FABMI

Fundamentals of
Accounting, Business
FABMI & Management I
J e f fe r y O . E N G U E R R A
FR
INTRODUCTION TO ACCOUNTING
W H AT I S A C C O U N T I N G ?
ACCOUNTING Accounting is a service activity

• Is a service activity
• Its function is to provide quantitative
information, primarily financial in
nature, about economic entities that is
intended to be useful in making
economic decisions, and in making
reasoned choices among alternative
courses of action- Accounting Standard
Council
hi 2
FR
The function of accounting is to

provide quantitative information, About economic entities
primarily financial in nature
hi 3
FR
Making reasoned choices among

Intended to be useful in making alternative courses of action.
economic decisions
hi 4
FR
ACCOUNTING Identifying
• a process of IDENTIFYING, RECORDING,
and COMMUNICATING economic -this involves selecting economic events that
events/information that is useful in are relevant to a particular business
making economic decisions. transaction
hi 5
FR
Recording Communicating
– this involves keeping a chronological
– occurs through the preparation and
diary of events that are measured in
distribution of financial and other accounting
pesos. The diary referred to in the
reports.
definition are the journals and ledgers
which will be discussed in future
chapters.
hi 6
FR
The Nature of Accounting
Accounting is a service activity Accounting is a process

– provides assistance to decision
– A process refers to the method of performing
makers by providing them financial
any specific job step by step according to the
reports that will guide them in coming
objectives or targets. Accounting is identified as
up with sound decisions.
a process, as it performs the specific task of
collecting, processing and communicating
financial information. In doing so, it follows
some definite steps like the collection, recording,
classification, summarization, finalization, and
reporting of financial data.
hi 7
FR
Accounting deals with financial
Accounting is an information system information and transactions
– recognized and characterized as a
– records financial transactions and data,
storehouse of information. As a service
classifies these and finalizes their results given
function, it collects processes and
for a specified period, as needed by their users.
communicates financial information of any
At every stage, from start to finish, accounting
entity.
deals with financial information and financial
This discipline of knowledge has
information only. It does not deal with non-
evolved to meet the need for financial
monetary or non-financial aspects of such
information as required by various interested
information.
groups.
hi 8
FR
Accounting is both an art and a discipline

– art of recording, classifying, summarizing
and finalizing financial data. The word ‘art’
refers to the way something is performed. It
is behavioral knowledge involving a certain
creativity and skill to help us attain some
specific objectives. Accounting is a systematic
method consisting of definite techniques and
its proper application requires skill and
expertise. So by nature, accounting is an art.
And because it follows certain standards and
professional
hi
ethics, it is also a discipline. 9
FR
T h e F u n c t i o n s o f A c c o u nt i n g i n B u s i n e s s
➢ Maintenance of systematic records
➢ Financial results of an entity can be

communicated
➢ Meeting Legal requirements
➢ Protecting assets of a business
➢ Assistance to management
hi 10
FR
H i sto r y o f A c c o u nt i n g
• Accounting can be traced to ancient civilizations • Records of cash, commodities and

• Accounting records dating back more than 7000 transactions were kept by military
years have been found in Mesopotamia personnel of Roman army.
• Other early accounting records were also found
in the ruins of ancient Babylon, Assyria and • The merchants during the Goryeo
Sumerian Dynasty of Korea kept track of their
• The roman Empire had access to detailed business and trades through record-
financial information as seen in “The Deeds keeping methodologies
of the Divine Augustus
• Records of cash, commodities and transactions
were kept by military personnel of Roman army
hi 11
FR
H i sto r y o f A c c o u nt i n g • Describes the counting methods
then in use among northern
• Luca Bartolomeo de Pacioli Italian merchants including
• Father of Accounting double- entry bookkeeping, trial balances,
balance sheets and various other tools
still employed by professional accountants
hi 12
Lesson 2: Branches of Accounting and FR
Users of Accounting
B R A N C H ES O F AC CO U N T I N G
Financial Accounting Cost Accounting

– primarily concerned with the recording of business – primarily concerned with the proper
transactions and the eventual preparation of accumulation of cost such as materials,
financial statements. labor and overhead, the proper costing
of inventories, and the study of
different costing methods.
Managerial Accounting
– the preparation of financial reports and Tax Accounting
management research intended for management – deals with the study of provisions of
use and the interpretation of these reports and the law with regard to the Philippine
researches, taxation system and the proper
computation of taxes.
hi 13
Lesson 2: Branches of Accounting and Users of FR
Accounting
Auditing Accounting Research

– deals with the examination of the financial - focuses on the search for new
statements by an independent party to ascertain knowledge on the effects of economic
whether such financial statements are in conformity events on the process of summarizing,
with accounting standards generally accepted in the analyzing, verifying, and reporting
Philippines. standardized financial information, and
on the effects of reported information
Accounting Education
on economic events. Researchers
- This branch of accounting deals with developing
typically choose a subject area and a
future accountants by creating relevant accounting
methodology on which to focus their
curriculum.
efforts.
hi 14
Accounting
Government Accounting
- the process of recording, analyzing, classifying,
summarizing, communicating and interpreting
financial information about the government in
aggregate and in detail reflecting transactions and
other economic events involving the receipt,
spending, transfer, usability and disposition of assets
and liabilities.
hi 15
Accounting
U s e rs o f A c c o u nt i n g I n fo r m at i o n
Internal Users
- are those individuals inside a company who
plan, organize, and run the business.
External Users
– are individual and organization outside the
company who want financial information
about the company.
hi 16
Accounting
U s e rs o f A c c o u nt i n g I n fo r m at i o n
Internal Users
- are those individuals inside a company who
plan, organize, and run the business.
External Users
– are individual and organization outside the
company who want financial information
about the company.
hi 17
Accounting
Fo r m s o f B u s i n e s s O rga n i zat i o n s
According to Activity
➢ Service
– renders services to the public
➢ Merchandising
– buys and sells merchandise to the public
➢ Manufacturing
– buys raw materials and converts them into
finished products or goods to be sold to the public
hi 18
Accounting According to Ownership
Fo r m s o f B u s i n e s s O rga n i zat i o n s ➢ Single/ Sole Proprietorship
- owned by only 0ne (1) person
called proprietor or sole dealer.
➢ Partnership
– owned by two (2) or more persons called
partners
➢ Corporation
– owned by five (5) or more persons
called shareholders
➢ Cooperative
- People-centered enterprises owned, controlled and run
by and for their members to realize their economic, social ,
and cultural needs and aspirations.
hi 19
Fill-out the blank matrix.
Item(s) Sole Proprietorship Partnerships Corporation Cooperatives
1. Number of
possible owner(s)
2.Management(wh
o manages the
business)
3. Termination of the
Business
4. Government
Agency assigned to
regulate
Fill-out the blank matrix .
Item(s) Sole Proprietorship Partnerships Corporation Cooperatives
5. Transfer of
ownership
6. Liability of
Owners
FR
Lesson 6:Accounting Concepts and Principles
• Business entity principle

– a business enterprise is separate and distinct from its owner or investor.
• Going concern principle
– business is expected to continue indefinitely.
• Time period principle
– financial statements are to be divided into specific time intervals.
• Monetary unit principle
– amounts are stated into a single monetary unit
•Objectivity principle
– financial statements must be presented with supporting evidence.
hi 22
FR
• Cost principle
– accounts should be recorded initially at cost.
• Accrual Accounting Principle
– revenue should be recognized when earned regardless of collection and expenses
should be recognized when incurred regardless of payment. On the other hand, the cash
basis principle in which revenue is recorded when collected and expenses should be
recorded when paid. Cash basis is not the generally accepted principle today.
• Matching principle
– cost should be matched with the revenue generated.
• Disclosure principle
– all relevant and material information should be reported.
hi 23
FR
• Conservatism principle
– also known as prudence. In case of doubt, assets and income should not be overstated while liabilities and
expenses should not be understated.
hi 24
FR
Lesson 7:Accounting Equation
𝑨𝑺𝑺𝑬𝑻𝑺 = 𝑳𝑰𝑨𝑩𝑰𝑳𝑰𝑻𝑰𝑬𝑺 + 𝑶𝑾𝑵𝑬𝑹′𝑺 𝑬𝑸𝑼𝑰𝑻𝒀
➢ Assets
-are economic resources owned by the firm/business.
➢ Liabilities
-are obligations of the firm/business from past events which are to be settled or to be paid in the
future.
-are debts of the business owing to outside parties.
➢ Equity/Owner’s Equity
- are owner’s claim in the firm/business. (residual interest in the assets after deducting all its
liabilities.
𝑫𝒐𝒖𝒃𝒍𝒆 𝑬𝒏𝒕𝒓𝒚 𝑩𝒐𝒐𝒌𝒌𝒆𝒆𝒑𝒊𝒏𝒈
hi 25
FR
Happy Tour Travel
𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝑶𝒘𝒏𝒆𝒓′ 𝒔 𝑬𝒒𝒖𝒊𝒕𝒚
𝑷 𝟑𝟎𝟎, 𝟎𝟎𝟎 𝑷 𝟏𝟎𝟎, 𝟎𝟎𝟎 𝑷 𝟐𝟎𝟎, 𝟎𝟎𝟎
hi 26
FR
𝑭𝑰𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑻𝒓𝒂𝒏𝒔𝒂𝒄𝒕𝒊𝒐𝒏 𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝑶𝒘𝒏𝒆𝒓′𝒔 𝑬𝒒𝒖𝒊𝒕𝒚

1. Cash investment of the owner. + +
2.Collection from various customers for
services rendered.
+−
3.Receipt of cash proceeds of a bank loan. + +
4.Payment of rent. − _
5. Receipt of cash from a customer for + +
services to be rendered in the next period.
6. Additional investment of a computer by + +
the owner.
7.Payment of one−half of the bank loan. − −
hi 27
FR
𝑭𝑰𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑻𝒓𝒂𝒏𝒔𝒂𝒄𝒕𝒊𝒐𝒏 𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝑶𝒘𝒏𝒆𝒓′ 𝒔 𝑬𝒒𝒖𝒊𝒕𝒚
8.Payment of utilities. − −
𝟗.Cash withdrawal of the owner. − −
10. Billings to customers for services
rendered. + +
11. Purchased shop supplies on account. + −
12.Purchased various repair tools for cash. − +
13. Incurred expenses still unpaid. + −

14.Issued a note to a supplier to +−
temporarily settle a previous account
hi 28
FR
Example 1: Assume the Mr. X contributed 𝑃2000,00.00 to put up a travel agency.
𝑪𝒂𝒔𝒉 − 𝑷 𝟐𝟎𝟎, 𝟎𝟎𝟎 𝑶𝒍𝒊𝒗𝒆𝒓, 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 − 𝑷 𝟐𝟎𝟎, 𝟎𝟎𝟎
hi 29
FR
Example 1: Assume the Mr. X contributed 𝑃200,00.00 to put up a travel agency.

Example 2: Assume that the travel agency borrowed cash amounting 𝑃100,00.00 from the bank for purchase of some
assets.
𝑪𝒂𝒔𝒉∗ − 𝑷 𝟐𝟎𝟎, 𝟎𝟎𝟎

𝑳𝒐𝒂𝒏 𝑷𝒂𝒚𝒂𝒃𝒍𝒆∗ − 𝑷 𝟏𝟎𝟎, 𝟎𝟎𝟎 𝑴𝒓. 𝑿, 𝑪𝒂𝒑𝒊𝒕𝒂𝒍∗ − 𝑷 𝟐𝟎𝟎, 𝟎𝟎𝟎
𝑪𝒂𝒔𝒉 − 𝑷 𝟏𝟎𝟎, 𝟎𝟎𝟎
*Account - a device used to record the changes in the accounting elements.
hi 30
FR
Example 3: March 1- May Gomez opened a tour and travel service by contributing cash of 𝑃 50,000. She has three cars
worth 𝑃 1,200,000 but contributed only two cars worth 𝑃750,000.
March 3 – Gomez borrowed 𝑃100,000 cash from PNB for use in her business.
𝑪𝒂𝒔𝒉 −− 𝑷𝑷𝟏𝟓𝟎,
𝑪𝒂𝒔𝒉 𝟓𝟎, 𝟎𝟎𝟎
𝟎𝟎𝟎 𝑳𝒐𝒂𝒏𝒔 𝒑𝒂𝒚𝒂𝒃𝒍𝒆 − 𝑷 𝟏𝟎𝟎, 𝟎𝟎𝟎 𝑴𝒔. 𝑮𝒐𝒎𝒆𝒛, 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 − 𝑷 𝟖𝟎𝟎, 𝟎𝟎𝟎
𝑪𝒂𝒓𝒔 − 𝑷 𝟕𝟓𝟎, 𝟎𝟎𝟎
𝑷 𝟗𝟎𝟎,
𝟖𝟎𝟎, 𝟎𝟎𝟎
hi 31
FR
March 7 – Bought tables and chairs from Blim’s and paid cash 𝑃45,000. business.
March 15 – Various equipment were purchased on account from National Winners for 𝑃 55, 000

𝟏𝟓𝟎, 𝟎𝟎𝟎
𝑪𝒂𝒔𝒉 − 𝑷 𝟏𝟎𝟓, 𝑳𝒐𝒂𝒏𝒔 𝒑𝒂𝒚𝒂𝒃𝒍𝒆 − 𝑷 𝟏𝟎𝟎, 𝟎𝟎𝟎
𝑪𝒂𝒓𝒔 − 𝑷 𝟕𝟓𝟎, 𝟎𝟎𝟎 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 − 𝟓𝟓, 𝟎𝟎𝟎 𝑴𝒔. 𝑮𝒐𝒎𝒆𝒛, 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 − 𝑷 𝟖𝟎𝟎, 𝟎𝟎𝟎
𝑭𝒖𝒓𝒏𝒊𝒕𝒖𝒓𝒆 − 𝟒𝟓, 𝟎𝟎𝟎 𝑷𝟏𝟓𝟓, 𝟎𝟎𝟎
𝑬𝒒𝒖𝒊𝒑𝒎𝒆𝒏𝒕 − 𝟓𝟓, 𝟎𝟎𝟎
𝟗𝟓𝟓, 𝟎𝟎𝟎
𝑷 𝟗00, 𝟎𝟎𝟎
hi 32
FR
March 7 – Bought tables and chairs from Blim’s and paid cash 𝑃45,000. business.
March 15 – Various equipment were purchased on account from National Winners for 𝑃 55, 000
March 18 – Ms. Gomez made a cash withdrawal 5, 000 for personal use.

𝑪𝒂𝒔𝒉 − 𝑷 𝟏𝟎𝟎,
𝟏𝟎𝟓, 𝟎𝟎𝟎 𝑳𝒐𝒂𝒏𝒔 𝒑𝒂𝒚𝒂𝒃𝒍𝒆 − 𝑷 𝟏𝟎𝟎, 𝟎𝟎𝟎
𝑴𝒔. 𝑮𝒐𝒎𝒆𝒛, 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 − 𝑷 𝟖𝟎𝟎, 𝟎𝟎𝟎
𝑪𝒂𝒓𝒔 − 𝑷 𝟕𝟓𝟎, 𝟎𝟎𝟎 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 − 𝟓𝟓, 𝟎𝟎𝟎
𝐺𝑜𝑚𝑒𝑧, 𝐷𝑟𝑎𝑤𝑖𝑛𝑔 − 𝟓, 𝟎𝟎𝟎
𝑭𝒖𝒓𝒏𝒊𝒕𝒖𝒓𝒆 − 𝟒𝟓, 𝟎𝟎𝟎 𝑷𝟏𝟓𝟓, 𝟎𝟎𝟎
𝑷𝟕𝟗𝟓, 𝟎𝟎𝟎
𝑬𝒒𝒖𝒊𝒑𝒎𝒆𝒏𝒕 − 𝟓𝟓, 𝟎𝟎𝟎
𝟗50, 𝟎𝟎𝟎
𝑷 𝟗𝟓𝟓,
hi 33
FR
March 18 – Ms. Gomez made a cash withdrawal 5, 000 for personal use.
March 20 – The account due to National Winners was paid.

𝑪𝒂𝒔𝒉 −
𝑪𝒂𝒔𝒉 − 𝑷 𝑷 𝟒𝟓,
𝟏𝟎𝟎, 𝟎𝟎𝟎
𝟎𝟎𝟎 𝑴𝒔. 𝑮𝒐𝒎𝒆𝒛, 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 − 𝑷 𝟖𝟎𝟎, 𝟎𝟎𝟎
𝑪𝒂𝒓𝒔 − 𝑷 𝟕𝟓𝟎, 𝟎𝟎𝟎 𝑳𝒐𝒂𝒏𝒔 𝒑𝒂𝒚𝒂𝒃𝒍𝒆 − 𝑷 𝟏𝟎𝟎, 𝟎𝟎𝟎 𝐺𝑜𝑚𝑒𝑧, 𝐷𝑟𝑎𝑤𝑖𝑛𝑔 − 𝟓, 𝟎𝟎𝟎
𝑭𝒖𝒓𝒏𝒊𝒕𝒖𝒓𝒆 − 𝟒𝟓, 𝟎𝟎𝟎 𝐴𝑐𝑐𝑜𝑢𝑛𝑡𝑠 𝑝𝑎𝑦𝑎𝑏𝑙𝑒 − 𝟓𝟓, 𝟎𝟎𝟎 𝑷𝟕𝟗𝟓, 𝟎𝟎𝟎
𝑬𝒒𝒖𝒊𝒑𝒎𝒆𝒏𝒕 − 𝟓𝟓, 𝟎𝟎𝟎 𝑷𝟏𝟓𝟓, 𝟎𝟎𝟎
𝟗𝟓𝟎, 𝟎𝟎𝟎
𝑷 8𝟗5, 𝟎𝟎𝟎
hi 34
Lesson 7:Accounting Equation FR
Date ASSETS LIABILITIES OWNER'S EQUITY
Accounts Gomez, Gomez
March Cash Cars Equipment Furniture Loans Payable Drawing
Payable Capital
1 ₱ 50,000 ₱ 750,000 ₱ 800,000
3 ₱ 100,000 ₱ 100,000
Balances ₱ 150,000 ₱ 750,000 ₱ 100,000 ₱ 800,000
7 -₱ 45,000 ₱ 45,000
Balances ₱ 105,000 ₱ 750,000 ₱ 45,000 ₱ 100,000 ₱ 800,000
15 ₱ 55,000 ₱ 55,000
Balances ₱ 105,000 ₱ 750,000 ₱ 55,000 ₱ 45,000 ₱ 100,000 ₱ 55,000 ₱ 800,000
18 -₱ 5,000 -₱ 5,000
Balances ₱ 100,000 ₱ 750,000 ₱ 55,000 ₱ 45,000 ₱ 100,000 ₱ 55,000 ₱ 800,000 -₱ 5,000
20 -₱ 55,000 -₱ 55,000
Balances ₱ 45,000 ₱ 750,000 ₱ 55,000 ₱ 45,000 ₱ 100,000 ₱ - ₱ 800,000 -₱ 5,000
₱ 895,000 = ₱ 100,000 + ₱ 795,000
hi 35
FR
Business transactions and their effects on the accounting elements
Investment of assets by the owner 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒

𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒
Withdrawal of assets by the owner 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒
Purchase of assets in cash 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 &𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒
Purchase of assets on account 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒
Settlement of liabilities in cash 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒
Settlement of account with a note 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 &𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒
Settlement of liabilities from 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒

owner’s personal cash
hi 36
Lesson 7:Books of Accounts and Double-entry FR
System Duality Value received
Double-entry System Value

parted with
Equilibrium
All transaction are recorded in the Equal (debit & credit)
accounting records using the
“𝑑𝑜𝑢𝑏𝑙𝑒 𝑒𝑛𝑡𝑟𝑦 𝑠𝑦𝑠𝑡𝑒𝑚". Each
transaction is recorded in two parts
T-Account Account title
–D𝑒𝑏𝑖𝑡(𝐷𝑟. ) 𝑎𝑛𝑑 𝐶𝑟𝑒𝑑𝑖𝑡(𝐶𝑟. )
Cash The term “credit”
The term “debit”
𝐷𝑒𝑏𝑖𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 simply refers to
simply refers to
the right side of
the left side of the 1 − 𝐽𝑎𝑛 𝑃500 the account. It is
account. It is 3 − 𝐽𝑎𝑛 𝑃1,000 sometimes
sometimes 𝑃 800 – 4-Jan referred to as the
referred to as the
“value parted
“value received” 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 𝑃 700
with”
The difference between the total debits and total credits in the account
hi 37
represents the balance of the account
System
Normal BALANCES of Accounts Rules of Debits and Credits
Types of Accounts Normal Balance Debit Credit To 𝑑𝑒𝑏𝑖𝑡 an account with a normal
Assets Debit Increase Decrease debit balance means to increase that
account.
Liability Credit Decrease Increase To credit means to decrease it
Equity Credit Decrease Increase To cr𝑒𝑑𝑖𝑡 an account with a normal

credit balance means to increase that
Income Credit Decrease Increase account.
To debit means to decrease it
Expense Debit Increase Decrease
hi 38
System
Ending BALANCE of an Accounts
Cash
D𝑒𝑏𝑖𝑡s to a specific 𝑎𝑠𝑠𝑒𝑡𝑠 or 𝑒𝑥𝑝𝑒𝑛𝑠𝑒 account 𝐷𝑒𝑏𝑖𝑡 𝐶𝑟𝑒𝑑𝑖𝑡
should be greater than (or equal) the credits to 𝑃 500
that account. 𝑃1,000
𝑃 800
Credits to a specific 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑦, 𝑒𝑞𝑢𝑖𝑡𝑦 or 𝑖𝑛𝑐𝑜𝑚𝑒
account should be greater than (or equal) the (𝑃 700)
𝑒𝑛𝑑𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒
(800-1500)
debits to that account. abnormal
Acct. Payable
Cash 𝐷𝑒𝑏𝑖𝑡 𝐶𝑟𝑒𝑑𝑖𝑡
𝐷𝑒𝑏𝑖𝑡 𝐶𝑟𝑒𝑑𝑖𝑡 𝑃 500
𝑃1,000
𝑃 500 𝑃 800
𝑃1,000
𝑃 800 𝑃 700 𝑒𝑛𝑑𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒
(800-1500)
𝑃 700
𝑒𝑛𝑑𝑖𝑛𝑔 𝐵𝑎𝑙𝑎𝑛𝑐𝑒 abnormal
(1,500-800)
normal
hi 39
System
For each of the following accounts, determine the classification and normal
balance. Write the identifying letter and either 𝐷𝑟. 𝑜𝑟 𝐶𝑟. in the column
1. Wages Expense Assets
2. Millan, Capital Liabilities
3. Equipment Owner’s Equity
4. Professional fee Income
5. Millan, Drawing Expense
6. Rent Expense
7. Accounts Payable
8. Supplies
9. Prepaid Insurance
10. Accounts Receivable
11. Income From Service
hi 40
System
For each of the following accounts, determine the normal balance. Write
the identifying letter and either 𝐷𝑟. 𝑜𝑟 𝐶𝑟. in the column
1. Cash Assets
2. Capital Liabilities
3. Cars Owner’s Equity
4. Loans payable Income
5. Drawing Expense
6. Furnitures and fixtures
7. Equipment
8. Accounts payable
9. Service Income
11. Wages expense
12. Office Supplies
13. Notes payable
hi 41
System
Indicate the normal balance of the account (𝐷𝑟. 𝑓𝑜𝑟 𝑑𝑒𝑏𝑖𝑡 𝑜𝑟 𝐶𝑟. 𝑓𝑜𝑟 𝑐𝑟𝑒𝑑𝑖𝑡) and in what financial statement the count
should appear>
1. Dividend Income
2. Cash
3. Merchandise Inventory
4. Prepaid supplies
5. Unearned rent income
6. Adan, drawing
7. Purchases
8. Supplies
9. Cost of Sales
11. Professional fees
12. Loss on sale of equipment
hi 42
System Account Number
Account titles- the column- the
accounts affected by a corresponding
business transaction are numberings of the Debit & Credit
recorded in this column accounts affected column- the
by the transaction monetary effects
are listed here. of the transaction
to the account are
recorded here
Date Column-
indicates the
recording dates of GENERAL JOURNAL
the transactions.
Date Accounts Titles Acct. # Debit (Dr.) Credit (Cr.)
Transactions are ₱
recorded Cash 101 500.00
“chronologically”. ₱
Rent expense 510 500.00
hi 43
FR
Lesson 9:Accounting Cycle
ADJUSTING ENTRIES Purpose
ADJUSTING ENTRIES- 1. To take up unrecorded income and expense of the period.
are entries made 2. To split “mixed accounts "into real and nominal elements
prior to the
preparation of 1. Accrued income – income already earned but were not
financial statements collected nor recorded.
to update certain 2. Accrued expenses- expenses already expired but not paid
accounts so that nor recorded.
they reflect correct 3. Unearned income - Advance collection recorded as
balances as of the “liability” but a portion of which has already been earned.
designated time 4. Prepaid expense – advance payment recorded as an “asset”
but a portion of which has already expired.
hi 44
FR
ADJUSTING ENTRIES Purpose
ADJUSTING ENTRIES- 1. To take up unrecorded income and expense of the period.
are entries made 2. To split “mixed accounts "into real and nominal elements
prior to the
preparation of 5. Bad Debts –accounts of costumers that may not be collected
financial statements anymore.
to update certain 6.Depreciation – assets acquired whose utility value have
accounts so that decreased should be recorded as expense.
they reflect correct
balances as of the
designated time
hi 45
FR
ADJUSTING ENTRIES
Example: Accruals of Income and Expenses:
ABC Co. is preparing its financial statements for the period ended Dec. 31, 20x1. Adjustments
are needed for the following:
1. ABC Co. received a 𝟏𝟐%, 𝑷 𝟏𝟎𝟎, 𝟎𝟎𝟎, one-year, note receivable from DEF Co. on April 1,
20x1.The principal and interest on the note are due on April 1, 20x2.
The interest income is accrued as

follows:
Formula: 𝑰 = 𝑷𝒓𝒕
𝟗
𝑰 = 𝟏𝟎𝟎𝟎𝟎𝟎 𝟏𝟐%
𝟏𝟐
hi
𝑰 = 𝑷 𝟗𝟎𝟎𝟎 46
FR
ADJUSTING ENTRIES
AJE: for accrued interest income- ABC Co.
Dec Interest receivable 𝑷𝟗, 𝟎𝟎𝟎

31, Interest Income 𝑷𝟗, 𝟎𝟎𝟎
20x1 To accrue interest income earned but not yet
collected
AJE: for accrued interest Expense- DEF Co.
Dec Interest Expense 𝑷𝟗, 𝟎𝟎𝟎

31, Interest payable 𝑷𝟗, 𝟎𝟎𝟎
20x1 To accrue interest expense Expired but not
yet paid
hi 47
FR
Lesson 9:Accounting Cycle Interest receivable 𝑷𝟗, 𝟎𝟎𝟎
Interest Income 𝑷𝟗, 𝟎𝟎𝟎
ADJUSTING ENTRIES
In the next accounting period, the collection of
interest of ABC Co.is recorded as follows:
April Cash 𝑷𝟏𝟐, 𝟎𝟎𝟎
01, Interest Receivable 𝑷𝟗, 𝟎𝟎𝟎
20x2 Interest Income 𝑷 𝟑, 𝟎𝟎𝟎
To record the collection of interest
Interest Expense 𝑷𝟗, 𝟎𝟎𝟎
Interest payable 𝑷𝟗, 𝟎𝟎𝟎
April Interest Payable 𝑷𝟗, 𝟎𝟎𝟎

01, Interest Expense 𝑷𝟑, 𝟎𝟎𝟎
20x1 Cash 𝑷𝟏𝟐, 𝟎𝟎𝟎
To record interest expense
hi 48
FR
ADJUSTING ENTRIES
2. ABC Co. rents out its building to a tenant for a monthly rent of 𝑷𝟓𝟎, 𝟎𝟎𝟎. As of December
31, 20x1, the tenant has not yet paid the rent for the month of December.
hi 49
FR
ADJUSTING ENTRIES
AJE: for accrued rent income- ABC Co.
Dec Rent receivable 𝑷𝟓𝟎, 𝟎𝟎𝟎

31, Rent Income 𝑷𝟓𝟎, 𝟎𝟎𝟎
20x1
To accrue rent income
AJE: for accrued rent Expense- DEF Co.
Dec Rent Expense 𝑷𝟓𝟎, 𝟎𝟎𝟎

31, Rent payable 𝑷𝟓𝟎, 𝟎𝟎𝟎
20x1 To accrue rent expense
hi 50
FR
Lesson 9:Accounting Cycle Rent receivable 𝑷𝟓𝟎, 𝟎𝟎𝟎
Rent Income 𝑷𝟓𝟎, 𝟎𝟎𝟎
ADJUSTING ENTRIES To accrue interest
JAn, Cash 𝑷𝟓𝟎, 𝟎𝟎𝟎
20x2 Rent Receivable 𝑷𝟓𝟎, 𝟎𝟎𝟎
To record the collection of income
Rent Expense 𝑷𝟓𝟎, 𝟎𝟎𝟎

Rent payable 𝑷𝟓𝟎, 𝟎𝟎𝟎
JAn, Rent Payable 𝑷𝟓𝟎, 𝟎𝟎𝟎𝟎

20x2 Cash 𝑷𝟓𝟎, 𝟎𝟎𝟎
To record rent expense
hi 51
Lesson 9:Accounting Cycle FR
ADJUSTING ENTRIES
3. ABC Co. Issued a 𝟏𝟐%, 𝑷𝟏𝟎𝟎, 𝟎𝟎𝟎, one-year, note payable on October 01, 20x1. The
principal and interest are due on October 01,20x2
The interest income is accrued as

follows:
Formula: 𝑰 = 𝑷𝒓𝒕
𝟑
𝑰 = 𝟏𝟎𝟎𝟎𝟎𝟎 𝟏𝟐%
𝟏𝟐
𝑰 = 𝑷 𝟑, 𝟎𝟎𝟎
hi 52
FR
ADJUSTING ENTRIES
AJE: for accrued interest expense- ABC Co.
Dec Interest Expense 𝑷𝟑, 𝟎𝟎𝟎

31, Interest payable 𝑷𝟑, 𝟎𝟎𝟎
20x1 To accrue interest expense incurred but not
yes paid
Oct, Interest payable 𝑷𝟑, 𝟎𝟎𝟎

01,20 Interest Expense 𝑷𝟗, 𝟎𝟎𝟎
x2 Cash 𝑷 𝟏𝟐, 𝟎𝟎𝟎
To record the payment of interest
hi 53
ADJUSTING ENTRIES
Example: Depreciation and Bad Debts
1. On Jan. 01, 20x2, ABC Co. acquired equipment for 𝑷𝟐𝟎, 𝟎𝟎𝟎. The business expects to use
the equipment over the next 4 years.
The cost of the equipment is initially recorded as an asset because it provides future
economic benefits. As the equipment is used, a portion of the cost is recognized as expense
on a piecemeal basis (paunti unti). This portion is called depreciation. Depreciation means
the allocation of the cost of a depreciable asset over the periods the asset is used.
𝐶𝑜𝑠𝑡 − 𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒 20,000

𝐷𝑒𝑝𝑟𝑒𝑐𝑖𝑎𝑡𝑖𝑜𝑛 = = = 𝑃 5000
𝑈𝑠𝑒𝑓𝑢𝑙 𝐿𝑖𝑓𝑒 4
hi 54
FR
ADJUSTING ENTRIES
AJE: for Depreciation expense- ABC Co.
Dec Depreciation Expense 𝑷𝟓, 𝟎𝟎𝟎

31, Accumulated Depreciation 𝑷𝟓, 𝟎𝟎𝟎
20x1 To record depreciation expense for the
period.
hi 55
ADJUSTING ENTRIES
Example: Depreciation and Bad Debts
1. ABC Co. has total accounts receivable of 𝑷𝟐, 𝟎𝟎𝟎 on December 31,20x1 before any
adjustments. Of the total amount, it was estimated that 𝑷𝟓𝟎𝟎 is doubtful of collection.
(alanganin n makolekta)
AJE: for Bad Debts expense- ABC Co.
Dec Bad debts Expense 𝑷𝟓𝟎𝟎

31, Allowance for Bad debts 𝑷𝟓𝟎𝟎
20x1 To record the bad debts expense for the
period.
hi 56
FR
ADJUSTING ENTRIES
Real, Nominal and Mixed Accounts
1.Real Accounts(Permanent Accounts)- are accounts which are not closed at the end of the
accounting period. These “accounts” include all the “Balance Sheet accounts”, except the
“owner’s drawing” account.
2. Nominal Accounts (Temporary Accounts) – are accounts which are closed at the end of the
accounting period. These accounts include all “ Income Statement accounts”, drawings account,
clearing accounts and suspense accounts.
3. Mixed Accounts- Accounts that have both real and nominal account components. These are
subject to adjustment. These include “unadjusted prepayments and deferrals that have both
expired and unexpired components.
• The expired portion is the nominal account component while the unexpired portion is
real account.
hi • At the end of the period, adjusting entries are needed to separate these components.57
FR
ADJUSTING ENTRIES
Real account
(presented in the
Balance sheet)
Mixed Account Adjusting entry
(real & nominal (separate the two
account components) components)
Nominal account
(presented in the
Income statement)
hi 58
FR
ADJUSTING ENTRIES
Prepaid Expense- is an expense that has been paid for in advance (prepayments) for goods
or services but not yet incurred.
Methods: Methods:
1. Asset method- cash disbursements 2. Expense method- cash
for items of expenses are initially disbursements for items of expenses
debited to an “asset account”. At the are initially debited to an “expense
end of the period, the incurred account”. At the end of the period, the
portion is recognized as expense unused portion is recognized as asset
while the unused portion remains in while the incurred portion remains as
as asset expense.
hi 59
ADJUSTING ENTRIES
Prepaid Expense:
1. A business prepays one-year insurance for 𝑷 𝟏𝟐𝟎, 𝟎𝟎𝟎 𝒐𝒏 𝑶𝒄𝒕𝒐𝒃𝒆𝒓 𝟎𝟏, 𝟐𝟎𝒙𝟏
The prepayment of insurance is recorded as follows
Asset method Expense method
Prepaid Insurance 𝑷 𝟏𝟐𝟎, 𝟎𝟎𝟎 Insurance Expense 𝑷 𝟏𝟐𝟎, 𝟎𝟎𝟎
Cash 𝑷 𝟏𝟐𝟎, 𝟎𝟎𝟎 Cash 𝑷 𝟏𝟐𝟎, 𝟎𝟎𝟎
to record advance payment of 1-yr insurance to record advance payment of 1-yr insurance
incurred portion(expire) – Expense
𝟑
Before adjustment 𝟏𝟐𝟎, 𝟎𝟎𝟎 = 𝑷 𝟑𝟎, 𝟎𝟎𝟎
𝟏𝟐
𝑷 𝟏𝟐𝟎, 𝟎𝟎𝟎
not yet incurred (unexpired)portion- Asset
𝟗
𝟏𝟐𝟎, 𝟎𝟎𝟎 = 𝑷𝟗𝟎, 𝟎𝟎
𝟏𝟐
The Adjusting entry on December 31, 20x1 is recorded as follows
Asset method Expense method
Insurance expense 𝑷 𝟑𝟎, 𝟎𝟎𝟎 Prepaid Insurance 𝑷 𝟗𝟎, 𝟎𝟎𝟎
Prepaid Insurance 𝑷 𝟑𝟎, 𝟎𝟎𝟎 Insurance Expense 𝑷 𝟗𝟎, 𝟎𝟎𝟎
to recognize unexpired portion of 1-yr insurance
hito recognize expired portion of 1-yr insurance 60
ADJUSTING ENTRIES
Asset method
Prepaid Insurance Insurance Expense
10/1/x1 𝑃120,000
𝑃 30,000 AJE − 𝑃 30,000
End. Bal - 𝑃 90,000 End. Bal - 𝑃 30,000
Expense method
Insurance Expense Prepaid Insurance

10/1/x1 𝑃120,000
𝑃 90,000 AJE − 𝑃 90,000
End. Bal - 𝑃 30,000 End. Bal - 𝑃 90,000
hi 61
FR
ADJUSTING ENTRIES
Deferred/ Unearned Income- represents advance collection of income for the service to be
rendered .
Methods: Methods:
1. Liability Method- cash receipts 2. Income method- cash receipts from
from items of income are initially items are initially credited to an
credited to a “liability account” . At “income account”. At the end of the
the end of the period, the earned period, the unearned portion is
portion is recognized as “income” recognized as “liability” while the
while the unearned portion remains earned portion remains as “income”.
as “liability”
hi 62
ADJUSTING ENTRIES
Unearned Income
2. A business rents out its building to various tenants. On Aug 𝟎𝟏, 𝟐𝟎𝒙𝟏, the business receives one-year rent
in advance of 𝑷 𝟏𝟐𝟎, 𝟎𝟎𝟎 from its tenant. Rent per month is 𝑷𝟏𝟎, 𝟎𝟎𝟎
The receipt of the advance collection of rent is recorded as follows
Liability method Income method
Cash 𝑷 𝟏𝟐𝟎, 𝟎𝟎𝟎 Cash 𝑷 𝟏𝟐𝟎, 𝟎𝟎𝟎
Unearned rent 𝑷 𝟏𝟐𝟎, 𝟎𝟎𝟎 Rent Income 𝑷 𝟏𝟐𝟎, 𝟎𝟎𝟎
to record advance collection of 1-yr rent to record advance collection of 1-yr rent (rent income)
earned portion(used up) – Income
Before adjustment 𝟓
𝑷 𝟏𝟐𝟎, 𝟎𝟎𝟎 𝟏𝟐𝟎, 𝟎𝟎𝟎 = 𝑷 𝟓𝟎, 𝟎𝟎𝟎
𝟏𝟐
Unearned portion (unused) -Liability

𝟕
𝟏𝟐𝟎, 𝟎𝟎𝟎 = 𝑷𝟕𝟎, 𝟎𝟎
The Adjusting entry on December 31, 20x1 is recorded as follows 𝟏𝟐
Liability method Income method

Unearned rent 𝑷 𝟓𝟎, 𝟎𝟎𝟎 Rent Income 𝑷 𝟕𝟎, 𝟎𝟎𝟎
Rent Income 𝑷 𝟓𝟎, 𝟎𝟎𝟎 Unearned rent 𝑷 𝟕𝟎, 𝟎𝟎𝟎
hi
to recognize earned portion of the 1-yr rent in advance to recognize unearned portion of the 1-yr rent in advance63
ADJUSTING ENTRIES
Liability method
Unearned Income Rent Income
08/1/x1 𝑃120,000
𝑃 50,000 AJE − 𝑃 50,000
End. Bal - 𝑃 70,000 End. Bal - 𝑃 50,000
Income method
Rent Income Unearned Rent

10/1/x1 𝑃120,000
𝑃 70,000 AJE − 𝑃 70,000
End. Bal - 𝑃 50,000 End. Bal - 𝑃 70,000
hi 64
FR
Lesson 9:Accounting Cycle Rent receivable 𝑷𝟓𝟎, 𝟎𝟎𝟎
Rent Income 𝑷𝟓𝟎, 𝟎𝟎𝟎
ADJUSTING ENTRIES To accrue interest
JAn, Cash 𝑷𝟓𝟎, 𝟎𝟎𝟎
20x2 Rent Receivable 𝑷𝟓𝟎, 𝟎𝟎𝟎
To record the collection of interest
Rent Expense 𝑷𝟓𝟎, 𝟎𝟎𝟎

Rent payable 𝑷𝟓𝟎, 𝟎𝟎𝟎
JAn, Rent Payable 𝑷𝟓𝟎, 𝟎𝟎𝟎𝟎

20x2 Cash
To record rent expense 𝑷𝟓𝟎, 𝟎𝟎𝟎
hi 65
FR
Closing Entries
Closing Entries – this involves journalizing and posting closing entries and ruling the ledger.
Temporary accounts are closed, and the resulting profit or loss is transferred to an equity
account.
𝑪𝒍𝒐𝒔𝒊𝒏𝒈 𝒆𝒏𝒕𝒓𝒊𝒆𝒔 are entries Closing entries prepared as follows:

prepared at the end of the accounting 1. All "𝒊𝒏𝒄𝒐𝒎𝒆 𝒂𝒄𝒄𝒐𝒖𝒏𝒕𝒔“ are
period to "𝒛𝒆𝒓𝒐 𝒐𝒖𝒕“ all “temporary debited and all
accounts” in the ledger. “𝒆𝒙𝒑𝒆𝒏𝒔𝒆 𝒂𝒄𝒄𝒐𝒖𝒏𝒕𝒔” are
credited. The resulting balance is
recorded in a clearing account
called “𝑰𝒏𝒄𝒐𝒎𝒆 𝒔𝒖𝒎𝒎𝒂𝒓𝒚”.
hi 66
FR
Financial Statements
ABC Co.
Income Statement
for the month ended December 31, 20x1
Service fees ₱ 220,000.00
Expenses
Rent expense (₱ 10,000.00 )
Supplies expense (₱ 30,000.00 )
Utilities expense (₱ 3,000.00 )
Interest expense (₱ 1,000.00 )
Depreciation expense (₱ 3,000.00 )
Total expenses (₱ 47,000.00 )
Profit for the period ₱ 173,000.00
hi 67
FR
Closing Entries
Temporary accounts are closed and the resulting profit or loss is transferred to an equity
account.

prepared at the end of the accounting 2. The balances in “𝑰𝒏𝒄𝒐𝒎𝒆 𝒔𝒖𝒎𝒎𝒂𝒓𝒚” is
period to "𝒛𝒆𝒓𝒐 𝒐𝒖𝒕“ all “temporary closed to “𝒐𝒘𝒏𝒆𝒓’𝒔 𝒄𝒂𝒑𝒊𝒕𝒂𝒍" account.
accounts” in the ledger. 3. Any balance in the “𝑶𝒘𝒏𝒆𝒓’𝒔 𝒅𝒓𝒂𝒘𝒊𝒏𝒈”
account is closed to the “𝑶𝒘𝒏𝒆𝒓’𝒔 𝒄𝒂𝒑𝒊𝒕𝒂𝒍”
account.
hi 68
Closing Entries
ABC Co.
Worksheet
for the period ended December 31, 20x1
Income and expense accounts are Accounts Title Income statement Balance sheet
closed to the Dr Cr. Dr Cr.

Cash ₱ 190,000.00
“𝐼𝑛𝑐𝑜𝑚𝑒 𝑠𝑢𝑚𝑚𝑎𝑟𝑦" 𝑎𝑐𝑐𝑜𝑢𝑛𝑡
Equipment ₱ 180,000.00
Notes payable ₱ 100,000.00
Owner's equity ₱ 200,000.00
Owner's drawings ₱ 40,000.00
Service fees ₱ 220,000.00
Rent expense ₱ 10,000.00
Supplies expense ₱ 30,000.00
Total
Adjustments
“𝐷𝑟𝑎𝑤𝑖𝑛𝑔𝑠" 𝑖𝑠 closed to the Utilities expense ₱ 3,000.00
𝑂𝑤𝑛𝑒𝑟 ′ 𝑠 𝑒𝑞𝑢𝑖𝑡𝑦" Utilities payable ₱ 3,000.00
Interest expense ₱ 1,000.00
Interest payable ₱ 1,000.00
Depreciation expense ₱ 3,000.00
Accumulated depreciation ₱ 3,000.00
“𝐼𝑛𝑐𝑜𝑚𝑒 𝑠𝑢𝑚𝑚𝑎𝑟𝑦" 𝑖𝑠 closed to the Prepaid rent ₱ 50,000.00
Prepaid supplies ₱ 20,000.00
𝑂𝑤𝑛𝑒𝑟 ′ 𝑠 𝑒𝑞𝑢𝑖𝑡𝑦“
Total ₱ 47,000.00 ₱ 220,000.00 ₱ 480,000.00 ₱ 307,000.00
(profit or loss) ₱ 173,000.00 ₱ 173,000.00
hi ₱ 220,000.00 ₱ 220,000.00 ₱ 480,000.00 ₱ 480,000.00 69
FR
Closing Entries
Closing Entries #1
𝑺𝒆𝒓𝒗𝒊𝒄𝒆 𝒇𝒆𝒆𝒔 𝑷 𝟐𝟐𝟎, 𝟎𝟎𝟎

Rent expense 𝑷 𝟏𝟎, 𝟎𝟎𝟎
Supplies expense 𝑷 𝟑𝟎, 𝟎𝟎𝟎
Utilities expense 𝑷 𝟑, 𝟎𝟎𝟎
Interest expense 𝑷 𝟏, 𝟎𝟎𝟎
Depreciation expense 𝑷 𝟑, 𝟎𝟎𝟎
Income summary 𝑷𝟏𝟕𝟑, 𝟎𝟎𝟎
to close income and expense accounts to income summary
hi 70
FR
Closing Entries
Closing Entries #2
𝑰𝒏𝒄𝒐𝒎𝒆 𝒔𝒖𝒎𝒎𝒂𝒓𝒚 𝑷𝟏𝟕𝟑, 𝟎𝟎𝟎

Owner’s equity 𝑷𝟏𝟕𝟑, 𝟎𝟎𝟎
to close income summary to equity
Closing Entries #3
Owner’s equity 𝑷𝟒𝟎, 𝟎𝟎𝟎
Owner’s drawing 𝑷𝟒𝟎, 𝟎𝟎𝟎
to close drawing
hi 71
FR
Post-closing trial balance
𝒕𝒉𝒆 amounts in the “adjusted trial balance” or (the income statement and balance
sheet) are cross-footed with amounts in the closing entries” columns. The resulting
amount are then placed in the “Post-closing trial balance.
𝒕𝒉𝒆 amounts in the “Post-closing trial balance” will be the beginning balances of
the accounts in the next accounting period.
hi 72
Lesson 10 :Accounting Cycle for Merchandising FR
Business
𝑴𝒆𝒓𝒄𝒉𝒂𝒏𝒅𝒊𝒔𝒊𝒏𝒈 𝐛𝐮𝐬𝐢𝐧𝐞𝐬𝐬 is one that buys and sells goods without changing
their physical form.
The major revenue for a merchandising business comes from selling goods or
merchandising and is called 𝑺𝒂𝒍𝒆𝒔 𝑹𝒆𝒗𝒆𝒏𝒖𝒆.
A person who buys and sells goods or merchandise is called a 𝒎𝒆𝒓𝒄𝒉𝒂𝒏𝒅𝒊𝒔𝒆𝒓.

−A merchandiser may be a wholesaler or a retailer.
−A wholesaler is one who buys in bulk from a manufacturer or another wholesaler.
− A retailer buys merchandise from the manufacturer or wholesaler and sells them
by piece to ultimate consumer.
Manufacturer Wholesaler Retailer Consumer

hi 73
Business
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
𝒓𝒆𝒇𝒆𝒓𝒔 𝒕𝒐 𝒕𝒉𝒆 𝒈𝒐𝒐𝒅𝒔 that a merchandising business has purchased with the main
intention of reselling them, normally in their original form and without any further
processing.
Inventory System:
Perpetual method−in layman’s term, the word perpetual means continuing forever.
It is called as such because under this system, the inventory account (or merchandise
inventory) is updated each time a purchase or sale is made. Thus, the inventory
account shows a continuing or running balance of the goods on hand. This method
records continuously or perpetually the movement of the merchandise and shows
the inventory balance at any point.
74
Business
𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
𝒓𝒆𝒇𝒆𝒓𝒔 𝒕𝒐 𝒕𝒉𝒆 𝒈𝒐𝒐𝒅𝒔 that a merchandising business has purchased with the main
intention of reselling them, normally in their original form and without any further
processing.
Inventory System:
Periodic Method − In lay man’s term “periodic” means occurring or recurring at

regular intervals. It is called as such because under this system, the inventory account
(or merchandise inventory) is updated only when physical count is performed. Thus,
the amounts of inventory and cost o goods sold are determine only periodically.
Under this method, there is no detailed recording hence no inventory balance can be
determined at any point in time. In this system, it is used in businesses where the
turnover of the items or selling cycle is fast. 75
Business Sales discounts(SD)
Sales Revenue represent the total cash discount
represent the total cash sales given for paying in full within the
and the total credit sales for discount period.
the period. Cost of sales(COS) (Cost of good sold)
represent the total product costs which are sold
Sales returns and allowances(SRA)
during the year. This is determined by deducting
represent the total goods returned by the Ending Inventory from Cost of goods available
the customers and the total allowed for sale(CGAS). On the other hand, cost of goods
deduction on the outstanding liability available for sale is the sum of the Beginning
of the customers due to wrong inventory and the Net Cost Purchases(NCP).
specification.
76
Business
Purchase returns and allowances(PRA)
Purchases
is the opposite of Sales returns and
represent the total cash purchases and the allowances(SRA) and represent the total goods
total credit purchases for the period. returned by the business and the total allowed
Purchases here refer only to the items deduction on the outstanding liability of the
considered as merchandise and not the business due to wrong product specifications
purchase of supplies and fixed assets or
property, plant and equipment.
Purchase discount (PD) Net Cost of purchases(NCP)

is the opposite of Sales discounts(SD) represent the sum of Net purchases and freight
and represent the total cash discount In. Freight In represents the total delivery cost of
received by the business for paying in bringing goods from the supplier to the business.
full within the discount period.
77
Business
𝑮𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕 Profit or Net profit
(gross income, gross margin, or sales profit ) is the amount derived after deducting
is simply “Net sales minus cost of goods sold”. all the expenses from the gross profit.
Sales revenue ₱ 54,000.00

less: Cost of Sales ₱ 30,000.00
Gross Profit ₱ 24,000.00
other Revenues ₱ 5,000.00

Operating expenses (₱ 16,000.00)
other Expenses and Losses (₱ 2,000.00 )
Net Income ₱ 11,000.00
78
Business
𝑮𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕 Profit or Net profit
(gross income, gross margin, or sales profit ) is the amount derived after deducting
is simply “Net sales minus cost of goods sold”. all the expenses from the gross profit.
𝑮𝒓𝒐𝒔𝒔 𝒑𝒓𝒐𝒇𝒊𝒕 = 𝑵𝒆𝒕 𝑺𝒂𝒍𝒆𝒔 − 𝑪𝒐𝒔𝒕 𝒐𝒇 𝒈𝒐𝒐𝒅𝒔 𝒔𝒐𝒍𝒅
𝑵𝒆𝒕 𝒔𝒂𝒍𝒆𝒔 = 𝑻𝒐𝒕𝒂𝒍 𝒔𝒂𝒍𝒆𝒔 – 𝑺𝒂𝒍𝒆𝒔 𝒓𝒆𝒕𝒖𝒓𝒏𝒔 𝒂𝒏𝒅 𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕𝒔
𝑪𝒐𝒔𝒕 𝒐𝒇 𝒈𝒐𝒐𝒅𝒔 𝒔𝒐𝒍𝒅 = 𝑩𝒆𝒈𝒊𝒏𝒏𝒊𝒏𝒈 𝑰𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚 + 𝑵𝒆𝒕 𝒑𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔 − 𝑬𝒏𝒅𝒊𝒏𝒈 𝒊𝒏𝒗𝒆𝒏𝒕𝒐𝒓𝒚
𝑵𝒆𝒕 𝒑𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔 = 𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒆𝒔 + 𝑭𝒓𝒆𝒊𝒈𝒉𝒕 𝑰𝒏 – 𝑷𝒖𝒓𝒄𝒉𝒂𝒔𝒆 𝒓𝒆𝒕𝒖𝒓𝒏𝒔 𝒂𝒏𝒅 𝒅𝒊𝒔𝒄𝒐𝒖𝒏𝒕𝒔
79
Business
𝑶𝒏 Inventory count
𝒕𝒐 illustrate, assume that during the year total purchases amounted to 𝑃50,000 representing
200 chairs bought at 𝑃250 each. At the end of the year, the physical count showed 70 chairs
still on hand. Cost of sales are computed as follows:
Purchases (200xP250) ₱ 50,000.00

less: Merchandise Inventory, Dec. 31 (70xP250) ₱ 17,500.00
Cost of Goods sold ₱ 32,500.00
80
Business
𝒕𝒐 illustrate, assume that during the year total purchases amounted to 𝑃50,000 representing
200 chairs bought at 𝑃250 each. At the end of the year, the physical count showed 70 chairs
still on hand. Cost of sales are computed as follows:
Purchases (200xP250) ₱ 50,000.00
less: Merchandise Inventory, Dec. 31 (70xP250) ₱ 17,500.00
Cost of Goods sold ₱ 32,500.00
𝑯𝒐𝒘 𝒎𝒖𝒄𝒉 𝒊𝒔 the sales revenue if the merchandise was sold at 𝟓𝟎% above cost or mark-
up of 𝑷𝟏𝟐𝟓?
𝑺𝑷 = 𝟐𝟓𝟎 + 𝟏𝟐𝟓 = 𝑷𝟑𝟕𝟓
Sales (130xP375) ₱ 48,750.00
Cost of Sales (130x250 ₱ 32,500.00
81
Gross Income on Sales ₱ 16,250.00
Business
𝒊𝒏 𝒕𝒉𝒆 next accounting period .Another 100 chairs on hand are again purchase bringing the
total goods available for sale to 170. At the end of the year, if 50 chairs are still on hand, cost
of goods sold for 120 chairs will amount to P30,000
Merchandise Inventory, Jan 01 (70xP250) ₱ 17,500.00
Add: Purchases(100x250) ₱ 25,000.00
Total Goods Available for Sale(170x250) ₱ 42,500.00
Less: Change in Inventory (50x250) ₱ 12,500.00
Cost of Sales (120x250 ₱ 30,000.00
Sales (120xP375) ₱ 45,000.00
Cost of Sales (120x250) ₱ 30,000.00
Gross Profit (120x125) ₱ 15,000.00
82
Business
𝑯𝒐𝒘 𝒘𝒊𝒍𝒍 𝒕𝒉𝒆 accountant record these transaction?
Perpetual Method Periodic Method
Merchandise Inventory 𝟓𝟎, 𝟎𝟎𝟎 Purchases 𝟓𝟎, 𝟎𝟎𝟎
Cash 𝟓𝟎, 𝟎𝟎𝟎 Cash 𝟓𝟎, 𝟎𝟎𝟎
To record purchases To record purchases
Cash 𝟒𝟖, 𝟕𝟓𝟎 Cash 𝟒𝟖, 𝟕𝟓𝟎
Sales 𝟒𝟖, 𝟕𝟓𝟎 Sales 𝟒𝟖, 𝟕𝟓𝟎
To record sales To record sales
Cost of Sales 𝟑𝟐, 𝟓𝟎𝟎
Merchandise Inventory 𝟑𝟐, 𝟓𝟎𝟎
To record cost sales *no cost of sales entry
Purchases (200xP250) ₱ 50,000.00 Sales (130xP375) ₱ 48,750.00

less: Merchandise Inventory, Cost of Sales (130x250 ₱ 32,500.00
Dec. 31 (70xP250) ₱ 17,500.00
Gross Income on Sales ₱ 16,250.00
Cost of Goods sold ₱ 32,500.00 83
Business
Example 1. You Purchase goods worth 𝑷𝟏𝟎, 𝟎𝟎𝟎 on account.
Merchandise Inventory 𝟏𝟎, 𝟎𝟎𝟎 Purchases 1𝟎, 𝟎𝟎𝟎
Accounts payable 𝟏𝟎, 𝟎𝟎𝟎 Accounts payable 1𝟎, 𝟎𝟎𝟎
To record purchases To record purchases
Example 2. You returned damaged goods worth 𝑷𝟐, 𝟎𝟎𝟎 to the supplier.
Accounts payable 𝟐, 𝟎𝟎𝟎 Accounts payable 2, 𝟎𝟎𝟎
Merchandise Inventory 𝟐, 𝟎𝟎𝟎 Purchase returns 𝟐, 𝟎𝟎𝟎
To record purchase returns To record purchase returns
Example 3. You sold goods costing 𝑷𝟓, 𝟎𝟎𝟎 for 𝑷𝟐𝟎, 𝟎𝟎𝟎 on account.
Accounts receivable 𝟐𝟎, 𝟎𝟎𝟎 Accounts receivable 20, 𝟎𝟎𝟎
Sales 𝟐𝟎, 𝟎𝟎𝟎 Sales 𝟐𝟎, 𝟎𝟎𝟎
Cost of sales 𝟓, 𝟎𝟎𝟎 *no entry 84
Merchandise Inventory 𝟓, 𝟎𝟎𝟎
Business
On Sales Discounts
Assume that on March 1 Royal Furniture sold goods to Jim Perez for 𝑷𝟔, 𝟎𝟎𝟎 with a 𝑷𝟐, 𝟎𝟎𝟎 down payment and the balance
on term of 2/10, n/30. the customer paid on March 8.

Mar 1 Accounts receivable 𝟒, 𝟎𝟎𝟎 Mar. 1 Accounts receivable 𝟒, 𝟎𝟎𝟎
Cash 𝟐, 𝟎𝟎𝟎 Cash 2, 𝟎𝟎𝟎
Sales 𝟔, 𝟎𝟎𝟎 Sales 𝟔, 𝟎𝟎𝟎
Cost of sales 𝟑, 𝟎𝟎𝟎
Merchandise inventory 𝟑, 𝟎𝟎𝟎 Mar. 8 Cash 𝟑𝟗𝟐𝟎
To record cost of sales Sales discount 𝟖𝟎
Mar. 8 Cash 𝟑, 𝟗𝟐𝟎 Accounts receivable 𝟒, 𝟎𝟎𝟎
Merchandise inventory 𝟖𝟎 to record net of discount
Accounts receivable 𝟒, 𝟎𝟎𝟎
85
Business
Freight in vs. Freight out
If the term of shipment is FOB shipping point, it means that the title of ownership passes to the buyer as soon as seller turns
over the goods to a common carrier for the delivery of the goods to the buyer. Freight in or Transportation in is debited by
the buyer. While FOB destination which means free on board at destination, the seller is liable for the freight and is still
considered the owner of the goods until it reaches the buyer. Freight out or transportation out is debited by the seller.
Example 4. You paid shipping cost of 𝑷𝟏, 𝟎𝟎𝟎 on the purchase above.
Merchandise Inventory 𝟏, 𝟎𝟎𝟎 Freight-in 1, 𝟎𝟎𝟎
Cash 1, 𝟎𝟎𝟎 Cash 1, 𝟎𝟎𝟎
To record shipping cost To record shipping cost
86
Business
For you guyssss
You opened a souvenir store called “My Souvenir” on November 01,20x1. the following were the transactions during the
period.
Nov. 1 – Provided 𝑷𝟓𝟎, 𝟎𝟎𝟎 cash as initial investment to the business.
1- Acquired equipment for 𝟑𝟔, 𝟎𝟎𝟎 cash. The equipment has a useful life of 4 years.
1- Paid a one-year insurance premium of 𝑷𝟏𝟐, 𝟎𝟎𝟎.
12- Purchased inventory costing 𝑷𝟏𝟓, 𝟎𝟎𝟎.
15- Sold goods for 𝑷𝟏𝟓, 𝟎𝟎𝟎 cash. The cost is 𝐏𝟐, 𝟎𝟎𝟎.
Dec 1- Sold goods with sales price of 𝑷𝟏𝟐, 𝟎𝟎𝟎 in exchange for a 𝐏𝟏𝟐, 𝟎𝟎𝟎, 10% one year note receivable. Principal and
interest is due at maturity. The cost of sales is 𝑷𝟏, 𝟓𝟎𝟎.
5- Purchased inventory for 𝟐, 𝟎𝟎𝟎 on account.
26- Sold goods for 𝑷𝟏𝟕, 𝟎𝟎𝟎 on account. The cost of sales is 𝑷𝟑, 𝟎𝟎𝟎.
27- Paid 𝑷𝟏, 𝟎𝟎𝟎 account payable.
29- Collected 𝑷𝟏𝟎, 𝟎𝟎𝟎 account receivable.
87
Business
Nov. 1 – Provided 𝑷𝟓𝟎, 𝟎𝟎𝟎 cash as initial investment to the business.
Nov. 1 Cash ₱ 50,000.00

Owner's, Capital ₱ 50,000.00
to record owner's investement to the business
88
Business
Acquired equipment for 𝟑𝟔, 𝟎𝟎𝟎 cash. The equipment has a useful life of 4 years.
Nov. 1 Equipment ₱ 36,000.00

Cash ₱ 36,000.00
to record acquisition of equipment for cash
89
Business
Paid a one-year insurance premium of 𝑷𝟏𝟐, 𝟎𝟎𝟎.
Nov. 1 Prepaid Insurance ₱ 12,000.00

Cash ₱ 12,000.00
to record prepayment of insurance
90
Business
12- Purchased inventory costing 𝑷𝟏𝟓, 𝟎𝟎𝟎
Nov. 12 Merchandise Inventory ₱ 15,000.00
Cash ₱ 15,000.00
to record acquisition of inventory for cash
91
Business
15- Sold goods for 𝑷𝟏𝟓, 𝟎𝟎𝟎 cash. The cost is 𝐏𝟐, 𝟎𝟎𝟎.
Nov. 15 Cash ₱ 15,000.00

Sales ₱ 15,000.00
to record cash sales
Cost of Sales (COGS) ₱ 2,000.00

Merchandise Inventory ₱ 2,000.00
to record the cost of inventory sold as expense
92
Business
Dec 1- Sold goods with sales price of 𝑷𝟏𝟐, 𝟎𝟎𝟎 in exchange for a 𝐏𝟏𝟐, 𝟎𝟎𝟎, 10% one year note receivable.
Principal and interest is due at maturity. The cost of sales is 𝑷𝟏, 𝟓𝟎𝟎.
Dec. 1 Notes receivable ₱ 12,000.00

Sales ₱ 12,000.00
to record the sales in exchange for note
Cost of Sales ₱ 1,500.00

93
Business
5- Purchased inventory for 𝟐, 𝟎𝟎𝟎 on account.
Dec. 5 Inventory 102 ₱ 2,000.00

Accounts payable ₱ 2,000.00
to record the acqiusition of inventory on account
94
Business
26- Sold goods for 𝑷𝟏𝟕, 𝟎𝟎𝟎 on account. The cost of sales is 𝑷𝟑, 𝟎𝟎𝟎.
Dec. 26 Accounts Receivable ₱ 17,000.00

Sales ₱ 17,000.00
to record sale on account
Cost of Sales ₱ 3,000.00

to record the cost of inventory sold
95
Business
27- Paid 𝑷𝟏, 𝟎𝟎𝟎 account payable.
Dec. 27 Accounts payable ₱ 1,000.00

Cash ₱ 1,000.00
to record the payment of account payable
96
Business
29- Collected 𝑷𝟏𝟎, 𝟎𝟎𝟎 account receivable.
Dec. 29 Cash ₱ 10,000.00

Accounts Receivable ₱ 10,000.00
to record the collection of account receivable
97
Business Nov. 1 50000
Cash
36000 Nov. 1
Nov. 14 15000 12000 Nov. 1
GENERAL JOURNAL December Transactcion
Dec. 29 10000 15000 Nov. 12
Date Accounts Title F Debit (Dr.) Credit (Cr.) Dec. 1 Notes receivable ₱ 12,000.00
Nov. 1 Cash ₱ 50,000.00 Sales ₱ 12,000.00 1000 Dec. 27
Owner's, Capital ₱ 50,000.00 to record the sales in exchange for note 75000 64000
to record owner's investement to the
business Cost of Sales ₱ 1,500.00 Bal. 11000

to record the cost of inventory sold as expense Accounts Receivable
Cash ₱ 36,000.00
to record acquisition of equipment for Dec. 5 Inventory 102 ₱ 2,000.00 Dec. 26 17000 10000 Dec. 29
cash Accounts payable ₱ 2,000.00
to record the acqiusition of inventory on
account Bal. 7000
Cash ₱ 12,000.00 Dec. 26 Accounts Receivable ₱ 17,000.00
to record prepayment of insurance Sales ₱ 17,000.00 Prepaid Insurance
Nov. 12 Merchandise Inventory ₱ 15,000.00 Cost os Sales ₱ 3,000.00 Accounts Receivable

Cash ₱ 15,000.00 Merchandise Inventory ₱ 3,000.00
to record acquisition of inventory for cash to record the cost of inventory sold Dec. 26 17000 10000 Dec. 29
Nov. 14 Cash ₱ 15,000.00 Dec. 27 Accounts payable ₱ 1,000.00

Sales ₱ 15,000.00 Cash ₱ 1,000.00 Bal. 7000
to record cash sales to record the payment of account payable
Notes Receivable
Prepaid Insurance
Cost of Sales (COGS) ₱ 2,000.00 Dec. 29 Cash ₱ 10,000.00
Merchandise Inventory ₱ 2,000.00 Accounts Receivable ₱ 10,000.00 Dec. 1 12000
to record the cost of inventory sold as
expense to record the collection of account receivable
Bal. 12000
Equipment
98
Nov. 1 36000
Business Nov. 12
Merchandise Inventory
15000 2000 Nov .14
5-Dec 2000 1500 Dec. 1
3000 Dec. 26
Date Accounts Title F Debit (Dr.) Credit (Cr.) Dec. 1 Notes receivable ₱ 12,000.00
Nov. 1 Cash ₱ 50,000.00 Sales ₱ 12,000.00 17000 6500
Owner's, Capital ₱ 50,000.00 to record the sales in exchange for note Bal. 10500
business Cost of Sales ₱ 1,500.00

Prepaid Insurance
Cash ₱ 36,000.00 Nov. 1 12000 Dec. 31
to record acquisition of equipment for Dec. 5 Inventory 102 ₱ 2,000.00
cash Accounts payable ₱ 2,000.00 Bal.
account 12000
Cash ₱ 12,000.00 Dec. 26 Accounts Receivable ₱ 17,000.00
to record prepayment of insurance Sales ₱ 17,000.00
Equipment
Nov. 1 36000
Nov. 12 Merchandise Inventory ₱ 15,000.00 Cost os Sales ₱ 3,000.00
Cash ₱ 15,000.00 Merchandise Inventory ₱ 3,000.00 Bal. 36000
to record acquisition of inventory for cash to record the cost of inventory sold

Sales ₱ 15,000.00 Cash ₱ 1,000.00 Liabiliti
Accounts Payable
Merchandise Inventory ₱ 2,000.00 Accounts Receivable ₱ 10,000.00 Dec. 27 1000 2000 Dec. 5
expense to record the collection of account receivable Bal. 1000
99
Business Owner's Equity
Equ
50000 Nov. 1
Date Accounts Title F Debit (Dr.) Credit (Cr.) Dec. 1 Notes receivable ₱ 12,000.00 Bal. 50000
Nov. 1 Cash ₱ 50,000.00 Sales ₱ 12,000.00
Owner's, Capital ₱ 50,000.00 to record the sales in exchange for note Income
business Cost of Sales ₱ 1,500.00 Sales
15000 Nov. 14
Nov. 1 Equipment ₱ 36,000.00 12000 Dec. 1
Cash ₱ 36,000.00 17000 Dec. 26
to record acquisition of equipment for Dec. 5 Inventory 102 ₱ 2,000.00 Bal. 44000
cash Accounts payable ₱ 2,000.00
account
Nov. 1 Prepaid Insurance ₱ 12,000.00 Cost of Sales
Cash ₱ 12,000.00 Dec. 26 Accounts Receivable ₱ 17,000.00 Nov. 14 2000
to record prepayment of insurance Sales ₱ 17,000.00
to record sale on account Dec. 1 1500
Dec. 26 3000
Nov. 12 Merchandise Inventory ₱ 15,000.00 Cost os Sales ₱ 3,000.00
Cash ₱ 15,000.00 Merchandise Inventory ₱ 3,000.00 Bal. 6500
to record acquisition of inventory for cash to record the cost of inventory sold

Sales ₱ 15,000.00 Cash ₱ 1,000.00

Merchandise Inventory ₱ 2,000.00 Accounts Receivable ₱ 10,000.00
expense to record the collection of account receivable
100
Business T-Accounts
Assets
My Souvenir
Cash Merchandise Inventory Unadjusted Trial Balance
Nov. 1 50000 36000 Nov. 1 Nov. 12 15000 2000 Nov .14
Nov. 14 15000 12000 Nov. 1 5-Dec 2000 1500 Dec. 1 December 31, 20x1
Dec. 29 10000 15000 Nov. 12 3000 Dec. 26
75000
1000
64000
Dec. 27
Bal.
17000 6500
10500
Accounts DR. CR.
Bal. 11000
Cash 11000
Accounts Receivable Notes Receivable
Dec. 26 17000 10000 Dec. 29 Dec. 1 12000 Accounts Receivable 7000
Bal. 7000 Bal. 12000
Notes Receivable 12000
Prepaid Insurance Equipment
Nov. 1 12000 Dec. 31 Nov. 1 36000
Merchandise Inventory 10500
Bal. Bal. 36000
12000
Prepaid Insurance 12000
Liabilities
Equipment 36000
Accounts Payable Salaries Payable
Dec. 27 1000 2000 Dec. 5 10000 Dec. 31
Accounts Payable 1000
Bal. 1000 Bal. 10000
Equity Owner's Equity 50000

Owner's Equity
50000 Nov. 1 Sales 44000
Bal. 50000
Income Expenses Cost of Sales 6500

Sales
15000 Nov. 14 Nov. 14
Cost of Sales
2000
95000 95000
12000 Dec. 1 Dec. 1 1500
17000 Dec. 26 Dec. 26 3000
Bal. 44000 Bal. 6500
101
Business
Adjusting Entries-AJE #1
Dec 1- Sold goods with sales price of 𝑷𝟏𝟐, 𝟎𝟎𝟎 in exchange for a 𝐏𝟏𝟐, 𝟎𝟎𝟎, 10% one year note receivable.
Principal and interest is due at maturity. The cost of sales is 𝑷𝟏, 𝟓𝟎𝟎.
Dec. 31 Interest Receivable ₱ 100.00
Interest Income ₱ 100.00
to accrue interest income but not yet collected
Salaries earned by employees during the period but were not yet paid, amounting to 𝑷𝟏𝟎, 𝟎𝟎𝟎
Dec. 31 Salaries Expense ₱ 10,000.00
Salary Payable ₱ 10,000.00
to accrue salaries expense incurred but not yet paid
Of the accounts receivable , 𝑷𝟏, 𝟎𝟎𝟎 is doubtful of collection.
Dec. 31 Bad Debt Expense ₱ 1,000.00
Allowance for Bad Debts ₱ 1,000.00
102
Business
1- Acquired equipment for 𝟑𝟔, 𝟎𝟎𝟎 cash. The equipment has a useful life of 4 years.
Dec. 31 Depreciation Expense ₱ 1,500.00

Accumulated Depreciation ₱ 1,500.00
to record depreciation expense for the period
1- Paid a one-year insurance premium of 𝑷𝟏𝟐, 𝟎𝟎𝟎.
Dec. 31 Insurance Expense ₱ 2,000.00
Prepaid Insurance ₱ 2,000.00
to record insurance expense
103
Business
Adjustments
Dec. 31 Interest Receivable ₱ 100.00
Interest Income ₱ 100.00
to accrue interest income but not yet collected
Salary Payable ₱ 10,000.00
to accrue salaries expense incurred but not yet paid
Dec. 31 Depreciation Expense ₱ 1,500.00
Accumulated Depreciation ₱ 1,500.00
to record depreciation expense for the period
Dec. 31 Bad Debt Expense ₱ 1,000.00
Allowance for Bad Debts ₱ 1,000.00
to record bad debts expense for the period
Dec. 31 Insurance Expense ₱ 2,000.00
Prepaid Insurance ₱ 2,000.00
to record insurance expense
104
Lesson 10:Accounting Cycle for Merchandising FR
Business
Closing Entries
Temporary accounts are closed, and the resulting profit or loss is transferred to an equity
account.

prepared at the end of the accounting 1. All income accounts are debited, and all
period to "𝒛𝒆𝒓𝒐 𝒐𝒖𝒕“ all “temporary expenses are credited. The resulting balance is
accounts” in the ledger. recorded in a clearing account
C𝐚𝐥𝐥𝐞𝐝 “𝑰𝒏𝒄𝒐𝒎𝒆 𝒔𝒖𝒎𝒎𝒂𝒓𝒚”
2.The balance in “𝑰𝒏𝒄𝒐𝒎𝒆 𝒔𝒖𝒎𝒎𝒂𝒓𝒚” is
closed to the “𝑶𝒘𝒏𝒆𝒓’𝒔 𝒆𝒒𝒖𝒊𝒕𝒚” account
3. Any balance in the “𝑶𝒘𝒏𝒆𝒓’𝒔 𝒅𝒓𝒂𝒘𝒊𝒏𝒈”
account is closed to “𝑶𝒘𝒏𝒆𝒓’𝒔 𝒆𝒒𝒖𝒊𝒕𝒚 ”
hi account. 105
Business
Income Summary
Closing Entries-CLE #1 Bal-Dec 31 P23,100
Sales
P44,000 Bal-Dec 31
Bal. 0 CLE#1 P 44,000
Dec. 31 Sales ₱ 44,000.00 Bal. 0

Interest Income ₱ 100.00 Interest Income
Cost of Sales ₱ 6,500.00 P100 Bal-Dec 31
CLE#1 P 100
Depreciation Expense ₱ 1,500.00 Bal. 0
Bad Debt Expense P 1000
Dec. 31 Insurance Expense ₱ 2,000.00 Cost of Sales
Bal-Dec 31 P6,500
Income Summary ₱ 23,100.00 P6,500 CLE#1
to close Income and Expense to
Income Summary Bal. 0
Depreciation s Bad debt Expense

Insurance Expense Salaries Expense Expense Bal-Dec 31 P1,000
Bal-Dec 31 P2,000 Bal-Dec 31 P10,000 Bal-Dec 31 P1,500 P1,000 CLE#1
P2,000 CLE#1 P10,000 CLE#1 P1,500 CLE#1
Bal. 0
Bal. 0 Bal. 0 Bal. 0
106
Business
Closing Entries-CLE #2
Dec. 31 Income Summary

P23,100 Bal-Dec 31
CLE#2 P23,100
Income Summary ₱ 23,100.00
Bal. 0
Owner's equity 23100
Owner's
Dec. 31 to close Income Summary equity Equity
P50,000 Bal- Dec. 31
P23,100
Bal. P73,000
107
Business
For you guyzzzzz
Use periodic Inventory System

The accounts of Jim Boy Trading Co. have the following balances on January 01,20x1
Jim Boy Trading Co.
Trial Balance
January 01,2021
Accounts
Cash 𝑷𝟓𝟎, 𝟎𝟎𝟎
Accounts receivable 𝑷𝟏𝟐𝟎, 𝟎𝟎𝟎
Inventory 𝐏𝟑𝟎, 𝟎𝟎𝟎
Equipment 𝑷𝟐𝟎𝟎, 𝟎𝟎𝟎
Accumulated Dep. 𝐏𝟖𝟎, 𝟎𝟎𝟎
Accounts payable 𝑷𝟐𝟎, 𝟎𝟎𝟎
Jim Boy, Capital 𝑷𝟑𝟎𝟎, 𝟎𝟎𝟎
Total 𝑷𝟒𝟎𝟎, 𝟎𝟎𝟎 𝑷𝟒𝟎𝟎, 𝟎𝟎𝟎
108
Business
For you guyzzzzz
The following were the transactions during the year: Additional information
1. Sales on cash basis amounted to 𝑷𝟖𝟎, 𝟎𝟎𝟎 a. Annual depreciation on the equipment is
2. Sales on account amounted to 𝑷𝟏𝟑𝟎, 𝟎𝟎𝟎 𝑷𝟐𝟎, 𝟎𝟎𝟎.
b. The physical count of inventory on December
3. Purchases on accounts amounted to 𝑷𝟕𝟎, 𝟎𝟎𝟎
31, 20x1 revealed a 𝑷𝟔𝟎, 𝟎𝟎𝟎 balance of
4. Freight paid on purchases amounted to 𝑷𝟓, 𝟎𝟎𝟎 goods on hand.
5. Purchase returns amounted to 𝑷𝟏𝟎, 𝟎𝟎𝟎
6. Salaries paid amounted to 𝑷𝟔𝟎, 𝟎𝟎𝟎
7. Utility bills paid amounted to 𝑷𝟐𝟎, 𝟎𝟎𝟎 Requirements: complete the
8. Collections of accounts receivable amounted to accounting cycle:
𝑷𝟐𝟎𝟎, 𝟎𝟎𝟎
9. Payments of accounts payable amounted to 𝑷𝟔𝟎, 𝟎𝟎𝟎
10. Owner’s drawing during the year totaled 𝑷𝟖𝟎, 𝟎𝟎𝟎
109
Business
1. Sales on cash basis amounted to 𝑷𝟖𝟎, 𝟎𝟎𝟎
Cash ₱ 80,000.00
Sales ₱ 80,000.00
to record cash sale
2. Sales on account amounted to 𝑷𝟏𝟑𝟎, 𝟎𝟎𝟎
Accounts receivable ₱ 130,000.00

Sales ₱ 130,000.00
to record sales on account
110
Business
3. Purchases on accounts amounted to 𝑷𝟕𝟎, 𝟎𝟎𝟎
Purchases ₱ 70,000.00
to record purchases on account
4. Freight paid on purchases amounted to 𝑷𝟓, 𝟎𝟎𝟎
Freight-in ₱ 5,000.00
Cash ₱ 5,000.00
to record freight costs incurred on purchases
111
Business
5. Purchase returns amounted to 𝑷𝟏𝟎, 𝟎𝟎𝟎
Purchase returns ₱ 10,000.00
to record purchase returns
6. Salaries paid amounted to 𝑷𝟔𝟎, 𝟎𝟎𝟎

Salaries expense ₱ 60,000.00
Cash ₱ 60,000.00
to record payments of salaries
112
Business
7 Utility bills paid amounted to 𝑷𝟐𝟎, 𝟎𝟎𝟎
Utilities expense ₱ 20,000.00
Cash ₱ 20,000.00
to record payment of utility bills
8. Collections of accounts receivable amounted to 𝑷𝟐𝟎𝟎, 𝟎𝟎𝟎

cash ₱ 200,000.00
Accounts receivable ₱ 200,000.00
to record collecction of accounts receivable
113
Business
9. Payments of accounts payable amounted to 𝑷𝟔𝟎, 𝟎𝟎𝟎
Accounts payable 102 ₱ 60,000.00
Cash ₱ 60,000.00
to record the acqiusition of inventory on account
10. Owner’s drawing during the year totaled 𝑷𝟖𝟎, 𝟎𝟎𝟎
Jim Boy, Drawing ₱ 80,000.00

Cash ₱ 80,000.00
to record withdrawals of the owner from the business
114
Business
Adjusting Entries
Annual depreciation on the equipment is 𝑷𝟐𝟎, 𝟎𝟎𝟎.
Depreciation expense ₱ 20,000.00

Accumulated dep. ₱ 20,000.00
to record the depreciation expense for the year
a. The physical count of inventory on December 31, 20x1 revealed a 𝑷𝟔𝟎, 𝟎𝟎𝟎 balance of goods on hand.
Inventory, end ₱ 60,000.00

Income Summary ₱ 60,000.00
to recognise the ending inventory
115
Business
General Ledger
Assets
Cash Accounts receivable Inventory Equipment

beg. ₱ 50,000.00 ₱ 5,000.00 4 beg. ₱ 120,000.00 ₱ 200,000.00 8 beg. ₱ 30,000.00 beg. ₱ 200,000.00
1 ₱ 80,000.00 ₱ 60,000.00 6 2-Jan ₱ 130,000.00
8-Jan ₱ 200,000.00 ₱ 20,000.00 7 Bal. ₱ 30,000.00 Bal. ₱ 200,000.00
₱ 60,000.00 10
₱ 80,000.00 Bal. ₱ 50,000.00
Bal. ₱ 105,000.00
Accum. Dep.
AJE#1 ₱ 20,000.00
Bal. ₱ 20,000.00
116
Business
General Ledger
Liabilities
Accounts Payable
5 ₱ 10,000.00 ₱ 20,000.00 beg.
9 ₱ 60,000.00 ₱ 70,000.00
Bal. ₱ 20,000.00
Equity
Jim Boy, Capital Jim Boy, Drawing

₱ 300,000.00 beg.
10 ₱ 80,000.00
Bal. ₱ 300,000.00 Bal. ₱ 80,000.00
117
Business
General Ledger
Income
Sales Depreciation
₱ 80,000.00 1 expense
₱ 130,000.00 2 AJE#1 ₱ 20,000.00
Bal. ₱ 210,000.00
Bal. ₱ 20,000.00
Expenses Expenses
Purchases Freight-in
3 ₱ 70,000.00 4 ₱ 5,000.00
Bal. ₱ 70,000.00 Bal. ₱ 5,000.00
Purchase returns Salaries expense

3 6 ₱ 60,000.00
₱ 10,000.00
Bal. ₱ 10,000.00 Bal. ₱ 60,000.00
118
Business
hi 119
Lesson 10:Accounting Cycle-Merchandising Business FR
CLOSING ENTRIES Income summary
𝐶𝐿𝐸1 − 30,000 60,000 − 𝐴𝐸2

Dec. 31 Income Summary 30,000
Inventory, beg. 𝟑𝟎, 𝟎𝟎𝟎
to close beginning inventory to income summary
Inventory
beg. -30,000 30,000- CLE1
end. -60,000
Accounts Title Unadjusted trial balance Adjustments Adjusted trial balance Income statement Balance sheet Closing entries Post-closing trial balance
Dr Cr. Dr Cr. Dr Cr. Dr Cr. Dr Cr. Dr Cr. Dr Cr.
Inventory, beg ₱ 30,000.00 ₱ 30,000.00 ₱ 30,000.00 ₱ 30,000.00
Income summary ₱ 60,000.00 ₱ 60,000.00 ₱ 60,000.00 ₱ 105,000.00 ₱ 45,000.00
hi 120
Dec. 31 Sales 𝟐𝟏𝟎, 𝟎𝟎𝟎 30,000 60,000 − 𝐴𝐽𝐸2

Purchase returns 𝟏𝟎, 𝟎𝟎𝟎 45,000 − 𝐶𝐿𝐸2
Purchases 𝟕𝟎, 𝟎𝟎𝟎 75,000 − 𝑏𝑎𝑙.
Freight-in 𝟓, 𝟎𝟎𝟎
Salaries expense 𝟔𝟎, 𝟎𝟎𝟎
Utilities expense 𝟐𝟎, 𝟎𝟎𝟎
Depreciation expense 𝟐𝟎, 𝟎𝟎𝟎
Income summary 𝟒𝟓, 𝟎𝟎𝟎
to income summary and expense to income summary

Sales ₱ 210,000.00 ₱ 210,000.00 ₱ 210,000.00 ₱ 210,000.00
Purchases ₱ 70,000.00 ₱ 70,000.00 ₱ 70,000.00 ₱ 70,000.00
Freight-in ₱ 5,000.00 ₱ 5,000.00 ₱ 5,000.00 ₱ 5,000.00
Purchase returns ₱ 10,000.00 ₱ 10,000.00 ₱ 10,000.00 ₱ 10,000.00
hi 121
Income summary ₱ 60,000.00 ₱ 60,000.00 ₱ 60,000.00 ₱ 105,000.00 ₱ 45,000.00
30,000 60,000 − 𝐴𝐽𝐸2

Dec. 31 Income summary 𝟕𝟓, 𝟎𝟎𝟎 45,000 − 𝐶𝐿𝐸2
𝐶𝐿𝐸3 − 75,000.
Jim Boy, Capital 7𝟓, 𝟎𝟎𝟎 0 − 𝑏𝑎𝑙.
to close income summary to equity Jim Boy, Capital
300,000
75,000 − 𝐶𝐿𝐸3
375,000 − 𝑏𝑎𝑙.
Jim Boy, Capital ₱ 300,000.00 ₱ 300,000.00 ₱ 300,000.00 ₱ 80,000.00 ₱ 75,000.00 ₱ 295,000.00
hi 122
Income summary ₱ 60,000.00 ₱ 60,000.00 ₱ 60,000.00 ₱ 105,000.00 ₱ 45,000.00
CLOSING ENTRIES Jim Boy, drawing
80,000 80,000 − 𝐶𝐿𝐸4

Dec. 31 Jim Boy, Capital 𝟖𝟎, 𝟎𝟎𝟎
Jim Boy, drawing 8𝟎, 𝟎𝟎𝟎 0 − 𝑏𝑎𝑙.
to close the drawing account Jim Boy, Capital
300,000
80,000 − 𝐶𝐿𝐸4 75,000 − 𝐶𝐿𝐸3
295,000 − 𝑏𝑎𝑙.
Jim Boy, Capital ₱ 300,000.00 ₱ 300,000.00 ₱ 300,000.00 ₱ 80,000.00 ₱ 75,000.00 ₱ 295,000.00
Jim Boy, Drawings ₱ 80,000.00 ₱ 80,000.00 ₱ 80,000.00 ₱ 80,000.00

hi 123

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Fundamentals of

ACCOUNTING Accounting is a service activity

The function of accounting is to

Making reasoned choices among

Accounting is a service activity Accounting is a process

Accounting is both an art and a discipline

➢ Maintenance of systematic records

➢ Financial results of an entity can be

• Accounting can be traced to ancient civilizations • Records of cash, commodities and

Financial Accounting Cost Accounting

Auditing Accounting Research

• Business entity principle

– financial statements must be presented with supporting evidence.

𝑫𝒐𝒖𝒃𝒍𝒆 𝑬𝒏𝒕𝒓𝒚 𝑩𝒐𝒐𝒌𝒌𝒆𝒆𝒑𝒊𝒏𝒈

Happy Tour Travel

𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝑶𝒘𝒏𝒆𝒓′ 𝒔 𝑬𝒒𝒖𝒊𝒕𝒚

𝑷 𝟑𝟎𝟎, 𝟎𝟎𝟎 𝑷 𝟏𝟎𝟎, 𝟎𝟎𝟎 𝑷 𝟐𝟎𝟎, 𝟎𝟎𝟎

𝑭𝑰𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑻𝒓𝒂𝒏𝒔𝒂𝒄𝒕𝒊𝒐𝒏 𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝑶𝒘𝒏𝒆𝒓′𝒔 𝑬𝒒𝒖𝒊𝒕𝒚

𝑭𝑰𝒏𝒂𝒏𝒄𝒊𝒂𝒍 𝑻𝒓𝒂𝒏𝒔𝒂𝒄𝒕𝒊𝒐𝒏 𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝑶𝒘𝒏𝒆𝒓′ 𝒔 𝑬𝒒𝒖𝒊𝒕𝒚

13. Incurred expenses still unpaid. + −

Example 1: Assume the Mr. X contributed 𝑃2000,00.00 to put up a travel agency.

𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝑶𝒘𝒏𝒆𝒓′ 𝒔 𝑬𝒒𝒖𝒊𝒕𝒚

𝑪𝒂𝒔𝒉 − 𝑷 𝟐𝟎𝟎, 𝟎𝟎𝟎 𝑶𝒍𝒊𝒗𝒆𝒓, 𝑪𝒂𝒑𝒊𝒕𝒂𝒍 − 𝑷 𝟐𝟎𝟎, 𝟎𝟎𝟎

Example 1: Assume the Mr. X contributed 𝑃200,00.00 to put up a travel agency.

𝑪𝒂𝒔𝒉∗ − 𝑷 𝟐𝟎𝟎, 𝟎𝟎𝟎

*Account - a device used to record the changes in the accounting elements.

𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝑶𝒘𝒏𝒆𝒓′ 𝒔 𝑬𝒒𝒖𝒊𝒕𝒚

𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝑶𝒘𝒏𝒆𝒓′ 𝒔 𝑬𝒒𝒖𝒊𝒕𝒚

𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝑶𝒘𝒏𝒆𝒓′ 𝒔 𝑬𝒒𝒖𝒊𝒕𝒚

𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝑶𝒘𝒏𝒆𝒓′ 𝒔 𝑬𝒒𝒖𝒊𝒕𝒚

₱ 895,000 = ₱ 100,000 + ₱ 795,000

𝑨𝒔𝒔𝒆𝒕𝒔 = 𝑳𝒊𝒂𝒃𝒊𝒍𝒊𝒕𝒊𝒆𝒔 + 𝑶𝒘𝒏𝒆𝒓′ 𝒔 𝑬𝒒𝒖𝒊𝒕𝒚

Investment of assets by the owner 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒

Purchase of assets in cash 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 &𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒

Purchase of assets on account 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒

Settlement of liabilities in cash 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒

Settlement of account with a note 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒 &𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒

Settlement of liabilities from 𝐷𝑒𝑐𝑟𝑒𝑎𝑠𝑒 𝐼𝑛𝑐𝑟𝑒𝑎𝑠𝑒

Double-entry System Value

Equity Credit Decrease Increase To cr𝑒𝑑𝑖𝑡 an account with a normal

The interest income is accrued as

Dec Interest receivable 𝑷𝟗, 𝟎𝟎𝟎

AJE: for accrued interest Expense- DEF Co.

Dec Interest Expense 𝑷𝟗, 𝟎𝟎𝟎

April Interest Payable 𝑷𝟗, 𝟎𝟎𝟎

Dec Rent receivable 𝑷𝟓𝟎, 𝟎𝟎𝟎

AJE: for accrued rent Expense- DEF Co.

Dec Rent Expense 𝑷𝟓𝟎, 𝟎𝟎𝟎

Rent Expense 𝑷𝟓𝟎, 𝟎𝟎𝟎

JAn, Rent Payable 𝑷𝟓𝟎, 𝟎𝟎𝟎𝟎

The interest income is accrued as

Dec Interest Expense 𝑷𝟑, 𝟎𝟎𝟎

Oct, Interest payable 𝑷𝟑, 𝟎𝟎𝟎

𝐶𝑜𝑠𝑡 − 𝑆𝑐𝑟𝑎𝑝 𝑉𝑎𝑙𝑢𝑒 20,000

Dec Depreciation Expense 𝑷𝟓, 𝟎𝟎𝟎

AJE: for Bad Debts expense- ABC Co.

Dec Bad debts Expense 𝑷𝟓𝟎𝟎

Insurance Expense Prepaid Insurance