ACCOUNTANCY EXAM Important questions that needed to be

answered to attain financial

information:
CHAPTER 1 ➪ How much cash does the business
have?
➪ How much money do customers
➪ The process by which financial owe the business?
information about a business is ➪ What is the cost of the
recorded, classified, summarized, merchandise sold?
interpreted and communicated to ➪ What is the change in sales
owners, managers, and other volume?
interested parties. ➪ How much money is owed to the
➪ An accounting system is suppliers?
designed to accumulate data about ➪ What is the profit or loss?
a firm’s financial affairs, classify the
data in a meaningful way, and
summarize it in a periodic report
called a financial statement. ➪ Establishes the records and

➪ It is often called the “language of procedures that make up the

business”. accounting system.

➪ Supervises the operations of the

Importance of Accounting: system.

➪ It is needed in order to evaluate ➪ Interprets the resulting financial

the performance and other future statements.

possibilities for your business as it

grows over time.
➪ An efficient accounting system can
➪ Public Accounting: Services that
allow owners and managers to
offer to prepare financial
quickly obtain useful information
documents such as tax returns and
that can benefit said business.
budgets.

It includes three services:

 ➪ Auditing: The review of It contains the following
financial statements to activities:
assess their fairness and ➪ Establishing accounting
adherence to generally policies
accepted accounting ➪ Managing the accounting
principles. Accountants who systems
are CPAs perform financial ➪ Preparing the financial
audits. statements
➪ Tax Accounting: Involves ➪ Interpreting financial
tax compliance and tax statements
planning. Tax compliance ➪ Providing financial
deals with the preparation information
of tax returns and the audit ➪ Providing financial advice to
of those returns. Tax management
planning involves giving ➪ Preparing tax forms
advice to clients on how to ➪ Performing tax planning
structure their financial services
affairs in order to reduce tax ➪ Preparing internal reports
liability. for management
➪ Management Advisory
Services: Offering ➪ Governmental Accounting:
consulting services to Involves financial records and
clients provided by a preparing financial reports as part
specialist organization. of the staff of federal, state or local
government units. The Securities
➪ Managerial Accounting: Practice and Exchange Commission (SEC),
of identifying, measuring, the Internal Revenue Service
analyzing, interpreting, and (IRS), the Federal Bureau of
communicating financial Investigation (FBI) and Homeland
information. Also referred to as Security employ a large number of
“private accounting”. accountants.
NOTE: Many public accountants are 2) Suppliers
Certified Public Accountants (CPAs). To ➪ A number of other people
become a CPA, an individual must have a that are interested in the
certain number of college credits in financial information about
accounting courses, demonstrate good the business and provide its
personal character, pass the uniform CPA goods and services.
examination, and fulfill the experience ➪ They also need to set a
requirements of the state of practice. credit limit to the business.
CPAs must follow the professional code of
ethics. 3) Banks
➪ The bank needs to be sure
that the business will repay
the loan on time.
➪ The results of the accounting ➪ The bank will ask for the
process are communicated to financial information
many individuals and prepared by the business’
organizations. accountant.
➪ The bank will decide
1) Owners and Managers whether to make the loan
➪ Major responsibility of and the terms of said loan.
owners and managers of an
entity is internal control and 4) Tax Authorities
the prevention of fraud. ➪ Interested in financial
➪ Internal controls are the information about the
company’s policies and business.
procedures in place to ➪ The financial information is
safeguard assets, ensure used to determine the tax
reliability of accounting base:
data, and promote - Income taxes are
compliance with based on taxables.
management policies and - Sales taxes are
applicable laws. based on sales
income.
 - Property taxes are different goods and
based on the suppliers.
assessed value of
buildings, equipment 7) Employees and Unions
and inventories. ➪ Employees who are
members of a
5) Regulatory Agencies and profit-sharing plan pay
Investors close attention to the
➪ Regulatory agencies are financial results because
government authorities that they affect the employees’
are responsible for setting incomes.
and enforcing standards in
a specific field of activity or ➪ Employees who are
operations in the private members of a labor-union
sector of the economy. use financial information
about the firm to negotiate
➪ Investors are a business wages and benefits.
entity, financial entity or
even an individual who
takes their financial capital
and puts it/invests it in a ➪ Sole Proprietorship: A business
particular commodity, owned and operated by one
currency or company in person.
hopes of getting some ➪ Partnership: A business owned
semblance of financial and operated by two or more
returns in the future. people.
➪ Limited Liability Company: A
6) Customers business structure that combines
➪ A person or company that the liability protection of a
receives, consumes or buys corporation with the tax benefits of
a product or service and a partnership.
can choose between ➪ Corporation: A business structure
that is owned by
 shareholders/stockholders and - Determine the amount of
managed by a board of directors. increase or decrease
➪ Cooperative: A business structure
owned and operated by a group of 2) Make sure the equation is in
individuals for their mutual benefit. balance.
- An owner’s financial interest
in the business is called
equity or capital.
➪ An accounting principle that states
that the financial records of a
business must be kept separate
from those of its owners or any ➪ This arrangement is called buying
other businesses. on account.
➪ The business has a charge
CHAPTER 2 account or open-account credit
with its suppliers.
➪ Amounts that a business must pay

➪ A business transaction is any in the future are known as

financial event that changes the accounts payable.

resources of a firm. ➪ The companies or individuals to

➪ Purchases, sales, payments and whom the amounts are owed are

receipts are examples of business called creditors.

transactions. ➪ Equipment is a noncurrent or

➪ The accountant analyzes each long-term asset account which

business transaction to decide reports the cost of the equipment.

what information to record.

➪ Accountants use special

1) Describe the financial event. accounting terms when they refer

- Identify the property to property and financial interests.

- Identify who owns the ➪ They refer to the property that a

property business owns as assets and to

 the debts or obligations of the company lets a buyer purchase
business as liabilities. their goods or services on credit.
➪ The owner’s financial interest is ➪ Accounts payable is any sum of
called owner’s equity. money owed by a business to its
suppliers shown as a liability on a
company’s balance sheet. In
➪ Fundamental Accounting simple words, when buying goods
Equation is the relationship or services (also known as
between assets and liabilities plus equipment) with an arrangement to
owner’s equity. pay at a later date, such amount till
➪ Assets = Liabilities + Owner’s it is paid is referred to as accounts
Equity payable.
➪ The difference between accounts
receivable and accounts payable is
when the company owes a supplier
➪ Revenue is the total amount of money then it is called accounts
income generated by the sale of payable and vice versa for
goods and services related to the accounts receivable.
primary operations of a business.
➪ Expenses are the cost of
operations/money spent that a
company incurs to generate ➪ Shows the results of business
revenue. operations for a specific period of
➪ Prepaid expenses are future time such as a month, a quarter or
expenses that are paid in advance a year.
and hence recognized initially as ➪ The income statement shows the
an asset. revenue earned and the expenses
of doing business.
➪ Net income results when revenue
is greater than the expenses for
➪ Accounts receivable is listed as a
the period.
current asset on the seller’s
➪ When expenses are greater than
balance sheet. It is created when a
revenue, the result is a net loss.
 ➪ In the rare case that the revenue 6) Capital balance at the end of the
and expenses are equal, it is said period
to break even.
Inclusions of Balance Sheet:
The three-line heading of the income 1) Assets - The types and amounts of
statement: property that the business owns
1) Who - The business name appears 2) Liabilities - The amounts owed to
on the first line. creditors
2) What - The report title appears on 3) Owner’s Equity - The owner’s
the second line. equity on the reporting date
3) When - The period covered
appears on the third line. Reminders in preparing a balance
sheet:
➪ The three-line heading gives the
firm’s name, the title of the report,
➪ Statement of owner’s equity
and the date of the report.
reports the changes that occurred
➪ The account form shows total
in the owner’s financial interest
assets on the same horizontal line
during the reporting period.
as the total liabilities and owner’s
➪ The statement is prepared before
equity.
the balance sheet so that the
➪ Dollar signs are omitted when
amount of ending capital balance
financial statements are prepared
is available for presentation on the
on paper with ruled columns.
balance sheet.
➪ A single line shows that the
amounts above it are being added
Inclusions of Statement of Equity:
or subtracted. Double lines indicate
1) Capital balance at the beginning of
that the amount is the final amount
the period
in a column or section of a report.
2) Net Income/Net Loss
3) WIthdrawals
Specific order of preparing financial
4) Additional investments
statements:
5) Total of changes in equity
1) Income statement
2) Statement of owner’s equity
 3) Balance sheet

CHAPTER 3 ➪ Cash account is a ledger in which

all cash transactions are recorded.
It is also a debit account which

➪ Accounts are recognized by their means that debit in the cash

classification as assets, liabilities account would increase.

or owner’s equity. ➪ Cash is an asset.

➪ Asset accounts show the property ➪ Cash increases appear on the left

a business owns. side of the Cash T account.

➪ Liability accounts show the debts ➪ Decreases are shown on the right

of the business. side.

➪ Owner’s equity accounts show

the owner’s financial interest in the Steps to analyze the effects of the

business. business transactions:

➪ Each account has a name that 1) Analyze the financial event

describes the type of property, the ➪ Identify the accounts

debt, or the financial interest. affected

➪ Classify the accounts
affected
➪ Determine the amount of

➪ Accountants use T accounts to increase or decrease for

analyze transactions. each account

➪ It consists of a vertical line and a 2) Apply the left-right rules for each

horizontal line that resemble the account affected

letter T. 3) Make the entry in T-account form

➪ The name of the account is written

on the horizontal (top) line. (cheat sheet kasi ayaw ko na talaga)

➪ Increases and decreases in the

account are entered on either side
of the vertical line.
 ➪ A journal entry is the basis to
create a financial statement.

Debit - Assets. Withdrawals and

Expenses
Credit - Liabilities, Owner’s Equity and
Revenues

DEALER -> Dividends, Expenses, Assets

➪ An account balance is the (Debit) || Liabilities, Equity, Revenue
difference between the amounts on (Credit)
the two sides of the account.
➪ First add the figures on each side
of the account.
➪ If the column has more than one ➪ Interest = Principal x Rate x Time
figure, enter the total in small ➪ Use the “Banker’s Rule” = no. days
pencil figures called a footing. divided by 360
➪ Then subtract the smaller total ➪ Issuance: date in which a note is
from the larger total. written
➪ Usually account balances appear ➪ Payee: the person who’s paying
on the increased side of the ➪ Maturity Date: it is the date on
account. which the total amount borrowed
➪ The increased side of the account with interest is to be completely
is the normal balance of the repaid.
account. ➪ Always verify the days equal the
term of the note
CHAPTER 4
Notes Payable
➪ If you loaned from another

➪ A record of a business transaction business and put it into a written

in the accounting book of business. promise (aka note)

Notes Receivable
➪ If another business loaned from
you and puts it into a written
promise (aka note)

Note: Dishonored notes payable and ➪ Always follow the chart of accounts
receivable will have to use the I=PRT when creating a ledger.
equation when not meeting the deadline,
journal entry must have interest revenue
to it.
➪ Always follow the Assets =
Note: If there’s a down payment, see that Liabilities + Owner’s Equity
down payment as cash and input it into (Revenues - Expenses) format
the journal. If you’re the one buying when creating a trial balance
equipment or supplies with a down ➪ Example:
payment, then the journal entry would be
like this: Equipment or Supplies (Debit),
Accounts Payable (Credit) and Cash
(Credit) -> Subtract the price from the
downpayment and put it into the accounts
payable.

➪ If the first transaction starts on the

debit side, then all the transactions
with debits under the account title
are in addition while the
transactions with credit under the
account title are in subtraction.
➪ Inventory account reports the cost
➪ Example:
of unsold merchandise
 ➪ The inventory account of a trading Purchases - the account used to record
business contains merchandise purchases of inventory under the periodic
held for resale. system

Perpetual inventory - under this system Freight-in (transportation in) - the

the inventory account is updated each account used to record the shipping costs
time a purchase or sale is made. Thus the incurred on purchases of inventory under
inventory account shows a continuing or the periodic system
running balance of the goods on hand.
➪ Used normally for expensive items Purchase returns - the account used to
➪ More costly to implement record returns of purchases goods to the
➪ Record exists in every movement supplier
of inventory
➪ Inventory physical count is made at Purchase discounts - the account used
least once a year to record cash discounts availed on the
purchased goods
Periodic inventory - under this system,
the inventory account is updated only The sales department - sends an
when a physical count is performed. Thus authorized purchase requisition to the
the amounts of inventory and cost of purchasing department
goods sold are determined only
periodically. ACCOUNTS CLASSIFICATION
➪ Used for inexpensive items 1. Assets
➪ Cheaper to implement 2. Liabilities
➪ No record is kept for transactions 3. Owner’s Equity
involving inventory movement 4. Revenue
➪ Inventory physical count is made at 5. Expense
year end to establish ending
inventory amounts. Purchase account is under a different
classification: Costs of Goods Sold
(under Expenses)

Beginning Inventory:
Add: ➪ Credit Memorandum is issued by
Net cost of purchases the seller and is received by buyer

Is equal to Cost of goods available for Seller’s POV

sale ➪ Pwede the sales or selling price
➪ A sale is entered in the accounting
Less: records when the goods are sold
Ending Inventory or the service is provided
➪ Business Transaction: Sales
Is equal to Costs of Goods Sold Returns and Allowance (Debit) and
Accounts Receivable (Credit)

To compute for net cost of purchases: Sales

Purchases Less:
Less: Sales Discount
Purchase returns & allowance Sales Returns and Allowances
Purchase discount Is equal to Net Sales

Is equal to Net Purchases

Add:
Freight-in ➪ Shipping Point
➪ Freight on Board Destination
Is equal to Net Cost of Purchases ➪ Purchase of sales should be
recorded upon the transfer of
Purchases Returns and Allowances ownership of inventory
➪ Account is made when a vendor ➪ Inventories are to be delivered
returns something to a supplier or
receives an allowance against it. Transfer of Ownership
➪ Accounts Payable will be debited ➪ FOB shipping point is that the
and Purchases Returns and ownership of the goods is
Allowance will be a credited (this is transferred when the seller has
in Buyer’s POV) shipped the goods to the buyers
 ➪ A journal entry is made upon the ➪ Find the result of the first discount
point of shipment when multiplied to the price then
➪ Shipping Point = seller still owns once you get the product, that’s
it, buyer pays the FOB when you use the second discount
➪ Destination Point = buyer now by multiplying it to the product. (In
owns it, seller pays the FOB short, compound it)
➪ If seller is paying the delivery
charge, then it’s freight out or Cash Discount
delivery expense (Debited) ➪ Early payment discount
➪ FOB Prepaid = seller pays the ➪ Net 30 Days or n/30 = payment in
delivery charges full is due 30 days after the date of
➪ FOB Collect = buyer pays the the invoice
delivery charges ➪ Net 10 days EOM or n/10 EOM =
due 10 days after the end of the
month (the full version of the EOM)
in which the invoice was issued

Wholesale Business ➪ 2% (or any discount rate) 10

➪ A firm which sells goods to another days, net 30 days or 2/10, n/30 =

who will then sell it to the final if payment is made within 10 days

consumer (supplier -> wholesaler of the invoice date, the customer

-> retailer -> consumer) will pay the discounted price with

➪ Cash discounts = discount for 2% (an example) in it so they can

early payments be enticed by the discounted price

➪ Trade discounts = reduction from and pay the service or product

the list price or buying in bulk, will immediately.

not be recorded in the books of ➪ If not met with the due date, then

accounts there will be no discounts.

Series of Trade Discounts

➪ It’s stackable but don’t add the
discounts together ➪ Expense accruals: expenses that
have been incurred for which we
 have not yet received an invoice acquired on May 1 and carried a
from a supplier. Expenses are 1-year term to maturity. Prepare
debited while payables are the adjusting entry for the month
credited. ended.
➪ Revenue accruals: goods or
services that we have delivered for
which we have not yet billed the Interest Receivable 300
customer. Receivables are debited Interest Income 300
while revenues are credited.
3. Invested 90,000 cash in a
Note: If you see an entry for Expense certificate of deposit that paid 4%
Accruals that says “Accrued Utilities”, annual interest. The certificate was
“Accrued Taxes”, “Accrued Salaries”, etc. acquired on May 1 and carried a
in the credit part of the journal entry, it has 1-year term to maturity. Prepare
the same meaning as “Utilities Payable”, the adjusting entry for the year
“Taxes Payable”, “Salaries Payable”, etc. ended December 31, 2017.

Adjusting Entries of Accruals Interest Receivables 3,600

Examples: Interest Income 3,600
1. RDS Events agreed to arrange a
rush but simple wedding for a 4. Accrued salaries for the year
madly in-love couple in the ended December 31, 2016
afternoon of May 31. The entity is amounted to 34,500.
to charge fees of 5,300 for the
services, which is earned but Salaries Expense 34,500
unbilled. Salaries Payable 34,500

Accounts Receivable 5,300 5. Assume that on July 2, a Friday,

Service Revenue 5,300 the entity, which is on a five day
workweek and pays employees
2. Invested 90,000 cash in a weekly, paid its regular salaried
certificate of deposit that paid 4% employees 192,000. Prepare the
annual interest. The certificate was
 adjustments for the month ended
June 30, 2019.

➪ Prepaid expenses/Asset Method:

Salaries Expense 115,200
expenses paid in advance. It is an
Accrued Expense 115,200
asset, not an expense.
➪ At the end of the accounting
6. Accrued utilities for the month
period, the portion of an asset that
ended March 31, 2020 is 50,000
has expired becomes an expense.

Utilities Expense 50,000

Example:
Accrued Utilities 50,000
Cash
Service Revenue
7. On September 1, Pratricia issued a
promissory note amounting to
Service Revenue
100,000, 10% interest on an
Unearned Service Revenue
annual basis.
a) Assuming that every month
➪ Precollection/Liabilities Method:
Patricia records all interest
may utang ka kay customer ng
on the note, prepare the
services mo since nagbayad siya
adjustment for the month of
in advance pero di pa niya nakuha
September.
yun service/product that you’re
b) Assuming that every month
supposed to give.
Patricia records all interest
➪ Like I paid tickets for a flight pero
on the note, prepare the
next month pa ako mag-aalis sa
adjustment for the year
ibang bansa, that’s an unearned
ended December 31.
revenue since di ko pa nagamit
yun service yet.
a) Interest Expense 833.33
Interest Payable 833.33
Example:
Cash
b) Interest Expense 3,333.33
Unearned Revenue
Interest Payable 3,333.33
 Unearned Revenue Unearned Rental Rev. 48,000
Service Revenue
Unearned Rental Rev. 2,000
Adjusting Entries for Deferrals Rental Revenue 2,000
Examples:
Income/Asset Method:
1. Cabigting Company received Cash 48,000
24,000 representing advance Rental Revenue 48,000
payment for rental of an office
space for 6 months. Assuming that Rental Revenue 46,0000
Cabigting recorded the said Unearned Rental Rev. 46,000
amount as unearned revenue
revenue and the lease is to start on
March 1, record the adjusting entry
to recognize the revenue earned ➪ Depreciation refers to the loss of
for March. usefulness and not necessarily to a
decrease in the market value
Cash 24,000 ➪ The account depreciation expense
Unearned Rental Revenue is debited and the account
24,000 accumulated depreciation is
credited to record the depreciation
Unearned Rental Revenue 4,000 period.
Rental Revenue ➪ Straight-line depreciation: cost -
4,000 salvage value divided by the
estimated months of useful life
2. On July 1, 2020, Marasigan
Company received a 48,000 check Adjusting Entries of Depreciation:
for 2 years’ rent paid in advance. Examples:
Prepare Adjusting entry for the 1. Depreciation on the equipment of
month ended, July 31, 2020. ABM Company is P60,000

Liability Method:
Cash 48,000
 Depreciation Expense ➪ Bad Debts Expense is debited
60,000 while Allowance for Bad Debts is
Accumulated Depreciation credited
60,000 ➪ Allowance for bad debts ay
palaging karugtong ng accounts
2. Equipment costing 588,000 has a receivables
useful life of 5 years with an
80,000 salvage value at the end of Adjusting Entries for Doubtful
five years. Record the depreciation Allowance
for the year. Examples:
1. ABM Company made a credit sale
Depreciation Expense of 1,100,000 in 2019 and prior
101,600 experience indicates an expected
Accumulated Depreciation 1% average uncollectible accounts
101,600 rate based on credit sales.
3. Paid 160,000 cash to purchase a
delivery van on January 1. The van Doubtful Accounts Expense
was expected to have a 3 year life 11,000
and 10,000 salvage value. Prepare Allowance for DA
the adjusting entry for the year 11,000
ended December 31, 2016.
2. ABM Company has an outstanding
Depreciation Expense 50,000 Accounts Receivable balance of
Accumulated Dep. 50,000 500,000 and based on history 2%
of the receivables are considered
uncollectible.

➪ May nangutang sa company pero Doubtful Accounts Expense

di na natin sure kung magbabayad 10,000
pa si ate gurl or si kuya boi. Allowance for DA
➪ Consider it as an expense 10,000
 2. Income Statement/Statement of
Profit or Loss

➪ This multi-column document 3. Cash Flow Statement

provides an efficient way to

summarize the data for financial
statements.
➪ It simplifies the adjusting and ➪ Also known as an “Income

closing process. Statement”.

➪ A financial statement that

Steps in Making a Worksheet: summarizes a business’s revenues

Step 1: Analyze the transaction and expenses over a period of

documents time.

Step 2: Prepare general journal ➪ It tells how much profit that the

Step 3: Prepare general ledger business earned over a period of

Step 4: Prepare trial balance time.

Step 5: Prepare the adjustments ➪ Profit doesn’t necessarily translate

to cash flow.
➪ If the balance sheet is a snapshot
of a point in time, then the income
statement is more like a video or a

➪ Reports that summarize the boomerang covering a range of

activities and financial performance time.

of a business ➪ Example:

➪ They're prepared at the end of

each accounting period.
➪ They’re designed to give investors
and lenders a feel for a business’s
financial health.

3 Main Financial Statements: ➪ It has shown the revenue (how

1. Balance Sheet/Statement of much the business has earned
Financial Position from selling goods), the expenses
 (how much the business has spent
in its operations) and the profit
(how much the business has
generated money).
➪ Revenue - Expenses = Net Profit
or Net Loss

➪ The left side consists of the total

assets (the ones the business
➪ Summarizes the changes that
owns) while the right side consists
occurred in owner’s equity.
of the total liabilities and total
➪ Example:
equity (the ones the business
owes).
➪ Total Assets and the Total
Liabilities & Equity must be in
balance.

➪ Profit comes from the income

statement/statement of profit or ➪ A financial statement that shows a
loss. business’s cash inflows and
outflows over a period of time.
➪ Businesses need to make a cash
flow statement if they are using
➪ Also known as a “Balance Sheet” accrual accounting.
➪ A financial statement that gives a ➪ There are two types of accounting
snapshot of a business’s assets, methods: Cash Method and
liabilities and equity at a single Accrual Method.
point in time. ➪ Cash Method
➪ Example: - often used by smaller
businesses, it says that
revenue is recognized when
 cash is received and
expenses are recorded
when cash is paid out.
- The income statement and
the cash flow statement are
equivalent to one another.
- It has its limitations such as
if there’s a huge sale and
the customer doesn’t pay
the invoice until the
following accounting period.
- The revenue can be
understated in the period
that they made the sale and
overstated in the following
period when cash is
received and revenue is
recorded.
➪ Accrual Method: The 3 Cash Flow Activities:
- Revenue is recognized as 1. Operating:
it’s earned and expenses - day-to-day operations
are recorded as they are - Most important category of
incurred when the the 3 categories
substance of the transaction - These activities create
takes place. revenues and expenses
- This means that cash - Transactions that make up
inflows and outflows aren’t net income
equivalent to revenues and - Also affect current assets
expenses. and current liabilities on the
- They need to be tracked Balance Sheet
separately in the cash flow 2. Investing:
statement.
➪ Example:
 - Transactions that increase investments or other
and decrease long-term long-term assets and the
assets. cash inflows that come with
- Most common cash selling them.
transactions: purchase and - Cash flows from financing
sales of PPE (plant, activities relate to the
property and equipment) raising or repaying of cash
assets. or capital.
3. Financing: ● There are two ways
- Increases and decreases in a business can do
long-term liabilities and this, using liabilities
owner’s equity. or equity.
- Examples: ● They can borrow
1. Issuing stock and money from a
paying dividends third-party bank
(paying dividends which would
affects OE by increase their
lowering retained liabilities or a
earnings) business can look to
2. Buying and selling its owners, its
treasury stock shareholders, who
3. Borrowing money can make capital
and paying off loans contributions which
increase the equity.
➪ Direct Method: ● On the flip side, they
- Cash flows from operating also make loan
activities under the direct repayments back to
method mirrors the Income the bank and
Statement prepared under distribute dividends
the cash method. back to the owners.
- Cash flows from investing - When adding up the net
activities include cash cash flows from operating,
outflows from buying investing and financing, it
 can reconcile the net
increase/decrease in cash
back to the Balance Sheet.
➪ Indirect Method:
- The only section changes is
the cash flow from
operating activities.
- Always begins with net
profit or loss from the
Income Statement.
- Add back all the non-cash
expenses that appear
➪ Journal entries posted at the end
above it (these don’t
of an accounting period to reset
represent cash outflows and
temporary accounts to zero the
they need to be reversed
balances are transferred to a
out; the usual suspects are
permanent account called retained
depreciation and
earnings.
amortization and any gain
➪ Remember RED ALE on knowing
or loss on the sale of
which are temporary accounts and
non-current assets or
permanent accounts. RED
long-term assets).
(Revenue, Expenses and
- Adjust for the movement in
Dividends) falls under temporary
working capital (working
accounts while ALE (Assets,
capital is the difference
Liabilities and Equity) falls under
between current assets and
permanent accounts.
current liabilities; increases
➪ Permanent Account: the closing
in current assets like
balance at the end of an
inventory or receivables
accounting period is always carried
reduce cash flow while
forward into the next one.
increases in current
➪ Temporary Account: the closing
liabilities like payables
balance at the end of an
increase cash flow).
 accounting period always needs to ➪ Kung ang end of the accounting
be reset to zero. period mo ay December 31, ibig
sabihin gagawa ka ng reversing
entries sa January 1.
➪ It is necessary to test the quality of ➪ Only 4 accounts can be reversed:
the accounts by preparing a new Accrued Expenses, Accrued
trial balance. This final trial balance Revenues, Prepayments (Expense
is called the post-closing trial Method), Deferred Income (Income
balance. Method).
➪ Example:

- Understated amounts indicate a

reported amount is not correct and
the reported amount is less than
the true amount.
- Overstated amounts to describe an
incorrect reported amount that is
higher than the true amount.

➪ It is a journal entry which is the

exact opposite of a related
adjusting entry made to simplify
the recording of regular
transactions in the next accounting
period.
unting napagod ako dito dahil ang
➪ Literal na babaliktarin mo lang haba pala….
adjusting journal entry na ginawa -alex f.
mo.
➪ This step is optional.
➪ Ginagawa ito sa simula ng
susunod na accounting period.