doubtful accounts account) on the basis of above information.
2. Prepare an adjusting entry to recognize uncollectible accounts expense and adjust the
balance in allowance for doubtful accounts account to the required amount.
Solution/Answer:
(1). Computation of required balance in the allowance for doubtful accounts account:
54
2). Adjusting entry at the end of the period:
According to above calculations, the total estimated uncollectible amount at the end of the year is
PHP2,840 which represents the required balance in allowance for doubtful accounts account at the
end of the period. Since the company already has a credit balance of PHP2,000 in its allowance
for doubtful accounts account, the year-end adjusting entry will be made for the amount of only
PHP840 (PHP2,840 – PHP2,000). Thus, the adjusting entry is:
Notes:
1. Under the allowance method, if a specific customer's accounts receivable is identified as uncollectible, it is written
off by removing the amount from Accounts Receivable. The entry to write off a bad account affects only balance
sheet accounts: a debit to Allowance for Doubtful Accounts and a credit to Accounts Receivable. No expense or loss
is reported on the income statement because this write-off is "covered" under the earlier adjusting entries for estimated
bad debts expense.
2. After a seller has written off an accounts receivable, it is possible that the seller is paid part or all of the account
balance that was written off. Under the allowance method, if such a payment is received (whether directly from the
customer or as a result of a court action) the seller will take the following two steps:
a. Reinstate the account that was written off by reversing the write-off entry, as follows:
Accounts Receivable xxx

Allowance for Doubtful Accounts xxx
b. Record the collection (if any):
Cash xxx
Accounts Receivable xxx
55
The Direct Write-off Method:
The direct write off method (direct charge-off method ) involves charging bad debts to
expense only when individual invoices have been identified as uncollectible. The specific
action used to write off an account receivable under this method with accounting software is
to create a credit memo for the customer in question, which offsets the amount of the bad
debt. Creating the credit memo creates a debit to a bad debt expense account and a credit to
the accounts receivable account. The direct write off approach violates the matching principle,
under which all costs related to revenue are charged to expense in the same period in which
you recognize the revenue, so that the financial results of an entity reveal the entire extent of
a revenue-generating transaction in a single accounting period. The direct write off method
delays the recognition of expenses related to a revenue-generating transaction, and so is
considered an excessively aggressive accounting method, since it delays some expense
recognition, making a reporting entity appear more profitable in the short term than it really
is. The direct write off method can be considered a reasonable accounting method if the
amount that is written off is an immaterial amount, since doing so has minimal impact on an
entity's reported financial results, and so would not skew the decisions of a person using the
company's financial statements.
Notes:
In case of recovery of accounts written-off: Reverse the original write-off by crediting the bad debts expense account
and debiting accounts receivable with the amount received. For example, the customer pays the debt of PHP2,500 in
full. Reverse the original entry by crediting the bad debts expense account and debiting accounts receivable with
PHP2,500.
56
Figure 19: Effects on the financial statements if adjusting entries are omitted
(Source: https://www.harpercollege.edu)
The Worksheet
An accounting worksheet is a tool used to help bookkeepers and accountants complete

the accounting cycle and prepare year-end reports like unadjusted trial balances, adjusting journal
entries, adjusted trial balances, and financial statements. The accounting worksheet is essentially
a spreadsheet that tracks each step of the accounting cycle. The spreadsheet typically has five sets
of columns that start with the unadjusted trial balance accounts and end with the financial
statements. In other words, an accounting worksheet is basically a spreadsheet that shows all of
the major steps in the accounting cycle side by side. Each step lists its debits and credits with totals
calculated at the bottom. Just like the trial balances, the work sheet also has a heading that consists
of the company name, title of the report, and time period the report documents.
57
Figure 20: Sample of - Accounting Worksheet (Source: http://www.accountancyknowledge.com)
Notes:
An accounting worksheet’s main purpose is to ensure that the bookkeeper does not forget to make the required
adjustments when drawing up a firm’s income statement and balance sheet. A column on the left of the accounting
worksheet lists the main account titles. This is followed by five additional columns, each of which is divided into two
parts – debit and credit. The five columns of data, each of which list debit entries and credit entries separately are:
 Unadjusted trial balance – this contains all the asset, liability, revenue, and expense accounts that are used in the year.
The total of debits and credits are equal.
58
 Adjustments – every account that requires an adjustment entry will be listed here. An example is an entry for
depreciation of the firm’s long-term assets. The depreciation for the year will appear as a debit while the credit entry
will appear under the accumulated depreciation account. Again, the total of debit entries and credit entries will be
equal.
 Adjusted trial balance – this third column is the result of the entries in the previous two columns. Total debits will
equal the total credits.
 Income statement – the income statement column will contain only the revenue and expense accounts. If the total of
the revenue (credit) column exceeds the expense (debit) column, the difference is the net income for the year.
However, if the expenses exceed the revenue, the net result is a loss. A balancing entry will have to be made in either
case.
 Balance sheet – assets, liabilities, and the owner’s capital is reflected in this column. The total of the debits will equal
the total of the credit entries.
Remember that all the accounts in the company’s accounting records find their way to the accounting worksheet. This
essential step prevents errors in the preparation of the firm’s financial statements.
The Adjusted Trial Balance
An adjusted trial balance is prepared after adjusting entries are made and posted to the ledger. This
is the second trial balance prepared in the accounting cycle. Its purpose is to test the equality
between debits and credits after adjusting entries are entered into the books of the company.
59
Illustrative Problem:
Here is a sample unadjusted trial balance:

Unadjusted Trial Balance
December 31, 2019

Cash PHP 7,480.00
Service Supplies 1,500.00
Furniture and Fixtures 3,000.00
Accounts Payable PHP 9,000.00
Totals PHP 43,750.00 PHP 43,750.00
Data for Adjustments:
At the end of the period, the following adjusting entries were made:
Dec 31 Accounts Receivable 300.00

Service Revenue 300.00
60
31 Utilities Expense 1,800.00

Utilities Payable 1,800.00
31 Service Supplies Expense 900.00

Service Supplies 900.00
31 Depreciation Expense 720.00

Accumulated Depreciation 720.00
After incorporating the adjustments above, the adjusted trial balance would look like this:

Adjusted Trial Balance
December 31, 2019

Cash PHP 7,480.00
Service Supplies 600
Furniture and Fixtures 3,000.00
Accumulated
PHP 720.00
Depreciation
Utilities Payable 1,800.00
Utilities Expense 1,800.00
Service Supplies
900
Expense
Depreciation Expense 720
Totals PHP 46,570.00 PHP 46,570.00
Note: Just like in the unadjusted trial balance, total debits and total credits should be equal.
61
The Financial Statements

IAS 1 Presenta tion of Financial Statements sets o ut the o verall requirements for financial statements, includ ing how they should be s tructured, the minimum requirements for their content and overridin g concepts such as g oing concern, the accrual basis of accountin g and the current/no n-current distinction. The standard requires a complete set of financial statements to comprise a statement of financial pos ition, a statem ent of profit or loss and other comprehensive income, a statement of changes in equity and a statement of cash flows.
IAS 1 Presentation of Financial Statements sets out the overall requirements for financial
statements, including how they should be structured, the minimum requirements for their content
and overriding concepts such as going concern, the accrual basis of accounting and the
current/non-current distinction. The standard requires a complete set of financial statements to
comprise a statement of financial position, a statement of profit or loss and other comprehensive
income, a statement of changes in equity and a statement of cash flows. The objective of IAS 1
(2007) is to prescribe the basis for presentation of general purpose financial statements, to ensure
comparability both with the entity's financial statements of previous periods and with the financial
statements of other entities. IAS 1 sets out the overall requirements for the presentation of financial
statements, guidelines for their structure and minimum requirements for their content. [IAS 1.1]
Standards for recognizing, measuring, and disclosing specific transactions are addressed in other
Standards and Interpretations. [IAS 1.3]. IAS 1 applies to all general purpose financial statements
that are prepared and presented in accordance with International Financial Reporting Standards
(IFRSs). [IAS 1.2]. General purpose financial statements are those intended to serve users who are
not in a position to require financial reports tailored to their particular information needs. [IAS
1.7].
The objective of general purpose financial statements is to provide information about the financial
position, financial performance, and cash flows of an entity that is useful to a wide range of users
in making economic decisions. To meet that objective, financial statements provide information
about an entity's: [IAS 1.9]
 assets
 liabilities
 equity
 income and expenses, including gains and losses
 contributions by and distributions to owners (in their capacity as owners)
 cash flows.
That information, along with other information in the notes, assists users of financial statements
in predicting the entity's future cash flows and, in particular, their timing and certainty.
62
A complete set of financial statements includes: [IAS 1.10]
 a statement of financial position (balance sheet) at the end of the period

 a statement of profit or loss and other comprehensive income for the period (presented as
a single statement, or by presenting the profit or loss section in a separate statement of
profit or loss, immediately followed by a statement presenting comprehensive income
beginning with profit or loss)
 a statement of changes in equity for the period
 a statement of cash flows for the period
 notes, comprising a summary of significant accounting policies and other explanatory notes
 comparative information prescribed by the standard.
An entity may use titles for the statements other than those stated above. All financial statements
are required to be presented with equal prominence. [IAS 1.10]
When an entity applies an accounting policy retrospectively or makes a retrospective restatement

of items in its financial statements, or when it reclassifies items in its financial statements, it must
also present a statement of financial position (balance sheet) as at the beginning of the earliest
comparative period.
Reports that are presented outside of the financial statements – including financial reviews by
management, environmental reports, and value added statements – are outside the scope of IFRSs.
[IAS 1.14]
The financial statements must "present fairly" the financial position, financial performance and
cash flows of an entity. Fair presentation requires the faithful representation of the effects of
transactions, other events, and conditions in accordance with the definitions and recognition
criteria for assets, liabilities, income and expenses set out in the Framework. The application of
IFRSs, with additional disclosure when necessary, is presumed to result in financial statements
that achieve a fair presentation. [IAS 1.15]
IAS 1 requires an entity whose financial statements comply with IFRSs to make an explicit and
unreserved statement of such compliance in the notes. Financial statements cannot be described as
complying with IFRSs unless they comply with all the requirements of IFRSs (which includes
International Financial Reporting Standards, International Accounting Standards, IFRIC
Interpretations and SIC Interpretations). [IAS 1.16]
63
Inappropriate accounting policies are not rectified either by disclosure of the accounting policies
used or by notes or explanatory material. [IAS 1.18]
IAS 1 acknowledges that, in extremely rare circumstances, management may conclude that
compliance with an IFRS requirement would be so misleading that it would conflict with the
objective of financial statements set out in the Framework. In such a case, the entity is required to
depart from the IFRS requirement, with detailed disclosure of the nature, reasons, and impact of
the departure. [IAS 1.19-21]
Going concern:
The Conceptual Framework notes that financial statements are normally prepared assuming the
entity is a going concern and will continue in operation for the foreseeable future. [Conceptual
Framework, paragraph 4.1]
IAS 1 requires management to make an assessment of an entity's ability to continue as a going

concern. If management has significant concerns about the entity's ability to continue as a going
concern, the uncertainties must be disclosed. If management concludes that the entity is not a going
concern, the financial statements should not be prepared on a going concern basis, in which case
IAS 1 requires a series of disclosures. [IAS 1.25]
Accrual basis of accounting:
IAS 1 requires that an entity prepare its financial statements, except for cash flow information,
using the accrual basis of accounting. [IAS 1.27]
Consistency of presentation:
The presentation and classification of items in the financial statements shall be retained from one
period to the next unless a change is justified either by a change in circumstances or a requirement
of a new IFRS. [IAS 1.45]
64
Materiality and aggregation:
Information is material if omitting, misstating or obscuring it could reasonably be expected to

influence decisions that the primary users of general purpose financial statements make on the
basis of those financial statements, which provide financial information about a specific reporting
entity. [IAS 1.7]
Each material class of similar items must be presented separately in the financial statements.
Dissimilar items may be aggregated only if they are individually immaterial. [IAS 1.29]
However, information should not be obscured by aggregating or by providing immaterial
information, materiality considerations apply to the all parts of the financial statements, and even
when a standard requires a specific disclosure, materiality considerations do apply. [IAS 1.30A-
31]
Offsetting:
Assets and liabilities, and income and expenses, may not be offset unless required or permitted by
an IFRS. [IAS 1.32]
Comparative information:
IAS 1 requires that comparative information to be disclosed in respect of the previous period for
all amounts reported in the financial statements, both on the face of the financial statements and in
the notes, unless another Standard requires otherwise. Comparative information is provided for
narrative and descriptive where it is relevant to understanding the financial statements of the
current period. [IAS 1.38]
65
An entity is required to present at least two of each of the following primary financial statements:
[IAS 1.38A]
 statement of financial position*

 statement of profit or loss and other comprehensive income
 separate statements of profit or loss (where presented)
 statement of cash flows
 statement of changes in equity
 related notes for each of the above items.
* A third statement of financial position is required to be presented if the entity retrospectively

applies an accounting policy, restates items, or reclassifies items, and those adjustments had a
material effect on the information in the statement of financial position at the beginning of the
comparative period. [IAS 1.40A]
Where comparative amounts are changed or reclassified, various disclosures are required. [IAS
1.41]
Structure and content of financial statements in general:
IAS 1 requires an entity to clearly identify: [IAS 1.49-51]
 the financial statements, which must be distinguished from other information in a published
document
 each financial statement and the notes to the financial statements.
In addition, the following information must be displayed prominently, and repeated as necessary:
[IAS 1.51]
 the name of the reporting entity and any change in the name
 whether the financial statements are a group of entities or an individual entity
 information about the reporting period
 the presentation currency (as defined by IAS 21 The Effects of Changes in Foreign
Exchange Rates)
 the level of rounding used (e.g. thousands, millions).
66
Reporting period:
There is a presumption that financial statements will be prepared at least annually. If the annual
reporting period changes and financial statements are prepared for a different period, the entity
must disclose the reason for the change and state that amounts are not entirely comparable. [IAS
1.36]
Statement of financial position (balance sheet):
Current and non-current classification:
An entity must normally present a classified statement of financial position, separating current and
non-current assets and liabilities, unless presentation based on liquidity provides information that
is reliable. [IAS 1.60] In either case, if an asset (liability) category combines amounts that will be
received (settled) after 12 months with assets (liabilities) that will be received (settled) within 12
months, note disclosure is required that separates the longer-term amounts from the 12-month
amounts. [IAS 1.61]
Current assets are assets that are: [IAS 1.66]
 expected to be realized in the entity's normal operating cycle

 held primarily for the purpose of trading
 expected to be realized within 12 months after the reporting period
 cash and cash equivalents (unless restricted).
All other assets are non-current. [IAS 1.66]
Current liabilities are those: [IAS 1.69]
 expected to be settled within the entity's normal operating cycle

 held for purpose of trading
 due to be settled within 12 months
 for which the entity does not have an unconditional right to defer settlement beyond 12
months (settlement by the issue of equity instruments does not impact classification).
67
Other liabilities are non-current.
When a long-term debt is expected to be refinanced under an existing loan facility, and the entity
has the discretion to do so, the debt is classified as non-current, even if the liability would otherwise
be due within 12 months. [IAS 1.73]
If a liability has become payable on demand because an entity has breached an undertaking under
a long-term loan agreement on or before the reporting date, the liability is current, even if the
lender has agreed, after the reporting date and before the authorization of the financial statements
for issue, not to demand payment as a consequence of the breach. [IAS 1.74] However, the liability
is classified as non-current if the lender agreed by the reporting date to provide a period of grace
ending at least 12 months after the end of the reporting period, within which the entity can rectify
the breach and during which the lender cannot demand immediate repayment. [IAS 1.75]
Line items:
The line items to be included on the face of the statement of financial position are: [IAS 1.54]
(a) property, plant and equipment

(b) investment property
(c) intangible assets
(d) financial assets (excluding amounts shown under (e), (h), and (i)
(e) investments accounted for using the equity method
(f) biological assets
(g) Inventories
(h) trade and other receivables
(i) cash and cash equivalents
(j) assets held for sale
(k) trade and other payables
(l) Provisions
(m) financial liabilities (excluding amounts shown under (k) and (l))
(n) current tax liabilities and current tax assets, as defined in IAS 12
(o) deferred tax liabilities and deferred tax assets, as defined in IAS 12
(p) liabilities included in disposal groups
(q) non-controlling interests, presented within equity
(r) issued capital and reserves attributable to owners of the parent.
68
Additional line items, headings and subtotals may be needed to fairly present the entity's financial
position. [IAS 1.55]
When an entity presents subtotals, those subtotals shall be comprised of line items made up of
amounts recognized and measured in accordance with IFRS; be presented and labelled in a clear
and understandable manner; be consistent from period to period; and not be displayed with more
prominence than the required subtotals and totals. [IAS 1.55A]
Further sub-classifications of line items presented are made in the statement or in the notes, for
example: [IAS 1.77-78]:
 classes of property, plant and equipment

 disaggregation of receivables
 disaggregation of inventories in accordance with IAS 2 Inventories
 disaggregation of provisions into employee benefits and other items
 classes of equity and reserves.
Format of statement:
IAS 1 does not prescribe the format of the statement of financial position. Assets can be presented
current then non-current, or vice versa, and liabilities and equity can be presented current then
non-current then equity, or vice versa. A net asset presentation (assets minus liabilities) is allowed.
The long-term financing approach used in UK and elsewhere – fixed assets + current assets - short
term payables = long-term debt plus equity – is also acceptable.
Share capital and reserves:
Regarding issued share capital and reserves, the following disclosures are required: [IAS 1.79]
 numbers of shares authorized, issued and fully paid, and issued but not fully paid
 par value (or that shares do not have a par value)
 a reconciliation of the number of shares outstanding at the beginning and the end of the
period
 description of rights, preferences, and restrictions
 treasury shares, including shares held by subsidiaries and associates
 shares reserved for issuance under options and contracts
 a description of the nature and purpose of each reserve within equity.
69
Additional disclosures are required in respect of entities without share capital and where an entity
has reclassified puttable financial instruments. [IAS 1.80-80A]
Statement of profit or loss and other comprehensive income:
Concepts of profit or loss and comprehensive income:
Profit or loss is defined as "the total of income less expenses, excluding the components of other
comprehensive income". Other comprehensive income is defined as comprising "items of income
and expense (including reclassification adjustments) that are not recognized in profit or loss as
required or permitted by other IFRSs". Total comprehensive income is defined as "the change in
equity during a period resulting from transactions and other events, other than those changes
resulting from transactions with owners in their capacity as owners". [IAS 1.7]
Comprehensive income Profit Other

= +
for the period or loss comprehensive income
All items of income and expense recognized in a period must be included in profit or loss unless a
Standard or an Interpretation requires otherwise. [IAS 1.88] Some IFRSs require or permit that
some components to be excluded from profit or loss and instead to be included in other
comprehensive income.
Examples of items recognized outside of profit or loss:
 Changes in revaluation surplus where the revaluation method is used under IAS 16
Property, Plant and Equipment and IAS 38 Intangible Assets
 Remeasurements of a net defined benefit liability or asset recognized in accordance with
IAS 19 Employee Benefits (2011)
 Exchange differences from translating functional currencies into presentation currency in
accordance with IAS 21 The Effects of Changes in Foreign Exchange Rates
 Gains and losses on remeasuring available-for-sale financial assets in accordance with
IAS 39 Financial Instruments: Recognition and Measurement
 The effective portion of gains and losses on hedging instruments in a cash flow hedge
under IAS 39 or IFRS 9 Financial Instruments
 Gains and losses on remeasuring an investment in equity instruments where the entity has
elected to present them in other comprehensive income in accordance with IFRS 9
 The effects of changes in the credit risk of a financial liability designated as at fair value
through profit and loss under IFRS 9.
70
In addition, IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors requires the
correction of errors and the effect of changes in accounting policies to be recognized outside profit
or loss for the current period. [IAS 1.89]
Choice in presentation and basic requirements:
An entity has a choice of presenting:
 a single statement of profit or loss and other comprehensive income, with profit or loss and
other comprehensive income presented in two sections, or
 two statements:
o a separate statement of profit or loss
o a statement of comprehensive income, immediately following the statement of
profit or loss and beginning with profit or loss [IAS 1.10A]
The statement(s) must present: [IAS 1.81A]
 profit or loss
 total other comprehensive income
 comprehensive income for the period
 an allocation of profit or loss and comprehensive income for the period between non-
controlling interests and owners of the parent.
Profit or loss section or statement:
The following minimum line items must be presented in the profit or loss section (or separate
statement of profit or loss, if presented): [IAS 1.82-82A]
 revenue
 gains and losses from the derecognition of financial assets measured at amortized cost
 finance costs
 share of the profit or loss of associates and joint ventures accounted for using the equity
method
 certain gains or losses associated with the reclassification of financial assets
 tax expense
 a single amount for the total of discontinued items
71
Expenses recognized in profit or loss should be analyzed either by nature (raw materials, staffing
costs, depreciation, etc.) or by function (cost of sales, selling, administrative, etc). [IAS 1.99] If an
entity categorizes by function, then additional information on the nature of expenses – at a
minimum depreciation, amortization and employee benefits expense – must be disclosed. [IAS
1.104]
Other comprehensive income section:

The other comprehensive income section is required to present line items which are classified by
their nature, and grouped between those items that will or will not be reclassified to profit and loss
in subsequent periods. [IAS 1.82A]
An entity's share of OCI of equity-accounted associates and joint ventures is presented in aggregate
as single line items based on whether or not it will subsequently be reclassified to profit or loss.
[IAS 1.82A]*
* Clarified by Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016.

When an entity presents subtotals, those subtotals shall be comprised of line items made up of
amounts recognized and measured in accordance with IFRS; be presented and labelled in a clear
and understandable manner; be consistent from period to period; not be displayed with more
prominence than the required subtotals and totals; and reconciled with the subtotals or totals
required in IFRS. [IAS 1.85A-85B]*
* Added by Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016.
Other requirements:
Additional line items may be needed to fairly present the entity's results of operations. [IAS 1.85]
Items cannot be presented as 'extraordinary items' in the financial statements or in the notes. [IAS
1.87]
72
Certain items must be disclosed separately either in the statement of comprehensive income or in
the notes, if material, including: [IAS 1.98]
 write-downs of inventories to net realizable value or of property, plant and equipment to

recoverable amount, as well as reversals of such write-downs
 restructurings of the activities of an entity and reversals of any provisions for the costs of
restructuring
 disposals of items of property, plant and equipment
 disposals of investments
 discontinuing operations
 litigation settlements
 other reversals of provisions
Statement of cash flows:
Rather than setting out separate requirements for presentation of the statement of cash flows, IAS
1.111 refers to IAS 7 Statement of Cash Flows.
Statement of changes in equity:
IAS 1 requires an entity to present a separate statement of changes in equity. The statement must
show: [IAS 1.106]
 total comprehensive income for the period, showing separately amounts attributable to
owners of the parent and to non-controlling interests
 the effects of any retrospective application of accounting policies or restatements made in
accordance with IAS 8, separately for each component of other comprehensive income
73
 reconciliations between the carrying amounts at the beginning and the end of the period for
each component of equity, separately disclosing:
o profit or loss
o other comprehensive income*
o transactions with owners, showing separately contributions by and distributions to
owners and changes in ownership interests in subsidiaries that do not result in a loss
of control
* An analysis of other comprehensive income by item is required to be presented either in the

statement or in the notes. [IAS 1.106A]
The following amounts may also be presented on the face of the statement of changes in equity,
or they may be presented in the notes: [IAS 1.107]
 amount of dividends recognized as distributions

 the related amount per share.
Notes to the financial statements:
The notes must: [IAS 1.112]
 present information about the basis of preparation of the financial statements and the
specific accounting policies used
 disclose any information required by IFRSs that is not presented elsewhere in the financial
statements and
 provide additional information that is not presented elsewhere in the financial statements
but is relevant to an understanding of any of them
Notes are presented in a systematic manner and cross-referenced from the face of the financial
statements to the relevant note. [IAS 1.113]
74
IAS 1.114 suggests that the notes should normally be presented in the following order:*
 a statement of compliance with IFRSs

 a summary of significant accounting policies applied, including: [IAS 1.117]
o the measurement basis (or bases) used in preparing the financial statements
o the other accounting policies used that are relevant to an understanding of the
financial statements
 supporting information for items presented on the face of the statement of financial position
(balance sheet), statement(s) of profit or loss and other comprehensive income, statement
of changes in equity and statement of cash flows, in the order in which each statement and
each line item is presented
 other disclosures, including:
o contingent liabilities (see IAS 37) and unrecognized contractual commitments
o non-financial disclosures, such as the entity's financial risk management objectives
and policies.
* Disclosure Initiative (Amendments to IAS 1), effective 1 January 2016, clarifies this order just to
be an example of how notes can be ordered and adds additional examples of possible ways of
ordering the notes to clarify that understandability and comparability should be considered when
determining the order of the notes.
Other disclosures:
Judgements and key assumptions:
An entity must disclose, in the summary of significant accounting policies or other notes, the
judgements, apart from those involving estimations, that management has made in the process of
applying the entity's accounting policies that have the most significant effect on the amounts
recognized in the financial statements. [IAS 1.122]
Examples cited in IAS 1.123 include management's judgements in determining:
 when substantially all the significant risks and rewards of ownership of financial assets and
lease assets are transferred to other entities
 whether, in substance, particular sales of goods are financing arrangements and therefore
do not give rise to revenue.
75
An entity must also disclose, in the notes, information about the key assumptions concerning the
future, and other key sources of estimation uncertainty at the end of the reporting period, that have
a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities
within the next financial year. [IAS 1.125] These disclosures do not involve disclosing budgets or
forecasts. [IAS 1.130]
Dividends:
In addition to the distributions information in the statement of changes in equity (see above), the
following must be disclosed in the notes: [IAS 1.137]
 the amount of dividends proposed or declared before the financial statements were
authorized for issue but which were not recognized as a distribution to owners during the
period, and the related amount per share
 the amount of any cumulative preference dividends not recognized.
Capital disclosures:
An entity discloses information about its objectives, policies and processes for managing capital.
[IAS 1.134] To comply with this, the disclosures include: [IAS 1.135]
 qualitative information about the entity's objectives, policies and processes for managing
capital, including>
o description of capital it manages
o nature of external capital requirements, if any
o how it is meeting its objectives
 quantitative data about what the entity regards as capital
 changes from one period to another
 whether the entity has complied with any external capital requirements and
 if it has not complied, the consequences of such non-compliance.
76
Puttable financial instruments:
IAS 1.136A requires the following additional disclosures if an entity has a puttable instrument that
is classified as an equity instrument:
 summary quantitative data about the amount classified as equity

 the entity's objectives, policies and processes for managing its obligation to repurchase or
redeem the instruments when required to do so by the instrument holders, including any
changes from the previous period
 the expected cash outflow on redemption or repurchase of that class of financial
instruments and
 information about how the expected cash outflow on redemption or repurchase was
determined.
Other information:
The following other note disclosures are required by IAS 1 if not disclosed elsewhere in
information published with the financial statements: [IAS 1.138]
 domicile and legal form of the entity

 country of incorporation
 address of registered office or principal place of business
 description of the entity's operations and principal activities
 if it is part of a group, the name of its parent and the ultimate parent of the group
 if it is a limited life entity, information regarding the length of the life
Terminology:
The 2007 comprehensive revision to IAS 1 introduced some new terminology. Consequential
amendments were made at that time to all of the other existing IFRSs, and the new terminology
has been used in subsequent IFRSs including amendments. IAS 1.8 states: "Although this Standard
uses the terms 'other comprehensive income', 'profit or loss' and 'total comprehensive income', an
entity may use other terms to describe the totals as long as the meaning is clear. For example, an
entity may use the term 'net income' to describe profit or loss." Also, IAS 1.57(b) states: "The
descriptions used and the ordering of items or aggregation of similar items may be amended
according to the nature of the entity and its transactions, to provide information that is relevant to
an understanding of the entity's financial position."
77
Term before 2007 revision of IAS 1 Term as amended by IAS 1 (2007)

-balance sheet -statement of financial position
-cash flow statement -statement of cash flows
-statement of comprehensive income (income statement is retained in
-income statement
case of a two-statement approach)
-recognized in the income statement -recognized in profit or loss
-recognized [directly] in equity (only for OCI
-recognized in other comprehensive income
components)
-recognized [directly] in equity (for recognition
-recognized outside profit or loss (either in OCI or equity)
both in OCI and equity)
-removed from equity and recognized in profit or
-reclassified from equity to profit or loss as a reclassification adjustment
loss ('recycling')
-Standard or/and Interpretation -IFRSs
-on the face of -in
-equity holders -owners (exception for 'ordinary equity holders')
-balance sheet date -end of the reporting period
-reporting date -end of the reporting period
-after the balance sheet date -after the reporting period
78
Figure 21: Sample Statement of Financial Position-Report Form (Corporate Business)

[Source: https://www.myaccountingcourse.com]
Notes:
This statement can be reported in two different formats: account form and report form. The account form consists of
two columns displaying assets on the left column of the report and liabilities and equity on the right column. You can
think of this like debits and credits. The debit accounts are displayed on the left and credit accounts are on the right.
The report form, on the other hand, only has one column. This form is more of a traditional report that is issued by
companies. Assets are always present first followed by liabilities and equity. In both formats, assets are categorized
into current and long-term assets. Current assets consist of resources that will be used in the current year, while long-
term assets are resources lasting longer than one year. Liabilities are also separated into current and long-term
categories.
79
Figure 22: Sample Balance Sheet for Sole Proprietorships (Source: https://businesstips.ph)
Figure 23: A sample balance sheet for partnerships (Source: http://www.opentextbooks.org.hk)

80
Figure 24: Sample Income Statement (Merchandising Business)

Figure 25: Sample Income Statement (Service Business)

81
Figure 26: Sample Income Statement with attached Statement of Comprehensive Income
(Source: https://www.myaccountingcourse.com)
Notes:
An entity has a choice of presenting:
• a single statement of profit or loss and other comprehensive income, with profit or loss and other
comprehensive income presented in two sections, or
• two statements:
o a separate statement of profit or loss
o a statement of comprehensive income, immediately following the statement of profit or loss and beginning
with profit or loss [IAS 1.10A] (supra)
82
Figure 27: Sample Income Statement – Partnerships (Source: http://starcresto.com)

83
Figure 28: Sample-Statement of Cash Flows (Indirect Method)

84
Notes:
The cash flow statement format is divided into three main sections: cash flows from operating activities, investing
activities, and financing activities. Cash flows from operating activities include transactions from the operations of
the business. In other words, the operating section represent the cash collected from the primary revenue generating
activities of the business like sales and service income. Operating activities are short-term and only affect the current
period. For example, payment of supplies is an operating activity because it relates to the company operations and is
expected to be used in the current period. Operating cash flows are calculated by adjusting net income by the changes
in current asset and liability accounts. Cash flows from investing activities consist of cash inflows and outflows from
sales and purchases of long-term assets. In other words, the investing section of the statement represents the cash that
the company either collected from the sale of a long-term asset or the amount of money spent on purchasing a new
long-term asset. You can think of this section as the company investing in itself. The investments are long-term in
nature and expected to last more than one accounting period. Investing cash flows are calculated by adding up the
changes in long-term asset accounts. Cash flows from financing consists of cash transactions that affect the long-term
liabilities and equity accounts. In other words, the financing section on the statement represents the amount of cash
collected from issuing stock or taking out loans and the amount of cash disbursed to pay dividends and long-term debt.
You can think of financing activities as the ways a company finances its operations either through long-term debt or
equity financing. Financing cash flows are calculated by adding up the changes in all the long-term liability and equity
accounts. The cash flow statement presented using the direct method is easy to read because it lists all of the major
operating cash receipts and payments during the period by source. In other words, it lists where the cash inflows came
from, usually customers, and where the cash outflows went, typically employees, vendors, etc. After all of the sources
are listed, the total cash payments are then subtracted from the cash receipts to compute the net cash flow from
operating activities. Then the investing and financing activities added to arrive at the net cash increase or decrease.
On the other hand: The statement of cash flows prepared using the indirect method adjusts net income for the changes
in balance sheet accounts to calculate the cash from operating activities. In other words, changes in asset and liability
accounts that affect cash balances throughout the year are added to or subtracted from net income at the end of the
period to arrive at the operating cash flow. The operating activities section is the only difference between the direct
and indirect methods. The direct method lists all receipts and payments of cash from individual sources to compute
operating cash flows. This is not only difficult to create; it also requires a completely separate reconciliation that looks
very similar to the indirect method to prove the operating activities section is accurate. Companies tend to prefer the
indirect presentation to the direct method because the information needed to create this report is readily available in
any accounting system.
85
Figure 29: Statement of Changes in Equity for Sole Proprietorships (Source:

https://businesstips.ph)
Figure 30: Sample – Statement of Changes in Equity for Partnerships

(Source: https://slideplayer.com)
86
Figure 31: Sample – Statement of Stockholders’/Shareholders’ Equity

(Source: https://www.slideshare.net)
Figure 32: Sample – Statement of Retained Earnings

(Source: https://www.slideshare.net)
87
Notes:
Unappropriated retained earnings consist of any portion of a company's retained earnings that are not classified
as appropriated retained earnings. Appropriated retained earnings are set aside by the board and are assigned to a
specific purpose. They will not be distributed to shareholders as dividend payments. Unappropriated retained
earnings are not allocated for a specific purpose by the board, such as factory construction or marketing.
Unappropriated retained earnings can be passed on to shareholders in the form of dividend payments. Unappropriated
retained earnings help to determine the amount of dividend that will be paid to shareholders. They are not directed
towards a specific purpose by the board so are available to be paid out as dividends. The greater the unappropriated
retained earnings, the higher the dividend that can possibly be paid. Unappropriated retained earnings are divided
among all of the outstanding shares of the company and paid as dividends according to a predetermined dividend
payment schedule. Appropriated retained earnings are retained earnings that are specified by the board of directors for
a particular use. Appropriated retained earnings can be used for many purposes, including acquisitions, debt reduction,
stock buybacks and R&D. There may be more than one appropriated retained earnings accounts simultaneously.
Typically, appropriated retained earnings are used only to indicate to outsiders the intention of management to use the
funds for some purpose. The designation does not serve some internal accounting function. For example, if a company
wanted to set aside PHP50 million for the purchase of a new headquarters, the board would vote to appropriate PHP50
million of retained earnings for that purpose, and that amount would be entered into an appropriated earnings account
on the books. Once the acquisition was complete, that amount would be returned to the main retained earnings account.
Appropriated retained earnings do not have the force of law. If a company were to go bankrupt, the appropriated
amounts would return to the main retained earnings account and would be available to creditors and shareholders.
Learning Closing Entries
Closing entries, also called closing journal entries, are entries made at the end of an accounting
period to zero out all temporary accounts and transfer their balances to permanent accounts. In
other words, the temporary accounts are closed or reset at the end of the year. This is commonly
referred to as closing the books. Temporary accounts are income statement accounts that are used
to track accounting activity during an accounting period. For example, the revenues account
records the amount of revenues earned during an accounting period—not during the life of the
company. We don’t want the 2019 revenue account to show 2018 revenue figures. On the other
story - permanent accounts are balance sheet accounts that track the activities that last longer than
an accounting period. For example, a vehicle account is a fixed asset account that is recorded on
the balance. The vehicle will provide benefits for the company in future years, so it is considered
a permanent account. At the end of the year, all the temporary accounts must be closed or reset, so
the beginning of the following year will have a clean balance to start with. In other words, revenue,
expense, and withdrawal accounts always have a zero balance at the start of the year because they
are always closed at the end of the previous year. This concept is consistent with the matching
principle.
88
Temporary accounts can either be closed directly to the retained earnings account or to an
intermediate account called the income summary account. The income summary account is then
closed to the retained earnings account. Both ways have their advantages. Closing all temporary
accounts to the income summary account leaves an audit trail for accountants to follow. The total
of the income summary account after the all temporary accounts have been close should be equal
to the net income for the period. Closing all temporary accounts to the retained earnings account
is faster than using the income summary account method because it saves a step. There is no need
to close temporary accounts to another temporary account (income summary account) in order to
then close that again. Both closing entries are acceptable and both result in the same outcome. All
temporary accounts eventually get closed to retained earnings and are presented on the balance
sheet.
Figure 33: Closing Entries for Revenues, Costs and Expenses, Dividends (Drawings) [Source:
https://www.myaccountingcourse.com]
89
Notes:
Since dividend and withdrawal accounts are not income statement accounts, they do not typically use the income
summary account. These accounts are closed directly to retained earnings (or the capital account – owner’s equity for
single proprietorship; and partners’ equity for partnerships) by recording a credit to the dividend account and a debit
to retained earnings. Now that all the temporary accounts are closed, the income summary account should have a
balance equal to the net income/profit.
The Post-Closing Trial Balance
A post-closing trial balance is a listing of all balance sheet accounts containing non-zero
balances at the end of a reporting period. The post-closing trial balance is used to verify that
the total of all debit balances equals the total of all credit balances, which should net to zero.
The post-closing trial balance contains no revenue, expense, gain, loss, or summary account
balances, since these temporary accounts have already been closed and their balances moved
into the retained earnings account (or capital account/s for sole proprietorships/partnerships)
as part of the closing process.
90
Figure 34: Sample of Post-Closing Trial Balance (Source: https://slideplayer.com)
Reversing Entries
Reversing entries, or reversing journal entries, are journal entries made at the beginning of an
accounting period to reverse or cancel out (what were debited are to be credited and vice-versa)
adjusting journal entries made at the end of the previous accounting period. This is the last step in
the accounting cycle. Reversing entries are made because previous year accruals and prepayments
will be paid off or used during the new year and no longer need to be recorded as liabilities and
assets. These entries are optional depending on whether or not there are adjusting journal
entries that need to be reversed. Reversing entries are usually made to simplify bookkeeping in the
new year. For example, if an accrued expense was recorded in the previous year, the bookkeeper
or accountant can reverse this entry and account for the expense in the new year when it is paid.
The reversing entry erases the prior year’s accrual and the bookkeeper doesn’t have to worry about
it. If the bookkeeper doesn’t reverse this accrual enter, he must remember the amount of expense
that was previously recorded in the prior year’s adjusting entry and only account for the new
portion of the expenses incurred. He can’t record the entire expense when it is paid because some
of it was already recorded. He would be double-counting the expense. The adjusting entries to be
reversed are:
1. Prepayments – expense method only.

2. Deferred revenues – income method only.
3. All accruals (accrued revenues and accrued expenses).
91
Exercise – Reversing Entries:

Which of the following adjusting entries are to be reversed?
1 Interest Receivable 2,000.00
Interest Income 2,000.00
2 Depreciation-Building 500.00
Accumulated Depreciation-Building 500.00
3 Prepaid Insurance 100.00
Insurance Expense 100.00
4 Insurance Expense 200.00
Prepaid Insurance 200.00
5 Service Income 5,000.00
Unearned Service Income 5,000.00
6 Unearned Service Income 3,000.00
Service Income 3,000.00
7 Interest Expense 150.00
Interest Payable 150.00
Answer:
Based on the aforesaid adjusting entries, the following are to be reversed:
Adjusting entry #s: 1, 3, 5 and 7, only.

92
The Financial Statement Assertions
The AICPA mentions financial statement assertions inherent in the various components of the
plan’s financial statements, such as plan investments, contributions, benefits, participant data, plan
obligations, participant loans and administrative expenses. Assertions can be classified according
to the following broad categories: • Occurrence or existence — Do assets and liabilities actually
exist at a given date? Did recorded transactions occur during the current year or did they take place
in an earlier or later year? For example, all assets in the investment account must physically exist
and be available to pay benefits or plan expenses. • Rights and obligations — Do assets and
liabilities reported in the financial statements represent the rights and obligations of your plan as
of the date of the statement of net assets available for benefits? For example, an investment should
not be reported as an asset unless it is owned by the plan. Liabilities should be reported only if
they represent actual obligations of your plan, not obligations of an insurance company or another
entity. • Completeness — Are all transactions and accounts that should be presented in the financial
statements actually included? For example, all administrative expenses incurred during a given
year must be recorded, and all amounts owed to brokers for securities purchased must be included
in liabilities. • Accuracy or valuation and allocation — Are assets and liabilities valued
appropriately? Are assets, accrued liabilities, and accumulated benefit obligations included in the
financial statements at appropriate amounts, and any resulting valuation or allocation adjustments
recorded appropriately? For example, investments must be reported at fair value, and any related
investment income appropriately allocated. • Cut-off — Are all transactions and events recorded
in the proper period? For example, all employer contributions for the year have been properly
recorded, even if received in the subsequent year. • Classification and understandability — Are
transactions and events recorded in the proper accounts? Is the financial information appropriately
presented and described, and is information in disclosures expressed clearly? For example, costs
must be properly classified as either expenses or assets, and information about prohibited
transactions that have occurred at your plan must be disclosed in the notes to your plan’s financial
statements.
The Special Journals
Entering transactions in the general journal and posting them to the correct general ledger accounts
is time consuming. In the general journal, a simple transaction requires three lines—two to list the
accounts and one to describe the transaction. The transaction must then be posted to each general
ledger account. If the transaction affects a control account, the posting must be done twice—once
to the subsidiary ledger account and once to the controlling general ledger account. To speed up
this process, companies use special journals to record repetitive transactions that affect the same
set of accounts and have a consistent description. Such transactions can be documented on one line
in a special journal.
93
Then, instead of separately posting individual entries, each column's total is posted at the end of
the accounting period. Although companies create special journals for other types of repetitive
transactions, almost all merchandising companies use special journals for sales, purchases, cash
receipts, and cash disbursements.
Sales Journal:
The sales journal lists all credit sales made to customers. Sales returns and cash sales are not
recorded in this journal. Entries in the sales journal typically include the date, invoice number,
customer name, and amount. Invoices are the source documents that provide this information. In
its most basic form, a sales journal has only one column for recording transaction amounts. Each
entry increases (debits) accounts receivable and increases (credits) sales.
Notice the dates and posting references applied to each entry (Figure). Each day, individual sales
journal entries are posted to the accounts receivable subsidiary ledger accounts so that customer
balances remain current. Customer account numbers (or check marks if customer accounts are
simply kept in alphabetical order) are placed in the sales journal's reference column to indicate that
the entries have been posted. At the end of the accounting period, the column total is posted to the
accounts receivable and sales accounts in the general ledger. Account numbers are placed in
parentheses below the column to indicate that the total has been posted.
Many companies use a multi‐column (columnar) sales journal that provides separate columns for
specific sales accounts and for sales tax payable. Each line in a multi‐column journal must contain
equal debits and credits. For example, the entries in the sales journal (Figure), in a multi‐column
sales journal that tracks hardware sales, plumbing sales, wire sales, and sales tax payable.
Individual entries are still posted daily to the accounts receivable subsidiary ledger accounts, and
each column total is posted at the end of the accounting period to the appropriate general ledger
account.
Purchases Journal (Voucher Register – when using voucher system):
The purchases journal lists all credit purchases of merchandise. Entries in this journal usually
include the date of the entry, the name of the supplier, and the amount of the transaction. Some
companies include columns to identify the invoice date and credit terms, thereby making the
purchases journal a tool that helps the companies take advantage of discounts just before they
expire. The purchases journal (Figure) has only one column for recording transaction amounts.
Each entry increases (debits) purchases and increases (credits) accounts payable.
94
Each day, individual entries are posted to the accounts payable subsidiary ledger accounts. Creditor
account numbers (or check marks if the creditor accounts are not numbered) are placed in the
purchases journal's reference column to indicate that the entries have been posted. At the end of
the accounting period, the column total is posted to purchases and accounts payable in the general
ledger. Account numbers are placed in parentheses (Figure) to indicate that the total has been
posted.
Companies that frequently make credit purchases of items other than merchandise use a multi‐
column purchases journal. For example, the purchases journal (Figure) includes columns for
supplies and equipment. Of course, every purchase in the journal (Figure) must credit accounts
payable; equipment purchased with a note payable or supplies purchased with cash would not be
recorded in this journal. Individual entries are still posted daily to the accounts payable subsidiary
ledger accounts, and each column total is posted at the end of the accounting period to the
appropriate general ledger account.
Cash Receipts Journal:
Transactions that increase cash are recorded in a multi‐column cash receipts journal. If sales
discounts are offered to customers, the journal includes a separate debit column for sales discounts.
Credit columns for accounts receivable and for sales are normally present, but companies that
frequently receive cash from other, specific sources use additional columns to record those types
of cash receipts. In addition, the cash receipts journal includes a column named “Other/Sundry”,
which is used to record various types of cash receipts that occur infrequently and therefore do not
warrant a separate column. For example, cash receipts from capital investments, bank loans, and
interest revenues are generally recorded in the “Sundry column”. However, a company that
provides consumer loans and receives interest payments from many customers would probably
include a separate column for interest revenue. Whenever a credit entry affects accounts receivable
or appears in the “Other column”, the specific account is identified in the column named Account.
Accounts receivable payments are posted daily to the individual subsidiary ledger accounts, and
customer account numbers (or check marks if the customer accounts are not numbered) are placed
in the cash receipts journal's reference column. At the end of the accounting period, each column
total is posted to the general ledger account listed at the top of the column, and the account number
is placed in parentheses below the total. Entries in the “Other column” are posted individually to
the general ledger accounts affected, and the account numbers are placed in the cash receipts
journal's reference column. A “capital X” is placed below the “Other column” to indicate that the
column total cannot be posted to a general ledger account.
95
Cash Disbursements Journal (Check Register – for the voucher system):
Transactions that decrease cash are recorded in the cash disbursements journal. The cash
disbursements journal has one debit column for accounts payable and another debit column for all
other types of cash payment transactions. It has credit columns for purchases discounts and for
cash. Since each entry debits a control account (accounts payable) or an account listed in the
column named “Other”, the specific account being debited must be identified on every line.
The nature of each company's transactions determines which columns this journal includes. For
example, companies sometimes choose to include separate debit columns for regularly used
accounts such as salaries expense, sales commissions expense, or other specific accounts affected
by cash disbursements.
Entries that affect accounts payable are posted daily to the individual subsidiary ledger accounts,
and creditor account numbers (or check marks if the creditor accounts are not numbered) are placed
in the cash disbursements journal's reference column. At the end of the accounting period, each
column total is posted to the general ledger account listed at the top of the column, and the account
number is placed in parentheses below the total. Entries in the “Other column” are posted
individually to the general ledger accounts affected, and the account numbers are placed in the
cash disbursements journal's reference column. A “capital X” is placed below the “Other column”
to indicate that the column total cannot be posted to a general ledger account.
General Journal:
The general journal is used for adjusting entries, closing entries, correcting entries, and all
transactions that do not belong in one of the special journals. If a general journal entry involves an
account in a subsidiary ledger, the transaction must be posted to both the general ledger control
account and the subsidiary ledger account. Both account numbers are placed in the general
journal's reference column to indicate that the entry has been posted correctly.
96
Figure 35: Sample – Special Journals (Non-voucher System) [Source:

https://www.cliffsnotes.com]
97
98
99
100
101
The Voucher System
Relatively large organizations ordinarily provide for the control of purchases and cash
disbursements through adoption of some form of a voucher system. With the use of a voucher
system, checks may be drawn only upon a written authorization in the form of a voucher approved
by some responsible official. A voucher is prepared not only in support of each payment to be
made for goods and services purchased on account but also for all other transactions calling for
payment by check, including cash purchases, retirement of debt, replenishment of petty cash funds,
payrolls, and dividends.
102
The voucher identifies the person authorizing the expenditure, explains the nature of the
transaction, and names the accounts affected by the transaction. For control purposes, vouchers
should be prenumbered, checked against purchase invoices, and compared with receiving reports.
Upon verification, the voucher and the related business documents are submitted to the appropriate
official for final approval. When approved, the prenumbered voucher is recorded in a voucher
register. Also, the voucher includes a cover page that explains each attachment. The purchase
order, shipping receipt and the invoice are attached to the voucher. The owner reviews all the
voucher information before signing a check. The voucher may also list the general ledger accounts
used to record the transaction. The restaurant, for example, can credit (increase) the meat inventory
account and debit (decrease) the cash account to record the payment.
The voucher register is a book of original entry and takes the place of a purchases journal. Charges
on each voucher are classified and recorded in appropriate Debit columns, and the amount to be
paid is listed in an Accounts Payable or Vouchers Payable column. After a voucher is entered in
the register, it is placed in an unpaid vouchers file together with its supporting documents. Checks
are written in payment of individual vouchers. The checks are recorded in a check register, which
is used in place of a cash payments journal, as debits to Accounts Payable or Vouchers Payable
and credits to Cash. Since charges to the various asset, liability, or expense accounts were
recognized when the payable was recorded in the voucher register, these accounts need not be
listed in the payments record. When a check is issued, payment of the voucher is reported in the
voucher register by entering the check number and the payment date. Paid vouchers and supporting
documents are removed from the unpaid file, marked “paid”, and placed in a separate paid
vouchers file. The balance of the payable account, after the credit for total vouchers issued and the
debit for total vouchers paid, should be equal to the sum of the unpaid vouchers file. The voucher
register, while representing a journal, also provides the detail in support of the accounts payable
or vouchers payable total.
103
Figure 36: Sample – Journal Voucher (Source: http://onlineaccountreading.blogspot.com)

104
Figure 37: Voucher Data Recorded on the Voucher Register (Source: © 2010 Prentice Hall
Business Publishing, College Accounting: A Practical Approach, 11e by Slater)
Note: Gross method was used.
Figure 38: Voucher Data Recorded on the Check Register (Source: © 2010 Prentice Hall
Business Publishing, College Accounting: A Practical Approach, 11e by Slater)
105
On Operating Cycle
The operating cycle is the time required for a company's cash to be put into its operations and then
return to the company's cash account. A manufacturer's operating cycle is amount of time required
for the manufacturer's cash to be used to:
 pay for the raw materials needed in its products

 pay for the labor and overhead costs needed to convert the raw materials into products
 hold the finished products in inventory until they are sold
 wait for the customers' cash payments to be collected
The operating cycle is the sum of the following:
 the days' sales in inventory (365 days/inventory turnover ratio), plus

 the average collection period (365 days/accounts receivable turnover ratio)
The operating cycle has importance in classifying current assets and current liabilities. While most
manufacturers have operating cycles of several months, a few industries require very long
processing times. This could result in an operating cycle that is longer than one year. To
accommodate those industries, the accountants' definitions of current assets and current liabilities
include the following phrase: ‘within one year or within the operating cycle, whichever is longer’.
Figure 39: Operating Cycle – Service and Manufacturing Concerns

(Source: https://www.tendersontime.com)
106
Figure 40: Flow of Costs – Merchandising Operations (Source: https://www.kau.edu)
Figure 41: Flow of Costs – Manufacturing Operations (Source: https://www.slideshare.net)

107
Value-Added-Tax Implications
VAT – Defined:
Value-Added Tax (VAT) is a form of sales tax. It is a tax on consumption levied on the sale, barter,
exchange or lease of goods or properties and services in the Philippines and on importation of
goods into the Philippines. It is an indirect tax, which may be shifted or passed on to the buyer,
transferee or lessee of goods, properties or services.
Persons Required to File and Pay VAT Returns:
 Any person or entity who, in the course of his trade or business, sells, barters, exchanges,
leases goods or properties and renders services subject to VAT, if the aggregate amount of
actual gross sales or receipts exceed Three Million Pesos (PHP3,000,000.00).
 A person required to register as VAT taxpayer but failed to register.
 Any person, whether or not made in the course of his trade or business, who imports goods.
Value-Added Tax Rates:
 On sale of goods and properties - twelve percent (12%) of the gross selling price or gross
value in money of the goods or properties sold, bartered or exchanged.
 On sale of services and use or lease of properties - twelve percent (12%) of gross receipts
derived from the sale or exchange of services, including the use or lease of properties.
 On importation of goods - twelve percent (12%) based on the total value used by the Bureau
of Customs in determining tariff and customs duties, plus customs duties, excise taxes, if
any, and other charges, such as tax to be paid by the importer prior to the release of such
goods from customs custody; provided, that where the customs duties are determined on
the basis of quantity or volume of the goods, the VAT shall be based on the landed cost
plus excise taxes, if any.
 On export sales and other zero-rated sales - 0%.
Notes:
The VAT threshold is increased from P1.9 million to P3 million to protect the poor and low-income Filipinos and
small and micro businesses and for manageable administration. This effectively exempts the sale of goods and services
of marginal establishments from VAT. Under TRAIN, VAT exempt taxpayers will have the following options:
● PIT (Philippine Income Tax) schedule with 40% OSD on gross receipts or gross sales plus 3% percentage tax;
● PIT schedule with itemized deductions plus 3% percentage tax; or
● Flat tax of 8% on gross sales or gross revenues in lieu of percentage tax and personal income tax.
108
On Filing and Payment of VAT:
Monthly VAT returns BIR Form 2550M - Not later than the 20th day following the end of each
month (manual filing).
Quarterly VAT returns BIR Form 2550Q - Within twenty-five (25) days following the close of
taxable quarter (manual filing).
Computation of Value Added Tax Payable:
Value Added Tax Payable is normally computed as follows:
Computing Net VAT Payable on VAT “exclusive” Sales/Receipts:
Total Output Tax Due or Total Vatable Sales/Receipts x 12%

Less: Total Allowable Input Tax or Total Vatable Purchases x 12%
Equals: VAT Payable
Examples:
Case 1: Sample Computation of VAT Payable (VAT Exclusive):
Let’s assume that:

Total Vatable Sales (VAT exclusive) = P100,000
Total purchases with VAT receipts (VAT exclusive) = P70,000
P100,000 x 12% or P12,000

– P70,000 x 12% or P8,400
VAT Payable = P3,600
2. Computing Net VAT Payable on VAT “inclusive” Sales/Receipts
Total Output Tax Due or Total Vatable Sales / 1.12 x 12%

Less: Total Allowable Input Tax or Total Vatable Purchases / 1.12 x 12%
Equals: VAT Payable
109
Sample Computation of VAT Payable:
Example based on the above assumption:

Total Vatable Sales (VAT inclusive) = P112,000
Total purchases with VAT receipts (VAT inclusive) = P78,400
P112,000 /1.12 x 12% or P12,000

– P78,400 /1.12 x 12% or P8,400
Or an alternative computation:
P112,000 /9.333 or P12,000

– P78,400 /9.333 or P8,400
Output tax means the VAT due on the sale, lease or exchange of taxable goods or properties or
services by any person registered or required to register under Section 236 of the Tax Code.
Input tax means the VAT due on or paid by a VAT-registered on importation of goods or local
purchase of goods, properties or services, including lease or use of property in the course of his
trade or business. It shall also include the transitional input tax determined in accordance with
Section 111 of the Tax Code, presumptive input tax and deferred input tax from previous period.
Total Vatable Purchases are your total purchases from VAT registered suppliers. This should be
supported with VAT receipts.
Note: VAT exempt sales, zero rated sales, purchases not qualified for input tax, and other input
taxes (if any) should also be shown in the VAT returns.
Journal Entries Pertinent to VAT:
-When Goods are bought and you have to pay both purchase value and VAT input or paid both, at
that time, following journal entry shall be recorded:
Purchase Account Dr. (Value of Purchases)

VAT Input Account Dr. (VAT on Purchases)
Cash or Bank or Name of Creditor Account Cr. (Value of Purchases + VAT input)
110
- When Goods are Sold and you have to receive both Sale Value and VAT Output or received both, at
that time, following journal entry shall be recorded:
Cash or Bank or Name of Customer Account Dr. (Value of Purchases + VAT output)
Sale Account Cr. (Value of Sale)
VAT Output Account Cr. (VAT on Sale)
-When We pay the Net VAT (Payable) to Government. At that time, following journal entry shall be
recorded:
Net VAT Payable Account Dr. (Excess of VAT Output over VAT Input)
Bank Account (Cash in Bank) Cr.
Payroll Accounting
It is the employer’s responsibility to manage financial records that includes salary, benefits
and deductions for the employees and complying taxes for the government and these
processes takes a lot of work and time that is why many companies in the Philippines begin
to consider outsourcing.
It is in the law that employers are required to make contributions for their employees. These
contribution is a deduction to the employees’ monthly compensation. Here are the
mandated government agencies that the company should register to:
*Social Security System (SSS) – is a social insurance program for employees that will
provide financial assistance for them.
*Philippine Health Insurance Corporation (PHILHEALTH) – is a health insurance
corporation that will provide employees with their medical care.
*Home Development and Mutual Fund (HDMF) – is a national savings program that will
provide housing loans for the Filipino workers.
Also, register the business to Bureau of Internal Revenue (BIR) whom will assess and
collect the business’ taxes. All of these identification numbers are needed for filing all data
and details of the company and its employees.
111
Moreover, employees’ information such as name, gender, address, birth date, tax status,
number and names of qualified dependent, and identification numbers [Tax Identification
Number (TIN), SSS, HDMF, PHILHEALTH] must be gather upon his/her entry in the
company. This information must be organized and updated whenever there are changes in
the employee’s information. All the gathered data can be used for payroll processes and
filed every end of the month. Also, there are mandated regulations and policies regarding
the rights of the employer & employee, and payroll is one of the rights of an employee.
The company should adopt payroll policies. All company policies concerning employee’s
attendance, leaves, holiday pay, number of work hours, etc. - these must be in accordance
of the law. Employers can pay employees weekly, bimonthly, monthly by cash, check or
via electric transfer. There are positive and negative aspects in these methods, the company
has to choose what suits best for its business. Determining these is important to payroll
processing. It will identify how fast the process should be and what kinds of documents
should be needed for paying the employees. The payroll process that you might know
before is just multiplying an employee’s hours by an ‘x’ amount of pay rate and subtracting
deductions like tax withholdings, government contributions etc. it is surprisingly more than
that (just the tip of the ice berg). On top of registering nitty-gritty government documents
and submitting them on a periodic schedule, you have to adopt to ever changing labor laws,
updating established employee data base and making sure you pay your employees on the
time whether manually or depositing it to their bank accounts [ATM account].
112
Figure 42: Sample Payroll Register (Source: http://www.isuweldo.com)

113
Figure 43: Sample Payroll Journal Entries (http://www.isuweldo.com)

114
Figure 44: SSS Schedule of Contributions (https://www.sss.gov.ph)

115
Figure 45: BIR Withholding Tax Table (Source: http://birtaxcalculator.com)
Note: Annual Withholding Tax Table can be derived by multiplying all values in Monthly Table by twelve (12)
EXCEPT the percentages.
116
Figure 46: Contribution Schedule for PHILHEALTH (Source: https://philpad.com)
Notes: Same premium contributions of P2,400/year applies to OFW or those under the OWP
(Overseas Workers Program) applicable to Landbased OFWs. Members under this category can pay
either P2,400 for the annual contributions or P1,200 for the 6 months contributions.
On the other hand - Philhealth Contribution Table for Self-employed, Individually Paying
Member:
 With monthly income of PHP25,000 and below – PHP2,400/year

 With monthly income above PHP25,000 – PHP3,600/year
*All members under this category can pay quarterly, semi-annually or annually.
Finally - Philhealth Contribution Table 2019 for the Sponsored Program Members: Sponsored
members whose premium contributions are fully or partially subsidized by their sponsors such as
LGUs, Private Entities, Legislators, and National Government Agencies are under this category.
 Annual premium of PHP2,400 is also applied to these type of members.
According to Philhealth, all sponsored members and their beneficiaries shall be entitled to identified
in-patient hospital care (including the Z Benefit Package), out-patient care services, and other health
care services provided by accredited health care centers and providers. They shall also be entitled to
the No Balance Billing (NBB) Policy for health care services provided by accredited government
health facilities in a non-private accommodation. Likewise, they shall also be entitled to the Primary
Care Benefit 1 (PCB1) Package to be provided by their accredited Primary Care Benefit Provided
where they are assigned and enlisted.
117
The HDMF:
The Home Development Mutual Fund is very helpful in supporting Pagibig members to generate
savings, earn dividends and avail housing loans and other loans offered by Pagibig. It is mandatory
for employees to pay Pagibig Fund contributions every payroll or whenever they receive their salaries.
This is automatic and done by the employer every payroll. It is also important for employers to remit
and submit reports to Pagibig regarding all their employees’ contributions. Pagibig (HDMF) is a
mutual fund. All the money you will contribute to the HDMF will be pooled and invested to different
financial instruments usually government funds or money markets. These Mutual Fund then will earn
income from those investments. As a member of the Home Development Mutual Fund, you are
entitled to that income.
Every employee, employer, members, OFWs must take note the latest Pagibig Contribution Table
2019 below to aid and be aware how much you are paying to Pagibig Fund every month. The usual
payment is PHP100 following the maximum compensation set to PHP5,000. The maximum monthly
compensation allowed to compute each employee’s Pagibig contribution is currently set at PHP5,000.
This means that the maximum contribution a member can pay per month is currently PHP100 and the
employer’s share applied to that maximum contribution is also PHP100. If you are employed and you
are receiving more than PHP5,000 every month, you will be deducted PHP100 every month to cover
your employee share. The employer will also pay PHP100 to your Home Development Mutual Fund
(employer share).
Finally - an OFW whose employer is not subject to mandatory coverage shall contribute an amount
equivalent to 2% of his or her monthly salary. Said employee may opt to pay the employer counterpart
according to HDMF circular 391.
Figure 47: HDMF Contribution for OFW (Source: https://philpad.com)

118
Financial Statements Analysis [inclusive of financial ratios relevant to corporations]
Financial ratios (ratio analysis is a cornerstone of fundamental analysis) are created with the use
of numerical values taken from financial statements to gain meaningful information about a
company. The numbers found on a company’s financial statements – balance sheet, income
statement, and cash flow statement are used to perform quantitative analysis and assess a
company’s liquidity, leverage, growth, margins, profitability, rates of return, valuation, and more.
Uses and Users of Ratio Analysis:
Ratio analysis serves two main purposes:
1. Track company performance:

Determining individual ratios per period and tracking the change in their values over time is done
to spot trends that may be developing in the company. For example, an increasing debt-to-asset
ratio may indicate that a company is overburdened with debt and may eventually be facing default
risk.
2. Make comparative judgments regarding company performance

Comparing financial ratios with that of major competitors is done to identify whether the company
is performing better or worse than the industry average. For example, comparing the return on
assets between companies helps an analyst or investor to determine which company’s assets are
being used most efficiently.
Users of financial ratios include parties external and internal to the company:
 External users: Financial analysts, retail investors, creditors, competitors, tax authorities,
regulatory authorities, and industry observers
 Internal users: Management team, employees, and owners
119
Financial ratios are grouped into the following categories:
Liquidity Ratios:
Liquidity ratios measure a company’s ability to repay both short- and long-term obligations.
Common liquidity ratios include the following:
The current ratio measures a company’s ability to pay off short-term liabilities with current assets:
Current ratio = Current assets / Current liabilities
Moreover, this ratio indicates the company has more current assets than current liabilities.
Different industries have different levels of expected liquidity. Whether the ratio is considered
adequate coverage depends on the type of business, the components of its current assets, and the
ability of the company to generate cash from its receivables and by selling inventory
The acid-test ratio measures a company’s ability to pay off short-term liabilities with quick assets:
Acid-test ratio = Current assets – Inventories / Current liabilities
Notes: The acid‐test ratio is also called the quick ratio. Quick assets are defined as cash,
marketable (or short‐term) securities, and accounts receivable and notes receivable, net of the
allowances for doubtful accounts. These assets are considered to be very liquid (easy to obtain
cash from the assets) and therefore, available for immediate use to pay obligations. The traditional
rule of thumb for this ratio has been 1:1. Anything below this level requires further analysis of
receivables to understand how often the company turns them into cash. It may also indicate the
company needs to establish a line of credit with a financial institution to ensure the company has
access to cash when it needs to pay its obligations.
The cash ratio measures a company’s ability to pay off short-term liabilities with cash and cash
equivalents:
Cash ratio = Cash and Cash equivalents / Current Liabilities

120
The operating cash flow ratio is a measure of the number of times a company can pay off current
liabilities with the cash generated in a given period:
Operating cash flow ratio = Operating cash flow / Current liabilities
The average collection period (also known as day's sales outstanding) is a variation of receivables
turnover. It calculates the number of days it will take to collect the average receivables balance. It
is often used to evaluate the effectiveness of a company's credit and collection policies.
Average Collection Period = 365 Days / Receivable Turnover
Notes: A rule of thumb is the average collection period should not be significantly greater than a
company's credit term period. The average collection period is calculated by dividing 365 by the
receivables turnover ratio.
Solvency ratios:
Solvency ratios are used to measure long‐term risk and are of interest to long‐term creditors and
stockholders.
The debt to total assets ratio calculates the percent of assets provided by creditors. Total debt is
the same as total liabilities.
Debt to total assets ratio = Total debt / total assets
The times interest earned ratio is an indicator of the company's ability to pay interest as it comes
due.
Times interest earned ratio = Earnings before interest and taxes (EBIT) / Interest expense
Notes: A times interest earned ratio of 2–3 or more indicates that interest expense should
reasonably be covered. If the times interest earned ratio is less than two it will be difficult to find
a bank to loan money to the business.
121
Leverage Ratios:
Leverage ratios measure the amount of capital that comes from debt. In other words, leverage
ratios are used to evaluate a company’s debt levels. Common leverage ratios include the following:
The debt ratio measures the amount of a company’s assets that are provided from debt:
Debt ratio = Total liabilities / Total assets
The debt to equity ratio calculates the weight of total debt and financial liabilities against
shareholders’ equity:
Debt to equity ratio = Total liabilities / Shareholders’ equity
The interest coverage ratio determines how easily a company can pay its interest expenses:
Interest coverage ratio = Operating income / Interest expenses
The debt service coverage ratio determines how easily a company can pay its debt obligations:
Debt service coverage ratio = Operating income / Total debt service
Efficiency Ratios:
Efficiency ratios, also known as activity ratios, are used to measure how well a company is utilizing
its assets and resources. Common efficiency ratios include:
The asset turnover ratio measures a company’s ability to generate sales from assets:
Asset turnover ratio = Net sales / Total assets
The inventory turnover ratio measures how many times a company’s inventory is sold and
replaced over a given period:
Inventory turnover ratio = Cost of goods sold / Average inventory

122
The accounts receivable turnover ratio measures how many times a company can turn receivables
into cash over a given period:
Receivables turnover ratio = Net credit sales / Average accounts receivable
Notes: Net credit sales is net sales less cash sales. If cash sales are unknown, use net sales. Average
net receivables is usually the balance of net receivables at the beginning of the year plus the balance
of net receivables at the end of the year divided by two. If the company is cyclical, an average
calculated on a reasonable basis for the company's operations should be used such as monthly or
quarterly.
The days sales in inventory ratio measures the average number of days that a company holds onto
its inventory before selling it to customers:
Days sales in inventory ratio = 365 days / Inventory turnover ratio
Profitability Ratios:
Profitability ratios measure a company’s ability to generate income relative to revenue, balance
sheet assets, operating costs, and equity. Common profitability ratios include the following:
The gross margin ratio compares the gross profit of a company to its net sales to show how much
profit a company makes after paying off its cost of goods sold:
Gross margin ratio = Gross profit / Net sales
The operating margin ratio compares the operating income of a company to its net sales to
determine operating efficiency:
Operating margin ratio = Operating income / Net sales
The profit margin ratio, also known as the operating performance ratio, measures the company's
ability to turn its sales into net income. To evaluate the profit margin, it must be compared to
competitors and industry statistics.
Profit margin ratio = Net income / Net sales.

123
The return on assets ratio measures how efficiently a company is using its assets to generate profit:
Return on assets ratio = Net income / Total assets
The asset turnover ratio measures how efficiently a company is using its assets. The turnover value
varies by industry. It is calculated by dividing net sales by average total assets.
Asset turnover = Net sales / Average total assets
The return on equity ratio measures how efficiently a company is using its equity to generate profit:
Return on equity ratio = Net income / Shareholders’ equity
Notes: In a complex capital structure, net income is adjusted by subtracting the preferred dividend
requirement, and common stockholders' equity is calculated by subtracting the par value (or call
price, if applicable) of the preferred stock from total stockholders' equity. Thus, the formula would
be:
Return on equity ratio = Net income – Preferred dividends / Average shareholders’ equity
Market Value Ratios:

Market value ratios are used to evaluate the share price of a company’s stock. Common market
value ratios include the following:
The book value per share ratio calculates the per share value of a company based on equity
available to shareholders:
Book value per share ratio = Shareholders’ equity / Total shares outstanding
124
The dividend yield ratio measures the amount of dividends attributed to shareholders relative to
the market value per share:
Dividend yield ratio = Dividend per share / Share price

The earnings per share ratio measures the amount of net income earned for each share outstanding
[It measures the return in cash dividends earned by an investor on one share of the company's
stock]:
Notes: A low dividend yield could be a sign of a high growth company that pays little or no
dividends and reinvests earnings in the business or it could be the sign of a downturn in the
business. It should be investigated so the investor knows the reason it is low.
Earnings per share (EPS) represents the net income earned for each share of outstanding common
stock. In a simple capital structure.
Earnings per share ratio = Net earnings / Total shares outstanding
The price-earnings ratio compares a company’s share price to the earnings per share:
Price-earnings ratio [P/E] = Share price / Earnings per share
Note: A P/E ratio greater than 15 has historically been considered high.
The payout ratio identifies the percent of net income paid to common stockholders in the form of
cash dividends.
Payout ratio = Cash dividends / net income
Notes: A more stable and mature company is likely to pay out a higher portion of its earnings as
dividends. Many startup companies and companies in some industries do not pay out dividends. It
is important to understand the company and its strategy when analyzing the payout ratio.
125
Common-Size Analysis of Financial Statements:
Common-size analysis (also called vertical analysis) converts each line of financial statement data
to an easily comparable, or common-size, amount measured as a percent. This is done by stating
income statement items as a percent of net sales and balance sheet items as a percent of total assets
(or total liabilities and shareholders’ equity). There are two reasons to use common-size analysis:
(1) to evaluate information from one period to the next within a company and (2) to evaluate a
company relative to its competitors. Common-size analysis answers such questions as “how does
the company’s current assets as a percent of total assets compare with last year?” and “how does
the company’s net income as a percent of net sales compare with that of the competitors?”
Figure 48: Sample - Common-size Balance Sheet/Statement of Financial Position (Source:

https://saylordotorg.github.io)
126
Note: The composition of assets, liabilities, and shareholders’ equity accounts changed from 2009 to 2010. Notable
changes occurred for intangible assets (26.4 percent in 2009 versus 36.9 percent in 2010), long-term debt (10.4 percent
in 2009 versus 19.3 percent in 2010), retained earnings (86.5 percent in 2009 versus 68.0 percent in 2010), and treasury
stock (52.2 percent in 2009 versus 38.1 percent in 2010).
Figure: Sample - Common-size Income Statement (Source: https://saylordotorg.github.io)
Note: All percentages use net sales as the base.
Horizontal analysis (Trend Analysis):
Horizontal analysis (also known as trend analysis) is a financial statement analysis technique that
shows changes in the amounts of corresponding financial statement items over a period of time. It
is a useful tool to evaluate the trend situations.
127
The statements for two or more periods are used in horizontal analysis. The earliest period is
usually used as the base period and the items on the statements for all later periods are compared
with items on the statements of the base period. The changes are generally shown both in
pesos/dollars and percentage.
Pesos/Dollar and percentage changes are computed by using the following formulas:
Note: Horizontal analysis may be conducted for balance sheet, income statement, schedules of current and fixed assets
and statement of retained earnings.
Figure 50: Sample Trend Analysis for Financial Statements

(Source: https://www.accountingformanagement.org)
128
129
Notes:
In above analysis, 2007 is the base year and 2008 is the comparison year. All items on the balance sheet and income
statement for the year 2008 have been compared with the items of balance sheet and income statement for the year
2007. The actual changes in items are compared with the expected changes. For instance, if management expects a
30% increase in sales revenue but actual increase is only 10%, this may need to be investigated.
130
Internal Control Concepts

According to the AICPA: Internal control is a process — effected by plan management and other
personnel, and those charged with governance, and designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of financial reporting. Your plan’s
policies, procedures, organizational design and physical security all are part of the internal
control process. The following are some general characteristics of satisfactory plan internal
control over financial reporting:
• Policies and procedures that provide for appropriate segregation of duties to reduce the
likelihood that deliberate fraud can occur
• Personnel qualified to perform their assigned responsibilities
• Sound practices to be followed by personnel in performing their duties and functions
• A system that ensures proper authorization and recordation procedures for financial transactions
The Committee of Sponsoring Organizations of the Treadway Commission’s (COSO) Internal

Control — Integrated Framework provides detailed information about internal controls. COSO
has been recognized by executives, board members, regulators, standard setters and professional
organizations as an appropriate and comprehensive framework for internal control, and can be a
valuable resource to you in setting up your plan’s internal control.
The AICPA further asserted that: Internal control will vary depending on the plan’s size, type and
complexity; whether the plan uses outside service organizations to process transactions and
manage plan investments; and the size and qualifications of the department responsible for
financial reporting. Internal control should be based on a systematic and risk-oriented approach,
to ensure that there are adequate individual controls in areas with high risk, and that they are not
excessive in areas with low risk. Before making the decision to adopt a control, analyze the costs
of establishing and maintaining it, and consider: (1) The potential benefits the control will provide;
(2) The possible consequences of not implementing it.
131
Components of the Internal Controls Process
Internal Controls consists of five integrated components (also refer to Figure 7):
The control environment is the set of standards, processes and structures that provide the
basis for carrying out internal control across the organization. The board of directors and
senior management establish the tone at the top regarding the importance of internal control
including expected standards of conduct. Management reinforces expectations at the
various levels of the organization. The control environment comprises the integrity and
ethical values of the organization; the parameters enabling the board of directors to ca rry
out its governance oversight responsibilities; the organizational structure and assignment
of authority and responsibility; the process for attracting, developing and retaining
competent individuals; and the rigor around performance measures, incentives and rewards
to drive accountability for performance. The resulting control environment has a pervasive
impact on the overall system of internal control. Risk Assessment . Every entity faces a
variety of risks from external and internal sources. Risk is de fined as the possibility that
an event will occur and adversely affect the achievement of objectives. Risk assessment
involves a dynamic and iterative process for identifying and assessing risks to the
achievement of objectives. Risks to the achievement of these objectives from across the
entity are considered relative to established risk tolerances. Thus, risk assessment forms
the basis for determining how risks will be managed. A precondition to risk assessment is
the establishment of objectives, linked at different levels of the entity. Management
specifies objectives within categories relating to operations, reporting and compliance with
sufficient clarity to be able to identify and analyze risks to those objectives. Management
also considers the suitability of the objectives for the entity. Risk assessment also requires
management to consider the impact of possible changes in the external environment and
within its own business model that may render internal control ineffective. Control
activities are the actions established through policies and procedures that help ensure that
management’s directives to mitigate risks to the achievement of objectives are carried out.
Control activities are performed at all levels of the entity, at various stages within b usiness
processes, and over the technology environment. They may be preventive or detective in
nature and may encompass a range of manual and automated activities such as
authorizations and approvals, verifications, reconciliations and business performance
reviews. Segregation of duties is typically built into the selection and development of
control activities. Where segregation of duties is not practical, management selects and
develops alternative control activities.
132
Information and Communication . Information is necessary for the entity to carry out
internal control responsibilities to support the achievement of its objectives. Management
obtains or generates and uses relevant and quality information from both internal and
external sources to support the functioning of other components of internal control.
Communication is the continual, iterative process of providing, sharing and obtaining
necessary information. Internal communication is the means by which information is
disseminated throughout the organization, flowing up, down and across the entity. It
enables personnel to receive a clear message from senior management that control
responsibilities must be taken seriously. External communication is twofold: It enables
inbound communication of relevant external information, and it provides information to
external parties in response to requirements and expectations. Monitoring Activities .
Ongoing evaluations, separate evaluations, or some combination of the two are used to
ascertain whether each of the five components of internal control, including controls to
affect the principles within each component, is present and functioning. Ongoing
evaluations, built into business processes at different levels of the entity, provide timely
information. Separate evaluations, conducted periodically, will vary in scope and
frequency depending on assessment of risks, effectiveness of ongoing evaluations, and
other management considerations. Findings are evaluated against criteria established by
regulators, recognized standard-setting bodies or management and the board of directors,
and deficiencies are communicated to management and the board of directors as appropriate
(https://finance.unc.edu).
Figure 51: Components of the Internal Control (Source: https://finance.unc.edu)

133
Moreover, internal controls are policies and procedures put in place to ensure the continued
reliability of accounting systems. Accuracy and reliability are paramount in the accounting world.
Without accurate accounting records, managers cannot make fully informed financial decisions,
and financial reports can contain errors. Internal control procedures in accounting can be broken
into seven categories, each designed to prevent fraud and identify errors before they become
problems. There are internal control procedures are separation of duties, access controls, physical
audits, standardized documentation, trial balances, periodic reconciliations, and approval
authority. Separation of duties involves splitting responsibility for bookkeeping, deposits,
reporting and auditing. The further duties are separated, the less chance any single employee has
of committing fraudulent acts. For small businesses with only a few accounting employees, sharing
responsibilities between two or more people or requiring critical tasks to be reviewed by co-
workers can serve the same purpose. Accounting System Access Controls. Controlling access to
different parts of an accounting system via passwords, lockouts and electronic access logs can keep
unauthorized users out of the system while providing a way to audit the usage of the system to
identify the source of errors or discrepancies. Robust access tracking can also serve to deter
attempts at fraudulent access in the first place. Physical Audits of Assets. Physical audits include
hand-counting cash and any physical assets tracked in the accounting system, such as inventory,
materials and tools. Physical counting can reveal well-hidden discrepancies in account balances
by bypassing electronic records altogether. Counting cash in sales outlets can be done daily or
even several times per day. Larger projects, such as hand counting inventory, should be performed
less frequently, perhaps on an annual or quarterly basis. Standardized Financial Documentation.
Standardizing documents used for financial transactions, such as invoices, internal materials
requests, inventory receipts and travel expense reports, can help to maintain consistency in record
keeping over time. Using standard document formats can make it easier to review past records
when searching for the source of a discrepancy in the system. A lack of standardization can cause
items to be overlooked or misinterpreted in such a review. Daily or Weekly Trial Balances. Using a
double-entry accounting system adds reliability by ensuring that the books are always balanced.
Even so, it is still possible for errors to bring a double-entry system out of balance at any given
time. Calculating daily or weekly trial balances can provide regular insight into the state of the
system, allowing you to discover and investigate discrepancies as early as possible.
134
Periodic Reconciliations in Accounting Systems. Occasional accounting reconciliations can ensure

that balances in your accounting system match up with balances in accounts held by other entities,
including banks, suppliers and credit customers. For example, a bank reconciliation involves
comparing cash balances and records of deposits and receipts between your accounting system and
bank statements. Differences between these types of complementary accounts can reveal errors or
discrepancies in your own accounts, or the errors may originate with the other entities. Approval
Authority Requirements. Requiring specific managers to authorize certain types of transactions can
add a layer of responsibility to accounting records by proving that transactions have been seen,
analyzed and approved by appropriate authorities. Requiring approval for large payments and
expenses can prevent unscrupulous employees from making large fraudulent transactions with
company funds, for example (Ingram, 2019). For more relevant facts about internal control –
please refer to Appendix 4: Internal Control Vocabulary and Terms Catalog by the Internal Control
Institute.
Preventative and Detective Internal Controls:
Internal controls may generally fall into preventative or detective:
-Preventative controls are those such as requiring dual signatures on cheques or having password-
protected files. This type of control protects and limits access to business assets.
-Detective controls include reconciling the bank or inventory counts. Typically, these internal
controls are performed periodically to see if any need to be corrected. They will often turn up
internal errors or problems, as well as any external errors (such as bank errors).
Segregation of duties: Safeguarding assets
One of the key concepts in placing internal controls over a company’s assets is segregation of
duties. Segregation of duties serves two key purposes:
1. It ensures that there is oversight and review to catch errors
2. It helps to prevent fraud or theft because it requires two people to collude in order to
hide a transaction
135
Segregation of duties involves separating three main functions and having them conducted by
different employees:
1. Having custody of assets
2. Being able to authorize the use of assets
3. Recordkeeping of assets
This segregation of duties is often difficult to achieve in small businesses, but should be
implemented as much as possible. In some cases, it may result in an employee from another
department being responsible for one of the functions. And, where it is not possible to have
adequate preventative internal controls including segregation of duties, it is important to
implement a compensating control. An example of this could be increased periodic oversight by
you or the board of directors.
136
Simulated Examination
Part 1 – Multiple Choice
Select the letter of the best answer.
1. Accrued revenues are classified as:
A. Income
B. Assets
C. Liabilities
D. Capital
2. Prepaid Expenses are:
A. Expenses
B. Assets
C. Capital
D. Liabilities
3. Accrued expenses are classified as:
A. Expenses
B. Assets
C. Capital
D. Liabilities
4. It is a formal record that represents, in words, money or other unit of measurement, certain
resources, claims to such resources, transactions or other events that result in changes to those
resources and claims:
A. Journal
B. Account
C. Equity
D. Not given
5. The most basic of journals. It is a chronological list of transactions:

A. General Journal
B. Account
C. Equity
D. Not given
137
6. It is a graphic representation of a general ledger account:
A. Journal
B. T-Account
C. Equity
D. Chart of Accounts
7. It is a group of subsidiary accounts the sum of the balances of which is equal to the balance of
the related control account in the general ledger:
A. Journal
B. Subsidiary Ledger
C. Special Journals
D. Chart of Accounts
8. It is the process of transferring figures from the journal to the ledger accounts:
A. Journalizing
B. Interpreting
C. Summarizing
D. Posting
9. The document issued to acknowledge receipt of cash:
A. Voucher
B. Ledger
C. Official Receipt
D. Not given
10. It is a document issued by a vendor for specific materials or supplies furnished or services
rendered. It is called purchase invoice from the point of view of the seller:
A. Sales Invoice
B. Voucher
C. Official Receipt
D. Not given
138
11. This represents the inflow of assets (or decrease in liabilities) due operating activities. This
may include sales of products, merchandise, and services; and earnings from INTEREST,
DIVIDEND, rents:
A. Sales Invoice
B. Revenue
C. Official Receipt
D. Not given
12. It is the money received by a person or organization from rental of premises and/or
other assets:
A. Rent Income
B. Lease
C. Tariff
D. Not given
13. It is a process effected by plan management and other personnel, and those charged with
governance, and designed to provide reasonable assurance regarding the achievement of objectives
in the reliability of financial reporting:
A. Management
B. Governance
C. Internal Control
D. Not given
14. The company’s financial statements are primarily the responsibility of:
A. Management
B. Government
C. Internal Control
D. Board of Directors
15. It is a form of entity with one owner and the simplest possible form of business:
A. Cooperative
B. Partnership
C. Sole Proprietorship
D. Corporation
139
16. It is the account title used to record amounts to be paid for borrowed money and evidenced by
a promissory note. This is also called Loans Payable:
A. Notes Payable
B. Accounts Payable
C. Mortgage Payable
D. Not given
17. Refers to the logging of business transactions and their monetary value into the t-
accounts of the accounting journal as either debits or credits:
A. Closing Entry
B. Reversing Entry
C. Posting Entry
D. Journal Entry
18. This shows the components of net income in detail. It is the summary of the effect of
REVENUES and expenses over a period of time:
A. Balance Sheet
B. Income Statement
C. Statement of Cash Flows
D. Not given
19. This is a book of accounts in which data from transactions recorded in

journals are posted and thereby classified and summarized:
A. Balance Sheet
B. General Ledger
C. Statement of Cash Flows
D. Not given
20. The process of allocating the cost of property, plant and equipment assets to the periods
that will benefit from its use:
A. Amortization
B. Footing
C. Depreciation
D. Cross-footing
140
21. This means adding all the numbers in a single column; the result is the sum, which appears at
the bottom ("foot') of the column:
A. Amortization
B. Footing
C. Depreciation
D. Cross-footing
22. It is a method accountants use to verify that all the numbers add up. To do this is to ensure
that the sum of column totals equals the grand total:
A. Balancing
B. Footing
C. Depreciation
D. Cross-footing
23. It is a book used to record all collections made in cash such as for accounts receivable,
merchandise sold, and interest income:
A. Sales Journal
B. Cash Receipts Journal
C. Purchases Journal
D. Not given
24. The income received from ownership shares in a corporation:
A. Dividend Income
B. Interest
C. Salvage Value
D. Book Value
25. It is a form of doing business pursuant to a charter granted by government:

A. Cooperative
B. Corporation
C. Sole Proprietorship
D. Partnership
141
26. Represents the residual claims of owners:
A. Assets
B. Revenues
C. Equity
D. Profit
27. These are accounting entries to account for period changes, omissions or other financial
data required to be reported "in the books":
A. Adjusting Journal Entries
B. Closing Entries
C. Reversing Entries
D. Not given
28. These are bases of recording transactions in bookkeeping. These may include but not limited
to sales invoice and official receipts:
A. Vouchers
B. Business Documents
C. Ledgers
D. Journals
29. These are amounts collectible from its customers. It is the claim against a DEBTOR for an
uncollected amount, generally from a completed transaction of sales or services rendered:
A. Accounts Receivable
B. Insurance
C. Prepayments
D. Deferrals
30. Unearned revenues are classified as:
A. Revenues
B. Liabilities
C. Expenses
D. Assets
142
31. This involves separating three main functions and having them conducted by different
employees:
A. Security
B. Segregation of Duties
C. Transparency
D. Not given
32. These are a key feature of an internal control system because it establishes a control over
documents traceability and completeness of information. It can be better understood by looking at
an example of cash receipts which needs to heed into this key feature so that any receipt if not
recorded properly will be highlighted when calculating the total number of cash receipts:
A. Pre-numbered documents
B. Vouching
C. Audit Trail
D. Tracing
33. The _______ is the set of standards, processes and structures that provide the basis for
carrying out internal control across the organization:
A. Control Environment
B. Control Activity
C. Governance
D. Code of Ethics
34. A/an approach developed to transfer funds among parties without the use of paper (deposit
tickets, checks, etc.):
A. Electronic Funds Transfer

B. EDI
C. E-Commerce
D. E-Business
143
35. Physical controls relate primarily to the safeguarding of assets. _______ controls safeguard
assets and enhance the accuracy and reliability of the accounting records:
A. Mechanical and Electronic

B. Documentation
C. Internal Verification
D. Not given
36. Converts each line of financial statement data to an easily comparable, or common-size,
amount measured as a percent:
A. Trend Analysis
B. Vertical Analysis
C. Horizontal Analysis
D. Not given
37. The use of numerical values taken from financial statements to gain meaningful information
about a company:
A. Trend Analysis
B. Ratio Analysis
C. Horizontal Analysis
D. Not given
38. The _______ ratio measures a company’s ability to pay off short-term liabilities with current
assets:
A. Debt
B. Equity
C. Horizontal
D. Current
39. The normal balance of an account is related to the word:
A. Decrease
B. Increase
C. A or B
D. A and B
144
40. The normal balance of accrued revenues and deferred revenues, respectively:
A. Debit and Debit, respectively.

B. Debit and Credit, respectively.
C. Credit and Debit, respectively.
D. Both are credited when increased.
145
Part 2 – Application
Satisfy the requirements being asked for each case problems:
CASE PROBLEM 1:
Prepare Journal Entries, Posting Entries, Unadjusted Trial Balance (in good form), Statement of
Financial Position (in good form), and Income Statement (in good form); ignore adjusting entries:
146
Transaction #5: Also on December 7, Gray Electronic Repair Services purchased service
supplies on account amounting to PHP1,000.
Transaction #8: On December 14, Mr. Gray invested an additional PHP3,200.00 into the
business.
Transaction #12: On December 25, the owner withdrew cash due to an emergency need. Mr.
Gray withdrew PHP7,000 from the company.
Transaction #14: On December 30, the company acquired a PHP12,000 short-term bank loan;
the entire amount plus a 10% interest is payable after 1 year.
147
CASE PROBLEM 2:
Prepare Journal Entries, Posting Entries, Unadjusted Trial Balance (in good form), Statement of
Financial Position (in good form), and Income Statement (in good form); and include effects of
adjusting entries:
148
149
Additional Information:
-On December 31, 2019, Gray Electronic Repair Services rendered PHP300 worth of services to
a client. However, the amount has not yet been collected. It was agreed that the customer will pay
the amount on January 15, 2020. The transaction was not recorded in the books of the company as
of 2019.
-For the month of December 2019, Gray Electronic Repair Services used a total of PHP1,800
worth of electricity and water. The company received the bills on December 31, 2019 – but
unrecorded.
-Suppose at the end of the month, 60% of the service supplies bought on December 7, have been
used.
-Gray Electronic Repair Services estimates that $100.00 of its credit revenue for the period will
not be collected.
150
CASE PROBLEM 3:
Design your own Chart of Accounts and the: Prepare Journal Entries, Posting Entries, Unadjusted
Trial Balance (in good form), Statement of Financial Position (in good form), and Income
Statement (in good form); ignore effects of adjusting entries:
151
152
References
Print:
Ballada, Win Lu, et al. (2018). Basic Accounting Made Easy. DomeDane Publishers, Philippines.
Mowen, Maryanne M., et al. (2017). Managerial Accounting. Cengage Learning Asia, Philippines.
Robles, Nenita S., et al. (2016). The Intermediate Accounting Series. Millennium Books, Inc,,
Philippines.
Slater, Jeffrey (2010). College Accounting: A Practical Approach (11th Edition). Prentice Hall
Business Publishing.
Valix, Conrado T., et al. (2012). Financial Accounting 1, 2 and 3. GIC Enterprises & Co., Inc.,
Philippines.
Online:
aaahq.org/
Accountancy. Retrieved from https://www.prc.gov.ph/accountancy
Accounting: Debits and Credits. Retrieved from

https://guides.kendall.edu/accounting/debitsandcredits.
Accounting Cycle. Retrieved from https://www.investopedia.com/terms/a/accounting-cycle.asp.
Accounting for Adjusting Entries. Retrieved from

https://www.harpercollege.edu/academics/academic_support/tutoring/subjects/pdf/Adjust
ing%20Entries%20-%20CR.pdf.
153
Accounting for Merchandising Business. Retrieved from https://slideplayer.com/slide/13908349/.
Accounting for Partnerships. Retrieved from https://slideplayer.com/slide/6887942/.
Accounting Worksheet. Retrieved from https://www.myaccountingcourse.com/accounting-

cycle/accounting-worksheet.
Accounting Worksheet. Retrieved from http://www.accountancyknowledge.com/accounting-

worksheet/.
Accounts Receivable Aging. Retrieved from https://www.investopedia.com/terms/a/accounts-

receivable-aging.asp.
Accounts Receivable and Bad Debts Expense. Retrieved from

https://www.accountingcoach.com/accounts-receivable-and-bad-debts-
expense/explanation/4.
Kieso, Donald, et al. (2001). Accounting Principles. Retrieved from

https://www.kau.edu.sa/Files/0006920/Subjects/ch05%2011th.pdf.
Adjusted Trial Balance. Retrieved from https://www.accountingverse.com/accounting-

basics/adjusted-trial-balance.html.
Adjusting Entries for Accrued Expenses. Retrieved from

https://www.accountingverse.com/accounting-basics/accrued-expense.html.
Adjusting Entry for Accrued Revenue. Retrieved from

https://www.accountingverse.com/accounting-basics/accrued-income.html.
Adjusting Entry for Bad Debt Expense. Retrieved from

https://www.accountingverse.com/accounting-basics/bad-debts-expense.html.
Adjusting Entry for Depreciation Expense. Retrieved from

https://www.accountingverse.com/accounting-basics/depreciation-expense.html.
154
Adjusting Entry for Prepaid Expense. Retrieved from

https://www.accountingverse.com/accounting-basics/prepaid-expense.html.
Adjusting Entry for Unearned Revenues. Retrieved from

https://www.accountingverse.com/accounting-basics/unearned-revenue.html.
Admission and Withdrawal of Partners. Retrieved from

http://www.opentextbooks.org.hk/ditatopic/23539.
An Introduction to Managerial Accounting and Cost Concepts. to Retrieved from

https://www.slideshare.net/duonghoang2709/chapter-1-39083832.
Appropriated Retained Earnings. Retrieved from

https://www.investopedia.com/terms/a/appropriated-retained-earnings.asp.
A Review of the Accounting Cycle. Retrieved from

http://www.cengage.com/resource_uploads/static_resources/0324312148/10391/stice_em
t_13.pdf.
Wohlner, Roger. Accounting Basics: Branches of Accounting. Retrieved from

https://www.investopedia.com/university/accounting/accounting2.asp.
Baskerville, Peter. What are source documents in accounting?

https://resources.saylor.org/wwwresources/archived/site/wp-
content/uploads/2011/12/BUS103-SOURCEDOCUMENTS.pdf.
Barter. Retrieved from https://www.investopedia.com/terms/b/barter.asp.
Batas Pambansa Bilang 68. Retrieved from

https://www.lawphil.net/statutes/bataspam/bp1980/bp_68_1980.html.
Beattie, Andrew. Financial History: The Evolution of Accounting.

https://www.jimenezassociatesinc.com/app/.../Financial+History+of+Accounting.pdf.
155
BIR TRAIN Tax Tables. Retrieved from http://birtaxcalculator.com/tax_tables.php.
boi.gov.ph/
Bookkeeping vs. Accounting. Retrieved from

https://www.cashtrak.co.uk/site_files/6552/upload_files/BookkeepingvsAccounting.pdf?
dl=1.
BPO Industry at a Glance. Retrieved from https://www.senate.gov.ph/.../AG%202010-01%20-

%20BPO%20Industry.pdf.
Business and its Environment. Retrieved from

www.pondiuni.edu.in/storage/dde/downloads/h1040.pdf.
Business Process Outsourcing (2015/2016 INDUSTRY PROFILE). Retrieved from

https://psa.gov.ph/.../LABSTAT%20Updates%20%20Vol%2022%20No%2013%20on...
Cash Flow Statement. Retrieved from https://www.myaccountingcourse.com/financial-

statements/cash-flow-statement.
Certified Public Accountant. Retrieved from

https://en.wikipedia.org/wiki/Certified_Public_Accountant.
Closing Entries. Retrieved from https://www.myaccountingcourse.com/accounting-

cycle/closing-entries.
Closing Entries and the Post-Closing Trial Balance. Retrieved from

https://slideplayer.com/slide/7575827/.
Common-Size Analysis of Financial Statements. Retrieved from

https://saylordotorg.github.io/text_managerial-accounting/s17-02-common-size-analysis-
of-financ.html.
Completing the Accounting Cycle. Retrieved from https://slideplayer.com/slide/6596500/.

156
Components of the Internal Controls Process. Retrieved from

https://finance.unc.edu/departments/internal-controls/components-ic-process/.
Constitutional Mandate. Retrieved from https://www.coa.gov.ph/index.php/2013-06-19-13-06-

03/constitutional-mandate.
Corporations and Distributions. Retrieved from https://slideplayer.com/slide/10931084/.
Debits and Credits (Explanation). Retrieved from https://www.accountingcoach.com/debits-

and-credits/explanation/3.
Debit and Credit Rules. Retrieved from https://www.accountingtools.com/articles/what-are-the-

debit-and-credit-rules.html.
Dimagiba, Dennis, et al. (2018). INSIGHT: Philippines Tax Reform Continues in 2019. Retrieved
from https://www.bna.com/insight-philippines-tax-n73014481879/.
Doing Business in the Philippines. Retrieved from

https://www.dmdcpa.com.ph/sites/default/files/doing_business_in_the_philippines.pdf.
Financial Ratios. Retrieved from

https://corporatefinanceinstitute.com/resources/knowledge/finance/financial-ratios/.
From the cube to the rainbow double helix: a risk practitioner’s guide to the COSO ERM
Frameworks. Retrieved from https://www.theirm.org/media/3512521/IRM-Report-
Review-of-the-COSO-ERM-frameworks-v2.pdf.
General Ledger Examples. Retrieved from http://www.accountancyknowledge.com/general-
ledger-examples/.
Horizontal or trend analysis of financial statements. Retrieved from
https://www.accountingformanagement.org/horizontal-analysis-of-financial-statements/.
How to Compute VAT Payable in the Philippines? Retrieved from https://businesstips.ph/how-

to-compute-vat-payable-in-the-philippines/.
How to do Payroll Processing: Philippine Payroll Guide. Retrieved from

http://trendstatic.com/how-to-do-payroll-processing-philippine-payroll-guide-2.
How to Make a Statement of Changes in Owner’s Equity. Retrieved from

https://businesstips.ph/how-to-make-a-statement-of-changes-in-owners-equity/.
157
How to Recover an Accounts Receivable Write-off for a Previous Accounting Period. Retrieved
from https://smallbusiness.chron.com/recover-accounts-receivable-writeoff-previous-
accounting-period-25618.html.
https://na.theiia.org/
https://www.aat.org.uk/
https://www.accaglobal.com/
https://www.aicpa.org/
https://www.cimaglobal.com/
https://www.dti.gov.ph/
https://www.icb.org.au/
https://www.imanet.org/
Institute of Public Accountants (2018). Professional Practice Program Introduction to the

Accounting Profession (2018). Retrieved from
https://www.publicaccountants.org.au/media/1543137/Module-1-Introduction-to-the-
Accounting-Profession.pdf.
Introduction to Adjusting Entries: Purpose, Types and Composition. Retrieved from

https://www.accountingverse.com/accounting-basics/adjusting-entries-introduction.html.
Ingram, David (2019). What Are the Seven Internal Control Procedures in Accounting?
Retrieved from https://smallbusiness.chron.com/seven-internal-control-procedures-
accounting-76070.html.
IAS 1 Presentation of Financial Statements. Retrieved from

IAS 1 Presenta tion of Financial Statements
https://www.iasplus.com/en/standards/ias/ias1. Prese ntation of Financial Statements
Internal controls in accounting: Key benefits. Retrieved from https://www.marsdd.com/mars-

library/internal-controls-accounting-key-benefits/.
Internal Control Vocabulary Terms Catalog. Retrieved from

www.internalcontrolinstitute.org/pdf/vocab.pdf.
158
Journal Entries of VAT. Retrieved from http://www.svtuition.org/2013/07/journal-entries-of-

vat.html.
Journal Voucher. Retrieved from http://onlineaccountreading.blogspot.com/2014/11/journal-
voucher.html#.XHUcEokzbIU.
Measurement and Depreciation. Retrieved from https://www.accaglobal.com/ie/en/student/exam-
support-resources/fundamentals-exams-study-resources/f7/technical-articles/measure-
depreciation1.html.
New Philhealth Contribution Table 2019. Retrieved from https://philpad.com/new-philhealth-
contribution-table/.
Organize Service and Operating Cycle 16 of Day Conference. Retrieved from
https://www.tendersontime.com/blogdetails/organize-service-and-operating-cycle-16-
day-conference-11121/.
Pagibig Contribution Table 2019. Retrieved from https://philpad.com/pagibig-contribution-table/.
Partnership - Income Statement / Profit and Loss Statement Retrieved from
http://starcresto.com/blog/partnership-income-statement-profit-and-loss-statement.
Phases of Accounting. Retrieved from https://slideplayer.com/slide/8613984/.
Philippine Civil Law. Retrieved from http://www.chanrobles.com/civilcodeofthephilippines.htm.
Philippine Financial Reporting Standards (Adopted by SEC as of December 31, 2011). Retrieved
from http://www.sec.gov.ph/wp-content/uploads/2015/10/pfrs-adopted-by-sec-as-of-
12312011.pdf.
Philippine Financial Reporting Standard for Small Entities (“the Framework”). Retrieved from
http://www.picpa.com.ph/attachment/292018161238886.pdf.
Posting to the Ledger: The Classifying Phase. Retrieved from

https://www.accountingverse.com/accounting-basics/accounting-ledger.html.
Ratio Analysis. Retrieved from https://www.investopedia.com/terms/r/ratioanalysis.asp
Ratio Analysis. Retrieved from https://www.cliffsnotes.com/study-guides/accounting/accounting-

principles-ii/financial-statement-analysis/ratio-analysis.
159
Reports. Retrieved from http://www.isuweldo.com/reports.php.
Republic Act No. 6938, An Act to Ordain a Cooperative Code of the Philippines. Retrieved from
https://www.gppb.gov.ph/laws/laws/RA_6938.pdf.
Republic Act 9520. Retrieved from http://www.cda.gov.ph/resources/issuances/philippine-

cooperative-code-of-2008/republic-act-9520.
Retained Earnings. Retrieved from https://www.slideshare.net/SharonLong/chapter-01-lecture.
Revenue Recognition: Point of Sale. Retrieved from https://www.money-

zine.com/definitions/investing-dictionary/revenue-recognition-point-of-sale/.
Reversing Entries. Retrieved from https://www.myaccountingcourse.com/accounting-

cycle/reversing-entries.
Rules of Debit and Credit. Retrieved from https://www.playaccounting.com/explanation/ta-

exp/rules-of-debit-and-credit/.
Sample Balance Sheet and Income Statement. Retrieved from https://businesstips.ph/sample-

balance-sheet-and-income-statement/.
Schedule of Contributions. Retrieved from

https://www.sss.gov.ph/sss/appmanager/pages.jsp?page=scheduleofcontribution
Securing Business Permits and Business Registration. Retrieved from

invest.cfo.gov.ph/pdf/part2/securing-business-permits-and-business-registration.pdf.
SELF ASSESSMENT GUIDE BOOKKEEPING [NC III TESDA-SOP-QSO-13-F07]. Retrieved

from https://www.tesda.gov.ph/Downloadables/SAG-
BOOKKEEPING%20NC%20III%20.pdf.
Similarities and differences - A comparison of ‘full IFRS’ and IFRS for SMEs. Retrieved from
https://www.pwc.com/gx/en/ifrs-reporting/pdf/sims_diffs_ifrs_smes.pdf.
Special Journals. Retrieved from https://www.cliffsnotes.com/study-

guides/accounting/accounting-principles-i/subsidiary-ledgers-and-special-
journals/special-journals.
160
Subsidiary Ledgers. Retrieved from https://www.cliffsnotes.com/study-

guides/accounting/accounting-principles-i/subsidiary-ledgers-and-special-
journals/subsidiary-ledgers.
Tax Changes You Need to Know (TRAIN). Retrieved from

www.ntrc.gov.ph/images/Publications/train/tax-changes-you-need-to-know.pdf.
TESDA TRAINING REGULATIONS - BOOKKEEPING NC III. Retrieved from

https://tesda.gov.ph/Downloadables/TR%20Bookkeeping%20NC%20III.doc.
The Accounting Cycle. Retrieved from https://slideplayer.com/slide/8957678/.
The Chart of Accounts. Retrieved from http://wbbbb-ams.blogspot.com/2012/05/the-chart-of-

accounts.html.
The Direct Write-off Method. Retrieved from https://www.accountingtools.com/articles/what-is-

the-direct-write-off-method.html.
The importance of internal control in financial reporting and safeguarding plan assets. Retrieved
from
https://www.aicpa.org/content/dam/aicpa/interestareas/employeebenefitplanauditquality/r
esources/planadvisories/downloadabledocuments/plan-advisoryinternalcontrol-hires.pdf
The Periodic Method of Merchandise Accounting. Retrieved from

http://jeffboulton.ca/BAF%203M1%20Note%20-
%20Merchandise%20Journal%20Entries.htm.
The Post-Closing Trial Balance. Retrieved from https://www.accountingtools.com/articles/what-

is-a-post-closing-trial-balance.html.
The Updated COSO Internal Control Framework. Retrieved from

https://www.protiviti.com/sites/default/files/united_states/insights/updated-coso-internal-
control-framework-faqs-third-edition-protiviti.pdf.
Trial Balance Errors. Retrieved from

https://www.cengage.com/accounting/book_content/...warren/.../Electure_2-4b.ppt.
Types of Businesses and Business Activities. Retrieved from

https://courses.lumenlearning.com/suny-finaccounting/chapter/types-of-businesses-and-
business-activities/.
161
Unappropriated Retained Earnings. Retrieved from

https://www.investopedia.com/terms/u/unappropriated-retained-earnings.asp.
Value-Added Tax. Retrieved from https://www.bir.gov.ph/index.php/tax-information/value-

added-tax.html.
Voucher. Retrieved from https://www.investopedia.com/terms/v/voucher.asp.
What is an Accounting Worksheet? Retrieved from https://crushthecpaexam.com/accounting-

glossary/accounting-worksheet/.
What is a General Ledger? Retrieved from http://www.leoisaac.com/fin/fin049.htm.
What is a Trial Balance? Retrieved from https://www.accountingcoach.com/blog/what-is-a-trial-

balance.
What is Operating Cycle? Retrieved from https://www.accountingcoach.com/blog/what-is-the-

operating-cycle.
What is TRAN? Retrieved from http://www.dof.gov.ph/taxreform/index.php/e-vat/.
Writing Off an Account Under the Allowance Method. Retrieved from

https://www.accountingcoach.com/accounts-receivable-and-bad-debts-
expense/explanation/4.
www.picpa.com.ph/
www.sec.gov.ph/
162
Appendices
APPENDIX 1:
SECURING BUSINESS PERMITS AND BUSINESS REGISTRATION (Board of Investment
and Department of Trade and Industry)
APPENDIX 2:
TAX CHANGES YOU NEED TO KNOW (TRAIN) [by: Department of Finance - National Tax
Research Center]
APPENDIX 3:
Philippine Financial Reporting Standards (Adopted by SEC as of December 31, 2011)
APPENDIX 4:
Internal Control Vocabulary and Terms Catalog [Internal Control Institute]
APPENDIX 5:
[REPUBLIC ACT NO 9298] - AN ACT REGULATING THE PRACTICE OF
ACCOUNTANCY IN THE PHILIPPINES, REPEALING FOR THE PURPOSE
PRESIDENTIAL DECREE NO. 692, OTHERWISE KNOWN AS THE REVISED
ACCOUNTANCY LAW, APPROPRIATING FUNDS THEREFOR AND FOR OTHER
PURPOSES
APPENDIX 6:
The Overview of the Philippine Accounting Profession
APPENDIX 7:
Philippine Financial Reporting Standard for Small Entities (“the Framework”)
163
APPENDIX 8:
Similarities and differences A comparison of ‘full IFRS’ and IFRS for SMEs
APPENDIX 9:
From the cube to the rainbow double helix: a risk practitioner’s guide to the COSO ERM
Frameworks
APPENDIX 10:
The Updated COSO Internal Control Framework
APPENDIX 11:
SELF ASSESSMENT GUIDE BOOKKEEPING [NC III TESDA-SOP-QSO-13-F07]
APPENDIX 12:
TESDA TRAINING REGULATIONS - BOOKKEEPING NC III

Nc3 Bookkeeping Training Material

Uploaded by

Copyright:

Available Formats

Nc3 Bookkeeping Training Material

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Nc3 Bookkeeping Training Material

Uploaded by

Copyright:

Available Formats

What are the different types of business ownership?

What are the different types of business ownership?

What is the purpose of business beyond earning profit?

What is the purpose of business beyond earning profit?

1

[BOOKKEEPING TRAINING MANUAL FOR THE CITY COLLEGE

Compiled and Reviewed by:

It's attention to detail that

Accounting vis-a-vis Bookkeeping 10

The Accounting Cycle 17

Internal Control Concepts 130

Simulated Examination 136

Figure 1: 2015/2016 INDUSTRY PROFILE: Business Process Outsourcing (First of a series)

Additionally, doing business in the Philippines, either as single proprietorship, partnership or

Accounting vis-a-vis Bookkeeping

On a related context, bookkeeping is the skill or occupation of maintaining accurate records of

The Scope of Accountancy Work – The Branches of Accounting

According to the Professional Regulation Commission-Board of Accountancy (PRC-BOA):

Professional Careers – Accounting and Bookkeeping

The Accounting Cycle

Figure 5: Phases of Accounting (Source: https://slideplayer.com)

Figure 6: The Accounting Cycle (Source: https://slideplayer.com)

About Business Documents

The Rules: Debit and Credit

Figure 7: Summary of Rules – Debits and Credits (Source: https://www.playaccounting.com)

Figure 8: Increase (Decrease) – Debit and Credit of an Account

Figure 9: Normal Balance of Accounts (Source: https://www.accountingcoach.com)

The Chart of Accounts

Figure 10: Sample Chart of Accounts for a Service Concern

Figure 11: Accounts Pertinent to Merchandising Concerns (Source: https://slideplayer.com)

Figure 12: Accounts Peculiar to Merchandising Business (Source: http://jeffboulton.ca)

About Permanent and Drawing Accounts

The Classifying Phase – Posting to the Ledgers

Consequently, a T-Account is a graphic representation of a general ledger account. The name

Figure 13: A Sample Journal Entry (Source: https://www.accountingverse.com)

Figure 14: Sample – General Ledger Format 1 [Cash Account]

Figure 15: Sample – General Ledger Format 2 [Cash Account]

Figure 16: Sample T-Account (Source: https://www.accountingverse.com)

Figure 17: Subsidiary Ledgers (Source: https://www.cliffsnotes.com)

Illustrative Problem: Journal Entries to Posting Entries

Transactions – December 2019:

1. Journalize the transactions;

5 Taxes and Licenses 370.00

6 Furniture and Fixtures 3,000.00

7 Service Equipment 16,000.00

7 Service Supplies 1,500.00

12 Accounts Receivable 4,250.00

15 Accounts Receivable 3,400.00

23 Accounts Payable 500.00

25 Mr. Gray, Drawings 7,000.00

29 Rent Expense 1,500.00

31 Salaries Expense 3,500.00

Posting Entries: T-Accounts:

The Trial Balance

Figure 18: Errors Causing Unequal Trial Balance (Source: https://www.cengage.com)

Illustrative Problem 2: Preparation of Trial Balance

Transactions – December 2019:

Gray Electronic Repair Services

Account Title Debit Credit