Observe: 1.the recognition of income and expense
................ 2. payment? (is there any? “guess non”)
Saturday, January 10, 2009
A. ACCRUED EXPENSES (Payable)
…………………This is used to record expenses that are already incurred (used) by the business but not yet paid when the accounting period ends. If expenses will be paid at a future date, a liability account must be credited (Accrued Expense).
“in short po ito ay mga expenses na hindi mo pa nababayaran, kaya maliban sa Pagkakaroon ng expense nagkaroon din tau ng Utang or Liability, and that liability account should berecorded as “Accrued Expense” or Expense Payable” if and only if those expenses has not yet been recorded”
………………..“As what Expense Recognition Principle states, “all expenses should be recognized in the period these are incurred regardless whether paid or not”, its appropriate for us to make adjustments on the unrecorded expenses incurred at the end of the period to report all expenses incurred to produce the revenues during the accounting period.
….……………………………Pro-forma Adjusting Entries
……………….._______________ Expense……………..xx
………… ….........….Accrued _________ Expense…………….xx
…………To Illustrate:
………………The business is renting a space for 5000Php per month, payable every first day of the following month. The rental for the month of December was not paid when the accounting period ended on December 31, 2008. The business intends to pay the rental on January 1, 2009, the 1st day of the following month. The business accounting period ends every 31st of the year.
………….Analysis:
………………“Take note of the cut-off period (December 31, 2008)”
……………….“The Rent Expense should be recorded and reported in 2008, the period when the rent expense was incurred and not in 2009, the period where the rent expense will be paid.(with due respect to EXPENSE RECOGNITION PRINCIPLE).”
.....................“kung kelan sya nagamit dun din sya irerecord hindi ung kung kelan sya
babayaran, with due respect to our principles”
……………….“The adjusting entry should be prepared on December 31, 2008 to record the Rent Expense incurred and to recognize the corresponding Liability Account (Accrued Expense)
……………………………………....ADJUSTING ENTRY
…………………….Rent Expense……………………….5000
………………………..Accrued Rent Expense……………….5000
……….In the pro-forma adjusting entry, just fill in the blank of what account that have been accrued, so as if what have been accrued are-
1. Unpaid Salaries
…...................Salaries Expense…....…....……………....xx
……………………….Accrued Salaries Expense…………..xx
2. Unpaid Interest
......................Interest Expense………………...............xx
……………………….Accrued Interest Expense……………xx
Note: the accounts Accrued Rent Expense, Accrued Salaries Expense, Accrued Interest Expense, etc. are similar to Rent Payable, Salaries Payable, Interest Payable, etc. The term “accrued” when associated with an expense account connotes “payable” which means liability.
Effects of Error/Omission on Financial Statements
Income Statement- since Rental Expense has not been recorded, total expenses at the end of the period is understated. Deducting a smaller amount of expense that it should have been will overstate Net Income.
Balance Sheet- Since the liability will not be recognized, total liabilities reported in the Balance Sheet is understated. Owner’s Equity is overstated because the net income that’s is closed to capital is also overstated or better see the basic accounting Equation, A=L+P and assume any amount.
Financial Statements Presentation
.............Rent Expense, being a nominal account will be presented in the Income Statement Accrued Rent Expense, being a real account will be presented as a current liability in the liability section of the Balance Sheet.
“in short po ito ay mga expenses na hindi mo pa nababayaran, kaya maliban sa Pagkakaroon ng expense nagkaroon din tau ng Utang or Liability, and that liability account should berecorded as “Accrued Expense” or Expense Payable” if and only if those expenses has not yet been recorded”
………………..“As what Expense Recognition Principle states, “all expenses should be recognized in the period these are incurred regardless whether paid or not”, its appropriate for us to make adjustments on the unrecorded expenses incurred at the end of the period to report all expenses incurred to produce the revenues during the accounting period.
….……………………………Pro-forma Adjusting Entries
……………….._______________ Expense……………..xx
………… ….........….Accrued _________ Expense…………….xx
…………To Illustrate:
………………The business is renting a space for 5000Php per month, payable every first day of the following month. The rental for the month of December was not paid when the accounting period ended on December 31, 2008. The business intends to pay the rental on January 1, 2009, the 1st day of the following month. The business accounting period ends every 31st of the year.
………….Analysis:
………………“Take note of the cut-off period (December 31, 2008)”
……………….“The Rent Expense should be recorded and reported in 2008, the period when the rent expense was incurred and not in 2009, the period where the rent expense will be paid.(with due respect to EXPENSE RECOGNITION PRINCIPLE).”
.....................“kung kelan sya nagamit dun din sya irerecord hindi ung kung kelan sya
babayaran, with due respect to our principles”
……………….“The adjusting entry should be prepared on December 31, 2008 to record the Rent Expense incurred and to recognize the corresponding Liability Account (Accrued Expense)
……………………………………....ADJUSTING ENTRY
…………………….Rent Expense……………………….5000
………………………..Accrued Rent Expense……………….5000
……….In the pro-forma adjusting entry, just fill in the blank of what account that have been accrued, so as if what have been accrued are-
1. Unpaid Salaries
…...................Salaries Expense…....…....……………....xx
……………………….Accrued Salaries Expense…………..xx
2. Unpaid Interest
......................Interest Expense………………...............xx
……………………….Accrued Interest Expense……………xx
Note: the accounts Accrued Rent Expense, Accrued Salaries Expense, Accrued Interest Expense, etc. are similar to Rent Payable, Salaries Payable, Interest Payable, etc. The term “accrued” when associated with an expense account connotes “payable” which means liability.
Effects of Error/Omission on Financial Statements
Income Statement- since Rental Expense has not been recorded, total expenses at the end of the period is understated. Deducting a smaller amount of expense that it should have been will overstate Net Income.
Balance Sheet- Since the liability will not be recognized, total liabilities reported in the Balance Sheet is understated. Owner’s Equity is overstated because the net income that’s is closed to capital is also overstated or better see the basic accounting Equation, A=L+P and assume any amount.
Financial Statements Presentation
.............Rent Expense, being a nominal account will be presented in the Income Statement Accrued Rent Expense, being a real account will be presented as a current liability in the liability section of the Balance Sheet.
B.ACCRUED REVENUE (Receivable)
.......This is used to record an income already earned by the business but not yet collected when the accounting period ends. If the Revenue has not been recorded on the date it was earned it is necessary for us to record an adjusting entry. The purpose of this is to record the omitted Income earned and recognized, together with its corresponding Asset, Accrued Revenue (collectible or receivable) account that took part on that accounting period.
..................“do I have to explain this furthermore? ^_^”
..................“ito daw po ung mga services or other income sources dat has been rendered. so pag narender mo na, nagawa na means may income ka na regardless if a payment has been collected or not, but in this case the business already earned the income yet payment has not been collected, even though as it goes that way, dapat pa rin na irecord natin un, so together with the income that has not yet been recorded goes a Receivable (asset) account, Accrued Revenue”
....................“if and only if the assumption is that those income has not yet been recorded”
.....................................Pro-forma Adjusting Entry
............Accrued ___________ Revenue....................Phpxx
..............................___________ Revenue..................................Phpxx
To Illustrate:
On June 2, 2008 Nobody’s Company omitted to record its laundry service rendered to a customer on account, 2000Php. Payment is expected to be collected on the 28th of April and the company ended its accounting period on a monthly basis.
Analysis:
.................for no journal entry has been recorded to recognize the revenue earned, adjusting entry must be presented to report the revenue earned during the accounting period. And for it has been rendered on account, together with the revenue account, accrued income (receivable) must be debited to record the asset that is expected to be collected even after the accounting period.
................................................Adjusting Entry
............Accrued Service Revenue....................2,000
...........................Service Revenue...................................2,000
Illustrative Case for ACCRUED INTEREST INCOME:
..............On Dec. 2, 2008, Nobody’s Company received a 100,000Php 6%, 60 day-note from Someone Company.
Explanation: (don’t explain ur friends don’t nid 8, ur enemies won’t believe 8 anyway :D (paadlib ^_^V pis) )
Upon receipt of the note on December 2, 2008, the journal entry is
..........................Notes Receivable...........................100,000
..................................Cash.......................................................100,000
.............................................Received a 100,000, 6%, 60 day-note.
Since the note is interest bearing, interest is computed by using the simple formula as follows:
Interest = Principal x Rate of Interest x Time
I=Prt
I= 100,000Php x 6% or 0.06 per year x 60/360
= 1,000Php
The interest on Notes Receivable for 60 days or 2 months period is
1,000Php or 500Php per month.
ANALYSIS:
..................Counting from December 2, 2008 to complete 60 days, the maturity value
of the note will be 101,000Php (Principal= 100,000Php + 1,000Php (Interest)) which will due for collection on January 30, 2009. Recording the interest on Notes of 1,000Php upon maturity date follows that the period of 2009 records the Interest Income of 2008 which is a violation of “Revenue Recognition Principle”. Since the accounting period will end on Dec. 31, 2008 a portion of Interest Income representing December 2 to December 31, 2008 of 500Php should be recorded on Dec. 31, 2008. Record the Interest Income earned during the period and recognizes the corresponding Asset (Accrued Income) account.
.......................................................Adjusting Entry
............2008
...........Dec. 31........Accrued Interest Income..................500
........................................Interest Income.....................................500
.............................In the stated pro-forma adjusting entry for Accrued Income adjustments,
Just fill in the blank of what account that have been accrued, so as of what been accrued are;
Uncollected Rent
Accrued Rent Income..............................xx
................Rent Income...................................xx
Uncollected Interest
Accrued Interest Income........................xx
................Interest Income.............................xx
The account Accrued ___ Income is similar to _____ Receivable. The Term “accrued” when associated with an income accounts connotes “receivable” which means an asset.
EFFECT OF ERROR/ OMISSION ON FINANCIAL STATEMENT
........................If adjusting entry is not prepared on Dec. 31, 2008 the effects are as follows:
Income Statement- since Income has not been recorded, the total income
reported was understated, Thus Net Income is understated.
Balance Sheet- since the Receivable account (Accrued Income) has not been
omitted, the Asset account will now then be understated. Likewise
the Owner’s Equity account will now be understated due to the
understatement of the Net Income.
FINANCIAL STATEMENTS PRESENTATION
Accrued ____ Income being a real account will be presented in the current asset section of the Balance Sheet while the ____ Income as a nominal or temporary account will be reported in the Income Statement.
..................“do I have to explain this furthermore? ^_^”
..................“ito daw po ung mga services or other income sources dat has been rendered. so pag narender mo na, nagawa na means may income ka na regardless if a payment has been collected or not, but in this case the business already earned the income yet payment has not been collected, even though as it goes that way, dapat pa rin na irecord natin un, so together with the income that has not yet been recorded goes a Receivable (asset) account, Accrued Revenue”
....................“if and only if the assumption is that those income has not yet been recorded”
.....................................Pro-forma Adjusting Entry
............Accrued ___________ Revenue....................Phpxx
..............................___________ Revenue..................................Phpxx
To Illustrate:
On June 2, 2008 Nobody’s Company omitted to record its laundry service rendered to a customer on account, 2000Php. Payment is expected to be collected on the 28th of April and the company ended its accounting period on a monthly basis.
Analysis:
.................for no journal entry has been recorded to recognize the revenue earned, adjusting entry must be presented to report the revenue earned during the accounting period. And for it has been rendered on account, together with the revenue account, accrued income (receivable) must be debited to record the asset that is expected to be collected even after the accounting period.
................................................Adjusting Entry
............Accrued Service Revenue....................2,000
...........................Service Revenue...................................2,000
Illustrative Case for ACCRUED INTEREST INCOME:
..............On Dec. 2, 2008, Nobody’s Company received a 100,000Php 6%, 60 day-note from Someone Company.
Explanation: (don’t explain ur friends don’t nid 8, ur enemies won’t believe 8 anyway :D (paadlib ^_^V pis) )
Upon receipt of the note on December 2, 2008, the journal entry is
..........................Notes Receivable...........................100,000
..................................Cash.......................................................100,000
.............................................Received a 100,000, 6%, 60 day-note.
Since the note is interest bearing, interest is computed by using the simple formula as follows:
Interest = Principal x Rate of Interest x Time
I=Prt
I= 100,000Php x 6% or 0.06 per year x 60/360
= 1,000Php
The interest on Notes Receivable for 60 days or 2 months period is
1,000Php or 500Php per month.
ANALYSIS:
..................Counting from December 2, 2008 to complete 60 days, the maturity value
of the note will be 101,000Php (Principal= 100,000Php + 1,000Php (Interest)) which will due for collection on January 30, 2009. Recording the interest on Notes of 1,000Php upon maturity date follows that the period of 2009 records the Interest Income of 2008 which is a violation of “Revenue Recognition Principle”. Since the accounting period will end on Dec. 31, 2008 a portion of Interest Income representing December 2 to December 31, 2008 of 500Php should be recorded on Dec. 31, 2008. Record the Interest Income earned during the period and recognizes the corresponding Asset (Accrued Income) account.
.......................................................Adjusting Entry
............2008
...........Dec. 31........Accrued Interest Income..................500
........................................Interest Income.....................................500
.............................In the stated pro-forma adjusting entry for Accrued Income adjustments,
Just fill in the blank of what account that have been accrued, so as of what been accrued are;
Uncollected Rent
Accrued Rent Income..............................xx
................Rent Income...................................xx
Uncollected Interest
Accrued Interest Income........................xx
................Interest Income.............................xx
The account Accrued ___ Income is similar to _____ Receivable. The Term “accrued” when associated with an income accounts connotes “receivable” which means an asset.
EFFECT OF ERROR/ OMISSION ON FINANCIAL STATEMENT
........................If adjusting entry is not prepared on Dec. 31, 2008 the effects are as follows:
Income Statement- since Income has not been recorded, the total income
reported was understated, Thus Net Income is understated.
Balance Sheet- since the Receivable account (Accrued Income) has not been
omitted, the Asset account will now then be understated. Likewise
the Owner’s Equity account will now be understated due to the
understatement of the Net Income.
FINANCIAL STATEMENTS PRESENTATION
Accrued ____ Income being a real account will be presented in the current asset section of the Balance Sheet while the ____ Income as a nominal or temporary account will be reported in the Income Statement.
A.PREPAID EXPENSES
This is an expense that is already paid but not incurred.
This is exactly the opposite of accrued expense. There are two methods or approaches that can be used in recording prepayments, namely: Expense Method and Asset Method.
a. Expense Method- under this method or approach, an expense
................account is debited upon payment of the prepaid expense.
................This method is also called “nominal approach” because
................an expense is an Income Statement accounts.
b. Asset Method- under this method or approach, an asset account is
................Debited upon payment of the prepaid expense, that’s why it is also called as the “real
................approach” for an asset account is a real account.
.................“in short ang prepaid expense ay parang prepaid load lang yan, pagkatapos ng isang araw ung ibang load mo gamit na so that’s ur expense, pero ung iba hindi pa and that makes ur assets, dba mas maganda kung pagbukurin ang expense at asset pra malaman mo kung ilan pang load ang pwede mo pang ipang text sakin ^_^V”
(yuck A.S.A nmn ako :D)
And to arrive at that point we must allocate its value to its respective account.
Worth of the Purchased Supplies = 20,000Php
Worth of Unused supplies at the end of accounting period =5,000Php (as stated)
Therefore:
20,000- 5,000 = 15,000 (Used supplies or supplies expense at the end of the accounting
“ tagalog pa ba?^_^V”
“If ung journal entry nyo daw nung nagbayad kau eh nagrecognize ng expense account so means sa adjusting entry ung asset account nmn dapat mo irecognize so natural ung amount na irerecognize mo eh ung amount din ng asset mo, kung ano ang hindi pa narerecognize sya irerecord mo together with its respective amount”
.................2.if an asset account is debited upon payment or upon recording the Journal Entry (Asset Method), the adjusting entry must recognize the expense account which has not been recorded. Therefore; credit the asset account and debit the expense account.
“^_^V gets mo na sana”
This is exactly the opposite of accrued expense. There are two methods or approaches that can be used in recording prepayments, namely: Expense Method and Asset Method.
a. Expense Method- under this method or approach, an expense
................account is debited upon payment of the prepaid expense.
................This method is also called “nominal approach” because
................an expense is an Income Statement accounts.
b. Asset Method- under this method or approach, an asset account is
................Debited upon payment of the prepaid expense, that’s why it is also called as the “real
................approach” for an asset account is a real account.
.................“in short ang prepaid expense ay parang prepaid load lang yan, pagkatapos ng isang araw ung ibang load mo gamit na so that’s ur expense, pero ung iba hindi pa and that makes ur assets, dba mas maganda kung pagbukurin ang expense at asset pra malaman mo kung ilan pang load ang pwede mo pang ipang text sakin ^_^V”
(yuck A.S.A nmn ako :D)
.................“pero if pagkatapos ng isang araw na un ubos na load nyo, natural wag na kaung magbalak magbukod, ala na nmn kau paghiwalayin eh :D, parang prepaid expense din when the accounting period ends, then lahat namn ng narecord mo na expense (take note ha expense) ay nagamit mo, wag ka na gumawa ng adjusting entry ala na kwenta un kasi la nmn kau paghihiwalayin na accounts, para lang po yan sa paghihiwalay ng expense mo sa asset mo pa nung pagdating ng end of accounting period, pero pag Asset account nirecord mo nung umpisa aun nid mo na mag adjusting kasi may asset ka pa ba, dba sabi ko ubos na so expense na un :D”
To Illustrate the difference bet 2 methods:
..........On June 2, 2008 Nobody Company paid 20,000Php for the
supplies purchased. At the end of accounting period, 5,000Php of the supplies
remain unused.
JOURNAL ENTRY using….
Upon payment on June 2, 2008
........................................EXPENSE METHOD
To Illustrate the difference bet 2 methods:
..........On June 2, 2008 Nobody Company paid 20,000Php for the
supplies purchased. At the end of accounting period, 5,000Php of the supplies
remain unused.
JOURNAL ENTRY using….
Upon payment on June 2, 2008
........................................EXPENSE METHOD
...........Supplies Expense............................... 20,000
............................Cash .......................................................20,000
............................Cash .......................................................20,000
.........................................ASSET METHOD
..........Prepaid Supplies................................. 20,000
...........................Cash......................................................... 20,000
Now, the illustrative case states that 5000Php worth of supplies remains unused at the end of accounting period.
Regardless of which method used in recording the prepayment of the purchased supplies worth 20,000Php at the end of the period it is still a “mixed account” or a mixture of both Asset (unused supplies) and Expense (used supplies). For us to bring up the correct balance of those accounts, it’s a must for us to “split up” the 20,000Php worth of supplies into its real account (expense and asset).
..........Prepaid Supplies................................. 20,000
...........................Cash......................................................... 20,000
Now, the illustrative case states that 5000Php worth of supplies remains unused at the end of accounting period.
Regardless of which method used in recording the prepayment of the purchased supplies worth 20,000Php at the end of the period it is still a “mixed account” or a mixture of both Asset (unused supplies) and Expense (used supplies). For us to bring up the correct balance of those accounts, it’s a must for us to “split up” the 20,000Php worth of supplies into its real account (expense and asset).
And to arrive at that point we must allocate its value to its respective account.
Worth of the Purchased Supplies = 20,000Php
Worth of Unused supplies at the end of accounting period =5,000Php (as stated)
Therefore:
20,000- 5,000 = 15,000 (Used supplies or supplies expense at the end of the accounting
period)
After allocating or splitting up to its respective accounts adjusting entry must be recorded: The adjusting entry for a prepaid expense depends on the entry originally made at the time it was paid
Using the Expense Method:
.............................................................Journal Entry
Jun 2, 2008.........Supplies Expense........................ 20,000
......................................Cash ..........................................................20,000
............................................................Adjusting Entry
Dec. 31, 2008..... Unused or Prepaid Supplies......5,000
......................................Supplies Expense...................................... 5,000
After allocating or splitting up to its respective accounts adjusting entry must be recorded: The adjusting entry for a prepaid expense depends on the entry originally made at the time it was paid
Using the Expense Method:
.............................................................Journal Entry
Jun 2, 2008.........Supplies Expense........................ 20,000
......................................Cash ..........................................................20,000
............................................................Adjusting Entry
Dec. 31, 2008..... Unused or Prepaid Supplies......5,000
......................................Supplies Expense...................................... 5,000
checking:
Supplies Expense = 20,000 (journal entry)
Supplies Expense = 20,000 (journal entry)
........................................ - 5,000 (adjusting entry)Credited(-)
..........................................=======
..........................................=======
..........................................15,000 ending balance
Unused Supplies or Prepaid Supplies
........................................= 0.00 (journal entry)
........................................+5,000 (adjusting entry)Debited (+)
.........................................=====
..........................................5,000 ending balance
Using the Asset Method:
..............................................................Journal Entry
June 2, 2008...... Unused or Prepaid Supplies........ 20,000
.....................................Cash........................................................ 20,000
..............................................................Adjusting Entry
Dec. 31, 2008.... Supplies Expense.......................... 15,000
.....................................Unused Supplies................................... 15,000
Now check it for yourself using the T-Account ^_^
OBSERVE: 1. if an expense account is debited upon payment or upon recording the
.........................Journal entry (Expense Method), the adjusting entry must recognize
Using the Asset Method:
..............................................................Journal Entry
June 2, 2008...... Unused or Prepaid Supplies........ 20,000
.....................................Cash........................................................ 20,000
..............................................................Adjusting Entry
Dec. 31, 2008.... Supplies Expense.......................... 15,000
.....................................Unused Supplies................................... 15,000
Now check it for yourself using the T-Account ^_^
OBSERVE: 1. if an expense account is debited upon payment or upon recording the
.........................Journal entry (Expense Method), the adjusting entry must recognize
..........................the asset account. Therefore credit the expense account ; debit the
..........................asset account.
“ tagalog pa ba?^_^V”
“If ung journal entry nyo daw nung nagbayad kau eh nagrecognize ng expense account so means sa adjusting entry ung asset account nmn dapat mo irecognize so natural ung amount na irerecognize mo eh ung amount din ng asset mo, kung ano ang hindi pa narerecognize sya irerecord mo together with its respective amount”
.................2.if an asset account is debited upon payment or upon recording the Journal Entry (Asset Method), the adjusting entry must recognize the expense account which has not been recorded. Therefore; credit the asset account and debit the expense account.
“^_^V gets mo na sana”
B. PRECOLLECTION OF INCOME
...................Reminder: pls do read and understand “prepaid expense first” :D
..................“this refers to the revenue that has not yet been rendered or earned by the company but paid by the customers in advance, therefore we can classify Pre-collected or Unearned Revenue as Liability account and not a Revenue account for we haven’t yet rendered any service as an exchange for the payments received.”
..................“this is income that is already collected but not yet earned. This is exactly the opposite of “accrued revenue” - Lopez
There are two approaches that can be used in recording pre-collections upon the date of pre-collection or upon recording the Journal Entry:
Income Method
.................“under this method or approach, an income account is credited upon collection of receipt of cash or upon recording the JE. This method is also called “Nominal approach” because a revenue account is an Income Statement account.
Liability Method
..................“under this approach, a liability account is credited upon collection or upon recording the JE. This method is also called “Real approach” because a liability account is a balance sheet account and for all balance sheet accounts are called Real Accounts.
Illustrative Case 1:
....................................On June 2, 2008 Nobody’s Dormitory received a payment from a tenant as an advance payment for the room rental for 10 months, worth 50,000Php.
The transaction has been recorded upon the pre-collection of cash, using any of these methods:
......................................................Journal Entry
Analyzing the case
The 50,000Php that has been pre-collected on June 2, 2008 covers 12months of advance payment from the given date. The dormitory’s accounting period ends on December 31, 2008, from the month of June to December covers 6 months; the tenant paid for 10 months rental on advance, therefore on December 31 the 50,000Php must be split-upped,
To allocate:
.........................50,000
....................../10 months
........................========
........................5,000 per month
Solve for the Rent Income earned:
.............June- December = 6 months
...........................................x 5,000Php
...............................................=======
..............................................30,000Php = earned income ending balance
Solve for the Unearned Income:
.............................................50,000 – 30,000 = 20,000Php
..................................................................or
.......................10 months – 6 months = 4 months x 5,000 = 20,000Php
To illustrate the split up:
50,000= 30,000(Earned Income)
+20,000 (Unearned Income)
To record the ADJUSTMENT using the…
INCOME METHOD:
...................................................Journal Entry
...............June 2, 2008...Cash...............................50,000
...............................................Rent Income...........................50,000
................................................ Adjusting Entry
..............Dec. 31, 2008....Rent Income..............20,000
................................................Unearned Rent Income..... 20,000
LIABILITY METHOD:
....................................................Journal Entry
....June 2, 2008....Cash............................................. 50,000
.......................................Unearned Rent Income...................50,000
................................................ Adjusting Entry
....Dec. 31, 2008 ..Unearned Rent Income.....30,000
........................................Rent Income...................................30,000
..................“this refers to the revenue that has not yet been rendered or earned by the company but paid by the customers in advance, therefore we can classify Pre-collected or Unearned Revenue as Liability account and not a Revenue account for we haven’t yet rendered any service as an exchange for the payments received.”
..................“this is income that is already collected but not yet earned. This is exactly the opposite of “accrued revenue” - Lopez
There are two approaches that can be used in recording pre-collections upon the date of pre-collection or upon recording the Journal Entry:
Income Method
.................“under this method or approach, an income account is credited upon collection of receipt of cash or upon recording the JE. This method is also called “Nominal approach” because a revenue account is an Income Statement account.
Liability Method
..................“under this approach, a liability account is credited upon collection or upon recording the JE. This method is also called “Real approach” because a liability account is a balance sheet account and for all balance sheet accounts are called Real Accounts.
Illustrative Case 1:
....................................On June 2, 2008 Nobody’s Dormitory received a payment from a tenant as an advance payment for the room rental for 10 months, worth 50,000Php.
The transaction has been recorded upon the pre-collection of cash, using any of these methods:
......................................................Journal Entry
Analyzing the case
The 50,000Php that has been pre-collected on June 2, 2008 covers 12months of advance payment from the given date. The dormitory’s accounting period ends on December 31, 2008, from the month of June to December covers 6 months; the tenant paid for 10 months rental on advance, therefore on December 31 the 50,000Php must be split-upped,
To allocate:
.........................50,000
....................../10 months
........................========
........................5,000 per month
Solve for the Rent Income earned:
.............June- December = 6 months
...........................................x 5,000Php
...............................................=======
..............................................30,000Php = earned income ending balance
Solve for the Unearned Income:
.............................................50,000 – 30,000 = 20,000Php
..................................................................or
.......................10 months – 6 months = 4 months x 5,000 = 20,000Php
To illustrate the split up:
50,000= 30,000(Earned Income)
+20,000 (Unearned Income)
To record the ADJUSTMENT using the…
INCOME METHOD:
...................................................Journal Entry
...............June 2, 2008...Cash...............................50,000
...............................................Rent Income...........................50,000
................................................ Adjusting Entry
..............Dec. 31, 2008....Rent Income..............20,000
................................................Unearned Rent Income..... 20,000
LIABILITY METHOD:
....................................................Journal Entry
....June 2, 2008....Cash............................................. 50,000
.......................................Unearned Rent Income...................50,000
................................................ Adjusting Entry
....Dec. 31, 2008 ..Unearned Rent Income.....30,000
........................................Rent Income...................................30,000
Friday, January 9, 2009
SPECIAL JOURNALS
Use to record and post transactions that are of the same nature and which
frequently occur.
SALES JOURNAL
Only transactions involving “sale of merchandise on account”
Or “on credit terms” are recorded in this book.
....................................Pro-forma Journal Entries
.................Accounts Receivable..................................Phpxx
..........................Sales ...............................................................Phpxx
..........................Output Tax ..........................................................xx
PURCHASE JOURNAL
Only transactions involving “purchase of merchandise on account” or “on credit terms” are recorded in this book.
....................................Pro-forma Journal Entries
.................Purchases .................................................Phpxx
.................Input Tax ........................................................xx
...........................Accounts Payable........................................Phpxx
CASH RECEIPTS JOURNAL
Only transactions involving “receipts of cash” are recorded in this book such of sale on merchandise in cash, collection from the customer’s account, investment by the owner in terms of cash, cash received from a bank loan, refund from supplier for return of merchandise purchased in cash, etc.
.....................................Pro-forma Journal Entries
....................Cash ........................................................Phpxx
.........................(Various credits as mentioned
..........................Above) ...........................................................Phpxx
CASH DISBURSEMENT JOURNAL
Only transactions involving “cash payments” are recorded in this book such as purchases of merchandise in cash, payments of supplier’s account, owner’s drawing in cash, cash refund to customers whose merchandise purchased in account was returned, cash of fixed assets, payment of expenses, etc.
............................................Pro-forma Journal Entry
................(Various debits) ........................................Phpxx
........................Cash ................................................................Phpxx
frequently occur.
SALES JOURNAL
Only transactions involving “sale of merchandise on account”
Or “on credit terms” are recorded in this book.
....................................Pro-forma Journal Entries
.................Accounts Receivable..................................Phpxx
..........................Sales ...............................................................Phpxx
..........................Output Tax ..........................................................xx
PURCHASE JOURNAL
Only transactions involving “purchase of merchandise on account” or “on credit terms” are recorded in this book.
....................................Pro-forma Journal Entries
.................Purchases .................................................Phpxx
.................Input Tax ........................................................xx
...........................Accounts Payable........................................Phpxx
CASH RECEIPTS JOURNAL
Only transactions involving “receipts of cash” are recorded in this book such of sale on merchandise in cash, collection from the customer’s account, investment by the owner in terms of cash, cash received from a bank loan, refund from supplier for return of merchandise purchased in cash, etc.
.....................................Pro-forma Journal Entries
....................Cash ........................................................Phpxx
.........................(Various credits as mentioned
..........................Above) ...........................................................Phpxx
CASH DISBURSEMENT JOURNAL
Only transactions involving “cash payments” are recorded in this book such as purchases of merchandise in cash, payments of supplier’s account, owner’s drawing in cash, cash refund to customers whose merchandise purchased in account was returned, cash of fixed assets, payment of expenses, etc.
............................................Pro-forma Journal Entry
................(Various debits) ........................................Phpxx
........................Cash ................................................................Phpxx
ANALYZING and SUMMARIZING BUSINESS TRANSACTIONS OF A.....
SERVICE ENTITY
Analyzing Business Transactions
Business Transaction
“is the exchange between two parties of things and rights the value of
which are expressed in monetary terms or pesos.”
“Not all business activities are “accountable”. For example, the hiring of employees, death of company’s president and the entering into contracts are all business activities that cannot be qualified or expressed in terms of unit of measure, thus cannot be recorded in the books of the enterprise.”
“Business activities are said to be accountable and are called business transactions and events when they affect the elements of the accounting equation.”
Accounting Equation
Asset = Liabilities + Owner’s Equity ( - Drawings + Income – Expense)
Therefore: Assets- Liabilities= Owner’s Equity
Assets- Owner’s Equity= Liabilities
“The accounting equation shows the relationship among assets, liabilities and owner’s equity. Assets appear on the left hand side of the equation while the legal and economic claims against the assets- the liabilities and owner’s equity- appear on the right hand side of the equation. The two sides must ALWAYS be EQUAL.”
............................LEFT SIDE ......................................RIGHT SIDE
...........................ASSET .................................LIABILITIES
................................................................................+
....................................................................OWNER’S EQUITY
“Every transaction must always have a dual-effect or must affect atleast two
accounts.”
“The business transactions are analyzed from the viewpoint of the business. If the transaction is “Purchased” or “Bought”, it is the business that is buying. If the transaction is “Sold”, it is the business that is selling, if the transaction is “Paid” it is the business that pays, if the transaction is “Collected” it is the business that receives the payment…..
“ALWAYS CONSIDER YOURSELF AS THE BUSINESS” when making the analysis.”
RULES OF DEBIT AND CREDIT
The effect of changes in Assets, Liabilities and Owner’s Equity are being summarized in an accounting device called “account”. This device will group these accounting values with their amounts belonging to one item only. In the item “cash” for example, all amounts representing increases and decreases in cash are entered in the account “cash”.
As discussed earlier, an “account” is divided into two sides. The left-hand side which is called the “debit side” and the right-side is called the “credit side”
DEBIT ...............................................................CREDIT
Increase in Asset ..............................Decrease in Asset
Decrease in Liability ........................Increase in Liability
Increase in Drawing .........................Increase in Capital
Increase in Expense......................... Increase in Income
Normal Balance corresponds to the increase in each account.
Therefore:
INCREASE
DEBIT ....................................................................CREDIT
ASSET ...................................................................LIABILITY
EXPENSE ...............................................................INCOME
DRAWINGS ...........................................................CAPITAL
Analyzing Business Transactions
Business Transaction
“is the exchange between two parties of things and rights the value of
which are expressed in monetary terms or pesos.”
“Not all business activities are “accountable”. For example, the hiring of employees, death of company’s president and the entering into contracts are all business activities that cannot be qualified or expressed in terms of unit of measure, thus cannot be recorded in the books of the enterprise.”
“Business activities are said to be accountable and are called business transactions and events when they affect the elements of the accounting equation.”
Accounting Equation
Asset = Liabilities + Owner’s Equity ( - Drawings + Income – Expense)
Therefore: Assets- Liabilities= Owner’s Equity
Assets- Owner’s Equity= Liabilities
“The accounting equation shows the relationship among assets, liabilities and owner’s equity. Assets appear on the left hand side of the equation while the legal and economic claims against the assets- the liabilities and owner’s equity- appear on the right hand side of the equation. The two sides must ALWAYS be EQUAL.”
............................LEFT SIDE ......................................RIGHT SIDE
...........................ASSET .................................LIABILITIES
................................................................................+
....................................................................OWNER’S EQUITY
“Every transaction must always have a dual-effect or must affect atleast two
accounts.”
“The business transactions are analyzed from the viewpoint of the business. If the transaction is “Purchased” or “Bought”, it is the business that is buying. If the transaction is “Sold”, it is the business that is selling, if the transaction is “Paid” it is the business that pays, if the transaction is “Collected” it is the business that receives the payment…..
“ALWAYS CONSIDER YOURSELF AS THE BUSINESS” when making the analysis.”
RULES OF DEBIT AND CREDIT
The effect of changes in Assets, Liabilities and Owner’s Equity are being summarized in an accounting device called “account”. This device will group these accounting values with their amounts belonging to one item only. In the item “cash” for example, all amounts representing increases and decreases in cash are entered in the account “cash”.
As discussed earlier, an “account” is divided into two sides. The left-hand side which is called the “debit side” and the right-side is called the “credit side”
DEBIT ...............................................................CREDIT
Increase in Asset ..............................Decrease in Asset
Decrease in Liability ........................Increase in Liability
Increase in Drawing .........................Increase in Capital
Increase in Expense......................... Increase in Income
Normal Balance corresponds to the increase in each account.
Therefore:
INCREASE
DEBIT ....................................................................CREDIT
ASSET ...................................................................LIABILITY
EXPENSE ...............................................................INCOME
DRAWINGS ...........................................................CAPITAL
Bookkeepping and Financial Statements
BOOKKEEPPING
Is the process of recording business transactions. Since bookkeeping traditionally assumes the responsibility of recording functions it runs short of classifying and summarizing.
FINANCIAL STATEMENT
Objective: to provide information about financial position, performance and cash flows of an enterprise that is vital in making sound economic decisions.
Statement of Financial Position (Balance Sheet)
“shows the Financial position of an enterprise as of a particular date.”
Elements
a. Assets
“are business resources that have probable future economic
economic benefits and are under management’s control that are results
of past transactions.
b. Liabilities
“are business’ present obligations that are result of past transactions.
c. Owner’s Equity
“the residual interest of the owner in the assets of the business
entity.”
Statement of Comprehensive Income (Income Statement)
“shows the performance of the enterprise”
Elements
a. Revenues- are inflows from services rendered and other activities.
b. Expenses- are outflows of assets or incurrence of liabilities.
Results
Gains- “increase to equity”
“R>E”
Loss- “decrease to equity”
“R Statement of Changes in Owner’s Equity
“summarizes the changes in equity for a period of time”
Elements
1. Investment by the owners
2. Distribution to owners
3. Capital Maintenance Adjustment
Statement of Cash Flows
“provides information about cash inflows (receipts) and outflows (payments)”
1. Operating Cash Flows
2. Investing Cash Flows
3. Financing Cash Flows
Notes that Accompany Financial Statements
“adequate disclosures is perhaps the most important accounting principles to the
users of financial statements.”
Qualities of Financial Statement
1. Understandability- FS should be prepared and represented in a way that
should be prepared and represented in a way that it can be understood by the users.
2. Reliability- FS should carry the degree of confidence when used by
interested parties.
“to be reliable, it must be “free” from material misstatement and from bias”
2.1 Faithful Representation- the FS must be adequate and shows what it
purports to show
2.2 Neutrality- “FS must be free from bias”
- “It is not good to give favor to one party in detriment to
the other”
2.3 Conservatism- Alternative which has the least effect on Owner’s
equity should be chosen.
2.4 Completeness- FS is said to be complete if it contains full disclosure
of significant information.
2.5 Substance over Form- emphasizes the economic substance of events
3. Relevance- “information must be relevant to the decision-making needs of the
users.”
1.1 Materiality- determining whether an item is material or not.
1.2 Predictive Value- FS’s information enables the users to
forecast and make predictions about the outcome.
1.3 Feedback Value
1.4 Timeliness- Financial informations must be available at the
time of need.
4. Comparability-Financial Statement must be worth comparing for with
other companies’.
5. Consistency- method does not only maintain comparability but also
reliability.
Is the process of recording business transactions. Since bookkeeping traditionally assumes the responsibility of recording functions it runs short of classifying and summarizing.
FINANCIAL STATEMENT
Objective: to provide information about financial position, performance and cash flows of an enterprise that is vital in making sound economic decisions.
Statement of Financial Position (Balance Sheet)
“shows the Financial position of an enterprise as of a particular date.”
Elements
a. Assets
“are business resources that have probable future economic
economic benefits and are under management’s control that are results
of past transactions.
b. Liabilities
“are business’ present obligations that are result of past transactions.
c. Owner’s Equity
“the residual interest of the owner in the assets of the business
entity.”
Statement of Comprehensive Income (Income Statement)
“shows the performance of the enterprise”
Elements
a. Revenues- are inflows from services rendered and other activities.
b. Expenses- are outflows of assets or incurrence of liabilities.
Results
Gains- “increase to equity”
“R>E”
Loss- “decrease to equity”
“R
“summarizes the changes in equity for a period of time”
Elements
1. Investment by the owners
2. Distribution to owners
3. Capital Maintenance Adjustment
Statement of Cash Flows
“provides information about cash inflows (receipts) and outflows (payments)”
1. Operating Cash Flows
2. Investing Cash Flows
3. Financing Cash Flows
Notes that Accompany Financial Statements
“adequate disclosures is perhaps the most important accounting principles to the
users of financial statements.”
Qualities of Financial Statement
1. Understandability- FS should be prepared and represented in a way that
should be prepared and represented in a way that it can be understood by the users.
2. Reliability- FS should carry the degree of confidence when used by
interested parties.
“to be reliable, it must be “free” from material misstatement and from bias”
2.1 Faithful Representation- the FS must be adequate and shows what it
purports to show
2.2 Neutrality- “FS must be free from bias”
- “It is not good to give favor to one party in detriment to
the other”
2.3 Conservatism- Alternative which has the least effect on Owner’s
equity should be chosen.
2.4 Completeness- FS is said to be complete if it contains full disclosure
of significant information.
2.5 Substance over Form- emphasizes the economic substance of events
3. Relevance- “information must be relevant to the decision-making needs of the
users.”
1.1 Materiality- determining whether an item is material or not.
1.2 Predictive Value- FS’s information enables the users to
forecast and make predictions about the outcome.
1.3 Feedback Value
1.4 Timeliness- Financial informations must be available at the
time of need.
4. Comparability-Financial Statement must be worth comparing for with
other companies’.
5. Consistency- method does not only maintain comparability but also
reliability.
ASSUMPTIONS
1. Accounting Entity- business is considered as an entity that is separate and
distinct from the owner and management.
2. Going-Concern Assumption- the business is assumed to have a continuous
life of existence.
3. Time Period Assumption- the life of the business is divided into equal
periods called Accounting Period.
a. Calendar Year – January 1 to December 31
b. Fiscal Year- starts from any month except Jan. and ends on its
12th month afterwards
c. Natural Business Year- a 12 month period that ends on any
month when the business is at the lowest or slack season
4. Unit of Measure- “ the country’s currency”
5. Accrual Basis- income is recognized when earned.
Expense is recognized when incurred
distinct from the owner and management.
2. Going-Concern Assumption- the business is assumed to have a continuous
life of existence.
3. Time Period Assumption- the life of the business is divided into equal
periods called Accounting Period.
a. Calendar Year – January 1 to December 31
b. Fiscal Year- starts from any month except Jan. and ends on its
12th month afterwards
c. Natural Business Year- a 12 month period that ends on any
month when the business is at the lowest or slack season
4. Unit of Measure- “ the country’s currency”
5. Accrual Basis- income is recognized when earned.
Expense is recognized when incurred
Generally Accepted Accounting Principles
1. Cost Principle
Asset should be recorded at original/ acquisitioned cost.
2. Objectivity Principle
Accounting records should be reliable.
3. Materiality Principle
Practicability in determining the value of an item.
4. Matching Principle
Revenue is recognized when earned.
Expense is recognized when incurred.
5. Adequate Disclosure Principle
Financial Statement must be free from material misstatement.
Asset should be recorded at original/ acquisitioned cost.
2. Objectivity Principle
Accounting records should be reliable.
3. Materiality Principle
Practicability in determining the value of an item.
4. Matching Principle
Revenue is recognized when earned.
Expense is recognized when incurred.
5. Adequate Disclosure Principle
Financial Statement must be free from material misstatement.
TYPES and FORMS of BUSINESS
TYPES
a. Service Entity
The business derive its income from services rendered to clients,
in the case of professional services like of CPAs.
b. Merchandising Entity
The business is engaged in buying goods or any form of finished products and sells these at a profit
c. Manufacturing
The business is engaged in buying raw materials and supplies that will be converted into a finished product that will be subject to sale for profit.
FORMS
a. Sole Proprietorship
Capital is owned by a single person who has a complete control over business` decisions.
b. Partnership
A legal arrangement in which two or more persons agree to contribute capital or services to the business and divide its profits or losses.
a. General Partnership
each partner has unlimited liability for the debts incurred by the business.
b Limited Partnership
-One or more general partners
-One or more limited partners
c. Corporation
An artificial being created by law and is a legal entity separate and distinct from its owners.
a. Service Entity
The business derive its income from services rendered to clients,
in the case of professional services like of CPAs.
b. Merchandising Entity
The business is engaged in buying goods or any form of finished products and sells these at a profit
c. Manufacturing
The business is engaged in buying raw materials and supplies that will be converted into a finished product that will be subject to sale for profit.
FORMS
a. Sole Proprietorship
Capital is owned by a single person who has a complete control over business` decisions.
b. Partnership
A legal arrangement in which two or more persons agree to contribute capital or services to the business and divide its profits or losses.
a. General Partnership
each partner has unlimited liability for the debts incurred by the business.
b Limited Partnership
-One or more general partners
-One or more limited partners
c. Corporation
An artificial being created by law and is a legal entity separate and distinct from its owners.
ACCOUNTING
ACCOUNTING
“Language of Business”
“It 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”
- Accounting Standards Council (ASC) &
Statement of Financial Accounting
Standards (SFAS)
“It is the art of recording, classifying, summarizing, reporting and interpreting information in a significant manner and financial in nature…”
Therefore:
1. Accounting is about quantitative information
2. The information is of financial in nature
3. Usefulness of information in decision making for the betterment of the business entity.
“Language of Business”
“It 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”
- Accounting Standards Council (ASC) &
Statement of Financial Accounting
Standards (SFAS)
“It is the art of recording, classifying, summarizing, reporting and interpreting information in a significant manner and financial in nature…”
Therefore:
1. Accounting is about quantitative information
2. The information is of financial in nature
3. Usefulness of information in decision making for the betterment of the business entity.
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