Basic Accounting

Orlando DR Manalang, CPA

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.


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 F DEBIT CREDIT

2012

JAN 1 Cash PHP 150,000.00

Equipment PHP 100,000.00

Building PHP 5,100,000.00

Mr. O, Capital 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


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

Cash

Dr Cr

1-Jan PHP 150,000.00

Chart of Accounts detailed listing of General Ledgers accounts.

Asset Accounts Current Assets

1001 Cash in Bank 1003 Petty Cash Account 1005 Inventory 1008 Accounts Receivable 1012 Prepaid Expense

Long Term Assets 1200 Land 1300 Buildings 1301 Accumulated Depreciation, Buildings 1400 Vehicles 1401 Accumulated Depreciation, Vehicles 1600 Shop Equipment 1601 Accumulated Depreciation, Shop Equipment 1700 Office Equipment 1701 Accumulated Depreciation, Office Equipment

Other Assets 1800 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

Equipment

Dr Cr

1-Jan PHP 100,000.00

Building

Dr Cr

1-Jan PHP 5,100,000.00

Mr. O, Capital

Dr Cr

1-an 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


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 Credit Cash $800.00

Accounts Receivable 400.00

Supplies 600.00

Prepaid Rent 1,200.00

Equipment 10,000.00

Accounts Payable

$3,000.00 Owner, Capital

9,000.00 Owner, Drawing 1,000.00

Sales

3,000.00 Salary Expense 700.00

Misc. Expense 300.00

$15,000.00 $15,000.00

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


Work Sheet for the year ended 21.12.2005

Account Title Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet

Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.

1 Cash 37080

37080

37080

2 Accounts receivable 52320

i-600 51720

51720

3 Notes receivable 24000

24000

24000

4 Merchandise inv. 1.105 31650

31650

31650

5 Prepaid insurance 4800

c-2500 2300

2300

6 Prepaid rent 4395

b-2800 1595

1595

7 Store supplies 1650

f-1000 650

650

8 Furniture & fixture 13500

13500

13500

9 Acc-deprec. - furniture

3000

g-1350

4350

4350

10 Office equipment 11700

11700

11700

11 Acc-deprec. - equip.

4500

h-2340

6840

6840

12 Accounts payable

28600

28600

28600

13 Owner's equity

96000

96000

96000

14 drawings 4500

4500

4500

15 Purchases 180000

180000

180000

16 Sales

289200

289200

289200

17 Sales ret. & allow. 6000

6000

6000

18 Purchases ret. & allow.

2500

2500

2500

19 Freight inward & cust. 5750

5750

5750

20 Sales salaries exp. 34200

d-2100

36300

36300

21 Advertising exp. 3795

3795

3795

22 Delivery exp. 2850

2850

2850

23 Office exp. 3510

3510

3510

24 Office salaries 3000

3000

3000

25 Interest income

900

900

900

424700 424700

26 Rent exp.

b-2800

2800

2800

27 Insurance exp.

c-2500

2500

2500

28 Outstanding sales salaries

d2100

2100

2100

29 Interest receivable

e-200

200

200

30 Interest revenue

e-200

200

200

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

40000

36 Income summary

a-40000

40000

40000

52890 52890 470690 470690

Net Income

49355

49355

332800 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 Liability method

Date Particulars Debit Credit Particulars Debit Credit

2012 2012

Mar 31 Cash PHP 600,000.00 Mar 31 Cash PHP 600,000.00

Rent Income PHP 600,000.00 Unearned Rent PHP 600,000.00

to record precollected one

year rent

to record precollected one

year rent

Dec 31 Rent Income PHP 150,000.00 Dec 31 Unearned Rent PHP 450,000.00

Unearned Rent PHP 150,000.00 Rent Income PHP 450,000.00

to record adjustment 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 Asset method

Date Particulars Debit Credit Particulars Debit Credit

2012 2012

Mar 1 Rent Expense PHP 600,000.00 Mar 1 Prepaid Rent PHP 600,000.00

Cash PHP 600,000.00 Cash PHP 600,000.00

to record prepayment of

one year rent

to record prepayment of

one year rent

Dec 31 Prepaid Rent PHP 100,000.00 Dec 31 Rent Expense PHP 500,000.00

Rent Expense PHP 100,000.00 Prepaid Rent PHP 500,000.00

to record adjustment 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.


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:


2012

Dec 31 Depreciation Expense xx

Accumulated Depreciation 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


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:


2012

Dec 31 Bad Debts xx

Allowance for Doubtful Accounts 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 xx

Allowance for Doubtful Accounts (xx)

Net Realizable Value of A/R xx

Additional proforma entries:

-for Write Off of Accounts Receivable


Year

Month d1 Allowance for Doubtful Accounts xx

Accounts Receivable xx


-for Recovery of accounts previously written off


Year

Month d2 Accounts Receivable xx

entry 1. Allowance for Doubtful Accounts xx

To record recovery of A/R

Month d3 Cash xx

entry 2. Accounts Receivable xx

To record collection

Way to compute adjustment:

Allowance for Doubtful Accounts

Write Off

Beginning Balance

Ending Balance

Recovery

Provision

xx = 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:


PHP 50,000.00

-

PHP 200,000.00

PHP 15,000.00

PHP 235,000.00

PHP 250,000.00 PHP 250,000.00


Year 1

Month D1 Bad Debts PHP 235,000.00

Allowance for Doubtful Accounts PHP 235,000.00

To record provision for Bad Debts

Written Off

Balance, end.

Balance, beg.

Recovery

Provision

(worked back)


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

Recovered Accounts previously Written off is Php 45,000.00



PHP 30,000.00

PHP 200,000.00

PHP 250,000.00

PHP 45,000.00

PHP 35,000.00

PHP 280,000.00 PHP 280,000.00


Year 2




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

Year 1 Year 2 Year 3 Year 4

Sales PHP 1,000,000.00 PHP 1,250,000.00 PHP 1,562,500.00 PHP 1,953,125.00

Bad debts 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



PHP 50,000.00

-

PHP 165,000.00

PHP 15,000.00

PHP 200,000.00

PHP 215,000.00 PHP 215,000.00


Year 1




Written Off

Balance, end.

Balance, beg.

Recovery

Provision

(worked back)

Written Off

Balance, end.

Balance, beg.

Recovery

Provision


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 PHP 10,000.00

Salaries Expense 9,000.00

Repair Expense 1,000.00

Gas & Oil Expense 500.00

Utilities Expense 500.00 21,000.00

PHP 30,000.00

HAPPY TOUR & TRAVEL

CAPITAL STATEMENT


Sorio, Capital, Feb 1

PHP 800,000.00

Add: Net Income

PHP 30,000.00

Total

PHP 830,000.00

Less: Drawings

PHP 5,000.00

Sorio, Capital, Feb 29

PHP 825,000.00

HAPPY TOUR & TRAVEL

BALANCE SHEET

As of February 29, 2012

ASSETS

LIABILITIES & OWNER'S EQUITY

Cash PHP 47,000.00

Loans Payable

PHP

100,000.00

Accounts Receivable 28,000.00

Sorio, Capital 825,000.00

Cars 750,000.00

Equipment 55,000.00

Furniture & Fixtures 45,000.00

Total

PHP

925,000.00

PHP

925,000.00

1


HAPPY TOUR & TRAVEL

CASH FLOW STATEMENT


Cash Flows from Operating Activities

Cash received from customers PHP 23,000.00

Cash paid for expenses -21,000.00 PHP 2,000.00

Cash Flows from Investing Activities

Acquisition of Furniture & Fixtures -45,000.00

Acquisition of Equipment -55,000.00 -100,000.00

Cash Flows from Financing Activities

Investment by Sorio 50,000.00

Withdrawal by Sorio -5,000.00

Loan from bank 100,000.00 145,000.00

Net increase (decrease) in Cash

PHP 47,000.00

Cash, Feb 1

0.00

Cash, Feb 29

PHP 47,000.00

7. Journalizing and Posting of Closing Entries

a. Close Income accounts


2012

Dec 31 Income Accounts xx

Income & Expense Summary xx

b. Close Expense Accounts


2012

Dec 31 Income & Expense Summary xx

Expenses Accounts xx

c. Close Income & Expense Summary account

If with Debit balance: (Result of Operation is Net Loss)


2012

Dec 31 Owner, Capital xx

Income & Expense Summary xx

If with Credit balance: (Result of Operation is Net Income)


2012

Dec 31 Income & Expense Summary xx

Owner, Capital xx

1


d. Close Owner, drawing


2012

Dec 31 Owner, Capital xx

Owner, Drawing 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 Credit

2012

Mar 31 Cash PHP 600,000.00

Rent Income PHP 600,000.00

Dec 31 Rent Income PHP 150,000.00

Unearned Rent PHP 150,000.00

Jan 1 Unearned Rent PHP 150,000.00

Rent Income PHP 150,000.00

Expense method

Date Particulars Debit Credit

2012

Mar 31 Rent Expense PHP 600,000.00

Cash PHP 600,000.00

Dec 31 Prepaid Rent PHP 100,000.00

Rent Expense PHP 100,000.00

Jan 1 Rent Expense PHP 100,000.00

Prepaid Rent PHP 100,000.00

Basic Accounting

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