Sunteți pe pagina 1din 126

ACCOUNTING FOR

NON-ACCOUNTANTS
DIANE CHRISTELLE LACSON, CPA

PERSONAL COPY ONLY DO NOTE REPRODUCE


WHAT IS ACCOUNTING?

PERSONAL COPY ONLY DO NOTE REPRODUCE


WHAT IS 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.

PERSONAL COPY ONLY DO NOTE REPRODUCE


FORMS OF BUSINESS ORGANIZATION

• 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.

- the owner receives all profits, absorbs all loses and is


solely responsible for all debts of the business.
PERSONAL COPY ONLY DO NOTE REPRODUCE
FORMS OF BUSINESS ORGANIZATION

• 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.

Each partner is personally liable for any debt incurred in


the partnership.
PERSONAL COPY ONLY DO NOTE REPRODUCE
FORMS OF BUSINESS ORGANIZATION

• CORPORATION
- business owned by stockholders

- It is an artificial being created by operation of law,


having the rights of succession and the powers, attributes
and properties expressly authorized by law or incident to
its existence.
PERSONAL COPY ONLY DO NOTE REPRODUCE
FORMS OF BUSINESS ORGANIZATION

Forms Sole Proprietor Partnership Corporation

Owner Proprietor (one) Partners (two or more) Stockholders (one or


more) who have one
vote per share
Managers May be owner. Determined by Managers, board of
Participate in all day-to- partnership directors and
day operations. agreement; may be shareholders.
one or more partners

PERSONAL COPY ONLY DO NOTE REPRODUCE


TYPES OF BUSINESS

Type Activity Structure Examples


1. Services Selling people’s time Hiring skilled staff and Accounting
selling their time Legal
2. Trader Buying and selling Buying a range of raw Wholesaler
products materials and Retailer
manufactured goods,
making them available
for sale
3. Manufacture Designing products, Taking raw materials and Construction
aggregating components using equipment and staff Foods and Drinks
and assembling finished to convert them into Pharmaceuticals
products finished goods. Chemicals
4. Raw Materials Growing and extracting Buying blocks of land and Farming
raw materials using them to provide Mining
raw materials Oil
PERSONAL COPY ONLY DO NOTE REPRODUCE
TYPES OF BUSINESS

Type Activity Structure Examples


5. Infrastructure Selling and utilization of Buying and operating assets, Transport
infrastructure selling occupancy often Hotels
with combination with Telecoms
services Sport Facilities
6. Financial Receiving deposits, lending Accepting cash from Banks
and investing money depositors and paying them Investment houses
interest
7. Insurance Pooling premiums of many Collecting cash from many Insurance
to meet claims of few customers; investing the
money to pay the losses
experienced by a few
customers

PERSONAL COPY ONLY DO NOTE REPRODUCE


ACCOUNTING BASICS

PERSONAL COPY ONLY DO NOTE REPRODUCE


THE ACCOUNTING CYLE

Refers to a series of sequential steps or procedures


performed to accomplish the accounting process.

PERSONAL COPY ONLY DO NOTE REPRODUCE


THE ACCOUNTING CYLE

Step 1 Identification of Events to be Recorded


Step 2 Transactions are Recorded in the journal
Step 3 Journal Entries are posted to the Ledger
Step 4 Preparation of a trial balance
Step 5 Preparation of the Worksheet including Adjusting Entries
Step 6 Preparation of the Financial Statements
Step 7 Adjusting journal entries and journalized and posted
Step 8 Closing Journal Entries are Journalized and Posted
Step 9 Preparation of a Post-Closing Trial Balance
Step 10 Reversing Journal Entries are Journalized and Posted
ACCOUNTING METHODS

ACCOUNTING METHODS:
1. Cash Basis Accounting
- record all transactions when cash actually changes.

2. Accrual Basis Accounting


- record transactions when the transactions are completed,
even cash has not changed.
ELEMENTS OF FINANCIAL STATEMENTS

ASSETS, LIABILITIES and EQUITIES


- relate to reporting entity’s financial position

INCOME and EXPENSES


- relate to reporting entity’s financial performance
ELEMENTS OF FINANCIAL STATEMENTS

ELEMENTS DEFINITION OR DESCRIPTION


Asset A present economic resource controlled by the entity as a result of a past event. An
economic resource is a right that has the potential to produce economic benefits.

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

An entity controls an economic resource if it has


the present ability to direct the use of the
economic resource and obtain economic benefits
that may flow from it.
ASSETS

A present economic resource controlled by the entity as a result of a


past event. An economic resource is a right that has the potential to
produce economic benefits.
Rights:
(a) Rights that correspond to an obligation of another party:
(i) rights to receive cash
(ii) rights to receive goods or services
(b) Rights that do not correspond to an obligation of another party:
(i) rights over physical objects (PPE/Inventory)
(ii) rights to use intellectual property
ASSETS

A present economic resource controlled by the entity as a result of a


past event. An economic resource is a right that has the potential to
produce economic benefits.
Produce economic benefits:
(a) Receive contractual cash flows or another economic resource
(b) Exchange economic resources with another party on favorable
terms.
(c) Produce cash inflows or avoid cash outflows
(d) Extinguish liabilities by transferring the economic resource.
LIABILITY

A present obligation of the entity to transfer an economic resource


as a result of pas events.
For a liability to exist,
a. The entity has the obligation
b. The obligation is to transfer an economic resource
c. The obligation is a present obligation that exists as a result of
past events.

PERSONAL COPY ONLY DO NOTE REPRODUCE


LIABILITY

Obligation is a duty or responsibility that an entity has no practical


ability to avoid. An obligation is always owed to another
party(parties).
Obligations to transfer economic resource include:
a. Obligations to pay cash
b. Obligation to deliver goods or provide services
c. Obligations to transfer an economic resource if a specified
uncertain future event occurs.
EQUITY

The residual interest in the assets of the entity after


deducting all its liabilities.
Equities are:
Sole Proprietorship – one owner’s equity
Partnership – Owner’s equity exist for each partner
Corporation – stockholder’s equity consist of share capital, retained earnings.
FINANCIAL PERFORMANCE
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 STATEMENTS

FINANCIAL POSITION FINANCIAL PERFORMANCE


ASSET INCOME
LIABILITY EXPENSES
OWNER’S EQUITY
THE ACCOUNT
ACCOUNT

The basic summary device of accounting.

A separate account is maintained for each element that


appears in the Balance Sheet (assets, liabilities, and
equity) and in the Income Statement (income and
expenses)
ACCOUNT

A detailed record of increases, decreases and


balance of each element that appears in an
entity’s financial statements.
T-ACCOUNT

3 parts:
Account Title
Left Side Right Side
Debit Side Credit Side
ACCOUNTING EQUATION
ACCOUNTING EQUATION

- The most basic accounting tool


- Presents the resources controlled by the enterprise, the present
obligations and the residual interest in the assets.
- States that Assets must always equal liabilities and owner’s equity.

ASSETS = LIABILITIES + OWNER’S EQUITY

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

- Dual effects of a business transaction is recorded.


- A debit side entry must have a corresponding
credit side entry.
DEBITS AND CREDITS

Debit Credit

DR (abbreviation) CR (abbreviation)

When an amount is When an amount is


entered on the left entered on the right

Latin word DEBERE Latin word CREDERE


RULES OF DEBITS AND CREDITS

ASSETS = LIABILITIES + OWNER’S EQUITY

• 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

• Income increases owner’s equity and expenses decreases owner’s


equity.
• Increases in expenses are recorded as debits and decreases as
credits.
• Increases in income are recorded as credits and decreases as
debits.
NORMAL BALANCE OF AN ACCOUNT

Refers to the side of the account – debit or credit –


where increases are recorded.

DEBITS CREDITS
ASSETS LIABILITIES
OWNER’S WITHDRAWAL OWNER’S EQUITY
EXPENSES INCOME
ACCOUNTING EVENTS
AND TRANSACTIONS
ACCOUNTING EVENTS

ACCOUNTING EVENT is an economic occurrence that causes


changes in an enterprise’s assets, liabilities, and/or equity.

• May be internal actions: use of equipment for production of


goods and services
• External event: purchase of raw materials from a supplier
TRANSACTION

TRANSACTION is a particular kind of event that involves the transfer


of something of value between two entities.
Examples:
• Acquiring assets from owner(s)
• Borrowing funds from creditors
• Purchasing or selling of goods and services.
TYPICAL ACCOUNT
TITLES USED
STATEMENT OF FINANCIAL POSITION
(BALANCE SHEET)

• ASSETS
- classified into two: CURRENT and NON-CURRENT
ASSETS

Assets are classified as CURRENT when:

• It expects to realize the asset, or intends to sell or consume


it, in its normal operating cycle.
• It holds the asset primarily for the purpose of trading
• Expects to realize the asset within twelve months after the
reporting period
• The asset is cash or cash equivalent unless the asset is
restricted.
ASSETS

Operating Cycle

- Is the time between the acquisition of assets for processing and


their realization in cash or cash equivalents.
- When the entity’s normal operating cycle is not clearly
identifiable, it is assumed to be 12 months.
CURRENT ASSETS

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

Liabilities are classified as current when:

• It expects to settle the liability in its normal operating cycle


• It holds the liability primarily for the purpose of trading
• The liability is due to be settled within 12 months after the
reporting period
• The entity does not have an unconditional right to defer
settlement of the liability for at least 12 months after the
reporting period.
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

Step 1 Identification of Events to be Recorded


Step 2 Transactions are Recorded in the journal
Step 3 Journal Entries are posted to the Ledger
Step 4 Preparation of a trial balance
Step 5 Preparation of the Worksheet including Adjusting Entries
Step 6 Preparation of the Financial Statements
Step 7 Adjusting journal entries and journalized and posted
Step 8 Closing Journal Entries are Journalized and Posted
Step 9 Preparation of a Post-Closing Trial Balance
Step 10 Reversing Journal Entries are Journalized and Posted
TRANSACTION ANALYSIS (STEP 1)

The analysis of transactions should follow these four basic steps:


1. Identify the transaction from source documents.
2. Indicate the accounts-either assets, liabilities, equity, income or
expenses-affected by the transactions
3. Ascertain whether each account is increased or decreased by the
transaction.
4. Using the rules of debit and credit, determine whether to debit
or credit the account to record its increase or decrease.
TRANSACTION ANALYSIS (STEP 1)

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)

After the transaction or event has been identified and


measured, it is recorded in the JOURNAL.
The process of recording a transaction is called
JOURNALIZING.
THE JOURNAL

- a chronological record of the entity’s transactions.


- a book of original entry.
- shows all the effects of a business transactions in
terms of debits and credit.
THE JOURNAL

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

PERSONAL COPY ONLY DO NOTE REPRODUCE


THE LEDGER

- A grouping of the entity’s accounts.

-A General Ledger is the “reference book” of the


accounting system and is used to classify and summarize
transaction, and prepare data for basic financial
statements.

PERSONAL COPY ONLY DO NOTE REPRODUCE


CHART OF ACCOUNTS

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

Account No. Balance Sheet Accounts Account Balance Sheet Accounts


(ASSETS) No. (LIABILITIES & OWNER’S EQUITY)
110 Cash 210 Notes Payable
120 Accounts Receivables 220 Accounts Payable
130 Supplies 230 Salaries Payable
140 Prepaid Rent 240 Utilities Payable
150 Prepaid Insurance 250 Interest Payable
160 Service Vehicle 260 Unearned Referral Revenues

165 Accumulated Depreciation-Service Vehicle


170 Office Equipment 310 Perez-Manalo, Capital

175 Accumulated Depreciation-Office Equipment 320 Perez-Manalo, Withdrawals


330 Income Summary
CHART OF ACCOUNTS

Account INCOME STATEMENT ACCOUNTS Account INCOME STATEMENT ACCOUNTS


No. (INCOME AND EXPENSES) No. (INCOME AND EXPENSES)
410 Consulting Revenues 510 Salaries Expense
420 Referral Revenues 520 Supplies Expense
530 Rent Expense
540 Insurance Expense
550 Utilities Expense
560 Depreciation Expense-Service Vehicle
570 Depreciation Expense-Office Equipment
580 Miscellaneous Expense
590 Interest Expense
POSTING (STEP 3)

Posting means transferring the amounts from


the journal to the appropriate accounts in
the LEDGER. Debits in the Journal are posted
as debits in the ledger, and credits in the
Journal as credits in the ledger.
STEPS IN POSTING:

1. Transfer the date of the transaction from the Journal to The


Ledger.
2. Transfer the page number from the journal to the journal
reference column of the ledger.
3. Post the debit figure from the journal as a debit figure in the
ledger and the credit figure from the journal as a credit figure in
the ledger.
4. Enter the account number in the posting reference column of
the journal once the figure has been posted to the ledger.
TRIAL BALANCE (STEP 4)

- is a list of all accounts with their respective debit


or credit balances. It is prepared to verify the equality of
debits and credits in the ledger at the end of each
accounting period or at any time the postings are
updated.

- it is a control device that helps minimize


accounting errors.
STEPS IN MAKING THE TRIAL BALANCE

1. List the Account Titles in numerical order.


2. Obtain the account balance of each account from the
ledger and enter the debit balances in the debit column
and the credit balances in the credit column.
3. Add the debit and credit columns.
4. Compare the totals.
Weddings “R” Us
Trial Balance
May 31, 2019
Cash P 22,200
Accounts Receivables 12,000
Supplies 18,000
Prepaid Rent 8,000
Prepaid Insurance 14,400
Service Vehicle 420,000
Office Equipment 60,000
Notes Payable P 210,000
Accounts Payable 53,000
Utilities Payable 1,400
Unearned Referral Revenues 10,000
Perez-Manalo, Capital 250,000
Perez-Manalo, Withdrawals 14,000
Consulting Revenues 62,400
Salaries Expense 13,800
Utilities Expense 4,400
Total P 586,000 P 586,000
First Four Steps

THE GENERAL JOURNAL Cash


(the book of original entry)
Office Equipment
Office Equipment xx
Accounts Payable
Cash xx
Accounts Payable xx

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

2. Accrual Basis Accounting


- record transactions when the transactions are completed, even
cash has not changed.
- records revenues as they are earned and expenses as they are
incurred.
THE NEED FOR ADJUSTMENTS

• Adjustment entries are made to reflect the account


information on economic activities that have occurred
but have not yet been recorded.

• These entries are needed to measure properly the profit


for the period and to bring the related asset and liability
accounts to correct balances for the financial
statements.
Adjustments

THE GENERAL JOURNAL Prepaid Expenses


(the book of original entry)
Unearned Revenues
_________ xx
Payable
__________ xx
__________ xx
End of the period-adjusting
entry recorded in the
General Journal
Posting to the Ledger
Adjusted Trial Balance
Assets
Liabilities Adjusted Trial Balance is
Owner’s Equity prepared.
Revenues
Expenses
GENERAL TYPES OF
ADJUSTMENTS (STEP 5)
DEFERRALS AND ACCRUALS

EACH ADJUSTING ENTRY AFFECTS A BALANCE


SHEET ACCOUNT (ASSET/LIABILTY ACCOUNT) AND
AN INCOME STATEMENT ACCOUNT
(INCOME/EXPENSE).
DEFERRAL

The postponement of the recognition of “AN EXPENSE


ALREADY PAID BUT NOT YET INCURRED” or “REVENUE
ALREADY COLLECTED BUT NOT YET EARNED”

Examples:
Prepaid Rent
Unearned Revenues
ACCRUAL

The recognition of “ AN EXPENSE ALREADY INCURRED BUT


UNPAID” or “REVENUE EARNED BUT UNCOLLECTED.”

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

d. SERVICE VEHICLE AND OFFICE EQUIPMENT


Suppose that Weddings “R” Us estimated that the service vehicle, which
was bought on May 4, will last for seven years (84 months) and with a
salvage value of P84,000.
Computation:
Service Equipment
P420,000 – P84,000 = P336,000
P336,000/84 months = P4,000
Depreciation Expense:P4,000
Accumulated Depreciation: (P4,000)
ADJUSTMENT FOR DEFERRALS

e. The Office Equipment that was acquired on May 5 will have a


useful life of five years (60 months) and will be worthless at that
time.
Computation:
P60,000/60 months = P1,000
Depreciation expense: P1,000
Accumulated Depreciation: (P1,000)

PERSONAL COPY ONLY DO NOTE REPRODUCE


ADJUSTMENT FOR DEFERRALS

f. UNEARNED REFERRAL REVENUES


On May 15, 2019, Weddings “R” Us received P10,000 as an
advance payment for referrals made. Assume that by the
end of the month, one of the three couples referred has
already taken their marriage vows and as a result the
amount of P4,000 pertaining to the referred event has
been realized.
Unearned referral revenues : P4,000
Referral revenues: P4,000
ACCRUALS
ADJUSTMENT FOR ACCRUALS

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:

1 2 3 4 5 6 P7,800/26 days = P300/day


7 8 9 10 11 12 13 P300 x 3 days = P900/person
14 15 16 17 18 19 20 P900 x 2 persons = P1,800
21 22 23 24 25 26 27
Salaries Expense: P1,800
28 29 30 31
Salaries Payable: P1,800
ADJUSTMENT FOR ACCRUALS

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

i. ACCRUED CONSULTING REVENUES


Suppose that Weddings “R” Us agreed to arrange a rush
but simple civil wedding for madly-in-love couple in the
afternoon of May 31. The entity intended to charge fees of
P5,300 for the services, which is earned but unbilled.
Accounts receivables: P5,300
Consulting Revenues: P5,300
THE WORKSHEET
WORKSHEET

- A multi-column document that provides efficient way to


summarize the data for financial statements.
- simplifies the adjusting and closing process and can reveal
errors.
PREPARING THE WORKSHEET (STEP 5)

1. Enter the account balances in the unadjusted trial balance


columns and the total amounts.
2. Enter the adjusting entries in the adjustment columns and total
the amounts.
3. Compute each account’s adjusted balance by combining the
unadjusted trial balance and the adjustment figures. Enter the
amounts in the Adjusted Trial Balance columns.
4. Extend the asset, liability and owner’s equity amounts on the
adjusted trial balance columns to the balance sheet columns.
Extend the income and expense amounts to the Income
Statement column. Total the statement columns.
PREPARING THE FINANCIAL
STATEMENTS (STEP 6)
FINANCIAL STATEMENTS

• 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.

It summarizes the revenues earned and expenses incurred


for that period of time.
Weddings “R” Us
Income Statement
For the Month Ended May 31, 2019
Revenues
Consulting Revenues P 67,700
Referral Revenues 4,000
Total P71,700
Expenses
Salaries Expense P15,600

Utilities Expense 4,400

Rent Expense 4,000

Depreciation Expense-Service Vehicle 4,000

Interest Expense 3,500

Supplies Expense 3,000

Insurance Expense 1,200

Depreciation Expense-Office Equipment 1,000


Total 36,700
Profit P35,000
PREPARING THE FINANCIAL STATEMENTS (STEP 6)

STATEMENT IN CHANGES IN EQUITY

This summarizes the changes that occurred in


owner’s equity.
Weddings “R” Us
Statement of Changes in Equity
For the Month Ended May 31, 2019
Perez-Manalo, Capital (5/1/2019) P250,000
Add: Additional Investments by Perez-Manalo P 0
Profit 35,000 35,000
Total P285,000
Less: Withdrawals (14,000)
Perez-Manalo, Capital (5/31/2019) P271,000
PREPARING THE FINANCIAL STATEMENTS (STEP 6)

BALANCE SHEET

Statement that shows the financial position or


condition of an entity by listing the assets, liabilities
and owner’s equity as at a specific date.
Weddings “R” Us
Balance Sheet
For the Month Ended May 31, 2019
ASSETS LIABILITIES
Current Assets Current Liabilities
Cash P 22,200 Notes Payable P210,000
Accounts Receivable 17,300
Accounts Payable 53,000
Supplies 15,000
Salaries Payable 1,800
Prepaid Rent 4,000
Utilities Payable 1,400
Prepaid Insurance 13,200
Interest Payable 3,500
Total Current Assets P 71,700
Unearned Referral Revenues 6,000
Property, Plant and Equipment (Net)
Total Current Liabilities P275,700
Service Vehicles P420,000
Less: Accumulated Depreciation (4,000) P416,000 OWNER’S EQUITY

Office equipment P60,000 Perez-Manalo, Capital (5/31/19) 271,000


Less: Accumulated Depreciation (1,000) 59,000 475,000 TOTAL LIABILITIES AND OWNER’S P546,700
TOTAL ASSET P546,000 EQUITY
PREPARING THE FINANCIAL STATEMENTS (STEP 6)

STATEMENT OF CASH FLOWS

This provides information about the cash receipts and


cash payments of an entity during the period.
Cash flow Activities

• 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)

Payment for utilities (3,000)

Net Cash provided (used) P11,200


CASH FLOW FROM INVESTING ACTIVITIES:
Payment to acquire service vehicle P (420,000)

Payment to acquire office equipment (15,000)

Net cash provided (used) (435,000)


CASH FLOWS FROM FINANCING ACTIVITIES:
Cash received as investment from the owner P250,000
Cash received from borrowings (210,000)
Payment for withdrawals by owner (14,000)
Net cash provided (used) 446,000
NET INCREASE (DECREASE) IN CASH P22,200

Cash Balance at the beginning of the period 0

Cash balance at the end of the period P22,200


ADJUSTMENTS ARE JOURNALIZED
AND POSTED (STEP 7)
Adjustments are Journalized and Posted
(Step 7)

From the worksheet, record the adjustments in the


General Journal and post if the General Ledger

PERSONAL COPY ONLY DO NOTE REPRODUCE


CLOSING ENTRIES ARE JOURNALIZED
AND POSTED (STEP 8)
CLOSING ENTRIES ARE JOURNALIZED AND
POSTED (STEP 8)

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)

• Step 1: Close the income accounts

May 31 Consulting Revenues 67,700


Referral Revenues 4,000
Income Summary 71,700
CLOSING ENTRIES ARE JOURNALIZED AND
POSTED (STEP 8)
• Step 2: Close the expense accounts
May 31 Income Summary 36,700
Salaries Expense 15,600
Supplies Expense 3,000
Rent Expense 4,000
Insurance Expense 1,200
Utilities Expense 4,400
Depreciation Exp.-SV 4,000
Depreciation Exp.-OE 1,000
Interest Expense 3,500
CLOSING ENTRIES ARE JOURNALIZED AND
POSTED (STEP 8)

STEP 3: Close the Income Summary Account

May 31 Income Summary 35,000


Perez-Manalo, Capital 35,000
CLOSING ENTRIES ARE JOURNALIZED AND
POSTED (STEP 8)

STEP 4: Close the Withdrawal Account

May 31 Perez-Manalo, Capital 14,000


Perez-Manalo, Withdrawal 14,000
PREPARATION OF POST-CLOSING TRIAL
BALANCE (STEP 9)

POST-CLOSING TRIAL BALANCE


- Verifies that all debits equal the credits in the trial
balance
- The trial balance only contains balance sheet accounts
because all income and expense accounts have zero
balances.
Weddings “R” Us
Post Closing Trial Balance
May 31, 2019
ASSETS
Debit Credit
Cash P 22,200

Accounts Receivable 17,300


Supplies 15,000
Prepaid Rent 4,000
Prepaid Insurance 13,200
Service Vehicles P420,000
Accumulated Depreciation-SV P 4,000

Office equipment P60,000


Accumulated Depreciation-OE 1,000

Notes Payable 210,000

Accounts Payable 53,000


Salaries Payable 1,800
Utilities Payable 1,400
Interest Payable 3,500
Unearned Referral Revenue 6,000
Perez-Manalo, Capital 271,000
P551,700 P551,700
REVERSING ENTRIES (STEP 10)

- A journal entry which is the exact opposite of


related adjusting entry made at the end of the
period.
- Reversing entries are optional.
REVERSING ENTRIES (STEP 10)

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

With reversing and payment on the next payday


Salaries Expense 7,200
Cash 7,200
FINANCIAL STATEMENT
ANALYSIS
FINANCIAL STATEMENT ANALYSIS

- Used by management for monitoring performance and for


identifying strategies to further improve the company’s operation.
- Used by managers, investors, creditors, and etc.
FINANCIAL RATIOS:
1. Profitability Ratio
2. Efficiency Ratio
3. Liquidity Ratio
4. Leverage Ratio
PROFITABILITY RATIO

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)

PERSONAL COPY ONLY DO NOTE REPRODUCE


PROFITABILITY RATIO

• Gross Profit Margin


- measures the ability of the company to cover its cost of
goods sold from its sales.
Formula:
Gross Profit / Sales = Gross Profit Margin

PERSONAL COPY ONLY DO NOTE REPRODUCE


PROFITABILITY RATIO

PERSONAL COPY ONLY DO NOTE REPRODUCE