CHAPTER 1: Overview of Accounting

INTRODUCTION:
Accounting is part of any organization be it profit or non-profit. An
understanding of a business, its form of organization and type of operation may
minimize the risks of managing it. What is the basis of management in making
decisions? Accounting provides management with information essential to the
efficient conduct and evaluation of its activities. It gathers data which are financial in
nature, identifies what data are relevant to decisions to be made, process and
analyze these data and transforming it into reports that can be used in making sound
decisions.
This chapter introduces the meaning and importance of accounting, the rules
and principles, the business environment, the motives of doing business and the
users of financial information.

LEARNING OUTCOMES:
After studying this chapter, you should be able to:
1. Define accounting.
2. Define business and explain its various motives and role.
3. Identify the sources of fund of the business.
4. Describe the form of business organizations and type of operations.
5. Explain Generally Accepted Accounting Principles (GAAP) and identify its
underlying assumptions or concepts.
6. Discuss the elements of financial statements.
7. Identify the users and explain why they depend on accounting information.
8. Explain the process of providing information.

Lesson 1: Definition of Accounting

Accounting is defined as:
1. It is a service activity. Its function is to provide quantitative information
primarily financial in nature, about economic entities that is intended to be
useful in making economic decision. (Accounting Standard Council)
2. It is a process of identifying, measuring and communicating economic
information to permit informed judgment and decision by users of the
information. (American Accounting Association)
3. It is an art of recording, classifying and summarizing in a significant manner
and in terms of money, transactions and events which are in part at least in

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 financial character and interpreting the results thereof. (American Institute of
Certified Public Accountant)

To summarize, the essential characteristics of accounting based on the above

definition:
1. Quantitative in nature
2. Provide financial information
3. To be used in making economic or financial decision

Lesson 2: Business, its Motive and Role in Society

Business is an economic unit that controls resources and engages in buying

and selling goods or services.
A major concern of a business is how to best use the resources – what
machines are needed, what labor skills are required, how many men to employ,
how much fixed capital and working capital are needed, what raw materials to
use – all with the end of view of earning profit.
In business endeavor, success is possible when money, machines, men and
materials are used efficiently at the least possible cost. Most often success in
business is measured in terms of profit and increase in funds.
Profit generates more resources of funds for the business. With more funds,
there is a need for business to expand.

 Sources of Capital
The main source of capital of the business is its investor or owner.
With a successful business, investor succeeds not only in getting back
what was invested (return of capital) but receives more than the amount he or she
has invested (return on capital).
If the owner does not have enough cash to finance the activities of his
business, he can borrow funds from relatives, friends or financing institutions such as
banks and cooperatives.

 Role of Accounting in Business

The main goal of the business is to earn a profit. To determine whether the
business is earning a profit or incurring a loss, it is important that the owner keeps

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track the events or transactions that occur in his business. Hence, the use of
accounting is important.
Accounting is also called the “language of business”. It helps the owner to
generate information on what is happening in his business and such information will
be helpful to make economic decision necessary in carrying out the operation of the
business. Accounting gives an excellent gauge of how well the business is going. It
also provides financial information throughout the year so you can test the success of
your business strategies and make course corrections to ensure that you reach your
year-end profit goals.

Lesson 3: Nature of Business and type of Business Organizations

 Nature of Business
1. Manufacturing Business – this involves converting raw materials into finish
products.
E.g. manufacturing of furniture and fixtures, cars, etc.
2. Service-concern Business – this involves rendering of services for a fee.
E.g. Barber Shops, Hotel, Consultancy, etc.
3. Merchandising Business – this involves buying and selling of products.
E.g. Groceries, Department Stores, Sari-sari Stores, etc.
4. Agri-Business – this involves cultivating and selling of agricultural products.
5. Hybrid Business – this involves the combination of other types of business
mentioned above.

 Types of Business Organizations

1. Sole Proprietorship – it is owned by one individual.
Advantages
a. Ease in organizing Jorge’s

b. Low cost of organizing

Disadvantages
a. Limited source of financial resources
b. Owner shoulders all the losses incurred
c. Unlimited liability

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 2. Partnership – it is owned by two or more individual to combine their money,
property and services to a common fund and to divide the profits among
themselves.
Advantages
and
Jorge and
Jorge
a. More financial resources than a proprietorship Marsha
Marsha

b. Additional management skills

Disadvantages
a. Unlimited liability

3. Corporation – it is an artificial being owned by five but not more than 15

individuals called incorporator.
Advantages
J & M, INC.
a. The ability to obtain large amounts of resources
by issuing shares of stocks
J & M, Inc.
b. Limited liability
Disadvantages
a. Double taxation

4. Cooperative – the same as corporation but most of its profit not to be distributed
to the owners or members but it is used for the operation of the business.
Advantage
Large amount of resources by contribution of its members

Disadvantages
Not being taxed

 How business organizations obtains Profit

In a service business, money is received for the cost of service rendered.
Example:
Service Business Customer Profit
Cost of processing of Pays P1,500 Service revenue P1,500
visa and passport by the Cost of service 1,000
travel agency P1,000 Profit P500

In a merchandising business, money is received from the cost of

merchandise given.

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 Example:
Merchandising Business Customer Profit
Cost of a pair of shoes P150. Pays P250 Sales revenue P 250
Cost of sales 150
Profit P100

In a manufacturing business, raw material such as leather is bought and

manufactured into bags and shoes before they can finally be sold to customers.
Example:
Manufacturing Business Customer Profit
Cost of leather P50 Pays P150 Sales revenue P 150
Wages of worker P 25 Cost of sales 90
Manufacturing overhead P 15 Profit P60
Cost of a pair of shoes P 90

Lesson 4: Generally Accepted Accounting Principles (GAAP) and underlying

assumptions

GAAP are set of accounting rules, procedures, practices and standards that
are followed in preparing the financial statements. They served as the ground rules
that guide accounting practitioners in recording (identifying, analyzing, and
measuring) and reporting financial information of a business entity.
Some of the Generally Accepted Accounting Principles are the following:
1. Cost Principle – this principle requires that assets should be
recorded at original or acquisition cost.
2. Objectivity Principle – this principle requires that accounting
records should be based on reliable and verifiable data as evidence
of transactions.
3. Materiality Principle – this principle dictates practicability to rule
over theory in determining the valuation of an item. It is matter of
professional judgment of the auditor to determine the materiality of
an item.
4. Matching Principle – this is the combined concept of Revenue
Recognition and Expense Recognition Principles. Revenue should
be recognized when earned and corresponding expenses should be
recognized when incurred during the same period as revenue was
earned.

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 5. Consistency principle – this principle requires that accounting
methods and procedures should be applied on a uniform basis from
period to period to achieve comparability in the financial statements
6. Adequate Disclosure Principle – this principle requires that
financial statement should be free from any material misstatement;
that if there is any, proper disclosure should be made.

 Basic Accounting Assumptions or Concepts:

1. Going concern – the business will continue in operational existence
for the foreseeable future. The business is viewed to have a continuity
of existence.

2. Business entity concept – owner and the business are separate and
distinct of each other.

3. Monetary value – all transaction must be stated in terms of unit of

measure. Since we are in the Philippines, it must be stated in Peso.

4. Time period – the life of an entity is subdivided into time periods

which are of equal length for the purpose of making financial reports.
E.g. monthly, quarterly, semiannually, annually.

5. Accrual Basis – this assumes that recording of income and expenses

follow the accrual basis of accounting. That is, income is recognized
when earned regardless of when received and expense is recognized
when incurred regardless of when paid.

Lesson 5: Elements of Financial Statements

There are five elements of Financial Statements:
1. Assets Assets, Liabilities and Owner’s Equity are also
known as “accounting elements” or
2. Liabilities “accounting values”. They comprise the
Statement of Financial Position.
3. Owner’s Equity or Capital

4. Revenue or Income Revenue and Expenses are temporary

accounts of Owner’s Equity. They
5. Expenses comprise the Income Statement or
Statement of Financial Performance.

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 The Financial Statements
The objective of Financial Statements is to provide information about the
financial position, performance and cash flows of an enterprise that is vital in
making a sound economic decisions.
There are five basic financial statements, namely:
1. Statement of Financial Position or Balance Sheet
2. Income Statement
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Accounting Policies and Notes to Financial Statements

Statement of Financial Position – consist of three sections, Assets,

Liabilities and Equity. This statement measures and evaluates the
business liquidity (the ability of the business to meet currently maturing
obligations), solvency (the availability of cash over the longer term to meet
maturing obligations), financial structure (the source of financing for the
assets of the business) and capacity for adaptation (financial flexibility of the
business to use the available cash for unexpected requirements and investment
opportunities).

Income Statement – this shows the financial performance of the

business for a given period of time. These consist of the revenue,
expenses and operating results which could either be a profit or loss.

Statement of Cash Flows – provides information about cash inflows

(receipts) and cash outflows (payments) of an entity for a given period of
time which are being classified as:
a. Operating activities – inflows and outflows of cash from the normal operating
activities of the business.
b. Investing activities – inflows and outflows of cash from the sale or purchase of
assets other than inventory.
c. Financing activities – inflows and outflows of cash from the owners or creditors.

Accounting Policies and Notes to Financial Statements – this is an

integral part of the financial statement. This presents significant
accounting policies and schedules of computations and disclosures of
some events and other information essential to understanding the
company’s accounts.

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 Stakeholders as users and decision makers
1. Stakeholders – a person or entity who has an interest in the economic
performance of a business. Examples are: managers, lenders,
suppliers, employees, government and customers. Stakeholders are
classified as external users except for management who is an
internal user.
2. Owner or investor – one who puts capital (such as money or property)
in a business venture with the objective of receiving a return on capital
from the profits earned by the business.
3. Manager – one responsible for organizing, planning, directing and
controlling the operation of the business. He must be a good steward;
protecting the business resource and helping it grow in value.
4. Lender – assesses the ability of the borrower to pay to pay the
principal debt and the additional charge called the interest.
5. Supplier – offers goods or merchandise on cash or on credit term
depending on the paying ability of the customer.
6. Government – uses the accounting reports as tax collector, as a
regulatory body and as a customer.
7. Employee – are interested in information which enables them to
assess the stability and profitability of the enterprise.
8. Customer – asses the company’s ability to continuously supply the
goods they need at the right price and quality.

Lesson 6: The Process of Providing Information

1. Identify stakeholders

Business stakeholders are person or entity having an interest in the

economic performance of the business. It could either be internal
stakeholders such as owners, managers, employees or external
stakeholders such as customers, creditors, government, and the public.

2. Assess stakeholders’ informational needs

Stakeholders have different information needs. It is needed to assess the

information needs of the stakeholders in order to prepare reports for their
intended needs.

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 3. Design the accounting information system to meet the stakeholders’
needs.

The business should decide a mechanism tool in order to generate

information needs. It could be done manually or electronically generated.

4. Record economic data about business activities and events

This is to input business events and transaction to the respective books of

entry.

5. Prepare accounting reports for stakeholders.

The end process is to the preparation of financial statements.

ACCOUNTING INFORMATION SYSTEM

Statement Users Financial Information Decisions Supported

Investors Profitability Investment decisions
Lenders Financial Position Financing decisions
Managers Liquidity Performance evaluation
Suppliers Solvency Cash and credit strategies
Customers Cash flows Labor relations
employees Adequacy Allocation of resources
Government timing Tax plans

The figure above describes accounting as a service activity which provides financial information to
statement users in support of various economic decisions.

Chapter Exercises:
Review Questions:
1. What is accounting, and why is accounting important?
2. Explain why business plays an important role in the economy of the country.
3. What are the two main sources of capital?
4. What is profit and, how is it earned and what is its effect on business?
5. Why is accounting also called the “language of business”?
6. What is the main difference between a merchandising business and a
manufacturing business?
7. When is revenue recognized by a service provider? By a merchandiser? By a
manufacturer?

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8. What is Generally Accepted Accounting Principle? Discuss its relevance in
the preparation of financial statements.
9. Define and explain the basic accounting concept.
10. Discuss the process of providing information needs.

Analysis
Based on the situations given below, are the accounting practices in conformity
with the generally accepted accounting principles? Answer with a yes or no and
cite the applicable GAAP.
1. World travel Agency purchased land and paid P850,000 cash on
December 31, 2018. At December 31, 2019, although the land has
increased in value to P950,000 it was still reported in the financial
statement at P850,000.
2. Proctoso has some properties amounting to P1,000,000. One half of
this was invested in “Procto Shoe Shop” and the other half in another
business called “Procto Video Shop”. Two sets of financial
statements were prepared.
3. the owner-manager of Belo’s Health Spa took home some beauty
supplies amounting to P2,500 which the accountant did not record.
4. Rental amounting to P36,000 for the store space occupied by the
business was paid in advance for the years 2018 and 2019. The
whole amount was recorded as expense for 2018.
5. The company recorded service income of P10,000 after the customer
signed a contract for the repair of the delivery van.
6. A set of computer and printer was purchased for P60,000 which the
accountant immediately recorded as expense for the business.
7. The owner-manager bought a computer for P25,000. The invoice was
recorded given to the accountant who recorded it as an asset of the
business but the computer was for personal use.
8. The statement of financial position of J&F Play Center included paly
equipment purchased from Japan and stated in 350,000 yen. It was
reported at the same amount in the balance sheet. All other assets
were reported in Philippine Peso.

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 CHAPTER 2: THE ACCOUNTANCY PROFESSION AND ITS DEVELOPMENT

INTRODUCTION:
The business environment poses changes that challenge accountants and
other stakeholders as well.
This chapter discusses the accounting profession and the different regulatory
bodies and standard setting bodies to make you aware that whatever your
profession is, you will become a member of a professional organization and you will
have to comply with the rules and regulations promulgated by them.
The different standard setting bodies have updated or revised rules, principles
and requirements to regain confidence on investors, improve competitive positions
of the business enterprise to cope with the changing environment of business.

LEARNING OUTCOMES:
After studying this chapter, you should be able to:
1. Identify the different accounting areas, career fields and accounting
associations.
2. Explain the role of the regulatory bodies and professional bodies in
accounting.
3. Discuss the important provisions of the Accountancy Act of 2004.
4. Explain the theoretical framework of accounting.

Lesson 1: Career Fields, Areas and Accounting Associations

 Career fields in accounting

The accountant renders professional service in any of the following major
fields of work.
1. Public Accounting
A career field open to firms and individual CPA’s who offers expert
service like bookkeeping, auditing, accounting tax and financial
planning.
2. Private Accounting (or Industry Accounting)
Accountants are employed as financial accountant, controller, budget
officer, internal auditor, or cost accountant.
3. Government and Not-for-Profit Accounting

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 They work as accounts, auditor, budget officer etc. of any government
officer or agencies, religious organizations, labor unions, colleges and
universities, trade associations and many other.
4. Research and Education
Another professional field where the accountant assumes the role of
researcher, teacher and reviewer.

 Accounting Areas
The accounting profession requires one to take up the following courses,
each of which has a large body of accounting and theories:
1. Basic Accounting and Bookkeeping is the routine activity of recording,
classifying and summarizing business transactions in a systematic manner.
2. Financial Accounting involves the preparation and interpretation of or
financial statements that are intended for external users.
3. Cost Accounting deals with recording, classifying and summarizing the
details of materials, labor, and overhead necessary to produce and sell a
product or service.
4. Managerial Accounting is the presentation of financial and non-financial
information primarily for management to assist them in their various
functions.
5. Auditing deals with independent verification and examination of the
accounting records for the purpose of giving an opinion on the fairness of
the presentation of the financial statements.
6. Government and Non-Profit Accounting uses “Fund Accounting” deals
with the administration or use of public or community funds to bring about
service to the people.
7. Tax Accounting deals with tax matters affecting firms ( partnership and
corporation), individuals, trusts and estates.

Lesson 2: Professional Regulatory Bodies

1. Professional Regulation Commission (PRC)

This is a government body in charge of regulating and licensing the
practice of profession like accounting, medicine, engineering, nursing and the
like.

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2. Board of Accountancy (BOA)
Under the jurisdiction of PRC, and is tasked in setting up and
promulgating a set of professional standard and ethics in the practice of the
accounting profession.
Composed of a chairman and six members appointed by the
President of the Philippines upon the recommendation of the PRC.
It constantly monitors the practice of accountancy by conducting
exams to CPA candidates, granting certificates to board passers, registering
and suspending members, and conducting seminars to update the CPA’s on
current accounting and business standard and policies, among others.
3. Philippine Institute of Certified Public Accountants (PICPA)
It is the integrated national professional organization of certified public
accountants in the Philippines accredited by the Board and the Professional
Regulation Commission per PRC Accreditation No. 15 dated October 2, 1975.
The PICPA is the basic authority of all Philippine CPA’s setting up
and implementing rules vital to the accounting profession.
 The Philippine Financial Reporting Standards Council (PFRSC) was created
in 2006 as provided in the Philippine Accountancy Act of 2004 to assist in
formulating and promulgating standards. This replaced the Accounting
Standards Council (ASC) which was created in 1981 by the PICPA. PFRC is
responsible in establishing standards and ensuring quality accounting
practice in the Philippines.
 The Philippine Interpretations Committee (PIC) was also created on 2006 to
assist PFRSC in carrying out its functions of setting up and improving the
standards.
 The Philippine Financial Reporting Standards in the Philippines comprise of three
sets: Philippine Financial Reporting Standards (PFRS), Philippine
Accounting Standards (PAS) and Interpretations.
 Under PICPA’s umbrella are several accounting associations representing the
different accounting fields of specialization:
a. Association of Certified Public Accountants in Education (ACPAE)
b. Government Association of Certified Public Accountants
(GACPA)
c. Association of Internal Auditors (IIA)
d. Association of CPAs in Commerce and Industry (ACPACI)

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 4. Securities and Exchange Commission (SEC)
Its task is to safeguard public interest and regulate business
operations specifically of partnerships, corporations, entities granted license
to operate/franchise and foreign companies doing business in the Philippines.

5. Bangko Sentral ng Pilipinas (BSP)

Regulates the operations of all banks, as well as all importations and
exportations of goods.
6. Bureau of Internal Revenue (BIR)
BIR ensures compliance of tax and license requirements by all
businesses.

Lesson 3: The Accountancy Act of 2004

The Rules and Regulations Implementing Republic Act 9298 otherwise known
as Accountancy Act of 2004 has the following objectives:
a. Standardization and regulation of accounting education;
b. Examination for registration of certified public accountants; and
c. Supervision, control and regulation of the practice of accountancy in
the Philippines.

Salient points covered are the following:

1) Defines the standard of practice and service that an accountant may
engage in.
2) Mandates the creation of standard setting bodies such as Financial
Reporting Standard Council and the Auditing and Assurance Council.
3) Mandates the creation of Education Technical Council which is tasked to
assist the BOA in matters involving curriculum making, teaching standards,
monitoring progress of accountancy programs and evaluating performance
of educational institutions offering accountancy.
4) Requires the taking of licensure examination, registration and licensing of
certified public accountants before they can go into accounting and auditing
practice. It states that a candidate must be a Filipino citizen, of good moral
character, a holder of a degree of accountancy. To pass the licensure
examination and obtain a general average of 75% or better, with no grade
in any subject below 65%. Failure to pass the licensure examination after
taking it twice requires the candidate to take up a refresher course in an
accredited accountancy program before taking the examination the third
time.

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 5) Aside from a certificate of registration, a professional identification card
shall be issued to the registrant.
6) Enumerates prohibitions, vested rights and limitations in the practice of
accountancy.
7) Requires certificate of accreditation for individual CPA, as well as firms and
partnerships of CPA. Accounting practice commences only after the
individual, firm or partnership has been duly accredited.
8) Promulgation by PRC of a continuing professional education for all CPAs,
as requisite for renewal of license of practice

Lesson 4: Framework of Accounting

The framework describes the basic concepts that guide the accountant’s
actions in identifying, measuring and reporting economic information. It serves as
a guide in the following groups:
1) FRSC in developing future Reporting standards and in reviewing existing
Philippine accounting standards.
2) Prepares of financial statement in applying Financial Reporting
Standards.
3) Users of financial statements in interpreting the information contained in
the financial statements.
4) Auditors in forming an opinion as to the fairness in the presentation of the
financial statements.
5) All other interested parties who want to know how the standards are being
formulated.
The framework is also being used in resolving issued that are not addressed
directly by the FRS or by the Interpretation.
The framework deals with the following:
1) Objective of the financial statements
2) Qualitative characteristics of the financial statements.
3) Definition, measurement and recognition of the elements of the
financial statements.
4) Concept of capital and capital maintenance.

Chapter Exercise:
1. There are many career opportunities open to an accounting professional. A
few are described below which you are required to identify.

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 a. A licensed CPA professional who examines the records and reports of the
accounting department ensuring that these are fairly presented in
accordance with generally accepted accounting principles.
b. A licensed CPA professional or lawyer in charge of preparing reports
submitted to the BIR and who advises clients on financial and economic
decisions made and the impact of taxes on them
c. A licensed professional who makes a study and gives recommendations
to management regarding decision making problems such as feasibility
study of a new project, retain or drop a product, process further or sell the
product, merge with another company. One need not be a CPA for this
career opportunity.
d. One who evaluates past performance of the business, makes quantitative
projections or plans on how to accomplish the objectives of the company.
e. One who determines the cost of producing a product or service,
determines its profitability and monitors its performance in the market.
f. Responsible for establishing the recording system of the company,
prepares financial reports and assists management in analyzing them.
g. One whose responsibility encompasses accounting, tax, budgeting,
internal audit, system design and internal control.
h. Assist the accountant in the recording of transactions and other
procedural aspects of accounting such as posting, footing, cross-footing,
preparation of schedules and reports.
i. A licensed professional who assists students in their accounting, tax and
auditing courses.
2. Give some professional organizations and government agencies and discuss
how they regulate the practice of a profession such as the accountancy
profession.
3. Give the functions of the following councils created by the Accountancy Act of
2004.
a. Education technical Council
b. Continuing Profession Education Council
c. Financial Reporting Standards Council
d. Quality Review Council
e. Philippine Interpretation Committee
4. Describe the Framework of accounting, the different issues being dealt by it
and relevance to other groups.

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 CHAPTER 3: IDENTIFYING BUSINESS TRANSACTION

INTRODUCTION:
Accounting concepts and principles are relevant to financial reporting, understanding
how these are applied enables you to make a proper assessment of the financial
information that will lend to sound economic decisions.
This module will demonstrate the

LEARNING OUTCOMES:
After studying this chapter, you should be able to:
1. Define business transaction.
2. Identify account titles according to the accounting elements
3. Discuss the rules of debit and credit and the normal balances of each
account.
4. Analyze transaction in T accounts using debit and credit
5. Use the accounting equation to analyze business transactions.

Lesson 1: Business Transactions or Events

A business transaction is an economic event or condition that directly affect

an entity’s assets, liabilities or owner’s equity (called as accounting elements).
Example of business transactions:
1. Investment of the owner
2. Purchase of goods
3. Sale of goods
4. Payment of expenses

Take note that only those transactions or events related to the business
should be accounted and recorded.
Business events are the occasional occurrence in the life of the business like
loss due to fire, decline in market value, etc.
Business transactions are exchanges of equal monetary values. This
definition implies the following concept of understanding:
1. For every value received, another value is given away in exchange (
this is the dual effect of transaction that give rise to the DOUBLE
ENTRY BOOKKEEPING or the VENETIAN MODEL)

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 2. These values are measured in terms of pesos which are presumed to
be equal.

Lesson 2: The Account and Account Titles

To make the information understandable to the stakeholders, all business
transactions must be recorded by using an “account or account titles”.

The Account is a device used to record the changes in (increase or

decrease) in the accounting elements.

E.g. Asset accounts, Liability accounts, Equity accounts, Revenue/Income account

and Expenses account.

Account titles are special or particular name of an account.

For example, Asset account, its account titles are cash, accounts receivable,
inventory, etc.

Account and account titles are summarized in the Chart of Account.

Chart of Account is a list of names of the accounts that a company has identified
and made available for recording transactions in its general ledger.

 Account Classification
1. Asset account – these are resources controlled and owned by the business.
Example:
a. Cash – the account title to describe money, either in paper or in coins
and money substitutes like check, postal money orders, bank drafts
and treasury warrants.
b. Accounts receivable – account title for amounts collectible arising
from services rendered to customers on credit or sale of goods to
customers on accounts.
c. Inventory- assets which held for sale in the ordinary course of
business and in the process of production for such sale; or in the form
of material or supplies to be consumed in the production process or in
the rendering of services.

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 d. Prepaid Expenses – expenses that are paid in advance but are not
yet incurred or have not yet expired such as prepaid rental, prepaid
insurance, prepaid interest etc.
e. Unused Supplies- an account title for cost of stationery and other
supplies purchased for use but are left on hand and still unused.
f. Land- account title for the site where the building used as office or
store was contracted.
g. Building – finished construction owned by the business where
operations and transaction took place.
h. Furniture and Fixtures – includes chairs, tables, counters, display
cases and the like.
i. Machinery and equipment – tangible assets which are held by an
enterprise for use in the production or supply of goods and services.
j. Investments

2. Liability account – these are obligation or debts of the business

Example:
a. Accounts payable – a financial obligation of the business that
constitutes an oral or verbal promise to pay.
b. Accrued expense payable – these are expenses incurred by the
business but are not yet paid.
c. Loan payable – obligation by the business which is normally long
term in nature made through financial institutions such as banks etc.
d. Bonds payable - obligation by the business which is normally long
term in nature and is evidence by the issuance of bonds.
e. Notes payable- obligation by the business which is normally long
term in nature and is evidence by the issuance of a note.
3. Equity account – this is a residual interest of the business after deducting all
its liabilities from the assets.
Example:
a. Owner’s Equity – this is for sole proprietorship type of business
organization
b. Partner’s Equity – this is for partnership type of business
organization
c. Shareholder’s Equity – this is for corporation type of business
organization

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 4. Revenue/Income account – this pertains to the income or sale of goods or
rendering of services
Example:
a. Sales revenue/income – revenue from merchandising and
manufacturing business
b. Service revenue/income – revenue from service concern type of
business
c. Interest income
d. Commission income
e. Fees earned
f. Other income

5. Expense account – these are cost incurred by the business whether paid or
unpaid
Example:
a. Salaries Expense
b. Utilities Expense
c. Rent Expense
d. Cost of Sales
e. Repair and Maintenance
f. Interest Expense

Lesson 3: Basic Accounting Equation:

The accounting values (elements) are affected by the business transactions or

economic activities occurring daily in a business.

ASSETS = LIABILITIES + EQUITY

The resources The rights of the creditors, The rights of the

which represent debts of
owned by a business the business
owners

General Rule: ASSETS SHOULD ALWAYS BE EQUAL TO LIABILITIES AND

EQUITY

20
 Expanded Accounting Equation
REVENUE/
ASSETS = LIABILITIES + EQUITY + - EXPENSES
INCOME

ILLUSTRATION:
To illustrate the effects of the transaction in the accounting elements, let us assume
the following:

Assets invested by owner.

March 1 Margaret Claire opened a tour and travel service by investing cash and
of P50,000. She has three cars but decided to invest only two cars
costing P750,000.
Analysis: The assets of the business will increase in the form of cash
P50,000 and cars P750,000 with a corresponding increase
in owner’s equity.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash P 50,000 MC, Capital P 800,000
Cars 750,000 _______
P 800,000 P 800,000

Both sides of the equation were affected by the transaction.

Notice also that both have equal balances.

Cash borrowed from the bank.

March 3 Margaret Claire borrowed P100,000 cash from Metro Bank for use in her
business.
Analysis: The assets of the business will increase again in cash
P100,000 with a corresponding increase in liability.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash P 150,000 Loans payable P100,000 MC, Capital P 800,000
Cars 750,000 ________ _______
P 900,000 P100,000 P 800,000

The cash had increased by P100,000 bringing the balance to P150,000 with
corresponding increase in liabilities – loans payable.

Both Sides have equal balances of P900,000.

21
 Asset purchased for cash
March 7 Bought table and chairs from Blims and paid cash of P45,000
Analysis: The assets of the business will increase in the form of
furniture and fixtures and decrease in asset cash

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash P 105,000 Loans payable P100,000 MC, Capital P 800,000
Cars 750,000
Furniture 45,000 ________ ________
P 900,000 P100,000 P 800,000

Total assets are still the same since there was

only a change in its form..

Asset purchased on account.

March 15 Various equipment were purchased on account from Des marketing for
P55,000
Analysis: The assets of the business will increase in the form of
equipment with a corresponding increase in liability.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash P 105,000 Loans payable P 100,000 MC, Capital P 800,000
Cars 750,000 Accounts Payable 55,000
Furniture 45,000
Equipment 55,000 ________ ________
P 955,000 P 155,000 P 800,000

Cash Withdrawn by owner

March 18 Margaret Clair made a cash withdrawal of P5,000 for personal use.
Analysis: The assets of the business will decrease in the form of cash
with a corresponding decrease in owner’s equity.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash P 100,000 Loans payable P 100,000 MC, Capital P 800,000
Cars 750,000 Accounts Payable 55,000 MC, Drawing (5,000)
Furniture 45,000
Equipment 55,000 ________ ________
P 950,000 P155,000 P 795,000

The transaction decreases equity because the

owner recovered part of her investment by
withdrawing cash.

22
 Payment of Liability
March 20 The account due to Des Marketing was paid in cash.
Analysis: The assets of the business will decrease in the form of cash
with a corresponding decrease in liabilities.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash P 45,000 Loans payable P 100,000 MC, Capital P 800,000
Cars 750,000 MC, (5,000)
Drawing
Furniture 45,000
Equipment 55,000 ________ ________
P 895,000 P100,000 P 795,000

Note that the accounting equation was maintained all throughout the
transactions. This is because of the dual effect of the transaction in the
accounting elements. Recall that this Double-Entry System or Venetian Model,
requires that for every value received there is an equal value parted with.

The following table summarizes the effects of the transactions on the accounting
equation. Balances are given after each transaction.
Date ASSETS = LIABILITIES + OWNER’S EQUITY
Loans Accounts MC, MC,
March Cash Cars Equipment Furniture Payable Payable Capital Drawing
1 50,000 750,000 800,000
3 +100,000 +100,0000

Balances 150,000 750,000 100,000 800,000

7 -45,000 +45,000
Balances 105,000 750,000 45,000 100,000 800,000
15 +55,000 +55,000
Balances 105,000 750,000 55,000 45,000 100,000 55,000 800,000
18 -5,000 -5,000
Balances 100,000 750,000 55,000 45,000 100,000 55,000 800,000 -5,000
20 -55,000 -55,000
Balances 45,000 750,000 55,000 45,000 100,000 0 800,000 -5,000

895,000 = 100,000 + 795,000

23
 An interim statement of financial position can be prepared for Margaret Clair
Travel and Tours as of March 20:
Margaret Clair Travel and Tours
Statement of Financial Position
March 20, 2019

ASSETS: LIABILITIES AND OWNER’S EQUITY

Cash P 45,000 Loans Payable P 100,000
Cars 750,000 MC, Capital 795,000
Equipment 55,000
Furniture and Fixtures 45,000 _______
Total P 895,000 Total P 895,000

Note that the Owner’s Equity was presented already net of drawings (P800,000 –
P5,000)
The T- Account and the Rules of Debit and Credit

Lesson 4: T account and the Rules of Debit and Credit

Each account can be drawn to resemble the letter T called “T-account”.

The “T account” has a title, usually the name of the account; it has two sides, the left
side which is also called “Debit” and the right side which is also called
“Credit”.
ACCOUNT TITLE

LEFT SIDE RIGHT SIDE

DEBIT CREDIT

Value Value Parted

Received With

Debit side is also called the “Value Received” and Credit is also called the
“Value Parted With”

Value Received or Debit is anything that the business received.

Value Parted With or Credit is anything that the business has given to
receive something in return.

For example:
The business acquired office equipment and paid in cash.
Value Received or Debit – Office Equipment
Value Parted With or Credit – Cash

24
 Lesson 5: Normal Balance of Accounts

Normal balance of an account represents the side to which such

accounts increases.

The normal balances of each account differ according to its

classification.

The normal balance of all Assets and Expense account is on the Debit Side
ASSET ACCOUNT EXPENSE ACCOUNT
DEBIT CREDIT DEBIT CREDIT
(+) (-) (+) (-)
Increase Decrease Increase Decrease
Side Side Side Side
Normal Normal
Balance Balance

The normal balance of all Liability, Equity and Revenue/Income account is

on the Credit Side.

EQUITY ACCOUNT LIABILITIES ACCOUNT REVENUE ACCOUNT

DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
(-) (+) (-) (+) (-) (+)
Decrease Increase Decrease Increase Decrease Increase
Side Side Side Side Side Side
Normal Normal Normal
Balance Balance Balance

Factor that will Factor that will cause the

cause the “owner’s “owner’s equity” to increase
equity” to decrease are:
are:
1. Investment by owner.
1. Withdrawal 2. Revenue.
by owner.
2. Expense.

To summarize, the following rules of debit and credit should be observed:

We Debit to We Credit to:

Rule 1 Increase in Asset Decrease and Asset
Rule 2 Decrease a Liability Increase a Liability

25
 Rule 3 Decrease an Owner’s Increase an Owner’s
Equity Equity

Temporary Accounts
Rule 4 Increase in Drawing Decrease in Drawing
Rule 5 Decrease an Income Increase in Income
Rule 6 Increase and Expense Decrease an Expense

Lesson 6: ILLUSTRATION:
The following transactions are given to illustrate the application of the rules of debit
and credit through “side positioning”. This is an example of a service concern type of
organization.
Date Transaction
March 1 OLIVIA MARIE Ruiz opened a Travel and Tour service
business by investing cash of P50,000 and two cars worth
P750,000.
Analysis: Increase in assets cash P50,000 and cars
P750,000, and increase in owner’s equity, Ruiz
Capital P800,000.
Entry: Debit Cash P50,000, Debit Cars P750,000 and
Credit Ruiz,Capital P800,000

CASH
RUIZ, CAPITAL
March 1 50,000
March 1 800,000

CARS Note how the entries were

March 1 750,000 entered on the
corresponding increase or
debit/credit side of each
account.

Date Transaction
March 3 Borrowed P100,000 from China Bank for business use.
Analysis: Increase in assets cash and increase in
liabilities Loans payable P100,000
Entry: Debit Cash P100,000, Credit Loans Payable
P100,000

26
 CASH LOANS PAYABLE
March 1 50,000 March 3 100,000
3 100,000
Note that CASH
Account has now two
entries

Date Transaction
March 7 Bought tables and chairs from SL Luiz. Paid cash of
P45,000.
Analysis: Increase in assets furniture and fixture and
decrease in assets cash P45,000
Entry: Debit Furniture P45,000, Credit Cash P45,000

CASH FURNITURE & FIXTURES

March 1 50,000 March 7 45,000 March 7 45,000
3 100,000

Date Transaction
March 10 Purchase from Emcor two aircon units for P50,000, and an
electric fan for P5,000, all on account.
Analysis: Increase in assets equipment and increase in
liabilities Accounts payable P55,000
Entry: Debit Equipment P55,000, Credit Accounts Payable
P45,000

EQUIPMENT ACCOUNTS PAYABLE

March 10 55,000
March 10 55,000

Date Transaction
March 18 Ruiz made a cash withdrawal of P5,000 for personal use.
Analysis: Decrease in assets cash and cars decrease in
owner’s equity, Drawing P5,000.
Entry: Debit Ruiz, drawing P5,000, Credit Ruiz, Drawing
P5,000

27
 CASH RUIZ, DRAWING
March 1 50,000 March 7 45,000 March 18 5,000
3 100,000 18 5,000

Take note that as you go

on, data are accumulated in
their respective either on
the debit or credit side.
Date Transaction
March 20 Paid the account due to Emcor.
Analysis: Decrease in assets cash and decrease in
liabilities accounts payable P55,000
Entry: Debit Accounts Payable P55,000,and Credit Cash P55,000

CASH ACCOUNTS PAYABLE

March 1 50,000 March 7 45,000 March 20 55,000 March 10 55,000
3 100,000 18 5,000
20 55,000

Date Transaction
March 21 P15,000 was received from a tourist for a tour package for
three persons in Bagiuo.
Analysis: Increase in assets cash and increase in owner’s
equity service income by P15,000
Entry: Debit Cash P15,000,and Credit Service Income
P15,000

CASH SERVICE INCOME

March 1 50,000 March 7 45,000 March 21 15,000
3 100,000 18 5,000
21 15,000 20 55,000

Date Transaction
March 22 Paid for gas and oil P500 and repair of car P1,000.
Analysis: Decrease in assets cash P1,500 and decrease
in owner’s equity gas and oil expense P500 and
repair expense P1,000
Entry: Debit Gas and Oil Expense P500, Debit Repair
Expense P1,000 and Credit Cash P1,500

28
CASH GAS AND OIL EXPENSE
March 1 50,000 March 7 45,000 March 22 500
3 100,000 18 5,000
21 15,000 20 55,000 REPAIR EXPENSE
22 1,500
March 22 1,000

Date Transaction
March 24 Mr. San hired the services of the agency for his visitors and
promised to pay P16,000 on March 31.
Analysis: Increase in assets accounts receivable P16,000 and
Increase in owner’s equity Service Income P16,000
Entry: Debit Accounts Receivable P16,000 Credit Service
Income P16,500

ACCOUNTS RECEIVABLE SERVICE INCOME

March 24 16,000 March 21 15,000
24 16,000

Date Transaction
March 25 Paid for PLDT for telephone service P500.
Analysis: Decrease in assets cash P500 and decrease in
owner’s equity utilities expense P500.
Entry: Debit Utilities Expense P500, Credit Cash P500

CASH UTILITIES EXPENSE

March 1 50,000 March 7 45,000 March 25 500
3 100,000 18 5,000
21 15,000 20 55,000
22 1,500
25 500

Date Transaction
March 27 Billed CBMA faculty club P20,000 for a tour of Metro
Manila.
Analysis: Increase in assets Accounts Receivable and
Increase in owner’s equity Service Income

29
 P20,000.
Entry: Debit Accounts Receivable P20,00, Credit
Service Income P20,000

ACCOUNTS RECEIVABLE SERVICE INCOME

March 24 16,000 March 21 15,000
27 20,000 24 16,000
27 20,000

Date Transaction

March 30 Collected P8,000 from the customer Mr. San.

Analysis: Increase in assets Cash and decrease in assets
Accounts Receivable P8,000.
Entry: Debit Cash P8,000, Credit Accounts Receivable P8,000

CASH ACCOUNTS RECEIVABLE

March 1 50,000 March 7 45,000 March 24 16,000 March 30 8,000
3 100,000 18 5,000 27 20,000
21 15,000 20 55,000
30 8,000 22 1,500
25 500

Date Transaction
March 31 Paid for office rent P10,000 and salaries of workers
P9,000.
Analysis: Decrease in assets Cash P19,000 and
decrease in owner’s equity Rent Expense
P10,000 and Salaries Expense P9,000.
Entry: Debit Rent Expense P 10,000 and Debit
Salaries Expense P9,000, Credit Cash
P19,000

Cash Salaries Expense

March 1 50,000 March 7 45,000 March 30 9,000
3 100,000 18 5,000
21 15,000 20 55,000
30 8,000 22 1,500 Rent Expense
25 500 March 30 10,000
30 19,000

30
Chapter Exercises
Review Questions
1. What is a business transaction?
2. What is an account? An account title?
3. What is the use of an account?
4. What are the different classifications of an account? Give at least 3 examples.
5. The term debit means increase and credit means decrease? Do you agree with
this statement?

Analysis
I. Identify what type of account are the following.

Account Title Account Classification

1. Cash _________________________
2. Calumpiano, Equity _________________________
3. Salaries Expense _________________________
4. Accounts Receivable _________________________
5. Accounts Payable _________________________
6. Utilities Expense _________________________
7. Building _________________________
8. Mortgage Payable _________________________
9. Sales _________________________
10. Notes Receivable _________________________

II. Write the normal balances of the following account.

Account Title Normal Balance

1. Cash _________________________
2. Calumpiano, Equity _________________________
3. Salaries Expense _________________________
4. Accounts Receivable _________________________
5. Accounts Payable _________________________
6. Utilities Expense _________________________
7. Building _________________________
8. Mortgage Payable _________________________
9. Sales _________________________
10. Notes Receivable _________________________
11. Service Income _________________________
12. Inventory _________________________
13. Rent Expense _________________________
14. Permit and Licenses _________________________
15. Supplies _________________________

31
III. Indicate the VALUE RECEIVED or DEBIT and VALUE PARTED WITH or
CREDIT columns for the accounting values that are affected by the following
transactions: (Item No. 1 is answered for your guide).

Value Received Value Parted

Transactions
( DEBIT) with (Credit)
1. Payment of rental Rent Expense Cash
2. Initial investment by S. Ty
3. Bought a car on account
4. Rendered professional service on account.
5. Cash withdrawal by S. Ty
6. Collection from client’s account
7. Rendered professional service for cash
8. Issued a note for borrowed money.
9. Additional investment by S. Ty
10. Sold an old car for cash
11. Received a promissory note from a client
12. Payment of account to a supplier
13. Received a promissory note in exchange for
a client’s account
14. Give a promissory note in exchange for a
suppliers account.
15. The owner invested an IT computer
16. Paid the note issued to the bank
17. Investment in marketable securities
18. Payment of 2-year insurance premium

IV. Solve the following using the Basic Accounting Equation and the Expanded
Accounting Equation.

1. At the end of the year, the entity has reported total assets of P 600,000
and total liabilities of P 250,000. How much is the equity?

2. The company incurred a debt of P 500,000. At the end of the year, the
residual interest of the company totaled P 1,050,000. How much is the
total assets of the company?

3. During the year, the entity reported total liabilities of P 800,000 and equity
of P 350,000. At the end of the year, the entity earned income of P
1,200,000 and incurred expenses of P 750,000. How much is the total
asset of the company?

32
 4. Asset totaled P 2,500,000; Liabilities totaled P 225,000; Income totaled P
1,575,000; Expenses totaled P 925,000. How much is the equity?

5. Asset totaled P 1,500,000; Equity totaled P 825,000; Income totaled P

1,000,000 and Expenses totaled P 825,000. How is the total liability?

V. Analyze and determine the effect of each transaction below on Assets,

Liabilities and Owner’s Equity by using the appropriate account titles.
Transaction of January 1 is answered for your guide.

ASSETS LIABILITIES OWNER’S EQUITY

Transaction
Increase Decrease Decrease Increase Decrease Increase
Date
Debit Credit Debit Credit Debit Credit
Jan. 1
5
9
14
19
20
23
25
27
29
30
30

The selected transaction of Mr. Butch Concepcion, a practicing accountant is

narrated hereunder.

Jan 1. Mr. Concepcion made initial cash investment.

5 Rendered professional service on account
9 Collected cash from a client account.
14 Mr. Concepcion withdrew cash from his business for personal use.
19 Bought a car on account.
20 Paid rental for the month.
23 Paid salaries for the month.
25 Paid the car acquired on account.
27 Bought office cabinet on account.
29 Received a promissory note for services rendered.
30 Rendered professional service for cash.
30 Paid taxes and licenses.

VI. Angel Lacson, a business graduate student who was working as a mere
employee in a company called Think Twice Computer, decided to become

33
 an entrepreneur and put up an internet shop. The following are the
transactions for the month of March.

1 Angel started an internet shop called “Surf and Play.com” by

investing P50,000 and the proceeds from the sale of her car of
P300,000.
5 Angel hired two workers to assist her in the shop.
10 Two month’s rent deposit was paid in cash, P10,000
15 Paid P15,000 for building materials to fix the shop, P8,000 for
furniture, P45,000 for one unit of aircon and two units of electric fan.
20 Purchased supplies for cash, P15,000
25 The shop was ready for the installation of the computer units. Angel
purchased 12 units of computer hardware from Joebs PC. She paid
in cash 50% in cash P125,000 and a note for the balance payable in
24 monthly installments starting April 20.

Instuction:
Analyze the transaction, use the following account titles: cash, Supplies, Prepaid
Rent, Furniture and Fixture, Equipment, Leasehold Improvement, Notes Payable,
and Lacson, Capital.

Record the transaction using T-accounts. What is the owner’s net worth? Prepare a
statement of financial position.

34
 CHAPTER 4: THE ACCOUNTING CYCLE

INTRODUCTION:
The accounting information system describes the gathering and processing
data to produce meaningful reports which are communicated to the statement users.
Accounting cycle consists of series of steps or procedures to be performed
within one accounting period. Accountants call it a cycle since they repeat the steps
every accounting period.
This module discusses the steps of the accounting cycle.

Learning Outcomes:
After studying this module, you should be able to:
1. Identify the steps of the accounting cycle.
2. Discuss each step of the accounting cycle.

Lesson 1: Accounting Cycle

Accounting cycle is a series of chronological steps in accounting and

preparing financial reports.

 Steps or Process in Accounting Cycle

1. Identify and analyze business transaction.
In this step, you are to identify and analyze transactions whether are it is
accountable or not. Only those transactions that relates to the business
are to be recorded and analyzed.

2. Journalizing
This is simply recording all identified transaction in a journal.

3. Posting to the ledger

This step is to classify each account into their respective ledgers.

4. Prepare trial balance

This is to summarize all accounts posted in the ledger.

35
 5. Record adjustments to the ledger
This is to record transactions that were not recorded during the
accounting period, correction of errors and recording of accruals and
deferrals.

6. Prepare worksheet
This step is optional. In this step, you prepare a 10-column or 12-column
worksheet to present the summary of all accounts and its adjustments.

7. Prepare financial statements

After it has been summarized in the worksheet, you prepare financial
statements in good form. 8. Prepare closing entries In this step, you
eliminate or close all the temporary or nominal accounts. Temporary or
nominal accounts are revenue/income and expense account. This are
called temporary or nominal account because it is only incurred for the
current period and cannot be carried-forward to the next accounting
period.

8. Prepare post-closing trial balance

This step is similar to a trial balance but only the permanent or real
accounts are being recorded. Permanent or real accounts are assets,
liabilities and equity accounts. They are termed as permanent or real
accounts because it is to be carried-forward to the next accounting period.

9. Record reversing entries

In this step, you prepare entries to reverse the adjusting entries made to
all accruals and deferrals.

Chapter Exercise
1. What is accounting cycle?
2. Discuss the steps of the accounting cycle.

36
 CHAPTER 5: JOURNALIZING TRANSACTIONS, POSTING TO THE
LEDGER and TRIAL BALANCE

INTRODUCTION:
Accounting is a tool used in recording transactions up until the
preparation of financial reports.
Journalizing is the process of recording transactions in one of book of
accounts called Journal. Posting on the other hand is the process of
transferring and classifying the accounts to its respective ledger account
Imagine a business without record keeping activity; it would be very
difficult to trace activities that occur considering the volume of transactions
that occur each day. With the use of journals and ledgers, business owners
and managers can easily look back to any transactions at a glance, if proper
journal and posting procedures are prepared.
In this module, you will learn the usefulness and purpose of using the
book of accounts: the Journals and Ledgers.

Learning Outcomes:

After studying this chapter, you should be able to:

1. Journalize transactions using the general journal.
2. Post the journal entries to the general ledger and the subsidiary ledgers.
3. Prepare the Trial Balance

Lesson 1: Books of Accounts

1. Journal – it is also called as “Book of Original Entry”. It is where

transactions are recorded for the first time.

a. General Journal –used to record all kinds of accountable events

b. Special Journal – used to record only for a particular transaction
i. Sales journal – used to record for sales on account or credit
ii. Purchase journal – used to record for purchases on account or
credit
iii. Cash receipts journal – used to record all cash received
iv. Cash disbursement journal – used to record all cash payments

37
 2. Ledger – it is also called as “Book of Final Entry”. It is where all accounts are
classified and grouped according to its nature, kind or class.
a. General Ledger – used to post all accounts
b. Subsidiary Ledger – ledger of a particular account; used as a
supporting book for a general ledger

Lesson 2: Journalizing

After the transactions have been analyzed as accountable events, it is

then recorded in the books, called journal, of the entity in a chronological
manner.

The process of recording accountable events in the books is called

Journalizing. It is simply jotting down what the business received and what
has parted with to receive something.

The double entry system is used in journalizing accountable events.

It is based on the concept that each party in a business transaction will
receive something and give something in return.

In accounting, what is received is a Debit and what is given is a Credit.

Each journal entry contains the following items:

1. Date
2. The account title and the amount to be debited
3. The account title and the amount to be credited
4. Explanation.

Recall our transactions on OLIVIA MARIE TRAVEL and TOUR (module 3), an
illustration on how to record transactions using the general journal entry follows:

38
 GENERAL JOURNAL

Date Accounts and Debit Credit

2019 Explanation F
00
1 March 1 Cash 5 0 0 0 0
2 00
Cars 7 5 0 0 0 0
3 00
Ruiz, Capital 8 0 0 0 0 0
Investments of Ruiz to open
4
the business.
5
6 00
3 Cash 1 0 0 0 0 0
7 00
Loans Payable 1 0 0 0 0 0
8 Cash loan from Chinabank.
9
10 00
7 Furniture and Fixtures 4 5 0 0 0
11 00
Cash 4 5 0 0 0
Bought furniture and fixture
12
from SL Luiz.
13
14 00
10 Equipment 5 5 0 0 0
15 00
Accounts Payable 5 5 0 0 0
Bought equipment from Emcor
16
on account.
17
18 00
18 Ruiz, Drawings 5 0 0 0
19 00
Cash 5 0 0 0
20 Cash withdrawal by Ruiz
21
22 00
20 Accounts Payable 5 5 0 0 0
23 00
Cash 5 5 0 0 0
24 Paid account due to Emcor.
25
26 00
21 Cash 1 5 0 0 0
27 00
Service Income 1 5 0 0 0
Cash receive from Baguio
28
tour

29 00
22 Gas and oil Expense 5 0 0
30 00
Repair Expense 1 0 0 0
31 00
Cash 1 5 0 0
32 Payment for expenses.
33
34 00
24 Accounts Receivable 1 6 0 0 0
35 00
Service Income 1 6 0 0 0
36 Billed Mr. San for tour.
37
38 00
25 Utilities Expense 5 0 0
39 00
Cash 5 0 0
40 Paid PLDT Bill

39
 Date

2019 Accounts and Explanation F Debit Credit

1 00
March 27 Accounts Receivable 2 0 0 0 0
2 00
Service Income 2 0 0 0 0
Billed CBMA faculty club for
3
Manila tour.
4
5 00
30 Cash 8 0 0 0
6 00
Accounts Receivable 8 0 0 0
7 Collected from Mr. San
8
9 00
31 Rent Expense 1 0 0 0 0
10 00
Salaries Expense 9 0 0 0
11 00
Cash 1 9 0 0 0
12 Payment for expense

The following rules should be observed per page:

1. Enter the column headings: date, accounts and explanation, F, debit and
credit.
2. Enter on the date column, the year and the amount. The month is only written
only once until you move to the next month. Enter the date on the smaller
column beside the month.
3. Enter the debit account on the accounts and explanation column and the
amount on the debit column.
4. Enter the credit account on the accounts and explanation but indent it so it
will not fall on the debit account margin. Enter the amount on the credit
money column.
5. Enter a brief explanation on the accounts and explanations column. Indent it
further so it will not fall on debit or credit column. This is made for easy
reading.
6. The money column consist of eight spaces where, starting from the right, the
centavos, tens, hundreds, thousands, and ten thousands are placed. There is
no need to place a comma separating the hundreds from the thousands or a
decimal point separating the tens from the centavos.
7. If a complete journal entry cannot be accommodated at the bottom of the
page, then transfer all data to the next page. A journal entry must be
completely recorded in one place for easy reading and analysis.
8. A line or space is provided in between the entries to clearly separate one from
the other.

40
 9. If an error is committed either in figure or word, cross out the error with one
horizontal line and write the correct figure or word above it.

1000 car
For example:
100 or cash

A journal entry with one debit and one credit is called simple
journal entry.

An entry with more than one debit or more than one credit is called
a compound journal entry.

Lesson 3: Posting to the ledger

From the entries on the journal entry described previously, can you determine
immediately the balances of cash or service income? To make this possible, the
debits and credit of a particular account, such as cash, should be summarized on
one place, the cash ledger, and these ledgers are filed in a book called general
ledger which is also called the book of final entry.
One ledger is to one account. For example, if there are 20 accounts, then you
will need to 20 ledgers to be compiled in the general ledger.
The process of transferring the debits and credits from the journal to the
ledger is called posting.
Example: The posting procedure for Olivia Marie Travel and Tours.

GENERAL JOURNAL Page 1

Date
Description Debit Credit
2019
F
Cash 101 00
1 March 1 5 0 0 0 0
2 00
Cars 7 5 0 0 0 0
3 00
Ruiz, Capital 8 0 0 0 0 0
Investments of Ruiz to open
4
the business.

GENERAL LEDGER
CASH No. 101
Date Explanation F Debit Date Explanation F Credit
2019
March 1 J1 50 000 00

41
 The following rules should be observed:
A. Based on the first debit entry in the journal, look for the account in the
general ledger.
B. On the debit side date column, copy the date.
C. Copy the amount in the debit column.
D. Insert the journal page number in the folio column or posting reference
column of the ledger.
E. Insert the ledger account number in the folio column or posting reference to
the journal.
F. The next account to be posted is the Cars account. Repeat steps A to E. the
third account to be posted is the capital account and so on until all accounts
have been posted or transferred from the journal to the ledger.
The Cash ledger of Olivia Marie Travel and Tours appear below
CASH
Date Date
2019 Explanation F Debit 2019 Explanation F Credit
00
March 1 J1 50 000 March 7 J1 45 000 00
3 J1 100 000 00 18 J1 5 000 00
21 J1 15 000 00 20 J1 55 000 00
30 47 000 00 J2 8 000 00 22 J1 1 500 00
00
173 000 25 J1 500 00
31 J2 19 000 00
00
126 000

Debit Balance Footings

Lesson 4: Ledger Balances:

Balances of each account in the general ledger should be determined at least
at the end of each month. Observe the following rules:
1. Total the debit column and record it in small figures in pencil directly underneath
the last debit amount. This is called pencil footing. It is done in pencil and in
small figure only to distinguish it from the regular entry and to permit erasures if
the figure is not correct. Do the same for the credit column.
2. Extract the balance: if a debit balance, place it in the explanation column debit
side in line with the last debit posting; and if a credit balance, place it in in the
explanation column credit side in line with the last credit posting.

42
3. You need not to pencil foot if there is a single debit or credit amount only. You
need not extract the balance nor place it in the explanation column if the postings
are one side only.

Lesson 5: SUBSIDIARY LEDGERS:

If a business has a number of customers and creditors, the use of subsidiary
ledgers will help to track down the amount owed by each customer (receivable
account) and the amount owed by the business to its creditors (payable account).
The use of subsidiary ledger does not eliminate the ledger account of
Accounts Receivable and Accounts Payable but instead this account becomes the
control account.
A schedule of Accounts Receivable or Accounts Payable is prepared and the
total of which is compared with the balance of the control account in the general
ledger to see if the balances reconcile.

SUBSIDIARY LEDGER
JOURNAL
Accounts and NAME: Mr. San
Date Explanation F Debit Credit
ADDRESS: 123 Real St. Songco, Borongan
March Date Terms F Debit Credit Balance
Accounts Receivable 16 000 March
24 102
24 SA No. 1 J1 16 000 16 000
Service Income 16 000
102 20 000 30 OR No. 81 J2 8 000 8 000
27 Accounts Receivable
Service Income 20 000
30 Cash 8 000 NAME: CBMA faculty club
ADDRESS: CBMA Essu Borongan
Accounts Receivable 102 8 000
Date Terms F Debit Credit Balance
March
27 SA No. 2 J2 20 000 20 000

GENERAL LEDGER
ACCOUNTS RECEIVABLE
Date Particulars F Debit Date Particulars F Credit Postings from the
March March Journal to the Ledger
24 J1 16 000 30 J2 8 000
27 J2 20 000

OLIVIA MARIE TRAVEL AND TOUR

SCHEDULE OF ACCOUNTS RECEIVABLE The control account
March 31, 2019 of Accounts
Mr. San P 8,000 receivable should
reconcile with the
CBMA Faculty Club 20,000
total in the
Total 28,000 schedule.

43
Lesson 6: TRIAL BALANCE:
The purpose of a trial balance is to prove the equality of the debit and credit
of all accounts in the General Ledger.
The trial balance does not assure the correctness and accurateness of the
balances of accounts in the General Ledger. It only shows the debits and credits of
the accounts are balanced. Meaning, the debit and credit are equal.

The trial balance is said to be “in balance” if the debit and credit are equal.
However, it is said as “out of balance” if it is not equal. If the trial balance is “out of
balance”, it could mean that there are some errors or omission occurred in the
previous steps.
Some of the errors or omission might result but not limited to the following:
1. Failure to record transaction or to post a transaction.
2. Recording the same erroneous amount for both the debit and the credit parts
of a transaction.
3. Recording the same transaction more than once.
4. Posting a part of a transaction correctly as a debit or credit but to the wrong
account.

Procedure in Preparing the Trial Balance

1. A trial balance has the following headings:
a. Name of the business
b. Title of report (Trial Balance)
b. Period covered by the report
2. Account Titles are arranged in the order as: Assets, Liabilities, Capital,
Revenue and Expenses.
3. Only accounts with balances appear in the trial balance.
4. The peso sign is placed only in the first debit amount, first credit amount and
on the totals.
5. The totals are ruled (one horizontal line drawn under the last amount of debit
and credit columns) and double ruled (two horizontal lines are drawn under
the total figures).
6. If the total debits do not equal total credits, then error(s) must have been
committed which should be located before ruling and double ruling the totals.
It is advisable that the totals should be in pencil figures first and if found
correct then write in ink.

44
 Using the ledger balances of Olivia Marie Travel and Tours, the Trial balance
will appear as follows: (Note: ledger balances of the account of Cars up to Utilities
Expense were not illustrated, the instructor left this for you to work with and verify the
balances).

OLIVIA MARIE TRAVEL AND TOUR

TRIAL BALANCE
MARCH 31, 2019
Acct.
No. Account Titles Debit Credit
101 Cash P 47 000
102 Accounts Receivable 28 000
201 Cars 750 000
202 Equipment 55 000
203 Furniture and Fixtures 45 000
302 Loans Payable P 100 000
501 Ruiz, Capital 800 000
502 Ruiz, Drawing 5 000
601 Service Income 51 000
701 Gas and Oil Expense 500
702 Rent Expense 10 000
703 Repair Expense 1 000
704 Salaries Expense 9 000
705 Utilities Expense 500
TOTALS P 951 000 P 951 000

Chapter Exercise:
The following are the transactions of Carla Agravan Consultancy Office for January
for its first month of operation:
1 Carla invested P100,000 cash and P75,000 office equipment.
2 Signed a contract of lease for a monthly rental of P15,000
2 Bought furniture and fixtures for P10,000 and paid in cash.
3 Bought office supplies from Rex Bookstore for cash, P5,000.
7 Received P50,000 cash for the cost system installed for a manufacturing
company.
14 Paid salary of secretary and two clerks for the first half of January, P12,500.
16 Billed a client, Megaball for audit work rendered P40,000.
17 Jercil’s Modeling School was billed P15,000 for accounting services
rendered.
18 Megaball paid one half of its account.
20 Bought a second hand car for business use,P230,000. Give a down payment

45
 of P75,000 and issued a note for the balance.
24 Jercil’s Modeling School paid P5,000.
24 Carla took P6,000 cash for personal use.
25 Paid rent and salary.
30 Received utility bills for P3,750.
31 P4,500 supplies were used up.

Required:
a. Identify the business papers supporting each transaction.
b. Open a Chart of Accounts. Use account nos. 1 to 10 for current assets, 11 to
20 for non-current assets, 21 to 30 for current liabilities, 31 to 40 for non-
current liabilities, 41 and 42 for capital and drawing accounts, 43 for the
revenue account, 44 to 50 for the expense account.
c. Analyze the above transactions and record it in a two-column general journal.
Use the following accounts: Cash, Accounts Receivable, Office Supplies,
Furniture and Fixtures, Office Equipment, Automobile, Notes Payable, Utilities
Payable, C.A, Capital, CA, Drawing, Professional Fees, Rent Expense,
Salaries Expense, Supplies Expense, Utilities Expense.
d. Open the general ledger using the chart of accounts. Post the journal entries
and extract the balances.
e. Make simultaneous postings to the accounts receivable subsidiary ledgers.
f. Prepare the Trial Balance.
g. Reconcile the balances in the subsidiary ledgers to the balance of the control
account in the Trial Balance.

46
 CHAPTER 6: COMPLETING THE ACCOUNTING CYCLE
(SERVICE CONCERN)

INTRODUCTION:
The accounting cycle is a series of steps used to process and collect and
process financial information before financial statements can be prepared.
Users of the financial statement: external or internal, need accurate
information to assess the financial performance and condition of the business. It is
therefore important that the financial statement be accurately prepared. Ledger
balances should show accurately the revenues earned, expenses incurred, assets
owned and liabilities owed by the entity, hence the need for any adjustments.
This chapter explains the next three steps after the trial balance preparation:
gathering the adjusting entries, preparing the worksheet, recording adjustments and
preparing the trial balance.

Learning Outcomes:
After studying this chapter, you should be able to:
1. Prepare adjusting entries
2. Prepare working prepare to catch all adjusting entries.
5. Prepare an adjusted Trial Balance

Lesson 1: Adjustments

Adjustment or adjusting entries are journal entries which are to be recorded in

the General Journal but are prepared at the end of the accounting period.
Transactions to be recorded as adjustments are transactions that will occur
mostly at the end of the period that if without adjusting the book of accounts these
entries could not be recorded and will result to misleading financial statements.
Adjustments are prepared to be bring the records or balances of the accounts
updated and to properly match revenue against expenses during the period.

Types of Adjusting entries

1. Accrual – it follows the concept of Accrual Basis of accounting. Accrual
basis of accounting means that revenues are reported when earned
regardless of when collected and expenses are reported when incurred
regardless of when paid.

47
a. Accrued Income – these are income that is already earned but not yet
collected.
To illustrate:
The business received a P100,000 6%, 60 day note from a
customer dated December 2, 2019

Upon receipt of the note on December 2, 2019, the journal entry made
was:
Notes Receivable P100 000
Cash P100 000
Received a P100,000 6%, 60 day note.

Since the note is interest bearing, interest is computed by using the

simple interest formula as follows:

Interest = Principal x Rate of Interest x Time

= P100,000 x 6%/year x 60
360
= P1,000

Analysis: Counting from December 2, 2019 to complete 60 days, the

maturity value of the note will be P101,000 ( Principal – P100,000 +
P1,000 Interest) which will be due for collection on January 30, 2020.
Since the accounting period end December 31, 2019, a portion of the
Interest income representing December 2 to December 31, 2019 of P500
should be recognized in 2019 and the other portion of P500 will be
recognized in 2020.
ADJUSTING ENTRY:
2019
Dec. 31 Accrued Interest Income P 500
Interest Income P500
To record interest earned from the
period Dec. 2 to 31, 2019.

b. Accrued Expenses – these are expenses that are already incurred but not
yet paid.

48
 To illustrate:

The business is renting a space of the building for P15,000 per month,
payable every first day of the following month. The rental for the month of
December was not paid when the accounting period ended on December
31, 2019. The business intends to pay the rental on January 1, 2020.

Analysis: The rent expense should be recorded and reported in 2019, the
period where the rent expense was incurred and not in 2020, the
period where the rent expense will be paid.
The adjusting entry that should be prepared On December 31, 2019
records the Rent Expense incurred and recognizes the corresponding
liability account.

ADJUSTING ENTRY:
2019
Dec. 31 Rent Expense P 15 000
Accrued Rent Expense P15 000
To set-up unpaid rental for
the month of December 2019.

Take note of the following pro-forma adjusting entry for accruals: (just fill-in the
blanks of what account that have been accrued) The term “Accrued”
when associated with
an income account
connotes “receivable”
1. Accrued Income which means an
Accrued _________ Income xx asset.
_________ Income xx

The term “Accrued” when

2. Accrued Expense associated with an
__________ Expense xx expense account
connotes “payable” which
Accrued _______ Expense xx
means an liability.

2. Deferrals – these are income or expenses already received or paid in

advance but not yet rendered or used.
a. Pre-collection of Income – these represents advance collection of from
clients or customers but services have not yet been rendered. There are
two methods in recording pre-collection these are: Liability and Income
Method.

49
 When the advance collection was credited to an income account, the method
used is Income Method and if the advance collection was credited to a liability
account, the method used is the Liability method.

To illustrate:
On October 1, 2019, the business collected P120,000 from a tenant
representing an advance collection from building rental for one year. The
accounting period ends December 31, 2019.

A comparative journal entry showing both Income and Liability Method for
recording the advance collection is presented below:
COMPARATIVE JOURNAL ENTRIES
Income Method Liability Method
Upon
Cash P120,000 Cash P120,000
receipt
of cash Rent Income P120,000 Unearned Rent Income P120,000
on Oct. To record collection of To record collection of
1, 2019 advance rental for the period advance rental for the period
from Oct. 1, 2019 to Oct 1, from Oct. 1, 2019 to Oct 1,
2020 2020

Under the Income Method, Rent Income account has been credited upon
receipt of collection on Oct. 1, 2019, which means charging to income the
whole amount of P120,000.

Under the Liability Method, the advance collection was credited to

Unearned Rent Income account which means charging to liability the
whole amount of P120,000.

The adjusting entries as at December 31 should be:

Income Method
ADJUSTING ENTRY:
2019
Dec. 31 Rent Income P 90 000
Unearned Rent Income P90 000
To record the unearned (liability)
portion rental collected in advance

Liability Method
ADJUSTING ENTRY:
2019
Dec. 31 Unearned Rent Income P 30 000
Rent Income P30 000

50
 To record the earned(income) portion
rental collected in advance

Supporting computations follow:

Income or Earned Portion
computed as follows:

P120,000 = P10,000 x 3months = P30,000

12 months (Oct 1 to Dec. 31, 2019)

Liability or Unearned Portion

computed as follows:

P120,000 = P10,000 x 9months = P90,000

12 months (Jan. 1 to Oct. 1, 2020)

If adjustments have not been made on December 31, 2019, using the
Income Method, the Income and equity accounts will be overstated and
liability understated.

If adjustments have not been made on December 31, 2019, using the
Liability Method, the liability will be overstated, and income and owners
equity accounts will be understated.

The respective general account before and after adjustments are presented
below:

b. P Under Income Method Under Liability Method

r
Before Adjustment Before Adjustment
e
Rent Income Unearned Rent Income
p Oct. 1 120,000 Oct. 1 120,000
a Original Entry) (Original Entry)

y
c.After Adjustment After Adjustment

d.Rent Income Unearned Rent Income

e.Dec. 31 90 000 Oct. 1 120,000 Dec. 31 30,000 Oct. 1 120,000
AJE (Original Entry) AJE (Original Entry)
f. Balance P90,000
Balance P30,000
g.
h.Unearned Rent Income Rent Income
Dec. 31 90 000 Dec 31 30 000
i. AJE AJE
j.

51
 Take note that after the adjustments have been made, both the Income and
Liability Methods showed the same results:
Rent Income P 30,000
Unearned Rent Income 90,000
Total P 120,000

c. Prepayment of Expenses
This represents advance payment for service to be received (expenses to
be incurred in the future). There are two methods in recording prepayments,
these are Asset Method and Expense Method.

When the advance payment is debited to a prepaid expense account,

the method used is Asset Method, and if the advance payment is debited to
an expense account, the method used is the Expense Method.

To illustrate:

Assume that Mercury Drugstore issued a check on November 1 for

P90,000 as payment for six month’s store rental.

Using the Asset Method, the journal entry on November 1 would be:
JOURNAL ENTRY:
2019
Nov. 1 Prepaid Rent Expense P 90 000
Cash P90 000
To record payment of rent in advance
for 6 months.

On December 31, 2019, the Asset – Prepaid rent account will show a
balance of P90,000 and will cause overstatement of the account,
understatement of rent expense account, overstatement of net income and
owner’s equity, that is if no adjustment is made. Since the store space have
already been used for two months (November and December), the prepaid
account should be decreased by P30,000 that is equal to 2 months of rent
already expired (P90,000÷6 months = P15,000 rent per month x 2 months =
P30,000).
So the journal entry as at December 31 to adjust the prepaid rent account
would be:

52
 ADJUSTING ENTRY:
2019
Dec. 31 Rent Expense P 30 000
Prepaid Rent Expense P30 000
To record the expired portion of the
rent paid in advance

Using the Expense Method, the journal entry on November 1 would be

JOURNAL ENTRY:
2019
Nov. 1 Rent Expense P 90 000
Cash P90 000
To record the unexpired portion of the
rent paid in advance

On December 31, 2019, the account Rent Expense will show a balance of
P90,000 which if not adjusted will cause overstatement of the account,
understating net income and owner’s equity. Since only two month have
expired, the rent expense account should only have a balance of P30,000.

So the journal entry as at December 31 to adjust the rent expense

account would be:
ADJUSTING ENTRY:
2019
Dec. 31 Prepaid Rent Expense P 60 000
Rent Expense P60 000
To adjust for four months unexpired rent.

The respective general account before and after adjustments are presented below:
Under Expense Method Under Asset Method
Before Adjustment Before Adjustment

Rent Expense Prepaid Rent Expense

Nov. 1 90 000 Nov. 1 90 000
(Original Entry) (Original Entry)

After Adjustment After Adjustment

Rent Expense Prepaid Rent Expense

Nov. 1 90 000 Dec. 31 60,000 Nov. 1 90 000 Dec. 31. 30 000
(Original Entry) AJE (Original Entry) AJE
Balance 30 000 Balance 60,000

Prepaid Rent Expense Rent Expense

Dec. 31 60 000 Dec 31 30 000
AJE AJE

53
 Take note that after the adjustments have been made, both the Asset and
Expense Methods showed the same results:
Rent Expense P 30,000
Prepaid Rent Expense 60,000
Total P 90,000

3. Provision for Estimated Uncollectible Accounts (Bad Debts) – this is to record

any receivable that is yet or doubtful to be collected.
Accounts Receivable (AR) should be values at estimated realizable
value which is derived by deducting the Allowance for Uncollectible Accounts
from the AR and this usually occurs in trade receivables.
Because of uncertainty of collection, some of the customers’ accounts
are considered doubtful and hopeless of collection. The estimated loss that
the company may incur arising from these doubtful and hopeless accounts is
known as bad debts expense, doubtful accounts expense or uncollectible
accounts expense.
There are two methods in recognizing bad debts:
1. Allowance method (for general purpose reporting)
Bad debts expense is being recognized in anticipation that “what if
not the whole amount of receivable can be collected?” Because of
this, the company estimates a certain percent of the AR as
estimated uncollectible account.

To illustrate:
The business has an outstanding accounts receivable from various customers
in the amount of P200,000. At the end of its accounting period, it is estimated
that 5% of this is doubtful of collection.
ADJUSTING ENTRY:
2019
Dec. 31 Bad debts P 10 000
Allowance for doubtful accounts P10 000
To set up provision for doubtful
accounts, 5% of outstanding accounts
recievable.

If bad debts expense is not recorded:

Income Statement : Expense is understated and profit will be overstated.
Balance Sheet: the valuation account (allowance for doubtful account) is
understated, so Accounts Receivable is overstated.

54
 Financial Statement presentation:
Accounts Receivable P 200,000
Less: Allowance for Doubtful 10,000
Account
Estimated Realizable Value P 190,000

2. Direct Write-off method (for income tax purposes)

Under this method, the business adopts a policy of directly charging to
bad debts expense the account of a customer whom it believed could
not pay its balance anymore without providing for “Allowance for bad
Debts”.

To Illustrate: (continuing the example from the allowance method).

Mr. Carlo Katig, one of your customer, has left abroad leaving an
unpaid balance of P8,000.
ADJUSTING ENTRY:
2019
Dec. 31 Bad debts P 8 000
Accounts Receivable P8 000
To write-off the account of Mr. Katig.

With the direct write-off, the balance of the Accounts Receivable

account will automatically be reduced to P192,000 (P200,000 –
8,000).
Below are comparative entries showing Allowance and the Direct-
Write-off Method.
COMPARATIVE ENTRIES:
Transaction Data Allowance Method Direct Write-off Method
1. Total sales on account is Accounts Receivable P200,000
P200,000 Sales P200,000 Same entry
(Original Entry) To record sales on account
2. Estimated to be doubtful Bad Debts P10,000
of collection is 5% Allowance for bad Debts P10,000
No entry
To set up provision for doubtful
accounts.
3. Amount ascertained to be Allowance for bad Debts P8,000 Bad Debts P8,000
worthless is P8,000. Accounts Receivable P8,000 Accounts Receivable P8,000
To record bad debts written off. To record bad debts written off.

55
5. Provision for Depreciation of Fixed Asset – all fixed asset are subject to
depreciation except for land. The need to depreciate is to record the decrease of
value of the fixed asset due to obsolescence, wear and tear, etc.

The simplest and frequently used method of depreciation is called the straight line
method. The formula is:
Cost - Salvage Value, if any = Depreciation
Useful life in no. of year

To Illustrate:
On July 1, 2019, the business acquired an Office Equipment costing P75,000 with
an estimated life of 5 years and a salvage of P5,000 after its useful life.

Cost - Salvage Value, if any = Depreciation

Useful life in no. of year

75,000 – 5,000 = 14,000

5 years

Since the office is acquired on July 1, 2019 and the accounting period ends
December 31, 2019, the depreciation to be recorded shall be equal to six months
only (July – December), So from the P14,000 depreciation, we will only get a
fraction which is 6/12months or P7,000.
ADJUSTING ENTRY:
2019
Dec. 31 Depreciation Expense P 7 000
Accumulated Depreciation P7 000
To record depreciation expense from
July 1 to December 31, 2019.

Lesson 2: Worksheet
It connects the trial balance and financial statement. It is usually
prepared at the end of the accounting period. The preparation of a worksheet
is optional. It is used as a primary step in preparing for the financial
statements.
The use of a worksheet is mostly a working paper used by the
preparers for internal purposes only and to reduce the risk of errors when
producing financial statements. It uses all of the accounts contained in the
company’s accounting records, records adjusting entries and calculates the
final numbers to enter on the financial statements.

56
 It is divided into section: Unadjusted Trial Balance, Adjustments,
Adjusted Trial Balance, Statement of Comprehensive Income and Statement
of Financial Position.

Each section is subdivided into debit and credit columns. The totals of
the debit and credit column of each section must be equal to determine the
accuracy and corrections of the record-keeping process.

 Procedures in Preparing the Worksheet

1. In a columnar paper, either a 10-column or 12-column, copy as is the content of
the trial balance in the 1st Column of the worksheet.
2. 2nd Column of the worksheet is for the Adjustment. Write the adjusting entry
transaction amounts under the columns. If the transaction amount was a
debit, then write the amount in the debit column. If the transaction amount
was a credit, then write the amount in the credit column. Add the total debit
and credit. Amounts should be balanced or equal.
3. 3rd Column of the worksheet is for the Adjusted Trial Balance. The adjusted
balance is calculated by taking the amount from the Trial balance column by
adding or deducting the adjustments from the Adjustments column. A debit
balance is increased by a debit adjustment. A debit balance is decreased by a
credit adjustment. If a debit balance is decreased to less than zero, it
becomes a credit. The same philosophy applies to credit balances. If the
adjusted balance is a debit balance, write the balance in the left column. If the
adjusted balance is a credit balance, write the balance in the right column.
Add the total of debits and credits at the bottom. The totals should be equal.
4. 4th Column of the worksheet is for the Statement of Comprehensive Income or
Income Statement. Revenue and expense accounts are the written in this
column. The balances from these accounts should be carried over from the
Adjusted Trial Balance columns. If it was a debit balance, it should remain a
debit balance. Add the total of debits and
credits at the bottom. The column will not be equal. This difference is the net
income, and it should be added to the column at the bottom to make the two
columns equal. If credit column is greater than the debit column, the
difference is net income. However, if the debit column is greater than the
credit column, the difference is a net loss.

57
5.5th Column of the worksheet is the Statement of Financial Position or Balance
Sheet. Asset, Liabilities and Equity accounts are written in this column. The
balances from these accounts should be carried over from the Adjusted Trial
Balance columns. If it was a debit balance, it will remain a debit balance. Add the
total debit and credit at the bottom. The columns will not be equal. This difference
matches the difference from the Statement of Comprehensive Income Columns
and is the net income or net loss. It should be added to the column at the bottom
to make the two columns equal.

To illustrate the preparation of Worksheet:

A trial balance and additional information for adjustments appear below for
Emloys Auto Repair Shop after one year of operation:
EMLOYS AUTO REPAIR SHOP
TRIAL BALANCE
December 31, 2019
Debit Credit
Cash on Hand P 25,000
Cash in Bank 45,000
Accounts Receivable 49,000
Notes Receivable 30,000
Prepaid Insurance 15,000
Machinery and Equipment 150,000
Furniture and Fixtures 25,000
Accounts Payable P 26,000
Notes Payable 50,000
Cabrera, Capital 132,850
Cabrera, Drawings 5,000
Repair Income 275,000
Referral Income 15,000
Salaries Expense 45,000
Supplies Expense 600
Rent Expense 55,000
Taxes and License Expense 7,250
Utilities Expense 46,750
Interest Expense 250
Totals P 498,850 P 498,850

Other Information follows:

1. 10% of the accounts receivable should be recognized as doubtful of
collection.
2. Insurance premium recorded as Prepaid Insurance was for six months
starting Sept. 1, 2019.
3. Supplies still on hand, P200.
4. The note receivable represents a 60-day 12% note received from the
customer on Nov. 16, 2019.

58
 5. Machinery and equipment were acquired April 1, 2019 with an estimated
useful life of 10 years and scrap value of P2,500.
6. The furniture and fixtures were acquired January 1, 2019 with an
estimated life of 10 years and a scrap value of P2,500.
7. The notes payable is for 60 days at 18% due JGC Financing dated
December 1, 2019.
8. December gross receipts is one third of gross revenue of P13,000
subject to 3% percentage tax.

Adjusting Entries recorded in the GENERAL JOURNAL.

Date Particulars F Debit Credit

2019 Adjusting Entries:
Dec. 31 1) Bad Debts 607 4 900
Allowance for Doubtful Accounts 103 4 900
To record for the doubtful accounts.

2) Insurance Expense 608 10 000

Prepaid Insurance 107 10 000
To adjust for the expired insurance

3) Prepaid Supplies 108 200

Supplies Expense 602 200
To adjust for supplies still on hand.

4) Interest Receivable (Accrued Interest Income) 106 450

Interest Income 503 450
To accrue interest on notes.

5) Depreciation Expense - Machinery and Equipment 609 7 500

Accumulated Depreciation - Machinery and 202 7 500
Equipment
To take up depreciation for machinery and
Equipment

6) Depreciation Expense - Furniture and Fixture 610 2 250

Accumulated Depreciation - Furniture and Fixture 204 2 250
To take up depreciation for furniture and fixture

7) Interest Expense 606 750

Interest Payable 303 750
To accrue interest on notes due to JGC.

8) Taxes and Licenses 603 130

Taxes Payable ( Accrued Taxes Payable) 304 130
To record accrued taxes.
Explanation continues after the worksheet on the next page.

59
 EMLOY AUTO REPAIR SHOP
WORKSHEET
For the year ended December 31, 2019
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash on Hand 25 000 25 000 25 000
Cash in Bank 45 000 45 000 45 000
Accounts Receivable 49 000 49 000 49 000
Notes Receivable 30 000 30 000 30 000
Prepaid Insurance 15 000 2) 10 000 5 000 5 000
Machinery and Equipment 150 000 150 000 150 000
Furniture and Fixtures 25 000 25 000 25 000
Accounts Payable 26 000 26 000 26 000
Notes Payable 50 000 50 000 50 000
Cabrera, Capital 132 850 132 850 132 850
Cabrera, Drawings 5 000 5 000 5 000
Repair Income 275 000 275 000 275 000
Referral Income 15 000 15 000 15 000
Salaries Expense 45 000 45 000 45 000
Supplies Expense 600 3) 200 400 400
Taxes and Licenses 7 250 8) 130 7 380 7 380
Rent Expense 55 000 55 000 55 000
Utilities Expense 46 750 46 750 46 750
Interest Expense 250 7) 750 1 000 1 000
498 850 498 850
ADJUSTMENTS:
Bad Debts 1) 4 900 4 900 4 900
Allowance for Doubtful Accounts 1) 4 900 4 900 4 900
Insurance Expense 2) 10 000 10 000 10 000
Prepaid Supplies 3) 200 200 200
Interest Receivable 4) 450 450 450
Interest Income 4) 450 450 450
Depr'n - Mach and Equip. 5) 7 500 7 500 7 500
Accum. Depr'n - Mach and Equip 5) 7 500 7 500 7 500
Depr'n - Furniture and Fixtures 6) 2 250 2 250 2 250
Accum. Depr'n - Furnitires and Fix. 6) 2 250 2 250 2 250
Interest Payable 7) 750 750 750
Taxes Payable 8) 130 130 130
Total 26 180 26 180 514 830 514 830 180 180 290 450 334 650 224 380
Net Income 110 270 110 270
Totals: 290 450 290 450 334 650 334 650

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…continuation: Adjusting Entries recorded in the GENERAL JOURNAL.
a. The date on the adjusting entries is the end of the accounting period, December 31. After the adjustments are recorded in the
general journal, the next step is to post it to the general ledger to arrive at the adjusted balances of the accounts.
b. To illustrate the posting of the first two adjusting entries will appear as:
No.
BAD DEBTS 607 ALLOWANCE FOR DOUTFUL ACCOUNTS No. 104

Date Particulars F Debit Date Particulars F Credit Date Particulars F Debit Date Particulars F Credit
2019 2019
Dec. 31 AJE 1 4 900 Dec. 31 AJE 1 4 900

PREPAID INSURANCE No. 106

INSURANCE EXPENSE No. 608
Date Particulars F Debit Date Particulars F Credit
2019 2019 Date Particulars F Debit Date Particulars F Credit
Sept. 1 5 000 GJ9 15 000 Dec. 31 AJE 2 10 000 2019
Dec.
31 AJE 1 10 000

Note that the folio (F) column identifies the adjusting journal entries (AJE) with reference numbers copied from the
worksheet. After posting all entries, adjusted balances are taken and placed in the Particulars column. Ledger balances
will reflect same balances ash shown in the Adjusted Trial Balance of the Worksheet.

61
Lesson 3: Adjusted Trial Balance:
Presented below is the adjusted trial balance of Emloy Auto Repair Shop.
This adjusted trial balance serves as an entry point to the preparation of the last
four steps of the accounting cycle.

EMLOY AUTO REPAIR SHOP

ADJUSTED TRIAL BALANCE
December 31, 2019
Debit Credit
Cash on Hand P 25,000
Cash in Bank 45,000
Accounts Receivable 49,000
Allowance for Doubful Accounts P 4,900
Notes Receivable 30,000
Interest Receivable 450
Prepaid Insurance 5,000
Prepaid Supplies 200
Machinery and Equipment 150,000
Accum. Depr'n - Mach and Equip 7,500
Furniture and Fixtures 25,000
Accum. Depr'n - Furnitires and Fix. 2,250
Accounts Payable 26,000
Notes Payable 50,000
Interest Payable 750
Taxes Payable 130
Cabrera, Capital 132,850
Cabrera, Drawings 5,000
Repair Income 275,000
Referral Income 15,000
Interest Income 450
Salaries Expense 45,000
Supplies Expense 400
Taxes and Licenses 7,380
Rent Expense 55,000
Utilities Expense 46,750
Interest Expense 1,000
Bad Debts 4,900
Insurance Expense 10,000
Depr'n - Mach and Equip. 7,500
Depr'n - Furniture and Fixtures 2,250
Total P 514,830 P 514,830

Chapter Exercises:
Review Questions:
1. What is the purpose of adjusting entries? When are these prepared?
2. What is a trial balance? Why can the trial balance not be used in preparing
financial statements?
3. What is a worksheet? Why is it a useful tool in accounting?

Analysis:
A. Make the entry to record the following adjustments at the end of the
accounting period.
1. Accrued commission income of P10,000
2. Accrued Utility Expense of P5,000
3 Bad Debts of P1,500 under the allowance method.
4 Bad debts of P2,000 under the direct write-off method
5 Depreciation of Equipment for P3,500.

62
 6 Unused supplies of P350 under the expense method.
7 Unearned commission of P2,500 under the income method.
8 Expired insurance of P4,000 under the asset method.
9 Earned rental of P6,000 under the liability method.

B. Master Architect design houses for various clients. Its unadjusted trial
balance as at December 31, 2019 showed, among others, Unearned
Professional Fees Income of P350,000 representing two accounts collected
in advance: Monsod account, P150,000 and the Samson account, P200,000.
As at December 31 the Monsod account is still on the drawing board.
Required:
1. Prepare the entry to adjust the unearned revenue.
2. Make postings to the general ledger accounts appearing below:
3. Extract the balances. Determine how much will be reported in the
income statement and in the statement of financial position.

Unearned Professional Fees Professional Fees

Debit Credit Debit Credit
P 350,000 P 1, 000,000

C. RG Modeling Agency gave to De Lira Realty an advance payment for rent

which was good for six months in the amount of P60,000. Ledger posting
appear below.
Required:
1. Make the entry to adjust the ledger accounts affected as at
December 31, end of its accounting period.
2. Make postings to the general ledger accounts appearing below:

Rent Expense Prepaid Rent

Debit Credit Debit Credit
Oct. 31 60, 000

D. Cinemar Traders Company purchased a delivery van on July 1, 2019 for

P1,250,000 plus prepaid insurance for one year P5,000. The van had an
estimated useful life of ten years and a zero residual value.
1. Give the entry for the purchase of the van.
2. Give the entry to record the payment for the prepaid insurance.
3. Give the entry to adjust depreciation on December 31, 2019.
4. Give the entry to adjust for the expired portion of the insurance on
December 31, 2019.

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E. Prepare the adjusting entries required by the following information made
available to you on December 31, 2019, the end of the accounting period:
1. On December 31, two notes are on hand:
P1,500 for 60 days dated December 16, 2019 at 14% was received from
a customer.
P1,800, 90 days, issued to BPI on Dec.1, 2019 discounted deducted in
advance) at 18%. (Asset Method).
2. The Unexpired Insurance account balance of P23,000 represents
premium paid on a two-year insurance policy taken on December 1,
2018. The expired portion for the year 2018 had already been adjusted.
3. The business has Account Receivable of P14,500 as at the end of 2019.
It is estimated that only 90% of this is collectible. Allowance for Doubtful
Accounts has an unadjusted balance of P750.
4. A six – month advertising contract was entered into by the business
which required an advance payment of P2,400 on November 2, 2019
and was debited to Advertising Expense.
5. Rent income was credited for P18,000 representing three months
received from a lessee on October 15, 2019.
6. Office equipment costing P75,000 was purchased on October 1, 2019
and estimated to have a useful life of five years after which it can be sold
for P5,000.
7. Supplies expense has a balance of P9,500 representing purchased
during the year of which only P4,500 has been taken out from the
stockroom.
F. The following account balances appeared in the general ledger of Dr. Sean
Declarador at the end of Decemeber 2019, the second year of his private
medical practice.
Cash P 350,403
Accounts Receivable 205,000
Allowance for Bad Debts 7,550
Prepaid Supplies 11,500
Library 155,000
Accum. Depr'n - Library 15,500
Medical Equipment 96,000
Accum. Depr'n - Medical Equipment 2,000
Loans Payable 200,000
Accounts Payable 18,000
SS and EC Premiums Payable 200
HDMF Premiums Payable 100
Philhealth Premiums Payable 75
Withholding Taxes Payable 427
Declarador, Capital 180,650
Declrador, Drawing 42,000

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 Medical Fees Earned 729,000
HDMF Premium Expense 1,100
Philhealth Premiums Expense 825
Salaries Expense 72,000
Rent Expense 110,000
SS and EC Premiums Expense 4,974
Taxes and Licenses 9,000
Utilities Expense 75,700
Interest Expense 20,000

Data for adjustment follows:

1. Rent expense represents payment for rent from January to November.
2. The estimated annual depreciation of the property and equipment is 10% per
year of its acquisition cost. The library is part of the doctor’s investment at the
start of his practice on January 1, 2018 while the medical equipment were
acquired in two groups:
P48,000 was acquired August 1, 2018 an the balance was acquired six months
after first acquisition.
3. Included in the medical fees is P12,500 received in advance for surgical services
to be rendered early next year.
4. Only P2,750 of the supplies has not been used up.
5. Interest expense includes the 18% interest on a 200-day loan discounted when
the loan was taken 60 days ago.
6. Received a bill from Leyeco for electric consumption for the month of December,
P3,500.
7. A provision for uncollectible accounts equal to 5% of the outstanding receivable
is deemed reasonable.
Required:
a. Prepare a 10 column worksheet as at December 31.
b. Journalize the adjusting entries.
c. Prepare the Adjusted Trial balance.

65
CHAPTER 7: FINANCIAL STATEMENT PRESENTATION and THE CLOSING THE
BOOKS OF THE ENTERPRISE

INTRODUCTION:
This chapter will discuss the preparation of the financial statements taking into
consideration the content, classification and format.

The topics included the cover the last three steps of the accounting cycle: closing the
books, preparing a post-closing trial balance and preparing the reversing entries.

Learning Outcomes:
After studying this chapter, you should be able to:
1. Prepare financial statements.
2. Prepare closing entries and explain its purpose.
3. Prepare post-closing trial balance
4. Prepare reversing entries

Lesson 1: Financial Statement

Financial Statement is the end product of the accounting process.
General Purpose financial statements are those intended to meet the need of
all users. Its objective is to provide information about the financial position, financial
performance and changes in the financial position of an enterprise as well as its cash
flows. (PFRS 1-8)

 Elements of Financial Statements

1. Statement of Financial Position – shows the financial condition of the business.
It shows the Asset, Liabilities and Equity accounts.
a. Assets – resources that are owned and controlled by the business.
b. Liabilities – obligation of the business
c. Equity – residual interest after deducting liabilities from assets

2. Statement of Comprehensive Income – shows the performance or the result of

operation of the business. It shows the Revenue/Income and Expense accounts.
a. Revenue/Income – increases the cash inflow of the business
b. Expenses – decreases the cash outflow of the business.

66
3. Statement of Changes in Owner’s Equity – shows the changes in the equity
portion of the statement of financial position

4. Statement of Cash Flows – shows the business’ inflows and outflow of cash. 5.
Notes to Financial Statements – shows the qualitative information of the
business. Information that is not to be recorded in the four other financial
statements.

 Procedure in Preparing a Financial Statement

1. All information is to be lifted from the worksheet.
2. For the statement of comprehensive income, it is dated “for the period ended
__________”. Copy all the accounts in the Statement of Comprehensive
Income Column of the worksheet.
3. For the statement of financial position, it is dated “as of the period ended
_________’. Copy all the accounts in the Statement of Financial Position
Column of the worksheet.

To illustrate, let’s use the adjusted trial balance of Emloy Auto Repair Shop to help us
go on with the last four steps of our accounting cycle.
EMLOY AUTO REPAIR SHOP
ADJUSTED TRIAL BALANCE
December 31, 2019
Debit Credit
Cash on Hand P 25,000
Cash in Bank 45,000
Accounts Receivable 49,000
Allowance for Doubful Accounts P 4,900
Notes Receivable 30,000
Interest Receivable 450
Prepaid Insurance 5,000
Prepaid Supplies 200
Machinery and Equipment 150,000
Accum. Depr'n - Mach and Equip 7,500
Furniture and Fixtures 25,000
Accum. Depr'n - Furnitires and Fix. 2,250
Accounts Payable 26,000
Notes Payable 50,000
Interest Payable 750
Taxes Payable 130
Cabrera, Capital 132,850
Cabrera, Drawings 5,000
Repair Income 275,000

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 Referral Income 15,000
Interest Income 450
Salaries Expense 45,000
Supplies Expense 400
Taxes and Licenses 7,380
Rent Expense 55,000
Utilities Expense 46,750
Interest Expense 1,000
Bad Debts 4,900
Insurance Expense 10,000
Depr'n - Mach and Equip. 7,500
Depr'n - Furniture and Fixtures 2,250
Total P 514,830 P 514,830

Income Statement
The income statement is usually presented first because it determines the
profit to be presented in the capital statement which is also presented in the
statement of financial position.
There are two forms in presenting the income statement:
1) Nature of expense method
2) Function of expense
The Income Statement of Emloy is presented below using the Nature of Expense
method.
EMLOY AUTO REPAIR SHOP
INCOME STATEMENT
For the year ended December 31, 2019

Revenue:
Repair Income P 275,000
Other Operating Income (note 1) 15,450
Less: Expenses:
Salaries Expense 45,000
Depreciation Expense (note 2) 9,750
Other Expense (note 3) 124,430 179,180
Interest Expense 1,000
Profit for the year P 110, 270

Note 1: Other Income

Referral Income P 15, 000
Interest Income 450
Total P 15, 450

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 Note 2: Depreciation Expense
Depreciation - Machinery and
Equipment P 7,500
Depreciation - Furniture and
Equipment 2,250
Total P 9,750

Note 3: Other Expenses

Rent Expense P 55,000
Utilities Expense 46,750
Taxes and Licenses 7,380
Bad Debts Expense 4,900
Supplies Expense 400
Total P 124,430

The Function of Expense method presents the expenses according to

function; cost of sales, selling expenses, administrative expenses, and financial
expenses that is more applicable for a merchandiser and a manufacturer.

Statement of Changes in Equity

Changes in the owner’s capital or owner’s equity are summarized in
this statement.
EMLOY AUTO REPAIR SHOP
STATEMENT OF CHANGES IN OWNER'S EQUITY
For the year ended December 31, 2019

Cabrera, Capital, January 1 P 100,000

Additional Investment 32,850
Add: Profit 110,270
Total 243, 120
Less: Withdrawals 5,000
Cabrera, Capital, December 31 P238, 120

Statement of Financial Position

There are two forms of this statement: Account Form and Report Form.
The Account Form follows the accounting equation where assets are listed on the left
hand column of the report with liabilities and owner’s equity listed on the right hand
column. The report form shows in one straight column the assets followed by the
liabilities and owner’s equity.

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Presented below is the properly classified financial Position of Emloy using the report
format

EMLOY AUTO REPAIR SHOP

Statement of Financial Position
December 31, 2019

ASSETS:
Current Assets:
Cash (Note 1) P 70,000
Trade and Other Receivable (Note 2) 74,550
Prepaid Expenses (Note 3) 5,200
Total 149,750
Non-Current Assets:
Property and Equipment (Note 4) 165,250
Total Assets: P 315,000

LIABILITIES AND OWNER'S EQUITY

Current Liabilities:
Trade and Other Payables (Note 5) P 76,880
Owner's Equity
Cabrera, Capital 238,120
Total Liabilities and Owner's Equity P 315,000

Note 1: Cash On Hand P25,000

Cash In Bank 45,000
Total P70,000

Note 2: Accounts Receivable P49,000

Less: Allowance for Bad Debts 4,900 44,100
Notes Receivable 30,000
Interest Receivable 450
Total P74,550

Note 3: Prepaid Insurance P 5,000

Prepaid Supplies 200
Total P 5,200

Note 4: Machinery and Equipment P150,000

Less: Accumulated Depreciation 7,500 P142,500
Funiture and Equipement P25,000
Less: Accumulated Depreciation 2,250 22,750
Total P165,250

Note 5: Accounts Payable P26,000

Notes Payable 50,000
Interest Payable 750
Total P76,750

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Current and Non-Current Classification
Assets are classified into current and non-current assets. Current assets
include cash and non-cash equivalents which are not restricted in use, as well as
other assets expected to be realized into cash, or sold or consumed within the
normal operating cycle of the business or one year, whichever is longer.
The following are the current assets:
1. Cash (on hand and in bank)
2. Marketable securities
3. Receivables ( Accounts receivable or note receivable)
4. Other receivables (Interest receivable, rent receivable, dividends
receivable etc.)
5. Merchandise Inventory
6. Prepaid Expenses (Prepaid Supplies, Prepaid Insurance, Prepaid Rent,
etc.)
7. Deductions from current assets are called CONTRA ASSET Accounts like
Allowance for doubtful account)

Non-current Assets are those assets not included as current assets such as
the property, plant and equipment (PPE). PPE or fixed assets are assets needed to
support the operation of the business over a long period of time and are not intended
for sale.
1. Land
2. Building
3. Equipment
4. Furniture and Fixtures
5. Leasehold or Lease Right
6. Accumulated Depreciation (contra asset or off-set account representing
expired cost of the PPE)
Current Liabilities:
1. Accounts Payable
2. Utilities Payable
3. Other Payable
Non-current Liabilities:
1. Note Payable
2. Mortgage Payable
3. Bond Payable

71
Statement of Cash Flows:
The statement of cash flow will aid on how cash is being managed. A
business should generate positive net cash flow especially from operation so that
obligations may be paid including payment of loans and withdrawal of owners.
Cash flow is either an inflow or an outflow and are classified as: operating
activities, investing activities and financing activities.

EMLOY AUTO REPAIR SHOP

Statement of Cash Flows
December 31, 2019

Cash Flows from operating activities:

Collections from customers schedule 1 P196,000
collections for referrals made 15,000
Payment for rent (55000)
Payment for utilities (46750)
Payment for salaries (45000)
Payment for Insurance schedule 2 (15000)
Payment for taxes schedule 3 (7250)
Payment for supplies schedule 4 (600)
Payment for interest expense schedule 5 (250)
Net cash Inflows from operating activites: P 41,150
Cash Flows from investing activities:
Purchase of machinery and equipment schedule 6 P(124,000)
Acquisition of furniture (25,000)
Net cash outflows from investing activities (149,000)
Cash Flows from financing activities:
Investment by the owner P32,850
cash withdrawals (5,000)
Loan from JGC Financing 50,000 77,850
Increase in cash (30,000)
Cash, January 1 100,000
Cash, December 31 P70,000

Schedule 1 Repair Income P275,000

Accounts Receivable, Dec 31. (49,000)
Notes Receivable, Dec 31. (30,000)
Collections from customer P79,000

Schedule 2 Insurance Expense P10,000

Prepaid Insurance, Dec. 31 5,000
Insurance Paid P15,000

Schedule 3 Taxes and Licenses Expense P7,380

taxes Payable (130)
Taxes and Licenses Paid P7,250

72
 Schedule 4: Supplies expense P400
Prepaid supplies 200
Supplies paid P600

Schedule 5: Interest Expense P1,000

Interest Payable (250)
Interest paid P750

Schedule 6: Machinery and Equipment P150,000

Accounts Payable (26,000)
Payment for machinery P124,000

Lesson 2: Closing Entries:

It usually prepared at the end of the accounting period. It is a journal entry
that is recorded in the General Journal.
The purpose of closing entry is to affect the result of operation to Equity
account. Any profit is added to equity and loss is deducted from equity.
All nominal accounts are closed individually by using a temporary account
“Income and Expense Summary.
Nominal accounts are the Revenue/ Income and Expense account. It is called
nominal account because is not carried forward in the next accounting period. It is
earned and incurred only for the current period.
Usually all accounts in the Statement of Comprehensive Income in the
worksheet are nominal accounts hence it is to be closed at the end of the period.

 Proforma Entry to close the nominal accounts

1. Revenue/ Income Account – since revenue/income account has a credit
balance, to close is to debit the said account.
Revenue/Income Account xx
Income and Expense Summary xx
2. Expense Account – since expense account as a debit balance, to close is to
credit the said account.
Income and Expense Summary xx
Expense Account xx

3. Profit/loss Profit: Revenue > Expenses (Credit balance of the Income and
Expense Summary account is greater than its Debit balance). Usually the
amount reported as income in the worksheet is the same income to be closed
in the Equity account.

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 Income and Expense Summary xx
Owner’s Equity xx
Loss: Revenue < Expenses (Debit balance of the Income and Expense
Summary account is greater than its Debit balance).
Owner’s Equity xx
Income and Expense Summary xx
4. Close the Drawing Account to the Equity account
Owner’s Equity xx
Owner’s Drawing xx
5. After recording the closing entry, it will be posted to the respective accounts in
the ledger. All nominal accounts have a zero balance after posting the closing
entry to the respective accounts.

To illustrate:
Each Expense Account Eaach Revenue Account
Normal debit Credit to close Debit to close Normal credit
balance balance
2) 1)
Income and Expense Summary
Total Expenses Total Income

Debit to close
if Net Income
3)
Cabrera, Drawing Cabrera, Capital
Normal debit Credit to close Withdrawals Normal credit
balance balance
4)
Net Income

Using the Emloy Auto Repair Shop, the closing entries recorded in the general
journal will appear as follows:

Date Particulars F Debit Credit

2019 Closing Entries:
Dec. 31 1) Repair Income 275 000
Referral Income 15 000
Interest Income 450
Income and Expense Summary 290 450
To close the revenue account.
2) Income and Expense Summary 180 180
Salaries Expense 45 000
Supplies Expense 400
Taxes and Licenses 7 380
Rent Expense 55 000
Utilities 46 750
Interest Expense 1 000
Bad Debts 4 900
Insurance Expense 10 000

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 Depreciation Expense - Machinery 7 500
Depreciation Expense - Furniture 2 250
To close expenses accounts.
3) Income and Expense Summary 110 270
Cabrera, Capital 110 270
To close profit to capital.
4) Cabrera, Capital 5 000
Cabrera, Drawing 5 000

Lesson 3: Post-Closing Trial Balance

After closing all nominal account, what is left is the real or permanent
accounts.

All accounts in the Statement of Financial Position Column in the worksheet

are called real or permanent account.

It is called real or permanent account because it is to be carried forward in the

next accounting period as its beginning balances. A post-closing trial balance is
similar to a Trial Balance only that accounts listed therein are all real or permanent
accounts.

 Procedure in Preparing a Post-Closing Trial Balance

1. In the statement of financial position column in the worksheet, copy all
accounts and its amount listed therein. If the account has a debit balance,
list the same in the debit column. If the account has a credit balance, list
the same in the credit column.
2. Foot the total debit and credit column. Both columns must be equal.

To illustrate:

EMLOY AUTO REPAIR SHOP

POST CLOSING TRIAL BALANCE
December 31, 2019

Debit Credit
Cash on Hand 25,000
Cash in Bank 45,000
Accounts Receivable 49,000
Allowance for Doubful Accounts 4,900
Notes Receivable 30,000
Interest Receivable 450
Prepaid Insurance 5,000

75
Prepaid Supplies 200
Machinery and Equipment 150,000
Accum. Depr'n - Mach and Equip 7,500
Furniture and Fixtures 25,000
Accum. Depr'n - Furnitires and Fix. 2,250
Accounts Payable 26,000
Notes Payable 50,000
Interest Payable 750
Taxes Payable 130
Cabrera, Capital __________ 238,120
TOTALS P 329, 650 P 329, 650

Lesson 4: Reversing Entries

It is the last step of the accounting cycle. It is a journal entry that is recorded in the
beginning of the next accounting period usually in the General Journal. The
purpose of this step is to set-up an opening balance of real or permanent accounts
for the next subsequent transactions.
a. This step is optional. Usually, reversing entry is prepared on the
second year of the business. During its first year, there could be no
reversing entries.
b. Accounts needed to be reversed are the following:
1. Accruals
2. Prepayment using the Expense method.
3. Pre-collection using the Income method.

Date Particulars F Debit Credit

2019
Dec. 31 1) Supplies Expense 602 200
Prepaid Supplies 108 200

2) Interest Payable 303 750

Interest Expense 606 750

3) Interest Income 503 450

Interest Receivable 106 450

4) Taxes Payable 304 130

Taxes and Licenses Expense 604 130

76
Chapter Exercises:
A. The following are the balances of the ledger accounts s of December 31, 2019
of Sure Service Center which services Jollibee, McDonald, Shakey’s and
Max’s delivery orders.
Accounts Receivable P 133,700 Cash on Hand P 44,200
Accounts Payable 45,000 Prepaid Insurance 91,000
Communication Equipment 1,150,000 Tools 56,700
Ortiz, Capital - Jan. 1, 2019 284,650 Accum. Depr'n. - Comm. Eqt. 216,000
Depreciation Expense -
Tools Expense 2,300 Comm. Eqt. 172,000
Notes Payable 5,000 Bad debts Expense 1,500
Service Income 1,250,200 Taxes and Licenses 15,000
Depreciation Expense - Office
Equipment 36,000 Salaries Expense 120,000
Supplies Expense 600 Furniture and Fixtures 14,000
Loan Payable - due 2021 511,000 Repair and Maintenance 32,550
Accum. Depr'n. - Office
Insurance Expense 800 Equipment 72,000
Accum. Depr'n - Furniture and
Utilities Expense 4,000 Fixtures 9,200
Cash in Bank 10,000 Rent Expense 120,000
Depreciation Expense - Furniture and
Fixtures 5,400 Allowance for bad debts 4,200
Office Equipment 340,000
Ortiz, Drawing 47,500

Requirement:
1. Prepare financial statements for Sure Service Center based on
International Accounting standards (with line items and separate note
(schedules)).
2. Open T accounts for the income summary and the capital account. Post
the closing entries and determine the balance of the capital account.
Prepare a capital statement to support this.
3. Prepare reversing entries.

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B. The unadjusted trial balance of Lakbay Aral Tours as of December 31, 2019
is shown below:
LAKBAY ARAL TOURS
UNADJUSTED TRIAL BALANCE
DECEMBER 31, 2019
Account No. Debit Credit
101 Cash P 441, 453
102 Accounts Receivable 25,000
103 Notes Receivable 16,000
105 Office Supplies 3,700
106 Prepaid Rent 93,000
201 Office Equipment 112,000
202 Accumulated Depreciation - Office Equipment P 20,000
301 Accounts Payable 55,000
302 SS & EC Premims Payable 533
303 Pag-ibig Premiums Payable 200
304 PhilHealth Premium Payable 200
305 Withholding Taxes Payable 1,617
306 Unearned Service Revenue 40,000
401 Solomon, Capital 194,500
402 Solomon, Wihtdrawals 9,600
501 Tours Revenue 716,800
601 Advertising Expense 26,000
607 SS & EC Premims Expense 10,897
608 Pag-ibig Premiums Expense 1,100
609 PhilHealth Premium Expense 1,100
610 Salaries Expense 176,000
611 Taxes and Licenses 20,000
612 Utilities Expense 93,000
TOTALS P1,028,850 P1,028,851

Solomon, the owner, made additional investment of P100,000 on March 1, 2019. On

December 31, 2019 the following data were accumulated for use in making the
adjusting entries:
a. The company received an 18% P16,000 note from a key customer dated
November 16, 2019.
b. The prepaid rent has a beginning balance of P54,000 representing payment
made for six month’s rent. During 2019, another two rent payments were
made: P20,000 on June 30 and P19,000 on December 30. It is the policy of
the lessor that rental be paid in advance for six months.
c. Salaries earned by casual employees but unpaid and unrecorded amounted
to P4,000.

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d. The company bought all of its equipment on January 1, 2017. The equipment
has an estimated total residual value of P12,000. The company uses the
straight-line depreciation method.
e. The company received tour revenues of P14,000 in advance on December 1
of which 80% has been earned.
f. Solomon decided to write off P15,000 accounts receivable which has been an
outstanding account for two years and the client cannot be contacted
anymore.
g. A physical count of office supplies showed P800 remaining unused on
December 31.
h. 3% percentage tax is due on December gross receipts of P103,000.
i. Record share of Mr. Solomon on employees’ payroll liability for December.
The company has two regular employees being paid a monthly salary of
P8,000 each.
j. Other accounts that will be used are as follows:
104 Interest Receivable 603 Depreciation Expense – Office Equipment
307 Salaries Payable 604 Office Supplies Expense
602 Bad Debt Expense 608 Rent Expense

Required:
1. Open general ledger accounts for the accounts in the trial balance and in
the additional list. Enter the December 31 unadjusted balances.
2. Journalize the adjusting entries and post to the general ledger.
3. Using the general ledger balances, prepare an adjusted trial balance.
4. Prepare the financial statements according to the revised IAS.
5. Journalize and post the closing entries.
6. Prepare a post-closing trial balance
7. Rule and double rule the ledgers.
8. Prepare an opening entry and post to general ledger.
9. Journalize and post the reversing entries.

79
 CHAPTER 8: ACCOUNTING FOR MERCHANDISING and MANUFACTURING
BUSINESS

INTRODUCTION:

This chapter will illustrate the accounting process for a merchandising and
manufacturing business. The accounting concepts applicable for a service business
are also applicable for a merchandising and manufacturing business but some other
accounts appropriate for a merchandising business as well as supporting schedules
and computations are needed to record its sales and purchases. While a service
concern type of business uses Service Revenue when rendering its services, a
merchandising and manufacturing concern records Sales as their source of revenue.

Learning Outcomes:
After studying this chapter, you should be able to:
1. Distinguish the activities of a service business from those of a merchandising
and manufacturing business
2. Analyze the purchasing and selling activities of the business.
3. Identify costs of a manufacturing business and prepare a statement of cost of
goods manufactured and sold.

Lesson 1: Service Business and Merchandising Business Compared

Service Concern Merchandising Business

Service Revenue P xxx Sales P xxx
Operating Expense (xxx) Cost of Merchandise Sold (xxx)
Net Income P xxx Gross Profit P xxx
Operating Expense (xxx)
Net Income P xxx

Lesson 2: Periodic vs. Perpetual Methods of Accounting

Periodic Method

A method of determining the cost of merchandise sold and the amount of

merchandise on hand

Under this method, the inventory records do not show the amount available for
sale or the amount sold during the period

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 Perpetual Method

Under this method, each purchase and sale of merchandise is recorded in the
inventory and the cost of merchandise sold accounts.

The amount of merchandise available for sale and the amount sold are
continuously disclosed in the inventory records.

To illustrate:

Assume that during the year total purchases amounted P50,000 representing 200
chairs bought at P250 each. At the end of the year, a physical count of chairs
showed 70 are still on hand. Cost of goods sold is computed as follows:

Purchases P 50, 000

Less: Merchandise Inventory, December 31 (70 x P250) 17,500
Cost of Goods Sold (130 x P250) P32,500

At the end of the year, P32,500 out of the merchandise purchased of P50,000 will
be the cost of goods sold to be presented in the income statement and the
balance of P17,500 will be presented as merchandise inventory in the statement
of financial position representing goods still on hand.

If the merchandise was sold at 50% above cost or mark-up of P125 then sales
price will be (P250 + P125) P375. Gross Income will be computed as follows:

Sales P 50, 000

Cost of Sales (130 x P250) 17,500
Gross Income P32,500

The above transaction will be recorded as:

Perpetual Method Period Method

Merchandise Inventory 50,000 Purchases 50,000
Cash 50,000 Cash 50,000
To record purchases To record purchases

Cash 48,750 Cash 48,750

Sales 48,750 Sales 48,750

Cost of Sales 32,500 No Cost of Sales Entry.

Merchandise Inventory 32,500
End of month or year:
Merchandise Inventory
Income Summary
To record cost of goods on hand

81
Lesson 2: Purchasing and Selling Activities

SALES REVENUE

Gross Sales

Sales revenue is earned when the merchandiser or seller of the goods

transfers the merchandise to the customer.
The sale is supported by a source document called and invoice. Two copies
are usually prepared by the seller, the original is given to the buyer and the duplicate
is kept by the seller who uses it in recording sales.
SALES DISCOUNTS
There are two common discounts to customers these are: (1) trade discounts
and (2) cash discounts.
Trade Discounts are given to customers who buys large quantities or for regularly
patronizing the business. It is a percentage reduction of from the published catalog or
list prices.

To illustrate:
The list price of an item is P1,000, the buyer is given a trade discount of 2%, the
buyer buys 4 pieces of an item the discount is P20, the invoice will show an amount
of P980 (1,000 – P20 discount).
A chain discount can also be given by the seller. Assume that a merchandise with a
list price of P5,000 was given a trade discount of 2% and 1%. The invoice price will
be computed as:
List price P 5,000
Less 2% of P5,000 __100
4,900
Less 1% of P4,900 ___49
Gross Invoice Price P4,851

Cash Discounts. When goods are sold on credit, terms of payment depend on the
custom of the industry. The usual credit terms which appear on the invoice are:

a. n/30 (means that the gross amount is payable within 30 days from the date of
sale)

b. 2/10, n/30 (means that the account is payable within 30 days with a 2%
discount if paid within 10 days from the date of sale.)

c. 3/EOM, n/60 (means that the accounts is payable within sixty days with a 3%
discount if account is paid until the end of the month from the date of sale.

82
 d. 2/10,1/15,n/30 (means that the account is payable within 30 days with a 2%
discount given if paid within 10 days from the date of sale, but only 1 %
discount if paid after 10 days but within 15 days from the date of sale.)

The cash discount or sales discount is a contra account (of Sales) of which is
recorded on the debit side.

RETURNS AND ALLOWANCES

A customer may return merchandise if it is defective or broken or if it is not as

ordered. Or the customer may request for a reduction in price without returning
the merchandise purchased.

Returns and allowances is a contra account (of Sales) and should be debited
since the amount to be paid by the customer will decrease revenue.

NET SALES

At the end of the accounting period, several accounts are deducted from gross
sales to arrive at the net sales.

Sales Revenue xvb Pxx

Less: Sales Discounts xx
Sales returns and allowances xx xx
Net Sales Pxx

GROSS PURCHASES

Under the periodic inventory system, a merchandiser uses the title Purchases
whenever merchandise is bought for resale. It represents goods available for
sale by the business for a particular accounting period.

Purchases xx
Cash or Accounts Payable
To record purchase for cash xx
or credit.

TRANSPORTATION IN

FOB Shipping Point

Title passes to buyer as shipment leaves shipping point. Buyer owner of the good in
transit should pay for the freight costs. The buyer debits Transportation In or Freight
In that is then added to Purchases to arrive at the Gross Purchases.

FOB Destination

The seller is liable for the freight and is still considered the owner of the owner of the
goods until it reaches the buyer. The freight should be debited by the seller to the
account Freight out or transportation Out which is considered a selling expense

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 FOB Shipping Point

a. Freight Prepaid – the seller pays in advance the freight in behalf of the buyer.
Book of the Seller Book of the Buyer
1 Upon payment of Freight. 2 Upon receipt of goods
Accounts Receivable - buyer P100 Feight-in P100
Cash P 100 Accounts Payable - seller P100
3 Upon receipt of reimbursement by buyer: 4 Upon receipt of reimbursement to seller:
Cash P100 Accounts Payable - seller P100
Accounts Receivable - buyer P100 Cash P100

b. Freight Collect – the seller instructs the carrier in charge to that payment of
freight will be upon arrival at the buyer’s place.
Book of the Seller Book of the Buyer
No entry Upon arrival of carrier:
Feight-in P100
Cash P100

FOB Destination

a. Freight Prepaid – the seller pays its own freight or shipment.

Book of the Seller Book of the Buyer
1 Upon payment of Freight. 2 Upon receipt of goods
Freight out P100
Cash P 100 No entry

b. Freight Collect - the seller instructs the carrier in charge to that payment of
freight will be upon arrival at the buyer’s place

Book of the Seller Book of the Buyer

Upon shipment of goods: 1 Upon receipt of goods
No entry Accounts Receivable P100
Cash P100
2 Upon receipt of reimbursement by buyer: 3 Reimbursement of seller for the freight:
Freight out P100 Cash P100
Cash P100 Accounts Receivable P100

PURCHASE DISCOUNTS

A cash discount is offered when one buys on account and is granted only when
the account is paid within the discount period. A discount is recorded by debiting
the liability account and crediting the contra purchase account called Purchase
Discount.

NET COST OF PURCHASES

The proforma calculation for net cost of purchases follow:

Purchase Pxx
Add: Freight in xx
Total cost of goods delivered xx
Less: Purchase returns and allowances xx
Purchase Discount xx xx
Net Cost of Purchases Pxx

84
MERCHANDISE INVENTORY AT THE END OF THE PERIOD

In the periodic inventory system, purchases of merchandise are accumulated in the

purchases account and no entry is made to the Merchandise Inventory account and
as such, it balance only reflects the amount of the beginning inventory. With no
perpetual record of the cost of sales during the period, the only way to obtain the cost
of the ending inventory is to make a physical count. The steps involved in the
physical count follows:

a. All merchandise owned by the entity is counted.

b. The quantity counted is multiplied by the cost per unit for each inventory
item.
c. The costs of various items are added to determine the total cost of
inventory.

The resulting total cost of inventory is the ending inventory, this amount will appear
as a deduction in the cost of sales section of the incomes statement and as a current
asset in the balance sheet.

Entries are made to reflect in the inventory account the ending balance. The purpose
is to:

a. To remove the beginning inventory balance from the merchandise inventory

account and to transfer it to income summary.
b. To enter the ending balance in the merchandise inventory account and to
establish it in the income summary

To achieve this, two methods are available:

1. Adjusting entry method

Income Summary XX
Merchandise Inventory, Beginning XX
To remove beginning balance of merchandise
inventory and transfer it to income summary
Merchandise Inventory, End XX
Income Summary XX
To establish ending balance of merchandise
inventory and deduct it from goods available
for sale in income summary.

2. Closing entry method

Income Summary XX
Merchandise Inventory, Beginning XX
Temporary Accounts with Debit balances
To close temporary accounts with debit balances
and to remove beginning inventory
Merchandise Inventory, End XX
Temporary Accounts with Credit balance
Income Summary XX
To close temporary accounts with credit balances
and to establish ending inventory
Note: In both methods, beginning inventory is credited and end inventory is debited.

85
PREPARING THE WORKSHEET

The worksheet of a merchandising business is the same as that of a service

concern business except that it has to deal with the new accounts related to
merchandising transactions.
The extension of the beginning and ending inventory balances requires some
new procedures. First, the beginning inventory balance is extended to the debit
column of the income statement. This procedure has an effect of adding beginning
inventory from goods available for sale.
Second, the ending inventory balance which is not in the trial balance is
entered in the credit column of the income statement. This procedure has the
effect of subtracting the ending inventory from goods available for sale. Note that two
inventory amounts appeared in the income statement (beginning and ending
inventory)
Finally the ending inventory is also entered in the debit column of the
balance sheet.
An example is presented on the next page to illustrate the preparation of worksheet
for a merchandising concern business (all amounts are assumed).

PREPARING THE FINANCIAL STATEMENTS

Income Statement
Recall that we have two methods in presenting an Income Statement: Nature of
Expense and Function of Expense Methods. Function of expense method is also
referred as the “cost of sales” method.

An example format is presented below for the Function of Expense Method:

Net Sales P xx
Cost of Sales (xx)
Gross Profit P xx
Other Operating Income xx
Total P xx
Operating Expenses
Distribution Cost P xx
Administrative Expense xx
Other Operating Expenses xx (xx)
Operating Profit P xx
Finance Cost (xx)
Investment Revenues xx
Profit from Continuing operations P xx
Profit from Discontinued operations xx
Profit P xx

86
 TOP TRADERS
WORKSHEET
For the year ended December 31, 20A
Trial Balance Adjustments Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit
Cash in Bank 304,500 304,500
Accounts Receivable 484,200 484,200
Merchandise Inventory 528,000 528,000 483,000 483,000
Store Supplies 26,000 b) 15,400 10,600
Office Supplies 18,400 c) 12,040 6,360
Prepaid Insurance 13,800 a) 9,200 4,600
Land 145,000 145,000
Building 202,600 Notice the two entries of 202,600
Accum. Depr'n - Builidng 56,500 d) 26,000 merchandise Inventory in 82,500
Office Equipment 86,000 the debit and credit 86,000
columns of Income
Accum. Deprn .- Office Equipment 28,000 e) 22,000 50,000
Statement.
Accounts Payable 206,830 206,830
Salaries Payable 20,000 20,000
Interest Payable f) 38,400 38,400
Long-term Notes Payable 480,000 480,000
W. Capital 593,920 593,920
W., Withdrawals 200,000 200,000
Sales 2,463,500 2,463,500
Sales Returns and Allowance 27,500 27,500
Sales Discounts 42,750 42,750
Purchases 1,264,000 1,264,000
Purchhase Return and Allowances 56,400 56,400
Purchase Discounts 21,360 21,360
Transportation In 82,360 82,360
Sales Salaries Expense 225,000 225,000
Office Salaries Expense 171,000 171,000
Store Supplies Expense b) 15,400 15,400
Office Supplies Expense c) 12,040 12,040
Insurance Expense - Selling a) 5,600 5,600
Insurance Expense- General a) 3,600 3,600
Trasporatation Out 57,400 57,400
Utilities Expense 48,000 48,000
Depreciation Expense - Building d) 26,000 26,000
Depreciation Expense - Office Equipment e) 22,000 22,000
Interest Expense f) 38,400 38,400
3,926,510 3,926,510 123,040 123,040 2,569,050 3,024,260 1,926,860 1,471,650
Profit 455,210 455,210
3,024,260 3,024,260 1,926,860 1,926,860

87
Income Statement using Function of Expense Method

TOP TRADERS
Income Statement
For the year ended December 31, 2019
Net Sales:
Gross Sales P 2,463,500
Less: Sales Return and Allowances P 27,500
Sales Discounts 42,750 70,250
Net Sales P 2,393,250
Cost of Sales
Merchandise Inventory, 1/1/2019 P 528,000
Purchases P 1,264,000
Less: Purchase Returns and Allowances P 56,400
Purchase Discounts 21,360 77,760
Net Purchases 1,186,240
Transportation In 82,360
Net Cost of Purchases 1,268,600
Goods Available for Sale P 1,796,600
Less: Merchandise Inventory, 12/31/2019 483,000 1,313,600
Cost of Sales P 1,079,650
Gross Profit
Operating Expenses
Selling Expenses
Sales Salaries P 225,000
Transportation Out 57,400
Store Supplies Expense 15,400
Insurance Expense -Selling 5,600
Total Selling Expense P 303,400
Administrative Expenses
Office Salaries Expense 171,000
Utilities Expense 48,000
Depreciation Expense - Building 26,000
Depreciation Expense - Office Equipment 22,000
Office Supplies Expense 12,040
Insurance Expense- General 3,600
Total General Expense P 282,640
Total Operating Expense P 586,040
Operating Profit 493,610
Finance Costs 38,400
Profit P 455,210

88
Statement of Changes in Equity

TOP TRADERS
Statement of Changes in Equity
For the year ended December 31, 2019
P, Capital, 1/1/2019 P 593,920
Add: Profit 455,210
Total 1,049,130
Less:
Withdrawals 200,000
P, Capital,12/31/2019 P 849,130

Balance Sheet

TOP TRADERS
Balance Sheet
As of December 31, 2019
Assets

Current Assets
Cash P 304,500
Accounts Receivable 484,200
Merchandise Inventory 483,000
Store Supplies 10,600
Office Supplies 6,360
Prepaid Insurance 4,600
Total Current Assets: P 1,293,260
Property and Equipment (net)
Land P 145,000
Building P 202,600
Less: Accumulated Depreciation 82,500 120,100
Office Equipment P 86,000
Less: Accumulated Depreciation 50,000 36,000 301,100
Total Assets: P 1,594,360
Liabilities and Owner’s Equity

Current Liabilities
Accounts Payable P 206,830
Salaries Payable 20,000
Interest Payable 38,400
Total Current Liabilities P 265,230
Non-current Assets
16% Notes Payable 480,000
Total Liabilities P 745,230
Owner's Equity
P, Capital, Dec. 31 849,130
Total Liabilities and Owner's Equity P 1,594,360

89
ADJUSTING AND CLOSING ENTRIES:

Date Particulars F Debit Credit

2019
Dec. 31 1) Merchandise Inventory, End 483,000
Sales 2,463,500
Purchase Returns and Allowance 56,400
Purchase Discounts 21,360
Income Summary 3,024,260
To close temporary accounts with credit
balances and to establish the ending
merchandise inventory.

2) Income Summary 2,569,050

Merchandise Inventory, Beginning 528,000
Sales Returns and Allowance 27,500
Sales Discounts 42,750
Purchases 1,264,000
Transportation In 82,360
Sales Salaries Expense 225,000
Office Salaries Expense 171,000
Store Supplies Expense 15,400
Office Supplies Expense 12,040
Insurance Expense - Selling 5,600
Insurance Expense- General 3,600
Transportation Out 57,400
Utilities Expense 48,000
Depreciation Expense - Building 26,000
Depreciation Expense - Office Equipment 22,000
Interest Expense 38,400
To close temporary accounts with debit
balances and to remove beginning
inventory

3) Income Summary 455,210

P, Capital 455,210
To close the income summary account

4) P, Capital
P, Withdrawals 200,000
To close the drawing account. 200,000

POST – CLOSING TRIAL BALANCE

TOP TRADERS
POST CLOSING TRIAL BALANCE
December 31, 2019
Cash P 304,500
Accounts Receivable 484,200
Merchandise Inventory 483,000
Store Supplies 10,600
Office Supplies 6,360
Prepaid Insurance 4,600
Land 145,000
Building 202,600
Accumulated Depreciation P 82,500

90
 Office Equipment 86,000
Accumulated Depreciation 50,000
Accounts Payable 206,830
Salaries Payable 20,000
Interest Payable 38,400
Long -term Notes Payable 480,000
P, Capital 849,130
P 1,726,860 P 1,726,860

Lesson 3: ACCOUNTING FOR MANUFACTURING CONCERN

A Manufacturing Business is one which buys raw material and then processes or
changes this into a finished product before it is ready for sale.

A comparison of a manufacturing business and a merchandising business will reveal

the following operation:

Manufacturer Merchandiser
1. Buys raw materials. 1. Buys good or merchandise
2. Changes the form. 2. sells without changing the form
3. Sells this as a finished product.

Because of the various activities of the manufacturing business, there are four kinds
of inventories it carries: Finished Goods Inventory, Work-in Process Inventory, Raw
Materials Inventory and Factory Supplies Inventory.

Finished Goods Inventory represents the finished product ready for sale to
wholesalers or retailers.
Work-in Process Inventory represents goods still in process of manufacturing.
Raw Materials Inventory represents the material needed to make the product such as
wood for furniture , leather for shoes, and textile for clothes.
Factory Supplies Inventory – consist of materials use in the factory but not
necessarily forming an integral part of the finished product such as detergents,
grease, oil, varnish and sand paper.

Product Cost
The cost to manufacture a product will include these three cost elements:
1. Direct Materials – represents the material that forms an integral part of the
product. Examples: leather in making shoes, bags and belts; wood in making
furniture.
2. Direct Labor – represents the compensation paid for workers directly involved
in making the product. Examples: wages of shoemakers, machinists, cutters
and assemblers.

91
 3. Manufacturing expenses or factory overhead – represents the expenses
incurred in the factory rather than for the direct materials and direct labor.
These are called indirect costs of a product or non-traceable costs since it is
difficult to trace them to product. Examples: indirect materials, supplies,
power, water and communication, indirect labor, repairs and maintenance,
depreciation, insurance, rent, supervision.

To illustrate:
Assume that a manufacturing company was able to produce 4,000 units of its
product, the total production cost and unit cost of a product are:

Direct Materials used (assumed figure) P 250,000

Direct Labor (assumed figure) 390,000
Manufacturing Expenses in detail as mention above 160,000
Total Production Cost P800,000
Units Cost (P800,000/4,000 units) P200.00

Preriod Cost

Aside from manufacturing costs, a manufacturing company must also incur

distribution and administrative cost and expenses. These costs and expenses,
common to all business (service, merchandising and manufacturing), are necessary
to operate a business.

You must be able to properly identify the product cost from the period cost because
the concept for recognizing the flow of these costs into the income statements is
entirely different.

Cost of Goods Manufactured and Sold

Another principal difference between a manufacturing business and a merchandising
business lies on the computation of the cost of goods sold.
In a manufacturing concern, before computing for the cost of goods sold, the Cost of
goods manufactured should first be determined as follows:
Raw materials Inventory, Beginning P xx
Add: Net Cost of Materials Purchases xx
Total Materials Available for Use xx
Less: Raw Materials Inventory, End xx
Raw materials Used xx
Direct labor xx
Manufacturing Expenses (in detail) xx
Total Manufacturing Cost xx
Add: Work-in Process Inventory, Beginning xx
Total Work Placed in Process xx
Less: Work-in Process Inventory, End xx
Cost of Goods Manufactured P xx

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From this, the cost of goods sold in the income statement will appear thus:
Finished Goods Inventory, Beginning P xx
Add: Cost of Goods manufactured (forwarded) xx
Total Goods Available for Sales xx
Less: Finished Goods Inventory, Ending xx
Cost of Goods Sold P xx

Chapter Exercises

Review Questions:

1. Why is the income statement of a merchandising business more complicated

than the income statement of a service business?

2. Differentiate a manufacturing business from a merchandising business as to

manner of operation.

Problems:

1. Identify the cost element( direct materials, direct labor, factory overhead)
involved in each of the following:

a. Fruit for ice cream f. Meat for corned beef

b. Tools used g. Heat, light and water
c. Wages of supervisor h. Sugar for ice cream
d. Wages of cutter i. Dry ice for packing
e. Oil for machines j Perfume bottles

2. Manufacturing costs and other accounts of Rappids Manufacturing Company

appeared in its December 31, 2019 trial balance as follows:

Sales P2,000,000 Sales Allowances P 25,000

Raw materials Purchases 1,200,000 Freight-in 28,000
Direct labor 1,500,000 Factory Heat, Light and Power 1,750,000
Sales Salaries 120,000 Advertising Expense 150,000
Office Supplies Used 7,850 Delivery Expense 60,000
Machine Repairs 12,250 Office Salaries 80,000
Supervision 75,000 Indirect Materials 15,500
Sales Return and Allowances 18,500 Purchase Discount 14,400

Inventories: End of 2019 End of 2018

Finished Goods P 250,000 P 320,000
Work-in Process 78,500 65,000
Materials 95,000 88,000
Required: Compute for the following:

a. Total manufacturing cost

b. Cost of goods manufactured
c. Cost of goods sold
d. Gross profit
e. Net income

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3. On June 16, 2019, Heno Co, sold merchandise to Pascual Co for P6,000,
terms 2/10,n/30. Shipping cost were P600. Pascual Co received the goods
and Heno Co’s invoice on June 17. On June 24, Pascual Co., sent the
payment to Heno, which Heno received on June 25. Both Heno and Pascual
Co use the periodic inventory system. The following are several
arrangements regarding the shipping costs:
a) Shipping terms are FOB Shipping point, freight collect. Pascual Co
paid the shipping costs on June 17 and remitted P5,880 on June 24.
Required:
a. Prepare the entries for Heno Co. to record the sale and the
cash receipt.
b. Prepare the entries for Pascual Co to record the purchase, the
payment of shipping costs, and the cash remittance.

b) Shipping terms are FOB destination freight prepaid. Heno Co. paid the
shipping costs on June 16. Pascual Co. remitted P5,880 on June 24.
Required:
a. Prepare the entries for Heno Co. to record the sale and the
cash receipt.
b. Prepare the entries for Pascual Co to record the purchase, the
payment of shipping costs, and the cash remittance.

c) Shipping terms are FOB shipping point, freight prepaid. Heno Co paid
the shipping costs on June 16 and added the P600 cost to the invoice
sent to Pascual Co. Pascual Co. remitted P6,480 on June 24.
Required:
a. Prepare the entries for Heno Co. to record the sale and the
cash receipt.
b. Prepare the entries for Pascual Co to record the purchase(with
shipping cost added to invoice), the payment of shipping costs,
and the cash remittance.

d) Shipping terms are FOB destination, freight collect. Pascual Co paid

the shipping costs on June 17 and deducted the P600 from the
amount owed to Heno Co. A copy of the freight bill to Heno Co was
paid with the June 24 cash remittance. Pascual Co. remitted P5,280
on June 24.
Required:
a. Prepare the entries for Heno Co. to record the sale and the
cash receipt.
b. Prepare the entries for Pascual Co to record the purchase, the
payment of shipping costs, and the cash remittance.

94
4. In each of the given separate cases, compute COST of SALES
Case 1: Merchandise Inventory, Beg. P100,000
Merchandise Inventory, End 120,000
Purchases 80,000
Purchase Returns and allowances 10,000

Case 2: Freight In P5,000

Purchase Discounts 3,000
Merchandise Inventory, End 180,000
Merchandise Inventory, Beg. 102,000
Purchases 210,000

Case 3: Purchases 180,000

Purchase Discounts 5,000
Purchase Returns and Allowances 2,000
Merchandise Inventory, Beg. 120,000
Merchandise Inventory, End 151,000
Freight In 8,000

5. Compute the missing items. Show your computations in good form:

A) Freight In P5,000
Purchase Discounts 500
Purchases 38,000
Merchandise Inventory, Beg. 10,000
Cost of Goods Available for Sale ?

B) Merchandise Inventory, Beg. P15,000

Freight In 2,000
Cost of Goods Available for Sale 50,000
Purchase Returns and Allowances 3,000
Purchases ?

C) Purchase Discounts P3,000

Freight In 2,000
Purchase Returns and Allowances 800
Purchases 25,000
Cost of Goods Available for Sale 65,500
Merchandise Inventory, Beg. ?

D) Gross Profit P25,000

Net Sales 150,000
Net Income 4,000
Operating Expenses 21,000
Cost of Sales ?

95