TFTME 3115 – Accounting

Forms of Business Organization

Sole Proprietorship

▪ Single owner – proprietor/manager

▪ Services type of business – clinics
▪ Receive all profits = absorbs all losses
▪ Sole responsible for all the debts
▪ TAX: part of income tax of owner
o Revenue goes to income tax
o Owner pays the tax

Partnership

▪ Two or more partners – managing director (could be one or more)

o Whoever as long as there’s an agreement
▪ Larger capital
▪ Contribute money, property (car, land, equipment), industry (specialty, skills)
▪ GPP (general professional partnership)
o Practice same profession (doctor to doctor)
▪ TAX: partner pays or file of income tax
o Separate – not the money of owners
▪ Unlimited personal liability
o If the partnership has a debt that can’t be paid, can be get on partner’s property

Corporations

▪ Stockholders/ shareholders with board of directors

▪ Buys stocks in corporations
▪ Limited personal liability
o What you invested is what you’ll only get
o Up to the extent of your investment
o An artificial being created by law
▪ Not right but exists in the eye of the law
▪ Juridical entity
▪ Right only on paper
▪ Revised corporation code
▪ TAX: sales almost all on partnership

Three Types of Business

Service Business

▪ Schools, airlines, accounting firm

Merchandising Business

▪ Buys ready to sell

▪ Sari-sari store

Manufacturing Store

▪ Raw materials > work in progress/ongoing conversion process > finished good
Source of Capital

• Owners
• Lenders
o Banks and financial institutions

Activities in Business Organization

Financing

▪ Obtain financial resources

Investing

▪ Acquisition of long-term resources

o Assets
o Building, land, cars
o More than 5, 10, 15 years

Operating

▪ Daily operations
o Research and dev, expenses, utilities, supplies
o Only 1 year
▪ Use of resources to produce and sell goods

Accounting

• A process of identifying, measuring, and communicating economic information to permit

informed judgments and decisions by the users of the information. – American Accounting
Association

Identifying process

• Analytical component
o Time to think
o Determine whether the transaction needs to be recognized
• Recognition process
• Only accountable events (amounts)
o External events
▪ Involves entity and other entity
▪ Transact with other entity
▪ Transfer
• Reciprocal – purchase
• Non reciprocal – donation, payment of tax
o Internal events
▪ Does not involve outside parties
• Production
• Casualties (floods)

Measuring (component) process

• Technical components
o Assign amounts
 o Money

Communicating process

• Formal component
o Summarize transaction
• Activities:
o Recording/journalizing
o Classifying
o Summarizing financial statement

Purpose of Accounting

• Handles financial operations

• Provides information to decision makers

Users of Financial Statement

• Investors/stockholders/owners
• Employees
• Lenders/suppliers
• Government agencies (tax)
• Customers/public

Financial Statement Qualitative Characteristics

Fundamental QC

• Relevance – can affect a decision

o Materiality
▪ Inclusion that can affect
▪ Amount of money (subjective)
o Confirmatory value
▪ Also feedback value
▪ Reflects performance
o Predictive value
▪ Can be used in the future
• Faithful representation – what really happened
o Completeness – at least 100% material items
o Neutrality
o Free from error

Enhancing QC

• Comparability
o Intracomparability – can be compared to previous financial statements
o Intercomparability (other companies)
▪ Benchmarking
• Verifiability – even when copied by others, should stay the same
• Timeliness
• Understandability – assumption; accounting reader is literate
Other Qualities that a Financial Statement is Good

• Reliability – can be trusted

• Substance over form
• Prudence/conservatism
o Income – 100k (mas okay mababa)
o Expenses – 300k (mas okay mataas)

Generally Accepted Accounting Principles (GAAP)

Business Entity Concept

• Money as a person is separate to business

• Business is separate and distinct from the owner

Going Concern

• If silent, assume that the business does not have any intention to terminate
• Continue in coming years

Periodicity Concept

• Time period assumption

• Equal periods division
• Calendar period (Jan 1 – Dec 31)
• Fiscal period (12 mos. any month)
• Reports based on shorter period (interim reports)

Unit of Measure/Monetary Unit Concept

• The value before will stays

Cost Principle

• Historical cost; record the asset on how much it was paid

Objectivity

• Supported by document (receipt)

Estimation

• Near from fact (percentage/ratio)

Conservatism

Accrual Basis of Accounting

• When the money was earned

• When the sale was occurred
• Two Classes of Recognition
o Revenue recognition
▪ Record revenue when it is earned
▪ Service business – service has been earned
▪ Manufacturing and merchandising – when product have been sold
o Expense recognition/matching principles
▪ The process should be recognized in the same period during which the
related revenue was earned
o Utilities
 ▪ Electricity, internet, water
▪ What month it was consumed

Casual Basis of Accounting

• When the money was received

Timeliness

Materiality and Aggregation

• Shall add all expenses

• Separate reporting

ASSETS = LIABILITIES + OWNERS EQUITY

Major Accounts

Assets

• Present economic resources controlled by the entity as a result of the past events
• Can give economic benefits (cash)
o Current Assets
▪ Assets to be solved/consumed within the normal operating cycle or 1 year
• Cash
o Coins and currencies, bank checks, and money orders
o Cash on hand
o Cash in bank
• Receivables
o Collectibles from customers
o Creditor – nagpautang; debtor – umutang
▪ Accounts receivables
• “oral promise”; no interest
▪ Notes receivables
• Promissory notes; with interest
▪ Other receivables
• Dividends receivables; rent receivables
• Trading securities
o Marketable securities
o Investment in stocks of other companies
o Buys ownership
▪ ***liquid – madaling ibalik sa cash; pwede agad ibenta
• Merchandise inventory
o Goods, stocks ibebenta
• Prepaid expenses
o Advance payments, load
▪ Contra Assets for current assets (deduction from current assets)
• Allowance for doubtful accounts/bad debts
o Receivables
o 1M – A/R
X 10% 900k lang irereport na AR
100k – allowance
o Non-current Assets
 ▪ Fixed assets needed to support the operations over a long period (more than
1 year) and they are not intended for sale (buildings, computers)
• Land
• Building
• Equipment
• Furnitures (floor) and fixtures (nakasabit)
• Intangible assets
o Patent (inventories, ownership)
o Franchise (bumibili ng Karapatan)
o Licenses
o Trademarks (logo, registered)
▪ Contra Assets for non-current assets
• Accumulated depreciation
o Applicable except land
▪ Tumataas value (naappreciate)
▪ 200k (2019)^ appreciate
3m (2024) v depreciate
o Building
▪ 500M (2014)
Cost principle v (2024)
500M ^ straight line depreciation cost
20 = 25 UL
- 25 every year

Liabilities

• Present obligation to transfer an economic resource as a result of part event

• Tayo may debt
o Current liabilities
▪ Expected to be paid within normal operating cycle or one year
• Accounts payable
o Oral promise to trade on credit (utang) or on account
• Notes payable
o With promissory note; with interest
• Utilities payable
o Water electricity
• Interest payable
• Salaries payable
o employee
• Taxes payable
o Non-current liabilities
▪ Long-term obligation
• Notes payable
o Could be 3 years, based on agreement
• Loans payable
o Banks and other financial institution
• Mortgage payable
o With collateral (house and lot)
• Bonds payable
o 5 – 10 years; government bonds

Owner’s Equity/Capital

• Claims of the owner the assets after deducting the liabilities

 • Investment in owner
• Assets na nanggagaling kay owner
• Capital, initial investment
• Net income
o Liabilities
o Capital (owner)
o Investmet = net income
o Withdrawal = netloss
o Drawings
▪ Withdrawal of the owner
▪ Atang, Drawing
o Income
▪ pag may kinikita na ang company
▪ rent income (70%), interest income (30%)
o Expenses
▪ Gastos ng company
▪ Salary expense, utilities expense, supplies expense

Double Entry Bookkeeping

• At least 2 accounts are affected each transaction

Balance sheet accounts (permanent accounts)

• Assets
• Liabilities
• Capital/OE

Income statement accounts (temporary accounts)

• Income
• Expenses
• Drawing
o Income summary account
▪ Dito cinoclose para mawala

T-accounts

• Bawat accounts may sariling T-accounts

Accounts

DEBIT CREDIT
Increase (+) Increase (+)
Asset Liabilities
Expenses Capital
Drawing income

Decrease (-) Decrease (-)

Liabilities Asset
Capital Expenses
income Drawing
Accounting Process

• Analyze Business Documents

• Journalize Transactions
• Posting to a Ledger
• Prepare a trial balance
• Prepare adjusting entries
• Prepare adjusted trial balance, worksheet and Financial Statement
• Prepare closing entries
• Prepare post-closing trail balance
• Prepare Reversing Entries (optional)