Basic Accounting PDF

1
Study Guide in
Introductory
Accounting for
Service Business
Benedick Manalaysay
Accountancy Department
De La Salle University Manila
Confidentiality Requirement
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2
TABLE OF CONTENTS
Lesson
Number
Topic
Starting Page
Introduction to Accounting
Transaction Analysis
12
General Journal, General Ledger, Trial Balance
22
Financial Statements
29
Statement of Cash Flows
36
Correcting Entries
38
Payroll Accounting
40
Accounting for Promissory Notes
43
Accrued Income
52
10
Accrued Expense
55
11
Prepaid Expense
58
12
Unearned Income
62
13
Depreciation
66
14
Doubtful Accounts
71
15
Closing Entries, Post-Closing Trial Balance
76
16
Reversing Entries
82
3
LESSON 1
INTRODUCTION TO ACCOUNTING
Study Objectives
After studying this lesson, you should be able to:
Achievement of Objective
(Put a Check mark)
1
Learn the history of accounting
Define accounting
Know the
accounting
Know the branches of accounting
Distinguish the forms of business organizations

according to ownership and according to activity
Know the role of Certified Public Accountant in the

society
Know the functions of different government agencies and

professional bodies relevant to the accounting profession
Know the purposes of the business documents
Define financial statements and its components, generally

accepted accounting principles (GAAP), Financial
Reporting Standards Council (FRSC), and users of the
financial statements
10
Explain the different basic accounting concepts or

assumptions
11
Know other terms related to basic accounting
difference
between
bookkeeping
and
4
Objective 1
History of Accounting
Accounting has a long history. Some scholars claim that writing arose in order to record
information. Account records date back to the ancient civilizations of China, Babylonia, Greece
and Egypt. The rulers of these civilizations used accounting to keep track of the cost of labor and
materials used in building structures like the great pyramids. (Source: Horngren, Harrison and
Robinson, 1995)
Accounting developed as a result of the information needs of merchants in the city-states of Italy
during the 1400s. In that commercial climate a monk, Luca Pacioli, a mathematician and friend of
Leonardo da Vinci, published the first known description of double-entry bookkeeping entitled
Summa de Arithmetica, Geometria, Proportioni et Proportionalite, which means Everything about
Arithmetic, Geometry, and Proportion published in Venice in November 1494. This book
contained primarily principles of mathematics and incidentally a set of accounting procedures.
The pace of accounting development increased during the Industrial Revolution as the economies
of developed countries began to mass-produce goods. Until that time, merchandise was priced
based on managers hunches about cost but increased competition required merchants to adopt
more sophisticated accounting system.
In the nineteenth century, the growth of corporations especially those in the railroad and steel
industries, spurred the developed of accounting. Corporate owners were no longer necessarily the
managers of their business. Managers had to create accounting systems to report to the owners
how well their businesses were doing.
Government played a role in leading more development in the field of accounting when it started
using the income tax. Accounting supplied the concept of income. Also, government at all levels
has assumed expanded roles in health, education, labor and economic planning. To ensure that the
information that it uses to make decisions is reliable, the government has required strict
accountability in the business community.
At the beginning of the third millennium, there would still be significant developments in the
field of accounting. The great challenge of globalization and the effects of new technologies (e.g.
super computers, robotics, inter and intra-net, etc.) pose a shift in the structure and pattern in this
field. More and better accounting information are now being required and therefore, accounting,
being the means used in communicating business and financial information, must also evolve into
a more efficient level.
Reference: Workbook in Introductory Accounting for Service Business
Accounting as Language of Business

The primary objectives of the business are:
1. To generate profits
2. To properly manage limited and scarce resources
With these objectives, a business must prepare financial reports and interpret these reports as an
aid in decision-making. In making decisions, accounting is used as a tool for communication.
Objective 2
Definition of Accounting
1. Accounting is a service activity.
a. Its function is to provide quantitative information, primarily financial in nature,
about economic entities that is intended to be useful in making economic
decisions.
2. Accounting is the process of identifying, measuring and communicating economic
information to permit informed judgments and decisions by users of the information.
a. Identifying this accounting process is the recognition or nonrecognition of
business activities as accountable events (Valix, 2005). There are 3 types of
transactions:
i. Business transaction
1. transactions which are recorded in the financial books. Example
is investment of the owner.
ii. Personal transaction
1. transactions which are not recorded in the financial books.
Example is purchase of house and lot of a business owner using
his personal money.
iii. Neither business nor personal transaction
1. Business events that are not recorded in the financial books.
Examples are hiring of employees, death of the owner, entering
into a contract etc.
b. Measuring this accounting process is the assigning of Peso amounts to the
accountable economic transactions and events (Valix, 2005)
c. Communicating is the process of preparing financial statements and
interpreting the results thereof
3. Accounting is 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.
4. Accounting is an information system that measures, processes, and communicates
financial information about an identifiable economic entity.
Objective 3
Difference between Bookkeeping and Accounting
Bookkeeping
Accounting
Recording of transactions
Recording of transactions
Preparing financial reports
Preparing financial reports

Analyzing financial reports
Decision-making
Objective 4
Branches of Accounting
1. Financial Accounting is primarily concerned with the recording of business transactions
and the eventual preparation of financial statements (Valix, 2005).
2. Cost Accounting is primarily concerned with proper accumulation of costs such as
materials, labor and overhead, proper costing of inventories and study of different costing
methods.
3. Management Accounting is the preparation of financial reports and management
research intended for management use and interpretation of these reports and researches.
Examples of financial reports are Sales reports, Cost of Production reports, Budgets etc.
Example of management research is evaluation of a business process and management
consulting.
4. Taxation deals with the study of provisions of the law with regard to Philippine taxation
system and proper computation of taxes such as income tax, value-added tax, withholding
tax and other taxes.
5. Auditing basically deals with the examination of the financial statements by an
independent party (auditor) to ascertain whether such financial statements are in
conformity with Philippine Accounting Standards.
Objective 5
Forms of Business Organizations
1. According to ownership
a. Sole-proprietorship owned by only one person called sole-proprietor
b. Partnership owned by 2 or more persons called partners
c. Corporation owned by 5 or more persons called shareholders
2. According to activity
a. Service renders services to the public such accounting firms, law firms,
consulting firms, SPA, medical clinics, dental clinics, schools etc
b. Merchandising buys and sells merchandise to the public
c. Manufacturing buys raw materials and converts them into finished goods to be
sold to the public
Objective 6
Certified Public Accountant (CPA)
- is an accounting professional doing accounting, audit, tax, management consulting,
education and research work.
- Types of Accountants
o Private Accountant / Management Accountant
is an accounting professional employed in a private company or
organization
7
o
o
o
Public Accountant / Auditor

is an accounting professional independent from the private organizations
and is usually employed in an auditing firm
Government Accountant
is an accounting professional employed in a government agency
Accounting Educator and Researcher
is an accounting professional employed in a university, college or
research organization
Objective 7
Government Agencies and Professional Bodies
1. Bureau of Internal Revenue (BIR) agency in charge of proper collection of taxes from
the public
2. Securities and Exchange Commission (SEC) agency in charge of accumulating audited
financial statements of organizations, regulating companies issuing securities such as
stocks and bonds to the public, and monitoring companies in the insurance industry. This
agency also facilitates the registration of partnerships and corporations.
3. Bangko Sentral ng Pilipinas (BSP) / Central Bank of the Philippines agency in charge
of regulating Philippine bank operations, setting Philippine monetary policies etc.
4. Philippine Stock Exchange (PSE) agency in charge of monitoring securities
transactions of companies listed in the stock exchange.
5. Department of Trade and Industry (DTI) agency in charge of facilitating registration of
sole-proprietorship businesses and regulating consumer commodity transactions.
6. Commission on Audit (COA) agency in charge of auditing government-related
transactions
7. Board of Accountancy (BOA) - is an accounting body in charge of administering
licensure examination for accountants
8. Professional Regulation Commission (PRC) - government agency in charge of issuing
licenses to successful examinees in board exams
9. Philippine Instititute of Certified Public Accountants (PICPA) - Professional organization
of accountants in the Philippines
10. City Hall and Baranggay these political subdivisions issues business permits and
collects business taxes.
8
Objective 8
Business Documents
1.
2.
3.
4.
5.
6.
Purchase Order shows items to be ordered by the business

Delivery Receipt shows items to be delivered in the business
Sales Invoice shows items that were sold to the business
Statement of Account shows the summary of sales invoices
Cash Voucher shows the liability of the business to be paid in the future
Official Receipt shows the amount received by the business
Objective 9
Financial Statements
- Shows the results of the recording of the business transactions and are expressed in terms
of assets, liabilities, equity, income and expenses.
-
Six (6) Components

o Balance Sheet / Statement of Financial Position
Presents the financial condition of the business through its assets,
liabilities and capital / owners equity
o Income Statement
Presents the financial performance of the business through its income
and expenses
o Statement of Changes in Owners Equity
Presents the changes in capital such as additional investments,
withdrawals, net income and/or net loss
o Statement of Cash Flows
Presents the cash inflows and outflows of the business through its
operating, investing and financing activities
o Statement of Comprehensive Income
Presents gains and losses that were not presented in the Income
statement. Examples are Unrealized gain on sale of trading securities,
Foreign exchange gain on translation etc.
o Notes to the Financial Statements
Presents the details of the line items in the Balance Sheet and Income
Statement
Generally Accepted Accounting Principles (GAAP)

- Refers to rules, procedures, practice and standards followed in the preparation and
presentation of financial statements (Valix, 2005).
Financial Reporting and Standards Council (FRSC)
- The council establishes and improves accounting standards that will be generally
accepted in the Philippines (Valix, 2005)
9
Users of the Financial Statements
Internal Users
1. Management
2. Employees
External Users
1. Investors
2. Creditors / Lenders
3. Suppliers / Vendors
4. Government
5. Public
Objective 10
Basic Accounting Concepts / Assumptions
1. Entity
a. Under this concept, the business enterprise is viewed as separate from the
owners, managers, and employees of the business (Valix, 2005)
2. Time period
a. This concept requires that the indefinite life of an enterprise is subdivided into
time periods which are usually of equal length (Valix, 2005)
b. Calendar year is a 12-month period that ends on December 31, otherwise it is
called Natural business year or Fiscal year (Valix, 2005)
3. Monetary unit
a. This concept assumes that financial transactions be measured in terms of money
or currency of the Philippines
4.
Cost
a. This concept requires that assets should be recorded initially at original
acquisition cost (Valix, 2005)
5. Adequate disclosure
a. This concept requires that all significant and relevant information leading to the
preparation of financial statements should be clearly reported (Valix, 2005)
6. Materiality
a. This concept relates to the significance of an item to the overall presentation of
the financial statements. Information is material if its omission could influence
the economic decision of the users of the financial statements (Valix, 2005)
7. Accrual
a. This concept requires the income earned must be recognized in the financial
statements whether cash is received or not.
b. This concept also requires the expenses incurred must be recognized in the
financial statements whether cash is paid or not.
c. Because of this concept, organizations are preparing adjusting journal entries to
recognize accrued income and accrued expenses.
d. Accrued income refers to income earned but not yet received.
e. Accrued expense refers to expense incurred but not yet paid.
10
8. Consistency
a. This concept requires that the accounting methods and practices should be
applied on a uniform basis from one time period to another (Valix, 2005).
9. Comparability
a. There are 2 kinds of comparability: Comparability within an enterprise and
Comparability between enterprises (Valix, 2005)
b. Comparability within an enterprise is the quality of information that allows
comparisons within a single enterprise from one time period to the next (Valix,
2005)
c. Comparability between enterprises is the quality of information that allows
comparisons between two or more enterprises engaged in the same industry
(Valix, 2005)
10. Going Concern
a. This concept assumes that business will operate indefinitely and there is no
intention of liquidating or closing down the business
11. Revenue recognition
a. Same as accrued income concept
12. Expense recognition
a. Same as accrued expense concept
13. Matching
a. This concept requires that costs and expenses incurred in earning a revenue
should be reported in the same period when the revenue or income is earned
(Valix, 2005)
14. Conservatism
a. Under this concept, when alternatives exist, the alternative which has the least
effect on net income or owners equity should be chosen (Valix, 2005)
b. Conservatism is synonymous with Prudence. Prudence is the desire to exercise
care and caution when dealing with the uncertainties in the measurement process
such as assets or income are not overstated and liabilities or expenses are not
understated (Valix, 2005)
15. Objectivity
a. This concept requires that financial transactions that were recorded be supported
by business documents
Objective 11
Other Terms
Liquidity
Solvency
- Refers to the ability of the organization
- Refers to the ability of the organization
to pay its short-term (current)
to pay its long-term (noncurrent)
obligations
obligations
Stock Certificate evidence certifying the ownership of shares of stock of a shareholder
11
Further Readings
Kieso, D., Kimmel, P. and Weygandt, J. (2008). Accounting Principles, 8th edition. New Jersey:
John Wiley and Sons, Inc. pages 2 11, 21, 25, 29 31, 92 94
Kimwell, Mercedes (2009). Fundamentals of Accounting, 2nd edition. Manila: GIC Enterprises &
Co., Inc.
Valencia, E., and Roxas, G. (2009). Basic Accounting, 3rd edition. Baguio City: Valencia
Educational Supply.
Cabrera, M.E.B, Ledesma, E.F., and Lupisan M.C.Y. (2007). Fundamentals of Accounting Vol.
1. Manila: GIC Enterprises & Co., Inc.
Chalmers, K., Fyfe, M., Kieso, D., Kimmel, P., Mitrione, L., and Weygandt, J. (2007). Principles
of Financial Accounting. John Wiley and Sons Australia, Ltd.
12
LESSON 2
TRANSACTION ANALYSIS
Study Objectives
(Put a Check mark)
1
Define the accounting equation and know the effects of

the financial transactions on the accounting equation
Familiarize with the types of accounts for assets,

liabilities, capital, income and expenses
Objective 1
The Accounting Equation
Assets = Liabilities + Capital
The equation states that business assets are financed by two parties. They are the creditors or
vendors (liabilities) and the owner (capital).
Income will increase assets as well as capital and expenses will decrease assets as well as capital.
Business transactions will have an effect on the accounting equation. The following are the basic
financial transactions and the effects on the accounting equation.
Transaction
ASSETS
LIABILITIES
CAPITAL
Investment of the owner
Investment
Withdrawal of the owner
Withdrawal
Interest
expense
Borrowed
money
by
issuing a promissory note
Payment of the principal
and
interest
of
the
promissory note
13
Purchase of short-term
investment for cash
Sale
of
short-term
investment at a gain
Sale
of
short-term
investment at a loss
Cash advance
employee
to
an
Purchase of supplies for

cash
Purchase of supplies on
account
Purchase of a fixed asset
for cash
Purchase of a fixed asset on
account
Partial / Full payment of
accounts payable
Sale of a fixed asset at a
gain
Sale of a fixed asset at a

loss
Rendered services for cash
Rendered
account
services
on
Gain on sale
of investment
in
trading
securities
Loss on sale
of investment
in
trading
securities
Gain on sale
of equipment
Loss on sale
of equipment
Service
Income
Service
Income
14
Partial / Full collection of

accounts receivable
Received
cash
commission income
for
Payment of expenses for

cash
Commission
Income
Expense
Objective 2
Types of Accounts
CATEGORY
DEFINITION
ACCOUNT TITLE
DEFINITION /
EXAMPLES
ASSETS
CASH
This includes bills

and coins, bank
check, bank
accounts.
INVESTMENT IN
TRADING
SECURITIES
This refers to shortterm, highly liquid

investment in
securities such as
stocks and bonds.
TRADE AND OTHE

RECEIVABLES
These refer to
amounts collectible
from a person or a
company
PETTY CASH FUND
Cash used to pay

petty or small
amount of
expenses.
CASH ON HAND
Cash in the
possession and
custody of the
business.
CASH IN BANK
Self-explanatory
ACCOUNTS
RECEIVABLE
Amount collectible
from clients or
customers for
services rendered or
sale of goods
15
ALLOWANCE FOR
DOUBTFUL
ACCOUNTS
Is a Contra-asset
account that
represents provision
for estimated
doubtful accounts
NOTES RECEIVABLE
Same with
Accounts
Receivable but is
evidenced by a
promissory note
INTEREST
RECEIVABLE
Amount collectible
in a loan transaction
COMMISSION
RECEIVABLE
RENT RECEIVABLE
ADVANCES TO
EMPLOYEES
PREPAID EXPENSES
These refer to
expenses that are
paid in advance
Cash advance given

to employees
PREPAID RENT
PREPAID
INSURANCE
PREPAID
ADVERTISING
PREPAID
SUBSCRIPTIONS
OFFICE SUPPLIES
STORE SUPPLIES
PROPERTY, PLANT
AND EQUIPMENT
These refer to items

that are useful for
more than 1 year
LAND
OFFICE EQUIPMENT
STORE EQUIPMENT
Computer, Fax
machine
Cash register
machine
16
TRANSPORTATION
EQUIPMENT
Delivery Van,
Motorcycle, Cars,
Trucks
FURNITURE AND
FIXTURES
Cabinets, Tables,
Chairs
MACHINERY
BUILDING
Office building,
Factory plant
ACCUMULATED
DEPRECIATION
Is a Contra-asset
account that
represents
cumulative
depreciation for
depreciable fixed
assets
LIABILITIES
TRADE AND OTHER
PAYABLES
These refer to
amounts payable to
a person or a
company
ACCOUNTS
PAYABLE
Amount payable to
supplier, creditor or
vendor for money,
supplies, goods or
property loaned
NOTES PAYABLE
Same with
Accounts Payable
but is evidenced by
a promissory note
DISCOUNT ON
NOTES PAYABLE
Is a Contra-liability
account that
represents
unamortized
interest on the
promissory note
INTEREST PAYABLE
Amount payable in
a loan transaction
TAXES AND
LICENSES PAYABLE
Unpaid taxes and

licenses to be
remitted / paid to
the government
17
UTILITIES PAYABLE
Unpaid
communication,
light and water bills
SALARIES AND
WAGES PAYABLE
Unpaid salaries and

wages of the
employees
UNEARNED INCOME
This refers to cash

received in advance
but not yet earned
UNEARNED RENT
UNEARNED
ADVERTISING
UNEARNED
SUBSCRIPTIONS
UNEARNED
COMMISSION
MORTGAGE
PAYABLE
This refers to bank

loan with assets
such as house and
lot or vehicle as
collaterals
BONDS PAYABLE
This refers to loan

that is evidenced by
a bond certificate
or indenture
CAPITAL / OWNERS EQUITY

OWNER, CAPITAL
This refer to claim

or interest of the
owner
OWNER, DRAWING
This refer to
temporary
withdrawal of the
owner of cash,
supplies, goods or
18
property
INCOME
SERVICE INCOME
Income derived
from rendering of
services
Primary income for
service business
OTHER INCOME
Secondary income
for service business
INTEREST INCOME
Income from loan

transactions
DIVIDEND INCOME
Income from stock

investments
RENT INCOME
GAIN ON SALE OF
EQUIPMENT
Excess of selling
price over the net
book value of the
fixed asset
EXPENSES
EMPLOYEE BENEFIT
COST
Expenses related to
employee benefits
SALARIES AND
WAGES EXPENSE
Represents the total

gross salary or
wages of the
employees
SSS PREMIUMS
EXPENSE
Represents total
SSS (health benefit)
contributions of the
employer and the
employees
PHILHEALTH
CONTRIBUTIONS
EXPENSE
Represents total
Philhealth (health
benefit)
employer and the
employees
19
PAG-IBIG
CONTRIBUTIONS
EXPENSE
RENT EXPENSE
PROFESSIONAL FEES
Expense related to
professional
services of
accountants,
lawyers etc
ADVERTISING
EXPENSE
COMMISSION
EXPENSE
Expense related to
payment of
commission to
agents
REPAIR AND
MAINTENANCE
EXPENSE
SUPPLIES EXPENSE
INSURANCE
EXPENSE
REPRESENTATION
AND
ENTERTAINMENT
EXPENSE
Expense related to
cost of meetings
with clients such as
meals
TRANSPORTATION
EXPENSE
Expense related to
commuting from
the office to
clients office
FUEL AND OIL

EXPENSE
UTILITIES EXPENSE
Expense related to
communication
such as telephone,
Internet, electricity
and water
Represents total
Pag-IBIG (housing
benefit)
employer and the
employees
20
TAXES AND
LICENSES EXPENSE
Expense related to
business taxes and
permits from the
city hall
CHARITABLE
CONTRIBUTION
EXPENSE
Expense related to
donations
DEPRECIATION
EXPENSE
Noncash expense
that represents the
total depreciation
of the depreciable
fixed assets for the
year
DOUBTFUL
ACCOUNTS EXPENSE
Noncash expense
that represents the
total estimated
doubtful accounts
for the year
BAD DEBTS
EXPENSE
Noncash expense
that represents the
total accounts
receivable that
were written-off /
removed from the
financial books due
to its proven
uncollectibility
MISCELLANEOUS
EXPENSE
OTHER EXPENSE
LOSS ON SALE OF
EQUIPMENT
Excess of net book

value over the
selling price of the
fixed asset
FINANCE COST
INTEREST EXPENSE
Expense from loan

transactions
21
Further Readings
John Wiley and Sons, Inc. pages 14 20, 26 27, 159 164
Co., Inc.
Educational Supply.
22
LESSON 3
GENERAL JOURNAL, GENERAL LEDGER TRIAL BALANCE
Study Objectives
(Put a Check mark)
1
Know the concept of double-entry bookkeeping and the

appropriate accounting tool for financial transactions
Understand the concept of journalizing and prepare

journal entries
Post journal entries to the general ledgers
Prepare the trial balance
Objective 1
Double-entry Bookkeeping
This concept uses the tools debit and credit to record financial transactions. Further, this concept
dictates that for every debit, there is at least one credit and vice-versa.
Appropriate Accounting Tool
The table shows the appropriate accounting tool for the effects of the financial transactions on
assets, liabilities, capital, income and expenses.
Asset
Liability
Capital
Income
Expense
Increase
Decrease
Debit
Credit
Credit
Credit
Debit
Credit
Debit
Debit
Objective 2
Journalizing
This refers to the process of recording the financial transactions in the General Journal. General
Journal is also known as Book of Original Entry.
The following are examples of Journal Entries:
Adapted from Exercise 6-8 of Workbook in Introductory Accounting for Service Business
23
Journalize the following selected transactions of MJ Dry Cleaning. The following transaction
occurred during June 2010.
1
MJ Flores invested in the business the following: P 250,000 cash and P 420,000 worth of
dry cleaning equipment with fair value of P 400,000 but with existing liability of P
100,000 which is to be assumed by the business
Purchased dry cleaning supplies from Wilson Cleaners for P 22,100, payable after 20
days
Bought cash register from Carter Equipment, P 45,800. Terms: 30% down payment,
balance on account
Dry cleaning services rendered for the week totaled P 25,250 cash
GENERAL JOURNAL
Date
2010
Jun 01
02
04
07
Particulars
Page xx
Debit
Cash
Dry Cleaning Equipment
Accounts Payable
MJ Flores, Capital
Investment of the owner
101
110
210
320
250 000
400 000
Dry Cleaning Supplies

Accounts Payable
Purchase of supplies on account
108
210
22 100
Office Equipment
Cash
Accounts Payable
Purchase of cash register
111
101
210
45 800
Cash
Dry Cleaning Service Income
Rendered dry cleaning service
for cash
101
410
25 250
Credit
100 000
550 000
22 100
13 470
32 060
25 250
Simple entry and Compound entry

Simple entry is a journal with only one debit and one credit. Compound entry is a journal entry
with at least two debits or at least two credits.
24
Objective 3
Posting
This refers to the process of transferring the debit and credit amounts to the appropriate ledger
accounts. Ledger accounts are placed in a financial book called General Ledger. This is also
known as Book of Final Entry. After the amounts have been posted, one should post the ledger
account number back to the general journal. This process is known as cross-referencing.
Chart of Accounts
This chart lists the account titles to be used by the business and the related account numbers. The
following is a typical example of chart of accounts.
ASSETS
100
OWNERS EQUITY
300
Cash
Investment in Trading Securities
Accounts Receivable
Allowance for Doubtful Accounts
Notes Receivable
Advances to Employees
Prepaid Rent
Dry Cleaning Supplies
Land
Office Equipment
Building
Accumulated Depreciation
Accumulated Depreciation
Office Equipment
Accumulated Depreciation Building
101
102
103
104
105
106
107
108
109
110
111
120
130
MJ Flores, Drawing
MJ Flores, Capital
310
320
INCOME
400
Dry Cleaning Service Income

Interest Income
410
420
EXPENSES
500
Salaries and Wages Expense
510
131
Rent Expense
520
140
LIABILITIES
200
Accounts Payable
Notes Payable
Discount on Notes Payable
Unearned Advertising
Mortgage Payable
210
220
230
240
250
Advertising Expense
Commission Expense
Dry Cleaning Supplies Expense
Insurance Expense
Transportation Expense
Utilities Expense
Taxes and Licenses Expense
Depreciation Expense
Interest Expense
530
540
550
560
570
580
590
591
592
25
General Ledger Postings
CASH
Date
2010
Jun 01
07
Particulars
101
Debit
GJ1
GJ1
Totals
Balance
Date
2010
250 000 Jun 04
25 250
275 250
261 780
Particulars F
GJ1
Particulars
Debit
GJ1
Date
108
Particulars F
Particulars
Debit
GJ1
Date
110
Particulars F
Particulars
Debit
GJ1
Date
111
Particulars F
Particulars
Credit
45 800
ACCOUNTS PAYABLE
Date
Credit
400 000
OFFICE EQUIPMENT
Date
2010
Jun 04
Credit
22 100
DRY CLEANING EQUIPMENT

Date
2010
Jun 01
13 470
13 470
DRY CLEANING SUPPLIES

Date
2010
Jun 02
Credit
Debit
Date
2010
Jun 01
02
04
210
Particulars F
GJ1
GJ1
GJ1
Credit
100 000
22 100
32 060
26
MJ FLORES, CAPITAL
Date
Particulars
Debit
Date
2010
Jun 01
320
Particulars F
GJ1
DRY CLEANING SERVICE INCOME

Date
Particulars
Debit
Date
2010
Jun 07
550 000
410
Particulars F
GJ1
Normal Balances of the Accounts

Assets
Contra-assets
Liabilities
Contra-liabilities
Capital
Drawing
Income
Expenses
Credit
Debit
Credit
Credit
Debit
Credit
Debit
Credit
Debit
Credit
25 250
27
Objective 4
Trial Balance
This refers to the summary of balances in the ledger accounts. The accounts are arranged in the
order of assets, liabilities, equity, income and expenses.
PATRICE CONSULTING SERVICES

Trial Balance
July 31, 2010
Debit
Cash
Accounts Receivable
Office Supplies
Prepaid Insurance
Office Equipment
Accounts Payable
Notes Payable
Simone Patrice, Capital
Simone Patrice, Drawing
Consulting Fees
Rent Expense
Transportation Expense
Utilities Expense
Advertising Expense
Miscellaneous Expense
Totals
Credit
P 56 300
77 500
2 100
2 200
120 000
P 23 020
15 000
172 880
2 000
253 000
168 200
11 000
7 800
8 200
5 500
3 100
_______
P 463 900
========
P 463 900
========
Adapted from Workbook in Introductory Accounting for Service Business

A balanced trial balance means that journal entries are properly posted and ledger accounts are
properly balanced.
28
Further Readings
John Wiley and Sons, Inc. pages 46 56, 57 73
Co., Inc.
Educational Supply.
29
LESSON 4
FINANCIAL STATEMENTS
Study Objectives
(Put a Check mark)
1
Understand the procedures in preparing the income

statement
Understand the procedures in preparing the statement of

changes in owners equity
Understand the procedures in preparing the balance sheet
Understand the procedures in preparing the notes to the

financial statements
Compute the missing amounts in relation to changes in

capital
Objective 1
Income Statement
To recall, the Income Statement presents the financial performance of the business through its
income and expenses.
Net Income refers to the excess of income over expenses, otherwise it is called Net Loss.
There are two types of presentation for income statement.
1. Natural form
a. In this presentation, income and expense accounts are grouped according to
nature. Secondary income such as interest income, dividend income etc are
grouped under line item Other Income. On the other hand, expenses are
arranged from highest to lowest, except for Miscellaneous Expense, Other
Expense and Finance Cost. These line items are the last 3 line items in the
expense section.
2. Functional form
a. In this presentation, expenses are grouped according to function. The 4
classification of expenses are:
i. Distribution cost
ii. General and administrative expenses
iii. Other operating expenses
iv. Finance cost
30
Objective 2
Statement of Changes in Owners Equity
To recall, this component presents the changes in capital such as additional investments,
withdrawals, net income and/or net loss.
The following are the effects to the capital or equity:
EFFECTS
Investment
Withdrawal
Income
Expense
Net Income
Net Loss
Increase
Decrease
Increase
Decrease
Increase
Decrease
The Income Statement is connected to this component through Net Income or Net Loss and this
component is connected to the Balance Sheet through the Ending balance of the capital account.
The equation for computing Ending Capital Balance is
Owner, Capital beginning + Additional Investments + Net Income

Withdrawals Net Loss = Owner, Capital ending
Using the accounting equation, the equation for computing Beginning Capital Balance is
Assets, beginning Liabilities, beginning = Owner, Capital (beginning)
On the other hand, the alternative equation for Ending Capital Balance is
Assets, ending Liabilities, ending = Owner, Capital (ending)
31
Objective 3
Balance Sheet or Statement of Financial Position
To recall, the Balance Sheet presents the financial condition of the business through its assets,
liabilities and capital / owners equity
There are 2 forms of Balance Sheet:
1. Account-form
a. This form presents assets on the left side and liabilities and capital on the right
side
2. Report-form
a. This form presents assets on the upper side and liabilities and capital on the lower
side
Assets
Assets are classified into 2:
1. Current Assets
a. These refer to assets that are useful to the business within one year. Examples are
Cash, Investment in Trading Securities, Trade and Other Receivables,
Merchandise Inventory and Prepaid Expenses.
2. Noncurrent Assets
a. These refer to assets that are useful to the business for more than one year.
Examples are Property, Plant and Equipment, Long-term investments and
Intangible assets.
Assets are arranged in order of liquidity. Cash is the first line item because it is the most liquid
asset.
Liabilities
Liabilities are classified into 2:
1. Current liabilities
a. These refer to liabilities that are payable and will mature within one year.
Examples are Trade and Other Payables and Current-portion of long-term notes
payable.
2. Noncurrent liabilities
a. These refer to liabilities that are payable and will mature beyond one year.
Examples are Noncurrent-portion of long-term notes payable, Mortgage Payable,
and Bonds Payable.
Liabilities are arranged in order of maturity. For Noncurrent liabilities, the order is usually Notes
Payable, Mortgage Payable and Bonds Payable. The reason is Notes Payable will normally
mature first before mortagage and bonds.
Capital or Owners Equity

This represents the ending balance of capital from the statement of changes in owners equity.
32
Objective 4
Notes to the Financial Statements
To recall, this component presents the details of the line items in the Balance Sheet and Income
Statement
Trade and Other Receivables

For this category, the first line item is Accounts Receivable followed by Allowance for Doubtful
Accounts. The difference between these two line items is called Net Realizable Value. Net
realizable value represents the estimated amount to be collected from the clients / customers after
deducting doubtful accounts.
After Allowance for Doubtful Accounts, the next line item is Notes Receivable then followed by
account titles which have the word Receivable. They are arranged from highest to lowest since
their nature are the same. Receivable accounts are synonymous with Accrued Income. For
example, Interest receivable is the same with Accrued Interest Income.
The last line item is Advances to employees.
Prepaid Expenses
The items for this category are arranged from highest to lowest since their nature are the same.
Property, Plant and Equipment

The tabular presentation for this note is as follows:
Cost
Land
Transportation Equipment
Building
Equipment
Furniture and Fixtures
Total
Accumulated
Depreciation
Net Carrying Value
P 400,000
530,000
360,000
240,000
110,000
P 30,000
60,000
40,000
10,000
P 400,000
500,000
300,000
200,000
100,000
P 1,640,000
=========
P 140,000
========
P 1,500,000
=========
Adapted from the exhibits of the Workbook

The fixed asset items are arranged from highest acquisition cost to lowest acquisition cost. The
difference between the acquisition cost and accumulated depreciation is called the Net carrying
value or Net book value.
33
Trade and Other Payables
Line Item
1st
2nd
3rd
4th nth
Last
Accounts Payable
Notes Payable
Discount on Notes Payable
Account with the word Payable
Unearned income
For the 4th line item, the accounts are arranged from highest to lowest since their nature are the
same. Payable accounts are synonymous with Accrued Expense. For example, Rent payable
is the same with Accrued Rent expense.
Objective 5
Problems in connection to Statement of Changes in Owners Equity
1. A firm has just completed its first year of operations. During the year, the owner
withdrew P 50,000 and by the end of the year his equity stood at P 70,000, which
was a P 10,000 increase from his initial investment. If revenues generated during
the year totaled P 400,000, then expenses incurred during the year must have been
______________.
Owner, Capital beginning + Additional Investments + Income

Withdrawals Expense = Owner, Capital ending
Expense = Owner, Capital beginning + Additional Investments + Income
Withdrawals Owner, Capital ending
Solution in good accounting form

Beginning capital
Income
Withdrawals
Ending capital
Expenses
P 60,000
400,000
(50,000)
(70,000)
P 340,000
========
34
2. A business had assets of P 210,000 and liabilities of P 140,000 on January 1,
2008. Six months later, the assets totaled P 170,000 while outstanding debts
amounted P 95,000. During the six-month period, the proprietor withdrew cash of
P 12,000 and supplies worth P 5,000. During the same period, he also made
additional investments of P 24,000 cash and a second-hand equipment originally
costing P 45,000 but with a fair market value of P 20,000. The result of operations
was a ___________ of ____________.
Ending capital
Beginning capital
Additional investments
Withdrawals
Net Loss
P 75,000
(70,000)
(44,000)
17,000
P 22,000
========
35
Further Readings
Co., Inc.
Educational Supply.
36
LESSON 5
STATEMENT OF CASH FLOWS
Study Objectives
(Put a Check mark)
1
Recall the definition of Statement of Cash Flows and

classify the transactions as operating activity, investing
activity and financing activity
Prepare the Statement of Cash Flows and connect the

Ending cash balance to the Balance Sheet
Objective 1
Statement of Cash Flows
To recall, the Statement of Cash Flows presents the cash inflows and outflows of the business
through its operating, investing and financing activities.
Business Activities
1. Financing activities
a. These activities pertain to transactions such as
i. Investments of the owner
ii. Loans whether short term or long term
iii. Withdrawal of the owner
iv. Payment of the principal of the loans
2. Investing activities
a. These activities pertain to transactions such as
i. Sale of property, plant and equipment
ii. Purchase of property, plant and equipment
3. Operating activities
a. These activities pertain to transaction such as
i. Payment of the interest of the loans
ii. Other transactions not enumerated above
Objective 2
Connection of the Statement of Cash Flows to the Balance Sheet
The ending cash balance in the Statement of Cash Flows represents the cash balance in the
Balance Sheet.
37
Further Readings
John Wiley and Sons, Inc. pages 718 726
Co., Inc.
Educational Supply.
38
LESSON 6
CORRECTING ENTRIES
Study Objectives
(Put a Check mark)
1
Know the different accounting errors
Prepare correcting entries
Objective 1
Accounting Errors
1. Transposition error
a. Error in the position of figures. Example: 123 is written as 132
2. Transplacement error / Slide
a. Error in the placement of decimal point. Example: 1000.90 is written as 100.09
Objective 2
Correcting journal entries
- entries to correct incorrect journal entries
On September 15, a temporary withdrawal of P 12,000 by X, the owner was recorded as a debit to
Salaries and Wages Expense and a credit to Cash. The correcting entry was made at month-end.
Recorded entry
Date
2009
Sep 15
Particulars
Cash
Debit
Credit
12 000
12 000
Correct entry
Date
2009
Sep 15
Particulars
X, Drawing
Cash
Debit
Credit
12 000
12 000
Correcting Entry
Date
2009
Sep 30
Particulars
X, Drawing
Correcting entry
Debit
Credit
12 000
12 000
39
Further Readings
Co., Inc.
Educational Supply.
40
LESSON 7
PAYROLL ACCOUNTING
Study Objectives
(Put a Check mark)
1
Understand the concept of employee benefits and

compensation and the related terms such as Payroll
Register and payroll deductions
Prepare journal entries pertaining to payroll accounting
Objective 1
Employee Compensation and Benefits
Organizations normally monitor the attendance of the employees through time clock cards. These
cards show the time in and time out of the employees. Further, organizations also prepare and
distribute pay slips. These slips show the gross salary of an employee and the related deductions.
The normal deductions from the gross salary are SSS, Philhealth, Pag-IBIG, Withholding tax and
Cash advances.
Organizations also prepare the Payroll Register which shows the summary of the employees pay
slips.
The following is the tabular format of the Payroll Register
Employee
Name
Gross
Salary
Overtime,
Bonus and
Other
Benefits
Total
Salary
SSS
Philhealth
PagIBIG
Withholding
Tax
Cash
Advance
Net
Salary
Alpha
Beta
Charlie
TOTAL
Objective 2
Payroll Example and Journal Entries
SSS
Philhealth
Pag-IBIG
Total Employee Contributions

30,000
10,000
5,000
Total Employer Contributions

60,000
10,000
5,000
Assume Total gross salaries and wages is P 200,000, Total withholding taxes payable is P 20,000,
and Total advances to employees is P 10,000
41
Salaries and Wages of the employees

Date
2009
Sep 30
Particulars
SSS Premiums Payable
Philhealth Contributions Payable
Pag-IBIG Contributions Payable
Withholding Tax Payable
Advances to Employees
Cash
Salaries and Wages of the employees
Debit
Credit
200 000
30 000
10 000
5 000
20 000
10 000
125 000
Employer Contributions
Date
2009
Sep 30
Particulars
SSS Premiums Expense
Philhealth Contributions Expense
Pag-IBIG Contributions Expense
Employer Contributions
Debit
60 000
10 000
5 000
Credit
60 000
10 000
5 000
Remmittance to the government

agencies
Date
2009
Sep 30
Particulars
Withholding Tax Payable
Cash
Remmittance to the government
agencies
Debit
90 000
20 000
10 000
20 000
Credit
140 000
42
Further Readings
Co., Inc.
Educational Supply.
43
LESSON 8
ACCOUNTING FOR PROMISSORY NOTES
Study Objectives
(Put a Check mark)
1
Understand the concept of promissory notes and its parts

and prepare the journal entries in relation to issuance of
promissory notes and payment on the maturity date
Understand the concept of discounting of customers note

and prepare the necessary journal entries
Understand the concept of discounting of own note and

prepare the necessary journal entries
Objective 1
Promissory Notes
A promissory note is an unconditional promise in writing made by one person to another, signed
by the maker, engaging to pay on demand or at a fixed or determinable future time a sum certain
in money to order or to bearer (Valix, 2005).
Parts of a Promissory note
March 24, 2009
I promise to pay X, P 5,000 on April 7, 2009 with 12% interest.
(Sgd) Y
1.
2.
3.
4.
5.
6.
Date of the note March 24, 2009

Maturity date April 7, 2009
Maker Y
Payee X
Face value / Principal P 5,000
Interest rate 12%
Given the above promissory note, how much is the Maturity value?
44
Maturity value = Principal + Interest

Interest = Principal x Interest rate x Term / 360
Term refers to the period between the date of the note and the maturity date. 360 represents the
number of days in a year in accordance to Bankers rule.
In the above example the term is 14 days. 7 days in March (31-24) and 7 days in April.
For years 2000, 2004, 2008 and so on, remember that there are 29 days in February.
Interest = 5,000 x 12% x 14/360

= 23
Maturity value = 5,000
Journal Entries
Date of the note
Books of the Maker
Date
2009
Mar 24
Particulars
Debit
Cash
Notes payable
Issuance of promissory note
Credit
5 000
5 000
Books of the Payee

Date
2009
Mar 24
Particulars
Notes receivable
Cash
Receipt of promissory note
Debit
Credit
5 000
5 000
45
Maturity Date
Books of the Maker
Date
2009
Apr 07
Particulars
Debit
Notes payable
Interest expense
Cash
Payment of promissory note
Credit
5 000
23
5 023
Books of the Payee

Date
2009
Apr 07
Particulars
Debit
Cash
Notes receivable
Interest income
Collection of principal and interest
Credit
5 023
5 000
23
Dishonoring of promissory note

When the maker fails to pay the principal and interest on the maturity date, then the promissory
note is considered dishonored. For the journal entry in the books of the maker, instead of
crediting Cash, Accounts payable is credited. On the other hand in the books of the payee, instead
of debiting Cash, Accounts receivable is debited.
Maturity Date
Books of the Maker
Date
2009
Apr 07
Particulars
Debit
Notes payable
Interest expense
Accounts payable
Credit
5 000
23
5 023
Books of the Payee

Date
2009
Apr 07
Particulars
Accounts receivable
Notes receivable
Interest income
Collection of principal and interest
Debit
Credit
5 023
5 000
23
46
Discounting of promissory notes
When a promissory note is negotiable, the payee may obtain cash before maturity date by
discounting the note at a bank or other financing company. To discount the note, the payee must
endorse it. Thus, legally the payee becomes an endorser and the bank becomes an endorsee
(Valix, 2005).
Two types of discounting
1. Discounting of customers note
2. Discounting of own note
Objective 2
Discounting of Customers note
Using the above example, assume that the maker discounted the note on April 2 at a discount rate
of 15%.
The necessary equations for note discounting are as follows:
Interest on discounting = Maturity value x Discount rate x Discount period / 360

Cash proceeds = Maturity value Interest on discounting
Discount period refers to the period between the discount date and the maturity date.
For this example, the discount period is 5 days (April 7 2).
Interest on discounting = 5,023 x 15% x 5 / 360

= 10
Cash proceeds = Maturity value Interest on discounting
= 5,023 10
= 5,013
47
Discount Date
Books of the Maker
Date
2009
Apr 02
Particulars
Debit
Credit
Debit
Credit
No journal entry
Books of the Payee
Date
2009
Apr 02
Particulars
Cash
Interest expense
Notes receivable discounted
Interest income
Discounting of note
5 013
10
5 000
23
Notes receivable discounted is classified as a Contra-asset account and is presented as a

deduction from Notes receivable
Notes receivable
Less: Notes receivable discounted
P xxx
xxx P xxx
On the discount date, the payee needs to inform the maker that the note is discounted. On the
maturity date, the maker should directly pay to the bank or financing company.
Maturity Date
Books of the Maker
Date
2009
Apr 07
Particulars
Debit
Notes payable
Interest expense
Cash
Credit
5 000
23
5 023
Books of the Payee

Date
2009
Apr 07
Particulars
Notes receivable
Cancellation of contingent liability
Debit
Credit
5 000
5 000
48
Types of endorsement
1. Endorsement with recourse
a. This type requires the endorser to pay the endorsee if the maker dishonors the
note. This is the contingent or secondary liability of the endorser.
2. Endorsement without recourse
a. This type does not impose contingent liability on the endorser.
In the absence of any evidence to the contrary, endorsement is assumed to be with recourse
(Valix, 2005).
Assume that in the above example, the maker dishonored the note and the bank charged a
protest fee of P 500.
Maturity Date
Books of the Maker
Date
2009
Apr 07
Particulars
Debit
Notes payable
Interest expense
Miscellaneous expense
Accounts payable
Dishonoring of note
Credit
5 000
23
500
5 523
Books of the Payee

Date
2009
Apr 07
Particulars
Debit
Credit
Accounts receivable
Cash
Payment of promissory note plus
protest fees in behalf of the maker
5 523

Notes receivable
Cancellation of contingent liability
5 000
Principal
Interest
Protest fees
Total payment
5 523
P 5,000
23
500
P 5,523
======
5 000
49
Objective 3
Discounting of own note
In this type of discounting, the maker issues a promissory note to obtain cash. Interest on
discounting is deducted in advance and is debited using the account title Discount on Notes
Payable.
Example 1:
On July 14, 2009, for money borrowed, X discounted its own 30-day, 12% P 10,000 note with Y.
Interest on discounting = Principal x Interest rate x Term / 360

= 10,000 x 12% x 30 / 360
= 100
Discount Date
Books of the Maker
Date
2009
Jul 14
Particulars
Debit
Cash
Discount on notes payable
Notes payable
Discounting of note
Credit
9 900
100
10 000
Maturity Date
Books of the Maker
Date
2009
Aug 13
Particulars
Debit
Credit
Notes payable
Cash
10 000
Interest expense
Discount on note payable
Amortization of discount
100
10 000
100
50
Example 2:
On December 14, 2009, for money borrowed, X discounted its own 30-day, 12% P 10,000 note
with Y. The accounting period ends on December 31.
Year-end amortization
Amortization = Discount x (Year-end date Discount date) / Discount period
= 100 x (31-14) / 30
= 57
Discount Date
Books of the Maker
Date
2009
Dec 14
Particulars
Debit
Cash
Discount on notes payable
Notes payable
Discounting of note
Credit
9 900
100
10 000
Amortization at year-end
Books of the Maker
Date
2009
Dec 31
Particulars
Debit
Interest expense
Credit
57
57
Presentation
Notes payable
Less: Discount on notes payable
P 10,000
43
P 9,957
Maturity Date
Books of the Maker
Date
2010
Jan 13
Particulars
Debit
Credit
Notes payable
Cash
10 000
Interest expense
43
10 000
43
51
Further Readings
Co., Inc.
Educational Supply.
52
LESSON 9
ACCRUED INCOME
Study Objectives
(Put a Check mark)
1
Understand the concept of adjusting entries and the

reasons for providing adjusting entries at year-end
Recall the concept of accrued income and prepare

adjusting entry in relation to accrued income
Objective 1
Adjusting Entries
Adjusting entries refer to journal entries made at the end of the year for the following reasons:
1. Accrued income
a. There may be unrecorded income and there is a need to accrue income or
recognize receivables.
2. Accrued expense
a. There may be unrecorded expenses and there is a need to accrue expenses or
recognize payables.
3. Prepaid expense
a. There may be a consumed or used portion in the recorded prepaid expense or
there may be an unconsumed or unused portion in the recorded expense.
4. Unearned income
a. There may be an earned portion in the recorded unearned income or there may be
an unearned portion in the recorded income.
5. Depreciation
a. There is a need to provide depreciation for depreciable fixed assets.
6. Doubtful accounts
a. There is a need to provide estimated doubtful accounts in relation to accounts
receivable.
Objective 2
Accrued income
To recall, accrued income refers to income earned but not yet received. The following are the
examples of accrued income to be recognized at year-end:
1. Accrued commission income
a. It is possible that the company has already rendered the service pertaining to
commission but it has not yet received the commission as of year-end.
2. Accrued rent income
53
a. It is possible that the company or lessor has already earned the rent but it has not
yet received the rent payment as of year-end.
3. Accounts receivable
a. It is possible that the company has not yet recorded as of year-end the service
rendered.
4. Accrued interest income
a. It is possible that the company has not yet recorded the interest that is earned in
relation to notes receivable from the date of the promissory note until year-end
date.
Accrued
income is the same with
accrued interest income is the same with interest receivable.
receivable.
For
example,
Pro-forma Entry
Date
xxxx
Dec 31
Particulars
Debit
_____ receivable
_____ income
Recognition of accrued income
Credit
xxx
xxx
Example 1:
A company leases an office space for P 14,000 per month. As of December 31, 2009, companys
year-end, the tenant has not yet paid its rent for two months.
Adjusting entry
Date
2009
Dec 31
Particulars
Rent receivable
Rent income
(14, 000 x 2)
Recognition of accrued rent
Debit
Credit
28,000
28,000
Example 2:
As of December 31, 2009, ABC Hotel has generated lodging revenue of P 127,000 from guests
whose payments are not yet received until they check out.
Adjusting entry
Date
2009
Dec 31
Particulars
Lodging receivable
Lodging income
Recognition of accrued lodging
Debit
Credit
127,000
127,000
If the company did not recognize accrued income at year-end, then the financial statements will
be misstated showing understated assets and understated income.
54
Further Readings
Co., Inc.
Educational Supply.
55
LESSON 10
ACCRUED EXPENSE
Study Objectives
(Put a Check mark)
1
Recall the concept of accrued expense and prepare

adjusting entry in relation to accrued expense
Objective 1
Accrued expense
To recall, accrued expense refers to expense incurred but not yet paid. The following are the
examples of accrued expense to be recognized at year-end:
1. Accrued interest expense
a. It is possible that the company has not yet recorded the interest that is incurred in
relation to notes payable from the date of the promissory note until year-end date.
2. Accrued salaries and wages expense
a. It is possible that as of year-end, the company has not yet paid the employees
because the year-end date is not the same with the payroll date.
3. Accrued rent expense
a. It is possible that the company or lessee has already incurred the rent but it has
not yet paid the rent as of year-end.
4. Accrued utilities expense
a. It is possible that as of year-end, the company has not yet paid the utilities or the
billing statements of the utilities have not yet received by the company.
5. Accrued taxes and licenses expense
a. It is possible that as of year-end, the company has already earned from services
rendered and sale of goods but has not yet paid the related taxes.
Accrued
expense is the same with
interest expense is the same with interest payable.
payable. For example, accrued
Accrued expense is the opposite of accrued income. When one party recognize accrued income,
the other party should recognize accrued expense.
Pro-forma Entry
Date
Xxxx
Dec 31
Particulars
_____ expense
_____ payable
Recognition of accrued expense
Debit
Credit
xxx
xxx
56
Example 1:
Property taxes for three months estimated to total P 13,300 have accrued.
Adjusting entry
Date
2009
Dec 31
Particulars
Taxes and Licenses expense
Taxes and Licenses payable
Recognition of accrued taxes and
licenses
Debit
Credit
13,300
13,300
Example 2:
Electricity consumption for the month of December amounting to P 7,100 is not yet paid.
Adjusting entry
Date
2009
Dec 31
Particulars
Utilities expense
Utilities payable
Recognition of accrued utilities
Debit
Credit
7,100
7,100
If the company did not recognize accrued expense at year-end, then the financial statements will
be misstated showing understated liabilities and understated expense.
57
Further Readings
John Wiley and Sons, Inc. pages 104 108
Co., Inc.
Educational Supply.
58
LESSON 11
PREPAID EXPENSE
Study Objectives
(Put a Check mark)
1
Recall the concept of prepare expense and prepare

adjusting entry using the Asset method
Prepare adjusting entry using the Expense method
Prepaid expense
To recall, prepaid expense is an asset that is paid in advance but not yet consumed or used.
Companies have two options or methods in recording prepaid items. They may use the Asset
method or the Expense method.
Objective 1
Asset Method
If the company chooses to use the Asset method, then upon purchasing the prepaid item the proforma entry will be:
Date
xxxx
xxx xx
Particulars
Debit
Prepaid _____ expense

Cash
Purchase of prepaid item
Credit
xxx
xxx
It is possible that in this recorded prepaid expense there may be consumed or used portion. To
adjust the recorded prepaid expense, the pro-forma entry will be:
Date
zxxx
Dec 31
Particulars
_____ expense
Recognition of consumed or used
portion of the recorded prepaid
expense
Debit
Credit
xxx
xxx
59
Example:
On March 15, 2009, XYZ Company purchased office supplies for cash, P 100,000. At the end of
the year, record shows that 25% worth of supplies have been used.
Date
2009
Mar 15
Particulars
Office supplies
Cash
Debit
Credit
100,000
100,000
Adjusting entry
Date
2009
Dec 31
Particulars
Office supplies expense
Office supplies
Recognition of used portion of the
recorded office supplies
Debit
Credit
25,000
25,000
If the prepaid expense account is not adjusted at year-end, then the financial statements will be
misstated showing overstated assets and understated expenses.
If the adjusted Office supplies of P 75,000 is fully consumed in the following year, then the entire
P 75,000 will be transformed to Office supplies expense also in the following year.
Objective 2
Expense Method
On the other hand, if the company chooses to use the Expense method, then the pro-forma entry
to record the purchase of prepaid item is:
Date
xxxx
xxx xx
Particulars
Debit
_____ expense
Cash
Credit
xxx
Xxx
It is possible that in this recorded expense there may be unconsumed or unused portion. To adjust
the recorded expense, the pro-forma entry will be:
Date
xxxx
Dec 31
Particulars
_____ expense
Recognition of unconsumed or
unused portion of the recorded
expense
Debit
Credit
xxx
Xxx
60
Example:
Assume the same example in asset method but this time the company will use the expense
method.
Date
2009
Mar 15
Particulars
Cash
Debit
Credit
100,000
100,000
Adjusting entry
Date
2009
Dec 31
Particulars
Office supplies
Recognition of unused portion of the
recorded expense
Debit
Credit
75,000
75,000
If the expense account is not adjusted at year-end, then the financial statements will be misstated
showing understated assets and overstated expenses.
Notice that whether the company uses the asset method or expense method, the financial
statements will show same amounts for assets and expenses. In the above example, both methods
will show Office supplies adjusted balance of P 75,000 and Office supplies expense adjusted
balance of P 25,000.
61
Further Readings
John Wiley and Sons, Inc. 96 100, 115 117
Co., Inc.
Educational Supply.
62
LESSON 12
UNEARNED INCOME
Study Objectives
(Put a Check mark)
1
Recall the concept of unearned income and prepare

adjusting entry using the Liability method
Prepare adjusting entry using the Income method
Unearned income
To recall, unearned income is a liability that is received in advance but not yet earned.
Unearned income is the opposite of prepaid expense. If one party has recorded a prepaid item,
then the other party has to record an unearned item.
Companies have two options or methods in recording unearned items. They may use the Liability
method or Income method.
Objective 1
Liability Method
If the company chooses to use the liability method, then upon receiving the unearned item the
pro-forma entry will be:
Date
Xxxx
xxx xx
Particulars
Debit
Cash
Unearned _____ income
Receipt of unearned item in advance
Credit
xxx
Xxx
It is possible that in this recorded unearned income there may be earned portion. To adjust the
recorded unearned income, the pro-forma entry will be:
Date
Xxxx
Dec 31
Particulars
_____ income
Recognition of earned portion of the
recorded unearned income
Debit
Credit
xxx
xxx
63
Example:
On October 1, 2009, the company received from the tenant the advance rent payment of P
100,000 representing 10-month rent.
Date
2009
Oct 01
Particulars
Cash
Unearned rent income
Debit
Credit
100,000
100,000
Adjusting entry
Date
2009
Dec 31
Particulars
Rent income
100,000 / 10 = 10,000 x 3
Recognition of earned portion of the
recorded unearned rent
Debit
Credit
30,000
30,000
If the unearned income account is not adjusted at year-end, then the financial statements will be
misstated showing overstated liabilities and understated income.
If the adjusted Unearned rent income of P 70,000 is fully earned in the following year, then the
entire P 70,000 will be transformed to Rent income also in the following year.
Objective 2
Income Method
On the other hand, if the company chooses to use the Income method, then the pro-forma entry to
record the unearned item is:
Date
xxxx
xxx xx
Particulars
Debit
Cash
_____ income
Credit
xxx
xxx
It is possible that in this recorded income there may be unearned portion. To adjust the recorded
income, the pro-forma entry will be:
Date
xxxx
Dec 31
Particulars
_____ income
Recognition of unearned portion of
the recorded income
Debit
Credit
xxx
xxx
64
Example:
Assume the same example in liability method but this time the company will use the income
method.
Date
2009
Oct 01
Particulars
Cash
Rent income
Debit
Credit
100,000
100,000
Adjusting entry
Date
2009
Dec 31
Particulars
Rent income
100,000 / 10 = 10,000 x 7
Recognition of unearned portion of
the recorded income
Debit
Credit
70,000
70,000
If the income account is not adjusted at year-end, then the financial statements will be misstated
showing understated liabilities and overstated income.
Notice that whether the company uses the liability method or income method, the financial
statements will show same amounts for liabilities and income. In the above example, both
methods will show Unearned rent income adjusted balance of P 70,000 and Rent income adjusted
balance of P 30,000.
65
Further Readings
Co., Inc.
Educational Supply.
66
LESSON 13
DEPRECIATION
Study Objectives
(Put a Check mark)
1
Understand the concept of depreciation and its kinds
Enumerate the factors of depreciation and compute

depreciation using the straight line method
Objective 1
Concept of depreciation
Property, plant and equipment, except land, normally are usable for a number of years after which
they have relatively little value either for service or for sale. The difference between the original
cost of a property and any remaining value when it is retired or worn out is an expense that
should be distributed to the periods during which the asset is used (Valix, 2000).
Depreciation accounting
- Is a system of accounting which aims to distribute the cost of the depreciable fixed asset
less salvage value, if any, over the estimated useful life of the asset in a systematic and
rational manner. It is a process of allocation, not of valuation (Valix, 2000).
- The objective of depreciation accounting is to have each period benefitting from the use
of the asset bear an equitable share of the asset cost (Valix, 2000).
Depreciation
- Is the portion of the cost of the asset charged as expense during an accounting period
(Valix, 2000).
Kinds of depreciation (Valix, 2000)
1. Physical depreciation
a. Is related to the depreciable assets wear and tear and deterioration over a period.
This also results to the ultimate retirement of the property or termination of the
service of the asset.
b. Physical depreciation may be caused by:
i. Wear and tear due to frequent use
ii. Passage of time due to nonuse
iii. Action of the elements such as wind, sunshine, rain or dust
iv. Accidents such as fire, flood, earthquake and other natural disaster
v. Diseases in animals and wooden buildings
2. Functional or economic depreciation
a. Arises from obsolescence or inadequacy of the asset to perform efficiently.
i. Obsolescence may arise from the following:
67
1. When there is no future demand for the product which the
depreciable asset produces
2. When a new depreciable asset becomes available and the new
asset can perform the same function for substantially less cost
ii. Inadequacy arises when the asset is no longer useful to the firm because
of an increase in the volume of operations.
Objective 2
Factors of depreciation (Valix, 2000)
In order to properly compute the amount of depreciation to be charged as expense during an
accounting period, three factors are necessary, namely:
1. Cost
2. Scrap value
a. Is the amount estimated to be recovered when the asset is retired from use.
b. It is also known as Residual value or Salvage value.
c. From the practical standpoint, the scrap value is often considered as zero because
the valuation is usually very small or not capable of estimation.
3. Estimated useful life
a. Is the expected service or economic life of the asset.
Straight line method of depreciation (Valix, 2000)

Under the straight line method, the annual depreciation charge is calculated by allocating the
amount to be depreciated equally over the number of years of estimated useful life.
The formula for the computation of the annual depreciation following the straight line method is
as follows:
Annual depreciation =
Cost minus scrap
Life in years
Cost minus scrap value equals Depreciable cost. Depreciable cost multiplied by the Annual
depreciation rate also gives the amount of annual depreciation.
The Annual depreciation rate is determined by dividing 100% by the life of the asset in years. For
example, if the life of the asset is 5 years, then the depreciation rate is 20% (100% / 5).
The straight line method is based on the theory that periods benefited by the use of the asset
should bear an equal or equitable share of the asset cost because the straight line approach
considers depreciation as a function of time rather than as a function of usage.
68
Pro-forma Adjusting Entry
Date
xxxx
Dec 31
Particulars
Debit
Depreciation expense
Accumulated depreciation <asset>
Depreciation of fixed asset
Credit
xxx
xxx
Example:
Assume the following data for 2011
Equipment cost,
purchased on January 1, 2011
Scrap value
Life in years
P 105,000
P 5,000
5 years
A depreciation table may appear as follows:

Year
Depreciation
Acquisition cost
2011
2012
2013
2014
2015
Accumulated
depreciation
20,000
20,000
20,000
20,000
20,000
20,000
40,000
60,000
80,000
100,000
Net carrying
value
105,000
85,000
65,000
45,000
25,000
5,000
Adjusting entry for 2011

Date
2011
Dec 31
Particulars
Debit
Accumulated depreciation Equipment
Depreciation of equipment for 2011
Credit
20,000
20,000
Note xx Property, Plant and Equipment

Cost
Land
Building
Equipment
Total
Accumulated
Depreciation
Net Carrying Value
P xxx,xxx
xxx,xxx
xxx,xxx
105,000
xxx,xxx
P xxx,xxx
xxx,xxx
20,000
xxx,xxx
P xxx,xxx
xxx,xxx
xxx,xxx
85,000
xxx,xxx
P xxx,xxx
=========
P xxx,xxx
========
P xxx,xxx
=========
69
Adjusting entry for 2012
Date
2012
Dec 31
Particulars
Debit
Accumulated depreciation Equipment
Depreciation of equipment for 2012
Credit
20,000
20,000
Note xx Property, Plant and Equipment

Cost
Land
Building
Equipment
Total
Accumulated
Depreciation
Net Carrying Value
P xxx,xxx
xxx,xxx
xxx,xxx
105,000
xxx,xxx
P xxx,xxx
xxx,xxx
40,000
xxx,xxx
P xxx,xxx
xxx,xxx
xxx,xxx
65,000
xxx,xxx
P xxx,xxx
=========
P xxx,xxx
========
P xxx,xxx
=========
70
Further Readings
Co., Inc.
Educational Supply.
71
LESSON 14
DOUBTFUL ACCOUNTS
Study Objectives
(Put a Check mark)
1
Understand the concept of doubtful accounts
Compute doubtful accounts using the percent of accounts

receivable approach
Compute doubtful accounts using the aging analysis

approach
Objective 1
Accounting for Doubtful Accounts
Business enterprises sell on credit rather than only for cash to increase total service income or
sales and thereby increase income. However, an enterprise that sells on credit assumes the risk
that some clients or customers will not pay their accounts (Valix, 2005).
When an account becomes uncollectible, the enterprise has sustained a bad debt loss. This loss is
simply one of the costs of doing business on credit. Two methods are followed in accounting for
this bad debt loss, namely:
1. Allowance method
2. Direct write-off method
For ACTBAS1, only the allowance method will be discussed.
Allowance method
The allowance method requires recognition of doubtful accounts expense even if some of the
accounts receivable are doubtful of collection.
The adjusting entry to recognize doubtful accounts is:
Date
xxxx
Dec 31
Particulars
Debit
Doubtful accounts expense

Allowance for doubtful accounts
Recognition of doubtful accounts
Credit
xxx
xxx
72
Basis for computing doubtful accounts
There are two bases or approaches for computing doubtful accounts.
1. Balance sheet approach
a. Percent of Accounts receivable balance
b. Aging analysis
2. Income statement approach
For ACTBAS1, only the balance sheet approach will be discussed.
Objective 2
Percent of Accounts receivable balance
A certain rate is multiplied to the accounts receivable balance in order to get the required
allowance balance. The rate used is usually determined from past experience of the company
(Valix, 2005).
Example 1:
Assume accounts receivable balance of P 2,000,000 and doubtful accounts are estimated to be 3%
of accounts receivable are given in 2009 financial records
Adjusting entry
Date
2009
Dec 31
Particulars
Debit

(2,000,000 x 3%)
Credit
60,000
60,000
Note xx Trade and Other Receivables

Accounts receivable
P 2,000,000
Less: Allowance for doubtful accounts
60,000
P 1,940,000
Example 2:
Assume accounts receivable balance of P 2,000,000 and doubtful accounts are estimated to be 3%
of accounts receivable are given in 2010 financial records. Assume also that Allowance for
doubtful accounts has a balance of P 10,000 before adjustment.
Adjusting entry
Date
2009
Dec 31
Particulars
Debit

(2,000,000 x 3%) 10,000
Credit
50,000
50,000
73
Accounts receivable
P 2,000,000
60,000
P 1,940,000
Objective 3
Aging analysis
The aging of accounts receivable involves an analysis of the accounts where they are classified
into not due or past due. Past due accounts are further classified in terms of the length of the
period they are past due. The most common classifications are:
1.
2.
3.
4.
5.
6.
7.
8.
9.
Not due
1 to 30 days past due
More than 1 year past due
Bankrupt or under litigation
The allowance is then determined by multiplying the total of each classification by the rate or
percent loss experienced by the company for each category.
The major argument for the use of this method is the more accurate and scientific computation of
the allowance for doubtful accounts, and consequently, the accounts receivable are fairly
presented in the balance sheet at net realizable value (Valix, 2005).
Example:
The following data are summarized in aging the accounts at the end of the period:
Not due
Accounts receivable
balance
500,000
Experience
rate
Required allowance
1%
5,000
300,000
2%
6,000
200,000
4%
8,000
100,000
7%
7,000
50,000
10%
5,000
30,000
30%
9,000
More than 1 year past due
20,000
50%
10,000
Totals
1,200,000
50,000
74
The amount computed by aging of accounts receivable represents the required allowance for
doubtful accounts at the end of the period.
Thus, if the Allowance for doubtful accounts has a credit balance of P 10,000 before adjustment,
the doubtful accounts expense is determined as follows:
Adjusting entry
Date
2009
Dec 31
Particulars
Debit

50,000 10,000
Credit
40,000
40,000

Accounts receivable
P 1,200,000
40,000
P 1,160,000
When is an account past due?

The credit terms will determine whether an account is past due. For instance, if the credit terms
were 2/10 n/30, and the account is 45 days old, it is considered to be 15 days past due.
Net realizable value
- This represents the estimated amount to be collectible from the clients or customers after
deducting the allowance for doubtful accounts.
75
Further Readings
John Wiley and Sons, Inc. pages 387 388, 391 393, 105 118
Co., Inc.
Educational Supply.
76
LESSON 15
CLOSING ENTRIES, POST-CLOSING TRIAL BALANCE
Study Objectives
(Put a Check mark)
1
Understand the concept of closing entries and prepare

closing entries
Prepare the Post-Closing Trial Balance
Objective 1
Closing entries
After the preparing the financial statements, one needs to close the nominal accounts or income
statement accounts. If these accounts are not closed at the end of the year, then these accounts
will be carried forward to the next accounting period. If that happens, the following accounting
period will show a misstated income statement.
The following are the procedures in closing the nominal accounts.
1. Debit the income accounts and credit the Income summary account.
Closing entry
Date
xxxx
Dec 31
Particulars
Debit
_____ income
_____ income
Income summary
Closing entry for income accounts
Credit
xxx
xxx
xxx
2. Debit the Income summary account and credit the expense accounts.
Closing entry
Date
xxxx
Dec 31
Particulars
Debit
Income summary
_____ expense
_____ expense
_____ expense
_____ expense
_____ expense
Closing entry for expense accounts
Credit
xxx
xxx
xxx
xxx
xxx
xxx
77
3. Close the Income summary account to the Owner, drawing account. If the Income
summary has a credit balance, it means Net income, otherwise it means Net loss.
Closing entry representing Net income
Date
xxxx
Dec 31
Particulars
Debit
Income summary
Owner, drawing
Closing of income summary to drawing
account
Credit
xxx
xxx
Closing entry representing Net loss

Date
xxxx
Dec 31
Particulars
Debit
Owner, drawing
Income summary
account
Credit
xxx
xxx
4. Close the Owner, drawing account to the Owner, capital account.

Owner, drawing has a debit balance before
closing entry
Date
Xxxx
Dec 31
Particulars
Debit
Owner, capital
Owner, drawing
Closing of drawing account to capital
account
Credit
xxx
xxx
Owner, drawing has a credit balance

before closing entry
Date
Xxxx
Dec 31
Particulars
Debit
Owner, drawing
Owner, capital
account
Credit
xxx
xxx
78
Example:
Given the following Trial Balance after adjusting entries (Adjusted trial balance), prepare the
necessary closing entries at fiscal-year ended September 30, 2010.
Adapted from Workbook in Introductory Accounting for Service Business
KIM SAM SOON COMPANY

Adjusted Trial Balance
September 30, 2010
Debit
Cash on hand
Cash in bank
Accounts Receivable
Prepaid Office Supplies
Prepaid Insurance
Office Furniture
Accumulated Depreciation Office Furniture
Delivery Equipment
Accumulated Depreciation Delivery Equipment
Accounts Payable
Accrued Salaries and Wages Expense
Accrued Rent Expense
Accrued Interest Expense
Notes Payable
Unearned Service Income
Kim Sam Soon, Capital
Kim Sam Soon, Drawing
Service Income
Office Supplies Expense
Utilities Expense
Rent Expense
Interest Expense
Insurance Expense
Totals
Credit
P 6 000
30 200
150 450
7 800
1 330
120 600
P 17 340
156 000
33 150
33 100
12 670
12 000
3 500
120 000
9 600
130 100
29 370
242 000
26 860
3 100
4 960
39 620
24 000
12 300
870
_________
P 613 460
========
P 613 460
========
79
Closing entry
Date
2010
Sep 30
Particulars
Service income
Income summary
Closing entry for income accounts
Debit
Credit
242,000
242,000
Closing entry
Date
2010
Sep 30
Particulars
Income summary
Office Supplies Expense
Utilities Expense
Rent Expense
Interest Expense
Insurance Expense
Closing entry for expense accounts
Debit
Credit
111 710
26 860
3 100
4 960
39 620
24 000
12 300
870
Closing entry representing Net income

Date
2010
Sep 30
Particulars
Income summary
(242,000 111, 710)
account
Debit
Credit
130, 290
130, 290
Owner, drawing has a credit balance

before closing entry
Date
2010
Sep 30
Particulars
(130,290 29,370)
account
Debit
Credit
100,920
100,920
80
Objective 2
Post-Closing Trial Balance
After posting the closing entries, one needs to prepare the Trial balance after closing entries or the
Post-Closing Trial Balance.
KIM SAM SOON COMPANY

Post-Closing Trial Balance
September 30, 2010
Debit
Cash on hand
Cash in bank
Accounts Receivable
Prepaid Office Supplies
Prepaid Insurance
Office Furniture
Accumulated Depreciation Office Furniture
Delivery Equipment
Accumulated Depreciation Delivery Equipment
Accounts Payable
Accrued Salaries and Wages Expense
Accrued Rent Expense
Accrued Interest Expense
Notes Payable
Unearned Service Income
Totals
Credit
P 6 000
30 200
150 450
7 800
1 330
120 600
P 17 340
156 000
_________
33 150
33 100
12 670
12 000
3 500
120 000
9 600
231 020
P 472 380
========
P 472 380
========
Notice that in the Post-Closing Trial Balance, the income statement accounts and the drawing
account are not anymore included because they already have zero balances. In this trial balance,
the only remaining accounts are the real accounts or balance sheet accounts. Notice also that after
the closing entries, Kim Sam Soon, Capital increased from P 130,100 to P 231,020. This is due to
the addition of P 100,920, which is the amount in the last closing entry.
If the Post-Closing Trial Balance shows equal totals, then the books of accounts are ready for the
recording of transactions in the next accounting period.
81
Further Readings
Co., Inc.
Educational Supply.
82
LESSON 16
REVERSING ENTRIES
Study Objectives
(Put a Check mark)
1
Understand the concept of reversing entries and prepare

reversing entries
Objective 1
Reversing Entries
Reversing entries are optional entries that are prepared on the first day of the next accounting
period. The benefit of these entries is convenience in the recording of the journal entries which
are related to adjusting entries.
The following adjusting entries may be reversed:
1. Accrued income
2. Accrued expense
3. Prepaid expense (Expense method only)
4. Unearned income (Income method only)
Pro-forma Entries
Accrued income
Date
xxxx
Jan 01
Particulars
Debit
_____ Income
_____ Receivable
Reversing entry for accrued income
Credit
xxx
xxx
Accrued expense
Date
xxxx
Jan 01
Particulars
Debit
_____ Payable
_____ Expense
Reversing entry for accrued expense
Credit
xxx
xxx
83
Prepaid expense (Expense method only)
Date
xxxx
Jan 01
Particulars
Debit
_____ Expense
Prepaid _____ Expense
Reversing entry for prepaid expense
Credit
xxx
xxx
Unearned income (Income method only)

Date
xxxx
Jan 01
Particulars
Debit

_____ income
Reversing entry for unearned income
Credit
xxx
xxx
84
Further Readings
John Wiley and Sons, Inc. pages 156, 169 171
Co., Inc.
Educational Supply.

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1

General Journal, General Ledger, Trial Balance

Statement of Cash Flows

Accounting for Promissory Notes

Closing Entries, Post-Closing Trial Balance

Learn the history of accounting

Know the branches of accounting

Distinguish the forms of business organizations

Know the role of Certified Public Accountant in the

Know the functions of different government agencies and

Know the purposes of the business documents

Define financial statements and its components, generally

Explain the different basic accounting concepts or

Know other terms related to basic accounting

Accounting as Language of Business

3. Accounting is the art of recording, classifying and summarizing in a significant manner

Preparing financial reports

Preparing financial reports

Public Accountant / Auditor

Purchase Order shows items to be ordered by the business

Six (6) Components

Generally Accepted Accounting Principles (GAAP)

Define the accounting equation and know the effects of

Familiarize with the types of accounts for assets,

Assets = Liabilities + Capital

Investment of the owner

Withdrawal of the owner

Purchase of supplies for

Sale of a fixed asset at a

Partial / Full collection of

Payment of expenses for

This includes bills

This refers to shortterm, highly liquid

TRADE AND OTHE

PETTY CASH FUND

Cash used to pay

Cash advance given

These refer to items

Unpaid taxes and

Unpaid salaries and

This refers to cash

This refers to bank

This refers to loan

CAPITAL / OWNERS EQUITY

This refer to claim

Income from loan

Income from stock

Represents the total

FUEL AND OIL

Excess of net book

Expense from loan

Know the concept of double-entry bookkeeping and the

Understand the concept of journalizing and prepare

Post journal entries to the general ledgers

Prepare the trial balance

Dry Cleaning Supplies

Simple entry and Compound entry

Dry Cleaning Service Income

Salaries and Wages Expense

DRY CLEANING EQUIPMENT

DRY CLEANING SUPPLIES

DRY CLEANING SERVICE INCOME

Normal Balances of the Accounts