Acco 20273 Accounting 1 2

Republic of the Philippines
POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

INSTITUTE OF TECHNOLOGY
Management Technology Department
INSTRUCTIONAL MATERIAL
FOR
ACCO 20273
ACCOUNTING 1
COMPILED BY:
JOSEPHINE M. DELA ISLA,MBE, CPA

NIMFA M. DEL ROSARIO, MBE
INTRODUCTION
All businesses and organizations must keep accurate and current accounts of their financial
information so they can make sound business decisions. The process of analyzing and interpreting
financial information is called accounting. Accounting work is conducted by professional accountants,
who are trained in statistics, economics, accounting law, and other disciplines. Accounting includes
bookkeeping, which involves the creation of records and documents that show financial activity. This
module will help the student to be equipped in accounting environment. Prepare them in the business
environment as well as to have a knowledge in the basic principles of accounting which is very essential
in the foundation of this course.
1 |ACCO 20213 ACCOUNTING PRINCIPLES

Table of Contents
LESSON 1 INTRODUCTION TO ACCOUNTING PRINCIPLES 3
LESSON 2 FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE 9

FUNDAMENTAL ACCOUNTING EQUATION
LESSON 3 THE ACCOUNTING EQUATION 28
LESSON 4 RECORDING BUSINESS TRANSACTION 33
LESSON 5 ADJUSTING JOURNAL ENTRIES 55
LESSON 6 THE WORKSHEET 70
LESSON 7 COMPLETION OF THE ACCOUNTING CYCLE 80

COURSE OUTCOMES:
At the end of the course, students should be able to:
• Recognize the different kinds of terminologies in accounting.

• Identify business transactions and apply the accounting formula debit/credit theory
• Describe the accounting equation and prepare accounting entry
• Apply the accounting formula and Debit/credit theory
• Interpret data presented in the Balance Sheet, Income Statement, Statement of Cash
Flows, and Statement of Retain Earnings
• Summarize and apply basic concept financial statement
• Understand the complete accounting cycle
LESSON 1 INTRODUCTION TO ACCOUNTING PRINCIPLES
Learning Outcomes:
After successful completion of this lesson, you should be able to:
• Define accounting and know its purpose

• Differentiate the types of business organizations
• Distinguish the different types of business operations
• Know and appreciate the basic accounting principles used in the practice of accounting
Course materials:
Accounting Defined
Accounting is the systematic process of measuring and reporting relevant financial

information about the activities pf am economic organization or unit. Its underlying purpose is
to provide financial information. It is capable of being expressed in monetary terms.
The American Institute of Certified Public Accountants(AICPA) defines accounting as

the art of recording, classifying, and summarizing in a significant manner under terms of money,
transactions and events, which is a part at least of an financial character, and interpreting the
result thereof.
The Philippine of Institute of Certified Public Accountants(PICPA0 defines accounting as

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.
Four Aspects of Accounting
1. Recording- writing down of business transactions chronologically in the books of

account as they transpire.
2. Classifying- sorting similar and related business transactions into the three categories
of assets, liabilities, and owner’s equity.
3. Summarizing-preparing the financial statements from the transactions recorded in the
books of account designed to meet the information needs of its users.

4. Interpreting- representing the qualitative and quantitative financial information about
the business transactions in a language comprehensible to the users of financial
statements . By interpreting the data in the financial statements, users are able to
determine the financial standing of the company as well as its stability and growth
potential. Users interpret financial information relating to specific business decisions.
This makes accounting the language of business.
Parties Interested in the Financial Information
1. Investors/Owners/Stockholders
These people provide the financial resources to keep the business going. These parties
decide whether to invest or not depending on the estimated amount of income on their
investments. Upon investments, they would want to know the financial position or result
of operations of their business investment.
2. Government
Financial information is important for tax purposed and in compliance with Securities and
Exchange Commission(SEC) requirements.
3. Financial Institutions/Creditors
Before extending credit, financial institutions use financial information in determine the
capacity of the business organization to pay its obligations and their interests at the
appropriate time,
4. Management
Organizational managers use financial information to set goals for their companies.
Managers evaluate their progress towards these goals and use financial data as a guide
for future management actions.
5. Employees
Financial information provide information on company stability which is important for
employees to determine if they have a future in the company.
Three types of Business Organization
1. Sole/Single Proprietorship is a business owned and manage by only one person.

2. Partnership is a business organization owned and managed by two or more people who
agree to contribute money, property or industry to a common fund for the purpose of
earning a profit.
3. Corporation is a form of business organization managed by an elected board of
directors. The investors are called stockholders and the unit of a ownership is called
share of stock.
The Profession of Accountancy
Private accounting provides services to a particular business firm. Some companies

employ only one private accountant, while other companies employ many. In a company with
many accountants, the controller is the executive officer in charge of the accounting activity.
Private accountants may or may not be CPAs. They may specialize in one particular job
or task. For example, some may specialize in cost accounting, others in budgetary accounting,

others in the design and installation of accounting and data processing systems, while the
others are internal auditors.
Private Accounting offers accounting and related services for a fee to companies, other
organizations, and the general public. Certified Public Accountants(CPAs) are the licensed
professionals engaged in the practice of public accounting. They organized their own
accounting office and accept clients, mostly buisnesmen, who hire them to do accounting
services for a fee. These CPAs provide services in auditing, taxes, and management advising.
The specialized Accounting Fields
The different services that an accountant performs are the specialized accounting fields.
Accountants who had been performing these services for some time and had acquired expertise
on these lines have specialized in these fields of accounting.
1. General or financial accounting-the field of accounting concerned with the recording

of transactions of an economic unit and the preparation of reports from these records.
2. Auditing-it reviews the work of the general or financial accountant and presents an
opinion as to the fairness and accuracy of the accounting data.
3. Management accounting- it employs both historical and estimated datas in assisting
management with day-to-day problems and planning for the future.
4. Cost Accounting- it involves the determination and the control of costs, particularly the
costs of manufacturing processes and manufactured products.
5. Tax accounting-it involves the preparation of tax return and the consideration of tax
consequences of proposed business transactions.
6. Accounting system-the field of specialization engaged in the preparation of accounting
and office procedures for the accumulation and reporting of financial data.
7. Budgetary Accounting – it represents a plan of financial operations for a period, and
provides comparison of actual operation with the predetermined plan,
8. International accounting-this field concerns with the transactions of multinational
corporations involving international trade.
9. No-for-profit accounting-it involves the recording of transactions of a governmental
unit and the other not-for-profit organizations, such as churches, charities, and
educational institutions.
10. Social accounting- it involves the measurement of social costs land benefits that we
formerly consider to be not measurable.
11. Accounting instruction-accountants engaged in teaching accounting to accounting
students.
Bookkeeping and Accounting

Bookkeeping is the systematic recording of business data. The bookkeeper’s job is to
record and process the data in the accounting system. The work of the bookkeeper is
clerical in nature, mostly a segment of the accounting transactions, like the accounts
receivable clerk, the accounts payable clerk, or the payroll clerk.
In contrast, the job of the accountant is broader in scope. Accounts decide which data
the company needs and recorded, determining how they process the data, and deciding
how they design the reports or how to communicate the information to the decision makers.
Three types of Business Organization
1. Service is a type of business operation engaged in the rendering of services.

Ex. Dental Clinic, Barber Shop, Laundry Service
2. Trading/Merchandising is a type of business engaged in buying and selling goods.
Ex. Grocery, Sari-Sari Store
3. Manufacturing is engaged in the production of items to be sold. This type of business
operation is involved in the purchasing and converting of raw materials to finished
goods.
Ex. Shoe Factory, Food Processing
Accounting System comprise the methods used by the business to keep records of its
financial activities and to summarize these accounts in periodic accounting reports.
Transactions is a completed action which can be expressed in monetary terms.
Generally Accepted Accounting Principles (GAAP)
• These are broad, general statement or “rules” and “procedures ” that serve as guides in
the practice of accounting.
• These are standards, assumptions, and concepts with general acceptability.
• These are measurements techniques and standard used in the presentation of financial
statements.
Fundamental Concepts
1. Entity Concepts regards the business enterprise as separate and distinct from its
owners and from other business enterprises.
Ex. Mr. Santos has a car repair shop and a barber shop. The car repair shop is
considered as a separate entity distinct from the barber shop and the owner, Mr. Santos
The expenses of the car repair shop should not be mixed with the expenses of the
barber shop and the personal expenses of Mr. Santos. The two businesses are
considered to be separate economic units, separate and distinct from their owner. As
such, these should be treated as different from each other, although owned and
operated by only one person. Hence, the personal expenses of Mr. Santos should not
be mixed with the expense of any of the businesses.

2. Periodicity is the concept behind providing financial accounting information about the
economic activities of an enterprise for specified time periods. For reporting purposed,
one year is usually considered as one accounting period.
Ex. Separate financial reports are prepared yearly for the car repair shop and the
barbers shop of Mr. Santos, Hence, Mr. Santos can measure the income of the two
businesses annually.
An Accounting period may be classified as either of the following:
a) Calendar year- a twelve-month period that starts on January 1 and ends on December
31
b) Fiscal year-a twelve-month period that starts on any month of the year other than
January and ends twelve months after the start period (e,g. A business whose fiscal year
starts June 1, 2012 ends its fiscal year on May 31m 2013, This is still a twelve-month
period although it does not start in January and end in December) A natural business
year is any twelve-month period that end when business activities are at their lowest
point.
3. Going Concern is concept which assumes that the business enterprise will continue to
operate indefinitely.
EX. In preparing the financial statements of the car repair shop and the barbershop the
accountant assumes that the businesses will not close or shut operations within the next
year.
Basic Principles
1. Objectivity principle states that all business transactions that will be entered in the
accounting records must be duly supported by verifiable evidence.
Ex. Payments must be supported by official receipts, and bank deposits must be
supported by deposit slips.
2. Historical Cost means that all properties and services acquired by the business must
be recorded at its original cost.
Ex. Land bought in 1990 for one millions person should be recorded at one million
pesos even though its market value in the year 2012 is already two million pesos.
3. Accrual Principle states that income should be recognized at the time it is earned
such as when goods are delivered or when services have been rendered. Likewise,
expenses should be recognized at the time they are incurred such as when good and
services are actually used and not at the time when the entity pays for those goods
and services.
Ex. A hotel cannot consider as income the advance payment of a customer who
paid the hotel in advance for one month accommodation until the customer has
checked in. This is because the hotel has not yet rendered the services to the

customer. As such, the advance payment by the customer should be considered as
a liability on the part of the hotel in the form of services to be rendered.
4. Adequate Disclosure states that all material facts that will significantly affet the
financial statements must be indicated,
Ex. Land bought at one million pesos in 1998 should be recorded at historica cost in
the 2012 financial statements, however, the current market value of two million
pesos in the year 2012 may be indicated in the financial statements for the year 2012
in the form of a footnote or parenthetical note.
5. Materiality means that financial reporting is only concerned with information

significant enough to affect decision. This refers to the relative importance of an item
or event. An item is considered significant if knowledge of it would influence prudent
users of the financial statements.
Ex. Items of insignificant amount such as paper clips can be charge outright to
expenses.
6. Consistency means that approaches used in reporting must be uniformly employed

from period to period to allow comparison of results between time periods. Any
changes must be clearly explained.
Ex. If the straight line method of depreciation is being used by the company, then
the method should be uniformly used by the company in computing its annual
depreciation
Read:
Lesson 1 Introduction to Accounting Principles
By Flocer Lao Ong Fundamentals of Accounting textbook for beginners
Activities/Assessment:
Identification:
__________1. A service activity. Its function is to provide quantitative information primarily
financial in nature about economic.
___________2. An accountant who had passed an examination prepared and graded by the
Board of Accountancy under the Professional Regulations Commissions.
___________3. All business transaction that will be entered in the accounting records must be
fully supported by verifiable evidence.
___________4. Approaches used in reporting must be consistently employed from period to
period.
___________5. Financial reporting is concerned with significant information enough to affect
evaluation and decisions.
___________6. All properties and services acquired by the business must be recorded at its
original cost.
___________7. Revenue is recognized when actually earned.
___________8. Expenses is recognized when actually incurred or used.

___________9. All materials facts that will significantly affect the financial statements must be
indicated.
___________10. Business that is organized under the laws in which ownership is divided into
shares of stocks.
A. For each of the business listed below, indicate the type of the firm to where
each belongs. Used the following classifications; a) service company, b)
merchandising company, c)manufacturing company.
_______ 1 Department store _______ 11 Dental clinic
_______ 2 Barbers shop _______ 12 grocery
_______ 3 Textile mills _______ 13 pharmacy
_______ 4 Hardware _______ 14 Car assembler
_______ 5 Schools _______ 15 Dress shop
_______ 6 News stand _______ 16 Furniture maker
_______ 7 Appliance store _______ 17 Medical clinic
_______ 8 Shoe factory _______ 18 Repair shop
_______ 9 Driving school _______ 19 Gift shop
_______ 10 Fruit stand _______ 20 Laundry shop
LESSON 2 FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE

FUNDAMENTAL ACCOUNTING EQUATION
Learning Outcomes:
• Define and identify the basic elements of accounting-assets, liabilities, and owner’s
equity
• Determine the net income through operation
• Define and identify revenue, expense, net income, and net loss
• Define and know the components of financial statements
• Prepare property classified financial statements
Types of Financial Statements
The key product or the end product of the accounting process is a set of documents
called the financial statements comprised of the follow:
1. Statement of Financial Position or Balance Sheet- Shows the financial

condition/position of a business of a given period. It consists of the Asset, Liabilities,
and Capital.

2. Statement of Comprehensive Income or Income Statement- The income
statement shows the result of operations for a given period. It consist of the
Revenue, Cost, and Expenses.
The Statement of Comprehensive income consists of the Revenue, Cost,
Expenses and contains components of other comprehensive income (including
reclassification adjustments) as follows: changes in revaluation surplus, gains and
losses on benefit plans, gains and losses from investments in equity method, tax
expense, gain or loss from discontinued operations, gain or loss on realization of
asset from discontinued operations, gains and losses from foreign operations, and all
other operating and financial events affecting the owner’s equity in the business.
International Accounting Standards 1 defines Total Comprehensive Income as
the “change in equity during a period resulting from transactions and other events,
other than those changes resulting from transactions with owners in their capacity as
owners.”
For purposes of lesson in single proprietorship, the activities will consist of the
usual revenue, cost, expense and transaction with owners in their capacity as
owners. Hence, the Income Statement will be used to show the results of operations
since there is no activity beyond the regular profit and loss items.
3. Statement of Changes in Owner’s Equity or Statement of Owner’s Equity-
shows the changes in the Capital or Owner’s Equity as a result of additional
investments or withdrawals by the owner, plus or minus the net income or net loss
for the year.
4. Statement of Cash Flows- summarizes the cash receipts and cash disbursements
for the accounting period. It summarizes the cash activities of the business by
classifying cash inflows (receipt) and cash outflows (payments) into operating,
investing, and financing activities. It shows the net increase or decrease of cash in a
given period and the cash balance at the end of the period. This allows management
to assess the business’ ability to generate cash and project future cash flows.
Typical Account Titles Used
Balance Sheet
Balance Sheet accounts, namely Assests, Liabilities, and Owner’s Equity, are classified
as real or permanent accounts.

Assets- there are economic resources owned by the business expected for future gain. They
are property and rights of value owned by the business.
Liabilities- these includes debts, obligations to pay, and claim of the creditors on the assets of
the business.
Owner’s Equity or Capital- this includes the interest of the owners on the business; claims of
the owners on the assets of the business; and the investment of the owner plus or minus the
result of operation. Owner’s Equity or capital comes from two main sources- investment of
owners and earnings of the business.
The Fundamental Accounting Equation
Assets= Liabilities + Owner’s Equity
Illustration:
1. Assets = Liabilities + Owner’s Equity

₱? = ₱ 40,000 + ₱ 60,000
Answer: ₱ 100,000
Simple add liabilities of ₱ 40,000 and owner’s equity of ₱ 60,000 to get assets of
₱100,000.

₱ 150,000 = ₱? + ₱ 70,000
Answer: ₱ 80,000
Simple deduct owner’s equity of ₱ 70,000 from the assets of ₱ 150,000 to get liabilities
of ₱80,000

₱ 200,000= ₱110,000 + ₱?
Answer: ₱ 90,000
Simple deduct liabilities of ₱ 110,000 from the assets of ₱ 200,000 to get owner’s equity
of ₱90,000

Assets
Classification of assets
1. Current Assets
Improvements to International Accounting Standard 1 (December 2003) classifies assets as

current assets when it is:
a.) expected to be realized in, or is intended for sale or consumption in, the entity’s normal
operating cycle;
b.) held primarily for the purpose of being traded;
c.) expected to be realized within twelve months of the balance sheet date; or
d.) cash or a cash equivalent unless it is restricted from being exchange or used to settle a
liability for at least twelve months after the balance sheet date.
Classification of current Assets
Cash includes coins, currencies, checks, bank deposit, and other cash items readily
available for use in the operation of the business.
Cash equivalents are short-term investments that are readily convertible to known
amounts of cash which are subject to an insignificant risk to change in value (per SFAS No. 22,
revised 2000).
Marketable Securities are stock and bonds purchased by the enterprise and are to be
held for only a short span of time or short duration. They are usually purchased when a
business has excess cash.
Trade and Other Receivables include the amounts collectible from any of the following
accounts:
• Accounts Receivable - is the amount collectible from the customer to whom sales
have been made or services have been rendered on account or credit.
• Notes Receivable- is a promissory note issued by the client or the customer in

exchange for services or goods received as evidence of his/her obligation to pay.

• Interest Receivable- amount of interest collectible on promissory notes received
from customers and clients.
• Advances to Employees- certain amount of money loaned to employees payable in
cash or through salary deduction.
• Accrued Income- income already earned but not yet received.
Inventories present the unsold goods at the end of the accounting period. This is
applicable only to a merchandising business.
Prepaid Expenses include supplies brought for use in the business or services and
benefits to be received by the business in the future paid in advance.
Contra-Asset Accounts- these are accounts deducted from the related assets accounts.
Allowance for Bad Debts are losses due to uncollectible accounts. This is deducted
from the accounts receivable account to get the net realizable value. This is in line with the
financial statements’ qualitative characteristic of conservatism wherein no profits would be
anticipated but all probable or estimated losses should be provided.
Accumulated Depreciation represents the expired cost of property, plant and

equipment as a result or usage and passage of time. This is deducted from the cost of the
related assets account to get the carrying value of the assets.
2. Non-Current Assets
Classification of Non-Current Assets
Long-term Investments are assets held by an enterprise for the accretion of wealth
through capital distribution such as interest. Royalties, dividents and rentals, for capital
appreciation or for other benefits to the investing enterprise such as those obtained through
trading relationships. Investments are classified as long-term when they are intended to be held
for an extended period of time (International Accounting Standards No.25).
Property, Plant, and Equipment are tangible assets that are held by an enterprise for
use in the production or supply of goods or service, or for administrative purposes and which
are expected to be used for more than one period (International Accounting Standards No. 16).
Examples of Property, Plant, and Equipment

Land is a piece of lot or real estate owned by the enterprise on which a building can be
constructed for a business purpose.
Building is an edifice or structure used to accommodate the office, store, or factory of a

business enterprise in the conduct of its operations.
Equipment includes typewriter, air-conditioner, calculator, filing cabinets, computer,

electric fan, trucks, cars used by the business in its office, store, or factory. Specific account
titles may be used such as Office equipment, Store Equipment, Delivery Equipment,
Transportation Equipment, Machinery and Equipment.
Furniture and Fixtures includes tables. Chairs, carpets, curtains, lamp and lightning
fixtures, and wall decors. Specific account titles maybe used such as Office Furniture and
Fixture and Store Furniture and Fixtures.
Intangible Assets are identification, non-monetary assets without physical substance

held for use in the production or supply of goods or services, for rental to others, or for
administrative purposes. These include goodwill, patents, copyrights, licenses, franchise,
trademarks, brand names, secret processes, subscription list and non-competition agreements
(International Accounting Standards No. 38).
Liabilities
Improvements to International Accounting Standards 1 (December 2003) classifies a

liability as a current liability when it is:
a.) expected to be settled in the entity’s normal operating cycle;

b.) held primarily for the purpose of being traded;
c.) due to be settled within twelve months after the balance sheet date; or the entity does
not have an unconditional right to defer settlements of liability for at least twelve months
after the balance date.
Classification of current Liabilities
Trade and Other Payables- Includes payables from any of the following accounts:
Accounts Payable includes debts arising from purchase of an assets or

acquisition of services on account.

Notes Payable includes debts arising from purchase of an assets or acquisition
of services on account evidenced by a promissory note.
Loan Payable is a ability to pay the bank or other financing institution arising
from funds borrowed by the business from these institution payable within twelve
months or shorter. (Note: If loan is payable beyond twelve months, then it is
classified under non-current liabilities)
Utilities Payable is an obligation to pay utility companies for services received

from them. Example of this are telephone services to PLDT, Electricity to
Meralco, and water services to Maynilad.
Unearned Revenues represent obligations of the business arising from advance

payments received before goods or services are provided to the customer. This
will be settled when certain goods or services are delivered or rendered.
Accrued Liabilities include amounts owed to others for expenses already

incurred but not yet paid. Examples of these are salaries payable, utilities
payable, taxes payable, and interest payable.
Classification of Non-Current Liabilities
Non-Current Liabilities are long term liabilities or obligations which are payable for a period
longer than one year. Examples of Non-Current Liabilities are as follows:
Mortgage Payable is a long-term debt of the business with security or collateral in the
form of real properties. In case the business fail to pay the obligation, the creditor can
foreclose or cause the mortgaged asset to be sold and proceeds of the sale to be used
to obligation.
Bonds Payable is a certificate of indebtedness under the seal of a corporation,

specifying the terms of repayment and the rate of interest to be charged.
Owner’s Equity
Capital is an account bearing the name of the owner representing the original and
additional investment of the owner of the business increased by the amount of net income
earned during the year. It is decreased by the cash or other assets withdrawn by the owner as
well as the net loss incurred during the year.

Drawing represents the withdrawals made by the owner of the business either in cash
or other assets.
Income summary is a temporary account used at the end of the accounting period to
close income and expense account. The balance of this account shows the net income or net
loss for the period before it is closed to the capital account.
Income statement
Income statement accounts namely revenue and expense are classified as nominal or
temporary accounts.
Forms of Income Statements
1. Natural form- presents expenses according to nature. This type of income statement is
used in a service business.
2. Functional Form- presents expenses according to functional(e.g. cost of sales, selling
expenses, administrative expenses). This type is used in a merchandising business.
Service Income includes revenues earned or generated by the business in performing services
for a customer or client.
Examples: Laundry Services by a laundry shop
Medical Services by a doctor
Dental Services by a dentist
Salaries or Wages Expenses includes all payments made to employees or workers for
rendering services to the company. Examples are salaries or wages, 13th month pay, cost of
living allowances, and other related benefits given to them.
Utilities Expense is an expense related to use of electricity, fuel, water, and

telecommunications facilities.
Supplies Expense covers office supplies used by the business in the conduct of its daily
operations.
Insurance Expense is the expired portion of premiums paid on insurance coverage such as
premiums paid for health or life insurance, motor vehicles or other properties.

Depreciation Expense is the annual portion of the cost of a tangible asset such as buildings,
machineries, and equipment charged as expense for the year.
Uncollectible Accounts Expense/ Doubtful Accounts Expense/ Bad Debts Expense means
the amount of receivables charged as expensed for the period because they are estimated to be
doubtful of collection.
Interest Expense is the amount of money charged to the borrower for the use of borrowed
funds.
Statement of Financial Position/Balance Sheet
1. Account Form follows the accounting equation where assets are listed on the left-hand
column of the report with the liabilities and owner’s equity listed on the right-hand
column.
2. Report Form shows in one straight column the assets, followed by the liabilities and
owner’s equity.
Classification
Items in the statement of financial position or balance sheet are classified, with assets
and liabilities separated into two or more categories. Sub classification is as follows:
1. Assets are subclassified as current assets and non-current assets.

2. Liabilities are either current liabilities or non-current liabilities.
Current assets are classified and presented according to liquidity with the most liquid
followed by those with lesser liquidity/ since cash is the most liquid, it is always listed first
followed by other current assets according to their proximity to cash.
Liabilities are classified and presented based on their maturity. Obligations presently due for
payment are listed first.
Statement of Cash Flows
Components of the Statement of Cash Flows classified according to activities:
a. Operating Activities- the cash inflows (receipt) and the cash outflows (payments)
arising from the normal operation of the business.
Receipts of Cash:

• Collection from customers for the performance of service or sale of goods
• Royalties, fees, commissions received
• Interest, dividends, and other income received
Payment of Cash
• To supplies for services and goods acquired

• Employees’ salaries
• Government licenses and taxes
• Interest expense
• Other operating expenses
b. Investing Activities- the cash inflows (receipts) and the cash outflows (payments) from
the purchase and sale of property and equipment, investment in debt or trading
securities.
c. Financing Activities- the cash inflows (receipts) and the cash outflows (payments) from
the owners and creditors of the business.
Receipt of Cash
• original and additional investment by owner
• proceed of load
Payments of Cash
• cash withdrawal of owner

• payment for the principal balance of loan
The beginning balance of cash is added to the net increase or decrease in cash
resulting from the operating, investing, and financing activies in order to get the ending
cash balance which is the same as the amount of the cash account presented in the
statement of financial position.
Examples of the four statements, namely, (1) Income Statement, (2) Statement of
Financial Position (Report Form and Account Form), (3) Statement of Changes in
Owner’s Equity, and (4) Statement of Cash Flows are shown on pages 15 to 19. Notice
that the statement of financial position and income statement items are presented at the
minimum with supporting notes for line items with details.

Natural Form Income Statement
Apple Fresh Laundry Services

Income Statement
For Year Ended December 31, 20xx
Note
Service Revenue ₱ 298,000
Other Income 55,000
Total Income 1 ₱ 353,000
Expenses
• Salaries ₱ 160,000
• Depreciation 2 ₱13,000
• Supplies ₱ 10,000
• Rent ₱ 7,000
• Insurance ₱2,000
• Other Expenses 3 ₱ 2,600
• Finance cost 4 ₱ 3,400 198,000
Net Income ₱ 155,000
Account Form Balance Sheet

Statement of Financial Position
As of December 31, 20xx
Assets Note
Current Assets
Cash 5 ₱ 300,000
Investment in Trading Securities 60,000
Trade and Other REceivables 6 121,000
Prepaid Expenses 7 64,000
Total Current Assets 545,000

Non-Current Assets
Propery, Plant, And Equipent 8 693,000
__________
Total Assets ₱1,238,000
Liabilities & Owner’s Equity None

Current Liabilities
Trade and Other Payables 9 ₱ 304,000
Non-Current Liabilities
Mortgage Payable ₱300,000

Loan Payable ₱ 200,000
Total Non-Current Liabilities ₱ 500,000
Total Liabilities 804,000
Owner’s Equity
A, Capital ₱ 434,000
Total Liabilities and Capital ₱ 1, 238,000
Report Form Balancfe Sheet

Statement of Financial Position
As of December 31, 20xx
Assets Note
Cash 5 ₱ 300,000
Investment in Trading Securities 60,000
Trade and Other Receivables 6 121,000
Prepaid Expenses 7 64,000
Total Current Assets ₱ 545,000
Non-Current Asstes
Property, Plant, and Equipment 8 693,000

Total Assets ₱1,238,000
Liabilities & Owner’s Equity
Current Liabilities
Trade and Othe Payables 9 ₱ 304,000
Non-Current Liabilities
Mortgage Payable ₱ 300,000
Loan Payable ₱ 200,000
Total Non-Current Liabilities 500,000
Total Liabilities ₱ 804,000
Owner’s Equity
A, Capital 434,000
Total Liabilities and Capita ₱ 1,238,000

Statement of Changes in Owner’s Equity
A, Capital ₱ 259,000
Add: Additional Investment ₱ 50,000
Net Income 155,000 205,000
Sub-total ₱ 464,000
Less: Drawings 30,000
Total Owner’s Equity ₱ 434,000

Statement of Changes in Cash Flows
Cash Flows from Operating Activities
Receipts
Collections from Customer ₱ 177,000
Rent Income 35,000
Dividents Income 10,000
Interest Income 6,000
Payments
Operating Expenses (143,600)
Interest Expense (3,400)
Net Cash from Operating Activities ₱ 81,000
Cash Flows from Investing Activities
Receipts
Proceeds from sale of equipment ₱ 16,000
Proceeds from sale furniture 10,000
Payment
For purchase of Furniture (32,000)
Net cash from Investing Activities (6,000)
Cash Flows from Financing Activities
Receipts
Additional Investment of owner ₱ 50,000
Proceeds of Bank load 200,000
Payments
Cash Widrawal of Owner (30,000)
Payment of bank loan (150,000)
Net Cash from Financing Activities 70,000
Net Increase/Decrease in Cash ₱ 145,000
Cash Balance- January 1 155,000
Cash Balance- December 31 ₱ 300,000
The beginning balance of cash is added to the next increase or decrease in cash
resulting from the operating, investing, and financing activities in order to get the ending cash
balance which is the same as the amount of the cash account presented in the statement of
financial position.
Notice that the ₱ 300,000 cash balance as of December 31 is the balance of the cash
account in the statement of financial position.
Notes to financial Statement

Note 1- Other Income
Rent Income ₱35,000
Divident Income 10,000
Gain or Sale of Equipment 6,000
Total ₱ 55,000
Note 2- Depreciation Expense

Depreciation Expense- Mortgage ₱ 12,000
Depreciation Expense- Equipent 1,000
Total ₱ 13,000
Note 3- Other Expense

Loss on Sale of Furniture ₱ 2,600
Note 4- Finance Cost
Interest Expense- Mortgage ₱ 2,400
Interest Expense- Loan 1,000
Total ₱3,400
Note 5- Cash
Cash on Hand ₱ 175,000
Cash in Bank 125,000
Total ₱ 300,000
Note 6- Trade and Other Receivables

Account Receivable ₱40,000
Less: Allowance for Bad Dept 2,000 ₱ 38,000
Notes Receivable 45,000
Interest Receivable 7,000
Advances to Employees 21,000
Accured Income 10,000
Total ₱121,000
Note 7- Prepaid Expenses

Supplies ₱ 27,000
Prepaid Insurance 37,000
Total ₱ 64,0000
Note 8- Property, Plant, and Equipement

Land ₱ 200,000
Building ₱480,000
Less: Accumulated Depreciation 20,000 460,000
Equipement 26,000
Less: Accumulated Depreciation 3,000 23,000

Furniture and Fixtures 10,000
Total ₱ 693,000
Note 9- Trade and Other Payables

Accounts Payable ₱ 105,000
Notes payable 180,000
Accurued Expenses 19,000
Total 304,000
Read:
Lesson 2 Financial Statements for a Service Business and the Fundamental Accounting
Equation
Exercise 1
Write the letter of the correct answer on the blank.
a. Statement of financial position

b. Income statement
c. Statement of changes in owner’s equity
d. Assets
e. Liability
f. Owner’s equity
______1. Shows the result of operation for a given period of time

______2. Economic resources owned by the business expected for future gain.
______3. Shows the financial condition/position of a business as of a given period
______4. Interest of the owners on the business
______5. Shows the changes in the capital or owner’s equity as a result of additional
investment, withdrawals, net income or net loss for the year.
______6. Debts, obligations to pay, claims of the creditors on the assets of the business.
Exercise 2
a. Cash
b. Cash equivalent
c. Marketable securities
d. Account receivable
e. Note receivable
f. Inventories
g. Prepaid expenses
______1. Promissory note issued by the client for goods received

______2. Items that will be used in the operations of the business that have been

paid in advance
______3. Stock purchased by business to be held for a short time
______4. Unsold goods at the endof accounting period
______5. Amount collectible from customer to whom sales havebeen made or services have
been rendered on account or credit
______6. Includes coins, currencies, checks, and bank deposits
______7. Short-term investment readily convertible to known amounts of cash subject to an
insignificant risk to changes in value.
Exercise 3
a. Land
b. Building
c. Equipment
d. Furniture and fixtures
e. Accumulated depreciation
f. Intangible assets
______1. Contra-asset account representing expired cost of property, polant, and equipment as
a result of usage and passage of time.
______2. Lot used by the business on which a building can be constructed
______3. Non-monetary assets without physical substance held for use in the production or
Supply of goods, for rental to others, or for administrative purposes e.g., goodwill,
patents, copyright
______4. Tables, chairs, curtains, lightning fixtures, and wall decors
______5. Edifice, structure, used to house the office, store, factory
______6. Typewriter, air-conditioner, calculator, filing cabinet, computer, electric fan, trucks,
cars used in business.
Exercise 4
a. Account payable
b. Notes payable
c. Loan payable
d. Utilities payable
e. Unearned revenues
f. Accrued liabilities
g. Interest expense
______1. Debts arising from purchase of an asset on account evidenced by a promissory note
______2. An obligation to pay utility companies for services received from them
______3. Amount owed to others for expenses already incured but not yet paid
______4. Liability arising from amount of money borrowed by the business
______5. Debts arising from acquisition of services on account
______6. Obligation of the business arising from advance payments received before services
are provided to the customer.

Exercise 5
Find the missing amounts.
Assets Liabilities Owner’s equity

A. ₱ 4,902,400 ₱ ₱2,153,800
B. 9,656,000 987,200
C. 1,141,000 646,000
D. 8,200,000 3,250,000
E. 25,000,000 14,600,000
Exercise 6
For each of the following, write I if it is an income statement item and B if it is a balance sheet
item.
______1. Interest expense
______2. Interest receivable
______3. Mortgage payable
______4. Interest Income
______5. Miscellaneous Expense
______6. Drawing account
______7. Supplies Expense
______8. Supplies
______9. Equipment
______10. Building
______11. Salaries Expense
______12. Account Payable
______13. Prepaid rent
______14. Insurance Expence
______15.Cash
Exercise 7
Below are the classifications commonly found on a classified balance sheet. On the blank
provided before each number, write the classification to where it belongs.
a. Current assets
b. Property, plant, and equipment
c. Current liabilities
d. Non-current liabilities
e. Owners’s equity
f. Not a balance sheet item.
______1. Land
______2. Rent expense
______3. L, Capital
______4. Account Receivable
______5. Unearned rent
______6. Supplies used

______7. Supplies on hand
______8. Prepaid insurance
______9. Account payable
______10. Notes receivable
______11. Mortgage Payable
______12. Taxes payable
______13. Truck
______14. Equipment
______15. Commossion Earned
Exercise 8 – Comprehensive problem
Presented in the trial balance of Niko Ong Art Gallery. From the information given, prepare the
following by completing the incomplete statements and the accompanying notes to financial
statements.
1. Income Statement
2. Statement of Financial Position
3. Statement of changes in owner’s Equity
Niko Ong Art Gallery

Trial Balance
December 31, 2012
Cash ₱ 840,500
Account Receivable 50,000
Art Supplies 12,000
Prepaid Rent 30,000
Transportation Equipment 300,000
Office Equipment 50,000
Account Payable ₱ 37,000
Notes Payable 200,000
Utilities Payable 900
Unearned Painting revenue 250,000
Ong, Capital 500,000
Ong, Drawing 30,000
Painting Revenue 350,000
Salaries Expense 2,500
Utilities Expense 4,900
Total ₱ 1, 337,900 ₱ 1, 337,900

LESSON 3 THE ACCOUNTING EQUATION
Learning Outcomes:
• Identify the effects of transaction on the accounting equation

• Analyze the different transaction in a service type of business
INC- Increase
DEC- Decrease
NC- No Change
Transaction Assets Liabilities Capital Analysis

1. Owner invests INC No INC An entity separate and distinct from the owner is
cash Change created. The cash investment of the owner
increases the cash of the business and the capital.
2. Purchases INC INC No Supplies increase the asset of the owner and the
supplies on Change liability correspondingly increases as supplies
credit have been bought on account or credit.
3. Owner invests INC No INC The equipment increases the assets of the
equipment Change business. Since this is an investment by the
owner, capital of the owner correspondingly
increases.
4. Buys land INC/DEC No No Land increases the assets of the business but cash
paying cash Change Change correspondingly decreases with the cash paid for
purchase of the land.
5. Borrows cash INC INC No Cash increases the assets of the business because
with note Change the business borrowed money. Notes payable
increases the liabilities of the business as it
represents an obligation on the part of the
business to pay at a future date.
6. Rendered INC No INC The business earned an income by rendering
services for Change services and collecting revenues in cash. The
cash effect in the accounting equation is an increase in
cash for the collected and an increase in capital
as revenue increases capital.
7. Paid utilities DEC No DEC Payment represents cash outflow decreasing the
expense for Change assets of business. Expenses decrease the capital
the month of the business as they have an opposite effect
on income.
8. Paid the DEC No No This transaction is a payment of account. Since
supplies Change Change there is a cash outflows representing the
bought on payment of an existing liability, assets decreased
credit in the amount of liability on supplies paid.

9. Rendered INC INC INC Assets increased by the amount of account
services on receivable expected to be collected from the
credit customer to whom the services represents
revenue.
10. Collected the INC/DEC No No Assets increased as there was cash inflows in the
account in Change Change amount of the collection. However, assets
transaction #9 correspondingly decreased with the amount of
collection as the account receivable which is an
assets account will decreased. This is because the
amount the customer owes has already have
been collected.
Transaction Assets Liabilities Capital Analysis

1. Mr. Sy invests INC-CASH No INC- Mr. An entity separate and
₱ 500,000 cash ₱500,00 Charge Sy, distinct from Mr. Sy is
Capital ₱ created. The ₱500,000 cash
500,000 investment of Mr. Sy
increases the cash of the
business and the capital of
the owner.
2. Purchases INC INC - No The ₱5,000 supplies increase
₱ 5,000 supplies SUPPLIES Accounts change the assets of the business
on credit ₱5,000 Payable and the liability
₱5,000 correspondingly increases as
supplies were bought an
account or credit.
3. Owner invests INC No INC- Mr. The ₱60,000 land increases
₱60,000 EQUIPMENT Charge Sy, assets of the business. Since
equipment ₱60,000 Capital this is an investment by Mr.
₱60,000 Sy, capital of Mr. Sy
correspondingly increases by
₱60,000.
4. Buys land INC-LAND No No The ₱600,000 land increases
₱ 600,000 ₱600,00 Charge change assets of the business, but
paying cash DEC-LAND cash correspondingly
₱600,000 decreases by ₱600,000 with
the payment made for land.
5. Borrows cash INC-CASH INC - No Cash increase the assets by
₱20,000 with ₱20,000 Notes change ₱20,000 because the
notes payable Payable business borrowed money.
₱20,000 Notes payable increases the
liabilities by ₱20,000 as it
represent an obligation on the
part of the business to pay at
a future date.
6. Redered INC-CASH No INC- The business earned
₱10,000 service ₱10,000 Charge SERVICE ₱10,000 income by rendering
for cash ₱10,000 services and collecting
revenues in cash. Cash,

therefore, increases by
₱10,000 and the capital
increases by ₱10,000 as
revenue increases capital.
7. Paid ₱700 utility DEC-CASH No DEC- Payment of ₱700 represents
expense for the ₱700 Charge UTILITIES cash outflows decreasing the
month EXPENSE assets of the business.
₱ 700 Expense decrease the capital
of the business as they have
an opposite effect on income.
8. Paid the DEC-CASH DEC- No This transaction is a payment
supplies bought ₱5,000 Accounts change of account. Since there is
on credit in Payable cash outflows representing
transaction #2 ₱ 5,000 the payment of the ₱5,000
liability, cash decrease by
₱5,000 and liability likewise
decrease by ₱5,000. The
liability has been paid in full.
9. Rendered INC- No INC- Assets increased by ₱2,000
₱2,000 services ACCOUNTS change SERVICE which is the amount of
on credit RECEIVABLE INCOME accounts receivable expected
₱2,000 ₱2,000 to be collected from the
customer to whom the service
was rendered. Capital
increased by ₱2,000 since
revenue increases capital.
10. Collected the INC-CASH No No Assets increased by ₱2,000
account # 9 ₱2,000 change change representing the amount of
DEC- the collection. However,
ACCOUNTS assets correspondingly
RECEIVABLE decreased by ₱2,000 which is
₱2,000 the amount of accounts
receivable collected. This is
because you have already
collected from the customer
who owes you. You have no
accounts receivable from the
customer.

Read:
Lesson 3 The Accounting Equation
Exercise 1
Show the effects on the accounting equation. Write + for increase, - for decrease, and
NC for no change.
Asset Liabilities Capital

1. Paid account
to creditors
2. Sold truck for
cash at price
equal its cost
3. Collected an
account
receivable
4. Purchased a
typewriter in
cash
5. Paid utilities
for the month
6. Owner
withdrew cash
for personal
use
Exercise 2
NC for no change.
Asset Liability Capital

1. Owner invested
cash in the
business.
2. Owner borrowed
money from the
bank
3. Owner made an
additional
investment in the
business.
4. Owner purchased
a typewriter on

account.
5. Bought truck
paying 10% down
and balance on
account.
Exercise 3
NC for no change.
Asset Liability Capital

1. Niko opened
a dental clinic
by investing 1
million pesos.
2. Borrowed
₱100,000
from bank
rupt bank.
3. Invested a
dental chair
worth
₱300,000
4. Bought from A
Co. tables
worth
₱70,000. Paid
₱10,000 cash
and the
balance on
account.
5. Withdrew
₱9,000 for
personal use
6. Purchased
cabinets for
₱15,000 in
cash.
7. Paid his
account to A
Co. In full.

LESSON 4 RECORDING BUSINESS TRANSACTION
(Double- Entry System)
Learning Outcomes:
1. Familiarize oneself with the accounting cycle

2. State and apply the rules of debit and credit
3. Analyze transactions with the use of the debit and credit in T-accounts
4. Journalize transactions in the general journal
5. Post the journal entries in the general ledger
6. Prepare the trial balance and appreciate its use
Curse Materials:
The double -Entry system of Recording Transactions
Recording transactions in accounting is based on the double-entry system. The

transaction has a dual effect which means that every transaction affects at least two accounts.
For every debit, there is a corresponding credit. The total amount of the account debited must
equal the total amount of the account credited.
The accounting Cycle
The life if a business is divided into accounting periods of equal length. A standard
sequence of accounting procedures is repeated for each period. These uniform procedures
done to accomplish the accounting process are referred to as the accounting cycle.
1. Identifying and analyzing the events to be recorded

This is the process of identifying and analyzing the transactions to be recorded through
the business documents. Business documents are forms containing evidence to support
a business transaction. These documents provide the data concerning the parties
involved in the transaction, the exchange made, the date, and the money value of the
exchange. In determining the exchange made, the value received by the business and
the value parted are translated into their debit components.
2. Recording transactions in the journal

This is known as journalizing. It is the process of recording the transaction in the first
book of account known as the journal.
3. Posting journal entries to the ledger

This is known as posting. It is the process of transferring the information found in the
journal into the book of final entry known as the ledger. The ledger summarizes the
increase or decrease of individual accounts.
4. Preparing the trial balance

The trial balance is a list of accounts found in the ledger together with the accounts
balance or total. This is a proof that for every debit, there is a corresponding credit.
Hence, it is also a proof that the ledger is in balance.
5. Preparing the worksheet and adjusting entries

The worksheet is a common tool used by accountants to assemble on a sheet of paper
all the information needed to prepare the financial statements, adjusting entries, closing
entries, and the post-closing trial balance.
6. Preparing the financial statements

A statement of financial position, income statement, statement of changes in owner’s
equity, and statement of cash flows are prepared to provide useful information to parties
interested in the financial information of the business.
7. Journalizing and posting of adjusting journal entries

Adjusting entries are prepared at the end of the accounting period to update the
accounts for internal transaction because they affect more than one accounting period.
This will record the accruals, expiration of deferrals, estimation, and other events from
worksheet.
8. Journalizing and posting of closing journal entries

Closing entries are prepared at the end of the accounting period to update the owner’s
capital account. This will also eliminate the balances of the nominal accounts so that
they may be ready for the next period.
9. Preparing the post closing trial balance

After closing entries have been posted, the post closing trial balance is prepared from
the general ledger accounts. This is necessary to assure that these entries have been
correctly posted. This will also check the equality of the debits and credits after closing
entries.
10. Journalizing and posting of reversing journal entries

Reversing entries are prepared to simplify the accounting process. The adjusting entries
are simple reversed on the 1st day of the accounting period. Not all adjusting entries are
simply reversed on the 1st day of the accounting period. Not all adjusting entries are
reversed, only accruals and deferrals that use the nominal accounts.
The analysis of transaction
Following are the steps involve to analyze transactions:
1. From the business document, determine the kind of transaction or exchange made.
2. Analyze the transaction to determine the accounts affected. They can either affect the
assets, liabilities, owner’s equity, revenue or expenses accounts.
3. Determine the effects of the transaction on the accounts affected. The transaction can
either increase or decrease the account.

4. Appy the rules of debit and credit to identify whether the accounts affected should be
debited or credited to show the corresponding increase or decrease.
The Journal
The journal is a chronological record events or business transactions showing all the
effects of each transaction in terms of debits and credits. Because transactions are initially
recorded in the journal, it is called the book of original entry. The simplest journal is the general
journal.
As journal entry should contain the following:
1. Date. Write the month on the first transaction unless there is a change in month for the
succeeding transactions or a new page is used.
2. Account titles and explanation. Write the debit account at the extreme left of the first line
while the credit account is indented half-inch on the next line. The explanation describing
the transaction is written on the extreme left of the next line below the credit. Remember
to skip one line before proceeding to the next transaction.
3. P.R (Posting Reference). Write the corresponding account number here once the entry
is posted. Meanwhile, it is left blank until posting has been done.
4. Debit. Under this column, write the debit amount for each debit account.
5. Credit. Under this column, write the credit amount for each debit account.
Presume that Niko Ong established an art Gallery with an initial investment of ₱500,000 on
September 5, 2012. The journal entry is shown below.
General Journal
Page number
Date Account titles and explanation P.R Debit Credit
2012
Sept. 5 Cash 500,000
Initial Investment
The simple and compound entry
When only two accounts are affected, we call this a simple entry where there is only one
debit account and credit account. The previous example where the owner, Niko Ong, made an
initial investment is a simple entry. In some cases. A transaction would require the use of three
or more accounts in which case the entry is called a compound entry.

Journalizing the Transaction
Journalizing transaction is the process of recording transaction in the journal after it has
been recognized and measured.
In journalizing transactions the double entry system is used. In this case, two or more
accounts are affected by each transaction. It follows that for every debit, a corresponding credit
is made. The total debits should equal total credits for every transaction. In this way, the equality
of the accounting equation is maintained.
Rules for debit and credit
You debit to show You credit to show
1.) Increase in assets 1.) Decrease in assets
2.) Decrease in liability 2.) Increase in liabilities
3.) Decrease in owner’s equity 3.) Increase in owner’s equity
- Owner’s withdrawal - Initial investment

- Expenses - Additional investment
- Revenue/Income
Illustrative problem
Initial investment
The following are transactions for Niko Ong Art Gallery for the month of September. They will be
recorded using the double entry system. To analyze each transaction, the following shall be
used to show the effect on the accounts as follows: A (for assets), L (for liability) or OE (Owner’s
Equity). The effects on owner’s equity is subclassified as follows: OE:R (Revenue) and OE:E
(Expenses).
Sept. 1 Niko Ong has a talent for painting. He is into charcoal, water color, acrylic,
and oil painting. Having the flair for it, he started studying painting under a
private tutor at the age of 10. Because of many request for job paintings Niko
is getting from prospective customers, he decided to put up an art gallery. He
invested ₱500,000 in this initial endeavor.
Analysis Assets increased. Owner’s Equity increased.
Rules Debit increases in assets. Credit increases in owner’s equity.
Entry Increase in assets is recorded by a debit to cash. Increase in owner’s equity is

recorded by a credit to Ong, Capital.

Dr Cr
Cash (A) 500,000
Ong, Capital (OE) 500,000
Initial Investment
Acquisition of transportation equipment for cash
Sept.1 Acquired transportation equipment to be used for delivery ₱300,000 cash.

Analysis An asset increases in assets. Credit decreases in assets.
Rules Debit increases in assets. Credit decreases in assets.
Entry Increase in assets is recorded by a debit to transportation equipment.
Decrease in assets in recorded by a credit to cash.
Dr Cr
Transportation Equipment (A) 300,000
Cash (A) 300,000
Purchase transportation equipment for cash
Advance Payment of Rental
Sept.1 Rented office space and paid two months rent in advance, ₱30,000.
Analysis An asset increased. Another asset decreased.
Entry Increase in assets is recorded by a debit to prepaid rent.
Decrease in assets in recorded by a credit to cash.
Dr Cr
Transportation Equipment (A) 30,000
Cash (A) 30,000
Paid two months rent in advance
Issuance of Note for Cash
Sept.2 Niko Ong issued a promissory note for a ₱200,00 0 loan from metro bank. The
note carries a 12% interest per annum. The interest and the principal are
payable after one year.
Analysis Asset increased. Liabilities increased.
Rules Debit increases in assets. Credit decreases in liability.

Entry Increase in assets is recorded by a debit to cash.
Increase in liabilities is recorded by a credit to notes payable.
Dr Cr
Cash (A) 200,000
Notes Payable (L) 200,000
Borrowed money from the bank
Issuing a promissory note
Events not Affecting the accounting Equation (no journal entry)
Sept.2 Hired an office secretary with ₱5,000 monthly salary. The secretary started work
on the same day.
There is no entry necessary at this point as the hiring of the secretary has no effect on
the assets, liabilities, and owner’s equity.
Sept.2 Called Enriquez arty supplies and ordered oil paints and brushes worth ₱12,000
There is no entry necessary at this point as ordering of the oil paints and brushes has no
effect on the assets, liabilities, and owner’s equity. No delivery of the supplies has been made
thereby no liability arises.
Payment of insurance premiums
Sept.4 Paid insular life insurance co. ₱18,000 for one year insurance of art gallery.
Analysis Asset increased. Another asset decreased.
Entry Increase in assets is recorded by a debit to prepaid insurance.
Decrease in assets is recorded by a credit to cash.
Dr Cr
Prepaid Insurance (A) 18,000
Cash (A) 18,000
Paid one year insurance premium
Acquisition of office equipment paying down payment and the balance on account
Sept.5 Acquired office equipment from Abenson’s ₱50,000 paying ₱20,000 and the
balance at the end of the month. Note: A compound entry is needed in this
transaction.
Analysis Asset increased. Asset decreased. Liabilities increased
Rules Debit increases in assets. Credit decreases in assets. Credit increases in
liabilities.
Entry Increase in assets is recorded by a debit to office equipment.
Decrease in assets is recorded by a credit to cash. Increase in liabilities is

recorded by a credit to account payable.
Dr Cr
Office Equipment (A) 50,000
Cash (L) 20,000
Accounts Payable (L) 30,000
Bought office equipment paying cash and the balance

on account.
Purchase supplies on account
Sept.8 The ₱12,000 oil paints ordered from Enriquez art supplies were delivered on
account.
Analysis Asset increased. Liabilities increased
Rules Debit increases in assets. Credit increases in liabilities.
Entry Increase in assets is recorded by a debit to office equipment.
Decrease in assets is recorded by a credit to art supplies. Increase in liabilities is
recorded by a credit to account payable.
Dr Cr
Art supplies (A) 12,000
Account Payable (A) 12,000
Purchased art supplies on account
Partial settlement of account payable
Sept.10 Paid Enriquez art supplies ₱5,000 of the amount owed.

Analysis Assets decreased. Liabilities decreased
Rules Debit decreases in liabilities. Credit decreases in assets.
Entry decrease in liabilities is recorded by a debit to account payable.
Dr Cr
Account Payable (A) 5,000
Cash (A) 5,000
Made partial payment of liability
Cash collection from income earned
Sept.11 Painted the portrait of Don Enriquez Zobel receiving ₱200,000 cash for the
completed portrait.
Analysis Assets increased. Owner’s increased

Increase in owner’s equity is recorded by a credit to painting revenue.
Dr Cr
Cash (A) 200,000
Painting Revenue (OE:R) 200,000
Received cash for painting portrait
Payment of salaries
Sept.15 Paid secretary’s salary for half month, ₱2,500

Analysis Assets decreased. Owner’s decreased
Rules Debit decreases in owner’s equity. Credit decreases in assets.
Entry Decrease in owner’s equity is recorded by a debit to salary expense.
Dr Cr
Salaries Expense (OE:E) 2,500
Cash (A) 2,500
Paid secretary’s half month salary
Collection od unearned income
Sept.17 Received ₱250,000 cash for a contract to paint the portrait od Don Susana
Analysis Assets increased. Liabilities increased
Rules Debit increases in assets. Credit increases in liabilities.
Increase in liabilities is recorded by a credit to unearned painting revenue.
Dr Cr
Cash (A) 250,000
Unearned painting revenue (L) 250,000
Received cash for painting services to be
rendered
Income Earned on Account
Sept. 21 Delivered and billed Mr. Sy ₱150,000 for a landscape painting

Analysis Assets increased. Owner’s equity increased
Entry Increase in assets is recorded by a debit to account receivable.
Increase in owner’s equity is recorded by a credit to painting revenue.

Dr Cr
Accounts receivable (A) 150,000
Painting Revenue (OE:R) 150,000
Landscape painting on account
Cash withdrawal by owner for personal use
Sept. 23 Niko Ong withdrew ₱30,000 for personal use

Analysis Assets decreased. Owner’s equity decreased
Entry Decrease in owner’s equities recorded by a debit to Ong.
Dr Cr
Ong, Drawing (OE) 30,000
Cash (A) 30,000
Niko Ong withdrew cash for personal use.
Unpaid expenses already consumed / incurred (accrued expenses)
Sept. 23 Received bill from PLDT ₱900.

Analysis Liabilities increased. Owner’s equity decreased
Rules Debit decreases in owner’s equity. Credit decreases in liabilities.
Entry Decrease in owner’s equities recorded by a debit to utilities expense.
Increase in liabilities is recorded by a credit to utilities payable.
Dr Cr
Utilities expense (OE:E) 900
Utilities payable (L) 900
Received bill from PLDT
Partial collection of accounts receivable
Sept. 25 Received ₱100,000 from Mr. Sy as partial payment for landscape painting
delivered last sept. 21
Analysis An assets increased. Another assets decreased
Rules Debit decreases in assets. Credit decreases in assets.
Decrease in assets is recorded by a credit to account receivable.
Dr Cr

Cash (A) 100,000
Account receivable (A) 100,000
Received cash as partial collection from Mr. Sy
Payment of expenses incurred/consumed
Sept. 30 Paid electricity bill for the month, ₱4,000.

Analysis Assets decreased. Owner’s equity decreased
Dr Cr
Utilities expense( OE:E) 4,000
cash (A) 4,000
Paid electric bill for the month
Entry Decrease in owner’s equity is recorded by a debit to utilities expense.
Use of T-accounts
An account is a form of record that summarize the increases or decreases of any special
accounting value. The simplest form of an account is the T-Account because the accounting
equation is represented by a big T. It is an informal tool used to analyze the effect of a
transaction in the assets, liability, owner’s equity, revenue, and expenses.
The three elements of an account are:
1. Account title
2. Debit
3. Credit
The T-account and the rules of debit and credit
Account title
Debit Credit
1. Increase in asset 1. Decrease in asset

2. Decrease in liability 2. Increase in liability
3. Decrease in owner’s 3. Increase in owner’s equity
equity 4. (investment, additional
4. (withdrawals and expense investment,
revenue/income)

Illustrative Problem:
Sept 1 Niko Ong opened an art gallery. He invested ₱500,000 in this initial endeavor.
Rules: Debit increases in assets. Credit increases in owner’s equity.
Cash Ong, capital
Debit Credit Debit Credit
9/1 500,000 9/1 500,000
Sept 1 Acquired transportation equipment for ₱300,000
Rules Debt increases in assets. Credit decreases in assets.
Transportation Equipment Cash
9/1 300,000 9/1 500,000 9/1 300,000
Note: The ₱500,000 debit to cash is from the first September 1 transaction where Niko Ong
invested cash. We shall record all transactions continuously as they transpire
Sept.1 Rented office space and paid two months rent in advance, ₱30,000
Rules: Debit increases in assets. Credit de creases in assets.
Prepaid Rent Cash
9/1 300,000 9/1 500,000 9/1 300,000

9/1 30,000
Sept. 2 Niko Ong issued a promissory note for a ₱200,000 loan from Metro Bank.
Take note carries a 12% interest per annum. The interest and the principal are
payable after one year.

Rules: Debit increases in assets. Credit increases in liabilities.
Cash Notes Payable
9/1 500,000 9/1 300,000 9/2 200,000

9/2 500,000 9/1 30,000
Sept. 4 Paid insular life insurance Co. ₱18,000 for a one year insurance of the art gallery.
Rules: Debit increase in assets. Credit decrease in assets.
Cash Prepaid Insurance
9/1 500,000 9/1 300,000 9/4 18,000

9/2 200,000 9/1 30,000
9/4 18,000
Sept. 5 Acquired office equipment from Abenson’s, ₱50,000 paying ₱20,000 and the
balance at the end of the month.
Rules: Debit increases in assets. Credit decreases in assets. Credit increases in

liabilities.
Cash Office Equipment
9/1 500,000 9/1 300,000 9/5 50,000

9/2 200,000 9/1 30,000
9/4 18,000
9/5 20,000
Account Payable
Debit Credit
9/5 30,000
Sept. 8 The ₱12,000 oil paints ordered from Enriquez Art Supplies were delivered on

account.
Rules: Debit increases in assets. Credit increases in liabilities.
Art Supplies Account Payable
9/8 12,000 9/5 30,000
9/8 12,000
Sept. 10 paid Enriq2uez Art Supplies ₱5,000 of the amount owed.
Rules: Debit decreases in liabilities. Credit decreases in assets.
9/1 500,000 9/1 300,000 9/10 5,000 9/5 30,000

9/2 500,000 9/1 30,000 9/8 12,000
9/4 18,000
9/5 20,000
9/10 5,000
Sept. 30 Paid electricity bill for the month, ₱4,000
Rules: Debit decreases in owner’s equity. Credit decreases in assets.
9/1 500,000 9/1 300,000 9/23 900 9/5 30,000

9/2 200,000 9/1 30,000 9/30 4,000 9/8 12,000
9/11 200,000 9/4 18,000
9/17 250,000 9/5 20,000
9/25 100,000 9/10 5,000
9/15 2,500
9/23 30,000
9/30 4,000

The ledger
The ledger is a group of the account used by the company. It is the book of final entry.
An account is an accounting device or form or re4cord that summarizes the increase or
decreases of any specific accounting value. The accounts in the general groups:
1. Balance sheet or real accounts (assets, liabilities, and owner’s equity)

2. Income statement or nominal accounts (revenue and expenses)
The ledger has a record of each account. The T-accounts is the basic format used to record
every account. While the journal is chronologically arranged by date, the ledger is organized
by account.
Chart of Accounts
Chart of accounts is a list of all account titles used by company with their corresponding
account numbers. Account titles are arranged in financial statement order. Balance sheet
accounts which includes assets, liabilities, and owner’s equity come first. Account title in the
income statement which include revenue and expenses follow. The accounts are so
numbered for purposes of indexing and cross-referencing.
The succeeding pages present the chart of accounts of Niko Ong art gallery for
illustration.

Chart of Accounts
Balance Sheet Accounts
Assets Liabilities
110 Cash 210 Account Payable
120 Account receivable 220 Notes Payable
130 Art supplies 230 Salaries Payable
140 Prepaid rent 240 Utilities Payable
150 Prepaid insurance 250 Interest Payable
160 Transportation Equipment 260 Unearned Painting Revenue
165 Accumulated Depreciation

170 Office Equipment Owner’s Equity
175 Accumulated Depreciation
310 Ong, Capital
320 Ong, drawing
330 Income Summary
Income Statement Account
Income Expenses
410 Painting Revenue 510 Salaries Expense

520 Art Supplies Expense
530 Rent Expense
540 Insurance Expense
550 Utilities Expense
560 Depreciation Expense: Transportation Equipment
570 Depreciation Expense: Office Equipment
The Normal Balance of an Account
The side of an account where increases are recorded is referred as the normal balance
of an account. This can be the left side (debit) or the right side (credit). The reason for this is
account increases usually exceed account decreases. The following are the normal balances of
accounts:
Normal Debit Balance Normal Credit Balance
Asset Liability
Owner’s Drawing Owner’s Equity
Expense Income
Posting to the ledger
Posting is the process of transferring information from the journal to the ledger. Debits in
the journal are correspondingly posted as debits in the ledger, and credits in the journal are
likewise posted as credit in the ledger. The last step in posting are as follows:
1. From the journal, copy the date of transaction to the ledger.
2. Under the journal reference (J.R.) column of the ledger, copy the page number of the
journal.
3. Under the debit column in the ledger, transfer the debit amount from the journal. Under
the credit column in the ledger, transfer the credit amount from the journal.
4. After posting the amount to the ledger, write the account number in the posting reference
(P.R.) column of the journal.

General journal Page 1
Date Account Titles and Explanation P.R Debit Credit
2012
Sept. 1 Cash 110 500,000
Ong, Capital 310 500,000
Initial Investment
General Ledger
Account: Cash Account No. 110
Date Explanation J.R Debit Credit Balance
2012
Sept. 1 J-1 500,000 500,000
Account: Cash Account No. 110
Date Explanation J.R Debit Credit Balance
2012
Sept. 1 J-1 500,000 500,000
The Ledger Accounts After Posting
The debit or credit balance of each account is determined at the end of the accounting
period in order to prepare the trial balance. The debit column and the credit column of each
account are added to get the balance of each account. If an account’s total debt exceeds total
credit, the account has a debit balance. If the total credit exceeds total debit, the account has a
credit balance.
For illustration purposes, the ledger accounts of Niko Ong Art Gallery after posting, are
presented as follows:
Cash Account Payable
9/1 500,000 9/1 300,000 9/10 5,000 9/5 30,000

9/2 200,000 9/1 30,000 9/8 12,000
9/11 200,000 9/4 18,000 5,000 42,000
9/17 250,000 9/5 20,000 Bal. 37,000
9/25 100,000 9/10 5,000
9/15 2,500
9/23 30,000 Notes Payable
9/30 4,000 Debit Credit
1,250,000 409,500 9/2 200,000
Bal. 840,500 Bal. 200,000
Accounts receivable Utilities Payable

9/21 150,000 9/25 9/30 900
Bal. 50,000 100,000 Bal. 900
Art Supplies Unearned Painting Revenue

9/8 12,000 9/17 250,000
Bal. 12,000 Bal. 250,000
Prepaid Rent Ong, Capital

9/1 30,000 9/1 500,000
Bal. 30,000 Bal. 500,000
Prepaid Insurance Ong, Drawing

9/4 18,000 9/23 30,000
Bal. 18,000 Bal. 30,000
Transportation Equipment Painting Revenue
9/1 300,000 9/11 200,000
Bal. 300,000 9/21 150,000
Bal. 350,000

Office Equipment Salaries Expense
9/5 50,000 9/5 2,500
Bal. 50,000 Bal. 2,500
Utilities Expense
Debit Credit
9/23 900
9/30 4,000
Bal. 4,900
The Trial Balance
The trial balance is the schedule of all balances to prove the equality of the debit and
credit. It is a listing of all account titles with their respective debit or credit balances taken from
the ledger. However, it does not check or vouch the accuracy of the report.
The following are the steps in the preparing of the trial balance.
1. In their proper numerical, make a list of all account titles.

2. 2. Get the account balance of each ledger account and write them under their
corresponding debit or credit column.
3. Foot or add the debit account the credit column of the trial balance.
4. Check whether the debit totals and credit totals are equal. They must be equal,
otherwise your trial balance has error.
Possible Errors in the Trial Balance
1. Transportation- this error occurs when order of two numbers are reversed.
Ex. 48 was erroneously written as 84
1234 was erroneously written as 4321
2. Trans placement or slide- this occurs when decimal point has been moved or misplaced.
Ex. 100 was erroneously written as 10
67.89 was erroneously written as 678.9
Note: In both cases the discrepancy between the two columns of the trial balance is
divisible by 9.
For illustration purposes, presented below is the trial balance of Niko Ong Art Gallery.

Trial Balance
September 30,2012
Cash ₱ 840,500
Accounts Receivable 50,000

Art Supplies 12,000

Prepaid Rent 30,000
Accounts Payable ₱ 37,000
Unearned Painting Revenue 250,000

Ong, Drawing 30,000

₱1,337,900 ₱1,337,900
Read:
Lesson 4 Recording Business Transaction
Theory Exercise
Write the letter of the correct answer on the blank provided.
A. Journal B. Ledger C. Posting D. Journalizing
E. Accounting Cycle F. Trial Balance
__________1. The process of transferring information from the journal to the ledger.
__________2. It is the first book of account.
__________3. The uniform procedure done to accomplish the accounting process.
__________4. Process of recording transaction in the journal.
__________5. It is the book of final entry.
__________6. It is a list of accounts found in the ledger together with account’s balance.

Exercise 1
Malou decided to invest in a travel agency. Below are the transaction for the month of June.
You are requested to journalize the transaction.
June 1 Malou invested a car worth ₱550,000 and cash of ₱1,200,000.
4 borrowed ₱250,000 from Mito Bank
5 Bought furniture from Slim’s ₱30,000 on account
6 Withdrew cash ₱ 100,000 for personal use
15 Rendered services to Happy Tours ₱500,000 on account
21 Paid employees’ salaries for ₱50,000
30 Collected account from Happy Tours
Date Explanation PR Debit Credit

2012 1Cash 1,200,000
June _____________________ ____________
_____________________ _____________
Initial Investment
4 Cash 250,000
Loan Payable 250,000
Borrowed money from bank
___________
5 _____________________ ____________
_____________________
Bought furniture on account
___________
6 _____________________ _____________
_____________________
Withdrew cash for personal
use
15_____________________ ___________
_____________________ _____________
Rendered services on
account
21_____________________ ____________
_____________________ _____________
Paid employees’ salaries
____________
30_____________________ _____________
_____________________

Collected account in full
Exercise 2
Gisel decided to put up a consultancy firm. Below are the transaction for the month of
August, You are requested to journalize the transactions.
August 1 Gisel invested cash of ₱1,500,000
5 Rendered services to La Swerte Co. ₱75,000 on account
6 Bought Equipment from Bill’s ₱120,000 issuing a note for the account
7 Withdrew ₱90,000 for personal use
10 Paid rent for the month ₱26,000
15 Made additional investment of ₱320,000 in the business

2012 1 _____________________ ____________
Aug _____________________
Initial Investment _____________
5 _____________________ ____________
_____________________ _____________
Rendered services on
account
___________
6 _____________________ ____________
_____________________
Bought equipment on
account
___________
7 _____________________ _____________
_____________________
use
___________
10_____________________ _____________
_____________________
Paid rent for the month
____________
15_____________________ _____________
_____________________
Additional investment

Exercise 3
Chubs decided to put up a dental clinic. Below are the transaction for the month of
October, You are requested to journalize the transactions.
Oct. 1 Chubs invested cash of ₱500,000
5 Rendered services to Colgate Co. employees ₱75,000 cash.
6 Bought dental equipment ₱120,000 cash.
7 Chubs withdrew ₱30,000 for personal use.
18 Received a bill from Meralco ₱2,900
25 Paid Meralco

2012 2 _____________________ ____________
Aug _____________________
Initial Investment _____________
5 _____________________ ____________
_____________________ _____________
Rendered services for cash
___________
6 _____________________ ____________
_____________________
Purchase/bought dental
equipment for cash
___________
7 _____________________ _____________
_____________________
use
___________
18_____________________ _____________
_____________________
To record electricity
consumption for the month
____________
25_____________________ _____________
_____________________
Paid electric bill

LESSON 5 ADJUSTING JOURNAL ENTRIES
Learning Outcomes:
• Define adjusting journal entries and their importance.

• Describe the different types of adjusting journal entries.
• Make the required adjusting journal entries for the different accounts.
Course Materials:
Adjusting journal entries are entries used to update the accounts prior to the preparation
of financial statement because they affect more than one accounting period. Transactions are
apportioned properly between the accounting period affected. The accounts affected are
adjusted so that there would be no overstatement or understatement of balance sheet items and
income statement items.
The process of determining an entity’s net income or net loss requires certain income
and expense accounts to be apportioned over several accounting period. According to the
accrual principle, income is recognizes at the time it is actually earned and expense is
recognized at the time it is actually incurred or used. Thus, receipt of cash does not necessarily
mean a recognition of income, and payment of cash does not mean the recognition of an
expense.
An example of this is the cash received from a customer for the reservation of a hotel
room for two weeks. The receipt of cash from the customer does not necessarily mean that
income should be recognized. The receipt of cash should not recognizes more as a liability than
income. It is more appropriate to treat it is a liability in the form of service to be rendered. It is
only after the customer has checked in the hotel for his two-week stay can his advance payment
be considered as income because the service has already been rendered.
Another example is a one-year insurance premium paid for the insurance of a house.
The amount paid representing a one-year premium cannot be charged outright as an expense.
This is because the premium paid covers a one-year insurance. Hence, the full amount can only
be charged as expense after one year.
Following are the accounts subjected to adjustments:
I. Prepayments are expenses already paid but not yet incurred or used.
Asset method
Journal Entry upon payment:
Prepaid Expense xxx
Cash xxx
Adjusting Journal Entry at the end of the accounting period:

Expense xxx
Prepaid Expense xxx
Note: the amount on the adjusting journal entry represents the expired or used portion of the
payment.
Example 1
On October 1, 2012, X Co. Paid a one-year advance rent for ₱ 24,000. Give the
adjusting Journal Entry on December 31,2012.
Journal Entry upon payment on Oct.1, 2012.
Prepaid Rent 24,000
Cash 24,000
Adjusting Journal Entry at end of the accounting period Dec. 31, 2012
Rent Expense 6,000
Rent prepaid 6,000
To record the expired rent for the year.
Computation
The ₱24,000 rent represents one year or 12 months rent. Divide ₱24,000 by 12 to get
the monthly rent. Multipl it by 3 months representing the rent from Oct. 1 to December 31, 2012.
₱24,000/12 x 3 =₱6,000
₱6,000 is therefore the expired/used rent from Oct. 1 to Dec.31, 2012.
Analysis: When you oaid ₱24,000 for one year rent in advance on Oct. , you debited the asset
account prepaid rent representing 12 months rent. On December 31, at the end of the
accounting period, the ₱24,000 prepaid rent is not totally assets since it includes the 3 months
expired or used portion. Hence, an adjusting entry is necessary to recognize the rent expense
for 3 months by debiting it and decreasing the balance of prepaid rent by crediting it.
Example 2
On march 31, 2012, B Co. Paid ₱72,000 insurance premium for 2 years. Give the
adjusting journal entry on May 31, 2012.
Journal Entry upon payment on Mar. 31, 2012
Cash 72,000

Paid two-year insurance premium in advance
Adjusting Journal entry on May 31, 2012
Insurance Expense 72,000
To record expired insurance for the year
Computation
The ₱72,000 premium represents 2 years or 24 months premium. Devide ₱72,000 by 24

to get the monthly premium the multiply it by 2 to get the used months from Mar. 31 to May 31,
2012.
₱72,000/24 x 2- ₱6,000
Expired insurance premium, therefore to be charged to expense is ₱6,000 representing

the 2 months from March 31 to May 31, 2012.
Analysis: When you paid ₱72,000 for the two-year insurance on march 31, 2012, you debited
the assets account prepaid insurance representing 24 months insurance. On may 21, 2012
which is the end of accounting period, the ₱72,000 prepaid insurance is not totally an asset
since it includes the 2 months expired or used portion (March 31 to May 31). Hence, an
adjusting entry is necessarily to recognize the insurance expense for 2 months by debiting it and
decreasing the balance of prepaid insurance by crediting it.
Example 3
Supplies account on January1, 2012. Show the balance of ₱7,000. On December

31,2012 supplies on hand amounted to ₱2,000.
Adjusting Journal Entry on Dec. 31, 2012.
Supplies Expense 5,000
Supplies 5,000
To record supplies used for the year.
Computation
Supplies at the beginning of the year is ₱ 7,000. At the end of the year, the remaining
balance is ₱2,000. The difference represents the supplies used duting the eyar. Subtract
₱2,000 from ₱ 7,000 to get the supplies used during the year.
₱ 7,000 - ₱2,00. = ₱5,000

Analysis: on January 1, 2012, the asset account supplies has a balance of ₱7,000. Since at the
end of the year, the balance of the assets account supplies decreased to ₱ 2,000, the difference
represents the supplies used during the year. You will have to recognize the used supplies as
an expense by debiting supplies expense and decrease the asset account supplies by crediting
it.
Example 4
Supplies account showed a balance of ₱12,000. Supplies used during the year
amounted to ₱4,000. Give the adjusting journal entry on Dec. 31, 2012
Adjusting Journal Entry on Dec.31, 2012.
Supplies expense 4,000
Supplies 4,000
To record supplies used for the year
Computation
There is no computation necessary because the ₱4,000 supplies used during the year
was already given in the problem.
Analysis: The asset account supplies showed a balance of ₱12,000 at the beginning of the year
supplies used during the year amounted to ₱4,000. This should be recorded as expense by
debiting supplies expense and crediting the asset account supplies to decrease its balance.
II. Unearned or deferred income is income already received but not yet earned.
Liability method
Journal Entry receipt of cash:
Cash xxx
Unearned income xxx
Adjusting Journal Entry at the end of the accounting period:
Unearned income xxx
Income xxx
To record earned portion of the liability
Note: The amount of the adjusting journal entry is the earned portion of the amount initially
received.
Example 1

On November 30, 2012 A Co., received ₱36,000 advance rental for 6 months. Give the
adjusting journal entry on December 31, 2012.
Journal Entry upon receipt of cash on Nov.30.

Cash 36,000
Unearned income 36,000
Received 6 months rent in advance
Adjusting Journal Entry on Dec. 31.
Unearned income 6,000
Income 6,000
To record earned for the year
Computation
The ₱36,000 ash you received represents six months rent. Divide ₱36,000 by 6 to get
the monthly rent then multiply it by 1 month representing the rent from Nov. 30 to Dec. 31, 2012.
₱36,000/12 x 1 = ₱ 6,000
₱6,000 is therefore the rent income from Nov. 30 to Dec. 31, 2012.
Analysis: when you received ₱36,000 for the six months rent paid to you in advance on Nov. 30,
you debited cash and credited the liability account unearned rent income for 6 months rent. On
Dec. 31, which is the end od the accounting period, the ₱36,000 unearned rent income is not
totally a liability account since it now includes the 1 month earned rent. Hence, an adjusting
entry is necessary to recognize the earned portion of the initially recorded unearned rend
income by crediting rent income and debiting unearned rent income to decrease the liability.
Example 2
On may 1, Dr. Young received ₱60,000 for medical fees to be rendered in the next 3 months.
Give the adjusting journal Entry at the end of May.
Journal Entry upon receipt of cash on May 1
Cash 60,000
Unearned medical fees 60,000
Received cash for medical services to be rendered
Adjusting journal entry on May 1
Unearned Medical Fees 60,000
Medical fees 60,000

To record medical fees earned
Computation
The ₱60,000 cash received represents 3-month medical services to be rendered. Divide
₱60,000 by 3 to get the monthly medical fee.
₱60,000/3 = ₱20,000
₱20,000 is therefore the medical fees earned from May 1to May 31, 2012.
Analysis: When the ₱60,000 was received on May 1 for the 3 month medical services paid in
advance, cash was debited and the liability account unearned medical fees was credited
representing 3 months unearned fees. On may 31, the end of the month, the ₱60,000 unearned
medical fees is not totally a liability account since it includes the 1 month medical fees earned.
Hence, an adjusting entry is necessary to recognize the earned portion of the initially recorded
unearned medical fees by crediting medical fees and debiting unearned medical fees to
decrease the liability.
III. Accrued Expense are expenses already incurred or used, but not yet paid.
Adjusting journal entry at the end of the accounting period
Expenses xxx
Expenses Payable xxx
To record unpaid expenses
Example 1
Unpaid salaries at the end of december 31. 2012 amounted to ₱ 20,000.
Salaries Expenses 20,000
Salaries Payable 20,000
To record unpaid salaries at year end
Analysis: this is a liability on the part of the company because the employees have already
worked for this but the company has not paid their salaries. Hence, a liability on the part of
the company should be recognized at the end of the of the accounting period.
Example 2
The company received a telephone bill in the amount of ₱ 1,200 on Dec. 29, 2012 which
the company intends to pay on January 5, 2013.
Adjusting journal entry on December 31, 2012.

Utilities Expenses 1,200
Utilities Payable 1,200
To record unpaid utilities for the month
Analysis: this is a liability on the part of the company because the telephone bill is for the
month of December but the company has not paid for it. Hence, a liability on the part of the
company should be recognized at the end of the of the accounting period.
IV. Accrued Income is income already earned but not yet received.
Income Receivable xxx
Income xxx
To record income earned
Example
A one-year 10% note receivable in the amount of ₱ 100,000 was received on January 1,
2012. The interest and the principal are payable on maturity date. Give the adjusting journal
entry on June 30, 2012
Adjusting journal entry on January 30, 2012.
Interest Receivable 5,000
record interest income earned
Interest = Principal x Rate Time

x
= ₱ 100,000 x 10% a year ½ year

x
= ₱ 100,000 x .1 x 1/2
= ₱5,000 x
Interest for 6 months is ₱5,000
Computation:
Analysis: the note receivable bearer interest at 10% per annum. This interest will received
after one year on January 1, 2013. However, the note has already earned haft-tear interest
on June 30, 2012 in the amount of ₱5,000 although this interest has not yet been received.

Hence, an adjusting journal entry is necessary to recognize the interest earned on the notes
received for 6 months that is, from January 1 to June 30, 2012
V. Bad Debts/ Doubtful Accounts are losses due to uncollectible accounts.
Adjusting journal entry at the end of the accounting period.
Bad Debts Expense xxx
Allowance for Bad Debts xxx
To record estimated uncollectible accounts.
Example 1
Accounts receivable shows a balance of ₱50,000. It is estimated that 10% of this is

uncollectible. Give the adjusting journal entry on December 31, 2012 for the provision of the
estimated uncollectible account.
Bad Debts Expense 5,000
Allowance for Bad Debts 5,000
To record estimated uncollectible accounts
Computation: ₱50,000 x 10%= ₱5,000
Example 2
Accounts receivable shows a balance of ₱50,000. It is estimated that 10% of this is

uncollectible. Allowance for Bad debts per general ledger has a balance of ₱3,000. Give the
adjusting journal entry on December 31, 2012 for the provision of the estimated uncollectible
account.
To record estimated uncollectible accounts
Note: the required allowance for doubtful account is ₱5,000. However, per general ledger, the
allowance for doubtful accounts already shows a balance of ₱3,000. An adjusting journal entry
to bring the balance of the allowance for doubtful accounts to the required balance of ₱5,000 is
necessary. This can be best illustrated by the T-account.
Allowance for doubtful accounts
3,000 Balance before adjustment

2,000 Adjusting journal entry
5,000 Required Balance (end)
VI. Depreciation Expense is the allocation of plant asset cost over its estimated useful life.
This is the expense allotted for the wear and tear of property, plant, and equipment
due to passage of time.
The three factors considered in computing the depreciation expense:
1. Cost is the purchase price of the depreciable asset.

2. Salvage value is the estimated value of the asset at the end of its useful life.
3. Estimated useful life, as the name connotes, is not an exact measurement but merely an
estimation of the number of years an asset can be useful to the entity.
The formula for computing for annual depreciation is as follows:
Cost ₱ xxx
Less: Salvage value xxx
Depreciable cost ₱ xxx
Divided by: Estimated Useful life xxx
Annual Depreciation ₱ xxx
The process of recording depreciation does not directly change depreciation to the asset
account. The charge is recorded in a contra-asset account called accumulated depreciation.
The use of this account allows the original cost of the assets and the related accumulated
depreciation account to be shown in the balance sheet. The balance of the accumulated
depreciation is deducted from the cost of the asset to get the carrying value of the asset.
Example
A building with an estimated useful life of 20 years finished constructed on April 1, 2012.
The cost of the building is 2.6 million with an estimated salvage value of ₱200,000. Give the
adjusting journal entry on December 31, 2012 to record the depreciation of the building.
Adjusting journal entry on Dec. 31, 2012
Depreciation Expense 90,000
Accumulated Depreciation 90,000
To record depreciation expense for the building

Computation:
Cost ₱ 2,600,000
Less: Salvage value 200,000
Depreciable cost ₱ 2,400,000
Divided by: Estimated Useful life 20 years
Annual Depreciation ₱ 120,000
Alternative Method in re4cording prepayments and deferrals
1. Prepayments- an alternative method in recording prepayments is to initially record them

as expense instead of an asset.
Expense Method
Journal Entry upon payment
Expense xxx
Cash xxx
Paid Expense
Prepaid expense xxx
Expense xxx
To record unexpired expense
Note: the amount on the adjusting journal entry represents the unexpired or unused
portion of the prepayments.
Example
On October 1, 2012, X Co. Paid a one-year advance rent for ₱ 24,000. Give the
adjusting journal entry on Dec. 31, 2012.
Journal Entry upon payment

Rent Expense 24,000
Cash 24,000
Paid rent for one year
Prepaid rent 18,000
Rent Expense 18,000
To record unexpired expense
Computation
The ₱ 24,000 rent represents one-year or 12-months rent/ divide ₱24,000 by 12 to get the
monthly rent then multiply it by 9 months representing the unexpired or unused rent from
January 1 to September 30, 2013.
₱24,000/12 x9 =18,000
₱ 18,000 is therefore the prepaid rent from January 1 to September 30, 2013.

Analysis when you paid ₱24,000 for the one-year rent in advance on Oct 1, you debited the
expense account rent expense representing 12 months rent. On Dec. 31 the end of the
accounting period, the ₱24,000 rent expense is not really your rent expense for the year. It
includes the 9 months unexpired or unused portion. Hence, an adjusting entry is necessary to
recognize the asset portion by debiting prepaid rent and decreasing the balance of rent expense
by crediting it.
Summary for prepayments
Asset method Expense method
Upon payment on October 1, 2012
Prepaid rent 24,000 Rent Expense 24,000
Cash 24,000 Cash 24,000
Paid one year rent in advance Paid one year rent in advance
Adjusting journal entry on Dec 31, 2012
Rent expense 6,000 Prepaid rent 18,000
Prepaid rent 6,000 Rent expense 18,000
To record expired rent for the year To record the unused rent
The effect of the adjusting entries on the ledger accounts after posting is the same
regardless of the method used.
Asset Method Expense Method
Prepaid Rent Prepaid Rent

10/1 24,000 12/31 6,000 12/31 18,000
Bal. 18,000 Bal. 18,000

12/31 6,000 10/1 24,000 12/31 18,000
Bal. 6,000 Bal. 6,000
2. Deferrals- an alternative method in recording deferrals is to initially record them as an

income instead of liability.
Income method
Journal entry upon receipt of cash

Cash xxx
Income xxx
Received cash for service to be rendered
Income xxx
Unearned income xxx
To record income not year earned
Note: the amount of adjusting journal entry is the unearned portion of the amount initially
received.
Examples
On November 30,2012, A Co. Received ₱36,000 advance rental for 6 months. Give the
adjusting journal entry on December 31, 2012.
Journal entry upon receipt of cash

Cash 36,000
Rent Income 36,000
Received 6 months rent in advance

Rent Income 30,000
Unearned rent income 30,000
To record income not yet earned
Computation: The ₱36,000 cash received represents six months ren/ Divide ₱36,000 by 6 to get
the monthly rent the multiply it by 5 months representing the unearned rent from January 1 to
May 31, 2013.
₱36,000/12 x 5= ₱30,000
₱30,000 is therefore the unexpired rent from Jan 1 to May 31, 2013.
Analysis: when you received ₱ 36,000 for the six months rent paid to you in advance on Nov 30,
you debited cash and credited the revenue account rent income representing 6 months rent
income. On December 31, the end of the accounting period, the ₱36,000. Hence, an adjusting
entry is necessary to recognize the unearned portion of the initially recorded rent income by
crediting unearned rent and debiting rent income to decrease the revenue.
Summary for Deferrals

Liability method Income method
Upon payment on November 1, 2012
Cash 36,000 Cash 36,000
Unearned rent 36,000 Rent Income 36,000
Received one year rent in advance Received one year rent in advance
Adjusting journal entry on Dec 31, 2012

Unearned Rent 6,000 Rent Income 30,000
Rent Income 6,000 Unearned Rent 30,000
To record rent earned To record rent not yet earned
The effect of the adjusting entries on the ledger accounts after posting is the same
regardless of the method used.
Liability Method Income Method
Unearned Rent Unearned Rent

12/31 6,000 11/30 36,000 12/31 30,000
Bal. 30,000 Bal. 30,000

12/31 6,000 12/31 30,000 11/30 36,000
Bal. 6,000 Bal. 6,000
Read:
Lesson 5 Adjusting Journal Entries
Activities/Assessments:
Theory Exercise
a. Deferred Income d. Adjusting Journal Entries
b. Prepayment e. Accrued Income
c. Depreciation Expense f. Accrued Expense
__________1. Expenses already incurred but not yet paid.

__________2. Expenses already paid but nut yet incurred.
__________3. Entries used to re4cord internal transaction affecting more than one period.
__________4. Income already received but not yet earned.
__________5. Income already earned but not yet received.
__________6. The expense allotted for the wear and tear of equipment due to passage of time.
Exercise 1
Prepare the adjusting entry for each of the following for year ended December 31, 2012.
1. Paid trio insurance Co. ₱33,000 one year car insurance to commence August 1, 2012.
The amount of premium was debited to prepaid insurance

2. Borrowed ₱200,000 from Metro Bank issuing a one-year note with 12% annual interest
on April 30, 2012.
3. Bought ₱ 20,000 equipment with five-year estimated life and salvage value of ₱2,000.
Depreciation is computed on a straight-line basis.
4. Received ₱51,000 cash advance from a customer for one year services to be rendered
starting June 30, 2012. The amount was credited to Unearned Service Income.
5. Purchased ₱7,100 supplies at the beginning of the year. Supplies remaining at the end
of the year amounted to ₱2,900. Used the asset method.
6. Account receivable has a balance of ₱ 130,000. It is estimated that ₱ 5,000 of this is
uncollectible.

2012 1 _____________________ ____________
_____________________
To record expired insurance _____________
2 _____________________ ____________
_____________________ _____________
To record unpaid accrued interest
___________
3 _____________________ ____________
_____________________
To record depreciation of
equipment
Cost ₱
Less: Salvage Value 2,000
Depreciable cost ₱
Divided by: Estimated useful 5
Life years
Annual Depreciation ₱_____
___________
4 _____________________ _____________
_____________________
To record service earned
___________
5 _____________________ _____________
_____________________
To record supplies used for the
year
____________
6 _____________________ _____________
_____________________
To record provision for bad debts

Exercise 2
Prepare the adjusting entry for each of the following for year ended December 31, 2013
Received ₱
1. 63,000 cash advance from a customer for one year service to be rendered
starting June 1, 2013. The amount was credited to Unearned Service Income.
2. Paid one year rent in the amount of ₱180,000 to commend August 31, 2013.
The amount of premium was debited to prepaid rent.
3. Purchased ₱5,900 supplies at the beginning of the year. Supplies used for the
year amounted to ₱1,750. Used the asset method.
4. Received an 18% ₱ 120,000 note on May 1, 2013. Interest will be paid together
with the principal on maturity date.
5. Bought ₱42,000 equipment with five year estimated life and a salvage value of
₱3,000. Depreciation is computed on a straight line basis.
6. Accounts receivable has a balance of ₱ 50,000. It is estimated that 5% of this is
uncollectible. Allowance for bad Debt has a balance of ₱1,500.

2013 1 _____________________ ____________
_____________________
To record service earned _____________
2 _____________________ ____________
_____________________ _____________
To record expired rent
3 _____________________ ___________
_____________________ ____________
To record supplies used for
the year.
___________
4 _____________________ _____________
_____________________
To record accrued interest
earned
___________
5 _____________________ _____________
_____________________
To record depreciation of
equipment
Cost ₱ 42,000
Less: Salvage Value ________
Depreciable cost ₱
Divided by: Estimated useful 5 years
Life

Annual Depreciation ₱_______
____________
6 _____________________ _____________
_____________________
To record provision for bad
debts
LESSON 6 THE WORKSHEET
Learning Outcomes:
1. To know the purpose of the worksheet

2. Be familiar with the preparation of a worksheet
3. Appreciate the worksheet as a working paper to facilitate the accountant’s job.
Course Materials:
Worksheet
The worksheet is a common tool and a summary device used by accountants to gather
on a sheet of paper all the information needed for the preparation of the financial statement,
adjusting entries, closing entries, and the post-closing trial balance. Hence, before the adjusting
and closing entries are recorded on the books and financial statements are prepared, the
accountant is assured of the arithmetical accuracy of his work.

Trial Balance
December 31, 2012
Cash ₱ 840,500
Art Supplies 12,000
Prepaid Rent 30,000
Account Payable ₱ 37,000
Unearned Painting revenue 250,000

Ong, Drawing 30,000
Total ₱ 1, 337,900 ₱ 1, 337,900
The following are the additional information for Sept. 30, 2012.
a. Estimated doubtful accounts is ₱2,500.
b. Depreciation for the transportation equipment for the year is ₱10,000.
c. Art supplies used during the year amounted to ₱3,000.
d. Rent expense for the year is ₱20,000.
e. Insurance expense for the year is ₱4,500.
Steps in preparing the worksheet

The following are the steps in the preparation of the worksheet.
1. Write the heading on the top center of the paper covering the necessary data as follows:
• Name of business
• Name of Working Paper
• Period covered
The heading for the worksheet of Niko Ong art Gallery is as follows:

Worksheet
For month ended September 30, 2012
2. Copy the account titles and the balances of the trial balance in the unadjusted trial
balance columns. Total the amounts to check their accuracy. Total debits should equal
total credits.
Trial Balance Adjustment

No. Account title Debit Credit Debit Credit
110 Cash ₱ 840,000
120 Account receivable 50,000
130 Art supplies 12,000
140 Prepaid rent 30,000
150 Prepaid Insurance 18,000
160 Transportation Equipment 300,000
170 Office Equipmet 50,000
210 Accounts Payable ₱ 37,000
220 Notes Payable 200,000
240 Utilities Payable 900
260 Unearned Painting Revenue 250,000
310 Ong, Capital 500,000
320 Ong, Drawing 30,000
410 Painting Revenue 350,000
510 Salaries expense 2,500

550 Utilities Expense 4,900
Total ₱1,337,900 ₱1,337,900
3. a.) Enter the adjustment in the proper adjustment column writing the number or letter of
each adjustment accordingly before each debit or credit amounts. Accounts which are not
listed in the unadjusted trial balance are added under the accounts column.
b.) Total the pair of adjustment column to prove the equality of debits and credit.
Adjusting journal entries on December 31, 2012.

A. Estimated Doubtful Accounts is ₱2,500
To record estimated doubtful accounts
B. Depreciation of the transportation equipment for the year is ₱10,000.
Depreciation Expense 10,000
Accumulated Depreciation 10,000
To record depreciation expense for the transportation equipment.
C. Art supplies used during the year amounted to ₱3,000.
Art supplies expense 3,000
Art supplies 3,000
To record art supplies used.
D. Rent Expense for the year is ₱20,000
Rent expense 20,000
Prepaid rent 20,000
To record expired rent
E. Insurance expense for the year is ₱4,500.
Insurance expense 4,500
Prepaid insurance 4,500
(for step no. 3 worksheet see illustration)
4. Compute each account’s adjusted balance by extending the amounts from the pre-
adjusted trial balance to the adjusted trial balance plus or minus the adjustment. Compute
the total for each column of the adjusted trial balance to check the accuracy of the
extensions and prove the equality of the debits and credits.

Worksheet
No. Account title Trial Balance Adjustments Adjusted Income statement Balance sheet
Trial bala Debit Credit Debit credit

nce
110 Cash ₱ 840,000
120 Account 50,000

receivable
130 Art 12,000 3,000
supplies
140 Prepaid rent 30,000 20,000
150 Prepaid 18,000 4,500

Insurance
160 Transportatio 300,000
n Equipment
170 Office 50,000
Equipment
210 Accounts ₱ 37,000
Payable
220 Notes 200,000
Payable
240 Utilities 900
Payable
260 Unearned 250,000
Painting
Revenue
310 Ong, Capital 500,000
320 Ong, 30,000

Drawing
410 Painting 350,000
Revenue
510 Salaries 2,500
expense
550 Utilities 4,900
Expense
total ₱1,337,900 ₱1,337,900
Bad Debts a)2,500

Expense
Allowance (a)2,500
For Bad
Debts
Depreciation
Expense
Transportatio b)10,000
n equipment
Accumulated
Depreciation
Transportatio b)10,000
n Equipment
Art supplies c)3,000
Expense
Rent d)20,000
Expense
Insurance e)4,500
Expense
₱40,000 ₱40,000

Worksheet
No. Account title Trial Balance Adjustments Adjusted Inco state Balan she
me ment ce et
Trial balance Deb Credit Debit cred
it it
110 Cash ₱ 840,000 ₱840,000
120 Account 50,000 50,000

receivable
130 Art 12,000 c)3,000 12,000
supplies
140 Prepaid rent 30,000 d)20,000 30,000
150 Prepaid 18,000 e)4,500 18,000

Insurance
160 Transportation 300,000 300,000
Equipment
170 Office 50,000 50,000
Equipment
210 Accounts ₱ 37,000 ₱37,000
Payable
220 Notes Payable 200,000 200,000
240 Utilities Payable 900 900
260 Unearned 250,000 250,000

Painting
Revenue
310 Ong, Capital 500,000 500,000
320 Ong, Drawing 30,000 30,000
410 Painting 350,000 350,000

Revenue
510 Salaries 2,500 2,500
expense
550 Utilities 4,900 4,900
Expense
total ₱1,337,900 ₱1,337,900
Bad Debts a)2,500 a)2,500

Expense
Allowance a)2,500 a)2,500
For Bad Debts
Depreciation
Expense
Transportation b)10,000 b)10,000
equipment
Accumulated
Depreciation
Transportation b)10,000 b)10,000
Equipment
Art supplies c)3,000 c)3,000
Expense
Rent Expense d)20,000 d)20,000
Insurance e)4,500 e)4,500
Expense
₱40,000 ₱40,000 ₱1,350,000 ₱1,350,000

5. From the adjusted trial balance, extend the balances of the asset, Liability, and owner’s
Equity accounts to the Balance Sheet Columns and the adjusted balances of Income and
expense accounts to the income statement columns.
6. Total the balance sheet column and the income statement column. The difference
between the income statement column totals and the balance sheet column total should
be the same. Otherwise, review your work for error or errors. This difference represent
either the net income or net loss. When the credit total of the income statement exceeds
the debit total of the income statement exceed the credit total, the difference is a net loss.
7. Write the difference as a balancing figure on the income statement and on the balance
sheet. Write “Net income” or “net loss” under the account titles column depending on the
result of operations. For net income, write the amount under the debit column of the
income statement and credit column of the balance sheet. For net loss, write the amount
under the credit column of the income statement and debit column of the balance sheet.
8. Double rule the totals of the last four columns

No. Account title Trial Adjustments Adjusted Income Balance
Balance
Trial Balance statement sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit credit
110 Cash ₱ 840,000 ₱840,000 ₱840,00
0
120 Account 50,000 50,000 50,000
receivable
130 Art 12,000 3,000 12,000 12,000
supplies
140 Prepaid rent 30,000 20,000 30,000 30,000
150 Prepaid 18,000 4,500 18,000 18,000

Insurance
160 Transportatio 300,000 300,000 300,000
n Equipment
170 Office 50,000 50,000 50,000
Equipment
210 Accounts ₱ ₱37,0 ₱37,000
Payable 37,000 00
220 Notes 200,00 200,00 200,000
Payable 0 0
240 Utilities 900 900 900
Payable
260 Unearned 250,00 250,00 250,000
Painting 0 0
Revenue
310 Ong, Capital 500,00 500,00 500,000
0 0
320 Ong, 30,000 30,000
Drawing
410 Painting 350,00 350,00 350,000
Revenue 0 0
510 Salaries 2,500 2,500 2,500
expense
550 Utilities 4,900 4,900 4,900
Expense
total ₱1,337, ₱1,337
900 ,900
Bad Debts 2,500 2,500 2,500

Expense
Allowance 2,500 2,500 2,500
For Bad
Debts
Depreciation
Expense
Transportatio 10,000 10,000 10,000
n equipment
Accumulated
Depreciation
Transportatio 10,000 10,000 10,000
n Equipment
Art supplies 3,000 3,000 3,000
Expense
Rent 20,000 20,000 20,000
Expense
Insurance
Expense 4,500 4,500 4,500
₱40,000 ₱40,00 ₱1,350,000 ₱1,350, ₱47,400 350,000 ₱1,000,40
0 000 00
Net income 302,600 302,600
₱350,000 ₱350,000 ₱1,303,00
0

Financial statement of Niko Ong art Gallery
Income statement
Painting revenue ₱ 350,000
Expenses
Rent ₱20,000
Depreciation 10,000
Utilities 4,900
Insurance 4,500
Art supplies 3,000
Bad Debts 2,500
Salaries 2,500 47,000
Net income ₱ 302,600

Statement of changes in owner’s equity
Ong, Capita ₱500,000

Add: Net Income 302,600
Sub-total ₱802,600
Less: Drawings 30,000
Total Owner’s Equity ₱772,600
Notes to financial statements

Note1- Trade and other receivables
Accounts receivable ₱50,000
Less: Allowance for Bad Debts 2,500
Total ₱ 47,000
Note 2- prepaid Expenses
Art supplies ₱ 9,000
Prepaid rent ₱10,000
Prepaid insurance ₱13,000
Total ₱32,500
Note 3- Property, Plant and Equipment
Transportation Equipment ₱ 300,000
Less: accumulated Depreciation 10,000 ₱290,000
Total ₱340,000
Note 4- Trade and Other Payables

Accounts payable ₱ 37,000
Notes payable ₱200,000
Utilities payable 900
Unearned painting revenue 250,000
Total ₱487,900
Read:
Lesson 6 The Worksheet
Theory Exercise
Write “T” if the statement is true and “F” if the statement is false.
_______1.the worksheet is a summary device used by accountants to assemble on sheet of

paper the information necessary to prepare the financial statement.
_______2.operations result in a net loss if the credit total in yhe income statement exceeds the
debit total.
_______3.the difference between the income statement totals and the balance sheet totals are
not always the same.
_______4. A net loss is written in the credit column of the income statement and the debit
column
of the balance sheet.
_______5. In the worksheet, the balances of the asset, liability and capital accounts are
extended
to the income statement section.
Exercise 1
Presented is the year-end unadjusted trial balance of Start Services
Start Services
Trial balance
December 31, 2012
Cash ₱ 150,000
Account receivable 120,000
Supplies 7,000
Prepaid insurance 15,000
Office equipment 125,000
Accumulated Depreciation- ₱ 5,000
Office Equipment
Accounts payable 55,000
Mol, Capital 273,000
Mol, Drawing 50,000
Service Income 198,000
Rent Expense 30,000

₱ 531,000 ₱ 531,000
Year end adjustments:

1. Insurance Expense for the year is ₱8,000
2. Depreciation expense for office equipment is ₱10,000
3. Allowance for Bad debts is ₱ 6,000
Start Services
Worksheet
For year-end December 31, 2012
No. Account title Trial balance adjustment adjusted income Statement Balance sheet
110 Cash ₱
150,000
120 Account 120,000
receivable
130 Supplies 7,000
140 Prepaid 15,000
insurance
150 Office 125,000
equipment
155 Accumulated ₱5,000
depriciation
220 Accounts 55,000
payable
300 Mol, Capital 273,000
310 Mol, Drawing 50,000
410 Service 198,000
income
510 Rent expense 30,000
520 Salaries 25,000

expense
530 Utilities 9,000
Expense
Totals ₱531,000 ₱531,000
Exercise 2
Presented is the year-end unadjusted trial balance of look new repail shop.
Look New Repair Shop
Trial Balance
December 31, 2013
Cash ₱ 50,000
Account receivable 59,000
Prepaid Rent 78,000
Equipment 27,000
Accumulated Depreciation-Office Equipment ₱25,000
Accounts payable 66,000
L, Capital 100,000
L, Drawing 50,000

Repair Income 320,000
Rent Expense 75,000
₱511,000 ₱511,000
Yearend- adjustments:
a. Rent expense for the year is ₱28,000
b. Depreciation Expense for Equipment is ₱25,000
c. Allowance for bad debts is ₱3,000
Look new repair shop
Worksheet
For year-end December 31, 2013
No. Account title Trial balance adjustment adjusted income Statement Balance sheet
110 Cash ₱ 50,000
120 Account 59,000

receivable
130 Supplies 78,000
140 Prepaid 127,000
insurance
150 Office ₱25,000
equipment
210 Accumulated 66,000
depriciation
280 Accounts 100,000
payable
290 Mol, Capital 50,000
310 Mol, Drawing 320,000
410 Service 75,000
income
420 Rent expense 45,000
430 Salaries 27,000

expense
Totals ₱511,000 ₱511,000
LESSON 7 COMPLETION OF THE ACCOUNTING CYCLE
Learning Outcomes:
At the completion of this course, the student must be able to:
• Understand the objectives of closing entries

• Prepare the closing entries
• Prepare the post closing trial balance
• Understand the objectives of reversing entries
• Prepare the reversing entries when necessary

Course Materials:
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 worksheet 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.
Accountants perform the first three steps during the accounting period. They perform the
next seven steps at the end of the accounting period. They perform the eleventh step at the
beginning of the new accounting period.
WORKSHEET
The worksheet is a columnar sheet of paper on which accountants have summarized
information needed to make the adjusting and closing entries and to prepare the financial
statements. A worksheet is only a tool used by accountants and is not part of the formal
accounting records. They may use worksheets each time they prepare financial statements,
that is, monthly, quarterly, or at the end of the accounting year.
TRIAL BALANCE
The trial balance prepared after posting in the trial balance column of the worksheet.
Enter the title of each ledger account on the description columns of the worksheet. List all of the
account titles in the chart of the first two amount columns of the worksheet and add the
columns. If the debit and credit columns totals are not equal, an error exist which we need to fin
and correct before proceeding with the worksheet.
JOURNALIZING AND POSTING THE ADJUSTING ENTRIES
Record the adjusting entries in the journal and later post them to the ledger. To prove
that the balances of the accounts in the ledger conform with the balances.
THE CLOSING PROCESS
The closing entries are series of entries required at the end of the fiscal period to bring
the balances of the temporary accounts to zero so that they will be ready to receive data for the

next accounting period. These temporary accounts are the revenue, expenses, and drawing
accounts.
The steps in the closing process are as follows:
1. Closing the revenue accounts(s). Transfer the balances in the revenue accounts to:
a. Debit each revenue account for the amount of its balance and,
b. Credit the income summary account for the total revenue
2. Closing the expense accounts. Transfer the balances in the expense accounts to the
Income Summary account
a. Debit the income summary account for the total expenses, and
b. Credit each expense account for the amount of its balance
3. Closing the Income Summary account. Transfer the balance of the income summary
account to owner’s capital.
a. Credit balance in the income summary account represents net income and close iit by
debiting income summary and credit the capital account.
b. Debit balance in the income summary account represents net loss and close it by
debiting the capital account and crediting the income summary account.
4. Closing the owner’s drawing account. Transfer the balance of the owner’s drawing account
to the owner’s capital account.
a. Capital account is debited for the amount of the withdrawals, and
b. Credit the drawing account for its balance.
The closing Entries Examples appears as follows:
DATE DESCRIPTION P/R DEBIT CREDIT

19A Closing Entries
Jan 31 Service Revenue 41 12,075
Income Summary 33 12,075
31 Income Summary 33 10,055

Salaries Expense 51 3,960
Rent Expense 52 2,500
Taxes Expense 53 325
Utilities Expense 54 1,150
Miscellaneous Expense 59 850
Supplies Expense 55 1,060
Insurance Expense 56 150

Depreciation Expense 57 60
31 Income Summary 33 2,020

Juan dela Cruz, Capital 31 2,020
31 Juan dela Cruz, Capital 31 1,500

Juan dela Cruz, Drawing 32 1,500

Juan dela Cruz, Capital
Jan. 31 Closing 1,500 Jan, 31 20,000

31 Closing 2,020
20,520 22,020
Juan dela Cruz, Drawing

Jan. 5. 1,500 Jan. 31 Closing 1,500
Income Summary
Jan. 31 Closing 10,055 JAN. 7 12,075

31 Closing 2,020
12,075
Service Revenue
Jan.31 Adjusting 1,875 Jan. 7 4,000

31 Closing 12,075 8 7,500
13,950 31 Adjusting 2,450
13,950
Salaries Expense
Jan 10 3,800 Jan 31 Closing 3,960

31 Adjusting 160
3,960
POST-CLOSING TRIAL BALANCE
A post-closing trial balance is the trial balance prepare after the adjusting and closing
process.
NOTES PAYABLE Account No. 22

DATE ITEMS P/R DEBIT DATE ITEMS P/R CREDIT
19A
JAN 4 1 10,000

SALARIES PAYABLE Account No. 23
19A
JAN 31 ADJUSTING 3 160
UNEARNED SERVICE REVENUE Account No. 24

19A
JAN 31 ADJUSTING 3 1,875
JUAN DELA CRUZ, CAPITAL Account No. 31

19A 19A
JAN 31 CLOSING 4 1,500 JAN 1 1 20,000
31 CLOSING 4 2,020
JUAN DELA CRUZ, DRAWING Account No. 32

19A 19A
JAN 6 1 1,500 JAN 31 CLOSING 4 1,500
INCOME SUMMARY Account No. 33

19A 19A
JAN 31 CLOSING 4 10,055 JAN 31 CLOSING 4 12,075
31 CLOSING 4 2,020
SERVICE REVENUE Account No. 41

19A 19A
JAN 31 ADJUSTING 3 1,875 JAN 7 1 4,000
31 CLOSING 4 12,075 8 1 7,500
11,500
31 ADJUSTING 3 2,450
SALARIES EXPENSE Account No. 51

19A 19A
JAN 10 2 3,800 JAN 31 CLOSING 4 3,960
RENT EXPENSE Account No. 52

19A 19A
JAN 9 1 2,500 JAN 31 CLOSING 4 2,500

UTILITIES EXPENSE Account No. 53
19A 19A
JAN 12 2 1,150 JAN 31 CLOSING 4 1,150
Reverse all adjusting entries on the first day of the next period. A general rule to follow is that
may reverse all adjusting journal entries that increase assets or liabilities.
The Ledger Accounts after Closing process completed
CASH Account No. 11

19A 19A
JAN 1 1 20,000 JAN 2 1 2,500
4 1 10,000 2 1 1,800
7 1 4,000 5 1 3,000
11 1 3,500 6 1 1,500
19,800 37,500 9 1 2,500
10 2 3,800
15 2 2,600
17,700
ACCOUNT RECEIVABLE Account No. 12

19A 19A
JAN 8 4,000 1 7,500 JAN 11 2 3,000
31 ADJUSTING 3 2,450
SUPPLIES Account No. 13

19A 19A
JAN 2 1 2,500 JAN 31 ADJUSTING 3 1,060
PREPAID INSURANCE Account No. 14

19A 19A
JAN 2 1 1,800 JAN 31 ADJUSTING 3 150
PREPAID TAXES Account No. 15

19A
JAN 31 ADJUSING 3 1,425
EQUIPMENT Account No. 16

19A
JAN 3 1 7,200

ACCUMULATED DEPRECIATION Account No. 17
19A
JAN 31 ADJUSTING 3 60
ACCOUNTS PAYABLE Account No. 21

19A 19A
JAN 5 1 3,000 JAN 3 1 7,200
12 2 1,150
5,350 8,350
CRUZ SERVICE CENTER

Post-Closing trial Balance
January 31, 19A
ACCOUNT TITLES DEBIT CREDIT
Cash 19,800
Supplies 1,440
Prepaid Taxes 1,425
Equipment 7,200
Accumulated Depreciation 60
Accounts Payable 5,350
Notes payable 10,000
Salaries Payable 160
Unearned Service Revenue 1,875
Juan dela Cruz, Capital 20,520
37,965 37,965
THE INTERIM STATEMENTS
Interim statements are the statement prepared at the middle of the year. If the company
prepared financial statements every end of the month, the statements prepared from January to
November are interim statements. The year-end statements are the statements prepared at the
end of December.
REVERSING ENTRIES
The purpose of the reversing entries is to simplify the first entry relating to that same
item in the next accounting period.
Entries when no reversing entry is used Entries when reversing entry is used
Jan 31 Salaries Expense 160 Salaries Expense 160
Salaries payable 160 Salaries Payable 160

To adjust the accrued salaries To adjust accrued salaries
Feb. 1 No entry Salaries Payable 160
Salaries Expense 160
To reverse the adjusting entry made
Pn Jan. 31
Feb. 10 Salaries Payable 160 Salaries Expense 3, 800
Salaries Expense 3,640 Cash 3,800
Cash 3,800 Paid salaries to employees
Paid salaries to employees
The adjusting entries as of January 31, are the same whether or not we use a reversing
entry. The reversing entry, dated February 1, shown on the right-hand column above is the
exact reverse of the debit and credit used in the adjusting entry. The use of the reversing entry
simplifies the entry made of February 10. The accountant does not have to remember that he
had already recorded accrued salaries of P160. When the company paid P3,800, the entry is
simply a debit to Salaries Expense and a credit to Cash for P3,800.
The end result in the accounts is the same whether or not they use a reversing entry. To
prove this, we show the accounts as they would appear below. The beginning balance in the
Salaries Payable results from the adjusting entry made on January 31.
(1) The T-accounts as they appear when no reversing entry is used.
Salaries Expense Salaries Payable

Feb. 10 3,640 Feb. 10 160 Jan. 31 160
(2) The T-accounts as they appear when a reversing entry is used.
Salaries Expense Salaries Payable

Feb. 10 3,800 Feb. 1 160 Feb. 1 160 Jan 31 160
TAXES EXPENSE Account No. 54

19A 19A
JAN 13 2 1,750 JAN 31 ADJUSTING 3 1,425
31 CLOSING 4 325
SUPPLIES EXPENSE Account No. 55

19A 19A
JAN 31 ADJUSTING 3 1,060 JAN 31 CLOSING 4 1,060

INSURANCE EXPENSE Account No. 56
19A 19A
JAN 31 ADJUSTING 3 150 JAN 31 CLOSING 4 150
DEPRECIATION EXPENSE Account No.57

19A 19A
JAN 31 ADJUSTING 3 60 JAN 31 CLOSING 4 60
MISCELLANEOUS EXPENSE Account No.59

19A 19A
JAN 14 2 850 JAN 31 CLOSING 4 850
Read:
Lesson 7 Completion of the Accounting Cycle
Exercises
1. The trial balance of JMD COMPANY as of June 30, 2020 is as follows:
JMD COMPANY
Trial Balance
June 30, 2020
Cash 6,000
Prepaid Advertising -
Supplies 1,200
Equipment 60,000
Accumulated Depreciation-Equipment 2,400
Account Payable 12,000
Salaries payable -
JMD, Capital 51,000
JMD, Drawing 3,000
Sales Revenue 48,000
Advertising Expense 4,200
Rent Expense 4,800
Miscellaneous Expense 600
Depreciation Expense-Equipment -
Insurance Expense -

Supplies Expense -
113,400 113,400
Instructions:
1. In a general journal, make adjusting entries at the end of the month’s operating for each
of the following:
a. The firm has used P630 of the supplies in operating the business.
b. On June 1, a fire insurance policy was purchased for P3,600. This policy will provide
coverage for 2 full years. Make the adjusting entry to reflect June’s insurance
expense.
c. Unused advertising materials as of June 30 amounts of P1,800
d. The depreciation for June amounts to P600.
e. The accrued salaries for June amounts to P120.
General Journal Page 3

DATE DESCRIPTION P/R DEBIT CREDIT
2. After you have made the adjusting journals entries, answer these questions:
_____________a. What is the amount of supplies to be shown in the asset section of
the balance sheet?
_____________b. What is the amount of supplies expense to be shown on the June
income statement?
_____________c. How much is the insurance expense that appears on the June
income statement?
_____________d. Compute the total assets to appear on the June balance sheet?
_____________e. Compute the total liabilities to appear on the June 30 balance sheet?
_____________f. Compute the total expenses to appear on the June 30 income
statement.
____________g. What is the amount of net income for June.

Course Grading System
Class Standing
• Quizzes ……………………………50
• Exercises/Problem……………………..20
• Case Study…………………………… ..30
100 X70% 70%
Midterm / Final Examinations 30%

Total 100%
Midterm Grade + Final Term Grade = FINAL GRADE

2
References:
James Don Edwards PhD, James Don Edwards PhD

Accounting Principles: A Business Perspective, Financial Accounting
Arganda, Amelia M. Accounting principles 1: textbook. Workbook/ Amelia M. Arganda, Teresa

Cardenas-Atis; Bernardo G. Del Rosario Jr., (coordinator). 4th ed. – Mandaluyong
Flocer Lao Ong Fundamentals of Accounting textbook for beginners

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Republic of the Philippines

POLYTECHNIC UNIVERSITY OF THE PHILIPPINES

JOSEPHINE M. DELA ISLA,MBE, CPA

1 |ACCO 20213 ACCOUNTING PRINCIPLES

LESSON 1 INTRODUCTION TO ACCOUNTING PRINCIPLES 3

LESSON 2 FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE 9

LESSON 3 THE ACCOUNTING EQUATION 28

LESSON 4 RECORDING BUSINESS TRANSACTION 33

LESSON 5 ADJUSTING JOURNAL ENTRIES 55

LESSON 6 THE WORKSHEET 70

LESSON 7 COMPLETION OF THE ACCOUNTING CYCLE 80

2 |ACCO 20213 ACCOUNTING PRINCIPLES

At the end of the course, students should be able to:

• Recognize the different kinds of terminologies in accounting.

LESSON 1 INTRODUCTION TO ACCOUNTING PRINCIPLES

After successful completion of this lesson, you should be able to:

• Define accounting and know its purpose

Accounting is the systematic process of measuring and reporting relevant financial

The American Institute of Certified Public Accountants(AICPA) defines accounting as

The Philippine of Institute of Certified Public Accountants(PICPA0 defines accounting as

Four Aspects of Accounting

1. Recording- writing down of business transactions chronologically in the books of

3 |ACCO 20213 ACCOUNTING PRINCIPLES

1. Sole/Single Proprietorship is a business owned and manage by only one person.

Private accounting provides services to a particular business firm. Some companies

4 |ACCO 20213 ACCOUNTING PRINCIPLES

The specialized Accounting Fields

1. General or financial accounting-the field of accounting concerned with the recording

5 |ACCO 20213 ACCOUNTING PRINCIPLES

Three types of Business Organization

1. Service is a type of business operation engaged in the rendering of services.

Transactions is a completed action which can be expressed in monetary terms.

Generally Accepted Accounting Principles (GAAP)

6 |ACCO 20213 ACCOUNTING PRINCIPLES

7 |ACCO 20213 ACCOUNTING PRINCIPLES

5. Materiality means that financial reporting is only concerned with information

6. Consistency means that approaches used in reporting must be uniformly employed

8 |ACCO 20213 ACCOUNTING PRINCIPLES

LESSON 2 FINANCIAL STATEMENTS FOR A SERVICE BUSINESS AND THE

After successful completion of this lesson, you should be able to:

Types of Financial Statements

1. Statement of Financial Position or Balance Sheet- Shows the financial

9 |ACCO 20213 ACCOUNTING PRINCIPLES

Typical Account Titles Used

10 |ACCO 20213 ACCOUNTING PRINCIPLES

The Fundamental Accounting Equation

Assets= Liabilities + Owner’s Equity

1. Assets = Liabilities + Owner’s Equity

2. Assets = Liabilities + Owner’s Equity

3. Assets = Liabilities + Owner’s Equity

11 |ACCO 20213 ACCOUNTING PRINCIPLES

Improvements to International Accounting Standard 1 (December 2003) classifies assets as

Classification of current Assets

• Notes Receivable- is a promissory note issued by the client or the customer in

12 |ACCO 20213 ACCOUNTING PRINCIPLES

Accumulated Depreciation represents the expired cost of property, plant and

Classification of Non-Current Assets

Examples of Property, Plant, and Equipment

13 |ACCO 20213 ACCOUNTING PRINCIPLES

Building is an edifice or structure used to accommodate the office, store, or factory of a

Equipment includes typewriter, air-conditioner, calculator, filing cabinets, computer,

Intangible Assets are identification, non-monetary assets without physical substance