Basic Accounting Lecture 05202018

FUNDAMENTALS OF ACCOUNTING
By: Shiela Angeli C. Servidad

. . 6
1
COURSE OBJECTIVES
At the end of the course, participants are expected to

understand the following :
1. Basic Accounting Concepts

2. The Accounting Process (Service Business)
3. Preparation of the Basic Financial Statements
4. Accounting for Merchandising Business
5. Financial Statements Analysis
Methodology: - Classroom / Sit down discussions

- Exercises
- Written exam at the end of the session
2
COURSE OUTLINE
Module Title
Overview
1. Introduction to Financial Accounting
Case Study A: Spic & Span 2013
2. Accounting for Accruals
Case Study B: Spic & Span 2014
3. Deferrals
Case Study C: Chillers 2014
4. Accounting Cycle
5. The recording Process
Case Study D: AFNA, Inc.
6. Accounting for Merchandising Business
7. Financial Statements Analysis
3
OVERVIEW
4
OVERVIEW
5
MODULE 1
INTRODUCTION TO
FINANCIAL ACCOUNTING
• What is Accounting?
• The Accounting Equation
• Four Basic Financial Statements
• Transaction Analysis
6
Why Study ACCOUNTING?
Decisions are
based on
accounting
information
Need to understand ACCOUNTING & its

rules…
GAAP
7
ACCOUNTING
Measures
Financial
Aspects
THE LANGUAGE Compiles

OF BUSINESS information into
reports
Communicates
Information to
Decision makers
8
Types of Accounting
Financial
MANAGEMENT
Reporting
ACCOUNTING
FINANCIAL TAX
ACCOUNTING ACCOUNTING
GOVERNMENT
ACCOUNTING
9
Types of Accounting
I
N
F
O
R
FINANCIAL M MANAGEMENT
ACCOUNTING A ACCOUNTING
T
I
O
N
10
Types of Accounting
I
N
F
O
FINANCIAL MANAGEMENT
ACCOUNTING R ACCOUNTING
M
A
External Internal
Parties T Parties
I
O
N
11
Types of Accounting
I
N
F
O
External Internal
R
Parties Parties
M
Shareholders A BOD
Creditors T Management
Regulators I Employees
O
N
12
Types of Accounting
I
N
F
FINANCIAL
O MANAGEMENT
ACCOUNTING R ACCOUNTING
M
A
GAAP T NO GAAP
I
O
N
13
Remember…
GAAP Are the Rules

Generally
Accepted
Accounting
Principles
Financial Reporting Standards Council
14
Remember…
Generally Accepted
Accounting Principles (GAAP)
 Rules that govern the practice

of Accountancy
 PAS + PFRS + SIC + IFRIC
PAS = Phil. Accounting Standards

PFRS = Phil. Financial Reporting Standards
SIC = Standards Interpretation Committee
IFRIC = International Financial Reporting Interpretation Committee
15
Explanation
of
Accounting
Policies
Layout Types
Measurement
& of
Standards
Presentation Standards
Disclosure
Standards
16
MODULE 1
INTRODUCTION TO
17
THE ACCOUNTING EQUATION
ASSETS = CLAIMS
ASSETS = LIABILITIES + EQUITY
18
Assets
FINANCIAL
Liabilities
ELEMENTS
Equity
19
Assets FINANCIAL
ELEMENT
•Resources controlled as #1
a result of past events
&
•from which economic
benefits are expected
to flow into the enterprise
20
•Present obligation
arising from past events
FINANCIAL
Liabilities ELEMENT
#2
•the settlement of which is
expected to result in
outflow of economic
benefits
21
•Assets less liabilities
•NET ASSETS
FINANCIAL
Equity
ELEMENT
•Owner’s Equity #3
•Partners’ Equity
•Stockholders’ Equity
•Fund Equity
22
THE ACCOUNTING EQUATION
ASSETS =
+
LIABILITIES EQUITY
Something of Something What Remains

Value Owed
Cash Accounts Common
Land payable stock
Buildings Notes payable
Equipment Interest Retained
Inventories payable Earnings
Prepaid Other
insurance expenses
payable
23
EQUITY: The Owners’ Share
Two sources of equity

equity acquired from the owners by issuing
stock
equity earned by “operations”
Expanded accounting equation:

Stockholders’ Equity
Common Retained
Assets = Liabilities + Stock + Earnings
24
How is EQUITY “earned by operations”?
Answer: By earning “Net Income*”

(*also called “Net Earnings” or “Net Profit”)
NET INCOME/
REVENUE - EXPENSES =
(LOSS)
-
25
Revenue: Amounts received or to be received
from having sold a product or
provided a service.
Expenses: Assets or services “used up” in the

process of earning the revenue.
26
Retained Earnings:
The Net Income [Earnings] kept [Retained]
in the business since its beginning.
[It is the total of all net income (minus all losses)
and minus all dividends since the start of the
company.]
27
Expanded accounting equation:
Assets = Liabilities + Common +
Retained
Stock Earnings
Revenues
Dividends: Entity assets Expenses
given to or withdrawn by Dividends
owners
28
Exercise 1:
Identify the financial element to

which the following account
belongs to…
29
Account Financial Element
Cash Asset
Accounts Payable Liability
Inventory Asset
Investment in Shares Asset
of Stocks
Common Stock Equity
30
Account Financial Element
Gain on sale Equity (Revenue)
of land
Used supplies Equity (Expense)
Unused supplies Asset
31
Chart of Accounts
A list of account titles used by the business.

The accounts are divided into sections:
assets, liabilities, equity, revenues and
expenses.
32
MODULE 1
INTRODUCTION TO
33
Four Basic Financial Statements
1. Balance Sheet
Assets = Liabilities + Equity
Also called -
 Statement of Condition
 Statement of Assets and Liabilities
 Statement of Financial Position
34
2. Income Statement
Also called -
 Statement of Operations
 Statement of Income
 Earnings Statement
 Profit/Loss (or P & L) Statement
 Statement of Activities
 Revenue – Expenses = Net income (or Net Earnings)
35
Results: Statement of Income
NET
REVENUE > EXPENSES INCOME
NET
REVENUE < EXPENSES LOSS
BREAK
REVENUE = EXPENSES EVEN
36
3. Statement of Changes in
∆ Beginning of period total equity +

Stock issued + Net Income (or – Net loss)
– Dividends = End of period total equity
37
MODULE 1
INTRODUCTION TO
38
Transaction Analysis
What is a transaction?
A business event involving transfer of

something of value between entities.
39
What is transaction analysis?
Determining the effect of a business

event on the financial statements.
40
Where do you start?
 First, determine the effects of the

transaction on the accounting equation.
 Second, determine the effects on the
financial statements.
41
Assets = Claims
Four types of transactions

that keep the equation in balance
• Asset source • Asset Use
Transactions – an asset Transaction – an asset

increases and a decreases and a
corresponding claims corresponding claims
account increases account decreases
• Asset Exchange • Claims Exchange

Transactions – one asset Transactions – one claims
increases and another account increases and
decreases other decreases
42
Exercise 2:
Identify the effects of the

following transactions to the
accounting elements (Assets,
Liabilities, Equity)…
43
Transaction #1:
RCBC, a bank, accepts a P10,000

cash deposit from Customer A.
Deposit Account
Cash
RCBC Customer A
44
Asset Source
Transaction #2:
RCBC purchased a computer equipment for

P50,000 cash.
Cash
Computer Equipment
RCBC Supplier
45 Asset Exchange
Transaction #3:
RCBC incurred P20,000 salaries expenses

payable to employees.
Salaries Payable
Services
RCBC Employee
46
Claims Exchange
Transaction #4:
RCBC paid its salaries payable to its

employees.
Cash
Dec. in Salaries Payable
RCBC Employee
47
Asset Use
Introducing the Horizontal Financial
Statements Model
 Teaching/learning tool
 Used to show the impact a transaction has on
the three basic financial statements
Balance Sheet
Income Statement
Statement of Cash flows
Notice that the Balance Sheet Section is similar

to the Accounting Equation.
48
Horizontal Model Transaction Analysis
INCOME CASH
BALANCE SHEET STATEMENT FLOW
LIABILITIES +
=
ASSETS EQUITY Operating,
Revenue - Exp. = NI Investing,
Financing
Cash + Land = A/P + N/P + C/S + RE
49
CASE STUDY A: Spic & Span, Inc.
1. Spic & Span was formed on Jan. 1, 2013 by issuing

Common Stock in exchange for P2,000 cash.
2. The company provided services to customers for
P500 cash.
3. The company incurred P300 expenses which were
paid in cash.
4. The company purchased land by paying P1,500
cash.
5. The company borrowed P1,000 cash from the bank
by issuing an 8% Note Payable on Dec. 31st.
6. The company paid a P50 cash dividends to the
company’s owners (the stockholders). 50
Horizontal Model Transaction Analysis
Record the six transactions above in the Horizontal model below:
CASH
BALANCE SHEET INCOME STATEMENT FLOW
=
ASSETS LIABILITIES+ EQUITY -
Operating,
Revenue Exp. = NI Investing,
Cash
+ Land = A/P
+ N/P + C/S
+ RE Financing
1 2,000 2,000 2,000

2 500 500 500 500 500
3 (300) (300) 300 (300) (300)

4 (1,500) 1,500 (1,500)
5
1,000 1,000 1,000
6 (50) (50) (50)
1,650 1,500 1,000 2,000 150 500 300 200 1,650
TOTAL ASSETS = P 3,150 TOTAL LIABS. & EQUITY=P 3,150 51

Spic & Span, Inc.
Statement of Income
For the Year Ended Dec. 31, 2013
Revenue P 500
Less: Expenses 300
200
Net Income P
52
Spic & Span, Inc.
Statement of Changes in Stockholders’ Equity
Beginning Common Stock P 0

Plus Common Stock Issued 2,000
Ending Common Stock P 2,000
Beginning Retained Earnings P 0

Plus: Net Income 200
Less: Dividends (50)
Ending Retained Earnings 150

2,150
Total Stockholders’ Equity P
53
Spic & Span, Inc.
Statement of Financial Position
As of Dec. 31, 2013
Assets
Cash P 1,650
Land 1,500
Total Assets P 3,150
Liabilities
Notes Payable P 1,000
Common Stock P 2,000
Retained Earnings 150 2,150
Total Stockholders’ Equity
Total Liabilities & Stockholders’ Equity P 3,150
54
Classifications of Cash Flows
 Operating activities: OA
 Inflows: Collection of revenues
 Outflows: Payment of expenses, including interest
 Investing Activities: IA
 Inflows: Disposals of Land, building, equipment
Collections of loans made to others
 Outflows: Purchases of Land, building, equipment
Lending money to others
 Financing Activities: FA
 Inflows: Borrowing money from others
Cash received from issuing stock
 Outflows: Cash dividends paid to stockholders
Repayment of loans to creditors, but not
interest
55
Spic & Span, Inc.
Statement of Cash Flows
Cash flows from operating activities
Income from operations P 200
Net cash flows from operating activities P 200
Cash flows from investing activities
Purchase of land (P 1,500)
Net cash flows used in investing activities (P 1,500)
Cash flows from financing activities
Issuance of common stock P 2,000
Proceeds of notes payable 1,000
Payment of cash dividends ( 50)
Net cash flows from financing activities P 2,950
Net increase (decrease) in cash P 1,650
Cash balance, Jan. 1, 2013 0
Cash balance, Dec. 31, 2013 P 1,650
56
MODULE 2
ACCOUNTING
For
ACCRUALS
57
Difficulties in Measuring Income
• Accounting period issue

• Matching issue
What is ACCRUAL ACCOUNTING?

• Recording the financial transactions of a
business in the period in which they occur,
rather than in the period in which cash is
exchanged.
58
Examples of Accrual Events
• Sales made or services rendered “on

account”
• Purchases made “on credit”
• Wages expense for employees
“They have worked but not have not been paid yet.”
• Interest on money borrowed or lent
“When time has passed (so interest has been earned by the lender) but
the actual cash for the interest has not changed hands.”
• Income tax expense
“When you owe it but haven’t yet paid the BIR.”
59
Accounts Receivable – amounts owed by
customers for goods and services rendered.
• Recognition of events versus realization of

cash
 Recognizing an event means to record it in the
accounting records
 The term is most often used with respect to
recording revenues and expenses on the
income statement.
• When is revenue realized?

 When the amounts are earned
(required activities are complete)
60
Accounts Payable – amounts you owe creditors
for the purchase of goods and services.
• When are costs recognized

as expenses?
 When the “matching”

revenue is recognized, or
 When the benefits of the

expenditures are received
61
Review of Core Concepts
• Asset Source Transactions – an

asset increases and a corresponding
claims account increases
• Asset Use Transactions – an asset
decreases and a corresponding claims
accounts decreases
• Asset Exchange Transactions – one
asset increases and another asset
decreases
• Claims Exchange Transactions –
one claims account increases and
another decreases
62
Case Study B: Spic & Span’s 2014 Transactions
1. During 2014, provided services to customers for

P2,000 on account.
2. Incurred various operating expenses totalling
P1,200 on credit.
3. Collected P1,500 from the customers in transaction
#1.
4. Paid P1,000 on the accounts payable recorded in
transaction # 2.
5. On Jan. 1, 2014, invested P500 in a CTD with a 10%
interest and a 36-month term.
6. Recorded interest earned on the CTD for the first
12 months. (Note: cash payment of the invested principal
& the interest will be made at the end of the term of the
CTD.)
7. Paid P100 dividends to stockholders.
63
8. Accrued interest on Note payable.
Case Study B: Spic & Span’s 2013 Transactions
INCOME CASH
BALANCE SHEET (and Accounting Equation) STATEMENT FLOW
ASSETS LIABILITIES + EQUITY
Revenue- Exp. = NI OA, IA, FA
Cash
+CTD
Inv.
+A/R +
Int. Rec.
+ Land
= A/P
+ N/P
+ Int.
Pay.
+ C/S
+ RE
=
B 1,00
B 1,650 1,500 0 2,000 150 1,650
1 2,000 2,000 2,000
2 1,200 (1,200) 1,200
3 1,500 (1,500) 1,500 OA
4 (1,000) (1,000) (1,000) OA
5 (500) 500 (500) IA
6 50 50 50
7 (100) (100) (100) FA
8 80 (80) 80
E
B 1,550 + 500+ 500+ 50 + 1,500 = 200 + 1,000 + 80 + 2,000 + 820 2,050 - 1,280 = 770 1,550
64
Spic & Span, Inc.
Statement of Income
Revenue P 2,050
Less: Expenses 1,280
770
Net Income P
65
Spic & Span, Inc.
Beginning Common Stock P 2,000

Plus Common Stock Issued 0
Beginning Retained Earnings P 150

Plus: Net Income 770
Less: Dividends (100)
Ending Retained Earnings 820
Total Stockholders’ Equity P 2,820
66
Spic & Span, Inc.
As of Dec. 31, 2014
Assets
Cash P 1,550
Investment (CTD) 500
Accounts Receivable 500
Accrued Int. Receivable 50
Land 1,500
Liabilities
Accounts Payable P 200
Accrued Int. Payable 80
Notes Payable P 1,000 1,280
Retained Earnings 820
Total Stockholders’ Equity 2,820
67
Spic & Span, Inc.

Cash receipts from services P 1,500
Cash receipts from interest earned 0
Cash payments for operating expenses (1,000)
Cash payment for interest expense 0
Net cash flows from operating activities P 500
Cash payment for investment P (500)
Net cash flows used in investing activities P (500)
Payment for cash dividends P (100)
Net cash flows from financing activities P (100)
Net increase (decrease) in cash P (100)
Cash balance, Jan. 1, 2014 1,650
68
Module 3
ACCOUNTING
for
DEFERRALS
69
What is DEFFERAL?
A deferral event occurs when:

 cash is received before revenue is
earned;
or
 cash is paid before an expense is
incurred
Deferral events are part of accrual basis of

accounting.
70
Accruals vs. Deferrals (Revenues)
Accrual event
Now Later
Business Action Cash exchange
Performed Services Collect receivables
on account later.
Deferral Event
Now Later
Cash Exchange Business Action
Collected cash from Perform the services
customers, but services we have already
not yet performed. been paid for.
71
Deferred Expenses
You’ve paid the cash “upfront” but you haven’t

received the goods or services yet.
Prepaid expenses
Prepaid rent
Prepaid insurance
Unused Supplies
Asset Exchange: Prepaid

Cash asset is decreased expenses are
Prepaid expense asset is
increased ASSETS!
72
Deferred Expenses Related to
Buildings & Equipment
You’ve purchased an asset that will be used to

benefit more than one year of operations. When
you buy the asset you DO NOT “expense” it. You
postpone (defer) the recognition of the expense
until you have used the asset over a period of time.
DEPRECIATION
of plant (buildings) and equipment
Recognizing an expenditure by spreading it over

several years, allocating a part of the expense to
each of several period during which the asset is
used, is called DEPRECIATION.
73
Depreciation
The portion of the cost of an

asset allocated to any one
accounting period is called –
DEPRECIATION EXPENSE
Depreciation of an asset is an
allocation process – spreading
the cost of an asset that
benefits more than one
accounting period over the
estimated useful life of the
asset.
74
Example of Depreciation
Gen.Y Company bought a

printer for P6,000. The asset is
expected to last five years and
have a residual value of P500
at the end of its useful life. How
will the purchase and use of
the asset affect the financial
statement?
75
Example of Depreciation
We want to allocate the cost of the

asset to the income statement as
an expense during the time period
we use the asset. Why?
To comply with MATCHING principle.

Expenses incurred must be “matched” to
the same time period the revenues (from
using this equipment) are recorded.
If we depreciate the asset using the STRAIGHT LINE

method, we will divide the cost of the asset (minus any
estimated residual value) by the useful life:
(P6,000 - P500) / 5 years – P1,100 depreciation expense
per year
76
Effect on the Financial Statements
Purchase of asset:
Balance Sheet
Increases assets; may decrease cash (thus, no effect on net
assets) or may increase a liability.
Income Statement
No effect.
Statement of Changes in Stockholders’ Equity
No effect.
Statement of Cash Flows
Depends on whether or not the asset was purchased for
cash. If cash paid it is an Investing Activity cash flow.
77
Effect on the Financial Statements
Use of the asset:
Balance Sheet
Reduces the net book value of the asset by increasing a
contra-asset account called “accumulated depreciation”.
Income Statement
Depreciation expense reduces net income.
Statement of Changes in Stockholders’ Equity
Since the Net Income decreased, the remaining Retained
Earnings will decrease causing total Stockholders’ Equity to
decrease.
Statement of Cash Flows
No cash involved. Depreciation is an adjusting entry.
78
Deferred Revenue
You’ve received payment for something you

have NOT yet provided.
Revenue is not recognized until the service is

performed or the goods are delivered...but you
have to record the fact that you have received
the cash,
and…
A related LIABILITY (Unearned Revenue) must

be recorded and kept on the books until your
EARN the revenue.
79
Case Study C
ACCOUNTING
for
DEFERRALS
80
Chillers’ 2012 Transactions
1. Performed for service for customers, charging

P7,000 on account.
2. Collected P8,000 cash from customers for services
to be provided in the future.
3. Collected P7,000 of the receivables.
4. Paid P2,000 salaries in cash.
5. On July 1st purchased office equipment by paying
P9,000 cash. (estimates: life= 4 years, salvage value=P1,000)
6. On Nov. 1st paid P3,000 to rent space for the next
three months.
7. Year-end adjustment recognizing ¼ of the services
required by transaction #2 have been performed.
8. Year-end depreciation adjustment.
9. Year-end rent adjustment. 81
Below is the horizontal statements model (with
beginning balances) for Chillers, Inc.
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW
LIABILITIE
ASSETS
= S
+ EQUITY
Inco =
me
- Exp. NI OA, IA, FA
Cash + A/R + Prepai
d Rent
+ Equipt.
Office
- Accum
. Depn.
= Unearned
Revenue
+ C/S + RE
BB 5,000 4,000 7,000 2,000 5,000
7,000 7,000 7,000

1
8,000 8,000 8,000 OA
2
7,000 (7,000) 7,000 OA
3
(2,000) (2,000) 2,000 (2,000) OA

4
5 (9,000) 9,000 (9,000) IA
6
(3,000) 3,000 (3,000) OA
7 (2,000) 2,000 2,000
8
1,000 (1,000) 1,000
(2,000) (2,000) 2,000

9
EB
6,000 + 4,000 + 1,000 + 9,000 - =
1,000 6,000 + 7,000 + 6,000 9,000 - 5,000 = 4,000 6,000
82
Chillers, Inc.
Statement of Income
Revenue P 9,000
Less Expenses
Salary expense P 2,000
Depreciation expense 1,000
Rent expense 2,000 5,000
Net Income P 4,000
83
Chillers, Inc.

Plus Common Stock Issued 0

Beginning Retained Earnings P 2,000
Plus: Net Income 4,000
Less: Dividends 0
Ending Retained Earnings P 6,000
84
Chillers, Inc.
As of Dec. 31, 2012
Assets
Cash P 6,000
Accounts Receivable 4,000
Prepaid Rent 1,000
Property & Equipment 9,000
Office Equipt’ (1,000) 8,000
Accum. Depn.
Liabilities
Accounts Payable P 0
Unearned Revenue 6,000
Total Liabilities P 6,000
Retained Earnings 6,000
85
Chillers, Inc.

Cash payments for expenses (5,000)
Net cash flows from operating activities P 10,000
Cash payment for equipment P (9,000)
Net cash flows used in investing activities P (9,000)
Cash receipts from stock issue P 0
Payment for cash dividends 0
Net cash flows from financing activities P 0
Net increase (decrease) in cash P 1,000
86
MODULE 4
ACCOUNTING
CYCLE
87
TYPES OF TRANSACTIONS
INTERNAL EXTERNAL
88
OPERATING CYCLE
Inventory
Accounts
Receivable
Cash
89
ACCOUNTING PERIOD
12 MONTHS
- Calendar
- Non-calendar
90
Step 1
Analyze
Step 2
transactions
Step 9 Journalize
Prepare Post- transactions
Closing TB
Step 3
Step 8
Prepare Adjusted
The Post to Ledger
Accounts
Trial Balance
Accounting
Step 7 Cycle Step 4
Prepare Pre-Adj.
Prepare Financial
Statements Trial Balance
Step 6 Step 5
Prepare Journalize & Post
Trial Balance Adjusting entries
91
income assets
expenses liabilities
drawings/
dividends equity
Temporary (nominal) Permanent (real)

accounts accounts
92
MODULE 5
The Recording Process
93
The ACCOUNTING Cycle
 Transactions occur in the normal course of business.

We record them in our records with a JOURNAL ENTRY
(called “Journalizing”).
 Journal entries are posted to the GENERAL LEDGER

(called “Posting”).
 ADJUSTING ENTRIES are made (journalized) and

posted to the LEDGER.
Financial
Statements
Transactions The Process

94
The ACCOUNTING Cycle
 A Trial Balance may be prepared. It shows the

balance (amount and whether debit or credit) of
each account. A trial balance is NOT the same as a
“Balance Sheet”, which is a formal financial
statement.
 Financial Statements are prepared.
 Closing journal entries are made (journalized) and

posted to the ledger (and another trial balance,
called the “after-closing” or “post-closing” trial
balance may be prepared).
95
DOUBLE-ENTRY ACCOUNTING
 Each account can be increased or decreased.

 Debit means “left side”.
 Credit means “right side”.
 Assets are increased with debits and decreased with
credits.
 Liabilities and permanent Stockholders’ Equity are
increased with credits and decreased with debits
 In each journal entry, i.e.., recording of transaction, the
DEBITS = CREDITS
(No exceptions!)
96
T-ACCOUNTS
ASSETS
 In a transaction Increase
that increases an
asset, put that
amount on the LEFT
side of the asset
account.
97
T-ACCOUNTS
 In a transaction that ASSETS

increases an asset, put Increase Decrease
that amount on the LEFT
side of the asset account.
 In a transaction that
decreases an asset, put
that amount on the RIGHT
side of the asset account.
In the accounting records, we never cross out, or subtract or

change a number. Instead we use debits and credits to change
the balances of the account.
98
T-ACCOUNTS
CASH
 Calculate the balance of any 10
account , at any time by: P1,000 200 0 P150 total
1. drawing a line across the T-
total on 500 50
on credit
debit side side
account under the last posted 300
entry. Balance P850
2. Adding the amounts on the
left side and adding the amounts
on the right side of the account.
3. Subtract the two totals and put
the difference on the side with
the larger total. P1,000 - P150 = P850
99
T-Accounts: ASSETS
T-Accounts: Assets
CASH
 DEBITS on Debits
increase
Credits
decrease
the left !!! assets assets
e.g., when we
CREDITS on e.g., when we
receive cash, disburse
cash, we
the right !!! we debit the
credit the
CASH
account CASH
account
100
T-Accounts: LIABILITIES & EQUITY
Accounts Payable
Debits Credits
DEBITS on decrease
liabilities
increase
liabilities
the left !!!
e.g., when we e.g., when we
pay off some record an
of our amount we
CREDITS on accounts
payable, we
owe
someone, we
the right !!! debit A/P credit the A/P
account account
101
T-Accounts: LIABILITIES & EQUITY
Permanent Equity accounts work like liability

accounts
CAPITAL STOCK &
LIABILITIES RETAINED EARNINGS
Debits Credits
Debits Debits
decrease increase
decrease decrease
Capital Capital
liabilities liabilities
Stock & Stock &
Retained Retained
Earnings Earnings
Additions to Deductions
these from these
accounts are accounts are
put on the put on the
right. left.
102
T-Accounts
Nominal (Temporary) Equity accounts require thought!
Question: What effect will an increase in this Nominal account

have on Stockholders’ Equity?
EXPENSES & DIVIDENDS*

Answer: An increase in Expenses
Debits Credits decreases profit thus, decreases
increase decrease permanent Equity. Since decreases in
expenses expenses permanent Equity account are recorded
& & with debits, expense increases are
dividends dividends recorded with debits.
REVENUES
An Increase in Revenues increases Net
Debits Credits Income & thus increases permanent
decrease increase Equity account.
revenues revenues
*Dividends are also called “distributions.”
103
T-Accounts
Summary of Balance Sheet Accounts

and Debits and Credits
ASSETS LIABILITIES
increase decrease
decrease increase
STOCKHOLDERS’ EQUITY
Decrease` increase
104
Summary of DEBIT and CREDIT Rules
Assets are increased Liabilities & Permanent

with debits. Equity accounts are
increased with credits.
Assets include:
•Cash Liabilities include:
•Investments •All PAYABLES
•A/R •All UNEARNED revenues
•Interest receivables
•Inventory Permanent Equity
•Unused Supplies accounts include:
•Prepaid expenses •Capital Stock
•Fixed assets •Retained Earnings
105
Summary of DEBIT and CREDIT Rules
Expense accounts and Revenue accounts are

Dividends (also called increased with credits.
“Distributions”) are
increased with debits. Revenue accounts
include:
Expense accounts
include: •Sales
•Service revenue
•Cost of sales or •Fees earned
services
•Salaries •Interest income or
Interest earned
•Interest expense
•Rent income
•Rent expense
•Miscellaneous income
•Taxes
•Miscellaneous exp.
106
Grand Summary of DEBIT and CREDIT Rules
ACCOUNT TITLE
DEBIT SIDE CREDIT SIDE
1. Increases assets 1. Decreases in assets

2. Decreases in liabilities 2. Increases in liabilities
3. Decreases in SHE 3. Increases in SHE
a. Dec. in Capital stock a. Increase in Capital stock
b. Dec. in Retained Earnings b. Inc. in Retained Earnings
c. Dec. in Revenue c. Inc. in Revenue
d. Inc. in Expenses d. Dec. in Expenses
e. Inc. in Dividends e. Dec. in Dividends
107
How do journal entries relate to T-Accounts?
Journal entries are recorded chronologically as the

transactions occur:
Example: On Jan. 6 services are performed for customers

for which we collect P100 cash.
Date Account Title Debit Credit

Jan. 6 Cash 100
The asset “CASH” is increasing. Increase in Asset are

recorded by DEBITING the asset account.
108
How do journal entries relate to T-Accounts?
Increases in revenue accounts are recorded with CREDITS.
Journal entries are recorded chronologically as the

transactions occur:
Ex: On Jan. 6 services are performed for P100 cash.

Jan. 6 Cash 100
Service Revenue 100
An explanation goes here.
Journal entries are written in a journal and then posted to the
GENERAL LEDGER accounts (our t-accounts).
109
General Journal

Jan. 6 Cash 100
Service Revenue 100
Services rendered for cash.
Post from General Journal to the General Ledger.

CASH SERVICE REVENUE
1OO 100
110
Normal Balances
The normal balance of any account is the

side where you record the INCREASES.
For example, ASSETS are increased by

DEBITING them. So, the normal balance of
any asset account is a DEBIT balance.
111
CASE STUDY
The
RECORDING PROCESS
112
4. Statement of Cash Flows
∆ Cash inflow – Cash outflow = Net cash flow
113
CASE STUDY D: AFNA, Inc.’s 2014 Transactions
On Jan. 2, issued more Common Stock for P1,000 cash.
On Feb. 1, performed services for customers, charging P7,000 on

account.
On March 7, collected P8,000 cash from customers for services to

be provided in the future.
On April 9, collected P7,000 of the receivables.
On May 3, paid P2,000 salaries in cash.
On July 1st purchased office equipment by paying P9,000 cash.

(estimates: life= 4 years, residual value = P1,000)
On Nov. 1st paid P3,000 to rent office space for the next three
months.
114
Journal Entries
GENERAL JOURNAL
Date Account Titles Debit Credit

Journal Entries
Jan. 2 Cash 1,000
Common Stock 1,000
Issued additional stock for cash.
Feb. 1 Accounts Receivable 7,000

Service Revenue 7,000
Performed services to customers on account.
Mar. 7 Cash 8,000
Unearned Service Revenue 8,000
Collected cash for services to be provided in the future.
115
Journal Entries
GENERAL JOURNAL

Journal Entries
Apr. 9 Cash 7,000
Cash collection from customers.
May 3 Salaries expense 2,000
Cash 2,000
Paid salaries expense for the period.
July 1 Office Equipment 9,000
Cash 9,000
Purchase of equipment for cash.
116
Journal Entries
GENERAL JOURNAL

Journal Entries
Nov. 1 Prepaid Rent 3,000
Cash 3,000
Rental payments for three months.
117
HORIZONTAL ANALYSIS: AFNA, INC.’S 2014 TRANSACTIONS
BALANCE SHEET (and Accounting Equation) INCOME STATEMENT CASHFLOW

ASSETS = LIABILITIES + EQUITY
Prepaid Office Accum. Salaries Unearned Income- Expenses= NI OA, IA , FA
Cash + A/R + + - = + + C/S + RE
Rent Equipt. Depn. Payable Revenue
BB 5,000 4,000 7,000 2,000 5,000
1 1,000 1,000 =1,000 FA
2 7,000 7,000
3 8,000 8,000 8,000 OA
4 7,000 (7,000) 7,000 OA
5 (2,000) 2,000 (2,000)OA
6 (9,000) 9,000 (9,000) IA

7 (3,000) 3,000 (3,000)OA
8 (2,000) 2,000
9 1,000 1,000
10 (2,000) 2,000
11 600 Net income: 3,400 600
EB 7,000 + 4,000 + 1,000 + 9,000 - 1,000 = 600 + 6,000 + 8,000 + 5,400 9,000- 5,600 = 3,400 7,000
118
AFNA, Inc.
T-Accounts (Before Year-end AJEs)
December 31, 2014
CASH OFFICE EQUIP. ACCOUNTS RECIVABLE
BB 5,000 2,000 Apr 3 BB 0 BB 4,000
Feb 1 7,000 7,000 Apr 9
Jan. 2 1,000 9,000 Jul 1 Jul 1 9,000
Mar 7 8,000 3,000 Nov 11
Total 11,000 7,000 Total
Apr 9 7,000 Total 9,000
Total 21,000 14,000 Total Less: 7,000
Less: 14,000 EB 4,000

ACCUM. DEPN.
EB 7,000
PREPAID RENT RETAINED EARNINGS COMMON STOCK

BB 0 2,000 BB 7,000 BB
Nov 1 3,000 1,000 Jan 2
Total 3,000 2,000 EB
8,000 EB
119
AFNA, Inc.
T-Accounts (Before Year-end AJEs)
December 31, 2014
UNEARNED REVENUE SALARIES PAYABLE SALARIES EXPENSE
8,000 Mar 7 May 3 2,000
8,000 Total
EB 2,000
RENT EXPENSE DEPRECIATION SERVICE REVENUE

7,000 Feb 1
7,000 EB
120
AFNA, Inc.
Trial Balance
December 31, 2014
Accounts in Ledger Debit Credit

Cash 21,000 14,000
Accounts Receivable 11,000 7,000
Prepaid Rent 3,000
Office Equipment 9,000
Accum. Depreciation
Salaries Payable
Common Stock 8,000
Dividends
Depreciation Expense
Salaries Expense 2,000
Rent Expense
Totals 46,000 46,000
121
CASE STUDY D: AFNA, Inc.’s 2014 Transactions
On Jan. 2, issued more Common Stock for P1,000 cash.

On Feb. 1, performed services for customers, charging P7,000 on
account.
On March 7, collected P8,000 cash from customers for services to
be provided in the future.
On April 9, collected P7,000 of the receivables.
On May 3, paid P2,000 salaries in cash.
On July 1st purchased office equipment by paying P9,000 cash.
(estimates: life= 4 years, residual value = P1,000)
On Nov. 1st paid P3,000 to rent office space for the next three
months.
Year-end adjustment recognizing 1/4 of the services required by the
transaction #3 have been performed.
Year-end depreciation adjustment.
Year-end rent adjustment.
Year-end adjustment to accrue P600 salaries thru Dec. 31st. 122
Adjusting Journal Entries
GENERAL JOURNAL

Adjusting Entries
Dec. 31 Unearned Service Revenue 2,000

To recognize earned service revenue as of year-end.
Dec. 31 Depreciation expense 1,000
Accumulated Depreciation 1,000

To record depreciation of office equipment for the period.
[(P9,000 – 1,000 )/ 4 years x 6/12]
Dec. 31 Rent Expense 2,000
Prepaid Rent 2,000
To take up rent expense for the period. [P3,000 / 3 X 2]
123
Adjusting Journal Entries
GENERAL JOURNAL

Adjusting Entries
Dec. 31 Salaries Expense 600
Salaries Payable 600

To accrue unpaid salaries as of year-end.
124
AFNA, Inc.
T-Accounts (After Year-end AJEs)
December 31, 2014
CASH OFFICE EQUIP. ACCOUNTS RECIVABLE

BB 5,000 2,000 Apr 3 BB 0 BB 4,000
Jan. 2 1,000 9,000 Jul 1 Jul 1 9,000 Feb 1 7,000 7,000 Apr 9
Mar 7 8,000 3,000 Nov 11
Apr 9 7,000 Total 9,000 Total 11,000 7,000 Total
Total 21,000 14,000 Total Less: 7,000
EB 4,000
Less: 14,000 ACCUM. DEPN.
EB 7,000
0 BB
1,000 Dec 31
1,000 Total
PREPAID RENT RETAINED EARNINGS COMMON STOCK

BB 0 2,000 BB 7,000 BB
Nov 1 3,000 2,000 Dec 31
1,000 Jan 2
Total 3,000 2,000 EB
Less: 2,000 2,000 Total
8,000 EB
EB 1,000
125
AFNA, Inc.
T-Accounts (After Year-end AJEs)
December 31, 2014
UNEARNED REVENUE SALARIES PAYABLE SALARIES EXPENSE
Dec 31 2,000 8,000 Mar 7 600 Dec 31 May 3 2,000

Dec 31 600
Total 2,000 8,000 Total 600 EB
2,000 Less EB 2,600
6,000 EB
RENT EXPENSE DEPRECIATION SERVICE REVENUE

Dec 31 2,000 7,000 Feb 1
Dec 31 1,000
2,000 Dec 31
EB 2,000 EB 1,000
9,000 EB
126
AFNA, Inc.
Adjusted Trial Balance
December 31, 2014

Cash 21,000 14,000
Accounts Receivable 11,000 7,000
Prepaid Rent 3,000 2,000
Accum. Depreciation 1,000
Unearned Service Revenue 2,000 8,000

Common Stock 8,000
Dividends
Depreciation Expense 1,000
Rent Expense 2,000

Totals 51,600 51,600
127
AFNA, Inc.
Statement of Income
Revenue P 9,000
Less Expenses 5,600
3,400
Net Income P
128
AFNA, Inc.

Plus Common Stock Issued 1,000

Beginning Retained Earnings P 2,000
Plus: Net Income 3,400
Less: Dividends (0)
Ending Retained Earnings 5,400

129
AFNA, Inc.
As of Dec. 31, 2014
Assets
Cash P 7,000
Prepaid Rent 1,000
Office Equipment P 9,000
Accumulated Depreciation (1,000) 8,000
Liabilities
Salaries Payable P 600
Unearned Service Revenue 6,000 6,600
130
AFNA, Inc.

Cash payments for operating expenses (5,000)
Net cash flows from operating activities P 10,000
Purchased of office equipment P (9,000)
Net cash flows used in investing activities P (9,000)
Issuance of common stock P 1,000
Net cash flows from financing activities P 1,000
Net increase (decrease) in cash 2,000
131
AFNA, Inc.
Closing Entries
December 31, 2014

Closing Entries
Dec. 31 Service Revenue 9,000
Depreciation Expense 1,000
Rent Expense 2,000

To close nominal accounts to Retained Earnings.
132
AFNA, Inc.
Post-Closing Trial Balance
December 31, 2014

Cash 7,000
Prepaid Rent 1,000
Accum. Depreciation 1,000

Common Stock 8,000
Dividends
Service Revenue
Depreciation Expense
Salaries Expense
Rent Expense
Totals 21,000 21,000
133
MODULE 6
ACCOUNTING FOR
MERCHANDISING
BUSINESS
134
OVERVIEW
SERVICE MERCHANDISING
BUSINESS BUSINESS
*Services are provided

to customers
*Net income is earned
*Revenue (e.g. by buying and selling
Commissions, Fees, merchandise.
Fares, etc.)
*Expenses (e.g. Salaries,

Utilities, Depreciation,
etc.)
135
OVERVIEW
ACCOUNTING FOR SERVICE

BUSINESS
Measuring net income:
Revenues P XX
Less: Expenses (XX)
Net income P XX
136
OVERVIEW
ACCOUNTING FOR
MERCHANDISING BUSINESS
Measuring net income:
Sales P XX
Less: Sales returns/allowances (XX)
Net Sales XX
Less: Cost of goods sold (XX)
Gross profit XX
Less: Operating expenses (XX)
Net income P XX
137
ACCOUNTING FOR MERCHANDISING BUSINESS
ACCOUNTING FOR SALES

 Sales is the revenue account title used to record the sale of all
kinds of merchandise
Cash / AR P XX
Sales XX
Output VAT XX
Cash / AR P XX
Sales XX
138
ACCOUNTING FOR SALES

 EXAMPLE:
On December 1, 2008, sold P100,000 worth of merchandise for

cash. Output Tax is 12%. The entry will be:
Cash / AR P 112,000
Sales 100,000
Output VAT 12,000
139
ACCOUNTING FOR SALES RETURNS AND ALLOWANCES

 Few customers who may return all or a portion of the goods that
they purchased, due to wrong specifications, poor quality, or
erroneous merchandise being delivered.
Sales return and allowances P XX

Output VAT XX
Cash / AR XX
Sales return and allowances P XX

Cash / AR XX
140
ACCOUNTING FOR SALES RETURNS AND ALLOWANCES

 EXAMPLE:
On December 18, 2008, Mr. B, a customer, returned defective

merchandise with a selling price of P20,000 (excluding VAT). The
entry to record the return will be:
Sales returns and allowances P 20,000

Output VAT 2,400
Cash / AR 22,400
141
ACCOUNTING FOR SALES DISCOUNTS

 The terms of a credit sale may include an offer of a cash
discount, called sales discounts, to encourage customers to pay
their accounts promptly.
e.g.:
2/10, n/30 - 2% may be deducted from the amount due if the

customer pays within 10 days from the date of sale. The 10-day
period during which the customer can avail the discount is known
as the discount period. If the customer does not pay within 10
days, he/she must pay the full price within 30 days from the date of
sale. (can also be n/60)
Sales discounts P XX
Output VAT XX
Cash / AR XX
Sales discounts P XX
Cash / AR XX
142

 EXAMPLE:
On December 15, 2008, sold goods to Mr. B, for P80,000 on

account, terms: 2/10, n/30. On December 18, Mr. B returned
defective merchandise with a selling price of P20,000 (excluding
VAT). On December 22, received full payment from Mr. B.
Sales:
AR P 89,600
Sales 80,000
Output VAT 9,600
Sales returns:
Sales returns and allowances P 20,000
Output VAT 2,400
Cash / AR 22,400
143

Sales discounts:
Sales – December 15, sales invoice P 80,000
Less: Sales returns on Dec. 18 (20,000)
Amount due before discount P 60,000
Amount due before discount P 60,000

Less: 2% discount (P60,000 x 2%) (1,200)
Net discount 58,800
Add: Net output tax (9,600-2,400-144) 7,056
Amount due from Mr. B P 65,856
Cash P 65,856
Sales discounts 1,200
Output VAT 144
AR 67,200
144
ACCOUNTING FOR PURCHASES
 A merchandising business buys goods at cost and sells them at

a price above cost. The cost of the goods bought is debited to
the account called Purchases. The Purchases account is used
only for goods purchased for resale.
Purchases P XX
Input VAT XX
Cash / AP XX
Purchases P XX
Cash / AP XX
145
ACCOUNTING FOR PURCHASES

 EXAMPLE:
On December 6, purchased goods from National Co. for P160,000,

terms: 2/10, n/30. Input tax is 12% of the purchase price.
Purchases P 160,000
Input VAT 19,200
Cash / AP 179,200
146
ACCOUNTING FOR PURCHASE RETURNS AND ALLOWANCES
 If a buyer decides to return purchased goods, the transaction is

known as a purchase return in the books of the buyer. On the
other hand, a purchase allowance happens when the company
is still willing to accept the said goods, but with a reduction in
price.
Cash / AP P XX
Purchase returns and allowances XX
Input VAT XX
147
ACCOUNTING FOR PURCHASE RETURNS AND ALLOWANCES

 EXAMPLE:
On December 8, purchased returned to National Co. for P10,000

worth of defective goods.
AP P 11,200
Purchase returns and allowances 10,000
Input VAT 1,200
148
ACCOUNTING FOR PURCHASE DISCOUNTS
 The purchase discount account is used to record the amount

saved by paying promptly.
Cash / AP P XX
Purchase returns and allowances XX
Input VAT XX
149

 EXAMPLE:
On December 6, purchased returned to National Co. for P160,000

terms: 2/10, n/30. Input tax is 12% of the purchase price. On
December 8, returned to National Co. P10,000 worth of defective
goods.
Purchases:
Purchases P 160,000
Input VAT 19,200
AP 179,200
Purchase returns:
AP P 11,200
Input VAT 1,200
150

 EXAMPLE: (continuation)
If payment was made within the discount period:
Purchases – December 6 P 160,000

Less: December 8 returns (10,000)
Amount due (before input tax) P 150,000
Less: 2% discount (P60,000 x 2%) (3,000)
Net purchases 147,000
Add: Net input tax (19,200-1,200-360) 17,640
Amount due P 164,640
Purchase returns:
AP P 168,000
Input VAT 360
Cash 164,640
151

If payment was made outside the discount period:
Purchases – December 6 P 160,000

Less: December 8 returns (10,000)
Amount due (before input tax) P 150,000
Add: Net input tax (19,200-1,200-360) 18,000
Amount due P 168,000
Purchase returns:
AP P 168,000
Cash 168,000
152
OVERVIEW
SHIPPING CHARGES ON MERCHANDISE

PURCHASED OR SOLD
 When goods are purchased by the buyer, the cost of shipping the
merchandise may be shouldered by the buyer or seller depending
upon the arrangements made prior to the purchase or sale of the
merchandise.
FOB DESTINATION FOB SHIPPING POINT
*shipping costs c/o seller *shipping costs c/o buyer
*purchaser receives title to *purchaser receives title
the goods at point of to the goods at shipping
destination. point.
FREIGHT PREPAID FREIGHT COLLECT
*shipping costs were paid *shipping costs were paid
by the seller by the buyer
153

PURCHASED OR SOLD
 EXAMPLE:
On January 3, 2008, goods valued at P30,000 are purchased by

Manila, Co. from Cebu Trading, a company in Cebu City. Terms
are 2/10, n/30, FOB Destinaton, freight prepaid. Amount of freight
cost is P1,600.
MANILA CO. BOOKS CEBU TRADING BOOKS

(BUYER) (SELLER)
Purchases P 30,000 AR P 33,600
Input VAT 3,600 Sales 30,000
AP 33,600 Output VAT 3,600
Freight out P 1,600

No entry for the freight cost. Cash 1,600
154

PURCHASED OR SOLD
On January 3, 2008, goods valued at P30,000 are purchased by

Manila, Co. from Cebu Trading, a company in Cebu City. Terms
are 2/10, n/30, FOB Destinaton, freight collect. Amount of freight
cost is P1,600.
MANILA CO. BOOKS CEBU TRADING BOOKS

(BUYER) (SELLER)
AP P 1,600 Freight out P 1,600

Cash 1,600 AR 1,600
155

PURCHASED OR SOLD
Assume payments were made on January 9, entries will be:
MANILA CO. BOOKS (BUYER) CEBU TRADING BOOKS (SELLER)
AP P 32,000 Cash P 31,328
Purchase discount 600 Sales discount 600
Input VAT 72 Output VAT 72
Cash 31,328 AR 32,000
Supporting computations:
Purchases P 30,000 Sales P 30,000
Less: Pur. Disc. ( 600) Less: Sales Disc. ( 600)
Balance P 29,400 Balance P 29,400
Add: Input VAT (12%) 3,528 Add: Output VAT (12%) 3,528
Total 32,928 Total 32,928
Less: shipping costs Less: shipping costs
(paid by buyer) ( 1,600) (paid by buyer) ( 1,600)
Amount paid to seller P 31,328 Amount received by sellerP 31,328
156

PURCHASED OR SOLD
 EXAMPLE:
On January 4, Atlas Co located in Manila purchased goods worth

P40,000 from Davao Co. Freight cost was P3,000. Terms are 2/10,
n/30, FOB shipping point, freight collect.
ATLAS CO. BOOKS DAVAO CO. BOOKS

(BUYER) (SELLER)
Freight in P 3,000
Cash 3,000 No entry for the freight cost.
157

PURCHASED OR SOLD
On January 4, Atlas Co located in Manila purchased goods worth

P40,000 from Davao Co. Freight cost was P3,000. Terms are 2/10,
n/30, FOB shipping point, freight prepaid.
ATLAS CO. BOOKS DAVAO CO. BOOKS

(BUYER) (SELLER)
Freight in P 3,000 AR P 3,000

AP 3,000 Cash 3,000
158

PURCHASED OR SOLD
Assume payments were made on January 9, entries will be:
ATLAS CO. BOOKS (BUYER) DAVAO CO. BOOKS (SELLER)
AP P 47,800 Cash P 46,904
Purchase discount 800 Sales discount 800
Input VAT 96 Output VAT 96
Cash 46,904 AR 47,800
Purchases P 40,000 Sales P 40,000
Less: Pur. Disc. ( 800) Less: Sales Disc. ( 800)
Balance P 39,200 Balance P 39,200
Add: Input VAT (12%) 4,704 Add: Output VAT (12%) 4,704
Total 43,904 Total 43,904
Less: shipping costs Less: shipping costs
(paid by buyer) 3,000 (paid by buyer) 3,000
Amount paid to seller P 46,904 Amount received by sellerP 46,904
159
OVERVIEW
DETERMINING THE COST OF GOODS PURCHASED
Purchases P XX
Less: Purchase returns/allowances (XX)
Purchase discounts (XX)
Net Purchases XX
Add: Freight in XX
Cost of goods purchased P XX
 EXAMPLE:
XYZ Co. shows the following balance for the above accounts:
Purchases P350,00; Purchase return & allowances P10,000;
Purchase discounts P1,600; and Freight in P5,000.
Purchases P 350,000
Less: Purchase returns/allowances ( 10,000)
Purchase discounts ( 1,600)
Net Purchases 338,400
Add: Freight in 5,000
Cost of goods purchased P 343,300
160
COMPARISON OF PERIODIC AND PERPETUAL
INVENTORY SYSTEM
 Periodic System – cost of goods is determined only at the end of
an accounting period.
 Perpetual System – maintains detailed records of the cost of
each inventory item and continuously show the inventory that
should be on hand.
 EXAMPLE:
1) Purchased merchandise worth P80,000, terms 2/10, n/30, FOB

shipping point.
PERIODIC SYSTEM PERPETUAL SYSTEM
Purchases P 80,000 Mdse. Invty P 80,000

Input VAT 9,600 Input VAT 9,600
AP 89,600 AP 89,600
161
INVENTORY SYSTEM
2) Paid the shipping company (FOB shipping point, collect) P2,000.

Freight in P 2,000 Mdse. Invty P 2,000
Cash 2,000 Cash 2,000
3) Returned defective merchandise worth P12,000.
AP P 13,440 AP P 13,440
Pur. Return & allow 12,000 Mdse. Invty 12,000
Input VAT 1,440 Input VAT 1,440
162
INVENTORY SYSTEM
4) Paid Merchandise purchased in No. 1 less discount.

AP P 76,160 AP P 76,160
Pur. Discount 1,360 Mdse. Invty 1,360
Input VAT 163 Input VAT 163
Cash 74,637 Cash 74,637
AP : 89,600 – 13,440 = 76,160
Pur. Discount : 80,000 less returns of 12,000 = 68,000 x 2% = 1,360
Reduction in Input VAT due to discount : 1,360 x 12% = 163
Cash paid to the seller = 76,160 – 1,360 – 163 = 74,637
163
INVENTORY SYSTEM
5) Sold merchandise costing P20,000 for P24,000, terms: 2/10, n/30.

AR P 26,880 AR P 26,880
Sales 24,000 Sales 24,000
Output VAT 2,880 Output VAT 2,880
No entry to record the cost of CGS P 20,000

goods sold (CGS) at the time of Mdse. Invty 20,000
sale.
Note: Under the periodic system, an adjusting entry at the end of

the accounting period is made to record the costs of goods sold
after a physical count of unsold merchandise.
164
INVENTORY SYSTEM
6) Merchandise costing P2,000 and sold at P2,400 (VAT inclusive) is

returned by the customer.
Sales ret. & allow P 2,400 Sales ret. & allow P 2,400
Output VAT 288 Output VAT 288
AR 2,688 AR 2,688
No entry to record the cost of Mdse. Invty P 2,000

goods returned at the time of CGS 2,000
return.
165
MEASURING THE COST OF

GOODS SOLD
Merchandise Inventory, Beg. balance P XX

Add: Net Purchases
Purchases XX
Freight-in XX
Purchase ret. & allow. (XX)
Purchase discounts (XX) XX
Cost of goods available for sale XX
Less: Merchandise Inventory, End balance (XX)
Cost of goods sold P XX
166
GOODS SOLD
 To illustrate, assume the following account balances taken from
the unadjusted Trial Balance of Cool Computations Company
on December 31, 2008:
Accounts Debit Credit
Merchandise Inventory, Jan 1, 2008 80,000
Purchases 1,280,000
Freight-in 10,000
Purchase returns & allowances 64,000
Purchase discounts 46,000
 A physical inventory count was conducted at December 31,

2008. Unsold goods amounted to P160,000. The cost of goods
sold can now be computed, and the books adjusted to reflect
the same.
167

GOODS SOLD
Merchandise Inventory, Beg. balance P 80,000

Add: Net Purchases
Purchases 1,280,000
Freight-in 10,000
Purchase ret. & allow. ( 64,000)
Purchase discounts ( 46,000) 1,180,000
Cost of goods available for sale 1,260,000
Less: Merchandise Inventory, End balance 160,000
Cost of goods sold P 1,100,000
168
GOODS SOLD
 Adjusting entries:
1) Removing the beg. Balance of merchandise inventory figure of

P80,000 from merchandise inventory account.
CGS P 80,000
Mdse. Invty 80,000
COST OF GOODS SOLD MDSE. INVENTORY
80,000 80,000 80,000
169
GOODS SOLD
2) Closing the purchases account and purchases-related

accounts.
CGS P 1,180,000
Pur. Ret. & allow. 64,000
Pur. Discounts 46,000
Purchases 1,280,000
Freight-in 10,000
COST OF GOODS SOLD MDSE. INVENTORY PURCHASES
80,000 80,000 80,000 1,280,000 1,280,000

1,180,000
PURCHASE RET & ALLOW PURCHASE DISCOUNT FREIGHT-IN
64,000 64,000 46,000 46,000 10,000 10,000
170
GOODS SOLD
3) Setting up the ending inventory figure.
Mdse. Inventory P 160,000

Cost of goods sold 160,000
COST OF GOODS SOLD MDSE. INVENTORY
80,000 80,000 80,000

1,180,000
160,000
1,100,000
171
COMPUTING THE GROSS PROFIT
 Using the cost data from the previous illustration, additional

information are as follows: Sales, P2,000,000; Sales returns and
allowances, P30,000; and Sales Discount, P20,000. Gross profit is
computed as follows:
Sales P 2,000,000
Less:
Sales returns & allowances P 30,000
Sales discounts 20,000 50,000
Net Sales 1,950,000
Less: Cost of Goods Sold 1,100,000
Gross Profit P 850,000
172
MODULE 7
FINANCIAL
STATEMENTS
ANALYSIS
173
HORIZONTAL ANALYSIS
= Amount Amt Change / Prior
XYZ Co. – Statement of Financial Position Current Year - Prior Year
Change Year = % Inc/Dec
Inc. ( Dec)
ASSETS 2014 2013
Amount %
Current Assets
Cash and cash equivalents 1,744 754 990 131%
Trade receivables 933 1,222 (289) -24%
Inventories 516 766 (250) -33%
Deferred tax assets 13 27 (14) -52%
Prepaid expenses and other current assets-net 759 568 191 34%
Total Current Assets 3,965 3,337 628 19%
Non-current Assets
Investments and advances 2,978 2,291 687 30%
Interest in joint venture 36 50 (14) -28%
Property and equipment-net 2,249 2,224 25 1%
Deferred tax assets-net 71 77 (6) -8%
Other noncurrent assets-net 685 634 51 8%
Total Noncurrent Assets 6,019 5,276 743 14%
Total Assets 9,984 8,613 1,371 16%
174
HORIZONTAL ANALYSIS
XYZ Co. – Statement of Financial Position
LIA BILITIES A ND STOCKHOLDER S' Inc. ( Dec)

2014 2013
EQU ITY Amount %
Current Liabilities
Trade payables 1,013 777 236 30%
Accrued expenses 1,240 1,031 209 20%
Other current liabilities 270 282 (12) -4%
Current portion of long-term debt 228 113 115 102%
Total Current Liabilities 2,751 2,203 548 25%
Non-current Liabilities
Long term debt-net of current portion 510 737 (227) -31%
Total Noncurrent Liabilities 510 737 (227) -31%
Total Liabilities 3,261 2,941 320 11%
Stockholder's Equity
Capital stock 1,030 1,017 13 1%
Additional paid-in capital 1,788 1,654 134 8%
Subscriptions receivable (97) - (97) -100%
Share in cumulative translation adjustments of
subsidiaries 190 85 105 124%
Retained earnings 3,812 2,916 896 31%
Total Stockholder's Equity 6,723 5,672 1,051 19%
Total Liabilities and Stockholder's Equity 9,984 8,613 1,371 16%
175
VERTICAL ANALYSIS
2014 2013
ASSETS 2014 2013
% %
Current Assets
Cash and cash equivalents 1,744 754 17.47% 8.75%
Trade receivables 933 1,222 9.34% 14.19%
Inventories 516 766 5.17% 8.89%
Deferred tax assets 13 27 0.13% 0.31%
Prepaid expenses and other current assets-net 759 568 7.60% 6.59%
Total Current Assets 3,965 3,337 39.71% 38.74%
Non-current Assets
Investments and advances 2,978 2,291 29.83% 26.60%
Interest in joint venture 36 50 0.36% 0.58%
Property and equipment-net 2,249 2,224 22.53% 25.82%
Deferred tax assets-net 71 77 0.71% 0.89%
Other noncurrent assets-net 685 634 6.86% 7.36%
Total Noncurrent Assets 6,019 5,276 60.29% 61.26%
Total Assets 9,984 8,613 100.00% 100.00%
176
VERTICAL ANALYSIS
LIA BILITIES A ND STOCKHOLDER S' 2014 2013

2014 2013
EQU ITY % %
Current Liabilities
Trade payables 1,013 777 10.15% 9.02%
Accrued expenses 1,240 1,031 12.42% 11.97%
Other current liabilities 270 282 2.70% 3.27%
Current portion of long-term debt 228 113 2.28% 1.31%
Total Current Liabilities 2,751 2,203 27.55% 25.58%
Non-current Liabilities
Long term debt-net of current portion 510 737 5.11% 8.56%
Total Noncurrent Liabilities 510 737 5.11% 8.56%
Total Liabilities 3,261 2,941 32.66% 34.15%
Stockholder's Equity
Capital stock 1,030 1,017 10.32% 11.81%
Additional paid-in capital 1,788 1,654 17.91% 19.20%
Subscriptions receivable (97) - -0.97% 0.00%
Share in cumulative translation adjustments of
subsidiaries 190 85 1.90% 0.99%
Retained earnings 3,812 2,916 38.18% 33.86%
Total Stockholder's Equity 6,723 5,672 67.34% 65.85%
Total Liabilities and Stockholder's Equity 9,984 8,613 100.00% 100.00%
177
VERTICAL ANALYSIS
XYZ Co. – Statement of Income
Years ended Dec 31 2014 2013

2014 2013 % %
REVENUES
Net sales 13,138 12,651 100% 100%
Cost of sales 10,142 10,235 77% 81%
GROSS PROFIT 2,996 2,416 23% 19%
OPERATING EXPENSES
General and administrative 1,150 986 9% 8%
Advertising and promotion 498 357 4% 3%
1,648 1,343 13% 11%
INCOME FROM OPERATIONS 1,348 1,073 10% 0%
OTHER INCOME(CHARGES) (2) (337) 0% -3%
INCOME BEFORE INCOME TAX 1,346 736 10% 6%
PROVISION FOR INCOME TAX
Current 302 244 2% 2%
Deferred 5 4 0% 0%
Total provision for income tax 307 248 2% 2%
NET INCOME 1,039 488 8% 4%
178
FS RATIOS FOR BANKS
RATIO FORMULA
Net Income
Return on Equity (ROE)
Average equity
Net Income
Return Average Assets (ROA)
Average total assets
Net Interest Income /1

Net Interest Margin (NIM)
Average earning assets /2
1/ - Interest income less Interest expense
2/ - Interbank, RDA/SDA, Investment Securities, Net Loans,
179
FS RATIOS FOR BANKS
RATIO FORMULA
Net Income Attributable to Common

Earnings per share (EPS) Shareholders /3
Weighted Average Common Shares
3/ - Net income less Preferred Shares & HT1 Dividends
Total Tier 1 Capital

Tier 1 Capital Adequacy Ratio (CAR)
Total Risk-Weighted Assets
Total Qualifying Capital

Total Capital Adequacy Ratio (CAR)
Total Risk-Weighted Assets
180
FS RATIOS FOR BANKS
RATIO FORMULA
SHE Attributable to Common Shareholders /4
Book Value per Common Share (BV/S)
Weighted Average Common Shares
4/ - Total SHE less Preferred Stock and Hybrid Tier 1
Securities
Non-Performing Loans (NPLs) /5

NPL ratio
Total Gross Loan Portfolio
/6
Non-Performing Assets (NPAs)
NPA ratio
Total Gross Assets
5/ - Net of total specific provisions
6/ - NPLs as defined in 5/+ Gross ROPAs
181
FS RATIOS FOR BANKS
RATIO FORMULA
Other Operating Expenses
Cost to Income Ratio
Total Income /7
7/ - Net interest income + Other Income
Liquid Assets /8
Liquid Assets to Total Assets
Total Assets
8/ - COCI + Due from BSP & Other Banks + Interbank loans + FVPL + AFS
Total Tangible Capital Funds to Total Total Tangible Capital Funds /9

Tangible Assets Total Tangible Assets /9
9 / - Total Capital Funds or Total Assets, as applicable, minus Goodwill and Deferred tax Assets
Dividend Per Common Share

Dividend Pay-out Ratio
Earnings Per Share
182
SAMPLE STATEMENTS OF FINANCIAL POSITION
GROUP PARENT COMPANY

2014 2013 2014 2013
RESOURCES
CASH AND OTHER CASH ITEMS P 13,085 P 9,826 P 9,539 P 7,563
DUE FROM BSP 46,099 52,491 37,763 48,679
DUE FROM OTHER BANKS 16,600 7,537 15,535 6,212
TRADING AND INVESTMENT
SECURITIES 100,790 92,700 87,540 79,240
LOANS AND RECEIVABLES - Net 261,574 237,960 205,614 191,636
INVESTMENTS IN SUBSIDIARIES
AND ASSOCIATES - Net 321 333 7,999 7,999
BANK PREMISES, FURNITURE,
FIXTURES AND
EQUIPMENT - Net 7,031 8,814 4,487 7,021
INVESTMENT PROPERTIES - Net 5,355 4,579 3,426 1,944
OTHER RESOURCES - Net 7,050 7,629 5,027 4,796
TOTAL RESOURCES P 457,905 P 421,869 P 376,930 P 355,090
183

2014 2013 2014 2013
LIABILITIES AND EQUITY
DEPOSIT LIABILITIES P 315,761 P 297,853 P 248,022 P 243,620
Demand 32,197 28,448 24,391 23,575
Savings 164,269 157,065 142,375 134,757
Time 119,295 112,340 81,256 85,288
Total Deposit Liabilities 315,761 297,853 248,022 243,620
BILLS PAYABLE 39,799 39,895 36,837 37,067
BONDS PAYABLE 23,486 23,317 23,486 23,317
SUBORDINATED DEBT 9,921 - 9,921 -
ACCRUED INTEREST,
TAXES AND OTHER EXPENSES 4,671 4,537 3,498 3,549
OTHER LIABILITIES 11,136 11,459 8,474 8,387
Total Liabilities 404,774 377,061 330,238 315,940
184
EQUITY 2014 2013 2014 2013
Attributable to Parent Company Shareholders
Preferred stock 3 3 3 3
Common stock 12,757 12,757 12,757 12,757
Treasury stock - - - -
Capital paid in excess of par 16,148 16,148 16,148 16,148
Hybrid perpetual securities 4,883 4,883 4,883 4,883
Revaluation reserves on AFS - ( 5,005 ) - ( 4,334 )
Revaluation reserves on FVOCI 835 825
Accumulated translation adjustment 71 76 - -
Reserve for trust business 366 348 341 327
Other reserves ( 97 ) ( 282 ) - -
Retirement plan remeasurement ( 224 ) ( 225 ) ( 75 ) ( 155 )
Surplus 18,367 16,082 11,810 9,521
53,109 44,785 46,692 39,150
Non-Controlling Interest 22 23 - -
Total Equity 53,131 44,808 46,692 39,150
TOTAL LIABILITIES AND EQUITY P 457,905 P 421,869 P 376,930 P 355,090
185
SAMPLE STATEMENTS OF INCOME
2014 2013 2014 2013
INTEREST INCOME
Loans and receivables P 15,961 P 14,302 P 11,143 P 10,138
Trading and investment securities 4,026 4,259 3,578 3,762
Others 213 263 190 246
20,200 18,824 14,911 14,146
INTEREST EXPENSE
Deposit liabilities 2,581 2,682 1,849 1,855
Bills payable and other borrowings 2,652 2,831 2,519 2,698
5,233 5,513 4,368 4,553
NET INTEREST INCOME 14,967 13,311 10,543 9,593
IMPAIRMENT LOSSES - Net 2,509 2,054 1,663 1,380
NET INTEREST INCOME AFTER
IMPAIRMENT LOSSES 12,458 11,257 8,880 8,213
OTHER OPERATING INCOME

Trading and securities gains - net 2,545 2,600 1,869 1,762
Service fees and commissions 2,297 2,398 1,166 1,375
Trust fees 297 304 255 257
Foreign exchange gains - net 237 264 199 221
Miscellaneous 1,726 4,244 2,668 4,208
7,102 9,810 6,157 7,823
TOTAL OPERATING INCOME P 19,560 P 21,067 P 15,037 P 16,036

186
SAMPLE STATEMENTS INCOME
2014 2013 2014 2013
TOTAL OPERATING INCOME P 19,560 P 21,067 P 15,037 P 16,036
OTHER OPERATING EXPENSES

Employee benefits 4,064 3,886 2,748 2,639
Occupancy and equipment-related 2,528 2,390 1,863 1,731
Taxes and licenses 1,463 1,708 1,016 1,202
Depreciation and amortization 1,577 1,318 860 772
Miscellaneous 4,604 5,172 3,483 3,943
14,236 14,474 9,970 10,287
PROFIT BEFORE TAX 5,324 6,593 5,067 5,749

TAX EXPENSE 914 1,259 588 967
NET PROFIT P 4,410 P 5,334 P 4,479 P 4,782
Earnings Per Share

Basic P 3.11 P 3.95 P 3.16 P 3.52
Diluted P 3.11 P 3.95 P 3.16 P 3.52
187
End of Presentation
THANK YOU!
188

Basic Accounting Lecture 05202018

Uploaded by

Copyright:

Available Formats

Basic Accounting Lecture 05202018

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Basic Accounting Lecture 05202018

Uploaded by

Copyright:

Available Formats

FUNDAMENTALS OF ACCOUNTING

By: Shiela Angeli C. Servidad

At the end of the course, participants are expected to

1. Basic Accounting Concepts

Methodology: - Classroom / Sit down discussions

Need to understand ACCOUNTING & its

THE LANGUAGE Compiles

GAAP Are the Rules

Financial Reporting Standards Council

 Rules that govern the practice

 PAS + PFRS + SIC + IFRIC

PAS = Phil. Accounting Standards

ASSETS = LIABILITIES + EQUITY

Something of Something What Remains

Two sources of equity

Expanded accounting equation:

Answer: By earning “Net Income*”

Expenses: Assets or services “used up” in the

Identify the financial element to

Accounts Payable Liability

Used supplies Equity (Expense)

Unused supplies Asset

A list of account titles used by the business.

 Revenue – Expenses = Net income (or Net Earnings)

∆ Beginning of period total equity +

A business event involving transfer of

What is transaction analysis?

Determining the effect of a business

Where do you start?

 First, determine the effects of the

Four types of transactions

• Asset source • Asset Use

Transactions – an asset Transaction – an asset

• Asset Exchange • Claims Exchange

Identify the effects of the

RCBC, a bank, accepts a P10,000

RCBC purchased a computer equipment for

RCBC incurred P20,000 salaries expenses

RCBC paid its salaries payable to its

Dec. in Salaries Payable

Notice that the Balance Sheet Section is similar

1. Spic & Span was formed on Jan. 1, 2013 by issuing

1 2,000 2,000 2,000

3 (300) (300) 300 (300) (300)

1,650 1,500 1,000 2,000 150 500 300 200 1,650

TOTAL ASSETS = P 3,150 TOTAL LIABS. & EQUITY=P 3,150 51

Less: Expenses 300

Beginning Common Stock P 0

Ending Common Stock P 2,000

Beginning Retained Earnings P 0

Ending Retained Earnings 150

• Accounting period issue

What is ACCRUAL ACCOUNTING?

• Sales made or services rendered “on

• Recognition of events versus realization of

• When is revenue realized?

• When are costs recognized

 When the “matching”

 When the benefits of the