Batch 2024 - Computerized Accounting

BATCH 2021: COMPUTERIZED ACCOUNTING
SAN BEDA UNIVERSITY - BS ACCOUNTANCY

Ora et Labora
PROFESSOR: Ma’am Jacquie Moreno
OUTLINE
COMBINED NOTES AND ANNOTATIONS FROM PRICE et al & The Students
I. ACCOUNTING: THE LANGUAGE OF VIII. ACCOUNTING FOR PURCHASES AND

BUSINESS ACCOUNTS PAYABLE
II. ANALYZING BUSINESS TRANSACTIONS IX. CASH RECEIPTS, CASH PAYMENTS, AND
III. ANALYZING BUSINESS TRANSACTIONS BANKING PROCEDURES
USING T ACCOUNTS X. PAYROLL COMPUTATIONS, RECORDS AND
IV. THE GENERAL JOURNAL AND THE PAYMENT
GENERAL LEDGER XI. PAYROLL TAXES, DEPOSITS, AND REPORTS
V. ADJUSTMENTS AND WORKSHEETS XII. ACCRUALS, DEFERRALS, AND THE
VI. CLOSING ENTRIES AND POST CLOSING WORKSHEET
ENTRIES XIII. FINANCIAL STATEMENT AND CLOSING
VII. ACCOUNTING FOR SALES AND ACCOUNTS PROCEDURE
RECEIVABLE XIV. ACCOUNTING PRINCIPLES AND REPORTING
STANDARDS
I. ACCOUNTING: THE LANGUAGE OF BUSINESS
SECTION 1
ACCOUNTING
- Definition: provides financial information about a business or a nonprofit organization.
- Process by which financial information about a business is recorded, classified, summarized, interpreted and
communicated to owners, managers and other interested parties.
- Financial information is needed by owners, investors, managers and other interested parties in order to make
decisions.
- Language of Business: Accounting is used to communicate financial information
INFORMATION NEEDED:
- How much cash does the business have?
- How much money do customers owe the business?
- What is the cost of the merchandise sold?
- What is the change in sales volume?
- How much money is owed to suppliers?
- What is the profit or loss?
ACCOUNTING SYSTEM
- Designed to accumulate data about a firm’s financial affairs, classify the data in a meaningful way, and
summarize it in periodic reports – financial statements.
ACCOUNTANT
- Establishes the records and procedures that make up the accounting system,
- Supervises the operations of the system, and
1 | Computerized Accounting | CARLOS, MENDOZA, RIVERA | BATCH 2021

- Interprets the resulting financial information.
- Most owners and managers rely heavily on the accountant’s judgment and knowledge when making financial
decisions.
ACCOUNTING CAREERS
BOOKKEEPER ACCOUNTING CLERK ACCOUNTANT
- responsible for recording - responsible for the - responsible for keeping

business transactions. recordkeeping part of the records and providing
- require one to two years of accounting system—perhaps financial information
accounting education plus payroll, accounts receivable, about the business.
experience as an or accounts payable. - require a bachelor’s
accounting clerk. - require one to two degree but are sometimes
accounting courses and little filled by experienced
or no experience. bookkeepers or individuals
with a two-year college
degree
CERTIFIED BOOKKEEPER (CB)

- designation that assures an individual possesses the level of knowledge and skills needed to carry out all key
accounting functions through the adjusted trial balance, including payroll.
Requirements:
(1) pass the national certified bookkeepers’ exam,
(2) sign a code of ethics, and
(3) submit evidence of at least two years of full-time bookkeeping experience or 3,000 hours of part-time or freelance
experience.
OCCUPATION DUTIES ENTRY-LEVEL EDUCATION
BOOKKEEPING, ACCOUNTING, Produce financial records, Some college, no degree

AUDITING CLERKS transactions, update statements, and
check financial records for
accuracy.
BUDGET ANALYSTS Help public and private institutions Bachelor’s degree

organize their finances and
prepare budget reports and
monitor institutional spending

COST ESTIMATORS Collect and analyze data to estimate Bachelor’s degree
time, money, resources, and labor
required for product manufacturing,
construction projects, or services and
some specialize in a particular
industry or product type.
FINANCIAL ANALYSTS Provide guidance to businesses and Bachelor’s degree

individuals making investment
decisions and assess the
performance of stocks, bonds, etc.
FINANCIAL MANAGERS Responsible for financial health, Bachelor’s degree

produce financial reports, direct
investment activities, and develop
strategies and plans for the
long-term financial goals.
MANAGEMENT ANALYSTS “Management consultants” propose Bachelor's degree

ways to improve efficiency and
advise managers how to make more
profit by reducing costs and
increased revenue.
PERSONAL FINANCIAL ADVISORS Give financial advice to people and Bachelor’s degree
help with investments, taxes, and
insurance decisions.
POSTSECONDARY TEACHERS Instruct students in a wide variety of Doctoral or professional degree

academic and vocational subjects
beyond high school level, conduct
research and publish scholarly
papers and books.
TAX EXAMINERS & COLLECTORS, Ensure that governments get their tax Bachelor’s degree
AND REVENUE AGENTS money from businesses and citizens
and review tax returns, conduct tax
audits, identify taxes owed, and
collect overdue tax payments.
TOP EXECUTIVES Devise strategies and policies to Bachelor’s degree

ensure that an organization meets its
goals and they plan, direct, and
coordinate operational activities of
companies and public and
private-sector organizations.
AREAS OF ACCOUNTING
PUBLIC MANAGERIAL ACCOUNTING GOVERNMENTAL
ACCOUNTING ACCOUNTING
● Work for public accounting firms and ● “Private Accounting” ● Involves keeping
provide accounting services for other ● Working for a single financial records and
companies. business in industry preparation of financial
Certified Public Accountant (CPA): ● Establish accounting reports as part of the
(1) Have certain number of college credits in policies staff of federal, state, or
accounting courses ● Manage accounting local government units
(2) Demonstrate good personal character system Government Units
(3) Pass the Uniform CPA Examination ● Prepare financial - Do not earn profits
(4) Fulfill experience requirements of the state statements - Receive and pay out
of practice ● Interpret financial huge amounts of
- Must follow the professional code of information money and needs
ethics ● Provide financial procedures for
OFFERS: advice to management recording and
● Prepare tax forms managing the money
AUDITING TAX MANAGEMEN
● Perform tax planning Government Agencies
ACCOUNTIN T ADVISORY
services - Hire accountants to
G SERVICES
● Prepare internal audit financial
reports for statements and records
Review of Tax Involve helping
managements of a business under
financial Compliance clients improve
their jurisdiction to
statements Preparation of their
uncover possible
to assess tax returns information
violations of the law
their and audit of systems or
fairness and returns their business
Securities and Exchange
adherence Tax Planning performance.
Commission (SEC)
to GAAP. Giving advice
CPAs: to clients in
Internal Revenue
Perform how to
Services (IRS)
financial structure
audit their financial
Federal Bureau of
affairs to
Investigation (FBI)
reduce tax
liability.
Homeland Security
USERS OF FINANCIAL INFORMATION
Owners and Internal control and prevention of fraud

Managers Internal Control
- company’s policies and procedures in place to safeguard assets, ensure reliability of
accounting data, and promote compliance with management policies and applicable
laws

- Goal: Prevention of fraud - intentional and reckless acts that result in the confiscation of
a firm’s assets or misinterpretation of the firm’s accounting data
Suppliers Assess the ability of the company to pay its bills and set a credit limit for the firm
Banks Ensure that a firm will repay the loan on time, will ask for financial information prepared by the
accountant and decide whether to make the loan and the terms of loan
Tax Authorities Internal Revenue Service (IRS) and other state and local tax authorities are interested in the
firm’s financial information
Tax Base:
- Income taxes are based on taxable income
- Sales taxes are based on sales income
- Property taxes are based on the assessed value of buildings, equipment, and inventory
(goods available for sale)
Regulatory Federal Communications Commission

Agencies and - Receives financial information from radio and television stations
Investors Securities and Exchange Commission
- Oversees the financial information provided by publicly owned corporations to their
investors and potential investors
- Publicly owned corporations: trade their shares on stock exchanges and in
over-the-counter markets
- Responsible for reviewing the accounting methods used by publicly owned
corporations
- If the SEC does not agree with the reporting that results from an accounting method, the
SEC can suspend trading of a company’s shares on the stock exchanges.
Securities Act 1933 and Securities Exchange Act 1934
- Protect those who invest in publicly owned corporations
Sarbanes-Oxley Act
- Tightens regulation of financial reporting by publicly held companies and their
accountants and auditors
- Prohibits accountants from offering a broad range of consulting services to publicly traded
companies that they audit and requires accounting firms to change the lead audit or
coordinating partner and the reviewing partner for a company every five years
Customers Pay special attention to financial information about the firms with which they do business
Business analyzes the financial information about the computer manufacturer in order to
determine its economic health and the likelihood that it will remain in business
Employees and Interested in the financial information of the business that employs them.
Unions - Employees who are members of a profit-sharing plan pay close attention to the
financial results because they affect employee income
- Employees who are members of a labor union use financial information about the firm to
negotiate wages and benefits
SECTION 2
BUSINESS AND ACCOUNTING
- Accounting process: recording, classifying, summarizing, interpreting, and communicating financial information
about an economic or social entity
- Entity: recognized as having its own separate identity - may be an individual, a town, a university, or a business
- Economic entity: business or organization whose major purpose is to produce a profit for its owners
- Social entities: nonprofit organization - cities, public schools, and public hospitals

MAJOR CHARACTERISTICS OF BUSINESS ENTITIES
TYPES OF BUSINESS ENTITY
CHARACTERISTIC SOLE
PROPRIETORSHIP PARTNERSHIP CORPORATION
Ownership One owner Two or more owners One or more owners, even
thousands
Life of the Business Ends when the owner dies, Ends when one or more Can continue indefinitely;
is unable to carry on partners withdraw, when a ends only when the
operations, or decides to partner dies, or when the business goes bankrupt or
close the firm partners decide to close when the stockholders vote
the firm to liquidate
Responsibility for debts Owner is responsible for Partners are responsible Stockholders are not
of the business the firm’s debt when the individually and jointly for responsible for the firm’s
firm is unable to pay the firm’s debts when the debts; they can close only
firm is unable to pay the amount they invested
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

- Must be followed by publicly owned companies unless they can show that doing so would produce information
that is misleading
- Developed by the Financial Accounting Standards Board (FASB), which is composed of five full-time
members
- Financial Accounting Standards Board: Issued 168 Statements of Financial Accounting Standards
- American Institute of Certified Public Accountants: National association for certified public accountants
- American Accounting Association: Group of accounting educators
- International accounting: Study of the accounting principles used by different countries
- 1973: International Accounting Standards Committee (IASC) was formed and was recently changed to
International Accounting Standards Board (IASB)
- International Accounting Standards Board: Deals with issues caused by the lack of uniform accounting
principles and makes recommendations to enhance comparability of reporting practices
THE USE OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
- Financial statements are audited by independent certified public accountants
- Independent: They are not employees of the company being audited and they do not have a financial interest in
the company
- Financial statements includes the auditor’s report - auditor’s opinion about the fair presentation of the
operating results and financial position of the business and confirms that the financial information is prepared in
conformity with generally accepted principles
II. ANALYZING BUSINESS TRANSACTIONS

SECTION 1
PROPERTY AND FINANCIAL INTEREST
- Accounting process starts with the analysis of business transactions
- Business transactions: Any financial event that changes the resources of a firm - purchases, sales, payments,
and receipts of cash
- When a business transaction occurs, it is analyzed to identify how it affects the equation property equals
financial interest
STEPS TO ANALYZE THE EFFECT OF A BUSINESS TRANSACTION:
1. Describe the financial event
● Identify the property
● Identify who owns the property
● Determine the amount of increase or decrease
2. Make sure the equation is in balance
Property = Financial Interest
PURCHASING EQUIPMENT FOR CASH

Eli Consulting Services issued a $5,000 check to purchase a computer and other equipment.
Cash + Equipment = Trayton Eli, Capital
Previous balances $ 100,000 = $ 100,000

(b) Purchased equipment + $ 5,000 =
(b) Paid cash -5,000
New balances $ 95,000 + $ 5,000 = $ 100,000
* Trayton Eli’s personal assets, such as his personal bank account, house, furniture, and automobile, are kept
separate from the property of the firm
* Nonbusiness property is not included in the accounting records of the business entity
PURCHASING EQUIPMENT ON CREDIT
- Accounts payable: Amounts that a business must pay in the future
- Creditors: Companies or individuals to whom the amounts are owed
Eli’s Consulting Services purchased office equipment on account from Office Plus for $6,000.
Cash + Equipment = Accounts + Trayton Eli,

Payable Capital
Previous balances $ 95,000 + $ 5,000 = $ 100,000

(b) Purchased equipment + $ 6,000 =
(b) Incurred debt = +$ 6,000

New balances $ 95,000 + $ 11,000 = $ 6,000 + $ 100,000
PURCHASING SUPPLIES
Eli’s Consulting Services issued a check for $1,500 to Office Delux, Inc., to purchase office supplies.
Cash + Supplies + Equipment = Accounts + Trayton Eli,

Payable Capital
Previous balances $ 95,000 + $ 11,000 = $ 6,000 + $ 100,000

(d) Purchased supplies + $ 1,500
(d) Paid cash -$ 1,500
New balances $ 93,500 + $ 1,500 + $ 11,000 = $ 6,000 + $ 100,000
PAYING A CREDITOR
Eli’s Consulting Services issued a check for $2,500 to Office Plus.
Cash + Supplies + Prepaid + Equipment = Accounts + Trayton

Eli,
Rent Payable Capital
Previous balances $ 91,000 + $ 1,500 + $ 11,000 = $ 3,500 + $ 100,000

(e) Paid cash -$ 8,000
(e) Prepaid rent +$ 8,000
New balances $ 83,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000
PROPERTY = FINANCIAL INTEREST
Cash $ 83,000 Accounts Payable $ 3,500

Supplies 1,500 Trayton Eli, Capital 100,000
Prepaid Rent 8,000
Equipment 11,000
TOTAL $ 103,500 TOTAL $ 103,000
RENTING FACILITIES
Eli’s Consulting Services issued a check for $8,000 to pay for rent for the months of December and
January.
Cash + Supplies + Equipment = Accounts + Trayton Eli,

Payable Capital

Previous balances $ 93,000 + $ 1,500 + $ 11,000 = $ 6,000 + $ 100,000
(e) Paid cash -$ 2,500
(e) Decreased cash = -$ 2,500
New balances $ 91,000 + $ 1,500 + $ 11,000 = $ 3,500 + $ 100,000
ASSETS, LIABILITIES, AND OWNER’S EQUITY

- Assets: Property that a business owns
- Liabilities: Debts or obligations of the business
- Owner’s Equity: Owner’s financial interest - sometimes called proprietorship or net worth
- Balance Sheet: Financial statement where a business can review the status of the firm’s assets, liabilities, and
owner’s equity and shows the firm’s financial position on a given date
BALANCE SHEET FOR ELI’S CONSULTING SERVICES

ELI’S CONSULTING SERVICES
BALANCE SHEET
NOVEMBER 30, 20X1
Assets Liabilities
Cash 83,000.00
Accounts Payable 3,500.00
Supplies 1,500.00
Prepaid Rent 8,000.00 Owner’s Equity
Equipment 11,000.00 Trayton Eli, Capital 100,000.00
Total Assets 103,500.00 Total Liabilities and 103,500.00

Owner’s Equity
_____________________________________________________________________________________________
SECTION 2
FUNDAMENTAL ACCOUNTING EQUATION
- Total left side of the report must equal, or balance, the total on the right side.
- Firm’s assets must equal to the total of its liabilities and owner’s equity
Assets = Liabilities + Owner’s Equity

- Fundamental Accounting Equation: Relationship between assets and liabilities plus owner’s equity
- Revenues increase owner’s equity, while expenses decrease owner’s equity
EARNING REVENUE AND INCURRING EXPENSES

- Revenue: Or income, is the inflow of money or other assets that results from the sales of goods or services or
from the use of money or property

- When a sale occurs, the revenue increases assets and also increases owner’s equity
- Expense: Involves the outflow of money, the use of other assets, or the incurring of a liability
- Expenses cause a decrease in owner’s equity
SELLING SERVICES FOR CASH

Eli’s Consulting Services earned a total of $36,000 in revenue from clients who paid cash for
accounting and bookkeeping services.
Cash + Supplies + Prepaid + Equipment = Accounts + Trayton Eli, + Revenue

Rent Payable Capital
Previous balances $ 83,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000

(g) Rec. cash +$ 36,000
(g) Increased
owner’s equity
by earning revenue +$ 36,000
New balances $ 119,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000 + $ 36,000
TOTAL $ 139,500 = $ 139,500
SELLING SERVICES ON CREDIT

- Accounts Receivable: Amounts owed by these clients
Eli’s Consulting Services earned $11,000 of revenue from charge account clients.
Assets = Liabilities + Owner’s

Equity
Cash + Accounts + Supplies + Prepaid + Equipment = Accounts + Trayton Eli, +

Revenue
Receivables Rent Payable Capital
Previous balances $ 119,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000 + $ 36,000

(h) Rec. new
asset - accts. rec. +$ 11,000
(h) Increased
owner’s equity
by earning revenue +$ 11,000
New balances $ 119,000 + $ 11,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000 + $ 47,000
TOTAL $ 150,500 = $ 150,500
COLLECTING RECEIVABLES
Eli’s Consulting Services received $6,000 on account from clients who owed money for services
previously billed.
Assets = Liabilities + Owner’s
Equity
Cash + Accounts + Supplies + Prepaid + Equipment = Accounts + Trayton Eli, +

Revenue
Previous balances $ 119,000 + $ 11,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000 + $ 47,000
(h) Rec. cash +$ 6,000
(h) Decreased
accounts receivable -$ 6,000
New balances $ 125,000 + $ 5,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000 + $ 47,000
TOTAL $ 150,500 = $ 150,500
PAYING EMPLOYEES’ SALARIES

Eli’s Consulting Services paid $8,000 in salaries for the accounting clerk and Sergio Sanchez.
Cash + Accounts + Supplies + Prepaid + Equipment = Accounts + Trayton Eli, + Revenue + Expenses
Previous balances $ 119,000 + $ 5,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000 + $ 47,000 +
(i) Rec. cash -$ 8,000
(i) Decreased
Owner’s equity
By incurring
Salaries expense +$ 8,000
New balances $ 117,000 + $ 5,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000 + $ 47,000 - $ 8,000
TOTAL $ 142,500 = $ 142,500
PAYING UTILITIES EXPENSE

Eli’s Consulting Services issued a check for $650 to pay the utilities bill.
Previous balances $ 117,000 + $ 5,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000 + $ 47,000 - $ 8,000
(k) Paid cash -$ 650
(k) Decreased
owner’s equity
by incurring
salaries expense + $ 650
New balances $ 116,500 + $ 5,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000 + $ 47,000 - $ 8,650
TOTAL $ 141,850 = $ 141,850
EFFECT OF OWNER’S WITHDRAWALS

Trayton Eli wrote a check to withdraw $5,000 cash for personal use.
Previous balances $ 116,350 + $ 5,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000 + $ 47,000 - $ 8,000
(k) Withdrew cash -$ 5,000
(k) Decreased
owner’s equity - $ 5,000
New balances $ 111,350 + $ 5,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 95,000 + $ 47,000 - $ 8,650

TOTAL $ 136,850 = $ 136,850
INCOME STATEMENT
- Provide information about revenue and expenses, assets and claims on the assets, and owner’s equity
- Shows the results of business operations for specific period of time such as a month, a quarter, or a year
- Sometimes called a profit and loss statement or a statement of income and expenses
- Shows the difference between revenue from services provided or goods sold and the amount spent to operate
the business
- Net Income: Revenue > Expenses
- Net Loss: Revenue < Expenses
- Break Even: Revenue = Expenses
INCOME STATEMENT OF ELI’S CONSULTING SERVICES

INCOME STATEMENT
MONTH ENDED DECEMBER 31, 20X1
Revenue
Fees Income 47,000.00
Expenses
Salaries Expense 8,000.00

Utilities Expense 650.00
Total Expenses 8,650.00
NET INCOME 38,350.00
FORMATTING
- Three-line heading:
● WHO: Business’ name on the first line
● WHAT: Report title on the second line
● WHEN: Period covered on the third line
- The use of single and double rules:
● Single lines: Used to show that the amounts above it are being added or subtracted
● Double lines: Used under the final amount in a column or section of a report
STATEMENT OF OWNER’S EQUITY
- Report the changes that occurred in the owner’s financial interest during the reporting period
- First line: Capital balance at the beginning of the period
- Second line: Net income (increase to owner’s equity); net loss (decrease to owner’s equity)
- Third line: Withdrawal by the owner decreases the owner’s equity

- Fourth line: Additional investments by the owner - increase to owner’s equity
- Total changes in equity is reported as either increase in capital or decrease in capital
- Last line: Capital balance at the end of the period
Trayton Eli, Capital, December 1, 20X1 100,000.00
Net Income for December 38,350.00
Less: Withdrawals for December 5,000.00
Increase in Capital 33,350.00
TRAYTON ELI, CAPITAL, DECEMBER 31, 20X1 38,350.00
* Additional investments can be cash or other assets - equipment.

- If cash, the investment is recorded at its fair market value
- Fair market value: Current worth of an asset or the price the asset would bring if sold on the open market
STATEMENT OF FINANCIAL POSITION
- Balance sheet: Snapshot of the firm’s financial position on a specific date
- Prepared using the account form
- Account form: Show total assets on the same horizontal line as the total liabilities and owner’s equity
IMPORTANCE OF FINANCIAL STATEMENTS
- Business decisions are made based on the information in financial statements
- Business managers and owners use the balance sheet and the income statement to control current
operations and plan for the future
III. ANALYZING BUSINESS TRANSACTIONS USING T ACCOUNTS
SECTION 1
ASSET, LIABILITY, AND OWNER’S EQUITY
- Account: Established separate records for assets, liabilities, and owner’s equity
- Accounts are recognized by their classification as assets, liabilities, or owner’s equity
- T account: Used by accountants to analyze transactions
T ACCOUNT
- Consists of a vertical line and a horizontal line that resemble the letter T
- Name of account is written in the horizontal top line
- Increases and decreases in the account are entered on either side of the vertical line

ASSETS LIABILITIES OWNER’S EQUITY
+ - - + - +
Record Record Record Record Record Record
increases decreases decreases increases decreases increases
RECORDING A CASH INVESTMENT

Trayton Eli invested $100,000 in the business.
CASH
+ -
(a) 100,000
- Cash is an asset
- Cash increases appear on the left side of the Cash T account
- Cash decreases are shown on the right side
TRAYTON ELI, CAPITAL
- +
(a) 100,000
- Increases in owner’s equity appear on the right side of the T account
- Decreases in owner’s equity appear on the left side
STEPS TO ANALYZE THE EFFECTS OF THE BUSINESS TRANSACTION:

1. Analyze the financial event
● Identify the accounts affected
● Classify the accounts affected
● Determine the amount of increase or decrease for each account
2. Apply the left-right rules for each account affected
3. Make the entry in T-account
RECORDING CASH PURCHASE OF EQUIPMENT
Eli’s Consulting Services issued a $5,000 check to purchase a computer and other equipment.
EQUIPMENT CASH
+ - + -
(b) 5,000 (a) 100,000 (b) 5,000
RECORDING CREDIT PURCHASE OF EQUIPMENT

The firm bought office equipment for $6,000 on account from Office Plus.

EQUIPMENT ACCOUNTS PAYABLE
+ - - +
(b) 5,000 (c) 6,000
(c) 6,000
RECORDING CASH PURCHASE OF SUPPLIES

Eli’s Consulting Services issued a check for $1,500 to Office Delux Inc. to purchase office supplies.
SUPPLIES CASH
+ - + -
(d) 1,500 (a) 100,000 (b) 5,000
(d) 1,500
RECORDING PAYMENT TO A CREDITOR

Eli’s Consulting Services issued a check in the amount of $2,500 to Office Plus.
ACCOUNTS PAYABLE CASH
- + + -
(e) 2,500 (c) 6,000 (a) 100,000 (b) 5,000
(d) 1,500
(e) 2,500
RECORDING PREPAID RENT

Eli’s Consulting Services issued a check for $8,000 to pay rent for the months of December and
January.
PREPAID RENT CASH
+ - + -
(f) 8,000 (a) 100,000 (b) 5,000
(d) 1,500
(e) 2,500
(f) 8,000
ACCOUNT BALANCES
- Difference between the amounts on the two sides of the account
Steps:
● Add the figures in each side of the account
● If the column has more than one figure, enter the total in small pencil figures - footing

● Then, subtract the smaller amount from the larger total
Conditions:
● If the total on the right side is larger than the total on the left side, the balance is recorded on the right side.
● If the total on the left side is larger, the balance is recorded on the left side.
● If an account shows only one amount, that amount is the balance.
● If an account contains entries on only one side, the total of those entries is the account balance.
CASH
+ -
(a) 100,000 (b) 5,000
(d) 1,500
(e) 2,500
(f) 8,000
100,000 - 17,000
Bal. 83,000 17,000 ← Footing
- Usually, account balances appear on the increase side of the account

- The increase side of the account is the normal balance of the account
__________________________________________________________________
SECTION 2
REVENUE AND EXPENSE ACCOUNT
During December, the business earned $36,000 in revenue from clients who paid cash for
bookkeeping, accounting, and consulting services.
CASH FEES INCOME
+ - - +
Bal. 83,000 (g) 36,000
(g) 36,000
RECORDING REVENUE FROM SERVICES SOLD ON CREDIT

In December, Eli’s Consulting Services earned $11,000 from various charge account clients.
ACCOUNTS RECEIVABLE FEES INCOME
+ - - +
(h) 11,000 (g) 36,000
(h) 11,000
RECORDING COLLECTIONS FROM ACCOUNTS RECEIVABLE

Charge account clients paid $6,000, reducing the amount owed to Eli’s Consulting Services.

CASH ACCOUNTS RECEIVABLE
+ - + -
Bal. 83,000 (h) 11,000 (i) 6,000
(g) 36,000
(i) 6,000
RECORDING EXPENSE FOR SALARIES

Expense
- Expense: An outflow of cash, the use of other assets, or the incurring of a liability
- Decrease owner’s equity which is on the left side of the T account
- Increases in expenses are recorded on the left side of the T account
- Decreases in expenses are recorded on the right side of the T account
In December, Eli’s Consulting Services paid $8,000 in salaries.
SALARIES EXPENSE CASH
+ - + -
(j) 8,000 Bal. 83,000 (j) 8,000
(g) 36,000
(i) 6,000
RECORDING EXPENSE FOR UTILITIES

Eli’s Consulting Services issued a check for $650 to pay the utilities bill.
UTILITIES EXPENSE CASH
+ - + -
(k) 650 Bal. 83,000 (j) 8,000
(g) 36,000 (k) 650
(i) 6,000
THE DRAWING ACCOUNT

- Against previously earned profits that have become part of capital or against profits that are expected in the
future.
- Decrease owner’s equity and could be recorded on the left side of the capital account
- Drawing account: Set up to record withdrawals

Trayton Eli wrote a check to withdraw $5,000 cash for personal use.
TRAYTON ELI, DRAWING CASH
+ - + -
(l) 5,000 Bal. 83,000 (j) 8,000
(g) 36,000 (k) 650
(i) 6,000 (l) 5,000
THE RULES OF DEBIT AND CREDIT
NORMAL BALANCES
DEBIT CREDIT
Asset Liability
Expense Revenue
Drawing Capital
- Double-entry system: Accounting system which requires that for all transactions, the amounts entered as debits
must be equal to the amounts entered as credits.
Debit Credit Debit Credit Debit Credit

+ - - + - +
Increase Decreases Decreases Increases Decreases Increases
Debit Credit Debit Credit Debit Credit

+ - - + - +
Increases Decreases Decreases Increases Decreases Increases
TRIAL BALANCE
- Statement that tests the accuracy of total debits and credits after transactions have been recorded
- If total debits do not equal total credits, there is an error
TRIAL BALANCE
DECEMBER 31, 20X1

Account Name Debit Credit
Cash xxxx
Accounts Receivable xxxx
Supplies xxxx
Prepaid Rent xxxx
Equipment xxxx
Accounts Payable xxxx
Trayton Eli, Capital xxxx
Trayton Eli, Drawing xxxx
Fees Income xxxx
Salaries Expense xxxx
Utilities Expense xxxx
TOTAL 150,500.00 150,500.00
STEPS:
1. Enter the trial balance heading - company name, report title, and closing date for the accounting period.
2. List the account names in the same order as they appear on the financial statements.
● Assets
● Liabilities
● Owner’s Equity
● Revenue
● Expenses
3. Enter the ending balance of each account in the appropriate Debit or Credit column.
4. Total debit column
5. Total credit column
6. Compare the total debits with the total credits
UNDERSTANDING TRIAL BALANCE ERRORS
- Adding trial balance columns incorrectly;
- Recording only half a transaction—for example, recording a debit but not recording a credit, or vice versa;
- Recording both halves of a transaction as debits or credits rather than recording one debit and one credit;
- Recording an amount incorrectly from a transaction;
- Recording a debit for one amount and a credit for a different amount;
- Making an error when calculating the account balances.
FINDING TRIAL BALANCE ERRORS
1. Check the arithmetic. If the columns were originally added from top to bottom, verify the total by adding from
bottom to top.
2. Check that the correct account balances were transferred to the correct trial balance columns.
3. Check the arithmetic used to compute the account balances.
4. Check that each transaction was recorded correctly in the accounts by tracing the amounts to the analysis of the
transaction.

5. Compute the difference between the debit total and the credit total - if divisible by 2, a debit might be recorded
as a credit or a credit recorded as a debit
6. If the difference is evenly divisible by 9, there might be a transposition
- Transposition: When digits of a number are switched (357 for 375)
375 - 357 = 18 → 18/9 = 2
- Slide: When the decimal point is misplaced (375 for 37.50)
375.00 - 37.50 = 337.50 → 37.50
CHART OF ACCOUNTS
- List of all the accounts used by a business
- Each has number and a name
- Balance sheet accounts are listed first, followed by the income statement accounts
- Account number is assigned based on the type of account
PERMANENT AND TEMPORARY ACCOUNTS
- Permanent accounts: Also called real accounts, are accounts that are closed at the end of every accounting
period
- Temporary accountants: Also called nominal accounts, these accounts are transferred to the capital account at
the end of the accounting period and these accounts start with zero balances
IV. THE GENERAL JOURNAL AND THE GENERAL LEDGER
SECTION 1
THE GENERAL JOURNAL
- Accounting cycle: series of steps performed during each accounting period to classify, record, and summarize
data for a business and to produce needed financial information
- Journal: diary of business activities
- Journal lists transactions in chronological order
- Sometimes called the record of original entry - it is where transactions are first entered in the accounting
records
- General journal: Financial record for entering all types of business transactions
- Journalizing: Process of recording transactions in the general journal
Steps:
1. Record the year first, then the month and day
2. Record the debit first
3. Indent about one-half inch and record the credit
4. Indent again and write the description
5. Leave a blank line between general journal entries
GENERAL JOURNAL PAGE 1___

POST.
DATE DESCRIPTION REF. DEBIT CREDIT
1 20X 1
1
2 Nov. 6 Cash (Debit) xxxx 2
3 Trayton Eli, Capital (Credit) xxxx 3
4 Investment by owner 4
(Description)
- Description should refer to the source of the information

- Audit trail: A chain of references that makes it possible to trace information, locate errors, and prevent fraud
- It provides a means of checking the journal entry against original data on the document
POST.
1 20X 1
1
2 Nov. 30 Accounts Payable xxxx 2
3 Cash xxxx 3
4 Paid in account, Office Plus, 4
5 Invoice 2223, Check 1003 5

DESCRIPTION:
- Supplier name
- Invoice number
- Check number
COMPOUND ENTRIES
- A journal entry that contains more than one debit or credit
- In a compound entry, record all debits first, followed by the credits
On November 7, the firm purchased equipment for $5,000, issued Check 1001 for $2,500, and agreed
to pay the balance in 30 days.
POST.
1 20X 1
1

2 Nov. 7 Equipment xxxx 2
3 Cash xxxx 3
4 Accounts Payable xxxx 4
5 Bought equip. from The 5
6 Information Technology Store, 6
7 Inv. 11, issued Ck. 1001 for 7
8 $2,500, bal. Due in 30 days 8
__________________________________________________________________
SECTION 2
THE GENERAL LEDGER
- Master reference file for the accounting system
- Provides a permanent, classified record of all accounts used in a firm’s operations
- Ledger: Where businesses keep account records on a special form that makes it possible to record all data
efficiently
- Record of final entry: The ledger is the last place that accounting transactions are recorded
- Posting: Process of transferring data from the journal to the ledger
ACCOUNT Cash ACCOUNT NO. 101__
BALANCE
POST.
DATE DESCRIPTION DEBIT CREDIT
REF.
DEBIT CREDIT
1 20X 1
1
2 Nov. 6 J1 xxxx xxxx 2
ACCOUNT Trayton Eli, Capital ACCOUNT NO. 301__
BALANCE
POST.
REF.
DEBIT CREDIT
1 20X 1
1
2 Nov. 6 J1 xxxx xxxx 2
STEPS TO POST FROM THE GENERAL JOURNAL TO GENERAL LEDGER:

1. Enter date of transaction and enter a description of the entry, if necessary. Usually, routine entries do not
require descriptions
2. Enter general journal page in the posting reference column - J refers to the general ledger
3. Enter the debit amount in the Debit column or credit amount in the Credit column
4. Compute the balance and enter it in the Debit Balance column or the Credit Balance column
5. Enter the ledger account number in the Posting Reference column
* Be sure to enter the numbers in the Posting Reference columns. This indicates that the entry was posted and ensures
against posting the same entry twice
- Posting reference: Part of the audit trail and allow a transaction to be traced from the ledger to the journal entry,
and then to the source document
- Each ledger account provides a complete record of the increases and decreases to that account
- Balance ledger form: Shows the current balance for the account
CORRECTING JOURNAL AND LEDGER ERRORS
- When errors are made in accounting records, they should be adjusted by making correcting entry - journal
entry made to correct the erroneous entry
- A correcting entry, a journal entry reflects the reality of the transaction that occurred
V. ADJUSTMENTS AND WORKSHEETS
SECTION 1
THE WORKSHEET
- Form used to gather all data needed at the end of an accounting period to prepare the financial statements
- Fourth step in the accounting cycle
- Provides convenient form for gathering the information and determining the effects of the changes
Sections:
● Trial balance
● Adjustments
● Adjusted trial balance
● Income statement
● Balance sheet
THE TRIAL BALANCE SECTION
Steps:
1. Enter the general ledger account names
2. Transfer the general ledger account balances to the debit and credit columns of the Trial Balance section
3. Total the Debit and Credit columns to prove that the trial balance is in balance
4. Place a double rule each Trial Balance column to show that the work in that column is complete
THE ADJUSTMENTS SECTION

- Journal entries made to update accounts for previously unrecorded items - adjusting entries
- These changes are first entered on the worksheet at the end of each accounting period
SUPPLIES → SUPPLIES EXPENSE

On November 28, 20X1, Eli’s Consulting Services purchased $1,500 of supplies. On December 31,
the trial balance shows a $1,500 balance in the Supplies account.
- This amount is too high because some of the supplies were used during December.
- An adjustment must be made for the supplies used
- Supplies: Overstated because a fewer supplies are actually on hand
- Supplies Expense: Understated
- The cost of the supplies used represents an operating expense that has not been recorded
Remaining supplies: $1,000
Supplies used: $500 ($1,500 - $1,000 = $500)
PREPAID EXPENSES
- Items that are acquired and paid for in advance of their use
- When cash is paid for these items, amounts are debited to Prepaid Rent, Prepaid Insurance, and Prepaid
Advertising - all are asset accounts
- When prepaid expense are used, an adjustment is made to reduce the asset accounts and to increase the
related expense accounts
ADJUSTING FOR EXPIRED RENT
Rent for December and January: $8,000
Expired rent after a month: $4,000 ($8,000 ÷ 2 months)
ADJUSTING FOR DEPRECIATION
- Depreciation: Process of allocating the cost of long-term assets over their expected useful lives
- Straight-line depreciation: Results in an equal amount of depreciation being charged to each accounting
period during the asset’s useful life
Formula:
- Salvage value: Estimate of the amount that may be received by selling or disposing of an asset at the end of
its useful life
Eli’s Consulting Services purchased $11,000 worth of equipment. The equipment has an estimated
useful life of five years and no salvage value.
Steps:

1. Convert the asset’s useful life from years to months: 5 years × 12 months = 60 months.
2. Divide the total depreciation to be taken by the total number of months: $11,000 ÷ 60 = $183 (rounded).
3. Record depreciation expense of $183 each month for the next 60 months.
- Contra-account: Has a normal balance that is opposite that of a related account
- Accumulated Depreciation - Equipment: A contra asset account with a normal credit balance, which is opposite
the normal balance of an asset account
- Book value: Portion of an asset’s original cost that has not yet been depreciated
Equipment $11,000
Less: Accumulated Depreciation - Equipment - 183
Equipment at book value $10,817
WORKSHEET
ACCOUNT NAME TRIAL BALANCE ADJUSTMENTS
DEBIT CREDIT DEBIT CREDIT
1 Cash xxxx 1
2 Accounts Receivable xxxx 2
3 Supplies xxxx (a) xxxx 3
4 Prepaid Rent xxxx (b) xxxx 4
5 Equipment xxxx 5
6 Accumulated Dep. - Equipment (c) xxxx 6
7 Accounts Payable xxxx 7
8 Trayton Eli, Capital xxxx 8
9 Taryton Eli, Drawing xxxx
10 Fees income xxxx
11 Salaries Expense xxxx
12 Utilities Expense xxxx
13 Supplies Expense (a) xxxx
14 Rent Expense (b) xxxx
15 Depreciation Exp. - Equipment (c) xxxx
16 TOTALS xxxx xxxx xxxx xxxx

THE ADJUSTED TRIAL BALANCE SECTION
Steps:
1. Combine the figures from the Trial Balance section and the Adjustments section of the worksheet. Record the
computed results in the Adjusted Trial Balance columns.
2. Total the Debit and Credit columns in the Adjusted Trial Balance section. Confirm that debits equal credits.
THE INCOME STATEMENT AND BALANCE SHEET SECTION
- Used to separate the amounts needed for the balance sheet and the income statement
- Report form balance sheet: Lists the asset accounts first, followed by liabilities and owner’s equity
- Account form balance sheet: Assets on the left and liabilities and owner’s equity on the right
- Report form is widely used it provides more space for entering account names and format is easier to prepare
WORKSHEET
ADJUSTED
ACCOUNT NAME TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
1 Cash xxxx xxxx 1
2 Accounts Receivable xxxx xxxx 2
3 Supplies xxxx xxxx 3
4 Prepaid Rent xxxx xxxx 4
5 Equipment xxxx xxxx 5
6 Accumulated Dep. - Equipment xxxx xxxx 6
7 Accounts Payable xxxx xxxx 7
8 Trayton Eli, Capital xxxx xxxx 8
9 Taryton Eli, Drawing xxxx xxxx
10 Fees income xxxx xxxx
11 Salaries Expense xxxx xxxx
12 Utilities Expense xxxx xxxx
13 Supplies Expense xxxx xxxx
14 Rent Expense xxxx xxxx
15 Depreciation Exp. - Equipment xxxx xxxx

16 TOTALS xxxx xxxx xxxx xxxx xxxx xxxx
xxxx xxxx
xxxx xxxx xxxx xxxx

Steps:
1. After all account balances are transferred from the Adjusted Trial Balance section of the worksheet to the
financial statement sections, total the Debit and Credit columns in the Income Statement section
2. Total the columns in the Balance Sheet section
3. Income statement - Subtract the smaller column total from the larger one.
4. Enter the difference on the line below the smaller total. In the Account Name column, enter “Net Income” or “Net
Loss.”
- Net income: Causes a net increase in owner’s equity
5. As a check on accuracy, the amount in the Balance Sheet Debit column is subtracted from the amount in the
Credit column and compared to net income
6. Balance sheet section - Subtract the smaller column total from the larger one. The difference should equal the
net income or net loss computed in the Income Statement section.
7. Enter the difference on the line below the smaller total
8. Total the Income Statement and Balance Sheet columns - total debits equal total credits for each section
* If it had a loss, the loss would be entered in the Credit column of the Income Statement section and the Debit column
of the Balance Sheet section
* “Net Loss” would be entered in the Account Name column on the worksheet
VI. CLOSING ENTRIES AND POST CLOSING ENTRIES
SECTION 1
CLOSING ENTRIES
Closing are journal entries that:

1. Transfer the results of operations to owner’s equity
2. Reduce revenue, expense, and drawing account balances to zero.
Income Summary Account

- Classified as a temporary owner’s equity account
- A special owner’s equity account that is used only in the closing process to summarize results of operations.
- Has a zero balance after the closing process and it remains with a zero balance after the closing procedure for
the next period
- Other names for this account are Revenue and Expense Summary and Income and Expense Summary
There are three different types of accounts, the permanent, temporary, and suspense accounts.
a. Permanent accounts, also called real accounts, are used to record items that are a continuous concern
over multiple accounting periods. These are the balance sheet account that has actual identity and not
a representation of an item.

b. Temporary accounts or Nominal accounts are used to record items that pertain to a specific
accounting period and would not be relevant to the next accounting period. Temporary accounts include
income, expenses and Owner’s Drawing account.
c. Suspense Accounts serve as a temporary storage or holding area for accounts that will be closed
during the closing process. It is used to summarize accounts that have the same nature so that it will be
easier to trace and review the past records.
STEPS IN THE CLOSING PROCESS
1. Transfer the balance of the revenue to the Income Summary account.
Fees Income Income Summary
Closing xxx Balance xxx Closing xxx
2. Transfer the expense balance account to the Income Summary account.
Income Summary Expense 1
Closing xxx Balance xxx Balance xxx Closing xxx
Expense 2 Expense 3
Balance xxx Closing xxx Balance xxx Closing xxx
Expense 4 Expense 5
Balance xxx Closing xxx Balance xxx Closing xxx
3. Transfer the balance of the Income Summary account to the owner’s capital account.
Income Summary Owner's Capital
Closing xxx Balance xxx Balance xxx
Closing xxx

4. Transfer the balance of the drawing account to the owner’s capital account.
Owner's Capital Owner's Drawing
Closing xxx Balance xxx Balance xxx Closing xxx
GENERAL JOURNAL
DATE Account Name Debit Credit
20X1
Dec 31 Fees Income xxx
Income Summary xxx
Dec 31 Income Summary xxx
Expense 1 xxx
Expense 2 xxx
Expense 3 xxx
Expense 4 xxx
Expense 5 xxx
Dec 31 Income Summary xxx
Owner's Capital xxx
Dec 31 Owner's Capital xxx
Owner's Drawing xxx

__________________________________________________________________________________
SECTION 2
PREPARING THE POST-CLOSING TRIAL BALANCE
- Is a statement that is prepared to prove the equality of total debits and credits.
- It is the last step in the end-of-period routine.
- The post-closing trial balance verifies that:

a) Total debits equal total credits;
b) Revenue, expense, and drawing accounts have zero balances.
- Only permanent or real accounts (Assets, Liabilities, and Owner’s Equity) will be included. These are
accounts that will be carried over to the next accounting period
- The account balances appearing in this trial balance will be the opening balances of the same accounts in the
next accounting period.
Eli's Consulting Services
Postclosing Trial Balance
December 31, 20X1
Account Name Debit Credit
Cash
Accounts Receivable xxx
Supplies xxx xxx
Prepaid Rent xxx
Equipment xxx
Accumulated Dep. - Equipment xxx
Accounts Payable xxx
Trayton Eli, Capital xxx
Totals xxx xxx
INTERPRETING THE FINANCIAL STATEMENTS

- The ninth and last step in the accounting cycle is interpreting the financial statements.
- Management needs timely and accurate financial information to operate the business successfully
Information in the financial statements provides answers to many questions:

1. What is the cash balance?
2. How much do customers owe the business?
3. How much does the business owe suppliers?
4. What is the profit or loss?
END-OF-MONTH FINANCIAL STATEMENTS

Income Statement
Month Ended December 31, 20X1
Revenue
Fees Income xxx
Expenses
Salaries Expense xxx
Rent Expense xxx
Depreciation Expense-Equipment xxx
Total Expenses xxx
Net Income for the Month xxx
Statement of Owner's Equity
Month Ended December 31, 20X1
Trayton Eli, Capital, December 1, 20X1 xxx
Net Income for the December xxx
Less: Withdrawals for December xxx
Increase in Capital xxx
Trayton Eli, Capital, December 31, 20X1 xxx

Balance Sheet
December 31, 20X1
ASSETS
Cash xxx
Accounts Receivable xxx
Supplies xxx
Prepaid Rent xxx
Equipment xxx
Less: Accumulated Depreciation xxx xxx
Total Assets xxx
LIABILITIES AND OWNER'S EQUITY
Liabilities
Accounts Payable xxx
Owner's Equity
Trayton Eli, Capital xxx
Total Liabilities and Owner's Equity xxx
THE ACCOUNTING CYCLE
Step 1: Analyze Transactions

- Analyze source documents to determine their effects on the basic accounting equation.
- The data about transactions appears on a variety of source documents such as:
- sales slips, purchase invoices, credit memorandums, check stubs
Step 2: Journalize the transactions

- Record the effects of the transactions in a journal.

Step 3: Post the journal entries
- transfer data from the journal to the general ledger accounts.
Step 4: Prepare a worksheet

- At the end of each period, prepare a worksheet.
Step 5: Prepare financial statements

- Prepare financial statements to report information to owners, managers, and other interested parties.
Step 6: Journalize and post the adjusting entries

- Use the worksheet to journalize and post adjusting entries
- The adjusting entries are a permanent record of the changes in account balances shown on the worksheet.
Step 7: Journalize and post the closing entries

- Transfer net income or net loss to owner’s equity
- Reduce the balances of the revenue, expense, and drawing accounts to zero.
Step 8: Prepare a post closing trial balance

- Shows that the general ledger is in balance after the closing entries are posted
- Used to verify that there are zero balances in revenue, expense, and drawing accounts.
Step 9: Interpret the financial information

- Use Financial statements to understand and communicate financial information and o make decisions
- Accountants, owners, managers, and other interested parties interpret financial statements by comparing such
things as profit, revenue, and expenses from one accounting period to the next.
VII. ACCOUNTING FOR SALES AND ACCOUNTS RECEIVABLE
SECTION 1
Three basic types of business are:

service business: sells services
merchandising business: sells goods that it purchases for resale
manufacturing business: sells goods that it produces
RETAIL BUSINESS
- it is a business that sells goods and services directly to individual consumers
Merchandise Inventory
- the stocks of goods a merchandising business keeps on hand.
2 TYPES OF INVENTORY CONTROL SYSTEM
1. Periodic inventory system

- an inventory in which the merchandise inventory balance is only updated when a physical inventory is
taken.
2. Perpetual inventory system
- an inventory system that tracks the inventories on hand at all times

Special Journal
- journal that is used to record only one type of transaction
Subsidiary Ledger
- ledger that contains accounts of a single type
Types of Journals
a. Sales - to record sales of merchandise on credit
b. Purchases - to record purchases of merchandise on credit
c. Cash receipts - to record cash received from all sources
d. Cash payments -to record all disbursements of cash
e. General - to record all transactions that are not recorded in another special journal and all adjusting and closing
entries
Type of Ledger
a. General - Assets, Liabilities, Owner’s equity, revenue, and expense accounts
b. Accounts Receivable - Accounts for credit customers
c. Accounts Payable - Accounts for creditors
Name of Account Type of Account Normal Balance Used to Record

Sales Revenue CR Sales of merchandise inventory
Sales Tax Payable Liability CR Sales tax charged to customers
Early payment discounts given to
Sales Discount Contra revenue DR buyer by seller
Sales Returns and Products returned by buyer on the
Allowances Contra revenue DR seller's books
Credit Card Expense Expense DR Fees charged by credit card companies
The cost of merchandise sold to
Cost of Goods Sold Expense DR companies
SALES JOURNAL
Journalizing and Posting Credit Sales
GENERAL JOURNAL

20X1
JAN 3 Accounts Receivable xxx
Sales Tax Payable xxx
Sales xxx
Sold merchandise on credit, sales slip 1101
8 Accounts Receivable xxx

Sales xxx

Sales xxx

Sales xxx
ACCOUNT __Accounts Receivable__ ACCOUNT NO. __111__
BALANCE
DATE DESCRIPTION F DEBIT CREDIT
DEBIT CREDIT
20X1
JAN. 1 Balance xxx
3 J2 xxx xxx
8 J2 xxx xxx
11 J2 xxx xxx
15 J2 xxx xxx
ACCOUNT __Sales Tax Payable_____ ACCOUNT NO. __231__
BALANCE
DEBIT CREDIT
20X1
JAN. 1 Balance xxx
3 J2 xxx xxx
8 J2 xxx xxx
11 J2 xxx xxx
15 J2 xxx xxx
ACCOUNT __Sales_______________ ACCOUNT NO. __401__
BALANCE
DEBIT CREDIT
20X1
JAN. 1 Balance xxx
3 J2 xxx xxx
8 J2 xxx xxx
11 J2 xxx xxx
15 J2 xxx xxx

Note: the word “balance”, is to record beginning balances, enter the date in the Date column, the word balance in the
Description column, a check mark in the Posting Reference column, and the amount in the Debit or Credit column.
Sales Tax Payable

- A liability account that is credited for the sales tax charged
Recording Transactions in a Sales Journal
SALES JOURNAL PAGE _1_
SALES TAX
SALES SLIP CUSTOMER'S ACCOUNT ACCOUNTS SALES
DATE PAYABLE
NO. DEBITED RECEIVABLE DEBIT CREDIT
CREDIT
20X1
JAN 3 1101 xxx xxx xxx
8 1102 xxx xxx xxx
1
1 1103 xxx xxx xxx
1
5 1104 xxx xxx xxx
1
8 1105 xxx xxx xxx
2
1 1106 xxx xxx xxx
2
8 1107 xxx xxx xxx
2
9 1108 xxx xxx xxx
3
1 1109 xxx xxx xxx
3
1 1110 xxx xxx xxx
January credit sales of Max-Out Sporting Goods recorded in a sales journal. Since Maxx-Out Sporting Goods is located
in a state that has an 8% sales tax on retail transactions, its sales journal includes a Sales Tax Payable Credit column.
- Headings and columns in the sales journal speed up the recording process.
- No general ledger account names are entered.
- Only one line is needed to record all information for each transaction (date, sales slip number, customer’s name,
debit to Accounts Receivable and credit to Sales Tax Payable, and credit to Sales.
- There is no need to enter any descriptions since a sales journal is used for a single purpose.
Special journals vary in format according to the needs of individual businesses.
Posting from a Sales Journal

- It is necessary to post each credit sale individually to general ledger accounts.
- Summary postings are made at the end of the month after the amount columns of the sales journal are totaled.

- In actual practice, before any posting takes place, the equality of the debits and credits recorded in the sales
journal is proved by comparing the column totals.
- All multicolumn special journals should be proved in a similar manner before their totals are posted.
- After the equality of the debits and credits has been verified, the sales journal is ruled and the column totals are
posted to the general ledger accounts involved.
- To indicate that the postings have been made, the general ledger account numbers are entered in parentheses
under the column totals in the sales journal.
- The abbreviation S1 is written in the Post Ref. column of the accounts, to indicate that the data was posted from
page 1 of the sales journal.
_____________________________________________________________________________________________
SECTION 2
Accounts Receivable
- A business that extends credit to customers must manage its accounts receivable carefully.
- Represent a substantial asset for many businesses, and this asset must be converted into ash in a timely
manner.
Accounts Receivable Ledger

- Individual accounts for all credit customers
- Referred to as a subsidiary ledger because it is separate from and subordinate to the general ledger.
- Provides a convenient way to answer questions from credit customers.
The accounts for credit customers are maintained in a balance ledger form with three money columns
NAME ________________________
ADDRESS ________________________
DATE DESCRIPTION F DEBIT CREDIT BALANCE

20X1
JAN. 1 Balance xxx
3 S1 xxx xxx
For a small business, customer accounts are alphabetized in the accounts receivable ledger. Larger firms and firms
that use accounting software programs assign an account number to each credit customer and arrange the customer
accounts in numeric order.
POSTING A CREDIT SALE

- Each credit sale recorded in the sales journal is posted to the appropriate customer’s account in the accounts
receivable ledger.
- The date, sale slip number, and the amount that the customer owes as a result of the sale are transferred from
the sales journal to the customer’s account.
- The amount is taken from the Accounts Receivable Debit Column of the journal and is entered in the Debit
column of the account
- To show that the posting has been completed, a check mark is entered in the sales journal and the abbreviation
S1 is entered in the Post Ref. column of the customer’s account.

POSTING CASH RECEIVED ON ACCOUNT
- When the transaction involves cash received on account from a credit customer, the cash collected is first
recorded in a cash receipts journal
- The cash is then posted to the individual customer account in the accounts receivable ledger
NAME ________________________
ADDRESS ________________________
DATE DESCRIPTION F DEBIT CREDIT BALANCE

20X1
JAN. 1 Balance xxx
3 Sales Slip 1101 S1 xxx xxx
7 CR xxx xxx
SALES RETURNS AND ALLOWANCES

- The balance of the Sales Returns and Allowances account is subtracted from the balance of the Sales account
to show net sales on the income statement.
- A sale is entered in the accounting records when the goods are sold or the services are provided, if something is
wrong with the goods or service, the firm may take back the goods, resulting in a sales return or give the
customer a reduction in price resulting in sales allowance.
- When a return or allowance is related to a credit sale, the normal practice is to issue a document called a credit
memorandum to the customer rather than giving a cash refund. Credit memo states that the customer’s
account is being reduced by the amount of the return or allowance plus any sales tax.
- Debit to sales returns and allowances is preferred to making a direct debit to sales
- It is a contra revenue account because it has a debit balance, which is contrary, or opposite, to the normal credit
balance for a revenue account.
T-Account Representation
Sales Tax Payable
- +
xxx
Sales Returns and Allowances

+ -
xxx
Sales Tax Payable

+ -
xxx
General Journal Entry
GENERAL JOURNAL

20X1
JAN 23 Sales Returns and Allowances xxx
Accts. Rec xxx
Effects on Financial Statements

- Increase in contra revenue causes a decrease in net income.
- The asset Accounts Receivable is decreased
- Liability Sales Tax Payable is also decreased
SALES RETURNS AND ALLOWANCES JOURNAL

- A business may use a general journal to record this transaction, or it may use a special sales returns and
allowances journal
- Small firm that has a limited number of sales returns and allowances doesn’t need to establish a special journal
for these transactions
- It is efficient to use a special journal for this transaction if a business is having many sales returns and
allowances.
REPORTING NET SALES

- At the end of each accounting period, the balance of the sales returns and allowances account is subtracted
from the balance of the sales account in the revenue section of the income statement. The resulting figure is the
net sales for the period.
Maxx-Out Sporting Goods

Income Statement (Partial)
Month Ended January 31, 20X1
Revenue
Sales xxx
Less: Sales Returns and Allowances xxx
Net Sales xxx
SCHEDULE OF ACCOUNTS RECEIVABLE

- This account remains in the general ledger and continues to appear on the balance sheet at the end of each
fiscal period.
- The total of the schedule is compared with the balance of the Accounts Receivable account. If the two figures
are not equal, errors must be located and corrected.
- It reports information about the firm’s accounts receivable at the end of the month
- Management can review the schedule to see exactly how much each customer owes.
__________________________________________________________________
SECTION 3
WHOLESALE BUSINESS

- A manufacturer or a distributor of goods that sells to retailers or large consumers such as hotels and
hospitals.
- Procedures used by wholesalers to handle sales and accounts receivable are the same as those used by
retailers.
- Offers cash discounts and trade discounts, which are not commonly found in retail operations. If the business
does not offer a cash discount, the payment terms would be net 30, (n/30), meaning payment is due by 30 days
after the invoice date.
COMPUTING TRADE DISCOUNT

- The price adjustment is based on the volume purchased by trade customers and takes the form of a trade
discount, which is a reduction from the list price – the established retail price (list price less all trade discounts) is
the amount the wholesaler records in its sales journal.
- The net price (list price less all trade discounts) is the amount the wholesaler records in its sales journal.
- Publishing separate trade discounts can simplify the pricing structure appearing in product catalogues and
brochures, while providing the company the flexibility to change the discounts offered through separate updates.
- Companies can raise the discount offered as the volume of product purchased increases, promoting customer
loyalty.
Single Trade Discount
List price P1500

Less 40% discount (1500 x
0.40) 600
Invoice price P900
Series of Trade Discount
List price P1500

Less first discount (1500 x 0.25) 375
Difference P1125
Less second discount (1125 x
0.15) 168.75
P956.2
Invoice price 5
Recording Merchandise Purchased with Trade Discounts

Example transactions:
A vendor of Big 10 Sporting Goods, Modern Sportsman, offers merchandise for sale with a list price of P10,000, with
trade discounts of 20% and 10%, terms 2/10, n/30.
On September 15, Big 10 Sporting Goods purchased merchandise with a list price of P10,000 from Modern Sportsman.
On September 24, Big 10 Sporting Goods paid the amount owed to Modern Sportsman, less the 2% discount.
P10,00
List price 0
Less first
discount 2,000

Difference P8,000
Less second
discount 800
Invoice price P7,200
The journal entry to record:
GENERAL JOURNAL

20X1
1
SEPT 5 Merchandise Inventory P7200
Accounts Payable - Modern Sportsman P7200
2
4 Accounts Payable - Modern Sportsman 7200
Merchandise Inventory (2% x 7,200) 144
Cash (P7,200 - P144) 7056
Sales Journal for a Wholesale Business

- Wholesale business does not need to account for such taxes
- Maybe a simple sales journal that has a single amount column.
- The total of this column is posted to the general ledger at the end of the month as debit to the Accounts
Receivable account and a credit to the Sales account
INVOICE ACCOUNTS RECEIVABLE DR

DATE CUSTOMER'S ACCOUNT DEBITED
NO. SALES CR
20X1
JAN 3 7099 Hardware Company xxx
31 7151 Department Store xxx
31 Total xxx
CREDIT POLICIES
- The Increase in profits a business expects when it grants credit will be realized only if each customer completes
the transaction by paying for the goods or services purchased. If payment is not received, the expected profits
become actual losses and the purpose for granting the credit is defeated
- Business firms try to protect against the possibility of such losses by investigating a customer’s credit record
ability to pay for purchases before allowing any credit to the customer.
- Larger business maintains a credit department to determine the amounts and types of credit that should be
granted to customers

Each business must develop credit policies that achieve maximum losses from uncollectible accounts:
● A credit policy that is not too tight results in a low level of losses at the expense of increase in sales volume.
● A credit policy that is too lenient may result in increased sales volume accompanied by a high level of losses.
Accounting for different types of credit sales

● Open-account credit - The form of credit most commonly offered by professional people and small business
permits the sale of services or goods to the customer with the understanding that the amount is to be paid at a
later date.
● Business credit cards – many larger retail businesses such as department stores, gasoline companies, provide
their own credit card to customers who have established a credit. Whenever a sale is complete using a business
credit card, a sales slip is prepared in the usual manner, then the sales slip and the credit card are placed in a
mechanical device that prints the customer’s name, account number, and other data on all copies of the sales
slip.
● Bank credit cards – Retailers can provide credit while minimizing or avoiding the risk of losses from
uncollectible accounts by accepting bank credit cards. The most widely accepted bank credit cards are
MasterCard and Visa.
● Cards issued by credit card companies – credit cards such as American Express and Diners Club are issued
by business firms or subsidiaries of business firms that are operated for the special purpose of handling credit
card transactions. The potential cardholder must submit an application and pay an annual fee to the credit card
company
ACCOUNTING FOR CREDIT CARD SALES

● The procedure used to account for credit card sales is similar to the procedure for recoding open-account credit
sales. However, the account receivable is with the credit card company, not with the cardholder who buys the
goods or services.
Recording Credit Card Company Sales
SALES TAX
SALES CUSTOMER'S ACCOUNT ACCOUNTS SALES
DATE PAYABLE
SLIP NO. DEBITED RECEIVABLE DEBIT CREDIT
CREDIT
20X1
JAN 3 533 American Express xxx xxx xxx
(Wilson Davis)
11 651 MasterCard xxx xxx xxx
(Teresa Logan)
Recording Sales for Accounts Receivable from Credit Card Companies

SALE ACCT. REC. - SALES -
SALES
ACCOUNTS CREDIT SALES CREDIT
S CUSTOMER'S ACCOUNT TAX
DATE F RECEIVABL CARD CREDI CARD
SLIP DEBITED PAYABLE
E DEBIT COMPANIES T COMPANIE
NO. CREDIT
DEBIT S CREDIT
20X
1
Summary of credit card
JAN 3 sales/
American Express xxx xxx xxx
1 Summary of credit card

1 sales/
MasterCard xxx xxx xxx
3
1 Totals xxx xxx xxx
xxx xxx xxx
Sales Taxes
- The retailer is required to collect sales tax from customers, make periodic reports to the taxing authority, and pay
the taxes due when the reports are filed.
- The information required for the monthly return comes from the accounting data of the current month.
- Three accounts are involved: Sales Tax Payable, Sales, and Sales Returns and Allowances
The amount of the firm’s taxable gross sales is determined as:
Cash Sales Pxxx

Credit sales xxx
Total sales Pxxx
Less sales returns and allowances xxx
Taxable gross sales for January Pxxx
VIII. ACCOUNTING FOR PURCHASES AND ACCOUNTS PAYABLE
SECTION 1
MERCHANDISE PURCHASES
Accounting for Purchases

- A large firm usually has a centralized purchasing department that is responsible for locating suppliers, obtaining
price quotations, negotiating credit terms, and placing orders.
- Small firms' purchasing activities are handled by a single individual, usually the owner or manager.
Purchasing Procedures

a) When a sales department needs goods, it sends the purchasing department a purchase requisition – lists of
items to be ordered signed by someone with the authority.
b) The purchasing department selects a supplier that can furnish the goods at a competitive price and then issues
a purchase order – specifies the exact items, quantity, price, and credit terms signed by someone with the
authority.
c) When the goods arrived at the business, they are inspected
d) A receiving report is prepared to show the quantity and condition of the goods received
e) The purchasing department receives a copy of the receiving report and compares it to the purchase order.
f) If defective goods or the wrong quantity and condition of the goods receive, the purchasing department contacts
the supplier and settles the problem.
Purchases Account
- It is a temporary account classified as a cost of goods sold on account.
Cost of Goods Sold
- Actual cost to the business of the merchandise sold to customers.
FREIGHT CHARGES
- Sometimes the buyer pays the freight charge – cost of shipping goods from the seller’s warehouse to the
buyer’s location
There are two ways to handle the freight charges paid by the buyer
1. The buyer is billed directly by the transportation company for the freight charge. The buyer issues a check
directly to the freight company.
2. The seller pays the freight charge and includes it on the invoice. The invoice includes the price of the goods
and the freight charge.
The freight charge is debited to the Freight in or Transportation In account. This is a cost of goods sold account showing
transportation charges for merchandise purchased. The buyer enters three elements in the accounting records:
Price of goods (debit Purchases) P550

Freight charge (debt Freight In) 50
Total invoice credit Accounts Payable P600
Purchases Journal
- For most merchandising businesses, it is not efficient to enter purchases of goods in the general journal.
Instead, credit purchases of merchandise are recorded in a special journal called the purchases journal.
GENERAL JOURNAL

20X1
JAN 3 Purchases 501 xxx
Freight In 502 xxx
Accounts Payable 205 xxx
Purchased merchandise from Active Designs,
Invoice 5879 dated Jan. 2, 20X1 terms 2/10, n/10

INVOICE ACCOUNT
PURCHASED INVOICE PURCHASE FREIGHT
DATE NUMBE TERMS F S PAYABLE
FROM DATE S DEBIT IN DEBIT
R CREDIT
20X
1
JAN 3 5879 1/2/20X1 2/10, n/30 xxx xxx xxx
5 633 1/3/20X1 n/30 xxx xxx xxx
6 8011 1/4/20X1 n/31 xxx xxx xxx
7 4321 1/4/20X1 2/10, n/30 xxx xxx xxx
1 1/15/20X
9 8997 1 2/10, n/30 xxx xxx xxx
2 1/22/20X
3 7985 1 n/31 xxx xxx xxx
3
1 xxx xxx xxx
Recording Transaction in a Purchase Journal

Use the information on the purchase invoice to make the entry in the purchases journal:
1. Enter the date, supplier name, invoice number, invoice date, and credit terms.
2. In the Accounts Payable Credit column, enter the total owed to the supplier.
3. In the Purchases Debit column, enter the price of the goods purchased.
4. In the Freight in Debit column, enter the freight amount.
The total of the Purchases Debit and Freight in Debit columns must equal the amount entered in the Accounts Payable
Credit column. The invoice date and credit terms determine when payment is due.
The following credit terms often appear on invoices:

- Net 30 days, or n/30, means that payment in full is due 30 days after the date of the invoice.
- Net 10 days EOM, or n/10 EOM, means that payment in full is due 10 days after the end of the month in
which the invoice was issued.
- 2% 10 days, net 30 days, or 2/10, n/30, means that if payment is made within 10 days of the invoice date, the
customer can take a 2 percent discount. Otherwise, payment in full is die in 30 days.
Remember that the purchases journal is only for credit purchases of merchandise for resale to customers
____________________________________________________________________________________
SECTION 2
ACCOUNTS PAYABLE LEDGER

- Provides information about the individual accounts for all creditors
- It is a subsidiary ledger; it is separate from and subordinate to the general ledger
- Shows purchases, payments, and returns and allowances

- The balance of the account shows the amount owed to the creditor
PURCHASE RETURNS AND ALLOWANCES

- When merchandise arrives, it is examined to confirm that it is satisfactory
- A purchase return is when the business returns the goods. A purchase allowance is when the purchaser
keeps the goods but receives a reduction in the price of the goods.
- The supplier issues a credit memorandum for the return or allowance. The credit memorandum reduces the
amount that the purchaser owes. Purchases returns and allowances are entered in the Purchases Returns
and Allowances account, not in the Purchases account.
T-Account Presentation
Purchases Returns and
Allowances
- +
xxx
Accounts Payable
- +
xxx
General Journal Entry
GENERAL JOURNAL
DEBI CREDI
DATE DESCRIPTION F T T
20X
1
3
JAN 0 Accounts Payable xxx
Purchases Returns and Allowances xxx
Received Credit Memo 103 for damaged
merchandise returned; original invoice 7985
COST OF PURCHASES
- Purchases account accumulates the cost of merchandise bought for resale. The income statement of a
merchandising business contains a section showing the total cost of purchases. Combines information about
the cost of the purchases, freight in, and purchases returns and allowances for the period.
Net delivered cost of purchases is calculated as:

Purchases 17540
Freight in 1225
Delivered Cost of Purchases 18795
Less Purchases Returns and
Allowances 100
Net Delivered Cost of Purchases 18595

For firms that do not have freight charges, the amount of net purchases is calculated as:
Purchases 17540
Less Purchases Returns and
Allowances 100
Net Purchases 17440
Internal Control of Purchases

- Internal controls are the company’s policies and procedures in place to safeguard assets, ensure reliability of
accounting data, and promote compliance with management policies and applicable laws
- Purchases and payments should be properly authorized and processed with appropriate documentation to
provide a system of checks and balances
- A division of responsibilities within the purchases ensures strong internal controls.
A business should ensure its control process includes sufficient safeguards to:
a. Create written proof that purchases and payments are authorized;
b. Ensure that different people are involved in the process of buying goods, receiving goods, and making
payments.
IX.CASH RECEIPTS, CASH PAYMENTS, AND BANKING PROCEDURES
SECTION 1
Cash Receipts
- Cash is the business asset that is most easily lost, mishandled, or even stolen
- Types of cash receipts depends on the nature of the business
- Supermarket receive checks as well as currency and coins, Department stores receive checks in the mail, or
by electronic payment, from charge account customers
- Cash received by wholesalers is usually in the form of checks.
Cash Transactions
- Most transactions involve checks and electronic transfers of funds.
Cash Payments
- Most businesses make payments by check
- Petty cash funds are used to handle payments involving small amounts of money, such as postage stamps,
delivery charges, and minor purchases of office supplies.
- Some businesses maintain a fund to provide cash for business-related travel and entertainment expenses.
Cash Receipts Journal
CASH RECEIPTS JOURNAL

PAGE _1_

SALES OTHER ACCOUNTS CREDIT
ACCOUNTS SALES
TAX CASH
DATE DESCRIPTION F RECEIVABLE CREDI ACCOUNT
PAYABLE F AMOUNT DEBIT
CREDIT T NAME
CREDIT
20X
1
JAN 7 An Anh xxx xxx
8 Cash Sales xxx xxx xxx
Vickie
11 Bowman xxx xxx
M. Ferraro,
12 Investment Capital xxx xxx
13 Barbara Coe xxx xxx
Cash
15 Cash Sales xxx xxx short/over xxx xxx
The cash receipts journal has separate columns for the accounts frequently used when recording cash receipts. There
are columns for:
● debits to Cash,
● credits to Accounts Receivable for payments received on account,
● credits to Sales and Sales Tax Payable for cash sales.
At the end of the month, the totals of these columns are posted to the general ledger.
Cash Short or Over

- Occasionally, errors occur when making changes. When errors happen, the cash in the cash register is either
more than or less than the cash listed on the audit tape.
- When cash in the register is more than the audit tape, cash is over.
- When cash in the register is less than the audit tape, cash is short.
- Cash tends to be short more often than over because customers are more likely to notice and complain if
they receive too little change.
- If the account has a credit balance, there is an overage, which is treated as revenue. If the account has a
debit balance, there is a shortage, which is treated as an expense.
Cash Received on Account

- After a firm bills the customers once a month. They send a statement of account that shows the transaction
during the month and the balanced owed
- A firm checks the credit customers, and are entered in the cash receipts journal, then the checks are
deposited in the bank
Cash Discounts on Sales

- Most retail businesses do not offer cash discounts. However, many wholesale businesses offer cash
discounts to customers who pay within 10 days
- Sales discounts are recorded when the payment is received
Collection of a Promissory Note and Interest

- A promissory note is a written promise to pay a specified amount of money on a certain date
- Most notes require that interest is paid at a specified rate
- Sometimes used to replace an accounts receivable balance when the account is overdue

____________________________________________________________________________________
SECTION 2
Cash Payments Journal

- Special journal used to record transaction involving the payment of cash
CASH PAYMENTS JOURNAL

PAGE __1__
OTHER ACCOUNTS DEBIT PURCHASE

CASH
CK ACCOUNTS S
DATE DESCRIPTION F AMOUN CREDI
NO. PAYABLE ACCOUNT TITLE F DISCOUNT
T T
DEBIT S CREDIT
20X
1
JAN 1 111 January rent Rent expense xxx xxx
112 Store fixtures Store Equipment xxx xxx
113 Tax remittance Sales Tax Payable xxx xxx
World of
114 sports xxx xxx xxx
115 Active designs xxx xxx xxx
Notice that there are separate columns for the accounts frequently used when recording cash payments. At the end of
the month, the totals of these columns are posted to the general ledger.
Petty Cash fund
Establishing the fund

- The amount of the petty cash fund depends on the needs of the businesses. Usually the office manager,
cashier, or assistant is in charge of the petty cash fund
- The establishment of the petty cash fund should be recorded in the cash payments journal.
- Debit Petty Cash Fun in the other accounts debit section of the journal and enter the credit in the cash credit
column.
Making Payments from the Fund

- Petty cash fund payments are limited to small amounts
- A petty cash voucher is used to record the payments made from the petty cash fund
- The person receiving the funds signs the voucher, and the person who controls the petty cash fund initializes
the voucher.
Petty Cash Analysis Sheet

- Record transactions involving petty cash
- The receipts column shows cash put in the fund, and the payments column shows the cash paid out
Replenishing the Fund
1. Total the columns on the petty cash analysis sheet.

2. Prove the petty cash fund by adding cash on hand and total payments. This should equal the petty cash fund
balance.
3. Write a check to restore the petty cash fund to its original balance.
4. Record the check in the cash payments journal. Refer to the petty cash analysis sheet for the accounts and
amounts to debit.
_____________________________________________________________________________________________
SECTION 3
BAKING PROCEDURES
- Many businesses make daily bank deposits, and some make two or three deposits a day. Keeping excess
cash is a dangerous practice
Writing checks
- A check is a written order signed by an authorized person, the drawer, instructing a bank, the drawee, to pay
a specific sum of money to a designated person or business.
Endorsing Checks
- A written authorization that transfers ownership of a check.
- After the payee transfer ownership to the bank by an endorsement, the bank has a legal right to collect
payment from the drawer, the person or business that issued the check
- If the check cannot be collected, the payee guarantees payment to all subsequent holders.
Blank endorsement – is the signature of the payee that transfers ownership of the check without specifying to whom or
for what purpose
Full endorsement – is a signature transferring a check to a specific person, business, or bank. Only the person,
business, or bank named in the full endorsement can transfer it to someone else.
Restrictive endorsement – a signature that transfer the check to a specific party for a specific purpose, usually for
deposit to a bank account
Deposit Slip
- A form prepared to record the deposit of cash or checks to a bank account
Postdated Check
- Dated sometime in the future
- If the business receives a postdated check, it should not deposit it before the date on the check. Otherwise,
the check could be refused by the drawer's bank.
- Postdated checks are written by drawers who do not have sufficient funds to cover the check. The drawer
expects to have adequate funds in the bank by the date on the check. Issuing or accepting postdated checks
is not a proper business practice.
Reconciling the Bank Statement

- It shows a day-to-day listing of all transactions during the month.
- A code, explained at the bottom, identifies transactions that do not involve checks or deposits. The last
column of the bank statement shows the account balance at the beginning of the period, after each day's
transactions, and at the end of the period.

Cancelled checks are checks paid by the bank during the month. Cancelled checks are proof of payment. They are filed
after the bank reconciliation is complete.
Changes in the Checking Account Balance

● Credit memorandum explains any addition, other than a deposit, to the checking account. For example, when
a note receivable is due, the bank may collect the note from the maker and place the proceeds in the checking
account. The amount collected appears on the bank statement, and the credit memorandum showing the
details of the transaction is enclosed with the bank statement.
● Debit memorandum explains any deduction, other than a check, from the checking account. Service charges
and dishonored checks appear as debit memorandums.
● Bank service charges are fees charged by banks to cover the costs of maintaining accounts and providing
services, such as the use of the night deposit box and the collection of promissory notes.
● Dishonored check is one that is returned to the depositor unpaid. Normally, checks are dishonored because
there are insufficient funds in the drawer's account to cover the check. The bank usually stamps the letters NSF,
for Not Sufficient Funds, on the check. The business records a journal entry to debit Accounts Receivable and
credit Cash for the amount of the dishonored check.
BANK RECONCILIATION PROCESS
- Sometimes the difference between the bank balance and the book balance is due to errors. The bank might
make an arithmetic error, give credit to the wrong depositor, or charge a check against the wrong account.
Other than errors, there are four reasons why the book balance of cash may not agree with the balance on the bank
statement.
1. Outstanding checks are checks that are recorded in the cash payments journal but have not been paid by
the bank.
2. Deposit in transit is a deposit that is recorded in the cash receipts journal but that reaches the bank too late
to be shown on the monthly bank statement.
3. Service charges and other deductions are not recorded in the business records.
4. Deposits, such as the collection of promissory notes, are not recorded in the business records.
Maxx-Out Sporting Goods

Bank Reconciliation Statement
December 31, 20X1
Balance on Bank Statement xxx

Additions:
Deposit of January 31 in transit xxx
Check incorrectly charged to account xxx xxx
xxx
Deductions for outstanding checks
check 124 of January 31 xxx
check 127of January 31 xxx
Total Checks Outstanding xxx

Adjusted Bank Balance xxx
Balance in Books xxx

Deductions:
NSF Check xxx
Bank Service Charge xxx xxx
Adjusted Book Balance xxx
First Section
Bank Statement balance

+ deposits in transit
- outstanding checks
+/- bank errors
Adjusted book balance
Second Section
Book balance
+ deposits not recorded
- deductions
+/- errors in the books
Adjusted book balance
Using Online Banking

- Online banking offers many features to make businesses more efficient. These features include:
a. Businesses can initiate electronic funds transfers (EFT) to vendors from a computer instead of writing
checks.
b. Payments to government agencies for taxes can be submitted online, using the government agency
website, to avoid late payment penalties.
c. Businesses can receive EFT from customers, rather than receiving checks in the mail.
d. Businesses can deposit checks from customers using a dedicated scanning device.
e. Many banks offer security alerts for such instances as changes in mailing addresses and ATM and
automatic payment withdrawals that exceed specified limits.
X.PAYROLL COMPUTATIONS, RECORDS AND PAYMENT
SECTION 1
PAYROLL LAWS AND TAXES

- A large component of the activity of any business is concerned with payroll work. Payroll accounting is so
important that it requires special consideration.

EMPLOYEE
- An employee is hired by and works under the control and direction of the employer.
- Usually the employer provides the tools or equipment used by the employee, sets the employee's working
hours, and determines how the employee completes the job.
- All employee earnings are subject to payroll taxes, and those taxes are reported on a calendar-year basis.
- Examples of employees are the company president, the bookkeeper, the sales clerk, and the warehouse
worker.
INDEPENDENT CONTRACTOR
- Paid by the company to carry out a specific task or job but is not under the direct supervision or control of
the company.
- Told what needs to be done, but the means of doing the job are left to the independent contractor.
- Examples of independent contractors are the accountant who performs the independent audit, the outside
attorney who renders legal advice, and the consultant who installs a new accounting system.
FAIR LABOR STANDARDS ACT

- applies only to firms engaged directly or indirectly in interstate commerce. It sets a minimum hourly rate
of pay and maximum hours of work per week to be performed at the regular rate of pay.
- When an employee works more than 40 hours in a week, the employee earns at least one and one-half times
the regular hourly rate of pay for the extra hours. This overtime rate is called time and a half.
SOCIAL SECURITY TAX

- A federal act providing certain benefits for employees and their families.
Social Security's Old-Age, Survivors, and Disability Insurance (OASDI) program provides the following benefits:
● Retirement benefits when a worker reaches the eligible retirement age.
● Benefits for the dependents of the retired worker.
● Benefits for the worker and the worker's dependents when the worker is disabled.
These retirement and disability benefits are paid by the social security tax, sometimes called the FICA or OASDI tax.
Both the employer and the employee pay an equal amount of social security tax. The employer is required to
withhold social security tax from the employee's pay.
To determine the amount of social security tax to withhold from an employee’s pay, multiply the taxable wages by the
social security tax rate. Round the result to the nearest cent.
Employee Gross Pay Tax Rate Tax

A 400 6.20% 24.8
B 380 6.20% 23.56
C 427.5 6.20% 26.51
D 560 6.20% 34.72
Total social
security tax 109.5
withheld 9
MEDICARE TAX

- closely related to the social security tax.
- a tax levied equally on employees and employers to provide medical care for the employee and the
employee's spouse after each has reached 65.
- applies to all salaries and wages paid during the year. The employer is required to withhold the Medicare
tax from the employee's pay and send it to the federal government on the schedule established by the IRS.
Employee Gross Pay Tax Rate Tax

A 400 1.45% 5.80
B 380 1.45% 5.51
C 427.5 1.45% 6.20
D 560 1.45% 8.12
Total Medicare tax 109.59
FEDERAL INCOME TAX

- Employers are required to withhold from employees' earnings an estimated amount of income tax that will be
payable by the employee on the earnings.
- The amount depends on several factors like single/married, how frequently an employee is paid, and number
of dependents.
Use the following steps to determine the amount to withhold;

1. Choose the table for the pay period and the employee’s marital status.
2. Find the row in the table that matches the wages earned. Find the column that matches the number of
withholding allowances claimed on Form W-4 – a form to claim exemption allowances. The income tax to
withhold is the intersection of the row and the column.
LOCAL TAXES
- employers are required to withhold local income taxes from employees' earnings.
- The local income tax withholding rules are generally almost identical to those governing federal income tax
withholding, but they require separate general ledger accounts in the firm's accounting system because those
taxes are submitted to the state and/or local government.
FEDERAL UNEMPLOYMENT TAX

- provides benefits for employees who become unemployed. Taxes levied by the federal government against
employers to benefit unemployed workers are called federal unemployment taxes (FUTA).
- Employers pay the entire amount of these taxes.
Federal Income Social Security

Tax Tax Medicare Tax Unemployment Tax
Employee Employee
Employee Employer
Employer Employer
The Employee pays these taxes by the withholding of the tax from the periodic wage payment.
The Employer pay these taxes through the deposits/filling and reporting on the appropriate forms.

WORKER’S COMPENSATION INSURANCE
- It is not a tax, but insurance that protects employees against losses from job-related injuries or illnesses, or
compensates their families if death occurs in the course of the employment.
- Typically, a company will pay the workers' compensation insurance premium at the beginning of the year, and
later in the year the rate may be adjusted by the insurance company based on claims against the company.
- Rates may also be separated by job roles and responsibilities within the business.
_____________________________________________________________________________
SECTION 2
COMPUTING TOTAL EARNINGS OF EMPLOYEES
● Hourly rate basis - workers earn a stated rate per hour. Gross pay depends on the number of hours worked.
● Salary basis – workers earn an agreed-upon amount for each week, month, or other period.
● Commission basis – workers, usually salespeople, earn a percent of net sales.
● Piece-rate basis – manufacturing workers are paid based on the number of units produced.
HOURS WORKED
- Many businesses use time and attendance systems for hourly employees.
- The payroll clerk collects this data at the end of the week, determines the hours worked by each employee,
and multiplies the number of hours by the pay rate to compute the gross pay and withholdings.
- Most businesses utilize a payroll software program to calculate earnings, withholdings, and net pay.
GROSS PAY
Example:
Dunlap earns P200 per hour. He worked 45 hours. He is paid 40 hours at regular pay and 5 hours at time and a half.
The Wage and Hour Law method identifies the overtime premium, the amount the firm could have saved if all the hours
were paid at the regular rate. The overtime premium rate is 100, one-half of the regular rate (P200 x ½ = P100)
Total hours x regular rate

45 hrs x 200 = P 9,000
Overtime Premium:
5 hrs x 100 = 500
Gross Pay P 9,500
WITHHOLDING ALLOWANCES
The amount of federal income tax to withhold from an employee’s earning depend on the:
● Earnings during the pay period,
● Length of the pay period.
● Marital status.
● Number of withholding allowances.
A tax payer claims a withholding allowance for:

● The taxpayer

● A spouse who does not also claim an allowance
● Each dependent for whom the taxpayer provides more than half the support during the year.
WITHHOLDINGS NOT REQUIRED BY LAW

● Group life insurance
● Group medical insurance
● Company retirement plans
● Bank or credit card union savings plans or loan repayments
● Stocks and other investment purchase plans
● Employer loan repayments
● Union dues
____________________________________________________________________________________
SECTION 3
RECORDING PAYROLL
- Involves two separate entries: to record the payroll expense and another to pay the employees.
- General journal entry to record the payroll expense is based on the payroll register.
T – ACCOUNT PRESENTATION
Office Salaries Expense Social Security Tax Payable

+ - - +
xxx xxx
Medicare Tax Payable Shipping Wages Expense

- + + -
xxx xxx
Employee Income tax Health Insurance Premium

Payable Payable
- + - +
xxx xxx
Salaries and Wages Payable

- +
xxx
GENERAL JOURNAL ENTRY
GENERAL JOURNAL

20X1
JAN 8 Office Salaries Expense xxx
Shipping Wages Expense xxx

Social Security Tax Payable xxx
Medicare Tax Payable xxx
Employee Income Tax Payable xxx
Health Insurance Premiums Payable xxx
Salaries and Wages Payable xxx
Payroll for week ending Jan. 6
Paying Employees
T-ACCOUNT PRESENTATION
Salaries and Wages Payable Cash

- + + -
xxx xxx
GENERAL JOURNAL ENTRY
GENERAL JOURNAL

20X
1
JAN 8 Salaries and Wages Payable xxx
Cash xxx
To record payment of salaries and wages for
week ended Jan. 6
XI. ACCRUALS, DEFERRALS, AND THE WORKSHEET
SECTION 1
ACCRUAL BASIS
- It attains the goal of matching expenses and revenue in an accounting period.
- Revenue is recognized when earned, expenses are recognized when incurred or used; not necessarily
when the cash is received or paid
ADJUSTMENTS
ACCRUED EXPENSE PREPAID EXPENSES/DEFERRALS

Expenses that relate to (are used in) the current period Expenses that are paid for and recorded before they are
but have not yet been paid and do not yet appear in the used.
accounting records
ACCRUED INCOME UNEARNED REVENUE
Income that has been earned but not yet received and Cash is received before income is earned.
recorded.
DEPRECIATION EXPENSE BAD DEBTS EXPENSE
The cost of a long-term asset is allocated over the asset’s Sometimes the account receivable is never collected.
expected useful life by depreciation (ppe except land) Losses from uncollectible accounts are classified as
operating expenses.
ADJUSTMENT FOR MERCHANDISE INVENTORY

*made in two steps, not necessary if a perpetual inventory system was used.
Accounts
- Income Summary: temporary owner’s equity account used in the closing process
- Purchases: all purchases of merchandise are debited to this account
- Sales: all sales of merchandise are credited to this revenue account
- Merchandise Inventory: consists of goods that business has on hand for sale to customers
● At the end of the period, business determines the ending balance
● Physical Inventory: counting the no. of units at hand and enter it on an inventory sheet; each item, the
quantity is multiplied by the unit cost to find the totals per item, all added up to compute for the total
cost of merchandise
➔ Step 1: The beginning inventory is taken off the books by transferring the account balance to the Income
Summary account [labeled “(a)” in the worksheet]
Merchandise Inventory Income Summary
Bal. xxxx Adj. xxxx Adj. xxxx
➔ Step 2: The ending inventory is placed on the books by debiting Merchandise Inventory and crediting Income
Summary [labeled “(b)” in the worksheet]
Merchandise Inventory Income Summary
Bal. xxxx Adj. xxxx Adj. xxxx Adj.xxxx

Adj. xxxx
➔ Effect of the Adjustment= removes the beginning merchandise inventory balance and replace it with the
ending merchandise inventory balance
_____________________________________________________________________________________________
SECTION 2
WORKSHEET
- Used as a tool to assemble data about adjustments and organize the information for financial statements
- To prepare for the income statement section transfer the adjusted amounts of revenues/ sales and expenses

- To prepare for the balance sheet section transfer the adjusted amounts of assets, liabilities, capital, and drawing
account
- Make sure to balance the debit and credit columns of the income statement and balance sheet.
COMPANY NAME
WORKSHEET
YEAR ENDED DECEMBER 31, 202X
Adjusted Trial
Trial Balance Adjustments Income Statement Balance Sheet
Account Balance
Name
DR CR DR CR DR CR DR CR DR CR
TRIAL BALANCE ADJUSTMENTS ACTION
Debit Debit ADD
Debit Credit SUBTRACT
Credit Credit ADD
Credit Debit SUBTRACT
XII. FINANCIAL STATEMENT AND CLOSING PROCEDURE

SECTION 1
PREPARING THE FINANCIAL STATEMENTS
- The information needed to prepare the financial statements is on the worksheet in the Income Statement and
Balance Sheet sections.
- Classified Format of Financial Statements: revenues, expenses, assets, and liabilities are divided into groups
of similar accounts and a subtotal is given for each group
CLASSIFIED INCOME STATEMENT
- Multi-step income statement; several subtotals are computed before net income is calculated.
- Operating Revenue: contains of the revenue earned from normal business activities
- Cost of Goods Sold: the cost of the merchandise sold during the period
Elements for computation
(a) Beginning Inventory
(b) Net Cost of Purchase
(c) Ending Inventory
FORMULA FOR COST OF GOODS SOLD:
Beginning Inventory

Add: Net Cost of Purchase
Purchases
Freight-In
Less: Purchase Returns and Allowances
Purchase Discount
Total Goods Available For Sale
Less: Ending Inventory
COST OF GOODS SOLD
- Gross Profit on Sales: The difference between Net Sales and Cost of Goods Sold
Formula for Net Sales:
Sales
Less: Sales Returns and Allowances

Sales Discount
GROSS PROFIT ON SALES
- Operating Expenses: All expenses arises from normal business activities;

2 Categories:
(a) Selling Expenses: All expenses related to sales
(b) General Administrative Expenses: Expenses not directly connected with sales function; rent, utilities, salaries for
office
NET INCOME/NET LOSS FROM OPERATIONS
- Keeping operating and nonoperating income separate helps financial statement users learn about the operating
efficiency of the firm
Format:
Gross Profit on Sales
Less: Total Operating Expenses
NET INCOME/NET LOSS FROM OPERATIONS
OTHER INCOME AND OTHER EXPENSES

- Income that is earned from sources other than normal business activities: appears in the Other Income section
- Expenses that are not directly connected with business operations: appear in the Other Expenses section
- Net Income/ Net Loss: This is used in preparing Statement of Owner’s Equity
CLASSIFIED INCOME STATEMENT

COMPANY NAME

INCOME STATEMENT
OPERATING REVENUE
Sales xxxx
Less: Sales Return Allowances xxxx
Sales Discount xxxx
Net Sales xxxx
COST OF GOODS SOLD
Beginning Inventory xxxx
Add: Purchase xxxx
Freight-In xxxx
Delivered Cost of Purchase xxxx
Less: Purchase R&A xxxx
Purchase Discounts xxxx xxxx
Net Delivered Cost of Purchase xxxx
Total Goods Available for Sale xxxx
Less: Ending Inventory xxxx
Cost of Goods Sold xxxx
Gross Profit on Sales xxxx
OPERATING EXPENSES
Selling Expenses
Salaries Expenses-Sales xxxx
Advertising Expense xxxx
Cash Short or Over xxxx
Supplies Expense xxxx
Depreciation Expense - Store xxxx
Total Selling Expense xxxx
Administrative Expense
Rent Expense xxxx

Salaries Expense - Office xxxx
Insurance Expense xxxx
Payroll Taxes Expense xxxx
Depreciation Expense - Office xxxx
Total Administrative Expense xxxx
Total Operating Expense xxxx
Net Income from Operations xxxx
OTHER INCOME
Interest Income xxxx
Miscellaneous Income xxxx
Total Other Income xxxx
OTHER EXPENSE
Interest Expense xxxx
Net Non Operating Expense xxxx
NET INCOME xxxx
CONDENSED INCOME STATEMENT

- Summarized the detail in a few lines of information.
COMPANY NAME
INCOME STATEMENT
Net Sales xxxx
Cost of Goods Sold xxxx
Gross Profit xxxx
Operating Expenses
Selling Expenses xxxx
Administrative Expenses xxxx
Total Operating Expense xxxx

Net Income from Operations xxxx
Other Expense xxxx
NET INCOME xxxx

- It reports the changes that occurred in the owner’s financial interest during the period.
COMPANY NAME
Name, Capital, January 1 xxxx
Net Income xxxx
Less: Withdrawals xxxx
Increase in Capital xxxx
NAME, CAPITAL, DECEMBER 31

xxxx
CLASSIFIED BALANCE SHEET

- Divides the various assets and liabilities into groups
- Current Assets: Cash, items normally converted into cash and is listed in order of liquidity
- Plant and Equipment: Non current asset PPE; used in the business for longer than one year
* Book value = Original cost that is not yet depreciated
- Current Liabilities: Debts to paid within a year and is listed in priority of payment
- Long-term Liabilities: Debts due more than a year
- Owner’s Equity: Financial interest
Illustration:
COMPANY NAME
BALANCE SHEET
DECEMBER 31,202X
ASSETS
Current Assets
Cash xxxx
Petty Cash Fund xxxx

Notes Receivable xxxx
Accounts Receivable xxxx
Less: Allowance for DOubtful Accounts xxxx xxxx
Interest Receivable xxxx
Merchandise Inventory xxxx
Prepaid Expense
Supplies xxxx
Prepaid Insurance xxxx
Prepaid Interest xxxx xxxx
Total Current Assets xxxx
Plant and Equipment
Store Equipment xxxx
Less: Accumulated Depreciation xxxx xxxx
Office Equipment xxxx
Less: Accumulated Depreciation xxxx xxxx
Total Plant and Equipment xxxx
TOTAL ASSETS xxxx
LIABILITIES AND OWNER’S EQUITY
Current Liabilities
Notes Payable - Trade xxxx
Notes Payable - Bank xxxx
Accounts Payable xxxx
Interest Payable xxxx
Social Security Tax Payable xxxx
Medicare Tax Payable xxxx
Employee Income Tax Payable xxxx
Federal Unemployment Tax Payable xxxx
State Unemployment Tax Payable xxxx

Salaries Payable xxxx
Sales Tax Payable xxxx
TOTAL CURRENT LIABILITIES xxxx
OWNER’S EQUITY
Name, Capital xxxx
TOTAL LIABILITIES & OWNER’S EQUITY xxxx
JOURNALIZING ADJUSTING ENTRIES

- Adjustments are made a permanent part of the accounting records
- They are recorded in the general journal as adjusting journal entries and are posted to the general ledger.
TYPE OF ADJUSTMENTS PURPOSE
INVENTORY Removes beginning inventory and adds ending inventory to

the accounting records.
EXPENSE Matches expense to revenue for the period; the credit is to

a contra asset account
Required for bad debts and depreciation.
ACCRUED EXPENSE Matches expense to revenue for the period; the credit is to
a liability account
PREPAID EXPENSE Matches expense to revenue for the period; the credit is to
an asset account
ACCRUED INCOME Recognizes income earned in the period. The debit is to an

asset account
Illustration:
GENERAL JOURNAL
Adjusting Entries
202X Income Summary xxxx
DEC. 31 Merchandise Inventory xxxx
To transfer beg. in. to income summary

31 Merchandise Inventory xxxx
Income Summary xxxx
To record ending inventory
31 Doubtful Accounts Expense xxxx
Allowance for Doubtful Accounts xxxx
To record estimated loss...
31 Depreciation Expense- Equipment xxxx
Accumulated Depreciation-Equip xxxx
To record depreciation
31 Salaries Expense xxxx
Salaries Payable xxxx
To record accrued salaries
31 Payroll Taxes Expense xxxx
Social Security Tax Payable xxxx
Medicare Tax Payable xxxx
To record accrued payroll taxes
31 Interest Expense xxxx
Interest Payable xxxx
To record interest on a _ note payable dated

_
31 Supplies Expense xxxx
Supplies xxxx
To record supplies used

31 Insurance Expense xxxx
Prepaid Insurance xxxx
To record expired insurance
31 Interest Expense xxxx
Prepaid Interest xxxx
To record transfer of _ prepaid interest
31 Interest Receivable xxxx
To record accrued interest
POSTING ADJUSTING ENTRIES

- After journalizing, the next step is to post it in the general ledger
- Word adjusting is entered in the Description column of the general ledger account; to distinguish entries
occurred in that period
- After the adjusting entries have been posted, the general ledger account balances match the amounts
shown in the Adjusted Trial Balance section of the worksheet
JOURNALIZING CLOSING ENTRIES
- All temporary accounts are closed at the end of the period
(a) Revenue
(b) Cost of goods sold
(c) Expense
(d) Income summary
(e) Drawing accounts
➔ Step 1: Closing the Revenue Accounts and the Cost of Goods Sold Accounts with Credit Balances to
Income Summary
GENERAL JOURNAL
Date Description F DEBIT CREDIT
202X Closing Entries
DEC 31 Sales xxxx
Miscellaneous Income xxxx

Purchases Returns and Allowances xxxx
Purchase Discounts xxxx
Income Summary xxxx
➔ Step 2:Closing the Expense Accounts and the Cost of Goods Sold Accounts with Debit Balances.
GENERAL JOURNAL
DEC 31 Income Summary xxxx
Sales Return and Allowances xxxx
Purchases xxxx
Freight-In xxxx
Salaries Expense-Sales xxxx
Advertising Expense xxxx
Cash Short or Over xxxx
Supplies Expense xxxx
Depreciation Expense xxxx
Rent Expense xxxx
Salaries Expense xxxx
Insurance Expense xxxx
Payroll Tax Expense xxxx
Uncollectible Accounts Expense xxxx
Interest Expense xxxx
➔ Step 3: Closing the Income Summary Account.

This entry transfers the balance into the Capital Account
* the balance in the Income Summary Account should be equal to the net income or loss for the period.
GENERAL JOURNAL

DEC 31 Income Summary xxxx
Name, Capital xxxx
➔ Step 4: Closing Drawing Account

This entry closes the drawing account and updates the capital account so that its balance agrees with the ending
capital reported on the statement of owner’s equity and on the balance sheet.
GENERAL JOURNAL
DEC 31 Name, Capital xxxx
Name, Drawing xxxx
POSTING THE CLOSING ENTRIES

- Closing entries are posted from the general journal to the general ledger
- Word Closing is entered in the Description column of each account that is closed
- After the closing entry is posted, each temporary account balance is zero
PREPARING POST-CLOSING TRIAL BALANCE

- To confirm that general ledger is in balance
- Assets, liabilities, capital are the only accounts should appear
- Any necessary correcting entries must be journalized and posted so that the general ledger is in balance
before any transactions can be recorded for the new period
___________________________________________________________________________________________
SECTION 2
FINANCIAL RATIOS
GROSS PROFIT 𝐺𝑟𝑜𝑠𝑠 𝑃𝑟𝑜𝑓𝑖𝑡 Calculate the amount of gross profit earned from each
𝑁𝑒𝑡 𝑆𝑎𝑙𝑒𝑠
PERCENTAGE dollar of sales
WORKING 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡𝑠 − 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖 To measure ability to pay current obligations, maybe
CAPITAL compared to other firms
CURRENT RATIO 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐴𝑠𝑠𝑒𝑡 Another measure of a firm’s ability to pay its current
𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝐿𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦
obligations. The current ratio may be compared to
other firms in the same business
INVENTORY 𝐶𝑂𝐺𝑆
*Average Inventory = Calculate and evaluate the company’s efficiency in
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐼𝑛𝑣𝑒𝑛𝑡𝑜𝑟𝑦
TURNOVER [(Beginning Inventory+Ending Inventory)/2] purchasing and selling merchandise inventory

ACCOUNTS 𝑁𝑒𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑆𝑎𝑙𝑒𝑠
*Average Calculate and evaluate the company’s efficiency in
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑅𝑒𝑐𝑒𝑖𝑣𝑎𝑏𝑙𝑒
RECEIVABLE accounts receivable (A/R) = [(Beginning A/R +
granting credit and collecting cash from credit
TURNOVER Ending A/R)/ 2] customers
AVERAGE 365 days / Accounts Receivable To calculate the average number of days it takes for a
COLLECTION Turnover business to receive cash from credit customers
PERIOD
AVERAGE 365 days / Inventory Turnover To calculate the average number of days it takes to
NUMBER OF sell merchandise inventory after it is purchased
DAYS IN
INVENTORY
REVERSING ENTRIES
- They are made to reverse the effect of certain adjustments
- Helps prevent errors in recording payments or cash receipts in the new accounting period.
- Not all adjustments needs reversal
- Reversing entries are made for accrued items that involve future payments or receipt of cash
* Making these reversing entries means that the accountant does not have to review the year-end adjustments
before recording in the next year
Making these reversing entries means that the accountant does not have to review the year-end adjustments before
recording the payment of payroll taxes in the next year
(a) Accrued salaries
(b) Accrued payroll taxes
(c) Interest payable
(d) Interest Receivable
XIII. ACCOUNTING PRINCIPLES AND REPORTING STANDARDS
SECTION 1
THE NEED FOR GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
- Ensures that financial statements are meaningful and useful
- It allows the financial statements of different companies to be compared
- Be able to compare company’s own financial statement period to period
*Accounting principles may vary from country to country.
SARBANES-OXLEY ACT
- It is a law passed by the U.S. Congress in 2002 in reaction to the “accounting scandals” of public companies
in the early 2000s
- Reaffirms the SEC’s role as the authoritative accounting rule-making body
- The act permits the SEC to accept the accounting and reporting rules developed by “a private-sector
organization,” provided certain requirements are met.
SECURITIES AND EXCHANGE COMMISSION

- 1934. Congress of US established SEC
- The legal rule-making body from the public sector
- Authorized to: Define accounting terms and to prescribe accounting principles for companies under its
jurisdiction. It has the “final voice” in accounting principles for those companies.
FINANCIAL ACCOUNTING STANDARDS BOARD
- 2003. SEC officially recognized the FASB as the accounting standard setter under Sarbanes-Oxley.
- The primary representative of the private sector
- FASB’s work is based on a fundamental framework of accounting, developed under its conceptual framework
project.
- Designated organization in the private sector for establishing standards of financial accounting that govern the
preparation of financial reports by nongovernmental entities and establish and improve standards of
financial accounting
- Issued 8 Statements of Financial Accounting Concepts that provide the guidelines on which the official
Statements of Financial Accounting Standards are to be based.
1. Define the goals and objectives of accounting.
2. Identify users of financial reports and the uses made of the reports.
3. Examine the qualitative characteristics that make accounting information useful.
4. Identify and define the financial elements such as assets, liabilities, revenues, and expenses, whose
inclusion and classification make financial statements meaningful and useful.
5. Establish the form and content of financial statements.
6. Set forth fundamental recognition criteria.
7. Develop measurement standards for financial elements that appear in the financial statements.
FINANCIAL ACCOUNTING STANDARDS BOARD ACCOUNTING STANDARDS CODIFICATION
- Codification is now the source of all authoritative nongovernmental GAAP.
- GAAP related to assets are now found in the section of the Codification for Assets (ASC300 Assets)
_____________________________________________________________________________________________
SECTION 2
CONCEPTUAL FRAMEWORK
- Foundation underlying all generally accepted accounting principles and reporting practices. It is very
important in your study of accounting.
INTERNATIONAL ACCOUNTING STANDARDS BOARD
- 2000. Credited to oversee IASB
- To develop International Financial Reporting Standards that bring transparency, accountability, and efficiency
to financial markets around the world
- Issued about 40 “International Accounting Standards.”
THE USERS AND USERS OF FINANCIAL REPORT
CURRENT AND POTENTIAL INVESTORS AND CREDITORS
➔ Financial reports should provide useful information to guide them in making investment and credit
decisions

➔ Information that is needed by investors and creditors should help them assess the likelihood of receiving a
future cash flow, the amount of such a cash flow, and the time when the cash flow may be received
Financial Report users needs information about:
● Profits
● Economic resources (assets)
● Claims against the assets (liabilities and owner’s equity)
● Changes in assets and in the claims against the assets
➔ Information about profits appears in the income statement
➔ Information about assets, liabilities, and owner’s equity is provided primarily in the balance sheet
➔ The statement of cash flows provides information about the cash received from major sources during the
period and the uses made of that cash
CONCEPTUAL FRAMEWORK OF ACCOUNTING BY IASB
- 2018. Revised CONFRA was published
- Structure: introductory explanation on the status and purpose of the Conceptual Framework, eight chapters, and
a glossary
The 4 Level of Concepts in CONFRA
I. Qualitative Characteristics of Financial Reports
- Makes the accounting information useful for users.
- It is assumed that users of accounting information have basic knowledge in business and economics.
Relevance Faithful Representation
- Capable of making a difference in a - Reflects what really happened in business

decision activities
- Not useful, not relevant
To be a faithful representation information
To be relevant it must have a value and must must be complete, neutral, and free from
be material in amount or nature. error.
➔ Predictive Value ➔ Completeness
Relevant = Predictions/ forecast about the It includes everything to reflect the true
meaning and ultimate outcome of events event
➔ Confirmatory Value ➔ Neutrality
Relevant = Helps to verify fulfillment or non Financial statements are prepared

fulfillment of prior expectations or objectively and free from bias
decisions
➔ Freedom of Error
Information is free from error and expected

to reflect unbiased judgments and due
diligence in applying appropriate accounting
principles.
ENHANCING QUALITATIVE CHARACTERISTICS

- These attributes enhance the relevance and faithful representation of the information (maximized individual
& together)
● Comparability: Can be compared across other companies, identify similarity and differences between
different accounting periods.
- Uniformed
- Consistent
● Timeliness: Disclose accounting information in a timely manner; information is available to users early
enough to use it in the decision process.
● Verifiability: Independent measures obtain similar results; same conclusions drawn.
● Understandability: Accounting information should be comprehensible to the users.
II. Basic Assumptions Underlying Financial Reports
- Financial statement users should be able to assume that preparers of the statements have made in preparing
the statements.
● Separate Entity: Business is separate from its owners
● Going Concern: Assumed that business will continue to operate indefinitely
● Monetary Unit Assumption: It has two aspects
(1) Expressing financial facts and events is meaningful only when they can be expressed in
monetary terms; intangible and potential assets or liabilities shall be disclosed.
(2) Value of money is stable; the cost of assets purchased many years ago to be added to the
costs of recently purchased assets of the same kind and the total dollar amount reported on the
financial statements.
● Periodicity of Income Assumption: Assumed that the activities of the business can be separated into
time periods with revenues and expenses being assigned on a logical basis to those periods
III. Basic Accounting Principles
- These four basic principles to serve as guides to preparing financial statements
● Historical Cost: Asset is recorded and remains in the account at its original cost even though its
value may increase to an amount materially in excess of cost
● Revenue Recognition Principle: Revenue is recognized when it is both earned and realized
(a) Revenue is earned when entity has done all that it has to do to be entitled to all benefits to
be received from the sale or service
(b) Revenue is realized when cash, financial claims, or other assets have been received as a
result of the income-earning activity.
● Matching principle: Revenue must be matched against expired costs incurred in earning the
revenue
● Full Disclosure Principle: All information that might affect the user’s interpretation of the profitability
and financial position of a business must be disclosed in the financial statements or in notes to the
statements
IV. Modifying Constraints

- A number of practical considerations are recognized as constraining or modifying the application of the
general principles.
● Materiality: Refers to the significance of an item of financial data in relation to other financial data
Eg: Suppose that during the year a small business purchases small items of equipment, each costing
$200, but with a total cost of $1,800. If the company’s usual net income is only $15,000, the $1,800 cost
would likely be considered material.
* Information is material if omitting or obscuring it could reasonably be expected to influence the
decisions that the primary users of general-purpose financial statements make on the basis of those
financial statements, which provide financial information about a specific entity.
● Cost-Benefit Test: Determine whether the increased cost of complying with an accounting principle or
standard is justified by the benefit (increased usefulness of the statements) that would result if the
preferred treatment is followed
● Conservatism: One that would result in the least possible reported income or largest reported loss
- When in doubt, take the conservative action
● Industry Practice: Existing accounting practices in certain industries have sometimes become
acceptable as GAAP
- Most of the accounting practices related to specific industries have been adjusted to fit into the
conceptual framework. In cases where they have not (e.g., the oil industry), it is because of
unusual operating activities or high risks involved.

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BATCH 2021: COMPUTERIZED ACCOUNTING

SAN BEDA UNIVERSITY - BS ACCOUNTANCY

I. ACCOUNTING: THE LANGUAGE OF VIII. ACCOUNTING FOR PURCHASES AND

I. ACCOUNTING: THE LANGUAGE OF BUSINESS

1 | Computerized Accounting | CARLOS, MENDOZA, RIVERA | BATCH 2021

BOOKKEEPER ACCOUNTING CLERK ACCOUNTANT

- responsible for recording - responsible for the - responsible for keeping

CERTIFIED BOOKKEEPER (CB)

OCCUPATION DUTIES ENTRY-LEVEL EDUCATION

BOOKKEEPING, ACCOUNTING, Produce financial records, Some college, no degree

BUDGET ANALYSTS Help public and private institutions Bachelor’s degree

2 | Computerized Accounting | CARLOS, MENDOZA, RIVERA | BATCH 2021

FINANCIAL ANALYSTS Provide guidance to businesses and Bachelor’s degree

FINANCIAL MANAGERS Responsible for financial health, Bachelor’s degree

MANAGEMENT ANALYSTS “Management consultants” propose Bachelor's degree

POSTSECONDARY TEACHERS Instruct students in a wide variety of Doctoral or professional degree

TOP EXECUTIVES Devise strategies and policies to Bachelor’s degree

3 | Computerized Accounting | CARLOS, MENDOZA, RIVERA | BATCH 2021

USERS OF FINANCIAL INFORMATION

Owners and Internal control and prevention of fraud

4 | Computerized Accounting | CARLOS, MENDOZA, RIVERA | BATCH 2021

Regulatory Federal Communications Commission

5 | Computerized Accounting | CARLOS, MENDOZA, RIVERA | BATCH 2021

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

II. ANALYZING BUSINESS TRANSACTIONS

6 | Computerized Accounting | CARLOS, MENDOZA, RIVERA | BATCH 2021

PURCHASING EQUIPMENT FOR CASH

Cash + Equipment = Trayton Eli, Capital

Previous balances $ 100,000 = $ 100,000

New balances $ 95,000 + $ 5,000 = $ 100,000

Property = Financial Interest

Cash + Equipment = Accounts + Trayton Eli,

Previous balances $ 95,000 + $ 5,000 = $ 100,000

7 | Computerized Accounting | CARLOS, MENDOZA, RIVERA | BATCH 2021

Cash + Supplies + Equipment = Accounts + Trayton Eli,

Previous balances $ 95,000 + $ 11,000 = $ 6,000 + $ 100,000

New balances $ 93,500 + $ 1,500 + $ 11,000 = $ 6,000 + $ 100,000

Cash + Supplies + Prepaid + Equipment = Accounts + Trayton

Previous balances $ 91,000 + $ 1,500 + $ 11,000 = $ 3,500 + $ 100,000

New balances $ 83,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000

PROPERTY = FINANCIAL INTEREST

Cash $ 83,000 Accounts Payable $ 3,500

TOTAL $ 103,500 TOTAL $ 103,000

Cash + Supplies + Equipment = Accounts + Trayton Eli,

8 | Computerized Accounting | CARLOS, MENDOZA, RIVERA | BATCH 2021

New balances $ 91,000 + $ 1,500 + $ 11,000 = $ 3,500 + $ 100,000

ASSETS, LIABILITIES, AND OWNER’S EQUITY

BALANCE SHEET FOR ELI’S CONSULTING SERVICES

NOVEMBER 30, 20X1

Prepaid Rent 8,000.00 Owner’s Equity

Equipment 11,000.00 Trayton Eli, Capital 100,000.00

Total Assets 103,500.00 Total Liabilities and 103,500.00

Assets = Liabilities + Owner’s Equity

EARNING REVENUE AND INCURRING EXPENSES

9 | Computerized Accounting | CARLOS, MENDOZA, RIVERA | BATCH 2021

SELLING SERVICES FOR CASH

Assets = Liabilities + Owner’s Equity

Cash + Supplies + Prepaid + Equipment = Accounts + Trayton Eli, + Revenue

Previous balances $ 83,000 + $ 1,500 + $ 8,000 + $ 11,000 = $ 3,500 + $ 100,000