MD Fabm1 Q2

SHERWIN AVILA-HIDALGO
FABM1 Instructor
FUNDAMENTALS
OF ACCOUNTANCY,
BUSINESS &
MANAGEMENT
Quarter 2
Fundamentals of Accountancy, Business and Management Q2
BOOK OF ACCOUNTS I
Lesson 09
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.
The simplest form of the account is known as the “T” account because of its similarity to the letter T.
The left side of an account is popularly called debit or debit side, while the right is credit or credit side.
Each account is assigned an account title or account name, which is usually written immediately above
the letter T as shown below.
[Account Title]
Left Side or Debit Side Right Side or Credit Side

(Assets, Expenses, Losses) (Liabilities, Equity, Revenue
Gains, Contra-Assets)
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
for both sides.
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.
GROUPS OF ACCOUNTS
• Permanent accounts or real accounts – these accounts are reported in the balance sheet.
These are accounts consisting of assets, liabilities and equity. Each’ balances can be carried
over to the next accounting period.
• Temporary or nominal accounts – temporary accounts are accounts reported in the income
statement. These are accounts consisting of revenues and expenses. Unlike permanent
accounts, temporary accounts’ balances cannot be carried over to the next accounting period
but are closed each period and form part of a permanent account.
• Mixed accounts – these accounts contains both the permanent and temporary components.
However, at the end of each reporting period, the mixed accounts are adjusted and the
components are broken down, so that there are no more mixed accounts by the time financial
statements are prepared.
THE RULE OF DEBIT AND CREDIT
ACCOUNT DEBIT CREDIT

Assets [+] [-]
Liabilities [-] [+]
Capital or Equity [-] [+]
Revenue [-] [+]
Expenses [+] [-]
[+] increase; [-] decrease
ACCOUNTING EVENTS AND TRANSACTIONS
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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.
ILLUSTRATIVE EXAMPLE
Mr. Wara I. A-Wood wants to open an accounting firm this year. The following transactions are made
during the month. The following are the transactions made:
February 14, 20x1 Mr. W. A-Wood invested P250,000 to start an accounting office.
W. A-Wood Accounting Firm

Financial Transaction Worksheet
Month of February 20x1
ASSETS = LIABILITIES + EQUITY

February Cash Accounts Office Office Accounts Notes + W. A-Wood,
20x1 Receivable Supplies Equipment Payable Payable Capital
14 250,000 250,000
The financial transaction is analyzed as follows:
• An entity separate and distinct from A-Wood’s personal financial affairs is created.
• An economic resource – cash of P 250,000 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. A-Wood, 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.
February 15, 20x1 Purchased office supplies worth P 50,000 on account.

Balance 250,000 250,000

15 50,000 50,000
Balance 250,000 50,000 = 50,000 250,000
300,000 = 300,000
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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.
February 18, 20x1 Rendered professional services for cash, P45,000.

Balance 250,000 50,000 50,000 250,000

18 45,000 45,000 Prof. Fee
Balance 295,000 50,000 = 50,000 295,000
345,000 = 345,000
February 20, 20x1 Rendered professional service on account, P 50,000.

Balance 295,000 50,000 50,000 295,000

20 50,000 50,000 Prof. Fee
Balance 295,000 50,000 50,000 = 50,000 345,000
395,000 = 395,000
February 24, 20x1 Paid electricity bills, P 5,000.

Balance 295,000 50,000 50,000 50,000 345,000

24 ( 5,000) ( 5,000) Utilities
Exp.
Balance 290,000 50,000 50,000 = 50,000 340,000
390,000 = 390,000
February 26, 20x1 Collected P15,000 from customer’s account. On the same day, he applied for a
short-term loan from a local bank and was granted in the amount of P100,000,
less P5,000 service charges. Mr. W. A-Wood issued 1 year promissory note. He
also paid the water bill amounting to P8,675.
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Balance 290,000 50,000 50,000 50,000 340,000

26 15,000 (15,000)
95,000 100,000 ( 5,000) Ser. Exp.
( 8,675) ( 8,675) Utilities
Exp.
Balance 391,325 35,000 50,000 = 50,000 100,00 326,325
476,325 = 476,325
February 27, 20x1 Mr. W. A-Wood withdrew P30,000 for personal use. He also paid his two
employees their salary for the month worth 20,000 each.

Balance 391,325 35,000 50,000 50,000 100,00 326,325

27 ( 30,000) ( 30,000) W, Withd
(40,000) ( 40,000) Salaries
Exp.
Balance 321,325 35,000 50,000 = 50,000 100,000 256,325
406,325 = 406,325
February 28, 20x1 At the end of the month, physical count of the office supplies revealed that P
25,000 had been consumed. Mr. W. A-Wood purchased a printer and
photocopying machine totally amounting to P82,000 by issuing a promissory
note.

Balance 321,325 35,000 50,000 50,000 100,000 256,325

28 (25,000) 82,000 82,000 ( 25,000) Supplies
Exp.
Balance 321,325 35,000 25,000 82,000 = 50,000 182,000 231,325
463,325 = 463,325
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Summary of W. A-Wood in tabular Form
W. A-Wood Accounting Firm

Financial Transaction Worksheet
Month of February 20x1

14 250,000 250,000
15 50,000 50,000
18 45,000 45,000 Prof. Fee
20 50,000 50,000 Prof. Fee
24 ( 5,000) ( 5,000) Utilities
Exp.
26 15,000 (15,000)
95,000 100,000 ( 5,000) Ser. Exp.
( 8,675) ( 8,675) Utilities
Exp.
27 ( 30,000) (30,000) W, Withd
( 40,000) (40,000) Salaries
Exp.
28 (25,000) 82,000 82,000 (25,000) Supplies
Exp.
321,325 35,000 25,000 82,000 = 50,000 182,000 231,325
463,325 = 463,325
THE USE OF T-ACCOUNT
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.
CASH W, CAPITAL
02/14/x1 250,000 250,000 02/14/x1
OFFICE SUPPLIES ACCOUNTS PAYABLE

02/15/x1 50,000 50,000 02/15/x1
February 18, 20x1 Rendered professional services for cash, P45,000.
CASH REVENUE ON PROFFESIONAL FEE

02/18/x1 45,000 45,000 02/18/x1
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ACCOUNTS RECEIVABLE REVENUE ON PROFFESIONAL FEE

02/20/x1 45,000 45,000 02/20/x1
CASH UTILITIES EXPENSE

5,000 02/24/x1 02/24/x1 5,000
less P5,000 services charges. Mr. W. A-Wood issued 1 year promissory note. He
CASH ACCOUNTS RECEIVABLE

02/26/x1 15,000 15,000 02/26/x1
CASH NOTES PAYABLE

02/26/x1 100,000 15,000 02/26/x1
CASH SERVICE EXPENSE

5,000 02/26/x1 02/26/x1 5,000
CASH UTILITIES EXPENSE

8,675 02/26/x1 02/26/x1 8,675
CASH W, WITHDRAWAL
30,000 02/27/x1 02/27/x1 30,000
CASH SALARIES EXPENSE

40,000 02/27/x1 02/27/x1 40,000
note.
UNUSED OFFICE SUPPLIES OFFICE SUPPLIES EXPENSE

25,000 02/28/x1 02/28/x1 25,000
OFFICE EQUIPMENT NOTES PAYABLE

02/28/x1 82,000 82,000 02/28/x1
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BOOK OF ACCOUNTS II
Lesson 10
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
• Cash register tapes
• Official receipts
• Bank deposit slips
• Bank statements
• Checks
• Purchase orders
• Time cards
• Statement of accounts
BOOKS OF ACCOUNTS
Book of accounts for the preparation of the financial statements and the other reports needed by the
data-users, where the business transactions are recorded, classified, and summarized. These are:
• Journals and Ledgers – two books stamped by the Bureau of Internal Revenue before any
business transaction could be recorded therein.
• Trial balance
ACCOUNTING CYCLE
1. Documentation. Analyzing business documents which serve as a basis of recording

transactions.
2. Journalizing. Recording business transactions in the journal to have chronological records of
economic activities.
3. Posting. The information in the general journal is transferred to the General Ledger to create
a record of classified accounts.
4. Preparation of Trial Balance. A trial balance is prepared to prove the equality of debits and
credits in the general ledger.
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.
6. Worksheet. Work sheet is prepared to facilitate the preparation of financial statements.
7. Financial Statement. The basic financial statements are prepared after making the necessary
adjustments.
a. Statement of Financial Performance
b. Statement of Financial Position
c. Statement of Cash Flows
d. Statement of Changes in Equity
e. Notes to Financial Statement
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8. Journalizing and posting closing entries. The objective of closing entry is to transfer the
revenue, expense and drawing accounts to the capital account.
9. Preparation of a Post-closing trial balance
10. Reversing journal entries (made at the start of the next period)
STEP 1: TRANSACTION ANALYSIS (SOLE PROPRIETORSHIP)
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.
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. A-WOOD ACCOUNTING FIRM

CHART OF ACCOUNTS
Balance Sheet Accounts Income Statement Accounts
ASSETS REVENUE
110 Cash 410 Revenue on Professional Fee
120 Accounts Receivable
130 Notes Receivable EXPENSES
140 Unused Office Supplies 510 Supplies Expense
150 Land 520 Utilities Expense
160 Office Equipment 530 Salaries Expense
165 Accumulated Depreciation-O/E 540 Interest Expense
170 Furniture & Fixtures 550 Rent Expense
175 Accumulated Depreciation-F&F 560 Depreciation Expense-O/E
570 Depreciation expense-F&F
LIABILITIES 580 Miscellaneous Expense
210 Accounts Payable
220 Notes Payable
230 Utilities Payable
240 Salaries Payable
250 Interest Payable
260 Unearned Revenue
EQUITY
310 W, Capital
320 W, Withdrawal
330 Income Summary
STEP 2: JOURNALYZING (SOLE PROPRIETORSHIP)
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.
A journal could either be a general journal or a special journal, depending on the type of transactions
that are recorded therein.
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• General journals recorded all types of business transactions.
• Special journals may be used to be able to group specific types of transactions in one book of
original entry.
GENERAL JOURNAL
General journal is the simplest type of journal. It is formatted such way as:
• 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.
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.
Illustrative Example:
February 18, 20x1 Received cash worth P45,000 as the value of the consultation of ABC
Company. Consultation rate is P5,000 per consultation.
less P5,000 service charges. Mr. W. A-Wood issued 1 year promissory note. He
note.
March 1, 20x1 A new air-borne infectious disease called SLGRD disease break out and
impaired most of the peoples’ ability to walk. People started to feel dizzy and
sleep all the time. Six of the employees resigned leaving two employees
behind.
March 15 20x1 Due to the fear of people to go outside, W. A-Wood Accounting Firm slowed
down, so a temporary shutdown was made.
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GENERAL JOURNAL Page 1
DATE ACCOUNT TITLES AND EXPLANATION PR DEBIT CREDIT
20x1
February 14 Cash 110 2 5 0 0 0 0 . 00
W, Capital 310 2 5 0 0 0 0 . 00
Invested 250,000 cash to open up a firm
15 Unused Office Supplies 140 5 0 0 0 0 . 00

Accounts Payable 210 5 0 0 0 0 . 00
Purchased office supplies on account
18 Cash 110 4 5 0 0 0 . 00
Revenue on Professional Fee 410 4 5 0 0 0 . 00
Rendered professional service for cash
20 Accounts Receivable 120 5 0 0 0 0 . 00

Rendered professional service on account
24 Utilities Expense 530 5 0 0 0 . 00

Cash 110 5 0 0 0 . 00
Paid electricity bill
26 OPTION A: SIMPLE ENTRY

Cash 110 1 5 0 0 0 . 00
Accounts Receivable 120 1 5 0 0 0 . 00
Collection of previous accounts
Cash 110 1 0 0 0 0 0 . 00
Notes Payable 220 1 0 0 0 0 0 . 00
Loaned by issuing promissory note
Service Expense 520 5 0 0 0 . 00

Cash 110 5 0 0 0 . 00
Fees paid for transacting a loan
Utilities Expense 530 8 6 7 5 . 00

Cash 110 8 6 7 5 . 00
Paid water bill
OPTION B: COMPOUND ENTRY
Cash 110 1 0 1 3 2 5 . 00
Service Expense 520 5 0 0 0 . 00
Accounts Receivable 120 1 5 0 0 0 . 00
Notes Payable 220 1 0 0 0 0 0 . 00
Collection, loan and fee, water bill
Note: For purposes of the illustration, we have shown two options above for multiple transactions. In
recording such, we have the option whether to record each transaction separately in a simple entry form
(as illustrated in Option A), or we record all transactions in a compounded way in a compound entry form
(as illustrated in Option B). But in actual practice, it depends on which option we should use. Also, we
cannot use both for recording a “per date” multiple transactions as it will double our entry hence
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affecting the total balance of debits and credits to a misstatement. For the next usage, we will be using
Option B for our illustration.
Take note that the post reference of the general journal is not filled up yet in the process of recording.
This will be filled in the posting process. (Also, this illustration will still be used in further steps.)
STEP 3: POSTING (SOLE PROPRIETORSHIP)
GENERAL 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.
CASH Account No: 110
DATE EXPLANATION J.R. DEBIT CREDIT BALANCE
Feb. 14, 20x1 Invested P250,000 to open up a firm J-1 2 5 0 0 0 0 . 00 2 5 0 0 0 0 . 00
Feb. 18, 20x1 Rendered professional service for Cash J-1 4 5 0 0 0 . 00 2 9 5 0 0 0 . 00
Feb. 24, 20x1 Paid electricity bill J-1 5 0 0 0 . 00 2 9 0 0 0 0 . 00
Collections from previous accounts J-1 1 5 0 0 0 . 00 3 0 5 0 0 0 . 00
Loaned by issuing promissory note J-1 1 0 0 0 0 0 . 00 4 0 5 0 0 0 . 00
Feb. 26, 20x1
Fees paid for transacting a loan J-1 5 0 0 0 . 00 4 0 0 0 0 0 . 00
Paid water bill J-1 8 6 7 5 . 00 3 9 1 3 2 5 . 00
Withdraw cash for personal use; paid
Feb. 27, 20x1
ACCOUNTS RECEIVABLE
employees' salary J-2 7 0 0 0 0 . oo 3 2 1Account
3 2 No: 120
5 . 00
Feb. 20, 20x1 Rendered professional service on account J-1 5 0 0 0 0 . 00 5 0 0 0 0 . 00
Feb. 26, 20x1 Collection of previous accounts J-1 1 5 0 0 0 . 00 3 5 0 0 0 . 00
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UNUSED OFFICE SUPPLIES Account No: 130

Feb. 15, 20x1 Purchased office supplies on account J-1 5 0 0 0 0 . 00 5 0 0 0 0 . 00
Feb. 28, 20x1 Record used up office supplies J-2 2 5 0 0 0 . 00 2 5 0 0 0 . 00
OFFICE EQUIPMENT Account No: 160

Feb. 26, 20x1 Purchase of office equipment J-2 8 2 0 0 0 . 00 8 2 0 0 0 . 00
ACCOUNTS PAYABLE Account No: 210

Feb. 15, 20x1 Purchase of office supplies on account J-1 5 0 0 0 0 . 00 5 0 0 0 0 . 00
NOTES PAYABLE Account No: 220

Feb. 26, 20x1 Loaned by issuing a promissory note J-1 1 0 0 0 0 0 . 00 1 0 0 0 0 0 . 00
Feb. 28, 20x1 Purchased equipment with note issued J-2 8 2 0 0 0 . 00 1 8 2 0 0 0 . 00
W, CAPITAL Account No: 310

Feb. 14, 20x1 Invested 250,000 cash to open up a firm J-1 2 5 0 0 0 0 . 00 2 5 0 0 0 0 . 00
W, WITHDRAWAL Account No: 320

Feb. 28, 20x1 Withdraw cash for personal use J-2 3 0 0 0 0 . 00 3 0 0 0 0 . 00
REVENUE ON PROFESSIONAL FEE Account No: 410

Feb. 18, 20x1 Rendered professional service for cash J-1 4 5 0 0 0 . 00 4 5 0 0 0 . 00
Feb. 20, 20x1 Rendered professional service on account J-1 5 0 0 0 0 . 00 9 5 0 0 0 . 00
SUPPLIES EXPENSE Account No: 510

Feb. 28, 20x1 Record used office supplies J-2 2 5 0 0 0 . 00 2 5 0 0 0 . 00
SERVICE EXPENSE Account No: 520

Feb. 26, 20x1 Fees paid for transacting a loan J-1 5 0 0 0 . 00 5 0 0 0 . 00
UTILITIES EXPENSE Account No: 530

Feb. 24, 20x1 Paid electricity bill J-1 5 0 0 0 . 00 5 0 0 0 . 00
Feb. 26, 20x1 Paid water bill J-1 8 6 7 5 . 00 1 3 6 7 5 . 01
SALARIES EXPENSE Account No: 540

Feb. 27, 20x1 Paid employees' salary J-2 4 0 0 0 0 . 00 4 0 0 0 0 . 00
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 determined 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.
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STEP 4: PREPARING AN UNADJUSTED TRIAL BALANCE (SOLE PROPRIETORSHIP)
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.

Unadjusted Trial Balance
December 31, 20x1
DEBIT CREDIT
Cash 321,325.00
Accounts Receivable 35,000.00
Unused Office Supplies 25,000.00
Office Equipment 82,000.00
Accounts Payable 50,000.00
Notes Payable 182,000.00
W, Capital 250,000.00
W, Withdrawal 30,000.00
Revenue on Professional Fee 95,000.00
Supplies Expense 25,000.00
Service Expense 5,000.00
Utilities Expense 13,675.00
Salaries Expense 40,000.00
Total 577,000.00 577,000.00
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 Error
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.
STEP 5: PREPARATION OF ADJUSTING JOURNAL ENTRIES (SOLE PROPRIETORSHIP)
PURPOSE OF ADJUSTING ENTRIES
• Proper matching income and incurred expenses.

• Certain figures reported in the balance sheet are either overstated or understated entries are
omitted.
• Failure to prepare theses entries affects not only the financial statements of the current
reporting period, but also those of the succeeding periods.
• Adjusting entries does not involve cash. There are no adjusting entries under the pure-cash
basis accounting.
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DATA OF THE ADJUSTING ENTRIES
• Review the Trial Balance and Analyze the ledger accounts.

• Review the source documents.
Example: if the Meralco bill paid on January 13, 2020 represented the electric consumptions
from November to December 23, 2019, it means that there’s unbilled electricity consumed
from 24 to 31. this unbilled expense must also be estimated and adjusted as accrued expense
as of December 31, 2007.
• Undertake ocular inspections and counts.
The values assigned to the unused supplies and unsold goods are based on a count of the items
inside the storeroom.
• Consult with experts
ITEMS TO BE ADJUSTED
• Unrecognized Transactions that affect the future period
o Accrual – Accrued income

o Accrual – Accrued expense
• Recognized Transactions that Affect the Future Period
o Deferral – Unearned Income

o Deferral – Prepaid expenses
o Depreciation or amortization
• Erroneously recorded past transaction
ACCRUALS
Accruals are earned revenues and incurred expenses that have yet to be received or paid.
• Accrued Income
Arises if income is already earned but not yet collected as of the reporting date. If income is
already earned but there is no corresponding cash collection, an asset in the form of a
receivable, should be taken up in the books of the business. Failure to adjust the accrued
income understates both the income and the assets of the business.
If the word accrued or receivable is attached to an income or a revenue account the resulting
account title is an asset title. Its adjusting journal entry could look like this:
Accrued _________ Income xx

________ Income xx
To recorded earned income bot not yet been collected
Upon collection of payment, the receivable account will be decreased based on the value
collected and cash will be debited against the accrued income.
Cash xx
Accrued __________ Income xx
To record collection of accrued income
In a service activity, a good example to this is when a firm rendered service to a customer for
P20,000, but after rendition, the payment for service fee has not been collected by the firm or
not been paid by the client in a form of cash, this is an accrual.
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The journal entry if the collection has been done is supposed to be:
Cash 20,000
Service Income 20,000
Rendered professional fee for cash
But since there is not receipt of cash, a cash must not be recorded. But since a service has been
rendered, an income has already been earned, only that there is no cash collected. And even
when there is no cash involved, it should have been a future benefit to the firm (as cash is a
highly liquid asset used for the future use of the company). Thus, recording an asset, aside
from cash is necessary. Since there is no cash received, a receivable is recorded instead. An
adjusting entry must be done as the manner illustrated below:
Accrued Service Income 20,000

Record earned service income but not yet collected
If a collection was made, say a receipt of P20,000 as full payment for the unpaid service fee,
then cash will then be recorded by debiting it against the accrued income:
Cash 20,000
Accrued Service Income 20,000
Receipt of cash as full payment for service receivable
Note: “Accrued __________ Income” is the same as “_____________ [Income]* Receivable”
• Accrued Expense
These are expenses that are already incurred in the present reporting period, but not yet
recognized since they are to be paid in the coming reporting periods. If all expenses that were
paid for were fully incurred, and all incurred expenses were fully paid for, there will be no need
to make adjusting entries for accrued expenses.
Accrued expense is treated in the same manner as an accrued income, but in an inverse
manner. If the word accrued or payable is attached to an expense account the resulting
account title is a liability title. Its adjusting journal entry could look like this:
_______ Expense xx
Accrued ________ Expense xx
To recorded incurred expenses bot not yet been paid
Upon payment, the payable account will be decreased based on the value paid and cash will
be credited against the accrued expense.
Accrued ________ Expense xx

Cash xx
To record payment of accrued expense
As an illustration, take our company that rents in a commercial space with monthly rental fee
of P10,000. For twelve months, we haven’t paid the rental fee. If only we have the rental fee
for a year, we don’t need to prepare an adjusting entry, but instead record:
Rent Expense 120,000

Cash 120,000
To record cash payment for rental
But since there is not payment done even when an expense has already been incurred, it’s
inappropriate to reduce cash when it’s not been involved yet. But we have the obligation to
pay that in the future nevertheless; thus, we record a payable account instead.
15 | P a g e
Rent Expense 120,000
Accrued Rent Expense 120,000
Record incurred rental fee but not yet paid
Upon payment, we credit cash against the payable balance,

Cash 120,000
Record full payment of rent expense payable
Note: “Accrued ___________ Expense” is the same as “___________ [Expense]* Payable”
* Sometimes omitted in recording thus leaving account titles such as “___________ Receivable”
and “_________ Payable”
DEFERRALS
It refers to a delay in recognition of an accounting transaction. It happens when a collection has been
done but income has not yet earned or payment has been made when an expense has not yet been
incurred.
• Deferrals on Expense or Prepayments
These expenses are paid before they are incurred. The outlay of cash precedes the actual
consumption of the economic benefit. Prepaid expenses are usually periodic expenses which
are paid at the beginning of a certain period of time for convenience of both the payor and the
payee. Most prepaid expenses are expenses incurred every month, and instead of being
bothered to go to the payee every month to tender payment, the payor just pays the whole
amount at the start of a period.
Adjusting entries for prepayments varies as to whether the company records in an expense
method or an asset method.
Asset Method: The company treated all payments as an asset – Prepaid Expense. An
adjustment was to be made to take out the expired portion of the whole amount recorded as
an asset because a portion of the amount paid is supposed to be expensed because it was
already been incurred.
Pro-forma Journal Entry: (entry made upon transaction)
Prepaid ________ Expense xx

Cash xx
To record payment
Adjusting Entry at the end of the period:
__________ Expense xx
Prepaid _____ Expense xx
To recognize the expired portion from a recorded prepaid expense
On Oct0ber 15, 20x1, Good Vibes Company paid the commercial space owner the rental fee of
P60,000. The monthly rental fee is P5,000. Upon payment, the company recorded,
Prepaid Rent Expense 60,000
16 | P a g e
Cash 60,000
To record rental payment
However, a portion of P60,000 has already expired at the end of the year, and so the expired
portion must be recorded by taking it out of the recorded prepaid expense, by deducting the
amount of the value of the expired portion to the amount recorded as prepaid rent expense.
Rent Expense 12,500

To record the expired portion of the recorded prepayment
After the adjustment, the following balances will reflect at the end of the year:
Cash P (60,000)
Rent Expense 12,500
Prepaid Rent Expense (60,000 - 12,500) 47,500
Expense Method: The company treated all payments as an expense. An adjustment was to be
made to take out the unexpired portion of the whole amount recorded as an expense because
a portion of the amount paid is supposed to be an asset as it has not yet been incurred.
_______ Expense xx
Cash xx
To record advance payment of expenses
Prepaid ______ Expense xx

_______ Expense xx
To recognize the unexpired portion from the recorded advance payment
On Oct0ber 15, 20x1, Chill Lang Tayo Company paid the commercial space owner the rental fee
of P60,000. The monthly rental fee is P5,000. Upon payment, the company recorded,
Rent Expense 60,000

Cash 60,000
To record rental payment
However, a portion of P60,000 that has been expensed outright was not supposed to be
expensed as it has not been uncured yet (unexpired), and so the unexpired portion must be
recorded by against the rent expense, by deducting the amount of the value of the unexpired
portion to the amount recorded as rent expense.

Rent Expense 47,500
To record the unexpired portion of the amount expensed outright
After the adjustment, the following balances will reflect at the end of the year:
17 | P a g e
Cash P (60,000)
Rent Expense (60,000 - 47,500) 12,500
• Deferrals on Income or Precollections
This occurs when the company records an income account when it has not been earned yet. If
an income collection is part earned and part unearned as of the reporting period, then it is part
income and part liability. An adjusting entry will occur depending on how the company treated
the collection made – whether its is based in income methods or in liability method.
Liability Method: The company treated all collections as liability. An adjusting entry has to be
made by reducing the amount of the recorded liability accounts as some portion of it was
supposed to be recognized as income as they are already earned.
Cash xx
Unearned Service Income xx
To record advance collection
Adjusting Entry:
Unearned Service Revenue xx

Service Revenue xx
To record the earned portion of unearned revenue
On March 31, 20x1, Kaya Pa Ba Company received P225,000 as payment for the advertising fee
of KapuMilya’s newly released product, remote controlled KapuMilya brownbox, promoting a
product useful for better quality television viewing. The monthly advertising fee is 15,000. Kaya
Pa Ba recorded the transaction as,
Cash 225,000
Unearned Service Income 225,000
To record advance collecting of advertising fee
Since not all of the total collections are still payable by the company, as at the end of the
period, some portion is earned already for the year 20x1, it must be reduced as it will only be
earned next period. Since a portion has been earned already at end-year, at the end of the
period, Kaya Pa Ba will make an adjustment,

To recognize the earned portion of the service precollection
18 | P a g e
At the end of the period, the following balances are present,
Cash P 225,000
Service Income (225,000-90,000) 135,000
Income Method: The company treated all collections as income or revenue. An adjustment
was to be made so that there will be a proper allocation between the earned and unearned
portion of the collection at the end of the year. Since every collection is treated as income, a
portion of it will be reduced to properly record a portion which has not been earned yet.
Cash xx
________ Income xx
To record precollection
_______ Income xx
Unearned _______ Income xx
To recognize the unearned portion of the precollection
On March 31, 20x1, Kaya Pa Ba Company received P225,000 as payment for the advertising fee
of KapuMilya’s newly released product, remote controlled KapuMilya brownbox, promoting a
product useful for better quality television viewing. The monthly advertising fee is 15,000. Kaya
Pa Ba recorded the transaction as,
Cash 225,000
To record advance collecting of advertising fee
Since not all of the total collections are actually earned for the year 20x1, it must be reduced
as it will only be earned next year. An additional advertisement services has to be done first
before it can fully be considered earned, and so, at the end of the period, it is still Kaya Pa Ba’s
liability to KapuMilya. To adjust,

To record the earned portion of precollection
At the end of the period, the following balances are present,
Cash P 225,000
Unearned Service Income (225,000-135,000) 90,000
As you can observe, regardless of the method used, it will still result to allocation of what is earned
or incurred and what is expired and which is not.
• Depreciation and Amortization
Depreciation
19 | P a g e
Depreciation is a noncash account which is applied to the components of property, plant and
equipment or (PPE). It is a value caused by the decline of the value of the property due to
passage of time. The most common method of computing depreciation is called straight-line
method.
𝐶𝑜𝑠𝑡 𝑜𝑓 𝑡ℎ𝑒 𝐹𝑖𝑥𝑒𝑑 𝐴𝑠𝑠𝑒𝑡 − 𝑅𝑒𝑠𝑖𝑑𝑢𝑎𝑙 𝑉𝑎𝑙𝑢𝑒

𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
𝐸𝑠𝑡𝑖𝑚𝑎𝑡𝑒𝑑 𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
The cost of fixed asset is the acquisition cost of the fixed asset plus all costs that are directly
related to the acquisition of the fixed asset.
The residual value is the estimated value of the fixed asset upon its disposal or sale. It is the
remaining value of the asset once the estimated useful life has been used up due to passage
of time. It is also called salvage value.
The estimated useful life is the number of periods a particular fixed asset is expected to be
useful in the business operation.
The entry to record depreciation is,
Depreciation Expense xx
Accumulated Depreciation xx
To record depreciation for the year
On September 24, 20x1, Makapoy Na Company purchased a building with a cost of P2,000,000
having a salvage value of 200,000 with an estimated useful life of 30 years. At the end of the
period 20x1, how much is the depreciation?
2,000,000 − 200,000
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 =
30
𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 60,000
Since the date of acquisition was September 24, 20x1, from this date to December 31, 20x1, it
only took about three months in the use for the business, therefore, the depreciation for 20x1
is,
𝑁𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑀𝑜𝑛𝑡ℎ𝑠 𝐹𝑖𝑥𝑒𝑑 𝑖𝑠 𝑈𝑠𝑒𝑑 𝑖𝑛 𝑎 𝑃𝑒𝑟𝑖𝑜𝑑

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 𝐴𝑛𝑛𝑢𝑎𝑙 𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 𝑥
# 𝑜𝑓 𝑀𝑜𝑛𝑡ℎ𝑠 𝑝𝑒𝑟 𝑃𝑒𝑟𝑖𝑜𝑑
3 𝑚𝑜𝑛𝑡ℎ𝑠
𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = 60,000 𝑥 = 𝟏𝟓, 𝟎𝟎𝟎
12 𝑚𝑜𝑛𝑡ℎ𝑠
To record the depreciation for the year,
Depreciation Expense – Building 15,000

Accumulated Depreciation – Building 15,000
To record depreciation of the building
Doubtful Accounts/Uncollectible Accounts/Bad Debts
A doubtful account is an account receivable that might become a bad debt at some point in
the future. It is an estimate as to how many customers will not pay the full amount they owe.
So rather than waiting to see exactly how payment work out, the company will record a
doubtful account with an entry,
Doubtful Accounts Expense xx

Allowance for Doubtful Accounts xx
To record estimated uncollectible accounts for the year
20 | P a g e
Methods of Estimating the Expense from Bad Debts:
o Percentage of Sales Method:
Percentage of loss x Credit Sales (or Gross sales or Net Sales) of the current period =
Estimate, out of the credit sales (or Gross sales or Net sales of the current period) that
is doubtful of collection
o Percentage of Receivables Method:
Percentage of loss x Receivable balance at the end of the current period = Estimate,
out of the Receivable balances, that is doubtful of collection
On January 18, 20x1, Mapiraw Naman Company provided consultancy service to a highly
profitable company, Katurugi Na Iton Ltd. for P200,000 on account. It is Mapiraw Naman
Company’s policy to realize 5% of receivables as doubtful accounts.
Computation:
Bad Debts Expense = 5% x 200,00 = 10,000
To record the estimation for the year, the company should record the doubtful accounts in the
same manner below:
Doubtful Accounts Expense 10,000

Allowance for Doubtful accounts 10,000
To record estimated doubtful accounts for the year
• Correction of errors
According to Philippine Standard on Auditing No. 240, “error refers to an unintentional

misstatement in financial statements including the omission of an amount or disclosure,
including:
o A mistake in gathering or processing data from which financial statements are

prepared;
o An incorrect accounting estimate arising from oversight or misinterpretation of facts;
o A mistake in the application of accounting principles relating to measurement,
recognition, classification, presentation or disclosure.”
Adding a journal entry may be enough to correct an accounting error. This type of journal entry
is called a “correcting entry.”
How do we correct an accounting error?
1. Review the trial balance

2. Review bank reconciliations
3. Routine check to identify error
Common Types of Accounting Errors:
1. Subsidiary Entries – these are transactions entered incorrectly.
Example: Maguol Co. loaned P100,000 to Drained-Na-Ako Bank but erroneously entered the
transaction as a P10,000 loan.
Entry Made:
21 | P a g e
Cash 10,000
Loans Payable 10,000
To record the loan transaction
Correct Entry:
Cash 10o,000
To record the loan transaction
90,000 (100,000-10,000) must be added to the loan balance as it was supposed to be

recorded as 100,000. Since 10,000 has been recorded, a correcting entry will vary to the
understated recording of loan.
Correcting Entry:
Cash 90,000
To correct the erroneously recorded loan transaction
2. Transposition Errors – these mistakes happen when two digits are reversed (or
“transposed”). The error will show as mistake in data entry when a new recording is to be
posted.
Example: Waray Na Gud Co. paid a P5,685 electricity bill. He mistakenly recorded P5,865 for
the said transaction.
Entry Made:
Utilities Expense 5,865

Cash 5,865
To record payment of electricity bill
Correct Entry:
Utilities Expense 5,685

Cash 5,685
To record payment of electricity bill
P180 (5,865-5,685) was the overstatement of utilities expense and understatement of cash
so a correcting entry is to be made:
Correcting Entry:
Cash 180
Utilities Expense 180
To reverse back the misstatement of utilities expense and cash erroneously recorded
3. Rounding Errors – rounding a number off seems like it shouldn’t matter but it can throw
off the accounting, resulting in a snowball effects of errors. People can make this mistake,
but it can also be a computerized error.
4. Entry Reversal – reversing accounting entries means that an entry is credited instead of
being debited, or vice versa. The issue is that this mistake can’t be spotted in the trial
balance, but it will still be in balance regardless. An example to this is when a company paid
an internet plan but was entered as invoice by mistake.
5. Error of omission – This happens when a financial transaction isn’t recorded and so isn’t
part of the documentation usually, the transaction, which could be an expense or sale of a
service, is overlook or forgotten. An example to this is when a company received a check
from the customer but has been forgotten to be entered in the company’s book.
22 | P a g e
6. Error of commission – when an amount is entered as the right amount and the right
account but the value is wrong, this is an error of commission.
7. Error of principle – this is a transaction that doesn’t meet the Generally Accepted
Accounting Principles (GAAP). It’s also called an “input error” because, though the number
is correct, it’s recorded in the wrong account. An example is when a company debited an
expense instead of an asset.
Let us continue our illustration with W. A-Wood Accounting Firm to apply adjusting entries.
The following information occurred after Shut down:
• The company actually rents a space worth P1,000 monthly. No payment has been made even
before the outbreak of the disease.
• Two employees still managed to provide consultancy services online in behalf of the
Accounting Firm and garnered P400,000 for their service. But the transaction has not been
recorded as no payment has been rendered.
• Salaries has been applied to these two employees starting June 1, 20x1 with an increased
monthly rate to P12,000 per employee. But these two has not yet been paid.
• Office equipment was originally purchased with a residual value of 2,000 and an estimated
useful life of 10 years.
• It is in the firm’s policy to realize annually 2% doubtful accounts on receivable balance.
• February 26 payment of water bill of P8,675.oo was supposed to be P8,765.00. The error has
been detected only when they checked the source document for the year.
• Consultation to ABC Company was only done thrice within the year.
ADJUSTING JOURNAL ENTRIES

20x1
December 31 Rent Expense 1 0 5 0 0 . 00
Accrued Rent Expense 1 0 5 0 0 . 00
Record unrecorded rent expense for 10.5
months
Accrued Revenue on Professional Fee 4 0 0 0 0 0 . 00

Record unrecorded yet unpaid revenue
on professional fee
Salaries Expense 1 6 8 0 0 0 . 00
Accrued Salaries Expense 1 6 8 0 0 0 . 00
Record accumulated unpaid salaries to
employees for 7 months
Depreciation Expense 6 6 6 6 . 67
Accumulated Depreciation 6 6 6 6 . 67
Record depreciation for the year
Doubtful Accounts Expense 7 0 0 . 00

Allowance for Doubtful Accounts 7 0 0 . 00
Record 2% of receivable balance to realize
possible bad debts
Utilities Expense 9 0 . 00
Cash 9 0 . 00
To correct understatement ofexpense
and overstatement of asset
Revenue on Professional Fee 3 0 0 0 0 . 00

Unearned Revenue on Prof. Fee 3 0 0 0 0 . 00
To record the unearned portion of
professional income received last
February 26, 20x1
23 | P a g e
STEP 6: PREPARING AN ADJUSTED TRIAL BALANCE (SOLE PROPRIETORSHIP)
STEP 7: PREPARING A FINANCIAL STATEMENTS (SOLE PROPRIETORSHIP)
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 ______________ or for the six months ended ___________.
For the balance sheet, the date is written as: As of ___________ or just the date itself.

Statement of Financial Performance
For the year ended December 31, 20x1
Revenue on Professional Fee 465,000.00

Less: Expenses
Supplies Expense 25,000.00
Service Expense 5,000.00
Utilities Expense 13,765.00
Salaries Expense 208,000.00
Rent Expense 10,500.00
Depreciation Expense 6,666.67
Doubtful Accounts Expense 700.00 269,631.67
NET INCOME 195,368.33
24 | P a g e
Statement of Changes in Owner's Equity
For the year ended December 31, 20x1
Beginning Capital Balance -
Add: Investment/Additional Investments 250,000.00

Net Income 195,368.33 445,368.33
Less: Withdrawals 30,000.00

ENDING CAPITAL BALANCE 415,368.33
Report Form

Statement of Financial Position
As of December 31, 20x1
ASSETS
Current Assets
Cash 321,235.00
Less: Allowance for Doubtful Accounts 700.00
Accounts Receivable, net 34,300.00
Accrued Revenue on Professional Fee 400,000.00
Total Current Assets 780,535.00
Noncurrent Assets
Less: Accumulated Depreciation 6,666.67
Total Noncurrent Assets 75,333.33
TOTAL ASSETS 855,868.33
LIABILITIES AND OWNER'S EQUITY

Current Liabilities
Accrued Rent Expense 10,500.00
Accrued Salaries Expense 168,000.00
Unearned Revenue on Prof. Fee 30,000.00
Total Current Liabilities 440,500.00
Noncurrent Liabilities -
Total Liabilities 440,500.00
Owner's Equity
W, Capital 415,368.33
Total Owner's Quity 415,368.33
TOTAL LIABILITIES AND OWNER'S EQUITY 855,868.33
25 | P a g e
415,368.33
10,500.00
50,000.00
182,000.00
168,000.00
30,000.00
440,500.00
415,368.33
440,500.00
855,868.33
-
LIABILITIES AND OWNER'S EQUITY
TOTAL LIABILITIES AND OWNER'S EQUITY

Unearned Revenue on Prof. Fee
Accrued Salaries Expense
Accrued Rent Expense
Accounts Payable
Total Current Liabilities
Noncurrent Liabilities
Total Owner's Quity

Notes Payable
Current Liabilities
Total Liabilities
W, Capital
Owner's Equity
Statement of Financial Position
As of December 31, 20x1
321,235.00
34,300.00
25,000.00
82,000.00
400,000.00
6,666.67
780,535.00
75,333.33
855,868.33
700.00
35,000.00
Accounts Receivable, net

Less: Allowance for Doubtful Accounts
Accrued Revenue on Professional Fee

ASSETS
Less: Accumulated Depreciation

Unused Office Supplies
Accounts Receivable
Office Equipment
Total Noncurrent Assets

Total Current Assets
Noncurrent Assets
TOTAL ASSETS
Current Assets
Account Form
Cash
STEP 8 – CLOSING JOURNAL ENTRIES (SOLE PROPRIETORSHIP)
Closing entries are made at the end of an accounting period after adjusting entries and financial
statements have been prepared for the purpose of closing all nominal or temporary accounts. To close
an account means to reduce it to zero. Closing nominal accounts is logical because they measure
activities that have occurred during a given period of time. At the end of the accounting period,
nominal accounts have served their purpose. Thus, their balances must be reduced to zero so that the
nominal accounts can be used to measure activities in the next accounting period.
Actually, nominal accounts are temporary equity accounts. Accordingly, their balances may be
transferred directly to an equity account during closing. However, most accountants transfer nominal
account to a clearing account known as income summary. The income summary account summarizes
26 | P a g e
the net income or net loss for the period and its balances is ultimately closed to capital in the case of
proprietorship or retained earnings in the case of a corporation. In sole proprietorship, the entry may
look like this:
Upon clearing of nominal accounts:
All Revenues xx
All Expenses xx
Income Summary xx
To clear all nominal accounts
Upon closing income summary:
Income Summary xx
X, Capital xx
To close income summary
In W. A-Wood Accounting Firm, the closing entry will be:
CLOSING ENTRIES
20x1
December 31 Revenue on Professional Fee 4 6 5 0 0 0 . 00
Supplies Expense 2 5 0 0 0 . 00
Service Expense 5 0 0 0 . 00
Salaries Expense 2 0 8 0 0 0 . 00
Rent Expense 1 0 5 0 0 . 00
Depreciation Expense 6 6 6 6 . 67
Doubtful Accounts Expense 7 0 0 . 00
Income Summary 1 9 5 3 6 8 . 33
To clear all nominal accounts
Income Summary 1 9 5 3 6 8 . 33
W. Capital 1 9 5 3 6 8 . 33
To close the income summary
STEP 9 – PREPARING A POSTCLOSING TRIAL BALANCE (SOLE PROPRIETORSHIP)
A postclosing trial balance is simply a listing of general ledger accounts and their balances after the
closing entries have been made. Accordingly, it consists entirely of real or permanent accounts.
In W. A-Wood’s case, the postclosing trial balance is shown below:

Postclosing Trial Balance
December 31, 20x1
DEBIT CREDIT
Cash 321,235.00
Allowance for Doubtful Accounts 700.00
Accrued Revenue on Professional Fee 400,000.00
Accumulated Depreciation 6,666.67
Accrued Rent Expense 10,500.00
Accrued Salaries Expense 168,000.00
Unearned Revenue on Prof. Fee 30,000.00
W, Capital 415,368.33
Total 863,235.00 863,235.00
27 | P a g e
STEP 10 – PREPARING A REVERSING JOURNAL ENTRY (SOLE PROPRIETORSHIP)
Reversing entries are made at the beginning of the new accounting period in order to transfer all
accrued and prepaid items established by adjusting entries to the nominal accounts that are to be used
in recording transactions during the new period.
These are called reversing entries because they are the exact opposite of certain adjusting entries
made at the end of the preceding period. Its sole purpose is to simplify the recording of certain kinds
of recurring transactions..
The adjustments normally requiring reversal at the beginning of the new period are:
• Accrued expenses
• Prepaid Expenses, if the expense method is used in recording expense
• Accrued income
• Deferred Income, if the income method is used in recording income
To illustrate, let’s use W. A-Wood’s case of the accrued rent. Let’s consider all transactions concerning
such account:
Upon adjustment:
Rent Expense 10,500

To record unpaid rental
Upon clearing of nominal account:
Income Summary 10,500

Rent Expense 10,500
To clear rent expense
Upon reversal:

Rent Expense 10,500
To reverse accrual entry
Using our ledger, the flows of transactions are:
RENT EXPENSE
Adjustment 12/31/20x1 10,500
10,500 12/31/20x1 Upon closing
Balance 01/01/20x2 0
10,500 01/01/20x2 Reversal
ACCRUED RENT EXPENSE

10,500 12/31/20X1 adjustment
Reversal 01/01/20x2 10,500
0 01/01/20x2 Balance
Accrued expenses are short term payables, thus even if it will not be collected in 20x1, surely, it will be
collected the next period. Reversing entry is not a mandatory thing to do by any company. It’s optional.
But we can see the difference based on our illustration.
28 | P a g e
Upon adjustment, we added a new transaction by opening an expense account. Now since it is a
temporary account, soon, it will be closed and be consumed by capital account, thereby giving us a
zero balance for rent expense. But the balance for accrued expense still remained intact. With
reversing entry at the beginning of the next accounting period, we see a zero balance in accrued
expense leaving a negative balance to rent expense. Why so?
Under accrual basis of accounting, we record an expense even when there is no payment yet. So
regardless if its in cash or not, an expense will still be recognized nonetheless. And it is expected that
in the next accounting period, which in our case is 20x2, surely, a payment will be made by W. A-Wood.
If there is no reversing entry made, it would seem that such payment for expense has occurred in the
current period. But it is not supposed to be 20x2’s concern as it has already been incurred in 20x1. So,
to avoid mistake, the company should take note that a payment has been done during the year but
such has been incurred in the previous period. It would be a hassle for the company to do so. But with
reversing entry, things will get a bit simple, upon payment, we will surely record,
Rent Expense 10,500

Cash 10,500
Payment for rental last year
The ledger would look like this after payment,
RENT EXPENSE
Adjustment 12/31/20x1 10,500
10,500 12/31/20x1 Upon closing
Balance 01/01/20x2 0
10,500 01/01/20x2 Reversal
Payment 10,500
Balance 0
See, with reversing entry, the company no longer need to take note at the end of the year that there
is such payment for previous year’s unpaid rent payable, they can just immediately record expense
and cash respectively and not worry of its effect because upon payment, the negative balance for rent
expense will be zeroed out due to such transaction. A cash transaction has occurred in 20x2, but the
expense remained unchanged in 20x2 because of the reversing entry made. Nothing really big came
up, but it made the company’s work easier.
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ACCOUNTING FOR MERCHANDISING BUSINESS

Lesson 11
OVERVIEW OF A MERCHANDISING BUSINESS
Merchandising business (or a trading business) is a company that buys goods and resells these goods,
without making any modifications, at a price higher than its purchase price for the purpose of making
profit.
This type of business is much common in the Philippines and can range from small-to large-sized
entities. Examples: sari-sari stores, department stores, grocery shops, and those selling in wholesale.
NORMAL OPERATING CYCLE OF MERCHANDISING BUSINESS
ACCOUNTING FOR A MERCHANDISE
• The sales account represents the aggregate selling price of all the goods sold in the normal
course of the business’ operations.
• A merchandising enterprise computes for the cost of goods sold or cost of sales of the period.
• Cost of goods sold is an operating expense, it is usually reported separately to be able to
highlight the amount of the gross profit on sales in the income statement.
Formula:
Net Sales Revenue:
Gross Sales xx
Less: Sales Returns xx
Sales Discounts xx
Sales Allowances xx xx xx
Less: Cost of Sales:
Beginning Inventory xx
Add: Purchases xx
Freight-in xx
Gross Purchases xx
Less: Purchase Returns xx
Purchase Discounts xx
Purchase Allowances xx xx
Net Purchases xx
Less: Ending Inventory xx xx
Gross Profit xx
Less: Other Operating Expenses xx
Operating Profit or Income before Int. & Tax. xx
Less: Interest xx
Taxes xx xx
Income after Interests and Taxes xx
Note:
30 | P a g e
Freight-in is the costs for having the goods delivered to their intended location.
Freight-out is a fee paid regarding the transportation to the buyer of the inventory sold
by the company. This is part of selling expense.
Comprehensive Example:
ABC Merchandise opened up a business by investing P1,000,000. His total purchases for the year are
P300,000, But 30% of these purchases were reduced with 5% due to a discount offered by the supplier
and P3,000 was returned due to defect in the product. The cost of delivering the goods from the
supplier to ABC Merchandise is P5,000.
Of the total purchased inventories, the company was able to sold most of these inventories for
P700,000 leaving a count of P50,000 inventories on hand. P5,000 was offered as a discount to
customers for the year and P2,000 were returned by customers.
The company was able to sold these much because of a good marketing strategy, by advertising their
products to different radio and television channels. They were able incur P200,000 in advertising fee
and paid salary for P150,000. No interest was paid, but the BIR collected 25% of their net income for
tax due at the end of the year. How much is the net income after taxes?
Net Credit Sales:

Gross Sales P700,000
Less: Sales Discount 5,000
Sales 2,000 7,000 693,000
Less: Cost of Sales:

Beginning Inventory 0
Add: Purchases 300,000
Freight In 5,000
Gross Purchases 305,000
Less: Purchase Return 3,000
Purchase Discount 4,500 7,500
Net Purchases 297,500
Less: Ending Inventory 50,000 247,500
Gross Profit 445,500
Less: Operating Expenses;
Advertising Expense 200,000
Salaries Expense 150,000 50,000
Net Profit before Interests and Taxes 395,000
Less: Taxes (25%) 98,875
Net Profit After Interests and Taxes 296,625
Computation:
Purchase discount = 300,000 x 30% x 5% = 4,500
JOURNALIZING THE TRANSACTIONS OF A MERCHANDISING BUSINESS
Transactions having effects on the company's books require journal entries. Since a merchandising
business involves regular and recurring inventory transactions, we begin by studying the different
events involving the said account.
INVENTORY SYSTEMS USED FOR MERCHANDING TRANSACTION
• Perpetual inventory systems keep track of all changes in the inventory account. This system is
more expensive as more costs are incurred to make sure that amounts regarding inventory are
available at every point of sale.
• Periodic inventory systems provide date on inventory levels at some points in time. Hence, a
physical count is made usually at year-end to provide figures as to how many exist at that point
in time.
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PERPETUAL INVENTORY SYSTEM PERIODIC INVENTORY SYSTEM

Used for both expensive and Used for inexpensive items
inexpensive items. Cheaper to implement
More costly to implement No record is kept for transactions
Record exists in every movement of involving inventory movement
inventory. Inventory physical count is made at least
Inventory physical count is made at least once a year.
once a year. Inventory physical count is made at year-
end to establish ending inventory
amounts
In journalizing the transaction, how does the two differ?
TRANSACTION PERPETUAL PERIODIC

Purchase of inventory (on cash Inventory xx Purchases xx
or on account) Cash/Account Payable xx Cash/Account Payable xx
Delivery fee for the purchase Inventory xx Freight-In xx
(on cash or on account) Cash/Account Payable xx Cash/Account Payable xx
Return, Discount, Allowance of Cash/Account Receivable xx
inventory received (on cash or Purchase Returns xx
on account)
Cash/Account Receivable xx Cash/Account Receivable xx
Inventory xx Purchase Discount xx
Cash/Account Receivable xx
Purchase Allowance xx
Sales (on cash or on account) Cash/Accounts Receivable xx Cash/Accounts Receivable xx
Sales Revenue xx Sales Revenue xx
Cost of Sales xx
Inventory xx
Sales returns, allowances and Sales Discounts xx Sales Discounts xx
discounts Cash xx Cash xx
Sales Returns xx Sales Returns xx

Cash xx Cash xx
Sales Allowances xx Sales Allowances xx

Cash xx Cash xx
Year-end inventory count No entry. Inventory amount Inventory-End xx
can be computed from the Cost of Sales xx
movements on the inventory Purchase Discount xx
account title Purchase Returns xx
Purchase Allowances xx
Purchases xx
Freight-In xx
Inventory-Beg xx
TERMS OF SALES – TRANSFER OF OWNERSHIP
Freight on Board (FOB) Shipping Point – means that the ownership of the goods is transferred
when the seller has shipped the goods to the buyers. A journal entry is made upon the point of
shipment. As such, the buyer is considered to own the goods even if the goods are on transit and
have not been received as the transfer happened on the day the goods were shipped.
Freight on Board (FOB) Destination – means that the ownership of the goods is transferred
when the goods have reached its destination. A journal entry is made upon the actual receipt of
the goods. As such, the seller still owns the goods as it is being delivered as there is no transfer
of ownership yet.
32 | P a g e
CASH DISCOUNTS
When goods are sold on credit, terms of payment depend on the custom of the industry. The usual
credit term which appears on the invoices are:
• n/30 (which means that the gross amount is payable within 30 days from the date of sale);
• 2/10, n/30 (which means that the account is payable within 30 days with a 2% discount given
if the account is paid with in 10 days from the date of sale);
• 3/EOM, n/60 (which means that the account is payable within days with a 3% discount given
if the account is paid until the end of the month from the date of sale);
• 2/10, 1/15, n/30 (which means that the account is payable within 30 days with a 2% discount
given if the account is paid within 10 days from date of sale, but only a 1% discount if the
account is paid after 10 days but within 15 days from the date of sale). The account paid
within 10 days or 15 days must be in full unless otherwise agreed upon that partial
collections will also be given discounts.
Methods of Recording Cash Discounts
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• Gross Method: a method of recording purchases at the full invoice price without deduction of
any cash discounts. If the discount will be taken, the cash payment would be net discounts but
if not, value for cash payment will be based on the full invoice price.
• Net Method: a method of recording purchases at invoice price less the cash discount. If the
discount will be taken, cash payment will be based on the recorded liability at the time of
transaction. Meaning, the discount has already been deducted so it doesn’t have to be
deducted once again. But if the discount will not be taken, the full invoice price will be taken
and the discount netted at the time of transaction shall be forfeited or returned back.
Nakakastress Merchandising sold P50,000 inventory to Nakakabaliw Enterprise with credit terms of
2/20, n/30. How do we account such transaction if we are the buyer? seller?
Nakakastress Merchandising Nakakabaliw Enterprise

(Seller) (Buyer)
At the time of transaction Gross Method: Gross Method:
Accounts Receivable 50,000 Purchases 50,000

Sales 50,000 Accounts Payable 50,000
Net Method: Net Method:
Accounts Receivable 49,000 Purchases 49,000

Sales 49,000 Accounts Payable 49,000
Gross Method: Gross Method:
If collection/payment is made
within the discount period Cash 49,000 Accounts Payable 50,000
(discount taken) Sales Discount 1,000 Purchase Discount 2,000
Accounts Receivable 50,000 Cash 48,000
Cash 49,000 Accounts Payable 49,000

If collection/payment is made Gross Method: Gross Method:
beyond the discount period
(discount not taken) Cash 50,000 Accounts Payable 50,000
Cash 50,000 Accounts Payable 49,000

Accounts Receivable 49,000 Purchase Disc. Loss 1,000
Sales Disc. Forfeited 1,000 Cash 50,000
Note: In the illustration above, we see account titles such as Purchases, Purchase Discount and Purchase
Discount Loss, which means the inventory system used is periodic inventory system, but under perpetual
inventory system, these three account titles must be replaced with the account title “Inventory.”
SPECIAL JOURNALS
Special journals are journals that an organization maintains to record their business transactions that
are frequent or repetitive in nature. When transaction volume of a business rises and a single journal
becomes inadequate, it is advantageous to maintain a separate journal for all frequent or repetitive
transactions such as purchases, purchases returns, sales, sales returns, cash receipts and cash
payments etc.
Purchase Journals
34 | P a g e
Purchase journal (also known as purchases book and purchases day book) is a special journal used by
businesses to record all CREDIT or ON ACCOUNT purchases.
Explanation of columns:
• Date column: Date column is used to record the date on which the invoice belonging to goods
purchased is received.
• Supplier column: The supplier’s name is written in this column. Some businesses also include
a brief description of goods purchased in this column.
• Invoice date column: The invoice date column is used to record the date on which the invoice
is prepared by the supplier.
• Payment terms column: This column is used to record the payment terms allowed by the
supplier.
• Reference column: At the end of each day, the entries from purchases journal are posted to
individual accounts in the accounts payable subsidiary ledger. If a computer software is used,
these entries are immediately posted to subsidiary ledger. Reference column is used to record
the account numbers of the accounts to which the entries have been transferred. If accounts
are not numbered, the page number of accounts is recorded in this column.
• Accounts payable column: The amount payable on the invoice is recorded in this column.
• Items columns: These columns are used to enter the cost of individual items purchased from
suppliers such as inventory, store supplies, office supplies and equipment etc. The number of
item columns to be used on a purchases journal depends on the nature and requirement of
each individual business.
Sales Journal
The sales journal (also known as sales book and sales day book) is a special journal that is used to
record all CREDIT or ON ACCOUNT sales.
35 | P a g e
Explanation of columns:
• Date: This column is used to record the date on which the sale is made. Normally, it is the same
date as written on the invoice.
• Account debited: This column is used to enter the name of customers whose individual
accounts are maintained in accounts receivable subsidiary ledger.
• Invoice number: The sales invoice number is written in this column.
• Post reference (PR): The entries in sales journal are posted on daily basis to relevant accounts
in accounts receivable subsidiary ledger. The post reference is used to enter account numbers
of individual accounts in the accounts receivable subsidiary ledger in which the entries are
posted.
• Accounts receivable & Sales: In this column, the net amount receivable from customers is
written. In the general ledger, the accounts receivable account is debited and sales account is
credited by the total of this column.
• Cost of goods sold & inventory: In this column, the cost price of the merchandise sold is
entered. In general ledger, the cost of goods sold account is debited and inventory account is
credited by the total of this column.
Cash Receipts Journal
The cash receipts journal manages all cash inflows of a business organization. In other words, this
journal is used to record all cash coming into the business.
36 | P a g e
Explanation of the columns used in cash receipts journal:
• Date: The date at which the cash is received is entered in date column.
• Account credited: The account credited column is used to enter the title or name of the
account that is credited in ledger as a result of cash inflow. For every inflow of cash, one or
more accounts are essentially credited in accounts receivable subsidiary ledger or in general
ledger or in both.
• Post reference: The post reference column is used to enter the account number of subsidiary
or general ledger account to which the entry belongs.
• Explanation: The explanation or reason of the cash inflow is briefly explained in this column.
• Cash: In cash column the amount of cash received is entered. The cash account in general
ledger is debited by the total of this column.
• Sales discount: Sellers allow discount to customers that make payment within discount period.
The amount of discount allowed to customers is entered in sales discount column. The sales
account maintained in general ledger is debited by the total of this column.
• Accounts receivable: When a credit customer makes the payment, his account is credited in
accounts receivable subsidiary ledger. The amount by which a customer’s account is credited
is entered in this column.
• Sales: This column is used to record cash sales. Every time a cash sale is made, the amount
received is entered in this sales column
• Other accounts: This column is used to record the receipt of cash from sources other than cash
sales or credit customers. Examples include the receipt of cash for interest, rent and the sale
of old assets etc.
• Cost of goods sold/inventory: In cash receipt journal, this column is used to record the cost of
merchandise sold for cash. This column is also found in sales journal where it is used to enter
the cost of goods sold on credit. The total of this column is debited to cost of goods sold
account and credited to inventory account in general ledger.
37 | P a g e
Cash Disbursements or Payments Journal
The cash disbursements journal (also known as cash payments journal) is a special journal that is used
by a business to manage all cash outflows. In other words, a cash disbursements journal is used to
record any transaction that includes a credit to cash.
Explanation of the columns used in cash disbursements journal
• Date column: The date at which a payment is made to someone is entered in date column.
• Check number column: In large businesses, the payments are mostly made by checks. If the
payment is made by a check, this column is used to enter the check number belonging to the
payment.
• Payee column: The payee name (the person or entity to whom the payment is being made) is
entered in this column.
• Account debited column: Every cash transaction results in a credit to cash account and a debit
to some other account. Account debited column is used to enter the title of the account to be
debited in the accounts payable subsidiary ledger or general ledger as a result of the payment
of cash.
• Posting reference (PR) column: All accounts in subsidiary and general ledger are properly
numbered. Posting reference (abbreviated as PR) column is used to write the number of the
account mentioned in account debited column.
• Cash column: The amount of cash paid is entered in cash column. This amount must be net of
any purchases discount received from suppliers of inventory etc.
• Inventory column: Inventory column is used to enter the purchases discount allowed by
suppliers of inventory. As the discount taken form suppliers reduces our inventory cost, the
inventory account in the general ledger is credited by the total of this column at the end of the
period.
• Other accounts column: The cash paid for any purpose other than credit purchases is recorded
in this column. Examples include payment for inventory purchased on cash, payment for
purchase of assets and payment of salaries, carriage and other expenses etc.
• Accounts payable column: The amount by which a supplier’s account is debited is written in
this column.
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SUBSIDIARY LEDGERS
A subsidiary ledger stores the details for a general ledger control account. Once information has been
recorded in a subsidiary ledger, it is periodically summarized and posted to a control account in the
general ledger, which in turn is used to construct the financial statements of a company. Most
accounts in the general ledger are not control accounts; instead, individual transactions are recorded
directly into them. Subsidiary ledgers are used when there is a large amount of transaction information
that would clutter up the general ledger. This situation typically arises in companies with significant
sales volume. Thus, there is no need for a subsidiary ledger in a small company.
Accounts Receivable Ledger
The accounts receivable ledger is a subledger in which is recorded all credit sales made by a business.
It is useful for segregating into one location a record of all amounts invoiced to customers, as well as
all credit memos and (more rarely) debit memos issued to them, and all payments made against
invoices by them. The ending balance of the accounts receivable ledger equals the aggregate amount
of unpaid accounts receivable.
Accounts Payable Ledger
An accounts payable subsidiary ledger is an accounting ledger that shows the transaction history and
amounts owed to each supplier and vendor. An accounts payable (AP) is essentially an extension of
credit from a supplier that gives a business (the buyer in the transaction) time to pay for the supplies.
The subsidiary ledger records all of the accounts payables that a company owes.
39 | P a g e
References:
https://www.accountingformanagement.org/what-are-special-journals/
https://www.accountingformanagement.org/cash-disbursements-journal/
https://www.accountingformanagement.org/cash-receipts-journal/
https://www.accountingformanagement.org/purchases-journal/
https://www.accountingformanagement.org/sales-journal/
https://www.accountingtools.com/articles/what-is-a-subsidiary-ledger.html
https://www.investopedia.com/terms/a/accounts-payable-subsidiary-ledger.asp
40 | P a g e

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SHERWIN AVILA-HIDALGO

Left Side or Debit Side Right Side or Credit Side

THE RULE OF DEBIT AND CREDIT

ACCOUNT DEBIT CREDIT

[+] increase; [-] decrease

ACCOUNTING EVENTS AND TRANSACTIONS

FINANCIAL TRANSACTION WORKSHEET

W. A-Wood Accounting Firm

ASSETS = LIABILITIES + EQUITY

The financial transaction is analyzed as follows:

February 15, 20x1 Purchased office supplies worth P 50,000 on account.

ASSETS = LIABILITIES + EQUITY

Balance 250,000 250,000

Balance 250,000 50,000 = 50,000 250,000

February 18, 20x1 Rendered professional services for cash, P45,000.

ASSETS = LIABILITIES + EQUITY

Balance 250,000 50,000 50,000 250,000

Balance 295,000 50,000 = 50,000 295,000

February 20, 20x1 Rendered professional service on account, P 50,000.

ASSETS = LIABILITIES + EQUITY

Balance 295,000 50,000 50,000 295,000

Balance 295,000 50,000 50,000 = 50,000 345,000

February 24, 20x1 Paid electricity bills, P 5,000.

ASSETS = LIABILITIES + EQUITY

Balance 295,000 50,000 50,000 50,000 345,000

Balance 290,000 50,000 50,000 = 50,000 340,000

ASSETS = LIABILITIES + EQUITY

Balance 290,000 50,000 50,000 50,000 340,000

Balance 391,325 35,000 50,000 = 50,000 100,00 326,325

ASSETS = LIABILITIES + EQUITY

Balance 391,325 35,000 50,000 50,000 100,00 326,325

Balance 321,325 35,000 50,000 = 50,000 100,000 256,325

ASSETS = LIABILITIES + EQUITY

Balance 321,325 35,000 50,000 50,000 100,000 256,325

Balance 321,325 35,000 25,000 82,000 = 50,000 182,000 231,325

W. A-Wood Accounting Firm

ASSETS = LIABILITIES + EQUITY

321,325 35,000 25,000 82,000 = 50,000 182,000 231,325

THE USE OF T-ACCOUNT

February 15, 20x1 Purchased office supplies worth P 50,000 on account.

OFFICE SUPPLIES ACCOUNTS PAYABLE

February 18, 20x1 Rendered professional services for cash, P45,000.

CASH REVENUE ON PROFFESIONAL FEE

February 20, 20x1 Rendered professional service on account, P 50,000.

ACCOUNTS RECEIVABLE REVENUE ON PROFFESIONAL FEE

February 24, 20x1 Paid electricity bills, P 5,000.

CASH UTILITIES EXPENSE

CASH ACCOUNTS RECEIVABLE

CASH NOTES PAYABLE

CASH SERVICE EXPENSE

CASH UTILITIES EXPENSE

CASH SALARIES EXPENSE

UNUSED OFFICE SUPPLIES OFFICE SUPPLIES EXPENSE

OFFICE EQUIPMENT NOTES PAYABLE

1. Documentation. Analyzing business documents which serve as a basis of recording

STEP 1: TRANSACTION ANALYSIS (SOLE PROPRIETORSHIP)

The analysis of transactions should follow these four basic steps:

W. A-WOOD ACCOUNTING FIRM

STEP 2: JOURNALYZING (SOLE PROPRIETORSHIP)

Simple and Compound Entry

15 Unused Office Supplies 140 5 0 0 0 0 . 00

20 Accounts Receivable 120 5 0 0 0 0 . 00

Note: “Accrued Income” is the same as “___ [Income]* Receivable”

Note: “Accrued _ Expense” is the same as “_ [Expense]* Payable”