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CERTIFIED BOOKKEEPER PROGRAM

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MODULE 2
JANUARY 15, 2011
Certified Accounting Technician, Level 1
 LEARNING OBJECTIVES
4

1. Know the sequential in the accounting cycle.

2. Distinguish between the cash basis and accrual basis accounting.
3. Understand the principle of “Matching Costs Against Revenue”
4. Prepare the adjusting entries.
5. Prepare a worksheet.
6. Prepare detailed financial statements (using the natural format
and the functional format).
7. Prepare the closing entries.
8. Prepare the Post-Closing Trial Balance.
9. Prepare the opening entry (if new books will be used).
10. Prepare the reversing entries required.)
CASH BASIS VS. ACCRUAL BASIS
OF ACCOUNTING

Cash Basis, recognizes Accrual Basis, revenue

the revenue only when is recognized when
collected and records earned, collected or
only the expenses not and expenses are
recognized when
when paid. incurred paid or not.
MATCHING CONCEPT
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

CASH BASIS VS. ACCRUAL BASIS OF ACCOUNTING:

Cash Basis, recognizes the revenue only when collected and records only the
expenses when paid.

Accrual Basis, revenue is recognized when earned collected or not and

expenses are recognized when occurred paid or not.

MATCHING CONCEPT
It states that the expenses incurred during the period whether pair or not
are matched against the revenue earned for the same period whether
collected or not for the correct determination of the net profit.

ADJUSTMENTS AND ADJUSTING ENTRIES:

Adjustment, an amount that is added to or subtracted from an account
balance to bring the balance up to date..
Adjusting Entries, journal entries that update the general ledger accounts at
the end of the accounting period.
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

ACCRUALS :
An Accrual is the recognition of revenue or an expense that has accumulated
overtime but has not yet been recorded. It is recorded when:
1. There are unrecorded revenues earned in the accounting period which has
not been collected.
2. There are unrecorded expenses incurred in the accounting period which has
not been paid.
Accrued Revenues or Accrued Assets are revenues that have been earned but
not yet received or recorded.
Examples: Interest earned on notes receivable, fees from advertising services
but not yet received.
Accrued Expenses or Accrued Liabilities are expenses already incurred but not
yet paid and recorded.
Examples: Unpaid salaries and wages, interest incurred on unpaid notes, and
property taxes owed but not yet paid.
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

DEFERRALS :
An deferral is the delay in recognizing revenue for cash already received or an
expense for a bill already paid. It is required when:
1. Already recorded revenues apply to two or more accounting periods.
2. Already recorded expenses must be spread out over two or more accounting
periods.
Unearned Revenues or Deferred Revenues are revenues received before it is
actually earned and is initially recorded as liabilities.
Examples: Cash received for advance rentals of property or tuition received in
advance by a school.
Prepaid Expense or Deferred Expenses are expenses paid in advance and are
initially recorded as assets.
Examples: Office supplies, Insurance Premiums, Rental paid in advance and
bank discounts on interest-bearing notes.
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

ADJUSTING PROCESS :

Accrued Expense

Doubtful Accounts Expense Prepaid Expense

Six Categories of
Adjusting Entries

Depreciation Expense Accrued Income

Prepaid Income
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

MAKING ADJUSTMENTS:
Types of Adjusting Entries Effects if Adjustment is not made
Adjustment (understated or overstated)

Expenses Net
Debit Expense Income
Prepaid
Expense Credit Assets
Owner’s
Asset Equity

Owner’s
Equity
Unearned Debit Liability Liability
Income Credit Income Net
Revenue Income

Expense Net
Accrued Debit Expense Income
Expense Credit Liability
Liability Owner’s
Equity
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

MAKING ADJUSTMENTS:
Types of Adjusting Entries Effects if Adjustment is not made
Adjustment (understated or overstated)
Owner’s
Assets Equity
Accrued Debit Asset
Income Credit Income Net
Revenue Income

Expense Net
Depreciation Debit Expense Income
Expense Credit Contra Asset
Owner’s
Asset Equity

Expense Net
Bad Debts Debit Expense Income
Expense Credit Contra Asset
Owner’s
Asset Equity
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

MAKING ADJUSTMENTS:

Expense and Revenue Method

Types of Adjusting Entries Effects if Adjustment is not made

Adjustment (understated or overstated)
Owner’s
Asset Equity
Prepaid Debit Asset
Expense Credit Expense Net
Income
Expenses

Net
Unearned Debit Revenue Revenue Income
Income Credit Liability
Liability Owner’s
Equity
Module 2- Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

Sample Problem 1 NESTOR MARTEL LAW OFFICE

Trial Balance
December 31, 20CY

ACCOUNT TITLE DEBIT CREDIT

Cash P 78,400.00
Accounts Receivable 8,900.00
Prepaid Insurance 6,000.00
Office Supplies 2,500.00
Furniture and Equipment 75,000.00
Accounts Payable P 30,000.00
Loan Payable 60,000.00
Nestor Martel, Capital 60,000.00
Nestor Martel, Drawing 12,000.00
Fees Earned 44,400.00
Salary Expense 5,500.00
Advertising expense 3,600.00
Utilities Expense 1,500.00
Miscellaneous Expense 1,000.00
TOTALS P 194,400.00 P 194,400.00
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

Expanded Chart of Accounts listed below will be used as reference:

Balance Sheet Accounts Income Statement Accounts
101 – Cash 401 – Fees Earned
102 – Accounts Receivable 501 – Salary Expense
104 – Prepaid Advertising 502 – Rent Expense
105 – Prepaid Insurance 503 – Advertising Expense
106 – Office Supplies 504 – Utilities Expense
108 – Furniture and Equipment 505 – Insurance Expense
109 – Accumulated Depreciation 506 – Supplies sExpense
201 – Accounts Payable 507 – Depreciation Expense
202 – Accrued Expenses 509 – Miscellaneous Expense
203 – Unearned Fees 601 – Interest Expense
204 – Loan Payable
301 – Nestor Martel Capital
302 – Nestor Martel, Drawing

Additional Information:
1. The one-year P6,000 insurance paid was effective December 1
2. Office rental of P4,000 for the month of December was still unpaid.
3. Interest of 18% per annum of P60,000 bank loan granted on December 11, has accrued.
4. Advertising placement of P3,600 for three months was effective December 1.
5. Fees of P5,000 collected in advance on December 30 will be for service to be rendered next
year.
6. Office supplies unused at the end of the month amounted to P1,600.
7. Furniture and equipment are estimated to have a useful life of ten years. It was decided to
provide one-month depreciation for December.
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

Required: Under the Accrual basis of Accounting

a. Prepare the necessary adjusting journal entries on December 31.

b. Posting to accounts effected by the adjusting journal entries.

c. Prepare the adjusted trial balance as of December 31 of the current year.

SOLUTION TO SAMPLE PROBLEM 1

(refer to MS Excel Sheet 1)
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

WORKSHEET:

Company Name
Worksheet Designation
Period of Time that the transactions span

Account Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Title dr cr dr cr dr cr dr cr dr cr
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

STEPS IN PREPARING THE WORKSHEET :

1. Write the heading.
2. Write the account titles and their unadjusted balances.
3. Enter the adjustments in the Adjustments column.
4. Compute and combine the figures in the trial balance and the adjustments.
5. Enter the adjusted amounts in the Adjusted Trial Balance.
6. Extend the assets, liabilities, and owner’s equity amounts from the Adjusted
Trial Balance to the Balance Sheet Column.
7. Extend revenues, costs and expenses amounts to the income Statement
columns.
8. Total the Balance Sheet and Income Statements.
9. Compute the net income or net loss on the Income Statement.
10. Enter the net income or net loss as the balancing amount on the income
statement and on the balance sheet and total the columns.
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

Sample Problem 2

Mr. Jose Calves operates a realty office and the following unadjusted ledger
balances as of December 31 of the current year is made available.

Cash 30,250.00 Jose Calves, Capital 64,880.00

Accounts Receivable 50,000.00 Jose Calves, Drawing 40,400.00
Notes Receivable 20,000.00 Fees Earned 439,500.00
Accrued Interest Income - Salary Expense 215,500.00
Office Supplies - Rent Expense 55,000.00
Prepaid Insurance - Utilities Expense 16,500.00
Office Equipment 91,600.00 Insurance Expense 7,200.00
Accumulated Depreciation 18,320.00 Supplies Expense 5,400.00
Accounts Payable 9,250.00 Depreciation Expense -
Accrued Expense - Miscellaneous Expense 12,600.00
Unearned Fees 12,500.00 Interest Income -
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

Date needed to determine the year-end adjustments are as follows:

1. Office Supplies used during the year was P4,050.
2. One-year insurance premium was paid on April 1 of the current year.
3. Office equipment has a useful life of 10 years without salvage value.
4. Equal monthly rentals for December was due but not yet paid.
5. Accrued fees earned but not yet collected, P10,000.
6. Unpaid Salaries and wages at December 31 was P4,400.
7. Unearned Fees as of December 31 was P6,500.
8. The 60-day, 12% Notes Receivable was received on December 1.

Required:
a. Prepare the necessary adjusting entries.
b. Prepare a 6 - column worksheet with the following column headings: Trial
c. Prepare an adjusted trial balance at December 31.
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

Notes to Adjustments:
1. Office supplies in the unadjusted trial balance is zero, therefore Expense
method of recording was used.
2. Prepaid insurance amount is not shown in the trial balance, therefore the
Expense method of recording was used. The unexpired insurance portion is
three months.
3.Since the business is in its third of operation, depreciation for the current
year is equivalent to one year.
4. January to November is 11 months that is used to divide P55,000.
5. Fees earned but not yet collected is accrued income. Accrued income is also
referred to as accounts receivable.
6. Unpaid salaries and wages is an accrued expense.
7. Unearned fees amount is shown in the trial balance, therefore the liability
method of recording was used.
8. Interest on notes receivable has accrued for 30 days (Dec 1-31)

SOLUTION TO SAMPLE PROBLEM 2

(refer to MS Excel Sheet 2)
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

Journalizing
Collecting the business Posting to
and transactions. the ledger
analyzing the accounts.
source
documents.

Preparing Preparing
the post- the trial
closing trial ACCOUNTING CYCLE balance.
balance.

Journalizing Determining
and posting which
adjusting and accounts
closing need
entries. adjustments.
Preparing Completing
the financial the end-of
statements. year
worksheet.
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

FINANCIAL STATEMENTS:
Financial Statements are the accounting reports prepared at the end of an
accounting period.

Statement of Comprehensive Income statements that shows the results of

operations for a given period of time. This statement will show whether the
business made a profit or incurred loss.

Statement of Changes in Equity a statement that shows the ending capital of

the owner as of a given date.

Statement of Financial Position Sheet a statement that shows the financial

condition of the business as of a given date. It shows the assets, liabilities and
capital of the business).

Statement Of Cash Flows a statement that shows the sources and uses of cash
for a given period of time.
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

Classification of the Statement of Financial

Position Items:
• Assets - Current Assets and Property, Plant and Equipment
• Liabilities - Current Liabilities and Long-Term Liabilities
•Current Liabilities
•Long-term liabilities
• Owner’s Equity
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

Adjustments
Closing Entries
Closing Process:
•Debit all the revenue accounts and credit the Income & Expense
Summary account
•Debit the Income & Expense Summary account and credit all the expense
accounts.
•Net Income or Loss from the Income Summary is transferred to Owner’s
Capital account.
•The balance of the owner’s drawing account will also be closed to the
capital account to determine the owner’s equity at the end of the period.
Post Closing Trial Balance
Reversing Entries
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

CHART OF ACCOUNTS
FOR MERCHANDISING BUSINESS:
Sales and Related Accounts
•Sales
•Sales Returns and Allowances
•Sales Discounts
Purchases and Related Accounts
•Purchases
•Purchase Returns and Allowances
•Purchase Discounts
•Transportation In
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

CHART OF ACCOUNTS
FOR MERCHANDISING BUSINESS:
Cost of Goods Sold
•Merchandise Inventory
•Purchases
•Transportation In (Freight In)
•Purchases Returns and Allowances
•Purchases Discounts
Operating Expense
•Selling Expenses
•Administrative Expenses
•Income From Operations
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

COMPUTATIONS: NET SALES

Net Sales
Sales Revenue P XXX
Less: Sales Discounts P XXX
Sales Returns and Allowances XXX XXX
Net Sales P XXX

Cost of Goods Sold

Beginning Inventory P XXX
Add: Purchases XXX
Transportation In XXX
Total P XXX
Less: Purchases Discounts P XXX
Purchase Returns and Allowances XXX XXX
Total Goods Available for Sale P XXX
Less: Ending Inventory XXX
Cost of Goods Sold P XXX
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

COMPUTATIONS: GROSS PROFIT

Gross Profit
Net Sales P XXX
Less: Cost of Goods Sold XXX
Gross Margin on Sales XXX

Cost of Goods Sold

Beginning Inventory P XXX
Add: Purchases XXX
Transportation In XXX
Total P XXX
Less: Purchases Discounts P XXX
Purchase Returns and Allowances XXX XXX
Total Goods Available for Sale P XXX
Less: Ending Inventory XXX
Cost of Goods Sold P XXX
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

COMPUTATIONS:
Profit computation by nature:
Net sales x
Cost of sales (x)
Gross profit x
Other income x
Marketing and distribution expenses (x)
Administrative expenses (x)
Interest expense (x)
Profit before income tax x
Income tax (x)
Profit x
Module 2 - Measuring Business Income by Adjusting Process and Completing the Accounting Cycle

OPERATING CYCLE FOR

MERCHANDISING BUSINESS:

Cash Cash

Collection Purchases

Cash Sales

Sales Inventory

Inventory Distribution

Purchase and Cash Sales Purchase and Sale on Account