Financial Accounting and

Reporting

1. According to Accounting Standards Communicating – means the results of

Council (ASC) measurement have to be communicated to all
Accounting is a service activity. Its function is to users of statement or reports
provide quantitative information, primarily
Economic Information - means an information of
financial in nature, about economic entities, that is
economic value plays a vital role in the accounting
intended to be useful in making economic
process
decision—in making reasoned choices among
alternative courses of action Permit informed judgements and decisions –
enables the users to make informed judgements.
As a service, accounting intends to supply financial
reports to be used by economic decision makers. Users of information – emphasis is on the users of
Economic decision making is the main reason why information such as investors/owners, suppliers
accounting records and reports are prepared. In and creditors, lenders, managements, employees,
recording transactions and events, accounting customers, government and regulatory services,
gives due importance to the measurement of security analysts and advisors & public.
business activities that have monetary value.

2. According to American Institute of

01: Review of the Accounting Process
Certified Public Accountants (AICPA)
Accounting is the art of recording, classifying and
summarizing in a significant manner and in terms
of money transactions and events which are in part
at least of a financial character and interpreting the
results thereof.

As an art, accounting demands critical thinking

and creative skills. Accountants gather relevant
data and convert them into organized financial
reports then draw certain economic meanings
from them.

3. According to American Accounting

Association (AAA)
Accounting is the process of identifying, measuring
and communicating economic information to I. Accounting - recording, classifying,
permit informed judgment and decision by users of summarizing, interpreting
the information. II. Analyzing - determine if transaction is
recordable or not
Process – not confined to single event
III. Recording - recording the transactions in
Identifying – identifying economic activities or the books of original entry – journalizing
business transactions IV. Classifying - transferring the transactions
to the ledger (posting)
Measuring – means that business transactions V. Summarizing - grouping according to
have to be measured, generally in terms of value or accounting elements– assets, liabilities,
money capital, revenue and expenses
 Financial Accounting and
Reporting

Key words and Concepts: III. Corporation

Capital is divided into shares of stock and
1. Reporting - the process of communicating the registered with the SEC.
results of operation. IV. Cooperative
2. Interpreting - the computation of relationship Capital is divided into shares and owned by
of figures from the financial reports. several people called members
3. Business Entity - The business entity for which
the accounting is to be made. ➢ Service - Rendering service for a fee.
4. Double Entry System - Introduced by Fra. Luca ➢ Trading or Merchandising - Buying and
Pacioli—for every value received, there is value selling of goods in the same form
parted with. ➢ Manufacturing - Conversion of raw
material into finished goods.
➢ Going Concern - In the absence of evidence
➢ Accounting Equation - A = Liabilities + to the contrary, a business is operating
Owner’s Equity
indefinitely.
➢ Accounting Elements - Assets, Liabilities,
➢ Prudence - Choosing unfavorable outcome-
Equity, Revenue, Expenses
-conservatism.
➢ Debit/Credit - Increase & decrease in the
➢ Stable Monetary Unit - Philippine peso is a
account reasonable unit of measure and purchasing
➢ Adjusting Entries - Used to update certain power is stable.
accounts at the end of the period

➢ Closing Entries - Nominal account balances

are put to zero 02: Partnership Environment
➢ Reversing Entries - Optional entries to
maintain consistency in recording 1. Advantage vs. Sole Proprietorship
- Brings greater financial capability to the
business.
1. Cash & Accrual Basis - timing of recording
- Combines special skills, expertise and
revenues and expenses.
experience of the partners.
2. Chart of Accounts - list of account titles with
- Offers relative freedom and flexibility of
codes group according to accounting
action in decision-making.
elements.
3. Worksheet - tool to facilitate the preparation
2. Advantage vs. Corporation
of financial statements.
- Easier and less expensive to organize,
4. Special Journal - journals with special money
subject to less legal requirements.
columns for frequently used accounts to
- Suited to the practice of profession
facilitate recording.
- Flexibility in operations
5. Subsidiary Ledger - individual ledgers for
- A partnership offers certain advantages
customers and creditors, the totals should
over a sole proprietorship and a
match the control accounts.
corporation. It also has a number of
disadvantages.
I. Sole Proprietorship
Business owned and operated by only one 3. Disadvantages of Partnership
person. - Easily dissolved and thus unstable
II. Partnership compared to a corporation.
Owned by 2 or more persons who entered - Mutual agency and unlimited liability may
into a contract. create personal obligations to partners.
 Financial Accounting and
Reporting

- Less effective than a corporation in raising ➢ All partners are liable to the extent of their
large amounts of capital. separate properties.
➢ The limited partners are liable only the
extent of their personal contributions. In a
Partnership distinguished from Corporation limited partnership, the law states that
there shall be at least one general partner.

According to Duration

➢ Partnership with a fixed term or for a

particular undertaking
➢ Partnership at will - One in which no
term is specified and is not formed for
any particular undertaking.

According to Purpose

➢ Commercial or trading partnership

➢ Professional or non-trading partnership
Classification of Partnership ➢ One formed for the transaction of
business
According to Object ➢ One formed for the exercise of
➢ Universal partnership of all present profession
property
➢ Universal partnership of profits According to legality of existence
➢ Particular partnership
➢ All contributions become part of the ➢ De jure (concerning law) - One which
partnership fund. has complied with all the legal
➢ All that the partners may acquire by their requirements for its establishment.
industry of work during the existence of ➢ De facto (concerning fact) - One has
the partnership and the use of whatever
failed to comply with all the legal
the partners contributed at the time of the
institution of the contract belong to the
requirements for its establishment.
partnership. If the articles of universal
partnership did not specify its nature, it will Kinds of Partners
be considered universal partnership of 1. General partner - One who is liable to the
profits.
extent of his separate property after all the
➢ The object of the partnership is
assets of the partnership are exhausted.
determinate—its use or fruit, specific
undertaking, or the exercise of a profession 2. Limited partner – One who is liable only the
or vocation. extent of his capital contribution. He is not
allowed to contribute industry or services
According to Liability only.

➢ General
➢ Limited
 Financial Accounting and
Reporting

3. Capitalist partner – One who contributes investments, treatment of excess

money or property to the common fund of contribution (as capital or as loan) and
the partnership. penalties for a partner’s failure to invest
and maintain agreed capital;
4. Industrial partner – One who contributes
his knowledge or personal service to the 5. The rights and duties of each partner;
partnership. 6. The accounting period to be adopted, the
5. Managing partner – One whom the nature of accounting records, financial
partners has appointed as managers of the statements and audits by independent
partnership. public accountants;

6. Liquidating partner – One who is 7. The method of sharing profit and loss,
designated to wind up or settle the affairs frequency of income measurement and
of the partnership after dissolution. distribution, including any provisions for
the recognition of differences in
7. Dormant partner – One who does not take contributions;
active part in the business of the
partnership and is not known as a partner. 8. The drawings or salaries to be allowed to
partners;
8. Silent partner – One who does not take
active part in the business of the 9. The provision for arbitration of disputes,
partnership though may be known as a dissolution and liquidation.
partner. A contract of partnership is void whenever
9. Secret partner – One who takes active part immovable property or real rights are
in the business but is not known to be a contributed and a signed inventory of the said
partner by outsiders. property is not made and attached to a public
instrument.
10. Nominal partner or partner by estoppel –
One who is actually not a partner but who SEC Registration
represents himself as one.

Articles of Partnership

A partnership may be constituted orally or in

writing. In the latter case, partnership agreements
are embodied in the Articles of Partnership.

1. The partnership name, nature, purpose and

location; 1. Verification of proposed business name
2. The names, citizenship and residences of 2. Submission of the following documents
the partners;
➢ Other documents that may be required:
3. The date of formation and the duration of
the partnership; ➢ Endorsement from other government
agencies if the proposed partnership will
4. The capital contribution of each partner, engage in a government regulated industry
the procedure for valuing non-cash (i.e. for air transport, the endorsement will
 Financial Accounting and
Reporting

come from Civil Aeronautics Board; for In basic accounting, PFRS were discussed in the
banks, pawnshops or other financial context of sole proprietorship. These accounting
intermediaries, from Banko Sentral and principles also apply to a partnership. Thus,
Pilipinas; for charitable institutions and ➢ The recording of assets, liabilities, income
social welfare organizations, from DSWD; and expenses is consistent for both sole
for professional organizations, PRC; for proprietorship and partnerships.
educational institution, DOE-CHED; for
technical-vocational, TESDA; for hospitals, ➢ There will be no marked difference in their
DOH; for insurance and mutual benefits, operations.
Insurance Commissions; recruitment Differences arise between the two forms of
agencies, POEA business concerning owner’s equity.
➢ For partnership with foreign partners, SEC Proprietorship has one capital and one drawing
Form F-105, bank certificate of capital accounts. In a partnership, separate capital and
contribution of partners, proof of drawing accounts are established for each
remittance of foreign partner’s contribution partner.

➢ Pay the registration/filing and miscellaneous Partner’s Capital Accounts

fees
1. DEBIT
Forward the documents to SEC Commissioner for - Permanent withdrawals
Signature - Debit balance of the drawing account at
the end of the period.
The Philippine Accountancy Act of 2004, Section 2. CREDIT
28 - Original investment
- Additional investment
The Securities and Exchange Commission shall not - Credit balance of the drawing account at
register any corporation organized for the practice the end of the period
of public accountancy.
Partner’s Drawing Accounts
When the partnership capital is P3,000 or more, in
money or property, the public instrument must be 1. DEBIT
recorded with the Securities and Exchange - Temporary withdrawals
Commission (SEC). Even if it is not registered, the - Share in loss (this may be debited directly
partnership having a capital of P3,000 or more is to capital)
still valid and therefore has legal personality. 2. CREDIT
- Share in profit (this may be credited
Accounting for Partnership directly to capital)

➢ The recording of assets, liabilities, income

and expenses is consistent for sole Loans receivable/payable to partner
proprietorship & partnerships. If a partner withdraws a substantial amount of
➢ There will be no marked difference in money with the intention of repaying it, the debit
their operations. should be to Loans Receivable-Partner account
➢ A partnership capital account is credited instead of to Partner’s drawing account.
for his initial and additional net
investments (assets contributed less A partner may lend amounts to the partnership in
liabilities assumed by the partnership) excess of his intended permanent investment.
Partnership 2. Division of profits or losses - The essence
By the contract of partnership, two or more of partnership is that each partner must
persons bind themselves to contribute money, share in the profits or losses of the venture.
property, or industry to a common fund, with the
intention of dividing the profits among themselves. 3. Co-ownership of contributed assets - All
Two or more persons may also form a partnership assets contributed into the partnership are
for the exercise of a profession. owned by the partnership by virtue of its
➢ An association of two or more persons to separate and distinct juridical personality.
carry on, as co-owners, a business for If one partner contributes an asset to the
profit. business, all partners jointly own it in a
➢ The partnership has a juridical personality special sense.
separate and distinct from that of each of
the partners. Thus for example, where 4. Mutual agency - any partner can bind the
Vincent Fabella and Wilhelmina Neis other partner to a contract if he is acting
established a partnership, three persons within his express or implied authority.
are involved, namely the partnership and
the two partners. 5. Limited Life – a partnership has a limited
➢ Partners resemble sole proprietorships, life. It may be dissolved by the admission,
except that there are two or more owners death, insolvency, incapacity withdrawal of
of the business where each owner is called a partner or expiration of the term
partner. specified in the partnership agreement.
➢ Partnerships provide a means of obtaining
more equity capital than a single individual 6. Unlimited liability - All partners (except
can obtain and allow the sharing of risks for limited partners), including industrial
rapidly going businesses. Partnerships are partners, are personally liable for all debts
often formed to bring together various incurred by the partnership. If the
talents and knowledge. partnership can not settle its obligations,
➢ General professional partnerships are creditor’s claim will be satisfied from the
partnerships generally associated with the personal assets of the partners without
practice of law, public accounting, prejudice to the rights of the separate
medicine and other professions. creditors of the partners.
➢ A profession is an occupation that involves
a higher education or its equivalent, and 7. Income taxes - Partnerships, except
mental rather than manual labor. The general professional partnerships are
exercise of a profession is not a business or subject to tax at the rate of 30% of taxable
an enterprise for profit but the law allows income.
two or more persons to act as partners in
the practice of their professions. 8. Partner’s equity accounts - Accounting for
➢ Service industries, retail trade, wholesale partnerships are much like accounting for
and manufacturing enterprises may also be sole proprietorships. The difference lies in
organized as partnerships. the number of partner’s equity accounts.
Each partner has a capital account and a
Characteristics of Partnership withdrawal account that serves similar
1. Mutual Contribution - There cannot be a functions as the related accounts for sole
partnership without contribution of proprietorships.
money, property or industry to a common
fund.
Partnership Formation
1. Valuation 1. Valuation
2. Adjustment
3. Opening entries

➢ The books of partnership are opened with

entries reflecting the net contributions of
the partners to the firm. Asset accounts
are debited for assets contributed to the
partnership, liability accounts are credited
for any liabilities assumed by the
partnership and separate capital accounts
are credited for the amount of each Fair Value - the price at which an asset or liability
partner’s net investment (assets less could be exchanged in a current transaction
liabilities) between knowledgeable, unrelated willing parties.
➢ Partners may invest cash or non-cash
assets in the partnership. When a partner 2. Adjustment
invests non-cash assets, they are to be
recorded at values agreed upon by the
partners. In the absence of any agreement,
the contributions will be recognized at
their fair market value at the date of
transfer to the partnership.

➢ The fair market value of an asset is the

estimated amount that a willing seller
would receive from a financially capable
buyer for the sale of the asset in a free
market. Per International Financial In cases when the prospective partners have
Reporting Standards No. 3. fair value is the existing businesses, their respective books will
price at which an asset or liability could be have to be adjusted to reflect the fair market
exchanged in a current transactions values of their assets or to correct misstatements
between knowledgeable, unrelated willing in the accounts.
parties.
If the adjustments will not be made, the initial
➢ In cases when the prospective partners capital balances of the partners may be
have existing businesses, their respective inequitable.
books will have to be adjusted to reflect
the fair market values of their assets or to I. Valuation
correct misstatements in the accounts. If ▪ net contributions of the partners
the adjustments will not be made, the ▪ Investment may be cash or on-cash
initial capital balances of the partners may assets
be inequitable. ▪ Investment is based on the fair
market value of the asset
 II. Adjustment in assets are recorded in the opposite manner as
▪ books will have to be adjusted to reflect liabilities and owner’s equity are recorded. The
the fair market values of their assets or to equation also explains why liabilities and capital
correct misstatements in the accounts follow the same rules of debit and credit. The logic
of debiting and crediting is related to the
III. Opening entries accounting equation.
▪ Individual with no existing business
▪ Conversion of sole proprietorship Accounting is based on a double-entry system
▪ Admission or retirement of a partner which means that the dual effects of a business
transaction are recorded. A debit side entry must
Partnership Formation have a corresponding credit side entry. For every
a partnership may be formed in any of the ff ways: transaction, there must be one or more accounts
1. Individual with no existing business form a debited and one or more accounts credited. Each
partnership transaction affects at least two accounts. The total
debits for every transactions must always equal to
2. Conversion of a sole proprietorship to a the total credits.
partnership
a. A sole proprietor and an individual The account type determines how increases and
without an existing business form a decreases in it are recorded. The rules of debit and
partnership credit for income and expenses are based on the
b. Two or more sole proprietors forms a relationship of these accounts to owner’s equity.
partnership Income increases owner’s equity while expenses
decrease owner’s equity.
3. Admission or retirement of a partner (to be
covered in Chapter 3) Partnership Formation: Conversion of a sole
proprietorship to a partnership
A. ASSET
▪ Increase in asset ➢ A sole proprietor and an individual without
▪ Increase in expense an existing business form a partnership.
▪ Increase in drawing
▪ Decrease in liability Emerita Geron and Emerita Modesto formed a
▪ Decrease in owner’s equity general professional partnership . Emerita Geron
▪ Decrease in revenue will invest sufficient cash to get an equal interest
B. CEDIT in the partnership while Emerita Modesto will
▪ Decrease in asset transfer the assets and liabilities of her business.
▪ Decrease in expense The account balances on the books of Modesto
▪ Decrease in drawing prior to partnership formation follows:
▪ Increase in liability
▪ Increase in owner’s equity
▪ Increase in revenue

The accounting equation states that assets must

always equal to liabilities plus owner’s equity.

Note that the assets are on the left side of the

equation opposite the liabilities and owner’s
equity. This explains why increase and decreases
 Illustration:
➢ It is agreed that for purposes of establishing
Emerita Geron’s interest, the following
adjustments shall be made in the books of
Emerita Modesto:
1. An allowance for uncollectible accounts of
5% of accounts receivable is to be
established.
2. Prepaid expenses amounting to P30,000
were omitted by the accountant. This is to
be recognized.
3. Additional salaries payable in the amount
of P10,000 is to be established. ➢ Individuals with no existing business form a
partnership

On July 1, 2017, Nilo Burgos and Helenita Ruiz

agreed to form a partnership. The partnership
agreement specified that Burgos is to invest cash
of P700,000 and Ruiz is to contribute land with a
fair market value of P1,300,000 with P300,000
mortgage to be assumed by the partnership.

1. An allowance of 5% of P300,000 or P15,000

needs to be established. The account
allowance for uncollectible accounts
(impairment loss) is a contra-asset account. The opening entry to recognize the contributions of
When this account is increased, the effect is to each partner into the partnership is simply to debit
decrease the related assets account. The the assets contributed, and to credit the liabilities
owner’s equity is also decreased since this assumed and the capital account of each partner.
provision is considered an expense in the
ordinary course of business.
2. An omission to record the asset-prepaid
expense will denote that the expenses of the
business are overstated. When the expense
are overstated, profit and correspondingly the
owner’s equity is understated.
3. The establishment of additional salaries
payable will increase liabilities. It can be
deducted that the salaries expenses are
understated and to correct the misstatement,
the owner’s equity will be decreased.

Suppose that Burgos and Ruiz formed another

partnership with Nora Elizabeth Maniquiz. Burgos
and Ruiz considered Maniquiz who has a vast
business network in Bicol as an industrial partner. 3. Interest accrued on the notes receivable will be
The partnership did not receive any asset from recognized: P10,000, 12% dated July 1, 2017 and
Maniquiz. In this case, only a memorandum entry P20,000, 12% dated August 1, 2017.
in the general journal will be made. 4. Interest on notes payable to be accrued at 14%
annually from April 1, 2017.
➢ A sole proprietor and another individual 5. The furniture and fixtures are to be valued at
form a partnership P46,000.
6. Office supplies on hand that have been
The statement of financial position of Galicano Del charged to expense in the past amounted to
Mundo on Oct. 1, 2017, before accepting Christine P4,000. These will be used by the partnership.
Resultay as partner is shown as follows:
New books for the Partnership (required per NIRC)
The opening entry to recognize the contributions of ➢ The following procedures may be used in
each partner into the partnership is simply to debit recording the formation of the
the assets contributed, and to credit the liabilities partnership:
assumed and the capital account of each partner. Books of Galicano Del Mundo
1. Adjust the assets and liabilities of Galicano
Del Mundo in accordance with the
agreement. Adjustment are to be made to
his capital account.
2. Close the books
Books of the Partnership:
1. Record the investment of Galicano Del
Mundo
2. Record the investment of Christine
Resultay

Christine Resultay offered to invest cash to get a

capital credit equal to one-half of Galicano Del
Mundo’s capital after giving effect to the
adjustments below. Del Mundo accepted the
offer.

1. The merchandise is to be valued at P74,000

2. The accounts receivable is estimated to be 95%
collectible.
 ➢ Two or more sole proprietor form a
partnership

The conditions and adjustments agreed upon

by the partners for purposes of determining
their interests in the partnership are:
1. Actual count and bank reconciliation on
Corpuz proprietorship’s cash account
revealed cash short and unrecorded
expenses of P3,500.
2. Establishment of a 10% allowance for
uncollectible accounts in each book.
3. The merchandise inventory of Gevera is to
be increased by P10,000.
4. The furniture and fixtures of Corpuz are to
be depreciated by P6,000.
5. The delivery equipment of Gevera is to be
Note that furniture and fixtures are now recorded depreciated by P9,000.
in the partnership books at the agreed amount of
P46,000 which represented the cost of the asset to New books for the Partnership (required per NIRC)
the partnership. On the other hand, the accounts ➢ The following procedures may be used in
receivable is still recorded at gross amount of recording the formation of the
P240,000 with a related allowance for uncollectible partnership:
accounts of P12,000. The P12,000 is only a
provision for possible uncollectibles.
Books of Deogracia Corpuz and Esterlina Gevera
1. Adjust the accounts of both parties in
accordance with the agreement.
Adjustment are to be made to their
respective capital account.
2. Close the books.
Books of the Partnership:
1. Record the investment of Deogracia
Corpuz
2. Record the investment of Esterlina Gevera

Limited Liability Company

➢ A limited liability company (LLC) is a hybrid

form of business for it combines the best
features of a partnership and a
corporation. LLC is a form of legal entity
that provides limited liability to its owners.
➢ The owners of an LLC are called members.
These owners may be individuals,
partnerships, corporations or other
entities. Many states even allow one-
person LLCs. The members have limited
liability even if they are active in the
company.
➢ In 1988, the Internal Revenue Service (IRS)
of the United States of America ruled that
LLC may be treated as a partnership for tax
purposes subject to conditions. As a result
of this ruling, all 50 U.S. states allow LLCs.
➢ This type of entity is attractive for
professional service firms because the
owners will not have personal liability for
the other owner’s malpractice.
➢ A limited liability partnership (LLP) is very
similar to an LLC except that investment in
LLP is restricted to professional.
➢ The four major international accounting
firms KPMG, Ernst & Young, Price
Waterhouse Coopers and Deloitte &
Touche started as partnerships. As they
grew and the risk increased, these firms
were allowed to change, by operation of
law, to LLPs. The LLP concept is different
from that of a limited partnership.
➢ The accounting for LLCs is similar to
partnerships. The term “member” and
“member’s equity” are used instead of
“partner” and “partner’s equity.”