CHAPTER 1 REVIEW OF BASIC ACCOUNTING A student who has taken up Basie Accounting should realize by now how important this course is in one's personal life and more so for a business enterprise. Basie Accounting or Bookkeeping is not just about record-keeping and -report-making. It facilitates planning, financing, using and controlling of resources and helps stakeholders (investor, financial planner, creditor, government official, supplier) make sound financial judgment regarding economic problems in order to come up with good economic decisions. This chapter should help you remember the important topics in Basic Accounting specially the accounting cycle which involves the processing of financial transactions for sole proprietor- owned businesses. This book will focus on Financial Accounting and Reporting for partnerships and corporations, a course which describes how financial transactions are analyzed, measured, recorded, and reported for a service or merchandising business owned by two or more Persons called partners or by an investor or group of investors called corporators. Additional topics such as Accounting for a Manufacturing Business, Cash and Cash Control, Managing the Cash Flows and Financial Statement Analysis are also included in this textbook. OUTCOME BASED EDUCATION The thrust in education is to equip the student with the required knowledge and skills to prepare him for work immediately after graduation. The classroom should bring out the best ‘out of the leamer, discover his ability, improve this and make him ready for the big job in the workplace. At the end of the day the big questions are: Has the learner developed the competencies to explain, interpret, analyze and form judgement? Is the learner well prepared to face the differing situations in the workplace? THE PRESENT DAY ACCOUNTANT In this time and age of high information technology and global competition, much is expected of the accountant. He has to wear many hats as the firm’s planner, economic forecaster, financial analyst, and systems analyst aside from the traditional practice as ‘company controller, external or internal auditor. Having all of these in mind, the Commission on Higher Education passed Resolution no.231-2017 dated March 28,2017, covering Policies, standards and guidelines for implementing learning-competency based standards and outcomes expected of graduates of the four bachelor degree programs in accounting which are the following: BACHELOR OF SCIENCE IN ACCOUNTANCY (BSA). Certified Public Accountants (CPAs) provide assurance and audit services for statutory financial reporting. They also Provide tax-related services, management advisory services, and expertise in financial Feporting and control, assisting various stakeholders to come up with informed judgement relevant in making major business decisions. The practice of the professions requires one to Pass the CPA Licensure Examination or CPALE. The Accountancy Act of 2004 provides the Tequirements to qualify for the CPALE. BACHELOR OF SCIENCE IN INTERNAL AUDITING (BSIA) Internal Auditors Systematically work wih management to audit all systems and operations to ensure that a) Tisks are properly managed, b) processes are in place, and c) procedures are in compliance With the policies and regulations of the organization and those of the government, as well, 1 aTheir audit services help identify areas where improvements might be needed and these include financial control and IT, tangible aspects of operations such as supply chain or IT systems, as well as intangible aspects such as organizational culture and ethics. BACHELOR OF SCIENCE IN ACCOUNTING INFORMATION SYSTEM SAIS) AIS managers must acquire a combination of knowledge in business, accounting and computer systems. This profession involves coordinating effectively the firm's information technology activities, providing expertise in choosing the best design and maintenance for the firm's overall information system, assessing the integrity and the effectiveness of the system and recommending improvements towards overall efficiency of operation. BACHELOR OF SCIENCE IN MANAGEMENT ACCOUNTING (BSMA) Management accountants are expected to provide their expertise in accounting and finance relevant to decision making and other actions such as planning and control of business activities and influencing behaviors at different levels of activities towards the ‘overall realization of the organization’s goals and objectives. The accountant before renewing the professional license and be re-accredited for the public practice is required by the BoA to retool in the following competency areas: technical competence, professional skills and values, ethics and attitudes. To be globally competitive, ‘one must meet the demands of an ever changing environment by devoting oneself to a lifelong process of learning- attend conferences and seminars, acquire new skills. To maintain ones competitiveness, professionals must have the following skills and traits: 1) effective communication skills, (2) right attitude, values and personality, (3) competence (4) creative and innovative mind, (5) flexibility and adaptability, (6) critical mind, (7) good interpersonal skills, and (8) updated technical skills and knowledge classified into four:: general knowledge, business knowledge, information technology knowledge and accountaney knowledge if you are an accountancy major. Exercise 1 : Direction, Match the description given on the left-hand column to the appropriate knowledge base/skill given on the right-hand column: This knowledge will help you understand how business works A Information and what strategies are needed to solve business problems. technology This skill will make you open to ideas, be inquisitive, listen to B_ Creative skills others opinions, respect others viewpoints. __3. This skill will enable you to clearly define a problem, gather C Critical skills information and form alternative courses of actions. __4. This knowledge will enable you to interact with people, and D_ Business q makes you appreciate their, behavior, and their social and Knowledge cultural beliefs. : This skill requires you to be ready to adapt to the fast pace of | E al technological change and the paradigm shift to plobalation Mee and communication, _6. This skill will enable you to express yourself clearly, explain Accounting well so others will understand you. Knowledge __7. This knowledge helps you understand and analyze financial © Communication 8. 8. —* This skill, known as “people’s skill” T helps you moti H influence and get along with others, Rey aaaLADDERIZED ACCOUNTING COURSES Accounting courses are taken up in a ladderized manner starting with Conceptual Framework of accounting involving concepts, principles and standards laying the groundwork for preparing financial reports. Financial Accounting and Reporting or Bookkeeping covers accounting for a sole-proprietor owned business operating either as a service provider or as a merchandiser. The third step is Intermediate Accounting which covers standards and procedures in financial reporting dealing with how the four basic accounting elements are analyzed, measured, recognized and presented in formal reports called general purpose financial statements. Cost Accounting comes next which covers cost determination, analysis and control for service and manufacturing firms. This is followed by Advanced Financial Accounting and Reporting where special topics are discussed in the same fashion as intermediate Accounting High up in the ladder are Management Accounting and Management Services are courses which deal with tools and techniques in planning, controlling and decision-making of management. The second to the last step is Assurance Accounting which covers the concepts and procedures in reviewing the financial reports of firms to ensure its compliance with generally accepted accounting standards. A final requirement for graduation is the Internship course which is a hands-on or working experience required to be taken up in an audit or accounting firm. FOUR MAJOR FIELDS OF ACCOUNTING PRACTICE The four major work fields open for the accounting graduates are the following: public accounting, private accounting, education accounting and government accounting. In public accounting, services offered are: financial accounting, tax, auditing, cost accounting, information system and design, and management consultancy. They either open offices as individual practitioners or as partners. Some of the popular audit and consultancy firms are the following: Sycip, Gorres, Velayo & Co., Isla Lipana & Co., Punongbayan Araullo & Co, and the firm of Reyes, Tacondong & Co. Most of these firms have partnered with foreign audit firms such as the Deloitte & Touche, Ernst & Young, KPMG Marwick and Pricewaterhouse Coopers. Every engagement or service is headed by a senior partner who acts as the engagement partner, and his staff from top to bottom is made up of managers, supervisors, senior clerks and junior clerks. In private accounting, the graduates are employed in firms, work in the following departments: general accounting, cost, budgeting, internal audit, managerial accounting, tax, and information system, They hold company positions as Chief Finance Officer or Controller, Senior Accountant, Cost Accountant, Budget Officer, Internal Auditor, EDP Head, Financial Analyst, and Tax Officer, among others. In the interest of public service, CPAs hold government positions as forensic examiners, auditors, analysts, accountants, finance officers, budget officers, BIR commissioner, and planners in such offices as the Bureau of Internal Revenue, Commission on Audit, Philippine Commission on Good Government, Bureau of Customs, Bangko Sentral hg Pilipinas and Securities and Exchange Commission, among others. Accounting educators handling accounting, auditing, finance, and tax courses guide students in their academic work and prepare them for their professional practice. Some of them get invited by prestigious accounting review centers coaching the candidates for the CPALE, CMA and CIA board examinations.. cofessional work of the Three new accounting areas have been added increasing aie vorenal ‘Accounting, accountant: Social Accounting, Environment Accounting am TT aveos and the Social Accounting measures the impact business policies Rein and educational benefits, people living in the community such as salary and promotion, We® 1 AN highlights product handling and disposal. Environmental Accounting previo ee eee economic benefits provided by natural resources on one hand and Or Ech iN tn preventing or correcting pollution and resource degradation on Ti OU nk ettie Accounting. also called investigative accounting involves application Ol, Sis and techniques related to fraud, embezzlement and any financial wrongdoine, Mstitne fates involving losses and damages related to product liability, shareholders’ disputes, _ manipulations and price fixing are just a few being tackled in forensic accounting. Exercise 2 Direction: \dentify each item in Column 2 by selecting one of the terms in Column 1: Column 1 A. Social Accounting F Government Accounting K Advanced Accounting B_ Financial Accounting G Tax Accounting ____N Forensic Officer C. Cost Accounting H Information Systems Design M BIR Commissioner D Management Accounting 1 Controllership . N Budget Officer E Audit and Assurance J Environment Accounting O Finance Officer Column 2 1, Emphasizes the preparation of financial statements. It is concerned with providing financial information to external users. 2. An area where there is detailed recording, classifying and summarizing of costs and expenses necessary to produce and sell a product or service. 3. This accounting area places emphasis on economic transactions and its impact on people, places and the environment, 4. The function of providing consulting services to improve client's use of the firm's capabilities and resources to ensure the achievement of its goals and objectives. 5. This accounting area deals with an examination of the an independent accountant who gives an opinion as to 6. It deals with the preparation of tax returns, reports in compliance with tax laws and with alternative way to save on tax liabilities, 7. Also known as fund accounting, it is applied to the di departments with a view of recording the diferent sorecd and utilization, financial statements prepared by the fairness of its presentation. Planning and structuring transactions and a view of helping management choose an ifferent political branches of of funds, its proper allocation 8. An accounting area where an investigative accountant damages involving product liability, stock ipaisured to estimates losses and market manipulations and Price fixing, etc. Nt ion nec ecords, business to run smoothly, make financial forecast and estemse Ke, it Possible for the timate its future outcome. 10, One who has the power to decide assessment disputes, i fees and other charges, impose penalties and other mates eee eee 11. A higher financial accounting subject covering special top , sll el St emsay [2 Encompasses the areas of responsibility for accounting and finance and deals with aerate apClal feports designed to assist management in converting their plans > and in controlling its financial resources through evaluation of performance against standards, |1, Focuses on natural resources and its contribution to economic well-being through preventive and control measures involving process emissions, pollution and resources degradation, ACCOUNTING AND THE BUSINESS. ORGANIZATION A business is a commercial activity intended for the development and distribution of goods and services. The primary objective of any business is to optimize the use of the resources, ensure its profitability and maintain its solvency and stability for the protection of all stakeholders. How does one know if the business is profitable, liquid or stable? The answer lies in the analysis and evaluation of its financial reports. Accounting is a service activity. Its primary objective is providing financial information through financial reports. Financial information assists a statement user in making sound financial decision. [t helps investors and creditors evaluate the financial strengths and weaknesses of an enterprise vis-a-vis profitability, liquidity and solvency. It is also useful in assessing the amounts, uncertainties and risks as well as the proper timing of expected cash flows to meet the firm’s cash requirements. A business takes any of the three legal forms (sole proprietorship, partnership, and corporation) depending on the number of owners or investors. Likewise, a business may operate as a service provider, merchandiser or manufacturer. Some businesses, such as a school, are multi-operators providing not only services (education) but also selling goods (books and supplies) or manufacturing their own products (uniforms). Exercise 3 Direction: From the following list of possible answers, identify what is being referred to in each of the statements given below: Business Entity Management Accounting Business Documents Profitability Corporation Creditor Single Proprietorship Transactions Net Income Service Business Manufacturing ee Pe i Liquidit Social Responsibility am sal Merchandising Business Government Financial Statements Simplest form of business organization which is owned by one person. Detives its income mainly from the sale of service to clients. Buys raw material, processes it and sells it as a finished product. aie Communicates significant information about the business to the interested parties.An artificial being created by operation of law where interest over is expressed by the number of shares. 7. This interested party would like to know whether the business 1s solvent before it extends financial help. 8. An economic unit, regarded as separate from its owner or owners that enters into business transactions for profit. vents or happenings which can be measured in terms of money and entered in the accounting records. 10. Reports which summarizes the financial condition of the business and its operating result, 11. The excess of revenues over costs and expenses. 12, Ethical behavior of a person or entity towards society- doing good for the well being of people. 13, Ability of the business to meet its current obligations. 14, This type of business buys goods which are ready for sale. 15, Original evidences of transactions which bring changes in the business values. ACCOUNTING STANDARDS. Accounting is used in every kind of business from a local store to a large multi-national company, from a sole-proprietorship to a corporation. It covers up a large range of activities from the simple services provided by professionals to manufacturing of cars, appliances, wines, chemicals and the like. When financial statements are published, stakeholders (investors, suppliers, customers, government, and creditors) want to be sure that these can be trusted, that the measures used to compute for assets, liabilities, equity, revenues and expenditures are reliable. Thus, general principles have to be laid down to guide the accountants in the recognition, measurement and preparation of financial reports. Each country has its own Accounting Standard Council or Board whose responsibility is to set up accounting rules and regulations subject to the approval of the professional body of CPAs, the Security and Exchange Commission and even the Monetary Board. With the emergence of one global business world, the divergence of the accounting standards brought about by culture, place and people, has been resolved when in 2001 the International Accounting Standard Board was created. Its members are made up of auditors, financial statement preparers, financial statement users, academicians, representing a broad geographical spread from Europe, Asia, America, Africa and the other parts of the world. The intention of the Board was to harmonize the standards set up by the various national standard setting bodies. ‘THE FRAMEWORK The framework is a set of concepts and principles used in the preparation and presentation of financial statements and is divided into seven sections: 1, Objective of Financial StatementsUnderlying assumptions Qualitative characteristies Elements of financial statements and its recognition and measurement Financial Statements Concepts of Capital and Capital Maintenance ayaep THE OBJECTIVE __ The objective of the framework is to provide a guide in the preparation, review and design of the accounting standards as a basis for presentation of the financial statements, UNDERLYING ASSUMPTIONS To meet this objective, financial statements must be prepared based on general accounting principles and assumptions which came about from long time practice. A business is assumed to be a separate entity from other business entities and from the owner based on the Business Entity assumption. The Going Concern assumption assumes that the business will operate for an indefinite period of time while the Time Period assumption states that the life of the business may be divided into uniform periods of time. All transactions and events must be measured in terms of money based on the Monetary assumption. QUALITATIVE CHARACTERISTICS The Framework for the preparation and presentation of financial statements describes, among thers, the attributes or characteristics that financial information must possess to make them trustworthy and useful in making informed judgment and decision. The framework identifies two fundamental attributes: relevance and faithful representation and five enhancing attributes: understandability, verifiability, timelines, comparability and consistency. Relevance refers to the quality of information which must make a difference by influencing one to make a meaningful decision. It gives information about the firm's past performance of the business (feedback value) and the information must enable one to project what might take place in the future (predictive value). The information is also affected by materiality which means that the information has a large influence on the user, the absence of which will adversely affect judgment. For information to be reliable it must be objective and free from material errors or misstatements. It must faithfully represent what it purports to be and not mislead the users. Neutrality requires that the information should be useful to all users and not show bias to a particular user who might be influenced to act accordingly. Prudence is another ingredient of reliability which requires the accountant to exercise caution when using estimates or information that is marked by uncertainty. ndability requires that 1) terminologies must be clear, 2) form and preseoition Oeriy ani 3) wets have a reasonable knowledge of finance, economics and accounting to be able to make a good assessment and sound judgment, There must also be prompt or timely reporting of information else information becomes useless or irrelevant. . i i bility) or of one Comparing data of one period against another period (intracomparability) ° company’ aint Snother company (intercomparability) enhances also the quality of information as it leads to better judgment by the user. Complementing comparability is uniformity which requires consistency in the application of rules, principles or accounting methods when comparing one period against another period or when comparing (wo companies. Exercise 4 irecti ing lis il identify what is being referred to in Di it the following list of possible answers, identify wh e a saatet te statements given below as being complied with or violated:A. Business Entity E, Verifiability ! NT ee esis B. Going Concern meliness, Nesey C. Understandability —_ G. Comparability K. Ne oP bal D. Relevance H. Consistency bat Ie uoblaced evi dence This supports Reliability and requires that information be supported ra business, Only transactions belonging to the firm are recorded in the books o be tae A violation of reliability is the practice of reporting expenses as assets (0 boost the profit of the firm, 4. A violation of relevance is the omission of a liability which would have greatly affected the financial position of the firm, Monthly, quarterly and annual financial reports are usually prepared for eon People will always put up a business with the expectation that it will succeed and operate indefinitely. 7. Accountants usually prepare only general purpose financial statements for all external users, 8. To determine competitiveness of Goldilocks, benchmarking against Red Ribbon is needed, 9. To facilitate comparison, the method of measuring depreciation or bad debts or revenue should be the same from one period to another period or from one company to another company. Uncertain of how to measure the property, it was deliberately overstated based on the market value volunteered by a friend. eRe ae 10. ACCOUNTING PRINCIPLES The accountant, in fulfilling the objectives of accounting, must follow certain basic concepts and principles. The accountant analyzes and processes the financial data based on these accounting principles. Likewise, these principles set certain limitations in the preparation of the reports. Exchange Price Principle requires measurement of transactions on the basis of the cost price or equal-to-cash price. Revenue Recognition principle records revenue when camed without regard to cash collected while the Matching principle requires recoding of expenses incurred to generate revenues it reported. Full discl losure principle requires reporting the details behind the financial statements that would influence users” decisions, Accounting principles may be derived from business practice, pronouncements of professional bodies like the Philippine Financial the Intemational Accounting Standards, regulations passed by the Commission, Bureau of Internal Revenue and Bangko Sentral Ng Pil opinions of accountants, Reporting Standards and Securities and Exchange lipinas, Exercise 5 Direction: Identify (by using letters) the basic concept that best describe: ituation: Concepts: A Exchange Price D Business Entity G earn aa B Matching E Objectivity H Accrual C Feedback Value F Predictive Value 1 Disclocure 1. Joshua bought land for his business and This was higher than the cash price of P250,000, The land was re , 2019 Bernie Flo Payment and recorded it as an uneamed revenue. 3. Merchandise sold for P500,000 was recorded as sales revenue by 2 M( ), The accountant also recognized P300,000 cost of sales for this in the Ned ee ae 4. The company was confronted by a lawsuit in 2019 for breach of conte the amount of P500,000. No final judgment has been rendered as at Dec, 31, 2019 and the fina bia 8ey some doubts about the outcome of the case. Nevertheless, accountant added this information to the financial report for the benefit of all readers. Company accountant prepared a report analyzing the financial statements of the business as to ils liquidity, profitability and solvency for the past three years. 6. Using no. 5 as a guide, management was able to foresce the future direction of the company and a master budget was prepared to improve its financial performance. Stationeries and supplies were purchased on several separate occasions and some of them were usable for a period longer than a year. This was expensed as incurred, 8. Refer to no, 1. The land was appraised in 2020 for P350,000. ‘The accountant still presented the land at P250,000 in its current statement of financial position but with a supporting note of its appraised value, (Give three principles supporting this procedure). 9. The owner of Bernie Flower Shop took home some flowers. The accountant recorded this as personal drawing of the owner. revenue of P1,000,000 was recorded in 2020. Related to this was the recording of salesmen commission based on 10% of sal THE FINANCIAL STRUCTURE OF A BUSINESS Based on the Framework of Accounting, the financial position or structure of a business comprise of three elements - assets, liabilities, and owner’s equity while its financial performance comprises of two elements called revenues and expenses. Assets are economic resources owned and used in the operation of the business and are expected to benefit the business over a number of years, Financing is always the first activity of a business. The first assets or business resources are contributed by the business owner, secondarily by creditors such as banks for cash loans and suppliers for appliances, furniture, equipment, and goods. Assets are therefore claimable by two parties - creditors and owner(s) and from which came the next two elements - liabilities and equity. Liabilities as defined in the framework is a present obligation arising from a past event, the settlement of which is expected to result in an outflow of resources from the enterprise. A liability is usually paid:in cash but may also be paid in the form of property or service. Net assets or net worth of the business is determined by deducting the total liabilities from the total assets. The net assets claimable by the owner is called owner's ~quity. Equity is defined by the framework as the residual right or interest of the owner(s) in the entity’s net assets. As there are numerous owners in a partnership and in a corporation, equity is called Partners’ Equity and Shareholders’ Equity, respectively. ‘The financial structure of a business shows a relationship of balance of the three elements and is expressed in an accounting equation: Assets = Liabilities + Owner's Equity To illustrate, Bert Oliver contributed P200,000 cash to put up a travel agency and borrowed from the bank P300,000 more to put up a travel agency. The accounting equation will show: Assets Cash P500,000 = Loan Payable P300,000 + Oliver Capital P200,000 Another major activity of the business which will cause the Capital to change is its operating activity. Once business is operating, it will receive cash and other assets from its. customers, The inflow of cash and other assets represents income. A business cannot eam revenue without consuming some assets or using up services of other businesses or persons. The consumption of asset or using up of service to generate revenue is called an Expense. If Oliver paid for Utility Expense of P1,000 and received cash of P10,000 from his client, his net income is P9,000 which will increase his capital, thus the above accounting equation will change: Assets in cash P509,000= Loan Payable P300,000 + Oliver Capital P209,000. ity of the business is the investing activity. Oliver's business just one asset, cash. It has to purchase furniture and fixtures, .rs, Cash will decrease, with a corresponding increase in any The third major act cannot operate smoothly with jt Supplies, equipment, among other of the aforementioned assets.FINANCIAL STATEMENTS ‘The four financial statements and their purposes are. . 1. Statement of Comprehensive Income, summarizes the company’s revenues ang expenses along with the other comprehensive income resulting in a net income or los; over a period of time. Net income occurs when revenues exceed expenses. Net loss ‘occurs when expenses exceed revenues. The income statement may be presented under a nature of expense form or a function of expense form as recommended by the International Accounting Standards. The income statement shows a series of sections, beginning with the most important section and ending with the least important section, to arrive at the net income of net loss. It may also show only two sections, one for all the revenues and another for all the costs and expens' coe . Statement of Owner's Equity explains changes in equity from net income (or loss) ang from owner investment (withdrawals) over a period of time. 3. The Statement of Financial Position or balance sheet describes the financial structure of the business at a given date by listing its assets, liabilities and owner's equity 4, Statement of Cash Flows shows how the cash was generated and used by the business based on three major activities: operating, investing and financing. Exercise 6 Identify the following definitions with the terms given below: a. The relationship between a company's assets, liabilities, and equity. b. This represents an exchange of value between two parties. c. A financial statement that reports the changes in the equity of the owner or investor. 4. A financial statement that lists cash receipts and payments over a period of time, arranged according to the major activities of the company. ___e. Creditors’ claims on assets. ___f. Sourcing of funds is one of the major activities of the company. gz. A decrease in economic benefit during the accounting period that results in a decrease in equity, other than those relating to distributions to equity participants (ia the form of personal drawings made by the owner), as defined in PAS 1. h. As defined in the Framework, these are resources obtained and controlled by the enterprise as a result of a past event and from which probable future economic benefits are expected to flow to the enterprise. PAS 1 defines this as an increase in economic benefits during the period that rests equity, other than those resulting from contributions of the equit participants (investors). 1. Business Transactions 6. Expenses 1. Financing Activity 2: Accounting equation 7. Investing Activity 12. Economic Benefit 3. Liabilities 8. Assets 13. Statement of Cash Flows 4, Statement of Owner's Equity _9. Revenues 5. Statement of Financial Position 10. Statement of Comprehensive Income Exercise 7 The accounts of Greenfield Company with the increases or decreases that occutt® during the year 2019 are as follows: Increase Decrease Cash P250,000 Accounts Receivable P 50,000 ‘Accounts Payable 110,000 Notes Payable 160,000 10Except for net income, investment of P30,000 by the owner, and a withdrawal of P11.000 by the owner, no other items affected the owner's capital account. Using the accounting equation, compute net income for 2019. Exercise 8 From the following adjusted trial balance, determine: 1). Net income eared by the agency 2) Owner’s equity at the end of 2919. 3) Total assets of the company classified into current assets and properties, 4) Total liabilities of the company classified into current and long term. GO NA Travel Agency Trial Balance December 31, 2019 Cash On Hand and in bank P 99,550.00 Notes Receivable 6,000.00 Accounts Receivable 26,400.00 Allowance for Bad Debts P 2,640.00 Prepaid Insurance 1,800.00 ‘Supplies inventory 1,500.00 Land 300,000.00 Building 1,350,000 00 Accumulated Depreciation ~ Building 135,000.00 Furniture & Equipment 81,000.00 Accumulated Depreciation — Furniture & Equipment 15,000.00 Accounts Payable 78,000.00 Mortgage Payable due 2025 450,000.00 Go, Capital 700,000.00 Go, Drawing 1,800.00 Service Fee 550,000.00 Commission Income 231,760.00 Interest Income 11,100.00 Rent Income 24,000.00 Insurance Expense | 600.00 Depreciation Expense ~ Furniture & Equipment 5,000.00 Bad Debts 1800.00 Taxes Expense 14,000.00 Utility Expense 2,200.00 Salaries Expense 195,000 90 Advertising Expense 40,500.00 Depreciation Expense ~ Building Fie Interest Expense 350) Supplies Expense Exercise 9 ided wit i i k place during the year, Identify by You are provided with the following transactions that took pI i Placing he amounts (with a + or — sign) in the appropriate columns whether the transactions iare operating, financing or investing activities. Determine the cash balance. Owner invested PS0,000 cash and merchandise P500,000. Borrowed P250,000 from Metro and issued a long term note. Recorded cash sales P80,000 and credit sales P200,000 Purchased inventory for P15,000 cash and on account P160,000 Issued a short term note for the new equipment purchased for P10,000. Paid P20,000 cash for personal use of the owner. Acquired a building for P750,000 . Paid P 50,000 cash and a note for the balance, Only a fourth of total operating expenses was accrued for P25,000. Half of customers’ accounts coming from ¢ above were collected Paid half of suppliers’ account coming from d) above. Force mpeaece Use the following format: Operating Financing Investing a.__ Owner's cash investment + 50,000 -] Exercise 10 Selected transaction data of a business for the month of January are summarized below. Determine the amount of revenue, expense and net income for the month of January. Service sales charged to customers on account for January 350,000 Cash received from cash customers for the month of January 300,000 Cash received from account customers during January: Service sales charged to customers prior to January 150,000 Service sales charged to customers during January 200,000 Expenses incurred prior to January and paid during January 80,500 Expenses incurred and paid in January 38,500 Expenses incurred in January but paid in February 70,000 THE RECOGNITION PROCESS Transactions are the daily activities of a business supported by documents and from which accounting records are based. These transactions cause the business elements (assets, liabilities, equity, revenues, and expenses) to change. The change, which is either an increase or decrease, is best analyzed in an accounting tool called Debit and Credit, Following the accounting equation (Assets ~ Liabilities = Equity) assets and expenses are increased on the debit side while the liabilities, capital and revenue are increased on the credit side. Exercise 11 Place the letter(s) of the appropriate element either on the debit column or on the credit column to show the effect ofthe listed transaction data on the accounting elements 12a '(D_Made partial payment of the P20,000. account for equipment. _ Debit Credit (1) The owner contributed cash to the business, cash P200,000 2) Purchased equipment on account, P50,000, cash, P5,000, 5) Borrowed money from BDO, Issued a 90-day 12% P500,000 note, ) Billed customer for goods sold, P25,000. 8) Paid employee's P15,000 salary less 5% SSS, 2% HDME, 1% PH. (9) Collected half of amount due from customers billedin transaction 6, (10) Received a bill from Manila Waters for December, P5,000. E, Owner’s Capital A. Assets C. Liability F. Expense B. Owner’s Drawing D, Revenue BUSINESS PAPERS. All business transactions are supported by business documents. The following are the usual business documents prepared: invoice (sale of merchandise or service), official receipt (cash collection), cash/check voucher (cash or check payment), statement of account (outstanding account of customer). Without a business document, a transaction cannot be recorded by the accountant. Exercise 12 Direction: From the following business papers of Alfresco Marketing, describe the transactions that took place. EVER BRIGHT CANDLES 480 Pasong Tamo, Makati Head Office Tel. No. 524-8677 to 79 TIN # 420-110-414-788 VAT CUSTOMER'S COPY INVOICE NO. 81075 Date June25, 2019 TERMS 2/10,n/30. Deliverto: _ALFRESCO Marketing 3190 Gil Puyat Ave., Makati SONO. 0048 SODate 6/24/19 STOCK # | DESCRIPTION UNIT PRICE TOTAL Candles (small) a pack of six Tapect Pro raaa0 (medium) 10 packs P240 2,400.00 (big) Vatable Sales 4,821.43 1296 VAT $78.57. TOTAL P3400. IMPORTANT: No complaint willbe ACKNOWLEDGE RECEIPT OF entertained unless acknowledge by ABOVE IN GOOD CONDITION inearsrastanteted in ot M Mabuhay Peter Dy 625/16 Date Delivered Customers Signature Delivered By: 13Sy sALFRESCO 3190 Gil Puyat Ave., Makai eee nl )-000-04 129( In settlement of the following (AS Mktg. TIN ot Rae _ vaT INVOICE NO, Amount, ¥ OFFICIAL RECEIPT No. 0034 Date June 15, 2015 Received from _ Phil Christian Bookstore the amount of __ five thousand TOTAL _P (P_5,000_) in full/partial payment of account due us. Cash 5,000 [Check M.O. By: Rolando Mallari [Total Payment Cashier ALFRESCO CHECK VOUCHER Mktg. No. 07 Payee__Phil Long Distance Tel Co Date _June 18,2019 PARTICULARS AMOUNT | Telephone bill for May P4500 | TOTAL P_ 4,500 Distribution of account: ‘Account Title [ Debit [Credit Bank _ BPI Check No, 887724 Payment received by: Oscar Cruz —— Alfredo Fresco Benita Figueroa May Mabuhay Prepared By: Certified Correct By; ‘Approved By:Natures Best Philippines Inc, NB 2842 Git Puyat, Makati INV/OFFICIAL RE , JOFFICIAL RECEIPT NO. Tel No. 8163711 to 15 81023 RE CEI oye : ree INVOICE FROM DISTRICT: A220 P8,650.00 | Cash Payment Description Amount [ _ C 5,850.00 For Non-cash Payment: | Date:_6/10/19 |e Bank/Branch Check no. Acct. no. FB 668868 04198-3 j Payment Accepted by: | Payment accepted by: Emy Ong 6101 | Amount in words: Five thousand eight hundred fifty ‘oouorsh Signature/Printed Name JOURNALIZATION AND THE BOOK OF ORIGINAL ENTRY Journalization is the process of recording chronologically business transactions in the book of original entry called the Journal. Recording all the transactions in a single journal is, possible but itis seldom used in actual practice unless the business is a wholesaler with few transactions, Where a business organization is quite large and the transactions are numerous, special journals may be designed to be able to record the transactions conveniently. Special journals include the following: sales journal, purchases journal, cash receipts journal and cash disbursements journal. All other transactions as well as the adjusting, closing and reversing entries are recorded in the general journal. If the company is using the voucher system, the check register and voucher register are used instead of the cash disbursements journal and purchases journal, The use of special journals facilitates specialization and division of work thus minimizing recording and posting time. Exercise 13 Refer to exercise 11, prepare journal entries, make postings and prepare atrial balance. Exercise 14 ' Direction: Below are the selected transactions of Casey’s Bookstore. Indicate by means of used: A. sales journal B. cash disbursements journal C. h receipts journal E general journal where each of the wuld be recorded. Give the journal entries in each book letters the journals to be Purchases journal D. cas following transactions sho Mr. Casey made additional investments: cash of P50,000 and furniture worth P15,000. Office equipment was purchased on account, P10,000. . Merchandise purchases amounted to P15,000. Terms: P5,000 down, . Sales on account amounted to P12,000. . 7 15 Account purchases in No, 3 was paid within the discount period. balance 2/10, veeneA credit memo for P1,000 was issued to a customer in No. 4 Cash sales amounted to P5,000. Operating expenses paid P3,000. Borrowed P10,000 trom the bank and issued a promissory note- P10,000 was collected from the account sales in No. 4. Sold to a customer who gave a promissory note, P2,500. 12. Purchased office supplies on account, P150. 13. Received a telephone bill for P300. 14. Note of customer in No, 11 was dishonored. 15. Cash purchases amounted to P15,000. Fae ers POSTING TO THE GENERAL LEDGER, Transactions recorded in the journal in terms of debits and credits are transferred to their accounts in the general ledger. The transfer is called posting, and. this is done to accumulate in one place all the information concerning the changes (debit or credit) affecting a specific asset, liability or proprietorship account. After accumulating the data, a balance is extracted for each of the specific accounts in the ledger. Assets and expenses usually have debit balances, while liabilities, capital and income have credit balances. The real or balance sheet accounts are brought forward to the next accounting period while the nominal or income statement accounts are closed to the capital account. TRIAL BALANCE fier all the transactions have been posted to their ledger accounts and the balances for each of the accounts determined, a trial balance is prepared. A trial balance is a list of accounts with balances. It provides a check on how accurate the recordings and postings are. If the trial balance is out of balance, errors that may have been committed are the following: Posting a debit entry on the credit side of the ledger and vice versa; error in adding or subtracting to get the balance of an account; copying of wrong amount in the ledger from the journal, or in the trial balance from the ledger; copying a debit balance in the credit column of the trial balance or vice versa; wrong addition of the debit column ot credit column of the trial balance, error of transposition or transplacement. Even if the debit and credit totals are equal, there may still be errors committed that are not transparent such as: wrong computation, wrong use of account title, a . omission of an entry or recording of an entry twice. Exercise 14 Direction: — ‘The following accounts show the beginning balances and the transactions fo" the first half of January. Post the remaining transactions for January and extrac the balances for each of the accounts and prepare a t trial balance, Cash Santos, Capital Jan. 12,000 | Jan 15 2,000 Tan. 1 25,500 14 11,500 1,000 16i \ Accounts Receivable Sales y 2 Jan. , iol Jan. 14 11,500 Jan. 9 17,000 Merchandise Inventor Jan. 5,000 7 oe 7 2040 Furniture & Equipment P Jan. 1 3,500 Tan.7 e300] 16 5,000 , . Accounts Payable Input Tax Jan. 1 15,000 ~ Jan.7 2,220 7 20,720 16 600 16 5,600 Withholding Tax Payable Salaries & Wages Jan. 15 300” Jan. 15 2,500 | ____Uitilty Expense Jan. 16 1,000 Jan. 17 Santos paid P20,000 of the business liabilities out of his personal cash. 20 22 25 30 31 Cash sales amounted to P4,480 inclusive of 12% VAT. Collected the account of a customer, P5,000 less a P100 discount and a P12 adjustment for VAT. Paid for utility expenses, P1,500. Paid for semi-monthly salaries less withholding tax. Purchased equipment, P7,840 inclusive of 12% VAT. Terms: P5,000 down, balance 2/10, n/30. Paid the liability on the equipment purchased on the 16th less a 2% decrease on equipment for the discount and adjustment for the VAT. Exercise 15 {An inexperienced bookkeeper prepared the following trial balance: Cheng Company Trial Balance December 31, 2019 Debit Credit Cash P16,800 Prepaid Insurance 3,500 ‘Accounts Payable 3,000 Uneared Revenue 4,200 Common Stock 13,000 Dividends 4,500 Service Revenue 25,600 Salaries Expenses 400 Rent Expense _ 2.400 = 52,000 Prepare a correct trial balance.COMPILATION OF DATA FOR ADJUSTMENT From the trial balance at the end of the accounting period, some accounts need to be adjusted before the financial statements can be prepared. Exercise 16 The following are the items that need adjustments at the end of the accounting period: 1. Accrued income 5. Bad Debts 2. Accrued expense 6, Merchandise Inventory 3. Prepaid expense 7. Depreciation 4. Deferred income Identify the adjustment to be made and the pro-forma entry. Assume the Company is using the liability method in no. 5 and the asset method in no. 6, ‘The adjustment related to fixed asset which attempts to spread the cost of the fixed asset over its usefil life. Debit Credit 2. The adjustment for accounts receivable to bring it to its realizable value Debit Credit 3. The adjustment to set up the unsold goods remaining on hand at the end of the period Debit Credit 4. Expense already used up or incurred but not yet paid. Debit Credit 5. Uneamed Income collected but a portion of it is already earned. Debit Credit 6. Unused Supplies already paid but a portion ofits already used up. Debit Credit 7. Income already eamed but not yet collected. Debit Credit —r Exercise 17 You are given the following working paper which you are required to complete: ' SHOPWISE MART t SIX-COLUMN WORKSHEET DECEMBER 31,2019 | ‘Trial Balance | Adjustments | Adjusted Trial Balance Debit_[ Credit | Debit | Credit | Debit_ | Credit ish. 2 counts Receivable 10 [Allowance for Bad Debts 1 2 | Merchandise Inventory 24 12 [Office Supplies Inventory 4 T [Store Furniture & Fixtures 7 Accumulated Depreciation 3 4 Accounts Payable 3 Santos, Capital 26 Santos, Personal 5 Sales R Sales Returns 2 Advertising, 3 Rent i Sales Salaries: iM Totals 2B 78 Prepaid Rent————— 2 Salaries Payable u Cost of Sales 2 Bad Debts Depreciation Office Supplies Used Totals The company is using the perpetual method of recording inventory. Exercise 18 The following are selected balances taken from the adjusted trial balance of Fernan Corporation as of December 31, 2018: Debit Credit Accounts Receivable ' P 120,000 ‘000 arene for Doubtful Accounts Ps Sales Returns & Allowances wr Sales DiscountFor the year 2019, the following transactions took place: a) Sales amounted to P1,500,000 of which 60% is on credit, with b) Collections from account customers amounted to 800,000 ou collected outside the discount period. ¢c) Sales returns and allowances amounted to P1,800 out of which P900 cash refunds ‘Were given to customers. terms of 2/10, n/30 it of which P388,400 wer, Direction: a) Compute for the balance of the accounts receivable as of December 31, 2019 Use T Account b) The policy of the company is to maintain the allowance for doubtful accounts based on a certain percentage of accounts receivable outstanding, What is the required allowance for doubtful accounts? ©) Give the adjusting entry. Support with an Allowance for Doubtful Accounts T-account. Exercise 19 On September 1, 2019, ABC Company and MNO Company signed a contract with the Daily Bulletin for an ad of their products to be printed every Sunday and to run for 4 months ata rate of P10,000 per month, ABC Company immediately issued a check for this contract while MNO did not because the owner of the Daily Bulletin was a close friend. a) Give the adjusting entry of the ABC Company if the accounting period is yearly ending October 31 and the company is using the asset method. b) Give the adjusting entry of MNO Company if its accounting period is yearly ending December 31 and a statement of account was received from Daily Bulletin. Exercise 20 Ramos, Incorporated was in need of cash. A short-term loan applied for P100,000 was approved by BPI Family Bank at 24% for 90 days. A check was issued on November 2, 2019. The loan was discounted in advance and Ramos, Incorporated used the expense method. Give the entries on November 2, Decetnber 31 end of the accounting period, and 08 maturity date. Exercise 21 Using the data in No, 20 but assume that a 90 day 12% i vas iced by tonne Ue 'y 12% interesting bearing note W Give the entries on November 2, December 31 end manly gue of the accounting period and 0”Exercise 22 Records of the equipment purchased by Sinta Company showed: Useful fife Items Qty Cost Unit Date Acquired Scrap Value in years Computer (2) P29,000 Sept. 1, 2018 P5,000 4 Aircon ay 10,000 Mar. 1, 2018 3,000 6 Airfan Q) 1,500 Feb, 1, 2017 300 6 Direction: a) Adjusting entries on December 31, 2018 b) Financial position presentation as of December 31, 2018. Exercise 23 Using the data in No. 22 above, give the adjusting entries and the financial position presentation if the accounting period ends on December 31, 2019. Exercise 24 The accounts and their balances in the ledger of May Vera Novelty Store on December 31, 2019 are as follows: Cash on Hand 4,400 Cash In Bank 84,500 Accounts Receivable 30,200 Merchandise Inventory 38,400 Supplies On Hand 2,170 Prepaid Insurance 2,500 Store Equipment 17,000 Accumulated Depreciation — Store Equipment 4,500 Office Equipment 5,200 Accumulated Depreciation ~ Office Equipment 1,600 Accounts Payable 30,900 Withholding Taxes Payable 3,500 Mortgage Payable (due 2021) 60,000 Sales Returns and Allowance 3,000 Sales Discount 500 2137,300 Output Tax 230,300 Purchases Bn Purchase Returns & Allowances Fan Purchase Discount se a00 Input Tax, 2.000 Freight In , Sales Salaries 24,600 Delivery Expense 6,800 Rent Expense 6,000 Miscellaneous Selling Expense 1,250 Office Salaries 13,600 Telephone and Telegraph 1,360 Gain on Sale of Land 7,720 Interest Expense 300 Vera, Capital 44,700 Vera, Personal 12,000 Sales 310,600 The data for the year end adjustments on December 31, are as follows: 1. Merchandise inventory on hand, P41,600. . Supplies unused, P1,120. . Allowance for bad debts to be set up at 5% of accounts receivable. Prepaid insurance is for one year dated April 1. Depreciation for store equipment, 10% and for office equipment, 5%. Accrued sales salaries, P460 and office salaries, P210, yaya en Set up VAT Payable by closing Input Tax against Output Tax, Direction: 1. In an eight-column worksheet, prepare the trial balance on the first {wo ‘money columns. 2. Prepare the adjusting entries on the next two money columns, 22ies J Ex i tend to the next two money columns the adjusted account balances Tepresenting nominal or income statement accounts. Extend to the last two money columns, the adjusted account balance Tepresenting real or financial position accounts. 5. Prepare the financial statements. Exercise 25 \ partial adjusted trial balance of Zaylo Company at December 31, 2019, shows the following. Zaylo Company Trial Balance December 31, 2019 Debit Credit Supplies P850 Prepaid Insurance 2,400 Salaries Payable P800 Unearned Revenue 730 Supplies Expense 950 Insurance Expense 600 Salaries Expense 1,800 Service Revenue 2,000 Instructions: Answer the following questions, assuming the year starts January 1. a) The amount of P950 in Supplies Expense is the result of an adjusting entry and PS00 of supplies were purchased in March. What was the balance in Supplies on January 1? b) The amount of P600 in Insurance Expense came from the December 31 adjusting entry. The original insurance premium was for one year. What was the total premium and when was the policy purchased? c) P3,500 of salaries was paid in2019. What was the balance in Salaries Payable at December 31, 2018? 4) P1,600 was received in 2019 for services performed in December. What was the balance in Unearned Revenue on December 31, 2018? CLOSING ENTRIES After preparing the financial statements, the revenue and expense accounts would have served its purpose for the current accounting period. These accounts should now be closed to make the ledgers ready for the nominal accounts for the next accounting period. Pro-forma for closing, using the income statement as a guide, are as follows: 8) Close net sales - Sales XX, Sales Returns and Allowances Sales Discount Income and Expense Summary BRE 3b) Close cost of sales - xx Merchandise Inventory, End XX Purchase Returns and Allowances x Purchase Discount x Income and Expense Summary * ae Merchandise Inventory, Beg te Purchases xx Freight In ©) Close operating expenses Income and Expense Summary xx xx Operating Expenses (in detail) 4) Close other income and expenses Other Income (in detail) xx Other Expenses (in detail) i Income and Expense Summary xx At this point, in T account, the Income and Expense Summary will show: Income and Expense Summary b) cost of sales xx] a) netsales xx ¢) operating expenses xx | d) net other income =x If the balance at this point is on the credit side, then it represents net income. To close - Income and Expense Summary xx Owner’s Capital Xx If the drawing account has a debit balance it means that the owner’s personal withdrawals is greater than the net profit eamed. To close - Owner’s Capital xx Owner’s Drawing x POST-CLOSING TRIAL BALANCE : After preparing the closing enitries, another trial balance is prepared for the accounts stll open. Again, the reason for this isto prove the equality of the debits and credits REVERSING ENTRIES These entries are prepared first day of the next accounti es . ins i 4 ” some adjusting entries. The purpose of reversing entries are, BES tb Taveras 5 1. To close out accounts that were only created when adjusting entries were prepared, such as the accrued income and expenses, the prepaid expen d , Ss the unearned income under the income method,” "der the expense method and 2. For consistency in the accounting procedure of recording i impli P ing income and e) 3. To simplify the bookkeeping entries in the following accounting eae 24Exercise 26 Kim Minerva gave you the following adjusted trial balance: KIMMIE SNER COMPANY Adjusted Trial Balance For the Month Ended June 30, 2019 f Adjusted Trial Balance ; Account Titles Debit Credit Cash 4,650 f Accounts Receivables 5,200 Supplies 640 Accounts Payable 2,500 Unearned Revenue 200 Minerva, Capital 7,280 Minerva, Drawing 400 Service Revenue 5,360 Salaries Expense 1,650 Miscellaneous Expense 350 Supplies Expense 3,050 Salaries Payable 600 . P15,240 15,940 Direction: a) Prepare the closing entries at June 30, 2019. b) Prepare a post closing trial balance as at June 30. ©) Reversing entries at the start of another fiscal period assuming that advances are under the liability method and prepayments under the asset method. MERCHANDISING BUSINESS A trader or merchandiser buys goods or articles, which it sells at a profit, without changing the form of the goods or articles. ‘The following are the account titles peculiar to a merchandising business: for goods purchased - Purchases Purchase Returns & Allowances Purchase Discount Freight In for sales made - Sales Sales Returns & Allowances Sales Discount Exercise 27 Cebu Bookstore bought cabinets and glass shelves for its store from Manita Furniture Company, paid P6,000 plus freight of P750 under the term FOB Shipping Point. Direction; Give the journal entries in the books of the seller and buyer. 25 ——Exercise 28 On June 10, Good Grocery was granted an allowance of P150 for an office table that i, Purchased on account two days ago from Restwell Furniture Store. Direction: Give the journal entries in the books of both the seller and the buyer. Exercise 29 ABAKADA Bookstore makes purchases at least twice a year. Sales price is usually 200% of cost. The company uses perpetual method. You are given the following information; a) 2,000 copies of books were in the bookstore as of December 31, 2018. The unit cost averaged P87 including freight. b) May invoice showed 5,000 copies ordered from Jasmine Printing Press at a unit cost of P90. Freight amounted to P5,000. ©) 3,000 books were sold on account coming from the May purchase d) October invoice showed 3,000 copies were purchased on account from Pauline Printers at a unit cost of P85. Freight amounted to P7,500. ©) Sold for cash 1,000 of the books in stock as at Jan 1, 2019. Direction: a) Give the entries and compute for the gross profit. b) Prepare a stock card and determine inventory balance at the end of the year. Exercise 30 For each of the following purchases of Friends Company, assume that credit terms are 2/10, 1/30 and that any credit memorandum was issued and known before Friends Company made the payments. Prepaid Freight Credit | Amount Shipping Terms (by seller) _| Memorandum A | P 20,000 shipping p P1,500 P B 000 shipping point 3,000 8,500 120,000 F.O.B. destination 7,200 10,000 ! Direction: In each case, determine (a) the appropriate cash discount available and (b) the cash remitted if the payment is made within the discount period. Exercise 31 In each of the following independent cases, prepare the entries and the subsidiary ca"! if necessary, from the viewpoint of the buyer and seller: a) Silver Company sold merchandise to Universal Corporation on September 15 P90,000, terms 2/10, n/30, FOB Shipping Point. It prepaid delivery expense 0 September 16, P4,000 and on September 20 it received a check for P40,000. OF September 25 the remaining balance was paid in full. On September 30, Univers! 26returned spoiled goods amounting to 5,000 whi Silver Company acknowledged. b) Gold Company, an RTW distributor, bought equipment from Abenson for P100,000. Terms: 50% down, balance 3% e.o.m, FOB destination, dated July 5, Abenson prepaid the freight for P2,500, A. Partial payment was made on July 15, P30,000 and a credit memo was received on July 20 for a defect in the equipment, P5,000. ‘The balance which was due at the end of the month was not paid, Gold issued, instead, a 15-day, 18% promissory note. The note was paid on maturity date, , . ©) Copper Company, an appliance company, bought a printer for office use for P15,000. Terms: 2% and 1% trade discount, balance 2/10, 1/15, 1/30. Date: February 1. Payments were made on February 10 for P5,000 and the balance on February 15. d) Us ituation a) but assume this time that the business is VAT registered. Exercise 32 A company’s operating figures for four consecutive periods are given below: qa) (2) @G) (4) Beginning Inventory P 250,000 P-200,000 P'150,000 P 230,000 Net Cost of Purchases 450,000 550,000 500,000 450,000 Cost of Goods Available for Sale P 700,000 P- 750,000 P 650,000 P 680,000 Ending Inventory 200,000 150,000 230,000 160,000 Cost of Goods Sold P 500,000 P.600,000 +P. 420,000 520,000 Direction: Assuming that the following errors were made, compute the correct cost of goods sold for each period: Period Error in Ending Inventory, 1 Overstated 20,000 2 Understated P30,000 3 Overstated 10,000 CODE OF PROFESSIONAL CONDUCT .d rules to all professionals in the performance of their nurses, engineers, lawyers, architects and the like. ly on the professionals’ understanding and moral values and secondarily the atitude of peers, public opinion and vigilance of professional associations to which they belong. These associations have their own set of code and i necessary sanctions or disciplines members who violate the rules. i it i ici tive professional Commitment. A professional must commit themselves in practicing sensitive pr and moral judgments in all their undertakings. Additionally, they have a continuing role to cooperate with each other to improve the practice of their profession, maintain the public’s confidence, and carry out the profession's special responsibilities for self-governance. ¢ 5 will is committing oneself to act in a way Accepting engagements and doing the client’ n that vill protect stakeholders" interest, stand by their trust and reliance in you, demonstrate The Code provides guidance an‘ responsibilities be they accountants, nurs Compliance with the rules depends primar 27conflicting pressures must act wig, professionalism at all times. Professionals who encounter ©: crve the stakeholder, ‘, " enuine it est to st integrity, objectivity, due professional care and a genuine interes n ires one to be honest. Integrity Principle. Integrity is an element of character which requir ang not subordinate client’s confidence for personal gain. A pol does not entertain deceit or subordination of judgment which will lead to lose of public trust. ee Objectivity and Independent ould be free of etry (ro cues ote discharging professional responsi sa state of min 7 ty and i es, Independence. requires one to avg relationships that may inpair a professionals quality of judgment Professionals mus scrupulous in the application of judgment and candid in their dealings with all sta - . aa i \der_ excell Due Professional Care. The essence of due professional care is to render excellent professional service. Due eare requires one to discharge professional responsibilities with competence and diligence. Competence requires one to have a good edueslional background and experience. To maintain competence, itis required that continuing professional education and improvement throughout the life ofa professional be maintained. Professionals mus alg be diligent in fulfilling its commitment. Diligence imposes the responsibility to render services promptly and carefully, to be thorough, work the plans, and supervise the activities to ensure the success of the plans set up. A professional s ies. Objectivity Exercise 33 A code of professional ethics guides professionals in their professional practice. Identify what are described in A with the ethical conduct given in B: SETA 1) A company accountant must know whether a disbursement should be treated as capital expenditure or as revenue expenditure, or else financial statements will be unreliable. 2) This is akin to good behavior where a professional practitioner refrains from engaging in activites that will destroy or discredit the profession such as manipulating records and reports, accepting bribes, gifts or favors. 3) Security measures in locking files and documents may eliminate this threat to an ethical conduct. 4) Avoid being bias, disclose all relevant information and exercise fair judgment, 5) This involves quality of service, master diligence in rendering the service. 6) Ben Logan, a family member of the com client firm, Ace Logan informed the board 7) Mr. Calvin is a board member of RAM C investor as to the attractiveness of Ram sh impending strike. Mr. Calvin denied the ty of knowledge, adequate experience, and pany auditor Ace Logan, is the treasurer of the about this and offered to withdraw as auditor. ‘Orporation. He was consulted by a prospective fares which is rumored to go down because of at Tumor although he knows it is true. SETB a) Objectivity ¢) Integrity 3) Dus:petiteeat b) Confidentiality 4) Independence perreas onal care f) Competence 28t ‘TAX REFORM PACKAGE Two things that are sure in this world are taxes and death. Taxes, for instance, are hound to. change. The Tax Reform Package was approved into law and took effect on January 2018. The objective was for a majority of the earners to take home more pay which would then be able to buy more food on the table, Pay utility bills, and make life more comfortable. The Tax Reform for Acceleration and Inclusion Law (TRAIN) 1, which is now a law, drastically brought down personal income taxes. The exemption level is much higher than before at P250,000 per year. It means that a worker or employee earning P20,833 a month or P250,000 a year, is exempt from paying taxes effective January 1, 2018 up to December 31, 2022. The law carried also revised premium contributions as follows: $8 Contribution. The contribution rate is now 14% of the monthly salary credit not exceeding P20,000 and this is being shared by the employer (8.5%) and the employee (4.5%). In excess of P20,000, the monthly premium is P900 per employee or P450 semi-monthly. PhilHealth. The monthly contribution shall be 4% of the monthly basic salary with floor of P10,000 or P400 and a ceiling of P80,000 or P3,200. If your salary is P8,000, the floor of P400 is to be paid, always equally between employer and employee. If the salary is over P10,000 both employee and employer pays 2% each. Minimum is P400, maximum is P3,200 shared equally. HDMF/Pag-Ibig. The monthly contribution shall be 2% for the employer and 1% for the employee based on a monthly salary of P1,500 or less. Over P1,500 to P5,000, a rate of 2% is to paid each by the employer and employee. The maximum is P100 for each, the minimum at P1,500 is P15 for the employee and P30 for the employer. Assume monthly pay of three employees: Fajardo P20,000, Alberto P22,000, Cecille 45,000. Fajardo Alberto Cecille Monthly Salary 20,000 P22,000 45,000 SS Premium 900.00 900.00 900.00 PH 2% 400.00 440.00 HDMF 100.00 Total Deductions — 1,400.00 Taxable Income P18,600.00 Tax Due a)- by - 2,50042,442 (25% of 43,100- ©) P 4,942 33,333) RA 10960 Income Tax Table: : : Those earning a monthly pay of P20,833 or lesser are tax exempt. Those ett in excess of P20,833 but not exceeding 33,333 pay a tax of 20%. Those earning in excess of P33,333 but not exceeding 66,667 pay a tax of P2,500 +25% of the excess, To offset the drain in the governme some of the day-to-day commoditis beverages, and fuel) which contribut ent's coffer brought by this cutback on personal income tax ies have been taxed higher (cars, tobacco, sugar-sweetened (ed to the country’s inflation or rising prices. 29BUSIN q emage Tax are also included in ESS TAXES. Value Added Tax or VAT and Percentage Tax 8 0g kia & reform package. It is required effective January 2018 that a 12% r s ry 2 : a income tax, the moment gross sales or gross receipts hit the 3,000,000 threshold, applies to sellers of goods and service providers, as well, for sales or receipts is P3,000,000 or more. To illustrate: Assume RG Trading, a dry g0 P3,000,000 gross sales annually. RG Trading reported of P1,092,000, VAT inclusive. This was purchased on January 1 as long as their anmual gros. gods merchandiser earns more 1 for the first quarter of 2018 cash sale, for P560,000, VAT inclusive January entry: Purchases Speed Input Tax 60, Cash 560,000 January to March Cash 1,092,000 * oe Sales 975,000 Output Tax 117,000 If you will prepare a quarterly statement of financial position, adjusting entry on March 31, should be: Output Tax 117,000 Input Tax 60,000 VAT Payable 57,000 VAT and percentage tax are payable within 25 days at the end ofa quarter. If you will pay on April 10, entry will be: VAT Payable 37,000 Cash In Bank 57,000 ‘A percentage tax, instead of a 12% VAT, is levied if annual gross revenue does not hit 3,000,000. A service provider or retailer records a tax expense account for this, Assume RG Retailer has a gross revenue of P120,000 reported for the first quarter of 2018. March 31 Taxes Expense 3,600 Taxes Payable 3,600 TRAIN 2 or TRABAHO (Tax Reform for Attracting Better and Higher Quality Opportunities) is a second tax reform package still on the floor of Congress. It focuses on {™0 things: 1) Reducing the 30% corporate tax gradually by 2% a year starting 2021 eventually bringing down the rate to 20% by 2029. 2) Reducing various tax exemptions and tax holidays to minimize the “special treatment” enjoyed by a minority of corporations numbering arcu 5% that currently are only paying 6percent to 13 percent tax, EXERCISE 34 A. RG Trading employs three clerks and pay them monthly salary as follows: 1) Clark, cashier, P24,000 2) Bess, sales clerk, P15,000 3) Alex, manager, P30,000 Compute for their taxable income and the tax due from each one. B. RG Trading purchased goods in April for P728,000 VAT inclusi the second quarter reported sales of P1,274,000 inclusive of VAT. Give the pee aad i ie oe 30