Sevice Entity Module

Table of Contents
Topic 1: Accounting Equation and Double-entry System ............................................................................ 1

Recognition and Derecognition principle ..................................................................................................... 2
Elements of Financial Statements................................................................................................................. 2
Exercises: Accounting Equation and Double-entry System .......................................................................... 9
Topic 2: Accounting Cycle of Service Entity ................................................................................................ 12
Analyzing Transactions................................................................................................................................ 12
Exercises: Analyzing Transaction ................................................................................................................ 14
Journalizing transactions ............................................................................................................................ 15
Posting or Accumulating ............................................................................................................................. 18
Exercises: Journalizing and Posting ............................................................................................................. 20
Preparation of Unadjusted trial balance..................................................................................................... 23
LOCATING ERRORS IN THE TRIAL BALANCE ................................................................................................ 24
Exercises: Unadjusted Trial Balance............................................................................................................ 26
Preparation of Adjustments ........................................................................................................................ 29
ADJUSTING ENTRIES FOR ACCRUALS .......................................................................................................... 30
ADJUSTING ENTRIES FOR DEFERRALS ......................................................................................................... 33
Exercises: Adjustments ............................................................................................................................... 44
Preparation of Financial Statements / Adjusted Trial Balance ................................................................... 48
The WORKSHEET ......................................................................................................................................... 48
Exercises: Worksheet .................................................................................................................................. 53
Components of Financial Statements ......................................................................................................... 55
Exercises: Statement of Cashflow ............................................................................................................... 62
Closing Entries ............................................................................................................................................. 62
Exercises: Closing Entries ............................................................................................................................ 67
Post-closing trial balance ............................................................................................................................ 68
Reversing Entries......................................................................................................................................... 68
Key to Correction: Accounting Equation and Double-entry System ........................................................... 69
Key to correction: Analyzing Transaction ................................................................................................... 71
Key to Correction: Journalizing and Posting ............................................................................................... 72
Key to correction: Unadjusted Trial Balance .............................................................................................. 76
Key to correction: Adjustments .................................................................................................................. 78
Key to Correction: Worksheet .................................................................................................................... 89
Key to correction: Statement of cashflows ................................................................................................. 91
Key to Correction: Closing Entries............................................................................................................... 92
Unit 1: Accounting Cycle of Service Industry
Introduction: This unit discusses

 The basic concept of accounting for Service industry
 The Accounting Cycle of Service industry
 The Basic Accounting Equation
Essential Questions
 What are the components of the Financial Statements for Service Entity?
 What is the step by step process in the Accounting Cycle?
 What is Double-entry system?
 What is the Basic Accounting equation?
Intended learning outcome

 Discuss the steps in the Accounting Cycle
 Discuss the application of the Double-entry system
 Discuss the Basic accounting equation
 Discuss the components of Financial statements
 Discuss the elements of Financial statements
Topic 1: Accounting Equation and Double-entry System
In order to better understand the concept accounting, one needs to grasp the concept of
Accounting Equation first.
The basic accounting equation is:

Assets = Liabilities + Owner's Equity
The expanded version is:

Current Asset Current Liabilities Beginning Capital +
+ + Income + Additional
Non-Current Asset Non-Current Investment -
Liabilities Withdrawal
This equation is the fundamentals of every journal entry thus, the foundation of the Financial
Statements. The Accounting Equation is the product of the usage of Double Bookkeeping
System, which means that in every transaction there is always two or more account affected,
there is always a debit and a credit, that is why in every journal entry there is always at least
one debit and one credit.
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Recognition and Derecognition principle
Before we discuss the meaning of the Elements of Accounting Equation, let us first discuss the
Recognition and Derecognition concept.
Recognition- the process of capturing for inclusion in the Financial Statements an item that
meets the definition of an asset, a liability, equity, income or expense. In simple words, before
an item be included in the financial statements it must meet the definition of one of the
accounting elements.
Derecognition – is the removal of all or part of recognized asset or liability from an entity's
statement of financial position. Derecognition occurs when an item no longer meets the
definition of an asset or liability
In simple words, you will recognize an item if it meets a definition of one of the accounting
elements, and derecognize an item if it no longer meets the definition of asset or a liability. It
means that knowing the definition of each of the Accounting elements are important. Having
said that let us discuss the Accounting Elements one by one.
Elements of Financial Statements

1. Assets – resource controlled by the enterprise as a result of past events and from which
future economic benefits are expected to flow to the enterprise.
Let's break down the words used in the definition

 Resource controlled by the enterprise – control means having the right to use and
dispose the resources. Control is also evidence by having the right to restrict others
to use the asset
 Result of Past event – there must be a past transaction that gives birth to the asset
 Future economic benefits are expected – In order to be an asset, a resource must
have a future benefit or use to the entity.
 Current Assets- an asset is considered current if they are held for the purpose of being
traded, expected to be realized or consumed within 12 months after the end of
reporting period or operating cycle whichever is longer.
In classifying whether an asset is current or not, it is important to first analyze whether
your asset is held for trading or not.
Trade Assets – asset arises or use in the normal operation of the business
Note: Trade assets are usually current assets
Example of trade assets.
 Cash – Normally current assets but if restricted for noncurrent
purposes that cash will become Noncurrent. Example: Cash
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restricted to purchase a machinery, since machinery is
noncurrent therefore that cash is restricted for noncurrent
purpose making it noncurrent as well.
 Inventory – Merchandise for sale of the entity.
 Account receivable – receivable resulting from selling of
merchandise or service.
 Notes receivable – receivable with a written note promising to
pay
 Prepaid expense- advance payment of services or merchandise to
be received in the future
If an asset is a trade asset then use the following:
 To be classified as current asset, a TRADE ASSET must be collectible
within one year or operating cycle whichever is LONGER
Operating cycle – The amount of time from purchasing inventory to
collection of receivables. If silent, the operating cycle is one year.
Sample Problem: The entity has a note receivable collectible after 4 years.
The entity is engaging in constructing bridges and has an operating cycle is 5
years.
Analysis: 1-year vs Operating Cycle of 5 years, operating cycle is longer therefore
you will use 5 years as a benchmark for your trade assets. Since the receivable is
a trade asset and is collectible inside the operating cycle (4 years maturity is
inside the 5 years’ operating cycle) the Account receivable is classified as current
asset.
Note: Operating cycle can only be use as a benchmark if the asset is a trade asset
of the business such as Account receivables and Notes receivables.
Non trade assets - Assets that doesn't meet the criteria of trade assets.
Note: Non trade assets are usually noncurrent assets
Example of nontrade assets
 Property, plant and equipment – tangible assets that are held for
use in production or supply of goods or services
 Intangible assets – identifiable, nonmonetary assets without
physical substance.
 Sinking fund – cash set aside for noncurrent portion such as
buying an equipment or paying long term debt.
If an asset is non trade, then use the following:
 To be classified as current asset, a NON-TRADE ASSET must be
collectible within one year
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Sample problem: The entity has a mortgage receivable collectible after 4
years. The entity is engaged in constructing bridges and has an operating
cycle of 5 years.
Analysis: Since mortgage receivable is not an asset arises from normal operation
the operating cycle of 5 years is ignored and only 1 year is used as benchmark to
classify it as current or noncurrent assets. Since 4 years is outside the 1 year
benchmark, the mortgage payable is consider as noncurrent assets.
Note: 1 year is the benchmark used if the assets do not arise from the normal
operation of the business such as Mortgage receivables.
 Non-current assets- if an asset doesn't meet the criteria of current asset it is considered
as non-current assets.
Trade Assets
 If an asset is a trade asset and the maturity is more than the operating
cycle or 1 year whichever is longer, then it is considered to be noncurrent
assets.
Non trade assets
 If an asset is a nontrade asset and the maturity is more than 1 year, then
it is considered to be noncurrent assets.
Let us sum up the discussion using this information map.
Trade Assets- if silent

- If the maturity is less than one year
or operating cycle whichever is longer
Current Assets
Non-trade Assets- if the maturity is less than

one year
Assets
Trade Assets- if the maturity is more than one

year or operating cycle whichever is longer
Non-Current Assets
Non-trade Assets- if silent

- If the maturity is more than
one year
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2. Liabilities- a present obligation of the entity arising from past events, the settlement of
which is expected to result in an outflow of economic resources embodying economic
benefits

 Present obligation – the entity is required to pay it
 Arising from past events- there is a transaction that gives birth to the liability.
Obligatory event – transaction that gives birth to the liability
 Settlement is expected to result in an outflow of economic resources – asset is
required as payment
 Current Liabilities - A liability is considered current if it is due within 12 months after

the end of the balance sheet date. In other words, they are expected to be paid in the
next year.
If the company's normal operating cycle is longer than 12 months, a liability arising
from normal operation is considered current if it is due within the operating cycle
Trade Payables – liability incurred or arises as a result of normal operation of the

business
Note: Trade payables are usually current liabilities.
Example of trade payables
 Accounts payable – Payable incurred when buying to the supplier of goods.
 Taxes Payable – Payable from the government. All taxes are current liability
except for the Deferred Tax Liability which is a noncurrent liability.
 Salaries payable
 Notes Payable – Payable with a written promise to pay note.
 Provision – estimated liability with uncertain timing and amount. Ex.
Provision for lawsuit and warranty liability.
If a liability is a trade liability then use the following:

 To be classified as current liability, a trade payable must be expected to
be paid within one year or operating cycle whichever is longer.
Sample problem: The entity has a note payable amounting to P4, 000,000
with a maturity of 4 years. The operating cycle of the entity is 5 years.
Analysis- Since note payable is a trade payable, operating cycle is used in
determining whether it is current or noncurrent. 5 years’ operating cycle is
longer than one year, therefore 5 years will be use as threshold. Since 4 years
maturity is within the 5 years’ operating cycle, the note payable is considered
current liability.
Non trade payables – liabilities that doesn't meet the criteria of trade payables
Note: Non trade payables are usually non-current liabilities
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Examples non trade payables
 Mortgage payable – payables with a collateral of real property
 Bonds Payable – payables evidence by a Bond certificate
 Non-current liabilities- if a liability doesn't meet the criteria of current liability it is

considered as non-current liability.
Trade Payables
- Trade payables are considered to be non-current liabilities if it is expected to be paid
more than operating cycle or 1 year whichever is longer
Non trade payables

- Non trade payables are considered to be non-current liabilities if it is expected to be
paid for more than 1 year.
To sum up the discussion let us use this information map
Trade Liabilities- if silent

- If the maturity is less than one year
or operating cycle whichever is longer
Current
Liabilities
Non-trade Liabilities- if the maturity is less

than one year
Liabilities
Trade Liabilities- if the maturity is more than

one year or operating cycle whichever is longer
Non-Current
Liabilities
Non-trade Liabilities- if silent

- If the maturity is more
than one year
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3. Expense – Decrease in economic benefit or incurrence of liability that results in decrease
of equity other than the withdrawals of owners. Usually incurred to generate an income.

 Decrease in economic benefit – decrease in asset
 Incurrence of liability – increase in liability
 Results in decrease of equity – there must be an adverse or negative effect to the
entity
 Other than the withdrawals of the owner- the decrease in asset or increase in
liability must be a result of outside transactions.
The definition of expenses encompasses expenses and losses.
Expenses – arises in the course of ordinary activities of the enterprise. There are
various classes of expenses but they are generally classified as cost of services
rendered or cost of goods sold, distribution or selling expenses, administrative
expenses or other operating expenses.
Losses – represent other items that meet the definition of expenses and may or
may not, arise in the course of ordinary activities of an enterprise. Losses
represent decreases in economic benefits and as such are no different in nature
from expenses.
Typical Account Titles Used

Cost of Sales – The cost incurred to purchase or to produce the products sold to
customers during the period; also called cost of goods sold.
Salaries or Wages Expense – Includes all payments as a result of an employer-employee
relationship such as salaries or wages, 13th month pay, cost of living allowance, overtime
pay, hazard pay, holiday pay and other benefits.
Telecommunications, Electricity, Fuel and Water Expense – expenses related to the use
or consumption of telecommunication facilities, electricity, fuel and water. Also called
Utilities Expense
Rent Expense – Expense for rentals for space, equipment or other assets used in the
business
Supplies Expense – Expense of using supplies (e.g. office supplies, store supplies) in the
conduct of operations
4. Income- Increase in economic benefit or decrease in liability that results in increase of

equity other than the investments of the owners. Usually earned as a result of incurring
expenses.
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 Increase in economic benefit – increase in asset
 Results in increase of equity – there must be a positive effect to the entity
 Other than the investments of the owners - the increase in asset or decrease in
liability must be a result of outside transactions.
The definition of income encompasses both revenue and gains:

Revenue – arises in the course of the ordinary activities of an enterprise and is
referred to by a variety of different names including, sales, fees, etc.
Gains – represent other items that meet the definition of income and may, or
may not, arise in the course of ordinary activities of an enterprise. Gains
represent increases in economic benefits and as such are no different in nature
from revenue.
Typical Account Titles Used

Service Income – Revenues earned by performing services for a customer or client; for
example, accounting services by a CPA firm, Haircut services by a Salon, Construction
Services by an Engineering Firm.
Sales – Revenues earned as a result of sale of merchandise; for example, sale of
furniture by firm whose main line is about manufacturing furnitures.
5. Owner’s Equity- Also known as net assets or equity, capital refers to what is left to the
owners after all liabilities are settled.
Capital – This account is used to record the original and additional investments
of the owner of the business entity. It is increased by the amount of profit
earned during the year or is decreased by loss. Cash or other assets that the
owner may withdraw from the business ultimately reduce it. This account title
bears the name of the owner.
Withdrawals – When the owner of a business entity withdraws cash or other
assets, such are recorded in the drawing or withdrawal account rather than
directly reducing the owner’s equity account.
Income Summary – It is a temporary account used at the end of the accounting
period to close income and expenses. This account shows the profit or loss for
the period before closing to the capital account.
THE ACCOUNT
The basic summary device of accounting is the account. A separate account maintained for
each element that appears in the balance sheet (assets, liabilities and equity) and in the
income statement (income and expense). Thus, an account may be defined as a detailed
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record of the increases, decreases and balance of each element that appears in an entity’s
financial statements. The simplest form of the account is known as “T-account” because of
its similarity to the letter “T”.
ACCOUNT TITLE
Left side or Right side or
Debit side Credit side
Dr. Cr.
Exercises: Accounting Equation and Double-entry System

Choose the best answer.
1. Which of the following accounting equations are correct?
1. Non-current assets + Current assets = Non-current liabilities – Current liabilities +
Capital
2. Assets – Liabilities = Capital + Revenue – Expenses
3. Capital + Non-current liabilities = Non-current assets + Working capital
a. (1) and (2) only
b. (1) and (3) only
c. (2) and (3) only
d. (1), (2) and (3)
2. Which of the following is correct under the double entry system?

a. Asset amount must be equal to liability account
b. The change in asset must be compensated by a change in liability
c. The change in a debit-side entry must be compensated by a change in credit-
side entry
d. An increase in asset must be compensated by a decrease in asset
3. Which of the following statements are correct?

1. The total amount of liabilities can be greater than the total amount of capital
2. Asset = Capital + Liabilities
3. The total amount of asset can be greater than the sum of liabilities and capital
a. (1) and (2) only
b. (1) and (3) only
c. (2) and (3) only
d. (1), (2) and (3)
4. Which of the following statements regarding the double-entry system is incorrect?

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a. An increase in asset means a credit entry in assets account
b. A decrease in liability means a debit entry in liabilities account
c. An increase in drawings means a debit entry in capital account
d. A decrease in non-current asset means a credit entry in assets account
5. Which of the following is correct if the sole proprietor of an entity borrows P30,000
in the name of the entity and deposits it into the entity’s bank account?
a. assets of the entity increase by P30,000
b. The liabilities of the entity decrease by P30, 000
c. The capital of the entity increases by P30, 000
d. The drawings of the entity increase by P30, 000
6. Which of the following transactions affects the total value of liabilities of a firm?
a.) goods purchased from suppliers by cash
b.) Interest received from a bank
c.) office equipment bought on credit
d.) goods sold to customers on credit
7. On May 1, 2021, Chia Ohab sets up a business and brings office equipment of P50,
000 and inventory of P30, 000 to the business. Chia puts up P80, 000 into the firm’s
cash box and P100, 000 into the firm’s bank account. Meanwhile, the firm lends
P50, 000 cash to BCD Company and borrows P200, 000 from You Do Note bank to
acquire a piece of premises.
What is the amount of total assets on May 1, 2021?
a. P510, 000
b. P210, 000
c. P260, 000
d. P460, 000
8. If during the accounting period the assets decreased by P10, 000, and equity
increased by P2, 000, then how did liabilities change?
a.) Increased by P12, 000
b.) Increased by P8, 000
c.) Decreased by P12, 000
d.) Decreased by P8, 000
9. If during the accounting period the assets increased by P14,000, and equity
increased by P4,000, then how did liabilities change?
a.) Increased by P10,000
b.) Increased by P4,000
c.) Decreased by P4,000
d.) Decreased by P10,000
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10.If during the accounting period the assets increased by 30,000 and Liabilities
decreased by P8,000, then how did equity change?
a.) Increased by P22,000
b.) Increased by P38,000
c.) Decreased by P22,000
d.) Decreased by P38,000
11. Which of the following statements is incorrect?

a. The settlement of a liability requires cash payment
b. Liabilities can result from accepted trade practices or business commitments.
c. An estimated amount may be assigned to a liability when it is presented in the
balance sheet.
d. Liabilities represent present economic obligations that would future settlement
12.Which of the following statements is incorrect?

a. The term income encompasses both realized and unrealized gains.
b. The term income encompasses both revenues and gains.
c. Recognition of income is generally accompanied by a simultaneous recognition of
an asset.
d. Income is recognized only when cash is collected from the client or customer
13.Which of the following transactions will increase the total assets of the business?
a. a customer’s payment, to apply on his open balance
b. Bought an equipment, on cash basis
c. Bought an equipment, on account basis
d. Paid utilities expense incurred.
14. An account has the following uses, except

a. Sorting device that is used to be able to group the business transactions by
accounting elements.
b. Sorting device that is used to summarize the net effect of the transactions one
each accounting element.
c. Source of the balances that are reported in the financial statements.
d. Accounting device used to detect errors committed
15.Which of the following statements is incorrect?

a. The owner’s equity represents the claim of the owner over the assets of the
business.
b. The owner’s equity increases as a result of additional investments and net
income of the business.
c. The income and expenses of the business enterprise affect the owner’s equity.
d. Debit means increase, and credit means decrease
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Topic 2: Accounting Cycle of Service Entity
Definition of terms
 Service Industry- a kind of business which provides services rather than tangible objects.
 Merchandising Industry- is a kind of business that buys goods and then resells them,
generally for a higher price than they were purchased. A buy and sell kind of business.
 Manufacturing Industry- is a kind of business that is engage in the transformation of
goods, materials or substances into new products.
 Sole Proprietorship- a business with only one owner
 Chart of Accounts- A listing of the accounts available in the accounting system in which
to record entries
 Accounting Cycle- The accounting cycle is a collective process of identifying, analyzing,
and recording the accounting events of a company.
 Double Entry System - Every transaction will involve at least two (2) accounts
Accounting Cycle of Service Industry

 Analyzing Transactions
 Journalizing Transactions
 Posting/Accumulating Transactions
 Preparation of Unadjusted Trial Balance
 Adjustments
 Preparation of Financial Statements
 Closing Entries
 Post-Closing Trial Balance
 Reversing Entries
1. Analyzing Transactions- the most important step in accounting cycle because it is the
identification if whether a transaction is accountable or non-accountable event.
Accountable event- Transactions that will be recorded in the Journal.
Non-Accountable event- transactions that is not recorded in the Journal
Note: All accountable events are required to be recorded in the Journal. Non accountable event
is not necessarily ignored, some are required to be disclosed in the Notes to Financial
Statements by the Accounting Standard.
Accountable event – Recorded in the Journal
Non accountable event

Ignored – if not required by a standard to be disclosed
- if the problem is SILENT just ignore the non-accountable event
Disclosed- if it is required by the standard to be disclosed
Example: Related party transactions
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The big question is how will you analyze a transaction? Let us use two simple words to explain
how to analyze transactions
Classifying – Knowing the account titles that are affected by the transaction.
- Two or more account must be affected because we are using Double Entry System
in recording every transaction.
Measuring- Knowing the monetary value of the transaction
Note: Classification and Measurement must be both present in order for a transaction to be
labeled as an accountable event.
To further illustrate how to analyze a transaction let us use three example problems.
Problem 1: On January 10,2021 ABC Company agreed to purchase a Land to be paid in cash
from BCD Company. The price of the land was not agreed upon as of January 10.
Account titles affected- Land and Cash
Monetary Value – None
Analysis: Non accountable event. It is non accountable event because even though at least
two account title are affected, the transaction lacks monetary value which is one of the
requirements in order for a transaction to be an accountable event.
Problem 2: On January 10,2021 ABC Company sign a contract to hire an accountant for a salary
of P200,000. The accountant will start on the end of the month.
Account titles affected – None
Monetary Value – 200,000
Analysis: Non accountable event. It is non accountable event because no account title was
affected, the expense for the accountant is not yet incurred nor paid because the accountant is
yet to start at the end of the month.
Problem 3: On January 10,2021 ABC Company paid 200,000 for the purchase of equipment
from BCD Company.
Account titles affected- Cash and Equipment
Monetary Value- 200,000
Analysis- Accountable Event. It is accountable event because at least two account was
affected by the transaction and there is monetary value assigned to it
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As a conclusion,
Two or more account was None or only one account was
affected affected
+ +
Monetary Value Monetary Value
= Accountable Event = Non - Accountable Event
Two or more account was

affected
+
No Monetary Value
=Non-Accountable Event
Exercises: Analyzing Transaction

Instruction: Choose which of the following transactions Accountable and Non-Accountable
events are.
1. The entity purchased an equipment amounting to P10,000,000 - Accountable
2. An entity sign a contract amounting to P8,000,000 – Non-Accountable
3. An entity file a lawsuit to collect P5,000,000 for copyright violations – Non-Accountable
4. An entity was awarded P5,000,000 for successfully defending a Patent - Accountable
5. ABC company offers to purchase a piece of land for P2,500,000 there is a high likelihood
that the offer will be accepted – Non-Accountable
6. An entity receives notice that its rentals for an office space will increase by P50,000 per
month effective next month – Non-Accountable
7. An entity receives its electricity bill for the last month amounting to P40,000. The bill is due
for payment next month - Accountable
8. The entity purchase inventory amounting to P4,000,000. The payment is due next month -
Accountable
9. ABC company paid P1,000,000 for land - Accountable
10. An entity received P50,000 for services to be rendered next month - Accountable
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2. Journalizing transactions
 recording the accountable events to the Journal
 The main reason why analyzing transaction is important is because not all transactions
will be journalized, only those accountable events will be shown in the journals of the
company.
Journal- chronological record of entity's transactions

-also called book of original entry
Two types of journal

 Special Journal- Journals that is used to record specific transactions. The purpose of
these journals is to segregate specific transactions from others so they can be better
handled and controlled.
- Sales journal -used to record all of the company sales on credit
- Purchases journal - used to record credit transactions
- Cash receipts journal - used to record all transactions that result in the receipt of
cash
- Cash payment/disbursements journal - a record of a company's internal accounts
that itemizes all financial expenditures made with cash or cash equivalents
 General journal- used to record transactions that is not recorded in the special journals.
The big question is, how will you journalize an accountable event? Before answering that, let us
first define some important words that will be used all throughout the discussion in journalizing
transactions
 Normal balance- the side of the entry where a specific account increase.
 Debit- the left side of the journal entry
 Credit- the right side of the journal entry
 Elements of Financial Statements- Assets, Liabilities, Expense, Income, and Equity
 Simple Journal Entry- Journal entry that involves two account titles
 Compound Journal Entry- Journal entry that involves three or more account titles
A common mistake of accounting students is memorizing that debit means increase and credit
means decrease, it is important to understand that increasing an account is dependent solely
on their normal balances, having said that let us discuss each accounting elements and their
respective normal balances.
DEBIT CREDIT
Liabilities
Assets
Income
Expense
Equity
Using the above table, it means that if you want to increase an asset you need to put the asset
in its normal balance which is debit same goes with expenses, but if you want to increase
liability, income and equity you need to put it in the credit side of your journal entry.
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Of course there are times that you need to decrease a certain account balance, if you want to
decrease an account all you need to do is to put it on the other side of its normal balance, for
example if you want to decrease an asset all you need to do is to put it on the credit which is
the other side of its normal balance debit.
Here are sample problems to help you in journalizing transactions
January 10- Chia Ohab invested P1,000,000 in her business named World of Dragon Nest
Company.
January 25- Purchase of 300,000 worth of equipment
January 31- Purchase of Land worth 700,000. Half of it was paid with cash.
February 2 – Debt amounting to 300,000 was paid
February 5- The entity billed the tenants amounting to 500,000 for January's rent
February 7- Half of the February 5 billing was paid
Chart of accounts
Account titles Posting Reference
Cash 110
Accounts Receivable 120
Equipment 150
Land 160
Accounts Payable 200
Ohab, Capital 300
Ohab, Drawing 310
Rent Revenue 410
Utilities Expense 510
Date Account titles and Explanation P.R. Debit Credit
January 10 Cash 110 1,000,000
Ohab, Capital 300 1,000,0000
To record the initial investment
25 Equipment 150 300,000

Accounts Payable 200 300,000
Purchase of equipment on account
31 Land 160 700,000
Accounts Payable 200 350,000
Cash 110 350,000
Purchase of Land
February 2 Accounts Payable 200 300,000
Cash 110 300,000
Payment of liability
5 Accounts Receivable 120 500,000
Rent Revenue 410 500,000
To record billing of tenants
7 Cash 110 250,000
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Accounts Receivable 120 250,000
To record the collection
Analysis
January 10
Accounts affected: Increase in Cash and Increase in Equity
Monetary Value: 1,000,000
Explanation: Since there is an increase in Cash which is an asset Cash should be debited, while
Increase in Equity is always in the side of credit. Normal balance is really necessary in making
proper journal entry.
January 25
Accounts affected: Increase in equipment and increase in Accounts Payable
Monetary Value: 300,000
Explanation: Cash was not affected because it is not specified that the equipment was paid in
cash, never assumed unless otherwise stated in the problem. The equipment was debited
because purchasing equipment results in increasing equipment which is an asset. The accounts
payable was credited because purchasing equipment without paying cash will result in increase
in liability with a credit normal balance.
January 31
Accounts affected: Increase in Land, Increase in Accounts Payable and decrease in cash.
Explanation: Land was debited because increase in land is an increase in asset and asset has a
debit normal balance. The problem stated that half of the amount was paid in cash that is why
cash was credited because cash in asset and if you want to decrease an asset you need to put it
on the other side of its normal balance that is why decreasing cash should be recorded as
credit. Lastly, accounts payable was credited because only half of the price was paid and the
other half was a liability.
February 2
Accounts affected: Decrease in Liability and decrease in cash
Explanation: The liability was paid and resulted in decrease of accounts payable which is a
liability account that is why it is debited in the entry, paying liability requires an outflow of cash
therefore decreasing the cash balance as well which is an asset account that is why cash was
credited in the journal entry.
February 5
Accounts affected: Increase in Accounts Receivable and Increase in rent revenue
Explanation: Rent for January is already earned that is why a revenue must be recognized even
if there is no cash payment from the tenants. An increase in revenue is recorded as credit to
rent revenue, and since there is no cash payment a debit to accounts receivable must be
recorded
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February 7
Accounts affected: Decrease in Accounts Receivable and Increase in cash
Monetary value: 250,000
Explanation: Receipt of cash is recorded as debit to cash, and decrease in receivable is recorded
in the opposite of its normal balance.
In studying how to make journal entries you need to

 Memorize the normal balance of each accounting element (Assets, Liabilities, Equity,
Income, and Expenses)
 Be familiar of different account titles under each of the accounting elements
-even if you memorize the normal balance of Elements of Financial statements it is
nothing if you are not familiar of the different account titles under them. Like for
instance when you see the account title Prepaid expense, what is its normal balance?
How about the Petty Cash? Since they are both asset their normal balance is debit, but if
you don't know that they are assets memorizing that debit is the normal balance of
assets was in vain because you might choose credit because you are not familiar that
those two are examples of assets.
 Keep on practicing by answering a lot of journal entries problem to sharpen your
analytical skills in identifying the right account titles affected in every transaction
3. Posting or Accumulating- transferring the amounts from the journal to the appropriate
accounts in the ledger. It is called Accumulating because this is the time where in the company
will accumulate all the transactions in a specific account to know the exact balance of each
accounts.
Ledger – is the book use to compute the balance of each of the account titles.
-also known as the book of final entry or book of secondary entry.
Two types of ledger

 General Ledger- set of master accounts where transactions are accumulated
 Subsidiary Ledger- intermediary set of accounts linked to the general ledger as a
supporting document
Difference between General ledger and Subsidiary Ledger

Category General ledger Subsidiary ledger
It is a group of accounts with It is a group of account with
Nature
difference characteristics similar characteristics
It is required to be used in It is optional in recording
Use
recording the accounts process
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Trial Balance is made using Trial balance is not prepared
Link to Trial balance
the General ledger using the Subsidiary ledger
General ledger controls the Subsidiary ledger is part of
Relationship with each other
Subsidiary ledger the General ledger
General ledger will follow the
In case of conflict with the Amount computed in the
amount in the Subsidiary
amount Subsidiary ledger will be used
ledger
Steps in Posting
1. Prepare each of the account title in the Chart of accounts
2. Transfer the Journal entry in the ledger according to its Posting reference
3. Total the debit and credit, if debit is higher than that account has a debit balance, if
credit is higher than that account has credit balance.
4. Use the amount computed to make the Trial Balance
Using the previous Journal entry made, let's Post it in the Ledger.
Account: Cash Account No. 110

Date Explanation J.R. Debit Credit Balance
January 10 1 1,000,000 1,000,000
31 3 350,000 650,000
February 2 4 300,000 350,000
7 6 250,000 600,000
Account: Accounts Receivable Account No. 120

February 5 5 500,000 500,000
7 6 250,000 250,000
Account: Equipment Account No. 150

January 25 2 300,000 300,000
Account: Land Account No. 160

January 31 3 700,000 700,000
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Account: Accounts Payable Account No. 200
January 25 2 300,000 300,000
31 3 350,000 650,000
February 2 4 300,000 350,000
Account: Rent Revenue Account No. 410

February 5 5 500,000 500,000
Account: Ohab, Capital Account No. 300

January 10 1 1,000,000 1,000,000
The date is just copied from the Journal entries being posted. The J.R. means Journal Reference,
in actual practice the pages of the journal are used as Journal reference, but since we only have
1 page the JR was according to the chronological order of the journal entry.
Example: The January 10 transaction was posted to the Cash and Ohab, Capital. The JR is one
because it is the first journal entry made by the entity. The debit to cash was posted to the
account cash and the credit to capital was posted to the account capital. The P.R. means
posting reference, it is used to easily post a journal entry, like for instance in January 10 we see
that in journal entry there is a section for PR, for Cash 110 and for Ohab, Capital 300, you will
then use that PR to easily look where to post the journal entry.
Exercises: Journalizing and Posting
Multiple Choice
Instruction: Choose the best answer
1. Posting refers to the process of transferring information from
a. a journal to the general ledger accounts
b. general ledger accounts to journal
c. source of documents to a journal
d. a journal to source documents
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2.____ refers to the process of transferring the debit and credit amounts from journals to
ledger accounts.
a. Balancing off
b. transferring
c. Posting
d. Closing
3. What is post reference?

a. Found initially in the chart of accounts
b. Use to easily know where to post a specific journal entry
c. Found in the heading of every ledger account
d. All of the above
4. Which of the statements is false?

a. The ledger is the book of final entry because it is the final book done before making the
Financial Statements
b. The ledger is used to make the Trial balance
c. The ledger is made before journal
d. The journal is made before the ledger
5. Which of the following is true?

a. The balance computed in the ledger is the amount used in making the trial balance
b. When the general ledger and the subsidiary ledger has conflict in the amount, the latter
prevails
c. General ledger is required accounting book, while subsidiary ledger is not required
d. Subsidiary ledger is more of a supporting document that is why it prevails in case of conflict
with the general ledger
e. All of the above
6. A journal entry that contains more than just two accounts is called
a. A posted journal entry
b. An adjusting journal entry
c. An erroneous journal entry
d. Compound journal entry
7. A journal entry that contains two accounts is called

a. A simple journal entry
c. An erroneous journal entry
d. Compound journal entry
8. A journal entry that contains one account is called

a. A posted journal entry
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c. Simple journal entry
d. None of the above
9. Which of the following transactions results in an increase in revenues?
a. Collection of cash on account
b. Receipt of cash form bank loan
c. Sale of land at cost for cash
d. Services rendered on credit
10. Which of the following has a debit normal balance?

a. Accumulated depreciation
b. Prepaid rent
c. Unearned rent
d. Bonds Payable
Problem Solving
April 1 Withdrew P77,000 from a personal savings account and used it to
open a new account in the name of Katipunan Services.
2 Acquired a service vehicle costing P81,000. A payment of P17,500
in cash was made and a note payable given for the P63,500 remainder
3 Paid rent for the month, P7,150.
6 Acquired plumbing supplies on account P55,700.
10 Cash in the amount of P18,350 was received for plumbing services rendered.
12 Acquired additional plumbing supplies for cash, P8,050.
14 Paid salaries, P11,600.
17 Rendered plumbing services and billed the customer, P42,200.
18 Paid P15,700 of the amount owed from the transaction of Apr. 6.
21 Paid miscellaneous expenses, P4,300.
23 Collected P21,000 from the customer on the Apr. 17 transaction
25 Withdrew P14,500 from the business.
26 Paid the first installment of the note payable, P3,850.
30 Paid telephone expense, P1,250.
Chart of accounts: Cash; Accounts Receivable; Plumbing supplies; Service Vehicle; Notes
Payable; Accounts payable; Arc, Capital; Arc, Withdrawals; Plumbing revenues; Salaries
expense; Rent expense; Telephone expense; and Miscellaneous expense
Requirement: Prepare the necessary journal entry and post the transaction to the ledger
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4. Preparation of Unadjusted trial balance
 Trial balance is a list of all accounts with their respective debit or credit balances.
 it is done to verify the equality of debits and credits in the ledger.
 it is done after the posting to the ledger because all of the balance computed in the
ledger is being used in the preparation of the Unadjusted trial balance
Procedures in the preparation of trial balance are as follow

1st - List the account titles in numerical order (use the Posting reference) shown in the chart of
accounts
2nd - Obtain the account balance of each account from the ledger and enter the debit balance in
the debit column and the credit balances in the credit column
3rd - Add the debit and credit columns
4th - Compare the total, the total of debit and credit must be the same.
Sample problem
Chart of accounts
Account titles Posting Reference
Cash 110
Prepaid Expense 130
Equipment 150
Land 160
Agase, Capital 300
Agase, Drawing 310
Rent Revenue 410
After Posting, the entity shows the following balance of each account
Land - P2,300,000
Cash- P3,200,000
Accounts Payable- P2,000,000
Accounts Receivable- P1,000,000
Utilities Expense- P300,000
Agase, Drawing - P100,000
Agase, Capital- P2,000,000
Rent revenue- P4,000,000
Equipment- P1,000,000
Prepaid expense- P100,000
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Unadjusted Trial Balance
No. Account Title Debit Credit
110 Cash 3,200,000
120 Accounts Receivable 1,000,000
130 Prepaid Expense 100,000
150 Equipment 1,000,000
160 Land 2,300,000
200 Accounts Payable 2,000,000
300 Agase, Capital 2,000,000
310 Agase, Drawing 100,000
410 Rent Revenue 4,000,000
510 Utilities Expense 300,000
Total 8,000,000 8,000,000
Explanation: Use the posting reference number as a way to know what account should go first
in the list. After listing the account, just copy the balance computed in the Ledger in each
account.
After computing the debit and credit, can we say that your trial balance is absolutely correct if
the debit and credits are equal? The answer is no because of
 Human Error- unintentional wrong journal entries or posting to the ledger
 Fraud- Intentional wrong journal entries or posting to the ledger
Human error and fraud will result to

1. Sliding error- the decimals of the monetary value were put in the wrong place
Example: P2691.89 was recorded as P26918.9
2. Transposition error- the figures were interchanged
Example: P2691.89 was recorded as P2961.89
3. Omission- the transaction was not recorded
Example: P2691.89 was not recorded at all
4. Transaction was recorded for more than once
Example; P2691.89 was recorded as P2691.89 but recorded twice even if the transaction
only happens once.
5. Wrong account title was used
Example: Purchase of Equipment in credit was recorded as purchase of equipment in cash.
LOCATING ERRORS IN THE TRIAL BALANCE

An inequality in the totals of debits and credits would automatically signal the presence of an
error.
The following procedures are the ways to easily locate an error in case the Trial balance is not
balance
1. Recompute the columns. The first thing to do is to make sure that the inequality was not a
mathematical error or a result of wrong input in your calculator
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2. If the inequality was not solved by recomputation, the next thing to do is to determine the
exact amount by which the trial balance is out of balance
 If the discrepancy is divisible by 9, this suggests either a transposition error or a sliding
error. For example, assume that the Cash balance is P23,000 but for some reason you
recorded it as P32,000 leaving a P9,000 overstatement which is divisible by 9
 Try dividing the discrepancy by 2, and scan the columns for an amount equal to the
amount. Example, assume that the cash was 50,000 but it was erroneously recorded as
credit, the result is a discrepancy of P100,000
3. If after scanning the trial balance the inequality was still unsolved the next thing to do is to
compare the trial balance with that in ledger. Be certain that no amount is omitted.
4. Recompute the balance of the ledger accounts
5. Trace all posting to the journal and make sure that no amount was recorded wrong
The following error are not detected by a trial balance

1. Omission of a journal entry
2. Recording the same transaction more than once
3. Recording an entry but the debit and credit has the same wrong amount
4. Posting the right amount in the wrong account title
5. Transposition, sliding, omission error in the Journal Entry
The above example was the reason that even if your trial balance is balance there is no
assurance that your trial balance is absolutely correct.
As a conclusion,
 if the trial balance is not balance there is an error that needs to be corrected
 if the trial balance is balance it doesn't mean that your trial balance is absolutely correct
Having said that, trial balance is merely a control device that helps MINIMIZE accounting
errors.
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Exercises: Unadjusted Trial Balance
Multiple Choice
1. Without the use of a trial balance, _________

a. double-entry system will not be applied in accounting
b. there are no other ways to identify whether there is any problem
c. accounting ratios cannot be calculated
d. inequality between debit and credit balances cannot be easily found
2. What is the purpose of trial balance?

a. To ensure that your Financial statements are correct
b. To absolutely assure that your journal and posting is correct
c. To check the equality of debit and credit
3. Unadjusted Trial balance

a. A listing of the account with their respective balance before adjustments
b. Done to make sure that your posting is correct
c. If equal, means that all your journal entries are correct
d. Is not required to be equal because it is still unadjusted
4. Which of the following situations will cause the total debit balance to be greater than the
total credit balance?
a. The amount extracted from Accounts receivable is posted to the wrong side of the trial
balance.
b. the amount extracted from the machinery account is posted wrongly as P4,000 instead of
P40,000
c. The amount extracted from Accounts Payable is posted in the wrong side of the trial balance
d. the sales of goods to a debtor, Mr K are recorded in the account of another debtor Mr. L
5. Which of the following situations will cause total debit balance to be smaller than the total
credit balance?
a. The amount extracted from a creditor's account is posted to the wrong side of the trial
balance.
b. the amount extracted from the account of a debtor, Mr.K,is posted as P1,000 instead of
P1,100
c. Sales of goods are recorded as purchased of goods in the ledger accounts.
d. The purchased of fixture is recorded in furniture account.
6. Which of the following will make the trial balance equal even if there is an error committed
a. P1234 debit in the Journal entry was posted as P1243 in the ledger
b. Wrong account title was used in making journal entry
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c. A debit in the ledger was transfer to the trial balance as credit
d. A credit balance in the ledger was transfer to the trial balance as debit
7. Which of the following error is untraceable in the trial balance

a. Transposition error in one account in the ledger
b. Transposition error in the journal entry
c. Transposition error in the trial balance
d. All transposition error is untraceable
8. A sliding error
a. Is untraceable if committed in one of the accounts in posting
b. Is traceable if committed in the journal entry
c. Is a kind of error arising from wrong placement of decimal
d. Is untraceable If done in the journal entry
e. Both C and D
9. Unadjusted trial balance

a. Is done before adjustments
b. Is done to ensure that debit and credits are equal
c. Cannot give an absolute assurance that your journal and ledger is correct
d. All of the above
10. Unadjusted trial balance

a. Is used directly in making the Financial Statements
b. Is made to ensure that the debits and credits are correct
c. Is made to reduce the risk of error to zero
d. Is made just to check whether debits and credits are equal

a. If the trial balance is not balance it means that there is an error
b. If the trial balance is balance it means that there is no error
c. If the trial balance is balance it means that there is an error
d. Both a and b
12. Which of the following is true about an imbalance trial balance?

a. If the discrepancy in trial balance is divisible by 9 it might be a a result of transposition or
sliding error
b. Dividing the discrepancy by 2 might lead you to the source of error
c. An imbalance trial balance is a conclusive evidence of a presence of error
d. All of the above
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Problem Solving
Instruction: Prepare the Unadjusted trial balance using the following data
Chart of Accounts
Cash 110
Notes Receivable 130
Prepaid Expense 140
Land 150
Equipment 160
Accumulated Depreciation 170
Loans Receivable 180
Notes Payable 220
Loans Payable 230
Taray, Capital 310
Taray, Withdrawal 320
Rent Revenue 410
Telephone Expense 520
After posting, the entity reported the following in the Ledger

Drawing 500,000
Rent revenue 5,000,000
Telephone expense 300,000
Utilities expense 400,000
Cash 3,000,000
Accounts Receivable 1,000,000
Loans Payable 4,000,000
Capital 3,500,000
Notes Payable 1,500,000
Equipment 4,000,000
Land 3,000,000
Accumulated depreciation 1,000,000
Loans receivable 2,000,000
Prepaid expense 1,000,000
Notes receivable 1,000,000
Accounts Payable 1,200,000
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5. Preparation of Adjustments
- After making the unadjusted trial balance the next thing to do is to make the
Unadjusted trial balance Adjusted and it is only possible through adjustments.
- done at the end of reporting period
Note: In actual scenario no one will come to office at exactly December 31(if the
company uses Calendar year) just to effect adjustments in the book, so
adjustments are usually done at a date later than the end of reporting period
but dated as of the end of reporting period just to follow the Accounting
standards that says adjustment must be done before the end of the reporting
period.
Types of Adjustments
 Reclassifying entries
- Entries done to correct a wrong account title in journal entry. The key word here
is the word “classifying” the error is in the classification which means an error in
account title.
Example: On January 10, ABC company purchase an equipment costing 10,000,000.
The entity made the following journal entry on January 10
Equipment 10,000,000
Cash 10,000,000
The entry made is wrong because it is not stated that the company paid it in cash,
therefore the assumption is that the purchase is in credit. The entry to correct is done
through a reclassification entry
Cash 10,000,000
Accounts Payable 10,000,000
Note: The cash was wrongly reduced by 10,000,000 even if there is no outflow of cash so
to correct it the cash was debited by the same amount, likewise Accounts Payable was not
recorded even if there is a liability incurred as of January 10, so to increase it we need to record
Accounts payable in credit.
 Correcting entries
- correcting any other error aside from wrong account title.
 Adjusting entries
- It is done to update the books with economic events that already happened but
is not yet recorded
- Every time you make an adjusting entries It ALWAYS involves one Income
Statement Account (Income or Expense account) and one Balance Sheet
account (Asset or Liability account)
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The need for adjustments..
It is easy to understand why we need to make the reclassifying and correcting entries—to
correct an error, the problem is in the Adjusting entries, why is it important for us, future
accountants, to understand the adjusting entries?
Adjusting entries are done to reflect in the accounts information on economic activities that
have occurred but have not yet been recorded. Adjusting entries assign revenues to the period
they are earned, and expenses to the period they are incurred. Adjusting entries ensures that
the recognition and derecognition principles are properly applied
 Recognition principle – the process of including an item in Financial statements that

meets the definition of asset, liability, expense, income and equity.
 Derecognition principle- the process of removing an item in Financial statements that
doesn't meet the definition of asset, and liability
In making adjusting entries it is important to understand when to recognize Income and

expense.
Recognition of Income
An income is recognized when there is an INCREASE IN ASSET, or DECREASE IN LIABILITY OTHER
THAN INVESTMENT FROM OWNERS. It is important to note that in order for an income to arise
the transaction must be between the business and other entity.
Recognition of Expense
An expense is recognized when there is a DECREASE IN ASSET, or INCREASE IN LIABILITY OTHER
THAN WITHDRAWALS FROM OWNERS. It is important to note that in order for an expense to
arise, the transaction must between the business and other entity.
To further illustrate the relationship of recognition principle with adjusting entries let us
move in the specific accounts that needs to be adjusted in financial statements. Let us divide
the accounts into two parts the Adjusting Entries for Accruals and Adjusting Entries for
Deferrals
ADJUSTING ENTRIES FOR ACCRUALS- Accrual means recording income when earned not
when the cash was received and recording expense when incurred not when payment was
given. In simple means, accrual is about recording the transactions when the transaction
happens regardless even if there is no cash involvement.
Accrual adjusting entries involves

1. Accrued Salaries- Salaries are normally paid at regular intervals. It can be weekly, semi-
monthly or monthly. Accounting problems arises when the book needs to be close but there is
still unpaid salaries because the date of payment is not yet due. Adjusting entries are needed to
record unpaid salaries as of the end of the period.
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Pro-porma Journal Entry
Salaries Expense xx-------Income statement account
Salaries Payable xx------ Balance sheet account
Example:
ABC Company has 2 employees with a salary of 1,000 per day. The policy of the company is to
pay the employee every 10th day and 25th day of the month. Assuming that the company uses
calendar year. Make the proper adjusting entry.
Analysis: Since the end of the year is December 31 Adjusting entry must be made during that
day. As of December 31, the last payment of salary was December 25, from December 26 to 31
the employee was not paid therefore there is an unrecorded expense.
Computation
P1,000 per day
X 6 days unpaid(December 26-December 31)
P6,000 per employee
X 2 employee
P12,000 unpaid salaries for 2 employees
Accounts affected: Increase in Salaries Expense and Increase in Salaries Payable

Adjusting Entry
Salaries Expense 12,000
Salaries Payable 12,000
Explanation: After computing the monetary value of the transaction we should analyze the
effect of the unpaid salaries. Since we are applying the concept of accrual which means we
should record expense when incurred not when paid, the 2 employees already worked for the
period December 26 to December 31 thus, expense was already incurred even if not paid. The
expense was unrecorded as of December 31 because no payment was made that is why we
need to debit salaries expense to increase the expense and also credit the salaries payable to
increase the liability as of the end of the year because of the presence of unpaid salaries.
2. Accrued Interest Expense – Interest are normally paid with intervals. Accounting problems
arises when the payment doesn’t fall in the end of the year because there will be unpaid
interest.
The computation for interest is as follows

P x R x T = Interest Expense
P= Principal or the entire amount of liability
R= interest rate
T= Time, the unpaid period
Note: Interest are expressed at annual rates, so if interest is computed for less than a year, the
calculation must express time as a portion of a year
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Pro-porma journal entry
Interest Expense xx---------- Income Statement Account
Interest Payable xx------------- Balance sheet Account
Example
On December 1, an entity borrowed P100,000 ,12% loan from Metrobank payable after 1 year.
Make the proper adjusting entry regarding the interest
Analysis: Adjusting entry is done at the end of the reporting period, in this case on December 31
because the problem is silent that's why the assumption is that the company is using calendar
year. From December 1 to December 31 there is 1-month unpaid interest as of the end of the
reporting period.
Computation
Interest = Principal x Interest Rate x Length of time
= 100,000 x 12% x 1/12
Interest = 1000
Accounts Affected- Increase in Interest Expense and increase in interest payable

Adjusting Entry
Interest Expense 1,000
Interest Payable 1,000
Explanation: As of December 31 , there is 1 month unpaid interest, so the right thing to do is to

record it by increasing interest expense and interest payable. Expense needs to be increased
because even though it is unpaid the expense was already incurred, and since it is unpaid the
payable must also be increased.
3. Accrual for Uncollectible Account- Entities often allow clients to purchase goods or avail
services on credit. Some of these accounts will never be collected; hence there is a need to
reflect these as charges or deduction against income in a form of expense.
Pro-forma Journal Entry
Doubtful Account Expense xx---------- Income statement account
Allowance for Doubtful Accounts xx----------Balance sheet account
There are different ways in computing estimated uncollectible accounts, but for simplicity we
will use the Percentage of Sales.
Example: Assume that the entity made credit sales of P1,000,000 in 2020 and prior experience
indicated an expected 2% uncollectible account base on credit sales.
Compute and make the proper adjusting entry.
Computation
1,000,000--- Credit Sales
X 2% --- rate of uncollectible
20,000 ---- Estimated uncollectible account
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Adjusting Entry
Doubtful account expense 20,000
Allowance for doubtful accounts 20,000
Explanation: Uncollectible accounts are only estimated base on past experience regarding their
credit sales. Since it is just estimation the journal entry involves increasing an expense and
increasing a contra receivable account not directly deducting the amount to receivable.
Contra Account – contra account is used to reduce the value of a certain account when they are
netted together. Contra account's normal balance is the opposite of the associated account. For
example, the allowance for doubtful account is a contra receivable account since receivable has
a debit normal balance then Allowance for doubtful account's normal balance should be credit
the opposite of the normal balance of the associated receivable account.
Note: The key word is the word “Contra”, since it is Contra or Against, its normal balance is
always the opposite of the account that it is against.
Normal balance of contra account

Debit Credit
Contra Liability Contra Asset
Contra Equity Contra Expense
Contra Income
Note: Their normal balance is in the opposite side of the account that they are against to.
4. Accrued Interest Income – same concept and computation with Accrued Interest expense,
the only difference is that you are the one that extends credit to other entity.
Journal Entry
Interest Receivable xx--------- Balance sheet account
Interest Income xx ---------- Income Statement account
Explanation: Interest receivable was debited because as of the year end there is unrecorded
interest from the customer having the credit. Interest income is credited because income is
being recorded when earned and not when the cash payment was received.
Note: Adjusting Entries involving accruals increases BOTH a Balance sheet account (real
account) and an Income statement account (Nominal account).
ADJUSTING ENTRIES FOR DEFERRALS – Entities often make expenditures that benefit
more than one period. They also often receive cash before the service or product was delivered
to the customer. When those two scenarios happen there is a need for adjusting entries
because those two transactions fall under the concept of deferrals. Deferrals happen when
there is an Advance Payment or Advance Collection, in other words it happens when expense is
paid before incurring it or when income payment is received before earning it. Adjustments for
deferrals is done in order to make deferrals in to accruals.
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1. Prepaid Expenses – Some assets are paid in advance like rents and insurance. An accounting
problem arises when the advance payments covered two or more reporting period. There is a
need for adjusting entries to record the expire portion of the prepaid expenses when the
advance payment covers two or more reporting period.
Two methods of recording Prepaid Expense or Advance Payments of Expense

 Asset method – the entire pre-payment is initially recorded as an asset. Expense is
recognized in adjusting entry.
 Expense method- the entire pre-payment is initially recorded as an expense. Asset is
recognized in adjusting entry
Note: Both method of recording is correct, but if the problem is silent, use the Asset method
because it strictly adheres to the Accrual principle of recording expense when incurred not
when paid.
To illustrate the difference between the two let us use an illustrative problem
On May 31,2020 ABC Company paid 600,000 to BCD Company for a 1-year insurance covering
the date May 31,2020 to May 31,2021. Prepare the necessary entry using Asset Method and
Expense method
In recording advance payment, there three Important dates that you need to take note
1. The date of transaction- the date that the entity paid the prepaid expense.
In this case it is May 31,2020
2. The date of adjustments- the end of the reporting period
In this case it is December 31,2020
3. The expiration of the contract – the last day that the prepaid expense covers
In this case it is May 31,2021
It is important to take note these three important dates because you need it in the
computation.
 Date of transaction to Date of Expiration of contract = Total life of the prepaid
- The total life will be divided in the Expired portion and Unexpired portion
 Date of transaction to Date of Adjustments = Expired Portion of the Prepaid

-The expired portion is the EXPENSE portion of the prepaid because it the part that was
already used by the entity
 Date of Adjustments to Date of expiration= Unexpired portion of the Prepaid

- The unexpired portion is the ASSET portion of the prepaid because it is the part that is
still available to be used by the entity.
Date of transaction Expired Portion Date of Adjustments--------------------------

--------------------- Unexpired Portion Date of Expiration
Total Life of the Pre-payment
34 | P a g e
Computation:
Date of transaction to Date of Expiration of contract = Total life
May 31,2020 to May 31,2021 = 12 months—Total life
Date of transaction to Date of Adjustments = Expired portion

May 31,2020 to December 31,2020 = 7 months is already used or expired as of December 31
Date of Adjustments to Date of Expiration = Unexpired portion

December 31,2020 to May 31,2021 = 5 months is still unexpired
Note: Total life of the pre-payment = Expired portion + Unexpired portion
600,000/ 12 months = 50,000 insurance per month

50,000 x 7 months (Expired portion) = 350,000 expense to be recognized
50,000x 5 months (Unexpired portion) = 250,000 asset left as of the end of reporting period.
Entry
Date Asset method Expense method
May 31,2020 Prepaid Insurance 600,000 Insurance Expense 600,000
(Transaction Date) Cash 600,000 Cash 600,000
Analysis: Since it is an asset Analysis: Since it the expense

method, the entry should involve method, the entry should involve
a recognition of asset. Cash is a recognition of expense. Cash is
credited because there would be also credit because it is a
no advance payment without an prepayment.
outflow of cash
December 31 Insurance Expense 350,000 Prepaid Insurance 250,000
(Adjustments) Prepaid Insurance 350,000 Insurance Expense 250,000
Computation Computation
600,000/ 12 months = 50,000 per 600,000 / 12 months = 50,000
month insurance per month
50,000 x 7 months = 350,000 50,000 x 7 months = 350,000
expense to be recognized expense to be recognized
Expense to be recognized 350,000 Expense to be recognized

Initial Recorded Expense 0 350,000
Adjustments to expense 350,000 Initial recorded expense
(600,000)
Analysis: Asset method requires a Adjustments to expense
recognition of expense (its (250,000)
counterpart) in the adjusting
entry. 7 months was already used Alternative Computation
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by the entity, that is why it is 600,000/12 months = 50,000 per
proper to recognize an expense month
for that expired period and since 50,000 x 5 months = 250,000
in Asset method the initial entry assets to be recognized
doesn't recognized expense the
adjusting entry will have the
recognition of the expense for the Analysis: Expense method
expired period. requires a recognition of asset
(its counterpart) in the adjusting
As of the adjustment date, the entry. 5 months is still unused as
effects to the accounts are of the end of reporting period,
that is why it is proper to
Cash: (600,000) recognize an asset for that
Prepaid Insurance: 250,000 unexpired period. We saw that in
= 600,000 less 350,000 the computation we get the
Insurance Expense: 350,000 350,000 expense, since in
expense method the initial
After adjustments the entity has journal entry requires the
1. Outflow of 600,000 cash recognition of expense in the
2. 350,000 expense to be whole prepayment, the proper
recognized in the Income way to adjust it is by deducting
Statement 250,000 to the initial 600,000
3. 250,000 Prepaid Insurance in recorded expense
the Balance sheet
As of the adjustment date the
effects to the accounts are
Cash: (600,000)
Prepaid Insurance: 250,000
Insurance Expense: 350,000
=600,000 less 250,000
After the adjustments the entity

has
1. Outflow of 600,000 cash
2. 350,000 expense to be
recognized in the Income
Statement
3. 250,000 Prepaid Insurance in
the Balance sheet
Note: The two methods should have the same results after one adjusting entries. After one
adjustment, the Expense method will become like an Asset method. All the subsequent
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entries after the first adjusting entries will be the same regardless of method you use, that is
the reason why the Standard of Accounting allows the usage of any of these methods in
recording pre-payments.
May 31,2021 Insurance Expense 250,000 Insurance Expense 250,000
(Expiration) Prepaid Insurance 250,000 Prepaid Insurance 250,000
600,000/ 12 months = 50,000 per 600,000/12 = 50,000 per month
month 50,000 x 5 = 250,000 expense to
50,000 x 5= 250,000 expense to be recognized in 2021
be recognized in 2021 Expense to be recognized
250,000
Expense to be recognized 250,000 Initial recorded expense
Initial recorded expense 0 0
Adjustments 250,000 Adjustments
250,000
Analysis: The last portion of
expense is recognized and prepaid Analysis: After one adjusting
expense became zero. Note that entry, the Expense method will
the initial recorded expense is become like asset method, that’s
zero because the 350,000 why the last entry is recognition
recognized before was during of expense, an entry entirely the
2020, expense is a nominal same with the asset method.
account which means its balance Note that the initial recorded
during the year will not be carried expense is zero because the
out the next year that is why 350,000 is an expense recognized
during 2021 the initial recorded in 2020, expense is a nominal
expense is zero. account which means that its
balance in 2020 will never reach
the 2021
Note: The journal entry is the same because after one adjusting entry, the Expense method
already recognized an asset making it like an asset method.
2.Advance collection-Some customers also pay in advance before receiving the service or
goods from the entity. Adjusting entry is required because not all of the cash you received is an
income, some of it is liability and some part of it is already income, therefore you need to adjust
the book to reflect the actual amount of income you earned during the period and the right
amount of liability you have from the undelivered goods or services. Adjusting entries for
advance collection is done to follow the Accrual concept, that Income is recognize when earned
and not when the cash is received.
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Two methods of recording Advance collections
 Liability Method- the entire pre-collection is initially recorded as liability. Income is
recognized in adjusting entry.
 Income Method- the entire pre-collection is initially recorded as income. Liability is
recognized in the adjusting entry.
Note: Both method of recording is correct, but if the problem is silent, use the liability
method because it strictly adheres in Accrual principle of recording income when earned
and not when cash is received.
To further illustrate the difference between the two, let us use an illustrative problem
On October 1 ,2021 the entity received P1,200,000 rent payment from a customer. The rent
covers the period October 1, 2021 to October 1, 2022. Prepare the necessary entry using
Liability method and Income method.
In recording advance collection, there are three Important dates that you need to take note
1. The date of transaction- the date that the entity received the advance collection
In this case it is June 30,2021
2. The date of adjustments- the end of the reporting period
In this case it is December 31,2021
3. The expiration of the contract – the last day that the advance collection covers
In this case it is June 30, 2022
It is important to take note these three important dates because you need it in the
computation.
 Date of transaction to Date of Expiration = Total life of the pre-collection
- The total life will be divided in the Expired portion and Unexpired portion
 Date of transaction to Date of Adjustments = Expired Portion of the Pre-collection

-The expired portion is the INCOME portion of the pre-collection because it the part
that was already earned by the entity
 Date of Adjustments to Date of expiration= Unexpired portion of the Pre-collection

- The unexpired portion is the Liability portion of the pre-collection because it is the
part that is still unearned for the reason that the service is still not given to the
customer
Note: Total life of pre-collection = Unexpired portion + expired portion
Date of transaction Expired Portion Date of Adjustments--------------------------

--------------------- Unexpired Portion Date of Expiration
Total Life of Pre-Collection
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Computation:
Date of transaction to Date of expiration of contract = total life
October 1,2021 to October 1, 2022 = 12 months
Date of transaction to Date of adjustments = Expired portion

October 1,2021 to December 31,2021 = 3 months
Date of Adjustments to Date of Expiration = Unexpired portion

December 31,2021 to October 1,2022 = 9 months
1,200,000 / 12 months = 100,000 rent per month

100,000 x 3 months (expired period = 300,000 income to be recognized
100,000 x 9 months (unexpired period) = 900,000 liability left as of the end of the reporting
period.
Entry
Date Liability method Income method
October 1,2021 Cash 1,200,000 Cash 1,200,000
(Transaction Date) Unearned Rent Income 1,200,000 Rent Income 1,200,000
Analysis: Liability method requires Analysis: Under Income method, a

a recognition of liability in the recognition of Income is made upon
initial entry because the cash the receipt of advance collection
received for future service was from the customer.
treated as a liability. The word
“Unearned” is used to set up a
liability account.
December 31 Unearned rent Income 300,000 Rent Income 900,000
(Adjustments) Rent Income 300,000 Unearned Rent Income 900,000
Analysis: The expired portion of the Analysis: As of the end of the

rent is 3 months. The customer reporting period the customer
already used the property for 3 already used the 3-month rent.
months that is why it is proper for Therefore, the income should be
the entity to record income reduced for only 3 months and a
equivalent to the 3 months and to liability should be recorded for the
remove the liability already used unexpired portion
by the customer.
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1,200,000 / 12 = 100,000 rent per 1,200,000/12 = 100,000 rent per
month month
100,000 x 3 months = 300,000 100,000 x 3 = 300,000 income to be
income to be recognized recognized
Income to be recognized 300,000 Income to be recognized 300,000

Initial recorded income 0 Initial recorded Income 1,200,000
Adjustments 300,000 Adjustments (900,000)
As of the adjustment date the

effects to the accounts are Alternative Computation
1,200,000 /12 months = 100,000 rent
Cash: 1,200,000 per month
Unearned Rent income: 900,000 100,000 x 9 months ( Unexpired
= 1,200,000 less 300,000 portion) = 900,000 liability to be
Rent Income: 300,000 recognized
Either way, you will get the same

P900,000 adjustments
As of the adjustment date, the

effects to the accounts are
Cash: 1,200,000
Unearned Rent Income: 900,000
Rent Income: 300,000
= 1,200,000 less 900,000
Note: The two methods should have the same results after one adjusting entries. After one
adjustment, the Income method will become like Liability method. All the subsequent entries
after the first adjusting entries will be the same regardless of method you use, that is the reason
why the Standard of Accounting allows the usage of any of these methods in recording pre-
payments.
October 1 ,2022 Unearned Rent Income 900,000 Unearned Rent Income 900,000
(Expiration) Rent Income 900,000 Rent Income 900,000
1,200,000 / 12 = 100,000 per 1,200,000 / 12 = 100,000 per month
month 100,000 x 9 = 900,000 income go be
100,000 x 9 = 900,000 income to recognized during 2022
be recognized during 2022
Income to be recognized 900,000
Income to be recognized 900,000 Initial recorded income 0
Initial recorded income 0 Adjustments to income 900,000
Adjustments to income 900,000
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Analysis: The initial recorded Analysis: The entry is entirely the
amount is zero because the same as the liability method,
300,000 income was recorded on because after one adjusting period
2021, income is a nominal account, the income method already
therefore its balance last 2021 will recognized a liability which makes it
not be included in the computation like the liability method
of income in 2022
Note: The journal entry is the same because after one adjusting entry, the Income method
already recognized a liability making it like a liability method.
Important concepts that will help you in answering adjustments regarding

deferral
I. Pre-payment
 If the problem doesn't dictate the method to be used in recording, use the Asset
method because it follows the Accrual concept of recording expense when incurred that
is why the initial record of prepayment under this method involves a recognition of
asset not expense
 Remember that Asset method and Expense method are both allowed by the standard
because after the adjusting entry the result of these two methods are the same
 Remember the partnership of Asset and Expense method because it might be in handy
to remember the adjusting entry for them. If you use the Asset method then the
adjusting entry will show a debit to expense, and if you use Expense method then the
adjusting entry will show a debit to asset.
 Always remember how to compute for the expense using the dates given in the
problem. Remember that the expired portion is the expense, and the unexpired
portion is always the asset of the entity, that is true whether under Asset method or
Expense method.
 Remember that after one adjusting entry the Expense method will become like the
Asset method both in entry and analysis because in the first adjusting entry the
Expense method will start to record asset that is why it became like an asset method. It
means that after one adjusting entry, the computation and journal entry under the two
method will become the same.
II. Pre-collection
 If the problem doesn't dictate the method to be used in recording, use the Liability
method because it follows the Accrual concept of recording income when earned that is
why the initial record of pre collection under this method involves a recognition of
liability not an income
 Remember that Liability method and Income method are both allowed by the standard
because after the adjusting entry the result of these two methods are the same
 Remember the partnership of Liability and Income method because it might be in handy
to remember the adjusting entry for them. If you use the Liability method then the
41 | P a g e
adjusting entry will show a credit to income, and if you use Income method then the
adjusting entry will show a credit to liability
 Always remember how to compute for the Income using the dates given in the problem.
Remember that the expired portion is the income, and the unexpired portion is always
the liability of the entity, that is true whether the entity uses Liability method or
Income method.
 Remember that after one adjusting entry, the Income method will become like the
Liability method both in journal entry and analysis, because after the first adjusting
entry the Income method will start to record liability making it like the liability method.
It means that after the first adjusting entry, the journal entry and analysis for both
methods will become the same.
3. Depreciation – When an entity acquires long-lived assets such as buildings, service vehicles,
computers or office furniture, it is basically buying or prepaying for the usefulness of that asset.
Since these kinds of asset are use for more than one period proper accounting requires the
allocation of the cost of the asset over its estimated useful life. Depreciation means allocating
the cost of the asset over service life or useful life of the asset
Factors involve in computing depreciation

 Cost – The amount an entity paid to acquire the depreciable asset
 Estimated useful life – is the estimated number of periods that an entity can make use
of the asset.
 Salvage value – the amount that the asset can probably be sold for at the end of its
estimated useful life.
 Depreciable cost – the amount subject to depreciation. Computed by deducting the
salvage value from the cost.
 Depreciation expense – the amount recorded as an expense every year.
There are a lot of ways on how to compute depreciation, the simplest procedure is
called the Straight-line method
Asset cost xx
Less: Estimated Salvage Value xx
Depreciable Cost xx
Divided by: Estimated useful life xx
Depreciation Expense for each period xx
 Accumulated depreciation- the total depreciation. A balance sheet account/ real

account.
Computed by adding all the past depreciation expense or using this formula
Depreciation expense per year x Number of years passed = Acc. Depreciation
 Carrying amount or Book value of the asset – the value of the asset after deducting the
accumulated depreciation. The amount needed for reporting purposes
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Cost of the Asset xx
Less: Accumulated Depreciation (xx)
Carrying amount/Book value xx
Pro-forma Journal Entry of Depreciation expense

Depreciation Expense xx--------------- Income statement account
Accumulated Depreciation xx--------------Balance sheet account
Illustration: Suppose that ABC Company paid cash for an equipment worth P6,000,000 on May
31,2021. The company estimated that the useful life of the equipment is 5 years from the date
of purchase and with a salvage value of P1,000,000. Prepare the necessary journal entry.
Accounts affected: Increase in equipment and decrease in cash
Date of Purchase
Equipment 6,000,000
Cash 6,000,000
Explanation: Increase in equipment is debit because it is an asset, while decrease in cash is
credit because its normal balance is debit.
Adjusting Entry at December 31,2021

Computation:
Cost 7,000,000
Less: Salvage Value 1,000,000
Depreciable Cost 6,000,000
Divided by useful life 5 years
Depreciation per year 1,200,000
x 7/12----- The equipment was purchase on May 31. From May
Depreciation expense 700,000 31 to December 31 there is only 7 months of deprecation
Depreciation Expense 700,000

Accumulated Depreciation 700,000
Explanation: Equipment was debited when the equipment was purchase last May 31,2021.
Since the asset was used for May 31 to Dec 31, some part of the assets needs to be transferred
to expense and that's what depreciation is all about, it is about dividing the depreciable cost of
the asset over the time that the same asset is being used. Increasing expense and decreasing
the asset by use of Contra Asset must be seen in the adjusting entry. Expense is recorded
Book value of Equipment as of December 31,2021

Cost 7,000,000
Less: Accumulated Depreciation (700,000)
Carrying amount/Book value 6,300,000
2021 is the first year of the equipment, that is why the Accumulated Depreciation is the same
as the Depreciation expense for that year.
43 | P a g e
Adjusting entry at December 31,2022
Computation:
Cost 7,000,000
Less: Salvage Value 1,000,000
Depreciable Cost 6,000,000
Divided by useful life 5 years
x 12/12-----Since the equipment was used for the whole year during
Depreciation Expense 1,200,000 the year 2022, the expense is also for the whole year
Depreciation Expense 1,200,000

Accumulated Depreciation 1,200,000
Note: It is important to take note what year is being ask in the problem. If the problems asks for
the depreciation of the first year and the last year of equipment, you need to be careful about
the dates, because in the first year and last year of the equipment you might need to divide the
depreciation because most of the assets was purchased in the middle of the year and not
January 1.
Book value at December 31,2022

Cost of the Asset 7,000,000
Less: Accumulated Depreciation (1,900,000)---Depreciation Expense 2021 700,000
Book Value/Carrying amount 5,100,000 Depreciation Expense 2022 1,200,000
Note: Book value or carrying amount is the amount reported in the Financial Statements, that is
why it is required for us to understand the concept behind it. The accumulated depreciation is
computed by adding all the previously recorded depreciation expense.
Exercises: Adjustments
Multiple Choice
1. One of the following is subject to reclassifying entry

a. Wrong amount
b. Wrong account title
c. Wrong amount and wrong account title
d. All of the above is subject to reclassifying entry
2. Which of the following is an adjusting entry
44 | P a g e
a. Increase in asset and increase in liability
b. Increase in asset and increase in expense
c. Increase in asset and decrease in expense
d. Increase in asset and decrease in liability
3. Adjustments
a. Usually done after the reporting period but dated as of the end of the reporting period
b. Involves correcting, reclassifying, and adjusting entries
c. Is required to be done every year
d. All of the above is a concept of adjustments
4. Accrual
a. Recording income when earned not when received
b. Recording expense when incurred not when paid
c. Recording the transaction even if there is no cash involvement
d. All of the above is correct about accrual
5. Deferral
a. Recording income when received not when earned
b. Recording expense when paid not when incurred
c. Is not allowed by accounting standards
d. All of the above is correct about deferral
6. Which of the following is essential in computing the interest income

a. Principal – the total amount of receivable, this serves as basis of interest
b. Interest rate – the agreed rate of interest per annum
c. Time – the period in which the receivable is outstanding for one period
d. All of the following
7. Which of the following is an expense

a. Increase in asset and increase in equity
b. Increase in liability and increase in equity
c. Increase in liability and decrease in equity
d. Decrease in asset and decrease in equity
e. Both C and D
8. Which of the following is an Adjusting entry

Debit Credit
a. Asset Liability
b. Liability Asset
c. Liability Income
d. Income Expense
9. Which of the following is a deferred revenue?
45 | P a g e
a. Billing customer for service given to them
b. Paying in advance for the company's insurance
c. Receiving cash in advance for future service to customer
10. Which of the following is an accrued revenue?

a. Receiving cash in advance
b. Billing customer for service already provided
c. Paying the rent in advance
d. Both b and c
11. On Jan.2021, a P120,000 check was paid for rental expense of twenty- four months. The
amount was recorded in the rent expense account. How much is the rent expense incurred for
the year ended Dec.31,2021?
a.P10,000
b.P20,000
c.P120,000
d.P60,000
12. On Nov.2019, five months of insurance amounting to P130,000 were paid for the period
from Nov.1, 2019 to Mar.31,2020. the amount was debited to the insurance expense account.
How much was the insurance expense incurred for the year ended Dec.31,2019?
a.P26,000
b.P52,000
c. P78,000
d.P130,000
13. For the year ended Mar.31 ,2019 a business that offers yoga lessons received P15,000 in
yoga fees, which was recorded in the yoga fees revenue account. The amount included P2,500
for Apr.2019 lesson. Assuming there are no other transactions relating to yoga fee revenue
during the financial year, how much is the yoga fee earned for the year ended Mar.31,2019?
a.P2,500
b.P12,500
c.P15,000
d.P17,500
14. An amount of P235,000 was received in December 2020, the 55,000 is for December and
the rest is for January 2021, the amount was recorded in the commission income account. It
was discovered that commission income earned in November amounting to P40,000 was not
yet received as of Dec.31,2020. How much is the commission earned for the year ended
Dec.31,2020?
a.P55,000
b.P180,000
c.P235,000
46 | P a g e
d.P95,000
15. Suppose an entity recorded an expense when paid, but the expense was incurred one year
before the payment date. Which of the following accounting principles has been violated?
a. Consistency concept
b. Historical cost concept
c. Accrual concept
d. Entity concept
Problem Solving
Instruction: Prepare the necessary adjusting entries
1. On May 31, 2020 the entity paid P48,000 for insurance covering the period May 31,2020 to
May 31,2022.
Use Asset Method and Expense Method
2. On February 29,2020 the entity received P72,000 for an advance rent covering the period
February 29,2020 to February 28,2022.
Use Liability Method and Income Method
3. On December 1,2020 the entity received a 12% P1,000,000 note to a client for the plumbing
service rendered. The note with interest will be paid on December 1,2022.
Prepare the necessary journal entry
A. At the initial date of transaction
B. At December 31,2020
C. At December 31,2021
D. At December 1, 2022
4. On November 1,2020 the entity issued a 24% P4,000,000 note for purchase of furniture and
fixtures. The note with the interest will be paid on November 1,2022.
Prepare the necessary journal entry for the following dates
A. November 1,2020
B. December 31,2020
C. December 31,2021
D. November 1,2022
5. On December 1,2020 an entity purchases an equipment costing P40,000,000. The entity

expects to use the equipment for 3 years. The expected selling price of the asset after the end
of its useful life is P4,000,000.
Requirements:
1. Prepare the adjusting entry for 3 years
2. Compute for the book value of equipment every year
47 | P a g e
6. Preparation of Financial Statements / Adjusted Trial Balance
The WORKSHEET
- in preparing the Financial Statements, Accountants often use the Worksheet as an
Accounting tool to transfer the balance in Unadjusted Trial balance to the Financial
Statements.
- Worksheet is just a tool, it is not required in the process of making the Financial
Statements. It is not a part of journal or the ledger, nor is it a Financial Statement. It is
just a summary device use by the accountant for his convenience
- composed of ten (10) columns.
How to prepare the Worksheet?
Step 1: Input the account balances in the unadjusted trial balance columns and total
the amounts
Step 2: Enter the adjusting entries in the adjustments columns and total the amounts
Step 3: Compute each account’s adjusted balance by combining the unadjusted trial
balance and the adjustments. Input the Adjusted amounts in the adjusted trial balance.
Step 4: Extend the assets, liabilities, and owner’s equity amounts from the adjusted trial
balance columns to the Balance sheet columns. Extend the income and expense
amounts to the Income statement columns. Total the amounts
48 | P a g e
Ohab Company
Worksheet
For the Year Ended December 31,2020
Unadjusted Trial Adjustments Adjusted Trial Income Balance Sheet
Balance Balance Statement
No. Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
110 Cash 55,000
120 Accounts Receivable 50,000
130 Prepaid Rent 40,000
140 Prepaid Insurance 30,000
150 Service Vehicle 60,000
155 Acc. Depreciation- 10,000
Vehicle
210 Accounts Payable 20,000
220 Notes Payable 30,000
230 Unearned Rent 50,000
310 Ohab, Capital 50,000
320 Ohab, Withdrawals 20,000
330 Income Summary
410 Rent Revenue 145,000
510 Salaries Expense 30,000
520 Rent Expense 20,000
530 Depreciation
Expense- Vehicle
305,000 305,000
Figure 1: Unadjusted Trial Balance
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Ohab Company
Worksheet
110 Cash 55,000
130 Prepaid Rent 60,000 A 10,000
140 Prepaid Insurance 30,000 B 5,000
155 Acc. Depreciation- 10,000 C 15,000
Vehicle
230 Unearned Rent 50,000 D 20,000
310 Ohab, Capital 50,000
320 Ohab, Withdrawals 20,000
330 Income Summary
410 Rent Revenue 145,000 D 20,000
520 Rent Expense A 10,000
530 Insurance Expense B 5,000
540 Depreciation C 15,000
Expense- Vehicle
305,000 305,000 50,000 50,000
Figure 2: Adjustments
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Ohab Company
Worksheet
110 Cash 55,000 55,000
120 Accounts Receivable 50,000 50,000
130 Prepaid Rent 60,000 A 10,000 50,000
140 Prepaid Insurance 30,000 B 5,000 25,000
150 Service Vehicle 60,000 60,000
155 Acc. Depreciation- 10,000 C 15,000 25,000
Vehicle
210 Accounts Payable 20,000 20,000
220 Notes Payable 30,000 30,000
230 Unearned Rent 50,000 D 20,000 30,000
310 Ohab, Capital 50,000 50,000
320 Ohab, Withdrawals 20,000 20,000
330 Income Summary
410 Rent Revenue 145,000 D 20,000 165,000
510 Salaries Expense 30,000 30,000
520 Rent Expense A 10,000 10,000
530 Insurance Expense B 5,000 5,000
540 Depreciation C 15,000 15,000
Expense- Vehicle
305,000 305,000 50,000 50,000 320,000 320,000
Figure 3: Adjusted Trial Balance
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Ohab Company
Worksheet
110 Cash 55,000 55,000 55,000
120 Accounts Receivable 50,000 50,000 50,000
130 Prepaid Rent 60,000 A 10,000 50,000 50,000
140 Prepaid Insurance 30,000 B 5,000 25,000 25,000
150 Service Vehicle 60,000 60,000 60,000
155 Acc. Depreciation- 10,000 C 15,000 25,000 25,000
Vehicle
210 Accounts Payable 20,000 20,000 20,000
220 Notes Payable 30,000 30,000 30,000
230 Unearned Rent 50,000 D 20,000 30,000 30,000
310 Ohab, Capital 50,000 50,000 50,000
320 Ohab, Withdrawals 20,000 20,000 20,000
330 Income Summary
410 Rent Revenue 145,000 D 20,000 165,000 165,000
510 Salaries Expense 30,000 30,000 30,000
520 Rent Expense A 10,000 10,000 10,000
530 Insurance Expense B 5,000 5,000 5,000
540 Depreciation C 15,000 15,000 15,000
Expense- Vehicle
305,000 305,000 50,000 50,000 320,000 320,000 60,000 165,000 260,000 155,000
Profit 105,000 105,000
165,000 165,000 260,000 260,000
Figure 4: Income Statement and Balance Sheet, and Computation of Profit
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Figure 1: The first step is to just put the balance computed in the ledger to the Unadjusted Trial
Balance column of the Worksheet.
Figure 2: Adjustments are recorded in the second column of the worksheet. All the entry in you
adjustments should be recorded in it
Figure 3: Adjusted Trial Balance is made by combining the amount in the unadjusted trial
balance and the Adjustment column of the worksheet, this column will serve as the foundation
of your Financial statements
Figure 4: Expense and Income are extended to the Income Statement column, while the Asset,
liability and Equity are extended to the Balance sheet column. The trickiest part of this step is
that initially the debit and credit are not equal, both for the Income statement and the Balance
sheet because of the presence of the Profit or loss. The profit or loss are computed as follows
Revenue 165,000
Expenses (60,000)
Profit 105,000
Note: Profit is the balancing figure for both the income statement and balance sheet account in
the Worksheet
Exercises: Worksheet
Multiple Choice
Choose the best answer

a. Worksheet is required, and is part of Accounting cycle
b. Without worksheet it is impossible to make an FS
c. Worksheet is optional because it is a mere tool to simplify the making of FS
d. None of the Above
2. Which of the following is correct?

a. The first step in making a worksheet is by entering the amount of the Unadjusted
trial balance
b. The last step of worksheet is the computation of profit and using the same to
balance the income statement and balance sheet column
c. The worksheet has 10 columns composed of unadjusted trial balance,
Adjustments, Adjusted Trial Balance, Income Statement and Balance sheet.
d. All of the Above
3. The income statement debit column of the worksheet contains

a. Asset from the Adjusted trial balance
b. Expense from the Unadjusted trial balance
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c. Asset from the Unadjusted Trial Balance
d. Expense from the Adjusted Trial Balance
4. Adjusted trial balance

a. Is made after the Adjustment column
b. Is computed by combining the balance of Adjustments column and Unadjusted
trial balance
c. Serves as the basis of making the Financial Statements
d. All of the above
5. The Balance sheet credit column of the worksheet contains

a. Asset from the adjusted trial balance
b. Liability and Equity from the unadjusted trial balance
c. Revenue from the Adjusted trial balance
d. Liability and Equity from the Adjusted trial balance
Problem Solving
Acts Company has the following data(unadjusted) for the year 2020
Cash 10,000
Accounts receivable 20,000
Prepaid Rent 5,000
Prepaid Insurance 4,000
Equipment 45,000
Acc.Depreciation 7,000
Accounts Payable 10,000
Unearned Revenue 30,000
Acts, withdrawal 10,000
Acts, Capital 30,000
Rent Revenue 30,000
Rent Expense 10,000
Insurance Expense 3,000
Additional info
A. Out of the 5,000 prepaid rent, 4,000 is still unused at the end of the period
B. Out of the 4,000 prepaid insurance, 3,000 was already used during 2020
C. Equipment’s depreciation is 10,000 per year
D. Out of the 300,000 unearned revenue, 200,000 worth of service was already given
to the client
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Components of Financial Statements
Financial Statements are the reason why we have Accounting cycle in the first place. All the
previous step has one goal, to produce a Complete Set of Financial Statements that is compose
of
 Statement of Comprehensive Income
 Statement of Other Comprehensive Income
 Statement of Changes in Equity
 Statement of Cash flow
 Statement of Financial Position
 Notes to Financial Statements
Note: The above components were listed according to their correct order by which they
are being made. The first statement to be done is Statement of Comprehensive Income,
then Statement of Other Comprehensive Income, then Statement of Changes in Equity
follows, then Statement of Cash flow, then the Statement of Financial Position, and
lastly the Notes to Financial Statements.
Components of Financial Statements

1. Statement of Comprehensive Income
- Also called Statement of Financial Performance and Income Statement
- Records the change in equity during a period resulting from transactions and
other events, other than changes resulting from transactions with owners in
their capacity as owners
- Made to properly match earnings and expenditures to follow Matching Principle
- It is the first component to be done, an accountant should start in making this
Statement before proceeding to the others.
Note: Statement of Comprehensive Income and the Statement of Other
Comprehensive Income can be done at the same time since the standard permits
them to be shown in either Single Statement of Comprehensive Income or in a
Two separate statement.
Components of Statement of Comprehensive Income

 Expense- Unfavorable result of primary operation of the entity.
 Losses – Unfavorable result of non-primary operation of the entity
 Revenue- favorable result of primary operation of the entity
 Gains- favorable result of non-primary operation of the entity.
2. Statement of Other Comprehensive Income
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- Comprises items of income and expenses including reclassification adjustments
that are not recognized in profit or loss as required or permitted by the
Philippine Financial Reporting Standard.
The Components of “Other Comprehensive Income “include the following:

1. Revaluation Surplus during the year
2. Unrealized gain or loss on investment in equity instrument measured at
fair value through Other Comprehensive Income
3. Gain or Loss from translation of the financial statements of a foreign
operation
4. Change in fair value attributable to credit risk of a financial liability
designated at fair value through profit or loss
5. Remeasurements of defined benefit plan, including actuarial gain or loss
6. Unrealized gain or loss from derivative contracts designated as cash flow
hedge
Note: An entity has two options of presenting comprehensive income, namely:

1. Two statements
a. An income statement showing the components of profit or loss
b. A statement of comprehensive income beginning with the profit or
loss computed in the income statement plus or minus items from
other comprehensive income
2. Single statement of comprehensive income
-combined statement showing the components of profit or loss
and components of other comprehensive income in a single
statement.
Example Statement of Comprehensive Income
1. Two statements
Ohab company
Income Statement
Year Ended December 31,2020
Net Sales 10,000,000

Cost of Sales 4,000,000
Gross Income 6,000,000
Administrative Expense (2,000,000)
Selling Expense (3,000,000)
Operating Income 1,000,000
Other Income 2,000,000
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Other Expense (1,500,000)
Net Income 1,500,000
Ohab Company
Statement of Comprehensive Income
Year ended December 31,2020

Other Comprehensive Income to be reclassified to profit
or loss:
Unrealized loss on derivative contract designated
as cashflow hedge (300,000)
Foreign currency translation gain 400,000 100,000
Comprehensive Income 1,600,000
2. Single Statement
Ohab Company
Statement of Comprehensive Income
Year Ended December 31,2020
Net Sales 10,000,000

Cost of Sales 4,000,000
Gross Income 6,000,000
Administrative Expense (2,000,000)
Selling Expense (3,000,000)
Operating Income 1,000,000
Other Income 2,000,000
Other Expense (1,500,000)
Other comprehensive income to be reclassified
to profit or loss
Unrealized loss on derivative contract
designated as cash flow hedge (300,000)
Foreign currency translation gain 400,000 100,000
Comprehensive Income 1,600,000
Either way of presentation is accepted by the Accounting Standard.
3. Statement of Changes in Equity

- Summarizes the changes that occurred in Owner's equity.
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- Compose of Beginning balance of capital, additional investments, withdrawals
during the period, and Net Income or Net Loss during the period.
After computing the comprehensive income using the Statement of Comprehensive

Income, the next step is to transfer the computed comprehensive income to the Owner's
Equity account
Ohab Company
Statement of Changes in Equity
Year ended December 31,2020
Chia Ohab Capital ,January 1,2020 2,000,000

Add: Additional Investment 500,000
Profit 600,000 1,100,000
Total 3,100,000
Less: Withdrawals (900,000)
Chia Ohab, Capital December 31,2020 2,200,000
In making the Statement of Changes In Equity, it is important to remember that there are
factors that affects the Owner’s equity of a sole proprietorship, those are:
 Beginning Capital – The capital from the previous year
 Additional investment – The inflow of resources from the owner during the
year
 Profit or loss – the amount computed in the Statement of Comprehensive
Income
 Withdrawals- the outflow of resource to the owner during the year
4. Statement of Cash flow

- Provides information about the cash receipts and cash payments of an entity
during the period.
- A formal statement that classifies cash receipts (inflows) and cash payments
(outflows) into Operating, Investing, and Financing activities.
- Can be computed using Direct Method and Indirect Method.
 Cash flow from Operating Activities

- Generally, involve providing services, and producing and delivering of goods. All
cash flow from main line of business is under operating activities
- Compose of cash flows from Current assets and current liabilities
Example: Receipt from Accounts Receivable, Payment of Accounts Payable
 Cash flow from Investing Activities
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- Include making and collecting loans, acquiring and disposing investments in debt
or equity securities, and obtaining and selling long term assets.
- Compose of cash flows from Non- current assets
Example: Receipt of cash from selling an equipment, buying a land, purchasing
an office building.
 Cash flow from Financing Activities

- Activities in obtaining resources from owners and creditors
- Compose of cash flows from Equity and Non-current liabilities
Example: Withdrawals and investments of the owner, payment of long-term
debt, receipt of cash from long term bank loan.
Direct Method of Cash flow Vs Indirect Method

- the main and only difference between the two is the computation of Cash flow
from operating activities.
 Operating Activities
Direct Method Indirect Method

Cash inflow less Cash outflow Accrual Net Income xx
= Cashflow from Operating Add: Non-cash expense xx
Activities Less: Non-cash Income (xx)
Cash Basis Net Income xx
Add: Decrease in current assets xx
Increase in current liability xx
Less: Increase in current assets (xx)
Decrease in current liability (xx)
Cash flow provided by Operating Activities xx
Indirect method derives the net cash provided by operating activities by adjusting the
net income by the non-cash items, that is why you will see that in the start of the
formula you will deduct the non-cash income and add back the non-cash expense
because those two are included in the computation of net income but should not be
included in the computation of cash flows.
After adjusting the net income, the next thing to do is to consider the changes of the
current items, since Operating activities deals with current items of the financial
statements.
Note:
- In computing the cashflow it is important to understand that only cash items are
included in it. In cash flow statements, it is like computing the net income using cash
basis
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- The Accounting Standard doesn’t give specific method to be used in the computation
of cashflow, which means that either method is acceptable. In answering accounting
problems, you must look in the given in order for you to know which method is suitable
in every situation.
Example: If the given is Inflow and outflow then use the Direct method, but if the
problem has an income statement and a balance sheet, then the method to be used is
the indirect method.
Example:
a. Ohab Rental service has the following transaction during the year
Purchase of Office supplies in cash 60,000
Payment of rent expense 50,000
Purchase of office supplies on account 40,000
Rental revenue paid in cash 200,000
Rental revenue on account 300,000
Purchase of equipment in cash 500,000
Compute for the Cash flow from Operating Activities
Solution
Cash Inflow
Rental revenue paid in cash 200,000
Less: Cash Outflow
Office Supplies in cash (60,000)
Payment of Rent Expense (50,000)
Cashflow provided by Operating Activities 90,000
Purchase of office supplies on account is excluded because there is no involvement of

cash in that transaction, rental revenue on account is also excluded for the same reason,
while the purchase of equipment in cash is excluded because it is not a part of the
Operating activities for it involves purchase of Non-current asset which is a part of
investing activities.
b. Ohab Rental has the following data

Net Income for 2020 200,000
2019 2020
Accounts Receivable 200,000 100,000
Office Supplies 100,000 150,000
Prepaid Rent 50,000 25,000
Equipment 300,000 250,000
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Accounts Payable 300,000 400,000
Notes Payable 200,000 100,000
Loans Payable 350,000 300,000
Compute for the cash flow from operating activities
Solution:
Net Income 200,000

Add: Non-Cash expense
Total 250,000
Increase and Decrease in current items
Decrease in Accounts Receivable 100,000
Increase in office supplies (50,000)
Decrease in Prepaid Rent 25,000
Increase in Accounts Payable 100,000
Decrease in Notes Payable (100,000)
Since the available data is the Net Income and the Balance sheet, the only way to
compute for the cashflow is by adjusting the Net Income by items that doesn’t have any
effects in cash but included in the computation of the net income.
Changes in equipment is excluded because only the Current items are included in the
computation of cashflow from operating activities, Loans payable is also excluded
because it is not a current item.
To get the increase or decrease, just compare the 2020 balance from 2019.
Note: At this point, you will see that it is crucial to be familiar of different account titles
and their classifications.
 Investing Activities
-under the Direct and Indirect method there is no difference in computing the Cash
flow from Investing Activities.
Cash inflow less cash outflow = Cash flow from Investing Activities
 Financing Activities
-There is also no difference in Direct method and Indirect method when it comes to the
computation of the Cash flow from Financing Activities
Cash inflow less cash outflow = Cash flow from Financing Activities
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Exercises: Statement of Cashflow
Multiple Choice
1. Which of the following statement is true?
a. Direct method is required to be used to compute for the cashflow
b. Indirect method is required to be used to compute for the cashflow
c. Statement of cashflow is the only component of FS that is not following
accrual concept
2. Which of the following is false?

a. In computing the Cashflow provided by the Operating activities, Direct
method and Indirect method are two different approach that results to the
same figures
b. In computing the cashflow provided by the Financing Activities, you just need
to deduct the cash outflow from cash inflow
c. In computing the cashflow provided by the Investing Activities, there are two
different ways that yields the same results
d. All of the above
3. Which of the following is included in the computation of cashflow from operating

activities?
a. Net income, non-cash expense, changes in current items
b. Current assets and current liabilities
c. Non-current liabilities and Equity
d. Both A and B

a. Buying a land on account is part of Cashflow from investing activities
b. Buying short term investment on cash is part of cashflow from investing
activities
c. Buying equipment partly on cash and on account are part of cashflow from
operating activities
d. Buying land on account partly on cash and on account are part of cashflow
from investing activities

a. Investment of owners in the form of equipment is part of Cashflow from
Financing Activities
b. Withdrawals of owner in the form of equipment is part of Cashflow from
Investing Activities
c. Receipt of bank loan is part of Cashflow from Operating activities
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d. Investment of owners of cash is part of Financing activities
Problem Solving
1. The entity has the following data during the year
Revenue 100,000
Expense* (60,000)
Net Income 40,000
*Expense is composed of
Rent Expense 50,000
2019 2020
Cash 50,000 ?
Accounts Receivable 100,000 150,000
Prepaid Rent 60,000 30,000
Equipment 100,000 90,000
Land 200,000 150,000
Accounts Payable 100,000 200,000
Notes Payable 30,000 50,000
Loans Payable 0 40,000
Mortgage Payable 100,000 50,000
Capital 280,000 ?
Additional info:
- There is no investment nor withdrawals during the year.
Compute for
- The decrease in Equipment is the result of depreciation expense.
- The decrease in land is a result of sale of land
- Increase in loans payable is a result of a cash receipt from the bank
- Decrease in mortgage is a result of payment of the payable.
a) Cashflow provided by Operating Activities

b) Cashflow provided by Investing Activities
c) Cashflow provided by Financing Activities
d) Cash Balance for 2020
e) Capital Balance for 2020
5. Statement of Financial Position

- Also called Balance Sheet
- Shows the assets, liabilities and capital of the entity.
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- Assets are listed base on liquidity. Liquidity talks about how fast a specific asset
can be converted in to cash
- Liabilities are listed base on maturity. Maturity is the settlement date of the
liability
Ohab Company
Statement of Financial Position
As of December 31,2020
Assets
Current Assets
Cash P200,000
Accounts Receivable 80,000
Supplies 30,000
Prepaid Rent 20,000
Total Current Assets P330,000
Non-current Assets
Service Vehicles P150,000
Less: Acc. Depreciation 10,000 P140,000
Office Building 200,000
Less: Acc. Depreciation 20,000 180,000 320,000
Total Assets P650,000
Liabilities
Current Liabilities
Notes Payable P200,000
Salaries Payable 40,000
Total Current Liabilities P380,000
Owner’s Equity
Ohab, Capital 270,000
Total Liabilities and Owner’s Equity P650,000
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7. Closing Entries
– Transferring all the nominal or temporary account to capital.
- Closing means you will make those nominal account zero balance, therefore the
proper closing entry is to put those income related nominal account in the
opposite of their normal balances and to put the Income summary account as a
balancing figure
Example of Nominal account: Expense, Income, Income summary and
Withdrawals
Steps in making closing entries
1. Close the income accounts to income summary

Income xx
Income Summary xx
Income has a normal balance of credit, since the goal of Closing entry is to make the
Income zero then the proper way to do it is by putting income in the debit, the opposite
of its normal balance, and by putting the income summary in the credit as a balancing
figure.
2. Close the expense to income summary

Income summary xx
Expense xx
Expense has a normal balance of debit, since the goal of Closing entry is to make the
Expense zero, then the proper way is to put the Expense in credit, the opposite of its
normal balance, and to put the Income summary in the debit as a balancing figure.
3. Close the income summary to capital

*If the income summary has debit balance
Capital xx
Income summary xx
Income summary is also a nominal account used to accumulate the income and expense
in the closing entries. Since it is nominal account, it is necessary to also make it zero by
putting it in the opposite of its balance.
Note: Income summary has no normal balance, you will just put it in the opposite of
its current balance
**If the income summary has credit balance

Income summary xx
Capital xx
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Note: Income summary account is use to close income related nominal account. Income
summary is then closed to the capital account.
4. Close the withdrawal account

Capital xx
Withdrawals xx
Withdrawals are not income related account that is why even though it is a nominal
account you will not use the Income summary in closing it, the proper way is to just
immediately close it to capital.
.
Sample Problem: During the year the entity incurred 800,000 expense. During the year the
entity also earned 1,000,000 income. The owner of the entity took 200,000 cash during the
year. Prepare the necessary closing entry
Simple Journal Entry

Closing of Expense
Income summary 800,000
Expense 800,000
Analysis: Since expense has a normal balance of debit, reducing it to zero needs a credit to
expense.
Closing of Income
Income 1,000,000
Income summary 1,000,000
Analysis: Since income has a normal balance of credit, reducing it to zero needs a debit to
income.
Closing of Income summary
Capital 200,000
Analysis: Income summary account has a debit of 800,000 and credit of 1,000,000 which leads
to the credit balance of 200,000. Since income summary account is also a temporary account
used in closing income related nominal account the income summary will then be closed to
capital account, that is the reason why you see a debit entry in income summary.
Closing of withdrawal
Capital 200,000
Drawing 200,000
Analysis: Since drawing has a debit normal balance to close it would require you to put it in
credit.
Or you can use Compound Journal Entry

Closing of expense and income
Income 1,000,000
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Expense 800,000
Analysis: Income summary is balancing figure.
Closing of income summary

Income Summary 200,000
Capital 200,000
Closing of withdrawal
Capital 200,000
Drawing 200,000
Using the above example, we can see that the sole purpose of closing entries is to close or zero
out all nominal accounts such as income, expense, gain, losses and withdrawals in order to
transfer it into the capital account.
Exercises: Closing Entries

Multiple Choice
Choose the best answer

a. Closing entries are made at the end of the year
b. Closing entries are made to make all nominal account zero
c. The goal of closing entry is to transfer all nominal accounts in to the capital
d. All of the above

a. Income related accounts are first closed to Income summary account then to the
Capital account
b. Withdrawals are directly close to the Capital account
c. Income summary account has no normal balance because it is just used as a
balancing figure in closing income related account
d. All of the Above

a. Closing the Income will result in Debit to Income summary account
b. Closing the expense will result in Credit to Income summary account
c. Closing the withdrawal will result to debit to Income summary account
d. Closing the income will result to Credit to Income Summary account
4. Which of the following is a correct closing entry?

a. Cash 100,000
Income Summary 100,000
b. Income Summary 100,000
Revenue 100,000
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c. Income Summary 100,000
Expense 100,000
d. Income Summary 100,000
Withdrawals 100,000
8. Post-closing trial balance

- done to check the equality of the account after closing entries are made
- Optional, not required because only Balance sheet account is left after the
closing entries.
9. Reversing Entries
- A journal entry which is the exact opposite of a relating adjusting entry made at
the end of the period.
- Reversing entries can only be done to previous adjusting entries.
- All accruals can be reversed, but only deferrals using income and expense
method can be reversed
- Done at the beginning of the next reporting period.
- Optional, not required by the standard.
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Key to Correction: Accounting Equation and Double-entry System
1. C
Statement 1 is wrong because the Current Liabilities are deducted instead of being
added to the equation
Statement 2 is correct, it is the Basic Accounting Equation
Statement 3 is correct; Working Capital means Current Asset less Current Liability
2. C
A is wrong, Asset must be equal to Liabilities + Equity
B is wrong, change in assets is not always connected to change in liability
C is correct, it is the definition of Double Entry System
D Is wrong, an increase in some assets are not always connected to decrease of other
assets
3. A
Statement 1 is correct; liabilities can be greater or lesser than the capital
Statement 2 is correct, it is the Basic Accounting Equation
Statement 3 is wrong, the total amount of Asset must be equal to the sum of liabilities
and Capital
4. A – Use the concept of Normal Balances
5. A- The entry would be

Cash 30,000
Loans Payable 30,000
Take note that even though the owner is the one who borrowed cash the transaction
was made under the name of the business; thus, it is a transaction of the business itself
6. C – credit means no cash payment was made.
7. D
Office Equipment 50,000
Inventory 30,000
Cash
(80,000+100,000-50,000+200,000) 330,000
Receivable 50,000
Total Assets 460,000
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8. C
Asset = Liabilities + Equity
(10,000) = Liabilities + 2,000
(10,000) – 2000 = Liabilities
(12,000) = Liabilities
9. A
Asset = Liabilities + Equity
14,000= Liabilities + 4,000
14,000 – 4,000 = Liabilities
10,000 = Liabilities
10. B
Assets = Liabilities + Equity
30,000= (8,000) + Equity
30,000 + 8,000 = Equity
38,000 = Equity
11. A
A is wrong because Liability can be paid using Non cash asset such as Building, Inventory
etc.
B is correct, liabilities can arise from contract
C is correct, liabilities can be estimated, example is Provision for warranty liability.
D is correct, it is in the definition of liability
12. D
A is correct, realized and unrealized gains are within the scope of income
B is correct, both terms are under the concept of Income
C is correct, the word “Generally” made the statement correct because most of the time
when there is an increase in income there is also an increase in asset. C will be wrong if the
paragraph uses the word “Always” instead of the word “Generally”
D is wrong, income is recognized when earned not when cash is collected
13. C
A = It has no effect in the total assets because the receivable was reduced and at the
same time the cash was reduced
B = No effect in total assets because the Equipment was increased at the same amount
the cash was decreased
C = Increase in total assets and increase in total liabilities
D = Decrease in asset and increase in expense
14. D
A is correct, an account is used to sort business transaction
B is correct, it is also one of the uses of accounts
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C is correct, financial statements are made using the accounts
D is wrong, account title cannot be used to detect errors
15. D
A is correct, it is the definition of owner’s equity
B is correct, it increases because of those two items
C is correct, it is the composition of equity
D is wrong, normal balance will dictate the increase and decrease of a specific account
title
Key to correction: Analyzing Transaction

1. Accountable event
Accounts Affected: Equipment and Accounts Payable
Monetary Value: P10,000,000
2. Non-Accountable Event
Accounts Affected: None, signing of contract will not result to any changes in accounts
Account titles and Monetary Value should both be present in order to be an
accountable event
Accounts Affected: None, filing a lawsuit will not result to any changes in accounts
Account titles and Monetary value should both be present in order to be an accountable
event
4. Accountable Event
Accounts Affected: Cash and Income, the Lawsuit was already given a final judgment
that is why there is already an effect to the accounts
Accounts Affected: None, even if the offer was highly probable to be accepted there is
still no accounts affected until the proposal is actually accepted.
6. Non-Accountable event
Accounts Affected: None, increase in future rents has nothing to do with the account
titles
Monetary Value: P50,000
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Accounts Affected: Utilities Expense and Utilities Payable. The electricity was incurred
last month; therefore, accounts was already affected even if payment is due next month.
Accounts Affected: Purchases and Accounts Payable
Accounts Affected: Land and Cash

Accounts Affected: Unearned Income and Cash. The cash was received for service to be
rendered next month that is why the income is not yet earned.
Monetary Value: P50,000
Key to Correction: Journalizing and Posting
Multiple Choice
1. A
2. C
3. D
4. C
5. E
6. D
7. A
8. D
9. D
10. B
Problem Solving
Journal Entry
April 1 Cash 77,000
Arc, Capital 77,000
The owner withdrew cash in its personal account to put in the business. A common
misconception is that treating these kinds of transaction as withdrawal which is a
terrible blunder. Always remember that you are recording the transaction of the
business, that is why this transaction is an investment in your eyes.

Notes Payable 63,500
Cash 17,500
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Use the notes payable not the accounts payable because it was specifically mentioned
in the transaction that the entity made a note.
3 Rent Expense 7,150

Cash 7,150
6 Plumbing Supplies 55,700

The problem doesn't state that there is a note given unlike in April 2, that is why in this
scenario Accounts payable was used.
10 Cash 18,350
Plumbing Revenue 18,350
12 Plumbing Supplies 8,050

Cash 8,050

Cash 11,600

Plumbing Revenues 42,200
Billing doesn't mean that there is a cash payment. If the problem doesn't say that a
billing was paid in cash, then use the Accounts receivable

Cash 15,700
21 Miscellaneous Expense 4,300

Cash 4,300
23 Cash 21,000
25 Arc, Withdrawals 14,500

Cash 14,500

Cash 3,850
30 Telephone Expense 1,250

Cash 1,250
Posting
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Cash _______ Arc, Capital___
Debit Credit Debit Credit
April 1 77,000 April 1 77,000
2 17,500 Balance 77,000
3 7,150
10 18,350
12 8,050
14 11,600
18 15,700
21 4,300
23 21,000
25 14,500
26 3,850
30 1,250
Balance 32,450
The total of Debit is higher than the total of credit, that is why the cash has a debit balance of
22,450.
Service Vehicle____ Notes Payable___

April 2 81,000 April 2 63,500
Balance 81,000 26 3,850___________
Balance 59,650
Rent Expense___ Plumbing Supplies___

April 3 7,150 April 6 55,700
Balance 7,150 12 8,050______________
Balance 63,750
Accounts Payable___ Plumbing Revenue____

April 6 55,700 April 10 18,350
18 15,700 17 42,200
Balance 40,000 Balance 60,550
Salaries Expense___ Accounts Receivable___

April 14 11,600 April 17 42,200
74 | P a g e
Balance 11,600 23 21,000
Balance 21,200
Miscellaneous Expense__ Arc, Withdrawals__

April 21 4,300 April 25 14,500 ________________
Balance 4,300 Balance 14,500
Telephone Expense___
Debit Credit
April 30 1,250_____________
Balance 1,250
Checking:
Asset = Liability + Owner's equity
Assets
Cash 32,450
Plumbing Supplies 63,750
Service Vehicle 81,000
Total assets 198,400
Liabilities
Notes Payable 40,000
Total Liabilities 99,650
Owner's Equity
Arc, Capital 77,000
Arc, Withdrawals (14,500)
Telephone expense ( 1,250)
Miscellaneous Expense ( 4,300)
Salaries Expense (11,600)
Plumbing Revenue 60,550
Rent expense ( 7,150)
Total Owner's Equity 98,750
75 | P a g e
198400= 99650 + 98750
198400= 198400
Using the accounting equation, we can check whether our posting is correct or not. If the debit
and credit is equal there is a high chance that what you've done is correct. Since we all know
that even if debit and credit are equal there is no absolute assurance that what you've done is
correct because there are errors that still makes your debit and credit equal.
Key to correction: Unadjusted Trial Balance
Multiple Choice
1. D
2. C
A is wrong, trial balance can’t ensure that the FS is correct
B is wrong, Balance sheet can’t give an absolute assurance about the correctness of
journals and posting.
C is correct, the sole purpose of Balance sheet is to ensure the equality of debit and
credit
3. A
A is correct, it is the definition of unadjusted trial balance
B is wrong, it is done to ensure that debit and credit are equal
C is wrong, even if debit and credit are equal it doesn’t mean that the journals are
correct
D is wrong, it is required because it is part of the accounting cycle
4. C
A is wrong, the credit is higher than debit
B is wrong, credit is higher by 36,000. Credit is higher than debit because the debit to
equipment was lower than the right amount
C- Debit is higher because a credit balance was posted to debit
D is wrong, just wrong name of the debtor will not make the trial balance not balance
5. B
A- Creditor's account is Accounts payable, debit is higher because accounts payable was
posted in the debit
B- Debit is lower because the Accounts receivable was posted 100 lower than the right
amount
C- Debit is higher because sales was put in the debit side of the ledger
D- Wrong account title, the trial balance is still equal
76 | P a g e
6. B
A is wrong, the trial balance is unequal because the error was committed only in debit.
B is correct, wrong account title in the journal will not result in inequality of trial balance
C is wrong, a debit balance was posted as credit, making credit higher than debit
D is wrong, a credit balance was posted as debit, resulting to debit higher than the
credit
7. B
A is wrong, it is traceable because only one account has an error, resulting to inequality
of debit and credit
B is correct, since the error happened in the journal entry, both debit and credit were
misstated which means that the debit and credit are equal
C is wrong, it is traceable because when an amount is misstated in the trial balance it is
usually happens in one of the accounts resulting to inequality of debit and credit
8. E
A is wrong, it is traceable because the error only happens in one account resulting to
inequality of the trial balance when the trial balance is done
B is wrong, it is untraceable because the error happens in both debit and credit resulting
to equality of the trial balance when the trial balance is done
C is correct, it is the definition of sliding error
D is correct
9. D
10. D
A is wrong, adjusted trial balance is the one used directly in making the Financial
Statements
B is wrong, it doesn’t give an assurance that the debits and credits are correct
C is wrong, trial balance can’t reduce the risk of error to zero because of the undetected
errors even if the trial balance is equal
D is correct, it is the main purpose of trial balance, whether unadjusted or adjusted
11. A
A is true, when the trial balance is imbalance it is a conclusive evidence that there is an
error in the books
B is false, when the trial balance is balance it doesn’t give an assurance that there is no
error because of the presence of untraceable errors
C is false, when the trial balance is balance it doesn’t mean that there is an error.
12. D
Problem Solving
77 | P a g e
Unadjusted Trial Balance
No. Account Title Debit Credit
110 Cash 3,000,000
120 Accounts Receivable 1,000,000
130 Notes Receivable 1,000,000
140 Prepaid Expense 1,000,000
150 Land 3,000,000
160 Equipment 4,000,000
170 Accumulated depreciation 1,000,000
180 Loans Receivable 2,000,000
210 Accounts Payable 1,200,000
220 Notes Payable 1,500,000
230 Loans Payable 4,000,000
310 Reyes, Capital 3,500,000
320 Reyes, Withdrawal 500,000
410 Rent Revenue 5,000,000
510 Utilities Expense 400,000
520 Telephone Expense 300,000
Total 16,200,000 16,200,000
Key to correction: Adjustments
Multiple Choice
1. B
A is subject to correcting entries
B is subject to reclassifying entry because the error is in the account title
C is subject to correcting entries because the error is combination of two errors
2. C
A is wrong because the two affected accounts are both real account
B is wrong because even if it is composed of one real and one nominal account, the
entry to be made is both debits.
C is correct, one nominal account and one real account. It also follows that a journal
entry must have at least one debit and one credit
D is wrong, the two affected accounts are real accounts
3. D
4. D
5. D
78 | P a g e
6. D
7. E
A is an income
B is not a journal entry, both credit entry
C is an expense
D is an expense
8. C
A is wrong, both are real accounts
B is wrong, both are real accounts
C is correct, one nominal and one real account
D is wrong, both are nominal accounts
9. C
A is an accrued revenue, the income was already earned
B is an advance payment, a deferred expense
10. B
A is a deferred revenue because the cash was received in advance
B is an accrued income because the income was already earned
C is an advance payment, a deferred expense
11. D
120,000/24 months = 5,000 per month
5,000 x 12(January to December) = 60,000
12. B
130,000/5 months= 26,000 per month
26,000 x 2(November 1 to December 31) = 52,000
13. B – Out of 15,000 cash received, the 2500 is for the month of April therefore 15,000 less
2,500 is the revenue for the month of March.
14. D – Out of 235,000 cash received on December only 45,000 is for December, but don't
forget the Income earned in November amounting to 50,000. The question is Income earned
for the year ended meaning the whole income earned during the year
November Income 55,000
December Income 40,000
Total Income 95,000
15. C
79 | P a g e
The accrual concept was violated because the expense was recorded when paid not
when incurred
Problem Solving
1.
Date Asset Method Expense Method
May Prepaid Insurance 48,000 Insurance Expense 48,000
31,2020 Cash 48,000 Cash 48,000
Asset method should record an asset in Expense method should record an

the original entry expense in the original entry
December Insurance Expense 14,000 Prepaid Insurance 34,000
31, 2020 Prepaid Insurance 14,000 Insurance Expense 34,000
Solution: Solution:
48,000/ 24 months (May 31,2020 to 48,000/24 months = 2,000 expense

May 31,2022) = 2000 expense per per month
month
2,000 x 7= 14,000 expense to be
2,000 x 7(May 31,2020 to December recognized
31,2020)
= 14,000 expense to be recognized Expense to be recognized 14,000
Initial recorded expense (48,000)
Expense to be recognized 14,000 Adjustments for expense (34,000)
Initial recorded expense 0
Adjustments for expense 14,000 Alternative Solution:
2,000 x 17 months (Unexpired portion
Under asset method you need to as of December 31, 2020)
record the unrecorded expense at the = 34,000 adjustments for expense
end of the period that is why expense Note: Either way you will get the
is debited. The expense should be amount 34,000.
deducted to the asset that is why
prepaid insurance was credited. Under asset method you need to
record the unrecorded asset at the
end of the period that is why prepaid
insurance is debited. Only 14,000
expense is incurred at the end of the
period that is why 34,000 is deducted
80 | P a g e
to the initial recorded expense to
arrive in 14,000 expense.
Dec. 31, Insurance Expense 24,000 Insurance Expense 24,000
2021 Prepaid Insurance 24,000 Prepaid Insurance 24,000
Solution: Same solution and explanation with

the Asset method. Always remember
48,000 / 24 months = 2,000 expense that after one adjusting entry, the
per month Expense method will become the
2,000 x 12(January 1,2021 to same with the analysis of Asset
December 31,2021) = 24,000 expense method because in the first adjusting
to be recognized entry, the expense method will start
to recognized an asset making it like
Expense to be recognized 24,000 an Asset method.
Initial recorded expense 0
Adjustment for expense 24,000
Expense is a nominal
account/temporary account, that is
why the expense recorded in 2020 is
not included in the computation in the
expense for 2021. The expense for
2021 is for the whole year because the
entity used the insurance from January
1, 2021 to December 31,2021
May Insurance Expense 10,000 Insurance Expense 10,000

31,2022 Prepaid Insurance 10,000 Prepaid Insurance
Solution: Same analysis and explanation with

48,000/ 24 months = 2,000 expense the Asset method.
per month
2,000 x 5(Jan.1,2022 to May 31,2022) Checking
= 10,000 expense to be recognized Expense for 2020: 14,000
Expense for 2021: 24,000
Expense to be recognized 10,000 Expense for 2022: 10,000
Initial recorded expense 0 Total Expense 48,000
Adjustment for expense 10,000
Note: The total expense should equal
It is important to note that the year the total prepaid insurance, because
2022 is the year of expiration of the the expense every year is only
Prepaid Insurance. The expense for computed by dividing the prepaid
2022 is from January 1 to May 31 only insurance over its life
81 | P a g e
because the insurance will expire on
May 31, 2022.
2.
Date Liability Method Income Method
February Cash 72,000 Cash 72
29,2020 Unearned Rent Income 72,000 Rent Income 60,000
Liability method requires a recognition Income method requires a

of liability at the date of receipt of cash. recognition of income at the date of
Using the word “Unearned” means that receipt of cash.
the rent income is still a liability
December Unearned Rent Income 30,000 Rent Income
31, 2020 Rent Income 30,000 Unearned Rent Income
Computation: Computation:
72,000 / 24 months (February 29,2020 72,000 / 24 months = 3,000 per

to February 28,2022) = 3,000 per month month
3,000 x 10 months (February 29, 2020 3,000 x 10 months = 30,000 income to

to December 31, 2020) = 30,000 income be recognized
to be recognized
Income to be recognized 30,000 Initial recorded income (72,000)
Initial recorded income 0 Adjustment for income (42,000)
Adjustment for income 30,000
Alternative Computation:
Under liability method, income is 3,000 per month x 14 months
recorded at the end of the year as part (Unexpired portion as of December
of Adjustments that is why Income was 31, 2020) = 42,000 adjustment for
credited. income
Note: Either way you will get the
42,000 adjustments to income
Under income method, liability is

recorded at the end of the year as
part of adjustments that is why
Liability was credited
December Unearned Rent Income 36,000 Unearned Rent Income 36,000
31, 2021 Rent Income 36,000 Rent Income 36,000
82 | P a g e
Same analysis and computation with
Solution: the Liability method, because after
3,000 x 12 months (January 1,2021 to one adjusting entry, the income
December 31,2021) = 36,000 income to method will become like the liability
be recognized method

Initial recorded income 0
Adjustments to income 36,000
Income is a nominal account, that is

why the income recorded in 2020 is not
included in 2021’s computation of
adjustments for income.
February Unearned Rent Income 6,000 Unearned Rent Income 6,000
28, 2022 Rent Income 6,000 Rent Income 6,000
Solution: Same solution and explanation with

3,000 x 2 months (January 1, 2022 to the liability method
February 28,2022) = 6,000 income to be
recognized Checking:
Income recognized in 2020 30,000
Income to be recognized 6,000 Income recognized in 2021 36,000
Initial recorded income 0 Income recognized in 2022 6,000
Adjustments to income 6,000 Total recognized income 72,000
It is important to take note that the Always remember that the total
expiration of the unearned income is recognized income must be equal to
February 28,2022. During the year 2022, the original cash received by the
the rent income is only for the month of entity.
January and February.
3. A. December 1, 2020
Note Receivable 1,000,000
Plumbing Revenue 1,000,000
B. December 31, 2020

Interest Receivable 10,000
Interest Income 10,000
Solution:
Principal X Interest Rate X Time = Interest Income
1,000,000 x 12% x 1/12 = 10,000
83 | P a g e
Adjustments is necessary to affect the unrecorded interest income as of the year end.
During 2020, the entity holds the credit for only 1-month period (From December 1,2020 to
December 31,2020), thus the interest is computed for only 1 month.
C. December 31,2021
Interest Receivable 120,000
Solution:
Principal X Interest Rate X Time = Interest Income
1,000,000 x 12% x 12/12 = 120,000
During the year 2021, the entity held the credit for one whole year (from January 1,2021
to December 31,2021) that is why the interest is computed for 12 months.
D. December 1,2022
To Record the payment of the notes
Cash 1,000,000
Notes Receivable 1,000,000
To record the Payment of the interest

Cash 240,000
Interest Receivable* 130,000
Interest Income** 110,000
Solution
*Interest Receivable in 2020 10,000
Interest Receivable in 2021 120,000
Total Interest Receivable 130,000
The interest receivable was computed the recorded interest receivable during 2020 and 2021.
The reason why adjusting entry is required for interest is not just because to record the interest
income at year end, but also to record the respective interest receivable during those periods.
**Interest Income = Principal X Interest Rate X Time

Interest Income = 1,000,000 x 12% x 11/12
Interest Income = 110,000
Interest income for the year 2022 is computed only for the month of January 1 to
December 1 and not December 31 because the receivable was already paid at December 1,
meaning the entity only held the receivable for 11 months that is why the interest is computed
for 11 months as well.
Alternative Compound Journal Entry

Cash 1,240,000
Interest receivable 130,000
84 | P a g e
Notes receivable 1,000,000
4. A. November 1,2020
Furniture and fixtures 4,000,000
B. December 31,2020
Solution:
Interest Expense = Principal x Interest rate x Time
Interest Expense = 4,000,000 x 24% x 2/12
Interest Expense = 160,000
Interest is computed for only 2 months because the entity only incurred expense from
November 1 to December 31.
C. December 31,2021
Interest Expense
Interest Payable
Solution:
Interest Expense = Principal x Interest rate x Time
Interest Expense = 4,000,000 x 24% x 12/12
Interest Expense = 960,000
Interest is computed for 12 months because during 2021, the liability was outstanding
for the whole year.
D. November 1,2022
To record the payment of principal

Cash 4,000,000
To record the payment of interest

*Interest Expense 800,000
**Interest Payable 1,120,000
Cash 1,920,000
Solution
*Interest expense = Principal x Interest rate x Time
Interest expense = 4,000,000 x 24 % x 10/12
Interest expense = 800,000
85 | P a g e
Interest expense was computed for 10 months only, because the liability is outstanding
only for 10 months during the 2022. The liability was paid on November 1, that is why interest
expense is computed for the period of January 1 to November 1 only.
**Interest payable in 2020 160,000

Interest payable in 2021 960,000
Total Interest Payable 1,120,000
Alternative compound journal entry

Interest Payable 1,120,000
Cash 5,920,000
5. December 31,2020
Solution:
Cost 40,000,000
Less: Salvage Value (4 ,000,000)
Depreciable cost 36,000,000
Useful life ÷ 3
X 1/12---December 1 to December 31
Cost 40,000,000
Accumulated Depreciation (1,000,000)
Book Value as of 12/31/2020 39,000,000
December 31,2021
Solution:
Cost 40,000,000
Useful life ÷ 3
X 12/12---January 1 to December 31
86 | P a g e
Cost 40,000,000
Accumulated Depreciation (13,000,000)-- Accumulated Depreciation 2020 1,000,000
Book Value as of 12/31/2021 27,000,000 Accumulated Depreciation 2021 12,000,000
Total Accumulated Depreciation 14,000,000
December 31,2022
Solution:
Cost 40,000,000
Useful life ÷ 3
X 12/12---January 1 to December 31
Cost 40,000,000
Accumulated Depreciation (25,000,000)-- Depreciation Expense 2020 1,000,000
Book Value as of 12/31/2022 15,000,000 Depreciation Expense 2021 12,000,000
Depreciation Expense 2022 12,000,000
December 31,2023
Solution:
Cost 40,000,000
Useful life ÷ 3
X 11/12---January 1 to December 1. The equipment’s
Depreciation Expense 11,000,000 useful life is only up to December 1,2023
87 | P a g e
Cost 40,000,000
Accumulated Depreciation (36,000,000)-- Accumulated Depreciation 2020 1,000,000
Book Value as of 12/31/2022 4,000,000 Accumulated Depreciation 2021 12,000,000
Accumulated Depreciation 2022 12,000,000
Accumulated Depreciation 2023 11,000,000
At the end of the useful life of the asset, the book value is always equal to the salvage
value because it is the estimated value of the asset after using it.
88 | P a g e
Key to Correction: Worksheet
1. C
A is false, worksheet Is not required
B is false, Financial statements can be made even without the worksheet
C is true, it is the definition of worksheet
2. D
3. D
4. D
5. D
Problem Solving
Acts Company
Worksheet
For the year ended December 31,2020
Unadjusted Trial Adjustments Adjusted Trial Income Statement Balance Sheet
Balance Balance
Account Title Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 10,000 10,000 10,000
Accounts Receivable 20,000 20,000 20,000
Prepaid Rent 5,000 A 1,000 4,000 4,000
Prepaid Insurance 4,000 B 3,000 1,000 1,000
Equipment 45,000 45,000 45,000
Acc. Depreciation 7,000 C 5,000 12,000 12,000
Accounts Payable 10,000 10,000 10,000
Unearned Rent 30,000 D 20,000 10,000 10,000
Acts, Capital 30,000 30,000 30,000
Acts, Withdrawals 10,000 10,000 10,000
Rent Revenue 30,000 D 20,000 50,000 50,000
Rent Expense 10,000 A 1,000 11,000 11,000
Insurance Expense 3,000 B 3,000 6,000 6,000
Depreciation Expense C 5,000 5,000 5,000
89 | P a g e
107,000 107.000 29,000 29,000 112,000 112,000 22,000 50,000 90,000 62,000
Profit 28,000 28,000
50,000 50,000 90,000 90,000
90 | P a g e
Key to correction: Statement of cashflows
1. C
A and B are wrong, there is no required method
C is correct, all other components of FS are following the accrual, only Statement
of Cashflow used the Cash basis.
2. C
A is correct, Indirect method and Direct method will yield the same result
B is correct, in Financing Activity and Investing Activity the only way to compute
the cashflow is by deducting the outflow from the inflow
C is wrong, there is only one method to compute the Cashflow from the
investing activity
3. D
A is correct, it is use under the indirect method
B is correct, it is use under the direct method
C is false, it is included in the computation of cashflow for Financing Activities.
4. D
A is false, it is not included because it is on account, no cash involvement
B is false, it is part of operating activities because it is a short-term investment
C is false, it is part of investing activities
D is correct, the amount paid in cash is included in the cashflow from investing
activities
5. D
A is false, it is not part of any activity under the Cashflow statement because
there is no cash involved
B is false, no cash involve therefore it is not part of Cashflow
C is false, it is part of Financing Activities
D is correct, it is a financing activity
Problem solving
1. A. Net Income 40,000

Add: Depreciation Expense 10,000
Total 50,000
Increase in Accounts Receivable (50,000)
Decrease in Prepaid Rent 30,000
Increase in Accounts Payable 100,000
Increase in Notes Payable 20,000
B. Sale of Land 50,000
91 | P a g e
C. Receipt from Loans Payable 40,000
Payment of Mortgage (50,000)
Cashflow used by Financing Activities (10,000)
D. Cashflow from Operating Activities 150,000

Cashflow from Investing Activities 50,000
Cashflow used in Financing Activities (10,000)
Cashflow during the year 190,000
Add: beginning cash balance (2019) 50,000
Cash balance for 2020 240,000
E. Capital,2019 280,000
Net Income (2020) 40,000
Capital,2020 320,000
Key to Correction: Closing Entries

1. D
2. D
3. D
4. C
A is wrong, cash is a real account, therefore it is not subject to closing entries
B is wrong, the proper way to close the Income is by debiting income and crediting the
income summary account
D is wrong, Withdrawals are not income related account that is why the proper way to
close it is by closing it directly to capital
92 | P a g e

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Table of Contents

Topic 1: Accounting Equation and Double-entry System ............................................................................ 1

Introduction: This unit discusses

Intended learning outcome

Topic 1: Accounting Equation and Double-entry System

The basic accounting equation is:

The expanded version is:

Elements of Financial Statements

Let's break down the words used in the definition

Trade Assets- if silent

Non-trade Assets- if the maturity is less than

Trade Assets- if the maturity is more than one

Non-trade Assets- if silent

Let's break down the words used in the definition

 Current Liabilities - A liability is considered current if it is due within 12 months after

Trade Payables – liability incurred or arises as a result of normal operation of the

If a liability is a trade liability then use the following:

 Non-current liabilities- if a liability doesn't meet the criteria of current liability it is

Non trade payables

To sum up the discussion let us use this information map

Trade Liabilities- if silent

Non-trade Liabilities- if the maturity is less

Trade Liabilities- if the maturity is more than

Non-trade Liabilities- if silent

Let's break down the words used in the definition

Typical Account Titles Used

4. Income- Increase in economic benefit or decrease in liability that results in increase of

The definition of income encompasses both revenue and gains:

Typical Account Titles Used

Exercises: Accounting Equation and Double-entry System

2. Which of the following is correct under the double entry system?

3. Which of the following statements are correct?

4. Which of the following statements regarding the double-entry system is incorrect?

11. Which of the following statements is incorrect?

12.Which of the following statements is incorrect?

14. An account has the following uses, except

15.Which of the following statements is incorrect?

Accounting Cycle of Service Industry

Accountable event – Recorded in the Journal

Non accountable event

Measuring- Knowing the monetary value of the transaction

Monetary Value – None

Monetary Value – 200,000

Monetary Value- 200,000

Two or more account was

Exercises: Analyzing Transaction

Journal- chronological record of entity's transactions

Two types of journal

25 Equipment 150 300,000

In studying how to make journal entries you need to

Two types of ledger

Difference between General ledger and Subsidiary Ledger

Account: Cash Account No. 110

Account: Accounts Receivable Account No. 120

Account: Equipment Account No. 150

Account: Land Account No. 160

Account: Rent Revenue Account No. 410

Account: Ohab, Capital Account No. 300

Exercises: Journalizing and Posting

3. What is post reference?

4. Which of the statements is false?

5. Which of the following is true?

7. A journal entry that contains two accounts is called