Financial Accounting

Accounting – process of identifying, measuring, and communicating economic

information to permit judgements and decisions by users of such information.

- The end product of the financial accounting process is a set of reports that are called
financial statements and these are:
1. Balance Sheet 2. Income Statement 3. Cash Flow Statement
( Stock Report ) ( Flow Report ) ( Flow Report )

BASIC ACCOUNTING CONCEPTS:

1. Entity Concept
“the entity is a specific business enterprise, separate and distinct from the
owners”
2. Monetary Concept
“information presented in financial statements should be expressed in terms of
monetary units “
3. Historical Cost Concept
“the acquisition of goods and services is entered in the entity’s financial records at
their original or acquisition costs”
4. Dual Aspect Concept
“every economic event affects at least two balance sheet accounts”
5. Going-Concern Concept
“unless there is evidence to the contrary, it is always assumed that an entity will
continue to operate indefinitely”
6. Accounting - Time Period Concept
“income is measured between revenues and expenses generated within a specified
period of time, usually 1 year. The accounting period ( accounting year or fiscal year )
may correspond to the calendar year or the entity’s natural business cycle”
7. Conservatism Concept
“recognition of increases in an entity’s retained earnings ( revenues ) requires
better evidence than does recognition of decreases ( expenses ). Recognize revenues only
when they are reasonably certain and recognize expenses as soon as they are reasonably
possible”
8. Realization Concept
“the amount recognized as revenue is the amount that is reasonably certain to be
realized”
9. Matching Concept
“when a given event affects both revenues and expenses, the effect on each should
be recognized in the same accounting period”
10. Consistency Concept
“whatever method of treatment of specific transactions experienced by the
company must be the same method utilized whenever similar transactions are
encountered”
11. Materiality Concept
“only significant transactions are recorded or recognized “

__________________________________________________________________________________ 1
ENGECON : Financial Accounting
Balance Sheet - is a document that reports the financial position of a company as of a
specific point in time.
- it represents a listing of the resources available for use by the business
and the claims of various interested parties against these resources.
3 Major Sections:
1. Assets 2. Liabilities 3. Owner’s Equity

Income Statement - a summary of the revenues and expenses of the firm for an
accounting period. It reports the results of operations of an entity and indicates the
business’ profitability ( loss ) performance.

Basic Accounting (B. S.) Equation: ASSETS=LIABILITIES+OWNER’S EQUITY

Basic Income Statement Equation: REVENUES-EXPENSES=NET INCOME (LOSS)

Format of a Balance Sheet:

<Name of Company>
Balance Sheet
As of <Date>
Assets Liabilities
Current Assets: Current Liabilities:
Cash xxx Accounts Payable xxx
Accounts Receivable xxx Notes Payable xxx
Inventory xxx Accrued Expenses xxx
Prepaid Expense xxx Deferred Income xxx
Fixed Assets: Long Term Debt xxx
Land xxx
Building xxx Owners' Equities
Less: Acc'd (xxx) Capital Stock xxx
Depreciation
Equipment xxx Other Paid-in-Capital xxx
Less: Acc'd (xxx) Retained Earnings xxx
Depreciation

Total Assets xxx Total L. and O. E. xxx

---- ----

3. Assets---resources which possesses the following characteristics:

(a) it must have future value
(b) it must have peso value
(c) it must be under control of the business organization

4. Liabilities---represents the claims of the creditors on the assets.

Characteristics:
(a) there is a legal obligation to satisfy these claims
(b) the amount of satisfaction is certain
(c) the time when the claim is to be satisfied is certain

__________________________________________________________________________________ 2
ENGECON : Financial Accounting
5. Owners' Equities---represents the claims of the owners on the assets.
Characteristics:
(a) the satisfaction of the claims is "residual"
(b) the amount of satisfaction is not certain
(c) the time when the claim is to be satisfied is open-ended
- Composed of two items: direct investment of owners and earnings of the business that
have been retained for reinvestment purposes

6. Liquidity---refers to how fast the assets can be turned into cash.

7. Current Assets---assets that can be turned into cash within one year.
8. Fixed Assets---assets that can be turned into cash after one year.
9. Cash---consists of petty cash, cash in bank and current accounts.
10. Marketable securities---are short term investments that can easily be turned into cash.
11. Accounts Receivables---amounts owed by customers for goods delivered or services
rendered.
12. Inventory---consists of merchandise intended for sale, raw materials, partially
processed goods and supplies.
13. Prepaid expense---expenses paid in advance that has future benefit (e.g. prepaid
insurance).
14. Depreciation---loss in value of the asset per specified period.
15. Accumulated Depreciation---total loss in value of the asset from the time it was
acquired to the specified time.
16. Accounts Payable---amount due the suppliers for goods bought.
17. Notes Payable---loans evidenced by a note made by the business entity.
18, Accrued Expenses---expenses due by the business entity but have not yet been paid
for services that have rendered (e.g. wages).
19. Deferred Income---amount paid in advance by customers for goods that have not yet
been delivered or services that have not yet been rendered.
20. Long-term Debt---loans payable in more than one year.
21. Capital Stock---equals to the number of stocks issued times its par value.
22. Other Paid-in-Capital---total amount paid by the stockholders in excess of the capital
stock.
23. Retained Earnings---portion of the entity's profit flowed back in the business
operations.
24. Dividends---portion of the entity's profit given to the owners.
25. Income Statement---is a financial statement which reports and summarizes the
revenues and expenses of an accounting period.

__________________________________________________________________________________ 3
ENGECON : Financial Accounting
Format of an Income Statement:
<Name of the Company>
Income Statement
For the period ended <Date>
Sales xxx
Cost of Goods Sold (xxx)
Gross Margin xxx
Operating Expenses
Advertising Expenses xxx
Commission Expenses xxx
Travelling Expenses xxx
Representation Expenses xxx
Depreciation xxx
Utilities xxx
Taxes xxx (xxx)
Operating Income xxx
Income Taxes (xxx)
Net Profit After Taxes xxx
Add: Retained Earnings, Beg xxx
Optional Less: Dividend Payments xxx
Retained Earnings xxx

26. Revenues---inflow of assets that increase owners' equities.

27. Expenditures---occurs when an asset or services is acquired. It can be made by cash,
by the exchange of another asset, or by increasing by liability.
28. Expenses---are expenditures that decrease owners' equities.
29. Income---measures the difference between revenues and expenses.
30. Sales---total amount charged to customers of products sold during the accounting
period.
31. Cost of Goods Sold---cost to the business of the merchandise sold to customers
during the period.
32. Gross Margin---the excess of sales over cost of goods sold.
33. Operating Expenses---those costs incurred in normal profit-directed operations.
34. Operating Income---difference between gross margin and operating expenses.
35. Income Taxes---amount due the government based on the net income before taxes.
36. Net Income After Taxes---difference between net income before taxes and income
taxes.

Sample Problem 1 : The Case of May Corp.

Following are the accounts of May Corp. as of May 31, 1995:

Amount in (‘000)
Accounts Payable P 2,839
Accounts Receivable P 7,266
Accrued Wages Payable P 658
Accumulated Depreciation on Bldg. P 52,000
Accumulated Depreciation on Eqpt. P 1,768

__________________________________________________________________________________ 4
ENGECON : Financial Accounting
 Bank Notes Payable P 2,795
Building P 195,000
Capital Stock P 130,000
Cash P 11,661
Equipment (at cost) P 4,420
Land P 29,900
Merchandise Inventory P 9,945
Note Receivable P 3,900
Other Assets P 1,619
Other Liabilities P 817
Prepaid Insurance P 1,033
Retained Earnings P 73,822
Supplies on Hand P 1,853
Taxes Payable P 1,898

Req’d:
1. Prepare the balance sheet of May Corp. as of May 31, 1995. Use proper format.
2. If you are going to buy May Corp., how much is the fair price?

Sample Problem 2: The Case of Makapal Merchandising

Mr. Kapal started a business called Makapal Merchandising, he is hoping and praying
for the business to be successful. During the month of September he wanted to see all the
transactions that has transpired. The following are the transactions that have occurred
during September. Prepare a balance sheet for the as of the end of September.

a. He opened a bank account in the name of the entity amounting to P15,000.

b. Makapal Merchandising was granted a bank loan worth P10,000.
c. The business purchases merchandise inventory for P5,500. The P5,500 was paid in
cash.
d. The entity sold merchandise costing P600 for P1,000. The P1,000 was paid in cash.
e. The entity purchased more merchandise for P3,000, agreeing to pay the amount
within 60 days.
f. Merchandise costing P1,200 was sold for P1,850 which was all received in cash.
g. Merchandise costing P500 was sold for P800 with the customer agreeing to pay
within 90 days.
h. The store acquired a five-year fire insurance policy for P500 paid in cash.
i. Mr. Kapal received an offer to sell his business for a total of P40,000.
j. Mr. Kapal withdrew P1,500 for his personal expense.
k. The entity bought a tract of land which will serve as a parking lot for customers. The
land costs P10,000, to be paid in cash.
l. Mr. Kapal took merchandise costing P100 which could have been sold for P160 to
customers.
m. The business paid P1,000 of its Loans Payable.
n. Merchandise costing P400 was sold for P600 received in cash.

__________________________________________________________________________________ 5
ENGECON : Financial Accounting
Sample Problem 3: The Case of Sari-Sari Store
The account balances in the ledger of Sari-Sari Store Inc. on December 31, 1996
were as follows:

Entry Debit Credit

Cash Php 3,600
Accounts Receivable 30,000
Mdse. Inventory 156,300
Land 200,000
Building 500,000
Accumulated Depreciation 100,000
Accounts Payable 48,600
Notes Payable 350,000
Capital Stock 300,000
Retained Earnings 91,300
Total Php 889,900 Php 889,900

The following transactions occurred during the year 1997:

1. Sales totaled Php 815,000, 40% of which was received in cash. The cost of
merchandise sold amounted to 50% of sales. However, sales returns amounted to
Php 5,000. This was to be deducted from the customer’s account.
2. Fire insurance for 1998 amounting to Php 10,000 was paid.
3. Inventory amounting to Php 500,000 was purchased on credit.
4. Sari-Sari Store Inc. secured a bank loan amounting to Php 100,000 at an interest of
12% per year. Interest is to be paid every three months. The loan was signed on
September 1, 1997.
5. The following expenses were paid for in cash:
Sales Salaries Php 100,000
Supplies 50,000
Utilities 70,000
Miscellaneous 15,000
Total Php 235,000
6. Wages representing salary of casual employees for the last two weeks of December
1997 amounted to Php 25,000. This is to be paid only on January 15, 1998. The company
was forced to hire additional workers during the peak season.
7. The company declared on November 10, 1997 a cash dividend of Php 100,000 to its
stockholders which is to be paid on February 1, 1998.
8. Depreciation for the year was estimated at Php 10,000.
9. The company issued additional stocks amounting to Php 30,000 at par value but which
were bought for Php 50,000.
10. The company belongs to the 35% government tax bracket. Taxes on a firm’s earnings
for the accounting period are paid during April of the following year.

Requirements:
a. Journalize all transactions using the debit / credit entry method.
b. Prepare the Balance Sheet and Income Statement for Sari-Sari Store Inc., as of the end
of the year 1997.
__________________________________________________________________________________ 6
ENGECON : Financial Accounting
__________________________________________________________________________________ 7
ENGECON : Financial Accounting