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BY: Bayani D. Edlagan Ma. Cecilia S. Mercado
This presentation covers the concepts and practice of accounting fundamental. From the concepts and information about accounting up to the accounting cycle, which includes journalizing, reversing and closing entries. Accounting is a profession similar to medicine and law. Such profession continually evolve and change as society and the needs of society change. The objective of this presentation is to make people aware of how accounting works in relation to business and also how can it be helpful even in a simple way of living. This also emphasized the importance of accounting in any types of business. Little by little, you will be able to understand how accounting works and you will realize its significance to our daily living. This presentation is based on the book of Bayani D. Edlagan and Ma. Cecilia S. Mercado, “Accounting Fundamental.”
Introduction to Accounting Concepts and Practice
CHARACTERISTICS OF ACCOUNTING INFORMATION Accounting information is composed principally of financial data about business transactions, expressed in terms of money. The mere records of transactions are of little use in making “informed judgments and decisions.” The recorded data must be sorted and summarized before significant reports and analyses can be prepared. The “basic raw materials” of accounting are composed of business transaction data. Its “primary end products” are composed of various summaries, analyses, and reports.
USERS OF ACCOUNTING INFORMATION
Accounting provides the techniques for accumulating and the language for communicating economic data to various categories of individuals and institutions. Investors in a business enterprise need information about its financial status and its future prospects. The government agencies are concerned with the financial activities of business organizations for purposes of taxation and regulation. The individuals most dependent upon and most involved with the end products of accounting are those charged with the responsibility for directing the operations of enterprises.
USERS OF ACCOUNTING INFORMATION For example. The relevant information for one category of users may differ markedly from that needed by other users. management relies upon accounting to provide the amount owed to each creditor and by each customer and the date each payment is due. . Once the user groups are identified. in the conduct of day-to-day operations. and the nature of the relevant data determined. however. the accountant is able to establish an information network to assist each group in forming judgments and making decisions regarding future actions.
Many employees with specialized training in non-business areas also make use of accounting data and should understand accounting principles and terminology. the greater is the need for an understanding of accounting concepts and terminology. . The higher the level of authority and responsibility. The importance of understanding accounting is not limited to the business world.RELATIONSHIP OF ACCOUNTING TO OTHER FIELDS Everyone engaged in business activities. from the youngest employee to the manager and owner. comes into contact with accounting.
or financial vice-president. controller. are said to be engaged in private accounting. and staff accountants employed by them. . as chief accountant. are said to be engaged in public accounting. The rapid development of accounting theory and technique during the current century has been accompanied by an expansion of the career opportunities in accounting and an increasing number of professionally trained accountants.PROFESSION OF ACCOUNTANCY Accountancy is a profession with stature comparable to that of engineering or law. Accountants employed by a particular business enterprise or not-for-profit organization. Accountants who render accounting services on a fee basis.
This act created the Board of Accountancy which was given the power among other. the Philippine Legislature passed the Accountancy Act in March 1923. Recognizing the need for reliable professional accounting service. . The revised Accountancy Law was released which define the practice of accountancy to include not only CPAs in public practice. abbreviated as CPA. but also those in private accounting. in government services and in education. to issue the certificate of Certified Public Accountant. and increased the contents and coverage of subjects in the CPA examinations. In May 1975.PUBLIC ACCOUNTING The practice of public accounting is generally restricted to licensed CPA’s.
management advisory services. to Filipino with respect to the practice of accountancy). . To practice public accountancy.PUBLIC ACCOUNTING In Section 10 of the Law. taxation. such registration to be made annually. given by the Board of Accountancy. auditing theory. business law. CPAs and firms or partnerships. covering theory of accounts. practical accounting problem1. He/she must be a holder of a degree of Bachelor of Science in Commerce or its equivalent from any college or university recognized by the government. by law. problem 2. of good moral character and at least twenty one year of age. it is provided that: an applicant for the CPA certificate must be a Filipino citizen (or a citizen of foreign country granting reciprocal privileges. The CPA candidate is required to successfully pass a written examination. including partners and staff members must register with the Professional Regulation Commission. auditing problems. auditing theory.
PRIVATE ACCOUNTING The scope of activities and duties of private accountants varies widely. Various governmental units and other not-for-profit organizations also employ accountants. they may be call industrial or cost accountants. Internal auditors are accountants who review the accounting and operating procedures prescribed by their companies. If they are employed by a manufacturing concern. Private accountants are frequently called management accountants. . The chief accountant in a business may be call controller. Accountants who specialize in internal auditing may be granted the Certified Internal Auditor (CIA) certificate.
. all citizens are affected by accounting in some way. an engineer responsible for selecting the most desirable solution to a technical manufacturing problem may consider cost accounting data to be the decisive factor. broadly speaking. Lawyers use accounting data in tax cases and in lawsuits involving property ownership and damages from breach of contract. Governmental agencies rely on accounting data in evaluating the efficiency of government operations and for appraising the feasibility of proposed taxation and spending programs. Accounting plays an important role in modern society and.RELATIONSHIP OF ACCOUNTING TO OTHER FIELDS For example.
. Corporate enterprise must employ such principles in preparing their annual reports on profitability and financial status for their stockholders and the investing public.SPECIALIZED ACCOUNTING FIELD FINANCIAL ACCOUNTING It is concerned with the recording of transactions for a business enterprise or other economic unit and the periodic preparation of various reports from such records.
SPECIALIZED ACCOUNTING FIELD AUDITING It is a field of activity involving an independent review of the accounting records. both actual and prospective for the use of management in controlling current operations and in planning for the future. public accountants examine the records supporting financial reports of an enterprise and express an opinion regarding their fairness and reliability. In conducting an audit. It is concerned primarily with the costs of manufacturing processes and of manufactured products. In addition. one of the principal functions of cost accountants is to assemble and interpret cost data. but increasing attention is being given to distribution costs. . COST ACCOUNTING It emphasizes the determination and control of costs.
Accountants specializing in this field. It deals with the specific problems that confront enterprise managers at various organizational levels. must be familiar with tax statutes affecting their employer or clients and also must keep up to date on administrative regulations and court decisions on tax cases. . The management accountant is frequently concerned with identifying alternative courses of action and in helping to select the best one. TAX ACCOUNTING It encompasses the preparation of tax returns and the consideration of the tax consequences of proposed business transactions or administrative courses of action. particularly in the area of tax planning.SPECIALIZED ACCOUNTING FIELD MANAGEMENT ACCOUNTING It employs both historical and estimated data in assisting management in daily operations and in planning future operations.
through records and summaries provides comparisons of actual operations with the predetermined plans. BUDGETARY ACCOUNTING It presents the plan of financial operations for a period and. .SPECIALIZED ACCOUNTING FIELD ACCOUNTING SYSTEM It is the special field concerned with the design and implementation of procedures for the accumulation and reporting of financial data. The systems accountant must devise appropriate “checks and balances” to safeguard business assets and provide for information flow that will be efficient and helpful to management. it is sometimes concerned to be a part of management accounting. A combination of planning and controlling future operations.
charities. and taxation of various countries bear on international operations and accounting principles. . NOT-FOR-PROFIT ACCOUNTING It specializes in recording and reporting the transactions of various governmental units and other not-for-profit organizations such as church. by other institutions. Accountants specialized in this area must be familiar with the influences of customs law. and educational institutions. An essential element in an accounting system that will insure strict adherence on the part of management to restrictions and other requirements imposed by law.SPECIALIZED ACCOUNTING FIELD INTERNATIONAL ACCOUNTING It is concerned with the special problems associated with the international trade of multinational business organizations. or by individual donors.
SPECIALIZED ACCOUNTING FIELD SOCIAL ACCOUNTING It is the newest field of accounting and is the most difficult to describe concisely. . not only in terms of facilitating trade but also of assuring a good environment for the area’s residents. One of the engagement in this field involved measurement of traffic patterns in a densely populated section of the nation (like Metro Manila) as part of a government study to determine the most efficient use of transportation funds.
the accountant must possess a much higher level of knowledge. and the interpretation of the reports. Accountants often direct and review the work of bookkeeper. A bookkeeper may be responsible for keeping all the records of a business or only a minor segment. Much of the work of the bookkeeper is critical in nature and increasingly being accomplished through the use of mechanical and electronic equipment. the preparation of reports based on the recorded data. In event.BOOKKEEPING AND ACCOUNTING BOOKKEEPING is the recording of business data in a prescribed manner. conceptual understanding. ACCOUNTING is primarily concerned with the design of the system of records. and analytical skill than is required of the bookkeeper. such portion of customer accounts in department store. .
BUSINESS ENTITY CONCEPT The business entity concept is based on identifying the individual economic units for which economic data are needed. These individual economic units include all business enterprises organized for profit. The basic economic data for a unit must first be recorded. followed by analysis and summarization. cities. numerous governmental units. other bit-for-profit units like church and clubs. . the accountant can determine which economic data and activities should be analyzed. The business entity concept is based on the applicability of accounting to individual economic units in society. and finally by periodic reporting. Once the entity is identified. and towns. Thus. and individual persons and family units. and summarized in reports. recorded. accounting applies to each separate economic unit. such as provinces.
partnerships. And is owned by two or more individual in accordance with a contractual agreement. is a separate legal entity in which ownership is divided into shares of stock. or corporations.BUSINESS ENTITY CONCEPT This subject is concerned primarily with the accounting principles and techniques applicable to profit making businesses. A sole proprietorship is owned by one individual. A corporation. Such businesses are customarily organized as a sole proprietorship. . organized in accordance with the Corporation Law.
. and other service establishments MERCHANDISING Companies purchase goods that are ready for sale and then sell these goods to customers. Example: Accounting firms. law firms. MANUFACTURING Companies buy raw materials. convert them into another form of products and the sell the products to other companies or to final consumers.ACTIVITIES PERFORMED BY BUSINESS ORGANIZATION SERVICE Companies perform services for a fee.
A particular business transaction may lead to an event or condition that constitutes another transaction.BUSINESS TRANSACTIONS A business transaction is the occurrence of an event or of a condition that must be recorded. .
the equities on the assets must also amount to P1. AND CAPITAL The properties owned by a business enterprise are referred to as assets and the rights or claims to the properties are referred to as equities.000.000. The relation between the two may be stated in the form of an equation. LIABILITIES. as follows: Assets = Equities .000.000. If the assets owned by the business amount to P1.ASSETS.
AND CAPITAL Equities may be subdivided into two types: the right of creditors and the rights of owner. The equity of the owners is called capital or owner’s equity. which is known as the accounting equation: Assets = Liabilities + Capital (or Owner’s Equity) .ASSETS. LIABILITIES. The equities of creditors represents debts of the business and are called liabilities. Expansion of the equation to give recognition to the two basic types of equities yields the following.
ASSETS. yielding: Asset Liabilities = Capital Every business transaction affects the assets. However. the changes in these items are such that the equality of two sides of the accounting equation is always maintained. The residual claim of the owner or owners is sometimes given greater emphasis by transposing liabilities to the other side of the equation. liabilities and/or capital of the business. . LIABILITIES. AND CAPITAL It is customary to place “ Liabilities” before “Capital” in the accounting equation because creditors have preferential rights to the assets.
the rules of debit and credit may be stated as follows: . or capital item.RULES OF DEBIT AND CREDIT Based on the positions of increases and decreases in an account for an asset. liability.
1 DEBIT 1. Increase in Capital a. Increase in Expenses c. Withdrawal by the Owner b. Increase in Revenue . Increase in Liabilities 3. Investment by the Owner b. Decrease in Revenue CREDIT 1. Decrease in Assets 2. Increase in Assets 2. Decrease in Liabilities 3. Decrease in Capital a. Decrease in Expenses c.TABLE 1.
TRANSACTIONS AND THE ACCOUNTING EQUATION All business transactions. it must be analyzed into its debit and credit elements. Capital? How is each item affected – it is increased or decreased? According to the rules of debit and credit. The following questions will be helpful in analyzing a business transaction. Which item (items) is/are affected – Assets. Liabilities. is the increase or the decrease in the item to be debited or credited? What account titles should be used to record the debit or credit item? . Before a transaction can be recorded in the book of accounts. can be stated in terms of the resulting change in the three basic elements of the accounting equation. from the simplest to the most complex.
The money values of these two elements are equal. it affords numerous checks and safeguard which reduce to a minimum the chances of loss through intentional r unintentional errors committed by personnel. liabilities. For every debit element.DOUBLE ENTRY BOOKKEEPING Every business transaction has two-fold effect on the assets. Moreover. there is a corresponding credit element. The manner of recording both the debit and credit elements of each transaction is referred to as double-entry bookkeeping. The doubleentry bookkeeping is preferred because it generally result in more accurate accounting records and statements. . and/or capital of the business.
DOUBLE ENTRY BOOKKEEPING The effect of these changes on the accounting equation can be demonstrated by studying some typical transactions using the analysis sheet as follows: .
2 ±ASSETS ±LIABILITIES ±CAPITAL .Table 1.
19xx Nick Requijo establishes a sole proprietorship to be known as Requijo Taxi.DOUBLE ENTRY BOOKKEEPING As the basis of this illustration. Each transaction or group of similar transactions during the first month of operations is described followed by an illustration of its effect(s) on the accounting equation and the corresponding two-column journal entry and explanation of entry for each give transaction. assume that on September 1. .
000 and to increase capital.DOUBLE ENTRY BOOKKEEPING TRANSACTION ONE Nick Requijo deposited P500. on the other side of the equation.000 in a bank account in the name of Requijo Taxi. the equation for Requijo Taxi will appear as follows: . by the same amount. After the transaction. The effect of this transaction is to increase the asset cash by P500.
000 +Requijo.3 ±ASSETS ±LIABILITIES ±CAPITAL + Cash 1 P500.000 .Table 1. Capital P500.
000. Nick Requijo’s personal assets. with cash of P500. and his personal liabilities are excluded from consideration. . his personal bank account.000 and the owner’s equity of P500.DOUBLE ENTRY BOOKKEEPING It should be noted that the equation relates only to the business enterprise. The business is treated as a distinct entity. such as his home. car.
4 Date DESCRIPTION Post Ref. Debi Credi t t Sept.0 00 To record investment of the owner . 1 Cash 500.Table 1. Capital 500. 000 Nick Requijo.
DOUBLE ENTRY BOOKKEEPING
The explanation of each debit or credit entry on the journal is based on the rules of debit and credit. Cash was debited because of increase in asset while Capital was credited because of increase in capital due to investment of the owner.
DOUBLE ENTRY BOOKKEEPING
TRANSACTION TWO Requijo’s next transaction on September 5 is to purchase land as a future building site, for which P100,000 cash is paid. This transaction changes the composition of the assets but does not change the total amount. The items in the equation prior to this transaction, the effects of this transaction, and the new balance after the transaction are as follow:
±ASSETS + Cash 1. P500,000 - Cash P100,000 2. + Land P100,000
±CAPITAL + Requijo, Capital P500,000
DOUBLE ENTRY BOOKKEEPING
After the transaction, there is a land costing P100, 000 but the balance is reduced to P400, 000. The total assets composed of cash and land total to P500, 000. Notice that there is no change in the liability and capital items.
Sept. 5 Land Cash To record purchase of land for cash
100,00 0 100,000
.DOUBLE ENTRY BOOKKEEPING In the transaction recorded. The reason for the debit and credit comes from the rules of debit and credit. Land was debited because of increase in assets while Cash was credited because of decrease in assets. there was a change in the asset element.
. On September 7 Requijo purchases P60.DOUBLE ENTRY BOOKKEEPING TRANSACTION THREE Requijo’s current plans are to lease cars and other equipment from California Bus Company for several months until he can arrange financing for the purchase of cars and other equipment and for the construction of garage and storage facilities. Prepaid expenses are expenses paid in advance and are classified as asset. such as supplies. This type of transaction is called purchase of supplies on account and the liability created is termed accounts payable. are considered to be prepaid expenses. 000 of parts and other supplies from various suppliers. Consumable commodities acquired. agreeing to pay in the near future.
as indicated below: . In this illustration. the purchases are recorded as a group.DOUBLE ENTRY BOOKKEEPING In actual practice. The effect is to increase the assets and liabilities by P600. however. each purchase would be considered and recorded as it occurred and a separated record would be maintained for each creditor. 000.
000 ±LIABILITIES ±CAPITAL + Requijo. Capital P500.000 + Supplies 3.000 .Cash 2. P100.Table 1.000 P + Account Payable P60.000 .000 + Land P100. P500.7 ±ASSETS + Cash 1. 60.
000. 000 composed of Cash P400. 000. the total assets amount to P560. .DOUBLE ENTRY BOOKKEEPING After this transaction. debit and credit. 000 and Capital of P500. and Supplies P60. The total equity is also P560. Land P100. 000. still balance. 000. The total of the two column. 000 composed of Accounts Payable P60.
8 Date DESCRIPTION Post Ref.000 To record purchase of supplies on account . Debit Credit 60. 7 Supplies Accounts Payable 60.Table 1.00 0 Sept.
Supplies (unused) was debited because of increase in assets while Accounts Payable is credited because of increase in liability.In the transaction recorded. .
P10.000 is paid to creditors on account.DOUBLE ENTRY BOOKKEEPING TRANSACTION FOUR On September 9. The effect on the equation is as follows: . thereby reducing both assets and liabilities.
000 + Land P100.000 .000 P +Account Payable P60. 10.Table 1.Account Payable P10. P500.000 ±LIABILITIES ±CAPITAL + Requijo.000 . 60.9 ±ASSETS + Cash 1.000 + Supplies P 3.000 .Cash 2.000 . Capital P500.Cash 4. P100.
000 composed of Cash P390. The total equity is also P550. 000. the total assets amount to P550. and Supplies P60. 000. 000. .DOUBLE ENTRY BOOKKEEPING After this transaction. 000. Land P100. 000 composed of Accounts Payable P50. The equation is still balance. 000 and Capital P500.
10 Date DESCRIPTION Post Ref. 9 Accounts Payable Cash To record payment of account 10.Table 1. Debit Credit 10.000 . 000 Sept.
Accounts Payable was debited because of decrease in liability while cash was credited because of decrease in assets.In the transaction recorded. .
DOUBLE ENTRY BOOKKEEPING TRANSACTION FIVE The principal objective of the owner of a business enterprise is to increase capital through earnings. For Nick Requijo. rent revenue for the use of real estate or other property. the amount charged to customers for goods or services sold to them is called revenue. Alternative terms may be used for particular types of revenue. and all of the other expenses of operating the business. In general. such as sales for the sale of merchandise or business services. the rent. fees earned for charges by a physician to patients. . this means that the cash and other assets acquired through the sale of taxi services must be greater than the cost of the gasoline and other supplies used. and fares earned for Requijo Taxi. the wages of drivers.
the excess is a net loss. . or a year. Expenses would include supplies used. such as a month. The excess of the revenue over the expenses incurred in earning the revenue is called net income or net profit. Since it is ordinarily impossible to determine the exact amount of expense incurred in connection with each revenue transactions. a semester.DOUBLE ENTRY BOOKKEEPING In a broad sense. the amount of assets consumed or services used in the process of earning revenue is called expense. If the expenses of the enterprise exceed the revenue. salaries and wages of employees. or a quarter. rather than each of small group of sales. it is considered satisfactory to determine the net income or the net loss for a specified period of time. and other assets and services used in operating the business.
receiving the amount in cash. The total effect of these transactions is to increase cash by P150. 000.DOUBLE ENTRY BOOKKEEPING During the first month of operations Requijo Taxi earned fares of P150. At the time expenses of the business are incurred. In terms of the accounting equation. they are treated as offsets against revenue and hence as reduction in capital. 000 and to yield revenue in the same amount. 000 increases in capital. The revenue can be viewed as though it affected a P150. the effect of the receipt of cash for services performed follows: .
000 ±LIABILITIES ±CAPITAL + Requijo.000 + Cash 5.000 + Land P100.000 + Supplies P 60.Table 1.000 + Fares Earned P150.Cash P100.000 .000 3.Account Payable P10. +Account Payable P60. P150.000 .11 1. 4. Capital P500.000 . ±ASSETS + Cash P500.000 .Cash P 10. 2.
000. when the money is collected. In the transaction recorded. Cash was debited because of increase in assets while Fares Earned was credited because of increase in capital due to increase in revenue. At a later date. The total equities are also P700. a business may make sales of goods or services on account. with cash increasing and accounts receivable decreasing. . 000. Instead of requiring payment of cash at the time goods or services are sold or rendered. 000 (including the fare earned). the total assets amount to P700. In such cases. there is only an exchange of one asset for another. and Supplies P60. called an account receivable.DOUBLE ENTRY BOOKKEEPING After this transaction. 000. allowing customer to pay later. and the revenue is realized in exactly the same manner as if cash had been immediately received. 000 composed of Cash P540. the business acquires a claim against the customer. 000 composed of Accounts Payable P50. 000 and Capital of P650. An account receivable is as much an asset as cash. Land P100.
00 0 To record receipt of revenue from various customer. . Debit Credit Sept.Table 1.0 00 150.12 Date DESCRIPTION Post Ref. 30 Cash Fares Earned 150.
rent. P50. P10. miscellaneous expenses. P40. gas and oil. 000.DOUBLE ENTRY BOOKKEEPING TRANSACTION SIX Various business expenses incurred and paid during the month were as follow: wages. 000. 000. 000. P20. The effect of this group of transaction is to reduce cash and to reduce capital. as indicated in the following manner in the equation: .
000 P10. 5.Rent Expense P 20.000 + Cash P150.000 .13 ±ASSETS ±LIABILITIES 1. 4.Cash P 10.000 P100.000 .000 P100.Cash P120.Gas & Oil P 50.000 . +Account Payable + Supplies P 60.Table 1. + Cash .000 P60. Expense P 6.Wages Expense P 40.000 + Fares Earned P150. Capital P500.000 .Account Payable .000 .Misc. 2.000 ±CAPITAL + Requijo.Cash + Land P500. .000 .000 3.
000. 000. The total equities are also P580. 000. . 000 composed of Cash P420. and Supplies of P60. Land P100.DOUBLE ENTRY BOOKKEEPING After this transaction. the total asset amount to P580. 000. these items are closed to capital at the end of the accounting period. 000 composed of Accounts Payable P50. It should be remembered that revenue and expense accounts are temporary capital accounts. 000 and Capital of P530.
00 0 50.00 0 120. Debit Credit 40.00 0 20.Table 1. .00 0 10.00 0 Sept.14 Date DESCRIPTION Post Ref. 30 Wages Expense Rent Expense Gas and Oil Expense Miscellaneous Expense Cash To record payment of expenses.
. Rent Expense.DOUBLE ENTRY BOOKKEEPING In the transaction recorded. Gas and Oil Expense. Wages Expense. Miscellaneous Expense were debited because of decrease in capital due to increase in expenses while cash was credited because of decrease in assets.
000 composed of Cash P420. 000 (P60.P40. 000. 000 composed of Accounts Payable of P50. Land P100. the remainder of P20. 000. The total equities are also P560.DOUBLE ENTRY BOOKKEEPING TRANSACTION SEVEN At the end of the month it is determined that the cost of supplies on hand is P40. This deduction of P20. . 000. the total assets amount to P560. 000) have been used in the operations of the business. 000 in supplies and capital may be shown as follows: After this transaction. 000. 000. 000 and Capital of P510. 000. and Supplies of only P40.
000 . 2.000 P100.Cash P500. 5.000 P 10.Supplies P20.000 .Account Payable P10. 6. + Cash . Expense P 20.000 +Account Payable P60. P100.000 + Fares Earned P150.000 7.000 P120.000 -Wages Expense P 40. 4. Capital P500.15 ±ASSETS 1.000 ±LIABILITIES ±CAPITAL + Requijo.Table 1.000 -Supplies Expense P20. .000 .000 + Supplies P 60.Cash + Cash .000 P150.000 P 50.000 -Rent Expense -Gas & Oil -Misc.000 + Land 3.Cash P 10.
16 Date Particulars Supplies Expense Supplies To record part of the supplies used in the operation of the business Debit P20.000 .000 Credit P20.DOUBLE ENTRY BOOKKEEPING Table 1.
Debit 20.Date DESCRIPTION Post Ref. 30 Supplies Expense Supplies 20.000 To record part of supplies in the operation of the business .000 Credit Sept.
and “prepaid” denote asset. Note to Students – The terms “unused”.In the transaction recorded. “unexpired”. Supplies Expense was debited because of decrease in capital due to increase in expenses while Supplies (Unused) was credited because of decrease in assets. . “inventory”.
. Land P100. This transaction. 000 composed of Cash P400. The total equities are also P540. 000 in cash for his personnel use. Nick Requijo withdraws from the business P20. 000. and Supplies of P40. the total assets amount to P540. 000 withdrawals on the equation is as follows: After this transaction. which affects a decrease in cash and a decrease in capital. The effect of the P20. is the exact opposite of an investment in the business by the owner. 000. and it should be excluded from consideration in determining the net income from operations of the enterprise.DOUBLE ENTRY BOOKKEEPING TRANSACTION EIGHT At the end of the month. 000 and Capital P490. 000 composed of Accounts Payable P50. 000. The withdrawal is not a business expense. 000.
Supplies . Capital P500.Cash + Land 3.000 P 10. 4. + Supplies P 60.000 -Supplies Expense P20.000 -Wages Expense P 40.000 + Fares Earned P150. Drawing P20.Cash P20.Cash + Cash .000 P100.000 .000 . 5.000 .000 P 50. 6.Table 1. 8. + Cash .000 P120.000 P100. . P500.000 7.000 -Rent Expense -Gas & Oil -Misc.000 P20.000 2.000 P150. Expense P 20.Account Payable P10.17 ±ASSETS 1.000 ±LIABILITIES ±CAPITAL + Requijo.000 -Requijo.Cash P 10.000 +Account Payable P60.
000 20.000 . Debit Credit 20.DOUBLE ENTRY BOOKKEEPING Table 1. 30 Requijo. DESCRIPTION Sept. Drawing Cash To record withdrawal of owner.18 Date . Post Ref.
Drawing was debited because of decrease of capital due to withdrawal and cash was credited because of decreases in assets .In the transaction recorded. Requijo.
The equality of the two sides o the accounting equation is always maintained. The transactions are identified by transaction numbers and the balance of each item is shown after each transaction. . should be noted: The effect of every transaction can be stated in terms of increases and/or decreases in one or more of the accounting elements. which apply to all types of businesses.SUMMARY The business transactions of Requijo Taxi are summarized in tabular form below. The following observations.
19 .Table 1.
ACCOUNTING STATEMENTS BALANCE SHEET A kind of financial statement that list the assets. and capital of a business entity as of a specific dated. and capital at the end of the first month of operation appears on the last line of the summary in the preceding page. It is a kind of financial statement that shows the financial position of the business entity as of a given date. usually at the close of the last day of a month or of a year. Because of its similarity to the account. with the liability and capital section presented below the asset section. Another arrangement in common use lists the assets on the left and the liabilities and capital on the right. Minor arrangements of these data and the addition of a heading yield the balance sheet illustrated below. . is called the report form. liabilities. This form of balance sheet. usually the end of the year. a basic accounting device described earlier in the chapter. it is referred to as the account form of the balance sheet. liabilities. The amount of Requio Taxi’s assets.
Requijo Taxi Balance Sheet September 30, 19xx
Assets Cash Supplies Land Total Assets Liabilities Accounts Payable Capital Capital Total Liabilities and Capital
P400, 000 40, 000 100, 000 P540, 000
P 50, 000
490, 000 P540, 000
It is customary to begin the asset section with cash, which is followed by receivables, inventory (for trading business), supplies, prepaid expense items, and other assets that will be converted into cash or consumed in the near future. The assets of a relatively permanent nature, such as land, buildings, and equipment, follow in that order. Note that in the balance sheet presented the total assets and the total of liability and capital are equal. The balance sheet shows the liquidity (solvency) and stability of as enterprise. Solvency refers to the ability of the business to pay currently maturing liabilities while stability refers to the ability of the enterprise to pay maturing obligations and give return on the investment of the owner(s).
In the liabilities and capital section of the balance sheet, it is customary to present the liabilities first followed by capital. In the illustration for Requijo Taxi the liabilities are composed entirely of accounts payable. When there are two or more categories of liabilities, each should be listed and the total amount of liabilities presented in the following manner:
Liabilities Accounts Payable Notes Payable Salaries Payable Total Liabilities
P150, 000 50, 000 6, 000 P206, 000
INCOME STATEMENT A kind of financial statement that shows the summary of the revenue and the expenses of a business entity for a specific period of time, such as a month or a year. It is a kind of financial statement that shows result of business operations for a period of time, usually a year. Revenue earned and expenses incurred during the month were recorded in the equation as increases and decreases in capital, respectively. The details together with net income in the amount of P10, 000, are reported in the income statement presented below.
000 P 10. 000 140. 19xx Fares Earned Operating Expenses Gas & Oil Expense Wages Expense Rent Expense Supplies Expense Miscellaneous Expense Total Operating Expenses Net Income P150.Requio Taxi Income Statement For the Month Ended September 30. 000 40. 000 10. 000 20. 000 20. 000 P 50. 000 .
Miscellaneous expenses is usually shown as the last item regardless of the amount.The order in which the operating expenses are presented in the income statement varies among businesses. users will know if the operation of the business is profitable. beginning with the larger items. If the total net asset inflow is more than the net asset outflow. In the income statement. it is a net loss. . If the net asset outflow is more than the net asset inflow. One of the arrangements commonly followed is to list them in the order of size. Profitability refers to the ability of the business to increase owner’s capital. the resulting effect is net income.
. 000 of capital reported in the balance sheet at the end of the month reveals a decrease of P10. such a month or a year. This information is presented in the capital statement. 000.ACCOUNTING STATEMENTS CAPITAL STATEMENT (Statement of Owner’s Equity) It is a statement that shows the summary of the changes in capital of a business entity that have occurred during a specific period of time. 000 at the beginning of the month with the P490. which serves as a connecting link between the balance sheet and the income statement. This net decrease is composed of two significant changes in capital that occurred during the period: (1) the net income of P10. 000 by the owner. Comparison of the original investment of P500. and (2) a withdrawal of P20. 000.
Requijo Taxi Capital Statement For the Month Ended September 30. 000 P10. September 1. 19xx P500. 000 10. 000 20. 19xx Net Income Withdrawal Decrease in Capital Capital. 000 P490. September 30. 000 . 19xx Capital.
only partnership and corporation are allowed to use fiscal year. single proprietorship is allowed only to use calendar year.Basically. In the Philippines. . there are two accounting period. the calendar year and the fiscal year. A calendar year is a twelve-month period that ends on December 31 while the fiscal year is a twelve-month period that ends at the end of any month other than December.
(2) financing activities. This difference occurs because revenues and expenses may not be recorded at the same time that cash is received from customers and cash is paid to creditors. . and (3) investing activities. The net cash flow from operating activities will normally differ from the amount of net income for the period. Each of these sections is described below: Cash Flows form Operating Activities This section reports a summary of cash receipts and cash payments from operations.ACCOUNTING STATEMENTS STATEMENT OF CASH FLOWS The statement of cash flows consists of three sections: (1) operating activities.
Cash Flow from Investing Activities This section reports the cash transactions for the acquisition and sale of relatively long-term or permanent-type assets. and cash withdrawals by the owner. Preparing the statement of cash flows requires an understanding of concepts that we will not discuss in the chapter. The preparation of the statement of cash flow is required by pronouncement. . borrowing. But a simple illustration will be given to be able to illustrate how statement of cash flow is prepared. every year that the income statement is presented.ACCOUNTING STATEMENTS Cash Flows from Financing Activities This section reports the cash transactions related to cash investments by the owner.
Requijo Taxi Statement of Cash Flows For the Month Ended September 30. 000 50. 19xx Cash Flows from Operating Activities: Net Income Add: Increase in Supplies Total Less: Increase in Accounts Payable P10. 000 . 000 P50. 000 Cash Flows from Investing Activities Acquisition of Land Increase in Cash (100. 000 40. 000) P400. 000 Cash from Operating Activities Cash Flows from financing Activities Investment of Owner P 0 500.
CHAPTER 2 The Accounting Cycle .
The accounting procedures of most businesses involve certain basic steps that are accomplished in a given order.THE ACCOUNTING CYCLE The double entry accounting system provides a basic framework for the analysis of business activities. . This sequence of operations is known as the accounting cycle. Now we wish to go into greater detail about the accounting procedures used to account for the operations of a business during a specific period.
7. Gather documents and analyze transactions from source documents. 8. 6. Journalize reversing entries. 3. Prepare a trial balance. . Prepare adjusting entries and adjust the general ledger accounts. 5. Journalize closing entries. 4. Record transactions in journals. 9. 2. Prepare financial statements.THE ACCOUNTING CYCLE The steps of the accounting cycle are listed below: 1. Prepare post-closing trial balance. Post journal entries to general ledger accounts.
that is. . Business enterprises whose fiscal year ends in December are said to be on a calendar-year basis. Many enterprises prefer to have their accounting year coincide with their “natural” business year. the fiscal year ends when business is slow and inventory quantities are small and easy to count.The annual period adopted by a business enterprise is known as fiscal year.
and (5) a cash register tape listing a day’s over-the-counter sales to customers. the date of transaction. (2) a bank check indicating the payment of obligation.STEP 1 ANALYZING TRANSACTIONS FROM SOURCE DOCUMENTS Source documents are printed or written forms that generate when the enterprise engages in business transactions. Some examples of source documents are (1) a purchase or seller’s invoice showing evidence of a purchase of merchandise (or supplies) on account. . Even a brief source document usually specifies the peso amount involved. (3) a deposit slip showing the amount of funds turned over to the bank. and possibly the party dealing with the enterprise. (4) a cash receipt indicating funds received from a customer.
The following are good example of business papers commonly used in a business: . called business papers. Without business papers. it would be difficult to keep accurate record of business transactions. These business papers furnish the information needed in recording business transactions.BUSINESS PAPERS All business transactions are evidenced supported by printed forms or documents.
In a merchandising business. from the point of view of the buyer. from the point of vies of the seller. The sample of an invoice is given below. list of the articles sold or list of services rendered. a business form called invoice is prepared. it is a purchase invoice. and other information. The original of the invoice is given to the buyer of goods or services.BUSINESS PAPERS 1. . Invoices are prenumbered and usually made out in triplicate or quadruplicate depending upon the need of the business. The invoice shows the date of sale/service rendered. Sales or Service Invoice – after the sale of goods of service has taken place. the invoice is called sales invoice.
Table 2.1 .
. Official Receipt – official receipt are issued every time the business receives cash. the amount of cash received. the party from whom the cash is received. the explanation of the transaction.BUSINESS PAPERS 2. and the signature of the personnel who issued the receipt. The receipt shows the date on which the cash is received.
2 .Table 2.
These bills sent by these companies are called Statement of Account. A sample of statement of account is given below. light bills. Thus. M. . telephone bills. P. Statement of Accounts – many business like Meralco. and others send bills to their customers to inform them of the amount they have to pay.S.D. and many others. SMART Communication. Inc.. water bills.T.W. there are electric bills..S..L.BUSINESS PAPERS 3.
3 .Table 2.
the name if the depositor. the account number of the depositor. . Deposit slip is filled up every time money is deposited in the bank. the amount of cash deposited. Deposit Slip – at present.BUSINESS PAPERS 4. They deposit their money in the bank and the payment from their deposit are made by means of issuing checks. and the signature of the depositor. The deposit slip shows the date of the deposit . many businesses have current account or checking accounts with the banks.
After the bank have paid the payee. to pay the bearer or order a certain sum of money. Check – a check is an order to the bank signed by the person issuing it (the depositor). .BUSINESS PAPERS 5. the amount is deducted from the deposit of the person who issued the check.
name of the payee. address of the payee. and signature of the payee. . Cash Voucher – the cash voucher is the document prepared every time payment of an obligation is made. A sample of cash voucher is presented below. approval of payment\. The voucher is a business’ preprinted form that is prenumbered. and should include the following information. date of payment.BUSINESS PAPERS 6. description of the obligation to be paid. amount paid.
4 .Table 2.
If the claim is valid. the bank charges the depositor a debit memorandum. When buyer/customer is given allowance. like in restaurants. or discovered error in the invoice. Other Business papers – there are many other documents that are used by accountant to obtain information regarding business transactions. Strip of paper comes out as evidence of the money received by the cashier. cash registers are used. items ordered. A promissory note is a written promise to pay signed by one party. called the maker. and other information. returned the goods purchased. or the business may give it to its creditors. the seller of the goods or services should be notified. the seller of goods or services sends a credit memorandum which shows the amount by which account is reduced. The amount to be paid not including the interest. amount paid. When the depositor obtains a checkbook from the bank and the depositor did not pay it.BUSINESS PAPERS 7. The slip shows the date. to pay a certain specified sum to another. Promissory Notes may be received by the business from its debtors. 8. The note may or may not be interest bearing. Cash Register Slip – in many businesses. . The amount to be paid including the interest is called the maturity value. is called the face of the note.
Journals. . are tabular records in which business activities are analyzed in terms of debits and credits and recorded in chronological order before they are entered in the general ledger.STEP 2 JOURNALIZING Journalizing is the process of recording business transactions to the book of original entry called journals. or records of original entry. An accounting journal may be one of a group of special journals. or it may be a general journal.
For example. and purchases of goods or services.STEP 2 JOURNALIZING A special journal is designed to record a specific type of frequently occurring business transactions. a business with 100 employees who are paid every two weeks would probably use a special journal for payrolls. Other types of transactions that are often recorded in special journals are cash receipts. . Special journals are used to facilitate the recording of business transactions in the book of accounts. cash disbursements. sales of goods or services. at least 200 payroll transaction would be recorded. Because two paydays would normally occur in a month.
Transactions that do not occur often enough to warrant entry in a special journal are recorded in the general journal. All businesses. . have a general journal. even those using many special journals.STEP 2 JOURNALIZING In contrast to the special journals. the general journals (two-column journal) is a relatively simple record in which any type of business transaction may be recorded.
Write an explanation of the transaction below the account titles. Accounts credited are then recorded. Place the appropriate money amounts in the left-hand (debit) and right (credit) money columns.STEP 2 JOURNALIZING The procedure for recording entries in the general journal is as follows: Indicate the year. indented one-half inch from margin. disclosing the information necessary to understand the event being recorded. and date of the entry. . month. indented one-half inch to the right. Usually the year and month are rewritten only at the top of each journal or at the point where they change. Accounts debited are entered close to the left-hand margin and are traditionally recorded first. Enter titles of the accounts affected in the description column. The explanation should be as brief as possible.
We will explain the use of the column headed “Post Ref.STEP 2 JOURNALIZING Each transaction entered in the journal should stated in terms of equal debits and credits.” (posting reference) later in step 3 of the accounting cycle. The account titles cited in the description column should correspond to those used for the related general ledger accounts. we should leave a line blank between entries. To separate clearly the various entries. .
5 .Table 2.
.600 to Accounts Payable. Any number of accounts may appear in a compound entry.000 to Cash and P4. The debit of P9. The last journal entry in Exhibit 1-2 is an example of compound journal entry involving three accounts.600 to Test Equipment is offset by credits of P5.STEP 2 JOURNALIZING Compound Journal Entries A journal entry that involves more than just two accounts is called a compound entry. the total of the debit amounts must always equal the total of the credit amounts. but regardless of how many accounts are used.
both records contain error. consequently. . because erasures completely remove the original recording. the acceptance of erasures might allow someone to falsify accounting records. Often the person correcting the entry must place his or her initials near the correction. This facilitated any further inquiry about the nature of or reason for the correction.STEP 2 JOURNALIZING Correction of Journal Errors Certain procedures should be followed when errors are found in journal entries. a single line is drawn through the erroneous amount or accounts title. Once an erroneous journal entry has been transferred to the ledger accounts. and the correction is entered on the same line just above the error. If an error journal entry has not been transferred to the general ledger. other procedures are used. The recommended procedures for correcting this situation are discussed in step 3 below. As you might imagine. Errors should not be erased.
data from the journal that stresses the total of particular transaction (such as collection of accounts receivable) are transcribed to a ledger that stresses the total effect of many business transactions on a particular business variable (such as cash. . accounts receivable. This type of data is specifically needed for the preparation of financial statements.STEP 3 POSTING TO THE LEDGER After transactions have been journalized. Thus. the next step in the accounting cycle is to transfer the debits and credits in each journal entry to the appropriate general ledger accounts. and so on).
Both journals and accounts have posting reference columns.STEP 3 POSTING TO THE LEDGER Posting References It is important to be able to trace any entry in a ledger account to the journal from which it was posted. Consequently. Posting references appearing in ledger accounts identify the journal from which the related entry was recorded. accounting records use a system of references. The posting references in the journals and ledger accounts are entered when the journal entries are posted to the ledger accounts. . Entries in the posting reference columns of journals indicate the account to which the related debit and credit has been posted.
Exhibit 1-3 shows a chart of accounts for Dalay TV Service. the five major sections of the general ledger (assets.STEP 3 POSTING TO THE LEDGER Chart of Accounts A chart of accounts is usually prepared in order to facilitate the analysis of activities and the formulation of journal entries. and expenses). The account titles should be grouped by. . revenue. The chart of accounts is a list of the titles and numbers of all accounts found in the general ledger. and in order of. owner’s equity. liabilities. indicating the account numbers that will now be used.
Table 2.6 .
Exhibit 1-4 of Dalay TV Service’s December transactions from the general journal to the ledger accounts. and day) is entered in the appropriate account. Each debit entry is posted as follows: The date (year. as indicated in the journal’s money columns. . The amount is entered in the account as a debit or a credit. Note that this is the date of the journal entry. The account number is placed in the posting reference column of the journal. month. the year and month are restated only at the top of a new accounts page or at the point where they change. not necessarily the date of the actual posting. As with journals. The posting reference from the journal (both symbol and page number) is placed in the posting reference column of the ledger account.STEP 3 POSTING TO THE LEDGER Illustration Of Posting. and the new balance is calculated.
and the subsequent postings. the nature of the transaction the related journal entry. Exhibit 1-4 (see following pages) is a comprehensive illustration of the journalizing and posting of the December transactions of Dalay TV Service. Bear in mind that the account numbers in the posting reference of the journal are not entered when the journal entry in recorded. they are inserted when the entry is posted. . You should review each transaction in the illustration form. the total debit posted should equal the total credit posted.STEP 3 POSTING TO THE LEDGER Regardless of the type of journals or the number of entries involved.
7 .Table 2.
credit amounts in the journal are posted to the credit side of the corresponding accounts in the general ledger. Debit amount in the journal are posted to the debit side of the corresponding accounts in the general ledger. Therefore. it follows that the sum of the debit amounts and that of the credit amounts would also be equal in the ledger. . In like manner.STEP 3 POSTING TO THE LEDGER The foregoing should have been noted in the illustration. in every entry in the journal the debit amount equal the credit amount.
An error involving only the wrong amount being posted may be corrected by drawing a line through the incorrect amount. entering the correct amount above. slide (transplacement) which means that the decimal point was placed in wrong position.STEP 3 POSTING TO THE LEDGER Correction Erroneous Postings Even the most carefully kept accounts will occasionally contain posting errors. Some common errors are as follows: transposition (transfer of position) which means that there was a change in the position of numbers. 10. . When an amount has been posted to the wrong account.g. e. and initialing the correction.000 or 100. 936 was written as 396. the correction should be made with a journal entry.g. e.000. more detailed discussion on this matter is provided in the section of adjusting entry.000 was written as 1. however.
a semester. Preparatory to the setting of the trial balance. or a year. This facilitate the determination of the account balance after transactions have been posted. a test of the equality of the debit amounts and credit amounts in the general ledger is made. . It is usually prepared at the end of a month. each general ledger account with more than one entry on either side is footed. a quarter. Accounts with only one entry on either side need not be footed. The test is known as the trial balance. Periodically. Pencil footing means that the temporary total of the amounts of each side of the account is taken. a trial balance is prepared from the general ledger. Each of the debit totals and credit totals of the accounts are written (in pencil) just below the last entry on the particular side.STEP 4 PREPARATION OF A TRIAL BALANCE After the journal entries have been posted to the general ledger accounts.
When the debit total and credit total of an account are equal.STEP 4 PREPARATION OF A TRIAL BALANCE Open and Closed Accounts The difference between a debit total and a credit total of an account is called account balance. When the debit total and credit total of an account are not equal. the account is said to be an open account (with balance). . closed account ( without balance). the account is said to be.
and procedures have been complied accurately. The trial balance of totals is a list of all accounts (that have entry. . practices. For this reason. The preparation of the trial balance is more of a check on the arithmetical accuracy of the accounting records rather than an absolute guarantee that all generally accepted accounting principles. This type of trial balance is commonly used because it gives the detailed information needed in the other steps of the accounting cycle. Only open accounts are included when preparing trial balance of balances. it is called trial balance of totals.STEP 4 PREPARATION OF A TRIAL BALANCE Types of Trial Balance Trial balance could either be trial balance of totals or trial balance of balances. whether open or closed) in the general ledger with their total debit amounts and total credit amounts. The conventional way is the preparation of trial balance of balances rather than the trail balance of totals. closed accounts are excluded. The trial balance of balances is a list of the open accounts in the general ledger and their balances.
Heading should be written on top of the page. that is. If the account has a debit balance. Each line of the heading must be centered on the page. The heading shows the name of the business on the first line. If it has a credit balance. Trial balance on the second line. . and the date on the third line. Add each amount column to prove that the two totals are equal.STEP 4 PREPARATION OF A TRIAL BALANCE Steps in Preparing Trial Balance Prepare the trial balance in a two-column journal. draw lines under the totals. credit account titles should not be indented. write the balance on the credit amount column. All the account titles in the trial balance are written with the same margin from the left side of the page. Write the title of each open account on the Account Titles column. write the balance in the debit column of the trial balance. If the two totals are equal.
showing all the general ledger account balances in one report. makes it easier to review the accounts and determine which account balances need to be adjusted before preparing the financial statements. as is done in this trial balance. Table 2.STEP 4 PREPARATION OF A TRIAL BALANCE The trial balance of the Dalay TV Service at December 31 is shown in Exhibit 1-5.8 .
CHAPTER 3 Adjusting Entries and the Preparation of the Financial Statements .
only real and nominal accounts exist. nominal. Real accounts are the asset. after the accounts have been adjusted. Nominal accounts are the expense and income accounts. and the capital accounts. the real and nominal elements contained in the mixed accounts have been recorded in separate accounts. and mixed. .Adjusting Entries and the Preparation of the Financial Statements Before the books of accounts are adjusted at the end of the accounting period. liability. Thus. Mixed accounts are those which contain both real and nominal elements and which are adjusted at the end of the period so that their balances become either purely real or purely nominal. the accounts may be classified into real.
STEP 5: GATHERING DATA TO ADJUST THE ACCOUNTS AND PREPARATION OF A WORKSHEET ADJUSTING ENTRIES UNDER THE ACCRUAL BASIS OF ACCOUNTING The extent and nature of adjusting entries depend on the basis on which the books are kept by the enterprise. while expenses are recognized as expense on the period that it was incurred not on the period of payment. the cash basis and the accrual basis. . revenues are recognized are recognized as income on the period that revenue is earned not in the period of collection. There are generally two methods of keeping accounting records. Under the cash basis of accounting revenues are recognized as expense on the period of payment. In the accrual basis of account.
STEP 5: GATHERING DATA TO ADJUST THE ACCOUNTS AND PREPARATION OF A WORKSHEET The application of the accrual basis of accounting necessitates adjusting entries for the following seven items: Doubtful Accounts Depreciation Accrued Expenses Accrued Revenue Prepaid Expenses Unearned Revenue (Deferred Revenue) Ending Merchandise Inventory .
a better income measurement procedure. The loss which is a result of worthless or bad accounts is referred to as doubtful accounts expense. operations are charged with estimated expenses. it maybe inevitable that some of the receivables will not be collected. For proper income measurement. therefore.DOUBTFUL ACCOUNT DOUBTFUL ACCOUNTS When a business allows customers to avail services on credit. . Using this procedure. This produces a better matching of revenues and expenses and. it is important that a provision for the uncollectible accounts be provided during the same period that the income from services is recognized. and receivables are reduced by means of a contra asset account – Allowance for Doubtful Accounts.
DOUBTFUL ACCOUNT The provision for doubtful accounts is based on estimate and is computed usually as a percentage of credit revenues or as a percentage of outstanding accounts receivable. The purposes of the adjustment are: (1) to record the doubtful account expense during the same period that the related revenue is recognized. . and (2) to report the accounts receivable at the approximate collectible amount.
DOUBTFUL ACCOUNT ADJUSTING ENTRY FOR DOUBTFUL ACCOUNTS The pro-forma adjusting journal entry for the estimated loss on uncollectible account is: Table 3.1 .
2 . let us assume the following data as part of the trial balance of an enterprise rendering repair services for home appliances: Table 3.To illustrate.
Percentage Revenue Assume it was provided that the expected uncollectible account during the year would be equal to 1% of the Service Income earned during the period, the adjusting entry for doubtful accounts would be:
Percentage Receivable When the provision for doubtful accounts is based on percentage of receivable, it may based on the following estimates of computation: (1) allowance for doubtful accounts increased (decreased) by percentage of outstanding receivable, or (2) allowance for doubtful accounts increased (decreased) to percentage of outstanding receivable. It should be noted that the difference of the two methods is only the words by and to, but it should be remembered because it makes a lot of difference.
Allowance for Doubtful Accounts Increased BY percentage of receivable Assume that it was agreed that the allowance for doubtful accounts will be increased by 1% of the outstanding receivable. The adjusting journal entry will be: Table 3.4
Note that if the allowance for doubtful accounts will be increased by percentage of receivable, the doubtful accounts expense is computed by multiplying the receivable by the given percentage.
DOUBTFUL ACCOUNT Allowance for Doubtful Accounts Increase TO percentage of receivable Assume that it was agreed that the allowance for doubtful accounts will be increased to 1% of the outstanding receivable. The adjusting journal entry will be: .
5 .Table 3.
the doubtful account expense is computed by multiplying the receivable by the given percentage to compute for the desired balance of the allowance after adjustment. . then the balance before the adjustment is deducted from it to arrive at the amount of doubtful accounts to be provided.DOUBTFUL ACCOUNT Computation: Balance after adjustment (P50.000 x 1%) Less: Balance before adjustment Amount of adjustment for Doubtful Accounts P500 200 300 Note that if the allowance for doubtful account will be increased to percentage of receivable.
Proper accounting requires the systematic allocation (assignment) of the cost of the assets over its estimated useful life. Depreciation is the assignment of part of the cost of the asset over the period it was used to properly match the revenue and cost of that period. These assets help generate revenue for the entity. it is basically paying in advance for the usefulness of such asset. furniture. machines. and other long-life assets. The following three factors are considered in the computation of depreciation: Cost of the fixed asset The estimated useful life The estimated scrap value of the asset .DEPRECIATION DEPRECIATION When the business entity acquired tangible fixed assets such as delivery equipment. Each accounting period in which such assets are used should share a portion of their cost as expense. building. computer.
31 of Asset xxx Accumulated Depreciation-Name of Asset To record depreciation for the period xxx . Credi Debit t Depreciation Expense-Name Dec.Table 3.6 Adjusting Entry for Depreciation Date 19xx DESCRIPTION Post Ref.
At the end of the year. The annual depreciation is computed as follows: Formula to Compute Annual Depreciation: Cost of Asset . 000 after its useful life. assume that an equipment was purchased on January 1 of the year for P1.000.DEPRECIATION The account Depreciation is an expense account while the account Accumulated Depreciation is a contra asset account which is deducted from the appropriate fixed asset account when preparing a balance sheet.000. annual depreciation should be adjusted. It has an estimated life of 10 years and a scrap value of P100. before the financial statements are prepared. To illustrate.Scrap Value Estimated Useful Life .
000 90. 000 ÷ 10 years ). 31 Equipment Accumulated Depreciation-Equipment To record depreciation for the period 90. the depreciation to be provided would amount to P90.7 Date 19xx DESCRIPTION Post Ref.DEPRECIATION At the end of the accounting period.000 – P100. 000 (P1. the adjustment would be: Table 3.000.000 . Accordingly. Debit Credit Depreciation ExpenseDec.
This is the simplest and the most commonly used method in computing depreciation. .The method used in computing depreciation for the equipment is the straight-line method.
the equipment would be presented in the balance sheet as follows: Equipment Less: Accumulated Depreciation Book Value P1. The difference between the cost of the fixed asset and the accumulated depreciation is the book value of the asset. In the illustration provided above.000 90. .000 The accumulated depreciation account is known as the contra-asset account.DEPRECIATION Depreciation expense is the assigned portion of the cost of the fixed asset to the periods during which it is used.000. Accumulated depreciation is the total accumulated amount of depreciation that has been recorded for the fixed asset. The book value represent the portion of the cost of the fixed asset that has not yet been recorded as depreciation expense. since it is presented as a deduction from the asset account.000 P 910.
How much depreciation should be provided as of December 31 of the year? Formula to Compute Fractional Depreciation Cost of Asset – Scrap Value Estimated Useful Life x ½ = Fractional Depreciation . Let us assume now that the equipment was acquired only July 1 (not January 1) and was used only for six months.DEPRECIATION Fractional Depreciation In the illustration given. it was assumed that the asset is used for one year.
000 – P100. 000 (P1. 000 ÷ 10 years x ½ ).000. the depreciation to be provided at the end of the year would be P45.DEPRECIATION Following the given formula. The adjusting entry to record the depreciation of the above equipment would be: .
00 0 45.8 Post Ref. 45.000 .Table 3. 1 Equipment Accumulated Depreciation-Equipment To record depreciation for six months. Debit Credit Date 19xx DESCRIPTION 3 Depreciation ExpenseDec.
ACCRUED EXPENSES Accrued Expenses are expenses already incurred but not yet paid. salaries and many others. Usually expenses is recorded when payment is made. The accrued expenses are usually incurred on various continuing services provided to the business such as electricity. This situation creates understatement of expenses on the income statement which will overstate the net income and understate liabilities in the balance sheet. rental. an adjustment is needed to up-date the accounts for proper financial statement presentation.ACCRUED EXPENSES 3. If at the end of the period the expense is not yet paid. interest. The business usually incurs expenses but may take time before it could pay them. telephone. Adjusting Entry for Accrued Expenses The pro-forma adjusting journal entry for accrued expense is: . Consequently. taxes. water. it may therefore still be unrecorded.
000 . 31 An Expense Account (Name of expense) Payable To record accrued expense for the period Post Ref.9 Date DESCRIPTION 19xx Dec.Table 3. Debit Credit 20. 000 20.
October rental should be paid by November 5. an adjusting entry as follows is necessary: . 000 per month. Assume Nikko Jay Service Co. At December 31. is renting a shop location at the rate of P20. because rent expense is understated and liability is understated too. November rental should be paid December 5. Its lease agreement provides that payment of rental should be made on or before the 5th day of every month for the month after the facility was used. when the business will prepare the financial statements. Meaning. Correspondingly.ACCRUED EXPENSES Illustration. the December rental is still unpaid although they have use the facility. and so on.
31 Rent Expense Rent Payable To record accrued expense for the period . Debit Credit 20.Table 3.10 Date 19xx DESCRIPTION Post Ref. 000 Dec. 000 20.
ACCRUED REVENUE Accrued revenues are revenue already earned but collection has not yet been received. Many kinds of revenues like revenue from interest, revenue from commission, from rental on property, are recorded only when received. It goes to say, therefore, that when no collection is received these revenues are not yet recorded. This results in the understatement of revenue account on the income statement and subsequently understatement of receivable account in the balance sheet. Consequently, an adjusting entry is necessary to up-date and correct the accounts to be able to present reliable financial statements. Adjusting Entry for Accrued Revenue The pro-forma adjusting entry for accrued revenue is:
Date 19xx DESCRIPTION Post Ref. Debit Credit
(Name of Income) Dec. 31 Receivable Revenue Account To record accrued revenue for the period
Illustration: In the preceding illustration for Nikko Jay Co. above, was analyzed on the point of view of the lessee. Let us now analyze it from the point of view of the owner of the owner of the property. If you were the owner of the property, at the end of December, you have already earned your rent revenue because they have already used the property but you have not received their payment. This is a good example of accrued revenue. For this illustration, the necessary adjusting entry is:
Date 19xx DESCRIPTION
3 Dec. 1 Rent Receivable Rent Revenue To record accrued rent for December.
PREPAID EXPENSES Prepaid expenses are expenses already paid but not yet incurred. Expenses could be paid in advance. Some example of prepaid expenses are rent paid in advance, advertising paid in advance, interest on discounted notes, purchase of supplies, and insurance premium paid on the beginning of the policy period. Prepaid expenses are assets, not expenses. The terms prepaid, unexpired, unused, on hand, and inventory denotes assets. At the end of the accounting period, when the portion of these assets have been used or expired, they become expense that requires adjustment.
Advance payment of expenses (Prepaid expense) could be recorded in the accounting records under any one of the two methods: (1) the asset method, and (2) the expense method.
the asset recorded could have been partly used up. At the end of the accounting period. rendering the asset account debited to be overstated while the expense account is understated.PREPAID EXPENSES The Asset Method The asset method is the procedure of recording the advance payment of expenses by debiting an asset account. Entry for Prepaid Expenses using Asset Method The journal entry to record the payment of expenses using the asset method is: . This situation requires the preparation of an adjusting entry to correct and up-date the accounts for proper financial statement presentation.
it is called asset method.Table 3. etc. For this reason.) Cash To record advance payment of expenses. .13 Date 19xx Asset Account (Prepaid. Sept. Debit Credit Note that asset account is debited to record the advance payment of expenses. 1 Unused. xxx xxx DESCRIPTION Post Ref.
PREPAID EXPENSES Adjusting Entry for Prepaid Expenses using Asset Method The pro-forma adjusting journal entry for prepaid using the asset method is: .
etc.Table 3.14 Date 19xx DESCRIPTION Post Ref. 1 Expense Account Asset Account (Prepaid.) To record unexpired portion of an asset for the period. xxx xxx . Credi Debit t 3 Dec. Unused.
00 0 . If the asset method of recording is used.0 00 Sept.PREPAID EXPENSES Illustration. Ma. 000 to Ace Advertising Company. 1 Prepaid Advertising Cash To record advance payment of advertising. Assume that on September 1 if the current year. then the entry on September 1 will be: Table 3. Gina Trucking Service paid six-month advertising amounting to P120. Debit Credit 120. 120.15 Date 19xx DESCRIPTION Post Ref.
000. 000 (P20. 000 (P120. the recorded prepaid advertising is P120. At December 31. the end of the accounting period. when it should only be P40. . 000 ÷ 6). 000 x 4 months) of the advertising applicable to the months of September to December have expired while P40. 000 x 2 months) the portion applicable to the months of January and February (next year) remains unused. At December 31. P80.Analysis. The rate of advertising per month is P20. 000. 000 (P20.
the adjusting entry should be: Table 3. 000 80. At December 31. 000. Debit Credit 80. 000 Dec. 31 Advertising Expense Prepaid Advertising To record advertising expense incurred for the period .16 Date 19xx DESCRIPTION Post Ref.PREPAID EXPENSES The asset is overstated by P80. the same amount of understatement of the advertising expense account.
. that the account debited in the original entry (upon payment) is the account credited on the adjustment.It should be noticed in the analysis. It is so because the account debited in the recording of the payment is overstated at the end of the period.
This situation requires the preparation of adjusting entry to correct and up-date the accounts for proper financial statement presentation. the expense recorded could not have been used up. Original Entry for Prepaid Expenses using Expense Method The journal entry to record the payment of expenses using the expense method is: . At the end of the accounting period.PREPAID EXPENSES The Expense Method The expense method is the procedure of recording the advance payment of expenses by debiting an expense account. rendering the expense account debited to be overstated while the asset is account understated.
Table 3. it is call expense method. Debit Credit xxx xxx . For this reason. Post Ref. 1 Expense Account Cash To record advance payment of expenses Note that expense account is debited to record the advance payment of expenses.17 Date DESCRIPTION 19xx Sept.
PREPAID EXPENSES Adjusting Entry for Prepaid Expenses using Expense Method The pro-forma adjusting journal entry for prepaid expenses using the expense method is: Table 3.18 .
) Expense Account To record Unexpired expense during the period xxx xxx . Dec. Credi Debit t 3 Asset Account (Prepaid.Date 19xx DESCRIPTION Post Ref. etc. 1 Unused.
19 . We will be using the same data for asset method. then the entry for September 1 would be: Table 3. 000 advertising paid by Ma. Gina Trucking Service to Ace Advertiser Company for the period September 1 (current year) to February (next year).PREPAID EXPENSES Illustration. If the expense method of recording is used. on the P120.
1 Advertising Expense Cash To record advance payment of Advertising 120.Date 19xx DESCRIPTION Post Ref.00 0 . Debit Credit Sept.00 0 120.
because the expense account was debited and the P120. But.20 . Table 3.Analysis. The analysis made using the asset method is still valid. the expense account is overstated by P40. the portion applicable to the months of January and February (next year). It is the same amount of understatement of the asset (prepaid) account. 000 is not all used up. 000.
00 0 Dec. 31 Prepaid Advertising Advertising Expense To record the amount of unexpired advertising at the end of the period. Debit Credit 40. 40.000 .Date 19xx DESCRIPTION Post Ref.
In the two analysis provided. The amounts represent the correct balances in our analysis. it should be noted that after the adjustment have been recorded in the accounts the resulting balance for both accounts will be the same. that the account debited in the original entry (upon payment) is the account credited on the adjustment. both for the asset method and the expense method. It is so because the account debited in the recording of the payment is overstated at the end of the period. . 000 for Prepaid Advertising.PREPAID EXPENSES It should be noticed in the analysis. P80. 000 for Advertising Expense and P40.
When such revenues are received in advance. the enterprise has an obligation to perform services (or delivery of goods).UNEARNED REVENUE (Deferred Revenue) Unearned revenues are revenues already received (collected) but not yet earned. advance receipt of revenue (Unearned revenue) may be recorded in the accounting records under any one of the two methods: Liability Methods Revenue Methods . Like in prepaid expenses. The liability is referred to as unearned revenue. Sometimes the business receives payment for the services (or goods) before service is actually rendered.
the liability recorded could have been partially earned rendering the liability account credited to be overstated and the revenue account understated. Original Entry for Unearned Revenue using Liability Method The journal entry to record the receipt of revenue in advance using the liability method is: . At the end of the accounting period.UNEARNED REVENUE (Deferred Revenue) The Liability Method The liability method is the procedure of recording the advance receipt of revenue by crediting a liability account. This situation requires the preparation of adjusting entry to correct and up-date the accounts for proper financial statement presentation.
Table 3. Debit Credit xxx .21 Date 19xx 1 Aug. Cash Unearned (Name of Revenue) Account To record advance receipt of revenue xxx DESCRIPTION Post Ref.
UNEARNED REVENUE (Deferred Revenue) Adjusting Entry for Unearned Revenue using Liability Method The pro-forma adjusting journal entry for unearned revenue using the liability method is: Table 3.22 .
22 Date 19xx Liability (Unearned) Dec. Debit Credit xxx xxx .Table 3. 31 Account Revenue Account To record revenue earned for the period. DESCRIPTION Post Ref.
If the liability method is used. Assume that on August 1. representing 6-month advance rental.UNEARNED REVENUE (Deferred Revenue) Illustration. 000 from a tenant. covering the period from August (current year) to January (next year). the entry on August 1 would be: . the business received P72.
23 Date DESCRIPTION 19xx Aug. Post Ref.000 Credit 72. Debit 72. 1 Cash Unearned Rent To record advance receipt of revenue.000 .Table 3.
the end of the accounting period. 000. that the account credited in the original entry (upon receipt of revenue) is the account debited on the adjustment. the adjusting entry should be: It should be noted in the analysis. At December 31. The rate of the monthly rental is P12. the recorded unearned rent per record before any adjustment is P72. The liability account is overstated by P60. 000 ÷ 6). At December 31. 000 the rent applicable to the month of January (next year) remains unearned. It is so because the account credited in the recording of the receipt of revenue is overstated at the end of the period.UNEARNED REVENUE (Deferred Revenue) Analysis. the same amount of understatement of the rent revenue account. 000 (P72. P60. 000. . 000 x 5 months) of the rent applicable to the months of August to December have been earned while P12. At December 31. 000 (P12. 000. when it should only be P12.
000 .000 Credit 60.Table 3.24 Date DESCRIPTION 19xx Dec. 31 Unearned Rent Rent Revenue To record revenue earned during the period Post Ref. Debit 60.
This situation requires the preparation of an adjusting entry to correct and up-date the accounts for proper financial statement presentation. rendering the revenue account credited to be overstated and the liability account understated. Original Entry for Unearned Revenue using Revenue Method The journal entry to record the receipt of revenue in advance using the revenue method is: . the revenue recorded could not have been all earned.UNEARNED REVENUE (Deferred Revenue) The Revenue Method The revenue method is the procedure of recording the advance receipt of revenue by crediting a revenue account. At the end of the accounting period.
Table 3. Debit Credit xxx xxx . Post Ref. 1 Cash Revenue Account To record advance receipt of revenue.25 Date DESCRIPTION 19xx Aug.
UNEARNED REVENUE (Deferred Revenue) Adjusting Entry for Unearned Revenue using Revenue Method The pro-forma adjusting journal entry for unearned revenue using the revenue method is: .
Debit Credit 3 Dec. 1 Revenue Account Unearned (Name of Revenue) Account To record revenue unearned at the end of the period xxx xxx .Table 3.26 Date 19xx DESCRIPTION Post Ref.
27 Date DESCRIPTION 19xx Dec. the entry would be: Table 3. Applying the same example in the liability method. if the revenue method is used. representing a 6-month advance rental covering the period from August (current year) to January (next year). that on August 1.Illustration. 000 from a tenant. 31 Revenue Account Unearned (Name of Revenue) Account To record revenue unearned at the end of the period Post Ref. Debit Credit xxx xxx . the business received P72.
000 x 5 months) of the rent applicable for the months of August to December have been earned while P12. 000. the end of the accounting period. At December 31.UNEARNED REVENUE (Deferred Revenue) Analysis. 000. 000 (P72. the same amount of understatement of the unearned rent account. when it should only be P60. The rate of the monthly rental is P12. 000 the rent applicable to the months of January (next year) remains unearned. At December 31. The revenue account is overstated by P12. At December 31. 000 (P12. the recorded rent revenue before any adjustment is P72. 000 ÷ 6). 000. the adjusting entry should be: . only P60.
000 . Debit Credit 12.Table 3.28 Date 19xx DESCRIPTION Post Ref.00 0 3 Dec. 1 Rent Revenue Unearned Rent To record revenue unearned at the end of the period 12.
UNEARNED REVENUE (Deferred Revenue) It should be noticed in the analysis. . that the account credited in the original entry (upon receipt of revenue) is the account debited on the adjustment. It is so because the account credited in the recording of the receipt of revenue is overstated at the end of the period.
PREPARATION OF THE WORK SHEET The work sheet is also a tool used by the accountant to facilitate the preparation of adjusting entries. It is a columnar paper which can be used for the following purposes: Compute adjustments and the adjusted balances of the accounts. Classify the accounts into income statement accounts (nominal accounts) and balance sheet accounts (real accounts) for financial statements preparation. and financial statements. closing entries. Determine net income (or loss). .
PREPARATION OF THE WORK SHEET Accountants often use work sheet to facilitate preparation of financial statements. Using the work sheet. a multi-column document which provides efficient way of summarizing necessary data for the financial statements preparation. adjustments must therefore be posted to the general ledger to bring the balances to correct amounts. the accountant is assured of the mathematical accuracy of his work. If not. the trial balance may be prepared on a work sheet (may be called analysis sheet). To facilitate such work. . The financial statements maybe prepared directly from the trial balance if the business has relatively few accounts and if it shows the correct balances of the accounts.
PREPARATION OF THE WORK SHEET The following steps are followed when preparing the work sheet: Place the heading at the center of the columnar form: Name of the Company. extend the adjusted balances of all accounts to the adjusted trial balance columns. Prove equality of the debit and credit amounts. See to it that the debit and credit totals are balanced. double-rule if equal. in the appropriate account title column. Place the trial balance on the first section (first two column). Work Sheet. New account titles are placed below. Enter all the adjustments in the next section (third and fourth columns). . and. the period covered. List the accounts as they appear in the general ledger. Complete the next section (fifth and sixth columns). Use numbers or letters to identify each entry.
Determines the net income (or net loss) by analyzing the column totals of the income statement columns. and to the fifth section (ninth and tenth columns) all balance sheet accounts (real accounts). If the debit column total exceed the credit column total.PREPARATION OF THE WORK SHEET Complete the statement sections. it represent net income. it represent a net loss. If the credit column total exceed the debit column total. . extend the fourth section (seventh and eight columns) all income statement accounts (nominal accounts).
Sagum Laboratory began operation on January 1.PREPARATION OF THE WORK SHEET Illustrative Problem – Preparation of Work Sheet. Its accounting period ends December 31 and the accounts are adjusted annually on this date. Its unadjusted trial balance at December 31. 19xx. 19xx. is as follows: . and provides various diagnostic services for physicians and clinics.
000 220. 000 60. 300 6. Capital Diagnostic Fees Salaries and Wages Expense Rent Expense Total Debit 1. 000 3. 200 31. 000 110. 000 270. 000 9. 500 . 000 __________________ 397. 500 397. 19xx Account Titles Credit Cash Accounts Receivable Medical Supplies Prepaid Insurance Laboratory Equipment Accumulated Depreciation – Laboratory Equipment Accounts Payable Unearned Diagnostic Fees Cecil Sagum. 000 58.Sagum Laboratory Trial Balance December 31. 000 4.
29 .Table 3.
Basically. the formal financial statements are prepared. . The balance sheet is that kind of financial statement that shows the financial position of the business as of a given date. the nature and form of the income statement and the balance sheet have been taken up in Chapter 1.STEP 6 PREPARATION OF FINANCIAL STATEMENTS After the worksheet has been completed. The income statement is the kind of financial statement that shows results of operations for a period of time. The financial statement of Sagum Laboratory will be prepared with the aid of a worksheet in this chapter. usually a year. The kind of financial statements have been illustrated. there are two principal accounting statements for a sole proprietorship: the balance sheet and the income statement. usually the end of the accounting period.
all revenues are grouped together in one section.STEP 6 PREPARATION OF FINANCIAL STATEMENTS Kinds of Income Statement Single-step form – in this type of income statement. The net income or net loss are determined by deducting the total expenses from the total revenue. Multi-step form Forms of Balance Sheet Report Form . and all expenses in another section.a balance sheet that presents the assets on the top section and the liabilities and owner’s equity at the bottom section of the report. .
500 P 20. Plant. and Equipment Total Assets LIABILITIES Current Liabilities Accounts Payable Unearned Diagnostic Fees Salaries Payable Rent Payable Total Current Liabilities OWNER’S EQUITY Cecil Sagum. Plant.900 P 6.000 180. Capital (per Capital Statement) Total Liabilities and Owner’s Equity P 1.000 P 9.200 P 300 P 8.700 .000 P 90.000 P 6.000 600 2.100 1.Sagum Laboratory Balance Sheet As of December 31. 19xx ASSETS Current Assets Cash Accounts Receivable Less: Allowances for Doubtful Depreciation Medical Supplies Prepaid Insurance Total Current Assets Property. and Equipment Laboratory Equipment Less: Accumulated Depreciation Total Property.000 P 200.300 P 4.700 P 3.700 194.000 P 200.700 P 270.
Account Form – the balance sheet that is presented in account form presents the assets o the left side and the liabilities and owner’s equity on the right side of the statement. 19xx ASSETS Total Current Assets Total Property. Plant. Name of Company Balance Sheet As of December 31. and Equipment Total Assets xxx xxx xxx LIABILITIES AND OWNER’S EQUITY Total Liabilities Owner’s Equity Total Liabilities and owner’s Equity xxx xxx xxx .
the total current liabilities are deducted from the total current assets to arrive at the working capital. the total of the property and equipment is added to working capital and the long-term liabilities are deducted to arrive at the net assets and owner’s equity. In the second section. In the first section.STEP 6 PREPARATION OF FINANCIAL STATEMENTS Other method of Presentation There is a Form of balance sheet presentation that gives emphasis on the current working capital position of the business. the financial position form. .
Current Assets includes cash and other assets that will be converted into cash or used up by the business . assets are normally classified in the balance sheet into the (1) current. plus cash on hand consisting of currency. drafts. It is evidenced by an oral promise to pay. These are items without restriction and available for current operations of the business. An example is prepaid insurance. It is an asset awaiting assignment to expense.STEP 6 PREPARATION OF FINANCIAL STATEMENTS Classification of Assets For a service business. It includes deposits in banks available for current operations at the balance sheet date. and money orders. Cash is any medium of exchange that the bank accepts at face value. whichever is longer. . Notes Receivable is same as account receivable except that the customer or client gives a promissory note to evidence its obligation. and (2) property and equipment. Prepaid Expense is also known as Deferred Expenses which is the expenses paid in advance. undeposited checks. Accounts Receivable is the amount owed to a business by customers (clients).
and computer used either in the office. Equipments are those items refer to the filing cabinet. and other fixtures used in the business. such as office building.STEP 6 PREPARATION OF FINANCIAL STATEMENTS Property. cabinet. . cash register. cars. motorcycles. calculator. Land is the ground on which the business buildings of the enterprise are located. Furnitures and Fixtures refers to the tables and chairs. adding machine. counter. Building is an edifice or structures constructed on the land. store. and other transportation vehicles used for delivery purposes. or for delivery. also called plant assets or fixed assets. Delivery Equipment refers to trucks. plant and equipment is an asset acquired for use in a business rather than for resale. Land can also be used for outside storage space or a parking lot.
. Salaries and Wages Payable are amounts owed to employees for services rendered but for which payment has not been made at the balance sheet date.STEP 6 PREPARATION OF FINANCIAL STATEMENTS Classifications of Liabilities Current Liabilities are debts usually due within one year. usually more than one year. Long-term Liabilities are liabilities not due for a relatively long period of time. Unearned Revenue or Deferred Revenue is payments for services or sale of goods that are received in advance from customer or client. Interest Payable arises when interest has been incurred but not yet paid at the balance sheet date because the amount is not due on Notes Payable until later. Notes Payable are unconditional written promises by an enterprise to pay certain sum of money at a determinate future date. the payment of which normally will require the use of current assets. Accounts Payable is the amount owed by the business to creditors for the items or services purchased from them.
Income Summary is an account used in the closing process for transferring the revenue and expense account balances to the owner’s capital account at the end of the period.STEP 6 PREPARATION OF FINANCIAL STATEMENTS Classification of Owner’s Equity Owner’s Equity is the claim of the owner over the asset of the business. Owner’s Capital is the investment of the owner of the business. . Owner’s Drawing is the withdrawals of the owner on the capital and earnings of the business. It is residual claim because it will only be satisfied after the payment of the obligation of the business to its creditors.
and retainer’s fee or audit fee for CPAs. Other Revenues are revenues derived from sources other than the principal line of service rendered like interest. and commission. rent. . medical fee for doctors.STEP 6 PREPARATION OF FINANCIAL STATEMENTS Classifications of Revenue Professional Fees is the income or remuneration received by professionals from rendering services to clients. The fee could be described depending upon the line of professional like legal fee for lawyers. dental fee for dentist.
rent. Rent Expenses are expenses incurred for the use of rented facility like building. Insurance Expense is payment made for the premium of an insurance policy.STEP 6 PREPARATION OF FINANCIAL STATEMENTS Classification of Operating Expenses Operating Expense is the cost of the services that are used or consumed in the operation of the business or practice of profession like salaries and wages. Salaries and Wages Expenses are payments made to employees for the services they rendered to the business. Utilities Expense refers to the various expenses incurred by the business on water. Advertising Expense is payment made to the advertisement of the business or practice of the profession. supplies. pencils. utilities. and other means of communication to customers or clients. . envelopes. pens and other necessary supplies used in the business. insurance and others. Supplies Expense is the cost office stationery. telephone. taxes. electricity.
CHAPTER 4 Completing the Accounting Cycle The Closing Process .
they are generally called temporary accounts or nominal accounts. the revenue and expense account balances are reported in the income statement. the balances of these accounts should be zero at the beginning of the next period. . Because the balances of revenue and expense accounts are not carried forward. The balances of the accounts reported in the balance sheet are carried forward from year to year. The expenses are deducted from revenues to determine the net income or net loss during the period. Since revenues and expenses are reported for each period. Because of their permanent nature. The zero balances allow the next period’s revenues and expenses to be recorded separately from the preceding period.COMPLETING THE ACCOUNTING CYCLE THE CLOSING PROCESS Nature of closing process At the end of the accounting period. balance sheet accounts are called real accounts.
Thus the owner’s drawing account is also a temporary account. Since withdrawals are reported for each period.COMPLETING THE ACCOUNTING CYCLE THE CLOSING PROCESS How are the end-of-period of balances of temporary accounts converted to zero? To begin. . At the end of an accounting period. the revenue and expense account balances are transferred to an account called Income Summary. the balance of the owner’s drawing accounts should be zero at the beginning of the next period. Its balance is transferred to the owner’s capita. The owner’s withdrawal are deducted from the net income or added to the net loss for the period to determine the net increase or decrease in owner’ equity. The balance of Income Summary is then transferred owner’ capital account and the balance of the owner’s drawing account is transferred to owner’s capital accounts. account at the end of the period. the balance of the owner’s drawing account is reported on the statement of owner’s capital (statement of owner’s equity).
STEP 7 JOURNALIZING AND POSTING CLOSING ENTRIES Revenue. The transfer process is called closing process. Crediting all nominal accounts with debit balances (expenses). (The accounts debited and credited are reversed if there is a net loss). . the drawing account is transferred to capital account by debiting the capital account and crediting the drawing account for the same amount. these entries are as follows: Debiting all nominal accounts with credit balances (revenues) and crediting the total to Income Summary account. and drawing account balances are transferred to the owner’s equity account by a series of entries called closing entries. For sole proprietorship. and debiting the total to Income Summary. Four entries are required at the end of the period. expense. the Net Income is transferred to the Capital account by debiting the Income Summary for the amount of its balance and the Capital account is credited for the same amount.
STEP 7 JOURNALIZING AND POSTING CLOSING ENTRIES The account titles and balances in preparing the closing entries may be obtained from either the work sheet. and or ledger. The amount for the third entry is the net income or net loss appearing at the bottom of the work sheet. the date for the first two entries appeared in the Income Statement columns. The closing entries for Sagum Laboratory (See illustration on Chapter 3) is shown below: Table 4.1 . the statement of owner’s equity. The drawing account balance appears in the Balance Sheet debit column of the work sheet. the income statement. If a work sheet is used.
Table 4.1 .
In addition. It should be noted that Income Summary is used only at the end of the period. At the end of the closing process. the balance in the capital account will agree with the amount reported on the statement of owner’s equity and the balance sheet. the next period’s transaction for the revenue. expense. If the books will still be used in the next accounting period. the revenue. Profit and Loss Summary. Income Summary has no balance. and Income and Expense Summary. and drawing will be posted directly below the closing entry. . expense.STEP 7 JOURNALIZING AND POSTING CLOSING ENTRIES After the closing entries have been posted to the ledger. it is sometimes called a clearing account. At the beginning of the closing process. Because income summary has the effect of clearing the revenue and expense accounts of their balances. and drawing accounts will have zero balances. Income Summary will be debited and credited for various amounts. During the closing process. Income Summary will again have no balance. a line should be inserted in both balance columns opposite the final entry. Balancing and ruling After the closing process. Other titles used for this account include Revenue and Expense Summary.
The accounts and amounts should agree exactly with the accounts and amounts listed on the balance sheet at the end of the period. Table 4.STEP 8 POST-CLOSING TRIAL BALANCE The last accounting procedure for a period is to prepare a trial balance after the closing entries have been posted. The purpose of post-closing (after closing) trial balance is to make sure that the ledger is in balance at the beginning of the next period. The post-closing trial balance of Sagum Laboratory is shown in Exhibit 4-1 below.2 .
Table 4.2 .
STEP 8 POST-CLOSING TRIAL BALANCE Instead of preparing a formal post-closing balance. . The calculator tape or computer printout. using a printing calculator or a computer. Without such tape or printout. it is possible to list the accounts directly from the ledger. becomes the post-closing trial balance. there are no efficient means of determining the cause of inequality.
A typical example is accrued wages owed to employees at the end of the period. if expenses method is used Unearned revenues. if the revenue method is used . However. the first payment of wages in the following period will include the accrual.the reversing entry ---.may be used to simplify the analysis and recording of this first payroll entry in a period. Accrued expenses Accrued revenues Prepaid expenses. the debits and credits are reversed.STEP 9 REVERSING ENTRIES Some of the adjusting entries recorded at the end of the accounting period have an important effect on otherwise routine transactions that occur in the following period. If there has been an adjusting entry for accrued wages expense. Reversing entries are generally made on the first day of the next accounting period. The amounts and accounts are the same as the adjusting entry. an optional entry --. As the tem implies. In the absence of some special provision. Wages Payable must be debited for the amount owed for the earlier period. Adjustments that can be reversed are enumerated as follows. a reversing entry is the exact reverse of the adjusting entry to which it relates. and the Wages Expense must be debited for the portion of the payroll that represents expense for the later period.
Illustration: analysis of the adjusting entry. six-month note for P20. The adjusting entry for this is: Table 4. On December 31. However.000 dated accrued interest on this note is P300 (P20. if there are reversing entries for these items. the business have issued a nine-percent. whether accrued or not.STEP 9 REVERSING ENTRIES Reversing Entry For Accrued Expenses Accrued expenses of the present period are usually pain in the next period. the accrued expenses paid in the next period necessarily be debited to the accrued liability account. can be consistently debited to the expense accounts. all expenses pain in the future. If the adjusting entries for accrued expenses are not reversed.000 x 9% x 2/12). closing entry and reversing entry for accrued Expense.3 . the end of the accounting period.
Table 4. 515 202 300 300 . 3 1 Description Post Ref.3 Date 19xx Dec. Debit Credit Interest Expense Interest Payable To record accrued interest for the period.
303 515 Debit Credit 300 300 .4 Date Description 19xx Dec. 31 Income Summary Interest Expense To close interest expense Post Ref.STEP 9 REVERSING ENTRIES The closing entry for the Interest Expense account at December 31 is: Table 4.
5 Date Description 19xx Dec. 31 Interest Payable Interest Expense To reverse the adjusting entry for accrued interest on Notes Payable Post Ref.On January 1. 202 515 Debit Credit 300 300 . the Reversing Entry for the accrued interest (expense) is: Table 4.
whether accrued or not could be debited to Interest Expense. The debit to Interest Payable in the reversing entry closes the credit to the same account in the adjusting entry. Thus. all interest paid.STEP 9 REVERSING ENTRIES After this entry. the accounts Interest Expense and Interest payable after the adjusting entry and reversing entries have been posted are as follows: . The credit to Interest Expense in the reversing entry will serve to adjust the account balance to the amount of interest incurred in the current period.
1 Revers GJ ing 300 account no.Table 4. Debit 19xx Jan.6 INTEREST PAYABLE Date Items Ref. 31 Items Adjusti GJ ng 300 . 202 Ref. Credit Date 19xx Dec.
Debit Date Items Ref. 19xx 19xx Adjust Dec. 1 ing GJ 300 31 g GJ Revers Jan. 1 ing GJ Credit 300 300 . Closin Jan.Table 4.7 INTEREST EXPENSE Date Items Ref.
Upon payment. . an entry debiting Interest Expense will be made and if the entry is posted to the Interest Expense account. the account will appear as follows.000 x 9% x 6/12). the total interest to be paid in the note is P900 (P20. and the P300 is payment of accrued interest.8 This shows that while the interest pain in April amounted to P900. Table 4. the date of maturity of the note.STEP 9 REVERSING ENTRIES At April 30. only the balance of the account of P600 (P900 – P300) is the expense incurred and paid in April.
Debit Date Items Ref.8 INTEREST EXPENSE Date Items Ref. Adjustin Dec. 1 19xy 19xy Payment of Revers Apr. 19xx 19xx Dec. 1 ing Credit 300 300 . Closin 31 g 300 31 g Jan.30 Interest 900 Jan.Table 4.
this accrued revenue when received in the future must necessarily be credited to the accrued revenue account. if there is a reversing entry. However.STEP 9 REVERSING ENTRIES Reversing Entry for Accrued Revenue Accrued revenue for the present period is usually collected in the next accounting period. all revenue in the future. whether accrued or not. . If no reversing entry is made. can be uniformly credited to the revenue account.
000 x 9% x 2/12). Using the same illustrative example as above.STEP 9 REVERSING ENTRIES Illustration: analysis of the adjusting entry.000 dated November 1 (current year0 collectible April 30 (next year). let us now analyze it on the point of view of the recipient of the note. closing entry and reversing entry for accrued interest revenue.9 . the accrued interest on this note is P300 (P20. six-month note for P20. the end of the accounting period. The adjusting entry for this is: Table 4. At December 31. the business received a nonepercent. On December 31.
107 405 Debit Credit 300 300 .9 Date Description 19xx Dec. 31 Interest Receivable Interest Revenue To record accrued interes revenue for the period Post Ref.Table 4.
the reversing entry for the accrued interest revenue is: Table 4.11 .STEP 9 REVERSING ENTRIES The closing entry for the Interest Income at December 31 is: Table 4.10 On January 1.
10 Date Description 19xx Dec.Table 4. 31 Interest Revenue Income Summary To close interest revenue Post Ref. 405 303 Debit Credit 300 300 .
Table 4. 405 107 Debit Credit 300 300 .11 Date Description 19xx Jan. 1 Interest Income Interest Recevable To reverse the adjusting entry for accrued interest on Notes Receivable Post Ref.
Thus. The credit to Interest Receivable in the reversing entry closes the debit to the same account in the adjusting entry. the accounts Interest Revenue and Interest Receivable after the adjusting entry and reversing entries have been posted are as follows: Table 4. The debit to Interest Revenue in the reversing entry will serve to adjust the account balance to the amount of interest earned in the current period.12 Table 4.13 . whether accrued or not could be credited to Interest Revenue. all interest collected.STEP 9 REVERSING ENTRIES After this entry.
Table 4. t GJ 300 .12 Date 19xx Dec 31 Adjusting GJ 300 INTEREST RECEIVABLE Ref Items . Debit Date Items 19xx Jan 1 Reversing Credi Ref.
dit 19xx Dec Adjust 300 1 ing GJ 300 19xx Dec 31 Jan 1 Closing Reversing GJ GJ 300 .Table 4.13 INTEREST REVENUE Date Items Cre Ref. Debit Date Items Ref.
. only the balance of the account of P600 (P900 – P300) is the revenue earned and collected in April. a P900 entry to credit Interest Revenue account. the date of maturity of the note.000 x 9% 6/12). and the P300 is collection of accrued interest. the total interest to be collected on the note in P900 (20.STEP 9 REVERSING ENTRIES At April 30. 14 This shows that while the interest collected in April amounted to P900. Upon collection. the account will appear as follows: Table 4.
14 INTEREST REVENUE Date 19xx Dec 31 19xx1 Reversin g GJ Items Ref.Table 4. Debit Date 19xx Dec.Adjusti 300 03 ng GJ 19xx 1 Collecti Apr on of 300 30 Interest GJ Cre Items Ref. dit Closing GJ 300 Jan 1 900 .
to ensure consistency of the method of recording being used and for proper recognition of the expense on the proper accounting period. the adjusting entry to record the asset (prepaid) portion of the expense should be reversed on the beginning of the next period. the adjusting entry to record the expense incurred during the current period need not be reversed because there will be no inconsistency of recording that will occur in the next period. . Expense Method is when an expense is paid in advance is debited to an Expense Account.STEP 9 REVERSING ENTRIES Reversing Entry for Prepaid Expenses Asset Method is when an expense paid in advance is debited to and Asset Account.
The original entry to record transaction. Analysis of the original entry.000 to Ace Realty. On October 1. current year. the business paid P50. closing entry and reversing entry on Prepaid Expenses. The remainder is applicable to the months of January and February next year.STEP 9 REVERSING ENTRIES Illustration. At December 31. when Expense Method is used. upon payment is: . only P30. adjusting entry. representing 5-month rent covering the period October (current year) to February (next year).000 for three months (October to December) rental have been used up.
000 50. 508 101 Debit 50.000 Credit .Table 4.15 Date Description 19xx Dec 1 Expense Cash To record payment of rent in advance Post Ref.
STEP 9 REVERSING ENTRIES The adjusting entry for the Prepaid Rent at December 31 is: Table 4.17 .16 The closing entry for the Rent Expense at December 31 is as follows: Table 4.
16 Date Description 19xx Dec 31 Prepaid Rent Rent Expense To record Prepaid REnt Post Ref.Table 4. 110 508 Debit 20.000 .000 Credit 20.
000 . 508 110 Debit 20. 1 Rent Expense Prepaid Rent To reverse the adjusting entry for Prepaid Rent. Post Ref.Table 4.000 Credit 20.17 Date Description 19xx Jan.
18 Table 4. . in the next period.STEP 9 REVERSING ENTRIES After these entries are posted.000.19 It should be noted that the Prepaid Rent has become a closed account and the Rent Expense account has a debit balance of P20. the adjustment under the expense method can be used again. the Prepaid Rent account and the Rent Expense account will be as follows: Table 4. Thus.
Table 4. Debit Date Items Credi Ref.00 0 GJ 20. 1 ng GJ .18 PREPAID RENT Date Items 19xx Dec.00 19xx Reversi 0 Jan. t 20.3 Adjusti 1 ng Ref.
19 Date Items Ref.000 GJ 30.000 . Credit GJ 20.Table 4. Debit Date Items 19xx Payment 19xx Adjust Oct. 1 ing 19xx1 19xx1 Reversi Closin Jan 1 ng GJ 20.31 of Rent GJ 50.000 31 g Ref.000 Dec.
STEP 9 REVERSING ENTRIES Reversing Entry for Unearned Revenues Liability Method is when a revenues received in advance is credited to a Liability Account. to ensure consistency of the method of recording being used and for proper recognition of the revenue on the proper accounting period. . the adjusting entry to record the revenue earned during the current period need not be reversed because there will be no inconsistency of recording that will occur in the next period. the adjusting entry to record the liability (Unearned) portion of the revenue should be reversed on the beginning of the next period. Revenue Method is when a revenue received in advance is credited to a Revenue Account.
Analysis of the original entry.000 for four months (September to December) rental have been earned. representing 6mont rent covering the period September (current year) to February (next year). The original entry to record the transaction. the business received P48.20 . At December 31. closing entry and reversing entry on Unearned Revenue. upon collection is: Table 4.STEP 9 REVERSING ENTRIES Illustration. current year. adjusting entry.000 applicable to the months of January and February next year is still unearned. when Income Method is used. only P32.000 from a tenant. On September 1. the remainder of P16.
20 Date Description 19xx Sept. 101 404 Debit 48.Table 4. 1 Cash Rent Revenue To record collection of rent in advance Post Ref.000 48.000 Credit .
21 The closing entry for the Rent Revenue at December 31is: Table 4.STEP 9 REVERSING ENTRIES The adjusting entry for the Unearned Rent at December 31 is: Table 4.22 .
31 Rent Revenue Unearned Rent To record Unearned Rent Post Ref.21 Date Description 19xx Dec. 404 207 Debit 16.000 .000 Credit 16.Table 4.
000 Credit 32.22 Date Description 19xx Dec.000 . 404 303 Debit 32.Table 4. 31 Rent Income Income Summary To close Rent Revenue Post Ref.
23 After these entries are posted.24 . the reversing entry for the Unearned Rent is: Table 4. the Unearned Rent account and the Rent Revenue account will be as follows: Table 4.STEP 9 REVERSING ENTRIES On January 1.
Post Ref. 207 404 Debit 16.23 Date Description 19xx Jan.000 Credit 16. 1 Unearned Rent Rent Revenue To reverse the adjusting entry for Unearned Rent.Table 4.000 .
Table 4.00 Jan 1 ng GJ 0 31 ting GJ 0 . Debit Date Items Ref.24 UNEARNED RENT Credi Date Items Ref. Adjus 16.00 Dec. t 19xx 19xx Reversi 16.
000. The following are the main purposes of reversing entries that should be remembered: (1) consistency in the use of method. the adjustment under the revenue method can be used again. Thus. in the next period. .STEP 9 REVERSING ENTRIES It should be noted that the Unearned Rent has become a closed account and the Rent Revenue account has a credit balance of P16. and (2) recording of revenues and expenses in the proper accounting period.
Jamora Nancy Bunag .Thank you! PRESENTED BY: Julie Anne P.
Mercado. Edlagan and Ma. . for without them this presentation would not be possible.Acknowledgment Special thanks to the writers of the book “Accounting Fundamental”. Bayani D. Cecilia S.
. this project is submitted by Julie Anne Jamora and Nancy Buñag to Prof. Angela David.Polytechnic University of the Philippines Taguig Campus As partial requirement in the subject OS 341“Web Page Development ”.
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