Accounting Reviewer( Chapter 1-8 and 10)

7/30/2019 Accounting Reviewer( Chapter 1-8 and 10)

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Reviewer

Chapter 1 and 2

Accounting- is a service activity. Its function is to provide quantitative information, primarily financial in nature, about

economic decisions, in making reasoned choices among alternative courses of action

- Art of recording, classifying and summarizing and interpreting the results thereof

Specialized Accounting Fields

1.

Public Accounting- accountants here may practice as an individual or as a member of a accountingfirm. CPA are public accountants

Auditing- involves the independent examination of financial statement for the purpose of

expressing an opinion on the fairness of the said statements prepared by the company under

review

Tax Services- CPAs specializes in tax accounting prepare income tax returns and advise clients

on tax matters

Management Advisory Services- involves providing services to clients on matters relating to

the design and maintenance of a companys accounting system, budgeting, ect.

2. Private Accounting- employed by business firms or by a not-for-profit organization. May be hires asaccounting clerk, bookkeeper, management accountant, cost accountant, internal auditor, etc.

3. Government Accounting- employed in any governmental units4. Accounting Education- employed as instructors, professors, reviewers or researchers

Generally Accepted Accounting Principle/GAAP- rules, procedures, practice and standards followed in the

accumulation, preparation and presentation of accounting data

1. Business Entity Concept- business entity is treated as separate and distinct from its owner/s andfrom other business units

2. Going concern/Continuity Assumption- assumes business entity will continue to operate for anindefinite period

3. Time period Assumption- requires indefinite life of the business be divided into time periodsMonthly Basis

Quarterly Basis

Semi-annual BasisAnnual Basis

-Calendar year

-Fiscal year

4. Unit of Measurement Assumption- monetary unit which is Peso

5. Accrual Basis- requires that revenue or income should be recognized when earned regardless of

when collection is received; and expense should be recognized when incurred regardless of when

payment is made

6. Matching Principle- relates to the expense recognition principle which requires that costs and

expenses incurred in generating the revenue should be properly matched against the related

revenue

Accounting -> accounting information -> users -> internal -> Management accounting -> management

| -> External ->Financial Accounting ->creditors, govt agencies, customer

|

v

Financial Statement- the end product of the accounting process

1. Statement of Comprehensive Income/Income Statement Shows the operating result of the business as agiven period of time. Shows Profitability

2. Statement of Financial Position/Balance Sheet- Shows the financial condition of the business of a givendate. Shows Stability

Account Form- The form of the balance sheet that shows the assets on the left and the

liabilities and the owners equity on the right Report Form- The form of the balance sheet that lists the liabilities and OE below the asset

section

3. Statement of Change in Owners Equity- Simply called Capital Statement. It is the summary of changes inthe OE that have occurred during a specific period of time

4. Statement of Cash Flows- Provides information about the cash receipts and cash payments of an entity for agiven time period.

Operating Activities- involve the production or purchase o merchandise and the sale of goods

or services to customers


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Investing Activities- involve making and collecting loans or that involve purchasing and selling

plant asset, other productive assets, and investments

Financing Activities- involve the companys transactions with its owners and long term

creditors

5. Note to the Financial Statements- to make the financial statement more useful and meaningful to the users.This statements presents in narrative form the significant accounting policies and other related explanatory

notes that have affected the preparation of the financial statements

Qualitative characteristics of financial statements1. Relevance 3. Understandability2. Reliability 4. Comparability

Business Organization:

1. Single/Sole Proprietorship- owned by only an individual2. Partnership- owned by two or more persons who bind themselves to contribute common assets and dividing

profits among themselves

3. Corporation- artificial being created by operation of law having the rights of successionTypes of Business

1. Service Business- business that renders services to customer2. Merchandising Business- buys finished or ready made good or commodities and sells them at a profit3. Manufacturing Business- makes finished goods from raw material. Produces the goods that it sells

Business objective:

1. Profitability2. Stability/Solvency- ability of company to pay and changes in time

Basic Functions of accounting

1. Recording- Bookkeeping- process of systematically maintaining a record of all business transactions Friar Luca Pacioli- Father of double-entry bookkeeping

2. Classifying- Sort/group items of the same natureElement of Financial Statement

1. Asset- sources controlled or owned by the businessExample:

a. Cash- any medium of exchange that a bank will accept at face valueb. Accounts Receivable- claims against debtors or customer from services rendered on accountc. Notes Receivable- claims supported by promissory noted. Merchandise Inventory- goods on hand and are available for salee. Office/Store Supplies- supplies being used by the businessf. Prepaid Expense- expenses paid in advanceg. Office/Store Equipment- includes computer, AC units, electric fan, freezers, etch. Furniture and Fixture- includes office tables, chairs, filing cabinets, etc.i. Intangible asset- identifiable non-monetary asset w/o physical substancej. Franchise- right granted by one party to another party for a specific periodk. Copyright- exclusive right or protection granted to an author or literary, musical or artisticl.

Patent- exclusive legal right granted by the government for an inventionm. Trademarks- words, names, symbols, or other devices used in trade to indicates sourcen. Computer software- used for digitally stored data such as comp. programs

2. Liabilities- obligations of the businessExample:

a. Accounts Payable- amounts due to creditors for assets acquired on accountb. Notes Payable- amounts due to creditors evidenced by written promise to payc. Mortgage Payable- long term debts secured by a collaterald. Salaries Payable- unpaid salariese. Unearned Revenue- revenue collected in advance

3. Owners Equity/Capital- represents equity or claim of the owner on the assets of the business. Owners Drawing- cash or other asset withdrawn or taken by the owner from business for

personal use

4. Revenue- gross inflow of assets for service rendered, for sale of merchandise, for professional fees5. Expense- gross outflow of asset

3. Summarizing- preparation of Accounting reports/financial statement4. Interpreting- analysis of Financial Statement

Accounting Information System- combination of personnel, records, procedures that a business uses to provide

financial data.

Features of effective accounting system

Control Compatibility Flexibility Good cost/benefit relationship


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Components of a computerized system

1. Hardware 2. Software 3. Company PersonnelBusiness Transaction- is an event that has some effect on the resources of a firm or on the sources of the firms assets

Source Documents- evidence of a transaction that describes the essential facts of the transaction

Examples:

a. Official Receipt- collection from customerb. Vouchers- cash or check- cash paymentsc. Invoice- sales of merchandise and purchase of merchandise

ASSETS = EQUITIES (means the rights to properties)

CREDITORS OWNER

| |

V V

ASSETS = LIABILITIES + OWNERS EQUITY

(Accounting Equation- shows relationship between the companys resources and the sources of these resources)

Chapter 3

Accounting Process/ Accounting cycle- consists of the sequence of steps that must be followed within the accounting

period

1. Analysis of Business Transaction 7. Preparing the Financial Statement2. Journalizing 8. Journalizing and Posting the Adjustment entries3. Posting 9. Journalizing and Posting the Closing entries4. Preparing a trial balance 10. Preparing the Post-closing trial balance5. Gathering of necessary adjustment data 11. Preparing the Reversing entries6. Preparing a worksheet

Journalizing- process of recording business transaction in the book of original called Journal.

Journal Entries- entry that involve two accounts only

Compound journal entry- entry that involve more than two accountsDouble-entry Bookkeeping- method of recording business transactions which recognizes the dual effect of a transaction

Account- record of each asset, liability, owners equity, revenue and expense items in which the effects of business

transaction are recorded

T-Account- basic form of an account use in illustrations, problem solving and in analyzing transaction

Rules of Debit and Credit:

Debit Credit

+ Asset - Asset

- Liabilities + Liabilities

- Owners Capital + Owners Capital

+ Owners Drawing - Owners Drawing

- Revenue + Revenue+ Expense - Expense

Ledger- group of accounts

- Summary of transaction for an accounting period

- Book of final entry

Posting- process of transferring the entries from the journal to the accounts in the ledger

Account Balance- the difference between the total debit and the total credit of an account

Pencil Footing- process where the amounts of the debit and credit columns of the accounts are totaled and

the account balance is determined

Normal Balance:

Assets - Debit

Liabilities - Credit

Owners Capital - Credit

Owners Drawing - Debit

Revenue - Credit

Expense - Debit

Trial Balance- summary listing of the account titles and the balance of each account from the ledger

- prepared to test equality of debit and credit

Chart of Accounts- list of all accounts of the business and their corresponding account numbers


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Chapter 4

Cash Basis of accounting- recognizes revenue when cash is received; and recognizes expenses when cash is paid

Accrual Basis of accounting- requires that revenue or income should be recognized when earned regardless of when

collection is received; and expense should be recognized when incurred regardless of when payment is made

Accounting Period- is the period of time, normally one month, one quarter or year into which an entitys life is arbitrarily

divided for financial statement purposes

Compiling adjusting data- is the process of gathering and putting together data necessary to update the balances of

some accountsAdjusting Entries- are entries prepared at the end of an accounting period to update or adjust the balances of accounts.

- It will always involve revenue or an expense account and an asset or a liability account.- Ensure the application of the accrual basis of accounting and the matching principle

Types of Adjusting Entries

1. Accrued Expense - a liability account- Unrecorded expense

- Payable

- Accrued liability

- Expenses already incurred but not yet paid

AJE: Expense ---------xx

Payable------------xx

2. Accrued Revenue - an asset account- Accrued asset

- Unrecorded revenue

- Receivable

- Revenue already earned by the business but not yet received or collected at the end of

the accounting period

AJE: Receivable------xx

Revenue-----------xx

3. Prepaid Expense/ Deferred Expenses expenses paid in advance- An asset

Two methods of recording Prepaid Expense1. Asset Method- account is debited upon payment is an asset account. Upon adjustment, an expense

account is debited with a corresponding credit to an asset account

AJE: Expense---------xx

Asset/Prepaid--------xx

Compute: Expense (used)

2. Expense Method- the account debited upon payment is an expense account. Upon adjustment, anasset account is debited and an expense account is credited

AJE: Prepaid/Asset------xxExpense----------------xx

Compute: Asset (unused)

4. Unearned Revenue/Deferred Revenue Revenue collected in advance

- A liability account

Two methods of recording Unearned Revenue

1. Liability Method- the account credited upon receipt of cash is a liability account. Upon adjustment,such liability account will be debited and a revenue account is credited

AJE: Liability/Unearned------xx

Revenue---------------------xx

Compute: Earned Revenue

2. Revenue Method- the account credited at the date of collection is a revenue or income account.

Upon adjustment, a revenue account is debited and a liability account is credited

AJE: Revenue--------------xx

Liability/Unearned----xx

Compute: Unearned Revenue


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5. Depreciation- decrease in value of an asset

Depreciation accounting- the process of allocating the depreciable cost of a fixed asset over its

estimated life

Accumulated Depreciation- is a contra-asset account

Contra-Asset Account- an account that is offset against an asset account on the balance sheet

Factors to be considered in computing Dep.:

1. Asset Cost- amount you paid for the asset

*include also the installation cost2. Residual Value- amount can be sold after its useful life

3. Useful life- years or number of units, or hours that the asset can be used

* Book Value- Asset cost-Accumulated Dep.

Straight Line Method

Depreciation= Asset Cost- Estimated Residual Value ----> Depreciable cost

Estimated Useful life

AJE: Depreciation Expense-Asset------xx

Accumulated Depreciation-Asset-----xx

Compute: Depreciation

Accruing Interest

Interest --> Creditor nagpapautang - revenue

| --> Debtor nangungutang expense

V

Principal x Interest Rate x Time/Term of the rate

Promissory note --> creditor notes receivable

--> debtor notes payable

Interest Receivable- account shows interest earned but not yet collected

Interest Payable- account shows interest expense but not yet paid

Deferrals- refers to the postponement of the recognition of revenue which the company has received or collected in

advance and the postponement of the recognition of expense which has been paid in advance

Accruals- refer to the recognition of expense already incurred though not yet paid, and the recognition of revenue

already earned though not yet received

Property, Plant and Equipment- physical resources that are owned and used by a business which are relatively fixed or

permanent in nature that have a long useful life. Sometimes called Fixed Asset or Plant Asset.

Chapter 5

Worksheet- is a columnar sheet of paper used to summarize information needed to make the adjusting and closingentries and to prepare the financial statements

Columns in the ten-column worksheet

1. Trial Balance column (unadjusted)

- copy the trial balance in the trial balance column of the work sheet.

- Usually, only those accounts with the balances as of the end of accounting period are listed

2. Adjustment column

- enter the adjustments in the adjustments column of the work sheet

- If the account is not included in the original trial balance, add the account title below the totals of the

trial balance.

- Key Letter facilitates the actual journalizing of the adjusting entries

3. Adjusted Trial Balance

- is the original trial balance plus or minus the adjustments.

- Add the two accounts if both account is in debit or credit balance. Subtract the two accounts if one

account is in the debit side and the other one is in the credit side

4. Income Statement Column

-extend all revenue and expense account balance from adjusted trial balance column to the income

statement column.

Net income- if the total revenue exceeds the total expenses. It is added to the debit column total in

order to bring the two columns into agreement

Net Loss- if the total expense exceeds the total revenue. It is added to the credit column total.


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5. Balance Sheet Column

- Extends the assets, liabilities, and owners equity accounts from the adjusted trial balance columns to

the balance sheet columns

- Note that the beginning rather than the ending balance of the owners capital is carried into the credit

column because the closing entries are not yet prepared

Preparing Financial Statement from the Worksheet

1. Income Statement/ Statement of Comprehensive Income

- Information needed to prepare the income statement can be taken from the income statementcolumn in the work sheet.

2. Capital Statement/ Statement of Change in Owners Equity

- is a financial statement that summarizes the transaction affecting the owners capital

- prepared by showing the beginning capital balance, adding net income or deducting net loss, and then

subtracting the owners withdrawals. The result is the ending capital balance that id forwarded to the

balance sheet

3. Balance Sheet/ Statement of Financial Position

Classified Statement of financial position- subdivides the asset and liabilities in order to provide more specific

information for the users of the financial statements.

Classification of Asset

1. Current Assets- are cash and other assets that are converted into cash or used up in a relatively short period

of time, usually one year or less.

- are listed in order of liquidity or their convertibility into cash

2. Non-current Assets- are assets acquired for use in the business rather than for sale.

- They are also called fixed assets because they are used for long-term purposes

Classification of Liability

1. Current Liabilities- are debts usually due within one year, the payment of which normally will require the use

of current assets

- Usually listed in order of their maturity

2. Non-current Liabilities- are those debts that will be paid after a relatively long period of time, usually more

than one year.

- Normally, the ones with the earliest due dates are listed first4. Statement of Cash Flows

- Sets out requirements for the presentation of cash flow statement and related disclosures.

- States that cash flow information is useful in providing users of financial statements with a basis to assess the

ability of the enterprise to generate cash and the need of the enterprise to utilize those cash flows

Operating Activities- create revenue and expenses in the entitys major line of business

Investing Activities- increase or decrease the assets that the business has to work with

Financing Activities- obtain funds from investors and creditors needed to launch and sustain the business.

Closing Process

Closing entries- are entries prepared at the end of the accounting period to bring the balances of the

temporary or nominal accounts to zero, so that they will be ready to receive data for the next accounting period. Income Summary- a clearing account. The other terms used are Revenue and Expense Summary or Profit and

Loss Summary

Temporary Accounts

1. Revenue

-in closing the revenue accounts, the balance in the revenue are transferred to the Income Summary

account by debiting each revenue account and crediting income summary for the total revenue

2. Expense

-in closing the expense accounts, the balances in the expense accounts are transferred to the Income

Summary account by debiting the income summary account for the total expenses and crediting each

expense account.

In closing the income summary account- the balance of income summary account is

transferred to the owners capital.

A credit balance in the income summary account represents net income and is closed by

debiting income summary and crediting the owners capital

A debit balance in the income summary account represents net loss and is closed by

debiting owners capital and crediting the income summary account.


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3. Owners Drawing

- in closing the owners drawing, the balance of the owners drawing account is transferred to the

owners capital account by debiting the owners capital account for the amount of withdrawals and

crediting the drawing account for its balance

Post-Closing Trial Balance

- It is the trial balance prepared after the adjusting and closing procedures.- Sometimes called a statement of financial position in a trial balance form because it consists of

asset, liabilities and owners equity

Interim Statements are financial statements prepared for period of less than a year.

- considered essential in providing investors and the other with timely information as to the progress of

an enterprise

- In preparing interim reports, adjustments for accrued items must be considered

Reversing Entries- are prepared as of the first day of the next accounting period.

- They reverse the effects of the adjusting entry to which they relate- The purpose of this is to simplify the first entry relating to that same item in the next accounting

period.

- Not all adjusting entries are reversed on the first day of the new accounting period.- Ideal entries for reversing are those relating to situation where cash is paid or received in an

adjusting entry.


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Chapter 6

Merchandising Business- revenue activities of this business involve in buying and selling merchandise

- accounting for this business is more complex than for a service business

- buys finished or ready made good or commodities and sells them at a profit

Income Statement for Merchandising

Revenue from Sales arise from sales of goods or merchandise

|Minus

|

Cost Of Goods Sold tells how much the merchandiser paid for goods or merchandise sold

|

Equals

|

Gross Margin/Profit diff. bet. Revenues from sales and cost of goods sold

|

Minus

|

Operating Expense expenses other than cost of goods sold that are incurred in running the business

|

Equals

|

Net Income what left after deducting operating expense from gross margin

SELLER

Invoice is a document prepared by the seller of the merchandise

- If sellers copy, Sales invoice

- If buyers copy, Purchase Invoice

Sales (revenue)- revenue account that is used in recording sales of merchandise whether the sale is made on cash or on

account1. Cash Sales - > Cash-----xx

Sales------xx

2. On Account/Credit - > Accounts Receivable----xx

| Sales-------------------xx

Credit terms

(Agreement of buyer and seller)

Deductions:

1. Sales Returns and Allowances term used in recording whether it is a return or allowance. It is also a contra-

revenue account

Sales Return- return of merchandise if it is defective, of poor quality, or erroneous merchandise hadbeen delivered

Sales Allowance- the customer may also willing to accept the goods despite some defects provided a

reduction in the invoice price

Credit Memorandum- evidence of sales returns

- informs the customer that a credit has been made to his/her account for a sales return

On Account:

Sales Returns and Allowances----xx

Accounts Receivable----------xx

Cash:

Sales Returns and Allowances----xx

Cash------------------------------xx

2. Sales Discount- cash discount

- given by the seller to encourage customer to pay their account early

- is a contra-revenue account

2/10,n/30 --> 2 is the discount rate

10 is the discount period

n/30 is the credit period

2/10,n/30 is the credit term


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On Account:

If collected with discount:

Cash--------------xx

Sales Discount--xx

AR--------------------xx

If collected with no discount:

Cash----------xx

AR---------------xx

BUYER

2 inventory system used for inventories

1. Periodic the count of physical inventory takes place periodically, usually at the end of the acctg. Period, and no

detailed records of physical inventory on hand are maintained during the period.

- Used by merchandising companies with low value items of inventory

Purchases the account title used in this inventory system whenever the company buys merchandise

2. Perpetual- provides detailed records of the quantity and cost of each item of inventory and continuously shows the

cost of goods on hand

- Used by companies that sell high-unit value items such as automobiles, computers, stereo, etc.

Merchandise Inventory- the account title used in this inventory system in all aspects.

Cost of Goods Sold- when the item is sold

Purchases (Expense)-used only for merchandise purchased for sale

1. Cash Purchases

Purchases-----xx

Cash-------------xx

2. On account

Purchases-----xx

AP-----------------xx

Deductions:

1. Purchase Returns and Allowances- from the buyers POV, the returns and allowances on goods purchased

- is a contra account whose normal balance is credit.

Debit Memorandum- evidence that the purchase is returned

- This is will inform the seller that a debit has been made to the purchasers AP

Cash:

Cash-----------------------------------------xx

Purchase Returns and Allowances--------xx

On Account:

Accounts Payable-------------------------xx

Purchase Returns and Allowances--------xx

2. Purchase Discount- cash discount

- to encourage customer to pay their account early, from the POV of the seller

- is a contra account

If paid with discount:

Accounts Payable------------xx

Cash--------------------------------xx

Purchase Discount--------------xx

If paid with no discount:

Accounts Payable--------------xx

Cash--------------------------------xx

Trade Discounts- given to customer so that they will buy more merchandise

- is a percentage reduction from published list price, may be granted to certain customers such as

dealers or whole salers for buying frequently and in large quantities

List Price- the original or the listed price

Chain Discount- series of trade discount

Sales price/invoice price- List price trade discount

Transportation Cost


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FOB Shipping Point- the term means free on board at shipping point. The buyer agreed to shoulder all

transportation cost

Freight In-----------xx

Cash-------------------xx

Freight In used to record freight costs incurred by the buyer in acquiring the merchandise

- it is an Adjunct Account

FOB Destination- the term means free on board at destination. The seller to agreed to shoulder all the

transportation cost

Freight Out-------xxCash----------------xx

Freight Out used to record shipping costs shouldered by the seller for sales of merchandise to

customer. Also called Delivery Expense

Freight Prepaid- when the seller pays the transportation cost at time of shipping

Freight Collect- when the buyer pays the transportation cost at the place of destination

Merchandise Inventory (Asset)- goods in hand and available for sale

Cost of Goods Sold- refers to the cost of merchandise sold to customers during an accounting period. Represents the

largest single deduction in a companys income statement

Chapter 7

Uncollectible Accounts/Doubtful Account/Bad Debts Expense

- is an operating expenses incurred because of failure to collect receivables

- reasons why an account or a note becomes uncollectible are bankruptcy of the debtor, discontinuance of the

debtors business, disappearance of the debtor, failure of repeated attempts to collect and the barring collection

by the statute of worthlessness of the receivables and RIP

2 Methods of accounting for receivables thought to be uncollected

1. Direct Write-off Method used by small businesses who sell most of its merchandise or services on cash basis

- a way of accounting for uncollectible accounts receivable in which identified uncollectible

accounts are charged directly to an expense account

Bad Debts Expense-----xxAccounts Receivable------xx

2. Allowance/Reserved Method- recording bad debts adheres to these principles by making provision for bad debts

expense in advance of the time when the debts are identified as being uncollectible

- the method of accounting for uncollectible account that prepares adjusting entry to

take up provision for bad debts.

Allowance for Bad Debts- is a contra-asset account that is deducted from the balance of the accounts

receivable at the end of the period

In writing-off uncollectible in allowance method:

Bad debts accounts-----xxAccounts Receivable------xx

To Prepare AJE

1. AJE: Bad Debts Expense----------xx

Allowance for Bad Debts----xx

2. Compute: Provision for bad debts

2 ways in estimating bad debts based in the AR balance

1. Percentage of Accounts Receivable Method/Single Rate

-under this method, a single rate is multiplied by the total outstanding accounts receivable and the

product represents the estimated uncollectible account or the required balance

- a method of determining the size of allowance for doubtful accounts by basing the calculations on

accounts receivable balance at the end of the period

Debit balance in the Allowance for bad debts- Add

Credit balance in the Allowance for bad debts- Deduct

2. Aging of Accounts Receivable Method

-is the process of listing each accounts receivable according to the due date of the account

- a means of classifying accounts receivable according to their age, used to determine the balance in

allowance of doubtful accounts


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Aging Schedule- prepared by classifying each receivable by its due date. Completed by adding

the columns to determine the total amount of receivables in each age class

8 column Worksheet is needed in merchandising consisting of trial balance, adjustments, income statement and

balance sheet

Financial Statements

Income Statement- reports sales, cost of merchandise sold and gross profit.

2 Formats of Income Statement

1. Function of Expense or Multiple-step income statement

Net Sales P xxx

Cost of Sales (xxx)

---------

Gross Profit P xxx

Other Income xxx

Distribution Cost (xxx)

Administrative Expense (xxx)

Other Expenses (xxx)

Finance Costs (xxx)

---------

Net Income P xxx

---------

---------

2. Nature of Expense

Net Sales P xxx

Other Income xxx

----------

Total Revenue P xxx

Charges in Merchandise Invty. (xxx)Net Purchases (xxx)

Operating Expenses (xxx)

Finance Costs (xxx)

-----------

Net Income P xxx

-----------

-----------

Sales- is the principal source of income of a merchandising business

Net Sales- computed by deducting the contra-revenue accounts from gross sales

= Sales Sales Returns and Allowance Sales Discounts

Cost of Goods Sold- principal source of expense in the merchandising business= Total Cost of Goods Available for Sale Ending Merchandise Inventory

Total Cost of Goods Available for Sale= Beginning Merchandise Inventory + Net Purchases

Gross Profit= Net Sales Cost of Goods Sold

Other Income or non-operating revenue- revenues not related to the sale of product or merchandise or services

regularly offered for sale by a business

Operating Expense- expenses other than cost of goods sold

= Selling Expense + General Administrative Expense

Selling Expense- expenses directly related to the selling activity of the business

General and Administrative Expenses- expenses incurred in the general operations of the business

Other Operating Expenses/Finance Cost- expenses not directly related to the general operations of the business.

Example is the interest expense incurred on borrowing made by business

Net Income= (Gross Profit + Other Income) (Total Operating Expense + Finance Cost)


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Chapter 8

Special Journal- It records a particular type of transaction that occurs frequently

- are designed to systematize the recording of major recurring type of transactions

Advantages of using Special Journals

1 It saves time in journalizing

2. It saves time in posting

3. It eliminates the detail from the general ledger4. It provides division of labor

5. It aids in management analysis

4 Special Journal

1. Sales Journal (SJ)- used only for sales in credit

Consists of the ff.:

-Date

-Invoice number (Inv.no.)- simply provides documentation that sale actually occurred

- Accounts debited- the customers name in order to know the subsidiary ledger account affected

-Post Reference- a check mark is place to indicate that the amount of the sale has been posted to the

customers subsidiary ledger

-Accounts Receivable-Dr. Sales- Cr.

2. Cash Receipts Journal (CRJ)- is used for all transactions involving receipt of cash by the business. The most frequently

type of cash transaction is cash sales and collections on account receivable.

- Cash Inflows


-Date

-Accounts Credited

-Post Reference

-Sundry Accounts- Cr. provided for miscellaneous accounts which do not occur with enough frequency

to warrant special journal

-Sales- Cr.

-Accounts Receivable- Cr.-Sales Discount- Dr.

-Cash- Dr.

3. Purchases Journal (PJ)- is designed to accommodate the recording of everything purchased on account

- used to record all purchases of merchandise and other items on account


-Date

-Accounts Credited

-Post Reference

-Accounts Payable-Cr.

-Purchases- Dr.

-Store Supplies- Dr.-Office Supplies- Dr.

-Sundry Accounts

-Account titles

-P/R

-Amount

4. Cash Disbursement Journal (CDJ)- used to record all transactions involving payments of cash for various purposes

- Cash Outflow


-Date

-Check no.

-Accounts Debited

-Post Reference

-Sundry Accounts- Dr.

-Accounts Payable- Dr.

-Purchase Discount- Cr.

-Cash- Cr.

Control Account- is an account in the general ledger that shows all the total balance of the subsidiary accounts related

to it

Subsidiary ledger accounts- shows the details supporting the related general ledger control account balance. These

accounts are normally arranged alphabetically by the name of the customer or supplier


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- Is a group of related accounts showing the details of the balance of a general ledger account

Schedule of accounts receivable and accounts payable- prepared to ensure that the total balances in the subsidiary

ledger account agrees with the control account

-merely listing of open account balances

Chapter 10

Internal Control- encompasses the policies and the procedures use to safeguard assets, ensure accurate business

information, and ensure compliance with laws and regulation

Employee Fraud- is the intentional act of deceiving an employer for personal gain

Elements of Internal Control

1. Control Environment- is the overall attitude management and employees about the importance of controls

a. Managements Philosophy and Operating style- relates whether management emphasizes the

importance of internal controls

b. Businesss personnel policies- involve the hiring, training, evaluation, compensation, and promotion

of employees

c. Companys organizational structure

2. Risk Assessment- all business face risk such as changes in customer requirements, competitive threats, regulatory

changes and changes in economic factors. Management should identify such risks

3. Control Procedures- provides reasonable assurance that business goals will be achieved, including preventing of fraud

a. Competent Personnel, Rotating Duties and Mandatory Vacations

b. Separating Responsibilities for Related Operations

c. Separating Operation, Custody of Assets and Accounting

d. Proofs and Security Measures

Proofs- involve procedures such as authorization, approval, and reconciliation

security Measures- involves measures to safeguard assets

4. Monitoring- used to locate weaknesses and improve control

- includes observing employee behavior and the accounting system for indicators of control problems

5. Information and Communication

Cash- includes coins, currency (paper money), checks and money orders

- is the most liquid asset and most likely to be stolen or used improperly in a business

Cash Register- control cash and important control to protect cash received in over-the-counter sales

Change Fund- the amount used for making change for customers

Cash short and over account- account use in the difference bet. Cash on hand and the amount of cash sales

Voucher System- is a set of procedures for authorizing and recording liabilities and cash payments

2 files maintained in the system

1. Unpaid Voucher File- contains all vouchers that has been prepared and approved as proper liabilities but havenot yet been paid

2. Paid Voucher File- contains all voucher that have been paid

Supporting documents needed:

a. Purchase Requisition- is a written request from an employee inside the company to the purchasing

dept. to purchase certain items

b. Purchase Order- document sent from the purchasing dept. to a supplier requesting that merchandise

of other items be shipped to the purchaser

c. Invoice- the bill sent from the supplier to the purchaser requesting payment for the merchandise

shipped

d. Receiving Report- document prepared by the receiving dept. showing the description and quantities

of items received from a supplier in a particular shipment

Voucher- is any document that serves as proof of authority to pay cash

- An invoice that has been approved for payment could be considered as a voucher

- normally prepared after all necessary supporting documents have been received

Bank Account- reduce amounts of cash on hand

- provide an independent recording of cash transactions

Bank Statement- record of all checking account transactions

-summary of all transaction and is mailed to the company


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Reconciling Items

1. Deposit in transit- is typically a days cash receipts recorder in the depositors book in one period but recorded as a

deposit by the bank in the succeeding bank period

2. Outstanding checks- checks issued by a depositor that has not been presented to the bank for payment

3. Services charges- amounts deducted by bank to cover the costs of handling the checking account

4. NSF Check- No Sufficient Fund Check

- Customers check returned by the bank because the customers checking account balance was

insufficient to cover the check

5. Notes collected by bank- represent proceeds of note collected by the bank for the depositor

6. Book error- depositors errors made in writing amounts in cash book

7. Bank error- banks error in writing the amounts of deposits and withdrawals

Bank Book

a. Deposit in transit +

b. Outstanding Check -

c. Services Charges (debit memo) -

d. NSF check -

e. Notes collected by bank (credit memo) +

f. Book errors

g. Bank errors

Bank Reconciliation- is an analysis of the items and amounts that result in the cash balance reported in the bank

statement to differ from the balance of the cash account in the ledger

Certified Check- is a check written, or drawn by a depositor and taken to the depositors bank for certification

Cashiers Check- is a check drawn by a bank made out to either the depositor or a third party after deducting the

amount of the check from the depositors account or receiving cash from the depositor

Petty Cash Fund- is a fund set aside to have small amounts of cash available for immediate payment of items

Petty cash custodian/cashier- the one who is responsible for the operation of the fund which includes the control of the

petty cash and documenting the disbursements made from the fund

Petty cash voucher- prepared by the cashier when there is a need to disburse cash from the fundVoucher register- is a multicolumn special journal. It contains a record of all voucher prepared, listed in order by date

and voucher number

Check register- is a special journal showing all check issued, listed by date and check number.