ABM

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Accrual Accounting

• Records income and expenses when they are earned or incurred, even if no money has been received or paid yet.

Cash-Basis Accounting

• Records income and expenses only when cash is actually received or paid.

Accounting Period Concept

Basic accounting period is one (1) year

Calendar Year

January 1 to December 31 (accounting period)

Fiscal Year

Doesn’t end at December 31 (accounting period concept)

Revenue Recognition Principle

• business should record (or recognize) revenue when it is earned, not necessarily when cash is received

• “Recording” meaning making a journal entry

Matching Principle

business should record expenses in the same period as the revenues they helped generate, so that income is accurately shown for that time.

Net Income (Loss)

Revenue - Expenses =

The Time Period-Concept

• financial activities are divided into specific time periods

• To measure income, companies update their accounts at the end of each period, usually monthly.

Prepaid

You pay or receive money before the actual expense or income happens, also called deferrals (Pay Early)

Prepaid Expenses

You pay for something in advance (like rent or insurance) and use it up over time.

Unearned Revenues

You receive money before doing the work or giving the service, so you owe the customer something.

Depreciation

Spreading the cost of a long-term asset (like equipment) over the time it’s used.

Accrual

You record the expense or income before the money is actually paid or received (Pay Later)

Accrued Expenses

You owe money for something you’ve already used or received but haven’t paid for yet (like salaries or bills).

Accrued Revenues

You’ve earned money by providing a service or product, but you haven’t received payment yet.

Accounting Cycle

1. Identify and Analyze Transaction

2. Record Transactions in a Journal

3. Post Transaction to General Ledger

4. Determine Unadjusted Trial Balance

5. Analyze the Worksheet

6. Adjust Journal Entries and Fix Errors

7. Create Financial Statements: Prepare the main reports -Income Statement, Owner’s Equity Statement, Balance Sheet

8. Close the Books

The Five Financial Statements

Income Statement, Statement of Changes in Owner’s Equity, Balance Sheet, Statement of Cash Flows, Notes to Financial Statements

Income Statement

• Shows the business’s revenues and expenses to find out if it made a profit or loss 

• Example: It tells if the business earned or lost money this month.

Statement of Changes in Owner’s Equity

• Shows how the owner’s capital changed during the period from investments, withdrawals, and net income or loss.

• Example: It explains why the owner’s money in the business increased or decreased.

Balance Sheet

• Shows the company’s assets, liabilities, and owner’s equity at a specific date.

• Example: It gives a picture of the business’s financial position today.

• Assets = Liabilities + Owners Equity

Statement of Cash Flows

• Shows how cash came in and went out of the business 

• Example: It tells where the cash came from and how it was spent.

Notes to Financial Statements

• Gives extra details or explanations about the numbers in the financial statements.

• Example: It explains accounting methods, special transactions, or important facts behind the figures.

Merchandising Business

• type of business that buys goods (products) from suppliers and sells them to customers to earn a profit

• Wholesaler buys in bulk then offers merchandise by retail price

• Manufacturer - Wholesaler - Retailer - Consumer

Purchasing

Buying goods or products from suppliers to sell in the store.

Handling

Taking care of the goods after buying them — like storing, arranging, or displaying them properly.

Returning of Goods Purchased

• Sending back items to the supplier if they are damaged, incorrect, or of poor quality.

Selling

• Offering and transferring the goods to customers in exchange for money.

Returning of Goods Sold

• Accepting items that customers bring back if they are defective or not as expected.

Maintaining Adequate Stocks on Hand

Making sure there are enough goods available for customers, but not too much to cause waste or overstock.

Revenue from Sales

The total money earned from selling goods to customers.

Cost of Goods Sold (Merchandise)

The total cost of the products that were sold to customers.

Gross Profit

The profit made after subtracting the cost of goods sold from sales revenue.

Formula for gross profit

Sales – Cost of Goods Sold = Gross Profit.

Operating Expenses

The costs of running the business every day, like rent, salaries, or utilities.

Income From Operations

The profit left after subtracting operating expenses from gross profit.

Formula for income from operations

Gross Profit – Operating Expenses = Income from Operations.

Other Income and Other Expense

Income or expenses not related to main business activities.

Net Income

The final profit after all incomes and expenses are considered.

Formula

Income from Operations + Other Income – Other Expenses.

Sales

The total value of goods sold to customers.

Sales Returns and Allowances

The value of goods customers returned or discounts given for damaged goods. This reduces total sales.

Sales Discount

A reduction in price given to customers for early payment.

Purchases

The total cost of goods bought for resale.

Purchase Returns and Allowances

Goods returned to the supplier or price reductions for damaged goods. This reduces total purchases.

Purchase Discount

A price reduction received from suppliers for paying early.

Transportation in - Freight-In

The shipping cost paid by the buyer to bring the goods to the store. This is added to the cost of goods purchased.

Transportation out - Freight-Out

The shipping or delivery cost paid by the seller to send goods to customers. This is considered an operating expense.

Merchandise Inventory

The goods on hand that are ready to be sold but not yet sold.

Example

Unsold shirts in the store.

Operating Cycle of Merchandising Business

1. Availability of Cash

2. Buying of Merchandise for Resale

3. Sold to Customers

4. Account Receivable Collected

Perpetual Inventory System

Every time goods are bought or sold, the system updates inventory and cost of goods sold (COGS) automatically. (Continuos, using computers)

Periodic Inventory System

Inventory is counted only at the end of an accounting period (like monthly or yearly). Purchases are recorded during the period, but COGS is calculated only after a physical count of inventory.