fabm 1 & 2

I. introduction to
accounting
Accounting has four phases
RECORDING - bookkeeping
CLASSIFYING - items are classified
(1) Asset (2) Liability (3) Capital (4) Revenue (5) Expense
SUMMARIZING - summarized through financial statement
INTERPRETING - accountant's interpretation
 II. TYPES OF MAJOR
ACCOUNTS
Accounting equation
Assets = Liabilities + Owner's Equity
Liabilities = Assets - Owner's Equity
Owner's Equity = Assets - Liabilities
Chart of accounts
is a list of account titles used by the business. It serves as a guide to the
bookkeeper. Such accounts are divided into sections and each title has a given
code number.
 III. DEBIT AND CREDIT

T-accounts
To Debit (Left side) To Credit (Right side)

1. To increase assets 1. To decrease assets

2. To decrease liabilities 2. To increase liabilities
3. To decrease proprietorship due to: 3. To increase proprietorship due to:
a) Withdrawals of assets by the owner a) Investment by the owner
b) Increase in expenses and losses b) decrease in expenses and losses
c) Decrease in income c) Increase in income
Normal Balance
Debit Credit
ASSETS LIABILITIES
OWNER'S DRAWINGS OWNER'S CAPITAL/EQUITY
EXPENSES INCOME/REVENUE

ASSETS, LIABILITIES, and OWNER'S CAPITAL/EQUITY are the real

accounts/permanent accounts or the balance sheet accounts

OWNER'S DRAWINGS, EXPENSES, and INCOME/REVENUE

are the temporary accounts, nominal accounts, or the Profit & Loss
accounts.
 IV. ACCOUNTING PERIOD
and ACCOUNTING CYCLE
Accounting Period Accounting Cycle
a.k.a 'fiscal period is each segment consists of successive steps
of time, usually a year, in which starting with the recording of
statements are prepared in order to transactions (book of accounts)
know the results of the business and ending with a post-closing
operation during that particular trial balance.
period of time.
Successive steps that consists in one accounting cycle:
1. Journalizing
2. Posting
3. Preparation of the trial balance
4. Adjusting the entries
5. Preparation of the worksheet
6. Preparation of the financial statements
7. Closing the entries
8. Reversing the entries
1) JOURNALIZING
- first step in accounting cycle. The process of recording
business transactions in a journal
JOURNAL - wherein business transactions were recorded.
"book of original entry."
There are 2 kinds of journal:
1. General Journal
2. Special Journal:
a) The Cash Receipts Journal c) The Sales Journal
b) The Cash Payments Journal d) The Purchases Journal
 GENERAL JOURNAL
simplest form of journal, two-column form.

General Journal contains the following:

1. Date - date of transaction.
2. Account titles and Explanation - debit and credit accounts & a
brief explanation.
3. Folio - post reference number or ledger page
4. Debit - amounts debited
5. Credit - amounts credited
PROCEDURES IN JOURNALIZING
 JOURNAL ENTRY
record of business transactions in journal.

2 TYPES OF JOURNAL ENTRY:

1. Simple journal entry - 1 debit and 1 credit account.
2. Compound journal entry
- 1 debit & 2 or more credits
- 2 or more debits & 1 credit
- 2 or more debits & 2 or more credits
(need example)
The following transactions of “Triple A Repair Shop” occurred in the month of October,
2020”.

Oct. 2 Mr. Jose Manalo began the business by investing P800,000 cash.

Cash is an asset. Owner's Capital is a proprietorship

The assets and the proprietorship are affected.

When you enter the amount of P800,000 to the Cash account on the debit side, the cash account
will increase because the rule that will apply is rule no 1 rules to debit which is to increase assets.

When you enter the amount of P800,000 to the Proprietorship account on the credit side, the
proprietorship account will increase because the rule that will apply is letter a of rule no 3 rules
to credit which is to increase proprietorship due to investment by the owner.
Oct. 2 Purchased service truck worth P250,000 on credit from Lilac Ent.

Service vehicle is an Asset. Accounts Payable is a Liability.

The assets and the liabilities are affected.

When you enter the amount of P250,000 to the Service Vehicle account on the debit side, the
Asset account will increase because the rule that will apply is rule no 1 rules to debit which is to
increase assets.

When you enter the amount of P250,000 to the Accounts Payable - Lilac Ent. on the credit side,
the liabilities account will increase because the rule that will apply is rule no 2 rules to credit
which is to increase liabilities.
Oct. 2 Paid rent for two months, P20, 000.

Prepaid rent is an Asset. Cash is an Asset

When you enter the amount of P_____ to the _____ (account) on the (debit, credit)
side, the ____ (account) will (increase, decrease) because the rule that will
apply is rule ___ which is to ____
Oct. 2 Bought table and chairs from Yao Furniture on credit , P40,000

Office Furniture and Fixtures is an Asset. Accounts Payable is a liability.

When you enter the amount of P_____ to the _____ (account) on the (debit, credit)
side, the ____(account) will (increase, decrease) because the rule that will apply
is rule ___ which is to ____
Oct. 30 Paid P25,000 salaries

Salary Expense is an Expense. Cash is an Asset.

 CHART OF ACCOUNTS

ASSETS LIABILITIES
CASH ACCOUNTS PAYABLE – VVV BOOKSTORE
ACCOUNTS RECEIVABLE – MR. FABIAN ACCOUNTS PAYABLE – KUYA’S FURNITURE
ACCOUNTS RECEIVABLE – MR. CABUYAO ACCOUNTS PAYABLE – STAR TRADING
PREPAID RENT NOTES PAYABLE
SURGICAL SUPPLIES
OFFICE FURNITURE AND FIXTURES PROPRIETORSHIP
SURGICAL TOOLS AND EQUIPMENT DR. BELO, CAPITAL
MEDICAL LIBRARY DR. BELO, DRAWINGS

EXPENSES
INCOME
SALARY EXPENSE
PROFESSIONAL FEES
UTILITY EXPENSE
Oct 3 Bought medical library worth P15,000 from VVV Bookstore by
paying P2,000 and the balance on credit.

Oct 15 Bought medical instruments from Star Trading, P42,000 on credit.

 2. POSTING
- the process of transferring the records from the journal
to the ledger.
- "Book of Final Entry."
2. POSTING
2. POSTING
 3. PREPARATION OF THE TRIAL BALANCE
Footing the accounts: before preparing the trial balance,
the accounts should be footed first.
 THE TRIAL BALANCE
- list of accounts with open balances.
- Trial balance proves the equality of the debits and the
credits in the general ledger.

debit balance; debit total > credit total

credit balance; debit total < credit total
if debit side = credit side, the account is a zero balance or
closed account.
 V. Adjusting the entries
Accounts that need to be adjusted.
1. Adjustment for the expiration of prepayment of expenses.
2. Adjustment for the realization of income collected in advance.
3. Adjustment for the accrual of expenses.
4. Adjustment for the accrual of income.
5. Provision for bad debts.
6. Provision for depreciation.
I. Adjustment for the Expiration of Prepayment of Expenses.

Prepaid expenses are expenses paid in advance. At the time of payment, the
account is an asset and as it is used it becomes an expense.

For simplicity purposes, we shall be using the asset method.

I. Adjustment for the Expiration of Prepayment of Expenses.
On November 1, 2019, Jose Yulo paid P30,000 for a three-month rental of the
office space.

Analysis.
The P30,000 which was paid in November 1 is for a three-month rental of the space, i.e. for
November, December, and January. As of December 31, the end of the accounting period, only
P20,000 or rental for two months have already been incurred, so that portion is an expense
and the remaining P10,000 is still prepaid until January 31 of the following accounting period.
ii. Adjustment for the Realization of income collected in advance.

Unearned income arises when payment is received before goods are

delivered or before services are rendered.

For simplicity purposes, we shall be using the liability method.

ii. Adjustment for the Realization of income collected in advance.
On November 1, 2019, the business received P30,000 cash from the tenant of the
vacant space of the store.

Analysis.
As of December 31, the two-month rentals or P20,000 are already earned. Only P10,000 or the
rental for the month of January is still unearned.
iii. Accrual of expenses.
Accrued expenses are those already incurred during the period but are not
yet paid or recorded.
At the end of the accounting period, the income statement should reflect
such expense and the balance sheet should reflect a liability account. The
adjusting entry to record accrual expense is debit the expense account and
credit the liability account.
iii. Accrual of expenses.
Office employees are paid every two weeks. On December 31, five days’ salaries of
an office employee for P300 per day have accrued.
Adjusting entry:

.
iv. Accrual of income.
Accrued income arises when goods have been delivered or services have
been rendered but no amount of payment have been collected or if there is
payment, such collection is not yet recorded.
In order to avoid understatement of income and asset, an adjusting entry is
needed at the end of the period.
iv. Accrual of income.
A tenant who occupies the right side of the shop space, is two months in arrears as
of the balance sheet date. His monthly rental is P2, 500 per month.
Adjusting entry:

.
V. Provision for bad debts.
Usually most business firms extend credits to attract more customers and to
sell more goods. However, not all credits extended are good or collectible.
For a reason or another, a certain percentage of these collectibles are not
collected. For this reason, the business should provide for such losses for
non-collection of credits. This loss from uncollectible accounts is called bad
debts.
Bad debt is a nominal account which must be shown in the income
statement at the end of the accounting period.
Provision for bad debts.
Example.
The entry to adjust bad debts is as follows:

Bad debts xxxx

Allowance for Bad debts xxxx
V. Provision for bad debts.
Bad debts or Loss from bad debts is debited to show a decrease in proprietorship account due to estimated
loss.
Estimated Uncollectible Account or Allowance for Bad debts which is a valuation account is credited because
it is a deduction from an asset account, Account receivable. In the balance sheet presentation, Estimated
Uncollectible Account is deducted from Accounts Receivable to show the net book value or the net realizable
value of the accounts receivable.
Method No. 2.
Increasing the accumulated allowance for bad debts to a certain percentage of the accounts receivable.
Vi. Provision for depreciation
 VI. PREPARATION OF THE WORKSHEET
A worksheet is prepared to facilitate the preparation of adjusting entries,
financial statements, and closing entries. It is prepared before the
construction of financial statements and before the adjusting entries are
entered in the journal and posted.

The following steps are taken in preparing a worksheet:

1. Write the heading of the worksheet at the top of the paper with the
following information.
VI. PREPARATION OF THE WORKSHEET
 VI. PREPARATION OF THE
FINANCIAL STATEMent
After the accounts have been adjusted and worksheet has been constructed, financial statements are
prepared.
There are two basic accounting statements:
The income statement which contains the income and expense accounts, shows the results of the business
operation or the performance of the business.
The balance sheet contains the assets, liabilities, and proprietorship of the business. It shows the financial
condition of the businesS.

INCOME STATEMENT.

From the worksheet, the income statement can be prepared by referring to the income statement columns
and the balance sheet can be prepared from the balance sheet columns of the worksheet.
income statement
balance sheet
 VII. CLOSING THE ENTRIES
The nominal accounts have served its purpose, that is they have been used to measure
and show the nature and causes of income and the nature of expenses and losses.

These income and expense accounts do not accumulate. They are calculated for each
fiscal period. As a result, these accounts must be closed.

4 NOMINAL ACCOUNTS:
1. Income
2. Expense
3. Owner's drawings
4. Revenue and Expense Summary Account

 VII. CLOSING THE ENTRIES

STEPS TO CLOSE THE NOMINAL ACCOUNTS:
1. Debit the income account and credit the Revenue and Expense Summary account.

2. Credit the expense account debit the Revenue and Expense Summary Account
 VII. CLOSING THE ENTRIES
3. Get the difference of the Revenue and Expense Summary account. The difference should be
closed to the capital account. If there is a drawing account, the difference of the Revenue and
Expense Summary account should be closed to this account. The drawings account then is closed
to the capital account.
Illustration.
balance sheet - final
FABM2
 II. STATEMENT OF COMPREHENSIVE
INCOME(SCI)
OBJECTIVES:
1. Understand the purpose of the Statement of Comprehensive
Income;
2. Identify the elements of the Statement of Comprehensive Income;
3. Describe the nature of the accounts reported on the SCI;
4. Prepare a Multi-step Statement of Comprehensive Income;
5. Determine the normal balances of the elements of the SCI.
 STATEMENT OF COMPREHENSIVE INCOME
FABM 1 - INCOME STATEMENT
- explains some of the changes that occur between two
SFPs taken one year apart.

This statement contains:

a) Revenue generated by operating the business
b) Costs spent to generate the revenue
c) Income; revenue - costs = income

When do we use "for the period" and "as of" reports?

 STATEMENT OF COMPREHENSIVE INCOME
When do we use "for the period" and "as of" reports?

"for the period" "as of"

-> only for that particular period -> running balance
-> nominal accounts -> real accounts
STATEMENT OF COMPREHENSIVE INCOME
For example, the SCI in Figure 1 is described as “for the year ended
December 31, 2019.” This means that the reported revenue of
P1,290,000 was generated from January 1, 2019 to December 31, 2019.
 ELEMENTS OF THE SCI
Income and Expense are the general terms used to describe the
elements of the SCI.
INCOME refers to a transaction that increases assets and/or decreases
liabilities leading to an increase in equity resulting from the operations
of the business and not from the owner’s contribution.
EXPENSES are transactions that decrease assets and/or increase
liabilities leading to a decrease in equity resulting from the operations
of the business and not because of distribution to owners.

ELEMENTS OF THE SCI

2 kinds of INCOME:
REVENUES are income generated from the primary operations of the
business. (sales - expenses = revenue)
GAINS are income derived from other activities of the business.
EXAMPLE: 7/11
Revenue Gains
- resulting income coming from the - from the sales of equipment
sale of goods.
- all the goods in the 7/11 were sold
less the expenses.
ELEMENTS OF THE SCI
2 kinds of EXPENSES:
EXPENSES are related to the primary operations of the business.
LOSSES are from other activities of the business.
EXAMPLE: National Bookstore

The primary operation of the business is the main criterion for the classification.
Classification method can help the readers of the financial statements to understand the
operations of the reporting company.

Items from the primary operations = continue regularly

Items from other activities = may be one time or limited occurrence
ELEMENTS OF THE SCI

ELEMENTS OF THE STATEMENT OF COMPREHENSIVE INCOME.

1. REVENUE.
a. SERVICE INCOME (Rendering services)
b. SALES (Sell goods)

2. EXPENSES.
a. COST OF GOODS SOLD (Cost of Sales)
b. OPERATING EXPENSES

3. OTHER EXPENSES AND OTHER INCOME

I. SERVICE INCOME
"service income account". It is the revenue derived from the rendering of
services.
Service Industry
II. SALES
"sales revenue account". It is the revenue derived from the selling of
goods.
Trading and Merchandising Industry.
Another principle:
"Revenue from sales of goods is recognized when goods have been delivered"
goods are returned -> not deducted from sales, rather a normal
accounting practice is to report, under the "Sales Returns and
Allowances" a contra-sales account.
Discounts availed by the customers are not deducted from the Sales
Revenue -> it's recorded as Sales Discount (accounting practice).
III. EXPENSES
a) Cost of Goods Sold (Cost of Sales)
Freight-In and Freight-Out
2 ways of keeping records of inventory (Perpetual Inventory Method,
Periodic Inventory Method)

2 contra-purchases accounts :
> Purchase returns and allowances
> Purchase discount
b) Operating Expenses
Operating Expenses - other expenses related to the operation
Bad debt expense - operating expense related to accounts receivable
Depreciation expense -Fixed assets are used in business operations
and are not intended for sale.
c) Other expenses and other Income
Losses/other expenses
Gains/other income
 PRESENTATION OF
STATEMENT OF
COMPREHENSIVE INCOME
Single- Step Statement of Comprehensive Income
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Multi- Step Statement of Comprehensive Income

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EXAMPLE:
EXAMPLE:
III. STATEMENT OF FINANCIAL POSITION
FABM 1 - BALANCE SHEET
-it contains assets, liabilities, and equity.
-financial condition of the business.

ACCOUNTING EQUATION

Assets = Liabilities + Owner's Equity

(ALOE)
III. STATEMENT OF FINANCIAL POSITION
TITLE.

ASSETS
LIABILITIES
EQUITY
III. STATEMENT OF FINANCIAL POSITION
FORMAT OF THE SFP
ACCOUNT FORM
T-account format
left (assets) and right (liabilities and equity)
III. STATEMENT OF FINANCIAL POSITION
FORMAT OF THE SFP

REPORT FORM
"simple list"
the list of an
asset account,
liabilities, and
owner's equity in
one take?