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Basic Financial Accounting and Reporting (Bfar) : Philippine Based (Summary and Class Notes)
Basic Financial Accounting and Reporting (Bfar) : Philippine Based (Summary and Class Notes)
I. Introduction to Accounting
II. The Accounting Equation and the Double- Entry System
F. Preparation of Worksheet
G. Preparation of Financial Statements
H. Closing Journal entries
A. Service Business
B. Merchandising Business
1. Perpetual Inventory System
2. Periodic Inventory System
i. Special Journal
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Chapter III
BFAR: THE ACCOUNTING CYCLE
Legend:
Step 1 -- step 3 --- During the period
Step 4 – step 9 --- End of the period
Step 10 --- An optional process for the next period.
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Step 2. Transactions are journalized (Journal Entry)
Journalizing
The process of recording the transactions.
Journal
It is a chronological record of the entity’s transactions.
A book of original entry.
Journal Entry
It shows all the effects of a business transaction in terms of debits and credits.
Two kinds of entry: Simple entry and Compound entry.
Simple entry – only two accounts are affected (one account for debit and so for
credit).
Compound entry – there are three or more accounts are affected or journalized.
General Journal
The simplest journal in accounting.
Format are the following:
A. Date (Note: Year and Months are not written for every entry unless it changes).
B. Account Title & Explanation (Note: Account debited entered extreme left side
and account credited entered from next line then,
brief description and skip line after each entry.
C. P.R. (Posting Reference) – used when entries are posted.
D. Debit – entered on left side
e. Credit – entered on right side
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Step 3. Posting in the ledger
Ledger
Grouping of the entity’s accounts.
Used to classify and summarize transactions and to prepare data for basic financial
statements.
Posting
Transferring amounts from general journal to appropriate accounts in the ledger.
Steps in Posting
1. Transfer date of transaction from journal to ledger.
2. Transfer the page number from journal to Journal Reference (J.R.)
3. Post the debit and credit figure in the ledger.
4. Enter account number in the Posting Reference (P.R.) of the journal once posted.
Note: Each balance is determinant by footing (adding) all the debit and credit.
General ledger
The “reference book” of the accounting system.
It is used to classify and summarize transactions and prepare data for basic
financial statements.
Classified into two general groups:
Balance sheet or Permanent accounts (real accounts)
These are Assets, Liabilities and Equity accounts.
Income Statement or Temporary accounts (nominal accounts)
These are Income and Expenses.
Their balances is transferred in permanent’s owner’s equity.
Chart of Accounts
Listing of all accounts and their account numbers or codes in the ledger.
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Step 4. Trial Balance
Trial Balance
Listing of all ledger accounts, in order, with their respective debit or credit balances.
It is prepared to verify the equality of debits and credits in ledger.
A control device that helps minimizing accounting errors.
Slide
Moving of the decimal point.
Adjustment
Its purpose not to remain the accounts at is.
Affect nominal and permanent accounts.
Two kinds of adjusting: Accrual and Deferral
Recognition
The process of capturing for inclusion in the Statement of Financial Position (SFP)
that meets the definition of assets, liabilities and equity.
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Carrying amount
The amount which assets, liabilities and equity is recognized in the statement of
financial position.
Matching cost
Simultaneous recognition of income and expenses.
Derecognition
The removal of all or part of a recognized assets or liabilities from entity’s SFP.
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Suppose on January 10, 2019, ABC Company made 30 000 advanced collections
from its customers.
Liability Method
Journal entry:
Jan. 10 Cash 30 000.00
Unearned Revenue 30 000.00
Adjusting entry:
Jan. 31 Unearned Revenue 6 000.00
Service Income 6 000.00
Income Method
Journal entry:
Jan. 31 Cash 30 000.00
Service Income 30 000.00
Adjusting entry:
Jan. 31 Service Income 24 000.00
Unearned Income 24 000.00
2. Accrued Interest
Interest Expense xx
Interest Payable xx
To get interest:
Interest= (Principal) (rate) (time) or I= Prt
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3. Accrued Revenue
Accounts Revenue xx
Service Revenue xx
If:
Required Allowance (RA) > ADA
Doubtful Account Expense (DAE) xx
Allowance for Doubtful Accounts xx
Asset method – a prepaid expense account (an asset) is recorded when the
amount is paid.
Asset Method
Journal entry:
Jan. 1 Service Supplies 1 500.00
Cash 1 500.00
At the end of the amount, 60% of the supplies have been used. Thus, out of the 1
500 pesos, 900 pesos worth of supplies have been used and 600 pesos remain unused.
Adjusting entry:
Jan. 31 Service Supplies expense 900.00
Service Supplies 900.00
Expense Method
Journal entry:
Jan. 1 Service Supplies Expense 1 500.00
Cash 1 500.00
Adjusting entry:
Jan. 31 Service Supplies 600.00
Service Supplies Expense 600.00
AJE:
Rent Expense xx
Prepaid Rent xx
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2. Supplies
Journal Entry:
Supplies xx
Cash xx
AJE:
Supplies Expense xx
Supplies xx
Depreciation
Requires the allocation of the cost of asset over its estimated useful life.
Include three factors:
Straight-line method
The simplest procedure in estimating depreciation.
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Accumulated Depreciation
The reduction is recorded in a contra-account. In other words, the contra-account
of property and equipment accounts.
4. Unearned Revenue
Journal Entry:
Unearned Revenue xx
Revenue xx
AJE:
Cash xx
Unearned Revenue xx
1. Cash basis – does not record transaction until it was received or paid.
2. Cash receipts – treated as revenue
3. Cash payments – treated as expense
4. Periodicity concept – divide the economic life of a business into artificial time periods
and the only way to know how successfully a business has
operated to close its doors.
5. Liquidation – going out of the business.
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Steps in preparing the worksheet
Financial Flexibility
The ability to take efficient actions to alter amounts and timings of cash flows so
that it can respond to unexpected needs and opportunities.
Solvency
It refers to availability of cash over the longer term to meet financial statements as
they fall due.
Financial Statements
Means by which the information accumulated and processed in financial
accounting is periodically communicated to the users.
Balance sheet
Lists of all assets, liabilities and equity at a specific date.
Format:
Report form – list of Assets, Liabilities and Equity in a vertical sequence.
Account form – list of Assets on left side and Liabilities and Equity on right
side.
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Income statement
Presents summary of the revenues and expenses of an entity for a specific period.
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Trading securities
PAS 7, paragraph 15, provides that cash flows arising from the
purchase and sale of dealing or trading securities are classified
as operating activities.
Direct method – the entity’s net cash provided by (used in) operating
activities is obtained by adding the individual
operating cash inflows then subtracting the
individual operating cash outflows; CI- CO.
Indirect method – adjusting profit for income and expense items not
resulting from cash transactions.
Examples:
A. Cash payments to acquire property, plant and equipment, intangibles and
other long- term assets.
B. Cash receipts from sales of property, plant and equipment, intangibles
and other long-term assets.
C. Cash payments to acquire equity or debt instruments of other entities
(current and long-term investments).
D. Cash receipts from sales of equity or debt instruments of other entities.
E. Cash advances and loans to other parties than advances and loans
made by financial institution.
F. Cash receipts from repayment of advances and loans made to other
parties.
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G. Cash payments for future contract, forward contract, option contract and
swap contract.
H. Cash receipts from future contract, forward contract, option contract and
swap contract.
Examples:
A. Cash receipts from issuance of ordinary and preference shares.
B. Cash payments to acquire treasury shares
C. Cash receipts from issuing debentures, loans, notes, bonds, mortgages,
and other short or long term borrowings.
D. Cash payments for amounts borrowed
E. Cash payments by a lessee for the reduction of the outstanding principal
lease liability.
Accounting Policies
Specific principles, bases, conventions, rules and practices adopted by an
enterprise in preparing and presenting financial statements.
Closing procedure
Phase of cycle
Balance of the owner’s capital account represents the cumulative net result of
income, expenses and withdrawal transactions.
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Income summary
Used to clue close expense and income accounts.
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REFERENCES
Ballada, Win. (2018). Basic Financial Accounting and Reporting Made Easy 21st
Edition. Sampaloc Manila Philippines: DomDane Publishers.
Valix, C.T., Peralta, J.F., & Valix, C. M. (2020). Conceptual Framework and Accounting
Standards. Recto Avenue, Sampaloc Mnaila, Philippines: GIC Enterprises &
CO., Inc.
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