2nd Semester AY 2019-2020 Fundamentals of Accountancy Part 1

2ND SEMESTER A.Y.
2019-2020
FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT PART 1
COMPLETION OF THE ACCOUNTING CYCLE FOR MERCHANDISING
ADJUSTING ENTRIES
The application of the accrual basis of accounting requires adjusting entries for the following:
1. Accrued income or uncollected income
2. Accrued expenses or unpaid expenses
3. Prepaid expenses or expenses paid in advance
4. Unearned income or income received/collected in advance
5. Depreciation of fixed assets
6. Estimated loss from uncollectible accounts
7. Ending merchandising inventory or unsold merchandise at the end of the accounting period
Chapter 6 discusses the first five items enumerated above. This chapter will have an additional
discussion for those items requiring adjustments and shall include a detailed discussion about estimated
uncollectible accounts and inventory adjustments.
ESTIMATED UNCOLLECTIBLE ACCOUNTS
Regardless of the utmost care exercised in granting credit to customers and the efficiency of collection
methods adopted, a portion of the receivables may turn out to be uncollectible. Because failure to
collect the receivables, the advance provision for uncollectible accounts is recorded as an operating
expense in the same period that the revenue from related sales is recognized. This is an application of
the matching process of income determination.
Pro-forma adjusting entry to record the estimated uncollectible accounts will be:
Doubtful Accounts Expense xx

Allowance for Doubtful Accounts xx
Estimated loss on uncollectible accounts
The estimate for doubtful accounts may be based on either sales or the outstanding receivables at the
end of the accounting period.
SALES PERCENTAGE METHOD
When the base used in computing the charge to doubtful accounts is sales (either the gross sales or the
net sales), debit goes to Doubtful Accounts Expense and the credit to Allowance for Doubtful Accounts.
You multiply the uncollectible percentage by the sales base without looking into the existing balance of
the contra-asset account, Allowance for Doubtful Account.
The following December 31 data were obtained from the books before an adjustment was made:
Debit Credit
Accounts Receivable 100,000
Allowance for Doubtful Accounts 3,000
Sales 500,000
Sales Returns and Allowances 20,000
One-half of 1% of net sales will probable be uncollected.
Give the adjusting entry for the estimated uncollectible accounts under each of the following
independent assumptions and compute its net realizable value.
ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 1

2ND SEMESTER A.Y. 2019-2020
AJE: Dec 31 Doubtful Accounts Expense 2,400

The uncollectible account is computed as (P500,000 - P20,000) x 0.005 = P2,400.
At the end of the current year, its net realizable value will be:
Accounts Receivable P100,000

Less: Allowance for Doubtful Accounts 5,400
Net Realizable Value P 94,600
Allowance for Doubtful Accounts

End Bal. 5,400 Beg. Bal. 3,000
Adjustment 2,400
RECEIVABLES AS BASE
When receivables are used as the basis for adjustment, the allowance is adjusted to a certain
percentage of receivable or the allowance is adjusted to an amount determined from the aging schedule.
This emphasizes the current net realizable value of the receivables, hence it focuses more on the
statement of financial position rather than on the income statement. The longer a customer’s account
remains outstanding, the less likely that it will be collected. So, we can base the estimate of uncollectible
accounts on how long the accounts have been outstanding.
PERCENTAGE OF RECEIVABLE
Doubtful Accounts Expense is debited and Allowance for Doubtful Accounts is credited for an amount
that brings the allowance balance. The required allowance balance is the amount arrived at by
multiplying the loss percentage by the outstanding receivables. This will serve as the desired ending
balance of Allowance for Doubtful Accounts.
The following December 31 data were obtained from the books before an adjustment was made:
Debit Credit
Sales 500,000
5% of outstanding accounts are doubtful.
Give the adjusting entry for the estimated uncollectible accounts under each of the following
independent assumptions and compute its net realizable value.
AJE: Dec 31 Doubtful Accounts Expense 2,000

The uncollectible account is computed as P100,000 x 0.05 = P5,000 - P3,000 = P2,000.
As what you have noticed, when using the percentage of receivables, credit beginning balance of
Allowance for Doubtful Accounts is deducted from its ending balance to arrive at the adjusted amount
of uncollectible account. On the other hand, if it is a debit beginning balance, then add.


Net Realizable Value P 95,000

End Bal. 5,000 Beg. Bal. 3,000
Adjustment 2,000
AGING OF RECEIVABLES
Determining the length of time the accounts are outstanding, whether or not it is beyond its due date
and classifying each receivable as either not yet due or past due is a process called aging of receivables.
The number of days an account is past due is determined from the due date of the individual customer’s
account to the date the aging schedule is prepared which is considered the cut-off date in determining
the age of the receivables. A sliding scale of percentages based on industry or company experience, is
used to estimate the amount of uncollectibles in each age class. A series of loss percentages is applied to
the different age groups and the total amount determined is the required allowance balance. The
allowance balance before adjustment is subtracted from the required allowance balance and the
difference is debited to Doubtful Accounts Expense and credited to Allowance for Doubtful Accounts.
The Accounts Receivable clerk of ECQ Company prepared the following partially completed aging of
receivables schedule as of the end of business on November 30.
Customer Balance Not Past Days Past Due

Due 1 - 30 31 - 60 61 - 90 Over 90
Subtotal P872,500 P540,000 P180,000 P78,500 P42,300 P31,700
The following accounts were unintentionally omitted from the aging schedule:
Customer Balance Due Date

Corona Industries P25,000 August 24
COVID-19 Trading 8,500 September 3
Dovolyu Inc. 35,000 October 17
Lockdown Mart 6,500 November 5
Natoy Corp. 12,000 December 3
ECQ Company has a past history of uncollectible accounts as shown bellow:
Age Class Percentage of Uncollectibility

Not past due 2%
1-30 days past due 4%
Over 90 days past due 40%
Requirements:
1. Determine the number of days due for each of the preceding accounts.
Corona Industries August 24 - November 30 = 98 days old

COVID-19 Trading September 3 - November 30 = 88 days old
Dovolyu Inc. October 17 - November 30 = 44 days old
Lockdown Mart November 5 - November 30 = 25 days old
Natoy Corp. Due on December 3 = not yet due

2. Complete the aging of receivables schedule. Estimate the allowance for doubtful accounts, based on
the aging of receivables schedule
Customer Balance Not Past Days Past Due

Due 1 - 30 31 - 60 61 - 90 Over 90
Subtotal P872,500 P540,000 P180,000 P 78,500 P 42,300 P 31,700
Corona Industries 25,000 25,000
COVID-19 Trading 8,500 8,500
Dovolyu Inc. 35,000 35,000
Lockdown Mart 6,500 6,500
Natoy Corp. 12,000 12,000
Total P959,500 P552,000 P186,500 P113,500 P 50,800 P 56,700
Uncollectibility Rate x 2% x 4% x 10% x 20% x 40%
Required Bal. of ADA P 62,690 P 11,040 P 7,460 P 11,350 P 10,160 P 22,680
3. Assume that the allowance for doubtful accounts for ECQ Company has a credit balance of P6,890
before adjustment on November 30. Journalize the adjusting entry for uncollectible accounts as of
November 30.

End Bal. 62,690 Beg. Bal. 6,890
Adjustment 55,800
AJE: Nov 30 Doubtful Accounts Expense 55,800


Net Realizable Value P896,810
Positive indicators of the worthlessness of a customer’s account include bankruptcy, disappearance of

the customer and repeated attempts to collect that proved futile. There are two (2) alternative
methods of writing off the customer’s accounts that are worthless, namely: the direct write-off method
and the allowance method.
Direct Method Allowance Method
Doubtful Accounts Expense xx Allowance for Doubtful Accounts xx

Accounts Receivable xx Accounts Receivable xx
Write-off of customer’s accounts Write-off of customer’s accounts
If the customer whose accounts were previously written off will come back to pay his accounts, then the
seller will first reverse the entry made to write off the accounts in order to restore the balance of the
said customer’s accounts. This will be followed by an entry recording the subsequent collection.

Doubtful Accounts Expense xx Allowance for Doubtful Accounts xx
Recovery of accounts previously written-off Recovery of accounts previously written-off

Cash xx Cash xx
Collection of accounts previously written-off Collection of accounts previously written-off
Note: If the problem is silent, Allowance Method is assumed.
INVENTORY ADJUSTMENT
The adjusting entries are the same under both periodic and perpetual inventory systems except for
merchandise inventory. When the periodic inventory is used, cost of goods sold is not recorded on the
date of sale. Whether a company uses a periodic or perpetual inventory system, a physical count should
be conducted at least once a year. This is also done in compliance with BIR requirement. At the end of
the accounting period, a physical count is taken to determine the cost of the inventory on hand. The
cost of goods sold during the period is reported in a separate section in the income statement or the
computation of which may be shown in detail in the accompanying notes to financial statements. The
following entries pertaining to inventory balances may be shown as part of the adjusting entries for the
period if Adjusting Method is used by the company or alternatively may be shown as part of the closing
entries if Direct Extension Method or Closing Method is used.
Pro-forma entries:
Income Summary xx
Merchandise Inventory xx
To close the beginning inventory
After this entry has been recorded and posted, the balance of the merchandise inventory account will be
zero.
Merchandise Inventory xx
Income Summary xx
To set up inventory end
After this second entry has been recorded and posted, the balance of the merchandise inventory
account is the amount of the merchandise of inventory end.
As pointed out in the previous chapter, under the perpetual inventory system, a company maintains a
separate merchandise inventory account in the ledger. During the period, this account shows the
amount of merchandise for sale at any time. No adjustments are required for the merchandise inventory
account at the end of the accounting period because its account balance shows the amount of goods
that should be on hand. If the physical count confirms this account balance, no adjusting entries are
needed. However, trading businesses may experience some loss of inventory due to shoplifting,
employee theft or stolen inventory or errors made in recording or counting inventory. As a result, the
physical inventory taken at the end of the accounting period may differ from the amount of inventory
shown in the records. When the amount of inventory per records is larger than the amount of inventory
per physical count, the difference is often called inventory shrinkage or inventory shortage.
On December 31, 2019, the end of the calendar year period, the inventory records showed P350,000
debit balance of merchandise inventory account but per physical inventory taken on that date, only
P330,000 is on hand or is actually available. The adjusting entry will be:
AJE: Dec 31 Cost of Goods Sold 20,000

Merchandise Inventory 20,000
Inventory shortage

After recording and posting this adjusting entry to the ledger, the inventory records agree with the
actual physical count at the end of the accounting period. Since no system of procedures and safeguards
can totally eliminate it, inventory shrinkage is often considered a normal cost of operations. However, if
the amount of inventory shrinkage is abnormally large, it may be disclosed on the income statement
under a separate account Loss from Merchandise Inventory Shrinkage or Loss from Inventory Shortage.
Such computation will be explained in detail in the notes to financial statements.
INVENTORY ERRORS
In the process of maintaining inventory records and the physical count of goods on hand, errors may
occur. It is quite easy to overlook goods on hand, count goods twice, or simply make mathematical
mistakes. Therefore, it is important that accountants and business owners fully understand the effects
of inventory errors and grasp the need to be careful to get these numbers as correct as possible. In the
statement of financial position, ending inventory errors will have the same effect on total assets and
owner’s equity and no effect on liabilities. In the income statement of the current year:
1. An error in beginning inventory will have a reverse effect on net income.

2. An error in ending inventory will have a similar effect on net income.
3. If ending inventory errors are not corrected in the following period, their effect on net income for that
period is reversed.
To summarize, any errors in reporting inventory based on physical inventory will misstate the ending
inventory, current assets, total assets, and owner’s equity on the statement of financial position. It will
also misstate the cost of goods sold, gross profit and net income on the income statement.
WORKSHEETS
A worksheet is a multicolumn form that may be used to facilitate preparation of adjusting entries and
financial statements. By means of a worksheet, the accountant will be able to assemble the unadjusted
trial balance, adjustments, adjusted trial balance, income statement, statement of changes in owner’s
equity and the statement of financial position or balance sheet on one columnar sheet of paper before
adjusting and closing entries are actually placed in the books.
Remember that a worksheet is not a journal and worksheet preparation is merely discretionary or
optional on the part of the bookkeeper or accountant. The items found on the adjustments column of
the worksheet will have to be recorded in the general journal and posted later to the general ledger.
The adjusted balances of the accounts will be shown in the adjusted trial balance which is prepared to
check the equality of the debits and credits after posting the adjustments made.
The preparation of a worksheet for a merchandising business is basically similar to the preparation of a
worksheet for a service business except that there are new account titles introduced. In the worksheet
presentation, there 2 alternative ways of presenting merchandise inventory, the Adjusting Method and
the Closing Method (also known as the Direct Extension Method).
For the Adjusting Method, there are two entries: 1) to close merchandise inventory beginning, we debit
Income Summary and credit Merchandise Inventory beginning; and 2) to set up merchandise inventory
end, we debit Merchandise Inventory ending and credit Income Summary.
For the Closing Method or Direct Extension Method, we extend the merchandise inventory beginning to
adjusted trial balance debit column and income statement debit column while merchandise inventory
end is set up in the income statement credit column and statement of financial position debit column.

FINANCIAL STATEMENTS
Entities report information in the form of financial statements issued on a periodic basis. These financial
statements are most useful if they are prepared and supplied to the various accounting users on a timely
basis. The income statement, statement of changes in owner’s equity and statement of cash flows are
prepared for a specific period of time, while the statement of financial position or the balance sheet
reports data at a specific date. Every set of financial statements is accompanied by explanatory notes
and supporting schedules that are considered integral part of the statements. Notes to financial
statements consist of a summary of the accounting policies applied, comments on individual items
included in the financial statements which also include additional information.
GENERAL REQUIREMENTS
Philippine Accounting Standards (PAS) 1 “Presentation of Financial Statements” sets out the general
requirements relating to the form and content of financial statements. As pointed out from Chapter 7 of
your book, the financial statements should include the primary statements such as the income
statement, statement of changes in owner’s equity, cash flow statement and statement of financial
position. In addition to the primary statements, it must include a summary or statement of accounting
policies and explanatory notes. Each set of financial statements should identify the following
information:
1. name of the reporting entity;

2. whether the financial statements cover the individual entity or a group of entities;
3. presentation currency and units;
4. date covered by the report or the reporting period; and
5. any changes to this information during the period.
FORMS OF INCOME STATEMENT
The revised PAS 1 provides that an entity shall present on the face of the income statement an analysis
of expenses using a classification based on either the function of expenses or their nature within the
entity, whichever provides information that is reliable and more relevant. It does not prescribe any
format. Management must choose which format, functional or natural, is most appropriate.
The new standard simply states that because each method of presentation has merit for different types
of entities, management is required to select the most relevant and reliable information. The standard
further states that when the functional presentation or cost of sales approach is used, additional
disclosure is necessary for the nature of the expenses because the nature of the expenses is useful in
predicting future cash flows. It is believed that the cost of sales method would provide more relevant
information to the users aside from the fact that it is simple and easy to understand. However, the
operating result and net profit are the same regardless of which method is used by the reporting entity.
FUNCTIONAL PRESENTATION
This is the traditional and common form of income statement which is also known as the cost of sales
method. This form classifies expenses according to their function as part of cost of sales, selling
activities, administrative activities and other activities. Entities classifying expenses by function shall
disclose additional information on the nature of expenses. Allocation of costs can be arbitrary and
involves considerable judgement.

Business Name
Income Statement
For the period ended December 31, 201A
Sales P xx
Less Sales Returns and Allowances P xx
Sales Discounts xx xx
Net Sales P xx
Less Cost of Goods Sold:
Merchandise Inventory beginning P xx
Add Net Purchases:
Gross Purchases P xx
Add Freight-in xx
Total P xx
Less Purchases Returns and Allowances P xx
Purchases Discounts xx xx xx
Cost of Goods Available for Sale P xx
Less Merchandise Inventory end xx xx
Gross Profit or Gross Margin or Gross Income P xx
Add Other Revenues and Gains:
Interest Revenue P xx
Rent Revenue xx
Commission Revenue xx
Gain on Sale of Fixed Assets xx xx
Total Income P xx
Less Expenses:
Selling Expenses:
Sales Salaries Expense P xx
SSS Contributions - sales xx
PhilHealth Contributions - sales xx
Pag-IBIG Contributions - sales xx
Sales Commissions xx
Store Supplies Expense xx
Freight out or Delivery Expense xx
Depreciation Expense - Store Equipment xx P xx
General and Administrative Expenses:
Office Salaries P xx
Bonuses xx
Office Supplies Expense xx
Taxes and Licenses xx
SSS Contributions - office xx
PhilHealth Contributions - office xx
Pag-IBIG Contributions - office xx
Depreciation Expense - Office Equipment xx xx
Other Expenses and Losses:
Loss on Sale of Fixed Assets P xx
Casualty Loss from Earthquake xx xx
Finance Costs:
Interest Expense on bank loans P xx
Interest Expense on bonds payable xx xx xx
Pre-tax Income or Taxable Income or Net Income Before Tax P xx
Less Income Tax xx
Net Income After Tax (Net Loss) P xx

NATURAL PRESENTATION
This income statement presentation is referred to as the nature of expense method. Under this form,
expenses are aggregated according to their nature and not allocated among the various functions within
the entity. The natural expenses are the expenses themselves. The expenses which are of the same
nature are grouped or aggregated and presented as one item.
Business Name
Income Statement
For the period ended December 31, 201A
Sales P xx
Less Sales Returns and Allowances P xx
Sales Discounts xx xx
Net Sales P xx
Add Other Income and Gains xx
Investment Income xx
Total Income P xx
Less Expenses:
Increase or Decrease in Inventory P xx*
Net Purchases:
Gross Purchases P xx
Less Purchases Returns and Allowances P xx
Purchases Discounts xx xx
Total P xx
Add Freight-in xx xx
Sales Commission xx
Advertising Expense xx
Supplies Expense xx
Freight out or Delivery Expense xx
Depreciation Expense xx
Taxes and Licenses xx
Loss on Sale of Fixed Assets P xx
Casualty Loss from Earthquake xx xx
Finance Cost:
Interest Expense on bank loans xx xx
Pre-tax Income or Taxable Income or Net Income Before Tax P xx
Less Income Tax xx
Net Income After Tax (Net Loss) P xx
*Increase in inventory will be in parenthesis and deducted while decrease in inventory will be added.

COMPREHENSIVE ILLUSTRATION
Let us have a sample problem that would illustrate the remaining steps of the accounting cycle for a
trading or merchandising business. The chart of account of Easy Q Trading is shown below:
Easy Q Trading
Chart of Accounts
Assets Income
101 Cash 401 Sales
110 Notes Receivable 402 Sales Returns and Allowances
112 Accounts Receivable 403 Sales Discounts
113 Allowance for Doubtful Accounts 410 Commissions Revenue
120 Interest Receivable 411 Interest Revenue
122 Merchandise Inventory
130 Supplies Cost
132 Prepaid Rent 510 Purchases
134 Prepaid Insurance 512 Purchases Returns and Allowances
140 Land 514 Purchases Discount
150 Building 516 Freight-in
151 Accumulated Depreciation - Building
160 Equipment Expenses
161 Accumulated Depreciation - Equipment 520 Insurance Expense
522 Supplies Expense
Liabilities 525 Rent Expense
210 Notes Payable 530 Doubtful Accounts Expense
212 Accounts Payable 540 Depreciation Expense - Building
220 Interest Payable 545 Depreciation Expense - Equipment
225 Unearned Commissions Revenue 550 Interest Expense
560 Loss on Sale of Equipment
Owner’s Equity 580 Miscellaneous Expense
301 Y. Ghana, Capital
302 Y. Ghana, Drawing
350 Income Summary
The following are the account balances of Easy Q Trading on December 31, 2019, the end of a
semi-annual period.
Cash P 15,060 Y. Ghana, Drawing 4,500

Notes Receivable 4,000 Sales 827,600
Accounts Receivable 75,000 Sales Returns and Allowances 1,200
Allowance for Doubtful Accounts 500 Sales Discounts 920
Merchandise Inventory, July 1, 2019 120,000 Commissions Revenue 760
Prepaid Rent 3,600 Interest Revenue 450
Land 50,000 Purchases 630,800
Building 300,000 Purchases Returns and Allowances 1,600
Accumulated Depreciation - Building 90,000 Purchases Discount 5,000
Equipment 12,000 Freight-in 2,200
Accumulated Depreciation - Equipment 4,200 Insurance Expense 2,400
Notes Payable 6,000 Supplies Expense 2,200
Accounts Payable 26,000 Loss on Sale of Equipment 330
Y.Ghana, Capital 263,300 Miscellaneous Expense 1,200

Additional Information:
a. Supplies used during the period amounted to P1,700.
b. Payment of rental of an out-of-town bodega made at the start of the period is good for 3 years.
c. Unearned commissions at the end of the year, P120.
d. The insurance is a one-year premium on fire insurance policy effective September 1, 2019.
e. Estimated uncollectible accounts, 3% of outstanding customer’s accounts.
f. Estimated annual rate of depreciation: Building 5%; Equipment 10%.
g. The notes payable represents a 120-day 12% note dated October 2, 2019. Interest and principal are
payable at maturity date.
h. The notes receivable represents a 90-day 6% note dated December 1, 2019. Interest and principal are
collectible at maturity date.
i. Unsold merchandise at the close of the year amounted to P160,000.
Requirements:
1. Prepare a 12-column and a 10-column worksheet. (Please see worksheets on a separate file)
2. Journalize the adjusting entries.
3. Prepare the income statement using the natural and functional presentation of expenses.
4. Prepare the statement of changes in owner’s equity.
5. Prepare a classified statement of financial position in report form.
6. Journalize the closing entries.
7. Prepare the post-closing trial balance.
8. Prepare the reversing entries.
ADJUSTING ENTRIES
2019 Particulars Debit Credit

Dec 31 Supplies 500
Supplies Expense 500
Unused supplies
Rent Expense 600

Prepaid Rent 600
Expired rental
Commissions Revenue 120

Unearned Commissions Revenue 120
Unearned commissions
Prepaid Insurance 1,600

Insurance Expense 1,600
Unexpired insurance
Doubtful Accounts Expense 1,750

Uncollectible accounts for the period
Depreciation Expense - Building 7,500

Accumulated Depreciation - Building 7,500
Depreciation for six months
Depreciation Expense - Equipment 600

Accumulated Depreciation -Equipment 600
Depreciation for six months


Dec 31 Interest Expense 180
Interest Payable 180
Unpaid Interest (P6,000 x 0.12 x 90/360)
Interest Receivable 20
Interest Revenue 20
Accrued interest earned (P4,000 x 0.06 x 30/360)
Income Summary 120,000

Merchandise Inventory - July 1 120,000
To close merchandise inventory beginning
Merchandise Inventory - December 31 160,000

To set up inventory end
Methods used for deferrals depend on the given account from the unadjusted trial balance. For
prepayments, Asset method is used when the given account is an asset (letter b) and Expense method
when the given is an expense (letters a & d). For pre-collections, Liability Method is used when a liability
account is given and Income Method for an income account (letter c). Percentage of receivables is used
for uncollectible accounts (letter e). Straight-line method is assumed for depreciation (letter f). Interests
are accrued (letters g & h). The last two journal entries (letter i) are part of the end of the accounting
period adjustments if the company is using the Adjusting Entry Method. These adjusting entries will be
recorded in the general journal and thereafter will be posted to the general ledger. The adjusted
balances obtained for each account are the balances that will be reflected in the company’s financial
statements.
FINANCIAL STATEMENTS
Natural Presentation
Easy Q Trading
Income Statement
For the semi-annual ended December 31, 2019
Sales P 827,600
Less Sales Returns and Allowances P 1,200
Sales Discounts 920 2,120
Net Sales P 825,480
Add Other Income and Gains:
Commissions Revenue P 640
Interest Revenue 470 1,110
Total Income P 826,590
Less Expenses:
Increase in Inventory P (40,000)
Net Purchases 626,400
Insurance Expense 800
Supplies Expense 1,700
Rent Expense 600
Miscellaneous Expense 1,200
Loss on Sale of Equipment 330
Finance Costs:
Interest Expense 180 601,060
Net Income Before Tax P 225,530

Functional Presentation
Easy Q Trading
Income Statement
Sales P 827,600
Less Sales Returns and Allowances P 1,200
Sales Discounts 920 2,120
Net Sales P 825,480
Less Cost of Goods Sold:
Merchandise Inventory, July 1, 2019 P 120,000
Add Net Purchases:
Gross Purchases P 630,800
Add Freight-in 2,200
Total P 633,000
Less Purchases Returns and Allowances P 1,600
Purchases Discounts 5,000 6,600 626,400
Cost of Goods Available for Sale P 746,400
Less Merchandise Inventory, December 31 160,000 586,400
Gross Profit or Gross Margin or Gross Income P 239,080
Add Other Revenues and Gains:
Commissions Revenue P 640
Interest Revenue 470 1,110
Total Income P 240,190
Less Expenses:
Selling Expenses:
Doubtful Accounts Expense P 1,750
General and Administrative Expenses:
Insurance Expense P 800
Rent Expense 600
Miscellaneous Expense 1,200 12,400
Finance Costs:
Interest Expense 180 14,660
Net Income Before Tax P 225,530
Easy Q Trading
Statement of Changes in Owner’s Equity
Y. Ghana, Capital - July 1, 2019 P 263,300

Add Net Income 225,530
Total P 488,830
Less Y. Ghana, Drawing 4,500
Y. Ghana, Capital - December 31, 2019 P 484,330

Report Form
Easy Q Trading
Statement of Financial Position
December 31, 2019
Assets
Current Assets:
Cash P 15,060
Notes Receivable 4,000
Accounts Receivable P 75,000
Allowance for Doubtful Accounts 2,250 72,750
Supplies 500
Prepaid Rent 3,000
Total Current Assets P 256,930
Non-current Assets:
Property, Plant and Equipment:
Land P 50,000
Building P 300,000
Less Accumulated Depreciation - Building 97,500 202,500
Equipment P 12,000
Less Accumulated Depreciation - Equipment 4,800 7,200 259,700
Total Assets P 516,630
Liabilities and Owner’s Equity
Current Liabilities:
Notes Payable P 6,000
Accounts Payable 26,000
Total Liabilities P 32,300
YY. Ghana, Capital 484,330
Total Liabilities and Owner’s Equity P 516,630
CLOSING ENTRIES

Dec 31 Sales 827,600
Interest Revenue 470
Purchases Returns and Allowances 1,600
Purchases Discount 5,000
To close nominal accounts with credit balances


Dec 31 Income Summary 649,780
Sales Discounts 920
Purchases 630,800
Freight-in 2,200
Insurance Expense 800
Rent Expense 600
Interest Expense 180
Miscellaneous Expense 1,200
To close nominal accounts with debit balances

Y. Ghana, Capital 225,530
To close income summary account

Y. Ghana, Drawing 4,500
To close drawing to capital
The second to the last closing entry is the entry needed to close the credit excess balance of the Income
Summary account in the ledger which at the same time is the entry to record the net profit for six (6)
months.
Easy Q Trading
Post-closing Trial Balance
December 31, 2019
Account Titles Debit Credit

Cash P 15,060
Notes Receivable 4,000
Allowance for Doubtful Accounts P 2,250
Supplies 500
Prepaid Rent 3,000
Land 50,000
Building 300,000
Accumulated Depreciation - Building 97,500
Equipment 12,000
Accumulated Depreciation - Equipment 4,800
Notes Payable 6,000
Accounts Payable 26,000
Total P 621,180 P 621,180

The post-closing trial balance is prepared from the permanent accounts in the general ledger.
Remember that the balance of each account is computed after every posting. This post-closing trial
balance provides evidence that the journalizing and posting of closing entries have been properly
completed and shows that the accounting equation is in balance at the end of an accounting period. But
just like any other trial balance, it does not prove that all transactions have been recorded or that the
ledger is accurate. It will still balance even if there was an omission in journalizing or posting or even if
there was duplication in journalizing and posting a transaction.
NATURE OF REVERSING ENTRIES
After the books have been closed and the post-closing trial balance has proven the equality of the debits
and credits in the ledger, certain adjusting entries have an important effect on otherwise routine
transactions that occur in the next accounting period and so it is preferable to prepare the so-called
reversing entries. These reversing entries are optional (which means that they may or may not be made)
and if made, they shall be dates as of the first day of the next accounting period.
The use of reversing entries generally simplifies the analysis of transactions and reduces the likelihood
of errors in the subsequent recording of transactions. They are made for convenience and consistency in
the handling of accrued and deferred items. Only the following adjusting entries will be reversed:
1. Accrued or Uncollected Revenues

2. Accrued or Unpaid Expenses
3. Unearned Income under Income Method
4. Prepaid Expenses under the Expense Method
Such reversing entry made eliminates the balance of a statement of financial position account that was
recognized in the adjusting entry. These reversing entries are posted to the general ledger after which
the books are ready for the next accounting period and the successive steps in the accounting cycle are
then repeated. With the increased use of computerized accounting systems , data entry personnel may
be inputting routine accounting entries. In such an environment, reversing entries may be useful, since
these individuals may not recognize the impact of adjusting entries on the related transactions in the
following period.
REVERSING ENTRY FOR ACCRUED INCOME
Accrued Income for the present accounting period is usually collected in the next accounting period. If
no reversing entry is made, this accrued income when received in the future must necessarily be
credited to the Accrued Income account. However, if there is a reversing entry, all income collected in
the future, whether accrued or not, can be uniformly credited to the Income account. To illustrate the
optional use of reversing entries, consider the given cases below:
Case 1
During the month of December, only P20,000 out of the agreed monthly rental of P50,000 was collected
on December 23. An adjusting entry was made on December 31, 2019 for the uncollected rental of
P30,000. On January 18, 2020, the accrued rental of P30,000 and the January rental were received.
With Reversing Entry Without Reversing Entry

12/23/19 Cash 20,000 12/23/19 Cash 20,000
Rent Revenue 20,000 Rent Revenue 20,000
Partial collection for Partial collection for
December rental December rental
12/31/19 Rent Receivable 30,000 12/31/19 Rent Receivable 30,000
Rent Revenue 30,000 Rent Revenue 30,000
Accrued December rental Accrued December rental
12/31/19 Rent Revenue 50,000 12/31/19 Rent Revenue 50,000
Income Summary 50,000 Income Summary 50,000
To close revenue account To close revenue account


1/1/2020 Rent Revenue 30,000 No Reversing entry is made.
Rent Receivable 30,000
To reverse the adjusting entry
1/18/2020 Cash 80,000 1/18/2020 Cash 80,000
Rent Revenue 80,000 Rent Receivable 30,000
Collected the balance from the Rent Revenue 50,000
December rental and also the Collected the balance from the
January rental December rental and also the
January rental
You will notice in the above illustration that when a reversing entry is made, the subsequent collections
will be credited outright to a revenue account since the asset account Rent Receivable is eliminated or
closed after posting the reversing entry in the general ledger.
REVERSING ENTRY FOR ACCRUED EXPENSE
Accrued Expenses of the current period are usually paid in the next accounting period. If the adjusting
entries for accrued expenses are not reversed, the payment of accrued expenses in the next accounting
period must necessarily be debited to a Payable or Accrued Expense account. However, if there are
reversing entries for these items, all expenses paid in the future, whether accrued or not, can be
consistently debited to the Expense account.
Case 2
On December 31, 2019, the company has accrued taxes amounting to P1,500. On January 3`, 2020,
taxes amounting to P2,000 are paid which included the accrual from last year.

12/31/19 Taxes 1,500 12/31/19 Taxes 1,500
Taxes Payable 1,500 Taxes Payable 1,500
Unpaid taxes in 2019 Unpaid taxes in 2019
12/31/19 Income Summary 1,500 12/31/19 Income Summary 1,500
Taxes 1,500 Taxes 1,500
To close an expense account To close an expense account
1/1/2020 Taxes Payable 1,500 No Reversing entry is made.
Taxes 1,500
To reverse the adjusting entry
1/31/2020 Taxes 2,000 1/31/2020 Taxes 500
Cash 2,000 Taxes Payable 1,500
Paid the December accrued taxes Cash 2,000
and also the tax due in January Paid the December accrued taxes
and also the tax due in January
As illustrated in case no. 2, when reversing entry is made, subsequent payment of expenses will be
debited or charged to an expense account that is equal to the actual amount paid. This means that the
January 31, taxes being an expense account will be debited for the amount paid since the liability
account Taxes Payable is eliminated or closed after the reversing entry is posted to the general ledger.
Whether the bookkeeper opted to prepare the reversing entries or not, both will have the same effect
on the accounting records provided that they are accurately recorded in the books.
The entry to record the subsequent collection of an accrued revenue or the subsequent payment of an
accrued expense will depend on whether a reversing entry is made or not.

The reversing entries of Easy Q Trading are shown below:

Jan 1 Supplies Expense 500
Supplies 500

Insurance Expense 1,600


Interest Expense 180
Interest Revenue 20
You will notice that in reversing entries as shown above, a statement of financial position or balance
sheet account is recorded opposite to its normal balance, thereby closing or eliminating the balance of
that account. At this point, you know already the reason or reasons why it is preferable to put up
reversing entries in the books. The use of reversing entries will not change the amounts reported in the
financial statements. They will only simplify the recording of the subsequent transactions.
Finally, all is well that ends well. May you have understood the lessons despite being deprived from the
conventional learning system. This is quite a struggle to all of you. Nevertheless, this pandemic will not
stop you from acquiring the power of knowledge. May you continue to seek more information from
your day-to-day experiences in order to achieve greater glory. As future accountants and businessmen,
always remember to act, count and think. Take care and God bless.
“Act. Count. Think.”
Stay safe and healthy everyone! :)
-End-
Joemel D. Dakay, CPA

Steffi Kay D. Pantino, CPA
Earnst John M. Quijano, CPA
Acc 01 Teachers

2nd Semester AY 2019-2020 Fundamentals of Accountancy Part 1

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2nd Semester AY 2019-2020 Fundamentals of Accountancy Part 1

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2ND SEMESTER A.Y.

FUNDAMENTALS OF ACCOUNTANCY, BUSINESS AND MANAGEMENT PART 1

COMPLETION OF THE ACCOUNTING CYCLE FOR MERCHANDISING

ESTIMATED UNCOLLECTIBLE ACCOUNTS

Doubtful Accounts Expense xx

SALES PERCENTAGE METHOD

One-half of 1% of net sales will probable be uncollected.

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 1

AJE: Dec 31 Doubtful Accounts Expense 2,400

The uncollectible account is computed as (P500,000 - P20,000) x 0.005 = P2,400.

Accounts Receivable P100,000

Allowance for Doubtful Accounts

5% of outstanding accounts are doubtful.

AJE: Dec 31 Doubtful Accounts Expense 2,000

The uncollectible account is computed as P100,000 x 0.05 = P5,000 - P3,000 = P2,000.

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 2

Accounts Receivable P100,000

Allowance for Doubtful Accounts

Customer Balance Not Past Days Past Due

Customer Balance Due Date

ECQ Company has a past history of uncollectible accounts as shown bellow:

Age Class Percentage of Uncollectibility

Corona Industries August 24 - November 30 = 98 days old

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 3

Customer Balance Not Past Days Past Due

Allowance for Doubtful Accounts

AJE: Nov 30 Doubtful Accounts Expense 55,800

Accounts Receivable P959,500

Positive indicators of the worthlessness of a customer’s account include bankruptcy, disappearance of

Direct Method Allowance Method

Doubtful Accounts Expense xx Allowance for Doubtful Accounts xx

Direct Method Allowance Method

Accounts Receivable xx Accounts Receivable xx

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 4

Direct Method Allowance Method

Note: If the problem is silent, Allowance Method is assumed.

AJE: Dec 31 Cost of Goods Sold 20,000

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 5

1. An error in beginning inventory will have a reverse effect on net income.

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 6

1. name of the reporting entity;

FORMS OF INCOME STATEMENT

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 7

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 8

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 9

Cash P 15,060 Y. Ghana, Drawing 4,500

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 10

2019 Particulars Debit Credit

Rent Expense 600

Commissions Revenue 120

Prepaid Insurance 1,600

Doubtful Accounts Expense 1,750

Depreciation Expense - Building 7,500

Depreciation Expense - Equipment 600

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 11

2019 Particulars Debit Credit

Income Summary 120,000

Merchandise Inventory - December 31 160,000

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 12

Y. Ghana, Capital - July 1, 2019 P 263,300

ACC 01 | Fundamentals of Accountancy, Business and Management Part 1 13

Liabilities and Owner’s Equity