Chapter 2

The Conceptual Framework for Financial Reporting

52. Under a financial capital maintenance concept, a profit is earned if

a. the financial amount of the net assets at the beginning exceeds the financial
The Accounting Process
amount of the assets at the end.
b. the financial amount of the net assets at the end exceeds the financial
amount of the net assets at the beginning. Learning Outcomes
c. the financial amount of net assets at the beginning exceeds the financial
amount of net assets at the end after excluding any distribution and After reading this chapter, you should be able to:
contribution from owners. •
d. the financial amount of the net assets at the end exceeds the financial (a) enumerate the steps in the accounting processing cycle;
arnount of the net assets at the beginning after excluding any distribution (b) understand the means of processing the accountable events from one
and contribution from owners. accounting cycle to another;
(c) acquire proficiency and accuracy in answering theoretical and problem-solving
53. This concept should be used if the main concern of users is with the operating questions about the accounting process.
capability of the entity.
a. Financial capital concept
b. Invested capital concept Accounting
c. Operating capital concept
d. Physical capital concept > Accounting is 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,in making reasoned choices
among alternative courses ofaction.

". The Accounting Process

■ 1.' f'-.
■' I 't'
■ r ' ■ y' 1 .. I > During the accounting period
'

Step 1 - Obtain information about external transactions from source

0 ■ ■ !'
documents.
N
I' ,
o A mechanism is needed to relay the essential information
. A: about each transaction to the accountant
j' o Source documents such as sales Invoices, bills from suppliers,
■i'X ■■-■-r': . ■"s.'
' and cash register tapes serve this need.
■ ■■

Step 2 - Anal5^e the transaction.

■t
V ■ ■ .
■
o Transaction analysis is the process of reviewing the source
documents to determine the dual effect on the accounting
i.i. r.
equation and the specific elements involved.

Step 3 - Record the transaction in a journal.

■ ' . 1■ • t 1 ^ k V : ' . • ■
• ' ' : - ' . .y
' o The third step in the process is to record the transaction in a
' -".S; ' ... • .
i « < » '• ' • ) ! . • 1 .. ' • ' 4 i
'■ - J journal. A journal provides a chronological record of all
economic events affecting a firm,
o Special journals include:
.vr-. • :r-. . 'y. ^ Sales journal - record sales on account
j. .UT'
✓ Purchases journal - record purchases of inventory on
'H account.
T..-
Cash receipts journal - record all transactions
^ i' :
involving receipts of cash
!' I
Cash disbursements journal - record all transactions
involving payments of cash. \

32
Chapter 3
The Accounting Process
o General journal - record transactions not recorded in the
specizd journals. All transactions are recorded in the general
journal ifspecial journals are not used.
Step 4- Post from the journal to the general ledger accounts.
o Step 4 is to periodically transfer or post the debit and credit
information from the journal to individual ledger accounts,
o Each account provides a summary of the effects of all events
and transactions on that individual account
o This process is.called posting. Posting involves transferring
debits and credits recorded in individual journal entries to the
specific accounts affected,
o Kinds of Ledgers
General ledger - one which contains appearing in the
financial statements.
✓ Subsidiaiy ledger - a supporting ledger consisting ofa
group of accounts with similar nature, the total of
which is in agreement with the balance of the related
controlling account in the general ledger.
> Atthe end ofthe accounting period
• -Step 5- Prepare an unadjusted trial balance.
® ^ trial, balance is simply a list of the general ledger accounts
along with their balances at a particular date, listed in the
order that they appear in the ledger.
° purpose of the trial balance is to allow us to check for
and to verify that the sum of the accounts with
debit balances equals the, sum of the accounts with credit
balances.
^ the debits and credits are equal,though,does not
^®®®ssarily ensure that the equal balances are correct. The
trial balance could contain offsetting errors.
. Step 6 - Record adjusting entries and post to the general ledger
accounts. : . •
o Adjusting entries
✓ are required to implement the accrual accounting
model.
✓ help ensure that all revenues are recognized in the
period goods or services are transferred to customers,
regardless of when the cash is received,
enable a company to recognize all expenses incurred
during a period, regardless of when cash payment is
made.
Adjusting entries are necessaiy for three situations:
^ Prepa3mients,sometimes referred to as deferrals
^ Accruals
^ Estimates (i.e. depreciation,bade debts,etc.)
34
Chapter 3
The-Accounting Process
Step 7- Prepare an adjusted trial balance.
o The term adjusted refers to the fact that adjusting entries have
now been posted to the accounts.
Step 8- Prepare financial statements.
o The financial statements are the primary means of
communicating financial information to external parties.
> At the end ofthe year
• Step 9- Close the temporary accounts to retained earnings.
o The closing process serves a dual purpose:
^ the temporary accounts (revenues, expenses, gains
and losses) are reduced to zero balances, ready to
measure activity in the upcoming accounting period,
and
these temporary account balances are closed
(transferred) to retained earnings to reflect the
changes that have occurred in that account during the
period.
• Step 10- Prepare a ppst-clqsing trial balance.
o The purpose of this trial balance is to verify that the closing
entries were prepared and posted correctly and that the
accounts are now ready for next year's transactions.
> Optional Steps
• Use of a Worksheet
6 A worksheet often is used to organize the accounting
information heeded to prepare adjusting and closing entries
and the financial statements. It is an informal tool only and is
not part ofthe accounting system.
o The worksheet is utilized in conjunction with Step 5 in the
processing cycle, preparation of an unadjusted trial balance.
Reversing Entries
6 Reversing entries are used at the beginning of a reporting
period.
o -These optional entries remove the effects of some of the
adjusting entries recorded atthe end ofthe previous reporting
period for the sole purpose of simplifying jounial entries
recorded during the new period.
o If reversing entries are used,these entries are recorded in the
general journal and posted to the general ledger accounts on
the first day ofthe new period.
o Reversing entries are used most often with:
^ accruals;
^ prepa5nhents (expense method was initially used);
and
- ^ dsferred revenues(income method was initially used).
35
 Chapter 3 ^Chapter 3
The Accounting Process The Accounting Process

TRUE OR FALSE QUESTIONS 19. For a profitable company, the entry to close the income summaiy account is
debit income summary and credit retained earnings.
1. In a T-Account, this T format graphically depicts the debits on the left side of
the T and the credits on the right side. 20. The accumulated depreciation account is not closed to income summary
account at the end of^e accounting period.
2. An unadjusted trial balance is a listing ofall the business accounts that are going
to appear on the financial statements after year-end adjusting journal entries 21. A worksheet is nota formal statement
are made.
22. Ifthe total ofthe debits exceeds the total ofthe credits in the income statement
3. Accrued expenses are goods or services that have been paid for by a company columns ofa worksheet,there is a net loss.
but have not been consumed yet.
23. A simple journal entry consists oftwo ore more debits or two or more credits.
4. An accounting cycle is always equal to one calendar period.
24. The debit and credit analysis of a transaction normally takes place before an
5. The primaiy objective ofthe accounting activity is to state an opinion regarding entry is recorded in a journal.
the fairness offinancial statements.
25. The left side of an account is always the debit side and the right side is always
6. When the trial balance is balanced, it proves the accuracy of the bookkeeping the credit side.
records.

7. Adjusting entries should be made at the beginning of an accounting record.

8. Reversing entries are done at the start ofa new accounting period.
(

9. After closing entries, the debit side ofan expense account is equal to its credit
side.

10. To accrue means to paythe expenses when this became due.

V ■ ■ *

11. All ^set accounts are nominal accounts.

12.
Not all of die adjusting entries may be reserved.
f 13. The accounting cycle starts with the analysis ofbusiness transaction.
14. After proper analysis, the .business transaction is Recorded iri journal in a
chronological order. '"

15.. In acc:c)un1ing/bookkeeping,the term posting refers to transfer ofentries from

journal to ledger.

16. The collection or group of accounts in an organization is known as general

ledger.

17. A credit may signify an increase in an expense account

' . . , ' ' ' ' \
la The income statement is generally prepared first among the financial
statenients.

36
37
C^iapter 3
Tlie Accounting Process Chapter 3
The Accounting Process
FINANCIAL ACCOUNTING THEORY QUESTIONS
6. It is an accounting device for accumulating increases and decreases relating to
a particular accounting value such as an asset or a liability.
Which ofthe following statements about accounting is false?
a. Account
a. Accounting is a practical art.
b. Journal
b. Accounting is a social science. c. Trial balance
c. Accounting is a service activity.
d. Worksheet
d. The function of accounting is to provide qualitative information, primarily
financial in nature, about economic entities, that is intended to be useful in 7. An account in financial reporting that increases the book value of a -
making economic decision. liability account
a. Adjunct account
Which of the following describes accounting as a science? b. Contra account
a. It requires creative judgment and skills. c. Nominal adjunct account
b. It follows a systematic and organized path to understanding the economic d. Nominal contra account
status of the entity.
c. It presents the financial findings by following and implementing 8. The natural balance of a contra account
a universally accepted method (GAAPJ. a. is the same as the account with which it is paired.
d. Accounting is the application of knowledge comprising of some accepted b. is always the opposite of the account with which it is paired.
theories, rules, concept and conventions. c. couldn't be the opposite of the account with which it is paired.
d. may or may not be the opposite of the account with which it is paired.
3. Which of the following describes accounting as an art?
a. Accounting includes rules, principles, concepts, conventions, and i 9. Which ofthe following documents is generated by the vendor when a company
standards. purchases goods on account?
b. Accounting requires gaining knowledge about the economic status of an a. Collection letter
entity by systematic study. b. Official receipts
0. Recording, classifying and summarizing of business transaction is done on c. Purchase Journal
the basis of certain principles of double entry book-keeping system which d. Sales invoice
are universally applicable.
d. It tells us the manner through which some special objectives, like 10. When the manufacturing department is in need of goods or materials to
ascertaining the operating result for an accounting period and the financial complete its upcoming jobs, what document will it issue to the purchasing
position of the business on a particular date, can be achieved. department?
a. Billing statement
Which ofthe following is not an economic entity? b. Cash advance summary
a. Cardo Cruz Massage Spa and Other Services *0. Purchase requisition
Mr. Leonard Bryan G., owner offacial and skin care clinic. d. Sales order
Philippine Review Institute for Accountancy,Inc.(PRIA)
PDAC & Co., CPAs [Certified Public Accountants and Management 11. In terms of debits and credits, which types of accounts will have the same
Consultants) normal balances?
a. Dividends,expenses,assets
5. Ma C.Si[MCS]is the owner and manager of Masipag Construction Services. MCS b. Assets, capital stock, revenues ^
purchased a condominium unit for personal use and a pick-up truck to be used c. Expenses,liabilities, capital stock
in the construction business. Which ofthe following assumptions,principles,or d. Retained earnings, dividends,liabilities
constraints would be violated if both the condominium unit and the pick-up
truck are recorded as assets of the business? 12. Every transaction will affect how many accounts?
Conservatism constraint a. Only one
Continuity assumption b. Only two
Materiality constraint c. Two or more
Separate entity assumption d. At least three

38 39
 Chapter 3 Chapter 3
The Accounting Process The Accounting Process
13. When special journals are used,a General Journal is Which of the following statements is true regarding debits and credits?
a. not needed. a. Before adjustments, debits will not equal credits in the trial balance.
b. still required. :if' b. In the income statement, revenues are increased by debit whereas in the
c. used only to record sales returns and allowances. statement of fi nancial position, retained earnings account is increased by a
d. used only to record cash deposits of owner investments. credit
c. In the income statement, debits are used to increase account balances
14. Which of the following transactions is recorded in a cash receipts journal? whereas in the statement of financial position, credits are used to increase
a. Credit sales account balances.
b. Inventories are received d. The rules for debit and credit and the normal balance of share capital are
c. Collection of accounts receivable the same as the liabilities.
d. Sales revenue is billed to the customers
A debit balance in the nominal "income summary" account represents
15. A ledger a. capital
a. is a book of original entry. b. liability
b. contains only asset and liability accounts. c. net income
0. should show accounts in alphabetical order. d. net loss
d. is a collection ofthe entire group of accounts maintained by a company.
Certain accounts are closed at the end of an accounting period to
16. This ledger may contain transactions about receipts into stock, movements a. reduce the number of accounts that appear in the ledger.
of stock to the production floor, conversion into finished goods, scrap and b. transfer the effect of transactions recorded in the real accounts to owner's
rework reporting, write-offs for obsolete items, and sales to customers. equity.
a. Accounts payable ledger c. reduce the number of items that get reported in the general-purpose
b. Fixed assets ledger financial statements.
c. Inventory ledger d. prepare those accounts for recording of transactions of the subsequent
d. Purchases ledger accounting period.
17. An error which is disclosed by a trial balance is What is the normal order of accounts in preparing a post-closing trial balance?
a. double-posting a credit to Sales amounting to P15,000. a. Asset, liability and equity
b. an omission of a journal entry on purchases on account. b. Asset, liability, equity, income and expenses
c. posting to the correct debit or credit side of a wrong account. c. Asset, equity, income, expenses and liability
d. a journal entry for salaries paid amounting to P180,000 was not posted d. All accounts with debit balances and then all accounts with credit balances

18. Which ofthe following statements is false regarding adjusting entries? Which of the following items would appear in the post-closing trial balance?
a. Adjusting entries involve accruals or deferrals. a. Distribution cost
b. Cash is neither debited nor credited as a result of adjusting entries. b. Increase in the fair value of trading securities
c. Each adjusting entry affects one revenue account and one expense account. c. Loss" from write-down of inventory to net realizable value
d. Each adjusting entry affects one statement of financial position and one d. Cumulative balance of unrealized fair value gain of FA-FVOCI
income statement account.
Which is an optional step in the accounting cycle?
19. Which ofthese items least resembles a typical adjusting entry? a. Adjusting entries
a. Debit an asset, credit a liability b. Closing entries . •
b. Debit an asset, credit a revenue. c. Financial statements -
c. Debit an expense,credit a liability < d. Reversing entries
d. Debit a revenue, credit a liability ;

An appropriate reversing entry

a. is dated the first day of the next accounting period.
b. must be made because they are required by accounting standards.
c. is usually made for adjusting entries that affect deferred items only.
d. is often used to correct entries which were initially based on estimates.

"■i . f
■f. - , -r •. '•> ■ .,r ■''V,
li-.hi J-V.;.' ..i jJ.
 '{pii
ri jjyl

Chapters Chapter 3
The Acxoimtiiig Process The Accoanting Process

PRACTICAL nNANCIAL PROBLEMS C. Parahaque Inc., a VAT registered entity, issued Sales Invoice No. 35 for an item
sold on credit for P250,000 and granted multiple discounts to the client at 15%
and 3%.
Muntinlupa Enterprise reported the following events to its bookkeeper that
occurred on April 15,2021:
(4) The correct entry to record this transaction Includes a debit to Account
• Hired five (5) employees who will be assigned to handle the deliveiy Receivablefor
operations of the company. Each employee signed a P15,000 monthly a. P20S,000.
salary contract b. P206,12S.
c. P229,600.
• The purchasing officer prepared a purchase order (PO) for inventory d. P230,860.
amounting to P85,000. The said PO has been mailed to the supplier on the
same date. (5) TheJournal entryfor the above transaction would Include a credit to Salesfor
a. P20S,000.
• Muntinlupa's chairman, Mr. Hini M. Atay, suffered a heart attack and b. P206,12S.
immediately died. The expected loss for this to Muntinlupa is estimated at c. P229,600.
P10,000,000.
d. P2S0,000.
• Billing for electricity for the month of March 2021 received today
amounting to P13,600. D. Makati Cleaning Services is a manpower firm that provides housekeeping,
janitorial and laundry services. As the bookkeeper of Makati, the follovvang
• Delivered P300,000 worth ofinventories to customer with selling price of documents were provided to you:
P350,000.
• ^Official Receipt(OR)
(1) How much is the total accountable eventthat occurred on April 15,2021? o OR No.254- P35,000(paymentfor SI No.1117)
fl. P323,600
o OR No.255 - P26,500(payment for SI No.1119)
b. P663,600
o OR No.256- P38,950(paymentfor SI No.1118)
c. P748,600
o OR No.257-P15,000(Cash sales)
d., P833,600
• Acknowledgment Receipt(AR)
B. Marikina Trading Corporation recorded the journal entries for the following: o AR No.143- P300,000(pa3nnent ofsharesubscribed)
OR No.255 - P200,000(refund ofsecurity deposit for rent)
• Accrual ofwater consumption ofP35,000.
Service Invoice (SI)
• Declaration ofP800,000 cash dividends. o SI No.1120 - P55,000
• Sales on account ofP350,000. o SINo.ll21-P35,000
o SINo.ll22-P85,000
• Purchase ofcomputer equipmentfor P350,000 cash.
• Issuance ofcapftal stock for cash at par amounting to P400,000. (6) How much Is the total debit to cash In the cash receipts books?
a. P100,450
(2) Whatrieteffect do these entries have on equity? b. PUS,450
d. Decrease ofP85,000 c. P615,450
b. Decrease ofP450,000 d. P790,450
c. Decrease cfP50,000
d. Increase ofP85,000 (7) How much should be recorded In the sales books?
a. P175,000
(3) What neteffect do these entries have on assets? b. P190,000
a. Decrease ofP400,000 / c. P290,45q
b. Decrease ofP435,000 d. P790,450
c. Increase ofP50,000
d. increase ofP400,000 .

42 43
 Chapters Chapter 3
The Accounting Process The Accomiting-Process

E. The Navotas Wholesale Company began operations on September 1,2021. The • Inventories ^
following transactions occurred during the monA ofSeptember. o This account has a balance of nil atthe beginning,
o Inventory worth PI8,000 was purchased on credit
The stockholders of Navotas paid P100,000 cash in exchange for 10,000 o Sold inventoiy worth P13,000.
ordinary shares.
• Equipment
Rent.on ofhce space was paid on September 1 amounting to P12,000, o Purchased office equipment oh credit amounting to P80,000.
applicable to September and October rent o Sold for PI0,000 an old laptop acquired three years aga for
P25,000.
A photocopying machine was purchased for P40,000 cash.
(9) Whatis the correct ending balance ofCash?
A note payable is signed for P30,000 representing loans payable to a bank. a. P82,50d
b. P92,500
On September S, 2021, Navotas purchased inventory on account costing
c. P102,500
P76,000.
d. P112,500
P44,000 worth of merchandise was sold on account for P80,000.
(10) Whatis the correct ending balance ofall assets above?
Customers paid P30,000. a. P112,500
b. P262,500
Navotas paid its suppliers amounting to P40,000. c. P280,500 .
d. P290,500
Salaries and wages of P14,000 for the month of September were paid on
September 30,2021.
You received the unadjusted trial balance of.Las Pihas Merchandising for the
The president of Navotas Borrowed P40,000Jrom Ae company. month ended January 31,2021:
(8) Whatis the correctending balance ofCash^
a. P14,000 Pgbjt Credit
Cash 35,000
b. PIS.OOO
Accounts Receivable 85,000
c. P22,000
Merchandise Inventories 28,500
d. P30,000
Prepaid expenses 15,000
Land 150,000
F. The following T-accounts for assets are available in the records of Man Company: Machinery - net of depreciation 85,700
Accounte Payable 98,500
Cash ■ Accounts Receivable Interest Payable 15,000
10,000 85,000 75,000 93,000 Ordinary Shares 224,000
1 17,500 18,000 Retained Earnings 185,000
Sales 340,400
Inventories Equipment Cost of Goods Sold 71,000
13,000 18,000 . 80,000 Rent expense 35,000
10,000 Salaries and wages 38,7b0
Cash
Interest expense 44,000

o The beginning balance ofqash is PI7,500.

TOTAL 552,900 897,900
G The credit to caSh pertains to cash sales.

Account Receivable The following information are also available: .

o The beginning balance of this account is P75,006 and the ending
balance is P93,000. • Company checks amounting to P85,000 were already recorded but
b Credit sales ofP18,000 was recorded and posted. remained in the possession of Las Pihas as ofJanuary 31,2021.

44 45
 Chapter 3
Chapter 3
The Accoiinting Process
!The Accouhting Process

Prepaid rent 2,000

• Creditsales amounting to P561,000 was recorded as PI56,000. The related
Insurance expense 7,300
debit to accounts receivable was correctly recorded.
Owner's investment 95,000
• The balance of furniture and equipment amounting to P350,000 was not Rent and Rates Expense 400
included in the list above.
Accumulated Depreciation - Equipment 14,000
Accrued Revenue 15,000
• Share Premium of P285,000 from issuance ofshares was recorded as part Machineiy 25,000
of Retained Earnings. Drawings 3,500
Equipment 40,000
• Based on inventory records, the balance of cost of goods sold should be Maintenance expense 5,000
P471,000. Miscellaneous expense 4,800
Accrued expenses 1,500
(11) Whatis the correct trial balance tx)ta!? Depreciation expense - Equipment 2,000
a. P1^S2,900 Unexpired insurance 8,500
b. Pl,4S2,9dO Vendor's payable 500
c. Pl,487,900
d P155Z900 (13) Whatis the correct trial balance total?
a. P120,000
H. The following transactions for Novaliches Design have been journalized and b. P123,000
posted to the proper accounts: c. ^ P130,S00
d. P132,000
• Mr.Arid Tekto invested P8,000 cash in Novaliches.

• Novaliches paid the first months'rent with P300 cash. J. Prepaid Insurance account began the year with a balance of P23,000. During the
year,insurance in the amount of P57,000 was purchased. At the end ofthe year
• Purchased equipment by pa3dng P2,000 cash and executing a note payable March 31®^, 2021,the amount ofinsurance still unexpired was P35,000.
for P3,000.
(14)Ifthe asset method is used,the adjusting entry willinclude a debitto insurance
• Purchased supplies for P200 cash. expense of
a. P35,000
• Novaliches billed clients for a total ofP1,000 for design services rendered. b. P45,000
c. P57,000
• Received P750 cash front clients for services rendered above.
d. P69,000
• Mr.Tekto took a withdrawal ofP2,000
K. On July 3, a deposit in the amount of P5,000 was received for services to be
(12J Whatis the correct trial balance total? performed. By the end of the month, services in the amount of Pl,200 were
a. P10,000
performed.
b. P12,000
c. PHOOO
(15) Using the liability method, the initial entry will include a
d. P16,000
a. credit to cashfbrPl,200
b. credit to revenuefor P5,000
I. The following information is available for Val Services at March 31,2021: c. credit to unearned revenuefor P5,000
d. credit to earned revenuefor Pl,200
Description Amount
Bank Loan 14,000 (16) Using the revenue method, the adjusting entry will include a
Financial Asset at FVPL 6,500 a. debit to revenuefor Pl,200
Bill Payable 1,000 b. debit to revenuefor P3,800
Unearned Revenue 3,500 c. credit to unearned revenuefor Pl,200
Sundry Debtors 12,000 d. credit to revenuefor Pl,200
Outstanding salaries 2,500
47
46
Chapter 3 Chapter 3
The Accounting Process The Accounting Process

L. Bacoor Realty Co. pays weekly salaries ofP125,000 on Friday for a five-day week The following information are available for the month ofJune 2021 for the three
ending on that day. (3)outside salespersons:

Fixed salaries Net sales Commissibn'rate

(17) The adjusting entry at the end of the accounting period, assuming that the
period ends on Thursday, will include a Donna 25,000 225,000 10%'
a. debit to salaries payablefor PI00,000. Regine 37,500 625,000 10%
b. creditto salaries payablefor P125,000. Mikey 62,500 1,000,000 15%'
c. debit to salaries expensefor P100,000.
d. debit to salaries expensefor P125,000. (20)Whatshould Sta. Rosa Enterprise accrue for sales commissions at June 2021?
a. P110,000
b. P112,500 ' '
M. For the year ending December 31, 2021, Imus Janitorial Services mistakenly c. P125,000
omitted adjusting entries for P86,000 of unearned revenue that was earned, d. P235,000
earned revenue that was not billed ofP125,000 and accrued wages of P29,000. '
(18) Whatis the combined effectofthe errors on revenue,expenses and net income, P. Cabuyao Leasing's unadjusted prepaid expense account at December 31, 2021,
respectively? revealed the following:
a. P39,000 understated,P29,000 understated, P182,000 understated • An opening balance ofP120,000 for an insurance policy^ Cabuyao had paid
b. P39,000 understated,P29,000 understated, P96,000 understated an annual premium of P240,000 on July 1,2020.
c. P211,000 understated,P29,000 understated,P182,000 understated
d. P211,00 overstated,P29,000 understated, P240,000 understated • A P360,000 annual insurance premium payment made July 1,2021.

• A P1,000,000 advance rental pa5mient for a warehouse Cabujrao leased for

N. The adjustment for accrued fees of P267,000 was journalized as a debit to, one year beginning January 1, 2022.
Accoi^nts Payable for P267,000 and a credit to Se^ce Revenue of P267,000. In
addition, Ae adjustment for depreciation ofP163/b00 was journalized as a debit ' (21) Whatamountshould Cabuyao report as prepaid expense in its December 31,
to Depreciation Expense for P136,000 and a credit to Accumulated Depreciation 2021 statement offinancial position?
forP163,000. ' a. P180,000
b. Pl,180,000
(19) Which ofthefollowing statements is true? c. Pl,300,000
a. The trial balance totals are e^qual. d. P1,360,0Q0
Excluding the error in the adjusting entry for depreciation, the trial
balance totals are equal.
c. The debit total ofthe trial balance is higher by P27,000. Q. San Pedro Company presented the following data for 202i:'
d. Excluding the error in the adjusting entry for accrued fees, the trial
Assets,January 1 5,400,000
balance totalsdre equal Liabilities, January 1 3,240,000
Shareholders' equity,Januaiy 1 7

O. Sta. Rosa Enterprise hires outside salespersons with the following terms on Dividends paid in 2013 1,080,000
salaries and commissions: Increase in share capital-ordinaiy 972,000
Shareholders' equity, December 31 ?
• Fixed monthly salaries and commissions based on net sales. Net income 1,080,000
• Sales commissions are computed and paid-on; a monthly basis [in the (22) What is the shareholders' equity at December 31,2021?
month following the month of sale) and the fixed salaries are treated aS
a. Pl,890,000
advances against commissions.
. . . . , , , r ' b. jPl,998,000
• Ifthe fixed salaries for salespersons exceed their sales commissions earned c. P3,132,000
for a month,such excess is not charged back to them. d. P3,186,000

48 49
 Chapter 3
The Accounting Process

Bocaue Trading provided the following information for the year:

Cash and Cash Equivalents
Accounts receivable, January 1 190,000
Collections from customers 2,100,000
Shareholders' equity,January I 380,000 Learning Outcomes
Total assets,January 1 750,000
Total assets, December 31 880,000 After reading this chapter, you should be able to:
Accounts receivable, December 31 360,000
Total liabilities, December 31 390,000 (a] understand the definition and nature of cash and cash equivalents and identify
its composition;
(23) What is the net income for the current year? (b) know the proper presentation of cash and cash equivalents in the statement of
a. P70.000
financial position;
h. PI10,000 (c] explain the basic features of a cash control system;
c. PI50,000
(d) understand how a petty cash system works and be able to solve problems
d. P490,000 involving the petty cash fund;
(e] solve simple and complex problems relating to bank reconciliation and proof of
The adjusted trial balance of Malolos Fabrication for the month ended January 31, cash; and
2021 shows the following: (f) attain proficiency in solving problems relating to cash and cash equivalents.

Debit Credit
Definition and Nature
Cash 150,000
Accounts Receivable 355,000 Cash is any item that can be used as a medium ofexchange and which is acceptable
Prepaid expenses 88,000 by bank at face value upon deposit. Cash or cash on hand and in banks include
Land 250,000
Machinery - net of depreciation 185,700 > cash items on hand - undeposited cash collections and cash items awaiting
Accounts Payable 198,500 deposit such as bills and coins, bank drafts, customers' checks, manager's
Interest Payable 8,000 checks,cashier's checks and postal money orders
Ordinary Shares 350,000
Retained Earnings 450,000 > peso or foreign currency deposits in bank - savings,checking or money market
Revenue 585,100 accounts

Direct Labor 185,000

> working funds - petty cash fund, change fund, payroll fund,and dividend fund
Direct Materials 157,000
• \
Depreciation expense 13,300 These items should be unrestricted and immediately available for use in the current
Rent expense 115,000 operations.
Utilities expense 78,600
Interest expense 14,000
❖ Cash Equivalents
TOTAL 1,591,600 1,591,600
These are short term and highly liquid investments that are both readily marketable
(24) What is the correct trial balance total after all closing entries are made? to known amounts of cash and are subject to Insignificant risk of change in value.
a. Pl,028,700
b. PI,050,900 > Examples are Bangko Sentral ng Pilipinas (BSPJ treasury bills, commercial
c. Pl,569,400 papers, and money market instruments with original maturities of three
d. Pl,591,600 months or less.

> The determination of original maturity date starts from the date of acquisition
ofthe instrument and not from the date indicated on the face ofthe instrument.

> Trading equity securities cannot qualify as cash equivalents because these
equity securities do not have maturity dates.
V

> f ■