Basic Accounting Reviewer PDF

**Chapter 1** **Business**- a legally-recognized organizational entity existing within an economically free country designed to sell goods and/or provide services to consumers **Profit-oriented enterprise**- aims to earn income or profit through the provision of goods and/or services to consumers...

**Chapter 1** **Business**- a legally-recognized organizational entity existing within an economically free country designed to sell goods and/or provide services to consumers **Profit-oriented enterprise**- aims to earn income or profit through the provision of goods and/or services to consumers **Non-profit-oriented enterprise**- aims to achieve socio-civic or charitable aims **[Forms of Business Enterprises] (**according to nature of operations**)** 1\. **Service business or service concern** simplest form of business and provides services to clients or customers in exchange for fees, rent, interest or royalties 2\. **Merchandising business or trading concern**- purchase goods from suppliers and, without altering the state of the goods bought, sell the same at a higher price than cost 3\. **Manufacturing business or** **manufacturing concern**- involves the most complex activities and actually produces the goods that it sells to customers **[LEGAL FORMS of Business/ Business Ownership ]** ∙ **Sole Proprietorship**- most basic legal form of business and has only one owner [Advantages: ] 1\. Easier to form compared to partnerships and corporations 2\. Generally has uncomplicated transactions and minimal regulatory requirements 3\. Decisions can be arrives at in less time and implemented faster 4\. Proprietor enjoys all the profits earned by the business [Disadvantages]: 1\. Proprietor faces financing problems because of the enterprise's limited ability to raise capital once volume of business increases 2\. Proprietor does not receive the benefit of second opinion on decisions made 3. Proprietor bears the risks and losses which may be incurred in the business 4. Proprietor has unlimited personal liability for the debts incurred by the business the Civil Code of the Philippines [Advantages]: 1\. It is easier to organize compared to a corporation 2\. Burden of management is shared among partners 3\. More ideas are exchanged and brainstormed which results in better decision-making 4\. Can raise more capital than sole proprietorship [Disadvantages: ] 1\. Depends on the capability of each partner to invest resources into the business 2\. Plurality of owners may result to disagreements regarding ideas and management style, hampering business operations 3\. Life of partnership may be fragile --it may be dissolved by agreement, by withdrawal of one or more partners, or by the death of or incapacity of partner 4\. Partners have unlimited personal liability for partnership debts ∙ **Corporation**- the most complex form of business organizations \- **Shareholder**- a person who invests in a corporation \- **Certificate of stock**- evidence of the number of shares purchased \- Governed by the Corporation Code of the Philippines \- Management of operations of the corporation is centralized in the corporation's board of directors Page \| 1 [Advantages: ] 1\. Has the greatest capacity to raise capital 2\. Can raise capital by selling shares of stock to the public as a whole 3\. Shareholders may transfer their shares without the need to obtain the consent of other shareholders 4\. Corporations may exist for period no longer than 50 years, subject to renewal 5\. Limited liability of owners (shareholders are liable to third parties for the losses of the corporation only to the limit of their fully-paid investments) 6\. If corporation goes bankrupt, lenders cannot take personal assets of the stockholders [Disadvantages: ] 1\. The cost of forming and managing a corporation is relatively high compared to sole proprietorships and partnerships 2\. Subject to greater scrutiny, regulation, control and supervision by the government 3\. Management is more complex 4\. Has limited powers, as expressly stated in the Corporation Code of the Philippines and its own Articles of Incorporation 5\. Subject to higher income tax rate ∙ **Cooperatives**- defined by *International Cooperative Alliance's Statement on* *Cooperative Identity* as "autonomous associations of persons united voluntarily to meet their common economic, social, and cultural needs and aspirations through jointly owned and democratically controlled enterprises" **Economic Decisions** Economic decisions- decisions which affect the resources it controls and the obligations of the business to other enterprises **Financial Information-** a summary of all the transactions of the business over a period of time. Most important financial information comes from accounting **Accounting**- the art of recording, classifying and summarizing, in a significant manner, and in terms of money, transactions and events which are in part at least of a financial character, and interpreting the results thereof \- Is a service activity. Its function is to provide quantitative information, primarily financial in nature, about economic entities, that is intended to be useful in making economic decisions \- Service function to management. It basically processes raw data and converts them to meaningful information that will be useful for decision-making \- Is the process of identifying, measuring and communicating economic information to permit informed judgement and decision by users of **Basic purpose of accounting:** to supply financial information to users of the information to help them make informed judgements and better decisions Accounting is language of the business: used to communicate financial information to interested parties. Through this, different users of information understand what is happening in the business enterprise **Bookkeeping**- procedural or mechanical aspect of accounting and involves set-up, update and maintenance of accounting records. It can be done by properly trained non-accountants **Accounting**- interpretation of information recorded under bookkeeping. Practice of accountancy can be done only by certified public accountants **The Accountancy Profession** Accounting is a profession because it has the attributes required of a profession. Page \| 2 *1. **Mastery of particular intellectual skill, acquired by training and*** ***education**.* Accounting requires students to finish degree in Bachelor of Science in Accountancy and pass government examination administered by *Professional Regulatory Board of Accountancy* *2. **Adherence by its members to a common code of values and conduct established by its administrating body, including maintaining an*** ***outlook which is essentially*** ***objective.*** The Code of Ethics is mandatory for all CPAs *3. **Acceptance of duty to society as a whole (usually in return for*** ***restrictions in use of a title or in the granting of qualification).*** Majority rely on CPAs for sound financial accounting and reporting, effective financial management and competent advice on a variety of business and taxation matters **The Accountancy Act of 2004** *Republic Act No. 9298*, the Philippine Accountancy Act of 2004 Objectives: ∙ Standardization and regulation of accounting education ∙ Examination for registration of certified public accountants ∙ Supervision, control, and regulation of the practice of accountancy in the Philippines **Article II** creates **Professional Regulatory Board of Accountancy** which enforces the provisions of the Philippine Accountancy Act. It is also granted the right to issue, suspend, revoke or reinstate CPA certificates for the practice of the profession ∙ The Board is composed if a chairman and 6 members, all of whom are appointed by the President of the Republic of the Philippines **The CPA Board Exams** Any person applying for examination shall establish the following requisites to the satisfaction of the Board that he/she: ∙ Is a Filipino citizen ∙ Is of good moral character ∙ Is a holder of degree of Bachelor of Science in Accountancy conferred by a school, college, academy or institute duly recognized and/or accredited by the CHED or other authorized government offices ∙ Has not been convicted of any criminal offense involving moral turpitude Licensure examination for CPAs shall cover , but are not limited to, the following subjects: ∙ Management Services ∙ Business Law and Taxation ∙ Theory of Accounts ∙ Auditing Theory ∙ Auditing Problems ∙ Practical Accounting Problems 1 ∙ Practical Accounting Problems 2 ∙ Economics To be qualified as having passed the licensure exam, candidate must obtain a general average of 75% with no grades lower than 65% in any given subject. If candidate obtains required rating or above in at least a majority of subjects provided for in this Act, they will receive a conditional credit for the subjects passed Such candidate will take an examination in the remaining subjects within 2 years from preceding examination and fails to obtain 75% and a rating of at least 65% for the subjects re-examined, they will be considered as having failed the entire examination Candidates who **fail 2 complete examinations** shall be disqualified from taking another exam unless they submit evidence to the satisfaction of the Board that they enrolled an completed at least 24 units of subject given in the licensure examination **Sectors of Accounting Practice** 1\. ***Public practice***- This sector includes individual practitioners, small accounting firms, medium sized and multinational Page \| 3 accounting firms that render independent professional accounting services to the public. CPAs charge professional fees for these services. Example of service are: ∙ **Auditing**- most common service provided by CPAs and involves independent examination of financial statements for the purpose of expressing an opinion on the fairness of these statements advisory/consulting services on matters of accounting, finance, business policies, organization procedures, budgeting, product costing and the conduct of operations ***2. Commerce and Industry*** Accountants are employed in various positions such as: vice-president for finance, chief accountant, cost accountant, internal auditor or budget officer. The highest accounting officer of a business organization is known as the controller. Accountants in commerce and industry assist management in planning and controlling a company's operations ***3. Education*** This area employs accountants as professors, reviewers or researchers. They take steps to clarify and address emerging accounting issues encountered by accountants in other sectors. They share results of discussion and research with colleagues in other sectors. Educators also prepare aspiring CPAs for the Licensure Examinations ***4. Government*** Accountants may be hired as staff, auditor, budget officer or consultant in government units like the Commission on Audit, Bureau of Internal Revenue, Department of Finance, Department of Budget and Management, and the Securities and Exchange Commission **Accounting --Then and Now** ∙ Ancient civilizations of Babylon, Greece and Egypt also used clay tablets and later papyri to record document wage payments, material requisitions and costs of labor merchants used these methods to keep track of their business ∙ Double-entry records first appeared in Genoa in 1340 AD **Luca Pacioli and the Summa** ∙ 1494, Friar Luca Pacioli wrote a book containing discussions on the double entry bookkeeping system entitled Summa de Arithmetica, Geometria, Proportioni et Proportionalita (Everything about Arithmetic, Geometry, Proportions and Proportionality), summary of the existing mathematical knowledge at the time ∙ Considered as Father of Double-Entry Bookkeeping **The Industrial Revolution** ∙ Cost accounting- specialized field of accounting which deal with the allocation of costs to products was developed during this period **Fields of Accounting** 1\. ***Financial accounting***-focuses on preparation of general-purpose financial statements with the aim of meeting most of the needs of the external users 2\. ***Management accounting-*** concerned with financial reporting for internal users (management) and users have control over the accounting system and can specify precisely the type of reports needed for use in decision-making Page \| 4 3\. ***Cost accounting-*** measures a business' costs to help management in controlling expenses 4\. ***Tax accounting-*** has two aims: compliance with tax laws and minimizing the company's tax bill through legal means 5\. ***Government accounting-*** encompasses the process of analyzing, classifying, summarizing and communicating all transactions involving receipt and disposition of government funds and property and interpreting the results thereof. Focus is the proper custody, disposition and accounting for public funds **Chapter 2** **Generally Accepted Accounting Principles** ***GAAP-*** comprises the accounting principles and processes, standards and underlying assumptions that are used in preparing financial statements ***Financial Reporting Standards Council (FRSC)-*** official accounting standard setting body in the Philippines. The primary task of FRSC is to improve and establish accounting standards that will be generally accepted in the Philippines ***Philippine Financial Reporting Standards (PFRS)-*** The FRSC issued this and this constitutes the generally accepted accounting standards observed in the Philippines -PFRS includes: ∙ Philippine Accounting Standards ∙ PFRS ∙ Philippine Interpretations developed by Philippine Interpretations Committee **Basic Accounting Concepts** 1\. ***Business entity principle:*** business is considered distinct and separate from the owner(s) of the business ∙ Accounting entity- an organization accounted for as a separate economic unit 2\. ***Dual-effect of business transactions:*** whenever a business transaction takes place, it is assumed that the value receive is equal to the value given up (for every value received, there is an equal value given up) Debit-Credit 3\. ***Matching principle:*** profit or loss is computed by deducting the expenses incurred from the income earned during an accounting period. Income recorded and reported in one accounting period should be matched against the expenses that directly or indirectly contributed to the generation of the income 4\. ***Accrual basis:*** income is recognized when it is earned, regardless of when cash is received. Expenses are recognized when incurred, regardless of when cash is paid ∙ If services have already been rendered to a customer, income is recognized even if cash has not been received from the customer ∙ If cash is received from customer before a service is rendered or goods are delivered, income is not yet earned because there is no service or delivery of goods yet. The cash received would be earned only upon rendering of service or delivery of the goods ∙ If services have already been received by the business from its suppliers, expenses are recognized even if these services have not yet been paid for by the businessz ∙ If cash has already been paid by the business to its suppliers, an expense is not recorded until it is incurred 5\. ***Cash basis of Accounting:*** income is recognized when cash is received, and expenses are recognized when cash is paid (extra concept sometimes used by other businesses) 6\. ***Stable monetary unit:*** it is concerned with information which can be quantified and expressed in terms of money. For business transactions to be included in the accounting records and financial statements of the enterprise, it must be expressed in terms of a uniform means of measurement 7\. ***Periodicity (Time Period Concept):*** operating life of an enterprise may be conveniently divided into time periods of equal length called accounting periods. Page \| 5 Normal accounting period is equal to 12 months or 1 year 8\. ***Going Concern (Continuity*** ***Assumption):*** enterprise is a going concern and will continue operation for the foreseeable future. It is assumed that the enterprise has neither the intention nor the need to liquidate or curtail materially the scale of its operations **Accounting Framework** ∙ The Framework for the Preparation and Presentation of Financial Statements sets out the concepts that underlie the preparation and presentation of financial statements for external users ∙ The Framework is not part of the PFRS and in case of conflict, the requirements of the PFRS shall prevail over those of the Framework **Purposes of the Framework** a\) Assist the FRSC in developing accounting standards that represent the GAAP in the Philippines b\) Assist the FRSC in its review and adoption of existing International Financial Reporting Standards Reporting Standards and in dealing with topics that have yet to from the subject of an FRSC statement conform with the Philippine GAAP e\) Assist users of financial statements in interpreting the information contained in financial statements prepared in conformity with Philippine GAAP f\) Provide those who are interested in the work of the FRSC with information about its approach to the formulation of Philippine Financial Reporting Standards **Scope of the Framework** a\. Objective of financial statements b\. Underlying assumptions in the preparation of financial statements c\. Qualitative characteristics that determine the usefulness of information in financial statements statements maintenance **Financial Statements** ***Financial statement-*** the means by which the information accumulated in and processed by financial accounting is communicated to users on a periodic basis and is the end-product of the financial accounting process Parts: 1\. Statement of financial position or balance sheet 2\. Statement of comprehensive income (income statement) 3\. Statement of changes in equity 4\. Statement of cash flows 5\. Notes to the financial statements **Users of Financial Statements** 1\. ***Investors-*** providers of risk capital and are concerned with the risk inherent in and return provided by their investments. They need information to help them determine whether to buy, sell or hold their investments. Info enables them to assess enterprise's ability to pay dividends 2\. ***Employees-*** interested in information about the stability and profitability of their employers. Info enables them to assess the enterprise's ability to provide 3\. ***Lenders-*** determine whether their loans and the interest attaching to them will be paid when due 4\. ***Suppliers and other trade creditors*** determine whether the amounts owing to them will be paid when due 5\. ***Customers-*** information about the continuance of an enterprise 6\. ***Government and their agencies*** interested in the allocation of resources and, therefore, the activities of the enterprise. They also require information Page \| 6 to regulate the activities of enterprise, determine taxation policies and as the basis for national income and similar statistics 7\. ***The public-*** enterprises affect the members of the public in a variety of ways ∙ Financial statements are primarily used for the use of investors and creditors **Information Provided by Financial Statements** ∙ Information about the financial position, financial performance and cash flows of an entity **1. Financial Position** \- Condition of a business, in monetary terms, as of a given date or point in time and is primarily provided in a statement of financial position or balance sheet. Financial position is affected by the economic resources controlled, financial structure,, liquidity, solvency, and capacity to adapt to changes in the environment in which an enterprise operates ***Liquidity-*** availability of cash in the *near future* to cover currently maturing liabilities or obligations ***Solvency-*** availability of cash over the *long term* to meet obligations when they fall due ***Capacity for adaptation-*** ability of the enterprise to use its available cash for *unexpected requirements* and investment opportunities or simply called as emergency money **2. Performance or profitability** **-** Refers to whether a company is able to generate profit or incur a loss during a particular accounting period and is used for statement of comprehensive income. 2 parts: profit/loss portion and other comprehensive income portion ***Income statement-*** useful tool for evaluating management's stewardship of the resources of the enterprise and for assessing the inflow and outflow of cash **3. Changes in financial position** **-** Information concerning changes about a company's financial position is useful in order to assess its investing, financing and operating activities during the reporting period. This information provides users with a basis to assess the enterprise's ability to generate cash and cash equivalents and the needs of the enterprise to utilize those cash flows ***Statement of cash flows-*** summarizes cash activity for the period, classified according to the nature of activity **4. Other supplementary information -** Additional information that is relevant to the need of financial statement users. May include: ∙ disclosures about the risk and uncertainties concerning the enterprise and any resources and obligations not recognized in the statement of financial position ∙ information about geographical and industry segments ∙ effects on the enterprise of changing prices **General-Purpose Financial Statements** \- financial statements that meet most of the needs of other users ∙ Special-purpose financial statements covered by management accounting and auditing courses **Frequency of Preparation of Financial Statements** \- Usually prepared annually Page \| 7 ∙ Interim financial statements- shorter period financial statements (monthly, quarterly or semi-annually) ∙ Preparation and presentation of the financial statements of the enterprises ∙ Selecting and applying the accounting policies and principles which are appropriate for the company **Underlying Assumptions in the Preparation of Financial Statements** Underlying assumptions-concepts which are assumed to have been applied in preparing financial statements ∙ Accrual basis ∙ Going concern **Elements of Financial Statements** **A. Elements pertaining to financial position** 1\. ***Assets***- resource owned and/or controlled by the enterprise and expected to provide future economic benefits to the enterprise. It is acquired by an enterprise as a result of a past transaction or event. The enterprise should have the capacity to restrict or prevent other entities from enjoying the economic benefits arising from the use of the resource or item ∙ **Cash**- items considered as medium of exchange in business transactions ∙ **Accounts receivable**- valid claims from customers or clients arising from the provision of services or delivery of goods in the ordinary course of business where the price for these services or goods have not yet been paid ∙ **Supplies on hand-** supplies purchased by an enterprise which are unused as of the reporting date ∙ **Merchandise inventory-** goods which have been bought from suppliers for resale to customers at a higher price than cost ∙ **Property , plant and** **equipment-** long-lived assets which have been acquired for use in operation 2\. ***Liabilities-*** present obligation of the enterprise arising from past events, which are to be settled in the future. It is required to be settled in the future ∙ **Accounts payable-** amounts due to suppliers for goods purchased or services received on account ∙ **Salaries payable-** due to employees which are unpaid as of the reporting date ∙ **Utilities payable-** due to utility companies for electricity, heat, light and water charges ∙ **Advances from customers** amounts received from customers in advance for delivery of goods or provision of services ∙ **Loans payable-** obligations of an enterprise to lenders 3\. ***Equity-*** claim; residual interest in the assets of the enterprise after deducting all its liabilities and arise from the original investment by an owner into the business and increased by additional investments by the owners and by profit earned during a period **B. Elements pertaining to performance or profitability** 1\. ***Income-*** increase in economic benefits during the accounting period in the form of inflows or enhancements of assets or decreases of liabilities that result in the increase of equity other than those a relating to contributions from equity participants ∙ **Revenue-** course of the ordinary activities of an enterprise (sales, fees, dividends, royalties and rent) ∙ **Gain-** other items that meet the definition of income and may or may not arise in the course of the ordinary activities of an enterprise 2\. ***Expenses-*** decrease in economic benefits during the accounting period in the form of outflows or depletions of Page \| 8 assets or incidences of liabilities that result in decreases in equity other than those relating to distributions to equit participants ∙ **Losses-** other items that meet the definition of expenses and may or may not arise in the course of the ordinary activities of the enterprise **Recognition of the Elements of the Financial Statements** **Recognition-** process of incorporating in the statement of financial position or statement of comprehensive income an item that meets the definition of an element and satisfies the criteria for recognition Criteria: 1\. It is probable that any future economic benefit associated with the item will flow to or from the enterprise 2\. The item has cost or value that can be measured with reliability ∙ *Asset* is recognized when it is probable that the future economic benefits will and asset has a cost or value that can be measured reliably ∙ *Liability* recognized when it is probable that an outflow of resources embodying economic benefits will result from settlement of a present obligation and it can be measured reliably ∙ *Income* is recognized when increase in future economic benefits related to an increase in an asset or a decrease of a liability has arisen that can be measures reliably ∙ *Expenses* is recognized when a decrease in future economic benefits related to a decrease in asset or an increase of a liability has arisen that can be measure reliably **Measurement of the Elements of the Financial Statements** \- Process of determining the monetary amounts at which the elements of the financial statements are to be recognized and carried in the financial statements Measurement Bases ∙ ***Historical cost***: assets are recorded at the amount of cash or cash equivalents paid or the fair value of the consideration given to acquire them at the time of their acquisition ∙ ***Current cost:*** assets are carried at the amount of cash or cash equivalent they would have to be paid if the same or an equivalent asset was acquired currently ∙ ***Realizable (settlement) value:*** assets are carried at the amount of cash or cash equivalent that could currently be obtained by selling the asset in an orderly disposal ∙ ***Present value:*** assets are carried at the present discounted value of the future net cash inflows that the item is expected to generate in the normal course of business **Qualitative Characteristics of Financial Statements (Accounting concepts)** Qualitative characteristics- attributes that make the information provided in financial statements useful to users **4 principal qualitative characteristics** 1\. ***Relevance-*** when it influences the economic decisions of users by helping them evaluate past, present or future events or confirming or correcting past evaluations a\) **Predictive role-** if it is used to make predictions of future cash inflows or income in future periods b\) **Confirmatory role-** if it is used o confirm or correct the earlier expectations of a financial statement user c\) **Materiality-** if its omission or misstatement could influence the Page \| 9 economic decisions of users taken on the basis of financial statements 2\. ***Reliability-*** info should be free from material error and bias and can be depended upon by users to respect faithfully that which it either purports to represent or could reasonably be expected to represent a\) **Faithful representation-** information must represent faithfully the transactions and other events it either purports to represent or could reasonably be expected to represent. The actual effects of transactions should be properly accounted for and reflected in the financial statements b\) **Substance over form-** transactions and other accountable events are accounted for and presented in accordance with their substance and economic reality and not merely their legal form c\) **Neutrality-** financial statements must be free from bias d\) **Prudence (Conservatism)-** inclusion of a degree of caution in the exercise of judgement needed in making the estimates required under conditions of uncertainty, such that asset or income are not overstated and liabilities and expenses are not understated e\) **Completeness-** info must be complete within the bounds of materiality and cost 3\. ***Understandability-*** words and other accounting terminology being used are those expected to be known and understood by users of the financial statements a\) **Intra-comparability-** users must be able to compare the financial statements of an enterprise across accounting periods b\) **Inter-comparability-** users must be able to compare financial statements of different enterprises in order to evaluate their relative financial position **Constraints on Relevant and Reliable Information** 1\. ***Timeliness-*** if there is undue delay in the reporting of information it may lose its relevance 2\. ***Cost-benefit-*** cost of providing financial information should not exceed the benefits of having these information available for decision-makers 3\. ***Balance between Qualitative*** ***characteristics-*** relevance and reliability are not present simultaneously as desired **Business transaction-** exchange of values involving two parties or within the enterprise **External transactions-** sale of goods to customers or the provision of services to clients **Internal transactions-** manufacture of goods for sale and incurrence of losses by the company resulting from fire and flood **Source Documents** \- Original record of a business transaction (date and nature of transaction amount and parties involves) Examples: 1\. **Sales invoice-** issued to evidence a sale for cash 2\. **Delivery receipt-** evidence the acceptance/receipt of the goods delivered to the customer 3\. **Official receipt-** issued to evidence the receipt of cash from customers 4\. **Vendor's invoice-** issued to the enterprise by the enterprise's suppliers 5. **Purchase requisition forms-** evidences an employee's request for the purchase of needed goods or suppliers 6\. **IOUs-** note acknowledging indebtedness to the enterprise 7\. **Promissory notes-** unconditional promise in writing made by one person to another 8\. **Bank statements-** summary of all financial transactions occurring over a certain period on a bank account 9\. **Minutes of meetings-** record of a meeting Page \| 10 10\. **Business letters-** business correspondences 11\. **Job time tickets-** time spent working at a particular customer order 12\. **Certificates of stock-**ownership of shares in a corporation 13\. **Time records/timesheets-** time-in and time-out of employees 14\. **Check voucher-** authorization of cash disbursement transactions 15\. **Journal voucher-** documents used for transactions and journal entries for which there is no other source document **Basic Accounting Equation** Assets= Liabilities + Equity Net Assets-focuses on equity or the claim of owners to the assets of the business Equity= Assets -- Liabilities **Possible effects of business transactions:** a\) Increase in assets= increase in liabilities b) Increase in assets = increase in equity c) Increase in one asset= decrease in another asset d\) Decrease in assets= decrease in liabilities e) Decrease in assets= decrease in equity f) Increase in liabilities= decrease in equity g) Increase in equity = decrease in liabilities h) Increase in one liability= decrease in another liability i\) Increase in one equity= decrease in one equity **Expanded Accounting Equation** Assets= Liabilities + Equity + Income -- Expenses **Parts of:** ∙ **Financial Position:** assets, liabilities and equity ∙ **Comprehensive Income:** Income and expenses ∙ **Cash flows:** any activity that results in inflow or outflow of money or resources **Common Examples of Account Titles Used** ***1. Asset Accounts*** ∙ **Held for trading securities** temporary investments of excess cash which are primarily held for short-term gain ∙ **Loans and receivables-** trade receivables and non-trade receivables and are claim against others which arise in the ordinary course of doing business ∙ **Trade notes receivable-** written promise from the customer to pay a fixed amount of money on a certain future date substance ***2. Liability Accounts*** ∙ **Accounts payable-** opposite of accounts receivable ∙ **Notes payable-** enterprise is the one who promises to pay ∙ **Accrued liabilities-** amounts owed to others for unpaid expenses recording long-term debts of an enterprise Page \| 11 purposes and is often obtained by floating bonds ***3. Equity Accounts*** ∙ **Equity-** used to record the original and additional investments of the owner of the business entity ∙ **Withdrawals-** when proprietor withdraws cash or other assets for non-business use ∙ **Income summary-** temporary account used to summarize all income and expenses for a given period ***4. Income Accounts*** ∙ **Service income or fees income** revenues earned by performing services for customers ∙ **Sales-** revenues earned as a result of sale of merchandise ***5. Expense Accounts*** ∙ **Cost of sales-** cost incurred to purchase or to produce the products sold to customers during the period ∙ **Salaries and wage expense** payments as a result of an employer employee relationship ∙ **Utilities expense-** expenses related to use of communication facilities, the consumption of water and electricity ∙ **Rent expense-** expense for leased office space, equipment or other assets rented from others ∙ **Supplies expense-** account used for recording the usage of supplies in the normal course of business ∙ **Insurance expense-** portion of ∙ **Depreciation expense-** the portion of the cost of a tangible asset allocated or charged as expense during as accounting period ∙ **Bad debts expense-** amount of receivables estimated to be uncollectible and charged as expense during an accounting period ∙ **Interest expense-** expense related to borrowed funds **Double-Entry Accounting System** 1\. For every debit entry, there must be a corresponding credit entry and accounting equation must always be maintained 2\. Each transaction affects at least two accounts 3\. Total debit for a transaction must equal total credits 4\. An account is debited when an amount is entered on the left side of the account and credited when amount is entered on the right side 5\. The account type determines how increases or decreases in it are recorded **Account Balances** \- Difference between the total debits and the total credits of each account **Debit balance-** if total debits are greater than the total credits **Credit balance-** if the total credits are greater than the total debits **Normal balance-** usual balance of an account assuming proper accounting has been made **Chapter 4** **Steps in Accounting Cycle:** 1\. Analyzing business transactions through source documents 2\. Journalizing, or the recording of transactions in a journal 3\. Posting or transferring of the entries from the journal to the ledger 4\. Preparing the trial balance 5\. Preparing the 10-column worksheet and making the necessary adjusting journal entries 6\. Preparing the financial statements based on adjusted account balances 7\. Recording adjusting entries to the journal and posting the same to the ledger 8\. Recording and posting of closing entries 9. Ruling and balancing real and nominal accounts 10\. Preparing post-closing trial balance 11. Preparing reversing entries **Journal-** book where transactions are initially recorded in a systematic and chronological order; also called the book of original entry Page \| 12 **Compound journal entry-** more than one account is involved in a single entry **Chart of accounts-** list of all accounts of the business and their respective account numbers. Use of this would reduce confusion as to the choice of account titles and permits uniformity in recording routine transactions **Ledger-** group of accounts and known as the book of final entry **Trial balance-** list of all accounts and their balances and indicated whether total debit equals total credit. It does not guarantee that all transactions have been recorded. It is commonly taken every month-end **Footing-** adding all the debits and credits **Open account-** when in trial balance, there is a balance either on the debit or credit side **Closed account-** if the debit equals credit **Reasons Why Trial Balance may not be Balance:** 2\. Error in transferring from the ledger to the trial balance 4\. Error in journalizing 5\. Error of omission Working-Back Method 2\. Transplacement error- e.g. 1M -\> 100,000 3. Transposition error- when position of numbers are mixed (e.g. 5**35**,700 -\> 5**53**,700) Page \| 13