Accounting for Service Business

History of Accounting
Accounting has a long history. Some scholars claim that writing arose in order to record information. Account records date back to the ancient civilizations of China, Babylonia, Greece and Egypt. The rulers of these civilizations used accounting to keep track of the cost of labor and materials used in building structures like the great pyramids. (Source: Horngren, Harrison and Robinson, 1995)
Accounting developed as a result of the information needs of merchants in the city-states of Italy during the 1400s. In that commercial climate a monk, Luca Pacioli, a mathematician and friend of Leonardo da Vinci, published the first known description of double-entry bookkeeping entitled Summa de Arithmetica, Geometria, Proportioni et Proportionalite, which means Everything about Arithmetic, Geometry, and Proportion published in Venice in November 1494. This book contained primarily principles of mathematics and incidentally a set of accounting procedures. The pace of accounting development increased during the Industrial Revolution as the economies of developed countries began to mass-produce goods. Until that time, merchandise was priced based on managers’ hunches about cost but increased competition required merchants to adopt more sophisticated accounting system.

In the nineteenth century, the growth of corporations especially those in the railroad and steel industries, spurred the developed of accounting. Corporate owners were no longer necessarily the managers of their business. Managers had to create accounting systems to report to the owners how well their businesses were doing.
Government played a role in leading more development in the field of accounting when it started using the income tax. Accounting supplied the concept of income. Also, government at all levels has assumed expanded roles in health, education, labor and economic planning. To ensure that the information that it uses to make decisions is reliable, the government has required strict accountability in the business community.
At the beginning of the third millennium, there would still be significant developments in the field of accounting. The great challenge of globalization and the effects of new technologies (e.g. super computers, robotics, inter and intra-net, etc.) pose a shift in the structure and
pattern in this field. More and better accounting information are now being required and therefore, accounting, being the means used in communicating business and financial information, must also evolve into a more efficient level.
Reference: Workbook in Introductory Accounting for Service Business
Accounting as “Language of Business”
The primary objectives of the business are:
1. To generate profits
2. To properly manage limited and scarce resources
With these objectives, a business must prepare financial reports and interpret these reports as an aid in decision-making. In making decisions, accounting is used as a tool for communication. Confidentiality Requirement
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Objective 2
Definition of Accounting
1. Accounting is a service activity.
a. Its function is to provide quantitative information, primarily financial in nature, about economic entities that is intended to be useful in making economic decisions.
2. Accounting is the process of identifying, measuring and communicating economic information to permit informed judgments and decisions by users of the information. a. Identifying – this accounting process is the recognition or nonrecognition of business activities as “accountable events” (Valix, 2005). There are 3 types of transactions:
i. Business transaction –
1. transactions which are recorded in the financial books. Example is investment of the owner.
ii. Personal transaction –
1. transactions which are not recorded in the financial books. Example is purchase of house and lot of a business owner using his personal money.
iii. Neither business nor personal transaction –
1. Business events that are not recorded in the financial books. Examples are hiring of employees, death of the owner, entering into a contract etc.
b. Measuring – this accounting process is the assigning of Peso amounts to the accountable economic transactions and events (Valix, 2005)
c. Communicating – is the process of preparing financial statements and interpreting the results thereof
3. Accounting is the art of recording, classifying and summarizing in a significant manner and in terms of money, transactions and events which are, in part at least, of a financial character, and interpreting the results thereof.
4. Accounting is an information system that measures, processes, and communicates financial information about an identifiable economic entity.
Objective 3
Difference between Bookkeeping and Accounting
Bookkeeping
Accounting
? Recording of transactions
? Recording of transactions
? Preparing financial reports
? Preparing financial reports
? Analyzing financial reports
? Decision-making
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Objective 4
Branches of Accounting
1. Financial Accounting – is primarily concerned with the recording of business transactions and the eventual preparation of financial statements (Valix, 2005). 2. Cost Accounting – is primarily concerned with proper accumulation of costs such as materials, labor and overhead, proper costing of inventories and study of different costing methods.
3. Management Accounting – is the preparation of financial reports and management research intended for management use and interpretation of these reports and researches. Examples of financial reports are Sales reports, Cost of Production reports, Budgets etc. Example of management research is evaluation of a business process and management consulting.
4. Taxation – deals with the study of provisions of the law with regard to Philippine taxation system and proper computation of taxes such as income tax, value-added tax, withholding tax and other taxes.
5. Auditing – basically deals with the examination of the financial statements by an independent party (auditor) to ascertain whether such financial statements are in conformity with Philippine Accounting Standards.
Objective 5
Forms of Business Organizations
1. According to ownership
a. Sole-proprietorship – owned by only one person called sole-proprietor b. Partnership – owned by 2 or more persons called partners c. Corporation – owned by 5 or more persons called shareholders 2. According to activity
a. Service – renders services to the public such accounting firms, law firms, consulting firms, SPA, medical clinics, dental clinics, schools etc b. Merchandising – buys and sells merchandise to the public c. Manufacturing – buys raw materials and converts them into finished goods to be sold to the public
Objective 6
Certified Public Accountant (CPA)
– is an accounting professional doing accounting, audit, tax, management consulting, education and research work.
– Types of Accountants
o Private Accountant / Management Accountant
? is an accounting professional employed in a private company or organization
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o
o
o
Public Accountant / Auditor
? is an accounting professional independent from the private organizations and is usually employed in an auditing firm
Government Accountant
? is an accounting professional employed in a government agency Accounting Educator and Researcher
? is an accounting professional employed in a university, college or research organization
Objective 7
Government Agencies and Professional Bodies
1. Bureau of Internal Revenue (BIR) – agency in charge of proper collection of taxes from the public
2. Securities and Exchange Commission (SEC) – agency in charge of accumulating audited financial statements of organizations, regulating companies issuing securities such as stocks and bonds to the public, and monitoring companies in the insurance industry. This agency also facilitates the registration of partnerships and corporations. 3. Bangko Sentral ng Pilipinas (BSP) / Central Bank of the Philippines – agency in charge of regulating Philippine bank operations, setting Philippine monetary policies etc. 4. Philippine Stock Exchange (PSE) – agency in charge of monitoring securities transactions of companies listed in the stock exchange.
5. Department of Trade and Industry (DTI) – agency in charge of facilitating registration of sole-proprietorship businesses and regulating consumer commodity transactions. 6. Commission on Audit (COA) – agency in charge of auditing government-related transactions
7. Board of Accountancy (BOA) – is an accounting body in charge of administering licensure examination for accountants
8. Professional Regulation Commission (PRC) – government agency in charge of issuing licenses to successful examinees in board exams
9. Philippine Instititute of Certified Public Accountants (PICPA) – Professional organization of accountants in the Philippines
10. City Hall and Baranggay – these political subdivisions issues business permits and collects business taxes.
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Objective 8
Business Documents
1.
2.
3.
4.
5.
6.
Purchase Order – shows items to be ordered by the business Delivery Receipt – shows items to be delivered in the business Sales Invoice – shows items that were sold to the business Statement of Account – shows the summary of sales invoices Cash Voucher – shows the liability of the business to be paid in the future Official Receipt – shows the amount received by the business
Objective 9
Financial Statements
– Shows the results of the recording of the business transactions and are expressed in terms of assets, liabilities, equity, income and expenses.
–
Six (6) Components
o Balance Sheet / Statement of Financial Position
? Presents the financial condition of the business through its assets, liabilities and capital / owner’s equity
o Income Statement
? Presents the financial performance of the business through its income and expenses
o Statement of Changes in Owner’s Equity
? Presents the changes in capital such as additional investments, withdrawals, net income and/or net loss
o Statement of Cash Flows
? Presents the cash inflows and outflows of the business through its operating, investing and financing activities
o Statement of Comprehensive Income
? Presents gains and losses that were not presented in the Income statement. Examples are Unrealized gain on sale of trading securities, Foreign exchange gain on translation etc.
o Notes to the Financial Statements
? Presents the details of the line items in the Balance Sheet and Income Statement
Generally Accepted Accounting Principles (GAAP)
– Refers to rules, procedures, practice and standards followed in the preparation and presentation of financial statements (Valix, 2005).
Financial Reporting and Standards Council (FRSC)
– The council establishes and improves accounting standards that will be generally accepted in the Philippines (Valix, 2005)
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Users of the Financial Statements
Internal Users
1. Management
2. Employees
External Users
1. Investors
2. Creditors / Lenders
3. Suppliers / Vendors
4. Government
5. Public
Objective 10
Basic Accounting Concepts / Assumptions
1. Entity
a. Under this concept, the business enterprise is viewed as separate from the owners, managers, and employees of the business (Valix, 2005) 2. Time period
a. This concept requires that the indefinite life of an enterprise is subdivided into time periods which are usually of equal length (Valix, 2005) b. Calendar year is a 12-month period that ends on December 31, otherwise it is called Natural business year or Fiscal year (Valix, 2005)
3. Monetary unit
a. This concept assumes that financial transactions be measured in terms of money or currency of the Philippines
4.
Cost
a. This concept requires that assets should be recorded initially at original acquisition cost (Valix, 2005)
5. Adequate disclosure
a. This concept requires that all significant and relevant information leading to the preparation of financial statements should be clearly reported (Valix, 2005) 6. Materiality
a. This concept relates to the significance of an item to the overall presentation of the financial statements. Information is material if its omission could influence the economic decision of the users of the financial statements (Valix, 2005) 7. Accrual
a. This concept requires the income earned must be recognized in the
financial statements whether cash is received or not.
b. This concept also requires the expenses incurred must be recognized in the financial statements whether cash is paid or not.
c. Because of this concept, organizations are preparing adjusting journal entries to recognize accrued income and accrued expenses.
d. Accrued income refers to income earned but not yet received. e. Accrued expense refers to expense incurred but not yet paid. Confidentiality Requirement
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8. Consistency
a. This concept requires that the accounting methods and practices should be applied on a uniform basis from one time period to another (Valix, 2005). 9. Comparability
a. There are 2 kinds of comparability: Comparability within an enterprise and Comparability between enterprises (Valix, 2005)
b. Comparability within an enterprise is the quality of information that allows comparisons within a single enterprise from one time period to the next (Valix, 2005)
c. Comparability between enterprises is the quality of information that allows comparisons between two or more enterprises engaged in the same industry (Valix, 2005)
10. Going Concern
a. This concept assumes that business will operate indefinitely and there is no intention of liquidating or closing down the business
11. Revenue recognition
a. Same as accrued income concept
12. Expense recognition
a. Same as accrued expense concept
13. Matching
a. This concept requires that costs and expenses incurred in earning a revenue should be reported in the same period when the revenue or income is earned (Valix, 2005)
14. Conservatism
a. Under this concept, when alternatives exist, the alternative which has the least effect on net income or owner’s equity should be chosen (Valix, 2005) b. Conservatism is synonymous with Prudence. Prudence is the desire to exercise care and caution when dealing with the uncertainties in the measurement process such as assets or income are not overstated and liabilities or expenses are not understated (Valix, 2005)
15. Objectivity
a. This concept requires that financial transactions that were recorded be supported by business documents
Objective 11
Other Terms
Liquidity
Solvency
– Refers to the ability of the organization
– Refers to the ability of the organization
to pay its short-term (current)
to pay its long-term (noncurrent)
obligations
obligations
Stock Certificate – evidence certifying the ownership of shares of stock of a shareholder Confidentiality Requirement
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey: John Wiley and Sons, Inc. pages 2 – 11, 21, 25, 29 – 31, 92 – 94 Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises & Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol. 1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 2
TRANSACTION ANALYSIS
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1
Define the accounting equation and know the effects of
the financial transactions on the accounting equation
2
Familiarize with the types of accounts for assets,
liabilities, capital, income and expenses
Objective 1
The Accounting Equation
Assets = Liabilities + Capital
The equation states that business assets are financed by two parties. They are the creditors or vendors (liabilities) and the owner (capital).
Income will increase assets as well as capital and expenses will decrease assets as well as capital. Business transactions will have an effect on the accounting equation. The following are the basic financial transactions and the effects on the accounting equation.
Transaction
ASSETS
LIABILITIES
CAPITAL
Investment of the owner
?
?
Investment
Withdrawal of the owner
?
?
Withdrawal
?
Interest
expense
Borrowed
money
by
issuing a promissory note
Payment of the principal
and
interest
of
the
promissory note
?
?
?
?
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Purchase of short-term
investment for cash
Sale
of
short-term
investment at a gain
Sale
of
short-term
investment at a loss
Cash advance
employee
to
an
Purchase of supplies for
cash
Purchase of supplies on
account
Purchase of a fixed asset
for cash
Purchase of a fixed asset on
account
Partial / Full payment of
accounts payable
Sale of a fixed asset at a
gain
Sale of a fixed asset at a
loss
Rendered services for cash
Rendered
account
services
on
??
??
?
??
?
Gain on sale
of investment
in
trading
securities
Loss on sale
of investment
in
trading
securities
??
??
?
?
??
?
?
?
?
??
?
Gain on sale
of equipment
??
?
Loss on sale
of equipment
?
?
Service
Income
?
?
Service
Income
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Partial / Full collection of
accounts receivable
Received
cash
commission income
for
Payment of expenses for
cash
??
?
?
Commission
Income
?
?
Expense
Objective 2
Types of Accounts
CATEGORY
DEFINITION
ACCOUNT TITLE
DEFINITION /
EXAMPLES
ASSETS
CASH
This includes bills
and coins, bank
check, bank
accounts.
Self-explanatory
ACCOUNTS
RECEIVABLE
Amount collectible
from clients or
customers for
services rendered or
sale of goods
This refers to shortterm, highly liquid
investment in
securities such as
stocks and bonds.
These refer to
amounts collectible
from a person or a
company
Cash in the
possession and
custody of the
business.
CASH IN BANK
TRADE AND OTHE
RECEIVABLES
Cash used to pay
petty or small
amount of
expenses.
CASH ON HAND
INVESTMENT IN
TRADING
SECURITIES
PETTY CASH FUND
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ALLOWANCE FOR
DOUBTFUL
ACCOUNTS
Is a Contra-asset
account that
represents provision
for estimated
doubtful accounts
NOTES RECEIVABLE
Same with
Accounts
Receivable but is
evidenced by a
promissory note
INTEREST
RECEIVABLE
Amount collectible
in a loan transaction
COMMISSION
RECEIVABLE
RENT RECEIVABLE
ADVANCES TO
EMPLOYEES
PREPAID EXPENSES
These refer to
expenses that are
paid in advance
Cash advance given
to employees
PREPAID RENT
PREPAID
INSURANCE
PREPAID
ADVERTISING
PREPAID
SUBSCRIPTIONS
OFFICE SUPPLIES
STORE SUPPLIES
PROPERTY, PLANT
AND EQUIPMENT
These refer to items
that are useful for
more than 1 year
LAND
OFFICE EQUIPMENT
STORE EQUIPMENT
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Computer, Fax
machine
Cash register
machine
16
TRANSPORTATION
EQUIPMENT
Delivery Van,
Motorcycle, Cars,
Trucks
FURNITURE AND
FIXTURES
Cabinets, Tables,
Chairs
MACHINERY
BUILDING
Office building,
Factory plant
ACCUMULATED
DEPRECIATION
Is a Contra-asset
account that
represents
cumulative
depreciation for
depreciable fixed
assets
LIABILITIES
TRADE AND OTHER
PAYABLES
These refer to
amounts payable to
a person or a
company
ACCOUNTS
PAYABLE
Amount payable to
supplier, creditor or
vendor for money,
supplies, goods or
property loaned
NOTES PAYABLE
Same with
Accounts Payable
but is evidenced by
a promissory note
DISCOUNT ON
NOTES PAYABLE
Is a Contra-liability
account that
represents
unamortized
interest on the
promissory note
INTEREST PAYABLE
Amount payable in
a loan transaction
TAXES AND
LICENSES PAYABLE
Unpaid taxes and
licenses to be
remitted / paid to
the government
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UTILITIES PAYABLE
Unpaid
communication,
light and water bills
SALARIES AND
WAGES PAYABLE
Unpaid salaries and
wages of the
employees
UNEARNED INCOME
This refers to cash
received in advance
but not yet earned
UNEARNED RENT
UNEARNED
ADVERTISING
UNEARNED
SUBSCRIPTIONS
UNEARNED
COMMISSION
MORTGAGE
PAYABLE
This refers to bank
loan with assets
such as house and
lot or vehicle as
collaterals
BONDS PAYABLE
This refers to loan
that is evidenced by
a bond certificate
or indenture
CAPITAL / OWNER’S EQUITY
OWNER, CAPITAL
This refer to claim
or interest of the
owner
OWNER, DRAWING
This refer to
temporary
withdrawal of the
owner of cash,
supplies, goods or
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property
INCOME
SERVICE INCOME
Income derived
from rendering of
services
Primary income for
service business
OTHER INCOME
Secondary income
for service business
INTEREST INCOME
Income from loan
transactions
DIVIDEND INCOME
Income from stock
investments
RENT INCOME
GAIN ON SALE OF
EQUIPMENT
Excess of selling
price over the net
book value of the
fixed asset
EXPENSES
EMPLOYEE BENEFIT
COST
Expenses related to
employee benefits
SALARIES AND
WAGES EXPENSE
Represents the total
gross salary or
wages of the
employees
SSS PREMIUMS
EXPENSE
Represents total
SSS (health benefit)
contributions of the
employer and the
employees
PHILHEALTH
CONTRIBUTIONS
EXPENSE
Represents total
Philhealth (health
benefit)
contributions of the
employer and the
employees
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PAG-IBIG
CONTRIBUTIONS
EXPENSE
RENT EXPENSE
PROFESSIONAL FEES
Expense related to
professional
services of
accountants,
lawyers etc
ADVERTISING
EXPENSE
COMMISSION
EXPENSE
Expense related to
payment of
commission to
agents
REPAIR AND
MAINTENANCE
EXPENSE
SUPPLIES EXPENSE
INSURANCE
EXPENSE
REPRESENTATION
AND
ENTERTAINMENT
EXPENSE
Expense related to
cost of meetings
with clients such as
meals
TRANSPORTATION
EXPENSE
Expense related to
commuting from
the office to
client’s office
FUEL AND OIL
EXPENSE
UTILITIES EXPENSE
Expense related to
communication
such as telephone,
Internet, electricity
and water
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Represents total
Pag-IBIG (housing
benefit)
contributions of the
employer and the
employees
20
TAXES AND
LICENSES EXPENSE
Expense related to
business taxes and
permits from the
city hall
CHARITABLE
CONTRIBUTION
EXPENSE
Expense related to
donations
DEPRECIATION
EXPENSE
Noncash expense
that represents the
total depreciation
of the depreciable
fixed assets for the
year
DOUBTFUL
ACCOUNTS EXPENSE
Noncash expense
that represents the
total estimated
doubtful accounts
for the year
BAD DEBTS
EXPENSE
Noncash expense
that represents the
total accounts
receivable that
were written-off /
removed from the
financial books due
to its proven
uncollectibility
MISCELLANEOUS
EXPENSE
OTHER EXPENSE
LOSS ON SALE OF
EQUIPMENT
Excess of net book
value over the
selling price of the
fixed asset
FINANCE COST
INTEREST EXPENSE
Expense from loan
transactions
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th
edition. New Jersey: John Wiley and Sons, Inc. pages 14 – 20, 26 – 27, 159 – 164 Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises & Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol. 1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 3
GENERAL JOURNAL, GENERAL LEDGER TRIAL BALANCE
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1
Know the concept of double-entry bookkeeping and the
appropriate accounting tool for financial transactions
2
Understand the concept of journalizing and prepare
journal entries
3
Post journal entries to the general ledgers
4
Prepare the trial balance
Objective 1
Double-entry Bookkeeping
This concept uses the tools debit and credit to record financial transactions. Further, this concept dictates that “for every debit, there is at least one credit and vice-versa”. Appropriate Accounting Tool
The table shows the appropriate accounting tool for the effects of the financial transactions on assets, liabilities, capital, income and expenses.
Increase
Asset
Liability
Capital
Income
Expense
Decrease
Debit
Credit
Credit
Credit
Debit
Credit
Debit
Debit
Objective 2
Journalizing
This refers to the process of recording the financial transactions in the General Journal. General Journal is also known as “Book of Original Entry”.
The following are examples of Journal Entries:
Adapted from Exercise 6-8 of Workbook in Introductory Accounting for Service Business Confidentiality Requirement
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Journalize the following selected transactions of MJ Dry Cleaning. The following transaction occurred during June 2010.
1
MJ Flores invested in the business the following: P 250,000 cash and P 420,000 worth of dry cleaning equipment with fair value of P 400,000 but with existing liability of P 100,000 which is to be assumed by the business
2
Purchased dry cleaning supplies from Wilson Cleaners for P 22,100, payable after 20 days
4
Bought cash register from Carter Equipment, P 45,800. Terms: 30% down payment, balance on account
7
Dry cleaning services rendered for the week totaled P 25,250 cash
GENERAL JOURNAL
Date
2010
Jun 01
02
04
07
Particulars
Page xx
F
Debit
Cash
Dry Cleaning Equipment
Accounts Payable
MJ Flores, Capital
Investment of the owner
101
110
210
320
250 000
400 000
Dry Cleaning Supplies
Accounts Payable
Purchase of supplies on account
108
210
22 100
Office Equipment
Cash
Accounts Payable
Purchase of cash register
111
101
210
45 800
Cash
Dry Cleaning Service Income
Rendered dry cleaning service
for cash
101
410
Credit
25 250
100 000
550 000
22 100
13 470
32 060
25 250
Simple entry and Compound entry
Simple entry is a journal with only one debit and one credit. Compound entry is a journal entry with at least two debits or at least two credits.
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Objective 3
Posting
This refers to the process of transferring the debit and credit amounts to the appropriate ledger accounts. Ledger accounts are placed in a financial book called General Ledger. This is also known as “Book of Final Entry”. After the amounts have been posted, one should post the ledger account number back to the general journal. This process is known as “cross-referencing”. Chart of Accounts
This chart lists the account titles to be used by the business and the related account numbers. The following is a typical example of chart of accounts.
ASSETS
100
OWNER’S EQUITY
300
Cash
Investment in Trading Securities
Accounts Receivable
Allowance for Doubtful Accounts
Notes Receivable
Advances to Employees
Prepaid Rent
Dry Cleaning Supplies
Land
Dry Cleaning Equipment
Office Equipment
Building
Accumulated Depreciation –
Dry Cleaning Equipment
Accumulated Depreciation –
Office Equipment
Accumulated Depreciation – Building
101
102
103
104
105
106
107
108
109
110
111
120
130
MJ Flores, Drawing
MJ Flores, Capital
310
320
INCOME
400
Dry Cleaning Service Income
Interest Income
410
420
EXPENSES
500
Salaries and Wages Expense
510
131
Rent Expense
520
140
LIABILITIES
200
Accounts Payable
Notes Payable
Discount on Notes Payable
Unearned Advertising
Mortgage Payable
210
220
230
240
250
Advertising Expense
Commission Expense
Dry Cleaning Supplies Expense
Insurance Expense
Transportation Expense
Utilities Expense
Taxes and Licenses Expense
Depreciation Expense
Interest Expense
530
540
550
560
570
580
590
591
592
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General Ledger Postings
CASH
Date
2010
Jun 01
07
Particulars
F
101
Debit
GJ1
GJ1
Totals
Balance
Date
2010
250 000 Jun 04
25 250
275 250
261 780
Particulars F
GJ1
Particulars
F
Debit
GJ1
Date
108
Particulars F
Particulars
F
Debit
GJ1
Date
110
Particulars F
Particulars
F
Debit
GJ1
Date
111
Particulars F
Particulars
F
Credit
45 800
ACCOUNTS PAYABLE
Date
Credit
400 000
OFFICE EQUIPMENT
Date
2010
Jun 04
Credit
22 100
DRY CLEANING EQUIPMENT
Date
2010
Jun 01
13 470
13 470
DRY CLEANING SUPPLIES
Date
2010
Jun 02
Credit
Debit
Date
2010
Jun 01
02
04
210
Particulars F
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GJ1
GJ1
GJ1
Credit
100 000
22 100
32 060
26
MJ FLORES, CAPITAL
Date
Particulars
F
Debit
Date
2010
Jun 01
320
Particulars F
GJ1
DRY CLEANING SERVICE INCOME
Date
Particulars
F
Debit
Date
2010
Jun 07
550 000
410
Particulars F
GJ1
Normal Balances of the Accounts
Assets
Contra-assets
Liabilities
Contra-liabilities
Capital
Drawing
Income
Expenses
Credit
Debit
Credit
Credit
Debit
Credit
Debit
Credit
Debit
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Credit
25 250
27
Objective 4
Trial Balance
This refers to the summary of balances in the ledger accounts. The accounts are arranged in the order of assets, liabilities, equity, income and expenses.
PATRICE CONSULTING SERVICES
Trial Balance
July 31, 2010
Debit
Cash
Accounts Receivable
Office Supplies
Prepaid Insurance
Office Equipment
Accounts Payable
Notes Payable
Simone Patrice, Capital
Simone Patrice, Drawing
Consulting Fees
Salaries and Wages Expense
Rent Expense
Transportation Expense
Utilities Expense
Advertising Expense
Miscellaneous Expense
Totals
Credit
P 56 300
77 500
2 100
2 200
120 000
P 23 020
15 000
172 880
2 000
253 000
168 200
11 000
7 800
8 200
5 500
3 100
_______
P 463 900
========
P 463 900
========
Adapted from Workbook in Introductory Accounting for Service Business A balanced trial balance means that journal entries are properly posted and ledger accounts are properly balanced.
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey: John Wiley and Sons, Inc. pages 46 – 56, 57 – 73
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises & Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol. 1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 4
FINANCIAL STATEMENTS
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1
Understand the procedures in preparing the income
statement
2
Understand the procedures in preparing the statement of
changes in owner’s equity
3
Understand the procedures in preparing the balance sheet
4
Understand the procedures in preparing the notes to the
financial statements
5
Compute the missing amounts in relation to changes in
capital
Objective 1
Income Statement
To recall, the Income Statement presents the financial performance of the business through its income and expenses.
Net Income refers to the excess of income over expenses, otherwise it is called Net Loss. There are two types of presentation for income statement.
1. Natural form
a. In this presentation, income and expense accounts are grouped according to nature. Secondary income such as interest income, dividend income etc are grouped under line item “Other Income”. On the other hand, expenses are arranged from highest to lowest, except for Miscellaneous Expense, Other Expense and Finance Cost. These line items are the last 3 line items in the expense section.
2. Functional form
a. In this presentation, expenses are grouped according to function. The 4 classification of expenses are:
i. Distribution cost
ii. General and administrative expenses
iii. Other operating expenses
iv. Finance cost
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Objective 2
Statement of Changes in Owner’s Equity
To recall, this component presents the changes in capital such as additional investments, withdrawals, net income and/or net loss.
The following are the effects to the capital or equity:
EFFECTS
Investment
Withdrawal
Income
Expense
Net Income
Net Loss
Increase
Decrease
Increase
Decrease
Increase
Decrease
The Income Statement is connected to this component through Net Income or Net Loss and this component is connected to the Balance Sheet through the Ending balance of the capital account. The equation for computing Ending Capital Balance is
Owner, Capital – beginning + Additional Investments + Net Income – Withdrawals – Net Loss = Owner, Capital – ending
Using the accounting equation, the equation for computing Beginning Capital Balance is
Assets, beginning – Liabilities, beginning = Owner, Capital (beginning)
On the other hand, the alternative equation for Ending Capital Balance is
Assets, ending – Liabilities, ending = Owner, Capital (ending)
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