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SUMMARY OF
LESSONS IN
FINANCIAL
ACCOUNTING
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UNANG ARALIN: Ano Ba Ang Accounting?

 
DEFINITION OF ACCOUNTING 

According to IRFS, accounting is a service activity. Its function is to

provide quantitative information, primarily financial in nature about economic
entities that is intended to be useful in making economic decisions in
making reasoned choices among alternative courses of actions.
 
 
SERVICE 
 doing something for others 
QUANTITATIVE 
is something: 
 relating to numbers or amounts. 
 relating to an amount that can be measured.
 related to information that can be shown in numbers. 
INFORMATION 
 the communication or reception of knowledge or intelligence 
 the knowledge obtained from investigation, study, or instruction facts, data 
FINANCIAL 
 usually refers to money matters 
ECONOMIC 
 means something concerned with the organization of the money industry
and trade 
 it is the way or manner in sustaining a living. 
REASONED CHOICE 
 is based on careful thought, rather than on an appeal to one's emotions 

 
BASIC FINANCIAL STATEMENTS PRODUCED BY ACCOUNTING SYSTEM  

Income Statement 
 a report on how much money the company has made 
Capital Statement or Statement of Changes in Capital  
 changes in capital/investment 
 if the capital has increased or decreased 
Balance Sheet or Statement of Financial Position  
 how much of the business property is financed  by debt or by
investment/capital? 
Statement of Cashflow or Cashflow Statement 
 In accrual basis:  
 Converts income earned on an accrual basis into income earned on a
cash basis. 
 How much money does the company actually
make on a cash basis?  *NOTE
 What happened to the proceeds of the sale? 
 How did the business handle the money?  Formerly, the Statement of
Cashflow was not required
because income could be
calculated on a cash basis
(only when cash is
received, it will be
recorded) 
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TYPES OF BUSINESS 

SERVICE 
 Provides service to customers and clients 
MERCHANDISING 
 Also called as a trading business 
 Buy goods in salable form and sell to customers in higher amount 
 Retailing & wholesaling 
MANUFACTURING 
 Buys raw materials to create a new product before selling to the customer 

PURPOSE OF ACCOUNTING 

The purpose of accounting is to provide quantitative information which are translated

or presented into financial statements. 

*NOTE

 Purpose of Providing Quantitative Information is for the government actually

owns our properties. And as a result, there is a tax because the property is only
"borrowed." 
 It will be shown on the income statement.

Common users of financial statements and the reasons why they need this
information: 

Company The management team needs to understand the profitability, liquidity, and
management  cash flows of the organization every month, so that it can make operational
and financial decisions about the business. 
 The owner himself/herself 
 The report card of the business 

Customers   When a customer is considering which supplier to select for a major

contract, it wants to review their financial statements first, in order to judge
the financial ability of a supplier to remain in business long enough to
provide the goods or services mandated in the contract. 
 Long-term supplier 

Employees   A company may elect to provide its financial statements to employees,

along with a detailed explanation of what the documents contain. This can
be used to increase the level if employee involvement in and understanding
the business. 
 For them to be aware of the company's standing 
 To determine whether or not the company is already
losing money 
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Government   A government in whose jurisdiction a company is located will request

financial statements in order to determine whether the business paid the
appropriate amount of taxes. 

Investment Outside analysts wants to see financial statements in order to decide

Analysts  whether they should recommend the company's securities to the clients. 
Investors   Investors will likely require financial statements to be provided, since they
are the owners of the business, and want to understand the performance of
their investment. 

Lenders   An entity loaning money to an organization will require financial

statements in order to estimate the ability of the borrower to pay back all
loaned and related interest charges. 

Rating A credit rating agency will need to review the financial statements in order
agencies  to give a credit rating to the company as a whole or to its securities. 

Suppliers   Suppliers will require financial statements in order to decide whether it is

safe to extend credit to a company. 

Unions   A union needs the financial statements in order to evaluate the ability of a
business to pay compensation and benefits to the union members that it
represents. 

Competitors   Entities competing against a business will attempt to gain access to its
financial statements, in order to evaluate its financial condition. The
knowledge they gain could alter their competitive strategies. 
 

THREE PERSONS OR ENTITIES IN THE WORLD OF COMMERCE 

Entities or entity 
 Something that exists apart from other things, having its own independent
existence. 
A person, partnership, organization (corporation), or business 
 That has a legal and separated identifiable existence. 
 Economic beings 
o Sole proprietorship - owned by one person, and its equity would
typically consist of a single owner's capital account.  
o Partnership - owned by more than one person, with its equity
consisting of a separate capital account for each partner. 
o Corporation - a very common entity form, with its ownership interest
being represented by divisible units of ownership called shares of
stock. Corporate shares are easily transferable, with the current
holder(s) of the stock being the owner.  

PROCEDURE OF REGISTERING A BUSINESS 

 
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IKALAWANG ARALIN: Kasaysayan ng Accounting at Pangkalahatang

Pamantanyan ng Accounting

HISTORY OF ACCOUNTING  

The first name that might come to mind when referencing early accounting
history is Fra Luca Bartolomeo de Pacioli, an Italian mathematician, Franciscan friar,
collaborator with Leonardo da Vinci, who described double-entry bookkeeping in his
“Summa de Arithmetica, Geometria, Proportioni et Proportionalita”  in 1494. While
that may sound like a long time ago, accounting may have roots that *NOTE
trace back even earlier. Accounting has been around for centuries. It’s
a critical part of the business, record-keeping, and life in general. Friar Luca Pacioli is
considered as “Father of
Double-entry
The earliest accounting records were found over 7,000 years Bookkeeping”. However,
he isn’t the one who
ago among the ruins of Ancient Mesopotamia. At the time, people relied invented the system.
on accounting to keep a record of crop and herd growth. They used
accounting techniques that are still used today to determine if there was
a surplus or shortage after crops were harvested each season. The first
record of accounting that occurred thousands of years ago in Mesopotamia has
evolved into the intricate element of business and life that it is today.   
ACCOUNTING HISTORY DURING THE ROMAN EMPIRE  

  During the reign of the Roman Empire, accounting continued to evolve much
further. “The Deeds of the Divine Augustus” is an account of Emperor Augustus’
financial dealings. It listed such quantities as distributions to the people, grants of
land, building of temples, money to military veterans, religious offerings, and money
spent on theatrical shows and gladiator events. This discovery hints at the scope of
accounting information available to the emperor, which he then probably used for
planning and decision-making purposes. Roman historians also recorded public
revenues, the amount of money in the state treasury, taxes, slaves, freedmen, and
more. Fra. Luca Pacioli’s Contribution to the Accounting Profession  
In1494, Pacioli wroteSummade Arithmetica, Geometria, Proportioni et Proport
ionalita, which included a twenty-seven-page treatise on bookkeeping
titled, Particularis de Computis et Scripturis (Details of Calculation and
Recording) on the subjects of record keeping
and doubleentry accounting. Pacioli’s book became the reference text and teaching
tool on the subjects of bookkeeping and accounting for the next several hundred
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years. This was the first time that symbols for plus and minus appeared in a printed
book. This book was the first known published work on the topic of double-entry
bookkeeping.

ACCOUNTING DURING THE MIDDLE AGES  

  During the Middle Ages, bartering was the primary form of money-changing, but
when Europe changed to a monetary economy is the 13th Century, merchants
began relying on bookkeeping to keep a record of multiple transactions. This is when
double-entry bookkeeping got its start, which is when a debit and credit value is
entered for each transaction by the accountant. Merchants at the time used
accounting as a new recording system. It provided them with constant information
about their businesses that they could use in decision-making to grow their business
as they saw fit. This laid the foundation of how we use and understand accounting
today.  
 
ACCOUNTING SYSTEMS IN TODAY’S GENERATION  

 Nowadays, there are accounting standards, auditing regulations, and ethical

standards for accountants to follow. Along with this standard is the advancement in
technology and accounting has gone through many changes throughout the ages.
Through all the changes, accounting technology has always played a part in making
the accountant’s job just a little easier. As people’s knowledge of technology
increased so has the accountant’s ability to analyze statistical values.  
Accountants were pushed towards acquiring new skills due to the
advancements that information technology has made on the accounting industry.
Accountants now have to have a high level of computer and technical skills. These
skills have become part of the knowledge, and abilities of the accounting
professionals. In its report the American Institute of Certified Public Accounts
(AICPA) cites that, “The knowledge, skills and abilities necessary for the entry-level
accountant now include the application and integration of information technology into
the accounting process, as well as financial and managerial accounting principles”
(Dillon, Kruck, 2004) 

ACCOUNTING STANDARDS IN
THE WORLD AND IN THE
PHILIPPINES  

Financial statements have

incredible importance for both
internal and external stakeholders.
They basically are a report card for
the company; hence, it is important
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that they are regulated and do not report misleading information.  Accounting

standards are exceedingly useful because they attempt to standardize and regulate
accounting definitions, assumptions, and methods. Because of generally accepted
accounting standards we are able to assume that there is consistency from year to
year in the methods used to prepare a company's financial statements. And although
variations may exist, we can make reasonably confident conclusions when
comparing one company to another or comparing one company's financial statistics
to the statistics for its industry. Over the years the accounting standards have
become more complex because financial transactions have become more complex. 

*NOTE

THE PHILIPPINE FINANCIAL REPORTING The first accounting standards

STANDARD  used in the Philippines were the
Generally Accepted Accounting
1. Economic Entity Assumption   Principles of the US.
  
The accountant keeps all the business transactions of a sole proprietorship
separate from the business owner's personal transactions. For legal
purposes, a sole proprietorship and its owner are considered to be one
entity, but for accounting purposes they are considered to be two separate
entities.  
 
2. Monetary Unit Assumption  

In the Philippines economic activity is measured in Philippine pesos, and

only transactions that can be expressed in Philippine pesos are recorded.  
Because of this basic accounting principle, it is assumed that the peso's
purchasing power has not changed over time. As a result, accountants
ignore the effect of inflation on recorded amounts. For example, pesos from
a 1960 transaction are combined (or shown) with pesos from a 2019
transaction.  
 
3. Time Period Assumption  
  
This accounting principle assumes that it is possible to report the complex
and ongoing activities of a business in relatively short, distinct time intervals
such as the five months ended May 31, 2019, or the 5 weeks ended May 1,
2019. The shorter the time interval, the more likely the need for the
accountant to estimate amounts relevant to that period. For example, the
property tax bill is received on December 15 of each year. On the income
statement for the year ended December 31, 2018, the amount is known;
but for the income statement for the three months ended March 31, 2019,
the amount was not known, and an estimate had to be used.  
It is imperative that the time interval (or period of time) be shown in the
heading of each income statement, statement of owner’s/stockholders'
equity, and statement of cash flows. Labeling one of these financial
statements with "December 31" is not good enough–the reader needs to
know if the statement covers the one week ended December 31, 2019 the
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month ended December 31, 2019 the three months ended December 31,
2019 or the year ended December 31, 2019. 
 

4. Cost Principle  
  
From an accountant's point of view, the term "cost" refers to the amount
spent (cash or the cash equivalent) when an item was originally obtained,
whether that purchase happened last year or thirty years ago. For this
reason, the amounts shown on financial statements are referred to as
historical cost amounts.  
Because of this accounting principle asset amounts are not adjusted
upward for inflation. In fact, as a general rule, asset amounts are not
adjusted to reflect any type of increase in value. Hence, an asset amount
does not reflect the amount of money a company would receive if it were to
sell the asset at today's market value. (An exception is certain investments
in stocks and bonds that are actively traded on a stock exchange.) If you
want to know the current value of a company's long-term assets, you will
not get this information from a company's financial statements–you need to
look elsewhere, perhaps to a third-party appraiser.  
 
5. Full Disclosure Principle  
  
If certain information is important to an investor or lender using the financial
statements, that information should be disclosed within the statement or in
the notes to the statement. It is because of this basic accounting principle
that numerous pages of "footnotes" are often attached to financial
statements.  
For example, the company is named in a lawsuit that demands a significant
amount of money. When the financial statements are prepared it is not
clear whether the company will be able to defend itself or whether it might
lose the case. As a result of these conditions and because of the full
disclosure principle the lawsuit will be described in the notes to the financial
statements.  
In compliance with this full disclosure principle, a business usually lists its
significant accounting policies as the first note to its financial statements.  
 
6. Going Concern Principle  
  
This accounting principle assumes that a business will continue to exist
long enough to carry out its objectives and commitments and will not
liquidate in the foreseeable future. If the business' financial situation is such
that the accountant believes that it will not be able to continue on, the
accountant is required to disclose this assessment.  
The going concern principle allows the business to defer some of its
prepaid expenses until future accounting periods.  
 
7. Going Concern Principle  
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This accounting principle assumes that a business will continue to exist
long enough to carry out its objectives and commitments and will not
liquidate in the foreseeable future. If the business' financial situation is such
that the accountant believes that it will not be able to continue on, the
accountant is required to disclose this assessment.  
The going concern principle allows the business to defer some of its
prepaid expenses until future accounting periods.  

8. Revenue Recognition Principle  

  
Under the accrual basis of accounting (as opposed to the cash basis of
accounting), revenues are recognized as soon as a product has been sold
or a service has been performed, regardless of when the money is actually
received. Under this basic accounting principle, a company could earn and
report P1,000,000 of revenue in its first month of operation but receive P0
in actual cash in that month.  
For example, if ABC Company completes its service at an agreed price of
P50,000, ABC should recognize P50,000 of revenue as soon as its work is
done—it does not matter whether the client pays the P50,000 immediately
or in 30 days. Do not confuse revenue with a cash receipt.
 
9. Materiality  
  
Because of this basic accounting principle or guideline, an accountant
might be allowed to violate another accounting principle if an amount is
insignificant. Professional judgement is needed to decide whether an
amount is insignificant or immaterial.  
An example of an obviously immaterial item is the
purchase of a 7,500 printer by a highly profitable multi- *NOTE
million-peso company. Because the printer will be used for
five years, the matching principle directs the accountant to Because of materiality,
financial statements usually
expense the cost over the five-year period. The materiality show amounts rounded to
guideline allows this company to violate the matching the nearest hundred, to the
principle and to expense the entire cost of 7,500 in the nearest thousand, or to the
year it is purchased. The justification is that no one would nearest million pesos
consider it misleading if 7,500 is expensed in the first year depending on the size of
the company.  
instead of 1,500 being expensed in each of the five years
that it is used.  
 
10. Conservatism  
  
If a situation arises where there are two acceptable alternatives for
reporting an item, conservatism directs the accountant to choose the
alternative that will result in less net income and/or less asset amount.
Conservatism helps the accountant to "break a tie." It does not direct
accountants to be conservative. Accountants are expected to be unbiased
and objective.  
The basic accounting principle of conservatism leads accountants to
anticipate or disclose losses, but it does not allow a similar action for gains.
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For example, potential losses from lawsuits will be reported on the financial
statements or in the notes, but potential gains will not be reported. Also, an
accountant may write inventory down to an amount that is lower than the
original cost but will not write inventory up to an amount higher than the
original cost. Accounting Standards in the World and in the Philippines  ,
Financial statements have incredible importance for both internal
and external stakeholders. They basically are a report card for the
company; hence, it is important that they are regulated and do not report
misleading information.   

Accounting standards are exceedingly useful because they attempt

to standardize and regulate accounting definitions, assumptions, and
methods. Because of generally accepted accounting standards we are able
to assume that there is consistency from year to year in the methods used
to prepare a company's financial statements. And although variations may
exist, we can make reasonably confident conclusions when comparing one
company to another, or comparing one company's financial statistics to the
statistics for its industry. Over the years the accounting standards have
become more complex because financial transactions have become more
complex.  
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PANGATLONG ARALIN: Ang Pangunahing Panatayan ng Accounting (The Basic

Accounting Equation)
 

THE BASIC ACCOUNTING EQUATION 

ASSETS= LIABILITIES + OWNER’S EQUITY/CAPITAL 

 The basic features of the accounting model in use today trace roots back over
500 years. Luca Pacioli, a Renaissance-era monk, developed a method for tracking
the success and failure of trading ventures.  
 The central part of accounting system is the notion that a business entity can
be described as a collection of assets and the corresponding claims against those
assets. The claims can be divided into the claims of creditors and owners (i.e.
liabilities and owner’s equity.  

ASSETS  

are the economic resources of the entity, and include such items as cash,
accounts receivable (amounts owed to a firm by its customers), inventories, land,
buildings, equipment, and even intangible assets like patents and other legal
rights. Assets entail probable future economic benefits to the owner.  

LIABILITIES 

are amounts owed to others relating to loans, extensions of credit, and other

obligations arising in the course of business.  Implicit to the notion of a liability is
the idea of an “existing” obligation to pay or perform some duty.  

OWNER’S EQUITY 

is the owner’s stake in the business. It is sometimes called net assets, because it
is equivalent to assets minus liabilities for a particular business.  
The so-called “owners” depend on the legal form of the entity. Examples of entity
types include sole proprietorships, partnerships, and corporation.  
 
During the operations of the business, the said basic accounting equation expands
into this: 
ASSETS= LIABILITIES + OWNER’S EQUITY/CAPITAL (Beginning Capital +
Additional Investments + Net Income (Revenue – Expenses) –
Drawings) 
 

*NOTE

 Asset, Liabilities and capital are seen in Balance sheet.

 Beginning Capital, Additional Capital, Drawing and Net Income are seen in Capital Statement.
 Revenue and expenses are seen in Income Statement.
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PANG-APAT NA ARALIN: Pangkalahatang Idea sa Proseso ng

Accounting (Overview of the Accounting Process) 
 
STAGES OF THE ACCOUNTING CYCLE 
 
Stage A: Recording of External Transactions or Exchange Transactions. 

1. Analyze the source documents. 

2. Journalize external transactions (Involved outside person — exchange
transactions). 
account.   *NOTE
3. Post to the ledger the journal entries.  There are two types of entry:
• Classification according to account titles.  •Singe journal entry - One debit
account and one credit account. 
4. Balance the ledger accounts and summarize them. 
•Compound journal entry- One or
5. Prepare the unadjusted trial balance.  more debit account and one or more
• List of all ledger account balances of external credit
transactions. 
 
Stage B: Recording of Internal Transactions or Non-exchange
Transactions (Normally do not have source documents)

1. Analyze the unadjusted trial balance. 

2. Journalize internal transactions or adjusting entries.  *NOTE
• Updating journal entries from the beginning up to There are two types of entry system
the end of the accounting period.  in merchandising:
3. Post to the ledger the adjusting journal entries.  • Periodic System (Merchandising) -
Needs adjusting entries. 
4. Balance the ledger accounts and summarize.  • Perpetual System (Merchandising) -
5. Prepare the adjusted trial balance.  No need for adjusting entries. 

Stage C: Preparation of Financial Statements

1. Analyze the adjusted trial balance. 

2. Prepare the income statement. 
3. Prepare the capital statement. 
4. Prepare the balance sheet. 
5. Prepare the cash flow statements. 
• Analyze the cash ledger to create a statement of cash flow. 
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Stage D: Recording of Closing Entries 

All debit accounts will be transferred to credit accounts vice versa using the income
summary account. An income summary account is like a clearing account and only
use in closing entries.
*NOTE
1. Analyze the income and capital statements.  Income summary is not part of
2. Journalize the closing entries.  financial statement but part of the
• Accounts to be closed: Revenue, Expense, and closing process. Its purpose is to
Drawing (Drawing account will be close by deducting determine the net income. 
the capital account — Dr. Capital account Cr.
Drawing account). 
3. Post the closing entries to the ledger. 
4. Balance the ledger and summarize the accounts. 
5. Prepare the post-closing trial balance. 

Stage E: Recording of Reversing Entries 

Preparation for the new accounting period. 

1. Analyze adjusting entries on accruals and deferrals. 
2. Prepare reversing entries on accruals and deferrals using the income and
expense method. 
 
 
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PANG LIMA NA ARALIN: Ano ang Source Document? Anu-Ano

ang Halimbawa Nito 
 
WHAT IS SOURCE DOCUMENT?
 Source of External Transactions 
 An Original record which contains details that support or substantiate
a transaction  
 Once printed in paper, may be electronic recorded nowadays  
 A document that contains transactions modifying the equation:  
ASSETS = LIABILITIES + CAPITAL [BEGINNING CAPITAL + ADDITIONAL
CAPITAL + REVENUE – EXPENSES – DRAWING] 
Examples of Source Documents 
 Cash receipts 
 Credit card receipts 
 Cash register tapes 
 Check copy or stub 
 Customer invoices 
 Supplier invoices 
 Purchase orders 
 Time cards used for payroll 
 Deposit slips 
 Notes for loans 
 Payment Stubs for Interest 

Business Documents 
 Documents that will lead creation of source documents 
 These are documents proving a commercial transaction that has
not affected yet the Assets, Liabilities, and the Capital of the
Business 

Examples of Business Documents 

o Contact of rent without payment and without occupation of them
premises yet 
o Purchase order  
o Sales order 
 
RECORDING OF EXTERNAL TRANSACTIONS 
1. Analyze the source document 
2. Journalize the External Transactions  *NOTE
3. Post in Ledger 
4. Balance the ledger account and summarize  Source Document are the
only documents that need
5. Prepare the Unadjusted Trial Balance 
an entry.
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PROCESS OF ANALYZING A SOURCE DOCUMENT 

CASH ACC. REC.
AFBD SUPPLIES

ASSET PREPAYMENTS
BUILDING
EQUIPMET
ACC. DEP

LAMD

SOURCE ACCOUTS PAYABLE

NOTES PAYABLE
DOCUMENT TRANSACTION LIABILITIES MORTGAGE PAYABLE
UNEARNED REVENUE

OWNER’S CAPITAL
OWNER’S DRAWING
REVENUE
CAPITAL EXPENSE
DEPRECIATION
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PANG-ANIM NA ARALIN: Pag-unawa sa Transaction mula sa Source Document at

Paggamit ng Account Title

WHAT IS TRANSACTION?

Transactions occur for an instance of buying and selling. All the transactions are
important to record to use as a proof.
*NOTE
Transactions can
be found in the
source document.
These are the following transactions:

1. Investment

2. Cash sales

3. Account sales

4. Purchase of supplies

5. Purchase of merchandise

6. Received bills

7. Paid bills

8. Paid rent

9. Paid expenses

10. Acquire loan

ACCOUNTING TRANSACTIONS

 It is the main events of businesses. It brings changes to their assets, liabilities

and equities which reported or recorded to their accounting books.
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Examples of Accounting Transactions:

 Sale in cash to a customer

 Sale on credit to a customer
 Receive cash in payment of an invoice owed by a customer
 Purchased fixed assets from a supplier
 Record the depreciation of a fixed assets overtime
 Purchase consumable supplies from a supplier
 Investment in another business
 Investments in marketable securities
 Engaging in a hedge to mitigate the effects of an unfavorable price change
 Borrow funds from a lender
 Issue a dividend to investors
 Sale of assets to a third party

INTERNAL TRANSACTION WITHOUT SOURCE DOCUMENTS

Internal transactions are those transactions with monetary impact but which no outside
person or organization is involved. It does not relate with two parties nor does it involve
any other second party.

Examples:

 use of supplies
 expired prepayments
 depreciation expense
 bad debts or accounts receivable
 setting up of petty cash fund
 accrual of expenses and income

EXTERNAL TRANSACTIONS WITH SOURCE DOCUMENTS

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The transactions that occur between two persons or two organizations or between a
person and organization in terms of money are called external transactions or business
transactions.

USED ACCOUNTS TITLE FOR JOURNALIZING THE

TRANSACTIONS

*CASH *ACCOUNTS RECEIVABLE

What elements in ASSET *SUPPLIES

*EQUIPMENT
*PREPAYMENTS
*BUILDING *LAND
the accounting *ACCUMULATED DEPRECIATION *ALLOWANCE FOR BAD DEBTS
equation have
been affected by
 ACCOUNTS PAYABLE
the transactions LIABILITIES  NOTES PAYABLE
found in the  MORTGAGE PAYABLE
source  UNEARNED REVENUES
CAPITAL
documents?
CAPITAL *DRAWING *REVENUE
*SUPPLIES EXPENSE *RENT
*UTILITIES *BAD DEBTS
*DEPRECIATION *CAPITAL

PANG PITONG ARALIN: Pagbabago sa Account Titles ayon sa Uri (Types) at Anyo
(Forms) ng Negosyo.

TYPES OF BUSINESS

Service Business

– provides services to clients or customers in exchange for fees.

Operating Cycle: (Process)

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 Seller/Provider of Services buys supplies and materials that needs in

operating the business
 Seller/Provider of Services render services on either cash or account
 Seller/Provider of Services collects payment

Merchandising Business (Trading Business)

– purchase goods from suppliers and sell to customers at a higher price than the
cost.

Operating Cycle: (Process)

 Seller buys merchandise for sale from supplier
oSeller found some problem or defective on the goods for sale bought from
the supplier
oSeller issues a debit memorandum to the supplier
 Seller sells the merchandise for sale on either cash or account
oSale on account may have cash discounts. If the collection/payment is
within the discount period then given cash discounts shall be applied. If the
collection/payment is after the discount period, cash discounts is excluded
which means full payment shall collect/pay.
oBuyer found defective goods, issues debit *NOTE
memorandum. On the other hand, Seller will Types of discount:
receive the memorandum and record it to cancel Purchase Discounts – Cash
the sale of defective merchandise and the payment Discount in the point of view of
the buyer
to it.
Sale Discounts – Cash
 Seller collects payment (if there is defective goods plus Discount in the point of view of
the cash discounts, it will be subtracted from the original the seller
amount of payment)

Manufacturing Business
– buys raw materials to create new product then sell the product to customers.
Operating Cycle: (Process)
 Seller/Manufacturer buys raw materials then converts it into a new product
o Seller/Manufacturer sells the product on either cash or account
o Sale on account may have cash discounts. If the collection/payment is
within the discount period then given cash discounts shall be applied. If
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the collection/payment is after the discount period, cash discounts is

excluded which means full payment shall collect/pay.
o Buyer found defective goods, issues debit memorandum. On the other
hand, Seller will receive the memorandum and record it to cancel the
sale of defective merchandise and the payment to it
o Seller collects payment (if there is defective goods plus the cash
discounts, it will be subtracted from the original amount of payment)

*Note:

In Service Business, it may also have cash

discounts, however, it is very rare. Therefore,
cash discounts may apply usually on
Merchandising and Manufacturing Business

ACCOUNT TITLES BASED ON THE TYPES OF BUSINESS (Sole Proprietorship)

ACCOUNT TITLES SERVICE MERCHANDISING MANUFACTURING

BUSINESS BUSINESS BUSINESS
ASSETS
Cash ✓ ✓ ✓
Accounts Receivable ✓ ✓ ✓
Supplies ✓ ✓ ✓
Prepaid Assets ✓ ✓ ✓
Land ✓ ✓ ✓
Equipment ✓ ✓ ✓
Building ✓ ✓ ✓
Merchandise ✓
Inventory
Raw Materials ✓
Inventory
Work-In Process ✓
Inventory
Finished Goods ✓
LIABILITIES
Accounts Payable ✓ ✓ ✓
Notes Payable ✓ ✓ ✓
Mortgage Payable ✓ ✓ ✓
Expenses Payable ✓ ✓ ✓
Unearned Revenue ✓ ✓ ✓
CAPITAL
Owner’s Capital ✓ ✓ ✓
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Owner’s Drawing ✓ ✓ ✓
REVENUE
Service Revenue ✓
Sales ✓ ✓
Sales Return and ✓ ✓
Allowances
Sales Discount ✓ ✓
EXPENSES
Supplies Expense ✓ ✓ ✓
Rent Expense ✓ ✓ ✓
Utilities Expense ✓ ✓ ✓
Insurance Expense ✓ ✓ ✓
Salaries Expense ✓ ✓ ✓
Interest Expense ✓ ✓ ✓
Depreciation ✓ ✓ ✓
Expense
Advertising Expense ✓ ✓ ✓
Bad Debts Expense ✓ ✓ ✓
Miscellaneous ✓ ✓ ✓
Expense
Purchases ✓ ✓
Freight-In ✓ ✓
(Transportation
Expense that
shoulders by buyer)
Freight-Out ✓ ✓
(Transportation
Expense that
shoulders by seller)
Merchandise ✓ ✓
Inventory
Cost of Goods Sold ✓ ✓
Factory Overhead ✓
Direct Labor ✓
Indirect Labor ✓
Direct Materials ✓
Indirect Materials ✓

FORMS OF BUSINESS
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 Sole Proprietorship – a business that has only one owner.

 Partnership – a business that is associated of two or more persons who bind
themselves to contribute money, property or industry and divide profits among
themselves.
 Corporation – a business that is operated by law.

CAPITAL ACCOUNT TITLES BASED ON THE FORMS OF BUSINESS

Sole Proprietorship

 there is only one capital and one drawing accounts

Partnership

 there are two or more capitals and drawing accounts as how many partners
there are in the business.

Corporation

 has a separate book for the names of stockholders, the only account titles that
will be written in the Statement of Owner’s Equity are the following: Capital
Stock, Additional Paid-In Capitals, Treasury Stock, Retained Earnings, and
Dividends.

*Note:
PANG WALONG The forms of business only varies In the financial statement of ‘Statement of
ARALIN: Kahulugan
Changes in Owner’s Equity. The rest of the financial statements have the same
(Definition) ng mga
Iba’t Ibang Account account titles depending on the types of business*
Titles

ACCOUNT TITLES

These are the names or titles used to sort, record and store transactions.
 2

ACCOUNT TITLES COMMONLY USED IN BUSINESS *Note:

Partnership and Sole Proprietorship
have the same accounts title

ACCOUNT TITLES DESCRIPTION/ EXPLANATION OF ACCOUNT

ASSETS

Cash Checking account balance currency, coins, checks received from

customers but not yet deposited.
Accounts Receivable Amounts owed to the company for service performed or products
sold but not yet paid for.
Merchandise inventory Cost of merchandise purchased but not yet been sold.

Raw Materials The total cost of component parts currently in stock that have not
yet been used in work-in-process or finished goods production.
 Direct Materials
 Indirect materials
Work-in Process Refers to the raw materials, labor and overhead cost incurred for
Inventory products that are at various stages of the production Process
Finished Goods The products in a manufacturer’s inventory that are completed
Inventory and are waiting to be sold.
Supplies Cost of supplies that have not yet been used.

Prepaid Insurance Cost of insurance that is paid in advance and includes a future
accounting period.
Equipment Cost to acquire and prepare equipment for use by the company.

Accumulated Amount of equipment’s cost that has been allocated to

Depreciation - Depreciation Expense since the time the equipment was
Equipment acquired.
Buildings Cost to purchase or construct buildings for use by the company.

Accumulated Amount of buildings’ cost that has been allocated to Depreciation

Depreciation – Buildings Expense since the time the building was acquired.
Land Cost to acquire and prepare land for use by the company.

LIABILITIES
Notes Payable Amount principal due on a formal written promise to pay.

Accounts Payable Amount owed to suppliers who provided goods and service to the
company but did not require immediate payment in cash.
 2

Wages Payable Amount owed to employees for hours worked but not yet paid.

Interest Payable Amount owed for the interest on Notes Payable up until the date
of the balance sheet.
Mortgage Loan Payable A formal loan that involves a lien on real estate until the loan is
repaid.
Unearned Revenue Amounts received in advance of delivering goods or providing
services.
REVENUE FOR SERVICE BUSINESS
Service Revenue Amounts earned from providing services to clients, either for
cash or on credit.
REVENUE ACCOUNTS FOR MERCHANDISING AND MANUFACTURING BUSINESS
Sales It contains the record of all sales transactions. This includes both
cash and credit sales.
Sales Return and A contra revenue account that reports
Allowances 1. Merchandise returned by a customer, and
2. The allowances granted to a customer because the seller
shipped improper or defective merchandise.
Sales Discounts A sales discount is a reduction in the price of a product or service
that is offered by the seller, in exchange for early payment by the
buyer.
EXPENSES
Salaries Expense Expenses incurred for the work performed by salaried employees
during the accounting period. Normally receive a fixed amount on
a weekly, month or annual basis.
Wages Expense Expenses incurred for the work performed by non-salaried
employees during the accounting period. Normally receive an
hourly rate of pay.
Rent Expense Cost of occupying rented facilities during the accounting period.

Utilities Expense Cost for heat, water and sewer that were used during the
accounting period.
Telephone Expense Cost of telephone used during the accounting period.

Advertising Expense Cost incurred by the company during the accounting period for
ads, promotions and other selling and expenses.
Depreciation Expense Cost of long-term assets allocated to expense during the current
accounting period.
Supplies Expense Cost of supplies used up during the accounting period.

EXPENSE ACCOUNTS FOR MERCHANDISING AND MANUFACTURING BUSINESS

Purchases A temporary account used in the periodic inventory system to
record the purchases of merchandise for resale.
 2

Cost of Goods Sold Refers to the direct costs attributable to the procurement or
production of the goods sold by the business.
Purchase Returns and The temporary contra purchases account used in a periodic
Allowances inventory system which represents the amounts of merchandise
that were returned to the suppliers and the amounts allowed as
deductions by the suppliers for goods not returned.
Purchase Discounts A deduction that a company may receive if the supplier offers it
and the company pays the supplier’s invoice within a specified
period of time.
Freight – In The shipping cost to be paid by the buyer of merchandise
purchased when the terms are FOB shipping point.
NON – OPERATING REVENUE AND EXPENSES ACCOUNTS

Interest Revenues Interest and dividends earned on bank accounts, investments or

notes receivable.
Gain on Sale of Assets Occurs when the company sells one of its assets for more than
the asset’s book value
Loss on Sale of Assets Occurs when the company sells one of its assets for less than
the asset’s book value
CAPITAL SOLE PROPRIETORSHIP
Owner’s, Capital Amount the owner invested in the company.

Owner’s, Drawing Amount that the owner has withdrawn for personal use.

CAPITAL PARTNERSHIP
A, Capital Amount the owner invested in the company.
B, Capital
A, Drawing Amount that the owner has withdrawn for personal use.
B, Drawing

CAPITAL CORPORATION

Capital Stock Capital stock is the number of common and preferred shares that
a company is authorized to issue, according to its corporate
charter.
Treasury stock The number of shares a company holds in its treasury.
Essentially capital stock that has been bought back or never was
issued to the public.
Additional Paid in Capital (APIC) is the value of share capital above its stated par value
and is an accounting item under Shareholder’s Equity on the
balance sheet.
Dividends A dividend is the distribution of reward from a portion of the
company’s earnings and is paid to a class of its shareholders.
Retained Earnings The profits that a company has earned to date, less any
dividends or other distributions paid to investors.
 2

*NOTE
Cost of Goods Sold is same
as Cost of Sales

Date Account Name P/R Debit Credit

January 1 Debited Account XXXX
Credited Account XXXX
Description of Journal
Entry
PANG SIYAM NA ARALIN: Pagtatala sa Journal ng Pagpapalitan ng Transakyon
(Journalizing Exchange or External Transaction)

WHAT IS JOURNALIZING
 the second step in the first stage of accounting cycle.
 is the recording of transactions as debits and credits using appropriate
account titles and filing out other details of the journal, such as date, amount
and explanation

TYPES OF JOURNALS
1. General Journal

2. Special Journal
2. 1. Purchase Journal *NOTE
Purchase Journal is used for all
 Single Column Purchase Journal purchases of merchandise on
account. And each entry debits
purchases and credits accounts
payable
 2

Purchase Journal for Business using Periodic System of Inventory

Date Account Credited Terms Reference Purchases Dr.

Purchase Journal for Business using Perpetual System of Inventory

Date Account Credited Terms Reference Merchandise
Inty Dr.

*Multi-Column Purchase Journal

Date Accounts Terms P/R Accounts Purchases/Merch Supplies Other
Credited Payable andise Inventory Dr. Accounts
Cr. Dr. Dr.

*NOTE
2. 2. Sales Journal
Sale Journal is used for all sales of
Sales Journal for Business using Periodic System merchandise on account. And each entry
debits accounts receivable and credits sales.
of Inventory

Date Account Debited Invoice PR Accounts Receivable-Dr. Sales –

Number Cr.

Totals

Date Account Debited Invoice PR Accounts Receivable- Cost of Goods Sold-

Number Dr. Sales – Cr. Dr. Inventory-Cr.
 2

Totals
Sales Journal for Business using Perpetual System of Inventory

Sales Journal with a “Sales Tax Payable” Column

Date Account Invoice PR Accounts Sales taxes Sales Cr.

Debited Numbe Receivable-Dr. payable-Cr.
r

*NOTE
Cash Receipt Journal is used for all cash
receipts. And each entry includes a debit to
2. 3. Cash Receipt Journal cash and has equal debits and credits.

Cash Receipts Journal for Business using

Periodic System of Inventory
Date Accounts Ref Cas Sales Accounts Sales Cr. Other
Credited h Dr. Discount Dr. Receivable Accounts
Cr. Cr.

Cash Receipts Journal for Business using Perpetual System of Inventory

Date Accounts Ref Cash Sales Accounts Sales Other Cost of
Credited Dr. Discount Receivabl Cr. Accounts Goods Sold
Dr. e Cr. Cr. Dr.
Merchandise
Inventory Cr.

2. 4. Cash Payment/Disbursement Journal

*NOTE

Disbursement Journal is used for all cash

 2

Date Accounts Ref Other Accounts Purchases Purchase Cash Cr.

Debited Account Payable Dr. Dr. Discount
s Dr. Cr.

2. 5. Purchase Return Journal

2. 6.Sales Return Journa

Date Credit Customer’s PR Accounts Sales Tax Sales Inventory
Memo Account Credited Receivable Payable Return & Dr.
No. Cr. Dr. Allow. Dr COGS cr.
Total

PANG SAMPUNG ARALIN: Ano Ang Debit at Credit?

THE ACCOUNTING EQUATION

Date Accounts Terms Ref. Debit Note Accounts Payable Dr.

Debited Purchase Return Cr.
Assets =
Liabilities +
Owner’s
Equity(Capital)

Owner’s
Equity is
 2

Beginning Capital + Additional Investments + Revenue – Expenses – Drawings

THE EXPANDED ACCOUNTING EQUATION

ASSETS = LIABILITIES + CAPITAL + REVENUES – EXPENSES – DRAWINGS

Note:
Debit simply means Left
NORMAL BALANCES
Side and Credit simply
ACCOUNTS TITLE DEBIT means
CREDITright side.
ASSETS
Cash 
Accounts Receivable 
Allowance for Bad Debts 
Supplies 
Prepayments 
Equipment 
Building 
Accumulated Depreciation 
Land 
LIABILITIES
Accounts Payable 
Notes Payable 
Mortgage Payable 
Unearned Revenue 
CAPITAL
Corrales, Capital 
Corrales, Drawing 
Revenue 
Expense 

CONTRA ACCOUNT
An account with a balance that is the opposite of the normal balance.
 Allowance for Bad debts
 Accumulated Depreciation
Note:
Increase – maintain the
normal balance; Decrease
– take the opposite
direction.
 2

PANG-LABING ISANG ARALIN: Aplikasyon ng Debit at Credit

STEP 2: JOURNALIZING
This is the process of recording transactions for the first time in the books called
Journals.
Note:
Special Journals for Service Business: Journal is the books of
original entry
1. Cash Receipts Journal
2. Cash Disbursements Journal
Special Journals for Merchandising Business Note:
Transactions which cannot
1. Cash Receipts Journal be recorded in the special
2. Cash Disbursements Journal journals will be recorded in
3. Sales Journal the GENERAL JOURNAL.
4. Purchase Journal
 2

TRANSACTIONS FOR A SERVICE BUSINESS

JOURNALIZED TRANSACTIONS FOR A SERVICE BUSINESS

2
 2

TRANSACTIONS FOR A MERCHANDISING BUSINESS

JOURNALIZED TRANSACTIONS FOR A MERCHANDISE BUSINESS

 2

RECORDING OF TRANSACTIONS OF A SERVICE BUSINESS USING SPECIAL

JOURNALS
 2

FORMAT OF SPECIAL JOURNALS

 2

PANG-LABING DALAWANG ARALIN: Special Journals ng Merchandising

Business

SPECIAL JOURNALS IN MERCHANDISING BUSINESS

*NOTE:
 Cash Receipts Journal
 Cash Disbursement Journal Special Journals will be used
more in Merchandising business
 Sales Journal due to the repeating transactions
 Purchases Journal happening in the Merchandising
 Sales Returns Journal* Business.
 Purchases Returns Journal*
ACCOUNT TITLE USED IN MERCHANDISING BUSINESS
 Sales
 Sales Returns and Allowances
 Purchases
 Purchase Returns and Allowances
 Merchandise
 Freight In
 Freight Out

HEADINGS OF SPECIAL JOURNALS: PERIODIC INVENTORY SYSTEM :

1. CASH RECEIPTS JOURNAL
Date Account Ref. Cash Dr. Sales Discount Accounts Sales Other
s Dr. Receivable Cr. Cr. accounts Cr.
credited

2. SALES CREDIT JOURNAL ENTRY

Date Particulars Debit Credit
1-20-2020 Accounts Receivable XXX
Sales XXX

3. SALES JOURNAL

Date Account Debited Invoice Number PR Account Receivable – Dr.

Sales – Cr.
 2

4. PURCHASES JOURNAL – SINGLE COLUMN

Date Account Terms Reference Purchases Dr.
Credited

HEADINGS OF SPECIAL JOURNALS: PERPETUAL INVENTORY SYSTEM

1. CASH RECEIPTS JOURNAL
Date Account Ref. Cash Sales Accounts Sales Other Cost of goods
s Dr. Discount Receivable Cr. account sold Dr.
credited Dr. Cr. s Merchandise
Cr. Inventory Cr.

2. SALES CREDIT JOURNAL

Date Particulars Debit Credit
1-20-2020 Accounts Receivable XXX
Sales XXX
Cost of Good Sold XXX
Merchandise Inventory XXX

3. SALES JOURNAL
Date Account Invoice PR Account Receivable Cost of Good
Debited Number – Dr. Sold – Dr.
Sales – Cr. Inventory – Cr.

4. PURCHASES JOURNAL – SINGLE COLUMN

Date Account Terms Reference Merchandise
Credited Inventory Dr.
 2

HEADINGS OF SPECIAL JOURNALS

1. PURCHASES JOURNAL – MULTI COLUMN

Dat Account Term P/ Account Purchases/Merchandi Supplie Other
e s s R s se Inventory Dr. s Account
Credited Payable Dr. s
Cr. Dr.

2. SALES RETURN AND ALLOWANCES JOURNAL

Date Credi Customer’s PR Accounts Sales Tax Sales Inventory
t Account Receivable Payable – Returns – Dr.
Mem Credited – Cr. Dr. & Allow. COGS –
o No. – Dr. Cr.

3. PURCHASE RETURN AND ALLOWANCES JOURNAL

Date Accounts Terms Ref. Debit note Accounts payable Dr.
debited Purchase Return Cr.

PANG-LABING TATLONG ARALIN: Posting ng mga Journal Entries sa Ledger at

Paghahanda ng Unadjusted Trial Balance

WHAT IS JOURNAL?
It reecords events and transactions based on their chronological happenings.
WHAT IS LEDGER?
 2

It is a book which consists of pages of accounts. Journal entries are posted in this book
arranged based on the account titles.

3RD STEP IN ACCOUNTING CYCLE: POSTING TO THE LEDGER – THE

CLASSIFYING PHASE

It is the transfer of journal entries to ledger. Where the transactions are classified
according to account titles.

2 TYPES OF LEDGER:

 General Ledger – it is sometimes called “control ledger” if the account has a

subsidiary ledger.
 Subsidiary Ledger – usually for Accounts Receivable account and Accounts
Payable account. *NOTE
Double Entry Bookkeeping –
generally accepted method for
RULES FOR POSTING OF ENTRIES IN THE LEDGER: every debit there is a
corresponding credit
1. A separate account is opened for each account and
entries from the journal are posted in respective ledger
account accordingly.
 Transactions are journalized, journal entries are posted.
2. The account which is debited in the journal should also be debited in the ledger
account the same way that account credited in the journal book should also be
credited in the appropriate ledger account.
3. There should be cross-indexing for each ledger post. *NOTE
 In journal – ACCOUNT NUMBER If not yet posted to ledger,
 In ledger – PAGE NUMBER IN JOURNAL there is still no attached
reference in the general
journal.

4TH STEP IN ACCOUNTING CYCLE: BALANCE THE LEDGER ACCOUNTS AND

SUMMARIZE

Total Debits minus Total Credits = Balance brought down and carried forward

PROCEDURE IN BALANCING THE ACCOUNT

 2

1. Find the difference between the total debit and the total credit of the account.
2. Put the difference on the smaller side so that the two sides become equal.
Then put the totals on both sides. Before writing the total, draw a single line
and after the total draw double lines. The two totals must be placed in two
columns opposite each other.
3. When the difference is put on the smaller side, write “Balance Carried Down”
in the particulars column, against the net balance account on the particular
day.
-Balance Carried Down- difference between the debit and the credit.
4. On the next month, the balance is brought down on the opposite side and the
account is continued with this balance. Write “Balance Brought down” on the
heavier column on the first day of the following month.
*NOTE
WHAT IS T-ACCOUNTS? Journal entries are closed
to segregate external
 It is a fundamental accounting training tool used for transactions, internal
transactions, and the
visualizing the more complex transactions. It is the closing entry.
skeleton form of the ledger.
 It consists of dates and amount only.
 Some used this before the formal ledger.
 It is used to check the correctness of the debit and credit / balance of the
accounts in order to proceed in the ledger which is to be presented to the
BIR.

5TH STEP IN ACCOUNTING CYCLE: PREPARE THE UNADJUSTED TRIAL

BALANCE – THE SUMMARY LIST OF EXTERNAL TRANSACTIONS

List all of the accounts in the ledger with the corresponded value in debit or credit side.
CHART OF ACCOUNTS
List of account titles commonly used in the business

PANG LABING APAT NA ARALIN: Pagsusuri ng Unadjusted Trial Balance para sa

Pagtatala ng mga Internal Transactions

RECORDING OF INTERNAL TRANSACTIONS

1) Analyze the unadjusted trial balance
 2

 Identifying accounts which have to be updated or adjusted.

 Analyzation should be account by account.
 Internal transactions have no source documents.
 Look for the transaction that has no source document but has an impact to
the balances or to the accounting equation.
 Business transaction = exchanged transaction or third party involved
 External transactions doesn’t reflect all of the profits of the business
 This may lead to overstatement or understatement of balances.
2) Journalize internal transactions or adjusting
entries *NOTE
Preparing adjusting entries is the
3) Post the Adjusting journal entries to the ledger hardest part in the accounting cycle
4) Balance the ledger accounts and summarize as it requires skill and wide
5) Prepare the Adjusted Trial Balance imagination.

CHARACTERISTICS OF A BUSINESS TRANSACTION

The following are five important characteristics of a valid business transaction that every
bookkeeper or accountant recognizes before entering the transaction in the journal.
 It is a monetary event.
 It affects financial position of the business.
 It belongs to business not to the owner or any other person managing the
business.
 It is initiated by an authorized person.
 It is supported by a source document.

TYPES OF BUSINESS TRANSACTIONS

In accounting, the transactions may be classified as:
1. External transactions and
2. Internal transactions

ANALYZE THE UNADJUSTED TRIAL BALANCE

 to determine which account balances, have to be updated for internal or
unrecorded transactions.
 What is not seen and documented will now be recorded.
 Journalizing adjusting entries is recording the internal transactions of the
business.
 All events and occurrences that modify the accounting equation:
ASSET=LIABILITIES+CAPITAL
which are not substantiated by a source document will now be entered in the
journal.
 2

Unadjusted Trial Balance

Cash XXXXXX
Accounts Receivable XXXXXX
Allowance For Doubtful Accounts Or Bad Debts XXXXXX
Notes Receivable XXXXXX
Supplies XXXXXX
Merchandise Inventory (Raw Materials Inventory, Finished
Goods Inventory) XXXXXX
Depreciable Assets (Furnitures And Fixture, Equipment, XXXXXX
Building
Accumulated Depreciation Of Depreciable Assets XXXXXX
Land XXXXXX
Accounts Payable XXXXXX
Notes Payable XXXXXX
Mortgage Payable XXXXXX
Corrales, Capital XXXXXX
Corrales, Drawing XXXXXX
Revenue XXXXXX
Unearned Revenue XXXXXX
Expenses XXXXXX
 2

PANG LABING-LIMANG ARALAIN: Pagsusuri ng Cash Account At ang mga Kaugnay

Na Internal Transactions (Adjusting Journal Entires)

ANALYZE THE UNADJUSTED TRIAL BALANCE 

Identifying Accounts which have to be Updated or Adjusted 

CASH 
Make sure that the amount recorded in the ledger account is final and can now
be recorded in the financial statement. If not, cash count. Tally the actual cash count
with the cash balance per ledger. If there is a shortage, it should be recorded and cash
account should be updated – adjusting entry, internal transaction. After updating the
cash account, the total amount should reconcile with the Cash in Bank. 

Cash shortage XXX

Cash XXX
Journal Entry
a. If there is a shortage

b. If there is an overage

Cash XXX
Cash Overage XXX
 2

*NOTE:
To reconcile business transactions in the ledger account:  
Cash Overage is an
income account.
Daily cash sheet is an internal control measure prepared at the Cash Shortage is
end of each day to monitor the cash and to make sure that cash is equal an expense
to the sales and accounts receivable per day.  account.  

PETTY CASH FUND  

 Petty Cash is a small amount of money regularly kept financing small
amounts of expenses.  
*NOTE
Each release of cash from
To create a petty cash fund:  the Petty Cash Fund must
1. Issue check to create a petty cash fund.  come with a Petty Cash
2. Make a Petty cash box.  Voucher, approved and
3. Appoint a petty cash custodian for managing the prepared by the custodian. 
petty cash fund.  
Entry to create a petty cash fund:

Petty Cash XXX

Cash XXX

PETTY CASH FUND REPLENISHMENT 

1. Record the set up of fund 

2. Expenses, with or without source documents, will only be recorded in the
journal entry at the end of the period or upon replenishment 
3. When the fund needs to be replenished, all loans must be listed and
journal entries must be made since expenses will be changed to cash.

JOURNAL ENTRY: 

Expense XXX
Cash XXX

BANK RECONCILIATION STATEMENT 

In order to make a bank reconciliation statement, a bank statement from the bank
given monthly is needed. It will be reconciled in the ledger balance of Cash in Bank for
the same month end of the month. 
 2

Accounts in the bank reconciliation statement that need adjustment:  

 NSF Check or not sufficient funds check is a check that was honored by
the bank of the entity issuing the check, on the grounds that the entity’s
bank account does contain sufficient funds.

Account Receivable XXX

Cash in Bank XXX

 Service charge is to be recorded as an expense.

Service Charge XXX

Cash in Bank XXX

 Interest income is to be recorded as an income. Debit: cash in bank,

credit: interest income. 

Cash in Bank XXX

Interest Income XXX

Other Credits Directly into the Bank needs to be updated *NOTE

because the company needs to know who paid directly to the
bank instead of paying to the company so that the accounts Dishonored Checks needs to be
receivable of that client will be deducted.   adjusted since the accounts
receivables will increase again. 

STEPS IN THE PREP OF BANK RECONCILING STATEMENT 

1. Find the Deposit in Transit.  

2. Find the outstanding/ unpresented checks and deduct from bank
statement balance.  
3. Find and add credit memorandum to the business’ accounting record.   
4. Find and deduct the amount found in the unrecorded debit memorandum
from the business books of account.  
5. Determine if the balances per books and bank statement are equal.  
6. Make appropriate journal entries.  
 2

ESPESYAL NA ARALIN PARA SA PETTY CASH FUND AT BANK

RECONCILIATION STATEMENT (Accounting for Petty Cash and How to Prepare
Bank Reconciliation Statement)

PETTY CASH FUND

It is money set aside to defray relatively small amounts of cash disbursements.
Accounting for Petty Cash
1. Establishment
2. Payment of Expenses
3. Replenishment of Petty Cash Fund
4. Recoding of expenses paid through Petty Cash Fund

Entry to establish Petty Cash Fund

Account Debit Credit
Petty Cash 1,000
Cash 1,000

Illustration:
The Petty Cash Fun paid for the following expenses and it is business’ policy to
replenish it if the petty cash fund is below 400, to wit:

Office Supplies 390

Gasoline 155
 2

Coffee and drinks for clients 70

Total expenses paid out of Petty Cash Fund 615
Actual Cash Count 365
Total 980
Cash Shortage 20

The Journal Entry to record full replenishment in case there is a cash shortage:
The petty cash custodian lets the cash balance in the petty cash box decline below 400
before applying for replenishment. The cashier issues a replenishment check for $280,
the entry is:
Account Debit Credit
Petty Cash 635
Cash (in bank) 635

The cashier records the expenses associated with the petty cash receipts that were
submitted. The entry is:
Date Account Debit Credit
Feb. 28 Supplies Expense 390
Fuel Expense 155
Miscellaneous Expense 70
Cash Shortage (over) 20
Cash 635
To replenish cash receipts on hand
totaled 615 related to office supplies -390,
gasoline -155, coffee and drinks -70.
Remaining cash in the fund was 365, bringing
the total to 980. A shortage of 20 was noted
and replenished.

PREPARATION OF BANK RECONCILIATION STATEMENT

A Bank Reconciliation Statement is a statement prepared by the depositor
(Account Holder/Business) to reconcile the differences in balances of the cash book
(cash ending balance) and balance per Bank Statement. It is the process of accounting
for the differences between the balance appearing on the bank statement and the
balance appearing on the cash book of the business (depositor).
 2

One of the procedures for establishing the correct cash balance (and for controlling
cash) is the reconciling of the bank and book cash balances. Bank reconciliation
explains the difference between the balance in the company’s records and the balance
in the bank’s records. When completed, the reconciliation should show the correct cash
balance.
SOURCES OF DIFFERENCES IN BANK RECONCILIATION
 Items in transit arise from several circumstances. The firm’s account may
contain a debit entry for a deposit that was not received by the bank prior to the
statement date. Similarly, some of the checks credited to the ledger account will
probably not have been processed by the bank prior to the statement date.
Banks often record other decreases or increases to accounts and notify the
depositor by mailed notices.
*NOTE
 Errors
These items seldom appear
 Service Charges on a reconciliation because
they are generally reported
to the company prior to bank
statement date.
Importance of Bank Reconciliation Statement
 Detecting errors such as double payments, missed
payments, calculation errors, etc.
 Tracking and adding bank fees and penalties in the books.
 Spot fraudulent transactions and theft.
 Keeping tracks of accounts payable and receivables of the business.
Formats used in the preparation of Bank Reconciliation Statement
A. Conforming Balances
1. Bank to books
2. Books to Bank

The Dr. balance shown in the completed cash book is P7,090 while the bank
statement shows a Cr. Balance of P9,870. A bank reconciliation must therefore, be
prepared as follows:
Balance per bank statement 9,870
Add: Cheques in Transit
Deposited on 30 May 1,810
Deposited on 31 May 2,220
______ 4,030
13,900
Less: Outstanding checks (unpresented checks)
Check No. 789 5,890
Check No. 791 920
______ 6,810
 2

B. Congruent Balances
Pro Forma bank Reconciliation Statement

ABC Co.
Bank Reconciliation
For the month ended August 30, 2016
Balance per books, end. Pxx Balance per bank statement, end. Pxx
Add: Credit Memos (CM) Xx Add: Deposits in Transit (DIT) Xx
Less: Debit Memos (DM) (xx) Less: Outstanding Checks (OC) (xx)
Add/Less: Book errors Xx Add/Less: Bank errors Xx
Adjusted balance Pxx Adjusted balance Pxx

BANK DEBIT AND CREDIT MEMOS

Verify all debit and credit memos on the bank statement. Debit memos reflect
deductions for such items as service charges, NSF checks, safe deposit box rent, and
notes paid by the bank for the depositor. Credit memos reflect additions for such items
as notes collected for the depositor by the bank and wire transfers of funds from another
bank in which the company sends funds to the home office bank. Check the bank debit
and credit memos with the depositor’s books to see if they have already been recorded.
Make journal entries for any items not already recorded in the company’s books.

UNPRESENTED, OUTSTANDING, UNCASHED CHECKS

Checks issued (for payments) by the business but not presented for payment. The
business may issue checks to suppliers or creditors, some of them may not present the
checks for collection on the date indicated in the check. If this happens the check will be
recorded as disbursement in the books of the business but not in the bank records.
These outstanding checks will be used to reconcile the book and bank balances, but the
books will no longer be disturbed because these items were already recorded in the
books.

DEPOSIT IN TRANSIT CHECKS

Checks of customers paid to the business which were deposited by the business and
recorded in its books as cash in bank but remained unrecorded in the bank. This usually
 2

happens when deposit is made beyond the cut-off time. The deposit was recorded in
the books of the business, but the bank recorded it on a later day. There is no need for
an adjusting entry here because the deposit was already recorded in the books.

BANK CHARGES
The bank collects service fees from depositors for collection charges or interest on
overdraft etc. Bank debits the account of the client by issuing a debit memo but this
memo sometimes reaches the client too late for the recording. The depositor usually
comes to know about it only at the end of the month. Since this bank charges are actual
expenses which were not recorded, the books of the business have to be updated to
record this transaction. This is not an adjusting entry but an updating entry.
Account Debit Credit
Bank Service Charges xxx
Cash in bank xxx

INTEREST CREDIT BY BANK

Sometimes an account with the bank earns interest and the bank increases the deposit
of the client and sends the client a credit memo, but this memo is sent through mail and
reaches the client too late for the recording and it is usually at the end of the month after
receiving the bank statement that the client depositor would know of the adjustment
made by the bank. This interest credit or income should be recorded in the books of the
client depositor since this is an income that should be reflected in the books.
Account Debit Credit
Cash in Bank xxx
Interest income on Bank Deposit xxx

DIRECT DEPOSITS TO BANK

Sometimes the business sells on account to the customers and these customers
directly pay to the bank. The bank records the collection without the knowledge of the
client depositor and if this happens the books of the business should be updated to
record collection of account. The entry to record this transaction will be as follows.
Account Debit Credit
Cash in bank xxx
Accounts Receivable xxx
 2

DIRECT PAYMENT MADE BY THE BANK

Bank may have deducted items for the customer’s account but the customer may not be
aware of the deduction until the bank statement arrives (eg. Payment of notes for the
account of customers). This is a business transaction performed by the bank on behalf
of the client depositor. Since this is not yet recorded in the books of the business, an
entry should be made, to wit:
Account Debit Credit
Notes Payable xxx
Cash in bank xxx

ERRORS AND OMISSIONS

 Bank Errors. Sometimes banks make errors by depositing or taking money out
of business’ account in error. The owner needs to contact the bank to correct
these errors but there will be no entry needed because the bank error is
unrelated to business’ records.
 Book errors. A common error by depositors is recording a check in the
accounting records at an amount that differs from the actual amount. The books
have to be adjusted to recorded the correct amount of disbursement.
 2

PANG LABING-ANIM NA ARALAIN: PAGSUSURI NG ACCOUNTS RECEIVABLE AT

PAGTUTUOS NG ALLOWANCE FOR DOUBTFUL ACCOUNT PARA SA PAGTATALA
NG KAUGNAY NA EXTERNAL TRANSACTIONS

Notes:
At this stage we already have external transaction for Accounts Receivable account.
We are ought to know the amount that can be collected by knowing what type of changes are happening
from the customers through sales on account.

I. IDENTIFYING ACCOUNTS WHICH HAVE TO BE UPDATED OR ADJUSTED

Accounts Affected in Adjusted Trial Balance:

Accounts Receivable (external transaction)
 The total amount of money that the business claims for goods and
services, including other charges.
 no need for adjustment unless there are errors.
Allowance for Doubtful Accounts / Bad Debts (internal transaction)
 requires adjusting

METHODS OF RECORDING BAD DEBTS

A. Direct Write-Off
 The direct write-off method is simple: The debt is written off when it
becomes certain that the amount will not be collected, and all collection
efforts have not yielded favorable results. When the account is written off,
the expense bad debt will be debited, and account receivable will be
 2

credited for the amount that are ACTUALLY uncollectible to remove the
receivable from the books.
 doesn’t set up expenses every end of the period.
 debts are only erased from the Accounts Receivable if it is sure that they
cannot be collected.
Example:
To illustrate the direct write-off method, assume that on Jan. 31, 2020 Terimacor
decides to write off the account of Dr. Guevarra since collection efforts have failed and
that Dr. Guevarra can no longer be found
The direct write-off entry is as follows:
ACCOUNTS TITLE DEBIT CREDIT
Bad Debt Expense 1 500
Accounts Receivable 1 500
Flow:

SALE ON Account
ACCOUNT Receivable

Uncollectible? Set up
Allowance

Bad Debts Expense- XXX

Bad Debts Written Off- XXX

B. Allowance Method
 Unlike the direct write-off method, the allowance method records an
expense to bad debt using an estimate of accounts that are unlikely to be
collected before specific customer accounts are identified as being
uncollectible.
 sets up expenses every end of the period.
 keeps track of the expense to easily be managed/deducted at the end of
the period.
 Debit: Allowance for Bad Debts, Credit: Accounts Receivable
 preferred method in Financial Statements for it evenly distributes the
expenses every period.
 Estimate of credit sales that will not be collected
 To establish the allowance for doubtful accounts, the management
considers customers that might default
 2

 Based on historical trends, economic trends or some other form of

measurement.

SALE ON Account
ACCOUNT Receivable

Uncollectible? Set up
Allowance

1. Percentage of
Bad Debts Expense- XXX
Sales
Example: Allowance for Bad Debts- XXX
2.Percentage of
ToReceivables
illustrate the
allowance method, assume that Terimacor estimates its bad debt at 3%
of accounts receivable. At the end of the month, the balance in accounts receivable is
10 000 and the allowance for doubtful accounts has a zero balance. The entry to record
the estimate is as follows:
ACCOUNTS TITLE DEBIT CREDIT
Bad Debt Expense 300
Allowance for Doubtful Accounts 300

Three months later, Terimacor decides to write off 5 000 of Dr. Guevarra’s overdue
invoice. The entry to record the write-off is as follows:
ACCOUNTS TITLE DEBIT CREDIT
Allowance for Doubtful Accounts 5,000
Accounts Receivable 5,000

This entry adjusts the balance of the allowance account to a debit 4 700.

Debit Credit
10 000 5 000
Bad Debts Expense
Debit Credit
300
Allowance for Bad Debts

Debit Credit
5 000 300
4 700
 2

If the Accounts Receivable did not increase nor decrease in the next accounting period,
the 3% allowance will be based on the remaining accounts receivable of 5 000 and the
adjusting entry necessary to update the account receivable will be:
Debit Credit
Bad Debt Expense 4 850
Allowance for Bad Debt 4 850

Allowance for Bad Debt balance before adjusting entry:

Allowance for Bad Debt
Debit Credit
5 000 300
4 700

Adjusting entry on the next accounting period

Debit Credit
Bad Debt Expense 4 850
Allowance for Bad Debt 4 850

ALLOWANCE FOR BAD DEBT BALANCE AFTER ADJUSTING ENTRY:

Allowance for Bad Debt
Debit Credit
5 000 300
4 850 5 000 x 3%=150
150 5 000 x 3%=150
 2

SETTING UP OF ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS

Allowance
(credit) Write-Offs

If allowance is greater than Write-offs, the normal balance is credit.

Allowance
Write-Offs
(credit)

If allowance is less than Write-offs, the normal balance is debit.

Aging Method
Value of percent that can’t be collected in a specified amount of time.

Percentage of Credit Sales Method

Formula:
Prior period’s ACTUAL uncollectible accounts/Prior period’s credit sales=Percentage of
Sales Allowance for Uncollectible Accounts
Bad Debt Expense= Net Sales (total or credit) x Percentage estimated as uncollectible
 2

PANG LABING PITO NA ARALIN: Pagsusuri ng Notes Receivable at Pagtutuos ng

Interest income

*Note:

Interest on note receivable is an internal transaction on note receivable.

Example of a note receivable: Promisorry note

*Note:

If you receive a note, you have notes receivable

If you issue a note, you have notes payable

Requisite of a Promisorry Note

 Principal amount
 Location and date of issuance
 Time frame
 Name of Maker
 Name of Payee
 Interest rate
 Signature

P 15,000 Rodriguez Rizal, April 10, 2020

3 months Joelyn Mercadejas

Riego Steel Corporation

10%
 2

HOW TO COMPUTE FOR INTEREST

INTEREST = Principal x Interest Rate x Frequency of the year

i.e
*Note:
P15,000 x 10% x 90 days/360 days= P375
A note falling on a
WHAT IS MATURITY DATE? Sunday or Holiday is
 Maturity date is when the note is due and need to be paid. due on next
business day.
HOW TO DETERMINE MATURITY DATE?
 On demand – the maturity date depends on the holder and it cannot
be computed.
 On a stated date – the exact date is designated and no need to compute for
maturity date.
 At the end of a stated period:
a. One year after the date – maturity date is at the same month and
day of the next year
b. X months after date – Same date in the month of maturity
*Note:
c. X days after the date – Computation of days is needed.
The day of issuance
Ex. 60-day note dated April 10 matures on June 9. is omitted and the
last day is included
Life of Note 60 days
in the count.
Days remaining in April not
counting the:
Date of origin of the note 20
Total days in May 31 51
MATURITY DATE IN JUNE 9

CONVERSION OF ACCOUNTS RECEIVABLE TO NOTE RECEIVABLE

 2

Note:
Account receivable can only be converted to note receivable if the payer doesn’t pay the
balance on the date stated in the receipt.

Ex:
Mercadejas had purchased P7,000 of merchandise on account from Alleje on
Feb 12. The normal credit period elapsed and Mercadejas can’t pay the invoice
Alleje agrees to accept Mercadejas P7,000, 10%, 90-day note dated June 10 to
settle Mercadejas open account.

Journal Entry to convert the accounts receivable to note receivable:

a. Assume that the note is paid at maturity

Feb 12 Accounts Receivable P 7,000

Sales P 7,000
To record the sales of Merchandise on
account

Mar 12 Notes Receivable 7,000

Account Receivable 7,000
To record exchange of a note for an open
account of XX

June 10 Cash 7,175

Notes Receivable 7,000
Interest Revenue 175
Interest= 7,000 x 10% x (90/360)

b. Assume that the note is a dishonored note.

Feb 12 Accounts Receivable P 7,000

Sales P 7,000
To record the sales of Merchandise on
account

Mar 12 Notes Receivable 7,000

Account Receivable 7,000
To record exchange of a note for an open
account of XX

June 10 Account Receivable 7,175

Notes Receivable 7,000
Interest Revenue 175
To record dishonor of Mercadejas’ note

*Note:
Dishonored note is a
note that the maker failed to
pay.
 2

PANG LABING WALO NA ARALIN: Pagtatala ng Internal Transaksyon sa Supplies

at Advance Payments o Prepaids

SUPPLIES AND OTHER PREPAYMENTS

Paid but not all are used or incurred immediately.
 Supplies – the used supplies should be recorded to reflect the actual
remaining assets and actual supplies expense to be presented in the
financial statements.
 Prepayments – the expired portion should be recorded and Prepayments
should be updated to reflect the true value of asset and expense that would
be presented in the financial statement.

SUPPLIES
 2

 Using of supplies within a period is an internal transaction because it

does not have a source document (receipt) as you use it.
Examples:
 Cleaning and Janitorial supplies
 Mail and shipping supplies
Supplies or supplies expense?
Methods of recording supplies and prepayments
1. Asset method
Initial Entry
ACCOUNTS TITLE DEBIT CREDIT
Supplies 2,400
Cash 2,400
To record purchase of supply

Final entry:
ACCOUNTS TITLE DEBIT CREDIT
Supplies 2,400
Cash 2,400
To record purchase of supply

2. Expense method
Initial Entry
ACCOUNTS TITLE DEBIT CREDIT
Supplies Expense 2,400
Cash 2,400
To record purchase of supply

Final entry:
ACCOUNTS TITLE DEBIT CREDIT
Supplies 2,400
Supplies Expense 2,400
To record purchase of supply

PREPAYMENTS OR PREPAID EXPENSES

 Expense that covers beyond the current period
 advance payments
Examples:
 Prepaid Rent
 Prepaid Advertising
 2

 Prepaid Insurance

PANG LABING SIYAM NA ARALIN: Inventories

WHAT IS MERCHANDISE INVENTORY?

It is the goods owned by the business organization which are held for sale to the
consumers. And goods held for sale to customers.

HOW TO RECORD MERCHANDISE INVENTORY?

Types of Inventory System:

 Periodic Inventory System
- Uses Purchases account to record all purchases related transactions.
 Perpetual Inventory System
- Records all inventory transactions as they occur in the Merchandise
Inventory account.
Illustration 1.1

Periodic Inventory System Perpetual Inventory System

 2

Purchases Account Merchandise Inventory

Account
Cost of Goods Sold Account

Under the periodic inventory system, the cost of goods sold is calculated using the
following formula:

Beginning Inventory + Purchases = Cost of goods available for sale

Cost of goods available for sale – Ending Inventory = Cost of Goods sold

Example:
TERIMACOR MERCHANSING has beginning inventory of P100,000, has
paid P170,000 for purchases, and its physical inventory count reveals an ending
inventory cost of 80,000. The calculation of its cost of goods sold is:
P100,000 (Beginning Inventory) + P170,000 (Purchases) – P80,000 (Ending
Inventory)
= P190,000 (Cost of Goods Sold)

ACCOUNTING FOR MERCHANDISE INVENTORY USING PERIODIC SYSTEM:

To record Purchases:

Debit Credit
Purchases xxx
Cash/Accounts Payable xxx

To record Sales:

Debit Credit
Accounts Receivable/ Cash xxx
Sales xxx

To close at the end of the period, you need to transfer purchases in inventory
account.

Debit Credit
Inventory xxx
Purchases xxx
 2

Disadvantages of using Periodic Inventory System:

 Delayed Information
 Errors resulting from estimates
 Massive adjustments for obsolescence and losses
 Not Scalable

ACCOUNTING FOR MERCHANDISING USING PERPETUAL INVENTORY

SYSTEM:
To record Purchases:

Debit Credit
Inventory 1,500-
Accounts Payable 1,500-

To record P300 freight in cost associated with the delivery of inventory:

Debit Credit
Inventory 300-
Accounts Payable 300-

To record a sale of P3,000 for which the associated inventory cost is P1,800

Debit Credit
Accounts Receivable 3,000-
Revenue 3,000-
Cost of goods sold 1,800-

Inventory 1,800-

To record a downward inventory adjustment of P800, caused by inventory theft

detected during an inventory account.

Debit Credit
Inventory shrinkage expense 800-
Inventory 800-

SUMMARY OF INTERNAL TRANSACTIONS ON MERCHANDISE INVENTORY:

If the method being used is periodic inventory system
 2

 Merchandise inventory is to be determined thru actual physical count. To

set up the cost of goods sold and to determine the actual Merchandise
Inventory to be recorded as asset in the financial statements.
 The internal transactions will be the cost of goods sold considering that
there is no source document to support the journal entry.
If the method being used is perpetual inventory system
 The internal transaction that should be recorded will be the losses, and the
obsolescence found during physical count to check the reconciliation of
the balance per books and actual balance per physical count.
 There is no need to set up the cost of goods sold because the perpetual
system provides for the recording of the cost of sales during every sales
transaction.

PANG DALAWAMPUNG ARALIN: Depreciation Expense at Accumulated

Depreciation

DEPRECIATION EXPENSE
 value of fixed assets diminishes because of the wear and tear through use,
time, and elements of decomposition.
 Recorded at the end of each accounting period
 Income statement account

ACCUMULATED DEPRECIATION
 Contra- asset account presented in the balance sheet as a deduction from
the asset being depreciated
 Total depreciation of asset

JOURNAL ENTRY
ACCOUNTS TITLE DEBIT CREDIT
Depreciation Expense xxx
Accumulated Depreciation xxx

METHODS IN COMPUTING DEPRECIATION EXPENSE

a. Straight-line Method
FORMULA:
Depreciation Expense = (Cost – Salvage Value) / useful life
 2

b. Double-declining
FORMULA:
Depreciation Expense = 100% / useful life x 2 x Cost of Asset

c. Sum of the years’ Digits Depreciation

FORMULA:
Depreciation Expense = Cost x (Life / sum of the years)
*sum of the years = (Life x (Life+1))/2

d. Unit of Production Depreciation

FORMULA:
Unit Expense = (Cost of Depreciable Asset – Residual Value) / Total
estimated units
Depreciation Expense = Unit Expense x Actual Units Produced

LAND
 Recorded at the value of the original purchase price along with the extra fees
needed to acquire the land
 Land does not depreciate thus its value never decreases

Even if the land’s market value goes up or down, it is not recognized in the balance
sheet. However, if the land is sold, the difference between the purchase price and
the selling price will be recorded as a gain or loss on the income statement.
- *NOTE
Land appreciates but there is
no appreciation entry
 2

PANG DALAWAMPU’T ISANG ARALIN: Accrued Expenses at Accrued Revenue

ACCRUED EXPENSES
 Expenses that are not paid for yet.
 If there is a receipt already then it is no longer accrued. Rather, it would be
considered as an accounts payable.
 Internal transactions, there is no source document.
 At the end of the period, even if there are no receipts or bills yet, you are
already computing for your debts and expenses.
 It will no longer be an adjusting entry if there is already a source document.
What is the meaning of accrued in accounting?
When should expenses and revenues be recorded in the books of records?
Accounting Bases
(1) Cash Basis Accounting – The time where cash is received or given out is
the time where revenues and expenses are recognized (same time).
(2) Accrual Basis Accounting – Even if cash is still not yet received or given
out, revenues and expenses are already recognized (may differ in time).
ACCRUED EXPENSE
Even though receipts/bills have not yet arrived, you already recognize the incurred
expenses.
Format:
Date Particulars Debit Credit
MM/DD/YY Accrued Expense xxx
Accounts xxx
Payable
 2

Illustration: Terimacor consumes P5,000 Electricity in February 2020. The expense

for the Electricity consumed remains unpaid on the balance sheet day (February 28).
The company then receives its bill for the utility consumption on March 5 and makes
the payment on March 25.
- Reporting Period: February 1 – 18 (The month when the electricity was
consumed)
- Bill received: March 5
- Bill paid: March 25

Entry:
Date Particulars Debit Credit
2/28/2020 Utility Expense 5,000
Utility Payable 5,000
Even though the receipt for the electricity has not arrived yet, the expense incurred is
recorded already.
Date Particulars Debit Credit
3/25/2020 Utility Payable 5,000
Cash 5,000
 If you accrued your expense at the end of February, then you should reverse
it at the beginning of March so that once the bill arrives, you can debit the
accounts expenses and credit accounts payable.
 After paying at March 25, you would debit utilities payable and credit cash (for
the entry reversed in the beginning of March).
 If not reversed, the receipt will be part of the expense on the current month
even if it should be recorded on the prior month. It would be incorrect.

ACCRUAL EXPENSES
with reversing entries at the beginning of the following month/period.
UNEARNED REVENUE
 Income received but not yet rendered, a liability.
 Can be recorded as an outright income (since eventually it would be an
income earned) or as an unearned revenue (since you are still no rendering
your service for the income received),
Two Methods of Recording Unearned Income
(1) Liability Method
- Done by debiting cash and crediting unearned revenue.
 2

- In adjusting unearned income using liability method, revenue will be

recorded.
Illustrations:
(1) Entry to record the advance collection

Date Particulars Debit Credit

2/01/2020 Cash 120,000
Unearned 120,000
Revenue

(2) Entry to record the delivery of 50,000 pesos worth of medicines and medical
supplies
Date Particulars Debit Credit
2/28/2020 Unearned 50,000
Revenue
Revenue 50,000

Revenue/Income Method
 Done by debiting Cash and crediting income/revenue.
 Revenue is already recorded, an external transaction.
 In adjusting unearned income using income method, unearned revenue
will be recorded.
*NOTE
Illustrations: At the end of the period, revenue is
(1) Entry to record the advance collection being recorded since the unearned
revenue has already been recorded
Date Particulars Debit in theCredit
beginning of the month.
2/01/2020 Cash 120,000
Revenue 120,000

Date Particulars Debit Credit

2/28/2020 Revenue 70,000
Unearned 70,000
Revenue
(2) Entry to record the delivery of 50,000 pesos worth of medicines and medical
supplies
 *120,000 - 50,000 (earned revenue) = 70,000 (actual unearned revenue)
 *At the end of the period, liability is being recorded (as shown above) since
the revenues was already recorded at the beginning of the month.
 2

(3) Entry to reverse the recording of unearned revenue to revert the

Date Particulars Debit Credit
3/01/2020 Unearned 70,000
Revenue
Revenue 70,000
record of the revenue account

Notes Payable (interest on notes)

Point of view of debtor.

Mortgage Payable (interest on loan)

Computation will be based on the interest given by bank. *NOTE
Reversing entry is only applicable
under the revenue method (to make
Accrued Revenue the recorded accounts consistent).
 Revenue earned but not yet received.
 No bill is issued even if services or goods have been delivered.
Format:
Date Particulars Debit Credit
MM/DD/YY Account xxx
Receivable
Revenue xxx
*
*NOTE
Illustration: *No document, hence an adjusting
entry.
On February 28, 200, Terimacor calculated 1,000 as rent
*Recorded only for the purpose of
earned but not received from the Master Siomai stall owner presenting the financial statement.
who rented store’s frontage. The cash was received on
March 5, 2020. These events will be recorded in the journal
as follows:
Date Particulars Debit Credit
Feb. 28, 2020 Accounts 1,000
Receivable
Revenue 1,000
1. When income accrued on Feb. 28, 2020:
 *An adjusting entry for it is an internal transaction (there is no source
document).
 *Transaction is recorded for there is already right to collect since the service
has been rendered.
Date Particulars Debit Credit
March 5, 2020 Cash 1,000
 2

Accounts 1,000
Receivable

2. When the income was collected on March 5, 2020

 *Collection of accounts receivable.
 *No reversing entry (since the revenue account was no affected).

DEFERRED INCOME
 Income received but the service or good has not yet been delivered.
 An advance collection of income.
Two Methods:
(1) Liability Method
(2) Revenue Method

DEFERRED EXPENSE
- Expense that has been paid for but not yet incurred.
Two Methods:
(1) Expense Method
(2) Asset Method

PANG DALAWAMPU'T DALAWANG ARALIN: Pagtatala ng Adjusting Entries at

Paggamit ng Worksheet
 2

WHAT IS ADJUSTING ENTRIES?

Adjusting entries are records of internal transactions.

Some adjusting entries are for the following events or occurrences:

1. Cash shortage after cash count.
2. Merchandise inventory remaining at the end of the period and the cost of
goods sold.
3. Noted reconciling items in the bank reconciliation.
4. Interest income on notes receivable and interest expense on notes payable
and mortgage payable.
5. Doubtful accounts expense or bad debts.
6. Remaining supplies and Used supplies.
7. Remaining and Expired portion of the prepayment such as rent, advertising,
insurance, and other prepayments.
8. Depreciation of fixed assets and amortization of intangible assets.
9. Impairment of an asset.
10. Revenue earned on advance collection previously recorded as unearned
revenue.
11. Remaining liability or unearned revenue on advance collection previously
recorded as revenue.
12. Accrued Revenue.
13. Accrued Expenses.
14. Errors in journalizing and posting external transactions.

PARTS OF WORKSHEET
1. Name of business organization and preparation date.
2. Particulars / Item column.
3. Unadjusted Trial Balance section with its debit and credit columns.
4. Adjustment section with its debit and credit columns.
5. Adjusted trial balance section with its debit and credit columns.
6. Income statement section with its debit and credit columns.
7. Balance sheet section with its debit and credit columns.

WHAT IS A WORKSHEET?

The Worksheet is the scratch where you can compute the External and Internal
Transactions before recording it to the journal and posting in the ledger. It is used for
 2

you to make sure that your computations are correct and to avoid any mistakes or
corrections in the journal and ledger. The journal and ledger must be free from errors
and erasers as the Bureau of Internal Revenue audited it and to avoid any suspicion
or a questionable thought regarding the erasers in the journal and ledger. The
journal and ledger must be perfectly presented to the regulatory bodies.

● The Worksheet is not an official document. However, it is a scientific way for

computing Adjustments and Income to be presented in Financial Statements.

● If the amount in the Unadjusted Trial Balance section is Debited and the
amount in the Adjustment section is also Debited, you just need to Add the
two amounts. It is also the same when the amount is Credited on both
sections.

● On the other hand, if the amount in the Unadjusted Trial Balance section is
Debited and the amount in the Adjustment section is Credited, you need to
SUBTRACT the two amounts. It is also the same when the amount in the
Unadjusted Trial Balance section is Credited and the amount in the
Adjustment section is Debited.

● Just remember that when the amount in both sections is on the same side like
Debit and Debit, Credit and Credit, you just ADD the two amounts. On the
other hand, when it is not on the same side like Debit and Credit, Credit and
Debit, you need to SUBTRACT the two amounts.

● The same steps or procedures on the preparation of the Unadjusted Trial

Balance are followed in the preparation of the Adjusted Trial Balance.

PANG DALAWAMPU'T TATLONGNG ARALIN: Income Statement

FINANCIAL STATEMENT
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The preparation of Financial Statement in the following order:

1. Income Statement
2. Capital Statement or Statement of Owner’s Equity for Sole Proprietorship and
Partnership and Statement of Retained Earnings for Corporations.
3. Balance Sheet.
4. The Statement of Cash Flows

BASIC ACCOUNTING EQUATION

*NOTE
Assets = Liabilities + Equity/Capital Balance Sheet Accounts
Capital Statement Accounts
Beginning Capital + Additional Capital + Net Income Statement Accounts
Income (Revenue – Expense) – Drawing

CASH FLOW STATEMENT

will not be included in the basic accounting equation. But you can see it in the
comparative balance sheet. The decrease and increase in the accounts the
constitutes the income will be included in the cash flow statement, but if we will
consider the entries in the ledger on computing cash flow, because what we are
measuring in the cash flow is the ending balance of cash, if cash basis there will no
problem, the cash will represent your income in cash basis but considering the
accrual basis, we will just convert our net income into a cash basis.

2. Preparation of Income Statements – Here we will see the income of a

proprietorship, partnership or a company.
There are 2 steps in doing income statements
namely, single-step and multi-step.
Single - Step – In this step we can’t
create a lot of analysis because all the
income are single line and the expenses
are also in single line and their difference
is the net income, revenue – expense =
net income, there’s no classification
that’s why it can’t generate a lot analysis.
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Multi – Step – Unlike in the multi-step

there’s a classification, for examples in
Sales to get the gross profit; sales are
being subtracted by Cost of Good sold. It
means that the organization are
separating the net income from sales or
from the product itself. There are also
three classification in expenses namely,
operating expenses, and administrative
expenses. So we can see in the picture
that both revenue and expenses are
being classified into different categories
and
this *NOTE
step In preparing Income Statement we should go
will back on work sheet and focus on adjusted trial
generate more analysis for the balance, after closing the trial balance, all of the
accounts that became zero will be included in
organization.
income statement and the remaining accounts that
didn’t become zero will be included in balance
sheet. The result in income statement should be
place in the capital.

TO PREPARE A MULTI-STEP INCOME STATEMENT YOU MUST FOLLOW THE

FOLLOWING PROCEDURE.
1. Select your reporting period
2. Write the income statement header
3. Compute for the total of all the operating revenues
4. Compute for the total operating expenses
5. calculate gross profit
6. calculate operating income
7. add non-operating revenues and expenses
8. calculate net income
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DIFFERENT INCOME STATEMENT FROM SERVICE COMPANY,

MANUFACTURING AND MERCHANDISING

In these three examples we can literally

see the differences, from service,
merchandising and manufacturing, as
the business become complex, there
are more accounts that are being
considered, and that’s why the easiest
here is the service business while the
manufacturing business is much
complex and difficult. In the
classification these 3 are all the same
but they differ in the number of
accounts.
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PANG DALAWAMPU’T APAT NA ARALIN: Paghahanda ng Capital Statement at

Balance Sheet

PREPARE THE CAPITAL STATEMENT

Capital Statement (Statement of Changes in Equity)
 for sole proprietorship and partnership present the opening balance of the
capital at the first line, and then any kind of addition in investment or profit
earned during the accounting period is added in the nest line arriving at the
total balance of capital. Deductions in the form of withdrawals or loss of the
business are then subtracted from the total balance of the capital arriving at
the balance of capital at the end of the accounting period.
Beginning capital + additional capital = available capital

The Statement of Changes in Equity for corporation is a reconciliation of the

beginning in a corporation’s equity during a reporting period. It is common part of the
annual financial statements of the corporation.
The statement starts with the beginning equity balance, the amount of shares of
stocks issued, additional paid-ins for issuances of stocks, treasury stocks, retained
earnings and the adds or subtracts such item as profits and dividend payments to
arrive at the ending balance.
 Stock issuances – are public offerings of shares, also known as partial
ownership, in a formerly private company in exchange for money. The
company then uses this capital for expansion, debt payment or other
purposes.
 Treasury stock or reacquired stock – is stock which is bought back by
the issuing company, reducing the amount of outstanding stock on the
open market.
 Retained earnings of a corporation – is the accumulated net income of
the corporation that is retained by the corporation at a particular point of
time, such as at the end of the reporting period.
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Income of a
corporation

Additional Other
paid-in income

Ordinary
share

Simple illustration of Statement of Stockholders’ Equity:

Total Stockholder’s Equity = Common Stock + Additional Paid-in Capital + Retained

earnings

PREPARE THE BALANCE SHEET

 A Balance Sheet is a statement of the financial position of a business that
lists the assets, liabilities and owner’s equity at a particular point in time. In
other words, the balance sheet illustrates the business’ net worth.
 The Balance Sheet is the most important of the three main financial
statements used to illustrate the financial health of a business.
 An up-to-date and accurate balance sheet is essential for a business owner
looking for additional debt or equity financing, or who wishes to sell the
business and needs to determine its net worth.

Simple illustration of Balance Sheet:

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Sole Proprietorship Partnership

Corporation

REMEMBER THE EQUATION:

ASSETS=LIABILITIES+CAPITAL(CAPITAL+REVENUE-EXPENSES-
DRAWING)

The Balance Sheet is the same equation in an easier to read format

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DALAWAMPU’T LIMA NA ARALIN: Cash Flow Statement o Statement of Cash

Flows

WHAT IS A CASH FLOW STATEMENT?

The statement of cash flows, or the cash flow statement, is a financial statement:
 that summarizes the amount of cash and cash equivalents entering and leaving
a company.
 that explains the difference between the beginning cash and ending cash
balances of the business.
 that converts the accrual basis of accounting into a cash basis of accounting
 that measures how well a company manages its cash position, meaning how
well the company generates cash to pay its debt obligations ad fund its
operating expenses.

EXAMPLE OF CASH LEDGER/ACCOUNT

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CASH LEDGER/ACCOUNT *NOTE

The Cash Flow Statement complements the
balance sheet and income statement and is
This will be analyzed to come up with the mandatory part of a company’s financial
reports since 1987.
presentation of Cash Flow Statement with the use of
Direct Method.

PURPOSES OF THE CASH FLOW STATEMENT

 The CFS allows investors to understand how a company’s operations are

running, where its money is coming from, and how money is being spent. The
CFS is important since it helps investors determine whether a company is
standing on solid financial ground.
 Creditors, on the other hand, can use the CFS to determine how much cash is
available (referred to as liability) for the company to fund its operating expenses
and pay its debts.

COMPONENTS OF CASH FLOW STATEMENT

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IN CASH FLOW STATEMENT, THE CASH WILL BE CLASSIFIED INTO THREE:

1. Operating Activities – the inflows and outflows of cash through the operating or
primary activities of the business. It is composed of Current Assets (except
Marketable Securities) and Current Liabilities.
These operating activities might include:
 Receipts from sales of goods and services
 Interest payments
 Income tax payments
 Payments made to suppliers of goods and services used in production
 Salary and wage payments to employees
 Rent payments
 Any other type of operating expenses
2. Investing Activities – this is where the money is putted for future use. Non-
Current Assets and Marketable Securities are part of the investing activities.
Here are the examples of investing activities:
 Purchase of fixed assets
 Purchase of investments such as stocks or securities – cash Lending
money
 Sale of fixed assets
 Sale of investment securities
 Collection of loans and insurance proceeds
 2

3. Financing Activities – it is where the source of money came from and where it
is applied. It is the money that run the business. This activity is consisting of Non-
Current Liabilities and Equity, such as issuance of share of stocks and long-term
obligations.
Financing activities include:
 Dividend payments
 Stock repurchases
 Bond offerings – generating cash

METHODS OF COMPUTING CASH FLOWS

1. Direct Method – Directly based on cash ledger or account. This method starts
with the cash transactions such as cash received, and cash paid. This is also the
most preferred method of Accounting Standard Board and other users since it is
easily to evaluate than indirect method.
Example of Cash Flow Statement under Direct Method:
 2

2. Indirect Method – this method, on the other hand, starts with net income.
Comparative balance sheet and income statement is needed in this method. It is
the most preferred method of accountants since it is easier for them to create
Statement of Cash Flow using this method.
Example of Cash Flow Statement under Indirect Method:

The formula below will be used to check the net cash inflow or outflow that we get to
either of the method. The increase (decrease) in cash should match the amount in
the net cash inflow or outflow of the year.
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DALAWAMPU’T ANIM NA ARALIN: Closing Entries

WHAT IS A CLOSING ENTRY?

A closing entry is a journal entry made at the end of the accounting period. It
involves shifting the adjusted balance of the temporary accounts to the income
statement by reducing these balances to zero through the use of a clearing account
called income summary account.

WHAT IS A CLOSING PROCESS?

The Accounting Closing Process, also called closing the books, is the steps required
to prepare accounts for financial statement preparation and the start of the next
Accounting period. The closing process consists of steps to transfer temporary
account balances to permanent accounts and make the general ledger ready for the
next Accounting Period.
THREE MAIN STEPS:
 Identify temporary accounts that need to be closed.
 Record closing entries.
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 Prepare the Post Closing Trial Balance.

Illustration:
In this illustration we will close Macoral’s Guitar shop, Inc.’s temporary accounts
using the income summary account method. there are three general closing entries
that must be made.
1. Closing all revenue and gain accounts. all of Terimacor’s revenue or income
accounts are debited and credited to the income summary accounts. This resets the
income accounts to zero and prepares them for the next year.
Close Income Accounts to Income Summary
Date Account Name Debit Credit

December 31 Revenues 27, 800.00

-Income summary 27, 800.00 *NOTE
Remember that all
revenue, sales, income,
2. Closing all expense and loss accounts. All expense accounts and gain accounts are
and debiting income summary. closed in this entry.
Terimacor’s business or
Close Expense Accounts to Income Summary
has a few accounts to
Date Account Name Debit close.
Credit

December 31 Income summary 14, 850.00

-Cost of Goods Sold 10, 200.00
-Depreciation Expense 2, 000.00
-Rent Expense 500.00
-Supplies Expense 500.00
-Utilities Expense 400.00
-Wages Expense 750.00
-Interest Expense 500.00

3. Closing the balance of the Income Summary to the Retained Earnings (Capital)
To close the balance of the Income Summary

Date Account Name Debit Credit

December Income summary 19,250.00

31 Retained 19,250.00
Earnings
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Now that all the temporary account should have a balance equal to the net income
shown on Terimacor’s income statement.

4. Close all dividend or withdrawal accounts since dividend and withdrawals

Accounts are not income statement accounts, they do not typically use the income
summary account. These accounts are closed directly to retained earnings by
recording a credit to the dividend account and a debit to retained earnings.

Close Dividend Accounts to Retained Earnings

Date Account Name Debit Credit

December 31 Retained Earnings 1,000.00

-Dividends 1,000.00

WHAT IS THE POST CLOSING TRIAL BALANCES?

The post closing trial balance is a list of all accounts and their balances after the
closing entries have been journalized and posted to the ledger. In other words, the
post closing trial balance is a list of accounts or permanent accounts that still have
balances after the closing entries have been made.
Format:

*NOTE
A post closing trial balances in the accounting cycle displaying in three columns: A column for
account names, debits, and credits. Since only balance sheet accounts are listed on this trial
balance, they are presented in balance sheet order starting with assets, liabilities, and ending with
equity

.
Terimacor’s Bicycle Rental
Post-Closing Trial Balance
December 31, 2018
Account Titles Debit Credit
Cash 212,000
Accounts Receivable 60,000
Prepaid Expenses 71,000
Computer Equipment 100,000
Accumulated Depreciation 1,667
Accrued Expenses 14,844
Loans Payable 342,214
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Income Tax Payable 75

Terimacor, Capital 84,200
Totals 443,000 443,000
DALAWAMPU’T PITO NA ARALIN: Reversing Entries

WHAT IS REVERSING ENTRY?

 Entries prepared at the beginning of a new accounting period to reverse

certain adjusting entries. They are prepared to facilitate the recording of
expense payments and revenue receipts during the new accounting period in
the usual manner.
 Certain adjusting entries recorded at the end of the accounting period are
reversed at the beginning of a new accounting period. These adjustments
include accrued expenses, accrued revenues or income, prepaid expenses
recorded under the expense method and deferred revenues or income
recorded under the revenue method.
 The preparation of reversing entries is optional, but it facilitates the recording
of expense payments and revenue receipts in the new period in the usual
manner. This means that expense payments are recorded as a debit to an
expense account and a credit to cash; revenue receipts are recorded as a
debit to cash and a credit to revenue or income account.

The adjustment that will be reserved if reversing entries are prepared and the pro-
forma reversing entries prepared at the beginning of a new accounting period are as
follows:
1. Accrued Expense
Payable xxx
Expense xxx

2. Accrued Income
Income xxx
Receivable xxx

3. Prepaid expense - expense method

Expense xxx
Prepaid Expense xxx

4. Deferred revenue or income - revenue method

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Unearned Income xxx

Income xxx

The advantage of preparing the reversing entries and identifying adjusting

entries that may be reversed.
- Reversing entries are prepared at the beginning of a new accounting period
for the following adjustments: (1) accrued expense, (2) accrued Income, (3)
prepaid expense recorded under the expense method, and (4) unearned
income, recorded under the income method. The preparation or reversing
entries is optional but it facilitates the recording of expense payment and
revenue receipts during the new accounting in the usual manner.

CHAPTER 1&2: Partnership Formation

 2

WHAT IS PARTNERSHIP?
 a contract whereby two or more persons bind themselves to contribute
money, property, or industry into a common fund with the intention of dividing
profits among themselves. (Article 1767 of the Civil Code of the Philippines).
 A legal subject matter. Accountant capture what is the content of their
agreement to put in the books.
 Study the accounting determination of Partnership Formation, Operating, and
Dissolution with the support of the Civil Code.
 Operation of partnership is based on the Accounting Principles.
 The agreement of partners is based on the law (Civil Code).

CHARACTERISTICS AND ELEMENTS OF A PARTNERSHIP

1. Mutual Contribution
 it means the partners contribute into a common fund with the intention
of dividing profits.
2. Mutual Agency
 all partners is an agent of the partnership.
 the decision/movement of one is the decision/movement of all.
3. Unlimited Liability
 It only applies for General Partner wherein the personal asset of the
partner may be used to satisfy the partnership creditor’s claims upon
liquidation.
4. Limited Life
 There are many ways to dissolve a partnership: admission, death,
incapacity, or withdrawal of any partner or by expiration of the term
specified in the partnership agreement.
5. Division of Profits and Losses
 This is their purpose of entering a partnership.
 This is the primary concept of the partnership, to divide among
themselves the income or profit of the business.
6. Legal Entity
 The member/partner of the partnership is different from the person of
the partnership. The mistake of the partnership is not the mistake of the
partner.
 Business Entity Concept – recording will be separate from the
recording of the personal transaction and the business transaction.
 Legal Entity Concept – there is a legal personality separate and distinct
from that of each the partners.

7. Co-ownership of Contributed Assets

 Once the property has been contributed, it is already co-owned by
other partners by the partnership.
 2

8. Income Tax
 There are two class of Partnership
i. General Professional Partnerships (GPP) – the main purpose
is to practice or exercise their profession. The net income of
partnership is non-taxable. However, the share of the individual
partner is subjected to the ordinary income tax. It is included in
the graduated income tax which is 0% - 32%.
ii. Partnership for Profit – the main purpose is to gain profit. the
net income of the partnership is taxable in the same manner as
the corporation which is 30% income tax. But the share of
individual partner is subject to 10% withholding tax.

ADVANTAGES OF A PARTNERSHIP
1. Easy to organize and less expensive than a corporation.
2. The unlimited liability of the partners makes it attractive to creditors.
3. Higher fund will be raised than a sole proprietorship. You raise money out of
trust.
4. More partners of different skills and expertise makes it possible to manage all
the partnership activities.

DISADVANTAGES OF A PARTNERSHIP
1. Easy to be dissolved (Limited life).
2. All partner is liable for the bad actions of the other partner (Mutual Agency).
3. The liability of the partnership will extend to the personal property of the
partners excelt limited partner. (Unlimited Life).
4. Disagreement among partners may lead to dissolution.
5. A partner has to consult the other partners before a decision will be made.

KINDS OF PARTNERSHIPS
1. As to Liability of Partners
a) General Partnership – if all the partners are general partners wherein all
partners are liable up to extent of their personal properties. They are
willing to give up their personal property.
b) Limited Partnership – if there is one or more limited partners. The name
of the partnership should put a word limited or LTD. to give notice to the
public that there is one or more partners in the partnership who will not
answer for the liability to the creditor. There should be at least one general
partner in a limited partnership.

2. As to Duration
a) Partnership at will –until the partners want the partnership to last.
 2

b) Partnership with fixed term – a term or duration is indicated in the

Articles of Co-partnership. The term or duration has been agreed upon.

3. As to Legality of Existence
a) De jure partnership – all the requirements has complied in the Securities
and Exchange Commission.
b) De facto partnership – the requirements is not yet fully complied. For
example, the papers or requirements is already in the process.

4. As to Purpose or Activity
a) Commercial or Trading Partnership – the main activity is the
manufacture and sale of the purchase and sale of goods.
b) Professional or Non-trading partnership – the main activity is to render
services.

5. As to Object
a) Universal Partnership
a. Universal partnership of all present property – the property itself
has been transferred to the partnership.
b. Universal partnership of all profit – the use or interest of the
property has been only contributed. Movable Property – personal
property. Immovable property – real property.
b) Particular Partnership – one which has for its object a determine thing,
their use or fruits, or a specific undertaking or the exercise of a profession
or vocation. There is only specific activity that the partnership will engage.

6. As to Representation to Others
a) Ordinary Partnership – fully-consummated or legal partnership.
Partnership which transacts to public as a partnership.
b) Partnership by estoppel – not really a partnership but the people inside it
is deceiving the public that they are a partnership. If there are complain
about them, they cannot tell that they are not partnership because they are
acting as a partnership and still considered as a partnership by estoppel.

7. As to Publicity
a) Secret Partnership – a partnership that is not known by the public.
b) Open Partnership – a partnership that is known by the public.

CLASS OF PARTNERS
1. As to Contribution
a) Capitalist Partner – Contribute cash or property.
b) Industrial Partner – Contribute industry, labor, skill, talent or service.
c) Capitalist-industrial partner – Combination of property and skills.
 2

2. As to Liability
a) General Partner – the liability extends to his personal property.
b) Limited Partner – the liability is limited only to his contribution in the
partnership.

3. As to Management
a) Managing Partner – the one who takes care on all the affairs of the
partnership.
b) Silent Partner –only who only invests in the partnership and does not
participate in the management.

4. Other Classifications
a) Liquidating Partner – one who takes charge upon liquidation. It is not
necessary to be the manager of the partnership but anybody of the
partnership can be appointed as the liquidating partner.
b) Nominal Partner – one who is not really a partner, not being a party to the
partnership agreement, but is made liable as a partner for the protection of
innocent persons. It is like the partnership by estoppel.
c) Ostensible Partner – one who takes active part in the management of the
firm and known to the public. This is usually the manager.
d) Secret Partner – Capitalist that do not one to get involve or to participate.
e) Dormant Partner – Both a secret partner and a silent partner.

PARTNERSHIP CONTRACT
 A partnership is created by an oral or a written agreement. It is required in
writing if the contribution will exceed P3,000.
 Agreement of the partnership can be seen in the Articles of Co-Partnership.
 Articles of Co-Partnership contains the following information:
1. The name of the partnership;
2. The names and address of the partners, classes of partners, stating
whether the partner is a general or a limited partner;
3. The effective date of contract;
4. The purpose or purposes and principal office of the business;
5. The capital of the partnership stating the contributions of individual
partners, their description and agreed values;
6. The rights and duties of each partner;
7. The manner of dividing net income or loss among the partners,
including salary allowance (distribution of the net profit) and interest on
capital (share of the partner in the net income of the business);
8. The conditions under which the partners may withdraw money or other
assets for personal use;
9. The manner of keeping the books of accounts;
10. The causes for dissolution; and
11. The provision for arbitration in settling disputes.
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ORGANIZING A PARTNERSHIP
To operate legally, the partnership has to comply with the registration requirements
of the following government offices:
First, go to a lawyer, request for a draft of articles of Co-Partnership. After that go to
SEC (Mentioned below)
Government Agencies
Securities and Exchange Commissions (SEC)
o Filing of the Articles of Co-Partnership
o This is where you will register the name for the partnership.
City or Municipality Mayor’s Office
o After the partnership have the name, they must go to the City or
Municipal Permit for the registration of the business in the Local
Government.
Bureau of Internal Revenue (BIR)
o After acquiring name and Mayor’s Permit. They should go to the BIR
for the registration of the Books of Accounts. Registration as Vat or
Non-Vat tax payer. And registration for other regulating government
agencies.
ACCOUNTING FOR PARTNERSHIPS
The operation of partnership and sole proprietorship is almost the same, the
difference is the recording of the capital. In partnership, there should be many capital
accounts and drawing accounts as there are partners.

PARTNER’S CAPITAL ACCOUNT

1. Permanent withdrawal (decrease) of 1. Original Investment by a partner
capital
2. Share in partnership loss from partner 2. Additional investment by a partner
3. Closing entry of drawing account 3. Share in partnership profits from
operations

PARTNER’S DRAWING ACCOUNT

1. Personal withdrawal by a partner 1. Share in partnership profits from
operations (This may be credited directly
to the partner’s capital account)
2. Share in partnership loss from
operations (this may be deducted directly
to the partner’s capital account)
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OPENING ENTRIES
 Partners may contribute cash, property, or industry to the partnership.
 Cash is always recorded as face value. It has no fair market value.
 For Non-Cash Asset Contribution or Property
o Agreed Value must be recorded.
o If there is no Agreed Value, Fair Market Value must be recorded.
 Fair Market Value – The value of a product if you sell it in the
market today.
 Book Value = Cost – Depreciation
 For Industry – Memorandum Entry is prepared

PARTNERSHIP FORMATION
A. TWO OR MORE PERSONS FORM A PARTNERSHIP FOR THE FIRST
TIME.
 This is the easiest because both has no existing business.

1. Cash Contributions (Capitalist Partners)

Amado and Agustin agreed to form a partnership by contributing P200,000 cash
each.
The entry to record the contributions in the partnership is:
Cash 400,000
Amado, Capital 200,000

Agustin, Capital 200,000

Cash and Non-Cash Contributions (Capitalist Partners)

Bicen and Bunque made the following contributions in the partnership:

Bicen Bunque
Cash P200,00 P300,000
0
Inventories P300,00
0
Equipment P400,000
Total P500,00 P700,000
0
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The entry to record the contributions of the partners follows:

Cash 500,000
Inventories 300,000
Equipment 400,000
Bicen, Capital 500,000
Bunque, Capital 700,000

2. Contributions in the form of Cash, Non-cash Assets, and Industry (Capitalist

Partners)
Cindy, Carla, and Carmen formed a partnership. Cindy contributed P200,000
cash, Carla contributed P150,000 cash and equipment valued at P350,000;
Carmen is an industrial partner to contribute her special skills and talents to the
partnership. Profit or loss to be shared equally among the partners.
The entry to record the contributions of partners Cindy and Carla follows:

Cash 350,000
Equipment 350,000
Cindy, Capital 200,000
Carla, Capital 500,000

The memorandum entry to record the contribution of partner Carmen follows:

Carmen is admitted into the partnership as an industrial partner to share one-third in
the partnership profit. Carmen is an industrial partner so she memorandum entry
must be recorded.

B. A SOLE PROPRIETOR AND AN INDIVIDUAL FORM A PARTNERSHIP

 This one is composed of One Sole Proprietor and an Individual Partner.
 There is an option to
o Use the books of the Sole Proprietor (Adjust only)
o Open a new set of Books (Adjust and Close)
 It is a common practice that a new set of books be opened for any new
business undertaking. It gives the sense of fairness.
 In the valuation of the property, agreed capital or fair market value can be
used. But in the absence of both, book value can be used.
EXAMPLE
Mejia and Reyes formed a partnership wherein Mejia is to contribute cash while
Reyes is to transfer the assets and liabilities (net assets) of his business. Account
balances on the books of Reyes are as follows:
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Cash 300,000
Accounts Receivable 250,000
Inventories 200,000
Cash 80,000
Inventories 670,000

The partners agreed on the following conditions: Note:

1. An allowance for uncollectible accounts of P12,000 is to be
established.

Reyes, Capital 12,000

Allowance for Uncollectible Accounts 12,000
2. The inventories are to be valued at their current replacement cost of
P220,000.

Inventory 20,000
Reyes, Capital 20,000

3. Prepaid expenses of P7,000 and accrued expenses of P4,000 are to be

recognized.

Prepaid Expense 7,000

Reyes, Capital 4,000
Reyes, Capital 7,000
Expenses Payable 4,000
4. Reyes is to be credited for an amount equal to the net assets transferred.
5. Mejia is to contribute sufficient cash to have an equal interest in the
partnership.

ASSUMPTION 1 – Use the Books of the Sole Proprietor

The adjusting entries necessary to update the balances to agreed
values upon partnership formation are recorded through the capital accounts
of the partners. A capital adjustment account may also be used and its
balance is transferred to the capital accounts after all adjustments in the net
assets are made.
Step 1. Adjust the books of the sole proprietor Reyes to agreed values. (Mentioned
above)
The balance of the capital account of Reyes after the three adjusting entries are
posted is 681,000 (670,000 – 12,000 + 20,000 + 3,000). There is an 11,000 increase
in capital.
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Step 2. Record the investment of the other partner.

Cash 681,000
Mejia, Capital 681,000

ASSUMPTION 2 – The partnership will open a new set of books

When the partnership will open a new set books, the entries to record are the
investment of the partners at agreed values.
An example of provided using a new book for a partnership using the data given in
Illustrative Problem A are shown as follow:

Step 1: First, we need to adjust and close the book of Reyes.

a. Reyes, Capital 12,000
Allowance for Uncollectible Accounts 12,000
b. Inventories 20,000
Reyes, Capital 20,000
c. Prepaid Expense 7,000
Expense Payable 4,000
Reyes, Capital
3,000
d. Allowance for Uncollectible Accounts 12,000
Accounts Payable 80,000
Expenses Payable 4,000
Reyes, Capital 681,000
Cash 300,000
Accounts Receivable 250,000
Inventories 220,000
Prepaid Expenses 7,000
To close the books of Reyes

Step 2: After closing the book of Reyes, record the investment of the partners
in the new set of book at agreed value.
a. Cash 300,000
Accounts Receivable 250,000
 2

Inventories 220,000
Prepaid Expenses 7,000
Allowance for Uncollectible Accounts 12,000
Accounts Payable 80,000
Expenses Payable 4,000
Reyes, Capital 681,000
To record the investment of Reyes

b. Cash 681,000
Mejia, Capital 681,000
To record the investment of Mejia

C. TWO OR MORE SOLE PROPRIETORSHIP FORMS A PARTNERSHIP

 All prospective partners are already in business.

 There is an option to
1. Use the books of the either of the two Sole Proprietor
2. Open a new set of Books
 It is a common practice that a new set of books be opened for any new
business undertaking.
 In the valuation of the property, agreed capital or fair market value (in the
absence of agreed values). But in the absence of both, book value can be
used.

Illustrative Problem B: Sotea, owner of Sotea Variety Store, and Valdez, owner of
Valdez Trading, decided to continue their business on July 01, 2020. Each is to
transfer business assets and liabilities (net assets) at agreed values. Statements
of financial position for two proprietors are presented below.

Sotea Variety Store

Statement of Financial Position
July 01, 2020

Assets
Cash 130,000
Accounts Receivable 75,000
Less Allowance for Uncollectible Accounts 5,000 70,000
Merchandise Inventory 300,000
Store Equipment 630,000
Less Accumulated Depreciation 35,000 595,000
Total Assets P1,095,000
Liabilities and Capital
 2

Accounts Payable 150,000

Sotea, Capital 945,000
Total Liabilities and Capital P1,095,000

Valdez Trading
Statement of Financial Position
July 01, 2020
Assets
Cash 35,000
Accounts Receivable 350,000
Less Allowance for Uncollectible Accounts 25,000 325,000
Merchandise Inventory 1,250,000
Delivery Equipment 470,000
Less Accumulated Depreciation 8,000 462,000
Total Assets P2,072,000
Liabilities and Capital
Accounts Payable 345,000
Valdez, Capital 1,727,000
Total Liabilities and Capital P2,072,000

The partners Sotea and Valdez agreed on the following conditions, respectively:

1.Partner’s capital in the partnership shall be equal to the adjusted net assets
transferred.
2. Adjustments are to be made as follows:
a. Allowance for Uncollectible Accounts shall be P7,500 and P32,000,
respectively.
b. Inventories are to be valued at 110% of their recorded values.
c. Both store and delivery equipment are 5% depreciated.
ASSUMPTION 1 - The partnership will use the books of the sole proprietor
This assumption has the same procedure discussed under Formation B -
Assumption 1.
Assuming that books of Valdez will be used by the partnership, the steps are as
follows:

Step 1: Adjust the books of Valdez Trading

a. Valdez, Capital 7,000

Allowance for Uncollectible Accounts 7,000
32,000 – 25,000 = 7,000
b. Merchandise Inventory 125,000
Valdez, Capital 125,000
c. Valdez, Capital 15,500
 2

Accumulated Depreciation - Delivery Equipment 8,000

Delivery Equipment 23,500
P470,000 x 5% = P23,500
P462,000 NBV old - (470,000 x 95%) NBV new = P15,500

Step 2: Record the investment of Sotea

a. Cash 130,000
Accounts Receivable 75,000
Merchandise Inventory (300,000x110%) 330,000
Store Equipment (630,000x95%) 598,500
Allowance for Uncollectible Accounts 7,500
Accounts Payable 150,000
Sotea, Capital 976,000

The following adjusting and closing entries are prepared separately on the
books of Sotea Variety Store:
a. Sotea, Capital 2,500
Allowance for Uncollectible Accounts 2,500
7,500-5,000 = 2,500
b. Merchandise Inventory 30,000
Sotea, Capital 30,000
c. Accumulated Depreciation - Store Equipment 35,000
Store Equipment 31,500
Sotea, Capital 3,500
P630,000 x 5% = P31,500
P595,000 NBV old - (630,000 x 95%) NBV new = P3,500
d. Allowances for Uncollectible Accounts 7,500
Accounts Payable 150,000
Sotea Capital 976,000
Cash 130,000
Accounts Receivable 75,000
Merchandise Inventory 330,000
Store Equipment 598,500

ASSUMPTION 2 - The partnership will use a new sets of books

Using a new sets of book in a partnership, entries are prepared to record the
investment of the partners at agreed values.
An example provided using a new set of books in a partnership using the Illustrative
Problem B.
 2

a. Cash 130,000
Accounts Receivable 75,000
Merchandise Inventory (300,000x110%) 330,000
Store Equipment (630,000x95%) 598,500
Allowance for Uncollectible Accounts 7,500
Accounts Payable 150,000
Sotea, Capital 976,000
To record the investment of Sotea
b. Cash 35,000
Accounts Receivable 350,000
Merchandise Inventory (1,250,000x110%) 1,375,000
Delivery Equipment (470,000x95%) 446,500
Allowance for Uncollectible Accounts 32,000
Accounts Payable 345,000
Valdez, Capital 1,829,500
To record the investment of Valdez
*NOTE
The plant assets transferred to the books of the new The new partnership may
partnership are recorded net of depreciation. The account prepare a separate entry
accumulated depreciation is not carried on the partnership books. for each partner’s
contribution as shown or a
The net amount, being the agreed value, represents the cost of the compound entry that
plant assets to the partnership and such amount becomes the shows the contributions of
basis for the future depreciation of the partnership. all the partners.
A statement of financial position prepared immediately after
the formation of the partnership of Sotea and Valdez is shown below.

Sotea and Valdez

Statement of Financial Position
July 01, 2020
Assets
Cash 165,000
Accounts Receivable 425,000
Less Allowance for Uncollectible Accounts 39,500 385,500
Merchandise Inventory 1,705,000
Store Equipment 598,500
Delivery Equipment 446,500
Total Assets P3,300,500
Liabilities and Capital
Accounts Payable 495,000
Sotea, Capital 976,000
Valdez, Capital 1,829,000
 2

Total Liabilities and Capital P3,300,500

CHAPTER 3: Distribution of Profits and Loss

METHODS OF DISTRIBUTING PROFITS BASED ON PARTNER’S AGREEMENT

1. Equally – it is simple to apply but does not give due recognition on the disparity
of capital contribution nor does it recognize the time and effort that a partner may
devote in running the firm’s business operations.
2. Arbitrary ratio (Percentage, Decimal, Fraction, Ratio) – it is simple to apply
but does not give recognition on the disparity of capital contributions nor does it
recognize the time and effort that a partner may devote in running the firm’s
business operations.
3. Capital ratio (Original, Beginning, Ending, Average) – this method e
differences in the capital contributions but does not take into account the time
and effort that a partner may devote in running the firm’s business operations.
Bases of capital ratio:
 original (before starting the business operation)
 beginning (might differ from original capital on the subsequent period)
 ending (beg. cap + net profit/loss – withdrawal)
 average (no. of mos. Capital in use x no. of mos. / 12 mos.)
4. Interest on capital and the balance on agreed ratio – this method recognizes
the differences in the capital contributions but does not take into account the time
and effort that a partner may devote in running the firm’s business operations.
 Interest is allowed to partners for the use of invested capital. Interest as
agreed by the partners shall be allowed in proportion over the period such
capital was actually used. Moreover, the interest shall be provided whether
 2

the profit is sufficient or insufficient or there is a net loss unless otherwise

is agreed upon by the partners.
5. Salary allowances to partners and the balance on agreed ratio – this method
recognizes the time and effort that a partner may devote in running the firm’s
business operations but does not take into consideration the differences in capital
contributions.
 Salaries allowed to partners as compensation for their time devoted in the
business. Salaries as agreed by the partners shall be allowed in proportion
to the time the partners actually rendered services to the firm. Such
salaries shall be provided whether the profit is sufficient or insufficient or
there is net a loss unless otherwise agreed upon by the partners.
6. Bonus to managing partner and the balance on agreed ratio – this method
allows a bonus, as an incentive, to the managing partner. It is usually a
percentage of the profit. Bonus, therefore, is allowed only when there is a profit. It
may be computed using any one of the following as basis:
a. Bonus is based on profit before deducting bonus and income tax
b. Bonus is based on profit after deducting bonus but before deducting income
tax
c. Bonus is based on profit after deducting income tax but before deducting
bonus
d. Bonus is based on profit after deducting both bonus and income tax
- Salary and interest to capital, even if it is a net loss, but when it comes to
bonus, there must be a profit.

7. Interest on capital, salaries to partners, bonus to managing partner, and the

balance on agreed ratio.

Illustrative Problem A: The following data are available in the books of Calma and
David Partnership for the year 2014.
Calma, Capital
May 1 P100,000 Jan. 1 Balance P2,500,000
April 1 250,000
Oct. 1 500.000
Balance – P3,150,000
- P100,000 permanent drawing account
Calma, Drawing
Jan.1 – Dec. 31 P300,000
- P300,000 temporary drawing account
David, Capital
June 1 P150,000 Jan. 1 Balance P1,500,000
Dec. 1 50,000 Sept. 1 500,000
Balance – P1,800,000
 2

David, Drawing
Jan.1 – Dec. 31 P225,000

Income Summary
Dec. 31 P600,000

Twelve cases will be illustrated using the given data. Cases 1-10 will show sufficient
profit. Case 11 will show insufficient profit. Case 12 shows a loss.

Case 1 – Profit is divided equally

Income Summary 600,000
Calma, Capital 300,000
David, Capital 300,000
P600,000/2 = P300,000
Case 2 – Prifit is divided ¾ and ¼ to Calma and David
Income Summary 600,000
Calma, Capital 450,000
David, Capital 150,000
P600,000 x ¾ = P450,000
P600,000 x ¼ = P150,000
Case 3 – Profit is divided in the ratio of 1:2 to Calma and David
Income Summary 600,000
Calma, Capital 200,000
David, Capital 400,000
P600,000 x 1/3 = P200,000
P600,000 x 2/3 = P400,000
Case 4 – Profit is divided 20% and 80% to Calma and David
Income Summary 600,000
Calma, Capital 120,000
 2

David, Capital 480,000

P600,000 x 20% = P120,000
P600,000 x 80% = P480,000
Case 5 – Profit is allocated based on the beginning capital ratio
Income Summary 600,000
Calma, Capital 375,000
David, Capital 225,000
P600,000 x 25/40 = 375,000
P600,000 x 15/40 = 225,000
Case 6 – Profit is allocated based on the ending capital ratio
Income Summary 600,000
Calma, Capital 381,820
David, Capital 218,180
P600,000 x 315/495 = 381,820
P600,000 x 180/495 = 218,180

The ending capital balances of the partners are computed as follows:

Calma David
Beginning balances 2,500,000 P1,500,000
Additional investment 750,000 500,000
Drawing (100,000) (200,000)
Ending Balances P3,150,000 P1,800,000

**Withdrawals deducted for purposes of determining ending capital balances are the
debit entries in the capital accounts of each of the partners. These debit entries
represent permanent withdrawals or decreases on capital. The credit entries
represent initial and/or additional investments.
On the other hand, the debits to the drawing accounts represent temporary
withdrawals or decreases in capital caused by the share in loss (though may be
debited directly to the capital account) or withdrawal of assets in anticipation of
profits. The credit entries represent increases in capital (may be credited to the
capital account) caused by the share in profit. The entries in drawing accounts are
not considered in computing ending capital for the purpose of establishing the ratio.
Case 7 – Profit is allocated based on the average capital ratio
 2

Income Summary 600,000

Calma, Capital 381,290
David, Capital 218,710
P600,000 x 2,745,830/4,320,830 = 381,290
P600,000 x 1,575,000/4,320,830 = 218,710
An average capital ratio is a method of divided profit based on the amount of capital
invested and the time during which such capital is actually used in the business.
The following steps are to be followed in determining the average capital of each
partner using the peso month method, thus, arriving at the capital ratio:
1. Multiply beginning capital by the number of months that is remained unchanged.
2. 2. Determine each new capital balance in chronological order and multiply by the
number of months it remained unchanged.
3. Add the products which represent peso months and divide the total by twelve (12)
to obtain the average monthly capital.
By the following steps given, the average capital of each partners can be calculated
as follows:
Calma, Capital
Period Capital No. of Pero Months Average
Balances mos. Capital
Unchange
d
Jan 1 – Mar 31 2,500,000 3 7,500,000
Apr 1 – Apr 30 2,750,000 1 2,750,000
May 1 – Sep 30 2,650,000 5 13,250,000
Oct 1 – Dec 31 3,150,000 3 9,450,000
12 32,950,000 P2,745,830
David, Capital
Jan 1 – May 31 P1,500,000 5 P7,500,000
Jun 1 – Aug 31 1,350,000 3 4,050,000
Sep 1 – Nov 30 1,850,000 3 5,550,000
Dec 1 – Dec 31 1,800,000 1 1,800,000
12 18,900,000 1,575,000
P4,320,830

Case 1 to 7 provide for division of profits using a single allocation procedure.

However, there are instances when the partnership agreement may provide for a
combination of several allocation procedures (multiple bases of profit allocation) to
be used in distribution of profit. Since partnerships specify a profit distribution to be
followed to whatever extent possible, most agreements specify that the entire
 2

process is to be completed and any remainder is to be allocated in the profit and loss
ratio, the following cases are used to illustrate various multiple allocation procedures.
Case 8 – Each Partner is allowed 10% interest on ending capital and the
remaining profit is divided 60%, 40%
Income Summary 600,000
Calma, Capital 378,000
David, Capital 222,000

The distribution of profits may be recorded separately as follows:

Income Summary 495,000
Calma, Capital 315,000
David, Capital 180,000
Interest on ending capital
Income Summary 105,000
Calma, Capital 63,000
David, Capital 42,000
Remaining income divided 60%, 40%
Division of Profit
Calma David Total
Interest on ending capital
P3,150,000 x 10% P315,000
P1,800,000 x 10% P180,000 P495,000
Remainder – 60%,40%
P105,000 x 60% 63,000
P105,000 x 40% 42,000 105,000
Total P378,000 P222,000 P600,000

Case 9 – David is allowed salaries of P500,000 and the remaining profit is

divided in the ratio of 1:4
Income Summary 600,000
Calma, Capital 20,000
David, Capital 580,000
 2

Division of Profit
Calma David Total
Salaries P500,000 P500,000
Remainder – 1:4
100,000 x 1/5 P20,000
100,000 x 4/5 80,000 100,000
Total P20,000 P580,000 P600,000

Case 10 – David, the managing partner is allowed a bonus of 20% of profit

BEFORE bonus and income tax and the remainder is divided in the ratio of
beginning capital
Using the income tax rate of 30% the partnership income before income tax is
P857,143 that us, net profit of P600,000 divided by 70%
Income Summary 600,000
Calma, Capital 267,857
David, Capital 332,143
Division of Profit
Calma David Total
Bonus – 857,143 x 20% P171,429 P171,429
Remainder
P428,571 x 25/40 P267,857
P428,571 x 15/40 161,587 428,571
Total P267,857 P332,143 P600,000
Other assumption on the computation of bonus shall be illustrated later in the
chapter.
Case 11 – The partnerd are allowed P5,000 and P10,000 weekly salaries,
respectively, 10% interest on average capital, and the remainder is divided in
the ratio of 2:3.
Income Summary 600,000
Calma, Capital 289,000
David, Capital 310,250
Division of Profit
Calma David Total
Salaries to Partners
P5,000 x 52 P260,000
P10,000 x 52 P520,000 P780,000
Interest on average
capital
 2

P2,745,830 x 10% 274,000

P1,575,000 x 10% 157,500 432,080
Remainder – (P612,080)
P612,080 x 2/5 (244,830)
P612,080 x 3/5 (367,250) (612,080)
Total P289,750 P310,250 P600,000

The sum of the salary allowance and interest allowance on the average capital of the
partners exceeded the profit of 600,000 resulting in a negative remainder (loss or
deficit). Such loss is distributed as provided in the profit and loss sharing agreement.
Case 12 – Assume the same agreement as in Case 11 ecept that instead of a
profit the partnership has incurred a loss of P160,000.
The allowance for salaries and interest will still be provided, thereby resulting in a
total loss to be divided as agreed.
David, Capital 109,750
Calma, Capital 9,750
Income Summary 100,000
Division of Profit
Calma David Total
Salaries to Partners
P5,000 x 52 P260,000
P10,000 x 52 P520,000 P780,000
Interest on average capital
P2,745,830 x 10% 274,000
P1,575,000 x 10% 157,500 432,080
Remainder – (P1,112,080)
P1,112,080 x 2/5 (524,830)
P1,112,080 x 3/5 (787,250) (P1,112,080)
Total P9,750 (P109,750) (P100,000)

The allocation of partnership profit follows the order of the profit sharing agreement
in allocating the bonus, the salary allowances, the interests and the remainder to
individual partners.
The bonus is computed on the basis of the partnership profit as the concept of
“partnership profit” is generally understood in accounting practice. Partners may,
however, intend for salary and interest allowances to be deducted in determining the
base for computing the bonus. In such case, no bonus is allowed if there is
insufficient profit after distribution of salaries and interests.
The interests of the partners may not be apparent when technical accounting terms
are used; so, the partnership agreement should be precise in specifying
measurement procedures to be used in determining the amount of a bonus.
 2

Illustrations in the computation of bonus using other assumptions. The same data in
Illustrative Problem A shall be used. Bonus rate is 20%.
1. Bonus is based on profit after deducting bonus but before deducting income tax
B = .20 (P857,143 – B)
B = P171,428 – .20B
B – .20B = P171,428
B = P171,428/1.20
B = P142,857
2. Bonus is based on profit after deducting bonus but after deducting income tax
B = .20B (857,143 – 257,134)
T = .30 x P857,143
= P257,143 *NOTE
The bonus was not deducted
Substituting for T in the first equation and solving for B
from the profit subject to income
B = .20 (P857,143 – B – T) tax. The bonus being computed
B =.20 x P600,00 is not an excuse but a
B = P120,000 distribution of profit after income
tax.
1. The bonus is based on profit after deducting bonus and
income tax
B = .20B (857,143 – B – T)
T = .30 x P857,143
= P257,143
Substituting for T in the first equation and solving for B
B = .20 (P857,143 – B – 257,143)
B =.20 (P600,00 – B)
B = P120,000 – .20B)
B + .20B = P120,000
B = P120,000/1.20
B = P100,000
The partnership form of business allows a wide
selection of profit distribution ratios to meet the *NOTE
In the preceding
individual desires of the partners. Ratios for profit examples, bonus is
distributions may be based on the percentage of total treated as a distribution of
partnership capital, time and effort invested in the partnership profit, and
partnership, or a variety of other factors. Some therefore such bonus is
partnerships, however, have a profit-sharing ratio that not deductible as an
expense in determining
is different from their loss sharing ratio. the amount of taxable
profit. The same is true
for salaries and interest
ORDER OF PRIORITY PROVISION allowed on capital.

In some instances, the partners may agree not to use

residual sharing ratio in the event profits did not exceed the total of the salary and
interests allowed. In this case, the partners must agree on the priority of the various
 2

features. If the partnership agreement gives salary allowances priority over interest
on capital balances, then profit would first apply to salaries and the balances would
be divided in the ratio of interest allowance and vice-versa.

Illustrative Problem B: Santos and Tomas are partners with capital balances
P315,000 and P180,000, respectively. The profit and loss agreement provides
salaries of P500,000 to Santos and P250,000 to Tomas, 10% interest on capital and
the balance will be divided equally. Income is to be allocated by first giving priority to
interest on invested capital and then on salary allowance. Partnership net income for
the year is P600,000.

The following is the division of the P600,000 profit in accordance with the order of
priority provision.
Santos Tomas Total
Interest on capital
P315,000 x 10% P31,500
180,000 x 10% P18,000 49,500
Salaries (ratio 50:25) 183,500 367,000 550,500
Total 215,000 385,000 600,000

The entry to record the distribution of the profit is as follows:

Income Summary 600,000
Santos, Capital 215,000
Tomas, Capital 385,000
 2

Partnership Chapter 3: Correction of Errors

CORRECTION OF ERRORS
This occur when accountants fail to record prepaid expenses, accrued expenses,
accrued income, unearned income, and overstatement and understatement in
purchases.
Correction in profit of current year for
errors made in
Prior Year Current Year
1 Unrecorded prepaid expenses - +
2 Unrecorded accrued expenses + -
3 Unrecorded accrued income - +
4 Unrecorded unearned income + -
5 Overstatement of inventories + -
6 Understatement of inventories - +
7 Overstatement of purchases - +
8 Understatement of purchases + -
9 Overstatement of depreciation none +
1 Understatement of depreciation none -
0
*NOTE
Illustrative Problem: Tax implications of these
corrections are properly
Hannah, Ines, and Julian are partners sharing profit on a 2:3:5 accounted for if the
ratio. On January 1, 2019, Karina was admitted into the partnership partnership is not a
with a 20% share in profits. The old partners shall continue to general professional
partnership.
participate in profits in proportions to their original ratios,
 2

For the year 2019, the partnership books showed a profit of P398,000. It was
ascertained, however, that the following error were made:
1. Accrued expenses not recorded at the end of 2018 P5,000
2. Overstatement of 2019 ending inventory 48,000
3. Goods received and inventoried in 2019 but the related 20,000
purchases not recorded
4. Income received in advance (unearned income), not 10,000
recorded at the end of 2018)
5. Prepaid expenses not recorded at the end of 2018 3,000

The corrected profit for 2019 based on a 30% income tax rate shall be
computed as follows:
Recorded Profit P398,000
Corrections:
Unrecorded accrued P5,000
expenses, 2018
Unrecorded unearned income, 10,000
2018
Overstatement of ending (48,000)
inventory, 2019
Unrecorded purchases, 2019 (20,000)
Unrecorded prepaid expenses, (3,000)
2018
Total Corrections before (P56,000)
income tax
X 70%
Total Corrections after income (39,200)
tax
Corrected profit P358,800

The distribution of corrected profit shall be based on the new profit and loss
ratios computed as follows:
Hannah 20% x 80% 16%
Ines 30% x 80% 24%
Julian 50% x 80% 40%
Karina 20%
100%

The corrected profit shall be divided among partners as follows:

Hannah P358,000 x 16% P57,408
Ines P358,000 x 24% 2486,112
Julian P358,000 x 40% 143,520
Karina P358,000 x 20% 71,760
P358,800
 2

Capital Balances Ratio Adjusted to Profit and Loss Ratio

Partners may decide to bring their capital balances into their profit and loss ratio,
which can be accomplished through either of the following:
 The capital balances are to be brought into the profit and loss ratio by
payments outside of the firm among the partners and where the total
firm capital is to remain the same.
 The capital balances are to be brought into the profit and loss ratio by
the lowest possible additional cash investment in the firm by the
partners.
 The capital balances are to be brought into the profit and loss ratio by
the lowest possible additional cash investment or cash withdrawal from
the firm by the partners.

Illustrative Problem:
Lopez and Nunag are partners whose original capital balances were not in profit and
loss ratio. On December 31, 2014, capital balances are as follows:

Lopez P 400,000 20%

Martin P 200,000 30%
Nunag P 400,000 50%

Partners want to bring capital balances into the profit and loss ratio.
Assumption 1. Capital balances are to be brought into the profit and loss ratio by
payments outside of the firm among the partners and with the total firm capital to
remain the same.
Lopez Martin Nunag Total
Capital Balances P400,000 P200,000 P400,000 P1,000,000
Required Capital 200,000 300,000 500,000 1,000,000
Cash received P200,000 (P100,000) (P100,000) -
(paid)

For the capital balance to be brought into the profit and loss ratio and the total firm
capital to remain the same, Martin and Nunag have to pay Lopez P100, 000 each.
The entry required on the partnership books is as follows:

Lopez, Capital 200,000

Martin, Capital 100,000
Nunag, Capital 100,000
 2

Assumption 2. Capital balances are to be brought into the profit and loss ratio by
the lowest possible cash investment in the firm by the partners.
Lopez Martin Nunag Total
Capital Balances P400,000 P200,000 P400,000 P1,000,000
Required Capital 400,000 600,000 1,000,000 2,000,000
Additional - P400,000 P600,000 P1,000,000
investment

P400,000 / 20% = P2,000,000

P200,000 / 30% = P666,666
P400,000 / 50% = P800,000

For the capital balance to be brought into the profit and loss ratio by the lowest
possible additional cash investment, use as basis for determining the required
capital, the capital Lopez divided by his profit share (P400,000/20% equals
P2,000,000). The required entry on the books of the partnership is as follows.

Cash 1,000,000
Martin, Capital 400,000
Nunag, Capital 600,000

Assumption 3. Capital balances are to be brought into the profit and loss ratio by
the lowest possible additional investment or cash withdrawal from the firm by the
partners.
Lopez Martin Nunag Total
Capital Balances P400,000 P200,000 P400,000 P1,000,000
Required Capital 160,000 240,000 400,000 800,000
Add’l investments (P240,000) P40,000 - (P200,000)
(drawings)

In order to bring the capital balances into the profit and loss ratio by the lowest
possible additional cash investment or cash withdrawal from the firm by the partners,
use as basis for determining the required capital, the capital of Nunag divided by his
profit share (P400,000/50% equals P800,000). The required entry on the books of
the partnership is as follows.

Lopez, Capital 240,000

Cash 240,000

Cash 40,000
Martin, Capital 40,000

CHAPTER 4: PARTNERSHIP DISSOLUTION PART1

 2

Article 1825 of the Civil Code of the Philippines defined dissolution as the change in
the relation of the partners caused by any partner ceasing to be associated in the
carrying out of the business. Dissolution is the termination of the life of the
partnership and it can be followed by a formation of new partnership or liquidation. In
the formation of a new partnership the operation of the partnership business will
continue, while on the other hand, liquidation will stop the operation. Also, in
liquidation each partner will have their capital back.

CAUSE/SOURCE OF PARTNERSHIP DISSOLUTION

 Admission of a new partner
 Retirement or withdrawal of a partner
 Death, incapacity or bankruptcy of a partner
 Incorporation of a partnership will result to a partnership dissolution by a
change in ownership structure.
With the consent of all the partners the new partner may be admitted in an existing
partnership. In the admission of a new partner, the firm will automatically be
dissolved, and a new partnership will be formed. All new partners need to create a
contract such as Article of Co. Partnership.

THESE ARE THE TARGETS THAT WE NEED TO DO IF THERE IS A NEW

PARTNER.
1. The determination of profit and loss from the beginning of the accounting period
up to the admission of the new partner, and the distribution of profit or loss to the old
partners
2. We should always update the record books and check if there are any errors that
needs correction
3. Revaluation of accounts that results to adjustment of profit and loss. But it
depends, if the appraised value is equal to the book value there will be no
revaluation.
4. Closing of Partnership books, we need to close it because we will open a new
partnership.

ADMISSION BY PURCHASE
 2

There will have a selling of interest that will not add investment in the partnership,
but rather adjust the investment of the old partner. The only affected capital is the
capital of the seller. Admission by purchase of interest from the old partners is
considered as personal transaction between the selling partner and buying partner.
The amount paid personally goes to the partner who sells his interest. There is only
a transfer of capital from the selling partner to the account of the buying partner. The
purchase price of the interest sold can be equal, less than or more than the book
value of the interest sold. The gain or loss of the selling partner from the purchase is
considered as personal gain or loss that is not included in the partnership.

ADMISSION BY INVESTMENT
The whole partnership is affected because the partnership will have additional
capital. The interest of partners will also change. The capital contribution of the new
partner will also be recorded in the partnership.
*NOTE
The pro-form entry is: Admission of a new partner
may be a purchase of
interest from one or more
original old partners or
(Name of the Seller), Capital xxx investment or asset
revaluation to the
(Name of the Buyer), Capital xxx
partnership.

CASE 1 PURCHASE AT BOOK VALUE

A purchases B's interest 100,000 by paying 100,000
B, Capital 100,000
A, Capital 100,000

In this case, the book value of B's interest is equal to the amount paid by A.

CASE 1B PURCHASE AT BOOK VALUE TO TWO OR MORE PARTNERS

A purchases B's interest amounting 100,000 and C's interest amounting 100,000 by
paying 200,000.
B, Capital 100,000
C, Capital 100,000
A, Capital 200,000

In this case, the book value of B's and C's interest is equal to the amount paid by A.
CASE 2 PURCHASE LESS THAN BOOK VALUE
 2

A purchases B's interest 100,000 by paying 90,000

B, Capital 100,000
A, Capital 100,000
In this case, the book value of B's interest is less than to the amount paid by A. The
difference of 10,000 is a personal loss by B.

CASE 3 PURCHASE MORE THAN BOOK VALUE

At purchasing more than book value, the old partner will benefit at the excess
payment that made by the new partner. But that extra interest will not be recorded in
the books of the partnership as part of the transaction and only the original interest
will be recorded.

ASSET REVALUATION UPON ADMISSION OF A NEW PARTNER BY

PURCHASE
Although it is by purchase, the purchase is not between the old partner and new
partner. But it is a purchase between the partnership and the new partner. The
revaluation of asset of the old partnership is generally accomplished before the
admission of the new partner. Asset revaluation’s effect is conducted to the capital
accounts of the old partners. And for the adjusted capital of the old partner, it will
become the basis for the interest transferred to the new partner.

Here are the procedure/steps to this approach.

1. Compute the new partnership capital using the interest of the incoming
partner.
2. After we get the new capital using the interest of the new partner then you will
deduct it to the capital of the old partnership. The difference will be the asset
revaluation.
3. Allocate the asset revaluation among the old partners according to their
residual profit and loss sharing agreement.
4. When the share of the partners on asset revaluation was obtained then it will
be added to their capital balances to get the capital balances after the asset
revaluation.
5. Compared the amount of the interest transferred by the old partners to the
new partner based on their capital after the asset revaluation. Prepare the
entry to record the admission of the new partner.

PARTNERSHIP ADMISSION BY INVESTMENT

 2

 A transaction between the original partnership and the new partner.

 Terms like invests and contributes represent the admission of a new partner
by investment.
 It increases the total assets and the total capital of the partnership.
 The entry to record the admission of the new partner:
○ If the investment is in the form of cash:
Cash xxx
Capital xxx

○ If the investment is in the form of non-cash assets:

*Non-cash asset account* xxx (Fair/book/agreed value)
Capital xxx

 Agreed Capital (AC)

○ Other terms: New Firm Capital, Total Capital, and Agreed
Capitalization.
○ It is the amount of the new capital set by the partners for the
partnership.
○ It may be equal to, more than, or less than the total contributions of the
partners.
○ Terms of the admission of a new partner may indicate the agreed
capital. If not, it can be computed in two ways:

Illustrative Problem:
Corpuz and Carlos are partners with capital balances of ₱150,000 each. Cabral
invests ₱100,000 for a ⅖ interest in the new partnership.

Method 1: The new partner’s investment used Method 2: The old partners’
as a basis investment used as a basis

Formula: Formula:
Investment of the new partner ÷ Investment of the old partners
(equal to the net assets or capital
New partner’s fraction of interest of the partnership) ÷
Old partners’ fraction of interest

Computation: Computation:
 2

₱100,000 ÷ ⅖ = ₱250,000 ₱300,000 ÷⅗ = ₱500,000

*Note:

The partners may choose or agree on which of these bases will be used
in determining the agreed capital

● Total Contributed Capital (CC)

○ It is the investment of all the partners, both old and new to the
partnership.
○ It is the sum of the old partners’ capital balances and the new partner’s
contribution.
○ It is the actual contribution to the partnership.

Using the information in the example given,

Sum of old partners’ contribution ₱300,000

New partner’s contribution ₱100,000

Total Contributed Capital ₱400,000

BONUS
 It is the transfer of capital from one partner to another.
 It is an advantage given to the incoming partner (for having a special
skill) or to the old partners (for acquiring goodwill in the partnership).
 A bonus to the old partners is given by the new partner.
■ Reduction in the capital of the new partner; increase in the
capital of the old partners
■ Capital accounts of the old partners are credited according to
their profit & loss ratio
 A bonus to the new partner is given by the old partners.
■ Reduction in the capital of the old partners; increase in the
capital of the new partner
■ Capital accounts of the old partners are debited according to
their profit & loss ratio
 Computation and determination of the ownership of bonus (if it is not
explicit)
 2

1. Multiply agreed capital (AC) by the fraction of interest of the new

partner. The result is the capital credit of the new partner in the
partnership.
2. Compare the capital credit with the investment of the new
partner.
● Bonus to the new partner: capital credit > investment of
the new partner
● Bonus to the old partners: capital credit < investment of
the new partner

ASSET REVALUATION

 It is a necessary adjustment in asset values upon admission of a new

partner.
 The adjustments may be determined as the difference between the
agreed capital and the total contributed capital (AC - CC).
 Asset revaluations upon partnership formation relate only to the
partners of the old partnership.

● Capital Credit
○ It is the interest or equity of a partner in the firm.
○ It is computed by multiplying agreed capital by the fraction of interest of
a partner.

PROBLEMS RELATING TO ADMISSION OF A PARTNER BY INVESTMENT

Agreed Capital is stated/given

Illustrative Problem: Calma and Castro are partners with capital balances of
₱200,000 and ₱100,000, respectively. They share profits and losses equally. Conde
is to be admitted to the partnership.

CASE 1: NO BONUS, NO ASSET REVALUATION

Conde invests ₱100,000 for a ¼ interest in the agreed capital of ₱400,000.
Cash 100,000
Conde, Capital 100,000
 2

Solution:
Step 1: Fill in the given data in the table
a. Partners, old and new
b. Agreed Capital (AC) column with the total written first
c. Contributed Capital (CC) column

Illustration:

AC CC

Old ₱300,000

New ₱100,000

₱400,000 ₱400,000

Step 2: Compare AC and CC. In this case, AC = CC (₱400,000 = ₱400,000).

Therefore, there is no asset revaluation.

Step 3: Determine if there is a bonus.

a. Compute for the capital credit of the new partner.
b. Write the amount in the AC column of the new partner.
c. Compare the new partner’s AC with his CC. In this case, AC and CC
are the same. Therefore, there is no bonus.

Illustration:

AC CC

Old ₱300,000

New ₱100,000 ₱100,000

₱400,000 ₱400,000

Capital Credit = Agreed capital x fraction of interest

= ₱400,000 x ¼ = ₱100,000

Step 4: The above table will be completed as follows:

 2

a. AC or capital credit of the old partners

AC x fraction of interest (4/4 - ¼ = ¾)
₱400,000 x ¾ = ₱300,000

b. A completed table appears as follows:

AC CC Bonus.

Old ₱300,000 ₱300,000 0

New ₱100,000 ₱100,000 0

₱400,000 ₱400,000 0

c. Conclusion:
i. Total Agreed Capital = Total Contributed Capital; therefore,
there is no asset revaluation
ii. New partner: AC = CC; therefore, there is no bonus
iii. Old partners: AC = CC; therefore, there is no bonus either.
iv.
CASE 2: BONUS TO THE OLD PARTNERS, NO ASSET REVALUATION
Conde invests ₱100,000 for a ⅕ interest in the new firm capitalization of ₱400,000.
Cash 100,000
Conde, Capital 80,000
Calma, Capital 10,000
Castro, Capital 10,000

Illustration (after the application of all the steps):

AC CC Bonus

Old ₱320,000 ₱300,000 ₱20,000

New ₱80,000 ₱100,000 (₱20,000)

₱400,000 ₱400,000 0

Capital Credit = Agreed capital x fraction of interest

 2

= ₱400,000 x ⅕ = ₱80,000

Conclusion:
i. Total Agreed Capital = Total Contributed Capital; therefore, there is no asset
revaluation
ii. New partner: AC < CC; therefore, he gives the bonus
iii. Old partners: AC > CC; therefore, they receive the bonus and share according
to their profit and loss ratio.

CASE 3: BONUS TO THE NEW PARTNER, NO ASSET REVALUATION

Conde invests ₱60,000 for a ¼ interest in the total capitalization of ₱360,000.
Cash 60,000
Calma, Capital 15,000
Castro, Capital 15,000
Conde, Capital 90,000

Illustration (after the application of all the steps):

AC CC Bonus

Old ₱270,000 ₱300,000 (₱30,000)

New ₱90,000 ₱60,000 ₱30,000

₱360,000 ₱360,000 0

Capital Credit = Agreed capital x fraction of interest

= ₱360,000 x ¼ = ₱90,000

Conclusion:
i. Total Agreed Capital = Total Contributed Capital; therefore, there is no asset
revaluation
ii. New partner: AC > CC; therefore, he receives the bonus
iii. Old partners: AC < CC; therefore, they give the bonus and share according to
their profit and loss ratio.
 2

CASE 4: POSITIVE ASSET REVALUATION, NO BONUS

Conde invests ₱100,000 for a ⅕ interest in the agreed capital of ₱500,000.
Other Assets 100,000
Calma, Capital 50,000
Castro, Capital 50,000

Cash 100,000
Conde, Capital 100,000

Illustration (after the application of all the steps):

AC CC Asset Revaluation

Old ₱400,000 ₱300,000 ₱100,000

New ₱100,000 ₱100,000 0

₱500,000 ₱400,000 ₱100,000

Capital Credit = Agreed capital x fraction of interest

= ₱500,000 x ⅕ = ₱100,000

Conclusion:
i. Total Agreed Capital > Total Contributed Capital; therefore, there is a positive
asset revaluation
ii. New partner: AC = CC; therefore, there is no bonus
iii. Old partners: AC > CC; therefore, they are credited for asset revaluation and
shared according to their profit and loss ratio.

CASE 5: NEGATIVE ASSET REVALUATION, NO BONUS

Conde invests ₱60,000 for a ⅕ interest in the agreed capital of ₱300,000.
 2

Calma, Capital 30,000

Castro, Capital 30,000
Other Assets 60,000

Cash 60,000
Conde, Capital 60,000
Illustration (after the application of all the steps):

AC CC Asset Revaluation

Old ₱240,000 ₱300,000 (₱60,000)

New ₱60,000 ₱60,000 0

₱300,000 ₱360,000 (₱60,000)

Capital Credit = Agreed capital x fraction of interest

= ₱300,000 x ⅕ = ₱60,000

Conclusion:
i. Total Agreed Capital < Total Contributed Capital; therefore, there is a negative
asset revaluation
ii. New partner: AC = CC; therefore, there is no bonus
iii. Old partners: AC < CC; therefore, they are charged for the asset revaluation
and shared according to their profit and loss ratio.

AGREED CAPITAL IS NOT GIVEN

When such situation exists, the admission of the new partner is
recorded using any of these two methods:
(1) Bonus Method
(2) Asset Revaluation Method

● Bonus Method (AC = CC)

○ The agreed capitalization of the new partnership is equal to the total
amount of contribution of all the partners, both old and new.
 2

○ No asset revaluation is recognized but there will be a transfer of capital

called bonus.

● Asset Revaluation Method

 It is made to properly value the assets of the partnership prior to the
admission of a new partner.
 It results either in an increase or decrease in the recorded amount of
the partnership’s assets and the partners’ capital.
 A positive asset revaluation indicates that some partnership assets are
undervalued.
 A negative asset revaluation, on the other hand, indicates that some
partnership asset is overvalued.
 Under this method, the balances of the partnership’s asset and
partner’s capital must be adjusted prior to the admission of a new
partner.

● Positive Asset Revaluation Method (AC > CC)

 It increases the old partnership assets and the capital accounts of the
old partners.
 The increase is shared by the old partners based on their profit & loss
ratio.
 The agreed capitalization of the new partnership is more than the total
amount of contributions of both the old and new partners.

Under this method, the agreed capitalization is computed as follows:

AC = New partner’s CC ÷ new partner’s fraction of interest

● Negative Asset Revaluation Method (AC < CC)

○ It decreases the old partnership asset and the capital accounts of the
old partners.
○ The decrease is shared by the old partners based on their profit & loss
ratio.
○ The agreed capitalization of the new partnership is less than the total
amount of contributions of both the old and new partners.
○ The agreed capitalization under this method is computed in the same
manner as in positive asset revaluation.
 2

Illustrative Problem: Conde invests ₱100,000 for a ⅕ interest in the partnership of

Calma and Castro. The contributions of Calma and Castro are ₱200,000 and
₱100,000 respectively, and they share profits and losses in the ratio of 3:1. After the
admission of Conde, profits and losses will be divided equally.

1. Bonus Method
Cash 100,000
Conde, Capital 80,000
Calma, Capital 15,000
Castro, Capital 5,000

AC CC Bonus

Old ₱320,000 ₱300,000 ₱20,000

New ₱80,000 ₱100,000 (₱20,000)

₱400,000 ₱400,000 0

The capital credit of the old and new partners is computed as follows:
New: ₱400,000 x ⅕ = ₱80,000
Old: ₱400,000 x ⅘ = ₱320,000

The capital credit for the new partner is less than his capital contribution. Therefore,
the new partner gives the bonus.

Divison of bonus to old partners: (3:1)

Calma: ₱20,000 x ¾ = ₱15,000
Castro: ₱20,000 x ¼ = ₱5,000

2. Positive Asset Revaluation

Method
Other Assets 100,000
Calma, Capital 75,000
Castro, Capital 25,000
Cash 100,000
100,00
Conde, Capital 0
 2

AC CC Revaluation

Old ₱400,000 ₱300,000 ₱100,000

New ₱100,000 ₱100,000

₱500,000 ₱400,000 ₱100,000

The agreed capital of the new partnership is computed by dividing the new partner’s
contribution by his fraction of interest (₱100,000 ÷ ⅕ = ₱500,000)

Illustrative Problem: Conde invests ₱80,000 for a ¼ interest in the partnership of

Calma and Castro. The contributions of Calma and Castro are ₱200,000 and
₱100,000 respectively, and they share profits and losses in the ratio of 3:1. After the
admission of Conde, profits and losses will be divided equally.

1. Bonus Method
Conde, Capital 80,000
Calma, Capital 11,250
Castro, Capital 3,750
Cash 95,000

AC CC Bonus

Old ₱285,000 ₱300,000 (₱15,000)

New ₱95,000 ₱80,000 ₱15,000

₱380,000 ₱380,000 0

The capital credit of the old and new partners is computed as follows:
New: ₱380,000 x ¼ = ₱95,000
Old: ₱380,000 x ¾ = ₱285,000
 2

The capital credit of the new partner is greater than his capital contribution.
Therefore, he receives the bonus and the bonus is shared by the old partners
according to their profit and loss ratio.

2. Negative Asset Revaluation

Calma, Capital 45,000
Castro, Capital 15,000
Cash 60,000

Cash 80,000
Conde, Capital 80,000

AC CC Bonus

Old ₱240,000 ₱300,000 (₱60,000)

New ₱80,000 ₱80,000 ₱60,000

₱320,000 ₱380,000 0

The agreed capital of the new partnership is computed by dividing the new partner’s
contribution by his fraction of interest (₱80,000 ÷ ¼ = ₱320,000)

AGREED CAPITAL IS NOT GIVEN BUT BASIS FOR ITS COMPUTATION IS

INDICATED IN THE TERMS OF ADMISSION

Calma and Castro have capital balances of ₱200,000 and ₱100,000, respectively
and sharing profits and losses in the ratio of 3:1, Conde invests ₱100,000 in the firm
and is credited for ₱50,000 which is to be ⅛ of the new firm capital.

The entry to record the admission of Conde to the partnership:

Cash 100,000
Conde, Capital 50,000
Calma, Capital 37,500
 2

Castro, Capital 12,500

AC CC Bonus

Old ₱350,000 ₱300,000 ₱50,000

New ₱50,000 ₱100,000 (₱50,000)

₱400,000 ₱400,000 0

The new partner is to be credited for ₱50,000 which is ⅛ of the new firm capital.
Thus, ₱50,000 ÷ ⅛ = ₱400,000 agreed capital.

The agreed capital of is equal to total contributed capital, therefore, there is no asset
revaluation.

The capital credit of the new partner is less than his contribution, therefore, he gives
the bonus. The bonus is shared by the old partners in their profit and loss ratio.

THE AMOUNT OF THE CONTRIBUTION OF THE NEW PARTNER IS NOT GIVEN

Illustrative Problem: Calma and Castro have capital balances of ₱200,000 and
₱100,000, respectively. They share profits and losses in the ratio of 3:1. Conde
invests sufficient amount for a ⅓ interest.

The entry to record the admission of Conde to the partnership:

Cash 150,000
Conde, Capital 150,000

Explanation:
 2

 The new firm capital (AC) is computed by dividing the old partners’
contribution by their fraction of interest (₱300,000 ÷ ⅔) = ₱450,000
 The investment of the new partner is computed by multiplying the AC by his
fraction of interest (₱450,000 ÷ ⅓ = ₱150,000). Conde has to invest ₱150,000
in order to have a ⅓ interest in the firm.

Illustrative Problem: Coral, Cielo and Camu are partners with capital balances of
₱112,000, ₱130,000 and ₱58,000 respectively, sharing profits and losses equally.
Cuevas admitted as a new partner bringing with him his expertise and good
reputation. He is to invest cash for a 25% interest in the assets of the partnership
which includes a credit ₱18,750 for bonus upon the admission.

The entry to record the admission of Cuevas to the partnership:

Cash 75,000
Coral, Capital 6,250
Cielo, Capital 6,250
Camu, Capital 6,250
Cuevas, Capital 93,750

Explanation:
 The ₱18,750 bonus given by the old partners to the new partner has to be
deducted first from the total capital of partners to get their 75% interest. Thus:
₱112,000 + ₱130,000 + ₱58,000 - ₱18,750 = ₱281,250
₱281,250 ÷ 75% = ₱375,000
 The amount to be contributed by the new partner is computed by deducting
the ₱18,750 bonus received from the old partners from the 25% interest
acquired from the old partners. Thus:
₱375,000 ÷ 25% = ₱93,750
₱93,750 - ₱18,750 = ₱75,000

FRACTION OF INTEREST IS NOT GIVEN

Illustrative Problem: Conde invests ₱50,000 in the firm. However, upon his
admission ₱10,000 bonus is allowed by the old partners.

The entry to record the admission of Conde to the partnership:

 2

Cash 50,000
Calma, Capital 7,500
Castro, Capital 2,500
Conde, Capital 60,000

ADMISSION OF A NEW PARTNER BY PURCHASE & INVESTMENT

In Article 1825 of the Civil Code of the Philippines, dissolution is the change in the
relation of the partners. Dissolution terminates the life of an existing partnership and
may be followed by a formation of a new partnership or liquidation. In forming a new
partnership, the new partners continue the business of the dissolved partnership
without disruption. Dissolution by change in ownership structure are cause by
admission of a new partner, retirement or withdrawal of a partner, death, incapacity
or bankruptcy of a partner, and incorporation of a partnership.

A new partner may be admitted to an existing partnership only with the consent of all
the partners present. With the admission of the new partner, the business is
 2

automatically dissolved, and a new partnership is established. There will be a

new contract for the new partnership. A new partner may be admitted by purchase of
interest from one or more of the original partners or investment or asset contribution
to the partnership.

In admission by purchase, the new partner purchases a capital equity interest

directly from one or more of the old partners. The transaction between the old and
new partner is a personal transaction. Thus, the amount paid by the partner who
purchases an interest goes personally to the partner who sells his interest. There will
be an entry to record the transfer of capital from the capital account of the selling
partner to that of the buying partner. The amount to be recorded must be the book
value of the interest sold regardless of the amount paid. The new partner may pay
the selling partner equal, more than, or less than the book value of the interest sold.
The gains or losses that the old partner may experience will only be a personal gain
or loss. These will not affect the partnership books. The admission of a new partner
by purchase will not affect the total assets and total capital of the partnership.
Revaluation of assets of the old partnership is generally undertaken prior to the
admission of a new partner. The effect of the asset revaluation is adjusted to the
capital balances of the old partners and this becomes the basis for the interest
transferred to the new partner.

To get the asset revaluation just follow the procedure below:

Step 1 – Compute the new partnership capital using as basis the

amount to be paid by the incoming partner and his fraction of interest.

Step 2 – Deduct the capital of the old partnership from the capital of
the new partnership. The difference is the asset revaluation.

Step 3 – Allocate the asset revaluation among the old partners in

accordance with their residual profit and loss sharing agreement.

Step 4 – Add the share of each partner on the asset revaluation to their
capital balances to get the capital balances after the asset revaluation.
 2

Step 5 – Compute the amount of interest transferred by the old

partners to the new partner based on their capital after the asset revaluation.

Step 6 – Prepare the entry to record the admission of the new partner.

In the previous mode of admission, the transactions between the

selling and buying partner are personal transactions. In admission by
investment, the transaction is between the original partnership and the new
partner who will invest or contribute to the partnership. The total assets and
total capital of the partnership will be increased by the investment of the new
partner. The entry to record the admission of the new partner depends upon
the capital interest credited to the partners’ accounts. The agreed capital is
the amount of new capital arranged by the partners for the partnership. It may
be equal to, more than, or less than the total contributions of the partners. In
admitting a new partner, agreed capital may be indicated in the terms of the
partnership. The total of sum of the capital balances of the old partners and
the contribution of the new partner in the partnership is called the total
contributed capital. The interest or equity of a partner in the firm is called the
capital credit. A bonus is a transfer of capital given to any of the old or new
partners. The bonus is a reduction in the capital of the partner who gave
a bonus, while there is an increase in the capital of the receiving partner.
The old partners may be the one to give bonus to the new partner or vice
versa depending on their terms. Asset revaluation is a necessary adjustment
in asset values upon admission of a new partner. The adjustment in assets
may be determined as the difference between the agreed capital and the total
contributed capital.

The following are the steps in admission by investment:

Step 1 – Fill in the data of the partners (old and new), agreed capital
(AC), total written first, and total contributed capital (CC) in the table.

Step 2 – Compare AC and CC. If the total of AC and CC are equal,

then there is no asset revaluation. If there is a difference between the two,
then compute for the asset revaluation.
 2

Step 3 – Determine if there is a bonus.

Step 4 – Complete the table and draw a conclusion based on the table.
Prepare the entry to record the admission.

ADMISSION BY PURCHASE

Since a partnership is based on contract, any changes in the

composition of the partners will dissolve the partnership. Dissolution may take
place without disrupting the regular operation of the business. It will only
involve a change in the partnership contract to cover the changes in the
association of the partners.

The cash payment given directly to the selling partner. The partnership
will simply record the change in ownership. Also, take note that the assets
and equity before and after admission is the same.

Entry on the book of the partnership:

Selling Partners Capital…………………….xx

Buying Partner's Capital…………………………..xx

To record the admission of a new partner

*NOTE
Capital of the new partner to be
recorded is equal to the capital of
the selling partner multiplies by the
interest acquired by buying partner.
EXAMPLE:

Geoff and Barry are partners with capital balances of P200,000 and
P100,000, respectively. They share profit and losses equally. Sarah will be
admitted as a new partner by purchasing 1/5 interest from Geoff paying
P40,000.

Entry on the books of the partnership.

Geoff, Capital…………….. P40,000

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Sarah, Capital……………………..P40,000

To record the admission of the new partner.

P200,000 X 1/5 = P40,000

The partnership will only record the transfer of the 1/5 interest from
Geoff to Sarah. The payment of P40,000 cash by Sarah to Geoff is not
recorded in the company books because it is a personal transaction. The
amount paid is equal to the book value of the acquired interest.

After the admission of Sarah, the total capital of the partnershop wil still
be at P300,000 as shown below:

Geoff, Capital (P200,000-P40,000)……………………. P160,000

Barry, Capital
………………………………………………………..P100,000

Sarah, Capital
……………………………………………………….P40,000

Total
Capital………………………………………………………….P300,000

ADMISSION BY INVESTMENT

The admission of a new partner by investment constitutes the entry of

a new partner with a corresponding increase in assets and increase in total
capital of the partnership. A person may be admitted into a partnership by
investing cash or non-cash assets to the firm. The terms such as invests and
contributes are used to indicate the admission of a new partner by investment.

Illustration:

Partners Capital balances before Profit and Loss Ratio

admission
A 250,000 40%
B 100,000 35%
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C 150,000 25%
Total Capital 500,000 100%

Example:

Bong, the new partner will invest P150,000 for 30% interest in equity
and in profit in the new partnerahip caputal of P650,000. As per agreement,
upon admission of Bong, the new partnership capital would be P650,000,
which is equal to the actual contribution of the old partners and new partner.

Partners Total actual contribution New Partnership Capital

Old Partners 500,000 500,000
New Partner (Bong) 150,000 150,000
Total Capital 650,000 650,000

The entry to record the admission of a new partner

Cash………………..150,000

Bong, Capital…………….150,000

PARTNERSHIP CHAPTER 5: Disassociation by Retirement, Withdrawal Incapacity

or Death of a Partner

Capital Structure of the Partnership may change either by:

1. Retirement or Withdrawal of any partners; or
2. Death or Incapacity of a partner.

CHANGE IN CAPITAL STRUCTURE BY WITHDRAWAL OR RETIREMENT OF A

PARTNER
The partnership may allow any of its partners to withdraw or retire from the
firm, and the interest of the retiring partners may be:
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1. Sold to a new partner (outsider) – With the consent of the continuing

partners, the retiring partner may sell his interest to an outsider and is
recorded in the same manner as in the admission of a new partner by
purchase. Any gain or loss from the sale is a personal gain or loss of the
retiring partner.
2. Sold to the continuing or remaining partners – The retiring partner may
sell his interest to any of the continuing partners and is recorded in the same
manner as in the sale of interest to a new partner. Any gain or loss from the
sale is a personal gain or loss of the retiring partner.
3. Sold to the partnership – The retiring partner may sell his interest to the
continuing partners through partnership. The partnership may pay the retiring
partner by:
a. Payment in cash;
b. Transfer of non-cash assets; or
c. Recognition of liability for the full or the balance of the unpaid interest of
the retiring partner.

The purchase price by the partnership to the retiring partner may be:
a. Equal to the interest of the retiring partner (at book value)
b. Less than the interest of the retiring partner (at less than book value)
c. More than the interest of the retiring partner (at more than book value)

When the payment to the retiring partner is less than or more than his capital
interest, the difference between the purchase price and the capital interest may be
accounted for by using:
a. Bonus method; and/or
b. Asset revaluation method

ACCOUNTING PROBLEMS INVOLVED IN THE RETIRING OF A PARTNER

The interest in the partnership of a retiring partner must be established upon
his retirement. Following are the accounting problems involved in determining the
capital interest of a retiring partner:
1. Determination of the profit or loss from the beginning of the accounting period
to the date of withdrawal and the distribution of such profit or loss.
2. Closing of the partnership books.
3. Correction of accounting errors in prior periods like overstatement or
understatement of inventories, excessive depreciation charges and failure to
provide adequately for doubtful accounts.
4. Revaluation of partnership assets to current values.
5. Recording of bonus brought by the retirement of a partner.
6. Settlement of the interest of the retiring partner.
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CALCULATION OF RETIRING PARTNER’S INTEREST

The schedule below will be helpful in determining the interest of a retiring
partner:
Investment
- Withdrawals
+ Share in partnership profits to date of retirement, or
- Share in partnership losses to date of retirement
+ Loans and advances to the partnership, or
- Loans and advances from the partnership
+ Revaluation of assets increasing their recorded values, or
- Revaluation of assets decreasing their recorded values
Interest upon retirement

Illustrative Problem A: The statement of financial position of the partnership of Dy,

David and Diaz on December 31, 2014 follows:

Assets Liabilities and Capital

Cash P110,000 Liabilities P20,000
Other Assets 30,000 Dy, Capital 20,000
David, Capital 40,000
Diaz, Capital 60,000
P140,000 Total Liabilities and Capital P140,000

The partners share profits and losses in the ratio of 4:2:4. On July 1, 2015, Diaz
asked to be allowed to withdraw from the partnership. The partners decided to close
the books as of this date so as to determine the capital interest of Diaz. Profit for the
six months ended amounted to P60,000 while drawings of Dy, David and Diaz
amount to P4,000, P6,000 and P2,000, respectively. Profits and losses are to be
shared equally after the retirement of Diaz.

The following entries will be prepared prior to the retirement of Diaz from the
partnership:

1. Income Summary 60,000

Dy, Capital P24,000
David, Capital P12,000
Diaz, Capital 24,000
Net income from Jan. 1 to June 30
divided in the ratio of 4:2:4
2. Dy, Capital 4,000
David, Capital 6,000
Diaz, Capital 2,000
Dy, Drawing 4,000
David, Drawing 6,000
Diaz, Drawing 2,000
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After considering the preceding entries, the capital interest of the partners as of July
1, 2015may now be computed as follows:
Diaz Dy David
Capital balance, Dec. 31, 2014 P60,000 P20,000 P40,000
Share in profit from Jan. 1 – June 30 24,000 24,000 12,000
Withdrawals ( 2,000) ( 4,000)
( 6,000)
Capital balance, July 1, 2015 P82,000 P40,000
P46,000

The entries to record the retirement of Diaz using several assumptions are illustrated
below.

Assumption 1 – Sale of interest to a new partner. Diaz sold his interest to Duque
for P100,000.

Diaz, Capital 82,000

Duque, Capital 82,000

The gain of P18,000 (P100,000 – P82,000) is a personal gain of Diaz since the sale
of the interest to an outsider is a personal transaction between the buying partner
and Diaz.

Assumption 2 – Sale of interest to the continuing partners. Diaz sold his interest
to Dy and David for P75,000; the interest being divided equally by the remaining
partners. Profits and losses after the retirement of Diaz will be divided equally.

Diaz, Capital P82,000

Dy, Capital 41,000
David, Capital 41,000

The loss of P7,000 (75,000 – P82,000) is a personal loss of Diaz since the sale of
the interest to Dy and David is a personal transaction among the partners.

Assumption 3 – Sale of interest to the partnership. Diaz sold his interest to the
partnership. The partners agreed to make immediate cash settlement to the retiring
partner. Profits and losses after the retirement of Diaz will be divided equally.

Case A – Settlement to retiring partner is equal to his capital interest.

The partnership paid Diaz P82,000.

Diaz, Capital 82,000

Cash 82,000

*NOTE This settlement involves no bonus nor asset revaluation.

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Case B – Settlement is less than the capital interest of the retiring partner (at
less than book value). The partnership paid Diaz P76,000 which is P6,000 less
than his capital interest of P82,000.

The difference between the amount of payment and the capital interest of Diaz may
now be considered as:
1. Bonus to the remaining partners (Bonus Method)
2. Asset Revaluation reducing the capital accounts of all the partners (Asser
Revaluation Method)

BONUS METHOD

Diaz, Capital 82,000

Cash 76,000
Dy, Capital 4,000
David, Capital 2,000
P6,000 x 4/6 = P4,000
P6,000 x 2/6 = P2,000

The bonus of P6,000 is shared by the remaining partners in accordance with the
original profit and loss ratio of 4:2.

ASSET REVALUATION METHOD

Dy, Capital 6,000

David, Capital 3,000
Diaz Capital 6,000
Other Assets 15,000

The difference of P6,000 is only a portion of the asset revaluation. The total amount
of asset revaluation is calculated by dividing the difference of P6,000 by the retiring
partner’s fraction of interest or P6,000 ÷ 4/10 = P15,000. Thus, the reduction from
the capital balances of the partners will be computed as follows:

Dy = P15,000 x 4/10 = P6,000

David = P15,000 x 2/10 = P3,000
Diaz = P15,000 x 4/10 = P6,000

After the preceding entry, the capital balance of Diaz is P76,000 and payment to him
will be recorded as follows:

Diaz, Capital 76,000

Cash 76,000
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A compound entry may be made as follows:

Dy, Capital 6,000

David, Capital 3,000
Diaz, Capital 82,000
Cash 76,000
Other Assets 15,000

Case C – Settlement is more than the capital interest of the retiring partner (at
more than book value). The partnership paid Diaz P85,000 which is P3,000 more
than his capital interest of P82,000.

The difference between the amount of payment and the capital interest of Diaz may
now be considered as:
1. Bonus to the remaining partners (Bonus Method)
2. Asset Revaluation reducing the capital accounts of all the partners (Asser
Revaluation Method)

Bonus Method

Diaz, Capital 82,000

Dy, Capital 2,000
David, Capital 1,000
Cash 85,000
P3,000 x 4/6 = P2,000
P3,000 x 2/6 = P1,000

The bonus of P3,000 is shared by the remaining partners in accordance with the
original profit and loss ratio of 4:2.
Asset Revaluation Method

Other Assets 7,500

Dy, Capital 3,000
David, Capital 1,500
Diaz Capital 3,000

The difference of P3,000 is only a portion of the asset revaluation. The total amount
of asset revaluation is calculated by dividing the difference of P3,000 by the retiring
partner’s fraction of interest or P3,000 ÷ 4/10 = P7,500. Thus, the reduction from the
capital balances of the partners will be computed as follows:

Dy = P7,500 x 4/10 = P3,000

David = P7,500 x 2/10 = P1,500
Diaz = P7,500 x 4/10 = P3,000
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After the preceding entry, the capital balance of Diaz is P85,000 and payment to him
will be recorded as follows:

Diaz, Capital 85,000

Cash 85,000

A compound entry may be made as follows:

Other Assets 7,500

Diaz, Capital 82,000
Cash 85,000
Dy, Capital 3,000
David, Capital 1,500

COMPARISON BETWEEN THE BONUS AND ASSET REVALUATION METHOD

The two methods discussed may offer different results as to capital balances of the
remaining partners because of the effect on depreciation of the asset revaluation.

To illustrate the effects of the bonus and asset revaluation method, we will use the
information under Assumption 3 – Case C – the payment to the retiring partner is
more than his capital interest. The schedule below shows the comparison between
the bonus and asset revaluation method:

Assets Revaluation Dy, Capital David,

Capital
Balances after retirement of Diaz
under the bonus method P38,000 P45,000
Balances after retirement of Diaz under
the asset revaluation method P7,500 P43,000 P47,500
Depreciation on asset revaluation
(divided equally) (7,500) ( 3,750) (3,750)
Balances after depreciation P39,250 P43,750
Net advantage (disadvantage) of using
the bonus method (P1,250) P 1,250

Based on the above analysis, David will prefer the bonus method while Dy will prefer
the asset revaluation method.

CHANGE IN CAPITAL STRUCTURE BY DEATH OR INCAPACITY OF A

PARTNER

The death or incapacity of a partner legally dissolves the old partnership since a
partner ceases to be associated in the carrying on of the business. The remaining
partners may continue operations based on a new contract. The interest of the
deceased or incapacitated partner must be determined by the partnership in order to
make necessary settlement with his legal representatives.
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The following accounting problems are encountered in case of death or incapacity of

a partner:

1. Determination of the profit or loss from the beginning of the accounting period
to the date of death or incapacity and the distribution of such profit or loss.
2. Closing of the partnership books. Partnership agreement, however, may
provide that the books need not be closed and net income for the fraction of
the accounting period to the date of death or incapacity be determined.
3. Correction of prior year’s income, if there is any.
4. Revaluation of partnership assets to current values.
5. Recording of bonus.
6. Settlement of the interest of the deceased or incapacitated partner.