THEORIES: (TRUE or FALSE)

- Accounting is a service activity whose function is to provide quantitative information

about economic entities.

- The records used for the initial recording of business transactions are journals.

- The rules for debit and credit and the normal balance of liabilities are the same as for

capital.

- Special journals are used to record usual and frequent transactions.

- The preparation of worksheet eliminates the need to journalize and post adjusting entries.

- The accounting process consists of the recording phase and the reporting phase.

- The purpose of trial balance is to reconcile subsidiary ledger balances with general ledger

balances.

- Accumulated depreciation is an example of an adjunct account.

- The general ledger includes all accounts appearing in the financial statements, while

subsidiary ledgers provide details in support of certain general ledger balances.

- Entering a debit balance in an account as a credit will cause the trial balance to be out of balance by an
amount that is divisible by two (2).

- Adjusting entries are made to correct errors made in the recording phase.

- The entry to record depreciation expense is an example of an adjustment that would be

reversed if reversing entries are made.

- It is sometimes correct for a compound entry's debit totals and credit totals to be unequal.

- The trial balance is used to prepare the statement of comprehensive income while the

general ledger is used to prepare the statement of financial position.

- The recording of an accrued expense will always result to an increase in an expense

account and a liability account.

- The balances of all accounts in the general ledger must be closed at the end of the

accounting period.

- The asset and liability accounts are known as real accounts.

- The adjusted trial balance is prepared after the financial statements are prepared.

- Owner's equity is the excess of an entity's assets over its liabilities.

- The general ledger account that summarizes the detailed information in a subsidiary

ledger is known as control account.

- The balance sheet shows the financial position of a company at a given date.

- The difference between the debit total and the credit total in the statement of financial

position section of the work sheet represents the profit or loss during the period.

- Recording the expiration of a prepaid asset results in the reduction of the asset account

and an increase in a related expense account.

- Reversing entries are prepared at the end of the accounting period.

- Since new and revenue accounts will be opened in the subsequent accounting period, it is

no longer necessary for an entity to post the closing entries to the accounts in the ledger.

EXERCISES:

Exercise I (Classifying Types of Adjustment.)

Classify the following items as (a) prepaid expense. (b) unearned revenue, (c) accrued revenue,

or (d) accrued expense.

- Cash received for services not yet rendered.

- Supplies on hand.

- Utilities owed to be paid the following month.

- Taxes owed but payable in the next period.

- A three-year premium paid on a fire insurance policy for the buildings.

- Cash received for use of land within the next six months.

- Fees earned to be received the following month.

- Rent expense owed but not yet paid.

- Subscriptions received in advance by a magazine publisher.

- Fees earned but unbilled

- Salaries owed but not yet paid.

- Rent revenue earned but not yet received.

- Insurance paid.

- Fees received but not yet earned.

- Unpaid wages.

Exercise 2 (Adjusting Entries)

Give the account/s to be credited to complete the adjusting entries below:

Debit Credit

I. Uncollectible Accounts Expense

2. Prepaid Rent

3. Office Supplies on Hand

4. Salary Expense

5. Insurance Expense

6. Interest Receivable

7. Interest Expense

8. Rent Income

9. Depreciation Expense

10. Inventory, end

Exercise 3 (Adjusting and Reversing Entries - Prepaid Expenses and Unearned Revenues)

The following are selected transactions of the ABC Trading during the year 2020:

a. On December I, 2020, the company received P300,000 representing rental payments for

the period December I, 2020 to November 30, 2021.

b. On March I, 2020, an insurance premium of P90,000 was paid covering a period of one

year beginning on this date.

Instructions: Provide the necessary adjusting entries as of December 31, 2020 and appropriate

reversing entries as of January I, 2021 assuming:

1. Transactions were originally recorded in asset and liability accounts.

2. Transactions were originally recorded in expense and revenue accounts.

Exercise 4 (Adjusting and Reversing Entries)

DEF Merchandising follows the policy of recording prepayments in revenue and expense

accounts and reverses appropriate adjusting entries at the beginning of the new accounting

period. The records of the business show the following:

a. On September I, 2020, DEF borrowed P2,000,000 cash from the Bank of the Philippines by

issuing a 6% note payable in one year. The interest is payable upon maturity of the note.

b. On February I, 2020, DEF paid insurance premium of P72,000 covering a period of three

years beginning on this date.

c. On December I, 2020, DEF paid P360,000 representing rental for one year starting on this

date.

d. DEF reports accounts receivable of Pl ,500,000 and allowance for uncollectible accounts of

PI0,000 (debit balance); P50,000 of the receivables are uncollectible.

e. DEF pays all employees every Friday. The total payroll for the five-day workweek ending

January 3, 2020 is P450,000.

f. DEF purchased office equipment on August 1, 2020 amounting to Pl20,000. On January 1,

2020, the office equipment account has a balance of P480,000. All equipment have estimated

useful life of 5 years with no residual value.

g. Office supplies on hand on January I, 2020 amounted to P5,000. During the year, office

supplies of P 12,500 were purchased. On December 31, 20 20, there are unused supplies of

P4,500.

h. DEF subleases part of its office space for P30.000 per month. On November I 2020, it

received rental payments for six months starting on this date.

i. Merchandise inventory on January 1 and December 31 amounted to P 180,000 and P220,000,

respectively.

Instructions:

l. Prepare the necessary adjusting entries on December 31 , 2020.

2. Prepare appropriate reversing entries as of January 1, 2021.

Exercise 5 (Adjusting Entries/or Inventories and Closing Entries)

The following balances are found in the general ledger of GHI Sales after recording the

necessary adjusting entries, except for inventories, in the year 2020:

Purchases 2,100,000 Sales 5,000,000

Freight-in 10,000 Sales Returns 5,000

Purchase Returns 20,000 Sales Discounts 10,000

Inventory, beginning 50,000 Interest Revenue 25,000

Castro, Capital 2,000,000 Selling Expense 450,000

Castro, Drawing 500,000 Interest Expense 15,000

Administrative Expense 500,000 Accounts Payable 300,000

Accounts Receivable 1,500,000

The ending inventory based on physical count is P 140,000.

Instructions:

I. Prepare the required adjusting entries for inventory under the two approaches.

2. Prepare the required closing entries as of December 31, 2014 using the approach in which

no separate cost of goods sold account is set up in adjusting the inventory balance.

Exercise 6 (Real Accounts)

The accountant of JKL Enterprises had just completed posting all the adjusting entries to the

appropriate ledger accounts and now wishes to close the ledger balances in preparation for the

next accounting period.

For each of the accounts listed below, indicate whether the following should be: (a) carried

forward to the next accounting period, (b) closed by crediting the account, or (c) closed by

debiting the account

- Accounts Payable - Cash

- Accounts Receivable - Freight-in

- Accumulated Depreciation - Income Summary

- Interest Payable - Prepaid Insurance

- Interest Revenue - Purchases Discounts

- Lacap, Capital - Purchases

- Lacap, Drawing - Salaries Payable

- Merchandise Inventory. beg. - Sales

- Merchandise Inventory, end - Sales Discounts

- Notes Receivable - Sales Returns and Allowances