FABM

ACCOUNTING 2) How did the equity change over the reporting

period?

Fra Luca Pacioli

- Italian Mathematician, , Franciscan Friar, 3) What is the entity’s financial status?

collaborator with Leonardo Da Vinci and an 4) What are the cash flows from operating,
contributor to the field now known as accounting investing, and financing activities during the
- Referred to as the “Father of Accounting and period?

Bookkeeping” - Income Statement presents the summary of the

- Wrote “Particularis De Computis Et revenues and expenses of an entity for a specific
period.

Scriptus” (1949) - it is the first know published

text describing the double entry bookkeeping - Statement of Changes in Equity presents a
system
summary of the changes in capital such as
investments, profit or loss, and withdrawals during
Accounting
a specific period.

- Accounting is the art and science of analyzing,

- Statement Financial Position (Balance Sheet)
recording, classifying, and summarizing of
provides a picture of the financial condition of the
business transactions, whose function is to
business, listing of assets, liabilities, and equities.

provide quantitative information, primarily financial

in nature, about economic entities, that is intended - The Balance Sheet presents information based on
to be useful in making economic decisions.
the basic accounting model, the accounting
- It is the language of business
equation:

- Accounting is a Science because it follows a ASSETS = LIABILITIES + OWNER’S EQUITY

systematic and organized path to understanding - Statement of Cash Flows reports the amount of
the economic status of the entity
cash received and disbursements for the period.

- Accounting is an Art because it presents the • Business transactions must be measurable in terms
financial findings by following and implementing a of money. All other transactions that are non-
universally accepted method (GAAP).
monetary are not within the scope of accounting.

Business Transactions • Users of accounting information, such as

- It is an economic event or condition that directly entrepreneurs, managers, stakeholders, etc., are
expected to provide quantitative information of an
changes an entity’s financial condition or directly
entity in a timely manner so as to infer sound
affects its results of operations.

decisions.

- An accounting transaction takes place when a

Users of Financial Statements
business exchanges a thing or things of value for
another.

Accounting Process

1) Analyzing - if transaction affects that financial

condition of the business

2) Recording - of business transactions

3) Classifying - of transactions into accounts

4) Summarizing - through preparation of financial

statements
Language of Business
5) Reporting & Interpreting - analysed to evaluate
- Accounting is a means by which businesses’
liquidity, profitability and solvency of the business

financial information is communicated to users

• ACCOUNTING IS A SERVICE ACTIVITY.

Bookkeeping vs. Accounting
Quantitative information involves preparation of
financial statements.
Business Entity Concept:

Financial Statements Business is viewed as an entity separate from its

- F/S consist of balance sheet, income statement, owners, creditors, or other businesses. Personal
transactions of owners are not recorded on the
and cash flow statement.

books of the business.

- It aims to provide information about the financial

conditions of the business

1) What were the operating results for the period?

 FABM
Cost Concept: - Advantages:

Amounts are initially recorded in the accounting • Easy to set up and discontinue

records at their cost of purchase price. This concept

• Requires a small amount of capital (minimal
involves the objectivity and unit of measure capitalization)

concepts.

• Profits earned accrue to the owner

Objectivity Concept:
• Total control of the business

This concept requires that the amounts recorded in

- Disadvantages:

the accounting records be based on objective

evidence.
• Unlimited personal liability

Unit of Measure Concept: • Limited management skills

This concept requires that economic data be • Limited access to capital

recorded on the same units, such that value of

• Lacks continuity in case of death or incapacity
received is in pesos and value parted is in pesos.
of owner

Double Entry Accounting 2) Partnership

- Double Entry means value received and value - Two or more persons bind themselves to
parted. It means that for every transaction or contribute more, property, or industry to a
economic event, there are at least two effects to common fund, with the intention of dividing the
the business.
profit among themselves

Functions of Accounting: - Characteristics:

• Fulfil the stewardship function of the management

• Mutual contribution

• To help interested users come up with informed • Division of profit and loss

decisions

• Co-ownership of contributed assets

• To support daily operations of the business

• Mutual agency

TYPES OF BUSINESSES
• Unlimited liability

• Service Business
• Income taxed

- Selling people’s time

• Partner’s equity account

- Hire staff (time and expertise)

• Limited life

• Merchandising/Trade Business
- Advantages vs. Sole Proprietorship

- Buy and sell

• Brings greater financial capability to the

- Wholesales (business to business)
business

- Retailers (business to consumer)

• Combines special sails, expertise, and

• Manufacturing Business experience of the partners

- Buy raw materials and convert them into goods

• Offers relative freedom and flexability of action
in decision making

• Raw Materials
- Grow and extract raw materials
• Risks are shared

- Advantages vs. Corporations

• Infrastructure
- Selling the utilisation of infrastructure: hotels, • Easier and less expensive to organize

transport (land, sea, air), telecoms, sports facilities, • More personal and informal

property management
- Disadvantages:

• Financial • Profits are shared

- Receiving, lending, investing money (bank/

• Easily dissolved thus unstable compared to
investment house)
corporations

FORMS OF BUSINESSES
• Mutual agency and unlimited liability ma create
1) Sole Proprietorship personal debts

- Only one owner = proprietor

- Partnership vs. Corporation:

- Receives all profits, absorbs all losses and is solely • Manner of Creation (Partnership = word of
responsible for all the debts of the business
mouth, Corporation = government)

 FABM
• Number of Persons (P = 2 or more, C = 5-15)
social, economic, and cultural needs and
aspirations by making equitable contributions to
• Commendment of Judicial Personality (C =
the capital required; patronising their products and
SEC)

services and accepting a fair share of the risks and

• Management (P = any or none, C = board of benefits of the undertaking in accordance with
directors)
universally accepted cooperative principles.

• Extend Viability (P = if 1 loan all are - Advantages:

responsible, C = other owners will not shoulder)

• Unlimited

• Right of Succession (P = no ROS, C =

company will choose another CEO)
• Equality of members

• Tax benefits

• Terms of Existence (P = depends on the

partners, C = only until 50 but can still be • Limited liability

extended)

• Greater ability to attract capital

3) Corporation
• Affords greater business volume with the
- An artificial being created by operation of law, resulting benefit of bigger profits which will be
having the right succession and the powers, shared by more people

attributes and properties expressly authorised by - Disadvantages:

law to incident to its existence (Corporation code

of the Philippines, section 2).
• Shared control

- It is owned by stockholders. Owners rare not • One member, one vote

personally liable for the corporation’s debts. The BRANCHES OF ACCOUNTING

corporation is a separate legal entity.
Bookkeeping
- Major Stockholder = if there are 100,00 stocks, - It is the mechanical task involving the collection of
he must own more than 50,001
basic financial data.

- Stocks = ownership, goes to the capital of the - Data are entered in the book of accounts,
business
classified and summarized.

- Articles of the Corporation = Authorization

- Accounting function takes over and requires the
- Advantages:
ability to examine a problem using both financial
and non-financial data.

• Has the legal capacity to act as a legal entity

Financial Accounting
• Shareholders have limited liability

- It is focused on there cording of business

• It has continuity of existence

transactions and the periodic preparation of

• Shares of stock can be transferred without the reports on results of operations, changes in equity,
consent of their shareholders
financial position, and cash flows.

• Greater ability to acquire funds

- Complaint to generally accepted accounting
- Disadvantages:
principles.

• Relatively complicated in formation and Managerial Accounting

management
- The process of identification, measurement,
• Greater degree of government control and accumulation, analysis, preparation, interpretation
supervision
and communication of information used by
management to plan, evaluate, and control within
• Relatively high cost of formation and operation

an entity and to assure appropriate use of and

• Heavier taxation than other forms of business accountability for its resources.

organisations

Financial vs. Managerial

• Minority shareholders are subservient to the
wishes of the majority

• Management and control have been separated

from ownership

4) Cooperative
- An autonomous and duly registered association of
persons, with a common bond of interest, who
have voluntarily joined together to achieve their
 FABM
also maintains accounts of financial transactions of
all national government agencies and
instrumentalities.

National Budget
- The government's estimate of its income and
expenditure. It is what the government plans to
Cost Accounting spend for its program and projects and where the
- The collection, allocation, and control of the costs funds will be sourced, whether from revenues or

to produce or supply a product or service.

borrowings. the major phases of budgeting
process are as follows: preparation, authorization
- Intersection of financial and managerial.

or legislation, execution and accountability.

Financial Management
General Appropriations Act
- The management of the finances of organization to - The GAA is the approved national budget for the
achieve the financial objectives of the entity -
year. This is in consonance with Sec. 29, Article VI
maximization of the wealth of shareholders.

of the 1987 Constitution, "No money shall be paid

- Functions include: raising capital; managing day to out of the Treasury except in pursuance of an
day cash flows; selecting best project to invest in; appropriation by law.”

managing exposure to risk; developing a structure

Auditing
capable of ensuring that managers act ethically
- A systematic process of objectively obtaining and
and in the owner's interests.

evaluating evidence regarding assertions about

Government Accounting
economic actions and events to ascertain the
- According to Sec. 209 of Presidential Decree 1445, degree of correspondence between those
it encompasses the processes of analyzing, assertions and established criteria and
recording, classifying, summarizing and communicating the results to interested users.

communicating all transactions involving the

Taxation
receipt and disposition of government funds and
- Tax accounting includes the preparation of the
property, and interpreting the results thereof.

relevant tax returns and computation of tax

New Government Accounting System
payable by both business entities and individuals.

- A simplified set of accounting concepts, guidelines - Tax Evasion - non declaration of sources of
and procedures designed to ensure correct,
income on which tax might be due.

complete, and timely recording of government

- Tax Avoidance - reduce client's tax liabilities

financial transactions, and production of accurate

and relevant financial reports.
Accountancy Research

Accounting Responsibility - The systematic process of collecting and anlayzing

Commission on Audit information to increase one's understanding of the
functions of a professional accountant and
- Also known as COA is an independent
contribute to the solution of problems besetting
constitutional commission that keeps the general
the practice of the profession.

accounts of the government, promulgates

accounting rules and regulations, and submits to Forensic Accounting

the President and Congress an annual report of the - Also known as fraud examination. This practice
government.
includes fraud detection, fraud prevention,
litigation support, business valuations, expert
Department of Budget and Management
witness services, and other investigative services

- The DBM is responsible for the formulation and

- Common types of frauds: employee
implementation of the National Budget with the
goal of attaining our national socio-economic embezzlement, vendor fraud, customer fraud,
management fraud, investment scams, etc.

plans and objectives. It shall be responsible for the

efficient and sound utilization of the government ACCOUNTING PRINCIPLES AND CONCEPTS
funds and revenues to effectively service the Fundamental Concepts:
country's development objectives.

• Entity Concept
Bureau of Treasury
- An accounting entity is an organization or a section
- The principal custodian of all national government
of an organization that stands apart from other
funds. The BT receives and keeps government
organizations and individuals as a separate
funds, manage and control the disbursements. It
 FABM
economic unit. The transactions of different - Possible to implement

entities should not be accounted for together. Each

• Objectivity Principle
entity should be evaluated separately

- Accounting records and statements are based on

• Periodicity Concept the most reliable data available so that they will be
- An entity's life can be meaningfully subdivided into as accurate and as useful as possible. Reliable
equal time periods for reporting purposes. This data are verifiable when they can be confirmed by
concept allows the users to obtain timely independent observers.

information to serve as a basis on making - Based on the most reliable data available, there
decisions about future activities. For the purpose should be a basis/evidence when making reports,
of reporting to outsiders, one year is the usual compilation of evidence/receipts

accounting period.

• Historical Cost
- Calendar = from Jan 1-Dec 31

- This principle states that acquired assets should

- Fiscal period = 12 months may start any time in
be recorded at their actual cost and not at what
the year
management thinks they are worth as at reporting
• Stable Monetary Unit Concept date.

- The Philippine peso is a reasonable unit of - If you buy resources such as land, computers, and
measure and that its purchasing power is relatively machines it should be recorded on their actual
stable. It allows accountants to add and subtract cost

peso amounts as though each peso has the same

• Revenue Recognition Principle
purchasing power as any other peso at any time.
- It is to be recognized in the accounting period
This is the basis for ignoring the effects of inflation
when goods are delivered or services are rendered
in the accounting records.

or performed.

- Does not include inflations

- Once given service to a customer, and the

- Whatever amount is not subject to inflation
business hasn’t received money from the costumer
• Accrual basis yet, it is still recognized as a rendered service and
- Accrual accounting depicts the effects of is recorded.

transaction and other events and circumstances • Expense Recognition Principle

on a reporting entity's economic resources and - Expense should be recognized in the accounting
claims in the periods in which those effects occur, period in which goods and services are used up to
even if the resulting cash receipts and payments produce revenue and not when the entity pays for
occur in a different period.
those goods and services.

- Already bought by supplier but haven’t received - You have received a bill from (e.g) Ceneco,
the supplies, is still recorded or recognized
immediately record that as a utility expense, even if
Criteria for General Acceptance of An Accounting not paid yet, you have to recognize the expense.

Principle
• Adequate Disclosure
• Accounting Principle - Requires that all relevant information that would
- A principle has relevance to the extent that it affect the user's understanding and assessment of
results in information that is meaningful and useful the accounting entity be disclosed in the financial
to those who need to know something about a statements.

certain organization.
- Everything that is relevant to the accounting record
- It can influence, is meaningful, and useful to the should be included in the financial statements.

users of the reference

• Materiality
- A principle has objectivity to the extent that the - Financial reporting is only concerned with
resulting information is not influenced by the information that is significant enough to affect
personal bias or judgement of those who furnish it. evaluations and decisions. Materiality depends on
Objectivity connotes reliability and trustworthiness, the size and nature of the item judged in the
verifiability which means that there is some way of particular circumstances of its omission. In
finding out whether the information is correct.
deciding whether an item or an aggregate of items
- It free from biases or error, connotes reliability and is material, the nature and size of the item are
trustworthiness
evaluated together. Depending on the
- A principle has feasibility to the extent that it can circumstances, either the nature or the size of the
item could be the determining factor.

be implemented without undue complexity or cost.

 FABM
- In financial statements, any omission of a big • Relevance
amount is a no no in accounting, concerned that it - Relevant financial information is "capable of
will greatly affect the reliability of the information
making a difference in the decisions made by
• Consistency Principle users.” Financial information is capable of making
- The firms should use the same accounting method a difference in decisions if it has predictive value,
confirmatory value, or both. They are both
from period to period to achieve comparability
interrelated.

over time within a single enterprise. However,

changes are permitted if justifiable and disclosed - Financial information has a predictive value when it
in the financial statements.
can be used as an input to processes employed by
- Use the same accounting method from period to users to predict future outcomes.

period.
- Financial information has a confirmatory value
when "it provides feedback about previous
Conceptual Framework for Financial Reporting
evaluations.”

(IFRS Framework)
- The new International Financial Reporting - Information is material "if omitting it or misstating it
could influence decisions that users make on the
Standards Framework describes the basic
basis of financial information about a specific
concepts that underlie the preparation and
reporting entity.”

presentation of financial statements for external

users. It deals with the following:
• Faithful Representation

• Objective of financial statements

- This fundamental characteristic seeks to maximize
the underlying characteristics of completeness,
• Qualitative characteristics of useful financial
neutrality and freedom from error.

information

• Completeness
• Elements, recognition and measurement of
financial statements
- All information necessary for a user to understand
the phenomenon being depicted, including all
Objective:
necessary descriptions and explanations.

The objective of general purpose financial reporting is

to provide financial information about the reporting • Neutrality

entity that is useful to present and potential investors, - Free from bias or unbiased in the selection or
lenders and other creditors, who use that information presentation of financial information. It means that
to make decisions about buying, selling or holding reports are not manipulated to increase probability
equity or debt instruments and providing or settling that financial information will be received favorably
loans or other forms of credit.
by users. F/S are not neutral if by the selection or
presentation of information, they influence the
Qualitative Characteristics of Useful Financial
making of a decision or judgment to achieve a
Information
predetermined result or outcome.

- The qualitative characteristics of useful financial

reporting identify the types of information are likely • Freedom from Error

to be most useful to users in making decisions - There are no errors or omissions for the reported
about the reporting entity on the basis of information.

information in it financial report.

- There are no errors or omissions in the description
of the transactions and other vents, and no errors
have been made in selecting and applying an
appropriate process to produce the reported
information.

Enhancing Qualitative Characteristics

• Comparability
- Enables users to identify and understand
similarities in, and differences among items.

Fundamental Qualitative Characteristics - Information about a reporting entity is more useful

- Fundamental and Faithful representation are the if it can be compared with similar information
about other entities and with similar information
fundamental qualitative characteristics useful
financial information. Information must be BOTH about the same entity for another period or
another date.

relevant and faithfully represented if it is to be

useful.

 FABM
• Verifiability • Current Cost
- Helps assure users that information represents - Assets are carried at the amount of cash or cash
faithfully the economic phenomena it purports to equivalent that would have to be paid if the same
represent.
or an equivalent asset was acquired currently.
- Different knowledgeable and independent Liabilities are carried at the undiscounted amount
of cash or cash equivalents that would be required
observers could reach consensus, although not
to settle the obligation currently.

necessarily complete agreement, that a particular

depiction is a faithful representation.
• Realizable/Settlement Value

• Timelines - Realizable Value - Assets are carried at the

- Information is available to decision makers in time amount of cash or cash equivalents that could
currently be obtained by selling an asset in an
to be capable of influencing their decisions.

orderly disposal.

- The older the information, the less useful.

- Settlement Value - Liabilities are carried at the

• Understandability undiscounted amounts of cash or cash equivalents
- Classifying characterizing, and presenting expected to be paid to satisfy the liabilities in the
information clearly and concisely makes it normal course of business.

understandable.

• Present Value
Applying the Enhancing Qualitative - Assets are carried at the present discounted value
Characteristics
of the future net cash inflows that the item is
- Cost constraint on useful financial reporting:
expected to generate in the normal course of
- Cost is a pervasive constraint on the business.

information that can be provided by general - Liabilities are carried at the present discounted
purpose financial reporting. Reporting such value of the future net cash outflows that are
information imposes costs and those costs expected to be required to settle the liabilities in
should be justified by the benefits of reporting the normal course of business.

that information.

SARBANES-OXLEY ACT 2002

Underlying Assumptions
Ethics
Going Concern: The F/S are normally prepared on - Moral principles that govern a person's behaviour
the assumption that an enterprise is a going concern or the conducting of an activity

and will continue in operation for the foreseeable

Ethical Dilemma
future.

Examples:

Measurements of the Elements of Financial

Statements - Directs a subordinate not to hire a qualified
- Measurement is the process of determining the individual because he is not his (superior's) type.

monetary amounts at which the elements of the - To remain competitive, a company decided to use
financial statements are to be recognized and cheaper lumber in the ladders it sells; although the
carried in the balance sheet and income management now, that in some instances, poor
statement. This involves the selection of a quality of the product can cause injury.

particular basis of measurement.

White Collar Crime
• Historical Cost
- Crime that is committed by someone, typically for
• Current Cost
financial gain

• Realizable Value
Whistle Blowing/er

• Present Value
- Is a person who exposes any kind of information or
activity that is deemed illegal, unethical, or not
• Historical Cost
correct within an organization that is either private
- Assets are recorded at the amount of cash or cash
or public.

equivalents paid or the fair value of the

Conflicts of Interest
consideration given to acquire them at the time of
their acquisition. Liabilities are recorded at the - A conflict of interest is a situation in which a
same amount of proceeds received in exchange person or organization is involved in multiple
for the obligation, or at the amount of cash or cash interests, financial or otherwise, and serving one
equivalents expected to be paid to satisfy the interest could involve working against another.

liability in the normal course fo business.

• Fiduciary Responsibilities

 FABM
• Sexual Harassment
- SOX - Rotation of Audit lead partners every 5
years

• Discrimination

PH
Ethical Reasoning
- Analyze the consequences, analyze the actions, - COEPA prohibits firms performing audits of listed
companies from acquiring other engagements with
and make a decision

that are directly related to prep of financial

Sarbanes-Oxley Act of 2002 and Code of
statements such as BK, IT and actuarial services.
Corporate Governance but other services such as taxation and
Sarbanes-Oxley Act of 2002 management consultancy are not prohibited.

- Was signed into law by President George W. Bush - COEPA - requires rotation of audit lead partners in
on July 30, 2002.
audits of listed companies.

- It is the most far-reaching attempt to protect Corporate Responsibility

investors since the Securities Act of 1933 following
US
the Great Depression

- SOX create board audit committees and specifies

- This law applies to all companies that are required
the rules governing its composition and functions,
by to file periodic reports with he US SEC.
all members must be independent meaning no
- (Ethical financial reporting)
transactions such as consulting services.

Code of Corporate Governance PH

- On April 5, 2002, the Securities and Exchange - Independent directors in the board of public
Commission of the Philippines issued companies. maybe composed of min 5 but not
Memorandum Circular no. 2, aka Code of more than 15 members elected by stockholders 2
Corporate Governance.
independent or at least 20% of the members
- Was adopted from the revised code of ethics of whichever is lesser.

professional accountants by the International Corporate Responsibility for Financial Reports

Federation of Accountants.

US
Public Company Accounting oversight Board - CEO and CFO assume responsibility for the
US correctness and accuracy or reports. this
- The board oversees audits of all public companies, certification assures integrity of the company's
system of internal controls. Purpose -
whose share are listed and traded in the public
stock exchanges.
accountability

- Was created to protect the interests of the PH

investing public by ensuring that financial reports - SEC released a Financial Disclosure Checklist
and informative and accurate with respect to their where it includes the Statement of Management's
true financial condition.
Responsibility certifying that f/s have been prep in
conformity of the GAAP, maintenance of acctg
PH
system and disclosure of weakness of internal
- Philippines Regulatory Board of Accountancy

control

- Tasked to supervise, control and regulate the

Disclosures in Periodic Reports
practice of accountancy and has the power to
US
oversee the quality of audits of all financial
statements.
- Financial reports must include a statement of all
material correcting adjustments and off balance
Auditor Indepence
sheet transactions, arrangements, obligations that
US
may have material current or future effect on the
- SOX prohibits the firms to perform audits of listed company.

companies from engaging in other financial

PH
services such as BK, financial system design and
- ASC requires disclosure of all significant policies
implementation, appraisal or valuation services,
and all related party transactions. disclosure of all
actuarial services, internal audit outsourcing
services, management or HR consultancy, fundamental errors and related party transactions

investment advising. The purpose is to prevent the Personal Loans to Executive

audit firms from acquiring other financial interests
US
in their client companies.

- Not allowed

 FABM
PH equity, revenues, and expenses. It includes
- Not allowed but can receive reasonable per diems.
reference numbers so they can be traced to the
ledger.

Penalties

Criminal Penalties for Altering Documents

US
- Max of 20 years - federal investigation

- Max of 10 years - corporate audit records

PH
- Fine of 5000 pesos 2 years 4 months and 1 day to
max of 6 years

- Within 10 years - 50k to 100k for corporations

Assets

- Individual 1k not more than 6 months of - Can either be under Current or Noncurrent
Assets
imprisonment

- Resources that an entity owns in order to derive

Defrauding Shareholders
some future benefits

US
- Used by company in its normal operations such as
- Fine and 25 years of imprisonment

the manufacture of goods or delivery of services

PH - The main feature of assets is their capability to

- Fine of 50k to 5 million pesos more than 7 less give benefits to the entity

than 21 years of imprisonment

Current Assets
Corporate Responsibility for Financial Reports - All assets which are expected to be realized within
US the ordinary course of business, or a span of 12
- Fine of not more than 1 million 10 years
months whichever is longer.

- Wilful certification 5 million more than 20 years

- Realization here only means that these assets are
expected to be converted to cash, sold, or
PH
disposed after a certain time, or through the
- 50k to 100k fine 2 to 6 years imprisonment
passage of time.

Corporate Fraud Accountability Cash

US - Money that the business use comprising of the
- 1M to 5m 10 to 20 years in prison
bills and coins. In accounting for cash, money
deposited in the bank or even undeposited checks
- False or misleading statement 25M dollars

from customers are still considered as cash.

PH
- Considered as the most liquid of all assets.

- 50k to 5m 7 to 21 years

Cash Equivalents
BASIC ACCOUNTING EQUATION
- Are sometimes included in the Cash account.

Assets = Liabilities + Equity - These are short term investments which are
• The left side of the equation represents what the considered subject to negligible changes in fair
company owns. These are resources that the entity value, and are maturing within three months from
controls in order to attain future benefits.
the date of purchase. Example: BSP Treasury Bills,

• The right side represents the claims of the different money market instruments, certificates of
parties to the companies assets. Liabilities deposits.

represent the claims of the entity's creditors while Accounts Receivable

Equity represents the residual interest of the - Are oral promises to the entity to receive cash at a
owners of the entity or capitalization and income of
later date. They usually arise from the normal
the owners.

course of business, such as selling goods or

Accounts delivering services, but can also from non trade
- Chart of Accounts is a listing of all accounts used events.

by a company in its operations. the chart of - Those which arise from the normal course of
accounts is classified according to the five major business are called trade receivables, those
accounts in the following order: assets, liabilities,
 FABM
which do not are either called non-trade - They are expected not to be converted into cash
receivables or other receivables.
immediately and regularly placed as means of
- While they can be easily convertible and liquid as production.

cash, not all receivables can be collected. - Can be collectively called as Property, Plant, and
Companies set up a contra asset account called Equipment (PPE)

Allowance for Doubtful Accounts or Bad Debts Equipment/Machinery

Allowance which estimates how much of the
- Example: Pandesal shops would need ovens and
current receivables are uncollectible.

furnaces in order to properly and actually create

Short Term Investments their goods. The product of these ovens is the
- This account contains the company's investments pandesals which would be sold later on and
in low risk, high liquid assets such as bonds and eventually increase the cash of the shop

stocks, which are expected to be liquidated in less Land and Building

than a year. Additional income of the company
- In most businesses, a physical store is necessary
through interests, dividends, and price
for them to operate. The land and building must be
appreciations

owned by the business.

Notes Receivable
Intangible Assets
- Represents promises to the entity to receive cash
- Assets also includes intangible things that can
at a later date, with the main distinctions that otes
neither be seen or touched. For example, the
receivable are all written, hence, more formal than
software used by computer shops are actually
accounts receivable.

assets of that they own. Even though one cannot

- Tends to have longer maturity dates than accounts touch the software, it is still an asset of the
receivable but still are generally considered as computer shop that will earn the shop future
within the operating cycle.
benefits

- Are sometimes called promissory notes Liabilities

Inventories - Can be Current or Noncurrent Liabilities

- Products held for sale by a business in its normal - One of the claims of external parties from the
operations.
entity.

- Also includes raw materials, work-in-process - Debts of the entity to external creditors.

items, and finished goods.

- Some debts are not in the form of money but in the

- Items that are not used as input of a product but
form of obligations to do some service.

still used in the production are called supplies.

Current Liabilities
Prepayments (Prepaid Expenses)
- These are liabilities which are expected to be
- Prepayments is an amount paid in advance for settled or paid out by the entity within 12 months.

goods and services anticipated to be received by

Accounts Payable
the entity in the future.

- Opposite of accounts receivable

- Examples: rent, salaries, utilities, and insurance.

- The entity is the borrower.

- Prepayments would only cease to be as such

when they are finally used up.
- This account is helpful in an entity's cash
management as it can help the entity lessen the
Noncurrent Assets
pressure of a cash outflow by deferring cash
- Accounts that do not meet the current asset payment dates.

classification.

Notes Payable
Investments
- Are written promises of the entity to pay a sum
- These are investments which the business does certain in a future determinable time.

not expect to realize within 1 year.

- Usually arise from large trade or business

- Examples are real estate, long term notes, transactions which additional formality is
government treasury bills, and funds set aside for necessary

long term purposes.

- Notes payable pay interest regularly

Fixed Assets
Accrued Liabilities
- Most tangible and longest serving assets a
- Entity receives benefits from certain events, yet
company can have

has been unable to pay for it. Example: Electricity

 FABM
and water expenses have been consumed - The common stock account represents the
throughout the month but are only paid during due number of common shares issued and outstanding
dates
multiplied by the stock's par or stated value.

Unearned Revenues Preferred Stock

- Form of accrued liability where entity received - A security which represents ownership in a
payment before services are done. Example tuition corporation, and owners are called preferred
fee of students but only upon finishing the stockholders.

academic period can the school consider such - Difference is the preferences as to corporate
unearned revenues as finally earned
dividends/ liquidation. When a corporation
Current Portion of Long Term Debts declares a dividend, preferred stockholders are
- Some long term debts are being paid in installment given priority over common stockholders.

basis, due to their large principals. Portion of these - Comes with a par value and a stated interest

debts that are to be paid within the year must be Treasury Shares
included in the current liabilities.

- Buy back shares of the corporation.

Noncurrent Liabilities
- Preventing a corporate take over or increasing the
- Form the residual portion of liabilities. By strict stock price

definition, these are liabilities which the entity

Additional Paid-In Capital
expects to settle after more than a year, or have
the legal or contractual capacity to defer payment - Are also called as Share Premium

accordingly
- Excess over par value contributed by the
Bonds Payable company's shareholders in a stock issue.

- A form of long term debt, often in huge sums, - Arises because the selling value of a stock is
issued by the government, banks, and huge always greater than its par value.

corporations seeking huge financing sources

Retained Earnings
Equity/Owner’s Capital/Stockholder’s Equity - Represent the accumulated net income from
- Equity is the residual interest of the owners in the operations over several periods.

assets of the business after considering all - Dividends reduced retained earnings.

liabilities.

Revenues
- For sole proprietorship and partnerships, equity is
- Equity increases as a result of revenues, gains, or
called owner's capital. (Dela Cruz, Capital)

capital contributions.

- For corporations, shareholder's equity has more

- Revenues are the amounts received by a business
components.

earned as a result of selling something or

Owner’s Capital rendering a service.

- For sole proprietorship and partnership, - Can be classified into: Operating or Non-
withdrawals of owner/s is allowed.
operating Revenue
- Contra Equity Account is called the Owner's - Operating Revenues - revenues that originate
Drawing (Dela Cruz, Drawing)
from main business operations

Common Stock - Non-operating Revenues - revenues that do not

- A security which represents ownership in a originate from main business operations and are a
corporation.
result of some side activities

- Those who own a common stock of a corporation - Sales Revenue - main source of revenue for
are called common stockholders.
businesses that products (eg supermarket,
- Rights of Common Stockholders:
convenience stores and food manufacturers)

- Service Revenue - main source of revenue for

• Right to vote in the stockholders' meetings

businesses that render services (eg barber shops,

• Right to receive dividends
accounting firms)

• Pre-emptive right - right to be offered first to - Interest Revenue - revenue earned as a resut of
buy additional shares the event of a future
investment in debt securities or receivables from
issuance
other entities

- Common stock comes with a par value, the legal

nominal value assigned to it

 FABM
- Dividend Revenue - revenue earned as a result of
dividend declaration of a company where in a
business has invested stocks.

- Contribution Revenue - revenue earned by non

profit organizations usually in the form of donations
by outside parties.

Other Revenues

Gains
INTIAL INVESTMENT

- Are increases in equity as a result of non recurring - Chay Rosa wants to establish her barbecue
activities or the increase in value of investments. business. In order to open the business, she
Non recurring activities include the sale of invested ₱25,000 as initial capital.

company noncurrent assets.

Expenses
- Equity decreases as a result of expenses, losses
and distribution of owners.

- Expenses are the amounts consumed by the

PURCHASE OF EQUIPMENT

business to operate.

- To actually create her famous barbecue, she would

- Result of day to day activities to generate income

need the proper equipment to cook it. Thus, she

- Cost of Goods Sold - when inventory is sold, the went to the local hardware store and bought grills
cost of goods sold reflect what the company and utensils for ₱20000.

incurred to make the inventory sell (in

manufacturing companies) or to buy them
(merchandising companies)

- Depreciation Expense - a result of using building

and equipment

- Office Supplies Expense - a result of using up

office supplies

- Bad Debt Expense - an estimate of how much

PURCHASE OF INVENTORIES THROUGH CREDIT

accounts receivable the company will not be able

to collect - Chay Rosa's barbecues require only the freshest
meat which can be bought from Ate Shine's Store
- Interest Expense - interest incurred as a result of
in the market. Since the meat costs ₱10,000, Chay
borrowing money

Rosa does not have enough money to purchase

Other Expenses but since she is a trusted suki of this store, Ate
Losses
Shine decided to give the meat on the condition
that she will have to pay her in 30 days.

- Opposite of gains. they are decreases in equity as

a result of non-recurring activities or decreases in
the value of assets.

- Distribution to owners - assets given to owners,

usually cash. in corporations, they are called
dividends

Assets = Liabilities + Equity

• The Accounting Equation answers the fundamental

concept of the Double Entry System where a PAYMENT OF EXPENSES

business transaction has at least two effects on the - Before Chay Rosa can operate her business, she
accounting equation.
has to comply with several government
• (+ Asset & - Asset) or (+ Asset, + Equity) or (+ requirements such as permits. She paid ₱ 1000.

Asset, + Liability) or (- Asset & - Liability) or (-Asset

& - Equity)

 FABM
SALE OF BARBECUES
• Crucial in ensuring regulatory compliance as they
- With everything in place, Chay Rosa can now sell also serve as proof of the business transactions
reflected in the financial statements.

her famous barbecues. During the first day of her

new venture, she was able to sell 1000 barbecues Two Major Book of Accounts
with a selling price of ₱20000. Half of which was 1) Journals

paid cash. The other half was to be paid in 5 days.

2) Ledgers

Journals
- It is often referred to as the book of original entry.

- The chronological record of all company's

transactions listed by date.

- The recording of financial information into the

journal is known as the process of Journalizing
- Correspondingly, the 1000 barbecues account for - 2 kinds: General Journals and Special Journals
half of the total supply of barbecues of Chay Rosa.
General Journals
- All business transactions are recorded in
chronological order.

DEBIT AND CREDIT

Accounting Cycle: 1) Date

1) Analyze Transaction
- The date at which the transaction occurred

2) Journalizing
2) Account Titles and Explanation

3) Posting
- The account to be debited and the account to be
credited are recorded. The account titles are
4) Preparation of Worksheet

referenced to the Chart of Accounts. Correct and

5) Preparation of Financial Statement
proper usage of the account titles are necessary
6) Record Adjusting Entries
for a clear and accurate presentation of amounts in
the financial statements. Notice that the accounts
7) Record Closing Entries

credited are indented.

8) Prepare Post Closing Trial Balance

3) Reference Number
9) Interpretation

- The reference number of each account journalized.

Rules of Debit and Credit:
The ref column is left blank during the journalizing
Debit - value received or the value paid for in a process and is filled out during the posting
transaction
process.

Credit - value parted or the values given in a 4) Debit

transaction
- The amount received of being paid for in the
BOOK OF ACCOUNTS business transaction.

• To keep track of its transactions more efficiently, 5) Credit

companies keep and maintain a set of books or - The amount given up or value parted with in the
records called Books of Accounts.

business transaction.

• The finance records, ledgers, and journals that Benefits:

compose the company's accounts. These serve as
a financial memory and comprise of every single • Companies can easily detect if there are missing or
business transactions and financial information of a unrecorded transactions

company.
• Discloses the full effect of each of the transactions
per entry.

 FABM
• Serves as check and balance tool of the company.
Ledgers

Special Journals - After journalizing the business transactions in the

- Used by large companies often engage in general journal and special journals, the company
will now proceed to the process of posting

hundreds of transactions each day. Used to

record typical and similar types of transactions. Posting
The number of special journals managed by a - Involves the transferring of journal entries to the
company is dependent on the types of ledger accounts to bring together the effect of the
transactions that occur frequently.
transactions to the individual accounts of the
- Sales Journal, Cash Receipts Journal, Purchases company.

Journal, Cash Payments Journal

- The ledger is the grouping of all accounts of a
Sales Journal company showing its respective outstanding
- Used in journalizing all sales of merchandise on balances. It is also called as the Book of Final
Entry
account

- General Ledger, Subsidiary Ledger

General Ledger
- Grouping of all accounts (assets, liabilities, and
equity) with their balances.

Cash Receipts Journal

- Used in journalizing all cash received including
cash sales

1) Date
- The date of transactions is also entered in
reference to the journal

2) Explanation

- A brief description of the business transaction is

defined. This is sometimes omitted since the
Purchase Journal entries on the journal already provide an
- Used in journalizing all purchases of merchandise explanation of the transaction.

on account
3) Reference

- This column displays the journal page number

from which the transaction was posted.

4) Debit
- Amounts debited to the account are inputted.

5) Credit
- Amounts credited to the account are inputted.

Cash Payments Journal 6) Balance

- Used in journalizing all cash paid including cash - After every transaction, the balances of each
purchases
account are know without the need for further
computations. On the year end, these balances will
be the basis of the amounts presented in the
financial statements of the company.

7) Account Title
- The general ledger contains all the comapny's
accounts and its balances. Each T account is
labeled with its corresponding account title.

8) Ledger Account Reference Number

 FABM
- With reference to the company's Chart of - If there is an increase ↑, record the account as
Accounts each of the account titles corresponds to credit

a reference number.
- If there is a decrease↓, record the account as debit

Subsidiary Ledger
Owner’s Equity
- Expansion of the general ledger and provides more - If there is an increase ↑, record the account as
detailed individual balances of accounts such as
credit

accounts receivable and accounts payable.

- If there is a decrease↓, record the account as debit

Accounts Receivable Ledger

Expenses
- Used in tracking individual accounts receivable
balances of company's customers.
- If the expenses are incurred, it’s automatically an
increase. so if it is increase ↑ record the account
as debit

Revenues
- When the business rendered service or sell
products that is an increase ↑ in revenues, so
record the account as credit

Accounts Payable Ledger

- Used in tracking individual accounts payable
balances of company's creditors

INTRODUCTION OF CAPITAL

- September 1, 2016 - J. Cruz invested P200,000 to

Benefits: start an auto repair business.

• Aids in knowing the balances of each of the

accounts at any given time.

• Classifies the transactions into accounts and

provides the outstanding balances or each.

• Serves as a control account to check for errors and

misstatements in posting.

• At the month or year end, the company reconciles

the balances of its ledger and subsidiary ledgers.

RULES OF DEBIT AND CREDIT PURCHASE OF ASSET OF CREDIT

Debit - September 2, 2016- Cruz bought repair equipment

from X Co. on credit, P100,000

- Values received or the value paid for in a

transaction

Credit
- Values parted or the value given for in a
transaction

Effects of Transactions:

↑↓ (increase or decrease)

Assets
- If there is an increase ↑, record the account as PURCHASE OF SUPPLIES/INVENTORY

debit
- September 4, 2016- Cruz bought Shop Supplies
- If there is a decrease↓, record the account as for cash, P62,000

credit

Liabilities
 FABM
PAYMENT OF EXPENSES

- September 25, 2016 - Paid a month’s rent,

P10,000; Cruz paid the salaries and wages of
employees P15,000

PARTIAL PAYMENT OF LIABILITY

- September 10,2016 - Paid X Co. partially, P60,000

COLLECTION OF ASSET

- September 26, 2016 - Cruz made partial

collections from customers’ accounts P30,000

INCURRING LIABILITY

- September 12, 2016 - Cruz received a bank loan

for business use P100,000

INCOME ON ACCOUNT AND PARTIAL PAYMENT

- September 27, 2016 - Billed a customer P6,000

and received a partial payment of P2,000

INCOME FOR IMMEDIATE PAYMENT

- September 15, 2016 - Customers paid cash for

auto repair services rendered, P25,000

PURCHASE OF AN ASSET AND INCURRING A

LIABILITY

- September 28, 2016 - Shop supplies purchased

INCOME ON ACCOUNT/CREDIT
P15,000 and made a down payment of P5,000

- September 20, 2016 - Repair services rendered on

account, P50,000

PAYMENT OF OTHER EXPENSES

- September 29, 2016 - Received bills for light,

water and telephone and paid P5,000

 FABM

WITHDRAWALS OF OWNER

- September 30, 2016 - Cruz withdrew P20,000 for

his personal use