Basic Financial Accounting and Reporting

Accounting is a Service activity. Its Function is to Provide

Quantitative information primarily financial in nature about
economic entities that is extended to be useful in making
economic decisions.
-Accounting Standard Council
Accounting is the process of identifying, measuring and
communicating economic information to permit and inform judgment
and decision by the user of information.
-American Accounting Association
Accounting is te art of recording, classifying, and summarizing
in a significant manner and in terms of money, transaction, and
events which are in part at least, of a financial character and
interpreting the result.
-American Institute of Certified Public Accountant
Accounting is an information system that measures, process and
communicate financial information about economic entity.
-Financial Accounting Standard Board

ADJUSTING ENTRY
 Accountant make adjusting entries is to reflect in the
account information on economic activities that have
occurred but have not yet been recorded.
THE TIME PERIOD or PERIODICITY PRINCIPLE
 Generally states that the life of business entity may be
divided into several period.

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  Financial statement of an entity should be prepared at least
 Annually
 Annual
 Semi-annual
 Quarterly
 Monthly
The need for adjusting Entries
1. Some income earned or expenses incurred have not beed
recorded in the books.
2. Include in the book are some which are not yet earned or
some expenses which are not yet expired.
3. Some asset included in the book are already expired are use
up.
4. Some liabilities included in the book such as advances from
costumer or clients are already earned.
ITEM USUALLY ADJUSTED
1. Accrued income and Accrued expenses
2. Differed income and Prepaid expenses
3. Bad debts or doubtful account
4. Depreciation

MIDTERM QUIZ #1
INSTRUCTION: From the given data, prepare the adjusting
entries for the year ended December 31,2022. Do not use a
separate paper sheet of paper. Use the vacant space below and
and the back of this paper for your answer and solutions. Do
your best!
1. Of the P2,000 office supplies inventory, P800 cost of
supplies were on hand. Asset account was debited upon
purchase.
 Office supplies inventory P1,600
Supplies 1,600

2
2. Raid insurance premium on March 1, 2022 amounting to P4,800
for a 2-year policy contract. Expense account was debited
upon payment.
 Pre-paid insurance P4,800
Insurance Expense 4,800
3. Received cash of P72,000 for a 3-year advance rental to
commence September 30, 2022. Unearned Rent account was
credited from receipt of cash.
 Unearned rent P6,000
Rent Income 6,000
4. Salaries from the period December 27, 2022 to January 3,
2023 at P225/day were unpaid.
 Salaries expense 1,125
Salaries payable 1,125
5. Of the recorded Interest income account of P5,000, P3,000
was unearned at the end of the period.
 Interest income 3,000
Unearned revenue 3,000
6. Purchase of supplies for P3,000. At the end of the year,
P1,000 cost of supplies was used. Expense method was use
payment supplies.
 Prepaid supplies 1,000
Supplies expense 1,000
7. A P48,000 6%, 120-day note was received from a client dated
Nov.1 2022. The interest was not yet collected at the of the
accounting period.
 Interest receivable 480
Interest income 480
8. Before adjustment, a balance of laundry supplies inventory
was 35,000. Physical account of supplies inventory was
P15,000.
 Supply expense 20,000
Supplies 20,000
9. Signed an advertising contract on June 1, 2022 with a radio
station for P35,000. The contract will commence upon payment
on June 15, 2022 and will terminate on June 15, 2022.
Expense method is used in recording prepayment.

3
  Prepaid advertising 18,950
Advertising Expense 18,950

10.Supplies inventory showed a balance of P40,000 as of

December 31, 2022. During this year, P25,000 cost of
supplies was purchased and at the end of December 31, 2023,
P20,000 were found to be on hand.
 Supplies expense 25,000
Supplies 25,000

Accrual of Income and Expense

Accrual Principle
1. Income is recognize as earned at the time service is
rendered regardless of when cash is received.
 This is also called the revenue recognition principle
2. Expense is recognized as incurred at the time service is
receive or use up regardless of when cash is paid (also
called the expense recognition principle or the matching
principle.

ILLUSTRATION 1:
Accrual of unrecorded income/expense
For the year 2022, Aste company sold books amounting to
P180,000 for Yuno books store. As a December 31, Yuno
bookstore did not yet issue to Asta the check for the 10%
commission on the book sold.
DECEMBER 31, 2022
Book of Yuno Book of Asta
Commission expense P18,000 Commission Receivable P18,000
Commission Payable 18,000 Commission Income 18,000

ILLUSTRATION 2:
On December 1, 2022, ABC Company issued a 45-day, 12% note
for a P100,000 cash loan extend by DEF Finance. The not7e Is
dated December 1, 2022.
1. What is the journal entry to be recorded in December 1, 2022

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 2. What is the adjusting journal entry to be recorded on
December 31, 2022?

December 1, 2022
Book of ABC (company Issuer) Book of DEF Finance(holder)
Cash P100,000 Notes Receivable P100,000

Notes payable 100,000 Cash 100,000

Formula For Simple Interest

I=PRT
I=(PRINCIPAL)(RATE)(TIME)

ABC Company (Issuer)

1
Interest expense (100,000×12%× ) P100,000
12
Interest Payable 100,000

DEF Finance (holder)

1
Interest expense (100,000×12%× ) P100,000
12
Interest Payable 100,000

TYPES OF ACCOUNT
TEMPORARY ACCOUNTS
 Temporary accounts, also called a nominal account are
those which are close at the end of an reporting
period.
 This accounts are also called “Income statement
accounts” because these are generally composed income
statements.

Example:
Income accounts Drawing Account
Expense accounts Income- Summary accounts

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PERMANENT ACCOUNT
 Permanent account, also known as a real account those which
are NOT CLOSE at the end of the reporting period. This
account are “carried over” in the succeeding Period.
 This account are often called “balance sheet account”
because, they are compose of balance sheet item.
EXAMPLE:
Asset, liability, equity

TYPES OF ACCOUNT: MIXED ACCOUNT

Mixed account are those which have BOTH PERMANENT and TEMPORARY
COMPONENTS, hence the name mixed these accounts having a mixture
of real and nominal components must be separated to determine the
proper amount to be reported in a given accounting period
necessary to present a reliable financial report.
EXAMPLE:
Prepaid expense, Unearned revenues/Differed income
RELEVANCE OF ADJUSTING ENTRIES MIXED ACCOUNTS
 Mixed account having both permanent and temporary components
should be adjusted at the end of the end of every reporting
period
 In adjusting entries seek to separate the permanent and
temporary aspects of mixed accounts.
 The purpose of separation is to properly match and classify
the components of this account in the proper accounting
period in which they were incurred or earned, as the case
maybe, to be able to achieve a reliable financial reporting
that, should result better economic decision.
PREPAID EXPENSE AS MIXED ACCOUNTS
PREPAID EXPENSE represent advance payments from the entity
for goods or service to be used or consumed or incurred in
the future.
EXAMPLE:
Prepaid rent, prepaid insurance, prepaid advertising etc.
PREPAID expense may be recorded:
ASSET METHOD
EXPENSE METHOD

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 ILLUSTRATION#3
Asset vs expense method
On August 1, 2021, Isagal company paid advance rent to
Sagino company in the amount of P120,000 for 1 year.
1. What is the journal entry to be recorded in August 1,
2022
2. What is the adjusting journal entry to be recorded on
December 31, 2022?
AUGUST 1, 2022
ASSET METHOD EXPENSE METHOD
Prepaid rent P120,000 Rent expense P120,000
Cash 120,000 Cash 120,000

DECEMBER 31,2022
ASSET METHOD
Rent Expense (120,000/12months×8months) P40,000
Prepaid Rent 40,000

EXPENSE METHOD
Prepaid rent(120,000/12months×8months) P80,000
Rent expense 80,000
DIFFERED INCOME AS A MIXED ACCOUNTS
 Differed income advanced collections from an entity for
goods or service to be delivered or perform in the future.
EXAMPLE:
Advance from the costumers, unearned revenue
Differed income may be recorded using;
Liability method
Income method.
ILLUSTRATION#4
DIFFERED INCOME
LIABILITY vs. INCOME METHOD
On September 30, 2022, Hayami received advance rent from Atona
company in the amount of P120,000 for one year.

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 1. What is the journal entry

LIBILITY METHOD INCOME METHOD

Cash P120,000 Cash P120,000
Unearned rent income 120,000 Rent Income 120,000
LIABILITY METHOD
Unearned rent income (120,000/12×3) P30,000
Rent Income 30,000

MIXED ACCOUNT METHOD Journal Journal entry Adjusting

method upon upon receipt entry at the
amount of of cash end of of the
cash accounting
period

PREPAID Asset method Recognized an Recognized

EXPENSE asset for the expense for
whole amount expired
portion

Expense Recognized Recognized

method expense for expense for
the whole and unexpired
amount portion

DIFFERED Liability Recognized Recognized on

INCOME method liability for income for
the whole the earned
amount portion

Income method Recognized a Recognized

n income for liability for
the whole unearned
amount portion

QUIZ #2

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Problem 1: On March 16,Josephine Company received a 30-day,18%
note for P15,000 from a customer for professional service
rendered. The company uses the fiscal accounting period ending
March 31.

Required:

1.Make a journal entry on March 16 for the note that was received
and on March 31 for the adjustment to accrue interest.

Note Receivable P15,000

Service Revenue 15,000

Problem 2:Mr. A, owner of a building in Makati, leases out store

and office spaces to tenants for a monthly rental of P15,000. For
each of the following independent information provided on
December 31, 2022, give the adjusting entry.

Required:

1.Two tenants have not paid for the December rent.

Account receivable P30,000

Rent income 30,000

2.Prepaid insurance expense of P180,000 represents one-year

insurance paid on October 15, 2022.

Prepaid Insurance (180,000/12×9.5) P142,500

Insurance expense 142, 500

3.The employment contract states that an employee is to receive a

monthly salary of P7,500 payable every 2nd day of the month for
salary covering the last half of the previous month and every
17th of the month for the salary concerning the first half of the
current month. Four employees were hired by the lessor.

Salaries Expense (7,500/2×4) P15,500

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 Salaries Payable 15,500

4.Rental income included advance collection of P60,000 of which

only 50% was earned at the end of the accounting period.

Rent income P30,000

Unearned rental income 30,000

Problem 3: Tita Dely's Cooking Center purchased cooking supplies

amounting to P5,000 on June 30, 2022 and P7,000 on October 15,
2023. Supplies on hand was 1,500 on December 31, 2022 and P2,200
on December 31.2023.

Required:

1. Prepare the entry in 2022 to record the purchase using both

the asset and expense methods.

ASSET METHOD EXPENSE METHOD

Cooking supplies P5,000 Cooking supplies expense

P5,000

Cash 5,000 Cash

5,000

2.Prepare the adjusting entry on December 31, 2022 for both

methods.

ASSET METHOD

Cooking supplies expense P3,500

Cooking supplies 3,500

EXPENSE METHOD

Cooking supplies P1,500

Cooking supplies expense 1,500

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3.Prepare the entry on 2023 to record the purchase on October 15,
2023 using both methods.

ASSET METHOD

Cooking supplies expense P7,000

Cash 7,000

EXPENSE METHOD

Cooking supplies expense P7,000

Cash 7,000

3. Prepared the adjusting entry on December 31, 2023 for

both methods.

ASSET METHOD

Cooking Supplies expense P6,300

Cooking Supplies 6,300

EXPENSE METHOD

Cooking Supplies P2,200

Cooking Supplies Expense 2,200

Problem 4: Received cash of P216,000 for a 4-year advance rental

to commence September 30, 2022.

Required:

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1.Prepare the entry in 2022 to record the purchase using both the
liability and income methods.

Cash 216,000

Unearned rent Revenue 216,00

Cash 216,000

Rent Income 216,000

2. Prepare the adjusting entry on December 31, 2022 for both

methods.

Unearned rent revenue P13,500

Rent income 13,5000

Rent Income P17,500

Unearned Rent Revenue 17,500

DEPRECIATION

 Is a systematic allocation of depreciable amount over its

useful life.

DEPRECIATION PERIOD- begins when asset is available or ready for

use and ends when the asset has been derecognized.

ELEMENTS

1. Direct Association – its not benefit more than 1 accounting

period
2. Direct Association – recognized expense if recognized
revenue
3. Systematic/ Rational – benefit more than 1 accounting
period

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 Cost−Salvage Value
Useful Life

Residual Value = Depreciation Amount

Scrap Value

KINDS OF DEPRECIATION

PHYSICAL- ultimate retirement of property or asset

 Wear and tear

 Passage of time
 Expose to elements-rain, sunlight, air
 Accident- natural disaster

FUNCTION/ECONOMIC

 Obsolescence – walang demand, walang pakinabang

 Indaquancy- Disapat sa demand

BASIC METHOD

100 %
STRAIGHT LINE METHOD
Useful Life

COST −SALVAGE VALUE

RESIDUAL VALUE 100 %
= SCRAP VALUE
¿ 5
¿
USEFUL LIFE

100,000−20,000
= = 20% × 80,000= P16,000
5 years

=P16,000

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DECLINING BALANCE

COST= 550,000 SV= 50,000 EUL= 5 years

200%= 20% × 2= 40%

Depreciation Amount Rate Dep. Expense Accumulated

Dep. Carrying Amount

YEAR1 500,000 × 40% 200,000 200,000 300,000

2 300,000 × 40% 120,000 320,000 180,000

3 180,000 ×40% 72,000 392,000 108,000

4 108,000 ×40% 43,200 435,200 64,800

14,800 ----- RV (50,000)

450,000 14,800

SUM OF YEARS (SYD )

Cost- P430,000 SV- 30,000 EUS- 5 Years

5+4+3+2+1= 10

Depreciable Amount Fraction Depreciation Expense

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 4
1 400,000 × 160,000
10

3
2 400,000 × 120,000
10

2
3 400,000 × 80,000
10

1
1 400,000 × 40,000
10

P 400,000

MIDTERM SEATWORK 1

Problem 1: Rem Company purchased a machinery on June 1, 2022. The

machinery's cost is P450,000 and is estimated to have 10-year
useful life with no residual value. Rem uses the straight-line
method for depreciating this asset.

Required: On December 31, 2022, what adjusting journal entry

should Rem make to record the machinery's depreciation?

Depreciation expense P26,250

Accumulated depreciation 26,250

Problem 2: On January 1, 2022, Ryuk Company purchased a building

at a cost of P50,000,000.The building is estimated to have a
useful life of 50 years with a salvage value of P750,000.
Depreciation for this building is computed using the sum of the
years' digits method.

Required: Give the adjusting journal entry on December 31, 2022

to record the building's
depreciation.
Depreciation expense 1,931,372.55
Accumulated depreciation 1,931,372.55

Problem 3:Near Company purchased a factory equipment which was

installed and put into service on January 1, 2021 at a total cost
of P1,280,000. Residual value was estimated at P80,000.The

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equipment is being depreciated over eight years by the double
declining balance method.

Required:For the year 2022, how much depreciation expense should

Near record in the equipment?

Depreciation Expense 320,000

Accumulated depreciation 320,000

MIDTERM QUIZ 3

Problem 1: on February 28, 2022, Watari Company purchased

equipment from Note Company at a cost of P470,000. The equipment
has a useful life of 5 years and has a P30,000 salvage
value.Watari has opted to use the straight-line method for
depreciating this asset.

Required: On December 31,2024, what adjusting journal entry

should Watari make to record the equipment's depreciation?

Depreciation expense P88,000

Accumulated depreciation 88,000

Problem 2: Light Company purchased a machine for P4,500,000 on

January 1, 2022. The machine has an estimated useful life of four
years and a residual value of P500,000. The machine is being
depreciated using the sum of the years' digits method.

Required: The December 31, 2023 asset balance, net of accumulated

depreciation, should be   

Depreciation fraction Accumulated dep. Expense

4
Year 1 4,000,000 P1,600,000
10
3
2 4,000,00 1,200,000
10
2
3 4,000,000 800,000
10
1
4 4,000,000 400,000
10
Net accumulated depreciation P1,700

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Problem 3: on July 1, 2022, Mell1o Company purchased factory
equipment for P5,000,000. Residual value was estimated at
P200,000.The equipment will be depreciated over ten years using
the double declining balance method...

Required: Counting the year of acquisition as one-half year, what

adjusting journal entry should Mello make for 2022 to record the
depreciation for this asset?

1
×2=20 % 5,000 × 20% =1,000,000
10
1,000,000 ÷ 2= 500,000

Depreciation Expense 500,000

Accumulated Depreciation 500,000

Problem 4: on April 1, 2022, L Company purchased a new machinery

for P3,000,000.The machinery has an estimated useful life of five
years, and depreciation is computed by the sum of the years'
digits method.

Required: Give the adjusting journal entry on December 31,2023.

Depreciation P850,000
Accumulated Depreciation 850,000

Sum of years

Problem 5: The following is taken from the Statement of Financial

Position of Misa Company on December 31, 2020 and December 31,
2019:
2022

Buildings-cost 25,000,000 25,000,000

Accumulated depreciation-buildings 5,000,000 3,875,000

Misa did not acquire or dispose of any buildings during 2022.

Misa uses the straight-line method of depreciation.

Required: If the residual value is assumed to be 10% of asset

cost, what is the average useful life of the buildings? 4 years

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 22,500,000
Depreciable cost =20 years
1,125,000

Problem 6:L Company purchased equipment on January 1, 2020 for

P5,000,000. The equipment had an estimated 5-year service life.
L's policy for 5-years is to use the 200% double declining
balance method for the first two years of the asset's life and
then switch to the straight-line depreciation method.

Required: In its December 31, 2022 Statement of Financial

Position, what amount should L report as accumulated depreciation
for the equipment?

BAD DEBTS – An entity that sells on credit assumes the risk of

some costumer will not pay their account.

ALLOWANCE METHOD

 Recognized an expense when account is deemed uncollectible

Bad debt expense xx

Allowance for bad debts xx

The allowance for doubtful accounts is deduction from account

receivable

Generally accepted accounting principles require the use of the

allowance method because it conforms with the matching principle.

Moreover, accounts receivable would be properly measured at net

realizable value.

ILLUSTRATION- Allowance method

1. Accounts of P30,000 are considered doubtful of collection.

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Doubtful accounts 30,0000

Allowance for doubtful accounts 30,000

2. The accounts are subsequently discovered to be worthless or

uncollected

Allowance for doubtful accounts 30,0000

Accounts receivable 30,000

3. The same accounts that are previously written off are

unexpectedly recovered or collected

Account Receivable 30,000

Allowance for doubtful accounts 30,000

Cash 30,000

Account receivable 30,000

DIRECT WRITE-OFF METHOD

 Recognized an expense when account is deemed worthless or

uncollectable

Bad debt expense xx

Account Receivable xx

ILLUSTRATION- DIRECT WRITE-OFF METHOD

1. Account of P30,000 are considered doubtful of collection

No entry

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 2. The accounts proved to be worthless

Bad debts 30,000

Accounts receivable 30,000

3. The same accounts that are previously written off as

worthless are recovered or collected.

Accounts receivable P30,000

Bad debts 30,000

Cash P30,000

Account receivable 30,000

If the recovery is subsequent to year of writeoff and direct and

the direct writeoff methd is use, the recovery may simply be
credited to other income.

DOUBTFUL ACCOUNTS IN THE INCOME STATEMENT

1. DISTRIBUTION COST

If the granting of credit and collection of accounts are

under the charge of sales manager, doubtful accounts shall
be considered as distribution cost.

2. ADMINISTRATIVE EXPENSE

If the granting of credit and collection of accounts are

under the charge of an officer other than sales manager,
doubtful accounts shall be considered as administrative
expense.

In the absence of any contrary statements doubtful accounts

shall classified as administrative expense.

BAD DEBT ESTIMATION

BALANCESHEET APPROACH

1. Aging of account receivable

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  The aging of accounts receivable involves an analysis where
the accounts are classified into not due or past due.

a. Not due e. 91 to 120 days past due

b. 1 to 30 days past due f. 121 to 180 past due
c. 31 to 60 days past due g. 181 to 365 days
d. 61 to 90 days past due h. More than 1 year past due

The allowance is then determined by multiplying the total of

each classification by the rate or percent of loss experience
by the entity for each category

The major argument for this method is the more accurate and
scientific computation of the allowance for doubtful accounts.

The objection of the aging method is that it violates the

matching process.

ILLUSTRATION

Not due 500,000 1% 5,000

1 to 30 days past due 300,000 2% 6,000

31 to 60 days past due 200,000 4% 8,000

61 to 90 days past due 100,00 7% 7,000

91 to 120 days past due 50,000 10% 5,000

181 to 365 days 30,000 30% 9,000

More than 1 year past due 20,000 50% 10,000

1,200,000 50,000

The amount computed by aging of accounts received represents the

required allowance for doubtful accounts at the end of the period

Thus, if the allowance for doubtful accounts has credit balance

of P10,000 before adjustment, doubtful accounts expense is
determined as follow:

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Required allowance 50,000

Less: Allowance balance before adjustment 10,000

Doubtful account expense 40,000

The journal entry to record the doubtful account expense is

Doubtful accounts 40,000

Allowance for doubtful accounts 40,000

2. % of receivable

 A certain rate I multiply by the open accounts at the end of

the period in order to get the required allowance balance
 This procedure has the advantage of presenting the accounts
receivable at estimated net realizable value. The approach
is also simple to apply.

However, the application of this approach violates the principle

of matching principle of matching bad debts loss against the
sales revenue.

Moreover, the loss experience rate may be difficult to obtain and

may not be reliable

What to compute is the required allowance

 Ending balance of the allowance for bad debts

ILLUSTRATION

The balance of accounts receivable is P 2,000,000 and the credit

balance in the allowance for doubtful accounts is P10,000.
Doubtful accounts are estimated at 3%of accounts receivable.

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JOURNAL ENTRY

Doubtful accounts

Allowance for doubtful accounts 50,000

Allowance for doubtful accounts 50,000

Required allowance (3% × 2,000,000) 60,000

Less: Credit balance in allowance 10,000

Doubtful account expense 50,000

INCOME STATEMENT

1. % of sales/ revenue

What to compute is expense

Percent of sales
The amount of sales for the year is multiplied by a certain rate
to get the . The rate may be applied on credit sales or total
sales.

Theoretically, the rate to be used is computed by dividing the

bad debt losses in prior years by the charge sales of prior
years.

The rate thus obtained is multiplied by the current year's charge

sales to arrive at the doubtful accounts expense.

Practically, however, there is no substantial difference if in

the computation of the rate, the basis is total sales of the
prior periods.
In such a case, the rate thus obtained is multiplied by the
current year's total sales to get the doubtful accounts expense.

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This procedure of determining the rate has the advantage of
eliminating the extra work of making a record of cash sales and
credit sales.

However,this approach may prove unsatisfactory when there.is a

considerable fluctuation in the proportion of cash and credit
sales periodically.

Argument for percent of sales method

When the “percent of sales" method is used in computing doubtful

accounts, proper matching of cost against revenue is achieved.
This is so because the bad debt loss is directly related to sales
and reported in the year of sale.

Thus,this method is an income statement approach because it

favors the income statement.

Argument against percent of sales method

The main argument against this method is that the accounts

shown at estimated realizable value
receivable may not be
because the allowance for doubtful accounts may prove
excessive or inadequate.

Thus,it becomes necessary that from time to time the accounts

should be "aged" to ascertain the probable loss.
As a consequence,the rate applied on sales should be revised
accordingly.

Illustration

The following accounts are gathered from the ledger.

Accounts receivable 1,000,000
Sales 5,050,000
Sales return 50,000
Allowance for doubtful accounts 20,000

If doubtful accounts are estimated at 1% of net sales,the

doubtful accounts expense is P50,000(1%xP5,000,000)and recorded
as follows:

Doubtful accounts 50,000

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 Allowance for doubtful accounts 50,000

If this method is used,the resulting amount of the computation is

already the amount of the doubtful accounts expense and not the
required allowance,in contradistinction with the aging method and
the percent of accounts receivable method.

The allowance balance before adjustment is ignored in determining

the doubtful accounts expense to be recorded.

However,the allowance for doubtful accounta should have an

adjusted balance of P70,000,the beginning allowance of P20,000
plus the adjustment of P50,000.

Correction in allowance for doubtful accounts

As pointed out earlier,the percent of sales method of estimating

doubtful accounts has the dis advantage of the allowance for
doubtful accounts being inadequate or excessive.

Aging the accounts is then necessary to test the reasonableness

of the allowance.

Where the allowance is inadequate or excessive, a question arises

as to the proper treatment of the discrepancy, whether to
consider it as an error or a component of profit or loss..

The correction is to be reported in the income statement either

as an addition to or subtraction from doubtful accounts expense.

The reason is that the correction is the natural result of a

change in estimate. Changes in estimate are treated currently and
prospectively,if necessary.

Accordingly, an inadequate allowance is adjusted as follows:

Doubtful accounts XX
Allowance for doubtful accounts XX

An excessive allowance is recorded as follows:

Allowance for doubtful accounts XX

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 Doubtful accounts XX

When the allowance is excessive, there is a corollary problem

when the discrepancy is more than the debit balance in the
doubtful accounts expense account.

For example, if the amount of correction due to excessive

allowance is P30,000 and the doubtful accounts expense account
has a debit balance of P20,000, following the above procedure
will result to a credit balance in the doubtful accountsexpense
account of P10,000. Such balance is obviously abnormal.

It is believed that in such a case, the P10,000 difference shall

not be treated as a prior period error but included in the
determination of the income of the current period.

Journal entry
Allowance for doubtful accounte 30,000
Doubtful accounts 20,000
Miscellaneous income 10,000

Debit balance in allowance account

Is this possible?How?What does it indicate?

The allowance for doubtful accounts normally has a credit

balance.

However,in certain instances,it may have a debit balance because

it may be the policy of the entity to adjust the allowance at the
end of the period and record accounts written off during the
year.

For example,on January 1, the allowance account before adjustment

has a credit balance of P30,000 and during the year an account of
P50,000 is written off and recorded as follows:

Allowance for doubtful accounts 50,000

Accounts receivable 50,000

Thus,on December 31,the allowance account has debit balance of

P20,000 before adjustment.

26
The debit balance does not indicate that the allowance is
inadequate because the accounts written off during the year and
charged to the allowance may have arisen from current year sales.

Thus, the charge to the allowance account simply predates the

recording of doubtful accounts.

At the end of the period when adjustments are made, the debit
balance should be considered.
To continue the example-if on December 31,the required allowance
is P40,000,the adjustment should be:

Doubtful accounts 60,000

Allowance for doubtful accounts 60,000

Required allowance 40,000

Add:Debit balance in allowance 20,000
Doubtful accounts expense 60,000

Note that after the adjustment for the doubtful accounts,

allowance account has credit of P40,000,which is the require

SEATWORK 3

Problem 1:Gon Company recorded a total of P80,000 accounts

receivable for services rendered in 2021. out of these
receivables, p50,000 were collected.For 2021,Gon Company
estimates that 3% of the outstanding accounts receivable will be
uncollectible.The following year, another P120,000 accounts
receivable were recorded for services rendered. Collections
amounted to P60,000 from previous and present accounts.kil1ua,a
2021 customer who owed the company P10,000,was declared bankrupt
by the Court in 2022. For 2022, Gon estimates that the previous
year's estimate for uncollectibility of outstanding accounts
receivable needs to be increased by 4%.Gon Company uses the
direct write-off method.

Required:
1. Prepare all the necessary journal entries (including
adjustments) for 2021 and 2022.

2021:
Account receivable P80,000
Service Revenue 80,000

27
 Service Revenue 50,000
Cash 50,000

Account receivable 50,000

Account Receivable 50,000

2022

Account receivable P120,000

Service revenue 120,000

Cash P60,000
Account receivable 60,000

Service revenue P60,000

Account receivable 60,000

Allowance receivable P10,000

Account receivable 10,000
NO ENTRY

Problem 2: For 2021, Kurapika Company who uses the allowance

method for bad debt estimation recorded a total of P90,000
accounts receivable for services rendered during theyear.Kurapik
estimates that a 38 allowance for uncollectiblity of outstanding
receivables will be stable fo five years.The next year, another
P150,000 accounts receivable were recorded for services rendered
Collections amounted to P80,000 from previous and present
accounts. For 2022, you as Kurapil Company's accountant, assessed
that a receivable fron Leorio, a customer who'owed the compa
P5,000 last 2021, must be considered worthless as he was adjudged
insolvent by the Court.

Required:
2021
1. Prepare all the necessary journal entries (including
adjustments) for 2021 and 2022. Problem

Account receivable 90,000

Service income 90,000

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 Uncollectable account expense P2,700
Allowance for uncollectable 2,700

2022
Account receivable P150,000
Service income 150,000

Cash P80,000
Account receivable 80,000

Allowance for uncollectable accounts P5,000

Account Receivable 5,000

Unearned accounts expense P1,950

Allowance for uncollectable 1,950

NO ENTRY

3: Meruem Company showed you the following selected December

31,2022 unadjusted acco balances in its books:

Accounts Receivable P100,000

Allowance for doubtful accounts 2,750
Sales P150,000

Required: Give the adjusting journal entries for Meruem Company

assuming:

1. Meruem Company estimates that 5% of"åccounts receivable are

uncollectiblé.
100,000 × 5% =5,000

Doubtful accounts 2, 250

Allowance for doubtful aacount 2,250
5,000

2. Meruem Company estimates that 5% of sales revenue are

uncollectible.
150,000 × 5%=7,500

Doubtful account expense P7,5000

Allowance for doubtful accounts 7,500

Problem 4:Kite Company showed you the following data about its
outstanding receivables: P15 are not yet due; P122,500 are

29
already due for 59 days; P50,000 are already due for 120 P72,000
are already due for 180 days; and P15,000 are due for 200 days.
Based on past experi Kite Company estimates that receivables due
60 days or under are 96% collectible; 6% of thos over 60 days but
less than or equal to 120 days are undollectible; those already
due for more 120 days but less than or equal to 180 days are 8%
uncollectible; and those due more than 18 are 20% uncollectible.
For the current year, Kite Company's allowance for doubtful
account a balance of P15,000.

Required:
1. Prepare an aging schedule of Kite Company's accounts
receivable.

Aging schedule Balance Rate Required allowance

Not due 12,000 0 0
1-59 day due 2,500 4% 4,800
60-120 days 50,000 6% 3,000
121-150 days 72,000 8% 5,760
181-200 days 15,000 20 3,000
409,500 16,660

Doubtful accounts P1,600

Allowance for doubtful accounts 1,660

2. Give the adjusting journal entry to record the bad debts

expense.

Problem 5:Hunter Company rendered services worth P10,000 on

account on 2021. At year en such amount was determined to be
uncollectible. During 2022, P5,000 of this amount was d be
worthless and was consequently written-off. On 2024, P3,000 of
the accounts written subsequently collected.
Required: Prepare the journal entries to fecord: (1) the accrual
of the revenue; (2) re of the bad debts expense; (3) write-off;
and (4) the subsequent collection of the accoun off using:
1. The allowance method
2. The direct write-off method

10,000 × 3%=3,000

2021

30
Account receivable P 10,000
Service revenue 10,000

Bad debts P300

Allowance for doubtful account 300

Allowance method :
Allowance for doubtful account P5,000
Account Receivable 5,000

Direct write-off method:

Bad debts P5,000
Account receivable 5,000

Allowance method

Account receivable P3,000

Allowance for doubtful account 3,000

Cash P3,000
Accounts receivable 3,000

Direct write-off method:

Accounts receivable P3,000
Bad debts 3,000

Cash P3,000
Accounts receivable 3,000
QUIZ:
Problem 1: Make the entry to record the following adjustments at
the end of the accounting period:
a. Accrued commission income of P10,000.
 Account receivable 10,000
Commission 10,000

b. Accrued utility expense of P5,000.

 Utilities Expense 5,000

Utilities payable 10,000

C. Bad debts of P1,500 under the allowance method.

 Bad debts 1,500

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 Allowance for bad debts 1,500

d. Bad debts of P2,000 under the direct write-off method.

 Depreciation expense 2,000
Accumulated depreciation 2,000

e. Depreciation of equipment for P3,500.

 Depreciation expense
Accumulated depreciation

f. Unused supplies of P350 under the expense method.

 Supplies 350,
Supplies expense 350

g. Unearned commission of P2,500 under the income method.

 Commision income 2,5000
Unearned income 2,500

h. Expired insurance of P4,000 under the asset method.

 Insurance expense 4,000
Prepaid insurance 4,000

i. Earned rental of P6,000 under the liability method.

 Unearned rental income 6,000
Rent income 6,000

Problem 2:Meliodas Company uses the fiscal accounting period

endung June 30. It employs six clerks at a weekly salary of
P1,250 each. Payroll is weekly and the company pays the employees
every Saturday. The last Saturday of the month is June 26. The
next payroll date covers June 28, 29, 30, and July 1, 2, and 3.
Required:
1. If the unadjusted trial balance show salary expense
amounting to P352,500, how much should be presented in the
income statement?

 1,250/6 = 208.33 × 3 = 624.99×6 =3,749.94

 352,500+3,749.94= 356,249.94/356,250

2. Entry to adjust for accrued salaries for the fiscal period

ending June 30.
 Salaries expense 3,749.94
Salaries payable 3,749.99

32
Problem 3: on September 21,2022, Gilthunder Corporation 1oaned
from bank amounting to P90,000 evidenced by note with a 6%
interest per annum.
Required:
1. Give the adjusting journal entry on December 31, 2022 to
accrue the interest.
 Interest expense (90,000×3%70/360) 1,515
Interest income 1,515

Problem 4: Escanor's Voice Publication received P108,000 from 250

subscribers representing one year subscriptio for twelve monthly
issues on its Nanatsu no Taiza magazine.The subscriptions were
received on March 1 and th magazines were mailed during March.The
company uses the calendar accounting period.
Required:
1. Make the entry to record the collection using the income
method on March 1.
 Cash 108,000
Subscription income 108,000
2. Make the adjusting entry to record the liability for the
magazine issues not yet mailed but already paid for.
 Subscription income (108,000×12×2) 18,000
Unearned income 18,000

3. Using T accounts,post the entries to the subscription Income

and the Unearned
Subscription Incom accounts and determine the balances that
should be presented in the financial statements.

Problem 5:Gowther designs for various clients. Its unadjusted

trial balance as at December 31,2022 showed
among others, Unearned Professional Fees of P350,000 (for the
Diane account,P150,000;and the king account
the drawing board.
P200,000) and Professional Fees Revenues of P8,850,000.As at
December 31,only the Diane account is still or
Required:
1. Make the entry to adjust the Unearned Professional Fees and
increase the Professional Fees as a December 31,end of its
accounting period

33
  Unearned professional fees 200,000
Professional fees 200,000
2. Using T accounts, enter the balances, post to the entries
to the rent expese and the prepaid rent to determine the
balances should be presented in the financial statements.

Problem 6: on october 31, Merlin Modeling Agency gave to Ban

Realty an advance payment for rent which was good for six months
in the amount of P60,000.
Required:
1. Make the entry to record the advance payment on october 31
using the expense method.

2. Make the entry to adjust the rent expense and setup the
prepaid rent as at December 31,end of its accounting period.

3. Using T accounts,post the entries to the Rent Expense and

the prepaid Rent and determine the balances that should be
presented in the financial statements.

Problem 7: The unadjusted trial balance of Elizabeth showed,

among others,Medical supplies of P75,500 and Medical supplies
Expense of P10,000. on December 31,end of the accounting
period,P5,500 are still on/hand.
Required:

34
1. Make the adjusting entry on December 31 to adjust for the
medical supplies used.
2. Using T accounts, enter the balances of the accounts, post the
adjusting entry and determine the
adjusted balances to be presented in the financial statements.

Problem 8: An entity purchased an asset on January 1, 2022

amounting to P270,000. The residual value was determined to be
P30,000 and the useful life is 5 years.
Required:
1. Using the Sum-of-the-year's digits method, how much is the
depreciation expense, accumulated depreciation,and asset
carrying value for 2022-2026? Make a table (lapsing
schedule) to show these amounts.

2. Give all necessary journal entries from 2022-2026.

3. Using the double declining balance method of depreciation,

how much is the depreciation expense, accumulated
depreciation, and asset carrying value for 2022-2026? Make a
table (lapsing schedule) to show these amounts.

35
 4. Give all necessary journal entries from 2022-2026.

5. using the straight-Line method of depreciation, how much is

the depreciation expense, accumulated depreciation, and
asset carryingvalue for 2022-2026? Make a table (lapsing
schedule) to show these amounts.       

                     
Problem 9: on January 1,
2019, Zeldris Company purchased a machine for P710,000 with a
useful life of 5 years and has a salvage value of
P20,000.onJanuary1,2022,it was assessed that the machine, due to
obsolescence, its useful life from the date of acquisition will
only be four years.
Required:
1.How much is the book value of the machine on December 31, 20192

2.How much is the accumulated depreciation on December 31, 2020?

3.What is the appropriate adjusting entry on December 31, 2021?

4. How much will the operating expense increase on 2022?

36
Problem 11: Eren Co. found the accounts receivable of P100,000 to
be doubtful of collection on December 31, 2021.on January 15,
2022, the P100,000doubtful account is deemed worthless and needs
to be written off. On october 1,2024,the P100,000 accounts
previously written off is subsequently collected.
Required:Prepare the journal entries to record the foregoing
under:
1. Direct write-off method



2. Allowance method


Problem 12:Mikasa Company billed their clients a total of

P1,250,000 for the year 2021. Their records showed P950,000 of
this was collected in the same year. Based on the percentage of
uncollected accounts to outstanding receivables in the past, the
accountant estimated that 3% of the accounts may prove
uncollectible.
The following year, 2022, total professional fees bill amounted
to P1,350,000 while total collections amounted to P957,000.

37
Required:
1. Assume the company is using the allowance method, give the
entries in the year 2021 to record the

2.Give the journal entries for the year 2022 to record the
revenue, collection and the bad debts. revenue, collection, and
the bad debts.

Problem 13:LEVI, a reflexology and therapy clinic, bills clients

(patients,tourists, managers of hotels) on terms of 10 days.
Total amount billed for the year 2021 was P245,000 less
collection of P176,545. For the year 2022, total billings
amounted to P395,000 of which 30% was collected.Collections in
2022 from 2021 accounts amounted to one half of the outstanding
balance.The company is using the direct write-off method and the
accountant deemed that a 2021 account for P15,000 should be
written off in 2022 as it is certain that this account would not
be collected anymore.
Required:
1. Give the adjusting entries for 2021 and 2022.


2. Compute for the net realizable value of accounts receivable

for both years.

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