Unit II - THE ACCOUNTING PROCESS

(SERVICE AND TRADING)

Topics: (21 hours)

1. Business transactions and source documents
2. The accounting equation/ Typical account titles used
3. The accounting cycle/Rules of debit and credit and their applications
4. Journalizing
5. Posting
6. Preparation of Trial Balance
7. Journalizing and posting adjusting entries
8. Journalizing and posting closing entries
9. Preparing post-closing trial balance
10. Work Sheet Preparation
11. Financial statements preparation
12. Journalizing and posting reversing entries

Lesson 1 - Business transactions and Accounting Equation

Business Transaction
 An accountable event or economic event which has an effect on assets liabilities and equity of the
business entity.
 An event which involves an exchange of values between two parties, value received and value
parted with.

Business transactions may be:

1. Internal - only the business is involved in the business transaction.
Parties involved Example of Business transactions
The building was destroyed by fire - loss is recognized
The business only
The business only Provision for depreciation for depreciable assets

2. External - the parties involved are the business and a third party.

Third Party involved Example of Business transactions

The business purchased office supplies from ABC Supplies
Another business entity Company for P 1,500 cash.
The owner The owner, Mr. Reyes invested additional cash of P 15,000 to the
business
The creditor The business purchased goods from FTG Trading Company,
P 10,000 on account.
The government The business paid business permits and licenses, P 2,000.
The employees The business paid salaries of the employees for the month,
P 15,000.
Source Documents

Each transaction must be supported by a document. The document must be properly compiled and
controlled for easy reference. Where good system of record keeping exists, financial information becomes
more reliable for it can easily be traced back to the source documents. Original documents are
considered better source documents than duplicated or copies.

Examples of Source Documents

1. Official receipts (OR)

 this supports cash payments if the OR is issued by other entities or it supports cash receipts if
OR is issued by the business.

2. Sales Invoice
 supports sales if issued by the seller and supports purchases if received by the purchaser or
buyer.

3. Statement of Account
 supports liability to a creditor for purchases of goods or services on account or services
received from a s,ervice provider like, VIWAD, FICELCO, PLDT.

4. Payroll sheet
 supports payment of salaries of employees.

5. IOUs
 supports advances made by employees.

6. Promissory note
 supports receivable from customers, if issued by customer and if issued by the business,
supports liability or payable to creditor.

7. Bank Statements, Bank Passbook, validated deposits and withdrawal slips

 supports information about cash in bank.

Basic Accounting Equation

ASSETS = LIABILITIES + EQUITY

Note: (Equity or Capital for Sole Proprietorship is Owners’ Equity, Partners’ Equity for Partnership,
Shareholder’s Equity for Corporation)

Accounting equation states that assets must always equal to liabilities (creditors’ equities) and owner’s
equities. It shows that business entity’s assets come from 2 sources or equities – borrowings from
lenders or creditors (liabilities), and contributions or investment by the owners ( capital).

Elements of Financial Statements

The elements of financial statements defined in the March 2018 Conceptual Framework for Financial
Reporting are:

 assets, liabilities and equity – relate to reporting entity’s financial position; and
 income and expenses – relate to reporting entity’s financial performance.
Statement of Financial Position Accounts

ASSETS –

 refer to resources owned and controlled by the entity as a result of past transactions and
events, from which future economic benefits are expected to flow the entity. In simple terms,
assets are properties or rights owned by the business.

 They may be classified as current or non-current.

Current Assets – Assets are considered current if they are held for the purpose of being
trades, expected to be realized or consumed within twelve months after the end of the
period or its normal operating cycle (whichever is longer), or if it is cash.

Examples of current assets accounts are:

1. Cash – includes money (bills and coins, funds for current purposes, checks, cash in
banks) or its equivalent that is readily available for unrestricted use. ( e,g, Cash on
hand- if in the possession of the business; Cash in bank – if deposited to the bank)

2. Accounts Receivable – receivables supported by oral or informal promises to pay.

 Allowance for Doubtful Accounts – This is a valuation account which shows

estimated uncollectible amount of accounts receivable. It is contra-asset account and
is presented as a deduction to accounts receivable.

3. Notes Receivable -receivable supported by a written promise to pay in the form of a

promissory notes.

Note: other receivables may be: Rent Receivable, Interest Receivable, Due from
Employees (or Advances to Employees), and other claims.

4. Inventories – assets or goods held for sale in the ordinary course of business.
5. Prepaid Expenses – expenses paid in advance, such as:
a. Prepaid Rent – rent paid in advance
b. Prepaid insurance – cost of insurance paid in advance
c. Prepaid supplies (Office supplies ) – cost of unused office and other supplies
d. Prepaid Advertising – cost of advertisements or promotion of the business goods or
services paid in advance.

Non-current Assets – Assets that do not meet the criteria to be classified as current. Hence, they
are long-term in nature – useful for a period longer that 12 months or the company’s
normal operating cycle. Examples of non-current asset accounts include:

A. Long-term investments – investments for long-term purposes such as investment in

stocks, bonds, and properties; and funds set up for long-term purposes.

B. Plant Property and Equipment - consists of:

1. Land – land owned for business operations (not for sale)

2. Building – structure owned and used by the business for its operation, such as office
building, factory, warehouse, or store.

 Accumulated Depreciation – Building – the total amount of depreciation expenses

recognized since the building was acquired and made available for use.
 3. Equipment – consists of various assets

a. Machineries and other factory equipment

b. Store Furniture and Fixtures (shelves to display goods for sale, etc.)
c. Office Equipment – ( tables, chairs, cabinets, etc. used in the office),
d. Computer Equipment ( server, laptops, etc.)
e. Transportation Equipment ( delivery trucks, vehicle, etc.)

 Accumulated Depreciation – equipment - the total amount of depreciation expenses

recognized since the equipment was acquired and made available for use.

Note: Accumulated Depreciation is a valuation account which represents the decrease in

value of a fixed asset due to continued use, wear & tear, passage of time, and
obsolescence. It is a contra-asset account and is presented as a deduction to the
related fixed asset.

C. Intangibles – long-term assets with no physical substance, such as goodwill, patent,

copyright, trademark, etc.

LIAIBILITIES

 A present obligation of the entity to transfer an economic resource as a result of past events. It
represent claims by other parties aside from the owners against the assets of a company.

 Per revised PAS 1, an entity shall classify liability as current when:

a. it expects to settle the liability in its normal operating cycle;
b. it holds the liability primarily for the purpose of trading;
c. the liability is due to be settled within 12 months after the reporting period; or
d. the entity does not have an unconditional right to defer settlement of the liability for at
least twelve months after the reporting period.

All other liabilities should be classified as non-current liabilities.

 Classifications of liabilities are:

Current Liabilities – Examples are:

 Accounts Payable - obligations supported by an oral or informal promise to pay by

the debtor.

 Notes Payable - obligations supported by a written promise to pay by the debtor in

the form of a promissory note.

 Bank Payable or Loan Payable – obligations or debts owed to bank(s) or financing

institutions for money borrowed and for use in business operations.

 Interest Payable – interest incurred but not yet paid. Interest payable arises from
interest bearing liabilities, e.g. bank loan.

 Utilities Payable – obligations or debts owed to utility companies for the use
electricity, water, internet and telephone facilities.

 Unearned income – income already received or collected in advance but not yet
earned or goods or services are not yet provided.
  Current portion of long-term debt – portions of long term debt, such as mortgage
payable, bonds payable, etc, , which are to be paid within one year from the balance
sheet or statement of financial position date.

Non-current Liabilities (Long Term Liabilities)

 Liabilities are not currently payable. They are not due within the next 12 months after the end of
the accounting period or the company's normal operating cycle, whichever is shorter. In other
words, non-current liabilities are those that do not meet the criteria to be considered current.

 Examples:

 Mortgage payables – obligations and debts owed to financial institutions for which the
business entity pledged as security certain asset, such as land and buildings.

 Bonds Payable – business entity obtains fund for acquisition of equipment and other
assets by issuing bonds. These are debts due to bond holders.

EQUITY ( Capital, Net Assets)

 Residual amount after deducting liabilities from assets

 Owner’s Capital - used to record original and additional investment, withdrawals, profits earned
or losses incurred by the business

Owner’s Capital
Increased by Decreased by
 Investments by the owner  Permanent withdrawal by the owner
 Profit earned by the business  Losses incurred by the business

 Owner’s Drawing – used to record temporary withdrawals of the owner during the period. At the
end of the period, any balance of this account is closed to Owner’s capital account.

Income Statement Accounts

Income

 Service Income - revenues earned from rendering services to clients (examples: beauty salon,
massage parlor, repair shop, etc. ).

 Professional Fees – income earned from the practice of profession for professional services
rendered,( doctors, lawyers, etc.)

 Rent Income – income earned by lessor engage in renting apartments, condominiums,

machineries and equipment, etc.)

 Sales – revenues derived from sale of goods or merchandise.

 Interest income – revenues earned by lending institutions for lending or granting loans to others.
 Expenses
 Cost of Sales - cost of merchandise or goods sold during the period.
 Salaries Expense or Wages Expense – for salaries paid to employees for services rendered to
the business during the period.

 Taxes and Licenses - for business permits, licenses or local taxes required by the government
for the conduct of business.

 Supplies Expense – for cost of office supplies, store supplies or shop supplies that have been
used during the current period.

 Utilities Expense – for cost of utilities (electricity, water, telephone, internet, etc.) used or
consumed during the period.

 Advertising Expense –cost of advertisements or promotion of the business goods or services

incurred or paid during the current period.

 Rent Expense – represents the amount incurred or paid for the use of space for the office, store
and/or factory area.

 Transportation Expense – represents the amount paid as ordinary transportation expenses/costs

incurred by an employee from one work place to another which are reimbursable by the business.

 Insurance Expense - for cost of insurance pertaining to the current period,

 Depreciation Expense - the portion of the cost of depreciable asset ( building or equipment) that
has been allocated to the current period.

 Bad Debt Expense – ( doubtful accounts expense) amount of estimated losses from
uncollectible accounts receivable during the period.

 Travel Expense – costs incurred when travelling on business trips or employees attending
seminars.

 Interest expense – cost incurred for the use of the lender’s money.

 Miscellaneous expense – for various small amount of expenditures which do not warrant separate

Notes:
receivable is an asset, while payable is a liability.
prepaid is an asset, while unearned is a liability.
Earned represents income, while incurred represents expense.
Unused or prepaid is an asset, while used or expired is an expense.

Business Transaction Analysis

 Every business transaction can be analyzed based on its effects on the accounting equation –
assets, liabilities and equity.

 Income and expenses affects equity or capital. Income is added to equity while expenses is
deducted from equity.
  Business transaction is an event which involves an exchange of values between two parties,
value received and value parted with.

The following effects are classified as valued The following effects are classified as
received: value parted with
 Increase in Assets  Decrease in Assets
 Decrease in Liabilities  Increase in Liabilities
 Decrease in Capital/Equity  Increase in Capital/Equity
Due to: increase in withdrawal Due to: investments
Increase in expenses (incurred) Increase in income (earned)

Illustrative Problem 1 :

Problem 1: Selected business transactions of the SPEEDY REPAIR SHOP for the month of June 2022:
June 2022
1 - Mr. Mac Cascas started a shoe repair business by investing P 50,000 cash, Furniture and Fixtures,
P 5,000 and repair supplies, P 3,000..
3 - Paid the rent of the shoe repair business for one month, P 1,200.
5 - Purchased a shoe repair equipment from Capitol Shoe Supply, P 15,000. Terms: 90 days.
8 - Paid to Capitol Shoe Supply P 5,000 cash to apply on account.
10 - Purchased various chairs and tables for shop use from Reliable Home Furnishing, P 1,800. Terms.
Cash.
12 - Cash received for services rendered P 13,500.
15 - Paid the required mayor’s permit and licenses to operate business, P1,500.
18 - Purchased additional repair supplies for shop use for cash P 2,200.
20 - Received a bill from Islander for advertisement that appeared in the newspaper, P 310.
22 - Issued a 120-day note to Capital Shoe Supply for the balance of the account with them.
25 - Sent a bill to Zenith Footwear for various repair services rendered P 16,500.
26 - Received a check from Zenith Footwear, P 5,000 to apply on account.
30 - Paid the salary of shop employees, P 4,200.
30 - Mr. Cascas, the owner, withdrew cash for personal use P 3,000.

REQUIRED: Analyze the above transactions by giving the:

a) Value received and value parted with - state the appropriate account title to be used
b) Accounting elements affected and the effect on the elements affected
Solution:
TRANSACTION ANALYSIS
Effect on
Transaction Account Title Amount A L OE
June, 2022
1- Mr. Mac Cascas started a shoe repair VR - Cash 50,000 +
business by investing P 50,000 cash, Furniture and Fixtures 5,000 +
Furniture and Fixtures, P 5,000 and Repair Supplies 3,000 +
repair supplies, P 3,000. VPw/ - Mr. Mac Cascas, Capital 58,000 +

3 - Paid the rent of the shoe repair VR - Rent Expense 1,200 -

business for one month, P 1,200 VPw/ - Cash 1,200 -

5 - Purchased a shoe repair equipment VR – Repair Equipment 15,000 +

from Capitol Shoe Supply, P 15,000. Vpw/- Accounts Payable 15,000 +
Terms: 90 days

8 - Paid to Capitol Shoe Supply P 5,000 VR- Accounts Payable 5,000 -

cash to apply on account. VPw/ - Cash 5,000 -

10 - Purchased various chairs and tables VR- Funiture and Fixtures 1,800 +
for shop use from Reliable Home VPw/- Cash 1,800 -
Furnishing, P 1,800. Terms. Cash.

12 - Cash received for services rendered VR - Cash 13,500 +

P 13,500. VPw/- Service Income 13,500 +

15 - Paid the required mayor’s permit & VR- Taxes and Licenses 1,500 -
licenses to operate business, P 500. VPw/- Cash 1,500 -

18- Purchased additional repair supplies VR- Repair supplies 2,200 -

For shop use for cash P 2,200. . VPw/- Cash 2,200 -

20 - Received a bill from Islander for VR- Advertising Expense 310 -

advertisement that appeared in the VPw/- Accounts Payable 310 +
newspaper,P 310.

22 - Issued a 120-day note to Capital VR - Accounts Payable 10,000 -

Shoe Supply for the balance of the VPw/- Notes Payable 10,000 +
account with them.

25 - Sent a bill to Zenith Footwear for VR- Accounts Receivable 16,500 +

repair services rendered P 16,500. VPw/- Service Income 16,500 +

26 - Received a check from Zenith VR- Cash 5,000 +

Footwear, P 5,000 to apply on account VPw/- Accounts Receivable 5,000 -

30 Paid the salary of shop employees, VR - Salary expense 4,200 -

P 4,200 VPw/- Cash 4,200 -

30 - Mr. Cascas, the owner, withdrew VR – Mr. Mac Cascas, Drawing 3,000 -
cash for personal use P 3,000. VPw/- Cash 3,000 -
EXAMPLES EXPLAINED and accounting Equation illustrated:

1 Mr. Mac Cascas started a shoe repair business by investing P 50,000 cash, Furniture and Fixtures,
P 3,000 and repair supplies, P 5,000.

Analysis:
Increase in Assets: Cash, Furniture and Fixtures and repair supplies
Increases in Equity – investment - M. Cascas capital.

Accounting Equation:
Assets = Liabilities Owner’s Equity
Cash Furniture & Fix. Repair Supplies M. Cascas, Capital
50,000 5,000 3,000 = 0 58,000
58,000 58,000

3 - Paid the rent of the shoe repair business for one month, P 1,200.

Analysis:
Decrease in Asset : Decrease in Cash , P 1,200
Decrease in Equity : Increase in expenses

Accounting Equation:
Assets = Liabilities Owner’s Equity
Cash Furniture & Fix. Repair Supplies M. Cascas, Capital
50,000 5,000 3,000 = 0 58,000
( 1,200) ( 1,200) – Expense
48,800 5,000 3,000 = 56,800
56,800 = 56,800

5 - Purchased a shoe repair equipment from Capitol Shoe Supply, P 15,000. Terms: 90 days.

Analysis:
Increase in Asset : Repair Equipment, P 15,000
Increase in Liability : Accounts Payable, P 15,000

Accounting Equation:
Assets = Liabilities Owner’s Equity
Cash Furn & Fix R. Supplies Repai. Equip Accounts Payable M. Cascas, Capital
50,000 5,000 3,000 = 58,000
( 1,200) ( 1,200) – Expense
15,000 = 15,000
48,800 5,000 3,000 15,000 = 15,000 56,800
71,800 = 71,800

8 - Paid to Capitol Shoe Supply P 5,000 cash to apply on account.

Analysis:
Decrease in Asset : Cash, P 5,000
Decrease in Liability (payment) : Accounts Payable, P 5,000

Note: Partial payment of liability

Accounting Equation:
Assets = Liabilities Owner’s Equity
Cash Furn & Fix R. Supplies Repai. Equip Accounts Payable M. Cascas, Capital
50,000 5,000 3,000 = 58,000
( 1,200) ( 1,200) – Expense
 15,000 = 15,000
(5,000) (5,000)
43,800 5,000 3,000 15,000 = 10,000 56,800
66,800 = 66,800

10 - Purchased various chairs and tables for shop use from Reliable Home Furnishing, P 1,800. Terms.
Cash.

Analysis:
Increase in Asset : Furniture and Fixtures (chairs & tables) , P 1,800
Decrease in Asset (payment) : Cash, P 1,800

Note: Accounting elements affected – Assets only: Increase in one form of asset and Decrease in
another form of asset.

Accounting Equation:
Assets = Liabilities Owner’s Equity
Cash Furn & Fix R. Supplies Repai. Equip Accounts Payable M. Cascas, Capital
50,000 5,000 3,000 = 58,000
( 1,200) ( 1,200) – Expense
15,000 = 15,000
(5,000) (5,000)
(1,800) 1,800
42,000 6,800 3,000 15,000 = 10,000 56,800
66,800 = 66,800

12 - Cash received for services rendered P 13,500.

Analysis:
Increase in Asset : Cash , P 13,500
Increase in Equity : increase in income, P 13,500

Accounting Equation:
Assets = Liabilities Owner’s Equity
Cash Furn & Fix R. Supplies Repai. Equip Accounts Payable M. Cascas, Capital
50,000 5,000 3,000 = 58,000
( 1,200) ( 1,200) – Expense
15,000 = 15,000
(5,000) (5,000)
(1,800) 1,800
13,500 13,500 (Income)
55,500 6,800 3,000 15,000 = 10,000 70,300
80,300 = 80,300

15 - Paid the required mayor’s permit and licenses to operate business, P1, 500.

Analysis:
Decrease in Asset : Cash (payment) , P 1,500
Decrease in Equity : increase in Expense, P 1,500

Accounting Equation:
Assets = Liabilities Owner’s Equity
Cash Furn & Fix R. Supplies Repai. Equip Accounts Payable M. Cascas, Capital
50,000 5,000 3,000 = 58,000
( 1,200) ( 1,200) – Expense
 15,000 = 15,000
(5,000) (5,000)
(1,800) 1,800
13,500 13,500 - Income
(1,500) (1,500) expense
54,000 6,800 3,000 15,000 = 10,000 68,800
78,800 = 78.800

18 - Purchased additional repair supplies for shop use for cash P 2,200.

Analysis:
Increase in Asset : Repair Supplies , P 2,200
Decrease in Asset : Cash (payment) , P 2,200

Accounting Equation:
Assets = Liabilities Owner’s Equity
Cash Furn & Fix R. Supplies Repai. Equip Accounts Payable M. Cascas, Capital
50,000 5,000 3,000 = 0 58,000
( 1,200) ( 1,200) – Expense
15,000 = 15,000
(5,000) (5,000)
(1,800) 1,800
13,500 13,500 - Income
(1,500) (1,500) expense
(2,200) 2,200
51,800 6,800 5,200 15,000 = 10,000 68,800
78,800 = 78.800

20 - Received a bill from Islander for advertisement that appeared in the newspaper, P 310.

Analysis:
Increase in Liability : Accounts Payable, P 310
Decrease in Equity : increase in expense (advertising incurred), P 310

Accounting Equation:
Assets = Liabilities Owner’s Equity
Cash Furn & Fix R. Supplies Repai. Equip Accounts Payable M. Cascas, Capital
50,000 5,000 3,000 = 58,000
( 1,200) ( 1,200) – Expense
15,000 = 15,000
(5,000) (5,000)
(1,800) 1,800
13,500 13,500 - Income
(1,500) (1,500) expense
(2,200) 2,200
310 (310) -expense
51,800 6,800 5,200 15,000 = 10,310 68,490
78,800 = 78.800

22 - Issued a 120-day note to Capital Shoe Supply for the balance of the account with them.

Analysis:
Increase in Liability : Notes Payable, P 10,000
Decrease in Liability : Accounts Payable P 10,000
 Note: Accounting elements affected – Liabilities only: Increase in one form of liability and
Decrease in another form of liability.

Accounting Equation:
Assets = Liabilities Owner’s Equity
Accounts Note
Cash Furn & Fix R. Supplies Repair Equipt. Payable Payable M. Cascas, Capital
50,000 5,000 3,000 = 58,000
( 1,200) ( 1,200) – Expense
15,000 = 15,000
(5,000) (5,000)
(1,800) 1,800
13,500 13,500 - Income
(1,500) (1,500) expense
(2,200) 2,200
310 (310) -expense
(10,000) 10,000
51,800 6,800 5,200 15,000 = 310 10,000 68,490
78,800 = 78.800
25 - Sent a bill to Zenith Footwear for various repair services rendered P 16,500.

Analysis:
Increase in Assets : Accounts Receivable , P 16,500
Increase in Equity : Increase in income (services rendered) P 16,500

Accounting Equation:

Assets = Liabilities Owner’s Equity

Accounts Furn & Repair Repair Accounts Note
Cash Receivable Fix Supplies Equipt. Payable Payable M. Cascas, Capital
50,000 5,000 3,000 = 58,000
( 1,200) ( 1,200) – Expense
15,000 = 15,000
(5,000) (5,000)
(1,800) 1,800
13,500 13,500 - Income
(1,500) (1,500) expense
(2,200) 2,200
310 (310) -expense
(10,000) 10,000
16,500 16,500 - income
51,800 16,500 6,800 5,200 15,000 = 310 10,000 84,990
95,300 = 95,300

26 - Received a check from Zenith Footwear, P 5,000 to apply on account.

Analysis:
Increase in Assets : Cash , P 5,000
Decrease in Asset : Accounts Receivable, P 5,000

Note: Partial collection of accounts receivable

 Accounting Equation:

Assets = Liabilities Owner’s Equity

Accounts Furn & Repair Repair Accounts Note
Cash Receivable Fix Supplies Equipt. Payable Payable M. Cascas, Capital
50,000 5,000 3,000 = 58,000
( 1,200) ( 1,200) – Expense
15,000 = 15,000
(5,000) (5,000)
(1,800) 1,800
13,500 13,500 - Income
(1,500) (1,500) expense
(2,200) 2,200
310 (310) -expense
(10,000) 10,000
16,500 16,500 - income
5,000 (5,000)
56,800 11,500 6,800 5,200 15,000 = 310 10,000 84,990
95,300 = 95,300

30 - Paid the salary of shop employees, P 4,200.

Analysis:
Decrease in Assets : Cash (payment) , P 4,200
Decrease in Equity : increase in expense, P 4,200

Accounting Equation:

Assets = Liabilities Owner’s Equity

Accounts Furn & Repair Repair Accounts Note
Cash Receivable Fix Supplies Equipt. Payable Payable M. Cascas, Capital
50,000 5,000 3,000 = 58,000
( 1,200) ( 1,200) – Expense
15,000 = 15,000
(5,000) (5,000)
(1,800) 1,800
13,500 13,500 - Income
(1,500) (1,500) expense
(2,200) 2,200
310 (310) -expense
(10,000) 10,000
16,500 16,500 - income
5,000 (5,000)
(4,200) (4,200) expense
52,600 11,500 6,800 5,200 15,000 = 310 10,000 80,790
91,100 = 91,100
30 - Mr. Cascas, the owner, withdrew cash for personal use P 3,000.

Analysis:
Decrease in Assets : Cash (payment) , P 3,000
Decrease in Equity : withdrawal by owner, P 3,000

Accounting Equation:

Assets = Liabilities Owner’s Equity

Accounts Furn & Repair Repair Accounts Note
Cash Receivable Fix Supplies Equipt. Payable Payable M. Cascas, Capital
50,000 5,000 3,000 = 58,000
( 1,200) ( 1,200) – Expense
15,000 = 15,000
(5,000) (5,000)
(1,800) 1,800
13,500 13,500 - Income
(1,500) (1,500) expense
(2,200) 2,200
310 (310) -expense
(10,000) 10,000
16,500 16,500 - income
5,000 (5,000)
(4,200) (4,200) expense
(3,000) (3,000) - Drawing
49,600 11,500 6,800 5,200 15,000 = 310 10,000 77,790
88,100 = 88,100

Lesson 1
Activity 1:

Name: _________________________________

I - Account Classification
Instructions: On the space provided after each of the items below, write the letter(s) corresponding to:

1 - the account classification:

CA - Current Assets OE – Owner’s Equity

NCA - Non-Current Assets I - Income
CL - Current Liabilities E - Expenses
NCL - Non-Current Liabilities

2 - the Statement where the account should be presented.

IS – Income Statement SFP – Statement of Financial Position

Account 1 - Classification 2 - Statement

1. Accounts Payable
 2. Notes Receiveble
3. Salary Payable
4. Supplies on Hand
5. Service Income
6. Interest Receivable
7. Interest Expenses
8. Office furniture and fixtures
9. Building
10. Rent Expense
11. Notes Payable, due in 5 years
12. Supplies Expense
13. Prepaid Insurance
14. Advertising Expense
15. Office Equipment
16. Store furniture and Fixtures
17. Prepaid Rent
18. Interest Income
19. A. Kuripot, Personal
20. Bad debts Expense
21. Notes Payable
22. Delivery Equipment
23. Light and water Expense
24. Cash
25. Accounts Receivable
26. Prepaid Advertising
27. Machinery
28. Insurance Expense
29. Depreciation Expense - building
30. Utilities Payable

II. Fill in amount of the missing element of financial position:

Assets Liabilities Owner’s Equity

1) P 760,000 P 360,000 ?
2) 860,000 ? P 592,000
3) ? 108.000 760,000
4) 626,000 376,240 ?
5) ? 800,000 ( 100,000)

1. ___________________________
2. ___________________________
3. ___________________________
4. ___________________________
5. ___________________________

III. Use the accounting equation to answer the following questions:

 1. At the beginning of the year, the assets of Silver Services were P 360,000 and its owner’s equity
was P 200,000. During the year, assets increased by P 120,000 and liabilities increased by
P 20,000. What was the owner’s equity at the end of the year? ___________________

2. At the beginning of the year, Peña Calling Station had liabilities of P100,000 and owner’s equity
of P96,000. If assets increased by P 40,000 and liabilities decreased by P 30,000, what was the
owner’s equity at the end of the year? ______________________

3. The liabilities of Ragal Company equal one-third of the total assets and the owner’s equity is
P240,000. What is the amount of the liabilities? ___________________

4. A company has assets of P 600,000 and owner’s equity of P450,000. What is the amount of
liabilities? _________________________

5. ARD company has liabilities of P147,000 and owner’s equity of P 236,500. What is the amount of
assets? __________________________

IV. Supply the missing element of performance:

Income Expense Profit (Loss)

1) P 840,000 ? P 360,000
2) 2,400,000 ? 540,000
3) 1,300,000 P 860,000 ?
4) 2,000,000 720,000
5) 1,800,000 (400,000)

1. _______________________________
2. _______________________________
3. _______________________________
4. _______________________________
5. _______________________________

Lesson 1
Activity 2 - Transaction Analysis

The following transactions were taken from the books of TRJ Services for the month of July 2021:

July 2021
1 - TR Tan invested cash, P 30,000, office furniture and equipment P 10,000, and office supplies P 5,000
2 - Paid rent for the month, P 3,500
5 - Bought additional office supplies from Berzo Tdg. P 3,000 cash.
8 - Receipts for the week for services rendered amounted to , P 16,000
10 - Bought a typewriter from VERA Marketing, for P 20,000. Terms: 50% down, balance on account.
15 - Paid taxes and licenses, P 2,500.
18 - Paid in full the account with VERA.
20 - Billed CRT Corp. for services rendered, P 10,000.
21 - Cash receipts for services rendered, P 14,500.
23 – Received 30 day promissory note for P 15,000 from RND Company for services rendered.
25 - Received P 6,000 cash from CRT Corp. to apply on account
28 - Paid salary of employees, P 6,000.
 29 - Paid light and water bills, P 1,200.
31 - TR Tan withdrew P 4,000 cash for personal use.
31 – Collected in full the account of CRT Corp.

REQUIRED. Analyze the above transactions by giving the:

a) Value received and value parted with and state the appropriate account title to be used
b) Accounting elements affected and the effect on the elements affected

ASSETS LIABILITIES OWNER’S EQUITY

Cash Accounts Payable TR Tan, Capital
Accounts Receivable TR Tan, Personal
Notes Receivable Service Income
Office Supplies Salaries and Wages
Office furniture and equipment Taxes and Licenses
Utilities expense
Rent Expense

Note: Answer sheet is given below. May be handwritten but use the same format.

Lesson 1
Activity 2 - Transaction Analysis
Name: _______________________

Answer sheet:
Effect on
Transaction Account Title Amount A L OE
July
1 VR -

VPw/ -

2 VR -
VPw/ -

5. VR –
Vpw/-

8. VR-
VPw/ -
 10 VR-
VPw/-

15 VR-
VPw/-

18 VR-
VPw/-

20 VR-
VPw/-

21 VR -
VPw/-

23 VR -
VPw/-

25 VR-
VPw/-

28 VR-
VPw/-

29 VR-
VPw/-

31 VR –
VPw/-

31 VR -
VPw/-

II - Describe each of the transactions as shown in the completed financial statement worksheet/
accounting equation given below:

Cash Accounts Supplies Equipment Accounts Quinn, Capital

Receivable Payable
1) P 100,000 P 5,000 P 20,000 = P 125,000
2) ( 2,500) ( 2,500) Rent Expense
3) 15,500 15,500 Service income
4) ( 10,000) 50,000 P 40,000
5) P25,000 25,000 Service Income
6) ( 15,000) ( 15,000)
7) 20,000 ( 20,000)
8. 3,500 ( 3,500)
9. ( 3,000)
3,000
10. (10,000) 10,000 additional invest
 P 105,000 5,000 8,000 70,000 18,500 169,500

1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Lesson 2 – Books of Accounts, Double-entry System and The accounting cycle

Books of Accounts

 Two books of accounts maintained by business entity

1. Book of original entry - Journal

2. Book of Final Entry - Ledger

Journal (Books of original entry)

 Book or accounting record where business transactions are recorded for the first time through
journal entries. This recording phase is called journalizing.

 Types of journals:
1. General Journal - a 2 column journal where:
a. all business transactions are recorded if a business entity does not utilize special
journals,
 b. all transactions that cannot be recorded in the special journals are recorded if a business
entity uses special journals.

2. Special journals – is used to record similar transactions.

a. Sales journal – used to record sales on account
b. Purchase journal – used to record purchases of goods or merchandise on account.
c. Cash receipts journal – used to record all transactions involving cash receipts
d. Cash disbursements journal – used to record all transactions involving cash payments.

(Note) : For Service Business – General Journal will be used to record business transactions
For Merchandising Concern – Special Journals and General Journal will be used to record
business transactions.

Ledger (Book of final entries)

 A systematic compilation of group of accounts used to classify the effects of business

transactions by transferring the entries from the journal (book original entry) to the ledger (book
of final entries. This process is called posting.

 Types of ledgers

a. General ledger – contains all the accounts (controlling accounts) appearing in the trial balance
b. Subsidiary ledger – shows the breakdown of the balances of the controlling account, (e.g.
Accounts receivable, accounts payable, etc.).

DOUBLE ENTRY BOOKKEEPING

 Double entry bookkeeping system is based on the fundamental accounting assumption that all
business transactions have two-fold effects – that for every value received , there is a
corresponding equal value given up. Value received is always debited while value parted with is
always credited.

 RULES OF DEBIT AND CREDIT

Debit Credit

1) Increase in Asset 1. Decrease in Asset

2) Decrease in Liability 2. Increase in Liability
3) Decrease in Owner’s Equity 3. Increase in Owners Equity
due to: due to:
a) withdrawal a) investment
b) expenses incurred b) income earned
Normal balances of accounts and to increase or decrease them.

Account Normal Balance To Increase To Decrease

Asset Debit Debit Credit
Liability Credit Credit Debit
Owner’s Capital Credit Credit Debit
Owner’ Drawing (Personal) Debit Debit Credit
Income Credit Credit Debit
Expense Debit Debit Credit

Accounting cycle – refers to a series of sequential steps or procedures performed to accomplish the
accounting process.

The steps in the cycle and their aim follow:

1. Identification of Events or transaction to be recorded

Aim: to gather information about transactions or events generally through the source documents
and determine the effects of the transaction on the accounting elements.

2. Journalizing - Transactions are Recorded in the Journal

Aim: to record the dual effects of the transaction or accountable event in the journal(s).

3. Posting - Journal Entries are Posted to the Ledger

Aim: to transfer the information from the journal to the ledger for classification.

4. Preparation of the Unadjusted Trial Balance

Aim: to provide a listing of account balances from the general ledger to verify or proved the
equality of debits and credits in the ledger. This serves as basis for preparing adjusting
entries

5. Preparation of the Adjusting Entries

Aim: to update some ledger accounts as to the reporting date to record accruals, expiration of
deferrals, estimations and other events.

6. Preparation of the Adjusted Trial Balance (or Worksheet Preparation)

Aim: To check the equality of debits and credits after the adjustments and to aid in the
preparation of financial statements.

7. Preparation of the Financial Statements

Aim: to provide useful information to decision-makers. Financial statements are the end product
of accounting process in which the information processed is communicated to users.

8. Closing Journal Entries are Journalized and Posted (Closing the Books)
Aim: to close temporary accounts and transfer net income to owner’s equity. Closing the books
means journaling and posting closing entries and ruling the ledger.

9. Preparation of Post-closing Trial Balance

Aim: to check the equality of debits and credits after the closing entries.

10. Reversing Entries are Journalized and Posted.

Aim: to simplify the recording of certain regular transactions in the next accounting period.
Reversing entries are usually made at the beginning of the next accounting period to
reverse some of the adjusting entries made at the end of the reporting period.
 This cycle is repeated each accounting period. The first three steps in the accounting cycle are
accomplished during the reporting period. The fourth to the ninth steps generally occur at the end of the
period. The last step occurs at the beginning of the next period.