ENTREPRENEURSHIP

Quarter 2: Module 7 & 8

Learning Competencies:

Lesson 1 – Perform bookkeeping tasks

Lesson 2 – Prepare an income statement and a balance sheet,
Lesson 3 – Identify where there is a profit or loss for a business,
Lesson 4 – Interpret financial statements (balance sheet, income statement),
cash flow projections, and summary of sales and cash receipts

LESSON 1: Perform Bookkeeping Tasks

What’s In

In the previous lesson, you learned how to make and prepare a business
plan, operate the business, know how to sell the product, and the significance for
keeping business records.

A business plan is an effective tool in making your dream business come

true.It reiterates different plans or strategies in Operation and Administration,
Marketing, Production and Logistics, Finance, etc.

The operational plan put into details on what business model you are going
to employ and how are you going to start the business. Among others, its also
reiterated the layers pf management, type of skills and employee attitude your
business need and the steps on how to get the government license.

The marketing plan contains valuable strategies as to what product your

are going to produce or sell, what industry you want to enter, group of target
customers, or your target market and the business model or strategies you are
going to employ.

The production plan revealed the production processes and the quality
control system of the goods produced for sale. While the logistics provides a
channel of distribution of the goods from production lines down to the
wholesellers/retailers or directly to consumers.

The financial plan talks about monetary requirements before you open the
business. While financial forcast informs the business owners of the expected
outcome of the business in monetary terms.

What’s New

What is Bookkeeping?

Bookkeeping is the process of recording business transactions in a systematic

and chronological manner.

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 It is systematic because it follows procedures and principles. On the other
hand, it is chronological because the transactions are recorded in order of the date
of occurrence.

Bookkeeping is the starting point of the accounting process. A sound

bookkeeping system is the foundation for gathering the information necessary to
answer questions related to profitability, solvency and liquidity of the business.

What is a Bookkeeper?

Each business has a bookkeeper who is incharge to record, maintain and

update business records from all sorts of financial transactions using account title
that can be found in the charts of accounts already set up by the Accountant.

The bookkeeping function dictates the bookkeeper to keep track of all financial
transactions of the business. Only transactions that has monetary value will be
recorded.

The bookkeeper uses the Book of Accounts to record the business transactions
which is to be consolidated later to help construct financial statement such as the
Trial Balance, Income Statement and Balance Sheet.

What is a Book of Account?

The book of accounts are composed of the Journal and Ledger. It depends
on the type of business, some businesses used special journals when they are
engaged merchandising type of business to records business transactions. This
module will cover and provide example for service oriented business. Thus, only
journal and ledger will be used in the succeeding examples.

There are two types of books used in recording business transactions. They
are called journals and ledgers.

Journal refers to the book of original entry while the Ledger refers to the book
of final entry.

What is a General Journal?

The general journal is the most basic journal which provides columns for date,
account titles and explanations, folio or references and a separate column for debit
and credit entries. Depicted in figure 1 below is a sample format of a general
journal:

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What is a General Ledger?

The general ledger is a grouping of all accounts directly traceable to chart of

accounts. These accounts will be reflected in the financial statements as a
summary of all financial activities that have taken place as recorded in the general
journaland subsidiary ledgers. Depicted in figure 2 below is a sample format of a
general ledger:

What is a Subsidiary Ledger?

The subsidiary ledger is a group of accounts directly associated from the general
ledger. This record is created to maintain individual accounts for customers
and vendors whose cash is not being used as a medium of exchange when
purchasingor selling merchandise. Depicted in figure 3 and 4 below is a sample
format of a subsidiary ledgers Accounts Receivable and Accounts Payable
respectively:

The Rules of Debit and Credit

In the process of journalization, following the rules of Debit and Credit are
essential part to ensure accurate recording and sound decision making. Debit is
abbreviated as DR while CR for Credit.

It is a requirement that the bookkeeper is able to master the normal balance of

each account title before performing the tasks of bookkeeper.

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When to Debit?

When cash or non-cash items are received, the said cash or non-cash items
must be recorded in the debit column. This means that the debit balance
increased. It is called Value Received.

When to Credit?

When cash or non-cash items are given, the said cash or non-cash items must
be recorded in the credit column. This means that the credit balance is increased.
It is called Value Parted With.

The following steps will be undertaken in determining account balances for every
account title such as cash, account receivable, etc.:

1. Add all the debit side to generate total debit

2. Add all the credit side to generate total credit.
3. Subtract total debit to the total credit.
4. Determine the balance of each account.

Depicted in figure 5 below is a matrix of normal debit and credit balances of

Five Major Accounts:

In order to fully understand the concept of debit and credit balances, depicted
in figure 6 below is a matrix of normal debit and credit balances under each of the
five major accounts:

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 TRIAL BALANCE

Trial balance is a list of all ledger accounts with closed or final balances on a
certain period arranged according to the rules of debit and credit. The debit and
credit columns must be equal in total amount. This is the first report prior to
financial statement preparation. Depicted in figure 7 below is a sample format of a
trial balance report with peso amount.

As you can observed, the accounts reflected in figure 7 above are arranged
according to the proper placement of the five major accounts. The Assets,
Liabilities, Owner’s Equity, Revenue and Expense accounts. You may refer to figure
6.

On the other hand, the trial balance report has two phases. The first phase
“Unadjusted trial balance” is a report of all balances after the posting of the general
ledger accounts. The general ledger account balances are extracted to construct the
unadjusted trial balance. Meanwhile, the second phase is the “Adjusted trial
balance”. This phase is a final report of trial balance after all necessary
adjustments in journal entries are posted in the general ledger.

What is an Adjusting Entry?

Making an adjusting entry helps the bookkeeper capture all financial events
happened over a period of time within the accounting cycle. It is essential in
keeping the financial record updated. The bookkeeper is going to look or examine

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accounts that needs to be updated. Outlined below are the five basic sources of
adjusting entries:

1. Depreciation expense
2. Deferred expenses of prepaid expenses
3. Deferred income of unearned income
4. Accrued expenses of accrued liabilities
5. Accrued income or accrued assets

1. Depreciation

This is a method of allocating the cost of an asset to an expense over the

accounting periods that make up the asset’s useful life. Examples of assets subject
to depreciation are: Store, Office, Building, and Transportation equipment. These
types of assets lose their ability to provide useful service as time passes.
Depreciation can also be referred to as the decrease in the usefulness of these types
of assets. Take note that Land is not subject to depreciation because the value of
land mostly increases as time passes.

There are several methods or formulas to compute the amount of

depreciation. The simplest is the straight-line method.

Illustrative problem:

The cost of the equipment is PHP25,000. It was estimated to have a useful

life of five years. It is estimated that after five years, the office equipment can be
sold at a scrap value of PHP1,000. To compute for the monthly depreciation, just
divide the annual depreciation by 12. One year is composed of 12 months.

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 The depreciation expense is an allocated for all sixed assets except land.
Example are building, equipment and or machineries that the business is using to
generate income. It shall be reported as an expense account in the income
statementdirectly attributable in the said fixed assets. While the accumulated
depreciation is a balance sheet account but treated as a contra-account to the
concerned fixed asset.

Refer to the illustration below:

2. Deferred Expenses or Prepaid Expenses

These are items that have been initially recorded as assets but are expected
to become expenses over time or through the operations of the business.
In order to recognize the correct amount of expenses, prepayments shall be
amortized weekly, semi-monthly or monthly, depending on its nature and purpose.

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The supplies expense is an income statement account, while the supplies which is
now credited is an asset account. All asset has a normal debit balance.
Consideringthat the supplies in this record is credited. This will be deducted to the
supplies account in the balance sheet to generate the remaining balance in
supplies.

3. Deferred income of unearned income

These are items that have been initially recorded as liabilities but are expected
to become income over time or through the operations of the business.

Illustrative problem:
On February 15, 2016 Matapang entered into a contract with Makisig to
maintain the computers of Makisig for two months starting on February 15, 2016
up to April 15, 2016. On the same date, Makisig paid the total contract amount of
PHP40,000 in full. The entries to record and adjust the books are: In the February
above, as of end of February 2016, Matapang has already earned the service
revenue for the first 15 days, thus an adjusting entry is recorded.

4. Accrued Expenses of Accrued Liabilities

These are items of expenses that have been incurred but have not been
recorded and paid.

Illustrative problem:
On February 29, 2016, Matapang received the electric bill for the month of
February amounting to PHP3,800. Matapang will pay this bill on March 2016. The
electric bill represents the cost of electricity used (or incurred) for February.
Although the said bill is still unpaid and thus was not recorded, the matching
principle and accrual basis of accounting dictates that the same should be
recorded in February. Otherwise, your expense will be understated and thus the

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company will be reporting an overstated income (or an erroneous income). Needless
to say, erroneous information may lead to wrong decisions. The entry to record the
accrual of this expense is:

5. Accrued expenses of accrued liabilities

These are income items that have been earned but have not been recorded
and paid by the customer. In short, these are receivables of the business.

Illustrative problem:
On February 28, 2016, Matapang repaired the computer of Pedro for
PHP15,000. Pedro was on an out-of-town trip so he could not pay Matapang. He
told Matapang that he will pay for their services on March 1, 2016. Matapang has
already earned the PHP15,000 but was not paid as of the end of February 2016.
Therefore, an income should be properly recognized in February 2016 for this
transaction. The entry to record this is:

LESSON 2: Prepare an Income Statement and a Balance Sheet

INCOME STATEMENT

This statement is one of the major financial report. Also known as profit and

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loss statement or statement of comprehensive income. This statement summarizes
the results of company’s operations for a specific period of time. If the result of
operation is positive, then the business earns net income otherwise, net loss.

Ledger accounts that can be found in the income statement are called
Temporary accounts of Nominal accounts. They are called such because at the
end of the accounting period, balances under these accounts are transferred to the
capital account, thus having only temporary amounts and resulting to zero
beginning balances at the beginning of the following year.(Haddock, Price, &
Farina, 2012)

Examples of temporary accounts include revenues, sales, utilities expense, supplies

expense, salaries expense, depreciation expense, interest expense among others.
Depicted in figure 8 below is sample format of an income statement.

The different parts of income statement are:

 The heading or title of report

 Name of the company
 Date or period covered

Major parts are:

 Income or revenues - consist of all income received within the period

upon provision of services for service-concern business and sales for
merchandising
 Expenses – money spent during the conduct of business operations
 Net income / net loss – the outcome of business operations.

BALANCE SHEET

Also known as the statement of financial position. This statement summarizes

the total balances of assets, liabilities and owner’s equity. In general, it provides the
financial condition of the business on a specific date.

The balance sheet is composed of Permanent accounts. Permanent in nature

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because their balances remain intact and will be forwarded from one period to
another.

Contra asset are those asset account presented under the asset portion of
the balance sheet such as Allowance for Bad debts and Accumulated depreciation.
Depicted in figure 9 below is sample format of a balance sheet of a service type
business presented in as an account format with contra asset account.

The different parts of balance sheet are:

 The heading or title of report

 Name of the company
 Date or period covered

Major parts are:

 Assets (Current and Non-current)

Current Assets – Assets that can be realized (collected, sold, used up) one
year after year-end date. Examples include Cash, Accounts Receivable,
Merchandise Inventory, Prepaid Expense, etc.
Current Assets are arranged based on which asset can be realized first
(liquidity). Current assets and current liabilities are also called short term assets
and shot term liabilities.

Noncurrent Assets – Assets that cannot be realized (collected, sold, used up)
one year after yearend date. Examples include Property, Plant and Equipment
(equipment, furniture, building, land), Long Term investments, Intangible
Assets etc.

Liabilities (Current and Non-current)

Current Liabilities – Liabilities that fall due (paid, recognized as revenue)

within one year after year end date. Examples include Notes Payable, Accounts
Payable, Accrued Expenses (example: Utilities Payable), Unearned Income,
etc.

Noncurrent Liabilities – Liabilities that do not fall due (paid, recognized as

revenue) within one year after year-end date. Examples include Loans Payable,
Mortgage Payable, etc.
Noncurrent assets and noncurrent liabilities are also called long term assets
and long-term liabilities.

Owner’s Equity or Capital

Capital is an item of balance sheet wherein the capital or interest of the owner
of the business is listed. Initial withdrawal of capital will be recorded in a drawing
account of the owner and will be reflected as a deduction to the capital balance.

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LESSON 3: Identify where there is a Profit or Loss for a Business

Profitability has always been the overall goal of the business. It is of great

achievement in a successful implementation of strategic, operating and other plans.

In identifying the profit or loss of a business, the business will record every detail

of all business transactions and translate it into financial report. An income

statement is a financial report that reveals the total revenue or income, total
expenses incurred during the conduct of the business and, most of all the net profit
or net loss as a result of business operations over a specified period of time.

Below is the basic equation of income statement of a service-concern business:

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LESSON 4: Interpret Financial Statements (Balance Sheet, IncomeStatement,
Cash Flow Projections and Summary of Sales and Cash Receipts)

INTERPRETATION OF FINANCIAL STATEMENTS

Financial statements will reveal the outcome of the business operations. A

financial analyst is like a medical doctor who will conduct diagnosis by reading the

financial report and render interpretations on it which will be used as the basis of a

sound economic decision making.

As previously defined, balance sheet reflects the financial position and condition of
the business. The financial position refers to the assets of the business which will
be financed by the liability and owner’s equity. On the other hand, financial
condition refers to the situation wherein assets, liability and owner’s equity are
used to maximize income. Also, assets, liability and owner’s equity may encounter
growth or decline in value.

There are many available financing tools to be used in analyzing and interpreting
financial statements. It depends on the purpose. Most of these tools are able to
evaluate and interpret asset growth of the business, profitability, liquidity and
solvency. In general, it will provide a bird’s eye view of the overall health of the
business.

Depicted in figure 14 below is a matrix of financial interpretation with formula and

explanation.

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