MODULE 1 INTRODUCTION TO ACCOUNTING THE INSTITUTE OF CERTIFIED BOOK-KEEPERS LEARNING OBJECTIVES After a careful study of this module, you should be able to: 1. Know the definition of accounting and its role in business. 2. Distinguish the different types and forms of business organization as well as their characteristics. Learn the different accounting values or elements. Learn the accounting process (functions of accounting) Know the accounting equation and its significance. Know what a business transaction is and its effect on the accounting elements. 7. Learn how to record the business transactions using the double entry method of bookkeeping 8. Learn how to prepare the trial balance and how to detect errors in posting 9. Learn how to prepare the financial statements of a servicing and trading concern (Statement of Profit or Loss. Statement of Financial Position, Statement of Changes in Equity, and Statement of Cash Flows) RO Oa2 Introduction to Accounting Module 1 1.0 ACCOUNTING DEFINED . is a service activity whose function is to CCOUNKING smite sistas intomaton. pinay financial in nature, about economic entities, that is intended to be useful in making economic decisions. (AICPA, Statement of Accounting Principles Board) Accounting is 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 character and interpreting the results thereof. (AICPA, Committee ‘on Accounting Terminology) Accounting is the process of classifying, measuring and communicating economic information to permit informed judgment and decision by users of the information. (American Accounting Association) In general sense, Accounting is an information system that provides reports to stakeholders about economic activities and condition of a business. 2.0 ROLE OF ACCOUNTING IN BUSINESS 2.1 RECORDING. Record and analyze business transactions. 2.2 REPORTING. Communicate financial information fo all interested parties. 2.3 ANALYZING, or managers make decisions. 3.0 TYPES OF BUSINESS 3.1 Service business — an entity that provides services to customers (e.g. schools, insurance companies, accounting or law firms, repair shops, transportation companies, etc.) 3.2 Merchandising business - an entity that purchases goods from merchandise suppliers and sells the same to its Customers on their original condition (e.g. retailers, wholesalers, groceries department stores, hardwares, drugstores, etc.) 3.3 Manufacturing business — an entity that converts raw materials into finished products made for sale to customers (e.g. manufacturer of food, clothing, medicines, toys, furniture, fixtures, equipment, etc.) www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 3 4.0 TYPES OF OWNERSHIP STRUCTURE (Forms of Business Organization) 4.1 Proprietorship — is a business that is owned and operated by a single individual (the owner is called proprietor). 4.2. Partnership - is a business that is owned by two or more persons (the ‘owners are called partners) 4.3 Corporation - is a business whose equity is divided into shares of stock and is created by operation of law (the owners are called stockholders) 4.4 Cooperative - is a business whose equity is divided into members interest, created by operation of law to foster the welfare of its members, and is exempted from income taxation. (the owners are called members) 5.0 Characteristics of the Different Forms of Business Organization Proprietorship Partnership Corporation Cooperative 1. One owner, ‘Two or more Minimum of 5 Minimum of 15 owners incorporators but __incorporators but unlimited number unlimited number of owners. of members 2. Unlimited liability Unlimited lit Limited liability of Limited liability of for unpaid debts. for partnership the stockholders the members for debts. for corporate the cooperative’s, debts. debts. 3. Owner manages There isa Management is Management is the business. managing partner.. vested in the vested in the board of directors BOD. (BOD). 6.0 BASIC ELEMENTS OF ACCOUNTING (Accounting Values) 6.1 Statement of Financial Positi Condition of the Business) n Elements (Shows the Financi 6.1.1 Assets - economic resources that have values, owned or controlled by the business. Included in this element are cash, ‘Synergy in Global Education! www.certscollege.org4 Introduction to Accounting Module 1 receivables, inventory, land, bi equipment. 6.1.2 Liabilities - economic or legal obligations that a business owes to other persons. Included in this element are accounts payable, notes payable, loan payable, payables to government and unpaid (accrued) expenses, 6.1.3 Equity - is the owner's interest in, or claim to, the assets of a business. It is the difference in the amounts of assets and liabilities. It is sometimes referred to as “net assets’. 19, machinery, furniture and 6.2 Statement of Profit or Loss Elements (Shows the Results of Operations) 6.2.1 Income — inflows of assets resulting from revenues or gains. Income increases equity. Revenues result from the sale of goods or performance of services in the normal operating business cycle Gains are income aside from revenues and those from transactions directly involving owners. 6.2.2 Expenses — are decreases in assets or increases in liability resulting from cash spent, use of resources or incurrence of liability in order to produce revenue. Expenses decrease equity. 6.2.3 Profit (Loss) - the excess (deficit) of revenue over expenses for a given accounting period. Profit increases equity while loss decreases equity. 7.0 THE ACCOUNTING PROCESS (Functions of Accounting) Accounting is a measurement and communication process designed to provide useful and timely financial information. Its functions are the following: 7.1 Recording — this is more popularly known as BOOKKEEPING, which involves putting into records the business transactions and events. This can be done manually, with the use of mechanical devices or electronically, or with the use of computer. 7.2. Classifying- this involves the grouping of similar items together in order to make the recording of the different transactions and events more systematic. This function is set up in the CHART OF ACCOUNTS. 7.3 Summarizing — this involves the preparation and presentation of financial statements. 7.4 Interpreting- this involves the analysis of financial statements (by developing financial ratios and explaining their significance) for the benefit of the readers or users. www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 8.0 RECORDING OF THE BUSINESS TRANSACTIONS 84 1. THE ACCOUNTING EQUATION The relationship between the three basic accounting elements of the Statement of Financial Position - Assets, Liabilities, and Equity - can be expressed in the form of a simple equation known as the Accounting Equation. All accounting information is recorded within the framework of the accounting equation. The basic accounting equation is shown below: PRESENTATION EQUATION 2. Assets Liabilities 5 Equity PHP 500,000.00 = PHP 200,000.00 + PHP 300,000.00 or VALUATION EQUATION 8.2 PHP 500,000.00 - PHP 200,000.00 Assets E Liabilities Equity PHP 300,000.00 The equality of the accounting equation is always maintained for every transaction that is recorded. The peso amount on the left side of the equation (called DEBIT) should always equal to the peso amount on the right side of the equation (called CREDIT). If assets increase, liabilities and/or equity must increase by the same amount. Conversely, if assets decrease, there will be a corresponding decrease by the same amount in the liabilities and/or equity. An increase in an asset may also have a corresponding decrease in another asset or an increase in a liability may also have a corresponding decrease in another liability by an equal amount ACCOUNTING EQUATION EXPANDED Assets Liabi jes + Equity Cash Accounts payable Owner's Contributions + Accounts receivables + Bank loan - Drawing + Supplies + Income + Equipment - Expenses ‘Synergy in Global Education! www.certscollege.org8.3 www.certscollege.org Introduction to Accounting Module 1 8.2.1 The two sides of the equation should always balance. 8.2.2 The effect of every transaction is an increase or decrease in one or more of the accounting equation elements. 8.2.3 The equity is increased by the amount invested by the owner and decreased by withdrawals. In addition, the equity is increased by income and is decreased by expenses. BUSINESS TRANSACTION Business Transaction — is an economic event or condition that directly changes an entity's financial condition or directly affects its results of operations. An accounting transaction takes place when a business exchanges a thing or things of value for another. . DEBIT is the value received or paid for by the business while CREDIT is the value parted with or given up by the business. This is called the dual effect of a transaction This is illustrated in the next page. Business transactions will affect the accounting elements but the equality of the accounting equation will be maintained. The analysis of the effects of a transaction in the accounting elements is illustrated in page 7 (see expanded accounting equation). ‘Synergy in Global Education!Module 1 Introduction to Accounting 8.3.1. DEBIT AND CREDIT ANALYSIS Business transactions are recorded in terms of debit and credit DEBIT (Dr.) CREDIT (Cr.) Transactions (June 20CY) eee fee ‘with) J. Cruz invested P200,000 to JCruz, Capital 1 Start an auto repair bu aaa (Ownership right) Cruz bought repair equipment ‘Accounts payable 2 fromX Co. on credit, P100,000,_ Eduipment (Obligation to pay) Gruz bought shop supplies for Series oan Shop Supplies Cash ' ‘Recounts Payable 4 Paid XCo. partial, P60,000. ESCUTIB FAYADIE 4) Cash 5 Giu2 received a bankloan for Gash Toan Payable business use, P100,000. (Promise to pay) Customers paid cash for auto 6 repairs services rendered, Cash Pea ae (envices) 7 Repair services rendered on Accounts Receivable ¢ > account P50,000. ight to collect) 8 Paidamonth’s rent 10,000, Rentexpense (Rightto ac, occupy) Cruz made partial collections en 9 fom customers accounts, Cash ‘eelinatan wtoighe ! Collect) qo. Oiiz paid the salaries and Salary Expense Cash wages of personnel, P15,000. _(Employees' services) asl Billed a customer, P6000 and Cash 11 received a partial payment of Accounts receivable ae 2,000. Right to collect) Shop supplies purchased Gash 42. 15,000 and made adown Shop supplies ‘Accounts payable payment of P5,000 (Obligation to pay) 13, Shop supplies bought for cash’ Sipplies Expense (Used, and used, P18,000 supplies) Cruz withdrew P20,000 for his” J. Cruz, Drawing 14 Cash personal use. (Ownership right taken) ‘Synergy in Global Education! www.certscollege.orgIntroduction to Accounting Module 1 8.3.2 ACCOUNTING EQUATION EXPANDED ASSETS LIABILITIES EQUITY Cash_[_+AR_| +Supplies | + Equpt ‘AP__[ +Bank Loan Cap._| + Revenues 1 200,000 | 200,000 Transaction: J. Cruz, invested P200,000 to start an auto repair business. 2 100,000 100,000 | Transaction: Cruz bought repair equipment from X Co.on credit, P100, 000 3 | -62,000 62,000 I Transaction: Cruz bought shop supplies for cash, P62,000. 4 -60,000 60,000 | Transaction: Paid X Co. partially, P60,000 5 | 100,000 100,000 Transaction: Cruz received a bank loan for business use, P100,000. 6 | 25,000 25,000 Transaction: Customers paid cash for auto repairs services rendered, P25 000 7 50,000 50,000 Transaction: Repair services rendered on account, P50,000. 8 | -10,000 I 10,000 Transaction: Paid a month's rent, 10,000, 10 30,000 | -30,000 I Transaction: Cruz made partial collections from customers’ accounts, P30,000. -15,000 I 15,000 Transaction: Cruz paid the salaries and wages of laborers, P15,000, 4 2,000] 4,000 I 6,000 www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 9 cash [ +AR | +Supplies | +Equpt. [=| AP [+BankLoan| +] JC.Cap. | +Revenues | -Expense Transaction: Billed a customer, P6,000 and received a partial payment of P 2,000. 12 -5,000 15,000 10,000 Transaction: Shop supplies purchased. P15,000 and made a down payment of P 5,000. 13 | -18,000 18,000 Transaction: Shop supplies bought for cash and used, P18,000. 14 | -20,000 -20,000 Transaction: Cruz withdrew P20,000 for his personal use. 8.3.3. ACCOUNTING EQUATION EXPANDED Cash +AR_| +Supplies | +Equpt. [=| AP | +BankLoan | +| J.C.Cap | +Revenues | -Expense 1|_ 200,000 200,000 2 100,000 100,000 Bal.| 200,000 100,000 100,000 200,000 3. -62,000 62,000 Bal.| 138,000 62,000 | 100,000 100,000 200,000 4 | -60,000 -60,000 Bal_ 78,000 62,000 | 100,000 40,000 200,000 5 100,000 100,000 Bal. 178,000 62,000 | _ 100,000 40,000 100,000 200,000 625,000 25,000 Bal_| 203,000 62,000 | _ 100,000 40,000 100,000 200,000 25,000 ‘Synergy in Global Education! www.certscollege.org10 Introduction to Accounting Module 1 Cash | +AR | +Supplies | +Equpt. [=| AP | +BankLoan | + | J.C.Cap | +Revenues | -Expense 7 50,000 50,000 Bal. | 203,000 50,000 62,000 100,000 40,000 100,000 200,000 75,000 8 | -10,000 “10,000 Bal 193,000, 50,000| 62,000 | 100,000 40,000 | __ 100,000 200,000 75,000, -40,000 9 30,000 | -30,000 Bal_| 223,000| 20,000| 62,000 | 100,000 40,000 |__ 100,000 200,000 78,000 |__-40,000 410 | -15,000 -15,000 Bal. | 208,000 20,000 62,000 100,000 40,000 100,000 200,000 75,000 -25,000 112,000 | 4,000 6,000 Bal. 210,000 24,000 62,000 100,000 40,000 100,000 200,000 81,000 -25,000 12 -5,000 15,000 10,000 Bal 205,000| 24,000| 77,000 | 100,000 50,000 100,000 200,000 81,000 |__-25,000 13 | -18,000 -18,000 Bal 187,000| 24,000| 77,000 100,000 0,000 | __ 100,000 200,000 81,000 __-43,000 14 -20,000 20,000 Bal. 167,000, 24,000 77,000 100,000 50,000 100,000 180,000 81,000 -43,000_ www.certscollege.org Synergy in Global Education!Module 1 10. 1" 12. 13. 14, Introduction to Accounting Transaction effect: Increase Assets (Cash) and increases Equity (J. Cruz, Capital) by P200,000. Transaction effect: Increase Assets (Equipment) and increases Liabilities (Accounts Payable) P100,000, Transaction effect: Decrease Assets (Cash) and increases another Assets (Shop Supplies) P62,000. Transaction effect: Decrease Assets (Cash) and decreases Liabilities (Accounts Payable) P60, 000. Transaction effect: Increase Assets (Cash) and increases Liabilities (Bank Loan) by P100, 000. Transaction effect: Increase Assets (Cash) and increases Equity (Revenues) by P25, 000. Transaction effect: Increase Assets (Accounts receivable) and increases Equity (Revenues) by P50,000. Transaction effect: Decrease Assets (Cash) and decreases Equity (Expenses) by P10, 000. Transaction effect: Increase Assets (Cash) and decreases another Assets (Accounts Receivable) by P30,000 Transaction effect: Decrease Assets (Cash) and decreases Equity (Expenses) by P15, 000. Transaction effect: Increase Assets - (Cash-P2,000 and Accounts Receivable-P4,000) and increases OE (revenues) by 6,000, Transaction effect: Increase Assets - Supplies-P15,000, decreases Assets - Cash-P5,000 and increases Liabilities - (A/c Payable) - P10,000. Transaction effect: Decrease Assets (Cash) and decreases Equity (Expenses) by P18, 000. Transaction effect: Decrease Assets (Cash) and decreases Equity (J. Cruz, Capital) by P 20, 000. 8.4 FINANCIAL STATEMENTS Accounting Period — the period at the end of which financial statements are prepared. The accounting period usually covers one year because it jibes with the payment of the annual income taxes. Calendar Year a 12-month period ending December 31 Fiscal Year a 12-month period not ending December 31 Natural Business Year —_a 12-month period which ends at the time the business activity is at its lowest Financial Statements - are accounting reports prepared at the end of an accounting period (usually one year) that provide financial information regarding the transactions that have been recorded and summarized. The ‘Synergy in Global Education! "1 www.certscollege.org12 Introduction to Accounting Module 1 principal financial statements which are the end-products of accounting are the a. Statement of Profit or Loss ~ also called as the Income Statement, a statement, which shows the revenue and expenses for a specified period of time. It shows the results of operations. b. Statement of Changes in Equity - is a statement, which shows the summary of changes in the equity for a given period of time. This statement supplements the Statement of Financial Position. ¢. Statement of Financial Position — is a statement which shows the assets, liabilities and equity of the business as of a specific date. It shows the financial condition of the business. This statement is called as the Balance Sheet for small and medium-sized businesses. d. Statement of Cash flows - is a summary of cash inflows and cash outflows for a specific period of time, such as a month or a year. J. CRUZ AUTO REPAIR SHOP Statement of Profit or Loss For the Month Ended, June 30, 20CY INCOME Repair Income P 81,000.00 EXPENSES Salary P 15,000.00 Rent 10,000.00 Supplies 18,000.00 Total Expenses 43,000.00 PROFIT P 38,000.00 —Esgnae Transferred to Statement of Changes in Equity www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 13, J. CRUZ AUTO REPAIR SHOP Profit transferred Statement of Changes in Equity hom’ Statement cf For the Month Ended, June 30, 20CY om on oes) J. Cruz Capital, June 1 Pp - ‘Add: Investment in June P 200,000.00 Profit in June 38,000.00 238,000.00 Total 238,000.00 Less: J. Cruz, Drawing 20,000.00 J. Cruz Capital, June 30 248,000.00 Notes: 1. The data presented on the financial statements are taken from the data summarized from the Expanded Accounting Equation on Page 8 2. tis assumed that J, Cruz started business on June 1, 200C J. CRUZ AUTO REPAIR SHOP ‘Statement of Financial Position June 30, 20CY ASSETS Cash P 167,000.00 Accounts Receivable 24,000.00 Shop Supplies 77,000.00 Repair Equipment 100,000.00 TOTAL ASSETS P 368,000.00 LIABILITIES AND EQUITY Accounts Payable P 50,000.00 Bank Loan 100,000.00. P 150,000.00 J. Cruz, Capital 218,000.00 < TOTAL LIABILITIES and EQUITY P 368,000.00 ‘Synergy in Global Education! www.certscollege.org14 Introduction to Accounting Module 1 J. CRUZ REPAIR SHOP Statement of Cash Flows For the Month Ended June 30, 20CY Cash Flows From Operating Activities: Collections from Customers P 57,000.00 Payments for Expenses (25,000.00) Payment for Shop Supplies (85,000.00) _P (53,000.00) Cash Flows from Investing Activities: Payment for Repair Equipment (60,000.00) Cash Flows from Financing Activities: Bank Loan 100,000.00 Investment of J. Cruz 200,000.00 Cash withdrawal of J. Cruz (20,000.00) __280,000.00 Net Cash Inflow (June 30 balance) 167,000.00 Example Problem 1.1 On July 1 of the current year, Paul Brite started a TV repair business. He invested P50,000 in cash to start his business: Purchased for casti shop supplies costing P3,500. Brite bought from A & G Company repair equipment costing P 20,000 on eredlit. Customers paid P12,000 cash for repair Services rendered. Brite made a partial payment to A & G Company, P15,000. Customers were billed on account P14,000 for repairservices rendered. Rental for the month of July was paid, P6,000. Collected, P8,000 from customers as payment of thei accounts. Paid wages of assistant helper for the month of July, P4,000. 10. Bought additional shop supplies costing P 7,500. A down payment of P 3,000 was made and the balance is payable at the end of the month 11. Repair services rendered, P 9,000. Received P4,500 as partial payment. 12. _ Repair supplies bought for cash and used for repairs amounted to P 6,500. 13. Brite withdrew P 10,000 for his personal use. BOOrISHMRENS= Required: ‘a. Record the peso amount under the appropriate heading below on the accounting equation to show the effect of each transaction. Show the balance after the second transaction and thereafter and their final balances. Assets Liabilities Equity Cash | +AR | +Supplies | +Equipment AP | + P.B,Cap | +Revenues | - Expenses www.certscollege.org ‘Synergy in Global Education!Module 1 b. Prepare the following financial statements: ‘Statement of Profit or Loss for the month ended July 31, of the current year. Statement of Changes in Equity for the month ended July 31, of the current year. Statement of Financial Position as of July 31, of the current year. ‘Statement of Cash Flows for the month ended July 31, of the current year. 1 2. 3. 4. Introduction to Accounting Solution to Example Problem 1a: 15 Cash | +AR_| +Supplies | +Equpt. AP. P.B.Cap. | +Revenues | Expenses 4 | 50,000 50,000 2 | -3.500 3,500 Bal. | 46,500 3.500 50,000 3 20,000 20,000 Bal. | 46,500 3,500 | 20,000 20,000 50,000 4|12,000 42,000 Bal. | 58,500 3,500 | 20,000 20,000 50,000 12,000 5 | -15,000 =15,000 Bal. | 43,500 3,500 | 20,000 5,000 50,000 12,000 6 14,000 414,000 Bal. | 43,500 | 14,000 3,500 | 20,000 5,000 50,000 26,000 7 | -6,000 “6,000 Bal. | 37,500 | 14,000 3.500 | 20,000 5,000 50,000 26,000 | -6,000 8) 8.000 | -8,000 Bal. | 45,500 | 6,000 3,500 | 20,000 5,000 50,000 26,000 | -6,000 9) -4,000 4,000 Bal. | 41,500 | 6,000 3,500 | 20,000 5,000 50,000 26,000 | -10,000 10 | -3,000 7,500 4,500 Bal. | 38,500 | 6,000 | 11,000 | 20,000 9,500 50,000 26,000 | -10,000 11 | 4,500 | 4,500 9,000 Bal. | 43,000 | 10,500 | 11,000 |" 20,000 9,500 50,000 35,000 | -10,000 12 | 6,500 6,500 Bal. | 36,500 | 10,500 11,000 | 20,000 9,500 50,000 36,000 | -16,500 13 =10,000 17,000 40,000 35,000, ‘Synergy in Global Education! www.certscollege.org16 Introduction to Accounting Solution to Example Problem 1.1b. PAUL BRITE TV REPAIR SHOP Statement of Profit or Loss For the Month Ended, July 31, 20CY REVENUES Repair Income EXPENSES Salary Expense P 4,000.00 Rent Expense 6,000.00 Supplies Expense 6,500.00 Total Operating Expenses PROFIT PAUL BRITE TV REPAIR SHOP Statement of Changes in Equity For the Month Ended, July 31, 20CY P. Brite Capital, July 1 Add: Investment in July P.50,000.00 Profit in July 18,500.00 Total Less: J. Cruz, Drawing P. Brite Capital, July 31 www.certscollege.org Module 1 P 35,000.00 16,500.00 P 18,500.00 Pp - 68,500.00 68,500.00 10,000.00 58,500.00 ‘Synergy in Global Education!Module 1 Introduction to Accounting 7 9.0 PAUL BRITE TV REPAIR SHOP ‘Statement of Financial Position July 31, 20CY ASSETS Cash P 26,500.00 Accounts Receivable 10,500.00 Shop Supplies 11,000.00 Repair Equipment 20,000.00 TOTAL ASSETS P 68,000.00 LIABILITIES AND EQUITY Accounts Payable P 9,500.00 P. Brite, Capital 58,500.00 TOTAL LIABILITIES and EQUITY P 68,000.00 PAUL BRITE TV REPAIR SHOP Statement of Cash Flows For the Month Ended July 31, 20CY Cash Flows From Operating Activities: Collections from Customers P 24,500.00 Payments for Expenses (10,000.00) Payment for Shop Supplies 13,000.00) P 1,500.00 Cash Flows from Investing Activities: Payment for Repair Equipment (15,000.00) Cash Flows from Financing Activities: Investment of J. Cruz 50,000.00 Cash withdrawal of J. Cruz 10,000.00) 40,000.00 Net Cash Inflow (June 30 balance) 26,500.00 DOUBLE-ENTRY METHOD OF BOOKKEEPING Every business transaction affects at least two accounts (items). When you record the peso amount of a transaction in one account, you record that same amount in another account. This is done to keep both sides of the accounting equation equal or in balance. ‘Synergy in Global Education! www.certscollege.org18 Introduction to Accounting Module 1 The “double-entry system” is used because you are recording the amount involved in a transaction twice. The fact that each transaction has a dual effect on the accounting elements is the basis for the double-entry method of bookkeeping. Double-Entry Method of Bookkeeping ~ is a method of recording the business ‘transactions in terms of the dual effect on the accounting elements (ie., assets, liabilities, equity, income and expenses). In other words, the transactions are recorded in terms of the increase or decrease in the accounts that are affected. An Account ~ is an accounting device used to classify and store information about the increases and decreases in a particular item. 9.4. THE TACCOUNT The T account, is so called because of its T shape. It is used to show the increase or decrease in an account (item) caused by a transaction. It is a convenient tool to analyze and record the effect of a transaction in a particular account (item). To Account Title Left side Right side Debit Credit (debit) (credit) The T account has a TOP, a LEFT SIDE and a RIGHT SIDE. On the Top of the T is the title or name of the Account. Amounts recorded on the left side are called DEBIT amounts while amounts recorded on the right side are called CREDIT amounts. 9.2, RULES OF DEBIT AND CREDIT Debits and credits are used to record the increases and decreases in each account affected by a business transaction. To understand how transactions are recorded in the books (called books of accounts) in terms of debits and credits, one should know first which side are the different accounting elements. The accounting equation below will determine which side are the different accounting elements or which side is a particular account (item) ASSETS: LIABILITIES AND EQUITY www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 19 The left side of the accounting equation has been traditionally called the DEBIT side (abbreviated DR) while the right side of the accounting equation is called the CREDIT side (abbreviated CR). All the asset accounts therefore, being on the left side are debits and all liabilities and equity accounts, being on the right side are ore‘ 10.0 RULES OF ADDITION AND SUBTRACTION BY POSITION ‘Add on the same side and subtract on the opposite side. 10.1. 10.2. 10.3. Rules For Asset Accounts 10.1.1 Add (increase) on the same side (debit) 10.1.2 Subtract (decrease) on the opposite side (credit) 10.1.3 The normal balance for an asset account is a debit balance. Asset Accounts Debit Credit Increase Decrease Normal Balance Rules For Liability and Equity Accounts Add (increase) on the same side (credit) Subtract (decrease) on the opposite side (debit) The normal balance for a liability or equity account is a credit balance. Debit Decrease Increase Normal Balance USING THE T ACCOUNT Being familiar with the rules of debit and oredit for asset, liability, and equity accounts, these rules will be applied by using an example problem Below is the example problem given on page 9, illustrating how the effect of each transaction is recorded in the accounting equation. This time, it will ‘Synergy in Global Education! www.certscollege.org20 Example On July 1 July 1 3 5 8 10 12 14 17 19 22 25 28 31 Required: Introduction to Accounting Module 1 be illustrated how the effect of each transaction is recorded (posted) in the T account. Problem 1.2 of the current year, Paul Brite started a TV repair business He invested 50,000 in cash to start his business. Purchased for cash shop supplies costing P3,500. Brite bought from A & G Company repair equipment costing P 20,000 on credit. Customers paid P12,000 cash for repair services rendered. Brite made a partial payment to A & G Company, P15,000. Customers were billed on account P14,000 for repair services rendered. Rental for the month of July was paid, P6,000. Collected P8,000 from customers as payment of their accounts. Paid wages of assistant helper for the month of July, P4,000. Bought additional shop supplies costing P7,500. A down payment of P 3,000 was made and the balance is payable at the end of the month. Repair services rendered, P 9,000. Received P4,500 as partial payment. Repair supplies bought for cash and used for repairs amounted to P 6,500. Brite withdrew P 10,000 for his personal use. |: Using the following accounts: Cash, Accounts Receivable, Shop Supplies, Equipment, Accounts Payable, P. Brite Capital, P. Brite Drawing, Repair Income, Salary Expense, a. Postt Rent Expense and Supplies Expense. he transactions to the corresponding T Accounts. b. Prepare a Trial Balance. T ACCOUNTS Cash Accounts Receivables Repair Equipment ‘Shop Supplies Paul Brite, Capital Accounts Payable Repair Income Paul Brite, Drawing wwnw.certscollege.org ‘Synergy in Global Education!Module 1 Salary Expense Suppli Introduction to Accounting 2 Expense Rent Expense Note: In making the T accounts, you normally provide more lines or space for Cash © and other accounts that are more frequently affected by the transactions given in the problem. a) The T accounts are arranged using the accounting equation that starts with assets, liabilities and equity. b) The T account for Cash is longer (more space) because there are more transactions that affect this account. ©) The postings to the T accounts are dated based on the dates in the transactions above. You will be able to analyze the effects of each transaction on the different accounts by following the dates chronologically. d) Balances are determined by getting the difference between the debit totals and credit totals. ) The balances are the amounts that will be reflected in the trial balance. Solution to Example Problem 1.2a. Cash Accounts Receivables 707 0,000 | 7703 3500 72 714,000 | 7/17 3,000 7108 12,000 | 7/10 15000 _7125 4,500 77 8,000 | 7/14 6,000 78,500 3,000 725 4500 | 7/19 4,000 Bal 70,500 72 3,000 78 6,500 713 10,000 74500 48,000 Bal Repair Equipment Shop Supplies 705 20,000 7703 3,500 Bal 20.000 7122 7,500 Bal 77.000 Paul Brite, Capital Accounts Payable 7701 30000 | “710 15,000 | 7/05 20,000 Bal 50,000 7122 4,500 ‘Synergy in Global Education! 715,000 724,500 Bal 9,500 www.certscollege.org22 Introduction to Accounting Module 1 Repair Income Paul Brite, Drawing 7/08 72,000 7st 10,000 m2 14,000 Bal 10,000 1/25 Bal 35,000 Salary Expense Rent Expense TAS 4,000 7a 6,000 Bal 4.000 Bal 6,000) Supplies Expense 728. 6500 Bal 6,500 Note: After all transactions have been entered (called posting) in the appropriate T accounts, each account must be totaled to determine the balance. When there is only one transaction recorded in a T account, the balance shall be simply carried forward. If there are many transactions recorded in a T account, the difference between the total debit and total credit represents the net debit or credit balance whichever is higher. The balances of the different T accounts will be summarized and shown in the trial balance. 11.0 TRIAL BALANCE A Trial Balance — is a listing of all the balances of the different accounts (assets, liabilities, equity, revenues and expenses), as of a given time. This is prepared at the end of each monthty. The total of all the accounts with debit balances must equal with the total of all the accounts with credit balances. If not, then an error in posting (recording in the T account) must have been committed. 11.1 Purposes of the Trial Balance: 11.4.1 To check the accuracy of posting (recording in the T accounts) by testing the equality of the debits and credits. 11.4.2 Itaids in locating errors in posting. 11.4.3. Itserves as a basis in the preparation of the financial statements The account balances determined for Paul Brite TV Repair business on Page 16 will be used to illustrate the preparation of a trial balance. www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 23 Solution to Example Problem 1.2b. PAUL BRITE TV REPAIR SHOP Trial Balance July 31, 20CY ACCOUNT TITLE DEBIT CREDIT Cash P 26,500.00 P Accounts Receivable 10,500.00 ‘Shop Supplies 11,000.00 Repair Equipment 20,000.00 Accounts Payable 9,500.00 P. Brite, Capital 50,000.00 P. Brite, Drawing 10,000.00 Repair Income 35,000.00 Salary Expense 4,000.00 Rent Expense 6,000.00 ‘Supplies Expense 6,500.00 Totals P__ 94,500.00 _P__ 94,500.00 12.0 BUSINESS TRANSACTION FLOW Journal Ledger Entries) \ Accounts / \ / Financial Statements Source Documents ~ are the business forms and papers (e.g. invoices, official receipts, vouchers, memoranda, deposit slips, check stubs, cash register tapes, payroll time cards, etc.) evidencing or supporting a transaction which serve as the basis for recording in the books of accounts. Books of Accounts — are the accounting books where business transactions are recorded, The books of accounts consist of the GENERAL JOURNAL and the GENERAL LEDGER. The General Journal - a two-column journal, which is called the “book of original entry” because this is the first book where the business transactions are recorded ‘Synergy in Global Education! www.certscollege.org24 Introduction to Accounting Module 1 The General Ledger — also called the “book of final entry’ because this is the book where the business transactions are finally recorded. The ledger serves the same purpose as the T account but more formal and detailed. After the transactions are recorded in the general journal in terms of debit and credit, the transaction will be further recorded in the general ledger. The process of recording in the joumal is called JOURNALIZING while the process of recording in the general ledger is called POSTING. 12.4 THE GENERAL JOURNAL Many kinds of joumal are used in business. One of the most common is the two-column general journal. It is an all- purpose journal in which all the business transactions may be recorded. Each entry made in the general journal includes the following information, entered in this order: 12.1.1 The date of the transaction NOTE: The account debited is on the extreme left (under the description column) while the account credited is indented a litle to the right. This is to distinguish the debit entry from the credit entry. The short explanation below the credit entry is likewise indented to the right to distinguish it from the credit entry. yp indicating the account number ee 121.2 The name of the account debited as well the amount. 121.3 The name of the account credited as well as the amount. 121.4 A posting reference (PR) of the account. 12.1.5 Asshort explanation of the transaction. ‘Samples of entries in the General Journal Jan. 1 J. Cruz, the owner invested cash in the business, P 50,000 [GENERAL JOURNAL Date Description PRI Debit Credit Wan. | 7 |cash 101 |5]0] 0] 0] 9| oo| J. Cruz, Capital 301 5{0|0|0|0| 00 Initial investment. www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 25 Jan, 2 Paid advertising expense, P 51,331.50 [GENERAL JOURNAL Date Description PR| Debit Credit \Jan, | 2|Advertising Expense 501 Cash 101 Advertising expenses paid. 12.2 CHART OF ACCOUNTS Chart of Accounts — is a list of all account titles and their account (code) numbers used for joumnalizing business transactions. Order of Listing the Accounts - The accounts are normally listed in the order in which they appear in the financial statements. The Statement of Financial Position accounts first, in the order of assets, liabilities and equity. The Statement of Profit or Loss accounts are then listed in the order of income and expenses. Numbering (Coding) of the Accounts - An account number identifies the account. Account numbers may have three, four or more digits. The number of digits to be used will vary depending on the nature and size of the business. Below is an example of Chart of Accounts. ‘Sample Chart of Accounts (Service Business) ‘Statement of Financial Posi naccounts —_Statement of Profit or Loss accounts 100 - Assets 400 - Revenues 101 - Cash 401 - Service Income 102 - Accounts Receivable 103 - Unused Office Supplies 500 - Expenses 104 - Prepaid Rent 501 - Salary Expense 121 - Delivery Equipment 502 - Advertising Expense 122 - Accumulated Depreciation - 503 - Communication Expense Delivery Equipment 504 - Office Supplies Expense 505 - Rent Expense 200- Liabilities 506 - Insurance Expense 201 - Accounts Payable 507 - Miscellaneous Expense 202 - Salaries Payable 508 - Depreciation Expense 300 - Equity 201 - Brandon Lopez, Capital 302 - Brandon Lopez, Drawing 303 - Income and Expense Summary ‘Synergy in Global Education! www.certscollege.org26 Introduction to Accounting Sample Chart of Accounts (Merchani ‘Statement of Financial Position Accounts Module 1 \g Business) Statement of Profit or Loss Accounts 100- Assets 101 - Cash 102 - Notes Receivable 103 - Accounts Receivable 104 - Allowance for Impairment Loss 105 - Interest Receivable 106 - Merchandise Inventory 107 - Supplies Inventory 108 - Prepaid Insurance 110 - VAT Input Tax 121 - Delivery Equipment 122 - Accumulated Depreciation - Delivery Equipment 123 - Store Equipment 124 - Accumulated Depreciation - Store Equipment 125 - Office Equipment 126 - Accumulated Depreciation - Office Equipment 200 - Liabilities 201 - Accounts Payable 202 - Notes Payable 203 - Accrued Sundry Payable 210 - VAT Output 211 - VAT Payable 300 - Equity 301 - Mary Modern, Capital 302 - Mary Modern, Drawing 303 - Income and Expense Summary 400 - Revenues 401 - Sales 402 - Sales Returns and Allowances 403 - Sales Discounts 500 - Cost of Sales 501 -Purchases 502 -Freight-in 503 -Purchase Returns and Allowances 504 -Purchase Discounts 600 - Operating Expenses 601 - Sales Salary Expense 602 - Advertising Expense 603 - Commission Expense 604 - Delivery Expense 605 - Misc. Selling Expense 608 - Depreciation Expense ~ Delivery Equipment 607 - Depreciation Expense - Store Equipment 608 - Depreciation Expense - Office Equipment 609 - Rent Expense 610 - Insurance Expense 611 - Office Supplies Expense 612 - Impairment Loss 700 - Other income 701 - Interest Income 800 -Other Expense 801 — Interest Expense NOTE: Alll Statement of Financial Position accounts are called REAL ACCOUNTS and all Statement of Profit or Loss accounts are called NOMINAL ACCOUNTS. Example Problem 1.3 Nestor Martel, a Lawyer decided to open a law firm named Martel Law Firm. The partial chart of accounts listed below will be used for recording purposes. www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 27 ‘Statement of Financial Position accounts 100 - Assets 200 - Liabilities 101 - Cash 201 - Accounts Payable 102 - Accounts Receivable 204 - Loan Payable 105 - Prepaid Insurance 106 - Office Supplies 300- Equity 108 - Fumiture and Equipment 301 - Nestor Martel, Capital 302 - Nestor Martel, Drawing Statement of Profit or Loss accounts 400- Revenues 500 - Expenses 401 - Legal Fees Earned 501 - Salary Expense 503 - Advertising Expense 504 - Utilities Expense 509 - Miscellaneous Expense In December of the current year, the following transactions took place: Dec. 2— Nestor Martel invested P60,000 cash to put up his law firm. 4— Aone-year insurance effective December 1 was paid, P6,000. 6 Office furniture costing P15,000 was purchased on account from EZ Furniture Company. 8- Office supplies costing P2,500 was bought for cash 11 ~ Received from City Bank P60,000 for loan applied to be used in his law practice. 14 Purchased on credit a desktop computer and printer for office use costing 60,000 from Micro System Inc. 16 — Received P 12,500 cash for legal services rendered to Jose Lopez. 18 — Paid P1000 for Miscellaneous expenses incurred. 20 - Received P10,500 cash for legal services rendered to clients. 22 — Advertising placed on a local paper for three months effective December ‘was paid, P3,600. 24 — Various clients were billed for legal services rendered, P16,400. 25 — Micro System, Inc. was partially paid, P45,000. 26 - Collected the accounts from various clients, P7,500. 27 — Light, water and telephone expenses for the month of December was paid to the owner of the property, P1,500. (Utilities expense) 28 - The salary of the secretary was paid, P5,500 29 — Nestor Martel withdrew P12,000 for personal use. 30— Received P5,000 for legal services rendered. ‘Synergy in Global Education! www.certscollege.org28 Introduction to Accounting Module 1 Required: a) Journalize the above transactions in the general journal. b) Post each journal entry to the general ledger. ©) Prepare a Trial Balance at December 31 of the current year. Solution to Example Problem 1.3a ‘GENERAL JOURNAL Page 1 Date Desorption PR Debit Credit Dec. | 2 | Cash 401 ooo] oo ‘Nestor Martel, Capital 301 e[olololol oo Initial investment by the owner 4 | Prepaid insurance att ool ol oo Cash 101 6000 | 0 Paid insurance for one year 6 | Furniture and Equipment 708, 0 | 0] 0| 0 Accounts Payable 201 1[s)0]o}0| 0 Furniture purchased on account 8 | Office Supplies 510, S| 010] 0 Cash 104 2{5|00| 0 ‘Office supplies bought, for cash 11 | Cash. 104 O| 0] 0| 00 Loan Payable 204 6{o;o0lolo] Receipt of bank loan from City Bank. 74 | Fumiture and Equipment 708, ololo| oo Accounts Payable 201 6{olololo] wo ‘Computer equipment purchased on credit. 16 | Cash 104 5 [0/0/00 Legal Fees Earned 40% 1[2/5|o]0| 0 Legal services rendered for cash 18 | Miscellaneous Expense 509, oO} 0|0| 0 Cash 404 T{olo}o] co Miscellaneous Expense paid Dec. | 20 | Cash 40% 5 [0] 0| 0 Legal Fees Earned 404 T{o/s|ol0] 0 Legal services rendered for cash 22 | Advertising Expense 503, 6 | 0] 0] 0 Cash 101 3/6/00] 0 Payment for Advertising www.certscollege.org Synergy in Global Education!Module 1 Introduction to Accounting 29 ‘GENERAL JOURNAL Page 2 Date Description PR Debit Credit 24 | Accounts receivable 102 4]o Legal Fees Eamed 404 40/0] Legal services rendered on account 25 | Accounts Payable 20% olo Cash 104 o[olo| wo Partial payment of account 26 | Cash 104 5/0 Accounts Receivable 102 5|o|0| 0 Collection of accounts receivable 27 | Utilities Expense 504 Slo Cash 404 5[0[0| wo Light, water and telephone paid 28 | Salary Expense 50% slo Cash 104 5[olo| 0 ‘Salary of secretary paid. 28 | Nestor Martel, Drawing 302 olo Cash 401 O{ 0/0] Cash Withdrawal by owner, 30 | Cash 40% alo Legal Fees Earned 40% 0{0|0| 0 Legal services rendered for cash. Note: When recording an expense paid in advance, two methods are acceptable — $ the asset method and the expense method. Under the asset method an asset account (Prepaid Expense) is used (see transaction dated December 4 as an example). Under the expense method, an expense account is used (see transaction dated December 22 as an example). At the end of the period, an adjusting entry will be made to adjust the amount to the correct amount of expense to be charged for the period. This will be discussed in module 2. 12.3. THE GENERAL LEDGER General Ledger is a book or file by a business where accounts are kept on separate pages or cards. In a computerized accounting system, accounts are kept on magnetic tapes or disks but the accounts as a group are still referred to as the ledger, or the ledger accounts. This is called the book of final entry ‘Synergy in Global Education! www.certscollege.org30 Introduction to Accounting Module 1 because this is where the transactions are finally recorded. This is the T account expanded and formalized as a book. The traditional general ledger format is shown below. For each account, one ledger is opened. The account title or name is written in the middle and the account number is written on the right hand comer of the account name. The ledger has the following column headings: Left Side (Debit Side) Right Side (Credit Side) 1, Date 1. Date 2. Participants 2. Participants 3. Posting reference (PR) 3. Posting reference (PR) 4, Amount of debit entry 4, Amount of credit entry Account Name Account Number Date _| Particulars [PR Debit Date Particulars |PR Credit Opening Accounts in the General Ledger Before the entries in the general journal can be posted to the general ledger, an account must be opened for all the accounts listed in the chart of accounts. www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 31 Solution to Example Problem 3b: GENERAL LEDGER Cash 101 Date Particulars [P.R. Debit Date Particulars [PR Credit Dec.[ 2 Ht 6[oJololo]-|Dec.| 4 J 6 olol o] - 4 J 6{olololol- 8 Jt 2|5Io| 0] - 16 J 1 [al slolol- 18 J 1 lolol of - 20 2 1folslofol- 22 2 3|elo|o| - 26 2 7{5\o] 0] - 25 2 4{ 5 lolol o| - 30 2 slololo]- 27 2 1|slol of - 28 2 5|5lo| 0] - 29 2 1{2[olol o| - Accounts Receivable 102 Date Particulars [P.R. Debit Date Particulars_|P.R. Credit Dec. | 24 2 1]6[4]o[o] - [Dec. [26 2 7{s5[ofo] - Prepaid Insurance 105 [Date [Particulars _|P.R.|Debit Date [Particulars _|P.R_|Creait Dec.| 4 Jt 6fofolol - fice Supplies 106 IDate__ [Particulars _|P.R.|Debit ate___|Particulars _|P.R.\Credit Deo.| 8 Jt 2[slolo]- Furniture & Equipment 108 IDate__ [Particulars _|P.R.|Debit ate__|Particulars _|P.R. |Credit Deco. | 6 Jt 1[s[o[o[o] - 14 Ht 6[olololo| - ‘Synergy in Global Education! www.certscollege.org32 Introduction to Accounting Module 1 Accounts Payable 201 Date [Particulars _|P.R [Debit Date __ [Particulars _|P.R.|Creait Dec. [25 v2 la [s Jo fo fol |ec. Je lst 1 [5 [o fo fo 14 lst le |o fo fo fo}. Loan Payable 204 Date [Particulars _[P.R.[Debit Date [Particulars _[P.R|Creait Dec [11 laa le [o fo fo fof Nestor Martel, Capital 301 Date Particulars [P.R. Debit Date Particulars [P.R. Credit Dec. [2 lst le fo fo fo fo Nestor Martel, Drawing 302 Date [Particulars _[P.R [Debit Date [Particulars _|P.R.|creait Dec. [29 \s-2 1 [2 fo fo fo |- Legal Fees Eamed 401 Date | Particulars | PR Debit Date Particulars_| PR Credit Dec. [16 [5-4 it [2]5}o\o}- l20 ls-2 i lols{olo)- laa ls-2 i [6l4/olo}. 30 ls-2 'slololo|- Salary Expense 501 Date__| Particulars | PR Debit Date_| Particulars | PR Credit Dec. 28 \J-2 Is [5 fo |o |. www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 33 Advertising Expense 503 Date _ [Particulars _|PR [Debit jate__|Particulars_|PR [Credit Dec. [22 \J-2 is |6 Jo Jo}. Utilities Expense 504 Date _ [Particulars _|PR [Debit jate__|Particulars_|PR [Credit Dec. [27 \J-2 1 5 [0 [o|- Miscellaneous Expense 509 Date [Particulars _|PR [Debit ate__|Particulars_|PR [Credit Dec. 18 let 1 0 [0 fo |- Note: If there are no centavos in the amount column, a dash (-) is placed in the centavos column instead of 00 (double zero). ‘Synergy in Global Education! www.certscollege.org34 Introduction to Accounting Solution to Example Problem 1.3¢: Module 1 NESTOR MARTEL LAW OFFICE Trial Balance December 31, 20CY ACCOUNTS DEBIT CREDIT Cash P 78.400 P Accounts Receivable 8,900 Prepaid Insurance 6,000 Office Supplies 2,500 Furniture and Equipment 75,000 Accounts Payable 30,000 Loan Payable 60,000 Nestor Martel, Capital 60,000 Nestor Martel, Drawing 12,000 Legal Fees Eamed 44,400 Salary Expense 5,500 Advertising Expense 3,600 Utilities Expense 1,500 Miscellaneous Expense 1,000 Totals P__ 194,400 _P_194,400 NESTOR MARTEL LAW OFFICE Trial Balance December 31, 20CY ACCOUNTS DEBIT CREDIT Cash P 155,500 P 77,100 Accounts Receivable 16,400 7,500 Prepaid Insurance 6,000 Office Supplies 2,500 Furniture and Equipment 75,000 Accounts Payable 45,000 75,000 Loan Payable 60,000 Nestor Martel, Capital 60,000 Nestor Martel, Drawing 12,000 Legal Fees Eamed 44,400 Salary Expense 5,500 ‘Advertising Expense 3,600 Utilities Expense 1,500 Miscellaneous Expense 1,000 Totals P_ 324,400 P_ 324,400 www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 35 Note: The trial balance on top is called the Trial Balance of Balances. This is ! widely used in practice. The trial balance below is called the Trial Balance of Totals. This is the preferable method by the Bureau of Intemal revenue (BIR). A trial balance is prepared to check the accuracy of posting to the general ledger and to prove the equality of the debits and credits. If the trial balance is imbalance, error/s in the recording in the general journal as well as posting to the general ledger must have been committed and must be located, However, a balanced trial balance (the total of the debit column is equal to the total of the credit column) does not necessarily mean that no errors have been committed. The following errors cannot be detected by the trial balance: No entry was made for a given transaction. ‘A journal entry was not posted to the general ledger. ‘A journal entry was posted twice. Incorrect accounts were used to record a given transaction Incorrect amounts were recorded for a given transaction. Ifthe trial balance does not balance, the following are the common mistakes or errors: 1. Error in addition or subtraction in the general ledger or error in addition in the trial balance itself. 2. Error of transposition, which means that digits are incorrectly interchanged. (eg. P 890 is recorded as P 980. 3. Slide error or transplacement error, which means error in placing the decimal point. (eg. P 150.00 is recorded as P 15.00) Short Cuts in Locating Error/s in the Trial Balance If the total of the debit column in the trial balance is not equal to the total of the credit column, the following procedures may be followed to detect the error/s: 1, Get the difference between the total debits and total credits. ii, A difference of 10, 100, 1,000, etc., would probably indicate a simple error in addition either in the trial balance or the general ledger. ili, Ifthe difference is divisible by two,(2), the error would probably be in posting to the wrong side (ie., a debit is posted on the credit side or vice versa) iv. If the difference is divisible by nine (9), the error would probably be an error in transposition or error in transplacement. ‘Synergy in Global Education! www.certscollege.org36 Introduction to Accounting Module 1 Procedures to Correct Errors in Journali ing or Posting 1. Draw a straight horizontal-line through the error and insert the correct title or amount if the entry is incorrect or the posting is incorrect. 2. Make a correcting entry. This will correct the wrong entry recorded, Correcting Entry — an entry made in the general journal to correct an error discovered. 13.0 NATURE AND ACCOUNTING FOR MERCHANDISING BUSINESS. The revenue generating activities of a merchandising business involve the buying and selling of merchandise (items bought for resale in its original form such as goods, groceries, books, appliances, drugs, clothing, etc.). When the merchandise is sold, the revenue is reported as Sales and its cost is recognized as expense called Cost of Goods Sold, which is subtracted from sales to arrive at the Gross Profit. Other expenses are then deducted to arrive at the net profit. Unsold merchandise at the end of a given period is called Merchandise Inventory. Sales — Cost of Goods Sold = Gross Profit — Operating Expenses = Profit (Loss) 143.1 ACCOUNTING FOR PURCHASES OF MERCHANDISE, There are two methods of accounting or recording for merchandise purchases: 13.1.1 Periodic Inventory Method — Under this method every time a purchase of merchandise is made, it is charged or recorded (debited) to an account called PURCHASES. When a sale is made. A revenue account called SALES is recorded (Credited) At the end of a given period, an inventory ( physical count of the goods unsold - called MERCHANDISE INVENTORY- END) is made to determine the cost of goods sold. This ending inventory will then be carried forward to the next period and will become the MERCHANDISE INVENTORY-BEGINNING. This method of accounting is used by a merchandising concem 13.1.2 Perpetual Inventory Method — Under this method, an account called MERCHANDISE INVENTORY (instead of Purchases) is used to record acquisition of merchandise. When a sale is made, two entries will be made; the first is to record the revenue account called sales and the second is to record the cost by charging or debiting to an account called COST OF GOODS www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 37 SOLD. In this manner, the merchandise inventory account will have a running balance and there is no need to make a physical count. If ever a physical count or an inventory will be made, it is only for the purpose of checking the accuracy of recording but not for the purpose of determining the ending balance of the merchandise inventory. This method is normally used by a manufacturing concern. In normal business practices, before purchases are made by the purchasing department, it will require an approved Purchase Requisition before it is authorized to issue a Purchase Order for the requested merchandise. ‘Synergy in Global Education! www.certscollege.org38 Recording Basic Inventory Transactions ‘Transactions: Introduction to Accounting Module 1 Periodic Inventory Systems Perpetual inventory Systems, Merchandise credit purchases, P300,000. Merchandise creat sales, 560,00, costing 220,00. ash purchases, 120,000, Cash sales, #310000 on goods casting 190,00. Defective goods retumed to cash supplier, 10,0. Defective good returned to account supplier 73,0. ‘Goods received from cash customers, 5,000, Gade received from credits customers, 712,000 costing 7,00. Payment to merchandise creditors within the discount, 290,00 after deducting a dzcount of Pto,oo0. Collections fom credit customers of 400,00, less discount P8300. www.certscollege.org lpuchaces Accounts Payable lhcounts Receivable ‘sales fo entry Jpucnaces cash lcasn sales fo etry lcash Purchases Returns Iacounts Payable Parcs Matar ales Returns fo entry Iales Returns ‘ecounts Receivable fo entry lacounts Payable Purchases Discounts Cash lcasn las Discounts ‘Accounts Receivable 3000000 60,000.00 120,000.00 310,000.00 ‘3000.00 5900.00 1200000 382,000.00 ‘3000.00 [Merchandise Inventory 30,900.00 0900.00] | Accounts Payable /ncounts Receivable 60,000.00 600000] | Sales (ostot soles 220,000.00 Merchandise Inventory IMerchandize inventory 120,000.00, 120.0000) | cash cash 310,000.00 1000000] | Sales (costo ales 190,000.00 Merchandise Inventory (cash 1000.00 1090000| | Merchandise Inventry - Purchase Returns /Acounts Payable 5,000.00 900000| | ~ Merchandise Inventory - Purchase Returns sees Returns 500.00 soo00| | cash [Merchandise inventory - Sales Returns 2,600.00, ‘Cost of sles Soles Retumns 12,000.00 1200000] | Accounts Receivable [Merchandise Inventory - Sales Returns 7900.00 (Cost of sles lncounts Payable 300,000.00 3000000] | Merctandseimetary-Purchases cots 29000000| | cash cash 382,000.00 [Merchandise Inventory - Sales Discounts ‘3,000.00 4oo0000| | Accounts Receivable 3000000 310,000.00 190,000.00 1000000 ‘3000.00 5000.00 2,500.00 1200000 7,000.00 1000000 290,000.00 ‘Synergy in Global Education!Module 1 Introduction to Accounting Purchase Requisition Form — is a written request form to buy a certain item or items. Purchase requisition forms are generally pre-numbered consecutively to prevent misuse or loss Purchase Order Form - is a buyer's formal order form indicating therein the merchandise requested in the purchase requisition form. The pre-numbered purchase order and requisition forms will support the purchase evidenced by an Invoice. Purchase Discount — is a discount given to the buyer for early payment of a purchase made on credit. Discount Period - is the period of time within which an invoice must be paid to be entitled to a discount. Trade Discount - is a special discount (outright deduction) from the list price offered by a seller to buyers if the order is in large quantity. 13.2. TERMS OF PURCHASES: ‘Synergy in Global Education! CASH OR COD (Cash on Delivery) - this means that payment is required at the time the merchandise is delivered. 2/40, n/30 - this means that a 2% discount of the gross invoice price is allowed if payment is made within 10 days after the invoice date, and the gross price is due 30 days from the invoice date. 2IEOM, n/60 - this means that a 2% discount of the gross invoice price is allowed if payment is made up to the end of the month and the gross price is due 60 days from the invoice date 2M0/EOM, n/60 - this means that a 2% discount of the gross invoice price is allowed if payment is made by the 10" of the following month, and the gross price is due 60 days from the invoice date. Credit Term — is the term when payment for the merchandise is to be made as agreed upon by the seller and the buyer. Credit Period — is the time in which the buyer is allowed to pay. 39 www.certscollege.org40 Introduction to Accounting Module 1 TRANSPORTATION COSTS: Freight In — this represents the transportation costs and other costs incidental to the purchase of the merchandise. FOB Shipping Point - this means Free on Board up to the shipping point. Freight charges will be shouldered by the seller up to the shipping point before loading to a common carrier. Once the goods are loaded, the buyer will pay for the freight charges. FOB Destination - this means Free on Board up to the point of destination. The seller will pay for the freight charges up to the buyer's destination, Freight Collect - this means that the buyer is to pay the freight when the merchandise arrives. If the term is FOB destination, the buyer can deduct the cost of the freight when paying the invoice. Freight Prepaid — this means that the seller has paid the freight on the goods at the time of shipment. If the term is FOB shipping point, the seller can collect the cost of the freight from the buyer. 43.3. PURCHASE RETURNS AND ALLOWANCES Merchandise may not always be received in satisfactory condition or according to the previously agreed-on terms. The goods may be damaged or defective, or may have arrived too late. In such cases, the buyer may return the shipment to the seller or agree to keep the shipment if granted an allowance. Purchase Returns and Allowances — are reductions in the purchase price of merchandise bought, resulting from merchandise returned to the seller or from the seller's reduction in the original purchase price. 13.4 RECORDING PURCHASES AND PAYMENT OF ACCOUNTS: Note: For simplicity, the amount P10,000 for the purchase of merchandise (exclusive of 12% Value Added Tax) is used for all the examples. Example 1: June 1 — Purchased merchandise costing P10,000, terms COD as per invoice No. 3857. Entry: June 4 - Purchases 10,000 Vat Input Tax (12% x 10,000) 1,200 Cash 11,200 www.certscollege.org ‘Synergy in Global Education!Module 1 ‘Synergy in Global Education! Introduction to Accounting Note: Value-added Tax is an indirect tax shouldered by the buyer. If the invoice amount is already VAT inclusive, divide the amount by 1.12 then multiply by .12 to determine Vat input Tax. Ifthe purchase is a non-vat transaction, just remove Vat Input Tax. Entry: June 4 - Purchases 10,000 Cash 10,000 Example 2: June 1 — Purchased merchandise with a list price of P10,000 for cash per Invoice No. 3857 Trade discount 10% and 15%. Entry: June 1 - Purchases (10,000 x 90% x 85%) 7,650 Vat Input Tax (12% x 7,650) 918 Cash 8,568 Note: The net invoice amount is the amount recorded (list price minus by the trade discounts). Trade discount is not recorded. Example 3: June 2 - Purchased merchandise worth P10,000 on account per Credit Invoice No. 860. Terms: 15 days. Entry: June 2 ~ Purchases 10,000 Vat Input Tax 1,200 Accounts Payable 14,200 Payment June 17 - Accounts Payable 11,200 Cash 11,200 Example 4: June 2- Purchased merchandise with a price of P10,000 ‘on account per Credit No. 1860. Terms: 2/10, 1/30. Entry: June 2 - Purchases 10,000 Vat Input Tax 1,200 Accounts Payable 11,200 Payment June 12 - Accounts Payable 11,200 Cash 11,000 Purchase Discount 200 Note: Discount is computed based on the merchandise cost without VAT. Ifthe invoice is paid after June 12, there will be no more cash discount. a www.certscollege.org42 Introduction to Accounting Module 1 Example 4a: If Term is: 2/EOM, n/60. Payment June 30 - Accounts Payable 11,200 Cash 11,000 Purchase Discount 200 Note: If the invoice is paid after June 30, there will be no more cash discount. Example 4b: If Terms is: 2/10 EOM, n/60. Payment July 10 - Accounts Payable 11,200 Cash 11,000 Purchase Discount 200 Note: If the invoice is paid after July 10, there will be no more cash discount. Example 5: June 4 ~ Purchased merchandise with a list price of P10,000 ‘on account per Credit Invoice No 1865. Trade discount is 20% and 10%. Terms: 2/10, n/30. Entry: June 4 ~ Purchases (10,000 x 80% x 90%) 7,200 Vat Input Tax (12% x 7,200) 864 Accounts Payable 8,064 Payment June 14 — Accounts Payable 8,064 Cash 7,920 Purchase Discount (7,200 x 2%) 144 Note: If the invoice is paid after June 14, there will be no more cash discount, Example 6: June 6 — Bought merchandise costing P10,000 on account per Credit Invoice No. 1870. FOB Shipping Point, Freight Prepaid by the seller, P1,000. Terms: 2/10, 1/30, Entry: June 6 - Purchases 10,000 Freight In 1,000 Vat Input Tax 1,320 Accounts Payable 12,320 www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 43 Payment June 16 — Accounts Payable 12,320 Cash 12,120 Purchase Discount 200 Note: Freight or transportation cost is not included in computing the discount. Example 7: June 6 — Bought merchandise on account, P 10,000.per Credit Invoice No. 1870 FOB Shipping Point, Freight Collect, P 1,000, 2/EOM, 160. Entry: June 6 ~ Purchases 10,000 VAT Input Tax 1,200 Accounts Payable 11,200 Freight In 1,000 VAT Input Tax (12% x P 1,000) 120 Cash 1,120 Payment June 30 — Accounts Payable 11,200 Cash 11,000 Purchase Discount 200 Example 8: June 8 - Bought merchandise costing P10,000 on account per Credit InvoiceNo.1880, FOB Destination, Freight Prepaid, P1,000. Terms: 2/10, 1/30. Entry: June 8- Purchases 10,000 Vat input Tax 1,200 Accounts Payable 11,200 Payment June 18 — Accounts Payable 11,200 Cash 11,000 Purchase Discount 200 Example 9: June 8 - Bought merchandise costing P10,000 on account per Credit Invoice No.1890. FOB Destination, Freight Collect, P1,000. Terms: 2/10 EOM, 1/30. Entry: June 8 ~ Purchases 10,000 Vat Input Tax 1,320 Accounts Payable 10,200 Cash 1,120 ‘Synergy in Global Education! www.certscollege.org44 Introduction to Accounting Module 1 Payment July 10 - Accounts Payable 10,080 Cash 9,880 Purchase Discount 200 Note: The freight paid is deducted from accounts payable and the discount is computed based on the invoice cost of the merchandise. Example 10 June 2 — Purchased merchandise costing P10,000 on account per Credit Invoice No. 1900. Term: 2/10, n/30. June 4— Received a credit memorandum from a seller for the merchandise retumed, P2,000. (Assume VAT excluded) Entry: June 2— Purchases 10,000 VAT Input Tax 1,200 Accounts Payable 11,200 Return June 4 - Accounts Payable 2,240 VAT Input Tax 240 Purchases Returns & Allowances 2,000 Payment June 12 Accounts Payable 8,960 Cash 8,800 Purchases Discounts 160 Note: Discount is computed after returns and allowances are deducted from the invoice cost. When partial payments are made on a particular invoice within the discount period, cash discount is not yet allowed. Cash discount is allowed only if the invoice cost net of returns and allowances are paid in full within the discount period The Gross Method is used in recording Purchases in the examples given, Under the Net Method, cash discounts are immediately deducted from Purchases and Accounts Payable. It is assumed that the business follows a policy of paying their accounts within the discount period NET METHOD - Using Example 10 transaction above, the entries would be: Entry: June 2 ~ Purchases 9,800 Vat Input Tax 1,200 Accounts Payable 11,000 Note: The account Purchases is recorded net of P 200 purchase discount. www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 45 Payment June 12 Accounts Payable 11,000 Cash 11,000 If paid after the discount period, the entry would be Payment June 30 — Accounts Payable 11,000 Purchase Discount Lost 200 Cash 14,200 NET METHOD - Using Example 10 transactions above with merchandise returns: Entry: June 2 - Purchases 9,800 VAT Input Tax 1,200 Accounts Payable 11,000 Return June 4 — Accounts Payable 2,200 VAT Input Tax 240 Purchase Returns and Allowances 1,960 Payment June 12— Accounts Payable 8,800 Cash 8,800 If paid after the discount period, the entry would be Payment June 30 — Accounts Payable 8,800 Purchase Discount Lost 160 Cash 8,960 14.0 ACCOUNTING FOR SALES The merchandise in stock will be sold and new items will be purchased to replace the items sold. Merchandise sales are credited to the Safes account. Sales can be made on cash or credit basis under the different terms similar to the terms of purchases discussed earlier. For every sale made, a 12% VAT Output Tax is recorded. The difference between the VAT Output Tax and the VAT Input Tax (normally a credit balance) represents the liability of the business to the government. Sales Invoice - is a document that the seller gives to the buyer listing the items ordered as per the P.O. (purchase order of the buyer), together with the quantity, price, description, value added tax, the terms, and the total price of the items ordered. ‘Synergy in Global Education! www.certscollege.org46 Introduction to Accounting Module 1 Credit Memo — is a form used by the seller to notify the buyer that his account is. credited (the amount is reduced) for the return of defective merchandise or allowance for damaged merchandise. Sales Discount - is a discount granted by the seller for early collection on a credit sale. Sales Returns and Allowances - are reductions in sales, resulting from merchandise being returned by the customer or from seller’s reduction in the original sales price. Freight Out - this represents the cost of transporting the merchandise sold from the seller's place to the buyer's place which is to be shouldered by the seller (business). 43.5 RECORDING SALES AND COLLECTION OF ACCOUNTS: Note: For simplicity, the amount P15,000 for the sale of merchandise (exclusive of the 12% Value-added Tax ) is used for all the examples. Example 1: June 2 - Sold merchandise worth P15,000 per Cash Sales Invoice No. 1001 Entry: June 2 — Cash (112% x 15,000) 16,800 Sales 15,000 Vat Output Tax (12% x 15,000) 1,800 Note: If the amount of the invoice is VAT inclusive, divide the amount by 1.12 than multiply by .12 to determine the VAT Output Tax. If the sale were a non-VAT transaction, the entry would be: Entry: June 2~Cash 15,000 Sales 15,000 Example 2: June 3 — Sold merchandise worth P15,000 per Credit Invoice No. 101. Terms: n/15. Entry: June 3 — Accounts Receivable 16,800 Sales 15,000 Vat Output Tax 1,800 Collection June 18 - Cash 16,800 Accounts Receivable 16,800 www.certscollege.org ‘Synergy in Global Education!Module 1 ‘Synergy in Global Education! Introduction to Accounting Note: If the sale were a non-VAT transaction, the entries would be: Entry: June 3 — Accounts Receivable 15,000 Sales 15,000 Collection June 18 - Cash 15,000 Accounts Receivable 15,000 Example 3: June 4 - Sold merchandise worth P15,000 per Credit Invoice n. 102. Terms: 2/10, n/30. Entry: June 4 — Accounts Receivable 16,800 Sales 15,000 Vat Output Tax 1,800 Collection June 14 -Cash 16,500 Sales Discount (2% x 15,000) 300 Accounts Receivable 16,800 Note: If the sale were a non-VAT transaction, the entries would be: Entry: June 4 — Accounts Receivable 15,000 Sales 15,000 Collection June 14 - Cash 14,700 Sales Discount (2% x 15,000) 300 Accounts Receivable 15,000 Example 4: June 5 — Sold merchandise worth P15,000 per Credit invoice No. 103. FOB Shipping Point, Freight Collect, P1,000. Terms: 2/10, 1/30. Entry: June 5 — Accounts Receivable 16,800 Sales 15,000 Vat Output Tax 1,800 Collection June 15-Cash 16,500 Sales Discount 300 Accounts Receivable 16,800 Note: The entries are the same as in Example 3 because transportation ‘costs are to be paid by the customer. 47 www.certscollege.org48 Introduction to Accounting Module 1 Example 5: June 6 — Sold merchandise worth P15,000 per Credit Invoice No. 104. FOB Shipping Point, Freight Prepaid, P1,000. Terms: 2/10, 1/30. Entry: June 6 -- Accounts Receivable 17,920 Sales 15,000 Vat Output Tax 1,800 Cash 1,120 Collection June 16 - Cash 17,620 Sales Discount 300 Accounts Receivable 17,920 Note: The transportation costs prepaid by the seller are chargeable to the customer's account. Note: If the sales were a non-VAT transaction, the entries would be: Entry: June 6 - Accounts Receivable 16,000 Sales 15,000 Cash 1,000 Collection June 16 - Cash 15,700 Sales Discount 300 Accounts Receivable 16,000 Example 6: June 7 - Sold merchandise worth P15,000 per Credit Invoice No. 105. FOB Destination Point, Freight Collect, P1,000. Terms: 2/10, 1/30, Merchandise was received on June 9. Entry: June 9 — Accounts Receivable 15,800 Freight Out 1,120 Sales 15,000 Vat Output Tax 1,920 Collection June 19 - Cash 15,500 Sales Discount 300 Accounts Receivable 15,800 Note: The transportation costs paid by the customer were deducted from the customer's account. www.certscollege.org ‘Synergy in Global Education!Module 1 ‘Synergy in Global Education! Introduction to Accounting If the sale were a non-VAT transaction, the entries would be: Entry: June 9 — Accounts Receivable 14,000 Freight Out 1,000 Sales 15,000 Collection — June 14- Cash 13,700 Sales Discount 300 Accounts Receivable 14,000 Example 7 June 8 - Sold merchandise worth P15,000 per Credit Invoice No. 106. FOB Destination Point, Freight Prepaid, P1,000. Terms: 2/10, n/30.Merchandise was received on June 10, Entry: June 10 - Accounts Receivable 16,800 Freight Out 1,000 VAT Input Tax 120 Sales 15,000 Vat Output Tax 1,800 Cash 1,120 Collection June 20 -Cash 16,500 Sales Discount 300 Accounts Receivable 16,800 Note: If the sale were a non-VAT transaction, the entries would be: Entry: June 10 - Accounts Receivable 15,000 Freight Out 1,000 Sales 15,000 Cash 1,000 Collection June 20 - Cash 14,700 Sales Discount 300 Accounts Receivable 15,000 Example 8: June 9 - Sold merchandise worth P15,000 per Credit Invoice No. 107. Terms: 2/10, n/30 June 10 - Received merchandise returns from the customer, P2,000 and issued credit memorandum No, 001 (Assume VAT Excluded) 49 www.certscollege.org50 Introduction to Accounting Module 1 Entry: June 9 — Accounts Receivable 16,800 Sales 15,000 Vat Output Tax 1,800 Return June 10 - Sales Retums & Allowances 2,000 Vat Output Tax 240 Accounts Receivable 2,240 Collection June 19 - Cash 14,300 Sales Discount 260 Accounts Receivable 14,560 Note: If the sale were a non-VAT transaction, the entries would be: Entry: June 9 — Accounts Receivable 15,000 Sales 15,000 Return June 10 - Sales Retums & Allowances 2,000 Accounts Receivable 2,000 Collection — June 19 - Cash 12,740 Sales Discount 260 Accounts Receivable 13,000 15.0 CHART OF ACCOUNTS FOR A MERCHANDISING BUSINESS The chart of accounts for a merchandising business (see sample on page 19) should include the different account titles used in the preceding examples to record the purchases and sales of merchandise. 15.1 SALES AND RELATED ACCOUNTS: Sales — this revenue account represents the merchandise sold to customers valued at selling price whether for cash or on credit. Sales Returns and Allowances — this represents the merchandise retumed by customers or the price adjustments allowed for damaged merchandise valued at selling price. This is to be subtracted from sales. Sales Discount — this represents the cash discounts granted by the seller to the customers for early payments of their accounts. www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting ‘Synergy in Global Education! Freight Out - This represents the cost of transporting the merchandise sold to the buyer's place. This is considered an expense of the seller. 45.2 PURCHASES AND RELATED ACCOUNTS: Purchases - this represents the cost of merchandise purchased from vendors or suppliers whether for cash or on credit. Purchase Returns & Allowances - this represents merchandise returned to vendors/suppliers or price adjustments for damaged merchandise valued at purchase cost. Purchase Discount - this represents cash discounts granted by the suppliers to the buyers for early payments of their accounts. Freight In - this represents the cost of transporting the merchandise purchased up to the buyer's place. This is added to the cost of the merchandise purchased by the buyer. Merchandise Inventory - this represents the unsold merchandise valued at cost as of a given date. 45.3 GROSS PROFIT COMPUTATION OF A MERCHANDISING BUSINESS: Sales Less: Sales Returns and Allowances 2,000 Sales Discounts 3,000 Net Sales Less: Cost of Goods Sold Merchandise Inventory - beg 10,000 Add: Purchases 100,000 Freight-in 4,000 Total 704,000 Less: Purchases Ret & Allow 1,000 Purchase Discounts 5,000 6,000 __ 98,000 Cost of Goods Available for Sale 708,000 Less: Merchandise Inventory - end GROSS PROFIT Note: All the above figures are assumed figures. 745,000 18,000 90,000 www.certscollege.org52 Introduction to Accounting Module 1 16.0 TRIAL BALANCE of a MERCHANDISING BUSINESS A trial balance is a list of accounts in the general ledger with balances. It provides a check on the accuracy of the posting (recording in the general ledger) by showing the equality of the total debits and total credits. Example Problem: (Preparing a Trial Balance) The following ledger accounts and their balances appear in the general ledger of Modern Appliance Store for the current year ending December 31 Cash Notes Receivable Accounts Receivable Merchandise Inventory-end Prepaid Insurance Office Supplies VAT Input Tax Delivery Equipment Accumulated Depreciation Store Equipment Accumulated Depreciation Office Equipment Accumulated Depreciation ‘Accounts Payable Notes Payable VAT Output Tax Mary Modern, Capital Mary Modern, Drawing Sales www.certscollege.org 285,430.00 60,000.00 275,600.00 1,578,650,00 12,000.00 6,250.00 22,400.00 '500,000.00 50,000.00 150,000.00 15,000.00 50,000.00 10,000.00 (945,850.00 100,000.00 30,800.00 41,508,945,00 60,000.00 3,760,600.00 Sales Retums and Allowances 37,500.00 Sales Discounts 50,650.00 Purchases 2,625,250.00 Purchase Returns and Allowances 26,250.00 Purchase Discounts 40,560.00 Freight In 60,250.00 Sales Salary Expense 218,875.00 Advertising Expense 33,000.00 Commission Expense 75,250.00 Delivery Expense 112,500.00 Misc. Selling Expense 12,450.00 Office Salary Expense 425,900.00 Rent Expense 110,000.00 Insurance Expense 42,000.00 Office Supplies Expense 16,800.00 ‘Tax Expense 10,250.00 Misc. General Expense 6,200.00, Interest income 41,200.00 Interest Expense 12,000.00 ‘Synergy in Global Education!Module 1 Introduction to Accounting 53 SOLUTION - Example Problem Modern Appliance Store Trial Balance December 31, 20CY Account Title Debit Credit Cash P 255,430.00 P Accounts Receivable 275,600.00 Notes Receivable 60,000.00 Merchandise Inventory 1,578,650,00 Office Supplies 6,250.00 Prepaid Insurance 12,000.00 VAT Input Tax 22,400.00 Delivery Equipment 500,000.00 Accumulated Depreciation 50,000.00 Store Equipment 150,000.00 Accumulated Depreciation 15,000.00 Office Equipment 50,000.00 Accumulated Depreciation 10,000.00 Accounts Payable 945,650.00 Notes Payable 100,000.00 VAT Output Tax 30,800.00 Mary Modern, Capital 1,505,945.00 Mary Modern, Drawing 60,000.00 Sales 3, 760,600.00 Sales Returns and Allowances 37,500.00 Sales Discounts 50,650.00 Purchases, 2,625,250.00 Purchases Returns and Allowances 26,250.00 Purchases Discounts 40,560.00, Freight in 60,250.00 Sales Salary Expense 215,675.00 Advertising Expense 33,000.00 Commission Expense 75,250.00 Delivery Expense 112,500.00, Misc. Selling Expense 12,450.00 Office Salary Expense 125,900.00, Rent Expense 110,000.00, Insurance Expense 12,000.00 Office Supplies Expense 16,800.00 “Tax Expense 10,250.00 Misc. General Expense 6,200.00 Interest Income 1,200.00 Interest Expense 12,000.00 Totals P ‘Synergy in Global Education! www.certscollege.org54 Introduction to Accounting Module 1 PROBLEMS: 1.1 Juan Carlos is a barber and on July 1 of the current year, Carlos Barber Shop had the following Statement of Financial Position: CARLOS BARBER SHOP Statement of Financial Position July 1, 200 ASSETS Cash P 25,000.00 Shop Supplies 23,500.00 Shop Fixtures 55,000.00 Shop Equipment 170,000.00 TOTAL ASSETS 273,500.00 LIABILITIES Accounts Payable P 25,000.00 EQUITY Juan Carlos, Capital 248,500.00 TOTAL LAIBILITIES and EQUITY P.273,500.00 The following transactions were made during the month. Purchased equipment on account, P11,500. Withdrew P6,000 for personal use. Paid P 10,000 of the accounts payable. Cash receipts for the month totaled P65,000 for services rendered Expenses paid for the month totaled P24,000, ‘Shop supplies worth P4,500 was used during the month. meaoce REQUIRED: Indicate the effects of the above transactions on the accounting equation shown below www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 55 ASSETS = LIABILITIES + EQUITY J Shop Shop__ Shop Accounts Cash sypples Fixtures Equipment ‘Payable eee eee Bal_ | 25,000 | 23,500 | 58,000 [170,000 25,000 | | 248,500 a Bal. | bf Bal. | c.f Bal. | df Bal ef Bal. | 4 | Bal 1.2 Andrea Bonito has decided to go into business for herself as a professional photographer and the following transactions transpired in October. a. She invested P300,000 to open the AB Photo Arts. b. Paid rental for the month, P12,000. . Purchased for cash camera equipment worth P220,000. d. Bought photo and developing supplies worth P18,000 on account. . Bought office equipment worth P45,000 on credit from Burroughs Company. f. Received P25,000 for photography services rendered. g. Andrea Bonito invested a computer valued at P30,000, in the business, h. Andrea Bonito withdrew P12,000 from the business for her personal use. i. Paid Burroughs Company P30,000 as partial payment of account. j. Took wedding pictures and agreed to accept payment fifteen days later, P12,000. k. Paid salary of assistant for the month, P6,000. |. Photo supplies used for the month, P4,000. REQUIRED: 1, Record the peso amount under the appropriate heading below to show the effect of each transaction on the accounting equation and determine the balances after every transaction. (See solution pattern below). ASSETS = UABILITIES + EQUITY Cash Accounts Photo _ Camera ‘Accounts ABonito Revenues Expenses Receivable Supplies Equipment Payable Capital ‘Synergy in Global Education! www.certscollege.org56 13 14 www.certscollege.org Introduction to Accounting Module 1 After determining the final balances of the accounts in Problem 1.2 above, prepare the following financial statements of AB Photo Arts for the months of October of the current year. REQUIRED: Reno ‘Statement of Profit or Loss ‘Statement of Changes in Equity ‘Statement of Financial Position Statement of Cash Flows Jose Masipag, a local CPA, completed the following transactions during January of the current year. The following account titles are to be used. Cash Accounts payable Insurance expense Accounts receivable Jose Masipag, Capital Light & water expense Office supplies Jose Masipag, Drawing Rent expense Office Equipment Fees eamed Salary expense Office Furniture Communication expense Taxes and licenses Notes payable Gas and oil expense January Jose Masipag made an initial investment of P 25,000. Paid the rent for the month of January, P4,000 Paid fire insurance for the month of January, P300. Received from George Jimenez P750 for services rendered. Borrowed P5,000 from the bank giving a 60-day note. Paid membership dues to PICPA, P500. Tomas Buena paid P950 for services rendered to him. Bought for cash a new desk and table for the office, P5,500. Paid business license fee to the city, P1,000. Received a check from Ben Hardin for services rendered, P850. Billed Susan Salgado P§,000 for services rendered. Jose Masipag withdrew P2,500 for personal use. Paid P 600 for the gasoline used in business, P60O. Received P650 form Wilfred Arietta P650 for services rendered. Paid the secretary's salary for January 1 to 15, P2,500. Purchased a computer and printer giving a note for P30,000 Bought office supplies from Golden Bell Co. on account, P60. Billed Samuel Donate P5,200 for services rendered. Collected P3,000 from Susan Salgado to apply on her account. Received cash from Fortune Company P4,750 for services rendered Paid Golden Bell Co. for office supplies purchased on January 16. Jose Masipag made an additional investment of P10,000. Received partial payment of P2,500 form Samuel Donate. Paid the note issued on January 15. ‘Synergy in Global Education!Module 1 Introduction to Accounting 87 25 Received P7,000 from Bell Company for services rendered. 28 Paid for January light and water bill, P1200. 28 Paid the secretary's salary for January 16 to 31, P2,500. 29 Paid Shell Service Station, P1,200 for gas and oil 30 Paid PLDT Co. for telephone bills, P800. REQUIRED: a). _ Journalize the above transactions in the general journal. b). Prepare the T accounts and post each entry to the T accounts. ©). Prepare a trial balance. 1.5 The following ledger balances were extracted from the general ledger of Gordon Dry Cleaning on December 31, 200: Cash P 22,500 Loan Payable 40,000 Due from Customers 12,600 Notes Receivable 8,000 Due to Suppliers 14,000 Fumiture and Fixtures 28,000 Notes Payable 10,000 Office Equipment 50,000 Truck 180,000 REQUIRED: Based on the above information how much is the equity as of December 31, 200E? 1.6 The following information is made available to you by Nelson Santos, the owner of 17 Santos Trucking Company on June 30, 200F: Santos Capital, Jan. 1 P 50,000 Santos Drawing 30,000 Service Income 250,000 Rent 45,000 Salaries 100,000 Advertising 40,000 Insurance 20,000 Utilities 3,800 REQUIRED: Prepare the Statement of Comprehensive Statement of profit or loss and the Statement of Changes in Equity. The following transactions for the month of January (first month of operations) were ‘completed by Quality Auto Repair Shop, owned and operated by Dimas Salang Jan, 1 Mr, Salang invested P 50,000 to start his auto repair shop business. 1 Bought for cash tools costing P 25,500. 1 ‘Synergy in Global Education! Purchased office tables and chairs from NICFUR on credit, P 12,520. www.certscollege.org58 aan 8 9 9 12 15 17 18 20 20 21 22 23 24 25 26 27 28 30 34 REQUIRED: reaece Introduction to Accounting Module 1 Received cash P 10,260 for repair service rendered to a customer. Mr. Salang invested his personal tools in the business, P 1,565 Received a promissory note from a customer for the repair of his car, P 7,400. Borrowed P 40,000 from PNB for use in the business. Issued a promissory note to Security Bank for money borrowed, P 5,000. Paid advertising, P 1,800. Mr. Salang withdrew cash for his personal use, P 2,000. Paid the salary of the mechanic and clerk, P 16,700. Rent of the shop was paid, P 3,000 Office supplies bought for cash & used, P 4,236. Bought a jeep, P 250,000 making a down payment of P 25,000. Received cash for repair services rendered to customers, P 31,000. Insured the shop from fire and paid the insurance company, P 2,670. Paid the following expenses: Telephone bill P 1,530.75 Electric bill 4,610.50 Made a partial payment to PNB, P 30,000. Paid in full the loan with Security Bank Collected the promissory note received on Jan. 5. Issued a promissory note to NICFUR in payment of the account (see Jan. 1) Bought a small piece of land for use in the business on credit P 30,000, Mortgaged the land with a bank for P 20,000. Paid the following salaries: Mechanic. P 12,000 Clerk 4,500 Repair service rendered to various customers for cash, P 21,250. Record the above transactions in the general journal. Post to the T accounts. Prepare the Trial Balance Prepare the Statement of profit or loss Prepare the Statement of Changes in Equity Prepare the Statement of Cash Flows. 1.8 D. Makita decided to put up an internet café business somewhere in Makati, The following transactions occurred in February, its first month of operations. Feb. 1 1 The owner, D. Makita invested cash of P 200,000 and 25 units of computer costing of P 265,000. Bought tables and chairs from Tupaz Company on credit, P 22,650 www.certscollege.org ‘Synergy in Global Education!Module 1 No 9 10 1 12 13, 14 15 16 17 18 20 23 25 28 28 REQUIRED: Introduction to Accounting 59 ‘Secured a business permit from the city Hall of Makati and paid various licenses totaling P 8,150. Total collections for the day from internet service, P 22,000. Paid the rent for February, P 12,000. Bought and used office supplies from Cunanan bookstore, P 1,260.80 on credit. Bought small tools on account from Convex Trading P 2,500.30 Registered the business name with the Dept. of Trade & Industry and paid P 2,010.50. Received a total cash of P 20,000 for the day from different ‘customers for the use of the computer. The owner withdrew cash for his personal use, P 10,000 Paid miscellaneous expenses, P 1,250. Paid salaries of the mechanic and clerk, P 13,850. Cash collections for the day from internet service, P 11,080. Bought a fax machine, P 25,000 paying a down payment of 40% and issued a note for the balance. Paid telephone bill, P 1,925 and electric bill, P 6,480. The owner invested his personal computer to the business P 18,000. The fax machine was used by a customer and collected P 250 for its use. Bought copying machine for cash, P 22,650, Collected P 1,200 from a customer for photo copying service. Received cash for intemet service, P 6,890. A loan was secured from PNB, P 12,000. Paid salaries of the mechanic and clerk, P 12,670 Paid Corvex Trading, P 1,000. (see transaction dated Feb. 6) 1. Record the foregoing transactions in the general journal. (see chart of accounts below) 2. Post to the general ledger. 3. Prepare the trial balance as of February 28, 200. 4, Prepare the Statement of profit or loss for the Month ended February 28, 200D. §. Prepare the Statement of Financial Position. CHART OF ACCOUNTS ASSETS. INCOME 101 Cash 401 Income from Internet 102 Tools 402 Income from Fax Machine 103 Computer Equipment 403 Income from Photo Copying 104 Furniture & Fixtures 105 Office Equipment ‘Synergy in Global Education! www.certscollege.org60 Introduction to Accounting Module 1 LIABILITIES EXPENSES 201 Accounts Payable 501 Taxes & Licenses Expense 202 Notes Payable 502 Rent Expense 203 Loan Payable 503 Office Supplies Expense 504 Miscellaneous Expense EQuiTy 505 Salaries Expense 301 D. Makita, Capital 506 Telephone & Telegram Expense 302. D. Makita Drawing 507 Light & Water Expense 1.9 The following accounts in the general ledger of Rey's Auto Repair Shop on December 31,2000: Cash Rey Capital Notes Payable 120,000 | 50,000 120,000 7,800 4,000 9,200 | 3,000 4,500 25,000 | 1,000 6,000 | 12,000 Rey Drawing Loan Payable 2,500 | 15,000 7,000 25,000 8,000 | 1,800 7,000 Service Income Accounts Payable 3,600 9,200 16,500 450 11,000 1,250 3,500 Misc. Expense 450 Accounts Receivable Rent Income 11,000 | 6,000 8,000 Notes Receivable Rent Expense 3,500 | 2,500 72,000 Tools Salaries Expense 7,000 15,000 Furniture & Fixtures Advertising Expense 4,000 3,600 Office Equipment Taxes and Licenses 16,500 3,000 4,500 Insurance Expense Machinery (250 50,000 www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 61 REQUIRED: 1. Prepare the trial balance. 2. Match the DEBIT amounts against the CREDIT amounts found in the different ledger accounts and reconstruct the journal entries made with explanation. (Start with the cash account and so forth & so on), 1.10 On January 1, 200E, the following accounts appeared in the general ledger of Joni’s Repair Shop’ Cash P10,500 Accounts Payable P 22,000 Accounts Receivable 8,400 Loan Payable 5,000 Fumiture 12,600 Joni Capital 2 Repair Equipment 54,000 During the month of January, the following transactions transpired Collection of accounts receivable P 4,500. Fumiture bought for cash, P 3,700. Repair equipment bought for cash, P 12,000. Payments of accounts, P 6,600, Partial payment of loan, P 3,000. Additional investment of Joni, P 10,000. Cash withdrawal of Joni, P 4,000, Cash received for repair services rendered, P 50,000. Total expenses paid for the month P 27,000. REQUIRED: Open T accounts for the beginning balances. Record the transactions direct to the T accounts, Prepare the Statement of Changes in Equity. Prepare the Statement of Financial Position as of January 31, 200E. Prepare the Statement of Cash Flows. gReNS The following balances were extracted from the general ledger of Karen Keng, ‘owner of the GINHAWA MASSAGE CLINIC on December 31, 200C: Karen Capital 85,000 Notes Receivable P1,200 Office Equipment 12,000 Notes Payable 8,000 Accounts Payable 16,600 Interest Income 360 Cash 18,540 Tel. & Tel. Expense 1,250 Tools 21,500 Interest Expense 220 Karen Personal 10,000 Postage & Stamps Expense 50 Accounts Receivable 21,460 Insurance Expense 4,100 Mortgage Payable 30,000 Truck 84,700 Loan Payable 20,000 Subscription & Publication Expense 160 Service Income 78,560 Office Supplies Expense 3,150 Fumiture & Fixtures 8,900 Machinery 36,290 Salaries Expense 21,000 Rent Income 6,000 ‘Synergy in Global Education! www.certscollege.org62 Introduction to Accounting Module 1 REQUIRED: 1, Prepare the Trial Balance (Arrange the accounts in the following order: Assets, Liabilities, Equity, Drawing, Income, and Expense) 2. Prepare the Statement of Profit or Loss 3. Prepare the Statement of Changes in Equity 4, Prepare the Statement of Financial Position 1.12 The JM LUNA Enterprise had the following trial balance as of July 1 of the current year. JM LUNA ENTERPRIS Trial Balance July 1, 20CY 4.N. ACCOUNT TITLE DEBIT CREDIT HW Cash P 22,000 P 13 Office Equipment 18,300 21 Accounts Payable 4,500 31 JM Luna, Capital 37,800 32 JMLuna, Drawing 4,800 41 Fees Earned 17,800 Sl Salary Expense 52 Rent Expense 53 Communication Expense 54 Utilities Expense 55 Supplies Expense 56 Taxes and Licenses 57 Miscellaneous Expense None of the journal entries for the month of July had been posted or included in the trial balance. GENERAL JOURNAL Date Description Debit Credit July 1 Supplies expense 8300.00 {ecounts payable 800.00 Office supplies purchased on account. 2 Salary expense 7,500.00 Cash 7,500.00 Paid payroll www.certscollege.org ‘Synergy in Global Education!Module 1 10 if 16 18. 2 Introduction to Accounting Rent expense Cash Paid rent for July Cash Fees earned Received fees for services rendered. JM Luna, Drawing Cash Withdrawal for personal use. Communication expense Cash Paid PLDT for telephone bill Cash Fees Earned Received fees for services rendered. Accounts payable Cash Paid account for office supplies Utilities expense Cash Paid for water bill. Office Equipment. Accounts payable Purchase ofa file cabinet on account Cash JM Luna, Capital Cash investment of JM Luna. Accounts payable Cash Paid partial on file cabinet. Cash Fees earned Received fees for services rendered. ‘Synergy in Global Education! 5,500.00 5,600.00 3,600.00 900.00 3,900.00 800.00 600.00 3,200.00 20,000.00 2,000.00 9,000.00 63 5,500.00 5,600.00 3,600.00 900.00 3,900.00 800.00 600.00 3,200.00 20,000.00 2,000.00 9,000.00 www.certscollege.org64 31 Introduction to Accounting Taxes and Licenses Cash Business license fee paid, Utilities Expense Cash Paid electric bill. Cash Fees earned Received fees for services rendered. Salary Expense. Cash Paid payroll Miscellaneous expenses Cash Paid for miscellaneous expenses REQUIRED: 1, Open the accounts listed in the trial balance above in the general ledger and post the beginning balances. 2. Post the joumal entries (shown below and in the next page) to the general ledger. 3. Prepare a trial balance as of July 31 of the current year. Module 1 600.00 600.00 950.00 950.00 10,050.00 10,050.00 7,500.00 7,500.00 500.00 500.00 1.13 William Dixon, a professional, owns a small service business. During the month of June, several transactions transpired which are listed below. The trial balance for July 1, of the current year is also shown below. AN 1 12 13 15 21 31 32 41 51 WILLIAM DIXON Trial Balance June 1, 20CY ACCOUNT TITLE DEBIT CREDIT Cash P23,500 P Accounts Receivable 17,500 Office Equipment 27,500 Automobile - Accounts Payable 18, 500 W. Dixon, Capital 52, 100 W. Dixon, Drawing 11,000 Fees Eamed 43, 000 Salary Expense 9,000 www.certscollege.org ‘Synergy in Global Education!Module 1 52 53 54 55 56 Totals June Introduction to Accounting 65 Rent Expense 18,000 Communication Expense 2,850 Utilities Expense 2,250 Supplies Expense 1,250 Miscellaneous Expense 750 P__113,600__P 113, 600 Paid the monthly rent, P6,000. Collected from Robert Cruz, P7,500 for services previously billed. Paid water and electric bill, P1,750. Billed Doris Mendoza P8,500 for services rendered. Paid PLOT telephone bill, P1,050. Dixon invested his personal car worth P150,000 into the business. Paid salary of secretary, P4,500. Received a check for P8,500 from Doris Mendoza.(see transaction dated June 8) Billed Wamer Holden Co. P15,000 for services rendered Paid the account of Manila Company, P9,000. Paid Ace Supply Company P950 for office supplies bought and used. Paid miscellaneous bills, P650. Withdrew P6,000 for living expenses. Required: 1. Record the above transactions in the general journal 2. Post the journal entries to the general ledger icating the posting reference 3. Prepare a Trial Balance as of June 30, of the current year. 1.14 On June 1 of the current, Daniel Chavez established DC Modern Designs. During the month the following transactions were completed: June 1 3 5 7 9 " 13 15 7 19 Transferred his personal savings of P250,000 for his capital in the business. Paid the rent for the month of June, P5,000. Purchased office equipment on account, P105,000 Bought a used vehicle for P180,000, paying P100,000 cash and giving a note payable for the remainder. Purchased decorating supplies for cash, P13,150. Received cash of P33,000 for decorating services rendered. Paid fire and casualty insurance premiums, P1,800. Billed customers for job completed, P19,500. Paid the bills for gas and oil used in vehicle for delivery P2,900. Paid light and water bills, P2,450. ‘Synergy in Global Education! www.certscollege.org66 Introduction to Accounting Module 1 21. Received cash of P12,000 from customers for services rendered, 23 Paid miscellaneous expense, P1,950. 25 Made partial payment on the amount owned on June 7, P30,000. 26 Withdrew cash for personal use, P25,000. 30 Paid salaries of employees, P19,000. The chart of accounts of DC Modern Designs is listed below: Cash Accounts receivable Decorating supplies Prepaid Insurance Office Equipment Service Vehicle Notes payable Accounts payable Daniel Chavez, Capital Daniel Chavez, Drawing Service Income Salary Expense Delivery Expense Rent Expense Utilities Expense Miscellaneous Expense Required: ‘Assign appropriate three-digit account number for each account above. Joumalize each transaction using the above chart of accounts. Post entries to the general ledger indicating the posting reference. Prepare a trial balance as of June 30, of the current year. Bene 1.15 Angelo Parco, had the following trial balance at the end of March of the current year. ANGELO PARCO Trial Balance March 31, 20CY AN ACCOUNT TITLE DEBIT CREDIT 11 Cash P56,300 P 12 Accounts Receivable 77,500 13 Prepaid Insurance 9,600 16 Automobile 200,000 www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 21 Notes Payable 23° Accounts Payable 31 A Parco, Capital 32 A Parco, Drawing 20,000 41 Fees Earned 51 Salary Expense 150,050 52 Rent Expense 36,000 53 Advertising Expense 18,000 54 Automobile Expense 12,650 55 Supplies Expense 7,200 56 — Miscellaneous Expense 5,500 Totals April REQUIRED: 67 60,000 33,350 180,000 319,450 P 592,800 P 592,800 Paid office rent for the month of April, P12,000, Received cash from clients on account, P54,200. Paid advertising expense, P3,000 Billed on account for office supplies used, P1,200. Creditors’ account were paid, P7,650. Paid repairs for automobile, P1,750. Miscellaneous expenses of P2,150 were paid, Revenue earned and billed for the month, P92,400, Gas and oil used for automobile was paid, P3,650. Paid salaries for the month, P20,750. Withdrew cash for personal use, P15,000. Paid partial on note issued, P10,000. 1, Joumalize the above transactions. 2. Open the accounts in the general ledger and post the journal entries indicating the posting reference. 3. Prepare trial balance as of April 30, of the current year. 1.16 Lucy Fer is the owner of Speedy Trucking Company. After one month of operation: the following balances were extracted on March 31, 200E from the general ledger: Lucy Fer Capital P 140,000 Office Equipment 24,145 Loan Payable 8,300 Cash 9,270 Tools 10,750 Lucy Fer Drawing 5,000 Service Income 72,700 Fumiture & Fixtures 14,450 ‘Synergy in Global Education! www.certscollege.org68 Introduction to Accounting Module 1 Salaries Expense 7,500 Gas & Oil 3,000 Supplies Expense 1,575 Advances to Employees 180 Telephone & Telegram 625 Miscellaneous Expense 105 Truck 142,350 Taxes & Licenses 2,050 All the transactions were purely on a cash basis. REQUIRED: 1. Trial Balance (arranged accordingly) 2. Statement of Changes in Equity 3. Statement of Cash Flows The following are the normal transactions of a servicing concern: 1, The owner invested cash. 2. Paid telephone bills 3. Borrowed money from PNB. 4. Bought office tables on credit 5. The owner withdrew cash for his personal use. 6. Bought computers for cash 7. Paid electric bills. 8. Paid the account with the supplier. 9. Cash received for services rendered 10. Billed customers for services rendered. 11. Bought tools on account. 12. Paid in full the loan with the bank. 13. Bought a piece of land making a down payment. 14. Received a promissory note for services rendered. 15. Bought office supplies on credit. 16. Paid advertisements. 17. Paid the services of a lawyer. 18. Bought newspapers for cash. 19. Paid telephone bills. 20. Issued a promissory note for money borrowed 21, Bought stamps for cash. 22. Paid the rent of the office. 23. Bought a delivery truck with a 40% down payment. 24. Paid the following expenses: water bills, and insurance premium. 25. Paid the municipal licenses and permits. 26. Issued a note in payment of an account. www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 27. Received a note from a customer in payment of his account. 28. Paid the salaries of the following: office clerks and secretary. 29. Billed customers for services rendered. 30. Paid promissory note. 31. Collected a promissory note. 32. The owner brought home tools for his personal use. 33. The owner invested his typewriters in the business. 34. Mortgaged the land with the bank. 35. Cash services rendered to various customers. 36. Collected the rental of a tenant. 37. Paid interest on the loan 38. Collected the interest on the note receivable 39 \come received 40. Misc. expenses paid. 41. Bought ball pens and papers on account. 42. Sold the land for cash 43. Bought filing cabinets on credit. 44. The owner made additional cash investment. 45. Services rendered on account. 46. Utilities paid 47. Collected an account of a customer. 48. Paid the account of a certain supplier. 49. The salary of the janitor is paid 50. Insurance premium is paid. REQUIRED: 1 1.18 Classify the items listed below by checking the appropriate boxes. Prepare the journal entry (without the amount) to record the above transactions. 69 Accounts Assets | Liab. | Equity |Drawing| income | Exp.| DR | CR Nominal Real ‘Accounts Receivable Karen Capital Karen Personal Cash Interest collected Rent paid ‘Advertising paid Interest paid Rent collected ‘Synergy in Global Education! www.certscollege.org70 Introduction to Accounting Module 1 Accounts Assets | Liab. | Equity |Drawing| income |Exp.| DR | CR | Nominal| Real lo. Salaries }11. Supplies used 12. Subscriptions —_&| [Publications 13. Mortgage Payable 114. Taxes & Licenses 115. Notes Receivable H6. Notes Payable 17. Unused Supplies 18. Postage & Stamps. 19. Insurance paid 20. Light & Water 21. Loan Payable l22. Service Income l23. Office Equipment l24. Fumiture & Fixtures 25. Professional fees paid [26. Delivery Truck. 1.19 On July 31, of the current year, Cecile Hart prepared the following trial balance for her service business. CECILE HART Trial Balance July 31, 20CY AN ACCOUNT TITLE DEBIT CREDIT 11 Cash P P 50,000 12 Accounts Receivable 120,000 15 Office Equipment 200,000 17 Office Furniture 16,500 21 Accounts Payable 100,000 31 Cecile Hart, Capital 60,000 32 Cecile Hart, Drawing 41,000 41 Fees Eamed 310,000 51 Salary Expense 44,000 52 Rent Expense 14,000 53 Communication Expense 1,000 www.certscollege.org ‘Synergy in Global Education!Module 1 Introduction to Accounting 54 — Utilities Expense 3,250 55 Supplies Expense 56 Miscellaneous Expense Totals P_594,250__P_368,750 It is apparent that the trial balance is not correct and does not balance. The following information was given 1, Allof the accounts have normal balances. 2. The debits to the Cash account total P140,000 and the credits to the Cash account total P89,000. 3. A P2,000 cash receipt from a customer was not posted to the Accounts Receivable account. 4. The balance in the Fees Eamed accounts is P130,000 instead of P310,000. 5. The debits to the Office Equipment account total P309,000 and the credits to the Office Equipment account total P188,000. 6. The balance in Cecile Hart's capital account is P160,000, 7. The credits to the Accounts Payable account total P173,000 and the debits to the Accounts Payable account total P50,000. REQUIRED: Given the above information, prepare a corrected trial balance as of July 31, of the current year. 1.20 Shown below are the balances of selected accounts in the general ledger: Cash Robert Capital 20,000 2,500 20,000 12,000 9,000 5,000 | 14.200 Robert Drawing Service Income 2,500 12,000 16,000 Accounts Receivable Office Equipment 16,000 5,000 15,000 Accounts Payable Expenses 9,000 15,000 14,200 n ‘Synergy in Global Education! www.certscollege.org72 Introduction to Accounting Module 1 REQUIRED: Based on the above T accounts reconstruct the journal entries made with explanation. 1.21. The following purchases were made by STAREX Trading during 200F: List Price Trade Discount Terms DR Amount = CR ‘Amount a. P 180,000 8% COD b. P 17500 10%: 5% — n/60 ©. P.200,000 3%:2%:1% n/EOM REQUIRED: Give the journal entries u 9 the blank space provided. 1.22. The following Sales were made by CONDES Co. during 200C: List Price Trade Discount Terms DR = Amount = CR Amount a 220,000 6% 1/30 b. P 180500 6% 8% COD cP 150,000 10%:4% — n/EOM REQUIRED: Give the journal entries using the blank space provided. 1.23 Shown below are different freight terms: Freight Terms Who should shoulder Who will the freight pay a. FOB-Shipping Point ~ Freight Collect b. FOB -Shipping Point - Freight Prepaid c. FOB ~ Destination ~ Freight Collect d. FOB — Destination - Freight Prepaid REQUIRED: Indicate on the blank space provided whether it is the BUYER or the SELLER, 1.24 Manila Trading Company bought merchandise from Singapore Trading Company costing P 450,000 exclusive of freight charges of P 12,000 which was paid by the right party. REQUIRED: In parallel column, record the above transactions in the books of the buyer and seller under each of the following freight terms: www.certscollege.org ‘Synergy in Global Education!