Reviewer For Far

CAGAYAN STATE UNIVERSITY- ANDREWS CAMPUS
BACHELOR OF SCIENCE IN BUSINESS ADMINISTRATION- FINANCIAL MANAGAMENT 1B

FUNDAMENTALS OF ACCOUNTING AND REPORTING
CHAPTER 1 Normally ends with the preparation of the

Introduction to Accounting trial balance.
 ACCOUNTING
 Accounting  Covers the whole process of identifying,
- Is a process of identifying, recording and recording, and communicating information
communicating economic information that to interested users.
is useful in making economic decisions.
FUNCTIONS OF ACCOUNTING
ELEMENTS OF THE DEFINITION OF ACCOUNTING o Accounting is often referred to as the
“language of business” because it is
1. IDENTIFYING fundamental to the communication of
 The accountant analyzes each business financial information.
transaction and identifies whether the
transaction is “accountable event” and 1. RECORDING
“non-accountable event”.  Is the process of putting into writing the
 Only “accountable events’’ are financial activities of the entire enterprise
chronologically.
recorded.
*JOURNALIZING- recording of transactions and
 ACCOUNTABLE EVENTS OR ECONOMIC events.
EVENTS - are those that affect the
assets, liabilities, equity, income or 2. CLASSIFYING
expenses of a business.  The process of grouping into specific
 *Sociological and physiological matters classifications similar or alike transactions
are outside the scope of accounting. *POSTING- classifying of financial activities into
specific account classifications.
2. RECORDING
3. SUMMARIZING
 The accountant recognizes the
 The process of preparing financial reports
identified “accountable events”. This
(financial statement) from the recorded
process is called “journalizing”. and classified transactions and events of
 Classifies the effect of the event on the the enterprise.
accounts is called posting.
4. INTERPRETING
3. COMMUNICATING  The process that supplies answers to
 Summarizes the information processed questions about the profitability, stability,
in the accounting system in order to solvency, and liquidity of an enterprise.
produce meaningful reports.
USERS OF ACCOUNTING INFORMATION
 It is important because it is useless
unless it is communicated to interested 1. INTERNAL USERS
users.  Those who are directly involved in
managing the business.
NATURE OF ACCOUNTING a. Business owners who are directly involved
in managing the business
 Accounting is a process with the basic b. Board of directors
purpose of providing information about c. Managerial personnel
economic activities that is intended to d. Management group
be useful in making economic e. Managerial accounting
decisions.
2. EXTERNAL USERS
BOOKKEEPING AND ACCOUNTING  Those who are not directly involved in
managing the business.
 BOOKKEEPING a. Existing and potential investors (e.g
stockholders who are not directly
 Refers to the process of recording the
involved in managing the business)
accounts or transactions of an entity.
MIDTERMS
b. Lenders and creditors

c. Government Agencies 6. AUDITING
d. Non-managerial employees - Involves the inspection of an entity’s
e. Customers financial statements or business
f. Public processes to ascertain their
g. Financial accounting correspondence with an established
criteria.
BRIEF HISTORY OF ACCOUNTING the information needs of internal users.

 Double Entry records first came out
during 1340 A.D in Genoa
 In 1494, the first systematic record keeping
dealing with the “double entry recording
system” was formulated by Fra Luca Pacioli
 Fra Luca Pacioli- father of modern
accounting
COMMON BRANCHES OF ACCOUNTING
1. PUBLIC ACCOUNTING
- Involves reviewing a client’s financial
documents for accuracy and
completeness before the documents are
disclosed to the public.
2. PRIVATE ACCOUNTING
- Review their client’s internal business
documents and work with financial
managers to plan budgets and evaluate
fiscal performance
3. FINANCIAL ACCOUNTING
- A branch of accounting that focuses
on general purpose financial
statements.
 Financial Statements are the
structured representation of an entity’s
financial position and results of its
operations.
 A financial report includes the financial
statements plus other information
provided outside the financial statements
 Financial reporting is the provision of
financial information about an entity that is
useful to external users.
4.MANAGEMENT ACCOUNTING
- Involves the accumulation and
communication of information for use by
internal users.
 Financial Accounting focuses on the
information needs of external
users.
 Management Accounting focuses on
MIDTERMS
7. TAX ACCOUNTING
- Is the preparation of tax BUSINESS is an activity where goods or services are
returns and rendering of tax exchanged for money.
advice.
1. SOLE OR SINGLE PROPRIETORSHIP
8. COST ACCOUNTING - A business that is owned by only on
- Is the systematic recording and individual.
analysis of the costs of materials, - Sole proprietor
labor, and overhead incident to the - DTI
production of goods or rendering
of services. 2. PARTNERSHIP
- Is a business that is owned by two or
9. ACCOUNTING EDUCATION more individuals who entered into a
- Refers to teaching accounting and contract.
accounting-related subjects in an - Partners
organized learning environment. - SEC
10. ACCOUNTING RESEARCH 3. CORPORATION

- Pertains to the careful analysis of - Also owned by more than one individual
economic events and other - Created by operation of law rather than a
variables to understand their contract
impact on decisions. - Represented by shares of stocks
- Stockholders or shareholders
FORMS OF BUSINESS ORGANIZATIONS - SEC
5. GOVERNMENT ACCOUNTING 4. COOPERATIVE

- Refers to the accounting for the government - Owned by more than one individual
MIDTERMS
- Formed in accordance with the provisions - Assets, liabilities, equity, income, and
of The Philippine Cooperative Code of expense are stated in terms of a
2008 common unit of measure.
- Members  TIME PERIOD
- Life of the business is divided into series of
TYPES OF BUSINESS ACCORDING TO ACTIVITIES reporting periods.
o REPORTING PERIOD (ACCOUNTING
1. SERVICE BUSINESS PERIOD)
- One that offers services as its main - Divided into series of equal short periods.
product rather than physical goods. A. CALENDAR YEAR PERIOD
- E.g schools, hospitals, clinics, banks, - Starts in January 1 and ends on December
hotels, restaurants, etc. 31 of the same year.
B. FISCAL YEAR
2. MERCHANDISING BUSINESS - Covers 12 months but starts on a date
- Trading business other than January 1.
- One that buys and sells goods without C. INTERIM PERIOD
changing their physical form - Shorter than 12 months
- E.g general merchandise resellers,
distributors, dealers
III.PERVASIVE
3. MANUFACTURING BUSINESS
- One that buys raw materials and process  MATERIALITY CONCEPT
them into final products. - Guides the accountant when applying
- Changes the physical form of the goods accounting principles.
it has purchased in a production process - Accounting principles are applicable only
- E.g car manufacturers, to material items.
technology companies, factories  COST-BENEFIT (REASONABLE
ASSURANCE)
4. HYBRID BUSINESS - The costs of processing and
- Engage in more than one type of activity. communication information should not
exceed the benefits to be derived from the
CHAPTER 2 information’s use.
Accounting concepts and principles IV. OTHER
 ACCRUAL BASIS OF ACCOUNTING
ACCOUNTING POSTULATES(ASSUMPTIONS)
- Economic events are recorded in the period
- are set of logical ideas and procedures
in which they occur rather than at the point
that guide the accountant in recording and
in time when they affect cash.
communicating economic information
- fundamental concepts/ principles and
BASIC PRINCIPLES OF ACCOUNTING
basic notion that serve as the bedrock of
accounting
 MEASUREMENT
- Guidelines in the qualification of financial
I.UNDERLYING ASSUMPTION information
- Assets must be initially recorded at cost
 GOING CONCERN ASSUMPTION
- Provides for values in addition to the
- The business is assumed to continue to
historical cost that may be used in
exist for an indefinite period of time.
reporting for assets
II.IMPLICIT ASSUMPTIONS
 REVENUE RECOGNITION
 SEPARATE ENTITY (ENTITY CONCEPT) - This principle requires that revenues must
- The business is viewed as a separate be recognized or realized when earned
person, distinct from its owner(s).
 STABLE MONETARY UNIT  EXPENSES RECOGNITION-MATCHING
PRINCIPLE
MIDTERMS
- Some costs are initially recognized as assets 3. Elements (definition, recognition, and
and charged as expenses only when the measurement)
related revenue is recognized. 4. Concepts of capital and its maintenance
 FULL DISCLOSURE  Objective of general purpose financial
- Related to both the concepts of materiality reporting provide financial information
and cost-benefit that is useful in making decisions about
- Information communicated to users providing resources to the entity
reflect a series of judgement trade-offs
that strive for: QUALITATIVE CHARACTERISTICS OF USEFUL
a. Sufficient detail to disclose 2. Qualitative
FINANCIALcharacteristics
INFORMATION of useful
matters that make a difference to information
users
b. Sufficient condensation to
make the information
understandable, keeping in mind
the costs of preparing and using
it.
ACCOUNTING STANDARDS
 The Generally Accepted Accounting

Principles (GAAP) in the Philippines are
represented by the Philippine
Financial Reporting Standard (PFRS).
 The Philippine Financial Reporting
Standards (PFRS) are standards and
interpretations adopted by the Financial
Reporting Standard Council. Consists
of:
a. PFRS
b. Philippine Accounting Standard
c. Interpretations
10 CORE GAAP PRINCIPLES

1. Principle of Regularity
2. Principle of Consistency
3. Principle of Sincerity
4. Principle of Permanence
5. Principle of Non-compensation
6. Principle of Prudence
7. Principle of Continuity
8. Principle of Periodicity
9. Principle of Materiality
10. Principle of Good Faith
THE CONCEPTUAL FRAMEWORK FOR FINANCIAL

ACCOUNTING AND REPORTING
The conceptual framework sets out the concept

that underline the preparation and presentation of
financial statements for external users.
1. Objective of financial reporting
MIDTERMS
 QUALITATIVE CHARACTERISTICS
- Are the traits that determine
whether an item of information is
useful to users.
- These are the characteristics that  FUNDAMENTAL QUALITATIVE

make information useful to users. CHARACTERISTICS
o RELEVANCE
- Information is relevant if it can affect
the decisions of users
a. PREDICTIVE VALUE
- Information has a predictive value if it
can help users to make predictions
about future outcomes.
b. COMFIRMATORY VALUE
- Help users to confirm past predictions.
c. MATERIALITY
- “entity-specific” aspect of relevance
meaning it depends on the facts and
circumstances surrounding a specific
entity.
- if omitting it or misstating it could
influence the decisions of users.
o FAITHFUL PRESENTATION
- If it is factual, meaning it represents
the actual effects of events that have
taken place.
a. COMPLETENESS
- All information necessary for users to
have complete understanding of the
financial statements provided.
b. NEUTRALITY
- Information is selected or
presented without bias.
c. FREE FROM ERROR
- Not materially misstated
- They enhance the usefulness of information  ENHANCING QUALITATIVE

CHARACTERISTICS
MIDTERMS
a. COMPARABILITY  OBLIGATIONS
- Help users identify similarities - Means a duty or responsibility
b. VERIFIABILITY - Either a legal obligation or a constructive
- If different users could reach a obligation
general agreement as to what the a. LEGAL OBLIGATION
information intends to represent - Results from a contract legislation, or
c. TIMELINESS other operation of law
- If it is available to users in time to be able b. CONSTRUCTIVE OBLIGATION
to influence their decisions - Results from your past actions that have
d. UNDERSTANDABILITY created valid expectations from others
- Users are expected to have a reasonable  GIVING UP OF ECONOMIC RESOURCES
knowledge of business activities and a
- Settling the obligation necessarily would
willingness to analyze the information
require you to pay cash, to transfer other
diligently
non-cash assets, or to render a service.
 PRESENT OBLIGATION AS A RESULT OF
CHAPTER 3 PAST EVENTS
The Accounting Equation give up economic resources when settling them
 THE BASIC ACCOUNTING EQUATION

- All the process in an accounting system
must observe the equality of the
accounting equation
ASSETS= LIABILITIES + EQUITY
 ASSET
- Are the economic resources you control
that have resulted from past events and can
provide you with economic benefits.
 CONTROL
- Exclusive right to enjoy the economic
benefits and the ability to prevent
others from enjoying these benefits
 PAST EVENTS
- The control over an economic resource
have resulted from a past event or
transaction
 ECONOMIC BENEFITS
- To be an asset, the economic resource
must have the potential to provide you
with economic benefits in at least one
circumstance.
a. Sold, leased, transferred or exchange for
other assets
b. Used singly or in combination with other
assets to produce goods or provide
services
c. Used to enhance the value of other assets
d. Used to promote efficiency and cost savings
e. Used to settle a liability
 LIABILITIES
- Present obligations that have resulted
from past events and can require you to
MIDTERMS
a. You have already obtained economic
benefits or taken an action
b. As a consequence, you are
required to transfer an
economic resource.
 EQUITY
- Is simply assets minus liabilities.
Other terms for equity are
“capital”, “net asset”, and “net
worth”
ORIGINAL FORM:
A= L + E
VARIATION 1: E= A
- L VARIATION 2:
L= A – E
THE EXPANDED ACCOUNTING

EQUATION
ASSET=LIABILITIES+EQUITY+INCOME-
EXPENSES
Example 1:
If you have total liabilities of
1,500 and equity of 900, how much are
your total assets?
*1,500 + 900 = 2,400 (Total Assets)
Example 2:
If you have total assets of 2,400 and
liabilities of 1,500, how much is your total
equity?
*2,400 – 1,500 = 900 (Total Equity)
Example 3:
If you have total income of 6,000
and total expenses of 3,000, how much is
your profit (or loss)?
*6,000 – 3,000 = 3,000 (Profit)
Example 4:
If you have total income of 2,000
and total expenses of 7,000, how much is
your profit (loss)?
*2,000 – 7,000 = (5,000) (Loss)
MIDTERMS
Example 5: *52,000 + 25,100 – 24,500 = 52,600

If you have a total income of 5,000 and a (Don’t mind the income because is already given)
profit of 2,000, how much are your total
expenses for the period? CHAPTER 4
*Income – expenses = profit (loss) TYPES OF MAJOR ACCOUNTS
5,000 – expenses = 2,000
Expenses= 5,000 – 2,000 = 3,000 STATEMENT OF INCOME STATEMENT
FINANCIAL ACCOUNTS
Example 6: POSITIONING
You had total assets, liabilities, and equity of REAL/ PERMANENT NOMINAL/
12,000, 7,000, and 5,000, respectively, at the ACCOUNTS TEMPORARY
beginning of the period. During the period, your total ACCOUNTS
liabilities decreased BY 3,000, while your profit was Asset Income
1,000. How much are your ending total assets?
Liabilities Expenses
Equity
ASSETS LIABILITIES EQUITY
 STATEMENT OF FINANCIAL POSITION

Beginning 12,000 7,000 5,000 - Is a statement that gives the financial
condition of business as of a given
Changes (2,000) (3,000) +1,000 date
Ending 10,000 4,000 6,000 - Another name for balance sheet
- This is used by investors, creditors, and
Example 7: other statement users to evaluate liquidity,
You had total assets, liabilities, and equity of solvency, and the need for additional
12,000, 7,000, and 5,000, respectively, at the financing for the business
beginning of the period. During the period, your total
liabilities decreased TO 3,000, while your profit was 3 ELEMENTS OF SFP
1,000. How much are your ending total assets?
1. ASSETS
- Things owned by the business
ASSETS LIABILITIES EQUITY - Properties or rights on properties owned
by the business
- Assets are under the control and
Beginning Irrelevant Irrelevant 5,000 custodianship of the entity as a result of
past transaction which will generate
Changes Irrelevant +1,000
income for the entity.
Ending 9,000 3,000 6,000
2. LIABILITIES
Example 8: - Debts of the business
If you have total income of 125,000 and a - Debts to be paid by the business to its
loss of 21,250, how much are your total suppliers of products for sale, or supplies
expenses for the period? to be used
*125,000 + 21,250 = 146,250
3. EQUITY/ CAPITAL
Example 9: - Investment of the owner in the business
Liabilities = 52,000
Equity = 25,100  STATEMENT OF COMPREHENSIVE
Income = 129,000 INCOME
Loss= (24,500) - financial statement that presents the
success or failure of business operations
How much is the ending total assets? of a company for a given period, in terms
of profitability.
MIDTERMS
a) The chart of accounts of a bank should

ELEMENTS OF SCI conform to the chart of accounts
a. INCOME endorsed by the Bangko Sentral ng
- refers to the economic benefits that flow Pilipinas (BSP)
to the business in the form of increases in b) The chart of accounts of a cooperative
assets. It is also a reduction in liabilities should conform to the chart of accounts
resulting from business operations. endorsed by the Cooperative Development
b. EXPENSE Authority (CDA)
- pertains to a decrease in economic benefits c) The chart of accounts and the account
of the business due to reduction in assets numbering system of a national
or addition in liabilities resulting from the government agency must conform to the
business operations. Note: Other Revised Chart of Accounts (RCA) issued by
comprehensive income is added after the the Commission on Audit (COA)
two elements.
COMMON ACCOUNT TITLES
CHART OF ACCOUNTS  ASSETS

o Cash - includes money or its equivalent
 Chart of accounts that is readily available for unrestricted
- a list of all the accounts used by the use, e.g., cash on hand and cash in bank.
business – account numbers are assigned o Accounts receivable - receivables
to the accounts to facilitate recording, supported by oral or informal promises to
cross- referencing, and retrieval of pay.
information. o Allowance for bad debts — the aggregate
amount of estimated losses from
 The first digit in the 3-digit uncollectible accounts receivable. Another
numbering refers to the major types term is “allowance for doubtful accounts.”
of accounts: o Notes receivable — receivables supported
MAJOR TYPES OF by written or formal promises to pay in the
ASSIGNED NUMBER
ACCOUNTS form of promissory notes.
Asset 1 o Inventory — represents the goods that are
Liability 2 held for sale by a business. For a
Equity 3 manufacturing business, inventory also
Income 4 includes goods undergoing the process of
Expenses 5 production and raw materials that will be
consumed in the production process
 The second digit in the 3-digit numbering o Prepaid supplies — represents the cost of
refers to the account titles and the unused office and other supplies.
sequence on how they are listed in the o Prepaid rent — rent paid in advance.
chart of accounts. o Prepaid insurance - cost of insurance paid
in advance
 The third digit in the 3-digit numbering, o Land - the lot on which the building of
if not zero, signifies that the account is a the business has been constructed or a
contra account or an adjunct account to a vacant lot which is to be used as future
related account. plant site. Land is not depreciable.
o Building - the structure owned by a
 Note: To promote comparability, a business for use in its operations.
business shall use account titles that o Accumulated depreciation - building -
conform to the PFRS and industry the total amount of depreciation expenses
practices. Furthermore, regulated recognized since the building was acquired
businesses should have charts of and made available for use.
accounts and/or account numbering o Equipment-consists of various assets such
system that conform to relevant as:
regulations. a. Machineries and other factory equipment
MIDTERMS
b. Transportation equipment
MIDTERMS
c. Office equipment revenue.

d. Computer equipment
e. Furniture and fixtures
o Accumulated depreciation - equipment —
the total amount of depreciation expenses
recognized since the equipment was
acquired and made available for use.
 LIABILITIES
o Accounts payable — obligations supported
by oral or informal promises to pay by the
debtor.
o Notes payable — obligations supported
by written or formal promises to pay by
the debtor in the form of promissory notes.
o Interest payable – interest incurred but
not yet paid
o Salaries payable - salaries already
earned by employees but not yet paid by
the business.
o Utilities payable - utilities (e.g.,
electricity, water, telephone, internet,
cable TV, etc.) already used but not yet
paid.
o Unearned income — Items related to
income that were collected in advance
before they are earned.
 EQUITY
o Owner's capital (or Owner's equity) -
the residual amount after deducting
liabilities from assets.
o Owner's capital account is increased by
investments or contributions by the
owner and decreased by withdrawals or
distributions to the owner
o Owner's capital account is increased by
income or profit earned and decreased
by expenses or loss incurred
o Owner's drawings - temporary
withdrawals of the owner during the
period.
 INCOME
o Service fees — revenues earned from
rendering services
o Sales - revenues earned from the sale
of goods
o Interest income - revenues earned from
the issuance of interest-bearing
receivables.
o Gains — income earned from the sale of
assets (except inventory) or from
enhancements of assets or decreases in
liabilities that are not classified as
MIDTERMS
 EXPENSES
o Cost of sales (or Cost of goods
sold) — represents the value of
inventories that have been sold
during the accounting period.
o Freight-out — represents the sellers’ costs
of delivering goods to customers.
o Salaries expense - represents the
salaries earned by employees for the
services they have rendered during the
accounting period
o Rent expense - represents the rentals
that have been used up during the
accounting period.
o Utilities expense - represents the
cost of utilities that have been used
during the accounting period.
o Supplies expense- represents the
cost of supplies that have been used
during the period.
o Bad debt expense — the amount of
estimated losses from uncollectible
accounts receivable during the period.
Other term is “doubtful accounts
expense”.
o Depreciation expense - the portion of
the cost of a depreciable asset (e.g.,
building or equipment) that has been
allocated to the current accounting
period.
o Advertising expense —cost of
promotional or marketing activities
during the period.
o Insurance expense - represents the
cost of insurance pertaining to the
current accounting period.
o Taxes and licenses - represents the
cost of business and local taxes
required by the government for the
conduct of business
o Transportation and travel expenses
o Interest expense — represents the cost
of borrowing money. It is the price that
a lender charges a borrower for the use
of the lender's money. Other terms for
interest expense are finance costs and
borrowing costs.
o Miscellaneous expense - represents
various small expenditures which do
not warrant separate presentation.
o Losses — expenses which may or may
not arise from the ordinary course of
business activities.
MIDTERMS
CHAPTER 5 - Contains all the accounts appearing in the

Books of Accounts and Double-Entry System trial balance.
b. SUBSIDIARY LEDGER
THE BOOKS OF ACCOUNTS - Provides a breakdown of the balances of
controlling accounts
 JOURNAL *CONTROLLING ACCOUNT (or control account)
- Also called the “book of original entries” consists of a group of accounts with similar nature.
- The accounting record where *BALANCE OF THE CONTROLLING ACCOUNT is
business transactions are first shown in the general ledger
recorded. *BALANCES OF THE ACCOUNT that comprises the
*The recording process in the journal is called controlling account are shown in the SUBSIDIARY
JOURNALIZING. LEDGER.
TYPES OF JOURNALS FORMATS OF THE BOOKS OF ACCOUNTS

 SPECIAL JOURNAL
- Is used to record transactions of a  GENERAL JOURNAL
similar nature
- Simplify the recording process, thus
providing an efficient way of recording
and retrieving of information.
 COMMON EXAMPLES OF SPECIAL

JOURNALS
a. SALES JOURNAL – is used to record sales
on account
b. PURCHASES ACCOUNT – is used to
record purchases of inventory on account
c. CASH RECEIPTS JOURNAL- is used to
record all transactions involving receipts
of cash
d. CASH DISBURSEMENTS JOURNAL –
is used to record transactions
involving payment of cash
 GENERAL JOURNAL  SPECIAL JOURNAL

- All other transactions that cannot
be recorded in the special journals
are recorded in this journal.
- Examples of such transactions include
purchases of inventory in exchange for
notes payable, adjusting entries,
correcting entries, reversing entries, and
the like.
 LEDGER
- Systematic compilation of a group
of accounts
- Used to classify the effects of
business transactions on the accounts
- “Book of secondary entries” or the “book
of final entries”
*The process of recording in the ledger is
POSTING.
MIDTERMS
KINDS OF LEDGERS
a. GENERAL LEDGER
MIDTERMS
 GENERAL LEDGER &

SUBSIDIARY LEDGER
DOUBLE ENTRY SYSTEM
Double-entry system
 Under this system, each transaction is
recorded in two parts — debit and
credit. Ending balance of an account
 For each amount that is debited, there  Debits to a specific ASSET OR EXPENSE
must be a corresponding amount that is account should be greater than the credits
credited, and vice-versa. to that account.
Double-entry system  Credits to LIABILITY, EQUITY OR INCOME
 DEBIT(Dr.) simply refers to the left side of account should be greater than the debits
an account, while CREDIT(Cr.) refers to to that account.
the right side of an account.  The difference of the monetary totals of
debit and credit is called the ENDING
Concepts of Duality and Equilibrium BALANCE.
1. Concept of Duality- each transaction as  The minimum amount of ending balance of
having a two-fold effect on values. an account is ZERO.
2. Concept of Equilibrium- requires that Illustrations
each transaction is recorded in terms of Case #1: Asset Account
equal debits and credits. At the beginning of the period, you have a cash
Normal balances of accounts balance of P5,000. During the period, you had total
- on the side where an increase in that account cash collections amounting to P12,000 and made
is recorded. total cash payments of 6,000.
CASH
DEBIT CREDIT
BEGINNING BAL.
5,000
CASH COLLECTION 6,000 CASH
Rules of Debits and Credits
12,000 PAYMENTS
 To debit an account with a normal debit
balance means to increase that account. ENDING BALANCE
To credit it means to decrease it. 11,000
 To credit an account with a normal
credit balance means to increase that
account. To debit it means to decrease it. Illustrations
Case #2: Liability Account
At the beginning of the period, you have a note
payable of P1,500. During the period, you obtained
an additional loan amounting to P700 and made
total payments of P600.
MIDTERMS
NOTES PAYABLE Accounts Receivable,

60,000
net
DEBIT CREDIT
Example 2: 1,500 BEGINNING BAL.

You have a building with a historical cost of 1,200,000 and an accumulated depreciation of P400,000. How
LOAN 700 ADDITIONAL LOAN
much is the carrying amount of your building?
PAYMENTS
600
1,600 ENDING BALANCE SOLUTION:
CONTRA ACCOUNTS AND ADJUNCT ACCOUNT
A. Contra accounts - presented in the Building 1,200,000

financial statements as DEDUCTION to
their related accounts. Accumulated depreciation-Building (400,000)
B. Adjunct accounts - presented in the
financial statements as ADDITION to Building, net 800,000
their related accounts.
CHAPTER 6
Business Transactions and Their Analysis
Examples of account with contra account
THE ACCOUNTING CYCLE
- represents the steps or procedures used
to record transactions and prepare
financial statements
- implements the accounting processes of
identifying, recording, and
communicating economic information
STEPS IN THE ACCOUNTING CYCLE

1. Identifying and analyzing - gather
information from source documents and
 The SUM of the balances of an account and determine the effect of the transactions on
its related contra or adjunct account is the accounts.
called the “NET CARRYING AMOUNT” 2. Journalizing - identified accountable
(simply the ‘carrying amount’) of that events are recorded in the journals
account. 3. Posting - information from the journal are
transferred to the ledger.
Example 1: 4. Preparing the unadjusted trial balance -
Your accounts receivable has a balance of balances of the general ledger accounts are
P100,000, while the related allowance for bad proved as to the equality of debits and
debts account has a balance of P40,000. How much credits
is the carrying amount of your accounts 5. Preparing the adjusting entries – accounts
receivable? are updated as of the reporting date
SOLUTION: 6. Preparing the adjusted trial balance - equality
of debits and credits are rechecked after
adjustments are made.
Accounts Receivable 100,000
7. Preparing the financial statements –
information processed is communicated to
Allowance for Bad users
(40,000)
Debts
MIDTERMS
8. Closing the books - journalizing and business sends to its customer listing the
posting closing entries and ruling
the ledger.
9. Preparing the post-closing trial balance -
equality of debits and credits are again
rechecked after the closing process.
10. Recording of reversing entries - usually
made at the beginning of the next
accounting period to simplify the recording
of certain transactions in that period.
IDENTIFYING AND ANALYZING TRANSACTIONS

AND EVENTS
- involves IDENTIFYING a business
transaction and ANALYZING whether or
not the transaction affects the assets,
liability, equity, income or expenses of
the business.
- transaction that has an effect on the
accounts is an “ACCOUNTABLE
EVENT”
- a transaction that has no effect on the
accounts is a “NON-ACCOUNTABLE
EVENT”
- Transactions are normally identified from
“SOURCE DOCUMENTS”
• SOURCE DOCUMENTS
- written evidences containing
information about transactions.
EXAMPLES OF SOURCE DOCUMENTS

• Sales invoice – used for the sale of goods
• Official receipts - used for the
rendering of services.
 Purchase order - issued by a buyer to a
seller indicating the types, quantities and
agreed prices for products or services
that the buyer intends to purchase.
• Delivery receipt - document signed by the
receiver of a shipment acknowledging the
receipt of goods.
• Bank deposit slip - evidences a deposit to
a bank account.
• Bank statement - report issued by the
bank that shows the deposits and
withdrawals during the period and
cumulative balance of a depositor's
bank account.
• Check - an instrument that orders a bank
(drawee) to pay the person named on
the check or the bearer thereof (payee) a
definite amount of money from the drawer’s
bank account.
• Statement of Account – a report a
MIDTERMS
transactions with the customer
during a period
TYPES OF EVENTS
A. EXTERNAL EVENTS –
transactions that involve the
business and another external
party
B. INTERNAL EVENTS – do not
involve external parties
• JOURNALIZING
- record the accountable event in the
journal by means of a journal
entry.
- A journal entry has the following format:
• PARTS OF A JOURNAL ENTRY

 Date - journal entries are
recorded in the journal
chronologically
 Account titles and amounts to be
debited and credited - each
transaction is recorded the journal
in two parts ~ debit and credit.
 Short description the of the
transaction - short description of
the transaction is provided for future
reference.
• JOURNALIZING
 Simple journal entry – contains a single
debit and single credit element.
 Compound journal entry - one that contains
two or more debits or credits.
CHAPTER 7
 POSTING Posting the Ledger
- Third step in the accounting cycle
- The process of transferring data
from the journal to the
appropriate accounts in the
ledger.
- The PURPOSE OF POSTING is to
classify the effects of transactions
on specific asset, liability, equity,
income, and expense accounts in
order to provide more meaningful
information.
PREPARING THE UNADJUSTED TRIAL BALANCE
 TRIAL BALANCE
- is a list of general ledger accounts
and their business
- to check the equality of total
debits and credits
MIDTERMS
TYPES OF TRIAL BALANCE

a. UNADJUSTED TRIAL BALANCE – this is
prepared before adjusting entries are
made
b. ADJUSTED TRIAL BALANCE – this is
prepared after adjusting entries but before
the financial statements are prepared
c. POST-CLOSING TRIAL BALANCE- this is
prepared after the closing process.
ERRORS REVEALED BY A TRIAL BALANCE

a. Journalizing or posting one-half of an entry
b. Recording one part of an entry for a
different amount than the other
part
c. Transplacement error on one side of an
entry.
d. Transposition error on one side of an entry *source: google (for reference only)
 Transplacement error (sliding error)  The unadjusted trial balance is simply a list
is committed when the number of of the ending balances of accounts in the
digits in an amount is incorrectly general ledger.
increased or decreased  The heading of the trial balance consists of:
 Transposition error is committed a. Name of the business
when digits in an amount are b. Title of the report
interchanged c. Date of the report
 Account titles are listed in the unadjusted
ERRORS NOT REVEALED BY A TRIAL BALANCE trial balance in the following order:
a. Omitting entirely the entry for a transaction a. Asset
b. Journalizing or posting an entry twice b. Liabilities
c. Using a wrong account with the same c. Equity
normal balance as the correct d. Income
account e. Expense
d. Wrong computation with same erroneous  Recall again the normal balances
amount posted to both the debit and credit of accounts:
sides  Assets and Expenses = DEBIT
 Liabilities, Equity, Income = CREDIT
 The purpose of preparing a trial
balance is to determine whether the
total debits and total credits in the
ledger are equal.
 If total debits and total credits are

not equal, an error surely exists.
 However, if total debits and total
credits are equal, it does not
necessarily mean that there are no
errors.
MIDTERMS

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CAGAYAN STATE UNIVERSITY- ANDREWS CAMPUS

BACHELOR OF SCIENCE IN BUSINESS ADMINISTRATION- FINANCIAL MANAGAMENT 1B

CHAPTER 1 Normally ends with the preparation of the

b. Lenders and creditors

BRIEF HISTORY OF ACCOUNTING the information needs of internal users.

COMMON BRANCHES OF ACCOUNTING

10. ACCOUNTING RESEARCH 3. CORPORATION

5. GOVERNMENT ACCOUNTING 4. COOPERATIVE

 The Generally Accepted Accounting

10 CORE GAAP PRINCIPLES

THE CONCEPTUAL FRAMEWORK FOR FINANCIAL

The conceptual framework sets out the concept

1. Objective of financial reporting

- These are the characteristics that  FUNDAMENTAL QUALITATIVE

- They enhance the usefulness of information  ENHANCING QUALITATIVE

 THE BASIC ACCOUNTING EQUATION

ASSETS= LIABILITIES + EQUITY

THE EXPANDED ACCOUNTING

Example 5: *52,000 + 25,100 – 24,500 = 52,600

 STATEMENT OF FINANCIAL POSITION

a) The chart of accounts of a bank should

CHART OF ACCOUNTS  ASSETS

c. Office equipment revenue.

CHAPTER 5 - Contains all the accounts appearing in the

TYPES OF JOURNALS FORMATS OF THE BOOKS OF ACCOUNTS

 COMMON EXAMPLES OF SPECIAL

 GENERAL JOURNAL  SPECIAL JOURNAL

 GENERAL LEDGER &

DOUBLE ENTRY SYSTEM

NOTES PAYABLE Accounts Receivable,

Example 2: 1,500 BEGINNING BAL.

A. Contra accounts - presented in the Building 1,200,000

STEPS IN THE ACCOUNTING CYCLE

IDENTIFYING AND ANALYZING TRANSACTIONS

EXAMPLES OF SOURCE DOCUMENTS

• PARTS OF A JOURNAL ENTRY

PREPARING THE UNADJUSTED TRIAL BALANCE

TYPES OF TRIAL BALANCE

ERRORS REVEALED BY A TRIAL BALANCE

 If total debits and total credits are

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