bsa qualifying exam reviewer

8/11/2019 BSA Qualifying Exam Reviewer

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QUALIFYING EXAM REVIEWER

THEORIES FROM

FINANCIAL ACCOUNTING

BY WEYGANDT ET AL

Prepared by:

Laron Yvette Vicente de Ocampo

ACTBAS1

I.

Introduction to Accounting

1.1

Financial Statements

Financial Statementsprovide management, owners and other interested parties with

relevant financial data. These are:

Statement of Comprehensive Incomepresents income and expenses and

resulting profit or loss for a specific period of time. As permitted by the

International Accounting Standards, an entity may present all items of income

and expense recognized in a period in either a single statement of

comprehensive income or in two statements:

a.

a separate Income Statement/Profit of Loss Statementdisplaysincome and expenses resulting in a profit or loss

-

revenue is listed first followed by expenses before determining

profit (or loss) for the period

-

expenses are listed in order or magnitude

b.

a Statement of Comprehensive Incomedisplays components of

other comprehensive income which comprises other income and

expenses that are not recognized in profit or loss

Statement of Changes in Equitysummarizes the changes in owners equity for

a specific period of time

-

time period is the same as that covered by the income statement-

information in this statement indicated the reasons why owners equity has

increased or decreased

a. owners additional investmentsassets that the owner

puts into the business

b.

profits (or loss)gross increase (decrease) in owners

equity which is equal to the difference of revenue arises


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in the course of the ordinary activities of the businessand

gainsinclude gains on disposal of non-current asses and

unrealized gains on revaluing assets(expenses) over the

expensesthe cost of assets consumes or services used in

the process of earning income (revenue and gains)

c.

owners drawingswithdraw cash or other assets for

personal use

Statement of Financial Positionreports the assets, liabilities and owners

equity at a specific date or point in time

-

assets are listed at the top, followed by liabilities and owners equity

-

total assets must equal total liabilities and owners equity (capital)

-

snapshot of business financial condition at aspecific moment in time

usually month-end or year-end

Statement of Cash Flowssummarizes information about the cash inflows

(receipts) and outflows (payments) for a specific period of time

-

reports the cash effect of the following activities of an entity during a

period:

a.

operating activitiesinclude transactions that create

income and expenses

b. investing activitiesinclude (a) acquiring and disposing of

investments and plant, property and equipment and (b)

lending money and collecting loans

c.

financing transactionsinclude (a) obtaining cash from

issuing debt and repaying the amounts borrowed and (b)

obtaining cash from shareholders and providing them with a

return on their investment

-

reports the net increase or decrease in cash and the cash amount at the end

of the period

-

this report is useful of investors and creditors because they would want to

know what is happening to the companys most liquid resource

-

answers the following questions:

a.

Where did cash come from?

b.

What was the cash used for?

c.

What was the change in the cash balance?

Notes to Financial Statementsinclude summary of significant accounting

policies used to prepare financial statements, and other explanatory notes and

supporting schedules

1.2

Definition, Nature and Scope of Accounting

Accountingis an information system that identifies, records and communicates the

economic events of an entity to interested users

Identifyingselecting the economic activities/transactions relevant to a

particular entity


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Recordingprovide a history of the entitys financial activities

-

consists of keeping a systematic, chronological diary of events

-

classifies and summarizes economic events

Communicatingthrough accounting reports of which the most common are

the financial statements, financial information is communicated to interested

users:

a.

Internalmanagers who plan, organize and run a business

1.

Marketing Managers

2.

Production Supervisors

3.

Chief Financial Officers

4.

Other Employees

b. Externalthere are types of external users and these are:

1.

Investors (Owners)use accounting information to

make decisions to buy, hold or sell shares

2.

Creditors (such as Supplier and Bankers)use

accounting information to evaluate risks of granting

credit or lending money

3.

Tax Authorities- want to know whether the

company complies with the tax laws

4.Regulatory Agencieswant to know whether the

entity is operating within the prescribed rules

5.

Customersinterested in whether an entity will

continue to honor product warranties and support

its product lines

6.

Employees and Labor Unionswant to know

whether the entity can pay increased wages and

benefits

7.Economistsuse accounting information to

forecast economic activity

Analyzing- involves the use of ratios, percentages, graphs and charts to highlight

significant financial trends and relationships

Interpretinginvolves explaining the uses, meaning and limitations of reported

data

-

often referred to as the language of businessmeans of communication

as it provides information that assist users to understand where the entity

has been by looking at its past performance, to understand where it is now

by looking at its current financial position, and to provide insight into what

is likely future prospects are

-

its purpose is to assist people, whether internal or external to an entity, to

make decisions about the allocation of scarce resources

-

means of measuring business activity and processing this information into

reports to communicate results to decision makers


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-

may be divided into:

a.

Financial Accountingprovides economic and financial

information for external users

b. Management Accountingprovides economic and financial

information for internal users

-

has three major fields:

a.

Public Accountingwould offer expert services to the

general public

-

involves the following major area/work:

1.

Auditingpublic accountants such as Certified

Public Accountant (CPA) or Chartered Accountant

(CA) examine the financial statements of entities

and express on opinion as to the fairness/reliability

of presentation

2.

Taxationincludes tax advice and planning,

preparing tax returns and representing clients

before government agencies

3.

Management Consultingranges from installing of

basic accounting systems to helping entities

determine whether they should use the space

shuttle for high-tech research and development

projects

-

also include activities such as developing business financial

plans and outsourcing requirements for clients

b.

Private (or Management) Accountingincludes the

following activities:

1.

General Accountingrecording daily transactions

and preparing financial statements and related

information

2.

Cost Accountingdetermining the cost of

producing specific products

3.

Budgetingassisting management in quantifying

goals concerning revenue, costs of goods sold and

operating expenses

4.Accounting Information Systems- designing both

manual and computerized data processing systems

5.

Tax Accountingpreparing tax returns and doing

tax planning for the business

6.

Internal Auditingreviewing the business

operations to see if they comply with the

management policies and evaluating the efficiency

of operations


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c.

Not-for-Profit Accountingnon-profit entities also need

sound financial reporting and control because donors to

such entities would want information about how well the

entity has met its financial objectives and whether

continued support is justified

-

entities must also make decisions about allocating funds

-

one area of Not-for-Profit Accounting is Government

Accounting

1.3

Brief History of Accounting

The origins of accounting are generally attributed to the work of Luca Pacioli, an Italian

renaissance mathematician. In his 1494 text Summa de arithmetica, geometria,

proportione et proportionalite, he described a system to ensure that financial

information was recorded efficiently and accurately.

The advent of the industrial age in the 19th

century and later, the emergence of large

entities, a separation of the owners from the managers of business took place. As a

result, the need to report the financial status of the entity became more important, to

ensure that the managers acted in accord with the owners wishes. Also, transactions

between entities became more complex, making necessary improved approaches for

reporting financial information

Our economy has now evolved into a post-industrial agethe information agein

which many products are information services. The computer had been the driver of

this age

1.3.1

Double-Entry Bookkeeping

Double-Entry Bookkeepingsuggests that for every credit entered into a

ledger, there must be corresponding debit.

-

one of the most beautiful discoveries of the human spirit

1.3.2

Harmonization of Accounting Reports

Generally Accepted Accounting Principles (GAAP)set of standards and

rules for financial reporting

-

these principles, since they are Generally Accepted, have a substantial

authoritative support from

1.3.3

International Accounting Standards

International Accounting Standards Board (IASB)national accounting

standard-setting bodies and/or regulatory and enforcement agencies

1.4

Relationship of Accounting to Other Fields of Discipline

How will the study of accounting help me?

General Managementmake wise business decisions

Marketingdevelops strategies to help the sales

Financeexamine and analyze statements

Real Estateagents must understand the numbers involved

1.5

Forms of Business Organization as to Ownership and Activity

Proprietorshipa business owned by one person


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-

owner is often the manager/operator of the business, which is usually a small

service-type one

-

only relatively small amount of money is necessary

-

owner receives any profits, suffers any losses and is personally liable for all debts of

the business

-

although there is no legal distinction between the business and the owner,

accounting records of the business activities are still kept separate from the

personal records of the owner

Partnershipbusiness owned by two or more persons

-

like a proprietorship in most cases expect that there are more than one owner

involve

-

partnership agreement which may either be oral or in writing sets forth terms such

as initial investment, duties of each partner, division of profit (or loss) and

settlement to be made upon death or withdrawal of a partner

-

each partner has unlimited personal liability for the debts of the partnership

-

partnership affairs must be kept separate from the personal activities of the

partners

-

often used to organize retail and service-type business, including professional

practices

Company/Corporationbusiness organized as a separate legal entity under the

corporation law and having ownership divided into transferable shares

-

shareholders enjoy limited liability or they are not personally liable for the debts of

the company

-

shareholders may transfer all or part of their shares to other investors at any time

-

ease with ownership

-

has unlimited life since the ownership may be transferred without dissolving the

company

1.6

Basic Professional Values and Business Ethics

Ethicsstandards of conduct which encompasses principles such as:

a.

acting in the public interest

b.

acting with integrity (i.e. with honesty, fairness and sincerity)

c.

avoiding conflicts of interest

d.

independence

e.

respect for confidentiality

f.

maintaining technical competence

g.

acting with due care

h.

behaving ethically

II.

Measuring and Reporting Financial Position

2.1

Nature and Forms of Statement of Financial Position

Statement of Financial Position presents:


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Current Assetscash and other resources that are reasonably expected to be realized

in cash or sold or consumed in the business within 1 year of the reporting date or the

business operating cycle- is the average time that is required to go from cash to cash in

producing revenuewhichever is longer

-

Important in assessing the businesss short-term dept-paying ability

Financial Assetscash and accounts receivables are example of these. Financial Assets

may also be:

a.

Current

b.

Non-Currentare long-term assets and are given meaningful

descriptions, such as:

1.

Property, Plant and Equipmenttangible resources of a

relatively permanent nature that are used in the business

and not intended for sale

2.

Intangible Assetsare non-current resources that do not

have physical substance and are recorded at cost which is

expensed over the useful life of the intangible asset

3.

Investment Propertyinvestment of non-current assets

other than financial assets

Current Liabilitiesare liabilities that are (1) expected to be settled in the business

operating cycle, (2) held primarily for the purpose of trading, (3) due and to be settled

within 12 month after the end of the reporting period. Liabilities are also current when

the entity does not have an unconditional right to defer settlement of the liability for at

least 12 months after the reporting period

Non-Current Liabilitiesobligations expected to be paid after 1 year or after an

operating cycle

Owners Equity/Capitalthis varies with the form of business entity.

a.

Proprietorship: one capital account

b.

Partnership: capital for each partner

c.

Company: divided into three accounts which when combined

comprise the shareholders equity

1.

Share Capitalinvestment of assets

2.

Reservesincreases in equity from sources other

than contributed capital from the owners and

retained earnings

3.Retained Earningsprofit retained for the use in

the company

Presentation of Financial Statements, as prescribed by the IAS that must at least include

the following line items: (a) property, plant and equipment, (b) investment property, (c)

intangible assets, (d) financial assets, (e) investments accounted for using equity

method, (f) biological assets, (g) inventories, (h) trade and other receivables, (i) cash and

cash equivalents, (j) the total assets classified as held for sale, and assets included in

disposal groups classified as held for sale, (k) trade and other payables, (l) provisions,


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(m) financial liabilities, (n) liabilities and assets for current tax, (o) deferred tax liabilities

and deferred tax assets, (p) liabilities included in disposal groups classified as held for

sale, (q) minority interest, presented within the equity and (r) issued capital and

reserves attributable to owners of the parent may be presented in either:

2.1.1 Report Formassets are presented above the liabilities and equity

2.1.2

Account Formassets and liabilities and equity are presented side by side

with assets at the left and liabilities and equity at the right

2.2

Related Accounting Concepts/Principles

2.2.1

Entityactivities of the company be kept separate and distinct from the

activities of the owner

2.2.2

Monetaryonly transaction data that can be expressed in terms of money

may be included in the accounting records

2.2.3

Costassets should be recorded at costthe value exchange at the time

something is acquired

Market (or Fair) Valuevalue determined by the market at the time

2.2.4

Objectivity or Reliability - information is free of error and bias

2.2.5

Going Concernassumes that the entity will continue in operation long

enough to carry out its existing objectives

2.2.6 Materialityrelates to an items impact on an entitys overall financial

condition and operations

-

an item is said to be material when it is likely to influence users

decisions

2.2.7

Disclosurecircumstances and events that make a difference to financial

statement users be disclosed

2.3

Accounting Equation

The two basic elements of a business are what it owns and what it owes.

Assetsresources controlled by an entity

Liabilitiesclaims against assets or existing debts and obligations

Owners Equityownership claim on total assets

At all times, Assets of the entity MUST equal to its Liabilities and Owners Equity

(Capital)A=L+C

2.4

Transactional Analysis: Assets, Liabilities and Owners Equity

Transactionsare the economic events of an entity that are recorded, which may be

identified as externalentity and some outside entity, or internalwithin one entity

2.5

Preparation of Statement of Financial Position

III.

Measuring and Reporting Financial Performance

3.1

Nature and Forms of Income Statement

3.1.1

Natural Formformat where expenses are classified according to the

nature of expense

3.1.2

Functional Formexpenses are subdivided into:

c.

Selling or Distribution Expensesmaking sales


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d.

Administrative Expenses (General Expenses)general

operating activities

e.

Finance Costassociated with the financing of the business

operations and debtcollection

f.

Other Expense

3.2

Related Accounting Concepts/Principles

3.2.1

Time Perioddivision of economic life of a business into artificial time

periods

d.

Interim Periodsmonthly and quarterly time periods

e.

Annual Basis

1.

Financial (or Fiscal) Yearstarts months between

January and December

2.

Calendar Yearstarts January

3.2.2

Income Recognitionrevenue be recognized in the accounting period when

an increase in future economic benefits has occurred

3.2.3

Matching or Expense Recognitionexpenses be recognized in the

accounting period when a decrease in future economic benefits has

occurred

3.2.4 Accrualdetermine profits means recognizing revenue when earned rather

when cash is received and recognizing expenses when incurred rather than

when paid

3.2.5

Consistencyentity uses the same accounting principles

3.2.6

Conservatism (Prudence)not overstating assets and income and

understating liabilities and expenses

3.2.7

Disclosure

3.3

Expanded Accounting Equation

Assets = Liabilities + Owners Capital - Owners Drawings + Revenue - Expenses

3.4

Transactional Analysis: Revenues and Expenses

3.5

Preparation of Natural Form Income Statement

IV.

Measuring and Reporting Changes in Equity

4.1

Nature and Form of Statement of Changes in Owners Equity

4.2

Transaction Analysis: Investments, Withdrawals, Net Income (Loss)

4.3

Preparation of Statement of Changes in Owners Equity

V. Measuring and Reporting Cash Flows

5.1

Nature and Forms of Statement of Cash Flows

Statement of Cash Flowswhich helps creditors and investors to assess (a) the entitys

ability to generate future cash flows, (b) ability to pay dividends and meet obligations,

(c) the reasons for the difference between profit and net cash provided (used) by

operating activities and (d) the cash investing and financing transaction during the

period may be presented using two methods:


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5.1.1

Direct Methodprovides major classes of gross cash receipts and gross

cash payments which are determined from the accounting records of the

entity or by adjusting sales, cost of sales and other items in the income

statement for:

a.

changes during the period in inventories and operating

receivables and payables

b.

other non-cash items, and

c.

other items for which the cash effects are investing or

financing cash flows

5.1.2

Indirect Methodnet cash from operating activities is determined by

adjusting profit for the effect of:

a.

changes during the period in inventories and operating

receivables and payables

b.

non-cash items such as depreciation, provisions, deferred

taxes, unrealized foreign currency gains and losses,

undistributed profits of associates, and minority interest,

and

c.

all other items for which the cash effects are investing and

financing cash flows

5.2

Components of Statement of Cash Flows

5.2.1

Operating Activities

5.2.2

Investing Activities

5.2.3

Financing Activities

5.3

Preparation of Statement of Cash FlowsDirect Method

VI.

The Accounting Cycle

6.1

Accounting Cycle and Business Documents Used

Documentsprovide evidence that transactions and events have occurred. Examples

are:

a.

Official Receipts

b.

Sales Invoice

c.

Shipping Document

d.

Check Butt

e.

Cash Register Tape

6.2

Analyzing Business Transactions in Terms of Debits and Credits

Accountan individual accounting record of increases and decreases in a specific asset,

liability and owners equityitem.

T-Accountstandard shorthand in accounting that helps make clear the effects of

transactions on individual accounts.

Debitindicates left

Creditindicate right

Double-Entry Systemequality of debits and credits


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6.3

Recording of Business Transactions in the Journal

Journalreferred to as book of original entry on which transactions are recorded in

chronological order

6.3.1

Rendering of Service, with Output VAT

6.3.2

Purchase of Supplies and Equipment, with Input VAT

6.3.3

Remittance of VAT

6.4

Accounting for Payroll

6.4.1

Definition of Payroll Terms

Payrollpertains to both:

a.

Salariesare paid managerial, administrative and sales personnel

b.

Wagesare based on a rate per hour or on a piecework basis paid

to sales assistants, factory employees and manual laborers

Bonusagreements for management personnel and employees which may

be based on such factors as increased sales or profit

-

may be paid in cash and/or by granting executives and employees to

acquire company shares at favorable prices called share option plans

6.4.2

Calculation of Net Pay or Take Home Pay

Net Paydetermined by subtracting payroll deductions from gross earnings

is total remuneration earned by an employee

6.4.3

Payment with Deductions (SSS, Philhealth, PAG-Ibig, Withholding Tax,

Advances to Employees)

6.4.4

Subsequent Remittance to Government Agencies of Amount Withheld from

Salaries and Corresponding Employers Contribution

6.5

Accounting for Promissory Notes

Promissory Noteis a written promise to pay a specified amount of money on demand

or at a definite time.

-

may be used (a) when individuals and businesses lend or borrow money, (b) when

the amount of the transaction and the credit period exceed normal limits or (c)

settlement of accounts receivable

-

may be transferred to another party by endorsement

Issuerparty making the promise to pay

Payeeparty to whom payment is made

Basic issues in accounting for notes are:

a.

recognizing notes

b.

valuing notes

c.

selling notes

Honored Notepaid in full at its maturity date

Dishonored Notenot paid in full at maturity and is no longer negotiable

6.5.1

Determination of Maturity Date, Interest, Maturity Value, Discounts and

Cash Proceeds

6.5.2

Recording of Transactions Involving Promissory Notes

6.5.2.1

Receipts and Issuance


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6.5.2.2

Collection and Payment at Maturity

6.5.2.3

Dishonor by the Maker

6.5.2.4

Renewal of Note

6.5.2.5

Discounting of Notes Receivable with Recourse (Separate Recording

of Interest Expense and Income)

6.5.2.5.1

Honor or Dishonor of Discounted Note

6.5.2.6

Discounting Own Note

6.5.2.6.1

Honor or Dishonor of Discounted Own Note

6.5.2.6.2

Amortization of Discount on Note Payable (Straight-Line

Method)

6.6

Posting to the General Ledger (T-Account Form of Ledger)

Ledgerkeeps in one place all the information about the changes in specific account

balances

Chart of Accountslists the accounts and the account numbers that identify their

location in the ledger

6.7

Preparing the Trial Balance

Trial Balancelist of accounts and their balances at a given time which is prepared at

the end of the accounting period.

6.7.1

Use and Limitations of a Trial Balance

Purposes:

a.

primary purpose is to prove (check) that the debits and credits are

equal after posting

b.

may be used to correct errors in journalizing and posting

c.

useful in preparation of financial statements

Limitations:

a.

does not guarantee freedom from recording errors

b.

does not prove that all transactions have been recorded or that the

ledger is correct

6.7.2

Locating Errors in the Trial Balance

Correcting Errors

a.

If the error is 1, 10, 100, 1000 re-add and recalculate

b.

If the error is divisible by 2, scan trial balance to see whether a

balance equal to half the error has been recorded in the wrong

column

c.

If the error is divisible by 9, retrace the account balances to see

whether they have been correctly copied to the ledger. Usually

occurs when theres transposition error reversing order of

numbers

d.

If the error is not divisible by 2 or 9scan everything

6.7.3

Preparing Correcting Entries

Errors should be corrected as soon as they are discovered through

correcting entries


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6.7.4

Preparing Corrected Trial Balance

6.8

Journalizing and Posting Year-End Adjustments (Accrual Basis)

Adjusting Entriesare needed to ensure that the revenue and expense recognition

principles are followed

6.8.1 Accrued Expenses (Expenses Payable)expenses incurred but not yet paid

6.8.2

Accrued Income (Receivables)revenue earned but the yet received in

cash

6.8.3

Prepaid Expensesexpenses paid in cash and recorded as assets before

they are used or consumed

6.8.4

Amortization of Discounts of Notes Payable (Straight-Line Method)

6.8.5

Unearned Incomecash received and recorded as liabilities before revenue

is earned

6.8.6

Depreciation (Straight-Line Method)allocation of the cost of an asset to

expense over its useful life in a rational and systematic manner and

represents the future economic benefit that has been used in the period

6.8.7

Doubtful Accounts (Allowance Method)estimating receivables not

expected to be collectible at the end of each period

6.8.8

Direct Write-Off Methodwhen a particular account is determined to be

uncollectible and the loss is charged to Bad Debts Expense and the carrying

amount of Accounts Receivable is reduced in the Statement of Financial

Position

6.8.8.1

Balance Sheet Approach

6.8.8.1.1

Percentage of Accounts Receivablemanagement

estimates what percentage of receivables will result to

losses from uncollectible accounts

6.8.8.1.2

Percentage of Sales Methodmanagement estimate

what percentage of credit sales will be uncollectible

6.8.8.1.3 Aging of Accounts Receivablecustomer balances are

classified by length of time they have been unpaid

6.9

Preparing Financial Statements

6.9.1

Statement of Comprehensive Income

6.9.1.1

Income Statement

6.9.2

Statement of Financial Position

6.9.3

Statement of Changes in Equity

6.9.4

Statement of Cash Flows

6.9.5

Notes to Financial Statements

6.10

Closing the Books

Closing the Booksaccounts are made ready for the next period

Temporary or Nominal Accountsare the accounts that are closed which relate to only

given accounting period and they include all income statement and drawing accounts


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Permanent or Real Accountsrelate to one or more future accounting periods and

they consist of all statement of financial position accounts which are not closed but

rather forwarded to the next accounting period

6.10.1

Journalizing Closing Entries

6.10.2

Posting Closing Entries

6.10.3

Ruling Nominal Accounts and Balancing Real Accounts

6.10.4

Preparing and Post-Closing Trial Balance

Post-Closing Trial Balancelists of permanent accounts and their balances

after closing entries have been journalized and posted

6.11

Journalizing and Posting Reversing Entries

Reversing Entriesmade at the beginning of the next accounting period which is the

exact opposite of the adjusting entry made in the previous accounting period

ACTBAS2

I.

Introduction to Merchandising Business

1.1

Nature and Operating Cycle

Operating cycle of a merchandising business is ordinarily longer than that of a service

business

1.2

Business Documents Used

Purchase Invoicedocuments that indicates the total purchase price and other relevant

information

Sales Invoiceprovides support for a credit sale

II. Accounting Cycle of a Merchandising Business

2.1

Recording Purchase and Sale of Merchandise in General Journal

2.1.1

Perpetual Inventory System (Gross Method Only)detailed records of the

cost of each inventory purchase and sale are maintained and continually

shows the inventory that should be on hand

-

cost of sales is determined each time a sale occurs

2.1.2

Periodic Inventory System (Gross Method Only)detailed inventory

records of the goods on hand are not kept throughout the period and the

cost of sales is only determined at the end of the accounting period

-

cost of goods on hand are determined through physical count

-

in determining cost of sales (1)determine inventory beginning, (2) add

the cost of goods purchased and (3) subtract inventory end

2.1.3

Freight Terms

Freight Costcost of delivering goods

Freight-Inconsidered part of the cost or purchasing inventory

Freight-Outdelivery expense


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FOB Shipping Pointgoods are placed free on board the carrier by the

seller, and the buyer pays the freight cost

FOB Destinationgoods are placed free on board to the buyers place of

business and the seller pays the freight

Collectthe buyer pays

Prepaidthe seller pays

2.1.3.1

FOB Shipping Point, Collectbuyer pays

2.1.3.2

FOB Shipping Point, Prepaidbuyer has to pay but the seller pays

2.1.3.3

FOB Destination Point, Collectseller has to pay but the buyer

pays

2.1.3.4

FOB Destination Point, Prepaidseller pays

2.1.4

With Value-Added Tax

2.2

Recording Purchase and Disposal of Property, Plant and Equipment

PPE Assets/Fixed Assetsare resources that (1) have physical substance, (2) are used in

the operations of the business and (3) are not intended for sale to customers

-

are expected to provide services to the entity for a number or years

-

with exception of land, PPE Assets decline in service potential over their useful lives

Costconsists of all expenditures necessary to acquire the asset and make it ready for

its intended use, including import duties and non-refundable taxes after deducting trade

discounts and rebates

Useful Life/Service Lifeis an estimate of the assets expected productive life which

may be expressed in terms of (1) time period over which the asset is expected to be

available for use or (2) the number of units of production or the output expected to be

obtained from the asset

Residual Valuethe current estimate of the assets disposal value, net of disposal costs,

if the asset is already of the age and in the condition expected at the end of its useful

life

Carrying Amountcost of the PPE less its accumulated depreciation

Depreciable Costis the cost of the asset less its residual value

Depreciationis the allocation of the depreciable amount of PPE to expense over its

useful life which may be calculated using the following methods:

a.

Straight-line Methoddepreciation is the same for each year of the

assets useful life and is measured solely by the passage of time

b.

Units-of-Activity or Production Methoduseful life is expressed in

terms of total units of production or expected from asset, rather than as

time period

c.

Reducing-Balance/Accelerated-Depreciation Methodproduces a

decreasing annual depreciation expense over the assets useful life

2.2.1

Revenue vs. Capital Expenditures

Capital Expendituresaddition and improvements incurred to increase the

operating efficiency, productive capacity or useful life of a PPE which are

usually material in amount and occur infrequently


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Revenue Expendituresare expenditures during useful life or the costs

incur for ordinary repairs, additions or improvements with the purpose of

maintaining the operating efficiency and productive life of the PPE Asset

2.2.2

Journal Entries Related to Purchase (Net Method)

2.2.3

Disposal of Property, Plant and Equipment through Sale

In a disposal by sale, the carrying amount of the asset is compared with the

net proceeds received from the sale

Gain on Disposaloccurs if the net proceeds of the sale exceed the carrying

amount of the PPE and is reported as income on the income statement

Loss on Disposaloccurs if the net proceeds of the sale are less than the

carrying amount of the PPE and is reported on the income statement among

expense items

2.3

Preparing Functional-Form Income Statement (Including Computation of Missing

Amounts)

Income Statement begins by presenting Sales Revenue. The contra revenue accounts

Sales Returns and Allowances and Sales Discounts are deducted from Sales to arrive at

Net Sales

Gross Profitthe difference of sales over cost of sales which represents the inventory

profit of a business

Other Incomerevenue items other than sales revenue

Other Expensesare the third component in measuring profit for a retailer

2.4

Recording of Business Transactions using Special Journals and the General Journal

Special Journalis used to record similar types of transactions

2.4.1

Sales Journalused to record sales of inventory on account

Steps:

a.

journalizing credit sales

b.

posting the sales journal

c.

proving the ledgers

1.

the total of the general ledger debit balances

must equal the total of the general ledger credit

balances

2.

the sum of the subsidiary ledger balances must

equal the balance in the control account

Advantages include:

a.

one-line entry for each sales transaction saves time because

it is not necessary to write out the four account titles for

each transaction

b.

only totals, rather than individual entries, are posted to the

general ledger which saves posting

c.

division of labor because one individual can takes

responsibility for the sales journal

2.4.2

Cash Receipts Journalused to record all receipts of cash


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Steps:

a.

journalizing cash receipts transactions

b.

posting the cash receipts journal

c.

proving the ledgers

2.4.3 Purchase Journalused to record all purchases on inventory on account

Steps:

a.

journalizing credit purchases of inventory

b.

posting the purchase journal

c.

expanding the purchases journal

2.4.4

Cash Payments Journalused to record all payments of cash

Steps:

a.

journalizing cash payments transactions

b.

posting the cash payments journal

2.4.5

General Journal- is used if a transaction cannot be recorded in a special

journal

-

includes credit sales of assets other than inventory and other types of

purchases on account

-

may be used to record such transactions as granting credit to a

customers for a sales return or allowance, granting or to record such

transactions as granting credit to a customers for a sales return or

allowance, granting of credit from a supplier for purchases returned,

acceptance of note receivable from a customer and purchase of

equipment by issuing note payable

-

also used for correcting, adjusting and closing entries

2.5

Posting from the General and Special Journals to the General and Subsidiary Ledgers

Subsidiary Ledgeris a group of accounts with a common characteristics

Advantages:

a.

show transactions affecting one customer or one creditor in a single

account, thus providing up-to-date information on specific account balances

b.

free the general ledger of excessive details resulting to the trial balance of

the general ledger to not contain vast numbers of individual account

balances

c.

help locate errors in individual accounts by reducing the number of

accounts in one ledger and by using control accounts

d.

make possible a division of labor in posting

2.5.1 Accounts Receivable/Customer Subsidiary Ledgerwhich collects

transaction data of individual customers

2.5.2

Accounts Payable/Creditor Subsidiary Ledgerwhich collects transaction

data of individual creditors

2.5.3

General Leger/Control Accountsummarizes the subsidiary ledger

2.6

Preparing Scheduled of Accounts Receivable and Payable

2.7

Manual vs. Computerized Accounting Systems


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2.8

Completion of the Accounting Cycle

2.8.1

Journalizing and Posting Year-End Adjustments (Accrual Basis)

2.8.1.1

Review: Accrued Expenses

2.8.1.2

Review: Accrued Revenues

2.8.1.3

Review: Prepaid Expenses

2.8.1.4

Review: Unearned Income

2.8.1.5

Review: Amortization of Discount

2.8.1.6

Depreciation (Straight-Line Method)

2.8.1.7

Doubtful Accounts (Allowance Method)

2.8.1.7.1

Estimation: Balance Sheet Approach

2.8.1.7.2

Write-off and Recovery

Write-off

-

bad debts is not increased when the write-off

occurs using the Allowance Method

-

write-off only affects the Statement of Financial

Position accounts and not the Income Statement

Recovery

-

two entries are required to record the recovery of a

receivable written-off: (1) the entry made in writing

off the account is reversed to reinstate the

customers account and (2) the collection is

journalized in the usual manner

2.8.1.8

Merchandise Inventory (Periodic Inventory System)

2.8.2

Bank Reconciliation Statement

-

the use of bank account contributes significantly to good internal

control over cash

-

the asset account Cash maintained by the depositor is the reciprocal of

the banks liability account for each depositor and it should be possible

that these accounts agree at any time

Bank Statementshows the depositors bank transactions and balances. It

shows:

a.

checks paid and other debits and transfers that reduce the

balance in the depositors accounts

b.

deposits and other credits and transfers the increase the

balance in the depositors account

c.

the account balance after each days transactions

Checka written order signed by the depositor directing the back to pay a

specified sum of money to a designated recipient

2.8.2.1

Preparing a Simple Bank Reconciliation Statement (Adjusted

Balance Method)

Reconciling Items of the Depositor:

a.

Direct Debits


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1.

Bank Fee - monthly fee charged by bank for

its services

2.

Dishonored Check/Bouncing Check- a

deposit check from customer which

bounces because of insufficient fund

b.

Direct Credits

1.

Notes Receivables collected by bank in

behalf of the depositor

c.

Transfers

1.

Transfers from Electronic Fund Transfer

(EFT)are payment systems that use wire,

telephone or internet to transfer cash from

one location to another

d.

Errors

Reconciling Items of the Bank

a.

Outstanding Depositsdeposits recorded by the depositor

that have not been recorded by the bank

b.

Unpresented Checksissued checks recorded by the

business that have not been presented by the recipient to

the bank for payment

c.

Errors

2.8.2.2

Recording Adjusting Entries for Reconciling Items

2.8.3

Preparing a Work Sheet

2.8.4

Preparing Financial Statement

2.8.4.1

Functional-Form Income Statement

2.8.4.2

Report-Form Statement of Financial Position

2.8.4.3

Statement of Changes in Equity

2.8.4.4

Direct-Method Statement of Cash Flows

2.8.4.5

Notes to Financial Statements

2.8.5

Journalizing and Posting Closing Entries

2.8.6

Preparing Post-Closing Trial Balance

2.8.7

Journalizing and Posting Reversing Entries

2.9

Introduction to Voucher System

Voucher Systemis a network of approvals by authorized individuals acting

independently to ensure that all payment by check are proper

Voucheris an authorization from prepared for each expenditure and is required for all

types of cash payments except those from petty cash fund

2.10

Establishment and Replenishment of Petty Cash Fund under the Imprest System

Petty Cash Fundis a cash fund used to pay relatively small amount but still satisfactory

control

Imprest Systemoperation of petty cash fund which involves three steps:

a.

establishing the fund


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3.

appointing a petty cash custodian/cashier

4.

determining the size of the fund

b.

making payments from fund

c.

replenishing the fund

ACTPACO

I.

Introduction to Partnership as a Business Organization

1.1

Forms of Business Organization

1.2

Definition and Special Features of a Partnership

Partnershipis an association of two or more persons carrying on a business in

common with a view to making a profit

-

each partner is required to have his or her own capital account

Characteristics of Partnership:

a.

Association of Individualseasy formation because two or more

individuals may form a partnership by a simple act as a handshake

b.

Mutual Agencyeach partner may act in behalf of the partnership when

engaging in partnership business

c. Limited Lifeit may be ended voluntarily at any time through acceptance

of a new partner or the withdrawal of a partner and/or death or incapacity

of a partner

d.

Unlimited Liabilityeach partner is personally and individually liable for all

partnership liabilities

e.

Co-Ownership of Propertypartnership assets are owned jointly by the

partners. If the partnership is dissolved, the assets do not legally revert to

the original contributor. Each partner has a claim on total assets equal to

the balance in his or her respective capital account

f. Co-Ownership of Profit (or Loss)if the partnership contract does not

specify to the contrary, all profit or loss is shared equally by the partners

1.3

Kinds of Partnership and Kinds of Partners

Kinds of Partnership:

a.

Limited Partnershipone or more partners have unlimited liability and one

or more partners have limited liability for the debts of the businessb.

Incorporated Limited Partnershipis a special type of partnership primarily

used for people engaged in high-risk venture-capital projects

Kinds of Partners:

a.

General Partnersthose who have unlimited liability


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b.

Limited Partners/Special Partners/Sleeping Partnersare responsible for

the debts of the partnership up to the limit of their investment in the

business

1.4

Advantages and Disadvantages of a Partnership

Advantages:

a.

combining skills and resources of two or more individuals

b.

ease of formation

c.

not subject to as much government regulation as companies

d.

ease of decision making

e.

no taxation or partnership profits

Disadvantages:

a.

mutual agency

b.

limited life

c.

unlimited liability

d.

partners must be able to work together

II.

Accounting for Partnership Formation

2.1

Opening Entries of a Partnership upon Formation

2.1.1

Organization of a New Partnership

Each partners initial investment in a partnership is entered in the

partnership records. These investments should be recorded at the fair value

of the assets at the date of their transfer to the partnershipthat is, the fair

market value at the time the partnership is formed

2.1.2

Conversion of Sole Proprietorship(s) into a Partnership using New Set of

Books

III.

Accounting for Division of Profits and Losses

3.1

Methods of Dividing Profits and Losses

Partnership profit or loss is shared equally unless the partnership contract or

partnership agreement indicates otherwise or the Profit-and-Loss Ratioused to

identify the basis for dividing profit and loss

3.2

Accounting for Interest on Capital Balances, Salary Allowance, and Bonuses as Part of

Profit Distribution

Salaries to partners and interest on partners capital are not expenses of the partnership

Salaries Expensepertains to the cost of services performed by employees

Interest Expenserelates to the cost of borrowing from creditors

Partners, as owners of the business, are not considered either employees or creditors,

thus salary to partners and interest on partners capital do not enter into the

determination of profit or loss

3.3

Preparation of Financial Statements

The financial statements of a partnership are similar to those of a proprietorship. The

only difference is due to the number of owners involved

Statement of Changes in Partnerships Equityused to explain the changes in each

partners capital or current account and in total partnership equity during the year


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IV.

Partnership Dissolution without Liquidation

4.1

Distinction between Dissolution and Liquidation

Partnership Dissolutionoccurs whenever a partner withdraws or a new partner is

admitted but does not necessarily mean that then business ends

Partnership Liquidationends the economic life of the entity

4.2

Accounting for Admission of New Partner(s) using Bonus Method

Admission of new partner results in the dissolution of the existing partnership and the

beginning of a new one

The new partner may be admitted either by:

a.

Purchasing the Interest of an Existing Partnerpersonal transaction

between one or more existing partners and the new partner

b. Investing Assets in the Partnershipis transaction between the

partnership and the new partner which increases both the net assets and

total equity of the partnership

Bonus to Old Partnersresults when the new partners investment in the partnership is

greater than the capital credit on the date of admittance

Bonus to New Partnerresults when the new partners investment in the business is

less than his or her capital credit

4.3

Withdrawal or Retirement of a Partner

A partner may withdraw from the partnership voluntarily be selling his or her equity in

the partnership. He or she may also withdraw involuntarily by reaching mandatory

retirement age or by dying. Like admission of new partner, withdrawal also dissolves

existing partnership

Withdrawal may be accomplished by:

4.3.1

Purchase of Interest by Other Partners or by an Outsideris a personal

transaction between partners

4.3.2

Settlement of Interest by the Partnershipis a transaction that involves

the partnership

Bonus to Retiring Partnermay be paid to a retiring partner when (1) there is

unrecorded goodwill resulting from the partnerships superior earnings record and (2)

the remaining partners are anxious to remove the partner from the partnership

Bonus to Remaining Partnersthe retiring partner may give bonus to the remaining

partner when (1) the partnership has a poor earnings record and (2) the partner is

anxious to leave the partnership

V. Partnership Dissolution with Liquidation: General Partnership

5.1

Introduction to the Two Kinds of Liquidation

5.1.1

Lump-Sum Method

5.1.2

Installment Method

5.2

Accounting for the Liquidation of a General Partnership under the Lump-Sum Method

To liquidate partnership, it is necessary to:

a.

sell non-cash assets for cash and recognize a gain or loss on realization


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b.

allocate gain/loss on realization to the partners based on their profit-and-

loss ratio

c.

pay partnership liabilities in cash

d.

distribute remaining cash to partners on basis of their capital balances

No Capital Deficiencywhen a partnership is liquidated and all partners have credit

balances in their capital accounts

Capital Deficiencyat least one partners capital account has a debit balance

5.2.1

Deficient Partner is Solventthe partner with capital deficiency pays the

amount owed to the partnership

5.2.2

Deficient Partner is Insolventthe partner with capital deficiency is unable

to pay the amount owed to the partnership thus the partners with credit

balances absorb the loss or the deficiency

5.3

Accounting for the Liquidation of a General Partnership under the Installment Method

5.3.1

Preparation of Schedule of Safe Payments

Schedule of Cash Paymentsis used to determine the distribution of cash

to the partners in liquidation of partnership

VI.

Accounting for Corporate Formation and Operation

6.1

Introduction to Corporation

6.1.1

Definition of a Corporation

Company/Corporationis a legal entity that has most of the rights and

privileges of a person such as:

a.

the right to vote

b.

the right to hold public office

-

is subject to the same duties and responsibilities as a person

-

it may be classified by:

a.

Purpose

1.

Profit

2.

Non-profit

b.

Ownership

1.

Publicly Held Companymay have thousands of

shareholders

2.

Privately Held Companyoften referred to as a

proprietary limited company, usually has only few

shareholders

Company Constitutionregulates companys internal management

Preliminary Expensescosts incurred in the formation of a company which are

capitalized as the definition of an asset since it is expected to provide future economic

benefits to the entity

Preference Shareshave contractual provisions that give them preference or priority

over ordinary shares in certain areas as (1) distribution of profits (dividends), (2) assets

in the event of liquidation

Ordinary Sharescommon class of share which have the right to:


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a.

vote in the election of BOD

b.

share the companys profits through receipt of dividends

c.

Preemptive Rightkeep the same percentage ownership when new shares

are issued

d. Residual Claimshare in assets upon liquidation in proportion to their

holdings

Shareholders Certificate/Stock Certificateproof of share ownership

Issued Sharesshares on the hands of the shareholders

Par Valuearbitrary amount assigned to each share

Share Capitaltotal amount of cash and other assets paid in to the company by

shareholders

Retained Earningsprofit retained in a company

Issue Pricethe price that the company receives from the issue of shares

Forfeited Shares/Treasury Sharesshares lost by a person due to failure to pay his or

her share when the call is due, which may later be re-issued

Prior-Period Errorcorrected by reinstating comparative amounts and opening

retained earnings as soon as the error has been discovered

6.1.2

Characteristics of a Corporate Form of Business Organization

Separate Legal Entitythe company acts under its own name rather that in

the name of its shareholders

No Mutual Agencyacts of shareholders do not bind the company unless

such shareholders are duly appointed agents of the corporation

Limited Liability of Shareholderscreditors have recourse only to the

company assets to satisfy their claim because the liability of the

shareholders is normally limited to their investments in the company

Transferable Ownership Rightsownership of a company is held in shares

which are transferable units

Ability to Acquire Capitaleasy to obtain capital through the issue of

shares

Continuous Lifeits continuance as a going concern is not affected by the

withdrawal, death or incapacity of a shareholder, employee or senior

executive

Separation of Ownership and Managementthe owners who are the

shareholders of the company are not the same ones who manage it rather,

it is the Board of Directors (BOD) who does

Government Regulationssubject to numerous state and federal

regulations

Company Taxationowners share of profits from corporations is reported

on his or her personal income tax return

6.1.3

Distinction between Partnership and Corporation

6.1.4

Types of Corporation

6.1.5

Legal Requirements for the Formation of a Corporation


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6.1.6

Definition of Terms

VII.

Accounting for Share Capital Transactions

7.1

Accounting for Par Value Shares

7.1.1

Journal Entry Method

7.1.2

Memorandum Method

7.2

Accounting for Preference Shares and Ordinary Shares

7.3

Accounting for No-Par Value Shares

7.4

Incorporating a Partnership

7.5

Accounting for Delinquent Shares

7.6

Accounting for Treasury Share

7.6.1

Reacquired through Purchase

7.6.2

Reacquired through Donation (Memo Entry)

7.6.3

Subsequent Sale At Cost, Below Cost, or Above Cost

7.7

Shareholders Equity Presentation Contributed Capital

VIII.

Accounting for Accumulated Profits/Loss (Retained Earnings)

8.1

Definition of Retained Earnings

8.2

Appropriation from Retained Earnings for Legal, Contractual or Voluntary Reasons

Retained Earnings Restrictionsare portion of the retained earnings balance currently

unavailable for dividends due to the following causes:

a. Contractualthe restriction that limits the use of company assets for

payment of dividends

b.

Voluntarymade voluntarily for specific purposes

8.3

Kinds of Dividends

Dividenddistribution by a company to its shareholders on a pro rata (proportional)

basis which can take four forms:

a.

Cashpro rata distribution of cash to shareholders

For a company to pay cash dividend, it must have:

1.

Retained Earnings

2.

Adequate Cash

3.

A Declaration of Dividends

b.

Property

c.

Scripa promissory note to pay cash

d.

Shares/Bonus Sharespro rata distribution to shareholders of the

companys own shares

-

may be expressed in two ways as (1) as a percentage of the stated value of the

share or (2) as dollar (peso) amount per share

8.4

Accounting for Cash and Bonus Issueupon Declaration and Distribution of Dividends

Declaration Datewhen the company formally declares the cash dividend and

announces it to the shareholders

Record Datewhen ownership of the issued shares is determined for dividend

purposes

Payment Datedividends are paid and payment is recorded


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8.5

Preparation of Statement of Changes in Shareholders Equity

IX.

Special Topics

9.1

Book Value Per Share

9.2

Basic Earnings Per Shareindicates the profit earned per issued ordinary share