1 EXECUTIVE SUMMARY The knowledge gained from within the bounds of a four-walled classroom may be enough to sustain a student’s survival in a school setting. However, not all things could be learned from lessons in school hence this study is conducted to evaluate the differences in the accounting methods and principles used by different entities from the theories and illustrations shown in the book, specifically the differences and similarities of recording transactions by different entities in terms of profit and expense recognition. In this connection, this study was conducted to five business entities which were chosen by the proponents which are as follows: Sion Travel and Tours (Partnership Liquidation), Quality Appliance Plaza-Valencia (Installment Sales), Da Dailo Architect (Long-Term Construction Contract), Bukidnon Investment and Finance Corporation (Home Office and Branch Accounting), and GTY Trading-Malaybalay (Consignment). The data were gathered through personal interview addressed to respective personnel in
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EXECUTIVE SUMMARY
The knowledge gained from within the bounds of a four-walled classroom may be
enough to sustain a student’s survival in a school setting. However, not all things could
be learned from lessons in school hence this study is conducted to evaluate the
differences in the accounting methods and principles used by different entities from the
theories and illustrations shown in the book, specifically the differences and similarities
of recording transactions by different entities in terms of profit and expense recognition.
In this connection, this study was conducted to five business entities which were
chosen by the proponents which are as follows: Sion Travel and Tours (Partnership
Liquidation), Quality Appliance Plaza-Valencia (Installment Sales), Da Dailo Architect
(Long-Term Construction Contract), Bukidnon Investment and Finance Corporation
(Home Office and Branch Accounting), and GTY Trading-Malaybalay (Consignment).
The data were gathered through personal interview addressed to respective personnel
in each of the entities and interview through phone calls were also used to acquire
additional data.
From the study, the proponents concluded that there were no great deviations
with respect to the methods employed in the actual environment and what are illustrated
in the book. Almost all standards were followed except in the recording of expenses and
revenue as in the case of consignment and installment sales since it is not applicable
and the entities are not allowed to take account for it.
This study was of great help to the proponents; it made them aware and know
the things happening in the real practice
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CHAPTER I
INTRODUCTION
Background of the Study
Accounting plays an important role in every business entity. Accounting
information is critical in planning and decision-making processes that are made by the
firm’s management for the business thrive over the long run. Hence, the accounting
information provided must be accurate, relevant and faithfully presented given the
weight of its influence over every business decision. Entities avail the services of
accountants in handling transactions and every economic event with honesty, diligence
and with their full capabilities as professionals to the business’ advantage.
From this, the value of an accountant’s talent and responsibility in every business
entity as well as to the economy as a whole can be deduced. Before the accountants
became the professionals that they are, they were made to go through rigid training in
school to acquire a degree in accounting and pass the competent CPA Board
Examination to become eligible licensed professionals.
Knowledge about the basic and core concepts, principles, from fundamentals to
every specialized accounting area, as well as an understanding of the most basic
treatment of an account to its many specificities and details, recording transactions and
preparing financial reports is being taught to every undergraduate accountancy student
in school. However, there are deviations between the actual circumstances involving the
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work of an accountant from the theoretical exemplifications written in textbooks.
Reasons can be enumerated for such differences as uniqueness of transactions,
convenience, automation, and outdated knowledge regarding the treatment of an
economic transaction or lack of knowledge even. Not to mention that accounting
standards are constantly being changed to address the needs of the entity as
businesses evolve with complexities. It is to the advantage of the students to be able to
look into these differences and understand why such departures from the theoretical
models are made and understand why such departures from the theoretical models are
made and be able to have a glimpse of what really happens in the environment outside.
As soon-to-be professionals in the accounting parlance, the students will need all the
knowledge they can acquire to prepare themselves for their future.
The thrust behind this research is for compliance of the requirement under
Accy55 entitled Advanced Accounting II. The subject introduced topics of which some
were already known to the students. The topics include partnership liquidation,
installment sales, long-term construction contract, home-branch accounting and
consignment accounting which are the focus of this study as given by the subject
instructor.
Five topics are given instead of only one so that the knowledge of the students
may not be concentrated only on one particular topic which will be an advantage to their
part.
This study will serve as an immersion of the students to the actual business
environment to which they will eventually be headed for. An experience in the real
environment of a firm will be a form of strategy in gaining a better understanding of the
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theoretical concepts and its practical applications in actual as well as further knowledge
that may not be written in books.
Statement of the Problem
In general, this study seeks to assess and evaluate the accounting methods used
in every entity in actual practice from the theoretical methods as illustrated in the book.
Specifically this study seeks to answer the following questions:
1. What is the demographic profile of each entity under study?
2. How do the following entities record transactions in terms of:
A. Partnership
a) liquidation process?
B. Installment Sales
a) cash sales and installment credit sales?
b) recognition of gross profit?
c) repossessed merchandise?
d) trade-ins?
C. Long Term Construction Contracts
a) contract costs incurred in progress?
b) subcontractor costs?
c) purchase of materials in advance?
d) progress billings to the customers?
e) revenue recognition?
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D. Home Office and Branch Accounting
a) normal operating transactions between Home office and its
Branches?
b) revenue recognition?
E. Consignment
a) receipt of merchandise to be consigned?
b) distribution of inventory to consignees?
c) remittances from the consignees?
d) profit recognition?
Assumptions of the Study
The proponents of the study are assuming that all of the prospective entities to
be chosen follow the procedures as illustrated through the textbooks:
Partnership Liquidation:
Assets are sold either on a lump-sum or on an installment basis
There is either a gain or loss on the realization of the non-cash assets
There are liabilities that must be paid to outside creditors
There are liquidation expenses incurred
Home Office and Branch Accounting
The Home Office and the Branch maintains their own books of accounts
The recording procedures for transactions are similar to the procedures as per
illustration from the book
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The Investment in Branch account and the Home Office account are assumed to
have the same balance at the end of the period
The balance in the Income Summary account is closed to the Home Office
account
Consignment
The law of agency governs the determination of rights and obligations of
the parties
There is a written contract prepared expressing the nature of the
relationship and covering matters such as payment terms of the sales
price that are to be granted by the consignee to buyers, expenses made
by the consignee that are to be reimbursed by the consignor
The transactions are recorded on the books of the consignee and
consignor
Whether the entity is a consignor or consignee, in the determination of
profits, the entity uses either the following:
o Separately determined
o Not separately determined
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Significance of the Study
Without an On-the-Job Training provided for in the current curriculum enrolled in
by the students, they are placed at the disadvantage of not being able to see the
actuality of the accounting practice outside the walls of the institution. Given the
circumstances, the students are likely alienated from the practical applications of their
field of study and tend to be too attached to school taught matters. It is important for the
students to be exposed to the actual work environment, even if only through a research
study, to acquaint themselves to the applications of the concepts illustrated in
textbooks. This will help them adjust the knowledge they have acquired within the
classroom setting to its several departures in the reality of the circumstances in actual
practice. Thus, this research will more likely be an equivalent of an OJT for the
students.
This study will be a valuable contribution for the students’ preparations in
becoming future professionals in the competent world of business. Thus, this study is
specifically significant to the students studying accounting for their better understanding
and to expose them to the actuality of the work outside the school.
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CHAPTER II
REVIEW OF RELATED LITERATURE
PARTNERSHIP LIQUIDATION
Definition and Characteristics of Partnership Liquidation
Article 1767 of the partnership law states that, “By the contract of partnership two
or more persons bind themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among themselves.”
Liquidation of a partnership means winding up the business usually by selling the
assets, paying the liabilities, and distributing the remaining cash to the partners. A
business is in the process of realization, the process of converting its assets into cash;
and making settlement with creditors is said to be in liquidation.
There are certain rules that should be followed in the liquidation of partnership,
namely:
1. Always allocate and close gain or losses to the partners’ capital account prior
to distributing any cash to the partners.
2. When the business is liquidated, the partner is entitled to an amount
depending upon his capital contribution, his drawing, his share in the net
income or loss from operations before liquidation, gains and losses on
realization, and the balance of his loan account, if any.
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As a general rule the order of payment of partnership liabilities are as follows:
a. Those owing to creditors other than partners.
b. Those owing to the partners other that for capital and profits.
c. Those owing the partners in respect of capital.
d. Those owing to partners in respect of profits.
Methods of Partnership Liquidation
LUMP-SUM METHOD is one which all assets are converted into cash
within a very short time, outside creditors are paid, and a single, lump-sum
payment is made to the partners for their total interest.
INSTALLMENT METHOD is one in which the realization of non-cash
assets is accomplished over an extended period. When cash is available,
creditors may be partially or fully paid. Any excess may be distributed to
the partners in accordance with the program of safe payment or cash
priority program, whichever method of distributing excess cash is
employed by. This process persists until all the non-cash assets are sold.
INSTALLMENT SALES
Definition and Characteristics of Installment Sales
An Installment Sale is the exchange of an asset for a series of payments that
occurs over a specific period of time. It is generally a “disposition of property where at
least one payment is to be received after the close of the taxable year in which the
disposition occurs. Installment Sales are valuable tool to help sellers defer tax. As with
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any other seller financing, however, the seller is generally at risk with respect to the
buyer’s creditworthiness or ability to manage the asset. The seller may often retain a
lien against the property to secure payment of the installment obligation, which itself
may or may not be evidenced by note.
Revenue Recognition for Installment Sales
There are different methods governing revenue recognition under installment
sales it could be installment sales method, cost recovery method or deposit method.
The installment method was developed to account for sales contracts allowing
buyers to make payments over several years. As the payment period becomes longer,
the risk of loss resulting from uncollectible accounts increase; consequently,
circumstances surrounding a receivable may lead to considerable uncertainty as to
whether payments will actually be received. Under these circumstances, the uncertainty
of cash collections dictates that revenue recognition should be deferred until the actual
receipt of cash.
The installment method can be used in sales transactions for which payment is to
be made through periodic installments over an extended period of time and the
collectability of the sales price cannot be reasonably estimated. Installment method
revenue recognition is not in accordance with the accrual accounting because revenue
recognition is not normally based upon cash collection.
When a seller uses the installment method, both revenue and cost of sales are
recognized at the point of sale, but the related gross margin is deferred to those periods
during which cash will be collected. As receivables are collected, a portion of the
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deferred gross profit equal to the gross profit rate times the cash collected is recognized
as income. When this method is used, the seller must compute each year’s gross profit
rate and also must maintain records of installment accounts receivables and deferred
revenue that are separately indentified by the year of sale.
The Cost-recovery method is used when the uncertainty of collection of the sales
price is so great that even is of the installment method cannot be justified. It is the most
conservative of all revenue recognition methods. Under the cost recovery method, both
revenues and cost of all sales are recognized at the point of sale, but the related gross
profit is deferred until all costs of sales have been recovered. Each installment must
also be divided between principal and interest, but unlike the installment method where
a portion of the principal recovers the costs of sales and the remainder is recognized as
gross profit, all of the principal is first applied to recover the cost of the assets sold. After
all costs of sales have been recovered, any subsequent cash receipts are realized as
gross profit.
Under the Deposit Method, seller reports the cash received from the buyer as a
deposit on the contract and classifies it on the balance sheet as a liability. The seller
does not recognize revenue or income until the sale is complete.
LONG-TERM CONSTRUCTION CONTRACT
Definition and Characteristics of Long-term Construction Contracts
PAS 11 defines construction contract as contract specifically negotiated for the
construction of an asset or a combination of assets that are closely interrelated or
interdependent in terms of design, technology or their ultimate purpose or use.
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There are two classifications of construction contract, the fixed price contract and
the cost-plus contract. Fixed price contract is a construction contract in which the
contactor agrees to a fixed contract price, or a fixed rate per unit of output, which in
some cases is subject to cost escalation clauses and cost-plus contract is a
construction contract in which the contractor reimburse for allowable or otherwise
defined cost, plus a percentage of this cost or a fixed fee.
Contract cost are cost that relate directly to the specific contract; are attributable
to contract activity in general and can be allocated to the contract; and are specifically
chargeable to the customer under terms of the contract. It can be broken down into
cost incurred to date and estimated cost to complete. Cost incurred to date includes
pre-contract cost and cost incurred after contract acceptance. Estimated costs to
complete are anticipated cost of materials, labor, subcontracting cost, and indirect cost
required to complete a project at a scheduled time.
Subcontractor cost is the amount billed to the principal contractor for work done
by the subcontractor.
For accounting purposes, contracts are combined or segmented. A group of
contracts may be combined if they are closely related that they are, in substance, part of
a single project with an overall profit margin. Segmenting a contract is a process of
breaking up a larger unit into smaller units.
There are different methods governing revenue recognition under long-term
construction contract it could be percentage-of-completion method or zero profit
method.
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Percentage-of-completion method is to be used when the outcome of the
construction contract can be estimated reliably, that is, the estimate of cost to complete
and the extent of progress toward the completion of long term contracts are reasonably
dependable. Under this method, gross profit is recognized as construction progresses.
Zero profit method recognizes revenue in an amount exactly equal to cost
incurred until reasonable objective estimates of the completion are available. This
method indicates to financial statement users the volume of the company’s business
while deferring the recognition of gross profit until more reliable estimates if the degree-
of-completion can be made.
HOME-BRANCH ACCOUNTING
Definition and Characteristics of Home-Branch Accounting
Companies may increase sales volume through the establishment of sales outlet
in various areas. Such sales outlets may be a branch or an agency. In our study, we
only focused on the home and the branch.
When a company operates a branch, it must maintain accounting records to
facilitate its reporting responsibility to the home office. (Guerrero, 2009)
Uses of the Reciprocal Accounts
Transactions between the home office and a branch are recorded in
intracompany accounts. These accounts are reciprocal accounts between the home
office and the branch. In recording inter-office transactions, two reciprocal accounts are
used, namely, the Investment in Branch or Branch Current account used by the home
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office which is classified as an asset; and the Home Office or Home Office Current
account used by the branch which is classified as liability.
Establishing of Branch
When establishing a branch, the transfer of assets to the branch is recorded by
the home office in the Investment in Branch account, and the branch records the
transfer with an entry to Home Office account. (Guerrero, 2009)
Branch Income or Loss Definition
Each branch computed income periodically. Home office and branches are
separate legal entities, so they computed income taxes for the company as a whole.
Branches’ revenue and expenses accounts are closed to its Income Summary account.
Income Summary accounts balance is closed to home Office account. When the branch
reported its income or loss to the home office, an entry is made on the book of home
office.
Merchandise Shipments to Branch
Home office may ship merchandise inventory to be sold by its branch. The
branch may also purchase merchandise from outside suppliers. Merchandise
transferred from home office to branch should be recorded by both home and branch.
Apportionment of Expenses
Home office may allocate expenses to a branch. Expenses might be of several
types such as when expenses incurred by the branch paid by the home office,
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expenses that are incurred by the home office on behalf of the branch and allocation of
expenses incurred by the home office. (Guerrero, et. al., 2011)
Preparation of Combined Financial Statements
The Statement of Financial Position and Income Statement of the home office
and the branch must be combined for some external purposes. Reciprocal or
intercompany account balances must be eliminated. Working papers usually prepare to
eliminate accounts affected in recording intercompany transactions. Working paper
elimination procedures are as follows:
1. Eliminate reciprocal accounts.
2. Eliminate intercompany transfer accounts.
a. Shipments to branch from Home Office accounts.
b. Allowance for Overvaluation of Branch Inventory.
3. Eliminate the overvaluation in branch beginning inventory.
4. Eliminate the overvaluation in branch ending inventory.
Combined Statement of Financial Position
The reciprocal accounts “Investment in Branch” and “Home Office” accounts are
not presented as well as the Allowance for Overvaluation accounts.
Combined Income Statement
The merchandise inventories, beginning and ending inventories are presented at
cost. The Shipment to Branch and Shipment from Home Office are not presented.
(Guerrero, 2009).
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CHAPTER III
METHODOLOGY
PARTNERSHIP LIQUIDATION ACCOUNTING
Place and Time
The interview was conducted in Poblacion, Banisilan, North Cotabato on
September 1, 2012.
About the Entity
The entity’s name is Sion Travel and Tours, owned by Annalie Lagat and Min Ju
Choi. It was established on November 2007 and was liquidated on May 2009. The entity
is a service concern business that offers domestic and international ticketing, hotel
accommodation, day tours and immigration assistance. Their major markets are Korean
businesspersons, tourists and students.
Gathering of Data
Data for this certain topic was gathered through an interview. The interviewee
was one of partners of the entity. Phone call interview was also done for additional
information. The questions asked during the interview were as follows:
1. What is the name of the liquidated partnership and who are the partners?
2. Was the partnership registered to SEC?
3. What is the nature of the business?
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4. How does it operate?
5. Who are your major markets?
6. How much is your contributed capital?
7. How did you divide the profit or loss?
8. What are the reasons for liquidation?
9. What have you done to the non-cash assets?
10.What was the liquidation expenses paid?
11.Are there any loan payables or receivables to/from partners?
12.Did you follow the Article of partnership in regards to liquidation?
13. Is there any action to inform the SEC that the partnership was liquidated?
INSTALLMENT SALES ACCOUNTING
Place and Time
The interview was conducted at Quality Appliance located in Valencia City on
September 14 and 21, 2011.
About the Entity
The entity’s name is Quality Appliance, a sole proprietorship owned by Mr.
Tomas Yap. Quality Appliance is a merchandising business which derives its revenues
from the sale of various home appliances. The entity has already 29 branches all over
the Philippine with its main office located in Cagayan de Oro City.
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Gathering of Data
Data for this particular topic was gathered through the means of an interview with