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

III. BFAR: The Accounting Cycle

A. Identification of events to be recorded.
B. Journal Entry

C. Posting in the ledger

D. Preparation of Trial Balance
E. Adjusting Journal Entries

F. Preparation of Worksheet
G. Preparation of Financial Statements
H. Closing Journal entries

J. Preparation of Post-Closing Trial Balance

K. Reversing Journal Entries
IV. Types of Business Organization: Application of Accounting

A. Service Business
B. Merchandising Business
1. Perpetual Inventory System
2. Periodic Inventory System
i. Special Journal

ii. Combination Journal

iii. Voucher System
C. Manufacturing Business

D. Comparisons between the three types of business organization

V. Special Topic: Payroll

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 Chapter III
BFAR: THE ACCOUNTING CYCLE

Accounting Cycle (by steps)

1. Identification of events to be recorded.

During the 2. Transactions are recorded in the journal.
accounting period
3. Journal entries are posted to the ledger.
4. Preparation of Trial Balance.
5. Preparation of the worksheet including adjusting entries.
6. Preparation of the Financial Statements.
At the end of 7. Adjusting journal entries are journalized and posted.
accounting period
8. Closing journal entries are journalized and posted.
9. Preparation of a post-closing trial balance.
10. Reversing journal entries are journalized and posted.

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.

Step 1. Transaction Analysis (or identification of events to be recorded)

1. Identify the transaction from source documents.

2. Indicate the accounts affected by transaction whether it affect on entity’s Asset,
Liabilities and Equity.
3. Ascertain whether accounts increases or decreases.
4. Determine whether debit or credit the account.

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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.

Procedures in Trial Balance

1. List the account titles in numerical order.
2. Obtain the account balance of each account to debit and credit.
3. Add the debit and credit columns.
4. Compare the totals.

Amount of discrepancy – is often a clue to the source of error.

Transposition error
 Discrepancy is divisible by 9 and reversing the order of numbers.
 Example: 21 750 – 21, 570

Slide
 Moving of the decimal point.

Step 5. Adjusting the accounts (adjusting entry)

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.

Accrual ( SFP and IS)

 No involvement of cash
 Record revenues as they are rendered regardless when cash is received.
 Record expense when incurred regardless when cash is paid.
 Can used either liability method or revenue method.
 Example: Unearned revenue also known as unearned income / deferred revenue/
deferred income, represents revenue already collected but not yet
earned. Hence, they are also called “advances from customers”. In
accrual concept of accounting, unearned revenue are considered as
liability. There are two ways in recording unearned revenue:

Liability method – liability account is recorded when the amount is collected.

Income method – the accountant records the entire collection under an income
account.

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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

In January 31, 20% of unearned revenue was now rendered.

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

Adjustments for Accruals

1. Accrued Expense
Expense xx
Liability xx

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

4. Allowance for Doubtful Accounts (ADA)

Doubtful Accounts Expense xx
Allowance for Doubtful Accounts xx

If:
Required Allowance (RA) > ADA
Doubtful Account Expense (DAE) xx
Allowance for Doubtful Accounts xx

Required Allowance (RA) < ADA

Allowance for Doubtful Accounts xx
Doubtful Account Expense xx

Deferral ( SFP and IS)

 Postponement of the recognition
 There is involvement of cash.
 Adjust expense that is already paid but not yet incurred.
 Adjust revenue that is already collected but not yet earned.
 Can used either asset method or expense method.
 Example: Prepaid expenses or prepayments represent payments made for
expenses which have not yet been rendered. In other words, these are
“advanced payments” by a company for supplies, rent, utilities and
others that are still to be consumed. Hence, they are included in the
company’s assets. There are two ways in recording prepayments:

Asset method – a prepaid expense account (an asset) is recorded when the
amount is paid.

Expense method – the accountant initially records the entire payment as

expense.
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 Suppose that ABC Company purchase supplies worth of 1 500 pesos on cash.

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

Adjustments for Deferral

1. Prepaid Expenses
Journal Entry:
Prepaid Expense xx
Cash xx

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

3. Depreciation of Property and Equipment

AJE:
Depreciation Expense xx
Accumulated Depreciation xx

Depreciation
 Requires the allocation of the cost of asset over its estimated useful life.
 Include three factors:

(𝐴𝑠𝑠𝑒𝑡 𝐶𝑜𝑠𝑡−𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒)

Depreciation = 𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒

Asset Cost (AC)

 Amount of an entity paid to acquire the depreciable asset.

Salvage Value (SV)

 An amount that asset can probably be sold for at the end of its estimated useful life.

Useful Life (UL)

 Estimated number of periods that an entity can make use of the asset.

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

Related terms and definition

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.

Step 6. Preparation of Worksheet

Worksheet
 Accountants used to help transfer data from unadjusted trial balance to the
financial statements.
 Multi-column document that provides an efficient way to summarize the data for
financial statements.
 A summary device used by an accountant for his convenience.

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Steps in preparing the worksheet

1. Enter balances in the unadjusted trial balance.

2. Adjusting entries
3. Enter adjusted amount in the adjusted trial balance.
4. Balance sheet and Income statement.
5. Compute profit or loss.

Step 7. Preparing the Financial Statements

Financial statements analyse the balance sheet.
Liquidity
 It is refers to the availability of cash in the near future.

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.

Statement of Changes in Equity

 Present a summary of changes in capital such as investment, profit/ loss and
withdrawals during a specific period.

Statement of Cash flows

 Reports the amount of cash received and disbursed during the period including
cash equivalents.
 Provides cash receipts and payments.
 Included three activities:
Cash flows from Operating activities
 The cash flows derived primarily from the principal revenue producing
activities of the entity. In other words, a result from transactions and other
events that enter into the determination of net income or loss.
 Inflows: receipts of sales or revenues.
 Outflows: payments or expenses
 Examples:
A. Cash receipts from sale of goods and rendering of services.
B. Cash receipts from royalties, rental, fees, commissions and other
revenue.
C. Cash payments to suppliers for goods and services.
D. Cash payments for selling, administrative and other expenses.
E. Cash receipts and cash payments of an insurance entity for premiums
and claims, annuities and other policy benefits.
F. Cash payments or refunds of income taxes unless specifically identified
with financing and investing activities.
G. Cash receipts and payments for securities held for trading.

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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.

 Cash flows from operating activities can be presented in:

 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.

Cash flows from Investing activities

 The cash flows derived from the acquisition and disposal of long-term
assets and other investments not included in cash equivalents.

 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.

Cash flows from Financing activities

 The cash flows derived from the equity capital and borrowings of the entity.
 Resulted from transactions:
 Between the entity and the owners – equity financing
 Between the entity and the creditors – debt financing

 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.

Step 8. Closing journal entries.

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.

Step 9. Post- closing Trial Balance

 Final trial balance
 Containing only balance sheets (Assets, Liabilities and Ending Capital)

Step 10. Reversing

 A journal entry which is the exact opposite of adjusting journal entries.
 Basically a bookkeeping technique made to simplify the recording of regular
transactions in the next accounting period.
 Increases in assets and increases in liabilities are reversed.
 All accruals are reversed

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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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