FINANCIAL ACCOUNTING AND 2.

Qualitative information- expressed in words or

REPORTING (FAR) descriptive form. It is found in the notes to financial
statements and in the face of other components of
Midterm Exam Reviewer financial system.

Chapter 1 3. Financial information- expressed in money. It can also

be a quantitative information because monetary
Introduction to Accounting amounts are expressed in numbers.
ACCOUNTING – process of identifying, recording, and
communicating economic information that is useful in
making economic decisions. ACCOUNTING AS SCIENCE AND ART
1. Social science, accounting is a body of knowledge
which has been systematically gathered, claassified and
ESSENTIAL ELEMENRTS OF THE DEFINITION OF organized.
ACCOUNTING
2. Practical art, accounting requires the use of creative
a. Identifying- analyzes each business transaction and skills and judgment.
identifies whether the transaction is an accountable
event or non-accountable. ONLY ACCOUNTABLE EVENTS
ARE RECORDED IN THE BOOK OF ACCOUNTS. ACCOUNTING AS AN INFORMATION SYSTEM
 accountable event- those that affect the assets, *A system is one that consists of an input, process, and
liabilities, equity, income, or expenses of a output.
business.
In accounting system, the inputs are the identified
b. Recording- accountant recognizes the identified accountable events; the process are recording,
accountable events. This process is called journalizing. classifying and summarizing; the output is the
 After the journalizing, it classifies the effects of accounting report that is communicated to others.
the event on the “accounts”. The process is
called posting.
 Account- basic storage of information in BOOKKEEPING refers to the process of recording the
accounting accounts or transactions of an entity.
c. Communicating- at the end of each accounting period,  Ends with trial balance
the accountant summarizes the information processed in  Does not require interpretation of the
the accounting system in order to produce meaningful significance of the information processed.
reports.
ACCOUNTING- covers the whole process of identifying,
 Information processed in the accounting system recording and communicating information to interested
is useless unless it is communicated. users.
 Most common form of accounting reports is
FUNCTIONS OF ACCOUNTING IN BUSINESS
financial statements
Accounting is the language of business because it is
fundamental to the communication of financial
NATURE OF ACCOUNTING
information.
Accounting is a process with a basic purpose of providing
FUNCTIONS:
information about economic activities that is intended to
be useful in making economic decisions. 1. TO PROVIDE EXTERNAL USERS WITH INFORMATION
THAT IS USEFUL IN MAKING INVESTMENT AND CREDIT
DECISIONS
TYPES OF INFORMATION PROVIDED BY ACCOUNTING
2. TO PROVIDE INTERNAL USERS WITH INFORMATION
1. Quantitative information- expressed in numbers, THAT IS USEFUL IN MANAGING THE BUSINESS.
quantities, or units.
USERS OF ACCOUNTING INFORMATION
1. INTERNAL USERS- DIRECTLY INVOLVED IN MANAGING  GENERAL PURPOSE FINANCIAL STATEMENTS-
THE BUSINESS CATER TO THE COMMON NEEDS OF EXTERNAL
USERS, PRIMARILY THE POTENTIAL AND
2. EXTERNAL USERS- NOT DIRECTLY INVOLVED IN EXISITNG INVESTORS, LENDERS AND OTHER
MANAGING THE BUSINESS
CREDITORS
TYPES OF ACCOUNTING INFORMATION
1. GENERAL PURPOSE ACCOUNTING INFORMATION- FINANCIAL ACCOUNTING VS. FINANICAL REPORTING
DESIGNED TO MEET THE COMMON NEEDS OF MOST - BOTH FOCUS ON GENERAL PURPOSE FINANCIAL
STATEMENT USERS. STATEMENTS. HOWEVER, FINANCIAL
 PROVIDED BY FINANCIAL ACCOUNTING AND REPORTING ENDEAVORS TO PROMOTE
PREPARED PRIMARILY FOR EXTERNAL USERS PRINCIPLES THAT ARE USEFUL TO “OTHER
FINANCIAL REPORTING”
2. SPECIAL PURPOSE ACCOUNTING INFORMATION-
DESIGNED TO MEET THE SPECIFIC NEEDS OF “OTHER FINANCIAL REPORTING”- COMPRISES
PARTICULAR STATEMENT USERS. INFORMATION PROVIDED OUTSIDE THE FINANCIAL
STATEMENTS THAT ASSISTS IN THE INTERPRETATION OF
 PROVIDED BY MANAGEMENT ACCOUNTING A COMPLETE SET OF FS.
AND PREPARED PRIMARILY FOR EXTERNAL
USERS. FINANCIAL STATEMENTS VS. FINANICAL REPORT

(EXAMPLES NAA SA BOOK DAGHAN KAAYO. SCAN  FINANCIAL STATEMENTS- STRUCTURED

NALANG. HEHE) REPRESENTATION OF AN ENTITY’S FINANCIAL
POSITION AND RESULTS OF ITS OPERATIONS. IT
BRIEF HISTORY OF ACCOUNTING IS THE END PRODUCT OF THE ACCOUNTING
 SINCE THE DAWN OF CIVILIZATION WHEN PROCESS.
MANKIND BGEAN TO ENGAGE IN TRADE, MORE  FINANICAL REPORT- INCLUDES THE FINANCIAL
THAN 10,000 YEARS AGO, METHODS OF STATEMENTS PLUS OTHER INFORMATION
RECORD KEEPING AND ACCOUNTING HAVE PROVIDED OUTSIDE THE FINANCIAL
BEEN INVENTED. STATEMENTS
 8500 BC, ACCOUNTING HAS ALREADY EXISTED FINANICAL REPORTING
 TOKENS: CONES, DISKS, SPHERES, PELLETS,
WET CLAY TABLETS - PROVISION OF FINANCIAL INFORMATION
 MESOPOTAMIA, BABYLONIA, EGYPT, CHINA ABOUT AN ENTITY THAT IS USEFUL TO EXTERNAL
AND GREECE WERE PLACES THAT WERE USERS
KEEPING ACCOUNT RECORS. PRIMARY OBJECTIVE OF FR
 1211 AD, ONE OF THE SYSTEMS IN
ACCOUNTING WAS KEPT BY A FLORENTINE - PROVIDE INFORMATIOON ABOUT AN ENTITY’S
BANKER. HOWEVER, CONCEPT OF EQUALITY ECONOMIC RESOURCES (ASSETS), CLAIMS TO
FOR ENTRIES WAS ABSENT. THOSE RESOURCES (Liabilities and equity), AND
 DOUBLE ENTRY RECORDS FIRST CAME OUT CHANGES IN THOSE RESOURCES (INCOME,
DURING 1340 A.D. IN GENOA. EXPENSES, AND OTHER CHANGES)
 FRA LUCA PACIOLO (FATHER OF MODERN
ACCOUNTING) FORMULATED THE “DOUBLE
ENTRY RECORDING SYSTEM” IN 1494 AND WAS SECONDARY OBJECTIVE OF FR
INCLUDED IN HIS BOOK “SUMMA DI
ARITYHMETICA GEOMETRIA PROPORTIONI AND - PROVIDE INFORMATION USEFUL IN ASSESSING
PROPORTIONISTA” THE ENTITY’S MANAGEMENT STEWARDSHIP

COMMON BRANCHES OF ACCOUNTING 2. MANAGEMENT ACCOUNTING- INVOLVES IN THE

ACCUMULATION AND COMMUNICATION OF
1. FINANCIAL ACCOUNTING- FOCUSES ON GENERAL INFORMATION FOR USE BY INTERNAL USERS. AN
PURPOSE FINANCIAL STATEMENTS OFFSHOOT OF MANAGEMENT ACCOUNTING IS
 GOVERNED BY PFRS MANAGEMENT ADVISORY SERVICES.
3. GOVERNMENT ACCOUNTING0 ACCOUNTING FOR THE OF LAW. OWNERSHIP IN A CORPORATION IS
GOVERNMENT AND ITS INSTRUMENTALITIES, FOCUSING REPRESNTED BY SHARES OF STOCKS. OWNERS ARE
ATTENTION ON THE CUSTODY OF PUBLIC FUNDS, CALLED “STOCKHOLDERS/SHAREHOLDERS.”
PURPOSE TO WHICH THOSE FUNDS ARE COMMITTED,
 AN ARTIFICIAL BEING OR JURIDICIAL PERSON,
AND THE RESPONSIBILITY AND ACCOUNTABILITY OF THE
INDIVIDUALS ENTRUSTED WITH THOSE FUNDS. MEANING IN THE EYES OF THE LAW, A
CORPORATION IS LIKE A PERSON, SEPARATE
4. AUDITING- INVOLVES THE INSPECTION OF AN ENTITY’S FROM ITS OWNERS. THEREFORE, A
FINANCIAL STATEMENTS TO ASCERTAIN THEIR CORPORATION CAN TRANSACT ON ITS OWN,
CORRESPONDENCE WITH AN ESTABLISHED CRITERIA. HAVE ITS OWN PROPERTIES, INCUR ITS OWN
OBLIGATIONS, AND SUE OR BE SUED.
5. TAX ACCOUNTING- PREPARATION OF TAX RETURNS  THE INCORPORATORS OF A CORPORATION
AND RENDERING OF TAX ADVICE
SHALL NOT BE LESS THAN 5 BUT MORE THAN 15
6. COST OF ACCOUNTING- SYSTEMATIC RECORDING AND INDIVIDUALS.
ANALYSIS OF THE COSTS OF MATERIALS, LABOR, AND  CAN HAVE AS MANY STOCKHOLDERS AS ITS
OVERHEAD INCIDENT TO THE PRODUCTION OF GOODS AUTHORIZED CAPITALIZATION PERMITS.
OR RENDERING OF SERVICES.  REGISTERED IN SECURITIES AND EXCHANGE
COMMISSION
7. ACCOUNTING EDUCATION- TEACHING ACCOUNTING
AND ACCOUNTING-RELATED SUBJECTS IN AN 4. COOPERATIVE- OWNED BY MORE THAN ONE
ORGANIZED LEARNING ENVIRONMENT. THE PROCESS OF INDIVIDUAL. IT IS FORMED IN ACCORDANCE WITH THE
FACILITATING THE ACQUISITION OF KNOWLEDGE AND PROVISIONS OF THE PHILIPPINE COOPERATIVE CODE OF
SKILLS. 2008. OWNERS ARE CALLED “MEMBERS.”

8. ACCOUNTING RESEARCH- PERTAINS TO THE CAREFUL  A COOPERATIVE IS AN ASSOCIATIO OF

ANALYSIS OF ECONOMIC EVENTS AND OTHER VARIABLES INDIVIDUALS WHO JOINED TOGETHER TO
TO UNDERSTAND THEIR IMPAQCT ON DECISIONS. CONTRIBUTE CAPITAL AND COOPERATE IN ORDER
TO ACHIEVE CERTAIN GOALS.
 MEMBERS NEED TO PATRONIZE THE
FORMS OF BUSINESS ORGANIZATIONS COOPERATIVE’S GOODS OR SERVICES.
 IF COOPERATIVE EARNS PROFIT, A MEMBER CAN
- A BUSINESS IS AN ACTIVITY WHERE GOODS OR RECOVER HIS COSTS THROUGH PATRONAGE
SERVICES ARE EXCHANGED FOR MONEY. A FUNDS.
PERSON WHO IS ENGAGED IN BUSINESS IS  FOUNDING MEMBERS OR A COOPERATIVE SHALL
CALLED AN ENTREPRENUER OR BUSINESSMAN. NOT BE LESS THAN 15 INDIVIDUALS BUT CAN HAVE
AS MANY MEMBERS AS ITS BY-LAWS PERMIT.
1. SOLE OR SINGLE PROPRIETORSHIP- BUSINESS THAT IS
 REGISTERED IN COOPERATIVE DEVELOPMENT
OWNED BY ONLY ONE INDIVIDUAL. IT IS THE MOST
AUTHORITY
COMMON AND SIMPLEST FORM OF BUSINESS
ORGANIZATION. THE OWNER IS CALLED “SOLE PATRONAGE FUNDS- PERTAIN TO THE
PROPRIETOR.” PROFIT THAT A COOPERATIVE RETURNS TO
ITS OWNERS.
 REGISTERED IN DEPARTMENT OF TRADE AND
INDUSTRY
2. PARTNERSHIP- BUSINESS OWNED BY TWO OR MORE TYPES OF BUSINESS ACCORDING TO ACTIVITIES
INDIVIDUALS WHO ENTERED IN A CONTRACT TO CARRY
ON THE BUSINESS AND DIVIDE AMONG THEMSELVES 1. SERVICE BUSINESS- ONE THAT OFFERS SERVICES AS ITS
THE AERNINGS THEREFROM. OWNERS ARE CALLED MAIN PRODUCT RATHER THAN PHYSICAL GOODS. IT MAY
“PARTNERS.” OFFER PROFESSIONAL SKILLS, EXPERTISE, ADVICE,
LENDING SERVICE, AND SIMILAR SERVICES.
 REGISTERED IN SECURITIES AND EXCHANGE
COMMISSION 2. MERCHANDISING BUSINESS (TRADING BUSINESS)-
ONE THAT BUYS AND SELLS GOODS WITHOUT
3. CORPORATION- OWNED BY MORE THAN ONE CHANGING THEIR PHYSICAL FORM.
INDIVIDUAL. HOWEVER, IT IS CREATED BY OPERATIONS
3. MANUFACTURING BUSINESS- ONE THAT BUYS RAW  OPPOSITE OF THIS IS LIQUIDATING CONCERN.
MATERIALS AND PROCESSES THEM INTO FINAL THE ASSETS OF A LIQUIDATING CONCERN ARE
PRODUCTS. IT CHANGES THE PHYSICAL FORM OF THE MEASURED AT NET SELLING PRICE.
GOODS IT HAS PURCHASED IN A PRDUCTION PROCESS.
4. MATCHING (ASSOCIATION OF CAUSE AND EFFECT)-
 SOME BUSINESSES, CALLED HYBRID SOME COSTS ARE INITIALLY RECOGNIZED AS ASSETS AND
BUSINESSES, ENGAGE IN MORE THAN ONE TYPE CHARGED AS EXPENSES ONLY WHEN THE RELATED
OF ACTIVITY. REVENUE IS RECOGNIZED.
5. ACCRUAL BASIS OF ACCOUNTING- ECONOMIC EVENTS
ARE RECORDED IN THE PERIOD IN WHICH THEY OCCUR
Chapter 2 RATHER THAN AT THE POINT IN TIME WHEN THEY
ACCOUNTING CONCEPTS AND PRINCIPLES AFFECT CASH.

ACCOUNTING CONCEPTS AND PRINCIPLES 6. PRUDENCE OR CONSERVATISM- ACCOUNTANT

(ASSUMPTIONS OR POSTULATES)- SET OF LOGICAL IDEAS OBSERVES SOME DEGREE OF CAUTION WHEN
AND PROCEDURES THAT GUIDE THE ACCOUNTANT IN EXERCISING JUDGMENTS NEEDED IN MAKING
RECORDING AND COMMUNICATING ECONOMIC ACCOUNTING ESTIMATES UNDER CONDITIONS OF
INFORMATION. THEY PROVIDE A GENERAL FRAME OF UNCERTAINTY.
REFERENCE BY WHICH ACCOUNTING PRACTICE CAN BE 7. TIME PERIOD (PERIODICITY, ACCOUNTING PERIOD,
EVALUATED AND THEY SERVE AS GUIDE IN THE REPORTING PERIOD CONCEPTS)- THE LIFE OF THE
DEVELOPMENT OF NEW PRACTICES AND PROCEDURES. BUSINESS IS DIVIDED INTO SERIES OF REPORTING
 PROVIDE REASONABLE ASSURANCE THAT PERIODS.
INFORMATION COMMUNICATED TO USERS IS  THE LIFE OF THE BUSINESS IS DIVIDED INTO
PREPARED IN A PROPER WAY. SERIES OF EQUAL SHORT PERIODS CALLED
BASIC ACCOUNTING CONCEPTS REPORTING PERIOD OR ACCOUNTING PERIOD.
 A REPORTING PERIOD IS USUALLY 12 MONTHS,
- CONCEPTS AND PRINCIPLES ARE SOURCED CAN EITHER BE A CALENDAR YEAR PERIOD OR A
FROM THE STANDARDS (PFRS), THE FISCAL YEAR PERIOD.
CONCEPTUAL FRAMEWORK FOR FINANCIAL  AN ACCOUNTING PERIOD THAT IS SHORTER
REPORTING, OR GENERAL ACCEPTANCE IN THE THAN 12 MONTHS IS CALLED “INTERIM PERIOD”
PROFESSION DUE TO LONG-TIME USE. BELOW
ARE THE BASIC AND COMMON ACCOUNTING CALENDAR YEAR PERIOD- STARTS ON JANUARY 1 AND
CONCEPTS AND PRINCIPLES: ENDS ON DECEMBER 31 OF THE SAME YEAR

1. SEPARATE ENTITY CONCEPT- BUSINESS IS VIEWED AS FISCAL YEAR PERIOD- COVERS 12 MONTHS BUT STARTS
A SEPARATE PERSON, DISTINCT FROM ITS OWNERS. ON A DATE OTHER THAN JANUARY 1
ONLY THE TRANSACTIONS OF THE BUSINESS ARE 8. STABLE MONETARY UNIT- ASSETS, LIABILITIES,
RECORDED IN THE BOOKS OF ACCOUNTS. EQUITY, INCOME, AND EXPENSES ARE STATED IN TERMS
 THE APPLICATION OF THE SEPARATE ENTITY OF A COMMON UNIT OF MEASURE, WHICH IS THE PESO
CONCEPT IS NECESSARY SO THAT THE FINANCIAL IN THE PHILIPPINES. PURCHASING POWER OF THE PESO
POSITION AND FINANCIAL PERFORMANCE OF A IS REGARDED AS STABLE.
BUSINESS CAN BE MEASURED PROPERLY. 9. MATERIALITY CONCEPT- THIS GUIDES THE
2. HISTORICAL COST CONCEPT- ASSETS ARE INITIALLY ACCOUNTANT WHEN APPLYING ACCOUNTING
RECORDED AT THEIR ACQUISITION COST. PRINCIPLES. THIS IS BECAUSE ACCOUNTING PRINCIPLES
ARE APPLICABLE ONLY TO MATERIAL ITEMS.
3. GOING CONCERN ASSUMPTION- BUSINESS IS
ASSUMED TO CONTINUE TO EXIST FOR AN INDEFINITE  AN ITEM IS CONSIDERED MATERIAL IF ITS
PERIOD OF TIME. THIS IS NECESSARY FOR ACCOUNTING OMISSION OR MISSTATEMENT COULD
MEASUREMENTS TO BE MEANINGFUL. INFLUENCE ECONOMIC DECISIONS.
 MATERIALITY IS A MATTER OF PROFESSIONAL
JUDGMENT AND IS BASED ON SIZE AND NATURE
OF AN ITEM.
  ACCOUNTING PRINCIPLES DO NOT SPECIFY A PHILIPPINE FINANCIAL REPORTING STANDARDS (PFRS)
CERTAIN AMOUNT THAT IS CONSIDERED
MATERIAL - THESE ARE STANDARDS AND INTERPRETATIONS
ADOPTED BY THE FINANCIAL REPORTING
10. COST-BENEFIT (COST CONSTRAINT)- THE COSTS OF STANDARDS COUNCIL. THEY CONSIST OF THE
PROCESSING AND COMMUNICATING INFORMATION FOLLOWING:
SHOULD NOT EXCEED THE BENEFITS TO BE DERIVED
FROM THE INFORMATION’S USE. A. PFRS

11. FULL DISCLOSURE PRINCIPLE- RELATED TO BOTH THE B. PAS

CONCEPTS OF MATERIALITY AND COST-BENEFIT. UNDER C. INTERPRETATIONS
THIS, INFORMATION COMMUNICATED TO USERS
REFLECT A SERIES OF JDGMENTAL TRADE-OFFS THAT STANDARDS SERVE AS GUIDE WHEN RECORDING AND
STRIVE FOR: COMMUNICATING ACCOUNTING INFORMATION. IT
PROVIDES A MORE DETAILED APPLICATION OF
A. SUFFICIENT DETAIL TO DISCLOSURE MATTERS THAT CONCEPTS. THEY ALSO PRESCRIBE THE MOST
MAKE A DIFFERENCE TO USERS, YET APPROPRIATE PRINCIPLE FOR SPECIFIC ECONOMIC
B. SUFFICIENT CONDENSATION TO MAKE THE TRANSACTIONS.
INFORMATION UNDERSTANDABLE, KEEPING IN MIND THE PFRS ARE ISSUED BY THE FINANCIAL REPORTING
THE COSTS OF PREPARING AND USING IT. STANDARDS COUNCIL, WHICH IS THE OFFICIAL
12. CONSISTENCY CONCEPT- THIS CONCEPT REQUIRES A ACCOUNTING STANDARD-SETTING BODY OF THE
BUSINESS TO APPLY ACCOUNTING POLICIES PHILIPPINES.
CONSISTENTLY, AND PRESENT INFORMATION THE PFRS ARE PATTERNED FROM THE INTERNATIONAL
CONSISTENTLY, FROM ONE PERIOD TO ANOTHER. FINANCIAL REPORTING STANDARDS WHICH ARE
 ACCOUNTING POLICIES CAN BE CHANGED IF IT IS ISSUED BY THE INTERNATIONAL ACCOUNTING
REQUIRED BY A STANDARD OF THE CHANGE STANDARDS BOARD.
WOULD RESULT IN MORE RELEVANT AND MORE GENERALLY ACCEPTABLE MEANS:
RELIABLE INFORMATION.
A. THE STANDARD HAS BEEN ESTABLISHED BY AN
ACCOUNTING STANDARDS AUTHORITATIVE ACCOUNTING STANDARD-SETTING
BODY
- ACCOUNTING CONCEPTS AND PRINCIPLES ARE
EITHER EXPLICIT OR IMPLICIT. B. THE PRINCIPLE HAS GAINED GENERAL ACCEPTANCE
EXPLICIT- THOSE THAT ARE SPECIFICALLY MENTIONED IN DUE TO PRACTICE OVER TIME AND HAS BEEN PROVEN
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL TO BE MOST USEFUL.
REPORTING AND IN THE PHILIPPINE FINANCIAL - THE PROCESS OF ESTABLISHING ACCOUNTING
REPORTING STANDARDS (PFRS). STANDARDS IS A DEMOCRATIC PROCESS.
IMPLICIT- NOT SPECIFICALLY MENTIONED IN THE
FOREGOING BUT ARE CUSTOMARILY USED BECAUSE OF
THEIR GENERAL AND LONGTIME ACCEPTANCE WITHIN RELEVANT REGULATORY BODIES
THE ACCOUNTANCY PROFESSION. 1. SECURITIES AND EXCHANGE COMMISSION-TASKED TO
- THE TERMS “CONCEPTS”, “PRINCIPLES”, REGULATE CORPORATIONS, INCLUDING PARTNERSHIP.
“STANDARDS”, “ASSUMPTIONS”, AND IT REQUIRES BOTH TO FILE AUDITED FINANCIAL
“POSTULATES” ARE USED INTERCHANGEABLY IN STATEMENTS.
PRACTICE. 2. BUREAU OF INTERNAL REVENUE- TASKED IN
- “STANDARDS” USED TO REFER TO THE PFRS. COLLECTING NATIONAL TAXES AND ADMINISTERING THE
TRADITIONALLY, ACCOUNTING STANDARDS PROVISIONS OF THE TAX CODE.
WERE REFERRED TO AS THE GAAP.
3. BANGKO SENTRAL NG PILIPINAS- TASKED IN
REGULATING BANKS AND OTHER ENTITIES PERFORMING
BANKING FUNCTIONS. IT INFLUENCES THE SELECTION
AND APPLICATION OF ACCOUNTING POLICIES BY THESE  FREE FROM ERROR- INFROMATION IS NOT
BUSINESSES. MATERIALLY MISSTATED. THIS DOES NOT MEAN
THAT INFORMATION MUST BE PREFECTLY
4. COOPERATIVE DEVELOPMENT AUTHORITY- TASKED IN
ACCURATE. THIS MEANS THAT THERE ARE NO
REGULATING COOPERATIVES. IT INFLUENCES THE
ERRORS IN THE DESCRIPTION AND IN THE PROCESS
SELECTION AND APPLICATION OF ACCOUNTING POLICIES
BY WHICH THE INFORMATION IS SELECTED AND
BY COOPERATIVES.
APPLIED.
B. ENHANCING QUALITATIVE CHARACTERISTICS-
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL SUPPORT THE FUNDAMENTAL CHARACTERISTICS. THEY
REPORTING ENHANCE THE USEFULNESS OF INFORMATION. CONSIST
OF THE FOLLOWING:
- ALSO PRESCRIBES ACCOUNTING CONCEPTS
THAT ARE RELEVANT TO THE PREPARATION OF 1. COMPARABILITY- IF IT CAN HELP USERS
FINANCIAL STATEMENTS. IDENTIFY SIMILARITIES AND DIFFERENCES BETWEEN
- IT IS NOT A STANDARD. IT SERVES AS A GENERAL SETS OF INFORMATION.
FRAME OF REFERENCE DEVELOPING THE
2. VERIFIABILITY- IF DIFFERENT USERS COULD
STANDARDS.
REACH A GENERAL AGREEMENT AS TO WHAT THE
QUALITATIVE CHARACTERISTICS OF USEFUL FINANCIAL INFORMATION INTENDS TO PRESENT.
INFORMATION
3. TIMELINESS- IF IT IS AVAILABLE TO USERS IN
QUALITATIVE CHARACTERISTICS- TRAITS THAT TIME TO BE ABLE TO INFLUENCE THEIR DECISIONS.
DETERMINE WHETHER AN ITEM OF INFORMATION IS
4. UNDERSTANDABILITY- IF IT IS PRESENTED IN
USEFUL TO OTHERS. WITHOUT THESE, INFORMATION
A CLEAR AND CONCISE MANNER.
MAY BE DEEMED USELESS. THESE ARE BROADLY
CLASSIFIED INTO TWO:
A. FUNDAMENTAL QUALITATIVE CHARACTERISTICS-
Chapter 3
MAKE INFORMATION USEFUL TO OTHERS. CONSIST OF
THE FOLLOWING: The Accounting Equation
1. RELEVANCE- CAN AFFECT THE DECISIONS OF
USERS. WITHOUT THIS TRAIT, INFORMATION IS
DEEMED USELESS. THREE ASPECTS: The Basic Accounting Equation

 PREDICTIVE VALUE- IF IT CAN HELP USERS TO Assets= Liabilities + Equity

MAKE PREDICTIONS ABOUT FUTURE OUTCOMES
 CONFIRMATORY VALUE (FEEDBACK VALUE)- IF IT
CAN HELP USERS CONFIRM THEIR PAST Assets
PREDICTIONS
 MATERIALITY- IS AN ENTITY-SPECIFIC ASPECT OF -economic resources you control that have resulted
RELEVANCE, MEANING IT DEPENDS ON THE FACTS from past events and can provide you with economic
AND CIRCUMSTANCES SURROUNDING A SPECIFIC benefits.
ENTITY.
2. FAITHFUL REPRESENTATION- IF IT IS
FACTUAL, MEANING IT REPRESENTS THE ACTUAL Control
EFFECTS THAT HAVE TAKEN PLACE. THREE ASPECTS:
-ownership is not necessary to have control.
 COMPLETENESS- ALL INFORMATION FOR USERS TO
-what is important is that you control the right over the
HAVE A COMPLETE UNDERSTANDING OF THE FS IS
economic benefits that the resource may produce.
PROVIDED
 NEUTRALITY- INFORMATION IS SELECTED WITHOUT -control means you have the exclusive right to enjoy
BIAS, NOT MANIPULATED. those benefits and the ability to prevent others from
enjoying those.
Past events Giving up of economic resources

-the control ever an economic resource have resulted -settling the obligation necessarily would require you to
from a past event or transaction. pay cash, to transfer other non-cash assets or render a
service.
-resources for which control is yet to be obtained in the
future do not qualify as assets in the present.

-physical possession is also not necessary for control to Present obligation

exist. (ex. Money in the bank)
-a present obligation exists as a result of past events if

1. you have already obtained economic benefits or

Economic Benefits taken an action;

-to be an asset, the economic resource must have the 2. as a consequence, you are a required to transfer an
potential to provide you with economic benefits in at economic resource.
least one circumstance.

-examples: the economic resource can be

Equity
1. sold, leased, transferred or exchanged for other
-assets minus liabilities
assets
-capital, net assets, net worth
2. used singly or In combination with other assets to
produce goods or provide services

3. used to enhance the value of other assets *liabilities represent the creditors’ claim while equity
represents the owners’ claim, against the total assets of
4. used to promote efficiency and cost savings
the business.
5. used to settle a liability
*the quality of the accounting equation must be
maintained in all the accounting processes of recording,
classifying and summarizing.
Liabilities

-present obligations that have resulted from past events

and can require you to give up economic resources The expanded accounting equation
when settling them.
-shows all the financial statement elements

Assets= Liabilities +Equity +Income – Expenses

Obligation

-obligation means a duty or responsibility. It can either

Income
be:
-increases in economic benefits during the period in the
a. Legal obligation- an obligation that results a from a
form of increases in assets, or decreases in liabilities
contract, legislation or other operation of law
that result in increases in equity.
b. Constructive obligation- an obligation that results
from your past actions (past practice or published
policies) that have created a valid expectation on others Expenses
that you will accept and discharge certain
responsibilities. -are decreases in economic benefits during the period in
the form of decreases in assets or increases in liabilities,
that result in decreases in equity, excluding those 2. Liabilities- are your present obligations that have
relating to distributions to the business owners. resulted from past events and can require you to give
up resources when settling them.

3. Equity- assets minus liabilities

*the difference between income and expense
represents PROFIT OR LOSS 4.Income- increases in economic benefits during the
period in the form of increases in assets, or decreases in
-If income is greater than expenses, the difference is
liabilities, that result in increases in equity, excluding
profit.
those relating to investments by the business owner.
-if income is less than expenses, the difference is loss.
-includes both revenue and gains

a. Revenue- arises in the course of the ordinary

Chapter 4 activities of a business (sales, service fees)

Types of Major Accounts b.Gains- represent other items that meet the definition
of income and may or may not arise in the course of the
ordinary activities of the entity.
The Account -Carrying amount- net amount to which an item is
-basic storage of information in accounting carried or recorded in the books of accounts

-record of increases and decreases in a specific item of 5. Expenses- are decreases in economic benefits during
asset, liability, equity, income or expense the period in the form of decreases in assets or
increases in liabilities that result in decreases in equity
-it can be depicted through a “T-account” excluding those relating to distributions to the business
owner.
-the T account has three parts
-include both expenses and losses
a. Account title- describes the specific item of asset
liability, equity, income or expense a. Expenses- arise in the course of the ordinary activities
of a business
b. Debit side- left side of the account
b. Losses- represent other items that meet the
c. Credit side- right side of the account
definition of expenses and may or may not arise in the
course of the ordinary activities of the entity.

Debit (Dr.)- value received

Credit (Cr.)- value parted with Classification of the Five major Accounts

Balance- difference between the total debits and Balance Sheet Accounts
credits
-Assets, Liabilities, Equity

Income Statement Accounts

The Five Major Accounts
-Income and Expenses
-elements of financial statements

1. Assets- are the economic resources you control that

Balance Sheet/Statement of Financial Position- one of
have resulted from past events and can provide you
the components of a complete set of FS. It shows the
with future economic benefits.
financial position of the business.
Income Statement- a sub-component of the statement 2. Accounts Receivable- receivables supported by
of comprehensive income (also a component of oral informal promises to pay
complete FS), it shows the profit or loss of the business. 3. Allowance for bad debts- estimated losses from
uncollectible accounts receivable (allowance for
doubtful accounts)
Chart of Accounts- list of all accounts used by a 4. Notes Receivable- supported by written or
business formal promises to pay (promissory notes)
5. Inventory- goods held for sale, undergoing the
Account numbers- assigned to the accounts to facilitate process of production and raw materials
recording, cross-referencing, and retrieval of 6. Prepaid Supplies- unused office and other
information. supplies
-First digit: major type of accounts 7. Prepaid Rent- rent paid in advance
8. Prepaid Insurance- insurance paid in advance
Assets -1 9. Land- lot on which the building of the business
Liabilities-2 is constructed
10. Building- structure owned by a business
Equity- 3 11. Accumulated depreciation-building- total
amount depreciation expenses recognized since
Income-4
the building was acquired and used
Expense-5 12. Equipment- Machineries, Transportation
equipment, office equipment, computer
-Second digit: account titles and the sequence on how
equipment, furniture and fixtures
they are listed in the chart of accounts
13. Accumulated depreciation-equipment- total
-Third digit: if not zero, signifies that the account is a amount of depreciation expenses recognized since
contra or adjunct account the equipment was acquired and made available
for use

**To promote comparability, a business shall use

account titles that conform to the PFRSs and industry *collectively, land, building and equipment are referred
practices. Regulated businesses should have chart of to as “Property, Plant, Equipment,” “Capital Assets,” or
accounts and/or account numbering system that “Fixed Assets”
conform to relevant regulations

a. Bank- Bangko Sentral ng Pilipinas

Liabilities
b. Cooperative- Cooperative Development
Authority 1. Accounts Payable- obligations supported by oral
c. National Government Agency- Revised chart of or informal promises to pay
accounts issued by Commission on Audit 2. Notes Payable- supported by promissory notes
3. Interest Payable- interest incurred but not yet
paid
Common Account Titles 4. Salaries Payable- earned by employees but not
yet paid by the business
5. Utilities Payable- utilities (electricity, water,etc)
Balance Sheet Accounts already used but not yet paid
6. Unearned income- collected in advance before
Assets they are earned.
1. Cash- money or equivalent readily available for
unrestricted use (on hand or in bank)
Equity
 1. Owner’s capital (or owner’s equity)- the residual 15. Miscellaneous expense- small expenditures
amount after deducting liabilities from assets. 16. Losses- expenses which may or may not arise
Increased by contributions, profits. Decreased from the ordinary course of the business (selling
by withdrawals, distributions, losses. assets less than the carrying amount, decrease
2. Owner’s drawings- temporary withdrawals of in value of assets because of destruction,
the owner. Closed to owner’s capital account. damages,etc.)

Income Statement Accounts Chapter 5

Income Boks of Accounts and Double Entry System
1. Service Fees- earned from rendering services The Books of Accounts
2. Sales- earned from sale of goods
3. Interest income- earned from issuance of Journal – “book of original entries”, the accounting
interest- bearing receivables record where business transactions are first recorded.
4. Gains- earned from sale of assets of The recording process is called journalizing.
enhancement of assets or decreases in liabilities 1. Special Journal – to record transactions of a
that are not classified as revenue. similar nature. It simplifies the recording
process, an efficient way of recording and
retrieving information.
Expenses Examples:
a. Sales Journal – is used to record sales on
1. Cost of Sales/Cost of goods sold- value of
account
inventories sold during the period
b. Purchases journal – to record purchases of
2. Freight-out- sellers’ cost of delivering goods.
inventory on account
Delivery expense, transportation-out, carriage
c. Cash receipts journal – to record all
outwards
transactions involving receipts of cash
3. Salaries expense- salaries earned by employees
d. Cash disbursements journal – to record
4. Rent expense- rentals used up during the period
transactions involving payments of cash
5. Utilities expense- cost of utilities earned during
2. General journal – if it can’t be recorded in the
the period
special journal then record it in the general
6. Supplies expense- cost of supplies used up
journal
7. Bad debt expense- estimated losses from
uncollectible accounts (doubtful accounts
expense)
8. Depreciation expense- depreciation for the Ledger – “book of secondary entries” or “book of final
period entries”
9. Advertising expense- cost promotional or a. General Ledger – all accounts appearing in the
marketing activities trial balance
10. Insurance expense- cost of insurance during the b. Subsidiary Ledger – provides a breakdown of
period the balances of the controlling accounts
11. Taxes and licenses- cost of business and local
taxes required by the government (Partnerships Controlling account – one that consists of a group of
and Corporations- income tax expense) accounts with similar nature. Not all accounts in the
12. Transportation expenses- cost of employees general ledger though are controlling accounts. Only
getting from one workplace to another those whose balances necessarily need a breakdown
(reimbursable) are considered controlling accounts.
13. Travel expenses- business trips
14. Interest expense- cost of borrowing money
Double-entry – under this system, each transaction is 1. Identifying and analyzing – the accountant
recorded in two parts – debit and credit. This is in order gathers information from source documents
for accounting equation to be balance at all times. and determines and determines the effect of
the transactions of the accounts.
Concepts of Duality and Equilibrium
2. Journalizing – The identified accountable events
a. Concept of Duality – views each transaction as are recorded in the journals.
having a two-fold effects on values – a value 3. Posting – information from the journal are
received and a value parted with, and each transferred to the ledger
transaction is recorded using at least two 4. The unadjusted trial balance – the balances of
accounts. the general ledger accounts proved as to
b. Concept of Equilibrium – requires that each equality of debits and credits. Serves as a basis
transaction is recorded in terms of equal debits for adjusting entries.
and credits. 5. Adjusting entries – the accounts are updated as
of the reporting date on an accrual basis by
recording accruals, expiration of deferrals,
Normal Balances of accounts estimations, and other events often not
signaled by new source documents.
Type of Normal balance decrease 6. Adjusted trial balance – the equality of debits
account (increase) and credits are rechecked after adjustments are
Asset Debit Credit made. Serves as basis for the preparation of the
Liabilities Credit Debit financial statements.
Equity Credit Debit
7. Financial statements – these are the means by
Income Credit Debit
which the information processed is
Expenses Debit Credit
communicated to users.
8. Closing the books – this involves journalizing
Assets + Expenses = Liabilities + Equity + Income and posting closing entries and ruling the
ledger. Temporary accounts are closed and the
*Dr - Left side; Cr- right side
resulting profit or loss is transferred to an
equity account.
9. Post-closing trial balance – the equality of
Contra and Adjunct accounts debits and credits are again rechecked after the
a. Contra accounts are presented in the financial closing process.
statement as deduction to their related 10. Reversing entries – reversing entries are usually
accounts. made at the beginning of the beginning of the
b. Adjunct accounts are presented in the financial next accounting period to simplify the recording
statements as addition to their related of certain transactions in that period.
accounts.

Net Carrying amount – the sum of the balances of an Source Documents

account and its related contra or adjunct account.
a. Sales invoices – are used for the sale of goods
b. Official receipts – are used for the rendering of
Chapter 6 services
c. Purchase orders – a document issued by a
Business transactions and their analysis buyer to a seller indicating the types, quantities
and agreed prices for products and services that
The accounting cycle – represents the steps or
the buyer intends to purchase. Purchase orders
procedures used to record transaction and prepare
are prepared as internal control over purchases.
financial statements.

Steps:
 d. Delivery receipts – is a document signed by the Overview of the Recording Process
receiver of a shipment acknowledging the Example: On March 31, 20x1, the business pays employee
receipt of the goods. salaries for the current month amounting to P30,000.
e. Bank deposit slips – evidences a deposit to a Step 1: Transaction analysis
bank account it shows the date of deposit, the
Identify the accounts affected by the transaction
bank account name and number, and amount
and the effects of the transaction on these accounts
deposited
(increase or decrease)
f. Bank statements – a report issued by the bank
that shows the deposits and withdrawals during Accounts “Salaries expense” (expense) and
the period and the cumulative balance of a Affected “Cash” (asset)
depositor’s bank account. Effects on Expense is increased. Cash is
g. Checks - Accounts decreased.
h. Statements of account – a report a business Debit/Credit Expense is increased through debit.
Asset is decreased through credit.
sends to its customer listing the transactions
with the customer during the period, the
payments made by the customer and any Step 2: Journalizing
remaining balance due from the customer. It Transaction is recorded in debit/credit form
also serves as a notice of billing. (journal entry) in the journal.
Mar. Salaries expense 30,000
31, Cash 30,000
Types of events 20x1 To record
salaries expense
External events – are transactions that involve the
business and another external party.

Internal events – are events that do not involve an

external party. “the business only”

Simple and compound journal entries

a. Simple journal entry – one that contains a

single debit and a single credit
b. Compound journal entry – one that contains
two or more debits or credits.

CHAPTER 7: POSTING TO THE LEDGER

Posting
- The third step in the accounting cycle
- The process of transferring data from the journal
to the appropriate accounts in the ledger
o Done by transferring to amounts of debits
and credits in a recorded journal entry to the
ledger accounts
Purpose: Classify the effects of transactions on specific
asset, liability, equity, income and expense accounts to
provide more meaningful information.
Note: Accounts in the ledger resemble a “T-account”
 The ending balance of an account is the
difference between the total debits and credits
in that account.
Step 3: Posting 2. Journalizing or posting an entry twice
The debit(s) and credit(s) of the journal entry 3. Using the wrong account with the same normal
are transferred to the affected accounts in the ledger. balance as the correct amount
Cash Salaries 4. Wrong computation with same erroneous
expense amount posted to both debit and credit sides
Dr. Cr. Dr. Cr.
Another way of setting up the “Owner’s capital”
30,000 Mar. Mar. 30,000 and “Owner’s drawings” accounts is by using
31 31 the name of the business owner.
Heading of trial balance
Trial Balance 1. Name of business (Who?)
- A list of general ledger accounts and their 2. Title of the report (What?)
balances 3. Date of the report (When?)
- Checks the equality of total debits and credits in
the ledger  Order of account titles in the unadjusted trial
o Created a starting point for the preparation balance
of the financial statements o Assets, Liabilities, Equity, Income,
o Although optional, a trial balance shall be Expenses
prepared because it helps in revealing some
errors
CHAPTER 8: ADJUSTING ENTRIES
Types:
a) Unadjusted trial balance – prepared before Adjusting Entries
adjusting entries are made
Note: Adjusting entries and financial statements - Entries made before the preparation of financial
can’t be prepared unless total debit and credit is equal statements to update certain accounts so that they
reflect correct balances as of the designated time
b) Adjusted trial balance – prepared after
adjusting entries but before the financial Purpose:
statements are prepared
c) Post-Closing trial balance – prepared after the 1. Take up unrecorded income and expense of the
period
closing process
2. Split mixed accounts into their real and nominal
elements
Errors Revealed by a Trial Balance Accruals of Income and Expenses (NO CASH INVOLVED)
The trial balance can reveal errors that caused the total
 Accrual means to recognize an
debits and total credits to be unequal
o Income that is already earned but not yet
1. Journalizing or posting one-half of an entry (i.e.
collected
a debit w/o a credit or vice versa) o Expense that is already incurred but not yet
2. Recording one part of an entry for a different paid
amount than the other part  Gives rise to both income and receivable (or both
3. Transplacement error on one side of an entry. payable and expense)
- Transplacement/Slide error is committed when
the number of digits in an amount is incorrectly Note: (1) All adjusting entries involve at least one balance
increased or decreased (ex. ₱1000 is recorded sheet account and one income statement/statement of
as ₱100 or ₱10000) comprehensive income account
4. Transposition error on one side of an entry (2) All adjusting entries affect the profit or loss (or
- Transposition error is committed when comprehensive income) for the period
digits in an amount are interchanged (ex.
₱15,652 is recorded as ₱15,625 or ₱15,265) Recognition of Depreciation Expense
The Concept of Systematic and Rational Allocation
Errors not Revealed by a Trial Balance
The trial balance cannot reveal errors that do not cause - States that costs that provide economic benefits over
the debits and credits to be unequal several accounting periods but cannot be directly
1. Omitting entirely the entry for a transaction associated with the earning of revenues are
 recognized as expenses over the periods where the These are separated because the nominal account should
economic benefits are consumed be in income statement wile the real account is in balance
- Example is the recognition of depreciation expense. sheet
The equipment is initially recorded as asset. But
since the expense can’t be directly associated with Methods of Initial Recording of Income and Expenses
sales (as opposed to the cost of inventories sold), the Income
expense is recorded over the periods the equipment
is used. 1. Liability Method – advanced collections of income
are initially credited to a liability account. At end of
The Concept of Immediate Recognition period, the “earned portion” is recognized as income
- States that a cost that produces no future economic while the “unearned” remains as liability
benefits or an asset that ceases to provide future 2. Income Method – advanced collections of income
economic benefits is recognized immediately as are initially credited to an income account. At end
expense of period, the “unearned portion” is recognized as
- Example is the recognition of bad debts expense liability while the “earned” remains as income.
since accounts receivables that are doubtful for *Earned (‘used up’) portion is recognized as income for the
collection will not provide future economic benefits period
anymore.
*Unearned (‘unused’) portion is recognized as liability. Will
The Concept of Matching be recognized as income in the next accounting period.
- Costs that are directly associated with the earning of Expenses
revenue are recognized as expenses in the same
period in which the related revenue is recognized 1. Asset Method – prepayments of expenses are
- Example: The cost of inventory is initially recognized initially debited to an asset account. At end of
as asset and charged as expense (COGS) when period, the incurred (expired or used up) portion is
inventory is sold. recognized as expense while unused portion remains
as asset
Real, Nominal, and Mixed Accounts 2. Expense Method – prepayments of expenses are
1. Real/Permanent accounts – not closed at the end of initially debited to an expense account. At end of
the accounting period. These are extended to the next period, the unused (not yet incurred/ unexpired)
accounting period. Includes all balance sheet portion is recognized as assets while the expired
accounts except Owner’s drawings portion remains as expense
2. Nominal/Temporary accounts – closed at the end of *Incurred portion is recognized as expense for the period.
the accounting period. Includes all income statement
accounts, drawings account, clearing accounts, *Not yet incurred portion is recognized as asset. Will be
and suspense accounts. recognized as expense in the next accounting period.
- Clearing account – used temporarily to store
Note: The recording of items of income that were collected in
amounts that will eventually be transferred to
advance and items of expense that were paid in advance is
another account. Example is income
referred to as deferrals. (defer means to postpone the
summary -> closed to Owner’s capital
recognition)
account
- Suspense account – used temporarily to Accrual Deferral
store discrepancies in the accounts pending - To recognize income - To postpone the income
their analysis and permanent classification. that is already earned recognition of an
Example is cash shortage (closed to but not yet collected advance collection. It is
receivable/loss account) or overage (closed - To recognize expense treated as liability until
to payable/gain account) that is already incurred earned
3. Mixed accounts – have both real and nominal but not yet paid - To postpone the expense
account components. Subject to adjustment. recognition of the
- Include unadjusted prepayments (prepaid prepayment. It is treated
assets) and deferrals (unearned income) that as asset until incurred.
have both expired and unexpired
Accruals and Deferrals are opposites 😊
components
 The expired portion is the nominal account component while
the unexpired portion is the real account component
 CHAPTER 9 Financial Statements- end products of the accounting
process.
Accounting Cycle of a Service Business
- means by which information are
Service Business- one that offers services as its main summarized and communicated to users.
product rather than physical goods.
Statement of Financial Position (Balance Sheet)- shows
Worksheet- an analytical device used to facilitate the the assets, liabilities and equity of a business.
gathering of data for adjustments, the
Statement of Profit or Loss (Income Statement)- shows
preparation of financial statements and closing entries.
the income and expenses, and consequently,
Heading of the worksheet the profit or
loss, of a business.
1. Name of the business
2. Title of the report *Income Statement*
3. Date discovered by the report (i.e. for the  Profit- credits exceeds debit
period ended Dec. 31, 20x2)  Loss- debits exceeds credit
 Profit or Loss is closed to the “Owner’s Capital”.
Consistency Concept- applying the policy consistently in
the current and succeeding accounting periods *Balance Sheet*

Adjusting entries (identifying the needed adjustments)  Profit- debits exceeds credit
 Loss- credits exceeds debit
1. Accruals of income and expenses
2. Recognition of depreciation expense and bad Profit or Loss for the period - Balancing figure in the
Income Statement and Balance Sheet
debts expense
3. Deferrals of income and expenses (splitting of *Closing Entries- entries prepared at the end of the
‘mixed accounts’) accounting period to “zero out” all nominal accounts
in the ledger. Also referred to as “closing the
Adjustments columns - where you place the debits and books.”
credits of the adjusting entries
 Income Summary- clearing account
Rules of debits and credits
 Credit Balance- profit
1. Debit and Debit- Add  Debit balance- loss
2. Credit and Credit- Add
3. Debit and Credit or vice versa- Subtract  Income summary is closed to the “owner’s Capital”
 Owner’s Drawings is closed to the “Owner’s
Cross-footing – adding or subtracting amounts
Capital”
horizontally in accounting reports.

- Procedure to compute for the Post-Closing Trial Balance- prepared to check the
adjusted balances of accounts in the equality of the of debits and credits in the general
adjusted trial balance.
ledger after the closing
Footing- adding or subtracting amounts vertically in entries are made. Contains real accounts.
accounting reports.
- Procedure to compute for the “total” of the  Closed account- an account that has no balance
columns.  Open account- an account that has a balance.
Double Rule- two lines underneath an amount.
- Use to connote a total or the end of a
computation.
*Reserving Entries- entries usually made on the first day
of the next accounting period to reverse certain Purchases – the account used to record purchases of
adjusting entries in the immediately preceding period. inventory under the periodic system

Freight–In (Transportation-In) – the account used to

 Adjusting entries that may be reversed
record the shipping costs incurred on purchases of
1. Accruals for income or expense inventory under the periodic system
2. Prepayments (expense method) Purchase Returns - the account used to record returns
3. Advance collections (income method) of purchased goods to the supplier

Purchase Discounts – the account used to record cash

discounts availed of on the purchased goods
Chapter 10: Accounting Cycle of a
Merchandising Business

Merchandising Business – buys and sells goods without

changing their physical form

The main difference between a merchandising business

and service business is that a merchandising business
necessarily holds inventory of physical goods for sale

Inventory - refers to the goods that a merchandising

business has purchased and primarily intended for
resale

2 types of Inventory Systems:

1. Perpetual Inventory System – “continuing

forever” and is called as such because the
Inventory account is updated each time a
purchase or sale is made thus the Inventory
account shows a continuing or running balance
Sales – includes both cash sales and credit sales
of the goods on hand
2. Periodic Inventory System – “occurring or Sales Returns – the account used to record goods
recurring” and is called such because the retuned by customers
Inventory account is updated only when a
Sales Discounts - the account used to record cash
physical count of inventory is performed
discounts given to customers
 Chapter 11 h. Unlimited Liability – each partner, including industrial ones
may be held personally liable for partnership debt after all
Partnership Formation
partnership assets have been exhausted. If a partner is
Partnership - An unincorporated association of two or more personally insolvent, his share in the partnership debt shall
individuals to carry on, as co-owners, a business, with the intention be assumed by the other solvent partners.
of dividing the profits among themselves. - A partnership in which all partners are individually liable is
called a general partnership.
Characteristics - A partnership in which at least one partner is personally
a. Ease of formation – as compared to corporations, the liable is called a limited partnership. A limited partnership
formation of a partnership requires less formality. includes at least one general partner who maintains
b. Separate legal personality – the partnership has judicial unlimited liability. The others, called limited partners, may
personality separate and distinct from the partners. The limit their liability up to the extent of their contributions to
partnership can transact ad acquire properties in its name. the partnership. A limited liability partnership usually has
c. Mutual agency – the partners are agents of the partnership “LLP” in its name.
for the purpose of its business. As such, a partner may
legally bind the partnership to contract or agreement that is Advantages Disadvantages
in line with the partnership’s operations. Ease of formation Easily dissolved/limited life
d. Co-ownership of property – each partner is a co-owner of
the properties invested in the partnership and each has an Shared responsibility of running Unlimited liability
equal right with his partners to possess specific partnership the business.
property for partnership purposes. However, a partnership
Flexibility in decision making Conflict among partners
has no right to possess a partnership property for any other
purpose without the consent of his partners. Greater capital compared to Lesser capital compared to a
e. Co-ownership of profits – a partnership is created as a sole partnership corporation
business, as such, each partner is entitled to his share in the
partnership profit. A stipulation which excludes one or more Relative lack of regulation by A partnership is taxed like a
partners form any share in the profits or losses I void. the government as compared to corporation
f. Limited life – the creation of a partnership is basically corporations
consensual. A partnership can be dissolved.
g. Transfer of ownership – in case of dissolution, the transfer
of ownership, whether to a new or existing partner,
requires the approval of the remaining partners.
 Accounting for partnership

The accounting for assets and liabilities remains the same When measuring the contributions of partners, the following
regardless of the form of a business organization. What changes additional guidance from the PFRSs shall be observed:
is the accounting for equity.
Type of Contribution Measurement
Cash and cash equivalents Face amount of cash or cash
equivalent contributed.
The following are the major considerations in the accounting for (PAS7;Statement of cash
the equity of a partnership: flows)
a. Formation – accounting for initial investments to the Inventory Net realizable value
(estimated selling price less
partnership
costs to complete and sell), if
b. Operations – division of profits of losses
lower than cost. (PAS2;
c. Dissolution – admission of a new partner and withdrawal, Inventories)
retirement or death of a partner
d. Liquidation – winding-up of affairs
Each partner’s capital account is credited for the fair value of
his net contribution (i.e., fair value of contribution less any liability
Formation assumed by the partnership). No contribution shall be valued at an
amount greater than its fair value.
A contract of partnership is consensual. It is created by the
agreement of the partners which may be constituted in any form, A partner’s subsequent share in profits (losses) shall also be
such as oral or written. A partnership’s legal existence begins from credited (debited) to his capital account. Likewise, permanent
the moment the contract is executed, unless otherwise stipulated. withdrawals of capital are debited to the partner’s capital account.
Temporary withdrawals may be debited to the partner’s drawings
account. The sum of the balances in the partners’ individual capital
Valuation of contributions of partners accounts represents the total equity of the partnership

Capital contributions of partners to the partnership are initially Partners’ ledger accounts
measured at fair value. The partners’ ledger accounts are:
Fair value is “the price that would be received to sell an assets a. Capital accounts
or paid to transfer a liability in an orderly transaction between b. Drawings accounts
market participants at the measurement date.” c. Receivable from/Payable to a partner
 Capital and Drawings accounts The drawings account is a nominal account that is closed to the
related capital account at the end of the period. This account is a
Each partner has his or her own capital and drawings account,
contra equity account and has a normal debit balance.
e.g., “Juan dela Cruz, Capital” and “Juan dela Cruz, Drawings.” These
accounts are equity accounts and are used to record the following
transactions:
Receivable form/ Payable to a partner
Juan dela Cruz, Capital
The partnership may enter into a loan transaction with a
Permanent Xxx Xxx Initial partner. A loan extended by the partnership to partner is recorded
withdrawals of investment as a receivable from the partner, while a loan obtained by the
capital partnership from a partner is recorded as a payable to partner.
Additional
Share in losses Xxx Xxx
investments
Debit balance of xxx xxx Bonus on initial investments
Share in
drawings profits An accounting problem exists when a partner’s capital account
account
is credited for an amount greater than the fair value of his
contributions.
The partner’s capital account is a real account and has a normal
credit balance. For instance, a partnership agreement may allow a certain
partner who is bringing in expertise or special skill to the
Juan dela Cruz, Drawings partnership to have a capital credit greater than the fair value of his
Temporary Recurring contributions. In such case, the additional credit to the partner’s
Xxx Xxx capital (i.e., the ‘bonus’) is accounted for as a deduction from the
withdrawals reimbursable
during period costs paid the capital of the other partners. This accounting method is called the
partner “bonus” method.
Temporary funds Xxx
held to be Although, the credit to the partner’s capital may vary due to a
remitted to the ‘bonus,’ the corresponding debit to the asset account must still be
partnership equal to the fair value of the contribution. The difference between
the amounts credited and debited is treated as adjustment to the
capital accounts of the other partners.
Variations to the bonus method Chapter 12

A partnership agreement may stipulate a certain ratio to be Partnership Operations

maintained by the partners representing their specific interests in
Division of profits and losses
the equity of the partnership. This stipulation may give rise to
adjustments to the initial contributions to partners. Since The partners share in partnership profits or losses in accordance
technically there is no “bonus” being given to a certain partner, any with their partnership agreement.
increase or decrease to the capital credit of a partner is not
deducted from his co-partners’ capital accounts. Instead, the capital If only the share of each partner in the profits has been agreed
adjustment is accounted for is either: upon, the share of each in the losses shall be in the same
proportion.
a. Cash settlement among the partners; or
b. Additional investment or withdrawal of investment of a In the absence of stipulation, the share of each partner in the
partner profits and losses shall be in proportion to what he may have
contributed, but the industrial partner shall not be liable for the
losses. As for the profits, the industrial partner shall receive such
share as may be just and equitable under the circumstances. If
besides his services he has contributed capital, he shall also receive
a share in the profits in proportion to his capital.

➢ An industrial partner is one who contributes services to the

partnership rather than cash or other non-cash assets.
➢ A capitalist partner is one who contributes cash or other
non-cash assets to the partnership.
➢ A partner that contributes both services and cash or other
non-cash asset is both a capitalist and an industrial partner.

The designation of losses and profits cannot be entrusted to one

of the partners. A stipulation that excludes one or more partners
from any share in the profits or losses is void.
 In addition to profit or loss sharing, the partnership agreement Chapter 13
may also stipulate any of the following:
Partnership Dissolution
a. Salaries
Dissolution
Normally, an industrial partner receives salary in addition to his
As mentioned earlier, one of the characteristics of a partnership
share in the partnership’s profits as compensation for his services to
is that it has a “limited life,” in the sense that the partnership
the partnership.
agreement can be easily dissolved.
b. Bonuses
Dissolution is the change in the relation of the partners caused by
The managing partner may be entitled to a bonus for excellent any partner being disassociated from the business.
management performance. Unlike or salaries, a partner is entitled
Dissolution is different from liquidation. Liquidation is the
to a bonus only if the partnership earns profit. The partner is not
termination of business operations or the winding up of affairs.
entitled to any bonus if the partnership incurs loss.
Partnership dissolution does not necessarily terminate the business.
c. Interest on capital contributions The business continues until the remaining partners decide to
liquidate the business. If the business is continued after dissolution,
The partnership agreement may stipulate that capitalist
new articles of partnership should be drawn up.
partners are entitled to an annual interest on their capital
contributions. The following are major considerations in the accounting for
partnership dissolutions:

a. Admission of a partner
The items above are normally provided first to the respective
b. Withdrawal, retirement or death of a partner
partners and any remaining amount of the profit or loss is shared
among the partners based on their stipulated profit or loss ratio.

The admission of a new partner or the withdrawal, retirement

or death of an existing partner dissolves the original partnership
agreement because it creates a change in the relation of the
partners (e.g., a change in the number of the partners in a
partnership).

It should be noted that the admission of a new partner requires

the consent of all existing partners.
Admission of Partner Investment in the partnership

The admission of a new partner may be affected either through: Instead of purchasing interest from the existing partners, a new
partner may be admitted by investing directly in the business.
a. Purchase of interest in the partnership, or
b. Investment in the partnership This transaction is a transaction between the new partner and
the partnership. As such, any consideration paid by the incoming
partner is recorded in the partnership books. However, because
Purchase of interest this a transaction with an owner, no gain or loss is recognized

A new partner may be admitted when he purchases part or all Two things may happen when a new partner invests in a
of the interest of one or more of the existing partners. partnership:

This transaction is a personal transaction between and among 1. The new partner’s capital account is credited at an amount
the partners. As such, any consideration paid or received is not equal to the fair value of his investment; or
recorded in the partnership books. The only entry to be made in 2. The new partner’s capital account is credited at an amount
the partnership books is a transfer within equity. A new capital greater than or less than the fair value of his investment.
account is established for the new partner and a corresponding
The second scenario is accounted for under the “bonus
decrease is made on the capital account(s) of the selling partner(s).
method” similar to what we have already discussed under
No gain or loss is recognized in the partnership books.
partnership formation. That is, any increase (or decrease) in the
capital of the new partner is a reduction (or addition) to the capital
of the existing partners. The corresponding debit to the asset
Revaluation of assets account must still be equal to the fair value of the contribution.
When a partnership is dissolved, but not liquidated, a new
partnership is created. The assets and liabilities carried over to the
new partnership are restated to fair values. The second scenario may occur, for example, when:

The adjustment to the assets and liabilities is allocated first to a. The credit to the new partner’s capital account is greater
the existing partners before recording the admission of the new than his contribution because he is bringing in expertise to
partner. the business.
b. The credit to the new partner’s capital account is less than
his contribution in order to compensate for the past efforts
of the existing partners in establishing the business.
 Purchase of interest Investment in the partnership Purchase by one or all of the remaining partners
The incoming partner’s The incoming partner’s One or all of the remaining partners may purchase the interest
contribution is not recorded in contribution is recorded in the of the retiring, withdrawing, or deceased partner. This is a
the partnership books partnership books
transaction between and among the partners (or deceased
Partnership capital remains Partnership capital is partner’s estate). As such, the settlement amount is not recorded in
the same before and after the increased by the incoming the partnership books the only entry to be made is a transfer within
admission of the incoming partner’s contribution
equity. However, the above-mentioned adjustments (i.e., shares in
partner
profits or losses and revaluation gains or losses) are recorded first
NO gain or loss is recognized No gain or loss is recognized
before the settlement.
in the partnership books in the partnership books

Under the “bonus method,” any decrease (or increase) in the Purchase by the partnership
capital of the new partner is treated as an addition (or deduction) to
the capital of the existing partner’s, allocated based on their old The partnership may purchase the interest of the retiring
profit or loss sharing ratio. withdrawing, or deceased partner. This is a transaction between the
retiring or withdrawing partner (or deceased partner’s estate) and
the partnership. As such, the settlement amount is recorded in the
Withdrawal, retirement or death of a partner partnership books, alongside any other necessary adjustments.

When a partner withdraws, retires or dies, his interest may be

purchased by (a) one or all of the remaining partners or (b) the Bonus method
partnership. In case of death, the deceased partner’s estate is
entitled to the value of the partner’s interest at the date of his When the retiring, withdrawing, or deceased partner’s interest
death. is settled at an amount greater than or less than the value of his
interest, the bonus method is used. Under the bonus method, any
The interest of the withdrawing, retiring, or deceased partner is excess (or deficiency) in the payment is accounted for as a
adjusted for the following: deduction (or addition) to the remaining partners’ capital accounts.
a. His share of any profit or loss during the period up to the
date of his withdrawal, retirement, or death; and
b. His share of any revaluation gains or losses as at the date
of his withdrawal, retirement, or death.
 Purchase by remaining Purchase by partnership Withdrawal, retirement or death of partner
partners
The payment to the outgoing The payment to the outgoing Purchase by remaining partners Purchase by partnership
partner is not recorded in the partner is recorded in the The transaction is recorded as a The transaction is recorded in
partnership books partnership books transfer within equity: the regular manner:
Partnership capital remains Partnership capital is
the same before and after the decreased by the payment for
withdrawal, retirement or the outgoing partner’s capital Outgoing partner’s capital (Dr) Outgoing partner’s capital (Dr)
death of the outgoing partner balance.
No gain or loss is recognized in No gain or loss is recognized in Purchasing partner’s capital (Cr) Payment made (Cr)
the partnership books the partnership books

Incorporate of a partnership

Another instance that causes partnership. When a partnership is

converted into a corporation, the partners’ relation changes – they
cease to be partners (i.e., agents of the business) and become
stockholders.

Admission of a partner: Journal entries

Purchase of interest Investment in the partnership

The transaction is recorded as The transaction is recorded in
a transfer within equity: the regular manner:

Selling partner’s capital (Dr) Asset invested (Dr)

Incoming partner’s capital (Cr) Incoming partner’s capital (Cr)

 Chapter 14 solvent general partners are required to provide
PARTNERSHIP LIQUIDATION additional funds from their personal assets.
The claims to the personall assets of a partner
Liquidation- is the termination of business are ranked in the ff order:
operations or the winding up of affairs. A. Personal creditors
- a process by which B. Partnership creditors
1. Assets are converted into cash, C. Partners
2. Liabilities are settles, 3. Third, in case some partners are insolvent, their
3. Any remaining amount is distributed to owners capital deficiency is offset to the capital balances
of other partners. If after allocating the capital
Liquidation may either be: deficiency of an insolvent partner, a solvent
>Voluntary - per agreement of partners of a partner’s capital balance becomes negative
solvent partnership amount, the solvent partner is required to provide
>Involuntary - bankruptcy additional contribution.
Realization- the conversion of assets into cash
Liquidation - settlement of claims of creditors and The computations presented for installment
owners liquidation may be presented in formal manner
through either:
Methods of Liquidation 1. Safe payments schedule, or
1. Lump-sum Liquidation - all of the non cash 2. Cash priority program
assets of the partnership are sold simultaneously *its basic purpose is to prevent overpaymentys
or within a very short period of time. to partners during installment liquidation.
-is possible when there is a contracted buyer
of all the non-cash assets of the partnership Safe Payment Schedule- shows how much cash
-the assets are sold on a “package deal” basis. can be “safely” paid to the partners during
2. Installment Liquidation - it would take some installment liquidation, which avoids any
time before all the assets of a business are overpayment.
converted into cash.
-partner’s claims are settled on an installment The preparation of this schedule requires
basis application of the same concepts as those we have
applied earlier, namely:
Settlement of Claims following this order of a. Unsold non-cash assets are treated as loss;
priority: and
1. Outside Creditors b. Expected future liquidation costs and potential
2. Inside Creditors unrecorded liabilities are recognized immediately
3. Owner’s Capital Balances as losses.
Maximum Loss Possible- the sum of a and b above.
Statement of Liquidation- a financial report that
highlights the realization and the liquidation of a Cash Priority Program- determines which partner
partnership. should be paid first and which partner should be
-a formal report prepared on a liquidation paid last, after all the liabilities are settles. This
schedule can be prepared even prior to the sale of
Marshalling of Assets any asset.
The legal doctrine of marshalling of assets is
applied when the partnership and some of the The preparation of this schedule requires the
partners are insolvent. application of the same concepts as those we have
The following are the rules when applying this applied earlier, namely:
doctrine: A. Unsold non-cash assets are treated as loss;
1. First, any available assets of the partnership are and
used to settle the partnership’s liablities. B. Expected future liquidation costs and potential
2. Second, in case the assets of the partnership are unrecorded liabilities are recognized immediately
insuffecient to pay all liabilities (Insolvency), the as losses.
Maximum Loss Absorption Capacity- basis for the
rank on who would be paid first.
The partner with highest MLAC shall be paid
first. The partner with the lowest MLAC shall be
paid last.
The maximum loss absorption capacity is
computed as follows:
MLAC= Total partner’s interest in the partnership ÷
Partner’s P/L Percentage

Cash Priority Program is prepared as follows:

>First, the MLAC of the partners are determined.
This will be the basis in ranking the partners
according to their priority over cash payments.

>Second, the partners’ MLAC are equalized. This

will be the basis in preparing the cash priority
program.
>Third, the cash priorities are computed by
multiplying the differences above by the respective
partners’ P/L ratio.
 CHAPTER 15- ACCOUNTING FOR 1. Memorandum method- only a
CORPORATIONS memorandum is made for the authorized
capitalization. Subsequent issuance of
Intro: As said before, the accounting for assets and shares are credited to the share capital
liabilities remains the same regardless of the form account.
of a business organization- what changes is the 2. Journal entry method- the authorized
accounting for equity. capitalization is recorded by crediting
 Corporation- an artificial being created by “authorized share capital” and debiting
operation of law, having the right of succession and “unissued share capital.”
the powers, attributes and properties expressly The difference between the two represents
authorized by law or incident to its existence. the issued share capital.
- A separate legal entity distinguished from
its owners. The more commonly used method in practice
- Right to succession: it continues to exist is the memo. Method.
notwithstanding the withdrawal, death,  Unissued share capital- represents the portion of
insolvency or incapacity of the individual the authorized share capital not yet issued is still
owners and only dissolved again through an available for subscription and issuance.
operation of law.  Subscription- a contract between the purchaser of
Organization of a Corporation shares (ex. Investor) and the issuer (ex.
Corporation) in which the purchaser promises to
 Formed at leasdt 5 but not exceeding 15 buy shares of the issuing company’s stocks.
natural person, all of legal age and a  Subscription receivable- represents the unpaid
majority of whom are residents of the portion of the subscription price.
Philippines.  Subscription share capital- represents the portion
 Articles of incorporation must be of the authorized share capital that is subscribed
authorized by SEC. but not yet issued.
 Authorized capital stock- the maximum number of  Share capital- represents the portion of the
shares that the corporation can issue. Excess shares authorized share capital that is already issued.
issued is deemed illegal.  Share certificate- is a document that evidences the
 To amend there must be a majority vote of ownership of a share.
the board plus a vote by shareholders
representing at least 2/3 of the *Read notes p. 540
outstanding share capital.
 At least 25% of the corporation’s Classes of Share capital
authorized capitalization must be 1. Ordinary share capital (Common stock)-
subscribed and 25% of the total represent the residual corporate interest that
subscription must be paid upon bears the ultimate risk of loss and receive the
subscription. Cannot be less P5000. benefits of success. Not guaranteed of
dividends or any assets upon dissolution but
 Shareholder’s equity- the residual interests in the generally control the mgt. of corporation and
assets of a corporation after deducting all its tend to profit the most if it’s successful.
liabilities. Equivalent to the “Owner’s equity.” 2. Preference share capital (Preferred stock)-
Accounting for Share capital shares that give holders thereof certain
preferences over other shareholders.
 Four basic rights of ordinary shareolders: a. For par value shares, legal capital is the
aggregate par value of shares issued and
1. Right to attend and vote in shareholder’s
subscribed.
meetings
b. For no-par value shares, legal capital is the
2. Right to purchase additional shares
total consideration received or receivable
(preemptive rights)
from share issued or subscribed/ the
3. Right to share in corporate profit (right to
subscription price inclusive of any amount
dividends)
in excess of stated value.
4. Right to share in the net assets of the
corporation upon liquidation *Notes:
-In case of n-par value shares, legal capital includes
the share premium of ordinary shares.
Share premium arises from the ff:
-Preference shares can only be issued as par value
1. Excess of subscription price over par value
shares. Thus, the share premium of the preference
or stated value
shares is not included.
2. Excess of reissuance price over cost of
treasury cost of treasury shares issued.  Treasury shares (treasury stocks) – are an entity’s
3. Distribution of “small“ stock dividends. own shares that were previously issued but are
subsequently reacquired but not retired. Under the
*Note:
Corporation Code, an entity may reacquire its
-Share capital and subscribed share capital are previously issued shares only if it has sufficient,
credited at par value regardless of the subscription unrestricted retained earnings.
price
Accounted for using the cost method: The
-Share premium is credited at the subscription date reacquisition and subsequent reissuance of
even for subscriptions that are not yet paid; treasury shares are recorded at cost.
provided that it is probable that the total
Presented as deduction in the shareholders’ equity
subscription price will be collected.
 Retained earnings- represent the cumulative
 Par value share- one with a peso value fixed in the
profits that are retained in the business and not yet
articles of incorporation. It appears on each share
distributed o the shareholders. May consist of:
certificate issued
a. Unrestricted- portion of retained earnings that is
 No-par value share- one without a peso value fixed
available for future distribution to the shareholders
in the articles of incorporation. It has a stated value
b. Appropriated (Restricted)- not available for
(issued value) which is also indicated in the articles
distribution unless the restriction is subsequently
but not on the share certificate issued.
reversed.
 Legal capital- portion that cannot be distributed to
the owners during the lifetime of the corporation  Donated capital- arises from gifts received by the
unless the corporation is dissolved and all of its corporation from nonreciprocal transactions. May
liabilities are settled first. arise from the ff:
 Trust fund doctrine- where the legal capital is a. Donations from shareholders- credited to
based. States that the share capital of a share premium.
corporation is a trust fund held for the protection b. Donations from the government – these are
of its creditors. recognized as government grants
Legal capital is computed as follows: c. Donations from other sources- recognized
as income.
Donations may be in the form:
a. Cash
b. Noncash assets
c. Entity’s own shares

Pro-forma entries for treasury share transactions:

a. Acquisition of treasury shares:
Treasury shares (at cost) xx
Cost
xx
____________________________________
b. Reissuance of treasury shares at above cost
Cash xx
Treasury shares (at cost)
xx
Share premium- TS
xx
____________________________________
c. Reissuance of treasury shares below cost
Cash xx
(1) Share premium- TS xx
(2) Retained earnings xx
Treasury shares (at cost)
xx
Pro- forma entries for retirement of shares:
a. Retirement at below original issuance
Share capital (at par or stated value)
xx
Share premium- original issuance
xx
Treasury shares (at cost)/Cash
xx
Share premium- retirement
xx
____________________________________
b. Retirement at above original issuance price
Share capital (at par or stated value)
xx
Share premium- original issuance
xx
(1) Share premium- TS
xx
(2) Retained earnings
xx
Treasury shares (at cost)/ Cash
xx
 Chapter 16 – Accounting for Dividends (OS=Issued shares + Subscribed shares - Treasury
 Retained Earnings – where profits or losses and Shares)
distributions to owners of the corporation are Accounting for share dividends (accounted as
recorded follows)
- Represent the a. “Small” – if share dividends declared is less than
cumulative profits that are retained in the 20% of the outstanding shares (accounted at FV)
business and not yet distributed to the * difference of Par value and FV is credited to
shareholders share premium
Retained earnings may consist of: b. “Large” – share dividends declared is 20% or
 Unrestricted – portion of retained earnings more of the outstanding shares (accounted at par
available for future distribution to the value)
shareholders *Retained earnings – debit on declaration date
 Appropriated (Restricted) – portion that is not **Account titles (declaration date): Retained earnings,
available for distribution unless the restriction is share premium (for “small”), and stock dividends payable
subsequently reversed (does not mean that cash **Account titles (distribution date): Share dividends
fund has been set aside) payable and share capital
*When retained earnings account has a negative balance, Treasury shares declared as dividends
it is described in the FS as deficit. - “small” or “large” share dividends DO NOT
*When total shareholders equity has a negative balance, it APPLY
is described in the FS as capital deficiency - Cost method is used (Retained earnings is debited
(Liablities>Assets). for the cost of treasury shares declared)

Dividends-distributions to shareholders Preference shares have one or both of the following

1. Cash Dividends – in the form of cash preferences over ordinary shares:
2. Property Dividends – in the form of noncash 1. Preference in the distribution of assets in case of
assets (not included pa ni siya kay buotan si Millan corporate liquidation (preferred to as assets)
😊) 2. Preference in the distribution of dividends
3. Share Dividends – in the form of entity’s own (preferred to as dividends)
shares
Preference over Assets
Dates relevant to the accounting for dividends  Upon corporate liquidation and after
a. Date of declaration – date when the board of creditors’ claims are settled, preference
directors formally announces the distribution of shares preferred to as assets are settled first
dividends and any remaining amount is paid to the
b. Date of record – date on which the stock and ordinary shareholders
transfer book of the corporation is closed for  If preference shares are NOT referred to as
registration (closing). Only those who are listed as of assets, the remaining amount after
this date are entitled to receive dividends settlement of liabilities is shared
c. Date of distribution – date when dividends proportionately by the preference and
declared are distributed to shareholders ordinary shareholders
 Preference shares preferred to as assets are
***NOTE:EXAMPLES ON LAST PAGE*** normally entitled to a liquidation value
Accounting for cash dividends (amount that preference shareholders are entitled
- Most common form of distribution to owners to receive in case of corporate liquidation; usually
- May be declared as certain amount per share or more than par value)
percentage of the par value of shares  If net assets after settlement of creditors’
- Only outstanding shares are entitled to claims are insufficient to pay the liquidation
dividends . value, the preference shares will be entitled
 only to the remaining net assets. None wll be Liquidating dividends
paid to ordinary shareholders but are also NOT -dividends declared out of capital rather than from
obliged to provide additional capitallimited retained earnings
liability - declared upon corporate liquidation
Preference over Dividends - dividends declared in excess of the balance of
When dividends are declared, preference shares that unrestricted retained earnings are considered
are “preferred to as dividends” are paid first before liquidating dividends.
ordinary shareholders. Liquidating dividends are charged to the capital
Types: liquidated account which is the deduction from
1. Noncumulative – dividend entitlement for a year shareholders’ equity
is forfeited when dividends are NOT DECLARED in Wasting asset doctrine – permits wasting asset
that year corporations to declare dividends out of capital during
2. Cumulative – dividend entitlement accumulates their existence
each year until paid. Accumulated unpaid
dividends are disclosed in dividends in arrears but Share Split
not accrued as liability unless the dividends are Forms:
declared 1. Split up or share split
3. Nonparticipating – entitled only to a fixed 2. Split down or reverse share split
amount of dividends Split up – occurs when old shares are cancelled and
4. Participating – entitled to a amount in excess of replaced by a larger number of new shares but with
the fixed amount of dividends a reduced par value per share
*Amount of participation is computed after both the Split down – opposite of split up whereby old shares
preference and ordinary shares are allocated with are cancelled and replaced by a smaller number of
their basic dividends. Any excess of the dividends new shares but with an increased par value per share
declared after deducting the basic dividends is the ***Share splits affect only the number of outstanding
amount subject to participation which is allocated shares are par value per share and are also recorded
depending on the nature of participation of the through memo entry
preference shares
Types of Participating preferences shares:
a. Fully Participating – participates on a pro rata
basis (based on aggregate par values of outstanding
shares) with ordinary shareholders
b. Partially Participating – participates only up to
certain amount/percentage
--- preference shares may have more than one dividend
preference (ex. Cumulative and Participating)
Dividend entitlement of preference shares:
a. Percentage of par value – fixed rate based on par
value
b. Specific monetary amount per share
***In the absence of evidence to the contrary,
preference shares are assumed to be “preferred as to
dividends” with preference of “noncumulative and
nonparticipating”
 20x1
Share premium 22,000
September 21,
no entry
20x1
September 30, Stock dividends payable 55,000
Example See Problem 220x1
Page 585 Share capital 55,000

Case 3: "Large" Share Dividends (#3)

Problem 2
Case 1: Cash Dividends (#1) Shares issued (1M/P10 par) 100,000 Outstanding shares 110,000
Subscribed issues (200k/P10 par) 20,000 Multiply by: Dividends declared 1/4
Shares issued (1M/P10 par) 100,000 Outstanding shares 110,000 Treasury shares (150k/P15 cost) (10,000) Numbe r of share s de clare d as divide nds 27,500
Subscribed issues (200k/P10 par) 20,000 Multiply by: Dividends per share ₱ 2.00 Outstanding shares 110,000 Multiply by: Par value per share ₱ 10.00
Treasury shares (150k/P15 cost) (10,000) Total cash dividends 220,000 Total cash dividends 275,000
Outstanding shares 110,000

September 15, Retained earnings 220,000

September 15, Retained earnings 275,000
20x1 Cash dividends payable 220,000
20x1 Stock dividends payable 275,000
September 21,
no entry September 21,
20x1 no entry
20x1
September 30, Cash dividends payable 220,000
September 30, Stock dividends payable 275,000
20x1 Cash 220,000
20x1 Share capital 275,000
Case 2: "Small" Share Dividends (#2)
Case 4: Treasury Shares shared as Share Dividends (#4)
Shares issued (1M/P10 par) 100,000 Outstanding shares 110,000
Subscribed issues (200k/P10 par) 20,000 Multiply by: Dividends declared 1/20 Shares issued (1M/P10 par) 100,000 Outstanding shares 110,000
Subscribed issues (200k/P10 par) 20,000 Multiply by: Dividends declared 1/20
Treasury shares (150k/P15 cost) (10,000) Numbe r of share s de clare d as divide nds 5,500
Treasury shares (150k/P15 cost) (10,000) Numbe r of share s de clare d as divide nds 5,500
Outstanding shares 110,000 Multiply by: Fair value per share ₱ 14.00
Outstanding shares 110,000 Multiply by: Cost per treasury share ₱ 15.00
Total cash dividends 77,000
Total cash dividends 82,500
Case 1: Noncumulative and Nonparticipating (#5)
Retained earnings 77,000 Total dividends
September 15, declared
Retained earnings 82,500 600,000
September 15, 20x1 Stock dividends payable 82,500
Stock dividends payable 55,000 Allocation:
20x1 September 21,
Share premium 22,000 no entry
September 21, 1)20x1
Allocation to preference shares (500kx10%) 50,000
no entry September 30, Stock dividends payable 82,500
20x1
2)20x1
Excess allocated
Treasury to ordinary shares (600k-50k)
shares 550,000
82,500
September 30, Stock dividends payable 55,000 September 30, Retained earnings-appropriated 82,500
20x1 Share capital 55,000 As allocated Retained earnings-unrestricted
20x1 82,500 -

Case 3: "Large" Share Dividends (#3)

Case 1: Noncumulative and Nonparticipating (#5) Case 2: Cumulative and Nonparticipating (#6)
Shares issued (1M/P10 par) 100,000 Outstanding shares 110,000
Total dividends declared
Subscribed issues (200k/P10 par) 20,000 Multiply by: Dividends declared
600,000 1/4
Total dividends declared 600,000
Allocation:
Treasury shares (150k/P15 cost) (10,000) Numbe r of share s de clare d as divide nds 27,500 Allocation:
Outstanding shares 110,000 Multiply by: Par value per share ₱ 10.00
1) Allocation to preference shares (500kx10%)
Total cash dividends
50,000 275,000 1) Allocation to preference shares (500kx10%x3 yrs) 150,000
2) Excess allocated to ordinary shares (600k-50k) 550,000 2) Excess allocated to ordinary shares (600k-150k) 450,000
AsSeptember
allocated
15, Retained earnings 275,000
- As allocated -
20x1 Stock dividends payable 275,000
September 21,
no entry
Case20x1
2: Cumulative and Nonparticipating (#6)
September 30, Stock dividends payable 275,000
Total dividends declared 600,000
20x1 Share capital 275,000
Allocation:
Case 4: Treasury Shares shared as Share Dividends (#4)
Case 3: Noncumulative and Fully Participating (#7)
Total dividends declared 600,000 Preference shares: (50,000 Basic + 150,000 Participation) 200,000
Allocation: Ordinary Shares: (100,000 Basic + 300,000 Participation) 400,000
1) Basic allocation to preference shares (500kx10%) 50,000 Total Dividends 600,000
2) Basic allocation to ordinary shares (1Mx10%) 100,000
Excess subject to participation 450,000
3) Participation of preference shares (450kx500k/1.5M) 150,000
3) Participation of ordinary shares (450kx1M/1.5M) 300,000
As allocated -
Case 4: Cumulative and Fully Participating (#8)
Total dividends declared 600,000.00 Preference shares: (150,000 Basic + 116,666.67 Participation) 266,666.67
Allocation: Ordinary Shares: (100,000 Basic + 233,333.33 Participation) 333,333.33
1) Basic allocation to preference shares (500kx10%x3yrs) 150,000.00 Total Dividends 600,000.00
2) Basic allocation to ordinary shares (1Mx10%) 100,000.00
Excess subject to participation 350,000.00
3) Participation of preference shares (450kx500k/1.5M) 116,666.67
3) Participation of ordinary shares (450kx1M/1.5M) 233,333.33
As allocated -
Case 5: Cumulative and Participating up to 18% (#9)
Total dividends declared 600,000 Preference shares: (150,000 Basic + 40,000 Participation) 190,000.00
Allocation: Ordinary Shares: (100,000 Basic + 310,000 Participation) 410,000.00
1) Basic allocation to preference shares (500kx10%x3yrs) 150,000 Total Dividends 600,000.00
2) Basic allocation to ordinary shares (1Mx10%) 100,000
Excess subject to participation 350,000
3) Participation of preference shares [(18%-10%)xP500k] 40,000
3) Excess allocated to ordinary shares (350k-40k) 310,000
As allocated -
More than one class of preference shares (10%)
Total dividends declared 1,200,000.00 10% PS Participation: (150,000 Basic + 252,222.22 Participation) 402,222.22
Allocation: 14% PS Participation: (42,000 Basic + 151,333.33 Participation) 193,333.33
1) Basic allocation to 10% PS cumulative (500kx10%x3yrs) 150,000.00 Ordinary Shares: (100,000 Basic + 504,444.44 Participation) 604,444.45
2) Basic allocation to 14% PS noncumulative(300kx14%) 42,000.00 Total Dividends 1,200,000.00
3) Basic allocation to ordinary shares (1Mx10%) 100,000.00
Excess subject to participation 908,000.00
4) Participation of 10% PS (308kx500k/1.8M) 252,222.22
4) Participation of 14% PS (308kx300k/1.8M) 151,333.33
4) Participation of ordinary shares (308kx1M/1.8M) 504,444.45
As allocated -

Liquidating Dividends (#11) only date of declaration

Capital liquidated 375,000
December 31, 20x1 Retained earnings 125,000
Cash dividends payable 500,000