For ACCO 101 Review of Accounting Concepts and Process Part 1

ACCO 101 – Review of Accounting Concepts/Process (Service Business-Sole
Proprietorship)
Accounting is defined as a service activity. Its function is to provide quantitative information,

primarily financial in nature, about economic entities, that is intended to be useful in making economic
decisions, in making reasoned choices among alternative courses of action”.
It is also defined as the art of recording, classifying and summarizing, in a significant manner and in
terms of money, transactions and events which are in part at least of a financial character and
interpreting the results thereof.
The first definition states the purpose of accounting, that is, to provide quantitative information about a
business for the basis of economic decisions and resolutions.
The second definition states the phases performed in the accounting process. These are the recording,
classifying and the summarizing aspects of accounting. Recording or Bookkeeping is the process of
systematically maintaining a record of all business transactions. The recording of transactions either
manually or electronically is usually done in chronological order or according to the date of occurrence.
Classifying is the sorting or grouping of similar and interrelated transactions in their respective class.
Summarizing is the preparation of financial statements which include the Statement of financial Position
(Balance Sheet), Statement of Comprehensive Income, Statement of cash Flows, and Statement of
Changes in Owner’s Equity.
Accounting is an information system that measures business activities, processes information into
reports and communicates the reports to decision makers. It is for this reason that accounting has been
called the “Language of business”, because it serves as a communication link between the business
entity and the users of financial information.
FORMS OF BUSINESS ORGANIZATIONS
The three forms of business organizations are:

1. Single or sole proprietorship. Is a business owned by only an individual called the proprietor.
2. Partnership. Is an association of two or more persons who bind themselves to contribute money,
property or industry to a common fund, with the intention of dividing the profits among
themselves.
3. Corporation. A corporation is an artificial being created by operation of law having the rights of
succession and the powers and attributes expressly authorized by law or incident to its existence.
TYPES OF BUSINESS
Business entities may engage in any of the following types of business. These are:
1. Service business. This business renders services to customers or clients for a fee.
2. Merchandising or trading. This kind of business buy goods or commodities and
sells them at a profit.
3. Manufacturing business. This type makes finished goods from raw materials or
unassembled parts. A manufacturing business produces the goods that it sells.
The three types of businesses discussed which are the service business, merchandising and
manufacturing business may be either a sole proprietorship a partnership or a corporation.
THE BASIC FINANCIAL STATEMENTS OF BUSINESS ORGANIZATIONS
Financial Statements are the end product of the accounting process. They are the means by which
financial information about an economic entity is communicated to the various users of financial
information. Year-end financial statements must be prepared, although interim statements of less than
one year may be prepared for internal purposes. Most companies prepare monthly financial statements
for management use.
The five basic financial statements are the following:

1. Statement of Comprehensive Income or simply Income Statement. Is the financial statement that
shows the summary of the company’s revenues and expenses for a given period. The result of a
company’s business operation is reported in this financial statement.
1
2. Statement of Financial Position or Balance Sheet. Is the financial statement which shows the list of a
company’s asset, liabilities and owner’s equity as of a specific date, usually at the close of the last day
of a month or a year. It shows the financial position or condition of an enterprise as of a particular
date.
Shown in the Balance Sheet are the list and the amount f properties owned by the business, its
financial obligation and the equity of the owner/s on the properties of the business.
3. Statement of Changes in Owner’s Equity or simply the Capital Statement is the summary of changes in
the owner’s equity that have occurred during a specific period of time, such as a month or a year.
4. Statement of Cash Flows. Is the financial statement that provides information about the cash receipts
and cash payments of an entity for a given period of time. Reported in the cash flow statement are
the sources of cash and the uses or disbursements made by the company.
5. Notes to the financial statements. To make the financial statements more useful and meaningful to
those who might have an interest in the business, the notes to the financial statements are added as
one of the basic financial statement companies are required to prepare. This statement presents in
narrative form the significant accounting policies and other related explanatory notes that have
affected the preparation of the financial statements.
Example of a note to the financial statement is a disclosure regarding a lawsuit for which the
company is the defendant. Other relevant information which cannot be shown in the face of the
financial statements is reported in the Notes to the Financial Statements.
USERS OF FINANCIAL INFORMATION
Accounting serves people both inside and outside the business for various purposes. Hence, the users of
accounting information are classified into: Internal and External users.
The users of financial information and their information needs are as follows:
• Management for planning and controlling the operation of the business
• Creditors and suppliers in order to evaluate a borrower’s ability to pay and in

deciding whether to extend credit to a debtor.
• Owner/s of the firm need to know if the business is operating at a profit or loss.
• Investors to determine if their investment is profitable and safe and in deciding

whether to invest in the business or not. Also, whether they should buy, hold or
sell their shares of stocks.
• Government and their Agencies These users require financial information to

regulate the activities of the enterprise, determine taxation policies and as basis
for national income statistics. Examples of government agencies that require
companies to submit financial statements to them are: Bureau of Internal
Revenue (BIR), Securities and Exchange Commission (SEC).
• Customers Use financial statements as basis for evaluating the possibility of

price changes and identifying other sources of cheaper services and
commodities.
• Financial Analysts and Advisors Use financial information as basis in evaluating

the position of the business in the industry and render an opinion on the
business’ potentials regarding profitability risks and opportunities.
• Trade Associations Use financial data to report industry statistics; industry

comparisons and analysis in order that firms belonging to the same industry can
make relevant economic decisions.
2
ELEMENTS OF FINANCIAL STATEMENTS
The elements of financial statements also known as the five (5) basic classifications of accounts are as
follows:
1. ASSETS- the resources controlled by the enterprise as a result of past transactions and events and
from which future economic benefits are expected to flow to the entity. In layman’s language,
assets are the properties owned by the business. Examples of asset accounts are:
Cash Office Supplies Office Equipment

Accounts Receivable Prepaid Rent Store Equi pment
Notes Receivable Prepaid Insurance Machineries
Merchandise Inventory Furniture & Fixtures Land
Store Supplies Automobiles Building
Intangible Assets (like Franchise, Copyright, Patent, Trademarks).
2. LIABILITIES- are the present obligations of an enterprise arising from past transactions or events, the
settlement of which is expected to result in an outflow of resources. In simple terms, liabilities are
the financial obligation or debts of the business. It is also described as the claim or equity of the
creditors on the assets of the enterprise. Liability accounts include:
Accounts Payable Taxes Payable

Notes Payable Utilities Payable
Salaries Payable Mortgage Payable
Interest Payable Unearned Revenue
3. CAPITAL-The equity or claim of the owner on the assets of the business. It is the residual interest in
the assets of the business after deducting all its liabilities. Capital accounts of a sole proprietorship
consists of:
Owner’s Capital
Owner’s Drawing
Examples of capital accounts of a corporation are:
Preference Share Subscribed Preference share

Ordinary Share Subscribed Ordinary share
Additional paid in capital Donated Capital
Revaluation Surplus Retained Earnings
4. REVENUE OR INCOME-The gross inflow of economic benefits during the period in the form of inflows
or enhancements on assets or decrease in liabilities that result in increase in equity, other than those
relating to contributions from the owner/s.
Commonly used revenue accounts are:
Sales Interest Income

Service Revenue Fees Earned
Professional Fees Subscription Revenue
Rent Income Commissions Earned
The use of appropriate revenue account title depends upon the source of the revenue. For example,
if the revenue relates to rental the appropriate revenue account to use is rental income, if it relates
to interest, then interest income. The account sales is the commonly used revenue account by
merchandising companies.
5. EXPENSES- Are outflows or other “using-up” of assets or incurring of liabilities during a period as a
result of delivering or producing goods and/ or rendering services. In simple terms, expenses are
costs incurred to produce revenue. Expense accounts may include the following:
Salaries & Wages Expense Transportation Expense

Taxes and Licenses Expense Supplies Expense
Rent Expense Utilities Expense
3
Advertising Expense Repair &Maintenance
Insurance Expense Uncollectible accounts expense
Depreciation Expense or Bad debts expense
Miscellaneous Expense
THE ACCRUAL BASIS VERSUS THE CASH BASIS OF ACCOUNTING

Under the accrual basis, companies recognize revenues when earned regardless of when cash is
received and recognize expense when incurred regardless of when paid. For a service company, revenue
is considered earned when services have been rendered. For a merchandising business, revenue is
earned upon delivery of goods.
Under Cash basis, companies record revenue only when cash is received. Expenses are recorded only
when paid. The cash basis of accounting is prohibited under IFRS because it violates the revenue
recognition principle and the matching principle.
BASIC ACCOUNTING PRINCIPLES
Historical Cost Principle. IFRS requires that companies account for and report assets and liabilities on
the basis of acquisition price. Cost is generally, thought to be a faithful representation of the amount
paid for a given item.
Revenue Recognition Principle. This principle requires that companies should recognize revenue in the
period in which the performance obligation is satisfied. When a company agrees to perform a service or
sell a product to a customer, it has a performance obligation. When the company satisfies this
performance obligation, revenue is earned.
Matching Principle. Requires costs and expenses be properly matched with the related revenue.
Example is, only costs and expenses relating to year 2023 is to be matched from the 2023 revenue to
arrive at 2023 net income. If an expense not relating to year 2023 is deducted from 2023 revenue, the
matching principle is violated.
BASIC ASSUMPTIONS
Entity Concept. Assumes that the company is separate and distinct from its
owner/s and from other business unit. With this concept, the assets, liabilities, capital, revenues and
expenses of the business should be accounted for separately.
Going concern. Assumes that the company will have a long life. It is expected that companies will lasts
long enough to fulfill their objectives and commitments.
Monetary Unit Assumption. That money is the common denominator of economic activity and provides
an appropriate basis for accounting and measurement. The monetary unit is the most effective means of
expressing changes in capital and exchanges of goods and services.
THE ACCOUNTING PROCESS

The accounting process or the accounting cycle involves a series of steps accountants perform during an
accounting period relating to analyzing, recording, classifying, and summarizing the business
transactions of an entity. Its purpose is to generate the financial statements which will be used, to
report to the various users financial information about the entity.
The steps in the accounting process are:

1. Analyzing business transactions by examining the source documents.
2. Journalizing
3. Posting
4. Preparing the trial balance.
5. Preparing the adjusting entries.
6. Preparing a worksheet.
7. Preparing the financial statements.
8. Journalizing and posting the closing entries.
9. Preparing the post-closing trial balance.
10. Preparing the reversing entries.
4
ANALYZING BUSINESS TRANSACTIONS
In analyzing business transactions, the suggested procedures are as follows:

a. With the source documents, determine the particular accounts affected or involved in the
transaction. There are always two or more accounts involved in a transaction.
b. Determine the effect of the transaction on the accounts involved in terms of increase or
decrease. The accounts affected may either increase or decrease. One account may
increase, and the other decrease. Or the accounts involved may all increase or may all
decrease. (Pls. see examples below).
c. Determine the account or accounts to be debited and credited by applying the rules of debit
and credit.
THE RULES OF DEBIT AND CREDIT

The account or accounts to be debited and credited can be determined easily by applying the rules of
debit and credit.
Debit signifies: Credit signifies:
a. Increase in Assets Decrease in Assets
b. Decrease in Liabilities Increase in Liabilities
c. Decrease in Capital Increase in Capital
d. Increase in Drawing Decrease in Drawing
e. Decrease in Revenue Increase in Revenue
f. Increase in Expense Decrease in Expense
Interpretation of the rules of debit and credit:
a. Debit the asset account if it is to be increased, and credit if to be decreased.

b Debit the liability account if it is to be decreased, and credit if to be increased.
.
c. Debit the capital account if to be decreased, and credit if to be increased,
d Debit the drawing account if to be increased, and credit if to be decreased.
.
e. Debit the revenue account if to be decreased, and credit if to be increased.
f. Debit the expense account if to be increased, and credit if to be decreased.
When an account is debited, it does not mean that such account is increased, because debit may
increase or decrease the balance of an account. Likewise, when an account is credited it does not mean
that such account is decreased, because credit may also increase or decrease the balance of an account.
Note: In mathematics, the plus (+) sign is used to add and the minus (-) sign to subtract, in accounting,
increase and decrease in an account is being made by means of debiting and crediting the account.
Thus, if an amount of P100,000 is to be added to the account cash, then cash is to be debited for
P100,000. If an amount is to be deducted from the account cash, then cash has to be credited for the
said amount.
Analysis of business transactions and the application of the rules of debit and credit in determining the
account or accounts to be debited and credited are illustrated in the following examples.
1. The company purchased office equipment worth P65,000. Paid a down payment of P15,000 and
the balance on account.
Analysis:
Accounts affected Type of account Effect on the account
Office Equipment Asset increase
Cash Asset decrease
Accounts Payable liability increase
5
Account to be debited Accounts to be credited
Office Equipment Cash and Accounts Payable
The company purchased office equipment, so the account office equipment will have to be
increased by P65,000 in the record. Applying the rules of debit and credit, increase in asset is
recorded by debiting such asset. Thus, office equipment is to be debited. By paying cash, cash of
the company will decrease. Decrease in asset is recorded by a credit entry. That is why, cash is to
be credited for the amount of P15,000.
The other account involved is Accounts Payable. The company incurs a liability of P50,000 for the
unpaid balance. Increase in liability is recorded by crediting a liability account.
Stated differently, debit the value received and credit the value parted with. In the above example,
the value received is office supplies so it is the account to be debited. The value parted with is cash
so cash is to be credited.
If there are only two accounts involved in a transaction, one account is to be debited and the other
is to be credited. The two accounts cannot be both debited nor both credited.
2. A law firm received P8,000 cash from a customer for legal services rendered.
Analysis:

Cash Asset increase
Professional Fees Revenue Increase
Account to be debited Account to be credited

Cash Professional Fees
In the second example, the asset cash increase so it is to be debited. The revenue account
Professional fees also increase. Increase in revenue is recorded by a credit entry. Thus,
professional fees is to be credited.
B. The company paid a liability amounting to P 9,000.
Analysis:

Cash Asset decrease
Accounts Payable Liability decrease
Account to be debited Account to be credited

Accounts Payable Cash
Accounts Payable is to be debited because decrease in a liability account is recorded by a debit

entry.
6
The application of the rules of debit and credit are summarized as follows:
Business transactions Debit Credit

a. The owner invests cash in the business Cash Owner’s Capital
The owner withdrew cash from the
b.
business for personal use. Owner’s Drawing Cash
c. Purchased office supplies for cash Office Supplies Cash
d. Purchased office supplies on account Office Supplies Accounts Payable
Returned some office supplies
e. Accounts Payable Office Supplies
previously purchased on account.
Accounts Payable
f. Purchased equipment on account Equipment
Issued check in payment for the

g. Accounts Payable Cash
Equipment purchased on account.
Received cash from customers for
h. Cash Service Revenue
services rendered.
Rendered services to customers on
i.
account. Accounts Receivable Service Revenue
Received payment from customers
j.
on account. Cash Accounts Receivable
k. Paid employees’ salaries. Salaries Expense
Cash C Cash
NOTE: For easier understanding of the debit and credit, the following additional hints are given:
1. If there are only two accounts affected in the transaction, one is to be debited and the other one is to
be credited. The two accounts cannot be both debited or credited.
2. Apply the concept of value received and value given away.
In the transaction, purchased office supplies for cash, the value received is Office Supplies, so it is the
account to be debited. The value given away is Cash, so it is the account to be credited.
JOURNALIZING
Journalizing is the process of recording business transactions in the book of original entry called
JOURNAL. Business transactions are recorded following the double-entry bookkeeping. Double-entry
bookkeeping is a method of recording business transactions which recognizes the dual effect of a
transaction. This means that, for every value received there is a corresponding value parted with or
given up. In double-entry bookkeeping, each transaction is recorded by debiting and crediting accounts.
For every debit entry there is a corresponding credit entry with equal amount.
POSTING
Posting is the process of transferring the entries from the journal (the book of original entry) to the
accounts in the LEDGER (the book of final entry). This is the classifying phase of the accounting process
PREPARING THE TRIAL BALANCE

A trial balance is a summary listing of the account titles and the balance of each account. The account
balances contained in the trial balance are taken from the ledger.
Trial balance is prepared to test the equality of the debit and credit balances of the accounts in the
ledger. However, even if the trial balance is equal, it does not provide a complete proof of the accuracy
of the accounting records because there are errors which do not affect the equality of the trial balance.
Examples of errors which do not affect the equality of the trial balance are:
Failure to record a transaction, recording a transaction twice, using incorrect account in journalizing or
posting (e.g. supplies purchased was debited and posted to equipment).
But then, if the trial balance does not balance it is an indication that error has been committed.
7
PREPARING THE ADJUSTING ENTRIES
After preparing the trial balance, the financial statements cannot be prepared yet. Because there are
transactions of the business that are not yet recorded, hence there is a need for adjusting entries.
Adjusting Entries are entries prepared at the end of an accounting period to update or adjust the
balances of accounts, and to split mixed accounts. (the unadjusted balance of prepaid expense is an
example of a mixed account.) It is very important that adjustments be recorded correctly so that the
company’s profit for the period be measured properly and its related assets and liabilities be brought to
correct balances.
All adjusting entries affect at least one income statement account and one balance sheet account. Thus,
an adjusting entry will always involve a revenue or an expense account and an asset or a liability
account. Adjusting entries ensure the application of the accrual basis of accounting and the matching
principle.
TYPES OF ADJUSTING ENTRIES

1. Adjusting entries to take up accrued expenses
2. Adjusting entries to take up accrued revenue
3. Adjusting entries to take up depreciation of property, plant, and equipment
4. Adjusting entries for prepaid expenses
5. Adjusting entries for unearned revenue
6. Adjusting entries to take up provision for uncollectible accounts or bad debts
7. Adjusting entry for Merchandise Inventory
Accrued Expenses (a liability account) – are expenses already incurred but not yet paid. Examples of
accrued expenses are:
Unpaid salaries of employees Unpaid Rent
Unpaid utility bills Unpaid interest on notes payable
The adjusting entry for accrued expense involves a debit to an expense account and a credit to a
liability account.
ILLUSTRATIONS:
1. ADJUSTING ENTRIES FOR ACCRUED EXPENSES
a. On Dec.31, 2022, ABC Company has unpaid rental of P10,000. The adjusting entry is:
Rent Expense 10,000

Rent Payable 10,000
b. LG Company pays an average of P30,000 every Saturday to its 10 employees, for a 6-day work
week. If Dec 31, 2022, is Tuesday, the company has accrued salaries of P10,000 at Dec. 31, 2022.
The days accrued is Monday and Tuesday since the last payday was Saturday.
The adjusting entry on Dec. 31 is:

Salaries Expense 10,000
Salaries Payable 10,000
The computation of the unpaid salaries of P10,000 is:

Average weekly salary P30,000
Divide by number of work days 6
Average daily salary of the 10 employees P 5,000
Multiply by Nos. of days accrued 2
Accrued salaries at Dec. 31,2022 P10,000
2. ADJUSTING ENTRIES FOR ACCRUED REVENUE
Accrued Revenue, is revenue already earned but not yet received. The adjusting entry for accrued
revenue involves a debit to a receivable account and a credit to a revenue account. Example of an
accrued revenue is, accrued interest on notes receivable.
8
ILLUSTRATION:
At December 31, 2022, X Company has accrued interest on notes receivable of P1,000
The adjusting entry on December 31, 2022, to take up accrued interest on notes receivable is:
Interest Receivable 1,000

Interest Revenue 1,000
3. ADJUSTING ENTRIES TO TAKE UP DEPRECIATION OF PROPERTY, PLANT, AND EQUIPMENT
The adjusting entry to take up depreciation of Property, Plant, and Equipment is

Depreciation expense xxx
Accumulated Depreciation xxx
METHODS OF COMPUTING DEPRECIATION

The common methods of computing depreciation are:
1. Straight-line method
2. Double-declining balance method
4. Sum-of-the years digit method
5. Units of production method
Illustrations:
1 Alpha Company acquired an equipment on January1,2022, for a total cost of P160,000. The
. estimated useful life of the equipment is 5 years, at the end of which it is estimated to be sold
for P4,000.
The computation of depreciation expense, accumulated depreciation, and book value under
each of the above methods are shown below:
A. STRAIGHT-LINE METHOD
Cost of Equipment--------------- P160,000

Less: Estimated scrap value---- 4,000
Depreciable Cost----------------- P156,000
Divide by estimated useful life 5 years
Annual depreciation P 31,200
The depreciable cost or depreciation base is the amount that will be charged to depreciation
expense over the years the asset will be used.
Table of Depreciation- Straight-line Method
Deprec Accumulated
iation Depreciation Book Value Computation of
year Expense (end of year) (end of year) book value
2022 P 31,200 P 31,200 P 128,800 (P160,000-31,200)
2023 31,200 62,400 97,600 (P160,000-62,400)
2024 31,200 93,600 66,400 (P160,000-93,600)
2025 31,200 124,800 35,200 (P160,000-124,800)
2026 31,200 156,000 4,000 (P160,000-156,000)
Cost less Accumulated Depreciation = book value or carrying value
B. DOUBLE-DECLINING BALANCE METHOD
Compute first for the depreciation rate. That is,

100%
Estimated useful life Straight-line rate
100%
5 years 20%
9
20% x 2 = 40% (double declining rate of depreciation).
Double-declining balance method, means double the straight-line rate. That is why 20% was
multiplied by 2. Then, declining book value multiply by the depreciation rate = the annual
depreciation.
Under the declining balance method, the scrap value is not being considered in the computation
of depreciation.
Table of Depreciation- Double-declining balance Method

Computation of Accumulated
year depreciation Depreciation Depreciation (end of Book Value
expense Expense year) (end of year)
2022 P160,000 x 40% = 64,000 64,000 P 96,000
2023 96,000 x 40% = 38,400 102,400 57,600
2024 57,600 x 40% = 23,040 125,440 34,560
2025 34,560 x 40% = 13,824 139,264 20,736
2026 20,736 – 4,000 = 16,736 156,000 4,000
The book value of the asset at the end of its estimated useful life, must be equal to its estimated
residual value. That’s why in the above depreciation table, the depreciation expense of P16,736 for
the year 2022, is computed by subtracting the P4,000 estimated scrap value, from the P20,736
book value at the beginning of year 2022.
C. SUM-OF-THE YEARS DIGIT METHOD
First compute for the denominator to be used. That is:

Estimated useful life + 1 divided by 2, multiply by the estimated useful life = the denominator to be
used. That is:
5 + 1 = 6 /2 =3 x 5 = 15 or 5+4+3+2+1=15
(The number starts at 5 because the estimated useful life is 5.)
The annual depreciation equals = depreciable cost multiplied by the applicable fraction.
The declining balance method and the sum-of-the years digit method provides for a higher
depreciation in the early years and lower depreciation in the later years of the asset. That is why it
called accelerated methods.
Table of Depreciation- Sum-of-the years digit method

P Depreciatio Accumulated
year 160,000 – 4,000 = n Expense Depreciation Book Value
P156,000 (end of year) (end of year)
2022 P156,000 x 5/15 = 52,000 52,000 P 108,000
2023 156,000 x 4/15= 41,600 93,600 66,400
2024 156,000 x 3/15= 31,200 124,800 35,200
2025 156,000 x 2/15= 20,800 145,600 14,400
2026 156,000 x 1/15= 10,400 156,000 4,000
PARTIAL YEAR DEPRECIATION
Assume that the equipment was purchased on June 1, 2022, instead of January 1, 2022. The
depreciation expense for years 2022 to 2027 are shown in the following depreciation table:
A. STRAIGHT-LINE METHOD (160,000-4,000=156,000/5 yrs.= P31,200 annual depreciation)
Table of Depreciation- Straight-line Method

Accumulated
Depreciation Book Value
year Depreciation Expense (end of year (end of year)
10
2022 P 31,200 x 7/12=P18,200 P 18,200 P 141,800
2023 31,200 49,400 110,600
2024 31,200 80,600 79,400
2025 31,200 111,800 48,200
2026 31,200 143,000 17,000
2027 P 31,200 x 5/12=P13,000 156,000 4,000
The depreciation expense for the year 2022, is for seven (7) months only. (June 1 to December 31). The
depreciation expense for years 2023 to 2026 is P31,200, the annual depreciation. For year 2027,
depreciation is for 5 months only. (January to May 2027). The estimated useful life is 5 years. Since the
equipment was acquired June 1,2022, the end of its 5 year useful life is May 31, 2027.
B. DOUBLE-DECLINING BALANCE METHOD

Table of Depreciation- Double-declining balance Method
Depreciation Accumulated
year Expense Depreciation Book Value
Computation (for year) (end of year) (end of year)
2022 160,000 x 40% x 7/12= 37,333 37,333 P 122,667
2023 122,667 x 40% = 49,067 86,400 73,600
2024 73,600 x 40% = 29,440 115,840 44,160
2025 44,160 x 40% = 17,664 133,504 26,496
2026 26,496 x 40% = 10,598 144,102 15,898
2027 15,898 – 4,000 = 11,898 156,000 4,000
C. SUM-OF-THE YEARS DIGIT METHOD
Table of Depreciation- Sum-of-the years digit method

Accumulated
year Depreciation Depreciation Book Value
P160,000 – 4,000 =P156,000 Expense (end of year) (end of year)
2022 156,000 x 5/15 x 7/12 30,333 30,333 129,667
2023 156,000 x 5/15 x 5/12 = 21,667
156,000 x 4/15 x 7/12 = 24,267 45,934 76,267 83,733
2024 156,000 x 4/15 x 5/12 = 17,333
156,000 x 3/15 x 7/12 = 18,200 35,533 111,800 48,200
2025 156,000 x 3/15 x 5/12 = 13,000
156,000 x 2/15 x 7/12 = 12,133 25,133 136,933 23,067
2026 156,000 x 2/15 x 5/12 = 8,667
156,000 x 1/15 x 7/12 = 6,067 14,734 151,667 8,333
2027 156,000 x 1/15 x 5/12 = 4,333 4,333 156,000 4,000
ADJUSTING ENTRIES FOR PREPAID EXPENSES
Prepaid Expenses, are expenses already paid but not yet used or consumed. Examples are: Prepaid
Rent, Prepaid Insurance, Office Supplies
The adjusting entries for prepaid expenses depends upon the method used in recording the
prepayment.
The two methods of recording prepaid expenses are:
1. Asset method –The account debited upon payment is an asset. That’s

why it is called asset method.
2. Expense method - The account debited upon payment is an expense

account.
The company may use either method as they are both acceptable. But then consistency must be
observed.
11
Illustrations:
On May 1,2022, Malakas Company paid P120,000 to maganda Company. The amount is for one year
rental of the office space Malakas is occupying. The rent begins month of May.
The entries to record the payment on May 1, and the adjusting entries on December 31, 2022 under the
asset method and expense method are as follows:
Asset Method Expense Method

May 1 Prepaid Rent 120,000 Rent Expense 120,000
Cash 120,000 Cash 120,000
Dec. 31 Rent Expense 80,000 Prepaid Rent 40,000

Prepaid Rent 80,000 Rent Expense 40,000
Computations:
Amount of rent paid in advance P 120,000

Divide by period covered 12 mos.
Monthly rent P10,000
Multiply by nos. of months from May 1 to Dec. 31 8
Amount of rent expense for year 2022 P 80,000
Amount of rent paid in advance P 120,000

Less: Rent Expense for year 2022 80,000
Prepaid Rent to be reported at December 31,2022 P 40,000
Philippine Financial Reporting Standards (PFRS) requires that expenses paid in advance be taken up as
asset. So, if the company used expense method upon prepayment, prepaid rent must have to be debited
in the adjusting entry to take up the unused portion of the rent.
Whereas, if the company used the asset method, adjusting entry must be prepared at the end of the
accounting period, to take up the expense portion of the rent. Thus, rent expense has to be debited.
ADJUSTING ENTRIES FOR UNEARNED REVENUE
Unearned revenue, are revenue received in advance. (PFRS) requires that revenue received in advance
be reported as liability.
The adjusting entry for unearned revenue depends upon the method used when the revenue was
received in advance.
The two methods of recording unearned revenue are:

1. Liability method -The account credited upon receipt of cash is a liability
account.
2. Revenue method - The account credited upon receipt of cash is a

revenue account.
Illustration:
On May 1,2022, Maganda Company received P120,000 from MalakasCompany. The amount is for one
year rental of the office space Malakas is occupying. The rent begins month of May.
The entries to record the receipt of payment on May 1, and the adjusting entries on December 31, 2022
under the liability method and revenue method are as follows:
Liability Method Revenue Method

May
1 Cash----------------120,000 Cash 120,000
12
Unearned rent revenue Rent revenue 120,000
120,000
Dec. Unearned rent revenue--80,000 Rent revenue 40,000

31 Rent revenue 80,000 Unearned rent revenue 40,000
To take up the earned portion To take up the unearned
of the rent received in advance. portion of the rent received in
advance.
At December 31, 2022 the earned portion and unearned portion of the revenue received in advance is
computed as follows:
Amount received on May 1 P 120,000

Divide by period covered 12 mos.
Rent per month P 10,000
Multiply by number of months(from May 1 to Dec. 31) 8
Earned portion (to be taken up as rent revenue) P 80,000
Amount received on May 1 P 120,000

Less: Earned portion 80,000
Unearned portion at Dec. 31, 2022 (to be taken up as P 40,000
liability)
Under the liability method, the account credited upon the receipt of advance payment is a liability
account unearned rent revenue. Adjusting entry at the end of the accounting period must be prepared
to take up the revenue portion which is P80,000 (rent from May 1 to December 31).
Under the revenue method, the receipt of the advance payment from customer is recorded by a credit
to a revenue account. In the above illustration, Rent revenue was credited on May 1. Adjusting entry
should be prepared to adjust the balance of the rent revenue account and to take up the unearned
portion of the revenue received in advance.
ADJUSTING ENTRIES TO TAKE UP UNCOLLECTIBLE ACCOUNTS
Since not all receivables are collected, companies record those uncollectible accounts by a charge to
Uncollectible accounts expense. The other accounts used are Bad debts expense or Doubtful accounts
expense.
There are two methods of accounting for uncollectible accounts. These are:
1. Allowance method – under this method adjusting entry is prepared to take up provision for those
receivables that might not be collected. This is the generally acceptable method because it conforms
with the matching principle.
2. Direct-write off method – no adjusting entry is prepared under this method. This method, though simple
to use, is not generally acceptable. It violates the matching principle, since, uncollectible accounts
expense is recorded only when an account is written- off regardless of when the sale was made.
Comparison of entries prepared under: the Allowance method and Direct write-off method of acctg for
bad debts:
Entries under:
Transactions: Allowance method Direct write-off method
1. On Dec. 31,2019, X Company Bad debts expense - 20,000

estimates that P20,000 if its AR is Allowance for bad debts- 20,000 No adjusting entry
doubtful of being collected. Adjusting entry to take up doubtful accounts.
2. On Feb. 14, 2020, X Company Allowance for bad debts – 10,000 Bad debts expense- 10,000
wrote-off the account of Mr. Covi, Accounts receivable (Mr. Covi) - 10,000 Accounts receivable(Mr. Covi)- 10,000
P10,000. To write-off accounts receivable. To write-off accounts receivable.
3. On Nov.30,2020, Mr. Covi Accounts receivable(mr. covi)– 5,000 Accounts receivable (mr. Covi)– 5,000
showed up and pay Company X, Allowance for bad debts – 5,000 Bad debts expense – 5,000
P5,000 To re-establish the account of mr. covi which To re-establish the account of mr. covi .
had been previously written-off
13
Cash - 5,000 Cash - 5,000
Accounts receivable(Mr. Covi) -5,000 Accounts receivable(Mr. Covi) -5,000
To record collection of AR. To record collection of AR.
The presence of the account, allowance for uncollectible accounts indicates that the company is using
the allowance method.
In preparing the adjusting entry for uncollectible accounts, the company must have to make an estimate
of the amount that will be charged to uncollectible accounts expense. The estimated amount of the
accounts receivable that might become uncollectible may be based on the following:
1. By making an analysis of the outstanding accounts receivable by aging the accounts receivable.
An estimate of accounts that might not be collected is based on how long an account has been
overdue.
2. Percentage of the outstanding accounts receivable
How to prepare the adjusting entry to take up provision for uncollectible accounts
Illustrations:
The following information are taken from the books of Mabuhay Corporation at December 31, 2022.
Accounts Receivable P 950,000

Allowance for uncollectible accounts 15,000
Sales 5,000,000
The adjusting entries at December 31, 2022 to record uncollectible accounts expense under the
following cases are presented below:
Case 1- The company estimates its uncollectible accounts at December 31, 2022, by aging its accounts
receivable. Details of which is presented below:
Age Amount Estimated uncollectible
0-60 days P 300,000 1%

61-120 450,000 3%
Over 120 days 200,000 6%
Total P 950,000
The uncollectible accounts expense computed based on aging or analysis of accounts receivable is
presented below:
Estimated Amount
Amount uncollectible uncollectible
P 300,000 1% P 3,000
450,000 3% 13,500
200,000 6% 12,000
P 950,000 P28,500
Based on the analysis of the total accounts receivable of P950,000 the computed estimated accounts
that might become uncollectible is P28,500. If a balance sheet is prepared at December 31, 2022,
accounts receivable will be presented as follows:
Accounts Receivable P950,000

Less: Allowance for uncollectible accounts 28,500
Net realizable value 921,500
The amount of bad debts expense is computed as follows:
Estimated uncollectible accounts at December 31, 2022 - P 28,500

Less: Allowance balance (at Dec.31,2022 before adjustment ) 15,000 credit
Uncollectible accounts expense ( for year 2022 ) which is the P 13,500
14
amount of adjustment.
Based on the above computation, the adjusting entry to take up bad debts expense is:
Uncollectible accounts expense 13,500
Allowance for Uncollectible accounts 13,500
Although, the computed estimated uncollectible accounts at December 31,2022 amounts to P28,500,
the amount of uncollectible expense is only P13,500. It is because there is an allowance balance before
adjustment of P15,000 which is to be considered. The estimated uncollectible accounts at December 31,
amounting to P28,500 is the required allowance balance after adjustment.
After the above adjusting entry, the allowance for uncollectible accounts will have a balance of P28,500
at December 31,2022, as shown in the T-account below
Allowance for Uncollectible Accounts

15,000 balance before adjustment
13,500 adjustment
28,500 balance after adjustment
Sometimes, the balance of the allowance for uncollectible before adjustment is debit. This happens
when the amount of accounts receivable written-off is greater than the allowance balance.
Case 2- Assume that the allowance for uncollectible accounts at December 31,2022 before adjustment is
a debit balance of P15,000.
Computation of the amount of adjustment at December 31.2022:
Estimated uncollectible accounts at December 31, 2022 - P 28,500

Add: Allowance balance ( at Dec.31,2022 before adjustment ) 15,000 debit
Uncollectible accounts expense ( for year 2022 ) P 43,500
If the allowance balance is debit before adjustment, its amount is added to the estimated uncollectible
accounts.
Case 3-The uncollectible accounts at December 31, 2022 is estimated to be 4% of the outstanding
accounts receivable.
The adjusting entry to take up uncollectible accounts expense at December 31, is:
Allowance for Uncollectible accounts 23,000
Computation:
Multiply by percentage uncollectible 4%
Estimated uncollectible accounts at December 31, 2022 P 38,000
Less: Allowance balance at Dec. 31 (before adjustment) 15,000 credit
Uncollectible account expense, For year 2022 P 23,000
PREPARING A WORKSHEET
The worksheet is a columnar sheet of paper used to organize the data needed to prepare the financial
statements. It is not part of the formal accounting records. In fact it is optional. A worksheet is only a
tool used to summarize information needed to facilitate the preparation of financial statements.
A ten-column work sheet has the following column headings: unadjusted trial balance, adjustments,
adjusted trial balance, income statement and balance sheet with a debit and a credit column.
To illustrate the preparation of a 10-column worksheet, the trial balance of Mango Printing Services at
June 30,2023, is presented on the next page:
15
Mango Printing Services
Trial Balance
June 30, 2023
Debit Credit
Cash 400,150
Accounts Receivable 73,000
Allowance for bad debts 2,500
Supplies 91,700
Prepaid Rent 56,000
Prepaid Insurance 33,850
Automobile 785,000
Accumulated Depreciation – Auto. 170,000
Equipment 288,000
Accumulated Depreciation – Equip. 148,800
Accounts Payable 42,300
Notes Payable (due June 30, 2025) 300,000
Ali Mango, Capital 783,750
Ali Mango, Drawing 25,000
Printing Revenue 383,800
Utilities Expense 15,250
Miscellaneous Expense 5,200
Total 1,831,150 1,831,150
The adjustment data at June 30, were:

a. The estimated uncollectible accounts at June 30 is P 7,500.
b. Supplies inventory amounts to P 38,700.
c. The prepaid rent applicable to future periods is P 44,000
d. Expired insurance premiums P4,600
e. Accrued salaries P 9,900
f. Accrued interest on notes payable P10,500
g. Depreciation of the Automobile and Equipment were P10,000
and P8,800 respectively.
The adjusting entries for Mango Printing Services were:
a. Uncollectible accounts expense 5,000

Allowance for uncollectible accounts 5,000
Computation:
Estimated uncollectible accounts- P 7,500
Less: Allowance balance before adjustment- 2,500
Uncollectible accounts expense – P 5,000
b. Supplies Expense 53,000

Supplies 53,000
Computation:
Unadjusted balance of Supplies - P91,700
Less: Supplies inventory – 38,700
Supplies used to be charged to expense– P 53,000
c. Rent Expense 12,000

Prepaid Rent 12,000
Computation:
Unadjusted balance of Prepaid rent – P 56,000
Less: balance of prepaid rent at June 30, – 44,000
Expired Rent to be charged to expense– P 12,000
d. Insurance Expense 4,600
16
Worksheet
(there is no need to compute for the amount of insurance
expense. Its amount is given inFor
theMonth Endeddata).
adjustment June 30, 2023
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Accounts
e. Salaries Expense credit
debit debit credit debit 9,900
credit debit credit debit credit
Cash 400,150Payable 400,150 400,150
Salaries 9,900
Accounts Receivable 73,000 73,000 73,000
Allowance for bad debts
f. Interest Expense 2,500 a. 5,000 7,500
10,500 7,500
Supplies 91,700 b. 53,000 38,700 38,700
Prepaid Rent Interest
56,000 Payable c. 12,000 44,000 10,500 44,000
Prepaid Insurance 33,850 d. 4,600 29,250 29,250
Automobile g. Depreciation
785,000 Expense 785,000 18,800 785,000
Accum. depreciation - auto Accumulated depreciation-Auto.
170,000 g. 10,000 180,000 10,000 180,000
Equipment 288,000 288,000 288,000
Accum. depreciation . equip. Accumulated depreciation-Equip.
148,800 g. 8,800 157,600 8,800 157,600
Accounts Payable 42,300 42,300 42,300
Notes Payable 300,000 300,000 300,000
Ali Mango, Capital 783,750 783,750 783,750
Ali Mango, Drawing 25,000 25,000 25,000
Printing Revenue 383,800 383,800 383,800
Salaries Expense 58,000 e. 9,900 67,900 67,900
Utilities Expense 15,250 15,250 15,250
Miscellaneous Expense 5,200 5,200 5,200
Total 1,831,150 1,831,150
Uncollectible accounts expense a. 5,000 5,000 5,000
Supplies Expense b. 53,000 53,000 53,000
Rent Expense c. 12,000 12,000 12,000
Insurance Expense d. 4,600 4,600 4,600
Salaries Payable e. 9,900 9,900 9,900
Interest Expense f. 10,500 10,500 10,500
Interest Payable f. 10,500 10,500 10,500
Depreciation Expense g. 18,800 18,800 18,800
113,800 113,800 1,875,350 1,875,350 192,250 383,800 1,683,100 1,491,550
NET INCOME 191,550 191,550
Totals 383,800 383,800 1,683,100 1,683,100
The presence of the accounts prepaid rent and prepaid insurance in the unadjusted trial balance,
indicates that the company is using the asset method.
A 10-column worksheet prepared for Mango Printing Services is presented on the next page.
17
PREPARING THE FINANCIAL STATEMENTS:
Financial Statements are the end product of the accounting Process. They are the means used to communicate
to the various interested parties, financial information about an economic entity.
After completing the work sheet, all information needed to prepare the financial statements are already
available.
The following data taken from the adjusted trial balance column of the worksheet of Mango Printing Services,
will be used to illustrate the preparation of Income Statement, Capital Statement, and Balance Sheet.
Debit Credit
Cash 400,150
Allowance for bad debts 7,500
Supplies 38,700
Prepaid Rent 44,000
Automobile 785,000
Accumulated depreciation – Auto. 180,000
Equipment 288,000
Accumulated depreciation – Equip. 157,600
Interest Payable 10,500
Rent Expense 12,000
Supplies Expense 53,000
Depreciation Expense 18,800
Insurance Expense 4,600
Interest Expense 10,500
Total 1,875,350 1,875,350
THE INCOME STATEMENT
The Income Statement reports the revenues and expenses of a company, and finally the amount of net income
or loss. Most companies prepare an income statement monthly, quarterly, semi-annually and annually. The
data needed to prepare the income statement can be taken from the income statement columns of the work
sheet.

Income Statement
For Month Ended June 30, 2023
Printing Revenue P 383,800

Less: Operating Expenses
Salaries Expense P 67,900
Rent Expense 12,000
Total operating expenses 192,250
Net Income P 191,550
18
In the above income statement, total revenue is higher than total operating expenses. Thus, the result of
business operation is net income.
If the total operating expenses is higher than the total revenue, the difference is labelled net loss.
Income statement is dated for a given period of time. The shortest period an income statement is prepared is
for one month. The longest is for a period of one year.
THE CAPITAL STATEMENT
The capital statement (also called statement of owner’s equity) is a financial statement that summarizes the
transactions affecting the owner’s equity. This statement is prepared by showing the beginning capital balance,
plus additional investment if there’s any, adding net income (or deducting net loss), and then subtracting the
owner’s withdrawals.
The capital statement prepared for Mango Printing Services is as follows:

Capital Statement
For Month Ended June 30, 2023
Ali Mango, Capital (June 1, 2023) P 783,750

Add: Additional Investment -0-
Net income for month of June P 191,550
Total P 975,300
Less: Drawing (25,000)
The capital balance at June 30, which is P950,300 is the amount forwarded to the balance sheet.
Assuming that the amount of P259,450 is a net loss, The capital statement
will look like as follows:

Less Net loss (259,450)
:
Drawing ( 25,000)
Additional investment by the owner and net income increase capital. Whereas, net loss and drawing decreases
capital.
THE BALANCE SHEET
The Balance Sheet also referred to as the Statement of Financial Position provides information about the
nature and amounts of the company’s resources (Assets), financial obligations (Liabilities), and the equity of
the owner in the business as of a specific date. The balance sheet provides a basis for computing rates of
return and evaluating the capital structure of the enterprise. Analyst use this statement to assess a company’s
liquidity, solvency, and financial flexibility.
Assets are classified into current assets and non-current assets.
Current assets, includes cash and other assets that are converted into cash or used up in a relatively short
period of time, usually one year or less. The current assets common to a service company are: cash, accounts
receivable, notes receivables, supplies and other prepaid expenses. Current assets are listed in the order of
liquidity, or their convertibility into cash.
Non-current assets, include Long-Term Investments, Property, Plant and Equipment, Intangible assets and
Other assets. Property, Plant, and Equipment are assets acquired for use in a business rather than for sale.
They are also called fixed assets because they are used for long-term purposes.
Liabilities are also classified as current and non-current (long-term).
Current liabilities are debts which are due and payable within one year. The payment of which normally will
require the use of current assets. Current liabilities are usually listed in the order of their maturity. Examples of
19
current liabilities are: Accounts Payable, Notes Payable (short-term), Salaries Payable, Utilities Payable,
Unearned Revenue, and other accrued expenses.
Non-current liabilities (long-term liabilities) are those debts that will be paid after a relatively long period of
time, usually more than one year. Examples are: Notes Payable (long term), Mortgage Notes Payable, and
Bonds Payable.
The Balance Sheet of Mango Printing Services is presented below:

Balance Sheet
June 30, 2023
ASSETS
Current Assets:
Cash P 400,150
Less: Allowance for bad debts 7,500 65,500
Supplies 38,700
Prepaid Rent 44,000
Total current assets P 577,600
Property and Equipment:

Automobile P 785,000
Less: Accumulated Depreciation – Auto. 180,000 605,000
Equipment P 288,000
Less: Accumulated Depreciation – Equip. 157,600 130,400
Total Assets P 1,313,000
LIABILITIES
Current Liabilities:
Accounts Payable P 42,300
Interest Payable 10,500
Total current liabilities P 62,700
Long-term liability:
Total Liabilities P 362,700
CAPITAL
Total Liabilities and Capital P 1,313,000
JOURNALIZING AND POSTING THE ADJUSTING ENTRIES
The adjusting entries, which are first recorded in the work sheet, are recorded in the journal and posted in the
ledger. The adjusting entries are recorded on the next available space in the journal which are dated end of the
accounting period.
JOURNALIZING AND POSTING THE CLOSING ENTRIES
Closing entries are entries prepared at the end of an accounting period to reduce the balances of nominal
accounts to zero. The purpose is to clear the record of these nominal accounts of the preceding period’s
entries, in preparation for the next accounting period.
Only the amount of nominal or temporary accounts are closed. The balances of real accounts are not closed
because their balances are carried forward to the next accounting period. The accounts closed are: revenue
accounts, expense accounts, net income, and the owner’s drawing.
The first closing entry is to close all revenue accounts, by debiting the revenue accounts and by crediting the
account Income Summary.
20
The 2nd, closing entry is to close all expense accounts, by debiting Income Summary (for the total amount of
expenses) and by crediting all the expense accounts.
The 3rd closing entry is to close the amount of net income or net loss to capital. Net income is closed to capital
by debiting income summary and crediting capital.
The closing entries for Mango Printing Services are as follows:
a. To close revenue accounts

Income Summary 383,800
b. To close expense accounts

Rent Expense 12,000
c. To close the amount of net income
d. To close the owner’s drawing account
The T-account of Income summary is shown below:
INCOME SUMMARY
amount of expenses - 192,250 383,500 amount of revenue
191,550 net income
After closing the revenue and expense accounts to income summary, the balance of the income summary
account represent the amount of net income or net loss.
If the balance of income summary is a credit balance, the balance represents the amount of net income. It is
the difference between the amount posted in the credit side (the amount of revenue) and posted in the debit
side (which is the total expense).
If the total expense is greater than the total revenue, the income summary account will show a debit balance.
It means that the result of business operation is net loss.
The entry to close net loss to capital is:
Owner’s Capital xx
Income Summary xx
Income Summary is also a nominal account. After closing the amount of net income or loss to capital, the
balance of income summary will be zero.
PREPARING THE REVERSING ENTRIES:
Reversing entries, are entries prepared at the beginning of the next accounting period to reverse some of the
adjusting entries that was prepared in the preceding period. Reversing entry is the exact reverse of the
adjusting entry.
Only the following adjusting entries are reverse.

21
1. Adjusting entries for accruals. These are the adjusting entries for,
accrued expenses and accrued revenues.
2. Adjusting entries for deferrals. These are the adjusting entries for, prepaid expenses (only if the
company used the expense method). And adjusting entries for unearned revenue. (only if the company
used the revenue method).
If the asset method is used for prepaid items, the adjusting entry is not reversed.
Likewise, if the liability method is used for unearned revenue, the adjusting entry is not reverse.
The reversing entries for Mango Printing Services are:
Date
July 1 Salaries Payable 9,900
to reverse the adjusting entry for accrued salaries of
employees.
1 Interest Payable 10,500

to reverse the adjusting entry for accrued interest.
The adjusting entries for prepaid rent and prepaid insurance were not reversed because the company uses
the asset method. The presence of the account Prepaid Rent and Prepaid Insurance in the unadjusted trial
balance indicates that the Asset Method is the method being used.
22
PLEASE ANSWER THE FOLLOWING EXERCISES and PROBLEMS
Multiple Choice. Theory (Encircle the letter of your answer)
1. A service activity. Its function is to provide quantitative information, primarily financial in nature, about
economic entities.
a. Auditing c. Bookkeeping
b. Accounting d. Posting
2. The financial statement which reports the financial position of a company as of a specific date is the
a. income statement c. statement of owner’s equity
b. balance sheet d. statement of cash flows
3. The economic resources that a business owns and expects to be useful to the enterprise are called
a. owner’s equity c. revenue
b. liabilities d. assets
4. The recording of business transactions in the ledger is called
a. journalizing c. adjusting
b. posting d. reversing
5. Equities are legal and economic claims to the assets of a business. The owner’s claims on the business
assets are also known as
a. accounts payable c. outsider claims
b. liabilities d. capital
6. The statement of financial position reports the following, except
a. assets c. owner’s equity
b. liabilities d. revenue
7. A tool used by accountants to organize the data needed to prepare the financial statements
a. journal c. trial balance
b. ledger d. worksheet
8. A prepaid expense is NOT an

a. asset c. expired costs
b. economic resources d. unexpired costs
9. All of the following are assets except

a. Accounts Receivable c. Sales
b. Merchandise Inventory d. Prepaid Expense
10 A debit entry to the Cash account indicates:

.
a. The payment of an expense
b. The withdrawal of funds from the business by the owner
c. The borrowing of money from the bank
d. The billing to a client for services rendered on account.
11 A debit to a liability account indicates

.
a. The receipt of payment from customers
b. The incurrence of additional debt
c. Payment to creditors
d. Payment for supplies purchased for cash
12 The receipt of money due on account by a business would be recorded by

.
a. A debit to cash and credit to capital
23
b. A debit to cash and credit to service revenue
c. A debit to cash and credit to accounts receivable
d. A debit to accounts receivable and credit to service revenue
13 Entries prepared to update the balances of accounts

.
a. opening entries c. closing entries
b. adjusting entries d. reversing entries
14 The expected value of fixed assets after its estimated useful life
.
a. book value c. residual/scrap value
b. carrying value d. fair value
15 The method that do not consider the asset’s estimated residual value in computing depreciation
.
a. straight-line method c. sum-of-the years digit method
b. declining balance method d. units of production method
16 The method that provides equal amount of annual depreciation

.
a. straight-line method c. sum-of-the years digit method
b. declining balance method d. units of production method
17 Which of the following statements pertains to journalizing

.
a. Recording of transactions in the journal
b. Updating the balances of accounts
c. A chronological record of all the transactions of the company
d. Summarizing all the transactions of the firm
18 The normal balance of an account is on the

.
a. Debit side of an account
b. Credit side of an account
c. Side represented by increase in the account
d. Side represented by decrease in the account
19 Adjusting entries are necessary in order to

.
a. Prove the equality of the debits and credits
b. Detect and correct an erroneous entry
c. Correctly state the balances of accounts
d. Facilitate the preparation of financial statements
20 Accrued revenue can be best described as an amount

.
a. collected and currently matched with expenses
b. collected and not currently matched with expenses
c. not collected and currently matched with expenses
d. not collected and not currently matched with expenses
21 A bill from Meralco was received by the company. The bookkeeper recorded it as an expense even
. though no payment was made. This is an example of
a. accrued revenue c. prepaid expense
b. accrued expense d. unearned revenue
22 Which of the following errors would cause the trial balance to be unequal?
.
a. supplies purchased on account was posted to the account equipment
b. a cash sales was recorded correctly but posted as debit to cash and credit to
accounts payable.
24
c. office supplies purchased for cash was posted as a debit to utilities expense and
credit to accounts payable
d. A payment of P5,000 to a creditor was posted as a debit to accounts payable and
a debit to cash
23 If Income Summary has a P450,000 credit balance before it is closed to the Capital account, it means that:
.
a. the owner invested additional P450,000 in the business
b. expenses exceeded revenues by P450,000
c. the company had a profit of P450,000
d. the company had a net loss of P450,000
Upon
24 Upon purchase of an insurance policy for 2-year period, the company recorded the transaction by debiting
. Insurance Expense. At year-end, the adjusting entry for the said transaction will include:
a. A debit to an expense account for the expired portion
b. A credit to an asset account for the unexpired portion
c. A credit to expense account for the expired portion
d. A debit to asset account for the expired portion
25 The cash payment of an expense results in:

.
a. A decrease in the balance of the expense account
b. An increase in the balance of the expense account
c. An increase in the capital account
d. An increase in the balance of cash
Matching Type. Write your answer on the space provided before each number.
____ 1. Characterized as the language of business
____ 2. The book of final entry
____ 3. A contra asset account
____ 4. These are revenue received in advance
____ 5. The nominal account used in the closing process
____ 6. Assets = Liabilities + Owner’s Equity
____ 7. Jollibee food outlets are engaged in this type of business operation.
____ 8. Expenses already incurred but are not yet paid.
____ 9. The financial statement that reports the result of business operation.
____ 10. The business is treated as separate and distinct from its owner/s and from
other business units.
____ 11. The method of recording business transactions by debiting and crediting
accounts with equal value.
____ 12. Consists of cash and other assets which are expected to be received or
consumed within a year.
____ 13. A columnar paper used as a tool to facilitate the preparation of financial
statements.
____ 14. The series of steps perform by bookkeepers or accountants during an
accounting period.
____ 15. The method of accounting for uncollectible accounts which do no use the
term Allowance for Uncollectible Accounts.
List of possible answers

a. Accounting i. Balance Sheet q. Income Statement
b. Accounting cycle j. Current Assets r. Income Summary
c. Accounting Equation k. Entity concept s. Trial balance
d. Accrued Revenue l. Journal t. Service Business
e. Accrued Expense m. Ledger u. Merchandising Business
f. Assets N. Worksheet v. Double-entry bookkeeping
g. Allowance method O. Prepaid Expense w. Direct-write off method
h. Accumulated p. Compound journal x. Unearned Revenue
Depreciation entry
25
True or False. On the space provided before each number, write the letter T if the statement is correct and F if
incorrect.
____ 1. To debit means to increase the balance of an account.
____ 2. Assets are increased by a debit entry, while liabilities are increased by a
credit entry.
____ 3. The normal balance of assets, drawing and expenses is debit. While the
normal balance of liabilities, capital, and revenue is credit.
____ 4. A trial balance that is balance indicates that no error has been committed
in recording and posting business transactions.
____ 5. The book value of an asset is the estimated amount expected to be

recovered at the end of the asset’s useful life.
____ 6. The balance sheet reports all the assets, liabilities, and owner’s equity of a
company as of a specific date.
____ 7. Business transactions are analyzed after transactions are journalized.
____ 8. Adjusting entries ensure the application of the accrual basis of

accounting.
____ 9. The balances of real accounts are closed. While the balances of nominal
accounts are not closed, because their balances are carried forward to the
next accounting period.
____ 10. After closing the revenues and expenses, The income summary account
showed a credit balance. This balance is closed to capital by crediting
capital.
____ 11. The drawing account is closed by crediting the capital account.
____ 12. Assets, liabilities, capital, revenue, and expenses are all listed in the post-
closing trial balance.
____ 13. All adjusting entries involves an income statement account and a balance
sheet account.
____ 14. The recording of accrued revenue results in the increase of an asset and
an increase in revenue.
____ 15. Reversing entries are prepared at the end of an accounting period.
Identification
1. A service activity with the purpose of providing financial information about economic entities.
2. The financial statement that reports the company’s revenues and expenses for a given period.
3. A business engaged in providing services to customers for a fee.
4. The asset recorded by a company for services it has rendered to a client on account.
5. A business owned by a single individual.
6. A journal entry with two or more accounts debited and or credited.
7. The right side of an account.
8. Entries prepared to split mixed accounts.
9. Revenue is recognized when earned regardless of when received. While expenses are recognized when
incurred regardless of when paid.
10. Uses financial information for controlling the operations of the business.
11. The end product of the accounting process.
12. These are claims against debtors or customers arising from services rendered on account and sale of
merchandise on account.
13. These are expenses paid in advance.
14. The revenue account commonly used by merchandising companies.
16. Revenues already earned but not yet received.
17. These are revenues collected in advance by the business.
26
18. Expenses already incurred but not yet paid.
19. The statement showing the sources of cash that came into the company as well as the uses or
disbursements for which the cash went to.
20. An association of two or more persons who bind themselves to contribute money, property or industry to
a common fund, with the intention of dividing the profits among themselves.
Multiple Choice. Problem

1. An accounting firm began on June 1, 2023 with office supplies of P20,000. During
the month, the firm purchased supplies worth P 25,000. On June 30, supplies
inventory amounts to P 10,000. The supplies expense for the month of June
amounts to
a. P10,000 c. P35,000
b. P25,000 d. P45,000
2. On December 31, 2017, the account Supplies Expense showed a balance of

P46,800 before adjustment. Supplies Expense reported by the company in its
income statement for the year 2017 amounts to P 25,200. The adjusting entry
prepared for this item at December 31,2017 was
a. Debit Supplies for P21,600
b. Debit Supplies Expense for P25,200
c. Credit Supplies for 21,600
d. Credit Supplies Expense for 25,200
3. On October 1, 2017, Masaya Company purchased a one-year insurance policy for

P36,000. On that date, the bookkeeper debited the account Insurance Expense.
The adjusting entry on December 31, 2017 was
a. Debit insurance expense for P9,000
b. Debit prepaid insurance for P27,000
c. Credit insurance expense for P9,000
d. Credit prepaid insurance for P27,000
4. On May 1, 2023, Honest Company paid P240,000 to Cityhomes Development

Corporation. The amount represent two years rental beginning month of May.
The Prepaid Rent to be reported on the statement of financial position at
December 31, 2023 would be
a. P-0- c. P160,000
b. P80,000 d. P120,000
5. Using the data in No. 4, The Rent Expense that Honest Corporation would report
for year 2023 is
a. P-0- c. P160,000
b. P80,000 d. P120,000
6. For the month of April 2023, Masigasig Company reported Supplies Expense of P
15,000. On April 1, the company had Supplies worth P8,000 and on April 30,
supplies on hand amounts to 12,000. How much supplies were purchased by
Masigasig in May?
a. P8,000 c. P15,000
b. P12,000 d. P19,000
7. The account Unearned Subscription Revenue of Malicsi Company that appears on

its unadjusted trial balance at December 31, 2017, showed a balance of P72,000.
Whereas, the Unearned Subscription Revenue showed in its balance sheet at
December 31,2017 amounts to P16,000. The adjusting entry prepared at
December 31, was
a. Debit Subscription Revenue for P56,000
b. Debit Unearned Subscription Revenue for P56,000
c. Credit Unearned Subscription Revenue for P56,000
d. Credit Subscription Revenue for P16,000
27
8. On January 3, 2023, Lakas Company purchased equipment with invoice price of
P152,320 inclusive of 12% value added tax (VAT). The company spent installation
and testing cost of 4,500 and 3,800 respectively. For year 2023, the company
spent P6,700 for repair and maintenance of the equipment. The cost of the
equipment is
a. P144,300 c. P160,620
b. P151,000 d. P167,320
Use the following information to answer number 7, 8, 9 and 10.
On May 1,2015, Orange Company purchased a machine with a total cost of

P420,000. The machine was estimated to have a useful life of five years and a
salvage value of P 10,000. The company is using straight-line method.
9. How much depreciation expense was reported by Orange for the year 2015?
a. P84,000 c. P56,000
b. P82,000 d. P54,667
10. How much depreciation expense was reported by Orange for the year 2016?
a. P84,000 c. P56,000
b. P82,000 d. P54,667
11. What is the balance of Accumulated Depreciation-machine at December 31, 2016?

a. P136,667 c. P164,000
b. P140,000 d. P168,667
12. What is the book value of the machine at December 31, 2017
a. P201,333 c. P174,000
b. P196,000 d. P158,000
13. Furniture and fixtures were acquired by Apple Company for a total cost of P97,000
on January 2,2017. The estimated useful life of the furniture and fixtures is 7 years
with estimated scrap value of P 2,000. If the company is using sum-of-the years
digit method, how much depreciation expense was reported for the year 2017?
a. P13,571 c. P24,000
b. P20,357 d. P24,250
14. Dalandan Company is using double-declining balance method in depreciating its

property, and equipment. Equipment with estimated useful life of 8 years and
residual value of P5,000 was acquired for a total cost of P 245,000 on January 2,
2023. How much depreciation expense is to be reported for the year 2019?
a. P45,938 c. P60,000
b. P46,250 d. P61,250
15. For money borrowed, Loaner Company received P300,000 cash from Metrobank
on October 1,2017. On the same date, Loaner issued a 120-day, 10% promissory
note to Metrobank for the same amount. On December 31, 2017, the adjusting
entry by Loaner for the accrued interest on the note issued was
a. Debit Interest Receivable and credit Interest Revenue for P5,083
b. Debit Interest Expense and credit Interest Payable for P5,083
c. Debit Interest Receivable and credit Interest Revenue for P10,000
d. Debit Interest Expense and credit Interest Payable for P10,000
16. Tagumpay Company have 15 employees that are paid an average of P9,750 every
Saturday for a 6-day work week. Suppose the last payday in December 20xx was
December 27, how much is the accrued salaries at Dec.31, 20xx
a. P1,625 c. P4,875
b. P3,250 d. P6,500
Use the following information for number 17,18 and 19.

On December 31, 2017, Jollibit Company has outstanding accounts receivable of
P850,000. Based on analysis of accounts receivable the company estimates that P
35,600 is doubtful of being collected. On December 31, The allowance for doubtful
accounts has a balance of 12,500 before adjustment.
28
17. Based on the above data, how much uncollectible accounts expense was provided
by Jollibit for the year 2017?
a. P48,100 c. P23,100
b. P35,600 d. P12,500
18. The allowance for uncollectible accounts shown in the December 31, 2017 balance
sheet of Jollibit was
a. P48,100 c. P23,100
b. P35,600 d. P12,500
19. The net realizable value of accounts receivable at December 31,2017 was
a. P837,500 c. P801,900
b. P826,900 d. P814,400
20. On the capital statement of Cruz Medical Clinic for the year 2017, the owner’s
capital was P678,000 on January 1, 2017. And on December 31, 2017, the capital
become P1,234,000. During the year 2017, the owner made additional investment
of P250,000 and had cash withdrawals for personal use amounting to P125,000.
How much is the net income (loss) of Cruz Medical Clinic for the year 2017?
a. P360,000 c. P431,000
b. P410,000 d. P556,000
PROBLEM 1.
On August 1, 2023, Gym Paredes Fitness Center paid an advance rental on a space of a building it is occupying in
the amount of P 120,000. The amount is for one year rent paid in advance beginning month of August.
Under the Asset Method
a. The entry on August 1, 2023 to record the advance payment of rental is:
b. How much of the P 120,000 advance rental will expire at the end of each month?
c. How many months will cover the expense portion at December 31, 2023?
d. How much of the P 120,000 will be considered as Expense on December 31, 2023?
e. How much of the P 120,000 will be considered as asset on December 31, 2023?
The adjusting entry on December 31, 2023 is:
PROBLEM 2.
On October 1, 2023, TM Company paid P 24,000. The amount represent one year insurance
premium beginning month of October.
Under the Expense Method
a. The entry to record the advance payment of Insurance premium on October 1, 2023 is:
________________________________________________
________________________________________________
________________________________________________
b. The adjusting entry on December 31, 2023 is:

_________________________________________________
_________________________________________________
_________________________________________________
PROBLEM 3
Yellow Cab Transport Services purchased office supplies amounting to P 35,000 on January 3, 2023.
29
1. Prepare the entry to record the above transaction under:
_________________________ ___________________________
_________________________ ___________________________
_________________________ ___________________________
3. Assuming the office supplies used during the year 2023 amounts to P 30,000,
the adjusting entry under both methods are:
__________________________ __________________________
__________________________ __________________________
__________________________ __________________________
PROBLEM 4
On September 1, 2023, Manila Apartelle received P 120,000 from a tenant. The amount represent one-year
rental beginning month of September. Prepare the entries to be prepared on Sept. 1 and the adjusting
entry on Dec. 31, 2023, under both the liability method and the revenue method.
Sept. 1, entry:

__________________________ __________________________
__________________________ __________________________
__________________________ __________________________
December 31, Adjusting entry:

__________________________ __________________________
__________________________ __________________________
__________________________ __________________________
PROBLEM 5
At December 31, 2023, the account Rent Income showed unadjusted balance of P 60,000, the amount
was received from a tenant to cover six-month rent beginning Nov. 1, 2023.
Required: Prepare the adjusting entry on Dec. 31, 2023
________________________________________________________
________________________________________________________
________________________________________________________
PROBLEM 6
Prepare the adjusting entries on December 31,2023, the end of the annual accounting period, based on
the following independent data. Show your computations after each entry.
1. The Insurance Expense account had a debit balance on December 31,2023 of P72,000 representing
premium for a 2-year fire insurance policy effective October 1, 2023.
2. Rent Income was credited for P 36,000 on November 1, 2023, representing nine months rental
collected in advance.
3. Machinery per general ledger on December 31, 2023 shows a balance of P 372,000. Machinery
acquired during the year was P 52,000 on April 1, 2023. All machinery is to be depreciated at the rate
of 25% per annum.
4. As of December 31, 2023, commissions already earned but not yet collected amounts to P 38,000.
5. Supplies costing P 18,000 bought during the period was debited to the Supplies account. Of the
amount, P 10,000 were consumed during the year.
30
6. Unearned Subscriptions account showed a credit balance of P 56,000 per general ledger on December
31. Of this, 60% had been actually earned during the period.
7. On December 31, 2023 a 60-day, 9% Notes Payable has a balance of P 240,000 per general ledger. The
note was issued on December 1, 2023. No interest has been taken on this note.
8. Fees Collected in Advance has a balance of P 200,000 of which 40% has been earned.
9. Notes Receivable has a balance of P 120,000 received from a customer in settlement of an open
account on November 16, 2023. It is a 90-day, 12% note. No interest has been taken on this note.
10. The Prepaid Insurance account has balance of P 210,000 on December 31, 2023. The balance represent
two fire insurance policies acquired during 2023. The first policy, Policy I for P 120,000 was acquired on
March 1, 2023, and the second policy, Policy II was acquired on August 1, 2023, for P 90,000. Policy I is
payment for a 2-year plan while Policy II is for a one-year plan.
LAST PROBLEM
Villas Realty had the following trial balance dated June 30, 2023:
VILLAS REALTY
Trial Balance
June 30, 2023
Debit Credit
Cash 650,000
Prepaid Rent 108,000
Prepaid Insurance on Automobile 28,800
Supplies on Hand 9,000
Office Equipment 90,000
Accumulated depreciation Office Equip. 21,600
Automobile 240,000
Accumulated depreciation – Auto. 60,000
Notes Payable 150,000
Unearned Management Fees 46,800
M. Villas, Capital 1,337,400
M. Villas, Drawing 705,000
Sales Commissions Revenue 900,000
Management Service Revenue 72,000
Advertising Expense 9,000
Automobile Expense 53,400
Total P 2,598,600 P 2,598,600
Instructions:
1. Prepare a ten – column work sheet for the year ended June 30, 2023, using the following data for
adjustment:
a. Insurance expense on automobile for the year is P 14,400.

b. Rent expense for the year amounts to P 72,000.
c. Depreciation expense are: Office Equipment, P10,800; Automobile, P48,000.
d. Salaries incurred but unpaid as of June 30 amounts to P 9,990.
e. Supplies inventory on June 30, P 3,000.
f. The unearned management fees were received and recorded on April 1, 2023. The advance
payment covered six month’s management of an apartment building.
g. Accrued interest on notes payable, P 15,000.
31
2. From the data on your worksheet, prepare the following financial statements:
a. Statement of Income
b. Statement of Owner’s Equity
c. Statement of Financial Position
4. Prepare the Adjusting entries

5. Prepare the closing entries
6. Prepare the reversing entries
32

For ACCO 101 Review of Accounting Concepts and Process Part 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

For ACCO 101 Review of Accounting Concepts and Process Part 1

Uploaded by

Copyright:

Available Formats

ACCO 101 – Review of Accounting Concepts/Process (Service Business-Sole

Accounting is defined as a service activity. Its function is to provide quantitative information,

FORMS OF BUSINESS ORGANIZATIONS

The three forms of business organizations are:

THE BASIC FINANCIAL STATEMENTS OF BUSINESS ORGANIZATIONS

The five basic financial statements are the following:

USERS OF FINANCIAL INFORMATION

• Management for planning and controlling the operation of the business

• Creditors and suppliers in order to evaluate a borrower’s ability to pay and in

• Investors to determine if their investment is profitable and safe and in deciding

• Government and their Agencies These users require financial information to

• Customers Use financial statements as basis for evaluating the possibility of

• Financial Analysts and Advisors Use financial information as basis in evaluating

• Trade Associations Use financial data to report industry statistics; industry

Cash Office Supplies Office Equipment

Accounts Payable Taxes Payable

Examples of capital accounts of a corporation are:

Preference Share Subscribed Preference share

Sales Interest Income

Salaries & Wages Expense Transportation Expense

THE ACCRUAL BASIS VERSUS THE CASH BASIS OF ACCOUNTING

BASIC ACCOUNTING PRINCIPLES

THE ACCOUNTING PROCESS

The steps in the accounting process are:

In analyzing business transactions, the suggested procedures are as follows:

THE RULES OF DEBIT AND CREDIT

Interpretation of the rules of debit and credit:

a. Debit the asset account if it is to be increased, and credit if to be decreased.

Accounts affected Type of account Effect on the account

Account to be debited Account to be credited

B. The company paid a liability amounting to P 9,000.

Accounts affected Type of account Effect on the account

Account to be debited Account to be credited

Accounts Payable is to be debited because decrease in a liability account is recorded by a debit

Business transactions Debit Credit

Issued check in payment for the

2. Apply the concept of value received and value given away.

PREPARING THE TRIAL BALANCE

TYPES OF ADJUSTING ENTRIES

Rent Expense 10,000

The adjusting entry on Dec. 31 is:

The computation of the unpaid salaries of P10,000 is:

2. ADJUSTING ENTRIES FOR ACCRUED REVENUE

Interest Receivable 1,000

3. ADJUSTING ENTRIES TO TAKE UP DEPRECIATION OF PROPERTY, PLANT, AND EQUIPMENT

The adjusting entry to take up depreciation of Property, Plant, and Equipment is

METHODS OF COMPUTING DEPRECIATION

Cost of Equipment--------------- P160,000

Table of Depreciation- Straight-line Method

Cost less Accumulated Depreciation = book value or carrying value

B. DOUBLE-DECLINING BALANCE METHOD

Compute first for the depreciation rate. That is,

Table of Depreciation- Double-declining balance Method

C. SUM-OF-THE YEARS DIGIT METHOD

First compute for the denominator to be used. That is:

Table of Depreciation- Sum-of-the years digit method

PARTIAL YEAR DEPRECIATION

A. STRAIGHT-LINE METHOD (160,000-4,000=156,000/5 yrs.= P31,200 annual depreciation)

Table of Depreciation- Straight-line Method

B. DOUBLE-DECLINING BALANCE METHOD

C. SUM-OF-THE YEARS DIGIT METHOD

Table of Depreciation- Sum-of-the years digit method

ADJUSTING ENTRIES FOR PREPAID EXPENSES