IM Accounting Fundamentals Service Business

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES
Department of Accountancy
LOPEZ, QUEZON BRANCH
INSTRUCTIONAL MATERIAL
Fundamentals of Accounting
Compiled by:
Joanne Michelle D. Lee, CPA
(MODULE 1 – Introduction to Accounting)

Subject Overview
 No business could operate very long without knowing how
much it was earning and how much it was spending.
 Accounting provides the business with these information,
that’s why accountants are called the scorekeepers of
business.
 Without accounting, a business couldn’t function optimally; it
wouldn’t know where it stands financially, whether it’s making
a profit or not, and it wouldn’t know its financial situation.
 Also, a sound understanding of this language will bring about
a better management of the financial aspects of living.
 Personal financial planning, education expenses, car
amortization, business loans, income taxes and investments
are based on the information system that we call
Accounting.
Objectives
 After this module, the students should be able to:
 Define Accounting
 Understand the nature, functions, and objectives of
accounting
 Determine the scope and branches of accounting
 Recognize the users of accounting information and their
information needs
 Identify the forms of business organizations and their
activities
 Describe the basic financial statements of business
organizations
 Determine the elements of financial statements
 Explain basic accounting concepts and principles.
DEFINITIONS OF
ACCOUNTING
 The Accounting Standards Council (ASC) defines
accounting as follows:
 Accounting is a service activity.
 Its function is to provide quantitative information,
primarily financial in nature, about economic entities, that
is intended to be useful in making economic decisions, in
making reasoned choices among alternative courses of
action.
 Accounting is also defined as the art of recording,
classifying and summarizing, in a significant manner and
in terms of money, transactions and events which are in
part at least of a financial character and interpreting the
results thereof.
DEFINITIONS OF
ACCOUNTING
 The first definition states the purpose of accounting, that is,
to provide quantitative information about a business for the
basis of economic decisions and resolutions.
 The second definition states the phases performed in the
accounting process. These are the following:
 Recording or Bookkeeping – the process of systematically
maintaining a record of all business transactions.
 Classifying – the sorting or grouping of similar and interrelated
transactions in their respective class.
 Summarizing – is the preparation of financial statements which
include the Statement of Financial Position (Balance Sheet),
Statement of Profit or Loss (Income Statement), Statement of
Cash Flows, and Statement of Changes in Owner’s Equity.
DEFINITIONS OF
ACCOUNTING
 Accounting is actually an information system that
measures business activities, processes information
into reports and communicates the reports to decision
makers.
 Accounting is called the “Language of business”,
because it serves as a communication link between
the business entity and the users of financial
information.
 An accountant’s primary task therefore is to supply
financial information to statement users so that they
could make informed judgment and better decisions.
THE DEVELOPMENT OF
ACCOUNTING
 Accounting traces its roots to the Middle East region,
where as early as 8500 BC, tradesmen use clay
objects to represent commodities such as flocks of
sheep, jars of spices and oil, bolts of clothing and
other goods.
 The Ancient Civilizations of Babylon, Greece and
Egypt also used clay tablets.
 These records show wage payments, materials
requisitions and costs of labor, which only shows that
Accounting has already been used even during
Biblical times.
THE DEVELOPMENT OF
ACCOUNTING
 In 1494, Friar Luca Pacioli wrote a book which

contains discussions on the double-entry bookkeeping
system.
 The book was entitled, “Summa de Arithmetica,
Geometria, Proportioni et Proportionalita”,
(Everything about Arithmetic, Geometry, Proportions
and Proportionality).
 Friar Pacioli was considered the father of double-
entry bookkeeping.
THE DEVELOPMENT OF
ACCOUNTING
 In the mid-18th to the mid-19th centuries, the Industrial

Revolution altered the ay goods are produces from
artisan/craftsman method to the assembly-line
method.
 Also, during this period, the corporate form of business
organization was created to accommodate the need
for the increasing large amounts of funds which was
required to finance the expansion of business.
THE ROLE OF ACCOUNTING
FOR BUSINESS
A business is an organization in which basic resources
are assembled and processed to provide goods or
services to customers or clients.
 The role of accounting in business are as follows:
 Provides the necessary information essential in the

formulation and execution of business and non-business
policies.
 Business establishments and the government
acknowledge accounting as an essential tool of
management.
FORMS OF BUSINESS
ORGANIZATIONS
 The three forms of business organizations are as follows:
 Single or Sole Proprietorship – a business owned by only an

individual called proprietor. Easiest to form and less
complicated to operate and decisions are made faster.
 Partnership – an association of two or more persons who bind
themselves to contribute money, property, or industry to a
common fund, with the intention of dividing the profits among
themselves.
 Corporation – is an artificial being created by operation of law
having the rights of succession and the powers and attributes
expressly authorized by law or incident to its existence. It is the
most complex form of business organization because there are
several legal requirements that must be complied first before it
can commence its business operation.
TYPES OF BUSINESS
 Business entities may engage in any of the following
types of business:
 Service Business – renders services to customers or

clients for a fee.
Examples are as follows:
public transport companies medical or health clinics
beauty parlors event coordinators
security agencies law offices
repair shops accounting firms
laundry shops advertising firms
schools
TYPES OF BUSINESS
 Merchandising Business or Trading – buys goods or
commodities and sells them at a profit.
grocery stores hardware stores
supermarkets drugstores
car dealers appliance stores
 Manufacturing Business – makes finished goods from
raw materials or unassembled parts. It produces the
goods it sells.
shoe factories car assembler
food processing plants
SPECIALIZED ACCOUNTING
FIELDS
 Certified Public Accountants (CPA) are those who
have met the required education, experience and have
passed the CPA Licensure examination
A. Public Accounting – accountants and their staff render
services for a fee. The services rendered by CPAs in public
practice include:
 Auditing – involves the independent examination of financial
statements for the purpose of expressing an opinion on the
fairness of the said statements prepared by the company under
audit.
 Tax Services – CPAs who specialized in tax accounting
prepare income tax returns and advise clients on tax matters.
 Management Advisory Services – involve providing services
to clients on matters relating to the design and maintenance of
a company’s accounting system, budgeting, cost accounting,
production, organizational planning and other business matters.
THE GENERALLY ACCEPTED
ACCOUNTING PRINCIPLE
 GAAP defines what is accepted accounting practice and
they are like laws that must be followed in financial
reporting.
 GAAP encompasses the conventions, rules, procedures,
practice and standards followed in the accumulation,
preparation and presentation of accounting data in the
financial statements.
 The Financial Reporting Standards (FRSC) is the
accounting standard setting body created by the
Professional Regulation Commission (PRC) upon
recommendation of the Board of Accountancy (BOA).
 The FRSC aims to develop a single set of high quality,
understandable and enforceable accounting standards
that require high quality, transparent and comparable
information in financial statements.
THE GENERALLY ACCEPTED
ACCOUNTING PRINCIPLE
Some Generally Accepted Accounting Principles are:
 Business Entity Concept – the business entity is
treated as separate and distinct from its owner/s and
from other business units.
 Going Concern or continuity assumption – this
assumes that unless there is evidence to the contrary,
the business entity will continue to operate for an
indefinite period.
 Time Period Assumption – this requires that the
indefinite life of the business be divided into time periods
or accounting periods for the purpose of preparing
financial reports on the performance and financial
position of the business.
 Unit of measurement assumption – this specifies that
accounting should measure and report the results of a business’
economic activities in terms of a monetary unit such as the
Philippine Peso.
 Matching Principle – relates to the expense recognition
principle which requires that costs and expenses incurred in
generating the revenue should be properly matched against the
related revenue in determining the net income or net loss for the
period.
 Accrual Basis – requires that revenue or income should
be recognized when earned regardless of when
collection is received; and expense should be
recognized when incurred regardless of when payment
is made.
THE BASIC FINANCIAL
STATEMENTS
 Financial Statements are the end product of the accounting process.
 The five basic financial statements consist of the following:
1) Statement of Profit and Loss – shows the summary of the company’s
revenue and expenses for the given period. It is also known as Income
Statement.
2) Statement of Financial Position – shows the list of a company’s asset,
liabilities and owner’s equity as of a specific date, usually at the close of
the last day of a month or a year. It is also known as Balance Sheet.
3) Statement of Changes in Owner’s Equity – the summary of changes
in the owner’s equity that have occurred during a specific period of time,
such as a month or a year.
4) Statement of Cash Flows – provides information about the cash
receipts and cash payments of an entity for a given period of time.
5) Notes to the Financial Statements – to make the financial statements
more useful and meaningful to those who might have an interest in the
business, these notes are added as required to be prepared by
companies.
QUALITATIVE CHARACTERISTICS OF
FINANCIAL STATEMENTS
The fundamental qualitative characteristics of financial statements

consists of the attributes or qualities that make information provided in the
financial statements useful to users. These are:
 Relevance – Information has the quality of relevance when it would
influence a decision by helping users form predictions about the outcome
of past, present and future events, or confirm and correct prior
expectations.
 Faithful Representation – to be useful, financial information must not
only be relevant, it must also represent faithfully the phenomena it
purports to represent. This fundamental characteristic seeks to maximize
the underlying characteristics of the following:
 Completeness – a complete depiction includes all information necessary for a
user to understand what is being depicted, including all necessary descriptions
and explanations.
 Neutrality – financial information should be free from bias and is not slanted,
weighted, emphasized, de-emphasized or otherwise manipulated.
 Freedom from error – No errors or omissions in the description of the

phenomenon, and the process used to produce the reported information has
been selected and applied with no errors in the process.
QUALITATIVE CHARACTERISTICS OF
FINANCIAL STATEMENTS
The enhancing qualitative characteristics of financial statements

enhance the usefulness of information that is relevant and faithfully
represented. These are:
 Comparability – means the ability to bring together for the purpose of
noting points of likeness and differences. Information about a reporting
entity is more useful if it can be compared with similar information about
other entities and with similar information about the same entity for
another period or another date.
 Verifiability – means that different knowledgeable and independent
observers could reach consensus, although not necessarily complete
agreement, that a particular depiction is a faithful representation.
 Timeliness – information is available to decision-makers in time to be
capable of influencing their decisions.
 Understandability – information provided in the financial statements
must be presented in a form and expressed in terminology that a user
understands. Financial reports are prepared for users who have
reasonable knowledge of business and economic activities and who
review and analyze the information with diligence.
THE USERS OF FINANCIAL
INFORMATION
 Management – for planning and controlling the operation of the
business.
 Creditors and suppliers – in order to evaluate a borrower’s ability to pay
and in deciding whether to extend credit to a debtor.
 Owner/s of the firm – need to know if the business is operating at a
profit or loss.
 Investors – to determine if their investment is profitable and safe and in
deciding whether to invest in the business or not. Also, whether they
should buy, hold or sell their shares of stocks.
 Government and their agencies – require financial information to
regulate the activities of the enterprise, determine taxation policies and
as basis for national income statistics.
 Customers – use financial statements as basis for evaluating the
possibility of price changes and identifying other sources of cheaper
services and commodities.
 Employees – interested in information about the stability and profitability
of their employers.
 Public – financial statements may assist the public by providing
information about the trends and recent developments in the prosperity of
the enterprise and the range of its activities.
THE ELEMENTS OF FINANCIAL
STATEMENTS
The elements of financial statements also known as the five (5) basic
classifications of accounts are as follows:
1. ASSETS – resources controlled by the enterprise as a result of past
transactions and events and from which future economic benefits are
expected to flow to the enterprise.
2. LIABILITIES – defined as present obligations of an enterprise arising
from past transactions or events, the settlement of which is expected to
result in an outflow from the enterprise of resources embodying
economic benefits.
3. CAPITAL or OWNER’S EQUITY – represents the equity or claim of the
owner on the assets of the business.
4. REVENUE or INCOME – the gross inflow of economic benefits during
the period in the form of inflows or enhancements on assets or decrease
in liabilities that result in increase in equity, other than those relating to
contributions from the owner or owners.
5. EXPENSES – the gross outflow of economic benefits during the period
in the course of ordinary activities when these outflows result in
decrease in equity other than those relating to distribution to owners.
ASSETS
 Cash is any medium of exchange that a bank will accept at face value. It includes
coins and currencies, checks, money orders and bank drafts.
 Accounts Receivable are claims against debtors or customers arising from services
rendered on account and sale of merchandise on account.
 Notes Receivable are claims supported by promissory note.
 Merchandise Inventory are goods on hand and are available for sale.
 Office supplies/Store Supplies are supplies being used by the business.
 Prepaid Expenses are expenses paid by the business in advance.
 Office/Store Equipment includes computers, air-conditioning units, electric fans,

freezers, refrigerators, display cabinets, etc.
 Furniture and Fixtures includes office tables, chairs, filing cabinets, etc.
 Intangible Asset is an identifiable non-monetary asset without physical substance.
 Franchise is a right granted by one party (called franchisor) to another party (called
franchisee) for a specified period.
 Copyright is an exclusive right or protection granted to an author for literary, musical

or artistic work.
 Patent is an exclusive legal right granted by the government for an invention to

enable its holder to manufacture, sell and control an item or process.
 Trademarks are words, names, symbols, or other devices used in trade to indicate
the source of a product and to distinguish it from the products of others.
 Computer Software or just software is a general term primarily used for digitally
stored data such as computer programs and other kinds of information read and
written by computers.
LIABILITIES
 Accounts Payable are amounts due to creditors for assets acquired on
accounts.
 Notes Payable are amounts due to creditors evidenced by written
promise to pay.
 Mortgage Payable are long term debts secured by a collateral.
 Salaries Payable are unpaid salaries of employees at the end of an
accounting period.
 Interest Payable are interest due on borrowed funds.
 Utilities Payable examples are unpaid electric and water bills.
 Unearned Revenue is revenue collected by the business in advance
CAPITAL/OWNER’S EQUITY
 Owner’s Capital is used to record the original and additional
investments of the owner in the business entity. It is increased by the
amount of profit earned during the year or is decreased by a loss.
 Owner’s Drawing/Withdrawal are cash or other asset withdrawn or
taken by the owner from the business for personal use.
 Income Summary is a temporary account used at the end of the
accounting period to close income and expenses.
REVENUE OR INCOME
 Service Income are revenues earned by performing services for a
customer or client; for example, accounting services by a CPA firm,
laundry services by a laundry shop.
 Commonly used revenue accounts are:
Sales Interest Income Service Revenue
Fees Earned Professional Fees Subscription Revenue
Rent Income Commissions Earned
EXPENSES
 Salaries or Wages Expense includes all payments as a result of an
employer-employee relationship such as salaries or wages, 13th moth
pay, cost of living allowances and other related benefits.
 Utilities Expense is related to use of telecommunications facilities,
consumption of electricity, fuel and water.
 Supplies Expense includes used supplies in the conduct of daily
business.
 Insurance Expense are portion of premiums paid on insurance coverage
which has expired.
 Depreciation Expense is the portion of the cost of a tangible asset
allocated or charged as expense during an accounting period.
 Interest Expense is related to use of borrowed funds.
Video Links
 Watch: Benefits in Learning Accounting
https://youtu.be/sRuWd5TL5_I?list=PL5zKSeS09l339nB6ujJ
PQ9Rsv99_b-aTb
 Watch for Accrual Basis of Accounting
https://youtu.be/C8UuX75ZarU?list=PL5zKSeS09l339nB6ujJ
PQ9Rsv99_b-aTb
 Watch: What are Assets?
https://youtu.be/rOsuqG_J0t4?list=PL5zKSeS09l339nB6ujJP
Q9Rsv99_b-aTb
 Watch: What are Liabilities?
https://youtu.be/fKRwT10Sszc?list=PL5zKSeS09l339nB6ujJP
Q9Rsv99_b-aTb
 Watch: What is Equity?
https://youtu.be/Fr5oHEYrT2A?list=PL5zKSeS09l339nB6ujJP
Q9Rsv99_b-aTb
ASSIGNMENTS/QUIZZES/EXAM:
GENERAL INSTRUCTIONS:
 Answers on assigned exercises in this module should be
submitted in Google Classroom.
 Click the posted assignment in Google Classroom then attach
your answers.
 It can be a picture of the answers written on a sheet of paper or
you may type your answers on the spreadsheet provided.
 Once your answers are attached, do not forget to click the
TURN IN button.
 Once turned in, your work will be graded and you may view
your grade in the Google Classroom.
 You may submit your work on or before the due date and time
as stated in our schedule and in the posted assignment in the
Classroom.
 Quizzes will be posted in Google Classroom, to be conducted
through Google Forms, with time limit. Follow the further
instructions and schedules posted in Google Classroom.
M1 – Exercise 1
M1 – Exercise 2
M1 – Exercise 2
M1 – Exercise 3
M1 – Exercise 4
REFERENCES:
 A. Baguio, M. Balbarino, E. Dela Cruz, M. Doquenia, L. Espino, J. Fonte,

M. Hernane, M. Orfiano, L. Pilapil, & C. Vedasto. Principles of
Accounting. 2014 Edition
 W. Ballada & S. Ballada. Basic Accounting Made Easy. 17th Edition
 Pictures were taken or copied from Google Images.
 Video links were taken/copied from Youtube channel Accounting Stuff.
(MODULE 2 – Analyzing Business

Transactions)
Subject Overview
business.
Accounting.
Objectives

 Analyze business transaction and its effects to the
elements of financial statements.
 Know the source documents used as basis for recording
business transactions.
 Understand the concept of increase/decrease in an
account.
 Discuss the basic accounting equation
 Analyze the effects of business transactions to the
accounting equation.
ACCOUNTING INFORMATION SYSTEM
 Businesses cope with heavy loads in two ways:
computerization and specialization.
 We computerize to do the accounting faster and make it
more reliable.
 Specialization combines similar transactions to speed the
process.
FEATURES OF AN EFFECTIVE ACCOUNTING SYSTEM
A. Control - Managers must control operations, or the company
will lose focus.
B. Compatibility - A compatible system is one that works
smoothly with the company's personnel and organizational
structure.
C. Flexibility - A well-designed system is flexible if it
accommodates changes in the organization.
D. Good cost/benefit relationship - Managers want a system
that gives the most benefit at least cost.
COMPONENTS OF A
COMPUTERIZED SYSTEM
1) Hardware is the electronic equipment that includes computers, disk
drives, monitors, printers and the network that connects them.
2) Software is the set of programs that drives the computer.
Accounting software reads, edits (alter), and stores transaction data.
It also generates the report managers use to run the business.
3) Company personnel. Good personnel are critical to success.
Employees must be both competent and honest.
MANUAL AND COMPUTER-BASED SYSTEMS: A
COMPARISON
 The differences are largely a question of whether specific
procedures require human attention or whether they can be
performed automatically by a machine.
 Computers can be programmed to perform mechanical tasks with
great speed and accuracy.
 However, computers cannot think. Therefore, they are not able to
analyze business transactions. Without human guidance, computers
cannot determine which events should be recorded in accounting
records or which account should be debited or credited to properly
record an event.
 In manual systems, data are entered in the form of handwritten
journals.
 In a computer-based system, data are entered through a
keyboard, an optical scanner or any other input device.
 The data may be entered in a database, instead of a journal.
 A database is a warehouse of information stored within a computer
system. The purpose of the data base is to allow the information that
will be used for several different purposes to be entered into the
computer system only once.
MANUAL AND COMPUTER-BASED SYSTEMS: A
COMPARISON
 Computers can eliminate the need of copying and rearranging

information which already had been entered into the system. They
can also perform mathematical computations. In short, computers
eliminate most of the “paper work” involved in the operation of the
accounting system.
 However, they do not eliminate the need for accounting personnel
who can analyze business transactions and explain these events in
conformity with the generally accepted accounting principles.
 The manual process is the oldest and most traditional form of
accounting system. Manual process constitutes the physical events,
resources and personnel that characterize the business process.
Often, manual record keeping is used to teach the principles of
accounting to business students.
Merits in Studying the Manual
Process Model
 First, learning manual system helps establish an important

link between accounting information course and other
accounting courses.
 Second, the logic of the business process is more easily
understood when it is not shrouded by technology. Once
students understand what tasks to be performed, they are
better equipped to explore different and better ways of
performing these tasks through technology.
 Finally, manual procedures facilitate understanding internal
control activities, including segregation functions,
supervision, independent verification, audit trails, and access
controls.
BUSINESS TRANSACTIONS
 A business transaction is an event that has some effect on
the resources of a firm or on the source of the firm's assets.
It is also an activity that involves exchange of values.
 When the transaction is between a business and an outsider,
it is an external transaction. An example of it is a purchase
of office supplies from National Bookstore.
 Transactions that happen within the business that do not
involve outsiders are called internal transactions. An
example of it, is office supplies being used daily in the
operations of the business.
 The evidence of transaction that describes the essential
facts of the transaction is the source document.
 Examples of source documents are receipts of cash paid
or received, checks written or received, bills sent to
customer for services performed or bills received from
supplier for items purchased, cash register tapes, sales
tickets and notes given or received.
ANALYSING BUSINESS
TRANSACTIONS
 In order to generate financial reports which will be used for making
decisions, business transactions have to be analyzed, recorded and
summarized In analyzing transactions, the suggested procedures
are as follows:
ILLUSTRATION: Analyzing Business
Transactions
Transactions
Transactions
Transactions
Transactions
ACCOUNTING EQUATION
 The accounting equation is considered to be the foundation of the
double-entry accounting system. (Investopedia)
 Based on this double-entry system, the accounting equation
ensures that the balance sheet remains “balanced,” and each
entry made on the debit side should have a corresponding entry
(or coverage) on the credit side. (Investopedia)
ACCOUNTING EQUATION
 The left side of the equation shows the assets while the
right side show who provide the funds or resources
needed by the business.
 The amount and the composition of the assets, liabilities,
and owner's equity change as the business engages in
economic activities.
 Equity means the rights to properties.
 There are two equities: the equity of the creditors which
refers to liabilities and the equity of the owner or owners
referring to capital.
 In the accounting equation, liabilities is placed ahead of
owner's equity because creditors have preferential rights
on the assets of the business.
ILLUSTRATION: Effects of Transactions in
Accounting Equation
Leopoldo Medina decided to establish a sole proprietorship business and named
it as Medina Graphics Design. The worksheet that follows shows the first
transaction of the Medina Graphics Design. The dates are enclosed in
parentheses. During March 2012, the first month of operations, various financial
transactions took place. These transactions are described and analyzed as
follows:
Accounting Equation
Accounting Equation
Accounting Equation
Accounting Equation
Accounting Equation
Accounting Equation
Video Links
 Watch: Accounting Equation https://youtu.be/56xscQ4viWE
 Watch: Transaction Analysis
https://study.com/academy/lesson/using-the-accounting-
equation-analyzing-business-transactions.html
 Watch: Basic Accounting- Financial Transaction Worksheet
(Part 1)
https://youtu.be/fQ0P17eUR9M?list=RDCMUC9EwVTy54-
mxdH1e-aF4ixQ
 Watch: Basic Accounting- Financial Transaction Worksheet
(Part 2)
https://youtu.be/E50Tj5s6LIc?list=RDCMUC9EwVTy54-
mxdH1e-aF4ixQ
 Video Lectures by your professor on the Problem
Illustrations of this module will be uploaded in Youtube and
will be posted in Google Classroom and Messenger Group
Chat.
your answers.
TURN IN button.
Classroom.
M2-Exercises 1:
M2-Exercises 2:
M2-Exercises 3:
M2-Problem 1:
M2-Problem 2:
M2-Problem 3:
M2-Problem 3:
REFERENCES:

 Some definition of accounting terms were taken from Investopedia
website. https://www.investopedia.com
 Video links were taken/copied from Youtube channel Accounting Stuff
and Filipino Accounting Tutorial and Study.Com website.
(MODULE 3 – The
Accounting Process of a
Service Business)
Subject Overview
business.
Accounting.
Objectives
 Enumerate the steps in the accounting cycle
 State the rules of debit and credit and the normal balances
of accounts.
 Apply the rules of debit and credit in recording business
transactions.
 Record business transactions under the double-entry
system.
 Post transactions from journal to the ledger.
 Prepare a trial balance and know the purposes it serves.
THE ACCOUNTING CYCLE
STEP 1: Analyze
business
transactions
STEP 11:
STEP 2:
Reversing
Journalizing
Entries
STEP 10: Post-

closing Trial STEP 3: Posting
Balance
STEP 9:
Journalizing & STEP 4: Trial
Posting of Balance
Closing Entries
STEP 8:
STEP 5:
Journalizing &
Adjusting
Posting of
Entries
Adjusting Entries
STEP 7:
STEP 6:
Financial
Worksheet
Statements
 Journalizing – is the process of recording business transactions in
the book of original entry called journal.
 Double-entry bookkeeping – is a method of recording business
transactions which recognizes the dual effect of a transaction. This
means that, for every value received there is a corresponding value
parted with or given up.
 In double-entry bookkeeping, each transaction is recorded by
debiting and crediting accounts. For every debit entry there is a
corresponding credit entry with equal amount.
 An account is a record of each asset, liability, owner's equity,
revenue and expense items in which the effects of business
transactions are recorded. Each element of the financial statements
is given specific account title.
 A T-account is a very useful tool that is used for illustrations,
analyzing transactions and in problem solving. It is called T-account
because it resembles big letter T.
What is Debit and Credit?
 The words debit and credit came from the Latin words debere (meaning "to
owe") and credere (meaning to trust or believe").
 Debit is abbreviated as Dr. and credit as Cr.
 In accounting, the increase or decrease in an account is being made by
means of debit and credit.
 When an account is debited, it does not mean that such account is increased,
because debit may increase or decrease the balance of an account.
 Likewise, when an account is credited it does not mean that such account is
decreased, because credit may also increase or decrease the balance of an
account.
 To debit an account also mean to charge the account.
RULES OF DEBIT AND CREDIT
ILLUSTRATION: Debit & Credit
The accounts affected and whether it is to be debited or credited are as follows:
June 1 --Cash of P 200,000 was received from Atty. Flores, the owner as his
initial investment in his law firm.
Debit - Cash Credit - Alex Flores, Capital
 The receipt of cash by the company will increase its asset cash, therefore, cash is to
be debited. Alex Flores, Capital is to be credited to record the increase in the capital
account of the business.
2 - Purchased office supplies for cash, P 5,000.

Debit - Office Supplies Credit - Cash
 The purchase of office supplies will increase the asset office supplies, so it is to be
debited. Cash is to be credited because the payment will cause cash to decrease.
3 - Purchased office equipment worth P 50,000. Paid P 10,000 cash as

down payment and signed a promissory note for the balance.
Debit - Office Equipment Credit - Cash and Notes Payable
 The asset office equipment will increase so it has to be debited. The office equipment
was not paid in full so the company will have a liability for the unpaid balance. Since
the liability is supported by a promissory note, the account to be credited is Notes
Payable. Cash is also to be credited because the down payment will cause cash to
decrease.
4 - Issued check in payment for the promissory note issued, P 40,000
Debit - Notes Payable Credit - Cash
 The payment of a liability will cause liability to decrease. So, the liability account,
Notes Payable is to be debited. Every time the company pay or disburse cash, the
account Cash is credited to reflect the decrease in cash
5 - Received P 50,000 cash from clients for services rendered for cash.
Debit - Cash Credit - Professional Fees
 The receipt of cash by the business is always recorded by debiting the account cash,
whereas, the earning of revenue is always recorded by crediting the revenue account.
6 - Billed a client for services rendered on account, P 30,000.

Debit - Accounts Receivable Credit - Professional Fees
 The company will have a receivable from the client to whom services were rendered
on account. Therefore, Accounts Receivable is to be debited. Again, for a service
business, revenue is considered earned or realized once services have been
rendered whether for cash or on account. That's why, the revenue account
Professional Fees is to be credited.
7 - Received payment from the client to whom services were previously

rendered on account.
Debit - Cash Credit - Accounts Receivable
 The collection of a receivable will decrease the receivable account, so it is to be
credited.
8- The owner withdrew P 10,000 cash from the business for personal
use.
Debit - Alex Flores, Drawing Credit - Cash
 Cash taken by the owner for personal use is to be charged to the owner's drawing
account.
9- Paid office rent for the month, P 8,000.

Debit - Rent Expense Credit - Cash
 The payment for rental will increase the balance of the Rent Expense account, so it is
to be debited.
NOTE: For easier understanding of the debit and credit entries, additional
hints are given:
1. If there are only two accounts affected in the transaction, one is to be debited
and the other one is to be credited. The two accounts cannot be both debited
or credited.
2. Apply the concept of value received and value given away.
In the transaction, purchased office supplies for cash, the value received is
Office Supplies, so it is the account to be debited. The value given away is Cash,
so it is the account to be credited.
PROCEDURES IN RECORDING BUSINESS
TRANSACIONS IN A 2-COLUMN JOURNAL
Following are the steps or procedures in journalizing transactions using a 2-column
journal. Let us assume a manual accounting system is applied.
a. Date column
 Write the year in small figures on top of the first line of the date column.
The month is written below the year on the first line.
 The day is written on the first line of the 2nd column.
 The year and the month are not written again on the same page unless
the month changes.
 The day of each transaction is written regardless of the number of
transactions that occurred on the same date.
b. Description column
 The title of the account debited is written on the first line at the extreme left of the
description column.
 The title of the account credited is written on the second line indented by
about 12 inch from the debit entry.
 A brief description of the transaction is written below the entry and
indented again by about 2 inch from the credit entry. A complete journal
entry should have an explanation or description of the nature of the
transaction.
PROCEDURES IN RECORDING BUSINESS
TRANSACIONS IN A 2-COLUMN JOURNAL
c. Posting Reference (P/R) column

 This column is filled up only during the posting stage. The account
number of the account debited and credited are written on this column
after they are posted to the ledger.
d. Debit column
 The amount of the account debited is written on this column.
Reminder: Do not put peso sign, comma, and decimal point when using
columnar sheets. When there are no centavos involved, a dash is placed in the
centavo column.
e. Credit column
 The amount of the account credited is written on this column.
NOTE: Always leave one space after each journal entry. Write the name of
the book as in Journal or General Journal at the upper portion of every page. Put a
page number on each sheet of journal.
The third entry is a compound journal entry because there are more than
two accounts involved. A compound journal entry is one where in there are two
or more accounts debited and or two or more accounts credited. The amount of the
debits should always equal the amount of the credits.
The first and second entries are simple journal entries since there is only
one debit and one credit in the entry.
 A group of accounts is called a ledger. The ledger provides a summary of
transactions for an accounting period.
 Each account has an individual record in the general ledger wherein the
effects of business transactions are summarized.
 The general ledger contains the entire set of accounts used by a business
which are arranged in the following order: Assets, Liabilities, Capital,
Revenue, and Expense accounts.
 If journal is called the book of original entry, ledger is called the book of final
entry.
 Posting is the process of transferring the entries from the journal to the
accounts in the ledger.
 If an account is debited in the journal, it will also be posted on the debit side of
the account in the ledger. A credit entry in the journal is also posted in the
credit side of the account in the ledger.
The steps in posting are as follows:

1) Locate in the ledger the debit and credit accounts in the journal entry.
2) Enter the date of the transaction, and in the posting reference column of
the ledger, the page of the journal from which the entry originates.
3) Record the debit and credit amounts in their respective accounts as they
appear in the journal.
4) Enter in the posting reference column of the journal the account number
to which the amount was posted.
Posting Illustration
DETERMINING THE ACCOUNT
BALANCE
 After posting the journal entries to the ledger, the amounts of the debit and
credit columns of the accounts are totaled and the difference between the
amount of debit and credit totals is determined.
 This process is called pencil footing. The account balance is the difference
between the total debits and the total credits of an account.
 If the total of the debits is greater than the credits, the account will have a debit
balance.
Example: Debit Total P 20,000
Credit Total 15,000
Balance P 5,000 debit
The debit balance is written on the debit side of the account. If the credit total
is greater than the debit total, the account will have a credit balance. That is,
Credit Total P 20,000
Debit Total 15,000
Balance P 5,000 credit
The credit balance is written on the credit side of the account.

PREPARING THE TRIAL BALANCE
 A trial balance is a summary listing of the account titles and the balance of each account.
 It is prepared to test the equality of the debit and credit balances of the accounts in the
ledger.
 However, even if the trial balance is equal, it does not provide a complete proof of the
accuracy of the accounting records because there are errors which do not affect the
equality of the trial balance.
 But then, if the trial balance does not balance it is an indication that error has been
committed.
Steps in Preparing a Trial Balance:

1. Write the heading of the trial balance as follows:
Name of the business or proprietor
Trial Balance
Date
2. List the accounts with corresponding balances. Accounts should be arranged according to
financial statement appearance.
3. Write down the account balance on either the debit or credit column of the trial balance. If the
account balance is debit, it is written on the debit column. If the account balance is credit, it is
placed on the credit column of the trial balance.
Note: The balances of accounts are taken from the ledger.
4. Add the debit and credit columns of the trial balance. Normally, the debit and credit totals are
equal.
5. Double Rule or draw a double line under the totals of both columns.
.
CHART OF ACCOUNTS
 A chart of accounts is a list of all the accounts of the business and their corresponding
account numbers.
 Asset accounts are usually numbered starting with 1, liabilities starting with 2, capital
starting with 3, revenue starting with 4, and expenses starting with 5.
 This list of account titles are prepared beforehand to guide bookkeepers and accountants
as to what specific account titles are to be used in recording transactions.
SAMPLE CHART
OF ACCOUNTS
COMPREHENSIVE ILLUSTRATION: Posting to Trial
Balance Preparation
Balance Preparation
Balance Preparation
Balance Preparation
Balance Preparation
Balance Preparation
Balance Preparation
Balance Preparation
What to do when the trial balance does not
balance?
One way to discover error in the ledger is to prepare a trial balance. When the trial
balance is out of balance, it might be due to any of the following reasons.
1. Columns of the trial balance may be incorrectly added.
2. Account balance might have been entered in the wrong column. That is, a debit
balance erroneously listed in the credit column or vice versa. Go over with the
listed balances and check whether they are all in their normal balances.
3. Amounts from the ledger may be incorrectly entered on the trial balance or may
be omitted in the trial balance.
4. While posting, a wrong amount might have been posted to an account.
5. While posting, a debit is erroneously posted to the credit or vice versa.
The above errors will result to an unequal trial balance. However, there are errors
which do not affect the equality of the trial balance. Some of these errors are:
1. Failure to journalize a transaction.
2. Failure to post a transaction.
3. Recording the same transaction more than once.
4. Posting part of a transaction correctly as a debit or credit but to the wrong
account title. For example, a debit to supplies has been posted to the account
equipment. A credit to accounts payable has been credited to notes payable.
5. Recording a transaction whose debit and credit amounts are erroneous. For
instance, the amount of P 1,000 has been erroneously debited and credited for P 100.
This error is called slide. In a slide, the number is erroneously moved one or more
spaces to the right or left like writing P 352.00 as P 35.20 or P 3,520.
The other common error in writing an amount is transposition.
Transposition occurs when the order of the digits is changed mistakenly, or the digits
are erroneously rearranged like writing P 352 as P 532 or P 523.
Procedures in locating errors (When the trial balance does not balance)
 Errors usually arise from incorrect computations, journalizing and postings.
 What should be done if the trial balance totals do not balance? First, determine the
difference between the debit and credit totals of the trial balance columns.
 After determining the difference, the following steps can be made:
1. If the difference of the trial balance totals is a matter of P1, P10, P 100, or P
1,000, thus is an error in addition, therefore, re-add the trial balance columns
and re-compute the ledger account balances.
2. If the difference of the trial balance totals is divisible by two, look for a balance
equal to one half of the amount erroneously entered in the wrong column of the
trial balance.
3. If the difference of the trial balance totals is divisible by three or nine, a
transposition or a slide error may exist. If either of such error exists, retrace the
account balances on the trial balance to determine if they are transferred
incorrectly from the ledger.
4. If the difference of the trial balance column is not divisible by two or nine,
let us say P 265. This may result to the omission of an account balance in the trial
balance or omission in the posting a journal entry. Compare the balances in the
trial balance with that of the ledger and the postings in the ledger with the entry in
the journal.
5. If there was no error in transferring the ledger balances in the trial balance,
re-compute the account balances to determine whether error exists in
balance determination.
6. If the ledger balances are correct, pencil foot again or re-add the debit and
credit entries to each of the accounts in the ledger.
7. If there was no error in mathematical operation, the last resort is to work
back.
Video Links
 Watch: Accounting (A Basic Guide)
https://youtu.be/yYX4bvQSqbo?list=PL5zKSeS09l339nB6ujJPQ9Rsv99_b
-aTb
 Watch: Accounting Equation https://youtu.be/56xscQ4viWE
 Watch: Debits & Credits Explained
https://youtu.be/VhwZ9t2b3Zk?list=PL5zKSeS09l339nB6ujJPQ9Rsv99_b
-aTb
 Watch: Hack to Remember Debits & Credits https://youtu.be/5Y3wjH-
6gHk
 Watch: Debit and Credit Practice Questions and Solutions
https://youtu.be/yCOZ7aylC0c
 Watch: How Journal Entries Work? https://youtu.be/Y-_Q3rANyxU
 Watch: The Trial Balance Explained https://youtu.be/3_PfoTzSCQE
 Video Lectures by your professor on illustration problems of this
module will be uploaded in Youtube and will be posted in Google
Classroom and Messenger Group Chat.
your answers.
TURN IN button.
Classroom.
 Quizzes/Midterm Examinations will be posted in Google
Classroom, to be conducted through Google Forms, with time
limit. Follow the further instructions and schedules posted in
Google Classroom.
M3 - Exercises 1
M3 - Exercises 2
M3 – Exercises 3
M3 – Problem 1
M3 – Problem 2
M3 – Problem 2
REFERENCES:

(MODULE 4 – The
Adjusting Process)
Subject Overview
business.
Accounting.
Objectives
 Understand the different types of adjustments prepared at the end
of each accounting period.
 Prepare the adjusting entries and understand fully well the
importance of the adjusting entries on the company's financial
statements.
 Compare the accrual and cash basis of accounting.
 Explain Revenue Recognition Principle, Period of time Principle
and the Matching Principle.
 Distinguish deferrals from accruals.
 Know the two methods of recording prepayments (the asset
method and the expense method).
 Learn the two methods of recording income received in advance.
CASH BASIS OF ACCOUNTING
 The cash basis of accounting recognizes revenue when cash is
received; and recognizes expenses when cash is paid.
For example, under the cash basis, services rendered in year 2019
amounting to P50,000, for which cash is collected in 2020 would be treated as
revenue in year 2020. Similarly, under the cash basis, expenses of P30,000
incurred in 2019 for which cash is disbursed in 2020 are treated as 2020 expense.
Because of these improper assignments of revenues and expenses,
the cash basis of accounting is generally considered unacceptable. There are no
needs for adjusting entries under the cash basis of accounting.
 Income Statement Report
2019 2020
Revenue 0 50,000
Expenses 0 30,000
Net Income 0 20,000
ACCRUAL BASIS OF ACCOUNTING
 The accrual basis of accounting, already discussed in chapter
one, recognizes revenues when sales are made or services are
performed, regardless of when cash is received. It also recognizes
expenses as incurred, whether or not cash is paid out.
For instance, when services are performed for a customer on account
for P50,000 in 2019, the revenue is recorded at that time even though cash has
not been received. In 2020, when the company received cash no revenue is
recorded because it has already been recorded. Similarly, under the accrual
basis, expenses of P30,000 incurred in 2019 for which cash is disbursed in 2020
are treated as 2019 expense.
Under the accrual basis, adjusting entries are prepared to bring the
accounts up-to-date for economic activities that have taken place but have not
been recorded.
 Income Statement Report
2019 2020
Revenue 50,000 0
Expenses 30,000 0
Net Income 20,000 0
 Accounting period is the period of time, normally one month, one
quarter, or one year into which an entity's life is arbitrarily divided for
financial statement purposes.
 The length of the company's accounting period depends upon how
frequent managers, investors, and other interested people require
information about the company's performance.
 Every business prepares annual financial statements.
 THE ADJUSTING PROCESS

 After the preparation of the trial balance, the next step in the accounting
cycle is the compilation of data for adjustments.
 Compiling adjusting data is the process of gathering and putting together
data necessary to update the balances of some accounts.
 THE NEED FOR ADJUSTING ENTRIES

 Adjusting Entries are entries prepared at the end of an accounting
period to update or adjust the balances of accounts. It is very
important that adjustments be recorded correctly so that the
company's profit for the period be measured properly and its related
assets and liabilities be brought to correct balances for financial
statements.
 All adjusting entries affect at least one income statement account and
one balance sheet account. Thus, an adjusting entry will always involve
a revenue or an expense account and an asset or a liability account.
Adjusting entries ensure the application of the accrual basis of
accounting and the matching principle.
TYPES OF ADJUSTING ENTRIES
 Adjusting entries are generally prepared for the

following items:
1. Accrued Expenses
2. Accrued Revenue
3. Prepaid Expenses or Deferred Expenses
4. Unearned Revenues or Deferred Revenues
5. Depreciation of Property, Plant and Equipment
6. Uncollectible accounts or Bad debts
7. Merchandise Inventory
Adjusting Entries for Accrued Expenses or
Accrued Liabilities
 Accrued Expenses (a liability account) - are expenses already incurred but not yet
paid. These are also called accrued liabilities or accrued payable.
 Examples of accrued expenses are as follows:
Taxes Payable Interest Payable Utilities Payable

Salaries/Wages Payable Rent Payable Advertising Payable
ILLUSTRATION:
Failure to prepare the adjusting entry above, will result to taxes expense for the month of
September to be understated, resulting to an overstatement in the net income for the month of
September. On the other hand, the taxes payable will not be reflected in the balance sheet
thereby understating the total liabilities of the company at September 30, 2015.
Accrued Liabilities
Since the three days

accrued salaries as of March 31,
pertains to salaries for the month of
March, it has to be included in the
salaries expense for the month of March
by preparing an adjusting entry.
The income statement
prepared by the company for the month
of March would show Salaries Expense
of P 230,000, the salaries which had
been paid amounting to P 200,000 as
shown in the T-account plus the accrued
salaries of P 30,000.
Note: The adjusting entry for an accrued

expense always involves a debit to the
appropriate expense account and a credit to
a liability account.
Accrued Liabilities
The Interest Receivable

account is interest earned but not yet
collected; it is reported as a current
asset in the balance sheet. Interest
income is reported in the income
statement.
The Interest Payable account
is interest expense but not yet paid; it
is reported as a current liability in the
balance sheet.. Interest expense will
be reported in the income statement.
Adjusting Entries for Accrued Revenue or
Accrued Assets
Accrued Revenue (an asset account) -- is revenue already earned by
the business but not yet received or collected at the end of the accounting period.
Normally, accrued revenue is not recorded yet since it has not been received.
Adjusting Entries for Prepaid Expense or
Deferred Expenses
 Prepaid Expenses are expenses paid in advance. Since the benefits will be
received in the future, prepaid expenses are treated as asset.
 They are expected to become expenses through the passage of time or through
use and consumption.
 Prepaid expense is the exact opposite of accrued expense.
 Examples of prepaid expense include Supplies, Prepaid Rent, Prepaid Insurance,
and Prepaid Interest.
The adjusting entries for prepaid expenses depend upon the method used to record
the prepayment. The two methods of recording prepaid expenses are the Asset
Method and the Expense Method.
Asset Method - Under this method, the account debited upon payment is an asset
account. Upon adjustment, an expense account is debited with a corresponding credit
to an asset account.
Expense Method - the account debited upon payment is an expense account. Upon
adjustment, an asset account is debited and an expense account is credited.
A company may use either of the two methods, since they are both acceptable.
However, there must be consistency in using the method chosen.
Deferred Expenses
Deferred Expenses
Deferred Expenses
Deferred Expenses
Deferred Expenses
Adjusting Entries for Unearned Revenues or
Deferred Revenues
 Unearned revenues or Deferred Revenues (a liability account) – are

revenues collected or received in advance by the business.
 These revenues are not yet earned but already collected or received by the
business.
The adjusting entries for Unearned Revenues depend upon the method used in
recording the advance collection. The two methods of recording unearned
revenue are as follows:
Liability Method - Under this method, the account credited upon receipt of
cash is a liability account. Upon adjustment, such liability account will be debited and
a revenue account is credited.
Revenue Method or Income Method - the account credited at the date of

collection is a revenue or income account. Upon adjustment, a revenue account is
debited and a liability account is credited.
A company may use any of the two methods since they are both acceptable.
However, the company must be consistent in using the method chosen.
Deferred Revenues
Deferred Revenues
Deferred Revenues
Deferred Revenues
 Failure to adjust the account Unearned Rent Revenue at the end of an accounting
period will cause misstatement of the following items:
 Unearned Rent Revenue, will be overstated
 Total liabilities, overstated
 Rent Revenue, understated
 Net Income, understated
 If the Unearned Rent Revenue is not adjusted, rent revenue will be understated
because the earned portion of the unearned rent will not be taken up as revenue.
 On the other hand, failure to adjust the account Rent Revenue at the end of an
accounting period will cause misstatement of the following items:
 Rent Revenue, will be overstated
 Net Income, overstated
 Unearned Rent Revenue, understated
 Total Liabilities, understated
 Unearned Rent Revenue will be understated because it has been taken up as
Rent Revenue.
 Rent revenue will be overstated resulting to overstatement of net income.
Deferrals and Accruals Compared
 Deferrals – refers to the postponement of the recognition of

revenue which the company has received or collected in advance
and the postponement of the recognition of expense which has been
paid in advance.
 Thus, under the concept of deferrals income received in
advance should be taken up as liability and expense paid in
advance be taken up as asset.
 Deferrals include prepaid expenses (deferred expenses) and
unearned revenues (deferred revenues).
 Accruals – refer to the recognition of expense already incurred

though not yet paid, and the recognition of revenue already earned
though not yet received.
 Generally Accepted Accounting Principles requires that
adjustments be made for accrued items such as accrued
revenues and accrued expenses.
Adjusting Entries to take up Depreciation
of Property, Plant and Equipment
 Physical resources that are owned and used by a business which are
relatively fixed or permanent in nature that have a long useful life are called
Property, Plant and Equipment.
 They are sometimes called fixed assets or plant assets. Examples include
land, building, equipment, furniture and fixtures and transportation vehicles.
 These assets help generate income for the business. Therefore, it is
important and proper that a portion of the asset cost be recorded as expense
in each accounting period.
 Since fixed assets are expected to be useful for a longer time, it is not
recorded as expense in the year it is acquired but rather it is recorded as an
asset.
 The matching principle requires that a portion of the cost of plant assets be
recorded as expense in each period of usefulness.
 The process of allocating the depreciable cost of a fixed asset over its
estimated useful life is called Depreciation Accounting.
 The accumulated amount of depreciation expense from the year of
recognition to the latest balance sheet date is referred to as accumulated
depreciation.
Adjusting Entries to take up Depreciation of
Property, Plant and Equipment
 The pro-forma adjusting entry to take up depreciation of fixed asset follows:
Depreciation Expense (name of asset) -------------XXX
Accumulated Depreciation (name of asset) -------XXX
 The amount debited to Depreciation Expense is that portion of fixed asset cost
that is charged to expense. Accumulated Depreciation is a contra-asset account.
The credit is not made directly to the fixed asset account in order to preserve
the original cost of the fixed asset.
Factors to be considered in computing depreciation (using the straight line
method):
1. Asset Cost. This includes its purchase price plus other direct costs incurred
in acquiring and bringing the asset to its intended use. Examples of these
other costs are freight cost and installation cost.
2. Estimated Residual Value. This is the estimated amount the fixed asset can
be sold at the end of its useful life. Other terms used are salvage value,
scrap value, or trade in value.
3. Estimated useful life. This may be expressed in years or number of units, or
hours that the asset can be used.
There are several methods of computing depreciation, the most common are:
1. Straight-line method 3. Declining balance method
2. Sum-of-the years digit method 4. Units of production method
Video Links
 Watch: Prepayments & Accruals
https://youtu.be/H0N7tvXuJlU?list=RDCMUCYJLdSmyKoXCbnd-
pklMn5Q
 Watch: Accrued Expense Broken Down https://youtu.be/9aZ6CCj-ies
 Watch: Accrued Revenue Made Easy https://youtu.be/7ibN25VCvFg
 Watch: How Prepaid Expenses Work https://youtu.be/RE7wrflFOGA
 Watch: Deferred Revenue Explained https://youtu.be/F1zNQ1wga7o
 Watch: Straight-line Method of Depreciation in 3 Easy Steps
https://youtu.be/iruD9KTNnNc?list=RDCMUCYJLdSmyKoXCbnd-
pklMn5Q
 Watch: Depreciation Basics! With Journals
https://youtu.be/_pas1ETbrj8
 Video Lectures by your professor on the Problem Illustrations of
this module will be uploaded in Youtube and will be posted in
Google Classroom and Messenger Group Chat.
ASSIGNMENTS/QUIZZES:
your answers.
TURN IN button.
Classroom.
M4 - Exercises 1
M4 - Exercise 2
M4 - Exercise 3
M4 – Problem 1
M4 – Problem 2
REFERENCES:

(MODULE 5 – Completion of the

Accounting Cycle)
Subject Overview
business.
Accounting.
Objectives
 Prepare a work sheet.
 Prepare financial statements from the worksheet.
 Journalize and post adjusting and closing entries.
 Prepare post-closing trial balance.
 Enumerate the steps in the accounting cycle.
THE ACCOUNTING CYCLE
 The accounting cycle is a series of steps accountants perform during
an accounting period relating to analyzing, recording, classifying,
summarizing and reporting useful financial information. Its purpose is to
generate the financial statements.
The steps in the accounting cycle are:
1) The transactions are analyzed by examining source documents.
2) The transactions are journalized.
3) The journal entries are posted to the ledger.
4) A trial balance is prepared.
5) The data needed to adjust the accounts are assembled.
6) A work sheet is prepared.
7) The financial statements are prepared.
8) The adjusting entries are journalized and posted to the ledger.
9) The closing entries are journalized and posted to the ledger.
10) A post-closing trial balance is prepared.
11) The reversing entries are journalized and posted to the ledger.
THE WORKSHEET
 The work sheet is a columnar sheet of paper used to
summarize information needed to make the adjusting and
closing entries and to prepare the financial statements.
 A work sheet is only a tool used by accountants and is
not part of the formal accounting record.
 A work sheet is used each time financial statements are
prepared, either monthly, quarterly, semi-annually or
annually.
 This chapter illustrates a ten-column worksheet that
includes sets of columns for a trial balance, (unadjusted),
adjustments, adjusted trial balance, income statement,
and balance sheet.
 Each set of columns has a debit and a credit column.
Steps in preparation of Worksheet
The steps in the preparation of the worksheet are as follows:

1. Enter the titles and balances of ledger accounts in the Trial Balance
columns.
2. Enter the adjustments in the Adjustments columns. Identify each
adjustment with letters.
3. Enter adjusted account balances in the Adjusted Trial Balance
columns.
4. Extend adjusted balances of revenue and expense accounts from
the adjusted trial balance columns to the income statement column.
5. Extend adjusted balances of assets, liabilities, and owner's equity
accounts from the Adjusted Trial Balance columns to the balance
sheet column.
6. Determine the total of the income statement and the balance sheet
columns. Enter the net income or net loss as a balancing figure in
both pairs of columns, and again compute column totals.
THE TRIAL BALANCE COLUMNS
 Copy the trial balance prepared in the trial balance column of the work sheet.
 Enter the title of each ledger account on the description column. Usually, only
those accounts with balances as of the end of the accounting period are
listed.
 Alternatively, all account titles in the chart of accounts, even those with zero
balances are listed.
THE ADJUSTMENT COLUMNS
 Adjusting entries bring the accounts up-to-date prior to preparing of financial
statements. Enter the adjustments in the Adjustments columns of the work
sheet.
 If the account is not included in the original trial balance, add the account title
below the totals of the trial balance.
 The amounts are written the debit and credit sides of the adjustment columns
placing a key letter to the left of each amount.
 This key letter facilitates the actual journalizing of i adjusting entries later.
 For example, we identify the adjustment debiting Supplies Expense and
crediting Supplies by the letter (a).
 After entering all adjusting entries in the adjustment columns, add the two
columns. The totals of the two columns should be equal if all debits and
credits are entered properly.
THE ADJUSTED TRIAL BALANCE COLUMNS
 An adjusted trial balance is the original trial balance plus or minus the
adjustments.
 If the item appears as a debit in the trial balance, and there is a credit in
the Adjustment column, subtract the two amounts and extend the
difference on the adjusted trial balance column on the side of the larger
amount.
 If the item appears as a debit in the trial balance, and the adjustment is
also a debit amount, add and extend the total on the debit side of the
adjusted trial balance.
 Add also account with credit balance in the trial balance and credit
amount in the adjustments.
 Extend all accounts having balances to the Adjusted Trial Balance
columns.
 Note that some account balances remain the same because no
adjustment has affected them. Simply extend these account balances
to the Adjusted Trial Balance columns.
 Add the Adjusted trial balance debit and credit columns, the two
totals must be equal. If the Trial Balance columns and the Adjustments
columns total are equal but the Adjusted trial balance columns do not, a
mathematical error or an error in extension more likely causes the
inequality.
THE INCOME STATEMENT COLUMNS
 Extend all revenue and expense account balances from the adjusted
trial balance columns to the income statement columns.
 Since revenues carry credit balances, extend them to the credit
column; extend the expenses to the debit column.
 Then subtotal each column. If the total revenues exceed the total
expenses, the difference is the net income that is added to the debit
column total in order to bring the two columns into agreement.
 On the other hand, if the total expenses exceed the total revenues,
the result of business operation is a net loss which is added to the credit
column total.
THE BALANCE SHEET COLUMNS
 Extend the assets, liabilities, and owner's equity accounts from the
adjusted trial balance columns to the balance sheet columns.
 Debit the assets and credit the liabilities and owner's equity amounts.
 Note that the beginning rather than the ending balance of the owner's
capital is carried into the credit column because the closing entries are
not yet prepared.
If the income statement and balance sheet columns do not agree
on the first attempt, work backward through the process used in
preparing the work sheet.
Specifically, the following steps should be taken until the error is
discovered:
1) Re-add the debit and credit columns to see if an error is made in
addition. If the column totals do not agree, check to see if some
items are extended incorrectly from the adjusted trial balance
columns to the balance sheet and income statement column.
2) Re-add the Adjusted Trial Balance columns. If the totals agree,
check whether if each item is transferred to the correct income
statement and balance sheet columns. If the totals do not agree,
make sure that each adjustment is properly added to or subtracted
from the related amount in the Trial Balance column.
3) Re-add the Adjustments columns.
4) Re-add the Trial Balance columns. If the totals do not agree, review
the ledger accounts to find the error.
THE WORKSHEET ILLUSTRATED
THE WORKSHEET ILLUSTRATED
PREPARING FINANCIAL STATEMENTS
from the WORKSHEET
 After completing the work sheet, all information needed to prepare the
income statement, the statement of owner's equity, the statement of
financial position, and the statement of cash flows are readily available.
 The information needed to prepare the income statement can be taken
from the income statement columns in the work sheet.
THE INCOME STATEMENT

THE CAPITAL STATEMENT
 The capital statement (also called statement of owner's equity) is a
financial statement that summarizes the transactions affecting the
owner's capital.
 This statement is prepared by showing the beginning capital balance,
adding net income (or deducting net loss), and then subtracting the
owner's withdrawals.
 The result is the ending capital balance that is forwarded to the
balance sheet.
THE BALANCE SHEET
 A classified Statement of Financial Position/Balance Sheet subdivides
the assets and liabilities in order to provide more specific information for the
users of financial statements.
 The assets are classified into current assets and non-current assets.
Liabilities are also classified either as current or non-current (long-term).
 Current assets are cash and other assets that are converted into cash or
used up in a relatively short period of time, usually one year or less.
 Current assets commonly used by a service-type enterprise include cash,
accounts receivable, notes receivables, and prepaid expenses.
 Normally, current assets are listed in the order of liquidity, or their
convertibility into cash.
 Non-current assets are assets acquired for use in the business rather than
for sale.
 Non-current assets include Long-Term Investments, Property, Plant and
Equipment (Plant Assets), Intangible assets and Other assets.
 Property, Plant, and Equipment are assets acquired for use in a business
rather than for sale.
 They are also called fixed assets because they are used for long-term
purposes.
THE BALANCE SHEET
 Current liabilities are debts usually due within one year, the payment of
which normally will require the use of current assets.
 Current liabilities are usually listed in the order of their maturity.
 The sooner a liability is to be paid, the earlier it is normally listed.
 Examples include accounts payable, notes payable (short-term),
unearned revenues, accrued expenses and salaries payable.
 Non-current liabilities (long-term liabilities) are those debts that will

by paid after a relatively long period of time, usually more than one year.
 Normally the ones with the earliest due dates are listed first.
 Examples include Note Payable (long term), Mortgage Payable,
Bonds Payable.
BALANCE SHEET
ILLUSTRATION
THE STATEMENT OF CASH FLOWS
 International Accounting Standard No.7, Cash Flow Statements sets out
requirements for the presentation of the cash flow statement and related
disclosures.
 It states that cash flow information is useful in providing users o financial
statements with a basis to assess the ability of the enterprise to generate
cash and the need of the enterprise to utilize those cash flows.
 The economic decisions that are taken by users require evaluation of the
ability of an entity to generate cash and the timing and certainty of their
generation.
 Operating activities create revenues and expenses in the entity's major line of
business. Therefore, operating activities affect the income statement, which
reports the accrual basis effects of operating activities.
 Investing activities increase or decrease the assets that the business has to
work with. On the statement of cash flows, investing activities include more than
the buying and selling of assets that are classified as investments on the balance
sheet. Making a loan is an investing activity because the loan creates a
receivable for the lender.
 Financing activities obtain funds from investors and creditors needed to
launch and sustain the business. Financing activities include issuing stock,
borrowing money by issuing notes and bonds payable, selling treasury stock, and
making payments to stockholders (dividends and purchases of treasury stock).
Payments to creditors include principal payments only. The payment of
interest is an operating activity.
THE STATEMENT OF CASH FLOWS (Direct Method)
JOURNALIZING AND POSTING THE
ADJUSTING ENTRIES
 The adjusting entries, first recorded in the worksheet, are also

recorded in the journal and posted in the ledger.
 This is to prove that the balances of the accounts in the ledger
conform with the balances shown in the financial statements.
 The adjusting entries are recorded on the next available space in
the journal.
 These entries may or may not be explained. If no explanation is
required, “Adjusting Entries" are written at the center of the
description column above the first entry.
 These entries are also posted to the general ledger in the usual
manner, except that the word “Adjusting” is written on the items
column to differentiate it from other posted entries.
 The preparation of the work sheet does not eliminate the need to
prepare and post adjusting entries because the worksheet is only
an accounting tool and is not part of the formal accounting
records.
THE CLOSING PROCESS
 The closing entries are entries prepared at the end of the accounting
period to bring the balances of the temporary or nominal accounts to
zero, so that they will be ready to receive data for the next accounting
period.
 These temporary accounts are the revenues, expenses, and drawing
accounts.
 These accounts are closed at the end of each period so that we may
identify their balances by the year of their occurrence. Hence, we say
the sales of 2019 must not include the sales of 2020.
 In the closing process, a clearing account called "Income Summary"
is used.
 After all revenue and expense account balances are transferred to
Income Summary, its balance represents the net income or net loss
for the period.
 The other terms used are Revenue and Expense Summary or Profit
and Loss Summary.
The steps in the closing process are as follows:
1. Closing the revenue account(s). The balances in the revenue
accounts are transferred to the Income Summary account by debiting
each revenue account for the amount of its balance, and crediting the
income summary account for the total revenue.
2. Closing the expense accounts. The balances in the expense
accounts are transferred to the Income Summary account by debiting
the income summary account for the total expenses, and crediting
each expense account for the amount of its balance.
3. Closing the income summary account. The balance of the income
summary account is transferred to the owner's capital. A credit
balance in the income summary account represents net income and
is closed by debiting income summary and crediting the owner's
capital account. A debit balance in the income summary account
represents net loss and is closed by debiting the owner's capital
account, and crediting the income summary account.
4. Closing the owner's drawing account. The balance of the owner's
drawing account is transferred to the owner's capital account by
debiting the capital account for the amount of the withdrawals, and
crediting the drawing account for its balance,
The closing entries are recorded on the next available space in the journal
right after the adjusting entries. They are also posted in the usual manner
except that the word “Closing” is written on the items column to differentiate it
from other posted entries.
THE STATEMENT OF CASH FLOWS ILLUSTRATION
THE POST-CLOSING TRIAL BALANCE
 A post-closing trial balance is the trial balance prepared after the
adjusting and closing procedures.
 Sometimes it is also called a statement of financial position (balance
sheet) in a trial balance form, because the items appearing in the post-
closing trial balance consist of assets, liabilities, and owner's equity.
 The temporary accounts had been closed, so they are no longer
included in the post closing trial balance.
THE INTERIM STATEMENTS
 Interim statements are financial statements prepared for period of
less than a year.
 Interim reports are considered essential in providing investors and others
with timely information as to the progress of an enterprise.
 That is why most companies prepare a monthly or quarterly income
statement.
 In preparing interim reports, adjustments for accrued items must be
considered.
THE REVERSING ENTRIES

 For certain types of adjusting entries, reversing entries are prepared
as of the first day of the next accounting period.
 They are called reversing entries because they reverse the effects
of the adjusting entry to which they relate.
 The purpose of reversing entry is to simplify the first entry relating
to that same item in the next accounting period.
Video Links
 Watch: The INCOME STATEMENT Explained (Profit & Loss /
P&L)
https://youtu.be/hrSUq4wcd0g?list=PL5zKSeS09l339nB6ujJPQ9
Rsv99_b-aTb
 Watch: How The BALANCE SHEET Works
https://youtu.be/YZyBSU6YdmM
 Watch: Prepare A Cash Flow Statement | Direct Method
https://youtu.be/KOR10VPsyO8?list=PL5zKSeS09l339nB6ujJPQ9
Rsv99_b-aTb
 Watch: Basic Accounting | Accounting Cycle Step 5.
Preparation of Worksheet (Part 1)
https://youtu.be/WBo3aH1sHUM
 Watch: Basic Accounting | Accounting Cycle Step 5.
Preparation of Worksheet (Part 2)
https://youtu.be/xCuwDq80mKQ
 Video Lectures by your professor on the Problem Illustrations
of this module will be uploaded in Youtube and will be posted
in Google Classroom and Messenger Group Chat.
your answers.
TURN IN button.
Classroom.
 Quizzes/Final Examinations will be posted in Google
Classroom, to be conducted through Google Forms, with time
limit. Follow the further instructions and schedules posted in
Google Classroom.
M5 – Exercise 1
M5 – Exercise 1
M5 – Exercise 2
M5 – Exercise 3
M5 – Problem 1
M5 – Problem 2
M5 – Problem 3
M5 – Problem 4
M5 – Problem 4
M5 – Problem 4
REFERENCES:

 Video links were taken/copied from Youtube channel Accounting Stuff
and Filipino Accounting Tutorial.

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POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

(MODULE 1 – Introduction to Accounting)

 In 1494, Friar Luca Pacioli wrote a book which

 In the mid-18th to the mid-19th centuries, the Industrial

 The role of accounting in business are as follows:

 Provides the necessary information essential in the

 Single or Sole Proprietorship – a business owned by only an

 Service Business – renders services to customers or

The fundamental qualitative characteristics of financial statements

 Freedom from error – No errors or omissions in the description of the

The enhancing qualitative characteristics of financial statements

 Notes Receivable are claims supported by promissory note.

 Office supplies/Store Supplies are supplies being used by the business.

 Prepaid Expenses are expenses paid by the business in advance.

 Office/Store Equipment includes computers, air-conditioning units, electric fans,

 Intangible Asset is an identifiable non-monetary asset without physical substance.

 Copyright is an exclusive right or protection granted to an author for literary, musical

 Patent is an exclusive legal right granted by the government for an invention to

 A. Baguio, M. Balbarino, E. Dela Cruz, M. Doquenia, L. Espino, J. Fonte,

(MODULE 2 – Analyzing Business

 After this module, the students should be able to:

 Computers can eliminate the need of copying and rearranging

 First, learning manual system helps establish an important

 A. Baguio, M. Balbarino, E. Dela Cruz, M. Doquenia, L. Espino, J. Fonte,

STEP 10: Post-

2 - Purchased office supplies for cash, P 5,000.

3 - Purchased office equipment worth P 50,000. Paid P 10,000 cash as

6 - Billed a client for services rendered on account, P 30,000.

7 - Received payment from the client to whom services were previously

9- Paid office rent for the month, P 8,000.

c. Posting Reference (P/R) column

The steps in posting are as follows:

The credit balance is written on the credit side of the account.

Steps in Preparing a Trial Balance:

Note: The balances of accounts are taken from the ledger.

 A. Baguio, M. Balbarino, E. Dela Cruz, M. Doquenia, L. Espino, J. Fonte,

 Income Statement Report

 Income Statement Report

 THE ADJUSTING PROCESS

 THE NEED FOR ADJUSTING ENTRIES

 Adjusting entries are generally prepared for the

 Examples of accrued expenses are as follows:

Taxes Payable Interest Payable Utilities Payable

Since the three days

Note: The adjusting entry for an accrued

The Interest Receivable

 Unearned revenues or Deferred Revenues (a liability account) – are

Revenue Method or Income Method - the account credited at the date of

 Deferrals – refers to the postponement of the recognition of

 Accruals – refer to the recognition of expense already incurred

 A. Baguio, M. Balbarino, E. Dela Cruz, M. Doquenia, L. Espino, J. Fonte,

(MODULE 5 – Completion of the

The steps in the preparation of the worksheet are as follows:

THE INCOME STATEMENT

 Non-current liabilities (long-term liabilities) are those debts that will

 The adjusting entries, first recorded in the worksheet, are also

THE REVERSING ENTRIES

 A. Baguio, M. Balbarino, E. Dela Cruz, M. Doquenia, L. Espino, J. Fonte,