● Chapter 1 Introduction to Financial Accounting

Accounting Defenition
(ASC) Accounting Standard Council - Accounting is a service
activity that provides financial information on economic entities
for decision-making purposes.
(AICPA) American Institute of Certified Public Accountants
-
Accounting includes documenting, categorizing, and
summarizing financial transactions and occurrences, as well as
evaluating the outcomes in monetary
terms.
(AAA) American Accounting Association - Accounting is the
systematic process of identifying, measuring, and
communicating economic data to enable users to make
informed decisions.

Important Activities in the Accounting Process

1. IDENTIFYING
2. MEASURING
3. COMMUNICATING
- RECORDING (journalizing)
- CLASSIFYING (posting on general ledger)
- SUMMARIZING (preparation of financial statements)

FINANCIAL STATEMENTS - The means by which the

information
accumulated and processed in financial accounting is periodically
communicated to users. Users of financial information (investors,
creditors).
➢ Complete Set of Financial Statements
1. Statement of Financial Position
2. Income Statement
3. Statement of Comprehensive Income
4. Statement of Changes in Equity
5. Statement of Cash Flows
6. Notes, comprising a summary of significant
accounting policies and other explanatory notes.
 ➢ Elements of Financial Statements

FINANCIAL POSITION FINANCIAL PERFORMANCE

ASSETS INCOME

LIABILITIES EXPENSES

EQUITY

ASSETS - resources controlled by the entity as a result of past

transactions or events and from which future economic benefits
are expected to flow the entity.
LIABILITIES - present obligations of the entity arising from past
transactions or events the settlement of which is likely to result
in the outflow of resources embodying economic benefits.
EQUITY - The residual interest in the asset of the entity after
deducting all of its liabilities.
INCOME - Increase in economic benefit during the accounting
period in the form of an inflow or increase of assets or decrease
of liability that results in an increase in equity, other than
contribution from equity participants.
EXPENSES - Decrease in economic benefits during the
accounting period in the form of an outflow decrease in assets or
increase in liability that results in decline in equity, other
than distribution to equity participants.

Purpose of Accounting - Provide quantitative financial

information about a business that is useful in making economic
decisions through – the financial statements.

CONCEPTUAL FRAMEWORK - It is a summary of the terms

and concepts that underlie the preparation and presentation of
financial statements for external users.

● CHAPTER 2
 Accounting Process - The accounting process includes
summarising, evaluating, and reporting these transactions to
regulatory bodies, tax collection organizations, and oversight
agencies.
- Guide through the cycle from transaction to
financial report.
1. Analyzing the business documents or transactions.
2. Journalizing
3. Posting (T-accounts)
4. Preparing the unadjusted trial balance
5. Preparing the adjusting entries. (accruals, deferrals)
6. Preparing the financial statements
7. Preparing the closing entries
8. Preparing a post-closing trial balance
9. Preparing the reversing entries

Accounting Records - certain accounting records that provide

information on the profits and expenses of a business.
➢ Books of accounts
a. Journal - Chronological transaction records
b. Ledger - Accounts used to summarize the
consequences of transactions in each aspect of
financial statements.

Classes of Accounts
1. Real Accounts – represents assets, liabilities, and equity
2. Nominal Accounts – represents revenues and expenses
3. Mixed Accounts– represents those with real and nominal
element
4. Contra Accounts - deducted from a related account, like
accumulated depreciation
5. Adjunct Accounts - added to account, like premium on
bonds payable

Worksheet - used to facilitate the gathering of data for

adjustments and the preparation of financial statements
and closing entries.
 Trial Balance - a list of general ledger accounts and their
balances. Prepared to check the equality of total debits
and credits.
Types of trial balance
1. Unadjusted Trial Balance - before adjusting entries (real,
nominal, mixed accounts)
2. Adjusted Trial Balance - after adjusting entries (real and
nominal accounts)
3. Post-closing Trial Balance - after the closing process (real
accounts only)

Adjusting Entries - preparation of financial statements to

update certain accounts to reflect changes in correct balances.

Income - used to describe the excess of revenue over expenses.

Expenses - an outflow of cash or other valuable assets from a

company to an individual or business.

Financial Statements - end products of the accounting

process.

Closing Entries - closing entries process for nominal accounts,

ruling and balancing real accounts. End of the accounting period
to “zero out” all accounts in the ledger.

Post-closing Trial Balance - to prove the equality of debits and

credits in theledger after the closing process.

Reversing Entries - usually made on the frist day of the

accounting period to reverse adjusting entries.
 Closing Entries - are made after an accounting period after
adjusting entries and financial statements have been
completed with the goal of shutting all nominal or temporary
accounts.

Reversing Entries - At the start of a new accounting period,

accrued and prepaid items are transferred to nominal accounts
used for recording transactions during the current accounting
period.
● Items that could be reversed:
a. Accruals
b. Deferrals under the expense and income
method

Journal - is the process of recording transactions, by means of

journal entries.
➢ Types of Journals
1. General Journal - a book of original entries used to
record transactions. All transactions are recorded.
2. Special Journal - used to record transactions of a
similar nature.
a. Sales journal - record sales on account
b. Purchases journal - record purchases of
inventory on account
c. Cash receipts journal - record all transactions
involving receipt of cash
d. Cash disbursement journal - record all
transactions involving payment of cash
In summary:
1. The accounting cycle outlines steps for recording and
preparing
financial statements.

● It involves recording transactions and preparing financial statements in

a systematic order.
● Journal entries are made initially, followed by posting to the ledger.

2. The journal is the book of original entry.

● It's where all transactions are first recorded.

● Journal entries are later posted to the ledger, the book of final entry.

3. The ledger is a comprehensive compilation of accounts.

● It stores all accounts used by the entity.

● It's used to summarize transactions.

4. Journals are used only in the double-entry system.

● Single-entry systems use subsidiary ledgers for support.

● Both cash basis and accrual basis accounting can use either
double or single-entry systems.

5. An account is the basic storage unit in accounting.

● Debit is the left side, while credit is the right side.

6. The chart of accounts lists all accounts of the entity.

● It contains account names, codes, and categories.

7. The trial balance checks the equality of debits and

credits.

● It lists the balances of all accounts to ensure totals match.

8. Trial balance errors indicate unequal total debits and

credits.

● Errors in recording are revealed when debits and credits are

not balanced.

9. Adjusting entries update account balances for financial

statement preparation.

● They ensure the accuracy of financial data by adjusting the

accounts for accrued and deferred amounts.

10. Financial statements communicate processed

financial data.

● These statements provide users with accumulated and

processed information periodically.
 11. Income is recorded using either the liability or income
method.

● Expenses are recorded using either the asset or expense

method.

12. Reversing entries correct previous adjustments.

● They can adjust accruals, prepayments, or unearned income

recorded using specific methods.

Note:
The accounting cycle involves recording transactions and
preparing financial statements. It begins with journal entries
(original entry) and moves to post in the ledger (final entry).
Both double and single-entry systems can use subsidiary
ledgers, and both cash and accrual accounting methods are
compatible. Accounts store information; debit and credit
refer to the left and right sides. A chart of accounts lists all
accounts used. A trial balance ensures equal debits and
credits and reveals errors. Adjusting entries updates account
balances before preparing financial statements. These
statements convey financial information to users. Income
and expenses can be initially recorded in various ways but
result in the same final financial figures. Reversing entries
apply to all accruals, prepayments using the expense
method, and unearned income using the income method.
 ● CHAPTER 3:

Cash and Cash Equivalents - the line item on the balance

sheet that reports the value of a company's assets that are
cash or can be converted into cash immediately.

Cash - must be unrestricted for use in the current operations. It

is always a current asset.
➢ Cash on hand - undeposited collections or other
current funds
➢ Cash in bank - bank deposits that are available for
immediate withdrawal and unrestricted use.

Postdated checks received - do not qualify as cash.

Cash equivalents - “short-term”, debt instruments acquired

within 3 months or less before the maturity date.

Bank overdraft - (cash overdraft) is a negative (credit) balance

in cash in a bank
account. A negative balance from bank shall be reverted to cash
and payable.

Petty cash fund - requires all cash receipts to be deposited

intact and all cash disbursements.

1. Imprest Fund System

a. Petty cash expenses are recorded upon
replenishment.
b. Replenishment amount = Petty cash disbursements
2. Fluctuating Fund System
a. Petty cash expenses are immediately recorded.
b. Replenishment amount = or > or < Petty cash
disbursements

Bank Reconciliation - Comparing a company's internal financial

accounts to its bank statements helps identify inconsistencies
and provides a clear understanding of its actual cash flow.
 ● CHAPTER 4

Bank Reconciliation - report to bring the cash balance, per

records and bank statement.

1. Balance per books, end.

2. Balance per bank statement, end.

➢ Credit Memos - (addition) the amount owed by a

customer due to overpayment or returned goods.
➢ Debit Memos - (decuctions) increase the amount owed by
a customer due to underpayment or additional charges

Book Errors - errors committed by customers or depositor

Bank Errors - errors committed by the bank

Deposit in transit - deposits are made but still needs to be

credited.
Outstanding checks - already drawn and released to payees
but not yet encash with the bank.

Bank Reconciliation - Comparing a company's internal financial

accounts to its bank statements helps identify inconsistencies
and provides a clear understanding of its actual cash flow.
 ➢ Book reconciling items
1. Credit Memos– deposits credited by the bank; not yet
recorded as cash receipts in books
2. Debit Memos – checks debited by the bank; not yet
recorded as cash disbursements in books Bank
➢ Reconciling items
1. Deposits in transit – already recorded as cash receipts in
books; not yet credited by the bank
2. Outstanding checks – already recorded as cash
disbursements in books; not yet debited by the bank
➢ Forms
1. Adjusted balance method – book balance and bank
balance → correct cash balance
2. Book to bank method
3. Bank to book method

● CHAPTER 5
 Accounts Receivable - arise from credit sales. Accounts
receivable (AR) is an item on a company's balance sheet that
represents money due the company for products or services it has
already delivered. Accounts receivable is considered an asset to
the company.

Receivables - is the right to receive cash, another asset

(goods) or services. May be current or non-current and trade or non-
trade.

 The rules on current and noncurrent classification are

discussed in detail under PAS 1 and are also based on
the receivable as either trade or nontrade.
 Trade receivables arise from the sale of goods or
services to customers and in the form of accounts
receivable or notes receivable.
 Non-trade receivables are receivables from all other
types of transactions like advances to officers and
employees and advances to other entities.

ACCOUNTS RECEIVABLE
+ Credit Sales (-) Sales return and allowances
+ Recovery of accounts written off (-) Sales discounts
(-) Collections including recovery
(-) Write off
(-) Factored accounts

The write off for accounts receivable under the allowance

method is recorded by:
Allowance for doubtful accounts xx
Accounts Receivable xx

So therefore the recovery or the collection on an accounts

receivable that already has been written off cannot be
recorded by simply debiting cash and crediting accounts
receivable. The entry for the write off must be reversed and
before recording the collection with the following two entries:
Accounts Receivable xx
Allowance for doubtful accounts xx
Allowance for doubtful accounts xx
 Accounts Receivable xx

Initial Measurement - receivables are initially recognized at

fair value plus transaction cost.

Terms of sales - considered by timing of transfer of control

over the goods and sold.

FOB - Free on Board

1. FOB shipping point - goods sold is trasferred to the buyer upon shipment.
(shipment date)
2. FOB destination - when the buyer receives the goods. (receives the goods)

Accounting for freight chargres

1. Freight prepaid - the seller has paid the freight before shipment.
2. Freight collect - the freight not yet paid upon shipment.
 The entity who owns the goods being shipped should pay
for the shipping costs.

Trade discounts and Cash discounts - Trade discounts are

deducted from the list price in terms with invoice price. Trade
discounts are not recorded, either by the buyer ot seller. Cash
discounts are dedected from the invoice price. Cash
discounts are accounted for separately.

 Trade receivables are those resulting from the sale of

goods or services in the normal business process, while
non-trade receivables are those from other sources.
 Trade receivables are classified as current assets if they are
expected to be realized in cash within the normal operating
cycle or one year, whichever is longer.
 The entry adjusting to remove a credit or debit balance in a
receivable or payable increases the total receivables.
 Trade receivables without significant financing components
are measured at transaction price in accordance with PFRS
15, and may not be discounted if due within one year.
 The buyer's ownership is transferred upon shipment under
FOB shipping point, and sales and accounts receivable are
recognized on the shipment date.
  FOB destination allows ownership transfer only upon
shipment receipt, while sales and accounts receivable are
recognized upon delivery.
 The allowance method of recognizing bad debts on
accounts receivable is used for financial reporting
purposes.
 Doubtful accounts may be estimated using: (a) percentage
of credit sales, (b) percentage of receivables, or (c) aging of
receivables.
 The amount computed under the percentage of credit sales
method is the bad debts expense for the period.
 The amount computed under the percentage of receivables
and aging methods is the required balance of the allowance
account.

 CHAPTER 6

Notes Receivable - formal promise to pay, usually in the form

of a promissory note.
  Interest bearing - stated interest rate on the promissory
note, include nominal rate, coupon rate, and face rate.
 Non-interest bearing - do not have a stated interest
rate, include the interest. Represents an unspecified
principal and unspecified interest.

Trade and Non-trade notes receivables - Trade notes

receivable is about of sale of goods or services in ordinary
course. Non-trade notes receivable when someone owes
the company money not related to providing a service or
selling a product.

Initial measurement - receivables are recognized at fair value

plus transaction cost.
1. Short-term receivable
2. Long-term receivable with a reasonable interest rate
3. Long-term without interest (non-interest bearing)
4. Long-term bears an unreasonable interest rate (below-market interest
rate)
 Short-term matures in 1-year or less
 Long-term matures beyon 1 year

Future Value of an amount (FV of P1)

FV=PV*(1+r)^n
Present Value of a future amount (PV of P1)
PV = FV/(1 + i) n

 Claims supported by formal promises to pay usually in the form of

notes
 Dishonored notes receivable (not paid within due date) should be
transferred to A/R, including its face amount, interest, and other
charges

Tip: For installment payments, use PV of ordinary annuity (Period minus 1 if

there is advanced installment payment). IF lump sum payment, use PV.

Shortcut (Amortization Table) :

Carrying Amount Next Year = [Carrying Amount this year x (1+interest rate)] - annual
installment
Entry #1

Notes Receivable: Current – JPG $50,000

Accounts Receivable – JPG $50,000

This entry eliminates from Sparky’s books the accounts receivable from JPG for the original

invoice and establishes the new note receivable, due in six months.

Entry #2

Cash $51,504

Notes Receivable: Current – JPG $50,000

Interest Income – JPG 1,504

 CHAPTER 7
 Loans Receivable - Loan Receivable is a financial asset arising
from a loan granted by a bank or other financial institution to a
borrower or client initial measurement of loan receivable.

 Direct origination costs should be included in the initial

measurement of the loan receivable.
 Indirect origination costs should be treated as outright
expense.

Amortized cost - a financial accounting method that spreads

the expense of an asset over its expected useful life.

 If initial amount is LOWER, amortization difference is

ADDED to the carrying amount
 If initial amount is HIGHER, amortization difference is
DEDUCTED to the carrying amount.

Example:
Date Interest Interest Amortization Carrying
Received Income Amount
x/x/xx xx
x/xx/xx xx xx xx xx
x/xx/xx xx xx xx xx
x/xx/xx xx xx xx xx

Credit Losses - are the present value of all cash shortfalls.

INITIAL MEASUREMENT - fair value + transaction costs

attributed to the acquisition of the loan
- direct origination cost should be included in the initial
measurement of the loan receivable
- indirect origination cost should be treated as an outright
expense

Initial carrying amount

Transaction price/principal amount xxx
Direct origination cost xxx
Origination fees received (xxx)
Initial carrying amount xxx

Journal entries
To record loan
Loans receivable xxx
Cash xxx
To record origination fees received
Cash xxx
Unearned interest income xxx
To record direct origination costs incurred by bank
Unearned interest income xxx
Cash xxx
Credit risk is the possibility that one party to a financial
instrument would default on a commitment, resulting in a loss for the
other party.
Expected credit losses are an estimate of credit losses during
the financial instrument's life, calculated as the present value of any
cash shortfalls.
Impairment loss is the discrepancy between the loan's carrying
amount and the cash flows' present value.

 CHAPTER 8

Receivable Financing