2ND Quarter: Fundamentals of

Accountancy, Business, and Management

ACCOUNTING ADJUSTMENTS
 Adjusting entries - to update or correct an account

--> ACCRUALS
 ACCRUED EXPENSE
- are the expenses that are already incurred but not yet paid by the company
- Recognizing an incurred and unrecorded expense that remains unpaid because
payment is not yet due.
- Debit the expense account and Credit and appropriate accrued liability account
 ACCRUED REVENUE
- Income that is already earned by the company but not yet received.
- DEBIT an accrued receivable account, and CREDIT an appropriate income account
--> PREPAYMENT
Items of expenses already paid but not yet incurred, consumed or expired; e.g. prepaid rent,
prepaid insurance, prepaid interest, unused office supplies, and others
1. Expense Method - the debit is to an expense account. Debit an appropriate asset account
with an amount equal to the unexpired portion (asset portion), and Credit the expense
account with the same to reduce the expense
2. Asset method- the debit is to an asset account. Debit an appropriate expense account with
an equal to the expired portion, and credit the asset account to reduce the asset.
--> PRECOLLECTION
Income already received by the company but not yet earned, or, in other words, this is the
advance receipt coming from the customers.
 Liability Method-the credit account is to a liability account. Debit the liability account with
an amount exactly equal the unearned portion to reduce the balance of the account, and
Credit an appropriate income account.
 Revenue Method - the credit account is to an income account. Debit the income account to
reduce the balance of the account, and Credit a pre-collection account with the amount
equal to the liability or deferred revenue.
REASONS FOR ADJUSTMENTS
 To appropriate the mixed accounts into their real and nominal elements:
 Provision for depreciation
 Provision for doubtful accounts/bad debts
 Adjustment for the expiration of prepayments of expenses
 Adjustment for the realization of income collected in advance
To bring into the accounts unrecorded accrued items:
 Adjustment for accrual of expenses
 Adjustment for accrual of income
--> DEPRECIATION
Property, plant and equipment such as buildings, equipments, and machineries, furnitures
etc. are recorded at cost as an asset (cost principle).
Depreciation accounting
The cost of a long-lived asset (less scrap value, if any, called depreciable cost) is allocated
over its service life.

Depreciation
 The portion of the assets cost allocated as expense for the period
3 FACTORS
 Cost- amount recorded as the value of the asset
 Residual or scrap value- the net amount which enterprise expects to obtain from an asset
at the end of its useful life after deducting the expected cost of disposal
 Useful life- the period of time over which an asset is expected to be used by the enterprise
 Depreciable cost- cost of a long-lived asset less its residual value
STRAIGHT LINE METHOD
Annual Depreciation = Cost- Residual value / life in years
BOOK VALUE
The difference between the cost of the asset and its accumulated depreciation is called
carrying book value or book value.

ACCOUNTING CYCLE
 Known as Accounting process. Series of recurring accounting activities from the beginning
to the end of a given period of time

STEP 1: ANALYZING BUSINESS TRANSACTIONS
You have to analyze if a transaction is financial or non-financial in nature. Financial transactions
only should be recorded.
o Financial - maaaring ma-quantify (masukat ang halaga). Ex.: payment of utilities, borrowing
of money, withdrawal
o Non-financial - hindi masukat ang value. Ex.: hiring employees, orientation, seminar of
owners
STEP 2: JOURNALIZING
All transactions which are financial in nature with supporting source documents should be
recorded in your journal.
o Journal - book of original entry
STEP 3: POSTING TRANSACTIONS TO THE LEDGER
Post all transactions to ledger accounts. The Classifying part of accounting. We put on
specific ledger accounts those transactions happened for a specific period.
o Ledger - Book of Final Entry
STEP 4: PREPARING TRIAL BALANCE
To provide a listing to verify the equality of the debits and credits in the ledger.
 Trial Balance - bookkeeping worksheet in which the balance of all ledgers are compiled into
debit and credit account column totals that are equal. A company prepares a trial balance
periodically, usually at the end of every reporting period.
STEP 5: JOURNALIZING AND POSTING ADJUSTING JOURNAL ENTRIES
To record the accruals, expiration of deferrals, estimation, and other events.
 Adjusting entries are changes to journal entries you’ve already recorded. Specifically, they
make sure that the numbers you have recorded match up to the correct accounting
periods.
STEP 6: PREPARING ADJUSTED TRIAL BALANCE
To provide a listing to verify the equality of debits and credits in the ledger after
adjustments
 Adjusted Trial Balance - internal document that lists the general ledger account titles and
their balances after any adjustments have been made.
STEP 7: PREPARING FINANCIAL STATEMENTS
To provide useful information to decision-makers.
  Financial Statements are the reports that provide the detail of the entity’s financial
information including assets, liabilities, equities, incomes, and expenses, shareholders’
contribution, cash flow, and other related information during the period of time.
STEP 8: JOURNALIZING AND POSTING CLOSING ENTRIES
To close temporary accounts and transfer profit to owners’s equity.
 Closing Entry - journal entry that is made at the end of an accounting period to transfer
balances from a temporary account to a permanent account.
STEP 9: PREPARATION OF POST-CLOSING TRIAL BALANCE
To check the equality of debits and credits after closing entries.
 Post-Closing Trial Balance - listing of all balance sheet accounts containing non-zero
balances at the end of a reporting period.
STEP 10: JOURNALIZING AND POSTING REVERSING JOURNAL ENTRIES
To simplify the recording of certain regular transactions in the next accounting period.
 Reversing Entry - journal entry made in an accounting period which reverses selected
entries made in the immediately preceding period. The reversing entry typically occurs at
the beginning of an accounting period.

STATEMENT OF FINANCIAL POSITION

Also known as the balance sheet. This statement Includes the amounts of the company’s
total assets, liabilities, and owner’s equity which in totality provides the condition of the company on a
specific date. (Haddock, Price, & Farina, 2012)

Permanent Accounts
As the name suggests, these accounts are permanent in a sense that their balances remain
intact from one accounting period to another. (Haddock, Price, & Farina, 2012)
Examples of permanent account include Cash, Accounts Receivable, Accounts Payable, Loans Payable
and Capital among others. Basically, assets, liabilities and equity accounts are permanent accounts.
They are called permanent accounts because the accounts are retained permanently in the SFP until
their balances become zero.
Contra Assets
Accounts that are presented under the assets portion of the SFP but are reductions to the
company’s assets. These include Allowance for Doubtful Accounts and Accumulated Depreciation.
Accumulated Depreciation is a contra asset to the company’s Property, Plant and Equipment. This
account represents the total amount of depreciation booked against the fixed assets of the company.
Report Form
A form of the SFP that shows asset accounts first and then liabilities and owner’s equity
accounts after. (Haddock, Price, & Farina, 2012)
Account Form
A form of the SFP that shows assets on the left side and liabilities and owner’s equity on the right
side just like the debit and credit balances of an account. (Haddock, Price, & Farina, 2012)
a. Emphasize that the two are only formats and will yield the same amount of total assets,
liabilities and equity
b. Emphasize that assets should always be equal to liabilities and equity
Current Assets
Assets that can be realized (collected, sold, used up) one year after year-end date.
Examples include Cash, Accounts Receivable, Merchandise Inventory, Prepaid Expense, etc.
Current Liabilities
Liabilities that fall due (paid, recognized as revenue) within one year after year
end date. Examples include Notes Payable, Accounts Payable, Accrued Expenses (example: Utilities
Payable), Unearned Income, etc.
Noncurrent Assets
Assets that cannot be realized (collected, sold, used up) one year after yearend date.
Examples include Property, Plant and Equipment (equipment, furniture, building, land), Long Term
investments,Intangible Assets etc.
Noncurrent Liabilities
Liabilities that do not fall due (paid, recognized as revenue) within one year after year-end
date. Examples include Loans Payable, Mortgage Payable, etc.

The main difference of the Statements of the two types of business lies on the inventory
account. A service company has supplies inventory classified under the current assets of the company.
While a merchandising company also has supplies inventory classified under the current assets of the
company, the business has another inventory account under its current assets which is the
Merchandise Inventory, Ending.

STATEMENT OF COMPREHENSIVE INCOME

–Also known as the income statement.
Contains the results of the company’s operations for a specific period of time which is called net
income if it is a net positive result while a net loss if it is a net negative result. This can be prepared for
a month, a quarter or a year. (Haddock, Price, & Farina, 2012)

Temporary Accounts
Also known as nominal accounts are the accounts found under the SCI.
They are called such because at the end of the accounting period, balances under these accounts are
transferred to the capital account, thus having only temporary amounts and resulting to zero
beginning balances at the beginning of the following year.(Haddock, Price, & Farina, 2012)
Difference of the Statement of Comprehensive Income of a Service Company and of a
Merchandising Company
A service company provides services in order to generate revenue and the main cost
associated with their service is the cost of labor which is presented under the account Salaries
Expense. On the other hand, a merchandising company sells goods to customers and the main cost
associated with the activity is the cost of the merchandise which is presented under the line item Cost
of Goods Sold.
Single-step and Multi-step Format of the SCI
 Single-step – Called single-step because all revenues are listed down in one section while
all expenses are listed in another. Net income is computed using a “single-step” which is
Total Revenues minus Total Expenses. (Haddock, Price, & Farina, 2012)
 Multi-step – Called multi-step because there are several steps needed in order to arrive at
the company’s net income. (Haddock, Price, & Farina, 2012)
a. Emphasize that the two are only formats and will yield the same amount of net
income/loss
b. Discuss that single-step SCI is more commonly used by service companies while
multi-step format is more commonly used merchandising companies

Multi-Step SCI
i. First part is sales - This is the total amount of revenue that the company was able to generate from
selling products
ii. Second part compose of contra revenue – called contra because it is on the opposite side of the
sales account
1. Sales returns – This account is debited in order to record returns of customers or
allowances for such returns.(Haddock, Price, & Farina, 2012) Sales returns occur when
 customers return their products for reasons such as but not limited to defects or change of
preference.
2. Sales discount – This is where discounts given to customers who pay early are recorded.
(Haddock, Price, & Farina, 2012) Also known as cash discount. This is different from trade
discounts which are given when customers buy in bulk. Sales discount is awarded to
customers who pay earlier or before the deadline.
iii. Third part is Cost of Goods Sold – This account represents the actual cost of merchandise that the
company was able to sell during the year. (Haddock, Price, & Farina, 2012)
 Beginning Inventory – This is the amount of inventory at the beginning of the accounting
period. This is also the amount of ending inventory from the previous period
 Purchases – amount of goods bought during the current accounting period
 Contra Purchases –An account that is credited being “contrary” to the normal balance of
Purchases account.
 Purchase discount – Account used to record early payments by the company to the
suppliers of merchandise. (Haddock, Price, & Farina, 2012). This is how buyers see a sales
discount given to them by a supplier.
 Purchase returns – Account used to record merchandise returned by the company to their
suppliers. (Haddock, Price, & Farina,2012) This is how buyers see a sales return recorded by
their supplies
 Freight In – This account is used to record transportation costs of merchandise purchased
by the company. (Haddock, Price, & Farina, 2012) Called freight in because this is recorded
when goods are transported into the company.
 Ending inventory – amount if inventory presented in the Statement of Financial Position.
 Total cost of inventory unsold at the end of the accounting cycle.
iv. Fourth Part is General and Administrative Expenses –These expenses are not directly related to
the merchandising function of the company but are necessary for the business to operate effectively.
(Haddock, Price, & Farina, 2012)
v. Fifth Part is Selling Expenses – These expenses are those that are directly related to the main
purpose of a merchandising business: the sale and delivery of merchandise. This does not include cost
of goods sold and contra revenue accounts. (Haddock, Price, & Farina,2012)

How a company can earn without having cash and lose even with lots of cash.
A. Company can still have net income without cash transactions due to accrued income
 A sari-sari store who sells a lot of merchandise but majority of the sales are on
credit. High net income, low cash balance.
B. Company can still have net loss with a lot of cash revenues due to depreciation and
accrued expense
 We always see a lot of people buying from Jollibee/Mcdo using cash but a new
branch can still have net loss due to the depreciation expense of its
building/equipment.

Statement of Changes in Equity (SCE)

All changes, whether increases or decreases to the owner’s interest on the company during the
period are reported here. This statement is prepared prior to preparation of the Statement of Financial
Position to be able to obtain the ending balance of the equity to be used in the SFP. (Haddock, Price, &
Farina, 2012).
 SINGLE/SOLE PROPRIETORSHIP –An entity whose assets, liabilities, income and expenses
are centered or owned by only one person (Haddock, Price, & Farina, 2012).
  PARTNERSHIP – An entity whose assets, liabilities, income and expenses are centered or
owned by two or more persons (Haddock, Price, & Farina, 2012).
 CORPORATION – An entity whose assets, liabilities, income and expenses are centered or
owned by itself being a legally separate entity from its owners. Owners are called
shareholders or stockholders of the company(Haddock, Price, & Farina, 2012

 Initial Investment – The very first investment of the owner to the company.
 Additional Investment – Increases to owner’s equity by adding investments by the
owner(Haddock, Price, & Farina, 2012).
 Withdrawals –Decreases to owner’s equity by withdrawing assets by the owner (Haddock,
Price, & Farina, 2012).
 Distribution of Income – When a company is organized as a corporation, owners (called
shareholders) do not decrease equity by way of withdrawal. Instead, the corporation
distributes the income to the hareholders based on the shares that they have (percentage
of ownership of the company)

Bank Reconciliation Statement

Bank reconciliation statement is a report which compares the bank balance as per
company's accounting records with the balance stated in the bank statement.

The two common causes of the discrepancy in figures are:

 Time lags - prevent one of the parties (company or the bank) from recording the
transaction in the same period as the other party.
 Errors - by either party in recording transactions
The importance of Bank Reconciliations are as follows:
1. It helps in the identification of errors in the accounting records of the company or the
bank.
2. Cash is the most vulnerable asset of an entity. Bank reconciliations provide the necessary
control mechanism to help protect the valuable resource through uncovering irregularities
such as unauthorized bank withdrawals.
3. If the bank balance appearing in the accounting records can be confirmed to be correct by
comparing it with the bank statement balance,it provides added comfort that the bank
transactions have been recorded correctly in the company records.
4. Monthly preparation of bank reconciliation assists in the regular monitoring of cash flows
of a business.
There three methods of preparing bank reconciliation statement, namely:
 Adjusted Method wherein the balances per bank and per book are separately determined.
 Book to Bank Method wherein the book balance is adjusted to agree with the bank
balance.
 Bank to Book Method wherein the bank balance is adjusted to agree with book balance

The key terms to be aware of when dealing with a bank reconciliation are:
1. Deposits in transit - are amounts already received and recorded by the company, but are
not yet recorded by the bank. A deposit in transit is on the company's books, but it isn't on
the bank statement.
2. Outstanding checks - are checks that have been written and recorded in the company's
Cash account but have not yet cleared the bank account or presented to the bank by the
payee. Checks written during the last few days of the month plus a few older checks are
likely to be among the outstanding checks.
 3. Bank errors are mistakes made by the bank. Bank errors could include the bank recording
an incorrect amount, entering an amount that does not belong on a company's bank
statement, or omitting an amount from a company's bank statement.
4. Bank service charges are fees deducted from the bank statement for the bank's processing
of the checking account activity
Examples:
o accepting deposits,
o posting checks,
o mailing the bank statement,
Other types of bank service charges include the fee charged when a company overdraws its
checking account and the bank fee for processing a stop payment order on a company's check.
5. NSF check is a check that was not honored by the bank of the person or company writing
the check because that account did not have a sufficient balance. As a result, the check is
returned without being honored or paid.NSF is the acronym for not sufficient funds. When
the NSF check comes back to the bank in which it was deposited, the bank will decrease the
checking account of the company that had deposited the check. The amount charged will
be the amount of the check plus a bank fee.
6. Check printing charges occur when a company arranges for its bank to handle the
reordering of its checks. The cost of the printed checks will automatically be deducted from
the company's checking account.
7. Interest earned will appear on the bank statement when a bank gives a company interest
on its account balances. The amount is added to the checking account balance and is
automatically on the bank statement.
Notes Receivable are assets of a company. When notes come due, the company might ask
its bank to collect the notes receivable. For this service the bank will charge a fee.
Errors in the company's Cash account result from the company entering an incorrect
amount, entering a transaction that does not belong in the account, or omitting a
transaction that should be in the account..

The Bank Reconciliation Process

Step 1. Adjusting the Balance per Bank
The first step is to adjust the balance on the bank statement to the true, adjusted, or
corrected balance. The items necessary for this step are listed in the following schedule.
Step 2. Adjusting the Balance per Books
The second step of the bank reconciliation is to adjust the balance in the company's Cash
account so that it is the true, adjusted, or corrected balance.
Step 3. Comparing the Adjusted Balances
 After adjusting the balance per bank (Step 1) and after adjusting the balance per books
(Step 2), the two adjusted amounts should be equal.
 If they are not equal, you must repeat the process until the balances are identical. The
balances should be the true, correct amount of cash as of the date of the bank
reconciliation. The adjusted cash balance will appear as the Cash in Bank in the Statement
of Financial Position (Balance Sheet).