CHAPTER 1 Activities in Business Organizations

Accounting and its Environment

Financing Activities
Accounting - Require financial resources to obtain
other resources used to produce
- Service activity goods and services
- Provide quantitative information, - Primarily source are the creditors
financial in nature such as bank
- It measures, processes, and Investing Activities
communicates financial information - The selection and management of
- Process of identifying, measuring, long-term resources that will be used
and communicating economic to develop and produce goods and
information services.
- Art of recording, classifying, and - Includes buying land, equipment,
summarizing in terms of money, buildings, and other resources.
events, and interpreting the results Operating Activities
thereof - The use of resources to design,
produce, distribute, and market
Luca Pacioli goods and services

- Introduction of Double-entry Money

Bookkeeping - Serves as both medium of exchange
- Not the father of accounting but the and a measure of value
Father of Double-entry Bookkeeping.
Fundamental Concept
Forms of Business Organizations
Entity Concept
Sole Proprietorship - The transactions of different entities
- Single owner who is also the should not be accounted for
manager together.
- Small service type and retail - Each entity should be evaluated
establishments separately
- Ex. Physicians, lawyers, and Periodicity Concept
accountants - Obtain timely information
Partnership - Life of the business is divided into
- Owned and operated by two or more series of reporting periods
persons who contribute assets to a Stable Monetary unit concept
common fund with the intention of - Should use the same currency
dividing the profits among throughout the accounting period
themselves. Going Concern
Corporation - Assumption that the entity will
- Owned by stockholders continue in operation for the
- Artificial being created by operation foreseeable future
of law. - Opposite is the liquidating concern
Generally Accepted Accounting Owners Equity = Assets - Liabilities
Principles (GAAP) Liabilities = Assets - Owners Equity

Guidelines in accounting. Account

Relevance, objectivity, and feasibility - Basic summary device of accounting

Basic Principles T- account

Objectivity Principle
- Activities documented by objective
evidences
- Based on the most reliable data
available.
Historical Cost
- Acquired assets should be recorded
at their actual cost.
Revenue Recognition Principle
- Revenue is recognized when goods D.E.A.L.E.R.
and services are rendered or - Used to know the Normal Balance
performed.
Expense Recognition Principle
- Expense should be recognized when
goods and services are used up to
produce revenue
Adequate Disclosure
- All relevant information should be
disclosed in the financial statements
Materiality
- Depends on the size and nature of Normal Balance of:
the item.
- It is considered a material depends Drawings/Withdrawals is Debit
on the company and if it will affect Expense is Debit
the economic decisions Assets is Debit
Consistency Principle Liabilities is Credit
- Same accounting method from Equity is Credit
period to period Revenue is Credit

Accountancy Act of 2004 Typical account titles used

Republic act No. 9298
Assets
CHAPTER 2
The Accounting Equation Current Assets
- Cash
Assets = Liabilities + Owners Equity - Cash Equivalents
 - Notes receivable Type and effects of transactions
- Accounts receivable
- Inventories Source of Assets (SA) - Increase in assets
- Prepaid expense (any prepaid) and increase in either liabilities or Equity

Non-current Assets Exchange of Assets (EA) - Increase in

- Property, plan, and equipment (PPE) assets and increase in another assets
- Accumulated Depreciation
- Intangible Assets Use of Assets (UA) - Decrease in assets
and decrease in either liabilities or equity
Liabilities
Exchange of Claims (EC) - Increase in
Current Liabilities either Liabilities or equity and decrease in
- Accounts Payable either liabilities and equity
- Notes payable
- Accrued Liabilities
- Unearned revenues CHAPTER 3
- Current portion of Long-term Debt Recording Business Transactions

Non-current Liabilities Step 1 : Transaction Analysis

- Mortgage Payable - Identify the transactions
- Bonds payable - Indicate the accounts
- If it increases or decreases
Owners equity - If it debited or credited
- Capital
- Withdrawals Source documents
- Income summary - It is the basis of the transactions that
are to be journalized.
Income
- Service Income General Journal - Book of original entries
- sales
Posting - from general journal to the ledger
Expense
- Cost of sales Trial Balance - List of ledger accounts in
- Salaries or wage expense order.
- Telecommunications, electricity, fuel,
and water expense Journal - chronological record of the entity’s
- Rent expense transaction
- Supplies expense
- Insurance expense (date , account title and explanation ,
- Depreciation expense posting reference, debit, and credit)
- Uncollectible accounts expense
- Interest expense Simple entry - two accounts affected
Compound Entry - more than two accounts Credit: Cash
affected
Unearned revenues collected
Step 2 : Transactions are journalized Debit: Cash
- Recorded in the journal Credit: Unearned referral revenues

Initial Investment Revenues earned on account

Debit: Cash Debit: Accounts receivable
Credit: Capital Credit: consulting revenue

Rent paid in advance Withdrawals of cash by owner

Debit: Prepaid rent Debit: Withdrawals
Credit: cash Credit: Cash

Note issued for cash Salaries Paid

Debit: Cash Debit: Salaries Expense
Credit: Notes Payable Credit: Cash

Service vehicle acquired Expense incurred but unpaid

Debit: service vehicle Debit: Utilities expense
Credit: Cash Credit: Utilities Payable

Insurance Premiums paid Accounts receivable collected

Debit: Prepaid Insurance Debit: Cash
Credit: Cash Credit: Accounts Receivable

Off. Equip. Acquired on account Expenses incurred and paid

Debit: Office Equipment Debit: Utilities expense
Credit: Accounts Payable Credit: Cash

Supplies purchased on account Ledger - Group of entity’s accounts

Debit: Supplies
Credit: Accounts Payable General Ledger - reference book of the
accounting system
Accounts payable settled
Debit: Accounts payable Balance Sheet
Credit: Cash - Permanent accounts
- Assets, liability, owners equity
Revenues earned and cash collected Income statement
Debit: Cash - Nominal/temporary accounts
Credit: Consulting revenues - Income and expense

Salaries Paid Chart of accounts

Debit: Salaries expense
 - List of accounts and their account - Annual period ending on December
number 31
Natural Business Year
Step 3: Posting - Twelve-month period that ends when
- Transferring the amounts from the business activities are at their lowest
journal to the appropriate accounts level of annual cycle
in the ledger
Interim Period
Footing - It determines each account - Period less than a year
balance by adding all the debits and credits.
- If the debit is greater than the sum of Recognition
the credit, that account has a debit - The amount at which an asset,
balance. Vice Versa liability, or equity is recognized in the
statement of financial position to as
Step 4: Trial Balance its “carrying amount”
- List of all accounts with their
respective debit or credit balances Derecognition
- The removal of all or part of a
Locating errors recognized asset or liability from an
- Transposition (reverse of numbers) entity’s statement of financial
- Slide (moving of decimal point) position

CHAPTER 4 Contract
Adjusting the accounts - Agreement between two or more
parties that creates enforceable
Accrual Basis rights and obligations
- Transactions are recognized when
they occur and not as cash is Adjusting Entry
received or paid - To reflect in the accounts information
Cash Basis on economic activities that have not
- Transactions are recognized when yet been recorded
cash is received or paid
DEFERRALS AND ACCRUALS
Liquidation (Liquidating concern) -
Assumption that the business will go out of - Affects a balance sheet account and
business. (opposite of going concern) an income statement account

Periodicity Concept - The economic life of a Deferrals

business is divided into artificial time - The postponement of the recognition
periods of “an expense already paid but not
incurred” or “revenue collected but
Fiscal Year not yet earned”
- Any 12 consecutive months
Calendar year
 - Decreases the balance sheet
account and increases an income STRAIGHT LINE METHOD
statement

Accruals
- The recognition of “an expense
already incurred but not paid” or
“revenue already earned but not
collected
- Increases both balance sheet and Accumulated depreciation
income statement - A contra account. (Contra-asset)

Accrued - Delay payment or service Book value

Deferred - Advance yung payment or - Value of an asset after depreciation
service
Depreciable Amount
Step 5: Adjustments for deferrals - the depreciable cost of the asset
that will be subjected to
- Prepaid expense depreciation.
- Prepaid rent
- Prepaid insurance Accrual for uncollectible accounts
- Supplies - Doubtful accounts expense
- Depreciation of property and - Allowance for doubtful accounts
equipment
- Revenues received in advance to 4 methods in adjusting
revenues - Asset method
- Accrued expenses - Expense method
- Accrued salaries - Liability method
- Accrued interest - Income method
- Accrued revenues
CHAPTER 5
Worksheet and Financial Statements
Depreciation
Worksheet
Asset cost - amount an entity paid to - Multi-column document that
acquire the depreciable asset. (Historical summarizes the data for financial
Cost) statements

Salvage value - the amount that the asset Step 5: preparing the worksheet
can probably be sold for at the end of its - Unadjusted trial balance
estimated useful life - Adjusting entries
- Adjusted trial balance
Useful life - the estimated number of periods - Balance sheet
that an entity can make use of the asset. - Income statement
 - Compute profit or loss as the STATEMENT OF CASH FLOW
difference between total revenues
and total expenses Operating Activities
- Cash effects of transactions and
Financial statement other event determining the profit or
- The means by which the information loss
accumulated and processed in
financial accounting is periodically 1. Direct method
communicated to the users. - Adding the individual cash
- Provide financial information inflow and subtracting cash
outflow
1. Balance sheet / statement of 2. Indirect method
Financial position - Adjusting profit for income
2. Income statement / statement of and expense items not
financial performance resulting from cash
3. Statement of changes in equity transactions
4. Statement of cash flow
5. Notes to financial statements Cash inflows
6. Comparative financial statements - Receipts from sales/income
Cash Outflow
Step 6: Preparing the financial Statements - Payments to operating expenses

Liquidity Investing activities

- The availability of cash in the near - Making and collecting loans
future (non-current assets)

Financial Flexibility Cash inflows

- Ability to take effective actions to - Receipts from sales of non-current
alter the amounts and timings of assets
cash flow Cash outflows
- Payments to acquire non-current
Solvency assets
- Availability of cash over the longer
term Financing Activities
- Obtaining resources from owners
BALANCE SHEET and creditors

Format Cash inflows

1. Report format - Receipts from non current liabilities
- Assets, liabilities, and equity and equity
2. Account format Cash outflows
- Assets on the left and - Payment in form of withdrawal
liabilities and equity on the - Payment to notes payable
right
CHAPTER 6 good sold represent the cost of
Completing the cycles inventory sold.

Step 7: adjustments are journalized and Net sales

posted - Cost of sales
- Adjusting entries are directly entered Gross profit
in the worksheet + Income/ - expense
Profit
Step 8: Closing Entries are journalized and
posted Merchandising entity
- Income, expense, and withdrawal - Purchases inventory
accounts are temporary accounts - Sells the inventory
that accumulates information related - Uses cash to purchase more
to a specific inventory

1. Close the income accounts Source Documents

- Revenues and income 1. Sales invoice
summary - Prepared by the seller of
2. Close the expense account goods to the buyer
- Income summary and 2. Bill of lading
expense - Document issued by the
3. Close the income summary account courier
- Income summary and capital 3. The Statement of account
- Formal notice to the debtor
4. Close the withdrawal account the accounts already due
- Capital and withdrawal 4. Official receipt
- Receipt of cash by the seller
Step 9: Preparation of a post-closing trial or the authorized
balance representative
- Final trial balance. It verifies all the 5. Deposit Slips
debits and credits balances are - Details of deposit
equal - Validated deposit slip actually
deposited
Step 10: Reversing Entries 6. check/cheque
- Journal entry which is the exact - Written order to a bank by a
opposite of a related adjusting entry depositor to pay amount
made at the end of the period - Payor is the entity issuing the
check while payee is the
CHAPTER 7 receiver
Merchandising Operations 7. Purchase requisition
- Written request to the
Merchandising purchaser that goods be
- Net sales arise from the sale of purchased
goods while cost of sale or cost of 8. Purchase order
 - Authorization made by the FOB Shipping point
buyer to the seller to deliver - buyer
the merchandise FOB Destination
9. Receiving report - Seller
- Document containing
information about goods Freight Prepaid
received - Seller
10. Credit memorandum Freight collect
- Form used to notify the buyer - buyer
that his account is being
decreased due to errors Inventory System
- Represents goods available for sale
Cash Discounts - Quantity and cost of goods
- Business give discounts for prompt
payment 1. Perpetual Inventory System
- Computed after the trade discount - Continuously updated
- Designated by such notation - Low-volumed, high priced
Ex. 2/10 - Inventory (debit)
It means that if the buyer pays within
10 days, they will have a 2 percent 2. Periodic Inventory System
discount - End of the period
- High volumed, low priced
Discount period - Purchases (debit)
- The period covered by the discount
Net Sales
Purchase discounts - First part of merchandising income
- Buyer’s viewpoint statement
Sales Discount
- Seller’s viewpoint Gross sales - Sales return,
discounts, and allowances = Net
Trade Discount Sales
- Encourage buyers to purchase
products because of markdown Gross Sales
prices - Total sales for cash and on credit

Invoice price Sales - Normal balance is credit

- Subtracting the trade discount from
the list price Sales return and allowances
- Goods damaged, defective, or not in
Transportation cost accordance with the specification.
- Payment or cost for the freight - Normal balance is debit
- Contra-income account
FOB - Free on board
Transportation out
 - FOB destination, the seller Purchases Return And Allowances
shoulders the transportation cost - Contra-account
Cost of sales - Normal balance is credit
- Also known as cost of goods sold
- Largest single expense of the Purchases Discount
merchandising business. - Normal balance is credit
- Cost of the inventory sold to
customers Transportation In
- Transportation in is also added - FOB Shipping point
- Debit

Value-Added Tax entries

- 12%
1. Input tax - Debit
2. Output tax - Credit
3. VAT Payable

Operating Expense
Merchandising Inventory - Third major part of the income
1. Beginning Inventory statement for a merchandising entity
- Merchandise at the 1. Distribution Cost
beginning of the period - Entity’s effort to
- generate sales
2. Ending inventory Salaries,
- Merchandise at the end of Commissions Payroll
the period Advertisement
Traveling Stores
Net Cost of Purchases supplies Depreciation
- Under periodic inventory method Transportation out
2. Administrative expense
- General
administration
Office related
3. Other operating expense
- Not related to the
central operations
Purchases Expenses such as
- Debited to the purchase account losses
- Temporary account
CHAPTER 8
Gross price method Completing the cycle for a
- Recording the merchandise Merchandising Business
purchase at invoice price
Merchandise inventory at the end of the Special journals
period - Designed to record specific types of
transactions of a similar nature
The adjusting entry method
- Merchandise inventory beginning, 1. Sales journal
Credit - Sales of merchandise on
- Merchandise inventory Ending, Debit account
- Income summary opposite 2. Cash receipts journal
- All transactions involving
The closing entry method cash receipts
- Merchandise inventory beginning 3. Purchases journal
with temporary account with debit - Purchases of merchandise
balance, Credit and other assets on account
- Merchandise inventory Ending with 4. Cash disbursement journal
temporary account with credit - All cash payments
balance, Debit 5. General journal
- Income summary opposite - Transactions that cannot be
recorded properly in the
Preparing the worksheet special journals
- Same as the service business
- Beginning inventory, debit of the Advantages of using special journals
income statement - Permits division of labor
- Ending inventory, credit of the - Reduces recording time
income statement and also at the
debit of balance sheet Proving the ledgers
- Trial balance should be equal
Income statement - Accounts receivable control account
Statement of changes in equity and sum of the individual customer
Balance sheet account should be equal
Adjusting and closing entry
Post-closing trial balance Voucher
- Serially numbered form that
CHAPTER 9 identifies the name and address of
Special Journals and Voucher system the payee, due date, terms,
description, and invoice amount
Control accounts or subsidiary ledger
- Summary accounts within the Voucher register
general ledger - Takes the place of the purchases
journal and provides a record of all
Accounts receivable control account in authorized check payments.
general ledger
Unpaid Voucher file
Individual customer account in a subsidiary - Absence of entries in the payment
ledger date and check number
Check Register - Cost of goods that are in the
- Simplified form of the cash manufacturing process but
disbursement journal not yet complete
- Register is record of all check 3. Raw Materials Inventory
payments - Cost of direct materials on
hand that is intended for use
Paid Voucher File in the manufacturing process
- Paid voucher along its supporting 4. Factory Supplies Inventory
documents - Cost of unused indirect
materials
Combination Journal
- Combination of the general journal Accounting for manufacturing activities
and the special journals in a single 1. Cost-system
record. - Perpetual records
2. Non-cost system
CHAPTER 10 - Periodic inventory system
Manufacturing Operations
Manufacturing summary
Manufacturing - Summarize all the transactions that
- Begins with raw materials affect the computation of the cost of
goods manufactured.
Elements of Manufacturing Costs
1. Direct Materials Statement of cost of goods manufactured
- Physical part of a finished - Consist of total manufacturing costs
product
2. Direct Labor Total manufacturing cost
- The compensation to - Cost of direct materials used, direct
workers who convert raw labor, and manufacturing overhead
materials to finished goods
3. Manufacturing Overhead Statements of cost of goods sold
- All manufacturing costs that
cannot be classified as direct
material or direct labor
Prime cost = Direct material + Direct Labor
Conversion Cost = Direct Labor +
Manufacturing overhead

Manufacturing Inventory Accounts

CHAPTER 11
1. Finished Goods Inventory Payroll
- cost of completed goods that
have been remained unsold Accounting for payroll
2. Work in process inventory
Employee
 - Any individual who is a recipient of
salaries or wage
Employer
- A person for whom individual
performs or performed any service
Payroll
- Total amount paid to employees for
services provided
Payroll period
- Period for which an employer
ordinarily makes payment of salaries
or wages to the employees

Gross pay
- Total earnings of an employee
before taxes and other deduction

Salary
- Applied to managerial, supervisory,
and administrative service

Wages
- Ordinarily referred as remuneration
for skilled or unskilled labor

Employees Benefits
1. Social Security System
2. Employees’ compensation program
3. Workers’ investment and savings
program
4. National health insurance Program
5. Pag-Ibig Fund

Monthly Salary Credit

- Compensation base for contributions
and benefits related to the total
earnings for the month

Net Pay
- Gross pay less the deductions
- Take home pay