FAR REVIEWER

Accounting “language of business”

 Service activity; its function is to provide quantitative information primarily
financial
 It’s an art of recording, classifying, and summarizing business transactions
 Systematic process of objectively obtaining and evaluating events to ascertain the
degree of correspondence between these assertions and established criteria and
communicating the results to interested users.
The practice of accountancy in the Philippines is regulated under RA 9298.
BRANCHES OF ACCOUNTING
1. Financial Accounting- financial resources, obligation and activities of economic
identity
2. Management Accounting- development and interpretation to aid management
3. Tax Accounting- preparation of income tax returns
4. Net for Profit Accounting- used in government agencies, schools, organizations
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Accounting Cycle
1. Analyzing
2. Journalizing
3. Posting
4. Prepare Unadjusted Trial Balance
5. Adjusting
6. Prepare Adjusted Trial Balance
7. Prepare Financial Statements
8. Closing
9. Prepare Post Closing Trial Balance
10. Reversing (optional)

Service- business that generated income by providing services

Accounting Equation: ASSETS= Liabilities + Owner’s Equity
Assets- economic resource that you control, results from past events
Liabilities- resource supplied by creditors
Equity- net assets, affected by income and expense
-claim by the owner
Merchandising- purchases inventory, sells the inventory and uses the cash to purchase
more inventory and cycle continues
 Merchandiser- earns net income by buying and selling
a) Wholesaler- buys product from manufacturer & sells to retailer
b) Retailer- buys product from manufacturer or wholesaler and sells to
customer
Perpetual Inventory System Periodic Inventory System
-Updates accounting records for each -Recorded at the end of the period
purchase and sales of inventory purchase
-uses merchandise inventory -uses purchase return/ allowances
-have COGS -no COGS

NET METHOD GROSS METHOD

-Records purchases of inventory with -Records an invoice at full price without
a cash discount regard to any cash discounts

Merchandiser Cost Flow

Merchandise Inventory
Beg Inventory xxx COGAS= Beg Inventory + Net Purchase
Net Purchases xxx COGS= COGAS- End Inventory
COGAS (Cost xxx Gross Profit= Net Sales- COGS
of Goods Avail Net Income= Gross Profit - Expenses
For Sale)
xxx COGS
End Inventory xxx

Merchandiser Income Statement

Net sales xxx

Cost of Goods Sold (xxx)
Gross Profit xxx
Expenses (xxx)
Net Income/Loss xxx
Perpetual

ACCOUNTING FOR MERCHANDISE PURCHASES

Purchase without Cash Discounts Purchase with Cash Discounts

Merchandise Inventory xxx Merchandise Inventory xxx
Cash xxx Accounts Payable xxx
Payment with Discount Period Payment after Discount Period
Accounts Payable xxx Accounts Payable xxx
Merchandise Inventory xxx Cash xxx
Cash xxx
Purchase with Return and Allowances
Accounts Payable xxx
Merchandise Inventory xxx

Shipping Terms Goods in Transit Transportation Cost Paid by

owned by
FOB shipping point Buyer Merchandise Inventory xxx
Cash xxx

FOB Destination Seller Delivery Expense xxx

Cash xxx

FOB Destination
- Ownership of goods is transferred to buyer upon receipt
FOB Shipping Point
- Ownership of goods is transferred to buyer upon shipment

ACCOUNTING FOR MERCHANDISE SALES

Sales without Cash Discounts Purchase with Cash Discounts

Accounts Receivable xxx Accounts Receivable xxx
Sales xxx Sales xxx
COGS xxx n/10, n/30
Merchandise Inventory xxx COGS xxx
Merchandise Inventory xxx
Buyer Paid within Discount Period Buyer Paid after Discount Period
Cash xxx Cash xxx
Sales Discount xxx Accounts Receivable xxx
Accounts Receivable xxx
Sales with Return and Allowances
Sales with Returns and Allowances xxx
Cash xxx
Adjusting Entry -Is made at the end of the accounting period to reflect a transaction/
event that is not recorded yet.
Time Period Assumption

a. Annual Financial Statements- one year period

b. Interim Financial Statements- one, three, or six months activity
Accounting Period

a. Calendar Year- 12 consecutive months beginning at Jan 1 to Dec 31

b. Fiscal Year- 12 consecutive months ending on the last day of any month except
December.

1. DEFFERALS (unearned)
a. Prepaid Expenses- paid but not yet incurred
b. Unearned Revenue- cash received in advance

2. ACCRUALS (cost that are incurred in a period but both unpaid and unrecorded)
a. Accrued Expense
b. Accrued Revenue

3. DEPRECIATION (allocating the cost of assets over their estimated useful life)
Annual Depreciation= Cost – Salvage Value = Depreciation Amount
Est. Life Est. Life

Monthly Depreciation= Annual Depreciation

12

Asset Method Expense Method

Oct. 1 Prepaid Insurance xxx Oct 1 Insurance Expense xxx
Cash xxx Cash xxx
Dec 31 Insurance Expense xxx Dec 31 Prepaid Insurance xxx
Prepaid Insurance xxx Insurance Expense xxx

Liability Method Income Method

Oct. 1 Cash xxx Oct 1 Cash xxx
Unearned Rent Rev xxx Rent Revenue xxx
Dec 31 Unearned Rent Rev xxx Dec 31 Rent Revenue xxx
Rent Revenue xxx Unearned Rent Rev xxx
Worksheet- document used to help with adjusting closing accounts and with preparing
financial statements.
a. Adjusting Entries Adjustments
b. Adjusted Trial Balance
c. Income Statement
Revenues xxx
Expenses (xxx)
Net Income/Loss xxx

d. Balance Sheet and Statement of Owners Equity

Assets Liabilities Equity Statement of Owners Equity
Cash xxx A/P xxx Capital xxx Capital xxx
A/R xxx Long xxx TOTAL xxx Add: Income xxx
Land xxx term Less: Withdrawals (xxx)
TOTAL xxx TOTAL xxx Capital, Dec 31 xxx

Closing Process- important step at the end of accounting period after financial
statements are completed.
 Temporary Accounts- all accounts in income statements
- including income summary
 Permanent Accounts- asset, liabilities, equity

CLOSING ENTRIES- transfer at the end of the period that balances in revenue,
expense, withdrawals account to permanent capital account.
- necessary at the end of each period
1. Close Revenue Accounts to Income Summary
Service Fee xxx
Income Summary xxx

2. Close Expense Accounts to Income Summary

Income Summary xxx
Expenses xxx

3. Close Income Summary to Capital (revenue summary-expense summary)

Income Summary xxx
Capital xxx

4. Close Withdrawals Account to Capital (withdrawal Amount)

Capital xxx
Withdrawals xxx
Post-Closing Trial Balance- list of permanent accounts & their balances from the
ledger after closing entries have been journalized and posted.

Cash xxx
Accounts Receivable xxx
Supplies xxx
Prepaid Insurance xxx
Accounts Payable xxx
Unearned Revenue xxx
Capital xxx
TOTAL xxx xxx