Sie sind auf Seite 1von 270

ACCOUNTING ACCOUNTING

FUNDAMENTAL FUNDAMENTAL
BY: BY:
Bayani Bayani D. D. Edlagan Edlagan
Ma. Cecilia S. Mercado Ma. Cecilia S. Mercado
INTRODUCTION INTRODUCTION
%is presentation covers te concepts and practice oI %is presentation covers te concepts and practice oI
accounting Iundamental. From te concepts and inIormation accounting Iundamental. From te concepts and inIormation
about accounting up to te accounting cycle, wic includes about accounting up to te accounting cycle, wic includes
journalizing, reversing and closing entries. Accounting is a journalizing, reversing and closing entries. Accounting is a
proIession similar to medicine and law. Suc proIession proIession similar to medicine and law. Suc proIession
continually evolve and cange as society and te needs oI continually evolve and cange as society and te needs oI
society cange. society cange.
%e objective oI tis presentation is to make people %e objective oI tis presentation is to make people
aware oI ow accounting works in relation to business and aware oI ow accounting works in relation to business and
also ow can it be elpIul even in a simple way oI living. also ow can it be elpIul even in a simple way oI living.
%is also empasized te importance oI accounting in any %is also empasized te importance oI accounting in any
types oI business. Little by little, you will be able to types oI business. Little by little, you will be able to
understand ow accounting works and you will realize its understand ow accounting works and you will realize its
signiIicance to our daily living. signiIicance to our daily living.
%is presentation is based on te book oI Bayani D. %is presentation is based on te book oI Bayani D.
Edlagan and Ma. Cecilia S. Mercado, 'Accounting Edlagan and Ma. Cecilia S. Mercado, 'Accounting
Fundamental. Fundamental.
CHAPTER 1 CHAPTER 1
Introduction to Accounting Introduction to Accounting
Concepts and Practice Concepts and Practice
CHARACTERISTICS OF ACCOUNTING CHARACTERISTICS OF ACCOUNTING
INFORMATION INFORMATION
Accounting inIormation is composed principally Accounting inIormation is composed principally
oI Iinancial data about business transactions, oI Iinancial data about business transactions,
expressed in terms oI money. %e mere records expressed in terms oI money. %e mere records
oI transactions are oI little use in making oI transactions are oI little use in making
'inIormed judgments and decisions. %e 'inIormed judgments and decisions. %e
recorded data must be sorted and summarized recorded data must be sorted and summarized
beIore signiIicant reports and analyses can be beIore signiIicant reports and analyses can be
prepared. prepared.
%e 'basic raw materials oI accounting are %e 'basic raw materials oI accounting are
composed oI business transaction data. Its composed oI business transaction data. Its
'primary end products are composed oI various 'primary end products are composed oI various
summaries, analyses, and reports. summaries, analyses, and reports.
USERS OF ACCOUNTING INFORMATION USERS OF ACCOUNTING INFORMATION
Accounting provides te tecniques Ior accumulating Accounting provides te tecniques Ior accumulating
and te language Ior communicating economic data and te language Ior communicating economic data
to various categories oI individuals and institutions. to various categories oI individuals and institutions.
Investors in a business enterprise need inIormation Investors in a business enterprise need inIormation
about its Iinancial status and its Iuture prospects. %e about its Iinancial status and its Iuture prospects. %e
government agencies are concerned wit te Iinancial government agencies are concerned wit te Iinancial
activities oI business organizations Ior purposes oI activities oI business organizations Ior purposes oI
taxation and regulation. taxation and regulation.
%e individuals most dependent upon and most %e individuals most dependent upon and most
involved wit te end products oI accounting are involved wit te end products oI accounting are
tose carged wit te responsibility Ior directing te tose carged wit te responsibility Ior directing te
operations oI enterprises. operations oI enterprises.
USERS OF ACCOUNTING INFORMATION USERS OF ACCOUNTING INFORMATION
For example, in te conduct oI day For example, in te conduct oI day- -to to- -day operations, day operations,
management relies upon accounting to provide te management relies upon accounting to provide te
amount owed to eac creditor and by eac customer amount owed to eac creditor and by eac customer
and te date eac payment is due. and te date eac payment is due.
%e relevant inIormation Ior one category oI users %e relevant inIormation Ior one category oI users
may diIIer markedly Irom tat needed by oter users. may diIIer markedly Irom tat needed by oter users.
Once te user groups are identiIied, owever, and te Once te user groups are identiIied, owever, and te
nature oI te relevant data determined, te accountant nature oI te relevant data determined, te accountant
is able to establis an inIormation network to assist is able to establis an inIormation network to assist
eac group in Iorming judgments and making eac group in Iorming judgments and making
decisions regarding Iuture actions. decisions regarding Iuture actions.
RELATIONSHIP OF ACCOUNTING TO RELATIONSHIP OF ACCOUNTING TO
OTHER FIELDS OTHER FIELDS
Everyone engaged in business activities, Irom te Everyone engaged in business activities, Irom te
youngest employee to te manager and owner, comes youngest employee to te manager and owner, comes
into contact wit accounting. %e iger te level oI into contact wit accounting. %e iger te level oI
autority and responsibility, te greater is te need autority and responsibility, te greater is te need
Ior an understanding oI accounting concepts and Ior an understanding oI accounting concepts and
terminology. terminology.
%e importance oI understanding accounting is not %e importance oI understanding accounting is not
limited to te business world. Many employees wit limited to te business world. Many employees wit
specialized training in non specialized training in non- -business areas also make business areas also make
use oI accounting data and sould understand use oI accounting data and sould understand
accounting principles and terminology. accounting principles and terminology.
PROFESSION OF ACCOUNTANCY PROFESSION OF ACCOUNTANCY
Accountancy is a proIession wit stature comparable to tat oI Accountancy is a proIession wit stature comparable to tat oI
engineering or law. %e rapid development oI accounting engineering or law. %e rapid development oI accounting
teory and tecnique during te current century as been teory and tecnique during te current century as been
accompanied by an expansion oI te career opportunities in accompanied by an expansion oI te career opportunities in
accounting and an increasing number oI proIessionally trained accounting and an increasing number oI proIessionally trained
accountants. accountants.
Accountants wo render accounting services on a Iee basis, Accountants wo render accounting services on a Iee basis,
and staII accountants employed by tem, are said to be and staII accountants employed by tem, are said to be
engaged in engaged in public accounting public accounting. Accountants employed by a . Accountants employed by a
particular business enterprise or not particular business enterprise or not- -Ior Ior- -proIit organization, as proIit organization, as
cieI accountant, controller, or Iinancial vice cieI accountant, controller, or Iinancial vice- -president, are president, are
said to be engaged in said to be engaged in private accounting. private accounting.
PUBLIC ACCOUNTING PUBLIC ACCOUNTING
%e practice oI public accounting is generally restricted to %e practice oI public accounting is generally restricted to
licensed CPA`s. Recognizing te need Ior reliable proIessional licensed CPA`s. Recognizing te need Ior reliable proIessional
accounting service, te Pilippine Legislature passed te accounting service, te Pilippine Legislature passed te
Accountancy Act in Marc 1923. %is act created te Board oI Accountancy Act in Marc 1923. %is act created te Board oI
Accountancy wic was given te power among oter, to issue Accountancy wic was given te power among oter, to issue
te certiIicate oI CertiIied Public Accountant, abbreviated as te certiIicate oI CertiIied Public Accountant, abbreviated as
CPA. In May 1975, %e revised Accountancy Law was CPA. In May 1975, %e revised Accountancy Law was
released wic deIine te practice oI accountancy to include released wic deIine te practice oI accountancy to include
not only CPAs in public practice, but also tose in private not only CPAs in public practice, but also tose in private
accounting, in government services and in education, and accounting, in government services and in education, and
increased te contents and coverage oI subjects in te CPA increased te contents and coverage oI subjects in te CPA
examinations. examinations.
PUBLIC ACCOUNTING PUBLIC ACCOUNTING
In Section 10 oI te Law, it is provided tat: an applicant Ior In Section 10 oI te Law, it is provided tat: an applicant Ior
te CPA certiIicate must be a Filipino citizen (or a citizen oI te CPA certiIicate must be a Filipino citizen (or a citizen oI
Ioreign country granting reciprocal privileges, by law, to Ioreign country granting reciprocal privileges, by law, to
Filipino wit respect to te practice oI accountancy), oI good Filipino wit respect to te practice oI accountancy), oI good
moral caracter and at least twenty one year oI age. He/se moral caracter and at least twenty one year oI age. He/se
must be a older oI a degree oI Bacelor oI Science in must be a older oI a degree oI Bacelor oI Science in
Commerce or its equivalent Irom any college or university Commerce or its equivalent Irom any college or university
recognized by te government. recognized by te government.
%e CPA candidate is required to successIully pass a written %e CPA candidate is required to successIully pass a written
examination, given by te Board oI Accountancy, covering examination, given by te Board oI Accountancy, covering
teory oI accounts, business law, taxation, management teory oI accounts, business law, taxation, management
advisory services, auditing teory, auditing teory, auditing advisory services, auditing teory, auditing teory, auditing
problems, practical accounting problem1, problem 2. %o problems, practical accounting problem1, problem 2. %o
practice public accountancy, CPAs and Iirms or partnersips, practice public accountancy, CPAs and Iirms or partnersips,
including partners and staII members must register wit te including partners and staII members must register wit te
ProIessional Regulation Commission, suc registration to be ProIessional Regulation Commission, suc registration to be
made annually. made annually.
PRIVATE ACCOUNTING PRIVATE ACCOUNTING
%e scope oI activities and duties oI private %e scope oI activities and duties oI private
accountants varies widely. Private accountants are accountants varies widely. Private accountants are
Irequently called management accountants. II tey are Irequently called management accountants. II tey are
employed by a manuIacturing concern, tey may be employed by a manuIacturing concern, tey may be
call industrial or cost accountants. %e cieI call industrial or cost accountants. %e cieI
accountant in a business may be call controller. accountant in a business may be call controller.
Various governmental units and oter not Various governmental units and oter not- -Ior Ior- -proIit proIit
organizations also employ accountants. organizations also employ accountants.
Internal auditors are accountants wo review te Internal auditors are accountants wo review te
accounting and operating procedures prescribed by accounting and operating procedures prescribed by
teir companies. Accountants wo specialize in teir companies. Accountants wo specialize in
internal auditing may be granted te internal auditing may be granted te Certified Certified
Internal Auditor (CIA) Internal Auditor (CIA) certiIicate. certiIicate.
For example, an engineer responsible Ior selecting For example, an engineer responsible Ior selecting
te most desirable solution to a tecnical te most desirable solution to a tecnical
manuIacturing problem may consider cost accounting manuIacturing problem may consider cost accounting
data to be te decisive Iactor. Lawyers use accounting data to be te decisive Iactor. Lawyers use accounting
data in tax cases and in lawsuits involving property data in tax cases and in lawsuits involving property
ownersip and damages Irom breac oI contract. ownersip and damages Irom breac oI contract.
Governmental agencies rely on accounting data in Governmental agencies rely on accounting data in
evaluating te eIIiciency oI government operations evaluating te eIIiciency oI government operations
and Ior appraising te Ieasibility oI proposed taxation and Ior appraising te Ieasibility oI proposed taxation
and spending programs. Accounting plays an and spending programs. Accounting plays an
important role in modern society and, broadly important role in modern society and, broadly
speaking, all citizens are aIIected by accounting in speaking, all citizens are aIIected by accounting in
some way. some way.
RELATIONSHIP OF ACCOUNTING TO RELATIONSHIP OF ACCOUNTING TO
OTHER FIELDS OTHER FIELDS
SPECIALIZED ACCOUNTING FIELD SPECIALIZED ACCOUNTING FIELD
FINANCIAL ACCOUN%ING FINANCIAL ACCOUN%ING
It is concerned wit te recording oI It is concerned wit te recording oI
transactions Ior a business enterprise or oter transactions Ior a business enterprise or oter
economic unit and te periodic preparation oI economic unit and te periodic preparation oI
various reports Irom suc records. Corporate various reports Irom suc records. Corporate
enterprise must employ suc principles in enterprise must employ suc principles in
preparing teir annual reports on proIitability preparing teir annual reports on proIitability
and Iinancial status Ior teir stockolders and and Iinancial status Ior teir stockolders and
te investing public. te investing public.
SPECIALIZED ACCOUNTING FIELD SPECIALIZED ACCOUNTING FIELD
AUDI%ING AUDI%ING
It is a Iield oI activity involving an independent review oI It is a Iield oI activity involving an independent review oI
te accounting records. In conducting an audit, public te accounting records. In conducting an audit, public
accountants examine te records supporting Iinancial reports accountants examine te records supporting Iinancial reports
oI an enterprise and express an opinion regarding teir Iairness oI an enterprise and express an opinion regarding teir Iairness
and reliability. and reliability.
COS% ACCOUN%ING COS% ACCOUN%ING
It empasizes te determination and control oI costs. It is It empasizes te determination and control oI costs. It is
concerned primarily wit te costs oI manuIacturing processes concerned primarily wit te costs oI manuIacturing processes
and oI manuIactured products, but increasing attention is being and oI manuIactured products, but increasing attention is being
given to distribution costs. In addition, one oI te principal given to distribution costs. In addition, one oI te principal
Iunctions oI cost accountants is to assemble and interpret cost Iunctions oI cost accountants is to assemble and interpret cost
data, bot actual and prospective Ior te use oI management in data, bot actual and prospective Ior te use oI management in
controlling current operations and in planning Ior te Iuture. controlling current operations and in planning Ior te Iuture.
SPECIALIZED ACCOUNTING FIELD SPECIALIZED ACCOUNTING FIELD
MANAGEMEN% ACCOUN%ING MANAGEMEN% ACCOUN%ING
It employs bot istorical and estimated data in assisting It employs bot istorical and estimated data in assisting
management in daily operations and in planning Iuture management in daily operations and in planning Iuture
operations. It deals wit te speciIic problems tat conIront operations. It deals wit te speciIic problems tat conIront
enterprise managers at various organizational levels. %e enterprise managers at various organizational levels. %e
management accountant is Irequently concerned wit management accountant is Irequently concerned wit
identiIying alternative courses oI action and in elping to identiIying alternative courses oI action and in elping to
select te best one. select te best one.
%AX ACCOUN%ING %AX ACCOUN%ING
It encompasses te preparation oI tax returns and te It encompasses te preparation oI tax returns and te
consideration oI te tax consequences oI proposed business consideration oI te tax consequences oI proposed business
transactions or administrative courses oI action. Accountants transactions or administrative courses oI action. Accountants
specializing in tis Iield, particularly in te area oI tax specializing in tis Iield, particularly in te area oI tax
planning, must be Iamiliar wit tax statutes aIIecting teir planning, must be Iamiliar wit tax statutes aIIecting teir
employer or clients and also must keep up to date on employer or clients and also must keep up to date on
administrative regulations and court decisions on tax cases. administrative regulations and court decisions on tax cases.
SPECIALIZED ACCOUNTING FIELD SPECIALIZED ACCOUNTING FIELD
ACCOUN%ING SYS%EM ACCOUN%ING SYS%EM
It is te special Iield concerned wit te design and It is te special Iield concerned wit te design and
implementation oI procedures Ior te accumulation and implementation oI procedures Ior te accumulation and
reporting oI Iinancial data. %e systems accountant must reporting oI Iinancial data. %e systems accountant must
devise appropriate 'cecks and balances to saIeguard devise appropriate 'cecks and balances to saIeguard
business assets and provide Ior inIormation Ilow tat will be business assets and provide Ior inIormation Ilow tat will be
eIIicient and elpIul to management. eIIicient and elpIul to management.
BUDGE%ARY ACCOUN%ING BUDGE%ARY ACCOUN%ING
It presents te plan oI Iinancial operations Ior a period It presents te plan oI Iinancial operations Ior a period
and, troug records and summaries provides comparisons oI and, troug records and summaries provides comparisons oI
actual operations wit te predetermined plans. A combination actual operations wit te predetermined plans. A combination
oI planning and controlling Iuture operations, it is sometimes oI planning and controlling Iuture operations, it is sometimes
concerned to be a part oI management accounting. concerned to be a part oI management accounting.
SPECIALIZED ACCOUNTING FIELD SPECIALIZED ACCOUNTING FIELD
IN%ERNA%IONAL ACCOUN%ING IN%ERNA%IONAL ACCOUN%ING
It is concerned wit te special problems associated wit It is concerned wit te special problems associated wit
te international trade oI multinational business organizations. te international trade oI multinational business organizations.
Accountants specialized in tis area must be Iamiliar wit te Accountants specialized in tis area must be Iamiliar wit te
inIluences oI customs law, and taxation oI various countries inIluences oI customs law, and taxation oI various countries
bear on international operations and accounting principles. bear on international operations and accounting principles.
NO% NO%- -FOR FOR- -PROFI% ACCOUN%ING PROFI% ACCOUN%ING
It specializes in recording and reporting te transactions It specializes in recording and reporting te transactions
oI various governmental units and oter not oI various governmental units and oter not- -Ior Ior- -proIit proIit
organizations suc as curc, carities, and educational organizations suc as curc, carities, and educational
institutions. An essential element in an accounting system tat institutions. An essential element in an accounting system tat
will insure strict aderence on te part oI management to will insure strict aderence on te part oI management to
restrictions and oter requirements imposed by law, by oter restrictions and oter requirements imposed by law, by oter
institutions, or by individual donors. institutions, or by individual donors.
SPECIALIZED ACCOUNTING FIELD SPECIALIZED ACCOUNTING FIELD
SOCIAL ACCOUN%ING SOCIAL ACCOUN%ING
It is te newest Iield oI accounting and is te It is te newest Iield oI accounting and is te
most diIIicult to describe concisely. One oI te most diIIicult to describe concisely. One oI te
engagement in tis Iield involved measurement oI engagement in tis Iield involved measurement oI
traIIic patterns in a densely populated section oI te traIIic patterns in a densely populated section oI te
nation (like Metro Manila) as part oI a government nation (like Metro Manila) as part oI a government
study to determine te most eIIicient use oI study to determine te most eIIicient use oI
transportation Iunds, not only in terms oI Iacilitating transportation Iunds, not only in terms oI Iacilitating
trade but also oI assuring a good environment Ior te trade but also oI assuring a good environment Ior te
area`s residents. area`s residents.
BOOKKEEPING AND ACCOUNTING BOOKKEEPING AND ACCOUNTING
BOOKKEEPING is te recording oI business data in a BOOKKEEPING is te recording oI business data in a
prescribed manner. A bookkeeper may be responsible Ior prescribed manner. A bookkeeper may be responsible Ior
keeping all te records oI a business or only a minor segment, keeping all te records oI a business or only a minor segment,
suc portion oI customer accounts in department store. Muc suc portion oI customer accounts in department store. Muc
oI te work oI te bookkeeper is critical in nature and oI te work oI te bookkeeper is critical in nature and
increasingly being accomplised troug te use oI increasingly being accomplised troug te use oI
mecanical and electronic equipment. mecanical and electronic equipment.
ACCOUN%ING is primarily concerned wit te design oI te ACCOUN%ING is primarily concerned wit te design oI te
system oI records, te preparation oI reports based on te system oI records, te preparation oI reports based on te
recorded data, and te interpretation oI te reports. recorded data, and te interpretation oI te reports.
Accountants oIten direct and review te work oI bookkeeper. Accountants oIten direct and review te work oI bookkeeper.
In event, te accountant must possess a muc iger level oI In event, te accountant must possess a muc iger level oI
knowledge, conceptual understanding, and analytical skill tan knowledge, conceptual understanding, and analytical skill tan
is required oI te bookkeeper. is required oI te bookkeeper.
BUSINESS ENTITY CONCEPT BUSINESS ENTITY CONCEPT
%e %e business entity concept business entity concept is based on identiIying te is based on identiIying te
individual economic units Ior wic economic data are individual economic units Ior wic economic data are
needed. Once te entity is identiIied, te accountant can needed. Once te entity is identiIied, te accountant can
determine wic economic data and activities sould be determine wic economic data and activities sould be
analyzed, recorded, and summarized in reports. %e analyzed, recorded, and summarized in reports. %e
business entity concept is based on te applicability oI business entity concept is based on te applicability oI
accounting to individual economic units in society. %ese accounting to individual economic units in society. %ese
individual economic units include all business enterprises individual economic units include all business enterprises
organized Ior proIit, numerous governmental units, suc as organized Ior proIit, numerous governmental units, suc as
provinces, cities, and towns, oter bit provinces, cities, and towns, oter bit- -Ior Ior- -proIit units like proIit units like
curc and clubs, and individual persons and Iamily units. curc and clubs, and individual persons and Iamily units.
%e basic economic data Ior a unit must Iirst be recorded, %e basic economic data Ior a unit must Iirst be recorded,
Iollowed by analysis and summarization, and Iinally by Iollowed by analysis and summarization, and Iinally by
periodic reporting. %us, accounting applies to eac periodic reporting. %us, accounting applies to eac
separate economic unit. separate economic unit.
BUSINESS ENTITY CONCEPT BUSINESS ENTITY CONCEPT
%is subject is concerned primarily wit te %is subject is concerned primarily wit te
accounting principles and tecniques applicable to accounting principles and tecniques applicable to
proIit making businesses. Suc businesses are proIit making businesses. Suc businesses are
customarily organized as a sole proprietorsip, customarily organized as a sole proprietorsip,
partnersips, or corporations. A partnersips, or corporations. A sole proprietorship sole proprietorship
is owned by one individual. And is owned by two or is owned by one individual. And is owned by two or
more individual in accordance wit a contractual more individual in accordance wit a contractual
agreement. A agreement. A corporation, corporation, organized in accordance organized in accordance
wit te Corporation Law, is a separate legal entity in wit te Corporation Law, is a separate legal entity in
wic ownersip is divided into sares oI stock. wic ownersip is divided into sares oI stock.
ACTIVITIES PERFORMED BY BUSINESS ACTIVITIES PERFORMED BY BUSINESS
ORGANIZATION ORGANIZATION
SERVICE SERVICE
Companies perIorm services Ior a Iee. Companies perIorm services Ior a Iee.
Example: Accounting Iirms, law Iirms, and oter service Example: Accounting Iirms, law Iirms, and oter service
establisments establisments
MERCHANDISING MERCHANDISING
Companies purcase goods tat are ready Ior sale and Companies purcase goods tat are ready Ior sale and
ten sell tese goods to customers. ten sell tese goods to customers.
MANUFAC%URING MANUFAC%URING
Companies buy raw materials, convert tem into anoter Companies buy raw materials, convert tem into anoter
Iorm oI products and te sell te products to oter companies Iorm oI products and te sell te products to oter companies
or to Iinal consumers. or to Iinal consumers.
BUSINESS TRANSACTIONS BUSINESS TRANSACTIONS
A A business transaction business transaction is te occurrence oI an is te occurrence oI an
event or oI a condition tat must be recorded. event or oI a condition tat must be recorded.
A particular business transaction may lead to A particular business transaction may lead to
an event or condition tat constitutes anoter an event or condition tat constitutes anoter
transaction. transaction.
ASSETS, LIABILITIES, AND CAPITAL ASSETS, LIABILITIES, AND CAPITAL
%e properties owned by a business enterprise are %e properties owned by a business enterprise are
reIerred to as assets and te rigts or claims to te reIerred to as assets and te rigts or claims to te
properties are reIerred to as equities. II te assets properties are reIerred to as equities. II te assets
owned by te business amount to P1,000,000, te owned by te business amount to P1,000,000, te
equities on te assets must also amount to equities on te assets must also amount to
P1,000,000. %e relation between te two may be P1,000,000. %e relation between te two may be
stated in te Iorm oI an equation, as Iollows: stated in te Iorm oI an equation, as Iollows:
Assets Equities Assets Equities
ASSETS, LIABILITIES, AND CAPITAL ASSETS, LIABILITIES, AND CAPITAL
Equities may be subdivided into two types: te Equities may be subdivided into two types: te
rigt oI creditors and te rigts oI owner. %e equities rigt oI creditors and te rigts oI owner. %e equities
oI creditors represents debts oI te business and are oI creditors represents debts oI te business and are
called called liabilities. liabilities. %e equity oI te owners is called %e equity oI te owners is called
capital or owner`s equity. capital or owner`s equity. Expansion oI te equation Expansion oI te equation
to give recognition to te two basic types oI equities to give recognition to te two basic types oI equities
yields te Iollowing, wic is known as te yields te Iollowing, wic is known as te
accounting equation: accounting equation:
Assets Liabilities + Capital (or Owner`s Equity) Assets Liabilities + Capital (or Owner`s Equity)
ASSETS, LIABILITIES, AND CAPITAL ASSETS, LIABILITIES, AND CAPITAL
It is customary to place ' Liabilities beIore 'Capital in It is customary to place ' Liabilities beIore 'Capital in
te accounting equation because creditors ave preIerential te accounting equation because creditors ave preIerential
rigts to te assets. %e residual claim oI te owner or owners rigts to te assets. %e residual claim oI te owner or owners
is sometimes given greater empasis by transposing liabilities is sometimes given greater empasis by transposing liabilities
to te oter side oI te equation, yielding: to te oter side oI te equation, yielding:
Asset Asset - - Liabilities Capital Liabilities Capital
Every business transaction aIIects te assets, liabilities Every business transaction aIIects te assets, liabilities
and/or capital oI te business. However, te canges in tese and/or capital oI te business. However, te canges in tese
items are suc tat te equality oI two sides oI te accounting items are suc tat te equality oI two sides oI te accounting
equation is always maintained. equation is always maintained.
RULES OF DEBIT AND CREDIT RULES OF DEBIT AND CREDIT
Based Based on on te te positions positions oI oI increases increases and and
decreases decreases in in an an account account Ior Ior an an asset, asset, liability, liability,
or or capital capital item, item, te te rules rules oI oI debit debit and and credit credit
may may be be stated stated as as Iollows Iollows::
TABLE 1.1 TABLE 1.1
DEBIT CREDIT
1. Increase in Assets 1. Decrease in Assets
2. Decrease in Liabilities 2. Increase in Liabilities
3. Decrease in Capital 3. Increase in Capital
a. Witdrawal by te
Owner a. Investment by te Owner
b. Increase in Expenses b. Decrease in Expenses
c. Decrease in Revenue c. Increase in Revenue
TRANSACTIONS AND THE ACCOUNTING TRANSACTIONS AND THE ACCOUNTING
EQUATION EQUATION
All business transactions, Irom te simplest to te most All business transactions, Irom te simplest to te most
complex, can be stated in terms oI te resulting cange in te complex, can be stated in terms oI te resulting cange in te
tree basic elements oI te accounting equation. BeIore a tree basic elements oI te accounting equation. BeIore a
transaction can be recorded in te book oI accounts, it must be transaction can be recorded in te book oI accounts, it must be
analyzed into its debit and credit elements. %e Iollowing analyzed into its debit and credit elements. %e Iollowing
questions will be elpIul in analyzing a business transaction; questions will be elpIul in analyzing a business transaction;
Wic item (items) is/are aIIected Wic item (items) is/are aIIected Assets, Liabilities, Assets, Liabilities,
Capital? Capital?
How is eac item aIIected How is eac item aIIected it is increased or decreased? it is increased or decreased?
According to te rules oI debit and credit, is te increase or te According to te rules oI debit and credit, is te increase or te
decrease in te item to be debited or credited? decrease in te item to be debited or credited?
Wat account titles sould be used to record te debit or Wat account titles sould be used to record te debit or
credit item? credit item?
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
Every business transaction as two Every business transaction as two- -Iold eIIect on Iold eIIect on
te assets, liabilities, and/or capital oI te business. te assets, liabilities, and/or capital oI te business.
For every debit element, tere is a corresponding For every debit element, tere is a corresponding
credit element. %e money values oI tese two credit element. %e money values oI tese two
elements are equal. %e manner oI recording bot te elements are equal. %e manner oI recording bot te
debit and credit elements oI eac transaction is debit and credit elements oI eac transaction is
reIerred to as double reIerred to as double- -entry bookkeeping. %e double entry bookkeeping. %e double- -
entry bookkeeping is preIerred because it generally entry bookkeeping is preIerred because it generally
result in more accurate accounting records and result in more accurate accounting records and
statements. Moreover, it aIIords numerous cecks and statements. Moreover, it aIIords numerous cecks and
saIeguard wic reduce to a minimum te cances oI saIeguard wic reduce to a minimum te cances oI
loss troug intentional r unintentional errors loss troug intentional r unintentional errors
committed by personnel. committed by personnel.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
%e %e eIIect eIIect oI oI tese tese canges canges on on te te
accounting accounting equation equation can can be be demonstrated demonstrated by by
studying studying some some typical typical transactions transactions using using te te
analysis analysis seet seet as as Iollows Iollows::
Table 1.2 Table 1.2
ASSETS LIABILITIES CAPITAL
As te basis oI tis illustration, assume tat As te basis oI tis illustration, assume tat
on September 1, 19xx Nick Requijo on September 1, 19xx Nick Requijo
establises a sole proprietorsip to be known establises a sole proprietorsip to be known
as Requijo %axi. Eac transaction or group oI as Requijo %axi. Eac transaction or group oI
similar transactions during te Iirst mont oI similar transactions during te Iirst mont oI
operations is described Iollowed by an operations is described Iollowed by an
illustration oI its eIIect(s) on te accounting illustration oI its eIIect(s) on te accounting
equation and te corresponding two equation and te corresponding two- -column column
journal entry and explanation oI entry Ior eac journal entry and explanation oI entry Ior eac
give transaction. give transaction.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
TRANSACTION ONE TRANSACTION ONE
Nick Nick Requijo Requijo deposited P500,000 in a bank deposited P500,000 in a bank
account in te name oI account in te name oI Requijo Requijo %axi. %e %axi. %e
eIIect oI tis transaction is to increase te asset eIIect oI tis transaction is to increase te asset
cas by P500,000 and to increase capital, on cas by P500,000 and to increase capital, on
te oter side oI te equation, by te same te oter side oI te equation, by te same
amount. AIter te transaction, te equation Ior amount. AIter te transaction, te equation Ior
Requijo Requijo %axi will appear as Iollows: %axi will appear as Iollows:
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
Table 1.3 Table 1.3
ASSETS LIABILITIES CAPITAL
1
+ Cash
P500,000
+Requijo,
Capital
P500,000
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
It sould be noted tat te equation relates It sould be noted tat te equation relates
only to te business enterprise. Nick only to te business enterprise. Nick Requijo`s Requijo`s
personal assets, suc as is ome, car, is personal assets, suc as is ome, car, is
personal bank account, and is personal personal bank account, and is personal
liabilities are excluded Irom consideration. %e liabilities are excluded Irom consideration. %e
business is treated as a distinct entity, wit business is treated as a distinct entity, wit
cas oI P500,000 and te owner`s equity oI cas oI P500,000 and te owner`s equity oI
P500,000. P500,000.
Table 1.4 Table 1.4
Date DESCRIPTION
Post
Ref.
Debi
t
Credi
t
Sept. 1 Cas
500,
000
Nick Requijo, Capital
500,0
00
%o record investment
oI te owner
%e explanation oI eac debit or credit %e explanation oI eac debit or credit
entry on te journal is based on te rules oI entry on te journal is based on te rules oI
debit and credit. Cas was debited because oI debit and credit. Cas was debited because oI
increase in asset wile Capital was credited increase in asset wile Capital was credited
because oI increase in capital due to because oI increase in capital due to
investment oI te owner. investment oI te owner.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
TRANSACTION TWO TRANSACTION TWO
Requijo`s Requijo`s next transaction on September 5 is to next transaction on September 5 is to
purcase land as a Iuture building site, Ior wic purcase land as a Iuture building site, Ior wic
P100,000 cas is paid. %is transaction canges te P100,000 cas is paid. %is transaction canges te
composition oI te assets but does not cange te composition oI te assets but does not cange te
total amount. %e items in te equation prior to tis total amount. %e items in te equation prior to tis
transaction, te eIIects oI tis transaction, and te transaction, te eIIects oI tis transaction, and te
new balance aIter te transaction are as Iollow: new balance aIter te transaction are as Iollow:
Table 1.5 Table 1.5
ASSETS LIABILITIES CAPITAL
1.
Cas
P500,000
Requijo, Capital
P500,000
2.
- Cas
P100,000
Land
P100,000
AIter te transaction, tere is a land costing AIter te transaction, tere is a land costing
P100, 000 but te balance is reduced to P400, P100, 000 but te balance is reduced to P400,
000. %e total assets composed oI cas and 000. %e total assets composed oI cas and
land total to P500, 000. Notice tat tere is no land total to P500, 000. Notice tat tere is no
cange in te liability and capital items. cange in te liability and capital items.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
Table 1.6 Table 1.6
Date DESCRIPTION
Post
Ref. Debit Credit
Sept. 5 Land
100,00
0
Cas 100,000
%o record purcase
oI land Ior cas
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
In te transaction recorded, tere was a In te transaction recorded, tere was a
cange in te asset element. Land was debited cange in te asset element. Land was debited
because oI increase in assets wile Cas was because oI increase in assets wile Cas was
credited because oI decrease in assets. %e credited because oI decrease in assets. %e
reason Ior te debit and credit comes Irom te reason Ior te debit and credit comes Irom te
rules oI debit and credit. rules oI debit and credit.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
TRANSACTION THREE TRANSACTION THREE
Requijo`s current plans are to lease cars and oter Requijo`s current plans are to lease cars and oter
equipment Irom CaliIornia Bus Company Ior several monts equipment Irom CaliIornia Bus Company Ior several monts
until e can arrange Iinancing Ior te purcase oI cars and until e can arrange Iinancing Ior te purcase oI cars and
oter equipment and Ior te construction oI garage and storage oter equipment and Ior te construction oI garage and storage
Iacilities. Iacilities.
On September 7 Requijo purcases P60, 000 oI parts and On September 7 Requijo purcases P60, 000 oI parts and
oter supplies Irom various suppliers, agreeing to pay in te oter supplies Irom various suppliers, agreeing to pay in te
near Iuture. %is type oI transaction is called near Iuture. %is type oI transaction is called purchase of purchase of
supplies on account supplies on account and te liability created is termed and te liability created is termed
accounts payable accounts payable. Consumable commodities acquired, suc . Consumable commodities acquired, suc
as supplies, are considered to be prepaid expenses. as supplies, are considered to be prepaid expenses. Prepaid Prepaid
expenses are expenses paid in advance and are classified as expenses are expenses paid in advance and are classified as
asset. asset.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
In actual practice, eac purcase would be In actual practice, eac purcase would be
considered and recorded as it occurred and a considered and recorded as it occurred and a
separated record would be maintained Ior eac separated record would be maintained Ior eac
creditor. In tis illustration, owever, te creditor. In tis illustration, owever, te
purcases are recorded as a group. %e eIIect purcases are recorded as a group. %e eIIect
is to increase te assets and liabilities by P600, is to increase te assets and liabilities by P600,
000, as indicated below: 000, as indicated below:
Table 1.7 Table 1.7
ASSETS LIABILITIES CAPITAL
1.
Cas
P500,000
Requijo, Capital
P500,000
2.
- Cas
P100,000
Land
P100,000
3.
Supplies P
60,000
Account Payable
P60,000
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
AIter tis transaction, te total assets amount to AIter tis transaction, te total assets amount to
P560, 000 composed oI Cas P400, 000, Land P100, P560, 000 composed oI Cas P400, 000, Land P100,
000, and Supplies P60, 000. %e total equity is also 000, and Supplies P60, 000. %e total equity is also
P560, 000 composed oI Accounts Payable P60, 000 P560, 000 composed oI Accounts Payable P60, 000
and Capital oI P500, 000. %e total oI te two and Capital oI P500, 000. %e total oI te two
column, debit and credit, still balance. column, debit and credit, still balance.
Table 1.8 Table 1.8
Date DESCRIPTION
Post
Ref. Debit Credit
Sept. 7 Supplies
60,00
0
Accounts Payable 60,000
%o record purcase oI
supplies on account
In te transaction recorded, Supplies (unused) was
debited because of increase in assets while
Accounts Payable is credited because of increase
in liability.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
TRANSACTION FOUR TRANSACTION FOUR
On September 9, P10,000 is paid to On September 9, P10,000 is paid to
creditors on account, tereby reducing bot creditors on account, tereby reducing bot
assets and liabilities. %e eIIect on te assets and liabilities. %e eIIect on te
equation is as Iollows: equation is as Iollows:
Table 1.9 Table 1.9
ASSETS LIABILITIES CAPITAL
1.
Cas
P500,000
Requijo, Capital
P500,000
2.
- Cas
P100,000
Land
P100,000
3.
Supplies P
60,000
Account Payable
P60,000
4.
- Cas P
10,000
- Account Payable
P10,000
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
AIter tis transaction, te total assets amount to AIter tis transaction, te total assets amount to
P550, 000 composed oI Cas P390, 000, Land P100, P550, 000 composed oI Cas P390, 000, Land P100,
000, and Supplies P60, 000. %e total equity is also 000, and Supplies P60, 000. %e total equity is also
P550, 000 composed oI Accounts Payable P50, 000 P550, 000 composed oI Accounts Payable P50, 000
and Capital P500, 000. %e equation is still balance. and Capital P500, 000. %e equation is still balance.
Table 1.10 Table 1.10
Date DESCRIPTION
Post
Ref. Debit Credit
Sept. 9 Accounts Payable
10,
000
Cas 10,000
%o record payment oI
account
In te transaction recorded, Accounts Payable
was debited because of decrease in liability
while cash was credited because of decrease
in assets.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
TRANSACTION FIVE TRANSACTION FIVE
%e principal objective oI te owner oI a business %e principal objective oI te owner oI a business
enterprise is to increase capital troug earnings. For Nick enterprise is to increase capital troug earnings. For Nick
Requijo, tis means tat te cas and oter assets acquired Requijo, tis means tat te cas and oter assets acquired
troug te sale oI taxi services must be greater tan te cost troug te sale oI taxi services must be greater tan te cost
oI te gasoline and oter supplies used, te wages oI drivers, oI te gasoline and oter supplies used, te wages oI drivers,
te rent, and all oI te oter expenses oI operating te te rent, and all oI te oter expenses oI operating te
business. business.
In general, te amount carged to customers Ior goods or In general, te amount carged to customers Ior goods or
services sold to tem is called services sold to tem is called revenue. revenue. Alternative terms may Alternative terms may
be used Ior particular types oI revenue, suc as be used Ior particular types oI revenue, suc as sales sales Ior te Ior te
sale oI mercandise or business services, sale oI mercandise or business services, fees earned fees earned Ior Ior
carges by a pysician to patients, carges by a pysician to patients, rent revenue rent revenue Ior te use oI Ior te use oI
real estate or oter property, and real estate or oter property, and fares earned fares earned Ior Requijo Ior Requijo
%axi. %axi.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
In a broad sense, te amount oI assets consumed or In a broad sense, te amount oI assets consumed or
services used in te process oI earning revenue is called services used in te process oI earning revenue is called
expense. Expenses would include supplies used, salaries and expense. Expenses would include supplies used, salaries and
wages oI employees, and oter assets and services used in wages oI employees, and oter assets and services used in
operating te business. operating te business.
%e excess oI te revenue over te expenses incurred in %e excess oI te revenue over te expenses incurred in
earning te revenue is called net income or net proIit. II te earning te revenue is called net income or net proIit. II te
expenses oI te enterprise exceed te revenue, te excess is a expenses oI te enterprise exceed te revenue, te excess is a
net loss. Since it is ordinarily impossible to determine te net loss. Since it is ordinarily impossible to determine te
exact amount oI expense incurred in connection wit eac exact amount oI expense incurred in connection wit eac
revenue transactions, it is considered satisIactory to determine revenue transactions, it is considered satisIactory to determine
te net income or te net loss Ior a speciIied period oI time, te net income or te net loss Ior a speciIied period oI time,
suc as a mont, or a quarter, a semester, or a year, rater tan suc as a mont, or a quarter, a semester, or a year, rater tan
eac oI small group oI sales. eac oI small group oI sales.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
During te Iirst mont oI operations During te Iirst mont oI operations Requijo Requijo %axi %axi
earned Iares oI P150, 000, receiving te amount in earned Iares oI P150, 000, receiving te amount in
cas. %e total eIIect oI tese transactions is to cas. %e total eIIect oI tese transactions is to
increase cas by P150, 000 and to yield revenue in increase cas by P150, 000 and to yield revenue in
te same amount. %e revenue can be viewed as te same amount. %e revenue can be viewed as
toug it aIIected a P150, 000 increases in capital. toug it aIIected a P150, 000 increases in capital.
At te time expenses oI te business are incurred, At te time expenses oI te business are incurred,
tey are treated as oIIsets against revenue and ence tey are treated as oIIsets against revenue and ence
as reduction in capital. In terms oI te accounting as reduction in capital. In terms oI te accounting
equation, te eIIect oI te receipt oI cas Ior services equation, te eIIect oI te receipt oI cas Ior services
perIormed Iollows: perIormed Iollows:
Table 1.11 Table 1.11
ASSETS LIABILITIES CAPITAL
1.
Cas
P500,000
Requijo, Capital
P500,000
2.
- Cas
P100,000
Land
P100,000
3.
Supplies P
60,000
Account Payable
P60,000
4.
- Cas P
10,000
- Account Payable
P10,000
5.
Cas
P150,000
Fares Earned
P150,000
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
AIter tis transaction, te total assets amount to P700, 000 composed AIter tis transaction, te total assets amount to P700, 000 composed
oI Cas P540, 000, Land P100, 000, and Supplies P60, 000. %e total oI Cas P540, 000, Land P100, 000, and Supplies P60, 000. %e total
equities are also P700, 000 composed oI Accounts Payable P50, 000 and equities are also P700, 000 composed oI Accounts Payable P50, 000 and
Capital oI P650, 000 (including te Iare earned). Capital oI P650, 000 (including te Iare earned).
Instead oI requiring payment oI cas at te time goods or services are Instead oI requiring payment oI cas at te time goods or services are
sold or rendered, a business may make sales sold or rendered, a business may make sales of goods or services on of goods or services on
account, account, allowing customer to pay later. In suc cases, te business allowing customer to pay later. In suc cases, te business
acquires a claim against te customer, called an account receivable. An acquires a claim against te customer, called an account receivable. An
account receivable is as muc an asset as cas, and te revenue is realized account receivable is as muc an asset as cas, and te revenue is realized
in exactly te same manner as iI cas ad been immediately received. At a in exactly te same manner as iI cas ad been immediately received. At a
later date, wen te money is collected, tere is only an excange oI one later date, wen te money is collected, tere is only an excange oI one
asset Ior anoter, wit cas increasing and accounts receivable decreasing. asset Ior anoter, wit cas increasing and accounts receivable decreasing.
In te transaction recorded, Cas was debited because oI increase in assets In te transaction recorded, Cas was debited because oI increase in assets
wile Fares Earned was credited because oI increase in capital due to wile Fares Earned was credited because oI increase in capital due to
increase in revenue. increase in revenue.
Table 1.12 Table 1.12
Date DESCRIPTION
Post
Ref. Debit Credit
Sept. 30 Cas
150,0
00
Fares Earned
150,00
0
%o record receipt oI revenue
Irom various customer.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
TRANSACTION SIX TRANSACTION SIX
Various business expenses incurred and paid Various business expenses incurred and paid
during te mont were as Iollow: wages, P40, 000; during te mont were as Iollow: wages, P40, 000;
rent, P20, 000; gas and oil, P50, 000; miscellaneous rent, P20, 000; gas and oil, P50, 000; miscellaneous
expenses, P10, 000. %e eIIect oI tis group oI expenses, P10, 000. %e eIIect oI tis group oI
transaction is to reduce cas and to reduce capital, as transaction is to reduce cas and to reduce capital, as
indicated in te Iollowing manner in te equation: indicated in te Iollowing manner in te equation:
Table 1.13 Table 1.13
ASSETS LIABILITIES CAPITAL
1. Cas P500,000
Requijo, Capital
P500,000
2.
- Cas P100,000
Land P100,000
3. Supplies P 60,000
Account Payable
P60,000
4. - Cas P 10,000
- Account Payable
P10,000
5. Cas P150,000
Fares Earned
P150,000
6. - Cas P120,000
- Wages Expense P
40,000
- Rent Expense P
20,000
- Gas & Oil P
50,000
- Misc. Expense P
10,000
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
AIter tis transaction, te total asset AIter tis transaction, te total asset
amount to P580, 000 composed oI Cas P420, amount to P580, 000 composed oI Cas P420,
000, Land P100, 000, and Supplies oI P60, 000, Land P100, 000, and Supplies oI P60,
000. %e total equities are also P580, 000 000. %e total equities are also P580, 000
composed oI Accounts Payable P50, 000 and composed oI Accounts Payable P50, 000 and
Capital oI P530, 000. It sould be remembered Capital oI P530, 000. It sould be remembered
tat tat revenue revenue and and expense expense accounts are accounts are
temporary capital accounts; temporary capital accounts; these items are these items are
closed to capital at the end of the accounting closed to capital at the end of the accounting
period. period.
Table 1.14 Table 1.14
Date DESCRIPTION
Post
Ref. Debit Credit
Sept. 30 Wages Expense
40,00
0
Rent Expense
20,00
0
Gas and Oil Expense
50,00
0
Miscellaneous Expense
10,00
0
Cas
120,00
0
%o record payment oI
expenses.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
In te transaction recorded, In te transaction recorded, Wages Wages
Expense, Rent Expense, Cas and Oil Expense, Rent Expense, Cas and Oil
Expense, Miscellaneous Expense were Expense, Miscellaneous Expense were
debited because of decrease in capital due to debited because of decrease in capital due to
increase in expenses while cash was credited increase in expenses while cash was credited
because of decrease in assets. because of decrease in assets.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
TRANSACTION SEVEN TRANSACTION SEVEN
At te end oI te mont it is determined tat te cost oI At te end oI te mont it is determined tat te cost oI
supplies on and is P40, 000, te remainder oI P20, 000 (P60, supplies on and is P40, 000, te remainder oI P20, 000 (P60,
000 000- - P40, 000) ave been used in te operations oI te P40, 000) ave been used in te operations oI te
business. %is deduction oI P20, 000 in supplies and capital business. %is deduction oI P20, 000 in supplies and capital
may be sown as Iollows: may be sown as Iollows:
AIter tis transaction, te total assets amount to P560, 000 AIter tis transaction, te total assets amount to P560, 000
composed oI Cas P420, 000, Land P100, 000, and Supplies oI composed oI Cas P420, 000, Land P100, 000, and Supplies oI
only P40, 000. %e total equities are also P560, 000 composed only P40, 000. %e total equities are also P560, 000 composed
oI Accounts Payable oI P50, 000 and Capital oI P510, 000. oI Accounts Payable oI P50, 000 and Capital oI P510, 000.
Table 1.15 Table 1.15
ASSETS LIABILITIES CAPITAL
1. Cas P500,000 Requijo, Capital P500,000
2.
- Cas P100,000
Land P100,000
3. Supplies P 60,000 Account Payable P60,000
4. - Cas P 10,000 - Account Payable P10,000
5. Cas P150,000 Fares Earned P150,000
6. - Cas P120,000 -Wages Expense P 40,000
-Rent Expense P 20,000
-Gas & Oil P 50,000
-Misc. Expense P 10,000
7. - Supplies P20,000 -Supplies Expense P20,000
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
%able 1.16 %able 1.16
Date Particulars Debit Credit
Supplies Expense P20,000
Supplies P20,000
%o record part oI te
supplies used in te
operation oI te business
Date DESCRIPTION
Post
Ref. Debit Credit
Sept. 30 Supplies Expense 20,000
Supplies 20,000
%o record part oI
supplies in te operation oI
te business
In te transaction recorded, $upplies Expense was
debited because of decrease in capital due to increase
in expenses while $upplies (Unused) was credited
because of decrease in assets. Note to Students %e
terms 'unused, 'unexpired, 'inventory, and
'prepaid denote asset.
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
TRANSACTION EIGHT TRANSACTION EIGHT
At te end oI te mont, Nick At te end oI te mont, Nick Requijo Requijo witdraws Irom te business witdraws Irom te business
P20, 000 in cas Ior is personnel use. %is transaction, wic aIIects a P20, 000 in cas Ior is personnel use. %is transaction, wic aIIects a
decrease in cas and a decrease in capital, is te exact opposite oI an decrease in cas and a decrease in capital, is te exact opposite oI an
investment in te business by te owner. investment in te business by te owner. The withdrawal is not a The withdrawal is not a
business expense, and it should be excluded from consideration in business expense, and it should be excluded from consideration in
determining the net income from operations of the enterprise. determining the net income from operations of the enterprise. %e %e
eIIect oI te P20, 000 witdrawals on te equation is as Iollows: eIIect oI te P20, 000 witdrawals on te equation is as Iollows:
AIter tis transaction, te total assets amount to P540, 000 composed AIter tis transaction, te total assets amount to P540, 000 composed
oI Cas P400, 000, Land P100, 000, and Supplies oI P40, 000. %e total oI Cas P400, 000, Land P100, 000, and Supplies oI P40, 000. %e total
equities are also P540, 000 composed oI Accounts Payable P50, 000 and equities are also P540, 000 composed oI Accounts Payable P50, 000 and
Capital P490, 000. Capital P490, 000.
Table 1.17 Table 1.17
ASSETS LIABILITIES CAPITAL
1. Cas P500,000 Requijo, Capital P500,000
2.
- Cas P100,000
Land P100,000
3. Supplies P 60,000 Account Payable P60,000
4. - Cas P 10,000 - Account Payable P10,000
5. Cas P150,000 Fares Earned P150,000
6. - Cas P120,000 -Wages Expense P 40,000
-Rent Expense P 20,000
-Gas & Oil P 50,000
-Misc. Expense P 10,000
7. - Supplies P20,000 -Supplies Expense P20,000
8. - Cas P20,000 -Requijo, Drawing P20,000
DOUBLE ENTRY BOOKKEEPING DOUBLE ENTRY BOOKKEEPING
%able 1.18 %able 1.18
..
Date DESCRIPTION
Post
Ref. Debit Credit
Sept. 30 Requijo, Drawing 20,000
Cas 20,000
%o record witdrawal oI
owner.
In te transaction recorded, Requijo, Drawing was
debited because of decrease of capital due to
withdrawal and cash was credited because of
decreases in assets
SUMMARY SUMMARY
%e business transactions oI %e business transactions oI Requijo Requijo %axi are summarized in %axi are summarized in
tabular Iorm below. %e transactions are identiIied by tabular Iorm below. %e transactions are identiIied by
transaction numbers and te balance oI eac item is sown transaction numbers and te balance oI eac item is sown
aIter eac transaction. %e Iollowing observations, wic aIter eac transaction. %e Iollowing observations, wic
apply to all types oI businesses, sould be noted: apply to all types oI businesses, sould be noted:
%e eIIect oI every transaction can be stated in terms oI %e eIIect oI every transaction can be stated in terms oI
increases and/or decreases in one or more oI te accounting increases and/or decreases in one or more oI te accounting
elements. elements.
%e equality oI te two sides o te accounting equation is %e equality oI te two sides o te accounting equation is
always maintained. always maintained.
Table 1.19 Table 1.19
ACCOUNTING STATEMENTS ACCOUNTING STATEMENTS
BALANCE SHEE% BALANCE SHEE%
A kind oI Iinancial statement tat list te assets, liabilities, and capital A kind oI Iinancial statement tat list te assets, liabilities, and capital
oI a business entity as oI a speciIic dated, usually at te close oI te last day oI a business entity as oI a speciIic dated, usually at te close oI te last day
oI a mont or oI a year. oI a mont or oI a year. t is a kind of financial statement that shows the t is a kind of financial statement that shows the
financial position of the business entity as of a given date, usually the end financial position of the business entity as of a given date, usually the end
of the year. of the year.
%e amount oI Requio %axi`s assets, liabilities, and capital at te end %e amount oI Requio %axi`s assets, liabilities, and capital at te end
oI te Iirst mont oI operation appears on te last line oI te summary in oI te Iirst mont oI operation appears on te last line oI te summary in
te preceding page. Minor arrangements oI tese data and te addition oI a te preceding page. Minor arrangements oI tese data and te addition oI a
eading yield te balance seet illustrated below. %is Iorm oI balance eading yield te balance seet illustrated below. %is Iorm oI balance
seet, wit te liability and capital section presented below te asset seet, wit te liability and capital section presented below te asset
section, is called te section, is called te report form. report form. Anoter arrangement in common use Anoter arrangement in common use
lists te assets on te leIt and te liabilities and capital on te rigt. lists te assets on te leIt and te liabilities and capital on te rigt.
Because oI its similarity to te account, a basic accounting device described Because oI its similarity to te account, a basic accounting device described
earlier in te capter, it is reIerred to as te earlier in te capter, it is reIerred to as te account form account form oI te balance oI te balance
seet. seet.
Requijo %axi Requijo %axi
Balance Seet Balance Seet
September 30, 19xx September 30, 19xx
Assets Assets
Cas Cas P400, 000 P400, 000
Supplies Supplies 40, 000 40, 000
Land Land 100, 000 100, 000
%otal Assets %otal Assets P540, 000 P540, 000
Liabilities Liabilities
Accounts Payable Accounts Payable P 50, 000 P 50, 000
Capital Capital
Capital Capital 490, 000 490, 000
%otal Liabilities and Capital %otal Liabilities and Capital P540, 000 P540, 000
It is customary to begin te asset section wit cas, wic It is customary to begin te asset section wit cas, wic
is Iollowed by receivables, inventory (Ior trading business), is Iollowed by receivables, inventory (Ior trading business),
supplies, prepaid expense items, and oter assets tat will be supplies, prepaid expense items, and oter assets tat will be
converted into cas or consumed in te near Iuture. %e assets converted into cas or consumed in te near Iuture. %e assets
oI a relatively permanent nature, suc as land, buildings, and oI a relatively permanent nature, suc as land, buildings, and
equipment, Iollow in tat order. Note tat in te balance seet equipment, Iollow in tat order. Note tat in te balance seet
presented te total assets and te total oI liability and capital presented te total assets and te total oI liability and capital
are equal. are equal.
%e balance seet sows te liquidity (solvency) and %e balance seet sows te liquidity (solvency) and
stability oI as enterprise. Solvency reIers to te ability oI te stability oI as enterprise. Solvency reIers to te ability oI te
business to pay currently maturing liabilities wile stability business to pay currently maturing liabilities wile stability
reIers to te ability oI te enterprise to pay maturing reIers to te ability oI te enterprise to pay maturing
obligations and give return on te investment oI te owner(s). obligations and give return on te investment oI te owner(s).
In te liabilities and capital section oI te In te liabilities and capital section oI te
balance seet, it is customary to present te balance seet, it is customary to present te
liabilities Iirst Iollowed by capital. In te liabilities Iirst Iollowed by capital. In te
illustration Ior Requijo %axi te liabilities are illustration Ior Requijo %axi te liabilities are
composed entirely oI accounts payable. Wen composed entirely oI accounts payable. Wen
tere are two or more categories oI liabilities, tere are two or more categories oI liabilities,
eac sould be listed and te total amount oI eac sould be listed and te total amount oI
liabilities presented in te Iollowing manner: liabilities presented in te Iollowing manner:
ACCOUNTING STATEMENTS ACCOUNTING STATEMENTS
Liabilities Liabilities
Accounts Payable Accounts Payable P150, 000 P150, 000
Notes Payable Notes Payable 50, 000 50, 000
Salaries Payable Salaries Payable 6, 000 6, 000
%otal Liabilities %otal Liabilities P206, 000 P206, 000
ACCOUNTING STATEMENTS ACCOUNTING STATEMENTS
INCOME S%A%EMEN% INCOME S%A%EMEN%
A kind oI Iinancial statement tat sows te summary oI A kind oI Iinancial statement tat sows te summary oI
te revenue and te expenses oI a business entity Ior a speciIic te revenue and te expenses oI a business entity Ior a speciIic
period oI time, suc as a mont or a year. period oI time, suc as a mont or a year. t is a kind of t is a kind of
financial statement that shows result of business operations for financial statement that shows result of business operations for
a period of time, usually a year. a period of time, usually a year.
Revenue earned and expenses incurred during te mont Revenue earned and expenses incurred during te mont
were recorded in te equation as increases and decreases in were recorded in te equation as increases and decreases in
capital, respectively. %e details togeter wit net income in capital, respectively. %e details togeter wit net income in
te amount oI P10, 000, are reported in te income statement te amount oI P10, 000, are reported in te income statement
presented below. presented below.
Requio Taxi Requio Taxi
Income Statement Income Statement
For the Month Ended September 30, 19xx For the Month Ended September 30, 19xx
Fares Earned Fares Earned P150, 000 P150, 000
Operating Expenses Operating Expenses
Gas & Oil Expense Gas & Oil Expense P 50, 000 P 50, 000
Wages Expense Wages Expense 40, 000 40, 000
Rent Expense Rent Expense 20, 000 20, 000
Supplies Expense Supplies Expense 20, 000 20, 000
Miscellaneous Expense Miscellaneous Expense 10, 000 10, 000
%otal Operating Expenses %otal Operating Expenses 140,000 140,000
Net Income Net Income P 10, 000 P 10, 000
%e order in wic te operating expenses are presented %e order in wic te operating expenses are presented
in te income statement varies among businesses. One oI te in te income statement varies among businesses. One oI te
arrangements commonly Iollowed is to list tem in te order arrangements commonly Iollowed is to list tem in te order
oI size, beginning wit te larger items. Miscellaneous oI size, beginning wit te larger items. Miscellaneous
expenses is usually sown as te last item regardless oI te expenses is usually sown as te last item regardless oI te
amount. amount.
In te income statement, users will know iI te operation In te income statement, users will know iI te operation
oI te business is proIitable. oI te business is proIitable. Profitability Profitability reIers to te ability reIers to te ability
oI te business to increase owner`s capital. II te total net asset oI te business to increase owner`s capital. II te total net asset
inIlow is more tan te net asset outIlow, te resulting eIIect is inIlow is more tan te net asset outIlow, te resulting eIIect is
net income. II te net asset outIlow is more tan te net asset net income. II te net asset outIlow is more tan te net asset
inIlow, it is a net loss. inIlow, it is a net loss.
ACCOUNTING STATEMENTS ACCOUNTING STATEMENTS
CAPI%AL S%A%EMEN% (Statement oI Owner`s Equity) CAPI%AL S%A%EMEN% (Statement oI Owner`s Equity)
t is a statement that shows the summary of the changes in t is a statement that shows the summary of the changes in
capital of a business entity that have occurred during a capital of a business entity that have occurred during a
specific period of time, such a month or a year. specific period of time, such a month or a year.
Comparison oI te original investment oI P500, 000 at te Comparison oI te original investment oI P500, 000 at te
beginning oI te mont wit te P490, 000 oI capital reported beginning oI te mont wit te P490, 000 oI capital reported
in te balance seet at te end oI te mont reveals a decrease in te balance seet at te end oI te mont reveals a decrease
oI P10, 000. %is net decrease is composed oI two signiIicant oI P10, 000. %is net decrease is composed oI two signiIicant
canges in capital tat occurred during te period: (1) te net canges in capital tat occurred during te period: (1) te net
income oI P10, 000, and (2) a witdrawal oI P20, 000 by te income oI P10, 000, and (2) a witdrawal oI P20, 000 by te
owner. %is inIormation is presented in te capital statement, owner. %is inIormation is presented in te capital statement,
wic serves as a connecting link between te balance seet wic serves as a connecting link between te balance seet
and te income statement. and te income statement.
Requijo Taxi Requijo Taxi
Capital Statement Capital Statement
For the Month Ended September 30, 19xx For the Month Ended September 30, 19xx
Capital, September 1, 19xx Capital, September 1, 19xx P500, 000 P500, 000
Net Income Net Income P10, 000 P10, 000
Witdrawal Witdrawal 20, 000 20, 000
Decrease in Capital Decrease in Capital 10, 000 10, 000
Capital, September 30, 19xx Capital, September 30, 19xx P490, 000 P490, 000
Basically, tere are two accounting period, Basically, tere are two accounting period,
te calendar year and te Iiscal year. A te calendar year and te Iiscal year. A
calendar year calendar year is a twelve is a twelve- -mont period tat mont period tat
ends on December 31 wile te ends on December 31 wile te fiscal year fiscal year is a is a
twelve twelve- -mont period tat ends at te end oI mont period tat ends at te end oI
any mont oter tan December. In te any mont oter tan December. In te
Pilippines, only partnersip and corporation Pilippines, only partnersip and corporation
are allowed to use Iiscal year, are allowed to use Iiscal year, single single
proprietorshi proprietorship is allowed only to use p is allowed only to use
calendar year calendar year..
ACCOUNTING STATEMENTS ACCOUNTING STATEMENTS
S%A%EMEN% OF CASH FLOWS S%A%EMEN% OF CASH FLOWS
%e statement oI cas Ilows consists oI tree sections: (1) %e statement oI cas Ilows consists oI tree sections: (1)
operating activities, (2) Iinancing activities, and (3) investing operating activities, (2) Iinancing activities, and (3) investing
activities. Eac oI tese sections is described below: activities. Eac oI tese sections is described below:
Cash Flows form Operating Activities Cash Flows form Operating Activities
%is section reports a summary oI cas receipts and cas %is section reports a summary oI cas receipts and cas
payments Irom operations. %e net cas Ilow Irom operating payments Irom operations. %e net cas Ilow Irom operating
activities will normally diIIer Irom te amount oI net income activities will normally diIIer Irom te amount oI net income
Ior te period. %is diIIerence occurs because revenues and Ior te period. %is diIIerence occurs because revenues and
expenses may not be recorded at te same time tat cas is expenses may not be recorded at te same time tat cas is
received Irom customers and cas is paid to creditors. received Irom customers and cas is paid to creditors.
ACCOUNTING STATEMENTS ACCOUNTING STATEMENTS
Cash Flows from Financing Activities Cash Flows from Financing Activities
%is section reports te cas transactions related to cas %is section reports te cas transactions related to cas
investments by te owner, borrowing, and cas witdrawals by investments by te owner, borrowing, and cas witdrawals by
te owner. te owner.
Cash Flow from Investing Activities Cash Flow from Investing Activities
%is section reports te cas transactions Ior te acquisition %is section reports te cas transactions Ior te acquisition
and sale oI relatively long and sale oI relatively long- -term or permanent term or permanent- -type assets. type assets.
%e preparation oI te statement oI cas Ilow is required by %e preparation oI te statement oI cas Ilow is required by
pronouncement, every year tat te income statement is pronouncement, every year tat te income statement is
presented. Preparing te statement oI cas Ilows requires an presented. Preparing te statement oI cas Ilows requires an
understanding oI concepts tat we will not discuss in te capter. understanding oI concepts tat we will not discuss in te capter.
But a simple illustration will be given to be able to illustrate ow But a simple illustration will be given to be able to illustrate ow
statement oI cas Ilow is prepared. statement oI cas Ilow is prepared.
Requijo Taxi Requijo Taxi
Statement of Cash Flows Statement of Cash Flows
For the Month Ended September 30, 19xx For the Month Ended September 30, 19xx
Cas Flows Irom Operating Activities: Cas Flows Irom Operating Activities:
Net Income Net Income P10, 000 P10, 000
Add: Increase in Supplies Add: Increase in Supplies 40, 000 40, 000
%otal %otal P50, 000 P50, 000
Less: Increase in Accounts Payable Less: Increase in Accounts Payable 50, 000 50, 000
Cas Irom Operating Activities Cas Irom Operating Activities P P 00
Cas Flows Irom Iinancing Activities Cas Flows Irom Iinancing Activities
Investment oI Owner Investment oI Owner 500, 000 500, 000
Cas Flows Irom Investing Activities Cas Flows Irom Investing Activities
Acquisition oI Land Acquisition oI Land (100, 000) (100, 000)
Increase in Cas Increase in Cas P400, 000 P400, 000
CHAPTER 2 CHAPTER 2
The Accounting Cycle The Accounting Cycle
THE ACCOUNTING CYCLE THE ACCOUNTING CYCLE
%e double entry accounting system provides %e double entry accounting system provides
a basic Iramework Ior te analysis oI business a basic Iramework Ior te analysis oI business
activities. Now we wis to go into greater detail activities. Now we wis to go into greater detail
about te accounting procedures used to account about te accounting procedures used to account
Ior te operations oI a business during a speciIic Ior te operations oI a business during a speciIic
period. %e accounting procedures oI most period. %e accounting procedures oI most
businesses involve certain basic steps tat are businesses involve certain basic steps tat are
accomplised in a given order. %is sequence oI accomplised in a given order. %is sequence oI
operations is known as te operations is known as te accounting cycle accounting cycle. .
THE ACCOUNTING CYCLE THE ACCOUNTING CYCLE
%e %e steps steps oI te oI te accounting cycle accounting cycle are listed below: are listed below:
1. Gater documents and analyze transactions Irom source 1. Gater documents and analyze transactions Irom source
documents. documents.
2. Record transactions in journals. 2. Record transactions in journals.
3. Post journal entries to general ledger accounts. 3. Post journal entries to general ledger accounts.
4. Prepare a trial balance. 4. Prepare a trial balance.
5. Prepare adjusting entries and adjust te general ledger 5. Prepare adjusting entries and adjust te general ledger
accounts. accounts.
6. Prepare Iinancial statements. 6. Prepare Iinancial statements.
7. Journalize closing entries. 7. Journalize closing entries.
8. Prepare post 8. Prepare post- -closing trial balance. closing trial balance.
9. Journalize reversing entries. 9. Journalize reversing entries.
%e annual period adopted by a business %e annual period adopted by a business
enterprise is known as enterprise is known as fiscal year. fiscal year. Business Business
enterprises wose Iiscal year ends in enterprises wose Iiscal year ends in
December are said to be on a December are said to be on a calendar calendar- -year year
basis. Many enterprises preIer to ave teir basis. Many enterprises preIer to ave teir
accounting year coincide wit teir accounting year coincide wit teir ~natural ~natural
business year business year; tat is, te Iiscal year ends ; tat is, te Iiscal year ends
wen business is slow and inventory quantities wen business is slow and inventory quantities
are small and easy to count. are small and easy to count.
STEP 1 STEP 1
ANALYZING TRANSACTIONS FROM SOURCE ANALYZING TRANSACTIONS FROM SOURCE
DOCUMENTS DOCUMENTS
Source documents are printed or written Iorms Source documents are printed or written Iorms
tat generate wen te enterprise engages in business tat generate wen te enterprise engages in business
transactions. Even a brieI source document usually transactions. Even a brieI source document usually
speciIies te peso amount involved, te date oI speciIies te peso amount involved, te date oI
transaction, and possibly te party dealing wit te transaction, and possibly te party dealing wit te
enterprise. Some examples oI source documents are enterprise. Some examples oI source documents are
(1) a purcase or seller`s invoice sowing evidence oI (1) a purcase or seller`s invoice sowing evidence oI
a purcase oI mercandise (or supplies) on account, a purcase oI mercandise (or supplies) on account,
(2) a bank ceck indicating te payment oI obligation, (2) a bank ceck indicating te payment oI obligation,
(3) a deposit slip sowing te amount oI Iunds turned (3) a deposit slip sowing te amount oI Iunds turned
over to te bank, (4) a cas receipt indicating Iunds over to te bank, (4) a cas receipt indicating Iunds
received Irom a customer, and (5) a cas register tape received Irom a customer, and (5) a cas register tape
listing a day`s over listing a day`s over- -te te- -counter sales to customers. counter sales to customers.
BUSINESS PAPERS BUSINESS PAPERS
All business transactions are evidenced All business transactions are evidenced
supported by printed Iorms or documents, supported by printed Iorms or documents,
called called business papers. business papers. %ese business papers %ese business papers
Iurnis te inIormation needed in recording Iurnis te inIormation needed in recording
business transactions. Witout business business transactions. Witout business
papers, it would be diIIicult to keep accurate papers, it would be diIIicult to keep accurate
record oI business transactions. %e Iollowing record oI business transactions. %e Iollowing
are good example oI business papers are good example oI business papers
commonly used in a business: commonly used in a business:
BUSINESS PAPERS BUSINESS PAPERS
1. 1. $ales or $ervice Invoice $ales or $ervice Invoice aIter te sale oI goods oI service aIter te sale oI goods oI service
as taken place, a business Iorm called as taken place, a business Iorm called invoice invoice is prepared. is prepared.
%e invoice sows te date oI sale/service rendered, list oI te %e invoice sows te date oI sale/service rendered, list oI te
articles sold or list oI services rendered, and oter inIormation. articles sold or list oI services rendered, and oter inIormation.
Invoices are Invoices are prenumbered prenumbered and usually made out in triplicate or and usually made out in triplicate or
quadruplicate depending upon te need oI te business. %e quadruplicate depending upon te need oI te business. %e
original oI te invoice is given to te buyer oI goods or original oI te invoice is given to te buyer oI goods or
services. services.
In a mercandising business, Irom te point oI vies oI te In a mercandising business, Irom te point oI vies oI te
seller, te invoice is called seller, te invoice is called sales invoice sales invoice; Irom te point oI ; Irom te point oI
view oI te buyer, it is a view oI te buyer, it is a purchase invoice purchase invoice. %e sample oI an . %e sample oI an
invoice is given below. invoice is given below.
Table 2.1 Table 2.1
BUSINESS PAPERS BUSINESS PAPERS
2. 2. Official Receipt Official Receipt oIIicial receipt are issued every oIIicial receipt are issued every
time te business receives cas. %e receipt sows te time te business receives cas. %e receipt sows te
date on wic te cas is received, te party Irom date on wic te cas is received, te party Irom
wom te cas is received, te amount oI cas wom te cas is received, te amount oI cas
received, te explanation oI te transaction, and te received, te explanation oI te transaction, and te
signature oI te personnel wo issued te receipt. signature oI te personnel wo issued te receipt.
Table 2.2 Table 2.2
BUSINESS PAPERS BUSINESS PAPERS
3. 3. $tatement of Accounts $tatement of Accounts many business like many business like
Meralco Meralco, P.L.D.%., M.W.S.S., SMAR% , P.L.D.%., M.W.S.S., SMAR%
Communication, Inc., and oters send bills to teir Communication, Inc., and oters send bills to teir
customers to inIorm tem oI te amount tey ave to customers to inIorm tem oI te amount tey ave to
pay. %us, tere are electric bills, ligt bills, water pay. %us, tere are electric bills, ligt bills, water
bills, telepone bills, and many oters. %ese bills bills, telepone bills, and many oters. %ese bills
sent by tese companies are called sent by tese companies are called $tatement of $tatement of
Account. Account. A sample oI statement oI account is given A sample oI statement oI account is given
below. below.
Table 2.3 Table 2.3
BUSINESS PAPERS BUSINESS PAPERS
4. 4. Deposit $lip Deposit $lip at present, many businesses ave at present, many businesses ave
current account or cecking accounts wit te banks. current account or cecking accounts wit te banks.
%ey deposit teir money in te bank and te %ey deposit teir money in te bank and te
payment Irom teir deposit are made by means oI payment Irom teir deposit are made by means oI
issuing cecks. issuing cecks.
Deposit slip is Iilled up every time money is Deposit slip is Iilled up every time money is
deposited in te bank. %e deposit slip sows te date deposited in te bank. %e deposit slip sows te date
oI te deposit , te name iI te depositor, te account oI te deposit , te name iI te depositor, te account
number oI te depositor, te amount oI cas number oI te depositor, te amount oI cas
deposited, and te signature oI te depositor. deposited, and te signature oI te depositor.
BUSINESS PAPERS BUSINESS PAPERS
5. 5. heck heck a ceck is an order to te bank signed a ceck is an order to te bank signed
by te person issuing it (te depositor), to pay by te person issuing it (te depositor), to pay
te bearer or order a certain sum oI money. te bearer or order a certain sum oI money.
AIter te bank ave paid te payee, te amount AIter te bank ave paid te payee, te amount
is deducted Irom te deposit oI te person wo is deducted Irom te deposit oI te person wo
issued te ceck. issued te ceck.
BUSINESS PAPERS BUSINESS PAPERS
6. 6. ash Joucher ash Joucher te cas voucer is te document te cas voucer is te document
prepared every time payment oI an obligation is prepared every time payment oI an obligation is
made. %e voucer is a business` preprinted Iorm tat made. %e voucer is a business` preprinted Iorm tat
is is prenumbered prenumbered, and sould include te Iollowing , and sould include te Iollowing
inIormation; date oI payment, name oI te payee, inIormation; date oI payment, name oI te payee,
address oI te payee, description oI te obligation to address oI te payee, description oI te obligation to
be paid, amount paid, approval oI payment be paid, amount paid, approval oI payment\\, and , and
signature oI te payee. A sample oI cas voucer is signature oI te payee. A sample oI cas voucer is
presented below. presented below.
Table 2.4 Table 2.4
BUSINESS PAPERS BUSINESS PAPERS
. ash Register $lip . ash Register $lip in many businesses, like in restaurants, cas registers in many businesses, like in restaurants, cas registers
are used. Strip oI paper comes out as evidence oI te money received by are used. Strip oI paper comes out as evidence oI te money received by
te casier. %e slip sows te date, items ordered, amount paid, and oter te casier. %e slip sows te date, items ordered, amount paid, and oter
inIormation. inIormation.
. Other Business papers . Other Business papers tere are many oter documents tat are used by tere are many oter documents tat are used by
accountant to obtain inIormation regarding business transactions. Wen accountant to obtain inIormation regarding business transactions. Wen
buyer/customer is given allowance, returned te goods purcased, or buyer/customer is given allowance, returned te goods purcased, or
discovered error in te invoice, te seller oI te goods or services sould be discovered error in te invoice, te seller oI te goods or services sould be
notiIied. II te claim is valid, te seller oI goods or services sends a notiIied. II te claim is valid, te seller oI goods or services sends a credit credit
memorandum memorandum wic sows te amount by wic account is reduced. wic sows te amount by wic account is reduced.
Wen te depositor obtains a ceckbook Irom te bank and te depositor Wen te depositor obtains a ceckbook Irom te bank and te depositor
did not pay it, te bank carges te depositor a did not pay it, te bank carges te depositor a debit memorandum debit memorandum. .
Promissory Notes Promissory Notes may be received by te business Irom its debtors, or te may be received by te business Irom its debtors, or te
business may give it to its creditors. A promissory note is a written promise business may give it to its creditors. A promissory note is a written promise
to pay signed by one party, called te maker, to pay a certain speciIied sum to pay signed by one party, called te maker, to pay a certain speciIied sum
to anoter. %e note may or may not be interest bearing. %e amount to be to anoter. %e note may or may not be interest bearing. %e amount to be
paid not including te interest, is called te paid not including te interest, is called te face of the note face of the note. %e amount to . %e amount to
be paid including te interest is called te be paid including te interest is called te maturity value maturity value..
STEP 2 STEP 2
1OURNALIZING 1OURNALIZING
1ournalizing 1ournalizing is te process oI recording is te process oI recording
business transactions to te business transactions to te book of original book of original
entry entry called called journals journals. Journals, or records oI . Journals, or records oI
original entry, are tabular records in wic original entry, are tabular records in wic
business activities are analyzed in terms oI business activities are analyzed in terms oI
debits and credits and debits and credits and recorded in recorded in
chronological order chronological order beIore tey are entered in beIore tey are entered in
te general ledger. An accounting journal may te general ledger. An accounting journal may
be one oI a group oI special journals, or it may be one oI a group oI special journals, or it may
be a general journal. be a general journal.
STEP 2 STEP 2
1OURNALIZING 1OURNALIZING
A A special journal special journal is designed to record a speciIic is designed to record a speciIic
type oI Irequently occurring business transactions. type oI Irequently occurring business transactions.
For example, a business wit 100 employees wo are For example, a business wit 100 employees wo are
paid every two weeks would probably use a special paid every two weeks would probably use a special
journal Ior payrolls. Because two paydays would journal Ior payrolls. Because two paydays would
normally occur in a mont, at least 200 payroll normally occur in a mont, at least 200 payroll
transaction would be recorded. Special journals are transaction would be recorded. Special journals are
used to Iacilitate te recording oI business used to Iacilitate te recording oI business
transactions in te book oI accounts. Oter types oI transactions in te book oI accounts. Oter types oI
transactions tat are oIten recorded in special journals transactions tat are oIten recorded in special journals
are cas receipts, cas disbursements, sales oI goods are cas receipts, cas disbursements, sales oI goods
or services, and purcases oI goods or services. or services, and purcases oI goods or services.
STEP 2 STEP 2
1OURNALIZING 1OURNALIZING
In contrast to te special journals, te In contrast to te special journals, te
general journals general journals (two (two- -column journal) is a column journal) is a
relatively simple record in wic any type oI relatively simple record in wic any type oI
business transaction may be recorded. All business transaction may be recorded. All
businesses, even tose using many special businesses, even tose using many special
journals, ave a general journal. journals, ave a general journal. %ransactions %ransactions
that do not occur often enough to warrant that do not occur often enough to warrant
entry in a special fournal are recorded in the entry in a special fournal are recorded in the
general fournal. general fournal.
STEP 2 STEP 2
1OURNALIZING 1OURNALIZING
%e procedure Ior recording entries in te general journal is as %e procedure Ior recording entries in te general journal is as
Iollows: Iollows:
ndicate the year, month, and date of the entry. Usually the ndicate the year, month, and date of the entry. Usually the
year and month are rewritten only at the top of each fournal year and month are rewritten only at the top of each fournal
or at the point where they change. or at the point where they change.
Enter titles of the accounts affected in the description Enter titles of the accounts affected in the description
column. Accounts debited are entered close to the left column. Accounts debited are entered close to the left- -hand hand
margin and are traditionally recorded first. Accounts margin and are traditionally recorded first. Accounts
credited are then recorded, indented one credited are then recorded, indented one- -half inch to the half inch to the
right. right.
Place the appropriate money amounts in the left Place the appropriate money amounts in the left- -hand hand
(debit) and right (credit) money columns. (debit) and right (credit) money columns.
Write an explanation of the transaction below the account Write an explanation of the transaction below the account
titles, indented one titles, indented one- -half inch from margin. %he explanation half inch from margin. %he explanation
should be as brief as possible, disclosing the information should be as brief as possible, disclosing the information
necessary to understand the event being recorded. necessary to understand the event being recorded.
STEP 2 STEP 2
1OURNALIZING 1OURNALIZING
Eac transaction entered in te journal sould Eac transaction entered in te journal sould
stated in terms oI equal debits and credits. %e stated in terms oI equal debits and credits. %e
account titles cited in te description column sould account titles cited in te description column sould
correspond to tose used Ior te related general correspond to tose used Ior te related general
ledger accounts. %o separate clearly te various ledger accounts. %o separate clearly te various
entries, we sould leave a line blank between entries. entries, we sould leave a line blank between entries.
We will explain te use oI te column eaded 'Post We will explain te use oI te column eaded 'Post
ReI. (posting reIerence) later in step 3 oI te ReI. (posting reIerence) later in step 3 oI te
accounting cycle. accounting cycle.
Table 2.5 Table 2.5
STEP 2 STEP 2
1OURNALIZING 1OURNALIZING
Compound 1ournal Entries Compound 1ournal Entries
A journal entry tat involves more tan just two A journal entry tat involves more tan just two
accounts is called a accounts is called a compound entry compound entry. %e last . %e last
journal entry in Exibit 1 journal entry in Exibit 1- -2 is an example oI 2 is an example oI
compound journal entry involving tree accounts. compound journal entry involving tree accounts.
%e debit oI P9,600 to %est Equipment is oIIset by %e debit oI P9,600 to %est Equipment is oIIset by
credits oI P5,000 to Cas and P4,600 to Accounts credits oI P5,000 to Cas and P4,600 to Accounts
Payable. Any number oI accounts may appear in a Payable. Any number oI accounts may appear in a
compound entry; but regardless oI ow many compound entry; but regardless oI ow many
accounts are used, te total oI te debit amounts must accounts are used, te total oI te debit amounts must
always equal te total oI te credit amounts. always equal te total oI te credit amounts.
STEP 2 STEP 2
1OURNALIZING 1OURNALIZING
Correction of 1ournal Errors Correction of 1ournal Errors
Certain procedures sould be Iollowed wen errors are Certain procedures sould be Iollowed wen errors are
Iound in journal entries. Iound in journal entries. Errors should not be erased, because Errors should not be erased, because
erasures completely remove the original recording. erasures completely remove the original recording. As you As you
migt imagine, te acceptance oI erasures migt allow migt imagine, te acceptance oI erasures migt allow
someone to IalsiIy accounting records; consequently, oter someone to IalsiIy accounting records; consequently, oter
procedures are used. procedures are used.
II an error journal entry as not been transIerred to te II an error journal entry as not been transIerred to te
general ledger, a single line is drawn troug te erroneous general ledger, a single line is drawn troug te erroneous
amount or accounts title, and te correction is entered on te amount or accounts title, and te correction is entered on te
same line just above te error. OIten te person correcting te same line just above te error. OIten te person correcting te
entry must place is or er initials near te correction. %is entry must place is or er initials near te correction. %is
Iacilitated any Iurter inquiry about te nature oI or reason Ior Iacilitated any Iurter inquiry about te nature oI or reason Ior
te correction. Once an erroneous journal entry as been te correction. Once an erroneous journal entry as been
transIerred to te ledger accounts, bot records contain error. transIerred to te ledger accounts, bot records contain error.
%e recommended procedures Ior correcting tis situation are %e recommended procedures Ior correcting tis situation are
discussed in step 3 below. discussed in step 3 below.
STEP 3 STEP 3
POSTING TO THE LEDGER POSTING TO THE LEDGER
AIter transactions ave been journalized, te next AIter transactions ave been journalized, te next
step in te accounting cycle is to transIer te debits step in te accounting cycle is to transIer te debits
and credits in eac journal entry to te appropriate and credits in eac journal entry to te appropriate
general ledger accounts. %us, data Irom te journal general ledger accounts. %us, data Irom te journal
tat stresses te total oI particular transaction (suc as tat stresses te total oI particular transaction (suc as
collection oI accounts receivable) are transcribed to a collection oI accounts receivable) are transcribed to a
ledger tat stresses te total eIIect oI many business ledger tat stresses te total eIIect oI many business
transactions on a particular business variable (suc as transactions on a particular business variable (suc as
cas, accounts receivable, and so on). %is type oI cas, accounts receivable, and so on). %is type oI
data is speciIically needed Ior te preparation oI data is speciIically needed Ior te preparation oI
Iinancial statements. Iinancial statements.
STEP 3 STEP 3
POSTING TO THE LEDGER POSTING TO THE LEDGER
Posting References Posting References
It is important to be able to trace any entry in a ledger It is important to be able to trace any entry in a ledger
account to te journal Irom wic it was posted. account to te journal Irom wic it was posted.
Consequently, accounting records use a system oI reIerences. Consequently, accounting records use a system oI reIerences.
Bot journals and accounts ave posting reIerence columns. Bot journals and accounts ave posting reIerence columns.
Entries in the posting reference columns of journals Entries in the posting reference columns of journals
indicate the account to which the related debit and credit indicate the account to which the related debit and credit
has been posted. Posting references appearing in ledger has been posted. Posting references appearing in ledger
accounts identify the journal from which the related entry accounts identify the journal from which the related entry
was recorded. was recorded. %e posting reIerences in te journals and %e posting reIerences in te journals and
ledger accounts are entered wen te journal entries are posted ledger accounts are entered wen te journal entries are posted
to te ledger accounts. to te ledger accounts.
STEP 3 STEP 3
POSTING TO THE LEDGER POSTING TO THE LEDGER
Chart of Accounts Chart of Accounts
A cart oI accounts is usually prepared in order to A cart oI accounts is usually prepared in order to
Iacilitate te analysis oI activities and te Iormulation oI Iacilitate te analysis oI activities and te Iormulation oI
journal entries. journal entries. %he %he chart of accounts chart of accounts is a list of the titles and is a list of the titles and
numbers of all accounts found in the general ledger. numbers of all accounts found in the general ledger. %e %e
account titles sould be grouped by, and in order oI, te Iive account titles sould be grouped by, and in order oI, te Iive
major sections oI te general ledger (assets, liabilities, owner`s major sections oI te general ledger (assets, liabilities, owner`s
equity, revenue, and expenses). Exibit 1 equity, revenue, and expenses). Exibit 1- -3 sows a cart oI 3 sows a cart oI
accounts Ior accounts Ior Dalay Dalay %V Service, indicating te account %V Service, indicating te account
numbers tat will now be used. numbers tat will now be used.
Table 2.6 Table 2.6
STEP 3 STEP 3
POSTING TO THE LEDGER POSTING TO THE LEDGER
Illustration Of Posting. Illustration Of Posting. Exibit 1 Exibit 1- -4 oI Dalay %V Service`s December 4 oI Dalay %V Service`s December
transactions Irom te general journal to te ledger accounts. Eac debit transactions Irom te general journal to te ledger accounts. Eac debit
entry is posted as Iollows: entry is posted as Iollows:
%he date (year, month, and day) is entered in the appropriate account. %he date (year, month, and day) is entered in the appropriate account.
Note that this is the date of the fournal entry, not necessarily the date of Note that this is the date of the fournal entry, not necessarily the date of
the actual posting. As with fournals, the year and month are restated the actual posting. As with fournals, the year and month are restated
only at the top of a new accounts page or at the point where they only at the top of a new accounts page or at the point where they
change. change.
%he amount is entered in the account as a debit or a credit, as indicated %he amount is entered in the account as a debit or a credit, as indicated
in the fournals money columns, and the new balance is calculated. in the fournals money columns, and the new balance is calculated.
%he posting reference from the fournal (both symbol and page number) %he posting reference from the fournal (both symbol and page number)
is placed in the posting reference column of the ledger account. is placed in the posting reference column of the ledger account.
%he account number is placed in the posting reference column of the %he account number is placed in the posting reference column of the
fournal. fournal.
STEP 3 STEP 3
POSTING TO THE LEDGER POSTING TO THE LEDGER
Regardless oI te type oI journals or te number oI entries Regardless oI te type oI journals or te number oI entries
involved, te total debit posted sould equal te total credit involved, te total debit posted sould equal te total credit
posted. Exibit 1 posted. Exibit 1- -4 (see Iollowing pages) is a compreensive 4 (see Iollowing pages) is a compreensive
illustration oI te journalizing and posting oI te December illustration oI te journalizing and posting oI te December
transactions oI transactions oI Dalay Dalay %V Service. You sould review eac %V Service. You sould review eac
transaction in te illustration Iorm. transaction in te illustration Iorm.
te nature oI te transaction te nature oI te transaction
te related journal entry, and te related journal entry, and
te subsequent postings. te subsequent postings.
Bear in mind that the account numbers in the posting Bear in mind that the account numbers in the posting
reference of the journal are not entered when the journal reference of the journal are not entered when the journal
entry in recorded; they are inserted when the entry is entry in recorded; they are inserted when the entry is
posted. posted.
Table 2.7 Table 2.7
STEP 3 STEP 3
POSTING TO THE LEDGER POSTING TO THE LEDGER
%e Ioregoing sould ave been noted in te %e Ioregoing sould ave been noted in te
illustration; in every entry in te journal te debit illustration; in every entry in te journal te debit
amount equal te credit amount. Debit amount in te amount equal te credit amount. Debit amount in te
journal are posted to te debit side oI te journal are posted to te debit side oI te
corresponding accounts in te general ledger. In like corresponding accounts in te general ledger. In like
manner, credit amounts in te journal are posted to manner, credit amounts in te journal are posted to
te credit side oI te corresponding accounts in te te credit side oI te corresponding accounts in te
general ledger. %ereIore, it Iollows tat te sum oI general ledger. %ereIore, it Iollows tat te sum oI
te debit amounts and tat oI te credit amounts te debit amounts and tat oI te credit amounts
would also be equal in te ledger. would also be equal in te ledger.
STEP 3 STEP 3
POSTING TO THE LEDGER POSTING TO THE LEDGER
Correction Erroneous Postings Correction Erroneous Postings
Even te most careIully kept accounts will occasionally Even te most careIully kept accounts will occasionally
contain posting errors. An error involving only te wrong contain posting errors. An error involving only te wrong
amount being posted may be corrected by drawing a line amount being posted may be corrected by drawing a line
troug te incorrect amount, entering te correct amount troug te incorrect amount, entering te correct amount
above, and initialing te correction. Wen an amount as been above, and initialing te correction. Wen an amount as been
posted to te wrong account, owever, te correction sould posted to te wrong account, owever, te correction sould
be made wit a journal entry. Some common errors are as be made wit a journal entry. Some common errors are as
Iollows: Iollows: transposition transposition (transIer oI position) wic means tat (transIer oI position) wic means tat
tere was a cange in te position oI numbers, e.g. 936 was tere was a cange in te position oI numbers, e.g. 936 was
written as 396; written as 396; slide slide (transplacement) wic means tat te (transplacement) wic means tat te
decimal point was placed in wrong position, e.g. 10,000 was decimal point was placed in wrong position, e.g. 10,000 was
written as 1,000 or 100,000. more detailed discussion on tis written as 1,000 or 100,000. more detailed discussion on tis
matter is provided in te section oI adjusting entry. matter is provided in te section oI adjusting entry.
STEP 4 STEP 4
PREPARATION OF A TRIAL BALANCE PREPARATION OF A TRIAL BALANCE
AIter te journal entries ave been posted to te general AIter te journal entries ave been posted to te general
ledger accounts, a trial balance is prepared Irom te general ledger accounts, a trial balance is prepared Irom te general
ledger. Periodically, a test oI te equality oI te debit amounts ledger. Periodically, a test oI te equality oI te debit amounts
and credit amounts in te general ledger is made. %e test is and credit amounts in te general ledger is made. %e test is
known as te known as te trial balance trial balance. It is usually prepared at te end oI . It is usually prepared at te end oI
a mont, a quarter, a semester, or a year. a mont, a quarter, a semester, or a year.
Preparatory to te setting oI te trial balance, eac general ledger Preparatory to te setting oI te trial balance, eac general ledger
account wit more tan one entry on eiter side is account wit more tan one entry on eiter side is footed. footed.
Pencil Iooting means tat te temporary total oI te amounts Pencil Iooting means tat te temporary total oI te amounts
oI eac side oI te account is taken. Eac oI te debit totals oI eac side oI te account is taken. Eac oI te debit totals
and credit totals oI te accounts are written (in pencil) just and credit totals oI te accounts are written (in pencil) just
below te last entry on te particular side. %is Iacilitate te below te last entry on te particular side. %is Iacilitate te
determination oI te account balance aIter transactions ave determination oI te account balance aIter transactions ave
been posted. Accounts wit only one entry on eiter side need been posted. Accounts wit only one entry on eiter side need
not be Iooted. not be Iooted.
STEP 4 STEP 4
PREPARATION OF A TRIAL BALANCE PREPARATION OF A TRIAL BALANCE
Open and Closed Accounts Open and Closed Accounts
%e diIIerence between a debit total and a %e diIIerence between a debit total and a
credit total oI an account is called credit total oI an account is called account account
balance balance. Wen te debit total and credit total . Wen te debit total and credit total
oI an account are not equal, te account is said oI an account are not equal, te account is said
to be an to be an open account open account (wit balance). Wen (wit balance). Wen
te debit total and credit total oI an account are te debit total and credit total oI an account are
equal, te account is said to be, equal, te account is said to be, closed account closed account
( witout balance). ( witout balance).
STEP 4 STEP 4
PREPARATION OF A TRIAL BALANCE PREPARATION OF A TRIAL BALANCE
Types of Trial Balance Types of Trial Balance
%rial balance could eiter be trial balance oI totals or trial %rial balance could eiter be trial balance oI totals or trial
balance oI balances. %e balance oI balances. %e trial balance of totals trial balance of totals is a list oI all is a list oI all
accounts (tat ave entry, weter open or closed) in te general accounts (tat ave entry, weter open or closed) in te general
ledger wit teir total debit amounts and total credit amounts. For ledger wit teir total debit amounts and total credit amounts. For
tis reason, it is called tis reason, it is called trial balance of totals trial balance of totals. %e . %e trial balance of trial balance of
balances balances is a list oI te open accounts in te general ledger and teir is a list oI te open accounts in te general ledger and teir
balances. balances. Only open accounts are included when preparing trial Only open accounts are included when preparing trial
balance of balances, closed accounts are excluded. balance of balances, closed accounts are excluded. %e %e
conventional way is te preparation oI trial balance oI balances conventional way is te preparation oI trial balance oI balances
rater tan te trail balance oI totals. %is type oI trial balance is rater tan te trail balance oI totals. %is type oI trial balance is
commonly used because it gives te detailed inIormation needed in commonly used because it gives te detailed inIormation needed in
te oter steps oI te accounting cycle. te oter steps oI te accounting cycle.
%e preparation oI te trial balance is more oI a ceck on te %e preparation oI te trial balance is more oI a ceck on te
aritmetical accuracy oI te accounting records rater tan an aritmetical accuracy oI te accounting records rater tan an
absolute guarantee tat all generally accepted accounting principles, absolute guarantee tat all generally accepted accounting principles,
practices, and procedures ave been complied accurately. practices, and procedures ave been complied accurately.
STEP 4 STEP 4
PREPARATION OF A TRIAL BALANCE PREPARATION OF A TRIAL BALANCE
Steps in Preparing Trial Balance Steps in Preparing Trial Balance
Prepare the trial balance in a two Prepare the trial balance in a two- -column fournal. Heading column fournal. Heading
should be written on top of the page. %he heading shows the should be written on top of the page. %he heading shows the
name of the business on the first line. %rial balance on the name of the business on the first line. %rial balance on the
second line, and the date on the third line. Each line of the second line, and the date on the third line. Each line of the
heading must be centered on the page. heading must be centered on the page.
Write the title of each open account on the Account %itles Write the title of each open account on the Account %itles
column. f the account has a debit balance, write the column. f the account has a debit balance, write the
balance in the debit column of the trial balance. f it has a balance in the debit column of the trial balance. f it has a
credit balance, write the balance on the credit amount credit balance, write the balance on the credit amount
column. All the account titles in the trial balance are written column. All the account titles in the trial balance are written
with the same margin from the left side of the page, that is, with the same margin from the left side of the page, that is,
credit account titles should not be indented. credit account titles should not be indented.
Add each amount column to prove that the two totals are Add each amount column to prove that the two totals are
equal. equal.
f the two totals are equal, draw lines under the totals. f the two totals are equal, draw lines under the totals.
STEP 4 STEP 4
PREPARATION OF A TRIAL BALANCE PREPARATION OF A TRIAL BALANCE
%e trial balance oI te Dalay %V Service at %e trial balance oI te Dalay %V Service at
December 31 is sown in Exibit 1 December 31 is sown in Exibit 1- -5. sowing all te 5. sowing all te
general ledger account balances in one report, as is general ledger account balances in one report, as is
done in tis trial balance, makes it easier to review done in tis trial balance, makes it easier to review
te accounts and determine wic account balances te accounts and determine wic account balances
need to be adjusted beIore preparing te Iinancial need to be adjusted beIore preparing te Iinancial
statements. statements.
%able 2.8 %able 2.8
CHAPTER 3 CHAPTER 3
Adjusting Entries and the Preparation of the Adjusting Entries and the Preparation of the
Financial Statements Financial Statements
Adjusting Entries and the Preparation of the Adjusting Entries and the Preparation of the
Financial Statements Financial Statements
BeIore te books oI accounts are adjusted at te BeIore te books oI accounts are adjusted at te
end oI te accounting period, te accounts may be end oI te accounting period, te accounts may be
classiIied into real, nominal, and mixed. classiIied into real, nominal, and mixed. Real Real
accounts accounts are te asset, liability, and te capital are te asset, liability, and te capital
accounts. accounts. Nominal accounts Nominal accounts are te expense and are te expense and
income accounts. income accounts. Mixed accounts Mixed accounts are tose wic are tose wic
contain bot real and nominal elements and wic are contain bot real and nominal elements and wic are
adjusted at te end oI te period so tat teir balances adjusted at te end oI te period so tat teir balances
become eiter purely real or purely nominal. %us, become eiter purely real or purely nominal. %us,
aIter te accounts ave been adjusted, only real and aIter te accounts ave been adjusted, only real and
nominal accounts exist; te real and nominal elements nominal accounts exist; te real and nominal elements
contained in te mixed accounts ave been recorded contained in te mixed accounts ave been recorded
in separate accounts. in separate accounts.
STEP 5: GATHERING DATA TO AD1UST THE STEP 5: GATHERING DATA TO AD1UST THE
ACCOUNTS AND PREPARATION OF A ACCOUNTS AND PREPARATION OF A
WORKSHEET WORKSHEET
ADJUS%ING EN%RIES UNDER %HE ACCRUAL BASIS OF ADJUS%ING EN%RIES UNDER %HE ACCRUAL BASIS OF
ACCOUN%ING ACCOUN%ING
%e extent and nature oI adjusting entries depend on te %e extent and nature oI adjusting entries depend on te
basis on wic te books are kept by te enterprise. %ere are basis on wic te books are kept by te enterprise. %ere are
generally two metods oI keeping accounting records; te cas generally two metods oI keeping accounting records; te cas
basis and te accrual basis. Under te basis and te accrual basis. Under te cash basis of cash basis of
accounting accounting revenues are recognized as expense on te period revenues are recognized as expense on te period
oI payment. In te oI payment. In te accrual basis of account accrual basis of account, revenues are , revenues are
recognized are recognized as income on te period tat recognized are recognized as income on te period tat
revenue is earned not in te period oI collection, wile revenue is earned not in te period oI collection, wile
expenses are recognized as expense on te period tat it was expenses are recognized as expense on te period tat it was
incurred not on te period oI payment. incurred not on te period oI payment.
STEP 5: GATHERING DATA TO AD1UST THE STEP 5: GATHERING DATA TO AD1UST THE
ACCOUNTS AND PREPARATION OF A ACCOUNTS AND PREPARATION OF A
WORKSHEET WORKSHEET
%e application oI te accrual basis oI accounting %e application oI te accrual basis oI accounting
necessitates adjusting entries Ior te Iollowing necessitates adjusting entries Ior te Iollowing
seven items: seven items:
DoubtIul Accounts DoubtIul Accounts
Depreciation Depreciation
Accrued Expenses Accrued Expenses
Accrued Revenue Accrued Revenue
Prepaid Expenses Prepaid Expenses
Unearned Revenue (DeIerred Revenue) Unearned Revenue (DeIerred Revenue)
Ending Mercandise Inventory Ending Mercandise Inventory
DOUBTFUL ACCOUNT DOUBTFUL ACCOUNT
DOUB%FUL ACCOUN%S DOUB%FUL ACCOUN%S
Wen a business allows customers to avail services on Wen a business allows customers to avail services on
credit, it maybe inevitable tat some oI te receivables will credit, it maybe inevitable tat some oI te receivables will
not be collected. %e loss wic is a result oI wortless or not be collected. %e loss wic is a result oI wortless or
bad accounts is reIerred to as doubtIul accounts expense. For bad accounts is reIerred to as doubtIul accounts expense. For
proper income measurement, it is important tat a provision proper income measurement, it is important tat a provision
Ior te uncollectible accounts be provided during te same Ior te uncollectible accounts be provided during te same
period tat te income Irom services is recognized. %is period tat te income Irom services is recognized. %is
produces a better matcing oI revenues and expenses and, produces a better matcing oI revenues and expenses and,
tereIore, a better income measurement procedure. Using tereIore, a better income measurement procedure. Using
tis procedure, operations are carged wit estimated tis procedure, operations are carged wit estimated
expenses, and receivables are reduced by means oI a contra expenses, and receivables are reduced by means oI a contra
asset account asset account Allowance Ior DoubtIul Accounts. Allowance Ior DoubtIul Accounts.
DOUBTFUL ACCOUNT DOUBTFUL ACCOUNT
%e provision Ior doubtIul accounts is %e provision Ior doubtIul accounts is
based on estimate and is computed usually as a based on estimate and is computed usually as a
percentage of credit revenues percentage of credit revenues or as a or as a
percentage oI percentage oI outstanding accounts outstanding accounts
receivable receivable. %e purposes oI te adjustment . %e purposes oI te adjustment
are: (1) to record te doubtIul account expense are: (1) to record te doubtIul account expense
during te same period tat te related revenue during te same period tat te related revenue
is recognized, and (2) to report te accounts is recognized, and (2) to report te accounts
receivable at te approximate collectible receivable at te approximate collectible
amount. amount.
DOUBTFUL ACCOUNT DOUBTFUL ACCOUNT
ADJUS%ING EN%RY FOR DOUB%FUL ACCOUN%S ADJUS%ING EN%RY FOR DOUB%FUL ACCOUN%S
%e pro %e pro- -Iorma adjusting journal entry Ior te Iorma adjusting journal entry Ior te
estimated loss on uncollectible account is: estimated loss on uncollectible account is:
%able 3.1 %able 3.1
%o illustrate, let us assume te Iollowing data as part oI te
trial balance oI an enterprise rendering repair services Ior
ome appliances:
%able 3.2
DOUBTFUL ACCOUNT DOUBTFUL ACCOUNT
Percentage Revenue Percentage Revenue
Assume it was provided tat te expected Assume it was provided tat te expected
uncollectible account during te year would be uncollectible account during te year would be
equal to 1 oI te Service Income earned equal to 1 oI te Service Income earned
during te period, te adjusting entry Ior during te period, te adjusting entry Ior
doubtIul accounts would be: doubtIul accounts would be:
Table 3.3 Table 3.3
DOUBTFUL ACCOUNT DOUBTFUL ACCOUNT
Percentage Receivable Percentage Receivable
Wen te provision Ior doubtIul accounts is Wen te provision Ior doubtIul accounts is
based on percentage oI receivable, it may based on based on percentage oI receivable, it may based on
te Iollowing estimates oI computation: (1) allowance te Iollowing estimates oI computation: (1) allowance
Ior doubtIul accounts increased (decreased) Ior doubtIul accounts increased (decreased) by by
percentage oI outstanding receivable, or (2) percentage oI outstanding receivable, or (2)
allowance Ior doubtIul accounts increased allowance Ior doubtIul accounts increased
(decreased) (decreased) to to percentage oI outstanding receivable. percentage oI outstanding receivable.
It sould be noted tat te diIIerence oI te two It sould be noted tat te diIIerence oI te two
metods is only te words metods is only te words by by and and to to, but it sould be , but it sould be
remembered because it makes a lot oI diIIerence. remembered because it makes a lot oI diIIerence.
DOUBTFUL ACCOUNT DOUBTFUL ACCOUNT
Allowance for Doubtful Accounts Increased BY percentage of Allowance for Doubtful Accounts Increased BY percentage of
receivable receivable
Assume tat it was agreed tat te allowance Ior doubtIul Assume tat it was agreed tat te allowance Ior doubtIul
accounts will be increased by 1 oI te outstanding receivable. accounts will be increased by 1 oI te outstanding receivable.
%e adjusting journal entry will be: %e adjusting journal entry will be:
%able 3.4 %able 3.4
Note tat iI te allowance Ior doubtIul accounts will be
increased by percentage oI receivable, te doubtIul
accounts expense is computed by multiplying te
receivable by te given percentage.
DOUBTFUL ACCOUNT DOUBTFUL ACCOUNT
Allowance for Doubtful Accounts Increase Allowance for Doubtful Accounts Increase
TO percentage of receivable TO percentage of receivable
Assume tat it was agreed tat te Assume tat it was agreed tat te
allowance Ior doubtIul accounts will be allowance Ior doubtIul accounts will be
increased to 1 oI te outstanding receivable. increased to 1 oI te outstanding receivable.
%e adjusting journal entry will be: %e adjusting journal entry will be:
%able 3.5
DOUBTFUL ACCOUNT DOUBTFUL ACCOUNT
Computation: Computation:
Balance aIter adjustment (P50,000 x 1) Balance aIter adjustment (P50,000 x 1) P500 P500
Less: Balance beIore adjustment Less: Balance beIore adjustment 200 200
Amount oI adjustment Ior DoubtIul Accounts Amount oI adjustment Ior DoubtIul Accounts 300 300
Note tat iI te allowance Ior doubtIul account will be Note tat iI te allowance Ior doubtIul account will be
increased increased to to percentage oI receivable, te doubtIul account percentage oI receivable, te doubtIul account
expense is computed by multiplying te receivable by te expense is computed by multiplying te receivable by te
given percentage to compute Ior te desired balance oI te given percentage to compute Ior te desired balance oI te
allowance aIter adjustment, ten te balance beIore te allowance aIter adjustment, ten te balance beIore te
adjustment is deducted Irom it to arrive at te amount oI adjustment is deducted Irom it to arrive at te amount oI
doubtIul accounts to be provided. doubtIul accounts to be provided.
DEPRECIATION DEPRECIATION
DEPRECIA%ION DEPRECIA%ION
Wen te business entity acquired tangible Iixed assets suc as Wen te business entity acquired tangible Iixed assets suc as
delivery equipment, Iurniture, computer, macines, building, and oter delivery equipment, Iurniture, computer, macines, building, and oter
long long- -liIe assets, it is basically paying in advance Ior te useIulness oI liIe assets, it is basically paying in advance Ior te useIulness oI
suc asset. %ese assets elp generate revenue Ior te entity. Eac suc asset. %ese assets elp generate revenue Ior te entity. Eac
accounting period in wic suc assets are used sould sare a portion accounting period in wic suc assets are used sould sare a portion
oI teir cost as expense. Proper accounting requires te systematic oI teir cost as expense. Proper accounting requires te systematic
allocation (assignment) oI te cost oI te assets over its estimated useIul allocation (assignment) oI te cost oI te assets over its estimated useIul
liIe. liIe. Depreciation Depreciation is te assignment oI part oI te cost oI te asset over is te assignment oI part oI te cost oI te asset over
te period it was used to properly matc te revenue and cost oI tat te period it was used to properly matc te revenue and cost oI tat
period. period.
%e Iollowing tree Iactors are considered in te computation oI depreciation: %e Iollowing tree Iactors are considered in te computation oI depreciation:
Cost oI te Iixed asset Cost oI te Iixed asset
%e estimated useIul liIe %e estimated useIul liIe
%e estimated scrap value oI te asset %e estimated scrap value oI te asset
%able 3.6
Date DESCRIPTION
Post
Ref. Debit
Credi
t
19xx
Dec. 31
Depreciation Expense-Name
oI Asset xxx
Accumulated
Depreciation-Name oI Asset xxx
%o record depreciation
Ior te period
Adjusting Entry for Depreciation
DEPRECIATION DEPRECIATION
%e account Depreciation is an expense account wile te %e account Depreciation is an expense account wile te
account Accumulated Depreciation is a contra asset account wic account Accumulated Depreciation is a contra asset account wic
is deducted Irom te appropriate Iixed asset account wen preparing is deducted Irom te appropriate Iixed asset account wen preparing
a balance seet. a balance seet.
%o illustrate, assume tat an equipment was purcased on %o illustrate, assume tat an equipment was purcased on
January 1 oI te year Ior P1,000,000. It as an estimated liIe oI 10 January 1 oI te year Ior P1,000,000. It as an estimated liIe oI 10
years and a scrap value oI P100, 000 aIter its useIul liIe. At te end years and a scrap value oI P100, 000 aIter its useIul liIe. At te end
oI te year, beIore te Iinancial statements are prepared, annual oI te year, beIore te Iinancial statements are prepared, annual
depreciation sould be adjusted. %e annual depreciation is depreciation sould be adjusted. %e annual depreciation is
computed as Iollows: computed as Iollows:
Formula to Compute Annual Depreciation: Formula to Compute Annual Depreciation:
Cost of Asset Cost of Asset - - Scrap Value Scrap Value
Estimated Useful Life Estimated Useful Life
DEPRECIATION DEPRECIATION
At te end oI te accounting period, te At te end oI te accounting period, te
depreciation to be provided would amount to P90, 000 depreciation to be provided would amount to P90, 000
(P1,000,000 (P1,000,000 P100, 000 P100, 000 10 years ). Accordingly, 10 years ). Accordingly,
te adjustment would be: te adjustment would be:
%able 3.7 %able 3.7
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec. 31
Depreciation Expense-
Equipment 90,000
Accumulated
Depreciation-Equipment 90,000
%o record depreciation
Ior te period
%e metod used in computing depreciation Ior te
equipment is te straigt-line metod. %is is te
simplest and te most commonly used metod in
computing depreciation.
DEPRECIATION DEPRECIATION
Depreciation expense Depreciation expense is te assigned portion oI te cost oI te Iixed is te assigned portion oI te cost oI te Iixed
asset to te periods during wic it is used. asset to te periods during wic it is used. Accumulated depreciation Accumulated depreciation is is
te total accumulated amount oI depreciation tat as been recorded Ior te te total accumulated amount oI depreciation tat as been recorded Ior te
Iixed asset. %e diIIerence between te cost oI te Iixed asset and te Iixed asset. %e diIIerence between te cost oI te Iixed asset and te
accumulated depreciation is te accumulated depreciation is te book value book value oI te asset. %e book value oI te asset. %e book value
represent te portion oI te cost oI te Iixed asset tat as not yet been represent te portion oI te cost oI te Iixed asset tat as not yet been
recorded as depreciation expense. In te illustration provided above, te recorded as depreciation expense. In te illustration provided above, te
equipment would be presented in te balance seet as Iollows: equipment would be presented in te balance seet as Iollows:
Equipment Equipment P1,000,000 P1,000,000
Less: Accumulated Depreciation Less: Accumulated Depreciation 90,000 90,000
Book Value Book Value P 910,000 P 910,000
%e accumulated depreciation account is known as te contra %e accumulated depreciation account is known as te contra- -asset asset
account, since it is presented as a deduction Irom te asset account. account, since it is presented as a deduction Irom te asset account.
DEPRECIATION DEPRECIATION
Fractional Depreciation Fractional Depreciation
In te illustration given, it was assumed tat te In te illustration given, it was assumed tat te
asset is used Ior one year. Let us assume now tat te asset is used Ior one year. Let us assume now tat te
equipment was acquired only July 1 (not January 1) equipment was acquired only July 1 (not January 1)
and was used only Ior six monts. How muc and was used only Ior six monts. How muc
depreciation sould be provided as oI December 31 depreciation sould be provided as oI December 31
oI te year? oI te year?
Formula to Compute Fractional Depreciation Formula to Compute Fractional Depreciation
Cost of Asset Cost of Asset -- Scrap Value Scrap Value x Fractional Depreciation x Fractional Depreciation
Estimated Useful Life Estimated Useful Life
DEPRECIATION DEPRECIATION
Following te given Iormula, te Following te given Iormula, te
depreciation to be provided at te end oI te depreciation to be provided at te end oI te
year would be P45, 000 (P1,000,000 year would be P45, 000 (P1,000,000 P100, P100,
000 000 10 years x ). %e adjusting entry to 10 years x ). %e adjusting entry to
record te depreciation oI te above equipment record te depreciation oI te above equipment
would be: would be:
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec.
3
1
Depreciation Expense-
Equipment
45,00
0
Accumulated
Depreciation-Equipment 45,000
%o record depreciation
Ior six monts.
%able 3.8
ACCRUED EXPENSES ACCRUED EXPENSES
3. ACCRUED EXPENSES 3. ACCRUED EXPENSES
Accrued Expenses Accrued Expenses are expenses already incurred but not yet paid. are expenses already incurred but not yet paid.
%e business usually incurs expenses but may take time beIore it could pay %e business usually incurs expenses but may take time beIore it could pay
tem. Usually expenses is recorded wen payment is made. II at te end oI tem. Usually expenses is recorded wen payment is made. II at te end oI
te period te expense is not yet paid, it may tereIore still be unrecorded. te period te expense is not yet paid, it may tereIore still be unrecorded.
This situation creates understatement of expenses on the income This situation creates understatement of expenses on the income
statement which will overstate the net income and understate liabilities statement which will overstate the net income and understate liabilities
in the balance sheet. in the balance sheet. Consequently, an adjustment is needed to up Consequently, an adjustment is needed to up- -date te date te
accounts Ior proper Iinancial statement presentation. accounts Ior proper Iinancial statement presentation.
%e accrued expenses are usually incurred on various continuing %e accrued expenses are usually incurred on various continuing
services provided to te business suc as electricity, water, telepone, services provided to te business suc as electricity, water, telepone,
taxes, rental, interest, salaries and many oters. taxes, rental, interest, salaries and many oters.
Adjusting Entry for Accrued Expenses Adjusting Entry for Accrued Expenses
%e pro %e pro- -Iorma adjusting journal entry Ior accrued expense is: Iorma adjusting journal entry Ior accrued expense is:
Table 3.9 Table 3.9
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec. 31 An Expense Account 20, 000
(Name oI expense)
Payable
20,
000
%o record accrued
expense Ior te period
ACCRUED EXPENSES ACCRUED EXPENSES
Illustration. Illustration. Assume Nikko Jay Service Co. is renting a Assume Nikko Jay Service Co. is renting a
sop location at te rate oI P20, 000 per mont. Its lease sop location at te rate oI P20, 000 per mont. Its lease
agreement provides tat payment oI rental sould be made on agreement provides tat payment oI rental sould be made on
or beIore te 5t day oI every mont Ior te mont aIter te or beIore te 5t day oI every mont Ior te mont aIter te
Iacility was used. Meaning, October rental sould be paid by Iacility was used. Meaning, October rental sould be paid by
November 5, November rental sould be paid December 5, November 5, November rental sould be paid December 5,
and so on. At December 31, wen te business will prepare te and so on. At December 31, wen te business will prepare te
Iinancial statements, te December rental is still unpaid Iinancial statements, te December rental is still unpaid
altoug tey ave use te Iacility. Correspondingly, because altoug tey ave use te Iacility. Correspondingly, because
rent expense is understated rent expense is understated and and liability is understated liability is understated too, too,
an adjusting entry as Iollows is necessary: an adjusting entry as Iollows is necessary:
Table 3.10 Table 3.10
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec. 31 Rent Expense
20,
000
Rent Payable
20,
000
%o record accrued
expense Ior te period
ACCRUED REVENUE ACCRUED REVENUE
ACCRUED REVENUE ACCRUED REVENUE
Accrued revenues Accrued revenues are revenue already earned but collection as not are revenue already earned but collection as not
yet been received. Many kinds oI revenues like revenue Irom interest, yet been received. Many kinds oI revenues like revenue Irom interest,
revenue Irom commission, Irom rental on property, are recorded only revenue Irom commission, Irom rental on property, are recorded only
wen received. It goes to say, tereIore, tat wen no collection is wen received. It goes to say, tereIore, tat wen no collection is
received tese revenues are not yet recorded. received tese revenues are not yet recorded. This results in the This results in the
understatement of revenue account on the income statement and understatement of revenue account on the income statement and
subsequently understatement of receivable account in the balance subsequently understatement of receivable account in the balance
sheet. sheet. Consequently, an adjusting entry is necessary to up Consequently, an adjusting entry is necessary to up- -date and date and
correct te accounts to be able to present reliable Iinancial statements. correct te accounts to be able to present reliable Iinancial statements.
Adjusting Entry for Accrued Revenue Adjusting Entry for Accrued Revenue
%e pro %e pro- -Iorma adjusting entry Ior accrued revenue is: Iorma adjusting entry Ior accrued revenue is:
Table 3.11 Table 3.11
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec. 31
(Name oI Income)
Receivable xxx
Revenue Account xxx
%o record accrued
revenue Ior te period
ACCRUED REVENUE ACCRUED REVENUE
Illustration Illustration: In te preceding illustration Ior : In te preceding illustration Ior
Nikko Jay Co. above, was analyzed on te point oI Nikko Jay Co. above, was analyzed on te point oI
view oI te lessee. Let us now analyze it Irom te view oI te lessee. Let us now analyze it Irom te
point oI view oI te owner oI te owner oI te point oI view oI te owner oI te owner oI te
property. II you were te owner oI te property, at te property. II you were te owner oI te property, at te
end oI December, you ave already earned your rent end oI December, you ave already earned your rent
revenue because tey ave already used te property revenue because tey ave already used te property
but you ave not received teir payment. %is is a but you ave not received teir payment. %is is a
good example oI accrued revenue. For tis good example oI accrued revenue. For tis
illustration, te necessary adjusting entry is: illustration, te necessary adjusting entry is:
Table 3.12 Table 3.12
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec.
3
1 Rent Receivable 20,000
Rent Revenue 20,000
%o record accrued rent
Ior December.
PREPAID EXPENSES PREPAID EXPENSES
PREPAID EXPENSES PREPAID EXPENSES
Prepaid expenses Prepaid expenses are expenses already paid but not yet are expenses already paid but not yet
incurred. Expenses could be paid in advance. Some example oI incurred. Expenses could be paid in advance. Some example oI
prepaid expenses are rent paid in advance, advertising paid in prepaid expenses are rent paid in advance, advertising paid in
advance, interest on discounted notes, purcase oI supplies, and advance, interest on discounted notes, purcase oI supplies, and
insurance premium paid on te beginning oI te policy period. insurance premium paid on te beginning oI te policy period.
Prepaid expenses are assets, not expenses. Prepaid expenses are assets, not expenses. %e terms prepaid, %e terms prepaid,
unexpired, unused, on and, and inventory denotes assets. At te unexpired, unused, on and, and inventory denotes assets. At te
end oI te accounting period, wen te portion oI tese assets end oI te accounting period, wen te portion oI tese assets
ave been used or expired, tey become expense tat requires ave been used or expired, tey become expense tat requires
adjustment. adjustment.
Advance payment oI expenses (Prepaid expense) could be Advance payment oI expenses (Prepaid expense) could be
recorded in te accounting records under any one oI te two recorded in te accounting records under any one oI te two
metods: (1) te asset metod, and (2) te expense metod. metods: (1) te asset metod, and (2) te expense metod.
PREPAID EXPENSES PREPAID EXPENSES
The Asset Method The Asset Method
%e asset metod is te procedure oI recording te advance payment %e asset metod is te procedure oI recording te advance payment
oI expenses by debiting an asset account. At te end oI te accounting oI expenses by debiting an asset account. At te end oI te accounting
period, te asset recorded could ave been partly used up, rendering te period, te asset recorded could ave been partly used up, rendering te
asset account debited to be overstated wile te expense account is asset account debited to be overstated wile te expense account is
understated. %is situation requires te preparation oI an adjusting entry to understated. %is situation requires te preparation oI an adjusting entry to
correct and up correct and up- -date te accounts Ior proper Iinancial statement date te accounts Ior proper Iinancial statement
presentation. presentation.
Entry for Prepaid Expenses using Asset Method Entry for Prepaid Expenses using Asset Method
%e journal entry to record te payment oI expenses using te asset %e journal entry to record te payment oI expenses using te asset
metod is: metod is:
Table 3.13 Table 3.13
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Sept. 1
Asset Account (Prepaid,
Unused, etc.) xxx
Cas xxx
%o record advance
payment oI expenses.
Note tat asset account is debited to record te
advance payment oI expenses. For tis reason, it is
called asset method.
PREPAID EXPENSES PREPAID EXPENSES
Adjusting Entry for Prepaid Expenses using Adjusting Entry for Prepaid Expenses using
Asset Method Asset Method
%e pro %e pro- -Iorma adjusting journal entry Ior Iorma adjusting journal entry Ior
prepaid using te asset metod is: prepaid using te asset metod is:
Table 3.14 Table 3.14
Date DESCRIPTION
Post
Ref. Debit
Credi
t
19xx
Dec.
3
1 Expense Account xxx
Asset Account
(Prepaid, Unused, etc.) xxx
%o record unexpired
portion oI an asset Ior te
period.
PREPAID EXPENSES PREPAID EXPENSES
Illustration. Illustration. Assume tat on September 1 iI te current Assume tat on September 1 iI te current
year, Ma. Gina %rucking Service paid six year, Ma. Gina %rucking Service paid six- -mont advertising mont advertising
amounting to P120, 000 to Ace Advertising Company. II te asset amounting to P120, 000 to Ace Advertising Company. II te asset
metod oI recording is used, ten te entry on September 1 will be: metod oI recording is used, ten te entry on September 1 will be:
%able 3.15 %able 3.15
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Sept. 1 Prepaid Advertising
120,0
00
Cas
120,00
0
%o record advance
payment oI advertising.
Analysis. %e rate oI advertising per mont is P20, 000 (P120,
000 6). At December 31, te end oI te accounting period,
P80, 000 (P20, 000 x 4 monts) oI te advertising applicable
to te monts oI September to December ave expired wile
P40, 000 (P20, 000 x 2 monts) te portion applicable to te
monts oI January and February (next year) remains unused.
At December 31, te recorded prepaid advertising is P120,
000, wen it sould only be P40, 000.
PREPAID EXPENSES PREPAID EXPENSES
%e asset is overstated by P80, 000, te same amount oI %e asset is overstated by P80, 000, te same amount oI
understatement oI te advertising expense account. At December understatement oI te advertising expense account. At December
31, te adjusting entry sould be: 31, te adjusting entry sould be:
%able 3.16 %able 3.16
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec. 31 Advertising Expense
80,
000
Prepaid Advertising
80,
000
%o record advertising
expense incurred Ior te
period
It It should should be be noticed noticed in in the the analysis, analysis, that that the the account account
debited debited in in the the original original entry entry (upon (upon payment) payment) is is the the
account account credited credited on on the the adjustment adjustment.. It It is is so so because because
te te account account debited debited in in te te recording recording oI oI te te payment payment is is
overstated overstated at at te te end end oI oI te te period period..
PREPAID EXPENSES PREPAID EXPENSES
The Expense Method The Expense Method
%e expense metod is te procedure oI recording te advance %e expense metod is te procedure oI recording te advance
payment oI expenses by debiting an expense account. At te end oI te payment oI expenses by debiting an expense account. At te end oI te
accounting period, te expense recorded could not ave been used up, accounting period, te expense recorded could not ave been used up,
rendering te expense account debited to be overstated wile te asset is rendering te expense account debited to be overstated wile te asset is
account understated. %is situation requires te preparation oI adjusting account understated. %is situation requires te preparation oI adjusting
entry to correct and up entry to correct and up- -date te accounts Ior proper Iinancial statement date te accounts Ior proper Iinancial statement
presentation. presentation.
Original Entry for Prepaid Expenses using Expense Method Original Entry for Prepaid Expenses using Expense Method
%e journal entry to record te payment oI expenses using te %e journal entry to record te payment oI expenses using te
expense metod is: expense metod is:
Table 3.17 Table 3.17
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Sept. 1 Expense Account xxx
Cas xxx
%o record advance
payment oI expenses
Note tat expense account is debited to record te advance
payment oI expenses. For tis reason, it is call expense
method.
PREPAID EXPENSES PREPAID EXPENSES
Adjusting Entry for Prepaid Expenses using Adjusting Entry for Prepaid Expenses using
Expense Method Expense Method
%e pro %e pro- -Iorma adjusting journal entry Ior Iorma adjusting journal entry Ior
prepaid expenses using te expense metod is: prepaid expenses using te expense metod is:
%able 3.18 %able 3.18
Date DESCRIPTION
Post
Ref. Debit
Credi
t
19xx
Dec.
3
1
Asset Account (Prepaid,
Unused, etc.) xxx
Expense Account xxx
%o record Unexpired
expense during te period
PREPAID EXPENSES PREPAID EXPENSES
Illustration. Illustration. We will be using te same data Ior asset We will be using te same data Ior asset
metod, on te P120, 000 advertising paid by Ma. Gina metod, on te P120, 000 advertising paid by Ma. Gina
%rucking Service to Ace Advertiser Company Ior te period %rucking Service to Ace Advertiser Company Ior te period
September 1 (current year) to February (next year). II te September 1 (current year) to February (next year). II te
expense metod oI recording is used, ten te entry Ior expense metod oI recording is used, ten te entry Ior
September 1 would be: September 1 would be:
%able 3.19 %able 3.19
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Sept. 1 Advertising Expense
120,00
0
Cas
120,00
0
%o record advance
payment oI Advertising
Analysis Analysis.. %e %e analysis analysis made made using using te te asset asset
metod metod is is still still valid valid.. But, But, because because te te expense expense
account account was was debited debited and and te te P P120 120,, 000 000 is is not not all all
used used up, up, te te expense expense account account is is overstated overstated by by
P P40 40,, 000 000,, te te portion portion applicable applicable to to te te monts monts oI oI
January January and and February February (next (next year) year).. It It is is te te same same
amount amount oI oI understatement understatement oI oI te te asset asset (prepaid) (prepaid)
account account..
%able %able 33..20 20
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec. 31 Prepaid Advertising
40,00
0
Advertising Expense 40,000
%o record te
amount oI unexpired
advertising at te end oI
te period.
PREPAID EXPENSES PREPAID EXPENSES
It should be noticed in the analysis, that the It should be noticed in the analysis, that the
account debited in the original entry (upon account debited in the original entry (upon
payment) is the account credited on the payment) is the account credited on the
adjustment. adjustment. It is so because te account debited in It is so because te account debited in
te recording oI te payment is overstated at te end te recording oI te payment is overstated at te end
oI te period. oI te period.
In te two analysis provided, bot Ior te asset In te two analysis provided, bot Ior te asset
metod and te expense metod, it sould be noted metod and te expense metod, it sould be noted
tat aIter te adjustment ave been recorded in te tat aIter te adjustment ave been recorded in te
accounts te resulting balance Ior bot accounts will accounts te resulting balance Ior bot accounts will
be te same, P80, 000 Ior Advertising Expense and be te same, P80, 000 Ior Advertising Expense and
P40, 000 Ior Prepaid Advertising. %e amounts P40, 000 Ior Prepaid Advertising. %e amounts
represent te correct balances in our analysis. represent te correct balances in our analysis.
UNEARNED REVENUE (Deferred Revenue) UNEARNED REVENUE (Deferred Revenue)
Unearned revenues Unearned revenues are revenues already received are revenues already received
(collected) but not yet earned. Sometimes te business (collected) but not yet earned. Sometimes te business
receives payment Ior te services (or goods) beIore service receives payment Ior te services (or goods) beIore service
is actually rendered. Wen suc revenues are received in is actually rendered. Wen suc revenues are received in
advance, te enterprise as an obligation to perIorm services advance, te enterprise as an obligation to perIorm services
(or delivery oI goods). (or delivery oI goods). The liability is referred to as The liability is referred to as
unearned revenue. unearned revenue.
Like in prepaid expenses, advance receipt oI revenue Like in prepaid expenses, advance receipt oI revenue
(Unearned revenue) may be recorded in te accounting (Unearned revenue) may be recorded in te accounting
records under any one oI te two metods: records under any one oI te two metods:
Liability Metods Liability Metods
Revenue Metods Revenue Metods
UNEARNED REVENUE (Deferred Revenue) UNEARNED REVENUE (Deferred Revenue)
The Liability Method The Liability Method
%e liability metod is te procedure oI recording te %e liability metod is te procedure oI recording te
advance receipt oI revenue by crediting a liability account. advance receipt oI revenue by crediting a liability account. At At
the end of the accounting period, the liability recorded the end of the accounting period, the liability recorded
could have been partially earned rendering the liability could have been partially earned rendering the liability
account credited to be overstated and the revenue account account credited to be overstated and the revenue account
understated. understated. %is situation requires te preparation oI %is situation requires te preparation oI
adjusting entry to correct and up adjusting entry to correct and up- -date te accounts Ior proper date te accounts Ior proper
Iinancial statement presentation. Iinancial statement presentation.
Original Entry for Unearned Revenue using Liability Method Original Entry for Unearned Revenue using Liability Method
%e journal entry to record te receipt oI revenue in %e journal entry to record te receipt oI revenue in
advance using te liability metod is: advance using te liability metod is:
Table 3.21 Table 3.21
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Aug.
1
Cas xxx
Unearned (Name oI
Revenue) Account xxx
%o record advance
receipt oI revenue
UNEARNED REVENUE (Deferred Revenue) UNEARNED REVENUE (Deferred Revenue)
Adjusting Entry for Unearned Revenue Adjusting Entry for Unearned Revenue
using Liability Method using Liability Method
%e pro %e pro- -Iorma adjusting journal entry Ior Iorma adjusting journal entry Ior
unearned revenue using te liability metod is: unearned revenue using te liability metod is:
%able 3.22 %able 3.22
Table 3.22 Table 3.22
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec. 31
Liability (Unearned)
Account xxx
Revenue Account xxx
%o record revenue
earned Ior te period.
UNEARNED REVENUE (Deferred Revenue) UNEARNED REVENUE (Deferred Revenue)
Illustration. Illustration. Assume tat on August 1, te Assume tat on August 1, te
business received P72, 000 Irom a tenant, business received P72, 000 Irom a tenant,
representing 6 representing 6- -mont advance rental, covering mont advance rental, covering
te period Irom August (current year) to te period Irom August (current year) to
January (next year). II te liability metod is January (next year). II te liability metod is
used, te entry on August 1 would be: used, te entry on August 1 would be:
Table 3.23 Table 3.23
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Aug. 1 Cas 72,000
Unearned Rent 72,000
%o record advance
receipt oI revenue.
UNEARNED REVENUE (Deferred Revenue) UNEARNED REVENUE (Deferred Revenue)
Analysis. Analysis. %e rate oI te montly rental is P12, 000 (P72, 000 %e rate oI te montly rental is P12, 000 (P72, 000 6). At 6). At
December 31, te end oI te accounting period, P60, 000 (P12, 000 x 5 December 31, te end oI te accounting period, P60, 000 (P12, 000 x 5
monts) oI te rent applicable to te monts oI August to December ave monts) oI te rent applicable to te monts oI August to December ave
been earned wile P12, 000 te rent applicable to te mont oI January been earned wile P12, 000 te rent applicable to te mont oI January
(next year) remains unearned. At December 31, te recorded unearned rent (next year) remains unearned. At December 31, te recorded unearned rent
per record beIore any adjustment is P72, 000, wen it sould only be P12, per record beIore any adjustment is P72, 000, wen it sould only be P12,
000. %e liability account is overstated by P60, 000, te same amount oI 000. %e liability account is overstated by P60, 000, te same amount oI
understatement oI te rent revenue account. At December 31, te adjusting understatement oI te rent revenue account. At December 31, te adjusting
entry sould be: entry sould be:
It should be noted in the analysis, that the account credited in the original It should be noted in the analysis, that the account credited in the original
entry (upon receipt of revenue) is the account debited on the adjustment. entry (upon receipt of revenue) is the account debited on the adjustment.
It is so because te account credited in te recording oI te receipt oI revenue It is so because te account credited in te recording oI te receipt oI revenue
is overstated at te end oI te period. is overstated at te end oI te period.
Table 3.24 Table 3.24
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec. 31 Unearned Rent 60,000
Rent Revenue 60,000
%o record revenue
earned during te period
UNEARNED REVENUE (Deferred Revenue) UNEARNED REVENUE (Deferred Revenue)
The Revenue Method The Revenue Method
%e revenue metod is te procedure oI recording te %e revenue metod is te procedure oI recording te
advance receipt oI revenue by crediting a revenue account. advance receipt oI revenue by crediting a revenue account. At At
the end of the accounting period, the revenue recorded the end of the accounting period, the revenue recorded
could not have been all earned, rendering the revenue could not have been all earned, rendering the revenue
account credited to be overstated and the liability account account credited to be overstated and the liability account
understated. understated. %is situation requires te preparation oI an %is situation requires te preparation oI an
adjusting entry to correct and up adjusting entry to correct and up- -date te accounts Ior proper date te accounts Ior proper
Iinancial statement presentation. Iinancial statement presentation.
Original Entry for Unearned Revenue using Revenue Method Original Entry for Unearned Revenue using Revenue Method
%e journal entry to record te receipt oI revenue in %e journal entry to record te receipt oI revenue in
advance using te revenue metod is: advance using te revenue metod is:
Table 3.25 Table 3.25
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Aug. 1 Cas xxx
Revenue Account xxx
%o record advance
receipt oI revenue.
UNEARNED REVENUE (Deferred Revenue) UNEARNED REVENUE (Deferred Revenue)
Adjusting Entry for Unearned Revenue using Revenue Adjusting Entry for Unearned Revenue using Revenue
Method Method
%e pro %e pro- -Iorma adjusting journal entry Ior unearned revenue Iorma adjusting journal entry Ior unearned revenue
using te revenue metod is: using te revenue metod is:
Table 3.26 Table 3.26
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec.
3
1 Revenue Account xxx
Unearned (Name oI
Revenue) Account xxx
%o record revenue
unearned at te end oI te
period
Illustration. Applying te same example in te liability
metod, tat on August 1, te business received P72, 000
Irom a tenant, representing a 6-mont advance rental
covering te period Irom August (current year) to
January (next year), iI te revenue metod is used, te
entry would be:
Table 3.27
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec. 31 Revenue Account xxx
Unearned (Name oI
Revenue) Account xxx
%o record revenue
unearned at te end oI te
period
UNEARNED REVENUE (Deferred Revenue) UNEARNED REVENUE (Deferred Revenue)
Analysis. Analysis. %e rate oI te montly rental is P12, 000 (P72, 000 %e rate oI te montly rental is P12, 000 (P72, 000
6). At December 31, te end oI te accounting period, only 6). At December 31, te end oI te accounting period, only
P60, 000 (P12, 000 x 5 monts) oI te rent applicable Ior te P60, 000 (P12, 000 x 5 monts) oI te rent applicable Ior te
monts oI August to December ave been earned wile P12, monts oI August to December ave been earned wile P12,
000 te rent applicable to te monts oI January (next year) 000 te rent applicable to te monts oI January (next year)
remains unearned. At December 31, te recorded rent revenue remains unearned. At December 31, te recorded rent revenue
beIore any adjustment is P72, 000, wen it sould only be P60, beIore any adjustment is P72, 000, wen it sould only be P60,
000. %e revenue account is overstated by P12, 000, te same 000. %e revenue account is overstated by P12, 000, te same
amount oI understatement oI te unearned rent account. At amount oI understatement oI te unearned rent account. At
December 31, te adjusting entry sould be: December 31, te adjusting entry sould be:
Table 3.28 Table 3.28
Date DESCRIPTION
Post
Ref. Debit Credit
19xx
Dec.
3
1 Rent Revenue
12,00
0
Unearned Rent 12,000
%o record revenue
unearned at te end oI te
period
UNEARNED REVENUE (Deferred Revenue) UNEARNED REVENUE (Deferred Revenue)
It should be noticed in the analysis, that It should be noticed in the analysis, that
the account credited in the original entry the account credited in the original entry
(upon receipt of revenue) is the account (upon receipt of revenue) is the account
debited on the adjustment. debited on the adjustment. It is so because It is so because
te account credited in te recording oI te te account credited in te recording oI te
receipt oI revenue is overstated at te end oI receipt oI revenue is overstated at te end oI
te period. te period.
PREPARATION OF THE WORK SHEET PREPARATION OF THE WORK SHEET
%e %e work sheet work sheet is also a tool used by te accountant to is also a tool used by te accountant to
Iacilitate te preparation oI adjusting entries, closing entries, Iacilitate te preparation oI adjusting entries, closing entries,
and Iinancial statements. It is a columnar paper wic can be and Iinancial statements. It is a columnar paper wic can be
used Ior te Iollowing purposes: used Ior te Iollowing purposes:
Compute adjustments and te adjusted balances oI te Compute adjustments and te adjusted balances oI te
accounts. accounts.
ClassiIy te accounts into income statement accounts ClassiIy te accounts into income statement accounts
(nominal accounts) and balance seet accounts (real (nominal accounts) and balance seet accounts (real
accounts) Ior Iinancial statements preparation. accounts) Ior Iinancial statements preparation.
Determine net income (or loss). Determine net income (or loss).
PREPARATION OF THE WORK SHEET PREPARATION OF THE WORK SHEET
Accountants oIten use work seet to Iacilitate preparation Accountants oIten use work seet to Iacilitate preparation
oI Iinancial statements. %e Iinancial statements maybe oI Iinancial statements. %e Iinancial statements maybe
prepared directly Irom te trial balance iI te business as prepared directly Irom te trial balance iI te business as
relatively Iew accounts and iI it sows te correct balances oI relatively Iew accounts and iI it sows te correct balances oI
te accounts. II not, adjustments must tereIore be posted to te accounts. II not, adjustments must tereIore be posted to
te general ledger to bring te balances to correct amounts. %o te general ledger to bring te balances to correct amounts. %o
Iacilitate suc work, te trial balance may be prepared on a Iacilitate suc work, te trial balance may be prepared on a
work seet (may be called analysis seet), a multi work seet (may be called analysis seet), a multi- -column column
document wic provides eIIicient way oI summarizing document wic provides eIIicient way oI summarizing
necessary data Ior te Iinancial statements preparation. Using necessary data Ior te Iinancial statements preparation. Using
te work seet, te accountant is assured oI te matematical te work seet, te accountant is assured oI te matematical
accuracy oI is work. accuracy oI is work.
PREPARATION OF THE WORK SHEET PREPARATION OF THE WORK SHEET
%e Iollowing steps are Iollowed wen preparing te work seet: %e Iollowing steps are Iollowed wen preparing te work seet:
Place te eading at te center oI te columnar Iorm: Name oI te Place te eading at te center oI te columnar Iorm: Name oI te
Company, Work Seet, and, te period covered. Company, Work Seet, and, te period covered.
Place te trial balance on te Iirst section (Iirst two column). List Place te trial balance on te Iirst section (Iirst two column). List
te accounts as tey appear in te general ledger. See to it tat te te accounts as tey appear in te general ledger. See to it tat te
debit and credit totals are balanced. debit and credit totals are balanced.
Enter all te adjustments in te next section (tird and Iourt Enter all te adjustments in te next section (tird and Iourt
columns). Use numbers or letters to identiIy eac entry. Prove columns). Use numbers or letters to identiIy eac entry. Prove
equality oI te debit and credit amounts, double equality oI te debit and credit amounts, double- -rule iI equal. rule iI equal.
New account titles are placed below, in te appropriate account New account titles are placed below, in te appropriate account
title column. title column.
Complete te next section (IiIt and sixt columns), extend te Complete te next section (IiIt and sixt columns), extend te
adjusted balances oI all accounts to te adjusted trial balance adjusted balances oI all accounts to te adjusted trial balance
columns. columns.
PREPARATION OF THE WORK SHEET PREPARATION OF THE WORK SHEET
Complete te statement sections, extend te Iourt Complete te statement sections, extend te Iourt
section (sevent and eigt columns) all income section (sevent and eigt columns) all income
statement accounts (nominal accounts), and to te statement accounts (nominal accounts), and to te
IiIt section (nint and tent columns) all balance IiIt section (nint and tent columns) all balance
seet accounts (real accounts). seet accounts (real accounts).
Determines te net income (or net loss) by Determines te net income (or net loss) by
analyzing te column totals oI te income statement analyzing te column totals oI te income statement
columns. II te credit column total exceed te debit columns. II te credit column total exceed te debit
column total, it represent net income. II te debit column total, it represent net income. II te debit
column total exceed te credit column total, it column total exceed te credit column total, it
represent a net loss. represent a net loss.
PREPARATION OF THE WORK SHEET PREPARATION OF THE WORK SHEET
Illustrative Problem Illustrative Problem -- Preparation oI Work Preparation oI Work
Seet. Sagum Laboratory began operation on Seet. Sagum Laboratory began operation on
January 1, 19xx, and provides various January 1, 19xx, and provides various
diagnostic services Ior pysicians and clinics. diagnostic services Ior pysicians and clinics.
Its accounting period ends December 31 and Its accounting period ends December 31 and
te accounts are adjusted annually on tis date. te accounts are adjusted annually on tis date.
Its unadjusted trial balance at December 31, Its unadjusted trial balance at December 31,
19xx, is as Iollows: 19xx, is as Iollows:
Sagum Sagum Laboratory Laboratory
Trial Balance Trial Balance
December 31, 19xx December 31, 19xx
Account Titles Account Titles Debit Debit
Credit Credit
Cas Cas 1, 000 1, 000
Accounts Receivable Accounts Receivable 9, 200 9, 200
Medical Supplies Medical Supplies 31, 300 31, 300
Prepaid Insurance Prepaid Insurance 6, 000 6, 000
Laboratory Equipment Laboratory Equipment 270, 000 270, 000
Accumulated Depreciation Accumulated Depreciation Laboratory Laboratory
Equipment Equipment 60, 000 60, 000
Accounts Payable Accounts Payable 3, 000 3, 000
Unearned Diagnostic Fees Unearned Diagnostic Fees 4, 000 4, 000
Cecil Cecil Sagum Sagum, Capital , Capital 110, 000 110, 000
Diagnostic Fees Diagnostic Fees 220, 000 220, 000
Salaries and Wages Expense Salaries and Wages Expense 58, 000 58, 000
Rent Expense Rent Expense
Total Total 397, 500 397, 500 397, 500 397, 500
Table 3.29 Table 3.29
STEP 6 STEP 6
PREPARATION OF FINANCIAL STATEMENTS PREPARATION OF FINANCIAL STATEMENTS
AIter te workseet as been completed, te Iormal AIter te workseet as been completed, te Iormal
Iinancial statements are prepared. %e kind oI Iinancial Iinancial statements are prepared. %e kind oI Iinancial
statements ave been illustrated, te nature and Iorm oI te statements ave been illustrated, te nature and Iorm oI te
income statement and te balance seet ave been taken up in income statement and te balance seet ave been taken up in
Capter 1. %e Iinancial statement oI Sagum Laboratory will Capter 1. %e Iinancial statement oI Sagum Laboratory will
be prepared wit te aid oI a workseet in tis capter. be prepared wit te aid oI a workseet in tis capter.
Basically, tere are two principal accounting statements Basically, tere are two principal accounting statements
Ior a sole proprietorsip: te balance seet and te income Ior a sole proprietorsip: te balance seet and te income
statement. %e b statement. %e balance sheet alance sheet is tat kind oI Iinancial is tat kind oI Iinancial
statement tat sows te Iinancial position oI te business as statement tat sows te Iinancial position oI te business as
oI a given date, usually te end oI te accounting period. %e oI a given date, usually te end oI te accounting period. %e
income statement income statement is te kind oI Iinancial statement tat is te kind oI Iinancial statement tat
sows results oI operations Ior a period oI time, usually a year, sows results oI operations Ior a period oI time, usually a year,
STEP 6 STEP 6
PREPARATION OF FINANCIAL STATEMENTS PREPARATION OF FINANCIAL STATEMENTS
Kinds of Income Statement Kinds of Income Statement
Single Single- -step form step form -- in tis type oI income statement, in tis type oI income statement,
all revenues are grouped togeter in one section, and all revenues are grouped togeter in one section, and
all expenses in anoter section. %e net income or net all expenses in anoter section. %e net income or net
loss are determined by deducting te total expenses loss are determined by deducting te total expenses
Irom te total revenue. Irom te total revenue.
Multi Multi- -step form step form
Forms of Balance Sheet Forms of Balance Sheet
Report Form Report Form - - a balance seet tat presents te a balance seet tat presents te
assets on te top section and te liabilities and assets on te top section and te liabilities and
owner`s equity at te bottom section oI te report. owner`s equity at te bottom section oI te report.
Sagum Laboratory Sagum Laboratory
Balance Sheet Balance Sheet
As of December 31, 19xx As of December 31, 19xx
ASSETS ASSETS
Current Assets Current Assets
Cas Cas P 1,000 P 1,000
Accounts Receivable P 9,200 Accounts Receivable P 9,200
Less: Allowances Ior DoubtIul Depreciation Less: Allowances Ior DoubtIul Depreciation P 300 P 300 P 8,900 P 8,900
Medical Supplies P 6,300 Medical Supplies P 6,300
Prepaid Insurance Prepaid Insurance P 4,500 P 4,500
Total Current Assets Total Current Assets P 20,700 P 20,700
Property, Plant, and Equipment Property, Plant, and Equipment
Laboratory Equipment P 270,000 Laboratory Equipment P 270,000
Less: Accumulated Depreciation Less: Accumulated Depreciation P 90,000 P 90,000
Total Property, Plant, and Equipment Total Property, Plant, and Equipment 180,000 180,000
Total Assets Total Assets P 200,700 P 200,700
LIABILITIES LIABILITIES
Current Liabilities Current Liabilities
Accounts Payable P 3,100 Accounts Payable P 3,100
Unearned Diagnostic Fees 1,000 Unearned Diagnostic Fees 1,000
Salaries Payable 600 Salaries Payable 600
Rent Payable Rent Payable 2,000 2,000
Total Current Liabilities Total Current Liabilities P 6,700 P 6,700
OWNER`S EQUITY OWNER`S EQUITY
Cecil Sagum, Capital (per Capital Statement) Cecil Sagum, Capital (per Capital Statement) 194,000 194,000
Total Liabilities and Owner`s Equity Total Liabilities and Owner`s Equity P 200,700 P 200,700
Account Form Account Form -- te balance seet tat is presented in account Iorm te balance seet tat is presented in account Iorm
presents te assets o te leIt side and te liabilities and owner`s presents te assets o te leIt side and te liabilities and owner`s
equity on te rigt side oI te statement. equity on te rigt side oI te statement.
Name of Company Name of Company
Balance Sheet Balance Sheet
As of December 31, 19xx As of December 31, 19xx
ASSETS ASSETS LIABILITIES AND OWNER`S EQUITY LIABILITIES AND OWNER`S EQUITY
%otal Current Assets %otal Current Assets xxx xxx %otal Liabilities %otal Liabilities xxx xxx
%otal Property, Plant, and Equipment %otal Property, Plant, and Equipment xxx xxx Owner`s Equity Owner`s Equity xxx xxx
%otal Assets %otal Assets xxx xxx %otal Liabilities and owner`s Equity %otal Liabilities and owner`s Equity xxx xxx
STEP 6 STEP 6
PREPARATION OF FINANCIAL STATEMENTS PREPARATION OF FINANCIAL STATEMENTS
Other method of Presentation Other method of Presentation
%ere is a Form oI balance seet presentation tat %ere is a Form oI balance seet presentation tat
gives empasis on te current working capital gives empasis on te current working capital
position oI te business, te position oI te business, te financial position financial position form form. .
In te Iirst section, te total current liabilities are In te Iirst section, te total current liabilities are
deducted Irom te total current assets to arrive at te deducted Irom te total current assets to arrive at te
working capital. In te second section, te total oI te working capital. In te second section, te total oI te
property and equipment is added to working capital property and equipment is added to working capital
and te long and te long- -term liabilities are deducted to arrive at term liabilities are deducted to arrive at
te net assets and owner`s equity. te net assets and owner`s equity.
STEP 6 STEP 6
PREPARATION OF FINANCIAL STATEMENTS PREPARATION OF FINANCIAL STATEMENTS
ClassiIication oI Assets ClassiIication oI Assets
For a service business, assets are normally classiIied in te balance seet into te (1) For a service business, assets are normally classiIied in te balance seet into te (1)
current, and (2) property and equipment. current, and (2) property and equipment.
Current Assets Current Assets includes cas and oter assets tat will be converted into cas or used includes cas and oter assets tat will be converted into cas or used
up by te business , wicever is longer. up by te business , wicever is longer.
Cash Cash is any medium oI excange tat te bank accepts at Iace value. It includes is any medium oI excange tat te bank accepts at Iace value. It includes
deposits in banks available Ior current operations at te balance seet date, plus cas deposits in banks available Ior current operations at te balance seet date, plus cas
on and consisting oI currency, undeposited cecks, draIts, and money orders. %ese on and consisting oI currency, undeposited cecks, draIts, and money orders. %ese
are items witout restriction and available Ior current operations oI te business. are items witout restriction and available Ior current operations oI te business.
Accounts Receivable Accounts Receivable is te amount owed to a business by customers (clients). It is is te amount owed to a business by customers (clients). It is
evidenced by an oral promise to pay. evidenced by an oral promise to pay.
Notes Receivable Notes Receivable is same as account receivable except tat te customer or client is same as account receivable except tat te customer or client
gives a promissory note to evidence its obligation. gives a promissory note to evidence its obligation.
Prepaid Expense Prepaid Expense is also known as DeIerred Expenses wic is te expenses paid in is also known as DeIerred Expenses wic is te expenses paid in
advance. It is an asset awaiting assignment to expense. An example is prepaid advance. It is an asset awaiting assignment to expense. An example is prepaid
insurance. insurance.
STEP 6 STEP 6
PREPARATION OF FINANCIAL STATEMENTS PREPARATION OF FINANCIAL STATEMENTS
Property, plant and equipment Property, plant and equipment is an asset acquired Ior use in a is an asset acquired Ior use in a
business rater tan Ior resale; also called plant assets or business rater tan Ior resale; also called plant assets or
Iixed assets. Iixed assets.
Land Land is te ground on wic te business buildings oI te enterprise is te ground on wic te business buildings oI te enterprise
are located. Land can also be used Ior outside storage space or a are located. Land can also be used Ior outside storage space or a
parking lot. parking lot.
Building Building is an ediIice or structures constructed on te land, suc as is an ediIice or structures constructed on te land, suc as
oIIice building. oIIice building.
Equipments Equipments are tose items reIer to te Iiling cabinet, calculator, are tose items reIer to te Iiling cabinet, calculator,
adding macine, cas register, and computer used eiter in te oIIice, adding macine, cas register, and computer used eiter in te oIIice,
store, or Ior delivery. store, or Ior delivery. Delivery Equipment Delivery Equipment reIers to trucks, cars, reIers to trucks, cars,
motorcycles, and oter transportation veicles used Ior delivery motorcycles, and oter transportation veicles used Ior delivery
purposes. purposes.
Furnitures and Fixtures Furnitures and Fixtures reIers to te tables and cairs, cabinet, reIers to te tables and cairs, cabinet,
counter, and oter Iixtures used in te business. counter, and oter Iixtures used in te business.
STEP 6 STEP 6
PREPARATION OF FINANCIAL STATEMENTS PREPARATION OF FINANCIAL STATEMENTS
Classifications of Liabilities Classifications of Liabilities
Current Liabilities Current Liabilities are debts usually due witin one year, te payment oI are debts usually due witin one year, te payment oI
wic normally will require te use oI current assets. wic normally will require te use oI current assets.
Accounts Payable Accounts Payable is te amount owed by te business to creditors Ior te is te amount owed by te business to creditors Ior te
items or services purcased Irom tem. items or services purcased Irom tem.
Notes Payable Notes Payable are unconditional written promises by an enterprise to pay are unconditional written promises by an enterprise to pay
certain sum oI money at a determinate Iuture date. certain sum oI money at a determinate Iuture date.
Salaries and Wages Payable Salaries and Wages Payable are amounts owed to employees Ior services are amounts owed to employees Ior services
rendered but Ior wic payment as not been made at te balance seet date. rendered but Ior wic payment as not been made at te balance seet date.
Interest Payable Interest Payable arises wen interest as been incurred but not yet paid at arises wen interest as been incurred but not yet paid at
te balance seet date because te amount is not due on Notes Payable until te balance seet date because te amount is not due on Notes Payable until
later. later.
Unearned Revenue or Deferred Revenue Unearned Revenue or Deferred Revenue is payments Ior services or sale is payments Ior services or sale
oI goods tat are received in advance Irom customer or client. oI goods tat are received in advance Irom customer or client.
Long Long- -term Liabilities term Liabilities are liabilities not due Ior a relatively long period oI time, are liabilities not due Ior a relatively long period oI time,
usually more tan one year. usually more tan one year.
STEP 6 STEP 6
PREPARATION OF FINANCIAL STATEMENTS PREPARATION OF FINANCIAL STATEMENTS
Classification of Owner`s Equity Classification of Owner`s Equity
Owner`s Equity Owner`s Equity is te claim oI te owner over te asset oI te is te claim oI te owner over te asset oI te
business. It is residual claim because it will only be satisIied business. It is residual claim because it will only be satisIied
aIter te payment oI te obligation oI te business to its aIter te payment oI te obligation oI te business to its
creditors. creditors.
Owner`s Capital Owner`s Capital is te investment oI te owner oI te business. is te investment oI te owner oI te business.
Owner`s Drawing Owner`s Drawing is te witdrawals oI te owner on te capital is te witdrawals oI te owner on te capital
and earnings oI te business. and earnings oI te business.
Income Summary Income Summary is an account used in te closing process Ior is an account used in te closing process Ior
transIerring te revenue and expense account balances to te transIerring te revenue and expense account balances to te
owner`s capital account at te end oI te period. owner`s capital account at te end oI te period.
STEP 6 STEP 6
PREPARATION OF FINANCIAL STATEMENTS PREPARATION OF FINANCIAL STATEMENTS
Classifications of Revenue Classifications of Revenue
Professional Fees Professional Fees is te income or remuneration is te income or remuneration
received by proIessionals Irom rendering services to received by proIessionals Irom rendering services to
clients. %e Iee could be described depending upon clients. %e Iee could be described depending upon
te line oI proIessional like legal Iee Ior lawyers, te line oI proIessional like legal Iee Ior lawyers,
dental Iee Ior dentist, medical Iee Ior doctors, and dental Iee Ior dentist, medical Iee Ior doctors, and
retainer`s Iee or audit Iee Ior CPAs. retainer`s Iee or audit Iee Ior CPAs.
Other Revenues Other Revenues are revenues derived Irom sources are revenues derived Irom sources
oter tan te principal line oI service rendered like oter tan te principal line oI service rendered like
interest, rent, and commission. interest, rent, and commission.
STEP 6 STEP 6
PREPARATION OF FINANCIAL STATEMENTS PREPARATION OF FINANCIAL STATEMENTS
Classification of Operating Expenses Classification of Operating Expenses
Operating Expense Operating Expense is te cost oI te services tat are used or consumed in te is te cost oI te services tat are used or consumed in te
operation oI te business or practice oI proIession like salaries and wages, operation oI te business or practice oI proIession like salaries and wages,
rent, supplies, utilities, taxes, insurance and oters. rent, supplies, utilities, taxes, insurance and oters.
Salaries and Wages Expenses Salaries and Wages Expenses are payments made to employees Ior te are payments made to employees Ior te
services tey rendered to te business. services tey rendered to te business.
Rent Expenses Rent Expenses are expenses incurred Ior te use oI rented Iacility like are expenses incurred Ior te use oI rented Iacility like
building. building.
Supplies Expense Supplies Expense is te cost oIIice stationery, envelopes, pencils, pens and is te cost oIIice stationery, envelopes, pencils, pens and
oter necessary supplies used in te business. oter necessary supplies used in te business.
Utilities Expense Utilities Expense reIers to te various expenses incurred by te business on reIers to te various expenses incurred by te business on
water, electricity, telepone, and oter means oI communication to water, electricity, telepone, and oter means oI communication to
customers or clients. customers or clients.
Insurance Expense Insurance Expense is payment made Ior te premium oI an insurance policy. is payment made Ior te premium oI an insurance policy.
Advertising Expense Advertising Expense is payment made to te advertisement oI te business or is payment made to te advertisement oI te business or
practice oI te proIession. practice oI te proIession.
CHAPTER 4 CHAPTER 4
Completing the Accounting Cycle Completing the Accounting Cycle
The Closing Process The Closing Process
COMPLETING THE ACCOUNTING CYCLE COMPLETING THE ACCOUNTING CYCLE
THE CLOSING PROCESS THE CLOSING PROCESS
Nature of closing process Nature of closing process
At te end oI te accounting period, te revenue and At te end oI te accounting period, te revenue and
expense account balances are reported in te income expense account balances are reported in te income
statement. %e expenses are deducted Irom revenues to statement. %e expenses are deducted Irom revenues to
determine te net income or net loss during te period. Since determine te net income or net loss during te period. Since
revenues and expenses are reported Ior eac period, te revenues and expenses are reported Ior eac period, te
balances oI tese accounts sould be zero at te beginning oI balances oI tese accounts sould be zero at te beginning oI
te next period. %e zero balances allow te next period`s te next period. %e zero balances allow te next period`s
revenues and expenses to be recorded separately Irom te revenues and expenses to be recorded separately Irom te
preceding period. Because te balances oI revenue and preceding period. Because te balances oI revenue and
expense accounts are not carried Iorward, tey are generally expense accounts are not carried Iorward, tey are generally
called called temporary accounts temporary accounts or or nominal accounts. nominal accounts. %e %e
balances oI te accounts reported in te balance seet are balances oI te accounts reported in te balance seet are
carried Iorward Irom year to year. Because oI teir permanent carried Iorward Irom year to year. Because oI teir permanent
nature, balance seet accounts are called nature, balance seet accounts are called real accounts. real accounts.
COMPLETING THE ACCOUNTING CYCLE COMPLETING THE ACCOUNTING CYCLE
THE CLOSING PROCESS THE CLOSING PROCESS
How are te end How are te end- -oI oI- -period oI balances oI temporary accounts period oI balances oI temporary accounts
converted to zero? %o begin, te revenue and expense account balances are converted to zero? %o begin, te revenue and expense account balances are
transIerred to an account called transIerred to an account called Income Summary Income Summary. %e balance oI Income . %e balance oI Income
Summary is ten transIerred owner` capital account and te balance oI te Summary is ten transIerred owner` capital account and te balance oI te
owner`s drawing account is transIerred to owner`s capital accounts. owner`s drawing account is transIerred to owner`s capital accounts.
At te end oI an accounting period, te balance oI te owner`s At te end oI an accounting period, te balance oI te owner`s
drawing account is reported on te statement oI owner`s capital (statement drawing account is reported on te statement oI owner`s capital (statement
oI owner`s equity). %e owner`s witdrawal are deducted Irom te net oI owner`s equity). %e owner`s witdrawal are deducted Irom te net
income or added to te net loss Ior te period to determine te net increase income or added to te net loss Ior te period to determine te net increase
or decrease in owner` equity. Since witdrawals are reported Ior eac or decrease in owner` equity. Since witdrawals are reported Ior eac
period, te balance oI te owner`s drawing accounts sould be zero at te period, te balance oI te owner`s drawing accounts sould be zero at te
beginning oI te next period. beginning oI te next period. %hus the owner's drawing account is also a %hus the owner's drawing account is also a
temporary account temporary account. . Its balance is transIerred to te owner`s capita; account Its balance is transIerred to te owner`s capita; account
at te end oI te period. at te end oI te period.
STEP 7 STEP 7
1OURNALIZING AND POSTING CLOSING 1OURNALIZING AND POSTING CLOSING
ENTRIES ENTRIES
Revenue, expense, and drawing account balances are transIerred to Revenue, expense, and drawing account balances are transIerred to
te owner`s equity account by a series oI entries called te owner`s equity account by a series oI entries called closing entries closing entries. .
%e transIer process is called %e transIer process is called closing process closing process. Four entries are required . Four entries are required
at te end oI te period. For sole proprietorsip, tese entries are as at te end oI te period. For sole proprietorsip, tese entries are as
Iollows: Iollows:
Debiting all nominal accounts wit credit balances (revenues) and Debiting all nominal accounts wit credit balances (revenues) and
crediting te total to Income Summary account. crediting te total to Income Summary account.
Crediting all nominal accounts wit debit balances (expenses), and Crediting all nominal accounts wit debit balances (expenses), and
debiting te total to Income Summary. debiting te total to Income Summary.
te Net Income is transIerred to te Capital account by debiting te te Net Income is transIerred to te Capital account by debiting te
Income Summary Ior te amount oI its balance and te Capital account Income Summary Ior te amount oI its balance and te Capital account
is credited Ior te same amount. (%e accounts debited and credited are is credited Ior te same amount. (%e accounts debited and credited are
reversed iI tere is a net loss). reversed iI tere is a net loss).
te drawing account is transIerred to capital account by debiting te te drawing account is transIerred to capital account by debiting te
capital account and crediting te drawing account Ior te same amount. capital account and crediting te drawing account Ior te same amount.
STEP 7 STEP 7
1OURNALIZING AND POSTING CLOSING 1OURNALIZING AND POSTING CLOSING
ENTRIES ENTRIES
%e account titles and balances in preparing te closing %e account titles and balances in preparing te closing
entries may be obtained Irom eiter te work seet, te income entries may be obtained Irom eiter te work seet, te income
statement, te statement oI owner`s equity, and or ledger. II a statement, te statement oI owner`s equity, and or ledger. II a
work seet is used, te date Ior te Iirst two entries appeared work seet is used, te date Ior te Iirst two entries appeared
in te Income Statement columns. %e amount Ior te tird in te Income Statement columns. %e amount Ior te tird
entry is te net income or net loss appearing at te bottom oI entry is te net income or net loss appearing at te bottom oI
te work seet. %e drawing account balance appears in te te work seet. %e drawing account balance appears in te
Balance Seet debit column oI te work seet. Balance Seet debit column oI te work seet.
%e closing entries Ior %e closing entries Ior Sagum Sagum Laboratory (See illustration Laboratory (See illustration
on Capter 3) is sown below: on Capter 3) is sown below:
%able 4.1 %able 4.1
Table 4.1 Table 4.1
STEP 7 STEP 7
1OURNALIZING AND POSTING CLOSING 1OURNALIZING AND POSTING CLOSING
ENTRIES ENTRIES
AIter te closing entries ave been posted to te ledger, te balance in te AIter te closing entries ave been posted to te ledger, te balance in te
capital account will agree wit te amount reported on te statement oI owner`s capital account will agree wit te amount reported on te statement oI owner`s
equity and te balance seet. In addition, te revenue, expense, and drawing equity and te balance seet. In addition, te revenue, expense, and drawing
accounts will ave zero balances. accounts will ave zero balances.
It sould be noted tat Income Summary is used only at te end oI te period. It sould be noted tat Income Summary is used only at te end oI te period.
At te beginning oI te closing process, Income Summary as no balance. During At te beginning oI te closing process, Income Summary as no balance. During
te closing process, Income Summary will be debited and credited Ior various te closing process, Income Summary will be debited and credited Ior various
amounts. At te end oI te closing process, Income Summary will again ave no amounts. At te end oI te closing process, Income Summary will again ave no
balance. Because income summary as te eIIect oI clearing te revenue and balance. Because income summary as te eIIect oI clearing te revenue and
expense accounts oI teir balances, it is sometimes called a expense accounts oI teir balances, it is sometimes called a clearing account. clearing account.
Oter titles used Ior tis account include Revenue and Expense Summary, ProIit Oter titles used Ior tis account include Revenue and Expense Summary, ProIit
and Loss Summary, and Income and Expense Summary. and Loss Summary, and Income and Expense Summary.
Balancing and ruling Balancing and ruling
AIter te closing process, a line sould be inserted in bot balance columns AIter te closing process, a line sould be inserted in bot balance columns
opposite te Iinal entry. II te books will still be used in te next accounting period, opposite te Iinal entry. II te books will still be used in te next accounting period,
te next period`s transaction Ior te revenue, expense, and drawing will be posted te next period`s transaction Ior te revenue, expense, and drawing will be posted
directly below te closing entry. directly below te closing entry.
STEP 8 STEP 8
POST POST- -CLOSING TRIAL BALANCE CLOSING TRIAL BALANCE
%e last accounting procedure Ior a period is to %e last accounting procedure Ior a period is to
prepare a trial balance aIter te closing entries ave prepare a trial balance aIter te closing entries ave
been posted. %e purpose oI post been posted. %e purpose oI post- -closing (aIter closing (aIter
closing) trial balance is to make sure tat te ledger is closing) trial balance is to make sure tat te ledger is
in balance at te beginning oI te next period. %e in balance at te beginning oI te next period. %e
accounts and amounts sould agree exactly wit te accounts and amounts sould agree exactly wit te
accounts and amounts listed on te balance seet at accounts and amounts listed on te balance seet at
te end oI te period. te end oI te period.
%e post %e post- -closing trial balance oI closing trial balance oI Sagum Sagum
Laboratory is sown in Exibit 4 Laboratory is sown in Exibit 4- -1 below. 1 below.
%able 4.2 %able 4.2
Table 4.2 Table 4.2
STEP 8 STEP 8
POST POST- -CLOSING TRIAL BALANCE CLOSING TRIAL BALANCE
Instead oI preparing a Iormal post Instead oI preparing a Iormal post- -closing closing
balance, it is possible to list te accounts balance, it is possible to list te accounts
directly Irom te ledger, using a printing directly Irom te ledger, using a printing
calculator or a computer. %e calculator tape calculator or a computer. %e calculator tape
or computer printout, becomes te post or computer printout, becomes te post- -closing closing
trial balance. Witout suc tape or printout, trial balance. Witout suc tape or printout,
tere are no eIIicient means oI determining te tere are no eIIicient means oI determining te
cause oI inequality. cause oI inequality.
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
Some oI te adjusting entries recorded at te end oI te accounting Some oI te adjusting entries recorded at te end oI te accounting
period ave an important eIIect on oterwise routine transactions tat occur period ave an important eIIect on oterwise routine transactions tat occur
in te Iollowing period. A typical example is accrued wages owed to in te Iollowing period. A typical example is accrued wages owed to
employees at te end oI te period. II tere as been an adjusting entry Ior employees at te end oI te period. II tere as been an adjusting entry Ior
accrued wages expense, te Iirst payment oI wages in te Iollowing period accrued wages expense, te Iirst payment oI wages in te Iollowing period
will include te accrual. In te absence oI some special provision, Wages will include te accrual. In te absence oI some special provision, Wages
Payable must be debited Ior te amount owed Ior te earlier period, and te Payable must be debited Ior te amount owed Ior te earlier period, and te
Wages Expense must be debited Ior te portion oI te payroll tat Wages Expense must be debited Ior te portion oI te payroll tat
represents expense Ior te later period. However, represents expense Ior te later period. However, an optional entry an optional entry --- --- te te
reversing entry reversing entry ---- ---- may be used to simpliIy te analysis and recording oI may be used to simpliIy te analysis and recording oI
tis Iirst payroll entry in a period. As te tem implies, a tis Iirst payroll entry in a period. As te tem implies, a reversing entry reversing entry is is
te exact reverse oI te adjusting entry to wic it relates. %e amounts and te exact reverse oI te adjusting entry to wic it relates. %e amounts and
accounts are te same as te adjusting entry; te debits and credits are accounts are te same as te adjusting entry; te debits and credits are
reversed. reversed. Reversing entries are generally made on the first day of the next Reversing entries are generally made on the first day of the next
accounting period. accounting period.
Adjustments tat can be reversed are enumerated as Iollows. Adjustments tat can be reversed are enumerated as Iollows.
Accrued expenses Accrued expenses
Accrued revenues Accrued revenues
Prepaid expenses, iI expenses metod is used Prepaid expenses, iI expenses metod is used
Unearned revenues, iI te revenue metod is used Unearned revenues, iI te revenue metod is used
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
Reversing Entry For Accrued Expenses Reversing Entry For Accrued Expenses
Accrued Accrued expenses oI te present period are usually pain in te next expenses oI te present period are usually pain in te next
period. II te adjusting entries Ior accrued expenses are not reversed, te period. II te adjusting entries Ior accrued expenses are not reversed, te
accrued expenses paid in te next period necessarily be debited to te accrued expenses paid in te next period necessarily be debited to te
accrued liability account. However, iI tere are reversing entries Ior tese accrued liability account. However, iI tere are reversing entries Ior tese
items, all expenses pain in te Iuture, weter accrued or not, can be items, all expenses pain in te Iuture, weter accrued or not, can be
consistently debited to te expense accounts. consistently debited to te expense accounts.
Illustration: Illustration: analysis of the adjusting entry, closing entry and reversing analysis of the adjusting entry, closing entry and reversing
entry for accrued Expense. entry for accrued Expense. On December 31, te end oI te accounting On December 31, te end oI te accounting
period, te business ave issued a nine period, te business ave issued a nine- -percent, six percent, six- -mont note Ior P20,000 mont note Ior P20,000
dated accrued interest on tis note is P300 (P20,000 x 9 x 2/12). %e dated accrued interest on tis note is P300 (P20,000 x 9 x 2/12). %e
adjusting entry adjusting entry Ior tis is: Ior tis is:
%able 4.3 %able 4.3
Table 4.3 Table 4.3
Date Description
Post
Ref. Debit Credit
19xx
Dec.
3
1 Interest Expense 515 300
Interest Payable 202 300
%o record accrued
interest Ior te period.
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
%e %e closing entry closing entry Ior te Interest Expense Ior te Interest Expense
account at December 31 is: account at December 31 is:
%able 4.4 %able 4.4
Date Description
Post
Ref. Debit Credit
19xx
Dec. 31 Income Summary 303 300
Interest Expense 515 300
%o close interest
expense
On January 1, te Reversing Entry Ior te accrued
interest (expense) is:
%able 4.5
Date Description
Post
Ref. Debit Credit
19xx
Dec. 31 Interest Payable 202 300
Interest Expense 515 300
%o reverse te
adjusting entry Ior
accrued interest on
Notes Payable
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
AIter tis entry, all interest paid, weter accrued or not AIter tis entry, all interest paid, weter accrued or not
could be debited to Interest Expense. %e credit to Interest could be debited to Interest Expense. %e credit to Interest
Expense in te reversing entry will serve to adjust te account Expense in te reversing entry will serve to adjust te account
balance to te amount oI interest incurred in te current period. balance to te amount oI interest incurred in te current period.
%e debit to Interest Payable in te reversing entry closes te %e debit to Interest Payable in te reversing entry closes te
credit to te same account in te adjusting entry. %us, te credit to te same account in te adjusting entry. %us, te
accounts Interest Expense and Interest payable aIter te accounts Interest Expense and Interest payable aIter te
adjusting entry and reversing entries ave been posted are as adjusting entry and reversing entries ave been posted are as
Iollows: Iollows:
Table 4.6 Table 4.6
INTEREST
PAYABLE
account no.
202
Date Items Ref. Debit Date Items Ref. Credit
19xx 19xx
Jan. 1 Revers
ing
GJ
300
Dec.
31
Adjusti
ng
GJ
300
Table 4.7 Table 4.7
INTEREST EXPENSE
Date Items Ref. Debit Date Items Ref. Credit
19xx 19xx
Jan. 1
Adjust
ing GJ 300
Dec.
31
Closin
g GJ 300
Jan. 1
Revers
ing GJ 300
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
At April 30, te date oI maturity oI te note, te At April 30, te date oI maturity oI te note, te
total interest to be paid in te note is P900 (P20,000 x total interest to be paid in te note is P900 (P20,000 x
9 x 6/12). Upon payment, an entry debiting Interest 9 x 6/12). Upon payment, an entry debiting Interest
Expense will be made and iI te entry is posted to te Expense will be made and iI te entry is posted to te
Interest Expense account, te account will appear as Interest Expense account, te account will appear as
Iollows. Iollows.
%able 4.8 %able 4.8
%is sows tat wile te interest pain in April %is sows tat wile te interest pain in April
amounted to P900, only te balance oI te account oI amounted to P900, only te balance oI te account oI
P600 (P900 P600 (P900 P300) is te expense incurred and paid P300) is te expense incurred and paid
in April, and te P300 is payment oI accrued interest. in April, and te P300 is payment oI accrued interest.
Table 4.8 Table 4.8
INTEREST EXPENSE
Date Items Ref. Debit Date Items Ref. Credit
19xx 19xx
Dec.
31
Adjustin
g 300
Dec.
31
Closin
g 300
Jan. 1
19xy 19xy
Apr.30
Payment
oI
Interest 900 Jan. 1
Revers
ing 300
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
Reversing Entry for Accrued Revenue Reversing Entry for Accrued Revenue
Accrued revenue Ior te present period is usually Accrued revenue Ior te present period is usually
collected in te next accounting period. II no collected in te next accounting period. II no
reversing entry is made, tis accrued revenue wen reversing entry is made, tis accrued revenue wen
received in te Iuture must necessarily be credited to received in te Iuture must necessarily be credited to
te accrued revenue account. However, iI tere is a te accrued revenue account. However, iI tere is a
reversing entry, all revenue in te Iuture, weter reversing entry, all revenue in te Iuture, weter
accrued or not, can be uniIormly credited to te accrued or not, can be uniIormly credited to te
revenue account. revenue account.
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
Illustration: Illustration: analysis of the adjusting entry, closing entry and analysis of the adjusting entry, closing entry and
reversing entry for accrued interest revenue. reversing entry for accrued interest revenue. Using te same Using te same
illustrative example as above, let us now analyze it on te illustrative example as above, let us now analyze it on te
point oI view oI te recipient oI te note. On December 31, te point oI view oI te recipient oI te note. On December 31, te
end oI te accounting period, te business received a none end oI te accounting period, te business received a none- -
percent, six percent, six- -mont note Ior P20,000 dated November 1 mont note Ior P20,000 dated November 1
(current year0 collectible April 30 (next year). At December (current year0 collectible April 30 (next year). At December
31, te accrued interest on tis note is P300 (P20,000 x 9 x 31, te accrued interest on tis note is P300 (P20,000 x 9 x
2/12). 2/12).
%e %e adjusting entry adjusting entry Ior tis is: Ior tis is:
%able 4.9 %able 4.9
Table 4.9 Table 4.9
Date Description
Post
Ref. Debit Credit
19xx
Dec. 31 Interest Receivable 107 300
Interest Revenue 405 300
%o record accrued
interes revenue Ior te
period
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
%e %e closing entry closing entry Ior te Interest Income Ior te Interest Income
at December 31 is: at December 31 is:
%able 4.10 %able 4.10
On January 1, te On January 1, te reversing entry reversing entry Ior te Ior te
accrued interest revenue is: accrued interest revenue is:
%able 4.11 %able 4.11
Table 4.10 Table 4.10
Date Description
Post
Ref. Debit Credit
19xx
Dec. 31 Interest Revenue 405 300
Income Summary 303 300
%o close interest
revenue
Table 4.11 Table 4.11
Date Description
Post
Ref. Debit Credit
19xx
Jan. 1 Interest Income 405 300
Interest Recevable 107 300
%o reverse te
adjusting entry Ior
accrued interest on
Notes Receivable
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
AIter tis entry, all interest collected, weter accrued or AIter tis entry, all interest collected, weter accrued or
not could be credited to Interest Revenue. %e debit to Interest not could be credited to Interest Revenue. %e debit to Interest
Revenue in te reversing entry will serve to adjust te account Revenue in te reversing entry will serve to adjust te account
balance to te amount oI interest earned in te current period. balance to te amount oI interest earned in te current period.
%e credit to Interest Receivable in te reversing entry closes %e credit to Interest Receivable in te reversing entry closes
te debit to te same account in te adjusting entry. %us, te te debit to te same account in te adjusting entry. %us, te
accounts Interest Revenue and Interest Receivable aIter te accounts Interest Revenue and Interest Receivable aIter te
adjusting entry and reversing entries ave been posted are as adjusting entry and reversing entries ave been posted are as
Iollows: Iollows:
%able 4.12 %able 4.12
%able 4.13 %able 4.13
Table 4.12 Table 4.12
INTEREST RECEIVABLE
Date Items
Ref
. Debit Date Items Ref.
Credi
t
19xx 19xx
Dec 31 Adjusting GJ 300 Jan 1 Reversing GJ 300
Table 4.13 Table 4.13
INTEREST REVENUE
Date Items Ref. Debit Date Items Ref.
Cre
dit
19xx 19xx
Dec 31 Closing GJ 300
Dec
1
Adjust
ing GJ 300
Jan 1 Reversing GJ 300
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
At April 30, te date oI maturity oI te note, te total At April 30, te date oI maturity oI te note, te total
interest to be collected on te note in P900 (20,000 x 9 interest to be collected on te note in P900 (20,000 x 9
6/12). Upon collection, a P900 entry to credit Interest Revenue 6/12). Upon collection, a P900 entry to credit Interest Revenue
account, te account will appear as Iollows: account, te account will appear as Iollows:
%able 4. 14 %able 4. 14
%is sows tat wile te interest collected in April %is sows tat wile te interest collected in April
amounted to P900, only te balance oI te account oI P600 amounted to P900, only te balance oI te account oI P600
(P900 (P900 P300) is te revenue earned and collected in April, P300) is te revenue earned and collected in April,
and te P300 is collection oI accrued interest. and te P300 is collection oI accrued interest.
Table 4. 14 Table 4. 14
INTEREST REVENUE
Date Items Ref. Debit Date Items Ref.
Cre
dit
19xx 19xx
Dec 31 Closing GJ 300
Dec-
03
Adjusti
ng GJ 300
19xx1
19xx
1
Jan 1
Reversin
g GJ 300
Apr
30
Collecti
on oI
Interest GJ 900
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
Reversing Entry for Prepaid Expenses Reversing Entry for Prepaid Expenses
Asset Method Asset Method is wen an expense paid in advance is debited is wen an expense paid in advance is debited
to and Asset Account, te adjusting entry to record te to and Asset Account, te adjusting entry to record te
expense incurred during te current period need not be expense incurred during te current period need not be
reversed because tere will be no inconsistency oI recording reversed because tere will be no inconsistency oI recording
tat will occur in te next period. tat will occur in te next period.
Expense Method Expense Method is wen an expense is paid in advance is is wen an expense is paid in advance is
debited to an Expense Account, te adjusting entry to record debited to an Expense Account, te adjusting entry to record
te asset (prepaid) portion oI te expense sould be reversed te asset (prepaid) portion oI te expense sould be reversed
on te beginning oI te next period, to ensure consistency oI on te beginning oI te next period, to ensure consistency oI
te metod oI recording being used and Ior proper recognition te metod oI recording being used and Ior proper recognition
oI te expense on te proper accounting period. oI te expense on te proper accounting period.
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
Illustration. Analysis of the original entry, adjusting entry, Illustration. Analysis of the original entry, adjusting entry,
closing entry and reversing entry on Prepaid Expenses, closing entry and reversing entry on Prepaid Expenses,
when Expense Method is used. when Expense Method is used. On October 1, current year, On October 1, current year,
te business paid P50,000 to Ace Realty, representing 5 te business paid P50,000 to Ace Realty, representing 5- -mont mont
rent covering te period October (current year) to February rent covering te period October (current year) to February
(next year). At December 31, only P30,000 Ior tree monts (next year). At December 31, only P30,000 Ior tree monts
(October to December) rental ave been used up. %e (October to December) rental ave been used up. %e
remainder is applicable to te monts oI January and February remainder is applicable to te monts oI January and February
next year. next year.
%e %e original entry original entry to record transaction, upon payment to record transaction, upon payment
is: is:
Table 4.15 Table 4.15
Date Description
Post
Ref. Debit Credit
19xx
Dec 1 Expense 508 50,000
Cas 101 50,000
%o record payment oI
rent in advance
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
%e %e adjusting entry adjusting entry Ior te Prepaid Rent at Ior te Prepaid Rent at
December 31 is: December 31 is:
%able 4.16 %able 4.16
%e %e closing entry closing entry Ior te Rent Expense at Ior te Rent Expense at
December 31 is as Iollows: December 31 is as Iollows:
%able 4.17 %able 4.17
Table 4.16 Table 4.16
Date Description
Post
Ref. Debit Credit
19xx
Dec 31 Prepaid Rent 110 20,000
Rent Expense 508 20,000
%o record Prepaid REnt
Table 4.17 Table 4.17
Date Description
Post
Ref. Debit Credit
19xx
Jan. 1 Rent Expense 508 20,000
Prepaid Rent 110 20,000
%o reverse te
adjusting entry Ior
Prepaid Rent.
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
AIter tese entries are posted, te Prepaid Rent AIter tese entries are posted, te Prepaid Rent
account and te Rent Expense account will be account and te Rent Expense account will be
as Iollows: as Iollows:
%able 4.18 %able 4.18
%able 4.19 %able 4.19
It sould be noted tat te Prepaid Rent as It sould be noted tat te Prepaid Rent as
become a closed account and te Rent Expense become a closed account and te Rent Expense
account as a debit balance oI P20,000. %us, in account as a debit balance oI P20,000. %us, in
te next period, te adjustment under te expense te next period, te adjustment under te expense
metod can be used again. metod can be used again.
Table 4.18 Table 4.18
PREPAID RENT
Date Items Ref. Debit Date Items Ref.
Credi
t
19xx
Dec.3
1
Adjusti
ng GJ
20,00
0
19xx
Jan. 1
Reversi
ng GJ
20,00
0
Table 4.19 Table 4.19
Date Items Ref. Debit Date Items Ref. Credit
19xx
Oct.31
Payment
oI Rent GJ 50,000
19xx
Dec. 1
Adjust
ing GJ 20,000
19xx1 19xx1
Jan 1
Reversi
ng GJ 20,000 31
Closin
g GJ 30,000
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
Reversing Entry for Unearned Revenues Reversing Entry for Unearned Revenues
Liability Method Liability Method is wen a revenues received in advance is is wen a revenues received in advance is
credited to a Liability Account, te adjusting entry to record credited to a Liability Account, te adjusting entry to record
te revenue earned during te current period need not be te revenue earned during te current period need not be
reversed because tere will be no inconsistency oI recording reversed because tere will be no inconsistency oI recording
tat will occur in te next period. tat will occur in te next period.
Revenue Method Revenue Method is wen a revenue received in advance is is wen a revenue received in advance is
credited to a Revenue Account, te adjusting entry to record credited to a Revenue Account, te adjusting entry to record
te liability (Unearned) portion oI te revenue sould be te liability (Unearned) portion oI te revenue sould be
reversed on te beginning oI te next period, to ensure reversed on te beginning oI te next period, to ensure
consistency oI te metod oI recording being used and Ior consistency oI te metod oI recording being used and Ior
proper recognition oI te revenue on te proper accounting proper recognition oI te revenue on te proper accounting
period. period.
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
Illustration. Analysis of the original entry, adjusting entry, Illustration. Analysis of the original entry, adjusting entry,
closing entry and reversing entry on Unearned Revenue, closing entry and reversing entry on Unearned Revenue,
when Income Method is used. when Income Method is used. On September 1, current year, On September 1, current year,
te business received P48,000 Irom a tenant, representing 6 te business received P48,000 Irom a tenant, representing 6- -
mont rent covering te period September (current year) to mont rent covering te period September (current year) to
February (next year). At December 31, only P32,000 Ior Iour February (next year). At December 31, only P32,000 Ior Iour
monts (September to December) rental ave been earned, te monts (September to December) rental ave been earned, te
remainder oI P16,000 applicable to te monts oI January and remainder oI P16,000 applicable to te monts oI January and
February next year is still unearned. February next year is still unearned.
%e %e original entry original entry to record te transaction, upon to record te transaction, upon
collection is: collection is:
%able 4.20 %able 4.20
Table 4.20 Table 4.20
Date Description
Post
Ref. Debit Credit
19xx
Sept. 1 Cas 101 48,000
Rent Revenue 404 48,000
%o record collection
oI rent in advance
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
%e %e adjusting entry adjusting entry Ior te Unearned Rent at Ior te Unearned Rent at
December 31 is: December 31 is:
%able 4.21 %able 4.21
%e %e closing entry for the closing entry for the Rent Revenue at Rent Revenue at
December 31is: December 31is:
%able 4.22 %able 4.22
Table 4.21 Table 4.21
Date Description
Post
Ref. Debit Credit
19xx
Dec. 31 Rent Revenue 404 16,000
Unearned Rent 207 16,000
%o record Unearned
Rent
Table 4.22 Table 4.22
Date Description
Post
Ref. Debit Credit
19xx
Dec. 31 Rent Income 404 32,000
Income Summary 303 32,000
%o close Rent
Revenue
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
On January 1, te On January 1, te reversing entry reversing entry Ior te Ior te
Unearned Rent is: Unearned Rent is:
%able 4.23 %able 4.23
AIter tese entries are posted, te Unearned AIter tese entries are posted, te Unearned
Rent account and te Rent Revenue account Rent account and te Rent Revenue account
will be as Iollows: will be as Iollows:
%able 4.24 %able 4.24
Table 4.23 Table 4.23
Date Description
Post
Ref. Debit Credit
19xx
Jan. 1 Unearned Rent 207 16,000
Rent Revenue 404 16,000
%o reverse te
adjusting entry Ior
Unearned Rent.
Table 4.24 Table 4.24
UNEARNED RENT
Date Items Ref. Debit Date Items Ref.
Credi
t
19xx
Jan 1
Reversi
ng GJ
16,00
0
19xx
Dec.
31
Adjus
ting GJ
16,00
0
STEP 9 STEP 9
REVERSING ENTRIES REVERSING ENTRIES
It sould be noted tat te Unearned Rent as It sould be noted tat te Unearned Rent as
become a closed account and te Rent Revenue become a closed account and te Rent Revenue
account as a credit balance oI P16,000. %us, in te account as a credit balance oI P16,000. %us, in te
next period, te adjustment under te revenue metod next period, te adjustment under te revenue metod
can be used again. can be used again.
%e Iollowing are te main purposes oI reversing %e Iollowing are te main purposes oI reversing
entries tat sould be remembered: (1) consistency in entries tat sould be remembered: (1) consistency in
te use oI metod, and (2) recording oI revenues and te use oI metod, and (2) recording oI revenues and
expenses in te proper accounting period. expenses in te proper accounting period.
Thank you! Thank you!
PRESEN%ED BY:
Julie Anne P. Jamora
Nancy Bunag
Acknowledgment Acknowledgment
Special tanks to te writers oI te book Special tanks to te writers oI te book
'Accounting Fundamental, Bayani D. 'Accounting Fundamental, Bayani D.
Edlagan and Ma. Cecilia S. Mercado, Ior Edlagan and Ma. Cecilia S. Mercado, Ior
witout tem tis presentation would not be witout tem tis presentation would not be
possible. possible.
Polytechnic University of the Philippines Polytechnic University of the Philippines
Taguig Campus Taguig Campus
As partial requirement in te subject OS As partial requirement in te subject OS
341'Web Page Development , tis project 341'Web Page Development , tis project
is submitted by Julie Anne Jamora and is submitted by Julie Anne Jamora and
Nancy Buag to ProI. Angela David. Nancy Buag to ProI. Angela David.

Das könnte Ihnen auch gefallen