Summary Funacc

DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE
AND TECHNOLOGY
JUSTINIANA EDERA, SAN JOSE, DINAGAT ISLANDS
CHAPTER I
FUNDAMENTALS OF ACCOUNTING
Accounting is the process of IDENTIFYING, RECORDING, and COMMUNICATING economic events of an
organization to interested users.” (Weygandt,J.et.al)
IMPORTANCE OF ACCOUNTING IN BUSINESS

As we all know, there are so many people who depend their means of livelihood on employment
in various business establishments. Thus, business is of central importance in our economic society.
Business as an organization has some goals to attain. Its success depends to a great extent on the ability
of management to render decisions in behalf if the business? But what is the basis of management in
making decisions. Accounting provides management with information essential to the efficient conduct
and evaluation of its activities. It gathers data which are of financial in character, identifies which data
are relevant to the decisions to be made, processes and analyzes these data before transforming into
reports that can be used in making better decisions. Therefore, decision-makers of the business are
relying on accounting data to be able to make decisions.
At this point, the accountant who is a knowledgeable expert professional in the field of accounting
enters into the picture in the world of business. In general, the primary role of an accountant in business
is to prepare financial statements. The accumulated accounting data that are stored in the books of
accounts are transformed into report form called “financial statements”. To make this report more
meaningful, significant and historic in the life of the business, he does the most sensitive aspect of
accounting by analyzing and interpreting these financial data and provide the management with guide
and a basis for formulating and adopting financial plans and policies that will lead to efficient
management, thereby the goals and objectives for the business are attained.
IDENTIFYING- this involves selecting economic events that are relevant to a particular business
transaction. The economic events or transactions- In a bakery business:
 Sales of bread and other bakery products.

 Purchases of flour that will be used for baking
 Purchases of trucks needed to deliver the products.
RECORDING- this involves keeping a chronological diary of events that are measured in pesos. The diaries
referred to in the definition are the journals and ledgers.
COMMUNICATING- occurs through the preparation and distribution of financial and other accounting
reports.
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IMPORTANCE OF KEEPING BUSINESS RECORDS

The business should keep a “diary” of all transactions and events that it may have entered into. It is
difficult to memorize or recall considering the volume of the day to day transactions that occurred. The
records that are used and kept for this purpose are called books of accounts. While the data that are
stored in the book of accounts which are of financial in character are called accounting data which will
later be processed and transformed into a report form called financial statements.
NATURE OF ACCOUNTING
According to Accounting Theory: Accounting is a systematic recording of financial transactions and the
presentation of the related information to appropriate persons.”
 Accounting is a service activity. Accounting provides assistance to decision makers by providing

them financial reports that will guide them in coming up with sound decisions.
 Accounting is a process. A process refers to the method of performing any specific job step
according to the objectives or targets. Accounting is identified as a process, as it performs the
specific task of collecting, processing and communicating financial information. In doing so, it
follows some define steps like the collection, recording, classification, summarization, finalization,
and reporting of financial data.
 Accounting is both an art and discipline. Accounting is the art of recording, classifying,
summarizing and finalizing financial data. The word “art” refers to the way something is
preformed. It is behavioral knowledge involving a certain creativity and skill to help us attain some
specific objectives. Accounting is systematic method consisting of define techniques and its proper
application requires skill and expertise. So by nature, accounting is an art. And because it follows
certain standards and professional ethics, it is also discipline.
 Accounting deals with financial information and transactions: accounting records financial
transactions and data, classifies these and finalizes their results given for a specified period of
time, as needed by their users. At every stage, from start to finish, accounting deals with financial
information and financial information only. It does not deal with non-monetary or non-financial
aspects of such information.
 Accounting is an information system: Accounting is recognized and characterized as a storehouse
of information. As a service function, it collects processes and communicates financial information
of any entity. This discipline of knowledge has evolved to meet the need for financial information
as required by various interested groups.
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FUNCTION OF ACCOUNTING IN BUSINESS

Accounting is the means by with business information is communicated to business owners and
stakeholders. The role of accounting in business is to provide information for managers and owners to use
in operating the business. In addition, accounting information allows business owners to assess the
efficiency and effectiveness of their business operations. Prepared accounting reports can be compared
with industry standards or to a leading competitor to determine how the business is doing. Business
owners may also use historical financial accounting statements to create trends for analyzing and
forecasting future sales.
NATURE OF BUSINESS
A business firm may be classified in terms of what they offer, sell or produce.
They are as follows.
SERVICE CONCERN- the business derived its income from services rendered to clients in the case of
professional services like that of Accountants, Lawyers, Doctors, Dentist, etc. or to customers, in the case
of non-professional services, like that of a laundry shop, car repair shop, janitorial servicing etc.
MERCHANDISING – the business is engaged in buying goods or commodities or any form of finished
products and sells these at a profit. It might be at a retail or wholesale basis. Grocery stores are typical
examples of this nature of business.
MANUFACTURING - the business is engaged in buying of raw materials and supplies to be processed or
manufactured, converting them into finished products for sale at a profit, like that of a furniture shop, a
manufacturer of cars ad a home appliances and the like.
AGRICULTURE- The business is engaged in planting of corps and sells its products either in raw or finished
form at a profit.
LEGAL FORMS OF BUSINESS ORGANIZATION

There are four (4) legal forms of business organization that a person may choose from in establishing a
business. They are Sole or Single Proprietorship, Partnership, Corporation and Cooperatives. The
Generally Accepted Accounting Principles will still apply the Financial Statement of all four forms of
organization.
Sole Proprietorship- This is the simplest form of business organization where capital is owned and
provided by only one person called “Proprietor” who may manage the business by himself or hire another
person to do so.
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Partnership- the capital of the business is owned or provided by the two or more person called “Partners”
who should set forth agreements among themselves which include among others, the initial investments
of each partner, how profit and loss is to be divided and settlement to be made upon death or withdrawal
of a partner as embodied in the “ Articles of Co-Partnership” they have executed.
Corporation- this is the biggest and most complicated form of business organization. This is organized by
at least five but not more than fifteen person called “Incorporators”. Its capital is called “Capital Stock”
which is divided into units called “shares” and each share has a designated value called “Par Value”.
Owners of the shares of stock are called “stockholders”. Shares of stocks can be transferred without
dissolving the corporation, so it enjoys unlimited life.
COOPERATIVES - it operates similar to a corporation. It has its Board of Directors who are selected from
among its members. However, while number of voting shares in a corporation is based on shareholdings,
in a cooperative it is on a “ one-man, one vote” basis. Moreover , patronage refunds are given to
cooperative members who patronized their business activities.
HISTORY OF ACCOUNTING
Accounting is as old civilization itself. It has evolved in response to various social and economic needs of
men. Accounting started as a simple recording of repetitive exchanges. The history of accounting is often
seen as indistinguishable from the history of finance and business.
Following is the evolution of accounting:
THE CRADLE OF CIVILIZATION
Around 3600 BC record-keeping was already common from Mesopotamia, China and India to Central and
South America. The oldest evidence of this practice was the “clay tablet” of Mesopotamia which dealt
with commercial transactions at the time such as listing of accounts receivable and accounts payable.
14TH CENTURY- DOUBLE-ENTRY BOOKKEEPING
The most important event in accounting history is generally considered to be the dissemination of double
entry bookkeeping by Luca Pacioli (Father of Accounting) in 14 th century Italy. Paciolii was much revered
in his day, and was a friend and contemporary of Leonardo da Vinci. The Italians of the 14 th to 16th
centuries are widely acknowledged as the fathers of modern accounting and were the first to commonly
use Arabic numerals, rather than Roman, for tracking business accounts. Luca Pacioli wrote Summa de
Arithmetica, the first book published that contained a detailed chapter on double entry bookkeeping.
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FRENCH REVOLUTION (1770s)
The thorough study of accounting and development of accounting theory began during this period. Social
upheavals affecting government, finances, laws, customs and business had greatly influenced the
development of accounting.
THE INDUSTRIAL REVOLUTION (1760-1830)
Mass production and the great importance of fixed assets were given attention during this period.
19TH CENTURY- THE BEGINNINGS OF MODERN ACCOUNTING IN EUROPE AND AMERICA
The modern, formal accounting profession emerged in Scotland in 1854 when Queen Victoria granted a
Royal Charter to the Institute of Accountants in Glasgow, creating the profession of the Chartered
Accountant (CA). In the late 1800s, chartered accountants from Scotland and Britain came to the U.S. to
audit British investments. Some of these accountants stayed in the U.S., setting up accounting practices
and becoming the origins of several U.S. accounting firms. The first national U.S. accounting society was
set up in 1887. The American Association of Public Accountants was the forerunner to the current
American Institute of Certified Public Accountants. (AICPA) In this period rapid changes in accounting
practice and reports were made. Accounting standards to be observed by accounting professionals were
promulgated. Notable practices such as mergers, acquisitions and growth of multinational corporations
were developed. A merger is when one company takes over all the operations of another business entity
resulting in the dissolution of another business. Businesses expanded by acquiring other companies.
These types of transactions have challenged accounting professionals to develop new standards that will
address accounting issues related to these business combinations.
THE PRESENT- THE DEVELOPMENT OF MODERN ACCOUNTING STANDARDS AND COMMERCE
The accounting profession in the 20th century developed around state requirements for financial
statement audits. Beyond the industry’s self-regulation, the government also sets accounting standards,
through laws and agencies such as the Securities and Exchange Commission (SEC). As economies
worldwide continued to globalize, accounting regulatory bodies required accounting practitioners to
observe International Accounting Standards. This is to assure transparency and reliability, and to obtain
greater confidence on accounting information used by global investors.
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STUDENT’S NAME: ____________________________________

COURSE AND YEAR: _____________ CLASS SCHEDULE:
INSTRUCTOR: REX T. PASQUIL
Question for Review:
1. Define Accounting.
2. Give examples of decisions or questions that can be supported by accounting information.
3. Do you agree: “Accounting is vital to the success of a business?” Explain.
4. Do you think that non-financial information is still useful in the accounting process? Why or why
not? Explain.
5. Give a concrete example on how you can use accounting in your daily life.
6. Give some limitations of accounting.
SUMMATIVE ASSESSMENT
1. Which of the following is NOT a step in the accounting process?

a. Identification
b. Communication
c. Recording
d. Verification
2. Which of the following is NOT a relevant economic event?
a. An agent who attended to the concern of a complaining customer
b. Patricia, manager of Company X, who sold an abandoned building of her company.
c. Company Y which borrowed Php. 5M from a bank due to tight financial condition.
d. Company Z which paid its employees their salaries for the month of January.
3. Which of the following does NOT show one of the main functions of accounting?
a. Fred prepared a report to be submitted to the taxing authorities.
b. John recorded the purchase of equipment in the accounting books immediately after
purchase.
c. Jason prepare financial reports monthly for the company stakeholders.
d. Allen canvassed the price of sewing machine to be used in the company operations.
4. Which of the following statements describes the accounting process?
a. It involves identifying relevant economic events.
b. Recording economic events is an essential part of the accounting process.
c. The accounting process is not complete if the financial information is not communicated to
interested users.
d. All of the above.
5. Which is the most important step in the accounting process?
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a. Identification
b. Recording
c. Communication
d. All steps are equally important.
6. Who is considered as the father of modern accounting?
a. Queen Victoria
b. Luca Pacioli
c. Augustus
d. Suetonius
7. Which of the following is mostly used by accountants in communicating the results of operations
to outside parties?
a. Performance memos
b. Bulletin board postings
c. Public announcements of the results of operations
d. Financial statements
8. What profession does NOT use accounting information at all?
a. Entrepreneurs
b. Economists
c. Government Officials
d. None of the above
9. Who is the person responsible for the process of identifying, recording, and communicating
economic events of an organization?
a. Manager
b. Accountant
c. Bookkeeper
d. Treasurer
10. Statement I- Small businesses, such as sari-sari stores, have little to no use of accounting.
Statement II- Accounting reports and/ or financial statements need not be presented in a
standardized way.
a. Both statements are true.
b. Only Statement I is true.
c. Only Statement II is true.
d. Both statements are false.
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CHAPTER II
BUSINESS AND ACCOUNTING
Accounting is divided into several branches to better serve the needs of different users with varying
information needs. These branches sometimes overlap and they are often closely intertwined.
FINANCIAL ACCOUNTING
Financial accounting is the broadest branch and is focused on the needs of external users. Financial
accounting is primarily concerned with the recognition, measurement and communication of economic
activities. This information is communicated in a complete set of financial statements. It is assumed under
this branch that the users have one common information need. Financial accounting conforms with
accounting standards developed by standard-setting bodies. In the Philippines, there is a Council created
to set these standards. Examples of these financial reports include:
 The balance sheet (statement of financial condition)

 Income statement ( the profit and loss statement, or P&L)
 Statement of cash flows
Financial accounting is primarily concerned with processing historical data. Although financial accounting
generally meets the needs of external users, internal users of accounting information also use this
information for their decision-making needs.
MANAGEMENT (Managerial) ACCOUNTING
Management accounting emphasizes the preparation and analysis of accounting information within the
organization. The objective of managerial accounting is to provide timely and relevant information for
those internal users of accounting information, such as the managers and employees in their decision-
making needs. Oftentimes, these are sensitive information and are not distributed to those outside the
business for example, prices, plans to open up branches, customer list, etc. Managerial accounting
involves financial analysis, budgeting and forecasting, cost analysis, evaluation of business decisions, and
similar areas.
GOVERNMENT ACCOUNTING
Government accounting is the process of recording, analyzing, classifying, summarizing, communicating

and interpreting financial information about the government in aggregate and in detail reflecting
transactions and other economic events involving the receipt, spending, transfer, usability and disposition
of assets and liabilities. This branch of accounting deals with how the funds of the government are
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recorded and reported. Government accounting deals with these transactions, the recording of inflow
and outflow of funds of the government.
AUDITING
There are two types of auditing: external and internal auditing. External auditing refers to the
examination of financial statements by an independent CPA (Certified Public Accountant) with the
purpose of expressing an opinion as to fairness of presentation and compliance with the Generally
Accepted Accounting Principles (GAAP). The audit does not cover 100% of the accounting records but the
CPA reviews a selected sample of these records and issues an audit report. Internal Auditing deals with
determining the operational efficiency of the company regarding the protection of the company’s asstes,
accuracy and reliability of the accounting data, and adherence to certain management policies. It focuses
on evaluating the adequacy of a company’s internal control structure by testing segregation of duties,
policies and procedures, degrees of authorization, and other controls implemented by management.
TAX ACCOUNTING
Tax accounting helps clients follow rules set by tax authorities. It includes tax planning and preparation of
tax returns. It also involves determination of income tax and other taxes, tax advisory services such as
ways to minimize taxes legally, evaluation of the consequences of tax decisions and other tax-related
matters.
COST ACCOUNTING
Sometimes considered as a subset of management accounting, cost accounting refers to the recording,
presentation, and analysis of manufacturing costs. Cost accounting is very useful in manufacturing
business since they have the most complicated costing process. Cost accountants also analyze actual and
standard costs to help managers determine future courses of action regarding the company’s operations.
Cost accounting will help the owner set the selling price of his products.
ACCOUNTING EDUCATION
This branch of accounting deals with developing future accountants by creating relevant accounting
curriculum. Accounting professional can become faculty members of educational institutions. Accounting
educators contribute to the development of the profession through their effective teaching, publications
of their research and influencing students to pursue careers in accounting. Accounting teachers share
their knowledge on accounting so that students are informed of the importance of accounting and its use
in our daily lives.
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ACCOUTING RESEARCH
Accounting research focuses on the search for new knowledge on the effects of economic events on the
process of summarizing, analyzing, verifying, and reporting standardized financial information, and on the
effects of reported information on economic events. Researchers typically choose a subject area and a
methodology on which to focus their efforts. The subject matter of accounting research may include
information systems, auditing and assurance, corporate governance, financials, managerial and tax.
Accounting research plays an essential part in creating new knowledge. Academic accounting research “
addresses all aspects of the accounting profession” using a specific method. Practicing accountants also
conduct accounting research that focuses on solving problem for client or group of clients. The accounting
research helps standard-setting bodies around the world to develop new standards that will address
recent issues or trend in global business.
GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)
The preparation of financial statements is governed and guided by Generally Accepted Accounting
Principles (GAAP). Generally Accepted Accounting Principles are uniform set of accounting rules,
procedures, practices and standards that are followed in preparing the financial statements. Before an
accounting principle becomes generally accepted in the practice, it must first meet with the following
requirements, to wit:
a. It must have been established by a standard-setting body and must have gained world-wide or
universal acceptance among practitioners:
b. It must have substantial authoritative support from accounting bodies, such as Securities and
Exchange Commission ( SEC), Financial Executive Institute of the Philippines (FINEX), Bangko
Sentral ng Pilipinas (BSP), Board of Accountancy (BOA), Commission on Audit (COA) and other
respectable members of the financial community both locally and internationally.
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Accounting
Business
Organization operations
Sole partn corpor service Mercha Manufac

proprie ndising turing
ership ation
torship
ACCOUNTING PRINCIPLES
Some of the General Accepted Accounting Principles that are followed and are still applicable for use are:
1. Cost Principle- this principle requires that assets should be recorded at original or acquisition cost.
2. Objectivity Principle- This principle requires that accounting records should be based on reliable
ad verifiable data as evidence of transactions.
3. Materiality Principles- This principle dictates practicability to rule over theory in determining the
evaluation of an item. To determine whether the item is material or not, it is a matter of
professional judgment on the part of the accountant.
4. Matching Principle- This is the combined concept of Revenue Recognition and Expenses
Recognition Principles. Revenue should be recognized when earned and corresponding expense
should be recognized when incurred during the same period as revenue is earned. Proper
matching of revenue and expense are called for.
5. Consistency Principle- this principle requires that accounting methods and procedure should be
applied on a uniform basis from period to period to achieve comparability in the financial
statements.
6. Adequate Disclosure Principles - this principles requires that financial statements should be free
from any material misstatement; that if there is any, proper disclosure should be made.
7. Business entity principle- A business enterprise is separate and distinct from its owner or investor.
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MOTIVE OF PERSONS ENGAGED IN BUSINESS
The primary motive of persons engaged in business is profit. When we put in or invest capital into the
business which may either be in terms of money, property or both, we expect to receive in return an
amount more than they invested. But risk is inherent in every business activity, so that the results of its
operations may not always turn out to be as expected. Business sometimes suffers setbacks and thereby
incurs losses. However, a business may stand at a point much better than incurring losses. That if the
business cannot make profits, it cannot also incur losses. This is an instance wherein total sales or income
earned and total costs and expenses incurred at the end of a given period are equal. This “No profits, no
loss” situation of the business is being referred to as “break-even”
Illustrated below are three (3) possible results of the business operations:
At profit At Loss At Break-even
Sales or
Income Earned 100,000 100,000 100,000
Less: Cost & Exp. 80,000 120,000 100,000
Profit (loss) 20,000 (20,000) -0-
BASIC ACCOUNTING ASSUMPTIONS

1. Accounting Entity- This assumes that from accounting point of view, the business is considered as
“an entity that is separate and distinct from the owner or management”. When the owner puts in
money, property or both into the business, these become “not his personal assets anymore but
rather the assets of the business already”.
2. Going- Concern Assumption- the business is assured to have a continuous life of existence. Thus,
it will continue to operate for an indefinite period of time, so that financial statements are
prepared in a going concern unless there is a specific evidence to the contrary where departure
from and abandonment of this assumption warrants.
3. Time-Period Assumption- this assumes that the business has a continuous life of existence. It is
very impractical to wait for several years before its financial position, performance or result of
operations and cash flows can be known. Due to the duration of its existence, the life of the
business is divided into equal periods wherein at the end of each period the accountant prepares
the financial statements. The period being referred to is known as “accounting periods”.
The owner or management has three (3) annual accounting periods to choose from as far as
periodic reporting of financial statements are concerned, these are:
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 Calendar Year- The accounting period will begin on January 1 and will end on December
31 of the same year. This is the most common annual accounting that the business adopts
because this is the nearest accounting period wherein business adopts because this is the
nearest accounting period wherein business entities file their Income Tax Returns. There
are four (4) quarters in a calendar year and each quarter consisting of three (3) months.
The first quarter covers from January 1 to March 31; the second quarter covers from April
1 to June 30; the third quarter covers from July 1 to September 30; and the fourth quarter
and the last quarter covers from October 1 to December 31.
 Fiscal Year – accounting period will begin on the first day of any month of the year except
January and will end on the last day of the twelfth month completing the one year period.
The period begins on July 1 20A, it will end on June 30,20B. If quarterly basis is used in
reporting of financial statements, the first quarter covers July 1 to September 30; the
second quarter covers October 1 to December 31; the third quarter covers January 1 to
March 31; and the fourth and the last quarter covers April 1 to June 30.
 Natural Business Year – is a twelve month period that ends on any month when the
business is at the lowest or experiencing slack season. An enterprise may adopt any of the
preceding accounting periods. The basic consideration in the choice of an accounting
period is that the accounting period chosen must be reflective of result of “normal
operations”.
 Unit of Measure- this assumes that in the Philippines we used the “peso” as a unit of
measure. Peso as a unit of measure is assumed further to have a “stable value” which
means that purchasing power of the peso is “constant” regardless of inflation rates or
fluctuation in money values. In this, the function of accounting is “to account for peso only
and not for changes in its purchasing power”.
 Accrual Basis- this assumes that the recording of income and expense follow the accrual
basis of accounting. Under accrual basis, income is recognized when earned regardless of
when received and expense is recognized when incurred regardless of when paid. In other
words, the essence of accrual basis of accounting is the recognition of accounts receivable,
accounts payable, prepaid expenses, accrued expenses, deferred income and accrued income. This
practice results to proper matching of revenue and cost and expenses and could therefore show a
correct and meaningful financial statements.
ELEMENTS OF FINANCIAL STATEMENTS

There are five (5) elements of financial statements which are follows:
1. Assets
2. Liabilities
3. Owner’s Equity or Capital
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4. Revenue or Income
5. Expenses
ASSETS- are defined as “resources controlled by the enterprise as a result of past transactions and events
and from which future economic benefits are expected to flow the enterprise. In layman’s language,
assets denote things of value that are owned and used by the enterprise in its operations. Examples are
cash, building, land, machinery, furniture and fixtures, equipment, tools, etc. it also includes inventories,
prepaid expenses and a debt collectible by the enterprise from a customer from a customer which we
termed as a “Receivable”.
The following are the essential characteristics of an asset:
1. The asset is controlled by the enterprise;

2. The asset is a result of a past transaction or event;
3. The asset provides future economic benefit;
4. The cost of the asset can be reliably measured.
LIABILITIES – are defined as “ present obligations of an enterprise arising from past transactions or
events, the settlement of which is expected to result in an outflow from the enterprise of resources
embodying economic benefits”. In layman’s language, liabilities denote financial obligations of the
business to its creditors. It represents the claim of the creditors over the assets of the enterprise.
The following are the essential characteristics of a liability:
1. The liability is the present obligation of a particular enterprise. This means that the enterprise’
liability must be identified;
2. the liability arises from past transactions or events. This means that the liability is not recognized
until it is incurred;
3. the settlement of the liability requires an outflow of resources embodying economic benefits.
This means that the obligation of the enterprise is to transfer cash and non-cash resources or
provide services at some future time.
OWNER’S EQUITY OR CAPITAL – is the residual interest in the assets of the enterprise after deducting all
its liabilities. It is expressed in the equation as assets less liabilities equals owner’s Equity or Capital. It is
increased when there is Profit or additional contributions by the owner and decreased when there is loss
or withdrawal by the owner. In layman’s language, owners equity or Capital is the amount of money or
value of property put by the proprietor into the business to start with the operations which is referred to
as “ Initial Investment” or “ initial capital” Capital is synonymous to “ Proprietorship”’ “”Proprietary
Interest” or Net worth.”
The terms used in reporting the equity of an enterprise depending on what form of enterprise so as:
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1. Owner’s Equity for a proprietorship

2. Partner’s Equity for a partnership
3. Stockholders’ Equity or Shareholders’ Equity for a corporation.
Drawing or Personal- Refers to the amount of cash or value of the property that the owner has invested
in the enterprise but later withdrawn for personal use.
Revenues and Expenses which are the temporary accounts of Owner’s Equity are the components of an
Income Statement, a financial statement which directly relates to the measurement of performance
(previously termed as a result of operation) of an enterprise at the end of a given period of time.
REVENUE AND GAINS - it defines revenue as the “gross inflow of economic benefits during the period
arising in the course of ordinary activities of an enterprise when those inflows result in increase in equity,
other than those relating to contributions from owners”. Examples are proceeds from services rendered
by a servicing firm, income from use by other entities of the resources of the enterprise like royalties
income, rent income, interest income etc. and sale merchandise by a trading firm, while gains include
income from activities and events that do not form part of the ordinary course of the business operation.
Example is gain on sale of property and equipment, etc.
EXPENSES AND LOSSES- are the “gross outflow of economic benefits during the period arising in the
course of ordinary activities of an enterprise when those outflow result in decrease in equity, other than
those relating to distribution to owners”. Examples are salaries expense, rent expense, stationery and
supplies expense, bad debts, depreciation, taxes and licenses, etc,. while losses represent decreases in
assets or increases in liabilities arising from that activities or events that are outside the ordinary course
of business operation. Examples are the loss from sale of property and equipment loss due to theft or
pilferage et.
PROFIT (LOSS) – the excess of revenues over expenses is called “profit”, if an expense exceeds the
revenue a “Loss”
FINANCIAL STATEMENTS
Financial Statements are the means by which the information accumulated and processed in financial
accounting are periodically communicated to the users. They are designed to serve the needs of variety of
users, particularly owner and creditors. We will see then the “why” of accounting and this will facilitate
our learning on the “how” or the mechanics of the financial statements preparation.
1. Balance Sheet- is a financial statement which shows the financial position of an enterprise as of a
particular date. It consists of three (3) sections which are the Assets, Liabilities and Owner’s Equity
section. A balance sheet is always dated as follows;
“As of specific date”
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The balance sheet measures and evaluates in term of the enterprise liquidity, solvency,
financial structure and capacity for adaptation. Liquidity is the ability of the enterprise to meet currectly
maturing obligations. Solvency is the availability of cash over the longer term to meet maturing
obligations. Financial Structure is the source of financing for the assets of the enterprise. It indicates how
much is borrowed capital and how much is equity capital. Capacity for Adaptation is the financial
flexibility of the enterprise to use the available cash for unexpected requirements and investment
opportunities
Davao Laundry Services

Balance Sheet
As of 31, March 20A
ASSETS
Current Assets
Cash in Bank P 743,000
Accounts Receivable P 35,000
Less: Allow. For Bad Debts 350 34,650
Laundry Supplies 70,000
Total Current Assets P 847,650
Non-Current Assets:
Property and Equipment:
Laundry Equipment: P 150,000
Less: Accumulated Depreciation 2,500
Total Non-Current Assets 147,500
Total Assets P 995,150
LIABILITY AND OWNERS EQUITY
LIABILITIES
Current Liabilities
Notes Payable P 100,000
Accounts Payable 30,000
Accrued Advertising 3,000
Total Current Liabilities 133,000
OWNER’S EQUITY
S. Santos, Capital P 862,150
Total Liabilities and owner’s Equity P 995,150
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In the above balance sheet, the business tells us further that of the P 995,150, assets it owns, P
133,000 represents the claim of the creditors while the balance of P 862,150 represents the claim of the
owner over the assets of the business. More importantly, the balance sheet presents the equation,
ASSETS = LIABILITES + OWNER’S EQUITY
P 995,150 = P 133,000 + 862,150
2. INCOME STATEMENT- is a financial statement which shows the performance of the enterprise
for a given period of time. The performance of the enterprise is primarily measured in terms of the
level of income earned by the enterprise through effective and efficient utilization of its resources.
This income performance used to be known as the “results of operations” of the enterprise
consists of revenues, expenses and operating results which would either be profit or loss. The
relationship among the three can be expressed in the following:
REVENUE PXX
- EXPENSES XX
= PROFIT (LOSS) PXX

Income Statement
For the month ended 31 March 20A
Revenue
Laundry income P 80,000
Operating Expenses
Bad Debts P 350
Depreciation Exp. 2,500
Salaries Exp. 10,000
Rent Exp. 5,000
Utilities Exp. 12,000
Laundry Supplies Exp. 20,000
Taxes & Licenses 4,000
Advertising Exp. 3,000 56,000
Operating Income 23,150
Less: Finance Charges
Interest Exp. 1,000
Profit for the month 22,150
The business makes profit if total income earned exceeds total expenses incurred. If total expenses
incurred exceeds total income earned, the business incurs a loss. The business is said to be at break even
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if total income earned is equal to total expenses incurred. In the above income statement, it shows that
the business is making “profit” of P 22,150.
3. Statement of Changes in Equity – is a financial statement that summarizes the changes in equity
for a given period of time. The beginning equity of the owner is increased by the additional
investment and profit. Correspondingly, it is decreased by withdrawal and loss.
Shown below is the Statement of Changes in Owner’s Equity of Davao Laundry Services for the month
ended March 31,20A.

Statement of Changes in Owner’s Equity
S. Santos, Owner’s Equity – March 1,20A P850,000

Add: Additional Investment P -0-
Profit for the month 22,150 22,150
Total: 872,150
Less: Withdrawal 10,000
_______
S. Santos, Owner’s Equity –March 31,20A P 862,150
Looking at his Statement of Changes in Equity, we say that the beginning equity of the owner, Mr.
S. Santos in the amount of P850,000 has increased to P862,150 as a result of its operations. The amount
of increase is calculated as follows:
Owner’s Equity at the end P 862,150

Less: Owner’s Equity at the beginning 850,000
Increase in Owner’s Equity 12,150
The increase in owner’s equity by P12,150 is accounted for as follows:
Profit for the month (Increase Owner’s Equity) P22,150

Less: Owner’s withdrawal (Decrease Owner’s Eq) 10,000
Net Increase in Owner’s Equity P12,150
In an event wherein an owner’s withdrawal exceeds the profit of the business, there is a Net Decrease in
Owner’s Equity, hence, beginning owner’s Equity will also be decreased).
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4. Statement of Cash Flows- is a financial statement that provides information about cash inflows
(Receipts) and cash outflows (Payments) of an entity for a given period of time which are being
classified into the following activities:
a. Operating Activities- the inflows and outflows of cash from the normal operating activities of
the business.
b. Investing activities- the inflows and outflows of cash from the sale or purchase of assets other
than inventory.
c. Financial activities- the inflows and outflows of cash from the owners and creditors of the
enterprise.
This shows the net increase or decrease in cash during the period and the cash balance at the
end of the period.
As shown in the statement below, cash increased by P743,000. Increased is accounted for as follows:
Net cash flows provided by operating activities

Decreased cash (P47,000)
Cash flows from investing transactions
Decreased Cash (150,000)
Cash flow from financing transactions
Increased cash 940,000
Net increase in cash P743,000
Show below is the Statement of Cash Flows of Davao Laundry Services for the month ended
March 31,20A prepared under Direct Method.

Statement of Cash Flows
Cash Flows from Operating Activities

Cash received from customers ( 45,000 )
Payment of taxes and licenses ( 4,000 )
Payment of laundry supplies ( 60,000 )
Payment of Salaries ( 10,000 )
Payment of rental expense ( 5,000 )
Payment of utilities ( 12,000 )
Payment of interest ( 1,000 )
Net cash provided by ( used in)
Operating activities (P47,000)
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Cash Flows from Investing Activities:

Purchases of laundry equipment (150,000)
Net cash provided by (used in)
Investing activities (150,000)
Cash Flows from Financing Activities:
Cash received as investment by owner 850,000
Cash received from borrowing 100,000
Payment for withdrawal by owner (10,0000 )
Net cash provided by (used in)
Financing activities 940,000
Net Increase (Decrease) in Cash P 743,000

Cash balance at the beginning of the period ___-_____
Cash Balance at the end of the period P 743,000
5. Accounting Policies and Notes to Financial Statements- this is an integral part of the financial
statements. This presents significant accounting policies that affected the financial statements and
included supporting schedules of computations and disclosures of some events and other
information essential to understanding the company’s accounts.
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STUDENT’S NAME: ____________________________________
SELF ASSESSTMENT:
True or False
Instruction: Write letter “T” if the statement in correct and “F” if the statement is wrong.
_______1. Accounting provides management with information which are of financial in character
and identifies which data is relevant for decision – making.
_______2. The primary role of an accountant in business is to prepare financial statements.
_______3. Decision-makers of the business are relying of financial accounting data to be able to make
decisions.
_______4. The “no profit, no class “ situation of the business is referred to as “break-even”
_______5. The primary motive of a person of a person engaged in business is profit.
_______6. The accountancy profession is continually evolving and developing to meet the changing needs
of time.
______7. The length of accounting period chosen depends on the need of the owner for financial
information about his business.
______8. The period of one month is considered the shortest among the accounting periods.
______9. The excess of revenue over expenses is called operating loss.
______10. It becomes compulsory to all business establishments to maintain and keep business records
as required by law.
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STUDENT’S NAME: ____________________________________
DETERMINATION OF UNKNOWN ACCOUNTING ELEMENTS
The following relates to the financial position of an enterprise:
CASE 1 CASE 2 CASE 3 CASE 4
Assets P175,000 P450,000 P? P380,000
- Liabilities ________ 100,000 120,000 _______
= Owner’s Equity P75,000 P______ P180,000 P- 0 -
BASIC ACCOUNTING EQUATION
ASSETS = LIABILITIES + CAPITAL
CASE 1 P350,000 = P195,000 + P __________
CASE 2 _______ = 250,000 + 350,000
CASE 3 680,000 = ________ + 450,000
CASE 4 _______ = 650,000 + 320,000
CASE 5 275,000 = 85,000 + ____________
CASE 6 95,000 = ________ + 95,000
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STUDENT’S NAME: ____________________________________
Determination of Profit and Loss
The following relates to the operating returns (performance) of the business.:
CASE 1 CASE2 CASE3 CASE4 CASE5
Total Income P85,000 P90,000 P______ P60,000 P75,000

Total Expenses 60,000 ______ 40,000 ______ ______
Profit (loss) P______ P60,000 (P10,000) P10,000 P -0-
Determination of Profit, Loss and Breakeven
Profit (loss)
Income - Expenses = Breakeven
CASE 1 P350,000 - P260,000 = _________
CASE2 P450,000 - _______ = P270,000
CASE3 P150,000 - _______ = -0-
CASE4 P270,000 - _______ = (P20,000)
CASE 5 P150,000 - _______ = P30,000
CASE 6 _______ - P30,000 = (P20,000)
CASE 7 _______ - P50,000 = P10,000
CASE 8 _______ - P60,000 = -0-
CASE 9 _______ - P70,000 = P20,000
CASE 10 _______ - P90,000 = (P10,000)
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STUDENT’S NAME: ____________________________________
SUMMATIVE ASSESSMENT
PETNESS FIRST PETSHOP
Juan dela Cruz opened his pet shop business called Petness First Petshop. He opened a bank account for
his business and deposited PHP500,000. The business earned PHP50,000 but he had doubts with the
recorded expense of PHP60,000. He is not sure if he should include the following items as expenses:
Salary expense 20,000

Rent Expense 10,000
Utilities Expense (at home) 15,000
Utilities Expense (at the store) 10,000
Insurance expense 5,000
Withdrawals 10,000
TOTAL 60,000
Question
What do you think should not be included as expenses? Why?
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STUDENT’S NAME: ____________________________________
DISCUSSION QUESTIONS:
1. Explain the difference between assets and expenses?

2. Explain the difference between notes receivable and notes payable?
3. What are current and noncurrent liabilities?
4. What are items that increase / decrease equity?
5. Give examples of revenue.
6. In a corporation, what are the items included under the equity account?
7. Explain the difference between asset and expenses?
8. Explain the difference between notes receivable and notes payable?
9. Explain the difference between liabilities and revenues?
10. How is net income/ (net loss) determined?
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CHAPTER 3
RULES OF DEBIT AND CREDIT IN ACCOUNTING
Bookkeeping is the process of recording “systematically” the business transactions in a “chronological
manner”. It is systematic because “it follows procedures and principles”. It is chronological because the
transactions are recorded in “order of the date of occurrence.” The recording aspect is just one of the
four major functions of Accounting.
BUSINESS TRANSACTIONS AND EVENTS
Not all business activities are “accountable”. Business activities are said to be accountable and are
called business transactions and events when thet effect the assets, liabilities and owner’s equity or what
we previously termed as accounting elements or accounting values which are classified into two (2)
categories namely,
1. External transactions - these involve exchanges of economic resources by a business enterprise

with another business enterprise.
2. Internal transactions – these are transaction or events that happened or take place within the
business enterprise only.
Business events are the occasional occurrence in the life of business like for example, inventory loss due
to theft and robbery, decline in market valuation of inventory, calamities affecting the enterprise, etc.
Business transactions on the other hand, are exchanges of equal monetary values. This definition implies
the following concept of understanding:
1. For every value received, another value is given away as an exchange;

2. These values are measured in terms of pesos which are presumed to be equal.
To summarize, in every transaction, there is a Value Received, we call a Debit and Value Parted With, we
call a Credit. This is the “give and take” process of accounting as expressed in an equation:
Debit, Value Received = Credit, Value Parted With
ANALYSIS OF BUSINESS TRANSACTIONS

Business transactions are analyzed from the view point of the business. If the transaction is
“Purchased” or “Bought” it is the business that is buying; if the transaction is “sold”, it is the business that
is selling; if the transaction is “paid”, it is collecting; if the transaction is “collected”, it is the business that
is collecting; if the transaction is “Rendered Services”, it is the business that is rendering services, etc. and
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not the other way around. Don’t forget this, “always consider yourself as the business”, when making the
analysis.
The value received or debit should first be determined before the value parted with or credit. To
test your analytical ability on transaction analysis let us have a series of dry run or drill. Let us try this
, “If I’ll give you a spoon and you will give me a fork in return as an
exchange, can you determine the value received and the value parted
with?
If your answer is, the value received is spoon and the value parted
with is fork, you have answered it correctly. You will then say,
“Debit, Spoon and Credit, fork”
Let’s try it again, giving a final drill before we go into the business transaction analysis proper:
“If I’ll give you a piece of paper and you will give me a pen in return
as an exchange, can you determine the value received and the value
parted with?
If your answer is, the value received is a piece of paper and the value
parted with is a pen, you have answered it correctly again. You will
then say again,
“Debit, a piece of paper and Credit, pen”
Let us have this illustration:
“Bought a car for cash, P650,00.”
The following questions are answered for your final guide.
1. Who bought the car?

Ans. The business identifying
2. What is the value received?

Ans. Car
3. What is the value parted with? Analyzing
Ans. Cash
4. What is the peso equivalent of these exchanges?
Ans. P650,000 Measuring
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We then say,
Debit, value received – car P650,000

Credit, value parted with – cash P650,000 Journalizing
ACCOUNT TITLES
Account titles are identifications or brief descriptions of items that fall to same kind, class or nature. In
recording business transactions, the elements of financial statements which are better known as
accounting elements” or “accounting values” are to be assigned with their individual names called
“account titles”. In other words, it is a part of our study in accounting where we are to give or assign
names to various accounts.
Here are the different account titles which we have classified into Balance Sheet (financial position) and
Income Statement accounts (performance)
BALANCE SHEET ACCOUNTS

(Permanent Accounts)
ASSETS
Per PAS No. 1, assets are classified only into two, namely: Current Assets and non-current assets.
CURRENT ASSETS- Refer to all assets that are expected to be realized, sold or consumed within the
enterprise’s normal operating cycle. Operating cycle is the interval of the from the date of acquisition of
merchandise inventory, sell the inventory to customers and the ultimate collection of cash from the sale.
Cash – the account title to describe money, either in paper or in coins and money substitutes like check,
postal money orders, bank drafts and treasury warrants. When cash is within the premise of the business,
the account title is “Cash on Hand” and “Cash in Bank” if deposited in the bank.
Petty Cash Fund- The account title for money placed and set aside for petty or small expenses. This exists
when business used the imprested system of keeping cash.
Cash Equivalents- defined as short-term, highly liquid instruments that are readily convertible into cash
and they present insignificant risk of changes values because of changes in interest rates.
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Notes Receivable- This is promissory note that is received by the business from the customer arising
from rendering of services, sale of merchandise, etc.
Accounts Receivable- The account title for amounts collectible arising services rendered to a customer
or client on credit or sale of goods to customers on accounts. This constitutes an oral or verbal promise to
pay by a customer or client.
Allowance for Bad debts- This is an “asset offset” or a “contra-asset” account. It provides for possible
losses from uncollected accounts. Although this is not actually an asset, it is classified as such because it is
shown as a deduction from the Accounts Receivable which is a Current Asset Account.
Accrued Interest Income- the amount of interest earned on a Notes Receivable which is not yet
collected. (if the note is interest-bearing).
Advances to Employees - the amount title for amounts collectible from employees for allowing them to
make cash advances which are deductible against their salaries or wages.
Inventories- these are assets which are (1) held for sale in the ordinary course of business; (2) in the
process of production for such sale; or (3) in the form of materials or supplies to be consumed in the
production process or in the rendering of services.
Prepaid Expenses- account title for expenses that are paid in advance but are not yet incurred or have not
yet expired such as Prepaid Rental, Prepaid Insurance, Prepaid Interest, Prepaid Advertising, etc.
Unused Supplies – An account title for cost of stationery and other supplies purchased for use but are
left on hand and still unused. The account title should be specified as to “Unused Office Supplies” if
intended for the office, “Unused Shop Supplies” if intended for the shop, etc.
These accounts are normally arranged according to “liquidity” (ready conversion to cash) in the
Balance Sheet.
NON-CURRENT ASSETS- The FRSC states that “all other assets not classified as current should be classified
as non-current assets”.
Property and Equipment- defined as “tangible assets which are held by an enterprise for use in
production or supply of goods and services, for rental to others, or for administrative purposes, and are
expected to be used during more than one period”, such as:
a. Land – an account title for the site where the building used as office or store is constructed.
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b. Building- Account title for a finished construction owned by the business where operations and
transactions took place.
c. Equipment- includes calculators, typewriters, adding machines, computers, steel filing cabinets
and the like. If these are used in the office, the account title is “Office Equipment” and if used in
the store, “Store Equipment”. Trucks, jeeps, vans, automobiles and other kinds of motor vehicles
are used exclusively for delivering goods; the account title is “Delivery Equipment”.
d. Furniture and Fixtures - includes chairs, tables, counters, display cases and the like. If these are
used in the office, the account title is “Office Furniture & Fixtures” and if these are used in store,
the account title is “Store Furniture & Fixture”.
e. Accumulated Depreciation- this is an “asset offset” or “contra-asset” account. This is called a “
Valuation Account” which is shown as deduction from property and equipment.
f. Intangible Assets- These are identifiable non-monetary assets without physical substance.
Examples are patents, copyrights, franchises, trademarks, goodwill and others.
The assets that are classified as Property & Equipment or Fixed Assets are called “Depreciable Assets”
and are subject to “Depreciation” except land. Land is not subject to depreciation because it is
expected to be useful to the business enterprise for an indefinite period of time.
LIABILITIES
Liabilities are classified only into two, namely: current liabilities and non-current liabilities.
Current Liabilities- are financial obligations of the enterprise which are (a) expected to be settled in the
normal course of the operating cycle; (b) due to be settled within one year from the balance sheet date.
Account Payable- an account title for a financial obligation of an enterprise that constitutes an oral or
verbal promise to pay.
Notes Payable (Short-term) – as Accounts Payable in nature but only the obligation is evidenced by a
promissory note. The enterprise is the one who issued the note.
Accrued Expenses- these are expenses incurred by the enterprise but are not yet paid. This normally
occurs when the accounting period ended such as rent, salaries, interest, taxes payable etc.
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SSS Premium Payable – refers to the amount due and payable by the enterprise to the Social Security
System. This is composed of both employer and employees share of SSS contributions.
Philhealth Premium Payable – refers to the amount due and payable by the enterprise to the Philippine
Health Insurance Corporation. This is composed of both employer and employees’ share of Philhealth
contributions.
Pag-ibig Premium Payable - refers to the amount due and payable by the enterprise to the Home
Development Mutual Fund. This is composed of both employer and employees share of Philhealth
contributions.
Withholding Tax Payable- refers to the amount due and payable by the enterprise to the Bureau of
Internal Revenue for the tax withheld from employees.
Pre-collected or unearned Income- this is an account title for an income collected or received in advance
and is not yet considered as “earned”.
NON-CURRENT LIABILITIES – are financial long term obligations of the enterprise which are due and
payable for more than one year. This usually occurs in a corporate form of business organization.
Notes Payable (Long Term) - same nature with that of Notes
Payable (short-term) but only, this requires payment for more
than a year.
Mortgage Payable – a financial obligation of the enterprise
which requires a fixed or tangible property to be pledged as a
collateral to ensure payment.
OWNER’S EQUITY
Capital- This is the center of the owner’s concern because this may increase or decrease at anytime as a
result of business operation. In the normal course of operation, Owner’s Equity will be increased by “
income” and decrease by “expense”
The owner’s capital investment is indicated by the use of the owner’s name with a word “ capital” written
after the name which is separated by a “comma”. Thus, if the owner is Robert Jaworski, The title for his
capital account is,
“Robert Jaworski, Capital”
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Withdrawal- The owner’s withdrawal is likewise indicated by the use of the owner’s name with the word
“Drawing” or “Personal” written after the name which is separated by a “comma”. Thus, if the owner is
Robert Jaworski who made withdrawal, the title for his drawing account is,
“ Robert Jaworski, Personal” or “Robert Jaworski Drawing”
Income & Expense Summary- This is a temporary account created at the end of the accounting period
where Income and Expenses are temporarily closed to this account.
INCOME STATEMENT ACCOUNTS

(Temporary Accounts)
INCOME or REVENUE
Sales- In general, this represents revenue derived from the sale of merchandise.
Service Income- In general, this is the account title used for all types of income earned from the practice
of their profession or may be specified as “Accounting or Auditing Fees Income” for Accountd, “legal Fees
Income” for lawyers, “Dental Fees Income” for Dentist, “Medical Fees Income” for Doctors, etc.
Professional Income- the account title generally used by professionals for income earned from the
practice of their profession or may be specified as “Accounting or Auditing Fees Income” for
Accountants, “Legal Fees Income” for Lawyers, “Dental Fees Income” for Dentists, “Medical Fees
Income” for Doctors etc.
Rental Income- for income earned on buildings, space or other properties owned and rented out
by the business as the main line of its activity.
Interest Income - for income received by the business arising from an amount of money
borrowed by a customer and is usually covered by a promissory note. This is typical in a lending
institution.
Miscellaneous Income- for income earned by the business which is not the main line of its activity
and could not be clearly classified.
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EXPENSES
Cost of Sales or Cost of Goods Sold – cost to produce and sell the goods.
Interest Expense- an expense incurred from borrowed money. This is separately shown as a deduction
from Operating Income before arriving as Net Income.
Rent Expense- for the amount paid or incurred for use of property, usually premises.
Repairs and Maintenance- for experience incurred in repairing or servicing the building, machineries,
vehicles, equipment, etc, which are owned by the business.
Stationery and Office Supplies Expense- The stationery, envelopes, clips, fasteners, etc. used in the office
will bear the account title as “Office Supplies”;if use in the store ”Store Supplies” or another title may be
used to describe the kind of supplies used.
Salaries Expense – For compensation given to employees of a business. It may be specified as “Office
Salaries”, “Salesmen’s Salaries”, etc.
Bad Debts- for the anticipated loss that the business may occur arising from uncollectable accounts.
Depreciation Expense- for the allocated portion of the cost of property and equipment or fixed assets.
Taxes and Licenses- for the amount paid for business permits, licenses and other government dues
except the Income Tax paid which is not allowable by law as a deduction.
Insurance Expense- account title for the expired portion of the insurance premium paid.
Utilities Expense- account title for telephone, light and water bills. Also included is gasoline, lubricants
and oil.
SSS Contribution- Account title for the employer’s share on SSS Contribution.
Philhealth Contribution- account title used for the employer’s share on Philhealth Contribution.
Pag-ibig Contribution- The account title used for the employer’s share on Pag-ibig contribution.
Miscellaneous expense- any amount paid as expense with is not significant enough to warrant a
particular classification.
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STUDENT’S NAME: ____________________________________
Instruction: For each transaction, tell whether the assets, liabilities and equity will increase (I), decrease
(D) or is not affected (NE).
A L E
1. The owner invest personal cash in the business ______ ________ ________
2. The owner withdraws business assets fro personal
Use. ______ ________ ________
3. The company receives cash from a bank loan. ______ ________ ________
4. The company repays the bank that had lent money. ______ ________ ________
5. The company purchases equipment with its cash. ______ ________ ________
6. The owner contributes her personal truck to the business. _____ ________ ________
7. The company purchases supplies on credit. ______ ________ ________
8. The company purchases land by paying
Half in cash and signing a note. _____ ________ _______
9. The owner withdraws cash for personal use. ______ ________ _______
10. The company repays the suppliers. ______ ________ _______
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STUDENT’S NAME: ____________________________________
Instruction: The activity below is in reverse. Instead of analyzing transaction, describe each given entry
into a business daily transaction.
Example:
1. The owner invested cash of PHP 150,000 or the business earned PHP 150,000 cash from
providing services.
Date Assets Liabilities Owner’s Equity
Cash Supplies Equipment
Bal 60,000 7,500 300,000 75,000 292,500
1 150,000 150,000
2 (20,000) 20,000
3 (112,500) (112,500)
4 5,000 5,000
5 (15,000) (15,000)
6 (53,000) (53,000)
7 (8,000) (8,000)
STUDENT’S NAME: ____________________________________

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CLASSIFYING ACCOUNTING VALUES
Instruction: Classify the following account titles as to Assets, Liabilities and Owner’s Equity. Use “Check
Mark.
ASSET LIABILITY OWNER’S EQUITY
Sample (a) Rent Expense /

1. Cash in Bank
2. Felinda Dabalos, Capital
3. Postage and Communication
4. Accounts Receivable
5. Accounts Payable
6. Taxes and Licenses
7. Unused Office Supplies
8. Advances to Employees
9. Commission Income
10. Petty Cash Fund
11. Insurance Expense
12. Cash on Hand
13. Interest Income
14. Interest Expense
15. Retainer Income
STUDENT’S NAME: ____________________________________
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IDENTIFYING A CURRENT AND FIXED ASSETS

Instruction: Classify the following asset accounts. On the space provided, write CA, if Current Assets and
PE, if Property and Equipment.
1. Land ________
2. Accounts Receivable ________
3. Notes Receivable ________
4. Building ________
5. Unexpired Insurance ________
6. Cash on Hand ________
7. Furniture and Fixtures ________
8. Advances to Employees ________
9. Unused Office Supplies ________
10. Store Equipment ________
11. Prepaid Rent ________
12. Office Equipment ________
STUDENT’S NAME: ____________________________________
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Determination of Value Received and Parted With

Instruction: Determine the Value Received or Debit and the Value Parted With or Credit and indicate the
account classification as to Asset, Liability, Owner’s Equity, Income and Expenses. The transaction of
Sept. 1 is answered for your guide.
Value Received Account Value Parted with Account
Date or Debit Classification = or Credit Classification
Sept. 1 Cash Asset Rallos, Capital Owner’s Equity
3 ________ _________ ___________ ____________
5 ________ _________ ___________ ____________
8 ________ _________ ___________ ____________
10 ________ _________ ___________ ____________
12 ________ _________ ___________ ____________
14 ________ _________ ___________ ____________
16 ________ _________ __________ ____________
17 ________ _________ ___________ ____________
20 ________ _________ ___________ ____________
22 ________ _________ ___________ ____________
29 ________ _________ ___________ ____________
30 ________ _________ ___________ ____________
The following were the transactions of Miss Evansuenda Rallos during the month of September 20A.
Sept 1 Made cash investment to the business

3 Rendered Service on account
5 Borrowed money from a bank with a note issued
8 Received cash from services rendered
10 Withdrew cash from the business
12 Paid business permits
14 Received a promissory note for services rendered
16 Made additional investment – Computer.
17 Collected a customer’s account
20 Paid postage and stamps
22 Paid light and water bills (Utilities Expense)
29 Paid the promissory note issued
30 Paid salaries to employees.
STUDENT’S NAME: ____________________________________
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Effects of Transactions on the Accounting

Instruction: On the space provided, indicate either Increased or Decreased on the accounting values as
affected by the transactions. (No.1. is answered for your guide)
Affected Transactions Asset Liabilities Owner’s Equity
1. Initial investment of Cecil Rosada Increased Increased
2. Billed a customer for service rendered
3. Payment of salaries and wages
4. Cash collection from customers
5. Remittance of SSS Contributions
6. Issuance of a promissory note to supplier
7. Payment of 2 years insurance premium
8. Cash withdrawal of Cecil Rosada
9. Additional investment of Cecil Rosada
10. Purchased of computer on account
11. Received a promissory note from a customer
12. Sale of an old car owned by the business
13. Advance collection of services to be rendered
14. Rendered service to customer for cash
15. Payment of promissory note issued to a
supplier
16. Payment of taxes to the government
17. Payment of gasoline bills
18. Payment of 2 months advance rental
19. Collected the promissory note from a supplier
CHAPTER IV
EXTENDED ILLUSTRATIONS ON TRANSACTION ANALYSIS
The following transactions with corresponding analyses are given to illustrate the principle of debit
and credit with ready recognition of various forms of values:
Transaction 1- Brought a delivery car for cash, P500,000.
Analysis: In this transaction, the value we received is form of an Asset which is the delivery car, we call
Delivery Equipment and the value parted with is another form of an Asset which is Cash.
We then say,
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Debit, Asset-Delivery Equipment P500,000

Credit, Asset-Cash P500,000
Transaction 2- Sold an old typewriter for cash, P20,000.

Analysis: In this transaction, the value we received is a form of an Asset which is Cash and the value we
parted with is another form of an Asset which is the typewriter, we call Office Equipment.
We then say,
Debit, Asset-Cash P20,000
Credit, Asset-Office Equipment P20,000
Transaction 3- Bought laundry supplies on credit from SM City- Davao, P30,000.

Analysis: In this transaction, the value we received is a form of an Asset which is the Laundry Supplies
and the value parted with is a form of a Liability which is our “oral promise to pay”, we call Accounts
Payable.
We then say,
Debit, Asset-Laundry Supplies P30,000
Credit, Liability- Account Payable 30,000
Transaction 4-Paid our account with SM City – Davao, P30,000

Analysis: In this transaction we will get back our “oral promise to pay” as cancellation of our accounts.
The value we received, therefore, is a Liability, we call Accounts Payable and the value parted with is a
form of an Asset which is Cash.
We then say,
Debit, Liability- Accounts Payable P30,000
Transaction 5- Bought an office table on account from Emcor, P25, 000 and a promissory note was issued.
Analysis: In this transaction, the value we received is a form of an Asset which is office table, we call
Office Furniture & Fixture and the value parted with is out “written promise to pay” which is a Liability,
we call Notes Payable.
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We then say,
Debit, Asset-Office Furniture & Fixtures P25,000
Credit, Liability- Notes Payable P25,000
Transaction 6- Paid our account with Emcor, P25,000 and get back the promissory note we issued.
Analysis: In this transaction, we will get back our “ written promise to pay” as a cancellation of our
account. The value we received, therefore, is a form of a Liability, which is our written promise to pay, we
call Notes Payable and value parted with is a form of an Asset which is Cash.
We then say,
Debit, Liability-Notes Payable P25,000

Transaction 7- Received cash, P10,000 for services rendered to a customer.
Analysis: In this transaction, the value we received is a form of an Asset which is Cash and the value
parted with is a form of an Income which is our “services rendered.”
When then say,
Credit, Income-Service Income P10,000
Transaction 8- Rendered services to customer, P8, 000. The customer made an oral promise to pay
Analysis: In this transaction, the value we received is a form of an Asset which is our “right to collect”
from a customer’s account, we call an Accounts Receivable and the value parted with is form of an
Income which is our “services rendered”.
We then say,
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Debit, Asset-Accounts Receivable P8,000
Credit, Income-Service Income P8,000
Transaction 9- Collected the customer’s account, P8,000. (Refer to transaction No. 8)
Analysis: In this transaction, the value we received is a form of an Asset which is Cash and the value
parted with is another form of an Asset which is the cancellation of our “right to collect” from the
customer, we call Accounts Receivable.
When then say

Credit, Asset-Accounts Receivable P8,000
Transaction 10- Rendered services to a customer, P12,000. The customer gave us written promise to pay.
Analysis: In this transaction, the value we received is form of an Asset which is Cash and the value parted
with is another form of an Asset which is the returned of the promissory note to the customer as a
cancellation of our “right to collect”, we call Notes Receivable.
We then say:
Debit,Asset- Cash P12,000
Credit, Asset-Notes Receivable P12,000
Transaction 12 – Mr. Alfredo Salazar invest cash of P600,000 in the business.

Analysis: In this transaction, the value we received is a form of Asset which is Cash and the value parted
with is an “implied interest of the proprietor, Mr. Salazar to safeguard the amount of capital he puts into
the business, we call Owner’s Equity.
We then say,
Debit, Asset – Cash P600,000
Credit, Owner’s Equity- Salazar, Capital P600,000
Transaction 13- Mr. Alfredo Salazar withdraws cash of P5,000 from the business for his personal use.
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Analysis: In this transaction, the value we received is the “reduction of the proprietor’s capital”, we call
Drawing and value parted with is a form of an Asset which is Cash. (Drawing is a factor that will decrease
Owner’s Equity).
We then say,
Debit, Drawing – Salazar, Personal P5,000
Credit, Asset- Cash P5,000
Transaction 14- Paid salaries to employees for the month as follows:

Total Salaries P20,000.00
Less: Deductions
SSS P620.00
Philhealth 250.00
Pag-ibig 400.00
Withholding Tax 650.00 1,920.00
Amount of Cash to be paid P18,080.00
Analysis: In this transaction, the value we received is a form of an Expense which is the “benefit we get
from the services rendered by our employees”, we call Salaries Expense and the value parted with are as
follows.
1. Our promise to remit to Social Security System the employees’ share which we deducted from
employees’ payroll, we call a Liability-SSS Premium Payable, P620.00;
2. Our promise to remit to Philippine Health Insurance Corporation the amount of Philhealth which
we deducted from employees’ payroll, we call a Liability-PhilHealth Premium Payable, P250.00;
3. Our promise to remit to Home Development Mutual Fund the employees’ share which we
deducted from employees’ payroll, we call a Liability-Pag-ibig Premium Payable, P400.00
4. Our promise to remit to the Bureau of International Revenue the amount of tax which we
withheld from employees’ payroll, we call a Liability-Withholding Tax Payable, P650.00; and
5. An Asset – Cash, P18,080.00
We then say,
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Debit, Expense- Salaries Expense P20,000.00

Credit, Liability- SSS Premium Payable P620.00
Credit, Liability- PhilHealth Premium Payable 250.00
Credit, Liability- Pag-Ibig Premium Payable 400.00
Credit, Liability- Withholding Tax Payable 650.00
Credit, Asset Cash 18,080.00
(SSS, Philhealth and Pag-ibig contributions are mandatory deductions from employees’ payroll as
required by law)
Transaction 15- The business (employer) gives its counterpart on SSS, Philhealth and Pag-ibig
contributions.
Analysis: In this transaction, the value we received is the counterpart of SSS, Philhealth and Pag-ibig as
mandatory requirement by the government which is treated as “ Business Expense” and the value parted
with is a Liability which is our promise to make remittance to Social Security System, Philippine Health
Insurance Corporation and Home Development Mutual Fund.
We then say,
Debit, Expense- SSS Contribution P1,053

Debit, Expense- Philhealth Contribution 250
Debit, Expense- Pag-ibig Contribution 400
Credit, Liability- SSS Premium Payable P1,053
Credit, Liability- Philhealth Prem. Payable 250
Credit, Liability- Pag-ibig Premium Payable 400
Transaction 16 The business (employer) remits what is has deducted from payroll of employees together
with its counterpart contributions to social Security System, Philippine Health Insurance Corporation, and
Home Development Mutual Fund. (Refer to Transaction No. 15)
Analysis: In this transaction, the value we received is the fulfillment of our promise to remit which is a
Liability and the value parted with is Asset –Cash.
We then say,
Debit, Liability-SSS Premium Payable P1,673

Debit, Liability- Philhealth Prem. Payable 500
Debit, Liability- Pag-ibig Prem. Payable 800
Credit, Asset – Cash P2,973
Shares
Employee Employer Total
Social Security System P620 P1,053 P1,673
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Philhealth 250 250 500

Pag-ibig 400 400 800
Total 1,270 1,703 2,093
Transaction 17- the business (employer) remits to the Bureau of Internal Revenue the amount of tax that
was withheld from employees’ payroll, P650.00
Analysis: In this transaction, the value we received is the “fulfillment of our promise to remit” to Bureau
of Internal Revenue for the income tax we withheld, we call Liability-Withholding Tax Payable and the
value parted with is Asset – Cash.
We the say,
Debit, Liability-withholding Tax Payable P650

Credit, Asset-Cash P650
THE T-ACCOUNT
The effect of changes in Assets, Liabilities and Owner’s Equity are being summarized in an
accounting device called “account”. This device will group these accounting values with their amounts
belonging to one item only. In the item “cash” for example, all amounts representing increases and
decreases in cash are entered in the account “cash”.
An “account” is divided into two sides. The left – hand side which is called the “debit side” and the
right –hand side which is called the “credit side”.
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The left-hand or debit side shows the value received while the right hand or credit side shows the
Value parted with of transaction analysis. The device is commonly called “T-Account” because it
resembles a capital letter “T”. An account title is written above the T-Account.
Shown below is the information of an “Account”
ACCOUNT TITLE
Left- Hand side Right- Hand Side

Or or
Debit Side is for Credit Side
VALUE RECEIVED VALUE PARTED WITH
An amount entered on the left-hand side of the account is called a “debit Entry” while the amount
entered on the right- hand side called a “Credit Entry”.
The moment an “ account” is assigned to an item to which a title has already been designated,
such account becomes identical to the item thereafter. For instance the account assigned to the item
“Cash” becomes known as “ Cash Account” ; the account assigned to the item “Notes Receivable”
becomes known as “Notes Receivable Account”; the account assigned to the item “Rent Expense”
become known as “Rent Expense Account” and so forth.
To illustrate:
Show below is a T-account for the item “Cash”:
CASH
Dr. Cr.
(1) P25,000 (2) P10,000
As then item “ Cash” was written on top of the account, it becomes a Cash Account. The P25,000 that is
being entered at the left-hand side of the account is called a debit entry. The P10,000 that is being
entered at the right-hand side of the account is called a Credit Entry”.
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the words Debit and Credit came from the latin words “debere” and Credere. The former is abbreviated
as “Dr.” and the latter as “Cr.”
The words debit and credit can be used either as a verb or an adjective.
As a Verb:
To debit means to enter the amount of value received on the left-hand side or debit side of an account.
To Credit means to enter the amount of the value parted with on the right-hand or credit side of an
account.
We then say,
1. Cash account was debited by P25,000.” (this means that the amount of P25,000 was entered
on the debit side of the account)
2. Cash account was Credited by P10,000. This means that the amount of P10,000 was entered
on the Credit side of the account)
As an Adjective:
The words Debit and Credit are used to describe the two sides of the account.
We then say,
1. The debit side of cash account has an entry of P25,000. (the left-hand side of the account is being
referred to in this case)
2. The credit side of cash account has an entry of P10,000. (the right-hand side of the account is
being referred to in this case)
The total of the debit amounts or debit entries of an account is called debit total while the total of the
credit amounts or credit entries of an account is called Credit total.
Let us assume, Cash Account has the following entries:
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CASH
Dr. Cr.
P25,000 P10,000
20,000 5,000
Debit Total P45,000 P15,000- Credit Total
We then say,
Cash account has a debit total of P45,000 and credit total of P15,000.
AN ACCOUNT BALANCE
The difference between the debit total and credit total of an account is called an “Account
Balance”. If the total of the debit side exceeds the total of the credit side, the account is said to be in a
“Debit Balance”, Conversely, if the total of the credit side exceeds the total of the debit side, the account
is said to be in a credit Balance. If the debit total equals with that of the credit total, the account is said to
be “In Balance” or “Closed Account”
To illustrate:
The (3) three cases are being presented to illustrate an account balance.
Case 1: The “Cash Account” is used.
Let us assume, Cash account has the following debit and credit entries.
CASH
Dr. Cr.
P25,000 P10,000
10,000 5,000
Debit total- 35,000 P15,000 – Credit total
Debit balance P20,000
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In as much as the debit total (P35,000) exceeds the credit total (15,000), Cash account is said to be
in “Debit Balance”, by P20,000. Hence, the account balance of P20,000 was placed on the Debit side of
the account.
When then say,
“Cash account has a debit balance of P20,000”.
Case 2: The “Accounts Payable” account is used.
Let us assume, Accounts Payable account has the following debit and credit entries.
ACCOUNTS RECEIVABLE
Dr. Cr.
P15,000 P40,000
20,000 10,000
Debit total 35,000 P50,000- Credit Total
15,000- Credit balance
In as much as the credit total (P50,000) exceeds the debit total (P35,000), the Accounts Payable
account is said to in a “Credit Balance” by P15,000. Hence, the account balance of P15,000 was placed on
the Credit Side of the account.
We then say,
“Accounts Payable account has a credit balance of P15,000”.
Case: the “Accounts Receivable” account is used.
Let us assume, Accounts Receivable account has the following debit and credit entries:
ACCOUNTS RECEIVABLE
Dr. Cr.
P12,000 P10,000
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4,000 6,000
Debit total 16,000 16,000- Credit total
In as much as the debit total P16,000 equals with its credit total (16,000), the Accounts Receivable
account is said to be “in-balance” or “closed account”.
When then say,
Accounts Receivable account has a zero balance or the Accounts Receivable account is closed.”
DEBIT AND CREDIT
The term debit means “left” and “Credit” means “right”. This refers to an equation where the left
side is equal to the right side. If the left weights 60 pounds, correspondingly the right also weighs 60
pounds. There could be no instance that the left side weighs heavier or lighter than the right and vice
versa. The final rule is the “left will always equal to the right.”
BASIC ACOCUNTING EQUATION
As discussed earlier, the transaction analysis had developed an equation as:
VALUE RECEIVED = VALUE PARTED WITH

(The amount of value received will always equal with the amount of the value parted with)
When transactions are being recorded, there also developed a related Equation as:
DEBIT =CREDIT
(The amount entered on the debit side of an item’s account will always have a corresponding amount
entered on the credit side of another item’s account. Thus, the amount of the debit will always equal to
the amount of Credit).
To simplify, there are two basic elements of a business. These are
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1. What it owns
2. What it owes
Assets are the resources owned by the business (what it owns). Equities) are the rights or claims against
these resources (what it owes).
ASSETS = EQUITIES
Equities may be further sub-divided into two categories: Claim of Creditors and claim of the owner . The
claims of the creditors are called “Liabilities”. The claims of the owners are called “Owner’s Equity”.
Therefore, liabilities and owner’s equity. The equation above can then be expanded as follows:
ASSETS = LIABILITIES + ONWER’S EQUITY
This equation is referred to as the basic accounting equation. This accounting equation is applied
to all economic entities regardless of size, nature of business or forms of business organizations.
If the owners wants to know his proprietary interest in the business or if the wants to know how
much is his claim over the assets of the business, the accounting equation is restated as follows:
ASSET- LIABILITIES = OWNER’S EQUITY
EXPANDED ACCOUNTING EQUATION
To include the Income and Expense as temporary accounts together with drawing, the accounting
equation is expanded and restated as follows:
ASSETS= LIABILITIES + OWNER’S EQUITY(-Drawing+ Income-Expenses)
This very equation as related to the theory of Debit and Credit must not be interpreted that Assets will
always be received and therefore will always be debited and that liabilities and Owner’s Equity will
always be the value parted with and should always be credited. This equation relates to the Normal
Balances of the Three Account Values.
NORMAL BALANCES OF ACCOUNTS
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The Accounting Equation, ASSETS = LIABILITIES + OWNER’S EQUITY reflects the normal balances of the
three Accounting Values. This means that:
ASSETS - The normal balance is Debit
LIABILITIES - the normal balance is Credit
OWNERS EQUITY- the normal balance is Credit
The understanding of their respective normal balances is very important so that you can picture
the effect of charges on these values in terms of PESOS. To easily recall their normal balances is by
picturing at once the Accounting Equation.
SIDE POSITIONING
Additions and subtractions in the recording process are done by “Side Positioning”. As discussed
earlier, an account has two sides; the debit side and the credit side. An Asset which has normal balance of
a Debit is increased by entering the amount on the Debit side and is decreased by entering by entering
the amounts on the Credit Side.
Liabilities and Owner’s Equity which have the normal balances of Credit are increased by entering
the amounts of the Credit side and are decreased by entering the amounts on the Debit Side.
The other way of viewing these situations is by using the terms Positive and Negative ; Positive
means Add and Negative means deduct. The normal balances of theses value and its temporary accounts
are stated as Positive.
To illustrate:
ASSETS
Debit Side Credit Side
NORMAL BALANCE FOR NEGATIVE SIDE

POSITIVE SIDE Deductions or Decreases are
(Additions or Increases are entered here)
entered here
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We then say, DEBIT to increase an Asset and CREDIT to decrease an ASSET.
LIABILITIES
Debit Side Credit Side
NEGATIVE SIDE NORMAL BALANCE OR

(Deductions or Decreases Positive Side
Are entered here) (Additions or Increases are entered
Here)
We then say, CREDIT to increase a Liability and DEBIT to decrease a Liability
OWNER’S EQUITY
DEBIT SIDE CREDIT SIDE

(Deduction or Decreases POSITIVE SIDE
Are entered here) (Additions or Increases are
entered here
We then say, CREDIT to increase an Owner’s Equity and DEBIT to decrease an Owner’s Equity
the increase and decrease of an Owner’s Equity account are diagramed below:
INCREASE DECREASE
Investments Withdrawals
by owner Owner’s by owner
Equity
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Factors that will cause the “Owner’s Equity” to increase:
1. Investment of Owner
2. Revenues
Factors that will cause the “Owner’s Equity” to decrease:
1. Withdrawal by owner
2. Expense
TEMPORARY ACCOUNTS
DRAWING OR PERSONAL - THE REDUCTION OF AN Owner’s Equity account arising from cash or property
withdrawal of an owner is not debited to Owner’s Equity account to effect the decrease but instead
debited to Drawing Account.
DRAWING OR PERSONAL
NORMAL BALANCE OR NEGATIVE SIDE

POSITIVE SIDE (Deduction or Decreases
(Additions or Increases are are entered here)
Entered here)
We then say, DEBIT to increase Drawing and CREDIT to decrease Drawing.

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INCOME – all income earned of the same nature are summarized in this account.
INCOME

(Deductions or Decreases POSITIVE SIDE
Are entered here) (Additions or Increases
Are entered here)
We then say, CREDIT to increase Income and Debit to decrease Income.
EXPENSES – all expenses incurred of the same nature are summarized in this account.
EXPENSE
NORMAL BALANCE OR NEGATIVE SIDE

POSITIVE SIDE (Deduction or decreases
(Additions or Increases are entered here)
Are entered here)
We then say, Debit to increase an Expense and CREDIT to decrease an Expense
To summarize, Income and Expenses are factors that affect Owner’s Equity while Expenses
decreases Owner’s Equity. Owners Equity is increased by a credit to Income and is decreased by a debit to
Expense.
RULES OF DEBIT AND CREDIT
The accounting equation reflects the normal balance of the three accounting values as well as the
temporary accounts of an Owner’s Equity account. The “side Positioning” as adopted to effect the
increase and decreases of their respective amounts can be gleaned further with the developed rules of
debit and credit which are stated as follows:
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We DEBIT to: We CREDIT to:
RULE 1 Increase an Asset Decrease an Asset
RULE 2 Decrease a Liability Increase a Liability
RULE 3 Decrease an Owner’s Equity Increase an Owner’s Equity
TEMPORARY ACCOUNTS
RULE4 Increase in Drawing Decrease in Drawing
RULE5 Decrease an Income Increase an Income
RULE6 Increase an Expense Decrease an Expense
APPLICATION OF THE RULES
The following selected transactions are given to illustrate the application of the rules of debit and credit
through side positioning. ASSET is represented by the account Cash, LIABILITY is represented by the
account “Accounts Payable”, OWNER’S EQUITY is represented by the account “ Rosario Salva, Capital”,
DRAWING is represented by the account “Rosario Salva, Personal”, INCOME is represented by the
account “Stationery and Office Supplies Expense”.
Transaction No.1 – Mrs. R. Salva Made an initial investment of P10,000 cash.
Analysis: Debit, Cash of P10,000 and credit, R. Salva, Capital of

P10,000
Rule: Debit, increase in ASSET and credit, increase in Owner’s Equity.
CASH
Increase side (DEBIT) Decrease Side (CREDIT)

10,000
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R. SALVA, CAPITAL
Increase side (DEBIT) Decrease Side (CREDIT)

1) P10,000
Note the effect:
CASH account: Cash was debited and the amount of P10,000 was
entered on the increase side which is in its normal balance (positive) being an ASSET
account.
OWNER’S EQUITY Account: R. Salva, Capital was credited and the amount of P10,000 was entered on the
increase side which is in its normal balance (positive) being an Owner’s Equity account.
Transaction No.2. Mrs. R. Salva made an additional investment of P15,000 Cash.
Analysis: Debit, Cash of P15,000 and credit, R. Salva, Capital of
P15,000
Rule: Debit, increase in ASSET and credit, increase in Owner’s Equity
CASH
INCREASE SIDE (DEBIT) DECREASE SIDE (CREDIT)
1. P10,000
2. 15,000*
P25,000
R. SALVA, CAPITAL
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DECREASE SIDE (DEBIT) INCREASE SIDE (CREDIT)
1. P10,000
2. 15,000*
P25,000
Note the effect:
CASH Account – Cash was further debited and the amount of P15,000* was entered on the increase side
which had increased the amount of cash to P25,000. The amount of P15,000 was positioned at the
positive side of the account to effect the increase.
OWNER’S EQUITY account- R. Salva, Capital was further credited and the amount of P15,000* was
entered on the increase side which had increased the amount of capital to P25,000. The amount of
P15,000 was positioned at the positive side of the account to effect the increase.
Transaction No.3 – Mrs R. Salva made a cash withdrawal of P20,000.
Analysis: Debit, R. Salva, Drawing of P2,000 and credit, Cash of P2,000
Rule: Debit, decrease in Owner’s Equity (increase in Drawing) and credit, Decrease in Asset.
CASH
1) P10,000 3) P2,000*
2) 15,000 2,000
P25,000
23,000
R.SALVA, CAPITAL
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1) P10,000
2) 15,000
P25,000
R. SALVA, DRAWING
2,000*
Note the Effect:
CASH account- Cash was credited and the amount of P2,000* was entered on the decrease side which
had decreased the amount of cash balance to P23,000. The amount of P2,000 was positioned at the
negative side to effect the decrease.
OWNER’S EQUITY account – The P2,000* reduction of capital was shown in another account “R. Salva,
Drawing and not on the decrease side of the “R. Salva, Capital” account. Take note that the “Drawing”
account has an opposite position with the “Capital” account. While the “Capital” account is positioned as
a Credit to effect the decrease. The Capital of R. Salva had been decreased to P23,000.
Transaction No.4 – Mrs. T. Salva made another cash withdrawal of P3,000
Analysis: Credit, R. Salva, Drawing of P3,000 and credit, Cash of P3,000.
Rule: Debit, decrease in OWNER’S EQUITY (increase in Drawing ) and credit, decrease in ASSET.
CASH
INCEASE SIDE (DEBIT) DECREASE SIDE (CREDIT)
1) P10,000 3. P2,000
2) 15,000 4) 3,000
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P25,000 5,000
P20,000
R. SALVA, CAPITAL
1) P10,000
2) 15,000
P25,000
R. SALVA, DRAWING
3.. P2,000
4.. 3,000*
P5,000
Note the effect:
CASH account – Cash was further credited and the amount of P3,000* was entered on the decrease side.
The P3,000 increased the total amount of the credit side to P5,000 while the total amount of the debit
side was P25,000. In effect, the balance of cash account had been decreased to P20,000.
OWNER’S EQUITY account – the P3,000* was entered on the increase side of the “Drawing Account”
which means that the increase in “Drawing Account” will further decrease the balance of the “Owner’s
Equity Account” as they are in the opposite position. The “Drawing Account” had increased its balance to
P5,000 which resulted to a further decrease in Owner’s Equity Account from P23,000 to P20,000.
Transaction No. 5- Bought Stationery and Office Supplies on account from University Supply, P1,000.
Analysis: Debit, Stationery and Office Supplies Expense of P1,000 and credit, Accounts Payable of P1,000.
Rule: Debit increase in EXPENSE (Decrease in Owner’s Equity) and credit increase in LIABILITY.
STATIONERY AND OFFICE SUPPLIES EXPENSE

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5) P1,000
ACCOUNTS PAYABLE
5) P1,000
Note the Effect:
STATIONERY AND OFFICE SUPPLIES EXPENSE- was debited and the amount of P1,000 was entered on the
increase side which is in its normal balance (Positive) being an EXPENSE account.
ACCOUNTS PAYABLE – was credited and the amount of P1,000 was entered on the increase side which is
in its normal balance (Positive) being a LIABILITY account.
Transaction No. 6- Bought Stationery and Office Supplies on account from Visayan Educational Supply,
P2,500.
Analysis: Debit, Stationery and Office Supplies Expense of P2,500 and credit, Accounts Payable of P2,500.
Rule: Debit, increase in EXPENSE and credit, increase in LIABILITY.
STATIONERY AND OFFICE SUPPLIES EXPENSE
5) P1,000
6) 2,000*
ACCOUNTS PAYABLE

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5) P1,000
6) 2,000*
Note the Effect:
STATIONERY AND OFFICE SUPPLIES EXPENSE- the amount of P2,500* was entered on the increase side
(Positive) of the account which resulted to increase the amount of Stationery and Office Supplies Expense
to P3,500.
ACCOUNTS PAYABLE – the amount of P2,500* was entered on the increase side (Positive) of the account
which resulted to increase the amount of Account Payable to P3,500.
Transaction No. 7- Partial payment of account with University Supply, P600.
Analysis: Debit, Accounts Payable of P600 and credit, Cash of P600.
Rule: Debit, decrease in LIABILITY and credit, decrease in ASSET.
CASH
1) P10,000 3) P2,000
2) 15,000 4) 3,000
__________ 7) 600*
P25,000 P5,600
P19,400
ACCOUNTS PAYABLE
DECREASE SIDE (CREDIT) INCREASE SIDE (CREDIT)
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7) P600* 5) P1,000
______ 6) 2,500
P600 P3,500
P2,900
Note the Effect:
CASH account- the amount of P600* was entered on the decrease side of the account which means that
“cash” will be decreased by P600. The amount of P600 has increased the credit side amount of cash to
P5,600. This resulted to a further decrease of the cash account balance from P20,000 to P19,400.
ACCOUNTS PAYABLE – the amount of P600* was debited and was enter on the decrease side of the
account. Since it was positioned on the opposite side of the account’s normal balance (positive), it
decreased its balance from P3,500 to P2,900.
Transaction No. 8- Partial payment of account with Visayan Educational Supply, P1,500.
Analysis: Debit, Accounts Payable of P1,500 and credit, Cash of P1,500.
Rule: Debit, decrease in LIABILITY and credit, decrease in ASSET.
CASH
1) P10,000 3) P2,000
2) 15,000 4) 3,000
___________ 7) 600
P25,000 8) 1,500*
P17,900 P7,100
ACCOUNTS PAYABLE
7) P 600 5) P1,000
8) P1,500* 6) P 2,500
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P2,100 P3,500
P1,400
Note the effect:
CASH Account – the amount of P1,500* was credited and entered on the decrease side of the account
which means that cash will be decreased further by P1,500. This amount further increased the credit side
amount to P7,100 which in effect reduced the amount of cash account from P19,400 to P17,900.
ACCOUNTS PAYABLE – the amount of P1,500* was debited and entered on the decrease side of the
account which means that Accounts Payable account will be decreased further by said amount. While this
amount increased the debit side of the account to P2,100, in effect reduced the amount balance of the
account from P2,900 to P1,400.
Transaction No.9 - Received cash for services rendered to Mario Daray, P4,000.
Analysis: Debit, Cash of P4,000 and credit, Service Income of P4,000.
Rule: Debit, increase in ASSET and credit, increase in INCOME (increase in Owner’s Equity).
CASH
1) P10,000 3) P2,000
2) 15,000 4) 3,000
9) 4,000 7) 600
10) 6,000* 8) 1,500
P35,000 P7,100
P27,900
SERVICE INCOME
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9) P4,000
10) 6,000*
P 10,000
Note the Effect:
CASH account – the amount of P6,000* was debited and entered on the increase side of the account
which had increased the amount of cash balance from P21,900 to P27,900.
INCOME account – the amount of P6,000* was credited and entered on the increase side which had
increased the amount of Service Income from P4,000 to P10,000. The said amount was positioned on the
positive side of the account to effect the increase.
Shown below is the summary of DEBIT and CREDIT entries of each account:
DEBIT CREDIT BALANCE IN AMOUNT

ENTRIES ENTRIES DEBIT CREDIT
Cash (ASSET) P35,000 P7,100 P27,900
Acct. Pay
(Liability) 2,100 3,500 1,400
R. Salva, Capital
(Owner’s Equity) 25,000 25,000
TEMPORARY ACCOUNTS
R. Salva, Drawing
(PERSONAL) 5,000 5,000
Service Income
(INCOME) 10,000 10,000
Stationery and
Office Supplies
(EXPENSE) 3,500 ______ 3,500 ______
TOTAL P45,600 P45,600 P36,400 P36,400
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Take Note:
Both the totals of Debit and Credit entries of all accounts showed an equal balance of P45,600.
This proves the equality of Debit and Credit as expressed in the equation, DEBIT = CREDIT. Likewise, the
difference between the debit and credit entries of each account when totaled will also result to an equal
balance of P36,400. This resulted to this effect because whichever side of the account showed a bigger
balance, the difference also reflects or carries the sign of the side which has a bigger balance. In the
account cash for example, the “debit side” which is the “positive side” showed an amount of P35,000,
while the “credit side” which is the “negative side” showed an amount of P7,100. The difference in the
amount of P27,900 will bear or carry the “positive” sign and is therefore listed on the debit side of the
account balance. On the other hand, the Accounts Payable account showed a bigger amount in its credit
side compared to the debit side. While the credit entries showed a total of P3,500, the debit entries
showed a total of P12,100. The amount of difference, P1,400 will bear or carry the “positive” sign because
this account is a LIABILITY which has a normal balance of Credit. Hence, the amount of P1,400 is therefore
listed on the credit side of the account balance. Balances of other accounts are analyzed on the same
manner.
SUMMARY OF CHANGES IS TEMPORARY ACCOUNTS OF OWNER’S EQUITY
Service Income P10,000

Less: Expenses 3,500
Profit P 6,500
R. Salva,Capital, Beginning P10,000

Add: Additional Investment of Salva P15,000
Profit 6,500 21,500
Total P31,500
Less: R. Salva, Drawing 5,000
R. Salva, Capital, End P26,500
Take note, that the above summary of charges in temporary accounts of owner’s equity is in itself
an Income Statement because it shows Income less Expenses equals Profit.
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The Owner’s Equity, Beginning plus Additional Investment and Profit less Drawing equals
Owner’s Equity. End which is in itself the Statement of Changes in Equity.
The Summary of Changes in Accounting Values when placed in an Equation will shown the
following results:
ASSETS = LIABILITIES + OWNER’S EQUITY
P27,900 = P1,400 + P26,500
THE ACCOUNTING EQUATION IS IN BALANCE
Extended Illustration: Effects of Transactions on the Accounting Equation by using “Transactions

Analyses Worksheet”.
Investment by Owner
Feb. 5- Mr. Cesario O. Edulan, A CPA by profession opens an account with Allied Banking Corporation in
the amount of P100,000 to start with in his public practice.
Analysis: there is an increase in Asset – Cash in Bank, P100,000 and a corresponding increase in Owner’s
Equity – Edulan, Capital of P100,000.
Plotted in our Transactions Analyses Worksheet, the specific effect of this transaction on the basic
accounting equation are as follows:
Mr. Cesario O. Edulan, CPA

Transactions Analyses Worksheet
ASSETS = LIABILITIES + OWNER’S EQUITY
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Cash in Bank Edulan, Capital
Feb. 5 P100,000 = + p100,000- Investment
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We observed that the increase in Owner’s Equity is indicated to make it clear that the increase is an
investment rather than revenue from operation which is eventually excluded in determining net
operating income. At this point, the accounting equation is in balance, Assets equals Owner’s Equity since
Liability is zero.
Purchased of Equipment for Cash and Credit
Feb. 9- Purchased a brand new computer, paying cash of P30,000 and made an oral promise to pay of
P10,000 for the balance in later days.
Analysis: there is an increase in one form of an ASSET- Equipment P40,000 and a corresponding
decrease in another form of ASSET-cash in Bank, P30,000 and an increase in Liabilities-Account Payable,
P10,000.
Plotted in our Transactions Analyses Worksheet, the specific and cumulative effects of the 1 st two
transactions on the basic accounting equation are as follows:
Assets = Liabilities +Owner’s Equity
Cash in Bank Equipment = Accounts Payable + Edulan, Capital
Old Bal. P100,000 = P100,000
2/9 - 30,000+ P40,000 = +10,000
New Bal. P 70,000 + 40,000 = P 10,000 +P100,000

P110,000 P110,000
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We observed that the three specific items are affected: Cash in Bank is decreased by P30,000; Equipment
is increased by P40,000 and Accounts Payable is increased by P10,000. This result to have a total assets of
P110,000 against total liabilities and owner’s equity of P110,000. The equation is maintained.
Rendered Professional Service for Cash and Credit
Feb. 18- Rendered professional service, re-management consultancy, P35,000. The client paid P20,000
cash and made oral promise to pay for the balance of P15,000 in later days.
Analysis: There is an increase in one form of an Asset –Cash in Bank P20,000, an increase in
another form of an Asset- Accounts Receivable, P15,000 and a corresponding increase in Owner’s Equity-
Edulan, Capital (Professional Income) of P35,000.
Plotted in our Transactions Analyses Worksheet, the specific and cumulative effects of the 1 st
three transactions on the basic accounting equation are as follows:
Assets = Liabilities + Owner’s Equity
Cash in Accounts Equipment Accounts

Bank Receivable _________ Payable Edulan, Capital
Old Bal P70,000 P40,000 = P10,000 P100,000
2/18 + 20,000 + 15,000 __________ ________ + 35,000
We observed that three specific items are affected: Cash in Bank has increased by P20,000; Accounts
New Bal P90,000 + 15,000 + P40,000 = P10,000 + P135,000
P145,000by P15,000 and Edulan, Capital (Professional
Receivable has increased P145,000
Income) has increased by P35,000.
Why increased Owner’s Equity by P35,000 when only P20,000 has been collected? Because the inflows of
assets resulting from the earning of revenues does not have to be in the form of cash. Remember that
owner’s equity is increased when revenues are earned. At this point, the accounting equation remains in
balance at P145,000.
Withdrawal by Owner
Feb 24- Mr. Edulan withdraws Cash of P20,000 for his personal use.
Analysis: There is a decrease in Owner’s Equity- Edulan, Capital of P20,000 (increase in Drawing)
and a corresponding decreased in ASSET – Cash in Bank P20,000.
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Plotted in our Transactions Analyses Worksheet. The specific and cumulative effects of this 1 st four
Assets =Liabilities + Owner’s Equity

Cash in Accounts Accounts
Bank Receivable Equipment Payable Edulan, Capital
Old Bal. P90,000 P15,000 P40,000 = P10,000 P135,000
2/24 - 20,000 _______ _______ ________ - 20,000 drawing
New Bal. P70,000 + P15,000 + P40,000 = P10,000 + P115,000
P125,000 P125,000
We observed that this transaction results in an equal decrease in Assets- Cash in Bank Owner’s
Equity – Edulan, Capital by P20,000. Observe further that the effect of cash withdrawal by the owner is
the opposite of the effect of an investment by owner. Owner’s drawing does not represent expenses.
Like owner’s investment, it is not included in determining net income.
PAYMENT OF EXPENSES
Feb. 28- the business paid rental expense of P2,000 and salaries to office aide, P3,000.
Analysis: There is a decrease in Owner’s Equity- Edulan, Capital of P5,000 (increase in Rental
Expense, P2,000 and Salaries Expense, P3,000) and a corresponding decrease in asset – Cash in Bank,
P5,000.
Plotted in our Transactions Analyses Worksheet, the specific and cumulative effects of the 1st five

Old Bal. P70,000 P15,000 P40,000 = P10,000 P115,000
2/24 - 20,000 _______ _______ ________ - 20,000 drawing
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New Bal. P a g e + P15,000 + P40,000 = P10,000 + P115,000
P125,000 P125,000
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We observed that this transaction results in an equal decrease in Assets- Cash in Bank and Owner’s
Equity- Edulan, Capital by P20,000. Observe further that the effect mof cash withdrawal by the owner is
the opposite of the effect of an investment by owner. Owner’s drawing does not represent expenses.
Like owner’s investment, it is not included in determining net income.
PAYMENT OF EXPENSES
Feb. 28- The business paid rental expense of P2,000 and salaries to office aide, P3,000.
Analysis: There is a decrease in Owner’s Equity- Edulan, Capital of P5,000 ( increase in Rental Expense,
P2,000 and Salaries Expense, P3,000) and a corresponding decrease in Asset- Cash in Bank, P5,000.
Plotted in our Transactions Analyses Worksheet, the specific and cumulative effects of the 1st five

Old Bal P70,000 P15,000 P40,000 = P10,000 P115,000
- 2,000 Rental Exp.
2/28 - 5,000 ________ _________ _______ - 3,000 Salaries Exp
New Bal P65,000+ 15,000 + P40,000 = P10,000 + P110,000
P120,000 P120,000
We observed that these payments result in equal decrease in Assets- Cash in Bank by P5,000 and Owner’s
Equity – Edulan, Capital (for expenses of P5,00). At this point, we have included the equality of the
equation: Assets, P120,000= Liability, P10,000 and Owner’s Equity of P110,000.
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2/5 P100,000 P100,000 Investment
2/9 - 30,000 + P40,000 + P10,000
2/18 + 20,000 + 15,000 +35,000 (Professional Income)
2/24 - 20,000 - 20,000 (Drawing)
2/28 - 5,000 - 2,000 Rental Exp.
_______ ________ _________ ________ - 3,000 Salaries Exp.
P65,000 + P15,000 + P40,000 = P10,000 + P110,000
P120,000 P120,000
DRAFTING FINANCIAL STATEMENTS
From the summary of transactions, an outright drafting of financial statements can be drawn-up as
follows:
C.O EDULAN,CPA C.O. EDULAN, CPA

Income Statement Statement of Changes in Owner’s Equity
For the month ended 28,Feb. 20A For the month ended 28,Feb. 20A
Revenue: C. Edulan, Capital beg. P100,000

Professional Income P35,000 Add: Profit 30,000
Operating Expense: Total P130,000
Rental Expense P2,000 Less: Drawing 20,000
Salary Expense 3,000 5,000 C. Edulan, Capital end P110,000
Profit P30,000
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C.O. EDULAN, CPA

C.O. EDULAN, CPA Statement of Cash Flows
Balance Sheet For the month ended 28 Feb. 20A
As of 28, Feb. 20A
Cash Flows from Operating Activities:
Cash collected from clients
Assets
Cash payment to rental P 20,000
Cash payment to salary ( 2,000)
Cash in Bank P65,000 Net cash provided by (used in ( 3,000)
Accounts Receivable 15,000 Operating activities P 15,000
Equipment 40,000 Cash Flows from Investing Activities
Total Assets P120,000 Purchased of Equipment ( 30,000)
Net Cash provided by (used in ( 30,000)
Liabilities and Owner’s Equity Investing activities
Cash Flows from Financing Activities
Accounts Payable P10,000 Investment by owner 100,000
Withdrawal by owner ( 20,000)
C. Edulan, Capital 110,000
Net cash provided by (used in P 80,000
Total Liabilities and ______ Financing activities
Owner’s Equity P120,000 Net Increase (Decrease in Cash P 65,000
Cash Balance at the beginning
of the period -
Cash Balance at the end ____________
Of the period P 65,000
STUDENT’S NAME: ____________________________________
BASIC ACCOUNTING EQUATION

The information of an Accounting Equation is presented below. Fill in the amounts in each of the
Accounting Value affected by the given transactions. For your guide, the “BALANCES” of each value is
already given and transaction No. 1 is answered. Use a parenthesis sign for the decrease.
TRANSACTIONS ASSETS LIABILITIES +CAPITAL

1. Mrs. Loreta Mercado invested cash of P150,000 P150,000 P150,000
2. Rendered service to a client on account, P4,000
3. Bought computer on account, P40,000.
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4. Mrs. Loreta Mercado withdrew cash of P5,000.

5. Paid office rental for the month P1,000.
6. Partial payment of account, P3,000.
7. Mrs. Loreta Mercado invested office table, P10,000
8. Partial collection of client’s account, P2,000
9. Borrowed money from a bank and issued a note, P10,000
10. Partial payment of account, P2,000
11. Paid taxes and licenses and other assessments, P1,000
12. Paid the bank for borrowed money, P10,000
13. Received cash for services rendered, P3,000
14. Bought office supplies on account, P5,000 (Expense)
15. Full payment of account (Office Supplies ) P5,000
BALANCES P190,000 P35,000 P155,000
STUDENT’S NAME: ____________________________________

Determination of Account Debited and Credited
Instruction: Based on the given account titles determine the debit and credit accounts and amounts.
Write it on your columnar.
List of Account Titles

Assets Owner’s Equity
Cash in Bank Evelyn Basa, Capital
Accounts Receivable Evelyn Basa, Drawing
Office Equipment
Income
Liabilities Professional Fees Income

Accounts Payable Expenses
Unearned Professional Income Salaries Expense
SSS Premium Payable SSS Contribution
Philhealth Premium Payable Philhealth Contribution
Taxes and Licenses
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Jan 1- Evelyn Basa Invest cash of P100,000 in the accounting and auditing firm.
5 Rendered professional service for cash, P6,0000.
10 Bought computer on account, P30,000
18 Paid taxes and licenses to the government, P2,000
21 Withdrew P5,000 cash for her personal use.
25 Received cash in advance for professional services to be rendered, P7,000.
30 Paid salaries for the month.
Salaries P10,000
Less: SSS P333.40
Philhealth 125.00 458,40
Net Payroll P9,541.60
30 The employer’s share are follows: SSS, P526.60 and Philhealth, P125.00
STUDENT’S NAME: ____________________________________

Entering Entries Direct to T-accounts
The analyses in each of the given transactions are presented below: write it in your columnar.
ANALYSES
Transactions Debit Credit
Number Account Amount Account Amount
1 Cash on Hand P175,000 Daylinda Alfenche, Capital P175,000

2 Accounts Receivable 25,000 Service Income 25,000
3 Office Equipment 50,000 Accounts Payable 50,000
4 Rent Expense 5,000 Cash On hand 5,000
5 Cash on Hand 7,000 Accounts Receivable 7,000
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6 Daylinda Alfetche Drawing 3,000 Cash on Hand 3,000

7 Accounts Payable 20,000 Cash on Hand 20,000
8 Cash on Hand 15,000 Service Income 15,000
Requirements:
A. Make T-accounts for following: Cash on Hand; Accounts Receivable; Office Equipment; Accounts
Payable; Daylinda Alfeteche, Capital ; Daylinda Alfetche, Drawing; Service Income and Rent
Expense accounts.
B. Enter in the T-accounts you have prepared, the given analysis of each transaction and determine
the balance of Each of the account.
C. Determine the amounts of the Total Assets, Total Liabilities and Owner’s Equity (These include
Drawing, Income and Expense accounts).
D. Place the total of each of the accounting value in the equation A=L+P and try to see if the equation
is “in balance”
STUDENT’S NAME: ____________________________________

NORMAL BALANCE OF ACCOUNTS
Instruction: On the space provided, indicate whether the normal balance of each of the given accounts is
a Debit or Credit:
1. Notes Payable ________ 11. Prepaid Insurance __________

2. Taxes and Licenses _______ 12. Notes Payable __________
3. Cash in Bank ________ 13. Prepaid Rent __________
4. Accounts Payable ________ 14. Interest Expense __________
5. Alex Ajoc, Capital ________ 15. Professional Income __________
6. Insurance Expense ________ 16. Utilities Expense __________
7. Interest Income ________ 17. Supplies Used __________
8. Unused Supplies ________ 18. Office Equipment __________
9. Alex Ajoc, Drawing ________ 19. Rent Expense __________
10. Miscellaneous Expense ________ 20. Land __________
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EFFECTS OF ACCOUNT BALANCES
Instruction: On the space provided, indicate a check mark to accounts which will increase their balances
when debited.
_________ 1. Accounts _________ 6. Rent Expense

________ 2. Commission Income _________ 7. Notes Receivable
_________ 3. Furniture and Fixture _________ 8. Melindo Bidad, Drawing
_________ 4. Melindo Bidad, Capital _________ 9. Insurance Expense
_________ 5. Prepaid Advertising _________ 10. Accounts Payable
CHAPTER V
THE ACCOUNTING PROCESS OF A SERVICE CONCERN
Step 1 Step 2 Step 3 Step 4 Step 5

IDENTIFYING JOURNALIZIN TRIAL ADJUSTING
POSTING
G BALANCE ENTRIES
Step 10 Step 9 Step 8 Step 7 Step 6

REVERSING POST-CLOSING CLOSING FINANCIAL WORKSHEE
ENTRIES TRIAL ENTRIES STATEMENT T
”Accounting cycle refers to the various steps of the accounting process which are being passed –
through in a repetitive manner from the start up to the end of every accounting period regardless of
some variations in the accounting procedures”
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IDENTIFYING TRANSACTIONS
(1st Step of the Accounting Process)
The actual sequence of events begins with the identification of transactions. What transactions are
considered as accountable and what are not. The rule is, only transactions and events which are of
financial bearing to the business are being recognized.
The basis of identifying transactions are the supporting business documents that are on file or yet
to be filed as evidence of transactions to assure the reliability and verifiability of accounting records. The
most common documents of a service concerns business are customers’ and suppliers sales invoices,
official receipts, purchase orders, receiving reports, delivery receipts, cash vouchers, checks, etc. After
identifying, follows next is analyzing. By analyzing, we have to
ask this questions to ourselves. “What is the value received and
the parted away in this particular transactions”? while we
answered that “mentally” we then come to measuring of the
transaction. This time; we used the peso as our financial
denominator.
First Document
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Purchase order is the first

document that Davao Laundry
Services should fill-up in
placing orders
Second Document
In the second document SM City-
Davao, the supplier, issued a Charge
Invoice to Davao Laundry Services. The
charge invoice showed that Mr. Santos
acknowledged to have received the
goods.
In this narrative transaction, this

could be interpreted as follows:
“Purchased laundry supplies on account

from SM City- Davao, P35,000
Third Document
The third document is a Check Voucher.

This is used to accompany a Check (fourth
document) whenever payment is made by
customer, Davao Laundry Services.
In the narrative transaction, this

could be interpreted as follows:
“Partial payment of account made by

Davao Laundry Services to SM City-Davao
P25,000
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Fourth Document
The fifth document is to be prepared

by SM City- Davao, the supplier which
is an Official Receipt acknowledging to
have received payment from Davao
Laundry Services.
These complete the transactions between Davao

Laundry Services, the customer and SM CITY- Davao, the supplier.
JOURNALIZING
ND
(2 Step of the Accounting Process)
DOUBLE – ENTRY SYSTEM OF BOOKKEEPING
The double- entry system of bookkeeping recognizes the two- fold effects of transaction; the value
received, we call a debit and the value parted with, we call a credit. This justifies the equality of debit and
credit amounts. Because of the two-fold effect recognition, both sides of the fundamental equation are
always equal. They are in the state of “equilibrium”.
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This textbook illustrates the double-entry system of bookkeeping.
BOOKS OF ACCOUNTS
The records that are used and kept by the business in storing all of the accounting data are called
“Books of Accounts”. These books are with ready or prepared design to fit the need of the business and
also to provide convenience for the accountants in pursuing the primary objectives of accounting which is
“communication ”through the Financial Statements.
There are two sets of books that are used by the business. They are the “ book of original entry”
and the “book of final entry”. The book of original entry is called JOURNAL which is of two kinds; the
“GENERAL JOURNAL” and the “SPECIAL JOURNAL”. This is called the book of original entry because it is in
this book where transactions are recorded for the first time. The book of final entry is called the
“LEDGER” which is also of two kinds; the “GENERAL LEDGER” and the “SUBSIDIARY LEDGER”. This is
called book of final entry because it is in this book where transactions that were recorded in the Journal
are transferred for final recording. Special Journal and Subsidiary Ledgers are discussed in the succeeding
chapters.
GENERAL JOURNAL
A General Journal can that be of a “loose-leaf” or “book-bound” form. It has the following
columnar headings:
DATE COLUMN – Show the date when the transactions took place.
PARTICULARS- Shows the item or the accounts debited and credited as a result of a transaction
analysis as well as a brief or concise explanation of what the transaction is about.
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FOLIO- Shows the number of an account in a ledger or page of a ledger to which it was
transferred. Folio is the latin word for “page”. It is also called a “reference”.
DEBIT COLUMN – this is a money column showing the peso amount of the value received in a
transaction.
CREDIT COLUMN- this is the money column showing the amount of the value parted with in a
transaction.
Shown below is a page of a General Journal:
GENERAL LEDGER
A general ledger can that also be of a ”loose-leaf” or “book bound” form. This book will group
items of accounts of the same skind, class or nature. Each item or account is being provided with a leaf of
a ledger. For this reason, a ledger is also called “group of accounts”.
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A general ledger has two sides; the left-hand side which is called a debit side and the right-hand side
which is called a credit side. Each side has the column for the following:
DATE COLUMN – Shows the date of the transaction that occurred as recorded in the Journal;
PARTICULARS – shows a brief but a concise explanation of the transaction as shown in the Journal. This is
sometimes called “Explanation””Description” or “Item”.
FOLIO –shows the page number of a Journal where entries are taken from;
MONEY COLUMNS - The debit money column shows the amounts that are transferred from the debit
money column of the Journal while the credit money column shows the amounts that are transferred
from the credit money column of the Journal.
Shown below is a page of a GENERAL LEDGER.
a. To be used under manual accounting system.

b. To be used under computer- based accounting system
At the end of the accounting period, the debit and credit entries of its item or account in the ledger
are totaled. If the debit side total is bigger than the credit side total, the difference in amount is called
“DEBIT BALANCE”. We then say, the account is a debit balance. On the other hand, if the credit side
total is bigger that the debit side total, the difference in amount is called “CREDIT BALANCE “ We then
say, the account is a credit balance. If both totals of debit and credit sides are equal, the account is
said to be “IN-BALANCE” or “CLOSED ACCOUNT”
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RECORDING PROCESS
RECORDING is the first phase of Accounting. This involves the writing down of business transaction in
a systematic manner and in order of their occurrence in the book of original entry called Journal. The
act of recording business transactions in the Journal is called “JOURNALIZING” which is the second
step of the accounting process. The entry that is made in the journal is called “JOURNAL ENTRY”. A
journal entry may be “SIMPLE” or COMPOUND.
A simple journal entry is one that has one debit item with a debit amount and one credit item with
a credit amount. Shown below is the formation of a simple journal entry:
A compound journal entry is one that may have one debit item and two or more credit items; two
or more debit items and one credit item; or may have two or more items on both sides.
Also shown below is the formation of a compound journal entry with two debit and credit items:
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CHART OF ACCOUNTS
When transactions are recorded in the genereal journal, account titles are being used. A list of account
titles are prepared beforehand to guide bookkeeper and accountant of what specific titles are to be used
in describing the exchange of values in transaction. This list of account titles is called “Chart of Accounts”
Shown below is the chart of accounts of DAVAO LAUNDRY SERVICES, a laundry business that is owned and
managed by Mr. Severo Santos.
The chart of account titles which are arranged in this order: ASSETS, LIABILITIES, OWNER’S EQUITY,
INCOME and EXPENSES. If a transaction involves an account title which is not included in a given chart,
the bookkeeper may create an account title that he thinks more appropriate to use in describing the
exchanges of values.
DAVAO LAUNDRY SERVICES

Chart of Accounts
Balance Sheet Accounts Income Statements Accounts
Assets Income
Page Account Page Account

No. No. No. No.
1 111 Cash in Bank 13 441 Laundry Income

2 112 Accounts Receivable
3 112-A Allow for Bad Debts Expenses
4 113 Laundry Supplies
5 114 Laundry Equipment 14 551 Bad Debts
6 114-A Accu. Depreciation 15 552 Depreciation Expense
16 553 Salaries Expense
Liabilities 17 554 Rent Expense
7 221 Notes Payable 18 555 Utilities Expense
8 222 Accounts Payable 19 556 Laundry Supplies Expense
9 223 Accrued Advertising 20 557 Taxes and Licenses
21 558 Advertising Expense
22 559 Interest Expense
Owner’s Equity
10 331 S. Santos, Capital
11 332 S. Santos,Drawing
12 333 Income & Expense Summary
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GENERAL JOURNAL ENTRY
PAGE 1
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CORRECTING AN ERRONEOUS JOURNAL ENTRY
Neatness in recording transactions must be observed. Various erasures especially in the Journal
might lead to suspicions that there are manipulations done to cover-up some fraudulent and dishonest
practices. Although these may be honest mistakes, erasures destroy neatness of records and impair their
values.
Correction of errors in the Journal depends upon the following circumstances;
1. When the error was immediately discovered prior to posting of entries to the ledger, the
correction can be made by crashing out or drawing a single line through the wrong items or
accounts and writing the correct amount or item above the cancelled one. This also can be done in
figures if in error.
Example: “bought a computer on account, P50,000”
The above transaction was erroneously recorded in the General Journal as follows:
Office Supplies P5,000
Accounts Payable P5,000
Computer on Account
Since the correct account that should have been debited is Office Equipment (asset) and not Office
Supplies Expense, the correction is illustrated as follows:
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2. By preparing a correcting journal entry if the error was committed right after posting to the ledger
has been done and the impossibility of crashing over the entry is very evident and clear.
Example: “Bought a computer on account, P50,000”. The erroneous journal entry has been recorded as
follows:
WRONG ENTRY
Office Supplies Expense P50,000

Bought Computer on Account
CORRECT ENTRY
Office Equipment P50,000

Brought computer on Account
CORRECTING ENTRY
Office Equipment P50,000

Office Supplies Expense P50,000
To reclassify the former to the latter account.
3. A journal entry has not been made or omitted. Like in letter writing, if there is an important
message that we forgot to write in the body of the letter, we can make a postscript (P.S) or
additional message. In accounting, we also have to do the same manner by way of an “adjusting
entry”.
a. If the recorded or omitted transaction is “rendered services on account, P2,000”, the usual
journal entry is prepared as follows:
Accounts Receivable 2,000
Service Income 2,000
Service on Account.
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POSTING TO THE LEDGER AND TRIAL BALANCE PREPARATION
(3RD AND 4TH STEPS OF THE ACCOUNTING PROCESS)
Learning Objectives
After studying this chapter, we should be able to:
1. Acquaint the proper use of a ledger under the manual accounting system and develop skills in the
posting process.
2. Prepare a trial balance and learn how to locate errors in the trial balance.
POSTING TO THE LEDGER
After the transaction has been recorded in the Journal, the entries in the Journal will then be
transferred to another book called “Ledger” for final recording. The process of transferring entries from
the journal to the Ledger is what we call “Posting” which is the third step of the accounting process.
Posting simply means updating the ledger accounts for the effects of the transactions recorded in the
journal. It is merely copying carefully what has been footed in the ledger.
The transfer of entries from the Journal to ledger is actually the sorting process which means putting each
in certain place according to its kind, class or nature. This refers to “Classifying”, which is the second
phase” of accounting.
In manual accounting systems this can be a tedious and time- consuming process; but in
computer-based systems, it is usually done instantly and automatically. In addition, computerized posting
greatly reduces the risk of errors.
GENERAL JOURNAL
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Most businesses, especially large companies, may adopt different kinds of journals but all business
organizations use the most basic type of journal which is the general journal. The general journal typically
displays the transaction’s date, account titles and explanations, references, and respective amounts of
corresponding accounts. A sample format of a journal is shown as follows.
Date Account Titles and Explanation Ref. Debit Credit 5

2 3 4
2016 1 Cash 101 200,000
January 1 Shayne, Capital 301 200,000
Owner’s investment of cash in the business
January 2 Property, Plant and Equipment 140 50,000
Shayne, Capital 301 50,000
Owner’s investment of equipment in the business
January 3 Inventory 121 20,500
Cash 101 20,500
Purchase of inventories from supplier through cash
January 4 Accounts Receivable 111 50,000
Sales 400 50,000
Sale of inventory to customer on account
Cost of Goods Sold 500 15,000

Inventory 121 15,000
Sales of inventories to customer
January 8 Inventory 121 40,000
Accounts Payable 201 40,000
Purchase of inventories from supplier on account
January Cash 101 60,000
12 Sales 400 60,000
Sale of inventories to customer
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January Cash 101 24,000

14 Accounts Receivable 111 24,000
Collection of customer’s account receivable
January Sales Return 401 5,000
15 Accounts Receivable 111 5,000
Return of merchandise from customer
Inventory 121 1,500

Cost of Goods Sold 500 1,500
Return of merchandise from customer
January Accounts Payable 201 10,000
25 Cash 101 10,000
Payment of accounts payable to suppliers
January Shayne, Drawing 302 2,000
30 Cash 101 2,000
Withdrawal of cash from the business for her personal
use
January Salaries Expense 505 5,000
31 Cash 101 5,000
Paid salaries to employees for the month
Note: Transactions of the company are journalized in chronological order in the General Journal.
1. Date: The date at which the transaction occurred.

2. Account Titles and Explanation. The account to be debited and the account to be credited are
recorded. The account titles are referenced to the Chart of Accounts. Correct and proper usage of
the account titles are necessary for clear and accurate presentation of amounts in the financial
statements. In the given illustration, account titles used are (1) cash, (2) property, plant and
Equipment, (3) Shayne, Capital, (4) Inventories, etc. Notice that the accounts credited are
indented. Also a brief explanation of the business transaction is described. In the January 1 journal
entry, a brief explanation was stated as follows: Owner’s investment of cash in the business.
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3. Reference Number. Reference number of each account journalized. The Ref. column is left bank
during the journalizing process and is filled out during the posting process.
4. Debit. Corresponding amount of the account debited is entered. In the January 1 Journal entry,
the accounts Cash and Property Plant and Equipment are debited for 200,000 and 500,000,
respectively.
5. Credit. Corresponding amount of the account credited is entered. In the January 1 journal entry,
the account Shayne, Capital is credited for 50,000.
With the foregoing illustration, we can see the significance of the journal in the accounting
process. First, it shows a chronological record of the company’s transactions.
General Ledger
The general ledger contains all the asset, liability, and owner’s equity accounts of the
company. Unlike journal that are arranged chronologically (regardless of the accounts), the ledger are
usually grouped according to their chart of accounts and arranged according to the order on how they
appear o the financial statements, starting from the asset accounts, followed by the liability accounts, and
finally, the equity accounts including the revenues and expenses accounts as shown in the figure. Each
account is numbered based on the chart of accounts for easier and faster reference. The general ledger
shows the amount outstanding on each of the company’s accounts as of a certain date.
ASSET ACCOUNTS LIABILITY ACCOUNTS OWNER’S EQUITY

ACOCUNTS
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Property, plant Loans

Cost of Goods
and Equipment Payable
Sold
Inventory Salaries
Payable Sales
Account Interest
Receivable Payable Shayne,
Drawing
Cash Accounts
Payable Shayne,
Capital
Using the information from the sample general Journal, a sample format of general ledger is
illustrated as follows:
STEP 3- Posting
The summary (in specialized journals) or individual transactions (in the general journal) are then posted
from the journals to the general ledger (and subsidiary ledgers). Nothing should ever get posted to the
ledgers without first being entered in a journal
CASH NO.101
.Date Explanation Ref Debit Credit Balance

2015
JAN 1 Investment of Capital by Owner J1 200,000 200,000
3 Purchase of inventories from supplier J1 20,500 179,500
12 Sale of inventories to customer 60,000 239,500
14 Collection of customer’s accounts J1 24,000 263,500
receivable
25 Payment of accounts payable to supplier J1 10,000 253,500
30 Withdrawal of cash from the business J1 2,000 251,500
31 Paid salaries to employees for the month J1 5,000 246,500
Balance 246,500
ACCOUNTS RECEIVABLE NO.111
2015 Explanation Ref Debit Credit Balance
Jan 4 Sale of inventories to customer on J1 50,000 50,000
account
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14 Collection of customer’s account J1 24,000 26,000

receivable
15 Return of merchandise from customer J1 5,000 21,000
BALANCE 21,000
INVENTORY NO. 121
Jan3 Purchase of inventories from supplier J1 20,500 20,500
through cash
4 Sales of inventories to customer J1 15,000 5,500
8 Purchase of inventories from supplier on J1 40,000 45,500
account
12 Sale of inventories to customer 18,000 27,500
31 BALANCE 29,000
PROPERTY, PLANT AND EQUIPMENT NO. 140
JAN 2 Owner’s investment of equipment in the J1 50,000 50,000
business
31 BALANCE 50,000
ACCOUNTS PAYABLE NO.201
2015
JAN 8 Purchase of inventories from supplier on J1 40,000 40,000
account
25 Payment of accounts payable to supplier J1 10,000 30,000
31 BALANCE 30,000
SHAYNE, CAPITAL NO. 301
2015
Jan1 Investment of Capital by owner J1 200,000 200,000
2 Owner’s investment of equipment J1 50,000 250,000
31 BALANCE 250,000
SHAYNE, DRAWING NO. 302
2015
JAN 1 Withdrawal of Cash from the business J1 2,000 2,000
31 BALANCE 2,000
SALES NO. 400
2015
JAN 4 Sale of inventories to customer account J1 50,000 50,000
12 Sale of inventories to customer J1 60,000 110,000
31 BALANCE 110,000
SALES RETURN NO. 401
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2015
31 BALANCE 5,000
COST OF GOODS SOLD NO. 500
2015
4 Sales of investment to customer J1 15,000 15,000
12 Sale of inventories to customer J1 18,000 33,000
31 BALANCE 31,500
SALARIES EXPENSE NO. 405
2015
JAN 31 Paid salaries to employees for the J1 5,000 5,000
month
31 BALANCE 5,000
1. Account title. The general ledger contains all of company’s accounts and its balances. Each T-
account is labeled with its corresponding account title(e.g. Cash, Accounts Receivable, Accounts
Payable, Retained Earnings etc.
2. Ledger Account Reference Number. With reference to the company’s Chart of Accounts, each of
the account titles corresponds to a reference number. In the above example, the Cash account is
assigned to Reference Number 101 while the Accounts Receivable account corresponds to
Reference Number 111.
3. Date. The date of the transaction is also entered in reference to the journal.
4. Explanation. A brief description of the business transaction is defined. This is sometimes omitted
since the entries on the journal already provide an explanation of the transaction.
5. Reference. This column displays the journal page number from which the transaction was posted.
6. Debit. Amounts debited to the account are inputted.
7. Credit. Amounts credited to the account are entered.
8. Balance: What distinguished a ledger from the journal is the running outstanding balances
provided by the ledger. After every transaction, the balances of each of the accounts are known
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without the need for further computations. On years-end, these balances will be the basis of the
amounts presented in the financial statements of the company.
With the illustration, it will be easier for the company to determine the balances of each of its accounts.
These are as follows:
ASSETS
Cash 246,500
Inventory 29,000
Property 50,000
LIABILITIES
EQUITY
Shayne, Capital 250,000

Shayne, Drawing 2,000
Sales 110,000
Sales Return 5,000
Cost of Goods Sold 31,500
Salaries Expense 5,000
The general ledger aids in knowing the balances of each of the accounts at any given time. Unlike the
journal. the general ledger classifies the transactions into accounts and provides the outstanding balances
of each. Additionally, the general ledger, together with the subsidiary ledgers, serves as control account
to check for errors and misstatements in posting. At month-end or year end, the company reconciles the
balances of its general ledger and subsidy ledgers.
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FOOTING THE LEDGER
After posting the journal entries to the ledger, the amounts of debit and credit are being totaled
and usually done at the end of each month. This is called “footing”. FOOTING is the process of adding
each of the two amount columns of an account or item in the general ledger and finding their balances
thereof. In footing the account, a well-sharpened pencil should be used in writing the total of the amount
and the account balance. if an account is a debit balance (debit total is bigger than the credit total), the
amount of difference is placed on the “particular” column of the credit side. If there is only one entry in
any side of an account in the ledger, no footing is done and the entry is left “as is”
Footing is merely the total of the column and if error is committed, it may be erased and corrected
easily because pencil was being used. Footing is not considered an entry posted in the general ledger.
In a computer- based systems wherein a three- money column ledger is used , footing is no
longer necessary because the account maintains a running balance.
PREPARATION OF JOURNAL ENTRIES
Through the use of specialized journals (such as those for sales, purchases, cash receipts and cash
disbursement) and the general journal, transactions and events are entered into the accounting records.
These are called the books of original entry.
Debits and Credits are an integral part of the journalizing process. In accounting, debits or credits
are abbreviated as DR and CR respectively. When to debit and when to credit: An increase in asset
account is called debit and an increase in a liability or equity account is called a credit. Likewise, if we
decrease an asset account we credit that account. On the other side of the equation, if we decrease a
liability or equity account we debit those accounts.
Rules of Debit and Credits

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The name of the account to be debited is always listed first. The debited account is listed on the
first line with the amount in the left of the register.
The credited account is listed on the second line and is usually indented. The credited amount is
recorded on the right side of the register.
The total amount of debit should always equal the total amount of credit.
ACCOUNT CODE ACCOUNT TITLE ACCOUNT CODE ACCOUNT TITLE
Statement of Financial Position Accounts Income Statement Accounts

1000 Cash 4000 Service Revenue
1200 Accounts Receivable 4100 Sales
1201 Allowance for Bad 4101 Sales Returns and
Debts Allowances
1300 Inventory 4102 Sales Discounts
1400 Prepaid Expenses 4150 Interest Income
1500 Supplies 5000 Cost of Sales
1600 Office Equipment 5100 Purchase
1601 Accum. Deprn-Off. 5101 Purchase Returns
Eqpt and allowances
1650 Store Equipment 5102 Purchase Discount
1651 Accum. Deprn. Store 5103 Freight In
Eqpt.
1680 Transportation Salaries Expense
6100
Equipment
1681 Accum Deprn- Trans 6150 Supplies Expense
Eqpt
1750 Building 6200 Utilities Expense
1751 Accum. Deprn- Building 6220 Communication
Expense
1800 Land 6250 Travel Expense
1900 Intangible Assets 6300 Rental Expense
2000 Accounts Payable 6350 Fuel Expense
2100 Notes Payable 6400 Advertising
Expense
2200 Accrued Expenses 6410 Delivery Expense
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2201 Salaries Payable 6450 Commission

Expense
2202 Utilities Payable 6500 Depreciation
Expenses
2300 Income Taxes Payable 6600 Taxes and Licenses
3000 Owner’s, Capital 6700 Interest Expense
3100 Owner’s Withdrawal
Let us take the case of Pedro Matapang, a computer technician. Pedro decided to open his computer
repair shop on February 14,2016, naming it Matapang Computer Repairs. Pedro knows that business
transactions should be separated from personal finances. Thus, he decided to invest PHP200,000 in this
business. He deposited the amount with Nation Bank.
Entry:
GENERAL JOURNAL
Date Account Title and Explanation Ref Debit Credit
2/14/16 Cash 200,000
Mataoang, Capital 200,000
To record the initial investment of owner P.
Matapang
Notice that we have debited Cash, an asset account and credited Matapang, Capital, an equity account.
FEBRUARY `15,2016- Pedro purchased one computer unit from XY Computer Store to be used for the
business. He issued check number 001 amounting to PHP25,000.
Entry:
GENERAL JOURNAL
2/15/16 Office Equipment 25,000
Cash 25,000
To record the purchase of one computer unit
Notice that the debit to office equipment increased the asset account and the credit to cash decreased
the asset account.
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FEBRUARY 16,2016- Pedro hired Juana Magaling, an experienced secretary.
Entry: No Entry. This is not a financial transaction.
FEBRUARY 17,2016 - Repaired the computer of Jean and collected PHP10,000
GENERAL JOURNAL
2/17/16 Cash 10,000
Service Revenue 10,000
To record receipt of cash from customer
FEBRUARY 18,2016- Repair Mike’s computer. However, Mike will pay PHP15,000 on March 18,2016
GENERAL JOURNAL
2/18/16 Accounts Receivable 15,000
To record services rendered to a customer on
account
FEBRUARY 19,2016- Pedro purchased Office Supplies from MM Merchandise accounting to PHP5,000 on
account. Pedro will pay this on March 30,2016
GENERAL JOURNAL
2/19/201 Supplies Expense 5,000
6
To record purchase of office supplies on account
FEBRUARY 25,2016- Paid the salary of Juana amounting to PHP4,000
GENERAL JOURNAL
2/25/201 Salaries Expense 4,000
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6
Cash 4,000
To record the payment for salary of Juana
STEP 3- POSTING
The summary (in specialized journals) or individual transactions (in the general journal) are then posted
from the journals to the general ledger ( and subsidiary ledgers). Nothing should ever get posted to the
ledgers without first being entered in journal. We will now post the previous transactions of Pedro to the
general ledger.
GENERAL LEDGER
Account: Cash Account No: 1000
Date Item Ref Debit Credit Balance
2/14/201 Investment of Owner 200,000 200,00
6
2/15/16 Purchase of Computer 25,000 175,000
2/17/16 Repair Income – Jean 10,000 185,000
2/25/16 Payment of Juana Salary 4,000 181,000
GENERAL LEDGER
Account: Accounts Receivable Account No: 1200
2/18/16 Repair Income- Mike 15,000 15,000
GENERAL LEDGER
Account: Office Equipment Account No: 1600
2/15/16 Purchase of Computer 25,000 25,000
GENERAL LEDGER
Account: Accounts Payable Account No: 2000
2/15/16 Purchase office Supplies 5,000 5,000
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GENERAL LEDGER
Account: Matapang, Capital Account No: 3000
2/15/16 Investment of Owner 200,000 200,000
GENERAL LEDGER
Account: Service Revenue Account No: 4000
2/17/201 Repair Income- Jean 10,000 10,000
6
2/18/201 Repair Income – Mike 15,000 25,000
6
GENERAL LEDGER
Account: Supplies Expense Account No: 6150
2/14/201 Purchase- Office supplies 5,000 5,000
6
GENERAL LEDGER
Account: Salaries Expense Account No: 6100
2/2/2016 Payment of Juana’s Salary 4,000 4,000
STEP 4- UNADJUSTED TRIAL BALANCE
At the end of an accounting period (for example, one month or one year) the working trial balance
is prepared. This involves copying each account name and account balance to a worksheet (working trial
balance). The resulting first two columns of the worksheet are called the unadjusted trial balance. In the
preparation of the unadjusted trial balance, the balances in all general ledgers at the end of the reporting
date are forwarded to the appropriate column. The unadjusted trial balance for the transactions in our
example from Step 3 is the following:
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MATAPANG COMPUTER REPAIRS

Unadjusted Trial Balance
February 29,2016
Account Title Debit Credit
Balance Sheet Accounts
Cash 181,000
Office Equipment 25,000
Matapang, Capital 200,000
Income Statement Accounts

Supplies Expense 5,000
230,000 230,000
Notice that all asset accounts are presented first, followed by liabilities, equity (or capital account),
income accounts and lastly, expenses accounts.
STEP 5- WORKSHEET
This step is simply about plotting the items in the unadjusted trial balance on the worksheet. In a manual
accounting system, a worksheet is large columnar sheet of paper specifically designed to conveniently
arrange all the accounting information required at the end of a period. The worksheet is used to check
whether ledger accounts are balances and adjusted. The satisfactory completion of a worksheet provides
assurance that all the details of the end of period accounting procedure were properly brought together.
The worksheet serves as the source in the preparation of financial statements and other closing and
adjusting entries.
The body of the worksheet contains five pairs of money columns. A sample of a worksheet is shown
below:
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NAME OF THE COMPANY
WORKSHEET
For the period (Month/year) ended Unadjusted Trial Adjustments Adjusted Trial Statement of Statement of
______,20____ Balance Balance Position Income Financial
DR CR DR CR DR CR DR CR DR CR
Statement of Financial Position Accounts
Cash
Accounts Receivable
Inventory
Office Equipment
Accum Deprn-Off Eqpt
Land
Intangible Assets
Accounts Payable
Owner’s, Capital
Owner’s Withdrawal
Income Statement Accounts
Sales
Sales Returns and Allowances
Sales Discount
Interest Income
Purchases
Purchase Returns and Allowances
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Purchase Discounts
Freight In
Salaries Expense
Supplies Expense
Utilities Expense
STEP 6- ADJUSTING ENTRIES
At the end of the accounting period, some accounts in the general ledger would require updating. The journal entries that bring the accounts
up to date are called adjusting entries. One purpose of adjusting entries is for income and expenses to be reported in the correct period. Adjusting
entries ensure that both the revenue recognition and matching principles are followed.
REVENUE RECOGNITION – Accounting standards require that revenue is recognized when it is earned and the amount can be measured reliably. To
illustrate:
Assume that you are preparing the financial statements for Feb 2016. Matapang Computer Repairs rendered services amounting to
PHP25,000 for the repair of the computer units of Feb 26,2016. However, the payment for these services of Matapang will be made on Mar
15,2016.
Question: when should you recognize the PHP25,000 as revenue or income, in February or March? Applying the revenue recognition
principle, it should be reported as revenue for February 2016.
Assume that you are preparing the financial statements for February 2016. On February 28,2016, Matapang Repairs received payment from
Mr. Tamad amounting to PHP25,000. This payment is for the repair of the computer units of Mr. Tamad on March 5,2016.
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Question: When should you recognize the PHP25,000 as revenue or income, in February or
March? Applying the revenue recognition principle, it should also be reported as revenue in March
2016. Take note that since the service will be rendered in March, the revenue should also be
earned in March. What about February 2016? The amount is recorded as a liability because
Matapang Repairs has the obligation to render this service in the future.
Matching Principle – This principle directs a business to report an expense on its income
statement within the same period as its related income. To illustrate:
Assume that you are preparing the financial statements for February 2016. The business gives a
commission of 10% service income to its employees. The commission is paid the following month.
On February 2016, the total service income for the month is PHP100,000. Thus, the employees are
entitled to commission of PHP10,000. This amount will be paid on March 12,2016. Question:
When should the commission expense be recorded in the books of accounts of the business, in
March or in February? Applying the matching principle, the answer is in February.
Adjusting entries are made at the end of each accounting period. Adjusting entries make it
possible to report correct amounts on the statement of financial position and on the income
statement. All adjusting entries affect at least one income statement account and one statement
of financial position account. Thus, an adjusting entry will always involve an income or expense
account and an asset or liability account. There are five basic sources of adjusting entries:
1. Depreciation Expense
2. Deferred expenses or prepaid expenses
3. Deferred Income or unearned income
4. Accrued expenses or accrued liabilities
5. Accrued income or accrued assets.
# Depreciation. Depreciation is a method of allocating the cost of an asset to an expense over the
accounting periods that make up the asset’s useful life. Examples of assets subject to depreciation are:
Store, Office, Building and Transportation equipment. These types of assets lose their ability to provide
useful service as time passes. Depreciation can also be referred to as the decrease in the usefulness of
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these types of assets. Take note that Land is not subject to depreciation because the value of land mostly
increase as time passes.
Exercise on Adjusting Entries to record Depreciation
Recall that Matapang acquired office equipment of February 15,2016 for his repair shop business. The
cost of the equipment is PHP25,000. It was estimated to have a useful life of five years. It is estimated
that after five years, the office equipment can be sold at a scrap value of PHP1,000. The company uses the
straight line method of depreciation.
Depreciation is a means of allocating the cost of an asset to an expense over the accounting period that
will benefit the use of the asset. In the exercise above, the equipment will be used by Matapang for five
years, Proper accounting procedures dictates that the cost of PHP25,000 should be spread over five years.
There are several methods or formulas to compute the amount of depreciation. The simplest is the
straight line method. The formula is Annual Depreciation: (Acquisition Cost- Salvage or Residual Value)/
Useful life. Applying this formula to the exercise:
Annual Depreciation = (25,000-1,0000)/5
= PHP 4,800
If the accounting period being reported by Matapang is for the month ending February 29,2016, the
adjusting entry to record this depreciation in the books of Matapang is:
GENERAL Journal
2/29/16 Depreciation Expense 200
Accumulated Depreciation – Office Eqpt 200
The depreciation expense of PHP200 was derived by computing the monthly depreciation of PHP400
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(Annual Depreciation of PHP4,800/12moths) and multiplying the PHP400 by one-half since the equipment
was acquired in the middle of February,
#2 Deferred Expenses or Prepaid Expenses. These are items that have been initially recorded as assets
but are expected to become expenses over time or through the operations of the business.
Exercise- Adjusting entries to record deferred expenses or prepaid expenses. These are items that have
been initially recorded as assets but are expected to become expenses over time or through the
operations of the business.
Exercise- Adjusting entries to record deferred expenses or prepaid expenses
Recall that on February 19,2016 Matapang purchased PHP5,000 worth of office supplies on account. By
the end of the month, PHP2000 worth of these supplies are still unused.
The February 19,2016 entry to record the purchase on the account of office supplies was already posted
to the general ledger and included in the balances, as shown in the unadjusted trial balance above. The
entry was shown only for illustration purposes.
GENERAL JOURNAL
Date Item Ref Debit Credit
To record the purchased of office supplies on account
2/29/16 Supplies 2,000

To set-up the value of unused supplies
The “Supplies” account debited of February 29,2016 above in an asset account and represents the value
of supplies unused as of the end of February 2016. If these journal entries are posted to the general
ledger, the following should be the balance of each account:

Supplies 2,000
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Supplies 3,000
The alternative entries to record the above transactions are:
GENERAL JOURNAL
2/19/16 Supplies 5,000
To record the purchased of office supplies

Supplies 3,000
To set up the value of unused supplies
If the entries are posted in the ledger, the following should be the balances of each account:

Supplies 2,000
Notice that even with the different approaches in recording the transactions in the journal entreis, the
balances in the general ledger will always be the same whether you used the first approach or the second
approach.
#3 Deferred Income or Unearned Income. These are items that have been initially recorded as liabilities
but are expected to become income over time or through the operations of the business.
Exercise- Adjusting entries to record deferred or unearned income
On February 15,2016 Matapang entered into a contract with Makisig to maintain the computers of
Makisig for two months starting on February 15, 2016 up to April 15,2016. On the same date. Makisig
paid the total contract amount of Php40,000 in full. The entries to record and adjust the books are:
In the February 29,2016 entry above, as of end of February 2016, Matapang has already earned the
service revenue for the first 15 days, thus an adjusting entry is recorded.
GENERAL JOURNAL
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2/15/16 Cash 40,000
Unearned Service Revenue 40,000
To record receipt of full payment for the two- month
service contract with makisig
2/29/16 Unearned Service Revenue 10,000

To record service income earned from Feb 15-29,
2016; P40,000 x (1/2month/2months)
#4 Accrued Expenses or Accrued Liabilities. These are items of expenses that been incurred but have not
been recorded and paid.
Exercise- Adjusting entries to record Accrued expenses or accrued liabilities.
On February 29,2016, Matapang received the electric bill for the month of February amounting to PHP
3,800. Matapang will pay this bill on March 2016.
The electric bill represents the cost of electricity used (or incurred) for February. Although the said bill is
still unpaid and thus was not recorded, the matching principle and accrual basis of accounting dictates
that the same should be recorded in February. Otherwise, your expense will be understated and thus the
company will be reporting an overstated income (or an erroneous income). Needless to say, erreous
information may lead to wrong decisions.
The entry to record the accrual of this expense is:
GENERAL JOURNAL
2/29/16 Utilities Expense 3,800
Utilities Payable 3,800
To accrue the cost of electricity incurred for the
month of February.
#5 Accrued Income or Accrued Assets
These are income items that have been earned but have not been recorded and paid by the customer. In
short, these are receivables of the business.
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Exercise – Adjusting entries to record accrued income or accrued assets
On February 28,2016, Matapang repaired the computer of Pedro for PHP15,000. Pedro was on an out-of-
town trip so he could not pay Matapang. He told Matapang that he will pay for their services in March 1,
2016.
Matapang has already earned the PHP15,000 but was not paid as of the end of February 2016. Therefore,
an income should be properly recognized in February 2016 for this transaction. The entry to record this is:
GENERAL JOURNAL
2/29/16 Accounts Receivable 15,000
To accrue the cost of electricity incurred for the
month of February.
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Enter all adjustments to the worksheet
Matapang Computer Repairs
WORKSHEET
For the month ending February 29,2016 Unadjusted Trial Adjustments Adjusted Trial
Balance Balance Position
DR CR DR CR DR CR
Cash 221,000 221,000
Accounts Receivable 15,000 15,000 30,000
Supplies 2,000 2,000
Office Equipment 25,000 25,000
Accum. Deprn-Off Eqpt 200 200
Accounts Payable 5,000 5,000
Utilities Payable 3,800 3,800
Unearned Service Revenue 40,000 10,000 30,000
Matapang, Capital 200,000 200,000

Service Revenue 25,000 25,000 50,000
Supplies Expense 5,000 2,000 3,000
Salaries Expense 4,000 4,000
Utilities Expense 3,800 3,800
Depreciation Expense 200 200
270,000 270,000 31,000 31,000 289,000 289,000
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Note: The entry to record the receipt of PHP40,000 from Makisig on February 15,2016 was reflected in the unadjusted trial balance columns.
S
STEP 7. Preparation of the Financial Statements.
Using the information from the worksheet, the financial statements are prepared.
The following are the financial statement to be prepared:
1. Statement of Financial Position (SFP) – also known as the balance sheet. This statement includes the amounts of the company’s total
assets, liabilities ad owner’s equity which in totality provides the financial position of the company on a specific date.
2. Statement of Comprehensive Income (SCI) – also known as the income statement. Contains the results of the company’s operations
for a specific period of time. This can be prepared on a monthly, quarterly or yearly basis.
3. Statement of Changes in Equity (SCE) – this statement is prepared prior to preparation of the Statement of Financial Position in order
to obtain the ending balance of the equity to be used in the SFP. All changes, whether increases or decreases to the woner’s interest
on the company during the period are reported here.
4. Cash Flow Statement – Provides an analysis of inflows and /or outflows of cash from /to operating, investing and financing activities.
The income statement is prepared first so that net income can then be recorded in the statement of changes in equity. The statement of
changes in equity is then prepared to determine the ending balance of equity or capital account. Once the ending balance is determined, the
statement of financial position is prepared. The cash flow statement is prepared last. Based on the worksheet below, the income statement
of Matapang for February 2016 should appear as follows:
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For the month ending February 29,2016 Unadjusted Trial Income Statement
Balance
DR CR DR CR
Cash 221,000
Supplies 2,000

Accum. Deprn-Off Eqpt 200
Utilities Payable 3,800
Unearned Service Revenue 30,000

Service Revenue 50,000 50,000
Supplies Expense 3,000 3,000
Salaries Expense 4,000 4,000
Utilities Expense 3,800 3,800
Depreciation Expense 200 200
11,000 50,000
Net Income 39,000
Matapang Computer Repairs

Statement of Comprehensive Income
For the month ended February 29,2016
SERVICE REVENUE 50,000
LESS:EXPENSES
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Utilities Expense 3,800
Depreciation Expense 200
Total Expenses 11,000
NET INCOME 39,000
STEP 8- JOURNALIZE THE CLOSING JOURNAL ENTRIES
The income, expense, withdrawal (equity) accounts are called temporary accounts or nominal accounts.
They are called temporary because they accumulate the transactions of only one accounting period. At
the end of this accounting period, the changes in owner’s equity accumulated in these temporary
accounts are transferred into the owner’s capital account. This process serves two purposes: (1) to
update the balance of the owner’s capital; and (2) it returns the balances continue to exist beyond the
current accounting period. Closing the books is the process of transferring the balances of the temporary
accounts to the owner’s permanent capital account.
The closing journal entries should consist of the following:
 All of the nominal revenue accounts should be closed to the income summary account by debit to
revenue and Credit to income summary.
 All of the nominal expense accounts should be closed to the income summary by Credit to
expense and Debit to income summary.
 The balance in the income summary account should now reflect the net income for the accounting
period. The next journal entry should close the income summary account to the equity or capital
account. If there is a net profit this entry will be a Debit to income summary and a Credit to
owner’s capital account.
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 Once the closing journal entries have been entered into the general journal, the information
should be posted to the general ledger. When this is accomplished, all of the nominal accounts in
the general ledger. If we have any nominal accounts with positive balances, a mistake was made
along the way and will need to be corrected before proceeding to the next accounting period.
To illustrate:
GENERAL JOURNAL
Date Account title and Explanation Ref Debit Credit
2/29/16 Service Revenue 50,000
Income Summary 50,000
To close nominal revenue Accounts

Utilities Expense 3,800
Depreciation Expense 200
After the above, the balances for these accounts are:
Supplies Salaries Utilities Depreciation Revenue Income

Expense Expense Expense Expense Accounts Summary
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
3,00 3,000 4,000 4,000 3,800 3,800 200 200 50,000 50,000 11,000 11,000
0
0 0 0 0 0 0
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Notice that the ending balance of the Income Summary Account amounting to 39,000 credit represents
the net income for the period of Matapang. The balance of the Income Summary Account is then closed
to the Capital Account by this entry.
GENERAL JOURNAL
STUDENT’S NAME: ____________________________________

UNKNOWN ACCOUNT TO BE DEBITED
Instruction: Fill in the missing Account debited to complete the journal entries of Mr. Nelson Palete,
owner of Koronadal Refrigeration Services.
Jan 3 ____________________________
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N. Palete, Capital
Initial cash investment
7 _____________________________
Service Income
Rendered Services on account
10 _____________________________
Accounts Payable
Various shop supplies on account.
13 _____________________________
Cash on Hand
Payment of accounts
15 _____________________________
Cash on Hand
Withdrawal of the owner
19 _____________________________
Accounts Receivable
Collection of account
23 ____________________________
Notes Payable
Issued a note for borrowed money
27 _____________________________
Cash on Hand
Payment of Taxes and Licenses
30 _____________________________
Services Income
Received a note for services rendered
STUDENT’S NAME: ____________________________________

JOURNALIZING USING THE TRANSACTIONS ANALYSES WORKSHEET
Helen L. Valdez, is engaged in the business of Chairs and Tables rental for all occasions. She needs
your assistance in recording her business transactions. Shown hereunder is a chart of accounts for you to
use in describing the exchanges of values.
Valdez Tables and Chairs
Chart of Accounts
Assets Income Owner’s Equity
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Cash in Bank Rental Income H. Valdez, Capital

Accounts Receivable H. Valdez, Drawing
Tables and Chairs Expenses
Salaries Expense
Liabilities Rent Expense
SSS Premium Payable SSS Contribution
Philhealth Premium Payable Philhealth Contribution
The completed transactions for the month of December 2007 are as follows:
Dec1 She made the following investments:
Cash in Bank P75,000
Tables and chairs 150,000
5 Received cash for rental of tables and chairs, P15,000
8 Tables and chairs rental on account, P4,000.
13 Paid space rental for the month, P2,500.
17 She withdrew cash of P20,000 to buy a computer for her personal use.
20 Partial collection of account, P2,000 (refer to transaction of Dec. 8).
30 Paid salaries for the month:
Salaries 6,000
Less: Deductions
SSS P200
Philhealth 75 275
Net payroll P5,725
Required:
1. Set up accounts in the Transactions Analyses Worksheet, the same accounts listed in the given
Chart of Accounts.
2. Enter your analyses in the Transactions Analyses Worksheet showing the details of Valdez,
Capital account
3. Record the above transactions in a journal entry form. You may utilize the vacant space of your
worksheet.
STUDENT’S NAME: ____________________________________

JOURNALIZING – CREATING ACCOUNT TITLES
Mr. Bonifacio Slava, owner of Commander’s Barber Shop has been operating for a year. His
bookkeeper has resigned and he is asking your help to record his transactions for the month of July 2007.
His business has no chart of accounts where you can refer the appropriate account titles.
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July 2 He made an additional investment of P50,000.

6 Bought talcum powder, lotion, ribbing alcohol, soap, etc., on account, P2,000 (shop
Supplies Expense)
8 Paid P500 for laundry expenses.
10 Remitted to SSS, Philhealth and BIR what has been deducted from payroll for the month of
June 2005.
SSS P1,500.00
Philhealth 375.00
Withholding Tax 750.00
14 Total cash collection for two weeks (Barber Shop Income), P18,000.
16 Bought new barber’s chair on account P30,000 (Barber Shop Equipment)
18 Paid light and water bills P5,000 (Utilities Expense)
20 Paid the account of July 6.
26 Paid in full the account of July 16.
29 Total Cash collections for 2weeks (Barber Shop Income), P20,500.
31 Paid Salaries and wages for the month.
Salaries and Wages P16,500.00
Less: Deductions
SSS P583.50
Philhealth 187.50
Withholding Tax 250.00 1,021.00
31 Employer’s share: SSS, P936.50 and Philhealth, P187.50.
Requirement:
Record the transactions using a 2 Column General Journal. Create your own account titles that will
appropriately describe the exchanges of values.
STUDENT’S NAME: ____________________________________

POSTING TO THE LEDGER AND PREPARATION OF A TRIAL BALANCE

The following were the journal entries recorded in the General Journal of Mr. Elizardo Sintos, an operator
of a transportation business.
March 2 Cash on Hand P60,000

Jeepneys (2units) P450,000
Sintos, Capital P510,000
3 Prepaid Insurance P4,500
Cash on Hand 4,500
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5 Taxes and Licenses 3,500

Cash on Hand 3,500
8 Repairs and Maintenance 1,350
Battery Rental Expense 400
Cash on Hand 1,750
10 Cash on Hand 4,100
Rental Income 4,100
14 Jeep Supplies Expense 3,880
17 Cash on hand 4,800
Rental Income 4,800
18 Vulcanizing Expense 120
Cash 120
20 Sintos, Drawing 2,000
Cash on Hand 2,000
28 Cash on Hand 4,400
Rental Income 4,400
29 Accounts Payable 2,550
Cash On hand 2,550
Required:
1. Prepare T-account for each of the following: Cash on Hand; Prepaid Insurance; Jeepneys;
Accounts Payable; Sintos, Capital; Sintos, Drawing; Rental Income; Battery Rental Expense;
Jeepney Supplies Expense; Vulcanizing Expense and Taxes and Licenses.
2. Foot the T-Accounts
3. Prepare a Trial Balance.
STUDENT’S NAME: ____________________________________

JOURNALIZING BASED ON THE GIVEN CHART OF ACCOUNTS
Helen Grace Ferrer, CPA has P170,000 to start with in her public practice. She has completed her
transactions for the month of February 2007. The following chart of accounts are given below:
Helen Grace Ferrer, CPA
Chart of Accounts
Assets Owner’s Equity
Cash on Hand H. Ferrer, Capital
Cash in Bank H. Ferrer, Drawing
Accounts Receivable
Office Equipment Income
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Professional Fees Income

Liabilities Expenses
Accounts Payable Salaries and Wages
Unearned Professional Income Taxes and Licenses
SSS Premium Payable Supplies Expense
Philihealth Premium Payable Rent Expense
Withholding Tax Payable SSS Contribution
Philhealth Contribution
Feb. 1, 2020 She opened a bank account and deposited P100,000. The P70,000 will be used as
resolving fund. (Initial Investment)
2 Paid business permit and other fees, P1,,350.00
3 Bought various stationeries and supplies, P1,000
5 Bought a steel cabinet on account, P31,000.
15 Received P15,000 from a client for professional services rendered.
20 Made partial payment of December 5 account, P8,000.
21 Deposited to the bank, P5,000 (from cash on hand).
23 Paid office rental, P2,000.
25 Deposited to the bank, Cash received from a client for professional service
rendered, P5,000 (outright deposit)
26 Withdrew P4,000 from bank deposits for her personal use.
28 Paid salaries for the month.
Salaries 12,000
Less: Deductions
SSS P466.80
Philhealth 200.00
Withholding Tax 195.00 861.80
28 Employer’s share: SSS, P749.20 and Philhealth, P200.
29 Received cash in advance for the professional services to be rendered in March,
P8,000.
STUDENT’S NAME: ____________________________________
JOURNALIZING AND POSTING
Aida Ricarte, owner of Tacloban Beauty Salon has requested your assistance to do and prepare for
the following:
a. Recording of the transactions in the 2-column journal.
b. Posting the journal entries to the T-accounts or General Ledger
(Use the Page no. of the account found on the chart).
Page No. Page No.

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1 Cash in Bank 14 Ricarte, capital

3 Accounts Receivable 15 Ricarte, Drawing
5 Shop Supplies Inventory 16 Services Rendered
6 Furniture and Fixtures 17 Taxes and Licenses
8 Shop Equipment 20 Rental Expense
11 Accounts Payable 22 Commission Expense
Transactions for the month of October:
1. She made the following investments:
Cash P150,000
Furniture and Fixtures 25,000
Shop Equipment 35,000
2. Paid business permits and licenses, P2,050.00
9 Bought some beauty products and supplies on account, P15,000.
14 Revenue for the week:
Cash P5,000
On account 6,000
15 Partial payment of October 9 account, P9,000.
21 Revenue for the week, P10,000.
25 Payment of rental for the month, P5,000
27 Revenue for the week:
Cash P4,000
On account P7,000
28 Withdrew cash from the business for personal use, P3,000
30 Paid commission to beautician, P11,000
STUDENT’S NAME: ____________________________________

Posting Entries Directly to a T-Account and Preparation of a Trial Balance
Instruction: Set up seven (6) accounts in T form for each of the following: Cash on Hand, Accounts
Receivable, Photographic Supplies Inventory, Photographic Equipment. Accounts Payable and Sylvia
Gondales, Capital (for Drawing, Income and Expense).
June 1 the owner, Sylvia Gondales invest P80,000 cash and Photographic Equipment worth P50,000.
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June 3 Rendered photographic services on account, P10,000.

5 Purchased photographic supplies on account, P15,000.
8 Collected P8,000 cash from a customers’ account.
10 Paid light and water (Utilities Expense), P5,000.
13 Withdrew P5,000 cash from the business for personal use.
17 Rendered photographic services for cash, P15,000.
20 Paid P6,000 cash on the June 5 account.
23 Paid rental fee for the month, P3,000.
27 Withdrew another P2,000 cash from the business for personal use.
30 Paid salaries to employees, P8,000.
Requirements:
1. Enter the above transactions in T account you prepared.
2. Foot the account balance.
3. Prepare a trial balance.
STUDENT’S NAME: ____________________________________

Preparation of Adjusting Journal Entry

From the given partial trial balance, prepare adjusting journal entries at the end of the year:
Ma. Cristina Pascua-Obeso, CPA

Partial Trial Balance
December 31, 2020
Cash P 53,000
Furniture and Fixtures 35,000
Accounts
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Page P 27,000
Obeso, Capital 165,000
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1. Cash collected from a customer’s account in the amount of P10,000 was not recorded in the book.
This is covered by Official Receipt No. 0521 Dated December 31, 2020
Debit, ________________ and Credit _____________________.
2. Payment of account to a supplier in the amount of P15,000 was not recorded. This is covered by
Check No. 00751 as per check stub on file.
Debit ________________ and Credit ______________________
3. Cash withdrawal of the owner amounting to 5,000 was erroneously charged to Salaries Expense.
Debit ________________ and Credit ______________________
4. Furniture and fixtures was acquired on March 31,2020 with an estimated life of 5 years with a
residual value of P5,000 at the end of its life.
Debit ________________ and Credit ______________________
5. Provision for doubtful accounts is estimated to be at 1.5% of the Accounts Receivable.

Debit ________________ and Credit ______________________
STUDENT’S NAME: ____________________________________

Adjustments to Adjusted Trial Balance

Richard Belarmino
Preliminary Trial Balance
December 31,2020
Account Titles Trial Balance Adjustments Adjusted Trial Balance
Debit Credit Debit Credit Debit Credit
Cash in Bank 75,000
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Allow. For Bad Debts 500
Supplies Inventory 15,000
Acc. Dep’n Office
Equipment
Accrued Salaries
Expense
Belarmino, Capital 143,500
Bad debts
Depreciation Expense
Supplies Used
TOTAL 239,000 239,000
The following omissions were discovered in the course of your examination:
1 Cash received from a customer for services rendered was not recorded in the book. This is
covered by Cash Sales Invoice #0132 dated December 31, 2020, P5,000.
2 Allowance for doubtful accounts should be adjusted to equal to 1% of the outstanding accounts
receivable.
3 Office Equipment was acquired on July 1, 2007 with an estimated life of 5years without scrap
value.
4 Payment to a supplier’s account in the amount of P10, 000 was inadvertently omitted. This is
covered by Check Voucher #018 dated December 31, 2020.
5. Supplies that were actually on hand when physical counting was made, P8,000.
6 Unpaid salaries as of December 31, 2020, P3,000.
Required:
Prepare an adjusted trial balance. (use letter-sequencing in your adjusting entry)
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STUDENT’S NAME: ____________________________________

PREPARATION OF A WORKSHEET AND FINANCIAL STATEMENTS
Queen City Videotape

Preliminary Trial Balance
December 31,2020
Account Titles Debit Credit

Cash in Bank P 125,000
Allow. For Bad Debts
Unused Supplies 10,000
Videotape Inventory 105,000
Furniture and Fixture 80,000
Acc. Depreciation
Note Payable 50,000
Accrued Interest
Edgar Detoya, Capital 162,000
Edgar Detoya, Drawing
Rental Income 180,000
Other income 18,000
Bad Debts
Depreciation Expense
Interest Expense
Damaged Videotape
Supplies Videotape
Salaries Expense 95,000 _______
Total P 445,000 P445,000
The following errors and omissions were discovered at year-end prior to closing of the books.
a. Bad debts should be provided at 1%of the outstanding receivable balance.
b. Actual cost of supplies used amounted to P6,000.
c. Physical inventory conducted on December 31, 2020 were found to have P15,000 cost of
videotapes to have been damaged.
d. Furniture was acquired on October 1, 2020 with an estimated life of 5years and with a scrap value
of P5,000 at the end of its life.
e. Owner’s withdrawal was erroneously charged to salaries expense, P20,000.
f. Interest on Notes Payable has been accrued, P4,000
g. Payment for the purchase of videotapes on account was not recorded, P15,000.
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Required:
1. Separate Adjusting Journal Entries
2. An 8-column worksheet.
3. An Income Statement for the year ended 31 December 2020
4. A statement of charges in owners Equity for the Year ended December 31 2020.
5. A Balance Sheet as of December 31,2020
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FUNDAMENTALS OF ACCOUNTING
BUSINESS
AND
MANAGEMENT
Compiled by:
REX T. PASQUIL
Instructor
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DON JOSE ECLEO MEMORIAL FOUNDATION COLLEGE OF SCIENCE

IMPORTANCE OF ACCOUNTING IN BUSINESS

 Sales of bread and other bakery products.

IMPORTANCE OF KEEPING BUSINESS RECORDS

 Accounting is a service activity. Accounting provides assistance to decision makers by providing

FUNCTION OF ACCOUNTING IN BUSINESS

They are as follows.

LEGAL FORMS OF BUSINESS ORGANIZATION

Following is the evolution of accounting:

THE CRADLE OF CIVILIZATION

14TH CENTURY- DOUBLE-ENTRY BOOKKEEPING

FRENCH REVOLUTION (1770s)

THE INDUSTRIAL REVOLUTION (1760-1830)

19TH CENTURY- THE BEGINNINGS OF MODERN ACCOUNTING IN EUROPE AND AMERICA

THE PRESENT- THE DEVELOPMENT OF MODERN ACCOUNTING STANDARDS AND COMMERCE

STUDENT’S NAME: ____________________________________

Question for Review:

1. Which of the following is NOT a step in the accounting process?

 The balance sheet (statement of financial condition)

MANAGEMENT (Managerial) ACCOUNTING

Government accounting is the process of recording, analyzing, classifying, summarizing, communicating

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Sole partn corpor service Mercha Manufac

MOTIVE OF PERSONS ENGAGED IN BUSINESS

At profit At Loss At Break-even

Income Earned 100,000 100,000 100,000

Less: Cost & Exp. 80,000 120,000 100,000

Profit (loss) 20,000 (20,000) -0-

BASIC ACCOUNTING ASSUMPTIONS

ELEMENTS OF FINANCIAL STATEMENTS

The following are the essential characteristics of an asset:

1. The asset is controlled by the enterprise;

The following are the essential characteristics of a liability:

1. Owner’s Equity for a proprietorship

Davao Laundry Services

LIABILITY AND OWNERS EQUITY

ASSETS = LIABILITES + OWNER’S EQUITY

P 995,150 = P 133,000 + 862,150

= PROFIT (LOSS) PXX

Davao Laundry Services

Davao Laundry Services

S. Santos, Owner’s Equity – March 1,20A P850,000

Owner’s Equity at the end P 862,150

Profit for the month (Increase Owner’s Equity) P22,150

Net cash flows provided by operating activities

Davao Laundry Services

Cash Flows from Operating Activities

Cash Flows from Investing Activities:

Net Increase (Decrease) in Cash P 743,000

STUDENT’S NAME: ____________________________________

COURSE AND YEAR: _____________ CLASS SCHEDULE:

INSTRUCTOR: REX T. PASQUIL

and identifies which data is relevant for decision – making.

_______2. The primary role of an accountant in business is to prepare financial statements.

_______5. The primary motive of a person of a person engaged in business is profit.

information about his business.

______9. The excess of revenue over expenses is called operating loss.

STUDENT’S NAME: ____________________________________

COURSE AND YEAR: _____________ CLASS SCHEDULE:

INSTRUCTOR: REX T. PASQUIL

DETERMINATION OF UNKNOWN ACCOUNTING ELEMENTS

The following relates to the financial position of an enterprise:

CASE 1 CASE 2 CASE 3 CASE 4

- Liabilities __ 100,000 120,000 _