ACCOUNTABLE EVENTS

 Not all business activities are recorded in the financial statements. We only record transactions
that affect the financial position.
 Source Documents [example: receipts]
NON-ACCOUNTABLE EVENTS
 These are business activities that don’t affect the financial position of an entity. [examples:
Layoff of employees and Resignation of a CEO]
ANALYZING STEP/PROCESS
 We analyze the effect of transactions on the following:
- Assets
- Liabilities
- Equity
After identifying and analyzing, transactions will be recorded in BOOKS OF ACCOUNTS.
2 BOOKS OF AN ENTITY:
1. General Journal
2. General Ledger
The General Journal contains chronologically ordered list of transactions.
The Process of recording transactions from source documents to the general journal is called
JOURNALIZING.

HOW DO WE JOURNALIZE?
 We use the DOUBLE-ENTRY BOOKKEEPING SYSTEM in journalizing transactions.

IN A DOUBLE-ENTRY BOOKKEEPING, ACCOUNTAS HAVE 2 SIDES:

Account
Debit Credit
 Every account has a NORMAL BALANCE
 The normal balance of an account INCREASES the balance of the account.
Dividends/Withdrawals
Expenses DEBIT
Assets NORMAL BALANCE

 These accounts are debited upon INCREASING and credited upon DECREASING.
Liability CREDIT
Equity NORMAL BALANCE
Revenue

 These accounts are credit upon INCREASING and debited upon DECREASING.
ANATOMY OF A JOURNAL ENTRY
Date Account Title and Explanation PR Debit Credit
Jan 30 Salary Expense 501 1 5 0 0 0
Cash 101 1 5 0 0 0
Paid salary expense.

Signifies that a journal entry is already posted to the ledger

AN ENTITY BOUGHT SUPPLIES ON ACCOUNT

Supplies XXX
Accounts Payable XXX

 Since SUPPLIES INCREASE, we will debit the supplies. (note that supplies is an asset
account and asset accounts have debit as their normal balance)
 Since ACCOUNTS PAYABLE (AP) INCREASES, we will credit the AP account. (note that AP
is a liability account and Liability accounts have credit as their normal balance.)
SIMPLE JOURNAL ENTRY COMPOUND JOURNAL ENTRY
Example: Example:
Cash XXX Supplies XXX
Sales XXX Inventory XXX
Cash XXX
POSTING – We Classify similar accounts.
JOURNAL
(Book of Original Entry)

TRANSACTIONS
LEDGER
(Book of Final Entry)

DOUBLE-RULED ACCOUNT
BALANCE
FOOTING – The process of summing the debit or credit column.
CROSS FOOTING – The process used to verify the balance of an account.
ALL POSTINGS:

T-ACCOUNTS:
TRIAL BALANCE:

TRIAL BALANCE – A document that shows the balance of accounts in a business.

TRIAL BALANCE IS USED FOR: [1] Determining the totals of debits and credits. [2] Detecting
errors.
ACCOUNTING PERIOD
 CALENDAR YEAR
- Starts January 1; ends December 31
- Generally used by business
- Companies report financial statements with December 31 year-end
 but before you prepare Financial Statement, you need to update balances on an
entity, its called ADJUSTING PROCESS

 FISCAL YEAR
- Any 12-month period other than those ending December 31.
[example: April 1 to March 31 or July 1 to June 30]

 NATURAL BUSINESS YEAR

- Accounting Periods with year-end at its Lax Season.
ACCRUAL BASIS
 Revenues are recorded when earned
 Expenses are recorded when incurred
 Not when [a] Cash is received (revenue) [b] Cash is paid (expense)
CASH BASIS
 Revenue is recorded when Cash is received (revenue)
 Expense is recorded when Cash is paid (expense)
WHY ADJUST? (ADJUSTING PROCESS)
 Because of the accrual basis of accounting, accounts need to be adjusted to report revenues
and expenses at the proper period.

ACCRUALS AND DEFERRALS

ACCRUAL – Recognizing revenues and expenses when earned or incurred not when cash is
received or paid.
 MATCHING PRINCIPLE – matching expenses to revenues.

6 Types of Adjusting Items:

Type 1 – Prepaid Asset / Asset Method [deferral]
 Cash is paid in advance for expenses not yet incurred (initial entry involves recording a prepaid
asset)
 Example: ABC Company paid on Oct. 1 P30,000 for a 5-month rent in advance.

Oct. 1 [Initial Journal Entry] Dec. 31 [Adjusting Entry]

Prepaid Rent 30,000 P30,000x3/5 months = P18,000
Cash 30,000 Rent Expense 18,000
Prepaid Rent 18,000

DEPRECIATION – Systematic allocation of expenses of particular assets due to wear and tear.

METHODS OF DEPRECIATION
 There are many ways to depreciate an asset. The most common is the STRAIGHT-LINE
METHOD (SLM)
Formula: 𝐶𝑜𝑠𝑡−𝑆𝑎𝑙𝑣𝑎𝑔𝑒 𝑉𝑎𝑙𝑢𝑒
Periodic Depreciation =
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒
  Example: ABC Company purchased an equipment on January 1, 2019 costing P110,000 with
10 years useful life and P10,000 salvage value.
110,000−10,000 Yearly Depreciation = P10,000
Yearly Depreciation =
10

Dec. 31 [Adjusting Entry] ACCUMULATED DEPRECIATION – is a contra-asset account.

Depreciation Expense 10,000 In the financial statements, the equipment will be shown as:
Accumulated Depreciation 10,000
Equipment [Cost] P110,000
Less: Accumulated Depreciation 10,000
Equipment, net P100,000

Type 2 – Unearned Revenue / Liablity Method [deferral]

 Cash is received in advance for revenue not yet rendered (initial entry involves recording a
liability account).
 Example: During Dec. 1, 2020, ABC Company received P75,000 as advance payment from
customer good for 3 months of services.
Dec. 1 [Initial Journal Entry] Dec. 31 [Adjusting Entry]
Cash P75,000 1/3 months x 75,000 = P25,000
Unearned Revenue P75,000 Unearned Revenue P25,000
Service Revenue P25,000

Type 3 – Accrued Expenses [accrual]

 Expenses is already incurred but cash is not yet paid.
 Example 1: A company has 5 employees with P200 daily wage paid every Friday. The
employees work 5 days a week. Assume Dec. 31 is a Wednesday.
Dec. 31 [Adjusting Entry]
3 days x P200 daily wage x 5 employees = P3,000 ACCRUED WAGE
Salaries Expense 3,000
Salaries Payable 3,000
 Example 2: On Dec. 1, the company borrowed P100,000 cash with 12% interest. Principal and
interest mature after 6 months. I=PxRxT
Dec. 31 [Adjusting Entry]
where:
I = P100,000x12%x1/12 months = P1,000 I = Interest
P = Principle
Interest Expense 1,000 R = Rate
Interest Payable 1,000 T = Time

Type 4 – Accrued Revenues [accrual]

 Revenue is already earned but cash is not yet received.
 Example: ABC Company rendered services to customer D worth P500,000 on account.
Dec. 31 [Adjusting Entry] Assume P500,000 is collected on January 31 the following
year:
Accounts Receivable P500,000
Service Revenue P500,000
Cash P500,000
Accounts Receivable P500,000
Type 5 – Expense Method [deferral]
 Cash is paid in advance for expenses not yet incurred (initial entry involves recording an
expense account)
 Example: ABC Company paid on Oct. 1 P30,000 for a 5-month rent in advance.
Oct. 1 [Initial Journal Entry] Dec. 31 [Adjusting Entry]
Rent Expense 30,000 P30,000x2/5 months = P12,000
Cash 30,000 Prepaid Rent 12,000
Rent Expense 12,000

Type 6 – Revenue Method / Liability Method [deferral]

 Cash is received in advance for revenues not yet rendered (initial entry involves recording a
revenue account)
 Example: During Dec. 1, 2020, ABC Company received P75,000 as advance payment from
customer good for 3 months of services.
Dec. 1 [Initial Journal Entry] Dec. 31 [Adjusting Entry]
Cash P75,000 2/3 months x 75,000 = P50,000
Service Revenue P75,000 Service Revenue P50,000
Unearned Revenue P50,000

COMPREHENSIVE PROBLEM
Objective:
 To make Journal Entries
 To make Adjusting Entries
 To make Subsequent Entries

JOURNAL ENTRIES
SUBSEQUENT ENTRIES

INCOME STATEMENT APPROACH

 On initial entry, advanced payment of expenses and unearned revenue items are recorded
immediately as expenses and revenue, respectively.
TRANSACTION 1
Atty. Ann Jan Law Firm has the following transaction during the year:
Jan 1 Atty. Ann Jan purchased 1-year fire insurance for P5,000
Journal Entry [Jan 1]
Account Title Debit Credit
Insurance Expenses P5,000
Cash P5,000

TRANSACTION 2
Feb 2 Received P240,000 in advance from a client for an 18-month professional services.
Journal Entry [Feb 2]
Account Title Debit Credit
Cash P240,000
Professional Fees P240,000

TRANSACTION 3
Aug 1 Purchased a 10-month general insurance for P5,000.
Journal Entry [Aug 1]
Account Title Debit Credit
Insurance Expense P5,000
Cash P5,000

TRANSACTION 4
Oct 1 Received P30,000 from a customer for a 4-month service starting Nov 1.
Journal Entry [Oct 1]
Account Title Debit Credit
Cash P30,000
Professional Fees P30,000

ADJUSTING ENTRIES
(Income Statement Approach)

The following have the same adjusting entries from the balance sheet approach:
TRANSACTION 5
Adjusting Entry [Dec 31]
Account Title Debit Credit
Utilities Expense P6,000
Accrued Expense P6,000
Note!
TRANSACTION 6 Journal entries of accruals
are not affected by the
Adjusting Entry [Dec 31] approach used [whether
Account Title Debit Credit Balance Sheet or Income
Salaries Expense P9,000 Statement Approach]
Salaries Payable P9,000

Adjusting Entry [Dec 31]

Account Title Debit Credit
Interest Receivable P2,750
Interest Revenue P2,750
TRANSACTION 1
Jan 1 Atty. Jan purchased 1-year fire insurance for P5,000.
Journal Entry [Jan 1]
Account Title Debit Credit
Insurance Expense P5,000
Cash P5,000

Adjusting Entry [Dec 31]

Account Title Debit Credit
N/A

TRANSACTION 2
Feb 2 Received P240,000 in advance from a client for an 18-month professional services.
Journal Entry [Feb 1]
Account Title Debit Credit
Cash P240,000
Professional Fees P240,000
P240,000
X
7/18 months
Adjusting Entry [Feb 1]
Account Title Debit Credit
Professional Fees P93,333
Unearned Professional Fees P93,333

TRANSACTION 3
Aug 1 Purchased a 10-month general insurance for P5,000.
Journal Entry [Aug 1]
Account Title Debit Credit
Insurance Expense P5,000
Cash P5,000
P5,000
X
Adjusting Entry [Aug 1]
5/10 months
Account Title Debit Credit
Prepaid Insurance – general P2,500
Insurance Expense P2,500

TRANSACTION 4
Oct 1 Received P30,000 from a customer for a 4-month service starting Nov 1.
Journal Entry [Aug 1]
Account Title Debit Credit
Cash P30,000
Professional Fees P30,000
P30,000
X
Adjusting Entry [Dec 31] 2/4 months
Account Title Debit Credit
Professional Fees P15,000
Unearned Professional Fees P15,000
Made by: Maria Mhikaela C. Timajo