Principles of Accounting 1&2 Reviewer PDF

lOMoARcPSD|33752771 Principles-of-Accounting 1&2 reviewer for qualifying exam Bs accountancy (Rizal Technological University) Scan to open on Studocu Studocu is not sponsored or endorsed...

lOMoARcPSD|33752771 Principles-of-Accounting 1&2 reviewer for qualifying exam Bs accountancy (Rizal Technological University) Scan to open on Studocu Studocu is not sponsored or endorsed by any college or university Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS Principles of Accounting GENERAL TERMS: Introduction to Accounting Accounting is 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 - American Institute of Certified Public Accountants (AICPA). Accounting 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 – Financial Reporting Standards Council (FRSC). Accounting is an information system which measures the business activity, processes the information into reports and communicates the report to the decision makers. Accounting is the “language of business” because it serves as the communication link between the business entity and the users of financial information. - The purpose of accounting is to provide quantitative information about a business for the basis of economic decisions and resolutions. FOUR PHASES OF ACCOUNTING 1. Recording or Bookkeeping – is the process of systematically maintaining a record of all business transactions. It is done manually or electronically, also in chronological order or in accordance to the date of occurrence. 2. Classifying – is the sorting or grouping of similar and interrelated transactions in their respective class. They may be classified as asset, liability, capital, revenue and expense. 3. Summarizing – is the preparation of financial statements which include the Statement of Comprehensive Income, Statement of Changes in Owner’s Equity, Statement of Financial Position, Statement of Cash Flows, and Notes to Financial Statements. Data recorded are summarized through financial statements. 4. Interpreting – financial reports are reviewed and analyzed for decision-making purposes. Users of Financial Information - Users are called stakeholders. A stakeholder is a person or entity who has a “stake” or interest in the business. Direct Users 1. Owner- the one who puts up the capital in the business endeavor 2. Manager- the one who is responsible in managing the business 1|Page Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS 3. Lender or Creditor- the one who assesses the paying ability of the business- borrower by reading the financial reports 4. Supplier- the one who offers good or merchandise on cash basis or credit terms 5. Government- the one who monitors if the business is paying taxes 6. Employee- the one who works for the business 7. Customer- the one who assesses the company’s ability to supply the goods they need at the right price and right quality Indirect User- stock exchange, trade associations, regulatory bodies, and financial analysts. Forms of Businesses 1. Sole Proprietorship- owned and managed by one person (e.g. Parlor, Dress Shops, Bakeries) Advantages: small amount of capital needed, can be easily managed, owner gets all profit, and has ease in formation Disadvantages: difficult to expand the business, has no indefinite life, and owner has unlimited liability 2. Partnership- owned by two or more persons called partners who contribute money, property, and talent into a common fund for the purpose of sharing profit among themselves. Advantages: ease in managing because more owners are involved, management is more efficient Disadvantages: no indefinite life and has unlimited liability 3. Corporation- organized as a separate legal entity from the owners. Advantages: more capital, can afford to hire experts in the field, has perpetual existence, more stable then partnership business, higher amount of profit may be obtained, allows one-man corporation Disadvantages: has no unlimited liability therefore debts could only be paid out of corporate funds, subject to more legal and tax requirements, and an abuse of power could affect the welfare of the corporation Types of Business Operation 1. Service Business- provides service to the customers (e.g. travel agency, school, internet shop) 2. Merchandising Business- buys and sells good or merchandise for profit (e.g. shoe store, bookstore, drug store) 3. Manufacturing Business- buys raw material, processes it into finished goods and then sells it to customers (e.g. factories) Types of Business Activities 1. Financing Activities- cash flows derived from the equity capital and borrowings of the entity. 2|Page Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS 2. Investing Activities – cash flows derived from the acquisition and disposal of long-term assets. 3. Operating Activities – cash flows derived primarily from the principal revenue producing activities of the entity. Business Documents 1. Cash Memorandum- All transactions pertaining to cash sales or purchases are to be recorded. 2. Invoice- issued when service or merchandise is given to a customer or client. 3. Receipt- issued when cash is received by the entity. 4. Cheque- a negotiable instrument used as a substitute for cash, the payment for which is drawn against the entity’s or individual’s current account. 5. Cash or Check Vouchers- issued when cash is paid or a check is issued. 6. Promissory Note- a written promise to pay a certain sum of money at a future date. 7. Statement of Account- a bill presented to a customer for service rendered or merchandise sold given for which payment is demandable. Accounting Information System (AIS) Principles 1. Control Principle- It prescribes that AIS of the firm must have good internal control. Internal Control enumerates the methods and procedures necessary to monitor the activities of the business and ensure efficient operation. 2. Cost-Benefit Principle- It prescribes that the advantages enjoyed from installing the system must outweigh its cost. 3. Relevance Principle- It prescribes that the information must be reported promptly and that information must be useful to enable statement users to reach a conclusion and make a decision. 4. Compatibility Principle- It prescribes a system designed to fit the unique characteristics of a company – its personnel, activities, and structure. 5. Flexibility Principle- It prescribes that the company’s system should allow for changes if change is needed to come up with timely and updated information in response to industry demand, government promulgations, technological advances, and competitive pressures. Qualitative Attributes of Financial Statements 1. Understandability- requires that users have a reasonable knowledge of finance accounting and economics to come up with a good assessment and sound judgment; terminologies must be clear; presentation of reports must be orderly 2. Relevance- prescribes that the quality of information that will make a difference and influence a statement user to make a meaningful decision - the information must give the past performance of the business (feedback value) which is useful in projecting what might happen in the future (predictive value) 3|Page Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS Two examples of constraints in reporting relevant information - Materiality will depend whether an item will influence user’s decision or not - Timeliness is about giving the reports promptly or within the period it is needed to from judgment 3. Reliability- prescribes that the material is objective and free from material errors or misstatements Five ingredients to be considered: Faithful Representation means that information represents faithfully what they purport to be, that the information should not mislead users to think that it is when it is not Substance Over Form- if the substance or economic reality (intention) of the contract is not consistent with the legal form, the economic reality should prevail Neutrality requires that the information should be useful to all users, it should not show bias Prudence requires the accountant to exercise caution when using estimates or information that is marked by uncertainty Completeness prescribes that all information must be provided to make the value of the information more enhanced 4. Comparability- helps one identify changes taking place in two entity between two or more periods so users will be able to determine the change or trend of its performance or position; also, could be done to assess the competitiveness of two or more firms Generally Accepted Accounting Principle - These are not natural laws but man-made laws as a result of long-used accounting practice of the profession. 1. Going Concern Principle- it is expected that the business will continue to exist indefinitely (PAS 1 par. 25) thus financial statements should be prepared on a going concern basis unless management intends to close the business or cease trading; assets acquired such as PPE should be recognized at cost without regard to the changes in their market values; changes in value should be used only upon exit of the business 2. Business Entity Concept- assumes that the business enterprise is separate and distinct from its owner or investor 3. Exchange Price or Cost Principle- assets, liabilities, revenues, and expenses should be recorded based on its cost. Cost is the amount agreed upon in an arm’s length transaction. The cost price now may not be the cost price yesterday or tomorrow because values change. It means that constantly changing amounts will make the business’s assets value unreliable. 4. Measurement in terms of money- All business transactions are measured and recorded using only one unit of measurement 4|Page Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS 5. Accrual Assumption- PAS 1 par. 27-28 requires that financial statements be prepared under the accrual basis. Assets, liabilities, revenues, and expenses should be recognized based on the period they relate or based on the occurrence of the transaction/event rather than based on cash received or paid. Revenue Recognition Principle- Revenue is recognized when it is earned regardless of the date of its collection Expense Recognition Principle- Expense is recognized when incurred regardless of whether cash is paid or not 6. Objectivity- this concept requires that assets acquired must be verifiable and substantiated by documents such as invoices, vouchers, or official receipts. 7. Reporting Period- PAS 1 par 36-37 provides that the basic accounting period is one year with interim reports prepared for shorter period of time such as monthly, quarterly, or semi-annually; - Fiscal Period is a twelve-month period that ends on any month other than December 31 - Calendar/Accounting Period is a twelve-month period ending on December 31 8. Matching Principle- It requires that the cost and expense incurred in generating the revenue should be properly matched against the related revenue in determining the net income or loss for the period Different Reports Prepared Managerial Reports – prepared for management use. (Management Accounting) Financial Reports – prepared for the stakeholders or users of the financial information. Also called general purpose financial statements. (Financial Accounting) Tax Reports – prepared for the taxing agencies such as BIR. (Tax Accounting) Special Reports – prepared for certain regulatory bodies like BSP and SEC. Career Opportunities in Accounting 1. Public Accounting – a career field open to firms and individual CPAs who offers to the public, for a fee, expert services like bookkeeping, auditing, management advisory services and tax services. 2. Private Accounting – an accounting job done in private business enterprises. Accountants are usually employed as financial accountant, controller, budget officer, internal auditor, electronic data processing head or cost accountant. 3. Government and Not for Profit Accounting – a career field where one works as an accountant, auditor, budget officer or electronic data processing head of any of the government agencies, religious organizations, labor unions, colleges and universities, trade associations, and many more. 4. Research and Education – a professional field where the accountant assumes the role of researcher, teacher, and reviewer. 5|Page Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS Accounting Areas 1. Basic Accounting or Bookkeeping – the routine activity of recording, classifying, and summarizing business transactions in a systematic manner. 2. Financial Accounting – involves the preparation and interpretation of financial reports for external use. 3. Cost Accounting – control of business expenses and pricing of business products. 4. Management Accounting – involves the preparation and interpretation of financial statements for use by the management in decision-making. 5. Auditing – deals with the independent verification and examination of the accounting records for the purpose of giving credibility to the financial statements. 6. Government and Non-Profit Accounting – it uses fund accounting which deals with the administration or use of public or community funds to bring out service to the people. 7. Tax Accounting – deals with the preparation and filing of tax returns and determination of compliance with the tax laws by the business. THE ACCOUNTING CYCLE 6|Page Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS JOURNALIZING Journal – Book of Original entry. It provides a complete recording of a transactions in chronological order. Two-column Journal – the simplest form of journal Journalizing – process of recording in this book Journal Entry- entry made in journal Simple Journal Entry – a journal entry with one debit and one credit. Compound Journal Entry – when an entry has one more than one debit or more than one credit. Parts of General Journal Name of the Company General Journal Page # Date Accounts & Explanation F Debit Credit Normal Balances: Debit Credit Assets Liabilities Expenses Owner’s Capital Owner’s Drawings Income Assets 1. Current Assets-assets expected to be realized in cash, or sold or consumed within the normal operating cycle of the business or one year. a. Cash- includes currencies or coins or negotiable instruments such as bank check or postal money order used as a medium of exchange. Cash on Hand are cash items in the custody of the officer-in-charge or the owner. Cash in Bank are cash deposited in the bank under s current or savings account. Cash Equivalents which are short term, highly liquid investments such as a three-month time deposit or a three-month government treasury bill. b. Marketable Securities – highly traded in securities such as the stocks and bonds purchased by the enterprise that are held for a short-term duration. Like the cash equivalents, they are usually purchased when the enterprise has temporary idle or excess cash. c. Receivables- these are collectibles from customers clients and other persons for the goods, services or money given by the business. 7|Page Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS Accounts Receivable is used if only an or oral or an implied promise is received from the client or customer. Notes Receivable is evidenced by a promissory note issued by the debtor. d. Other Receivables: Interest Receivable -when interest is collectible on promissory notes received from clients and customers. Rent Receivable – for rent collectible from tenants. Dividend Receivable – dividend collectible by a shareholder from a corporation. e. Merchandise Inventory is an account title used to represent the stock of goods available for sale by the business. This is only applicable on merchandising business. f. Prepaid Expenses- these represents advance payments made for benefits or services to be received by the business in the future. Examples of these are Supplies, Prepaid Insurance and Prepaid Expense. 2. Non-Current Assets – are those assets not included as current assets such as the long-term investment, property, plant and equipment and intangibles. a. Land – lot or real estate owned and used by the business on which a building could be constructed b. Building – structure used to house the office, store, or factory. c. Equipment – typewriter, air conditioner, calculator, filing cabinets, computer, electric fan, trucks, cars used in the business. Specifically, titles may be used such as: Office Equipment, Store Equipment, and Delivery Equipment. d. Furniture and Fixtures – tables, chairs, curtains, lighting fixtures, and wall decors. e. Leasehold or Lease Right – for a fee, lessee is given the right to use the property of a lessor over a long period of time. f. Accumulated Depreciation – contra assets or off-set account representing expired cost of the plant, property or equipment as a result of usage and passage of time. This is a deduction from the property, plant and equipment account. Liabilities 1. Current Liabilities are those debts or obligations reasonably expected to be liquidated in the normal course of the enterprise’s operating cycle or paid within a period of one year by the use of current assets or the creation of other current liabilities. a. Accounts Payable – to trade creditors for purchase of goods or services on credit supported by oral or implied promise of the business. b. Notes Payable – a liability supported by a promissory note issued by the business to the creditor. 8|Page Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS c. Loans Payable – a liability to pay a bank or a financing institution for amount of money borrowed by the business. d. Utilities Payable – a liability to pay utility companies like PLDT, Meralco, and Manila Water for telephone, electricity, and water services received from them. e. Other Payables: Interest Payable -additional charge and obligation to pay for interest-bearing promissory notes issued by the business 2. Non-current Liabilities are long term liabilities or obligation which are payable longer than one year. a. Note Payable- which issued to the creditor and evidenced by a promissory note. b. Mortgage Payable – an obligation secured by the real property of the business. c. Bond Payable – a long-term promise usually from five to ten or twenty years supported by a formal contract containing the face value of the bond, the interest rate, the interest payment date and maturity date. Investment of Owner On May 1, Carl Angelo invested land which he bought for P200,000 but which current market value is P500,000. Date Accounts & Explanation F Debit Credit May 1 Land P500,000 Carlo Angelo, Capital P500,000 Initial investment of the owner. Investment in Property with an Attached Liability On May 8, Carl Angelo invested land with a previous cost of P300,000 and a current market value of P 500,000. The land was mortgaged to Metrobank for P200,000 but P150,000 is still due. This liability will be assumed by the business. Date Accounts & Explanation F Debit Credit May 8 Land P500,000 Mortgage Payable P150,000 Carl Angelo, Capital 350,000 Initial investment of the owner. Investment of An Already Existing Business Gab Jepsy has a business called Jepsy’s science tutorials Store which Carl Angelo wants to buy. On May 12, Jepsy offered to sell it for P208,000 after agreeing to decrease the value of the merchandise inventory and the office furniture and equipment. The assets and liabilities of the store are listed below at book values on the investment date: 9|Page Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS Reported Cost Per Book Current Market Value Accounts Receivable P100,000 P100,000 Merchandise Inventory 240,000 138,000 Office Furniture & Equipment 250,000 120,000 Total Assets P590,000 P358,000 Less: Accounts Payable 150,000 150,000 Net Assets P440,000 P208,000 Date Accounts & Explanation F Debit Credit May 12 Accounts Receivable P100,000 Merchandise Inventory 138,000 Furniture & Equipment 120,000 Accounts Payable P150,000 Carl Angelo, Capital 208,000 Initial investment of the owner. Drawing of Owner On May 8, the owner Carl Angelo transferred to her house a computer unit owned and being used in the business with a cost of P40,000, accumulated depreciation of P6,000 and a current market value of P25,000 Date Accounts & Explanation F Debit Credit May 1 Carl Angelo, Drawings P34,000 Accumulated Depreciation 6,000 Equipment P40,000 Initial investment of the owner. Summary of Journal Entries prepared for merchandising transactions: 1. Periodic Method – there is no detailed recording hence no inventory balance can be determined at any point of time. At the end of accounting period when the entities make a physical count to determine inventory hand. This method is adapted by businesses selling low priced-high volume goods such as the goods sold in supermarket, hardware store, or drugs store where it is difficult to track down every cost of merchandise sold if done manually. 2. Perpetual Method- shows the inventory balance at any point of time. Goods purchased are debited to an asset and goods sold are debited to cost of sales every time a sale revenue is recorded. This method is usually adapted by a business which sells high priced-low volume cars and appliances. 1. Pro-forma entries for transactions relating to purchases or merchandise (under Periodic and Perpetual Inventory Systems) A. To record purchase of merchandise for cash. 10 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS Periodic Inventory System Purchases xxx Cash xxx Perpetual Inventory System Merchandise Inventory xxx Cash xxx B. To record merchandise purchased on account. Periodic Inventory System Purchases xxx Accounts Payable xxx Perpetual Inventory System Merchandise Inventory xxx Accounts Payable xxx C. To record transportation costs paid on merchandise purchased. Periodic Inventory System Freight In xxx Cash xxx Perpetual Inventory System Merchandise Inventory xxx Cash xxx D. Merchandise returned that was purchased for cash receiving a refund. Periodic Inventory System Cash xxx Purchases Returns & xxx Allowances Perpetual Inventory System Cash xxx Merchandise Inventory xxx E. Merchandised returned that was purchased on account (the account has not been paid yet). Periodic Inventory System Accounts Payable xxx Purchases returns and xxx allowance Cash xxx Perpetual Inventory System Accounts Payable xxx Merchandise Inventory xxx Cash xxx 11 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS F. Payment of an account after the discount period. Periodic and Perpetual Inventory System Accounts Payable xxx Cash xxx 2. Pro-forma entries for transactions relating sales. A. Sales for Cash Periodic Inventory System Cash xxx Sales xxx Perpetual Inventory System Cash xxx Sales xxx Cost of Goods Sold xxx Merchandise Inventory xxx B. Sales on Account Periodic Inventory System Accounts Receivable xxx Sales xxx Perpetual Inventory System Accounts Receivable xxx Sales xxx Cost of Goods Sold xxx Merchandise Inventory xxx C. Returns by the customer of merchandise that was sold for cash paying a refund. Periodic Inventory System Sales Returns & xxx Allowances Cash xxx Perpetual Inventory System Sales Returns & xxx Allowances Cash xxx Merchandise Inventory xxx Cost of Goods Sold xxx D. Issuance of Credit Memo to a customer for merchandised returned previously sold on account Periodic Inventory System Sales Returns & xxx Allowances Accounts Receivable xxx 12 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS Perpetual Inventory System Sales Returns & xxx Allowances Accounts Receivable xxx Merchandise Inventory xxx Cost of Goods Sold xxx E. Receipt of payment from customer within the discount period. Periodic and Perpetual Inventory System Cash xxx Sales Discount xxx Accounts Receivable xxx F. Receipt of payment from customer after the discount period. Periodic and Perpetual Inventory System Cash xxx Accounts Receivable xxx G. Transportation costs of merchandise sold Periodic and Perpetual Inventory System Freight Out xxx Cash xxx Account Titles used in Merchandising 1. Purchases- account title that debited whenever merchandise is bought for resale. 2. Purchases Returns and Allowances- a contra account that is credited whenever goods bought may be returned to the seller for being defective, damaged, not as ordered. 3. Purchases Discount- a contra purchases account credited that decreases the liability to be paid by the buyer which in turn decreases the value of the merchandise purchased. 4. Freight In- also called as Transportation In, the buyer debits this and then added to purchases to arrive at gross purchases. *the account title Merchandise Inventory used in Perpetual Inventory System as a substitute for the account title Purchases, Purchases returns and Allowances, Purchases Discount, and Freight In 5. Sales- account credited when the merchandiser transfer the goods to the customer. The sale is supported by a source document called Invoice. 6. Sales Returns and Allowances- a contra revenue account used when a customer return merchandise if it is defective or damaged or if it is not as ordered. 7. Sales Discount- a contra account which is recorded on the debit side. This reduces the recorded revenue or sales. 8. Freight Out- or transportation out considered as a selling expense. Freight should be debited by the seller. 13 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS Discounts 1. Trade Discounts- it is a percentage reduction from a published list price may be granted to a retailers or wholesalers for buying large quantities of goods or for regularly patronizing the business. Since a trade discount is granted at the point of sale, this is immediately deducted from the list price and only the net amount called gross invoice price will be the basis for invoicing and recording. Example: Cristina Mison who owns and operates a store selling compact discs and tapes purchased a compact disc from Octo Arts with a list price of 10,000 less trade discounts of 2% and 1% and paid in cash. List Price P 10,000 Less 2% of P 10,000 200 P 9,800 Less 1% of P9,800 98 Gross Invoice Price P 9,702 Or: 10,000 x 98% = 9,800 x 99% = P 9,702 The entry will be: Purchases P 9,702 Cash P 9,702 2. Cash Discount- when goods are sold on account, terms of payment depend on the custom of the industry. Cash discount is meant to encourage a customer to pay immediately, speed up the seller’s cash inflow and allow to use the cash for another profitable operating cycle. The usual credit terms appear on the invoice are: n/30- which means that the gross amount is payable within 30 days from the date of sale. 2/10, n/30- which means that the accounts are payable within 30 days with the 2% discount given if the account is paid within 10 days from the date of sale. 3/EOM, n/60- which means that the account is payable within 60 days with a 3% discount given if the account is paid until the end of the month from date of sale. 2/10, 1/15, n/30- which means that the account is payable within 30 days with the 2% discount given if the account is paid within 10 days from the date of sale, but only 1% discount if the account is paid after ten days but within 15 days from the date of sale. Example: On March 1, Royal Furniture sold goods to Jim Perez for P6,000 with a P2,000 down payment and the balance of term of 2/10, n/30. 14 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS Date Accounts & Explanation F Debit Credit March Accounts Receivable P4,000 1 Cash on Hand 2,000 Sales P6,000 Sold goods to Perez on terms of 2,00 down payment, balance 2/10, n/30 8 Cash on Hand 3,920 Sales Discount 80 Accounts Receivable 4,000 Collected the account of Perez net of discount 4,000 x2% = 80 4,000 — 80 = 3,920 The company may grant discount only when the whole amount is paid within the discount period. Returns and Allowances Credit Memorandum- business document issued by the seller informing the buyer that his account decreased accordingly for the return made or for the reduction of price requested. Debit Memorandum- if it is the buyer who issues the document instead of the seller. Freight Terms Who shoulders freight? Who paid for it? FOB Destination, Freight Prepaid Seller Seller FOB Destination, Freight Collect Seller Buyer FOB Shipping Point, Freight Collect Buyer Buyer FOB Shipping Point, Freight Prepaid Buyer Seller Transportation Costs on Merchandise Purchased or Sold 1. FOB Shipping Point- the purchaser or buyer agreed to shoulder all the transportation costs from the point of shipment up to the point of destination; the buyer receives title to goods at the shipping point 2. FOB Destination- the seller agreed to shoulder all the transportation costs from the point of shipment up to the point of destination; the buyer receives title to goods at the point of destination 3. Freight Prepaid- when the seller pays the transportation costs at the time of shipment 15 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS 4. Freight Collect- when the buyer pays the transportation costs upon the receipt of goods at the place of destination POSTING TO THE LEDGER Ledger – shows in one page all the changes (increases or decreases) that took place for a particular amount. General Ledger – also called as the book of final entry. Posting – process of transferring the debits and credits from the journal to the ledger. Cross reference – facilitates the tracing of an entry to and from the journal and ledger. Footing – debit total and credit totals T-Account – the simplest tool use to analyze the effects of the transactions on each account. Two Column Ledger ACCOUNT TITLE Account No. Date Particulars F Debit Date Particulars F Credit Three Column Ledger ACCOUNT TITLE Account No. Balance Date Explanation F Debit Credit Debit Credit THE CHART OF ACCOUNTS Account- device used to record the increases and decreases affecting each of the different assets, liabilities, and owner’s equity. Chart of Accounts is a listing of account titles which guide the bookkeeper in the recording of transaction. Rhea’s Boxing Gym Chart of Accounts Acc No. Account Titles 16 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS TRIAL BALANCE- shows the equality of the debits and credits. Fritz Lopez Bookstore Trial Balance Date Account No. Account Titles Debit Credit Totals Rules 1. Account titles are arranged in the following order: Assets, Liabilities, Capital, Revenue, and Expenses. 2. Even the account is zero, it must still appear on the trial balance. It may be omitted but the readers may wonder what happened to this account. 3. The peso sign is placed only on the first debit amount, first credit amount, and on the totals. 4. The totals are ruled (one horizontal line drawn under the last amounts of the debit and credit columns) and double ruled (two horizontal lines are drawn under the total figures) Locating Errors If the total debit amount does not tally with the total credit amount, the differences usually gives a clue to the kind of error committed: 1. A difference of ten would indicate probably an error in addition. Add the debit and credit columns of the trial balance again. If the error is not there, go further and re-add the debit and credit columns of the ledgers. 2. If the difference is divisible by two, then the error probably is in posting to the wrong side, like a debit balance in the ledger is copied on the credit side of the trial balance or a debit entry in the journal was posted to the credit side of the ledger. 3. If the difference is divisible by 9 or a multiple of 9, the error probably is in transposition, that is the order of the digits are interchanged, say an amount of P29,560 was copied as P29,650. Or an error in transplacement, that is the decimal point is misplaced, say an amount of P290,000 was copied as P29,000. ADJUSTING ENTRIES This is the process of gathering and putting together various data necessary to update the balances of certain accounts in the books of the company. Following are the pro-forma entries to each of the adjusting entries: LEGEND: J/E – journal entries A/E – adjusting entries 17 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS 1. Prepaid Expenses/Deferred Expenses Expenses that are paid or acquired in advance. Bought supplies, P1000; supplies on-hand, P600 A. Asset method (used portion) – Preferred method J/E Supplies P1000 Cash P1000 A/E Supplies expense 400 Supplies 400 B. Expense method (unused portion) J/E Supplies expense 1000 Cash 1000 A/E Supplies 600 Supplies expense 600 2. Unearned Revenues Income already collected but not yet earned. Down-payment of 1000 for 5 months; adjusting period after 3 months A. Liability method (earned portion/amount of service done) – Preferred method J/E Cash 1000 Unearned revenue 1000 A/E Unearned revenue 600 Service revenue 600 B. Revenue method (unearned portion/amount of service that should be given) J/E Cash 1000 Service revenue 1000 A/E Service revenue 400 Unearned revenue 400 3. Accrued Expenses Expenses incurred but not yet paid. J/E or A/E Expense account xxx Liability account xxx A/E Interest expense xxx Interest payable xxx *Formula for simple interest: Interest = (Principal)(Rate)(Time) 18 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS 4. Accrued Revenues Revenue earned but not yet collected. J/E or A/E Accounts receivable xxx Service revenue xxx A/E Interest receivable xxx Interest revenue xxx *Formula for simple interest: Interest = (Principal)(Rate)(Time) 5. Doubtful accounts These represents customers’ accounts that may no longer be collected or that may possibly become bad debts. A. Allowance method (based on estimation/historical data) Bad debts xxx Allowance for bad debts xxx B. Direct write-off (recognizes bad debts only when it is certain) Bad debts xxx Accounts receivable xxx 6. Depreciation Systematic allocation of the depreciable amount of an item of a non-current asset over its useful life. Depreciation expense xxx Accumulated depreciation xxx *Formula for Depreciation: Depreciation = [Cost – salvage value]/estimated useful life 7. Merchandise Inventory (can be included in either adjusting or closing entries) Adjustment for inventory is only necessary if the periodic inventory system is used. Income summary (beg balance) Merchandise Inventory (beg balance) Merchandise Inventory (end balance) Income summary (end balance) FINANCIAL STATEMENTS INCOME STATEMENT/STATEMENT OF COMPREHENSIVE INCOME Also known as Profit or Loss Statement or Statement of Earnings; it shows how wealth is produced by listing the revenues earned and expenses incurred by the business. 19 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS Headings for Service concern: Patrick Bentulan’s Tutor Services Income Statement For the year ended Dec 31., 20xx Formula for Service concern: Net Income = Service revenue – Total operating expenses Headings for Merchandising concern: Maan Bentulan’s Bakery Statement of Comprehensive Income For the year ended Dec 31., 20xx Formula for Merchandising concern: Net Sales = Sales – (sales returns and allowances + sales discount) Cost of Goods sold = Total Goods available for sale – Inventory, end Total Goods available for sale = Inventory, beg + Net Purchases Gross Purchases = Purchases + Freight In Net Purchases = Gross Purchases – (Purchases returns and allowances + Purchases discount) Gross Profit = Net sales – Cost of goods sold Total Operating expenses = Selling expenses + Administrative expenses Operating profit = Gross Profit – Total Operating Expenses Net Income = Operating profit – non-operating expenses STATEMENT OF CHANGES IN OWNER’S CAPITAL Shows why the net worth changed by listing the activities that caused it to increase or decrease. Headings for Service/Merchandising concern: Thea Sofia’s Grocery Store Statement of changes in Owner’s Capital For the year ended Dec 31., 20xx *Additional investments and net income are added to the beginning capital then the drawing account is deducted from this to show the ending balance of the capital account. **If there is a net loss, it must be deducted to the beginning capital rather than added. 20 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS STATEMENT OF FINANCIAL POSITION Shows how the wealth (how healthy or robust) of the business stands by enumerating the assets, liabilities, and net worth. Headings for Service/Merchandising concern: Ali’s Jewelry Store Statement of changes in Owner’s Capital For the year ended Dec 31., 20xx *The statement of financial position operates similarly to the expanded accounting equation in which the ending balance of the capital account is used. STATEMENT OF CASH FLOWS Shows what happened to the cash by enumerating the activities of cash received and cash used by the business. Headings for Service/Merchandising concern: Jovin’s Comic Book Store Statement of Cash flows For the year ended Dec 31., 20xx 3 TYPES OF ACTIVITIES: OPERATING ACTIVITIES – earning of income by selling goods and services by incurring expenses such as wages, rent, utilities, and transportation - Current assets, Current Liabilities, Income statement items (revenues from cash and credit customers and expenses) INVESTING ACTIVITIES – acquisition of properties in land, furniture, equipment, and machineries – Non-current assets FINANCING ACTIVITIES – the first activity of a business; the owner finances the business with a startup capital in cash and other resources - Non-current liabilities, Capital statement items (Investment and Drawing) *The ending balance of Cash should be equal to the amount of cash in the ledger. 21 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS CLOSING ENTRIES These are entries prepared at the end of the accounting period that closes the nominal accounts to zero. Nominal Accounts – also known as temporary accounts; these accounts are the revenue accounts, expense accounts, and owner’s drawing account. Real Accounts – also known as permanent accounts; these accounts are carried to the next accounting period and these are the company’s assets, liabilities, and capital accounts. Following are the pro-forma entries closing entries prepared at the end of the accounting period: To close the credit balanced account(s): Credit balanced accounts xxx Income summary xxx *The credit balanced accounts are debited at their ledger balances to make those accounts zero. These accounts are the following: revenue accounts, purchases return and allowances, and purchases discounts. **The merchandise inventory (ending balance) can be debited to set-up its balance to the next accounting period. To close the debit balanced account(s): Income summary xxx Debit balanced accounts xxx *The debit balanced accounts are credited at their ledger balances to make those accounts zero. These accounts are the following: expense accounts, sales return and allowances, sales discount, and purchases. **The merchandise inventory (beginning balance) can be credited to close its balance. To close the balance of income summary account (net income/loss): Income summary xxx Owner’s capital xxx *This closing entry would be applicable if the business had a NET INCOME. Owner’s capital xxx Income summary xxx *This closing entry would be applicable if the business had a NET LOSS. 22 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS To close the balance of the owner’s drawing account: Owner’s capital xxx Owner’s drawing xxx POST CLOSING TRIAL BALANCE It is prepared after closing the nominal accounts; it consists of real accounts such as assets, liability, and capital accounts. PAPASA CO. Post-closing trial balance December 31, 20xx Cash ₱ 450,000 Supplies 300,000 Accounts receivable 50,000 Allowance for bad debts ₱15,000 Prepaid Insurance 10,000 Equipment 300,000 Accumulated depreciation – equipment 20,000 Accounts payable 350,000 Unearned revenue 160,000 Owner’s Capital 565,000 TOTAL ₱1,110,000 ₱1,110,000 *The balance of the owner’s capital account is reflected upon the ledger balance in which was updated by the closing entries. REVERSING ENTRIES Entries prepared at the beginning of a new accounting period to reverse certain adjusting entries. 1. Accrued Expenses 1.1. Companies that doesn’t use reversing entries: Adjusting Entry 5/31 Expense 1000 Liability 1000 Payment Entry 6/10 Expense 500 Liability 1000 Asset 1500 23 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS 1.2. Companies that used reversing entries: Adjusting Entry 5/31 Expense 1000 Payable 1000 Closing Entry 5/31 Income summary 1000 Expense 1000 Reversing Entry 6/1 Liability 1000 Expense 1000 Payment Entry 6/10 Expense 1500 Cash 1500 2. Accrued Revenues 2.1. Companies that doesn’t use reversing entries: Adjusting Entry 5/31 Accounts receivable 1000 Service revenue 1000 Payment Entry 6/10 Cash 1500 Service revenue 500 Accounts receivable 1000 2.2. Companies that used reversing entries: Adjusting Entry 5/31 Account receivable 1000 Service revenue 1000 Closing Entry 5/31 Service revenue 1000 Income summary 1000 Reversing Entry 6/1 Service revenue 1000 Accounts receivable 1000 24 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS Payment Entry 6/10 Cash 1500 Service revenue 1500 3. Prepaid Expenses (Expense method) Journal Entry Supplies expense 1000 Cash 1000 Adjusting Entry Supplies 600 Supplies expense 600 Closing Entry Income summary 400 Supplies expense 400 Reversing Entry Supplies expense 600 Supplies 600 4. Unearned Revenues (Revenue method) Journal Entry Cash 1000 Service Revenue 1000 Adjusting Entry Service Revenue 400 Unearned revenue 400 Closing Entry Service revenue 600 Income summary 600 Reversing Entry Unearned revenue 400 Service revenue 400 **Adjusting entries that can be reversed: 25 | P a g e Downloaded by Tina Mo ([email protected])  lOMoARcPSD|33752771 RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS 1. Prepaid Expenses (Expense method) 2. Unearned Revenues (Revenue method) 3. Accrued Expenses 4. Accrued Revenues NOTE: Reversing entries are optional. RIZAL TECHNOLOGICAL UNIVERSITY-BONI COLLEGE OF BUSINESS & ENTREPRENEURIAL TECHNOLOGY DEPARTMENT OF ACCOUNTANCY JUNIOR PHILIPPINE INSTITUTE OF ACCOUNTANTS OFFICERS F.Y. 2019-2020 President: GABRIEL DAVE AMOS Executive Secretary: JOYCE ANNE ROSETA Vice President for Academics: JUSTIN RABAGO Vice President for Non-Academics: JOYCE ANNE CLEOFE Vice President for Membership: SPENCER KIM CHICANO Vice President for Finance & Logistics: CARL JEROME CHING Vice President for Audit: JANE BOBADILLA Vice President for Internal Linkages: LOWELA BARBACHANO Vice President for External Linkages: HANNAH APALE TUBLE Vice President for Communication: ERIKA MAGTIBAY Adviser: PROF. ROWELL C. MARASIGAN, CPA, MBA Prepared by: SARAH NICOLE SANTOS BRIGITTE STACY EVANGELISTA JELYN NICOLE MIÑA JOSHUA PIROTE DONNA MECHELLE TANAEL FRITZ REIZEN LOPEZ THEA SOFIA BARABICHO JOHN PATRICK ABRAHAM BENTULAN Academic Enhancement Committees JUSTIN RABAGO Vice President for Academics 26 | P a g e Downloaded by Tina Mo ([email protected])