BASIC FINANCIAL ACCOUNTING and REPORTING (BFAR): PHILIPPINE BASED

(Summary and Class Notes)

I. Introduction to Accounting
II. The Accounting Equation and the Double- Entry System

III. BFAR: The Accounting Cycle

A. Identification of events to be recorded.
B. Journal Entry

C. Posting in the ledger

D. Preparation of Trial Balance
E. Adjusting Journal Entries

F. Preparation of Worksheet
G. Preparation of Financial Statements
H. Closing Journal entries

J. Preparation of Post-Closing Trial Balance

K. Reversing Journal Entries
IV. Types of Business Organization: Application of Accounting

A. Service Business
B. Merchandising Business
1. Perpetual Inventory System
2. Periodic Inventory System
i. Special Journal

ii. Combination Journal

iii. Voucher System
C. Manufacturing Business

D. Comparisons between the three types of business organization

V. Special Topic: Payroll

1
 Chapter II

THE ACCOUNTING EQUATION AND THE DOUBLE-ENTRY SYSTEM

Information System
It is the collection of people (competent ends of the users working), procedures
(manuals and guidelines), software (program used for instructions), hardware (used to
input devices), and data (raw materials from data processing) which works together to
provide information essential to running an organization.

Accounting Information System

Combination of personnel, records and procedures that a business uses to meet
its need for financial information.

Elements of Financial Statements

Elements for Statement of Financial Position (SFP)
I. Assets
 It is a present economic resource controlled by entity as a result of past event.
 An economic resource is a right that has the potential to produce economic
benefits and that economic benefits are no longer need to be expected to flow to
the entity.
 Classification of Assets:
 It is a present economic resource.
 The economic resource is a right that has potential to produce economic
benefits.
 The economic resource is also controlled by the entity as a result of past
events.
A. Right (may take the following forms)
1. Rights that correspond to an obligation of another entity
i. Right to receive cash
ii. Right to receive goods or services
iii. Right to exchange economic resources with another party on favourable

2
 terms
iv. Right to benefit from an obligation of another party if a specified uncertain
future event occurs.
2. Rights that do not correspond to an obligation of another entity
i. Right over physical objects, such as property, plant and equipment or
inventories
ii. Right to intellectual property
3. Rights established by contract or legislation
i. Right in owning a debt or equity instrument or registered patent.
B. Potential to produce economic benefits
1. For the potential to exist, it is only necessary that the right already exists even
the economic benefit is low.
2. The economic resource is the present right that contains potential and not
future economic benefits that the right may produce.
3. The entity would produce economic benefits if it is entitled to:
i. Receive contractual cash flows
ii. Exchange economic resources with another party on favourable terms.
iii. Produce cash inflows or avoid cash outflows
iv. Receive cash by selling the economic resource
v. Extinguish a liability by transferring an economic resource
C. Control of an economic resource
1. An entity controls an asset if it has present ability to direct the use of the
asset and obtain the economic benefits that flow from it.
i. Control includes the ability to prevent others from using such asset and
therefore preventing others from obtaining the economic benefits from the
asset.
ii. Control may arise if an entity enforces legal rights.
Note: No legal rights, control can still exist if an entity has other means of
ensuring that no other part can benefits from an asset.

3
II. Liability
 It is defined as present obligations of an entity to transfer an economic resource
as a result of past events.
 Classification of liability:
 The entity has an obligation.
 The obligation is to transfer an economic resource.
 Its obligation is a present obligation that exists as a result of past events.

A. Obligation
1. An obligation is the duty or responsibility that an entity has no practical ability
to avoid. It can be legal or constructive obligations.
2. Legal obligations may be legally enforceable as a consequence of a binding
contract or statutory requirement.
3. Constructive Obligations which arise from normal business practice, custom
and a desire to maintain good business relations or act in an equitable
manner.

B. To transfer of an economic resource

Obligations to transfer an economic resource include:
1. Obligation to pay cash
2. Obligation to deliver goods or noncash resources.
3. Obligation to provide services at some future time.
4. Obligation to exchange economic resources with another party on
unfavourable terms.

C. Past event
An obligation exists as a result of past event if both of the following conditions
are satisfied.
1. An entity already obtained economic benefits.
2. An entity must transfer an economic resource.

4
III. Equity
 It is the residual interest in the assets of the enterprise after deducting all its
liabilities.

Accounting Formula
Assets = Liabilities + Equity
Liabilities = Assets – Equity
Equity = Assets – Liabilities

Elements of Income Statement (IS)

I. Income ( Assets or Liabilities, Equity)
 It is defined as increases in assets or decreases in liabilities that result in increases
in equity, other than those relating to contributions from equity holders.
 Its definition encompasses both revenue and gains.
 Revenue are the inflows of ordinary course of business and is referred to by variety
of different names including sales, fees, interest, dividends, royalties and rent.
Note: Essence of Revenue is regularity.
 Gains represent other items that meet the definition of income and do not arise in
the course of the ordinary regular activities.
 Gains include from disposal of noncurrent asset, unrealized gain on trading
investment and gain from expropriation (public).

II. Expenses ( Assets or Liabilities, Equity)

 It is defined as decreases in assets or increases in liabilities that result in
decreases in equity, other than those relating to distributions to equity holders.
 Its definition encompasses those expenses that arise in the course of the ordinary
regular activities and as well as losses.
 Expenses are the outflows of ordinary course of business and it include cost of
goods sold (COGS), wages, maintenance, utilities and depreciation.

5
  Losses do not arise in the course of ordinary regular activities and it include losses
resulting from disasters (i.e. hurricane, floods, earthquakes etc. that is Act from
God).

Accounting Formula
Income = Profit + Expenses
Income = Revenue – Expenses

Example:
Income Expenses Profit
840K 480K 360K
1.3M 860K 440K
2.720M 2M 720K
1.4M 1.8M (400K)

If: Revenue > Expenses = Net Income (p+)

Revenue < Expenses = Net Loss (𝑛− )

To get:
Revenue = Net Income or Net Loss + Expenses
Expenses = Revenue - Net Loss
Net Income = Revenue – Expenses

Example: Revenue = Expenses + Net Loss

= 153 000 + (27 500)
= 153 000 – 27 500
= 125 000

6
Account
The basic summary device of accounting and it is the records of increases, decreases
or balances of each element that appears in financial statements.

T- Account
The simplest form of the account and can be illustrate into:

Account Title

Debit Credit

Accounting Equation
The most basic tool of accounting.

Debits and Credits – DOUBLE ENTRY SYSTEM

Double entry system

 Business transactions have dual effects.
 Debit side must have corresponding credit side entry.
 Each transaction affect two or more accounts.
 The total debit equals to the total credit.

Debit
A term from Latin word, debere (DR) meaning an amount entered on the left side
(value received).

Credit
A term from Latin word, credere (CR) meaning an amount entered on the right side
(value parted with).

7
Rules of Debit and Credit
Normal Balance
Balance Sheet Accounts Income Statement Accounts
Assets = DR CR Expenses = DR CR
Liabilities = DR CR Income = DR CR
Equity = DR CR
Withdrawals = DR CR
Capital = DR CR
 Investments – deducted from owner to its business.
 Withdrawals – Deducted from business to its owners.

To summarize together:
Debit Credit

Assets Liabilities
Withdrawals Capital
Expenses Income

Accounting Event
It is an economic occurrence that causes changes in an enterprise’s Assets,
Liabilities and Equity.

Transaction
A particular kind of event that involves the transfer of something value between two
entities.

Classification of Transactions
1. Source of Assets (SA) - Assets and Liabilities or Equity (other claims)
Example:
 Purchase of supplies on account (JE: Supplies (Dr); Accounts Payable (Cr))
 Sold of goods or cash (JE: Cash (Dr); Revenue (Cr))

8
 L
2. Exchange of Assets (EA) - Assets and other Assets
Example:
 Acquired equipment for cash (JE: Equipment (Dr); Cash (Cr))
 Collection of receivables (JE: Cash (Dr); Accounts Receivable (Cr))

3. Use of Assets (UA) - Assets and Liabilities or Equity (other claims)

Example:
 Settled accounts payable (JE: Accounts Payable (Dr); Cash (Cr))
 Paid salaries to employees (JE: Salary Expense (Dr); Cash (Cr))

L
4. Exchange of Assets (EA) - Liabilities or Equity and other Liabilities or Equity
Example:
 Received utility bill but did not pay (JE: Utility Expense (Dr);
Utility Payable (Cr))

Typical Account Titles Used

Operating Cycle
It is the time between acquisitions of assets for processing and their realization in
cash or cash equivalents.

1. Assets
 It is an economic resource controlled by an entity as a result of past event.
 Classified into: Current Assets and Noncurrent Assets

Current Assets
PAS 1, paragraph 66, provides that an entity shall classify an asset as
current when:
A. The asset is cash or cash equivalent unless the restricted to settle a
liability for more than twelve months after the reporting period.
B. The entity holds the asset primarily for the purpose of trading.

9
 C. The entity expects to realize the asset within twelve months after the
reporting period.
D. The entity expects to realize the asset or intends to sell or consume it
within the entity’s normal operating cycle.
 Presentation of Current Assets are usually listed in the order of liquidity.
 PAS, paragraph 54, the line items of current assets: CFTIP
 Cash and equivalents
 Financial assets at fair value such as trading securities and other investments
in quoted equity instruments.
 Trade and other receivables.
 Inventories
 Prepaid expenses
 Typical account title used:
 Cash – is the medium of exchange. Cash comprises cash on hand, petty
cash fund, cash in bank and demand deposits.
 Cash equivalents – are short-term highly liquid investments that are
readily convertible to known amount of cash and
which are subject to an insignificant risk of change
in value such example is treasury bill and time
deposit.

 Notes Receivables – it is a written pledge that the customer will pay in a

certain date.

 Accounts Receivable – the claims against customers arising from sales

of services or goods on credit. The contra-
account of accounts receivable is Allowance for
doubtful accounts (ADA) or also known as
allowance for bad debts, or allowance for
uncollectible accounts; creditor side.

10
  Inventories – assets held for sale in the ordinary course of business.

 Prepaid Expenses – the expenses paid in advance.

Noncurrent Assets
PAS 1, paragraph 66, states that “an entity shall classify all other assets
not classified as current as noncurrent”.
 Line items of noncurrent assets: PLIDO
 Property, plant and equipment
 Long-term investments
 Intangible assets
 Deferred tax assets
 Other noncurrent assets
 Typical account title used:
 Property, Plant and Equipment – are tangible assets (without physical
substance) that are held by enterprise
for use in production or supply goods
and services, for rental to others, or
for administrative purposes and are
expected to be used during more than
one period.

 Accumulated Depreciation – a contra-account of all tangible assets

except land. It contains the sum of the
periodic depreciation charges.

 Intangible Assets – a non-monetary assets without physical substance

and can be identified as identifiable intangible assets
(i.e. copyright, trademarks, brand name, etc.) and
unidentifiable intangible assets (goodwill).

11
2. Liabilities
 It is a present obligation of an entity to transfer an economic resource as result of
past event.
 Classified as current liabilities and noncurrent liabilities.

Current Liabilities
PAS 1, paragraph 69, provides that an entity shall classify a liability as
current when:
A. The entity expects to settle the liability within the entity’s normal operating
cycle.
B. The entity holds the liability primarily for the purpose of trading.
C. The liability is due to be settled within twelve months after the reporting
period.
D. The entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting period.
 PAS 1, paragraph 54, provides the items presented as current liabilities: TCSCC
 Trade and other Payables
 Current provisions
 Short-term borrowing
 Current porting of long-term debt
 Current tax liability
 Typical account titles used:
 Account Payable – the reverse relationship of accounts receivable.

 Notes Payable – the business entity is the maker of the note; debtor side.

 Accrued Liabilities – amounts owed to others for unpaid expenses.

 Unearned Revenues – receive payments but not yet rendered.

12
  Current portion of Long-term debt – portions of mortgage notes, bonds and
other long-term indebtedness with paid
within one year.

Noncurrent Liabilities
PAS 1, paragraph 69, provides that all liabilities not classified as current
are classified as noncurrent.
 Noncurrent assets are presented in NFDLL strategy.
 Noncurrent portion of long-term debt.
 Finance lease liability
 Deferred tax liability
 Long-term obligations to company officers
 Long-term deferred revenue.
 Typical account titles used:
 Mortgage Payable – a long-term debt of business entity for which business
entity had pledged certain assets as security to the
creditor also known as collateral.

 Bonds Payable – business organization obtain substantial sums of money

from lenders to finance the acquisition of equipment and
other assets.

 Bond – is the contract between the issuer and the lender specifying the
terms of repayment and interest to be charged.
3. Equity
 The term equity is the residual interest in the assets of the entity after deducting
all of its liabilities.
 The terms used in reporting the equity of an entity depending on the form of the
business organization are:
A. Owner’s equity in a proprietorship
B. Partner’s equity in a partnership

13
 C. Stockholder’s equity or shareholders’ equity in a corporation.
 PAS 1, paragraph 7, the holders of instruments classified as equity are simply
known as owners.
 Typical account titles used:
 Capital – a term from Latin word capitalis meaning property. It is a records
of the original and additional investment of the owner.

 Withdrawals – owner who simply withdraw cash.

 Income summary – a temporary account used at the end of accounting

period to close income and expenses.

14
To summarize the line items of five elements of financial statements.

ASSETS LIABILITIES

Current Assets Noncurrent Assets Current Liabilities Noncurrent Liabilities

- Cash - PPE - Account payable - Mortgage payable

- Cash equivalents - Accumulated - Notes payable - Bonds payable
Depreciation - Accrued liability - Loans payable
- Notes receivable - Intangible Assets - Unearned
- Accounts (goodwill, patents, Revenue
Receivable copyrights, licenses, - Current portion of
- Inventories franchises, long-term debt
- Prepaid expenses trademarks and
Brand names).

EQUITY ACCOUNTS EQUITY’s INCOME & EXPENSES

Debit Credit Debit (Expenses) Credit (Income)

- Withdrawals - Capital - COGS - Service Revenue

- Income Summary - Salaries/ Wages - Sales
Expense
- Telecommunication,
Electricity, fuel and
Water expense
- Rent expense
- Supplies Expense
- Insurance Expense
- Depreciation
Expense
- Uncollectible
Accounts Expense
- Interest Expense

15
 REFERENCES

Ballada, Win. (2018). Basic Financial Accounting and Reporting Made Easy 21st
Edition. Sampaloc Manila Philippines: DomDane Publishers.

Valix, C.T., Peralta, J.F., & Valix, C. M. (2020). Conceptual Framework and Accounting
Standards. Recto Avenue, Sampaloc Mnaila, Philippines: GIC Enterprises &
CO., Inc.

16