And equity including income and expenses account types

Financial accounting and reporting VOL-1A

a.Recording (steps 1-3)
b.Summarizing (steps 4-10)

3. Steps in the Accounting Cycle

b.Journalizing
c.Posting
d.Unadjusted trial balance e.Adjusting entries
f.Adjusted trial balance
g.Financial statements
h.Closing entries
Post-closing trial balance i.

Types of Journal Entries According to Form

16. Simple Journal Entry
It is a type of journal entry which contains a single debit and a single credit element.

This is the process of recording the transactions in the appropriate journals.

6. Journal
It is a chronological record of transactions. It is also known as the book of original entry.

Common Account Types

20. Real Accounts
These are the statement of financial position accounts or so-called permanent accounts which are not closed and are carried over to the next accounting period (i.e., assets, liabilities, and equity accounts).

These are the income statement accounts or temporary capital accounts which are closed at the end of the accounting period (i.e., income and

It is a list of general ledger accounts with their respective debit or credit balances.

24. Suspense Account
It is an account that holds temporarily certain information pending for disposition.

25. Reciprocal Account
It is an account that has a counterpart in another book within the entity or in another ledger of another entity.

29. General Ledger
It includes all the accounts appearing on the financial statements.

an accounting period to update certain revenue and expense accounts and to make sure the entity complies with the matching principle.

35. Prepayments
These are expense items already paid for but not yet incurred.

36. Methods of Initially Recording Prepayments

Financial accounting and reporting VOL-1A

38. Deferred Income
It refers to an income item that is already collected in cash but not yet earned.

a.Liability method – Dr. Unearned income (earned portion); Cr. Income
b.Income method – Dr. Income (unearned portion); Cr. Unearned income

41. Accrued Expense
It occurs in a transaction where expense has already been incurred but not yet paid for in cash.

Common Types of Estimates

47. Provision for Doubtful Accounts
It is the estimated amount of bad debts that will arise from accounts receivable that have been issued but not yet collected.

51. Basic Financial Statements

a.Statement of Financial Position (Balance Sheet)
b.Statement of Comprehensive Income (Income Statement)
c.Statement of Changes in Equity
d.Statement of Cash Flows
e.Notes and Disclosures.

55. Optional Steps in the Accounting Cycle

a.All trial balances
b.Reversing entries

62. Financial Position
It refers to the financial condition of the reporting entity represented by the economic

c.Contribute to economic efficiency – by helping investors identify opportunities and risks across the world.

63. Accrual Accounting
It means that the events should be reflected in the reports in the periods when the effects of transactions occur, regardless the related cash flows.

c.It can be used as a reference by preparers who are trying to develop accounting policies but cannot find any

b.Expenses shall be recognized when incurred, rather than when paid for in cash.

59. Objectives of Conceptual Framework

a.To provide financial information about reporting entities; and
b.To help investors, lenders and other creditors (primary users) in decision making.

qualitative characteristic is capable of making a difference in the users’ decisions.

71. Faithful Representation
It requires that accounting transactions and events should be recorded in a manner that represents their true economic substance.

73. Predictive Value 82. Comparability

It helps the users of financial statements in predicting future trends of the business.

represents faithfully the economic phenomena it 75. Materiality purports to represent.

It is the threshold above which missing or incorrect information in financial statements is considered to have an impact on the decision making of users.

of an individual entity’s financial report.

Underlying Characteristics Maximized by Faithful Representation

78. Neutrality 88. Direct Verification

It asserts that financial information must be free from bias or not prepared with the purpose to influence certain decisions of the users.

80. Prudence / Conservatism *** It is the exercise of caution when making
judgements under conditions of uncertainty such Chapter 3 that assets and income are not overstated and

expenses and liability are not understated.

Complete Set of Financial Statements

93. Statement of Financial Position
It contains information about the assets, liabilities and equity of the reporting entity at a point

These contain information about the income and expenses of the reporting entity over a period of

104. Unconsolidated
It refers to financial statements provided by

contributions from and distributions to equity holders.

about the accounting methods, assumptions,
judgments used and their changes. 109. Liability
*** It is a present obligation of the entity to transfer an economic resource as a result of past 98. Reporting Period events.

It is a specified period of time in which the
financial statements are prepared for. 110. Equity
It is the residual interest in the assets of the 99. Going Concern entity after deducting all its liabilities.

101. Kinds of Reporting Entities

a.A single entity – e.g., one company b.A portion of an entity – e.g., a division of one company
c.More than one entity – e.g., a parent and its subsidiaries reporting as a group

Financial accounting and reporting VOL-1A

115. Loss an asset or paid to settle a liability in an orderly

It refers to expenses incurred from events transaction between market participants at

expected to be derived from the used and ultimate disposal of an asset (based on exit price).

128. Fulfillment Value
It is the present value of the cash expected to be transferred for the payment of a liability

b.The item’s cost or value can be entry price). measured with reliability.

It means the removal of an asset or liability from the statement of financial position and normally it happens when the item no longer meets the definition of an asset or a liability.

123. Historical Cost

transaction price at the time of recognition of the element (based on entry price).

7

136. Financial Capital Maintenance
It asserts that profit is earned only when the amount of net assets at the end of the period is greater than the amount of net assets in the beginning, after excluding contributions from and distributions to equity holders (mandated by

the reporting entity, it is included in the books as cash.

Cash Items Included in the Accounting Books 146. Cash on Hand

holders. It includes undeposited cash collections and

141. Check
It is a document that orders a bank to pay a specific amount of money from the person's account to the person in whose name the same has been issued. In general, it is included in the books as cash provided that the same is payable to the reporting entity.

142. Bank Draft
It is a check drawn by a bank on its own funds in another bank. If it is payable to the reporting entity, it is included in the books as cash.

149. Bond Sinking Fund
It is a restricted asset of a corporation that was required to set aside money for redeeming or buying back some of its bonds payable.

General rule: It is presented as a noncurrent asset.

Financial accounting and reporting VOL-1A

160. Measurement of Cash

a.In general – face value
b.Foreign currency – current exchange rate
c.Cash held by a bank or financial institution under bankruptcy or financial difficulty – estimated realizable value

161. Foreign Exchange Restriction
Deposits in foreign banks which are subject to foreign exchange restriction, if material, should be classified separately among noncurrent assets

such related liability (i.e., if the noncurrent liability is reclassified as current, the related noncurrent cash fund shall also be reclassified as current asset).

163. Classification of Cash Fund Set Aside for the Acquisition of a Noncurrent Asset

157. Short-Term Financial Asset

It occurs when the cash in a bank account has a credit balance resulting from the issuance of checks in excess of deposits.

It is an investment that matures in more

than one year from the end of the reporting period and is classified as noncurrent asset.

the same shall be reclassified as current or temporary investment.

166. Compensating Balance
It generally takes the form of minimum checking or demand deposit account balance that

arrangement with a bank. Became Stale

Types of Compensating Balance

171. Adjustment Required for Undelivered or Unreleased Checks
Dr. Cash in bank; Cr. Expense or liability – The entry made upon issuance of said check should be reversed because in essence, no payment has really been made.

172. Postdated Check Delivered
It is a check drawn, recorded and already given to the payee but it bears a date subsequent to the end of reporting period.

appropriate account
b.If the amount is immaterial - Dr. Cash in bank; Cr. Miscellaneous income

177. Journal Entries for Cash Shortage

a.Initial entry – Dr. Cash; Cr. Cash short or over
b.If there is no claim on the overage – Dr.

Cash short or over; Cr. Miscellaneous income
c.If the cash overage is properly found to be the money of the cashier – Dr. Cash short or over; Cr. Payable to cashier

b.Replenishment of the fund is usually equal to the petty cash disbursements.

c.Replenishment should only be by means of drawing checks and not from undeposited collections.

unreplenished expenses at the end of the reporting period in order to state the correct balance of the fund.

182. Fluctuating Fund System

recorded in the general journal or cash

expenses is needed at the end of the

reporting period because of the outright recording of expenses.

Petty cash fund

185. Fluctuating Fund System

192. Journal Entry Used by the Bank to Record Withdrawals or Disbursements of Cash by the Reporting Entity
Dr. Bank account of reporting entity; Cr.

Cash

194. Bank Statement
It is a monthly report of the bank to the depositor showing data about the transactions of

200. NSF or DAIF Checks
These are checks deposited but not returned by the bank because of insufficiency of fund.

197. Credit Memos
These refer to items not representing

Bank Reconciling Items

cash receipts. Examples: deposits or withdrawals resulting to either

overstatement or understatement of cash balance

205. Certified Check
It is a check for which the issuing bank

depositor guarantees availability of cash in the holder's account.

a.NSF checks or DAIF (drawn against insufficient fund) checks
b.Technically defective checks
c.Bank service charges
d.Reduction of loan

Forms of Bank Reconciliation

209. Book to Bank Method
It is a form of bank reconciliation where the book balance is reconciled with the bank balance or

*** the book balance is adjusted to equal the bank

210. Bank to Book Method 217. Book Debits

It is a form of bank reconciliation where the bank balance is reconciled with the book balance or the bank balance is adjusted to equal the book

Book balance + Credit memos - Debit Memos ± Effect of errors = Adjusted book balance

212. Formula to Compute for the Adjusted Bank Balance under the Adjusted Balance Method of Bank Reconciliation
Bank balance + Deposits in transit - Outstanding checks (after excluding certified checks) ± Effect of errors = Adjusted bank balance

222. Computation of End of Month Deposits in

balance Transit

book balance Checks

Beginning of month outstanding checks +

sale of goods and services in the ordinary course of business and not supported by promissory notes.

266. Notes Receivable
These are receivables supported by formal promises to pay in the form of notes.

These represent claims arising from Examples: Dividends receivable, accrued

sources other than the sale of merchandise or services in the ordinary course of business.

rent, accrued royalties income, accrued interest on bond investments, etc.

Always classified as current asset.

in cash within one year, the length of the operating cycle notwithstanding.

b.Noncurrent asset – in case otherwise.

272. Subscription Receivable
General rule: Deduction from subscribed share capital.

Exception: Current asset if stated to be collectible within 1 year.

a.Initial measurement – fair value (face amount or original invoice amount)
b.Subsequent measurement – amortized cost (net realizable value of accounts receivable or gross accounts receivable less allowances)

279. Allowances Against Accounts Receivable These are usually deducted from accounts receivable to get the latter’s estimated recoverable amount or realizable value.

274. Special Deposits on Contract Bids General rule: Noncurrent asset.

Exception: Current asset if stated to be collectible within 1 year.

281. FOB Shipping Point of the product. No ledger account is opened for this

It is a shipping term which means that kind of discount.

290. Cash Discount
It is a discount allowed to stimulate instant payment of the goods purchased.

Methods of Recording Credit Sales

where the accounts receivable and sales are recorded at net amount of the invoice, meaning the

Destination invoice price minus the cash discount.
Dr. Accounts receivable, Freight out; Cr. ***
Sales, Allowance for freight charge
294. Journal Entries Under the Gross Method of

Sales, Cash invoice); Cr. Sales

b.Collection of customer’s account within

beyond the discount period – Dr. Cash; Cr. Accounts receivable

287. Journal Entry to Record Shipment of
Merchandise Sold Freight Prepaid Under FOB 295. Journal Entries Under the Net Method of Shipping Point Recording Credit Sales
Dr. Accounts receivable (invoice amount +

289. TRADE DISCOUNT
It is a discount that is allowed by the

wholesaler to the retailer, calculated on the list price		18

296. Sales Discount Forfeited
It is a miscellaneous or other income account credited whenever there is a collection of accounts receivable beyond the discount period

304. Journal Entries Under the Allowance Method of Recording Bad Debts or Doubtful Accounts

Dr. Sales discount; Cr. Allowance for sales discount (this entry may be reversed at the beginning of the next period.)

298. Bad Debt or Doubtful Account
It is an expense that a business incurs once the repayment of credit previously extended to a customer is estimated to be uncollectible.

Allowance for doubtful accounts

305. Journal Entries Under the Direct Writeoff Method of Recording Bad Debts or Doubtful Accounts

a.Distribution cost - if the granting of credit and collection of accounts are

*** under the charge of the sales manager.

If the problem is silent, bad debts expense is
an administrative expense.

303. Writeoff

Financial accounting and reporting VOL-1A

receivable – should be collectively

b.It provides the ending allowance for credit risk characteristics and

doubtful accounts.

a.It is the only income statement approach in estimating doubtful accounts.

Allowance for doubtful accounts

311. Journal Entry to Record Correction in 316. Dishonored

Allowance for Doubtful Account as a Change in Accounting Estimate

318. Initial Measurement of Notes Receivable
The initial measurement should be fair value plus transaction costs which is equal to:

a.General rule: Present value