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NON-ACCOUNTANTS
DIANE CHRISTELLE LACSON, CPA
• SOLE PROPRIETORSHIP
-This business organization has a single owner called the
proprietor who generally is also the manager.
-small service-type businesses and retail establishments.
• PARTNERSHIP
- business owned and operated by two or more persons
who bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing
profits among themselves.
• CORPORATION
- business owned by stockholders
ACCOUNTING METHODS:
1. Cash Basis Accounting
- record all transactions when cash actually changes.
Liability A present obligation of the entity to transfer an economic resource as a result of past
events.
Equity The residual interest in the assets of the entity after deducting all its liabilities.
Income Increases in assets, or decreases in liabilities, that result in increases in equity, other
than those relating to contributions from holders of equity claims.
Expenses Decreases in assets, or increases in liabilities, that result in decreases in equity, other
than those relating to distributions to holders of equity claims
FINANCIAL POSITION
ASSETS
3 parts:
Account Title
Left Side Right Side
Debit Side Credit Side
ACCOUNTING EQUATION
ACCOUNTING EQUATION
Note that the assets are on the left side of the equation opposite the liabilities and owner’s
equity. The logic of debiting and crediting is related to the accounting equation.
DEBIT AND CREDIT
THE DOUBLE-ENTRY SYSTEM
DEBITS AND CREDITS
Double-Entry System
Debit Credit
DR (abbreviation) CR (abbreviation)
• Increases in assets are recorded as debits (on the left side) while
decreases in assets are recorded as credits (on the right side).
• Increases in liabilities and owner’s equity are recorded by credits
and decreases are entered as debits.
• Income and expenses accounts are based on the relationship of
these accounts to owner’s equity.
RULES OF DEBITS AND CREDITS
DEBITS CREDITS
ASSETS LIABILITIES
OWNER’S WITHDRAWAL OWNER’S EQUITY
EXPENSES INCOME
ACCOUNTING EVENTS
AND TRANSACTIONS
ACCOUNTING EVENTS
• ASSETS
- classified into two: CURRENT and NON-CURRENT
ASSETS
Operating Cycle
ACCOUNT DESCRIPTION
CASH Cash is any medium of exchange that a bank will accept for deposit at
face value. Ex. Coins, Currency, Checks
CASH EQUIVALENTS Short-term, highly liquid investments that are readily convertible to
known amounts of cash and are subject to insignificant risks
NOTES RECEIVABLE A written pledge that the customer will pay the business a fixed
amount of money on a certain date.
ACCOUNTS RECEIVABLE Claims against customers arising from sales of services or goods on
credit.
INVENTORIES Assets which are (a) held for sale in the ordinary course of business;
(b) in the production of for such sale; (c) in the form of materials or
supplies to be consumed in the production process
PREPAID EXPENSES Expenses paid for by the business in advance.
NON-CURRENT ASSETS
ACCOUNT DESCRIPTION
PROPERTY, PLANT AND These are tangible assets that are held by an enterprise for
EQUIPMENT use in the production/supply of goods and services; expected
to be used during more than one period. Examples: Land,
Building, Equipment
ACCUMULATED DEPRECIATION It is a contra account that contains the sum of the periodic
depreciation charges. The balance in this account is deducted
from the cost of the related to arrive at book value.
INTANGIBLE ASSETS Identifiable, nonmonetary assets without physical substance
held for use in the production or supply of goods/services.
Examples: Goodwill, Patent, Copyrights, Franchise,
Trademarks.
STATEMENT OF FINANCIAL POSITION
(BALANCE SHEET)
• LIABILITIES
-classified into two: CURRENT and NON-
CURRENT
LIABILITIES
ACCOUNT DESCRIPTION
ACCOUNTS PAYABLE The buyer agrees to pay for them in the near future.
NOTES PAYABLE The business entity is the party who promises to pay the other
party a specified amount of money on a specified future date.
ACCRUED LIABILITIES Amounts owed to others for unpaid expenses. This account
includes salaries payable, utilities payable, interest payable
and taxes payable.
UNEARNED REVENUES When the business entity receives payment before providing its
customers with goods or service.
CURRENT PORTION OF LONG- These are portions of mortgage notes, bonds and other long-
TERM DEBT term indebtedness which are to be paid within one year from
the balance sheet date.
NON-CURRENT LIABILITIES
ACCOUNT DESCRIPTION
MORTGAGE PAYABLE This account records long-term debt of business entity for which the
business entity has pledged certain assets as security to the creditor.
In the event that the debt payments are not made, the creditor can
foreclose or cause the mortgaged asset to be sold to enable the
entity to settle the claim.
BONDS PAYABLE Business organizations often obtain substantial sums of money from
money lenders to finance acquisition of equipment and other
needed assets. They obtain these funds by issuing bonds. The bond is
the contract between the issuer and the lender specifying the terms
of repayment and the interest to be charged,
OWNER’S EQUITY
ACCOUNT DESCRIPTION
CAPITAL This account is used to record the original and additional
investments of the owner of the business entity. It is increased
by the amount of profit earned during the year or is decreased
by a loss.
WITHDRAWALS When the owner of the business entity withdraws cash or other
assets, such are recorded in the drawing or withdrawal account
rather than directly reducing the owner’s equity account
INCOME SUMMARY It is the temporary account used at the end of the accounting
Period to close income and expenses. This account shows the
profit or loss for the period before closing it to the capital
account.
FINANCIAL PERFORMANCE
(INCOME STATEMENT)
ACCOUNT DESCRIPTION
SERVICE INCOME Revenues earned by performing services
for a customer or client
SALES Revenues earned as a result of sale of
merchandise
FINANCIAL PERFORMANCE
(INCOME STATEMENT)
ACCOUNT DESCRIPTION
COST OF SALES The cost incurred to purchase or to produce the products sold to
customers during the period; also called COST OF GOODS SOLD
SALARIES or WAGES Includes all payments as a result of employer-employee
relationship.
UTILITIES EXPENSE Expenses related to use of telecommunications facilities,
consumption of electricity, fuel and water
RENT EXPENSE Expenses for space, equipment or other asset rentals.
SUPPLIES EXPENSE Expense of using supplies in the conduct of daily business.
INSURANCE EXPENSE Portion of premiums paid on insurance coverage
DEPRECIATION EXPENSE The portion of the asset charged as expense for the period.
UNCOLLECTIBLE ACCOUNTS EXPPENSE The amount of AR estimated to be doubtful of collection
INTEREST EXPENSE An expense related to use of borrowed funds.
RECORDING OF BUSINESS
TRANSACTIONS
THE ACCOUNTING CYLE
SOURCE DOCUMENT
- original written evidences containing information about the
nature and amounts of transactions.
- bases for the journal entries.
• Sales invoice
• Official receipts
• Bank deposits
• Purchase orders
TRANSACTIONS ARE JOURNALIZED (STEP 2)
FORMAT
1. Date. The year and month are not rewritten for every entry unless the year or
month changes or a new page is needed.
2. Account Titles and The account to be debited is entered at the extreme left of the first line
Explanation. while the account to be credited is entered slightly indented on the next
line. A brief description of the transaction is usually made on the line below
the credit.
3. P.R. (Posting This will be used when the entries are posted, that is, until the amounts are
Reference) transferred to the related ledger accounts.
4. Debit. The debit amount for each account is entered in this column.
5. Credit. The credit amount for each account is entered in this column.
WEDDINGS “R” US
JOURNALIZING ACTIVITY
Chart of Accounts
- is the listing of all the accounts and their account numbers in the
ledger.
- Arranged in the financial statement order, that is, assets first,
followed by liabilities, owner’s equity, income and expenses.
- The accounts should be numbered in a flexible manner to permit
indexing and cross-referencing.
CHART OF ACCOUNTS
The Ledger
Trial Balance A grouping of accounts. Used
Assets to classify and summarize
Liabilities transactions and to prepare
Listing of all ledger
Owner’s Equity data for statements
accounts, in order, with
Revenues
their respective debit or
Expenses
credit balances.
PREPARATION OF WORKSHEET
AND ADJUSTMENTS (STEP 5)
TWO METHODS OF ACCOUNTING
•CASH BASIS
•ACCRUAL BASIS
ACCOUNTING METHODS
ACCOUNTING METHODS:
1. Cash Basis Accounting
- record all transactions when cash actually changes.
- cash receipt are treated as revenues and cash disbursement as
expenses
Examples:
Prepaid Rent
Unearned Revenues
ACCRUAL
Example:
Utilities Expense not yet paid
Sales on Account (Accounts Receivables)
DEFERRALS
ADJUSTMENT FOR DEFERRALS
a. PREPAID RENT
On May 1, 2019, Weddings “R” Us paid P8,000 for two
months’ rent in advance.
Computation:
P8,000/2 months = P4,000/month
Rent expense: P4,000
Prepaid rent: (P4,000)
ADJUSTMENT FOR DEFERRALS
b. PREPAID INSURANCE
Weddings “R” Us acquired a one-year comprehensive insurance
coverage on the service vehicle and paid P14,400 premiums.
Computation:
P14,400/12months = P1,200
Insurance expense: P1,200
Prepaid insurance: (P1,200)
ADJUSTMENT FOR DEFERRALS
c. SUPPLIES
On May 8, Weddings “R” Us purchased supplies, P18,000. During the
month, the entity used supplies in the process of performing services for
clients. At the end of the accounting period, Perez-Manalo makes a careful
physical inventory of the supplies. The inventory count showed that
supplies costing P15,000 are still on hand.
Computation:
P18,000-P15,000 = P3,000
Supplies Expense: P3,000
Supplies: (P3,000)
ADJUSTMENT FOR DEFERRALS
g. ACCRUED SALARIES
Weddings “R” Us pays salaries every two Saturdays.
Assume that the calendar for May appears as follows:
Sunday Monday Tuesday Wednesday Thursday Friday Saturday Computation:
h. ACCRUED INTEREST
On May 2, 2019, Perez-Manalo borrowed P210,000 from Metrobank.
She issued a promissory note that carried a 20% interest per annum.
Both the interest and principal will be payable in one year.
Computation:
P210,000 x 20% = P42,000 interest for 1 year
P42,000/12 months = P3,500
Interest Expense: P3,500
Interest Payable: P3,500
ADJUSTMENT FOR ACCRUALS
• INCOME STATEMENT
• STATEMENT OF CHANGES IN EQUITY
• BALANCE SHEET
• STATEMENT OF CASH FLOWS
PREPARING THE FINANCIAL STATEMENTS (STEP 6)
INCOME STATEMENT
The income statement is a statement showing the
performance of the enterprise for a given period of time.
BALANCE SHEET
• OPERATING
- are cash flows from transactions that affect the net income of
the company.
• INVESTING
- cash flows from transactions that affect investment in the non-
current assets of the company.
• FINANCING
- cash flow from transactions that affect the debt and equity of
the company.
Weddings “R” Us
Statement of Cash Flows
For the Month Ended May 31, 2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Cash received from clients P60,400
Payment to suppliers ( 10,000)
Payment to employees (13,800)
Payment to office rent (8,000)
Payment for insurance (14,000)
TYPES OF ACCOUNTS:
1. Real – balances are carried over to the next
period
2. Temporary – balances are transferred to the
capital account.
CLOSING ENTRIES ARE JOURNALIZED AND
POSTED (STEP 8)
STEPS:
1. Close the income accounts.
2. Close the expense accounts.
3. Close the income summary account.
4. Close the withdrawal account.
CLOSING ENTRIES ARE JOURNALIZED AND
POSTED (STEP 8)
Examples:
Adjusting Entry: Salaries Expense 1,800
Salaries Payable 1,800
Without reversing:
Payment of salaries on the next payday
Salaries Expense 5,400
Salaries Payable 1,800
Cash 7,200
REVERSING ENTRIES (STEP 10)
Reversing Entry:
June 1 Salaries Payable 1,800
Salaries Expense 1,800
RETURN ON EQUITY
-measures the amount of net income earned in relation to equity.
Formula:
Net income / Stockholders Equity = Return or Equity
Example:
P35,000 / P271,000 = .129 or 12.9%
For every peso in equity, P0.129 is earned.
PROFITABILITY RATIO
• RETURN ON ASSETS
-measures the ability of the company to generate income out of its
resources.
Formula:
Operating Income / Total Assets = Return on Assets (ROA)