CHAPTER 1 FUNDAMENTAL CONCEPTS AND PRINCIPLES Learning Objectives 1. Define accounting and know its purpose 2. Differentiate the types of business organizations 3. Distinguish the different types of business operations 4. Know and appreciate the basic secounting principles used in the practice of accounting What is Accounting? Accounting is the systematic process ef measuring and reporting relevant financial information about the activities af an economic organization or unit. lis underlying purpose is to provide financial information. It is capable of being expressed in monetary terms. The American Institute of Certified Public Accountants (AICPA) defines accounting as the art of recording, classifying, and summarizing in a significant manner under terms of money, transaction and events, which are in part at least of a financial character, and interpreting the result thereof, The Philippine Institute of Certified Public Accountants (PICPA) defines accounting as a service activity, Its functions to provide quantitative information, primarily financial in nature, about economic entities. that is intended to be useful in making economic decisions. Four Aspects of Accounting 1, Recording — writing down of business transactions chronologically in the books of aecaunt as they transpire 2. Classifying - sorting, similar and rclatcd business transactions into the throe calcgorics of assets, liabilities, and owner's equity 3. Summarizing — preparing the financial statements from the transactions recorded in the books of account designed to meet the information needs of its users.4, Interpreting — representing the qualitative and quantitative financial information about the business transactions in a language comprehensible to the users af financial statements By interpreting the data in the financial statements, users are able to determine the Financial standing of the company as well as its stability and growth potential, Users interpret financi information relating to specific business decisions, This makes accounting the language af business Parties Interested in the Financial Information 1. Investorsfowners/stockholders They want to know the financial postion and results of operations oftheir business investment 2. Government Financial information is important for tax purposes and in compliance with Sccuritics and Exchange Commission (SEC) requirements 3. Financial Institutions/Creditars ‘These parties need financial information to deten to pay obligations ¢ the capacity of a business organization 4, Management Financial information is useful to the management for guidance for future actions 5. Employees They are interested to know if they have a future: in the company. 3 Types of Business Organization 1, SoleSingle Proprietorship is a business owned and managed by only one person, 2. Partnership is a business organization owned and managed by two or more people whe agree to contribute money, property or industry to 2 commen fund fer the purpose of eaming a profit, 3. Corporation is a form of business organization managed by an elected board of directors The investors are called stockholders and the unit of ownership is called share of stock. 3 Types of Business Operations 1. Service is a type of business operation engaged in the rendering of services Ex, Dental Clinic, Barber Shop, Laundry Service 2. Trading/Merchandising is a type of business engaged in buying and selling goods Ex. Grocery, Sari-Sari Store 3. Manufacturing is engaged in the production of items to be sold, This type of business ‘operation is involved in the purchasing and converting of raw materials 10 finished goods Ex, Shoe Factory, Food Processing 3 FUNDAMENTALS OF ACCOUNTING Textheak fee BeginnersAccounting System comprises the methods used by the business to keep records of its financial activitios and to summanize these accounis in periodic accounting reports, ‘Transaction is a completed action which can be expressed in monetary terms. Generally Accepted Accounting Principles (GAAP) ‘© These are broad, general statements or “rules” and “procedures” that serve as guides in the practice of accounting, These arc standards, assumptions, and concepts with gencral acceptability ‘© These are measurement techniques and standards used in the presentation and preparation of Financial statements Fundamental Concepts. 1, Entity Concept regards the business enterprise as separate and distinet from its owners and from other business enterprises Ex. Mr, Santos has a car repair shop and a barber shop. The car repair shop is considered fs a separate entity distinet from the barber shop and the owner, Mr. Santos. The expenses of the ear repair shop should not be mixed with the expenses of the barber shop and the personal expenses of Mr. Santos. The twa businesses are cansicered to be separate economic units. separate and distinct from their owner. As such, these should be treated as different from each other. alihough owned and operated by only one person. Hence. the personal expenses of Mr. Santos should not be mixed with the expenses of any of the businesses. 2. Perladicity \s the concept behind providing Financial accounting information about the economic activities af an enterprise for specified time periads. For reporting purpases. one ‘year is usually considered as one accounting period, Ex, Separate financial reports are prepared yearly for the ear repair shop and the barber shop of Mr. Santos. Hence, Mr. Santos can measure the income of the two businesses annually. An aceounting period may'be classified as cither ofthe following: a) Calendar ye 31 b) Fiscal year ~ a twelye-month period thal saris om any month of the year other than January and ends twelve months after the start period. (e.g. .A business whose fiscal year starts June 1, 2010 ends its fiseal year on May 31, 2011, This is still a twelve manth peried although it does not start in January and end in December), — twelve-month period that starts on January 1 and ends on December A natural business yeauris any twelve-month period that ends when business activ attheirlowest point, 3. Going Concern isa concept which assumes that the business enterprise will continue 10 operate indefinitely. Chapin: 1 Fundamental Concepie and Principles 3preparing the financial statements of the car repair shop and the barber shop, the accouniant assumes that the businesses will not close or shut operations within the next years Basic Principles 1. Objectivity Priaciple states that all business transactions that will be entered in the accounting records must be duly supported by verifiable evidence Ex. Payments must be supparted by official reccipts, and bank deposits must be supparted by deposit slips, 2. Historical Cast means that all propertics and services acquired by the business must be recorded at its original acquisition cost. Ex. Land bought in 1990 for one million pesos should be recorded at one million pesos even though its market value in the year 2009 is already two million pesos. 3. Accrwal Principle states that income should be recognized at the time itis camed such as when goods are delivered or when services have been rendered, Likewise, expenses should be recognized at the time they are incurred such as when goods and services are actually uused and not af the time when the entity pays for those goods and services Ex. A hotel cannot consider as income the advance payment of a customer who paid the hotel in advance for one month accommodation until the customer has checked in. This is bocause the hotel has not yet rendered the services to the customer. As such, the advance Payment by the customer should be considered as a liability on the part of the hotel in the Farm of serviges to be rendered. 4. Adequate Disclosure states that all material facts that will significantly affeet the Financial statements must be indicated. Ex. Land baught at one million pesos in 1998 shauld be recorded at historical cost in the 2009 financial statements, However, the eurrent market value of two million posos in the year 2009 may be indicated in the financial statements for the year 2009 in the form of a Footnote or parenthetical note. 8, Materialigy means that financial reporting is only concerned with information significant enough to affect decisions. This refers to the relative importance of an item or event, An item is considered significant if knowledge of it would influence prudent users of the financial statements Ex, Iloms of insignificant amount such as paper clips ean be charged outright to expenses. 6. Cansistency means that approaches used in reporting must be uniformly employed from period 10 period to.allow comparison of results between time periods, Any changes must be clearly explained Ex, If the straight line method of depreciation is being used by the company. then the method should be uniformly used by the company in computing its annual depreciation, 7 FUNDAMENTALS OF ACCOUNTING Textheak fee BeginnersExercise 1 Write the letter of the correct answer on the blank A. Historical Cost B. Objectivity C, Conservatisin (Prudence) D. Acerual Principle E, Full Disclosure F. Consistency G Materiality 1, All business transactions that will be entered in the accounting records must be fully supported by verifiable evidence. 2. Approaches used in reporting must be eansistently: employed from period to period 3. Financial reporting is concerned with significant information enough to affect evaluation and decisions 4, All properties and services acquired by the business must be recorded at its original cost 5. Revenue is recognized when actually earned 6. Expense is recognized when actually incurred or used. 7. All material facts that will significantly affect the financial statements must be indicated, Exercise 2 Write the letter of the eorreet answer en the blank. Ay Entity B. Periodicity C, Going Concern ‘Assumes that business has the ability to operate indefinitely in is separate and distinct from its owners, The business organiz: 3. Financial secounting provides information about the activities on an ccanomic enterprise for specit d time periods Chapin: 1 @ Fundamental Concepie and Principles @Exercise 1 Write the letter of the correct answer on the blank. Historical Cost Objectivity Conservatism (Prudence) ). Accrual Principle Full Diseloswre Consistency Materiality 8. All business transactions that will be entered in the accounting records must be fully supported by verifiable evidence, Approaches used in reporting must be consistently employed [rom period to period, Financial reporting is concerned with significant information cnough to affect evaluation and decisions All properties and services acquired by the business must be recorded at its original cost. Revenue is recognized when setually earned Expense is recognized when actually incurred or used. All material facts that will significantly affect the financial statements must be indicatedExercise 2 Write the letter of the correct answer on the blank Ay Entity B. Periodici C. Going Concern 1. Assumes that business has the ability to operate indefinitely 2. The business organization is separate and distinct from its owners 3. Financial accounting provides information about the activities on am economik enterprise far specified time periodsExercise 3 Write the letter of the correct answer on the blank provided. A. Gonerally Accepted Accounting Principles B. Accounting System C, Transaction D. Accounting, 2 3. 4 Methods used by a business to keep records of its financial activities and to summarize these activities in periodic accounting reports. Standards, concepts, and measuring techniques used in the preparation and presentation of financial statements Completed action which can be expressed in monetary terms, Systematic process of measuring and reporting relevant financial information about the activities of an economic organization or unit FUNDAMENTALS OF ACCOUNTING Textheak fee BeginnersExercise 3 Write the letter of the eorreet answer on the blank provided, ‘A, Generally Accepted Accounting Principles B. Accounting System C, Transaction D. Accounting, Methads used by a business to keep records of its financial activities and to summarize these activities in periodic accounting reports, Standards, concepts, and measuring techniques used in the preparation and presentation of financial statements, 3. Completed action w hich can be expressed in monetary terms 4. Systematic process of measuring and reporting relevant financial information about the activities of an economic organization or unitCHAPTER 2 FINANCIAL STATEMENTS FOR A SERVICE Business AND THE FUNDAMENTAL Accountinc Equation Learning Objectives 1. Define and identify the basic elements of accounting —assets, liabilities, and owner's equity 2. Determine the net income through operation 3. Define and identify revenue, expense, net imcome, and net loss 4. Define and know the components of financial statements 5. Prepare properly classified financial statements Types of Financial Statements 1. Balance Sheet — shows the financial condition/position of a busincss as.of a given period I consists of the Assets, Liabilitics, and Capital 2. Income Statement — shows the result of operations for a given period, It consists of the Revenue, Cost, and Expenses 3. Onner's Equity Statement — shows the changes in the Capital or Owner's Equity as a result of additional investment or withdrawals by the owner, plus or minus the net income or net loss for the year 4. Cash Flow Statement — summarizes the cash receipis and cash disbursements for the accounting period. It summarizes the cash activities of the business by classifying cash inflows (receipts) aiid cash outflows (payments) into operating, investing, and financing. activities. I shows the ne balance at the end of the period. This allows management to assess the business" abil generate cash and project future eash flows increase or decrease of cash in a given period and the cash Typical Account Titles Used Balance Sheet Balanse Shect accounts, namely Assets, Liabilities, and Owner's Equity, are classified as real ‘or permanent accountsAssets — these are economic resources owned by the business expected for future gain, They are property and rights of value owned by the business Liabilities ~ these include debts. obligations to pay. and elaims of the creditors on the assets of the business. Ovner's Equity or Capital ~ this includes the interest of the owners on the business, claims of the owners on the asscts of the business, and the investment of the owner plus or minus the resulis of operations. Owner's equity or capital comes from hwo main sources—investment of owners and carnings of the business The Fundamental Accounting Equation Assets = Liabilities # Owner's Equity IMlustration 1, Assets = Liabilities + Owner's Equity P? = P-40.000 + P0000 Answer: PLOO,000 Simply add liabilities of P49,000 and owner's equity of P60,000 (0 get assets of PIO,000. 2. Assets ~ Liabilities + Owner's Equity F 150,000 = BP? + P70,000 Answer: P 80,000 Simply deduct owner's equity of 70,0040 From the assets of P150,(000 to got liabilities of P80,000. 3, Assets = Liabilities + Owner's Equity 200,000 = P1100 +P? Answer: P9000 Simply deduct liabilities of P111,000 from the assets of P200,001 10 get owners equity of P90,000 Assets Classification of Assets 1, Current Assets Improvements to international Accounting Standards | (December 2003) classifies assets as current assets when it is: a) expected to be realized in, or is intended for sale or consumption in, the entity's normal operating evele; b) held primarily for the purpose of being traded e FUNDAMENTALS OF ACCOUNTING Textheak fee Beginners¢) expected fo be realized within twelve months of the balance sheet date; or d) cash or a cash equivalent unless it is resirieted from being exchanged or used to settle a liability for at least twelve months after the balance sheet date Classification: of Current Assets Cash includes coins, currencies, checks, bank deposits, and other cash items readily available for use in the operations of the business, Cash Equivalents are short-term investments that ate readily convertible to known amounts af cash which are subject to an insignificant risk to changes in value (per SFAS No. 22. revised 2140) Marketable Securities are stocks and bends purchased by the enterprise and are to be held for only a short span of time or short duration. They are usually purchased when a business has excess cash. Trade and Oiher Receivables includes the amounts collectible from any of the following accounts: + Aecarnts Receivable ~ is the amount collectible from the customer to whem sales have been made or services have been rendered on account or credit + Notes Receiable ~ is a promissory note issued by the client or the customer in exchange for services or goods received as evidence of his/her obligation to pay + dmerest Receivable —amount of interest collectible on promissory notes received from customers and clients. + Advances to Employees — certain amount of meney loaned to employees payable in cash or through salary deductions. + Accrued Income — income already earned bul not yet received Inventories represent the unsold goods at the end of the accounting period, This applicable only to a merchandising business Prepaid Expenses include supplics bought for usc in the business or services and benefits to be received by the business in the future paid in advance. Contra-Asset Accounts ~ (hese are accounts deducted from the related asset accounts Allowance for Bad Debtx are losses duc to uncollectible accounts, This is deducted from the accounts recervable account to get the net realizable value. This is in line with the financial statements” qualitative charseteristic of conservatism wherein no profits would be anticipated but all prabable orestimable losses should be provided Chapter 2 @ Financial Statements for » Senice Business and tha Fundamental Accounting Equation aAccumulated Depreciation represents the expired cost of property, plant, and equipment as a resull of usage and passage of time. This is deducted from the cost of the related asset account 2. Nom-Current Assets Classification of Non-Current Assets Lang: Term Investments are assets held by an enterprise for the accretion of wealth through capital distribution such as interest. royalties, dividends and rentals, forsapital appreciation or far other benefits to the investing enterprise such as those oblained through trading relationships. Investments arelassified as lang-lerm when they arc intended to be held for an extended period of time (internatianal Accounting Standards No. 23 Property, Plant, and Equipment are tangible assets that are held by an enterprise For use in the production or supply of goods or services, or for administrative purposes and which are expected 10 be used for more than one period Uiniernational Accounting Standards No. 16). Examples af Property, Plant, and Equipment Landis a piece of lot or real estate owned by the enterprise on whieh a building can be constructed for business purposes. Building is an edifice or structure used to accommodate the office, store. ar factory af a business enterprise in the conduct of its operations ipment includes typewriter, air-conditioner, calculator, filing cabinel, computer, clectrie fan, trucks, cars used by the business in its office, store, or factory: Specific, account titles may be used such as Office Equipment, Store Equipment, Delivery Equipment, Transportation Equipment, and Machinery Equipment Furamnire ane Fextures include tables, chairs, carpets, curtains, lamp and lighting fistures, and wall decors. Specific account titles maybe used such as Office Furniture and Fixtures and Store Furniture and Fixtures. Intangible Assets are identifiable, non-monetary assets without physical substance held for use in the production or supply of goods or services, for rental to others, or for administrative purposes. These include goodwill, patents, copyrights. licenses, franchises, trademarks. brand names, secret processes. subscription lists and non- competition agreements (Jaternational Accounting Standards Na. 38). Liabilities Improvements to fnernationat Accaunting Siandarey J (December 2003) classifies a liability asa current liability when itis: a) oxpecied te be seitled in the entity s normal aperating cycle; by held primarily for the purpose of being traded, ©}, due to be settled within twelve months after the balance sheet date: or the entity does not have an unconditional right ta defer settlement of the liability for at Least twelve months after the balance sheet date. io FUNDAMENTALS OF ACCOUNTING Textheak fee BeginnersClassification of Current Liabilities Trade ancl Orher Payables ~ includes payables from any of the following accounts: Accounts Payable includes debts arising from purchase of an asset or acqui of services on account Notes Payable ineludes debts arising from purchase of an asset or acquisition of services on account evidenced by a promissory note, oan Payable is a liability to pay the bank or other financing institution arising from funds borrowed by the business from these institutions payable within twelve months or shorter. (Nate: If loan is payable beyond twelve months, then itis classified under non-curront liabilities.) Uuiisies Payable is an obligation to pay utility companies for services received from them. Examples of this are telephone services to PLDT, electricity to Meraleo, and water services to Maynilad. Unearned Revenues roprescnt obligations of the business arising from advance payments received hefore goods or services are provided to the customer, This ‘will be seltled when certain goods oF services are delivered or rendered Accrued Liabilities include amounts owed to others for expenses already incurred but not yet paid. Examples of these are salaries payable, utilities payable. taxes payable, and interest payable. Classification of NowCucrent Liabilities Non-Current Liabilities ate long term liabilities or obligations which are payable for a period longer than one year. Examples of Non-Current Liabilities are as follows: Morigage Payable is a long-term debt of the business with security or collateral in the form af real properties, In case the business fails to pay the obligation, the creditor can foreclose or cause the mortgaged asset to be sold and the proceods of the sale to be used ta settle the obligation Fonds Payable is a certificate of indebtedness under the seal of a corporation, specifying the terms of repayment and the rate of interest to be charged. Owner's Equity Caprral is an account bearing the name of the ewner representing the original and additional investment of the owner ef the business increased by the amount of net income earned during the year. Itis decreased by the cash or other assets withdrawn by the owner as well as the net Joss incurred during the year Drawing represents the withdrawals made by the owner of the business either in cash or other assets. Chapter 2 @ Financial Satements fora Service Business and the Fundamental Accaunting Equation 7income Stmmmary is a temporary accounl sed al the end af the accounting period te close income and expense accounts. The halance of this accaunt shows the net income or not loss for the period before it is closed to the capital account. Income Statement Income Statement accounts namely revenue and expense are classified as nominal or temporary accounts, Forms of Income Statement 1, Natural Fore —prescnis expenses according to nature. This type of income statement is used in a service business 2, Functional Form — presents expenses according (o function, (e.g, cost of sales, selling expenses, administrative expenses). This type is used in a merchandising business. Service Income includes revenues camed or generated by the business in performing services for a customer of client. Examples: Laundry Services by a laundry shop. Medical Services by a doctor Dental Services by a dentist Salaries or Wages Expense includes all payments made to-mployces or workers for rendering services to the company. Examples arc salaries or wages, 13th month pay. cost of living allowances, and other related benefits given to them Usitities Expense is an expense related 10 the use of electricity, fuel, water, and telecommunications facilities, Supplies Expense covers office supplies used by the business in the conduct of its daily ‘operations, Insurance Expense is the expired portion of premiums paid an insurance coverage such as premiums paid for health or life insurance, motor vehicles or other properties. Depreciation Expense is the annual portion of the cost of a tangible asset such as b machineries, and equipment charged as expense for the year. ngs, Uncollectible Accounts Expense / Dowbtful Accaunts Expense / Bad Debts Expense means tho amount of receivables charged as expense for the poriod because they are estimated to be doubtful of collection, Interest Expense is the amount of money charged to the: borrawer for the use of borrowed Funds @ FUNDAMENTALS OF ACCOUNTING Textheak fee BeginnersBalance Sheet Balance sheet accounts namely Assets, Liabil permanent accounts #e8 and Owners Equity are classified as real or Forms of Balance Sheet 1. Acconnad Form follows the accounting equation where assets are listed on the left-hand column of the report with the liabilities and owner’s equity listed on the right-hand column. 2. Report Form shows in one straight column the assets, followed by the liabilities and owner's equity jassification hems in the balance shect are classified, with assets and liabilities separated into twa or more categories. Subclassification is as follows. 1. Assets are subclassified as current assets and non-current assets 2. Liabilities arc cither current liabilities or non-curent liabilities. ‘Current assets are classified and presented according to liquidity with the most liquid followed by those with lesser liquidity. Since cash is the most liquid, it is always listed first followed by other current assets according to their proximity to cash Liabilities are classified and presented based on their maturity, Obligations presently due for payment are listed first Cash Flow Statement ‘Componcats of the Cash Flow Statement classified according to activitics a) Operating activities — the cash inflows (receipts) and the cash outflows (payments) arising from the normal operations of the business Receipts of Cash. + collections from customers for the performange af services or sale of goods * rovaltics, fees, commissions received + inierest, dividends. and other income received Payments af Cash + to suppliers for services and goods acquired + cmployees' salaries * government licenses and taxes + interest expense + other operating expenses b) Fovesting Activities ~ the cash inflows (receipts) and the cash outflows (payments) from the purchase and sale of property and cquipment, investment in debt or trading sccuritics Chapler 2 @ Financial Statements for » Service Business and the Fundamental Accounting Equation 3¢) Financing Activities - the cash inflows (receipts) and the cash outflows (payments) from the owners and creditors of the business Receipts of Cash original and additional investments by owner + proceeds of loan Payments of Cash + cash withdrawal of owner * payment for the principal balance of loan Examples of the four statements, namely, (1) Income Statement, (2) Balance Sheet (Report Forin and Account Foti J,(3) Statement of Changes in Owner's Equity. aiid (4) Cash Flow Statement are shown on pages 14 to 18. Notice that the balance sheet and income statement items are presented at the minimam with supporting notes for line items with details. Natural Form Income Statement Apple Fresh Laundry Services Income Statement For Year Ended December 31, 200x Note Service Revenue 298,000 Other Income 1 ut Total Income 353,000 Expenses Salaries P 160,000 Depreciation 2 13.000 Supplies 10.000 Rent 7,00 Insurance 2,000 Other Expenses 3 2.60 Finance Cost 4 3.400 198,000 Net Income 2155.00 ie FUNDAMENTALS OF ACCOUNTING Textheak fee BeginnersLopenbg Supuoaciy jemauiepuny oxy UE seotEEN dofNOg € 2) SHOUTS IERIE wT AIdRKD st ACCOUNT FORM BALANCE SHEET Apple Fresh Laundry Services Balance Sheet As of December 31, 20x Assets Note Liabilities & Owner’s Equity Note Current Assets ‘Current Liabilities Cash 3B 300,000 Trade and Other Payables 9B 304,000 Investment in Trading Securities 60,000 Trade and Other Receivables 6 121,000 Non-Current Liabilities Prepaid Expenses 7 64,000 Total Current Assets P 45,000) Morigage Payable 30,0000 Loan Payable 200,00 Non-Current Assets Total Non-Curtent Liabilities 500,00) Total Liabilities P 804,000 Property, Plant, and Equipment & 693,000 ‘Owner's Equity ‘A, Capital 134.0000) Total Liabilities and Capital Total AssetsREPORT FORM BALANCE SHEET 6 Apple Fresh Laundry Services Balance She As of December 31, 200x Assets Note Current Assets Cash S P 300,000 Investment in Trading Securities 60.8100 Trade and Other Roccivables 6 121,000 Prepaid Expenses 7 64.000 Total Current Assets P 545.000 Non-Current Assets Property, Plant, and Equipment 8 693,000 Total Assets P1238,000 Liabilities & Owner's Equity Current Liabilities Trade and Other Payables 9 P 304.000 Non-Curront Liabilities Mortgage Payable P300,000 Loan Payable 200,000, Total Non-Current Liabilities 500,000 Total Liabilities P 804,000 Ownee’s Equity A. Capital 434.000 Total Liabilities and Capital P1238,000 FUNDAMENTALS OF ACCOUNTING Textheak fee BeginnersApple Fresh Laundry Services ‘Statement of Changes in Owner's Equity For Year Ended December 31, 200% A, Capital ‘Add; Additional Investment P 50,000 Net Income 55.000 ‘Sub-Total ‘Less: Drawings ‘Total Owner's Equity Apple Fresh Laundry Services Statement of Cash Flows For Year Ended December 31, 200x ‘Cash Flows from Operaing Activities Receipis Collections from customers Rent income 35,000 Dividends ineome 10,000 Interest income Payments Operating expenses Interest expense ‘Net Cash from Operating Activities ‘Cash Flows from Investing Activities Receims Proceeds from sale of equipment P 16,000 Proceeds from sale furniture 10,000 Payments For purchase of furniture 32.000) Net Cash from Investing Activities Cash Flows from Financing Activities Receipts Additional investment of owner P 50,000 Proceeds of bank foan 200,000 Payments Cash withdrawal of owner 80,000) Payment of bank loan 50,000) ‘Net Cash from Financing Activities Net Increase/Decrease in Cash Cash balance ~ January 1 ‘Cash balance ~ December 31 Chapter 2 # Financial Stsiements for a Service Business and the Fundamenial Accounting Equation P 259,000 — 205,000 P 464.000 434,000 P 81,000 (6,000) P 145,000 $5,000 300,000 7‘Notes 10 Finacial Statements Note 1 — Other Income Rent Income Dividends Income Gain on Sale of Equipment Interest Income Total Note ? ~ Depreciation Expense Depreciation Expense ~ Building Depreciation Expense ~ Equipment Total Note 3 ~ Other Expense Loss on Sale of Furniture Note 4— Finance Costs Interest Expense — Mortgage Interest Expense — Loan Total Note 5 — Cash Cash on Hand Cash in Bank Total Note 6 — Trade and Other Receivables Accounis Receivables Less: Allowance for Bad Debt Notes Receivable Imerest Receivable Advances io Employees Accrued Income Total Note 7 ~ Prepaid Expenses Supplics Prepaid Insurance Total Note 8 — Property, Plant, and Equipment ‘Land Building Less: Accumulated Depreciation Equipment Less: Accumulated Depreciation Furniture & Fixtures Toral Note 9 — Trade and Other Payables Accounts Payable Notes Payable Accrued Expenses Total rr 0008 10,000 6,900 4.000 E5500 PB 2.400 Looe P3400 175,000) 25,000 300.000 P 40,000 2.000 38,000 45,000 7.000 21,0008 000 P20 P 27.000 37.000 P bai 200,000 P 480,000 20,00 P 26,000 3.000 460,000 3,000 10,000 Faso F 103,000) 180,000 9,000 304,000 FUNDAMENTALS OF ACCOUNTING Taxtheak fee BeginnersExercise 1 Write the letter of the correct answer on the blank A. Balance Sheet B, Income Statement C. Owner's Equity Statement D, Assets E. Liabilities F. Owner's Equity 1. Shows the results of operations far a given period 2, Economie resources awned by the business expected for future gain 3. Shows the financial condition’position of a business as of a given period 4. Interest of the owners on the business 5. Shows the changes in the Capital or Owner's Equity as a result of additional Investment, withdrawals, ct income or net loss for the year 6. Debts, obligations to pay, claims of the creditors on the assets of the business Exercise 2 Write the letter of the correet answer on the blank A. Cash, Notes Reecivable B, Cash Equivalents F. Inventories C. Marketable Securities G Prepaid Expenses D. Accounts Receivable 1. Promissory note issued by the client for gaods received 2. items that will be used in the operations of the business that have been paid in advance 3. Stocks purchased by the business to be held for a short time 4. Unsold goods at the end of the accounting period ____ 5, Amount collectible from customer to whom sales have been made or services have been rendered on account or credit 6. Includes coins, currencies, checks, and baitk deposits 7. Short-term invesimeats readily convertible fo known amounts of cash subject to an insignificant risk to changes in value Chapler 2 @ Financial Ststemenie lor a Service Business and the Fundamental Accoursng Equation TEExercise 1 Write the letter of the correct answer on the blank. A, Balance Sheet B. Income Statement C. Owner's Equity Statement D, Assets E, Liabilities F, Owner's Equity Shows the results of operations far a given period Economic resources owned by the business expected for future gain Shows the financial condition/position of a business as of a given period Interest of the owners on the business Shows the changes in the Capital or Owner's Equity as a result of additional Investmcat, withdrawals, nct income or net loss for the year 6. Debts, obligations to pay, claims of the creditors an the assets of the businessExercise 2 Write the letter of the corrcet answer on the blank. A. Cash E. Notes Receivable B, Cash Equivalents F, Tiiventories C. Marketable Securities G Prepaid Expenses D. Accounts Receivable ____ 1, Promissory note issued by the client for goods received 2. items that will be used in the operations of the business that have been paid in advance 3. Stocks purchased by the business to be held for a short time 4. Unsold goods at the end of the accounting period ____ §._ Amount collectible from customer to whom sales have been made or services have been rendered on account or credit ____ 6, Includes coins. currencies, checks, and bank deposits 7. Shori-tenn inycsimeats readily convertible to known amounts of cash subject to an insignificant risk to changes in valueExercise 3 Write the letier of the correct answer on the blank. A. Land C. Equipment F. Accumulated Depreciation B, Building E. Furniture and Fixtures G Intangible Assets 1 Contra-asset account representing expired cost of property, plant, and equipment as a result of usage and passage af time 2. Lot used by the business on which a building can be constructed 3. Non-monetary assets without physical substance held for use in the production ar supply of goods, for rental to athers, or for admint patemts, copyrights Tables, chaits, curtains, lighting fixtures, and wall decors Edifice. structure used to house the office, store, or Factory Typewriter. air-conditioner, calculator. filing cabinet, computer, clectrie Fan, true cars used in business trative purposes ¢.g., goodwill, Exercise 4 Write the letter of the correct answer on the blank. A. Accounts Payable D. Utilities Payable G Interest Expense B. Notes Payable E. Uncarned Revenues C. Loan Payable , Accrued L Debts arising from purchase of an asset on account evidenced by a promissory note An obligation to pay utility companies for services received from them Amounts owed fo others for expenses already incurred but not yet paid Liability arising from amount of money borrowed by the business Debts arising from acquisition of services on account Obligations of the business arising from advance payments received before services are provided to the customer Exercise 5 Write the letier of the correct answer on the blank. A. Mortgage Payable C. Drawing Bonds Payable D, Income Summary Temporary account used al the end of the accounting period to close income and expense accounts Certificate of indebtedness under the seal of a corporation Long-term debt of the business with sccurity or collateral in the: form of real properties Represents the withdrawals made by the owner of the business cither in cash or other assets FUNDAMENTALS OF ACCOUNTING Textheak fee BeginnersExercise 3 Write the letter of the correct answer en the blank. A. Land C. Equipment F. Accumulated Depreciation B. Building E. Furniture and Fixtures G Intangible Assets Contra-asset account representing expired cost of propeny, plant, and equipment as.a result of usage and passage of lime ____ 2, Lot used by’ the business on which a building can be constructed ____ 3, Noa-monetary assets without physical substance held for use in the production or supply of goods, for rental to others, or for administrative purposes ¢.s,, goodwill, patents, copyrights |. Tables, chairs, curtains, lighting fixtures. and wall decors Edifice. structure wsed to house the office, store, oF factory Typenriler, air-conditioner, calculator, filing cabinet, computer. clectri¢ fam, trucks. cars used in businessExercise 4 Write the letter of the correct answer on the blank. A. Accounts Payable D. 1B, Notes Payable ilities Payable G Interest Expense E, Uneamed Revenues C. Loan Payable FR. Accrued Liabilities 1, Debis arising from purchase of an asset on account evidenced by a promissory note 2, An obligation to pay utility companics for services received fram them 3. Amounts owed to others for expenses already incurred but not yet paid __4._Linbitity arising trom amount of money borrowed by the business 5. Debts arising from acquisition of services on account 6. Oblis tions of the business arising from advance payments received before services are provided to the customerExercise 5 Write the letter of the correct answer on the blank A. Mortgage Payable C. Drawing B. Bonds Payable D. Income Summary ____ 1, Temporary account used at the end of the aecounting period to close income and expense accounts 2. Cerificate of indebtedness under the seal of a corporation 3. Long-term debt of the business with security or collateral in the form of real propertics 4. Represents the withdrawals made by the owner of the business cither in cash or other assetsExercise 6 Write the letter of the correct answer en the blank. A, Service Income D. Rent Expense B. Salaries Expense E. Supplies Expense C. Utilities Expense F, Insurance Expense 1, Amount paid for the use of space, equipment or other rentals 2. Amount of supplies tsed in the conduct of daily business 3. Revenues camed by performing services for a customer 4. Expired portion of premiums paid on insurance coverage 5, Paymonts made to employees far rendering, services to the eompany 6. Expenses related to the use of electricity, fuel, water, and telerommunications faci Exercise 7 Find the missing amounts. ASSETS. LIABILITIES OWNER'S EQUITY AL P4.902400 P 2,153,800) B. 9,656,000 987,200 c. 1,141,000 646,000 D. 8,200,000, 3,250,000 E, 25,000,100 14,600,000 Exercise 8 Find the missing amounts. ASSETS. LIABILITIES OWNER’S EQUITY AP 3,932,100 5,100,000 Bo 2.246.000 1777.20 c 1,141,000 646,000 D. 6,500,000 3.250.000 E, 10,000,000 4,900,000 Chapter 2 @ Financial Statements for » Service Business and tha Fundamental Accounting Equation aExercise 6 Write the letter of the correct answer on the blank. A, Servige Income D. Reit Expense B. Salaries Expense E. Supplies Expense C. Utilities Expense F. Insurance Expense Amount paid for the use of space, equipment or other rentals Amount of supplies used in the conduct of daily business Revenues camed by performing services for a customer Expired portion of premiums paid on insurance coverage 8. Paymonts made to omployees for rendering services to the company 6, Expenses related tothe use of electricity. fuel, water, and telecom munications facilitiesExercise 7 Find the missing amounts AL B. c D. ASSETS: P 4,902,400 1,141,000 8.200.000) 25,000,000 LIABILITIES P 9,656,000) 646,000 14,600,000 OWNER’S EQUITY 2,153,800 987,200 3,250,000Exercise 8 Find the missing amounts, ASSETS. LIABILITIES OWNER’S EQUITY a 3,932,100) 5,100,000 B. 2,246,000 1777200 1141000) 46,000 D. 6,500,000 3,250,004 E. 10,000,000 4,900,000Exercise 9 For cach of the following, write I if it is an income statement item and Bif it isa balance sheet item. Interest Expense Interest Receivable Mortage Payable Interest Income Miscellaneous Expense Drawing Account Supplies Expense Supplies Exercise 10 9. 10, 1. 12, 13. 14. 15, Equipment Building Salaries Expense Accounts Payable Prepaid Rent Insurance Expense Cash Below are the classifications commonly found on aclassified balance sheet. On the blank provided before each number, write the classification to where it belongs. = Current Ass Property, Plant, and Equipment ‘Current Liabilities NoneCurrent Liabilities ‘Owner's Equity Not a Balance Sheet hem Land Rent Expense L, Capital Accaunts Receivable Uneamed Rent Supplies Used Supplies on Hand Prepaid Insurance 1, ul 12, 13. 4. 1s. Accounts Payable Notes Receivable Mortgage Payable Taxes Payable Truck Equipment Commissions Earned FUNDAMENTALS OF ACCOUNTING Textheak fee BeginnersExercise 9 Foreach of the following, write Lif it is an income statement item and B if'it is a balance sheet item Tnterest Expense Interest Receivable Mortgage Payable Interest Income Miscellaneous Expense Drawing Account Supplies Expense Supplies 9. 10, it. 12, 13, 14, 15. Equipment Building Salaries Expense Agcounis Payable Prepaid Rent Insurance Expense CashExercise 10 Below arc the classifications commonly found on a classified balance sheet. Gn the blank provided before cach number, write the classification to where it belongs. Current Assets Property. Plant, and Equipment Current S Non-Current Liabilities Owner's Equity | Not a Balance Sheet Item Land Rent Expense L, Capital Accounts Receivable Uneamed Rent - Supplies Used Supplics en Hand Prepaid Insurance 10, u. 12, 13, 14. 15 Accounts Payable Notes Reccivable Mortgage Payable Taxes Payable Truck Equipment Commissions EarnedExercise 11 Presented below are the income slatement accounts for Willie’s Auto Repair Shop for the year ended December 31, 2008, Prepare a NATURAL FORM Income Statement for Willic’s Auto Repair Shop for year ended December 31, 2008 by completing. the Income Statement. Supplies Expense Bad Debis Expense Taxes & Licenses Depreciation Expense Insurance Expense Unilities Expense Remt Expense Repair Income Repair Income Expenses Rent Expense Unilities Expense Salaries Expense Insurance Expense Depreciation Expense Taxes & Licenses Bad Debts Expense Supplies Expense Net Income Chapter 2 @ Financial Statements for » Senice Business and tha Fundamental Accounting Equation Pano Ln.ou0 45,000 46,750 55,000 275,000 "s Auto Repair Shop Income Statement For Year Ended December 31, 2008 400. 3Exercise 11 Presented below are the income statement accounts for Willie's Auto Repair Shop for the year ended December 31, 20008, Prepare a NATURAL FORM Income Statement for Willic’s Auto Repair Shop for year ended December 31, 2018 by completing the Income Statement Supplies Expense P40 Bad Debts Expense 4,900 Taxes & Licenses 7,250 Depreciation Expense 9,750 Insurance Expense 10,000 Salaries Expense 45,000 Utilities Expense 40,750, Rent Expense 55,000 Repair Income 275,000 ie’s Auto Repair Shop Income Statement For Year Ended December 31, 2008 Repair Income Pe Expenses P Rent Expense Utilities Expense Salaries Expense Insurance Expense Depreciation Expense Taxes & Licenses Bad Debts Expense Supplies Expense 400 Net IncomeExercise 12 Presented below are the income statement accounts for Carl's Psychiatric CI NATURAL FORM Income Statement for Carl's Psychiatrie Clinic for year ended December 31 2008 by completing the income statement. Insurance Expense P 20.000 Salaries Expense 90,000 Utilities Expense 92.000 Rent Expense Liu,000 Professional Fees 600,000 Supplics Expense 800 Bad Debis Expense 9,800 Taxes & Licenses 15,000 Depreciation Expense 18,500 Carl's Psychiatric Clinic Income Statement For Year Ended December 31, 2008 ic, Prepare a Professional Fees Expenses Rent Expense Utilities Expense Salaries Expense Insurance Expense ‘Supplies Expense Net Income at 110,000 92,00 20,000 9,800 800 6.10 FUNDAMENTALS OF ACCOUNTING Textheak fee BeginnersExercise 12 Presented below are the income statement accounts for Carl's Psychiatrie Clinic, Prepare a NATURAL FORM Income Statement for Carl's Psychiatric Climic for year ended December 31. 2008 by completing the income statement, Insurance Expense P 20,000 Salaties Expense 90,000 Utilities Expense 92.000 Rent Expense Lto,000 Professional Fees 600,000 Supplies Expense 800 Bad Debis Expense 9,800 Taxes & Licenses 15,000 Depreciation Expense 18,500 ‘Carl's Psychiatrie Cli Income Statement For Year Ended December 31, 2008 Professional Fees F ‘Expenses Rent Expense P 110,000 Usilities Expense 92,000 Salaries Expense Insurance Expense 20,000 Depreciation Expense Taxes & Licenses Bad Debis Expense 9.400 Supplies Expense 0 356,100 Net Income EExercise 13 Presented below are the balance sheet accounts of Galvex Consultancy form balance sheet for the year December 31, 2008 by completing the balance sheet and the accompanying notes to Financial statement. F 65,000 350,000 Furniture & Fixtures 4,500 Accumulated Depreciation ~ Building, 50,000 Allowance for Bad Debts 6,000 101,000 Supplies 700 Accounts Receivable 46.500 Galvez, Capital 469,200 Accounts Payable 5,000 Loans Payable 50,000 Utilities Payable 500 Prepaid Insurance 10,000 Galver Consultancy Firm Balance Sheet As of December 31, 2008 Assets Note Current Assets Cash P Trade and Other Receivables L Prepaid Expenses 2 — Total Current Assets P Non-Current Assets Property, Plant and Equipment 3 Total Assets. P_s24,700 Liabilities & Owner's Equity Current Liabilities Trade and Other Payables 4 P Owner's Equity Galvez, Capital 469,200 Total Liabilities and Capital $24,700 ‘Chapter 2 # Financial Statomenis for a Service Business ard the Fursamental Accounting Equation FoExercise 13 Presented below are the balance sheet accounts of Galvex Consultancy Firm. Prepare a report form balance sheet for the year Docomber 31, 2008 by comploting the balance sheet Land P 68.000 Building 350,000 Furniture & Fixtures 4.400 Accumulated Depreciation ~ Building 50,000 Allowance for Bad Debis 6,000 Cash 101,000, Supplies 700 Agcounts Receivable 46,50 Galvez, Capital 469.200 Accounts Payable 3.000 Loans Payable 50,000 Utilities Pavable 500 Prepaid Insurance 10,000 Galvez Consultancy Firm Balance She As of December 31, 2008 Assets Note Current Asseis Cash P Trade and Other Receivables 1 Prepaid Expenses 2 Total Curront Assets . Nan-Current Assets Property. Plant and Equipment 3 Tolal Asscts B_324,700 Liabilities & Owner's Equity Current Liabilities Trade and Other Payables 4 PF Owner's Equity Galver, Capital 469,200 Total Liabilities and Capitat P_524,700 ‘Notes to Financial Statement Nate | - Trade and Other Receivables Accounts Receivable Pp Less: Allowance for Bad Debts Total Nate 2 ~ Prepaid Expenses Suplies Pp ——_ ‘Note 3 — Property, Plamt and Equipment Land F Building P Loss: Accumulated Depreciation Furniture and Fixtures Total z Nate 4 — Trade and Other Payables Accaunts Payable P Loans Payable Utilitics Payable TotalNoies to Financial Statement Note | - Trade and Other Receivables Accounts Receivable P Less: Allowance for Bad Debts Tot P Note 2 — Prepaid Expenses Suplies P Prepaid Insurance Tot Note 3 ~ Property, Plant and Equipment Land Pr Building P Less: Accumulated Depreciation Furniture and Fixtures Toral P Note 4 ~ Trade and Other Payables Accounts Payable Pr Loans Payable Utilities Payable Ta Exercise 14 Presented below are the balance sheet accounts of Forever Bridal Consultancy. Prepare an account form balanee sheet for the year December 31, 2008 by completing the balance sheet and the accompanying notes to financial statement. ‘Supplies P 1.000 Notes Receivable P 35,000 Equipment F, Capital 421,000 Building Accounts Payable 5,000 Furniture & Fixtures Loan Payable 39,000 ‘Accumulated Notes Payable 45,000 Depreciation ~ Building Prepaid Rent 4,000 Cash FUNDAMENTALSGF ACCOUNTING Textbook fr Begeners‘Notes to Financial Statement Note | ~ Trade and Oiher Receivables Accounts Receivable Less: Allowance for Bad Debts Total Prepaid I Total ‘Note 3 ~ Property, Plant and Equipment Land Building Less: Accumulated Depreciation Furniture and Fixtures Total Note 4 — Trade and Other Payables Accounts Payable Loans Payable Utilities Payable TotalExercise 14 Supplies P1000 Equipment 20,000 Buildings 384,000 Furniture & Fixtures 4500 Accumulated Depreciation ~ Building 0,000 Cash 111,500 Notes Receivable F, Capital Accounts Payable Loan Payable Notes Payable Prepaid Rent Forever Bridal Consultancy Balance Sheet As of December 31, 2008 Assets Current Assets Cash Notes Reecivable Prepaid Expenses Total Current Assets Non-Current Assets Property, Plant and Equipment Total Assets L Current Liabilities bilities & Owner's Equity Trade and Other Payables Owner’s Equity F. Capital Total Liabilites and Capital N Nate | ~ Prepaid Expenses Supplies Propaid Rent Total Note 2 ~ Property, Plant, and Equipment Building Loss: Accumulated Depreciation Equipment Furniture & Fistures Total Note 3 — Trade and Other Payables Accounts Pavable Notes Payable Loan Payable Total Note Presented below are the balance sheet accounts of Forever Bridal Consultancy. Prepare an account form balance sheet for the year December 31, 2008 by completing the balance sheet 35,000 421,000 5,000 39,000 45,000 4.000 Pp P_Sin.000 PB 421,000 BS 10,000 Pp PForever Bi Consultancy Balance Sheet As of December 31, 2008 Assets Note Current sAsseis Prepaid Expenses 1 Total Current Assets Non-Current Assets Property, Plant and Equipment 2 Total Assets Liabilities & Owner's Equity Current Liabilities ‘Trade and Other Payables 3 ‘Owner's Equity F, Capital ‘Total Liabilites and Capital No inane: meni Note | ~ Prepaid Expenses Supplies Prepaid Rent Total Note 2 — Property, Plant, and Equipment Bailding P Less: Accumulated Depreciation Equipment Furniture & Fixtures Total Note 3 - Trade and Other Payables Accounts Payable Notes Payable Loan Payable Total Chapler 2 @ Financial Statements for » Service Business and the Fundamental Accounting Equation 0) P_ 510,000 aForever Bi Balance Sheet As of December 31, 2008 Assets Note Current sAsseis Prepaid Expenses 1 Total Current Assets Non-Current Assets Property, Plant and Equipment 2 Total Assets Liabilities & Owner's Equity Current Liabilities Trade and Other Payables 3 ‘Owner's Equity F, Capital Total Liabilites and Capital No inane: meni Note | ~ Prepaid Expenses Supplies Prepaid Rent Total Note 2 — Property, Plant, and Equipment Bailding Less: Accumulated Depreciation Equipment Furniture & Fixtures Total Note 3 - Trade and Other Payables Accounts Payable Notes Payable Loan Payable Total Consultancy 0) P_ 510,000Exercise 15 From the information given from the records of Gracia’s Consultancy Services, prepare a statement of changes in owner's equity for year ended Dozomber 31, 2008, G Capital P 400,000 G Drawing, 40,000 The company generated a P150.000 net income. Gracia made an additional investment of PRO_O00, Gracias Consultaney Services ‘Statement of Owner's Equity For Year Ended December 31, 2008 Capital P Add: Additional Investment F Net Income 9,000 ‘Sub-Total P 630000 Less: Drawings Total Gwwner’s Equity 500000 Exercise 16 Using the same information from Exercise 15, except thal, instead of a net income, the company incurred a nt loss of P $5,000, Complete the statement of owner's equity of Gracias Consultancy Services. Gracias Consultancy Services ;atement of Owner's Equity For Year Ended December 31, 2008 Capital P 400,000 Add: Additional Investment 80.000 Sub-Total Less: Drawings P 40,000. Net Loss 95,000 Total Gwner’s Equity P 3e FUNDAMENTALS OF ACCOUNTING Textheak fee BeginnersExercise 15 From the infirmation given from the records of Gracias Consultancy Services, prepare a statement of changes in owner's equity For year ended December 31, 2008 G Capital P4000,000 G Drawing 40,000 The company generated a 150,000 net income. Gracia made an additional investment of 80.000 Gracias Consultancy Services Statement of Owner's Equ For Year Ended December 31, 2008 Capital P Add: Additional Investment ¥ Net Income. Sub-Total P 630,000 Less: Drawings Total Owner's EquityExercise 16 Using the same information from Exercise 15, except that, instead of a net income, the company incurred a net loss of P 55,000, Complete the statement of owner's cquity of Gracias Consultancy Services Gracias Consultancy Servic Statement of Owner's Equity For Year Ended December 31, 2008 Capital P 400,000 ‘Add: Additional Investment 80,000 ‘Sub-Total ‘Less: Drawings PF 40,000 Net Loss 95,00) ‘Total Owner's Equity EExercise 17-Comprehensive Problem Presented is the trial balance of Niko Ong Art Gallery, From the information given, prepare the following by completing the incomplete statements and the accompanying notes 10 financial statements |, Income Statement 2, Balance Sheet 3, Statement of Owner's Equity Nika Ong Art Gallery ‘Trial Balance December 31, 2008 Cash 840,500 Accounts Receivable 50,0001 Art Supplies 12.0001 Prepaid Rent 000 Prepaid Insurance 18,000 ‘Transportation Equipment 300.4100 Office Equipment 50,000 Accounts Payable P 37,000 Notes Payable 200,000 Utilities Payable 900) Uncamed Painting Revenue 25011100 Ong, Capital 500,000 Ong, Drawing 30.000 Painting Revenue 35018000 Salarics Expense: 2.500 Utilities Expense 4,900 Total Pi337.900 Chapter 2 @ Financial Staternente fora Secvice Business and the Fundamental Accounting Equation 3aExercise 17-Comprehensive Problem Presented is the {rial balance of Nike Ong Art Gallery, From ihe information given, prepare the following by completing the incomplete statements and the accom pany'ing mates to financial statements: 1, {ncome Statement 2, Balance Sheet 3, Statement of Owner's Equity Nika Ong Art Gallery Trial Balance December 31, 2008 Cash P 840.so0 Accounts Receivable 50,000 Art Supplies 12,000 Prepaid Rent 30,000 Prepaid Insurance 1s,000 Transportation Equipment 300.0000 Offige Equipment 50,000 Accounts Payable P 37,000 Notes Payable 2004100 Usilitics Payable 900 Uneamed Painting Revenue 350,000 ng, Capital 500,000 Ong, Drawing 30,000 Painting Revenue 3501000 Salaries Expense 2300 Utilities Expense 4,900 Total PL337.900 P1337.900 Niko Ong Art Gallery Income Statement For Year Ended December 31, 2008 Painting Revenue Pp Expenses Utilities P Salaries Net Income PB Niko Ong Art Gallery Balance Shee As of December 31, 2008 Assets Note Current Assets Cash F Accounts Receivable Prepaid Expenses 1 Total Current Assets P Non-Current Assets Property. Plant,and Equipment 2 Total Assets Liabilities Current Liabilities Trade and Other Payables 3 Fr Owner's Equity Ong, Capital Total Liabilities and Capital PB Niko Ong Art Gallery Statement of Changes in Owner's Equity For Year Ended December 31, 2008 ‘One, Capital P Add: Net Income Sub-Total Less: Drawings Total Owner's Equity £ Notes to Financial Statements Nate 4 — Prepaid Expenses Ant Sup Prepaid Rent Prepaid Insurance Total E Note 2 — Property, Plant, and Equipment Transportation Equipment P Office Equipment Total Note 3 — Trade and Other Payables Accounts Payable PF Notes Payable Utilities Payable Uneamed Painting Revenue Totalo Niko Ong Art Gallery Income Statement For Year Ended December 31, 2008 Painting Revenue r Expenses Utilities PF Salaries Net Income B Niko Ong Art Gallery Balance Sheet As of December 31, 2008 Asses Note Current Assets Cash P Accounts Receivable Prepaid Expenses 1 Total Current Assets P Non-Curtent Assets Property, Plant, and Equipment 2 Total Assets Liabili Current Liabilities Trade and Other Payables 3 PF Owner's Equity Ong, Capital Total Liabilities and Capital PB FUNDAMENTALS OF ACCOUNTING Textheak fee Beginners0 Ong Art Gallery Income Statement For Year Ended December 31, 2 Painting Revenue Expenses Utilities PF Salaries Net Income Niko Ong Art Gallery Balance Sheet As of December 31, 2008 Asses Note Current Assets Cash P Accounts Receivable Prepaid Expenses 1 Total Current Assets P Non-Current Assets Property, Plant, and Equipment 2 Total Assets Liabilit Current Liabilities Trade and Other Payables 3 F Owner's Equity Ong, Capital Total Liabilities and Capital PBNiko Ong Art Gallery Statement of Changes in Owner's Equi For Year Ended December 31, 2008 Ong. Capital Add: Net Income ‘Sub-Total Less: Drawings ‘Total Owner's Equity ‘Notes to Financial Statements Note 1 — Prepaid Expenses ‘Art Supplies P Prepaid Reat Prepaid Insurance Total Note 2 ~ Property, Plant, and Equipment Transportation Equipment P Office Equipment Total z Note 3 - Trade and Other Payables Accounts Payable P Notes Payable Utilities Payable ‘Uncamed Painting Revenue ‘Total P Chapter 2 @ Financial Staternente fora Secvice Business and the Fundamental Accounting Equation mHNiko Ong Art Gallery Statement of Changes in Owner’s Eq For Year Ended December 31, 2008 Ong, Capital Add: Net Income ‘Sub-Total Less: Drawings ‘Total Owner's Equity ‘Notes to Financial Statements Note I~ Prepaid Expenses Art Supplies P Prepaid Reat Prepaid Insurance Total Note 2 ~ Property, Plant, and Equipment Transportation Equipment P Office Equipment Total z Note 3 ~ Trade and Other Payables Accounts Payable P Notes Payable Utilities Payable Uneamed Painting Revenue ‘Total gECHAPTER 3 THE ACCOUNTING EQuaTION Learning Objectives 1. dontify the offeets of transactions on the accounting equation 2. Analyze the different transactions in a service type af business The following pages will illustrate the effect of transactions on the accounting equation, The abbreviations in the examples shall mean the following, IN ~ Increase DEC ~ Decrease NC = No Changeopen’ Sugunoooyy au. @ £ saideH ee 1 Transactions Assets Quer invests cash Inc Purchases supplies on INC credit Quiner invests equipment Inc INCIDEC Buys land paying cash Borrows cash with note Inc Rendered services foreash INC Paid utilities expense: DEC for the month Liab ios No Change INC. No change ING No change No change Capital Inc No change Inc No change No change Inc Analysis: An entity separate and distinct from the owner is created. The cash investment of the owner increases the cash ofthe business and the capital ofthe owner, ‘Supplies increase the asset of the ovmer and the liability correspandin gly increases as supplies have been bought an account of credit The equipment increases the assets ofthe business. Since this is an investment by the ovmer, capital of the owner correspondingly increases. Land increases the assets of the business but cash correspondingly decreases with the cash paid for purchase of ‘the land, Cash increases the assets of the business because the business borrowed money. Notes payable increases the ltabilites of the business as it represents an obligation on the part of the business to pay ata future date, The business eamed an income by rendering services and collecting revenues in cash, The effect in the accounting equation is an increase in cash for the cash collected and an increase in capital as revenue increases capital Payment represents cash auttlow decreasing the assets of business. Expenses decrease the capital of the business as they have an opposite effect on income,sss fog 20 10085291 ONLLNNODOW 4O-SWLNSNWONNS Analysis Transactions Assets Liabilities the supplies bought Dec DEC on credit 9. Rendered services on credit INC No change 10, Collected the accountin INC IDE transaction #9 Ne change This transaction is a payment ef account, Since there is cash outflow representing the payment of an existing liability assets decreased in the amount of the cash paid and llabiities decreased in the amount of the liability on supplies paid Assets increased by the amount of accounts receivable expected to be collected frem the customer to whom the service was rendered and capital increased since rendering of services represents revenue. Assetincreased as there was cash inflow in the amount of the collection. However, asset correspondingly decreased ‘with the amount of the collection as the accounts recetvable which is an asset account wil decrease. This is because the amaunt the customer ewes has already been collected,luogenbg Bununonoy ae ¢ 1sdeD SE The following details will include the amount and the aceount affected in illustrating the offeets on the asset equation, Notice thar the accounting equation is always balanced in every transaction such that assets are alway's equal to liabilities and capital Transactions Assets. Liabilities Capital Analysis 1, Me. Sy invests INC-CASH No Change —INC-Mr. Sy, An entity separate and distinct from Mr-Sy Is created 500,000 cash 00,000 Capital The 500,000 cash investment of Mr. Sy increases the cash 800,000 of the business and the capital of the owner. 2, Purchases ING INC-Accounts. No change The P5,000 supplies increase the assets of the business 5,000 supplies SUPPLIES Payable and the liability correspondingly increases as supplies were on credit 5,000 P5,000 baught an account or credit. 3. Owner invests P60,000 ING No change ING-Mr.Sy The PS0,000 equipmentincreases assets of the business, equipment Equipment Capital Since this is an investment by Mr. Sy, capital of Mr, Sy P 60,000 60,000 correspondingly increases by P60, 000. 4, Buys land 600,000 INC-LAND Nechange Nechange —_The F600,000 land increases assets of the business, paying cash 600,000 but cash correspondingly decreases by F600, 000, DEC -CASH with the payment made for the land, 600,000 5. Borrows cash 20,000 ING-GASH ING-Notes © Nochange ash increases the assets by P20,000 because the with notes payable 20,000 Payable business borrovred money. Notes payable increases the 20,000 liabilities by P2000 as it represents. an obligation on the: part of the business to pay at a firture date 6. Rendered 10,000 INC-CASH —No-change INC-SERVICE The business eamed 10,000 income by rendering services, services for cash F0,000 INCOME ——_ and collecting revenues in eash, Cash, therefore, increases 10,000 by P10,000 andthe capital increases by P'10,000 as revenue increases capital, 7. Paid P700 uiilities DEC-CASH No change DEC-UTILITIES Payment of P700 represents cash outflow decreasing the expense for the manth roo EXPENSE assets of the business. Expenses decrease the capital F700 af the business as they have an opposite effect on income,8) Transactions sss fog 20 10085291 ONLLNNODOW 4O-SWLNSNWONNS Assets Liabilities Capital Analysis 8, Paid the supplies bought DEC-CASH DEG-Accounts No change on creditin transaction P5000 Payable #2, 6,000 9, Rendered P2,000 ING-Accounts No-change INC-SERVICE services on credit Receivable INCOME, P2,000 2,000 10. Collected the account INC-CASH No change No change in uansaction #9 72,000 DEC - Accounts Recsivable P2,000 This vansaction is a payment af account, Since there Is cash outflovrrepresenting the payment of the P5,000 lability, cash decreased by P5,000 and liability likewise: decreased by P5,000. The liability has been paid in full Assets increased by P2,000 which is the amount of accounts receivable expected ta be collected fromthe customer to whom the service was rendered. Capital increased by P2,000 since revenue increases capital Assetincreased by P2,000 representing the amount of the collection. However, asset correspandingly decreased by 2,000 which is the amount of accounts receivable collected. This is because you have already collected from the customer wto owes you. You have no accounts receivable trom the customer,Theory Exercise ‘Write “T” if the statement is true and “E™ if the statement is false. 1 The fundamental accounting equation is Assets = Liabilities * Capital Revenue increases owner's equity Payment of an expense increases asset Expenses. decrease owner’s equity Receipt of cash decreases asset Exercise 1 Show the effects on the accounting equation, Write + for increase, ~ for decrease, and NC for No Change Asset | Liabil Capital 1, Paid account to creditors Sold truck for cash at price equal its cost 3, Collected an account reecivable 4. Purchased a typewriter in cash 3. Paid utilities for the month 6 Owner withdrew cash for personal use Exercise 2 Show the efffects on the accounting equation, Write + for inerease, - for decrease, and NC for Ne Change, Asset Lial 1, Owner invested cash in the business 2, Owner borrowed money from the bank 3. Owner made an additional investment in the business 4 Owner purchased a typewriter on account Bought truck paying 10% down and balance on account ‘Chapier 3.@ The Accounting Equation a7Exercise 1 Show the-efffects on the accounting equation, Write + for increase, — for decrease, and NC for No Change Asset | Liability | Capital 1, Paid account to creditors 2. Sold truck for cash at price equal its cost 3. Collected an account reecivable 4. Purchased a typewriter in ash Paid utilities for the month 6 Owner withdrew cash for personal useExercise 2 Show the effects on the accounting equation, Ws No Change 1c + for increase, — for decrease, and NC for Asset | Liability | Capital 1. Owner invested cash in the business 2. Owner borrowed money from the bank 3. Qwner made an additional investment in the business 4, Owner purchased a typewriter on account 3 Bought truck paving 10% down and balance on accountTheory Exercise ‘Write “T™ if the statement is true and “F* if the statement is false. The fundamental accounting equation is Assets = Liabilities + Capital Revenue increases owner's cquily Payment of an expense increases asset Expenses. decrease owner's equity Receipt of cash decreases assetExercise 3 Show the effects on the accounting equation, Write + for increase, ~ for decrease, and NC for No Change: Asset Liability ital 1, Nike opened a dental clinic by investing | Million pesos. 2. Borrowed P 100,000 from Bank Rupt Bank 3, Invested a dental chair worth P300,000 4. Bought from A Co. tables worth P70,000, Paid 10,000 cash and the balance oh account 5. Withdrow P#,0100 for personal use 6. Purchased cabinets for 15.000 in cash 7. Paid his account to A Co. in full Exercise 4 Show the effects on the accounting equation. Wr No Change. + for increase. for decrease, and NC far Asset Liability Capital 1. Gol opened a medical clinic by investing, apiece of land worth POE0, 000. 2. Invested PSH),000 cash 3. Withdrew P350,000 cash 4 Bought from Blims furnigure worth 65,000 and paid F13,000 cash and the balance on account Paid her account to Blims in full ae FUNDAMENTALS OF ACCOUNTING Textheak fee BeginnersExercise 3 Show the effects on the accounting equation, Write + for increase, — for decrease, and NC for No Change Asset Liabi ty Capital 1, Niko opened adental elinie by investing | Million pesos, 2. Borrowed P100,(0 from Bank Rupt Bank 3. Invested a dental chair worth P300,000 4. Bought from A Co. tables worth P70,000, Paid 10,000 cash and the balance on account 3, Withdrew P9,000 for personal use 6, Purchased cabinets for 15,000 in cash 7. Paid his account ta A Co. in fullExercise 4 Show the effects on the accounting equation, Write + for inerease, — for decrease, and NC for No Change, 1. Gelopened a medical clinic by investing apiece of land worth P980,000 Invested P5000 3. Withdrew P3S0,000 cash 65,0100 and paid P15,000 cash and the balance on account 5. Paid her account to Blims in fullCHAPTER 4 RECORDING BusiNEss TRANSACTIONS (Douste-Entry System) Learning Objectives Familiarize oneself with the accounting cyele State and apply the rules of debit and credit Analyze transactions with the usc of the debit and credit in T-accounts Jourmalize transactions in the general journal Post the journal entries in the general ledger Prepare the trial balance and appreciate its use The Double-Entry System of Recording Transactions Recording transactions in accounting is based on the double-entry system. The transaction has adual effect which means that every transaction affects al st two accounts, For every debit, there is a corresponding credil The total amount of the accounts debited must equal the tetal amount of the accounts credited, The Accounting Cycle The life of a business is divided into accounting periods of equal length, A standard sequence of accounting. procedures is repeated for each period, These uniform procedures done to accomplish the accounting process are referred to as the accounting cycle L Mentifving and analyting the events ta be recorded This isthe process of identifying and analy ing the transactions to be recorded through the business documents. Business documents are forms containing evidence to support a business: transaction, These documents provide thedata concerning the partics invelved in ths transaction, the exchange made, the date, and the money value af the exchange. In determining theexchange made, the value received by the business and the value parted are translated into their debit and credit components, a02, Recording transactions in the journal This is known as journaiizing. It is the process of recording, the transaction in the first book of account knows as the journal. 3. Pasting journal entries to the ledger This is known as posting. It is the process af transferring the mfermation found in the Journal into the book of final entry known as the fedger. The ledger summarizes the increases or decreases af individual accounts, 4. Preparing the trial balarce The trial batance is a list of accounts found in the ledger logether with the accounts balance or total. This is a proof that for every debit, there is a carresponding credit. Hence. itis also a proof that the ledger is in balance, 5. Preparing the worksheet and adjusting entries The wortshver is 2 common tool used by accountants to assemble on a sheet of paper the information needed to prepare the financial statements, adjusting entries, closing entries, and the posteclosing trial balance 6. Preparing the financial statements Abbalancesheet, income statement, statement ofchanges in equity, and a cash flow statement are prepared to provide useful information to parties interested in the financial information of the business. 7. Journalizing and posting of adjusting journal entries Adjusting entries are prepared at the end of the accounting, period to update the accounts for internal transactions because they affect more than one accounting period. This wall record the accruals, expiration of deferrals, estimation, and other events from the worksheet 8. Journalizing and posting of elosing journal entries Closing entries are prepared at the end of the accounting period to update the owner's capital account. This will also eliminate the balances of the naminal accounts so that they may be ready for the next period 9. Preparing the post closing trial balance Aficr the closing eatries have becn posted. the post closing trial balance is prepared from the general ledger accounts. ‘This is nocessary to assure that these entries have been correctly posted, This will alsa check the equality ofthe debits and credits after the elosing entries, 10. Journalizing and posting af reversing journal entries Reversing entries are prepared to simplify the accounting process. The adjusting entries are simply reversed on the first day of the accounting period. Not all adjusting entries are reversed, only secruals and deferrals that use the nominal sccounts, 7 FUNDAMENTALS OF ACCOUNTING Textoeakor BeginnersThe Analysis of Transaction Following are the sieps involved to analyze transactions: 1, Prom the business document, determine the kind of transaction or exchange made. 2, Analyze the transaction to determine the accounts affected. They can either affect the assets, liabilities, owner's equity. revenue or expenses accounts. Determine the effect of the transaction on the accounts alfected. The transaction can either increase or decrease the accounts 4. Apply the rules of debit and credit to identify whether the accounts affected should be debited or credited to show the corresponding increase ar decrease The Journal The Journal is a chronological record of events or business transactions showing all the effects of cach transaction in terms of debits and credits. Because transactions are initially recorded in the journal, itis called the book of original entry, The simplest journal is the general journal. A journal entry should contain the following 1. Pate. Write the month on the first transaction unless there is a change in month for the succeeding transactions or a new page is used 2. Account Titles and Explanation. Write the debit account at the extreme left of the first line while the credit account is indented half-inch on the next line. The explanation describing the transaction is written on the extreme left of the ncxt line below the credit. Remember fo skip one line defare proceeding io the nexi transaction 3. PR (Posting Reference) Write the corresponding account number here once the entry is, pasted. Meanwhile. itis left blank until the posting has been done. 4. Debit. Under this column, write the debit amount for each debit account 8. Credit, Under this column, write the credit amount for each eredit account. Presume that Niko Ong established an Art Gallery with an initial investment of P500,000 on September 5, 2008. The journal entry is showa below General Journal Page Number 2008 Cash Sept.3 ‘Ong, Capital Initial Investment Chapler d @ Recoating Guiness Trancactione (Dauble-Eréry Spates PR. | Debit S00. aThe Simple and Compound Entry When only two accounts are affected, we call this a simple entry where there is only one debit account and one credit account. The previous cxample where the owner, Niko Ong, made an initial investment is.a simple entry. In some cases, a transaction would require the usc of three or more accounts in which case the entry is called a compound exury Journalizing the Transactions. Journalizing is the process of recording transaction in the joum and measured In journalizing transactions the double entry system is used. In this case, two ar mare accounts ate affected by each transaction. 1t follows that for every debit, a corresponding credit is made. The total debits should equal total credits for every transaction. In this way. the equality of the accounting equation is maintained, after it has been recognized Rules for Debit and Credit You debit to show You credit to show 1. Increase in assets 1 Decrease in assots 2. Decrease in liabilities 2. Increase in liabilities 3. Decrease in awner’s equi 3. Increase in owner's equity - Owner's withdrawal - Initial investment - Expenses: - Additional investment + Revenuclincome llustrative Problem h al Investment ‘The following are transactions for Nike Ong ArtGallery for the month of September, They will be recorded using. the double cntry system. fo .analize each transaction, the fallowing shall be reed ta show the effect an the accounts «re follows: A (for Asset), E (for Liability) or OF (Owner's Equity). The effects an awmer s equity 4 swbclessified as faliows: OE: (Reverme) and OE:F (Expenses). Sept. 1 Niko Ong has a talent for painting, He is into charcoal, water color, acrylic, and oil painting, Having the flair for it, he started studying painting under a private tutor at the age of 10, Because of the many requests for jab paintings Niko is gelting from prospective customers, he decided to put up an art gallery. He invested P5 00,000 in this initial endeavor Analysis Assets increased. Owner's Equity increased Rules Debit increases in assets. Credit increases in owner's equity Entry Increase in assets is recorded by: a debit to cash. Increase in owner's equity’ is recorded by a eredit to Ong, Capital Dr Cr Cash (4) 309,000 ‘Ong. Capital (OE) 500,000 Initial Investment a FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersAcquisition of Transportation Equipment for Cash Sept. 1 Acquired transporiation equipment to be used for delivery P300,000 cash. Analysis An asset increased. Another asset decreased. Rules Debit increases in assets. Credit decreases in assets. Entry Increase in assets is recorded by a debit to transportation equipment Decrease in assets is recorded by a eredit to cash, Dr cr ‘Transportation Equipment (A) 200,000 Cash (AS 300,000 Parchased transportation equipment for cash Advance Payment of Rental Sept. | Rented office space and paid two months rent in advance, P50, 000, ‘Analysis ‘An asset increased, Another asset decreased Rules Debit increases in assels. Credit decreases in assets Entry Increase in assets is recorded by a debit to prepaid rent, Decrease in assets is recorded by a crédil to cash Dr cr Prepaid Rent (A) 30,000 Cash (A) 30,000 Paid two months rent in advance Issuance of Note for Cash Sept. 2 Niko Ong issued a promissory note for a P200,000 loan from Meteo Bank The note carries a 12% interest per annum. The interest and the principal are payable after one year Analysis Asset increased, Liabilities increased Rules ‘Debit increases in assets. Credit increases im liabilities, Entry Increase in assets is recorded by a debit to-cash. Increase in liabilities is recorded by a credit to notes payable. Dr Cr Cash (A) 200,000 Notes Payable (L) 200,000 Borrowed money from the bank issuing. a promissory note Events not Affecting the Accounting Equation (no journal entry) Sept.2 Hired an office secretary with P5,000 monthly salary. The secretary started work on the same di Thore is no cntry nosessary at this point as the hiring of the secretary has no effect on the asso. liabilities, and owner's equity Chapter 4 @ Recording Business Traneactione (Dauble-Eniny Syste) a3aa Sept. 2 Called Enriquez Art Supplies and ordered oil paints and brushes worth 12,000, There is no entry necessary at this point as the ordering of the oil paints and brushes has no effect om the asscts, liabilities, and ewner's equity, No delivery of the supplies has been made thereby no lishility arises, Payment of Insurance Premiums Paid Insular Life Insurance Co. P1¥8,0000 for one year insurance of the art gallery ‘Am asset increased, Another asset decreased Debit increases in assets. Credin decreases in assets Increase in assets is recorded by a debit to Prepaid Insurance. Decrease in assets is recerded by a credit to eash Dr cr Prepaid Insurance (A) 18,000 Cash (A} 18,000 Paid one year insurance premium Acquisition of Office Equipment Paying Down Payment and the Balance on Account Sept. 5 Acquired office equipment from Abenson’s P50,000 paying P20,000 and the balance at the end of the month, Note: A compound entry is needed in this transaction. Analysis Asscis increased. Assets decreased, Liabilities increased, Rules Debit increases in assets, Credil decreases in assets. Credit increases in liabilities Entry Increase in assots is recorded by a debit to office equipment. Decrease in assets is revorded by a credit to cash. Increase in liabilities is recorded by a credit to Accounts Payable, Dr Cr Office Equipment (A) 50,000 Cash (AY 20,000 Accounts Payable (L) 30,000 Bought office equipment paying cash and the balance on account, Purchase of Supplies on Account Sept. 8 The P12,000 oil paints ordered from Enriquez Art Supplies were delivered on aecount ‘Analysis Assets increased, Liabilities increased Rules Debit increases in assets. Credit increases in liabilities. Entry Increase in assets is recorded by a debit to Art Supplies. Increase in liabilities is recorded by a credit to Accounts Payable, Dr cr ‘Art Supplies (A) 12,000 Accounts Payable (L) 12,000 Purchased art supplies on account FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersPartial Settlement of Accounts Payable Sept. 10) Paid Enriques Art Supplies P5,0(M) of the amount owed Analysis Assets decreased. Liabilities decreased Rules Debit decreases in liabilities, Credit decreases in assets Entry Decrease in liabilities is recorded by a debit 10 accounts payable. Decrease in assets is recorded by a eredit to cash. Dr cr Accounts Payable (L) 5,000 Cash (A) 5,000 Made partial payment of liability Cash Collection fram Income Earned Sept, I Painted the portrait of Don Enrique Zobel receiving P200,000 cash for the completed portrait, Analysis Assets increased. Owner's equity increased. Rules, Debit increases in assets. Credit increases in owner's equity Entry Increase in assets is recotded by a debit to cash. Increase in owner's equity is recorded by a credit ta Painting Revenues. br Cr Cash (A) 200,000 Painting Revenues (OE:R) 200,000 Received cash for painting a portrait Payment of Salaries Sept. 15 Paid secretary's salary for half month, P2,500 Analysis Assets decreased. Owner's equity decreased. Rules Debit decreases in owner's equity, Credit deercases in assets, Entry ‘Decrease in owner's equity is recorded by a debit te salaries expense, Decrease in assels is recorded by a credit to cash, Dr Cr Salaries Expense (OE:E} 2.500 Cash (A) 2,500 Paid sceretary's half month salary Collection of Unearned Income Sept. 17 Received P250,000 cash for a contract to paint the portrait of Dofia Susana Analysis Assets increased, Liabilities increased. Rules Debit increases in assets. Credit increases in liabilities Entry Tnerease in assets is recorded by a debit to cash. Increase in liabilities is recorded by a credit to uncarned painting revenue. Dr cr Cash (Ay 250,000 eamed Painting Revenue (Ld 250,000 Received cash for painting services to be rendered Chapter 4 @ Recording Businece Traneactione (Double-Enity Syste)Income Earned on Agcount Sept. 21 Delivered and billed Mr. Sy P150,000 fora landscape painting Analysis ‘Assets increased, Owner's equity increased, Rules Debit inereases in assets. Credit inereases in owner's equity Entry Increase in assets is recorded by a debit to accounts receivable Increase in owner's equity’ is recorded by a eredit to painting revenues Dr cr Accounts Receivable (A) 150,000 Painting Revenucs (OE:R) 150.4000 Landscape painting on account Cash Withdrawal by Owner for Personal use Sept. 23 Niko Ong withdrew P'30,000 for personal use. Analysis Assets decreased, Owner's equity decreased, Rules Debit decreases in owner's equity. Credit decreases in assets Entry Decrease in owner's equity is recorded by a debit to Ong, Drawing. Decrease in assets is recorded by a credit Lo cash, Dr Cr Ong, Drawing (OB) 30,000 Cash (A) 30.000 Niko Ong withdrew cash for personal use, Unpaid Expenses already Consumed | Incurred (Accured Expenses) Sept. 23 Received bill from PLDT P90 Analysis Liabilities increased. Owner's Equity decreased Rules, Debit decreases in owner's eq Entry Decrease in owner's equity is recorded by a debit to utilitics expense. Increase in liabilities is recorded by a credit to w Uti s Expense (OEE) Utilities Payable (L} 900 Received billl form PLDT Partial Collection of Accounts Receivable Sept. 25 Received 100,000 from Mr, Sy as partial payment for landscape painting delivered last Sept. 21 Analysis ‘An Asset increased. Another Asset decreased, Rules, Debit increases in assets. Credit decreases in assets Entry Increase in assets is recorded by a debil to cash. Decrease in assets is recorded by a credit to accounts receivable, br cr Cash (A) 100,000 Accounts Receivable (A) 190,000, Received cash as partial collection from Mr. Sy 7 FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersPayment of Expenses Incurred/Consumed Sept. 30 Paid electricity bill for the month, Pa, (H0. Assets decreased. Owner's Equity decreased Debit decreases in owner's equity. Credit decreases in assets Decrease in owner's equity is recorded by a debit to utilities expense, Decrease in assets is recorded by a eredit to cash. Dr cr Utilities Expense (OEE) 4,000 Cash (A) 4,000 Paid electric bill for the month Use of T-Accounts An aecound is a form of record that summarizes the increases or decreascs of any specific accounting value. The simplest form of an account is the T-Account because the accounting equation is represented by a big T. It is an informal tool used 10 analyze the effect of a transaction in the assets, liabilities, owner's equity, revenue, and expenses The three clements of an account are: 1, Account Title 2. Debit 3 Credit ¢ T-Account and the rules of debit and credit Account Title Debit 1. Inerease in Asset Decrease in Liability Decrease in Owner's Equity (Withdrawals and Expenses) Credit 1, Decrease in Asset 2. Increase in Liability 3, Increase in Onvner’s Equity (Investment, Additional Investment, Revenue/Income) sstrative Problem Sept. | Nike Ong opened an art gallery. He invested P500,000 im this initial endeavor. Rules Debit increases in assets, Credit increases in owner's equity Cash Ong, Capital Debit Credit Debit Credit 91 $00,000 9H $00,000 Chapter 4 @ Recording Business Traneactions (Double-Eréry Syeters) a7Sopt. | Acquired transportation equipment for P3100 Rules Debit increases in assols, Crodit decreases in assets Transportation Equipment Cash Debit Credit Debit Credit 00,000 ‘9/1 500,000 9/1 300,000 on Nate : The P500,000 debit to cash is from the first September | transaction where Niko Ong invested cash. We shall record all transactions continuously as they transpire. Sept. 1 Renied office space and paid two months rent in advance, P30,000 Rules Debit increases in asscis. Credit decreases in assets. Prepaid Rent Cash Debi Credit Debit 9/1 30,000 $00,000 ol 3/1 30,000 Sept. 2 Niko Ong issued a promissory note for 2 P200,000 loan from MetroBank The note carries a 12% interest per annum. The interest and the principal are payable after one year. Rules Debit increases in assets, Credit increases in liabilities. Cash Notes Payable Debit Credit Debit Credit 509,000 9/1 300,000 92 200,000 972 200,000 a1 30,000 Sopt. 4 Paid Insular Life Insurance Co. P18,000 for a onceyear insurance of the art gallery Rules Debit increases in assets. Credit decreases in assets Cash Prepaid Insurance Debit Credit Debit Credix on 500,000 9/1 300,000 944 18,000 972 200,000 9/1 30,000 we 18.000 a FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersSept. 5 Acquired office equipment from Abenson’s, P50,000 paying P20,000 and the balance at the end of the month Rules: Debit increases in assets. Credit decreases in assets. Credit increases in liabilities Cash Office Equipment Debit Credit Debit Credit ‘9/1 500,000 SL 300,000 9/5 50,000 9/2 200,000 9" 30,000 94 18,000 Accounts Payable 9/8 20,000 Debit red Sept. 8 The P12,000-oil painis ordered from Enriquez Ari Supplies were delivered on account Rules Debit increases in assets. Credit increases in liabilities Art Supplies Accounts Payable Debit Credit Debit Credit 978 12,000 95 30,000 98 12.000 Sept. 10 Paid Enriquez Art Supplies P5,000 of the amount owed. Rules Debit decreases in liabilities. Credit decreases in assets Cash Accounts Payable Debit Credit Debit Credit 91 300,000 9/1 300,000 90 3,000 93 30,000 9/2 200,000 ai 30,000 a8 12,000 94 18,000 5 20,000 ono 5,000 Chapter 4 @ Recording Businece Traneactione (Double-Enity Syste)Sept. 11 Painted the portrait of Don Enrique Zobel receiving P200,000 cash for the completed portrait Rules Debit increases in assets. Credit increases in owner's equity Cash Painting Revenues Debit Credit Debit edit 9/1 s0,000 ort 300,000 on 200,000 92 200,000 9/1 30.000 SIL 200,000 94 18,0100 os — 20,000 alo 3,000 Sept. 15 Paid secretary’s salary for half month, P2500. Rules: Debit decreases in owner's cquity. Credit decreases in assets Cash Salaries Expense Debi Credit Debit Credit 9/1 $00,000 9/1 300,000 Ons 2,500 912 200,000 9/1 30,000 9/11 200,000) 914 18,000 915 20,000 910 00 os 2,500 Sept. 17 Received P250,000 cash for a contract to paint the portrait of Dofta Susana Rales. Debit increases in assets. Credit increases in liabilities Cash Uncarned Painting Revenue Debit Credit Debit edit 9/1 500,000 9/1 300.000 S/T 250,000 9/2 200,000 81 30,000 9fLL 200,000 94 18,000 250,000 9s 20,000 aia 5.000 aS 2.500 Delivered and billed Mi Debit increases in assets. C 130,000 fora landscape painting, \ereases in owner's equity Accounts Receivable Painting Revenues Debir Credit 921 180,000 FLL 208,000 9/21 150,000 FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersSept, 23 Niko Ong withdrew P30,000 For personal vse Rules Debit decreases in owner's equity, Credit decreases in assots Cash ‘Ong, Drawing Debit Credit Debit Credit 31 $00,000 1 300,000 9/23 30,000 972 200.000 130,000 ‘ai 200,000 9/4 18,000 917 280,000 9/8 20,000 of 5,000 152,500 9/23 30,000 Scpt. 23 Received bill from PLDT P90. Rules Debit decreases in owner's equity, Crodit increases in liabilities Utilities Expense Utilities Payable Debit Credit Debit Credit 923 5M 93 900 Sept, 25 Received P100,000 from Mr. Sy as partial payment for landscape painting delivered last Sept, 21, Rules Debit increases in assets. Credit decreases in assets Cash Accounts Receivable Debit Credit Debit Credit v1 300,000 3000.00 921 130,000 9125, 109.000 92 200,000 9/1 30,000 iL 200,000 94 18,000 OT 250,000 OS 20,000 9/25 1100,000 15,000 9S 2.500 9723 30,000 Chapter 4 @ Recording Business Traneactione (Dauble-Eniny Syste) aSept. 30 Paid electricity bill for the month, P4,000 Rules Debit decreases in owner's equity. Credit decreases in assets Cash Utilities Expense Debit Credit Debit Credit 9/1 500,000 9/1 300,000 923 900 972 200.000 ou 30,000 930 4.000 971 200,000 914 18.000 9"? 280,000 o/s 20,000 9/25 100,000 O10 8,000, WIS 2.500 9/23 30,000 930 4.000 The Ledger The Jedger is a group of the accounts used by the company. I is the book of final entry. Aa account is an accounting deviee or form of record that summarizes the increases or decreases of any specific accounting value. The accounts in the general ledger are classified into two general groups 1. balance sheet or real accounts (assets. liabilities, and owner"s equity) 2, income statement or nominal accounts (revenue and expenses) The ledger has a record of each account, The every account. While the journal is chronologis account. account is the basic format used to record lly arranged by date, the ledger is organized by Chart of Accounts Chart of Accounts is a list of all account titles used by the company with their corresponding account numbers. Account titles are arranged in financial statement order. Balance sheet accounts which include assets, linbilities, and owner's equity come first. Account titles in the incame statement which include revenue and expenses follow. The accounts are so numbered for purposes of indexing and cross-referencing ‘The succeeding panes present the chart of accounts af Niko Ong Art Gallery for illustration. BD FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersNiko Ong Art Gallery Chart of Accounts Balance Sheet Accounts Assets Liabilities 110 Cash 210 Accounts Payable 120 Accounts Receivable 220 Noles Payable 130.Art Supplics 230 Salaries Payable 140 Prepaid Rent 240 Utilities Payable 150 Prepaid Insurance 230 Interest Payable 160 Transportation Equipment 260 Unearned Painting Revenue 165 Accumulated Depreciation 170 Office Equipment Owner's Equity 175 Accumulated Depreciation 310 Ong. Capital 320 Ong. Drawing 330 Income Summary Income Statement Accounts Income Expenses 0 Painting Revenues 310 Salaries Expense 520 Art Supplies Expense 530 Rent Expense 540 Insurance Expense 580 Utilities Expense 560) Depreciation Expense: Transportation Equipment 570 Depreciation Expense : Office Equipment The Normal Balance of an Account The side of an account where increases are recorded is referred to as the normal balance of an account, This can be the left side (debit) ar the right side (credit) The reason for this is account incrwases usually exceed account decreases. The following are the normal balances of accounts: Normal Debit Balance Normal Credit Balance Asset Liability ‘Owner's Drawing Owner's Equity Expense Income Chapies 4 @ Recording Business Transactions (Double-Enity System) aaPosting to the Ledger Posting is the process af transferring information from the journal to the ledger Debits in the journal are correspondingly posted as debits in the ledger, and ere pasted as eredits in the ledger The steps an pasting are as follows’ is in the journal are likewise From the journal, copy’ the date of the transaction to the ledger ‘Under the journal reference (J.R.) column of the ledger, copy the page number ofthe journal Under the debit column in the ledger. transfer the debit amount from the journal. Under the credit column in the ledger, transfer the credit amount from the journal 4. After posting the amount to the ledger, write the account number in the pasting reference (PR) column of the journal Journal Gener Page i Account Titles and Explanation Cash 500,000 Ong, Capital 300,000 Initial Investment General Ledger Aceaunt: Cash Aceoumt No. 110 Date Explanation JR. | Debit Credit ‘Balance 2008 Sept. 1 Jt | $00,000 300,000 Account: Ong Capital Account Na. 310 Date Explanation JR. Credit | Balance 2008 Sept. 1 Jl so0,on0 | S00,000 The Ledger Accounts. After Posting The Debit or Credit balance of cach account is determined at the in order to prepare the trial balance. ‘The debit column and the ere added to get the balance of cach account. If an account's: account has a debit balance. If the total credit exceeds total de! Ba al debit exceeds total credi the account has a credit balance. dof the accounting, period column of each account are ihe FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersFor illustration purposes, the ledger accounts of Niko Ong Art Gallery after posting, are presented as follows: Cash Accounts Payable Credit SL 300,000 200,000 | 9 30,000 200,000 | 9M 18,000 250000 | 9s 20,000 Fon,000 | 971 5,000 2.500 30,00 4.000 T.250,000 Bal. 840,500 409,500 Accounts Receivable Debit Credit oe 3.000 or 30,000 oi 12.0001 S000 2.000 Notes Pavable Debit Credit 972 200,000 Bal. 200,000 Jiilities Payable Credit 150,000 | 9725 109,000 Bal. 50,000 Art Supplies Debit Credit 9/8 12,000 Bal. 12,000 Prepaid Rent Debit Credit 980 900 Bal. 200 Unearned Painting Revenue ont, Bal. 250,000 Ong, Capital Debit Credit 9 30,000 Bal, 30,000 Prepaid Insurance Debit Credit ‘of 500,000 Bal. 500,000 Ong, Drawing Debit Credit 94 18,000 Bal. 18,000 Debit Credit 93 30,000 Bal. 30,000 Chapies 4 @ Recording Business Transactions (Double-Enity System)Transportation Equipment Painting Revenues Debit Credit Debit Credit 300,000 9A 200,000 Bal. 300,000 921 150,000 Bal, 350,000 Office Equipment Salaries Expense Debix Credit Debit Credit 9/5__50.000 ONS 2.300 Bal, 50,000 Bal. 2,500 Utilities Expense Debit Cred 923 900 980 4,000 4300 The Trial Balance The triad alance is the schedule of all balances to prove the equality of the debit and credit Iisa listing ofall account titles with their respective debit or credit balances taken from the ledger. However, it does not check or vouch the accuracy of the report The following are the steps in the preparation of the trial balance. 1. Intheir proper aumerical order, make a listing of all account titles Got the account balance of each ledger account and write them under their corresponding debit or credit column 3. Fool or add the debit and the credit columns of the trial balance 4. Check whether the debit totals and credit totals are equal, They must be equal, otherwise your trial balance has error. Possible Ervors in the Trial Balance 1, Transposition - this error occurs when order of two numbers are reversed Fx, 48 was erroneously writien as 84 1234 was erroneously written a8 4321 ‘Transplacement or Slide ~ this occurs when a decimal point has been moved or misplaced Ex, 100 was erroncously written as 10 67,29 was erroneously written as 678.9 Note: In both cases the discrepancy between the two columns of the trial balance is divisible by 9 3 FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersFor illustration purposes, presented below is the (rial balance of Niko Ong Art Gallery, Nika Ong Art Gallery Trial Balance September 30, 2008 Cash Accounts Receivable Art Supplies Prepaid Rent Prepaid Insurance Transportation Equipment Office Equipment Accounts Payable Notes Payable Utilities Payable Uneamed Painting Revenues Ong, Capival Ong. Drawing Painting Revenues Salaries Expense Utilities Expense Theory Exercise P 840,500 50,000 12,000 30,000 18,000 300,000 50,000) 30,000 2,500 4.900 P_1337,900 Write the letter of the correct answer on the blank provided. A. Journal C. Posting B. Ledger D, Joumalizing 1 2. Ibis the first book of account 3 tis the book of final entry aoe BE, Accounting Cycle F Chapies 4 @ Recording Business Transactions (Double-Enity System) P 37,000 200,000 900 250,000 500,000 350,000 PLs7900 ’. ‘Trial Balance ‘The process of transferring. information from the journal to the ledger The uniform procedures dene to accomplish the accounting process ‘Process of recording transactions in the journal Lis a list of accounts found in the ledger together with the accounts” balances a7Theory Exercise Write the letter of the correct answer on the blank provided. AL Jounal B. Ledger C. Posting E, Accounting Cycle D. Joumalizing, F. Trial Balance The process of transferring information from the journal to the: ledger Its the first book of account The uniform procedures done to accomplish the aecaunti Process of recording transactions in the journal tis the book of final entry tis a list of accounts found in the ledger together with the accounts” balances ProcessExercise 1 Malow decided to invest ima travel agency, Below are the iransactions for the month of June. You are requested to jourualize the transactions. June 4 5 6 15 2b 20 Date 2009 June 1 4 6 Is 2 w oe Malou invested a car worth P 330,000 and cash of P 1,200,000, Borrowed P 250,000 from Mito Bank Bought furnituce from Slims P 30,0000 on account Withdrew cash P 100,000 for personal use Rendered services to Happy Tours P $00,000 on account Paid employee salantes for P 30.000 Collected account from Happy Tours Explanation PR Debit Credit Cash 1,200,000 Initial Investment Cash 250,000 Loan Payable 250,000, Borrowed money from the bank Bought furniture on account Withdrew cash for personal use Rendered services om account Paid employees” salaries Callecied accounts in fall FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersExercise 1 Malou decided to invest in a travel agency’ Below are the transactions for the month of June ‘You are requested ta journalize the transactions June 1 4 5 6 5 a w Date 2009 June 4 5 6 Is a 0 Malou invested a car worth P $50,000 and cash of P 1,200,000, Borrowed P 250,000 from Mito Bank Bought furniture from Stim's P 30,000 on account Withdrow cash F 100,000 for personal use Rendered services to Happy Tours P 500,000 on account Paid employee salaries for P 50,000 Collected account from Happy Tours Explanation PR Debit Credit Cash 1,200,000. Initial Investment Cash 0008 Loan Payable 250,000 Borrowed money from the bank ‘Bought funtiture om account for personal use Rendered services on account Paid employees” salaries Collected accounts in fullExercise 2 Gisol decided to put up a consultancy firm. Below are the transactions forthe month of August ‘You are requested to joumatize the transactions, August 1 5 6 z 10 15 Date 2009 Aug 1 6 7 w 1S Chapter 4 @ Recording Business Traneactione (Double-Eréry Syeters) Gisel invested cash of P 1.5110,000 Rendered services to La Swerte Co. P 75,000 on account Bought Equipment from Bill's P 120,000 issuing. a note for the aecount Withdrow P 90,000 for personal use Paid rent for the month P 26,000 Made additional investment of P 320.000 in the business Explanation PR Debit Credit estment Rendered services on account ‘Bought equipment om account ithdrew cash for personal use Paid ront for the month Additional investment aoExercise 2 Gisel decided to put up a consultancy firm. Below are the transactions for the month of August ‘You are requested to joumatize the transactions August I 3 6 7 10 15 Date 2009 Au 1 6 7 0 Gisel invested cash of P 1,500,000 Rendered services to La Swerte Co. P 75.000 on account ‘Bought Equipment from Bill's F 120,000 issuing a note for the account Withdrow P 90,000 for personal use Paid rent for the month P 26,0000 Made additional investment of P'320.000 in the business Explanation PR Debit Credit cesiment Rendered services on account Bought cquipment on account Withdrew cash for personal use Paid rent for the month Additional investmentExercise 3 Chubs de led to put up a dental clinic. Below are the transactions for the month of October You are requested to journalize the transactions. Oa 2 5 6 7 Is 2 Date 2008 Oct 2 In a0 Chubs invested cash of F 500,000, Rendered services to Colgate Co, employees P 75,04 cash, Bought Dental Equipment P 120,tH0 cash Chubs withdrew P 30,000 for personal use. Received a bill from Meraleo P 2,900 Paid Meraleo Explanation PR Debit Credit Initial Investment Rendered services for cash Purchased/Bought dental equipment for cash Withdrew cash for personal use To record electricity consumption For the month Paid electric bill FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersExercise 3 ‘Chubs decided 10 put up a dental clinic, Below are the transactions For the month of Qetober, ‘You are requested to journalize the transactions Od. 2 5 6 7 18 25 Date 2009 Oct, 2 8 (Chubs invested cash of P 500.000. Rendered services to Colgate Co, employces P 75,000 cash, Bought Dental Equipment F 1200) cosh Chubs withdrew P 30,000 for personal use, Received a bill from Meralco P 2,900, Paid Meralco Explanation PR Debit Credit Initial Investment ‘Rendered services for cash Parchased/Boughe dental equipment for cash ‘Withdrew cash for personal use ‘Torecord electricity consumption Far the month Paid electric billExercise 4 Dr. King decided to put up a medical clinic, Below ate the transactions for the month of July July King invested cash of P 1,000,000, 3 Bought office equipment at F 20.000 paying 25% and the balance on account Withdrew cash P 70,000 for personal use 15 Rendered medical treatment to Mr, Sy P 40,000 on account 21 Paid secretaries salaries for P 6,000 30 Bought supplies on account P 2,000 Required: 1, Jourmalize the transactions 2, Prepare the T-accounts, 3, Prepare the rial balance, Date Explan: PR Debit Credit 2000) duly 4 Initial Investment, Purchased/Bought office equipment paying down payment and the balance om account Withdrew cash for personal use Rendered services on account a Paid salaries for the month 30 Purchased/Bought supplies on account Chapter 4 @ Recording Business Traneactione (Dauble-Eniny Syste) 1Exercise 4 Dr. King decided to put up a medical clinic, Below are the transactions for the month of July’ July 4 King invested cash af P 1,000,000, 3 Bought office equipment at P 20.000 paying 25% and the balance on account ‘Withdrew cash P 70,000 for personal use 13 Rendered medical treatment to Mr, Sy F 401,000 on account 2 Paid secretaries salaries for P 6,000 30 Bought supplies on account P 2.0001 Required: 1. Jourmalize the transactions Date 2000 duly 2. Prepare the T-aecounts 3. Prepare the trial balance. Explanation PR Debit Credit investment Purchased/Bought office equipment paying down payment and the balance om account Withdrew cash for personal use Rendered services on account al Paid salaries for the month 30 Purchased/Bon supplies on account Cash Accounts Payable 7m 1,000,000 Bat Accounts Receivable Capital Bat Supplies K. Drawing Bal, Office Equipment Medical Fees Bal, Salarics Expense Bal, King Medical Clinie Trial Balance July 31, 2009 Cash P Agcounis Receivable Supplies Equipment ‘Accounts Payable Pp K. Capital K, Drawing Medical Foes Salaties Expense E1057 000 ELos7.000a Cash Accounts Payable 1,000,000 Bal Accounts Receivable K, Capital Bal Bal Supplies K, Drawiig Bal Bal Office Equipment Medical Fees Bal Bal. Salaries Expense Bal King Medical Trial Balance Cash Pp Agcounts Receivable Supplies Equipment Accounts Payable PB K. Capital K, Drawing Medical Fees Salaries Expense Peso = BL0S7.H00 FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersCash Accounts Payable 7H 1,000,000 Bal Accounts Receivable K, Capital Bal Bal Supplies K, Drawiiig Bal Bal Office Equipment Medical Fees Bal Bal. Salaries Expense Bal King Medical Trial Balance Cash Pp Acounts Receivable Supplies Equipment Accounts Payable PB K. Capital K, Drawing Medical Fees Salaries Expense Peso = POST H00Exercise 5 Mr Ong decided to put up an audit firm, Below are the transactions for the month of May. May 1 Ong invested cash of P 300,000. 6 Bought equipment P 34,000 cash 1S Rendered audit services to Mr. Tan P21,000 on account 21 Paid taxes for P 1,100, 30 Mr. Tan paid his account in fall Required 1 Jourmalize the transactions 2, Prepare the T-aecounts, 3, Prepare the trial balance, Date Explanation PR Debit 2009 May Investment 6 Bought equipment foreash Is Rendered services on account a Paid government taxes 30 ‘Colected account in full Chapler d @ Recoating Guiness Trancactione (Dauble-Eréry Spates cHExercise 5 Mr. Ong decided to put up am audit firm, Below are the transactions for the month of May, May 1 Ong invested cash of P 300.000. 6 Bought equipment P 34,000 cash 13 Rendered audit services to Mr. Tan P 21,000) om account 21 Paid taxes for P 1,000, 30 Mr. Tan paid his aecount in full. Required: 1. Jourmalize the transactions 2. Prepare the T-accounts. 3, Prepare the trial balance. Date Explanation PR Debit Credit 2000 May = 1 Initial Investment 6 Bought equipment forcash is Rendered services on account aL Paidl government taxes 30 Collected account in fill Cash Ong, Capital Bal, Bal Accounts Receivabl Audit Fees sas 2.000 | san 21,000 S15 21,000 Baloo Equipment Taxes Expense Sa Ong Auditing Firm Trial Balance May 31, 200a Cash Ong, Capital Bal Bal Accounts Receivable Audit Pees sis 21.000 | 5/21 21.000 1S 21.000 Bal 31.000 Equipment Taxes Expense 21 1.000 mB Bal 1000 Ong Auditing Firm Trial Balance May 31, 2009 P FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersCash Capital Bal. Bal Accounts Receivable Audit Pees sis 21.o00 | 521 21,000 51S 21,000 Bal. 31000 Equipment Taxes Expense 21 1.000 mB Bal 1000 Ong Auditing Firm Trial Balance May 31, 2009 PeCHAPTER 5 ADJUSTING JOURNAL ENTRIES Learning Objectives 1. Define adjusting joumal entries and their importance 2. Describe the different types of adjusting journal entries 3. Make the required adjusting journal entries for the different accounts Adjusting Journal Privies are entries used to update the accounts prior to the preparation of Financial Statement because they affeet more than one accounting period, Transactions are apportioned properly between the accounting period affected, The aceounts affected are adjusted so that there would be ao overstaiement or understatement of balance sheet items and income statement items, The process of determining an cntity’s nct income or net loss requires certain income and expense agcounts to be appartioned over several accounting periods, According to the accrual principle, income is recognized at the time it is actually eamed and expense is recognized at the time it is actually incurred or used. Thus. a receipt of cash does not necessarily mean a recognition of income. and payment of cash does not necessarily mean the recognition of an expense. ‘An example of this is the cash received from a customer for the reservation of a hotel room for two weeks. The receipt of cash from the customer does not necessarily mean that income should be recognized. The receipt of cash should he recognized more as a liability than income. It is more appropriate to treat it as a liability in the form of services to be rendered. It is only after the customer has checked in the hotel for his two-week stay ean his advance payment be considered as income because the services has already been rendered Another cxample is a one-year insurance promium paid far the insurance of a house. The amount paid representing a one-year premium cannot be charged outright as an expense. This is because the premium paid covers a one-year insurance, Hence, the full amount can only be charged 1s expense afler one year eSFollowing are the accounts subjected to adjustments: 1. Prepayments are expenses already paid but not yet ineurted ar used Asset Method Joumal Entry upon payment Prepaid Expense a Cash woe Adjusting Joumal Entry at the end of'the accounting period: Expense mx Prepaid Expense wx Note: The aniounit on the adjusting journal entey represents the expired or ised portion of the prepayment Example 1 On October L. 2008, X Co, paid a one-year advance rent for P 24,000. Give the Adjusting Joumal Entry om December 31. 2008. dowrnal Entry upon payment on Oct. 1, 2008 Prepaid! Rent 24.000 Cash 24,000 Paid one-year rent in advance Adjusting Journal Eniry ai end of the accounting period Dec 31, 2008 Rent Expense: 6.000 Prepaid Rent 6,000 To record the expired rent for the year Computation The P24,01H) rent represents one year or 12 months rent. Divide P24,(HIl by 12 to got the monthly rent. Multiply it by 3 months representing the rent from Oct, | to Dos, 31, 2008. P24,000/12 x 3 = PH000 P6,(100) is therefare the expired / used rent from Oct. | to Deo. 31, 2048 you debited Analysis: When you paid P24,00U for the one-year rent in advance on Oct. 1 the asset account Prepaid Rent representing 12 months rent. On December 31, at the end of the accounting period, the P24,000 Prepaid Rent is not totally asset since it includes the? FUNDAMENTALS OF ACCOUNTING Textbeakor Beginnersmonths expired or used portion (Oct, 1 fo Dee, 31), Hence, am adjusting entry is necessary to recagnize the rent expense for > months by debiting it and decreasing the balance of prepaid rent by crediting i Example 2 (On March 31, 2008, B Co. paid 72,000 insurance premium for 2 sears. Give the Adjusting Journal entry on May 31, 2008. Journal Entry npon payment an Mar. 31, 2008 Prepaid Insurance 72,000 Cash name Paid two-year insurance premium in advance Adjusting Journal entry on May 31, 2008 Insurance Expense 6.000 Prepaid Insurance 6.om0 To record expired insurance for the year Compurarion The P72,000 presminm represents 2 years or 24 months premiunt. Divide P72,00by 24 to get the monthly premium then multiply it by 2 to get the used months fmm Mar. 31 to May 31,2008, P72,000/24 x 2 = P6000 insurance premium, therefore ta be charged to expense is PG,0(M) representing the 2 months from Mar, 31 to May 31, 2008, Analysis: When you paid P72,000 forthe two-year insurance on Mar. 31, 2008, you debited the assct account Prepaid Insurance representing 24 months insurance. On May 31, 2008 which is the end of the accounting period, the P72,00H) Prepaid Insurance is no! totally an asset since it includes the 2 months oxpired or used portion (Mar. 31 to May 31). Hence, an adjusting entry is necessary’ to recognize the insurance expense for 2 months by debiting it and decreasing the balance of prepaid insurance by crediting it Example 3 ‘Supplies account on January |, 2008, showed a balance of P7,000, On December 31, 2008, supplies on hand amounted to P2,000. Adjusting Journal entry on December 31, 2008 Supplies Expense 5,000 Supplies 5.000) To record supplies used for the year Chapter 5 @ Adustng Jourat Erétioe a7Computation Supplies at the beginning of the year is P7,000, At the ead of the year, the remaining balance is P2,000, The difference represents the supplies used during the year. Subiract 2,000 from P7,000 to get the supplies used during the year P 7,000 —P 2,000 = P-5,000 Analysis: On Janvary 1, 2008, the asset account Supplies has a balance of P7,000, Singe at the end of the year, the balance of the asset account Supplics decreased to P2,000, the difference repiésents the supplies used during the year. You will have to fecognize the used supplies as an expease by debiting suppliesexpense and decrease the asset account Supplies by crediting it Example 4 Supplies account showed a balance of P12.000, Supplies used during the year amounted to P4000, Give the Adjusting Journal Entry on Dec. 31, 2008 Adjusting Journal eniry an Dec. 31, 2008 Supplies Expense 4000 ‘Supplies 4.000 To record supplies used for the year Computation There is no computation necessary because the P 4.(NN0 supplies used during the year was already given in the problem Anabysis: The asset account Supplies showed a balance of PI2,0100 at the beginning of the ‘year. Supplies used during the year amounted to P4,000. This should be recorded as expense by debiting supplies expense and crediting the asset account Supplies io decrease its balance IL. Unearned or Deferred income is income already received but not yet earned Lrabuliyy methext Joumal Entry upon receipt of cash Cash say Uneamed Theomie at Received cash for services 10 be rendered, Adjusting Journal Entry at the end of the accounting period Unearned Income xx Inceme wx To record earned portion of the liability Not initially reeen he amount of the adjusting joumal entry is the earned portion of the amount ed. FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersExample 1 On November 30, 2008, -Co., received P36,000 advance rental for 6 months. Give the Adjusting Joumal entry on December 31, 2008. Journal Entry npon receipt of cask on November 30 Cash 36,000 Unearned Rent Income 36,00 Received 6 months rent in advance Adjusting dournal Entry an December 31 Uneamed Rent Income 6.000 Rent Income 6,000 To record rent eamed for the year Computation The P.36,000 cash vou received represents six menths rent. Divide P36,000 by 6 to get the monthly rent then multiply it by I month representing the rent from Nov, 30 t9 Dee. 31, 2048, P36,000/12x 1 =P.6,000 P6.N00 is therefore the rent income from Nov. 30 to Dec. 31, 2008. Analysis: When you received P36,(NM1 for the six months rent paid to you in advanee on November 30, you debited cash and credited the liability account Uneamed Rent Income for months rent. On December 31, which is the end of the accounting period, the P36,00) Uneared Rent Income is not totally a liability aecount since it now includes the |-month caned rent (November 311 to December 31). Hence, an adjusting entry is necessary to rocognize the cared portion of the initially recorded Uncamed Rent Income by crediting Rent Income and debiting Uneamed Rent Income: to decrease the liability Example 2 On May 1, Dr. Young received P60,000 for medical fees to be renderes months, Give the Adjusting Journal Entry at the end of May, the nest 3 Journal Entry upon receipt of cash om Maw Cash 60.000 Uneamed Medical Fees cowie Received cash for medical services to be rendered Adjusting Journal Entry on May 31 Uneamed Medical Fees 20,000 Medical Fees 20,000 To record medical fees earned Chapter S @ aajestng 4ounal Emre #70 Compucation ‘The P60,000 cash received represents 3-month medical services to be rendered. Divide 601,000 by 3 to get the monthly medical fee 60,0003 = P20,000 20,000 is therefore the medical fees eared from May 10 May 31, 2008. Analysis: When the P60,000 was received on May | for the month medical services paid in advance, cash was debited and the liability account Unearned Medical Fees was-credited representing 3 months uneamed fees. On May 31, the end ofthe month, the P60,000 Uneamed ‘Medical Fees is not totally a liability account since it includes the I-month medical fees camed (May | to May 31). Hence, an adjusting entey'is necessary to recognize the earned portion of the initially recorded Unearned Medical Fees by crediting Medical Fees and debiting Uneamed Medieal Fees to decrease the liability, III Accrued Eapenses arc expenses already incurred or used, but not yet paid. Adjusting Journal Entry at the end of the accounting period Expenses sx Expenses Payable xxx To record unpaid expenses Example 1 Unpaid salaries at the-end af December 31, 2008 amounted to P20,000. Adjusting Journal Entry on December 31, 2008 Suluries Expense 20,000 ‘Salaries Payable 20,000 To record unpaid salaries at year end Analysis: This isa liability on the part of the company because the employees have already ‘worked for this but the company has not paid their salaries. Hence. the company should be recognizeel at the end of the accounting period. Example 2 The company received a telephone bill in the amountof F 1,200.0n Dec. 29,2008 whieh the company intends to pay an January 3, 2009. Adjusting Journal Entry on December 31, 2008: Utilities Expense 1.200 Utilities Payable 1200 To record unpaid utilities forthe month FUNDAMENTALS.OF ACCOUNTING Textbook for BepennersAnalysis: Thi ty on the part-of the company because the telephone bill is for the ‘month of December but the company has not yet paid For it. Hence, liability en the parto the company should be recognized at the cnd of the accounting period. IV. Accrued Income is income already earned but not yet received Income Receivable KN Income 2K To record income earned Example A one-year 10% note receivable in the amount of PLOO,000 was received on January 1, 2008, The interest and the prineipal are payable on maturity date, Give the Adjusting Journal Eniry on June 30, 2008. Adjusting Journal Eniry on June 30, 2008 Interest Receivable 5,000 Interest Income 5,000 ‘To record interest income earned Computation: Interest = Principal x Rate x Time 100,000 x 10% a year x 1/2 year = 100,000 x 1 a% 5,000 Interest for 6 months is P5,000. Analysis: The note receivable bears interest at 10% per annum. This interest will be received afler on year on January I, 2009. However, the note has already earned half-year interest ‘on June 30, 2008 in the amount of P5,000 although this interest has not yet heen received. Hence, an adjusting journal entry is necessary to recognize the interest earned on the notes receivable for 6 months that is, from January 1 to June 30, 2008, V. Bad Debts / Doubtful Accounts are losses due to uncellectible accounts. Adjusting Jaurnal Entry at the ead af the accounting period Bad Debts Expense sax Allowance for Bad Debts wx ‘To record estimated uncollectible accounts ‘Chapter Adjusting Journal Enties 7mExample E Accounts Receivable shows a balance of 50,1100. It is estimated thal 10% of this is uncollectible. Give the adjusting journal entry on December 31, 2008 for the provision of the estimated uncollectible account. Bad Debis Expense 5,000 Allowance for Bad Debis 3,000 To record estimated uncollectible accounts Computation: PS0,000 x 10% =P $,000 Example 2 Accounts Receivable shows a balance of P30,000. It is estimated that 0% of this is uncollectible. Allowance for Bad Debts per general ledger has a balance of P3,000, Give the adjusting, journal-entry on December 31, 20008 flor the provision of theestimated uncollectible account, Bad Debs. Expense 2.000 lowance for Bad Debts 2000 To record estimated uncollectible accounts Note: The required allowance for doubtful accounts is PS,000 (P50,000- 11%). However, pergencral ledger, the allowance fer doubtful accounts alrcady shows a balance of P3000. An adjusting journal entry to bring the balance of the allowance for doubtful accounts to the required balance of P3,000 is necessary, This can be best illustrated by the T> account, Allowance for Doubiful Accounts 3,000 Balance before adjustment i 1 2.000 Adjusting Journal Entry | 5.000 Required Balance (end) i VI. Depreciation Expense is the allocation of plant asset cost aver its estimated useful life. This is the expense allotted for the wear and tear of property, plani, and equipment duc to passage of time ‘The three factors considered in computing the deprecia n expense: 1, Cost is the purchase price of the depreciable asset 2. Salvage vole is the estimated value of the asset at the end of its useful life, 3. Estimated usefiel life, as the name connotes, is not an exact measurement but metely an estimation af the number of years an asset can be useful to the entity FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersThe formula for computing for annual depreciation is as follows: Cost P cod Less: Salvage Value 2x Depreciable cast Pp Xxx Divided by: Estimated Useful Life sk Annual Depreciati P xx ‘The process of recording depreciation does not directly charge depreciation to the asset account. The charge is recorded in a contraeasset account called accumulated depreciation. The use of this account allows the original cost of the asset and the related accumulated depreciation sceount to be shown in the balance sheet. The balance of the accumulated depreciation is deducted from the ¢ost of the asset to-get the book value of the asset, Example A building with an estimated useful life of 20 years finished construction on. April 1, 2008, The cost of the building is 2.6 million with an estimated salvage value of P200,000, Give the Adjusting Journal Entry on December 31, 2008 to record the depreciation of the building, Adjusting Journal Entry an Dec. 31, 2008 Depreciation Expense 0,000 Accumulated Depres ‘To record depreciation expense for the building 90,000 Computation: Cost Less: Sulvage Value Depreciable cost Divided by: Estimated Useful Life Annual Depreciation ‘Take note that what we have gotten is the annual depreciation, Since the building was completed.on April 1, we will have t apportion the annual depreciation of P120,000 by dividing it by [2.0 get the monthly depreciation then multiplying it by months representing the depreciation of the building from April | to Dec. 31,2008, P 120,000/12 x months = P 90,000 ‘Chaster 5-€ Adjusting Journal Entries 73Alternative Method in Recording Prepayments and Deferrals 1. Prepayments ~ an alternative method in recording prepayments is to initially record them as an expense instead of an asset. Journal Entry upon payment Expense soe Cash sx Paid expense Adjuesting Journal Entry at the end of the accounting period Expense sxx ‘To record unexpired expense Note: The amount on the adjusting journal entry represents the unexpired or wnused portion of the prepayment. Example 1 (On October 1, 2008, X Co. paid a one-year advance rent for P24,000, Give the Adjusting Journal Entry on Dec. 31, 2008. Rent Expense 24,000 Cash 24,000 Paid rent for one year Adjusting Journal Entry at end of the accounting period December 31, 2008 Prepaid Rent 18,000 Rent Expense 18,000 ‘To record the unexpired rent for the year Computation ‘The P24,000 rent represents one-year or 12-month rent. Divide P24,000 by 120 get the ent then multiply it by 9 months representing the unexpired or unused rent from to September 30, 2009, 24,000/ 12 x 9 = 18,000 P 18,000 is therefore the prepaid rent from January 1 to September 30, 2009, Analysis: When you paid P24,000 for the one-year rent in advance on Getober 1, your debited the expense account Rent Expense representing 12 months rent, On December 31 the end of the accounting period, the 24,000 Rent Expense is not really your rent expense for the year. It includes the 9 months unexpired or unused portion (January | to September Ta FUNDAMENTALS.OF ACCOUNTING Textbook for Bepenners30, 20019}, Hence, an adjusting entry is necessary to recognize the Asset portion by debiting Prepaid Rent and decreasing the balanco of Rent Expense by crediting, it ‘Summary for Prepayments Asset Method Expense Method Uper Payment an October 1, 2008 Prepaid Rent 34,000 Rent Expense 24,000 Cash 24,000 Cash 24,000 Paid one year reat in advance Paid one vear rent in advance Adjusting Journal entry on December 31, 2008 Rent Expense e.n00 Prepaid Rent 18,000 Prepaid Rent 6.000 Rent Expense 15,000 To record expired rent for the year To record the unused rent The effect of the adjusting entrics on the ledger accounts after posting is the same regardless of the method used. Asset Method Expense Method Prepaid Rent Prepaid Rent Debit Credit Debit Credit M124 000 2531 6,000 2 oon Bal. 18,000 Bal. 18,000 Rent Expense Rent Expense Debit Credit Debit Credit 31 6.1000 24,000 113,000 Bal. 6.00 Bal. 6.0 2. Deferrals — an alternative method in recording, deferrals is to initially record them as an income instead of liability Income Method soured Entry upon receipt af cash Cash NAN Income NxN, Received eash for service to be rendered Chapies 5 @ Adjusting Jousral Eni 78Adjusting Journal Entry at the end of the accounting period. Income xxx ‘Uneamed Income NKK To record income not yet earned Note: The amount of Adjusting Journal Entry is the wnearmectportian of the amount initially received. Example On November 301, 2008, A Co, received P36,000 advance rental for 6 months. Adjusting Journal Entry on December 31, 2008. Journal Entry upon receipt of cash on November 30 Cash 000, Rent Income 36,000 Received 6 months rent in advance Adjusting Journal Entry on December 31 Rent Income 30,000 Unearned Rent Income 30,000 To record rent not yet earned Comyuitation: The P36,000 cash received represents six months rent, Divide P36,000 by 6 to get the monthly rent then multiply it hy 5 months representing the uneamed rent from January | to May 31, 2009, P36,00012 x 5 = P30,000 30,000) is therefore thee unexpired rent from Jan. 1 to May 34, 20009. Analysis: When you received P36,0100 for the six months rent paid to you in advance on November 30, you debited cash and eredited the revenue account Rent Income representing 6 months rent income, On Dozember 31, the end ofthe accounting period, the P36,000 Rent Income isnot totally’ a revenue account since it includes the § months unearned rent (January 1 to May 31), Hence, an adjusting entry is necessary’ to recognize the uneamed portion of the initially recorded Rent Income by crediting Uneamed Rent and debiting Rent Income to decrease the revenue. FUNDAMENTALS OF ACCOUNTING Textbeakor Beginners‘Summary for Deferrals Liability Method Income Method Upon receipt of cash on November 30, 2008 Cash 36,000 Cash 36,000 Unearned Rent 36,000 Rent Income 36,000 Received one year rent in advance Received one year rent in advance Adjusting Journal-entry on Desember 31, 2008 Unearned Rent 6,000 Rent Income 30,000 Rent Income 6,000 Unearned Rent 30,000 Yo record rent earned ‘fo record rent not yet earned ‘The effect of the adjusting entries on the ledger accounts after posting is the same regardless ‘of the method used, Liability Method Income Method Uneamed Rent Unearned Rent Debit Credit Debit Credit 1231 6,000 -1130___36,000, 12/31_30,000 Bal. 30,000 Bal, 30,000 Rent Income Rent Income Debit Credit Debit Credit 231 6.000 231 30,000 /30 36,000 Bal 6,000 Bal, 6,000 Theory Exercise Write the letter of the correct answer on the blank. A. Deferred Income D.. Adjusting Journal Entries B. Prepayment E. Accrued Income C. Depreci n Expense F. Accrued Expense 1, Expenses already incurred but not yet paid 2. Expenses already paid but not yet incurred 3, Entries used to record internal transactions affecting more thaa one period 4. Income already received but not yet earned $. Income already earned but not yet received 6, The expense allowed for the wear and tear of equipment due to passage of time ‘Chapter 5 # Adusing Jounal Erizies TFTheory Exercise ‘Write the letter of the correct answer on the blank. A. Deferred Income D. Adjusting Journal Entries B. Prepayment E. Accrued Income C. Depreciation Expense F. Accrued Expense Expenses already incurred but not yet paid Expenses already paid but not yet incurred Enirics used to record internal transactions affecting more than enc period Income already received but not yet earned Income already: camed but not yet received ‘The expense allotted for the wear and tear of equipment duc to passage of timeExercise 1 78 Prepare the adjusting entry for each of the following for year ended December 31, 2010, 1. Paid Trio Insurance Co. P33.000 one year car insurance to commence August 1, 2010) The amount af premium was debited to Prepaid Insurance 2, Borrowed P200,(000) from Meteo Bank issuing a one-year note with 12% annual interest on April 30, 2010 3, Bought P20,000 equipment with five-year estimated life and a salvage value of P2,000. Depreciation is computed on a straight line basis 4, Received P51.000 cash advance [rom a customer for one year services fo be rendered starting June 30, 2010. The amount was credited to Uncamed Service Income, 5. Purchased P7, 1000 supplics at the beginning of the vear. Supplics remaining al the end of the ‘year amounted to P2,900, Use the asset method. 6. Accounts receivable has a balance of P130.000. It is estimated that P5.000 of this is uncollsctible. Date Explanation PR Debit Credit 20 To record expired insurance 2 To record unpaid accrued interest 3 To tecard depreciation of equipment Cost Pp Less: Salvage Value 2.000 Depreciable cost P Divided by: Estimated Useful Life Seas Annual Depreciation 4 To record service earned 8 To record supplies used for the year 6 To record provision for bad debts FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersExercise 1 Prepare the adjusting entry for each of the following 1 ear ended December 31, 2010) Paid Trio Insurance Co, P33,t100 one year car insurance 10 commence August 1, 2010. The amount of premium was debited to Prepaid Insurance. 2, Borrowed P200,(K00 from Meteo Bank issuing 4 one-year note with 12% annual interest on April 30, 2010) 3, Bought P20,000 equipment with five-vear estimated life and a salvage value of P2,000 Depreciation is computed on a straight line basis. 4. Reveived P51,000 cash advance from a customer for one year services ta be rendered starting June 30, 2010. The amount was credited to Uneamed Service Income, 3. Purchased P7,100 supplies at the beginning of the year, Supplies remaining at the-end of the ‘year amourited to P2,900. Use the assct method. 6. ‘Accounts receivable has a balance of F130,000, It is estimated that P5.000 of this is luncollectible Date Exp! PR Debit 210 1 ‘To record expired insurance 2 ‘To record unpaid accrued interest 3 To record depreciation of equipment Cost PB Less: Salvage Value 2.00 Depreciable cost B Divided by: Estimated Useful Life S years Annual Depresiation B 4 To record service eamed 5 To record supplies used for the year 6 ‘To record provision for bad debisExercise 2 Prepare the adjusting entry for each of the following for year ended December 31, 2010, 1. Received P63,000 cash advance from a customer for one year services to be rendered starting June I, 2010. The amount was credited to Unearned Service Income. 2. Paid one year rent in the amount of P180,000 to commence August 31, 2010. The amount of premium was debited to Prepaid Rent 3. Purchased PS,000 supplies at the beginning of the year. Supplies used for the year amounted to P1,750, Use the Asset Method. 4. Received an 18% P120,000 note on May 1, 2010. Interest principal on maturity date, $. Bought P42,000 equipment with five-year estimated life and a salvage value of P3,000. Depreciation is computed on a straight line basis. 6. Accounts receivable has a balance of P50,000. It is estimated that 5% of this is uncollectible. Allowance for Bad Debt has a balance of 1,500, be paid together with the Date Explanation PR Debit Credit 210 ‘To record service earned 2 ‘To record expired rent 3 ‘To record supplies used for the year 4 To record acerued interest eared 5 ‘To record depreciation of equipment Cost P 42,000 Less: Salvage Value Depreciable cost P Divided by: Estimated U: 3_veans Annual Depreciation P 6 ‘To record provision for bad debis ‘Chapter 5 # Adjusting Jounal Eriries 78Exercise 2 Prepare the adjusting entry’ for each of the following for year ended December 31, 2010, 1. Received P63.(1W) cash advance from a customer for one vear services to be rendered starting June 1, 2010 The amount was credited to Unearaed Service Income. 2. Paid one year rent in thc amaunt of P1SH,100 to commence August 31, 2010, The amount of premium was debited to Prepaid Rent Purchased 5.900 supplies at the beginning of the year. Supplies used for the year amounted to PI,750. Use the Asset Method. 4. Received an 18% P120,000 note on May I, 2010, Interest will be paid together with the principal on maturity daic 4, Bought P42,(100 equipment with five-year estimated life and a salvage value of P3,00. Depreciation is computed on a straight fine basis 6 Accounts receivable has a balance of P50,000. 11 is estimated that 5% of this is uneollectible Allowanee for Bad Debt has a balance of PL.S00. Date Explanation PR Debit Credit 2010 To record service camed 2 To record rent expense 3 To record supplies used for the 4 To record accrued interest eamed 5 ‘To record depreciation of equipment Cost P 42.000 Less: Salvage Value Depreciable cost Divided by: Estimated Useful Life S_ years Annual Depreciation E 6 To record provision for bad debts,Exercise 3 L, Ching Company presented the following information pertaining to-accounts to be adjusted. 1. On September 30, L. Ching Co. paid 6 months insurance premium P21,000. (Use Asset Method) 2. Office Supplies account shows a balance of P10.tH00 al the beginning of the year. A count of office supplies at the end of the year amounted to P3,800. 3. On December I, L. Ching Co. received P39.1000 far services to he rendered for the next 3 months starting on December |. This was credited to Unearned Service Income, 4. L. Ching Co. acquired office equipment on January 1, 2010 worth P40). The equipment is expected ta be used for 5 years after which it is expected 1a be worthless. 5. Estimated doubtful accounts for the year is P(N). Allowance for Doubtful accounts has a balance af P1000: 6. On December 31, accrued salaries amounted to P27,000, This will be paid on January $, 20 Required: Give the Adjust 2 Journal entries on December 31, 20101 Date Explanation PR Debit Credit 2010 To record expired insurance To record office supplies used To record inceme earned To record depreciation of equipment Cost Pp Less: Salvage Value Depreciable cost Pp Divided by: Estimated Useful Life B__S_ years Annual Depreciation To record provision for bad debts To record accrued salarics expense 20 FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersExercise 3 L. Ching Company presented the following information pertaining te accounts ta be adjusted, 1. On Sepiember 30, L. Ching Co. paid 6 months insurance premium P21.0H0. (Use Asset Method) 2. Office Supplies account shows a balance of P10, Hi) at the beginning of the year. A count of office supplies at the end of the year amounted to P3.8tH0 3. On December I. L. Ching Co. received P39:40K) for services to be rendered for the next 3 months starting on December I. This was credited to Unearned Service: Income. 4. L. Ching Co. acquired office equipment on January 1, 2010 worth P40,010). The equipment is cxpeeted to he used for $ ycars after which it is expected to be worthless. S, Estimated doubtful accounts for the vearis PA,((K) Allowance for Doubtful agcounts has a balance of P1,00U, 6 On December 31, accrued salaries amounted to P27,000, This will be paid on January’ 5, 2011 Required: Give the Adjusting Joumal catries on December 31. 2010. Date Explanation PR Debit Credit 2010 To record expired insurance 2 To record office supplies used 3 To record income earned 4 Te record depreciation of equipment Cot e Less: Salvage Value Depreciable cost Divided by: Estimated Useful Life = B__3_years Annual Depreciation 5 Te record provision for bad debs 6 To record accrued salaries expenseExercise 4 Flora Company presented the following information pertaining (o accounts to be adjusted, 1, On July 30, Flora Co. paid 6 months rent, P48,000.This was debited to Prepaid Rent. 2. Office Supplies account shows a balance of P13.000 on Jan. 1, 2010, A count of office supplies on Dee. 31 showed supplies balance of P4,200. 3. On November 1, Flora Co, received P54,000 for services to be rendered for the next 3 months starting November 1. This was credited to Unearned Service Income. 4) Flora Co. acquired office equipment on January |, 2010 for P6U,000. The equipment is expected to be used for 6 years after whieh it is expected to be worthless. Estimate doubtful accounts for the year is 1,500, On December 31, received utility bill for the month in the amount of P 5.600. This will be paid on January 3, 2011 zo Required: Give the Adjusting Journal Entries en December 31, 2010, Date Expk PR Debit Credit 2010 To record expired rent To record oifice supplies used To record service earned To record depreciation of equipment Cost Pr 60,000 Less : Salvage Value Depreciable cost P Divided by - Estimated | Annual Depreciation seful Life 6 years 6 Torecord unpaid acerued wilities Chapies 5 @ Adjusting Jousral Eni aExercise 4 Flora Company presented the following information pertaining to accounts te be adjusted, 1 2 On July 30, Flora Co. paid 6 months rent, P48,000.This was debited to Prepaid Rent Office Supplies account shows a balance of P13.000 on Jan, 1, 2010, A count of effice supplics on Dec. 31 showed supplies balance of P4,200. On November 1, Flora Co, received P54,000 for services to be rendered for the next 3 months starting November 1. This was eredited to Unearned Service Income. Flora Co. acquired office equipment on January 1. 2010 for F60,000, The equipment is, expected ta be used for 6 years after which it is expected to be worthless. Estimate doubtful accounts for the year is P1,S00, On December 31. received utility bill for the month in the amount of P 3.600. This will be paid on January 3, 2011 Required: Give the Adjusting Journal Entries on December 31, 2010 Date Expl ation PR Debit Credit 2010 ‘To record expired rent “To record office supplies used To record service cared To-record depreciation of equipment Cost 5 60,08) Less : Salvage Value Depreciable cost PF Divided by : Estimated Uscful Life 6 years Annuial Depreciation To rccord provision for bad debts 6 Torecord unpaid acerued utilitiesCHAPTER 6 THE WorRKSHEET Leaming Objectives 1, To know the purpose of the worksheet 2. Be familiar with the preparation of a worksheet 3. Appreciate the worksheet as a working paper to Facilitate the accountant’s job Worksheet The worksheet is a common tool and a summary deviee used by accountants to gather on a sheet of paper all the information needed for the preparation of the financial statements. adjusting entries, closing entries, and the post-closing trial balance, Hence, before the adjusting and closing entries are recorded on the books and financial statcmemts are prepared, the accountant is assured of the arithmetical accuracy of his work. a2For illustration purposes, presented below is the trial balance of Niko Ong Art Gallery, Niko Ong Art Gallery Trial Balance September 30, 2008 Cash P 840,500 Accounts Receivable Ss0.IKH) Art Supplies 12.000 Prepaid Rent 30,00 Prepaid Insurance 18,0000 Transportation Equipment 300,000 ‘Office Equipment 50,000 Accounts Payable P 37,000 Notes Payable 200,000 Utilities Payable un) Unearned Painting Revenue 250,00 ‘One. Capital 500.000 ‘Ong, Drawing 30.000 Painting Revenue 350,000 Salaries Expense 2,500 Utilities Expense 4.900 Pi337900 PL337.900 The following are the additional information for Sept, 30, 2008 Estimated doubtful accounts is P2.500. Depreciation for the transportation equipment for the year is P1000. Art supplies used during the ycar amounted to P3,000. Rent expense for the year is P20,(000. Insurance expense for the year is P4,$00, Chapter 6 © The WorksheetSteps in Preparing the Worksheet The following are the steps in the preparation of the worksheet. 1 ‘Write the heading on top center of the paper as follows: Niko Ong Ant Gallery Worksheet For Month Ended September 30, 2(KI8 2. Copy the trial balance in the unadjusted trial balance columns. Total them ta check the accuracy af the ainounts d September 36 Trial Balance | Adjustments No, | Account Title Debit Credit | Debit | Credix 110 | Cash P8450) 120 | Accounts Receivable 50,000 130_[ “An Supplies 13,000 140 | Prepaid Rent 30,000 150 | Prepaid Insurance 18.000 160_| Transportation Equipment 200,000 170_| Office Equipment 50,000 210 | Accounts Payable P3700 220 | Notes Payable 200,000 240 | Utilities Payable 00) 260_|_Unearned Painting Revenue 230,000 310_| Ong. Capital 5100.00) 320 | Ong, Drawing 30,000 310_| Painting Revenue 350.000 510_| Salaries Expense 2.500 330_| Utilities Expense 4.00 Total P1337,900 [P1337 900 ea 4) Enter the adjustments in the proper adjustments column vit each adjustment accordingly befare each debit or ered ng the number or letter of amounts. Accounts which are not included in the unadjusted trial balance are added under the accounts column. b) Total the adjustments column to prove the equality of debits and credits FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersAdjusting Journal Entries on December 31, 2008. A) Estimated Doubtful Accounts ts P2500. Bad Debis Expense 2,500 Allowance for Bad Debis 2,500 To record estimated doubtful accounts B) Depreciation of the transportation equipment for the year is P1000. Depreciation Expense 10.00) Accumulated Depreciation 10,000 To record depreciation expense for the transportation cquipmeat C) Att supplies used during the year amounted ta P 3.000, Art Supplies Expense 3.000 ‘Art Supplies 3,000 To record art supplies used D) Rent expense far the year is P 2 Rent Expense 20,000 Prepaid Rent 20,000 To record expired remt E) Insurance expense for the year is P 4,500, Insurance Expense 4500 Prepaid Insurance 4.500 To record expired insurance (For step no. 3 workshoet illustration, sce page 86) 4. Prepare the adjusted trial balance columns by extending the amounts in the pre-adjusted trial balance plus or minus the adjustments. Total the adjusted trial balance columns to check the accuracy of the extensions and prove the equality of debits and credits, (For step.no, 4 worksheet illutration, see page 87) Chapie: 6 @ Tha torkshost aeES stauuiBiag sop yoaqHeL SHILNNOOOW JO STWLNSWVENNA Nike Gag Art Gallery Worksheet For Month Ended Septembor 30, 2008 Te Batance, sirens Aajusted Teoma [Statement] Balance fia | Galanos Credt__| Debt_[ Credt_|_Deot_ | Greaa | _Deba_| Greda_| Bebe Ta|Cash, *2olAceaunts Receivable T30}art Supplies 3000] T40]Prepac Rent 'd) 20,000) 10|Prepaid Insurance e) 4.500) 710) Tranepeciatan Equipment T7O|Ofioe Equipment Zio|Aceounts Payabie F 37,000) 220|Notes Payanie 200,000] 240]Uuidies Payable 800] 280]Unesmed Pantng Revenues 750,020] 310|Ong, Capital 500,080] To}Ong. Drawing EI @70)Pamning Revenues 335/065] 510|Salanes Expense: 2.500) 'E50]Ubidies Expense 2.500) Totals FIST O00] FT INT BOO] (Ged Debs Copense [Allowance for Bad Debts (Depreciation Expense Trangporiation Equipment (Roearwiaied Deprecatian “Transportation Equipment [an Supplies Exponso. Rent Expense. insurance Expense ‘Shae Createaumyon au gseide 18. Wika Ong Art Gallary Worksheet ¥ 840,500] 50.000) 12,000 30,000) 18,000) 00.000} 50,000) on00) 350,000] 2.500) 4.300) Fras om "Transportation Equinment pplies Expense S00 anna lent Expense is) 70.000 3} 70,000] insurance Expanee f=) 4.500 @)__4 508 FH Hoo] PATOL pisses PREee From the adjusted trial balance, extend the balances of the Asset, Liability, and Owner's Equity accounts to the Balance Sheet section and the adjusted balances of Income and Expense accoumts to the Income Statement section Get the total of the Balance Shect and Income Statement columns, Compute the difference berwoen the Income Statement column totals and also. the difference between the Balanee Sheet column totals. The difference should be the same. Otherwise, review your work for error or errors, When the credit total af the Income Statement column is greater than the debit total, the difference is the Net Incame from aperations. On the other hand, when the debit total is greater than the eredit total, the: difference is a Net Loss from eperstions a) When operations result in Net Income. write “Net Income” under the account titles column, Write the amount in the debit column of the Income Statement and credit column of the Balance Sheet 1b) When operations result in Net Loss, write “Net Loss” under the account titles column Write the amount in the credit column of the Income Statement and debit column of the Balance Sheet, Double rule the totals of the last four columns. FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnerseouepomA ous & g9eeUD 69 ia, Totes, 12a accounts Hacanatie Tapas 750) Prepaid insane Tal Tar oprea Trafomes 210 facenun Pi zo} notes Dao] Vises Paya 200] ursamed Pant 310]0ng Captal “410[ Painting Revers B10] Slane Es Gai Uses Exper Taree, ies ng ar aay Workeheet Fer Month Ended 82} ous] Aftsanents Creat | oot] creat ram fey 500) per 30, 2008, Tea Daninancial Statements of Niko Ong Ant Gallery. ‘Niko Ong Art Gallery Income Statement For Month Ended September 30, 2008 Painting Revenue P 350,000 Expenses Rent P 20,000 Depreciation 10,000 Utilities 4,900 Insurance 4.500 ‘Art Supplies 3,000 Bad Debts 2.500 Salaries 2.500 47,400 Net Income F_ 302,600 ‘Niko Ong Art Gallery nee Sheet As af September 30, 2008 Assets Note ‘Current Assets Cash P 840,500 Trade and Other Receivables 1 47,500 Prepaid Expenses 2 32,500 Total Current Assets P 920,500 Non-Current Assets Property, Plant, and Equipment 3 340,000 ‘Total Assets Liabilities ‘Current Liabilities Trade and Other Payables 4 P 487,900 Owner's Equity ‘Ong, Capital 772.6 Total Liabilities and Capital P:1,260,500 FUNDAMENTALS.OF ACCOUNTING Textbook for BepennersNiko Ong Art Gallery Statement of Changes in Owner's Equity For Month Ended September 30, 2008 Ong, Capital P $00,000 Add: Net Income 303,600 Sub-Total P 802,600 Less: Drawings 30,000 Total Owner's Equity P772,600 Note 1 ~ Trade and Other Receivables Accounts Receivable P 50,000 Less: Allowance for Bad Debts __2,500 Total Note 2 ~ Prepaid Expenses Art Supplies P 9,000 Prepaid Rent 19,000 Prepaid Insurance 3,500 Tol F_ 32,500 Note 3 ~ Property, Plant, and Equipment Transportation Equipment P 300,000 Less: Accumulated Depreciation 0.000 -P290,000 Office Equipment 50,000 Total 23.40.0090 Note 4 — Trade and Other Payables Accounts Payable Notes Payable Ulilities Payable Uneared Painting Revenue Total ‘Ghapier 6 # The WorksheetTheory Exercise Write “T" if the statement is trae and “F” if the statement is false, 1. The worksheet is a summary device used by accountants to assemble on a shect af Paper the information necessary to prepare the Financial statements. 2. Operations result in a net loss if the credit total in the income statement exceeds the debit total The difference between the income statement totals and the balance sheet totals are not always the same. 4. Annet loss is written in the credit column of the incame statement and the debit column of the balance sheet. 5. In the worksheet, the balances of the asset, Liability, and capital accounts are extended to the income statement section Exercise 1 Presented is the year-end unadjusted trial balance of Star Services. Star Services Trial balance December 31, 2010 Cash 50,000 Accounts Receivable 120.000 Supplies 7.000 Prepaid Insurance 15,000 Office Equipment 125,000 Accumulated Depreciation-OiTice Equipment P 5,000 Accounts Payable 00 Mol, Capital 273,000 Mol, Drawing 50,000 Service Income 198,000 Rent Expense 30,000 Salaries Expense 25.000 Ulilitics Expense 9, S31 uo 00 -end adjustments: Insurance Expense for the year is P#,t004) Dopreciation Expense for office equipment is 10,000) Allowance for Bad Debts is P6,000. 2 FUNDAMENTALS OF ACCOUNTING Textbeakor BeginnersExercise 1 Presented is the year-end unadjusted trial balance of Star Services. Star Services Trial balance December 31, 2010 P 150,000, nts Receivable 120,000 Supplics 7.000 Prepaid Insurance 15,000 Office Equipment 15,4000 Accumulated Depreciation-Olfice Equipment Accounts Payable Mol, Capital Mol, Drawing, 0,000 Service Income 198,000, Rent Expense 30,000 Salaries Expense 25,000, Utilities Expense 9.000 BSL000 Lon) ‘Year-end adjustments: 1, Insurance Expense for the year is 8,000 2, Depreciation Expense for office equipment is P11,000, 3. Allowance far Bad Dobts is P6, 000 iar Sorvices ‘Worksheet For vansndnd became 3,200 Tal Baience | ___Agjusimants Adjusied vo] tewmntnte [agar init [ost | creat Set ame iol Capel Mol Drawing [Service income [Rent Expense: 520] Salanes Expense 25,000] 520] tities Expense TotalsTheory Exercise Write “T” if the statement is true and if the statement is false. The worksheet is a summary device used by accountants to assemble on a sheet of paper the information nocessary to prepare the financial statements Operations result in a net loss if the eredit total in the income statement exceeds the debit total. The difference between the income statement totals and the balance sheet totals are not always the same, A net loss is written in the eredit column of the income statement and the debit column of the balanee sheet. In the worksheet, the balances of the asset. Liability, and capital accounts are extended to the income statement sectioneoumpoN SUL @ 9 2918 £6. ‘Account Tile [Cash Tar Debit P 150,000] Batance Star Services Worksheet For Year-Ended December 31, 2010 Tat Great [pep Credit Debit [Simtement] Balance Great Deoit Sheet Gredit [Accounts Raveivable 720,000] [Supplies Prepaid Insurance 7,000] 5,000| [Ofice Equipment [Accumsialed Depreciation [Accounts Payable Moi, Capital Ml, Drawing [Service income Reni Expense Salaries Expense [Duities Expense “TotalsNo, ‘Account Tite Ti [Cash “720] Accounts Ravevabie 730|Supples 740] Prepad Insurance 750/Ofice Equipment 7155] Accumwiated Depreciation 20 [Accounts Payable '300|Mol, Capital 310 |Mol, Drawing 10|Servios Income 510|Rent Expense S20|Salares Expense 530] Utlities Expense Totals Star Services Worksheet For Year-Ended December 31, 2010 Taal | Baiance iments usied income [Statement] Balance Tal] Balance Debit | Credit | Debit | Creat | SSE) Debt | Crest | Debit P 750,000] 720,000] 7,000) 75,000 725,000] F_ 5000) 5,000) 373,000] 50,000] 138.000} F000] 75,000] 9.000 Ea heat CreditExercise 2 ba Look New Repair Shop Trial balance December 31, 2010 Cash Accounts Receivable Prepaid Rent Equipment Accumulated Depreciation-Equipment Accounts Pay able L, Capital L, Drawing Repair Income Rent Expense Salaries Expense Utilities Expense Year-end adjustments: a) Rent Expense for the year is P28,000, b) Depreciation Expense for Equipment is P5,001 Allowance for Bad Debts is P3,000. FUNDAMENTALS OF ACCOUNTING Textbeakor Beginners Presented is the year-end unadjusted irial balance of Look Now Repair Shop P 50,000) 59,000 78,000 137,000 50,000 78,000 43,000 27.0000 PS1Lo00 P 25,000 66,000 100.000 320,100 P5100Exercise 2 ‘resented is the year-end unadjusted trial balance of Look New Repair Shop Laok New Rep: ‘Trial balance December 31, 2 Shop P 30,000 nis Receivable 59,000 Prepaid Rent 78.000 Equipment 127,000 Accumulated Depreciation-Equipme P 25,000 Accouiits Payable 66.000 L, Capital 100,000 L, Drawing 50,00 Repair Income 320,000 Rent Expense 75,0000 Salaries Expense 45,000 Utilities Expense 27,000 P51 1.000 ‘Year-ond adjusimems. a) Rent Expense for the year is P28,0(H0 b) Depreciation Expense for Equipment is P25,001) £) Allowance far Bad Debts is P3, 0100 Teok New Repair Shop ‘Worksheet For Year-Ended December 31, 2010 Balers, ents Dear 7i0|Cash 50,000) 120 a eSB aa ‘S5fbpad Ra 75050 — Seana Tra 7m [Accurrulated Depreciation [Accounts Payable 5.000] Capita 700,00] 320,00) Rent Expense “2a0| Salaries Expense 45,000] #20] Ubiibes Expense 27,000) Totalssaavepan SUL @ 9 HSI 50. Took New Repair Shop Worksheet For Year-Ended December 31, 2010 Shest Dear F_ 50,000) 59.000) 78,000} 727,800) P25 00g 66.006] 700,00) 470 |Rent Expense 320,000) ‘Z20| Salaries Expense 430 [Utilities ExpenseTook New Repair Shop Worksheet For Year-Ended December 34, 2010 Recount Te Tal [ Balance [Adjustments Adjusted = Dest | Creat | Dest 10 |Cash re 50,000} ‘T20|Accaunts Recehane 59.000} 130) repaid Rent 78,000) 7120]Equipment 127.000) 20 [Salaries Expense 720] Utiries ExpenseCHAPTER 7 COMPLETING THE ACCOUNTING CYCLE Leaming Objectives Understand the objectives of closing entries Prepare the closing, entries Prepare the post closing trial balance Understand the objectives of reversing entries Prepare the reversing entries when necessary Closing Entries Accumulation of information on the details of operations entails maintaining separate revenue and expense accounts. at the end of the period, this information is neported im the income statement, ‘The revenue and expense accounts are then closed to the owner's cquity. This process also shows the results of operation. The closing entries update the owner's capital account at the end of the peritd. They also eliminate the balances of the nominal accouits to ready them for the ext accounting period. To close a temporary account, an entry is made to make its balance become zero. Closing iransfers the balances of the temporary accounts to the capital aocount, The Income Summary, considered to be a summary account, is used to close the income and expense accounts. Far illustration purposes, the following are accounts taken from the Ar Gallery al balance of Niko Ong Painting Revenue P 350,000 ‘Ong, Capital 500,000 Ong, Drawing 311,000 Salaries Expense 2.500 Utilities Expense 4,900 Bad Debts Expense 2,500 Depreciation Expense 10,000‘Art Supplies Expense 3,000 Reni Expense 20,0000 Insurance Expense 500 Steps in Closing the Accounts 1. Clase the incame acconnts Since income accounts have normal credit balances. each revenue account will have to be debited in the amount of its balance to bring their balances to cro. The credit is made to the income summary account 2008 Sept. 30 Painting Revenue 330,000 Income Summary 350000 To elose income accounts 2. Close the expense aceounts Expense accounts have normal debit balances, cach of these will have to be eredited to close the account, Thus, a compound entry is needed considering the mumber of expense accounts, The toval of all expense accounts is then credited to income summary. The entry to close the expense accounts of Niko Ong Art Gallery 2008 Sept. 30 Income Summary 41400 Salaries Expense 2.500 Utilities Expense 4.900 Bad Debi Expense 2,300 Depreciation Expense w.000 Art Supplies Expense 3,001 Rent Expense 20000 Insurance Expense 4500 To close expense accounts. Close the income summary account Notice that after posting the entries involving the income and expense accounts, the balance of the income summary account is exactly the met income or net loss for the period. A credit balance indicates a net income and a debit balance indicates a net loss. Regardless of whether the business yields a net income or a net loss, the income summary account must be clased to the capital account, For Nike Ong Ant Gallery, the entry is: 2008 Sopt. 30 Income Summary 302,600 Ong. Capital 302.600 To close income summary to capital Chapie: 7 @-Completing the Accaunting Cycle ‘a7Note; The balancing figure of the income summary account fo be closed to capital is the net income or net loss of the business. In the case of Niko Ong Art Gallery, P302, 611 is the amount of net income, (See worksheet on page 89.) 4. Close the drawing account The drawing account represents the amount withdrawn by the owner either in cash and non-cash assets for personal use. It is for this reason that the debit balance of the drawing account should be closed to capital The following entry isan illustration using Niko Ong Art Gallery 208 Sept. 30 Ong. Capital 30,000 (Ong, Drawing 30,000 To close drawing account to capital Preparation of the Post Closing Trial Balance The post-closing trial balance is prepared from the general ledger accounts after the closing entries have been posted, This is necessary to ensure that these entries have been correctly posted. This will also test the equality of the accounts, ‘The post-closing trial balance confirms the equality of the debits and credits, It contains only balance shect items such as assets, liabilities, and ending capital becausc all the income and expense accounts as well as the drawing sesount all have zero balances as a result of the closing entries. The following is an illustration of the post-

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