3 Major Definition of Accounting:

1.) Accounting is a service activity whose function is to provide quantitative information, primarily
financial in nature about the economic entity that is intended to be useful in making economic
decision.(BY: ASC-SFAS # 1: Accounting Standards Council - Statement of Financial Accounting
Standards)
~ Economic Entity = Company / Business ~ Quantitative = Measured ~ Financial = Money
~ ASC is now = Financial Reporting Standard Council (FRSC)
~ SFAS is now = PFRS (Philippine Financial Reporting Standard)

2.) Accounting is the art of recording, classifying and summarizing in a significant manner and in terms
of money, transactions or events which are in part at least of a financial character and interpreting
the results thereof. (BY: AICPA: American Institute of Certified Public Accountants)
3.) Accounting is the process of identifying, measuring and communicating economic information to
permit informed judgment and decision by users of the information. (BY: AAA: American Association
of Accountants) 

~ Accounting is the language of business, for it allows users to communicate with the entity.
~ FRSC (Financial Reporting Standard Council) - is the standard setting body created by PRC upon
the recommendation of BOA (Board of Accountancy) to assist the BOA in carrying out its power and
functions provided under R.A. No. 9298 or Accountancy Act of 2004.
- FRSC function is to establish and improve accounting standards that will be generally accepted in the
Philippines
~ FRSC is composed of 15 members:
(1) Chairman – senior accounting practitioner
(1) BOA – Board of Accountancy
(1) SEC – Securities and Exchange Commission
(1) BSP – Bangko Sentral ng Pilipinas
(1) BIR – Bureau of Internal Revenue
(1) COA – Commission on Audit
(1) FINEX – Major organization of prepares and users of Financial Statement or FS)
Preparers and users of FS Professional Organizations
ACCREDITED NATIONAL PROFESSIONAL ORGANIZATIONS OF CPAs
(2) Public Practice (ACPAPP)
(2) Commerce and Industry (ACPACI)
(2) Academe or Education (ACPAE)
(2) Government (GACPA)
~ Accounting Standards issued by FRSC are known as PAS (Philippine Accounting Standards) and PFRS
(Philippine Financial Reporting Standards) and considered as the “Highest Hierarchy” of GAAP
(Generally Accepted Accounting Principles).
~ GAAP – represents the rules, procedures, practice and standards followed in the preparation and
presenting of FS.
~ PFRS are standards and interpretations adopted by FRSC. (PRFS, PAS, Interpretations).
 Accounting as 2: Science and Art.
1. A. as a Science- A science because it’s supported by a body of knowledge which has been
significantly gathered, classified and organized.
2. A. as an Art- An art because it requires the use of creative skills.

 Phases of Accounting (Aspects of Communication) RCSI

1. Recording (Journalizing) – committing into writing transactions or events in the books of original
entry (Journals: Purchase, sales, cash receipts, cash payment/ disbursement, purchase return,
sales return, journal proper/ General Journal).
2. Classifying (Posting) – grouping of similar transactions/items into their respective classes.
- Financial Structure Equation: A=L+C/ Arranging account titles.
3. Summarizing – preparation of financial statements. (SFP, IS, SCI, SCE, SCF, NOTES IN FS)
- NOTES: In SCF, cash can generate in operating, financing activities, and investing)
4. Interpreting (Analytical phase of Accounting) – analysis of financial statements. (Liquidity,
solvency, profitability, financial flexibility and financial structure)
 a.) Liquidity- availability of cash in the near future to cover currently maturing obligations.
b.) Solvency- availability of cash in over a long term to meet financial commitments when they fall
due.
c.) Profitability- ability of company to earn profit.
d.) Financial Flexibility- ability to cope or adapt to changing financial conditions.
e.) Financial Structure- shows the sources of the company’s assets. How much was financed by
the owners and how much was financed by creditors.
 FORMS OF BUSINESS ORGANIZATIONS
I. According to Ownership:
1.) Sole or Single Proprietorship- business organization has a single or 1 owner called the proprietor
who generally is also the manager. Small service type.
2.) Partnership- 2 or more person or owner.
Capitalist- when a person contributed money.
Industrial Partner- when a person contributed talents or skills. Not required to share from lost.
Liability is unlimited.
3.) Corporation- A business owned by its stockholders. The corporation is a separate legal entity. An
artificial being created by law, composed of at least 5 person but note than 15. But it owned by
more than 15 owners (Investors/ Incorporators: Owners)
-Not all corporators are corporates but all incorporates are incorporators.
- OPC: One person corporation (pwede na one owner now)
- Articles of Corporations or by laws. You can easily shares your shares.
- Shareholders/ Stockholders- if it holds stock.
- Members- of not holding stocks.
- Not stocks: Board of trustees. With Stocks: Board of Directors.
II. According to Purpose/Activities/Functions
1. Service- offers skills, knowledge, not sell intangible products (salon, firms, hospitals,
restaurants)
2. Merchandising/Trading – buying and selling (department stores, SM)
3. Manufacturing – converting raw materials into finished product (Cosmetics, tailoring)
4. Raw Materials
5. Infrastructure
6. Financial
7. Insurance

 FUNCTIONS OF ACCOUNTING (IMC)

1) Identifying - is the process of recognition or non-recognition of business activities as
accountable events.
> 2 Types of Transactions: things that affect the business. (EX: Rendered service, paid bills/
expense, Owner investment, selling, borrowing money but not all transactions are recorded)
1. External - other parties, business or enterprise are involved.
a. Reciprocal: when something is given, something must be received. Ex: obtain electricity then
pay bills.
b. Non-Reciprocal: giving up or give something to other parties that doesn’t have anything. Ex:
donations, payment of taxes.
2. Internal – no other parties involved. Only the business is involved. Ex: Depreciation, lost,
manufacturing, incurring of losses.
2) Measuring - is the process of assigning peso amounts to the accountable economic transactions
or events.
> Measurement Bases
a.) Historical Cost- the amount you paid for the item.
b.) Current Value- Fair Value, Value in Use, Fulfilment Value, Current Cost.
Notes: Hiring of employee or dead of owner cannot be measured since it’s not I peso.
3) Communicating - is the process of preparing and distributing accounting reports to potential
users of accounting information.
> Aspects of Communicating:
 a.) Recording- writing the accountable business transactions in the books of original entry.
b.) Classifying- grouping and sorting similar transactions into respective classes.
c.) Summarizing- preparation and distribution of FS to users.
d.) Interpreting – FS analysis.

 Accounting as an Information System because it measures business activities, process information

into reports and communicates the reports to the decision maker.
 Key Products of this Information System:
> Financial Statements: are the means by which the information accumulated and processed in
Financial Accounting is periodically communicated to the users:
a.) Statement of Financial Position
b.) Income Statement
c.) Statement of Comprehensive Income
d.) Statement in Changes in Equity
e.) Statement of Cash Flows
f.) Notes, comprising a summary of significant accounting policies and other explanatory notes.
 Overall Objective of Accounting
> To provide quantitative financial information about a business that is useful to statement use
particularly to owners and creditors in making economic decisions.
 Users of Financial Information
 Primary Users:
- Existing and potential investors
- Lenders and other creditors
 Other Users: Employees, Customers, Government, Public
 The Accountancy Profession (Republic Act No. 9298 or the Philippine Accountancy Act of 2004)
- Republic Act No. 9298 or the Philippine Accountancy Act of 2004 is the Law that regulates the
practice of Accountancy in the Philippines.
- The Accountancy Profession: BOA (Board of Accountancy is the body authorize by law to
promulgate rules and regulations affecting the practice of the Accountancy Profession in the
Philippines
- BOA is the one responsible for preparing and grading CPA Board Examination given twice a year
(May and October) Multiple choices.
 CPA Board Examination Subjects (4 Majority Subjects)
1. Financial Accounting and Reporting (Theories and problems)
2. Management Accounting and Control
3. Advanced Financial Accounting and Reporting
4. Regulatory Framework for Business Transactions (Laws)
5. Auditing
6. Taxation
 4 Carrier Areas of Accounting: Public Practice, Private, Government, Academic
 9 BRANCHES OF ACCOUNTING (COMMON)
1. Auditing- Internal Auditing CPA or not pwede. External Auditing- MUST BE CPA
2. Financial Accounting
3. Management Accounting
4. Government Accounting
5. Tax Accounting
6. Fiduciary Accounting- charitable and not profit organization.
7. Cost Accounting
8. Accounting System
9. Social Accounting- Effects of the transactions of the business to the SOCIET

 9 Branches of Accounting In Details:

1. Auditing or External Auditing- IS A PROCESS OF EXAMINATION OF ACCOUTING AND FINANCIAL

RECORDS THAT IS UNDERTAKEN INDEPENTLY.
-is a part of the accounting world. It is an examination of accounting and financial records that is
undertaken independently. This is done to determine if the company or the business undertaking has
confirmed its operations to the laws and the generally accepted accounting principles.
-Examination of financial statements by independent CPA for the purpose of expressing an option as
to the fairness with which the financial statements are prepared.

2. Financial Accounting- IS A PROCESS OF GATHERING INFORMATION AND PRODUCING RECORDS ON

AN ORGANIZATION’S FINANCIAL ACTIVITY.
- a specific branch of accounting involving a process of recording, summarizing, and reporting the
myriad of transactions resulting from business operations over a period of time
-a process of gathering information and producing reports on an organization's financial activity

3. Management Accounting- IS PROCESS OF MEASUREMENT, ANALYSIS, IDENTIFYING AND

INTERPRETING THE ACCOUNTING INFORMATION THAT HELPS THE LEADERS TO MANAGE THE DAILY
OPERATIONS.
-a branch of accounting that is concerned with the identification, measurement, analysis, and
interpretation of accounting information so that it can be used to help managers make informed
operational decisions.
- Process of “identification, measurement, analysis, and interpretation of accounting information”
that helps business leaders make sound financial decisions and efficiently manage their daily
operations.

4. Government Accounting- IS THE PROCESS OF RECORDING AND MANAGEMENT OF ALL

TRANSACTIONS THAT INCURRED BY THE GOVERNMENT WHICH INCLUDES ITS INCOME AND
EXPENDITURES.
-process of recording, analysing, classifying, summarizing communicating and interpreting financial
information about government in aggregate and in detail reflecting transactions and other economic
events involving the receipt, spending, transfer, usability and disposition of assets
-refers to the process of recording and the management of all financial transactions incurred by the
government which includes its income and expenditures. Various governmental accounting systems
are used by various public sector entities

5. Tax Accounting -is the subsector of accounting that deals with the preparations of tax returns and
tax payments.
- is an individual focuses on income, qualifying deductions, donations, and any investment gains or
losses.

6. Fiduciary Accounting -is a comprehensive report of the activity within a trust, estate or
conservatorship during a specific time period.
-It shows all of the receipts and disbursements managed by the executor or trustee, properly
allocating all transactions between principal and income.

7. Cost Accounting -is a process of assigning costs to cost objects that typically include a company's
products, services, and any other activities that involve the company.
- is helpful because it can identify where a company is spending its money, how much it earns, and
where money is being lost.

8. Accounting System -a set of accounting processes with integrated procedures and controls
-is to record business transactions, summarize those transactions into an aggregated form, and create
reports that can be used by decision makers to monitor, analyse, and improve operations

9. Social Accounting -is the process of communicating the social and environmental effects of
organizations.

 Accounting Profession -is a professional who performs accounting functions such as account
analysis, auditing, or financial statement analysis
- Their activities include preparing financial statements, auditing company records to be sure
employees follow accounting policies and procedures, developing accounting systems, preparing
tax returns, and providing financial information for management decision-making.
 4 AREAS OF ACCOUNTING PRACTICE
1. Public Accounting - Rendering of independent and expert financial services to the public on a
fee basis (professional fees). (must be a CPA) (alam ko CPA firm ‘to)
- You must be accredited on PRC if you want to open a firm.
- Own accounting firm and not a salary based.
- 3 Areas of Public Accounting
1. Auditing- or also known as external auditing. This is very different from internal auditing.
2. Taxation
3. Management Advisory Services
2. Private Accounting - Employment in business entities in various capacity as accounting staff,
chief accountant, cost accountant and internal auditor, controller on a salary basis. (May or may
not be a CPA). Also known as Internal Auditing.
3. Government Accounting – Employment in different branches of the government and focused
on the custody and administration of public funds. Accounting staff, chief accountant, TESDA, COA
(May or may not be a CPA).
4. Education/Academe - Employment in educational institutions involved in teaching Accounting,
MAS, Finance, Business Law and Tax. (Must be a CPA if teaching on BSA or accounting major)

CPA BOARD EXAMINATION SUBJECTS

Financial Accounting and Reporting Management Accounting & Control
Advanced Financial Accounting & Reporting Regulatory Framework for Business Transactions
Auditing Taxation

 Rating in the Licensure Examination (CPA)

> Passed - A general average of at least 75% with no grades lower than 65%
> Conditional - With a grade of at least 75% in the majority of the subjects. (At least 4 subjects and
on next exam only 2 subs to take)
> Failed - A general average of lower than 75% and did not pass majority of the subjects.
 Practice of Public Accountancy- Must be
accredited with the PRC upon recommendation of RFBT 100% 95% 75% 95% 74%
BOA
Taxation 100% 95% 75% 98% 80%
- Requirements to be accredited: CPA,
minimum of 3 years meaningful experience in MAS 100% 65% 75% 90% 75%
any of the areas of public practice (Ex.
Auditing, Taxation, Advisory Services) and must Auditing 74% 65% 75% 92% 65%
earn at least 120 CPD (Continuing Professionals FAR 64% 65% 50% 74% 75%
Development) units.
AFAR 73% 65% 50% 64% 80%
I. Accounting vs. Auditing
a.) Accounting- in a broad sense Auditing is just a Average 85% 75% 67% 86% 75%
part of Accounting.
b.) Auditing- In a limited sense Auditing starts only Remarks Failed Passed Condi Condi Passed
when Accounting ceases.
- Accounting is constructive in nature while Auditing is analytical.
II. Accounting vs. Bookkeeping
- Bookkeeping is procedural (HOW) while Accounting is conceptual (WHY)

III. Accounting vs. Accountancy

- Accounting used to refer to a particular field or area of Accounting while Accountancy is a
profession.
 IV. Financial Accounting vs. Managerial Accounting
- Financial Accounting is primarily concerned with the recording of business transactions and the
eventual preparation of financial statements.
> Historical in Nature, General purpose reports, Intended for external users.
- Managerial Accounting is concerned with accumulation and preparation of financial reports for
internal users only
> Future oriented, special reports, Intended for internal users.
 5 or 6 COMPLETE SET OF FINANCIAL STATEMENTS:

1. I. Statement of Financial Position (SFP before it’s called balanced sheet)

a.) Assets: may be cash, furniture, buildings, and supplies.
b.) Liabilities: debts and liabilities
c.) Equity/ Capital/ Shareholders Equity: excess assets
II. Statement of Income/ Statement of Performance/ Income Statement
- see on the year ended. Shows Income, Expenses, Profit or loss
2. III. Statement of Comprehensive Income (SCI)
> unrealized gain or loss on FA-FVOCI Financial Assets (Fair Value through other comprehensive
Income)
> Gain on property revaluation. Changes in RS. Foreign currency translation (revenues, expenses
profit)/ Income, expenses, profit or loss.
3. IV. Cash Flow Statement/ Statement of Cash Flow (SCF)
> Sources. (OFI) Operating, Financing, Investing (Ways to generate cash)
4. V. Statement of Changes in Equity (SCE)
- 1. Beginning Balance; 2. Additional Investment; 3. Withdrawals; 4. Ending Balance
- Capital, withdrawal, income, expense.
5. VI. Notes to Financial Statements/ Accounting Policies
- additional info and supporting computations about items presented.

 CONCEPTUAL FRAMEWORK OF ACCOUNTING

> Summary of terms and concepts that underlie the preparation and presentation of financial
statements for external users. General purpose)
> It provides an overall theoretical foundation for accounting. Foundation for standards that:
a. Contribute to transparency
b. Strengthen accountability
c. Contribute to economic efficiency

~ Purposes of Conceptual Framework

> To assist the IASB to develop IFRS based on consistent concepts
> To assist the preparers of FS to develop consistent accounting policy when no standard applies
to a particular transaction or other event or where an issue is not yet addressed by an IFRS
> To assist preparers of FS to develop accounting policy when a standard allows a choice of an
accounting policy
> To assist all parties to understand and interpret the IFRS

~ Objective of Conceptual Framework of Accounting:

> To provide financial information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing resources to the entity

~ Scope of the Conceptual Framework

1. Objective of the Financial Reporting
2. Qualitative Characteristics
3. Financial Statements and Reporting entity
4. Elements of Financial Statements
5. Recognition and Derecognition
6. Measurement
 7. Presentation and disclosure
8. Concepts of Capital and Capital Maintenance

1. Specific Objectives of Financial Reporting

> To provide information useful in making decisions about providing resources of entity
> To provide information useful in assessing the cash flow prospects of the entity
> To provide information about entity resources, claims and changes in resources and claims

2. Qualitative Characteristics of Useful Financial Information

> Are the qualities or attributes that make financial accounting information useful to the users.

A. Fundamental Qualitative Characteristics (content)

I. Relevance (Materiality) - Information is considered relevant if it has the ability to affect the
decision making of the users. Without this ability, information is deemed irrelevant and useless.
~ Elements of Relevance:
1. Predictive Value - Information has a predictive value if the users can use it as an input in
making predictions or forecast of outcomes of event. Used past income statement.
- Refers to the fact that quality financial information can be used to base predictions, forecasts, and
projections on. Financial analysts and investors can use past financial statements to chart
performance trends and make predictions about future performance and profitability.
2. Confirmatory Value - This concept is related to the predictive value. Information has a
confirmatory value if users can use it to confirm their past predictions.
- Confirmatory value enables users to check and confirm earlier predictions or evaluations. For
example, in the decision to replace an equipment that has been used for the past six years, the
original cost of the equipment does not have relevance.

II. Faithful Representation - Information is faithfully represented if it is factual, meaning it

represents the actual effect of events that have taken place.
~ Elements of Faithful Representation:
• Completeness - Information must be presented with sufficient detail necessary for users to
understand them. Important information must not be omitted.
- The assertion of completeness is an assertion that the financial statements are thorough and include
every item that should be included in the statement for a given accounting period.
- Reliability of information contained in the financial statements is achieved only if complete financial
information is provided relevant to the business and financial decision making needs of the users.
Therefore, information must be complete in all material respects.
• Neutrality (Prudence or Conservatism) - Information are selected or represented without
bias. Information must not be manipulated to increase the probability that it will be received
favourably or unfavourably by the users. Neutrality requires that management prepare completely
unbiased financial statements. For example, a company with information about a probable lawsuit
must report it on their financial statement notes. Withholding this information would make the
financial statements unreliable to outside investors and creditors.
• Free from Error - Free from error means there are no errors in the description and in the
process by which the information is selected and applied.
- Free from error: means there are no errors and inaccuracies in the description of the phenomenon
and no errors made in the process by which the financial information was produced. (no inaccuracies
and omissions). That does not mean no inaccuracies can arise, particularly in case of making estimates

B. Enhancing Qualitative Characteristics (presentation) VCUT

V ~ Verifiability - A consensus was arrived in the presentation of the information in the Financial
Statements. Supported by business documents, may be an evidence.
- If the items presented in the Financial Statements can be duplicated by two independent
measurers using the same measurement method.

Types of Verification:

1. Direct Verification - Direct observation, Cash count, Physical count

2. Indirect Verification - Using formula or technique, GP method of estimating inventories, Bank
reconciliation

C ~ Comparability - If the information presented will allow the users to point out similarities and
differences.
Types of Comparability
a. Within the enterprise - Horizontal comparability or Intracomparability- Comparing FS covering two
periods
b. Between enterprises - Intercomparability or dimensional comparability- Comparing the Financial
Statements with FS of other companies belonging to the same industry.
> Consistency - Using the same methods from period to period within an entity or in a single period
across entities.
> Straight line method from period to period

U ~ Understandability - Information should be presented in such a way that it can be easily

understood by the users, must be clear and concise, use columns, and use terms commonly used in
Accounting. Comprehensible.

T~ Timeliness - Information must be submitted before a decision was made.

> Constraint on Useful Information
> Cost Constraints (Pervasive) - the benefits derived from the information should be greater than its
cost.
> Notes: Constraint means LIMITATION ON RESTRICTIONS.

~ Accounting Assumptions (POSTULATES) - are the basic notions or fundamental premises on which
the accounting process is based.

BASIC ACCOUNTING ASSUMPTIONS

I. Underlying Assumption- The going concern principle assumes that any organization. Organizational
structures will continue to operate its business for the foreseeable future. The principle purports that
every decision in a company is taken with the objective in mind of running the business rather than
that of liquidating it.
a. Going Concern – Continue to exist, indefinite. The business life is indefinite. The ability of the
company to continue its operations.

II. Implicit Assumptions- An accounting entity is a clearly defined economic unit that isolates the
accounting of certain transactions from other subdivisions or accounting entities. An accounting entity
can be a corporation or sole proprietorship as well as a subsidiary within a corporation.
> However, the accounting entity must have a separate set of books or records detailing its assets and
liabilities from those of the owner.
a.) Accounting Entity – believe that the business is separate from the owners
b.) Monetary Unit – record transaction using uniformed unit of measured
- The monetary unit assumption states that a company must record its business transactions in dollars
or some other unit of currency. Companies use the dollar since it is stable in value and available
everywhere. It also provides a consistent method of comparing the results of one company with those
of another. The monetary unit principle states that you only record business transactions that can be
expressed in terms of a currency. The monetary unit principle also assumes that the value of the unit
of currency in which you record transactions remains relatively stable over time.
> Quantifiability- assign PESO to values of money.
> Stability- assume that PESO is stable
c.) Time Periods – divide indefinite life into several times / basic time is 1 yr. Is an accounting principle
which states that a business should report their financial statements appropriate to a specific time
period. The time period assumption in accounting allows a company's activities to be divided into
informal time periods so it can produce financial information which individuals can use to make
decisions.
> TYPES OF ACCOUNTING YEAR/PERIOD
a.) Calendar Year- Starts on January 1 to December 31 (ALWAYS). Is what most of the business use.
> A calendar year is a one-year period between January 1 and December 31, based on the Gregorian
calendar. The calendar year commonly coincides with the fiscal year for individual and corporate
taxation. In a calendar year reporting method, companies will prepare their financial reports/
statements for the year based on the transactions that have taken place on the 1st of January and will
incorporate all other transactions that have taken place until the 365 days of the year that is 31st
December.
b.) Fiscal Year- it may start in any month and ends after 12 months. Ex. Starts on August 1 and ends at
July 31. A fiscal period or fiscal year is defined as a 12 month period in which a business entity will
account for all transactions and happenings dealing with that particular company. The 12 month
period does not necessarily coincide with the calendar year or January 1st to December 31st
c.) Natural Business Year – it starts during its fix season and ends during slacks season. A natural
business year is a period of 12 consecutive months (PEAK SEASON), terminating in a natural low point
in the sales activity of a business. These lower balances make it easier to audit the period-end
accounting records of a business, and verify that its ending balance sheet figures are accurate.

 Objective of Financial Reporting

> To provide financial information about the reporting entity that is useful to existing and potential
investors, lenders and other creditors in making decisions about providing resources to the entity.
 Specific Objectives of Financial Reporting
> To provide information useful in making decisions about providing resources of entity.
> To provide information useful in assessing the cash flow prospects of the entity.
> To provide information about entity resources, claims and changes in resources and claims.

3. Financial Statements and the Reporting Entity

> Are the means by which the information accumulated and processed in financial accounting is
periodically communicated to the users. Shows the assets, liabilities, and changes of items.
> Provide information about economic resources of the reporting entity, claims against the entity and
changes in economic resources and claims.
> Types of Financial Statements:
1. Consolidated Financial statements- prepared by the parent company. You can get the total items
of subsidiary and parent company. Assets of parents + Assets of subsidiary and also their liabilities.
2. Unconsolidated Financial statements
3. Combined Financial statements
> Complete Set of Financial Statements
1. Statement of Financial Position
2. Statement of Income
3. Statement of Comprehensive Income
4. Statement of Changes in Equity
5. Cash Flow Statement
6. Accounting Policies and Notes to Financial Statements

~ Reporting Entity- An entity that is required or chooses to prepare FS which can be a single entity or
a portion of an entity or more than one entity.
Examples:
1. Individual corporation, partnership or proprietorship
2. The parent alone
3. The parent and its subsidiary as a single reporting entity
4. Two or more entities without parent and subsidiary relationship as a single reporting entity
5. A reportable business segment of an entity

4. Elements of Financial Statements

1. Assets 2. Liabilities 3. Equity 4. Income 5. Expenses
a. Assets – present economic resources controlled by the entity as a result of past events.
~ Characteristics of Assets
a) The asset is a present economic resource – right
b) The economic resource is a right that has potential to produce economic benefits
c) The economic resource is controlled by the entity as a result of past events
Right
> Right to receive cash
> Right to receive goods and services
> Right to exchange economic resources with another party on favorable terms
> Right to benefit from an obligation of another party if a specified uncertain future events occurs
> Right over physical goods
> Right established by contract or legislation (equity or debt instruments)
~ Potential to produce economic benefits: There is potential benefit if the entity is entitled
a) To receive contractual cash flows
b) To exchange economic resources with another party on favourable terms
c) To produce cash inflows or avoid cash outflows
d) To receive cash by selling the economic resource
e) To extinguish a liability by transferring an economic resource
~ Control of an economic resource
a) If the company has the present ability to direct the use of the asset and obtain economic benefit
that flow from it
b) If the company has the ability to prevent others from using such asset
c) If the company may enforce legal rights

b. Liabilities – present obligations of an entity to transfer an economic resource as a result of a past

events.
~ Characteristics of Liability
a) The entity has an obligation
b) The obligation is to transfer an economic resource
c) The obligation is a present obligation that exists as a result of past events
~ Obligation- A duty or responsibility that an entity has no practical ability to avoid. It can be legal or
constructive.

~ Transfer of economic resource

a) Obligation to pay cash

 b) Obligation to deliver goods or noncash resources

c) Obligation to provide services at some future time

d) Obligation to exchange economic resources with another party on unfavourabl terms

e) Obligation to transfer an economic resource if specified uncertain future events

~ Past Events: Both conditions must be met

a) An entity has already obtained economic benefits

b) An entity must transfer an economic resource

c. Equity – residual interest in the asset of the entity after deducting all of its liabilities.

d. Income – increases in assets or decreases in liabilities that result in increases in equity other that
those relating to contributions from equity holders. Income encompasses both Revenues and Gains

> Revenue – arises in the course of ordinary regular activities of the entity.
> Gain – meet the definition of income but did not arise from the regular activity of the business.

e. Expense – decreases in assets or increases in liabilities that result in decreases in equity other that
those relating to distributions to equity holders.
– Expenses include both expenses from ordinary regular activities and Losses

5. Recognition and Derecognition

~ Recognition – The process of capturing for inclusion in the financial statements an item that meets
the definition of an asset, liability, equity, income or expense.
– Only items that meet the definition of assets, liability and equity are recognized in the statement of
FP.
– Only items that meet the definition of income and expenses are recognized in the statement of
financial performance
> Income Recognition – Income is recognized when earned which is usually at the Point of Sale.
> Exception to the Point of Sale Rule

1. Installment method – point of collection

2. Cost recovery or sunk cost method

3. Cash method

4. Percentage of completion method

5. Production method

> Expense Recognition – Expenses are recognized when incurred: Application of Matching Principle

1. Cause and Effect

2. Systematic and rational allocation – (ex. prepaid expense, depreciation)

3. Immediate recognition – recognized with or without revenue

~ Derecognition – removal of all or part of a recognized asset or liability from the statement of
financial position.
Asset – when the entity loses control of all or part of the asset
Liability – when the entity no longer has a present obligation for all or part of the liability.
6. Measurement – quantifying in monetary terms the elements in the financial statements.

Categories:

a) Historical Cost

Asset – cost incurred in acquiring or creating the asset consisting of

consideration paid plus transaction costs.

Liability – consideration received to incur the liability minus transaction costs.

Updating of Historical cost:

– Depreciation/amortization

– Payment received for disposing part or all of the asset

– Impairment

– Accrual of Interest

– Amortized cost measurement of financial asset

– Payment made

– Increase in value of obligation

– Accrual of interest

– Amortized cost measurement of financial liability

b) Current Value

7. Presentation and Disclosure (can be effective communication tool)

> Effective communication of information in FS makes the information more relevant contributes to a
faithful representation of an entity’s Asset, Liabilities, Income and Expenses.
> enhances Understandability
> enhances Comparability
> In the presentation of FS there should be proper: Classification and Aggregation
8. Capital Maintenance

1. Financial Capital – Based on Historical Cost

2. Physical Capital – Based on Current Cost

5 Elements of FS

1.) Assets – elements of financial position. Economics resources controlled by the entity as a result of past
events. E.g. Ballpen, if it has no ink then it has no future benefit therefore it is not asset anymore. In
order for company has to consider that it is their asset, they must have right over the asset. It is classify
into two:
- Current Assets – Include cash, those asset that can be converted into cash within 1 year or normal
operating cycle. Most common example of current assets: Cash, Cash equivalents, temporary
investments, accounts receivable, notes receivable, installment receivable, interest receivable,
advances to employees (receivables from employees), accrued revenues, inventories, supplies and
prepaid expenses.
- Non-Current Assets
2.) Liabilities – elements of financial position
3.) Equity – elements of financial position
4.) Income – elements of performance
5.) Expenses – elements of performance
Normal balance – CREDIT OR DEBIT. Basically the balance on our T accounts or balance sheet
1.) Asset – normal balance is DEBIT, rarely happens that it is in the credit
2.) Liabilities – CREDIT
3.) Equity – CREDIT
4.) Income – CREDIT
5.) Expense – DEBIT
Notes receivable – those collectible by next year is still current asset, even the normal operating cycle is 3
months. If the normal operating cycle is 3 years and it is collectible for 3 years therefore it is still current asset.
CURRENT ASSETS

1. Cash – include your coins and currencies, the bills that we have and includes check (it is not defective
or it will be accepted by the bank)
2. Cash Equivalents – it is high liquid (easily converted it into cash) investments by company. Those
investment whose original maturity is 3 months or less. Bonds (may be issued by the government or
business) (3 months only). Time deposit (if 3 months or less)
3. Temporary Investments – 3 months to 1 year. Shares of stocks or investment on bonds or time deposit
also whose term is more than 3 months to 1 year.
4. Long term Investment – more than 1 year
5. Accounts receivable – customer’s account / debtors account. The amounts of collectible to customer
because of selling inventories or from rendering services.
6. Notes receivable – receivable that is supported by promissory note. Interest bearing or non-interest
bearing
7. Interest receivables
8. Accrued revenues – already rendered but not yet earned. Rent receivable.
9. Inventories – items that is purchased by the company for the purpose of selling them. Manufacturing
purchased. Watson – beauty products. Savers – appliances. If they purchase for the purpose of using it,
it is consider as PPE. Raw materials inventory (alam mo na yan). Finished products (alam mo na rin yan)
10. Supplies – intent to use it for the business.
11. Prepaid expenses – paid before. Expenses already paid in advance but not yet incurred meaning not
yet used, not yet enjoyed.
Non-Current Assets
 Those not convertible to cash by 1 year. Kapag hindi current edi non-current hehez.
1. Property, land and equipment – land, building, equipment, machinery, tools, delivery.
- Tangible assets: Not consumable or hindi mawawala agad.
2. Long-term Investments – investment in bonds, investment in equity securities, sinking fund.
3. Intangibles – those not have physical characteristics but they produced revenues. Patent,
franchise, copyright, goodwill, trademark, secret processes, computer softwares.
Patent – right or title in using design
Franchise –
Copyrighty – inclusive right granted to author or to a composer.
Goodwill
4. Other Non-Current Assets – cash in a closed bank, non-current receivable (if more than a year or
more than normal operating chu chu)

Current Liabilities Non- Current Liabilities

- Accounts payable (suppliers account or investors - Bonds payable
account) - Mortgage Notes Payable (more than 1 year)
- Notes payable - Pensions Payable
- Interest payable - Lease Liability
- Accrued expense (already incurred bot not yet - Deferred Tax Liability
paid)
- Unearned Revenues (already receive but not yet
rendered),
- Bank overdraft
- Advances from employees (sometimes due to
employees or payable to employees)
- Withholding tax payable
 - Income tax payable
- VAT payable
- SSS Premiums Payable
- PAG Ibig (HDMF)
- Premiums Payable
- Philhealth Premium Payable
Liabilities – present obligations of an entity to transfer an economic resource as a result of past events.
Economic obligations of the company. Obligation = duty of the company which is un-avoidable or cannot be
avoid by the company. The entity can settle by cash, services or issue another liable for the payment of
another liability (from AP to NP).
EQUITY – residual interest in the assets of the entity after deducting all of its liabilities. (excess of assets over
the liabilities meaning assets – liability is our equity)
 Single Proprietorship – Capital (Leona, Capital)
 Partnership – Partners’ Equity. Number for capital accounts is the number of partner (Leona, Capital.
Leila, Capital)
 Corporation – Shareholders’ Equity (preference shares, ordinary shares, share premiums, retained
earnings). Don’t have to type capital unlike partnership, sama-sama na sila dyarn.
INCOME – increases in assets or decreases in liabilities that result in increases in equity other than those
relating to contributions from equity holders. (It is not income if it is from loan, it is not income if owners
invest). When you sold your goods or rendered your services.
- Income encompasses both REVENUES and GAINS
- Revenue – arises in the course of ordinary regular activities of the entity. Internet cafe is renting but if
they sell the equipment with income, it is GAIN.
- Gains – meet the definition of income but did not arise from the regular activity of the business
- Income - Professional Fees, Tuition Fees, Retainer’s Fee, Fares, Repairs Revenue/Income, Laundry
Revenue/Income, Interest Income, Rent Income, Subscription Revenue, Fees Earned, Commissions
Earned
- Gains – gains from sale equipment, gains from exchange
EXPENSES – decreases in assets or increases in liabilities that result in decreases in equity other than those
relating to distributions to equity holders. (meaning nagdecrease asset mo but owner did not withdraw)
- Expenses include both Expenses and Losses
- Expenses – arises in the course of ordinary regular activities
- Loss – meet the definitions of expense but did not arise from the regular activity
- Expenses – Salaries Expense, Rent Expenses, Prepaid Expense, Utilities Expense, Transportation
Expense, Gasoline and Oil Expense, supplies exp, insurance, advertising, repairs and maintenance,
taxes and licenses, sss contributions, depreciation, miscellanaeous Expense
- Loss – loss from sale equipment, loss from exchange

Chart of Account – list of account titles in the business.

REPORTS
Introduction of PRC
“The Professional Regulation Commission or PRC”

 Administers that implements and enforces the regulatory laws and policies of the country in
various occupation.
 Considerate the occupation and licensing of different professions.
 Takes action to protect the public from false information and fake documents by unauthorized
individuals, groups or entities.
History of PRC

 The Professional Regulation Commission otherwise known as PRC was first created as a national
government agency by Presidential Decree (P.D.) No. 223 dated June 22, 1973, signed by then
President Ferdinand E. Marcos.
 It is a three-man commission attached to Department of Labor and Employment (DOLE).
 It was previously called the Office of the Board of Examiners, which was created by Republic Act No.
546 on June 17, 1950, under the aegis of the Civil Service Commission.
  The PRC became operational on January 4.1974

Mission and Vision of PRC

MISSION

To deliberately, scientifically and consistently determine the

Competence of professionals through the provision of professional

Standards and judicious issuance of professional license of standards.

P – Professionalism, and Integrity

R – Responsibility, Unity, and Accountability

C – Competence and Excellence

VISION

The Professional Regulation Commission is the instrument of the Filipino people in securing for the nation. a
reliable, trustworthy and progressive system of determining the competence of professionals by credible and
valid license examinations whose standard of professionals practice are globally recognize

2 Important Functions of PRC

 To conduct and administer licensure examinations to aspiring professionals.

 To regulate and supervise the practice of the professions exercised in partnership with the forty-three
(43) Professional Regulatory Boards (PRBs).

Other Functions of PRC

• Executive - Administers, implements, and enforce the laws and policies with respect to the regulation
and licensing of the various professions and occupations, including the enhancement and maintenance
of professional and occupational standards and ethics.
• Quasi-Judicial - The power to: Issue summons, subpoena and subpoena duces tecum; May hold in
contempt erring party or person; May revoke or suspend certificates of registration and professional
licenses.
• Quasi-Legislative - Formulates rules and policies on professional regulation. Reviews revise and
approve resolutions embodying policies promulgated by the Professional Regulatory Boards.

Introduction of BOA (Board of Accountancy)

 These agencies establish the educational requirements and the eligibility of candidates desiring to sit
for the uniform CPA exam. They control the licensing of Certified Public Accountant (CPAs).
 The Board of Accountancy (BOA) has signed Resolution No. 03 of 2016 dated 19 January 2016. This
resolution reiterates the responsibilities of clients and external auditors in the preparation of the
financial statements promulgated by the Code of ethics for CPAs.
 BOA in carrying out its power and functions provided under R.A. No.9298 also called The Philippine
Accountancy Act of 2004.

HISTORY OF BOA (BOARD OF ACCOUNTANCY

In 1923, accounting was legally recognized as a profession in the country when the sixth Philippines
Legislature approved Act No. 3105 on March 17, 1923. This law created the Board of Accountancy vested with
authority to promulgate rules and regulations, to set professional standards for the accounting profession
practice and to issue certified public accountant certificates to those who have qualified in accordance with
the requirements of the law. The Board then was composed of a chairman and two members. The first Board
of Accountancy was composed of Chairman W. W. Larkin, and, Domingo Dikit and Felix Tiongson, as members.
On December 7, 1925, Act No. 3264 was enacted authorizing the Board of Accountancy to issue certificate of
Public Accountants (PA) to those who have not qualified as CPAs under Act No. 3264. The certification gave
the CPAs and the PAs the same privileges and prerogatives in the practice of the profession. Although
accounting has been practiced in the Philippines since the Spanish period and possibly even before, the seeds
of Philippine accountancy as a recognized profession were planted on March 17, 1928, when Act No. 3105 was
approved by the Sixth Legislature. Entitled 'An Act Regulating the Practice of Public Accounting; Creating the
Board of Accountancy. Since then, both the profession and the body that directly regulates it have grown
rapidly. From 43 registered accountants in 1923, the number of CPAs has grown to over 100,689 by 1999.
Qualifications of Members of the Professional Regulatory Board.
 A member of the Board shall, at the time of his/her appointment, possess the following
Qualifications:

 must be resident of the Philippines;

 must be registered Certified Public Accountant
 Must be of good moral character
 And also, Must not have any pecuniary interest.
Functions and Duties of BOA
1. Inspect Accredited Professional Organization (APO)
2. Discuss accountancy with CHED
3. Control the government matters
4. Attends to PRC matters.
5. Implements the ASEAN Mutual Recognition Arrangement for accountancy services.
6. Attends to international activities
7. Issues STP’s for foreign accountant
8. Overseas the investigation
9. Conduct research

3 Ratings for Board Exam

1. Passed
2. Conditional
3. Fail

PICPA - Philippine Institute of Certified Public Accountants

- Founded in 1929
- Jill Gilbert

Why do we have PICPA?

- To adapt code of ethics of its members
- Accountancy Education
- To practice CPA
- To carry out fact finding component of investigations upon the the delegation and approval of the
Professional Regulatory Board of Accountancy and the PRC
HISTORY OF PICPA
Each Geographical Area consists of Regions and each Region consists of Chapters, except Metro Manila
or the National Capital Region which is designated as Geographical and Regional as well. The National Office
sets the overall directions and policies, and each sector identifies the specific professional needs and plans the
current and future directions accordingly.
PICPA was founded in November 1929
 Enrique Caguiat, Santiago de la Cruz, Francisco Dalupan, Jaime Hernandez, Felipe Ollada,
Ramon del Rosario, Antonio Sanchez, Jose Torres, Artemio Tulio, Clemente Uson and Jesus
Zulueta. W. W. Larkin
The accreditation started on October 2, 1973
  PICPA was awarded Certificate of Accreditation, by then PRC Chairman Eric Nubla after having
complied with the requirements for accreditation under Presidential Decree No. 223.
Integration of the Accountancy Profession
 Integration of the accountancy profession was carried out under resolution No. 106 dated July
12, 1984 as amended by resolution No. 142 dated March 4, 1987.

The PICPA Building

 The place is staffed by men and women always ready to attend to members’ needs, and is open
to all members who wish to use its function rooms for meetings and seminars.
PICPA in the International Scene
 Foremost among these international organizations is the International Federation of
Accountants (IFAC), the broad objective of which is the development and enhancement of a
well-coordinated worldwide accountancy profession functioning under harmonized standards.
Year-Round Continuing Professional Education Program (CPE)
 Attendance to CPE provides opportunity to make valuable contacts with fellow members for a
mutually beneficial exchange of ideas and experiences, and to earn CPE credits.
4 Sector of Accountancy Profession
- Private Practice
- Public Practice
- Government
- Education/Academe
PICPA Organization Structure
- PICPA is a registered non-stock corporation with Geographical divisions, regions and chapters all over
the country.
The National Office
- is under the management of officers elected by the members of the Board themselves
Sectoral Directors
- are voted nationally one coming from each sector. The President is elected annually but rotated among
the regional directors
Geographical areas of PICPA
- Luzon
- Visayas
- Mindanao
- NCR

Core Values of PICPA

o Professional Excellence – Accountants knowledge and skills
o Integrity – You should be honest
o Commitment – dedicated to your profession
o Partnership and Teamwork – work together and help each other
o Advocacy for quality – diko ulit nanotes HAHAHA
o New Technologies and Innovativeness – Updated on Accounting technologies
o Social Responsibility – Have to be honest and Unbiased

standards in the accountancy profession and

protecting public
VISION
MISSION

A responsive and globally relevant professional

To serve the best committed to service excellence
organization committed to service excellence
towards its member and stakeholders while
towards its member and stakeholder.
promoting, upholding, and maintaining high
Aims and Purposes of PICPA why it existed
- To promote and maintain high professional and ethical standard
- To advance the science of accounting
- To develop and improve accountancy education
- To encourage cordial relations among accountants
- To protect the CPA
- To develop a treaty of friendship among its member

FRSC – Financial Reporting Standard Council

- The Financial Reporting Standards Council (FRSC) was established by the Professional Regulatory
Commission under the Implementing Rules and Regulations of the Philippine Accountancy of Act of
2004 to assist the Board of Accountancy in carrying out its power and to promulgate accounting
standards in the Philippines.
- It creates the PFRS or the Professional Regulation Commission under the implementing Rules and
Regulations of the Philippine Act of 2004. To assist the Board of Accountancy in carrying out its power
and to promulgate accounting standards in the Philippines.
- It was establish on November 1981 as ASC or Accounting Standard Council

History
The FRSC is the successor of the Accounting Standards Council (ASC). The ASC was created in
November 1981 by the Philippine Institute of Certified Public Accountants (PICPA) to establish generally
accepted accounting principles in the Philippines. The FRSC carries on the decision made by the ASC to
converge Philippine accounting standards with international accounting standards issued by the International
Accounting Standards Board (IASB).
Mission
To bring corporate confidence in auditing, financial
and non-financial reporting among users of
financial statements.
Vision
To be a model organization ensuring quality in
auditing, accounting and financial and non-financial
reporting
Objectives
a) To develop, in the public interest, a single set of high quality, understandable and enforceable
accounting standards that require high quality, transparent and comparable information in financial
statements and other financial reporting.
b) To promote the use and rigorous application of those standards; and
c) To work for the convergence of Philippine to promote the use and rigorous application of those
standards; and Accounting Standards with International Financial Reporting Standards (IFRSs) issued by
the IASB.
Functions
- To establish generally accepted accounting principles in the Philippines.
- To monitor the technical activities of the IASB and issues Invitations to Comment on exposure drafts of
proposed IFRSs as these are issued by the IASB.
Rationale

 To ensure consistency in recording, recognizing and measuring financial transactions.

Composition of FRSC
Composed of 15 representatives.
1 Chairman
1 Board of Accountancy (BOA)
1 Securities and Exchange Commission (SEC)
1 Bangko Sentral ng Pilipinas (BSP)
1 Bureau of Internal Revenue (BIR)
1 Commission on Audit (COA)
1 Financial Executive Institute of the Philippines (FINEX)
2 Public Practice
2 Commerce and Industry
2 Government
2 Academe

ISSUED OF FRSC

The FRSC issues its Standards in a series of pronouncements called Philippine Financial Reporting Standards
(PFRSs). These consist of:
 Philippine Financial Reporting Standards (PFRSs) – these correspond to International Financial
Reporting Standards (IFRSs);

 Philippine Accounting Standards (PAS - these corresponds to International Accounting Standards (IASs);
and

 Philippine Interpretations - these correspond to Interpretations of the International Financial Reporting

Interpretations Committee (IFRIC) of the IASB and the Standing Interpretations Committee (SIC) of the
IASC; these also include Interpretations developed by the PIC.
 PFRS (Philippine Financial Reporting Standards) consists:
 Philippine Financial Reporting Standards (PFRSs) – these correspond to International Financial
Reporting Standards (IFRSs)
 Philippine Accounting Standards (PAS – these corresponds to International Accounting Standards
(IASs); and
 Philippine Interpretations – these correspond to Interpretations of the International Financial
Reporting Interpretations Committee (IFRIC) of the IASB and the Standing Interpretations Committee
(SIC) of the IASC; these also include Interpretations developed by the PIC.

PFRS/PAS (Philippine Financial Reporting Standards/Philippine Accounting Standards) - are the new set of
Generally Accepted Accounting Principles (GAAP) issued by the Accounting Standards Council (ASC) to govern
the preparation of financial statements.
The Bangko Sentral ng Pilipinas (BSP) pronounced its adoption of the PFRS/PAS effective the annual financial
statements beginning 1 January 2005 in its Memorandum to All Banks and Other BSP Supervised Financial
Institutions (BSFIs) dated 11 January 2005.
Philippine Interpretation Committee

 The FRSC formed the Philippine Interpretations Committee (PIC) in August 2006 to assist the FRSC in
establishing and improving financial reporting standards in the Philippines.
PAS (Philippine Accounting Standard)

Number TITLE EFFECTIVE DATE

First-time Adoption of Philippine Financial Reporting
PFRS 1 (Revised) July 1, 2009
Standards
PFRS 2 Share-based Payment January 1, 2005
PFRS 3 (Revised) Business Combinations July 1, 2009
PFRS 4 Insurance Contracts January 1, 2005
Non-current Assets Held for Sale and Discontinued
PFRS 5 January 1, 2005
Operations
PFRS 6 Exploration for and Evaluation of Mineral Resources January 1, 2006
PFRS 7 Financial Instruments: Disclosures January 1, 2007
PFRS 8 Operating Segments January 1, 2009
PFRS 9 (2014) Financial Instruments January 1, 2018
PFRS 10 Consolidated Financial Statements January 1, 2013
PFRS 11 Joint Arrangements January 1, 2013
PFRS 12 Disclosure of Interests in Other Entities January 1, 2013
PFRS 13 Fair Value Measurement January 1, 2013
PFRS 14 Regulatory Deferral Accounts January 1, January 1, 2016
PFRS 15 Revenue from Contracts with Customers January 1, 2018
PFRS 16 Leases January 1, 2019
PFRS 17 Insurance Contracts January 1, 2023
 PAS is the set of internationally correlated accounting standards which the Philippine companies will
comply with, which is usually in line or reconcilable with either the US GAAP or IFRS.

Number TITLE EFFECTIVE DATE

PAS 1 (Revised) Presentation of Financial Statements January 1, 2009
PAS 2 Inventories January 1, 2005
PAS 7 Statement of Cash Flows January 1, 2005
PAS 8 Accounting Policies, Changes in Accounting Estimates and Errors January 1, 2005
PAS 10 Events after the Reporting Period January 1, 2005
PAS 12 Income Taxes January 1, 2005
PAS 16 Property, Plant and Equipment January 1, 2005
PAS 17 Leases January 1, 2005
PAS 19 (Revised) Employee Benefits January 1, 2013

History of Accounting

 Origins of keeping accounts (8500 B.C.)

 Ancient Civilization (3600 B.C.)
 Consolidated Financial Statements - On March 12, 1903, United States Steel published consolidated
financial statements as of December 31, 1902, together with Price & Watermelon & Company’s (PW)
assurance that they were audited and found correct. US steel resulted from the amalgamation of
various steel producers at that time. It’s the first billion- Dollar Corporation. It controlled 75 % of the
US steel business. There existed complex relationships between US Steel and its many subsidiaries such
that PW Managing Partner Arthur Lowes Dickson believed that the stockholders could be informed
adequately of entity’s relative financial condition only through consolidation of accounts. US Steel’s
consolidated financial statements rapidly became a landmark in accounting history.
 Schmalenbach and the Model Chart of Accounts
 Eugene Schmalenbach (1873- 1955) - was a German academic and economist. He was born in Halver,
and attended the Leipzig College of Commerce starting in 1898 Schmalenbach was a professor at the
University of Cologne. He claimed that important information could be gained from a firm’s accounts.
The results of one’s firm should show through- flows more usefully than balances. What he termed
“Dynamic Balances” were to be promptly and regularly prepared and presented, so that external
changes and internal efficiencies could be gauged. Inter- firm comparisons were also be facilitated.
 Income Tax - In the year 10 CE, Xin Dynasty’s Emperor Wang Mang instituited an unprecedented tax-
the income tax- at the “rate of 10 % of profits, for professionals and skilled labor”. To pay weapons and
equipment in preparation for the Napoleonic wars, William Pitt the Younger of Britain levied an income
tax in his budget of December 1798. The 1862 Union Government established the Bureau of
International Revenue to assess personal and corporate income taxes to help finance the Civil War. In
1943, the US Congress passed income tax withholding as the only way to collect on high tax rates to
fund World War II.
 In 8500 BC Merchants begin to use bullae and tokens to protect shipments. A merchant would take
one token for each item in the shipment and encase the tokens in a ball of clay. The ball would be dried
in the sun, given to the boatman, and then broken by the buyer on the other end of the transaction.
The buyer would match the tokens with the items in the shipment, to verify that everything sent was
accounted for.
 3600 B.C.
 Record keeping already common from Mesopotamia, China, India to Central and South America.
 The oldest evidence of this practice was the “clay tablet”
  The rulers of these civilisations used accounting to keep track of the costs of labor and materials used
in building structures as in the case of the pharaohs of Egypt in building great pyramids.

MIDDLE AGE
1. Middle Ages

 Arabic numerals were being used as a result of trade allowing columns of numbers to be added and
subtracted.

 Quipu, the way of Inca Empire to keep accounting records.

 The invention of double-entry bookkeeping was the decisive event in European economic history.
2. Florentine Approach

 Earliest Evidence of Bookkeeping - The earliest form of business bookkeeping in Florence, France was
evidenced by the bank ledger fragments of 1211 (transcribed in 1887 by Pietro Santini) and with the
development of accounting in Tuscany, Italy during 13th century, as evidenced in the account-books or
extracts.

 The account-books are in a “narrative” or “paragraph” form

 The format used in public accounts was in terms of “charge and discharge”

 Emergence of double-entry - It was first witnessed in the “ledgers” of Renieri Fini & Brothers (1296-
1305) and Giovanni Farolfi & Company (1299-1300) Giovanno Farolfi and Company

 A firm of Florentine merchants in Languedoc (Kingdom of France) In partnership of Amatino Manucci

 Double-Entry Bookkeeping - Appears in Farolfi ledger (1299-1300)

 The financial records the firms kept includes the details such as debits and credits and duality of entries
which identified as the oldest known existing examples of double-entry system.
3. Giovanni Farolfi and Company
4. Amatoni Manucci
5. The Method of Venice
6. Savary and Napoleonic Commercial Code

 Napoleonic code is the French civil code, confirmed under Napoleon Bonaparte on March 1804.

 It was first introduced in ordinance de commerece of 1673

 This legal requirements is an annual fair value statement of position.

INDUSTRIAL REVOLUTION AND INFORMATION AGE/PRESENT:
Industrial Revolution
- This revolution occurred in England from the mid-18th to the mid-19th century
- It changed the method of producing commercial goods from the handicraft method to the factory
system.
 - With this change, came the problem of costing for a large volume of products.
Cost Accounting
- The specialized field of cost accounting emerged to meet this need for the analysis of various costs.
(Cost accounting emerged para masolusyonan yung sinabi kanina which is yung problem about costing
for a large volume of products.)
- Cost accounting is the recording of all the costs incurred in a business in a way that can be used to
improve its management.

- Variable costs vary based on the amount of output produced. Variable costs may include labour,
commissions, and raw materials. Fixed costs remain the same regardless of production output. Fixed
costs may include lease and rental payments, insurance, and interest payments
Corporate Organization
- During the Industrial Revolution, there are so many businesses that are expanding their business
operations, and they need large amount of funds to build factories and purchase machinery.
- The said needs resulted to the development of corporate form of organization. (to sell stocks or shares)
- When they develop corporation form of organization, they will be able to expand their business
operations by selling the portion of their business using stocks or shares to the investors.
Depreciation
- The concept of depreciation was largely ignored until 1909 US corporate income tax law.
- 1909 US corporate income tax law permitted a deduction for depreciation charges in the calculation of
taxable income.
- By the beginning of the 20th century, some managers began to use depreciation to smooth reported
earnings.
Consolidated Financial Statements
Income Tax
Electronics Spreadsheet
Information age: Information systems
THINGS TO REMEMBER
ASSETS = LIABILITY AND EQUITY

5 [E]LEMENTS OF FINANCIAL POSITION

NORMAL BALANCE - the balance of the elements on T account and Balance sheet. DR/CR
(3) E of Financial position
DEBIT AND RARELY CREDIT ASSET
CREDIT LIABILITY
CREDIT EQUITY
(2) E of performance : Found in INCOME STATEMENT / profit and loss comprehensive income statement of
performance

CREDIT INCOME 
DEBIT EXPENSES

*FAR DISCUSSES MERCH AND MANUFACTURING BUSINESS ONLY*

ELEMENTS OF FINANCIAL POSITION

ASSETS 
Asset refers to anything owned by the business. There needs to be a right of ownership.
You will rarely see an asset to have a credited balance because the usual balance is debit. 
Future benefits may mean that the asset may produce income or you can use it in the conduct of your own
business.
Present economic resources controlled by the entity as a result of past events (Has economic benefits) Future
benefits classify it as an asset 
Ex. If you buy a pen, you will still be able to use it in the future because it’s long lasting, that is why it is an
asset. But you will not be able to classify it as an asset anymore the moment it runs out of ink. 
CURRENT ASSETS 
These should be consumable within 1 year/12 months or the normal operating cycle of the company. Keep in
mind that the length of the normal operating cycle depends on the company.  The normal operating cycle is
the length of time the company uses cash to purchase assets in the form of  inventories and convert it into
cash. Meaning, anything that is convertible into cash.
CASH
It can be in a form of CURRENCIES, BILLS AND DATED CHECKS/GOOD CHECKS
Dated checks or Good checks are non-defective and acceptable checks that have all the right and needed
information filled and bear the current date. Mind that cash is debited instead of checks. Remember that
POST-DATED CHECKS ARE NOT CASH
CASH EQUIVALENTS
(rarely encountered in FAR because it is tackled in intermediate accounting)
Highly liquid assets which means they are easily converted into cash. 
Investments whose original maturity is 3 months or LESS.  Time deposit classifies as a cash equivalent as long
as it’s 3 months or less as well.
TEMPORARY INVESTMENTS
Another form of liquid asset but the original maturity is more than 3 months but WITHIN 1 year. 
PREPAID EXPENSES
Pre paid means paid in advance but is not yet incurred nor used, it has not yet expired nor yet enjoyed.
Examples include Prepaid supplies, prepaid rent, prepaid load, etc.
SUPPLIES
Consumables that are used and which duty is to be used by the company in terms of the conduct of the
business.
ACCOUNTS RECEIVABLE- (customer’s account/debtor's account) It comes from the sale of inventory or from
rendering service to a customer or entity in return of cash on account.
NOTES RECEIVABLE- (interest bearing/non-interest bearing) If it is collectible within a year or the normal
operating cycle, even if the normal op cycle is 3 months, as long as it is still within one year, it is classifiable as
a current asset. If the normal op cycle is 3 years then it is still a current asset nonetheless.
INSTALLMENT RECEIVABLE
Classified as a current asset because it can be collected within a normal op cycle.
INTEREST RECEIVABLES FROM EMPLOYEES
ADVANCES TO EMPLOYEES
ACCRUED REVENUE- (for purpose of classification it is a current asset)
Revenues earned but not yet received. It means that you have already provided a good or service but the
cash or payment has not yet been received. Ex. The customer wanted a COD type of payment, you have
rendered goods but the payment is yet to come. Ex. Rent Receivable
Difference between accounts receivable and accrued revenue, is that Account receivables are invoices the
business has issued to customers that have not yet been paid, while Accrued Revenue represents money the
business has earned but has not yet invoiced to the customer.
Interest is an example of accrued revenue. The most common example of accrued revenue is the interest
income which is earned on investments but not yet received.
INVENTORIES- (unless it’s service company) Purchases depending on the company’s intention/ item’s purpose.
Items which the company purchases in terms of selling them. For example, a manufacturing company
purchases items they intend to use to manufacture goods they intend to sell.
MANUFACTURING (Raw materials inventory/work in process inventory/ goods in process inventory/ finished
goods inventory )
Work in process inv = work left in inventory. (Unfinished)
Finished goods inv = products that are finished.

MERCHANDISING COMPANY (Merchandise inv)

 Supplies are bought and put in inventory for the purpose of selling them.
NON-CURRENT ASSETS
Things that go way beyond or past a year or the company’s normal operating cycle.
PROPERTY, PLANT AND EQUIPMENT
 (TANGIBLE ASSETS) 
 Land, building, equipment, machinery, tools, delivery trucks, plant, vehicles, delivery equipment
 Anny assets subject to depreciation due to wear and tear but are not consumable
* WHICH MEANS ANYTHING PERMANENT IN NATURE AND IS NOT CONSUMABLE*
Chart of accounts is a list used by the business. It depends on the company. If there is no chart of account, you
are advised to make one including an accounting manual that the company will be able to use as well.
LONG TERM INVESTMENT
 (won't be encountered in FAR)
Property replacement fund, investment in bonds, investments in equity securities. Collectible past a year.
INTANGIBLES
Assets that are not in physical form such as
Patent, if you invented something (like an interface or software) and you do not want anybody else to claim or
use it to create their ideas.
Franchise, you can own your own brand and allow people to use it. (Jollibee or 7/11)
Copyright, Inclusive right granted to the author or composer.
Goodwill
Trademark
OTHER NON-CURRENT ASSETS
Cash in closed banks and non-current receivables as long as it’s past a year or past the norm op-cycle.

LIABILITIES
The normal balance is credit. Present obligations of an entity to transfer an economic resource as a result of
past events. They are duties that the company cannot avoid. Duties on how they will settle liabilities. (through
rendering service or from accounts payable to notes payable.) 
CURRENT LIABILITIES
ACCOUNTS PAYABLE
  (suppliers account or investors account)
NOTES PAYABLE
INTEREST PAYABLE
ACCRUED EXPENSES
 (used but not yet paid for it)
Example, you have used a rented building in January to be paid the following month.
UNEARNED REVENUE
 (already received payment but not yet rendered our service)
Example, the customer ordered a product that is yet to be delivered but they paid for it already using their
gcash.
BANK OVERDRAFT
 (rarely happens)
When you have a 10K deposit in a bank but you issued a check for 12k that means you will have a negative
cash balance, (2k)
ADVANCES FROM EMPLOYEES
(sometimes due to employees or payable to employees)
WITHHOLDING TAX PAYABLE
When companies have employees they will pay for their salaries but the BIR will take a part of it for tax.
(KALTAS, will be remitted by the company)
INCOME TAX PAYABLE
VAT PAYABLE

SSS PREMIUM PAYABLE

Employer’s share= if they deduct 350, the tdel will contribute 350. 
SSS Contribution expense (ma’am’s contribution is tdel’s expense as well
The amount remitted is called SSS premium payable

PHIL HEALTH PREMIUMS PAYABLE

NON CURRENT LIABILITIES

Payables that are not due in a year

BONDS PAYABLE
MORTGAGE NOTES PAYABLE
PENSIONS PAYABLE
LEASE LIABILITY
DEFERRED TAX LIABILITY
 (even if they are to be paid next year)

EQUITY
The normal balance is credit. Residual interest in the assets of the entity after deducting all of its liabilities. A-
L= EQUITY
SINGLE PROPRIETORSHIP
CAPITAL
LEONA, CAPITAL

PARTNERSHIP
 (NO. OF CAPITAL ACCOUNT IS SAME WITH NO. OF PARTNERS)
PARTNER’S EQUITY
LEONA, CAPITAL
LEILA, CAPITAL

CORPORATION 
(ONLY 1 ACCOUNT TITLE OUT OF ALL SHAREHOLDERS. EITHER PREFERENCE OR ORDINARY)
SHAREHOLDER’S EQUITY (STOCKHOLDER’S)
PREFERENCE SHARES
ORDINARY SHARES
SHARE PREMIUMS
RETAINED EARNINGS
ELEMENTS OF PERFORMANCE (Found in INCOME STATEMENT / profit and loss comprehensive income
statement of performance)
INCOME
 The normal balance is credit
 Increase in asset, increase in equity
 When the company render services
  When they sold inventories
 Do not forget that assets will increase and liability decreases but it should not come from the
contributors of the shareholders.
 If it is from a regular activity it is called revenue
 Retainers fee = professional fee
 Interest income 
 Rent income
 Subscriptions revenue (netflix, magazine)
 Commissions earned/income

If the laundry shop sold their machine it is not a regular activity then it is called gains
GAINS ARE INCOME BUT IT DID NOT COME  FROM THE REGULAR ACTIVITY
Gains are from sales of old washing machines and revenue is when people rented their washing machine.
INCOME ENCOMPASSES REVENUE AND GAIN

EXPENSES
The normal balance is debit. Decrease in assets, decrease in equity. When the company incurred expenses
they will decrease equity

Expenses 
 Regular activity
 Salaries expense
 Rent expense
 Utilities expense
 Transportation expense
 Supplies expense
 SSS contribution expense
 Depreciations
 Amortications

Losses
  Expense but did not arise from the regular activity
 Loss from sale of equipments
 Loss from exchanges

ELEMENTS OF FINANCIAL POSITION

1. ASSETS
 You will rarely see an asset to have a credited balance because the usual balance is debit.
 Asset refers to anything owned by the business. Future benefits may mean that the asset may
produce income or you can use it in the conduct of your own business
 Present economic resources controlled by the entity as a result of past events (Has economic
benefits) Future benefits classify it as an asset

Ex. you can still use your ballpen in the future that is why it is an asset but as soon as it ran out of ink
you cannot classify it as an asset.

 There needs to be right of ownership.

CURRENT ASSETS

Should be consumable within one year or within 12 months or the normal operating cycle of the
specific company. Ex. It varies and depends on the company. The length of time the company uses
cash to purchase asset in a form of  inventories and converting it into cash.

Convertible to cash.

-cash
 Currencies
 Bills
 Dated checks/ Good checks (bears the current date, information filled, non-defective,
acceptable)
Debit cash instead of checks
POST-DATED CHECKS AREN’T CASH

- cash equivalents (rarely encounter in FAR but in intermediate accounting)

 Highly liquid asset (easily converted to cash)
 Investments whose orig maturity is 3months or less
 Time deposit classify as one as long as it’s 3months or less (no cash but cash equiv.

-prepaid expenses
Not an expense. Prepaid means paid before or in advanced but not yet incurred or used. It has not yet
expired. Not yet enjoyed.
Supplies is included (prepaid supplies)
Ex. prepaid rent, prepaid load

-Supplies

Consumable things for the purpose of being used by the company

Used in the conduct of their business

-temporary investments
 Also liquid asset. More than 3 months but within 1 year

(NOTE!!! LONG TERM INVESTMENTS MORE THAN 1 year)

-accounts receivable (customer’s account/debter’s account)

From the sale of inv or rendering service

-notes receivables (interest bearing/non-interest bearing)

 (if it is collectible within a year or the normal operating cycle (even if the normal op cycle is 3
months, it is still within one year)
-Installment receivables are classified as current asset because it can be collected within a normal op
cycle.
-Interest receivables from employees
-Advances to employees

-Accrued revenues (for purpose of classification it is a current asset)

 Revenues earned but not yet received
 Interest is an example of accrued revenue

-Inventories (unless it’s service company)

Purchases depending on the company’s intention/ item’s purpose.

 Items which the company purchases in terms of selling them

 Manufacturing company purchases items they intend to use to manufacture goods they intend
to sell

MANUFACTURING (Raw materials inv/work in process inv/ goods in process inv/ finished goods inv )

Work in process inv = work left in inventory. Unfinished

Finished goods inv = products are finished

MERCHANDISING COMPANY (Merchandise inv)

NON-CURRENT ASSETS
Past a year or past the company’s normal op cycle
-Property, plant and equipment (TANGIBLE ASSETS)
Depends on the company’s chart of account. If there is no chart of account, make one. Make an
accounting manual as well.
 Land, building, equipment, machinery, tools, delivery trucks, plant, vehicles, delivery
equipment
(PERMANENT IN NATURE. NOT CONSUMABLE)
 Subject to depreciation due to wear and tear but are not consumable

Chart of accounts
List use by the business

-Long term investment (won't be encountered in FAR)

Property replacement fund, investment in bonds, investments in equity securities

-INTANGIBLES
Patent (if you invented something)
Franchise (allowed to use a brand name JOLLIBEE 7/11)
Copyright (author, composer),
Goodwill
Trademark
Computer Software (accounting softwares), secret processes

-Other non-current assets

Cash in closed banks, non-current receivables

FAR DISCUSSES MERCHANDISING and SERVICE BUSINESS

2. LIABILITIES
The normal balance is credit. Present obligations of an entity to transfer an economic resource as a
result of past events. They are duties that the company cannot avoid. Duties on how they will settle
liabilities. (thru rendering service or from accounts payable to notes payable)

CURRENT LIABILITIES

-accounts payable
-notes payable
-interest payable
-Accrued expenses (used but not yet paid for it)
-unearned revenues (already received payment but not yet rendered our service)
-bank overdraft (rarely happens)
When u have a deposit in a bank for 10k but u issued a check for 12k that means you will have a
negative cash balance.
-advances from employees
Withholding tax payable
When companies have employees they will pay for their salaries but the BIR will take a part of it for
tax. (KALTAS, will be remitted by the company)
-income tax payable
-Vat payable
-sss premium payable
Employer’s share= if they deduct 350, the tdel will contribute 350.
SSS Contribution expense (ma’am’s contribution is tdel’s expense as well
The amount remitted is called SSS premium payable
PHIL HEALTH premiums payable

NON CURRENT LIABILITIES

Payables not due in a year
-bonds payable
-mortgage notes payable
-pensions payable
-lease liability
Deferred tax liability (even if they are to be paid next year

3. EQUITY
The normal balance is credit.
Residual interest in the assets of the entity after deducting all of its liabilities
asset-liability=equity

SINGLE PROPRIETORSHIP

CAPITAL
LEONA, CAPITAL

PARTNERSHIP (NO. OF CAPITAL ACC SAME WITH NO. OF PARTNERS)

PARTNER’S EQUITY
LEONA, CAPITAL
LEILA, CAPITAL

CORPORATION (ONLY 1 ACC TITLES OF ALL SHAREHOLDERS EITHER PREFERENCE OR ORDINARY)

SHAREHOLDER’S EQUITY (STOCKHOLDER’S)

PREFERENCE SHARES
ORDINARY SHARES
SHARE PREMIUMS
RETAINED EARNINGS

ELEMENTS OF PERFORMANCE (Found in INCOME STATEMENT / profit and loss comprehensive

incomestatement of performance)

1. INCOME
The normal balance is credit
Increase in asset, decrease in equity
When the company render services
When they sold inventories
Do not forget that asset will increase and liability decreases but it should not come from the
contributors of the shareholders.
If it is from a regular activity it is called revenue
Retainers fee = professional fee
Interest income
Rent income
Subscriptions revenue (netflix, magazine)
Commissions earned/income

If the laundry shop sold their machine it is not a regular activity then it is called gains
GAINS ARE INCOME BUT IT DID NOT COME  FROM THE REGULAR ACTIVITY
Gain from sales of old
INCOME ENCOMPASSES REVENUE AND GAIN

2. EXPENSES
The normal balance is debit. Decrease asset ??? but did not pay cash from the business. ???
When the company incurred expenses they will decrease equity

Expenses
Regular activity
Salaries expense
Rent expense
Utilities expense
Transportation expense
Supplies expense
SSS contribution expense
Depreciations
Amortications

Losses
Expense but did not arise from the regular activity
Loss from sale of equipments
Loss from exchanges

ASSETS = LIABILITY AND EQUITY

THE ELEMENTS OF FINANCIAL STATEMENTS
EFFECTS OF TRANSACTIONS
Examples of transaction
Bought equipment for 300k

2 types of transaction
1. External Transactions
-Involving the entity and another entity
It involves the company and the bank (example)

Accounting Equation
1.Assets = Liabilities + Equity. Assets- Liabilities = answer – to answer in equity
(minus)

2. Liabilities=Assets-OE Capital + Income-Expense (If given and kulang ang

capital)

3. Equity = Assets – Liabilities.

Income added to capital

Expense deduct it to Capital

FORMULA!!!
Accounting Equation
1.Assets = Liabilities + Equity. Assets- Liabilities = answer – to answer in equity
(minus)

2. Liabilities=Assets-OE Capital + Income-Expense (If given and kulang ang

capital)

3. Equity = Assets – Liabilities.

Income added to capital

Expense deduct it to Capital

THINGS TO REMEMBER
ASSETS = LIABILITY AND EQUITY

5 [E]LEMENTS OF FINANCIAL POSITION

NORMAL BALANCE - the balance of the elements on T account and Balance sheet. DR/CR

(3) E of Financial position

DEBIT AND RARELY CREDIT ASSET
CREDIT LIABILITY
CREDIT EQUITY

(2) E of performance : Found in INCOME STATEMENT / profit and loss comprehensive income
statement of performance

CREDIT INCOME
DEBIT EXPENSES

*FAR DISCUSSES MERCH AND MANUFACTURING BUSINESS ONLY*

ELEMENTS OF FINANCIAL POSITION

ASSETS

Asset refers to anything owned by the business. There needs to be a right of ownership.
You will rarely see an asset to have a credited balance because the usual balance is debit.

Future benefits may mean that the asset may produce income or you can use it in the conduct of
your own business.

Present economic resources controlled by the entity as a result of past events (Has economic
benefits) Future benefits classify it as an asset
Ex. If you buy a pen, you will still be able to use it in the future because it’s long lasting, that is
why it is an asset. But you will not be able to classify it as an asset anymore the moment it runs out of
ink.

CURRENT ASSETS
These should be consumable within 1 year/12 months or the normal operating cycle of the
company. Keep in mind that the length of the normal operating cycle depends on the company.  The
normal operating cycle is the length of time the company uses cash to purchase assets in the form
of  inventories and convert it into cash. Meaning, anything that is convertible into cash.

CASH

It can be in a form of CURRENCIES, BILLS AND DATED CHECKS/GOOD CHECKS

Dated checks or Good checks are non-defective and acceptable checks that have all the right and
needed information filled and bear the current date. Mind that cash is debited instead of checks.
Remember that POST-DATED CHECKS ARE NOT CASH

CASH EQUIVALENTS
(rarely encountered in FAR because it is tackled in intermediate accounting)

Highly liquid assets which means they are easily converted into cash.
Investments whose original maturity is 3 months or LESS.  Time deposit classifies as a cash
equivalent as long as it’s 3 months or less as well.

TEMPORARY INVESTMENTS
Another form of liquid asset but the original maturity is more than 3 months but WITHIN 1 year.

PREPAID EXPENSES
Pre paid means paid in advance but is not yet incurred nor used, it has not yet expired nor yet
enjoyed. Examples include Prepaid supplies, prepaid rent, prepaid load, etc.

SUPPLIES
Consumables that are used and which duty is to be used by the company in terms of the conduct of
the business.

ACCOUNTS RECEIVABLE
(customer’s account/debtor's account)
It comes from the sale of inventory or from rendering service to a customer or entity in return of cash
on account.

NOTES RECEIVABLE
(interest bearing/non-interest bearing)
If it is collectible within a year or the normal operating cycle, even if the normal op cycle is 3 months,
as long as it is still within one year, it is classifiable as a current asset. If the normal op cycle is 3 years
then it is still a current asset nonetheless.

INSTALLMENT RECEIVABLE
Classified as a current asset because it can be collected within a normal op cycle.
INTEREST RECEIVABLES FROM EMPLOYEES

ADVANCES TO EMPLOYEES

ACCRUED REVENUE
(for purpose of classification it is a current asset)
Revenues earned but not yet received. It means that you have already provided a good or service but
the cash or payment has not yet been received. Ex. The customer wanted a COD type of payment, you
have rendered goods but the payment is yet to come. Ex. Rent Receivable

Difference between accounts receivable and accrued revenue, is that Account receivables are
invoices the business has issued to customers that have not yet been paid, while Accrued Revenue
represents money the business has earned but has not yet invoiced to the customer.
Interest is an example of accrued revenue. The most common example of accrued revenue is the
interest income which is earned on investments but not yet received.

INVENTORIES
(unless it’s service company)
Purchases depending on the company’s intention/ item’s purpose. Items which the company
purchases in terms of selling them. For example, a manufacturing company purchases items they
intend to use to manufacture goods they intend to sell.

MANUFACTURING (Raw materials inventory/work in process inventory/ goods in process inventory/

finished goods inventory )

Work in process inv = work left in inventory. (Unfinished)

Finished goods inv = products that are finished.

MERCHANDISING COMPANY (Merchandise inv)

Supplies are bought and put in inventory for the purpose of selling them.

NON-CURRENT ASSETS
Things that go way beyond or past a year or the company’s normal operating cycle.

PROPERTY, PLANT AND EQUIPMENT

(TANGIBLE ASSETS)

 Land, building, equipment, machinery, tools, delivery trucks, plant, vehicles, delivery
equipment
 Anny assets subject to depreciation due to wear and tear but are not consumable

* WHICH MEANS ANYTHING PERMANENT IN NATURE AND IS NOT CONSUMABLE*

Chart of accounts is a list used by the business. It depends on the company. If there is no chart of
account, you are advised to make one including an accounting manual that the company will be able
to use as well.

LONG TERM INVESTMENT

(won't be encountered in FAR)
Property replacement fund, investment in bonds, investments in equity securities. Collectible past a
year.

INTANGIBLES
Assets that are not in physical form such as
Patent, if you invented something (like an interface or software) and you do not want anybody else to
claim or use it to create their ideas.
Franchise, you can own your own brand and allow people to use it. (Jollibee or 7/11)
Copyright, Inclusive right granted to the author or composer.
Goodwill
Trademark

OTHER NON-CURRENT ASSETS

Cash in closed banks and non-current receivables as long as it’s past a year or past the norm op-cycle.

LIABILITIES
The normal balance is credit. Present obligations of an entity to transfer an economic resource
as a result of past events. They are duties that the company cannot avoid. Duties on how they
will settle liabilities. (through rendering service or from accounts payable to notes payable.)

CURRENT LIABILITIES

ACCOUNTS PAYABLE
(suppliers account or investors account)
NOTES PAYABLE
INTEREST PAYABLE

ACCRUED EXPENSES
(used but not yet paid for it)
Example, you have used a rented building in January to be paid the following month.

UNEARNED REVENUE
(already received payment but not yet rendered our service)
Example, the customer ordered a product that is yet to be delivered but they paid for it already using
their gcash.

BANK OVERDRAFT
(rarely happens)
When you have a 10K deposit in a bank but you issued a check for 12k that means you will have a
negative cash balance, (2k)

ADVANCES FROM EMPLOYEES

(sometimes due to employees or payable to employees)

WITHHOLDING TAX PAYABLE

When companies have employees they will pay for their salaries but the BIR will take a part of it for
tax. (KALTAS, will be remitted by the company)

INCOME TAX PAYABLE

VAT PAYABLE

SSS PREMIUM PAYABLE

Employer’s share= if they deduct 350, the tdel will contribute 350.
SSS Contribution expense (ma’am’s contribution is tdel’s expense as well
The amount remitted is called SSS premium payable

PHIL HEALTH PREMIUMS PAYABLE

NON CURRENT LIABILITIES

Payables that are not due in a year

BONDS PAYABLE
MORTGAGE NOTES PAYABLE
PENSIONS PAYABLE
LEASE LIABILITY
DEFERRED TAX LIABILITY
(even if they are to be paid next year)

EQUITY
The normal balance is credit. Residual interest in the assets of the entity after deducting all of
its liabilities. A-L= EQUITY
SINGLE PROPRIETORSHIP

CAPITAL
LEONA, CAPITAL

PARTNERSHIP
(NO. OF CAPITAL ACCOUNT IS SAME WITH NO. OF PARTNERS)

PARTNER’S EQUITY
LEONA, CAPITAL
LEILA, CAPITAL

CORPORATION
(ONLY 1 ACCOUNT TITLE OUT OF ALL SHAREHOLDERS. EITHER PREFERENCE OR ORDINARY)

SHAREHOLDER’S EQUITY (STOCKHOLDER’S)

PREFERENCE SHARES
ORDINARY SHARES
SHARE PREMIUMS
RETAINED EARNINGS

ELEMENTS OF PERFORMANCE (Found in INCOME STATEMENT / profit and loss comprehensive income
statement of performance)

INCOME
 The normal balance is credit
 Increase in asset, increase in equity
 When the company render services
 When they sold inventories
 Do not forget that assets will increase and liability decreases but it should not come
from the contributors of the shareholders.
 If it is from a regular activity it is called revenue
 Retainers fee = professional fee
 Interest income
 Rent income
 Subscriptions revenue (netflix, magazine)
 Commissions earned/income

If the laundry shop sold their machine it is not a regular activity then it is called gains
GAINS ARE INCOME BUT IT DID NOT COME  FROM THE REGULAR ACTIVITY
Gains are from sales of old washing machines and revenue is when people rented their
washing machine. INCOME ENCOMPASSES REVENUE AND GAIN
 EXPENSES
The normal balance is debit. Decrease in assets, decrease in equity. When the company
incurred expenses they will decrease equity

Expenses
 Regular activity
 Salaries expense
 Rent expense
 Utilities expense
 Transportation expense
 Supplies expense
 SSS contribution expense
 Depreciations
 Amortications

Losses
 Expense but did not arise from the regular activity
 Loss from sale of equipments
 Loss from exchanges

QUIZZES

Accounting Assumptions
ACCOUNTING ASSUMPTIONS- These are the notions or fundamental premise
on which the accounting process is based.

RELEVANCE- It is the capacity of information to make a difference in a decision by helping users form
predictions about the outcome of past, present and future events or confirm and correct prior
expectations.

CONCEPTUAL FRAMEWORK OF ACCOUNTING

Conceptual Framework of Accounting It is the summary of terms and concepts that underlie the
preparation and presentation of financial statements
UNDERSTANDABILITY
Understandability The Accountant should use terms and concepts that are commonly used in
Accounting and recognizable by users of financial statements

Fiscal Year

FISCAL YEAR It pertains to the time period or accounting year that starts in any month and ends after
twelve months.

Accounting Entity

ACCOUNTING ENTITY Under this assumption, the business is considered as separate and distinct from
its owner/s.

Going Concern

GOING CONCERN This assumption states that the life of the business is indefinite.

External Transaction
EXTERNAL TRANSACTION These are the transactions involving the entity and another entity

 financial position
FINANCIAL POSITION Assets, liabilities and owner’s equity are considered as elements of

Solvency

SOLVENCY
It pertains to availability of cash over a long-term to meet financial commitments when thy fall due

Private Accounting

PRIVATE ACCOUNTING
It is the area of Accounting which refers to employment of accountants in business entities in various
capacities as chief accountant, cost accountant or internal auditor on a salary basis.

Financial Accounting
FINANCIAL ACCOUNTING It is the branch of accounting that pertains to the recording of transactions
and eventual preparation of financial statements.
FEEDBACK VALUE It is the ability of information to allow confirmation or correction of earlier
expectations.

REPORTING ENTITY an entity that is required or chooses to prepare Financial Statements  which can
be a single entity or a portion of an entity or more than one entity.

Liabilities

LIANILITIES Present obligations of an entity to transfer an economic resource as a result of past

events

AUDITING This is the area of Accounting in which Accountants need to be CPAs and accredited with
BOA and are engaged in Tax, Auditing and MAS.

Consolidated Financial Statements

CONSOLIDATED FINANCIAL STATEMENTS These are the financial statements of a reporting entity that
comprises both the parent and subsidiaries.

DERECOGNITION It is the removal of all or part of a recognized asset or liability from the statement of
financial position

FINANCIAL STATEMENTS These are the means by which the information accumulated and processed
in financial accounting is  periodically communicated to the users.

Board of Accountancy

BOARD OF ACCOUNTANCY It is the body authorized by law to promulgate rules and regulations
affecting the practice of the Accountancy Profession in the Philippines. (No acronym please)

The concept of recognition is applied in which of the following Instances?

ANSWER: An entity includes the effects of an event in the financial statements through a journal
entry.

Which of the following events is not considered an exchange or reciprocal transfer?

ANSWER:  Payment of taxes

Entity A buys bananas and converts them into banana chips. The conversion of bananas into banana
chips is a (an)
ANSWER: internal event

Which of the following is applicable to Managerial Accounting?

ANSWER: Prepares Special Reports

In assessing the financial position of an entity, what indicates the amount of the assets financed by
creditors and owners.
 ANSWERS:

Financial Structure

Which of the following types of information is not a focus of the primary objective of financial
reporting?
ANSWER: information that helps a manager assess the efficiency and effectiveness of operations

COMPLETENESS Which of the following is a characteristic of faithful representation?

Predictive value
It is the attribute  that relates to information that is relevant.

All of the following are enhancing characteristics except

 ANSWER: Verifiability
Verifiability

 Consistency
Consistency


Understandability
Understandability


Comparability

Understandability Which of the following characteristics is fulfilled by separating current and

noncurrent assets on the balance sheets?

Accrual basis of accounting Which of the following terms best describes financial statements whose
basis of accounting recognizes transactions and other events when they occur?

Going concern assumption Which basic assumption may not be followed when an entity in
bankruptcy reports financial results?

Aggregation Immaterial amounts of similar nature and function shall be grouped or condensed as
one line item in the financial statements. This applies the basic feature of
Additional statements such as environmental reports and value added statements
Which of the following is not a component of a complete set of financial statements?

Accounting Entity What Accounting assumption is violated by the following situation?

Distribution to owners in the forms of drawings or dividends is recognized in the financial statements
as expenses, because it involves outflow of resources embodying economic benefits. 
Asset, Liability and Equity The elements directly related to the measurement of financial position are

Income encompasses both revenue and gain Which statement in relation to income is true?

Obligation It is a duty or responsibility that an entity has no practical ability to avoid.

A decrease in a liability from primary operations Revenue may result from

Cost The Conceptual Framework includes which of the following constraints?

FRSC It was established by the Board of Accountancy in 2006 under the Implementing Rules and
Regulations of the Philippine Accountancy Act 0f 2004.

PICPA It was founded in 1929 as a non-stock corporation with geographical divisions, regions and
chapters all over the country

PRC It is responsible for the administration, implementation and enforcement of regulatory policies
on the regulation and licensing of various professions and occupations under its jurisdiction.

FRSC It was established by the Board of Accountancy under the Implementing Rules and Regulations
of the Philippine Accountancy Act 0f 2004.

PICPA  Its mission is to serve the best interest of the members and the stakeholders while promoting,
upholding, and maintaining high standards in the accountancy profession and protecting public
interest.

PRC It was previously called the Office of the Board of Examiners, which was created by Republic Act
No. 546 on June 17, 1950.

FRSC One of its objectives is to develop, in the public interest, a single set of high quality,
understandable and enforceable accounting standards that require high quality, transparent and
comparable information in financial statements and other financial reporting.
BOA It has the power to issue, suspend, revoke or reinstate the Certificate of Registration for the
practice of the Accountancy profession

PRC Its mission is to deliberately, scientifically and consistently determine the competence of
professionals through the provision of professional standards and judicious issuance of professional
license.

FRSC It is composed of 14 members and a chairman who should be a senior accounting

practitioner.

PICPA It aims to promote and maintain high professional and ethical standards among accountants.

PRC It is a three-man organization attached to the office of the President.

BOA is the specific body mandated by law to promulgate rules and regulations affecting the practice
of Accountancy in the Philippines

PICPA Its vision is to a strong, dynamic and unified professional organization of highly respected,
world class and socially committed certified public accountants worthy of esteem of the Filipino
people.

PICPA It is the national organization of all CPAs in the Philippines.

Arrange the following events in accordance of their occurrence during the evolution of Accounting by
dragging the item into its correct place/order.
People leave in caves and use the walls of caves in keeping track the number of animals they
hunted by making tick marks on the wall

During this time, people were using materials such as twigs and pebbles in accounting for their
commodities.
Accounting records were found in Egyptian, Romans and Greek empires as well as Arabia. Back
then, rulers kept accounting records for taxing and spending on public works.

Egyptians carried on with Accounting records and even invented the first bead and wire abacus.
Transactions were recorded on abacus paper

The auditing profession was born to double check storehouses as to what came in and out the door

The first requirement for businesses to keep accounting records spread across many of the Italian
Republics in the 13th century

A book all about Mathematics, Geometry, and Proportion was published by a Franciscan monk
Accounting really took off during this period as industrial companies sought out to gain financing
and maintain efficiency through operations

The U.S. Generally Accepted Accounting Principles were developed and accounting became
important to reduce the amount of fraud and scandals in businesses.

Transactions are stored in cloud which enable accountants to access information by logging in on-
line.

TEAMWORK Uphold a strong bond of unity, working in the spirit of harmony and commonality.
INTEGRITY Advocate the truth and always conduct themselves at all times with honesty, uprightness
and adherence to sound moral principles.
SOCIAL RESPONSIBILITY Commit to a strong, active and devoted sense of duty to society.
PROFESSIONAL EXCELLENCE Always give their best in anything they do and always see to it that they
are competent and that they possess qualities exceeding the standard requirements.
INNOVATION Apply new ideas to improve performance and continuously promote creativity,
flexibility and resourcefulness.
DISCIPLINE Strictly adhere to the code of professional conduct adopted by PICPA to ensure highest
spiritual, moral and ethical standards.
COMMITMENT Bind themselves to uphold ideals to ensure accomplishment of PIPA’s mission and
vision.
INTEGRITY Accountants should restrict themselves from personal gain or advantage using confidential
information and should avoid manipulating the information and intentional misstatements
TEAMWORK Conduct activities such as seminars, conventions, and sports activity to create bond and
good relationship among its members.
PROFESSIONAL EXCELLENCE Ensure that accountants continue to obtain new knowledge in modern
technology.
INTEGRITY Conduct themselves in a way that will uphold the status and name of the organization.
PROFESSIONAL EXCELLENCE Equip themselves with skills that are not limited only to accounting but
rather as well as in the fields of finance, marketing, management and technology.
1. BULLAE It was considered as the first bill of lading and in which tokens were often sealed.
2. Amatino Manucci He was tagged as the inventor of double-entry bookkeeping and introduced
the Florentine Approach.
3. Eric Nubla He was the first commissioner of PRC.
must be a Dean of a college or university The following are the qualifications of the board member of
BOA except
 1. SOCCI All of the following are accredited national organizations of CPAs except
2. Any scope of Accounting practiceThe chairman of FRSC must be or must have been a senior
accounting practitioner in
3. PUBLIC PRACTICE COMMERCE AND INDUSTRY GOVERNMENT EDUCATION / ACADEME 4
Sectors or Areas of Practice recognized by PICPA

3 Main  Functions of PRC

Executive
Quasi-Judicial
Quasi-Legislative

At least 5 professions regulated by PRC

CERTIFIED PUBLIC ACCOUNTANT
ARCHITECT
PHARMACIST
DENTIST
CIVIL ENGINEER
CLASSIFICATION OF NORMAL BALANCE
ACCOUNT

Advances to Officers CURRENT ASSET DEBIT

Tuition Fees INCOME CREDIT

Accrued Revenues CURRENT LIABILITY CREDIT

Commissions Earned INCOME CREDIT

 CLASSIFICATION OF NORMAL BALANCE
ACCOUNT

Merchandise Inventory CURRENT ASSET DEBIT

Machinery NON-CURRENT ASSET DEBIT

Bank overdraft CURRENT LIABILITY CREDIT

Repairs and Maintenance EXPENSE DEBIT

Expense

Retained Earnings EQUITY CREDIT

Professional Fees INCOME CREDIT

Unearned Revenues CURRENT LIABILITY CREDIT

CLASSIFICATION OF NORMAL BALANCE

ACCOUNT

EXPENSE DEBIT

SSS Contributions
 NON CURRENT ASSET DEBIT
COPYRIGHT

Mortgage Payable NON CURRENT LIABILITES CREDIT

Prepaid Expense CURRENT ASSET DEBIT

Current Assets
Cash. Cash is any medium of exchange that a bank will accept for deposit at face value. It includes
coins, currency, checks, money orders, bank deposits and drafts.
Cash Equivalents. Per PAS No. 7, these are short-term, highly liquid investments that are readily
convertible to known amounts of cash and which are subject to an insignificant risk of changes in
value.
Notes Receivable. A note receivable is a written pledge that the customer will pay the business a
fixed amount of money on a certain date.

Accounts Receivable. These are claims against customers arising from sale of services or goods on
credit. This type of receivable offers less security than a promissory note.

Inventories. Per PAS No. 2, these are assets which are (a) held for sale in the ordinary course of
business; (b) in the process of production for such sale; or (c) in the form of materials or supplies to
be consumed in the production process or in the rendering of services.

Prepaid Expenses. These are expenses paid for by the business in advance. It is an asset because the
business avoids having to pay cash in the future for a specific expense. These include insurance and
rent. These prepaid items represent future economic benefits-assets-until the time these start to
contribute to the earning process; these, then, become expenses.
Non-current Assets
Property, plant and Equipment. Per PAS No. 16, these are tangible assets that are held by an
enterprise for use in the production or supply of goods or services, or for rental to others, or for
administrative purposes and which are expected to be used during more than one period. Included
are such items as land, building, machinery and equipment, furniture and fixtures, motor vehicles
and equipment.
Accumulated Depreciation. It is a contra account that contains the sum of the periodic depreciation
charges. The balance in this account is deducted from the cost of the related asset-equipment or
buildings-to obtain book value.
Intangible Assets. Per PAS No. 38, these are identifiable, nonmonetary assets without physical
substance held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes. These include goodwill, patents, copyrights, licenses, franchises,
trademarks, brand names, secret processes, subscription lists and non-competition agreements

Current Liabilities
Accounts Payable. This account represents the reverse relationship of the accounts receivable. By
accepting the goods or services, the buyer agrees to pay for them in the near future.
Notes Payable. A note payable is like a note receivable but in a reverse sense. In the case of a note
payable, the business entity is the maker of the note; that is, the business entity is the party who
promises to pay the other party a specified amount of money on a specified future date.
Accrued Liabilities. Amounts owed to others for unpaid expenses. This account includes salaries
payable, utilities payable, interest payable and taxes payable.
Unearned Revenues. When the business entity receives payment before providing its customers
with goods or services, the amounts received are recorded in the unearned revenue account
(liability method). When the goods or services are provided to the customer, the unearned revenue
is reduced and income is recognized.
Current Portion of Long-Term Debt. These are portions of mortgage notes, bonds and other long-
term indebtedness which are to be paid within one year from the balance sheet date.
Non-current Liabilities
Mortgage Payable. This account records long-term debt of the business entity for which the
business entity has pledged certain assets as security to the creditor. In the event that the debt
payments are not made, the creditor can foreclose or cause the mortgaged asset to be sold to
enable the entity to settle the claim.
Bonds Payable. Business organizations often obtain substantial sums of money from lenders to
finance the acquisition of equipment and other needed assets. They obtain these funds by issuing
bonds. The bond is a contract between the issuer and the lender specifying the terms of repayment
and the interest to be charged.
Owner's Equity
Capital (from the Latin capitalis, meaning "property"). This account is used to record the original
and additional investments of the owner of the business entity. It is increased by the amount of
profit earned during the year or is decreased by a loss. Cash or other assets that the owner may
withdraw from the business ultimately reduce it. This account title bears the name of the owner.
Withdrawals. When the owner of a business entity withdraws cash or other assets, such are
recorded in the drawing or withdrawal account rather than directly reducing the owner's equity
account. Income Summary. It is a temporary account used at the end of the accounting period to
close income and expenses. This account shows the profit or loss for the period before closing to
the capital account..

Income
Service Income. Revenues earned by performing services for a customer or client; for example,
accounting services by a CPA firm, laundry services by a laundry shop.
Sales. Revenues earned as a result of sale of merchandise; for example, sale of building materials by
a construction supplies firm.

Expenses
Cost of Sales The cost incurred to purchase or to produce the products sold to customers during the
period; also called cost of goods sold.

Salaries or Wages Expense. Includes all payments as a result of an employer-employee relationship

such as salaries or wages, 13th month pay, cost of living allowances and other related benefits.

Telecommunications, Electricity, Fuel and Water Expenses. Expenses related to use of

telecommunications facilities, consumption of electricity, fuel and water.

Rent Expense. Expense for space, equipment or other asset rentals.

Supplies Expense. Expense of using supplies (e.g. office supplies) in the conduct of daily business.

Insurance Expense. Portion of premiums paid on insurance coverage (e.g. on motor vehicle, health,
life, fire, typhoon or flood) which has expired.
Insurance Expense. Portion of premiums paid on insurance coverage (e.g. on motor vehicle, health,
life, fire, typhoon or flood) which has expired.

Depreciation Expense. The portion of the cost of a tangible asset (e.g, buildings and equipment)
allocated or charged as expense during an accounting period.

Uncollectible Accounts Expense. The amount of receivables estimated to be doubtful of collection

and charged as expense during an accounting period.

Interest Expense. An expense related to use of borrowed funds

FAR MIDTERM
LESSON 1: ADJUSTING ENTRIES

Adjusting Journal Entries

- Entries prepared at the end of each accounting period to update some accounts in the Trial Balance so that accounting
records will conform to the accrual basis of Accounting.
Mixed Accounts
- Portion is revenue and still a liability
- Portion is still asset and portion is still an expense.
- Examples: Supplies, Prepaid Insurance, Prepaid Rent, Prepaid Expenses, Unearned Interest, Unearned Revenues, and
all pre- payment.
- Not an Example of Mixed Accounts: Accrues Income and Accrued Expenses.

Accrual Basis of Accounting

- Income is recognized when earned regardless of when it is received and expense is recognized when incurred
regardless of when it is paid. In other words, the timing of cash flows (receipts and disbursements) is ignored in
recognizing revenues and expenses.

Cash Basis
- Revenues is recorded when cash is received and expense is recorded when cash is paid.

Why Adjust? Because of Accrual Basis of Accounting!

- Accounts need to be adjusted to report revenues and expense at the proper period.

Basic Items for Adjustments

> Under Deferrals

a.) Prepaid Expenses (Current Asset)

- Expenses already paid but not yet incurred.
- Advanced Payment of Expenses
- There are Two (2) Methods:
1.) Asset Method (Prepaid Asset) Expired Portion
- Cash is paid in advance for expenses not yet incurred.
- Initial entry involves recording prepaid asset
- Summary: Debit: ______ Expense and Credit: Prepaid ______
2.) Expense Method (Used Portion)
- Cash is paid in advance for expenses not yet incurred.
- Initial entry involves recording an expense account.
- Summary: Debit: Prepaid ______ and Credit: ______ Expense
b.) Unearned Revenues (Unearned Income and Current Liabilities)
- Income already received but not yet earned.
- Advanced Collection of Revenues
- There are Two (2) Methods:
1.) Liability Method (Unearned Revenues) Earned Portion
- Cash is received in advance for revenues not yet rendered.
- Initial entry involves recording a liability account.
- Summary: Debit: Unearned ______and Credit: ______ Income
2.) Income Method (Revenue Method) Unearned Portion
- Cash is received in advance for revenues not yet rendered.
- Initial entry involves recording a revenue account.
- Summary: Debit: ______ Income and Credit: Unearned _______

> Under Accruals

c.) Accrued Revenues/ Income (Current Assets)

- Revenues already earned but not yet received
- Unrecorded Revenues. Example is Accounts Receivable
 - Summary: Debit: ______ Receivable and Credit: ______ Income

d.) Accrued Expenses (Current Liabilities)

- Expenses already incurred but not yet paid (Involved 1 nominal and 1 real account)
- Unrecorded Expenses. Example is Utilities Expense
- Summary: Debit: ______ Expense and Credit: ______ Payable

e.) Depreciation (Contra- Asset)

- The portion or amount of property, plant and equipment allocated to expense in each Accounting Period.
- Because of frequently using or not using of PPE’s. (All PPE’s depreciate except Land.)
- Computation of Depreciation Using Straight-line Method: Cost – Residual Value (Scrap value/Salvage value)
Estimated life
- Summary: Debit: Depreciation Expense-_____ and Credit: Accumulated Depreciation-_____

f.) Doubtful Accounts/Bad Debts/Uncollectible Accounts (Contra- Asset)

- Accounts receivables that are no longer collectible or estimated to be uncollectible.
- Methods of Computing Doubtful Accounts: Certain Percentage of Sales; Certain Percentage of Accounts
Receivable; and Aging of Accounts receivable.
- Composed of one temporary and one is permanent
- Summary: Debit: Doubtful Accounts Expense and Credit: Allowance for Doubtful Accounts

Notes:
> Accruals (Acc)
- Expense occurred but not yet reported (Ex: Interest or loans) or the recognized revenues and expenses when earned or
incurred but not when cash is received or paid.
> Deferrals (Def)
- Payment made in one accounting period but not yet reported until the next accounting period. (Ex: Insurance
premiums, subscriptions)
> Business Documents- where we based our entries
- Examples: Official Receipts, Checks (paid), Cash Voucher, and Purchase invoice

> Always is Adjusting Entries there are:

a.) Permanent/ Real Accounts: Assets, Liabilities, Equity
b.) Temporary Accounts/ Nominal Accounts: Revenue and Expenses

- There are NO INITIAL ENTRY FOR CASH in adjusting entries!

a.) Income Statement- Revenues and Expense (Pag Temporary Accounts kino-closed)

b.) Balance Sheet- Assets, Liabilities and Equity

LESSON 2: COMPUTATION OF PAYMENT FOR ACCRUED EXPENSES

FORMULAS: (Yung naka blue yung nasa summary ni mam sa ppt)

* Beginning Balance = Beg Balance + Payments – Expense (Dito mo gamitin yung algebra)
* End/ Prepaid Expense End= Prep Expense Beg + Payment - Expense

1.) Payment for Expense or Cash Paid

 Payment for Expense = Prepaid Expense, End + Expense -- Prepaid Expense, Beg

2.) Expense (Gastos)

 Expense = Prepaid Expense, Beg + Payment-- Prepaid Expense, End

3.) Payment for Rent Expense or Cash Paid

 Payment for Rent Expense = Prepaid Rent, End + Rent Expense -- Prepaid Rent, Beg

* Under Accrued:

4.) Payment for Salaries (Payment for Royalty)

 Payment for Salaries = Accrued Salaries, Beginning + Salaries Expense -- Accrued Salaries, End

5.) Salaries Expense

 Salaries Expense = Accrued Salaries, End + Payment for Salaries -- Accrued Salaries, Beg

~ Under Accrued/ Use only when accrued are available: Compute the interest paid during the year:

6.) Payment for Interest Expense during the year (Payment for Expenses) “INTEREST PAID”

 Payment for Expense = Accrued Interest Expense, Beg (Jan)+ Interest Expense -- Accrued Interest Expense, End
(Dec)
 Payment for Expenses = Accrued Expense, Beg + Expense -- Accrued Expense, End

7.) Cash receipts from revenues (Payment for Expenses)

 Cash receipts from revenues = Accrued Income, Beg + Income or Revenues -- Accrued Income, End
8.) Expenses

 Accrued Salaries Payable/ Expenses = Accrued Expense, End + Payment -- Accrued Expense, Beg

9.) Revenues

 Service Receivable/Revenues = Accrued Income, End + Cash Received -- Accrued Income, Beg

~ Under Revenues and Unearned Revenues: used only when for revenues

10.) Cash Receipts

 Cash Receipts = Unearned Revenues, End + Revenues earned -- Unearned Revenues, Beg

11.) Revenues

 Revenues = Unearned Revenues, Beg + Cash Received -- Unearned Revenues, End

LESSON3: WORKSHEET

 A worksheet paper used to facilitate the preparation of Financial Statements, Adjusting Entries and Closing
Entries.
 Not permanent ACCOUNTING RECORD.
 Used only by Accountants for convenience.
 Optional Only.
 We are cross putting here in worksheet.

STEPS in PREPARING THE WORKSHEETS:

1st Step: Transfer the contents of The Trial Balance in the Worksheet

2nd Step: Enter the Adjustments

3rd Step: Compute the adjusted balance of each account and transfer in the adjusted column (Add both debit and Credit
and subtract id there are debit and credit in an account)

4th Step: Extend the adjusted balances of Revenues and Expenses in the Income Statement

5th Step: Extend the adjusted balances of Assets, Liabilities and Capital in the SFP

LESSON 4: Preparation of Income Statement, Statement of Changes in Equity, Statement of Financial Position, Statement
of Cash Flows, Closing Entries, and Reversing Entries

I. Income Statement (FROM HIGHEST TO LOWEST BUT LAST YUNG MISCELLANEOUS)

- Shows the performance of an entity for a given period of time.
- Shows the result of operations for a given period of time whether it’s loss or profit.
- Shoes the following: Income, Expense, Profit or loss.
- Operating Profit/ Income from operations= Profit-Operating Expenses. Finance Cost= Interest Expense.
a. Income- shows the revenues and gains. Revenues arise from the performance of the business while Gains
arise from the sales of asset.
b. Expense- shows expenses and loss.
c. Profit or loss- if revenues is higher, it is profit while if expenses is higher, it is loss.

II. Statement of Changes in Equity

- Shows the summary of changes in owner’s
equity
- Shows the following:
 a. Beginning capital
b. Additional investments
c. Profit or less
d. Withdrawals
e. Ending Capital

EX:

III. Statement of Financial Position

- Shows the financial position of an entity as of a
given date.
- Shows the assets, liabilities and equity.
- Balance Sheet
- Trade and Other Payables: Payables and unearned.
- 2 Forms of Statement of Financial Position
a. Report Form- Downward sequence
Assets
Liabilities
Owner’s Equity
b. Account Form
- Assets on the left side while Liabilities
& Owner’s Equity on the right
side.

IV. Statement of Cash

Flows
- Provides information about the
cash receipts and cash payments
of an entity during a period.
 - Provides information about the sources (cash inflows) and uses (cash outflows) of cash of an entity during a period.
- Sources of Uses of Cash
a. Operating- lahat ng galing sa income statement
b. Investing- acquisition of sales of non-current assets
c. Financing- Pag loans and withdrawals.

A. Operating Activities: B. Investing Activities C. Financing Activities

 Cash receipts from  Cash receipts from  Cash receipts from
- Rendering of services - Cash sale of PPE and other - Investments from the
- Cash sale of Merchandise/goods Non-Current Assets owner
- Collection of trade Accounts and Notes Receivables - Collection of Non-trade - Proceeds of loan
- Receipts from fees, royalties and other revenues Receivables (Advances of  Cash disbursements for
 Cash disbursements for employees, subsidiaries, - Owner’s withdrawals
- Cash purchase of merchandise damage or losses, dividends - Payment of loans
- Payment of Expenses and interest receivable, tax)
- Payment to suppliers  Cash disbursements for
- Payment for supplies - Cash purchase of PPE and
- Payment for Prepaid expenses other non-cash assets
- Payment for Interest - Payments for granting of
loans

 Two Methods of Preparing the Statement of Cash Flows

- Direct Method
- Indirect Method
Net Profit
Adjustments for:
Non-Cash Expenses (Depreciation)
(Increases)Decreases in Currents Assets
 Increases (Decreases) in Current Liabilities

V. Closing Entries- Entries prepared at the end of the Accounting period to remove the balances of temporary
accounts and transferred them to the capital or equity account.
- To get that income summary for capital just subtract all expenses in the total revenues.

 Temporary Accounts or Nominal

Accounts- To be closed
- Revenues, Expenses, Withdrawals
 Permanent Accounts or Real Accounts-
Not to be closed
- Assets, Liabilities, Capital
VI. Reversing Entries
- Entries prepared at the beginning of the next accounting period to simplify the recording of regular transactions
in the next accounting period.
- Exactly the opposite of the adjusting entries prepared.
- Optional
 Items to be Reversed
- Prepaid Expenses if expense method was used= DR: Prepaid Rent/ CR: Rent Expense
- Unearned Income if Income method was used= DR: Service Revenue/ CR: Unearned
- Accrued Income
- Accrued Expense

 
NEW LESSON: Double Entry (Double Rule)

NEW LESSON: MERCHANDISING BUSINESS

TYPES OF BUSINESS:

1.) Service Business- Provide a service fee

2.) Merchandising Business- Buys and sells finished products. (Merchandise)
3.) Manufacturing Business- Makes and sells finished products.

Methods of Accounting for Transactions of a Merchandising Activities

1. Periodic Approach- Requires physical count at the end of accounting period to determine the inventory and Cost
of goods sold
2. Perpetual Approach- Inventory and Cost of goods sold can be determined right away based on records because
there’s a continuous records of purchases and sales of merchandise

 SOURCE DOCUMENTS OR BUSINESS DOCUMENTS USED:

1.) Sales Invoice: prepared by seller of good and sent to the buyer. Specifies amount of sales, transportation and
payment terms. (In POV of seller: ito yung proof of benta/ sales ng merchandise pero sa POV naman ng buyer,
ito yung proof of purchase ng merchandise)

2.) Bill of Lading: document issued by the carrier (Trucking, shipping or airline). Specifies contractual conditions and
terms of delivery such as freight terms, time, place, and the person named to receive.

3.) Statement of Account: formal notice to the debtor detailing the accounts already due. (Invoice that is not yet
paid by the debtor, and always from the seller)

4.) Official Receipt: Evidences the receipt of cash by the seller. (Normally by the seller)

5.) Deposit Slips: printed forms with depositor's name, account number. Validated deposit slip indicates that cash
and deposited or credited to the account holder. (Proof nan a deposit na yung cash o check sa holder)

6.) Check: written order to a bank by a depositor to pay the amount account to the person named in the check. The
receiver is the payee. The entity issuing check is the payor. (Normally ito yung ginagamit sa business entity)

7.) Purchase Requisition: is a written request to the purchaser of an enity from the employee or user department
of the same entity that goods be purchased. (Ex: if kaylangan ng bondpaper, supplier)

8.) Purchase Order: is an authorization made by the buyer to the seller to deliver the merchandise as detailed in the
form. (Upon receiving number 7 ito na gagawin)

9.) Receiving Report: is a document containing information about goods received from a vendor. (Proof na nakuha
na goods sa vendor)
 10.)Credit Memorandum: is a form used by the seller to notify the due to errors or other factors requiring
adjustments. (Ex: If nagbenta ng account yung business na mali like instead of 8 na benta niya to ng 10 pesos, so
na bawasan yung ar ng 2 pesos. So para mag reflect ung account magbibigay si seller ng 2 pesos credit
memorandum, meaning magbibigay siya ng 2 pesos./ Ina adjust niya o binabawasan yun ar due to errors)
(Examples also is sales return)

Accounting for Transactions of a Merchandising Activities

 Two important transactions in Merchandising: Buying and Selling

Operating Cycle of Merchandising Business:

- The merchandising entity purchases the inventory, sells the inventory and uses the cash to purchase more
inventory- and the cycle continues.
- Yung cash niya ibibili niya ng inventory then yung inventory ibebenta niya sa customers niya then yung cash
from that sales pangbibili niya ulit ng inventory then that’s the cycle.

2 TYPES:

 Cash Sales- the cyle is from cash to inventory and back to cash.
Illustration: Cash > (Purchases) Inventory > (Sells the inventory/Cash Sales) > Cash

 Sales on Account- the cycle is from cash to inventory to accounts receivable and back to cash.
Illustration: Cash > (Purchases) Inventory > (Sells the inventory/Sale on account) > Accounts Receivable >
(Collections) Cash

 STEPS IN A PURCHASE TRANSACTION

Whenever a purchase or sale of merchandise occurs, the buyer and the seller should agree on the price of the
merchandise, the payment terms and the party to shoulder the transportation costs. Owners of small merchandising
firms may settle these terms informally by phone or by discussion with the vendor's representative. Most large
businesses, however, follow certain procedures when purchasing merchandise.

The procedures are as follows:

1. When certain items are needed, the user department fills in a purchase requisition form and sends it to
the purchasing department.

2. The purchasing department then prepares a purchase order after checking with the price lists,
quotations, or catalogs of approved vendors. The purchase order, addressed to the selected vendor, indicates the
quantity, description, and price of the merchandise ordered. It also indicates expected payment terms and
transportation arrangements.

3. After receiving the purchase order, the seller forwards an invoice to the purchaser upon shipment of the
merchandise. The invoice-called a sales invoice by the seller and a purchase invoice by the buyer-defines the terms of
the transaction.

4. Upon receiving the shipment of merchandise, the purchaser's receiving department sees to it that the
terms in the purchase order are complied with, and prepares a receiving report.
 5. Before approving the invoice for payment, the accounts payable department compares copies of the
purchase requisition, purchase order, receiving report and invoice to ensure that quantities, descriptions,
and prices agree.

All of the above forms-purchase requisition, purchase order, invoice, and receiving report-are source documents. When
the goods are received or when title has passed, the entity should record purchases and a liability (or a cash
disbursement). Generally, the seller recognizes the sales transaction in the record when goods have been shipped.

JOURNALIZING SALES AND PURCHASES RELATED TRANSACTIONS:

1.) Sales Transactions FOR SELLER

 Cash Sales  Sales Return

Dr: Cash Dr: Sales Return and Allowances
Cr: Sales Cr: Cash
 Sales Account  Sales Return
Dr: Accounts Receivable Dr: Sales Return and Allowances
Cr: Sales Cr: Accounts Receivable

COLLECTIONS:

Within Discount Period Beyond Discount Period

Dr: Cash Dr: Cash
Sales Discount Cr: AR
Cr: AR

2.) Purchase Transactions FOR BUYERS

 Cash Purchases  Purchases Return

Dr: Purchases Dr: Cash
Cr: Cash Cr: Purchase Return and Allowances
 Purchases on Account  Purchase Return
Dr: Purchases Dr: Accounts Payable
Cr: AP Cr: Sales Return and Allowances

PAYMENTS:

Within Discount Period Beyond Discount Period

Dr: AP Dr: AP

Cr: Purchase Discount Cr: Cash

Cash

 Issued a debit memo for merchandise purchase (KAPAG KA RETURNS NG BUYER)

Dr: AP 3000
Cr: Purchase Returns and Allowances 3000
 Issued a credit memo s seller or received a debit memo (KAPAG KA SA SELLER)

NOTES:

Seller > Common Carrier > Buyer

- TERMS THAT TELLS WHETER THE ITEMS INTRASIT ay sa seller or sa buyer na ba.
 FOB DESTINATION- owner of goods in trasit is the seller. Seller is the one in charge sa Freight cost sa common
carrier.
Dr: Freight out/ Transportation Out (Freight Prepaid seller nagbayd ng transpo)
Cr: A/P
 FOB SHIPPING POINT- Buyer na ang may ari. Kahit dipa na re received at in transit pa ang goods sa buyer na ang in
charged sa Freight Cost.
Dr: Freight in/ Transportation In (Freight Collect buyer nag bayad ng collect)
Cr: A/P
 Kapag freight prepaid may utang kapag freight collect kapag ka ikaw
 In sales discount exclude the first date and sama yung last date (Kinabukasan yung bilang)
 Ex: June 16, 6k sold to momo by sana. Terms 2/10 (2 percent discount in 10 days) n/30 (should be paid within 30
days)
 COD- Cash on delivery, FOR CASH
 Trade Discounts kapag 20% , 15%, and 10%
Example: 28,000.00, 5%, 10% (PWEDE DING: 28kx.95x.90)
28,000
Less: 1,400 (28kx.05)
Equals: 26,600
Less: 2,660 (26,600x.10)
Equals: 23,940.00
 2/10 is the cash discount(2 percent discount within 10 days) while n/30 (within 30 days)

Examples:

BUYERS SELLERS
1.) Dr: Purchases 200,000.00 1.) Cash 200k
Cr: Cash 200,000.00 Sales 200k
2.) Dr: Purchases 300,000.00 2.) Cash 300k
Cr: Cash 300,000.00 Sales 300k
3.) Dr: Purchases 257,040.00 3.) Cash 257,040
Cr: Cash 257,040.00 Sales 257,040
(OR: 420kx.80x.85x.90) 4.) AR 300k
4.) Purchases 300k Sales 300k
AP 300k 5.) AR 600k
5.) Purchases 600,000.00 Sales 600K
AP 600,000.00
6.) Purchases 300k
 Notes Payable 300k
7.) Purchases 450k
Cr: Cash 50k
AP 400k
8.) Purchases
Cr: Cash 80k
NP
9.) Purchases 975k
Cr: Cash
NP
AP 500k

FAR FINAL LESSONS

1. Preparation of Income Statement

- You call the service revenue as sales in merchandise.

- Partial Income Statement
Net Sales
Less: Cost of Sales or Cost of Goods sold
Gross Profit or Gross Loss (Madalang ang gross loss kasi dimo naman bebenta yung product na lower sa cost)

- Kapag Gross Sales- wala pang nadadag

- Kapag Net Sales- may na minus na
- Contra Revenue accounts or the accounts: Sales Discounts, Sales Returns and Allowances

- Computation of Net Sales

Sales
Less: Sales Discount
: Sales Returns and allowances
Net sales

- Total Goods available for sale: kasama pa yung yesterday. Ex: Yesterday 10 can goods yesterday left unsold at
20 pesos
 Examples:
Inventory, beg 10 20.00 200.00
Purchases 20 20.00 400.00
30 600.00
Inventory, end 18 20.00 360.00
Cost of goods 12 240.00

Computation of the Cost of Goods Sold or Cost of Sales

Merchandise Inventory Beginning

Add: Net Cost of Purchases (TOTAL GOODS AVAILABLE FOR SALE)

Purchases
Add: Transportation in NET COST OF PURCHASES
Total (Add sa begging inventory)
Less: Purchases Returns and Allowances
Purchases Discounts

Total Goods Available for Sale (TGAS)

Less: Merchandise Inventory, End (COST OF GOODS SOLD)

 You can solve this by assuming any amounts of inventory and then follow whatever is given in the problem.

EXAMPLES: GROSS PROFIT RATE??

EFFECTS OF ERRORS IN INVENTORIES

NEW LESSONS: PREPARATION OF WORKSHEET IN MERCHANDISING

STEPS:

- Transfer the contents of trial balance in the worksheet

- Extend the Merchandise Inventory, Begging in the Debit side of income statement
- Extend the Merchandise Inventory, End in the Credit side of income statement
- Also extend the merchandise Inventory, End in the debit side of statement of financial position.
- Then ENTER the ADJUSTMENTS
- Income Statement, adjust revenues and expenses in IS (Expenses sa debit and revenues sa credit)
- Extend the adjusted balances of assets, liabilities, and capital and withdrawals in the sfp

NOTES: ADJUSTED TRIAL BALANCE ANG LAGI I E EXTEND

VII. Adjusting Entry Method in ME

VIII. Closing Entries

 Closing Entry Method for Merchandise Inventory

 Post-Closing Trial Balance

IX. Reversing Entries
- Entries prepared at the beginning of the next accounting period to simplify the recording of regular transactions
in the next accounting period.
- Exactly the opposite of the adjusting entries prepared.
- Optional
 Items to be Reversed
- Prepaid Expenses if expense method was used= DR: Prepaid Rent/ CR: Rent Expense
- Unearned Income if Income method was used= DR: Service Revenue/ CR: Unearned
- Accrued Income
- Accrued Expense

• NEW LESSON: Forms of Income Statement

1. Functional Presentation or Cost of Sales Method
2. Nature of Expense Method

I. Functional Presentation or COGS

COMPUTATION OF THE COGS (COST OF GOODS SOLD/COST OF SALES)    
     
Merchandise Inventory Beginning    
Add: Net Cost of Purchases  
  Purchases  
  Add: Transportation In
  Total  
  Less: Purchases Returns and Allowances
    Purchases Discounts
TGAS (Total Goods Available for Sale)    
Less: Merchandise Inventorym End    
COGS    
 II. Nature of Expense Method
- Expenses are aggregated according to their nature and not allocated among the various
functions within the entity.
- Expenses which are of the same nature are grouped or aggregated and presented as one.
- Examples:
 Employee Benefits (Salaries, SSS, Philhealth Contributions)
 Supplies Expenses (Both Store and Office Supplies)
 Advertising Expenses
 Transportation Costs including Transportation out and other delivery costs
 Depreciation Expense
 Other Expenses

- Function of Expense Method

 Traditional Form of Income Statement
 Classifies expenses according to their functions as part of Cost of Goods Sold,
Distribution Costs, Administrative Activities and Other Activities.

I. Distribution Costs or Selling Expenses (IF GAGAMITING PANGBENTA,

RELATED SA PRODUCT)
- Costs which are directly related to selling, advertising and delivery of goods
to customers.
- Examples:
 Salesmen’s Salaries
 Commission
 Travelling and Marketing Expenses
 Advertising and Promotions Expenses
 Transportation out
 Depreciation of delivery and store Equipment
 Store Supplies Expenses
 Miscellaneous Selling Expenses

II. Administrative or General Expenses

- Costs which are related in the administration and general running of the
business. Include all expenses not related to selling and cost of goods sold.
- Examples:
 Office Salaries
 Office Supplies Expenses
 Donations and Contributions
 Professional Fees
 Depreciation of Office Equipment, Office Building
 Miscellaneous General Expenses
B. STATEMENT OF CHANGES IN EQUITY

C. STATEMENT OF FINANCIAL POSITION

NEW LESSONS: SPECIAL JOURNALS

- Journals designed to record recurring transactions.

ADVANTAGES OF SJ
- Helps reduce the cost
- Reduces time of recording and posting the transactions
- Allows the division of labor

TYPES OF SJ
- Sales Journal
- Purchase Journal
- Cash Receipts Journal
- Cash Payments or Cash Disbursement Journal

1. Sales Journals
 Designed to record sales of merchandise on accounts
 Put a check mark after posting in the subsidiary ledger in posting reference.

2. Purchase Journal
 Design to record the purchase of merchandise, supplies, PPE and other assets
on accounts.
 Put a check mark after posting in the subsidiary ledger in posting reference.
 Put the amounts individually in the general ledger.
 Put the account number after posting in the general ledger.

3. Cash Receipts Journal

 Designed to record transactions wherein the company will received cash
  Put a check mark after posting in the subsidiary ledger in posting reference.
 Post the amount individually in the general ledger.
 Put the account number after posting in the general ledger in PR.
 Examples:
- Sold Merchandise for cash
- Sold old equipment for cash
- Received cash investments by the owners
- Cash Sales
- Collections of accounts
- Collections of notes
- Proceeds of loans

4. Cash Payments or Cash Disbursement Journal

 Designed to record transactions wherein the company paid cash.
 Put a check mark after posting in the subsidiary ledger in PR.
 Post the amounts individually in the general ledger.
 Put the account number after posting in the general ledger.

 Examples:
- Payment of expenses
- Payment of account
- Cash purchases
- Payments of AP
- Payments of notes or loans
- Withdrawals by the owners.

NOTES:
~ TRANSACTIONS THAT YOU CANNOT RECORD IN SJ so you will record it in
GENERAL JOURNAL
 Depreciation Expense
 Adjusting Entries
 Closing Entries
 Returns unless received cash
~ SUBSIDIARY LEDGER
- Shows the details or breakdown of the balance of the controlling accounts
found in the general ledger.
- Only AR AND AP ONLY
- TOTALS LANG NG COLUMNS
- Types or Classes of Subsidiary Ledger
1. Accounts Receivable Ledger
 Ledgers of the company’s customers showing the changes in their accounts.
 Shows the detailed transactions and payment history of each customer.
2. Accounts Payable Ledger
 Ledgers of company’s suppliers/ creditors showing the changes in their
accounts.
 Shows the detailed transactions and payment history for each supplier.

NEW LESSON: Value Added Tax

 A form of sales tax
 Tax consumption levied on the sale, barter, exchange or lease of goods or
properties and services in PH. And on importance of goods in to the PH.
 It’s an indirect

- Pro Forma Entries

Notes: Even if you are a vat registered but you buy in the not vat. Walang input
tax OR Output Tax.