FABM 2 Accounting Notes PDF

FABM 2 First semester: First Quarter o Sociological and psychological ACCOUNTING matters are not recognize. ...

FABM 2 First semester: First Quarter o Sociological and psychological ACCOUNTING matters are not recognize.  Process of IDENTIFYING, NON ACCOUNTABLE EVENTS MEASURING, and COMMUNICATING o NOT RECOGNIZE but DISCLOSED economic information to permit only in the notes, if they have informed judgments and decisions by accounting relevance. users of the information. - (American Association of Accountants) o It may be recorded through a memorandum entry THREE IMPORTANT ACTIVITIES IN THE DEFINITION OF ACCOUNTING: TYPES OF EVENTS AND 1. IDENTIFYING TRANSACTIONS 2. MEASURING 3. COMMUNICATING 1. EXTERNAL EVENTS An event wherein there is a reciprocal giving and receiving of  Process of ANALYZING EVENTS and economic resources or discharging of TRANSACTIONS to determine whether economic obligations between an or not they will be recognized. entity and an external party. RECOGNITION TYPES OF EXTERNAL EVENTS o Process of INCLUDING THE i. EXCHANGE EFFECTS OF AN ACCOUNTABLE (RECIPROCAL EVENT in the STATEMENT OF TRANSFER) FINANCIAL POSITION or the Examples: sale, purchase, STATEMENT OF payment of liabilities, receipt COMPREHENSIVE INCOME of notes receivable in through a Journal Entry. exchange for accounts receivable, and the like.  Only ACCOUNTABLE EVENTS are ii. NON-RECIPROCAL recognized. TRANSFER - is a "one way" transaction in that the party ACCOUNTABLE EVENTS giving something does not o One that affects the assets, liabilities, receive anything in return, equity, income, or expenses of an while the party receiving does entity. not give anything in exchange. o Also known as ECONOMIC ACTIVITY. Examples: donations, gifts or charitable contributions, payment of taxes, imposition  FABM 2 First semester: First Quarter of fines, theft, provision of capital by owners!, distributions to owners', and Involves ASSIGNING NUMBERS, the like. 1 FASB Accounting normally in monetary terms, to the economic Standards Codification (ASC) transactions and events. 845 Several measurement bases are used in iii. External event other than accounting which include, but not limited to, transfer - an event that historical cost, fair value, present value, involves changes in the realizable value, current cost, replacement economic resources or cost and sometimes inflation-adjusted costs. obligations of an entity caused The most commonly used is historical cost. by an external party or external This is usually combined with the other source but does not involve measurement bases. Accordingly, financial transfers of resources or obligations. statements are said to be prepared using a mixture of costs and values. Costs include Examples: changes in fair historical cost and current cost while values values and price levels, include the other measurement bases. obsolescence, technological changes, vandalism, and the Valuation by fact or opinion like. The use of estimates is essential in providing relevant information. Thus, financial 2. INTERNAL EVENTS statements are said to be a mixture of fact and events that do not involve an external opinion. When measurement is affected by party. estimates, the items measured are said to be valued by opinion. TYPES OF INTERNAL EVENTS Examples: i. Production - the process by which resources are a. Estimates of uncollectible amounts of transformed into finished receivables. goods. Examples: conversion of raw materials into finished b. Depreciation and amortization expenses, products, production of farm which are affected by estimates of useful life products, and the like. and residual value. ii. Casualty - an unanticipated loss from disasters or other c. Estimated liabilities, such as provisions. similar events. Examples: loss d. Retained earnings, which is affected by from fire, flood, and other various estimates of income and expenses catastrophes.  FABM 2 First semester: First Quarter disclosed in the notes to financial statements. When measurement is unaffected by estimates, the items measured are said to be valued by fact. Examples: a. Ordinary share capital valued at par value to PROVIDE INFORMATION THAT IS b. Land stated at acquisition cost USEFUL IN MAKING ECONOMIC DECISIONS. c. Cash measured at face amount  Various sources of information are used when making economic decisions and the financial statements are only one of those sources. Other sources process of TRANSFORMING ECONOMIC may include current events, industry DATA INTO USEFUL ACCOUNTING publications, internet resources, INFORMATION, such as financial professional advices, expert systems, statements and other accounting reports, for etc. dissemination to users. It also involves  Economic entities use accounting to INTERPRETING the significance of the record economic activities, process processed information. data, and disseminate information The communicating process of accounting intended to be useful in making involves three aspects: economic decisions. An economic entity is a separately identifiable 1. Recording - refers to the process of combination of persons and property systematically committing into writing the that uses or controls economic identified and measured accountable events resources to achieve certain goals or in the journal through journal entries. objectives. An economic entity may 2. Classifying - involves the grouping of either be a: similar and interrelated items into their a. Not-for-profit entity - one that carries out respective classes through postings in the some socially desirable needs of the ledger. community or its members and whose 3. Summarizing - putting together or activities are not directed towards making expressing in condensed form the recorded profit; or and classified transactions and events. This b. Business entity — one that operates includes the preparation of financial primarily for profit. Economic activities are statements and other accounting reports. activities that affect the economic resources Interpreting the processed information (assets) and obligations (liabilities), and involves the computation of financial consequently, the equity of an economic statement ratios. Some regulatory bodies, entity. such as the Bangko Sentral ng Pilipinas (BSP), require certain financial ratios to be  FABM 2 First semester: First Quarter because monetary amounts are normally expressed in numbers. Economic activities include: 1. Production - the process of converting economic resources into outputs of goods and services that are intended to have greater utility than the required inputs. 1. General purpose accounting information - 2. Exchange - the process of trading designed to meet the common needs of most resources or obligations for other resources statement users. This information is or obligations. provided under financial accounting. General purpose information is governed by 3. Consumption - the process of using the generally accepted accounting principles final output of the production process. (GAAP) represented by the Philippine 4. Income distribution - the process of Financial Reporting Standards (PFRSs). allocating rights to the use of output among 2. Special purpose accounting information - individuals and groups in society. designed to meet the specific needs of 5. Savings - the process of setting aside particular statement users. This information rights to present consumption in exchange is provided by other types of accounting for rights to future consumption. other than financial accounting, e.g., managerial accounting, tax basis accounting. 6. Investment - the process of using current inputs to increase the stock of resources available for output as opposed to immediately consumable output. Information in the financial statements is not obtained exclusively from the entity's accounting records. Some are obtained from external sources. For example, fair value 1. QUANTITATIVE INFORMATION - measurements, resolutions of uncertainties information expressed in numbers, future least payments and contractual quantities, or units. commitments are only a few of the 2. QUALITATIVE INFORMATION - information presented in the financial information expressed in words or statements that are derived from external descriptive form. Qualitative information is sources. found in the notes to financial statements as Accounting as science and art well as on the face of the other financial statements. 1. As a social science, accounting is a body of knowledge which has been systematically 3. FINANCIAL INFORMATION - gathered, classified and organized. information expressed in money. Financial information is also quantitative information 2. As a practical art, accounting requires the use of creative skills and judgment.  FABM 2 First semester: First Quarter Accounting as an information system Accounting identifies and measures Accounting concepts refer to the principles economic activities, processes information upon which the process of accounting is into financial reports, and communicates based. The term "accounting concepts" is these reports to decision makers. used interchangeably with the following terms: Accounting as a language of business Accounting is often referred to as a "language of business" because it is ACCOUNTING ASSUMPTIONS fundamental to the communication of (ACCOUNTING POSTULATES) - are the financial information. fundamental concepts or principles and basic notions that provide the foundation of the Creative and Critical thinking in accounting process. accounting ACCOUNTING THEORY - is logical reasoning in the form of a set of broad The practice of accountancy requires the principles that (i) provide a general frame of exercise of creative and critical thinking. reference by which accounting practice can a. Creative thinking involves the use of be evaluated and (ii) guide the development imagination and insight to solve problems of new practices and procedures. It is the organized set of concepts and related by finding new relationships (ideas) among principles that explain and guide the items of information. It is most important in accountant's action in identifying, identifying alternative solutions. measuring, communicating accounting b. Critical thinking involves the logical information. Accounting theory comprises analysis of issues, using inductive or the Conceptual Framework and the deductive reasoning to test new relationships Philippine Financial Reporting Standards (PFRSs). to determine their effectiveness. It is most important in evaluating alternative solutions. Most accounting concepts are derived from the Conceptual Framework and the Creative skills and judgment are exercised in Philippine Financial Reporting Standards problem solving. The following are the steps (PFRSs). However, some accounting in problem solving: concepts are implicit, meaning they are not expressly stated in the Framework or PFRSs 1. Recognizing a problem but are generally accepted because of their 2. Identifying alternative solutions long-time use in the profession. Examples of accounting concepts: 3. Evaluating the alternatives 1. DOUBLE-ENTRY SYSTEM - each 4. Selecting a solution from among the accountable event is recorded in two parts - alternatives debit and credit. 2. GOING CONCERN ASSUMPTION - 5. Implementing the solution the entity is assumed to carry on its operations for an indefinite period of time. Meaning, the entity does not expect to end its operations in the foreseeable future.  FABM 2 First semester: First Quarter months but starts on a date other than The measurement basis involving mixture of January 1. costs and values is appropriate only when 6. MATERIALITY CONCEPT - the entity is a going concern. If the entity is information is material if its omission or a liquidating concern, the appropriate misstatement could influence economic measurement basis is realizable value, i.e., decisions. Materiality is a matter of estimated selling price less estimated costs professional judgment and is based on to sell for assets and expected settlement the size and nature of the item being amount for liabilities. judged. 7. COST-BENEFIT (COST 3. SEPARATE ENTITY CONSTRAINT/ REASONABLE (ACCOUNTING ENTITY / ASSURANCE) - the cost of processing BUSINESS ENTITY CONCEPT/ and communicating information should ENTITY CONCEPT) - the entity is not exceed the benefits to be derived viewed separately from its owners. from it. Accordingly, the personal transactions of the owners among themselves or with 8. ACCRUAL BASIS OF ACCOUNTING other entities are not recorded in the - the effects of transactions and other events entity's accounting records. This concept are recognized when they occur (and not as defines the area of interest of the cash is received or paid) and they are accountant. recorded in the accounting records and 4. STABLE MONETARY UNIT reported in the financial statements of the (MONETARY UNIT ASSUMPTION) periods to which they relate. Under accrual a. Assets, liabilities, equity, income and basis, income is recognized when earned expenses are stated in terms of a rather than when cash is collected and common unit* of measure, which is the expenses are recognized when incurred peso in the Philippines; and rather than when cash is paid. b. The purchasing power of the peso is 9. HISTORICAL COST CONCEPT regarded as stable or constant and that its (COST PRINCIPLE) - the value of an instability is insignificant and therefore asset is determined on the basis of ignored. acquisition cost. This concept is not always *To be useful, accounting information maintained. Some PFRSs require the should be stated in a common departure from this concept, such as when denominator. For example, amounts in inventories are measured at net realizable foreign currencies should be translated value (NRV) rather than at cost when into pesos. applying the "lower of cost and NRV" 5. TIME PERIOD (PERIODICITY measurement. ACCOUNTING PERIOD) - the life of 10. CONCEPT OF ARTICULATION - all the entity is divided into series of of the components of a complete set of reporting periods. An accounting period financial statements are interrelated. The is usually 12 months and may either be a preparation of a worksheet (and the eventual calendar year or a fiscal year period. A completion of the financial statements) calendar year period starts on January 1 recognizes that the financial statements are and ends on December 31 of that same fundamentally interrelated and interact with year. A fiscal year period also covers 12 each other. Accordingly, when users use the financial statements in making decisions,  FABM 2 First semester: First Quarter they need to use each financial statement in when required or permitted by the PFRSs or conjunction with the other financial when the change results to more relevant and statements. reliable information. Changes in accounting For example, when evaluating an entity's policies are disclosed in the notes. ability to generate future cash flows, all the 13. MATCHING (ASSOCIATION OF financial statements should be used and not CAUSE AND EFFECT) - costs are only the statement of cash flows. recognized as expenses when the related revenue is recognized. - Receivables and payables in the statement of financial position provide information on 14. ENTITY THEORY - the accounting expected cash receipts and cash objective is geared towards proper income determination. Proper matching of costs disbursements in future periods. against revenues is the ultimate end. This - Income and expenses in the statement of theory emphasizes the income statement and is profit or loss and other comprehensive exemplified by the equation "Assets - income provide information on the entity's Liabilities + Capital." ability to generate cash flows from its 15. PROPRIETARY THEORY - the operations. accounting objective is geared towards the - Information on issued and unissued shares in proper valuation of assets. This theory the statement of changes in equity provides emphasizes the importance of the balance information on the availability of equity sheet and is exemplified by the equation financing. Information on historical changes in "Assets - Liabilities = Capital." cash and cash equivalents in the statement of 16. RESIDUAL EQUITY THEORY — this cash flows helps users assess future sources theory is applicable when there are two classes and uses of funds. of shares issued, i.e., ordinary and preferred. - The notes to financial statements provides The equation is "Assets - Liabilities - information on the quality of earnings, e.g., Preferred Shareholders' Equity = Ordinary whether income or expenses are realized or Shareholders' Equity." This theory is applied unrealized or whether they are recurring or in the computation of book value per share non-recurring. and return on equity. 11. FULL DISCLOSURE PRINCIPLE - 17. FUND THEORY -, the accounting this principle recognizes that the nature and objective is neither proper income amount of information included in the determination nor proper valuation of assets financial statements reflect a series of but the custody and administration of funds. judgmental trade-offs. The trade-offs strive The objective is directed towards cash flows, for: exemplified by the formula "cash inflows a. sufficient detail to disclose matters that minus cash outflows equals fund." This make a difference to users, yet concept is used in government accounting and b. sufficient condensation to make the fiduciary accounting. information understandable, keeping in mind 18. REALIZATION - the process of the costs of preparing and using it. converting non-cash assets into cash or claims 12. CONSISTENCY CONCEPT - the for cash. It is also the concept that deals with financial statements are prepared on the basis revenue recognition. For example, realization of accounting principles that are applied occurs when goods are sold for cash or in consistently from one period to the next. exchange for accounts receivable or notes Changes in accounting policies are made only receivable. The goods are non-cash assets and  FABM 2 First semester: First Quarter they are converted into cash or, in the case of the receivables, claims for 19. PRUDENCE (CONSERVATISM) - is 1. FINANCIAL ACCOUNTING - is the the use of caution when making estimates branch of accounting that focuses on general under conditions of uncertainty, such that assets or income are not overstated and purpose financial statements. liabilities or expenses are not understated. In General purpose financial statements are other words, when exercising prudence, the those statements that cater to the common one which has the least effect on equity is needs of external users, primarily the chosen. potential and existing investors, and lenders Enter and other creditors. External users are those who are not involved in managing the entity. 20. MATCHING CONCEPT (DIRECT ASSOCIATION OF COSTS AND Financial accounting is governed by the REVENUES) - costs that are directly related Philippine Financial Reporting Standards to the earning of revenue are recognized as (PFRSs). expenses in the same period the related revenue is recognized. For example, the cost of inventory is initially recognized as asset and recognized as expense (i.e., cost of sales) when the inventory is sold. Other examples The term "financial accounting" is often include freight-out and sales commissions; used interchangeably with the term these are expensed in the period the related "financial reporting." Although, both sales are recognized. financial accounting and financial reporting 21. SYSTEMATIC AND RATIONAL focus on general-purpose financial ALLOCATION - costs that are not directly statements, the latter endeavors to promote related to the earning of revenue are initially recognized as assets and recognized as principles that are also useful other financial expenses over the periods their economic reporting." "Other financial reporting" benefits are consumed, using some method of comprises information provided outside the allocation. For example, the cost of equipment financial statements that assists in the is initially recognized as asset and interpretation of a complete set of financial subsequently recognized as depreciation statements or improves users' ability to make expense over the periods the equipment is efficient economic decisions. used. Other examples include amortization, expensing of prepayments, and effective Financial statements are the structured interest method of allocation. representation of an entity's financial 22. IMMEDIATE RECOGNITION - position and results of its operations. They costs that do not meet the definition of an are the end product of the accounting asset, or ceases to meet the definition of an process and the means by which information asset, are expensed immediately. Examples gathered and processed are periodically include casualty losses and impairment communicated to users. losses. A financial report includes the financial statements plus other information provided outside the financial statements that assists in the interpretation of a complete set of  FABM 2 First semester: First Quarter financial statements or improves users' and its instrumentalities, placing emphasis ability to make efficient economic decisions. on the custody of public funds, the purposes Financial reporting is the provision of for which those funds are committed, and financial information about an entity that is the responsibility and accountability of the useful to external users, primarily the individuals entrusted with those funds. investors, lenders, and other creditors, in 7. FIDUCIARY ACCOUNTING - refers making investment and credit decisions. to the handling of accounts managed by a Primary objective of financial reporting To person entrusted with the custody and provide information about an entity's management of property for the benefit of economic resources, claims to those another. resources, and changes in those resources. 8. ESTATE ACCOUNTING - refers to the Secondary objective of financial reporting handling of accounts for fiduciaries who To provide information useful in assessing wind up the affairs of a deceased person. the entity's management stewardship (i.e., 9. SOCIAL ACCOUNTING (SOCIAL how efficiently and effectively the entity's AND ENVIRONMENTAL management has discharged its ACCOUNTING OR SOCIAL responsibilities to use the entity's economic RESPONSIBILITY REPORTING) - the resources). process of communicating the social and environmental effects of an entity's 2. MANAGEMENT ACCOUNTING - economic actions to the society. refers to the accumulation and 10. INSTITUTIONAL ACCOUNTING - communication of information for use by the accounting for non-profit entities other internal users or management. An offshoot than the government. of management accounting is management 11. ACCOUNTING SYSTEMS - the advisory services which includes services to installation of accounting procedures for the clients on matters of accounting, finance, accumulation of financial data and designing business policies, organization procedures, of accounting forms to be used in data product costs, distribution, and many other gathering. phases of business conduct and operations. 12. ACCOUNTING RESEARCH - 3. COST ACCOUNTING - is the pertains to the careful analysis of economic systematic recording and analysis of the events and other variables to understand costs of materials, labor, and overhead their impact on decisions. Accounting incident to production. research includes a broad range of topics, 4. AUDITING - is the process of evaluating which may be related to one or more of the the correspondence of certain assertions with other branches of accounting, the economy established criteria and expressing an as a whole, or the market environment. opinion thereon. 5. TAX ACCOUNTING - the preparation of tax returns and rendering of tax advice, such as the determination of the tax BOOKKEEPING refers to the process of consequences of certain proposed business recording the accounts or transactions of an endeavors. entity. Bookkeeping normally ends with the preparation of the trial balance. Unlike 6. GOVERNMENT ACCOUNTING - accounting, bookkeeping does not require refers to the accounting for the government  FABM 2 First semester: First Quarter the interpretation of the significance of the A guidance states whether it is an integral processed information. part of the PFRSs. A guidance that is an integral part of the PFRSs is mandatory. ACCOUNTANCY refers to the profession The need for reporting standards or practice of accounting. The practice of For financial statements to be useful, they accounting can be broadly classified into should be prepared using reporting standards two - (1) Public practice and (2) Private that are generally acceptable. Otherwise, practice. Public practice does not involve an each entity would have to develop its own employer-employee relationship, while standards. If that is the case, every entity private practice involves an employer- may just present any asset or income it employee relationship - meaning the wants and omit any liability or expense it accountant is an employee. does not want. Financial statements would not be comparable, the risk of fraudulent reporting is heightened, and economic decisions based on these financial statements would be grossly incorrect. For this reason, Under R.A. 9298 also known as the entities should follow a uniform set of "Philippine Accountancy Act of 2004," the reporting standards when preparing and practice of accounting is sub-classified into presenting financial statements. the following: 1. Practice of Public Accountancy The term "generally acceptable" means that either: 2. Practice in Commerce and Industry 1. the standard has been established by an 3. Practice in Education/Academe – authoritative accounting rule-making body, e.g., the PFRSs adopted by the FRSC; or 4. Practice in the Government 2. the principle has gained general acceptance due to practice over time and has been proven to be most useful, e.g., double- entry recording and other implicit concepts. The process of establishing financial The Philippine Financial Reporting accounting standards is a democratic process Standards (PFRSs) represent the generally in that a majority of practicing accountants accepted accounting principles (GAAP) in must agree with a standard before it the Philippines. becomes implemented. The PFRSs are Standards and Interpretations Hierarchy of Reporting Standards adopted by the Financial Reporting When selecting its accounting policies, an Standards Council (FRSC). They comprise: entity considers the following in descending a. Philippine Financial Reporting Standards order: (PFRSs); 1. Philippine Financial Reporting Standards b. Philippine Accounting Standards (PASs); (PFRSs) and 2. In the absence of a PFRS that specifically c. Interpretations applies to a transaction or event, PERSs are accompanied by guidance to management shall use its judgment in assist entities in applying their requirements. developing and applying an accounting  FABM 2 First semester: First Quarter policy that results in information that is relevant and reliable. In making the judgment, 2. Philippine Interpretations Committee (PIC) - is a committee formed by the 1. management shall refer to, and consider the applicability of, the following sources in Accounting Standards Council (ASC), the descending order: predecessor of FRSC, with the role of reviewing the interpretations of the a. The requirements in PERSs dealing with similar and related issues; International Financial Reporting Interpretations Committee (IFRIC) for b. The Conceptual Framework. approval and adoption by the FRSC. 2. management may also consider the following: 3. Board of Accountancy (BOA) - is the a. Pronouncements of other standard-setting professional regulatory board created under bodies R.A. No. 9298 to supervise the registration, b. Accounting literature and accepted licensure and practice of accountancy in the industry practices (PAS 8.7 - 12) C Philippines. The BOA consists of a Although the selection of appropriate chairperson and six (6) members appointed accounting policies is the responsibility of by the President of the Philippines. The the entity's management, the proper Board shall elect a vice-chairperson from application of accounting principles is most among its members for a term of one (1) dependent upon the professional judgment year. of the accountant. 4. Securities and Exchange Commission (SEC) - is the government agency tasked in regulating corporations and partnerships, capital and investment markets, and the Accounting standard setting bodies and investing public. Some SEC rulings affect other relevant organizations the accounting requirements of entities and 1. Financial Reporting Standards Council the adoption and application of accounting (FRSC) - is the official accounting standard policies. setting body in the Philippines created under the Philippine Accountancy Act of 2004 5. Bureau of Internal Revenue (BIR) - (R.A. No. 9298). The FRSC is composed of administers the provisions of the National fifteen (15) individuals - a chairperson who Internal Revenue Code. These provisions do had been or presently a senior accounting not always reflect the goals of financial practitioner in any of the scope of reporting. However, they do at times accounting practice and fourteen (14) influence the choice of accounting methods representative members: and procedures. 6. Bangko Sentral ng Pilipinas (BSP) - influences the selection and application of 2. Philippine Interpretations Committee 2. accounting policies by banks and other entities performing banking functions.  FABM 2 First semester: First Quarter 7. Cooperative Development Authority PFRSs and PASs are based on these (CDA) - influences the selection and standards. application of accounting policies by The IASC was founded in June 1973. It was cooperatives. established as a result of an agreement by Accounting policies prescribed by a accountancy bodies in ten national regulatory body (eg,, BSP, CDA) are jurisdictions which constituted the original sometimes referred to as regulatory board, namely, Australia, Canada, France, accounting principles. Germany, Japan, Mexico, the Netherlands, the UK, Ireland and the US. International Accounting Standards Due process The International Accounting Standards Board (IASB) is the standard-setting body of The IFSs are developed through an the IFRS Foundation with the main international due process that involves objectives of developing and promoting accountants and other various interested global accounting standards. The IASB was individuals and organizations from around established in April 1, 2001 as part of the the world. Due process normally involves International Accounting Standards the following steps: Committee (IASC) Foundation. The IASC 1. The staff identifies and reviews issues Foundation is a non-profit organization associated with a topic and considers the based in Delaware, USA and is the parent of application of the Conceptual Framework to the IASB, which is based in London. On the issues; July 1, 2010, the IASC Foundation was renamed to International Financial 2. Study of national accounting requirements Reporting Standards Foundation or IFRS and practice, including consultation with Foundation. national standard-setters; The standards issued by the IASB are the 3. Consulting the Trustees and the Advisory International Financial Reporting Standards Council about the advisability of adding the (IFRSs), composed of the following: topic to the IASB's agenda; 1. International Financial Reporting 4. Formation of an advisory group to give Standards (IFRSs) advice to the IASB on the project; 2. International Accounting Standards 5. Publishing a discussion document for (IASs) public comment; 3. Interpretations 6. Publishing an exposure draft (a) for public comment; The IRSs are standards issued by the IASB after it replaced its predecessor, the 7. Publishing with an exposure draft a basis International Accounting Standards for conclusions and the alternative views of Committee (IASC), in April 1, 2001. The any IASB member who opposes publication; IASs are standards issued by the IASC 8. Consideration of all comments received; which were adopted by the IASB. The  FABM 2 First semester: First Quarter 9. Holding a public hearing and conducting Members of the Advisory Council are field tests, if necessary; and appointed by the IFRS Foundation which also appoints members to the IASB. These 10. Publishing a standard (a), including i) a members are drawn from different basis for conclusions, explaining, among geographic locations and have a wide other things, the steps in the IASB's due variety of backgrounds, including users, process and how the IASB dealt with public preparers, academics, auditors, analysts, comments on the exposure draft, and (ii) the regulators and professional accounting dissenting opinion of any IASB. member. bodies. Other relevant international 3. International Federation of Accountants organizations (IFAC) - is a non-profit, non-governmental, 1. International Financial Reporting non-political organization of accountancy Interpretations Committee (IFRIC) - is a bodies that represents the worldwide committee that prepares interpretations of accountancy profession. Its mission is to how specific issues should be accounted for develop and enhance the profession to under the application of IFRS where: provide services of consistently high quality in the public interest. Membership to the IFAC is a. The standards do not include specific open to all accountancy bodies recognized by authoritative guidance; and law or consensus within their countries. b. There is a risk of divergent and 4. International Organization of Securities unacceptable accounting practices. Commissions (IOSCO) - is an international body of security commissions. The Philippine The IFRIC is composed mostly of technical SEC is a member of IOSCO. partners in audit firms but also includes preparers and users. In 2002, IFRIC replaced Move to IFRSs the former Standing Interpretations Prior to the full adoption of the IFRSs in 2005, Committee (SIC) which had been created by the accounting standards used in the the IASC. All of the SIC Interpretations Philippines were previously based on US have been adopted by the IASB. GAAP, i.e., the Statements of Financial 2. IFRS Advisory Council (previously Accounting Standards issued by the Federal known as the Standards Advisory Council Accounting Standards. Board (FASB), the 'SAC) - is a group of organizations and U.S. national standard setting body. individuals with an interest in international The move to IFSs was primarily brought about financial reporting. The Advisory Council's by the increasing acceptance of IFRSs world- role includes advising on priorities within wide and increasing internationalization of the IASB's work program. The IASB is businesses thereby increasing the need for a required to consult with the Advisory common financial reporting standards that Council in advance of any board decisions minimize, if not eliminate, inconsistencies of on major projects that it wishes to add to its financial reporting among nations. agenda. "A good example of inconsistent national financial reporting is that of German car  FABM 2 First semester: First Quarter manufacturer Daimler-Benz AG (prior to its to converge their accounting standards to merger with Chrysler). Daimler-Benz obtained enhance the quality and comparability of a listing of its shares in the US in 1993, and in financial reporting so doing needed to report under both U.S. GAAP and German GAAP. While one might Changes in reporting standards expect that the profit reported would be Once established, financial reporting standards similar (as it was exactly the same set of are continually reviewed, revised or economic transactions being presented), this superseded. Changes to reporting standards was not the case. The company reported a are primarily made in response to users' needs. huge loss of $1 billion under US GAAP, while Users' needs for financial information change, at the same time reporting a profit of $370 and so must financial reporting standards in million under its own domestic German order to continually provide useful information. Legal, political, business and GAAP. This difference was simply the result social environments also influence changes in of different accounting practices being used by reporting standards. Regulatory bodies, different countries. Such significant lobbyists, laws and regulations, and changes in differences undermine the usefulness of economic environments affect the choice of financial statements." accounting treatment provided under the reporting standards. The future of IFRSs A significant milestone towards achieving the goal of having one set of global standards was reached in October 2002 when the FASB and THE WORKSHEET the IASB entered into a memorandum of Accountants often use a worksheet to help understanding called the "Norwalk Agreement." TRANSFER DATA FROM THE In this Agreement, the FASB and the IASB UNADJUSTED TRIAL BALANCE TO formalized their commitment to the THE FINANCIAL STATEMENTS. This convergence of U.S. GAAP and IFRSs by multi-column document provides an agreeing to use their best efforts to: efficient way to summarize the data for a. make their existing financial reporting financial statements. The accountant standards fully compatible as soon as generally prepares a worksheet when it is practicable, i.e., minimize differences, and time to adjust the accounts and prepare b. coordinate their future work programs to ensure that once achieved, compatibility is financial statements. Note, however, that it maintained. is possible to prepare financial statements directly from the adjusted trial balance at the Since the publication of the Norwalk end of the accounting period if the business Agreement, the IASB and FASB have been has relatively few accounts. The worksheet working together with the common goal of simplifies the adjusting and closing process. producing a single set of global accounting It can also reveal errors. The worksheet is standards. "In a public statement issued in not part of the ledger or the journal, nor is it January 2017, the outgoing (US) SEC Chair expressed support for the development of a financial statement. It is a summary device high-quality, globally accepted accounting used by the accountant for his convenience. standards, and suggested that the (US) SEC support further efforts by the FASB and IASB  FABM 2 First semester: First Quarter balance columns to the balance sheet columns. Extend the income and expense amounts to the income statement columns. 1. Enter the account balances in the Total the statement columns. Every account unadjusted trial balance columns and total is either a balance sheet account or an the amounts. Listing all the accounts with income statement account. Asset, liability, their balances helps identify the accounts capital and withdrawal accounts are that need adjustments. This practice will extended to the balance sheet columns. help ensure the achievement of Income and expense accounts are moved to completeness, and accuracy in the the income statement columns. Debits in the adjustment process. adjusted trial balance remain as debits in the statement columns while credits as credits 2. Enter the adjusting entries in the adjustments columns and total the amounts. 5. Compute profit or loss as the difference When a worksheet is used, all adjustments between total revenues and total expenses in are first entered in the worksheet. As each the income statement. Enter profit or loss as adjustment is entered, a letter is used to a balancing amount in the income statement identify the debit entry and the and in the balance sheet, and compute the corresponding credit entry. Note that the final column totals. adjustments are not journalized until after the worksheet is completed and the financial ESSENCE OF FINANCIAL STATEMENTS statements prepared. The financial statements are the means by 3. Compute each account's adjusted balance which the information accumulated and by combining the unadjusted trial balance processed in financial accounting is and the adjustment figures. ' Enter the periodically communicated to the users. adjusted amounts in the adjusted trial Without accounting information embodied balance columns.. This process is followed in the financial statements, users may not be through all the accounts. The adjusted trial able to arrive at sound economic decisions. balance columns are then totaled to check The objective of financial statements is to provide information about the financial the accuracy of the cross-footing. A simple position, financial performance, and cash convention to observe when extending flows of an entity that is useful to a wide amounts from the tríal balance to the range of users in making economic adjusted trial balance follows: decisions. Add when the type of adjustment (deblt or credit) is the same as the unadjusted COMPLETE SET OF FINANCIAL STATEMENTS Subtract when the type of adjustment An entity shall present with equal (debit or credit) is different from the prominence all of the financial statements in unadjusted balance. a complete set of financial statements. Per 4. Extend the asset, liability and owner's revised Philippine Accounting Standards equity amounts from the adjusted trial (PAS) No. 1, a complete set of financial statements comprises:  FABM 2 First semester: First Quarter 1. A statement of financial position as at the once the worksheet is completed, it is easy end of the period; to prepare the financial statements for the 2. A statement of comprehensive income for account balances have been extended to the the period; appropriate incale sentement and balance 3. A statement of changes in equity for the sheet columns. Most of the information period; needed to prepare the income statement, 4. A statement of cash flows for the period; statement of changes in equity and balance 5. Notes, comprising a summary of sheet are available from the worksheet. Note significant accounting policies and other that financial statements shall be presented explanatory information; and at least annually. 6. A statement of financial position as at the INCOME STATEMENT beginning of the earliest comparative period when an entity applies an accounting policy The income statement is a formal statement retrospectively or makes a retrospective showing the performance of the enterprise restatement of items in its financial for a given period of time. ummarizes the statements or when it reclassifies items in its revenues earned and expenses incurred financial statements. Information about the performance of an In a nutshell, the statement of financial enterprise, in particular its profitability, is position (or balance sheet) lists all the assets, required in order to assess potential changes liabilities and equity of an entity as at a in the economic resources that it is likely to specific date. The income statement presents a summary of the revenues and expenses of control in the future. It is also useful in an entity for a specific period. The statement predicting the capacity of the enterprise to of changes in equity presents a summary of generate cash flows from its existing the changes in capital such as investments, resource base. profit or loss, and withdrawals during a An entity shall present all items of income specific period. The statement of cash flows and expense recognized in a period: reports the amount of cash received and disbursed during the period. Accounting a) In a single statement of comprehensive policies are the specific principles, bases, income, or conventions, rules and practices adopted by b) In two statements: a statement displaying an enterprise in preparing and presenting components of profit or loss (separate financial statements. Notes to financial income statement) and a second statement statements provide narrative descriptions or beginning with profit or loss and displaying disaggregation of items presented in the components of other comprehensive income statements and information about items that (statement of comprehensive income). do not qualify for recognition in the In Accounting Fundamentals, the discussion statements, zeroed in on the separate income statement portion because the other. line items comprising the statement of comprehensive income will be tackled only in higher accounting because of their complexity. STATEMENT OF CHANGES IN EQUITY  FABM 2 First semester: First Quarter The statement of changes in equity longer term to meet financial commitments summarizes the changes that occurred in as they fall due. owner's equity. This statement is now a In preparing the balance sheet, it may not be required statement. Changes in an necessary to make any further analysis of the enterprise's equity between two balance data. The needed data-that is, the balances of sheet dates reflect the increase or decrease in the asset, liability, and owner's equity its net assets during the period. In the case of accounts-are already available from the sole proprietorships, increases in owner's balance sheet columns of the worksheet. equity arise from additional investments by However, the interim balance for owner's the owner and profit during the period. equity must be revised to include profit or Decreases result from withdrawals by the loss and owner's withdrawals for the owner and from loss for the period. The accounting period. The adjusted amount for beginning balance and additional ending owner's equity is shown in the investments are taken from the owner's statement of changes in equity. capital account in the general ledger. The Format profit or loss figure comes directly from the income statement while the withdrawals The balance sheet can be presented in either from the balance sheet columns in the the report format or the account format. The worksheet. report format simply lists the assets, followed by the liabilities then by the BALANCE SHEET owner's equity in vertical sequence. The The balance sheet is a statement that shows account format lists the assets on the left and the financial position or condition of an the liabilities and owner's equity on the entity by listing the assets, labilities and right. Either balance sheet format is owner's equity as at a specific date. acceptable. information needed for the balance sheet Classification items are the net balances at the end of the period, rather than the total for the period as It is proper to present a classified balance in the income statement. This statement is sheet; that is, the assets and liabilities are also called the statement of financial separated into various categories. Assets are position. sub-classified as current assets and non- current assets; while liabilities as current users of financial statements analyze the liabilities and non-current liabilities. At this balance sheet to evaluate an entity's point, it is advisable to review the liquidity, is financial flexibility, and its definitions of the foregoing (refer to Chapter ability to generate profits, and its solvency. 3). Classifying a balance sheet aids in the refers to the avallability of cash in the near analysis of financial statement data. To future after taking account of the financial make accounting information useful to commitments over this period. Financial decision-makers, the items in the balance flexibility is the ability to take effective sheet may be grouped and arranged in actions to alter the amounts and timings of accordance with the following guidelines: cash flows so that it can respond to unexpected needs and opportunities. This * Assets are classified and presented in includes the ability to raise new capital or decreasing order of liquidity. Cash is the tap into unused lines of credit. Solvency most liquid. Assets that are least likely to be refers to the availability of cash over the converted to cash are listed last.  FABM 2 First semester: First Quarter * Liabilities are generally classified and adjusting profit for income and expense presented based on time of maturity such items not resulting from cash transactions. that obligations which are currently due are The adjustment begins with profit followed listed first. by the addition of expenses and charges (e.g. Although there is no prescribed format for depreciation) that did not entail cash the balance sheet, what is required is the payments. Then, increases in current assets current and non-current distinction for assets and decreases in current liabilities involved and liabilities. Assets can be presented in the determination of profit but which did current then non-current, or vice versa. not actually increase or decrease cash, are Liabilities and equity can be presented subtracted from profit. Finally, decreases in current labilities then non-current labilies current assets and increases in current then equity, or vice versa. liabilities are added to profit to obtain net cash provided by (used in) operating activities. STATEMENT OF CASH FLOWS For example, increases in accounts The statement of cash flows provides receivable from sale of services or goods information about the cash receipts and cash represented an increase in profit without the payments of an entity during a period. It is a corresponding increase in cash-for it is still a formal statement that classifies cash receipts receivable. Since these revenues are already (inflows) and cash payments (outflows) Into included in the computation of profit, the operating, investing and financing activities. increase in accounts receivable should be This statement shows the net increase or deducted from the profit figure. decrease in cash during the period and the To illustrate further, assume that salaries cash balance at the end of the period; it also payable increased. Increases in salaries helps project the future net cashflows of the payable meant that the entity did not pay the entity. full amount of salaries expense for the period. The expense in the income Cash Flows from Operating Activities statement, for cash flow purposes, is Operating activities generally involve overstated by the amount of unpaid salaries. providing services, and producing and If expense is overstated, then profit is delivering goods. Cash flows from operating understated by the same amount; hence, the activities are generally the cash effects of increase in current liability is added to transactions and other events that enter into profit. the determination of profit or loss. This cash Enterprises are encouraged to report cash flow can be presented using either the direct flows from operating activities using the or the indirect method. direct method but the indirect method is Using the direct method, the entity's net acceptable. Only the direct method is cash provided by (used in) operating illustrated here. The following are the major activities is obtained by adding the classes of operating cash flows using the individual operating cash inflows and then direct method: subtracting the individual operating cash Cash Inflows outflows. receipts from sale of goods and The indirect method derives the net cash performance of services provided by (used in) operating activities by  FABM 2 First semester: First Quarter * receipts from royalties, fees, commissions RELATIONSHIP AMONG THE and other revenues FINANCIAL STATEMENTS Enter The financial statements are based on the Cash Outflows same underlying data and are fundamentally related. payments to suppliers of goods and services payments to employees payments for taxes payments for interest expense payments for other operating expenses 1. The income statement reports all income and expenses during the period. The profit Cash Flows from Investing Activities or loss is the final figure in this statement. Investing activities include making and 2. The statement of changes in equity collecting loans; acquiring and disposing of considers the profit or loss figure from the investments in debt or equity securities; and income statement as one of the determining obtaining and selling of property and factors that explains the change in owner's equipment and other productive assets. equity. Cash Inflows Enter receipts from sale of property and 3. The balance sheet reports the ending equipment : owner's equity, taken directly from the receipts from sale investments on notes in statement of changes in equity. debt or equity securities 4. The statement of cash flows reports the Cash Outflows net increase or decrease in cash during the payments to acquire property and period and ends with the cash balance equipment reported in the balance sheet. This statement payments to acquire debt or equity is prepared based on information from the securities income statement and the balance sheet. payments to make loans to others generally in the form of notes receivable Cash Flows from Financing Activities Financing activities include obtaining The adjustment process is a key element of resources from owners and creditors. accrual basis accounting. The worksheet Cash Inflows helps in the identification of the accounts receipts from investments by owners that need adjustments. The adjusting entries receipts from issuance of notes payable are directly entered in the worksheet. Most Cash Outflows accountants prepare the financial statements immediately after completing the worksheet. payment to owners in the forms of The adjustments are journalized and posted withdrawals. as the closing entries are made. This step in payment to settle notes payable the accounting cycle brings the ledger into  FABM 2 First semester: First Quarter agreement with the data reported in the balance and debiting the income financial statements. summary for the total. These data can be found in the debit side of the income statement columns of the worksheet. Income, expense and withdrawal The effect of posting the closing entry is to reduce the expense account balances to zero accounts are temporary accounts that and to transfer the total of the account accumulate information related to a specific balances to the debit side of the income accounting period. These temporary summary account. accounts facilitate income statement 3. Close the income summary account preparation. At the end of each year, the After posting the closing entries balances of these temporary accounts are involving the income and expense transferred to the capital account. Thus, the accounts, the balance of the income balance of the owner's capital account summary account will be equal to the represents the cumulative net result of profit or loss for the period. A profit is income, expense, and withdrawal indicated by a credit balance and a loss transactions. This phase of the cycle is by a debit balance. The income summary called the closing procedure. A temporary account, regardless of the nature of its account is said to be closed when an entry is balance, must be closed to the capital made such that its balance becomes zero. account. 4. Close the withdrawal account Closing simply transfers the balance of one The withdrawal account shows the account to another account. in this case, the amount by which capital is reduced balances of the temporary accounts are during the period by withdrawals of cash transferred to the capital account. A or other assets of the business by the summary account-Income Summary is used owner for personal use. For this reason, to close the income and expense accounts.. the debit balance of the withdrawal account must be closed to the capital 1. CLOSE THE INCOME ACCOUNTS account as follows: Income accounts have credit balances The effect of posting this closing entry is to before the closing entries are posted.: close the withdrawal account and to transfer The dual effect of the entry is to the balance to the capital account. make the balances of the income accounts equal to zero, and to transfer the balances in total to the credit side of the income summary account. It is possible to commit an error in posting 2. Close the expense accounts Expense the adjustments and closing entries to the accounts have debit balances before the ledger accounts; thus, it is necessary to test closing entries are posted. For this the equality of the accounts by preparing a reason, a compound entry is needed new trial balance. This final trial balance is crediting each expense account for its called a post-closing trial balance. The post- closing trial balance verifies that all the  FABM 2 First semester: First Quarter debits equal the credits in the trial balance. reversed are as follows: prepaid expenses The trial balance contains only balance sheet (expense method), unearned revenues items such as assets, liabilities, and ending (income method), accrued expenses and capital because all income and expense accrued revenues. accounts, as well as the withdrawal account, COMPARISON OF INCOME have zero balances. Notice that only the STATEMENTS balance sheet accounts have balances In ascertaining profit, a basic income because at this point, all the income Service entities perform services for a fee. statement accounts have been closed. statement is all that is needed. In Figure 7-1, profit is measured as the difference between Preparing the post-closing trial balance may revenues from services and expenses. In not be the last step in the accounting cycle. contrast, merchandising entities earn These Some entities elect to reverse certain end-of- entities use the same basic accounting profit period adjustments on the first day of the by buying and selling goods. methods as new period. A reversing entry is a journal service entities, but the process of buying entry which is the exact opposite of a related and selling merchandise requires some adjusting entry made at the end of the additional accounts and concepts. To period. It is basically a bookkeeping provide a better measure of performance, the technique made to simplify the recording of income statement of a merchandising regular transactions in the next accounting business is presented: period. It should be emphasized that reversing entries are optional. Also, the act In a merchandising business, net of reversing a previously recorded adjusting sales arise from the sale of goods entry should not lead us to the conclusion while cost of sales or cost of goods that the entries reversed are unnecessary or inaccurate. sold represents the cost of inventory the entity has sold to customers. The Even when an entity follows the policy of difference between net sales and cost making reversing entries, not all adjusting. entries should be reversed. Generally, a of sales is called gross profit. Then, reversing entry should be made for any other operating income is added and adjusting entry that increased an asset or a operating expenses like distribution liablity account. Therefore, all accruals are costs, administrative expenses and reversed but only deferrals initially recorded other operating expenses are in income statement-income or expense- deducted from gross profit to arrive accounts are reversed. Using the summary of at operating profit. Investment adjusting entries in Chapter 5, the veracity revenues, other gains and losses, and of the general rule stated in the previous finance costs, e.g. interest expense, paragraph can be proven. For example, in are considered to arrive at profit the case of a prepaid expense initially before tax then income tax expense recorded in an expense account, the is deducted to have profit from adjusting entry debited an asset-prepaid continuing operations. Finally profit expense. An asset increased; hence, applying the general rule, this adjustment can be from discontinued operations (net of reversed. After analyzing the rest of the tax) is taken to account to get profit adjusting entries, the adjustments that can be for the period.  FABM 2 First semester: First Quarter account, official receipt, deposit slip, check, OPERATING CYCLE OF purchase requisition, purchase order, receiving report and credit memorandum. A MERCHANDISING The descriptions of each follow: BUSINESS The merchandising 1. Sales invoice is prepared by the seller of entity purchases inventory, sells the goods and sent to the buyer. This document inventory and uses the cash to contains the name and address of the buyer, purchase more inventory-and the the date of sale and information- quantity, cycle continues. For cash sales, the description and price-about the goods sold. cycle is from cash to inventory and It also specifies the amount of sales, and the back to cash. For sales on account, transportation and payment terms. the cycle is from cash to inventory to accounts receivable and back to cash. 2. The bill of lading is a document issued by In any industry, the manager strives the carrier— a trucking, shipping or airline- to shorten the cycle. The faster the that specifies contractual conditions and sale of inventory and the collection terms of delivery such as freight terms, time, of cash, the higher the profits. The place, and the person named to receive the following illustrates the operating goods. cycle of a merchandiser: 3. The statement of account is a formal notice to the debtor detailing the accounts already due. SOURCE DOCUMENTS 4. The official receipt evidences the receipt of cash by the seller or the authorized representative. It notes the invoices paid and other details of payment.of cash by the seller or the authorized representative. It notes the invoices paid and other details of payment. 5. Deposit slips are printed forms with depositor's name, account number and space for details of the deposit. A validated deposit slip indicates that cash and checks with the supplied details were actually deposited or credited to the account holder. Merchandising businesses use various 6. A check is a written order to a bank by a business forms and documents to help depositor to pay the amount specified in the identify the transactions that should be check from his checking account to the recorded in the books. These source person named in the check. The entity documents contain vital information about issuing the check is the payor while the the nature and amount of the transactions. receiver is the payee. Among the more common source documents 7. The purchase requisition is a written are sales invoice, bill of lading, statement of request to the purchaser of an entity from an  FABM 2 First semester: First Quarter employee or user department of the same purchase order, receiving report and invoice entity that goods be purchased. to ensure that quantities, descriptions, and 8. The purchase order is an authorization prices agree. made by the buyer to the seller to deliver the merchandise as detailed in the form. 9. Receiving report is a document containing information about goods received from a vendor. It formally records the quantities and description of the goods delivered. When the goods are received or when title 10. A credit memorandum is a form used has passed, the entity should record by the seller to notify the buyer that his purchases and a liability (or a cash account is being decreased due to errors or disbursement). Generally, the seller other factors requiring adjustments. recognizes the sales transaction in the records when the goods have been shipped. TERMS OF TRANSACTIONS Merchandise may be purchased and sold 1. When certain items are needed, the user either on credit terms or for cash on department fills in a purchase requisition delivery. When goods are sold on account, a form and sends it to the purchasing period of time called the credit period is department. allowed for payment. The length of the 2. The purchasing department then prepares credit period varies across industries and a purchase order after checking with the may even vary within an entity, depending price lists, quotations, or catalogs of on the product. When goods are sold on approved vendors. The purchase order, credit, both parties should have an addressed to the selected vendor, indicates understanding as to the amount and time of the quantity, description, and price of the payment. These terms are usually printed on merchandise ordered. It also indicates the sales invoice and constitute part of the expected payment terms and transportation sales agreement. If the credit period is 30 arrangements. days, then payment is expected within 30 3. After receiving the purchase order, the days from the invoice date. The credit period seller forwards an invoice to the purchaser is usually described as the net credit period upon shipment of the merchandise. The or net terms. The credit period of 30 days is invoice-called a sales invoice by the seller noted as "n/30". If the invoice is due ten and a purchase invoice by the buyer-defines days after the end of the month, it may be the terms of the transaction. marked "n/10 eom." 4. Upon receiving the shipment pf merchandise, the purchaser’s receiving Some businesses give discounts for prompt department sees to it that the terms in the payment called cash discounts. If a trade purchase order are compiled, and prepares a discount is also offered, cash discount is RECEIVING REPORT computed on the net amount after the trade 5. Before approving the invoice for discount. This practice improves the seller's payment, the accounts payable department cash position by reducing the amount of compares copies of the purchase requisition, money in accounts receivable.  FABM 2 First semester: First Quarter Cash discount is designated by such notation are based on the invoice price which is as "2/10" which means the buyer may avail obtained by subtracting the trade discount of a two percent discount if the invoice is from the list price. paid within ten days from the invoice date. The period covered by the discount, in this case-ten days, is called the discount period. Cash discounts are called purchase discounts When merchandise is shipped by a common from the buyer's viewpoint and sales carrier- a trucking entity or an airline-the discounts from the seller's point of view. It carrier prepares a freight bill in accordance is usually worthwhile for the buyer to take a with the instruction of the party making the discount if offered even if it would mean shipping arrangements. The freight bill borrowing the money to make the payment. designates which party shoulders the costs, and whether the shipment is freight prepaid or freight collect. Freight bills usually show Suppliers furnish smaller wholesalers or whether the shipping terms are FOB retailers with price lists and catalogs shipping point or FOB destination. F.O.B. is showing suggested retail prices for their an abbreviation for "free on board". When products. These suppliers, however, also the freight terms are FOB shipping point, the include a schedule of trade discounts from buyer shoulders the shipping costs; ownership over the goods passes from seller to the buyer when the inventory leaves the seller's place of business-the shipping point. The buyer already owns the goods while still in transit and therefore, shoulders the transportation costs. If the terms are FOB destination, the seller bears the shipping costs. Title passes only when the goods are received by the buyer at the point of destination; while in transit, the seller is the listed prices to enable the wholesalers still the owner of the goods so the seller and retailers to determine the invoice price shoulders the transportation costs. In freight to be paid. Trade discounts encourage the prepaid, the seller pays the transportation buyers to purchase products because of costs before shipping the goods sold; while markdowns from the list price. Trade in freight collect, the freight entity collects discounts should not be confused with cash from the buyer. Payment by either party will discounts. Trade discounts enable the not dictate who should ultimately shoulder suppliers to vary prices periodically without the costs. Normally, the party bearing the the inconvenience of revising price lists and freight cost pays the carrier. Thus, goods are catalogs. There is no trade discount account typically shipped freight collect when the and there is no special accounting entry for terms are FOB shipping point; and freight this discount. Instead, all accounting entries prepaid when the terms are FOB destination.  FABM 2 First semester: First Quarter Sometimes, as a matter of convenience, the The perpetual inventory system is an firm not bearing the freight cost pays the alternative to the periodic inventory system. carrier. When this situation occurs, the seller Under the perpetual inventory system, the and buyer simply adjust the amount of the inventory account is continuously updated. payment for the merchandise. Perpetually updating the inventory account requires that at the time of purchase, merchandise acquisitions be recorded as debits to the inventory account. At the time of sale, the cost of sales is determined and recorded by a debit to the cost of sales account and a credit to the inventory account. With a perpetual inventory system, both the inventory and cost of sales accounts receive entries throughout the accounting period. Many merchandising entities are The shipping costs borne by the buyer using now using the perpetual inventory system the periodic inventory system are debited to with point-of-sale equipment. Computers transportation in account. In accounting, the have decreased in prices. These powerful cost of an asset-the merchandise inventory- machines have dramatically reduced the includes all costs (e.8., shipping costs) time required to manage inventory. incurred to bring the asset to its intended Supermarkets and department stores use use. In the cost of sales section of the point-of-sale scanners built into checkout income statement, the balance in this counters to collect transactional data for the account is added to purchases in computing cash register and to update their perpetual for the net purchases for the period. inventory system. In the absence of point-of- Shipping costs borne by the seller are sale scanners, the perpetual inventory debited to transportation out account. This system is more advisable for firms that sell account which is also called delivery low-volume, high-priced goods such as expense, is an operating expense in the motor vehicles, jewelry and furniture. When income statement. an entity uses the perpetual inventory system, the ending inventory should reconcile with the actual physical count at the end of the period assuming that no theft, Merchandise inventory is the key factor in