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CHAPTER 1

BASIC PRINCIPLES IN
ACCOUNTING

1
ACCOUNTING DEFINED
- A service activity. Its function is to provide quantitative information, primarily
financial in nature, about economic entities, that is intended to be useful in making
economic decisions. (Accounting Standards Council)
- the art of recording, classifying and summarizing in a significant manner and in terms
of money, transactions and events which are in part at least of a financial in character
and interpreting the results thereof. (Committee on Accounting Terminology of the
American Institute of CPA)
- The process of identifying, measuring, and communicating economic information to
permit informed judgement and decision by users of information
Keywords in the accounting definition:
1. About quantitative information;
2. Information are primarily financial in nature;
3. And, useful in making decisions
OBJECTIVE OF ACCOUNTING
To provide quantitative financial information about a business that is useful to users, whether
internal or external, in making decision.
USERS OF ACCOUNTING INFORMATION
INTERNAL USERS
These are people who are inside the business organization. Usually, people of the top level
management, employees and owners.
EXTERNAL USERS
People who do not have any direct control over the business organization. These are suppliers,
banks, creditors, investors including potential investors, government agencies and the public.
PHASES OF ACCOUNTING PROCESS
A. IDENTIFYING AND ANALYZING
In these phase, we tried to identify and analyse whether the transaction is accountable or not.
A transaction is considered accountable if it will affect the elements of accounting.
B. RECORDING AND CLASSIFYING
The phase in which the practitioner of accounting classify in which the transaction shall be
recorded. Moreover, the phase where the practitioner formally record that transaction.

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C. MEASURING
We try to measure the transaction. The unit of measure is Philippine peso.
D. SUMMARIZING
The process in which accountant try to summarize the day-to-day transactions in just one
report.
E. COMMUNICATING AND INTERPRETING
The process of discussing the summarize report of all accountable transaction in to the users
of accounting information.
TYPES OF BUSINESS ORGANIZATION
I. SOLE PROPRIETORSHIP
A type of business organization, in which only one person is the owner as well as operator of
the business is known as Sole Proprietorship.

II. PARTNERSHIP
A business form in which two or more persons agree to carry on business and share profits &
losses mutually is known as Partnership.
III. CORPORATION
A company is an association of persons who invests money towards a common stock, for
carrying on a business and shares the profits through dividends.
KINDS OF BUSINESS OPERATIONS
Service-Concern
A business organization that provides services to its consumers. Some of the examples of these is
providing accounting and auditing skills to clients
Merchandising
These is also known as a ‘buy-and sell’ business. The organization bought goods from other
business organization and sells those with mark-up.
Manufacturing
An organization that produce or manufacture goods and sell it for profits. In other words, these
organization shift the raw materials into a new consumable product.
UNDERLYING ASSUMPTIONS OF ACCOUNTING
The underlying assumptions of accounting are the basic notions or fundamental premises on
which the accounting process. These is also termed or knows as postulates.

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The underlying assumptions are:
1. Going concern
Accounting assumed that accounting entity will continue to exist or business
organization may operate indefinitely, unless, evidence of non-continuity is
present.
2. Accounting entity
These refers to the business organization, which may be a proprietorship,
partnership and corporation. Under this assumption, business organization is
separated from its owners or whoever constitute the organization.
3. Time period
The indefinite life of the entity is divided into time period like annually, semi-
annually, quarterly or monthly. In the business world, reporting period may be
fiscal or calendar.
4. Monetary unit
The monetary unit assumptions refers to the quantifiability of the assets,
liabilities, equity, income and expenses. An element is considered quantifiable if
it can be measure in Philippine peso. Another factor about these assumption is the
stability of the peso. These factor assume that peso is always stable.

ACCOUNTING METHOD
CASH BASIS OF ACCOUNTING
The rule in cash basis of accounting is that, income is being recognized if cash has already
received and expenses ire recognized if it was been paid. These type of accounting method is not
acceptable for the purpose accounting reporting.
ACCRUAL BASIS OF ACCOUNTING
The rule in accrual basis of accounting is that, income is being recognized when earned
regardless if cash is received or not. And, expenses are recognized when it is incurred regardless
if it paid or not. These is the acceptable method of accounting.
BOOKKEEPING VERSUS ACCOUNTING
Bookkeeping is the process or an activity of recording the day-to-day transaction of business
organization while accounting is the process of recording, measuring and communicating the
accountable transaction in which helpful in making economic decisions.

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Illustrative Exercise
EXERCISE NO. 1
TRUE OR FALSE
DIRECTION: Write “true” if the statement is correct otherwise “false” if the statement is
incorrect.
_______________1. Accounting is considered the language of business organization.
_______________2. Accounting is used in business only.
_______________3. The unit of measure used by the entity may depend on the currency
acceptable by the country were the entity is operating.
_______________4. Accounting assumes that a business may continue to exist in spite of the
clear manifestation of bankruptcy.
_______________5. Cash basis of accounting is the method accepted by the Generally Accepted
Accounting Principle (GAAP).
_______________6. In accrual basis of accounting, we recognized revenue if services were
rendered or goods were already transferred to the buyer, regardless if cash is received or not.
_______________7. The accounting entity is the business organization itself.
_______________8. Bookkeeping is part of accounting.
_______________9. Accounting is part of bookkeeping.
_______________10. Usually, reporting of accounting information is divided into different
period.
_______________11. Professional such as lawyers, doctors and engineers needs accounting
information.
_______________12. The government does not need accounting information.
_______________13. A partnership is composed of a minimum of two owners but with no
maximum.
_______________14. The only phase used in bookkeeping is the identifying and recording
phase.
_______________15. In accounting, expense are recognized if cash payment were already made.

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EXERCISE 2
MULTIPLE CHOICE
DIRECTION: Read each item carefully and choose the best answer among the choices provided.
Encircle your answer.
1. It is the process of recording transactions, primarily financial in nature, and summarizing
those transactions and then communicated to users for decision making.
A. Bookkeeping C. Auditing
B. Accounting D. Consulting
2. It is the acceptable accounting method according to Generally Accepted Accounting
Principles.
A. Accrual Basis of Accounting C. Cash Basis of Accounting
B. Both A and B D. Neither A nor B
3. It is the underlying assumption of accounting that tells us that accounting information
reporting shall be divided into equal periods.
A. Going concern C. Time Period
B. Accounting Entity D. Monetary Unit
4. Official receipts from services rendered or sale of merchandise is used at what particular
phase of accounting?
A. Analysing C. Recording
B. Identifying D. Summarizing
5. These user of accounting information is primarily concern with the performance of the
business organization.
A. Supplier C. Employees
B. Owner D. Government
6. The user of accounting information that is primarily concern with the capacity of the
company to pay its obligations when it is due.
A. Creditors C. Employees
B. Owner D. Supplier
7. The underlying assumption of accounting that entity has an indefinite life.
A. Time period C. Going concern
B. Monetary Unit D. Accounting entity
8. Which of the users is not considered internal user?
A. Shareholder C. Manager
B. Employee D. Public
9. It is an organization in which main operation is buying of goods at cost and selling those
goods with a mark-up.
A. Manufacturing C. Service Concern

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B. Merchandising D. Cooperatives
10. It is the shortest accounting period wherein financial statements are reported to various
users:
A. Semi-annually C. Quarterly
B. Annually D. Monthly
11. Primarily, business is established for
A. Profit C. Free
B. Service D. All of these
12. Which of the following assumptions that requires distinction between business
transaction and personal affairs of the owners
A. Accounting entity C. Time period
B. Continuity D. Going Concern
13. The business that derives its income from services rendered to clients or customers
A. Service concern C. Manufacturing
B. Merchandising D. Trading
14. The biggest and most complicated form of business organization. It is organized by at
least five but not more than fifteen persons called “incorporators”
A. Proprietorship C. Partnership
B. Corporation D. Cooperation
15. The accounting period will begin on the first day of any month of the year except for
January and ends on the last day of the month completing the one year period
A. Calendar C. Nature of business year
B. Fiscal D. None of the above

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CHAPTER 2
THE ACCOUNTING CYCLE:
IDENTIFYING AND
JOURNALIZING

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THE ACCOUNTING PROCESS
The accounting process is a series of activities that begins with a transaction and ends with the closing of
the books. Because this process is repeated each accounting and/or reporting period, it is referred to as the
accounting cycle.

IDENTIFYING
and
2
ANALYZING
10 TRANSACTION JOURNALIZING

REVERSING
ENTRIES

POSTING
9

POST CLOSING
TRIAL BALANCE

The Accounting Cycle


4

UNADJUSTED
TRIAL BALANCE
8
PREPARATION
CLOSING
ENTRIES

7 ADJUSTING
ENTRY
FINANCIAL PREPARATION
6
STATEMENTS
PREPARATION WORKSHEET
PREPARATION

(OPTIONAL)

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IDENTIFYING AND ANALYZING
The step in which we try to identify whether the transaction is accountable or not. A
transaction is considered accountable if any of the elements of accounting is being
affected. The five essential elements of accounting are assets, liabilities, equity (capital),
income and expenses.
a. Assets
– are controlled resources by the entity. An inflow of future economic benefits is
expected from those resources.
- are recognized if it is probable that future economic benefits will flow in the
entity and can be measured reliably.
b. Liabilities
- are obligations of the entity and it is expected that future outflow of resources
is expected to extinguish such obligation.
- are recognized if is probable that there is future outflow of resources in order
to extinguish obligations and such outflow can be measured reliably.
c. Equity
- is the investment of owners to the organization coming from its own personal
resources.
- it is the difference between total assets and total liabilities.
- the residual value or amount after paying all liabilities of the company
d. Income
- are inflows or other enhancements, or savings in cash flow, of future
economic benefits in the form of increases in assets or reductions in liabilities
of the entity, other than those relating to contributions by owners, that result in
increase in equity during the reporting period.
- a revenue should be recognized in the operating (performance) when it is
probable that the inflow or other enhancement or savings in outflows of future
economic benefit has occurred and can be measured reliably.
e. Expenses
- are consumptions or losses of future economic benefits in the form of
reductions in assets or increase in liabilities, other than those relating to
distributions to owners that result in decrease in equity.

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- an expense is recognized when it is probable that consumption or loss of
economic benefits resulting in reduction in assets and or liabilities has
occurred and can be measured reliably.
JOURNALIZING
Journalizing is the process of recording a business transaction in the accounting process.
This activity only applies to the double-entry system.
The double entry system is a fundamental concept underlying in bookkeeping and
accounting. This systems requires that every financial transaction has equal and opposite
effect in at least two different accounts. The said system shall satisfy the accounting
equation.
The accounting equation:

ASSETS = LIABILITIES + EQUITY

Note: Income and Expenses are included as part of equity.


In journalizing the accounting transaction, elements shall be recorded in accordance with
the following:

To Increase / An Inflow To decrease /An outflow


of of
ASSETS DEBIT CREDIT

LIABILITIES CREDIT DEBIT

CAPITAL ACCOUNT CREDIT DEBIT

INCOME CREDIT DEBIT

EXPENSES DEBIT CREDIT

OTHER ACCOUNT TITLES

DRAWING ACCOUNT DEBIT CREDIT


CONTRA-ASSETS
CREDIT DEBIT
ACCOUNTS

Example:
A. August 5, 2018: Purchase of supplies on account, P10,000

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Analysis:
Supplies is an asset and there is an inflow of asset in the business.
It was purchased on account, therefore there is an increase on your liability.
The Debit
To journalize:
The Credit
Supplies P10,000
Accounts Payable P10,000
To record the purchase of supplies on account.

B. August 7: Rendered services for cash, P25,000


Analysis:
The proprietor receive cash from the rendering a services.
The proprietorship has additional service income.

The journal entry:

Cash P25,000
Service Income P25,000
Received cash from rendering service.

The journal entries of two transactions in a journal sheet are shown below:

DATE
2018 PARTICULARS F DEBIT CREDIT

Aug. 5 Supplies 10,000


Accounts Payable 10,000
To record the purchase of supplies on account.

7 Cash 25,000
Service Income 25,000
Received cash from rendering service.

ILLUSTRATIVE EXERCISES:
PROBLEM 1
Identify what element or elements are being affected in the transaction and write the specific account title
to use.

TRANSACTIONS VALUE ACCOUNT VALUE ACCOUNT


RECEIVED? TITLE PARTED TITLE
(SPECIFIC) WITH? (SPECIFIC)
1. Purchase equipment for

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cash.
2. Rendered services on
account
3. Paid the outstanding
accounts payable.
4. Purchases office supplies
on account.
5. Invested cash in the
business.
6. Withdraw cash in the
business.
7. The entity paid its
employee’s salaries
8. 20% of the supplied were
already used.
9. Services rendered for cash.
10. Applied and approved a
loan from the bank.
11. Incurred salaries but not yet
paid.
12. Paid advertising in
advance.
13. The management
conducted a meeting.
14. Paid taxes payable of the
previous period
15. Received cash from
costumer but services are
not yet rendered.

PROBLEM 2
Using the accounting equation, determine in what element it should be classified and determine whether it
is an addition or deduction to the element:
1. Invested cash and supplies in the entity, cash – P40,000 and supplies P60,000.
2. Rendered services for cash, P180,000.
3. Incurred office supplies, P25,000
4. A note was issued to ABC Bank, P55,000.
5. Acquired computer equipment, P35,000.
6. Withdraw in the entity for personal use, P15,000.
7. Paid salaries, P12,500.
8. Rendered services on account, P15,000.
9. Paid electric, water and telephone bills, P1,450.
10. Paid P10,000 in advance for advertising the entity.

NO. ASSETS = LIABILITIES + EQUITY

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1.

2.

3.

4.

5.

6.

7.

8.

9.

10.

Additional Requirement:
From the analysis made above, prepare the journal entry for each transaction assuming item one is June 1,
2018 and the next it is June 2, and so on…. Use the journal sheet below:

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PROBLEM 3
Juan de la Cruz, CPA formed a service-concern entity. The following were the transaction occurred
during the 2018 operations:

January 1 Juan invested P500,000 cash in his newly formed entity.


January 3 Paid for the registration of the business at the city hall, P15,000.

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January 4 Purchased supplies P12,350 for the opening ceremony of the business entity.
January 6 Acquired computer equipment and furniture and fixture for P22,750 and P54,350,
respectively, in an on account basis.
January 8 Hired new employees in the entity.
January 10 Issued a note for a bank loan amounting to P150,000.
January 14 Rendered accounting services to clients, P45,000.
January 15 Paid salaries for P13,500.
January 18 Paid advertising in advance for P13,000.
January 19 Pay electricity, water and telephone bills, P16,450.
January 21 25% of the accounts payable related to the acquisition of fixed assets were paid.
January 23 20% of the supplies were already used by the entity.
January 25 Rendered services on account, P60,000.
January 28 Juan withdrew from the entity for his personal use, P12,000.
January 29 45% of the services rendered last January 25 were collected.
January 31 Paid salaries for P13,500.

Required: Prepare the journal entries of Juan de la Cruz, CPA Accounting Firm for the month of
January 2018.

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PROBLEM 4
On June 1, 2019, Christine Charity Resultay, Optometrist, established the Resultay Eye Clinic.
Transactions completed during the month are as follows:
a. Resultay deposited P200,000 in a bank account in the name of the business.
b. Paid office rent for the month, P8,400.
c. Bought office supplies for cash, P7,750.
d. Bough office equipment on account from Dagupan Equipment, P91,800.
e. Bought a computer from a Del Rosario Office Outfitters, P18,400, paying P6,000 in cash and the
balance on account.
f. Performed professional services for cash, P24,210.
g. Paid accounts to Del Rosario Office Outfitters, P9,000
h. Received and paid the bill for utilities, P2,430
i. Paid salaries of the part-time assistants, P9,900
j. Performed professional services for cash, P25,150
k. Resultay withdrew cash for personal use, P12,500.

Required:
A. Prepare the necessary journal entries for the month.

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EXERCISE 1

TRUE OR FALSE
DIRECTION: Write “true” if the statement is correct otherwise “false” if the statement is
incorrect.
_________________1. Capital represents residual interest in the assets of the business after
deducting all liabilities as expressed in the equation “Assets = Liabilities + Capital”.
_________________2. If an additional investment made by the owner, a debit to capital account
is needed.
_________________3. The first step in accounting process is the analysing business
transactions.
_________________4. The entry system used in journalizing is called “double-entry system”.
_________________5. The normal balance of an asset account is debit.
_________________6. An “accumulated depreciation account” is a contra-asset account and
therefore its normal balance is credit.
_________________7. A cash account could have a credit balance.
_________________8. An accounts receivable accounts pertains to the services rendered or
goods sold on account.
_________________9. Withdrawal of the owner shall be reflected in a drawing account.
_________________10. If assets increases and liabilities remain unchanged, capital account
increases.
_________________11. Collection of accounts receivable will not affect the liabilities and
capital element of the accounting equation.
________________12. Issuance of a bank loan may increase the assets.
________________13. Withdrawal of an owner from the entity may increases the capital
account.
________________14. Reclassification of the liability into an equity account, may unchanged
the balance of the accounting equation.
________________15. Expenses may decrease capital account while income may increase
capital account.

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EXERCISE 2

MULTIPLE CHOICE
DIRECTION: Read each item carefully and choose the best answer among the choices provided.
Encircle your answer.
1. It represents the residual interest in the assets of the business after deducting its liabilities
A. Capital C. Owner’s Equity
B. Net Worth D. All of the above
2. It denotes the financial obligation of the business to its creditors
A. Liabilities C. Assets
B. Owner’s Equity D. Expenses
3. What represents the claim of the creditor over the assets of the business
A. Liability C. Assets
B. Income D. Equity
4. The accounting equation is
A. Liabilities = Assets + Capital
B. Assets = Liabilities – Capital
C. Capital = Assets – Liabilities
D. Assets + Liabilities = Capital
5. At the beginning of the year, the total assets of the entity is P50,000 and owner’s equity is
P15,000. During the year, P5,000 of liability was paid. What is the total assets at the end
of the year?
A. P30,000 C. P55,000
B. P45,000 D. P20,000
6. Payment of rental fee incurred for the month, P50,000. Which of the following would be
your journal entry?
A. Cash 50,000
Rental expense 50,000
B. Rent payable 50,000
Cash 50,000
C. Cash 25,000
Rent expense 25,000
Rental Liability 50,000

D. No journal entry.

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7. Bridgette withdrew from her entity for P50,000 cash. During that day, the balances of
their total assets and liabilities are P175,000 and P50,000, respectively. What would be
the balance of the capital after the withdrawal?
A. P225,000 C.P200,000
B. P100,000 D. P 75,000
8. During the day, the management conducted a meeting. Thus, the aforementioned
transaction accountable?
A. Yes, because it affects the accounting elements.
B. Yes, because the management is conducting a meeting.
C. No, because no elements of accounting is being affected.
D. No, because the management decided not to record such transaction.
9. Payment of gasoline will
A. Increase liability and increase asset
B. Decrease capital and increase asset
C. Decrease asset and increase capital
D. Increase expense and decrease asset
10. Purchase of computer on account will result to
A. An increase on capital
B. A decrease on capital
C. An increase on asset
D. No effect to any of the accounting element.
11. Una invested cash, P75,000 and computer equipment of P30,000. The journal entry
would be
A. Cash 75,000
Una, Capital 30,000
Computer Equipment 105,000
B. Cash 75,000
Computer Equipment 30,000
Accounts Payable 105,000
C. Una, Capital 105,000
Cash 75,000
Computer Equipment 30,000
D. Cash 75,000
Computer Equipment 30,000
Una, Capital 105,000
12. At what point shall we record income?
A. If services were rendered already.
B. If cash is received from the customer.
C. If billing statement is released.
D. Upon meeting of minds.
13. Prepaid expenses are
A. Liabilities C. Assets
B. Expense D. Capital

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14. In accounting equation, if liability is P50,000 which is equal to 66 2/3% of the total assets
of Hero Enterprise, how much amount would represent owner’s equity?
A. P10,000 C. P25,000
B. P50,000 D. P75,000
15. In accounting equation, if equity is 33 1/3 % of the total assets, how much amount would
represent the claims of various creditors?
A. P 75,000 C. P100,000
B. P125,000 D. P150,000

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CHAPTER 3
THE ACCOUNTING CYCLE:
POSTING AND PREPARATION OF
TRIAL BALANCE

22
STEP 3: POSTING

Posting is the process of transferring the journal entries to the book of final entry or known as ledger.
These process is the third step in the accounting cycle.

The following steps are followed in posting process:


1. Determine whether the account title was debited or credited. Note: Each account title shall have
its own ledger or T-account.
2. Once determined if it was debited or credited, the amount debited shall be posted or copied at the
left side of the “T-account” otherwise right side if credited.
3. Add all amount being posted in the both sides.
4. Differentiate the debit total amount to credit total amount.
The following are the normal balances of each element:
Assets - Debit balance
Liabilities - Credit balance
Capital - Credit balance
Income - Credit balance
Expenses - Debit balance
Drawing - Debit balance
Contra assets - Credit balance

The T-Account is the skeleton form of a ledger. It is called as “T” because it resembles to a letter “T”.

Example

The following journal entries were made:

1/1 Cash 100,000


Mercy, Capital 100,000
Invested cash in the business.

1/5 Unused Supplies 7,500


Accounts Payable 7,500
Purchased supplies on account.

1/8 Equipment 23,000


Cash 23,000

23
Purchase office equipment.

1/10 Utilities Expense 12,000


Cash 12,000
Paid utilities expense for the month.

1/11 Mercy, Drawing 2,500


Cash 2,500

1/13 Cash 45,000


Service Income 45,000
Rendered services

1/14 Accounts Receivable 16,000


Service Income 16,000
Rendered services on account.

1/15 Salaries Expense 8,500


Cash 8,500
Paid salaries of employees.

The posting process steps:

Step 1 - All debited amounts of the account title shall be copied to the debit side of the t-account and
same way with the credited amount of the account.
Step 2 – Add all amounts in the debit side and credit side.
Step 3 – Determine the difference of the debit side and the credit side.

Illustration:
Below is an illustration on a general ledger:
Cash

Date Particulars F Debit Date Particulars F Credits


Jan 1 Investment JE-1 100,000 Jan 18 Purchases JE-1 23,000

13 JE-1 45,000 10 JE-1 12,000

11 JE -1 2,500

15 JE-1 8,500

145,000 46,000

Unadjusted 99,000

24
Balance

Accounts Receivable

Date Particulars F Debit Date Particulars F Credits


Jan 14 JE-1 16,000

16,000
Unadjusted 16,000
Balance

For other account titles, it is illustrated in a “T-account” below:


Mercy, Capital Unused Supplies
1/1 100,000 1/5 7,500

100,000 7,500

Equipment Utilities Expense


1/8 23,000 1/10 12,000
23,000 12,000

Mercy, Drawing Service Income


1/11 2,500 1/13 45,000
1/14 16,000
2,500
61,000

25
Accounts Payable Salaries Expense

1/5 7,500 1/15 8,500

7,500 8,500

STEP 4: PREPARATION OF THE UNADJUSTED TRIAL BALANCE

After the posting process, all unadjusted balances from each T-accounts shall be transferred to a
summarize report named “Trial Balance”. The trial balance objective is to determine that total debits and
total credits are equal. However, having an equal balance does not mean accurate and correct.

Below is an illustration of an Unadjusted Trial Balance:

Mercy Services Sole Proprietorship


Unadjusted Trial Balance
January 15, 2018

ACCT.NO ACCOUNT TITLES DEBIT CREDIT

1001 Cash 99,000

1002 Accounts Receivable 16,000

1003 Unused Supplies 7,500

1004 Equipment 23,000

2001 Accounts Payable 7,500

3001 Mercy, Capital 100,000

3002 Mercy, Drawing 2,500

4001 Service Income 61,000

5001 Salaries Expense 8,500

5002 Utilities Expense 12,000

Total 168,500 168,500

Illustrative Exercises

Problem 1

26
Elizabeth Tan, a graphic artist, opened a studio for her professional practice on August 1, 2018.
Transaction completed during the month follow:

1 Tan deposited P155,000 in a bank account in the name of the business.


2 Bought office equipment on account from Mandaluyong Equipment Company, P41,200.
3 Tan invested personal photographic equipment, P62,600
5 Paid rent for the month, P5,000
7 Bought office supplies for cash, P3,450.
9 Acquired insurance for two years, P8,200
12 Received a note P29,850 for graphic services rendered.
15 Paid salaries of the part-time assistants, P5,000.
17 Received and paid the bill for telephone service, P730.
19 Paid cash for minor repairs to graphic equipment, P860
23 Performed graphic services on account, P29,360.
25 Issued a note for the acquisition of office supplies, P7,900.
27 Paid accounts to Mandaluyong Equipment Company, P5,200
30 Elizabeth Tan withdrew cash for personal use, P10,000

Below are the chart of accounts of the entity. Use these accounts for preparation of necessary entries and
other accounting documents.

Assets Capital
Cash in bank Elizabeth Tan, Capital
Accounts receivable Elizabeth Tan, Drawing
Notes Receivable
Office Supplies Income
Prepaid Insurance Service Income
Office Equipment
Photographic Equipment Expenses
Salaries Expense
Liabilities Rent Expense
Accounts Payable Telephone Expense
Notes Payable Repair and Maintenance

Required:
A. Prepare necessary journal entries.

27
B. Prepare the different “T-accounts” of each account title and post all journal entries to
each “T-account”.

C. Prepare the unadjusted trial balance as of August 31, 2018.

28
Problem 2

Presented below is the balances of Gerbyn Yanuario Nursing Home as of January 1, 2017:

Debit Credit
Cash 16,000
Accounts Receivable 165,000
Supplies 21,000
Land 90,000
Nursing Building 350,000
Nursing Equipment 160,000
Notes Payable 350,000
Accounts Payable 47,000
Medina, Capital 405,000

During the month of January, the following transactions took place:

2 Acquired supplies on account, P17,500


6 Collected P82,000 from patients for services provided in 2016
10 Acquired nursing equipment on account, P35,000
11 Billed patients P167,000 for nursing fees
12 Paid P31,000 on accounts payable
17 Paid nursing salaries, P24,000
20 Paid utilities expense, P9,000
25 Medina withdrew P10,000 from the business
27 Received a bill from the Ryan Morales Ad Company for P12,500 for advertising expense
incurred during the month.
31 Paid P15,000 of the notes payable.

Required:
A. Prepare necessary journal entries.

29
B. Prepare the different “T-accounts” of each account title and post all journal entries to
each “T-account”.

C. Prepare the unadjusted trial balance as of January 31, 2017.

30
PROBLEM 3
N. Maraya established a proprietorship, The Professional Shoppers. The business charges a fee based on
amount of research done to support a cost-effective purchase decision and the actual shopping time
required. Maraya with the help of her “professional shoppers” will shop for almost anything from
corporate giveaways, computers to office and home furnishing.
Business is particularly heavy around and Christmas and in early summer. The business operates from a
rented office condominium unit. The shoppers receive a commission based on the revenues they produce
and a transportation allowance for the use of their personal vehicles for shopping trips. The following
transactions are for December 2019:
a. Maraya invested P300,000 in the business.
b. Acquired office equipment for P100,000. Miranda paid P20,000 in cash and promised to pay the
balance equally every end of the month.
c. Paid rent for December, P5,000
d. Provided shopping services for corporate accounts, P52,000
e. Paid telephone bill, P900
f. Borrowed cash from the bank by signing a note payable, P50,000
g. Bought a computer for office use, P48,000 cash
h. Collected cash from clients for services performed on account, P40,000
i. Paid commission to shoppers for revenues generated during the first half of the month, P18,200.
j. Paid electricity bill, P6,000.
k. Earned shopping revenues of P132,000: P60,000 cash, remainder on account.
l. Paid shoppers’ commission for last half of month, P46,200.
m. Paid transportation allowance for the month, P15,000.
n. Paid P10,000 on note payable to bank.
o. Paid cash on account for the office equipment purchased in transaction (b), P20,000
p. Maraya withdrew P20,000 for personal use.
Required:
A. Prepare necessary journal entries.

31
B. Prepare the different “T-accounts” of each account title used and post all journal entries
to each “T-account”.

32
C. Prepare the unadjusted trial balance as of December 31, 2019.

33
EXERCISE 1

TRUE OR FALSE
DIRECTION: Write “true” if the statement is correct otherwise “false” if the statement is
incorrect.
_______________1. Entries in the journal are transferred to the ledger for final recording.
_______________2. The skeleton form a general ledger is a T-account.
_______________3. Folio in the ledger shows the page number of a journal where the entries are
taken from.
_______________4. The book of original entry is called ledger.
_______________5. The book of final entry is called journal.
_______________6. Trial balance is prepared in order to check whether the total debit and total
credit is balance.
_______________7. The preparation of the trial balance is an aid to verify if the posting were
accurate.
_______________8. If the total debit is greater than the total credit in the general ledger, it
means that the account balance is debit.
_______________9. Payment of a liability has the effect of reducing cash balance.
_______________10. The arrangement of accounts in the general ledger is patterned from the
chart of accounts.
_______________11. The trial balance can be prepared in any given period time regardless of
whether or not financial statement is prepared.
_______________12. Posting a journal entry twice in the general ledger will cause the trial
balance to be “out of balance”.
_______________13. The accounts that remain open after footing the general ledger constitute
the trial balance.
_______________14. Posting is in itself the classifying function of accounting.
_______________15. Accuracy wise, when trial balance is “in balance” we take an assumption
that no error has been committed in both journalizing and posting process.

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EXERCISE 2

MULTIPLE CHOICE
DIRECTION: Read each item carefully and choose the best answer among the choices provided.
Encircle your answer.
1. A statement that summarizes the debit and credit entries of each account in a general ledger –
A. Balance Sheet C. Trial Balance
B. Income Statement D. Chart of Accounts
2. Which of the following error cannot be revealed by a trial balance?
A. Posting the amount of an item to a wrong side of the account or ledger.
B. Omission in posting of either debit or credit entry in the journal.
C. A journal entry that has not been posted in its entirety.
D. Footing of the account balance in the ledger is wrong.
3. Posting is the process of
A. Transferring entries from the journal to the ledger.
B. Transferring entries from the ledger to journal
C. Reconciling entries from journal to ledger
D. Reconciling entries from ledger to journal.
4. Despite of what has been done and the “trial balance” remained to be “out of balance”, the best
thing to do is to
A. Trace from the trial balance to the ledger and then to journal
B. Trace from the journal to the ledger and then to trial balance
C. Trace from the ledger up to journal entry.
D. Trace from the journal up to ledger only.
5. Which of the following entries in the general ledger where “footing” is not necessary?
A. When only credit entries are found in the ledger.
B. When only debit entries are found in the ledger.
C. When the debit and credit entries are equal.
D. When there is only one entry in any side of the account.
6. Footing is the term used for –
A. Adding the columns of figure.
B. Subtracting the columns of figure.
C. Multiplying the columns of figure.
D. Dividing the columns of figure.
7. To which of the following does classifying refer to
A. Recording C. Journalizing
B. Summarizing D. Posting
8. Posting
A. Normally occurs before journalizing

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B. Transfer ledger transactions data to the journal
C. Is an optional step in the recording process.
D. Transfers journal entries to the ledger accounts.
9. Which of the following statements is false concerning a trial balance?
A. Proves the mathematical accuracy of journalized transactions.
B. Will not balance if the balance if the correct journal entry is omitted in its entirety
C. A correct journal entry is posted twice
D. Proves that all transactions have been recorded.
10. A trial balance will not balance if
A. A correct journal entry is posted twice.
B. The purchase of supplies on account is debited supplies and credited to cash
C. A P210 payment on account is debited to accounts payable for P21 and credited to cash for
P21
D. A P100 cash drawing by the owner is debited to drawing account for P1,000 and credited to
cash for P100.
11. Which of the following is included in putting a heading of trial balance?
A. Name of the business or proprietor
B. Title of the report
C. Period covered by the report
D. All of the above.
12. Any deliberate or intentional act of letting it appear that the trial balance is “in balance” although
“out of balance”
A. Closed account C. Open account
B. Out-of balance D. Forced balance
13. If the total of the debit entries exceeds to the total of the credit entries after footing the account
A. The account is said to be “in balance”
B. The account is said to a “credit balance”
C. The account is said to be “out of balance”
D. The account is said to be in a “debit balance”
14. The double line drawn after the total of trial balance is called
A. Double entry system C. Double rule
B. Double line D. None of the above
15. The accounts that remained open after footing the ledger is called
A. Open account C. Posting error
B. Sliding error D. Footing error

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CHAPTER 4
THE ACCOUNTING CYCLE:
ADJUSTING ENTRIES

37
PREPARATION OF ADJUSTING ENTRIES

The adjusting entries are journal entries which primary purpose is to correct errors, eliminate
overvaluation or undervaluation of elements of accounting, recognition of unrecorded income and
expenses for the accounting period.

The following are circumstances that adjusting entries are required:

A. Correction of errors
B. Recognition of doubtful accounts expenses and depreciation expenses on fixed assets
C. Recognition of expenses not yet paid but incurred or already paid but not yet incurred.
D. Recognition of income not yet collected but earned or already collected but not yet earned.
E. Elimination of overvaluation or undervaluation of measurement
F. Reclassification of elements

Below is the general guideline in adjusting account titles:

ELEMENTS OVERVALUATION UNDERVALUATION

ASSETS Deduct by crediting Add by debiting


LIABILITIES Deduct by debiting Add by crediting
CAPITAL Deduct by debiting Add by crediting
INCOME Deduct by debiting Add by crediting
EXPENSE Deduct by crediting Add by debiting
DRAWING Deduct by crediting Add by debiting
CONTRA – ASSETS Deduct by debiting Add by crediting

CORRECTION OF ERRORS

In journalizing, accountant may usually have an errors in terms of recording the amount. The two usual
error in recording the amounts are:

I. Transposition error
These error occurs when the numbers in a particular amount interchange.

Example:
Transaction: Purchased equipment on account, P1,890,945.78. However, it was
erroneously recorded in the journal as P1,980,495.78.

During the journal entry:

Equipment 1,980,495.78

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Accounts Payable 1,980,495.78

Under adjusting entry:

Accounts Payable 89,550.00


Equipment 89,550.00

Explanation:

The adjusting entry is to debit accounts payable because the accounts payable was
originally recorded as P1,980,495.78 which in fact P1,890,945.78 and same with the
equipment account. So, considering there is an excessive recording of the amount, we
shall deduct accounts payable by debiting and deduct equipment by crediting.

The excess amount is computed:

Erroneously recorded amount P1,980,495.78


Less: Correct amount P1,890,945.78
Overvaluation on assets and liabilities 89,550.00

II. Sliding error

These occurs when the decimal point of an amount was transferred from one point to
another. For instance, the transaction is a purchase of supplies for an amount of
P1,190.00 but was erroneously recorded as P119.00.

The journal entry shows:

Supplies 119.00
Cash 119.00

In these, an undervaluation of assets occurred:

Erroneously recorded amount 119.00


Less: Correct Amount 1,190.00
Undervaluation on assets 1,071.00

To record the undervaluation:

Supplies 1,071.00
Cash 1,071.00

RECOGNITION OF BAD DEBTS EXPENSE (PROVISION ON ACCOUNTS RECEIVABLE)

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Bad debts expense or the doubtful account expense is an expense account that is related to the non-
collectability of accounts receivable. If a doubtful account expense is debited, an allowance for doubtful
account shall be credited.

Allowance for doubtful account is a contra-asset account that shows the cumulative amount of bad debts
expenses recognized. Cumulative means the previous bad debts expenses recognized plus bad debts
expense for these year recognized.

CASE 1 – ALLOWANCE TO BE RECOGNIZED IS 10% OF ACCOUNTS RECEIVABLE FOR 2017.


THEN, THE ALLOWANCE TO BE RECOGNIZED IN 2018 IS INCREASED BY 15% FOR 2018.

The following are the ending balances of accounts receivable for:

2017 1,000,000
2018 2,000,000

The beginning balance of Allowance for Doubtful Accounts for 2017 is P50,000.

To compute the allowance for 2017:

2017 Ending balance of Accounts Receivable 1,000,000


Multiply: Percentage of Allowance 10%
Allowance as for the year 2017 100,000
Less: 2017 beginning balance of Allowance 50,000
Doubtful Account Expense for 2017 50,000

Adjusting entry for 2017:

Doubtful Account Expense 50,000


Allowance on Doubtful Accounts 50,000

To compute allowance for 2018:

2018 Ending balance of Accounts Receivable 2,000,000


Multiply: Percentage of Allowance* 25%
Allowance for the year 2018 500,000
Less: 2018 beginning balance of allowance** 100,000
Doubtful Account Expense for 2018 400,000

*the percentage of allowance these year was computed as:

Percentage for 2017 10%


Plus: Additional percentage 15%
Percentage for 2018 25%

**The allowance for 2017 is the ending balance of allowance for 2017 and then considered as beginning
balance of 2018.

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Adjusting entry for 2018:

Doubtful Account Expense 400,000


Allowance on Doubtful Accounts 400,000

CASE 2 – ALLOWANCE TO BE RECOGNIZED IS 10% OF ACCOUNTS RECEIVABLE FOR 2017.


THEN, THE ALLOWANCE TO BE RECOHNIZED IN 2018 IS INCREASED TO 15% FOR 2018.

The following are the ending balances of accounts receivable for:

2017 1,000,000
2018 2,000,000

The beginning balance of Allowance for Doubtful Accounts for 2017 is P50,000.

To compute the allowance for 2017:

2017 Ending balance of Accounts Receivable 1,000,000


Multiply: Percentage of Allowance 10%
Allowance as for the year 2017 100,000
Less: 2017 beginning balance of Allowance 50,000
Doubtful Account Expense for 2017 50,000

Adjusting entry for 2017:

Doubtful Account Expense 50,000


Allowance on Doubtful Accounts 50,000

To compute allowance for 2018:

2018 Ending balance of Accounts Receivable 2,000,000


Multiply: Percentage of Allowance* 15%
Allowance for the year 2018 300,000
Less: 2018 beginning balance of allowance** 100,000
Doubtful Account Expense for 2018 200,000

*the percentage of allowance these year was computed as:

Percentage for 2017 10%


Plus: Additional percentage 5%
Percentage for 2018 15%

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**The allowance for 2017 is the ending balance of allowance for 2017 and then considered as beginning
balance of 2018.

Adjusting entry for 2018:

Doubtful Account Expense 20,000


Allowance on Doubtful Accounts 200,000

WRITE-OFF OF ACCOUNTS RECEIVABLE

The write off of account receivable happens if the business concludes that the accounts receivable cannot
be collected anymore.

Example:

10,000 of Account Receivable recorded in 2017 is to be written-off.

Entry:

Allowance for Doubtful Account 10,000


Accounts Receivable 10,000

RECORDING OF DEPRECIATION EXPENSE

Depreciation expense account is an account that is related to the used portion of fixed assets. Fixed
assets are building, equipment, furniture and fixtures and etc. The only fixed asset that cannot be
depreciated is land.

Accumulated depreciation is the cumulative amount of depreciation expense. Cumulative means that the
previous depreciation expenses recognized plus the depreciation expense for the year.

In determining the depreciation expense, the most common method used is the straight-line method.

Formula:

(COST OF FIXED ASSETS MINUS SALVAGE VALUE)


ANNUAL DEPRECIATION EXPENSE = USEFUL LIFE

Note: Salvage value is synonymous to scrap value.

Example:

A computer was purchased last June 1, 2017 for P130,000 and the salvage value of the computer after 10
years is P10,000.

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To compute the annual depreciation:

= (130,000 – 10,000) / 10 years

= 12,000 annual depreciation

Considering the computer was purchased and used starting June 1, the depreciation expense shall not for
the whole year. Therefore the annual depreciation shall be dived into 12 months and then multiply to the
numbers of months from June 1 to December 31. That is,

= 12,000 / 12 months

= 1,000 monthly depreciation expense

= 1,000 x 7 months ( from June 1 to December 31, 2017)

= 7,000

To record depreciation expense for December 31, 2017:

Depreciation Expense – Computer Equipment 7,000


Accumulated Depreciation Expense 7,000

To record depreciation expense for December 31, 2018:

Depreciation Expense – Computer Equipment 12,000


Accumulated Depreciation Expense 12,000

In 2018, the amount recorded depreciation expense is 12,000 considering that the computer equipment
was used for the whole year of 2018.

RECOGNITION OF EXPENSES NOT YET PAID (ACCRUED EXPENSES)

Accrued Expenses are expenses incurred for the accounting period but not yet paid by the entity. These
accountable transaction recognizes an expense and liability account.

Case 1 – Issued note in June 1, 2018 for an amount of P120,000 with a stated due date of May 31, 2019.
The note is a 10% interest bearing note. Principal and interests are paid when due date comes.

During the journal entry:

Cash 120,000
Notes Payable 120,000

Adjusting entry on December 31, 2018.

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Interest Expense 7,000
Accrued Interest Expense 7,000

*to compute the interest expense:

Principal amount 120,000


Multiply: Interest rate 10%
Annual Interest 12,000
Divided by: 12 months
Monthly Interest 1,000
No. of months passed 7 months (from June to
December)
Interest Expense 7,000

Case 2 - Salaries expenses incurred for the month of December 2018 but to be paid on January 2019,
P9,000.

Adjusting Entry:

Salaries Expense 9,000


Accrued Salaries Expense 9,000

RECOGNITION OF INCOME NOT YET COLLECTED (ACCRUED INCOME)

Accrued income are income earned for the accounting period but not yet collected by the entity. These
accountable transaction recognizes an income and asset account.

Case 1 – Received note in June 1, 2018 for an amount of P120,000 with a stated due date of May 31,
2019 for services rendered. The note is a 10% interest bearing note. Principal and interests are paid when
due date comes.

During the journal entry:

Notes Receivable 120,000


Service Income 120,000

Adjusting entry on December 31, 2018.

Accrued Interest Income 7,000


Interest Income 7,000

*to compute the interest expense:

Principal amount 120,000

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Multiply: Interest rate 10%
Annual Interest 12,000
Divided by: 12 months
Monthly Interest 1,000
No. of months passed 7 months (from June to
December)
Interest Income 7,000

Case 2 - Rendered services for the month of December 2018 but to be collected on January 2019, P9,000.

Adjusting Entry:

Accrued Service Income 9,000


Service Income 9,000

RECOGNITION OF ASSET FROM A PORTION OF EXPENSE RECORDED IN JOURNAL


ENTRY (EXPENSE METHOD)

One of the circumstances in which an asset shall be recognized in a portion of expense being recorded
during the journal entry, these method is known to be expense method of journalizing and adjusting entry.

To illustrate:

On June 1, 2018, Maria paid P120,000 rental fee good for one year.

During June 1, 2018, the journal entry made was:

Rent Expense 120,000


Cash 120,000

During December 31, 2018, the adjusting entry would be:

Prepaid Rent Expense 50,000


Rent Expense 50,000

The amount of 50,000 was computed in a manner below:

Rent Expense 120,000


Divide: 12 months 12
Monthly Rental Expense 10,000
No. of months not yet used x 5 months (January 2019 to May 2019)
Unexpired Portion 50,000

RECOGNITION OF EXPENSE FROM A PORTION OF ASSET RECORDED IN JOURNAL


ENTRY (ASSET METHOD)

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One of the circumstances in which an expense shall be recognized in a portion of assets being recorded
during the journal entry, these method is known to be expense method of journalizing and adjusting entry.

To illustrate:

On June 1, 2018, Maria paid P120,000 rental fee good for one year.

During June 1, 2018, the journal entry made was:

Prepaid Rent Expense 120,000


Cash 120,000

During December 31, 2018, the adjusting entry would be:

Rent Expense 70,000


Prepaid Rent Expense 70,000

The amount of 70,000 was computed in a manner below:

Prepaid Rent Expense 120,000


Divide: 12 months 12
Monthly Rental Expense 10,000
No. of months used x 7 months (June 2018 to December 2018)
Expired Portion 70,000

RECOGNITION OF LIABILITIES FROM A PORTION OF INCOME RECORDED IN


JOURNAL ENTRY (INCOME METHOD)

If the enterprise received an amount or any consideration for advance payment of services or good being
sold, the business may usually recognized such consideration as an income. Then later, the consideration
received was not yet earned, the entity shall derecognized the previously recorded income and then
recognized a liability.

To illustrate:

On June 1, the entity receive P120,000 advance payment for rental fees from a customer. The
P120,000 covers June 1, 2018 to May 31, 2019.

During June 1, 2018, the journal entry would be:

Cash 120,000
Rental Revenue 120,000

At the end of December 31, 2018, the adjusting entry:

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Rental Revenue 50,000
Unearned Rental Revenue 50,000

The amount of 50,000 was computed in a manner below:

Rent Expense 120,000


Divide: 12 months 12
Monthly Rental Revenue 10,000
No. of months not yet earned x 5 months (January 2019 to May 2019)
Unearned Portion 50,000

RECOGNITION OF INCOME FROM A PORTION OF LIABILITY RECORDED IN JOURNAL


ENTRY (LIABILITY METHOD)

If the enterprise received an amount or any consideration for advance payment of services or good being
sold, the business recognized such consideration as a liability. Then, as the sale become perfected, the
liability being recognized is derecognized and later on recognized as income.

To illustrate:

On June 1, the entity receive P120,000 advance payment for rental fees from a customer. The
P120,000 covers June 1, 2018 to May 31, 2019.

During June 1, 2018, the journal entry would be:

Cash 120,000
Unearned Rental Revenue 120,000

At the end of December 31, 2018, the adjusting entry:

Unearned Rental Revenue 70,000


Rental Revenue 70,000

The amount of 50,000 was computed in a manner below:

Rent Expense 120,000


Divide: 12 months 12
Monthly Rental Revenue 10,000
No. of months not earned x 7 months (June 1 2018 to December
2018)
Earned Portion 70,000

RECLASSIFICATION OF ACCOUNT TITLES

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Reclassification of accounts happens if the accountant erroneously recorded the account into a wrong
account.

Example:

Purchase supplies on account, P150,000

The wrong journal entry made was:

Equipment P150,000
Cash P150,000

To correct the journal entry:

Supplies P150,000
Equipment P150,000

Illustrative Exercises

Problem 1

Prepare the adjusting entries as of December 31 related to the following events happened within the
current year:

1. The accountant erroneously recorded the amount of supplies bought for cash as P189,790. In fact,
the correct amount paid was P198,709.
2. The entity bought a furniture and fixture last January 31, 2018. The cost of the furniture and
fixtures was P550,000. The furniture and fixture can be sold at a scrap value of P50,000. The
useful life of the furniture and fixtures is 5 years.
3. The entity received P800,000 cash on October 31, 2018. The cash received is for the advance
payment of advertising services good for 5 months. During October 31, the accountant recorded a
credit to Unearned Advertising Revenue for P800,000.
4. The entity paid the P450,000 insurance in an known insurance provider company. The payment
was made on September 1, 2018. The insurance policy acquired is good for 10 months. It was
discovered that the accountant recorded such payment as debit to Insurance Expense on
September 1.
5. The accountant erroneously recorded the payment of P50,000 for accounts payable as notes
payable and the amount recorded was P5,000.

Answers:

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Problem 2

The entity requires you to prepare an adjusting entry related to provision of accounts receivable:

Accounts Receivable, December 31, 2018 P1,250,000


Allowance for Doubtful Accounts P 125,000

The allowance for doubtful account shows an unadjusted balance.

Required: Prepare the adjusting entries related to the following cases:


A. The allowance for the current year shall be 15% of accounts receivable.

B. P15,000 of accounts receivable was written-off and then 20% of the accounts receivable
shall be the allowance for the current year.

Problem 3

The entity of Leila operated last January 1, 2017. Then, the following transactions occurred in relation to
the accounts receivable from January 1, 2017 to December 31, 2018.

For year 2017

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August 1 Rendered service on account for P1,000,000
November 1 Collected 25% of the accounts receivable recorded last August 1.
December 1 Rendered service for P50,000. The customer paid only 25% of the
amount.

For year 2018


February 28 Rendered services on account for P89,000
July 1 40% of the total accounts receivable remaining as of December 31, 2017
Were collected
September 16 4,000 accounts receivable were written off
December 17 Rendered service on account P90,000.
Required: Prepare the adjusting entry for year 2017 and 2018 based on the following cases:
A. The entity recognizes 5% of the 2017 accounts receivable be uncollectible and then will
increase by 10% on 2018.

B. The entity recognizes 5% of the 2017 accounts receivable be uncollectible and then will
increase to 10% on 2018.

Problem 4

The following information pertains to the following fixed assets:

Date of Purchase Amount Salvage Value Useful life


Computer Equipment June 15, 2018 P25,000 5% of purchase 3 years
price
Furniture and August 31, 2017 P189,000 9,000 5 years
Fixtures
Land January 1, 2018 P10,000,000 None 50 years

50
Building May 1, 2018 P7,950,000 10% of purchase 15 years
price
Equipment January 1, 2018 P345,000 25,000 8 years

Required: Prepare adjusting entries for the year ended December 31, 2018 in relation to the
aforementioned assets.

Problem 5

The following selected journal entries were discovered during the accounting period

February 1, 2018 Cash 60,000


Unearned Advertising Income 60,000
Received for one year advertising services.

March 30, 2018 Prepaid Insurance Expense 500,000


Cash 500,000
Advance payment of 2-year insurance expenses.

May 1, 2018 Cash 1,500,000


Loan payable 1,500,000
Approved 360 days, 15% interest bearing loan
payable.

August 1, 2018 Cash 190,000


Advertising Income 190,000
Received cash for 10-months advertising
services

September 30, 2018 Notes Receivable 50,000


Unearned Service Income 50,000
Received a 120 days, 10% interest bearing note.
Services rendered will commence on these date
and good for 12 months services.

November 1, 2018 Rental Expense 30,000


Cash 30,000
Payment of delivery vehicle rental fees for 12
months.
November 30, 2018 Cash 90,000
Advertising Income 90,000

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Cash received for 3 month advertising services.

Additional information:

a. It was determined that a supplies purchasedennia on account was erroneously recorded for
P177,650. The correct amount of purchase was P17,765.
b. The P750,000 equipment purchased on account last May 2018 was recorded as furniture and
fixtures.

Required:
A. Prepare necessary adjusting entry for the year ended December 31, 2018.

PROBLEM 6

Presented below, together with account numbers, is the unadjusted trial balance of M. Yanuario Travel
Agency for the year ended December 31, 2019:

M. Yanuario Travel Agency


Unadjusted Trial Balance
Dec. 31, 2019

110 Cash P 126,000


120 Accounts Receivable 645,000
130 Prepaid Rent 360,000
140 Office Supplies 63,000
150 Furniture 2,175,000
155 Accumulated Depreciation P 435,000
210 Notes Payable 900,000
220 Accounts Payable 285,000
230 Salaries Payable
240 Interest Payable
310 Yanuario, Capital 1,680,000
320 Yanuario, Withdrawals 1,200,000
510 Salaries Expense 3,771,000
520 Rent Expense
530 Office Supplies Expense
540 Depreciation Expense
550 Interest Expense
560 Miscellaneous Expense 93,000
Total P 8,433,000 P 8,433,000

Information pertaining to Yanuario’s accounts is as follows:


I. On November 1, 2019, Yanuario paid Juanita Rabena Realtors P360,000 for six month rent
on the office building commencing that date.
II. Office supplies on hand at December 31, 2019 amounted to P27,000.

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III. Furniture has useful life of 28 years and with salvage value of P75,000.
IV. At December 31, 2019, P105,000 salaries have been incurred but not yet paid.
V. The P900,000 note payable was issued on October 1, 2019, It will be repaid in the 12 months
together with interest at an annual rate of 24%.

Required:
A. Prepare the necessary adjusting journal entries.

B. Establish a “T-account” for each account title found in the unadjusted trial balance. Enter
the amount found in the unadjusted trial balance into the ledger account. Post the
adjusting entries. Compute the adjusted balances of each account title.

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C. Prepare the Adjusted Trial Balance for the year ended December 31, 2019.

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EXERCISE

TRUE OR FALSE
DIRECTION: Write “true” if the statement is correct otherwise “false” if the statement is
incorrect.
__________________1. Adjusting entries are always prepared at the end of each accounting
period.
__________________2. Prepaid is an opposite of Accrued Expense.
__________________3. Income statement accounts are also called real accounts.
__________________4. When a specific fixed asset is sold, the related accumulated depreciation
will also be written off.
__________________5. The value of property and equipment decreases due to wear and tear,
passage of time and introduction of new model and inventions.
_________________6. When depreciation expense is undertstated, the net book value of the
assets is overstated.
_________________7. Balance sheet accounts are also called nominal accounts.
_________________8. When an account of a certain is hopeless for collection, it is written-off
from the record.
_________________9. Revenue recognition principle states that income should be recognized
upon receipt of cash.
________________10. Failure to prepare adjusting entry on accrued expense will result to have
an understated net income.
________________11. Year-end adjustments and end of the period adjustments are two similar
terms in adjusting entries.

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________________12. The term accrued when associated with an expense account connotes a
liability.
________________13. When prepayment of expense under asset method is used, account cash
will always be credited.
________________14. In pre-payment and pre-collection adjustments, the accounts which are
mixed up with real and nominal elements are being split-up.
________________15. The account accrued rent income is similar to rent receivable.

EXERCISE 2

MULTIPLE CHOICE
DIRECTION: Read each item carefully and choose the best answer among the choices provided.
Encircle your answer.
1. An expense that is already incurred by the business but not yet paid when the accounting
period ends –
A. Accrued Expense C. Deferred Expense
B. Prepaid Expense D. None of the Above
2. Accrued income is
A. An income already earned but not yet collected
B. An income already collected but not yet earned.
C. An income matched with expense
D. None of the above.
3. Real accounts are composed of
A. Assets, Liabilities and Owner’s Equity
B. Assets, Liabilities and Income
C. Assets, Liabilities and Expense
D. Assets, Liabilities and Drawing
4. Accrued expense has a semblance of
A. Accounts Payable C. Prepaid Expense
B. Accounts Receivable D. Deferred Expense
5. Pre-collected income account is normally –
A. An income earned C. An asset recognized
B. A liability incurred D. An expense recognized.
6. An accrued expense adjustments would require a-
A. Debit to liability and credit to expense
B. Debit to expense and credit to liability
C. Debit to asset and credit to liability
D. Debit to expense and credit to owner’s equity
7. An accrued income adjustment would require a-
A. Debit to liability and credit to expense
B. Debit to asset and credit to income

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C. Debit to income and credit to liability
D. Debit to income and credit assets
8. Accrued interest income account is being presented as-
A. An income account C. An asset account
B. A liability account D. An owner’s equity account
9. Under expense method of recording prepayment, the account credited is always-
A. Account receivable C. Cash
B. Expense account D. Accounts Payable
10. Which of the following is reported in balance sheet?
A. Estimated uncollectible account
B. Provision for depreciation
C. Expired portion of prepayment
D. Earned portion of pre-collected income
11. What is the possible effect in the Balance Sheet if recording of depreciation expense is
omitted?
A. Net income is overstated.
B. Depreciation expense is understated.
C. Non-current asset section is overstated.
D. Non-current asset section is understated.
12. A method of providing uncollectible accounts which will not pass through the estimated
uncollectible accounts-
A. Uncollectible accounts recovery method
B. Allowance method
C. Direct write-off
D. Direct recovery method
13. All of the following are adjustments based on estimate, except
A. Accrual C. Uncollectible accounts
B. Depreciation D. Amortization
14. Which of the following is not needed in computing depreciation under straight-line
method?
A. Cost of the asset C. Scrap value of the asset
B. Estimated life of the asset D. Book value of the asset
15. Exception of depreciable assets which are subject to depreciation is-
A. Building ` C. Land
B. Furniture and Fixtures D. Equipment
16. If salaries of daily paid employees of Nelrose Anguit Co. for the period from Dec. 27,
20A to Jan. 5, 20B at P337 per day were unpaid as of December 31, 20A cut off date,
A. Accrued Salaries Payable, P1,685
B. Accrued Salaries Payable, P3,370
C. Salaries Expense, P1,685
D. Salaries Expense, P3,370
17. A machine costing P350,000 was purchased on account with a given term. If upon
payment, a 20% discount was availed, the credit entry will include-
A. Cash of P280,000 and machine of P70,000
B. Cash of P280,000 and purchase discount of P70,000
C. Accounts payable of P280,000 and machine of P70,000

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D. Machine of P280,000 and purchase discount of P70,000
18. Of the P5,300 Supplies inventory of Jonabelle Cacho Enterprises, P1,250 cost of supplies
were on hand. If Asset Account was debited upon purchase, the adjusting entry would be-
A. Used Supplies 1,250
Supplies 1,250
B. Used Supplies 4,050
Supplies 4,050
C. Supplies 1,250
Used Supplies 1,250
D. Supplies 4,050
Used Supplies 4,050
19. If advanced collection for service to be rendered in the later date of P2,500 was
erroneously recorded at P250, the adjusting entry required in the book of Dennis Garcia
Co. would require a credit to –
A. Unearned Service Income of P2,250
B. Service Income of P2,250
C. Accrued Service Income of P2,250
D. Answer not given
20. An insurance premium was paid Oct. 1, 20A by Arlene Grace Pinpin Co. for 2-year
policy contract, P4,800. If expense account upon payment, the adjusting entry on
December 31, 20A would be
A. Prepaid Insurance P4,200
Insurance Expense P4,200
B. Prepaid Insurance P600
Insurance Expense P600
C. Insurance Expense P4,200
Prepaid Insurance P4,200
D. Insurance Expense P600
Prepaid Insurance P600

58
CHAPTER 5
THE ACCOUNTING CYCLE:
WORKSHEET AND FINANCIAL
STATEMENTS PREPARATION

59
WORKSHEET PREPARATION

The worksheet preparation helps accountants to transfer data from unadjusted balance to the financial
statements. These multi-column (10-column) worksheet is an efficient way to summarize the data of
financial statements.

The following steps are being followed in preparation of worksheet:

1. Enter the account balances in the unadjusted trial balance columns and total the amounts.
2. Enter the adjusting entries in the adjustments columns and the total amounts.
3. Compute each accounts’ adjusted balance by combining the unadjusted trials balance and the
adjustment figures. Enter the adjusted amounts in the adjusted trial balance columns.
 Add when the type of adjustment (debit or credit) is the same as the unadjusted balance.
Subtract when the type of adjustment (debit or credit) is different from the unadjusted
balance.
4. Extend the assets and liability and owner’s equity amount from the adjusted trial balance columns
to the balance sheet columns. Extend the income and expenses amounts to the income statement
columns. Total the statement of columns.
 Note: The balances in the balances sheet and income statement columns total will be
imbalance. The differences being identified in both columns are the same and considered to
be the net income or losses of the entity.
 If total credit in the income column is higher than the total debit, it is net income.
 If total debit in the income column is higher than the total credit, it is net loss.

COMPLETE SET OF FINANCIAL STATEMENTS

Financial statements are the means by which the information accumulated and processed financial
accounting is periodically communicated to the users.

The following are the basic components of financial statements according to Philippine Accounting
Standards (PAS) 1:

a. Statement of Financial Position at the end of the period (Balance Sheet);


 Is the statement that shows the financial position or condition of an entity by listing
the assets, liabilities and owner’s equity as at a special date.
b. Statement of Comprehensive Income for the period (Income Statement);

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 Is the statement that shows the performance of the enterprise for a given period of
time.
c. Statement of Changes in Equity for the period;
 Is the statement that summarizes the changes occurred in owner’s equity.
d. Statement of Cash Flows for the period;
 Is the statement that provides the cash receipts and cash payments.
o Usually the statement of cash flows divided into three parts
 Operating Activities
 Investing Activities
 Financing Activities
e. Notes to Financial Statements
 Discussions and notes about the accounting policy used in preparation the financial
statements.

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Below are the adjusting entries disclosed in the worksheet:

A. Doubtful Account Expense 44,887.50


Allowance for Doubtful Accounts 44,887.50

B. Accrued Interest Income 7,500


Interest Income 7,500

C. Used Supplies 36,250


Supplies 36,250

D. Insurance Expense 18,000


Prepaid Insurance 18,000

E. Depreciation Expense – Service Vehicle 150,000


Accumulated Depreciation – Service Vehicle 150,000

F. Depreciation Expense – Office Equipment 21,087.50


Accumulated Depreciation – Office Equipment 21,087.50

G. Service Income 351,877.50


Unearned Service Income 351,877.50

H. Salaries Expense 67,000


Accrued Salaries Expense 67,000

I. Interest Expense 120,000


Accrued Interest Expense 120,000

THE STATEMENT OF CHANGES IN EQUITY

If net loss is being identified in the worksheet, such amount shall be a deduction from the sum of
beginning capital balance and additional investments.

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STATEMENT OF COMPREHENSIVE INCOME

STATEMENT OF FINANCIAL POSITION (ACCOUNT FORM)

64
STATEMENT OF FINANCIAL POSITION (REPORT FORM)

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THE STATEMENT OF CASH FLOWS (DIRECT METHOD)

OLAH ACCOUNTING FIRM


STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2018

CASH FLOW FROM OPERATIONS:


Cash receipts from sale of services xx
Cash receipts from royalties, commissions, etc, xx
Cash payment to suppliers (xx)
Cash payment to employees (xx)
Cash payment for taxes (xx)
Cash payment for insurance (xx)
Cash payment to other operating expenses (xx)
NET CASH PROVIDED BY (USED IN) OPERATION xx

CASH FLOW FROM INVESTING:


Cash receipts from sale of property and equipment xx
Cash receipts from sale of investments in debts and equity xx
Cash receipts from collections on notes receivable xx
Cash payments to acquire property and equipment (xx)
Cash payments to acquire debt or equity securities (xx)
Cash to make loans to others specially notes receivable (xx)
NET CASH PROVIDED BY (USED IN) INVESTING xx

CASH FLOW FROM FINANCING:


Cash receipts from investments by owners xx
Cash receipts from issuance of notes payable xx
Cash withdrawals of the owners (xx)
Cash payments to settle notes payables (xx)
NET CASH PROVIDED BY (USED IN) FINANCING xx
NET INCREASE (DECREASE) IN CASH xx

ADD: CASH BALANCE AT THE BEGINNING OF THE PERIOD xx


CASH BALANCE AT THE END OF THE PERIOD xx

Operating activities –are cash receipts and disbursements related to the normal operation of the entity or
cash transactions affecting the current assets and current liabilities of the entity

Investing activities – this are cash receipts and payments that usually affects the non-current assets of the
entity.

Financing activities – this are cash receipts and disbursements that usually affects the non-current
liabilities and equity section of the entity.

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THE STATEMENT OF CASH FLOWS (INDIRECT METHOD)

OLAH ACCOUNTING FIRM


STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2018

NET INCOME (LOSS) xx


Adjustments:
Non-cash Expenses (e.g depreciation) xx
Increases in Current Assets Accounts (xx)
Decreases in Current Assets Accounts xx
Decreases in Current Liability Accounts (xx)
Increase in Current Liability Accounts xx
NET CASH PROVIDED BY (USED IN) OPERATION xx

CASH FLOW FROM INVESTING:


Cash receipts from sale of property and equipment xx
Cash receipts from sale of investments in debts and equity xx
Cash receipts from collections on notes receivable xx
Cash payments to acquire property and equipment (xx)
Cash payments to acquire debt or equity securities (xx)
Cash to make loans to others specially notes receivable (xx)
NET CASH PROVIDED BY (USED IN) INVESTING xx

CASH FLOW FROM FINANCING:


Cash receipts from investments by owners xx
Cash receipts from issuance of notes payable xx
Cash withdrawals of the owners (xx)
Cash payments to settle notes payables (xx)
NET CASH PROVIDED BY (USED IN) FINANCING xx
NET INCREASE (DECREASE) IN CASH xx

ADD: CASH BALANCE AT THE BEGINNING OF THE PERIOD xx


CASH BALANCE AT THE END OF THE PERIOD xx

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Illustrative Exercises
Problem 1

Christopher Columbus is a lawyer specializing in corporate tax law. Provided below is a trial balance
taken on December 31, 2018:

COLUMBUS LEGAL SERVICES


Trial Balance
December 31, 2018

ACCOUNT TITLES DEBIT CREDIT


Cash 75,000
Accounts Receivable 45,000
Allowance for Doubtful Accounts 10,000
Office Supplies 8,000
Prepaid Insurance 12,000
Office Equipment 150,000
Computer Equipment 60,000
Notes Payable 50,000
Accounts Payable 5,000
Columbus, Capital 149,000
Columbus, Drawing 35,000
Legal Services Revenues 390,000
Rent Expense 50,000
Salaries Expense 120,000
Telephone Expense 10,000
Utilities Expense 39,000
Total 604,000 604,000

Information for year-end adjustments:


a. Office supplies on hand at year-end amounted to P3,000.
b. On Jan. 1 of the current year, Columbus purchased office equipment which cost P150,000
with an expected life of 5 years and no salvage value.
c. Computer equipment costing 60,000 with an expected life of three years and no salvage value
was purchased on July 1 of the current year.
d. A premium of P12,000 for one year insurance policy was paid on December 1.
e. Salaries earned by legal aide, which have not yet been paid, amounted to P3,000.
f. 30% of the accounts receivable are assumed to be uncollectible.

Required:
a. Prepare adjusting entries, if any.

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b. Prepare a 10-column worksheet for the year ended-December 31, 2018
c. Prepare the following financial statements for the year ended December 31, 2018:
i. Statement of Financial Position (account form)

ii. Statement of Comprehensive Income

iii. Statement of Changes in Equity

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Problem 2

Presented below is the unadjusted trial balance of Moises Dondoyano Information Systems Company for
the year ended December 31, 2018:

MD Information Systems Company


Unadjusted Trial Balance
December 31, 2018

ACCOUNT TITLES DEBIT CREDIT


Cash 45,000
Notes Receivable 360,000
Accounts Receivable 156,000
Office Supplies 63,000
Land 300,000
Building 1,590,000
Accumulated Depreciation – Building 254,000
Equipment 2,150,000
Accumulated Depreciation – Equipment 612,000
Accounts Payable 213,000
Unearned Consulting Revenues 450,000
Dondoyano, Capital, 1/1/2018 2,655,000
Dondoyano, Drawing 600,000
Consulting Revenues 2,108,000
Salaries Expense 875,000
Repairs Expense 116,000
Miscellaneous Expense 37,000
Total 6,292,000 6,292,000

Additional Information:

a. Office supplies on hand as at December 31, 2018 is P21,000.


b. One-third of the unearned revenues has been earned as at December 31, 2018.
c. Depreciation for the year amounted to P38,000 for the building and P123,000 for the equipment.
d. Salaries in the amount of P14,000 have accrued at year-end.
e. The notes receivable were accepted from several customers. The notes were issued on September
1, 2018 and will be settled together with a 20% interest on May 31, 2019.
f. Allowance for uncollectability is 10%.

Required:
a. Prepare adjusting entries, if any.

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b. Prepare a 10-column worksheet for the year ended-December 31, 2018
c. Prepare the following financial statements for the year ended December 31, 2018:
i. Statement of Financial Position (account form)

ii. Statement of Comprehensive Income

iii. Statement of Changes in Equity

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Problem 3

Below is the general ledger of the cash account:

DATE DESCRIPTIONS DEBIT DATE DESCRIPTIONS CREDIT


PURCHASE OF
1-Jan BEGINNING BALANCE 350,000.00 11-Jan EQUIPMENT 650,000.00

5-Jan LOAN FROM BANK 1,500,000.00 15-Jan PAYMENT OF SALARIES 145,000.00


COLLECTIONS OF
7-Jan ACCOUNTS RECEIVABLE 50,000.00 17-Jan PAYMENT OF UTILITIES 150,000.00
CASH SERVICES WITHDRAWAL OF THE
9-Jan RENDERED 85,000.00 18-Jan OWNER 18,500.00
ADDITIONAL PAYMENT OF
14-Jan INVESTMENT 45,000.00 23-Jan REGISTRATION 158,750.00

18-Jan SOLD BUILDING 1,780,000.00 27-Jan PURCHASE OF SUPPLIES 87,650.00


COLLECTION FROM
24-Jan CUSTOMERS 79,760.00 30-Jan PAYMENT OF LOAN 45,000.00

Additional information:
a. The company incurred a net loss of P344,240.
b. Depreciation Expenses recorded during the year is P34,000.
c. A gain from sale of Building were recorded, P15,000.
d. Balance sheets show the following balances:
January 1, 2018 December 31, 2018
Total Current Assets
(excluding cash account) 1,112,500 1,115,000
Total Current Liabilities 998,000 999,100

Required:
a. Prepare the statement of cash flows as of December 31, 2018 using the direct method.

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b. Prepare the statement of cash flows as of December 31, 2018 using the indirect method.

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PROBLEM 4
Vincent Fabella owns the Jose Rizal Heavy Bombers, a collegiate basketball team in the Phil-Am
Basketball Association. Presented below is the November 30, 2019 trial balance representing activities
from Jan. 1 to Nov. 30, 2019, together with the account number and titles:

Jose Rizal Heavy Bombers


Trial Balance
Nov. 30, 2019

Account Account Titles Debit Credit


No.
110 Cash P 1,129,800
120 Accounts Receivable 3,712,500
130 Uniform Supplies 31,050
140 Prepaid Insurance
150 Land 2,025,000
160 Training Facilities 12,750,000
165 Accumulated Depreciation -TF
170 Training Equipment 2,625,000
175 Accumulated Depreciation – TE
180 Player Contracts 11,250,000
210 Notes Payable P 1,800,000
220 Accounts Payable 4,725,000
230 Utilities Payable
240 Salaries Payable
250 Interest Payable
260 Advertising Payable
270 Unearned Games Attendance
Revenue
280 Mortgage Payable 10,500,000
310 Fabella, Capital 17,643,750
320 Fabella, Withdrawals 1,875,000
410 Game Attendance Revenues 10,125,000
510 Salaries Expense 4,875,000
520 Advertising Expense 400,950
530 Travel Expense 1,532,400
540 Laundry Expense 528,000
550 Medical Expense 194,550
560 Utilities Expense 1,734,000
570 Insurance Expense
580 Miscellaneous Expense 130,500
Total P44,793,750 PP44,793,750

During the month of December 2019, the Bombers were participating in the 2019 playoffs and the
following transactions took place:

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Dec. 1 Acquired the contract of Agustin Tiongco from the Negros Navigators for P1,875,000;
paying P225,000 in cash and remainder by issuing a note which interest is 10%
annually.
2 Collected P2,809,500 on accounts receivable from season-ticket holders.
3 Settled accounts payable, P1,657,500
4 Incurred advertising but not yet paid, P78,600
5 Acquired on account additional uniforms for the upcoming series with the San
Alcantara Padres, P30,750
9 Billed season-ticket holders for the last five games, P320,250
10 Paid the amount due on this date for a note payable, P600,000
11 Acquired insurance for the months of December to June, P215,250. Recorded as an
asset
12 Acquired additional training equipment on account, P319,500. The salvage value for
each equipment is 10% of the cost and depreciated for 5 years.
15 Paid players’ salaries, P1,136,250
17 Received cash advance for tickets playoff games, P3,316,050. Liability method was
used in recording.
19 Paid travel expenses to San Alcantara, P558,000
20 Paid laundry expenses, P12,600
23 Paid creditors, P941,850.
25 Paid miscellaneous expense, P26,850
26 Paid medical expense, P18,900
27 Utilities expense incurred but not yet paid, P210,450
28 Salaries not yet paid, P1,240,650
30 Fabella withdrew P250,000

Additional Information:
a. Training facilities were bought on first week of January of the current year with salvage value
of P1,025,000 with useful life of 10 years.
b. All training equipment were, except for those bought on December, were bought on January
31, 2019.

Required:
A. Prepare the journal entries for the December transactions, including adjusting entries.

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B. Establish a “T-account” for each account title found in the unadjusted trial balance. Enter
the amount found in the unadjusted trial balance into the ledger account. Post the
adjusting entries. Compute the adjusted balances of each account title.

C. Prepare a 10-colum worksheet.


D. Prepare the complete set of financial statements, except for the notes to financial
statements.

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EXERCISE 1

TRUE OR FALSE
DIRECTION: Write “true” if the statement is correct otherwise “false” if the statement is
incorrect.
________________1. Worksheet is used as a bridge connecting the trial balance and the
financial statements.
________________2. In a worksheet, when the total of the debit column of the Income
Statement exceeds the total of the credit column, it signifies a “loss”
________________3. In a worksheet, when the total of the credit column of the Income
Statement exceeds the total of the debit column it signifies “profit”
________________4. All nominal accounts are extended to the balance sheet section of the
worksheet.
________________5. All real accounts are extended to the debit side of the Income Statements
section of the worksheet.
________________6. When there is profit, it is extended to the credit column of the Balance
Sheet to effect the increase in Owner’s Equity.
________________7. An interim financial statements are statements prepared at any given
period during the year.
________________8. The report form of the balance sheet shows the Assets, Liabilities and
Owner’s Equity in a horizontal order.
________________9. The account form of the balance sheet shows the Assets, Liabilities and
Owner’s Equity in a vertical order.
_______________10. If the total debit is greater than the total credit in the balance sheet column
of the worksheet, it means the entity earned net income.

77
EXERCISE 2

MULTIPLE CHOICE
DIRECTION: Read each item carefully and choose the best answer among the choices provided.
Encircle your answer.
1. A worksheet preparation is
A. Mandatory C. Optional
B. Permanent D. Final
2. The drawing account is extended to what section of the worksheet?
A. Debit side of income statement
B. Credit side of income statement
C. Debit side of the balance sheet
D. Credit side of the balance sheet
3. The real accounts are extended to what section of the worksheet?
A. The income statement section
B. The balance sheet section
C. The debit side of the balance sheet section
D. The credit side of the balance sheet section
4. A balance sheet which is patterned after the accounting equation, A = L + OE is
presented in a horizontal order –
A. Natural Form C. Report Form
B. Account Form D. Functional Form
5. The income statements shows the performance of an enterprise
A. As of a given date C. At the time of crisis
B. At the end of the period D. At the time of Changes
6. Which of the following has the primary responsibility over financial statements
A. Management ` C. External Audit
B. Internal Audit D. Government
7. Which of the following account is extended to balance sheet debit?
A. Accrued Rent Income C. Rent Income
B. Unearned Rent Income D. None of the above
8. Which of the following financial statements is completed in a worksheet?
A. Notes to Financial Statements
B. Income Statements
C. Statement of Changes in Owner’s Equity
D. Statement of Cash Flows
9. Which of the following is the correct sequence of the accounting process?

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A. Journalizing, posting, trial balance, financial statements
B. Posting, journalizing, financial statements, trial balance
C. Journalizing, posting, financial statements, trial balance
D. Journalizing, trial balance, posting, financial statements

10. Which should come first in preparing a worksheet?


A. Adjusted Trial Balance
B. Balance Sheet
C. Income Statement
D. Adjustment
11. Which of the following is referred to as a “temporary account”?
A. Rent Expense C. Prepaid Rent expense
B. Accrued Rent Expense D. Unearned Rent
12. Which of the following cash flow transaction is classified as investing activity?
A. Investment by the owner
B. Collection from customer’s account
C. Withdrawal by the owner
D. Purchase of equipment
13. Which of the following cash flow transactions is classified as financing activity?
A. Purchase of Equipment
B. Payment of Rental Expense
C. Withdrawal by the Owner
D. Proceeds from sale of Equipment
14. Which of the following that shows details found in the General Ledger?
A. Balance Sheet C. Trial Balance
B. Subsidiary Ledger D. Income Statement
15. Which of the following transactions that do not change the total asset section of the
Balance Sheet?
A. Purchase of supplies inventory on account
B. Withdrawal of cash by the owner
C. Collection from customer’s account
D. Payment to supplier account

79
CHAPTER 6
THE ACCOUNTING CYCLE:
POSTING OF ADJUSTING
ENTRIES, PREPARATION OF
CLOSING ENTRIES AND POST –
CLOSING TRIAL BALANCE,
REVERSING ENTRIES

80
POSTING OF ADJUSTING ENTRIES TO GENERAL LEDGER
After the preparation of adjusting entries, those should be posted in the general ledger account.
The posting process of the adjusting entries is same with the posting entries of the journal entries
(original entries).
CLOSING ENTRIES PREPARATION
Closing entries are entries to close the temporary or nominal accounts. Nominal or temporary
accounts are income, expenses and withdrawal account. The basic purpose of closing entries are
to zero the balance (closed) of these nominal accounts.
Initially, these nominal accounts, except for withdrawal account, are being closed to another
nominal account named, “Income and Expense Summary” and/or “Income Summary Account”.
Proforma entry:
Service Revenue xx
Income and expense summary xx
To close income accounts.

Income and expense summary xx


Rent Expense xx
Salaries Expense xx
To close expense accounts

If all income and expenses accounts are closed to income and expense summary account, posting
of those entries will follow.

After posting, usually all income and expense accounts will have zero balances and the income
and expense summary account will have a balance equivalent to the net income or net loss
determined in the statement of comprehensive income.

Considering that income and expense summary account is a nominal account, such shall be
closed to capital account together with the withdrawal account.

To close the income and expense summary shall be made under the following circumstances:

If the entity earned net income:

Income and expense summary xx


______________, Capital xx

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If the entity incurred net loss:

_______________, Capital xx
Income and expense summary xx

Closing entry for the withdrawal account:

_______________, Capital xx
_____________, Drawing xx

Once closing entry for the income and expense summary and drawing account, posting of those
entry will follow.

PREPARATION OF POST CLOSING TRIAL BALANCE

The preparation of the post- closing trial balance is to check whether the real account, namely,
assets, liabilities and capital (except for the withdrawal account) account are still balance. These
trial balance is same with the unadjusted trial balance but the details being disclosed is different
considering that nominal accounts were already closed (zero balance).

The balances of these accounts are the balances after posting of adjusting entries and closing
entries were posted to the general ledger.

REVERSING ENTRIES PREPARATION

The reversing entry preparation is an optional step and then usually prepared at the beginning of
the new accounting period.

Reversing entries are the reversed entry of adjusting entries made in the preceding period.

For instance:

Adjusting entry:

Accrued Service Income 1,700


Service Income 1,700

Reversing entry:

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Service Income 1,700
Accrued Service Income 1,700

However, not all adjusting entries made are subject for reversing. Only accrued expenses and
income and prepaid expenses (expense method) and unearned revenue (income method) are
reversed at the beginning of accounting period.

Illustrative Exercise

Problem 1

The following are the balances presented in the adjusted trial balance:

CBCP Enterprise
Adjusted Trial Balance
December 31, 2018

Debit Credit
Cash 100,000
Accounts Receivable 175,000
Allowance for doubtful accounts 18,750
Office supplies 9,750
Prepaid Rent 12,450
Office equipment 145,000
Accumulated Depreciation – Office 14,765
equipment
Delivery Vehicle 225,000
Accumulated Depreciation –
Delivery Vehicle 45,750
Accounts Payable 87,500
Notes Payable 10,000
Accrued Interest Expense 4,500
Accrued Salaries Expense 14,500
Jampoy, Capital ?
Jampoy, Drawing 15,000
Service Income 287,500
Salaries Expense 65,900
Rent Expense 14,500
Advertising Expense 12,600
Depreciation Expense – Office 5,750
Equipment
Depreciation Expense – Delivery 8,650
Vehicle
Interest Expense 6,250
Doubtful Account Expense 1,650

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TOTAL ? ?

Required:
a. Compute for the net income (loss) for the period.

b. Prepare necessary closing entries.

c. Compute for the capital balance as of December 31, 2018.

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Problem 2

Presented below is the unadjusted trial balance of Moises Dondoyano Information Systems Company for
the year ended December 31, 2018:

MD Information Systems Company


Unadjusted Trial Balance
December 31, 2018

ACCOUNT TITLES DEBIT CREDIT


Cash 45,000
Notes Receivable 360,000
Accounts Receivable 156,000
Allowance for Doubtful Accounts 8,560
Land 300,000
Building 1,590,000
Accumulated Depreciation – Building 254,000
Equipment 2,150,000
Accumulated Depreciation – Equipment 612,000
Accounts Payable 213,000
Dondoyano, Capital, 1/1/2018 2,646,440
Dondoyano, Drawing 600,000
Consulting Revenues 2,558,000
Salaries Expense 875,000
Used Supplies 63,000
Repairs Expense 116,000
Miscellaneous Expense 37,000
Total 6,292,000 6,292,000

Additional Information:

a. Office supplies on hand as at December 31, 2018 is P21,000.


b. P35,000 of the consulting revenue were still unearned.
c. Depreciation for the year amounted to P38,000 for the building and P123,000 for the equipment.
d. Salaries in the amount of P14,000 have accrued at year-end.
e. The notes receivable were accepted from several customers. The notes were issued on September
1, 2018 and will be settled together with a 20% interest on May 31, 2019.
f. Allowance for uncollectability is 10%.

Required:
a. Prepare closing entries for the year ended December 31, 2018.

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b. Post-closing trial balance as of December 31, 2018

c. Compute for the ending capital balance of the entity.

d. Prepare reversing entries required on January 1, 2019.

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EXERCISE 1

TRUE OR FALSE
DIRECTION: Write “true” if the statement is correct otherwise “false” if the statement is
incorrect.

___________________1. Closing Entries will bring the account balances of all balance sheet
account into “zero”.
___________________2. Formal financial statements can be prepared even if there is no
worksheet.
____________________3. The purpose of the worksheet is to accompany the financial
statements to prove the that everything is complied with.
____________________4. A worksheet which does not contain column for “adjustments” is a 6-
column worksheet which is being called simple worksheet.
____________________5. In a worksheet, the amount of debit and credit columns of both
income statement and balance sheet when totalled are not “in balance”.
____________________6. If the credit side of Income and Expense Summary is bigger than its
debit side, the difference signifies a Net Income.
____________________7. The final closing entry is to close Drawing to Capital account.
____________________8. A loss is closed by debiting owner’s equity and crediting Income and
Expense Summary account.
____________________10. Profit and loss is not an account title, so that neither will appear in
the journal entry nor in the post-closing entry.
____________________11. A pre-closing trial balance is a trial balance before any adjustments
made.
____________________12. A debit balance in the income and expense summary signifies
favourable results of business operation.
____________________13. All nominal accounts are closed at the end of the period.
____________________14. Loss is good indicator that owner’s equity will increase.
____________________15. All income and expense accounts are reduced to “zero” when
closing entries are prepared.
____________________16. A post-closing trial balance is a balance sheet in a trial balance
form.
____________________17. Closing the books of accounts is merely a compliance of the
accounting requirement.
____________________18. During the closing process, revenues are transferred to the credit
side while expense to the debit side of the Income and Expense Summary account.

87
____________________19. An opening entry will always be prepared at the beginning of an
accounting period.
____________________20. Reversing entries are prepared whenever there are adjusting entries.

EXERCISE 2

MULTIPLE CHOICE
DIRECTION: Read each item carefully and choose the best answer among the choices provided.
Encircle your answer.
1. The formation of a post-closing trial balance is similar to a/an-
A. Income statement C. Balance Sheet
B. Trial Balance D. Worksheet
2. Which of the following account is closed?
A. Unearned interest income C. Accumulated depreciation
B. Prepaid insurance expense D. Uncollectible accounts
3. The following accounts are closed except-
A. Nominal accounts C. Income statement accounts
B. Temporary accounts D. Real Accounts
4. Which of the following entry is prepared at the end of the period?
A. Adjusting entry C. Reversing Entry
B. Closing entry D. Opening entry
5. Which of the following is a temporary account?
A. Nominal account C. Expense account
B. Income account D. All of the above
6. The final closing entry will involve –
A. Closing of net income or loss to drawing
B. Closing of drawing in capital account
C. Closing of net income to income and expense summary
D. Closing of income and expense to capital account
7. A balance sheet in a trial balance form is a –
A. Post- closing trial balance C. Pre-closing trial balance
B. Trial balance of balances D. Balance sheet in a report form
8. Which of the accounts is included in post-closing trial balance?
A. Asset account C. Expense account
B. Income account ` D. Drawing account
9. A pre-closing trial balance is similar to –
A. Unadjusted trial balance C. Post-closing trial balance
B. Adjusted trial balance D. A simple worksheet
10. Preliminary trial balance is similar to-
A. Unadjusted trial balance C. Simple worksheet
B. Adjusted trial balance D. Post-closing trial balance

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11. Which of the following account is included in the opening entry of the new set of
accounting period?
A. Uncollectible accounts C. Drawing Account
B. Accumulated depreciation D. Income and expense summary

12. Which of the following is not included in the post-closing trial balance preparation?
A. Estimated uncollectible account C. Unearned rent income
B. Drawing account D. Accumulated depreciation
13. Real and nominal accounts are the –
A. Balance sheet and income statement accounts
B. Only income statement account
C. Only balance sheet account
D. Income and expense accounts
14. The following statements pertaining closing entries are true except –
A. All nominal accounts are closed
B. Closing entries are done at the end of the year
C. Closing entries are recorded in the General Journal
D. Income accounts are closed by a credit.
15. Most probably, the last account which could be listed in the post-closing trial balance is –
A. Owner’s equity C. Accumulated Depreciation
B. Rent payable D. Owner’s Drawing

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PRACTICE
ACTIVITY
Juan de la Cruz, CPA hired you to prepare the financial statements for the year ended December 31, 2018
because he do not have the time to prepare his own financial statements due to many clients and
appointment.

On December 1, 2018, Juan provided you the unadjusted trial balance as of November 30, 2018.

Below the is the unadjusted trial balance of the JDC Accounting Services:

JDC ACCOUNTING SERVICES


UNADJUSTED TRIAL BALANCE
NOVEMBER 30, 2018

ACCOUNT TITLE DEBIT CREDIT


Cash 780,000
Accounts Receivable 754,000
Allowance for Doubtful Accounts 18,876
Notes Receivable 89,000
Office Supplies 75,000
Prepaid Insurance 65,000
Office equipment 90,000
Delivery Vehicle 87,650
Furniture and Fixtures 78,000
Accounts Payable 85,900
Notes Payable 90,000
JCD, Capital ?
JCD, Drawing 8,760
Accounting Services Revenue 545,000
Salaries Expense 87,000
Advertising Expense 150,000
Utilities Expense 87,650
Repair and Maintenance 7,890
Taxes and Licenses 10,750
Gasoline and Oils 7,890
Total ? ?

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The following transactions occurred on December 2018:

December 1 Juan additional investment of P500,000 cash in the entity.


December 3 Paid taxes and licenses of the business at the city hall, P15,000.
December 4 Purchased supplies P12,350 for the thanksgiving party of the
business entity.
December 6 Acquired computer equipment and furniture and fixture for
P22,750 and P54,350, respectively, in an on account basis. No
salvage value and can be used for 3 years.
December 8 Hired new employees in the entity. Hiring expenses incurred
P12,000.
December 10 Issued a note for a bank loan amounting to P150,000, 12% annual
interest.
December 14 Rendered accounting services to clients, P45,000.
December 15 Paid salaries for P13,500.
December 15 Paid advertising in advance for P13,000 for a coverage of 4
months.
December 19 Pay electricity, water and telephone bills, P16,450.
December 20 P18,000 of the notes payable outstanding as of November 30,
2018, was paid, including 10% annual interest. The said note was
issued on June 20, 2018
December 21 25% of the accounts payable related to the acquisition of fixed
assets acquired last January 6 were paid.
December 23 Additional P4,500 supplies were purchased.
December 25 Rendered services on account, P60,000.
December 28 Juan withdrew from the entity for his personal use, P12,000.
December 29 45% of the services rendered last December 25 were collected.
December 31 Salaries for P13,500 were incurred but not yet paid.
December 31 P8,750 of accounts receivable were written-off.
December 31 P24,765 accounting services rendered were not yet collected.

Additional Information:
1. The following useful life of fixed assets:

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Delivery equipment
- 5 years useful life,no salvage value, acquired on March 18, 2018
Furniture and Fixtures
- 5 years useful life, P7,000 salvage value, acquired on June 5, 2018
Office Equipment
- 10 years useful life, P10,000 salvage value, acquired on August 17, 2018

2. 30% of the supplies acquired were on hand.


3. P45,000 of the recorded accounting service revenue was an advance collection from a customer. The
advance collection cover for 7 months. The said amount were collected on November 18, 2018.
4. The amount of advertising reported in the unadjusted trial balance as of November 30, 2018 was an
advance payment for 10 months. Juan dela Cruz paid it on October 5, 2018.
5. The note receivable recorded in the unadjusted trial balance as of November 30, 2018 consist of the
following:
Date Received Due Date Amount Annual Interest
March 31, 2018 March 30, 2019 49,000 15%
August 1, 2018 July 31, 2019 40,000 10%

6. The remaining notes payable consist of the following:


Date issued Due Date Amount Annual Interest
August 2, 2018 August 1, 2019 28,800 12%
May 31, 2018 June 1, 2019 43,200 10%

7. 20% of the accounts receivable are considered uncollectible.

JCD ACCOUNTING SERVICES


CHART OF ACCOUNTS

92
ACCOUNT ACCOUNT TITLE ACCOUNT ACCOUNT TITLE
NO NO
Assets Equity
101 Cash 301 JCD, Capital
102 Accounts Receivable 302 JCD, Drawing
103 Allowance for Bad Debts Income
104 Notes Receivable 401 Accounting Service
Revenue
105 Accrued Interest Income 402 Interest Income
106 Office Supplies Expenses
107 Prepaid Insurance 501 Salaries Expense
108 Prepaid Advertising 502 Advertising Expense
109 Office Equipment 503 Utilities Expense
110 Accumulated Dep’n – 504 Repair and Maintenance
Equipment
111 Furniture and Fixtures 505 Taxes and Licenses
112 Accumulated Dep’n – 506 Gasoline and Oils
Furniture and Fixture
113 Delivery Vehicle 507 Interest Expense
114 Accumulated Dep’n – 508 Bad Debts
Delivery Vehicle
Liabilities 509 Dep’n Expense – Equipment
201 Accounts Payable 510 Dep’n Expense – Furniture
and Fixture
202 Notes Payable 511 Dep’n Expense – Delivery
Vehicle
203 Accrued Interest Expense 512 Used Supplies
204 Accrued Salaries Expense 513 Entertainment and Party
205 Unearned Service Revenue 514 Hiring Costs

Requirements:
1. Prepare journal entries, adjusting entries, closing entries, reversing entries in a journal
sheet.
2. Post all entries in a general ledger.
3. Prepare a 10-column worksheet
4. Prepare the following financial statements:
a. Statement of Financial Position (report form)

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b. Statement of Comprehensive Income
c. Statement of Changes in Equity
d. Statement of Cash Flows (Direct Method)
5. Post-closing trial balance

CHAPTER 7
MERCHANDISING
CONCERN

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MERCHANDISING CONCERN BUSIN8ESS

Merchandising business is the common form of business in the society. It is a business that
purchased a finished products at cost and resale it with a mark-up. In other words, the
merchandising business is a “buy and sell” business.

The only difference between the service-concern businesses to merchandising businesses is the
recording of revenue or sale.

TWO INVENTORY SYSTEM IN MERCHANDISING

There are two different inventory system or method used in recording the purchase of inventory
and its resale. These method are the periodic inventory system and perpetual inventory system.
These methods do have different methods on tracking the quantity of goods on hand.

Periodic Inventory System

These system relies upon an occasional physical count of the inventory to determine the ending
inventory balance and cost of goods sold (cost of sale).

Perpetual Inventory System

These is the more sophisticated method in recording and tracking the quantity of goods on hand.
The perpetual inventory keeps a continual track of inventory balances.

NEW ACCOUNT TITLES IN MERCHANDISING BUSINESS

Sales Account

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The account title used in recording the sold merchandise at its selling price. Sales account is an
income account, therefore, its normal balance is credit.

Sales Returns and Allowances

This account pertains to the merchandise being sold and then return by the customer. Its normal
balance is debit.

Sales Discount

This account pertains to the discount being provided to the customer. The normal balance of this
account is debit.

Purchases

This account is used if a periodic inventory system is used. This pertains to the merchandise
being purchased by the entity and it is measured at cost. Its normal balance is debit.
Purchase Returns and Allowances

This account is used if periodic inventory system is used. The account contains the merchandise
being returned to the supplier by the entity. Its normal balance is credit.

Purchase Discount

This account is used if periodic inventory system is used. This pertains to discounts availed by
the entity from the purchase of merchandise. Its normal balance is credit.

Cost of Sales/Cost of Goods Sold

This account is used if perpetual inventory system is used. This pertains to the merchandise at
cost actually sold by the entity. Its normal balance is debit.

Merchandise Inventory

Merchandise inventory account is used when purchase of merchandise was made, and returns of
those merchandise were made and even discount of such merchandise are availed and freight in.
This account is used when perpetual inventory system is used. Its normal balance is debit.

Freight In/Transportation in

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Freight in is an account used for the recording the transportation cost incurred of the inventory
from the supplier to buyer. Its normal balance is debit.

Freight Out/Transportation Out

Freight in is an account used for the recording the transportation cost incurred of the inventory
from the supplier to the buyer. Its normal balance is debit.

TWO TYPES OF DISCOUNTS

Cash Discounts

This are discounts granted to buyers if the on account purchases are paid within the discount
period. Supplier usually provides credit terms. In an invoice credit discount term is usually
illustrated in these manner: 5/10,n/30. This is interpreted as 5% if paid within 10 days, no
discount after 10 days.

Trade Discounts

This are discount granted immediately on the date of sale or purchase.

PROFORMA ENTRIES OF SALE AND PURCHASE TRANSACTION

Transaction Periodic Inventory System Perpetual Inventory System


Sale of goods Cash/Accounts Receivable xx Cash/Accounts Receivable xx
Sales xx Sales xx

Cost of sales xx
Merchandise Inventory xx
Purchase of goods Purchases xx Merchandise Inventory xx
Cash/Accounts Payable xx Cash/Accounts Payable xx
Sales Discount Sales Discount xx Sales Discount xx
Cash/Accounts Receivable xx Cash/Accounts Receivable xx
Sales Returns and Sales Returns and Allowances xx Sales Returns and Allowances xx
Allowances Cash/Accounts Receivable xx Cash/Accounts Receivable
xx

Merchandise Inventory xx
Cost of sales xx
Purchase Discount Cash/Accounts Payable xx Cash/Accounts Payable xx
Purchase Discount xx Merchandise Inventory xx
Purchase Returns and Cash/Accounts Payable xx Cash/ Accounts Payable xx
Allowances Purchase returns and allowances xx Merchandise Inventory xx
Freight In Freight In xx Merchandise Inventory xx

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Cash xx Cash xx

FREIGHT ON BOARD TERMS

FOB SHIPPING POINT

If the FOB term stipulated is a shipping point, it means that the inventory’s right of ownership
and obligations were already transferred to the buyer once inventory is at point of shipment.

FOB DESTINATION

If the FOB term stipulated is destination, it means that the inventory’s right of ownership and
obligation to such inventory retain to the seller from the point of shipment to the arrival to us
destination.

TRANSACTION SHIPPING POINT DESTINATION


Freight Prepaid by Accounts Receivable xx Freight Out xx
the Seller Cash Cash xx
xx
Freight Prepaid by Periodic Inventory System: Accounts Receivable xx
the Buyer Freight In xx Cash xx
Cash
xx

Perpetual Inventory System:


Merchandise Inventory xx
Cash xx

STATEMENT OF COMPREHENSIVE INCOME PRESENTATION

Considering that merchandising business uses a different account for revenue, the presentation of
comprehensive income will be based below:

Sales xx
Less: Sales Returns and Allowances (xx)
Sales Discounts (xx)
Net Sales xx
Less: Cost of Sales (xx)
Gross Profit xx

For computation of cost of sales under periodic inventory system:

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Beginning Inventory xx
Purchases xx
Less: Purchase Returns and Allowances (xx)
Purchase Discounts (xx)
Net Purchases xx
Less: Ending Inventory (xx)
Cost of Sales xx

Illustrative Exercise

PROBLEM 1

Virginia Ruben Enterprise engaged in the following transactions in August of the current year:

August 1 Invested cash P750,000 and computer equipment for P140,000.


2 Paid registration fees to city hall for P15,000.
3 Paid taxes and licenses to the Internal Revenue Department, P7,500.
5 Purchase delivery vehicle by issuing a note, P175,000.
6 Purchase merchandise for P250,000. These merchandise are sold 20%
mark-up based on costs.
8 Purchase furniture and fixture for P18,500.
10 Sold merchandise to O. Lacierda Trading on credit, P21,000, terms: n/40,
FOB shipping point, freight prepaid, P1,200.
11 Purchase merchandise for P145,000.
12 Purchased merchandise on credit fro R. Cabellon Stores, P38,000, terms:
n/30, FOB Shipping point, freight prepaid, P750.
13 Purchased store supplies on credit to Ipil Supplies, P6,360.
14 Purchased merchandise for P36,000, 5% trade discount was given.
15 Paid salaries to employees, P15,700.
16 Paid SouthMin for the freight cost in relation to the purchased made in
August 14.
18 Partially paid the purchases made on August 12, P15,000.
19 Returned some of the merchandise received on August 12, P6,000.
20 Lacierda returned P5,000 merchandise bought from Virginia.
21 Virginia withdraw P25,000 in the business.
23 Paid advertising expenses for P5,450.

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25 Collected in full from Lacierda.
26 Sold merchandise for P15,000.
27 Paid utilities for P7,890.
28 Paid in full to Cabellon.
29 Sold merchandise for P13,500, P50% downpayment was made and the
balance was made on a promissory note.
30 Incurred fuels for the delivery vehicle, P7,600.
31 Paid rental fees for the month, P8,700 and salaries to employees , P15,700.

Required: Prepare the following under periodic and perpetual inventory systems,
a. Journal entries

b. Posting the journal entries using T-account

100
c. Trial balance

d. 10-Column Worksheet
e. Statement of Financial Position

101
f. Statement of Changes in Equity

g. Statement of Comprehensive Income

102
h. Statement of Cash Flows under Direct Method

i. Closing entries

103
j. Post-closing trial balance.

PROBLEM 2

On March 1, 2018, John Pete Sarabia established a merchandising business. Transactions


completed during the month are as follows:
a. Sarabia invested P165,000 cash for the newly established business.

104
b. Bought a service vehicle from Elpidio Motors for P194,900, paying P25,000 in cash and
placing the balance on account
c. Bought equipment on account from Quirino Company, P28,500
d. Bought merchandise on account, P1,900,000. Freight Cost: P23,00 FOB Shipping Point
e. Paid rent for the month, P6,200.
f. Sold merchandise for cash for the first half of the month, P24,200. Cost of merchandise
sold: P18,500. Freight cost: 2,500. FOB Destination
g. Bought supplies for cash P1,800
h. Bought insurance for the service vehicle for one year, P4,000
i. Received and paid utilities bill, P6,040
j. Received a bill from Manila Gas for gas and oil used by the service vehicle for the
month, P6,080
k. Sold merchandise for cash, P28,240 and availed 5% discount. Freight cost: P4,576. FOB
Shipping Point. Mark up on based on sales is 25%.
l. Sold merchandise on account for the second half of the month, P25,200. Cost of
merchandise: P18,900. Freight cost: P7,500. FOB Destination
m. Paid salaries of the part-time assistants, P11,200
n. Sarabia withdraw cash for personal use, P15,500

Required: Prepare the following under periodic and perpetual inventory systems,
a. Journal entries

105
b. Posting the journal entries using T-account

c. Trial balance

106
d. 10-Column Worksheet
e. Statement of Financial Position

f. Statement of Changes in Equity

g. Statement of Comprehensive Income

107
h. Statement of Cash Flows under Direct Method

i. Closing entries

j. Post-closing trial balance.

108
EXERCISE 1

TRUE OR FALSE
DIRECTION: Write “true” if the statement is correct otherwise “false” if the statement is
incorrect.
________________1. Buying and selling are the primary activities of a merchandising business.
________________2. Under the merchandising concern, the business can be a buyer at one hand
and seller on the other hand.
________________3. Cash discount are called “purchase discount” from the point of view of of
the buyer.
________________4. The chart of accounts for merchandising concern is similar to service
concern.
________________5. There is only one ledger account to be maintained as merchandise
inventory for the beginning and ending.
________________6. Perpetual and periodic are the two inventory systems of merchandising
business.
________________7. Freight-in is an adjunct to purchase account.
________________8. Freight-out is neither cost nor asset to the business.
________________9. Freight-out refers to transportation expense in buying merchandise from a
supplier.
________________10. Freight-in refers to transportation expense in selling merchandise to a
customer.
________________11. Cash discount are called “sales discount” from the point of view of the
seller.
________________12. Under periodic inventory system, purchase of merchandise is debited to
“Purchases”.

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________________13. Perpetual inventory system debits “Merchandise Inventory” in
purchasing merchandise.
________________14. Trade discount are not recorded in the book of the business.
________________15. When a merchandise purchased is returned, a credit memo should be
issued by the supplier to advice the customer that reduction from receivable account has been
affected.

EXERCISE 2

MULTIPLE CHOICE
DIRECTION: Read each item carefully and choose the best answer among the choices provided.
Encircle your answer.
1. Which of the following is not considered an account title under periodic inventory
system?
A. Purchases C. Cost of Sales
B. Freight In D. Sales
2. Florita Acero Co. made an account purchases of P30,000 from Marysol Perocho
Convenience Store and was given a 5% purchase discount upon payment. The journal
entry to record the purchase of merchandise was –
A. Purchases 30,000
Cash 30,000
B. Accounts Payable 28,500
Cash 28,500
C. Purchases 30,000
Accounts Payable 30,000
D. Accounts Payable 30,000
Purchase Discount 1,500
Cash 28,500
3. Espanol Superstore sold merchandise on account for P37,000 and received cash payment
of P38,705 after deducting the sales discount. What was the percent of sales discount?
A. 2% C. 3%
B. 2.5% D.3.5%

110
4. Under perpetual inventory method, expenses incurred in shipping out the merchandise to
a buyer-
A. Freight out C. Freight in
B. Reduction from sales D. Addition to purchase
5. Under the perpetual inventory system, if ending inventory per stock card is P135,000
while the actual physical inventory account is P132,000, the difference is debited to-
A. Inventory short or over C. Overage inventory
B. Merchandise inventory D. Shortage in inventory
6. Which of the following account is not used under periodic inventory system?
A. Purchases C. Cost of Sales
B. Freight In D. Purchase Discount
7. A company buys merchandise costing P25,000 and returned P5,000 cost of merchandise.
If discount term is 2/10, n/30 and the company pays within the discount period, how
much amount it should pay to the seller?
A. P19,600 C. P21,000
B. P20,000 D. P24,500
8. The entry to record the return on of goods previously purchased on account due to bad
order will include-
A. A debit to Accounts Payable
B. A debit to Purchase Returns and Allowance
C. A credit to Accounts Payable
D. A debit to Purchase Discounts
9. When is physical inventory count usually conducted?
A. At the end of any given period
B. During mid-session
C. At the start of the year
D. When there is pilferage
10. The merchandise left on hand and unsold at the end of the period-
A. Merchandise Inventory, end C. Cost of Merchandise Sold
B. Merchandise Inventory, beg. D. Purchased left undelivered
11. The normal balance of an accounts Sales is –
A. Debit balance C. In-balance
B. Credit balance D. Out of balance
12. Under perpetual inventory system, freight in is debited to
A. Purchases C. Merchandise Inventory
B. Freight In D. Freight Out
13. Which of the following is an expense account?
A. Freight In C. Merchandise Inventory, beg.
B. Freight Out D. Merchandise Inventory, end
14. Which of the following is an “adjunct” account to purchases?

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A. Freight In C. Merchandise Inventory, beg.
B. Freight Out D. Merchandise Inventory, end
15. 2/10, n//30 terms means a 2 % discount if paid within ten days
A. From the invoice date
B. After invoice date
C. Before the invoice date
D. None of these

PRACTICE
ACTIVITY
JCD MERCHANDISE
UNADJUSTED TRIAL BALANCE
NOVEMBER 30, 2018

DEBIT CREDIT
Cash 780,000
Accounts Receivable 754,000
Notes Receivable 89,000
Merchandise Inventory 780,000
Office Supplies 75,000
Prepaid Insurance 65,000
Office equipment 90,000
Delivery Vehicle 87,650
Furniture and Fixtures 78,000
Accounts Payable 85,900
Notes Payable 90,000
JCD, Capital ?
JCD, Drawing 8,760
Sales 545,000
Sales Returns and Allowances 15,679

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Sales Discount 7,650
Purchases 507,890
Purchase Returns and Allowances 91,200
Purchase Discounts 60,800
Salaries Expense 87,000
Advertising Expense 150,000
Utilities Expense 87,650
Repair and Maintenance 7,890
Taxes and Licenses 10,750
Gasoline and Oils 7,890
Total ? ?

The following were the transaction occurred during the December 2018 operations:
December 1 Juan additional investment of P500,000 cash in his entity.
December 2 50% of the outstanding accounts payable last November 30 were paid. P10,000
discount was availed.
December 3 Paid taxes and licenses of the business at the city hall, P15,000.
December 4 Purchased supplies P12,350 for the Christmas Party of the business entity.
December 5 Collected 45% of the outstanding receivables as of November 30. P7,500 discount
were given.
December 6 A customer sold P15,000 merchandise. The cost of the merchandise returned, P11,250.
December 6 Acquired computer equipment and furniture and fixture for P22,750 and P54,350,
respectively, in an on account basis. No salvage value and can be used for 3 years.
December 7 Sold merchandise for 55,000 cash. FOB Destination, freight prepaid, P500. Cost of
merchandise sold, P47,500.
December 8 Sold inventory for P90,000. Cost of the merchandise sold is P75,000
December 10 Issued a note for a bank loan amounting to P150,000, 12% annual interest.
December 14 Sold merchandise to clients, P45,000 Credit terms: 5/10, n/15. Cost of merchandise
P32,500. Freight paid by the supplier.
December 15 Paid salaries for P13,500.
December 15 Paid advertising in advance for P13,000 for a coverage of 4 months.
December 19 Pay electricity, water and telephone bills, P16,450.
December 20 Collected the accounts receivable last December 14.
December 20 P18,000 of the notes payable outstanding as of November 30, 2018, was paid,
including 10% annual interest. The said note was issued on June 20, 2018
December 21 25% of the accounts payable related to the acquisition of fixed assets acquired last
January 6 were paid.
December 22 Purchased merchandise on account, P70,000. Credit terms: 10/5,n/10.
December 22 Sold merchandise for P15,780. Cost of merchandise sold is P10,750.
December 23 Additional P4,500 supplies were purchased.
December 24 Purchase merchandise for cash P50,000. Freight, P1,500.
December 25 Rendered services on account, P60,000.

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December 27 Paid accounts payable last December 22.
December 28 Juan withdrew from the entity for his personal use, P12,000.
December 29 45% of the services rendered last December 25 were collected.
December 31 Salaries for P13,500 were incurred but not yet paid.
December 31 P8,750 of accounts receivable were written-off.
December 31 P24,765 accounting services rendered were not yet collected.

Additional Information:
1. The following useful life of fixed assets:
Delivery equipment - 5 years useful life,no salvage value, acquired on March 18, 2018
Furniture and Fixtures - 5 years useful life, P7,000 salvage value, acquired on June 5, 2018
Office Equipment - 10 years useful life, P10,000 salvage value, acquired on August 17,
2018

2. 30% of the supplies acquired were on hand.


3. P45,000 of the recorded accounting service revenue was an advance collection from a customer.
The advance collection cover for 7 months. The said amount were collected on November 18,
2018.
4. The amount of advertising reported in the unadjusted trial balance as of November 30, 2018 was
an advance payment for 10 months. Juan dela Cruz paid it on October 5, 2018.
5. The note receivable recorded in the unadjusted trial balance as of November 30, 2018 consist of
the following:

Date received Due date Amount Annual Interest


March 31, 2018 March 30, 2019 49,000 15%
August 1, 2018 July 31, 2019 40,000 10%

6. The remaining notes payable consist of the following:

Date issued Due Date Amount Annual Interest


August 2, 2018 August 1, 2019 28,800 12%
May 31, 2018 June 1, 2019 43,200 10%

7. 20% of the accounts receivable are considered uncollectible.

Requirements:
1. Prepare journal entries, adjusting entries, closing entries in a journal sheet.
2. Post all entries in a general ledger.
3. Prepare a 10-column worksheet
4. Prepare the following financial statements:
a. Statement of Financial Position (report form)

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b. Statement of Comprehensive Income
c. Statement of Changes in Equity
d. Statement of Cash Flows (Direct Method)
5. Post-closing trial balance

REFERENCES

Fundamentals of Accounting 2018 edition, R. Lopez

Fundamentals of Accounting 2018 edition, Ballada

Financial Accounting and Reporting 2018 edition, C. Valix, et.al

www.investopedia.com

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