Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

OFFICE OF THE VICE PRESIDENT FOR BRANCHES AND
EXTENSIONS
MARAGONDON BRANCH

INSTRUCTIONAL MATERIALS

IN

ACCO 05BC
Fundamentals of Accounting 1

Compiled by: Checked by:

Cielo Amor E. Diquit Assoc. Prof. Ayreenlee E. Resus

Faculty Chairman
Committee on Writing Instructional Materials

Date: August 5, 2020 Date: ___________________

Approved by:

Dr. Agnes Y. Gonzaga Assoc. Prof. Denise A. Abril

Head, Academic Programs Director

Date: _________________ Date: __________________

1
 INTRODUCTION

Shalom, dear students! Welcome to this online class where learning never stops and continuous
fun learning is at hand. As the community of university continue to adopt this new way of learning,
you are encouraged to keep your spirits high up and make the most of the time you could allot in
learning at home using this instructional material. This may be difficult at first, but through
persistence and God within you, you can do this!

THE POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

VISION
Clearing the paths while laying new foundations to transform the Polytechnic University of
the Philippines into an epistemic community.

MISSION
Reflective of the great emphasis being given by the country's leadership aimed at
providing appropriate attention to the alleviation of the plight of the poor, the development
of the citizens, and of the national economy to become globally competitive, the University
shall commit its academic resources and manpower to achieve its goals through:

1. Provision of undergraduate and graduate education which meets international

standards of quality and excellence;
2. Generation and transmission of knowledge in the broad range of disciplines relevant and
responsive to the dynamically changing domestic and international environment;
3. Provision of more equitable access to higher education opportunities to deserving and
qualified Filipinos; and
4. Optimization, through efficiency and effectiveness, of social, institutional, and individual
returns and benefits derived from the utilization of higher education resources.

PHILOSOPHY
As a state university, the Polytechnic University of the Philippines believes that:

 Education is an instrument for the development of the citizenry and for the enhancement
of nation building;
 Meaningful growth and transformation of the country are best achieved in an atmosphere
of brotherhood, peace, freedom, justice and a nationalist-oriented education imbued with
the spirit of humanist internationalism.

STRATEGIC OBJECTIVES: TEN-PILLAR AGENDA

1. Dynamic, Transformational, and Responsible Leadership
2. Responsive and Innovative Curricula and Instruction
3. Enabling and Productive Learning Environment
4. Holistic Student Development and Engagement
5. Empowered Faculty Members and Employees
6. Vigorous Research Production and Utilization

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 7. Global Academic Standards and Excellence
8. Synergistic, Productive, Strategic Networks and Partnerships
9. Active and Sustained Stakeholders’ Engagement
10. Sustainable Social Development Programs and Projects

SHARED VALUES
 God-Fearing
 Love for Humanity and Democracy
 Collegiality
 Integrity and Credibility
 Transparency and Accountability
 Passion for Learning
 Humanist Internationalism

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

MARAGONDON BRANCH

GOALS
 Quality and excellent graduates
 Empowered faculty members
 Relevant curricula
 Efficient administration
 Development – oriented researches
 State-of-the-art physical facilities and laboratories
 Profitable income – generating programs
 Innovative instruction
 ICT – driven library
 Strong local and international linkages

PROGRAM OBJECTIVES
1. Provide complete understanding of the concepts, principles, theories, and philosophies
in Human Resource.
2. Assist students seek employment and facilitate the integration process in the corporate
environment so they can be immediately productive once employed.
3. Assist the students in appreciating the HR role in the organization and how they can make
meaningful contributions as a strategic partner in building the organization to become
globally competitive.
4. Develop researchers with quality output related to the field. Continuously conduct action
researches on the needs of laboratory and other facilities that could be locally produce
or innovated using local materials and adapted technology.

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 ACCO 05BC
FUNDAMENTALS OF ACCOUNTING 1

COURSE DESCRIPTION
COURSE TITLE : FUNDAMENTALS OF ACCOUNTING 1
COURSE CODE : ACCO 05BC
COURSE CREDIT : THREE (3) UNITS
PRE-REQUISITE :

The course provides full discussion of accounting for a service, merchandising and manufacturing
type of business. It tackles principles and concepts of accounting so that students will learn how
to use the various types of accounting information found in financial statements and business
reports. Emphasis is placed on understanding the reasons underlying basic accounting concepts
and providing students with an adequate background on the recording, classification, and
summarization functions of accounting to enable them to appreciate the varied uses of accounting
data.

COURSE OBJECTIVES

Institutional Program Outcomes Course Outcomes

Learning Outcomes
1. Creative and Critical Apply the concepts in facing challenges that may Learners are expected to analyze transactions
Thinking influence ones attitude in making management and be able to record, classify and summarize
decisions. those in a financial report called financial
2. Effective Effectively organize communications and make statement.
Communication effective development in dealing with personal blunders
that affect our relationship with others
3. Strong Service Demonstrate strong commitment to competence,
Orientation professionalism, independence, integrity and objectivity,
good corporate and social responsibility and ethical
practices in performing functions.
4. Passion to Life-Long Demonstrate commitment to continuous search for ideas
Learning and knowledge through continuing professional
education.
Adapt to changes by developing new ideas and finding
improved ways of doing things.
5. Sense of Nationalism Demonstrates the skills and knowledge assessing and
and Global evaluating concepts and issues related to local and
Responsiveness international business policies and policy-making
6. Community Describe how knowledge and learning from the
Engagement academic study/disciplines relates to one’s participation
in community service, civic, politics and government.
7. Adeptness in the Enhance the skills in the use of computer systems and
Responsible Use of applications, and technology.
Technology
8. High Level of Demonstrate attributes of persuasiveness, open-minded,
Leadership and and confident leader. Manage time and resources
Organizational Skills effectively.
9. Sense of Personal Perform services with highest standard of
and Professional professionalism and in accordance with ethical
Ethics requirements.

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COURSE REQUIREMENTS
The course requirements are as follows:

1. Students are highly encouraged to attend the class sessions regularly to maximize
learning and ensure requirements are complied with by both online and offline students.
2. The course is expected to have a minimum of four (3) quizzes and two (2) major
examination (Midterm and Final Examination).
3. All output such as graded recitation, quizzes and major examination must be sent only to
mrsdiquitpup@gmail.com.

GRADING SYSTEM
The grading system will determine if the student passed or failed the course. There will be two
grading periods: Midterm and Final Period. Each period has components of: 60% Class Standing
+ 40% Major Examination. Final Grade will be the average of the two periodical grades.

Midterm Finals
Class Standing Class Standing
 Quizzes 25%  Quizzes 25%
 Class Participation 20%  Class Participation 20%
 Attitude 15%  Attitude 15%
Mid-term Examination 40% Final Examination 40%

FINAL GRADE = (Midterm + Finals) /2

COURSE GUIDE
First Semester (16 weeks)
Course Plan

Week Topic Learning Outcomes Methodology Resources Assessm

ent
1 Introduction of the Students are - Orientation Fundamentals of - State
course content, expected to: - Setting of Accounting by ment
activities, - Appreciate the expectation Gloria A. Rante of
requirements and importance of the s expec
grading system. course. tation
- Understand the - Acce
requirements pted
imposed and
revie
wed
the
cours
e
syllab
us
2-4 Introduction to Students are - Demonstrati Fundamentals of Quiz
Accounting expected to: on Accounting by
Gloria A. Rante

5
 - What is - Describe the - Classroom
Accounting? accounting and discussion
- Functions of its function
Accounting - State the
- Bookkeeping branches of
- The Accounting accounting
Profession - Discuss the
- Organizations accounting
Important to the profession
Accounting - Identify the users
Profession of accounting
- Users of information
Accounting Data - Enumerate the
- Types of types of business
Business and forms of
- Forms of business
Business organization
Organization
- Activities of
Business
Organization
5-7 The Accounting Students are - Demonstrati Fundamentals of Seatwork
Concepts and the expected to: on Accounting by and quiz
Basic Financial - Discuss the - Recitation Gloria A. Rante
Statements accounting - Classroom
- Accounting concepts and interaction
Concepts and principles
Principles - Describe and
- Financial identify the
Statements components of
- Elements of financial
Financial statement
Statements - Enumerate and
- Accrual and demonstrate
Basis of thorough
Accounting understanding
on the elements
of financial
statements
- Differentiate the
accrual and
basis of
accounting
8-9 Analyzing and Students are - Demonstrati Fundamentals of Quiz, and
Summarizing expected to: on Accounting by Seatwork
Business - Identify different - Recitation Gloria A. Rante
Transactions source - Classroom
- Source documents discussion
documents evidencing a
- Accounting transaction
Process - Discuss and
- Accounting enumerate in
Equation and its correct
elements sequence the
- Business accounting
transactions process
- Double entry - Demonstrate
accounting thorough
- The T-account understanding
- Footing the on accounting
accounts equation and its
elements

6
 - Preparation of - Identify business
Trial Balance transactions and
- Permanent and its effects in the
Temporary accounting
Accounts equation
- Preparation of - Prepare Trial
Financial Balance
Statement - Prepare
Financial
Statements
MIDTERM EXAMINATION
10-11 Recording Business Students are - Demonstrati Fundamentals of Quiz,
Transactions expected to: on Accounting by seatwork,
- Continuation of - Describe the - Recitation Gloria A. Rante group
Accounting rules of debit and - Classroom presentatio
Process credit interaction n and
- Rules of Debit - Record researches
and Credit transactions
- Chart of directly to T-
Accounts Accounts
- Footing of - Foot the
Accounts accounts
- Journalizing - Journalize
- Posting to transactions
General Ledger - Post entries to
- Errors in General Ledger
accounting - Prepare Trial
process Balance
- Identify errors
that could occur
in the accounting
process
12-13 Adjusting the Students are - Demonstrati Fundamentals of Quiz,
Accounts expected to: on Accounting by seatwork
- The Accounting - Identify the - Recitation Gloria A. Rante and case
Period accounting - Classroom analyses
- Accrual and period discussion
Cash Accounting - Differentiate the
- Items that need cash and accrual
adjustments accounting
- Partial - Explain the
Worksheet importance of
adjusting entries
and its effect of
Financial
Statements
14-15 Completion of the Students are - Demonstrati Fundamentals of Quiz,
Accounting Cycle expected to: on Accounting by seatwork
- Preparation of - Prepare - Recitation Gloria A. Rante and
Worksheet Worksheet - Classroom Research
- Closing Entries - Discuss the discussion paper
- Post-Closing importance of
Trial Balance closing entries
- Reversing and prepare it
Entries - Prepare Post
Closing Trial
Balance
- Prepare
and
the
contrast models according to reversing entries LM model
derive the to would
changes
policy
how
16 FINAL EXAMINATION

7
 TABLE OF CONTENTS

Topic Page
Introduction
Orientation

Lesson 1 Introduction to Accounting 9

Unit 1 : Accounting 9
Unit 2 : Users of Accounting Data 11
Unit 3 : Types and Forms of Business 13

Lesson 2 The Accounting Concepts and Basic Financial Statements 15

Unit 1 : Accounting Concepts and Principles 15

Unit 2 : Financial Statements 17

Lesson 3 Analyzing and Summarizing Business Transactions 20

Unit 1 : Business Transactions and Accounting Process 20

Unit 2 : Double Entry Accounting 23

Lesson 4 Recording Business Transactions 26

Unit 1 : Journalizing and Posting to General Ledger 26

Unit 2 : Posting Entries to General Ledger 31

Lesson 5 Adjusting Accounts 36

Adjusting Entries 37

Lesson 6 Completion of Accounting Cycle 42

Unit 1 : Preparation of Worksheet 42

Unit 2 : Closing entries 44

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Lesson 1 – INTRODUCTION TO ACCOUNTING

Unit 1 – Accounting

Overview:
Accounting is a service activity that provides quantitative information, primarily financial in
nature, about economic entities that is intended to be useful in making economic decisions.
Accounting has different functions that helps business determine the efficiency of its performance,
aid ways to understand better the operation of the business. This lesson will tackle the different
functions, branches and profession that an accountant portray in a business industry.

Learning Objectives:
After successful completion of this lesson, you should be able to:
1. Define accounting.
2. Understand the functions of accounting in a business.

Course Materials:

Accounting

Accounting is defined as the language of business as it communications financial

information to interested parties such as internal and external users of financial information

Functions of Accounting

1. Identify the different business activities relevant to the operation of an organization.

2. Record business activities either manually or electronically (bookkeeping).
3. Prepare, analyze and interpret financial reports to different users of accounting
information depending on their economic needs.

Branches of Accounting

1. Financial Accounting – concerned primarily with the preparation of general-

purpose financial statements.
2. Management Accounting – focused on providing the management with accounting
information relevant to the activities of the different managers in the enterprise.
3. Tax Accounting – focused on the preparation of income tax returns and providing
advises to clients on matters related to tax issues.
4. Cost Accounting – focused on gathering cost information that is useful in
determining the product or service costs, to help the management in setting prices,
for the purpose of planning, controlling activities, improving quality and efficiency
operation.

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Accounting Profession

1. Public Accounting – individual practitioner or as a partner of an accounting firm

and are qualified to render services such as auditing, taxation and management
consultancy.
2. Private Accounting – accountants who work in a commerce and industry as
financial accountant, cost accountant and internal auditor.
3. Government Accounting – accountants who provide services to government
agencies like Polytechnic University of the Philippines (PUP), other state
universities and colleges, Commission on Audit (COA), Bureau of Internal
Revenue (BIR) and many others.
4. Education – accountants who are educators and play a very important role in the
development of future professionals.

Activities/Assessments:

Answer the following questions:

I. Classify the following job position according to the area of specialization in the
practice of accountancy.
1. Chief Accountant of Jollibee
2. Regional Controller of DPWH
3. Associate Partner of SGV
4. Dean of Accounting Department in University of the Philippines
5. RDO Officer of BIR RDO 45
6. Financial Analyst of Manulife Philippines
7. Accounting Clerk of MiniSo
8. Part-time Instructor of PUP
9. Accounting Head of Pamantasang Lungsod ng Maynila
10. Tax Practitioner handling various SMEs

References:
1.) Fundamentals of Accounting by Gloria Rante

10
Unit 2 – Users of Accounting Data

Overview:
There are different users looking after the accounting information and financial reports of
an organization for the purpose of sound decision-making. As the users differ, their information
needs also vary. This lesson will tackle different types of users of accounting information and how
they use the data they are requiring.

Learning Objectives:
After successful completion of this lesson, you should be able to:
1. Understand the classification of different users of accounting information.
2. Identify the internal and external users of accounting information.

Course Materials:

Users of Accounting Data

I. Internal Users – users whose decision has a direct effect on the internal operation of
the business.

a. Managers – directly involved in operation of the business and use accounting

data to improve effectiveness and efficiency of the organization.
b. Employees – use financial data to assess whether they are receiving the right
compensation and to check if they can bargain for higher remuneration,
retirement benefits and employment opportunities.
c. Officers – company executives who are interest 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 demographical market.
d. Internal auditors – users who protect and safeguard the resources of the
company against fraud or irregularities.

II. External Users – individuals or enterprises that have financial interest in the business
but they are not involved in the day to day activities of the organization.

a. Business Contacts – this include suppliers and other trade creditors who
assess the financial credibility of a business before making transactions with
them.
b. Lenders – users who extend financial assistance to the business in the form
of loans and provides secured or unsecured, long or short-term loan finance.
These are banks, financing institutions or private individuals who are
interested in information that enables them to determine whether their loans
and the interest attached to it, will be paid when due.
c. Customers – they are interested to know if the business can supply the needed
demand and to continue to provide similar services in the future or whether the
company is true to their commitment to fulfill warranty obligations.
d. Investors – this includes both existing and potential owners of equity of interest
in companies. They are interested in the performance of the company
measured in terms of its profitability and the extent to which those profits are
to be distributed to owners.

11
 e. Analysts/advisers – this group includes a range of advisers to inventors,
employees and the general public.
f. Governments and their Agencies – agencies that need financial reports from
companies. Examples of agencies include Bureau of Internal Revenue (BIR)
and Securities and Exchange Commission (SEC).
g. Independent Auditors – examine the financial reports to determine whether the
reports are prepared in accordance with Philippine Accounting Standards and
Philippine Financial Reporting Standards and determine whether the financial
statements are fairly presented.
h. Public – business enterprises provide substantial assistance to the general
public in many ways like, employment and they contribute also to the
enhancement of local economy.

Activities/Assessments:

Answer the following:

Give five examples of users of accounting information and explain why they need
accounting information.

References:
1.) Fundamentals of Accounting by Gloria Rante

12
Unit 3 – Types and Forms of Business

Overview:
Business organizations vary on the type or nature of its operation and the way it was
formed when it was established. This lesson will tackle how these business and types and forms
differ.

Learning Objectives:
After successful completion of this lesson, you should be able to:
1. Understand the different types of business organization.
2. Classify the business organization according to its formation.

Course Materials:

Business Organization

It is an entity formed for the purpose of carrying on commercial enterprise. Such an

organization is predicated on systems of law governing contract and exchange, property rights
and incorporation

Types of Business Organization

1. Service – a type of business that provides services to customers. Most common

examples of services businesses are utility companies like Manila Water,
MERALCO, telecommunication companies like PLDT, Globe and Smart
Telecommunication, transportation companies like Philippine Airlines, Victory
Liner, Manila Light Rail Transit; hotels and restaurants, educational institutions and
entertainment businesses.
2. Merchandising – traders or merchandisers purchased goods and sell them to
customers without changing their form. Examples of merchandising businesses
are SM Supermarket, Puregold, Abenson, and many more.
3. Manufacturing – companies that buy raw materials and convert them into a finished
product. Examples of manufacturing companies are car manufacturers like Toyota,
Inc., and Honda Philippines, makers of stereos, computers and televisions like
Sony, LG and many others.

Forms of Business Organization

1. Sole Proprietorship – an organization that is owned and operated by the owner. It

is very easy to organize and it requires very low capital. There is no special legal
requirement to form this organization. The owner of this business is personally
liable for the obligations of the business.
2. Partnership – an organization that is formed by two or more individuals who are
called partners. It is very easy to organize but it requires a larger amount of capital.
It requires a written agreement between the partners on how the business affairs
are handled. This agreement usually shows how the profit or loss is being divided
among the partners.

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 3. Corporation – is a business owned by stockholders and has legal personality that
is separate and distinct from the owners which allows it to conduct business in its
own name.

Activities/Assessments:

Answer the following:

Classify the following establishments according to its type of business.
1. Manila Hotel
2. Robinsons Department
3. Colgate Palmolive Philippines
4. Toyota Philippines
5. Cebu Pacific
6. Sun Life Corporation
7. Red Ribbon Bakeshop
8. Mercury Drug Store
9. Abbot Laboratories
10.AMA Computer College

References:
1.) Fundamentals of Accounting by Gloria Rante
2.) https://www.britannica.com/topic/business-organization

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Lesson 2 – THE ACCOUNTING CONCEPTS AND THE BASIC
FINANCIAL STATEMENTS

Unit 1 – Accounting Concepts and Principles

Overview:
Accounting concepts and principles are the guidelines used in preparing the financial
statements of the business organization. It ensures that accounting information presented will be
useful in terms of decision-making process of different users of the financial report.

Learning Objectives:
After successful completion of this lesson, you should be able to:
1. Understand the two underlying assumptions in Accounting.
2. Define and differentiate the qualitative characteristics of financial statements.

Course Materials:

Underlying Assumptions:

Accrual Basis. 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 when they relate.

Going Concern. It is the assumption that the enterprise has neither the intention nor the need to
liquidate its operations.

Qualitative Characteristics of Financial Statements

1. Understandability. The information provided in the financial statements must be

easily understood by the users.
2. Relevance. The information contained in the financial statements must be relevant
to the needs of the users.
3. Materiality. Information is material if its omission or misstatement could influence
the economic decision of users taken on the basis of the financial statements.
4. Reliability. Information has the quality of reliability when it is free from material error
and bias and depended upon by users to represent faithfully that which it either
purports to represent or could reasonably be expected to represent.
5. Faithful Representation. For information to be reliable, it must represent faithfully
the transactions and other events it purports to represent.
6. Substance Over Form. Information must be accounted for and presented in
accordance with their substance rather than in their legal form.
7. Prudence/Conservatism. It is the inclusion of a degree of caution in the exercise of
the judgments needed in making the estimates required under conditions of
uncertainty, such that assets or revenue are not overstated and liabilities or
expenses are understated.
8. Completeness. The information in the financial statements must be complete within
the bounds materiality and cost.

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 9. Comparability. Users must be able to compare the financial statements of an
enterprise in order to evaluate the economic trends in the industry and in order to
evaluate the performance of different enterprise in the same industry.
10. Timeliness. Information may lose its relevance if not timely reported.
11. Neutrality. The information contained in the financial statements must be neutral,
that is free from bias.

Activities/Assessments:

Enumerate and define the qualitative characteristics of financial statements.

References:
1) Fundamentals of Accounting by Gloria Rante

16
Unit 2 – Basic Financial Statements

Overview:
Financial statements provide information about the financial position of a company, the
performance of the operation of the business, and changes in the financial position of a company
that is used by wide range of users for the economic decisions. This lesson will tackle more of the
elements of financial statement and the manner of presenting it.

Learning Objectives:
After successful completion of this lesson, you should be able to:
1. Describe and identify the components of financial statement
2. Enumerate and demonstrate thorough understanding on the elements of financial
statements

Course Materials:

Financial statements show the results of stewardship of management, or the accountability of

management for the resources entrusted to it. A complete set of financial statement comprises
the following:

a. Statement of Financial Position or Balance Sheet. This shows the properties or assets
owned by the business, obligations to different parties (i.e. Suppliers, Government
Agencies and/or other enterprises) and the net capital. The elements of this statement are
the following:
1. Assets – resources controlled by the enterprise as a result of past events and from
which future economic benefits are expected to flow to the enterprise.
2. Liabilities – 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 economic benefits.
3. Equity or Capital – residual interest in the assets of an entity that remains after
deducting all its liabilities.
b. Statement of Comprehensive Income or Income Statement. This shows the revenue
generated by the enterprise on a specific period and the corresponding expenses incurred
in order to generate the former. The elements of this statement are:
1. Revenue or Income – these are increases in economic benefits during the
accounting period in the form of inflows or enhancements of assets or decreases
of liabilities (or a combination of both) from delivery or production of goods,
rendering of services or other activities that constitute the enterprise’s major
operations.
2. Expenses – these are decrease in economic benefits during the period in the form
of outflows or using up of assets or incurrence of liabilities (or combination of both)
that result in decreases in equity, other than those relating to distributions to equity
participants.

17
 c. Statement of Changes in Equity or Capital – this shows the movement or all the
changes in the capital or equity of an enterprise.
d. Statement of Cash Flow – this statement shows the effect of business activities on the
cash balances of an enterprise.
e. Notes of Financial Statement – this comprise the summary of significant accounting
policies and other explanatory notes. This contains additional information presented in the
above mentioned statements. This also discloses the narrative description of items
disclosed in those statements and information about items that do not qualify recognition
in those statements.

Guidelines in the Presentation of Financial Statements

Philippine Accounting Standards 1 (PAS) gives 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;
a. The name of the reporting entity;
b. Whether the financial statements over the individual entity or group of
entities.
2. The period covered by the financial statement shall be specified.

Sample Pro-forma of Financial Position: Account Form

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Sample Pro-forma of Financial Position: Report Form

Activities/Assessments:

Classify the accounts by putting a check on the appropriate column.

Item # Account Assets Liabilities Capital Revenue Expense

1 Office Supplies
2 Owner’s Drawings
3 Furniture and
Fixtures
4 Salaries Expense
5 Machinery
6 Customer’s
advance/deposit
7 Building
8 Rent Income
9 Sales
10 Cash

References:
1.) Fundamentals of Accounting by Gloria A. Rante

19
Lesson 3 – ANALYZING & SUMMARIZING BUSINESS TRANSACTIONS
Unit 1 – Business Transactions

Overview:
Business transactions are the very reason the business needs accounting. Business
transactions must be analyzed and interpreted correctly to ensure the transactions are recorded
in a correct manner. This lesson will tackle the process that is needed to apply and follow from
analyzing to recording and posting business transactions.

Learning Objectives:
After successful completion of this lesson, you should be able to:
1. Understand the flow of accounting process.
2. Comprehend the accounting equation and its elements.
3. Identify business transactions and their effects in the accounting equation

Course Materials:

Business transaction is any event that affects the financial positon of the business and can be
recorded reliably. It involves exchange of values. Examples of business transaction of a newly
organized business are:

1. Cash investment by owner

2. Payment for taxes and licenses
3. Payment for rental deposits and advances
4. Purchase of office supplier on account or by cash
5. Provide services for cash.

Business transactions are recorded and may be evident by source documents. Source documents
are the evidences of the daily activities of a business enterprise. It can be as follows:

1. Official Receipt
2. Check and check stub
3. Deposit slips
4. Withdrawal slips
5. Bank statement

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The Account Process

Journaling and
Preparation of Financial post closing trial
Documentation Journalizing Posting Adjusting entries Worksheet posrting closiing
Trial Balance Statements balance
entries

Errors in Accounting Process:

An inequality of the debits and credits is a sign of error. Some possible errors that cause inequality
of trial balance are:

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.

To locate an error, a bookkeeper normally works backward through the steps in the accounting
process starting from:

1. Re-adding the trial balance columns.

2. Compare the trial balance with the balances per account.
3. Verify the balance of each account be re-footing.
4. Verify postings to the ledger.
5. Verify journal entries.
6. Review the transactions, if necessary.

The Accounting Equation and its Elements

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

21
 Assets Liabilities Capital

Business Transactions and their Effects on the Accounting Equation

1. The owner invested P100,000 in a computer shop.

Increase in asset = Increase in owner’s equity
2. Purchased computer unit for P30,000, on account.
Increase in assets = increase in liabilities
3. Purchased computer unit for cash, P30,000.
Increase in one asset = decrease in another form of asset
4. Received cash amounting to P20,000 for computer rentals
Increase in asset = increase in owner’s equity (revenue)
5. Paid the account to a supplier in full, P30,000.
Decrease in asset = decrease in liability
6. Paid salaries of computer technician, P10,000.
Decrease in asset = decrease in owner’s equity (revenue)
7. Borrowed money from a bank to expand operation, P20,000.
Increase in asset = increase in liability

Activities/Assessments:

Activities
Read further the below topics in Fundamentals of Accounting pages 71-83:
1. Preparation of Trial Balance
2. Preparation of Financial Statement

Assessment
Classify the accounts below whether Balance Sheet or Income Statement account and a Debit
(Dr.) or Credit (Cr.) in nature.

Accounts BS or IS Dr or Cr
1. Accounts Payable
2. Office Supplies
3. Office Supplies Expense

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 4. Salaries Payable
5. Owner’s Equity
6. Accounts Receivable
7. Professional Fees Earned
8. Owner’s Withdrawal
9. Prepaid Insurance
10. Office Equipment

References:
1) Fundamentals of Accounting by Gloria A. Rante

23
Unit 2 – Double Entry Accounting

Overview:
Double entry accounting shows the relationship of two accounts to maintain the balance
in the accounting equation. This lesson will discuss the debits and credits and how this matters in
recording transactions up to presentation of financial information.

Learning Objectives:
After successful completion of this lesson, you should be able to:
1. Understand the concept of double entry accounting in analyzing transactions.
2. Use T-account in summarizing the total debit and credits.
3. Prepare trial balance and financial statements

Course Materials:

Double Entry Accounting

Double entry accounting is a method of record keeping in which each transaction affects at least
two accounts, one debited, one credited. For every debit, there must always be corresponding
credit, still maintaining the accounting equation. After all transactions are entered in their
respective accounts, the total debits always equal the total credits.

The T-Account

T-Account is an accounting tool used to help us understand the double entry accounting. This
helps summarized transactions into its debit and credit components.

Debit – left side of an account

Credit – right side of an account

Account Title

Ledt Side (Debit) Right Side (Credit)

Example:

1. The owner, G.A Rante invested P100,000 to start in accounting office.

Cash
1) 100,000

G Rante Capital
1) 100,000

Please refer to page 71-77 for more example transactions a plot in T-account.

24
Preparation of Trial Balance

Trial Balance is a list of all accounts with their balances. Remember that assets, expenses and
drawing have normal debit balances, while liabilities, capital and revenue have normal credit
balances. It is a proof that debit equals credits have been recorded for all transactions but not a
proof that the recording is accurate.

The accounts in trial balance are listed in this order according to their account numbers:

1. Assets (arranged according to their liquidity)

2. Liabilities
3. Capital
4. Drawing
5. Revenue
6. Expenses

If the totals of the debit and credit balances entered on the trial balance are not equal, then an
error or errors have been made either:

1. In the posting of transactions to the ledger accounts; or

2. In the balancing of the accounts; or
3. In the transferring of the balances from the ledger accounts to the trial
balance.

CIMA Learning System enumerates number of errors that do not prevent the trial balance from
agreeing. These are:

1. Errors of omission
2. Errors of commission
3. Error of principle
4. Errors of original entry
5. Reversal of entry
6. Duplication of entries
7. Compensation of errors

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

Please refer to page 80-82 of the book for more sample statements.

25
Activities/Assessments:

Assessment:

Prepare a Trial Balance using general journal for the below transactions of CMC Consultancy
Firm.

References:
1) Fundamentals of Accounting by Gloria A. Rante

26
Lesson 4: RECORDING OF BUSINESS TRANSACTIONS

Unit 1 – Journalizing

Overview:
The business should account all of its business transactions to present the true
performance of the business. In order to do this, accounting process must be followed carefully
to avoid errors and misstatements in the financial statement. This lesson will provide the detailed
process in recording the business transactions.

Learning Objectives:
After successful completion of this lesson, you should be able to:
1. Familiarize and understand the accounts under each element of financial statements.
2. Journalize business transactions correctly.

Course Materials:

Chart of Accounts is a list of Assets, Liabilities, Revenue, Expenses and Capital Accounts
applicable to the business enterprise. It normally includes brief description of the nature of
transactions, identification number or account number. In recording transactions, the bookkeeper
must refer to the Chart of Accounts to become guided with the account title to use for a particular
transaction.
Journalizing

Journal is a chronological record of business transactions. It is called the book of entry. A journal
entry is the recording of business transactions in the journal. It shows all the effects of the
transactions as expressed in terms of debit and credit. Each entry includes also a brief explanation
about the nature of the transaction. An entry with one debit and one credit is a simple journal entry
while an entry that involves one or more debits and one or more credits is a compound journal
entry. Journalizing is the process of entering a transaction in a journalizing.

The general journal contains the following columns:

1. Date column – for the first journal entry, the year, the month, the dates are entered
here. For all other journal entries on a page, only the date is written until the moth
changes.
2. Account title and explanation – the first line of entry shows the account debited
and the second line is credited. The account is indented to the right. For each entry,
a brief explanation is required enough to understand the nature of the transaction.
3. 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.
4. Debit – this is where the amount of the debit is written in line with the account
debited.
5. Credit – this is where the amount of the credit is written in line with the account
credited.

27
Sample genera journal entry:

28
29
Activities/Assessments:

Assessment:

Engr, Marikit opened its Electrical Consulting Firm with the following investment: P500,000 cash
and service vehicle with a fair value of P300,000. During the month of August, of the current year,
the following transactions occurred.

1 Paid P5,000 for various licenses and permits to operate.

Paid P50,000 as rental deposit for the office space.

Purchased various engineering supplies, P6,000 for cash.

2 Billed ZMDC Corporation for electrical services rendered, P20,000 due on August 31.

7 Provided electrical services to Crown Pacific Development and received P15,000 cash

15 Sent a check to Manila Times for advertising the services offered, P6,000.

. Paid the salary of the staffs. Gross pay, P30,000.

20 Purchased additional electrical equipment for P50,000. Terms: 30 days.

28 Provided another electrical services to Sta. Lucia Land, P10,000 receiving P5,000 and the
balance on October 31.

29 Purchase electrical equipment for cash, P12,000.

30 The proprietor withdrew P5,000 for personal use.

Rendered another electrical services, P10,000. The client issued a P30-day promissory
note for the amount.

31 Collected the amount due from ZMDC Corporation.

Collected the balance from Sta. Lucia Land.

Paid salary of staffs and assistants for the month: Gross Pay P30,000 less: WHT P2,400;
SSS/Med/Philhealth, P1,000. Pagibig P100.

Paid utility bills, P6,500.

Recorded supplies consumed for the month, P1,200.

30
Required:

1. Record the above transactions using the general journal.

2. Post the transactions to T-Accounts, using yellow pad.
3. Prepare a Trial Balance.

References:
1) Fundamentals of Accounting by Gloria A. Rante

31
Unit 2 – Posting to General Ledger

Overview:
After recording the business transactions of the business in a general journal, the
transactions should be posted to General Ledger to see the summary of transactions per account
as a preparation for Trial Balance and Financial Statement. This lesson will highlight the
information needed in posting to general ledger.

Learning Objectives:
After successful completion of this lesson, you should be able to:
1. Understand the concept of posting to general ledger.
2. Demonstrate clear understanding of different attributes of journal entry to .be used in
posting to general ledger.
3. Post journal entries to general ledger.

Course Materials:

Posting is the process of transferring the same information contained in the general journal.

General Ledger is the book where the entries are posted. It is considered as the book of final
entry as it contains complete collection of all accounts of a company. Each account has assigned
account number and the individual accounts are arranged in numerical sequence in the following
order: assets, liabilities, capital, drawing, revenue and expenses. It may be two-column type or
three-column type ledger. The advantage of a three-column ledger is that the balance of the
account is shown after each item has been posted.

32
Procedures in Posting Entries to General Ledger:

1. The date is filled up. Write here the date of the entry being posted.
2. The debits and credits for each entry in the general journal are transferred to the
general ledger in order in which they occur in the general journal.
3. The amount debit entry is entered in the debit column while the credit entry is
entered in the credit column.
4. The post reference in the general journal and general ledger are filled up. In the
general journal, write here the account number assigned to the individual accounts
or the page number assigned to the individual accounts or the page number of the
ledger where the entry was posted. In the general ledger, write here the page
number of the journal where the entry came from.

33
Illustration on how the information of general journal is posted to general ledger:

Activities/Assessments:

Assessment:

Binibini, a CPA, opened its Accounting Firm in July and had the following transactions for the
month.

34
1 Invested P200,000 cash and office equipment with a fair value of P30,000.

2 Secure business permits to operate and paid P5,000.

Paid P10,000 as rental for the office space and another P20,000 as a deposit.

Purchased various office supplies, P5,600 and air condition P16,800 for cash.

3 Hire one office staffs and two assistants in the field.

Purchased office table, filing cabinets, sofa and office chars for P28,000, cash.

4 Billed Kayapa Land for accounting services rendered, P22,400 due on December 15.

5 Provided accounting services to Camilo Homes for P16,800..

. Purchased computer unit P30,000 and printer P10,000. Terms: 30 days.

8 Sent a check to Todays Best for advertising the opening of the office, P6,720.

10 Provided another accounting services to Lucia Eat and Go, P10,000 receiving P5,000 and
the balance on December 15.

12 Rendered another accounting services, P11,200. The client issued promissory a 30-day
promissory note.

14 Purchase office equipment for cash, P12,000.

Collected the balance from Lucia Eat and Go and Kayapa Land.

15 The proprietor withdrew P5,000 for personal use.

Rendered another accounting services. The client was billed for P18,000.

18 The field assistant advanced P5,000 for personal expenses and promised to pay on the
following month.

20 Reimbursed the amount of P2,500 to the proprietor for the cost of lunch entertaining the
client and additional amount of P1,000 for the gasoline consumed during the week.

21 Rendered another accounting services for P15,000.

22 Paid 13th month pay of the staffs, P6,000.

27 Recorded office supplies consumed for the month, P1,200.

Received and recorded the utility consumption for electricity, P4,200.

28 Received cash for the rendered services amounting P19,000.

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 29 Paid the salary of the staffs for the period December 16-30:

Gross Salary P30,000

WHT Payable 6,000
SSS Premium Payable 1,000
Philhealth Payable 250
Pagibig Payable 300
Net Pay 22, 450

Required:

1. Record the above transactions using a general journal. Refer to the Chart of Accounts.
2. Post journal entries to general ledger.
3. Prepare a Trial Balance.

References:
1) Fundamentals of Accounting by Gloria A. Rante

36
Lesson 5: ADJUSTING THE ACCOUNTS

Overview:
Business transactions are recorded at the time they had happened to ensure the
presented financial information are relevant, timely and reliable for the economic decisions that
the users have to do. In this lesson, the accounting period as well as the importance of adjusting
entries are emphasized.

Learning Objectives:
After successful completion of this lesson, you should be able to:
1. Understand the different accounting period that a business may opt to use.
2. Describe the business transactions needing adjustments.
3. Prepare adjusting entries.

Course Materials:

The Accounting Period

The activities of an enterprise can be divided into specific periods such as per month, per quarter,
or per year. The accounting period is usually a span of 12 months. It may be a calendar year or
fiscal year.

1. Calendar year – is the normal year which ends December 31 of each year.
2. Fiscal year – is an accounting year of 12 consecutive months that may or may not
coincide with the calendar year. It starts in any month other than January 1 and
ends in any month other than December 31, i.e. February 1, 2020 – January 31,
2021.

Accrual vs Cash Accounting

Accrual Accounting requires that all revenue whether payment is received or not should be
recognized in the period the goods or services are delivered or rendered and that all related costs
to deliver the goods or to render the services whether paid or not should be recognized as
expense to match the revenue. This method of accounting provides a measure of the company’s
overall profitability of its activities.

Cash-basis accounting is in contrast to accrual accounting. Under this method, a revenue is

recorded when a cash is received and records expenses when cash is paid. All prepayments are
recorded as expenses while all advance payments from customers are recorded as revenue. For
services rendered on account, no revenue is recognized until collection is made.

37
The Revenue and the Matching Principle

The Revenue Principle dictates when to recognize revenue and what amount of revenue should
be recognized. In most cases, revenue is earned when the enterprise has delivered the goods or
the services. Examples of revenue are sales, professional fees earned, interests, dividends,
royalties, rent and gains arising from disposal of non-current assets.

The Matching Principle is when the enterprise must identify and recognize all expenses incurred
during the accounting period and match these expenses against the revenues earned during the
period to arrive at the net income.

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. Other transactions like prepayments of expenses may result to over statement of
expenses if the unused portion is not adjusted. Adjusting entries, therefore, bring the assets,
liabilities, revenue and expenses to their correct balances.

Adjusting Items

1. Prepaid Expenses – these are expenditures paid for goods that are not yet consumed like
supplies and insurance. At the end of an accounting period, it is necessary to determine
the unused portion of supplies or insurance so that the correct amount of used portion will
be reported as expense

Methods of Recording Prepayments

Asset Method. This method of recording prepayments requires an entry debiting an asset
and crediting cash upon disbursement.

Example 1: Purchase of supplies worth P5,000 is recorded as:

Supplies 5,000

Cash 5,000

At the end of the period, physical count of unused supplies showed a total of P3,500. This
shows that if P3,500 is unused, then P1,500 worth of supplies is used or consumed. There
is a need to make an adjusting entry to report the expense portion of the supplies.

Supplies Expense 1,500

Supplies 1,500

After the adjusting entry is made, the Supplies account with a balance of P3,500 is
reported as asset in the balance sheet while the Supplies Expense account with a balance
of P1,500 is reported in the income statement as Expense.

38
 Expense Method. This method of recording prepayments requires an entry debiting an
expense account upon payment. In the previous example, the supplies purchased were
recorded, the entry would be:

Supplies Expense 5,000

Cash 5000

The adjusting entry required to reflect the unused portion would be:

Supplies 3,500

Supplies Expense 3,500

2. Accrued Expenses – are items already recorded as expenses but not yet paid, thus
creating an obligation to make payments in the future. The most common examples are
salaries of employees and utilities expenses like bills from MERALCO,
Telecommunications (i.e. Globe/Smart/PLDT), and Manila Water for power, internet and
water consumption. The pro-forma entry to recognize accrued expense is
Expense 000
Accounts Payable/Accrued Expenses 000

3. Accrued Interest on Notes Payable – this arises when the company has an existing Notes
Payable to other entities which bears an interest. For example, a company issued a 90-
day 10% note on December 1, 2019 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
December 31, 2019, then the company must record the interest expense from December
1-31 as:
Interest Expense 833.33
Accrued Interest Payable/Interest Payable 833.33
(P100,000 x 10% x 1/12)

4. Accrued Revenue – are revenues already earned but no payment is received yet. Example
of accrued revenue is the interest earned from deposits in bank, but no record in the books
yet until a notice is received from the bank that the amount is already credited to the
company’s account. The pro-forma entry to record accrued interest is:
Interest Receivable 000
Interest Revenue 000

5. Deferred Revenue or Unearned Revenue – is the exact opposite of accrued revenue. In

this case, the payment is already 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.

Methods of Recording Prepayments

Revenue Method. This approach recognizes revenue upon receipt of payment from
customers. For example, on August 1, 2020, a tenant paid its for one year in advance in
the amount of P24,000. At the time cash is received, the entry is:
Cash 24,000
Rent Revenue 24,000

39
 When financial statement is prepared on December 31, 2020, an adjustment is necessary
to reflect the unearned potion of the rent corresponds to the period January 1, 2021-July
31, 2021. 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

6. Uncollectible Account Expense or Doubtful Accounts – are accounts of customers who do

not pay what they have promised to pay. The enterprise should provide allowance for
uncollectible accounts and recognize an expense or loss from these accounts. Other
terms for uncollectible accounts are Bad Debts and Doubtful accounts. Method in
establishing allowance for uncollectible accounts is Percentage of Receivable Method
which is based on the company’s past experience multiply by the outstanding balance of
the accounts receivable to determine the required balance of the allowance. This method
of providing allowance for uncollectible accounts closely relates the expense to be
recognized on the balances of the accounts receivable and the allowance account.

7. Depreciation – is the systematic means of allocating the costs of long lived asset over its
estimated economic life. It shows the portion 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. One of the most common method in establishing a depreciation is straight-line
method:
Depreciation Expense = Cost of Asset – Scrap Value
Estimated Economic life

Steps in the preparation Partial Worksheet

1. Prepare the first two-money columns for unadjusted trial balance. Label it as
Unadjusted Trial Balance (Debit, Credit). These are the balances of the accounts
before preparing the adjusting entries.
2. Analyze and journalize the data for adjustment and transfer the adjusting entries
to the 2nd pair of money columns labeled as Adjustments (debit, credit).
3. Compute for the adjusted balance by combining the unadjusted trial balance and
adjustments. Enter the adjusted balance in 3rd pair of money columns labeled as
Adjusted Trial Balance (debit, credit).

40
Activities/Assessments:

Assessment:

DBS Accounting Firm, started operation on April 1, 2019 and it provides accounting and tax
services to Small Medium Enterprises in Cavite. Its accounting period ends December 31, 2019
and on this date, adjusting entries are prepared. The trial balance of DBS Accounting Firm at
December 31, 2019 follows:

Additional Information:

1. An inventory of office supplies on December 31, 2013 showed supplies on hand totaled
P38,000.
2. The office equipment is estimated to have a 5yr useful life with salvage value of P40,000
starting from April 1, 2019.
3. The furniture and fixtures is estimated to last for 10 years with no salvage value.
4. The estimated useful life of building is 20 years with salvage value of P100,000.
5. The professional fees include P40,000 advance payments for client for services still be
rendered in the 1st quarter of 2020.
6. Utility bills received in the last week of December amounting to P5,000 is scheduled for
payment on the 1st week of January, 2020.

41
 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

1. Adjusting entries
2. Partial worksheet to reflect the adjusted Trial Balance

References:
1) Fundamentals of Accounting by Gloria A. Rante

42
Lesson 6: COMPLETION OF THE ACCOUNTING CYCLE

Unit 1 – Preparation of Worksheet

Overview:
After having discussed the partial worksheet in the previous lesson, the preparation of
balance sheet and income statement will now be discussed in this lesson to complete the
worksheet and prepare a Financial Statement.

Learning Objectives:
After successful completion of this lesson, you should be able to:
1. Recall and apply the full step of accounting process.
2. Prepare balance sheet, income statement and statement of changes in capital.
3. Determine the operational performance of the company by knowing its net income or net
loss for the given period.

Course Materials:
Steps in the Preparation of Worksheet

1. Prepare the first two-money columns for unadjusted trial balance. Label it as
Unadjusted Trial Balance (Debit, Credit). These are the balances of the accounts
before preparing the adjusting entries.
2. Analyze and journalize the data for adjustment and transfer the adjusting entries
to the 2nd pair of money columns labeled as Adjustments (debit, credit).
3. Compute for the adjusted balance by combining the unadjusted trial balance and
adjustments. Enter the adjusted balance in 3rd pair of money columns labeled as
Adjusted Trial Balance (debit, credit).
4. Extend the asset, liability and owner’s equity amounts from the Adjusted Trial
Balance to the Balance Sheet Columns. Total the columns. At this point, the total
debits are not equal to the total credits.
5. Extend the revenue and expense amounts to the Income Statement columns. Total
the Income Statement columns. Compute for the net income or net loss by
subtracting from Revenues (total credits) the total Expenses (total debits). If the
total credits are greater than the total debits, the result is net income.
6. Enter the net income or net loss as a balancing figure on the income statement
and the balance sheet.

43
For illustrative problem, go to page 275-289.

Activities/Assessments:

Assessment:

BTTS Studio Inc. provides quality training and workshop to aspiring artists twice a year. The first
session is from February-May and the next session is from August-November. Adjustments and
financial statements are prepared every after session. Below is the unadjusted trial balance of
BTTS as of June 30, 2020.

Additional Information:

a. Studio supplies on hand at June 30, P12,000.

b. Studio equipment is being depreciated over 10 years’ life with no residual value.
c. On March 1, 2019 BTTS borrowed P440,000 from a bank signing a one year, 10% note.
d. 30% of unearned client fee is confirmed to be earned as of June 30.
e. Client fees earned but not yet recorded amounts to P25,000.

Required: Prepare the following

1. Adjusting entries
2. 10-column worksheet

References:
1) Fundamentals of Accounting by Gloria A. Rante

44
Unit 2 – Closing Entries

Overview:
After one accounting period, the ending account balances of the business becomes its
beginning balances for the next accounting period. Hence, balance sheet should reflect the
updated balances at the beginning of the year and income statement should revert back to zero
as its beginning balances. To understand how this works, this lesson will dig more about the
closing entries.

Learning Objectives:
After successful completion of this lesson, you should be able to:
1. Understand the concept of nominal and real accounts.
2. Prepare closing entries.
3. Understand the concept of reversing entries.

Course Materials:

Closing Entries

Closing entries are usually prepared at the end of an accounting period like adjusting entries. Only
nominal accounts or temporary accounts and drawing account are closed at the end of an
accounting period. Nominal accounts are the accounts appearing in the income statement like
revenue and expense accounts.

Steps in Closing the books:

1. Debit each revenue account for the amount of its credit balance then credit Income
Summary or Profit and Loss Summary Account for the total.
Service Revenue 000
Income Summary/P&L Summary 000

2. Credit each expense account for the amount of its debit balance and debit Income
Summary or Profit and Loss Summary for the total:
Income Summary/P&L Summary 000
Salaries Expense 000
Utilities Expense 000
Supplies Expense 000

3. Close the Income Summary to Capital Account. The Income Summary account
summarizes the revenues and expenses for the periods. It signifies income when
the credit balance is greater than the debit balance.
Net Income:
Income Summary 000
Capital 000

Net Loss:
Capital 000
Income Summary 000

45
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 to check the equality of the accounting equation before the balances of
assets; liabilities and capital are forwarded to the next accounting period. This is the end of
accounting cycle. Please see page 294 for the illustration of Post-Closing Trial Balance.

Reversing Entries

Reversing entries are prepared at the beginning of the next accounting period. The objective of
these entries is to reverse the adjusting entry made on accruals of revenue and expenses. The
following is a summary of guidelines for reversing entries:

1. Reverse adjusting entries made on accrual of revenue and expenses.

2. Prepayments, if the initial entry to record the transactions is debited to an expense
account (expense method).
3. Advance payments made by customers, if the initial entry to record the transaction
is credited to revenue account (revenue method).
4. Provision for uncollectible accounts and depreciation are not reversed.

Activities/Assessments:

Assessment: Prepare Closing Entries

Pepito Manasweepstakes started its tutoring services with a capital of P100,000. At the end of its
1st year of operation, the adjusted account balances include the following nominal accounts with
normal balances.

Tutoring Services Earned P450,000

Salaries & Other benefits 190,000
Office Supplies 25,000
Depreciation Expense – Library Collection 3,000
Rent Expense 60,000
Traveling Expenses 15,000
Utilities Expense 48,000

References:
1) Fundamentals of Accounting by Gloria A. Rante

46