Actbas1 Study Guide

Study Guide in
Introductory
Accounting for
Service Business
Benedick Manalaysay
Accountancy Department
De La Salle University Manila
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TABLE OF CONTENTS
Lesson
Number
Topic Starting Page
1 Introduction to Accounting 3
2 Transaction Analysis 12
3 General Journal, General Ledger, Trial Balance 22
4 Financial Statements 29
5 Statement of Cash Flows 36
6 Correcting Entries 38
7 Payroll Accounting 40
8 Accounting for Promissory Notes 43
9 Accrued Income 52
10 Accrued Expense 55
11 Prepaid Expense 58
12 Unearned Income 62
13 Depreciation 66
14 Doubtful Accounts 71
15 Closing Entries, Post-Closing Trial Balance 76
16 Reversing Entries 82
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LESSON 1
INTRODUCTION TO ACCOUNTING
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1 Learn the history of accounting
2 Define accounting
3 Know the difference between bookkeeping and
accounting
4 Know the branches of accounting
5 Distinguish the forms of business organizations
according to ownership and according to activity
6 Know the role of Certified Public Accountant in the
society
7 Know the functions of different government agencies and
professional bodies relevant to the accounting profession
8 Know the purposes of the business documents
9 Define financial statements and its components, generally
accepted accounting principles (GAAP), Financial
Reporting Standards Council (FRSC), and users of the
financial statements
10 Explain the different basic accounting concepts or
assumptions
11 Know other terms related to basic accounting
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Objective 1
History of Accounting
Accounting has a long history. Some scholars claim that writing arose in order t
o record
information. Account records date back to the ancient civilizations of China, Ba
bylonia, Greece
and Egypt. The rulers of these civilizations used accounting to keep track of th
e cost of labor and
materials used in building structures like the great pyramids. (Source: Horngren
, Harrison and
Robinson, 1995)
Accounting developed as a result of the information needs of merchants in the ci
ty-states of Italy
during the 1400s. In that commercial climate a monk, Luca Pacioli, a mathematici
an and friend of
Leonardo da Vinci, published the first known description of double-entry bookkee
ping entitled
Summa de Arithmetica, Geometria, Proportioni et Proportionalite, which means Eve
rything about
Arithmetic, Geometry, and Proportion published in Venice in November 1494. This
book
contained primarily principles of mathematics and incidentally a set of accounti
ng procedures.
The pace of accounting development increased during the Industrial Revolution as
the economies
of developed countries began to mass-produce goods. Until that time, merchandise
was priced
based on managers hunches about cost but increased competition required merchants
to adopt
more sophisticated accounting system.
In the nineteenth century, the growth of corporations especially those in the ra
ilroad and steel
industries, spurred the developed of accounting. Corporate owners were no longer
necessarily the
managers of their business. Managers had to create accounting systems to report
to the owners
how well their businesses were doing.
Government played a role in leading more development in the field of accounting
when it started
using the income tax. Accounting supplied the concept of income. Also, governmen
t at all levels
has assumed expanded roles in health, education, labor and economic planning. To
ensure that the
information that it uses to make decisions is reliable, the government has requi
red strict
accountability in the business community.
At the beginning of the third millennium, there would still be significant devel
opments in the
field of accounting. The great challenge of globalization and the effects of new
technologies (e.g.
super computers, robotics, inter and intra-net, etc.) pose a shift in the struct
ure and pattern in this
field. More and better accounting information are now being required and therefo
re, accounting,
being the means used in communicating business and financial information, must a
lso evolve into
a more efficient level.
Reference: Workbook in Introductory Accounting for Service Business
Accounting as Language of Business
The primary objectives of the business are:
1. To generate profits
2. To properly manage limited and scarce resources
With these objectives, a business must prepare financial reports and interpret t
hese reports as an
aid in decision-making. In making decisions, accounting is used as a tool for co
mmunication.
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Objective 2
Definition of Accounting
1. Accounting is a service activity.
a. Its function is to provide quantitative information, primarily financial in n
ature,
about economic entities that is intended to be useful in making economic
decisions.
2. Accounting is the process of identifying, measuring and communicating economi
c
information to permit informed judgments and decisions by users of the informati
on.
a. Identifying this accounting process is the recognition or nonrecognition of
business activities as accountable events (Valix, 2005). There are 3 types of
transactions:
i. Business transaction
1. transactions which are recorded in the financial books. Example
is investment of the owner.
ii. Personal transaction
1. transactions which are not recorded in the financial books.
Example is purchase of house and lot of a business owner using
his personal money.
iii. Neither business nor personal transaction
1. Business events that are not recorded in the financial books.
Examples are hiring of employees, death of the owner, entering
into a contract etc.
b. Measuring this accounting process is the assigning of Peso amounts to the
accountable economic transactions and events (Valix, 2005)
c. Communicating is the process of preparing financial statements and
interpreting the results thereof
3. Accounting is the art of recording, classifying and summarizing in a signific
ant manner
and in terms of money, transactions and events which are, in part at least, of a
financial
character, and interpreting the results thereof.
4. Accounting is an information system that measures, processes, and communicate
s
financial information about an identifiable economic entity.
Objective 3
Difference between Bookkeeping and Accounting
Bookkeeping Accounting
. Recording of transactions
. Preparing financial reports
. Recording of transactions
. Preparing financial reports
. Analyzing financial reports
. Decision-making
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Objective 4
Branches of Accounting
1. Financial Accounting is primarily concerned with the recording of business tr
ansactions
and the eventual preparation of financial statements (Valix, 2005).
2. Cost Accounting is primarily concerned with proper accumulation of costs such
as
materials, labor and overhead, proper costing of inventories and study of differ
ent costing
methods.
3. Management Accounting is the preparation of financial reports and management
research intended for management use and interpretation of these reports and res
earches.
Examples of financial reports are Sales reports, Cost of Production reports, Bud
gets etc.
Example of management research is evaluation of a business process and managemen
t
consulting.
4. Taxation deals with the study of provisions of the law with regard to Philipp
ine taxation
system and proper computation of taxes such as income tax, value-added tax, with
holding
tax and other taxes.
5. Auditing basically deals with the examination of the financial statements by
an
independent party (auditor) to ascertain whether such financial statements are i
n
conformity with Philippine Accounting Standards.
Objective 5
Forms of Business Organizations
1. According to ownership
a. Sole-proprietorship owned by only one person called sole-proprietor
b. Partnership owned by 2 or more persons called partners
c. Corporation owned by 5 or more persons called shareholders
2. According to activity
a. Service renders services to the public such accounting firms, law firms,
consulting firms, SPA, medical clinics, dental clinics, schools etc
b. Merchandising buys and sells merchandise to the public
c. Manufacturing buys raw materials and converts them into finished goods to be
sold to the public
Objective 6
Certified Public Accountant (CPA)
- is an accounting professional doing accounting, audit, tax, management consult
ing,
education and research work.
- Types of Accountants
o Private Accountant / Management Accountant
. is an accounting professional employed in a private company or
organization
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o Public Accountant / Auditor
. is an accounting professional independent from the private organizations
and is usually employed in an auditing firm
o Government Accountant
. is an accounting professional employed in a government agency
o Accounting Educator and Researcher
. is an accounting professional employed in a university, college or
research organization
Objective 7
Government Agencies and Professional Bodies
1. Bureau of Internal Revenue (BIR) agency in charge of proper collection of tax
es from
the public
2. Securities and Exchange Commission (SEC) agency in charge of accumulating aud
ited
financial statements of organizations, regulating companies issuing securities s
uch as
stocks and bonds to the public, and monitoring companies in the insurance indust
ry. This
agency also facilitates the registration of partnerships and corporations.
3. Bangko Sentral ng Pilipinas (BSP) / Central Bank of the Philippines agency in
charge
of regulating Philippine bank operations, setting Philippine monetary policies e
tc.
4. Philippine Stock Exchange (PSE) agency in charge of monitoring securities
transactions of companies listed in the stock exchange.
5. Department of Trade and Industry (DTI) agency in charge of facilitating regis
tration of
sole-proprietorship businesses and regulating consumer commodity transactions.
6. Commission on Audit (COA) agency in charge of auditing government-related
transactions
7. Board of Accountancy (BOA) - is an accounting body in charge of administering
licensure examination for accountants
8. Professional Regulation Commission (PRC) - government agency in charge of iss
uing
licenses to successful examinees in board exams
9. Philippine Instititute of Certified Public Accountants (PICPA) - Professional
organization
of accountants in the Philippines
10. City Hall and Baranggay these political subdivisions issues business permits
and
collects business taxes.
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Objective 8
Business Documents
1. Purchase Order shows items to be ordered by the business
2. Delivery Receipt shows items to be delivered in the business
3. Sales Invoice shows items that were sold to the business
4. Statement of Account shows the summary of sales invoices
5. Cash Voucher shows the liability of the business to be paid in the future
6. Official Receipt shows the amount received by the business
Objective 9
Financial Statements
- Shows the results of the recording of the business transactions and are expres
sed in terms
of assets, liabilities, equity, income and expenses.
- Six (6) Components
o Balance Sheet / Statement of Financial Position
. Presents the financial condition of the business through its assets,
liabilities and capital / owner s equity
o Income Statement
. Presents the financial performance of the business through its income
and expenses
o Statement of Changes in Owner s Equity
. Presents the changes in capital such as additional investments,
withdrawals, net income and/or net loss
o Statement of Cash Flows
. Presents the cash inflows and outflows of the business through its
operating, investing and financing activities
o Statement of Comprehensive Income
. Presents gains and losses that were not presented in the Income
statement. Examples are Unrealized gain on sale of trading securities,
Foreign exchange gain on translation etc.
o Notes to the Financial Statements
. Presents the details of the line items in the Balance Sheet and Income
Statement
Generally Accepted Accounting Principles (GAAP)
- Refers to rules, procedures, practice and standards followed in the preparatio
n and
presentation of financial statements (Valix, 2005).
Financial Reporting and Standards Council (FRSC)
- The council establishes and improves accounting standards that will be general
ly
accepted in the Philippines (Valix, 2005)
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Users of the Financial Statements
Internal Users External Users
1. Management
2. Employees
1. Investors
2. Creditors / Lenders
3. Suppliers / Vendors
4. Government
5. Public
Objective 10
Basic Accounting Concepts / Assumptions
1.
Entity
a.
Under this concept, the business enterprise is viewed as separate from the
owners, managers, and employees of the business (Valix, 2005)
2.
Time period
a.
This concept requires that the indefinite life of an enterprise is subdivided in
to
time periods which are usually of equal length (Valix, 2005)
b.
Calendar year is a 12-month period that ends on December 31, otherwise it is
called Natural business year or Fiscal year (Valix, 2005)
3.
Monetary unit
a.
This concept assumes that financial transactions be measured in terms of money
or currency of the Philippines
4.
Cost
a.
This concept requires that assets should be recorded initially at original
acquisition cost (Valix, 2005)
5.
Adequate disclosure
a.
This concept requires that all significant and relevant information leading to t
he
preparation of financial statements should be clearly reported (Valix, 2005)
6.
Materiality
a.
This concept relates to the significance of an item to the overall presentation
of
the financial statements. Information is material if its omission could influenc
e
the economic decision of the users of the financial statements (Valix, 2005)
7.
Accrual
a.
This concept requires the income earned must be recognized in the financial
statements whether cash is received or not.
b.
This concept also requires the expenses incurred must be recognized in the
financial statements whether cash is paid or not.
c.
Because of this concept, organizations are preparing adjusting journal entries t
o
recognize accrued income and accrued expenses.
d.
Accrued income refers to income earned but not yet received.
e.
Accrued expense refers to expense incurred but not yet paid.
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8.
Consistency
a.
This concept requires that the accounting methods and practices should be
applied on a uniform basis from one time period to another (Valix, 2005).
9.
Comparability
a.
There are 2 kinds of comparability: Comparability within an enterprise and
Comparability between enterprises (Valix, 2005)
b.
Comparability within an enterprise is the quality of information that allows
comparisons within a single enterprise from one time period to the next (Valix,
2005)
c.
Comparability between enterprises is the quality of information that allows
comparisons between two or more enterprises engaged in the same industry
(Valix, 2005)
10. Going Concern
a.
This concept assumes that business will operate indefinitely and there is no
intention of liquidating or closing down the business
11. Revenue recognition
a.
Same as accrued income concept
12. Expense recognition
a.
Same as accrued expense concept
13. Matching
a.
This concept requires that costs and expenses incurred in earning a revenue
should be reported in the same period when the revenue or income is earned
(Valix, 2005)
14. Conservatism
a.
Under this concept, when alternatives exist, the alternative which has the least
effect on net income or owner s equity should be chosen (Valix, 2005)
b.
Conservatism is synonymous with Prudence. Prudence is the desire to exercise
care and caution when dealing with the uncertainties in the measurement process
such as assets or income are not overstated and liabilities or expenses are not
understated (Valix, 2005)
15. Objectivity
a.
This concept requires that financial transactions that were recorded be supporte
d
by business documents
Objective 11
Other Terms
Liquidity Solvency
-Refers to the ability of the organization
to pay its short-term (current)
obligations
-Refers to the ability of the organization
to pay its long-term (noncurrent)
obligations
Stock Certificate evidence certifying the ownership of shares of stock of a shar
eholder
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Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th editio
n. New Jersey:
John Wiley and Sons, Inc. pages2 11, 21, 25, 29 31, 92 94
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC E
nterprises &
Co., Inc.
3rd
Valencia, E., and Roxas, G. (2009). Basic Accounting, edition. Baguio City: Vale
ncia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accoun
ting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2
007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
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LESSON 2
TRANSACTION ANALYSIS
Study Objectives
(Put a Check mark)
1 Define the accounting equation and know the effects of
the financial transactions on the accounting equation
2 Familiarize with the types of accounts for assets,
liabilities, capital, income and expenses
Objective 1
The Accounting Equation
Assets = Liabilities + Capital
The equation states that business assets are financed by two parties. They are t
he creditors or
vendors (liabilities) and the owner (capital).
Income will increase assets as well as capital and expenses will decrease assets
as well as capital.
Business transactions will have an effect on the accounting equation. The follow
ing are the basic
financial transactions and the effects on the accounting equation.
Transaction ASSETS LIABILITIES CAPITAL
Investment of the owner
. .
Investment
Withdrawal of the owner
. .
Withdrawal
Borrowed money by
issuing a promissory note
. .
Payment of the principal
and interest of the
promissory note
. . .
Interest
expense
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Purchase of short-term
investment for cash
..
Sale of short-term
investment at a gain
..
.
Gain on sale
of investment
in trading
securities
Sale of short-term
investment at a loss
..
.
Loss on sale
of investment
in trading
securities
Cash advance to an
employee
..
Purchase of supplies for
cash
..
Purchase of supplies on
account
. .
Purchase of a fixed asset
for cash
..
Purchase of a fixed asset on
account
. .
Partial / Full payment of
accounts payable
. .
Sale of a fixed asset at a
gain
..
.
Gain on sale
of equipment
Sale of a fixed asset at a
loss
..
.
Loss on sale
of equipment
Rendered services for cash
.
.
Service
Income
Rendered services on
account
.
.
Service
Income
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Partial / Full collection of
accounts receivable
..
Received cash for
commission income
.
.
Commission
Income
Payment of expenses for
cash
.
.
Expense
Objective 2
Types of Accounts
CATEGORY DEFINITION ACCOUNT TITLE DEFINITION /
EXAMPLES
ASSETS
CASH This includes bills
and coins, bank
check, bank
accounts.
PETTY CASH FUND
Cash used to pay
petty or small
amount of
expenses.
CASH ON HAND Cash in the
possession and
custody of the
business.
CASH IN BANK Self-explanatory
INVESTMENT IN
TRADING
SECURITIES
This refers to shortterm,
highly liquid
investment in
securities such as
stocks and bonds.
TRADE AND OTHE
RECEIVABLES
These refer to
amounts collectible
from a person or a
company
ACCOUNTS
RECEIVABLE
Amount collectible
from clients or
customers for
services rendered or
sale of goods
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ALLOWANCE FOR
DOUBTFUL
ACCOUNTS
Is a Contra-asset
account that
represents provision
for estimated
doubtful accounts
NOTES RECEIVABLE Same with
Accounts
Receivable but is
evidenced by a
promissory note
INTEREST
RECEIVABLE
Amount collectible
in a loan transaction
COMMISSION
RECEIVABLE
RENT RECEIVABLE
ADVANCES TO
EMPLOYEES
Cash advance given
to employees
PREPAID EXPENSES These refer to
expenses that are
paid in advance
PREPAID RENT
PREPAID
INSURANCE
PREPAID
ADVERTISING
PREPAID
SUBSCRIPTIONS
OFFICE SUPPLIES
STORE SUPPLIES
PROPERTY, PLANT
AND EQUIPMENT
These refer to items
that are useful for
more than 1 year
LAND
OFFICE EQUIPMENT Computer, Fax
machine
STORE EQUIPMENT Cash register
machine
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TRANSPORTATION
EQUIPMENT
Delivery Van,
Motorcycle, Cars,
Trucks
FURNITURE AND
FIXTURES
Cabinets, Tables,
Chairs
MACHINERY
BUILDING Office building,
Factory plant
ACCUMULATED
DEPRECIATION
Is a Contra-asset
account that
represents
cumulative
depreciation for
depreciable fixed
assets
LIABILITIES
TRADE AND OTHER
PAYABLES
These refer to
amounts payable to
a person or a
company
ACCOUNTS
PAYABLE
Amount payable to
supplier, creditor or
vendor for money,
supplies, goods or
property loaned
NOTES PAYABLE Same with
Accounts Payable
but is evidenced by
a promissory note
DISCOUNT ON
NOTES PAYABLE
Is a Contra-liability
account that
represents
unamortized
interest on the
promissory note
INTEREST PAYABLE Amount payable in
a loan transaction
TAXES AND
LICENSES PAYABLE
Unpaid taxes and
licenses to be
remitted / paid to
the government
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UTILITIES PAYABLE Unpaid
communication,
light and water bills
SALARIES AND
WAGES PAYABLE
Unpaid salaries and
wages of the
employees
UNEARNED INCOME This refers to cash
received in advance
but not yet earned
UNEARNED RENT
UNEARNED
ADVERTISING
UNEARNED
SUBSCRIPTIONS
UNEARNED
COMMISSION
MORTGAGE
PAYABLE
This refers to bank
loan with assets
such as house and
lot or vehicle as
collaterals
BONDS PAYABLE This refers to loan
that is evidenced by
a bond certificate
or indenture
CAPITAL / OWNER S EQUITY
OWNER, CAPITAL This refer to claim
or interest of the
owner
OWNER, DRAWING This refer to
temporary
withdrawal of the
owner of cash,
supplies, goods or
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property
INCOME
SERVICE INCOME Income derived
from rendering of
services
Primary income for
service business
OTHER INCOME Secondary income
for service business
INTEREST INCOME Income from loan
transactions
DIVIDEND INCOME Income from stock
investments
RENT INCOME
GAIN ON SALE OF
EQUIPMENT
Excess of selling
price over the net
book value of the
fixed asset
EXPENSES
EMPLOYEE BENEFIT
COST
Expenses related to
employee benefits
SALARIES AND
WAGES EXPENSE
Represents the total
gross salary or
wages of the
employees
SSS PREMIUMS
EXPENSE
Represents total
SSS (health benefit)
contributions of the
employer and the
employees
PHILHEALTH
CONTRIBUTIONS
EXPENSE
Represents total
Philhealth (health
benefit)
employer and the
employees
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PAG-IBIG
CONTRIBUTIONS
EXPENSE
Represents total
Pag-IBIG (housing
benefit)
employer and the
employees
RENT EXPENSE
PROFESSIONAL FEES Expense related to
professional
services of
accountants,
lawyers etc
ADVERTISING
EXPENSE
COMMISSION
EXPENSE
Expense related to
payment of
commission to
agents
REPAIR AND
MAINTENANCE
EXPENSE
SUPPLIES EXPENSE
INSURANCE
EXPENSE
REPRESENTATION
AND
ENTERTAINMENT
EXPENSE
Expense related to
cost of meetings
with clients such as
meals
TRANSPORTATION
EXPENSE
Expense related to
commuting from
the office to
client s office
FUEL AND OIL
EXPENSE
UTILITIES EXPENSE Expense related to
communication
such as telephone,
Internet, electricity
and water
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TAXES AND
LICENSES EXPENSE
Expense related to
business taxes and
permits from the
city hall
CHARITABLE
CONTRIBUTION
EXPENSE
Expense related to
donations
DEPRECIATION
EXPENSE
Noncash expense
that represents the
total depreciation
of the depreciable
fixed assets for the
year
DOUBTFUL
ACCOUNTS EXPENSE
Noncash expense
that represents the
total estimated
doubtful accounts
for the year
BAD DEBTS
EXPENSE
Noncash expense
that represents the
total accounts
receivable that
were written-off /
removed from the
financial books due
to its proven
uncollectibility
MISCELLANEOUS
EXPENSE
OTHER EXPENSE LOSS ON SALE OF
EQUIPMENT
Excess of net book
value over the
selling price of the
fixed asset
FINANCE COST INTEREST EXPENSE Expense from loan
transactions
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Further Readings
n. New Jersey:
John Wiley and Sons, Inc. pages14 20, 26 27, 159 164
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
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essage.
LESSON 3
GENERAL JOURNAL, GENERAL LEDGER TRIAL BALANCE
Study Objectives
(Put a Check mark)
1 Know the concept of double-entry bookkeeping and the
appropriate accounting tool for financial transactions
2 Understand the concept of journalizing and prepare
journal entries
3 Post journal entries to the general ledgers
4 Prepare the trial balance
Objective 1
Double-entry Bookkeeping
This concept uses the tools debit and credit to record financial transactions. F
urther, this concept
dictates that for every debit, there is at least one credit and vice-versa .
Appropriate Accounting Tool
The table shows the appropriate accounting tool for the effects of the financial
transactions on
assets, liabilities, capital, income and expenses.
Increase Decrease
Asset Debit Credit
Liability Credit Debit
Capital Credit Debit
Income Credit
Expense Debit
Objective 2
Journalizing
This refers to the process of recording the financial transactions in the Genera
l Journal. General
Journal is also known as Book of Original Entry .
The following are examples of Journal Entries:
Adapted from Exercise 6-8 of Workbook in Introductory Accounting for Service Bus
iness
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Journalize the following selected transactions of MJ Dry Cleaning. The following
transaction
occurred during June 2010.
1 MJ Flores invested in the business the following: P 250,000 cash and P 420,000
worth of
dry cleaning equipment with fair value of P 400,000 but with existing liability
of P
100,000 which is to be assumed by the business
2 Purchased dry cleaning supplies from Wilson Cleaners for P 22,100, payable aft
er 20
days
4 Bought cash register from Carter Equipment, P 45,800. Terms: 30% down payment,
balance on account
7 Dry cleaning services rendered for the week totaled P 25,250 cash
GENERAL JOURNAL Page xx
Date Particulars F Debit Credit
2010
Jun 01 Cash 101 250 000
Dry Cleaning Equipment 110 400 000
Accounts Payable 210 100 000
MJ Flores, Capital 320 550 000
Investment of the owner
02 Dry Cleaning Supplies 108 22 100
Purchase of supplies on account
04 Office Equipment 111 45 800
Cash 101 13 470
Purchase of cash register
07 Cash 101 25 250
Dry Cleaning Service Income 410 25 250
Rendered dry cleaning service
for cash
Simple entry and Compound entry
Simple entry is a journal with only one debit and one credit. Compound entry is
a journal entry
with at least two debits or at least two credits.
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Objective 3
Posting
This refers to the process of transferring the debit and credit amounts to the a
ppropriate ledger
accounts. Ledger accounts are placed in a financial book called General Ledger.
This is also
known as Book of Final Entry . After the amounts have been posted, one should post
the ledger
account number back to the general journal. This process is known as cross-refere
ncing .
Chart of Accounts
This chart lists the account titles to be used by the business and the related a
ccount numbers. The
following is a typical example of chart of accounts.
ASSETS 100 OWNER S EQUITY 300
Cash 101 MJ Flores, Drawing 310
Investment in Trading Securities 102 MJ Flores, Capital 320
Accounts Receivable 103
Allowance for Doubtful Accounts 104
Notes Receivable 105 INCOME 400
Advances to Employees 106
Prepaid Rent 107 Dry Cleaning Service Income 410
Dry Cleaning Supplies 108 Interest Income 420
Land 109
Dry Cleaning Equipment 110
Office Equipment 111 EXPENSES 500
Building 120
Accumulated Depreciation
Dry Cleaning Equipment
130 Salaries and Wages Expense 510
Accumulated Depreciation
Office Equipment
131 Rent Expense 520
Accumulated Depreciation Building 140 Advertising Expense 530
Commission Expense 540
LIABILITIES 200 Dry Cleaning Supplies Expense 550
Insurance Expense 560
Accounts Payable 210 Transportation Expense 570
Notes Payable 220 Utilities Expense 580
Discount on Notes Payable 230 Taxes and Licenses Expense 590
Unearned Advertising 240 Depreciation Expense 591
Mortgage Payable 250 Interest Expense 592
nt from the author.
essage.
General Ledger Postings
CASH 101
Date Particulars F Debit Date Particulars F Credit
2010 2010
Jun 01 GJ1 250 000 Jun 04 GJ1 13 470
07 GJ1 25 250
Totals 275 250 13 470
Balance 261 780
DRY CLEANING SUPPLIES 108
2010
Jun 02 GJ1 22 100
DRY CLEANING EQUIPMENT 110
2010
Jun 01 GJ1 400 000
OFFICE EQUIPMENT 111
2010
Jun 04 GJ1 45 800
ACCOUNTS PAYABLE 210
2010
Jun 01 GJ1 100 000
02 GJ1 22 100
04 GJ1 32 060
nt from the author.
essage.
MJ FLORES, CAPITAL 320
2010
Jun 01 GJ1 550 000
DRY CLEANING SERVICE INCOME 410
2010
Jun 07 GJ1 25 250
Normal Balances of the Accounts
Assets Debit
Contra-assets Credit
Liabilities Credit
Contra-liabilities Debit
Capital Credit
Drawing Debit
Income Credit
Expenses Debit
nt from the author.
essage.
Objective 4
Trial Balance
This refers to the summary of balances in the ledger accounts. The accounts are
arranged in the
order of assets, liabilities, equity, income and expenses.
PATRICE CONSULTING SERVICES
Trial Balance
July 31, 2010
Debit Credit
Cash P 56 300
Accounts Receivable 77 500
Office Supplies 2 100
Prepaid Insurance 2 200
Office Equipment 120 000
Accounts Payable P 23 020
Notes Payable 15 000
Simone Patrice, Capital 172 880
Simone Patrice, Drawing 2 000
Consulting Fees 253 000
Salaries and Wages Expense 168 200
Rent Expense 11 000
Transportation Expense 7 800
Utilities Expense 8 200
Advertising Expense 5 500
Miscellaneous Expense 3 100 _______
Totals P 463 900 P 463 900
======== ========
Adapted from Workbook in Introductory Accounting for Service Business
A balanced trial balance means that journal entries are properly posted and ledg
er accounts are
properly balanced.
nt from the author.
essage.
Further Readings
n. New Jersey:
John Wiley and Sons, Inc. pages46 56, 57 73
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.
LESSON 4
FINANCIAL STATEMENTS
Study Objectives
(Put a Check mark)
1 Understand the procedures in preparing the income
statement
2 Understand the procedures in preparing the statement of
changes in owner s equity
3 Understand the procedures in preparing the balance sheet
4 Understand the procedures in preparing the notes to the
financial statements
5 Compute the missing amounts in relation to changes in
capital
Objective 1
Income Statement
To recall, the Income Statement presents the financial performance of the busine
ss through its
income and expenses.
Net Income refers to the excess of income over expenses, otherwise it is called
Net Loss.
There are two types of presentation for income statement.
1.
Natural form
a.
In this presentation, income and expense accounts are grouped according to
nature. Secondary income such as interest income, dividend income etc are
grouped under line item Other Income . On the other hand, expenses are
arranged from highest to lowest, except for Miscellaneous Expense, Other
Expense and Finance Cost. These line items are the last 3 line items in the
expense section.
2.
Functional form
a.
In this presentation, expenses are grouped according to function. The 4
classification of expenses are:
i. Distribution cost
ii.
General and administrative expenses
iii.
Other operating expenses
iv.
Finance cost
nt from the author.
essage.
Objective 2
Statement of Changes in Owner s Equity
To recall, this component presents the changes in capital such as additional inv
estments,
withdrawals, net income and/or net loss.
The following are the effects to the capital or equity:
EFFECTS
Investment Increase
Withdrawal Decrease
Income Increase
Expense Decrease
Net Income Increase
Net Loss Decrease
The Income Statement is connected to this component through Net Income or Net Lo
ss and this
component is connected to the Balance Sheet through the Ending balance of the ca
pital account.
The equation for computing Ending Capital Balance is
Owner, Capital beginning + Additional Investments + Net Income
Withdrawals Net Loss = Owner, Capital ending
Using the accounting equation, the equation for computing Beginning Capital Bala
nce is
Assets, beginning Liabilities, beginning = Owner, Capital (beginning)
On the other hand, the alternative equation for Ending Capital Balance is
Assets, ending Liabilities, ending = Owner, Capital (ending)
nt from the author.
essage.
Objective 3
Balance Sheet or Statement of Financial Position
To recall, the Balance Sheet presents the financial condition of the business th
rough its assets,
liabilities and capital / owner s equity
There are 2 forms of Balance Sheet:
1.
Account-form
a.
This form presents assets on the left side and liabilities and capital on the ri
ght
side
2.
Report-form
a.
This form presents assets on the upper side and liabilities and capital on the l
ower
side
Assets
Assets are classified into 2:
1.
Current Assets
a.
These refer to assets that are useful to the business within one year. Examples
are
Cash, Investment in Trading Securities, Trade and Other Receivables,
Merchandise Inventory and Prepaid Expenses.
2.
Noncurrent Assets
a.
These refer to assets that are useful to the business for more than one year.
Examples are Property, Plant and Equipment, Long-term investments and
Intangible assets.
Assets are arranged in order of liquidity. Cash is the first line item because i
t is the most liquid
asset.
Liabilities
Liabilities are classified into 2:
1.
Current liabilities
a.
These refer to liabilities that are payable and will mature within one year.
Examples are Trade and Other Payables and Current-portion of long-term notes
payable.
2.
Noncurrent liabilities
a.
These refer to liabilities that are payable and will mature beyond one year.
Examples are Noncurrent-portion of long-term notes payable, Mortgage Payable,
and Bonds Payable.
Liabilities are arranged in order of maturity. For Noncurrent liabilities, the o
rder is usually Notes
Payable, Mortgage Payable and Bonds Payable. The reason is Notes Payable will no
rmally
mature first before mortagage and bonds.
Capital or Owner s Equity
This represents the ending balance of capital from the statement of changes in o
wner s equity.
nt from the author.
essage.
Objective 4
Notes to the Financial Statements
To recall, this component presents the details of the line items in the Balance
Sheet and Income
Statement
Trade and Other Receivables
For this category, the first line item is Accounts Receivable followed by Allowa
nce for Doubtful
Accounts. The difference between these two line items is called Net Realizable Va
lue . Net
realizable value represents the estimated amount to be collected from the client
s / customers after
deducting doubtful accounts.
After Allowance for Doubtful Accounts, the next line item is Notes Receivable th
en followed by
account titles which have the word Receivable . They are arranged from highest to l
owest since
their nature are the same. Receivable accounts are synonymous with Accrued Income . F
or
example, Interest receivable is the same with Accrued Interest Income.
The last line item is Advances to employees.
Prepaid Expenses
The items for this category are arranged from highest to lowest since their natu
re are the same.
Property, Plant and Equipment
The tabular presentation for this note is as follows:
Cost Accumulated Net Carrying Value
Depreciation
Land P 400,000 P 400,000
Transportation Equipment 530,000 P 30,000 500,000
Building 360,000 60,000 300,000
Equipment 240,000 40,000 200,000
Furniture and Fixtures 110,000 10,000 100,000
Total P 1,640,000 P 140,000 P 1,500,000
========= ======== =========
Adapted from the exhibits of the Workbook
The fixed asset items are arranged from highest acquisition cost to lowest acqui
sition cost. The
difference between the acquisition cost and accumulated depreciation is called t
he Net carrying
value or Net book value.
nt from the author.
essage.
Trade and Other Payables
Line Item
1st Accounts Payable
2nd Notes Payable
3rd Discount on Notes Payable
4th nth Account with the word Payable
Last Unearned income
For the 4th line item, the accounts are arranged from highest to lowest since th
eir nature are the
same. Payable accounts are synonymous with Accrued Expense . For example, Rent payabl
e
is the same with Accrued Rent expense.
Objective 5
Problems in connection to Statement of Changes in Owner s Equity
1.
A firm has just completed its first year of operations. During the year, the own
er
withdrew P 50,000 and by the end of the year his equity stood at P 70,000, which
was a P 10,000 increase from his initial investment. If revenues generated durin
g
the year totaled P 400,000, then expenses incurred during the year must have bee
n
______________.
Owner, Capital beginning + Additional Investments + Income
Withdrawals Expense = Owner, Capital ending
Expense = Owner, Capital beginning + Additional Investments + Income
Withdrawals Owner, Capital ending
Solution in good accounting form
Beginning capital P 60,000
Income 400,000
Withdrawals (50,000)
Ending capital (70,000)
Expenses P 340,000
========
nt from the author.
essage.
2.
A business had assets of P 210,000 and liabilities of P 140,000 on January 1,
2008. Six months later, the assets totaled P 170,000 while outstanding debts
amounted P 95,000. During the six-month period, the proprietor withdrew cash of
P 12,000 and supplies worth P 5,000. During the same period, he also made
additional investments of P 24,000 cash and a second-hand equipment originally
costing P 45,000 but with a fair market value of P 20,000. The result of operati
ons
was a ___________ of ____________.
Ending capital P 75,000
Beginning capital (70,000)
Additional investments (44,000)
Withdrawals 17,000
Net Loss P 22,000
========
nt from the author.
essage.
Further Readings
n. New Jersey:
John Wiley and Sons, Inc. pages21 24, 12 13
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.
LESSON 5
STATEMENT OF CASH FLOWS
Study Objectives
(Put a Check mark)
1 Recall the definition of Statement of Cash Flows and
classify the transactions as operating activity, investing
activity and financing activity
2 Prepare the Statement of Cash Flows and connect the
Ending cash balance to the Balance Sheet
Objective 1
Statement of Cash Flows
To recall, the Statement of Cash Flows presents the cash inflows and outflows of
the business
through its operating, investing and financing activities.
Business Activities
1. Financing activities
a. These activities pertain to transactions such as
i. Investments of the owner
ii. Loans whether short term or long term
iii. Withdrawal of the owner
iv. Payment of the principal of the loans
2. Investing activities
a. These activities pertain to transactions such as
i. Sale of property, plant and equipment
ii. Purchase of property, plant and equipment
3. Operating activities
a. These activities pertain to transaction such as
i. Payment of the interest of the loans
ii. Other transactions not enumerated above
Objective 2
Connection of the Statement of Cash Flows to the Balance Sheet
The ending cash balance in the Statement of Cash Flows represents the cash balan
ce in the
Balance Sheet.
nt from the author.
essage.
Further Readings
n. New Jersey:
John Wiley and Sons, Inc. pages 718 726
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.
LESSON 6
CORRECTING ENTRIES
Study Objectives
(Put a Check mark)
1 Know the different accounting errors
2 Prepare correcting entries
Objective 1
Accounting Errors
1. Transposition error
a. Error in the position of figures. Example: 123 is written as 132
2. Transplacement error / Slide
a. Error in the placement of decimal point. Example: 1000.90 is written as 100.0
9
Objective 2
Correcting journal entries
-entries to correct incorrect journal entries
On September 15, a temporary withdrawal of P 12,000 by X, the owner was recorded
as a debit to
Salaries and Wages Expense and a credit to Cash. The correcting entry was made a
t month-end.
Recorded entry
Date Particulars Debit Credit
2009
Sep 15 Salaries and Wages Expense 12 000
Cash 12 000
Correct entry
2009
Sep 15 X, Drawing 12 000
Cash 12 000
Correcting Entry
2009
Sep 30 X, Drawing 12 000
Correcting entry
nt from the author.
essage.
Further Readings
n. New Jersey:
John Wiley and Sons, Inc. pages 68 69, 156 158
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.
LESSON 7
PAYROLL ACCOUNTING
Study Objectives
(Put a Check mark)
1 Understand the concept of employee benefits and
compensation and the related terms such as Payroll
Register and payroll deductions
2 Prepare journal entries pertaining to payroll accounting
Objective 1
Employee Compensation and Benefits
Organizations normally monitor the attendance of the employees through time cloc
k cards. These
cards show the time in and time out of the employees. Further, organizations als
o prepare and
distribute pay slips. These slips show the gross salary of an employee and the r
elated deductions.
The normal deductions from the gross salary are SSS, Philhealth, Pag-IBIG, Withh
olding tax and
Cash advances.
Organizations also prepare the Payroll Register which shows the summary of the e
mployees pay
slips.
The following is the tabular format of the Payroll Register
Employee
Name
Gross
Salary
Overtime,
Bonus and
Other
Benefits
Total
Salary
SSS Philhealth Pag-
IBIG
Withholding
Tax
Cash
Advance
Net
Salary
Alpha
Beta
Charlie
TOTAL
Objective 2
Payroll Example and Journal Entries
Total Employee Contributions Total Employer Contributions
SSS 30,000 60,000
Philhealth 10,000 10,000
Pag-IBIG 5,000 5,000
Assume Total gross salaries and wages is P 200,000, Total withholding taxes paya
ble is P 20,000,
and Total advances to employees is P 10,000
nt from the author.
essage.
Salaries and Wages of the employees
2009
Sep 30 Salaries and Wages Expense 200 000
SSS Premiums Payable 30 000
Philhealth Contributions Payable 10 000
Pag-IBIG Contributions Payable 5 000
Withholding Tax Payable 20 000
Advances to Employees 10 000
Cash 125 000
Salaries and Wages of the employees
Employer Contributions
2009 SSS Premiums Expense 60 000
Sep 30 Philhealth Contributions Expense 10 000
Pag-IBIG Contributions Expense 5 000
SSS Premiums Payable 60 000
Philhealth Contributions Payable 10 000
Employer Contributions
Remmittance to the government
agencies
2009 SSS Premiums Payable 90 000
Sep 30 Philhealth Contributions Payable 20 000
Withholding Tax Payable 20 000
Cash 140 000
Remmittance to the government
agencies
nt from the author.
essage.
Further Readings
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
nt from the author.
essage.
LESSON 8
ACCOUNTING FOR PROMISSORY NOTES
Study Objectives
(Put a Check mark)
1 Understand the concept of promissory notes and its parts
and prepare the journal entries in relation to issuance of
promissory notes and payment on the maturity date
2 Understand the concept of discounting of customer s note
and prepare the necessary journal entries
3 Understand the concept of discounting of own note and
prepare the necessary journal entries
Objective 1
Promissory Notes
A promissory note is an unconditional promise in writing made by one person to a
nother, signed
by the maker, engaging to pay on demand or at a fixed or determinable future tim
e a sum certain
in money to order or to bearer (Valix, 2005).
Parts of a Promissory note
March 24, 2009
I promise to pay X, P 5,000 on April 7, 2009 with 12% interest.
(Sgd) Y
1. Date of the note March 24, 2009
2. Maturity date April 7, 2009
3. Maker Y
4. Payee X
5. Face value / Principal P 5,000
6. Interest rate 12%
Given the above promissory note, how much is the Maturity value?
nt from the author.
essage.
Maturity value = Principal + Interest
Interest = Principal x Interest rate x Term / 360
Term refers to the period between the date of the note and the maturity date. 36
0 represents the
number of days in a year in accordance to Banker s rule.
In the above example the term is 14 days. 7 days in March (31-24) and 7 days in
April.
For years 2000, 2004, 2008 and so on, remember that there are 29 days in Februar
y.
Interest = 5,000 x 12% x 14/360

= 23
Maturity value = 5,000
Journal Entries
Date of the note
Books of the Maker
2009
Mar 24 Cash 5 000
Notes payable 5 000
Issuance of promissory note
Books of the Payee
2009
Mar 24 Notes receivable 5 000
Cash 5 000
Receipt of promissory note
nt from the author.
essage.
Maturity Date
Books of the Maker
2009
Apr 07 Notes payable 5 000
Interest expense 23
Cash 5 023
Payment of promissory note
Books of the Payee
2009
Apr 07 Cash 5 023
Notes receivable 5 000
Interest income 23
Collection of principal and interest
Dishonoring of promissory note
When the maker fails to pay the principal and interest on the maturity date, the
n the promissory
note is considered dishonored. For the journal entry in the books of the maker,
instead of
crediting Cash, Accounts payable is credited. On the other hand in the books of
the payee, instead
of debiting Cash, Accounts receivable is debited.
Maturity Date
Books of the Maker
2009
Interest expense 23
Accounts payable 5 023
Books of the Payee
2009
Apr 07 Accounts receivable 5 023
Interest income 23
Collection of principal and interest
nt from the author.
essage.
Discounting of promissory notes
When a promissory note is negotiable, the payee may obtain cash before maturity
date by
discounting the note at a bank or other financing company. To discount the note,
the payee must
endorse it. Thus, legally the payee becomes an endorser and the bank becomes an
endorsee
(Valix, 2005).
Two types of discounting
1. Discounting of customer s note
2. Discounting of own note
Objective 2
Discounting of Customer s note
Using the above example, assume that the maker discounted the note on April 2 at
a discount rate
of 15%.
The necessary equations for note discounting are as follows:
Interest on discounting = Maturity value x Discount rate x Discount period / 360
Cash proceeds = Maturity value Interest on discounting
Discount period refers to the period between the discount date and the maturity
date.
For this example, the discount period is 5 days (April 7 2).
Interest on discounting = 5,023 x 15% x 5 / 360
= 10
Cash proceeds = Maturity value Interest on discounting

= 5,023 10
= 5,013
nt from the author.
essage.
Discount Date
Books of the Maker
2009
Apr 02 No journal entry
Books of the Payee
2009
Apr 02 Cash 5 013
Interest expense 10
Notes receivable discounted 5 000
Interest income 23
Discounting of note
Notes receivable discounted is classified as a Contra-asset account and is prese
nted as a
deduction from Notes receivable
Notes receivable P xxx
Less: Notes receivable discounted xxx P xxx
On the discount date, the payee needs to inform the maker that the note is disco
unted. On the
maturity date, the maker should directly pay to the bank or financing company.
Maturity Date
Books of the Maker
2009
Interest expense 23
Cash 5 023
Books of the Payee
2009
Apr 07 Notes receivable discounted 5 000
Cancellation of contingent liability
nt from the author.
essage.
Types of endorsement
1.
Endorsement with recourse
a.
This type requires the endorser to pay the endorsee if the maker dishonors the
note. This is the contingent or secondary liability of the endorser.
2.
Endorsement without recourse
a.
This type does not impose contingent liability on the endorser.
In the absence of any evidence to the contrary, endorsement is assumed to be wit
h recourse
(Valix, 2005).
Assume that in the above example, the maker dishonored the note and the bank cha
rged a
protest fee of P 500.
Maturity Date
Books of the Maker
2009
Interest expense 23
Miscellaneous expense 500
Accounts payable 5 523
Dishonoring of note
Books of the Payee
2009
Apr 07 Accounts receivable 5 523
Cash 5 523
Payment of promissory note plus
protest fees in behalf of the maker
Notes receivable discounted 5 000
Cancellation of contingent liability
Principal P 5,000
Interest 23
Protest fees 500
Total payment P 5,523
======
nt from the author.
essage.
Objective 3
Discounting of own note
In this type of discounting, the maker issues a promissory note to obtain cash.
Interest on
discounting is deducted in advance and is debited using the account title Discoun
t on Notes
Payable .
Example 1:
On July 14, 2009, for money borrowed, X discounted its own 30-day, 12% P 10,000
note with Y.
Interest on discounting = Principal x Interest rate x Term / 360

= 10,000 x 12% x 30 / 360
= 100
Discount Date
Books of the Maker
2009
Jul 14 Cash 9 900
Discount on notes payable 100
Notes payable 10 000
Discounting of note
Maturity Date
Books of the Maker
2009
Aug 13 Notes payable 10 000
Cash 10 000
Interest expense 100
Discount on note payable 100
Amortization of discount
nt from the author.
essage.
Example 2:
On December 14, 2009, for money borrowed, X discounted its own 30-day, 12% P 10,
000 note
with Y. The accounting period ends on December 31.
Year-end amortization
Amortization = Discount x (Year-end date Discount date) / Discount period
= 100 x (31-14) / 30
= 57
Discount Date
Books of the Maker
2009
Dec 14 Cash 9 900
Discount on notes payable 100
Notes payable 10 000
Discounting of note
Amortization at year-end
Books of the Maker
2009
Dec 31 Interest expense 57
Presentation
Notes payable P 10,000
Less: Discount on notes payable 43 P 9,957
Maturity Date
Books of the Maker
2010
Jan 13 Notes payable 10 000
Cash 10 000
Interest expense 43
nt from the author.
essage.
Further Readings
n. New Jersey:
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.
LESSON 9
ACCRUED INCOME
Study Objectives
(Put a Check mark)
1 Understand the concept of adjusting entries and the
reasons for providing adjusting entries at year-end
2 Recall the concept of accrued income and prepare
adjusting entry in relation to accrued income
Objective 1
Adjusting Entries
Adjusting entries refer to journal entries made at the end of the year for the f
ollowing reasons:
1.
Accrued income
a.
There may be unrecorded income and there is a need to accrue income or
recognize receivables.
2.
Accrued expense
a.
There may be unrecorded expenses and there is a need to accrue expenses or
recognize payables.
3.
Prepaid expense
a.
There may be a consumed or used portion in the recorded prepaid expense or
there may be an unconsumed or unused portion in the recorded expense.
4.
Unearned income
a.
There may be an earned portion in the recorded unearned income or there may be
an unearned portion in the recorded income.
5.
Depreciation
a. There is a need to provide depreciation for depreciable fixed assets.
6.
Doubtful accounts
a.
There is a need to provide estimated doubtful accounts in relation to accounts
receivable.
Objective 2
Accrued income
To recall, accrued income refers to income earned but not yet received. The foll
owing are the
examples of accrued income to be recognized at year-end:
1.
Accrued commission income
a.
It is possible that the company has already rendered the service pertaining to
commission but it has not yet received the commission as of year-end.
2.
Accrued rent income
nt from the author.
essage.
a.
It is possible that the company or lessor has already earned the rent but it has
not
yet received the rent payment as of year-end.
3.
Accounts receivable
a.
It is possible that the company has not yet recorded as of year-end the service
rendered.
4.
Accrued interest income
a.
It is possible that the company has not yet recorded the interest that is earned
in
relation to notes receivable from the date of the promissory note until year-end
date.
Accrued income is the same with receivable. For example,
accrued interest income is the same with interest receivable.
Pro-forma Entry
xxxx
Dec 31 _____ receivable xxx
_____ income xxx
Recognition of accrued income
Example 1:
A company leases an office space for P 14,000 per month. As of December 31, 2009
, company s
year-end, the tenant has not yet paid its rent for two months.
Adjusting entry
2009
Dec 31 Rent receivable 28,000
Rent income 28,000
(14, 000 x 2)
Recognition of accrued rent
Example 2:
As of December 31, 2009, ABC Hotel has generated lodging revenue of P 127,000 fr
om guests
whose payments are not yet received until they check out.
Adjusting entry
2009
Dec 31 Lodging receivable 127,000
Lodging income 127,000
Recognition of accrued lodging
If the company did not recognize accrued income at year-end, then the financial
statements will
be misstated showing understated assets and understated income.
nt from the author.
essage.
Further Readings
n. New Jersey:
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.
LESSON 10
ACCRUED EXPENSE
Study Objectives
(Put a Check mark)
1 Recall the concept of accrued expense and prepare
adjusting entry in relation to accrued expense
Objective 1
Accrued expense
To recall, accrued expense refers to expense incurred but not yet paid. The foll
owing are the
examples of accrued expense to be recognized at year-end:
1.
Accrued interest expense
a.
It is possible that the company has not yet recorded the interest that is incurr
ed in
relation to notes payable from the date of the promissory note until year-end da
te.
2.
Accrued salaries and wages expense
a.
It is possible that as of year-end, the company has not yet paid the employees
because the year-end date is not the same with the payroll date.
3.
Accrued rent expense
a.
It is possible that the company or lessee has already incurred the rent but it h
as
not yet paid the rent as of year-end.
4.
Accrued utilities expense
a.
It is possible that as of year-end, the company has not yet paid the utilities o
r the
billing statements of the utilities have not yet received by the company.
5.
Accrued taxes and licenses expense
a.
It is possible that as of year-end, the company has already earned from services
rendered and sale of goods but has not yet paid the related taxes.
Accrued expense is the same with payable. For example, accrued
interest expense is the same with interest payable.
Accrued expense is the opposite of accrued income. When one party recognize accr
ued income,
the other party should recognize accrued expense.
Pro-forma Entry
Xxxx
Dec 31 _____ expense xxx
_____ payable xxx
Recognition of accrued expense
nt from the author.
essage.
Example 1:
Property taxes for three months estimated to total P 13,300 have accrued.
Adjusting entry
2009
Dec 31 Taxes and Licenses expense 13,300
Taxes and Licenses payable 13,300
Recognition of accrued taxes and
licenses
Example 2:
Electricity consumption for the month of December amounting to P 7,100 is not ye
t paid.
Adjusting entry
2009
Dec 31 Utilities expense 7,100
Utilities payable 7,100
Recognition of accrued utilities
If the company did not recognize accrued expense at year-end, then the financial
statements will
be misstated showing understated liabilities and understated expense.
nt from the author.
essage.
Further Readings
n. New Jersey:
John Wiley and Sons, Inc. pages 104 108
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.
LESSON 11
PREPAID EXPENSE
Study Objectives
(Put a Check mark)
1 Recall the concept of prepare expense and prepare
adjusting entry using the Asset method
2 Prepare adjusting entry using the Expense method
Prepaid expense
To recall, prepaid expense is an asset that is paid in advance but not yet consu
med or used.
Companies have two options or methods in recording prepaid items. They may use t
he Asset
method or the Expense method.
Objective 1
Asset Method
If the company chooses to use the Asset method, then upon purchasing the prepaid
item the pro-
forma entry will be:
xxxx
xxx xx Prepaid _____ expense xxx
Cash xxx
Purchase of prepaid item
It is possible that in this recorded prepaid expense there may be consumed or us
ed portion. To
adjust the recorded prepaid expense, the pro-forma entry will be:
zxxx
Dec 31 _____ expense xxx
Prepaid _____ expense xxx
Recognition of consumed or used
portion of the recorded prepaid
expense
nt from the author.
essage.
Example:
On March 15, 2009, XYZ Company purchased office supplies for cash, P 100,000. At
the end of
the year, record shows that 25% worth of supplies have been used.

2009
Mar 15 Office supplies 100,000
Cash 100,000
Adjusting entry
2009
Dec 31 Office supplies expense 25,000
Office supplies 25,000
Recognition of used portion of the
recorded office supplies
If the prepaid expense account is not adjusted at year-end, then the financial s
tatements will be
misstated showing overstated assets and understated expenses.
If the adjusted Office supplies of P 75,000 is fully consumed in the following y
ear, then the entire
P 75,000 will be transformed to Office supplies expense also in the following ye
ar.
Objective 2
Expense Method
On the other hand, if the company chooses to use the Expense method, then the pr
o-forma entry
to record the purchase of prepaid item is:
xxxx
xxx xx _____ expense xxx
Cash Xxx
It is possible that in this recorded expense there may be unconsumed or unused p
ortion. To adjust
the recorded expense, the pro-forma entry will be:
xxxx
Dec 31 Prepaid _____ expense xxx
_____ expense Xxx
Recognition of unconsumed or
unused portion of the recorded
expense
nt from the author.
essage.
Example:
Assume the same example in asset method but this time the company will use the e
xpense
method.

2009
Mar 15 Office supplies expense 100,000
Cash 100,000
Adjusting entry
2009
Dec 31 Office supplies 75,000
Office supplies expense 75,000
Recognition of unused portion of the
recorded expense
If the expense account is not adjusted at year-end, then the financial statement
s will be misstated
showing understated assets and overstated expenses.
Notice that whether the company uses the asset method or expense method, the fin
ancial
statements will show same amounts for assets and expenses. In the above example,
both methods
will show Office supplies adjusted balance of P 75,000 and Office supplies expen
se adjusted
balance of P 25,000.
nt from the author.
essage.
Further Readings
n. New Jersey:
John Wiley and Sons, Inc. 96 100, 115 117
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.
LESSON 12
UNEARNED INCOME
Study Objectives
(Put a Check mark)
1 Recall the concept of unearned income and prepare
adjusting entry using the Liability method
2 Prepare adjusting entry using the Income method
Unearned income
To recall, unearned income is a liability that is received in advance but not ye
t earned.
Unearned income is the opposite of prepaid expense. If one party has recorded a
prepaid item,
then the other party has to record an unearned item.
Companies have two options or methods in recording unearned items. They may use
the Liability
method or Income method.
Objective 1
Liability Method
If the company chooses to use the liability method, then upon receiving the unea
rned item the
pro-forma entry will be:
Xxxx
xxx xx Cash xxx
Unearned _____ income Xxx
Receipt of unearned item in advance
It is possible that in this recorded unearned income there may be earned portion
. To adjust the
recorded unearned income, the pro-forma entry will be:
Xxxx
Dec 31 Unearned _____ income xxx
_____ income xxx
Recognition of earned portion of the
recorded unearned income
nt from the author.
essage.
Example:
On October 1, 2009, the company received from the tenant the advance rent paymen
t of P
100,000 representing 10-month rent.

2009
Oct 01 Cash 100,000
Unearned rent income 100,000
Adjusting entry
2009
Dec 31 Unearned rent income 30,000
Rent income 30,000
100,000 / 10 = 10,000 x 3
Recognition of earned portion of the
recorded unearned rent
If the unearned income account is not adjusted at year-end, then the financial s
tatements will be
misstated showing overstated liabilities and understated income.
If the adjusted Unearned rent income of P 70,000 is fully earned in the followin
g year, then the
entire P 70,000 will be transformed to Rent income also in the following year.
Objective 2
Income Method
On the other hand, if the company chooses to use the Income method, then the pro
-forma entry to
record the unearned item is:
xxxx
xxx xx Cash xxx
_____ income xxx
It is possible that in this recorded income there may be unearned portion. To ad
just the recorded
income, the pro-forma entry will be:
xxxx
Dec 31 _____ income xxx
Unearned _____ income xxx
Recognition of unearned portion of
the recorded income
nt from the author.
essage.
Example:
Assume the same example in liability method but this time the company will use t
he income
method.

2009
Oct 01 Cash 100,000
Rent income 100,000
Adjusting entry
2009
Dec 31 Rent income 70,000
Unearned rent income 70,000
100,000 / 10 = 10,000 x 7
Recognition of unearned portion of
the recorded income
If the income account is not adjusted at year-end, then the financial statements
will be misstated
showing understated liabilities and overstated income.
Notice that whether the company uses the liability method or income method, the
financial
statements will show same amounts for liabilities and income. In the above examp
le, both
methods will show Unearned rent income adjusted balance of P 70,000 and Rent inc
ome adjusted
balance of P 30,000.
nt from the author.
essage.
Further Readings
n. New Jersey:
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.
LESSON 13
DEPRECIATION
Study Objectives
(Put a Check mark)
1 Understand the concept of depreciation and its kinds
2 Enumerate the factors of depreciation and compute
depreciation using the straight line method
Objective 1
Concept of depreciation
Property, plant and equipment, except land, normally are usable for a number of
years after which
they have relatively little value either for service or for sale. The difference
between the original
cost of a property and any remaining value when it is retired or worn out is an
expense that
should be distributed to the periods during which the asset is used (Valix, 2000
).
Depreciation accounting
-Is a system of accounting which aims to distribute the cost of the depreciable
fixed asset
less salvage value, if any, over the estimated useful life of the asset in a sys
tematic and
rational manner. It is a process of allocation, not of valuation (Valix, 2000).
-The objective of depreciation accounting is to have each period benefitting fro
m the use
of the asset bear an equitable share of the asset cost (Valix, 2000).
Depreciation
-Is the portion of the cost of the asset charged as expense during an accounting
period
(Valix, 2000).
Kinds of depreciation (Valix, 2000)
1.
Physical depreciation
a.
Is related to the depreciable asset s wear and tear and deterioration over a perio
d.
This also results to the ultimate retirement of the property or termination of t
he
service of the asset.
b.
Physical depreciation may be caused by:
i. Wear and tear due to frequent use
ii.
Passage of time due to nonuse
iii.
Action of the elements such as wind, sunshine, rain or dust
iv.
Accidents such as fire, flood, earthquake and other natural disaster
v.
Diseases in animals and wooden buildings
2.
Functional or economic depreciation
a.
Arises from obsolescence or inadequacy of the asset to perform efficiently.
i. Obsolescence may arise from the following:
nt from the author.
essage.
1.
When there is no future demand for the product which the
depreciable asset produces
2.
When a new depreciable asset becomes available and the new
asset can perform the same function for substantially less cost
ii.
Inadequacy arises when the asset is no longer useful to the firm because
of an increase in the volume of operations.
Objective 2
Factors of depreciation (Valix, 2000)
In order to properly compute the amount of depreciation to be charged as expense

during an
accounting period, three factors are necessary, namely:
1.
Cost
2.
Scrap value
a.
Is the amount estimated to be recovered when the asset is retired from use.
b.
It is also known as Residual value or Salvage value.
c.
From the practical standpoint, the scrap value is often considered as zero becau
se
the valuation is usually very small or not capable of estimation.
3.
Estimated useful life
a.
Is the expected service or economic life of the asset.
Straight line method of depreciation (Valix, 2000)
Under the straight line method, the annual depreciation charge is calculated by
allocating the
amount to be depreciated equally over the number of years of estimated useful li
fe.
The formula for the computation of the annual depreciation following the straigh
t line method is
as follows:
Annual depreciation =
Cost minus scrap
Life in years
Cost minus scrap value equals Depreciable cost. Depreciable cost multiplied by t
he Annual
depreciation rate also gives the amount of annual depreciation.
The Annual depreciation rate is determined by dividing 100% by the life of the a
sset in years. For
example, if the life of the asset is 5 years, then the depreciation rate is 20%
(100% / 5).
The straight line method is based on the theory that periods benefited by the us
e of the asset
should bear an equal or equitable share of the asset cost because the straight l
ine approach
considers depreciation as a function of time rather than as a function of usage.
nt from the author.
essage.
Pro-forma Adjusting Entry
xxxx
Dec 31 Depreciation expense xxx
Accumulated depreciation <asset> xxx
Depreciation of fixed asset
Example:
Assume the following data for 2011
Equipment cost,
purchased on January 1, 2011
P 105,000
Scrap value P 5,000
Life in years 5 years
A depreciation table may appear as follows:
Year Depreciation Accumulated
depreciation
Net carrying
value
Acquisition cost 105,000
2011 20,000 20,000 85,000
2012 20,000 40,000 65,000
2013 20,000 60,000 45,000
2014 20,000 80,000 25,000
2015 20,000 100,000 5,000
Adjusting entry for 2011
2011
Dec 31 Depreciation expense 20,000
Accumulated depreciation Equipment 20,000
Depreciation of equipment for 2011
Note xx Property, Plant and Equipment
Depreciation
Land P xxx,xxx P xxx,xxx
Transportation Equipment xxx,xxx P xxx,xxx xxx,xxx
Building xxx,xxx xxx,xxx xxx,xxx
Equipment
Furniture and Fixtures
105,000
xxx,xxx
20,000
xxx,xxx
85,000
xxx,xxx
Total P xxx,xxx P xxx,xxx P xxx,xxx
========= ======== =========
nt from the author.
essage.
Adjusting entry for 2012
2012
Dec 31 Depreciation expense 20,000
Accumulated depreciation Equipment 20,000
Depreciation of equipment for 2012
Note xx Property, Plant and Equipment
Depreciation
Land P xxx,xxx P xxx,xxx
Transportation Equipment xxx,xxx P xxx,xxx xxx,xxx
Building xxx,xxx xxx,xxx xxx,xxx
Equipment 105,000 40,000 65,000
Furniture and Fixtures xxx,xxx xxx,xxx xxx,xxx
Total P xxx,xxx P xxx,xxx P xxx,xxx
========= ======== =========
nt from the author.
essage.
Further Readings
n. New Jersey:
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.
LESSON 14
DOUBTFUL ACCOUNTS
Study Objectives
(Put a Check mark)
1 Understand the concept of doubtful accounts
2 Compute doubtful accounts using the percent of accounts
receivable approach
3 Compute doubtful accounts using the aging analysis
approach
Objective 1
Accounting for Doubtful Accounts
Business enterprises sell on credit rather than only for cash to increase total
service income or
sales and thereby increase income. However, an enterprise that sells on credit a
ssumes the risk
that some clients or customers will not pay their accounts (Valix, 2005).
When an account becomes uncollectible, the enterprise has sustained a bad debt l
oss. This loss is
simply one of the costs of doing business on credit. Two methods are followed in
accounting for
this bad debt loss, namely:
1. Allowance method
2. Direct write-off method
For ACTBAS1, only the allowance method will be discussed.
Allowance method
The allowance method requires recognition of doubtful accounts expense even if s
ome of the
accounts receivable are doubtful of collection.
The adjusting entry to recognize doubtful accounts is:
xxxx
Dec 31 Doubtful accounts expense xxx
Allowance for doubtful accounts xxx
Recognition of doubtful accounts
nt from the author.
essage.
Basis for computing doubtful accounts
There are two bases or approaches for computing doubtful accounts.
1. Balance sheet approach
a. Percent of Accounts receivable balance
b. Aging analysis
2. Income statement approach
For ACTBAS1, only the balance sheet approach will be discussed.
Objective 2
Percent of Accounts receivable balance
A certain rate is multiplied to the accounts receivable balance in order to get
the required
allowance balance. The rate used is usually determined from past experience of t
he company
(Valix, 2005).
Example 1:
Assume accounts receivable balance of P 2,000,000 and doubtful accounts are esti
mated to be 3%
of accounts receivable are given in 2009 financial records
Adjusting entry
2009
Dec 31 Doubtful accounts expense 60,000
Allowance for doubtful accounts 60,000
(2,000,000 x 3%)
Note xx Trade and Other Receivables
Accounts receivable P 2,000,000

Less: Allowance for doubtful accounts 60,000 P 1,940,000
Example 2:
Assume accounts receivable balance of P 2,000,000 and doubtful accounts are esti
mated to be 3%
of accounts receivable are given in 2010 financial records. Assume also that All
owance for
doubtful accounts has a balance of P 10,000 before adjustment.
Adjusting entry
2009
(2,000,000 x 3%) 10,000
nt from the author.
essage.
73

Accounts receivable P 2,000,000
Less: Allowance for doubtful accounts 60,000 P 1,940,000
Objective 3
Aging analysis
The aging of accounts receivable involves an analysis of the accounts where they
are classified
into not due or past due. Past due accounts are further classified in terms of t
he length of the
period they are past due. The most common classifications are:
1. Not due
2. 1 to 30 days past due
8. More than 1 year past due
9. Bankrupt or under litigation
The allowance is then determined by multiplying the total of each classification
by the rate or
percent loss experienced by the company for each category.
The major argument for the use of this method is the more accurate and scientifi
c computation of
the allowance for doubtful accounts, and consequently, the accounts receivable a
re fairly
presented in the balance sheet at net realizable value (Valix, 2005).
Example:
The following data are summarized in aging the accounts at the end of the period
:
Accounts receivable
balance
Experience
rate
Required allowance
Not due 500,000 1% 5,000
1 to 30 days past due 300,000 2% 6,000
31 to 60 days past due 200,000 4% 8,000
61 to 90 days past due 100,000 7% 7,000
91 to 180 days past due 50,000 10% 5,000
181 to 365 days past due 30,000 30% 9,000
More than 1 year past due 20,000 50% 10,000
Totals 1,200,000 50,000
nt from the author.
essage.
The amount computed by aging of accounts receivable represents the required allo
wance for
doubtful accounts at the end of the period.
Thus, if the Allowance for doubtful accounts has a credit balance of P 10,000 be
fore adjustment,
the doubtful accounts expense is determined as follows:
Adjusting entry
2009
50,000 10,000
Accounts receivable
Less: Allowance for doubtful accounts
P 1,200,000
40,000 P 1,160,000
When is an account past due?
The credit terms will determine whether an account is past due. For instance, if
the credit terms
were 2/10 n/30, and the account is 45 days old, it is considered to be 15 days p
ast due.
Net realizable value
-This represents the estimated amount to be collectible from the clients or cust
omers after
deducting the allowance for doubtful accounts.
nt from the author.
essage.
Further Readings
n. New Jersey:
John Wiley and Sons, Inc. pages 387 388, 391 393, 105 118
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.
LESSON 15
CLOSING ENTRIES, POST-CLOSING TRIAL BALANCE
Study Objectives
(Put a Check mark)
1 Understand the concept of closing entries and prepare
closing entries
2 Prepare the Post-Closing Trial Balance
Objective 1
Closing entries
After the preparing the financial statements, one needs to close the nominal acc
ounts or income
statement accounts. If these accounts are not closed at the end of the year, the
n these accounts
will be carried forward to the next accounting period. If that happens, the foll
owing accounting
period will show a misstated income statement.
The following are the procedures in closing the nominal accounts.
1. Debit the income accounts and credit the Income summary account.
Closing entry
xxxx
Dec 31 _____ income xxx
_____ income xxx
Income summary xxx
Closing entry for income accounts
2. Debit the Income summary account and credit the expense accounts.
Closing entry
xxxx
Dec 31 Income summary xxx
_____ expense xxx
_____ expense xxx
_____ expense xxx
_____ expense xxx
_____ expense xxx
Closing entry for expense accounts
nt from the author.
essage.
3. Close the Income summary account to the Owner, drawing account. If the Income
summary has a credit balance, it means Net income, otherwise it means Net loss.
Closing entry representing Net income
xxxx
Dec 31 Income summary xxx
Owner, drawing xxx
Closing of income summary to drawing
account
Closing entry representing Net loss
xxxx
Dec 31 Owner, drawing xxx
Income summary xxx
account
4. Close the Owner, drawing account to the Owner, capital account.
Owner, drawing has a debit balance before
closing entry
Xxxx
Dec 31 Owner, capital xxx
Owner, drawing xxx
Closing of drawing account to capital
account
Owner, drawing has a credit balance
before closing entry
Xxxx
Dec 31 Owner, drawing xxx
Owner, capital xxx
account
nt from the author.
essage.
Example:
Given the following Trial Balance after adjusting entries (Adjusted trial balanc
e), prepare the
necessary closing entries at fiscal-year ended September 30, 2010.
Adapted from Workbook in Introductory Accounting for Service Business

KIM SAM SOON COMPANY
Adjusted Trial Balance
September 30, 2010
Debit Credit
Cash on hand P 6 000
Cash in bank 30 200
Prepaid Office Supplies 7 800
Office Furniture 120 600
Accumulated Depreciation Office Furniture P 17 340
Delivery Equipment 156 000
Accumulated Depreciation Delivery Equipment 33 150
Accounts Payable 33 100
Accrued Salaries and Wages Expense 12 670
Accrued Rent Expense 12 000
Accrued Interest Expense 3 500
Unearned Service Income 9 600
Kim Sam Soon, Capital 130 100
Kim Sam Soon, Drawing 29 370
Service Income 242 000
Depreciation Expense 26 860
Office Supplies Expense 3 100
Rent Expense 24 000
Interest Expense 12 300
Insurance Expense 870 _________
Totals P 613 460 P 613 460
======== ========
nt from the author.
essage.
Closing entry
2010
Sep 30 Service income 242,000
Income summary 242,000
Closing entry for income accounts
Closing entry
2010
Sep 30 Income summary 111 710
Depreciation Expense 26 860
Office Supplies Expense 3 100
Rent Expense 24 000
Interest Expense 12 300
Insurance Expense 870
Closing entry for expense accounts
Closing entry representing Net income
2010
Sep 30 Income summary 130, 290
Kim Sam Soon, Drawing 130, 290
(242,000 111, 710)
account
Owner, drawing has a credit balance
before closing entry
2010
Sep 30 Kim Sam Soon, Drawing 100,920
Kim Sam Soon, Capital 100,920
(130,290 29,370)
account
nt from the author.
essage.
Objective 2
Post-Closing Trial Balance
After posting the closing entries, one needs to prepare the Trial balance after
closing entries or the
Post-Closing Trial Balance.
KIM SAM SOON COMPANY
Post-Closing Trial Balance
September 30, 2010
Debit Credit
Cash on hand P 6 000
Cash in bank 30 200
Prepaid Office Supplies 7 800
Office Furniture 120 600
Accumulated Depreciation Office Furniture P 17 340
Delivery Equipment 156 000
Accumulated Depreciation Delivery Equipment 33 150
Accounts Payable 33 100
Accrued Salaries and Wages Expense 12 670
Accrued Rent Expense 12 000
Accrued Interest Expense 3 500
Unearned Service Income 9 600
Kim Sam Soon, Capital _________ 231 020
Totals P 472 380 P 472 380
======== ========
Notice that in the Post-Closing Trial Balance, the income statement accounts and
the drawing
account are not anymore included because they already have zero balances. In thi
s trial balance,
the only remaining accounts are the real accounts or balance sheet accounts. Not
ice also that after
the closing entries, Kim Sam Soon, Capital increased from P 130,100 to P 231,020
. This is due to
the addition of P 100,920, which is the amount in the last closing entry.
If the Post-Closing Trial Balance shows equal totals, then the books of accounts
are ready for the
recording of transactions in the next accounting period.
nt from the author.
essage.
Further Readings
n. New Jersey:
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.
LESSON 16
REVERSING ENTRIES
Study Objectives
(Put a Check mark)
1 Understand the concept of reversing entries and prepare
reversing entries
Objective 1
Reversing Entries
Reversing entries are optional entries that are prepared on the first day of the
next accounting
period. The benefit of these entries is convenience in the recording of the jour
nal entries which
are related to adjusting entries.
The following adjusting entries may be reversed:
1. Accrued income
2. Accrued expense
3. Prepaid expense (Expense method only)
4. Unearned income (Income method only)
Pro-forma Entries
Accrued income
xxxx
Jan 01 _____ Income xxx
_____ Receivable xxx
Reversing entry for accrued income
Accrued expense
xxxx
Jan 01 _____ Payable xxx
_____ Expense xxx
Reversing entry for accrued expense
nt from the author.
essage.
Prepaid expense (Expense method only)
xxxx
Jan 01 _____ Expense xxx
Prepaid _____ Expense xxx
Reversing entry for prepaid expense
Unearned income (Income method only)
xxxx
Jan 01 Unearned _____ income xxx
_____ income xxx
Reversing entry for unearned income
nt from the author.
essage.
Further Readings
n. New Jersey:
John Wiley and Sons, Inc. pages 156, 169 171
nterprises &
Co., Inc.
3rd
ncia
Educational Supply.
ting Vol.
007). Principles
nt from the author.
essage.

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Interest = 5,000 x 12% x 14/360

Cash proceeds = Maturity value Interest on discounting

Interest on discounting = Principal x Interest rate x Term / 360

Date Particulars Debit Credit

Date Particulars Debit Credit

Date Particulars Debit Credit

Date Particulars Debit Credit

In order to properly compute the amount of depreciation to be charged as expense

Accounts receivable P 2,000,000

Note xx Trade and Other Receivables

Adapted from Workbook in Introductory Accounting for Service Business

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