Accountancy, Business, and Management 1 TG.pdf

The Commission on Higher Education in collaboration with the Philippine Normal University

Teaching Guide for Senior High School

FUNDAMENTALS OF ACCOUNTANCY,

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BUSINESS, AND MANAGEMENT 1 SPECIALIZED SUBJECT | ACADEMIC - ABM

This Teaching Guide was collaboratively developed and reviewed by educators from public and private schools, colleges, and universities. We encourage teachers and other education stakeholders to email their feedback, comments, and recommendations to the Commission on Higher Education, K to 12 Transition Program Management Unit - Senior High School Support Team at [email protected]. We value your feedback and recommendations.

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This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Development Team Team Leader: Joselito G. Florendo.

Writers: Carlsberg S. Andres, Arthur P. Barrido, Jr., Christopher B. Honorario

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Technical Editor:Daniel Vincent H. Borja Copy Reader: Fermin J. Villegas

Cover Artists: Paolo Kurtis N. Tan, Renan U. Ortiz

Published by the Commission on Higher Education, 2016 Chairperson: Patricia B. Licuanan, Ph.D. Senior High School Support Team Commission on Higher Education CHED K to 12 Transition Program Management Unit K to 12 Transition Program Management Unit Program Director: Karol Mark R. Yee Office Address: 4th Floor, Commission on Higher Education, Lead for Senior High School Support: C.P. Garcia Ave., Diliman, Quezon City Gerson M. Abesamis Telefax: (02) 441-0927 / E-mail Address: [email protected]

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Lead for Policy Advocacy and Communications: Averill M. Pizarro

Consultants THIS

PROJECT WAS DEVELOPED WITH THE

PHILIPPINE NORMAL UNIVERSITY.

Course Development Officers: Danie Son D. Gonzalvo, John Carlo P. Fernando

University President: Ester B. Ogena, Ph.D. Teacher Training Officers: VP for Academics: Ma. Antoinette C. Montealegre, Ph.D. Ma. Theresa C. Carlos, Mylene E. Dones VP for University Relations & Advancement: Rosemarievic V. Diaz, Ph.D. Monitoring and Evaluation Officer: Ma. Cynthia Rose B. Bautista, Ph.D., CHED Robert Adrian N. Daulat Bienvenido F. Nebres, S.J., Ph.D.,Ateneo de Manila University Administrative Officers: Carmela C. Oracion, Ph.D., Ateneo de Manila University Ma. Leana Paula B. Bato, Kevin Ross D. Nera, Minella C. Alarcon, Ph.D., CHED Allison A. Danao, Ayhen Loisse B. Dalena Gareth Price, Sheffield Hallam University Printed in the Philippines by EC-TEC Commercial, No. 32 St. Stuart Bevins, Ph.D., Sheffield Hallam University Louis Compound 7, Baesa, Quezon City, [email protected]

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This Teaching Guide by the Commission on Higher Education is licensed under a Creative Commons AttributionNonCommercial-ShareAlike 4.0 International License . This means you are free to: Share — copy and redistribute the material in any medium or format Adapt — remix, transform, and build upon the material. The licensor, CHED, cannot revoke these freedoms as long as you follow the license terms. However, under the following terms: Attribution— You must give appropriate credit, provide a link to the license, and indicate if changes were made. You may do so in any reasonable manner, but not in any way that suggests the licensor endorses you or your use. NonCommercial— You may not use the material for commercial purposes. ShareAlike— If you remix, transform, or build upon the material, you must distribute your contributions under the same license as the srcinal.

Introduction As the Commission supports DepEd’s implementation of Senior High School (SHS), it upholds the vision and mission of the K to 12 program, stated in Section 2 of Republic Act 10533, or the Enhanced Basic Education Act of 2013, that “every graduate of basic education be an empowered individual, through a program rooted on...the competence to engage in work and be productive, the ability to coexist in fruitful harmony with local and global communities, the capability to engage in creative and critical thinking, and the capacity and willingness to transform others and oneself.”

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To accomplish this, the Commission partnered with the Philippine Normal University (PNU), the National Center for Teacher Education, to develop Teaching Guides for Courses of SHS. Together with PNU, this Teaching Guide was studied and reviewed by education and pedagogy experts, and was enhanced with appropriate methodologies and strategies. Furthermore, the Commission believes that teachers are the most important partners in attaining this goal. Incorporated in this Teaching Guide is a framework that will guide them in creating lessons and assessment tools, support them in facilitating activities and questions, and assist them towards deeper content areas and com etencies. Thus, the introduction of the SHS for SHS Framework.

SHS for SHS Framework

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The SHS for SHS Framework, which stands for “Saysay-Husay-Sarili for Senior High School,” is at the core of this book. The lessons, which combine high-quality content with flexible elements to accommodate diversity of teachers and environments, promote these three fundamental concepts:

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SAYSAY:MEANING

Why is this important?

SARILI: OWNERSHIP How will I deeply understand this? What can I do with this?

Through this Teaching Guide, teachers will be able to facilitate an understanding of the value of the lessons, for each learner to fully engage in the content on both the cognitive and affective levels.

Given that developing mastery goes beyond memorization, teachers should also aim for deep understanding of the subject matter where they lead learners to analyze and synthesize knowledge.

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HUSAY: MASTERY


When teachers empower learners to take ownership of their learning, they develop independence and selfdirection, learning about both the subject matter and themselves.

Parts of the Teaching Guide

This Teaching Guide is mapped and aligned to the DepEd SHS Curriculum, designed to be highly usable for teachers. It contains classroom activities and pedagogical notes, and is integrated with innovative pedagogies. All of these elements are presented in the following parts: 1. • • • • • 2. • • • • 3.

Introduction Highlight key concepts and identify the essential questions Show the big picture and concept maps Present the relevant vocabulary Connect and review prerequisite knowledge Clearly communicate learning competencies and objectives Motivation Give local examples and applications Engage in a game or movement activity Provide a hands-on/laboratory activity Connect to a real-life problem Instruction/Delivery

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• Give a demonstration/lecture/simulation/hands-on activity • Show step-by-step solutions to sample problems • Use multimedia and other creative tools • Give applications of the theory • Focus on a specific story using the case study method 4. Pr ac ti ce • Discuss worked-out examples • Provide easy-medium-hard questions • Give time for hands-on unguided classroom work and discovery • Use formative assessment to give feedback 5. En ri chment • Provide additional examples and applications • Introduce extensions or generalisations of concepts • Encourage analysis through higher order thinking prompts and reflection questions • Allow pair/small group discussions to summarize and synthesize the learnings 6. Evaluation • Supply a diverse question bank for written work and exercises • Provide alternative formats for student work: written homework, journal, portfolio, group/individual projects, student-directed research project

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On DepEd Functional Skills and CHED College Readiness Standards As Higher Education Institutions (HEIs) welcome the graduates of the Senior High School program, it is of paramount importance to align Functional Skills set by DepEd with the College Readiness Standards stated by CHED. The DepEd articulated a set of 21 st century skills that should be embedded in the SHS curriculum across various subjects and tracks. These skills are desired outcomes that K to 12 graduates should possess in order to proceed to either higher education, employment, entrepreneurship, or middle-level skills development.

On the other hand, the Commission declared the College Readiness Standards that consist of the combination of knowledge, skills, and reflective thinking necessary to participate and succeed without remediation - in entry-level undergraduate courses in college.

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The alignment of both standards, shown below, is also presented in this Teaching Guide - prepares Senior High School graduates to the revised college curriculum which will initially be implemented by AY 2018-2019.

C o l l e g e R e a d i n e s s S t a n d a rd s F o u n d a t i o n a l S k i l l s

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D ep Ed F un c t i o n a l S k i l l s

Produce all forms of texts (written, oral, visual, digital) based on: 1. Solid grounding on Philippine experience and culture; 2. An understanding of the self, community, and nation; Visual and information literacies, media literacy, critical thinking 3. Application of critical and creative thinking and doing processes; and problem solving skills, creativity, initiative and self-direction 4. Competency in formulating ideas/arguments logically, scientifically, and creatively; and 5. Clear appreciation of one’s responsibility as a citizen of a multicultural Philippines and a diverse world;

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Systematically apply knowledge, understanding, theory, and skills for the development of the self, local, and global communities using prior learning, inquiry, and experimentation

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Global awareness, scientific and economic literacy, curiosity, critical thinking and problem solving skills, risk taking, flexibility and adaptability, initiative and self-direction

Work comfortably with relevant technologies and develop adaptations and innovations for significant use in local and global communities

Global awareness, media literacy, technological literacy, creativity, flexibility and adaptability, productivity and accountability

Communicate with local and global communities with proficiency, orally, in writing, and through new technologies of communication

Global awareness, multicultural literacy, collaboration and interpersonal skills, social and cross-cultural skills, leadership and responsibility

Interact meaningfully in a social setting and contribute to the fulfilment of individual and shared goals, respecting the fundamental humanity of all persons and the diversity of groups and communities

Media literacy, multicultural literacy, global awareness, collaboration and interpersonal skills, social and cross-cultural skills, leadership and responsibility, ethical, moral, and spiritual values


TABLE OF CONTENTS Lesson 1: Introduction to Accounting Lesson 2: Branches of Accounting Lesson 3: Users of Accounting Information Lesson 4: Forms of Business Organizations

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1 7 12 20

Lesson 5: Types of Business According to Activities

28

Lesson 6: Accounting Concepts and Principles

32

Lesson 7: The Accounting Equation

41

Lesson 8: Types of Major Accounts

52

Lesson 9: Books of Accounts

65

Lesson 10: Business Transactions and Their Analysis as Applied to the Accounting Cycle of a Service Business Pt.1

80

Lesson 11: Business Transactions and Their Analysis as Applied to the Accounting Cycle of a Service Business Pt.2

97

Lesson 12: Accounting Cycle of a Merchandising Business

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Fundamentals of Accountancy, Business, and Management 1

60 MINS

Introduction to Accounting Content Standards

The learners demonstrate an understanding of the definition, nature, function, and history of accounting

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LESSON OUTLINE

Introduction Communicating learning objectives

Performance Standards

Motivation

Learning Competencies

Instruction

The learners shall be able to • define accounting (ABM_FABM11-IIIa-1) • describe the nature of accounting (ABM_FABM11-IIIa-2)

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Examples of Service Businesses Discussion

30

Practice

Problem Sets

10

Enrichment

Group Discussions

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• explain the functions of accounting in business (ABM_FABM11-IIIa-3) • narrate the history/srcin of accounting (ABM_FABM11-IIIa-4)

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Review types of businesses

The learners shall be able to cite specific examples in which accounting is used in making business decisions.

Evaluation

Quizzes

5 10

Materials

Specific Learning Objectives

At the end of this lesson, the learners will be able to define accounting and describe its nature; explain the functions of accounting in business; give examples of business transactions and decisions requiring the need for accounting; and narrate the history of accounting

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manila paper, colored markers •

Accounting Theory (n.d.) Retrieved from http:// accountingtheory.weebly.com/nature-and-scope-of-accouting

•

Valencia, E. and Roxas, G. (2009). Basic Accounting, 3rd ed. Valencia Education Supply

•

Valix, Conrado T. et.al. (2015). Financial Accounting, Vol. 1, First part. GIC Enterprises & Co. Inc.

•

Weygandt, J. et. al. (2012) Accounting Principles 10th ed. John Wiley & Sons (Asia) Pte. Ltd.

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INTRODUCTION (3 MINS)

Teacher tip

Communicating learning objectives

1. Introduce the following learning objectives: a. I will be able to define accounting. b. I will be able to describe the nature of accounting. c. I will be able to explain the functions of accounting in business. d. I will be able to narrate the history/srcin of accounting. 2. Ask the learners the following questions: a. Do your parents ask how you spend your allowance every day? b. When deciding between buying a bottle of soft drinks or fruit juice, what is the basis of your decision? Do you compare the prices of both and then decide? c. When going home, do you sometimes choose to walk from school rather than riding a jeepney because you want to save? 3. Acknowledge all the answers of the learners and make a conclusion that accounting is involved in all of these.

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Acknowledge the answers of the learners. As an alternative, ask the learners to write anything they know about accounting on the board.

4. Relate the connection of accounting to our daily activities.

MOTIVATION (2 MINS) Ask the learners “Is accounting important to you?”. Leave this question unanswered. Remind the learners that you will ask this question again after you discuss the introduction to accounting. INSTRUCTION (30 MINS) Define accounting

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“Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic events of an organization to interested users.” (Weygandt, J. et. al)

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Explain the three highlighted words in the graphic: IDENTIFYING–

this involves selecting economic events that are relevant to a particular business transaction The economic events of an organization are referred to as transactions. Examples of economic events or transactions - In a bakery business: • sales of bread and other bakery products 2


• purchases of flour that will be used for baking • purchases of trucks needed to deliver the products RECORDING– this involves keeping a chronological diary of events that are measured in pesos. The diary referred to in the definition are the journals and ledgers which will be discussed in future chapters. COMMUNICATING–

occurs through the preparation and distribution of financial and other accounting reports.

Discuss the nature of accounting

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According to Accounting Theory(http://accountingtheory.weebly.com/nature-and-scope-of-accounting.html): “Accounting is a systematic recording of financial transactions and the presentation of the related information to appropriate persons.” Based on this definition we can derive the following basic features of accounting:

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• Accounting is a service activity. Accounting provides assistance to decision makers by providing them financial reports that will guide them in coming up with sound decisions.

• Accounting is a process: A process refers to the method of performing any specific job step by step according to the objectives or targets. Accounting is identified as a process, as it performs the specific task of collecting, processing and communicating financial information. In doing so, it follows some definite steps like the collection, recording, classification, summarization, finalization, and reporting of financial data.

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• Accounting is both an art and a discipline. Accounting is the art of recording, classifying, summarizing and finalizing financial data. The word ‘art’ refers to the way something is performed. It is behavioral knowledge involving a certain creativity and skill to help us attain some specific objectives. Accounting is a systematic method consisting of definite techniques and its proper application requires skill and expertise. So by nature, accounting is an art. And because it follows certain standards and professional ethics, it is also a discipline.

• Accounting deals with financial information and transactions: Accounting records financial transactions and data, classifies these and finalizes their results given for a specified period of time, as needed by their users. At every stage, from start to finish, accounting deals with financial information and financial information only. It does not deal with non-monetary or non-financial aspects of such information.

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• Accounting is an information system: Accounting is recognized and characterized as a storehouse of information. As a service function, it

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collects processes and communicates financial information of any entity. This discipline of knowledge has evolved to meet the need for financial information as required by various interested groups. Discuss the function of accounting in business

Ask the learners to comment on why accounting is considered as the language of business. Accounting is the means by which business information is communicated to business owners and stakeholders. The role of accounting in business is to provide information for managers and owners to use in operating the business. In addition, accounting information allows business owners to assess the efficiency and effectiveness of their business operations. Prepared accounting reports can be compared with

3


industry standards or to a leading competitor to determine how the business is doing. Business owners may also use historical financial accounting statements to create trends for analyzing and forecasting future sales. Accounting helps the users of these financial reports to see the true picture of the business in financial terms. In order for a business to survive, it is important that a business owner or manager be well-informed. Let us now discuss the function of accounting in business.

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Mr. Juan is a retired government employee who is good at baking.One day he decides to put upa bakery shop in your barangay. He renovates a portion of his house to serve as the area for the production of bread. He purchases baking equipment and raw materials to produce five different types of bread. Mr. Juan also hires Jose to help him with the baking and, at the same time, to be in-charge of sales. Mr. Juan pays Jose on aweekly basis. Every day, Mr. Juan’s wife deposits the daily cash sales in their bank account at XY Savings Bank. With the help of accounting, what possible decisions or questions of Mr. Juan can accounting provide an answer to?

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Possible Answers: • Is my business earning? (profitability) • How much daily or monthly sales do I need in order to recover my fixed cost? (break-even)

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toto hire help me with my production? •• Do CanI need I afford setadditional up a newworkers store in to another place? Where do I get the funds? • Can I afford to pay a bank loan? Discuss the history of accounting

Accounting is as old as civilization itself. It has evolved in response to various social and economic needs of men. Accounting started as a simple recording of repetitive exchanges. The history of accounting is often seen as indistinguishable from the history of finance and business. Following is the evolution of accounting:

• The Cradle of Civilization

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Around 3600 B.C., record-keeping was already commonfrom Mesopotamia, China and India toCentral and South America. The oldest evidence of this practice was the “clay tablet” of Mesopotamia which dealt with commercial transactions at the time such as listing of accounts receivable and accounts payable.

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• 14th Century - Double-Entry Bookkeeping

The most important event in accounting history is generally considered to be the dissemination of double entry bookkeeping by Luca Pacioli (‘The Father of Accounting’) in 14th century Italy. Pacioli was much revered in his day, and was a friend and contemporary of Leonardo da Vinci. The Italians of the 14th to 16th centuries are widely acknowledged as the fathers of modern accounting and were the first to commonly use Arabic numerals, rather than Roman, for tracking business accounts. Luca Pacioli wrote Summa de Arithmetica, the first book published that contained a detailed chapter on double-entry bookkeeping. 4


• French Revolution (1700s) The thorough study of accounting and development of accounting theory began during this period. Social upheavals affecting government, finances, laws, customs and business had greatly influenced the development of accounting.

• The Industrial Revolution (1760-1830) Mass production and the great importance of fixed assets were given attention during this period.

• 19th Century – The Beginnings of Modern Accounting in Europe and America

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The modern, formal accounting profession emerged in Scotland in 1854 when Queen Victoria granted a Royal Charter to the Institute of Accountants in Glasgow, creating the profession of the Chartered Accountant (CA). In the late 1800s, chartered accountants from Scotland and Britain came to the U.S. to audit British investments. Some of these accountants stayed in the U.S., setting up accounting practices and becoming the srcins of several U.S. accounting firms. The first national U.S. accounting society was set up in 1887. The American Association of Public Accountants was the forerunner to the current American Institute of Certified Public Accountants (AICPA). In this period rapid changes in accounting practice and reports were made. Accounting standards to be observed by accounting professionals were promulgated. Notable practices such as mergers, acquisitions and growth of multinational corporations were developed. A merger is when one company takes over all the operations of another business entity resulting in the dissolution of another business.

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Businesses expanded by acquiring other companies. These types of transactions have challenged accounting professionals to develop new standards that will address accounting issues related to these business combinations.

• The Present - The Development of Modern Accounting Standards and Commerce The accounting profession in the 20th century developed around state requirements for financial statement audits. Beyond the industry's self-regulation, the government also sets accounting standards, through laws and agencies such as the Securities and Exchange Commission (SEC). As economies worldwide continued to globalize, accounting regulatory bodies required accounting practitioners to observe International Accounting Standards. This is to assure transparency and reliability, and to obtain greater confidence on accounting information used by global investors. Nowadays, investors seek investment opportunities all over the world. To remain competitive, businesses everywhere feel the need to operate globally. The trend now for accounting professionals is to observe one single set of global accounting standards in order to have greater transparency and comparability of financial data across borders.

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PRACTICE (10 MINS) Divide the class into 2 groups. The first group will act out the definition of accounting while the second group will act out the evolution/history of accounting. ENRICHMENT (5 MINS) Go back to the unanswered question during your introduction of this topic. Ask the learners the following questions: Is accounting important to you? Does it affect your daily activities? How?

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Offer a reward system for the best group or to learners who show outstanding performance.

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EVALUATION (10 MINS) Give a short quiz. Ask the following questions: 1. Define accounting Answer: Accounting is the process of IDENTIFYING, RECORDING and COMMUNICATING economic events of an organization for interested users. 2. Give examples of decisions or questions that can be supported by accounting information. Suggested Answers: • Is my business earning? (profitability) • How much daily or monthly sales do I need in order to recover my fixed cost? (break-even) • Do I need to hire additional workers to help me with my production? • Can I afford to set up a new store in another place? Where do I get the funds? (financing decisions) • Can I afford to pay a bank loan?

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Teacher tip

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60 MINS

Branches of Accounting Content Standards

The learners demonstrate an understanding of the varied branches and areas of accounting, particularly: • Financial Accounting • Management Accounting • Government Accounting • Auditing • Tax Accounting • Cost Accounting • Accounting Education • Accounting Research

Motivation Instruction

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Practice

Enrichment

5

Trees and branches

5

Branches of Accounting

30

Boardwork

10

One question

10

Materials

manila paper, colored markers


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Resources

The learners shall be able to

• make a list of business within the community on the types of accounting services they require. • solve exercises in the identification of the branches of accounting described through the types of services rendered. Learning Competencies


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• Differentiate the branches of accounting. (ABM_FABM11-IIIa-5) • Explain the kinds/types of services rendered in each of these branches. (ABM_FABM11-IIIa-5)

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LESSON OUTLINE

Introduction Introduce the learning objectives

Accounting Basics: Branches of Accounting (n.d.) Retrieved from http://www.investopedia.com/university/accounting/ accounting2.asp •


•


•


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INTRODUCTION ( 5 MINUTES) Introduce the following learning objectives: • I will be able to differentiate the different branches of accounting • I will be able to explain the types of services rendered on the different branches.

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MOTIVATION (5 MINUTES) Draw a big tree with eight branches. As you discuss the topic, write the particular branch of accounting you are discussing on each branch. Label the root of the tree as ’Accounting’.

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INSTRUCTION (30 MINUTES) Branches of Accounting

Discuss the branches of accounting: According to Investopedia, (http://www.investopedia.com/university/accounting/accounting2.asp: “Accounting is divided into several branches to better serve the needs of different users with varying information needs. These branches sometimes overlap and they are often closely intertwined.” Financial Accounting

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Financial accounting is the broadest branch and is focused on the needs of external users. Financial accounting is primarily concerned with the recognition, measurement and communication of economic activities. This information is communicated in a complete set of financial statements. It is assumed under this branch that the users have one common information need. Financial accounting conforms with accounting standards developed by standard-setting bodies. In the Philippines, there is a Council created to set these standards. Examples of these financial reports include:

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• the balance sheet (statement of financial condition) • income statement (the profit and loss statement, or P&L) • statement of cash flows Financial accounting is primarily concerned with processing historical data. Although financial accounting generally meets the needs of external users, internal users of accounting information also use these information for their decision-making needs. Management (or Managerial) Accounting 8


Management accounting emphasizes the preparation and analysis of accounting information within the organization. The objective of managerial accounting is to provide timely and relevant information for those internal users of accounting information, such as the managers and employees in their decision-making needs. Oftentimes, these are sensitive information and is not distributed to those outside the business - for example, prices, plans to open up branches, customer list, etc. Managerial accounting involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business decisions, and similar areas. Government Accounting

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Government accounting is the process of recording, analyzing, classifying, summarizing, communicating and interpreting financial information about the government in aggregate and in detail reflecting transactions and other economic events involving the receipt, spending, transfer, usability and disposition of assets and liabilities. This branch of accounting deals with how the funds of the government are recorded and reported.

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Ask the learners the following questions:

Teacher tip Introduce the the Bureau of Internal Revenue and its role in the administration and implementation of our tax laws.

• What are the sources of income of the government? Possible Answer: Taxes paid by Filipinos • Where do these taxes go? Possible Answer: Roads, Hospitals, for education and others

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Government accounting deals with these transactions, the recording of inflow and outflow of funds of the government. Auditing

There are two types of auditing: external and internal auditing. External auditing refers to the examination of financial statements by an independent CPA (Certified Public Accountant) with the purpose of expressing an opinion as to fairness of presentation and compliance with the generally accepted accounting principles (GAAP). The audit does not cover 100% of the accounting records but the CPA reviews a selected sample of these records and issues an audit report.

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Internal auditing deals with determining the operational efficiency of the company regarding the protection of the company’s assets, accuracy and reliability of the accounting data, and adherence to certain management policies. It focuses on evaluating the adequacy of a company's internal control structure by testing segregation of duties, policies and procedures, degrees of authorization, and other controls implemented by management.

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Tax Accounting

Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and preparation of tax returns. It also involves determination of income tax and other taxes, tax advisory services such as ways to minimize taxes legally, evaluation of the consequences of tax decisions, and other tax-related matters. 9


Cost Accounting

Sometimes considered as a subset of management accounting, cost accounting refers to the recording, presentation, and analysis of manufacturing costs. Cost accounting is very useful in manufacturing businesses since they have the most complicated costing process.

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Cost accountants also analyze actual and standard costs to help managers determine future courses of action regarding the company's operations. Cost accounting will also help the owner set the selling price of his products. For example, if the cost accounting records shows that the total cost to produce one can of sardines is PHP50, then the owner can set the selling price at PHP60.

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Accounting Education

This branch of accounting deals with developing future accountants by creating relevant accounting curriculum. Accounting professionals can become faculty members of educational institutions. Accounting educators contribute to the development of the profession through their effective teaching, publications of their research and influencing students to pursue careers in accounting. Accounting teachers share their knowledge on accounting so that students are informed of the importance of accounting and its use in our daily lives. Accounting Research

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Accounting research focuses on the search for new knowledge on the effects of economic events on the process of summarizing, analyzing, verifying, and reporting standardized financial information, and on the effects of reported information on economic events. Researchers typically choose a subject area and a methodology on which to focus their efforts. The subject matter of accounting research may include information systems, auditing and assurance, corporate governance, financials, managerial, and tax. Accounting research plays an essential part in creating new knowledge. Academic accounting research "addresses all aspects of the accounting profession" using a scientific method. Practicing accountants also conduct accounting research that focuses on solving problems for a client or group of clients. The Accounting research helps standard-setting bodies around the world to develop new standards that will address recent issues or trend in global business.

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PRACTICE (10 MINUTES) Boardwork

Prepare eight flashcards with the branches of accounting written in every card. Write the following on a sheet of Manila paper and ask a learner to identify what branch of accounting renders this service: 1. Preparation of general-purpose financial statements Answer: Financial 2. Evaluation of the performance of a sales department Answer : Managerial 3. Develop standards to address a new business set up Answer: Accounting Research 4. Review tax compliance of the business Answer: Tax Accounting

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5. Evaluate whether a branch of the business complies with the collection and deposit policy of the company Answer: Auditing (Internal) 6. Review whether the financial statements are presented fairly and in compliance with accounting standards Answer: Auditing (External) 7. Report on the spending of government funds Answer: Government Accounting 8. Report on the total cost of materials and labor used in the production Answer: Cost Accounting 9. Conducting lectures on accounting topics Answer: Accounting Education

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ENRICHMENT (10 MINUTES) Ask the learners what branch of accounting do you want to focus on and why?

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60 MINS

Users of Accounting Information Content Standards

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LESSON OUTLINE

The learners demonstrate an understanding of the external and internal users of financial information.

Introduction Introduce the learning objectives


Motivation

The learners shall be able to • Solve exercises and problems on the identification of users of information, types of decisions to be made, and types of information needed by the users. • Cite users of financial information and identify whether they are external or internal users. Learning Competencies

Instruction

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Practice

5

Dream Business

5

Discussion

30

Role playing users

20

Enrichment

Dream Business continued

5

Evaluation

Quiz

5

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Materials school supplies

The learners shall be able to:

• define external users and gives examples ABM_FABM11-IIIa-7 • define internal users and give examples ABM_FABM11-IIIa-8 • identify the type of decisions made by each group of users ABM_FABM11IIIa-9

• describe the type of information needed by each group of users ABM_FABM11-IIIa-10

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Resources

•


•


•


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INTRODUCTION (5 MINUTES) Introduce the following learning objectives: • I will be able to define external users of accounting information and give examples • I will be able to define internal users of accounting information and give examples • I will be able to identify the types of decisions made by each group of users • I will be able to identify the types of information needed by each group of users

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MOTIVATION (5 MINUTES) 1. Ask the learners to recall the definition of accounting and why accounting is considered as the language of business. Accounting information helps users to make better financial decisions. 2. By emphasizing on the communicating part of the definition of accounting, ask the learners what business they would want to enter into. Possible answers: • buying and selling of cars

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• boutique • gasoline station • bakery 3. From the businesses enumerated, choose one business and use this as your example. Ask the learners: “If you are the owner, what do you want to know about the business? What possible decisions can accounting support?” Possible answers on information needs: • How much income have I earned for a certain period? • How much receivables do I have? • How much do I owe my suppliers? • How much is the value of my inventory?

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Possible answers on decision support • Will I be able to pay my liabilities if I earn this much? • Can I expand my business? Will I be able to afford buying new equipment? • Do I need to adjust my selling price? • Do I need to cut costs?

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4. “What if you are from a Local Government Unit (City/Municipality)? Do you think the Local Government ( City/Municipality) will be interested with your accounting reports/records?” Leave this question hanging and introduce to the topic for this lecture. Emphasize to the learners that the focus of your discussions are the users of accounting information and their information needs.

INSTRUCTION (30 MINUTES) Branches of Accounting

Discuss the internal users of accounting information. “Who uses accounting data or information?”

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There are two broad categories of users of financial information: internal and external users. INTERNAL USERS

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Internal users of accounting information are those individuals inside a company who plan, organize, and run the business. These users are directly involved in managing and operating the business. These include marketing managers, production supervisors, finance directors, company officers and owners

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Engage the learners in a question-and-answer type lecture.

Ask the learners to give examples of internal users and follow up with a question: “what information will that user need that can be answered by accounting?”

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Internal users (Primary Users) of accounting information include the following: Management

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Information need: income/earnings for the period, sales, available cash, production cost Decisions supported: analyze the organization's performance and position and take appropriate measures to improve the company results. sufficiency of cash to pay dividends to stockholders; pricing decisions Employees

Information need: profit for the period, salaries paid to employees Decisions supported: job security, consider staying in the employ of the company or look for other employment opportunities 14


Owners Information need: profit or income for the period, resources or assets of the business, liabilities of the business Decisions supported : considerations regarding additional investment, expanding the business, borrowing funds to support any expansion plans.

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Accounting information is presented to internal users usually in the form of management statements. This information will support whatever decision of the internal users. Discuss the external users of accounting information EXTERNAL USERS

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accounts, budgets, forecasts and financial

External users are individuals and organizations outside a company who want financial information about the company. These users are not directly involved in managing and operating the business. The two most common types of external users are potential investors and creditors. Potential Investors use accounting information to make decisions to buy shares of a company . Creditors (such as suppliers and bankers) use accounting information to evaluate the risks of granting credit or lending money. Also included as external users are government regulatory agencies such as Securities and Exchange Commission (SEC), Bureau of Internal Revenue (BIR), Department of Labor and Employment (DOLE),

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Social Security System (SSS), and Local Government Units (LGUs).

External users (Secondary Users) of accounting information include the following:

Creditors: for determining the credit worthiness of an organization. Terms of credit are set by creditors according to the assessment of their customers' financial health. Creditors include suppliers as well as lenders of finance such as banks.

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Tax Authorities (BIR): for determining the credibility of the tax returns filed on behalf of a company.

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Investors: for analyzing the feasibility of investing in a company. Investors want to make sure they can earn a reasonable return on their investment before they commit any financial resources to a company. Customers: for assessing the financial position of its suppliers which is necessary for them to maintain a stable source of supply in the long term. Regulatory Authorities (SEC, DOLE): for ensuring that a company's disclosure of accounting information is in accordance with the rules and regulations set in order to protect the interests of the stakeholders who rely on such information in forming their decisions. Engage the learners in a question-and-answer type lecture:

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Ask the learners to give examples of external users. Follow up with a question: “what kind of information do users need that can be answered by accounting?”. Possible answers on examples of External Users: potential investors – banks suppliers BIR DOLE

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Possible answers on information provided by Accounting: Income or profit of the business resources or assets of the business

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liabilities or amount owed by the business to its suppliers taxes paid by the business salaries and other benefits paid to employees

Possible answers on the decisions of external users that are supported by accounting information:

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Potential Investors – Is it profitable for me to invest in this business?

Banks – If extend a loan to this company, will it be able to pay this loan? Does this company have sufficient resources to pay its loan?

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Suppliers – Do I extend credit to this company? For how long? BIR – Is the owner paying the correct taxes?

DOLE – Are the employees paid according to what the law states? Do they get the benefits required?

16


SUMMARY OF THE DIFFERENCES BETWEEN INTERNAL AND EXTERNAL USERS Internal users of accounting information are those who are involved in planning, organizing and running the business. They need more detailed information on a timely basis in order to support their decisions. Examples of these internal users are managers, employees and owners.

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The external users of accounting information are those individuals or organizations outside a company who are interested in its financial information. Examples of these external users are potential investors, suppliers and government agencies.

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PRACTICE (10 MINUTES) Boardwork

Divide the class into two groups. Require them to act out internal and external users of accounting information. Give them five to ten minutes to meet and prepare for their presentation. Each group should be able to present the information needs of the different users and relate these information to their decision-making process.

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ENRICHMENT (10 MINUTES) Go back to the unanswered question in the first part of your introduction. Is the Local Government Unit (LGU) interested in your accounting reports?

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Possible Answer:

Yes. The LGU will check whether you are paying your local taxes. As required, businesses must have a business permit before they are allowed to operate in the city or municipality. This is renewed every year, with appropriate taxes paid. The local government may review your

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accounting records to check whether you are declaring or paying the correct taxes.

Ask this follow-up question: “Are the officers of the Local Government Unit internal or external users? Why? Answer: External. They are not directly involved in the operation or management of the business.

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EVALUATION (5 MINUTES) Give at least 3 internal users of accounting information. Give at least 3 external users of accounting information. Differentiate internal users from external users of accounting information.

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60 MINS

Forms of Business Organizations Content Standards

The learners demonstrate an understanding of the various forms of business organizations, as follows: •

Sole /Single Proprietorship

•

Partnership


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• Corporation Cooperatives

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LESSON OUTLINE

Introduction Sharing Dream Businesses

Practice

5

Allowance

5

Discussion and Interactive Recitation

30

Group work

10


Enrichment

Matrix

5


Evaluation

Quiz

5

• differentiate the forms of business organizations in terms of nature of ownership • make a list of existing business entities in their community and identify the form of business organization

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Manila paper, permanent marker Resources



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• differentiate the forms of business organizations. (ABM_FABM11-IIIb-11) • identify the advantages and disadvantages of each form. (ABM_FABM11IIIb-12)


Materials sample stock certificate, sample articles of incorporation,

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At the end of this lesson, the learners will be able to: • identify the forms of business organizations by nature of ownership. • give examples of businesses in their respective communities and identify the form • identify the advantages and disadvantages of the four forms of business organization

•

Partnerships (Title IX). Civil Code of the Philippines. Articles 1767 to 1867

•

Corporation Code of the Philippines. (n.d) Retrieved from http://www.sec.gov.ph/laws/pdf/Corporation Code of the Philippines.pdf

•

Republic Act 9520 (2008). Philippine Cooperative Code of 2008. Retrieved from http//www.cda.gov.ph/resources/ issuances/philippine-cooperative-code-of-2008/republicact-9520

•


•


20


INTRODUCTION ( 5 MINS) 1. Ask the learners whether they want to be in business. Then ask what business they want to put up and why. 2. Introduce the following learning objectives:

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•

I will be able to identify the forms of business organizations by nature of ownership.

•

will be able to give examples of businesses in my community and identify their form.

•

I will be able to identify the advantages and disadvantages of the four forms of business organizations.

MOTIVATION (5 MINUTES) 1. Ask them the following questions: How much is your daily allowance? • How much is your daily allowance? • Do you know that with your daily allowance you can own a company? 2. Link the answers of the learners.

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Tell them their daily allowance can be used to buy shares of stock of a corporation and that they will become the owner of such a company”.

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3. Inform them of the subject matter of your lecture.

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Teacher tip • Acknowledge the answers of the l earners and use the amounts as your basis in asking the second question. • Inform the learners that size of capital is not the only basis of owning a corporation.

INSTRUCTION (30 MINUTES) 1. Discuss sole/single proprietorship. “Suppose you want to open your own sari-sari store that will need PHP10,000 to start and you used your PHP10,000 savings to start the said business. You are the sole owner of the said sari-sari store. This type of business is called sole/single proprietorship.” a. Ask what is their idea of a sole/single proprietorship. Possible responses: • A form of business is owned by one person; the simplest, and the most common form of business organization 21


•

It is not separate from the owner. The business and the owner are inseparable

Inform the class how the Department of Trade and Industry is the government agency that regulates the trade names of sole/single proprietorship businesses.

b. Discuss the advantages of sole/single proprietorship. Possible responses: •

The owner keeps all the profits.

•

The owner makes all the decisions.

•

It is easy to form and operate.

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Misconception:

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c. Discuss the disadvantages of sole/single proprietorship. • The life of the business is limited to the life of the owner. Once the owner dies, the business will cease to operate under the name of the proprietor. •

Teacher tip

Some learners may ask that in their community, once a person dies the business is continued by his relatives. Emphasize that upon death of the old owner, the business legally ceases. The one taking over is considered as the new owner.

The amount of capital is limited only bythe wealth of the proprietor.

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2. Introduce the concept of partnership by asking the following suggested questions: “What if the needed amount to start your dream sari-sari store is PHP50,000 and you only have PHP25,000 cash savings. You ask Juan, your friend if he is willing to invest his PHP25,000 and become part owner of the sari-sari store. Assuming he agrees, what form of business organization was created?”

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Ask learners totypes use actual names ofother theirthan a friends. Other of businesses sari-sari store may be used by asking the learners. Read the Civil Code of the Philippines Articles 1767 to 1867 to supplement your readings.

a. Discuss partnerships • A form of business owned by two or more persons. The details of the arrangement between the partners are outlined in a written document called articles of partnership.

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•

Profits are divided among partners based on their agreed sharing.

•

The owner is called a partner.

b. Discuss the advantages of a partnership • Higher capital because two or more persons will contribute to the common fund. •

It is easy to operate like a sole/single proprietorship

22


c. Discuss the disadvantages of a partnership • The profits are divided among the partners.

3.

Teacher tip

•

A partner can be held liable for the acts of the other partners.

•

In a lawsuit, the personal properties of the partners can be held beyond their contributions and may be used to answer for any liability of the partnership.

Introduce the concept of a corporation by asking the following suggested questions:

Visit the Securities and Exchange Commission (SEC) website or download the Corporation Code of the Philippines to supplement your readings.

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“Assuming your dream is to open a grocery store and not just a sari-sari store but you will need PHP1,000,000 to start the said business. You have only PHP25,000, your friend Juan has PHP25,000, and your mother is willing to invest her PHP50,000, but still these are not enough to start your dream grocery store. Where will you get the money to raise the PHP1 million? You may consider setting up a corporation?”

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Cite names of corporations in their locality or ask the learners if they have any idea what a corporation is before discussing the topic. Download sample Articles of Incorporation to be shown during the discussion.

a. Discuss corporations

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•

A corporation is a business organized as a separate legal entity (artificial person) under the corporation law with ownership divided into transferable shares of stocks

•

Emphasize that it is the law (Corporation Code of the Philippines) that creates a corporation.

•

The corporation begins its existence from the date the Articles of Incorporation is approved by the Securities and Exchange Commission (SEC).

•

The SEC (Securities and Exchange Commission) is the government agency primarily tasked to regulate private corporations in the Philippines.

•

The owners are called stockholders or shareholders.

•

The word ‘Corporation/Incorporation/Corp./Inc.’ appears in the name of the entity.

•

The voting rights of a shareholder is generally based on the percentage of ownership.

•

The management of the business is delegated by the shareholders to the Board of Directors

•

The ownership is divided into shares and the value of one share may be denominated at a smaller amount, for example at PHP10 per share.

•

The proof of ownership is evidenced by a stock certificate.

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At this point, the teacher will share a sample of a stock certificate and articles of incorporation. 23


b. Discuss the advantages of a corporation • Can easily raise additional funds by selling shares of stocks to the public. •

Shareholders are not personally liable for the debts of the corporation. The extent of their liability is limited to their equity (ownership) in the corporation.

c. Discuss the disadvantages of a corporation • It is relatively complicated to set up. •

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Subject to several legal restrictions as listed in the Corporation Code of the Philippines

4. Discuss the nature of cooperatives by asking the following suggested questions: “Assuming all the mothers in your barangay decided to open a sari-sari store where all the members can buy in cash or in credit. Some mothers were also taught how to sew dresses and bags as part of the project of the group. These bags are then sold to a certain company. Aside from that, the organization provides seminars to the members on various topics involving mothers and their roles. At the end of the year, the profits are distributed among the members based on their capital contribution. The amount of their purchases in the sari-sari store during the year is also computed and they receive something out of the profit/surplus based on their purchases. This form of business organization is

O

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called a cooperative. a. Discuss cooperatives • A cooperative is a duly registered association of persons with a common bond of interest, voluntarily joining together to achieve their social, economic and cultural needs. •

The owners are called members who contribute equitably to the capital of the cooperative.

•

The members are expected to patronize their products and services.

•

The word ‘cooperative’ appears in the name of the entity.

•

This form of business organization is regulated by the Cooperative Development Authority (CDA).

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The teacher may introduce the role of CDA as a government agency regulating the cooperatives. b. Discuss the advantages of a cooperative • Enjoys certain tax exemption privilege •

Promotes the concept of sharing resources

24


c. Discuss the disadvantages of a Cooperative • Limited distribution of surplus •

Requires continuous education programs for members.

•

The members have active and direct participation in the business of the cooperative.

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5. Summarize all the forms of business organizations by asking a learner to write on the board all the forms. Possible Answers:

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1. Sole / Single Proprietorship 2. Partnership 3. Corporation 4. Cooperatives

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Ask the learner to give a brief description of each form and the advantage of creating such forms. End your discussion by referring to the questions posed in the introduction/motivation .

“Your PHP10 daily allowance may be used to buy shares of stocks, thus making you an owner of a Corporation.”

PRACTICE (10 MINUTES) Divide the class into four groups.

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1. Assign each group a form of business organization. 2. Assign a group leader/reporter for every group.

3. Ask each group to list down at least three businesses in their locality or in the country • For every business, the learner will identify the business activities, products or services offered by each business. •

The group may be asked to identify the owners of every businesses listed.

4. Ask the group leader or reporter to present the output of each group.

25


ENRICHMENT (5 MINUTES) 1. Post the blank matrix on the board. (see teaching materials below) 2. Ask a learner to fill-out the blank matrix on the board. Assign one learner per cell. ITEM

SoleProprietorship

Partnership

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2. Management (who manages the business) 3. Termination of the Business 4. Government agency assigned primarily to regulate 5. Transfer of Ownership 6.

Liability of Owners

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Corporations

1. Number of Possible Owners

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EVALUATION (5 MINUTES) 1. Enumerate all the forms of business organizations by nature of ownership. 2. Differentiate a corporation from a partnership according to number of owners and their liabilities. 3. Differentiate a corporation from cooperative. 4. Give two example of corporations in the Philippines. 5. Give two examples of cooperatives in the Philippines.

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Cooperatives

ITEM

SoleProprietorship

Partnership

1. Number of Possible Owners

Corporations

2more 1 or

At least 5

Cooperatives 15 or more

2. Management (who manages the business)

Owner (but he may hire somebody)

Partners (or they may hire managers)

Board of Directors and operating management

Board of Directors and operating management

3. Termination of the Business

Death of the owner

Death of any partner or withdrawal of a partner

As stated in the Articles of Incorporation, not to exceed 50 years.

As stated in the Articles of Cooperation, not to exceed 50 years.

4. Government agency Inlimitedcapacity,DTI assigned primarily to regulate

Inlimitedcapacity,DTI

5. Transfer of Ownership

Sell the business (it’s a new entity under a new owner)

6.

Unlimited ; other properties not used in the business may be held liable for the obligations of the business

Liability of Owners

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SEC

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Sell the business or interest Sellstocks of a partner (consent of other partners is necessary)

DC E P Generally unlimited; the other properties of the partners may be held liable for the obligations of the partnership.

Limited to the stock investment of the shareholder

There are types of partnerships that limit the liability of the partners

27


CDA Cannottransfernorsellhis membership

Limited to the capital contribution of the member


60 MINS

Types of Business According to Activities Content Standards

The learners demonstrate an understanding of the types of business according to activities, particularly: •

service business

•

merchandising business

•

manufacturing business


O

Practice


The learners shall be able to differentiate the types of business according to activities and make a list of businesses in their community according to their activities. Learning Competencies


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At the end of this lesson, the learners will be able to: • review the types of business according to activities • describe a service entity and give examples • describe a merchandising entity and give examples • describe a manufacturing entity and give examples

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5

Local Examples and Application

10

Discussion of the subject matter

20

Easy-medium-hard questions

10

Enrichment

More local examples

5

Evaluation

Quiz

5

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The learners should compare and contrast the types of business according to activities (ABM_FABM11-IIIb-13) identify the advantages and business requirements of each type (ABM_FABM11-IIIb-14)

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LESSON OUTLINE

Introduction Review previous discussion

Materials writing materials, school pads, projector and slides Resources

Wild, J. (2009). Principles of Accounting 19th ed. McGraw Hill Publishing Haddock, M., Price, J., & Farina, M. (2012). College Accounting: A Contemporary Approach 2nd Ed., New York: McGraw-Hill/Irwin

28


INTRODUCTION ( 5 MINS) Connect and/or review prerequisite knowledge: • Review the types of business organizations • Sole / Single proprietorship – owned by one person • Partnership – owned by partners (two or more persons) • Corporation – owned by shareholders • Emphasize that the types of business organizations differ on the presentation of the equity side but the accounting for assets and liabilities are essentially the same • Tell the learners that this topic, types of business operations, differs in terms of the presentation of the statement of comprehensive income (income statement) and the content statement of financial position (balance sheet)

O

MOTIVATION (10 MINS) 1. Give Local Example and Application • Ask the learners how the following earn profits: • Bruno’s Barber Shop • Clean Ko Place Mo Cleaning Services • Tutorial Services • Manila Hotel • Cynthia’s Food Vendor • Susan’s Roses Flower Shop • Wash Your Problem Laundry Shop • Bread Pit Bakery • Cut and Face Parlor • Fish Be With You Fish Shop

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2. After checking their answers, emphasize that because of the nature of their operations, the presentation of their statement of comprehensive income and the content of the statement of financial position may differ from each other ossible Answers 29


•

by providing services

•

by selling goods

INSTRUCTION (20 MINS) Lecture

3 types of business organizations: • Service Business This type of business offers professional skills, advice and consultations.

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Examples: barber shops and beauty parlors, repair shops, banks, accounting and law firms •

Merchandising Business

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This type of business buys at wholesale and later sells the products at retail. They make a profit by selling prices that are higher than their purchase costs. This type of business is also known as "buy and sell".

the merchandise or products at

Examples are: book stores, sari-sari stores, hardware stores

• Manufacturing Business This type of business buys raw materials and uses them in making a new product, therefore combining raw materials, labour and expenses into a product for sale later on.

E

Examples are: shoe manufacturing businesses, car manufacturing plants Additional information:

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There are businesses that may be classified under more than one type of business. A bakery, for example, combines raw materials in making loaves of bread (manufacturing), sells hot pan de sal (merchandising), and caters customers’ orders in small coffee table servings of ensaymada and hot coffee (service).

30


PRACTICE (10 MINS) Group work

Ask them to identify if it is a service, merchandising, manufacturing business or hybrid: 1. Provides services to customers 2. Sells goods to customers 3. Raw materials are available 4. Goods to be sold are purchased from a supplier 5. Goods to be sold are produced by the company itself 6. Supplies are used, no goods to be sold

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7. Bakery 8. Barber shop 9. Cellphone store 10. Abenson appliances

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Key Answers (1) service (2) either merchandising or manufacturing (3) manufacturing (4) merchandising (5) manufacturing (6) service (7) manufacturing (8) service (9) merchandising (10) merchandising

ENRICHMENT (5 MINUTES) Provide local examples. You can use the activity below. 1. Ask the learners to think of five companies/stores who do service, merchandising and manufacturing 2. Call on a learner and ask why those businesses were categorized as service, merchandising or manufacturing

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EVALUATION (5 MINUTES) Homework activity: Ask the learners to look for a business that is either a service, merchandising or manufacturing business. Ask them to interview the owner by asking the following questions. Pick someone from the class to discuss his findings. 31



120 MINS

Accounting Concepts and Principles Content Standards

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LESSON OUTLINE

The learners demonstrate an understanding of accounting Concepts and Principles

Introduction Communicate learning objectives

10


Motivation

Real life situation

15

Discussion

40

Exercises

40

Enrichment

More local examples

10

Evaluation

Homework

The learners shall be able to identify generally accepted accounting principles Learning Competencies

The learners shall be able to explain the varied accounting concepts and principles (ABM_FABM11-IIIb c-15) ; solve exercises on accounting principles as applied in various cases (ABM_FABM11-IIIb-c-16)


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Practice

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At the end of this lesson, the learners will be able to enumerate the principles of accounting; differentiate each principle; and, apply the accounting principle in a business setting

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Instruction

5

Materials school supplies Resources

Wild, J. (2009). Principles of Accounting 19th Ed. McGraw Hill Publishing. Haddocl, M., Proce, J., & Farina, M. (2012). College Accounting: A Contemporary Approach, 2nd ed. New York: McGraw-Hill/Irvin Valencia, E.G. & Roxas, G.F. (2010). Basic Accounting 3rd ed. Mandaluyong City, Philippines: Valencia Educational Supply.

32


INTRODUCTION (10 MINS) Introduce the lesson by starting with a review of the last topic. You can use the suggested concept map and statement below.

O MOTIVATION (15 MINS) Connect to a real life situation

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1. Remind the learners that the topic revolves on possible violations of the principles and that they need to be aware of it. 2. Hand out a copy of an article made specifically for this lesson 3. Let them read and answer the text quietly for 10 minutes.

33


Teacher tip You may use your own way to introduce the topic.

Suggested Introductory Statement : Last time, we were able to learn that Accounting is considered the language of business. In order for business entities to determine their financial performance, accounting is needed. There are different forms of business entities according to its organization and operations. A business can be organized as a sole proprietorship, a partnership or corporation. A business can be operated as a service, merchandising and manufacturing entity. Sometimes we want to determine our performance compared to similar companies, however, since there are a lot of ways and assumptions to present financial reports, we need to have a generally accepted rule for accounting. The purpose of our lesson for this session is for you to be able to identify the different concepts and principles of accounting and identify if a specific situation follows or violates an accounting principle.

Petness First Petshop Juan dela Cruz opened his pet shop business called Petness First Petshop. He opened a bank account for his business and deposited PHP500,000. The business earned PHP50,000 but he had doubts with the recorded expense of PHP60,000. He is not sure if he should include the following items as expenses: Salary expense

20,000

Rent expense Utilities expense (at home) Utilities expense (at the store)

10,000 15,000 10,000

Insurance expense

5,000

Withdrawals

10,000

TOTAL

60,000

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4. Ask the students what they think should not be included as expenses. Then explain why. Possible Responses : Salary expense – it should be included since it is related to the operations of the business Rent expense – it should be included since the rent is for the business Utilities expense (home) – should not be included; it is a personal expense

E

Utilities expense (store) – should be included; it is an expense of the business Insurance expense – should be included since the insurance is for the business

D

Withdrawals – should not be included since the withdrawal is for personal use

Follow up statement :

The activity is an application of the Business Entity Principle which is one of the most important principles in accounting. Other principles of accounting will be discussed in the next section.

34


INSTRUCTION (40 MINS) Give a lecture. The following principles should be discussed. After each principle, give a practical example. Suggested examples are given below.

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• Business entity principle – a business enterprise is separate and distinct from its owner or investor. Examples :

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o If the owner has a barber shop, the cash of the barber shop should be reported separately from personal cash. o The owner had a business meeting with a prospective client. The expenses that come with that meeting should be part of the company’s expenses. If the owner paid for gas for his personal use, it should not be included as part of the company’s expenses. • Going concern principle – business is expected to continue indefinitely.

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Example: When preparing financial statements, you should assume that the entity will continue indefinitely. • Time period principle – financial statements are to be divided into specific time intervals. Example :

o Philippine companies are required to report financial statements annually.

o The salary expenses from January to December 2015 should only be reported in 2015.

E

• Monetary unit principle – amounts are stated into a single monetary unit Example :

D

o Jollibee should report financial statements in pesos even if they have a store in the

United States.

o IHOP should report financial statements in dollars even if they have a branch here in the Philippines • Objectivity principle – financial statements must be presented with supporting evidence. Example : o When the customer paid Jollibee for their order, Jollibee should have a copy of the receipt to represent as evidence. 35


o When a company incurred a transportation expense, a voucher should be prepared as evidence. • Cost principle – accounts should be recorded initially at cost. Example :

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o When Jollibee buys a cash register, it should record the cash register at its price when they bought it. o When a company purchases a laptop, it should be recorded at the price it was purchased.

• Accrual Accounting Principle – revenue should be recognized when earned regardless of collection and expenses should be recognized when incurred regardless of payment. On the other hand, the cash basis principle in which revenue is recorded when collected and expenses should be recorded when paid. Cash basis is not the generally accepted principle today.

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Example:

When a barber finishes performing his services he should record it as revenue. When the barber shop receives an electricity bill, it should record it as an expense even if it is unpaid.

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• Matching principle – cost should be matched with the revenue generated. Example:

When you provide tutorial services to a customer and there is a transportation cost incurred related to the tutorial services, it should be recorded as an expense for that period.

E

• Disclosure principle – all relevant and material information should be reported. Example:

D

The company should report all relevant information.

• Conservatism principle – also known as prudence. In case of doubt, assets and income should not be overstated while liabilities and expenses should not be understated. Example: In case of doubt, expenses should be recorded at a higher amount. Revenue should be recorded at a lower amount. 36


• Materiality principle – in case of assets that are immaterial to make a difference in the financial statements, the company should instead record it as an expense. Example:

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A school purchased an eraser with an estimated useful life of three years. Since an eraser is immaterial relative to assets, it should be recorded as an expense.

PRACTICE (40 MINS)

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A. Concept check. Use the following multiple choice questions for practice. Ask the students to answer the following multiple choice questions: 1. The accounting guideline that requires financial statement information to be supported by independent, unbiased evidence other than someone's belief or opinion is the: a. Business entity principle b. Monetary unit principle c. Going-concern principle d. Cost principle e. Objectivity principle

E

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2. The principle that requires every business to be accounted for separately and distinctly from its owner or owners is known as the: a. Objectivity principle b. Business entity principle c. Going-concern principle d. Revenue recognition principle e. Cost principle

D

3. The rule that requires financial statements to reflect the assumption that the business will continue operating instead of being closed or sold, unless evidence shows that it will not continue, is the: 37


a. Going-concern principle b. Business entity principle c. Objectivity principle d. Cost Principle e. Monetary unit principle

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4. To include the personal assets and transactions of a business's owner in the records and reports of the business would be in conflict with the: a. Objectivity principle

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b. Realization principle c. Business entity principle d. Going-concern principle e. Revenue recognition principle

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5. The objectivity principle: a. means that information is supported by independent, unbiased evidence b. means that information can be based on what the preparer thinks is true

c. means that financial statements should contain information that is optimistic d. means that a business may not re-organize revenue until cash is received

E

6. Marian Mosely is the owner of Mosely Accounting Services. Which accounting principle requires Marian to keep her personal financial information separate from the financial information of Mosely Accounting Services? a. Monetary unit principle b. Going-concern principle c. Cost principle d. Business entity principle

D

7. Which of the following accounting principles would require that all goods and services purchased be recorded at cost? a. Going-concern principle 38


b. Continuing-concern principle c. Cost principle d. Business entity principle Answers : E, B, A, B, A, D, C B. Matching. Match the following words with their definition: a. Going concern principle

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e. Time period principle

h. Monetary unit principle

b. Objectivity principle

f. Cost principle

i. Accrual accounting principle

c. Matching principle

g. Disclosure principle

j. Conservatism principle

d. Materiality principle

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___________________ 1. All relevant information should be included in the financial reports ___________________ 2. In case of doubt, assets and income should not be overstated. ___________________ 3. Assume that the company will continue indefinitely.

___________________ 4. All transactions should be supported by unbiased evidence. ___________________ 5. Expenses should be recorded in the period when the revenue is generated. ___________________ 6. Minimal costs incurred should be recorded as an expense.

E

___________________ 7. A Philippine company should report financial statements in pesos. ___________________ 8. A barber who performs services for a client should record revenue.

D

___________________ 9. Statement of Financial position should be recorded as of December 31, 2015. ___________________ 10. A company that purchases furniture should record it at its acquisition price. Answers: 1. G

2. J

3. A

4. B

5. C

6. D

7. H

8. I

9. E

10. F

39


ENRICHMENT (10 MINS) Provide local examples. You can use the activity below. Accounting principles. Indicate which principles are violated

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1. The owner-manager bought a computer for personal use. The invoice was given to the accountant who recorded it as an asset of the business. 2. The statement of financial position of a company included an equipment purchased from Japan for 350,000 yen. It was reported at that amount in the statement of financial position while all the other assets were reported in Philippine pesos.

O

3. No financial statements were prepared by Michael Go for his business. He explained that he will prepare the statements when he closes the business, which he predicts to take place after 20 years. 4. Aside from owning a shoe store, Albert operates a canteen. The assets of the canteen are reported in the statement of financial position of the shoe store. 5. Purchased a hammer at a cost of PHP500. This was recorded as an asset and expense to decrease its value by PHP50 per year for 10 years.

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6. A food company ordered a machine needed in the assembly line of its production department. Upon order, the machine was immediately listed as one of its assets. Answers : (1) Business entity (2) Monetary unit (3) Time period (4) Business entity (5) Materiality (6) Objectivity

EVALUATION (5 MINS) Homework activity: 1. Ask the learners to think of two real life examples for each principle discussed. 2. Ask the learners to interview a business owner and ask them about their accounting practices. The students should identify if there has been any violation of the accounting principles.

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60 MINS

The Accounting Equation Content Standards Performance Standards

The learners shall be able to solve problems by applying the accounting equation. Learning Competencies

The learners shall be able to illustrate the accounting equation ; perform operations involving simple cases with the (ABM_FABM11-IIIb-c-17) use of the accounting equation (ABM_FABM11-IIIb-c-18)

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LESSON OUTLINE

The learners demonstrate an understanding of the accounting equation.


10

Motivation

Real life situation

20

Discussion

40

Exercises

20

Enrichment

More local examples

25

Evaluation

Homework

Instruction

O

Practice


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At the end of this lesson, the learners will be able to equate assets with liabilities and equity solve problems using the accounting equation

5

Materials school supplies Resources

Wild, J. (2009). Principles of Accounting 19th ed. McGraw Hill Publishing

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Haddock, M., Price, J., & Farina, M. (2012). College Accounting: A Contemporary Approach, 2nd ed. New York: McGraw-Hill/Irvin Valencia, E.G.& Roxas, G.F. (2010). Basic Accounting 3rd ed., Mandaluyong City, Philippines: Valencia Educational Supply.

41


INTRODUCTION (10 MINS) Communicate learning objectives • Tell the learners the learning objectives of this chapter • Understand the elements of the accounting equation • Use the accounting equation to solve problems • Give them an overview regarding the accounting equation • That the accounting equation is Assets = Liabilities + Equity

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• That for every transaction, the accounting equation should always be balanced. • That Assets are resources owned by the business. Ask them to enumerate or give an example of Assets

• That Liabilities are obligations by the business. Ask them to enumerate or give an example of Liabilities • Explain that Equity is the residual interest of the owner of the business. Meaning, any assets left after paying liabilities is the right of the owner of the business.

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• Explain that there are four elements that affect equity: (1) Investment; (2) Withdrawal; (3) Revenue, and; (4) Expenses.

MOTIVATION (20 MINS) Connect to a real life situation.

1. Place the accounting equation at the board. 2. Ask the learners for tenexamples of business transactions

E

3. Prove that for every transaction the accounting equation should always balance.

INSTRUCTION (40 MINS)

D

Give a lecture. Illustrate how each transaction affects the accounting equation. Illustration of the effects of the transaction in the accounting elements

42


Assets invested by the owner

July 1 - Paolo Reyes started a delivery service on July 1, 2013. The following transactions occurred during the month of July. He invested PHP800,000 cash and Cars amounting to PHP200,000

Borrowings from the bank

July 2 – Reyes borrowed PHP100,000 cash from PNB for use in his business.

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Asset purchased for cash July 7 – Bought tables and chairs from Orocan and paid PHP45,000 cash

Assets purchased on account

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July 15 – Various equipment were purchased on account from Fortune for PHP55,000

Cash withdrawal by the owner 43


July 18 – Reyes made a cash withdrawal of PHP5,000 for personal use

Payment of liability

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July 20 – The account due to Fortune was paid in cash

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DC E P 44


The following table summarizes the effects of these transactions on the accounting equation

O Determining profit through operation

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DC E P

•

Accrual basis of accounting vs Cash basis of accounting – accrual basis recognizes revenue when earned and recognizes expenses when incurred

•

Under the expense recognition principle, expenses can be recognized either as: (1) matching; (2) systematic allocation, or; (3) direct association.

•

Profit measures the performance of the company. If the revenue exceeds expenses, then it is a net profit; otherwise, it is a net loss.

Received cash for revenue earned 45


July 21 – A customer hired the services of Reyes. Cash of PHP15,000 was received from the customers.

Paid cash for expenses incurred

July 22 – Cash was paid for the following : gas and oil, PHP500 and car repairs, PHP1,000.

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Revenue rendered on account

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July 24 – Another customer hired the services of Reyes and promised to pay PHP16,000 on July 31.

Paid for expenses incurred

July 25 – Paid PHP500 for telephone bill.

D

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Revenue earned with a downpayment, balance on account

46


July 27 – Another customer hired the services of Reyes. A bill was issued to them for PHP20,000, 50% of which was collected

Customer’s account collected in cash

July 30 – The customer on July 24 paid 50% of his account in cash.

O Paid cash for expenses incurred

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July 31 – Paid PHP10,000 for rental of office space, and salaries of PHP9,000

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47


PRACTICE (25 MINUTES) Concept check. Use the following question set for practice.

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For each transaction, tell whether the assets, liabilities and equity will increase (I), decrease (D) or is not affected (NE).

O D

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DC E P 48


Possible Answers:

O ENRICHMENT (5 minutes)

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Provide local examples. Use the activity below. Instead of giving the transaction, the activity below is in reverse. Let them describe the given transaction. Describe each transaction.

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O Answer Key:

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1. The owner invested cash of PHP150,000 or the business earned PHP150,000 cash from providing services. 2. Purchased equipment at PHP20,000 for cash.

3. The owner withdrew cash of PHP112,500 or the business incurred PHP112,500 expenses and paid in cash.

E

4. The company purchased supplies on account.

5. The owner withdrew cash of PHP15,000 or the business incurred PHP15,000 expenses and paid in cash.

D

6. Paid liabilities worth PHP53,000.

7. The owner withdrew supplies worth PHP8,000 or the business used supplies worth PHP8,000.

EVALUATION (15 MINS) Give the following questions as their assignment

Jerome Garcia started a new business and completed these transactions during August: 50


Aug.

1

Garcia invested PHP48,000 cash in the business.

1

Rented office space and paid PHP800 cash for the August rent.

3

Purchased exploration equipment for PHP22,000 by paying PHP12,000 cash and agreeing to pay the balance in 3 months.

5

Purchased office supplies by paying PHP1,500 cash.

6

Completed exploration work and immediately collected PHP420 cash for the work.

8

Purchased PHP1,350 of office equipment on credit.

15

Completed exploration work on credit in the amount of PHP8,000.

18

Purchased PHP700 of office supplies on credit.

20

Paid cash for the office equipment purchased on August 8.

24

Billed a client PHP2,400 for work completed; the balance is due in 30 days.

28

Received PHP5,000 cash for the work completed on August 15.

30

Paid the assistant’s salary of PHP1,100 cash for this month.

30

Paid PHP340 cash for this month’s utility bill.

30

Garcia withdrew PHP1,050 cash from the business for personal use.

Required

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1. Arrange the following asset, liability, and equity titles in a table: Cash; Accounts Receivable; Office Supplies; Office Equipment; Exploration Equipment; Accounts Payable; Jerome Garcia, Capital; Jerome Garcia, Withdrawals; Revenues; and Expenses. 2. Use additions and subtractions to show the effects of each transaction on the accounts in the accounting equation. Show new balances after each transaction.

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360 MINS

Types of Major Accounts Content Standards

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LESSON OUTLINE The learners demonstrate an understanding of the five major accounts, namely: assets, liabilities, capital, income and expenses. Introduction Communicate learning objectives


Motivation

The learners shall be able to define, identify, and classify accounts according to Instruction the five major types.

O

Practice


The learners shall be able to • •

Discuss the five major accounts (ABM_FABM11-IIId-e-19) Cite examples of each type of account (ABM_FABM11-IIId-e-20)

•

Prepare a chart of accounts (ABM_FABM11-IIId-e-21)

Real life situation

10 10

Discussion

240

Exercises

60

Enrichment

More local examples

35

Evaluation

Homework

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5

Materials writing materials, school pad, projector and Powerpoint Resources


At the end of this lesson, the learners will be able to: • identify the account as assets, liabilities, capital, income or expenses • cite an example of each type of account • prepare a chart of accounts

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Wild, J. (2009). Principles of Accounting 19th ed. McGraw Hill Publishing Haddock, M., Price, J., & Farina, M. (2012). College Accounting: A Contemporary Approach, 2nd ed. New York: McGraw-Hill/Irvin Valencia, E.G.& Roxas, G.F. (2010). Basic Accounting 3rd ed., Mandaluyong City, Philippines: Valencia Educational Supply.

52


INTRODUCTION (10 MINS) Connect and/or review prerequisite knowledge •

•

Review the accounting equation. Ask them to differentiate the following: •

assets – resources owned by the company

•

liabilities – debt owed by the company

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• equity – residual interest of the owners Tell the learners that it is hard to record transactions using assets, liabilities and equity classification. The learners should use a device to record the changes in the accounting equation. The device used to record changes in accounting equation is called the Account.

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MOTIVATION (10 MINS) Give local examples and applications:

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Ask the learners how they understand assets, liabilities and equity by asking them to give examples of each. Lecture Proper

Teacher tip Ask the learners on what they see in the classroom as assets. Ask them to enumerate. Also ask them what they need to purchase if they will be putting up a business.

1. Introduce the types of major accounts: Assets, Liabilities, Owner’s Equity, Income and Expense. • Define Assets, Liabilities, Owner’s Equity, Income and Expense

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•

Assetsare the resources owned and controlled by the firm.

•

Liabilitiesare obligations of the firm arising from past events which are to be settled in the future.

•

Equityor Owner’s Equity are the owner’s claims in the business. It is the residual interest in the assets of the enterprise after deducting all its liabilities.

•

Incomeis the increase in economic benefits during the accounting period in the form of inflows of cash or other assets or decreases

D

of liabilities that result in increase in equity. Income includes revenue and gains. •

Expensesare decreases in economic benefits during the accounting period in the form of outflows of assets or incidences of

liabilities that result in decreases in equity.

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2. Assets Discuss the difference between Current vs. Non-Current Assets, and Tangible vs. Intangible Assets. •

Receivable, Merchandise Inventory, Prepaid Expense, etc. •

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Current Assetsare assets that can be realized (collected, sold, used up) one year after year-end date. Examples include Cash, Accounts Non-current Assets are assets that cannot be realized (collected, sold, used up) one year after year-end date. Examples include Property,

Plant and Equipment (equipment, furniture, building, land), long term investments, etc. •

Tangible Assets are physical assets such as cash, supplies, and furniture and fixtures.

•

Intangible Assets are non-physical assets such as patents and trademarks

O

Discuss the account titles used for Asset Accounts. Define each account and differentiate one from the other.

Current Assets •

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Cash is money on hand, or in banks, and other items considered as medium of exchange in business transactions.

•

Accounts Receivable are amounts due from customers arising from credit sales or credit services.

•

Notes Receivableare amounts due from clients supported by promissory notes.

•

Inventoriesare assets held for resale

•

Suppliesare items purchased by an enterprise which are unused as of the reporting date.

•

Prepaid Expenses are expenses paid in advance. They are assets at the time of payment and become expenses through the passage of

time.

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•

Accrued Incomeis revenue earned but not yet collected

•

Short term investments are the investments made by the company that are intended to be sold immediately

Non-Current Assets •

Property, Plant and Equipment are long-lived assets which have been acquired for use in operations.

•

Long term Investments are the investments made by the company for long-term purposes

•

Intangible Assets are assets without a physical substance. Examples include franchise and copyright. 54


3. Liabilities Liabilitiesare the debts and obligations of the company to another entity.

•

Discuss the differences of Current vs. Non-Current Liabilities.

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Current Liabilities.Liabilities that fall due (paid, recognized as revenue) within one year after year-end date. Examples include Accounts

Payable, Utilities Payable and Unearned Income.

Non-current Assets are liabilities that do not fall due (paid, recognized as revenue) within one year after year-end date. Examples include

O

Notes Payable, Loans Payable, Mortgage Payable, etc. •

Discuss the Account Titles used for Liability Accounts. Define each account and differentiate one from the other.

Current Liabilities

ED C

Accounts Payable are amounts due, or payable to, suppliers for goods purchased on

account or for services received on account.

Notes Payableare amounts due to third parties supported by promissory notes.

Accrued Expenses are expenses that are incurred but not yet paid (examples: salaries payable,

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Unearned Incomeis cash collected in advance; the liability is the services to be performed

Non-Current Liabilities Loans Payable Mortgage Payable

4. Owner’s Equity • Discuss what Owner’s Equity is.

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taxes payable)l or goods to be delivered in the future.

Owner’s Equity is the residual interest of the owner from the business. It can be derived by deducting liabilities from assets.

•

Discuss the Account Titles used for Equity Account. Define each account and differentiate one from the other.

55


Capitalis the value of cash and other assets invested in the business by the owner of the business. Drawingis an account debited for assets withdrawn by the owner for personal use from the business.

5. Income •

Discuss what Income is.

•

Discuss where Income increases and decreases in the accounting equation.

•

Give examples of Income Accounts.

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Incomeis the Increase in resources resulting from performance of service or selling of goods.

Income increases equity.

O

Service revenue for service entities, Sales for merchandising and manufacturing companies 6. Expense •

Discuss what Expense is.

•

Expense is the decrease in resources resulting from the operations of business Discuss where Expense increases and decreases in the accounting equation.

•

Give examples of Expense Accounts

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Expenses decreases Equity in the accounting equation Salaries Expense, Interest Expense, Utilities Expense II. Discuss Chart of Accounts.

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The following is a sample lecture for setting up a Chart of Accounts: •

A chart of accounts is a listing of the accounts used by companies in their financial records.

•

The chart of accounts helps to identify where the money is coming from and where it is going.

•

The chart of accounts is the foundation of the financial statements.

The following are the steps in the preparation of a basic chart of accounts: 1. Create two columns. 56


2. Prepare the assets first, then liabilities, then equity, then revenue and expenses. 3. List all assets, liabilities, equity, revenue and expenses account in the first column. 4. On the second column, choose an account code (discretion of the company). 5. On the third column, write the description for each account on when to use it.

An example of a chart of accounts is given below: Assets Account

Account Code *may vary

Cash

Description

1000

AccountsReceivable

1200

Inventory PrepaidExpenses

Use for actual cash transactions

Useforcustomerswhowillpayinthefuture

DC E P 1300 1400

Supplies

Use for items held for sale Useforexpensespaidinadvance

1500

OfficeEquipment StoreEquipment Land

Liabilities

D

AccountsPayable NotesPayable SalariesPayable

E

O

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Useforitemstobeusedinthefuture

1600

Useforequipmentthatareusedintheoffice

1700

Useforequipmentthatareusedinthestore

1800

2000

Use for land used in operations

Useforthedebtsofthecompany

2100

Useforpromissorynotesissuedbythecompany

2200

Useforsalariestobepaidinthefuture

Capital Owner’s,Capital

3000

57


Owner’s,Withdrawal

4000

Service Revenue

5000

Use for earnings

SalariesExpense

6000

Useforsalariesincurred,regardlessofpayment

UtilitiesExpense

6100

Useforelectricityandwaterexpensesincurred

PRACTICE (60 MINS) Matching Type Assets

Accounts Receivable

Intangible Assets

Liabilities

Notes Receivable

Property, Plant and Equipment

Owner’s Equity

Rent Expense

Cash

Prepaid Expense

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____________ 1. It is the obligations of the company payable in money, goods or services. ____________ 2. These are non-current tangible assets.

____________ 3. These assets are identifiable, non-monetary assets without physical substance. ____________ 4. It is the claim of the owner also known as the capital.

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____________ 5. It is the most liquid asset and is the medium of exchange for business transactions. ____________ 6. It is an expense for leased office space, equipment or assets rented from others.

D

____________ 7. Examples of this are cash, account receivable and prepaid expenses. ____________ 8. It is a written promise from the customer to pay his receivables on a certain future date.

ANSWERS: 1. Liabilities 2. Property, Plant and Equipment 3. Intangible Assets 4. Owner’s Equity 5. Cash 6. Rent Expense 7. Assets 8. Notes Receivable

58


ENRICHMENT (35 MINS) Provide local examples. You can use the activity below. Identify where you classify the following items AccountTitle

CurrentAsset

Non-CurrentAsset

Tangible

1 Account Receivable 2 Building 3 Cash

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4 Computer Equipment 5 Copyrights 6 Delivery Truck 7 Furniture & Fixtures 8 Store Supplies 9 Inventories 10 Land 11 Notes Receivable 12 Office Supplies 13 Accrued Income

D

14 Prepaid Insurance 15 Prepaid Rent

Answers AccountTitle 1 Account Receivable 2 Building

CurrentAsset

E

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Intangible

DC E P Non-CurrentAsset

Tangible

x x

x 59


Intangible

3 Cash

x

Equipment 4 Computer

x

5 Copyrights 6 Delivery Truck

x

x

x

x

9 Inventories

x

10 Land

O

x

11 NotesReceivable

x

12 OfficeSupplies

x

13 AccruedIncome 14 Prepaid Insurance

x x

15 PrepaidRent

x

EVALUATION (5 MINUTES) Homework activity: You can choose any activity below Activity 1

X

x

7 Furniture Fixtures & 8 StoreSupplies

x x

D

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x

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Indicate whether it is an increase (+), decrease (-), or no effect on the asset, liabilities and equity accounts. Assets

Liabilities

Equity

1.

Investment of cash in the business

_______

_______

_______

2.

Purchase of computer equipment for cash

_______

_______

_______

3.

Billed a customer for services rendered

_______

_______

_______

4.

Paid salaries

_______

_______

_______

60


5.

Purchased office supplies on credit

_______

_______

_______

6.

Paid advertising expense

_______

_______

_______

7.

Paid rent in advance for 3 months

_______

_______

_______

8.

Received cash from customers on account

_______

_______

9.

Withdrew cash for personal use

_______

_______

_______

10.

Invested land into the company

_______

_______

_______

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Answers for Activity 1

ED C

_______

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Indicate whether it is an increase (+), decrease (-), or no effect on the asset, liabilities and equity accounts.

1.

Investment of cash in the business

2.

Purchase of computer equipment for cash

3.

Billed a customer for services rendered

4.

Paid salaries

5.

Purchased office supplies on credit

6.

Paid advertising expense

7.

Paid rent in advance for 3 months

8.

Received cash from customers on account

9.

Withdrew cash for personal use

10.

Invested land into the company

D

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Assets

Liabilities

Equity

___+____

__NE_____

___+____

___NE____

__NE_____

___NE____

___+____

__NE_____

___+____

___-____

__NE_____

___-____

___+____

__+_____

___NE____

___-____

__NE_____

___-____

___NE____

__NE_____

___NE____

___+____

__NE_____

___+____

___-____

__NE_____

___-____

___+____

__NE_____

___+____

Activity 2 61


Identify if the account is an asset, liability, equity, income or expense and indicate its normal balance. Account

Asset

Liabilities

Owner'sEquity

Income

1 Accounts Receivable 2 Accumulated Depreciation 3 Advertising Expense

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4 Bonds Payable 5 Building 6 Cash

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7 De Jesus, Capital 8 De Jesus, Drawing 9 Delivery Truck 10 Interest Payable 11 Inventories 12 Land 13 Mortgage Loans 14 Notes Payable 15 Notes Receivable 16 Office Supplies

D

E

Expense

DC E P

17 Prepaid Expense 18 Rent Expense 62


Balance

19 Salaries Expense 20 Salaries Payable 21 Service Fees Income 22 Supplies Expense 23 Trading Securities 24 Unearned Income 25 Utilities Expense

Answers for Activity 2 Identify if the account is an asset, liability, equity, income or expense. Account

Asset

1 Accounts Receivable

X

2 Accumulated Depreciation

X

3 Advertising Expense 4 Bonds Payable

E

Owner'sEquity

O

Income

DC E P

X

5 Building

X

6 Cash

X

7 De Jesus, Capital 8 De Jesus, Drawing 9 Delivery Truck

Liabilities

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D

X X

X

63


Expense

X

Balance

10 Interest Payable

X

11 Inventories

X

12 Land

X

13 Mortgage Loans

X

14 Notes Payable

X

15 Notes Receivable

X

16 Office Supplies

X

17 Prepaid Expense

X

O

18 Rent Expense 19 Salaries Expense 20 Salaries Payable 21 Service Fees Income

X

22 Supplies Expense 23 Trading Securities X 24 Unearned Income

P E X

25 Utilities Expense

D

ED C

Y P X X

X X

x

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180 MINS

Books of Accounts Content Standards

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LESSON OUTLINE

The learners demonstrate an understanding of the two major types of accounts, namely, journal and ledger.



Motivation

The learners demonstrate an understanding of the two major types of accounts, namely, journal and ledger.

Instruction

The learners shall be able to identify the uses of the two books of accounts (ABM_FABM11-IIIf-22);illustrate the format of a general and special journals (ABM_FABM11-IIIf-23);and, illustrate the format of a general and subsidiary ledger (ABM_FABM11-IIIf-24)

10

Discussion

100

Exercises

30

Enrichment

More local examples

15

Evaluation

Homework

20

O

Practice


5

Real life situation

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Materials columnar sheet or worksheet (two, three, and five columns) Resources


At the end of this lesson, the learners will be able to: • identify the uses of the two books of accounts (journal and ledger) to record business transactions. • explain the use of general and special journals to record business transactions • discuss the use of general and subsidiary ledgers to record business transactions.

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General Journal Description Entries Example (n.d.) Retrieved from http://www.accountingtools.com/general-journal General Ledger (n.d.) Retrieved from http:// accountingtools.com/definition-general-ledger Valencia, et.al. (2010). Basic Accounting 3rd ed. valencia Educational Supply

65


INTRODUCTION (5 MINUTES) Introduce the following learning objectives: • I will be able to understand the uses of the two books of accounts (journal and ledger) in recording business transactions. • I will be able to explain the use of the general and special journals to record business transactions. • I will be able to discuss the use of the general and subsidiary ledgers to record business transactions.

MOTIVATION (10 MINUTES) Review the learners by asking the definition of accounting. “Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic events of an organization to interested users.” (Weygandt et.al.)

O

D

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Teacher tip Require the learners to bring one sheet of : two-column, 3- column and five-column worksheets. These can be purchased at any school supplies store in your area.

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Ask the learners, “from the definition, where do we record the transactions that we have identified? What are the tools that we use to document these transactions? How important are these records in accounting?” Leave these questions unanswered. Inform the learners that you will ask these questions again after the discussion of the subject matter.

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INSTRUCTION/DELIVERY/DISCUSSION (100 MINUTES) Teacher tip

The two major types of books of accounts are journal and ledger.

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1. Discuss the journal Companies initially record transactions and events in chronological order (the order in which they occur). Thus, the journal is referred to as the book of srcinal entry. For each transaction the journal shows the debit and credit effects on specific accounts.

O

There are two types of journals, the general journal and the special journal. GENERAL JOURNAL

Take note that the objective of this chapter is for the learners to appreciate the various tools used in recording transactions. Actual recording and use of these tools will be discussed in ABM 2.

The general journal is the most basic journal. Typically, a general journal has spaces for dates, account titles and explanations, references, and two amount columns.

DC E P

The journal makes several significant contributions to the recording process:

Teacher tip

•

It discloses in one place the complete effects of a transaction.

•

It provides a chronological record of transactions.

•

It helps to prevent or locate errors because the debit and credit amounts for each entry can be easily compared.

Shown below is an example of a general journal

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The accounting equation will be discussed in ABM1 Chapter 10 (Business Transactions)

General Journal

Da t e

A c co u n tT i t l ean dE x p l an at i o n

R ef

D ebi t

As you illustrate the use of the general journal please explain that the accounting equation will be maintained as the debit entry will be accompanied by a credit entry. The total debits should always equal total credits.

C re d i t

67


Journalizing process

Teacher tip

Entering transaction data in the journal is known as journalizing. Companies make separate journal entries for each transaction. A complete entry consists of:

There are available books of this format that can be bought in a bookstore. All the learners have to do is to fill it up. They can use a twocolumn book for a general journal.

•

The date of the transaction which is entered in the Date column.

•

The debit account title (that is, the account to be debited) which is entered first at the extreme left margin of the column headed “Account Titles and Explanation,” and the amount of the debit is recorded in the Debit column.

•

The credit account title (that is, the account to be credited) which is indented and entered on the next line in the column headed “Account Titles and Explanation,” and the amount of the credit is recorded in the Credit column.

O

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•

A brief explanation of the transaction which appears on the line below the credit account title. A space is left between journal entries. The blank space separates individual journal entries and makes the entire journal easier to read.

•

The column titled Ref. (which stands for Reference)which is left blank when the journal entry is made. This

DC E P

Teacher tip Review the topic on Chart of Accounts. The account title to be used in the column provided should coincide with the titles that are listed in the Chart of Accounts.

column is used later when the journal entries are transferred to the ledger accounts.

To illustrate the recording of transactions in the general journal, let us use the following transactions as an example: •

September 1, 2015 Mr. Ben Mabait invested PHP500,000 in a restaurant business by opening an account with SuperBank.

•

September 5, 2015 purchased kitchen appliances for his business amounting to PHP100,000 by issuing a check.

•

September 6, 2015 started his operations a made a sales for that day amounting to PHP20,000.

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68


We will now record the above transactions in the general journal. Teacher tips General Journal D at e

9/1/15

A cc ou ntT it lean dEx planat ion

R ef

D ebit

Cash

C r e d it

500,000

500,000

100,000

100,000

B. Mabait, Capital To record investment of Mr. Ben Mabait 9/5/15

Kitchen Appliances Cash To record purchase of kitchen appliances

9/6/15

DC E P 20,000

Cash Sales To record sales for the day

O

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• It is important to use correct and specific account titles in journalizing. The main criterion is that each title must appropriately describe the content of the account. • Some practitioner or CPA uses “Description or Particulars” instead of Account Titles and Explanation. • Remind the learners that for every journal entry the total debits and credit should always be equal. If not, the entry is erroneous.

20,000

Some entries involve only two accounts, one debit and one credit. An entry like these is considered a simple entry. Some transactions, however, require more than two accounts in journalizing. An entry that requires three or more accounts is a compound entry. All of the transactions in the above examples are simple entries. An example of a compound entry is the following:

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On September 7, 2015, Mr. Mabait purchased a motorcycle costing PHP80,000. He pays PHP30,000 cash and agrees to pay the remaining PHP50,000 on account (to be paid later). The compound entry is as follows:

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69


General Journal Da t e

9/7/15

A c c o u n t T i t l e an d E x p l an at i o n

R ef

D ebi t

Transportation Equipment Cash Accounts Payable

C re d i t

80,000 30,000 50,000

To record purchase of motorcycle by paying cash and the balance on account

SPECIAL JOURNALS

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Some businesses encounter voluminous quantities of similar and recurring transactions which may create congestion if these transactions are recorded repeatedly in a single day or a month in the general journal.Take the case of our example above, if Mr . Mabait will record the sales per day using the Official Receipt or Cash Sales Invoice issued, it would be unnecessary and impractical to credit “sales” account repeatedly. In order to facilitate efficient and practical recording of similar and recurring transactions, a special journal is used. The following are the commonly used special journals:

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•

Cash Receipts Journal – used to record all cash that has been received

•

Cash Disbursements Journal – used to record all transactions involving cash payments

•

Sales Journal (Sales on Account Journal) – used to record all sales on credit (on account)

•

Purchase Journal (Purchase on Account Journal) – used to record all purchases of inventory on credit (or on account)

Cash Receipts Journal is used to record transaction involving receipt or collection of cash. The following illustrate the format of a cash receipts journal:

E

Cash Receipts Journal

D AT E

D

D E SC R I P T I O N ( PA R T I C U L A R S )

REF

D ebi t Cas h

C re d i t Sa l e s

C re d i t Ac c o u nt Receivable

Teacher tip C re d i t Sundry

70


The format may vary depending on the nature of business and the frequency of transactions.

•

The date of the transaction is entered in the date column.

•

A brief explanation of the transaction is entered in the description column.

•

The column titled Ref. (which stands for Reference) which is left blank when the journal entry is made. This column is used later when the journal entries are transferred to the ledger accounts.

•

The Debit Cash column represents the amount of cash received for a particular transaction.

•

Major categories of receipts, such as cash sales and collection of accounts receivable are provided with separate columns. These transactions are frequent and repetitive items, therefore a separate column is provided.

•

The column sundry is used for various miscellaneous and less regular items, such as capital investment, receipt of loan proceeds, among others.

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The source document for this journal is the Official Receipts or Cash Receipts issued by the business. Cash Disbursements Journal (CDJ)

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The cash disbursements journal is the opposite of the cash receipts journal. It is the journal where all cash payments are recorded. An example of a cash disbursement journal is shown below: Cash Disbursements Journal

D AT E

D ESCRI P T I O N ( PA RT I CU L A RS)

REF

D •

Ch ec k or Vo uc he r Number

E

Cr ed it

D e b it

De b it

D e b it

C r e d it

C as h

A c co unt sP ayab l e

Sa l a r i e s

Su p p l i e s

Su n d r y

The date of the transaction is entered in the date column. 71


•

A brief explanation of the transaction is entered in the description column.

•


•

The Check or Voucher number represents the identifying number of the check issued for the related cash payment. Most of the time, a check or cash voucher accompanies the disbursement. The voucher number may be used as the alternative for this column.

•

The Debit Cash column represents the amount of cash received for a particular transaction.

•

Major categories of receipts, such cash sales and collection of accounts receivable are provided with separate columns. These transactions are frequent and repetitive items, therefore a separate column is provided.

•

The column sundry is used for various miscellaneous and less regular items, such as capital investment, receipt of loan proceeds, among others.

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The source documents used to update this journal are the check voucher or cash voucher, cash receipts or official receipts from suppliers or vendors. Sales Journal (Sales on Account Journal)

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The Sales Journal or Sales on Account Journal is used in recording several sales transactions on account. The source document for this journal is the charge invoice or sales invoice (for credit transactions) to various customers or clients. An example of a sales journal is shown below:

D AT E

E

Sales Journal

D E S C R I P T I O N ( C U ST O M E R N A M E )

D

RE F

C har g e D e b it Invoice or Accounts Sales Invoice Receivable No.

72


C r e d it Sales

•


•

A brief explanation of the transaction is entered in the description column or the name of the customer.

•


•

The Charge Invoice Number or Sales Invoice Number represents the identifying number of the source document issued to the customer when the sale was made.

•

The Debit Accounts Receivable column represents the amount of the sale transactions indicated in the charge invoice.

•

The Credit Sales column represents the amount of the sale transactions indicated in the charge invoice.

The source document for this journal is the Charge Invoice issued by the business.

Purchase Journal (Purchases on Account Journal)

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The Purchase or the Purchases Account Journal is used to record recurring purchases on account. The source documents forjournal purchase journal are theon invoices from the supplier of the company. Antransactions example of of a Purchase Journal is shown below:

Purchase Journal D AT E

D E SC R I P T I O N ( S U P P L I E R ’ S N A M E )

D

E

R EF

C h ar g e I n v o i c e o r Sal e s D e b i t C re d i t Invoice No. (from supplier)Purchase Accounts s Payable

•


•

A brief explanation of the transaction is entered in the description column or the name of the supplier 73


•


•

The Charge Invoice Number or Sales Invoice Number represents the identifying number of the source document issued by the supplier when the items, goods or merchandise were delivered to the company when the purchase was made.

•

The Debit Purchases column represents the amount of the goods purchases as indicated in the charge invoice from the supplier

•

The Credit Accounts Payable column represents the amount of the goods or items purchased on credit from the supplier. The amount is indicated in the charge invoice issued by the supplier.

The source document for this journal is the charge invoice from the supplier or vendor. 2. Discuss the ledger

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The ledger refers to the accounting book in which the accounts and their related amounts as recorded in the journal are posted periodically. The ledger is also called the ‘book of final entry’ because all the balances in the ledger are used in the preparation of financial statements. This is also referred to as the T-Account because the basic form of a ledger is like the letter ‘T’.

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There are two kinds of ledgers, namely; the general ledger and the subsidiary ledgers. GENERAL LEDGER

The general ledger (commonly referred by accounting professionals as GL) is a grouping of all accounts used in the preparation of financial statements. The GL is a controlling account because it summarizes all the activities that have taken place as recorded in its subsidiary ledger. The format of a general ledger is shown below:

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E

General Ledger

Account: Cash D at e

I t em

Account No.: 1000 R ef

De bit

C re d i t

B al anc e

74


•

The account portion refers to the account title for example: cash, accounts receivable.

•

The account number is an assigned number for each account title to facilitate ease in recording and cross-referencing.

•

The Date column identifies when the transaction happened.

•

The item represents the source journal and the nature of the transactions

•

The Reference identifies the page number of the general our special journal from which the information was taken.

•

The Debit and Credit columns are used in recording the amount of transactions from the general journal or special journal.

•

The Balance Column represents the running balance of the Account after considering the debit and credit amounts. If the running balance amount is positive, the account has a debit balance whereas if it has a negative running balance, the accounts has a credit balance.

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SUBSIDIARY LEDGER

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A subsidiary ledger is a group of like accounts that contains the independent data of a specific general ledger. A subsidiary ledger is created or maintained if individualized data is needed for a specific general ledger account. An example of a subsidiary ledger is the individual record of various payables to suppliers. The total amount of these subsidiary ledgers should equal the balance in the Accounts Payable general ledger. An example of a subsidiary ledgers are shown below:

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Accounts Payable Subsidiar Ledger Vendor/Supplier: Joy Food Corporation Address: Jose St, Sampaloc, Manila D at e

Vendor No.: 201

I t em

D

E

R ef

De bit

C re d i t

B al anc e

•

The upper portion indicates the name and address of the vendor or supplier.

•

The vendor number is an assigned number for each vendor as reference in keeping the records of a supplier. 75


•

The Date column identifies when the transaction happened.

•

The description column describes the nature of transaction.

•

The Reference identifies the page number of the general our special journal from which the information was taken.

•

The Debit and Credit columns reflect the various effects of every transaction to the record ofthe supplier or vendor.

•

The Balance column provides the running balance of every supplier.

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Take note that the total running balance for all subsidiary ledgers should equal the Accounts payable general ledger.

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At the end of this lecture, go back to the following questions posed in the motivation part:

“Accounting is the process of IDENTIFYING , RECORDING, and COMMUNICATINGeconomic events of an organization to interested users.”

DC E P

Ask the learners, “from the definition, where do we record the transactions that we have identified? What are the tools that we use to document these transactions? How important are these records in accounting?”

PRACTICE (30 MINS)

E

Identify what special journal that is applicable for the following transactions:

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1. Collected PHP10,000 from a customer in payment of his account. Answer: Cash Receipts Journal

2. Bought 100 pieces of mugs to be sold in the store amounting to PHP1,500 on account. Answer: Purchase Journal. 3. Sold five pieces of mugs to X, PHP320 cash. Answer: Cash Receipts Journal (the learner may answer Sales Journal (SJ), correct them as this transaction is a cash sale, SJ is applicable only to “ on account” transactions.

76


4. Sold two pieces of mugs to Y, PHP112 cash Answer: Cash Receipts Journal 5. Purchased office supplies for cash, PHP500. Answer: Cash Disbursement Journal (the learner may answer Purchase Journal (PJ). Correct them as this transaction is a cash purchase; PJ is applicable only to “on account” transactions. 6. Paid PHP20,000 monthly rental. Answer: Cash Disbursements Journal 7. Paid salary of staff, PHP15,000 Answer: Cash Disbursement Journal

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8. Sold 100 pieces of mugs to Unicup, Inc., PHP5,600 on account. Answer: Sales Journal

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9. Sold 500 pieces of mugs to Bugsmore Corp. for PHP15,300 payable one month after delivery. Answer : Sales Journal 10. Purchase on account 1,000 pieces of mugs for PHP12,400

Answer: Purchase Journal

Recitation

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1. Differentiate General Ledger from a Subsidiary Ledger Suggested Answer:

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A subsidiary ledger contains the details supporting the balance in the general ledger account. For example, a subsidiary ledger is maintained for all receivables from customers; the sum of balances per customer should equal the balance of Accounts Receivable Account in the general ledger account.

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2. Differentiate General Journal from a General Ledger Suggested Answer: Accounting transactions are first recorded in the general journal and in order of their occurrence. A general ledger contains a summary at the account level of every transaction that a business has engaged in. The general journal records all the transactions whereas the general ledger the effect of these journal entries to every account title. The general journal is called the book of srcinal entry while the general ledger is called the book of final entry. 77


Teacher tip Exercise

Prior to this meeting, require the learners to bring two-column and three-column worksheets. Using these columnar sheets, require the learners to prepare the format of general journal, cash receipts journal, cash disbursement journal, sales journal, purchase journal, general ledger and subsidiary ledger. After submission, the teacher will review if what they have prepared conforms to the format illustrated above.

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Write comments or corrections if necessary and return to the learners. Discuss common errors committed.

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ENRICHMENT (15 MINS) Summarize the discussions made. 1. Types of transactions recorded in the cash receipts journal: • cash received from a charge (on account) customer

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• •

cash received from a charges (on account) customer less a cash discount cash sales

•

cash received from sale of other assets.

•

all other transactions that require the issuance of a Cash receipt or Official Receipt document

2. A sales journal is used when two conditions are met: • merchandise is sold •

the sale is on account

D

E

3. A cash disbursements journal (cash payments journal) is used to record the following transactions: • purchase of merchandise for cash •

payment to creditor, vendors or suppliers

•

all cash payments

Ask the learners “how important are the journals and ledgers in accounting?” 78


Discuss the common errors or mistakes encountered by the learners and inform them of the correct way of preparing the journals and ledgers.

If the learners have access to Microsoft Excel, the teacher may ask the learners to prepare the journals and ledger using the excel format.

EVALUATION (20 MINS) QUIZ

1. Enumerate all special journals. (4 points) Answers:

•

Cash Receipts Journal

•

Cash Disbursement Journal

•

Purchase Journal (Purchase Journal on account)

•

Sales Journal (Sales Journal on account)

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2. Why do companies use special journals? (or What are the advantages of using a special journal)(7 points) Suggested Answer:

Special journals are designed to facilitate the process of journalizing and posting transactions. They are used for most frequent transactions in a business. For example, in merchandising businesses, companies acquire merchandise from suppliers frequently. To avoid repetitive journal entries for these transactions, a special journal (in this case: the purchase journal) is used.

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3. Identify the appropriate special journal to be used for every source document listed below: (4 points) • Official Receipt issued by the company Answer: Cash Receipts

D

•

Charge Invoice issued by the company Answer: Sales Journal

•

Charge Invoice from a supplier Answer: Purchase Journal

•

Official receipt from a supplier as proof of payment of account Answer: Cash Disbursement Journal 79



720 MINS

Business Transactions and Their Analysis as Applied to the Accounting Cycle of a Service Business Content Standards

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The learners demonstrate an understanding of the business transactions and LESSON OUTLINE their analysis, to include definition and nature of business transactions, types of Introduction Communicating learning objectives sources or business documents, and the rules of debits and credits. Review types of businesses Performance Standards

The learners shall be able to identify business and non-business transactions,

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enumerate the types of business documents, recite the rules of debit and credit, and apply these to simple cases. Learning Competencies


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• describe the nature of business transactions and give examples ABM_FABM11-IIIg-j-25

• identify the different types of business documents ABM_FABM11-IIIg-j-26 • analyze common business transactions using the rules of debit and credit ABM_FABM11-IIIg-j-27

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• solve simple problems and exercises in the analysis of business transactions ABM_FABM11-IIIg-j-28

Motivation

Instruction

Examples of Service Businesses

15 30

Practice

Discussion Problem Sets

Enrichment

Group Discussions

30

Evaluation

Quizzes

60

Materials

three-column worksheet, calculator Resources

The Chart of Accounts. (n.d.). Retrieved from http:// www.accountingtools.com/chart-of-accounts-overview Accounting Cycle (n.d.) Retrieved from http:// www.investopedia.com/terms/a/accounting-cycle.asp Valencia, et.al. (2010). Basic Accounting 3rd ed. Valencia Educational Supply Weygandt, J. et.al (2012). Accounting Principles 10th ed. John Wiley & Sons (Asia) Pte. Ltd.

80


435 150

INTRODUCTION (15 MINS) Communicating learning objectives

Introduce the following learning objectives: • • • •

I will be able I will be able I will be able I will be able

to describe the nature of a service business and give examples to identify the different types of business documents to prepare journal entries of business transactions in a service business. to solve problems and exercises in the analysis of business transactions.

Review of types of businesses

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Ask the learners to recall the discussion on types of businesses according to activities and ask them to differentiate the following:

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• service business • merchandising business • manufacturing business Post/show the following pictures and ask the learners to identify the type of business according to the activity shown.

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E

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1. car mechanic / repair - service 2. car parts store - merchandising 3. car making - manufacturing

81


Teacher tip Ask the learners what the picture is before asking them the type of activities. Modify the activity by picking different industries and showing service, merchandising, and manufacturing businesses in that industry.

MOTIVATION (30 MINS) Examples of Service Businesses

Ask the learners to give examples of service businesses in their community. Possible Answers: • • • • • •

barbershop offices of practicing doctors, lawyers and other professionals repairs of TV and other electrical equipment auto repair shop laundry shop dressmaker

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Review the discussion on five major accounts, namely: assets, liabilities, equity (capital), income, expenses. •

Assets are resources owned by a business.

• • • •

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Teacher tip An understanding of these major accounts is needed in the discussion of the subject matter.

Liabilities are claims against the assets of the business. Equity (capital) is the claim of the owner or owners. Income are increases in the equity or capital resulting from business activities entered into. Expenses are decreases in the equity or capital resulting from business activities. It may include assets or services consumed in the process of earning income After the review, inform the students about the importance of understanding these accounts in recording transactions involving service businesses.

INSTRUCTION (420 MIN)

D

Discuss the nature of a service business

E

A service business provides a needed service for a fee. In general, service businesses actually have no physical product sold to clients. Their services are designed to facilitate the work of clients and in return are paid. Service businesses include salons or barbershops, laundry services, car repairs, medical centers and services of professionals like lawyers and doctors. The revenue of a service business is usually realized once the service has been substantially completed. Aside from the minor supplies, the service business does not maintain a high level of inventory as compared to merchandising and manufacturing businesses. In relatively small service businesses, all transactions are on cash payments. This means sales are collected immediately while most expenses are paid outright in the form of cash 82


Teacher tip Ask the learners to recall the discussion on types of businesses according to activities

or checks. The typical financial transactions recorded for a service company include collecting a deposit from the customer, providing the service and receiving payment. Ask the learners to assist you in walking through the operations of certain service business. Use a repair shop of TVs and other electrical appliances as an example. Ask the learners what events or transactions usually occur in a repair shop. Discuss the accounting cycle of a service business THE ACCOUNTING CYCLE

1. Transactions

8. Closing the Books

2. Journal Entries

3. Posting

7. Financial

6. Adjusting Journal

Statements

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4. Trial Balance

5. Worksheet

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The accounting cycle is a continuous process of accumulating, summarizing and reporting financial information. The steps include: Identification and measurement of external transactions and internal events. At this stage, the documents used by the business are analyzed whether it has financial impact or effect. Recall the rule that only financial transactions are recorded and that the amount can be measured. These two conditions must exist in order that a particular transaction is recognized or recorded. As defined, financial transactions are those activities that change the value of an asset, liability or an equity. Examples of financial transactions: •

•

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Ask the learners to recall the discussion on types of businesses according to activities

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Entries

Step 1 - Transactions and/or Events

Teacher tip

Receipt of cash from a client as advance payment to repair a computer. In this case (asset) will increase. At the same time, the advances from client (liability) will also increase. The advances from client is a liability because the business has the obligation to render future service to the client. Payment of electric bill is a financial transaction. This will decrease the cash (asset) and reduce the income of the business at the same time. 83 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher tip In this chapter, the first four steps are discussed. It is suggested that this fig ure is posted on the board while discussing each step discussed.

Examples of non-financial transactions: • • •

Business Name & Business Address VAT REG TIN: 000-000-000-000

hiring and termination of employees recognition from the government as most outstanding business death of owner

The information needed when recording transactions are taken from forms used to document these transactions. In a typical service business, the following are the business documents used: 1. Official Receipt or Cash Receipt This document is used when a business receives money or a check. An Official Receipt or Cash Receipt is a document that acknowledges that money or a check have been received. 2. Charge Invoice or Sales Invoice A charge invoice is a document used when a service has been rendered, but the client will be billed only after a certain number of days from the date of service. Often, a

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SAMPLE OFFICIAL RECEIPT

Business Name & Business Address

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company will issue a statement of account to a customer, with the charge or sales invoice attached. For example: in a laundry business, a customer may avail of the services of the business. However, that customer and the owner of the business had a prior agreement that all services availed by the customer will be paid only after 30 days. In this case, a charge invoice is issued on the day the client availed of the services. 3. Check or Cash Voucher The check voucher is a document used when a check is issued to pay a certain supplier or vendor. For example, in a laundry business, for the payment of monthly electricity bills, the business may pay either in cash or check. But the company must prepare a cash or check voucher to support this payment. This document will serve as a record of payment and, at the same time, as proof that payment has been made by the company.

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SAMPLE SALES INVOICE

SAMPLE CHECK VOUCHER 84


Step 2 - Preparation of Journal Entries (journalization)

Teacher tip

Through the use of specialized journals (such as those for sales, purchases, cash receipts, and cash disbursements) and the general journal, transactions and events are entered into the accounting records. These are called the books of srcinal entry.

Ask the learners for examples of assets, liabilities and equity accounts as previously discussed.

Debits and Credits are an integral part of the journalization process. In accounting, debits or credits are abbreviated as DR and CR respectively.

Ask the learner to recall the previous discussion on the different books of accounts.

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When to Debit and when to Credit: An increase in an asset account is called a debit and an increase in a liability or equity account is called a credit. Likewise, if we decrease an asset account we credit that account. On the other side of the equation, if we decrease a liability or equity account we debit those accounts.

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Rules on Debits and Credits • • •

The name of the account to be debited is always listed first. The debited account is listed on the first line with the amount in the left side of the register. The credited account is listed on the second line and is usually indented. The credited amount is recorded on the right side of the register. The total amount of debit should always equal the total amount of credit.

Recall the discussion on the Chart of Accounts

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The Chart of Accounts is a listing of all account titles used in the business to record all the transactions. It is arranged according to the order of their appearance in the financial statements. Refer to Table X

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Teacher tip Review ABM1 Chapter 8 (Types of Major Accounts)

TABLE X. SAMPLE CHART OF ACCOUNTS

ACCOUNT CODE

ACCOUNT TITLE

ACCOUNT CODE

Statement of Financial Position Accounts

1000

Cash

4000

1200

AccountsReceivable

4100

1201

AllowanceforBadDebts

4101

1300

Inventory

4102

1400

PrepaidExpenses

4150

1500

Supplies

5000

1600

OfficeEquipment

5100

1601

StoreEquipment

1651 1680

Accum Deprn - StoreEqpt Transportation Equipment

1681

Accum Deprn - TransEqpt

1750 1751

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AccumDeprn-OffEqpt

1650

Building

P E

AccumDeprn-Building

ACCOUNT TITLE

Income Statement Accounts

ServiceRevenue

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Sales

Sales Returns and Allowances SalesDiscounts InterestIncome CostofSales Purchases

5101

Purchase Returns & Allowances

5102

PurchaseDiscounts

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5103 6100

FreightIn SalariesExpense

6150

SuppliesExpense

6200

UtilitiesExpense

6220

CommunicationExpense

1800

Land

6250

TravelExpense

1900

IntangibleAssets

6300

RentalExpense

2000

AccountsPayable

6350

FuelExpenses

2100

NotesPayable

6400

AdvertisingExpense

2200

AccruedExpenses

6410

DeliveryExpense

2201

SalariesPayable

6450

CommissionExpense

2202

UtilitiesPayable

6500

DepreciationExpense

2300

IncomeTaxesPayable

6600

TaxesandLicenses

3000

Owner’s,Capital

6700

InterestExpense

3100

Owner’s,Withdrawal

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86


Let us take the case of Pedro Matapang, a computer technician. Pedro decided to open his computer repair shop on February 14, 2016 , naming it Matapang Computer Repairs. Pedro knows that business transactions should be separated from personal finances. Thus, he decided to invest PHP200,000 in this business. He deposited the amount with Nation Bank. Entry: General Journal Da t e

2/14/16


R ef

D ebi t

O

Matapang, Capital

200,000

To record the initial investment of owner P. Matapang

Notice that we have debited Cash, an asset account and credited Matapang, Capital, an equity account.

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February 15, 2016 - Pedro purchased one computer unit from XY Computer Store to be used for the business. He issued check number 001 amounting to PHP25,000.

Entry:

General Journal D at e

2/15/16

A cc o u n tT i t l ean dE x p l an at i o n

Office Eq uipment Cash

D

E

R ef

D ebi t

The teacher may change the names to known personalities in their communities. The teacher may add funny names to excite the class.

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C re d i t

200,000

Cash

Teacher tip

C re d i t

25,000

25,000

To record the purchase of one computer unit

Notice that the debit to office equipment increased the asset account and the credit to cash decreased the asset account. February 16, 2016 - Pedro hired Juana Magaling, an experienced secretary.

Entry: No entry. This is not a financial transaction. 87


February 17, 2016 – Repaired the computer of Jean and collected PHP10,000

Teacher tip


2/17/16


R ef

D ebi t

C re d i t

10,000

Cash Service Revenue

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10,000

To record receipt of cash from customer

February 18, 2016 – Repaired Mike’s computer. However, Mike will pay PHP15,000 on March 18, 2016 General Journal Da t e

2/18/16


R ef

D ebi t

Accounts Receivable

15,000

O

C re d i t

15,000

Service Revenue To record services rendered to a customer on account

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February 19, 2016 – Pedro purchased Office Supplies from MM Merchandise amounting to PHP5,000 on account. Pedro will pay this on March 30, 2016. General Journal D at e

2/19/16


Supplies Expense Accounts Payable

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E

R ef

D ebi t

C re d i t

5,000

5,000

To record purchase of office supplies on account

February 25, 2016 – Paid the salary of Juana amounting to PHP4,000 General Journal

D at e

2/25/16


R ef

De bit

C re d i t

4,000

Salaries Expense Cash

4,000

To record payment of salary of Juana

The teacher may change the names to known personalities in their communities. The teacher may add funny names to excite the class.

88


Journal Entries in a Corporate Set-up

The example above assumed that the business is a sole proprietorship. How are transactions recorded if the owner of the business is a Corporation? Basically, the same entries are made, except for transactions affecting capital or equity accounts. To illustrate, let us take the following case: Sweeper Corporation was established to provide janitorial services to clients for a fee. The corporation issued 5,000 shares of common stock, at PHP100 par value to shareholders. The issue price paid by the shareholders on January 3, 2016 equal the par value. The entry to record this transaction is: General Journal D at e

1/3/16

A c c oun tT it l eandExp lanat ion

Re f

D e b it

500,000

Cash Share Capital - Common

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C r e d it

O

500,000

To record issuance of 5,000 shares at par value of Php100

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In the above example, if the issue price is PHP120 per share, what is the entry? General Journal Da t e

1/3/16

A c co untT it lean dE xpl an at io n

Cash Share Capital - Common Share Premium - Common

P E

Ref

D ebit

C r ed it

600,000

500,000 100,000

To record issuance of 5,000 shares at Php120 per share, Php100 par value

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Step 3 – Posting

Teacher tip

The summary (in specialized journals) or individual transactions (in the general journal) are then posted from the journals to the general ledger (and subsidiary ledgers). Nothing should ever get posted to the ledgers without first being entered in a journal.

Recall the discussion on the general ledger ABM1 – Chapter 9 (Books of Accounts)

Recall the lesson on the general ledger. We will now post the previous transactions of Pedro to the general ledger. For purposes of discussion, we will be using the three-column ledger.

General Ledger Account: Cash I t em

R ef

Investment of Ow ner

2/15/2016

Purchase of Computer

2/17/2016

Repair Income - J ean

2/25/2016

Payment of Juana salary

C re d i t

10,000

175,000 185,000

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4,000

Account: Accounts Receivable

B al anc e

200,000

25,000

General Ledger D at e

De bit

200,000

2/14/2016

2/18/2016

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Account No.: 1000

D at e

181,000

Account No.: 1200

I t em

R ef

Repair Income - M ike

P E

De bit

C re d i t

15,000

B al anc e

15,000

General Ledger Account: Office Equipment D at e

2/15/2016

I t em

Purchase of Computer

D

R ef

Account No.: 1600 De bit

C re d i t

B al anc e

25,000

25,000

General Ledger

Account: Accounts Payable D at e

2/19/2016

I t em

Account No.: 2000 R ef

De bit

Purchase - office supplies

C re d i t 5,000

B al anc e

5,000

90


General Ledger

Teacher tip

Account: Matapang Capital D at e

2/14/2016

Account No.: 3000 I t em

R ef

De bit

Investment of Ow ner

C re d i t

B al anc e

200,000

200,000

General Ledger Account: Service Revenue D at e

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Ref

De bit

C re d i t

B a l an c e

O

2/17/2016

Repair Income - Jean

10,000

10,000

2/18/2016

Repair Income - Mike

15,000

25,000

General Ledger Account: Supplies Expense D at e

2/19/2016


DC E P R ef

Purchase - office supplies

De bit

C re d i t

5,000

B al anc e

5,000

General Ledger Account: Salaries Expense D at e

2/2/5/16

Account No.: 6100

I t em

R ef

Payment of Juana’s salary

Step 4 - Unadjusted Trial Balance

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E

De bit

4,000

C re d i t

Recall the discussion on the general ledger ABM1 – Chapter 9 (Books of Accounts)

B al anc e

4,000

At the end of an accounting period (for example, one month or one year) the working trial balance is prepared. This involves copying each account name and account balance to a worksheet (working trial balance). The resulting first two columns of the worksheet are called the unadjusted trial balance. In the preparation of the unadjusted trial balance, the balances in all the general ledgers at the end of the reporting date are forwarded to the appropriate column. The unadjusted trial balance for the transactions in our example from Step 3 is the following: 91


MATAPANG COMPUTER REPAIRS Unadjusted Trial Balance February 29, 2016

Teacher tip

Account Title

Debit

This is the end of the first four steps. The next four steps will be discussed in Chapter 11.

Credit

Balance Sheet Accounts Cash

181,000

Accounts Receivable

15,000

Office Equipment

25,000

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Accounts Payable Matapang, Capital

Y P 5,000

200,000

Income Statement Accounts Service Revenue Supplies Expense

ED C

25,000

5,000

Salaries Expense

4,000

P E

230,000

230,000

Notice that all asset accounts are presented first, followed by liabilities, equity (or capital account), income accounts and lastly, expenses accounts.

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92


Review of the Accounting Equation

The basic accounting equation is what drives double-entry bookkeeping. The equation reflects the accounts reported in the balance sheet. The basic accounting equation is as follows: ASSETS = LIABILITIES + OWNERS' EQUITY

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This is a very simple algebraic equation that reflects how the assets of an entity must be supported by either debt or equity. As in algebra, if we add or subtract something from one side of the equation we must add or subtract the same amount from the other side. For example, if we were to increase cash (an asset) we might have to increase note payable (a liability account) so that the basic accounting equation remains in balance.

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ASSETS = LIABILITIES + OWNERS' EQUITY

PHP 500 = PHP 500

.

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Applying, the formula to our transactions in Step 3 above, the effects of these transactions to the equation are shown below: D AT E

T R A N S A CT I O N S

A S SE T S

P E

=

LIABILITIES

+200,000

2/14/2016

Investment of O wner, Pedro Matapang

2/15/2016

Purchase of computer

2/17/2016

Repair the computer of customer Jean and collected the payment

+10,000

2/18/2016

Repair the computer of Mike on account

+15,000

2/19/2016

Purchase of office supplies on account

2/25/2016

Payment of s alary of J uana

+

EQUITY

+200,000

+25,000 -25,000

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+10,000 +15,000 +5,000

-4,000

-5,000 -4,000

Notice that at all times, the effects of the transaction to the right and left side of the formula should be equal. If not, the journal entry is erroneous. 93


PRACTICE (150 MIN) Practice Set 1

Required Tasks

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Mr. Laban Deyro opened his laundry business in Iloilo City on January 2, 2016. The following transactions occurred during the month of January 2016: DATE

TRANSACTIONS

1/2/16

Invested PHP500,000 to his business. The trade name of the business was “MR. LABANDERO”

1/3/16

Hired Allan and Allie who will manage his business

1/4/16

Collections from various customers for the day - PHP3,000

1/5/16

Purchase store supplies from Labada Store - PHP10,000

1/7/16

Collections from various customers for the day - PHP8,000

1/8/16

MR. LABANDERO entered into an exclusive contract with Sikat Hotel where the business will do all the

1/9/16

laundry of the hotel. Sikat Hotel availed the services of MR. LABA NDERO amounting to PHP15,000. Payment will be made on January 20, 2016.

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1/10/16 Collections from various customers for the day - PHP12,000 1/12/16 Purchase a washing machine amounting to PHP50,000

1/15/16 Collections from various customers for the day - PHP20,000

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1/19/16 Paid electricity bill for the mon th amounting to PHP18,000

1/20/16 Received payment from Sikat Hotel amounting to PHP15,000

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1/21/16 Paid salaries of Allan and A llie - PHP15,000

1/22/16 Mr. Laban Deyro needed money for the hospitalization of his son. He withdrew PHP18,000 from the business. 1/25/16 Paid airfare ticket of PHP1,500 for the travel of Mr. Deyro to Manila to negotiate a contract with Sosyal Hotel 1/26/16 Paid taxes to the City of Iloilo, PHP4,000

1/27/16 Purchased office supplies amounting to PHP12,500 1/28/16 Collections from various customer for the day - PHP5,000 1/29/16 Sosyal Hotel availed the services of MR. LABANDERO amounting to PHP15,000 payable on Feb 25, 2016. 94


1. Prepare the general journal entries for the above transactions (ignore giving explanations after every entry) 2. Post the following transactions to the general ledger. 3. Prepare the unadjusted trial balance as of January 30, 2016

Practice Set 2

Required Task

On June 1, Maya Cruz opened the Ganda Beauty Salon. During the first month, the following selected transactions occurred:

Using the following format, identify the effects of above transactions to the accounting equation:

1. Deposited PHP5,000 cash in the City Bank in the name of the business 2. Paid PHP800 cash for beauty supplies

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3. Purchased equipment at a cost of PHP12,000 paying PHP2,000 in cash and the balance on account

Example:

4. Received PHP1,200 cash for services rendered 5. Paid PHP500 cash as a salary to a beautician


+200 = + 200

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6. Withdrew PHP400 cash for personal expenses

ENRICHMENT (30 MIN) Compound Journal Entry

What has been discussed in the above illustration required the learners to prepare a simple journal entry. A

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simple journal entry has one account title on the debit side and one account title on the credit side. However, there are instances where in one particular transaction, two or more accounts on either the debit or credit side are affected. In this case, the business may prepare a compound journal entry. A compound journal entry combines one or more accounts on the debit side or the credit side. To illustrate, assume that Jose Magalang decided to open a barbershop business in Makati City. He invested his old computer and PHP25,000 for this venture with a fair value of PHP15,000 to start the business. Notice that two account titles, Office Equipment and Cash, were debited in this entry.

D


2/17/16

A c c o u n t T i t l e an d E x p l a n a t i o n

Office Equipment Cash J. Magalang Capital

E Ref

.

Teacher Tip Ask the learners to di fferentiate a simple entry from a compound entry after the discussion of this part.

On September 7, 2016, Jose purchased various store equipment to be used in the business. The total cost of the equipment is PHP150,000. The supplier required Jose to pay 30% as down payment, with the balance payable 30 days after. Notice that you have twoaccount titles, Cash and Accounts Payable, affected on the credit side. General Journal

D e b it

C r e d it

15,000

D at e

2/17/16

A c c o u n t T i t l e an d E x p l an a t i o n

Store Equipment Cash

25,000 40,000

Accounts Payable

95


Re f

D e b it

C r e d it

150,000 45,000 105,000

Group Discussion

Group the learners into three and ask them to think of a service business. After coming up with a service business, ask the learners to list down all transactions possible in their business. Require them to present their output in class.

EVALUATION (60 MIN) Quiz

Indicate in each independent case whether the account is to be debited (DR) or to be credited (CR) 1. Increase in Accounts Payable 2. Decrease in Capital account 3. Increase in Service Revenue 4. Increase in Cash 5. Decrease in Accounts Receivable 6. Increase in Salaries Expense 7. Increase in Office Equipment 8. Increase in unpaid Salaries 9. Increase in Owner’s drawing account 10. Increase in Interest Income

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Prepare the entries to record the following independent transactions with explanations. 1. On Jan 4, 2016, received PHP20,000 from a customer in payment for services rendered. 2. Payment to X Supplier amounting to PHP4,000 for office supplies purchased on Jan 3, 2016. 3. Maria invested PHP60,000 on Jan 18, 2016 to start a barbershop in Iligan City. 4. On Jan 3, 2016 paid PHP10,000 rental amount for the month of Jan 2016,. 5. On Jan 15, 2016, Peter Pawn withdrew PHP30,000 from his business to pay for the tuition of his son. 6. Collected PHP20,000 of the accounts receivable from Malakas Company on Jan 17, 2016. 7. Paid the salary of the office secretary amounting to PHP15,000 on Jan 18, 2016. 8. Purchased office equipment worth PHP20,000 by paying 40% down payment and the balance on account. 9. Paid PHP2,000 of the accounts payable on Jan 28, 2016. 10. Rendered services to clients on Jan 18, 2016 amounting to PHP15,600.

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E

DC E P 96


Fill up the missing amount for each. 1. Asset = 120,000 Liabilities = 15,000 Equity = ? 2. Asset = ? Liabilities = 18,250 Equity = 98,360 3. Asset = = 1,000,000 Liabilities 370,000 Equity = ? = 780,508 4. Asset Liabilities = ? Equity = 619,000


720 MINS

Business Transactions and Their Analysis as Applied to the Accounting Cycle of a Service Business Content Standards

The learners demonstrate an understanding of the accounting cycle of a service business.

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Introduction Communicating learning objectives


The learners shall be able to identify business and non-business transactions, enumerate the types of business documents, recite the rules of debit and

Motivation

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Instruction

credit, and apply these to simple cases. Learning Competencies

The learners shall be able to • describe the nature of transactions in a service business ABM_FABM11-Iva-d-29

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• record transactions of a service business in the general journal ABM_FABM11-IVa-d-30

30

Review types of businesses Examples of Service Businesses

5

Practice

Discussion Problem Sets

Enrichment

Group Discussions

60

Evaluation

Quizzes

60

Materials

12-column worksheet

• posts transactions in the ledger ABM_FABM11-IVa-d-31 • prepare a trial balance ABM_FABM11-IVa-d-32 • prepare adjusting entries ABM_FABM11-IVa-d-33 • complete the accounting cycle ABM_FABM11-IVa-d-34

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LESSON OUTLINE

Resources

The Chart of Accounts. (n.d.). Retrieved from http:// www.accountingtools.com/chart-of-accounts-overview Accounting Cycle. (n.d.). Retrieved from http:// www.investopedia.com/terms/a/accounting-cycle.asp Valencia, et.al. (2010). Basic Accounting 3rd ed. Valencia Educational Supply. Weygandt, J. et. al. (2012). Accounting Principles 10th ed. John Wiley & Sons (Asia) Pte. Ltd. 97


485 80

INTRODUCTION (30 MINS)

Teacher tip

Communicating learning objectives

This is a continuation of the previous chapter. A review of the discussions on the previous chapter is necessary.

Introduce the following learning objectives: • • • • • •

I will be able I will be able I will be able I will be able I will be able I will be able

to give examples of transactions in a service business. to record the transactions of a service business in the general journal. to post transactions from the general journal to the general ledger. to prepare a trial balance. to prepare adjusting entries. to explain the accounting cycle of a service business

Review of previous topics

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Show the accounting cycle and ask learners what they have retained from the previous chapter. THE ACCOUNTING CYCLE

1. Transactions

2. Journal Entries

3. Posting


7. Financial Statements

6. Adjusting Journal Entries

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4. Trial Balance

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5. Worksheet

Review the first four steps in the accounting cycle that were previously discussed.

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Identification and measurement of external transactions and • Step 1- Transactions and/or Events: internal events

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Business transactions are recorded in the • Step 2 - Preparation of Journal Entries (Journalization): journals using debits and credits.

Posting of journal entries to general ledgers. • Step 3 – Posting: Preparation of unadjusted trial balance • Step 4 - Unadjusted Trial Balance:

98 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher tip The teacher may ask the learner to draw the accounting cycle, rather than posting it. If necessary, correct the drawing of the learner.

MOTIVATION (5 MINS)

Teacher tip

Examples of Service Businesses

Ask a learner to give examples of a service business. Acknowledge all possible answers and correct them if necessary. Get one example of a service business from those enumerated by the learner. Ask the learners to imagine the possible transactions that may occur in that particular business. Relate the answers of the learners to the subject matter of this chapter.

INSTRUCTION (485 MIN) Discuss Steps 5 to 8 of the Accounting Cycle

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THE ACCOUNTING CYCLE

To illustrate Figure 1, t he teacher may buy a one-piece 12-column worksheet from a local school supplies store. The teacher will then simply copy the column headings in Figure 1 onto the worksheet. Show this worksheet to the learners.

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Teacher tip Retain the accounting cycle on the board/


7. Financial Statements

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6. Adjusting Journal Entries

Step 5 - Worksheet

This step is simply about plotting the items in the unadjusted trial balance on the worksheet.

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In a manual accounting system, a worksheet is a large columnar sheet of paper specifically designed to conveniently arrange all the accounting information required at the end of a period. The worksheet is used to check whether ledger accounts are balanced and adjusted. The satisfactory completion of a worksheet provides assurance that all the details of the end-of-period accounting procedures were properly brought together. The worksheet serves as the source in the preparation of financial statements and other closing and adjusting entries.

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wall while each step is being d iscussed.

5. Worksheet

The body of the worksheet contains five pairs of money columns. A sample of a worksheet is shown below:

99 This Teaching Guide is a donation by CHED to DepEd. It is for reference purposes only.

Teacher tip To illustrate Figure 1, t he teacher may buy a one-piece 12-column worksheet from a local school supplies store. The teacher will then simply copy the column headings in Figure 1 onto the worksheet. Show this worksheet to the learners.

Name of the Company Worksheet For the period (monthy/year) ended _________, 20__

Unadjusted Trial Balance

Adjustments

Adjusted Trial Balance Position

DR

DR

DR

CR

CR

Cash Accounts Receivable

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Inventory Office Equipment Accum Deprn - Off Eqpt Land Intangible Assets Accounts Payable Owner’s, Capital Owner’s, Withdrawal Income Statement Accounts

Sales Sales Returns and Allowances Sales Discounts Interest Income Purchases Purchase Returns and Allowances Purchase Discounts Freight In

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E

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CR

Statement of Financial Position Accounts

Statement of Income Statement of Financial DR

DC E P

Salaries Expense Supplies Expense Utilities Expense 100


CR

DR

CR

Recall our example in Chapter 10, about Pedro Matapang who started his Matapang Computer Repairs business on February 14, 2016. The following transactions transpired in February 2016: 1. February 14, 2016 - Pedro Matapang invested PHP200,000 into his Matapang Computer Repair business. 2. February 15, 2016 - Pedro purchased one computer unit from XY Computer Store to be used for his business. He issued check number 001 amounting to PHP25,000. 3. February 16, 2016 - Pedro hired Juana Magaling, an experienced secretary. 4. February 17, 2016 – Repaired the computer of Jean and collected PHP10,000. 5. February 18, 2016 – Repaired the computer of Mike; however, Mike will pay PHP15,000 only on March 18, 2016. 6. February 19, 2016 – Pedro purchased Office Supplies from MM

P E

D

2/14/16

A c c o u n t T i t l e an d E x p l an at i o n

Cash

Re f

De b it

C r e d it

200,000 200,000

Matapang, Capital

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To record the initial investment of owner P. Matapang 2/15/16

Office Equipment Cash

O

25,000 25,000

To record the purchase of 1 computer unit 2/17/16

Cash

10,000 10,000

Service Revenue

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Merchandise amounting to PHP5,000 on account. Pedro will pay this on March 30, 2016. 7. February 25, 2016 – Paid the salary of Juana amounting to PHP4,000. The entries to record the above transactions are on the right:


To record receipt of cash from customer

2/18/16

Accounts Receivable

15,000

Service Revenue

15,000

To record services rendered to a customer on account

2/19/16

Supplies Expense

5,000 5,000

Accounts Payable To record purchase of office supplies on account 2/25/16

Salaries Expense Cash To record payment of salary of Juana

101


4,000 4,000

Recall that after posting to the general ledger, the unadjusted trial balance was:

Teacher tip The business of Pedro Matapang will be used throughout the discussion of this subject matter so that the teacher will find it easy to trace the transactions and complete the accounting cycle of a service business.

MATAPANG COMPUTER REPAIRS Unadjusted Trial Balance February 29, 2016 Account Title

Debit

Cash

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Credit

Balance Sheet Accounts 181,000

Accounts Receivable

15,000

Office Equipment

25,000

Accounts Payable Matapang, Capital

O

5,000

200,000

Income Statement Accounts Service Revenue Supplies Expense

DC E P

25,000

5,000 4,000

Salaries Expense

230,000

E

230,000

This now represents the first two money columns in the worksheet. Step 6 – Adjusting Entries

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At the end of the accounting period, some accounts in the general ledger would require updating. The journal entries that bring the accounts up to date are called adjusting entries. One purpose of adjusting entries is for income and expenses to be reported in the correct period. Adjusting entries ensure that both the revenue recognition and matching principles are followed. Prior to your lecture, recall the previous discussion on accounting principles and concepts, specifically the matching principle.

102


Revenue Recognition – accounting standards require that revenue is recognized when it is earned and the amount

Teacher tip

can be measured reliably. To illustrate:

The revenue recognition and matching principle were discussed in ABM 1 Chapter 6 (Accounting Concepts and Principles)

•

Assume that you are preparing the financial statements for Feb 2016. Matapang Computer Repairs rendered services amounting to PHP25,000 for the repair of the computer units of Mr. Tamad on Feb 26, 2016. However, the payment for these services of Matapang will be made on Mar 15, 2016. Question: when should you recognize the PHP25,000 as revenue or income, in February or March? Applying the revenue recognition principle, it should be reported as revenue for February 2016.

•

Assume that you are preparing the financial statements for February 2016. On February 28, 2016, Matapang Repairs received payment from Mr. Tamad amounting to PHP25,000. This payment is for the repair of the computer units of Mr. Tamad on March 5, 2016. Question: when should you recognize the PHP25,000 as revenue or income, in February or March? Applying the revenue recognition principle, it should be reported as revenue in March 2016. Take note that since the service will be rendered in March, the revenue should also be earned in March. What about February 2016? The amount is recorded as a liability because Matapang Repairs has the obligation to render this service in the future.

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Matching Principle - this principle directs a business to report an expense on its income statement within the same

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period as its related income. To illustrate: • Assume that you are preparing the financial statements for February 2016. The business gives a commission of 10% service income to its employees. The commission is paid the following month. On February 2016, the total service income for the month is PHP100,000. Thus, the employees are entitled to a commission of PHP10,000. This amount will be paid on March 12, 2016. Question: when should the commission expense be recorded in the book of accounts of the business, in March or in February? Applying the matching principle, the answer is in February.

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Adjusting entries are made at the end of each accounting period. Adjusting entries make it possible to report correct amounts on the statement of financial position and on the income statement. All adjusting entries affect at least one income statement account and one statement of financial position account. Thus, an adjusting entry will always involve an income or an expense account and an asset or a liability account. There are five basic sources of adjusting entries: 1. 2. 3. 4. 5.

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Depreciation expense Deferred expenses or prepaid expenses Deferred Income or unearned income Accrued expenses or accrued liabilities Accrued income or accrued assets

103


#1 Depreciation. Depreciation is a method of allocating the cost of an asset to an expense over the accounting periods that make up the asset’s useful life. Examples of assets subject to depreciation are: Store, Office, Building, and Transportation equipment. These types of assets lose their ability to provide useful service as time passes. Depreciation can also be referred to as the decrease in the usefulness of these types of assets. Take note that Land is not subject to depreciation because the value of land mostly increases as time passes. Exercise on Adjusting entries to record Depreciation

Depreciation is a means of allocating the cost of an asset to an expense over the accounting period that will benefit the use of the asset. In the exercise above, the equipment will be used by Matapang for five years. Proper accounting procedures dictates that the cost of PHP25,000 should be spread over five years.

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There are several methods or formulas to compute the amount of depreciation. The simplest is the straight line method. The formula is Annual Depreciation : ( Acquisition Cost – Salvage or Residual Value) / Useful Life. Applying this formula to the exercise: Annual Depreciation = (25,000-1,000) / 5 = PHP4,800

If the accounting period being reported by Matapang is for the month ending February 29, 2016, the adjusting entry to record this depreciation in the books of Matapang is:

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E

General Journal

Da t e

2/29/16


Depreciation E xpense

R ef

D ebi t

C re d i t

200

Accumulated Depreciation-Office Eqpt

Ask the learners what is the entry to record the acquisition of the vehicle. Answer: Transportation Eqpt - 50,000 Cash or Accounts Payable - 50,000

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Recall that Matapang acquired office equipment on February 15, 2016 for his repair shop business. The cost of the equipment is PHP25,000. It was estimated to have a useful life of five years. It is estimated that after five years, the office equipment can be sold at a scrap value of PHP1,000. The company uses the straight line method of depreciation.

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Teacher tip

200

The depreciation expense of PHP200 was derived by computing the monthly depreciation of PHP400 (Annual Depreciation of PHP4,800/12 months) and multiplying the PHP400 by one-half since the equipment was acquired in the middle of February. 104


Teacher tip There are other methods of depreciation, but straight line is the simplest and easiest to apply. Tell the learners that the other depreciation methods will be discussed in higher accounting subjects.

#2 Deferred Expenses or Prepaid Expenses. These are items that have been initially recorded as assets but are expected to become expenses over time or through the operations of the business. Exercise - Adjusting entries to record deferred expenses or prepaid expenses

Teacher tip

Recall that on February 19, 2016 Matapang purchased PHP5,000 worth of office supplies on account. By the end of the month, PHP2,000 worth of these supplies are still unused.

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The February 19, 2016 entry to record the purchase on the account of office supplies was already posted to the general ledger and included in the balances, as shown in the unadjusted trial balance above. The entry was shown only for illustration purposes. General Journal Da t e

2/19/16


R ef

Supplies E xpense

D ebi t

5,000

C re d i t

5,000

Accounts Payable To record the purchased of office supplies on account

2/29/16

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Supplies

DC E P 2,000

Supplies Expense To set-up the value of unused supplies

2,000

The “Supplies” account debited on February 29, 2016 above is an asset account and represents the value of supplies unused as of the end of February 2016. If these journal entries are posted to the general ledger, the following should be the balance of each account:

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Account Title

Supplies Accounts Payable Supplies Expense

In higher accounting subjects, this approach is referred to as the expense method of recording, where the expense account is initially used to record the transaction.

Debit

Credit

2,000 5,000 3,000

105


Teacher tip In higher accounting subjects, this approach is referred to as the asset method of recording, where the asset account is initially used to record the transaction.

The alternative entries to record the above transactions are: General Journal Da t e

2/19/16


Ref

Supplies

D ebit

C r ed it

5,000

2/29/16

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5,000

Accounts Payable To record the purchased of office supplies

Supplies E xpense

3,000

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3,000

Supplies To set up the value of unused supplies

If these entries are posted in the general ledger, the following should be the balances of each account: Account Title

Supplies

DC E P Debit

Credit

2,000

5,000

Accounts Payable Supplies Expense

3,000

Notice that even with the different approaches in recording the transactions in the journal entries, the balances in the general ledger will always be the same whether you used the first approach or the second approach.

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106


#3 Deferred Income or Unearned Income. These are items that have been initially recorded as liabilities but are expected to become income over time or through the operations of the business. Exercise – Adjusting entries to record deferred or unearned income

On February 15, 2016 Matapang entered into a contract with Makisig to maintain the computers of Makisig for two months starting on February 15, 2016 up to April 15, 2016. On the same date, Makisig paid the total contract amount of PHP40,000 in full. The entries to record and adjust the books are:

General Journal

2/15/16

2/29/16


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Cash Unearned Service Revenue To record receipt of full payment for the two-month service contract with Makisig

D ebi t

40,000

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C re d i t

40,000

DC E P

UnearnedServiceRevenue Service Revenue To record service income earned from Feb 15-29, 2016; P40,000 x (1/2 month /2 months)

10,000

10,000

#4 Accrued Expenses or Accrued Liabilities. These are items of expenses that have been incurred but have not been recorded and paid.

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Exercise – Adjusting entries to record Accrued expenses or accrued liabilities

On February 29, 2016, Matapang received the electric bill for the month of February amounting to PHP3,800. Matapang will pay this bill on March 2016.

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The “Unearned Service Revenue” account was not included in the Chart of Accounts illustrated in ABM1 Chapter 8 (Types of Major Accounts). Additional account titles maybe added to this chart if the need arises. Unearned Service Revenue will fall under the liabilities classification. For future purposes, assign account code 2400 for this.

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In the February 29, 2016 entry above, as of end of February 2016, Matapang has already earned the service revenue for the first 15 days, thus an adjusting entry is recorded. Da t e

Teacher tip

The electric bill represents the cost of electricity used (or incurred) for February. Although the said bill is still unpaid and thus was not recorded, the matching principle and accrual basis of accounting dictates that the same should be recorded in February. Otherwise, your expense will be understated and thus the company will be reporting an overstated income (or an erroneous income). Needless to say, erroneous information may lead to wrong decisions. The entry to record the accrual of this expense is: 107


Teacher tip In this case, the teacher may emphasize the value of generating accurate information for the users of accounting information. The wrong information may lead to wrong decisions. Emphasize also that one of the reasons for adjusting entries is to reflect the correct information in the financial statements. In higher accounting this is commonly referred to as the accrual process.


2/29/16


Teacher tip R ef

Utilities Expense Utilities Payable To accrue the cost of electricity incurred for the month of February.

D ebi t

C re d i t

3,800 3,800

#5 Accrued Income or Accrued Assets

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These are income items that have been earned but have not been recorded and paid by the customer. In short, these are receivables of the business. Exercise – Adjusting entries to record accrued income or accrued assets

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On February 28, 2016, Matapang repaired the computer of Pedro for PHP15,000. Pedro was on an outof-town trip so he could not pay Matapang . He told Matapang that he will pay for their services on March 1, 2016. Matapang has already earned the PHP15,000 but was not paid as of the end of February 2016. Therefore, an income should be properly recognized in February 2016 for this transaction. The entry to record this is: General Journal D at e

2/29/16


P E

Accounts Receivable Service Income To accrue the cost of electricity incurred for the month of February.

D

ED C R ef

D ebi t

In this case, the teacher may emphasize the value of generating accurate information for the users of accounting information. The wrong information may lead to wrong decisions. Emphasize also that one of the reasons for adjusting entries is to reflect the correct information in the financial statements. In higher accounting this is commonly referred to as the accrual process.

C re d i t

15,000

15,000

108


Enter all adjustments to the worksheet:

Matapang Computer Repairs Worksheet For the monthending February29,2016

Unadjusted TrialBalance DR

Adjustments

CR

DR

221,000

Accounts Receivable

O

15,000 25,000

Accum. Deprn-Off Eqpt Accounts Payable Unearned Service Revenue

221,000 30,000

2,000

2,000 25,000 200

200 5,000

3,800

3,800

10,000

30,000

200,000


Service Revenue Supplies Expense

Depreciation Expense

DC E P 40,000

Matapang, Capital

Utilities Expense

CR

5,000

Utilities Payable

Salaries Expense

DR

15,000

Supplies Office Equipment

Y P CR

Balance Sheet Accounts

Cash

Adjusted Trial Balance Position

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E

200,000

25,000

25,000

5,000

2,000

4,000

4,000 3,800

3,800

200 270,000

270,000

50,000 3,000

31,000

200 31,000

289,000

289,000

Note: The entry to record the receipt of PHP40,000 from Makisig on February 15, 2016 was reflected in the unadjusted trial balance columns.

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Step 7 - Preparation of the Financial Statements.

Worksheet

Using the information from the worksheet, the financial statements are prepared.

For the month ending February 29, Adjusted Trial 2016 Balance DR CR

The following are the financial statements to be prepared:

Balance Sheet Accounts

1. Statement of Financial Position (SFP) - Also known as the balance sheet. This statement includes the amounts of the company’s total assets, liabilities and owner’s equity which in totality provides the financial position of the company on a specific date.

Cash Accounts Receivable Supplies Office Equipment Accum. Deprn-Off Eqpt Accounts Payable Utilities Payable Unearned Service Revenue Matapang, Capital

2. Statement of Comprehensive Income (SCI) – Also known as the income statement. Contains the results of the company’s operations for a specific period of time. This can be prepared on a monthly, quarterly or yearly basis. 3. Statement of Changes in Equity (SCE) - This statement is prepared prior to preparation of the Statement of Financial Position in order to obtain the ending balance of the equity to be used in the SFP. All changes, whether increases or decreases to the owner’s interest on the company during the period, are reported here.

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Y P

221,000 30,000 2,000 25,000 200 5,000 3,800 30,000 200,000


Service Revenue Supplies Expense Salaries Expense Utilities Expense Depreciation Expense

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4. Cash Flow Statement - Provides an analysis of inflows and/or outflows of cash from/to operating, investing and financing activities.

Income Statement DR CR

50,000 3,000 4,000 3,800 200

50,000 3,000 4,000 3,800 200 11,000

Net Income

The income statement is prepared first so that net income can then be recorded in the statement of changes in equity. The statement of changes in equity is then Matapang Computer Repairs prepared to determine the ending balance of equity or capital account. Once the Statement of Comprehensive Income ending balance is determined, the statement of financial position is prepared. The For the month ended February 29, 2016 cash flow statement is prepared last. Based on the worksheet on the right, the SERVICE REVENUE income statement of Matapang for February 2016 should appear as follows:

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LESS: EXPENSES Supplies Expense Salaries Expense

50,000 39,000

50,000 3,000 4,000 3,800

Utilities Expense Depreciation Expense Total Expenses

11,000

NET INCOME

39,000

110


200

Step 8 - Journalize the Closing Journal Entries

The income, expense, withdrawal (equity) accounts are called temporary accounts or nominal accounts. They are called temporary because they accumulate the transactions of only one accounting period. At the end of this accounting period, the changes in owner’s equity accumulated in these temporary accounts are transferred into the owner’s capital account. This process serves two purposes: (1) to update the balance of the owner’s capital; and (2) it returns the balance of the temporary accounts to zero, so that they are ready to measure the income, expenses and drawings of the next accounting period again. The owner’s capital account and other statement of financial position accounts are referred to as permanent or real accounts because their balances continue to exist beyond the current accounting period. Closing the books is the process of transferring the balances of the temporary accounts to the owner’s permanent capital account. The closing journal entries should consist of the following: • • •

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All of the nominal revenue accounts should be closed to the income summary account by a Debit to revenue and a Credit to income summary. All of the nominal expense accounts should be closed to the income summary by a Credit to expense and a Debit to income summary. The balance in the income summary account should now reflect the net income for the accounting period. The next journal entry should close the income summary account to the equity or capital account. If there is a net profit this entry will be a Debit to income summary and a Credit to owner’s capital account.

•

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Once the closing journal entries have been entered into the general journal, the information should be posted to the general ledger. When this is accomplished, all of the nominal accounts in the general ledger should have zero balances. To double check on this, we should prepare another trial balance based on the new balances in the general ledger. If we have any nominal accounts with positive balances, a mistake was made along the way and will need to be corrected before proceeding to the next accounting period. To illustrate: General Journal Da t e

2/29/16


E

Service Revenue Income Summary To close nominal revenue accounts

Income Summary Supplies Expense Salaries Expense

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R ef

D ebi t

C re d i t

50,000

50,000

11,000 3,000 4,000

Utilities Expense

3,800


200 111


After the above entries, the balance for these accounts are: S u p p l i e s E x p e n se

S a l a r i e s E x p e n se

U t i l i t i e s E x p e n se

D e p r e c i a t i o n E x p e n se

Debit

Credit

Debit

Credit

Debit

Credit

Debit

Credit

PHP3,000

PHP3,000

PHP4,000

PHP4,000

PHP3,800

PHP3,800

PHP200

PHP200

PHP 0

PHP 0

PHP 0

PHP 0

R e ve n ue A c co u nt s

Debit

Credit

PHP50,000 PHP50,000

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PHP 0

I n co me S um ma r y

Debit

Credit

PHP11,000 PHP50,000

PHP39,000

Notice that the ending balance of the Income Summary Account amounting to PHP39,000 credit represents the net income for the period of Matapang. The balance of the Income Summary Account is then closed to the Capital Account by this entry: General Journal Da t e


R ef

O

C re d i t

39,000

PRACTICE (80 MIN) Exercise 1

Spencer Company has a fiscal year-end of June 30th. The following adjusting journal entries must be prepared in order to bring the accounting records up to date for the preparation of year-end financial statements. Interest on notes payable of PHP400 is accrued. Fees earned but unbilled total PHP1,400.

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ED C

D at e

6/30/016

P E

6/30/16

6/30/16

Salaries earned by employees of PHP700 have not been recorded. Bad debt expense for year is PHP900.

D ebi t

39,000

Income Summary Matapang, Capital

Each adjustment is journalized (using general journal format) as follows:

6/30/16

General Journal


De b i t

C re d i t

Interestexpense PHP400 Interest payable PHP400 To accrue interest on note payable through June 30, 2016 Accountsreceivable PHP1,400 Service revenue PHP1,400 To record service revenue for services unbilled at year-end Salariesexpense PHP700 Salaries payable PHP700 To accrue salaries through June 30, 2016. Baddebtexpense PHP900 Allowancefordoubtfulaccounts PHP900 To record bad debt expense for the year-ended June 30, 2016.

112


Exercise 2 (Depreciation)

Compute the depreciation expense for the following independent cases. Use the straight line method of depreciation. 1. Pedro Reyes purchased a delivery vehicle on January 1, 2016 amounting to PHP250,000. It is estimated that the vehicle will be useful for 10 years. The vehicle can be sold for PHP10,000 at the end of its useful life. If the accounting period being reported by Pedro is one (1) year from January – December 2016, how much is the depreciation expense? Solution:

Annual Depreciation = (Acquisition Cost – Salvage or Residual Value) / Useful Life Annual Depreciation = (250,000 -10,000) / 10 Answer = PHP24,000

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2. Pedro Reyes purchased a delivery vehicle on April 1, 2016 amounting to PHP250,000. It is estimated that the vehicle will be useful for 10 years. The vehicle can be sold for PHP10,000 at the end of its useful life. If the accounting period being reported by Pedro is one (1) year from January-December 2016, how much is the depreciation expense? Solution:

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Annual Depreciation = (Acquisition Cost – Salvage or Residual Value) / Useful Life Annual Depreciation = (250,000 -10,000) / 10 Annual Depreciation = PHP 24,000

Multiply the Annual Depreciation of PHP24,000 to the number of months in used/12, thus 24,000 x (9/12) Where the ‘9’ represents the number of month from April to December. Answer = PHP18,000

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3. Pedro Reyes purchased a delivery vehicle on January 1, 2016 amounting to PHP250,000. It is estimated that the vehicle will be useful for 10 years. The vehicle can be sold for PHP10,000 at the end of its useful life. If the accounting period being reported by Pedro is one (1) month (January 2016), how much is the depreciation expense for the month? Solution:

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Annual Depreciation = (Acquisition Cost – Salvage or Residual Value) / Useful Life Annual Depreciation = (250,000 -10,000) / 10 = P24,000 Answer = PHP24,000 / 12 = PHP2,000 for January 2016

113


Exercise 3

For each of the following items, write the journal entry first (if one is needed) to record the transactions; and then the adjusting entry, if any is required, for the end of the accounting year of Ron Car Rental Company on December 31, 2016. 1. On December 1, borrowed PHP300,000 cash from Nation Bank by issuing a promissory note with an interest of 12% per annum payable in three months. Answer: Journal Entry

Cash Note Payable

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Adjusting Entry

300,000 300,000

Hint: when a promissory note is issued to support a borrowing, the note payable account is used.

Interest Expense Interest Payable (or Accrued Expense) Computed as: PHP300,000 x 12% x (1/12)

O

3,000 3,000

Hint: the formula to compute interest is Principal x Interest Rate x Time

In the above situation, the amount of interest to be accrued on December 31 is good for one month only (covering Dec 1 to Dec 31, 2016) 2. On December 1, paid rental for six months beginning December 1, 2016 to May 31, 2017, at PHP3,000 per month. Answer: Journal Entry

RentalExpense Cash

Adjusting Entry

18,000 18,000

Hint: the amount of advance rental paid was for six month (P3,000/month x 6 months)

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Prepaid Expenses Rental Expense

15,000 15,000

Hint: the amount of prepaid expenses is the 5 month rental after December 31, 2016 (that is from January 2017 to May 2017), thus P3,000 per month x 5 months is P15,000. The PHP15,000 becomes an asset of the company as of December 31, 2016 but will be expensed the following accounting year.

3. On December 31, 2016, received telephone bills for the month December amounting to PHP5,600. The bill will be paid on January 2017. Answer: Adjusting Entry

Utilities Expense Utilities Payable

5,600 5,600

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ENRICHMENT (60 MIN) Kay Travel was organized on September 1, 2016. Assume that the accounts are closed and financial statements are prepared each month. The company occupies rented office space but owns office equipment estimated to have a useful life of 10 years from date of acquisition, September 1, 2016. The unadjusted trial balance for Kay at November 30, 2016 is shown below: Unadjusted Trial Balance Account Title and Explanation

Debit

Cash

Credit

1,750

AccountsReceivable

1,210 4,800

Office Equipment Accum. Deprn-Off Eqpt

80

Accounts Payable

1,640 7,490

Kay, Capital Kay, Withdrawal

500

Service Revenue Advertising Expense Salaries Expense

O

DC E P 4,220

3,600 770 13,430

13,430

Additional Information: The rent expense amounting to PHP770 covers rental for the month of November and December 2016 Instructions: 1. 2. 3. 4.

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This problem will result to a net loss, meaning expenses will exceed the income. This will teach the learner the effect of net loss on the capital or equity account. Also, this problem deals with prepayments.

Y P

800

Rent Expense

Teacher tip

Prepare the adjusting entries necessary for the above problem Prepare an adjusted trial balance Prepare an income statement ending November 30, 2016 Prepare closing entries

115


Solution:

Adjusting Entries:

Statement of Comprehensive Income:

General Journal Date

Account Title and Explanation

Ref Debit Credit

385

Prepaid Expenses Rental Expense Depreciation Expense Accumulated Deprn – Office Eqpt

385 40 40

Adjusted Trial Balance Debit


1,750 1,210

Prepaid Expenses Office Equipment Accum. Deprn-Off Eqpt Accounts Payable Kay, Capital Kay, Withdrawal Service Revenue Advertising Expense Salaries Expense Rent Expense Depreciation Expense

385 4,800

Credit

Closing Entries:

DC E P D at e

120 1,640 7,490 500

2/29/16

4,220 800 3,600 385 40 13,470

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E

13,470

Y P

SERVICE REVENUE

4,220

LESS: EXPENSES AdvertisingExpense Salaries Expense

3,600 385 4,825

NET LOSS

(605)

General Journal

A c c o u n t T i t l ea n d E x p l a n a t i o n

40

R ef

D ebi t

Service Revenue Income Summary To close nominal revenue accounts

4,220

Income Summary Advertising Expense Salaries Expense Rental Expense Depreciation Expense To close the expense accounts Kay, Capital Kay, Withdrawal To close the withdrawal account

4,825

Kay, Capital

116

800

Rental Expense DepreciationExpense Total Expenses

O

Adjusted Trial Balance: Account Title

KAY TRAVEL Statement of Comprehensive Income For the month ended November 30, 2016

Income Summary To close the income summary account


C re d i t

4,220

800 3,600 385 40 500 500

605 605

EVALUATION (60 MIN) Problem 1.Evergreen Laundry carried out the following transactions during May. Which of these transactions represented expenses in May? Explain. 1. Paid an attorney PHP500 for legal services rendered in April. 2.

Teacher tip

Require the learners to show their supporting computations. By showing their computations, you will be assured Answer: This is an April expense because it was incurred in April although payment was made in May. that the learners know what they are The owner withdrew PHP1,600 from the business for personal use. doing and to prevent them from copying Answer: Not an expense. This should be recorded as a withdrawal made by the owner. Owner’s withdrawals are considered other learners’ work.

separate from the transactions of the business. The learner may use the business entity principle as reason.

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3. Purchased a copying machine for PHP25,000 cash. The machine has a useful life of 25 months.

Answer: Part of the cost of the machine is an expense for May (depreciation) of PHP25,000/25 months which is PHP1,000 per month. The machine will benefit more than one accounting period.

4. Paid PHP450 gasoline for the delivery truck used in business during May. Answer: This is a May expense incurred during the month.

5. Paid salaries of employees for time worked during May - PHP3,000. Answer: An expense of May incurred during the month.

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Problem 2.On April 1, 2016, Mar Cruz, a lawyer, opened his own legal practice. The

DC E P

business adjusts and closes its accounts at the end of each month. The following trial balance was prepared after one month of operations. More information:

Unadjusted Trial Balance Account Title and Explanation

Cash • No interest has yet been paid on the note payable. Accrued interest at April 30 Accounts Receivable amounts to PHP200. Prepaid Expenses • Salaries earned by the office staff but not yet recorded or paid amounted to PHP970 Supplies by April 30. Office Equipment • Many clients are asked to make advance payment for legal services to be rendered in Accum. Deprn-Off Eqpt future months. These advances are credited to the Unearned Service Revenue Notes Payable account once received. During April, PHP5,020 of these advances were earned by Interest Payable the business. Unearned Service Revenue Cruz, Capital • Office supplies on hand by April 30 amounted to PHP400. Cruz, Withdrawal • The office equipment was purchased on April 1 and is being depreciated over an Service Revenue estimated useful life of 10 years with no residual value. Supplies Expense Instructions: Salaries Expense 1. Prepare the adjusting entries for April 30.

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2. Prepare a statement of income for April 2016. 117


Debit

Credit

10,060 0 7,800 1,460 26,400 0 16,000 15,020 20,000 3000 1,580 2,680 1,200 52,600

52,600

Suggested solution: General Journal Date

Account Title and Explanation

Ref

Debit

LAW OFFICE OF MAR CRUZ Statement of Comprehensive Income For the month ended April 30, 2016

Credit

200

Interest Expense Accrued Expense (Interest Payable)

200

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SERVICE REVENUE

6,600

LESS: EXPENSES Salaries Expense Salaries Payable

970 970

Unearned Service Revenue Service Revenue

Interest Expense

5,020 5,020

Supplies Supplies Expense

O

Depreciation Expense Total Expenses NET INCOME

400 400

Depreciation Expense Accum Deprn – Office Eqpt

Supplies Expense Salaries Expense

DC E P 220

220

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118


2,420 2,170 200 220 5,010 1,590


Accounting Cycle of a Merchandising Business

1080 MINS

LESSON OUTLINE Introduction

Content Standards

The learners demonstrate an understanding of the accounting cycle of a merchandising business to include the following:


O

•

journalizing of transactions using the general and special journals, namely: sales, purchase, cash receipts and cash payments journals.

Practice

•

posting to the general and subsidiary ledgers

Enrichment

•

preparation of trial balance.

•

adjusting entries to include pre payments, accrual and deferral

• •

worksheet preparation completing the accounting cycle of a merchandising business


P E

Evaluation

15

Examples of Merchandising Business

5

Discussion on periodic inventory system

380

Problem Sets

300

Perpetual inventory system and cost flow 240 consumptions Quizzes

140

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Resources

The learners shall be able prepare journal entries, post to the ledger, prepare the trial balance, worksheet and adjusting entries, and complete the accounting cycle of a merchandising business.

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Communicate learning objectives. Review some topics in Chapter 10-11

•

Financial Accounting. Merchandising Operations (n.d.) Retrieved from http://www.youtube.com/watch? v=ySVzjrPh-J4

•

The Chart of Accounts. (n.d.). Retrieved from http:// www.accountingtools.com/chart-of-accounts-overview

•

Accounting Cycle. (n.d.). Retrieved from http:// www.investopedia.com/terms/a/accounting-cycle.asp

•

Nickolas, Steven. What is the distinction between Free on Board (FOB) shipping point and destination? (n.d). Retrieved from http://www.investopedia.com/ask/ answers/052515/what-distinction-between-free-boardfob-shopping-point-and-destination.asp

•

Valencia, et.al. (2010). Basic Accounting 3rd ed. Valencia Educational Supply.

•

Weygandt, J. et. al. (2012). Accounting Principles 10th ed. John Wiley & Sons (Asia) Pte. Ltd.

119



The learners shall be able to: •

describe the nature of transactions in a merchandising business (ABM_FABM11-IVe-j-35);

•

record transactions of a merchandising business in the general and special journals (ABM_FABM11-IVe-j-36);

•

post transactions in the general and subsidiary ledgers (ABM_FABM11-IVe-j-37);

•

prepare a trial balance (ABM_FABM11-IVe-j-38);

•

prepare adjusting entries (ABM_FABM11-IVe-j-39);

•

complete the accounting cycle of a merchandising business (ABM_FABM11-IVe-j-40);

•

prepare the statement of cost of goods sold and gross profit (ABM_FABM11-IVe-j-41)

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Specific leaning Outcomes

At the end of this lesson, the learners will be able to:

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• •

describe the nature of a merchandising business and give examples record transactions of a merchandising business in the general and special journals

•

discuss the importance and use of a trial balance

•

prepare adjusting entries

•

understand the accounting cycle of a merchandising business

•

prepare a statement of cost of goods sold and gross profit

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120


INTRODUCTION (15 MINS) Communicating learning objectives

Introduce the following learning objectives: • • • • • •

I will be able to describe the nature of a merchandising business and give examples I will be able to record transactions of a merchandising business in the general and special journals I will be able to appreciate the use of a trial balance I will be able to prepare adjusting entries I will be able to understand the accounting cycle of a merchandising business I will be able to prepare a statement of cost of goods sold and gross profit

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Review the types of business according to activities and ask the learners to differentiate from each other. • service business • merchandising business • manufacturing business

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Teacher tip The accounting cycle for a service business is the same with that of a merchandising business.

Ask the learners to recall the discussion on the accounting cycle of a service business. Ask the learners to recall and narrate the accounting cycle. As a review, show the following picture:

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121


MOTIVATION (5 MINS)

Teacher tip

Ask the learners if they want to start a merchandising company. Engage them in a discussion related to the merchandising business that they want. Ask the learners what are the possible activities or transactions in a merchandising business set-up.

To illustrate Figure 1, t he teacher may buy a one-piece 12-column worksheet from a local school supplies store. The teacher will then simply copy the column headings in Figure 1 onto the worksheet. Show this worksheet to the learners.

Possible answers: •

buying of stocks or items for resale

•

payment of expenses related to operations

•

purchase of equipment

•

obtaining a loan to finance the business

•

investment of owners

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Ask the learners of any merchandising business in their community. Possible answers: •

supermarkets

•

pharmacies

•

grocery stores

.

INSTRUCTION (485 MIN)

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Nature and examples of merchandising company. Teacher tip

Discuss some important concepts and terms involving the merchandising business A merchandising company is an enterprise that buys and sells goods to earn a profit. 122


Ask the learners to recall the discussion on types of businesses according to activities.

Ask the learners to give you examples of merchandising businesses in their communities. For examples: •

Mercury Drug

•

Puregold

•

ACE Hardware

•

grocery stores

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Teacher tip

Merchandise(or

merchandise inventory) refers to goods that are held for sale to customers in the normal course of business. This includes goods held for resale. For example: •

Candies, canned goods, noodles sold at a grocery stores

•

Juice, biscuits sold in a grocery store

•

Medicines sold in a pharmacy

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The learners may think that merchandise inventory is only used to refer to small items. To a car dealer, a car is part of the merchandise inventory.

If a grocery store decided to sell an old computer used in the office, this would not be merchandise

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because grocery do not normally sell computers the storestore is simply off old office equipment. But astores computer would be merchandise for and a computer who selling resells computer units. Merchandise for one firm may be a fixed asset (or property and equipment) for another. In another example, a pharmacy decided to sell a table used in their display area. This table is not merchandise of a pharmacy. However, to a retail furniture store a table is merchandise because the business of a furniture store involves the buying and selling of tables.

E

A merchandiser’s primary source of revenue iss ales revenue or sales.

D

Expenses for a merchandising company are divided into two categories: 1. Cost of goods sold (COGS) – the total cost of merchandise sold during the period; and 2. Operating expenses (OP) - expenses incurred in the process of earning sales revenue that are deducted from gross profit in the income statement. Examples are sales salaries and insurance expenses.

123


Teacher tip There are furniture stores who manufacture their own products being sold. These furniture stores are manufacturing businesses and not merchandising businesses. In the example given, emphasize the word ‘retail’.

Gross profit (GP) is equal to Sales Revenue less the Cost of Goods Sold. Income measurement process for a merchandiser follows as: Sales

-

COGS

=

GrossProfit

-

OperatingExp.

The Operating Cycles for a merchandiser: Merchandising Company operating cycle (cash to cash) involves: 1. buy merchandise inventory 2. sell inventory 3. obtain Accounts Receivable 4. receive cash JOURNALIZING THE TRANSACTIONS IN A MERCHANDISING BUSINESS

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=

NetIncome(Loss)

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Prior to the discussion on the journal entries, recall theand firstnon-financial step in the accounting cycle discussed in previous chapters (specifically Chapter 10) on financial transactions.

Teacher tip Recall the discussion on Chapter 9 (Books of Accounts).

In step 1, transactions are identified and measured. At this stage, the documents used by the business

are analyzed to see whether these transactions have financial impact or effect. Recall the rule that only financial transactions are recorded and that the amount can be measured. These two conditions must exist in order for a particular transaction to be recognized or recorded. As defined, financial transactions are those activities that change the value of an asset, liability or equity.

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Step 2 is the Preparation of Journal Entries (Journalization)

A merchandising company may use special and general journals to record its transactions. SPECIAL JOURNALS

Some businesses encounter voluminous quantities of similar and recurring transactions, which may create congestion if these transactions are recorded repeatedly in a single day or monthly in the general journal. The use of special journals will eliminate this problem. 124


The following are the commonly used special journals:

Teacher tip The perpetual inventory system will be discussed in the “enrichment” portion of this guide.

1. Cash Receipts Journal –used to record all cash that had been received 2. Cash Disbursements Journal –used to record all transactions involving cash payments

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3. Sales Journal (Sales on Account Journal) –used to record all sales on credit (on account) 4. Purchase Journal (Purchase on Account Journal) –used to record all purchases of inventory on credit (or on account) INVENTORY SYSTEMS

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Maintaining inventory items is a unique set-up in a merchandising business. There are two methods of accounting for inventory, namely: Perpetual Inventory System and Periodic Inventory System. Merchandising entities may use either of the following inventory systems:

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1. Perpetual System— Detailed records of the cost of each item are maintained, and the cost of each item sold is determined from records when the sale occurs. For example, a car dealership has separate inventory records for each vehicle. •

Record purchase of Inventory.

•

Record revenue and record cost of goods sold when the item is sold.

•

At the end of the period, no entry is needed except to adjust inventory for losses, etc.

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2. Periodic System— Cost of goods sold is determined only at the end of an accounting period. This system involves: • Record purchase of Inventory.

D

•

Record revenue only when the item is sold.

•

At the end of the period, you must compute cost of goods sold (COGS): 1. Determine the cost of goods on hand at the beginning of the accounting period (Beginning Inventory = BI), 2. Add it to the cost of goods purchased (COGP), 3. Subtract the cost of goods on hand at the end of the accounting period 4. (Ending Inventory = EI) illustrated as follows:

BI

+

COGP

=Cost of goods available for sale

-

EI

=

125


COGS

Additional Considerations:

•

Perpetual systems have traditionally been used by companies that sell merchandise with high unit values such as automobiles, furniture, and major home appliances. With the use of computers and scanners, many companies now use the perpetual inventory system.

•

The perpetual inventory system is named because the accounting records continuously — perpetually —show the quantity and cost of the inventory that should be on hand at any time. The periodic system only periodically updates the cost of inventory on hand.

•

A perpetual inventory system provides better control over inventories than a periodic inventory, since the records always show the quantity that should be on hand. Then, any shortages from the actual quantity and what the records show can be investigated immediately.

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Note: The periodic inventory system will be used in all illustrations of this chapter while the perpetual system will be included in the “enrichment” portion of this guide. PERIODIC INVENTORY SYSTEM

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Recording purchases and related transactions under the Periodic Inventory System PURCHASES OF MERCHANDISE: PERIODIC SYSTEM

1. When merchandise is purchased for resale to customers, the account, Purchases, is debited for the cost of goods purchased. 2. Like sales, purchases may be made for cash or on account (credit). 3. The purchase is normally recorded by the purchaser when the goods are received from the seller. • Each credit purchase should be supported by a purchase invoice.

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•

A purchase invoice received by the buyer is actually a sales invoice or a charge invoice prepared by the supplier or vendor.

•

Note that only purchases of merchandise are debited to the ‘Purchase’ account. Acquisition (purchases) of other assets: supplies, equipment, and similar items are debited to their respective accounts.

TO ILLUSTRATE:

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Magaling Computer Store started its operations on January 2, 2016. The store is located in Sikat Mall in Bicol. The owner invested PHP500,000 to start the business. On January 3, 2016, Magaling purchased 20 units of computers on account for PHP10,000 each. Upon delivery of the units, the supplier, Delta, Inc., issued Charge Invoice No. 145 to Magaling. 126


Entry : General Journal D at e

1/3/16

A c c oun tT it l eandEx planat ion

Re f

D e b it

C r e d it

200,000

Purchases Accounts Payable

O

PURCHASE RETURNS AND ALLOWANCES •

Y P 200,000

To record purchase of 20 units of computers at PHP10,000 per unit from Delta, Inc. as per Charge Invoice 145.

A purchaser may find the merchandise received to be unsatisfactory because the goods are: •

damaged or defective

• •

of inferior quality not in accord with the purchaser’s specifications

DC E P

•

The purchaser initiates the request for a reduction of the balance due through the issuance of a debit memorandum. The debit memorandum is a document issued by a buyer to inform a seller that the seller’s account has been debited because of unsatisfactory goods.

•

A return of the merchandise (a deduction from the purchase price when unsatisfactory goods are kept) is shown by the entry where Accounts Payable is debited and Purchase Returns and Allowances is credited to show that the purchaseswas reduced with a return or an allowance.

•

The Purchase Returns and Allowances account is a “contra purchases” account when merchandise is returned to a supplier.

TO ILLUSTRATE:

D

E

Out of the 20 computer units purchased last January 3, 2016, it was found after inspection on the same day that one unit was damaged during shipment. Magaling issued a debit memorandum (DM 01) and informed the supplier that it will return the one damaged item. 127


Entry :

Teacher tip Use the same business as your example for all the discussions throughout this chapter.



1/3/16

Ref

Accounts Payable

D ebit

C r ed it

10,000

Y P

10,000

Purchase Returns and Allowances To record return of 1 unit of computers worth PhP10,000 from Delta, Inc. as per DM 01

Teacher tip

O

ACCOUNTING FOR FREIGHT COSTS

The sales agreement should indicate whether the seller or the buyer is to pay the cost of transporting the goods to the buyer’s place of business. The two most common arrangements for freight costs are FOB SHIPPING POINT AND FOB DESTINATION.

DC E P

FOB Shipping Point: • Goods placed free on board (FOB) the carrier by seller. •

Buyer pays freight costs. •

Freight-In is debited if buyer pays freight.

•

Cash is credited if the goods come on cash on delivery (COD), for example, and was paid immediately. Accounts Payable would becredited if on account.

•

Ownership over the goods is transferred to the buyer once it is out of the premises of the seller.

FOB Destination

D

E

Direct the students to used account titles listed in the chart of accounts presented in Chapter 8.

Teacher tip Direct the students to used account titles listed in the chart of accounts presented in Chapter 8. Use ‘inventory’ or ‘merchandise inventory’ interchangeably.

•

Goods placed free on board (FOB) at buyer’s business.

•

Seller pays freight costs.

•

Delivery Expense is debited if seller pays freight on outgoing merchandise to buyer. a This is an operating expense to the seller .

•

Ownership over the goods is transferred to the buyer once the goods are delivered and received by the buyer.

128


TO ILLUSTRATE: Assume the supplier of Magaling is based in Manila. In order to bring the 20 computer units to Bicol, it will cost PHP3,000 to deliver the goods. If the terms is FOB Shipping Point, the entry to record, assuming Magaling paid the common carrier in cash on January 4, 2016 is : Entry: General Journal Da t e


1/4/16

Freight-In Cash To record freight costs for the purchase of 20 units of computers

Ref

D ebit

Y P

C r ed it

3,000

3,000

O

If the terms is FOB Destination, no entry is recorded in the books of Magaling. The PHP3,000 will be paid by the seller, in this case Delta, Inc. PURCHASE DISCOUNTS:

DC E P

•

Credit terms (specify the amount of cash discount and time period during which a discount is offered) may permit the buyer to claim a cash discount for the prompt payment of a balance due. If the credit terms show 2/10, n/30 means a 2% discount is given if paid within 10 days (called the discount period); otherwise, the invoice is due in 30 days.

•

The buyer calls this discount a purchase discount.

•

A purchase discount is normally based on the invoice cost less returns and allowances, if any.

TO ILLUSTRATE

E

The credit terms for the purchase of 20 computer units (total cost PHP200,000) is 2/10, n/30. This means that if Magaling pays on or before January 13, 2016, it is entitled to a 2% discount, otherwise Magaling will have to pay the full amount on or before February 4, 2016 (30 days after purchase). On January 10, 2016, Magaling paid the account in full with Delta. Entry:

D

General Journal

D at e

A cc ou ntT it lean dEx planat ion

1/10/16

Accounts Payable Purchase Discount Cash To record full payment of Delta, Charge Invoice No. 129 145 with 2% discount computed as PhP200,000 x 2%

R ef

D e b it

C r e d it

200,000 4,000 196,000


Assuming that instead of paying on January 10, 2016, Magaling paid on February 4, 2016, thus forfeiting the 2% discount, the entry to record is: General Journal D at e

2/4/16

A c c o u n tT i t l ean dE x p l an at i o n

R ef

Accounts Payable Purchase Discount To record full payment of Delta, Charge Invoice No. 145

D ebi t

200,000

Y P 200,000

Recording of sales and related transactions under the Periodic Inventory System

SALES TRANSACTIONS: REVENUE ENTRIES FOR A MERCHANDISER

C re d i t

O

•

Revenues are reported when earned in accordance with the revenue recognition principle, and in a merchandising company, revenues are earned when the goods are transferred from seller to buye r.

•

All sales should be supported by a document such as a cash register tape (to provide evidence of cash sales) or cash receipt, or office receipt for cash sales, and charge invoice for credit sales, or sales on account.

•

One entry is made with each sale:

DC E P

Debit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which increases assets for the sales amount Credit — Sales which increases revenues •

E

The sales account is credited only for sales of goods held for resale. Sales of assets not held for resale (such as equipment, buildings, land, etc.) are credited directly to the asset account.

TO ILLUSTRATE :

D

For the month of January, Magaling made the following sale: 1/10/2016 Official Receipt (OR) No. 001 Sold two units for cash to Marie Cruz for PHP36,000 (PHP18,000 per unit), FOB Destination 1/15/2016 Charge Invoice (ChI) No. 001 Sold five units on account to Rafael Reyes for PHP97,500 (PHP19,500 per unit) with terms 3/10, n/ 30, FOB Shipping Point 130


Entry: General Journal D at e

1/10/16

Teacher tip

A cc ou ntT it lean dEx pl anat ion

Ref

D ebit

C r ed it

36,000

Cash Sales To record OR No. 001 cash sale - Marie Cruz

Y P

36,000


1/15/16

A c c oun tT it leandEx planat ion

R ef

Accounts Receivable Sales To record Charge Invoice No. 001 Rafael Reyes on account with terms 3/10, n/30

D ebit

O

Inform the students that sometimes it is best to avail of the discount because this will lower the cost and therefore increase the profit of the business.

C r e d it

97,500

When the learners ask why companies do not avail of discounts, say that there are times when companies do not have sufficient cash to settle the liability.

97,500

ED C

FREIGHT TERMS: FOB DESTINATION — SELLERPAYS FREIGHT •

An entry is made when seller pays the freight to deliver goods to a customer or buyer. If the buyer will pay for the freight, no entry is made.

•

Debit — Delivery Expense and credit — Cash or Accounts Payable

TO ILLUSTRATE:

D

P E

Teacher tip Review the discussion on Chapter 6 (Accounting Concepts and Principles) about revenue recognition principle.

On January 10, 2016 Magaling paid MM Express, PHP500 to deliver the two units to Marie Cruz. General Journal

D at e


1/10/16

DeliveryEx pense Cash To record full payment of Delta Charge Invoice No. 145

R ef

D e b it

C r e d it

500 500

Take note that no entry will be made regarding the sale to Rafael Reyes since the term is FOB Shipping Point. 131


SALES RETURNS AND ALLOWANCES: •

Sales Returns result when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for credit or a refund.

•

Sales Allowances result when customers are dissatisfied, and the seller allows a deduction from the selling price.

•

To grant the return or allowance, the seller prepares a credit memorandum to inform the customer that a credit has been made to the customer’s account receivable.

•

Sales Returns and Allowances is a contra revenue account to the Sales account. A contra account is a reduction to a particular account.

•

A contra account is used, instead of debiting sales, to disclose the amount of sales returns and allowances in the accounts.

•

This information is important to management as excessive returns and allowances suggest inferior merchandise, inefficiencies in filling orders, errors in billing customers, and mistakes in delivery or shipment of goods.

•

The normal balance of Sales Returns and Allowances is a debit.

O

• One entry is made with each sales return and allowance: The entry to record the sales return or allowance:

Y P

•

Debit — Sales Return and Allowances which decreases revenues for the amount of the sale

•

Credit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which decreases assets

TO ILLUSTRATE:

DC E P

On January 16, 2016, Rafael Reyes returned one unit of the computers purchased last January 15, 2016 under Charge Invoice 001. The unit returned was in good condition. However, Rafael Reyes returned the unit because it is one unit more than what they need. The return was approved and accepted by Magaling. The price will be deducted from the account of Rafael Reyes. Entry:

D

E

General Journal

D at e


1/10/16

Sales Return & Allowances Accounts Receivable To record return of one unit of computers from Rafael Reyes under Charge Invoice 001

R ef

D e b it

C r e d it

19,500 19,500

132


SALES DISCOUNTS 1. A sales discount is the offer of a cash discount to encourage customers to pay the balance at an earlier date. 2. An example of a discount term is commonly expressed as: 2/10, n/30, which means that the customer is given 2% discount if payment is made within 10 days. After 10 days there is no discount, and the balance is due in 30 days. 3. Sales Discounts is a contra revenue account with a normal debit balance. TO ILLUSTRATE:

Y P

Assume that Magaling purchased on cash, five units of computers at PHP10,000 per unit from a supplier on January 17, 2016. These units were subsequently sold to Jun Cruz on January 18, 2016 under Charge Invoice (ChI) No. 002 amounting to PHP90,000 (PHP18,000 per unit) with terms 2/10, n/30, FOB Shipping Point. On January 23, 2016, Cruz paid the said account in full. General Journal Da t e

1/17/16


Ref

D ebit

50,000

Purchases Cash

O

C r ed it

50,000

ED C

To record purchased on cash five units of computers 1/18/16

1/23/16

Accounts Receivable Sales To record sales on account under Charge Invoice No. 002 to Jun Cruz with terms 2/10, n/30

90,000

Cash

88,200

Sales Discount Accounts Receivable

D

P E

90,000

1,800 90,000

To record collection of accounts receivable from Jun Cruz net of 2% sales discount

Notice in the entry on January 23, 2016 that the cash received from Jun Cruz was net of the 2% discount because he made the payment within the discount period. Take note that the discount period in this case was from January 19, 2016 to January 28, 2016 (10 days). 133


What If Jun Cruz paid the account on January 30, 2016 instead of January 23, 2016? The entry would be:

Teacher tip


1/30/16


R ef


D ebi t

C re d i t

90,000

Y P

90,000

To record collection of accounts receivable from Jun Cruz

Determining Cost of Goods Sold under Periodic Inventory System

O

The amount indicated here is not connected with the journal entries prepared above. This is for i llustration purposes only.

The Cost of Goods Sold under the periodic inventory system is determined at the end of the period (monthly or yearly) by a short computation, as follows: Cost of goods sold:

Merchandise Inventory, Beginning Purchases

Purchases discounts

2,000

Net purchases Add: Freight in Cost of goods purchased

Merchandise Inventory, Ending Cost of goods sold

ED C

5,000

Less: Purchases returns and allowances

Cost of goods available for sale

100,000

250,000

D

P E

7,000

243,000 6,000 249,000 349,000 118,570 230,250

In a periodic inventory system, separate ledger accounts are maintained for various items composing the cost of goods sold (Purchases, Purchase Returns & Allowances, Freight-In, Purchase Discounts). At the end of the accounting period, a physical count of inventory is necessary to establish the ending balance of the inventory.

134


PRACTICE (300 MINS) COMPLETE ACCOUNTING CYCLE FOR A MERCHANDISING BUSINESS

Y P

Agila Merchandising, owned by Lito Agila, sells ready-to-wear shirts and dresses to its customers. It started its operations on January 1, 2016. The company issues the following documents : •

Official Receipts - for all cash collections

•

Charge Sales Invoice – for all sales on account

•

Check Voucher – for all cash disbursements

O

Step 1 & 2 –Understanding and Journalizing the transactions For the month of January 2016, the special journals of Agila are shown below:

ED C Sales Journal

D AT E

D E S C RI P T I O N ( C U S T O M E R NAME)

1/5/2016

Dax

1/7/2016

Marie

1/9/2016

Astro CANCELLED

D

Charge Invoice or Sales Invoice No.

P E

D eb it

C re d i t

Accounts Receivable

Sales

1

2,102

2,102

2

3,060

3,060

3

1,475

1,475

5

8,960

8,960

6

7,125

7,125

4

1/11/2016

PNSC

1/15/2016

PECO

1/16/2016

Ipedcare

7

4,560

4,560

1/19/2016

Te

8

1,250

1,250

135


1/21/2016

Joshua

9

3,125

1/22/2016

Joseph

1/24/2016

Jesper

11

2,080

1/28/2016

Nelcie

12

1,180

1/29/2016

10

3,125

4,510

Ryan

4,510 2,080

13

Y P

1,180

900

1/30/2016

Arlen

14

3,450

1/30/2016

Art

15

1,478

O

Total for January 2016

900 3,450 1,478

45 , 2 55

4 5, 2 5 5

CASH RECEIPTS JOURNAL DAT E

DE S C R I P T I O N (PARTICULARS)

1/2/2016

Ana

1/4/2016

Maria

1/6/2016

Peter

1/7/2016

Jun

1/7/2016

Karen

1/8/2016 1/8/2016

Jane May

Official Receipt Debit No.

1

P E 3

Credit

ED C Cash

Sales

1,000

2

D

Credit

1,289

1,289

4

3,456

3,456

5

1,290

7 8

1/10/2016

April

1/15/2016

PNSC

9

1/16/2016

Ana

10

Sales Discount

1,000

1,890

6

Debit Account Receivable

1,890

1,290 3,876

3,876

4,561

4,561

5,600

5,600

8,060

8,960

4,235

4,235 136


900

1/17/2016 1/21/2016

J uan

1/22/2016

Ray

1/23/2016

Te

1/24/2016 1/24/2016

11

Rafael

2,010

12 13

3,410

893

14

893

1,250

G eo

15

Dax

2,010

3,410

3,452

16

3,452

2,102

17

1,000

1/25/2016

Angela

1/29/2016

Clyde

18

345

1/30/2016

Joseph

19

4,000

1,000 345

Total

5 3 , 71 9

O

Y P

1,250

2,102

4,510 3 8 , 30 7

510

1 6 ,8 2 2

ED C

1, 4 1 0

PURCHASE JOURNAL D at e

A c c o u n tT i t l ean dE x p l an at i o n

1/2/2016 XYS Clothing 1/10/2016 RTW Super Store 1/29/2016 Dresses Unlimited Total CASH DISBURSEMENTS JOURNAL DAT E

D

DE S C R I PT I O N ( PA RT I C ULAR S )

R ef

P E

C he ck or CRE DIT Voucher C ash No.

1/2/16

St Realty Rental for Jan-Feb 2016 CV01

10,000

1/5/16

Del Supplies- office supplies

3,500

CV02

C h arg eI n v o i c eo rSal e sI n v o i c e No. (from supplier)

228,560 133,070 98,120

SI 102 SI611 SI341

DEBIT A cc o un t s Payable

DEBI T

D ebi t

DEBIT

Supplies Salaries Exp Exp

DEBIT Advertising Exp

228,560 133,070 98,120 45 9 , 75 0 4 5 9, 7 5 0

DEBIT Rental Exp

10,000 3,500 137


C re d i t

CREDIT Purch Disct

1/15/16

XYS Clothing- payment of account

CV03

220,000

1/16/16

Jean Guzman-salary Jan 1-15, 2016

CV04

7,500

1/16/16

Sonic Promo-Advertising

CV05

4,800

1/25/16

GoldmicSupplies

CV06

1,990

TOTAL

25 4 , 29 0

228,560

8,560 7,500

Y P

4,800

1,990 2 2 8, 5 6 0

1 4 , 00 0

5, 4 9 0

O

4 , 8 00

10 , 0 00

8, 5 6 0

In addition to the above special journals, the company maintains a general journal. The General Journal had the following entries for January General Journal D at e

1/2/16

A c c o u nTti t laenE dx pl anat io n

De bit

C re d i t

500,000

Agila, Capital To record initial investment of Agila 1/2/16

Ref

Cash

Transportation equipment

Additional Information:

DC E P

500,000

150,000

•

The delivery vehicle purchased in January 2, 2016 is estimated to be useful for 10 years with no residual or salvage value.

•

A physical count of merchandise inventory was conducted on January 30, 2016. The cost of the inventory on hand was PHP438,700.

•

On January 30, 2016, Agila received a statement of account from Gus Oil Center reflecting a total bill of PHP2,180, representing fuel purchases on January 2016 that were still unpaid as of the said date.

D

E

Step 3 – Posting to the General Ledger . From the summary of transactions in the special journals and general journals, the entries will now be posted in each general ledger account:

GENERAL LEDGER Account: Cash

Account No. : 1000 138


Da t e

1/2/16

It em

Ref

D e bit

Investment of owner

C re d i t

B a la n c e

500,000

500,000 150,000

Purchase of Vehicle 53,719

From the Cash receipts Journal From the Cash Disbursement Journal

O

GENERAL LEDGER Account: Accounts Receivable Da t e

It em

Ref

From the Sales Journal From the Cash Receipts Journal

Y P

403,719 254,290

149,429

Account No. : 1200

D e b it

DC E P

350,000

C re d i t

B a la n c e

45,255

45,255 16,822

28,433

GENERAL LEDGER

Account: Transportation Equipment Da t e

It em

E

General Journal - Purchase of vehicle

Account: Accounts Receivable Da t e

D

Ref

Account No. : 1680

D e bit

C re d i t

150,000

B a la n c e

150,000

GENERAL LEDGER Account No. : 2000

It em

Ref

D e bit

From the Purchase Journal

C re d i t

459,750 228,560

From the Cash Disbursements Journal 139


B a la n c e

(459,750) (231,190)

GENERAL LEDGER Account: Agila, Capital Da t e

Account No. : 3000 It em

Ref

De b i t

Initial Investment – Gen Journal

GENERAL LEDGER Account: Sales Da t e

It em

Ref

O

De b i t

From the Sales Journal From the Cash Receipts Journal

ED C

C re d i t

Y P

B a la n c e

500,000 ( 500,000)

Account No. : 4100 C re d i t

B a la n c e

45,255

( 45,255)

38,307

(83,562)

GENERAL LEDGER Account: Sales Discounts Da t e

It em

From the Cash Receipts Journal

Account: Purchases Da t e

D It em

P E

Ref

Account No. : 4102

De b i t

C re d i t

B a la n c e

1,410

1,410

GENERAL LEDGER Account No. : 5100 Ref

From the Cash Receipts Journal

De b i t

459,750

140


C re d i t

B a la n c e

459,750

GENERAL LEDGER Account: Purchase Discount Da t e


Ref

De b i t

From the Cash Disbursement Journal

GENERAL LEDGER Account: Salaries Expense Da t e

Ref

O

De b i t

14,000


GENERAL LEDGER Account: Supplies Expense It em

Account: Adveertising Expense It em

D

ED C Ref


Da t e

(8,560)

P E

C re d i t

B a la n c e 14,000

Account No. : 6150

De b i t

C re d i t

B a la n c e

5,490

5,490

GENERAL LEDGER

Ref


Account No. : 6400

De b i t

C re d i t

B a la n c e

4,800

4,800

GENERAL LEDGER

Account: Rental Expense Da t e

Y P

B a la n c e 8,560

Account No. : 6100

It em

Da t e

C re d i t


Ref

De b i t 10,000

From the Cash Disbursement Journal 141


C re d i t

B a la n c e 10,000

Step 4 & 5– Prepare the unadjusted trial balance, and preparation of worksheet. The balances in the general ledger for each account will be extended to the first two money columns of the worksheet. The unadjusted trial of Agila is: AGILA MERCHANDISING Worksheet For the month ending January 30, 2016

ACCOUNT TITLE

Unadjusted Trial Balance DEBIT

O

CREDIT

Balance Sheet Accounts 149,429


28,433

Merchandise Inventory

0

Accum. Deprn-Off Eqpt Accounts Payable

231,190

Agila, Capital

Sales Sales Discounts Purchases

DC E P 0-

150,000

Transportation Equipment


D

E

500,000

83,562

1,410 459,750 8,560

Purchase Discount Salaries Expense

Y P

14,000 142


Supplies Expense

5,490

Advertising Expense

4,800 10,000

Rental Expense

0


823,312

823,312

O

Y P

Step 6 – Prepare adjusting entries. Recall in Chapter 11, the five basic sources of adjusting entries: 1. Depreciation expense 2. Deferred expenses or prepaid expenses 3. Deferred income or unearned Income 4. Accrued expenses or accrued liabilities 5. Accrued income or accrued assets

DC E P

Identify transactions in the books of Agila that will require adjustments: •

Depreciation of transportation equipment purchased on January 2, 2016

Monthly Depreciation = (Cost – Salvage or Residual Value) / 120 months

E

= (150,000-0) / 120 = Adjusting entry :

•

Deferred or Prepaid Expenses

1,250

D


1,250

Accum. Deprn- Transpo Eqpt

1,250

In the cash disbursement journal, the rental payment made on January 2, 2016 is for the month of January and February 2016 amounting to PHP10,000. The entire amount was charged to rental expense which is not proper because one half (1/2) of the said payment is considered as an advance payment of rental. Thus, an asset should be recognized. The adjusting entry is: 143


Prepaid Expenses

5,000

Rental Expense

5,000

Note: With this entry, the correct rental expense of PHP5,000 and a prepaid expense of PHP5,000 ( an asset account) are recognized. •

Accrued Expenses

Y P

On January 30, 2016, fuel expenses incurred amounting to PHP2,180 should be recorded as an expenses and liability. The entry to adjust is: Fuel Expenses

2,180

Accrued Expenses

2,180

O

AGILA MERCHANDISING

Worksheet For the month ending January 30, 201

U n a dj u s t ed Tr ia l B al an c e

ACCOUNT TITLE

DEBIT


149,429

AccountsReceivable

28,433

MerchandiseInventory Prepaid Expenses Transportation Equipment Accum. Deprn-Off Eqpt Accounts Payable

-

DC E P

CREDIT

D

150,000

E

A d j u st m en t s

DEBIT

A d j u s t e d Tr ia l B a la n ce

CREDIT

DEBIT

CREDIT

149,429

-

28,433

-

-

-

5,000

1,250 231,190 2,180

Accrued Expenses

144


5,000

-

150,000

-

-

1,250

-

231,190

-

2,180

Agila, Capital

500,000

Income Statement Accounts 83,562

Sales SalesDiscounts Purchases

1,410 459,750 8,560

Purchase Discount Salaries Expense

14,000

Supplies Expense

5,490

Advertising Expense

4,800

Rental Expense Depreciation Expense

10,000

O

DC E P

Y P 5,000

1,250

Fuel Expenses

2,180

8 23 , 3 12

8 23 , 3 12

E

8 , 43 0

-

500,000

-

-

-

83,562

1,410

-

459,750

8,560

14,000

-

5,490

-

4,800

-

5,000 1,250

-

2,180 8 , 43 0

8 2 6 ,7 4 2

8 2 6, 7 4 2

Step 7 - Preparation of Financial Statements. The first statement prepared is the income statement. All income statement accounts are

extended to the appropriate column. Using the periodic inventory system, the beginning balance of merchandise inventory account is also extended to the debit side, while the result of the physical count to determine the ending inventory is reflected on the credit side. The total debit and total credit are determined and if credit balance is higher than the debit side, the difference is added to the debit side. The difference is actually the income for the period. However, if the total debit side exceeds the total credit side, the difference is added to the credit side and this is the net loss of the business. The statement of financial position is then prepared. All assets, liabilities and equity accounts are extended. The ending merchandise inventory is extended to the debit side.

D

The worksheet for these two financial statements are presented below:

145


AGILA MERCHANDISING Worksheet For the month ending January 30, 2016 Adjusted Trial Balance DEBIT

CREDIT

Income Statement DEBIT

Statement of Financial Position

CREDIT


149,429

AccountsReceivable

28,433

-

-

-

Merchandise Inventory Prepaid Expenses Transportation Equipment

150,000

-

-

1,250

-

AccruedExpenses

231,190 2,180

-

Agila,Capital


-

D

Sales

-

Sales Discounts

1,410

PurchaseDiscount

P E 500,000

-

459,750 -

O

438,700

-

AccountsPayable

Purchases

-

5,000

Accum. Deprn-Off Eqpt

Y P DEBIT

-

ED C

-

83,562

83,562

1,410

-

-

4 59,750

8,560

-

8,560

Salaries Expense

14,000

-

14,000

-

Supplies Expense

5,490

-

5,490

-

146


CREDIT

149,429 28,433

-

438,700 5,000

-

150,000

-

-

1,250

-

231,190

-

2,180

-

500,000

AdvertisingExpense

4,800

-

4,800

-

Rental Expense

5,000

-

5,000

-


1,250

-

1,250

-

Fuel Expenses

2,180

-

2,180

Net Income

36,942

826,742

826,742

Y P

-

493,880

530,822

————————>

O

530,822

530,822

DC E P

771,562

The proper format of the income statement and the schedule of cost goods sold of Agila for January 2016 are presented below: AGILA MERCHANDISING

Schedule of Cost of Goods Sold For the month ended January 30, 2016

E

Merchandise Inventory, Beginning

D

Add: Purchases

-0-

459, 970

Less: Purchase Discount

8, 560 ——————————-

Cost of Goods Available for Sale

451, 190

Less: Merchandise Inventory, Ending

(438, 700) ——————————-

Cost of Goods Sold

12,490 ——————————147


36,942

771,562

AGILA MERCHANDISING

Teacher tip

Income Statement For the month ended January 30, 2016 GROSS SALES

83,562

Less: Sales Discounts

(1,410)

Y P

Remind the learners that the Merchandise Inventory, Ending is established by conducting a physical count at the end of the reporting date. In the periodic inventory system, physical count is a must.

——————————— NET SALES

82,152

Less: Cost of Goods Sold (see above schedule)

(12,490)

O

——————————— GROSS PROFIT

69, 662

LESS: EXPENSES Salaries Expense

14,000

Salaries Expense Advertising Expense

ED C

Rental Expense Depreciation Expense

P E

Fuel Expense

5, 490 4,800 5,000

1, 250 2, 180

——————————-

Total Expense

D

32, 270 ——————————-

NET INCOME

36, 942 ——————————

Step 8 – Closing Entries. The closing journal entries consist of the following:

•

All of the nominal revenue accounts should be closed to the income summary account by a Debit to revenue and credit to income summary.

•

All of the nominal expense and cost of goods sold accounts should be closed to the income summary by a Credit to expense and a debit to income summary. 148


•

The Merchandise Inventory, Beginning is closed to Income summary account by a debit to Income Summary and a credit to Merchandise Inventory.

•

The Merchandise Inventory, Ending is set up in the books by a debit to Merchandise Inventory, Ending and a credit to Income Summary. The amount that will be used is the result of the physical count.

•

The balance in the income summary account should now reflect the net income for the accounting period. The next journal entry should close the income summary account to the equity or capital account. If there is a net profit this entry will be a debit to income summary and a credit to owner’s capital account.

Y P

Once the closing journal entries have been entered into the general journal, the information should be posted to the general ledger. When this is accomplished, all of the nominal accounts in the general ledger should have zero balances. To double check on this, we prepare another trial balance based on the new balances in the general ledger. If we have any nominal accounts with positive balances, a mistake was made along the way and will need to be corrected before proceeding to the next accounting period.

O

The closing entries of Agila are:

ED C

Teacher tip

GENERAL JOURNAL D AT E

A CCO UN TT I T LEA N DE X P LA N AT I O N

1/30/16

Sales Sales Discounts Income Summary To close nominal revenue accounts

Income Summary Purchase Discount

D

REF

P E

DEBI T

No closing entry was made for the Merchandise Inventory, Beginning because it was the first month of operations and the inventory beginning has zero value.

CR E D I T

83, 562

1,410 82,152

483,910 8,560

Purchases

459,750

Salaries Expense

14,000 149


Supplies Expense

5,490

Advertising Expense

4,800

Rental Expense

5,000

Y P 1,250

Depreciation Expense Expense Fuel

2,180

To close nominal expense and cost of goods sold account accounts

438,700

Merchandise Inventory, Ending Income Summary

438,700

O

To set up merchandise inventory ending

DC E P

After these entries, the income summary account has a balance of: Total Credits (82,152 + 438,700)

=

520,852

Total

=

83,910

Debit

Net (credit balance)

36,942

E

The last closing entry is to close the balance of income summary to the capital account:

D

GENERAL JOURNAL

D AT E


1/30/16

Income S ummary

REF

DEBI T

CR E D I T

36, 942 36, 942

Agila, Capital

150


Teacher tip The net credit balance of the income summary is equal to the net income as computed.

Inform the students that the net income will result to an increase in capital of the owner.

ENRICHMENT (80 MINS)

Teacher tip

As mentioned above, there are two methods in accounting for inventory: the periodic inventory system and perpetual inventory system.

To avoid confusion, discuss periodic and perpetual separately. Afterwards, compare these two systems. Notice that all the examples used under the perpetual method are the same with the periodic method presented above.

PERPETUAL INVENTORY SYSTEM

Recording Purchases and related transactions under the Perpetual Inventory System PURCHASES OF MERCHANDISE: PERPETUAL SYSTEM

O

Y P

•

When merchandise is purchased for resale to customers, the account, Merchandise Inventory, is debited for the cost of goods purchased.

•

Like sales, purchases may be made for cash or on account (credit).

•

The purchase is normally recorded by the purchaser when the goods are received from the seller. •

Each credit purchase should be supported by a purchase invoice.

• •

A purchase invoice received by the buyer is actually a sales invoice or a charge invoice prepared by the supplier or vendor. Note that only purchases of merchandise are debited to Merchandise Inventory. Purchases of other assets: supplies, equipment, and similar items) are debited to their respective accounts.

DC E P

TO ILLUSTRATE: Magaling Computer Store started its operations on January 2, 2016. The store is located in Sikat Mall in Bicol. The owner invested PHP500,000 to start the business. On January 3, 2016, Magaling purchased 20 computer units on account for PHP10,000 each. Upon delivery of the units, the supplier Delta, Inc. issued a Charged Invoice No. 145 to Magaling. Entry:

D

E

GENERAL JOURNAL

D AT E


1/3/16

Inventory (Merchandise Inventory) Accounts Payable

REF

D EB I T

CR ED I T

200,000 200,000

To record purchase of 20 units of computers at PHP10,000 per unit from Delta Inc., as per Charge Invoice 145

151


PURCHASE RETURNS AND ALLOWANCES •

A purchaser may be dissatisfied with merchandise received because the goods are: •

damaged or defective

•

of inferior quality

•

not in accordance with the purchaser’s specifications

Y P

•

The purchaser initiates the request for a reduction of the balance due through the issuance of a debit memorandum. The debit memorandum is a document issued by a buyer to inform a seller that the seller’s account has been debited because of unsatisfactory goods.

•

A return of the merchandise (a deduction from the purchase price when unsatisfactory goods are kept) is shown by the entry where Accounts Payable is debited and Merchandise Inventory is credited to show that the cost of the Merchandise Inventory is reduced with a return or an allowance.

O

TO ILLUSTRATE:

DC E P

Out of the 20 units of the computers purchased last January 3, 2016, it was found out after inspection on the same day that one unit was damaged during shipment. Magaling issued a debit memorandum (DM 01) and informed the supplier that it will return the one damaged unit. Entry :


1/3/16


Accounts Payable Inventory

D

E

REF

DEBI T

CR E D I T

10,000

10,000

To record return of 1 unit computer, PHP10,000 unit from Delta, Inc. as per DM 01

ACCOUNTING FOR FREIGHT COSTS

The sales agreement should indicate whether the seller or the buyer is to pay the cost of transporting the goods to the buyer’s place of business. The two most common arrangements for freight costs are FOB SHIPPING POINT AND FOB DESTINATION. 152


FOB Shipping Point Goods placed free on board (FOB) the carrier by seller. •

Buyer pays freight costs. • Merchandise Inventory is debited if buyer pays freight. ly. Accounts Payable would be • Cash is credited if the goods come oncash on delivery (COD), for example, and was paid immediate credited if on account.

•

Y P

Ownership over the goods is transferred to the buyer once it is out of the premises of the seller.

FOB Destination •

Goods placed free on board (FOB) at buyer’s business.

•

Seller pays freight costs.

O

• Delivery Expense is debited if seller pays freight on outgoing merchandise to a buyer which is an operating expense to the seller. •

Ownership over the goods is transferred to the buyer once the goods are delivered and received by the buyer.

TO ILLUSTRATE:

DC E P

Assuming the supplier of Magaling is based in Manila and in order to bring the 20 computer units to Bicol it will cost PHP3,000 to deliver the goods. 1. If the terms is FOB Shipping Point, the entry to record, assuming Magaling paid in cash the common carrier on January 4, 2016 is : Entry:

D

E

GENERAL JOURNAL

D AT E

1/4/16


Inventory Cash

REF

DEBI T

CR E D I T

3,000 3,000

To record freight costs for the purchase of 20 units computer

153


2. If the terms is FOB Destination, no entry is recorded in the books of Magaling. The PHP3,000 will be paid by the seller, in this case Delta, Inc. PURCHASE DISCOUNTS: •

Y P

Credit terms (specify the amount of cash discount and time period during which a discount is offered) may permit the buyer to claim a cash

discount for the prompt payment of a balance due. If the credit terms show 2/10, n/30 means a 2% is discount is given if paid within 10 days (called the discount period); otherwise the invoice is due in 30 days. •

The buyer records this discount as a reduction toMerchandise Inventory.

•

A purchase discount is normally based on the invoice cost less returns and allowances, if any.

O

TO ILLUSTRATE

The credit terms for the purchased of 20 computer units (total cost PHP200, 000) is 2/10, n/30. This means that if Magaling pays on or before January 13, 2016, it is entitled to a 2% discount. Otherwise, they will have to pay the full amount on or before February 4, 2016 (30 days after purchase). On January 10, 2016, Magaling paid in full the account with Delta. Entry:

DC E P


1/10/16


Accounts Payable Merchandise Inventory Cash

D

REF

E

DEBI T

CR E D I T

200,000

4,000 196,000

To record full payment of Delta Charge Invoice No. 145 with 2% discount computed as PHP200,000 x 2%

Assuming that instead of paying on January 10, 2016, Magaling paid on February 4, 2016, thus forfeiting the 2% discount, the entry to record is:

154


GENERAL JOURNAL DAT E

A C C OUN TT I T LEANDE X PLANAT I ON

2/4/16

Accounts Payable

REF

DE B I T

C R E DI T

200,000

Y P 200,000

Cash To record full payment of Delta Charge Invoice No.145

Recording of Sales and related transactions under the Perpetual Inventory System

SALES TRANSACTIONS: REVENUE ENTRIES FOR A MERCHANDISER

O

•

Revenues are reported when earned in accordance with the r evenue recognition principle; and in a merchandising company, revenues are earned when the goods are transferred from seller to buyer.

•

All sales should be supported by a document such as a cash register tape (provide evidence of cash sales) or cash receipt or office receipt for cash sales, and charge invoice for credit sales or sales on account.

•

Two entries are made with each sale: •

The first entry records the sale: •

•

•

DC E P

Debit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which increases assets for the sales amount

• Credit — Sales which increases revenues The second entry records the cost of the merchandise sold:

E

•

Debit — Cost of Goods Sold which increases expenses

•

Credit — Merchandise Inventory which decreases assets

D

The sales account is credited only for sales of good held for resale. Sales of assets not held for resale (such as equipment, buildings, land, etc.) are credited directly to the asset account.

TO ILLUSTRATE :

Assume that no freight costs were incurred when the 20 computer units were purchased. 155


For the month of January, Magaling made the following sale: 1/10/2016 Official Receipt (OR) No. 001 Sold two units for cash to Marie Cruz for PHP36, 000 (PHP18,000 per unit), FOB Destination

Y P

1/15/2016 Charge Invoice (ChI) No. 001 Sold five units on account to Rafael Reyes for PHP97,500 (PHP19,500 per unit) with terms 3/10, n/ 30, FOB Shipping Point. Entry: GENERAL JOURNAL D AT E

1/10/16


REF

DEBI T

Cash

36,000

Sales Cost of Goods Sold Inventory

O

CR E D I T

DC E P

36,000

20,000

To record OR No. 001 cash sale-Marie Cruz

E

20,000


1/15/16


Accounts Receivable Sales Cost of Goods Sold

D

REF

DEBI T

CR E D I T

97,500 97,500 50,000

Inventory

50,000

To record Charge Invoice No. 001 Rafael Reyes on account with terms 3/10, n/30 156


FREIGHT TERMS: FOB DESTINATION — SELLERPAYS FREIGHT • An entry is made when seller pays the freight to deliver goods to a customer or buyer. If the buyer will pay for the freight, no entry is made. • Debit — Delivery Expense and credit — Cash or Accounts Payable. TO ILLUSTRATE:

Y P

On January 10, 2016 Magaling paid MM Express, PHP500 to deliver the two units to Marie Cruz. GENERAL JOURNAL D AT E

1/10/16


REF

DEBI T

Delivery Expense

O

CR E D I T

500

Cash

500

To record full payment of Delta Charge Invoice No. 145

DC E P

Take note that no entry will be made as to the sale to Rafael Reyes since the term is FOB Shipping Point. SALES RETURNS AND ALLOWANCES: •

Sales Returns result when customers are dissatisfied with merchandise and are allowed to return the goods to the seller for credit or a refund.

•

Sales Allowances result when customers are dissatisfied, and the seller allows a deduction from the selling price.

•

To grant the return or allowance, the seller prepares a credit memorandum to inform the customer that a credit has been made to the customer’s accounts receivable.

•

Sales Returns and Allowances is a contra revenue account to the Sales account. A contra account is a reduction to a particular account. A contra account is used, instead of debiting sales, to disclose in the accounts the amount of sales returns and allowances. This information is important to management, as excessive returns and allowances suggest inferior merchandise, inefficiencies in filling orders, errors in billing customers, and mistakes in delivery or shipment of goods. The normal balance of Sales Returns and Allowances is a debit. Two entries are made with each sale return and allowance: The first entry records the sales return or allowance:

• • • • •

D

E

157


•

•

Debit —Sales Return and Allowances which decreases revenues for the amount of the sale

•

Credit — Accounts Receivable (if a credit sale) or Cash (if a cash sale) which decreases assets

The second entry records the increase in Merchandise Inventory: •

Debit — Merchandise Inventory which increases assets

•

Credit — Cost of Goods Sold which decreases expenses

TO ILLUSTRATE:

Y P

On January 16, 2016, Rafael Reyes returned one unit of the computers purchased last January 15, 2016 under Charge Invoice 001. The unit returned was in good condition. However, Rafael Reyes returned the unit because it is one unit more than what they need. The return was approved and accepted by Magaling. The price will be deducted from the account of Rafael Reyes.

O

Entry:

DC E P


1/16/16


REF

Sales Return and Allowances

CR E D I T

19,500

Accounts Receivable

Merchandise Inventory Cost of Goods Sold

DEBI T

D

E

19,500

10,000

10,000

To record return of one unit computer from Rafael Reyes under Charge Invoice No.001

SALES DISCOUNTS

1. A sales discount is the offer of a cash discount to a customer to encourage them to pay the balance at an earlier date. 2. An example of a discount term is commonly expressed as: 2/10, n/30, which means that the customer is given 2% discount if payment is made within 10 days. After 10 days there is no discount, and the balance is due in 30 days. 158


3. Sales Discounts is a contra revenue account with a normal debit balance. TO ILLUSTRATE: Assume Magaling purchased five units of computers on cash for PHP10,000 per unit from a supplier on January 17, 2016 that were subsequently sold to Jun Cruz on January 18, 2016 under Charge Invoice (ChI) No. 002 amounting to PHP90,000 (PHP18,000 per unit) with terms 2/10, n/30, FOB Shipping Point. On January 23, 2016, Cruz paid the said account in full. GENERAL JOURNAL D AT E


1/17/16

Inventory

REF

Cash To record five units of computers purchased on cash

1/18/16

Accounts Receivable Sales Cost of Goods Sold Inventory

P E

ED C

O D EB I T

Y P

CR E D I T

50,000

50,000

90,000 90,000 50,000 50,000

To record sales on account under Charge Invoice No. 002 to Jun Cruz with terms 2/10, n/30

1/23/16

Cash Sales Discount

D

88,200 1,800 90,000

Accounts Receivable To record collection of accounts receivable from Jun Cruz, net of 2% sales discount 159


Notice in the entry on January 23, 2016 that the cash received from Jun Cruz was net of the 2% discount because he made the payment within the discount period. Take note that the discount period in this case is from January 19, 2016 to January 28, 2016 (10 days). What If Jun Cruz paid the account on January 30, 2016 instead of January 23, 2016? The entry should be:

GENERAL JOURNAL DAT E

A C C OUN TT I T LEANDE X PLANAT I ON

1/23/16

Cash

REF

D EB I T

O

Accounts Receivable To record collection of accounts receivable from Jun Cruz.

Y P

C R E DI T

90,000

90,000

Determining Cost of Goods Sold under the Perpetual Inventory System

DC E P

The Cost of Goods Sold under the perpetual inventory system is determined by getting the running balance in the general ledger of the account. Recall the previous discussion on posting the journal entries to the general ledger. At any point in time, you can determine the cumulative cost of goods sold under the perpetual inventory system because in this system a separate general ledger for “Cost of Goods Sold” is maintained. THE FLOW OF INVENTORY COSTS

Under the periodic inventory system, physical count is necessary to determine the ending balance of merchandise inventory. After the count, the costs of these inventory items will be computed. There are instances that the unit prices for merchandise purchased are different. Consider this scenario:

D

E

Geo San is in the business of buying and selling canned sardines. On January 2016, Geo had the following transactions: 1/1/16

Merchandise inventory on hand 1,000 cans @ PHP10/can

1/10/16

Purchased 5,000 cans @ PHP11 /can

1/20/16

Purchased 4,000 cans @ PHP12/can

PhP 10,000 55,000 48,000

Total

PhP 113,000 160


During the month of January the total sales in units is 7,000. Therefore, the ending inventory in units is 3,000 cans of sardines (1,000+5,000+4,000-7,000). The problem now is the unit cost that will be used to determine the value of the ending inventory. This is where the cost flow assumption is needed. The two most commonly used cost flow assumptions are:

Y P

• Average Cost Using the above example, average unit cost is simply computed by dividing the total cost (PHP113,000) by total quantities (1,000+5,000+4,000) 11,000. Average unit cost is PHP11.30 The cost of merchandise inventory ending is 3,000 x PHP11.30 = PHP33,900

O

• First in, First Out (FIFO) As the name implies, FIFO involves the assumption that goods sold are the first units that were purchased - that means the oldest goods on hand. Thus, the remaining inventory is comprised of the most recent purchases.

DC E P

Applying this to the problem above, the 7,000 units sold were taken from: 1,000 @ PHP10 5,000 @ PHP11 1,000 @ PHP12 ———————7,000 units

E

Therefore, the ending inventory will come from the January 20 purchases: 3,000 @ PHP12 = PHP36,000

EVALUATION (30 MINS)

D

1. A company had the following transactions during December: •

Sold merchandise on credit for PHP5,000, terms 3/10, n/30. The items sold had a cost of PHP3,500.

•

Purchased merchandise for cash, PHP720. 161


•

Purchased merchandise on credit for PHP2,600, terms 1/20, n/30.

•

Issued a credit memorandum for PHP300 to a customer who returned merchandise purchased on November 29. The returned items had a cost of PHP210.

•

Received payment for merchandise sold on December 1.

•

Received a credit memorandum for the return of faulty merchandise purchased on December 4 for PHP600.

•

Paid freight charges of PHP200 for merchandise ordered last month (FOB shipping point).

•

Paid for the merchandise purchased on December 4, less the portion that was returned.

•

Sold merchandise on credit for PHP7,000, terms 2/10, n/30. The items had a cost of PHP4,900.

•

Received payment for merchandise sold on December 24.

O

Required:

Y P

Prepare the general journal entries to record these transactions using a perpetual inventory system. (Record all purchases initially at the gross invoice amount) Suggested Solution:

Accounts Receivable Sales

Cost of Goods Sold Merchandise Inventory

D

E

DC E P 5,000

5,000

3,500 3,500


720

Cash

720 162



2,600

Accounts Payable

2,600

Sales Returns and Allowances

300

Accounts Receivable


210

Cost of Goods Sold

Cash

150

Accounts Receivable

Accounts Payable

Merchandise Inventory Cash

210

4,850

Sales Discounts


ED C

O

Y P 300

D

P E

5,000

600 600

200 200

Accounts Payable

2,000 163


Merchandise Inventory (PHP2,000 x .01)

20

Cash

1,980

Accounts Receivable

7,000

Sales

Y P 7,000

Cost of Goods Sold

O

4,900


Cash Sales Discounts

DC E P

4,900

6,860 140

Accounts Receivable

7,000

2. The following data was taken from ledger account balances and supplementary data for the XYZ Company.

Merchandise inventory, beginning Merchandise inventory, ending Purchases Purchases discounts

D

E

PHP 20,000 23,000 215,000 6,000 3,000

Purchases returns and allowances

400,000

Sales 164


Sales discounts

3,200

Sales returns and allowances

1,800

Freight-in

10,000

Required:

Y P

Show the computation, in proper format, of net sales, cost of goods sold, and gross profit for the year ended December 31, 2016. Suggested Solution: XYZ COMPANY Income Statement

ED C

O

For the Year Ended December 31, 2016 Revenue from sales: Gross sales……………………………………… Less:Salesdiscounts…………………………. Sales returns and allowances………. Net sales…………………………………………

Cost of goods sold:

D

P E

PHP400,000 PHP3,200 1,800

Merchandise inventory, 1/1/16………………..

20,000

Purchases……………………………………….. Less: Purchase discounts……………………….

5,000 395,000

PHP215,000 PHP6,000 0 165


3,000

Purchase returns and allowances………

9,000

Net purchases …………………………………

206,000

Add Freight-in …………………………………

10,000

Cost of goods purchased……………………… Goods available for sale……………………….. Merchandise inventory, 12/31/16…………… Cost of goods sold………………………………………

O

Gross profit from sales……………………………………

ADDITIONAL PRACTICE SETS

Practice Set 1

Y P

DC E P

216,000 236,000 23,000 213,000 P182,000

Listed below are some of the accounts relating to the income of Leather Plus (owned by Abner Bravo) for the three month period ended March 31, 2016: Sales

500,000 Merchandise Inventory, beginning

Sales Returns and Allowances Sales Discounts Purchases Purchase Returns and Allowances Supplies Expense Salaries Expense

D

E

15,000 Merchandise Inventory, Ending

170,100 165,000

7,800 Purchase Discounts

1,800

302,000 Freight-In

4,9000R ental Expense 1,200 Delivery Expense 18,000 Utilities Expense

166


5,000 5,000 2,100 8,000

Instructions: 1. Prepare a schedule of cost of goods sold for the three-month period ended March 31, 2016. 2. Prepare a statement of income for the period ended March 31, 2016. 3. Prepare closing entries. Suggested Answers:

Leather Plus

O

Schedule of Costs of Goods Sold For the three-month period ended March 31, 2016

Merchandise Inventory, Beg

Purchases

302,000

Less: Purch Returns & Allow

(4,900)

Purch Discounts

Cost of Goods Available for Sale Less; Merchandise Inventory, End Cost of Goods Sold

DC E P 170,100

Add: Net Purchases

Add: Freight-In

Y P

(1,800) —————-

D

E

295,300

5,000 ——————470,400

(165,000) —————— 305,400 ——————— 167


Leather Plus

Income Statement For the three-month period ended March 31, 2016

Gross Sales

500,000

Less: Sales Returns & Allow

(15,000) (7,800) ——————

Sales Discounts

477,200

Net Sales

305,400 ——————

Less: Cost of Goods Sold

Gross Profit Less: Expenses

1,200

18,000

Salaries Expense

5,000

Rental Expense Delivery Expense

Total Expenses Net Income

DC E P 171,800

Supplies Expense

Utilities Expense

O

Y P

D

E

2,100

8,000 —————— 34,300 —————— 137,500 —————-

168


CLOSING ENTRIES 500,000

Sales

15,000

Sales Returns & Allow

7,800

Sales Discounts

477,200

Income Summary

334,600

Income Summary Purchase Returns & Allow

4,900

Purchase Discounts

1,800 302,000

Purchases

O

Y P

5,000

Freight-In Supplies Expense

Rental Expense Delivery Expense Utilities Expense

Income Summary Merchandise Inventory, Beg

Merchandise Inventory, End

ED C 1,200

18,000

Salaries Expense

D

P E

5,000 2,100 8,000

170,100

170,100

165,000 165,000

Income Summary

169


137,500

Income Summary

137,500

Bravo, Capital

Practice Set 2

Y P

Canto Merchandising sells facsimile, copiers and other types of office equipment. Transactions during the month of September 2016 are as follows:

O

Sept 1

Purchased five units of copiers on account from Machina Corp at a cost of PHP8,000 per unit. Payment is due 30 days after. Borrowed from Nation Bank, PHP50,000 at 10% interest per annum due in three months . Canto issued a promissory note for this borrowing. Paid one –year insurance covering the period Sept 1, 2016 – August 31, 2017 for PHP24,000

Sept 2

DC E P

Purchased 10 units of facsimile machines on cash from Tiktac Corp for a total price of PHP20,000.

Sept 7

Sold three units of copiers to Jane Nay on account for a total amount PHP45,000. The terms of the sale is 2/10, n 30.

Sept 10

Paid PHP5,600 for office supplies

Sept 14

Collected from Jane Nay the full amount relating to September 7 sales.

Sept 15

Paid PHP10,000 salaries of office staff

Sept 20

Sold on cash, two units of facsimile machines to Juan for PHP5,000

Sept 30

Purchased delivery truck worth PHP300,000 with an estimated useful life of 10 years with no residual value. Canto paid PHP200,000 cash and balance payable 30 days after.

Instructions:

D

E

1.

Prepare journal entries to record the above transactions, assuming Canto uses periodic inventory system.

2.

Prepare necessary adjusting entries on September 30, 2016.

170


Sept1

Purchases

40,000 AccountsPayable

Sept1

40,000

Cash

50,000 NotesPayable

Sept1

24,000 Cash

Sept2

24,000

O

Purchases

20,000 Cash

Sept7

AccountsReceivable

Sept10

SuppliesExpense

20,000

45,000

DC E P Sales

Cash

E

900

AccountsReceivable

Sept20

Sept 30

D

SalariesExpense

Cash

5,600

44,100

Sales Discount

Sept15

45,000

5,600

Cash

Sept14

Y P

50,000

InsuranceExpense

45,000

10,000

Cash

10,000 5,000

Sales

5,000

Transportation Equipment

300,000

Cash

200,000 171


AccountsPayable

100,000

Adjusting entries: 1. Prepaid Expense

22,000

Insurance Expense

22,000

Y P

Hint: learner may use Prepaid Insurance instead of Prepaid Expense . Expense should be PHP2,000 for September (PHP24,000/12months) Alternative solution: If the entry to record 9/1/16 was:

Prepaid Expenses

Adjusting entry should be:

O

24,000

Cash

24,000

Insurance Expense

2,000

Prepaid Expense

2. Accrual of interest on 9/1/16 borrowing: Interest Expense

P E

ED C

2,000

416.67

Accrued Expenses (Interest Payable)

416.67

Computation: PHP50,000 x 10% x 1/12; for one month only

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Biographical Notes JOSELITO G. FLORENDO

CHRISTOPHER B. HONORARIO

Team Leader

Writer

Mr. Joselito Florendo is Vice President for Planning and Finance at the University of the Philippines System. He also serves as an assistant professor of business courses at the Cesar E.A. Virata School of Business in UP Diliman. He has served multiple duties and responsibilities in the institution as a former Assistant Vice President for Planning and Finance, Executive Director of the UP Provident Fund, Director of the University’s Budget Office, Chief Accountant of the University’s Accounting Office, Assistant Executive Director of the UP Foundation, Director of UP Diliman’s Business Concessions Office and Chair of the Department of Accounting and Finance at the Virata School of Business.

Atty. Christopher Honorario is an Assistant Professor 5 under the College of Management of the University of the Philippines Visayas. He specializes in the following subjects: Financial Accounting, Managerial Accounting, Auditing and Design of Accounting Information Systems. He graduated with a Bachelor of Science in Accountancy at UP Visayas in1999 and then fulfilled his Masters of Management in the same university in 2005. Furthermore, he accomplished his Bachelor of Laws at the University of Iloilo in 2012 and was admitted to the Bar two years later. Atty Honorario also passed the Certified Public Accountant Licensure Exam in the year 1999.

Vice President Florendo completed his International Master’s in Small and Medium Enterprises in 2005 at the Asia-Europe Institute of the University of Malaya in Kuala Lumpur, Malaysia (with distinction). He obtained his Bachelor of Science in Business Administration and Accountancy degree, cum laude, in 1992 at University of the Philippines Diliman and ranked 15th in the May 1994 Certified Public Accountants Licensure Examination.

CARLSBERG S. ANDRES

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VP Florendo actively conducts seminars and workshops in accounting and finance for various public and private, local and international organizations. He was recently awarded the Deloitte-FINEX Most Outstanding Finance Educator of the Philippines for the year 2014-2015.

Writer

Mr. Carlsberg Andres has been a College Professor at the University of Santo Tomas since 2008. His education background includes a Bachelor of Science in Accountancy from UST and a Masters of Science in Finance from the University of the Philippines - Diliman. Mr. Andres is proficient in multiple business disciplines such as financial modelling, quantitative methods, financial reporting & analysis, investment management, and financial risk management to name a few. In addition to his academic achievements, he also has experience using software platforms such as Quickbooks, Peachtree, and Xero accounting system.


ARTHUR P. BARRIDO, JR.

FERMIN J. VILLEGAS

Writer

Copyreader

Prof. oArthur Barrido works as a professor of accounting and finance at the College of Management in the University of the Philippines Visayas. His areas of expertise include Financial Accounting/Management Accounting, and Financial Management/Investment Management. Prof. Barrido graduated from UP Visayas with a Bachelor of Science in Business Administration major in Accounting and Master of Management Business Management. In addition, he became a Certificate Public Accountant in 1988. He has been an integral member of UP Visayas as a Faculty since 1993, Investment Officer since 2001, and Chairperson (Department of Accounting) since 2009.

Mr. Fermin Villegas worked as a Freelance Senior Copywriter for Ogilvy and Manther Philippines. He has more than ten years of extensive work experience as a copywriter for other companies such as BCD Pinpoint Direct Marketing, Espresso DesignComm, and Lowe Philippines. Mr. Villegas graduated from the University of the Philippines Diliman with a degree in B.S. Chemistry and a CTA on Theater Arts. He has also garnered multiple awards and recognitions in the field of advertising, such as finalist for the 2002 Caples Awards, 3rd prize for the 2004 Caples Awards, Silver for the 2006 Araw Values Awards, and Bronze for the 2009 Ad Congress.

DANIEL H. BORJA, PH.D. TechnicalVINCENT Editor

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Dr. Daniel Vincent Borja is Associate Professor at the Cesar E.A. Virata School of Business, University of the Philippines Diliman. He is currently the Chairperson of the Department of Accounting and Finance and the Investment Officer of the University of the Philippines System. He earned his Bachelor of Science in Business Administration and Accountancy (cum laude), MS Finance, MS Management and PhD in Business Administration degrees from the University of the Philippines Diliman. He was an EGIDE scholar of the French Embassy in Manila to Angers, France. He was also part of the Asialink project on Banking and Finance sponsored by the European Commission to do research in Poitiers, France. Aside from teaching, Prof. Borja also conducts training programs and seminars for various institutions in industries such as banking, utilities, telecommunications, property, hospitals, government institutions, and non-profit organizations.

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Accountancy, Business, and Management 1 TG.pdf

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