PAMANTASAN NG LUNGSOD NG SAN PABLO

COLLEGE OF BUSINESS ADMINISTRATION

Bachelor of Science in Business Administration
MODULE FOR FUNDAMENTALS OF ACCOUNTING 1 & 2
CBMEC 1 – Fundamentals of Accounting 1 & 2

MODULE 1
Lesson Title : ACCOUNTING AND ITS ENVIRONMENT
Learning Objectives:
1. Define Accounting and explain its role in business.
2. Distinguish between the different forms and activities of business organization.
3. Explain the importance of the purpose and phases of accounting.
DEFINITIONS OF ACCCOUNTING
Accounting is 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 decisions.
Accounting is the process of identifying, measuring and communicating economic information to permit
informed judgments and decisions by users of the information.

Accounting is 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
(American Institute of Certified Public accountant Bulletin No. 1

EVOLUTION OF ACCOUNTING
Accounting history is important to accounting pedagogy, policy and practice. It makes it possible to better
understand our present and to forecast our future. Accounting history is the “study of the evolution in
accounting thought, practices and institutions in response to changes in the environment and societal needs.
It also considers the effect that this evolution has worked on the environment.
TYPES OF BUSINESS

Type Activity Structure Examples

Services Selling people’s time Hiring skilled staff and selling Software development
their time Accounting, Legal
Trader Buying and selling products Buying a range of raw Wholesaler
materials and manufactured Retailer
goods and consolidating
them,making them available
for sales in locations near to
their customers or online for
delivery
Manufacture Desgining products, Taking raw materials and using Vehicle assembly
aggregating components and equipment and staff to convert Construction
assembling finished products them into finished goods Engineering
Electricity, Water
Food and drink
Chemicals
Media, Pharmaceuticals
Raw Materials Growing or extracting raw Buying blocks of land using Farming, Mining, Oil
materials them to provide raw materials
Infrastructure Selling the utilization of Buying and operating assets Transport (airport operator,
infrastructure (typically large assets); selling airlines, trains, ferries, buses)
occupancy often in Hotels, Telecoms, Sports
combination with service facilities, Property
management
1

Financial Receiving deposits, lending Accepting cash from Bank

and investing money depositors and paying them Investment house
interest; using the money to
provide loans to borrowers,
 charging them fees and a
higher rate of interest than the
depositors receive
Insurance Pooling premiums of many to Collecting of cash from many Insurance
meet claims of a few customers; investing the
money to pay the losses
experienced by few customers.
By understanding the risk
accepted and the likelihood of
a claim paid

FORMS OF BUSINESS ORGANIZATIONS

Sole Proprietorship. This business organization has a single owner called the proprietor who generally is also
the manager. Sole proprietorship tend to be small service-type (e.g. physicians, lawyers and accountant)
businesses and retail establishments. The owner receives all profits, absorbs all losses and is solely
responsible for all debts of the business. Accounting records of the sole proprietorship do not include the
proprietor’s personal financial records.

Partnership. A 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 by the partnership. Accounting considers the
partnership as a separate organization, distinct from the personal affairs of each partner.

Corporation. A business owned by its 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. The stockholders are not personally liable for the corporation’s debts. The corporation is
separate legal entity.

MICRO, SMALL AND MEDIUM ENTERPRISE

Micro enterprise are those with assets, before financing, of P3.0 (before P1.5 million or less and employ not
more than nine workers.
Small enterprises are those with 10 to 99 workers.
Medium enterprise have assets, before financing, of above P15 million to P100 million and employ 100 to 199
workers.

ACTIVITIES IN BUSINESS ORGANIZATION

Financing Activities
Organizations require financial resources to obtain other resources used to produced goods and services.
They compete for these resources in financial markets. Financing activities are the methods an organization
uses to obtain financial resources from financial markets and how it manges these resources. Primary
resources of financing for most buseinesses are owners and creditors, such as banks and suppliers. Repaying
the creditors and paying a return to the owners are also financing activities.

Investing Activities
Managers use capital from financing activities to acquire other resources, used in thr transformation process-
that is, to transform resources from one form to a different form, which is more valuable, to meet the needs
of the people having right mix of resources is essential to efficient and effective operations.

An efficient business is one that provides good and services at low costs relative to their selling prices. An
effective business is one that is successful in providing goods and services demanded by the customers.

Operating Activities
Operating activities involve the use of resources to design, produce, distribute, and market goods and services.
Operating activities include research and development, design and engineering, purchasing, human resources,
production, distribution, marketing and selling services.
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PACIOLI’S DOUBLE-ENTRY BOOKKEEPING AND ITS EVOLUTION
In Fra Luca Pacioli’s book, Summa, there 36 short chapters on bookkeeping. Luca states that to be successful
every merchant needs three essential things: sufficient cash or credit, a good bookkeeper, and an accounting
system to view the business affairs at a glance. He discusses three books in the Summa: the memorandum,
the journals and the ledger.

In Pacioli’s book, he introduces the double entry accounting system-in which for every debet dare [should
give] there exists a debet habere [should have or should receive]. Modern bookkeeping systems are still
based on principles established in the 15th century, although they have had to be adapted to suit modern
conditions.

In summa, the memorandum is the book where all transactions are recorded, in the currency in which they
are conducted, at the time they are conducted. The memorandum, prepared in chronological order, is a
narrative description of the business’s economic events. The morandum is necessary because there are no
document to support the transactions.

The second book, the journal, is the merchant’s private book. The entries made here are in one currency, in
chronological order, and in narrative form. The last book, known as the Ledger, is an alphabetical listing of all
the business’s accounts along with the running balance of each particular account.

FUNDAMENTAL CONCEPTS
Entity Concept. The most basic concept in accounting is the entity concept. An accounting entity is an
organization or a section of an organization that stands apart from other organizations and individuals as a
separate economic unit. Simply put, the transaction of different entities should not be accounted for
together. Each entity should be evaluated separately.

Periodicity Concept. An entity’s life can be meaningfully subdivided into equal time periods for reporting
purposes. It will be aimless to wait for the actual last day of operations to perfectly measure the entity’s
profit. This concept allows the users to obtain timely information to serve as a basis on makine decisions
about future activities. For the purpose of reporting to outsiders, one year is the usual accounting period.

Stable Monetary Unit Concept. The Philippine peso is a reasonable unit of measure and that its purchasing
power is relatively stable. It allows accountants to add and subtract peso amounts as though each peso has
the same purchasing power as any other peso at anytime. This is the basis for ignoring the effects of inflation
in the accounting records.

Going Concern. Financial statements are normally prepared on the assumption that the reporting entity is a
going concern and will continue in operation for the foreseeable future. Hence, it is assumed that the entity
has neither the intention nor the need to enter liquidation or to cease trading. This assumption underlies the
depreciation of assets over their useful lives.

CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLES

A principle has relevance to the extent that it results in formation that is meaningful and useful to those who
need to know something about a certain organization.

A principle has Objectivity to the extent that the resulting information is not influenced by the personal bias
or judgement of those who furnish it. Objectivity connotes reliability and trustworthiness. It also connotes
verifiability, which means that there is some way of finding out whether the information is correct.

A principle has feasibility to the extent that it can be implemented without undue complexity or cost. These
criteria often conflict with one another. In some cases, the most relevant solution may be the least objective
and the least objective and the least feasible.

BRANCHES OF ACCOUNTING
 1. Auditing is the accountancy profession’s most significant service to the public. An external audit is the
independent examination that ensures the fairness and reliability of the reports that management
submits to users outside the business entity.

Internal auditors, perform routine tasks and undertake detailed checking of the company’s accounting
procedures.

External auditors, are likely to go in for much more selective testing.

2. Bookkeeping is a mechanical task involving the collection of basic financial data. The data are first
entered in the accounting records or the books of accounts, and then extracted, classified and
summarized in the form of income statement, balance sheet and cash flow statement.
3. Financial Accounting, is focused on the recording of business transactions and the periodic preparation
of reports on financial position and results of operations.
4. Financial Management is a relatively new branch of accounting that has grown rapidly over the last 30
years. Financial mangers are responsible for setting financial objectives, making plans based on those
objectives, obtaining the finance needed to achieve plans, and generally safeguarding all the financial
resources of the entity.
5. Management Accounting incorporates cost accounting data and adapts them for specific decisions
which management may be called upon to make. A management accounting system incorporates all
types of financial and non financial information from a wide range of sources.
6. Taxation , Tax accounting include the preparation of tax returns and consideration of the tax
consequences of proposed business transactions or alternative course of action.
7. Government Accounting is concerned with the identification of the sources and uses of resources
consistent with the provisions of city, municipal, provincial or national laws

LIFE ACTIVITIES 1
1. Why accounting often referred to as the language of business?
2. What are the three forms of business organization? Explain each briefly.
3. Discuss the criteria for general acceptance of an accounting principle.
4. What are the types of business? Distinguish them.
5. What is Accounting?

Reference: Basic Financial Accounting and Reporting

Win Ballada / Susan Ballada
2021 Edition
Prepared by: Mr. Rene Antiporda
----------------

MODULE 2

Lesson Title : Accounting Equation and the Double Entry System

Learning Objective:
1. Describe the parts of an information system.
2. Explain how an accounting information system helps the decision makers.
3. Define the elements of financial statements.
4. Understand what is meant by the accounting equation and prove the validity of the “mirror image”
concept.

Lectures:

PARTS OF AN INFORMATION SYSTEM

An information system is a collection of people, procedures, software, hardware and data which works
together to provide information-related or decision-making problems.

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1.People - are competent end users working to increase their productivity. End users use hardware and
software to solve information-related or decision-making problems.
2.Procedures- are manuals and guidelines that instruct end users on how to use the software and hardware.
3.Software- is another name for programs-instructions that tell the computer how to process data. The are
two kinds of software:
System Software – is background software that helps a computer manage its internal resources. An
example is the operating system.. Windows and Linux are popular operating system.
Application Software – performs useful works on general-purpose problems. The two types of
applications software are basic applications and advanced applications.
4.Hardware – consist of input devices, the system unit, secondary storage, output devices, and
communication devices.
Input Devices –translate data and programs that humans can understand into a form the computer can
process. The more common are the keyboard, mouse, scanner, digital camera and microphone.
The system unit – consist of electronic circuitry with two parts.
• Central processing unit [CPU] – controls and manipulate data to produce information.
• Memory [primary storage] – temporarily holds data, program instructions and processed
data.
Secondary Storage – stores data and programs. Three most common storage media are: flash drive,
hard disk and optical disk.
Output Devices – processed information from the CPU. Two important output devices are: monitor
and printer.
Communication Devices – These send and receive data and programs from one computer to another.
A device that connects a microcomputer to a telephone is modem.
5.Data – is the raw material for data processing. Data consists of numbers, letters and symbols and relates to
facts, events and transactions. Data describes something and is typically stored electronically in a file. A file
collection of characters organized as a single unit. Common types of files are document, worksheet and data
base.
Accounting information System
Every business organization must have an accounting information system which will generate reliable
financial information needed by decision makers in a timely manner. The design and operation of a system
must consider the anticipated users of the information and the types of decisions they are expected to make.
The design of the system to meet the entity’s information requirement depends on the firm’s size, nature of
operations, volume of transaction data, organizational structure, form of business and extent of government
regulation. These will influence the way in which information is accumulated and reported in the financial
statements.

TYPES OF ACCOUNTING INFORMATION SYSTEM

1. Manual system – utilize paper-based journals [general and special] and ledgers [ general and
subsidiary].
2. Computer-based transaction system replace paper records with computer records.
3. Database systems, embed accounting data within the business event data on which they are based.

Elements of Financial Statement

Element Definition or description

Asset A present economic resources controlled by the entity as a result of past events. 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 Increase in assets, or decrease in liabilities, that result in increase in equity, other than those
relating to contributions from holders of equity claims.
Expenses Decrease in assets, or increase in liabilities, that result in decreases in equity, other than those
relating to distributions to holders of equity claims.

The Account
The basic summary device of accounting is the account. 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 ]. Thus, an account may be defined as a detailed record of the increases, decreases and balance
sheet of each element that appears in an entity’s financial statements. The simplest form of the account is
known as the “T” account because of its similarity to the letter “T”. The Account has three parts as follows;

Account Title

Left side or Right side or

Debit side Credit side

The Accounting Equation

Financial Statement tell us how a business is performing. They are the final product of the accounting process.
But how do we arrive at the items and amounts that make up the financial statements? The most basic tool of
accounting is the accounting equation. This equation presents the resources controlled by the enterprise, the
present obligations of the enterprise and the residual interest in the assets. It states that assets must always
equal liabilities and owner’s equity. The basic accounting model is:

Assets = Liabilities + Owner’s Equity

Debits and Credits –The Double-Entry System

Accounting is based on a double entry system which means that the dual effects of business transaction is
recorded. A debit side entry must have a corresponding credit side entry. For every transaction, there must
be one or more accounts debited and one or more accounts credited. Each transaction affects at least two
accounts. The total debits for a transaction must always equal the total credits.

An account is debited when an amount is entered on the left side of the account and credited when an
amount entered on the right side. The abbreviations for debit and credit are Dr. [from the latin debere] and
Cr. [from the latin credere], respectively.

The account type determines how increases or decreases in it are recorded. Increases in assets are recorded
as debits [ on the left side of the account] while decreases in assets are recorded as credits [on the right side].
Conversely, increases in liabilities and owner’s equity are recorded by credits and decreases are entered as
debits.

The rules of debit and credit for income and expense accounts are based on the relationship of these accounts
to owner’s equity. Income increases owner’s equity and expense decreases owner’s equity. Hence, increases
in income are recorded as credits and decreases as debits. Increases in expenses are recorded as debits and
decreases as credits. These are the rules of debit and credit. The following summarizes the rules:

Balance Sheet Accounts

Assets Liabilities and Owner’s Equity

Debit Credit Debit Credit

[+] [-] [-] [+]
Increases Decreases Decreases Increases
Normal Balance Normal Balance

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Income Statement Accounts
 Debit for Credit for
decreases in owner’s equity increases in owner’s equity
Expenses Income

Debit Credit Debit Credit

[+] [-] [-] [+]
Increases Decreases Decreases Increases
Normal Balance Normal Balance

Normal Balance
The normal balance of any account refers to the side of the account –debit or credit – where increases are
recorded. Asset, owner’s equity withdrawal and expense accounts normally have debit balances; liability,
owner’s equity and income accounts normally have credit balances. This result occurs because increases in
an account are greater than or equal to decreases.

Typical Account Titles Used

Statement of Financial Position

Current Assets
Cash, Cash is any medium of exchange that a bank will accept for deposit at face value. It includes coins,
currency, checks, money orders, bank deposit and draft.
Cash Equivalents, Per PAS No.7, these are short-term, highly liquid investments that are readily convertible to
known amounts of cash and which are subject to an insignificant risk of changes in value.
Notes Receivable, a written pledge that the customer will pay the business a fixed amount of money on a
certain date.
Inventories, Per PAS No.2, these are assets which are [a] held for sale in the ordinary course of business; [b] in
the process of production for such sale; or [c] in the form of materials or supplies to be consumed in the
production process or in the rendering of service.
Prepaid Expenses, these are expenses paid for by the business in advance.
Non current Assets
Property, Plant and Equipment, Per PAS no. 16, these are tangible assets that are held by an enterprise for
use in the production or supply of goods and services, or for rental to others, or for administrative purposes
and which are expected to be used during more than one period. Included are such land, building, machinery
and equipment, furniture and fixture, motor vehicles and 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 ttthe related asset-equipment or buildings-to obtain
book value.
Intangible Assets, Per PAS No. 38, these are identifiable, nonmonetary assets without physical substance held
for use in the production or supply of goods or services, for rental to others, or for administrative purposes.
Current Liabilities
Accounts Payable , this account represents the reverse relationship of the accounts receivable. By accepting
the goods or services, the buyer agrees to pay for them in the near future.
Notes Payable, a note payable is like anote receivable but in reverse sense.
Accrued Liabilities, amount owed to other for unpaid expenses. This account includes salaries payable, utilities
payable, interest payable and taxes payable.
Unearned Revenue, when the business entity receives payment before providing its customers with goods or
services, the amounts received are recorded in the unearned revenue account [liability method]
Current Portion of Long-Term Debt. These are portions of mortgage notes, bonds and other long term
indebtedness which are to be paid within one year from the balance sheet date.
Non-current Liabilities
Mortgage Payable. This account records long-term debt of the business entity for which the business entity
has pledge certain assets as security to the creditor.
Bonds Payable. Business organizations often obtain substantial sums of money from lenders to finance the
acquisition of equipment and other needed assets.
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Owner’s Equity
Capital, this account is used to record the original and additional investments of the owner of the business
entity.
Withdrawals, when the owner of a 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 a 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 to the capital account.

Income Statement
Income

Service Income, revenues earned by performing services for a customer or client; for example, accounting
services by a CPA firm, laundry services by a laundry shop.
Sales, revenues earned as result of sale of merchandise, for example, sale of building materials by a
construction supplies firm.

Expenses

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 Expense, includes all payments as a result of an employer-employee relationship such as
salaries or wages , 13th month pay, cost of living allowance and other related benefits.
Telecommunications, Electricity, Fuel and Water Expenses, expenses related to use of telecommunications
facilities, consumption of electricity, fuel and water.
Rent Expense, expense for space, equipment or other asset rentals.
Supplies Expense, expense of using supplies [e.g. office supplies] in the conduct of daily business.
Insurance Expense, portion of premiums paid on insurance coverage [ e.g. on motor vehicle, health, life, fire,
typhoon or flood] which has expired.
Depreciation Expense, the portion of the cost of a tangible asset [e.g. buildings and equipment ] allocated or
charged as expense during an accounting pe3riod.
Uncollectible accounts expense, the amount of receivables estimated to be doubtful of collection and
charged as expense during an accounting period.
Interest Expense. An expense related to use of borrowed funds.

Accounting for business transactions

Accountants observe many events that they identify and measure in financial terms. A business transaction is
the occurrence of an event or a condition that affects financial position and can be reliably recorded.

Financial Transaction Worksheet

Every financial transaction can be analysed or expressed in terms of its effects on the accounting equation.
The financial transactions will be analysed by means of a financial transaction worksheet which is a form used
to analyse increases and decreases in the assets, liabilities or owner’s equity of a business entity.
Accounting Equation Illustrative Problem:
During March 2020, the first month of operations, various financial trasactions took place. These transactions
are described and analysed as follows: [ SEE ATTACHED]
Life Activities:
1.Explain the following in your own words
a. Rules of Debit and Credit
b. Intangible Asset
c. Elements of Financial Statements
2. Using the accounting Equation, complete the following table:
Assets Liabilities Equity
a P 457,000 P270,000
b P1,006,000 500,000
c. 309,000 120,000

d. 756,000 451,000
e. 895,000 148,000
 f. 668,000 222,000

3.Dolores Aguilar started Aguilar Industrial Spray Service on April 1, 2020. During April, Aguilar completed the
following transactions:
a. Invested cash in the business, P60,000
b. Bought a service vehicle from CDO Motors for P112,500, paying P22,500 in cash, with the remainder
due in thirty days.
c. Bought Spray Equipment on account from Misamis Farm Supplies, P18,000
d. Paid rent for the month, P5,600.
e. Paid cash for insurance on service vehicle for the year, P5,760.
f. Received cash for spray services done on a building, P21,750.
g. Bought supplies for cash, P5,730.
h. Billed customers on account for services performed, P4,440.
i. Paid cash for utilities, P960.
j. Received bill for gasoline used by the service vehicle during the month, P3,270.
k. Receipts from customers, P16,420.
l. Aguilar withdraw cash for personal use, P10,500
m. Paid salaries of employees, P20,400.

Required: Accounting Equation, Expanded., Income Statement and Balance Sheet.

Reference: Basic Financial Accounting and Reporting
Win Ballada / Susan Ballada
2021 Edition
Prepared by: Mr. Rene Antiporda
---------------

MODULE 3

Lesson Title : Processing and Reporting Accounting information for a Service Entity.
Learning Objective :
1. Describe the complete accounting processing cycle (APC)
2. Enumerate and explain the major steps in the accounting process cycle and their objectives.
3. Apply the accounting processing cycle to a service company in a sole proprietorship setting.
Lectures
Accounting Processing Cycle
Accounting processing cycle is a series of sequential steps during each accounting period to record, store, and
report the accounting information resulting from the business firm’s transactions.

Business engages in economic activities. The role of accounting is to analyse these activities for their impact
on a company’s accounting equation, and then enter the results of that analysis in the company’s accounting
system . When a company’s management team needs financial data for decision-making purposes and for
reports to external parties, the company’s financial statements are prepared and communicated. At the end of
the accounting period, the “books” are closed. A process that prepares the accounting records for the next
accounting period. The accounting activities described constitute major steps in the accounting cycle – a
sequence of activities undertaken by accountants to accumulate and report the financial information of a
business.

Overview of the major steps in the accounting processing cycle and their objectives follow:
Step 1 Identify and analyse transactions or events to be recorded.
Objective: To gather information, generally in the form of source documents, about transactions or
events.
Step 2 Journalize transaction and events.
Objective: To identify, assess, and record the economic impact of transactions on the firm in
chronological record [a.Journal ], in a form that facilitates transfer to the accounts.
Step 3 Posting from Journals to Ledger.
Objective: To transfer the information from the journal to ledger, the device that stores the accounts.
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Step 4 Prepare Unadjusted Trial Balance
 Objective: To provide convenient listing to check for debit-credit equality and to provide a starting
point for adjusting journal entries.
Step 5 Journalize and Post Adjusting Journal Entries
Objective: To record accruals expiration of deferrals, estimations, and other events often not signalled
by a new source document.
Step 6 Prepare adjusted trial balance
Objective: To check for debit-credit equality and to simplify preparation of the financial statement.
Step 7 Prepare Financial Statements
Objective: To provide information useful to external decision-makers.
Step 8 Journalize and Post Closing Journal Entries
Objective: To close temporary accounts and transfer net income amount to retained earnings.
Step 9 Prepare Post-Closing Trial Balance
Objective : To check for debit-credit equality after the closing entries
Step 10 Journalize and Post reversing Journal Entries
Objective: To simplify certain subsequent journal entries and reduce accounting cost [this an optional
step].

Illustrative Case 1: Accounting processing cycle applied to a service company[ Sole Proprietorship]

Joseph Cruz Enterprises was established on December 1, 20X1, as a small business that provides
website services [ creation, servicing, etc. ] to a number of clients.
The chart of accounts of the company follows:
Cash 01 Accounts Payable 11
Accounts Receivable 02 Notes Payable 12
Prepaid Rent 03 Unearned Revenue 13
Office Supplies 04 Wages Payable 14
Accum. Depn. Interest Payable 15
Office Equipment 06
J. Cruz, Capital 21
J. Cruz, Drawing 22
Fee Revenue 31
Wage Expense 41
Supplies Expense 42
Rent Expense 43
Depreciation Expense 44
Interest Expense 45

We now apply the recording process to the transactions of Joseph Cruz Enterprise Enterprises for the
month of December 20X1. Steps 1 to 6
RECORDING PROCESS
Dec. 1 - Joseph Cruz invested P300,000 cash in Joseph Cruz Enterprises.
1 – Joseph Cruz Enterprises prepaid rent for the covering the next six months, December 20X1 through
May 20X2. Monthly rent is P18,000; the total amount prepaid was P108,000. Cash.
1 – Joseph Cruz Enterprises purchased P28,500 of office supplies on account.
1 – Joseph Cruz Obtained two-year bank loan for P360,000, signing a promissory note. Annual interest of
10% is due each November 30.
2 – Joseph Cruz Enterprises used cash to purchase P324,000 of Office Equipment.
5 – Joseph Cruz Enterprises received P30,000 cash for services to be performed in the future.
6 – Joseph Cruz Enterprises performed services for several customers and was paid P135,100 cash.
8 – Joseph Cruz Enterprises performed P47,400 of services for which it received P10,000. Cash with the
remaining P37,400 to be paid in the future.
23 – On December 23, Joseph Cruz Enterprises paid its employees P 16,200 cash upon completion od her
first two weeks on the job.
27 - J. Cruz Enterprises received P24,000 cash from a customer for services previously performed on
account.
30 – Joseph Cruz withdrew P5,000 cash for personal use.
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General Journal

General Journal
Date Account Title and Explanation PR Debit Credit
20X1
Dec. 1 Cash 300,000
J. Cruz, Capital 300,000
To record issuance of ordinary share
Capital for cash.

1 Prepaid Rent 108,000

Cash 108,000
To record advance payment of six
Month’s rent.

1 Office Supplies 28,500

Accounts Payable 28,500
To record purchase of office supplies

2 Cash 360,000
Notes Payable 360,000
To record borrowing of funds.

2 Office Equipment 324,000

Cash 324,000
To record purchase of Office Equipment

5 Cash 30,000
Unearned revenue 30,000
To record advance payment from a
Customer

6 Cash 135,100
Fee revenue 135,100
To record fee revenue earned

8 Cash 10,000
Accounts receivable 37,400
Fee revenue 47,400
To record fee revenue earned

23 Wage Expense 16,200

Cash 16,200
To record payment of employees wages.

27 Cash 24,000
Accounts receivable 24,000
To record receipts of payment on account

30 J. Cruz, Drawings 5,000

Cash 5,000
To record payment of drawings

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General Ledger [T-Account]

Preparing the Trial Balance

Cash Accounts Payable J. Cruz, Capital
[1] 300,000 108,000 [2] _______ 28,500 [3] ________ 300,000 [1]
[4] 360,000 324,000 [5] 28,500 Bal. 300,000 Bal.
[6] 30,000 16,200 [9]
[7] 135,100 5,000 [11] Unearned Revenue J. Cruz, Drawings
[8] 10,000 _______ 30,000 [6] [11] 5,000 _______
[10] 24,000 ._____ 30,000 Bal. Bal. 5,000
Bal. 405,900 Notes Payable
Accounts Receivable _______ 360,000 [4]
[8] 37,400 24,000 [10] 360,000 Bal. Fee Revenue
Bal. 13,400 135,100 [7]
Office Supplies ________ 47,400 [8]
[3] 28,500 .____ 182,500 Bal.
Bal. 28,500

Prepaid Rent Wage Expense

[2] 108,000 ______ [9] 16,200 _______
Bal. 108,000 Bal. 16,200
Office Equipment
[5] 324,000 ______
Bal. 324,000

A Trial Balance is a listing of all accounts from the general ledger with their respective debit or credit balance.
Atrial balance is prepared at the end of an accounting period after all transactions have been recorded.
The two principal reasons for preparing a trial balance are:
1. To serve as check on whether the sum of the debit balances and the sum of credit balances from
general ledger accounts are equal. If the totals are not equal, it would indicate the presence of some
type of recording error.
2. To show all general ledger account balances in one location, which facilitates the preparation of
financial statements. The trial balance however, is not a financial statement.
Potential errors could still exist as a consequence of:
1. Transactions not being journalized,
2. Journal entries not being posted,
3. Journal entries being posted in wrong amount, and
4. Journal entries being posted to the wrong accounts.

JOSEPH ENTERPRISES
UNADJUSTED TRIAL BALANCE
December 31, 20X1
Account Title Debit Credit
Cash P 405,900
Accounts Receivable 13,400
Office Supplies 28,500
Prepaid Rent 108,000
Office Equipment 324,000
Accounts Payable P 28,500
Unearned Income 30,000
Notes Payable 360,000
J. Cruz, Capital 300,000
J. Cruz, Drawings 5,000
Fee revenue 182,500
Wage expense 16,200
Totals P 901,000 P 901,000
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Accounting Adjustments
Accounting adjustments are important to investors and others that rely on financial statements for valuing
company shares.

This section explains and illustrates the importance of those adjustments for financial statements. It also
shows how companies account for for adjustments and how financial statements are prepared from final
adjusted numbers.
Adjusting journal entries are classified into the following categories:
1] Deferrals. Both revenues and expenses may be deferred. Deferred revenues have been collected, but not
yet earned . For example, unearned revenue is a liability until earned, when it is recognized as revenue.

Pro forma adjusting entry to take up unearned revenue

Revenue xxx
Unearned revenue xxx
Deferred expenses have not been incurred, but cash has already been paid. These are assets until they get
used up or expire, at which time they become expenses.

Pro forma adjusting entry to take up prepaid expense

Prepaid expense xxx
Expense xxx

II] Accruals . Both revenues and expenses may also be accrued. Accrued expenses have been incurred, but no
cash has paid . This results in a payable recognized with the expense.

Pro forma adjusting entry to take up accrued expense

Expense xxx
Accrued expense payable xxx

Accrued income is income already earned but not yet collected. This results in a receivable recognized with
income.

Pro forma adjusting entry to take up accrued income

Receivable xxx
Revenue xxx

III] Other adjustments. These are adjustments for estimated item such as
A] Depreciation Expense
Pro forma adjusting entry to take depreciation
Depreciation expense xxx
Allowance for depreciation xxx

B] Bad debts expense

Pro forma adjusting entry to take up bad debts
Bad Debts expense xxx
Allow. For doubtful account xxx

Adjusting journal entries for Joseph Cruz Enterprises.

a. On December 20X 1, J. cruz purchased office supplies on account and the expenditure in an asset
account office supplies. On December 31, a physical count of the office supplies reveals that P15,300
worth of the supplies are available at the end of the month.
b. On December 1, 20X1 J. Cruz paid six months’ rent in advance and debited the P108,000 payment to
Prepaid, an asset account. On December 31, 20X1, one month of the prepaid rent of P 18,000 has
been used up.
c. On Dec. 2, 20X1, the office equipment purchased by J.Cruz for P324,000 is expected to last six years
straight-line depreciation is P54,000 per year [P324,000/6years] or P 4,500 per month [54,000/12
month].
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d. On Dec. 5, 20X1, J. Cruz signed a four-month contract to perform work for P7,500 per month with the
entire contract price of P30,000 received in advance.
e. J. Cruz’ employee is paid every two week at the rate of P8,100 per week. The employee was paid
P16,200 on Friday, Dec. 23,20X1.
f. On Dec. 1, 20X1 J. Cruz obtained a bank loan in the amount of P360,000 and signed a two-year note
payable. An annual interest rate on the rate is 10% with interest payable each November 30.
g. On Dec. 2, 20X1, J. Cruz entered into a one-year contract with a local company. J. Cruz agreed to
maintain the company’s website in exchange for a monthly fee of P1,500. Payable at the end of every
three months.

Using a Worksheet
A worksheet can be used to facilitate the adjusting and closing processes, and ultimately, the preparation
of a company’s financial statements. A worksheet is an informal document that helps accumulate the
accounting information needed to prepare the financial statements. A worksheet is a tool; it is not part of
a company’s formal accounting records. In this section we explain how a worksheet can be used to help
compile information for a set of financial statements.

Preparing a Worksheet
A worksheet is prepared at the stage in the accounting cycle when it is time to adjust the accounts and
prepare financial statements.

Preparing Financial Statements

The adjusted trial balance is used to prepare the income statement, the statement of stockholders’ equity
and the balance sheet.

Income Statement or Statement of Comprehensive Income

The income statement presents a company’s revenues and expenses and shows whether the company
operated at a profit or a loss.

Statement of owner’s Equity

The statement of owner’s equity reports the transactions and events causing company’s owner’s equity to
increase or decrease during an accounting period.

Balance Sheet or Statement of Financial Position

The balance sheet reports a company’s assets, liabilities and owner’s equity.

Statement of Cash Flows

The statement of cash flows reports information regarding a company’s cash inflows and outflows.
Life Activities:
A] Prepare a 10 column worksheet of Joseph Cruz Enterprise with columns for; Unadjusted Trial Balance,
Adjustments, Adjusted Trial Balance, Income Statement and Balance Sheet.
B] Emily Cruz, completed the transactions below for the month of December, 20X1. The company uses the
following chart of accounts.

Cash Emily Cruz, Capital

Accounts Receivable Emily Cruz, withdrawals
Supplies
Equipment Service Revenue
Furniture
Accumulated Depreciation-Equipt. Rent Expense
Accumulated Depreciation-Furn. Utilities Expense
Salary Expense
Accounts Payable Depreciation Expense – Equipment
Salary Payable Supplies Expense

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Dec. 2 Invested P120,000 to start an accounting practice, Emily Cruz, Accountant
2 Paid monthly office rent, P5,000.
 3 Paid in cash for an apple computer, P30,000. The computer is expected to remain in service for
5 years.
4 Purchase office furniture on account. The furniture should last for five years.
5 Purchase supplies on account, P3,000
9 Performed tax service for a client and received cash for the full amount of P 8,000.
12 Paid utility expenses, P2,000.
18 Performed consulting service for a client on account, P17,000
21 Received P9,000 in advance tax work to be performed evenly over the next 30 days.
21 Hired a secretary to be paid P15,000 on the 20th day of each month.
26 Paid for the supplies purchased on Dec. 5
28 Collected P6,000 from the consulting client on Dec. 18
30 Withdrew P16,000 for personal use.
Required: 1] Journalize transactions of Dec. 31 through 30.
2] Post to the T accounts, keying all items by date
3] Prepare trial balance at Dec. 31, Also set up columns for the adjustments for the adjusted
trial balance.
4] Prepare the adjusting entries at Dec. 31 from the following information
a. Accrued service revenue, P4,000
b. Earned a portion of the service revenue collected in advance on Dec. 21.
c. Supplies on hand, P1,000
d. Depreciation expense-equipment, P500; furniture, P600.
e. Accrued expenses for secretary salary.
5] Prepare the adjusted trial balance.

Reference: Cabrera Ma. Elenita B /Cabrera Gilbert B. Financial Accounting and Reporting Fundamentals ,
2019-2020 edition
Prepared by: Mr. Rene Antiporda
---------------------------------------------

MODULE 4

Lesson Title : Merchandising Operations

Learning Objectives :
1. Describe merchandising activities and identify the income components for a merchandising entity.
2. Distinguish between income statements of ervice and merchandising entities
3. Be familiar with the different source documents being used by merchandising entities.
Lectures
Comparison of income statement
Service entities perform services for a fee. In ascertaining profit, a basic income statement is all that is
needed. In figure 7-1, profit is measured as the difference between revenues from services and expenses. In
contrast, merchandising entities earn profit by buying and selling goods. These entities use the same basic
accounting methods as service entities, but the processs of buying and selling merchandise requires some
additional accounts and concept.
Service Merchandising
Income Statement Income Statement
Revenues from Services Net Sales
Minus
Cost of Sales
minus equals
Gross Profit
Expenses add or minus
Income or expenses
Equals equals
Profit Profit
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In merchandising business, net sales arise from the sale of goods while cost of sales or cost of goods sold
represents the cost of inventory the entity has sold to customers. The difference between net sales and
cost of sales is called gross profit. Then, other operating income is added and operating expenses [ like
distribution costs, administrative expenses and other operating expenses] are deducted from gross profit
to arrive at operating profit. Investment revenues, other gains and losses, and finance costs [e.g. interest
expense] are considered to arrive at profit before tax theen income tax expense is deducted to have profit
from continuing operations. Finally, profit from discontinued operations [net of tax] is taken to account to
get profit for the period.

Operating Cycle of a Merchandising Business.

The merchandising entity purchases inventory, sells the inventory and uses the cash to purchase more
inventory – and cycle continues. For cash Sales, the cycle is from cash to inventory and back to cash. For
Sales on account, the cycle is from cash to inventory to accounts receivable and back to cash. In any
industry, the manager strives to shorten the cycle. The faster the sale of inventory and the collection of
cash, the higher thee profits.

Source of Documents
Merchandising businesses use, various business forms and documents to help identify the transactions
that should be recorded in the books. These source documents contain vital information about the nature
and amount of the transactions.
1. Sales invoice. Is prepared by the seller of goods and sent to the buyer.
2. Bill of lading, is a document issued by the carrier – a trucking, shipping or airline – that specifies
contractual conditions and terms of delivery such as freight terms, time, place, and the person named
to receive the goods.
3. Statement of Account – is a formal notice to the debtor detailing the accounts already due.
4. Official receipt – evidences the receipt of cash by the seller or the authorized representative. It notes
the invoices paid and other details of payment.
5. Deposit slip – are printed forms with depositor’s name, account number and space for details of the
deposit. A validated deposit slip indicates that cash and checks with the supplied details were actually
deposited or credited to the account holder.
6. A check – is a written order to a bankby a depositor to pay the amount specified in the check from his
checking account to the person named in the check. The entity issuing the ceck is the payor while the
receiver is the payee.
7. Purchase requisition- is a written request to the purchaser of an entity from an employee or user
department of the same entity that goods be purchased.
8. Purchase order – is an authorization made by the buyer to the seller to deliver the merchandise as
detailed in the form.
9. Receiving report – is a document containing information about goods received from a vendor.
10. Credit memorandum – is a form used by the seller to notify the buyer that his account is being
decreased due to errors or other factors requiring adjustments.

Terms of transactions
Merchandise may be purchased and sold either on credit terms or for cash on delivery. When goods are
sold on account, a period called the credit period is allowed for payment. The length of the credit period
varies across industries and may even vary within an entity, depending on the product.

When goods are sold on credit, both parties should have an understanding as to the amount and time of
payment. These terms are usually on the sale invoice and constitute part of the sale agreement. If the
credit period is 30days , then payment is expected within 30 days from the date of invoice. The credit
period is usually described as net credit period or net terms. The credit period of 30 days is noted as
“n/30”. If the invoice is due ten days after the end of the month, it may be marked “n/10eom.”

Cash Discount
Cash discount are called purchase discounts from the buyer’s viewpoint and sales discount from the
seller’s point of view.

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 It is usually worthwhile for the buyer to take discount if offered although it may be necessary to borrow
the money to make the payment.

Illustration: Assume that an invoice for P150,000 with terms 2/10,n/30, is to be paid within the discount
period with money borrowed for the remaining 20 days of the credit period. If an annual interest rate of
18% is assumed, the net savings to the buyer is P1,530 which is determined as follows:

Cash discount of 2% on P150,000 P 3,000

Interest for 20 days at an annual rate of 18% on the amount
Due within the discount period
P147,000 x 18% x 20/360 1,470
Savings Effected by Borrowing P1,530

Transportation Costs:
FOB shipping point, the buyer shoulders the shipping cost.
FOB Destination – the seller bears the shipping costs.
Freight prepaid - the seller pays the transportation before shipping the goods sold.
Freight collect – the freight company collects from the buyer.

Freight Terms Who shoulders the Who Pays the

Transportation Costs? Shipper?
FOB Destination, Freight Prepaid Seller Seller
FOB Shipping Point, Freight Collect Buyer Buyer
FOB Destination, Freight Collect Seller Buyer
FOB Shipping Point, Freight Prepaid Buyer Seller
Inventory System
Merchandise Inventory is the key factor in determining cost of goods sold. Because merchandise inventory
represents goods available for sale, there must be a method of determining both the quantity and cost of
these goods.

Perpetual inventory system , is an alternative to the periodic inventory system. Under the perpetual inventory
system, the inventory account is continuously updated.

Periodic inventory system , is primarily used by businesses that sell relatively inexpensive goods and that are
not yet using computerized scanning systems to analyze goods sold. A characteristic of the periodic method
system is that no entries are made to the inventory account as the merchandise is bought and sold.

Net Sales
Net sales is the first part of the merchandising income statement .
Gross Sales
Gross sales consist of total sales for cash and on credit during an accounting period.
Journal entry to record the sale of merchandise for cash

Sept. 16 Cash 25,000

Sales 25,000
To record sale of mdse. For cash
If the sale of merchandise is made on credit
Sept. 16 Accounts Receivable 25,000
Sales 25,000
To record sale of mdse. For cash
Sales Discount
Assume that Christopher Biore Traders sold merchandise on Sept. 20 for P3,000; terms 2/10,n/30. At the
time of sale the entry is:
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Sept. 20 Accounts Receivable 3,000
 Sales 3,000
To record sales on credit;term 2/10,
n/60

The customer may take advantage of the sales discount any time on or before Sept.30, which is 10 days
after the date of the invoice. If the client paid on Sept. 30, the entry is

Sept. 30 Cash 2,940

Sales Discounts 60
Accounts Receivable 3,000
To record collection on the Sept. 20
sale, discounts taken

Sales Returns and Allowances

Buyers may be dissatisfied with the merchandise received either because the goods are damaged or
defective, of inferior quality or not in accordance with their specification.
Each return or allowance is recorded as debit to an account called sales returns and allowances. An
example of such transaction follows:

Sept. 17 Sales Return 760

Accounts Receivable [ or cash ] 760
To record return or allowance on
unsatisfactory merchandise.

Transportation Out
When the freight term is FOB destination, the seller shoulders the transportation costs; when the term
FOB shipping point, the buyer bears the shipping cost.

Case 1. Assume that Christopher Biore Traders sold merchandise totalling P 17,000 FOB destination,
freight prepaid; terms 2/10, n/30. The transportation costs amounted to P 1,900. The entry to record this
transaction would be.

Nov. 25 Accounts Receivable 17,000

Transportation Out 1,900
Sales 17,000
Cash 1,900
Sales on account, Terms 2/10, n/30;
FOB destination, freight prepaid, P1,900

If the invoice is collected on Dec. 5, the sales discount will be P340 [17,000 x 2%] Transportation out is an
operating expense.

Dec. 5 Cash 16,660

Sales discount 340
Accounts Receivable 17,000

Case 2. Assume that Christopher Biore Traders sold merchandise totaling P17,000 FOB shipping point,
freight collect; terms 2/10, n/30. The transportation costs amounted to P1,900. The entry to record
transaction would be:

Nov. 25 Accounts Receivable 17,000

Sales 17,000
Sold merchandise on account; terms 2/10, n/30;
FOB shipping point, freight collect

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 There is no debit to transportation out account since the shipping term provided that the buyer should
shoulder the transportation costs. If this invoice is collected on Dec. 5, the sales discount will be P340
[17,000 x 2%] The entry would be

Dec. 5 Cash 16,660

Sales Discount 340
Accounts Receivable 17,000

Case 3 Now, assume that Christopher Biore Traders sold merchandise totalling P 17,000 FOB destination,
freight collect; terms 2/10, n/30. The transportation costs amounted to P1,900. The entry to record this
transaction would be:

Nov. 25 Accounts Receivable 15,100

Transportation Out 1,900
Sales 17,000
Sales on account; terms 2/10, n/30; FOB
destination, freight collect, P1,900

Cost of Sales
Cost of sales or cost of goods sold is the largest single expense of the merchandising business. It is the cost of
inventory that the entity has sold to customers. Every merchandising business has goods availalble for sale to
customers. The goods available for sale druing the year is the sum of two-factors merchandise inventory at
the beginning of the year and the net cost of purchases during the period.

Christopher Biore Traders

Partial Income Statement
For the Year Ended Dec. 31, 2020

Cost of Sales
Merchandise Inventory, 1/1/20 P 528,000
Purchases P 1,264,000
Less: Purchase Ret. And Allow. P56,400
Purchase Discounts 21,360 77,760
Net Purchases P 1,186,240
Transportation In 82,360
Net Cost of Purchases 1,268,600
Goods Available for sale P 1,796,600
Less; Merchandise Inventory, 12/31/2020 483,000
Cost of Sales P 1,313,600

Merchandise Inventory
The inventory of a merchandising entity consists of goods purchased for resale. For a grocery store, inventory
would be made up of meals, vegetable, canned goods, and other items. For lumber and hardware, it would be
plywood, nails, paints, iron sheets, cement, tools, and other items. Merchandising entities purchase their
inventories from manufacturers, wholesalers and other suppliers.

The merchandise inventory at the beginning of the accounting period is called the beginning inventory.
Conversely, the merchandise inventory at the end of the year is called ending inventory.

Net cost of Purchases

Under the periodic inventory method, net cost of purchases consist of goods purchases minus purchases
discounts and purchases returns and allowances equals net purchases plus transportation cost.

Purchases
When the periodic inventory method is used, all purchases of merchandise are debited to the purchases
account as shown below:

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 Nov. 12 Purchases 15,000
Accounts Payable 15,000
To record purchases of merchandise; terms
2/10, n/30.

Purchases Returns and Allowances

Sales return and allowances in the seller’s book are recorded as purchases returns and allowances in the
books of the buyer. This should be recorded as follows:

Nov. 14 Accounts Payable 2,000

Purchases Returns and Allowances 2,000
Return of damaged merchandise purchased on
Nov. 12.

Purchases Discounts
Merchandise purchases are usually made on credit and commonly involve purchases discounts for early
payment, In relation to the Nov. 12 and 14 transactions, the payment is recorded as follows;

Nov. 22 Accounts Payable 13,000

Purchases Discounts[P13,000 x 2%] 260
Cash 12,740.

Transportation In
Case No 1 Assume that Christopher Biore Traders made purchases totalling P 17,000 FOB destination
freight prepaid; terms 2/10, n/30. Transportation costs amounted to P 1,900. The entry would be:

Nov. 25 Purchases 17,000

Accounts Payable 17,000
Purchased merchandise on account;
terms 2/10,n/30; FOB destination, freight
prepaid.

There is no debit to transportation in account since the shipping term provided that the seller should
shoulder the transportation costs. In addition the seller prepaid the freight. If this invoice is paid on Dec.
5, the purchases discount will be P340 [P17,000 x 2%]. The entry would be:

Dec. 5 Accounts Payable 17,000

Purchases Discounts 340
Cash 16,660

Case 2 Assume that Christopher Biore made purchases totalling P17,000 FOB shipping point, freight
collect; terms 2/10, n/30. The transportation costs amounted to P 1,900. The entry to record this
transaction would be:

Dec. 5 Purchases 17,000

Transportation 1,900
Accounts Payable 17,000
Cash 1,900
Purchases on account; terms 2/10, n/30; FOB
shipping point, freight collect, P 1,900.

If this invoice is paid on December 5, the purchases discount will be P340 [P17,000 x 2%] Transportation in
will form part of the net cost of purchase.

Dec. 5 Purchases 17,000

Purchases Discount 340
Cash 16,660

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 Life Activities:
A. Answer the following questions.
1. Describe the nature of merchandising business
2. Distinguish the income statement of a service entity from that of a merchandising entity.
3. What is the operating cycle of a merchandising business?
4. Name and describe at least eight of the more common source documents used by a merchandising
business.

B. Lenore Loqueque Homewares engaged in the following transactions in October:

Oct. 7 - Sold merchandise on credit to Lacson Co. terms n/30. FOB shipping point, P30,000
8 - Purchases merchandise on credit from Orcajada Co. terms n/30, FOB shipping point, P60,000
9 - Paid Mendoza Co. for shipping charges on merchandise purchased on Oct. 8, P2,540.
10 - Purchased merchandise on credit from Ortiz Co., terms n/30 FOB shipping, P90,000. Freight
prepaid by Ortiz, P6,000.
13 - Purchased office supplies on credit from Isagan Co., terms n/10, P24,000.
14 - Sold merchandise on credit to Pabelico Co., terms n/30, FOB shipping, P 24,000
14 - Returned damaged merchandise received from Orcajada Co. on Oct. 8 for credit, P6,000
17 - Received check payment from Lacson Co. for his purchase on Oct 7.
18 - Returned a portion of the office supplies received on Oct. 13 for credit, P4,000.
19 - Sold merchandise for cash, P18,000.
20 - Paid Ortiz Co. for purchase on Oct. 10.
21 - Paid Orcajada Co. the balance from the transaction on Oct. 8 and 14.
24 - Accepted from Pabelico Co. a return of merchandise, P2,000.

Required: Prepare the journal entries.

Reference: Basic Financial Accounting and Reporting

Win Ballada / Susan Ballada
2021 Edition
Prepared by: Mr. Rene A. Antiporda

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