CHAPTER 1

FINANCIAL ACCOUNTING PROCESS

ACCOUNTING SYSTEM is the means by which a reporting entity records and stores the financial and
managerial information from its transactions or economic events so that it can retrieve and report
the information in an accounting statement.

ELEMENTS:
1. PROCEDURES or set of inter-related activities involving originating, processing, and reporting of
financial and related data.
2. Statement of ACCOUNTING POLICIES and standards.
3. RECORDS and reports necessary to gather, process store and transmit financial and other
information.
4. BOOKKEEPING SYSTEM or pro-forma accounting entries including computational requirements.
5. PERSONNEL directly involved in accounting work.
6. Equipment and DEVICES used to expedite work, provide controls and minimize if not totally
prevent fraud and errors.

BOOKKEEPING is the SYSTEMATIC and CHRONOLOGICAL RECORDING OF TRANSACTIONS and events

in BOOKS OF ACCOUNTS; also known as RECORDING PHASE of accounting.

PURPOSE: Basis for determining financial position and operating results.

SYSTEMS of Bookkeeping:
 DOUBLE ENTRY Bookkeeping views a transaction as having two-fold effect on accounting values.
 SINGLE ENTRY Bookkeeping as a general rule only cash and personal accounts are recognized.

DISTINCTIONS:
Double Entry Single Entry
Principles involved Duality; equilibrium Recognizes only one phase of
transaction
Transactions/events recorded Every type of accountable Only involving cash/personal
event accounts
Accounts recognized ALEqREx Cash, AR, AP, Equity
Books used Journal and ledgers Cashbook and subsidiary ledger
F.S. preparation Accounting process and direct Analysis/indirect
matching approach approach/inventory method

ACCOUNTING RECORDS:
1. Business/Source documents - are original source materials evidencing transaction.
Ex. Purchase Invoice, O.R., vouchers, Debit/Credit memo, Bills
2. Books of Original Entry - refer to journals, such as general and special journals.
Ex. Cash Receipts/Disbursements Journal, Sales/Purchase Journal, Voucher/Check Register
3. Books of Final Entry -refer to ledgers, the General Ledger and the Subsidiary
Ledger.

BROAD STEPS of Financial Accounting Process:

1. Selecting - the Accountable Event.
2. Analyzing the Events - to determine their effects on the financial position of the
enterprise.
3. Measuring the effects - of the events on the financial position represented by money.
4. Classifying the measured effects – according to the individual asset, liabilities, owner’s equity
items and revenue/expenses affected.
5. Recording the measured effects.

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6. Summarizing the recorded effects.
7. Adjusting the records - are often required after events have been initially recorded,
classified, and summarized.
8. Communicating the processed information – in the form of financial statements.

PARTS of the Financial Accounting Process:

1. Identifying and analyzing transaction
2. Journalizing
3. Posting RECORDING Phase
4. Unadjusted trial balance
5. Adjusting entries
6. Financial statements
7. Closing entries SUMMARIZING Phase
8. Post-closing trial balance
9. Reversing entries

ACCOUNTING CYCLE is a series of well-defined steps leading to the communication of effects of

business transaction. The accounting cycle implements the accounting process.

 IDENTIFYING AND ANALYZING TRANSACTIONS AND EVENTS.

DUAL EFFECTS Principle affects at least two items in the accounting records.

Account - is used as a storage unit of information in Double-Entry System. It is an accounting

device used to summarize change is asset, liability, revenue, expense or proprietorship. It is
composed of three parts; name, debit, and credit.

KINDS of Account:

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 Real account  Clearing account  Reciprocal account
 Nominal account  Controlling account  Auxiliary account
 Mixed account  Suspense account  Summary account

Rules of Debit and Credit:

Dr Cr
Assets + -
Liabilities - +
Capital - +
Income/Retained Earnings - +
Expense + -

 JOURNALIZING THE TRANSACTIONS AND EVENTS IN THE BUSINESS FORMS TO APPROPRIATE

JOURNALS.

Journalizing - process of recording transactions by means of journal entry.

Parts of Journal Entry:

Date; Account to be debited/credited; Brief Explanation

TYPES of JOURNAL ENTRY as to:

Time Prepared Form
 Opening Entry – entry beginning a new system  Simple Journal Entry – contains one debit and
of accounting. one credit.
 Current Entry – record transactions completed  Compound Journal Entry – has two or more
during the accounting period. elements and often representing two or more
 Adjusting Entry – made at the end of the period transactions.
to update certain amounts as to reflect correct
balances at designated time.
 Closing Entries – made at the end of the period
after adjustments, by means of closing all
nominal accounts.
 Reversing Entries – made at the start of the
subsequent period to reverse certain adjusting
entries.
 Correcting Entries – made to correct errors.
 Reclassification Entries – transfer an item from
on to another.

JOURNAL - a formal record or book of original entry where transactions are recorded for the first
time.

TYPES of Journal:
Simple – used to record all transactions. Special – multi-column book to record
transactions of similar nature
 General Journal – simple journal with two  Cash receipt journal – records all transaction
money columns. involving receipts of cash.
 Combination journal – simple journal with  Cash disbursements journal – records all
several money columns. transactions involving payment of cash.
 Sales Journal – record all transactions involving
sale of merchandise.
 Purchases journal - record all transactions
involving purchase of merchandise for regular
sale.
 Voucher Register – used in a voucher system to
record all transactions giving rise to a liability on
an open account whether such liability is settled
VOUCHER SYSTEM or not.
 Check register – used in voucher system to

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 record all transactions involving payment of
check.
 Requisition Journal – used in cost accounting
system designed to record all transactions
involving issues of new materials,
manufacturing supplies to different functional
departments.
 Finished Goods Journal – used in cost
COST ACCOUNTING SYSTEM accounting designed to record cost of goods
that were completed and transferred to
finished goods stockroom.
 Factory Journal - used in cost accounting
designed to record the operations of the factory
under the dual accounting control.

VOUCHER System - a special method of accounting for business transactions which involves
payment of cash immediately or in the future. It is one of the means of establishing Internal Control over
the expenditures of the business.

Advantages Disadvantages Special Problems

 Better control over  Lacks flexibility.  PRA
disbursements.  May result in duplication of  Partial payments
 Facility in taking cash discount. work and increased  Payment by note
 Elimination of A/P Subsidiary bookkeeping expense.
Ledger.

Books of Accounts used: Procedures:

i. Voucher register – records vouchers issued. i. Preparing the voucher
ii. Check register – records all payments by ii. Approval of voucher
check. iii. Recording the voucher
iii. Sales register – records all credit sales. iv. Filing the unpaid voucher
iv. Cash receipts journal – records all receipts of v. Filing the paid voucher.
cash.
v. General Journal – records transactions not
recorded in special journal.

 POSTING FROM THE JOURNALS TO THE LEDGER

POSTING – is the process of transferring data from the journal to the appropriate accounts in the
ledger.

Purpose: serves to classify the effects of transactions on specific asset, liability, proprietorship,
revenue and expense accounts.

LEDGER - a systematic compilation of group accounts.

KINDS of Ledger:
General Ledger – contains all accounts appearing in the FS.
Private Ledger - which contains confidential information of all accounts are kept.
Subsidiary Ledger - supporting ledger consisting of a group of accounts of similar nature, the total
of which is in agreement with controlling account in the general ledger.

Kinds of Subsidiary Ledger: Advantages of Subsidiary Ledger:

AR, AP, WIP, FG, Factory, Plant, Expense  General ledger is relieved of too much detail.
 Trial balance is too much shorter.
 Preparation of the FS is facilitated.
 Work could be divided between several
persons.

 PREPARING THE UNADJUSTED TRIAL BALANCE TO PROVE THE EQUALITY OF DEBITS AND CREDITS
AND TO SERVE AS A BASIS FOR ADJUSTING ENTRIES.

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 TYPES of Trial Balance as to:
Form Time of Preparation
 Balances – contains accounts with open  Periodic/Unadjusted – contains real, nominal
balances. and mixed accounts; prepared before adjusting
 Totals – contains all accounts in the ledger, entries.
both open and closed.  Adjusted - contains real and nominal accounts.
 Post-Closing – contains real accounts only; one
performed after the closing process.

ERRORS revealed and not revealed by Trial Balance:

Revealed Not Revealed
 Transplacement  Wrong computation
 Transposition  Wrong account used/classification of account
 Error in posting one side of the entry  Double posting both sides of the entry
 Omission in posting one side of the entry  Omission in posting both sides of the entry
 Omission in journalizing a transaction

 PREPARING ADJUSTING ENTRIES TO TAKE UP ACCRUALS, EXPIRATION OF DEFERREALS,

ESTIMATIONS AND OTHER EVENTS OFTEN NOT SIGNALED BY NEW SOURCE DOCUMENTS.

CONCEPTS involved:

Accounting Period - a transition is recorded on the basis of business papers. Certain transactions,
however, remain unfinished at the time of reporting financial information.
Estimates and updating entries therefore become necessary in order to reflect
more fairly the status of certain accounts.

Accrual - Revenue must be recognized when earned, even if cash is not yet received.
- Expenses must be recognized when benefits are received, even if cash is not
yet paid.

Matching of Costs against Revenue – to have a fair measurement of revenue in a given period of
time, all costs and expenses incurred in generating that revenue must be deducted therefrom.

PURPOSE of Adjusting Entries:

a. Take upunrecorded income and expenses of the period

- Accrued expense/income
b. Split mixed accounts into real and nominal accounts
- Prepaid expense
- Unearned income
- Bad debts
- Inventory
- Depreciation
 PREPARING THE ADJUSTED TRIAL BALANCE/PREPARING THE WORKSHEET AFTER ADJUSTMENTS
AND TO FACILITATE THE PREPARATION OF THE FINANCIAL STATEMENTS.

WORKSHEET is an analytical device used in accounting to facilitate the gathering of data for
adjustments, preparation of FS and closing entries.

Factors affecting the money columns of the Worksheet:

a. Nature of the business
b. Ownership of the business
c. Concept followed in accounting for revenue and expense
d. Volume of activities.

 PREPARING THE FINANCIAL STATEMENTS

General Purpose Financial Statements

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Income Statement
Balance Sheet
Statement of Changes in Financial Position (statement of Cash Flow/Fund Flow)
Statement of Changes in Equity
Explanatory Notes

Objective of the Financial Statements

Financial Position
Performance
Changes in Financial Position
Disclosure

 CLOSING THE BOOKS INVOLVES JOURNALIZING AND POSTING CLOSING ENTRIES AND RULING THE
LEDGER. TEMPORARY CAPITAL ACCOUNT/NOMINAL ACCOUNTS ARE CLOSED AND THE RESULTING
NET INCOME (LOSS) IS TRANSFERRED TO THE CAPITAL/RETAINED EARNINGS ACCOUNT.

CLOSING ENTRIES are prepared at the end of accounting period to empty or bring to zero all nominal
accounts in the ledger.

STEPS in preparing closing entries:

a. Close all nominal accounts to income and expense summary account.
b. Close income and expense summary account to drawing/RE account.
c. Close drawing to capital account.

 PREPARING A POST-CLOSING TRIAL BALANCE TO PROVE THE EQUALITY OF DEBITS AND CREDITS IN
THE LEDGER AFTER THE CLOSING PROCESS.

Contents: Real accounts only.

 PREPARING, ENTERING AND POSTING OF REVERSING ENTRIES TO FACILITATE THE RECORDING OF

CERTAIN TRANSACTIONS IN THE SUCCEEDING ACCOUNTING PERIOD.

PURPOSE: For convenience in recording accruals.

For consistency.

Adjustments requiring reversal:

i. Accrued expense
ii. Prepaid expense, expense method
iii. Unearned income, income method

CHAPTER 2
PRESENTATION OF FINANCIAL STATEMENTS (PAS 1-REVISED 2005)

OBJECTIVE OF PAS 1:
 To prescribe the basis for presentation of general purpose FS, in order to ensure comparability
both with the enterprise’s own FS of previous period’s and with the FS of other enterprise.
 To achieve the objective, the statements sets out:
- The overall considerations for presentation of FS.
- The guidelines of their structure.
- The maximum requirements for the content of the FS.

SCOPE
This statement should be applied in the presentation of all general purpose FS prepared and
presented in accordance with IFRS.
 General-Purpose FS are those intended to meet the needs of users who are not in a position to
demand reports tailored to meet their specific information needs. They include those that are
presented separately or within another public document such as an annual report or a prospectus.
 Applicability - the standard applies equally to all entities and whether or not they need to
prepare consolidated FS or separate FS as defined in IAS 27.

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 The standard uses terminology that is suitable for profit oriented entities, including public sector
entities. Non-profit, government and other public sector entities seeking to apply this statement
may need to amend the descriptions used for certain line items in the FS and for the FS themselves.

FINANCIAL STATEMENTS are structured financial representation of the financial position of and the
transactions undertaken by the enterprise; means by which information accumulated and processed in
financial accounting is periodically communicated to the users.

PURPOSE
To provide information about the financial position, performance and cash flows of an enterprise useful
to wide range of users in making economic decisions. To meet this objective, FS provides information
about: assets, liabilities, equity, other changes in equity, income and expenses, including gains and
losses, cash flows.

RESPONSIBILITY FOR FS:

 Management is responsible for preparation and presentation.
 BOD reviews and approves before submitting to the stockholders.

General Purpose Financial Statements

Income Statement
Balance Sheet
Statement of Changes in Financial Position (statement of Cash Flow/Fund Flow)
Statement of Changes in Equity
Explanatory Notes

Objective of the Financial Statements

Financial Position Changes in Financial Position

Performance Disclosure

Underlying Assumptions
Accrual basis Going concern

Qualitative Characteristics

Understandability
Relevance - Materiality, Timeliness
Reliability -Representational faithfulness, Substance over Form, Neutrality, Prudence,
Completeness, Balance between Benefit and Cost
Comparability

IMPRACTICABLE
An entity cannot apply after making every reasonable effort to do so. International Financial Reporting
Standards (IFRS) are standards and interpretations adopted by the International Accounting Standards
Board (IASB). They comprise:
 International Financial Reporting Standards (IFRS)
 International Accounting Standards (IAS)
 Interpretations originated by International Financial Reporting Interpretations Committee (IFRIC)
or the former Standard Interpretations Committee (SIC)

MATERIAL OMMISSIONS/MISSTATEMENTS

Individually/collectively influence decisions of users taken on the basis of FS. Materiality depends on the
size and nature of the omission/misstatement judged in the surrounding circumstances.

NOTES provide - narrative descriptions or aggregations of items disclosed in the statements.

- Information about items do not qualify for recognition in the statements.

OVERALL CONSIDERATIONS

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 FAIR PRESENTATION AND COMPLIANCE WITH GAAP
- FS should present fairly the financial position, financial performance and cash flows.
- Fair presentation requires faithful representation:
i. Effects of other transactions and events.
ii. Conditions set-out in the framework.
- Fair presentation also requires an entity to:
i. Select and apply accounting policies in accordance with IAS 8 Accounting Policies, Changes in
Accounting Estimates and Errors
ii. Present information, including accounting policies that provides information that is:
iii. Provide additional disclosures when compliance with specific requirements of IFRS is
insufficient.
- Application of IFRS with additional disclosure when necessary is presumed to result in fair
presentation.
- Entity whose FS comply with IFRS shall make an explicit and unreserved statement of such
compliance in the Notes.
- When entity departs from standard/Interpretation in a prior period, and affects the FS, it shall
disclose this fact.
- Inappropriate accounting treatments are not rectified either by disclosure.
- Required disclosures in extremely rare circumstances when management concludes that
compliance with a Standard/Interpretation would be misleading:
i. FS present fairly the FS;
ii. It has complied with all material respects with GAAP, except that it has departed from a
statement in order to achieve fair presentation.
a. Relevant
b. Reliable
c. Comparable
d. Understandable

iii. Disclose the:

 Title of the Standard/Interpretation departed.
 Nature of the departure, including the treatment the Standard/Interpretation required.
 Reason why the treatment would be misleading.
 Treatment adopted.
 Financial impact of the departure.
- In extremely rare circumstances when compliance with Standard/Interpretation would be
misleading, but relevant regulatory framework prohibits departure, the entity, to maximum extent
possible reduce misleading aspects, by disclosing:
 The title of the Standard/Interpretation in question, nature of the requirement, and
reason why it is misleading.
 For each period presented the adjustments.

 GOING CONCERN
- In preparing FS, management should make assessment of the entity’s ability to continue as
going concern.
- When enterprise has history of profitable operations and ready access to financial resources,
conclusion that going concern basis is appropriate maybe reached without detailed analysis.
- In assessing the going concern assumption, management takes into account all available
information for the foreseeable future, which should at least, but not limited to 12 months from
Balance Sheet date.
- In assessing whether going concern basis is appropriate, management may consider wide range
of factors surrounding current and expected profitability, debt repayment schedules, and
potential sources of replacement financing.
- FS shall be prepared in going concern basis, unless the management:
 Intends to liquidate.
 Cease trading.
 No reliable alternative to do so.
- Material uncertainties may cast significant doubt or enterprise’s ability to continue as going
concern should be properly disclosed.
- When FS is not prepared on going concern basis, the reasons should be disclosed, together with
the basis on which FS are prepared and why it is not regarded as going concern.

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 ACCRUAL BASIS ACCOUNTING, except for cash flow information.

 CONSISTENCY OF PRESENTATION (Structure)

- The presentation and classification of items in the FS should be retained from one period to the
next, unless:
 It is apparent, following a significant change in the nature of entity’s operations or after the
review of the FS another presentation/classification would be more appropriate.
 Standard/interpretation requires a change in presentation.
- In the presence of alternatives, consistency can be deviated provided:
 Change is justifiable.
 Required disclosures are complied with.

 MATERIALITY AND AGGREGATION

- Each material class of similar items shall be presented separately in the FS.
- Items of dissimilar nature/function shall be presented separately unless immaterial.
- If a line item is immaterial, it is aggregated with other items either on the face/notes.
- Specific disclosure need not be satisfied if the information is immaterial.

 OFFSETTING
- Assets and liabilities; income and expense shall not be offset unless required or permitted.
- Offsetting is allowed only when presentation reflects the substance of the transaction/events.
 Gains and losses on NCA, investments and operating assets are reported by deducting from
proceeds the carrying amount and related expenses.
 Gains and losses arising from group of similar transactions are reported on net basis, unless
their amounts are material.
 Expenditure reimbursed under contractual arrangement may be netted against related
reimbursement.

 COMPARATIVE INFORMATION
- Should be included in narrative and descriptive information when it is relevant to an
understanding of current period’s FS.
- Shall be disclosed in respect to previous period for all amounts reported, except
Standard/Interpretation permits/requires otherwise.
- When presentation/classification:
Is amended, comparative amounts shall be If reclassification is impracticable, entity shall
reclassified. Entity shall disclose: disclose:
 Nature of reclassification;  Nature of adjustments that would have been
 Amount of each item/class of items made if assets were reclassified;
reclassified; and  Reason for not reclassifying the amounts.
 Reason for reclassification.

STRUCTURE AND CONTENT:

 IDENTIFICATION OF FINANCIAL STATEMENTS
FS and each component should be clearly identified and distinguished from other information in the
same published document. The ff. should be prominently displayed:
a. Name of the reporting enterprise on other means of proper identification.
b. Whether the FS cover individual or group of enterprise.
c. Balance Sheet date/period covered by the FS whichever is appropriate.
d. Reporting currency
e. Level of precision used in presentation of figures.

 REPORTING PERIOD
FS should be presented at least annually. When presented for a period longer/shorter than one
year, the ff. disclosures should be made:
a. Reason for using the period
b. Fact that comparative amounts of FS are not comparable.

 BALANCE SHEET
At any date presents an indication, in conformity with GAAP, of the financial status of the enterprise
at a particular period/point in time.

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 Significance: Information presented in the Balance Sheet help users evaluate the enterprise’s:
- LIQUIDITY means how close the assets are to cash realization.
- SOLVENCY is the ability of the enterprise to settle for long-term obligations.
- CAPITAL STRUCTURE is the source of financing for the assets of the enterprise, whether from the
owners or creditors.
- FINANCIAL FLEXIBILITY is the ability of the enterprise to use financial resources to adapt to
change or for unexpected cash requirements and investment opportunities.

 INCOME STATEMENT
All items of income and expense recognized in a period shall be included in profit or loss unless a
standard or an interpretation requires otherwise. This includes effects of changes in accounting
estimates:

Exclusions
 Correction of errors.
 Effect of changes in accounting policies.
 Revaluation surplus.
 Gains and losses arising on translating the FS of foreign corporation.
 Gains and losses for re-measuring Financial Assets.

 STATEMENT OF CHANGES IN EQUITY

Shall present the following: Shall present in the statement/notes:
 Profit or loss for the period.  Amounts of transaction with equity holders
 Each item of income and expense for the acting in their capacity as equity holders,
period recognized directly in equity and the showing separately distributions to equity
total of these items. holders.
 Total income and expenses for the period,  The balance of the RE in the beginning and the
showing separately the amounts attributable end of the period, and changes in the period.
to equity holders of the parent and to non-  Reconciliation between the carrying amount of
controlling interest. each class of contributed equity and each
 For each component of equity, the effects of reserve at the beginning and end of the period
changes in accounting policies and correction separately is closing each change.
of errors.

 CASH FLOW STATEMENT

Provides users of FS with a basis to assess the ability of the entity to generate cash and cash
equivalents and the needs of the entity to utilize these cash flows.

 NOTES TO FINANCIAL STATEMENT

- Shall be presented in a systematic manner, that each item shall be cross-referenced to any related
information.
Shall: Are presented in ff. order:
 Present information about the basis for a. Statement of compliance with PAS.
preparation of FS and accounting policies used. b. Summary of significant accounting policies
 Disclose information required by PAS not applied.
presented in the face of the BS, IS, SCE or CFS. c. Supporting information for items presented on
 Provide additional information that is not the face of the FS.
presented on the face of the BS, IS, SCE or CFS, d. Other disclosures, including:
but is relevant to an understanding of any of - Contingent liabilities and unrecognized
them. contractual commitments; and
- Non-financial disclosures.
- Entity shall disclose accounting policies:
a. Measurement bases used, and
b. Other accounting policies relevant to an understanding of the FS.
- Entity shall disclose information about key assumptions for the future, and other key sources of
estimation uncertainty at the BS date.

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- Entity shall disclose, in the summary of significant policies or other notes, the judgements, a par
from those involving estimations, that management has made in process of applying the entity’s
accounting policies that have significant effect on the amounts recognized in the FS., whether/when:
a. Financial assets are held-to-maturity investments
b. Substantially all the risk and rewards of ownership of financial assets and lease assets are
transferred to other entities.
c. In substance, particular sales of goods are financing arrangements and therefore do not give rise
to revenue.
d. The substance of the relationship between the entity and special purpose entity indicates that
the special purpose entity is controlled by the entity.
- Other disclosures
a. Amount of dividends proposed /declared before the FS were issued but not yet recognized as
distribution of equity holders and the related amount per share.
b. Amount of any cumulative preference dividends not recognized.
- Entity shall also disclose, if not elsewhere disclosed:
a. Domicile and legal form of the entity, country of incorporation and address of its registered
office.
b. Description of nature of entity’s operations and principal activities.
c. Name of parent and the ultimate parent of the group.

CHAPTER 3
BALANCE SHEET

PAS 1 does not prescribe a standard balance sheet format but rather prescribes a list of items that are
considered to be sufficiently different in nature or function to warrant presentation on the face of the
balance sheet as separate line items:
a. Property, plant and equipment;
b. Investment property;
c. Intangible assets;
d. Financial assets (excluding amounts under (e), (h) and (i);
e. Investments accounted for using the equity method;
f. Biological assets;
g. Inventories;
h. Trade and other receivables;
i. Cash and cash equivalents;
j. Trade and other payables;
k. Provisions;
l. Financial liabilities (excluding amounts under (j) and (k);
m. Liabilities and assets for current tax, as defined in IAS 12 Income Taxes;
n. Deferred tax liabilities and deferred tax assets, as defined in IAS 12;
o. Minority interest, presented with equity; and
p. Issued capital and reserves attributable to equity holders of the parent.

In addition, paragraph 76 of PAS requires an entity to disclose the following either on the face of the
balance sheet or in the notes:
a. For each class of share capital;
i. The number of shares authorized;
ii. The number of shares issued and fully paid, and issued but not fully paid;
iii. Par value per share, or that the shares have no par value;
iv. A reconciliation of the number of shares outstanding at the beginning and at the end of the
period;
v. The rights, preferences and restrictions attaching to that class including restrictions on the
distribution of dividends and the repayment of capital;
vi. Shares in the entity held by the entity or by its subsidiaries or associates; and
vii. Shares reserved for issue under options and contracts for sale of shares, including the terms
and amounts; and
b. A description of the nature and purpose of each reserve within equity.

PAS 69 of PAS 1 requires additional line items, headings and subtotals to be presented on the face of the
balance sheet when their inclusion is relevant to an understanding the entity’s financial position.

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Paragraph 72 explains that the judgement on whether additional items should be separately presented
is based on an assessment of:
a. The nature and liquidity of assets;
b. The functions of assets within the entity;
c. The amounts, nature and timing of liabilities.

Further, to enhance the understandability of the balance sheet line items, paragraph 74 of PAS 1
requires subclassifications of the line items to be presented either on the face of the balance sheet or in
the notes in a manner appropriate to the entity’s operations.

BALANCE SHEET

ASSET
Current Noncurrent
a. Cash and Cash Equivalents a. Noncurrent investments
 Compensating balance – not legally  Investment in debt/equity securities
restricted  Held-to-Maturity investments
 3 month BSP Treasury Bill  Investment in Branch
 3 month time deposit  Investment in Associate
 3 month money market instrument  Investment in Subsidiary
 3 year BSP Treasury Bill acquired 3 months  Investment in Joint Venture
before maturity b. Fund and other investments
 Preference shares with specified  Sinking fund
redemption date acquired 3 months  Preference shares redemption fund
before redemption date  Plant expansion fund
b. Financial Assets  Contingency fund
 Trading securities  Insurance fund
 Marketable securities c. Investment Property
c. Trade and other receivables d. Property, Plant and Equipment
 Trade – Accounts receivable, Notes  Land
receivable  Building
 Non-trade – dividends, interest,  Machinery
subscriptions  Equipment
Less Allowances for:  Furniture and Fixture
 Doubtful accounts  Patterns, molds and dies
 Sales return  Tools
 Sales discount  Book plates
 Freight charge  Timberlands
d. Inventories  Oil and mining lands
 Trading  Leases
 Manufacturing  Leasehold improvements
Less: Purchase discount e. Intangibles
e. Biological Assets  Internally developed:
f. Prepayments - Computer software
g. Funds  Thru government grant:
 Petty cash fund - Airport land rights
 Payroll fund - License to operate radio/T.V. station
 Interest fund - Import license/quotas/rights to
 Dividend fund access restricted resources
 Tax fund  Patent

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  Copyright
 Franchise
 Trademark/brandname
 Leasehold/lease rights
 Computer software
 Fishing rights and other specific rights
 Development cost
 Goodwill

LIABILITIES
Current Noncurrent
a. Trade and other payables a. Non-current portion of long-term debt
 Accounts payable b. Finance lease liability
 Notes payable c. Deferred tax liability
 Accrued interest on NP d. Long-term obligations to company officers
 Dividends payable e. Deferred Revenue
 Accrued expenses
 Customer’s credit balances
b. Provisions
c. Short-term Borrowing
d. Current portion of long-term debt
e. Current tax liability
f. Deferred Revenue

STOCKHOLDERS EQUITY
a. Capital stock
 Preference Shares
 Common Shares
Less: Treasury Stock/Shares
b. Subscribed Capital Stock
Less: Subscriptions Receivable
c. Additional Paid-in Capital/Share Premium Reserve for:
 Preference Shares
 Common Shares
 Treasury Shares
d. Retained Earnings
 Appropriated
 Unappropriated
e. Revaluation Surplus

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 CHAPTER 4
INCOME STATEMENT

PAS 1 does not prescribe standard income statement format. Rather, it prescribes line items considered
to be of sufficient importance to the reporting of the performance of an entity to warrant their
presentation on the face of the income statement. These items are set forth in paragraph 81 of PAS 1:
a. Revenue;
b. Finance costs;
c. Share profit or loss of associates and joint ventures accounted for using the equity method;
d. Tax expense;
e. A single amount comprising the total (i) the post-tax profit or loss of discontinued operations
and (ii) the post-tax gain or loss recognized on the measurement to fair value less costs to sell or
on disposal of the assets or disposal group(s) constituting the discontinued operation; and
f. Profit or loss.

In addition, paragraph 83 of PAS 1 requires additional line items, headings and subtotals to be presented
on the face of the income statement when such presentation is relevant to an understanding of the
entity’s financial performance.

Nature of Expense method

Revenue xx
Other income xx
Changes in inventories of FG and WIP xx
Raw materials and consumables used xx
Employee benefit expense xx
Depreciation and amortization expenses xx
Other expenses xx (xx)
Profit xx

PAS 89 encourages, but does not require, presentation of expense analysis on the face of the income
statement.

Function of Expense method

Revenue xx
Cost of sales (xx)
Gross profit xx
Other income xx
Distribution costs (xx)
Administrative expenses (xx)
Other expenses (xx)
Profit xx

If classification of expenses by function is used, additional information on the nature of expenses,

including depreciation and amortization e3xpense and employee benefits expense, must be disclosed.
Paragraph 94 of PAS 1 explains that this additional information is required because it is useful in
predicting future cash flows.

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 INCOME STATEMENT

REVENUE from
Sales of merchandise to Rendering of Services: Use of enterprise Disposal of Other
customers  Professional fee resources: resources: sources.
Less: Sales returns,  Tuition fee  Interest  Gain on sale of
allowances, discounts  Media advertising  Rent investments
commission  Royalty  Gain on sale of
 Insurance agency  Dividend PPE
commission  Gain on sale of
 Admission fee for Intangible
artistic performance Asset

EXPENSES before tax:

Cost of Sales – Selling Expenses: Administrative Finance cost Other expenses:
merchandising  Salesmen’s expenses:  Loss on sale of
concern salaries  Doubtful accounts trading
Cost of Goods Sold –  Sales commissions  Office salaries securities
manufacturing  Travelling and  Office supplies  Loss on sale of
concern marketing  Taxes PPE
 Advertising and  Contributions  Loss on sale of
publicity  Professional fees long-term
 Freight out  Depreciation of investment
 Depreciation of office  Other losses
delivery/store building/office such as,
equipment equipment casualty loss
 Amortization of
intangibles

EXPENSES after tax:

Current tax expense

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 CHAPTER 5
STATEMENT OF CHANGES IN EQUITY

Paragraph 96 of PAS 1 requires the following information to be presented on the face of the statement
of changes in equity:
a. Profit or loss for the period;
b. Each item of income or expense for the period that, as required by other Standards or by
Interpretations, is recognised directly in equity, and the total of these items; and
c. Total income and expense for the period [calculated as the sum of (a) and (b)], showing
separately the total amounts attributable to equity holders of the parent and to minority
interest;
d. For each component of equity, the effects of changes in accounting policies and corrections of
errors recognised in accordance with PAS 8.
If only the above items are required this is called Statement of Recognized Income and Expense.

Statement of Recognized Income and Expense

Consolidated The company
Note
200B 200A 200B 200A
Gain (loss) on revaluation of properties
Available for sale investments:
 Valuation gain (loss) taken to equity
 Upon sale transferred to P/L

FOREX translation differences

Gain (loss) on business combination
Net income recognized directly to equity
Profit for the period
Total recognized income and expense for the period
Attributable to:
Equity holders of parent
Non-Controlling Interest
Effect of Changes in accounting policy:
Equity holders of parent
Non-Controlling Interest

Statement of Changes in Equity

Consolidated Parent The company
Note
200B 200A 200B 200A 200B 200A
Share Capital:
Balance beg.
Dividend reinvestment plan
Group employee share acquisition scheme
Group share option scheme
New issues
Share buy-back
Balance end.
Reserves
Asset revaluation surplus:
Balance beg.
Revaluation increment
Transfers
Balance end.
Foreign currency translation difference:
Balance beg.
Currency translation adjustments
Balance end.
Business combination valuation reserve:
Balance beg.
Increment – new business combination

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Transfers to other reserves
Balance end.
Retained earnings:
Balance beg.
Total income and expense for the period
Total available for appropriation
Dividends paid/declared
Balance end.

TOTAL EQUITY end.

Paragraph 97 of PAS 1 requires an entity, to present, either in the face of the statement of changes in
equity or in the notes:
a. The amounts of transactions with equity holders acting in their capacity as equity holders,
showing separately distributions to equity holders;
b. The balance of retained earnings (i.e. accumulated profit or loss) at the beginning of the period
and at the balance sheet date, and the changes during the period; and
c. Reconciliation between the carrying amount of each class of contributed equity and each
reserve at the beginning and the end of the period, separately disclosing each change.

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 CHAPTER 6
EXPLANATORY NOTES

Paragraph 68A of PAS 1 requires disclosure of:

a. The total assets classified as held for sales included in disposal groups classified as held for sale
in accordance with PFRS 5 Non-current Assets Held for sale and Discontinued Operations; and
b. Liabilities included in disposal groups classified as held for sale in accordance with PFRS 5.

Paragraph 82 of PAS 1 requires disclosure of the items listed overleaf as allocations of profit or loss for
the period on the face of the income statement.
a. Profit or loss attributable to minority interest; and
b. Profit or loss attributable to equity holders of the parent.

To enhance understandability of the income statement, paragraph 86 of PAS 1 requires separate

disclosure of the nature and amount of material items of income and expense. Paragraph 87 of PAS 1
explains that the circumstances that would give rise to separate disclosure of items of income and
expense include:
a. Write-downs of inventories to net realizable value or of PPE to recoverable amounts, as well as
reversals of such write-downs;
b. Restructuring of the activities of an entity and reversals of any provisions of the costs of
restructurings;
c. Disposal of items of PPE;
d. Disposals of investments;
e. Discontinued operations;
f. Litigation settlements; and
g. Other reversals of provisions.
Disclosure of these items is particularly important to a user of income statement wishing to predict the
likely future sustainability of the reported profit or loss.

Paragraph 88 of PAS 1 requires an entity to present an analysis of expenses classified either by their
nature (purchases, transport costs, employee benefits, depreciation, advertising) or their functions
(COS, distribution costs, administrative costs) within the entity, whichever provides the more relevant
and reliable information.

Paragraph 95 of PAS 1 requires disclosure of, either on the face of the income statement, or the
statement of changes in equity or the notes, the amounts of dividends recognized as distributions to
equity holders during the period, and the related amount per share.

Notes are integral part of the financial statements. Their objective is to enhance the understandability of
the financial statements, and each item on the face of the statements should be cross-referenced to any
related information in the notes. Paragraph 103 to 124 of PAS 1 require that the notes disclose:
 a statement of compliance with PFRS;
 the basis of the financial statements’ preparation, including the measurement basis;
 other accounting policies used that are relevant to an understanding of the financial statements;
 information about the key assumptions concerning the future, and other key sources of
estimation uncertainty at the balance sheet date, that have significant risk of causing material
adjustment to the carrying amount of assets and liabilities within the next financial year;
 Other judgments management has made in the process of applying the entity’s accounting
policies that have the most significant effect on the amounts recognized in the financial
statements;
 The information required by PFRSs that is not presented on the face of the financial statements;
 Other additional information that is not presented on the face of the financial statements, but is
relevant to an understanding of one of them.

The summary of accounting policies is normally presented as the first note and ordinarily begins with
the required statement of compliance with PFRSs. Other notes are the normally presented in the
following order:
a. Supporting information for items presented on the face of the balance sheet, income statement,
statement of changes in equity and cash flow statement, in the order that each line item is
presented; and
b. Other disclosures that do not appear on the face of the financial statements, including:

18
  Contingent liabilities;
 Unrecognized contractual commitments, including commitments under operating leases;
 Non-financial disclosures, such as an entity’s risk management objectives and policies.

Paragraph 125 of PAS 1 requires the following note disclosures in regard to dividends of an entity:
a. The amount of dividends proposed or declared before the financial statements were authorized
for issue but not recognized as a distribution to equity holders during the period, and the
related amount per share; and
b. The amount of any cumulative preference dividends not recognized.

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 REFERENCES

 Intermediate Accounting
By Carlos Alindada, BBA, MBA, CPA; Ester F. Ledesma, BBA, CPA, MAT; Ma. Concepcion Y.
Lupisan, BSC, MSA, CPA

 Financial Accounting, Volume 2, (2012 Edition)

By Atty. Conrado T. Valix, CPA; Jose F. Peralta, CPA, MBA, DBA; Christian Aris M. Valix, CPA,
BSME

 2007 CRC-ACE Review Handouts

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