Fundamentals of Accounting (ACCL01B)

Basic Accounting for Non-Accountants (BACN01B)

Accounting for Non-Accountants (ACCN01B)
ACCOUNTING 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 decision.
ACCOUNTING PRINCIPLES AND ASSUMPTIONS
1. BUSINESS ENTITY CONCEPT This concept assumes that a business enterprise is separate and distinct from the owner or
investor. It is assumed that in preparing the financial statements only the properties, liabilities, income and expenses of
a particular business are reported therein. Personal properties and liabilities of the owner are not included in the
business financial statements.
2. EXCHANGE PRICE OR COST Assets should be recorded based on cost which is the amount exchanged at the time the
item was acquired. A machine with a list price of P50,000 which was purchased at a discount of P1,000 should be
recorded at P49,000. An equipment which was purchased at a price of P50,000 but could be purchased in another store
for P51,000 should be recorded at P50,000. Land costing 750,000 at the time it was acquired was purchased on
installment basis payable in 4 yearly installments of P200,000 or a total installment price of P800,000 should be
recorded at P750,000 which is the amount or value exchanged at the time the asset was acquired.
3. GOING CONCERN This concept supports the Exchange price or Cost principle. Based on this assumption, it is expected
that the business is a continuing concern or that it has an indefinite existence. This is the reason why properties are
recognized at cost without regard to the change in their market values in subsequent periods.
4. OBJECTIVITY This principle requires that financial data entered in the records must be verifiable and supported by
documents such as invoices, vouchers or official receipts.
5. ACCOUNTING PERIOD (PERIODICITY) How often should the accountant prepare the financial statements specially since
it is assumed that the business is a continuing concern? It is understood that a complete and accurate financial picture of
the business can only be made at the end of its life. However, since that statement users need financial information on a
regular basis and the success of its business operation depends on financial information contained in the accounting
reports, then its life has to be divided into specific time intervals called accounting period.
6. UNIT OF MEASURE (MONETARY) All business transactions are measured and recorded using only one unit of
measurement. Since money is used as a medium of exchange, it is therefore the most practical unit of measuring
financial data. At this point, it is worthwhile to note that in accounting, only data measurable in terms of money are
recognized and recorded in its books.
7. ACCRUAL PRINCIPLE
a. REVENUE RECOGNITION PRINCIPLE Revenue is recognized when it is earned. For a service business, revenue is
earned when service has been rendered. For merchandising or manufacturing concern, revenue is earned when
the merchandise or product has been sold or delivered to the customer. Thus, service rendered in June but
collected in July should be recorded as income in June. Note that, generally, collection whether is cash or in
property is not a requirement for recognizing revenue.
b. EXPENSE RECOGNITION PRINCIPLE There can be no revenue earned without expenses being incurred. There are
three ways of recognizing expenses:
i. Expense is recognized when revenue is recognized because it is directly associated to it, meaning the expense
would not have been incurred if there was no revenue. Example, If a customer is in a far place and you have
deliver the goods he ordered, you have to spend for delivery expense.
ii. Resources or assets that will benefit the business over a number of years should be spread out as expense over
the years that will benefit from its use. Example, you bought a delivery truck for P50,000 and it is expected be
used by the company for 5 years. Depreciation expense of P10,000 should be recognized every year for five
years for using the delivery truck.
iii. Periodic expenses are necessary to operate the business such as salary of your employees, rent of your store,
telephone, light and water used. Most often the expenses in this category are incurred or used up by the
business by hour, day or month.

Orlando DR Manalang, CPA

ELEMENTS OF FINANCIAL STATEMENTS

ASSETS resources owned and controlled by the enterprise as a result of a past event and from which economic benefits are
expected to flow to the enterprise (BUSINESS RESOURCES, example: Cash, Accounts Receivable, Notes Receivable, Inventory,
Prepaid Expenses, Office Supplies, Equipment, Machineries, Vehicles, Building, Land).
LIABILITIES a present obligation arising from past events, the settlement of which is expected to result in an outflow of
resources from the enterprise (BUSINESS OBLIGATIONS, example: Accounts Payable, Notes Payable, Accrued Expenses, Deferred
Income, Loans Payable, Mortgage Payable).
OWNERS EQUITY the residual right or interest of the owner in the enterprise net assets.
INCOME increases in economic benefits during the period in the form of cash inflows or enhancements of assets or decreases
in liabilities that result in increases in equity, other than those resulting from contributions of equity participants. Revenues
represent the inflow of cash or other assets from clients and customers for services performed or for goods sold by the business.
(Example: Service Fee, Professional Fee, Sales)
EXPENSES decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or
incidences of liabilities that results in decreases in equity, other than those relating to distributions to equity participants
(personal drawings of owner). (Example: Rent, Salaries, Utilities, Interest, Bad Debts, Depreciation).
ACCOUNTING PROCESS
1. Gathering Source Documents / Business Papers & Analyzing Business Transactions (ex. OR, Bills, Invoice, Voucher)
Analysis: Deciding whether the transaction must be recorded or not. Criterion:
a. There must be exchange of values For every value received by the business there must be an equal value
parted with.
b. It must be between two parties at least two parties are involved in the transaction.
c. It must be stated in terms of money can be measured using one common measurement or denominator which
is money.
2. Journalizing Making transaction entries into the Journal. (Journal the book of original entry)
Ex. On January 1, 2012, Mr. O (the owner) invested the following to his business:
Cash 150,000, Computers 100,000, Building 5,000,000.
DATE

PARTICULARS

DEBIT

CREDIT

2012
JAN

Cash

PHP 150,000.00

Equipment

PHP 100,000.00

Building
Mr. O, Capital

PHP 5,100,000.00
PHP 5,350,000.00

Note: Normal balance side of the elements (also, where the element-account increases)
Assets

Debit

Liabilities

Credit

Capital

Credit

Income

Credit

Expenses

Debit

Orlando DR Manalang, CPA

3. Posting the process of transferring records from Journal to Ledger. (Ledger the book of final entry)
Cash
1-Jan

1-Jan

Dr
PHP 150,000.00

Building
Dr
PHP 5,100,000.00

Cr
1-Jan

Equipment
Dr
PHP 100,000.00

Mr. O, Capital
Cr

Dr
1-an

Chart of Accounts detailed listing of General Ledgers accounts.

Asset Accounts
Current Assets
1001
1003
1005
1008
1012
Long Term Assets
1200
1300
1301
1400
1401
1600
1601
1700
1701
Other Assets
1800

Cash in Bank
Petty Cash Account
Inventory
Accounts Receivable
Prepaid Expense
Land
Buildings
Accumulated Depreciation, Buildings
Vehicles
Accumulated Depreciation, Vehicles
Shop Equipment
Accumulated Depreciation, Shop Equipment
Office Equipment
Accumulated Depreciation, Office Equipment
Deposits

Liability Accounts
Current Liabilities
2002
Accounts Payable
2100
Employment Tax Payable
2300
Short Term Loans Payable
2350
Customer Deposits
2385
Current Portion of Long Term Debt
2400
Accrued Expenses
Long Term Liabilities & Equity
2501
Land Payable
2505
Equipment Payable
2510
Vehicles Payable
2514
Bank Loans payable
2551
Less Current Portion LTD
2805
Paid in Capital
2825
Beginning Equity
2830
Partners Contribution
2835
Partners Draw

Orlando DR Manalang, CPA

Cr

Cr
PHP 5,350,000.00

Sales Accounts
3010
Frame Sales
3015
Other Sales
Direct Expense Accounts
4010
Shop or Design Labor
4015
Payroll Tax Expense
4023
Workers Comp Expense
4027
State Sales Tax Expense
4101
Materials
4200
Freight
4326
Engineering
4510
Outside Services
4550
Shop or Design Supplies
4647
Rental Expense
4700
Repair and Maintenance
4809
Small Tools
4830
Travel
4843
Lodging
4849
Meals
Indirect Expense Accounts (Overhead)
5010
Salaries & Wages, Office & Sales
5015
Payroll Tax Expense, Office & Sales
5023
Workers Comp Expense, Office & Sales
5300
Accounting
5312
Advertising
5330
Bank Fees
5341
Depreciation Expense
5345
Dues and Subscriptions
5353
Insurance: Product Liability
5355
Insurance: Vehicles
5358
Legal Fees
5550
Office Supplies
5600
Postage
5618
Research and Development
5700
Repair and Maintenance, Office
5762
Taxes and Licenses
5775
Telephone
5813
Training
5820
Utilities
Other Accounts
7050
Interest Income
7100
Cash Discounts
7200
Gain or Loss on Sale of Assets
8020
Interest Expense

Orlando DR Manalang, CPA

4. Preparation of Trial Balance a list of accounts with ledger balances (unadjusted). Being prepared to test the accuracy
of Journalizing and Posting process.

Your Business Name

Trial Balance
June 31, 20XX
Debit
Cash

$800.00

Accounts Receivable

400.00

Supplies

600.00

Prepaid Rent
Equipment

1,200.00
10,000.00

Accounts Payable

$3,000.00

Owner, Capital
Owner, Drawing

9,000.00
1,000.00

Sales

3,000.00

Salary Expense

700.00

Misc. Expense

300.00
$15,000.00

5. Preparation of Worksheet to facilitate adjustments and preparation of financial statements.

Orlando DR Manalang, CPA

Credit

$15,000.00

Work Sheet for the year ended 21.12.2005

Account Title

Trial Balance
Dr.

Cash

37080

Accounts receivable

52320

Notes receivable

Adjustments
Cr.

Dr.

Adjusted Trial Balance

Cr.

Dr.

Cr.

Income Statement

Balance Sheet

Dr.

Dr.

Cr.

37080

37080

51720

51720

24000

24000

24000

Merchandise inv. 1.105

31650

31650

Prepaid insurance

4800

c-2500

2300

2300

Prepaid rent

4395

b-2800

1595

1595

Store supplies

1650

f-1000

650

650

Furniture & fixture

13500

13500

13500

Acc-deprec. - furniture

10

Office equipment

11

Acc-deprec. - equip.

4500

12

Accounts payable

13

Owner's equity

14

drawings

4500

4500

15

Purchases

180000

180000

16

Sales

17

Sales ret. & allow.

18

Purchases ret. & allow.

19

Freight inward & cust.

20

Sales salaries exp.

21

Advertising exp.

22

i-600

3000

g-1350

11700

31650

4350

4350

11700
h-2340

11700
6840

6840

28600

28600

28600

96000

96000

96000

289200

4500
180000
289200

6000

6000
2500

289200
6000

2500

5750

2500

5750

5750

36300

36300

3795

3795

3795

Delivery exp.

2850

2850

2850

23

Office exp.

3510

3510

3510

24

Office salaries

3000

3000

3000

25

Interest income

34200

d-2100

900
424700

900

900

424700

26

Rent exp.

b-2800

2800

2800

27

Insurance exp.

c-2500

2500

2500

28

Outstanding sales salaries

29

Interest receivable

30

Interest revenue

31

Store supplies exp.

f-1000

1000

1000

32

Deprec. exp. furniture

g-1350

1350

1350

33

Deprec. exp. equipment

h-2340

2340

2340

34

Bad debts exp.

i-600

600

600

35

Merchandise inv. 31.12.05

a-40000

40000

36

Income summary

d2100
e-200

2100

2100

200
e-200

52890

200
200

a-40000
52890

Net Income

200

40000
40000

470690

40000

470690
49355
332800

Orlando DR Manalang, CPA

Cr.

49355
332800

187245

187245

6. Journalizing and Posting of Adjustments

adjustment for any income earned but not yet collected and for expenses incurred but not yet paid.
Proforma entries:
Accrual of
Income
Expenses
Particulars
Debit
Credit
Particulars
Debit
Credit
Receivable
xx
Expense
xx
Income
xx
Payable
xx

adjustment for any income collected but not yet earned and for any expenses paid but not yet incurred.
Example1: Being a Lessor, on March 31, 2012 you received advance payment for a one year rent from a tenant who will start
renting your property on the same date. Annual Rent is Php 600,000.00.
Deferral of Income
Income method
Date

Particulars

Debit

Liability method
Credit

2012
Mar 31

Cash

PHP 600,000.00

Rent Income
to record precollected one
year rent

Dec 31

Particulars

Debit

Credit

2012

Rent Income

Mar 31
PHP 600,000.00

PHP 150,000.00

Unearned Rent

Cash

PHP 600,000.00

Unearned Rent
to record precollected one
year rent

Dec 31
PHP 150,000.00

Unearned Rent

PHP 600,000.00

PHP 450,000.00

Rent Income

to record adjustment

PHP 450,000.00

to record adjustment

Computation:
Mar31 to Dec31 is 9 months. Rent Income is Php 450,000 (Php 600,000 x 9/12) or (9 months x Php 50,000*)
*Php50,000 is the monthly rent (Php600,000/12).
Example2: Being a Lessee, on March 1, 2012 you gave advance payment for a one year rent to the landlord for a lease that
will start on the same date. Annual Rent is Php 600,000.00.
Deferral of Expense
Expense method
Date

Particulars

Debit

Asset method
Credit

2012
Mar 1

Debit

Credit

2012
Rent Expense

PHP 600,000.00

Cash
to record prepayment of
one year rent

Dec 31

Particulars

Prepaid Rent
Rent Expense
to record adjustment

Mar 1
PHP 600,000.00

PHP 100,000.00

PHP 600,000.00

Cash
to record prepayment of
one year rent

Dec 31
PHP 100,000.00

Prepaid Rent

Rent Expense
Prepaid Rent

PHP 600,000.00

PHP 500,000.00
PHP 500,000.00

to record adjustment

Computation:
Mar1 to Dec31 is 10 months. Rent Expense is Php 500,000 (Php 600,000 x 10/12) or (10 months x Php 50,000*)
*Php50,000 is the monthly rent (Php600,000/12).
Note: With the examples above, the reporting period is assumed to be of calendar year. But take note that period for reporting
maybe Calendar (ending December 31) or Fiscal (ending any date not December 31). Hence, if reporting period will be September
30, For Deferral of Income example, months earned will only be from March 31 to September 30 only or 6 months. For Deferral of
Expense example, if reporting period is September 30, months incurred will be from March 1 to September 30 only or 7 months.
Orlando DR Manalang, CPA

 adjustment for depreciation expense for every depreciable assets.

Depreciation Expense per year = Depreciable Cost* / Estimated Useful Life
*Depreciable Cost = Cost(the original acquisition cost) Salvage value(the cost recoverable from sale of asset after its estimated useful life)

Proforma Entry:
DATE
PARTICULARS
2012
Dec
31 Depreciation Expense
Accumulated Depreciation

DEBIT

CREDIT

xx
xx

Example: The building invested by Mr. O is estimated to be used for 20 years (refer to journalizing example). Salvage value is
Php 100,000.00. The adjusting entry on December 31 is
DATE
PARTICULARS
F
DEBIT
CREDIT
2012
Dec
31 Depreciation Expense - Building
PHP 250,000.00
Accumulated Depreciation - Building
PHP 250,000.00
Computation:
Depreciation Expense =

Php 5,100,000 - Php 100,000

20years

adjustment for bad debts (provision).

Proforma entry:
DATE
PARTICULARS
2012
Dec
31 Bad Debts
Allowance for Doubtful Accounts

DEBIT

CREDIT

xx
xx

Basis for giving Allowance for Doubtful Accounts (the amount to be deducted from Gross Accounts Receivable to arrive at the
Net Realizable Value of Accounts Receivable)
% of Sales Income Statement approach (ex. The company provides 1% of Net Sales as Bad debts expense every year)
% of Accounts Receivable Balance Sheet approach (ex. The company provides allowance for bad debts as 2% of
Accounts Receivable)
From aging of Accounts Receivable (Receivables are being categorized by days of past due and certain percentage of
probability of not collecting such accounts are applied to every category)
Per Balance Sheet :
Account Receivable, gross
Allowance for Doubtful Accounts
Net Realizable Value of A/R

xx
(xx)
xx

Additional proforma entries:

-for Write Off of Accounts Receivable
DATE
Year
Month

PARTICULARS
d1 Allowance for Doubtful Accounts
Accounts Receivable

Orlando DR Manalang, CPA

DEBIT

CREDIT

xx
xx

-for Recovery of accounts previously written off

DATE
PARTICULARS
Year
Month
d2 Accounts Receivable
entry 1.
Allowance for Doubtful Accounts
To record recovery of A/R
Month
d3 Cash
entry 2.
Accounts Receivable
To record collection

DEBIT

CREDIT

xx
xx
xx
xx

Way to compute adjustment:

Allowance for Doubtful Accounts
Write Off
Ending Balance

xx

Beginning Balance
Recovery
Provision

xx

Example: Allowance for bad debts is based on 20% of Accounts Receivable for the year.
Year 1
Year 2
Year 3
Year 4
A/R
PHP 1,000,000.00 PHP 1,250,000.00 PHP 1,562,500.00 PHP 1,953,125.00
ADA (20%)
PHP 200,000.00
PHP 250,000.00
PHP 312,500.00
PHP 390,625.00
Year 1: Accounts Receivable written off is Php 50,000.00
Recovered Accounts previously written off is Php 15,000.00
Computation for Adjustment:

Allowance for Doubtful Accounts

Written Off

PHP 50,000.00
PHP 200,000.00

Balance, end.

PHP 15,000.00
PHP 235,000.00

Balance, beg.
Recovery
Provision
(worked back)

PHP 250,000.00

DATE
Year 1
Month

PARTICULARS
D1 Bad Debts
Allowance for Doubtful Accounts
To record provision for Bad Debts

Orlando DR Manalang, CPA

PHP 250,000.00

DEBIT

CREDIT

PHP 235,000.00
PHP 235,000.00

Year 2: Accounts Receivable Written off is Php 30,000.00

Recovered Accounts previously Written off is Php 45,000.00
Computation for Adjustment:
Allowance for Doubtful Accounts
Written Off

PHP 30,000.00
PHP 250,000.00

Balance, end.

PHP 280,000.00
DATE
Year 2
Month

PARTICULARS

Balance, beg.

PHP 200,000.00
PHP 45,000.00
PHP 35,000.00

Recovery
Provision
(worked back)

PHP 280,000.00
DEBIT

D2 Bad Debts
Allowance for Doubtful Accounts
To record provision for Bad Debts

CREDIT

PHP 35,000.00
PHP 35,000.00

Another example: Provision for doubtful accounts is 20% of Sales.

Sales
Bad debts

Year 1
PHP 1,000,000.00
PHP 200,000.00

Year 2
PHP 1,250,000.00
PHP 250,000.00

Year 3
PHP 1,562,500.00
PHP 312,500.00

Year 4
PHP 1,953,125.00
PHP 390,625.00

Year 1: Accounts Receivable written off is Php 50,000.00

Recovered Accounts previously written off is Php 15,000.00
Computation for Adjustment:

Allowance for Doubtful Accounts

Written Off

PHP 50,000.00
PHP 165,000.00

Balance, end.

PHP 15,000.00
PHP 200,000.00

Balance, beg.
Recovery
Provision

PHP 215,000.00
DATE
Year 1
Month

PARTICULARS
D1 Bad Debts
Allowance for Doubtful Accounts
To record provision for Bad Debts

Orlando DR Manalang, CPA

PHP 215,000.00
F

DEBIT

CREDIT

PHP 200,000.00
PHP 200,000.00

Preparation of Financial Statements

Basic Financial Financial Statements:
Balance Sheet (Statement of Financial Position) shows Liquidity, Solvency, and Stability of the Business Entity
Income Statement (Statement of Comprehensive Income) shows Profitability of the Companys operation
Cash Flow Statement (Statement of Cash Flows) shows cash flows from operating, investing, and financing activities
Capital Statement (Statement of Changes in Equity) shows any changes to the Interest or Equity of the Owner
Notes to Financial Statements shows additional disclosures about company policies, methods being used and all
computations to arriving to the balances showed at the face of Financial Statements
Example of Financial Statements:
HAPPY TOUR & TRAVEL
INCOME STATEMENT
For the month ended February 29, 2012
Servie Income

PHP 51,000.00

Less: Operating Expenses

Rent Expense
Salaries Expense
Repair Expense
Gas & Oil Expense
Utilities Expense

PHP 10,000.00
9,000.00
1,000.00
500.00
500.00

21,000.00
PHP 30,000.00

HAPPY TOUR & TRAVEL

CAPITAL STATEMENT
For the month ended February 29, 2012
Sorio, Capital, Feb 1
Add:
Net Income
Total
Less:
Drawings
Sorio, Capital, Feb 29

PHP 800,000.00
PHP 30,000.00
PHP 830,000.00
PHP 5,000.00
PHP 825,000.00

HAPPY TOUR & TRAVEL

BALANCE SHEET
As of February 29, 2012

ASSETS
Cash
Accounts Receivable
Cars
Equipment
Furniture & Fixtures
Total
Orlando DR Manalang, CPA

LIABILITIES & OWNER'S EQUITY

PHP 47,000.00
28,000.00
750,000.00
55,000.00
45,000.00
PHP
925,000.00

Loans Payable
Sorio, Capital

PHP
100,000.00
825,000.00

PHP
925,000.00

HAPPY TOUR & TRAVEL

CASH FLOW STATEMENT
For the month ended February 29, 2012
Cash Flows from Operating Activities
Cash received from customers
PHP 23,000.00
Cash paid for expenses
-21,000.00
Cash Flows from Investing Activities
Acquisition of Furniture & Fixtures
Acquisition of Equipment
Cash Flows from Financing Activities
Investment by Sorio
Withdrawal by Sorio
Loan from bank
Net increase (decrease) in Cash
Cash, Feb 1
Cash, Feb 29

PHP 2,000.00

-45,000.00
-55,000.00

-100,000.00

50,000.00
-5,000.00
100,000.00

145,000.00
PHP 47,000.00
0.00
PHP 47,000.00

7. Journalizing and Posting of Closing Entries

DATE
2012
Dec

DATE
2012
Dec

a. Close Income accounts

PARTICULARS

31 Income Accounts
Income & Expense Summary
b. Close Expense Accounts
PARTICULARS

Orlando DR Manalang, CPA

CREDIT

xx
xx

31 Income & Expense Summary

Expenses Accounts

c. Close Income & Expense Summary account

If with Debit balance: (Result of Operation is Net Loss)
DATE
PARTICULARS
2012
Dec
31 Owner, Capital
Income & Expense Summary
If with Credit balance: (Result of Operation is Net Income)
DATE
PARTICULARS
2012
Dec
31 Income & Expense Summary
Owner, Capital

DEBIT

DEBIT

CREDIT

xx
xx

DEBIT

CREDIT

xx
xx
F

DEBIT

CREDIT

xx
xx

DATE
2012
Dec

d. Close Owner, drawing

PARTICULARS

31 Owner, Capital
Owner, Drawing

DEBIT

CREDIT

xx
xx

8. Preparation of Post-Closing Trial Balance checking the accuracy of adjustment and closing process.

9. Journalizing and Posting of Reversing Entries done every first day of next accounting period.
Adjusting entries that are subject to reversal; Accruals, Deferral of income (under income method),Deferral of
expense (under expense method)
Example: Refer to adjustment example
Income method
Date
Particulars
Debit
2012
Mar 31 Cash
PHP 600,000.00
Rent Income
Dec 31 Rent Income
PHP 150,000.00
Unearned Rent
Jan 1 Unearned Rent
PHP 150,000.00
Rent Income

Date
Particulars
2012
Mar 31 Rent Expense
Cash
Dec 31 Prepaid Rent
Rent Expense
Jan 1 Rent Expense
Prepaid Rent
Orlando DR Manalang, CPA

Expense method
Debit

Credit

PHP 600,000.00
PHP 150,000.00
PHP 150,000.00

Credit

PHP 600,000.00
PHP 600,000.00
PHP 100,000.00
PHP 100,000.00
PHP 100,000.00
PHP 100,000.00