FUNDAMENTAL OF

ACCOUNTING 1
2015 EDITION

LEEMON LOPEZ ARAZA DYCI - COA AC101

TABLE OF CONTENTS

Session 1: Accounting Concepts and Its Consideration

Session 2: Basic Consideration on Financial Statements

Session 3: Preparation of Financial Statements

Session 4: Adjusting the Accounts

Session 5: Completing the Accounting Cycle
 Fundamentals
of Accounting 1
SESSION 1

ACCOUNTING CONCEPTS AND ITS CONSIDERATION

Desired Learning Outcomes

• Understand and explain the
definition, purpose, nature,
functions and objectives of
accounting.
• Distinguish the branches of
accounting, users of accounting
information.
• Understand the double entry
bookkeeping concept and how it
differs from single entry
bookkeeping.
• Appreciate the history of
accounting, accounting variations
among countries
• Adopt the basic professional values
and ethics

Instructor Leemon L. Araza 2015 Edition

 Why
Do
We
Need
Accounting?
So why do we need accounting? Asking
that question of an accountant is like
asking a farmer why we need rain. We need
accounting because it’s the only way for
business to grow and flourish. Accounting
is the backbone of the business financial
world. After all, accounting was created in
response to the development of trade and
commerce during the medieval times.

Accounting is the conscious of the

business world. When handled with care and
with respect, it performs as expected. When
abuse occurs, and the system is
circumvented or overridden because of
dishonesty and greed, it doesn’t work
correctly. Accounting is much like all

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 other systems in place, they are only as
good as the people using them.
ACCOUNTING is a service activity. It’s function is to provide
quantitative information, primarily financial in nature, about economic
entities that is intended to be useful in making economic decisions.

“Language of business”

Accounting as science and art

Fixed, inflexible,
❖ Accounting is a social science with a body of knowledge

which has been systematically gathered, classified, and organized and

systematic
organized. It is influenced by, and interacts with, economic, social
and political environments.
❖ Accounting is a practical art which requires the use of creative skill

and judgment. Opinionated, flexible and subjective

Accounting as an information system
❖ Accounting identifies and measures economic activities, processes
information into financial reports and communicates these reports to
decision makers.

Economic Activities and their classification

• Production – the process of converting economic resources into
outputs of goods and services that are intended to have greater
utility than the required inputs.
• Exchange – the process of trading resources or obligations for
other resources or obligation.

• Income distribution - the process of allocating rights to the use

of output among individuals and groups in society.

• Consumption – the process of using the final output of the

production process.

• Investment – the process of using current inputs to increase the

stock of resources available for output as opposed to immediately
consumable output.

• Savings – the process by which individuals and groups set aside

rights to present consumption in exchange for rights to future
consumption.

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BASIC PURPOSE OF ACCOUNTING: To provide quantitative information about economic
entities intended to be useful in making economic decisions.

TYPES OF INFORMATION PROVIDED BY ACCOUNTING

1. Quantitative information – expressed in numbers, quantities or units.
2. Qualitative information – expressed in words or descriptive form
3. Financial information – expressed in terms of money

ECONOMIC ENTITY VS BUSINESS ENTITY

❖ Economic entity – is a separately identifiable combination of persons and
property that uses or controls economic or scarce resources to achieve
certain goals or objectives. Scarce resources have no significant
characteristics.
o Not-for-profit or non-profit entity is one that carries out some
socially desirable needs of the community or its members whose
activities are not directed towards making profit.
o Business entity is an entity that produces and distributes goods or
services primarily for profit.

FUNCTIONS OF ACCOUNTING
❖ Identification. The accounting process of recognition or nonrecognition
of business activities as accountable events or whether has accounting
relevance.

One that is quantifiable and has an effect on assets, liabilities and

equity. This also known as economic activity, which is the subject
matter of accounting.

Criteria for accountable event

1. It must affect a financial element of accounting (increasing
or decreasing asset, liability or equity)
2. It is a result of a past activity
3. Its cost can be measured reliably.

❖ Measurement. The accounting process of assigning of peso amounts or

numbers to the economic transactions and events. The unit of measure of
accounting is money, expressed in prices.
❖ Communication. The accounting process of preparing and distributing
accounting reports to potential users of accounting information and
interpreting the significance of this processed information.
o Recording. the process of systematically committing to writing business
transactions and events after they have been identified and measured,
in books of account in a systematic and chronological manner according
to accounting rules.
o Classifying. The grouping of similar and interrelated items into
their respective classes.

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 o Summarizing. Putting together or expressing in condensed or brief
form the recorded and classified statements in financial statements.

BRANCHES OF ACCOUNTING/AREA OF SPECIALIZATION

1. Financial Accounting. The recording of transactions, preparation of
financial statements and communication of financial information to
external user groups. Focuses on general purpose reports.
2. Auditing. The examination of financial statements by independent
certified public accountant for the purpose of expressing an opinion on
the fairness of presentation of financial statements.
3. Management Accounting. Incorporates cost accounting data and adapts them
for specific decisions which management may be called upon to make. A
management accounting system incorporates all types of financial and non-
financial information from a wide range of sources.

4. Financial Management. Relatively new branch of accounting that has been

grown rapidly over the last 35 years. Financial managers are responsible
for setting financial objectives, making plans based on those objectives,
obtaining the finance needed to achieve the plans, and generally
safeguarding all the financial resources of the entity.

5. Taxation / Tax accounting. Involves the preparation of tax returns and

rendering of tax advice, such as determination of tax consequences of
certain proposed business endeavors.

6. Government Accounting. Accounting for the national government and its

instrumentalities, focusing attention on the custody of public funds and
the purpose or purposes to which such funds are committed.
7. Fiduciary Accounting. Handling of accounts managed by a person entrusted
with the custody and management of property for the benefit of another.

8. Social Responsibility. Reporting of programs and projects that have to do

with the upliftment of the welfare of the people of a community or of the
nation.

9. Environmental Accounting. The area of accounting that focuses on programs,

activities and projects that are focused care for Mother Earth.

One example of this is carbon accounting such as “Cap and

Scheme”, which is a process of encouraging reductions in
greenhouse gas emissions.

10. Price-level Accounting. Otherwise known as Accounting for

Hyperinflationary Economies – simply defined, is accounting that
recognizes in the financial statements changes in the purchasing power of
money.

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USERS OF ACCOUNTING INFORMATION
• Internal Users are those who make decisions directly affecting the internal
operations of the business.
o Managers are directly involved in operation of the business. They
need accounting data to improve the efficiency and effective of the
organization.
o Employees use financial data to assess whether they are receiving
the right compensation and to check if they bargain for higher
remuneration, retirement benefits and employment opportunities.
o Officers, also called as the company executives who are interested to
know if the company is doing well in its operation so they can plan
for possible expansion or branching out to widen its geographical and
demographic market.
the act of making money o Internal Auditors, there role is to protect and by
making people believe safeguard the resources of the company against something
which is not fraud or irregularities. true.

• External users are individuals or enterprises that have financial interest

in the business but they are not involved in the day activities of the
organization. These are:
o Investors (The providers of risk capital) are interested in information
which enables them to assess the ability of the enterprise to pay
dividends. They need information on whether they should buy, hold or
sell their shares in.
o Lenders are interested in information that enables them to
determine whether their loans, and their interest attaching to them
will be paid when due.
o Suppliers and other trade creditors are interested in information that enables
them to determine whether amount owing to them will be paid when due.
o Customers are interested in the quality of goods and services that they are
getting from the entity.
o Government and their agencies require information in order to regulate the
activities of the enterprise, determine taxation policies and as a
basis for national income and similar activities,

o Public are assisted by information through Financial statements about

the trend and recent developments in the prosperity of the
enterprise and the range of its activities.

FUNDAMENTAL CONCEPTS

Entity Concept
The most basic concept in accounting is the entity concept. An accounting
entity is an organization or a section of an organization that stands apart

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from other organizations and individuals as a separate economic unit. Simply
put, the transactions of different entities should not be accounted for
together. Each entity should be evaluated separately.

Periodicity Concept
An entity’s life can be meaningfully subdivided into equal time periods for
reporting purposes.
For the purpose of reporting to outsiders, one year is the usual accounting
period. Luca Pacioli, the first author of an accounting text, wrote in 1494:
“Books should be closed each year, especially in a partnership, because frequent
accounting makes for long friendship.”

Calendar Year – starts in January and ends in December.

Fiscal Year – starts in any month and ends after 12 months.

Stable Monetary Unit Concept

The Philippine Peso is a reasonable unit of
measure and that its purchasing power is relatively a greater increase in the supply
stable. This is the basis for ignoring the effects of of money or credit than in the
production of goods and
inflation in the accounting records. services, resulting in higher
prices and a fall in the purchasing power of money.
BASIC PRINCIPLES

Accounting practices follow certain guidelines. The set of guidelines and

procedures that constitute acceptable accounting practice at a given time is
GAAP, which stands for generally accepted accounting principles. In order to
generate information that is useful to the users of financial statements,
accountants rely upon the following principles.

Objectivity Principle. Accounting records and statements are based on the most
reliable data available so that they will be as accurate and as useful as
possible. Reliable data are verifiable when they can be confirmed by independent
observers.
the total cost of
Historical Cost. This principle states that acquired asset
producing or buying an
should be recorded at their actual cost and not at what item, which may
management thinks they are worth as at reporting date. include, e.g., its price
plus the cost of
delivery or storage.
Revenue Recognition Principle. Revenue is to be recognized in the accounting period
when goods are delivered or services are rendered or performed.

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Expense Recognition Principle. Expenses should be recognized in the accounting
period in which goods and services are used up to produce revenue and not when
the entity pays for those goods and services.

Adequate Disclosure. Requires that all relevant information that would affect
the user’s understanding and assessment of the accounting entity be disclosed
in the financial statements.

Materiality. Financial reporting is only concerned with information that is

significant enough to affect evaluations and decisions. Materiality depends on
the size and nature of the item judged in the particular circumstances of its
omission.

Consistency Principle. The firms should use the same accounting method from
period to period to achieve comparability over time within a single enterprise.
However, changes are permitted if justifiable and disclosed in the financial
statements.

UNDERLYING ASSUMPTIONS

Accrual Basis
Financial Statements are prepared on the accrual on the accrual basis of
accounting and not as cash or its equivalent is received or paid. Under this
assumption, the effects of transactions and other events are recognized when
they occur and they are recorded in the accounting records and reported in the
financial statements of the periods to why they relate.

In short, transactions are recognized when “Revenue as they earned, even not yet received
and; Expenses as they incurred, even not yet paid.

In cash basis accounting, however, does not record a transaction until cash is
received or paid. Generally, cash receipts are treated as revenues and cash payments as
expenses.

Going Concern
Financial statements are normally prepared on the assumption that an enterprise
is a going concern and will continue in operation for a foreseeable future. It
is assumed therefore that the enterprise has neither the intention nor the need
to liquidate its operations.

BUSINESS ORGANIZATION

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FORMS OF BUSINESS ORGANIZATIONS
▪ Sole Proprietorship. This business organization has a single owner called
the proprietor who generally is also manager. It tends to be small service-type
(e.g. physicians, lawyers and accountants) business and retail establishments.
The owner receives all profits, absorbs all losses and is solely responsible
for all debts of the business. From the accounting viewpoint, the sole
proprietorship is distinct from its proprietor. Thus, the accounting records do
not include proprietor’s personal financial records.

▪ Partnership. A business owned and operated by two or more persons who

bind themselves to contribute money, property or industry to a common fund,
with the intention of dividing the profits among themselves. Each partner is
personally liable for any debt incurred by the partnership, except limited
partner.
▪ Corporation. A business owned by its stockholders. It is an artificial
being created by operation of law, having the rights of succession and the
powers, attributes and properties expressly authorized by law or incident to
its existence. The stockholders are not personally liable for the corporation’s
debt.
PURPOSE OF BUSINESS ORGANIZATIONS
▪ Service companies perform services for a fee (e.g. law firms, accounting
and law firms, stock brokerage, beauty salons and recruitment agencies)

▪ Merchandising companies purchase goods that are ready for sale and then
sell these to customers (e.g. car dealers, clothing stores and
supermarkets)

▪ Manufacturing companies buy raw materials, convert them into products and
then sell the products to other companies or to final consumers (e.g.
paper mills, steel mills, car manufacturers and drug manufacturers)

MICRO, SMALL AND MEDIUM ENTERPRISES (MSME)

▪ Micro Enterprises are those with assets, before financing of P 3 million
or less and employ not more than nine (9) workers.
▪ Small Enterprises are those with assets, before financing of above P 3
million to P 15 million and employ 10 to 99 workers.

▪ Medium Enterprises are those with assets, before financing of above P15
million to P100 million and employ 100 to 199 workers.
ACTIVITIES IN BUSINESS ORGANIZATIONS

▪ Operating Activities are the principal activities of the enterprise. They

are the transactions and events that enter into the determination of
profit and loss. E.g.: o Sale of services o Purchase of supplies

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 o Payment of various expenses like salaries and other benefits to
employees, utilities, taxes and repairs and maintenance, insurance,
transportation and gasoline expense.
▪ Investing Activities are the acquisition and disposal of long-term assets
and other investments. E.g.:
o Purchase of equipment, furniture, automobile and land o Cost of
developing and constructing office or building o Sale of used fixed
assets o Loans and advances to other parties o Investments in equity
or debt instruments
▪ Financing Activities are activities that result in charges in the size
and composition of the contributed equity and borrowings of the
enterprise. E.g.:
o Cash proceeds from issuing shares of stocks by a corporation o Cash
proceeds and repayment of bank loans and other long-term barrowings.

**End of Session 1**

References:
Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14th Edition. Manila:
Domdane Publishers and Made Easy Books.
Ledesma, Ester L.(2014).Financial Accounting Theory Review Booklets. Manila: CRC-Ace The
Professional CPA Review School.
Rante, Gloria Aradaniel.(2013). Accounting for Service Entities. Mandaluyong City:
Millenium Books, Inc.
NAME: YR.&SEC.
COURSE: DATE

ACTIVITY NO. 1

Multiple Choice
1. Accounting is a service activity. Its function is to provide
a. Quantitative information
b. Qualitative information
c. Quantitative and qualitative information
d. None of the above
2. The basic purpose of accounting is

9|AC101SESSION1
 a. To provide the information that the managers of an economic entity need
to control its operations.
b. To provide information that the creditors of an economic entity can use
in deciding whether to make additional loans to the entity.
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about a business
enterprise that is useful in making rational economic decision.
3. Which of the following best describes the attributes of a partnership
a. Limited ability to raise capital; unlimited personal liability of
owners.
b. Limited ability to raise capital; limited personal liability of owners.
c. Ability to raise large capital; unlimited personal liability of owners.
d. Ability to raise large amounts of capital; limited personal liability
of owners.
4. Which of the following is true?
a. Stockholders are personally liable for the liabilities of the
corporation if the company us unable to pay.
b. Normally, stockholders can only sell their ownership interests when the
corporation terminates.
c. Partners are personally liable for the liabilities of the partnership
if the partnership is unable to pay.
d. Partners can normally transfer their partnership interests with ease.
5. Which accounting process is the recognition or non-recognition of business
activities as accountable events?
a. Identifying
b. Communicating
c. Recording
d. Measuring
6. The concept of the accounting entity is applicable
a. Only to the legal aspects of business organizations
b. Only to the economic aspects of business organizations
c. Only to business organizations
d. Whenever accounting is involved
7. The entity concept means that
a. Because a firm is separate and distinct from its owners, those owners
cannot have access to its assets unless the firm ceases to trade.
b. Accounts must be prepared for every firm.
c. The financial affairs of a firm and its owner are always kept separate
for the purpose of preparing accounts.
d. None of the above
8. Accountants do not recognize that the value of the peso changes over the
time. This concept is called the
a. Stable money unit concept

10 | A C 1 0 1 S E S S I O N 1
 b. Going concern concept
c. Cost principle
d. Entity concept
9. The principle of objectivity includes the concept of
a. Summarization
b. Verifiability
c. Classification
d. Conservatism
10. Which of the following is not a user of internal accounting information?
a. Store Manager
b. Chief executive officer
c. Creditor
d. Chief financial officer
11. An event that affects the financial position of an organization and requires
recording is called:
a. Transaction
b. Account
c. Business documents
d. Operating activities
12. All of the following are external users of accounting information except:
a. Creditors, lenders and suppliers
b. Present and potential investors
c. Government regulatory bodies
d. Managers and employees
13. It is the simplest of business organization
a. Service Entity
b. Merchandising Entity
c. Partnership
d. Sole Proprietorship
14. The following are examples of service business except:
a. SM Supermarket
b. Amana Hotel and Resorts
c. Cebu Pacific
d. Manila Water Inc.
15. The following are examples of manufacturing business, except:
a. Toyota Motors, Inc.
b. Sony Philippines
c. Red Ribbon Bakeshop
d. Rolex Watch Repair Shop
16. All of the following are qualitative characteristics of financial statements
except:

11 | A C 1 0 1 S E S S I O N 1
 a. Understandability
b. Relevance
c. Materiality
d. Going Concern
17. Financial information must possess this characteristic in order for the users
to easily understand the contents of the financial statements.
a. Reliability
b. Completeness
c. Relevance
d. Understandability
18. The measurement phase of accounting is accomplished by
a. Storing data
b. Reporting to decision makers
c. Recording data
d. Processing data
19. The communication phase of accounting is accomplished by
a. Storing data
b. Reporting to decision makers
c. Recording data
d. Processing data
20. A professional accountant should be straightforward and honest in all
professional and business relationships. This is in consonance with the
fundamental principle of
a. Integrity
b. Objectivity
c. Confidentiality
d. Professional competence and care

12 | A C 1 0 1 S E S S I O N 1
 Fundamentals
of Accounting 1
SESSION 2

BASIC CONSIDERATION ON FINANCIAL STATEMENTS

Desired Learning Outcomes

• Understand and explain the
objective and qualitative
characteristics of financial
statements.
• Distinguish the elements of
financial statements, its
recognition and measurements.
• Learn and apply the principle of
Accounting Equation, the rule of
debits and credits.
• Understand Accounting events and
transactions, types and effects of
transactions

Instructor Leemon L. Araza 2015 Edition

FINANCIAL STATEMENTS
OBJECTIVES
Provide information about the financial position, performance and changes
in financial position of an entity that is useful to a wide range of users in
making economic decisions.
Financial statements prepared for this purpose:
▪ Meet the common needs of most users
▪ Also show the results of the stewardship* of management, or
accountability of management for the resources entrusted to it.

0
 ▪ Do not, however, provide all the information that users may need to
make decisions since they largely portray the financial effects of
past events and do not necessarily provide nonfinancial information.

*e.g. in prev. times, it is the one employed by a large household or estate to

manage domestic concerns such as supervision of servants, collection of rents
and keeping of accounts.

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

A. Fundamental qualitative characteristics

a. Relevance
b. Faithful Representation

B. Enhancing Qualitative characteristics

a. Comparability
b. Verifiability
c. Timeliness
d. Understandability

RELEVANCE
Relevant financial information is capable of making a difference in the
decision made by users, influences the economic decisions of users by helping
them to evaluate, past, present, or future events or confirming, or correcting,
their past evaluations.

a. Predictive value. Financial information has predictive value if it can be

used as input to processes employed by users to predict future outcomes.
For e.g. information about financial position and past performance is
frequently used in predicting wages payments, and the ability of the
entity to meet maturing obligations.

b. Confirmatory value (or feedback). Financial information has confirmatory

value if it provides feedback about (confirms or changes) previous
evaluation. Information with feedback value enables users to confirm or
correct expectations.

FAITHFUL REPRESENTATION
To be useful, financial information must not only represent relevant phenomena,
but it must also faithfully represent the phenomena that it purports to
represent.

a. Completeness. A complete depiction includes all information necessary for

a user to understand the event or information being presented, including
all necessary descriptions and explanations.

b. Neutrality. A neutral presentation is one without bias.

1
 c. Freedom from error. Means there are no errors or omissions in the
description of the phenomenon, and the process used to produce the
reported information has been selected and applied with no errors in the
process.

ENHANCING QUALITATIVE CHARACTERISTICS

a. Comparability. It enables the users to identify and understand

similarities in, and differences among, items. Consistency, although
related to comparability, is not the same.
“Comparability is the goal; consistency helps to achieve that goal.”

b. Verifiability. Means that different knowledgeable and independent

observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.

c. Timeliness. Means having information available to decision-makers in time

to be capable of influencing their decisions.
d. Understandability. Means classifying, characterizing, and presenting
information clearly and concisely.

THE ELEMENTS OF FINANCIAL STATEMENTS

The financial statements portray the financial effects of transactions and

other events by grouping them into broad classes according to their economic
characteristics. These termed the elements of financial statements. Elements
directly related to measurement of financial position are:
Elements directly related to measurement of financial position are:
▪ Assets
▪ Liabilities
▪ Equity
Elements directly related to measurement of performance are:
▪ Income
▪ Expense

RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS

Recognition is the process of incorporating in the balance sheet or income statement an item
that meets the definition of an element and satisfies the criteria for recognition . An item that
meets the definition of an element should be recognized if:
▪ It is probable that any future economic benefit associated with the item
will flow to or from the enterprise; and

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 ▪ The item has a cost or value that can be measured with reliability.

MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS

Measurement is the process of determining the monetary amounts at which the elements of
financial statements are to be recognized and carried in the balance sheet and income
statement. This involves the selection of a particular basis of measurement. A
number of these are used to different degrees and in varying combinations in
financial statements. They include the following:

HISTORICAL COST. Assets are recorded at the amount of cash or cash equivalents
paid or the fair value of the consideration given to acquire them at the time
their acquisition.

CURRENT COST. Assets are carried at the amount of cash or cash equivalents that
would have to be paid if the same or an equivalent asset was acquired currently.

“Liabilities are carried at the discounted amount of cash and cash equivalents
that would be required to settle the obligation currently.”
RELIAZABLE (SETTLEMENT) VALUE

Reliazable value. Assets are carried at the amount of cash or cash

equivalents that could currently be obtained by selling an asset in an
orderly disposal.

Settlement value. Liabilities are carried at the undiscounted amounts of

cash or cash equivalents expected to be paid to satisfy the liabilities
in the normal course of business.

Present Value. Assets/liabilities are carried at present discounted value of

the future net cash inflows/outflows that the item is expected to
generate/settle in the normal course of business.

GUIDELINES IN THE PRESENTATION OF FINANCIAL STATEMENTS

Philippine Accounting Standard 1 (PAS) gives us the following guidelines in

the presentation of financial statements.
(1) Each component of the financial statements shall be clearly identified
and the following information shall be emphasized for a proper
understanding of the information presented:
i. The name of the reporting entity;
ii. Whether the financial statements cover the individual entity
or a group of entities.
(2) The period covered by the financial statement shall be specified.

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 Note: For Balance Sheet, use As of (date). For Income Statement, Statement
of Changes in Owner’s Equity and Statement of Cash flows, use For the
month/year ended (date).

FINANCIAL POSITION

The financial position of an enterprise is affected by the economic resources

it controls, its financial structure, it liquidity and solvency, and its
capacity to adapt to changes in the environment in which it operates. This is
primarily provided in the Statement of Financial Position or Balance Sheet.
It answers the following questions:
▪ What assets does entity own?
▪ What does it owe?
▪ What are the residual equity interests in the entity’s net assets?

Other important information provided by the statement of financial position

is as follows:
▪ Financial structure – is the source of financing for the assets of the
enterprise. It indicates what amount of assets has been financed by
creditors, which is borrowed capital, and what amount of assets has
been financed by owners, which is invested capital.
Significance:
(1) Useful in predicting future borrowing needs and how
future profits and cash flows will be distributed among
those with an interest in the enterprise.
(2) Useful in predicting how successful the enterprise is
likely to be raising further finance.
▪ Liquidity – refers to the availability of cash in the near future after
taking account of financial commitments over this period.
Significance:
(1) Useful in predicting the ability of the enterprise to
meet its short-term financial commitments as they fall
due.

▪ Solvency – refers to the availability of cash over the longer term to

meet financial commitments as they fall due. Significance:
(1) Useful in predicting the ability of the enterprise to
meet its long-term financial commitments as they fall
due.

▪ Capacity for adaption – the ability of the enterprise to use its

available cash for unexpected requirements and investment
opportunities. This is also known as financial flexibility.
(1) Information about the economic resources controlled by
the enterprise and its capacity for adaptation is useful

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 in predicting the ability of the enterprise to generate
cash and cash equivalents in the future.

COMPOSITION OF A STATEMENT IN FINANCIAL POSITION

Assets

These are resources controlled by the enterprise* as a result of past

events** and from which future economic benefits*** are expected to flow to the
enterprise.

For example, an asset may be:

• Used singly or in combination with other assets in the production
of goods or services to be sold by the enterprise;
• Exchanged for other assets;
• Used to settle a liability;
• Distributed to the owners of the enterprise.

Assets are should be classified only in two: current assets and noncurrent
assets. Operating Cycle is the time between the acquisition of assets for
processing and their realization in cash or cash equivalents. When the entity’s
normal operating cycle is not clearly identifiable, it is assumed to be twelve
months.
*Controlled by the enterprise – control is the ability to obtain the economic benefits
and to restrict the access of others (e.g. an entity being the sole user of its
plants and equipment or by selling idle assets)
**Past events – The event must be past before an asset can rise. (E.g. equipment will
only become an asset when there is the right to demand delivery or access to
the asset’s potential. Dependent on the terms of the contract, this may be on
acceptance of the order or on delivery.
***Future economic benefits – These are evidenced by the prospective receipt of
cash. This could be cash itself, an account receivable or any item which may be
sold. Although, for example, a factory may not be sold for it houses the
manufacturing facility for the goods. When these goods are sold, the economic
benefit resulting from the use of the factory is realized as cash.

Current Assets

An entity shall classify assets as current when:

a. It expects to realize the asset, or intends to sell or consume it, in
its normal operating cycle;
b. It holds the asset primarily for the purpose of trading;
c. It expects to realize the asset within twelve months after the
reporting period;

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 d. The asset is cash or cash equivalent unless the asset is restricted
from being exchanged or used to settle a liability for at least months
after the reporting period.
1. Cash any medium of exchange that a bank will accept for deposit at face
value. It includes coins, currency, checks, money orders, bank deposits
and drafts.
*Money orders is a document which can be bought as a way of sending money
through the post.

2. Cash Equivalents these are short-term, highly liquid investments that are
readily convertible to known amounts of cash and which are subject to an
insignificant risk of changes in value.
3. Accounts Receivable These are claims against customers arising from sale
of services or goods on credits. This type of receivable offers less
security than a promissory note.

4. Notes Receivable A note receivable is a written pledge that the customer

will pay the business a fixed amount of money on a certain date.
5. Inventory or Merchandise Inventory these are assets which are (a) held
for sale by the company, (b) in the process of production for such sale,
(c) in the form of materials (raw materials) or supplies to be consumed
in the production.

6. Supplies this may be office supplies like bond papers, paper clips and
the like or can be also store supplies like boxes, bags, packaging tapes
and other related materials.
7. Prepaid Expenses These are expenses paid for by the business in advance.
It is an asset because the business avoids, having to pay cash in the
future for a specific expense. This includes insurance and rent.

Non-current Assets

All other assets not classified or does not fall under the criteria of
current assets are called non-current assets.

1. Property, Plant and Equipment (PPE) these are tangible assets that are
held by an enterprise for use in the production or supply of goods or in
rendering services, or for rental to other, or for administrative purposes
and which are expected to be used during more than one period.
These are:
a. Land e. Delivery Equipment
b. Building f. Store Equipment
c. Office Equipment g. Service Vehicle
d. Furniture and Fixtures

2. Accumulated Depreciation applies to property, plant and equipment except

land as a contra account that contains the sum of periodic depreciation

6
 charges. The reflected amount is deducted from the cost of the related
asset to obtain book value.

To illustrate:
The Company has an office equipment worth P500,000 with a useful life of 10
years acquired last June 1, 2013.
Office Equipment P 500,000
Accumulated Depreciation – O/E (100,000)
Net book value P 400,000

Formula:
Annual Depreciation = Cost of the PPE – salvage value* (if any)
Life (n)

Accumulated Depreciation = Annual depreciation x age of the PPE

*Salvage value is the value of an asset if sold for scrap and also called as Residual or
scrap value.

To compute:
= 500,000 = 50,000 annual depreciation
10
= 50,000 x 2 years = 100,000 Accu. Dep.
(from june 1 2013 to june 1 2015)

3. Intangible
These are identifiable, nonmonetary assets without physical
substance held for use in the production or supply of goods or services,
for rentals to others or for administrative purposes. These are:
a. Goodwill e. Franchises
b. Patents f. Trademarks
c. Copyrights g. Brand names
d. Licenses

LIABILITIES

A present obligation of the enterprise arising from past events, the settlement
of which is expected to result in an outflow from the enterprise of resources
embodying can be measured benefits.

*Obligation – These maybe legal or not. A duty to do something or a debt.

* Transfer economic benefits - This could be a transfer of cash, or another property,
the provision of a service or the refraining from activities which would
otherwise be profitable.

7
The settlement of a present obligation involving outflow of resources may take
the form of:
a. Payment of cash
b. Transfer of other assets
c. Provision for services
d. Replacement of the present obligation with another obligation
e. Conversion of the obligation to equity

Current Liabilities

An entity shall classify a liability as current when:

a. It expects to settle the liability in its normal operating cycle
b. It holds the liability primarily for the purpose of trading
c. The liability is due to be settled within twelve months after the
reporting period; or
d. The entity does not have an unconditional right to defer settlement
of the liability for at least twelve months after the reporting
period.
1. Accounts payable This account represents the reverse relationship of the
accounts receivable. Due to suppliers of goods and other assets purchased
on credit.

2. Notes Payable A note payable is like a note receivable but in a reverse

sense. The business entity is the maker of the note; that is, the entity
is the party who promises to pay in a specified amount of money on
specified future date.
3. Accrued Liabilities Amounts owed to others for unpaid expenses. This
account includes:
a. Salaries payable c. Interest payable b. Utilities payable d.
Taxes payable

4. Unearned Revenues When the business entity receives payment before

providing its customers with goods or services, the amounts received are
recorded in the unearned revenue account (liability method). When the
goods or services are provided to the customer, the unearned revenue is
reduced and income is recognized.

5. Current portion of Long-term debt These are portions of long-term

liabilities which are to be paid within one year from the balance sheet
date.

Non-current liabilities

All other liabilities not classified or does not fall under the criteria of
current liabilities are called non-current liabilities.

8
 1. Mortgage payable This account records long-term debt of the business
entity for which the entity has pledged certain assets as security to the
creditor.

2. Bonds payable is an obligation in connection with the bond, a contract

between the issuer and the lender specifying the terms of repayment and
the interest to be charged.

OWNER’S EQUITY

Equity is defined as the residual interest in the asset of an entity that

remains after deducting all its liabilities.
1. Capital this account is used to record original and additional investment
of the owner of the business entity. In partnership, Partners’ Capital is
use as its capital account while in corporation is Shareholders’ Equity.

2. Withdrawals When the owner of a business entity withdraws cash or other

assets, such are recorded in the drawing or withdrawal account rather
than directly reducing the owner’s equity account.
3. Income Summary It is a temporary account used at the end of the accounting
period to close the income and expenses. This account shows the profit or
loss for the period before closing to the capital account.

FINANCIAL PERFORMANCE reflected by accrual accounting*

Performance of an enterprise – comprise its revenue, expenses, net income or

loss for a period of time. It is the level of income earned by the enterprise
through efficient and effective use of its resources. Information about
performance is primarily provided in an Income Statement or Statement of
Financial Performance or Statement of Comprehensive Income or Statement of
Income and Expenses.

*Accrual Accounting recognizes transactions and other events of a reporting

entity in the periods in which those effects occur, even if the resulting cash
receipts and payments occur in a different period.

COMPOSITION OF STATEMENT OF FINANCIAL PERFORMANCE

REVENUE OR INCOME

These are increases in economic benefits during the accounting period in the
form of inflows or enhancements of assets or decrease of liabilities from
delivery or production of goods, rendering of services, or other activities
that constitute the enterprise’s major operations.
1. Service Income Revenues earned by performing services for a customer or
client, for e.g. accounting services by a CPA firm, laundry services by
a laundry shop.

9
 2. Sales Revenues earned as a result of sale of merchandise; for e.g. sale
of merchandise by General Merchandise Store.

EXPENSES

These are decrease in economic benefits during the period in the form of
outflows or using up of assets or incurrence of liabilities that result in
decreases in equity, other than relating to distributions to equity
participants.
1. Cost of Sales The cost incurred to purchase or to produce the products
sold to customers during the period; also called as cost of goods sold.
2. Salaries and Wages Expense includes all payments as a result of an
employer-employee relationship such as salaries and wages, 13th month pay,
cost if living allowances, other related benefits.
3. Utilities Expense expenses related to use of telecommunications
facilities, consumptions of electricity, fuel and water.
4. Rent Expense expense for space, equipment or other asset rentals.
5. Supplies Expense expense of using supplies in the conduct of daily
business.

6. Insurance Expense portion of premiums paid on insurance coverage which

has expired.

7. Depreciation Expense portion of the cost of a tangible asset allocated or

charged as expense during an accounting period.
8. Uncollectible Accounts Expense the amount of receivables estimated to be
doubtful of collection and charged as expense during an accounting period.

9. Interest Expense An expense related to use of borrowed funds.

CHANGES IN FINANCIAL POSITION

It refers to the changes in the economic resources and obligation of an

enterprise. In constructing a statement of changes in Owner’s Equity, funds can
be defined in various ways, such as all financial revenues, working capital,
liquid assets or cash.

THE ACCOUNT

The basic summary device of accounting is the account. A separate account

is maintained for each element that appears in the balance sheet (assets,
liabilities, and equity) and in the income statement (income and expense). Thus,
an account may be defined as a detailed record of the increases, decrease and
balance of each element that appears in an entity’s financial statements.

10
 The simplest form of the account is known as the “T” account because of its
similarity to the letter T. the account has three parts as shown on the next
page.

Account Title
Left side or Debit Right side or side
credit side

THE ACCOUNTING EQUATION and DEBITS AND CREDITS-THE DOUBLE ENTRY SYSTEM

Assets = Liabilities + Equity

Balance

The basic tool of accounting is the accounting equation. The left side of
the equation shows how much the business owns, and the right side of the equation
shows how much resources do the outside creditor and owner supplied to the
business.

The logic of debiting and crediting is related to the accounting equation.

Transactions may require addition to both sides (left or sides), subtractions
from both sides (left and right sides), or an addition and subtraction on the
same side (left or right sides). But in all cases the equality must be maintained
as shown above.

Accounting is based on a double-entry system which means that the dual

effects of business are recorded. A debit side entry must have a corresponding
credit side entry. For every transaction, there must be one or more accounts
debited and one or more accounts credited and must be equal both sides. Each
transaction affects at least two accounts.

The rules of debit and credit in accounts.

ACCOUNT DEBIT CREDIT

Assets + -
Liabilities - +
Capital or Equity - +
Revenue or Income - +

11
 Expenses + -
(+) increase; (-) decrease

ACCOUNTING EVENTS AND TRANSACTIONS

An accounting event is an economic occurrence that causes changes in an

enterprise’s assets, liabilities, and/or equity. A transaction is a particular
kind of event that involves the transfer of something of value between two
entities.

Accountants observe many events that they identify and measure in financial
terms. A business transaction is the occurrence of an event or a condition that
affects financial position and can be reliably recorded.

Financial transaction worksheet

Every financial transaction can be analyzed or expressed in terms of its effects

on the accounting equation. The financial transactions will be analyzed by means
of a financial transaction worksheet which is a form used to analyze increases
and decreases in the assets, liabilities or owner’s equity of a business entity.

When a specific asset, liability or owner’s equity item is created by a financial

transaction, it is listed in the financial transaction worksheet using the
appropriate accounts.

12
 To illustrate:

Mr. Wagmalito Kayayan wants to open an accounting firm this year. The following
transactions are made during the month.

May 1. Mr. W. Kayayan invested P100,000 to start an accounting office.

W. Kayayan Accounting Firm
Financial Transaction Worksheet
Month of May 2015

ASSET = LIABILITIES + OWNER’S EQUITY

May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

1 100,000 100,000

The financial transaction is analyzed as follows:

• An entity separate and distinct from Kayayan’s personal financial affairs
is created.
• An economic resource – cash of P 100,000 is invested in the business
entity. The source of this asset is the contribution made by the owner,
which represents owner’s equity. The owner’s equity account is W. Kayayan,
Capital.
• The dual nature of the transaction is that cash is invested and owner’s
equity created. The effects of this transaction on the accounting equation
are as follows: increase in asset – cash from zero to P 250,000 and
increase in owner’s equity from zero to P 250,000.

May 3. Purchased office supplies worth P20,000 on account.

The effect of transaction is increase in asset and increase in liabilities. Take

note that the equality of the two sides of the equation is maintained.

13
 May 5. Purchased additional office supplies for cash, P10,000.
ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 100,000 0 20,000 0 20,000 0 + 100,000

5 10,000
90,000 0 30,000 0 = 20,000 0 + 100,000
120,000 = 120,000
(10,000)
Bal.

The effect of transaction is increase in asset and decrease in another asset

form of asset. After posting the transaction, total asset amounts to P120,000
and total liabilities and capital amount to P120,000.

May 6. Paid the accounts payable in full.

Transaction reduces both sides of the equation by P20,000 resulting to the

equality of the equation after posting.

May 8. Purchased 2 units of computer with printer for P50,000, 30 days.

ASSET = LIABILITIES + OWNER’S EQUITY
May
Cash Accounts Office Office = Accounts Notes + W. Kayayan
2015
Receivable Supplies Equipment Payable Payable Capital
Bal. 100,000 100,000
8 50,000 50,000
Bal. 70,000 0 30,000 50,000 = 50,000 0 + 100,000
150,000 = 150,000

May 10. Rendered accounting services for cash, P25,000.

ASSET = LIABILITIES + OWNER’S EQUITY

14
 May 15 Rendered accounting services on account, P 30,000.
ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 95,000 0 30,000 50,000 50,000 0 + 125,000

15 30,000 30,000 Prof.fee
Bal. 95,000 30,000 30,000 50,000 = 50,000 0 + 155,000
= 205,000 205,000

May 15 Paid Meralco bills, P 3,500.

ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 95,000 30,000 30,000 50,000 = 50,000 0 + 155,000

15 (3,500) (3,500)Utility
Exp.
Bal. 91,500 30,000 30,000 50,000 = 50,000 0 + 151,500
201,500 = 201,500

May 15 Paid salaries for the period, P15,000.

ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 91,500 30,000 30,000 50,000 = 50,000 0 + 151,500

15 (15,00) (15,000)Salaries
Exp.
Bal. 76,500 30,000 30,000 50,000 = 50,000 0 + 136,500
186,500 = 186,500

15
 May 20 Collected P10,000 from customer.
ASSET
May
Cash Accounts Office Office LIABILITIES + OWNER’S EQUITY
2015 = Accounts Notes + W. Kayayan
Receivable Supplies Equipment = Payable Payable Capital
Bal. 76,500 30,000 30,000 50,000 = 50,000 0 + 136,500
20 10,000 (10,000)
Bal. = 136,500
86,500 20,000 30,000 50,000 50,000 0

186,500 =

May 22 A Short term loan from a local bank was granted in the amount of P50,000,
less P5,000 financing charges. Mr. W. Kayayan issued 1 year promissory
note.
ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 86,500 20,000 30,000 50,000 = 50,000 0 + 136,500

22 45,000
131,500 20,000 30,000 50,000 50,000 (5,000)
Bal
231,500
.

Interes
t
Expense
= 50,000 50,000 +
231,500
131,500

16
 May 25 Paid telephone bill amounting to P 6,000.
ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital
Bal. 131,500 20,000 30,000 50,000 = 50,000 50,000 + 131,500
25 ( 6,000) (6,000) Comm.
Expense
Bal. 125,500 20,000 30,000 50,000 = 125,500
50,000 50,000 +
225,500 =
225,500

May 27 Mr. Kayayan withdrew P20,000 for personal use.

ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 125,500 20,000 30,000 50,000 = 50,000 50,000 + 125,500

27 (20,000) (20,000)Kayayan,

105,500 20,000 30,000 50,000

205,500

= 50,000 50,000 + 105,500

205,500
Withdrawals
Bal.
=

May 30 At the end of the month, physical count of the office supplies revealed that
P 5,000 had been consumed.
ASSET = LIABILITIES + OWNER’S EQUITY
May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

Bal. 105,500 20,000 30,000 50,000 = 50,000 50,000 + 105,500

30 ( 5,000) (5,000)Supplies

Bal.

17
 105,500 20,000 25,000 50,000
= 200,500 Expense
= 50,000 50,000 + 100,500
200,500

Summary of W. Kayayan in tabular Form

W. Kayayan Accounting Firm

Financial Transaction Worksheet
Month of May 2015

ASSET = LIABILITIES + OWNER’S EQUITY

May 2015
Cash Accounts Office Office = Accounts Notes + W. Kayayan
Receivable Supplies Equipment Payable Payable Capital

1 100,000 100,000
3 20,000 20,000
5 (10,000) 10,000
6 (20,000) (20,000)
8 50,000 50,000
10 25,000 25,000 Prof.fee
15 30,000 30,000 Prof.fee
15 (3,500) (3,500)Utility
Exp.
15 (15,00) (15,000)Salaries
Exp.
20 10,000 (10,000)
22 45,000 50,000 (5,000) Interest
Expense
25 ( 6,000) (6,000) Comm.
Expense
27 (20,000) (20,000)Kayayan,
Withdrawals

18
30 ( 5,000) (5,000)Supplies

105,500 20,000 25,000 50,000

200,500

= 50,000 50,000 + 100,500

200,500
Expense
Bal.
=

USE OF T-ACCOUNTS

Analyzing and recording transactions using the accounting equation is

useful in conveying a basic understanding of how transactions affect the
business. However, it is not an efficient approach once the number of accounts
involved increases. Double-entry system provides a formal system of
classification and recording business transactions.

May 1. Mr. W. Kayayan invested P100,000 to start an accounting office.

Cash W. Kayayan, Capital
5/1 100,000 100,000 5/1

May 3. Purchased office supplies worth P20,000 on account.

Office Supplies Accounts Payable
5/3 20,000 20,000 5/3

May 5. Purchased additional office supplies for cash, P 10,000.

Office Supplies Cash
5/3 20,000 5/1 100,000 10,000 5/5
5/5 10,000

May 6. Paid the accounts payable in full, P20,000

Accounts Payable Cash
5/6 20,000 20,000 5/3 5/1 100,000 10,000 5/5
20,000 5/6

May 8. Purchased 2 units of computer with printer for P50,000, 30 days.

Accounts Payable
Office Equipment 5/8 50,000
5/6 20,000 20,000 5/3
50,000 5/8

19
 May 10. Rendered accounting services for cash, P25,000.
Cash
Professional Fees 25,000 5/10
5/6 20,000 20,000 5/3
5/10 25,000 50,000 5/8

May 15. Rendered accounting services on account, P30,000.

Accounts Receivable Professional Fees

May 15. Paid Meralco bills, P3,500.

Cash Utilities Expense
5/15 30,000 25,000 5/10
30,000 5/15

5/6 20,000 20,000 5/3 5/15 3,500

5/10 25,000 50,000 5/8 3,500 5/15

May 15. Paid salary of office

staffs,P15,000
Cash
Salaries Expense 5/15 15,000
5/6 20,000 20,000 5/3
5/10 25,000 50,000 5/8 3,500 5/15
15,000 5/15

May 20. Collected P 10,000 from customer.

Cash
Accounts Receivable 5/15 30,000 10,000 5/20
5/6 20,000 20,000 5/3
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15 15,000 5/15

May 22. A short term loan from a local bank was granted in the amount of P50,000,
less P5,000 finance charges. W. Kayayan issued 1 year promissory note.
Cash Notes
Payable 50,000 5/22
5/6 20,000 20,000 5/3
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
5/22 45,000 15,000 5/15

Interest Expense
5,000 5/22

20
 May 25. Paid telephone bill amounting to P6,000.
Cash
Telephone Expense 5/25 6,000
5/6 20,000 20,000 5/3
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
5/22 45,000 15,000 5/15 6,000 5/25

May 27. W. Kayayan withdrew cash P20,000 for her personal use.
Cash W.
Kayayan drawing 5/27 20,000
5/6 20,000 20,000 5/3
5/10 25,000 50,000 5/8
5/20 10,000 3,500 5/15
5/22 45,000 15,000 5/15 6,000 5/25
20,000 5/27

May 30. At the end of the month, physical count of the office supplies revealed that
P5,000 had been consumed.
Office Supplies
Supplies Expense 5/30 5,000
5/3 20,000 5,000 5/30
5/5 10,000

References:
Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14 th Edition.
Manila: Domdane Publishers and Made Easy Books.
Ledesma, Ester L.(2014).Financial Accounting Theory Review Booklets. Manila: CRC-Ace
The Professional CPA Review School.
Rante, Gloria Aradaniel.(2013). Accounting for Service Entities. Mandaluyong City:
Millenium Books, Inc.
ACTIVITY NO. 1

NAME: YR.&SEC.
COURSE: DATE

MULTIPLE CHOICE

21
1. If a business is not being sold or closed, the amounts reported in the
accounts for assets used in the business operations are based on the cost of
assets. This practice is justified by
a. Accrual
b. Time period
c. Going concern
d. Accounting entity
2. It is the capacity of information to make a difference in decision by helping
users evaluate past, present and future events, or confirming, or correcting
their past evaluations.
a. Relevance
b. Reliability
c. Understandability
d. Comparability
3. The attributes of relevance include all except
a. Neutrality
b. Materiality
c. Predictive value
d. Feedback value
4. It is the quality of information that assures readers that the information
is free from bias or error and faithfully represents what it purports to
show.
a. Relevance
b. Reliability
c. Understandability
d. Comparability
5. The financial accounting information is directed toward the common needs of
users and is independent of presumptions about particular needs and desires
of specific.
a. Neutrality
b. Relevance
c. Completeness
d. Verifiability
6. It is the result of the standard of adequate disclosure
a. Completeness
b. Neutrality
c. Faithful Representation
d. Substance over form
7. The financial information must be comprehensible or intelligible if it is to
be useful.
a. Comparability
b. Understandability

22
 c. Relevance
d. Reliability
8. It is the ability to bring together for the purpose of noting similarities
and dissimilarities
a. Relevance
b. Reliability
c. Comparability
d. Understandability
9. Financial reporting is concerned only with information that is significant
enough to affect evaluation or decision.
a. Materiality
b. Timeliness
c. Comparability
d. Cost and benefit
10. The purchase of an asset on account will
a. Increase total liabilities and decrease total assets
b. Have no effect on total assets or total liabilities
c. Increase total assets and increase total liabilities
d. Increase total assets and decrease owner’s equity
11. Amounts owed by a business are referred to as
a. Assets
b. Equities
c. Liabilities
d. Capital
12. Which of the following equations is the fundamental accounting equation?
a. Assets – Liabilities = Owner’s Equity
b. Assets = Liabilities + Owner’s Equity
c. Assets – Owner’s Equity = Liabilities
d. Assets – Owner’s Equity = Liabilities
13. When an owner deposits cash in an account in the name of the business, it is
an increase to
a. Cash and Accounts receivable
b. Cash and withdrawals
c. Cash and capital
d. Cash and expenses
14. Which of the following is not considered an account?
a. Equipment
b. Revenues
c. Accounts Payable
d. Cash
e. Accounts Receivable

23
15. If an owner invests her computer and printer in the business, there is an
increase to
a. Cash and capital
b. Computer Equipment and withdrawals
c. Cash and withdrawals
d. Computer equipment and capital
16. The owner invested P50,000 in the business. What are the effects on the
fundamental accounting equation?
a. Assets increase P50,000; liabilities no effect; owner’s equity increase
P50,000
b. Assets increase P50,000; liabilities decrease P50,000; owner’s equity
increase P50,000
c. Assets increase P50,000; liabilities increase P50,000; owner’s equity no
effect
d. Assets increase P50,000; liabilities no effect; owner’s equity decrease
P50,000
17. The purchase of an asset for cash will
a. Increase total assets and decrease total liabilities
b. Have no effect on total assets or total liabilities
c. Increase total assets and increase total liabilities
d. Increase total assets and increase total owner’s equity
18. When the rent for the business is paid with a check
a. Cash is decreased and rent expense is decreased
b. Cash is decreased and rent income is increased
c. Cash is decreased and rent expense is increased
d. Cash is decreased and accounts payable is decreased
19. The purchase of supplies for cash will
a. Increase supplies and decrease cash
b. Increase supplies expense and decrease cash
c. Decrease cash and increase accounts payable
d. Decrease cash and increase capital
20. Which of the following transactions does not include an increase to expense?
a. Received and paid the phone bill
b. Bought office supplies on account
c. Received cash for services performed
d. Paid the week’s salaries

24
25
ACTIVITY NO. 2

NAME:
COURSE:

PROBLEM #1

Assets Liabilities Onwner’s Equity

1 760,000 360,000
2 860,000 592,000
3 108,000 760,000
4 626,600 376,240
5 800,000 (100,000)
6 600,000 450,000
7 530,000 410,000
8 473,000 153,700
9 147,000 236,500
10 624,000 237,000

❖ Fill the amount of the missing element of the financial position.

PROBEM #2

Income Expense Profit (Loss)

1 840,000 360,000
2 2,400,000 540,000
3 1,300,000 860,000
4 2,000,000 720,000
5 1,800,000 (400,00)
6 750,000 500,000
7 500,000 600,000
8 700,000 150,000
9 600,000 (150,000)
10 900,000 900,000

❖ Fill the amount of the missing element of the financial performance.

PROBEM #3

1. At the beginning of the year, the assets of Luke Services were P360,000
and its owner’s equity was P200,000. During the year, assets increased by
P120,00 and liabilities increased by P20,000. What was the owner’s equity
at the end of the year?
2. The liabilities of Neechee Company equal one-third of the total assets,
and the owner’s equity is P240,000. What is the amount of the liabilities?

26
 YR.&SEC.
DATE
3. At the beginning of the year, Cora Station had liabilities of P100,000
and owner’s equity of P96,000. If assets increased by P40,000 and
liabilities decreased by P30,000. What was the owner’s equity at the end
of the yaer?
❖ Use the accounting equation to answer each of the questions above.

ACTIVITY NO. 3

NAME: YR.&SEC.
COURSE: DATE

PROBLEM #1

Instruction: Indicate on the space provided,(1)(X)on the element where the

account belong (2) BS if the account is Balance Sheet account and IS if the
account is income statement account; Dr (debit) or Cr (credit) to identify the
normal balance of the account.
OWNER’S
Accounts ASSET LIABILITES BS or IS Dr or Cr
EQUITY
1. Repairs and Maintenance
Expense
2. Salaries and Wages
Expense
3. Notes Payable
4. Notes Receivable
5. Service Vehicle
6. Mortgage Payable
7. Utilities Expense
8. Furniture and Fixtures
9. Communication Expense
10. Employees’ benefits
payable
11. Office Equipment
12. Prepaid Insurance
13. Owner’s Withdrawal

27
14. Professional fees
earned
15. Accounts Receivable
16. Representation Expense
17. Salaries Payable
18. Office Supplies Expense
19. Office Supplies
20. Accounts payable
21. Cash
22. Inventory
23. Land
24. Accumulated
Depreciation
25. Miscellaneous Expense
26. Prepaid Rent
27. Rent Expense
28. Juan, Capital
29. Insurance Expense
30. Depreciation Expense

ACTIVITY NO. 4

NAME:
COURSE:

PROBLEM #1 Identifying the effects of a transaction

Instruction: Indicate the following sign in the appropriate column; (+) for
increases, (-) for decreases, and (+/-) for both increase and decrease.

Owner’s
Assets Liabilities
Equity
1. Cash payment by the owner
(investment)
2. Payment for taxes and licenses
expense
3. Repair and maintenance of office
4. payment of rent expense
5. Purchase of office supplies on
account

28
 YR.&SEC.
DATE
6. Purchase of office supplies for
cash
7. Payment of accounts payable
8. Provide services for cash
9. Purchase of equipment and
furniture for cash
10. Purchase of equipment and
furniture giving a 30day promissory
note
11. Payment of salaries of employees
12. Personal transaction like
withdrawal of the owner
13. Provide services on account
14. Provide services for cash
15. Collection of account from a
customer
16. Payment of utility bills
17. Provide services receiving a
30day promissory note
18. Payment for other expenses
19. Bought supplies paying 50% on cash,
and the remaining on account.
20. Rendered service receiving
partial payment on cash and the
remaining on account.

29
 YR.&SEC.
DATE
ACTIVITY NO. 5

NAME: COURSE:

PROBLEM #1 Transactions in a Completed Worksheet

Kaya Paba, to be able to guide the business administration students in their

pursuits to pass the accounting subject they enrolled, established the KP
Tutorial Services. On May 1, 2015, she contributed P70,000 as investment to
start the business. During the month, she entered into several transactions.
Note that she made no withdrawals during the month. The following is the
transactions worksheet prepared by her student-assistant:
CASH + ACCOUTS + OFFICE = ACCOUNT + NOTES + K. PABA,
RECEIVABLE EQUIPMENT PAYABLE PAYABLE CAPITAL
1 70,000 70,000
2 (45,000) 45,000 3 30,000 10,000
20,000
4 18,000 18,000
5 (5,000) (5,000)
6 7,000 7,000
7 (10,000) (10,000) 8 15,000) (15,000)

9 (7,000) (7,000)

❖ Describe each of the above transactions.

❖ If these transactions represent the operations of KP Tutorial Services
during month of May, what was the amount of profit or loss before
depreciation?

30
 YR.&SEC.
DATE

ACTIVITY NO. 6

NAME: COURSE:

PROBLEM #1 Recording Transactions in a Financial Transaction Worksheet

Emerita Modesto established her own business called Modesto’s Self-storage. The
account leadings are presented below. Transactions completed during the moth
follow.

a. Deposited P120,000 in a bank account in the name of the business.

b. Bought office equipment on account from PHINMA Company, P31,000.
c. Paid rent for the month, P24,000.
d. Bought supplies for cash, P4,500.
e. Paid salaries, P9,800.
f. Received cash for storage services, P36,000.
g. Received and paid the utility bill, P2,520.
h. Paid Errol Umerez Graphics for advertising, P4,280. (The bill was not
previously recorded.)
i. Paid for a one-year liability insurance policy, P8,350.
j. Billed customers for storage services on account, P33,700.
k. Received cash for storage services, P23,000.

31
 YR.&SEC.
DATE
l. Paid salaries, P9,900.
m. Paid PHINMA Company P11,000 as part payment on the office equipment bought
in transaction b.
n. Modesto withdrew P12,000 for personal use.

Required:

1. Record the transactions in columnar form, write plus and minus signs, and
show the balance after each transaction to be sure the equation remains
in balance.
2. Write the proof of totals at the bottom to show that one side of the
equations equals the other side.

ASSETS = LIABILITIES OWNER’S EQUITY

Accounts Prepaid Office Accounts Modesto,
Cash = Revenue Expenses
Receivable Insurance Equipment Payable Capital
a 120,000 120,000
Bal. 120,000 0 0 0 0 120,000 0 0

ACTIVITY NO. 7

NAME: COURSE:

PROBLEM #1 Recording Transactions in a Financial Transaction Worksheet

Nelson Daganta formed the Liceo Sign Company on Oct. 1, 2009. He deposited
P250,000 in GE Money Bank under the name of the new business entity. During the
month of October 2009, the following transactions occurred.

Oct. 2 Acquired a service vehicle in the amount of P195,000 on account.

32
 YR.&SEC.
DATE
3 Acquired supplies for cash, P57,000.
9 Received P87,500 cash for signs painted.
10 Paid the month’s event, P25,000.
11 Painted signs for Cagayan Company on account, P170,000 12 Paid P55,000 on
account from Oct. 2.
16 Withdrew P25,000 for personal use.
23 Collected P35,000 from Cagayan Company.
27 Paid salaries of P57,000 for the month.
30 Paid Bayan Tel P7,500 for communication services for the month.
31 Paid a bill from Ad Asia for P5,500 of advertising for the month.

Required
Establish the following accounts in a financial transactions worksheet: Cash;
Accounts Receivable; Supplies; Service Vehicle; Accounts Payable; and Daganta,
Capital. Record in the worksheet the transactions listed above.

33
 YR.&SEC.

DATE
ACTIVITY NO. 8

NAME:
COURSE:

PROBLEM #2 Recording Transactions in a Financial Transaction Worksheet

On Dec. 1, 2014, Ramil Sarabia opened a videotape rental store, Kalibo Video,
by investing P250,000 cash from his personal savings account. During the month
of December, the following transactions took place.

Dec. 1 Acquired supplies on account, P67,000.

4 Acquired videotape costing P235,000, on account.
5 Paid P85,000 to creditors.
8 Received P78,000 cash from ACA Video for rental fees.
11 Billed video city for video rentals, P105,000.
16 Paid salaries, P65,000.
17 Collected P77,000 from video city.
23 Sarabia withdrew P47,000 from the business.
24 Paid rent for the month, P41,500.
30 Paid utilities bill for the month, P17,500.

Required:

Record the transactions for the month of December 2014 using a financial
transaction worksheet. Use the following accounts: Cash; Accounts Receivable;
Supplies; Videotape; Accounts Payable; and Sarabia, Capital.

Determine the balances of the T-account.

34
ACTIVITY NO. 9

NAME:
COURSE:

Presented below is the balance sheet for the Leopoldo Medina Nursing Home:

Leopoldo Medina Nursing Home

Balance Sheet
Dec. 31, 2014

ASSETS

Current Assets
Cash P 16,000

Accounts Receivable 165,000

Supplies 21,000 P 202,000

Non-current Assets
Land 90,000

Nursing Home 350,000

Nursing Equipment 160,000 600,000

Total Assets P 802,000

LIABILITIES AND OWNER’S EQUITY

Liabilities
Accounts Payable 47,000
Notes Payable 350,000
Total Liabilities 397,000

Owner’s Equity
Medina, Capital 405,000
Total Liabilities and Owner’s Equity P 802,000

During the month of January 2015, the following transactions tool place:
Jan. 2 Acquired supplies on account, P17,500.
6 Collected P82,000 from patients for services provided in 2014.
10 Acquired nursing equipment on account, P35,000.

AC101 Session 3 35
 YR.&SEC.

DATE
11 Billed patients P167,000 for nursing fees.
12 Paid P31,000 on accounts payable.
17 Paid nursing salaries, P24,000.
20 Paid utilities expense, P 9,000.
25 Medina withdrew P10,000 from the business.
27 Received a bill from the Ryan Morales Ad Company for P12,500 for
advertising expense incurred during the month.
31 Paid P15,000 of the notes payable.

Required: (1) Enter the Dec. 31, 2014 balances in a financial transaction
worksheet. (2) Record the transactions for the month of January 2010. (3)
Determine the balances of accounts using T-account.

Fundamentals
of Accounting 1
SESSION 3

PREPARATION OF FINANCIAL STATEMENTS

Desired Learning Outcomes

• Understand the different source
documents evidencing a transaction.
• Understand and apply the accounting
cycle in day-to-day business
transactions.
• Familiarize with General Journal,
Ledger and Trial Balance.

36
 • Deeper understand the debit and
credit.

Instructor Leemon L. Araza 2015 Edition

AC101 Session 3 37
BUSINESS TRANSACTIONS

A business transaction is any event that affects the financial position of the
business and can be recorded reliably. It involves exchange of values. There
are transactions within the organization like recognizing the used portion of
supplies as expense, or with outside entities or persons like purchasing
supplies either for cash or on account.

SOURCE DOCUMENTS

Transactions and events are the starting points in the accounting cycle. By
relying on source documents, transactions and events can be analyzed as to how
they will affect performance and financial position. Source documents identify
and describe transactions and events entering the accounting process. These
original written evidences contain information about the nature and the amounts
of the transactions. Some of the more source documents are:
• Sales invoice • Checks
• Cash register tapes • Purchase orders
• Official receipts • Time cards
•
Bank deposit slips • Statement of accounts
Bank statements
TRANSACTION ANALYSIS

The analysis of transactions should follow these four basic steps:

1. Identify the transaction from source documents
2. Indicate the accounts – assets, liabilities, equity, income or expenses
– affected by the transaction.
3. Ascertain whether each account is increased or decreased by the
transaction.
4. Using the rules of debit or credit, determine whether to debit or credit
the account to record its increase or decrease.

ACCOUNTING CYCLE

Step 1 Documentation. Analyzing business documents which serve as a basis

of recording transactions.
Step 2 Journalizing. Recording business transactions in the journal to have
chronological records of economic activities.
Step 3 Posting. The information in the general journal is transferred to
the General Ledger to create a record of classified accounts.
Step 4 Preparation of Trial Balance. A trial balance is prepared to prove
the equality of debits and credits in the general ledger.
Step 5 Adjusting entries. Making end of period adjustments before financial
statements are prepared so that the income and expense in the income
statement are reported at their correct amounts.
Step 6 Worksheet. Work sheet is prepared to facilitate the preparation of
financial statements.

AC101 Session 3 2
Step 7 Financial Statement. The basic financial statements are prepared
after making the necessary adjustments.
a. Income Statement
b. Balance Sheet
c. Statement of Cash Flows
d. Statement of Changes in Equity
e. Notes to financial statement
Step 8 Journalizing and posting closing entries. The objective of closing
entry is to transfer the revenue, expense and drawing accounts to
the capital account.
Step 9 Preparation of a Post-closing trial balance
Step 10 Reversing journal entries (made at the start of the next period)

CHART OF ACCOUNTS

It is a list of Assets, Liabilities, Revenue, Expense and Capital Accounts

applicable to the business enterprise. It normally includes brief description
of the nature of transaction, identification number or account number. Presented
below is the chart of accounts for the illustration.

W. KAYAYAN ACCOUNTING FIRM CHART

OF ACCOUNTS
Balance Sheet Accounts Income Statement Accounts
ASSETS REVENUE
110 Cash 410 Service Revenue
120 Accounts Receivable
130 Notes Receivable EXPENSES
140 Office Supplies 510 Office Supplies Expense
150 Land 520 Utilities Expense
160 Office Equipment 530 Salaries Expense
165 Accumulated Dep. O/E 540 Telephone Expense
170 Furniture & Fixtures 550 Interest Expense
175 Accumulated Dep. F/F 560 Rent Expense
570 Depreciation Expense –O/E
LIABILITIES 580 Depreciation Expense –F/F
210 Accounts Payable 590 Miscellaneous Expense
220 Notes Payable 230 Utilities
Payable 240 Salaries Payable

250 Interest Payable

260 Unearned Revenue

AC101 Session 3 3
 EQUITY
310 W. Kayayan, Capital 320 W.
Kayayan, Withdrawals
330 Income Summary

JOURNALIZING

THE JOURNAL

The journal is a chronological record of the entity’s transactions. It is called

the book of original entry. A journal entry shows all the effects of a business
transaction in terms of debits and credits. Each transaction is initially
recorded in a journal rather than directly in the ledger. The general journal
is the simplest journal.

Simple and Compound Entry

In a simple entry, only two accounts are affected – one account is debited and
the other account is credited. However, some transactions require the use of
more than two accounts. When three or more accounts are required in a journal
entry, the entry is referred to as a compound entry.

Format

Date: The year and month are not written for every written entry unless the
year or month changes or a new page is needed.
Account Titles and Explanation: The first line of an entry shows the account
debited and the second line is the account credited. The account
credited is indented to the right. For each entry, a brief
explanation is required enough to understand the nature of the
transaction.
Posting Reference: This column is filled up only when the entry is transferred
to the next book of accounts, the ledger. Posting reference column
is where the account number of each account is written.
Debit: The debit amount for each account is entered in this column.
Credit: The credit amount for each account is entered in this column.

ILLUSTRATION

Once again, let us review the transactions of the newly organized accounting
firm of Mr. Kayayan.

May 1. Mr. W. Kayayan invested P100,000 to start an accounting office. May

3. Purchased office supplies worth P20,000 on account.
May 5. Purchased additional office supplies for cash, P10,000.
May 6. Paid the accounts payable in full.
May 8. Purchased 2 units of computer with printer for P50,000, 30 days.
May 10. Rendered accounting services for cash, P25,000.

AC101 Session 3 4
 May 15 Rendered accounting services on account, P 30,000.
May 15 Paid Meralco bills, P 3,500.
May 15 Paid salaries for the period, P15,000. May
20 Collected P10,000 from customer.
May 22 A Short term loan from a local bank was granted in the amount of P50,000,
less P5,000 financing charges. Mr. W. Kayayan issued 1 year promissory
note.
May 25 Paid telephone bill amounting to P 6,000.
May 27 Mr. Kayayan withdrew P20,000 for personal use.
May 30 At the end of the month, physical count of the office supplies revealed
that P 5,000 had been consumed.

GENERAL JOURNAL PAGE No. 1

Date Account Titles and Explanation PR Debit Credit

2014
1 Cash 110 1 0 0 0 0 0
May
W. Kayayan, Capital 310 1 0 0 0 0 0
Initial investment of the owner

3 Office Supplies 140 2 0 0 0 0

Accounts Payable 210 2 0 0 0 0
Office supplies purchased on account.

5 Office Supplies 140 1 0 0 0 0

Cash 110 1 0 0 0 0
Office Supplies purchased.

6 Accounts Payable 210 2 0 0 0 0

Cash 110 2 0 0 0 0
Full payment of account.

8 Office Equipment 160 5 0 0 0 0

Accounts Payable 210 5 0 0 0 0
Computer units purchased

10 Cash 110 2 5 0 0 0
Service Revenue 410 2 5 0 0 0
Service revenue rendered.

AC101 Session 3 5
 15 Accounts Receivable 220 3 0 0 0 0
Service revenue 410 3 0 0 0 0
Service revenue rendered on account.

15 Utilities Expense 520 3 5 0 0

Cash 110 3 5 0 0
Paid meralco bill.

2014
15 Salaries Expense 530 1 5 0 0 0
May
Cash 110 1 5 0 0 0
Paid Salary of office staffs

20 Cash 110 1 0 0 0 0
Accounts Receivable 120 1 0 0 0 0
Collection of account

22 Cash 110 4 5 0 0 0
Interest Expense 550 5 0 0 0
Notes Payable 220 5 0 0 0 0
Proceeds of loan.

25 Telephone Expense 540 6 0 0 0

Cash 110 6 0 0 0
Paid telephone bill.

27 W. Kayayan, Withdrawals 320 2 0 0 0 0

Cash 110 2 0 0 0 0
Withdrawal by the owner.

30 Office Supplies Expense 510 5 0 0 0

Office Supplies 140 5 0 0 0
Office Supplies consumed.

AC101 Session 3 6
Take note that the post reference of the general journal is not filled up yet
in the process of recording. This will filled in the posting process.

POSTING

THE LEDGER

A grouping of the entity’s accounts is referred to as a ledger. Although some

firms may use various ledger to accumulate certain detailed information, all
firms have a general ledger. A general ledger is the reference book of the
accounting system and is used to classify and summarize transactions, and to
prepare data for basic financial statements.

The accounts in the general ledger are classified into two general groups:
Permanent/Real accounts –balance sheet accounts Temporary/Nominal
accounts –income statement accounts

Posting means transferring the amounts from the journal to the appropriate
accounts in the ledger. The steps are illustrated as follows:
1. Transfer the date of the transaction from the journal to the ledger.
2. Transfer the page number from the journal to the journal reference.
3. Post the debit figure from the journal as a debit figure in the ledger
and the credit figure from the ledger as a credit figure in the ledger.
4. Enter the account number in the posting reference column of the journal
once the figure has been posted to the ledger.

Illustration:

Account: Cash Account No.: 110

Date Explanation J.R. Debit Credit Balance
2009
May 1 Initial Investment J-1 100,000.00 100,000.00
3 Office Supplies purchased J-1 10,000.00 90,000.00

Account: W. Kayayan, Capital Account No.: 310

Date Explanation J.R. Debit Credit Balance
2009
May 1 Initial Investment J-1 100,000.00 100,000.00

Account: Office Supplies Account No.: 140

AC101 Session 3 7
 Date Explanation J.R. Debit Credit Balance
2009
May 3 Office Supplies purchased J-1 10,000.00 10,000.00

LEDGER ACCOUNTS POSTING

At the end of the accounting period, the debit and credit balance of each
account must be determined to enable us to come up with a trial balance.
• Each account balance is determine by footing (adding) all the debits and
credits.
• If the sum of an account’s debit is greater than the sum of its credits,
that account has a debit balance.
• If the sum of its credits is greater, that account has a credit balance.

In the discussion of basic accounting, T-accounts is often use rather than the
actual ledger to facilitate the posting step in the accounting cycle.

TRIAL BALANCE

It is a list of all accounts with their respective debit or credit balances. It

is prepared to verify the equality of debits and credits in the ledger at the
end of each accounting period or at any time the postings are updated.
Illustration:
W. Kayayan Accounting Firm
Trial Balance
May 31, 2015

Cash 105,500

Accounts Receivable 20,000

Office Supplies 25,000

Office Equipment 50,000

Accounts Payable 50,000

Notes Payable 50,000
W. Kayayan, Capital 100,000
W. Kayayan, Withdrawals 20,000

Service Revenue 55,000

Office Supplies Expense 5,000

Utilities Expense 3,500

Salaries Expense 15,000

AC101 Session 3 8
 Telephone Expense 6,000

Interest Expense 5,000

Total P 255,000 P 255,000

The trial balance is a control device that helps minimize accounting errors.
When totals are equal, the trial balance is in balance. It only proves the
equality of debit and credit totals but not the following errors:
1. Failure to record or post a transaction.
2. Recording the same transaction more than once.
3. Recording an entry but with the same erroneous debit and credit amounts.
4. Posting a part of a transaction correctly as a debit or credit but to the
wrong account.

INEQUALITY OF TOTALS DUE TO ERRORS

These might arise from the following circumstances:
1. Failing to post part of a journal entry
2. Posting a debit as a credit, or vice versa.
3. Incorrectly determining the balance of an account.
4. Recording the balance of an account incorrectly in the trial balance.
5. Omitting an account from the trial balance.
6. Incorrectly determining the totals of the two columns of the trial
balance.
7. Listing a debit balance of an account in the credit column.

PREPARATION OF FINANCIAL STATEMENTS

All accounting reports require a heading which is written on the first three
lines at the center of the report being prepared.

1st line – name of the Company

2nd line – title of the report or statement
3rd line – Date of the report

For income statement and Statement of Changes in Equity, the date is written
as: For the month ended for the year ended u or for the six months
ended .

For the balance sheet, the date is written as: As of or just the date
itself.

W. Kayayan Accounting Firm

Income Statement

AC101 Session 3 9
 For the month ended May, 31, 2014

Service Revenue P 55,000

Less: Expenses
Office Supplies Expense P 5,000
Salaries Expense 15,000
Utilities Expense 3,500
Telephone Expense 6,000
Interest Expense 5,000 34,500
Net Profit P 20,500

W. Kayayan Accounting Firm

Statement of Changes in Capital
For the month ended May 31, 2014

W. Kayayan, Capital Beg. P 100,000

Add: Net profit 20,500
Total 120,500
Less: W. Kayayan withdrawals 20,000
W. Kayayan, Capital End. P 100,500

AC101 Session 3 10
REPORT FORM
W. Kayayan Accounting Firm
Balance Sheet May
31, 2014

Assets
Current Assets
Cash P 100,500
Accounts Receivable 20,000
Office Supplies 25,000
Total Current Assets P 150,000
Non-current Assets
Office Equipment P 50,000
Total Assets P 200,500

Liabilities and Owner’s Equity

Current Liabilities
Accounts Payable P 50,000
Notes Payable 50,000
Total Liabilities P100,000
Capital
W. Kayayan, Capital 100,500
Total Liabilities and Owner’s Equity P200,500

ACCOUNT FORM
W. Kayayan Accounting Firm
Balance Sheet May
31, 2014

Assets Liabilities and Owner’s Equity

Current Assets Current Liabilities
Cash P 100,500 Accounts Payable P 50,000
Accounts Receivable 20,000 Notes Payable 50,000
Office Supplies 25,000 Total Liabilities P100,000
Total Current Assets P 150,000
Capital
Non-current Assets W. Kayayan, Capital 100,500
Office Equipment P 50,000 Total Liabilities
Total Assets P 200,500 and Owner’s Equity P200,500

References:
Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14th Edition.
Manila: Domdane Publishers and Made Easy Books.

AC101 Session 3 11
Rante, Gloria Aradaniel.(2013). Accounting for Service Entities. Mandaluyong
City: Millenium Books, Inc.
ACTIVITY NO. 1

NAME: YR.&SEC.
COURSE: DATE

MULTIPLE CHOICE
1. The normal balance of an account is on the
a. Plus side
b. Left side
c. Debit side
d. Credit side
2. When a T-account has several items on both sides, the balance of the
account is written
a. On the side with the greatest number of items.
b. On the side with the least number of items.
c. On the side with the larger total.
d. On the side with the similar total.
3. A debit may signify a decrease in
a. A liability account
b. A revenue account
c. A liability and a revenue account
d. An asset and a revenue account
4. A debit may result in
a. An increase in an expense account
b. An increase in an asset account
c. A decrease in a liability account
d. A decrease in a revenue account
5. A purchase is recognized in the accounting records when
a. Payment is made for the item purchased
b. The purchase requisition is sent to the purchasing department
c. The buyer receives the seller’s bill
d. Title transfer from the seller to the buyer
6. Which of the following accounts will not affect owner’s equity?
a. Owner’s withdrawals
b. Land
c. Advertising Expense
d. Revenues

AC101 Session 3 12
7. Which of the following errors will not cause the debit and credit
columns of a trial balance to be unequal?
a. Only part of a journal entry was posted
b. A debit was posted to an account as a credit
c. A journal entry was accidentally posted twice
d. The trial balance was incorrectly summed.
8. Which of the following errors will cause a trial balance to be out of
balance?
a. The bookkeeper forgot to journalize a transaction
b. The bookkeeper forgot to post a journal entry to the ledger.
c. A journal entry was accidentally posted twice.
d. A credit was posted to an account as a debit.
9. The general journal does not have a column titled
a. Description
b. Posting reference
c. Account balance
d. Date
10. To find explanation for a transaction, one should look at the
a. Journal
b. Ledger
c. Chart of accounts
d. Trial balance
11. An entry with more than one debit or credit is called a
a. Double entry
b. Compound entry
c. Dual entry
d. Multiple entry
12. The term footing refers to the
a. Addition of a column of figures
b. Process of obtaining the top number in an account
c. Process of obtaining the bottom number in an account
d. Process of posting
13. Balance sheet accounts are
a. Temporary accounts
b. Accounts with debit balances only
c. Adjusting accounts
d. Permanent accounts
14. Posting is the process of transferring information from the
a. Journal to the trial balance
b. Ledger to the financial statements

AC101 Session 3 13
 c. Ledger to the trial balance
d. Journal to the ledger
15. Typically, the chart of accounts begins with
a. Asset accounts
b. Liability accounts
c. Revenue accounts
d. Expense accounts
16. All of the following are examples of source documents except
a. Check
b. Sales invoice
c. Statement of account
d. General journal
17. The equality of debits and credits in the ledger should be verified at
the end of each accounting period by preparing
a. An accounting statement
b. An account verification report
c. A trial balance
18. A balance report Of the following errors, the one that will cause an
inequality in the trial balance totals is
a. Incorrectly computing an account balance
b. Failure to record a transaction
c. Recording the same transaction more than once
d. Posting a transaction to the wrong account with the same normal
balance.
19. An entity’s trial balance
a. Shows a financial position
b. Establishes whether its accounting records are correct
c. List of all of the entries in its double-entry accounting records
d. Is a list of all of the accounts with their respective debit or
credit balances
20. If a P4,700 cash purchase of supplies is recorded as a P5,700 debit to
supplies expense and a P5,700 credit to cash, the result will be that
a. The trial balance will be out of balance
b. The supplies expense account will be understated
c. The cash account will be overstated
d. Supplies expense will be overstated and cash will be understated
21. If Accounts receivable has debit postings of P580,000, credit postings
of P440,000, and a normal ending balance of P480,000, which of the
following was its beginning.
a. P620,000 cr
b. P620,000 dr

AC101 Session 3 14
 c. P340,000 cr
d. P340,000 dr
22. If account payable has debit postings of P170,000, credit postings of
P140,000, and a normal balance ending balance of P60,000, which of the
following was its beginning balance?
a. P30,000 dr
b. P90,000 cr
c. P90,000 dr
d. P30,000 cr
23. A P800 credit item is accidentally posted as a debit. The trial balance
column totals will therefore differ by
a. P0
b. P400
c. P800
d. P1,600
24. If Accounts Payable has debit postings of P85,000, credit postings of
P70,000, and a normal ending balance of P30,000. What was its beginning
balance?
a. P45,000 cr
b. P15,000 dr
c. P45,000 dr
d. P15,000 cr
25. If accounts receivable has debit postings of P290,000, credit postings
of P220,000 and a normal ending balance of P240,000, which of the
following was its beginning?
a. P170,000 dr
b. P310,000 cr
c. P170,000 cr
d. P310,000 dr
Use of the following information to answer the questions below. The following
is the trial balance for Manabat Company.
Manabat Company
Trial Balance
Jan. 31, 2014

Cash P30,000
Accounts Receivable 20,000 Art
Supplies 30,000 Office
Supplies 50,000
Prepaid rent 70,000 Prepaid insurance
50,000 Art Equipment 50,000 Office
Equipment 30,000

AC101 Session 3 15
 Accounts Payable P 50,000 V. Manabat, Capital
150,000
V. Manabat, withdrawals ?
Advertising revenues ? Wages Expense ?
Utilities Expense 50,000
Telephone Expense 30,000
Total P A P B

26. If the balance of the Manabat, 28. In the trial balance, total
withdrawals account were assets equal P120,000 and the balance of a.
P330,000 the Wages Expense account were b. P230,000 P50,000, what would
be the c. P430,000 amount of B? d. P410,000
a. P180,000 29. If the total debits equals to
b. P580,000 490,000, what would be the
c. P370,000 balance of Advertising
d. P380,000 revenue?
27. If the trial balance showed a a. P290,000 balance of 70,000 in the b.
P330,000 Manabat, withdrawals account c. P190,000 and a balance of
P50,000 in d. P690,000 the Wages Expense account, 30. If the trial balance
showed a what would be the amount of balance of P80,000 in the
Advertising revenues for the wages expense and a balance of period?
P350,000 in the Advertising a. P330,000 Revenue, what would be the
b. P480,000 amount of A?
c. P180,000 a. P500,000
d. P430,000 b. P550,000
c. P450,000
d. P600,000

AC101 Session 3 16
 YR.&SEC.
DATE
ACTIVITY NO. 2

NAME:
COURSE:

PROBLEM #1

The following accounts were taken from the General Ledger of Kapit Tuko Law
Office at the end of its 1st year of operation, December 31, 2014.

Cash P 85,000
Accounts Receivable 60,000
Office Supplies 5,000
Office Equipment 100,000
Office Furniture 40,000
Service Vehicle 400,000
Accounts Payable 25,000
WHT Payable 8,000
SSS Payable 10,000
Philhealth Payable 2,000
K. Tuko, Capital 500,000
K. Tuko, withdrawals 20,000
Professional fees earned 959,000
Salaries and Wages 350,000
Rent Expense 240,000
Advertising Expense 12,000
Supplies Expense 10,000
Light and Water Expense 24,000
Gas and Oil Expense 75,000
Repairs and Maintenance 6,000
Telephone Expense 36,000
Representation Expense 30,000
Insurance Expense 6,000
Taxes and Licenses 5,000

Required:
Prepare a Trial Balance.
ACTIVITY NO. 3

AC101 Session 3 17
 YR.&SEC.
DATE
NAME:
COURSE:

PROBLEM #1

El Granado established the EG Data Encoders on May 15, 2014. The following
transactions occurred during the month.

a. El Granado invested P157,000 cash to establish the business

b. Bought office desks and filing cabinet for cash, P15,150.
c. El Granado invested in the business her personal computer with a fair
value of P57,500.
d. Bought computer software for use in the business from Dela Torre Computer
Center for P39,000 paying P15,000 down; the balance is due in thirty
days.
e. Paid rent for the month, P5,300.
f. Received cash for services rendered, P5,160.
g. Ordered a panaflex sign for P9,000 from Royal Bright Enterprises, with
P5,000 as down payment and the balance due when installed.
h. Received bill for advertising from Buy and Sell newspaper, P3,320.
i. Bought print paper and stationary on account, P2,290.
j. Received and paid electric bill, P1,240.
k. Paid bill for advertising recorded previously in transaction (h).
l. Received cash for services rendered, P10,900.
m. Paid salaries to employees, P8,400.
n. El Granado withdrew cash for personal use, P4,500.

Required:
1. Journalize each transactions
2. Establish the following T-accounts:

AC101 Session 3 18
 YR.&SEC.
DATE
▪ Cash ▪ El Granado, withdrawals
▪ Accounts Receivable ▪ Service Revenues
▪ Supplies ▪ Salaries Expense
▪ Office Equipment ▪ Advertising Expense
▪ Compute Software ▪ Rent Expense
▪ Signage ▪ Utilities Expense
▪ Accounts Payable ▪ Miscellaneous Expense
▪ El Granado, Capital
3. Prepare Trial Balance
4. Prepare Financial Statements
▪ Income Statements
▪ Statement of Changes in Capital
▪ Balance Sheet

ACTIVITY NO. 4

NAME:
COURSE:

PROBLEM #1

Marichu Fornolles Guardians completed the following transactions during October

2014.

Oct. 1 Fornolles transferred cash from a personal account to an account to be

used for the business, P243,000.
3 Fornolles invested in the business personal weapons having a fair market
value of P34,000.
4 Bought communication equipment on account from Pesa Electronics, P13,740.
5 Paid rent for the month, P7,650.
6 Bought a used service vehicle car for P93,000, paying P45,000 down, with
the balance due in thirty days.
9 Received invoice and paid insurance premium to Cacawa Fidelity company for
bonding employees, P7,710.

AC101 Session 3 19
 YR.&SEC.
DATE
12 Performed security services for Loreta Galleries. Billed Loreta for services
rendered, P8,250.
16 Received bill from Marcos Printers for office stationary, P1,757.
17 Billed Pascua Construction for services rendered, P14,790.
22 Paid Regal Shell Service for gasoline for service vehicle, P720.
24 Performed security services at a fashion jewelry fair, Billed organizers
for services rendered, P17,500.
27 Paid Pesa Electronics P4,500 to apply on account.
29 Received P8,250 from Loreta Galleries in full payment of account.
30 Billed Merchant Bank for services rendered, P21,600.
31 Receive and paid telephone bill, P1,030.
31 Paid salaries to employees, P31,500.
31 Fornolles withdrew cash for personal use, P18,000.

Required:
1. Prepare the journal entries for the October Transactions.
2. Set up the following ledger accounts using T-account and post all the
journal entries: Cash; Accounts Receivabe; Prepaid Insurance; Arms and
Communications Equipment; Service Vehicle; Accounts Payable; Fornolles,
Capital; Fornolles, Withdrawals; Service Revenue; Salaries Expense; Rent
Expense; Supplies Expense; gasoline Expense; and Utilities Expense.
3. Prepare a trial balance
4. Prepare the income statement, statement of changes in capital and balance
sheet.

AC101 Session 3 20
 YR.&SEC.
DATE
ACTIVITY NO. 6

NAME: COURSE:

PROBLEM #1
After several years with a large accounting firm. Virgie Dal decided to
establish her own accounting practice. The following transactions were completed
during May 2014.

May 2 Transferred P92,500 from a personal savings account to a checking account.

Virgie Dal, CPA.
3 Acquired office equipment on account from Gican Furniture, P36,800.
4 Acquired office supplies on account from Lorenzo office supply Company,
P17,100.
6 Performed accounting services for Cayao Computer Company and submitted a
bill of P29,200 for those services.
7 Paid for accounting and tax books for use in the practice, P19,500.
8 Paid Lorenzo Office Supply Company, P4,100 on account.
10 Acquired a condominium unit for the accounting practice, P265,000.
A down payment of 38,000 was made and issued a note payable for the
remaining P227,000.
12 Paid salaries, P14,200.
13 Received P9,750 from Cayaco Computer Company, billed on May 6.
16 Paid telephone expense, P650.
19 Received cash in the amount of P14,600 from Ponferada Book Company
for accounting services rendered for the month.
22 Acquired office supplies on account from Lorenzo Office Supply Company,
P4,650.
23 Withdrew P8,150 for personal use.
25 Paid salaries, P10,300.
26 Billed Bosante Exporters P31,600 for accounting services rendered.
27 Paid PICPA-Tacloban P5,500 for professional dues.
28 Paid P3,250 rent on an office-copying machine.

Required:
▪ Prepare the journal entries for the May transactions
▪ Post the entries to the ledger accounts using T-account. The
following accounts will be needed:

AC101 Session 3 21
 ❖Cash ❖Notes Payable ❖Rent Expense
❖Accounts ❖Accounts Payable ❖Telephone Expense
Receivable ❖Dal, Capital ❖Professional dues
❖Office Supplies ❖Dal, Withdrawals Expense
❖Office Condominium ❖Accounting
❖Office Equipment Revenues
❖Accounting Library ❖Salaries Expense
▪ Prepare a trial balance, income statement, statement of changes in
capital and balance sheet.

ACTIVITY NO. 5

NAME: COURSE:

PROBLEM #1 Correcting a Trial Balance

Below is the trial balance of Matilde Gascon Repair Service, which does not
balance.

Gascon Repair Service Trial

Balance
Jan. 31, 2014

Cash P 110,400
Accounts Receivable 284,600
Supplies 66,400
Prepaid Insurance 40,000
Office Equipment 526,800
Notes Payable P 130,000 Accounts Payable 195,400
Gascon, Capital 297,200 Gascon, Withdrawals 100,000
Repair Revenues 821,400
Salaries Expense 348,700
Advertising Expense 12,200
Totals P1,389,100 P1,544,000
The following information is obtained from a review of the record
keeping process.
a. An account receivable for P19,600 was incorrectly added as P 16,900 when
computing the balance of the Accounts Receivable account.
b. A debit posting from the journal for P5,200 is missing from the
Advertising Expense account.
c. A credit posting of P15,000 to Notes Payable should have been made to
Accounts payable.
d. A debit posting of P34,000 to Supplies was incorrectly posted as
P3,400.

AC101 Session 4 22
 YR.&SEC.
DATE
e. Credits to the ledger Accounts Payable account were under-footed by

P60,000.
f. Revenues are overstated in the ledger account by P40,000.
g. A credit posting for Repair Revenues from the journal in the amount of
P63,600 is missing.
h. Supplies acquired in the amount of P17,400 have been incorrectly posted
to the Office Equipment account.

Required: Prepare a corrected trial balance.

Fundamentals
of Accounting 1
SESSION 4

ADJUSTING THE ACCOUNTS

Desired Learning Outcomes

Understand the Accounting period.
Differentiate Accrual to Cash
Accounting.
Appreciate the importance of
Adjusting entries in the
preparation of financial
statements.
Items that needed Adjustments. The
Effects of not making the necessary

AC101 Session 3 23
 adjusting entries to financial
statements.

Instructor Leemon L. Araza 2015 Edition

AC101 Session 4 24
THE ACCOUNTING PERIOD

The activities of an enterprise can be divided into specific periods such as a

month, a quarter, a semester, or a year. The accounting period is usually s
span of 12 months. It may be a calendar year or fiscal year. Calendar year is
the normal year which ends December 31 of each year. Fiscal year is an accounting
year of 12 consecutive months that may or may not coincide with the calendar
yaer.

ACCRUAL VERSUS CASH ACCOUNTING

Accrual Accounting requires that all revenue earned whether payment is received
or not should be recognized in the period the goods or services are delivered
re rendered and that all related costs to deliver the goods or to render the
whether paid or not should be recognized as expense to match the revenue.

Cash-basis Accounting requires that all revenue is recognized only when cash is
received while expenses are recognized only when cash is paid.

IMPORTANCE OF ADJUSTING ENTRIES

Adjusting Entries are entries made at the end of the period to assign revenues
to the period in which they are earned and expenses to the period in which they
are incurred.

Many accounts need adjustments to reflect the current conditions as of time of

reporting in order for the statements to be meaningful. There may be financial
data not previously recognized that need to be recorded to make the books of
accounts up to date like the expenses already incurred but no payment until
sometime in the subsequent period, and revenues already earned but no cash is
collected yet.

ITEMS THAT NEED ADJUSTMENTS

PREPAID EXPENSES

Prepaid Expenses are expenditures paid for goods that are not yet consumed like
supplies, insurance and rent.

METHODS OF RECORDING PREPAYMENTS

Asset Method

1. Example for Supplies

a. Purchase of supplies worth P 5,000 is recorded as
Supplies 5,000
Cash 5,000

AC101 Session 4 2
 b. At the end of a period, physical count of unused supplies showed a
total of P3,500. This shows that if P 3,500 is unused, then P 1,500
worth of supplies is used or consumed.
Supplies Expense 1,500
Supplies 1,500

2. Example for Insurance

a. On October 1, 2013, a company paid P12,000 as insurance premium for
one year. The entry to record the payment under the asset method
is:
Prepaid Insurance 12,000
Cash 12,000

b. With the passage of time, the prepaid insurance gradually expires,

that’s why on Dec. 31, an adjusting entry is required to recognize
the expired portion of the insurance premium as expense.
Insurance Expense 3,000
Prepaid Insurance 3,000

3. Example for Rent

a. On Dec. 1, the company paid P18,000 as rent for one year. The entry
to record the payment under the asset method is:
Prepaid Rent 18,000
Cash 18,000

b. On Dec. 31, the entry will be (18,000/12 mons.)x 1 mons.=1,500.00

Rent Expense 1,500
Prepaid Rent 1,500

EXPENSE METHOD
This method of recording prepayments requires an entry debiting an expense
account upon payment.

1. Example for supplies

a. In the previous example, if the supplies purchased were recorded,
the entry would be:
Supplies Expense 5,000
Cash 5,000
b. The adjusting entry required to reflect the unused portion would be
Supplies 3,500
Supplies Expense 3,500

2. Example for Insurance

a. If the Expense Method is used to record the prepayment, the entry
made upon payment is:

AC101 Session 4 3
 Insurance expense 12,000
Cash 12,000

b. The adjusting entry on Dec. 31, would be:

Prepaid Insurance 9,000
Insurance Expense 9,000

3. Example for Rent

a. If the Expense Method is used to record the prepayment, the entry
made upon payment is:
Rent expense 18,000
Cash 18,000

b. The adjusting entry on Dec. 31, would be:

Prepaid Rent 16,500
Rent Expense 16,500

ACCRUED EXPENSES
These are items already recorded as expenses but not yet paid, thus creating an
obligations to make payments in the future. The most common examples are
salaries of employees and utilities expenses like bills from Meralco and Manila
Waters.

On June 15, when the company pays the salaries of employees, the payment will
be recorded as:

Salaries Expense P xxx

Cash P xxx

No accrual for salary payment on June 15 because this date is a regular working
day. The salary for the 2nd half of the month which is due June 30 will not be
paid on that day because it is a non-working day. So the salary of the employees
will be paid the following Monday, July 2. The bookkeeper will recognize the
expense on June 30 with the following entry:

Salaries Expense P xxx

Accrued Salaries or
Salaries Payable P xxx

ACCRUED INTEREST ON NOTES RECEIVABLE

A company issued a 90-day 10% note on Dec. 1 for P100,000. The notes payable is
due 90 days from date of issue including interest earned for 90 days. If
financial statements are prepared on Dec. 31, which are normally the case, then
the company must record the interest for 30 days as:
Interest Expense 833.33
Accrued Interest 833.33

AC101 Session 4 4
ACCRUED REVENUE

These are revenues already earned but no payment is received yet.

Interest Receivable P xxx
Interest Revenue P xxx

DEFERRED REVENUE OR UNEARNED REVENUES

This is the exact opposite of accrued revenues. In this case, payment is received
in advance prior to delivery of services, or delivery of goods, thus, creating
a liability for the amount collected in advanced; however, as the company
renders the service, the unearned revenue becomes earned revenue.

Revenue method
For example, on Aug. 1, a tenant paid its rent for one year in advance in the
amount of P 24,000. At the time cash is received, the entry is:

Cash 24,000
Rent Revenue 24,000

When financial statement is prepared on Dec. 31, an adjustment is necessary to

reflect the unearned portion of the rent that corresponds to the period Jan. 1
2013 – July 31, 2014. The adjusting entry would be:

Rent Revenue (7/12 x 24,000) 14,000

Unearned Rent 14,000

Liability Method
If the liability method is used to record the receipt of P24,000, the entry
upon receipt would be:

Cash 24,000
Unearned Rent 24,000

On Dec. 31, the amount earned must be recognized as revenue through an adjusting
entry.

Unearned rent 10,000

Rent Revenue 10,000

UNCOLLECTIBLE ACCOUNT EXPENSE OR DOUBTFUL ACCOUNTS

In any enterprise selling on account to its customers, experience show that

some customers will not be able to pay their accounts as they fall due.
Uncollectible accounts or bad debts are accounts of customers who do not pay
what they have promised to pay. The enterprise should provide allowance for

AC101 Session 4 5
uncollectible accounts and recognize an expense or loss from these accounts.
Other terms for uncollectible accounts are Bad Debts and Doubtful accounts.

a. Based on Percentage of Sales on Account or service revenue on account

For example, the company estimates that 2% of sales on account are
proven to be uncollectible. The entry would be:
Uncollectible account expense xxx
Allowance for uncollectible accounts xxx

The allowance for doubtful accounts is a contra account which is deducted from
the accounts receivable in the balance sheet to arrive at its net realizable
value.

b. Based on Accounts Receivable Balance

Example 1: The following balances are available from the records of Manila
Premier Hotel at December 31, 2013:

Accounts Receivable, 12/31 P 800,000

Allowance for uncollectible accounts,1/1 12,000 Cr.
Service Revenue on account 2,500,000

The company’s estimate for uncollectible accounts is 2% of accounts

receivable.

The adjusting entry required to reflect the expense for the year is:

Uncollectible account expense 4,000

Allowance for uncollectible accounts 4,000

Example 2: Assume the following balances:

Accounts Receivable, 12/31 800,000

Allowance for uncollectible accounts 22,000 Cr.
Service revenue on account 2,500,000

Since the required allowance is only P16,000, and the balance of the
allowance account is P22,000, the allowance for uncollectible accounts
should be reduced by P 6,000. The adjusting entry would be:

Allowance for uncollectible accounts 6,000

Uncollectible accounts expense 6,000

DEPRECIATION

Depreciation is the systematic means of allocating the cost of long lived

asset over its estimated economic life. Depreciation does not necessarily
measure the decline in the value of an asset but it shows only the portion

AC101 Session 4 6
of the cost of the asset that has expired due to using up the asset. The
assets that are subject to depreciation are called depreciable assets.
The formula:

Depreciation Expense = Cost of Asset – Scrap value/residual value/salvage value

Estimated economic life

Cost of asset is the amount of company paid to purchase the asset. It

includes the invoice price plus transportation charges and installation
fees.
Scrap value is the amount expected to be recovered at the end of an
asset’s useful life. It is also called residual value or salvage value.
Estimated economic life is the same as the estimated useful life of an
asset.
Depreciation cost or value is the difference between the cost of an asset
and its scrap value.

Example: A delivery equipment was purchased on Jan. 3, 2013 for P600,000.

It is estimated that the vehicle’s salvage value at the end of 10 yrs.
Is P50,000.

Dep. Expense = 600,000 – 50,000 = 55,000/yr.

10 yrs.

The adjusting entry on Dec. 31, 2013 will be:

Depreciation Expense 55,000

Accumulated Depreciation-D/E 55,000

Accumulated Depreciation is a contra account, which is reported as a

deduction from the related asset account.

The presentation of the asset and its related accumulated depreciation in

the balance follows:

Delivery Equipment P 600,000

Less: Accumulated Depreciation 55,000
Book value P 545,000

Book value is the part of the cost of the asset that is not yet allocated
to an expense account.

AC101 Session 4 7
References:
Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14th Edition.
Manila: Domdane Publishers and Made Easy Books.
Rante, Gloria Aradaniel.(2013). Accounting for Service Entities. Mandaluyong
City: Millenium Books, Inc.

EXERCISES

DBS Accounting firm, started operation only on January 1, 2020 and it provides
accounting and tax services to big establishments in Metro Manila. Its
accounting period ends Dec. 31, and on this date, adjusting entries are
prepared. The trial balance of DBS Accounting Firm at Dec. 31, 2020 follows:

DBS Accounting Firm

Trial Balance
December 31, 2020

Cash 120,000

Accounts Receivable 60,000

Office Supplies 50,000

Prepaid Insurance 24,000

Office Equipment 240,000

Furniture and Fixtures 40,000

Land 800,000

Building 1,300,000

Accounts Payable 168,000

Loans Payable 500,000

DBS, Capital 1,800,000

Professional fees 540,000

Salaries Expense 250,000

Advertising Expense 36,000

Transportation Expense 10,000

Utilities Expense 70,000

Miscellaneous Expense 8,000

Total P 3,008,000 P 3,008,000

Additional Information

AC101 Session 4 8
 1. An inventory of office supplies on December 31, 2014 showed supplies on
hand totaled P 38,000.
2. The prepaid insurance represents a one-year insurance policy on the
building purchased on May 1, 2013.
3. The Office Equipment is estimated to have a 5 year life with salvage value
of P 40,000 starting from April 1, 2013.
4. The furniture and fixtures is estimated to last for 10 years with no
salvage value.
5. The estimated useful life of the building is 20 yrs. with estimated
salvage value of P 100,000.
6. The Professional fees include P 40,000 of advances made by one client for
services still be rendered in the last week of December amounting to P
5,000 is schedule for payment on the first week of January 2015.
7. The company’s estimate as allowance for uncollectible accounts is very
minimal because it has not experienced defaulted accounts yet. The
estimate for uncollectible accounts is 2% of Accounts Receivable.

REQUIRED: Prepare the following

a. Adjusting Entries
b. Adjusted Trial Balance
c. Income Statement, Statement of Changes in Equity and Balance Sheet
ACTIVITY NO. 1

NAME: YR.&SEC.
COURSE: DATE

MATCHING TYPE

Below are terms pertinent to adjusting entries. Match each definition with its
related term. There are two answers for each term.

Terms Definitions

1. Accrued Expense a. Revenue not yet earned; collected in

2. Deferred Expense 3. advance.
Accrued Revenue b. Office supplies on hand; used next
4. Deferred Revenue accounting period.
c. Rent revenue collected; not yet earned.
d. Rent not yet collected; already earned.
e. An expense incurred; not yet paid or
recorded.
f. Revenue earned; not yet collected.
g. An expense not yet incurred; paid in
advance.
h. Property taxes incurred; not yet paid.

AC101 Session 4 9
Match each transaction with its related term:

Terms Definitions

1. Deferred Revenue a. At the end of the year, salaries payable of P3,600

had not been recorded or paid.
b. Supplies for office use were purchased
during the year for P500, and P100 of the
office supplies remained on hand (unused)
at year-end.
c. Interest of P250 on a note receivable was
earned at year-end, although collection
of the interest is not due until the
following year.
d. At the end of the year, service revenues
of P2,000 was collected in cash but was
not yet earned.

AC101 Session 4 10
ACTIVITY NO. 2

NAME: YR.&SEC.
COURSE: DATE

Journal Entries

Prepare Adjusting Entries required on December 31 for each item with your
supporting computations after each entry.

a. On March 1, 2013, XYZ Company paid P54,000 for 2 year insurance premium
on property. The bookkeeper debited Prepaid Insurance account at the time
of payment.
b. On December 1, 2013, ABC Company received P120,000 as advance payment for
professional services to be rendered starting 1st quarter of 2014. Unearned
revenue account was credited at the time of deposit.
c. Miscellaneous office supplies were purchased in the last quarter of 2014
amounting to P6,500. On December 31, inventories showed that P3,200 were
on hand. The purchase was debited to Office Supplies account.
d. The company’s office equipment costing P100,000 is expected to have 10
years economic life with no salvage value. This was purchased by the
company on Aug. 1, 2013.
e. ZTE company owes a bank a 10%, 90-day note for P 150,000 dated Nov. 1,
2013.

Use the journal provided on the other page for your answer.

11
 AC101 Session 4

Fundamentals
of Accounting 1
SESSION 5

COMPLETING THE ACCOUNTING CYCLE

Desired Learning Outcomes

• Understand and apply the remaining
steps in completing cycle; closing
entries, post-closing entries and
reversing entries.
• Deeper understanding the reasons
and importance of the remaining
steps.

Instructor Leemon L. Araza 2015 Edition

CLOSING ENTRIES

Closing entries are usually prepared at the end of an accounting period like
adjusting entries. Not all accounts are closed. Only the nominal accounts, often
called temporary accounts and the drawing account are closed at the end of the
accounting period. Nominal accounts are the accounts that appear in the income
statement like revenue and expense accounts.

A temporary account is said to be closed when an entry is made such that its
balance becomes zero. Closing simply transfers the balance of one account to
another account. In this case, the balances of the temporary accounts are

AC101 Session 4 12
transferred to the capital account. A summary account – Income and Expense
Summary is used to close the income and expense accounts.

1. Close the income accounts

Income accounts have credit balances before the closing entries are
posted. For this reason, an entry debiting each revenue account in the
amount of its balance is needed to close the account.

Dec 31 Revenues 67,700.00

Income & Expense Summary 67,700.00

2. Close the expense accounts

Expense accounts have debit balances before the closing entries are
posted. For this reason, a compound entry is needed crediting each expense
account for its balance and debiting the income and expense summary for
the total.

Dec 31 Income & Expense Summary 36,700.00

Salaries Expense 15,600.00
Supplies Expense 3,000.00 Rent Expense 4,000.00
Insurance Expense 1,200.00
Utilities Expense 4,400.00 Depreciation Expense-S.V.
4,000.00 Depreciation Expense-Off.Equp. 1,000.00
Interest Expense 3,500.00

3. Closing the income and expense summary

After closing entries involving the income and expense accounts, the
balance of the income summary account will be equal to the profit or loss
for the period. A profit is indicated by a credit balance and a loss by
a debit balance.

Dec 31 Income & Expense Summary 35,000.00

XYZ, Capital 35,000.00

4. Close the withdrawal account

The withdrawal account shows the amount by which capital is reduced during
the period by withdrawals of cash or other assets of the business by the
owner for personal use.
Dec. 31 XYZ, Capital 14,000.00

XYZ, withdrawals 14,000.00

POST-CLOSING TRIAL BALANCE

After posting the closing entries to the general ledger another trial balance
is prepared. This time, the accounts left with balances are all balance sheet
accounts or permanent accounts because all nominal accounts including the
drawing accounts have zero balances. This post-closing trial balance is prepared
AC101 Session 4 13
to check the equality of the accounting equation before the balances of the
assets; liabilities and capital are forwarded to the next accounting period.
This is the end of the accounting period.
XYZ Company
Post-closing Trial Balance Dec.
31,2014

Cash 22,200
Accounts Receivable 17,300
Supplies 15,000
Prepaid Rent 4,000 Prepaid
Insurance 13,200 Service Vehicle
420,000
Accumulated Depreciation-S.V. 4,000
Office Equipment 60,000
Accumulated Depreciation-O.E. 1,000 Notes Payable
210,000 Accounts Payable 53,000
Salaries Payable

AC101 Session 4 14