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FUNDAMENTAL OF

ACCOUNTING 1
2015 EDITION

LEEMON LOPEZ ARAZA DYCI - COA AC101


TABLE OF CONTENTS

Session 1: Accounting Concepts and Its Consideration

Session 2: Basic Consideration on Financial Statements

Session 3: Preparation of Financial Statements

Session 4: Adjusting the Accounts

Session 5: Completing the Accounting Cycle


Fundamentals
of Accounting 1
SESSION 1

ACCOUNTING CONCEPTS AND ITS CONSIDERATION

Desired Learning Outcomes


 Understand and explain the
definition, purpose, nature,
functions and objectives of
accounting.
 Distinguish the branches of
accounting, users of accounting
information.
 Understand the double entry
bookkeeping concept and how it
differs from single entry
bookkeeping.
 Appreciate the history of
accounting, accounting variations
among countries
 Adopt the basic professional
values and ethics

Instructor Leemon L. Araza 2015 Edition


Why
Do
We
Need
Accounting?

So why do we need accounting?


Asking that question of an accountant is
like asking a farmer why we need rain. We
need accounting because it’s the only way
for business to grow and flourish.
Accounting is the backbone of the
business financial world. After all,
accounting was created in response to the
development of trade and commerce during
the medieval times.

Accounting is the conscious of the


business world. When handled with care
and with respect, it performs as
expected. When abuse occurs, and the
system is circumvented or overridden
because of dishonesty and greed, it
doesn’t work correctly. Accounting is
much like all other systems in place,
they are only as good as the people using
them.

1|AC101 SESSION 1
ACCOUNTING is a service activity. It’s function is to provide
quantitative information, primarily financial in nature, about economic
entities that is intended to be useful in making economic decisions.

“Language of business”

Accounting as science and art


 Accounting is a social science with a body of knowledge Fixed, inflexible,
organized and
which has been systematically gathered, classified, and systematic
organized. It is influenced by, and interacts with,
economic, social and political environments.
 Accounting is a practical art which requires the use of creative skill
and judgment. Opinionated, flexible and
subjective
Accounting as an information system
 Accounting identifies and measures economic activities, processes
information into financial reports and communicates these reports to
decision makers.

Economic Activities and their classification


 Production – the process of converting economic resources into
outputs of goods and services that are intended to have
greater utility than the required inputs.

 Exchange – the process of trading resources or obligations for


other resources or obligation.

 Income distribution - the process of allocating rights to the


use of output among individuals and groups in society.

 Consumption – the process of using the final output of the


production process.

 Investment – the process of using current inputs to increase


the stock of resources available for output as opposed to
immediately consumable output.

 Savings – the process by which individuals and groups set aside


rights to present consumption in exchange for rights to future
consumption.

BASIC PURPOSE OF ACCOUNTING: To provide quantitative information about


economic entities intended to be useful in making economic decisions.

TYPES OF INFORMATION PROVIDED BY ACCOUNTING


1. Quantitative information – expressed in numbers, quantities or units.
2. Qualitative information – expressed in words or descriptive form
3. Financial information – expressed in terms of money

2|AC101 SESSION 1
ECONOMIC ENTITY VS BUSINESS ENTITY

 Economic entity – is a separately identifiable combination of persons


and property that uses or controls economic or scarce resources to
achieve certain goals or objectives. Scarce resources have no
significant characteristics.
o Not-for-profit or non-profit entity is one that carries out some
socially desirable needs of the community or its members whose
activities are not directed towards making profit.
o Business entity is an entity that produces and distributes goods
or services primarily for profit.

FUNCTIONS OF ACCOUNTING

 Identification. The accounting process of recognition or non-


recognition of business activities as accountable events or whether has
accounting relevance.

One that is quantifiable and has an effect on assets, liabilities and


equity. This also known as economic activity, which is the subject
matter of accounting.

Criteria for accountable event


1. It must affect a financial element of accounting (increasing
or decreasing asset, liability or equity)
2. It is a result of a past activity
3. Its cost can be measured reliably.

 Measurement. The accounting process of assigning of peso amounts or


numbers to the economic transactions and events. The unit of measure of
accounting is money, expressed in prices.

 Communication. The accounting process of preparing and distributing


accounting reports to potential users of accounting information and
interpreting the significance of this processed information.

o Recording. the process of systematically committing to writing


business transactions and events after they have been identified
and measured, in books of account in a systematic and
chronological manner according to accounting rules.

o Classifying. The grouping of similar and interrelated items into


their respective classes.

o Summarizing. Putting together or expressing in condensed or brief


form the recorded and classified statements in financial
statements.

3|AC101 SESSION 1
BRANCHES OF ACCOUNTING/AREA OF SPECIALIZATION

1. Financial Accounting. The recording of transactions, preparation of


financial statements and communication of financial information to
external user groups. Focuses on general purpose reports.

2. Auditing. The examination of financial statements by independent


certified public accountant for the purpose of expressing an opinion on
the fairness of presentation of financial statements.

3. Management Accounting. Incorporates cost accounting data and adapts


them for specific decisions which management may be called upon to
make. A management accounting system incorporates all types of
financial and non-financial information from a wide range of sources.

4. Financial Management. Relatively new branch of accounting that has been


grown rapidly over the last 35 years. Financial managers are
responsible for setting financial objectives, making plans based on
those objectives, obtaining the finance needed to achieve the plans,
and generally safeguarding all the financial resources of the entity.

5. Taxation / Tax accounting. Involves the preparation of tax returns and


rendering of tax advice, such as determination of tax consequences of
certain proposed business endeavors.

6. Government Accounting. Accounting for the national government and its


instrumentalities, focusing attention on the custody of public funds
and the purpose or purposes to which such funds are committed.

7. Fiduciary Accounting. Handling of accounts managed by a person


entrusted with the custody and management of property for the benefit
of another.

8. Social Responsibility. Reporting of programs and projects that have to


do with the upliftment of the welfare of the people of a community or
of the nation.

9. Environmental Accounting. The area of accounting that focuses on


programs, activities and projects that are focused care for Mother
Earth.

One example of this is carbon accounting such as “Cap and


Scheme”, which is a process of encouraging reductions in
greenhouse gas emissions.

10. Price-level Accounting. Otherwise known as Accounting for


Hyperinflationary Economies – simply defined, is accounting that
recognizes in the financial statements changes in the purchasing power
of money.

4|AC101 SESSION 1
USERS OF ACCOUNTING INFORMATION

 Internal Users are those who make decisions directly affecting the
internal operations of the business.
o Managers are directly involved in operation of the business. They
need accounting data to improve the efficiency and effective of
the organization.

o Employees use financial data to assess whether they are receiving


the right compensation and to check if they bargain for higher
remuneration, retirement benefits and employment opportunities.

o Officers, also called as the company executives who are


interested to know if the company is doing well in its operation
so they can plan for possible expansion or branching out to widen
its geographical and demographic market.
the act of making money
o Internal Auditors, there role is to protect and by making people believe
safeguard the resources of the company against something which is not
fraud or irregularities. true.

 External users are individuals or enterprises that have financial


interest in the business but they are not involved in the day
activities of the organization. These are:

o Investors (The providers of risk capital) are interested in


information which enables them to assess the ability of the
enterprise to pay dividends. They need information on whether
they should buy, hold or sell their shares in.

o Lenders are interested in information that enables them to


determine whether their loans, and their interest attaching to
them will be paid when due.

o Suppliers and other trade creditors are interested in information


that enables them to determine whether amount owing to them will
be paid when due.

o Customers are interested in the quality of goods and services


that they are getting from the entity.

o Government and their agencies require information in order to


regulate the activities of the enterprise, determine taxation
policies and as a basis for national income and similar
activities,

5|AC101 SESSION 1
o Public are assisted by information through Financial statements
about the trend and recent developments in the prosperity of the
enterprise and the range of its activities.

FUNDAMENTAL CONCEPTS

Entity Concept
The most basic concept in accounting is the entity concept. An
accounting entity is an organization or a section of an organization that
stands apart from other organizations and individuals as a separate economic
unit. Simply put, the transactions of different entities should not be
accounted for together. Each entity should be evaluated separately.

Periodicity Concept
An entity’s life can be meaningfully subdivided into equal time periods
for reporting purposes.
For the purpose of reporting to outsiders, one year is the usual
accounting period. Luca Pacioli, the first author of an accounting text,
wrote in 1494: “Books should be closed each year, especially in a
partnership, because frequent accounting makes for long friendship.”

Calendar Year – starts in January and ends in December.


Fiscal Year – starts in any month and ends after 12 months.
Stable Monetary Unit Concept
The Philippine Peso is a reasonable unit of
measure and that its purchasing power is relatively a greater increase in the supply
of money or credit than in the
stable. This is the basis for ignoring the effects of
production of goods and
inflation in the accounting records. services, resulting in higher
prices and a fall in the
purchasing power of money.
BASIC PRINCIPLES

Accounting practices follow certain guidelines. The set of guidelines and


procedures that constitute acceptable accounting practice at a given time is
GAAP, which stands for generally accepted accounting principles. In order to
generate information that is useful to the users of financial statements,
accountants rely upon the following principles.

Objectivity Principle. Accounting records and statements are based on the


most reliable data available so that they will be as accurate and as useful
as possible. Reliable data are verifiable when they can be confirmed by
independent observers.
the total cost of
Historical Cost. This principle states that acquired asset producing or buying an
should be recorded at their actual cost and not at what item, which may
management thinks they are worth as at reporting date. include, e.g., its price
plus the cost of
delivery or storage.

6|AC101 SESSION 1
Revenue Recognition Principle. Revenue is to be recognized in the accounting
period when goods are delivered or services are rendered or performed.

Expense Recognition Principle. Expenses should be recognized in the


accounting period in which goods and services are used up to produce revenue
and not when the entity pays for those goods and services.

Adequate Disclosure. Requires that all relevant information that would affect
the user’s understanding and assessment of the accounting entity be disclosed
in the financial statements.

Materiality. Financial reporting is only concerned with information that is


significant enough to affect evaluations and decisions. Materiality depends
on the size and nature of the item judged in the particular circumstances of
its omission.

Consistency Principle. The firms should use the same accounting method from
period to period to achieve comparability over time within a single
enterprise. However, changes are permitted if justifiable and disclosed in
the financial statements.

UNDERLYING ASSUMPTIONS

Accrual Basis
Financial Statements are prepared on the accrual on the accrual basis
of accounting and not as cash or its equivalent is received or paid. Under
this assumption, the effects of transactions and other events are recognized
when they occur and they are recorded in the accounting records and reported
in the financial statements of the periods to why they relate.

In short, transactions are recognized when “Revenue as they earned, even not yet
received and; Expenses as they incurred, even not yet paid.

In cash basis accounting, however, does not record a transaction until cash
is received or paid. Generally, cash receipts are treated as revenues and cash payments
as expenses.

Going Concern
Financial statements are normally prepared on the assumption that an
enterprise is a going concern and will continue in operation for a
foreseeable future. It is assumed therefore that the enterprise has neither
the intention nor the need to liquidate its operations.

7|AC101 SESSION 1
BUSINESS ORGANIZATION

FORMS OF BUSINESS ORGANIZATIONS

 Sole Proprietorship. This business organization has a single owner


called the proprietor who generally is also manager. It tends to be
small service-type (e.g. physicians, lawyers and accountants) business
and retail establishments. The owner receives all profits, absorbs all
losses and is solely responsible for all debts of the business. From
the accounting viewpoint, the sole proprietorship is distinct from its
proprietor. Thus, the accounting records do not include proprietor’s
personal financial records.

 Partnership. A business owned and operated by two or more persons who


bind themselves to contribute money, property or industry to a common
fund, with the intention of dividing the profits among themselves. Each
partner is personally liable for any debt incurred by the partnership,
except limited partner.

 Corporation. A business owned by its stockholders. It is an artificial


being created by operation of law, having the rights of succession and
the powers, attributes and properties expressly authorized by law or
incident to its existence. The stockholders are not personally liable
for the corporation’s debt.

PURPOSE OF BUSINESS ORGANIZATIONS

 Service companies perform services for a fee (e.g. law firms,


accounting and law firms, stock brokerage, beauty salons and
recruitment agencies)

 Merchandising companies purchase goods that are ready for sale and then
sell these to customers (e.g. car dealers, clothing stores and
supermarkets)

 Manufacturing companies buy raw materials, convert them into products


and then sell the products to other companies or to final consumers
(e.g. paper mills, steel mills, car manufacturers and drug
manufacturers)

MICRO, SMALL AND MEDIUM ENTERPRISES (MSME)

 Micro Enterprises are those with assets, before financing of P 3


million or less and employ not more than nine (9) workers.

 Small Enterprises are those with assets, before financing of above P 3


million to P 15 million and employ 10 to 99 workers.

8|AC101 SESSION 1
 Medium Enterprises are those with assets, before financing of above P15
million to P100 million and employ 100 to 199 workers.

ACTIVITIES IN BUSINESS ORGANIZATIONS

 Operating Activities are the principal activities of the enterprise.


They are the transactions and events that enter into the determination
of profit and loss. E.g.:
o Sale of services
o Purchase of supplies
o Payment of various expenses like salaries and other benefits to
employees, utilities, taxes and repairs and maintenance,
insurance, transportation and gasoline expense.

 Investing Activities are the acquisition and disposal of long-term


assets and other investments. E.g.:
o Purchase of equipment, furniture, automobile and land
o Cost of developing and constructing office or building
o Sale of used fixed assets
o Loans and advances to other parties
o Investments in equity or debt instruments

 Financing Activities are activities that result in charges in the size


and composition of the contributed equity and borrowings of the
enterprise. E.g.:
o Cash proceeds from issuing shares of stocks by a corporation
o Cash proceeds and repayment of bank loans and other long-term
barrowings.

**End of Session 1**

References:
Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14th Edition.
Manila: Domdane Publishers and Made Easy Books.
Ledesma, Ester L.(2014).Financial Accounting Theory Review Booklets. Manila: CRC-Ace
The Professional CPA Review School.
Rante, Gloria Aradaniel.(2013). Accounting for Service Entities. Mandaluyong City:
Millenium Books, Inc.

9|AC101 SESSION 1
NAME: YR.&SEC.
COURSE: DATE

ACTIVITY NO. 1

Multiple Choice
1. Accounting is a service activity. Its function is to provide
a. Quantitative information
b. Qualitative information
c. Quantitative and qualitative information
d. None of the above
2. The basic purpose of accounting is
a. To provide the information that the managers of an economic
entity need to control its operations.
b. To provide information that the creditors of an economic entity
can use in deciding whether to make additional loans to the
entity.
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about a business
enterprise that is useful in making rational economic decision.
3. Which of the following best describes the attributes of a partnership
a. Limited ability to raise capital; unlimited personal liability of
owners.
b. Limited ability to raise capital; limited personal liability of
owners.
c. Ability to raise large capital; unlimited personal liability of
owners.
d. Ability to raise large amounts of capital; limited personal
liability of owners.
4. Which of the following is true?
a. Stockholders are personally liable for the liabilities of the
corporation if the company us unable to pay.
b. Normally, stockholders can only sell their ownership interests
when the corporation terminates.
c. Partners are personally liable for the liabilities of the
partnership if the partnership is unable to pay.
d. Partners can normally transfer their partnership interests with
ease.
5. Which accounting process is the recognition or non-recognition of
business activities as accountable events?
a. Identifying
b. Communicating
c. Recording
d. Measuring
6. The concept of the accounting entity is applicable
a. Only to the legal aspects of business organizations
b. Only to the economic aspects of business organizations
c. Only to business organizations
d. Whenever accounting is involved

10 | A C 1 0 1 S E S S I O N 1
7. The entity concept means that
a. Because a firm is separate and distinct from its owners, those
owners cannot have access to its assets unless the firm ceases to
trade.
b. Accounts must be prepared for every firm.
c. The financial affairs of a firm and its owner are always kept
separate for the purpose of preparing accounts.
d. None of the above
8. Accountants do not recognize that the value of the peso changes over
the time. This concept is called the
a. Stable money unit concept
b. Going concern concept
c. Cost principle
d. Entity concept
9. The principle of objectivity includes the concept of
a. Summarization
b. Verifiability
c. Classification
d. Conservatism
10. Which of the following is not a user of internal accounting
information?
a. Store Manager
b. Chief executive officer
c. Creditor
d. Chief financial officer
11. An event that affects the financial position of an organization and
requires recording is called:
a. Transaction
b. Account
c. Business documents
d. Operating activities
12. All of the following are external users of accounting information
except:
a. Creditors, lenders and suppliers
b. Present and potential investors
c. Government regulatory bodies
d. Managers and employees
13. It is the simplest of business organization
a. Service Entity
b. Merchandising Entity
c. Partnership
d. Sole Proprietorship
14. The following are examples of service business except:
a. SM Supermarket
b. Amana Hotel and Resorts
c. Cebu Pacific
d. Manila Water Inc.
15. The following are examples of manufacturing business, except:
a. Toyota Motors, Inc.

11 | A C 1 0 1 S E S S I O N 1
b. Sony Philippines
c. Red Ribbon Bakeshop
d. Rolex Watch Repair Shop
16. All of the following are qualitative characteristics of financial
statements except:
a. Understandability
b. Relevance
c. Materiality
d. Going Concern
17. Financial information must possess this characteristic in order for
the users to easily understand the contents of the financial
statements.
a. Reliability
b. Completeness
c. Relevance
d. Understandability
18. The measurement phase of accounting is accomplished by
a. Storing data
b. Reporting to decision makers
c. Recording data
d. Processing data
19. The communication phase of accounting is accomplished by
a. Storing data
b. Reporting to decision makers
c. Recording data
d. Processing data
20. A professional accountant should be straightforward and honest in all
professional and business relationships. This is in consonance with
the fundamental principle of
a. Integrity
b. Objectivity
c. Confidentiality
d. Professional competence and care

12 | A C 1 0 1 S E S S I O N 1
Fundamentals
of Accounting 1
SESSION 2

BASIC CONSIDERATION ON FINANCIAL STATEMENTS

Desired Learning Outcomes


 Understand and explain the
objective and qualitative
characteristics of financial
statements.
 Distinguish the elements of
financial statements, its
recognition and measurements.
 Learn and apply the principle of
Accounting Equation, the rule of
debits and credits.
 Understand Accounting events and
transactions, types and effects of
transactions

Instructor Leemon L. Araza 2015 Edition

0
FINANCIAL STATEMENTS
OBJECTIVES
Provide information about the financial position, performance and
changes in financial position of an entity that is useful to a wide range of
users in making economic decisions.
Financial statements prepared for this purpose:
 Meet the common needs of most users
 Also show the results of the stewardship* of management, or
accountability of management for the resources entrusted to it.
 Do not, however, provide all the information that users may need
to make decisions since they largely portray the financial
effects of past events and do not necessarily provide non-
financial information.

*e.g. in prev. times, it is the one employed by a large household or estate


to manage domestic concerns such as supervision of servants, collection of
rents and keeping of accounts.

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

A. Fundamental qualitative characteristics


a. Relevance
b. Faithful Representation

B. Enhancing Qualitative characteristics


a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

RELEVANCE
Relevant financial information is capable of making a difference in the
decision made by users, influences the economic decisions of users by helping
them to evaluate, past, present, or future events or confirming, or
correcting, their past evaluations.

a. Predictive value. Financial information has predictive value if it can


be used as input to processes employed by users to predict future
outcomes. For e.g. information about financial position and past
performance is frequently used in predicting wages payments, and the
ability of the entity to meet maturing obligations.

b. Confirmatory value (or feedback). Financial information has


confirmatory value if it provides feedback about (confirms or changes)
previous evaluation. Information with feedback value enables users to
confirm or correct expectations.

1
FAITHFUL REPRESENTATION
To be useful, financial information must not only represent relevant
phenomena, but it must also faithfully represent the phenomena that it
purports to represent.

a. Completeness. A complete depiction includes all information necessary


for a user to understand the event or information being presented,
including all necessary descriptions and explanations.

b. Neutrality. A neutral presentation is one without bias.

c. Freedom from error. Means there are no errors or omissions in the


description of the phenomenon, and the process used to produce the
reported information has been selected and applied with no errors in
the process.

ENHANCING QUALITATIVE CHARACTERISTICS

a. Comparability. It enables the users to identify and understand


similarities in, and differences among, items. Consistency, although
related to comparability, is not the same.
“Comparability is the goal; consistency helps to achieve that goal.”

b. Verifiability. Means that different knowledgeable and independent


observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.

c. Timeliness. Means having information available to decision-makers in


time to be capable of influencing their decisions.
d. Understandability. Means classifying, characterizing, and presenting
information clearly and concisely.

THE ELEMENTS OF FINANCIAL STATEMENTS

The financial statements portray the financial effects of transactions


and other events by grouping them into broad classes according to their
economic characteristics. These termed the elements of financial statements.
Elements directly related to measurement of financial position are:

Elements directly related to measurement of financial position are:


 Assets
 Liabilities
 Equity
Elements directly related to measurement of performance are:
 Income
 Expense

2
RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS

Recognition is the process of incorporating in the balance sheet or income statement an


item that meets the definition of an element and satisfies the criteria for recognition. An item
that meets the definition of an element should be recognized if:

 It is probable that any future economic benefit associated with the


item will flow to or from the enterprise; and
 The item has a cost or value that can be measured with reliability.

MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS

Measurement is the process of determining the monetary amounts at which the elements
of financial statements are to be recognized and carried in the balance sheet and income
statement. This involves the selection of a particular basis of measurement. A
number of these are used to different degrees and in varying combinations in
financial statements. They include the following:

HISTORICAL COST. Assets are recorded at the amount of cash or cash


equivalents paid or the fair value of the consideration given to acquire them
at the time their acquisition.

CURRENT COST. Assets are carried at the amount of cash or cash equivalents
that would have to be paid if the same or an equivalent asset was acquired
currently.

“Liabilities are carried at the discounted amount of cash and cash


equivalents that would be required to settle the obligation currently.”

RELIAZABLE (SETTLEMENT) VALUE

Reliazable value. Assets are carried at the amount of cash or cash


equivalents that could currently be obtained by selling an asset in an
orderly disposal.

Settlement value. Liabilities are carried at the undiscounted amounts


of cash or cash equivalents expected to be paid to satisfy the
liabilities in the normal course of business.

Present Value. Assets/liabilities are carried at present discounted value of


the future net cash inflows/outflows that the item is expected to
generate/settle in the normal course of business.

GUIDELINES IN THE PRESENTATION OF FINANCIAL STATEMENTS

Philippine Accounting Standard 1 (PAS) gives us the following


guidelines in the presentation of financial statements.

3
(1) Each component of the financial statements shall be clearly
identified and the following information shall be emphasized for a
proper understanding of the information presented:
i. The name of the reporting entity;
ii. Whether the financial statements cover the individual
entity or a group of entities.
(2) The period covered by the financial statement shall be specified.

Note: For Balance Sheet, use As of (date). For Income Statement,


Statement of Changes in Owner’s Equity and Statement of Cash flows, use
For the month/year ended (date).

FINANCIAL POSITION

The financial position of an enterprise is affected by the economic


resources it controls, its financial structure, it liquidity and solvency,
and its capacity to adapt to changes in the environment in which it operates.
This is primarily provided in the Statement of Financial Position or Balance
Sheet.
It answers the following questions:
 What assets does entity own?
 What does it owe?
 What are the residual equity interests in the entity’s net assets?

Other important information provided by the statement of financial


position is as follows:

 Financial structure – is the source of financing for the assets of


the enterprise. It indicates what amount of assets has been financed
by creditors, which is borrowed capital, and what amount of assets
has been financed by owners, which is invested capital.
Significance:
(1) Useful in predicting future borrowing needs and how
future profits and cash flows will be distributed
among those with an interest in the enterprise.
(2) Useful in predicting how successful the enterprise is
likely to be raising further finance.

 Liquidity – refers to the availability of cash in the near future


after taking account of financial commitments over this period.
Significance:
(1) Useful in predicting the ability of the enterprise to
meet its short-term financial commitments as they
fall due.

 Solvency – refers to the availability of cash over the longer term


to meet financial commitments as they fall due.
Significance:

4
(1) Useful in predicting the ability of the enterprise to
meet its long-term financial commitments as they fall
due.

 Capacity for adaption – the ability of the enterprise to use its


available cash for unexpected requirements and investment
opportunities. This is also known as financial flexibility.
(1) Information about the economic resources controlled
by the enterprise and its capacity for adaptation is
useful in predicting the ability of the enterprise to
generate cash and cash equivalents in the future.

COMPOSITION OF A STATEMENT IN FINANCIAL POSITION

Assets

These are resources controlled by the enterprise* as a result of past


events** and from which future economic benefits*** are expected to flow to the
enterprise.

For example, an asset may be:


 Used singly or in combination with other assets in the production
of goods or services to be sold by the enterprise;
 Exchanged for other assets;
 Used to settle a liability;
 Distributed to the owners of the enterprise.

Assets are should be classified only in two: current assets and non-
current assets. Operating Cycle is the time between the acquisition of assets
for processing and their realization in cash or cash equivalents. When the
entity’s normal operating cycle is not clearly identifiable, it is assumed to
be twelve months.

*Controlled by the enterprise – control is the ability to obtain the economic


benefits and to restrict the access of others (e.g. an entity being the sole
user of its plants and equipment or by selling idle assets)
**Past events – The event must be past before an asset can rise. (E.g. equipment will
only become an asset when there is the right to demand delivery or access to
the asset’s potential. Dependent on the terms of the contract, this may be on
acceptance of the order or on delivery.
***Future economic benefits – These are evidenced by the prospective receipt of
cash. This could be cash itself, an account receivable or any item which may be
sold. Although, for example, a factory may not be sold for it houses the
manufacturing facility for the goods. When these goods are sold, the economic
benefit resulting from the use of the factory is realized as cash.

5
Current Assets

An entity shall classify assets as current when:


a. It expects to realize the asset, or intends to sell or consume
it, in its normal operating cycle;
b. It holds the asset primarily for the purpose of trading;
c. It expects to realize the asset within twelve months after the
reporting period;
d. The asset is cash or cash equivalent unless the asset is
restricted from being exchanged or used to settle a liability for
at least months after the reporting period.

1. Cash any medium of exchange that a bank will accept for deposit at face
value. It includes coins, currency, checks, money orders, bank deposits
and drafts.
*Money orders is a document which can be bought as a way of sending money
through the post.

2. Cash Equivalents these are short-term, highly liquid investments that


are readily convertible to known amounts of cash and which are subject
to an insignificant risk of changes in value.

3. Accounts Receivable These are claims against customers arising from


sale of services or goods on credits. This type of receivable offers
less security than a promissory note.

4. Notes Receivable A note receivable is a written pledge that the


customer will pay the business a fixed amount of money on a certain
date.

5. Inventory or Merchandise Inventory these are assets which are (a) held
for sale by the company, (b) in the process of production for such
sale, (c) in the form of materials (raw materials) or supplies to be
consumed in the production.

6. Supplies this may be office supplies like bond papers, paper clips and
the like or can be also store supplies like boxes, bags, packaging
tapes and other related materials.

7. Prepaid Expenses These are expenses paid for by the business in


advance. It is an asset because the business avoids, having to pay cash
in the future for a specific expense. This includes insurance and rent.

Non-current Assets

All other assets not classified or does not fall under the criteria of
current assets are called non-current assets.

6
1. Property, Plant and Equipment (PPE) these are tangible assets that are
held by an enterprise for use in the production or supply of goods or
in rendering services, or for rental to other, or for administrative
purposes and which are expected to be used during more than one period.
These are:
a. Land e. Delivery Equipment
b. Building f. Store Equipment
c. Office Equipment g. Service Vehicle
d. Furniture and Fixtures

2. Accumulated Depreciation applies to property, plant and equipment


except land as a contra account that contains the sum of periodic
depreciation charges. The reflected amount is deducted from the cost of
the related asset to obtain book value.

To illustrate:
The Company has an office equipment worth P500,000 with a useful life of
10 years acquired last June 1, 2013.
Office Equipment P 500,000
Accumulated Depreciation – O/E (100,000)
Net book value P 400,000

Formula:
Annual Depreciation = Cost of the PPE – salvage value* (if any)
Life (n)
Accumulated Depreciation = Annual depreciation x age of the PPE
*Salvage value is the value of an asset if sold for scrap and also called as Residual or
scrap value.

To compute:
= 500,000 = 50,000 annual depreciation
10
= 50,000 x 2 years = 100,000 Accu. Dep.
(from june 1 2013 to june 1 2015)

3. Intangible
These are identifiable, nonmonetary assets without physical
substance held for use in the production or supply of goods or
services, for rentals to others or for administrative purposes. These
are:
a. Goodwill e. Franchises
b. Patents f. Trademarks
c. Copyrights g. Brand names
d. Licenses

7
LIABILITIES

A present obligation of the enterprise arising from past events, the


settlement of which is expected to result in an outflow from the enterprise
of resources embodying can be measured benefits.

*Obligation – These maybe legal or not. A duty to do something or a debt.


* Transfer economic benefits - This could be a transfer of cash, or another
property, the provision of a service or the refraining from activities
which would otherwise be profitable.

The settlement of a present obligation involving outflow of resources may


take the form of:
a. Payment of cash
b. Transfer of other assets
c. Provision for services
d. Replacement of the present obligation with another obligation
e. Conversion of the obligation to equity

Current Liabilities

An entity shall classify a liability as current when:


a. It expects to settle the liability in its normal operating cycle
b. It holds the liability primarily for the purpose of trading
c. The liability is due to be settled within twelve months after the
reporting period; or
d. The entity does not have an unconditional right to defer
settlement of the liability for at least twelve months after the
reporting period.

1. Accounts payable This account represents the reverse relationship of


the accounts receivable. Due to suppliers of goods and other assets
purchased on credit.

2. Notes Payable A note payable is like a note receivable but in a reverse


sense. The business entity is the maker of the note; that is, the
entity is the party who promises to pay in a specified amount of money
on specified future date.

3. Accrued Liabilities Amounts owed to others for unpaid expenses. This


account includes:
a. Salaries payable c. Interest payable
b. Utilities payable d. Taxes payable

4. Unearned Revenues When the business entity receives payment before


providing its customers with goods or services, the amounts received
are recorded in the unearned revenue account (liability method). When
the goods or services are provided to the customer, the unearned
revenue is reduced and income is recognized.

8
5. Current portion of Long-term debt These are portions of long-term
liabilities which are to be paid within one year from the balance sheet
date.

Non-current liabilities

All other liabilities not classified or does not fall under the criteria
of current liabilities are called non-current liabilities.

1. Mortgage payable This account records long-term debt of the business


entity for which the entity has pledged certain assets as security to
the creditor.

2. Bonds payable is an obligation in connection with the bond, a contract


between the issuer and the lender specifying the terms of repayment and
the interest to be charged.

OWNER’S EQUITY

Equity is defined as the residual interest in the asset of an entity that


remains after deducting all its liabilities.

1. Capital this account is used to record original and additional


investment of the owner of the business entity. In partnership,
Partners’ Capital is use as its capital account while in corporation is
Shareholders’ Equity.

2. Withdrawals When the owner of a business entity withdraws cash or other


assets, such are recorded in the drawing or withdrawal account rather
than directly reducing the owner’s equity account.

3. Income Summary It is a temporary account used at the end of the


accounting period to close the income and expenses. This account shows
the profit or loss for the period before closing to the capital
account.

FINANCIAL PERFORMANCE reflected by accrual accounting*

Performance of an enterprise – comprise its revenue, expenses, net income or


loss for a period of time. It is the level of income earned by the enterprise
through efficient and effective use of its resources. Information about
performance is primarily provided in an Income Statement or Statement of
Financial Performance or Statement of Comprehensive Income or Statement of
Income and Expenses.

*Accrual Accounting recognizes transactions and other events of a reporting


entity in the periods in which those effects occur, even if the resulting
cash receipts and payments occur in a different period.

9
COMPOSITION OF STATEMENT OF FINANCIAL PERFORMANCE

REVENUE OR INCOME

These are increases in economic benefits during the accounting period in


the form of inflows or enhancements of assets or decrease of liabilities from
delivery or production of goods, rendering of services, or other activities
that constitute the enterprise’s major operations.

1. Service Income Revenues earned by performing services for a customer or


client, for e.g. accounting services by a CPA firm, laundry services by
a laundry shop.

2. Sales Revenues earned as a result of sale of merchandise; for e.g. sale


of merchandise by General Merchandise Store.

EXPENSES

These are decrease in economic benefits during the period in the form
of outflows or using up of assets or incurrence of liabilities that result in
decreases in equity, other than relating to distributions to equity
participants.

1. Cost of Sales The cost incurred to purchase or to produce the products


sold to customers during the period; also called as cost of goods sold.

2. Salaries and Wages Expense includes all payments as a result of an


employer-employee relationship such as salaries and wages, 13th month
pay, cost if living allowances, other related benefits.

3. Utilities Expense expenses related to use of telecommunications


facilities, consumptions of electricity, fuel and water.

4. Rent Expense expense for space, equipment or other asset rentals.

5. Supplies Expense expense of using supplies in the conduct of daily


business.

6. Insurance Expense portion of premiums paid on insurance coverage which


has expired.

7. Depreciation Expense portion of the cost of a tangible asset allocated


or charged as expense during an accounting period.

8. Uncollectible Accounts Expense the amount of receivables estimated to


be doubtful of collection and charged as expense during an accounting
period.

10
9. Interest Expense An expense related to use of borrowed funds.

CHANGES IN FINANCIAL POSITION

It refers to the changes in the economic resources and obligation of an


enterprise. In constructing a statement of changes in Owner’s Equity, funds
can be defined in various ways, such as all financial revenues, working
capital, liquid assets or cash.

THE ACCOUNT

The basic summary device of accounting is the account. A separate


account is maintained for each element that appears in the balance sheet
(assets, liabilities, and equity) and in the income statement (income and
expense). Thus, an account may be defined as a detailed record of the
increases, decrease and balance of each element that appears in an entity’s
financial statements.

The simplest form of the account is known as the “T” account because of
its similarity to the letter T. the account has three parts as shown on the
next page.

Account Title
Left side or Debit Right side or
side credit side

THE ACCOUNTING EQUATION and DEBITS AND CREDITS-THE DOUBLE ENTRY SYSTEM

Assets = Liabilities + Equity

Balance

The basic tool of accounting is the accounting equation. The left side
of the equation shows how much the business owns, and the right side of the
equation shows how much resources do the outside creditor and owner supplied
to the business.

The logic of debiting and crediting is related to the accounting


equation. Transactions may require addition to both sides (left or sides),

11
subtractions from both sides (left and right sides), or an addition and
subtraction on the same side (left or right sides). But in all cases the
equality must be maintained as shown above.

Accounting is based on a double-entry system which means that the dual


effects of business are recorded. A debit side entry must have a
corresponding credit side entry. For every transaction, there must be one or
more accounts debited and one or more accounts credited and must be equal
both sides. Each transaction affects at least two accounts.

The rules of debit and credit in accounts.

ACCOUNT DEBIT CREDIT


Assets + -
Liabilities - +
Capital or Equity - +
Revenue or Income - +
Expenses + -
(+) increase; (-) decrease

ACCOUNTING EVENTS AND TRANSACTIONS

An accounting event is an economic occurrence that causes changes in an


enterprise’s assets, liabilities, and/or equity. A transaction is a
particular kind of event that involves the transfer of something of value
between two entities.

Accountants observe many events that they identify and measure in


financial terms. A business transaction is the occurrence of an event or a
condition that affects financial position and can be reliably recorded.

Financial transaction worksheet

Every financial transaction can be analyzed or expressed in terms of its


effects on the accounting equation. The financial transactions will be
analyzed by means of a financial transaction worksheet which is a form used
to analyze increases and decreases in the assets, liabilities or owner’s
equity of a business entity.

When a specific asset, liability or owner’s equity item is created by a


financial transaction, it is listed in the financial transaction worksheet
using the appropriate accounts.

12
To illustrate:

Mr. Wagmalito Kayayan wants to open an accounting firm this year. The
following transactions are made during the month.

May 1. Mr. W. Kayayan invested P100,000 to start an accounting office.

W. Kayayan Accounting Firm


Financial Transaction Worksheet
Month of May 2015

ASSET = LIABILITIES + OWNER’S EQUITY


May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
1 100,000 100,000

The financial transaction is analyzed as follows:


 An entity separate and distinct from Kayayan’s personal financial
affairs is created.
 An economic resource – cash of P 100,000 is invested in the business
entity. The source of this asset is the contribution made by the owner,
which represents owner’s equity. The owner’s equity account is W.
Kayayan, Capital.
 The dual nature of the transaction is that cash is invested and owner’s
equity created. The effects of this transaction on the accounting
equation are as follows: increase in asset – cash from zero to P
250,000 and increase in owner’s equity from zero to P 250,000.

May 3. Purchased office supplies worth P20,000 on account.

ASSET = LIABILITIES + OWNER’S EQUITY


May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 100,000 100,000
3 20,000 20,000
Bal. 100,000 0 20,000 0 = 20,000 0 + 100,000
120,000 = 120,000

The effect of transaction is increase in asset and increase in liabilities.


Take note that the equality of the two sides of the equation is maintained.

May 5. Purchased additional office supplies for cash, P10,000.


ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 100,000 0 20,000 0 = 20,000 0 + 100,000

13
5 (10,000) 10,000
Bal. 90,000 0 30,000 0 = 20,000 0 + 100,000
120,000 = 120,000

The effect of transaction is increase in asset and decrease in another asset


form of asset. After posting the transaction, total asset amounts to P120,000
and total liabilities and capital amount to P120,000.

May 6. Paid the accounts payable in full.


ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 90,000 0 30,000 0 = 20,000 0 + 100,000
6 (20,000) (20,000)
Bal. 70,000 0 30,000 0 = 0 0 + 100,000
100,000 = 100,000

Transaction reduces both sides of the equation by P20,000 resulting to the


equality of the equation after posting.

May 8. Purchased 2 units of computer with printer for P50,000, 30 days.


ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 100,000 100,000
8 50,000 50,000
Bal. 70,000 0 30,000 50,000 = 50,000 0 + 100,000
150,000 = 150,000

May 10. Rendered accounting services for cash, P25,000.


ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 70,000 0 30,000 50,000 = 50,000 0 + 100,000
10 25,000 25,000 Prof.fee
Bal. 95,000 0 30,000 50,000 = 50,000 0 + 125,000
175,000 = 175,000

May 15 Rendered accounting services on account, P 30,000.


ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 95,000 0 30,000 50,000 = 50,000 0 + 125,000

14
15 30,000 30,000 Prof.fee
Bal. 95,000 30,000 30,000 50,000 = 50,000 0 + 155,000
205,000 = 205,000

May 15 Paid Meralco bills, P 3,500.


ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 95,000 30,000 30,000 50,000 = 50,000 0 + 155,000
15 (3,500) (3,500)Utility
Exp.
Bal. 91,500 30,000 30,000 50,000 = 50,000 0 + 151,500
201,500 = 201,500

May 15 Paid salaries for the period, P15,000.


ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 91,500 30,000 30,000 50,000 = 50,000 0 + 151,500
15 (15,00) (15,000)Salaries
Exp.
Bal. 76,500 30,000 30,000 50,000 = 50,000 0 + 136,500
186,500 = 186,500

May 20 Collected P10,000 from customer.


ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 76,500 30,000 30,000 50,000 = 50,000 0 + 136,500
20 10,000 (10,000)
Bal. 86,500 20,000 30,000 50,000 = 50,000 0 + 136,500
186,500 = 186,500

May 22 A Short term loan from a local bank was granted in the amount of
P50,000, less P5,000 financing charges. Mr. W. Kayayan issued 1 year
promissory note.
ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 86,500 20,000 30,000 50,000 = 50,000 0 + 136,500
22 45,000 50,000 (5,000)
Interest
Expense
Bal. 131,500 20,000 30,000 50,000 = 50,000 50,000 + 131,500
231,500 = 231,500

15
May 25 Paid telephone bill amounting to P 6,000.
ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 131,500 20,000 30,000 50,000 = 50,000 50,000 + 131,500
25 ( 6,000) (6,000) Comm.
Expense
Bal. 125,500 20,000 30,000 50,000 = 50,000 50,000 + 125,500
225,500 = 225,500

May 27 Mr. Kayayan withdrew P20,000 for personal use.


ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 125,500 20,000 30,000 50,000 = 50,000 50,000 + 125,500
27 (20,000) (20,000)Kayayan,
Withdrawals
Bal. 105,500 20,000 30,000 50,000 = 50,000 50,000 + 105,500
205,500 = 205,500

May 30 At the end of the month, physical count of the office supplies
revealed that P 5,000 had been consumed.
ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 105,500 20,000 30,000 50,000 = 50,000 50,000 + 105,500
30 ( 5,000) (5,000)Supplies
Expense
Bal. 105,500 20,000 25,000 50,000 = 50,000 50,000 + 100,500
200,500 = 200,500

16
Summary of W. Kayayan in tabular Form

W. Kayayan Accounting Firm


Financial Transaction Worksheet
Month of May 2015

ASSET = LIABILITIES + OWNER’S EQUITY


May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
1 100,000 100,000
3 20,000 20,000
5 (10,000) 10,000
6 (20,000) (20,000)
8 50,000 50,000
10 25,000 25,000 Prof.fee
15 30,000 30,000 Prof.fee
15 (3,500) (3,500)Utility
Exp.
15 (15,00) (15,000)Salaries
Exp.
20 10,000 (10,000)
22 45,000 50,000 (5,000) Interest
Expense
25 ( 6,000) (6,000) Comm.
Expense
27 (20,000) (20,000)Kayayan,
Withdrawals
30 ( 5,000) (5,000)Supplies
Expense
Bal. 105,500 20,000 25,000 50,000 = 50,000 50,000 + 100,500
200,500 = 200,500

USE OF T-ACCOUNTS

Analyzing and recording transactions using the accounting equation is


useful in conveying a basic understanding of how transactions affect the
business. However, it is not an efficient approach once the number of
accounts involved increases. Double-entry system provides a formal system of
classification and recording business transactions.

May 1. Mr. W. Kayayan invested P100,000 to start an accounting office.


Cash W. Kayayan, Capital
5/1 100,000 100,000 5/1

May 3. Purchased office supplies worth P20,000 on account.


Office Supplies Accounts Payable
5/3 20,000 20,000 5/3

17
May 5. Purchased additional office supplies for cash, P 10,000.
Office Supplies Cash
5/3 20,000 5/1 100,000 10,000 5/5
5/5 10,000

May 6. Paid the accounts payable in full, P20,000


Accounts Payable Cash
5/6 20,000 20,000 5/3 5/1 100,000 10,000 5/5
20,000 5/6

May 8. Purchased 2 units of computer with printer for P50,000, 30 days.


Accounts Payable Office Equipment
5/6 20,000 20,000 5/3 5/8 50,000
50,000 5/8

May 10. Rendered accounting services for cash, P25,000.


Cash Professional Fees
5/6 20,000 20,000 5/3 25,000 5/10
5/10 25,000 50,000 5/8

May 15. Rendered accounting services on account, P30,000.


Accounts Receivable Professional Fees
5/15 30,000 25,000 5/10
30,000 5/15

May 15. Paid Meralco bills, P3,500.


Cash Utilities Expense
5/6 20,000 20,000 5/3 5/15 3,500
5/10 25,000 50,000 5/8
3,500 5/15

May 15. Paid salary of office staffs,P15,000


Cash Salaries Expense
5/6 20,000 20,000 5/3 5/15 15,000
5/10 25,000 50,000 5/8
3,500 5/15
15,000 5/15

May 20. Collected P 10,000 from customer.


Cash Accounts Receivable
5/6 20,000 20,000 5/3 5/15 30,000 10,000 5/20
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
15,000 5/15

May 22. A short term loan from a local bank was granted in the amount of
P50,000, less P5,000 finance charges. W. Kayayan issued 1 year
promissory note.

18
Cash Notes Payable
5/6 20,000 20,000 5/3 50,000 5/22
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
5/22 45,000 15,000 5/15

Interest Expense
5,000 5/22

May 25. Paid telephone bill amounting to P6,000.


Cash Telephone Expense
5/6 20,000 20,000 5/3 5/25 6,000
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
5/22 45,000 15,000 5/15
6,000 5/25

May 27. W. Kayayan withdrew cash P20,000 for her personal use.
Cash W. Kayayan drawing
5/6 20,000 20,000 5/3 5/27 20,000
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
5/22 45,000 15,000 5/15
6,000 5/25
20,000 5/27

May 30. At the end of the month, physical count of the office supplies
revealed that P5,000 had been consumed.
Office Supplies Supplies Expense
5/3 20,000 5,000 5/30 5/30 5,000
5/5 10,000

References:
Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14th
Edition. Manila: Domdane Publishers and Made Easy Books.
Ledesma, Ester L.(2014).Financial Accounting Theory Review Booklets. Manila:
CRC-Ace The Professional CPA Review School.
Rante, Gloria Aradaniel.(2013). Accounting for Service Entities. Mandaluyong
City: Millenium Books, Inc.

19
ACTIVITY NO. 1

NAME: YR.&SEC.
COURSE: DATE

MULTIPLE CHOICE

1. If a business is not being sold or closed, the amounts reported in the


accounts for assets used in the business operations are based on the
cost of assets. This practice is justified by
a. Accrual
b. Time period
c. Going concern
d. Accounting entity
2. It is the capacity of information to make a difference in decision by
helping users evaluate past, present and future events, or confirming,
or correcting their past evaluations.
a. Relevance
b. Reliability
c. Understandability
d. Comparability
3. The attributes of relevance include all except
a. Neutrality
b. Materiality
c. Predictive value
d. Feedback value
4. It is the quality of information that assures readers that the
information is free from bias or error and faithfully represents what
it purports to show.
a. Relevance
b. Reliability
c. Understandability
d. Comparability
5. The financial accounting information is directed toward the common
needs of users and is independent of presumptions about particular
needs and desires of specific.
a. Neutrality
b. Relevance
c. Completeness
d. Verifiability
6. It is the result of the standard of adequate disclosure
a. Completeness
b. Neutrality
c. Faithful Representation
d. Substance over form
7. The financial information must be comprehensible or intelligible if it
is to be useful.
a. Comparability
b. Understandability

20
c. Relevance
d. Reliability
8. It is the ability to bring together for the purpose of noting
similarities and dissimilarities
a. Relevance
b. Reliability
c. Comparability
d. Understandability
9. Financial reporting is concerned only with information that is
significant enough to affect evaluation or decision.
a. Materiality
b. Timeliness
c. Comparability
d. Cost and benefit
10. The purchase of an asset on account will
a. Increase total liabilities and decrease total assets
b. Have no effect on total assets or total liabilities
c. Increase total assets and increase total liabilities
d. Increase total assets and decrease owner’s equity
11. Amounts owed by a business are referred to as
a. Assets
b. Equities
c. Liabilities
d. Capital
12. Which of the following equations is the fundamental accounting
equation?
a. Assets – Liabilities = Owner’s Equity
b. Assets = Liabilities + Owner’s Equity
c. Assets – Owner’s Equity = Liabilities
d. Assets – Owner’s Equity = Liabilities
13. When an owner deposits cash in an account in the name of the business,
it is an increase to
a. Cash and Accounts receivable
b. Cash and withdrawals
c. Cash and capital
d. Cash and expenses
14. Which of the following is not considered an account?
a. Equipment
b. Revenues
c. Accounts Payable
d. Cash
e. Accounts Receivable
15. If an owner invests her computer and printer in the business, there is
an increase to
a. Cash and capital
b. Computer Equipment and withdrawals
c. Cash and withdrawals
d. Computer equipment and capital

21
16. The owner invested P50,000 in the business. What are the effects on
the fundamental accounting equation?
a. Assets increase P50,000; liabilities no effect; owner’s equity
increase P50,000
b. Assets increase P50,000; liabilities decrease P50,000; owner’s
equity increase P50,000
c. Assets increase P50,000; liabilities increase P50,000; owner’s
equity no effect
d. Assets increase P50,000; liabilities no effect; owner’s equity
decrease P50,000
17. The purchase of an asset for cash will
a. Increase total assets and decrease total liabilities
b. Have no effect on total assets or total liabilities
c. Increase total assets and increase total liabilities
d. Increase total assets and increase total owner’s equity
18. When the rent for the business is paid with a check
a. Cash is decreased and rent expense is decreased
b. Cash is decreased and rent income is increased
c. Cash is decreased and rent expense is increased
d. Cash is decreased and accounts payable is decreased
19. The purchase of supplies for cash will
a. Increase supplies and decrease cash
b. Increase supplies expense and decrease cash
c. Decrease cash and increase accounts payable
d. Decrease cash and increase capital
20. Which of the following transactions does not include an increase to
expense?
a. Received and paid the phone bill
b. Bought office supplies on account
c. Received cash for services performed
d. Paid the week’s salaries

22
ACTIVITY NO. 2

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #1

Assets Liabilities Onwner’s Equity


1 760,000 360,000
2 860,000 592,000
3 108,000 760,000
4 626,600 376,240
5 800,000 (100,000)
6 600,000 450,000
7 530,000 410,000
8 473,000 153,700
9 147,000 236,500
10 624,000 237,000

 Fill the amount of the missing element of the financial position.

PROBEM #2

Income Expense Profit (Loss)


1 840,000 360,000
2 2,400,000 540,000
3 1,300,000 860,000
4 2,000,000 720,000
5 1,800,000 (400,00)
6 750,000 500,000
7 500,000 600,000
8 700,000 150,000
9 600,000 (150,000)
10 900,000 900,000

 Fill the amount of the missing element of the financial performance.

PROBEM #3

1. At the beginning of the year, the assets of Luke Services were P360,000
and its owner’s equity was P200,000. During the year, assets increased
by P120,00 and liabilities increased by P20,000. What was the owner’s
equity at the end of the year?
2. The liabilities of Neechee Company equal one-third of the total assets,
and the owner’s equity is P240,000. What is the amount of the
liabilities?
3. At the beginning of the year, Cora Station had liabilities of P100,000
and owner’s equity of P96,000. If assets increased by P40,000 and
liabilities decreased by P30,000. What was the owner’s equity at the
end of the yaer?
 Use the accounting equation to answer each of the questions above.

23
ACTIVITY NO. 3

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #1

Instruction: Indicate on the space provided,(1)(X)on the element where the


account belong (2) BS if the account is Balance Sheet account and IS if the
account is income statement account; Dr (debit) or Cr (credit) to identify
the normal balance of the account.
Accounts OWNER’S BS or IS Dr or Cr
ASSET LIABILITES
EQUITY
1. Repairs and Maintenance
Expense
2. Salaries and Wages
Expense
3. Notes Payable
4. Notes Receivable
5. Service Vehicle
6. Mortgage Payable
7. Utilities Expense
8. Furniture and Fixtures
9. Communication Expense
10. Employees’ benefits
payable
11. Office Equipment
12. Prepaid Insurance
13. Owner’s Withdrawal
14. Professional fees
earned
15. Accounts Receivable
16. Representation Expense
17. Salaries Payable
18. Office Supplies Expense
19. Office Supplies
20. Accounts payable
21. Cash
22. Inventory
23. Land
24. Accumulated
Depreciation
25. Miscellaneous Expense
26. Prepaid Rent
27. Rent Expense
28. Juan, Capital
29. Insurance Expense
30. Depreciation Expense

24
ACTIVITY NO. 4

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #1 Identifying the effects of a transaction

Instruction: Indicate the following sign in the appropriate column; (+) for
increases, (-) for decreases, and (+/-) for both increase and decrease.

Owner’s
Assets Liabilities
Equity
1. Cash payment by the owner
(investment)
2. Payment for taxes and licenses
expense
3. Repair and maintenance of office
4. payment of rent expense
5. Purchase of office supplies on
account
6. Purchase of office supplies for
cash
7. Payment of accounts payable
8. Provide services for cash
9. Purchase of equipment and
furniture for cash
10. Purchase of equipment and
furniture giving a 30day promissory
note
11. Payment of salaries of employees
12. Personal transaction like
withdrawal of the owner
13. Provide services on account
14. Provide services for cash
15. Collection of account from a
customer
16. Payment of utility bills
17. Provide services receiving a
30day promissory note
18. Payment for other expenses
19. Bought supplies paying 50% on
cash, and the remaining on account.
20. Rendered service receiving
partial payment on cash and the
remaining on account.

25
ACTIVITY NO. 5

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #1 Transactions in a Completed Worksheet

Kaya Paba, to be able to guide the business administration students in their


pursuits to pass the accounting subject they enrolled, established the KP
Tutorial Services. On May 1, 2015, she contributed P70,000 as investment to
start the business. During the month, she entered into several transactions.
Note that she made no withdrawals during the month. The following is the
transactions worksheet prepared by her student-assistant:

CASH + ACCOUTS + OFFICE = ACCOUNT + NOTES + K. PABA,


RECEIVABLE EQUIPMENT PAYABLE PAYABLE CAPITAL
1 70,000 70,000
2 (45,000) 45,000
3 30,000 10,000 20,000
4 18,000 18,000
5 (5,000) (5,000)
6 7,000 7,000
7 (10,000) (10,000)
8 15,000) (15,000)
9 (7,000) (7,000)

 Describe each of the above transactions.


 If these transactions represent the operations of KP Tutorial Services
during month of May, what was the amount of profit or loss before
depreciation?

26
ACTIVITY NO. 6

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #1 Recording Transactions in a Financial Transaction Worksheet

Emerita Modesto established her own business called Modesto’s Self-storage.


The account leadings are presented below. Transactions completed during the
moth follow.

a. Deposited P120,000 in a bank account in the name of the business.


b. Bought office equipment on account from PHINMA Company, P31,000.
c. Paid rent for the month, P24,000.
d. Bought supplies for cash, P4,500.
e. Paid salaries, P9,800.
f. Received cash for storage services, P36,000.
g. Received and paid the utility bill, P2,520.
h. Paid Errol Umerez Graphics for advertising, P4,280. (The bill was not
previously recorded.)
i. Paid for a one-year liability insurance policy, P8,350.
j. Billed customers for storage services on account, P33,700.
k. Received cash for storage services, P23,000.
l. Paid salaries, P9,900.
m. Paid PHINMA Company P11,000 as part payment on the office equipment
bought in transaction b.
n. Modesto withdrew P12,000 for personal use.

Required:

1. Record the transactions in columnar form, write plus and minus signs,
and show the balance after each transaction to be sure the equation
remains in balance.
2. Write the proof of totals at the bottom to show that one side of the
equations equals the other side.

ASSETS = LIABILITIES OWNER’S EQUITY


Accounts Prepaid Office Accounts Modesto,
Cash = Revenue Expenses
Receivable Insurance Equipment Payable Capital
a 120,000 120,000
Bal. 120,000 0 0 0 0 120,000 0 0

27
ACTIVITY NO. 7

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #1 Recording Transactions in a Financial Transaction Worksheet

Nelson Daganta formed the Liceo Sign Company on Oct. 1, 2009. He deposited
P250,000 in GE Money Bank under the name of the new business entity. During
the month of October 2009, the following transactions occurred.

Oct. 2 Acquired a service vehicle in the amount of P195,000 on account.


3 Acquired supplies for cash, P57,000.
9 Received P87,500 cash for signs painted.
10 Paid the month’s event, P25,000.
11 Painted signs for Cagayan Company on account, P170,000
12 Paid P55,000 on account from Oct. 2.
16 Withdrew P25,000 for personal use.
23 Collected P35,000 from Cagayan Company.
27 Paid salaries of P57,000 for the month.
30 Paid Bayan Tel P7,500 for communication services for the month.
31 Paid a bill from Ad Asia for P5,500 of advertising for the month.

Required
Establish the following accounts in a financial transactions worksheet: Cash;
Accounts Receivable; Supplies; Service Vehicle; Accounts Payable; and
Daganta, Capital. Record in the worksheet the transactions listed above.

28
ACTIVITY NO. 8

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #2 Recording Transactions in a Financial Transaction Worksheet

On Dec. 1, 2014, Ramil Sarabia opened a videotape rental store, Kalibo


Video, by investing P250,000 cash from his personal savings account. During
the month of December, the following transactions took place.

Dec. 1 Acquired supplies on account, P67,000.


4 Acquired videotape costing P235,000, on account.
5 Paid P85,000 to creditors.
8 Received P78,000 cash from ACA Video for rental fees.
11 Billed video city for video rentals, P105,000.
16 Paid salaries, P65,000.
17 Collected P77,000 from video city.
23 Sarabia withdrew P47,000 from the business.
24 Paid rent for the month, P41,500.
30 Paid utilities bill for the month, P17,500.

Required:

Record the transactions for the month of December 2014 using a financial
transaction worksheet. Use the following accounts: Cash; Accounts Receivable;
Supplies; Videotape; Accounts Payable; and Sarabia, Capital.

Determine the balances of the T-account.

29
ACTIVITY NO. 9

NAME: YR.&SEC.
COURSE: DATE

Presented below is the balance sheet for the Leopoldo Medina Nursing Home:

Leopoldo Medina Nursing Home


Balance Sheet
Dec. 31, 2014

ASSETS

Current Assets
Cash P 16,000
Accounts Receivable 165,000
Supplies 21,000 P 202,000
Non-current Assets
Land 90,000
Nursing Home 350,000
Nursing Equipment 160,000 600,000
Total Assets P 802,000

LIABILITIES AND OWNER’S EQUITY


Liabilities
Accounts Payable 47,000
Notes Payable 350,000
Total Liabilities 397,000

Owner’s Equity
Medina, Capital 405,000
Total Liabilities and Owner’s Equity P 802,000

During the month of January 2015, the following transactions tool place:
Jan. 2 Acquired supplies on account, P17,500.
6 Collected P82,000 from patients for services provided in 2014.
10 Acquired nursing equipment on account, P35,000.
11 Billed patients P167,000 for nursing fees.
12 Paid P31,000 on accounts payable.
17 Paid nursing salaries, P24,000.
20 Paid utilities expense, P 9,000.
25 Medina withdrew P10,000 from the business.
27 Received a bill from the Ryan Morales Ad Company for P12,500 for
advertising expense incurred during the month.
31 Paid P15,000 of the notes payable.

Required: (1) Enter the Dec. 31, 2014 balances in a financial transaction
worksheet. (2) Record the transactions for the month of January 2010. (3)
Determine the balances of accounts using T-account.

30
Fundamentals
of Accounting 1
SESSION 3

PREPARATION OF FINANCIAL STATEMENTS

Desired Learning Outcomes


 Understand the different source
documents evidencing a
transaction.
 Understand and apply the
accounting cycle in day-to-day
business transactions.
 Familiarize with General Journal,
Ledger and Trial Balance.
 Deeper understand the debit and
credit.

Instructor Leemon L. Araza 2015 Edition

AC101 Session 3 1
BUSINESS TRANSACTIONS

A business transaction is any event that affects the financial position


of the business and can be recorded reliably. It involves exchange of values.
There are transactions within the organization like recognizing the used
portion of supplies as expense, or with outside entities or persons like
purchasing supplies either for cash or on account.

SOURCE DOCUMENTS

Transactions and events are the starting points in the accounting


cycle. By relying on source documents, transactions and events can be
analyzed as to how they will affect performance and financial position.
Source documents identify and describe transactions and events entering the
accounting process. These original written evidences contain information
about the nature and the amounts of the transactions. Some of the more source
documents are:
 Sales invoice  Checks
 Cash register tapes  Purchase orders
 Official receipts  Time cards
 Bank deposit slips  Statement of accounts
 Bank statements

TRANSACTION ANALYSIS

The analysis of transactions should follow these four basic steps:


1. Identify the transaction from source documents
2. Indicate the accounts – assets, liabilities, equity, income or expenses
– affected by the transaction.
3. Ascertain whether each account is increased or decreased by the
transaction.
4. Using the rules of debit or credit, determine whether to debit or
credit the account to record its increase or decrease.

ACCOUNTING CYCLE

Step 1 Documentation. Analyzing business documents which serve as a


basis of recording transactions.
Step 2 Journalizing. Recording business transactions in the journal to
have chronological records of economic activities.
Step 3 Posting. The information in the general journal is transferred to
the General Ledger to create a record of classified accounts.
Step 4 Preparation of Trial Balance. A trial balance is prepared to
prove the equality of debits and credits in the general ledger.
Step 5 Adjusting entries. Making end of period adjustments before
financial statements are prepared so that the income and expense
in the income statement are reported at their correct amounts.
Step 6 Worksheet. Work sheet is prepared to facilitate the preparation
of financial statements.

AC101 Session 3 2
Step 7 Financial Statement. The basic financial statements are prepared
after making the necessary adjustments.
a. Income Statement
b. Balance Sheet
c. Statement of Cash Flows
d. Statement of Changes in Equity
e. Notes to financial statement
Step 8 Journalizing and posting closing entries. The objective of
closing entry is to transfer the revenue, expense and drawing
accounts to the capital account.
Step 9 Preparation of a Post-closing trial balance
Step 10 Reversing journal entries (made at the start of the next period)

CHART OF ACCOUNTS

It is a list of Assets, Liabilities, Revenue, Expense and Capital Accounts


applicable to the business enterprise. It normally includes brief description
of the nature of transaction, identification number or account number.
Presented below is the chart of accounts for the illustration.

W. KAYAYAN ACCOUNTING FIRM


CHART OF ACCOUNTS
Balance Sheet Accounts Income Statement Accounts
ASSETS REVENUE
110 Cash 410 Service Revenue
120 Accounts Receivable
130 Notes Receivable EXPENSES
140 Office Supplies 510 Office Supplies Expense
150 Land 520 Utilities Expense
160 Office Equipment 530 Salaries Expense
165 Accumulated Dep. O/E 540 Telephone Expense
170 Furniture & Fixtures 550 Interest Expense
175 Accumulated Dep. F/F 560 Rent Expense
570 Depreciation Expense –O/E
LIABILITIES 580 Depreciation Expense –F/F
210 Accounts Payable 590 Miscellaneous Expense
220 Notes Payable
230 Utilities Payable
240 Salaries Payable
250 Interest Payable
260 Unearned Revenue

EQUITY
310 W. Kayayan, Capital
320 W. Kayayan, Withdrawals
330 Income Summary

AC101 Session 3 3
JOURNALIZING

THE JOURNAL

The journal is a chronological record of the entity’s transactions. It is


called the book of original entry. A journal entry shows all the effects of a
business transaction in terms of debits and credits. Each transaction is
initially recorded in a journal rather than directly in the ledger. The
general journal is the simplest journal.

Simple and Compound Entry


In a simple entry, only two accounts are affected – one account is debited
and the other account is credited. However, some transactions require the use
of more than two accounts. When three or more accounts are required in a
journal entry, the entry is referred to as a compound entry.

Format

Date: The year and month are not written for every written entry unless
the year or month changes or a new page is needed.
Account Titles and Explanation: The first line of an entry shows the account
debited and the second line is the account credited. The account
credited is indented to the right. For each entry, a brief
explanation is required enough to understand the nature of the
transaction.
Posting Reference: This column is filled up only when the entry is
transferred to the next book of accounts, the ledger. Posting
reference column is where the account number of each account is
written.
Debit: The debit amount for each account is entered in this column.
Credit: The credit amount for each account is entered in this column.

ILLUSTRATION

Once again, let us review the transactions of the newly organized accounting
firm of Mr. Kayayan.

May 1. Mr. W. Kayayan invested P100,000 to start an accounting office.


May 3. Purchased office supplies worth P20,000 on account.
May 5. Purchased additional office supplies for cash, P10,000.
May 6. Paid the accounts payable in full.
May 8. Purchased 2 units of computer with printer for P50,000, 30 days.
May 10. Rendered accounting services for cash, P25,000.
May 15 Rendered accounting services on account, P 30,000.
May 15 Paid Meralco bills, P 3,500.
May 15 Paid salaries for the period, P15,000.
May 20 Collected P10,000 from customer.

AC101 Session 3 4
May 22 A Short term loan from a local bank was granted in the amount of
P50,000, less P5,000 financing charges. Mr. W. Kayayan issued 1 year
promissory note.
May 25 Paid telephone bill amounting to P 6,000.
May 27 Mr. Kayayan withdrew P20,000 for personal use.
May 30 At the end of the month, physical count of the office supplies
revealed that P 5,000 had been consumed.

GENERAL JOURNAL PAGE No. 1


Date Account Titles and Explanation PR Debit Credit
2014
1 Cash 110 1 0 0 0 0 0
May
W. Kayayan, Capital 310 1 0 0 0 0 0
Initial investment of the owner

3 Office Supplies 140 2 0 0 0 0


Accounts Payable 210 2 0 0 0 0
Office supplies purchased on account.

5 Office Supplies 140 1 0 0 0 0


Cash 110 1 0 0 0 0
Office Supplies purchased.

6 Accounts Payable 210 2 0 0 0 0


Cash 110 2 0 0 0 0
Full payment of account.

8 Office Equipment 160 5 0 0 0 0


Accounts Payable 210 5 0 0 0 0
Computer units purchased

10 Cash 110 2 5 0 0 0
Service Revenue 410 2 5 0 0 0
Service revenue rendered.

15 Accounts Receivable 220 3 0 0 0 0


Service revenue 410 3 0 0 0 0
Service revenue rendered on account.

15 Utilities Expense 520 3 5 0 0


Cash 110 3 5 0 0
Paid meralco bill.

AC101 Session 3 5
2014
15 Salaries Expense 530 1 5 0 0 0
May
Cash 110 1 5 0 0 0
Paid Salary of office staffs

20 Cash 110 1 0 0 0 0
Accounts Receivable 120 1 0 0 0 0
Collection of account

22 Cash 110 4 5 0 0 0
Interest Expense 550 5 0 0 0
Notes Payable 220 5 0 0 0 0
Proceeds of loan.

25 Telephone Expense 540 6 0 0 0


Cash 110 6 0 0 0
Paid telephone bill.

27 W. Kayayan, Withdrawals 320 2 0 0 0 0


Cash 110 2 0 0 0 0
Withdrawal by the owner.

30 Office Supplies Expense 510 5 0 0 0


Office Supplies 140 5 0 0 0
Office Supplies consumed.

Take note that the post reference of the general journal is not filled up yet
in the process of recording. This will filled in the posting process.

POSTING

THE LEDGER

A grouping of the entity’s accounts is referred to as a ledger. Although some


firms may use various ledger to accumulate certain detailed information, all
firms have a general ledger. A general ledger is the reference book of the
accounting system and is used to classify and summarize transactions, and to
prepare data for basic financial statements.

The accounts in the general ledger are classified into two general groups:
 Permanent/Real accounts –balance sheet accounts
 Temporary/Nominal accounts –income statement accounts

AC101 Session 3 6
Posting means transferring the amounts from the journal to the appropriate
accounts in the ledger. The steps are illustrated as follows:
1. Transfer the date of the transaction from the journal to the ledger.
2. Transfer the page number from the journal to the journal reference.
3. Post the debit figure from the journal as a debit figure in the ledger
and the credit figure from the ledger as a credit figure in the ledger.
4. Enter the account number in the posting reference column of the journal
once the figure has been posted to the ledger.

Illustration:

Account: Cash Account No.: 110


Date Explanation J.R. Debit Credit Balance
2009
May 1 Initial Investment J-1 100,000.00 100,000.00
3 Office Supplies purchased J-1 10,000.00 90,000.00

Account: W. Kayayan, Capital Account No.: 310


Date Explanation J.R. Debit Credit Balance
2009
May 1 Initial Investment J-1 100,000.00 100,000.00

Account: Office Supplies Account No.: 140


Date Explanation J.R. Debit Credit Balance
2009
May 3 Office Supplies purchased J-1 10,000.00 10,000.00

LEDGER ACCOUNTS POSTING


At the end of the accounting period, the debit and credit balance of each
account must be determined to enable us to come up with a trial balance.
 Each account balance is determine by footing (adding) all the debits
and credits.
 If the sum of an account’s debit is greater than the sum of its
credits, that account has a debit balance.
 If the sum of its credits is greater, that account has a credit
balance.

In the discussion of basic accounting, T-accounts is often use rather than


the actual ledger to facilitate the posting step in the accounting cycle.

AC101 Session 3 7
TRIAL BALANCE

It is a list of all accounts with their respective debit or credit balances.


It is prepared to verify the equality of debits and credits in the ledger at
the end of each accounting period or at any time the postings are updated.
Illustration:
W. Kayayan Accounting Firm
Trial Balance
May 31, 2015

Cash 105,500
Accounts Receivable 20,000
Office Supplies 25,000
Office Equipment 50,000
Accounts Payable 50,000
Notes Payable 50,000
W. Kayayan, Capital 100,000
W. Kayayan, Withdrawals 20,000
Service Revenue 55,000
Office Supplies Expense 5,000
Utilities Expense 3,500
Salaries Expense 15,000
Telephone Expense 6,000
Interest Expense 5,000
Total P 255,000 P 255,000

The trial balance is a control device that helps minimize accounting errors.
When totals are equal, the trial balance is in balance. It only proves the
equality of debit and credit totals but not the following errors:
1. Failure to record or post a transaction.
2. Recording the same transaction more than once.
3. Recording an entry but with the same erroneous debit and credit
amounts.
4. Posting a part of a transaction correctly as a debit or credit but to
the wrong account.

INEQUALITY OF TOTALS DUE TO ERRORS


These might arise from the following circumstances:
1. Failing to post part of a journal entry
2. Posting a debit as a credit, or vice versa.
3. Incorrectly determining the balance of an account.
4. Recording the balance of an account incorrectly in the trial balance.
5. Omitting an account from the trial balance.
6. Incorrectly determining the totals of the two columns of the trial
balance.
7. Listing a debit balance of an account in the credit column.

AC101 Session 3 8
PREPARATION OF FINANCIAL STATEMENTS

All accounting reports require a heading which is written on the first three
lines at the center of the report being prepared.

1st line – name of the Company


2nd line – title of the report or statement
3rd line – Date of the report

For income statement and Statement of Changes in Equity, the date is written
as: For the month ended for the year ended u or for the six
months ended .

For the balance sheet, the date is written as: As of or just the date
itself.

W. Kayayan Accounting Firm


Income Statement
For the month ended May, 31, 2014

Service Revenue P 55,000


Less: Expenses
Office Supplies Expense P 5,000
Salaries Expense 15,000
Utilities Expense 3,500
Telephone Expense 6,000
Interest Expense 5,000 34,500
Net Profit P 20,500

W. Kayayan Accounting Firm


Statement of Changes in Capital
For the month ended May 31, 2014

W. Kayayan, Capital Beg. P 100,000


Add: Net profit 20,500
Total 120,500
Less: W. Kayayan withdrawals 20,000
W. Kayayan, Capital End. P 100,500

AC101 Session 3 9
REPORT FORM
W. Kayayan Accounting Firm
Balance Sheet
May 31, 2014

Assets
Current Assets
Cash P 100,500
Accounts Receivable 20,000
Office Supplies 25,000
Total Current Assets P 150,000
Non-current Assets
Office Equipment P 50,000
Total Assets P 200,500

Liabilities and Owner’s Equity


Current Liabilities
Accounts Payable P 50,000
Notes Payable 50,000
Total Liabilities P100,000
Capital
W. Kayayan, Capital 100,500
Total Liabilities and Owner’s Equity P200,500

ACCOUNT FORM
W. Kayayan Accounting Firm
Balance Sheet
May 31, 2014

Assets Liabilities and Owner’s Equity

Current Assets Current Liabilities


Cash P 100,500 Accounts Payable P 50,000
Accounts Receivable 20,000 Notes Payable 50,000
Office Supplies 25,000 Total Liabilities P100,000
Total Current Assets P 150,000
Capital
Non-current Assets W. Kayayan, Capital 100,500
Office Equipment P 50,000 Total Liabilities
Total Assets P 200,500 and Owner’s Equity P200,500

References:
Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14th
Edition. Manila: Domdane Publishers and Made Easy Books.
Rante, Gloria Aradaniel.(2013). Accounting for Service Entities. Mandaluyong
City: Millenium Books, Inc.

AC101 Session 3 10
ACTIVITY NO. 1

NAME: YR.&SEC.
COURSE: DATE

MULTIPLE CHOICE
1. The normal balance of an account is on the
a. Plus side
b. Left side
c. Debit side
d. Credit side
2. When a T-account has several items on both sides, the balance of the
account is written
a. On the side with the greatest number of items.
b. On the side with the least number of items.
c. On the side with the larger total.
d. On the side with the similar total.
3. A debit may signify a decrease in
a. A liability account
b. A revenue account
c. A liability and a revenue account
d. An asset and a revenue account
4. A debit may result in
a. An increase in an expense account
b. An increase in an asset account
c. A decrease in a liability account
d. A decrease in a revenue account
5. A purchase is recognized in the accounting records when
a. Payment is made for the item purchased
b. The purchase requisition is sent to the purchasing department
c. The buyer receives the seller’s bill
d. Title transfer from the seller to the buyer
6. Which of the following accounts will not affect owner’s equity?
a. Owner’s withdrawals
b. Land
c. Advertising Expense
d. Revenues
7. Which of the following errors will not cause the debit and credit
columns of a trial balance to be unequal?
a. Only part of a journal entry was posted
b. A debit was posted to an account as a credit
c. A journal entry was accidentally posted twice
d. The trial balance was incorrectly summed.
8. Which of the following errors will cause a trial balance to be out of
balance?
a. The bookkeeper forgot to journalize a transaction
b. The bookkeeper forgot to post a journal entry to the ledger.
c. A journal entry was accidentally posted twice.
d. A credit was posted to an account as a debit.

AC101 Session 3 11
9. The general journal does not have a column titled
a. Description
b. Posting reference
c. Account balance
d. Date
10. To find explanation for a transaction, one should look at the
a. Journal
b. Ledger
c. Chart of accounts
d. Trial balance
11. An entry with more than one debit or credit is called a
a. Double entry
b. Compound entry
c. Dual entry
d. Multiple entry
12. The term footing refers to the
a. Addition of a column of figures
b. Process of obtaining the top number in an account
c. Process of obtaining the bottom number in an account
d. Process of posting
13. Balance sheet accounts are
a. Temporary accounts
b. Accounts with debit balances only
c. Adjusting accounts
d. Permanent accounts
14. Posting is the process of transferring information from the
a. Journal to the trial balance
b. Ledger to the financial statements
c. Ledger to the trial balance
d. Journal to the ledger
15. Typically, the chart of accounts begins with
a. Asset accounts
b. Liability accounts
c. Revenue accounts
d. Expense accounts
16. All of the following are examples of source documents except
a. Check
b. Sales invoice
c. Statement of account
d. General journal
17. The equality of debits and credits in the ledger should be verified at
the end of each accounting period by preparing
a. An accounting statement
b. An account verification report
c. A trial balance
18. A balance report Of the following errors, the one that will cause an
inequality in the trial balance totals is
a. Incorrectly computing an account balance
b. Failure to record a transaction

AC101 Session 3 12
c. Recording the same transaction more than once
d. Posting a transaction to the wrong account with the same normal
balance.
19. An entity’s trial balance
a. Shows a financial position
b. Establishes whether its accounting records are correct
c. List of all of the entries in its double-entry accounting records
d. Is a list of all of the accounts with their respective debit or
credit balances
20. If a P4,700 cash purchase of supplies is recorded as a P5,700 debit to
supplies expense and a P5,700 credit to cash, the result will be that
a. The trial balance will be out of balance
b. The supplies expense account will be understated
c. The cash account will be overstated
d. Supplies expense will be overstated and cash will be understated
21. If Accounts receivable has debit postings of P580,000, credit postings
of P440,000, and a normal ending balance of P480,000, which of the
following was its beginning.
a. P620,000 cr
b. P620,000 dr
c. P340,000 cr
d. P340,000 dr
22. If account payable has debit postings of P170,000, credit postings of
P140,000, and a normal balance ending balance of P60,000, which of the
following was its beginning balance?
a. P30,000 dr
b. P90,000 cr
c. P90,000 dr
d. P30,000 cr
23. A P800 credit item is accidentally posted as a debit. The trial
balance column totals will therefore differ by
a. P0
b. P400
c. P800
d. P1,600
24. If Accounts Payable has debit postings of P85,000, credit postings of
P70,000, and a normal ending balance of P30,000. What was its
beginning balance?
a. P45,000 cr
b. P15,000 dr
c. P45,000 dr
d. P15,000 cr
25. If accounts receivable has debit postings of P290,000, credit
postings of P220,000 and a normal ending balance of P240,000, which
of the following was its beginning?
a. P170,000 dr
b. P310,000 cr
c. P170,000 cr
d. P310,000 dr

AC101 Session 3 13
Use of the following information to answer the questions below. The
following is the trial balance for Manabat Company.
Manabat Company
Trial Balance
Jan. 31, 2014

Cash P30,000
Accounts Receivable 20,000
Art Supplies 30,000
Office Supplies 50,000
Prepaid rent 70,000
Prepaid insurance 50,000
Art Equipment 50,000
Office Equipment 30,000
Accounts Payable P 50,000
V. Manabat, Capital 150,000
V. Manabat, withdrawals ?
Advertising revenues ?
Wages Expense ?
Utilities Expense 50,000
Telephone Expense 30,000
Total P A P B

26. If the balance of the Manabat, 28. In the trial balance, total
withdrawals account were assets equal
P120,000 and the balance of a. P330,000
the Wages Expense account were b. P230,000
P50,000, what would be the c. P430,000
amount of B? d. P410,000
a. P180,000 29. If the total debits equals to
b. P580,000 490,000, what would be the
c. P370,000 balance of Advertising
d. P380,000 revenue?
27. If the trial balance showed a a. P290,000
balance of 70,000 in the b. P330,000
Manabat, withdrawals account c. P190,000
and a balance of P50,000 in d. P690,000
the Wages Expense account, 30. If the trial balance showed a
what would be the amount of balance of P80,000 in the
Advertising revenues for the wages expense and a balance of
period? P350,000 in the Advertising
a. P330,000 Revenue, what would be the
b. P480,000 amount of A?
c. P180,000 a. P500,000
d. P430,000 b. P550,000
c. P450,000
d. P600,000

AC101 Session 3 14
ACTIVITY NO. 2

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #1

The following accounts were taken from the General Ledger of Kapit Tuko Law
Office at the end of its 1st year of operation, December 31, 2014.

Cash P 85,000
Accounts Receivable 60,000
Office Supplies 5,000
Office Equipment 100,000
Office Furniture 40,000
Service Vehicle 400,000
Accounts Payable 25,000
WHT Payable 8,000
SSS Payable 10,000
Philhealth Payable 2,000
K. Tuko, Capital 500,000
K. Tuko, withdrawals 20,000
Professional fees earned 959,000
Salaries and Wages 350,000
Rent Expense 240,000
Advertising Expense 12,000
Supplies Expense 10,000
Light and Water Expense 24,000
Gas and Oil Expense 75,000
Repairs and Maintenance 6,000
Telephone Expense 36,000
Representation Expense 30,000
Insurance Expense 6,000
Taxes and Licenses 5,000

Required:
Prepare a Trial Balance.

AC101 Session 3 15
ACTIVITY NO. 3

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #1

El Granado established the EG Data Encoders on May 15, 2014. The following
transactions occurred during the month.

a. El Granado invested P157,000 cash to establish the business


b. Bought office desks and filing cabinet for cash, P15,150.
c. El Granado invested in the business her personal computer with a fair
value of P57,500.
d. Bought computer software for use in the business from Dela Torre
Computer Center for P39,000 paying P15,000 down; the balance is due in
thirty days.
e. Paid rent for the month, P5,300.
f. Received cash for services rendered, P5,160.
g. Ordered a panaflex sign for P9,000 from Royal Bright Enterprises, with
P5,000 as down payment and the balance due when installed.
h. Received bill for advertising from Buy and Sell newspaper, P3,320.
i. Bought print paper and stationary on account, P2,290.
j. Received and paid electric bill, P1,240.
k. Paid bill for advertising recorded previously in transaction (h).
l. Received cash for services rendered, P10,900.
m. Paid salaries to employees, P8,400.
n. El Granado withdrew cash for personal use, P4,500.

Required:
1. Journalize each transactions
2. Establish the following T-accounts:
 Cash  El Granado, withdrawals
 Accounts Receivable  Service Revenues
 Supplies  Salaries Expense
 Office Equipment  Advertising Expense
 Compute Software  Rent Expense
 Signage  Utilities Expense
 Accounts Payable  Miscellaneous Expense
 El Granado, Capital
3. Prepare Trial Balance
4. Prepare Financial Statements
 Income Statements
 Statement of Changes in Capital
 Balance Sheet

AC101 Session 3 16
ACTIVITY NO. 4

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #1

Marichu Fornolles Guardians completed the following transactions during


October 2014.

Oct. 1 Fornolles transferred cash from a personal account to an account


to be used for the business, P243,000.
3 Fornolles invested in the business personal weapons having a fair
market value of P34,000.
4 Bought communication equipment on account from Pesa Electronics,
P13,740.
5 Paid rent for the month, P7,650.
6 Bought a used service vehicle car for P93,000, paying P45,000
down, with the balance due in thirty days.
9 Received invoice and paid insurance premium to Cacawa Fidelity
company for bonding employees, P7,710.
12 Performed security services for Loreta Galleries. Billed Loreta
for services rendered, P8,250.
16 Received bill from Marcos Printers for office stationary, P1,757.
17 Billed Pascua Construction for services rendered, P14,790.
22 Paid Regal Shell Service for gasoline for service vehicle, P720.
24 Performed security services at a fashion jewelry fair, Billed
organizers for services rendered, P17,500.
27 Paid Pesa Electronics P4,500 to apply on account.
29 Received P8,250 from Loreta Galleries in full payment of account.
30 Billed Merchant Bank for services rendered, P21,600.
31 Receive and paid telephone bill, P1,030.
31 Paid salaries to employees, P31,500.
31 Fornolles withdrew cash for personal use, P18,000.

Required:
1. Prepare the journal entries for the October Transactions.
2. Set up the following ledger accounts using T-account and post all the
journal entries: Cash; Accounts Receivabe; Prepaid Insurance; Arms and
Communications Equipment; Service Vehicle; Accounts Payable; Fornolles,
Capital; Fornolles, Withdrawals; Service Revenue; Salaries Expense;
Rent Expense; Supplies Expense; gasoline Expense; and Utilities
Expense.
3. Prepare a trial balance
4. Prepare the income statement, statement of changes in capital and
balance sheet.

AC101 Session 3 17
ACTIVITY NO. 6

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #1
After several years with a large accounting firm. Virgie Dal decided to
establish her own accounting practice. The following transactions were
completed during May 2014.

May 2 Transferred P92,500 from a personal savings account to a checking


account. Virgie Dal, CPA.
3 Acquired office equipment on account from Gican Furniture, P36,800.
4 Acquired office supplies on account from Lorenzo office supply
Company, P17,100.
6 Performed accounting services for Cayao Computer Company and submitted
a bill of P29,200 for those services.
7 Paid for accounting and tax books for use in the practice, P19,500.
8 Paid Lorenzo Office Supply Company, P4,100 on account.
10 Acquired a condominium unit for the accounting practice, P265,000. A
down payment of 38,000 was made and issued a note payable for the
remaining P227,000.
12 Paid salaries, P14,200.
13 Received P9,750 from Cayaco Computer Company, billed on May 6.
16 Paid telephone expense, P650.
19 Received cash in the amount of P14,600 from Ponferada Book Company for
accounting services rendered for the month.
22 Acquired office supplies on account from Lorenzo Office Supply
Company, P4,650.
23 Withdrew P8,150 for personal use.
25 Paid salaries, P10,300.
26 Billed Bosante Exporters P31,600 for accounting services rendered.
27 Paid PICPA-Tacloban P5,500 for professional dues.
28 Paid P3,250 rent on an office-copying machine.

Required:
 Prepare the journal entries for the May transactions
 Post the entries to the ledger accounts using T-account. The
following accounts will be needed:
Cash Notes Payable Rent Expense
Accounts Accounts Payable Telephone Expense
Receivable Dal, Capital Professional dues
Office Supplies Dal, Withdrawals Expense
Office Condominium Accounting
Office Equipment Revenues
Accounting Library Salaries Expense
 Prepare a trial balance, income statement, statement of changes in
capital and balance sheet.

AC101 Session 3 18
ACTIVITY NO. 5

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #1 Correcting a Trial Balance

Below is the trial balance of Matilde Gascon Repair Service, which does not
balance.

Gascon Repair Service


Trial Balance
Jan. 31, 2014

Cash P 110,400
Accounts Receivable 284,600
Supplies 66,400
Prepaid Insurance 40,000
Office Equipment 526,800
Notes Payable P 130,000
Accounts Payable 195,400
Gascon, Capital 297,200
Gascon, Withdrawals 100,000
Repair Revenues 821,400
Salaries Expense 348,700
Advertising Expense 12,200
Totals P1,389,100 P1,544,000

The following information is obtained from a review of the record keeping


process.
a. An account receivable for P19,600 was incorrectly added as P 16,900
when computing the balance of the Accounts Receivable account.
b. A debit posting from the journal for P5,200 is missing from the
Advertising Expense account.
c. A credit posting of P15,000 to Notes Payable should have been made to
Accounts payable.
d. A debit posting of P34,000 to Supplies was incorrectly posted as
P3,400.
e. Credits to the ledger Accounts Payable account were under-footed by
P60,000.
f. Revenues are overstated in the ledger account by P40,000.
g. A credit posting for Repair Revenues from the journal in the amount of
P63,600 is missing.
h. Supplies acquired in the amount of P17,400 have been incorrectly posted
to the Office Equipment account.

Required: Prepare a corrected trial balance.

AC101 Session 3 19
Fundamentals
of Accounting 1
SESSION 4

ADJUSTING THE ACCOUNTS

Desired Learning Outcomes


Understand the Accounting period.
Differentiate Accrual to Cash
Accounting.
Appreciate the importance of
Adjusting entries in the
preparation of financial
statements.
Items that needed Adjustments.
The Effects of not making the
necessary adjusting entries to
financial statements.

Instructor Leemon L. Araza 2015 Edition

AC101 Session 4 1
THE ACCOUNTING PERIOD

The activities of an enterprise can be divided into specific periods such as


a month, a quarter, a semester, or a year. The accounting period is usually s
span of 12 months. It may be a calendar year or fiscal year. Calendar year is
the normal year which ends December 31 of each year. Fiscal year is an
accounting year of 12 consecutive months that may or may not coincide with
the calendar yaer.

ACCRUAL VERSUS CASH ACCOUNTING

Accrual Accounting requires that all revenue earned whether payment is


received or not should be recognized in the period the goods or services are
delivered re rendered and that all related costs to deliver the goods or to
render the whether paid or not should be recognized as expense to match the
revenue.

Cash-basis Accounting requires that all revenue is recognized only when cash
is received while expenses are recognized only when cash is paid.

IMPORTANCE OF ADJUSTING ENTRIES

Adjusting Entries are entries made at the end of the period to assign
revenues to the period in which they are earned and expenses to the period in
which they are incurred.

Many accounts need adjustments to reflect the current conditions as of time


of reporting in order for the statements to be meaningful. There may be
financial data not previously recognized that need to be recorded to make the
books of accounts up to date like the expenses already incurred but no
payment until sometime in the subsequent period, and revenues already earned
but no cash is collected yet.

ITEMS THAT NEED ADJUSTMENTS

PREPAID EXPENSES

Prepaid Expenses are expenditures paid for goods that are not yet consumed
like supplies, insurance and rent.

METHODS OF RECORDING PREPAYMENTS

Asset Method

1. Example for Supplies


a. Purchase of supplies worth P 5,000 is recorded as
Supplies 5,000
Cash 5,000

AC101 Session 4 2
b. At the end of a period, physical count of unused supplies showed a
total of P3,500. This shows that if P 3,500 is unused, then P 1,500
worth of supplies is used or consumed.
Supplies Expense 1,500
Supplies 1,500

2. Example for Insurance


a. On October 1, 2013, a company paid P12,000 as insurance premium
for one year. The entry to record the payment under the asset
method is:
Prepaid Insurance 12,000
Cash 12,000

b. With the passage of time, the prepaid insurance gradually


expires, that’s why on Dec. 31, an adjusting entry is required to
recognize the expired portion of the insurance premium as
expense.
Insurance Expense 3,000
Prepaid Insurance 3,000

3. Example for Rent


a. On Dec. 1, the company paid P18,000 as rent for one year. The
entry to record the payment under the asset method is:
Prepaid Rent 18,000
Cash 18,000

b. On Dec. 31, the entry will be (18,000/12 mons.)x 1 mons.=1,500.00


Rent Expense 1,500
Prepaid Rent 1,500

EXPENSE METHOD
This method of recording prepayments requires an entry debiting an expense
account upon payment.

1. Example for supplies


a. In the previous example, if the supplies purchased were recorded,
the entry would be:
Supplies Expense 5,000
Cash 5,000
b. The adjusting entry required to reflect the unused portion would
be
Supplies 3,500
Supplies Expense 3,500

2. Example for Insurance


a. If the Expense Method is used to record the prepayment, the entry
made upon payment is:
Insurance expense 12,000
Cash 12,000

AC101 Session 4 3
b. The adjusting entry on Dec. 31, would be:
Prepaid Insurance 9,000
Insurance Expense 9,000

3. Example for Rent


a. If the Expense Method is used to record the prepayment, the entry
made upon payment is:
Rent expense 18,000
Cash 18,000

b. The adjusting entry on Dec. 31, would be:


Prepaid Rent 16,500
Rent Expense 16,500

ACCRUED EXPENSES
These are items already recorded as expenses but not yet paid, thus creating
an obligations to make payments in the future. The most common examples are
salaries of employees and utilities expenses like bills from Meralco and
Manila Waters.

On June 15, when the company pays the salaries of employees, the payment will
be recorded as:

Salaries Expense P xxx


Cash P xxx

No accrual for salary payment on June 15 because this date is a regular


working day. The salary for the 2nd half of the month which is due June 30
will not be paid on that day because it is a non-working day. So the salary
of the employees will be paid the following Monday, July 2. The bookkeeper
will recognize the expense on June 30 with the following entry:

Salaries Expense P xxx


Accrued Salaries or
Salaries Payable P xxx

ACCRUED INTEREST ON NOTES RECEIVABLE

A company issued a 90-day 10% note on Dec. 1 for P100,000. The notes payable
is due 90 days from date of issue including interest earned for 90 days. If
financial statements are prepared on Dec. 31, which are normally the case,
then the company must record the interest for 30 days as:
Interest Expense 833.33
Accrued Interest 833.33

ACCRUED REVENUE

These are revenues already earned but no payment is received yet.

AC101 Session 4 4
Interest Receivable P xxx
Interest Revenue P xxx

DEFERRED REVENUE OR UNEARNED REVENUES

This is the exact opposite of accrued revenues. In this case, payment is


received in advance prior to delivery of services, or delivery of goods,
thus, creating a liability for the amount collected in advanced; however, as
the company renders the service, the unearned revenue becomes earned revenue.

Revenue method
For example, on Aug. 1, a tenant paid its rent for one year in advance in the
amount of P 24,000. At the time cash is received, the entry is:

Cash 24,000
Rent Revenue 24,000

When financial statement is prepared on Dec. 31, an adjustment is necessary


to reflect the unearned portion of the rent that corresponds to the period
Jan. 1 2013 – July 31, 2014. The adjusting entry would be:

Rent Revenue (7/12 x 24,000) 14,000


Unearned Rent 14,000

Liability Method
If the liability method is used to record the receipt of P24,000, the entry
upon receipt would be:

Cash 24,000
Unearned Rent 24,000

On Dec. 31, the amount earned must be recognized as revenue through an


adjusting entry.

Unearned rent 10,000


Rent Revenue 10,000

UNCOLLECTIBLE ACCOUNT EXPENSE OR DOUBTFUL ACCOUNTS

In any enterprise selling on account to its customers, experience show that


some customers will not be able to pay their accounts as they fall due.
Uncollectible accounts or bad debts are accounts of customers who do not pay
what they have promised to pay. The enterprise should provide allowance for
uncollectible accounts and recognize an expense or loss from these accounts.
Other terms for uncollectible accounts are Bad Debts and Doubtful accounts.

a. Based on Percentage of Sales on Account or service revenue on account


For example, the company estimates that 2% of sales on account are
proven to be uncollectible. The entry would be:

AC101 Session 4 5
Uncollectible account expense xxx
Allowance for uncollectible accounts xxx

The allowance for doubtful accounts is a contra account which is deducted


from the accounts receivable in the balance sheet to arrive at its net
realizable value.

b. Based on Accounts Receivable Balance

Example 1: The following balances are available from the records of


Manila Premier Hotel at December 31, 2013:

Accounts Receivable, 12/31 P 800,000


Allowance for uncollectible accounts,1/1 12,000 Cr.
Service Revenue on account 2,500,000

The company’s estimate for uncollectible accounts is 2% of accounts


receivable.

The adjusting entry required to reflect the expense for the year is:

Uncollectible account expense 4,000


Allowance for uncollectible accounts 4,000

Example 2: Assume the following balances:


Accounts Receivable, 12/31 800,000
Allowance for uncollectible accounts 22,000 Cr.
Service revenue on account 2,500,000

Since the required allowance is only P16,000, and the balance of the
allowance account is P22,000, the allowance for uncollectible accounts
should be reduced by P 6,000. The adjusting entry would be:

Allowance for uncollectible accounts 6,000


Uncollectible accounts expense 6,000

DEPRECIATION

Depreciation is the systematic means of allocating the cost of long


lived asset over its estimated economic life. Depreciation does not
necessarily measure the decline in the value of an asset but it shows
only the portion of the cost of the asset that has expired due to using
up the asset. The assets that are subject to depreciation are called
depreciable assets. The formula:

Depreciation Expense = Cost of Asset – Scrap value/residual value/salvage value


Estimated economic life

AC101 Session 4 6
Cost of asset is the amount of company paid to purchase the asset. It
includes the invoice price plus transportation charges and installation
fees.
Scrap value is the amount expected to be recovered at the end of an
asset’s useful life. It is also called residual value or salvage value.
Estimated economic life is the same as the estimated useful life of an
asset.
Depreciation cost or value is the difference between the cost of an
asset and its scrap value.

Example: A delivery equipment was purchased on Jan. 3, 2013 for


P600,000. It is estimated that the vehicle’s salvage value at the end
of 10 yrs. Is P50,000.

Dep. Expense = 600,000 – 50,000 = 55,000/yr.


10 yrs.

The adjusting entry on Dec. 31, 2013 will be:

Depreciation Expense 55,000


Accumulated Depreciation-D/E 55,000

Accumulated Depreciation is a contra account, which is reported as a


deduction from the related asset account.

The presentation of the asset and its related accumulated depreciation


in the balance follows:

Delivery Equipment P 600,000


Less: Accumulated Depreciation 55,000
Book value P 545,000

Book value is the part of the cost of the asset that is not yet
allocated to an expense account.

References:
Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14th
Edition. Manila: Domdane Publishers and Made Easy Books.
Rante, Gloria Aradaniel.(2013). Accounting for Service Entities. Mandaluyong
City: Millenium Books, Inc.

AC101 Session 4 7
EXERCISES

DBS Accounting firm, started operation only on April 1, 2014 and it provides
accounting and tax services to big establishments in Metro Manila. Its
accounting period ends Dec. 31, and on this date, adjusting entries are
prepared. The trial balance of DBS Accounting Firm at Dec. 31, 2014 follows:

DBS Accounting Firm


Trial Balance
December 31, 2014

Cash 120,000
Accounts Receivable 60,000
Office Supplies 50,000
Prepaid Insurance 24,000
Office Equipment 240,000
Furniture and Fixtures 40,000
Land 800,000
Building 1,300,000
Accounts Payable 168,000
Loans Payable 500,000
DBS, Capital 1,800,000
Professional fees 540,000
Salaries Expense 250,000
Advertising Expense 36,000
Transportation Expense 10,000
Utilities Expense 70,000
Miscellaneous Expense 8,000
Total P 3,008,000 P 3,008,000

Additional Information
1. An inventory of office supplies on December 31, 2014 showed supplies on
hand totaled P 38,000.
2. The prepaid insurance represents a one-year insurance policy on the
building purchased on May 1, 2013.
3. The Office Equipment is estimated to have a 5 year life with salvage
value of P 40,000 starting from April 1, 2013.
4. The furniture and fixtures is estimated to last for 10 years with no
salvage value.
5. The estimated useful life of the building is 20 yrs. with estimated
salvage value of P 100,000.
6. The Professional fees include P 40,000 of advances made by one client
for services still be rendered in the last week of December amounting
to P 5,000 is schedule for payment on the first week of January 2015.
7. The company’s estimate as allowance for uncollectible accounts is very
minimal because it has not experienced defaulted accounts yet. The
estimate for uncollectible accounts is 2% of Accounts Receivable.

REQUIRED: Prepare the following


a. Adjusting Entries
b. Adjusted Trial Balance
c. Income Statement, Statement of Changes in Equity and Balance Sheet

AC101 Session 4 8
ACTIVITY NO. 1

NAME: YR.&SEC.
COURSE: DATE

MATCHING TYPE

Below are terms pertinent to adjusting entries. Match each definition with
its related term. There are two answers for each term.

Terms Definitions

1. Accrued Expense a. Revenue not yet earned; collected in


2. Deferred Expense advance.
3. Accrued Revenue b. Office supplies on hand; used next
4. Deferred Revenue accounting period.
c. Rent revenue collected; not yet earned.
d. Rent not yet collected; already earned.
e. An expense incurred; not yet paid or
recorded.
f. Revenue earned; not yet collected.
g. An expense not yet incurred; paid in
advance.
h. Property taxes incurred; not yet paid.

Match each transaction with its related term:

Terms Definitions

1. Deferred Revenue a. At the end of the year, salaries payable


of P3,600 had not been recorded or paid.
b. Supplies for office use were purchased
during the year for P500, and P100 of
the office supplies remained on hand
(unused) at year-end.
c. Interest of P250 on a note receivable
was earned at year-end, although
collection of the interest is not due
until the following year.
d. At the end of the year, service revenues
of P2,000 was collected in cash but was
not yet earned.

AC101 Session 4 9
ACTIVITY NO. 2

NAME: YR.&SEC.
COURSE: DATE

Journal Entries

Prepare Adjusting Entries required on December 31 for each item with your
supporting computations after each entry.

a. On March 1, 2013, XYZ Company paid P54,000 for 2 year insurance premium
on property. The bookkeeper debited Prepaid Insurance account at the
time of payment.
b. On December 1, 2013, ABC Company received P120,000 as advance payment
for professional services to be rendered starting 1 st quarter of 2014.
Unearned revenue account was credited at the time of deposit.
c. Miscellaneous office supplies were purchased in the last quarter of
2014 amounting to P6,500. On December 31, inventories showed that
P3,200 were on hand. The purchase was debited to Office Supplies
account.
d. The company’s office equipment costing P100,000 is expected to have 10
years economic life with no salvage value. This was purchased by the
company on Aug. 1, 2013.
e. ZTE company owes a bank a 10%, 90-day note for P 150,000 dated Nov. 1,
2013.

Use the journal provided on the other page for your answer.

AC101 Session 4 10
Fundamentals
of Accounting 1
SESSION 5

COMPLETING THE ACCOUNTING CYCLE

Desired Learning Outcomes


 Understand and apply the remaining
steps in completing cycle; closing
entries, post-closing entries and
reversing entries.
 Deeper understanding the reasons
and importance of the remaining
steps.

Instructor Leemon L. Araza 2015 Edition

AC101 Session 4 1
CLOSING ENTRIES

Closing entries are usually prepared at the end of an accounting period like
adjusting entries. Not all accounts are closed. Only the nominal accounts,
often called temporary accounts and the drawing account are closed at the end
of the accounting period. Nominal accounts are the accounts that appear in
the income statement like revenue and expense accounts.

A temporary account is said to be closed when an entry is made such that its
balance becomes zero. Closing simply transfers the balance of one account to
another account. In this case, the balances of the temporary accounts are
transferred to the capital account. A summary account – Income and Expense
Summary is used to close the income and expense accounts.

1. Close the income accounts


Income accounts have credit balances before the closing entries are
posted. For this reason, an entry debiting each revenue account in the
amount of its balance is needed to close the account.

Dec 31 Revenues 67,700.00


Income & Expense Summary 67,700.00

2. Close the expense accounts


Expense accounts have debit balances before the closing entries are
posted. For this reason, a compound entry is needed crediting each
expense account for its balance and debiting the income and expense
summary for the total.

Dec 31 Income & Expense Summary 36,700.00


Salaries Expense 15,600.00
Supplies Expense 3,000.00
Rent Expense 4,000.00
Insurance Expense 1,200.00
Utilities Expense 4,400.00
Depreciation Expense-S.V. 4,000.00
Depreciation Expense-Off.Equp. 1,000.00
Interest Expense 3,500.00

3. Closing the income and expense summary


After closing entries involving the income and expense accounts, the
balance of the income summary account will be equal to the profit or
loss for the period. A profit is indicated by a credit balance and a
loss by a debit balance.

Dec 31 Income & Expense Summary 35,000.00


XYZ, Capital 35,000.00

AC101 Session 4 2
4. Close the withdrawal account
The withdrawal account shows the amount by which capital is reduced
during the period by withdrawals of cash or other assets of the
business by the owner for personal use.

Dec. 31 XYZ, Capital 14,000.00


XYZ, withdrawals 14,000.00

POST-CLOSING TRIAL BALANCE

After posting the closing entries to the general ledger another trial balance
is prepared. This time, the accounts left with balances are all balance sheet
accounts or permanent accounts because all nominal accounts including the
drawing accounts have zero balances. This post-closing trial balance is
prepared to check the equality of the accounting equation before the balances
of the assets; liabilities and capital are forwarded to the next accounting
period. This is the end of the accounting period.

XYZ Company
Post-closing Trial Balance
Dec. 31,2014

Cash 22,200
Accounts Receivable 17,300
Supplies 15,000
Prepaid Rent 4,000
Prepaid Insurance 13,200
Service Vehicle 420,000
Accumulated Depreciation-S.V. 4,000
Office Equipment 60,000
Accumulated Depreciation-O.E. 1,000
Notes Payable 210,000
Accounts Payable 53,000
Salaries Payable

AC101 Session 4 3