accounting

ACCOUNTING ACCOUNTING Accounting-the art of recording, classifying, and summarizing in a significant manner and in Accounting-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 financial character, terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.“and interpreting the results thereof.“

FOUR (4) FUNCTIONSFOUR (4) FUNCTIONS 1. Recording1. Recording-systematically and chronologically noting business transactions in the -systematically and chronologically noting business transactions in the

appropriate books.appropriate books. Different Accounting BooksDifferent Accounting Books

A. Sales journalA. Sales journal B. Purchase journalB. Purchase journal C. Cash Receipt Journal.BookC. Cash Receipt Journal.Book D. Cash Disbursement Journal/BookD. Cash Disbursement Journal/Book

GENERAL JOURNALGENERAL JOURNAL-is also known as journal voucher. Journal voucher allows for detailed explanation -is also known as journal voucher. Journal voucher allows for detailed explanation of a posting transaction. It is the book of original entryof a posting transaction. It is the book of original entry

-posting of miscellaneous business transactions-posting of miscellaneous business transactions -correcting errors-correcting errors -month end adjustments-month end adjustments GENERAL LEDGERGENERAL LEDGER-is the book of final entry.-is the book of final entry.

22. Classifying. Classifying

3. 3. SummarizingSummarizing

4. 4. InterpretingInterpreting

ACCOUNTING ACCOUNTING Accounting-the art of recording, classifying, and summarizing in a significant manner and in Accounting-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 financial character, terms of money, transactions and events which are, in part at least, of financial character, and interpreting the results thereof.“and interpreting the results thereof.“

ACCOUNTING EQUATIONACCOUNTING EQUATION

ASSETS=LIABILITIES + OWNER’S EQUITYASSETS=LIABILITIES + OWNER’S EQUITY

LIABILITIES=ASSETS-OWNER’S EQUITYLIABILITIES=ASSETS-OWNER’S EQUITY

OWNER’S EQUITY-ASSETS-LIABILITIESOWNER’S EQUITY-ASSETS-LIABILITIES

FIVE (5) FINANCIAL STATEMENTSFIVE (5) FINANCIAL STATEMENTS 1. INCOME STATEMENT 1. INCOME STATEMENT

2. BALANCE SHEET2. BALANCE SHEET

3. STATEMENT OF OWNER’S EQUITY/ 3. STATEMENT OF OWNER’S EQUITY/

STATEMENT OF STOCKHOLDER’S EQUITY/Statement of Changes in EquitySTATEMENT OF STOCKHOLDER’S EQUITY/Statement of Changes in Equity

4. STATEMENT OF CASH FLOW4. STATEMENT OF CASH FLOW

5. NOTES TO FINANCIAL STATEMENTS5. NOTES TO FINANCIAL STATEMENTS

Accounting PrinciplesAccounting Principles1.1. Basic Financial StatementsBasic Financial Statements Financial statements required by the ASC: balance sheet, statements of income and retained Financial statements required by the ASC: balance sheet, statements of income and retained

earnings, statement of cash flow and related notes.earnings, statement of cash flow and related notes. New regulations issued by the SEC regarding to the form and content of the financial statement.New regulations issued by the SEC regarding to the form and content of the financial statement.

2.2. Business combinationBusiness combination Methods that are allowed: Purchase and Pooling-of-InterestMethods that are allowed: Purchase and Pooling-of-Interest Goodwill arising under the purchase method is amortized over estimated life, not exceeding 40 years.Goodwill arising under the purchase method is amortized over estimated life, not exceeding 40 years. Straight-line method is used for amortizationStraight-line method is used for amortization

3.3. ConsolidationConsolidation A parent company is required to prepare consolidated financial statements when:A parent company is required to prepare consolidated financial statements when:

a.a. The total liabilities of an entity in the group exceed P50 million, or total liabilities of the group are The total liabilities of an entity in the group exceed P50 million, or total liabilities of the group are more than P150 millionmore than P150 million

b.b. The parent company falls under one of the following categories:The parent company falls under one of the following categories:• A company’s securities are offered for sale to the publicA company’s securities are offered for sale to the public• A financial intermediaryA financial intermediary• An issuer of registered commercial papersAn issuer of registered commercial papers

4. Marketable Securities4. Marketable Securities Treatment:Treatment:

1.1. Marketable securities held for working capital purposes: carried at the lower of aggregated Marketable securities held for working capital purposes: carried at the lower of aggregated cost or market valuecost or market value

2.2. Long-term marketable securities: valued similarlyLong-term marketable securities: valued similarly

3.3. Other long-term investments: accounted for under the equity method, or cost method.Other long-term investments: accounted for under the equity method, or cost method.

5. Inventories5. Inventories These are stated at the lower of cost market.These are stated at the lower of cost market. Determined based on following cost flow assumptions: Average Cost, FIFO, LIFO and Determined based on following cost flow assumptions: Average Cost, FIFO, LIFO and

specific identified method.specific identified method. Market is determined by replacement cost (which should not be more than NRV and not Market is determined by replacement cost (which should not be more than NRV and not

less than NRV reduced by a normal profit marginless than NRV reduced by a normal profit margin..

6. Property, Plant and Equipment6. Property, Plant and Equipment PPE are evaluated at cost (-) allowance for depreciation.PPE are evaluated at cost (-) allowance for depreciation. In periods of inflation, revaluation based on appraisal rights is allowed.In periods of inflation, revaluation based on appraisal rights is allowed. Methods for depreciation: Straight-line, units of production, sum-of-digits and declining Methods for depreciation: Straight-line, units of production, sum-of-digits and declining

balance method.balance method. PPE are usually depreciated over the life of the asset.PPE are usually depreciated over the life of the asset.

7. Capital7. Capital Capital in excess of par is shown separately.Capital in excess of par is shown separately. Treasury stocks are shown at cost as a deduction from capital.Treasury stocks are shown at cost as a deduction from capital.

8. Provisions and Reserves8. Provisions and Reserves All companies with material temporary differences are required to apply deferred tax All companies with material temporary differences are required to apply deferred tax

accounting. accounting. The provision for income tax is the sum of deferred tax expense or benefit and income The provision for income tax is the sum of deferred tax expense or benefit and income

tax currently payable or refundable.tax currently payable or refundable.

Additional Generally Accepted Accounting PrinciplesAdditional Generally Accepted Accounting Principles

Business Entity ConceptBusiness Entity Concept- activities of a business are recorded separately from the activities of the stakeholders.- activities of a business are recorded separately from the activities of the stakeholders.

- this separation allows us to measure the performance and the financial position of - this separation allows us to measure the performance and the financial position of each entity independent of all other entities.each entity independent of all other entities.

Cost ConceptCost Concept- Assets and services that are acquired should be recorded at their actual cost and the - Assets and services that are acquired should be recorded at their actual cost and the accounting record continues to be based on cost rather than current market value.accounting record continues to be based on cost rather than current market value.

Reliability or Objectivity PrincipleReliability or Objectivity Principle- Accounting records and statements are based on the most reliable data so that it will - Accounting records and statements are based on the most reliable data so that it will be as accurate and as useful as possible. be as accurate and as useful as possible.

Going-concern ConceptGoing-concern Concept- Accountants assume that the business will continue operating for the foreseeable - Accountants assume that the business will continue operating for the foreseeable future. future.

Time-period ConceptTime-period Concept

- Ensures that accounting information is current and is reported at regular intervals.- Ensures that accounting information is current and is reported at regular intervals.

- The timely representation of accounting data aids the comparison of business operations over - The timely representation of accounting data aids the comparison of business operations over time (ex. Year to year, quarter to quarter)time (ex. Year to year, quarter to quarter)

Stable-Monetary-Unit ConceptStable-Monetary-Unit Concept- Accounting information is expressed primarily in monetary terms.- Accounting information is expressed primarily in monetary terms.

- Accountant’s basis for ignoring the effect of inflation and making no adjustments for the changing - Accountant’s basis for ignoring the effect of inflation and making no adjustments for the changing value of foreign currencies.value of foreign currencies.

Comparability PrincipleComparability Principle- Accounting Information must be comparable from business to business.- Accounting Information must be comparable from business to business.

- Financial statements must be comparable from one period to next.- Financial statements must be comparable from one period to next.

Revenue (realization) PrincipleRevenue (realization) Principle- Revenue should be recorded when it is earned and not before. - Revenue should be recorded when it is earned and not before.

Matching Principle Matching Principle - Governs the timing of expense recognition in financial statements. - Governs the timing of expense recognition in financial statements.

- Accountants match or offset the revenue appearing in an income statement with all the expenses - Accountants match or offset the revenue appearing in an income statement with all the expenses incurred.incurred.

Adequate Disclosure PrincipleAdequate Disclosure Principle- A company’s financial statements should report enough information for outsiders to - A company’s financial statements should report enough information for outsiders to make knowledgeable decisions about the company. make knowledgeable decisions about the company.

- A company should report material, relevant, reliable, and comparable information - A company should report material, relevant, reliable, and comparable information about its economic affairs. about its economic affairs.

Materiality ConceptMateriality Concept- Companies must perform strictly proper accounting only for significant items and - Companies must perform strictly proper accounting only for significant items and transactions.transactions.

Conservation ConceptConservation Concept- Accountants should base their estimates on sound logic and select accounting - Accountants should base their estimates on sound logic and select accounting methods which neither overstate nor understate the facts.methods which neither overstate nor understate the facts.

- Accountants should select the accounting option which produces a lower net income - Accountants should select the accounting option which produces a lower net income for the current period and a less favorable financial position.for the current period and a less favorable financial position.

Consistency PrincipleConsistency Principle - When the company has adopted a particular accounting method, it should follow that - When the company has adopted a particular accounting method, it should follow that

method consistently rather that switch method from one year to the next.method consistently rather that switch method from one year to the next.

1. INCOME STATEMENT1. INCOME STATEMENT-the financial statement that shows how the profitable the firm has been during -the financial statement that shows how the profitable the firm has been during the past year.the past year.

>A financial statement that measures a company's financial performance over a specific accounting >A financial statement that measures a company's financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities. and expenses through both operating and non-operating activities.

>It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal >It also shows the net profit or loss incurred over a specific accounting period, typically over a fiscal quarter or year.quarter or year.

REVENUE- is REVENUE- is income that a that a company receives from its normal business activities, usually from the sale receives from its normal business activities, usually from the sale of of goods and services to customers. to customers.

Examples: sales revenueExamples: sales revenue

service revenueservice revenue

Rental revenueRental revenue

EXPENSES- It is an outflow of cash or other valuable assets from a person or company to another EXPENSES- It is an outflow of cash or other valuable assets from a person or company to another person or company.person or company.

Examples:Examples: rent expenserent expense

advertising expenseadvertising expense

miscellaneous expensemiscellaneous expense

salaries and wages expensesalaries and wages expense

cost of good soldcost of good sold

utilities expense such PLDT, Meralco, Mayniladutilities expense such PLDT, Meralco, Maynilad

FINANCIAL STATEMENTFINANCIAL STATEMENT

Income Statement Income Statement

Your Business Name Your Business Name

Income StatementIncome Statement For Month Ended June 30, 2010For Month Ended June 30, 2010 RevenuesRevenues

Net salesNet sales $5,000.00$5,000.00

Rental revenueRental revenue 1,000.001,000.00

Total revenues Total revenues $6,000.00$6,000.00

ExpensesExpenses

Wages expenseWages expense $1,500.00$1,500.00

Cost of goods sold 1,000.00Cost of goods sold 1,000.00

Utilities expenseUtilities expense 250.00 250.00

Supplies expenseSupplies expense 250.00 250.00

Total operating expensesTotal operating expenses 3,000.003,000.00

Net income/lossNet income/loss $3,000.00$3,000.00

================

Sole Proprietorship -Sole Proprietorship - Dennis Magno Trading CompanyDennis Magno Trading Company

CorporationCorporation -- Dennis CorporationDennis Corporation

FINANCIAL STATEMENTFINANCIAL STATEMENT

BALANCE SHEETBALANCE SHEET-the financial statement that presents a snapshots of the firm’s assets and the source of the -the financial statement that presents a snapshots of the firm’s assets and the source of the money used to buy those assetsmoney used to buy those assets

>A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific >A financial statement that summarizes a company's assets, liabilities and shareholders' equity at a specific point in time. These three balance sheet segments give investors an idea as to what the company owns point in time. These three balance sheet segments give investors an idea as to what the company owns and owes, as well as the amount invested by the shareholders.and owes, as well as the amount invested by the shareholders.

The balance sheet must follow the following formula:The balance sheet must follow the following formula:Assets = Liabilities + Owners' EquityAssets = Liabilities + Owners' Equity

Liabilities= Assets- Owner’s EquityLiabilities= Assets- Owner’s Equity

Owner’s Equity= Assets- LiabilitiesOwner’s Equity= Assets- Liabilities

AssetsAssets- the things that the company owns- the things that the company owns

>Any item of >Any item of economic value owned by an individual or owned by an individual or corporation, especially that which could be converted , especially that which could be converted to to cash

Current assetsCurrent assetsassets that can be easily converted into cashassets that can be easily converted into cash

Non-current assets-Non-current assets-assets that cannot be easily converted into cashassets that cannot be easily converted into cash

Liabilities-Liabilities-the firms/company debtsthe firms/company debts

Current liabilities-Current liabilities-debts or obligations that need to be paid within a short period of time.debts or obligations that need to be paid within a short period of time.

Non-current Liabilities- Non-current Liabilities- debts that do not need to be settled within a short period of timedebts that do not need to be settled within a short period of time

Owner’s Equity-Owner’s Equity-represents the owner’s personal investment in the firmrepresents the owner’s personal investment in the firm

CURRENT ASSETSCURRENT ASSETSThere are 5 major items included into current assets:There are 5 major items included into current assets: 1. Cash and cash equivalents — it is the most — it is the most liquid asset, which includes , which includes currency, ,

deposit accounts, and , and negotiable instruments (e.g., money orders, cheque, bank (e.g., money orders, cheque, bank drafts).drafts).

2. Short-term investments — include securities bought and held for sale in the near — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities).future to generate income on short-term price differences (trading securities).

3. Receivables — represents customer’s unpaid bills — represents customer’s unpaid bills ACCOUNTS RECEIVABLEACCOUNTS RECEIVABLE NOTES RECEIVABLENOTES RECEIVABLE INTEREST RECEIVABLEINTEREST RECEIVABLE

4. Inventory — trading these assets is a normal business of a company. — trading these assets is a normal business of a company. stocks of raw materialsstocks of raw materials finished goods or partially finished goodsfinished goods or partially finished goods

5. Prepaid expenses — these are expenses paid in cash and recorded as assets — these are expenses paid in cash and recorded as assets before they are used or consumed.before they are used or consumed. PREPAID RENTPREPAID RENT PREPAID INSURANCEPREPAID INSURANCE

CONTRA ASSETSCONTRA ASSETS Contra asset-deductible from current assetsContra asset-deductible from current assets NON-CURRENT ASSETS-NON-CURRENT ASSETS-

Ex. Accounts receivableEx. Accounts receivable Allowance for doubtful accounts/bad debtsAllowance for doubtful accounts/bad debts

NON-CURRENT ASSETSNON-CURRENT ASSETS Accumulated depreciationAccumulated depreciation

NON-CURRENT ASSETSNON-CURRENT ASSETS LANDLAND BUILDINGBUILDING EQUIPMENTSEQUIPMENTS FURNITURES AND FIXTURESFURNITURES AND FIXTURES CONTRA-ASSET (ACCUMULATED DEPRECIATION)CONTRA-ASSET (ACCUMULATED DEPRECIATION)

INTANGIBLE ASSETSINTANGIBLE ASSETS FRANCHISEFRANCHISE TRADEMARKTRADEMARK GOODWILLGOODWILL COPYRIGHTCOPYRIGHT PATENTPATENT LICENSESLICENSES ROYALTIESROYALTIES

BALANCE SHEETBALANCE SHEET CURRENT LIABILITIESCURRENT LIABILITIES

Accounts payableAccounts payable Notes payableNotes payable Loans payableLoans payable Salaries and wages payableSalaries and wages payable Utilities payableUtilities payable

NON-CURRENT LIABILITIESNON-CURRENT LIABILITIES Bonds payableBonds payable Mortgage payableMortgage payable

EQUITYEQUITY Other terms: owner’s capital/net asset/networthOther terms: owner’s capital/net asset/networth

CORPORATIONCORPORATION Stockholder’s Equity Stockholder’s Equity

Capital stockCapital stock-The -The number of of shares authorized for issuance by a for issuance by a company's charter, , including both common stock and preferred stock.including both common stock and preferred stock.

Retained EarningsRetained Earnings-refers to the portion of net income which is retained by the corporation -refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividendsrather than distributed to its owners as dividends

DividendsDividends-the portion of income to be distributed to shareholders-the portion of income to be distributed to shareholders

SOLE PROPRIETORSHIPSOLE PROPRIETORSHIP

Owner’s EquityOwner’s Equity

> Owner’s capital-Debt or equity funds provided by the > Owner’s capital-Debt or equity funds provided by the owner(s) of a business; sources of owner's capital are personal owner(s) of a business; sources of owner's capital are personal savings, sales of assets, or loans from financial institutionssavings, sales of assets, or loans from financial institutions

> Owner’s drawing/withdraw> Owner’s drawing/withdrawal-Withdrawals of owners are al-Withdrawals of owners are treated as a reduction of equity.treated as a reduction of equity.

BALANCE SHEET FOR SOLE PROPRIETORSHIPBALANCE SHEET FOR SOLE PROPRIETORSHIP

BALANCE SHEET FOR CORPORATIBALANCE SHEET FOR CORPORATIONONAssetsAssets

Current AssetsCurrent Assets

CashCash 10,000 10,000

Accounts ReceivableAccounts Receivable 15,000 15,000

InventoriesInventories 30,000 30,000

Prepaid rentPrepaid rent 5,0005,000

Total Current AssetsTotal Current Assets P 50,000.00 P 50,000.00

Non-current AssetsNon-current Assets

EquipmentEquipment 55,000 55,000

Furnitures & Fixtures Furnitures & Fixtures 10,000 10,000

PatentPatent 15,00015,000

Total Current AssetsTotal Current Assets 80,000.00 80,000.00

Total Current and Non-currents AssetsTotal Current and Non-currents Assets P130,000.00P130,000.00

======================

Liabilities and Stockholder’s EquityLiabilities and Stockholder’s Equity

LiabilitiesLiabilities

Current LiabilitiesCurrent Liabilities

Accounts payableAccounts payable 15,000 15,000

Salaries PayableSalaries Payable 9,0009,000

Total Current LiabilitiesTotal Current Liabilities P 24,000.00P 24,000.00

Non-Current LiabilitiesNon-Current Liabilities

Bonds payableBonds payable 20,000 20,000

MortgagesMortgages 35,00035,000

Total Non-Current LiabilitiesTotal Non-Current Liabilities 55,000.0055,000.00

Total Current and Non-currents LiabilitiesTotal Current and Non-currents Liabilities P 79,000.00 P 79,000.00========================

Stockholders’ equityStockholders’ equity

Common stockCommon stock 50,000 50,000

Retained EarningsRetained Earnings 1,000 1,000

Total Stockholder’s EquityTotal Stockholder’s Equity P 51,000.00P 51,000.00

Total Liabilities and Stockholder’s EquityTotal Liabilities and Stockholder’s Equity P 130,000.00 P 130,000.00

STATEMENT OF OWNER’S EQUITYSTATEMENT OF OWNER’S EQUITY

Joe Smith Laundry Shop Joe Smith Laundry Shop

Statement of Owner's EquityStatement of Owner's Equity

For Month Ended June 30, 2010For Month Ended June 30, 2010

Joe Smith, capital, June 1, 2010Joe Smith, capital, June 1, 2010 $10,000.00$10,000.00

Investment during the monthInvestment during the month 1,000.00 1,000.00

Net incomeNet income 3,000.003,000.00

14,000.0014,000.00

Withdrawals during the month Withdrawals during the month 2,000.002,000.00

Joe Smith, capital, June 30, 2010Joe Smith, capital, June 30, 2010 $12,000.00$12,000.00

====================

STATEMENT OF RETAINED EARNINGSSTATEMENT OF RETAINED EARNINGS

Bogus Manufacturing, Inc. Bogus Manufacturing, Inc.

Statement of Retained EarningsStatement of Retained Earnings

For Month Ended June 30, 2010For Month Ended June 30, 2010

Beginning Retained Earnings June 1, 2010Beginning Retained Earnings June 1, 2010 $1,231,243.00$1,231,243.00

Net incomeNet income 1,210,519.001,210,519.00

2,441,762.00 2,441,762.00

Dividends paid to shareholders Dividends paid to shareholders ( (900,000.00)900,000.00)

Ending Retained Earnings, June 30, 2010Ending Retained Earnings, June 30, 2010 $1,541,762.00$1,541,762.00

========================

Statement of Cash FlowStatement of Cash Flow -the firm’s cash inflows and outflows from its operations as well as its -the firm’s cash inflows and outflows from its operations as well as its

investments and financing activities. It contains several sections namely:investments and financing activities. It contains several sections namely:

Cash Flow generated by the firm’s operationsCash Flow generated by the firm’s operations The first section starts out with the net income. Since the net income is derived by deducting all The first section starts out with the net income. Since the net income is derived by deducting all

expenses from the revenues, amortization and deferred taxes are added back. Next all the expenses from the revenues, amortization and deferred taxes are added back. Next all the changes in current assets and current liabilities are either be added or deducted. The net changes in current assets and current liabilities are either be added or deducted. The net result is called result is called CASH PROVIDED BY OPERATIONS.CASH PROVIDED BY OPERATIONS.

Cash Flow invested in plant and equipmentCash Flow invested in plant and equipment The second portion deals with cash expenditures on fixed assets.The second portion deals with cash expenditures on fixed assets.

Cash Flow generated from financing activities such as the sale of new bonds Cash Flow generated from financing activities such as the sale of new bonds and stocksand stocks.. The third section shows the Cash generated from or spent on financing activities such as sale The third section shows the Cash generated from or spent on financing activities such as sale

of new stocks, flotation of new bonds, payment of debt and paying out dividends.of new stocks, flotation of new bonds, payment of debt and paying out dividends.

Statement of Cash FlowStatement of Cash FlowFor the Period 01/01/2006 to 12/31/2006For the Period 01/01/2006 to 12/31/2006

Cash flow from operationsCash flow from operations $4,000.00 $4,000.00

Cash flow from investing ($1,000.00)Cash flow from investing ($1,000.00)

Cash flow from financingCash flow from financing ($2,000.00($2,000.00))

Net Cash FlowNet Cash Flow $1,000.00 $1,000.00 ========================

NOTES TO FINANCIAL STATEMENTSNOTES TO FINANCIAL STATEMENTS

--are additional notes and information added to the end of the financial statements to are additional notes and information added to the end of the financial statements to supplement the reader with more information. Notes to Financial Statements help the supplement the reader with more information. Notes to Financial Statements help the computation of specific items in the financial statements as well as provide a more computation of specific items in the financial statements as well as provide a more comprehensive assessment of a company's financial condition. Notes to Financial comprehensive assessment of a company's financial condition. Notes to Financial Statements can include information on debt, going concern, accounts, contingent Statements can include information on debt, going concern, accounts, contingent liabilities, or contextual information explaining the financial numbers (e.g. to indicate a liabilities, or contextual information explaining the financial numbers (e.g. to indicate a lawsuit).lawsuit).

Normal Balances of AccountsNormal Balances of Accounts

AA DEBITDEBIT EE

LL OEOE RR CREDITCREDIT Contra accountContra account

STEPS IN PREPARING F/SSTEPS IN PREPARING F/S 1. 1. Income StatementIncome Statement

2. 2. STATEMENT OF OWNER’S EQUITY/ STATEMENT OF OWNER’S EQUITY/

STATEMENT OF STOCKHOLDER’S EQUITY/Statement of STATEMENT OF STOCKHOLDER’S EQUITY/Statement of Changes in EquityChanges in Equity

33. Balance Sheets. Balance Sheets 4. Statement of Cash Flow4. Statement of Cash Flow 5. Notes to Financial Statements5. Notes to Financial Statements

END….END….

THANK YOU!!!!

MIDTERMMIDTERM

THE ADJUSTING PROCESSTHE ADJUSTING PROCESS

ACCOUNTING PERIODS-ACCOUNTING PERIODS-refers to the period of time covered by an refers to the period of time covered by an income statementincome statement

>Fiscal year->Fiscal year- March 1-April, 31March 1-April, 31 >Calendar->Calendar- January 1-December 31January 1-December 31 ACCRUAL-BASIS ACCOUNTINGACCRUAL-BASIS ACCOUNTING-The most commonly used -The most commonly used

accounting method, which reports income when earned and expenses accounting method, which reports income when earned and expenses when incurred. In other words, using accrual basis accounting, you when incurred. In other words, using accrual basis accounting, you record both revenues and expenses when they occur.record both revenues and expenses when they occur.

CASH- BASIS ACCOUNTINGCASH- BASIS ACCOUNTING-which reports income when received -which reports income when received and expenses when paid.and expenses when paid.

-In cash basis accounting, revenues are recorded when cash is -In cash basis accounting, revenues are recorded when cash is actually received and expenses are recorded when they are actually actually received and expenses are recorded when they are actually paid (no matter when they were actually invoiced).paid (no matter when they were actually invoiced).

THE ADJUSTING PROCESSTHE ADJUSTING PROCESS ADJUSTING ENTRIESADJUSTING ENTRIES- are journal entries that are made at the end of the - are journal entries that are made at the end of the accounting period, to adjust expenses and revenues to the accounting period accounting period, to adjust expenses and revenues to the accounting period where they actually occurred. Generally speaking, they are adjustments based where they actually occurred. Generally speaking, they are adjustments based on reality, not on a source document. This is in sharp contrast to entries during on reality, not on a source document. This is in sharp contrast to entries during the accounting period (such as utility bills or fees for services rendered) that the accounting period (such as utility bills or fees for services rendered) that depend on source documents.depend on source documents.

Preparing adjusting entries is a key step in the ongoing Preparing adjusting entries is a key step in the ongoing accounting cycleaccounting cycle, , coming right after you’ve completed coming right after you’ve completed preparing a trial balancepreparing a trial balance..

Types of Adjusting EntriesTypes of Adjusting Entries There are five basic types of adjusting entries: There are five basic types of adjusting entries:

1. Prepaid expenses1. Prepaid expenses (or deferred expenses) are expenses paid in cash and recorded as assets (or deferred expenses) are expenses paid in cash and recorded as assets prior to being used.prior to being used.

-These are items that have been initially recorded as assets but are expected to become expenses -These are items that have been initially recorded as assets but are expected to become expenses through normal operation of business.through normal operation of business.

Examples: Prepaid rent, prepaid insurance, prepaid interestExamples: Prepaid rent, prepaid insurance, prepaid interest

Sample illustration:Sample illustration: Suppose ABC Company Suppose ABC Company prepaysprepays 3 months 3 months insurance expense insurance expense for his building on for his building on

October 1. If the contract specifies that the monthly insurance amounts to P1,000 October 1. If the contract specifies that the monthly insurance amounts to P1,000 per month, the entry to record the payment for 3 months is a debit to the asset per month, the entry to record the payment for 3 months is a debit to the asset account:account:

OJE (ORIGINAL JOURNAL ENTRY)OJE (ORIGINAL JOURNAL ENTRY) Oct. 1, 2009 Oct. 1, 2009

Prepaid InsurancePrepaid Insurance 3,0003,000

CashCash 3,0003,000

Paid three month’s insurance in advancePaid three month’s insurance in advance

Adjusting Entry after on Oct. 31, 2009Adjusting Entry after on Oct. 31, 2009 Insurance expenseInsurance expense 1,0001,000 Prepaid insurancePrepaid insurance 1,0001,000

2. Unearned revenues2. Unearned revenues (or deferred revenues) are revenues received in cash (or deferred revenues) are revenues received in cash and recorded as liabilities prior to being earned.and recorded as liabilities prior to being earned.

-These are items that have been initially recorded as liabilities but are expected -These are items that have been initially recorded as liabilities but are expected to become revenues over time or through the normal operations of the to become revenues over time or through the normal operations of the business.business.

Examples: unearned rent, tuition received in advance by a school, an annual Examples: unearned rent, tuition received in advance by a school, an annual retainer fee by a lawyerretainer fee by a lawyer

Sample illustration:Sample illustration: Suppose a client engages ABC Company’s services, agreeing to pay him Suppose a client engages ABC Company’s services, agreeing to pay him

P4,500 monthly beginning immediately. If this client makes the first payment on P4,500 monthly beginning immediately. If this client makes the first payment on Oct. 20, ABC Company records this increase in the business liabilities by Oct. 20, ABC Company records this increase in the business liabilities by recording:recording:

OJEOJE Oct. 20 CashOct. 20 Cash 4,5004,500 Unearned Service RevenueUnearned Service Revenue 4,5004,500 Record revenue in advanceRecord revenue in advance

AJEAJE Oct 31Oct 31 Unearned Service RevenueUnearned Service Revenue 1,5001,500 Service revenueService revenue 1,5001,500 To record unearned service revenue that has been earnedTo record unearned service revenue that has been earned

DepreciationDepreciation of fixed assets, of fixed assets, allowancesallowances for bad debts, and inventory adjustments. for bad debts, and inventory adjustments.

The logic of the accrual basis is probably best illustrated by how businesses account for plant assets. The logic of the accrual basis is probably best illustrated by how businesses account for plant assets. Land, buildings, furniture, machinery and equipment. Accountants systematically spread the cost of Land, buildings, furniture, machinery and equipment. Accountants systematically spread the cost of

each plant asset, except land, over the years of its useful life. This process is called the recording of each plant asset, except land, over the years of its useful life. This process is called the recording of DEPRECIATIONDEPRECIATION. .

Depreciation CalculationsDepreciation Calculations This illustrates the computation of the straight-line method of This illustrates the computation of the straight-line method of

depreciation using the following example. depreciation using the following example. Cost of Asset 10,500 Cost of Asset 10,500

Salvage Value 500 Salvage Value 500 Life Life 5 years 5 years

Straight-Line Depreciation Straight-Line Depreciation

Note that the straight line calculation considers salvage value up front Note that the straight line calculation considers salvage value up front in the calculation. 10,500 cost - 500 salvage value = 2,000 per year in the calculation. 10,500 cost - 500 salvage value = 2,000 per year ------------------------------- --------- ------------------------------- ---------

5 year life5 year life

DepreciationDepreciation

Sample Illustration:Sample Illustration: Depreciation on the office equipment of XYZ Company must also Depreciation on the office equipment of XYZ Company must also

be recorded at the end of October. This equipment cost P54,000 be recorded at the end of October. This equipment cost P54,000 and is assumed to have a useful life of 10 years. Monthly and is assumed to have a useful life of 10 years. Monthly depreciation expense on the straight-line basis is therefore, P450, depreciation expense on the straight-line basis is therefore, P450, computed by dividing the cost of P54,000 by the useful life of 12 computed by dividing the cost of P54,000 by the useful life of 12 months. The journal entry is as follows:months. The journal entry is as follows:

Oct. 19 Depreciation expense………………450.00Oct. 19 Depreciation expense………………450.00 Accumulated Depreciation………………………450.00Accumulated Depreciation………………………450.00

To record depreciation for October. Cost of P54,000/120 To record depreciation for October. Cost of P54,000/120 months=P450 per month.months=P450 per month.

4. Accrued expenses4. Accrued expenses (also called accrued liabilities) are expenses already incurred but not yet paid (also called accrued liabilities) are expenses already incurred but not yet paid or recorded.or recorded.

These are expenses that have been incurred but have not been recorded in the accounts.These are expenses that have been incurred but have not been recorded in the accounts. Example:Example: Accrued wagesAccrued wages Accrued taxesAccrued taxes Accrued interest on notes payableAccrued interest on notes payable

Sample illustration:Sample illustration: Most companies pay their employees at a set times. Suppose Compnay XYZ pays his Most companies pay their employees at a set times. Suppose Compnay XYZ pays his

employee a monthly salary of P19,000, half on the 15employee a monthly salary of P19,000, half on the 15 thth and half on the last day of the and half on the last day of the month. Assume that is either payday falls on a weekend, Company XYZ pays the month. Assume that is either payday falls on a weekend, Company XYZ pays the employee on the following Monday. Company XYZ paid his employee’s first half-month employee on the following Monday. Company XYZ paid his employee’s first half-month salary of P9,500 on Friday, and recorded the following entry:salary of P9,500 on Friday, and recorded the following entry:

Oct. 15 Salary Expense…..9,500Oct. 15 Salary Expense…..9,500 Cash………………………….9,500Cash………………………….9,500 To pay salary To pay salary The trial balance at Oct 31 includes Salary expense, with its debit balance of P9,500. If The trial balance at Oct 31 includes Salary expense, with its debit balance of P9,500. If

Oct. 31, the second payday of the month falls on a Sunday, the second half-month of Oct. 31, the second payday of the month falls on a Sunday, the second half-month of P9,500 can be paid on a Monday, Nov. 1, without an adjusting entry, this second P9,500 P9,500 can be paid on a Monday, Nov. 1, without an adjusting entry, this second P9,500 amount is not included in the Oct. 31 trial balance amount for Salary expense. Therefore, amount is not included in the Oct. 31 trial balance amount for Salary expense. Therefore, at Oct. 31, XYZ adjust for additional salary expense and salary payable of P9,500 at Oct. 31, XYZ adjust for additional salary expense and salary payable of P9,500 recording an increase in each of these account as follows:recording an increase in each of these account as follows:

Oct. 31 Salary expense…………………P9,500Oct. 31 Salary expense…………………P9,500 Salary payable……………………P9,500Salary payable……………………P9,500 To accrue salary expenseTo accrue salary expense

. Accrued expenses. Accrued expenses

The accounts at Oct. 31 now contain the complete salary information of The accounts at Oct. 31 now contain the complete salary information of the month. The expense account has a full month’s salary and the liability the month. The expense account has a full month’s salary and the liability account shows the portion that the business still owes.account shows the portion that the business still owes.

Company XYZ will record the payment of this liability on Nov. 2 by Company XYZ will record the payment of this liability on Nov. 2 by debiting Salary Payable and crediting Cash for P9,500. This payment debiting Salary Payable and crediting Cash for P9,500. This payment entry does not affect the Oct. or Nov. because the October expense was entry does not affect the Oct. or Nov. because the October expense was recorded on Oct. 15 and 31. November expense will be recorded in a like recorded on Oct. 15 and 31. November expense will be recorded in a like manner.manner.

--All accrued expenses are recorded with similar entries---a debit to All accrued expenses are recorded with similar entries---a debit to the appropriate expense account and a credit to the related liability.the appropriate expense account and a credit to the related liability.

Accrued revenuesAccrued revenues (also called accrued assets) are revenues already (also called accrued assets) are revenues already earned but not yet paid or recorded.earned but not yet paid or recorded.

-Revenue that has been earned but not yet received in cash is called -Revenue that has been earned but not yet received in cash is called ACCRUED REVENUEACCRUED REVENUE

Examples:Examples: >Fees for services that a lawyer has provider but has not billed the client at the end of the >Fees for services that a lawyer has provider but has not billed the client at the end of the

period.period. >Unbilled commissions by a travel agent>Unbilled commissions by a travel agent >Accrued interest on notes receivable>Accrued interest on notes receivable >Accrued rent on property rented to others>Accrued rent on property rented to others

Sample illustration:Sample illustration: Assume that Company XYZ was hired on Oct. 15 by a developer, Mr. Assume that Company XYZ was hired on Oct. 15 by a developer, Mr.

Santos to sell his numerous properties. Under the agreement, Mr. Santos to sell his numerous properties. Under the agreement, Mr. Santos will pay XYZ Company a monthly service fee of P5,000, with the Santos will pay XYZ Company a monthly service fee of P5,000, with the first payment on Oct. 15. During Oct, Company XYZ will earn a half first payment on Oct. 15. During Oct, Company XYZ will earn a half month’s fee,P2,500. On Oct. 31 he makes the following adjusting entry month’s fee,P2,500. On Oct. 31 he makes the following adjusting entry to record an increase in Accounts Receivable and Services Revenue:to record an increase in Accounts Receivable and Services Revenue:

Oct. 31Oct. 31 Account receivable (P5,000 x ½)…………..2,500 Account receivable (P5,000 x ½)…………..2,500 Service Revenue………………………………..2,500Service Revenue………………………………..2,500 To accrue service revenueTo accrue service revenue This adjusting entry illustrates accrual accounting and the revenue This adjusting entry illustrates accrual accounting and the revenue

principle in action. Without adjustments, Company XYZ’s financial principle in action. Without adjustments, Company XYZ’s financial statements would be misleading. statements would be misleading. All accrued revenues are accounted All accrued revenues are accounted for similarity-by debiting receivable and crediting revenue.for similarity-by debiting receivable and crediting revenue.

PREFINALSPREFINALS

INVENTORIESINVENTORIES InventoryInventory is the major current asset on the balance sheet of most businesses is the major current asset on the balance sheet of most businesses

that manufacture or buy inventory for resale. It is converted into cash within that manufacture or buy inventory for resale. It is converted into cash within the company’s operating cycle, and therefore it is considered as a current the company’s operating cycle, and therefore it is considered as a current asset.asset.

TYPES OF COMPANIES:TYPES OF COMPANIES: 11. MERCHANDISING COMPANY. MERCHANDISING COMPANY-sells goods in substantially the same -sells goods in substantially the same

physical form as that in which it acquires them. The entire inventory it physical form as that in which it acquires them. The entire inventory it purchases is in a ready to sell condition.purchases is in a ready to sell condition.

2. 2. MANUFACTURING COMPANYMANUFACTURING COMPANY-converts raw materials and purchases -converts raw materials and purchases parts into finished goods. parts into finished goods.

3 types of inventory3 types of inventory a. a. raw materialsraw materials b. b. work in processwork in process c. c. finished goodsfinished goods 3. 3. SERVICE ORGANIZATIONSERVICE ORGANIZATION-provides intangible services rather than -provides intangible services rather than

tangible goodstangible goods

SUPPLIES VS INVENTORYSUPPLIES VS INVENTORY Supplies- Supplies- are tangible items that will be consumed in the course are tangible items that will be consumed in the course

of normal operations. of normal operations.

Merchandise inventoryMerchandise inventory-The current asset which reports -The current asset which reports the cost of a retailer's, wholesaler's, or distributor's goods purchased the cost of a retailer's, wholesaler's, or distributor's goods purchased to be resold, which have not yet been sold as of the balance sheet to be resold, which have not yet been sold as of the balance sheet date.date.

Beginning inventoryBeginning inventory-the goods that are -the goods that are left over from preceding period.left over from preceding period.

Net PurchasesNet Purchases-additional purchases -additional purchases during the periodduring the period

Goods Available for SaleGoods Available for Sale-combination of -combination of beginning and net purchasesbeginning and net purchases

Ending InventoryEnding Inventory-goods still on hand at -goods still on hand at the end of the period and are still the end of the period and are still available for saleavailable for sale

COST OF GOODS SOLD (COGSCOST OF GOODS SOLD (COGS)-The direct costs attributable to the )-The direct costs attributable to the production of the goods sold by a company. This amount includes the production of the goods sold by a company. This amount includes the cost of the materials used in creating the good along with the direct labor cost of the materials used in creating the good along with the direct labor costs used to produce the good. It excludes indirect expenses such as costs used to produce the good. It excludes indirect expenses such as distribution costs and sales force costs. COGS appears on the income distribution costs and sales force costs. COGS appears on the income statement and can be deducted from revenue to calculate a company's statement and can be deducted from revenue to calculate a company's gross margin. Also referred to as "cost of sales.“gross margin. Also referred to as "cost of sales.“

Inventory and Cost of Goods SoldInventory and Cost of Goods Sold Beginning PurchasesBeginning Purchases P 276.00 P 276.00 +Net purchases+Net purchases 1,348.001,348.00 Cost of Goods AvailableCost of Goods Available 1,624.001,624.00 -Ending Inventory-Ending Inventory 317.00 317.00 Cost of Goods SoldCost of Goods Sold P1,307.00 P1,307.00

Cost of InventoryCost of Inventory Figuring the Cost of InventoryFiguring the Cost of Inventory 1. Determining the Quantity of Inventory1. Determining the Quantity of Inventory FOB (Free on Board)FOB (Free on Board) FOB Shipping Point-indicates that the title passes when the FOB Shipping Point-indicates that the title passes when the

goods leave the seller’s place of businessgoods leave the seller’s place of business FOB Destination Point- title passes when the goods arrive at the FOB Destination Point- title passes when the goods arrive at the

purchaser’s location.purchaser’s location.

Consigned Goods-in a consigned arrangement, the owner of the Consigned Goods-in a consigned arrangement, the owner of the inventory (the consignor) transfers the goods to another business inventory (the consignor) transfers the goods to another business (the consignee)(the consignee)

RULE OF THUMB-include in inventory only what the business owns. RULE OF THUMB-include in inventory only what the business owns.

Inventory Costing MethodInventory Costing Method 1. Specific Unit Cost-also called specific identification or specific invoice cost method.1. Specific Unit Cost-also called specific identification or specific invoice cost method. Under this method , the actual costs of the specific units are transferred from inventory to Under this method , the actual costs of the specific units are transferred from inventory to

the cost of goods sold. This method achieves the proper matching of sales and revenue the cost of goods sold. This method achieves the proper matching of sales and revenue and cost of goods sold when the individual units in the inventory are unique.and cost of goods sold when the individual units in the inventory are unique.

2. AVERAGE COST METHOD-is based on the average cost of inventory during the 2. AVERAGE COST METHOD-is based on the average cost of inventory during the period.period.

3. FIRST-IN, FIRST-OUT (FIFO) COST-under this method , the company must keep a 3. FIRST-IN, FIRST-OUT (FIFO) COST-under this method , the company must keep a record of each inventory unit purchase.The first costs into the inventory are the first costs record of each inventory unit purchase.The first costs into the inventory are the first costs out to the cost of goods sold.out to the cost of goods sold.

Ex. Company buys 10 coin purse @ P20.00 each on Sept. 5Ex. Company buys 10 coin purse @ P20.00 each on Sept. 5

Buys 20 more coin purse @19.00 each on Sept. 6Buys 20 more coin purse @19.00 each on Sept. 6

4. LAST-IN,LAST OUT-in this method, the company assigns the most recent inventory 4. LAST-IN,LAST OUT-in this method, the company assigns the most recent inventory costs to items sold.costs to items sold.

Ex. 10 pieces of coin purse -P19.00Ex. 10 pieces of coin purse -P19.00 20 pieces of coin purse-P20.0020 pieces of coin purse-P20.00

Date Time Quantity Unit cost Sale Price

Sept 5 Beg. Inventory 200 units 70

Sept 7 Sale 40 units 120

Sept 9 Purchases 60 units 80





Suppose an Intel Division that handles a computer components has Suppose an Intel Division that handles a computer components has these inventory records for Sept 2013. The Company has an operating these inventory records for Sept 2013. The Company has an operating expense of P5,000.00expense of P5,000.00

Intel CorporationIntel CorporationIncome StatementIncome Statement

Month Ended Sept 30, 2013 Month Ended Sept 30, 2013

FIFO LIFO AVERAGE

Sales Revenue 27,100.00 27,100.00 27,100.00

COGS

Beg. Inv. 14,000.00 14,000.00 14,000.00

Net Purchases 16,800.00 16,800.00 16,800.00

COGAS 30,800.00 30,800.00 30,800.00

Ending Inv. 17,500.00 25,000.00 19,250.00

cogs 13,300.00 5,800.00 11,550.00

Gross Margin 13,800 21,300.00 15,550.00

Operating Exp 5,000 5,000.00 5,000.00

Operating Income 8,800.00 16,300.00 10,550.00

1. How to get the sales revenue and Cost of Good Sold 1. How to get the sales revenue and Cost of Good Sold (COGS)(COGS)

QuantityQuantity Sale price totalSale price total Sept 7 40 Sept 7 40 120.00=120.00= 4,800.00 4,800.00 Sept 15 80Sept 15 80 200.00=200.00= 16,000.0016,000.00 Sept 24 Sept 24 3030 210.00= 210.00= 6,300.006,300.00 COGS 150COGS 150 Sales Revenue 27,100.00 Sales Revenue 27,100.00

2. How to get Beg. Inv cost?2. How to get Beg. Inv cost?

QuantityQuantity unit costunit cost

Beg. Inv. Beg. Inv. 200200 70.00=70.00=14,000.0014,000.00

3.How to get the ENDING INV.3.How to get the ENDING INV.

Beg. Inv.Beg. Inv. 200200

Add:Add: Net Purchases Net Purchases 200200

COGASCOGAS 400 400

Less:Less: COGSCOGS 150150

ENDING INVENDING INV 250250

How to get ending inventory cost for FIFO?How to get ending inventory cost for FIFO?

Ending inv. 250 x 70=PEnding inv. 250 x 70=P17,500.0017,500.00 How to get ending inventory cost for LIFO?How to get ending inventory cost for LIFO?

Ending inv 250x 100=Ending inv 250x 100=P25,000.00P25,000.00 HOW TO GET THE AVE. COST OF ENDING INVENTORY HOW TO GET THE AVE. COST OF ENDING INVENTORY

COST?COST?

COGASCOGAS 30,800.0030,800.00 =77 per unit=77 per unit

COGAS (units)COGAS (units) 400 400 Ending inv.Ending inv. 250x77=250x77=P19,250.00P19,250.00

EFFECTS OF FIFO, LIFO & AVERAGE EFFECTS OF FIFO, LIFO & AVERAGE COST ON INCOME & INCOME TAXCOST ON INCOME & INCOME TAX

EFFECT ON INCOMEEFFECT ON INCOME When inventory costs are When inventory costs are increasingincreasing, FIFO ending , FIFO ending

inventory is HIGHEST because it is priced at the most inventory is HIGHEST because it is priced at the most recent costs, which are the highest.recent costs, which are the highest.

LIFO inventory is LOWEST because it is priced at the LIFO inventory is LOWEST because it is priced at the oldest costs, which are the lowest.oldest costs, which are the lowest.

When inventory costs are When inventory costs are decreasingdecreasing, FIFO ending , FIFO ending inventory is LOWEST and LIFO is HIGHEST.inventory is LOWEST and LIFO is HIGHEST.

AVERAGE Cost avoid the extremes of FIFO and LIFOAVERAGE Cost avoid the extremes of FIFO and LIFO

Company accounting records reveal that related operating expense for Feb. was Company accounting records reveal that related operating expense for Feb. was P19,000.00 P19,000.00

Suppose an Apple Division that handles computer components has these Suppose an Apple Division that handles computer components has these inventory records for February 2013:inventory records for February 2013:

Date Item Quantity Unit cost Sale Price

Feb 1 Beg. Inv 100 units 80.00

6 60 units 90.00

13 70 units 200.00

21 150 units 90.00

24 210 units 220.00

27 90 units 100.00

30 30 units 250.00

Company accounting records reveal that related operating expense for Dec. was Company accounting records reveal that related operating expense for Dec. was P21,000.00 P21,000.00

Suppose an Intel department that handles computer components has these Suppose an Intel department that handles computer components has these inventory records for December 2012:inventory records for December 2012:

Date Item Quantity Unit cost Sale Price

Dec 5 Beg. Inv 520 units 270.00

6 Sale 50 units 300.00

7 Purchases 80 units 290.00


11 Sale 300 units 340.00

15 Sale 170 units 360.00


Methods of Estimating InventoryMethods of Estimating Inventory 1. Gross Margin (Gross Profit) Method1. Gross Margin (Gross Profit) Method The gross margin method is a way of estimating inventory based on the The gross margin method is a way of estimating inventory based on the

familiar cost of goods sold model:familiar cost of goods sold model:

Beg. Inv.Beg. Inv. AddAdd: Net Purchases: Net Purchases = COGAS= COGAS Less Ending InventoryLess Ending Inventory = COGS= COGS

2. RETAIL METHOD-like the gross margin method, it is based on the cost of 2. RETAIL METHOD-like the gross margin method, it is based on the cost of goods sold model. However, the retail method requires that the business goods sold model. However, the retail method requires that the business record inventory purchases both at cost-as shown in the purchase records- and record inventory purchases both at cost-as shown in the purchase records- and at retail (selling) price as shown in the price tags.at retail (selling) price as shown in the price tags.

PERIODIC AND PERPETUAL INVENTORY SYSTEMPERIODIC AND PERPETUAL INVENTORY SYSTEM

PERIODIC INVENTORY SYSTEM-PERIODIC INVENTORY SYSTEM-the business does the business does

not keep a continuous record of the inventory on hand . Instead at the end of the period, not keep a continuous record of the inventory on hand . Instead at the end of the period, the business makes a physical count of the on-hand inventory and applies the the business makes a physical count of the on-hand inventory and applies the appropriate costs to determine the cost of ending inventory.appropriate costs to determine the cost of ending inventory.

Also called the PHYSICAL SYSTEM because it relies on the actual physical count of Also called the PHYSICAL SYSTEM because it relies on the actual physical count of inventory.inventory.

PERPETUAL INVENTORY SYSTEMPERPETUAL INVENTORY SYSTEM-the business keeps a -the business keeps a continuous record of each inventory item. The records thus show the inventory on hand continuous record of each inventory item. The records thus show the inventory on hand at all times. Perpetual records are useful in preparing monthly, quarterly or other interim at all times. Perpetual records are useful in preparing monthly, quarterly or other interim financial statements.financial statements.

The business can determine the cost of ending inventory and the cost of goods sold The business can determine the cost of ending inventory and the cost of goods sold directly from the accounts without having to physically count the merchandise.directly from the accounts without having to physically count the merchandise.

Property, Plant & EquipmentProperty, Plant & Equipment

Accounting for depreciationAccounting for depreciation 1. Straight line method1. Straight line method Cost estimated -residual valueCost estimated -residual value=Annual Depreciation=Annual Depreciation Estimated Useful lifeEstimated Useful life P240,000-P20,000=P44,000.00P240,000-P20,000=P44,000.00 5 YEARS5 YEARS

SAMPLE PROBLEMSAMPLE PROBLEM

V-Label Company, a clothing company, acquired a new equipment at a cost of P1,500,000 at the beginning of the fiscal V-Label Company, a clothing company, acquired a new equipment at a cost of P1,500,000 at the beginning of the fiscal year. The equipment has an estimated life of 5 years and estimated residual value of P120,000. year. The equipment has an estimated life of 5 years and estimated residual value of P120,000.

Required: Determine the annual depreciation of the five years of estimated useful life of the equipment, the accumulated Required: Determine the annual depreciation of the five years of estimated useful life of the equipment, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by straight-line-depreciation at the end of each year, and the book value of the equipment at the end of each year by straight-line-methodmethod

YearYear Depreciation expenseDepreciation expense Accumulated dep.Accumulated dep. Book ValueBook Value End of yearEnd of year End of yearEnd of year

11 276,000276,000 276,000276,000 1,224,0001,224,000 22 276,000276,000 552,000552,000 948,000 948,000 33 276,000276,000 828,000828,000 672,000 672,000 44 276,000276,000 1,104,000 1,104,000 396,000 396,000 55 276,000276,000 1,380,000 1,380,000 120,000 120,000

KANG CHI Company, a clothing company, acquired a new equipment at a cost of KANG CHI Company, a clothing company, acquired a new equipment at a cost of P3,800,000 at the beginning of the fiscal year. The equipment has an estimated life of P3,800,000 at the beginning of the fiscal year. The equipment has an estimated life of 4years and estimated residual value of P400,000. 4years and estimated residual value of P400,000.

Required: Determine the annual depreciation of the five years of estimated useful life of Required: Determine the annual depreciation of the five years of estimated useful life of the equipment, the accumulated depreciation at the end of each year, and the book value the equipment, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by straight-line-methodof the equipment at the end of each year by straight-line-method

YearYear Depreciation expenseDepreciation expense Accumulated dep.Accumulated dep. Book Book ValueValue

End of yearEnd of year End of End of yearyear

KANG CHI Company, a clothing company, acquired a new equipment at a cost of P3,800,000 at the KANG CHI Company, a clothing company, acquired a new equipment at a cost of P3,800,000 at the beginning of the fiscal year. The equipment has an estimated life of 4years and estimated residual beginning of the fiscal year. The equipment has an estimated life of 4years and estimated residual value of P400,000. value of P400,000.

Required: Determine the annual depreciation of the five years of estimated useful life of the Required: Determine the annual depreciation of the five years of estimated useful life of the equipment, the accumulated depreciation at the end of each year, and the book value of the equipment, the accumulated depreciation at the end of each year, and the book value of the equipment at the end of each year by straight-line-methodequipment at the end of each year by straight-line-method

YearYear Depreciation expenseDepreciation expense Accumulated dep.Accumulated dep. Book ValueBook Value End of yearEnd of year End of End of

yearyear

1. 1. 680,000.00 680,000.00 680,000.00680,000.00 3,120,000.00 3,120,000.00 2. 2. 680,000.00680,000.00 1,360,000.00 1,360,000.00

2,440,000.002,440,000.00 3. 3. 680,000.00680,000.00 2,040,000.00 2,040,000.00

3,120,000.003,120,000.00 4. 4. 680,000.00680,000.00 2,720,000.00 1,080,000.00 2,720,000.00 1,080,000.00 5. 5. 680,000.00680,000.00 3,400,000.00 3,400,000.00

400,000.00400,000.00

FINALSFINALS

PARTNERSHIPPARTNERSHIP Partnership-is an association of two or more person who co-owns a Partnership-is an association of two or more person who co-owns a

business for profit. It brings together the capital, talents and experience of business for profit. It brings together the capital, talents and experience of the partners.the partners.

CHARACTERISTICSCHARACTERISTICS

1.1.Partnership Agreement-is a contract between the partners, so transactionsPartnership Agreement-is a contract between the partners, so transactions

involving the agreement are governed by contract law. The articles ofinvolving the agreement are governed by contract law. The articles of

partnership should make the following point clear: partnership should make the following point clear:

Name, location and nature of the businessName, location and nature of the business

Name, capital investment and duties of each partnerName, capital investment and duties of each partner

Method of sharing profits and losses by partnersMethod of sharing profits and losses by partners

Withdrawals allowed to the partnersWithdrawals allowed to the partners

Procedures in settling disputes between the partnersProcedures in settling disputes between the partners

Procedures in admitting new partnersProcedures in admitting new partners

Procedures for settling up with a partner who withdraws from the businessProcedures for settling up with a partner who withdraws from the business

Procedures for liquidating the partnership-selling the assets, paying the Procedures for liquidating the partnership-selling the assets, paying the liabilities and disbursing remaining cash to the partners.liabilities and disbursing remaining cash to the partners.

2. 2. LIMITED LIFELIMITED LIFE 3. MUTUAL AGENCY3. MUTUAL AGENCY 4. UNLIMITED LIABILITY4. UNLIMITED LIABILITY 5. CO-OWNERSHIP OF PROPERTY5. CO-OWNERSHIP OF PROPERTY 6. NO PARTNERSHIP INCOME TAXES6. NO PARTNERSHIP INCOME TAXES

Initial Investments by PartnersInitial Investments by Partners Example:Example: Jun and Norma form a partnership on Aug. 1, 2013 to sell videos. Jun and Norma form a partnership on Aug. 1, 2013 to sell videos. Jun’s contributionJun’s contribution cash of P100,000; inventory 700,000; and accounts payable 850,000; cash of P100,000; inventory 700,000; and accounts payable 850,000;

accounts receivable 300,000 less allowance for doubtful accounts of accounts receivable 300,000 less allowance for doubtful accounts of 50,000;computer equipment 5,000,000 less accumulated depreciation50,000;computer equipment 5,000,000 less accumulated depreciation

500,000.500,000.

Norma’s contribution:Norma’s contribution: Cash 50,000Cash 50,000 Computer software 1,000,000Computer software 1,000,000

Jun’s investment:Jun’s investment: Aug. 1 CashAug. 1 Cash 100,000100,000

A/RA/R 300,000300,000 Inv.Inv. 700,000700,000 Computer EquipComputer Equip 5,000,000 5,000,000 Allowance for doubtful acctAllowance for doubtful acct 50,00050,000

Accumulated depreciationAccumulated depreciation 500,000 500,000

A/PA/P 850,000 850,000

Jun’s investment in the partnership 4,700,000Jun’s investment in the partnership 4,700,000

To record Jun’s investment in the partnershipTo record Jun’s investment in the partnership

Norma’s investmentNorma’s investment

Aug. 1 CashAug. 1 Cash 50,00050,000

Computer SoftwareComputer Software 1,000,000 1,000,000

Norma’s investment in the partnership 1,050,000Norma’s investment in the partnership 1,050,000

To record Norma’s investment in the partnershipTo record Norma’s investment in the partnership

Options in determining partner’s Options in determining partner’s shares:shares:

1. 1. Sharing based on a Stated FractionSharing based on a Stated Fraction Example:Example: The partnership agreement of Juan and Pedro allocates two thirds (2/3) of the business The partnership agreement of Juan and Pedro allocates two thirds (2/3) of the business

profits and losses to Juan and one third (1/3) to Pedro . If the net income for the year is profits and losses to Juan and one third (1/3) to Pedro . If the net income for the year is 900,000 is:900,000 is:

Dec. 31 Dec. 31 Income SummaryIncome Summary 900,000900,000 Juan, capital (900,000 x2/3)Juan, capital (900,000 x2/3) 600,000600,000 Pedro, Capital (900,000x1/3)Pedro, Capital (900,000x1/3) 300,000300,000 To allocate net income to partnersTo allocate net income to partners

If the year’s operations resulted in a net loss of P660,000, the Income Summary account If the year’s operations resulted in a net loss of P660,000, the Income Summary account would have a debit balance of P660,000. In that case, the closing entry to allocate the loss would have a debit balance of P660,000. In that case, the closing entry to allocate the loss to the partner’s capital accounts would be:to the partner’s capital accounts would be:

Dec. 31Dec. 31 Juan, CapitalJuan, Capital (660,000 x 2/3)(660,000 x 2/3) 440,000440,000 Pedro, CapitalPedro, Capital (660,000 x 1/3) 220,000(660,000 x 1/3) 220,000 Income SummaryIncome Summary 660,000660,000 To allocate net loss to partnersTo allocate net loss to partners

2. Sharing Based on Partners’ Capital Contribution2. Sharing Based on Partners’ Capital Contribution Profits and losses are often allocated in proportion to the partner’s capital contribution in the Profits and losses are often allocated in proportion to the partner’s capital contribution in the

business. Suppose Antonio, Bautista and Cordova are partners in ABC Company. Their business. Suppose Antonio, Bautista and Cordova are partners in ABC Company. Their capital accounts have the following balances at the end of the year, before the closing capital accounts have the following balances at the end of the year, before the closing entries:entries:

Antonio, CapitalAntonio, Capital P 400,000 P 400,000 Bautista, CapitalBautista, Capital P 600,000 P 600,000

Cordova, CapitalCordova, Capital P 500,000P 500,000

P1,500,000P1,500,000

Assume that the partnership earned a profit of 1,200,000 for the year.Assume that the partnership earned a profit of 1,200,000 for the year.

Antonio:Antonio: 400,000/1,500,000 x 1,200,000=400,000/1,500,000 x 1,200,000= P320,000P320,000

Bautista:Bautista: 600,000/1,500,000 x 1,200,000=600,000/1,500,000 x 1,200,000= P600,000P600,000

Cordova:Cordova: 500,000/1,500,000 x 1,200,000=500,000/1,500,000 x 1,200,000= P500,000P500,000

Net income allocated to partnersNet income allocated to partners P1,200,000P1,200,000

The capital balances after closing the entry:The capital balances after closing the entry:

Antonio , Capital (400,000 + 320,000) = Antonio , Capital (400,000 + 320,000) = P 720,000 P 720,000

Bautista, Capital (600,000 + 480,000) =Bautista, Capital (600,000 + 480,000) = P1,080,000 P1,080,000

Cordova Capital (500,000 + 400,000) =Cordova Capital (500,000 + 400,000) = P P 900,000 900,000

P2,700,000P2,700,000

3. Sharing Based on Capital Contributions and Service to 3. Sharing Based on Capital Contributions and Service to the Partnershipthe Partnership

Ramon & Sharon formed a partnership in which Ramon invested P600,000 and Sharon Ramon & Sharon formed a partnership in which Ramon invested P600,000 and Sharon P400,000 for a total of P1,000,000. Sharon devotes more time to the partnership and P400,000 for a total of P1,000,000. Sharon devotes more time to the partnership and earns the larger salary. Accordingly, the partners have agreed to share profits s follows:earns the larger salary. Accordingly, the partners have agreed to share profits s follows:

A. The first P500,000 of partnership profit is to be allocated based on partners capital A. The first P500,000 of partnership profit is to be allocated based on partners capital contributions to the businesscontributions to the business

B. The next P600,000 of profits is to be allocated based on service, with Ramon receiving B. The next P600,000 of profits is to be allocated based on service, with Ramon receiving P240,000 and Sharon receiving P360,000.P240,000 and Sharon receiving P360,000.

C. Any remaining amounts to be allocated equallyC. Any remaining amounts to be allocated equally

The net income for the first year is P1,250,000The net income for the first year is P1,250,000

3. Sharing Based on Capital Contributions and Service to 3. Sharing Based on Capital Contributions and Service to the Partnershipthe Partnership

Ramon Ramon Sharon Sharon Total Total Total net incomeTotal net income P1,250,000 P1,250,000 Sharing of first P500,000 ofSharing of first P500,000 of Net income, based on capitalNet income, based on capital Contributions:Contributions: Ramon (P600,000/P1,000,000 X P500,000) P300,000Ramon (P600,000/P1,000,000 X P500,000) P300,000 Sharon (P400,000/P1,000,000 X P500,000) P200,000Sharon (P400,000/P1,000,000 X P500,000) P200,000 TotalTotal P 500,000P 500,000 Net income remaining for allocationNet income remaining for allocation 750,000 750,000 Sharing of next P600,000, based on service:Sharing of next P600,000, based on service: RamonRamon P240,000 P240,000 SharonSharon P360,000 P360,000 P 600,000P 600,000 TotalTotal P 150,000 P 150,000 Net Income remaining for allocationNet Income remaining for allocation Ramon (P150,000 x ½)Ramon (P150,000 x ½) P 75,000 P 75,000

Sharon (P150,000 x ½)Sharon (P150,000 x ½) P 75,000P 75,000 P 150,000P 150,000

TotalTotal - -

Net income allocated to the partnersNet income allocated to the partners P615,000 P615,000 P635,000P635,000 P1,250,000 P1,250,000

================ ================ ========= =========

EXERCISE IEXERCISE I

Jose Patalo & Wally Payola formed a partnership engaged in Video Production. Jose Jose Patalo & Wally Payola formed a partnership engaged in Video Production. Jose invested P3,700,000 and Wally P2,900,000 for a total of P6,600,000. Jose earns the invested P3,700,000 and Wally P2,900,000 for a total of P6,600,000. Jose earns the larger salary in managing the business. Accordingly, the partners have agreed to share larger salary in managing the business. Accordingly, the partners have agreed to share profits s follows:profits s follows:

A. The first P800,000 of partnership profit is to be allocated based on partners capital A. The first P800,000 of partnership profit is to be allocated based on partners capital contributions to the businesscontributions to the business

B. The next P760,000 of profits is to be allocated based on service, with Jose receiving B. The next P760,000 of profits is to be allocated based on service, with Jose receiving P425,000 and Wally receiving P335,000.P425,000 and Wally receiving P335,000.

C. Any remaining amounts to be allocated equallyC. Any remaining amounts to be allocated equally

The net income for the first year is P6,750,000The net income for the first year is P6,750,000

3. Sharing Based on Capital Contributions and Service to the 3. Sharing Based on Capital Contributions and Service to the PartnershipPartnership

Jose Jose WallyWally Total Total Total net incomeTotal net income P6,750,000 P6,750,000 Sharing of first P800,000 ofSharing of first P800,000 of Net income, based on capitalNet income, based on capital Contributions:Contributions: Jose (P3,700,000/P6,600,000 X P800,000) P448,484.85Jose (P3,700,000/P6,600,000 X P800,000) P448,484.85 Wally (P2,900,000/P6,600,000 X P800,000) P351,515.15Wally (P2,900,000/P6,600,000 X P800,000) P351,515.15 TotalTotal 800,000 800,000 Net income remaining for allocationNet income remaining for allocation P5,950,000 P5,950,000 Sharing of next P760,000, based on service:Sharing of next P760,000, based on service: JoseJose P425,000.00 P425,000.00 WallyWally P335,000.00 P335,000.00 P 760,000P 760,000 TotalTotal P5,190,000 P5,190,000 Net Income remaining for allocationNet Income remaining for allocation Jose (P5,190,000 x ½)Jose (P5,190,000 x ½) P 2,595,000.00 P 2,595,000.00

Wally (P5,190,000 x ½)Wally (P5,190,000 x ½) P2,595,000.00 P2,595,000.00 P5,190,000P5,190,000

TotalTotal - -

Net income allocated to the partnersNet income allocated to the partners P3,468,484.85 P3,281,515.15 P6,750,000 P3,468,484.85 P3,281,515.15 P6,750,000

============ ======================= =========== =========== ===========

4. Sharing Based on Salaries and Interest4. Sharing Based on Salaries and Interest Cruz and Lacson form an oil exploration Cruz and Lacson form an oil exploration

partnership. At the beginning of the year, their partnership. At the beginning of the year, their capital balances are P800,000 and P1,000.000, capital balances are P800,000 and P1,000.000, respectively. The partnership agreement allocates respectively. The partnership agreement allocates annual salary of P430,000 to Lacson and annual salary of P430,000 to Lacson and P350,000 to Cruz. After salaries are allocated, P350,000 to Cruz. After salaries are allocated, each partner earns an 8% interest on his each partner earns an 8% interest on his beginning capital balance. Any remaining net beginning capital balance. Any remaining net income is divided equally. Partnership profit of income is divided equally. Partnership profit of P960,000 would be allocated as :P960,000 would be allocated as :

44. Sharing Based on Salaries and . Sharing Based on Salaries and InterestInterest

LacsonLacson Cruz TotalCruz TotalTotal net incomeTotal net income P960,000 P960,000

First, Salaries:First, Salaries:

LacsonLacson P430,000 P430,000

CruzCruz P350,000 P350,000

TotalTotal P780,000P780,000

Net Income remaining for allocationNet Income remaining for allocation P180,000 P180,000

Second, Interest on beginning capital balancesSecond, Interest on beginning capital balances

LacsonLacson (P 800,000 x .08)(P 800,000 x .08) P 64,000 P 64,000

Cruz (P1,000,000 x .08)Cruz (P1,000,000 x .08) P 80,000 P 80,000 P144,000P144,000

TotalTotal P 36,000 P 36,000

Net income remaining for allocationNet income remaining for allocation

Lacson (P36,000 x ½) P 18,000Lacson (P36,000 x ½) P 18,000

Cruz (P36,000 x ½) P 18,000Cruz (P36,000 x ½) P 18,000

TotalTotal P 36,000P 36,000

Net income remaining for allocationNet income remaining for allocation - -

Net Income allocated to the partnersNet Income allocated to the partners P512,000 P448,000P512,000 P448,000 P 960,000 P 960,000

======= ======= ================ ======= =========

Exercise 2Exercise 2 4. Sharing Based on Salaries and Interest4. Sharing Based on Salaries and Interest Cruz and Lacson form a coal partnership. At the Cruz and Lacson form a coal partnership. At the

beginning of the year, their capital balances are beginning of the year, their capital balances are P800,000 and P1,000.000, respectively. The P800,000 and P1,000.000, respectively. The partnership agreement allocates annual salary of partnership agreement allocates annual salary of P430,000 to Lacson and P350,000 to Cruz. After P430,000 to Lacson and P350,000 to Cruz. After salaries are allocated, each partner earns an 8% salaries are allocated, each partner earns an 8% interest on his beginning capital balance. Any interest on his beginning capital balance. Any remaining net income is divided equally. remaining net income is divided equally. Partnership profit of P820,000 would be allocated Partnership profit of P820,000 would be allocated as :as :

DISSOLUTION OF PARTNERSHIPDISSOLUTION OF PARTNERSHIP 1. Admission by Purchasing a Partner’s Interest1. Admission by Purchasing a Partner’s Interest Example:Example: Derek and Angelica have a partnership that carries these figures:Derek and Angelica have a partnership that carries these figures:

CashCash P 400,000P 400,000 Total Liabilities P1,200,000Total Liabilities P1,200,000 Other AssetsOther Assets 3,600,000 Angelica, capital 1,100.000 3,600,000 Angelica, capital 1,100.000 Derek, capital Derek, capital 1,700,0001,700,000 Total Assets P4,000,000 Total Liabilities & P4,000,000 Total Assets P4,000,000 Total Liabilities & P4,000,000 ======== Capital ================= Capital =========

April 16 Angelica Capital 1,100,000April 16 Angelica Capital 1,100,000 John Lloyd 1,100,000John Lloyd 1,100,000 To transfer Angelica’s equity in the business to John LloydTo transfer Angelica’s equity in the business to John Lloyd

DISSOLUTION OF PARTNERSHIPDISSOLUTION OF PARTNERSHIP 2. Admission by Investing in the Partnership2. Admission by Investing in the Partnership Example:Example: The partnership of Vincent and Laly has the ff. assets, liabilties & capital:The partnership of Vincent and Laly has the ff. assets, liabilties & capital:

CashCash P 200,000P 200,000 Total Liabilities P1,000,000Total Liabilities P1,000,000 Other AssetsOther Assets 2,400,000 Vincent, capital 700.000 2,400,000 Vincent, capital 700.000 Laly , capital Laly , capital 900,000 900,000 Total Assets P2,600,000 Total Liabilities & P2,600,000 Total Assets P2,600,000 Total Liabilities & P2,600,000 ======== Capital ================= Capital =========

April 12 Other assets 800,000April 12 Other assets 800,000 Eric, Capital 800,000Eric, Capital 800,000 To admit Eric as a partner with a one third (1/3) interest in the business To admit Eric as a partner with a one third (1/3) interest in the business

DISSOLUTION OF PARTNERSHIPDISSOLUTION OF PARTNERSHIP After this entry, the partnership books show:After this entry, the partnership books show:

CashCash P 200,000P 200,000 Total Liabilities P1,000,000Total Liabilities P1,000,000 Other AssetsOther Assets 3,200,000 Vincent, capital 700.000 3,200,000 Vincent, capital 700.000 Laly, capital 900,000Laly, capital 900,000

Eric, capital Eric, capital 800,000800,000 Total Assets P3,400,000 Total Liabilities & P3,400,000 Total Assets P3,400,000 Total Liabilities & P3,400,000 ======== Capital ================= Capital ========= Eric’s 1/3 interest in the partnership Eric’s 1/3 interest in the partnership

[P800,000/(P700.000+900,000+800,000)=1/3][P800,000/(P700.000+900,000+800,000)=1/3]

3.Admission by Investing in the Partnership-Bonus to the Old Partners3.Admission by Investing in the Partnership-Bonus to the Old Partners Example: Example: Zuma and Galema’s partnership has earned above-average profits for Zuma and Galema’s partnership has earned above-average profits for

10yrs. The two partners share profits and losses equally. The balance 10yrs. The two partners share profits and losses equally. The balance sheet carries these figures:sheet carries these figures:

CashCash P 400,000P 400,000 Total Liabilities P1,000,000Total Liabilities P1,000,000 Other AssetsOther Assets 2,100,000 Zuma, capital 700.000 2,100,000 Zuma, capital 700.000 Galema, capital Galema, capital 800,000800,000 Total Assets P2,500,000 Total Liabilities & P2,500,000 Total Assets P2,500,000 Total Liabilities & P2,500,000 ======== Capital ================= Capital =========

The partners agree to admit Tuclao to a ¼ interest with his cash The partners agree to admit Tuclao to a ¼ interest with his cash investment of P900,000. Tuclao’s capital balance on the partnership investment of P900,000. Tuclao’s capital balance on the partnership books is P600,000 computed as follows:books is P600,000 computed as follows:

Partnership capital before Tuclao is admitted (P700,000 + 800,000) P1,500,000.00Partnership capital before Tuclao is admitted (P700,000 + 800,000) P1,500,000.00 Tuclao’s investment in the partnership Tuclao’s investment in the partnership 900,000.00 900,000.00 Partnership capital after Tuclao is admitted P2,400,000.00Partnership capital after Tuclao is admitted P2,400,000.00 ====================== Tuclao’s capital in the partnershipTuclao’s capital in the partnership P 600,000.00 P 600,000.00 ====================== Tuclao’s 1/4 interest in the partnership P2,400,000 X ¼=600,000Tuclao’s 1/4 interest in the partnership P2,400,000 X ¼=600,000

The entry on the partnership books to record Tuclao’s investments is:The entry on the partnership books to record Tuclao’s investments is:

CASHCASH 900,000900,000 Tuclao, Capital 600,000Tuclao, Capital 600,000 Zuma, Capital 150,000Zuma, Capital 150,000 Galema, Capital 150,000Galema, Capital 150,000 To admit Tuclao as a partner with ¼ interest in the snake bag businessTo admit Tuclao as a partner with ¼ interest in the snake bag business

NEW PARTNERSHIP BOOKNEW PARTNERSHIP BOOK

CashCash P1, 300,000P1, 300,000 Total Liabilities P1,000,000Total Liabilities P1,000,000 Other AssetsOther Assets 2,100,000 2,100,000 Zuma, capital 850.000 Zuma, capital 850.000 Galema, capital 950,000Galema, capital 950,000

Tuclao, capital Tuclao, capital 600,000600,000 Total Assets P3,400,000 Total Assets P3,400,000 Total Liabilities & P3,400,000 Total Liabilities & P3,400,000 ======== Capital ================= Capital =========

4. 4. Admission by Investing in Partnership-Bonus to the New Admission by Investing in Partnership-Bonus to the New PartnerPartner

Example:Example: Zuma and Galema’s partnership balance sheet is:Zuma and Galema’s partnership balance sheet is:

CashCash P 1,400,000P 1,400,000 Total Liabilities P1,200,000Total Liabilities P1,200,000 Other AssetsOther Assets 3,600,000 Zuma, capital 2,300.000 3,600,000 Zuma, capital 2,300.000 Galema, capital 1,Galema, capital 1,500,000500,000 Total Assets P5,000,000 Total Liabilities & P5,000,000 Total Assets P5,000,000 Total Liabilities & P5,000,000 ======== Capital ================= Capital =========

The partners admit Anaconda, a snake skin consultant, as a The partners admit Anaconda, a snake skin consultant, as a partner with 1/3 interest in exchange for his cash investment of partner with 1/3 interest in exchange for his cash investment of P1,000,000. At the time of Anaconda’s admission, the firm’s P1,000,000. At the time of Anaconda’s admission, the firm’s capital is P3,800,000.Zuma and Galema share profits and capital is P3,800,000.Zuma and Galema share profits and losses in the ratio of 2/3 to Zuma and 1/3 to Galema.losses in the ratio of 2/3 to Zuma and 1/3 to Galema.

Partnership capital before Anaconda is admitted (P2,300,000 + 1,500,000) P3,800,000.00Partnership capital before Anaconda is admitted (P2,300,000 + 1,500,000) P3,800,000.00 Anaconda’s investment in the partnership Anaconda’s investment in the partnership 1,000,000.00 1,000,000.00 Partnership capital after Anaconda is admitted P4,800,000.00Partnership capital after Anaconda is admitted P4,800,000.00 ====================== Anaconda’s capital in the partnership (P4,800,00 x 1/3)Anaconda’s capital in the partnership (P4,800,00 x 1/3) P1,600,000.00 P1,600,000.00 ======================

The entry to record Anaconda’s investment The entry to record Anaconda’s investment is:is:

Cash 1,000,000Cash 1,000,000

Zuma, Capital (600,000 x 2/3) 400,000Zuma, Capital (600,000 x 2/3) 400,000 Galema, Capital (600,000 x 1/3) 200,000Galema, Capital (600,000 x 1/3) 200,000 Anaconda, Capital 1,600,000Anaconda, Capital 1,600,000

To admit Anaconda as a partner with 1/3 interest in the snake bag To admit Anaconda as a partner with 1/3 interest in the snake bag businessbusiness

The new partnership’s balance sheet The new partnership’s balance sheet reports these amounts:reports these amounts:

CashCash P2, 400,000P2, 400,000 Total Liabilities P1,200,000Total Liabilities P1,200,000 Other AssetsOther Assets 3,600,000 3,600,000 Zuma, capital 1,900.000 Zuma, capital 1,900.000 Galema, capital 1,300,000Galema, capital 1,300,000

Anaconda, capital 1,Anaconda, capital 1,600,000600,000 Total Assets P6,000,000 Total Assets P6,000,000 Total Liabilities & P6,000,000 Total Liabilities & P6,000,000 ======== Capital ================= Capital =========

EXERCISESEXERCISES

Admission by Investing in the Partnership-Bonus to the Old PartnersAdmission by Investing in the Partnership-Bonus to the Old Partners ProblemProblem Tom and Jerry formed a partnership that has been existing for 15 years Tom and Jerry formed a partnership that has been existing for 15 years

and is earning average income. The two partners share profits and and is earning average income. The two partners share profits and losses with 2/3 for tom and 1/3 for Jerry . The balance sheet carries losses with 2/3 for tom and 1/3 for Jerry . The balance sheet carries these figures:these figures:

CashCash P 325,000P 325,000 Total Liabilities P2,240,000Total Liabilities P2,240,000 Other AssetsOther Assets 3,970,000 Tom, capital 1,155.000 3,970,000 Tom, capital 1,155.000 Jerry, capital Jerry, capital 900,000900,000 Total Assets P4,295,000 Total Liabilities & P4,295,000 Total Assets P4,295,000 Total Liabilities & P4,295,000 ======== Capital ================= Capital =========

The partners agree to admit Bunny to a ¼ interest with his cash The partners agree to admit Bunny to a ¼ interest with his cash investment of P800,000. investment of P800,000.

Required: Compute for Bunny’s capital investment and entry on the Required: Compute for Bunny’s capital investment and entry on the partnership bookpartnership book

Prepare the new Partnership BookPrepare the new Partnership Book

CORPORATIONCORPORATION

Stockholders’ EquityStockholders’ Equity

1. Paid-in Capital or Contributed Capital-1. Paid-in Capital or Contributed Capital-source of capital contributed by the source of capital contributed by the stockholders and others.-CAPITAL STOCKstockholders and others.-CAPITAL STOCK

2. Retained Earnings-net income retained in 2. Retained Earnings-net income retained in the business.the business.

SOURCES OF PAID-IN CAPITALSOURCES OF PAID-IN CAPITAL 1. STOCK1. STOCK Authorized shares of stockAuthorized shares of stock Treasury stockTreasury stock Outstanding stockOutstanding stock

Classes of Stock as to preference rights:Classes of Stock as to preference rights: a. Preferred a. Preferred stock-A class of ownership in a corporation that has a higher claim stock-A class of ownership in a corporation that has a higher claim

on the assets and earnings than common stock. Preferred stock generally has a on the assets and earnings than common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights.usually do not have voting rights.

b. Common b. Common Stock-A security that represents ownership in a corporation. Holders Stock-A security that represents ownership in a corporation. Holders of common stock exercise control by electing a board of directors and voting on of common stock exercise control by electing a board of directors and voting on corporate policy. Common stockholders are on the bottom of the priority ladder for corporate policy. Common stockholders are on the bottom of the priority ladder for ownership structure. In the event of liquidation, common shareholders have rights to a ownership structure. In the event of liquidation, common shareholders have rights to a company's assets only after bondholders, preferred shareholders and other debtholders company's assets only after bondholders, preferred shareholders and other debtholders have been paid in full. have been paid in full.

STOCK CERTIFICATESTOCK CERTIFICATE

CASH DIVIDENDCASH DIVIDEND

Non-participating StockNon-participating Stock Preferred stockholders’ dividend rights are usually limited to a certain amount. Preferred stockholders’ dividend rights are usually limited to a certain amount.

Such stock is said to be non-participating preferred stockSuch stock is said to be non-participating preferred stock Ex.Ex. Assume that ABC Corporation has 1,000 shares of Assume that ABC Corporation has 1,000 shares of P40P40 non-participating non-participating

preferred stock and 4,000 shares of common stock outstanding. Also assume preferred stock and 4,000 shares of common stock outstanding. Also assume that the net income, amount of earnings retained , and the amount of earnings that the net income, amount of earnings retained , and the amount of earnings retained, and the amount of earnings distributed by the board of directors for the retained, and the amount of earnings distributed by the board of directors for the 3 years of operations are as follows:3 years of operations are as follows:

2005 2006 20072005 2006 2007 Net Income P200,000 P550,000 P620,000Net Income P200,000 P550,000 P620,000 Amount Retained 100,000 200,000 400,000Amount Retained 100,000 200,000 400,000 Amount Distributed P100,000 P350,000 P220,000Amount Distributed P100,000 P350,000 P220,000

DividendsDividends 2005 2006 20072005 2006 2007 Amount distributed P100,000 P350,000 P220,000Amount distributed P100,000 P350,000 P220,000 Preferred divided Preferred divided 40,00040,000 40,00040,000 40,00040,000 (1,000 shares)(1,000 shares) Common Dividend P 60,000 P310,000 P180,000Common Dividend P 60,000 P310,000 P180,000 (4,000 shares)(4,000 shares) Dividends per share:Dividends per share: Preferred P40 P40 P40Preferred P40 P40 P40 Common P15 P77.50 P45Common P15 P77.50 P45 (60,000/4,000) (310,000/4,000) (180,000/4,000)(60,000/4,000) (310,000/4,000) (180,000/4,000)

CUMULATIVE PREFERRED STOCKCUMULATIVE PREFERRED STOCK

Ex.Ex. Assume that preferred stock is cumulative, Assume that preferred stock is cumulative,

and that no dividends were paid in 2005 and and that no dividends were paid in 2005 and 2006. In 2007, the board of directors 2006. In 2007, the board of directors declares dividends of P220,000. Distribution declares dividends of P220,000. Distribution of dividend paid in 2007 between preferred of dividend paid in 2007 between preferred and common stockholders are as follows:and common stockholders are as follows:

Amount Distributed P220,000Amount Distributed P220,000 Preferred dividend (1,000 shares):Preferred dividend (1,000 shares): 2005 dividend in arrears P40,0002005 dividend in arrears P40,000 2006 dividend in arrears 40,0002006 dividend in arrears 40,000 2007 dividend 2007 dividend 40,000 40,000 P120,000 P120,000 Common dividend (4,000 shares) P100,000Common dividend (4,000 shares) P100,000 Dividends per share:Dividends per share: Preferred P120Preferred P120 Common P 25Common P 25

accounting

Business

financial character

financial statementsfive

financial statements5

owners equity liabilities

equity method

journal voucher

cash receipt journal

statement of cash flow4