REVIEW ON BASIC ACCOUNTING

1. DEFINITION OF ACCOUNTING
a. A service activity. Its function is to provide quantitative information, primarily financial in nature, about economic
entities that is intended to be useful in making economic decisions.
b. A process of identifying, measuring, and communicating economic information to permit informed judgments and
decisions by users of the information.
c. Art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions and events
which are, in part at least, of a financial character, and interpreting the results thereof.

2. USERS OF ACCOUNTING INFORMATION

EXTERNAL USERS INTERNAL USERS

LENDERS EXECUTIVES
SHAREHOLDERS MANAGERS
GOVERNMENTS SALES STAFF
CONSUMERS BUDGET ANALYSTS
EXTERNAL AUDITORS INTERNAL AUDITORS
CUSTOMERS CONTROLLERS
SUPPLIERS HUMAN RESOURCES

3. BASIC ACCOUNTING CONCEPTS AND PRINCIPLES

a. Generally Accepted Accounting Principles (GAAP)
-Set of guidelines and procedures that constitute acceptable accounting practice at a given time.
-Aims to make information relevant (affect users decision-making), reliable (Trusted by users), and comparable
(Contrasting organizations).

b. Principles
1. Measurement/Cost Principle/ Historical Cost – Acquired assets should be recorded at their actual cost.
2. Revenue recognition principle – Revenue is to be recognized in the accounting period when goods are delivered or
services are rendered or performed, not when cash is collected.
3. Expense recognition principle/ Matching principle - Expenses should be recognized in the accounting period in
which goods and services are used up to produce revenue not when the entity pays for the goods or services.
4. Full disclosure - Requires that all relevant (not all) information that would affect the user’s understanding be
disclosed in the financial statements.

5. Other principles:
Objectivity principle – Accounting records and statements are based on the most reliable data available. Accounting
records are based on information that flows from activities documented by objective evidence.

Consistency principle - Firms should use the same accounting method from period to period to achieve comparability.

c. Assumptions
1. Going concern – Accounting information reflects presumption that the business will continue operating instead of
being closed or sold.
2. Monetary unit – We can express transactions and events in monetary units.
3. Time period – Life of a company can be divided into time periods, e.g. monthly, annually.
4. Business entity – A business is accounted for separately from other business, including its owner.

d. Constraints
1. Materiality – prescribes that only information that influences decisions need be disclosed.
2. Benefit exceeds cost – prescribes that only information with benefits of disclosure greater than the costs of providing
it need be disclosed.

4. BUSINESS ENTITIES

a. Sole proprietorship – a business owned by one person and accounted for separately.
b. Partnership – a business owned and operated by two or more persons who bind themselves to contribute money,
property or industry to a common fund, with intention of dividing profits among themselves.
c. Corporation – A business owned by its stockholders. An artificial being created by operation of law, having rights of
successions and powers authorized by law.

5. ELEMENTS OF FINANCIAL STATEMENTS

a. ASSETS – Resources controlled by the enterprise as a result of past events from which future benefits are expected to flow
to the enterprise.

CURRENT ASSETS:
CASH
SUPPLIES
ACCOUNTS RECEIVABLE
NOTES RECEIVABLE
MERCHANDISE INVENTORIES
*PREPAID EXPENSES - costs that have been paid but are not yet used up or have not yet expired.
 *ACCRUED REVENUES – revenues rendered but not yet collected

NON-CURRENT ASSETS:
PROPERTY PLANT AND EQUIPMENT (Land, Equipment, Machineries)
INTANGIBLE ASSETS

b. LIABILITY – Present obligation of the enterprise to outside parties arising from past events, settlement of which is
expected to result to an outflow from the enterprise.
-Claims of the creditors from the assets of the company.

CURRENT LIABILITIES:
ACCOUNTS PAYABLE
NOTES PAYABLE
*ACCRUED EXPENSES – expenses incurred but not yet paid
*UNEARNED REVENUES – money received from a customer for work that has not yet been performed.

NON-CURRENT LIABILITIES:
MORTGAGE PAYABLE
BONDS PAYABLE

c. CAPITAL/OWNER’S EQUITY/NET ASSETS – Residual interest in the assets of the enterprise after deducting all its
liabilities.
-Claims of the owners from the assets of the company

a. REVENUES – Sales, Service Revenue/Fees

b. EXPENSES – Cost of Goods sold, Salaries expense, Utilities expenses, Rent expenses, Maintenance expenses etc.
c. WITHDRAWALS – Withdrawal of assets by the owners.
d. CAPITAL INVESTMENT – Investment of assets by the owners.

CHART OF ACCOUNTS – A listing of all the accounts and their account numbers in the ledger.

6. ACCOUNTING EQUATION

Assets=Liabilities + Capital

Liabilities= Assets – Capital

Capital= Assets – Liabilities

7. DOUBLE-ENTRY SYSTEM

-For every transaction, there must be at least 2 accounts affected

-Debit and Credit should be equal

RULES OF DEBIT AND CREDIT:

-Debit (DR) is found on the left side of the T-account (Ledger); left most side of the journal entry
-Credit (CR) is found on the right side of the T-account (Ledger); indented part of the journal entry
-Debit is the normal balance (to record increase) of ASSETS
-Credit is the normal balance (to record increase) of LIABILITIES AND CAPITAL
-To decrease the balance of ASSETS, LIABILITIES AND CAPITAL, just use the opposite of the its normal balance

NORMAL BALANCE/TO RECORD INCREASE DR CR CR

ASSETS = LIABILITIES + *CAPITAL

OPPOSITE BALANCE /TO RECORD DECREASE CR DR DR

*CAPITAL COMPOSITION:

CAPITAL NORMAL BALANCE ANALYSIS

COMPOSITION (INCREASE)
REVENUES (+) CR Revenue increases capital
EXPENSES (-) DR Expenses decreases capital
OWNER’S DRAWING (-) DR Drawing decreases capital
INVESTMENT (+) CR Investment increases capital

CAPITAL
ASSETS LIABILITIES (INVESTMENT)
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
(+) (-) (-) (+) (-) (+)
increase decrease decrease increase decrease increase
     
 REVENUES EXPENSES OWNER'S DRAWING
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
(-) (+) (+) (-) (+) (-)
decrease increase increase decrease increase decrease
     

ACCOUNTING PROCESS

Steps in the Accounting Cycle – There are 9 basic steps in the accounting cycle, which includes 2 phases known as recording
and summarizing.

RECORDING PHASE

1. Analyzing the transaction (business document)- This is where the accountant gathers information from source
documents and determines the impact of the transaction on the financial position as represented by the equation “assets
equals liabilities plus equity”.

2. Journalizing – This is the process of recording the transactions in the appropriate journals. A journal is a
chronological record of transactions also known as the book of original entry. Although all transactions could be
recorded in the general journal, it is more efficient to use special journals in recording a large number of like
transactions. Special journals that enterprises usually use are:

1. Sales Journal – Only sales of merchandise on account are recorded.

2. Cash receipts journal – All types of cash receipts are recorded.
3. Purchase journal – Used to record all purchases on account (merchandise, equipment and supplies).
4. Cash disbursement journal – All payments of cash for any purpose are recorded.

Type of journal entries according to form:

1. Simple journal entry – One which contains a single debit and a single credit element.

2. Compound journal entry – One which has two or more elements and often representing two or more
transactions.

Accounts are the storage units of accounting information and used to summarize changes in assets, liabilities and equity
including income and expenses. The following are a broad classification of kinds of accounts:

1. Real account – Statement of financial position or so called permanent accounts. These accounts are not closed
and carryover to the next accounting period. (ex. Cash, AR and PPE)

2. Nominal account – Income statement or temporary capital accounts. These accounts are closed at the end of the
accounting period. (ex. Sales and expenses)

3. Mixed account – A combination of real and nominal accounts. (ex. Prepaid expenses)

4. Clearing account – Holds temporarily certain information pending transfer to other ledger accounts.

5. Controlling account – The general ledger account that summarizes the detailed information in a subsidiary
ledger.

6. Suspense account – Is an account that holds temporarily certain information pending for disposition.

7. Reciprocal account – Has a counterpart in another book with in the entity or in another ledger or another entity.

8. Principal account – An account that is independent or can stand alone.

9. Auxiliary account – An account that cannot stand alone and are technically neither assets, liabilities nor income
and expenses.

10. Summary account

3. Posting - It is the process of transferring data from the journal to the appropriate accounts in the general ledger and
subsidiary ledger. This process classifies all accounts that were recorded in the journals.

Kinds of ledgers

1. General ledger – Includes all the accounts appearing on the financial statements.

2. Subsidiary ledgers – Affords additional detail in support of certain general ledger accounts.
SUMMARIZING PHASE

4. Preparing the unadjusted trial balance – A list of general ledger accounts with their respective debit or credit
balance. The purpose of the unadjusted trial balance is to provide evidence that the total debits in the general ledger
equal the total credits and prepares the accounts for adjustments.

5. Preparing adjusting entries – To take up accruals, expiration of prepayments and deferrals, estimations and other
events often not signaled by new source documents. Adjusting entries are made at the end of each accounting period.
The concepts involved behind adjusting entries are ACCRUAL, MATCHING OF COSTS AGAINST REVENUE and
ACCOUNTING PERIOD.

Typical Adjusting Entries classified according to timing of cash flow.

1. Prepayments and Deferrals – The cash flow precedes the revenue or the expense recognition.

Prepaid Expenses

Asset Method Expense Method

Prepaid expense (asset) xx Expense xx

Cash xx Cash xx

Adjustment:

Expense xx Prepaid expense (asset) xx

Prepaid expense xx Expense xx

Deferred or Unearned Revenue

Liability Method Income Method

Cash xx Cash xx

Unearned Income (liab.) xx Income xx

Adjustment:

Unearned Income xx Income xx

Income xx Unearned Income (liab.) xx

2. Accruals – Income or expense recognition precedes the cash flow.

a. Accrued Income – Income earned but not yet received. A receivable is always debited and income is
recognized (credited)

b. Accrued expenses – Expenses incurred but not yet paid. An expense is recognized (debited) and a liability is
always credited.

3. Estimates – Adjusting entries that do not involve cash flows.

a. Doubtful accounts – The expense to be matched against credit sales.

b. Depreciation - Allocation of the cost of fixed assets as expense over its useful life

4. Ending inventory - An adjustment to set up the year-end physical count of the inventory. This only applies if the
PERIODIC INVENTORY SYSTEM IS USED.

6. Preparing the financial statements – The most important part of the summarizing phase, this is where the processed
information is communicated to external users.
 Basic financial statements

a. Statement of financial position

b. Income statement or a statement of comprehensive income

c. Statement of changes in equity

d. Statement of cash flows

e. Notes and disclosures

7. Preparing the closing entries – Recorded and posted for the purpose of closing all nominal or temporary accounts to
the income summary account and the resulting net income or loss is afterwards closed to the capital or retained
earnings account.

8. Preparing the post closing trial balance – A listing of general ledger accounts and their balances after closing entries
have been made. The post closing trial balance is the same with the year-end statement of financial position, the only
difference is that valuation accounts like allowances for assets are found in the credit side instead of being deducted
from the related asset account.

9. Preparing reversing entries – The last and optional step in the accounting cycle. Reversing entries are made at the
beginning of the new accounting period to reverse certain adjusting entries from the succeeding accounting period.
The purpose of reversing entries is a matter of convenience for accruals and consistency for the adjustments in the
following year for prepaid expenses and deferred income when the income statement method was used to record the
cash flow.

Once again, reversing entries will only apply to the following but remember that they are not necessary and only
optional:

1. Accrued income
2. Accrued expense
3. Prepaid expense, only if the expense method was used in recording the payment
4. Unearned income, only if the income method was used in recording the collection

Accrued Income Prepaid expense (Exp. Method)

12 mos. rental at 100 per month beginning Nov. 1, 2016. 18 mos. rental at 100 per month beginning Nov. 1, 2016

12/31/16 Adjustment: 11/1/2016

Rent Receivable 200 Rent Expense 1,800

Rent Income 200 Cash 1,800

1/1/2017 Reversing entry: 12/31/2016 Adjustment:

Rent Income 200 Prepaid Rent 1,600

Rent Receivable 200 Rent Expense 1,600

After the reversal, the rent receivable account will have a The adjustment under the expense method will be for the
balance of ZERO and the rent income account will have a unused portion or the prepayment of 1,600. If the asset
DEBIT balance of 200. Hence the collection of 1,200 method was used, the adjustment would have been for
will be recorded as follows: 200 or the portion for the expense.

10/31/2017 1/1/2017 Reversing entry:

Cash 1,200 Rent Expense 1,600

Rent Income 1,200 Prepaid Rent 1,600

After the reversing entry, the 1600 is once again expensed

and the 12/31/2017 adjusting entry will be as follows:
 Prepaid rent 400

Rent Expense 400

If the reversing entry was not prepared, the adjustment

would have been a debit to Rent expense and credit to
prepaid rent for 1,200 which is the adjustment used if the
ASSET METHOD was used.

ACCOUNTING FOR MERCHANDISING

Service Business Merchandising Business

Generates revenue from buying

Generates revenue from
Source of revenue and selling of merchandise
rendering of services
inventory
Income statement Revenue xx Net Sales xx (a)
Expenses (xx) Cost of Goods sold (xx) (b)
Net income xx Gross profit xx
Other revenues xx
Other expenses (xx) (d)
Net income xx

a Gross Sales xx
Sales Discount (xx)
Sales Returns (xx)
Net Sales xx

b Merchandise Inventory, Beginning xx

Net Purchases xx
Cost of Goods available for sale xx
Merchandise Inventory, Ending (xx)
Cost of Goods sold (Cost of sales) xx

c Gross purchases xx
Purchase Discount (xx)
Purchase Returns (xx)
Freight-in xx
Net Purchases xx

d Administrative expenses xx
Selling expenses (e.g. freight-out) xx
Other expenses xx

1. TERMS OF TRANSACTIONS

Credit period - Merchandise may be purchased and sold either on cash or on credit terms. When goods are sold on account, a
credit period is allowed for payment.

n/30 – Invoice is due within 30 days (credit period)

n/eom – Invoice is due at the end of the month

Cash discounts – Encourages prompt payment. Purchase discount for the buyer’s perspective, Sales discount for the seller’s
perspective. It decreases the cash payment/collection.

-Computed based on the Gross invoice price

-Recorded on the book (Required a journal entry)

2/10 – Customer can avail 2% discount if paid for within 10 days (discount period)

Trade discounts – Encourages buyers to purchase products because of the markdown from the list price.

-Computed based on the list price

-Not recorded on the book (Do not require a journal entry)

Ex. Merchandise inventory with a list price of 100,000 terms of 3/10, n/eom and trade discounts of 10%, 15%
LIST PRICE 100,000
TRADE
DISCOUNTS:
100,000x10% -10,000
90,000x15% -13,500
GROSS INVOICE PRICE 76,500
(100,000x90%x85%)

Note: Gross invoice price is the amount to be recorded in the Sales/Purchase not the list price.

SALES – Revenue arising from the sale of merchandise inventory

SALES DISCOUNT - Cash discount on the seller’s perspective, decreases cash collection. Contra-account to sales.
SALES RETURNS -Return of Merchandise inventory on Seller’s perspective, Decreases accounts receivable (If initially sold on
account/credit) or decreases cash (if initially sold for cash). Contra account to sales.
COST OF GOODS SOLD –Major expense of a merchandising business. Cost of the inventory sold to customers.

PURCHASES – Temporary account for merchandise purchased for resale.

PURCHASE DISCOUNTS - Cash discount on the buyer’s perspective, decreases cash collection. Contra-account to Purchases.
PURCHASE RETURNS - Return of Merchandise inventory on Buyer’s perspective, Decreases accounts payable (If initially
purchased on account/credit) or increases cash (if initially purchased for cash). Contra account to Purchases.

2. TRANSPORTATION COSTS / FREIGHT – Cost of shipping goods from one place to another

FOB Shipping Point (Origin/Seller)

 Freight-In account is debited by the buyer
 The buyer should pay the forwarder
FOB Destination (Buyer)
 Freight-Out is recorded by the seller
 It is the seller who should pay the forwarder.

Collect
 The buyer pays the forwarder. The buyer credits the CASH for the freight transactions

Prepaid
 The seller pays the forwarder. The seller credits the CASH for the freight transactions

JOURNAL ENTRIES

FOB SHIPPING, COLLECT

BUYER SELLER
Freight-In No entry
Cash

FOB SHIPPING, PREPAID

Freight-In Accounts Receivable
Accounts Payable Cash

FOB DESTINATION, COLLECT

Accounts Payable Freight-Out

Cash Accounts Receivable

FOB DESTINATION, PREPAID

No entry Freight-Out
Cash

3. NORMAL BALANCES

ACCOUNT NORMAL BALANCE

Sales CREDIT
Sales Discount DEBIT
Sales Returns DEBIT
Purchases DEBIT
Purchase Discount CREDIT
Purchase Returns CREDIT
Freight-in DEBIT
Freight-OUT DEBIT
Cost of goods sold DEBIT

4. INVENTORY SYSTEMS – systems available (Perpetual or Periodic) to merchandising entities to record events related to
merchandise inventory.

DESCRIPTION PERPETUAL PERIODIC

UPDATING OF RECORDS CONTINUOUS PERIODICALLY
VOLUME OF INVENTORIES LOW HIGH
PRICE OF INVENTORIES HIGH LOW

5. JOURNAL ENTRIES (PERIODIC AND PERPETUAL)

1 Sold merchandise on account costing P8,000 for P10,000; terms of 2/10,n/30

2 Customer returned Merchandise costing P400 that had been sold on account for P500
3 Received payment from customer for merchandise sold on account (within discount period)
4 Purchased on account Merchandise for resale for P6,000; terms were 2/10, n/30
5 Returned merchandise inventory purchased on account costing P300
6 Paid for the mechandise purchased on account (within discount period)

                     

PERIODI
  C PERPETUAL  
   

10,000.0 10,000.0
1 Accounts receivable 0 Accounts receivable 0  
10,000.0 10,000.0
  Sales 0 Sales 0  
   
  Cost of goods sold 8,000.00  
Inventor
  y 8,000.00  
   
Sales returns and Sales returns and
2 allowances 500 allowances 500  
  Accounts receivable 500 Accounts receivable 500  
   
  Inventory 400  
  Cost of goods sold 400  
   
3 Cash 9,310.00 Cash 9,310.00  
  Sales discount 190 Sales discount 190  
  Accounts receivable 9,500.00 Accounts receivable 9,500.00  
Discount (10,000- Discount (10,000-
  500x.02) 500x.02)  
   
4 Purchases 6000 Inventory 6000  
  Accounts payable 6000 Accounts payable 6000  
   
5 Accounts payable 300 Accounts payable 300  
Inventor
  Purchase returns 300 y 300  
   
6 Accounts payable 5700 Accounts payable 5700  
Inventor
  Purchase discounts 114 y 114  
  Cash 5586 Cash 5586  
Discount (6,000- Discount (6,000-
  300x.02) 300x.02)  
                     

6. SPECIAL JOURNALS – used to record and post similar type of transactions for efficiency and division of labor.

1. SALES JOURNAL – used to record sales of inventory on account/credit.

2. CASH RECEIPTS JOURNAL – used to record all receipts of cash (all transactions with debit cash)
-Purchase returns on cash
-Collections of accounts
3. PURCHASES JOURNAL – used to record all purchases on account/credit.
4. CASH DISBURSEMENTS JOURNAL – used to record all cash payments (all transactions with credit cash)
-Sales returns on cash
-Payment of accounts

GENERAL JOURNAL – used to record all transactions not found in the special journals (e.g. adjusting, closing, correcting
entries, Sales returns on account and Purchase returns on account)

SUBSIDIARY LEDGERS – a list of individual accounts with common characteristics. Contains detailed information on specific
accounts on general ledger.
Examples:
Accounts receivable ledger – stores transaction data of individual customers
Accounts payable ledger – stores transaction data of individual suppliers

SAMPLE QUESTIONS:

1. GAAP stands for Generally Accepted Accounting Principles which encompasses the conventions, rules and procedures
necessary to define what accepted accounting practice is. They are called generally accepted because
A. They are like laws that must be followed in financial reporting
B. They are developed through votes and conferences
C. They are from established laws which are irrevocable and cannot be changed
D. Because they become accepted by agreement rather than by formal deviation from a set of postulates and basic concepts
ANSWER: D

2. It encompasses the process of analyzing, classifying, summarizing and communicating all transactions involving the receipt
and disposition of government funds and property and interpreting the results thereof
A. Private accounting
B. Public Accounting
C. Government accounting
D. Managerial accounting
ANSWER: C

3. It is the area of accounting that emphasizes developing accounting information for use within an entity
A. Managerial accounting
B. Financial accounting
C. Public accounting
D. Private accounting
ANSWER: A

4. What is the purpose of accounting standards?

A. To create a common understanding between preparers and users of financial statements.
B. To establish new rules in accounting that would make users updated
C. To provide established and irrevocable criteria for preparing financial reports
D. None of the above
ANSWER: A

5. An accountant, should treat an entity as continuing in operation indefinitely in the absence of evidence to the contrary. This
accounting assumption is
A. Monetary unit
B. Time period
C. Accounting entity
D. Going concern
ANSWER: D

6. Which of the following best represents accounting entity assumption?

A. The company should not be named after the owner’s name
B. The owner cannot invest in the business to avoid merging assets of the company and the owner
C. The personal transactions of the owners should not be allowed to distort the financial statements of the entity
D. The owner’s withdrawal should be reflected as expense of the company so as to reflect the decrease in company’s resources
ANSWER: C

7. Which of the following is the correct sequence for the accounting cycle?
A. Analyzing, posting, journalizing, preparing unadjusted trial balance and determining adjusting entries.
B. Journalizing, posting, analyzing, preparing unadjusted trial balance and determining adjusting entries.
C. Analyzing, journalizing, posting, determining adjusting entries and preparing unadjusted trial balance
D. Analyzing, journalizing, posting, preparing unadjusted trial balance and determining adjusting entries.
ANSWER: D

8. Withdrawals by owners are treated as

A. Expenses
B. Decreases in equity, but not as expenses
C. Increase in liabilities
D. Increases in equity, but not as income
ANSWER: B

9. Which of the following is incorrect?

A. Financial reporting is the provision of financial information about an entity to external users that is useful to them in making
economic decisions.
B. Financial reports also include non-financial information such as description of major products and a listing of corporate
officers and directors
C. The overall objective of financial reporting is to provide financial information about the reporting entity that is useful for
primary users in making economic decisions
D. Financial reports only include financial statements. Other means of communicating information that relates directly or
indirectly to the financial accounting process does not fall under financial reporting
ANSWER: D

10. If a value of P52, 300 was received from customer for services rendered by employees, the entry would
A. Increase assets amounting to P52, 300, and increase liability for half the amount.
B. Increase assets amounting to P52, 300, and increase equity for half the amount.
C. Increase assets amounting to P52, 300, and increase liability for the same amount.
D. Increase assets amounting to P52, 300, and increase equity for the same amount.
ANSWER: D

11. Which of the following is to be credited?

A. The income account when there is rendering of service
B. The income account when there is a decrease in income
C. The expense account when there is used supplies
D. The liability account when there is a decrease in liability
ANSWER: A

12. Which of the following transactions will give rise to a revenue

A. Collection of an accounts receivable to a customer
B. Cash received as proceeds from a bank loan
C. Rendition of services to a customer on account
D. Payment of a liability
ANSWER: C

13. This is a device used periodically to test the equality of debits and credits
A. Chart of accounts
B. Accounts
C. Trial Balance
D. Financial Statement
ANSWER: C

14. A transaction that debits or credits more than two accounts at the same time requires a
A. Single entry
B. Compound entry
C. Posting entry
D. Adjusting entry
ANSWER: B

15. Accrual principle states that

A. Expenses should be recognized at the time of purchase regardless when the items purchased were already used or not.
B. Expenses should be recognized at the time they are incurred and not at the time when entity pays for those goods.
C. Expenses should always be recorded whenever there is an outflow of cash
D. Expenses should only be recorded when there is purchase of supplies.
ANSWER: B

16. Which of the following would be reported on the statement of Owner’s equity for the current year?
A. Sales
B. Additional investment for the current year
C. Cost of goods sold
D. Inventory
ANSWER: B

17. Which is false concerning the rules of debit and credit?

A. The left side of an account is always the debit side and the right side is always the credit side.
B. Increases in assets and expenses are debit entries, and increases in liabilities, equity and revenue are credit entries
C. The normal balance of any account appears on the side for recording increases
D. The word “debit” means to increase and the word “credit” means to decrease.
ANSWER: D

18. Which of the following application of the rules of debit and credit is true?
A. Decrease equipment with a credit and the normal balance is a credit
B. Increase accounts payable with a credit and the normal balance is a debit
C. Increase expense with a debit and the normal balance is debit
D. Decrease cash with a debit and the normal balance is credit
ANSWER: C

19. Which of the following is an essential characteristic of an asset?

A. The claims to an asset’s benefits are legally enforceable
B. An asset is tangible
C. An asset is obtained at a cost
D. An asset provides future benefits
ANSWER: D

20. Financial statements include a statement of financial position, a statement of comprehensive income, a statement of changes
in equity and a statement of cash flows. Which of the following is also included as a component of financial statements?
A. A statement of retained earnings
B. Accounting policies
C. An auditor’s report
D. A director’s report
ANSWER: B
21. Which accounting principle is being observed when an accountant charges to expense a cost that contributed to revenue
during a period?
A. Revenue realization
B. Matching
C. Monetary unit
D. Conservatism
ANSWER: B

22. Which of the following does not apply to the recognition of revenue for transactions involving the rendering of services
A. The amount of revenue and the costs incurred and costs to complete can be measured reliably
B. It is probable that payment for the services shall be received by the entity
C. The significant risks and rewards of ownership have been transferred to the buyer
D. The stage of completion of the transaction at the end of reporting period can be measured reliably
ANSWER: C

23. An expense is recognized immediately in the income statement

I. When an expenditure produces no future economic benefits
II. When cost incurred ceases to qualify for recognition as an asset in the statement of financial position
A. I only
B. II only
C. Either I or II
D. Neither I nor II
ANSWER: C

24. An income is recognized when

A. It is probable that future economic benefit will flow to the entity and the economic benefit can be measured reliably
B. It is possible that future economic benefit will flow to the entity and the economic benefit can be measured reliably
C. The entity obtains control of the future economic benefit
D. The future economic benefit can be measured reliably
ANSWER: A

25. An item would be considered material and therefore would be disclosed in the financial statements if
A. The expected benefits of disclosure exceed the additional costs
B. The impact on earnings is greater than 10%
C. The standard definition of materiality is met
D. The omission or misstatement of the amount would make a difference to the users.
ANSWER: D

26. Financial information exhibits consistency when

A. Accounting procedures are adopted which smooth net income and make results consistent between years
B. Gains and losses are shown separately in the income statement
C. Accounting entities give similar events the same accounting treatment each period
D. Expenditures are reported as expenses and netted against revenue in the period in which they are paid.
ANSWER: C

27. The primary focus of financial reporting has been on meeting the need of which of the following groups?
A. Managers of an entity
B. Existing and potential investors, lenders and other creditors
C. National and local taxing authorities
D. Independent CPAs
ANSWER: B

28. Double entry system means

A. Only two accounts are affected by each transaction recording
B. A transaction is recorded twice, once in the journal and the other in the ledger
C. For every asset increased, a revenue or liability must also be increased
D. At least two accounts are affected by each transaction recording
ANSWER: D

29. Which of the following is not a possible combination of a journal entry?

A. increase in asset and increase in liability
B. Decrease in equity and increase in liability
C. Decrease in liability and decrease in asset
D. Increase in asset and decrease in equity
ANSWER: D

30. The ledger account shows the following

Accounts receivable P250, 000
Accounts Payable P200, 000
Capital P100, 000
Cash ?
Expenses P350, 000
Revenues P500, 000
What is the balance of cash?
A. P150, 000
B. P250, 000
C. P200, 000
D. P450, 000
ANSWER: C

31. The following are accounts taken from the books of Tiger Advertising Agency.
Cash P725, 000
Accounts receivable P40, 000
Notes receivable P10, 000
Prepaid rent P24, 000
Office Equipment P44, 000
Furniture and Fixtures P34, 000
Supplies P4, 200
Accounts Payable P263, 000
Notes payable P17, 000

How much is the current asset of the company?

A. P779, 200
B. P793, 200
C. P799, 000
D. P803, 200
ANSWER: D

32. First statement: If total assets decreased by P40, 000 during a specific period and owner’s equity decreased by P45, 000
during the same period the period’s change in total liabilities was an P85, 000 increase.
Second statement: If net income for a business was P175, 000, withdrawals were P40, 000 in cash, and the owner made no
investment, and the owner’s equity increased P215, 000
A. First statement is true, second is false
B. First statement is false, second is true
C. Both statements are true
D. Both statements are false
ANSWER: D

33. Transposition is an
A. Error of interchanging the figures
B. Error of placing the decimal point
C. Error of not recording the transaction
D. Error, which if not detected, is automatically compensated or corrected in the next accounting period
ANSWER: A

34. A new business has the following transactions:

(1) The owner invested P50, 000
(2) P30, 000 of supplies were purchased. Half is for cash and the other half on account
(3) P43, 000 was received for payment for services rendered by the business.
(4) A salary of P17, 000 was paid to an employee
(5) P40, 000 was borrowed from the bank.
(6) The supplies purchased from number 2 transaction is already one fourth used

35. What is the correct amount of assets, liabilities and owner’s equity respectively?
A. P131, 000, P55, 000, P76, 000
B. P123, 500, P55, 000, P68, 500
C. P146, 000, P55, 000, P91, 000
D. P138, 500, P55, 000, P83, 500
ANSWER: B

36. The following financial information is known about five unrelated businesses:
COMPANY
A B C D E
12/31/2012
Assets P350, 000 P390, 000 P460, 000 P290, 000 P630, 000
Liabilities P270, 000 P300, 000 P300, 000 P200, 000 ?
12/31/2013
Assets P370, 000 P480, 000 P750, 000 ? P880, 000
Liabilities P238, 000 ? P360, 000 P270, 000 P400, 000
During 2013
Addl investment P46, 000 P70, 000 ? P230, 000 0
Net income ? P60, 000 P200, 000 P100, 000 P230, 000
Drawings P20, 000 P26, 000 P40, 000 P50, 000 P70, 000

What would be the correct amount of net income of Company A for the year 2013?
A. P80, 000
B. P132, 000
C. P241, 000
D. P26, 000
ANSWER: D

37. Referring to data from number 2, what would be the correct amount of liabilities as of December 31, 2013 of Company B?
A. P90, 000
B. P194, 000
C. P286, 000
D. P674, 000
ANSWER: C

38. Referring to data from number 2, what would be the correct amount of additional investment during the year 2013 of
Company C?
A. P70, 000
B. P160, 000
C. P390, 000
D. P710, 000
ANSWER: A

39. On January 8, 2014, Tyrion Company decided to purchase additional 20 machineries for his growing business. The total of
the purchased machineries amounts to P1, 350, 000. It was agreed that Tyrion should pay in full the machineries except for the 3
machineries which the seller agreed to be paid in half and the remaining balance be paid next month. What would be the
acceptable journal entry on January 8, 2014?
A. Machineries P1, 350, 000
Accounts Payable P202, 500
Cash P1, 147, 500
B. Machineries P1, 147, 500
Accounts Payable P202, 500
Cash P945, 000

C. Machineries P1, 350, 000

Accounts Payable P101, 250
Cash P1, 248, 750
D. Machineries P1, 350, 000
Accounts Payable P67, 500
Cash P1, 282, 500
ANSWER: C

40. When Leonardo Bucaycay started a business, he invested P15, 000 cash plus some land that had a fair market value of P23,
000. Also the business assumed responsibility for note payable for P18, 000 that was issued to finance the purchase of the land.
In recording Bucaycay’s investment, the entry will consist of
A. One debit and one credit
B. Two debits and one credit
C. Two debits and two credits
D. Debits that total P38, 000 and credits that total P33, 000
ANSWER: C

41. Sexy Services pays a monthly fixed salary expense of P25, 000. Its supplies expense is P5 for every P100 of services
rendered. Total supplies expense for the period is P2, 000. Sexy’s operating income is
A. P15, 000
B. P13, 000
C. P38, 000
D. P40, 000
ANSWER: B

42. The net asset of Y was P125, 000. An account payable of P11, 700 was paid. What is the new balance of Y’s net assets?
A. P136, 700
B. P113, 300
C. P125, 000
D. P101, 600
ANSWER: C

43. The total assets of X firm is P350, 000 of which P50, 000 is accounts receivable. Subsequently, P22, 500 of accounts
receivable was collected. What is the new balance of its total assets?
A. P337, 500
B. P322, 500
C. P350, 000
D. P400, 000
ANSWER: C

44. Available data pertaining to single step income statement

Net operating income P180, 000
Other income P5, 000
Operating expenses P300, 000
What is the service income of this servicing business?
A. P485, 000
B. P480, 000
C. P475, 000
D. P185, 000
ANSWER: B

45. The cost of service is 60% of service income. If the service income is P750, 000, what is the gross profit?
A. P300, 000
B. P450, 000
C. P150, 000
D. None of the choices
ANSWER: A

46. John, the accountant of XYZ Tutoring Services failed to recognize the following:
Utilities expense of P2, 530
Service fee earned but not yet received P5, 100
Supplies consumption of P1, 550
Payment of fire insurance for the next accounting period P1, 200
Owner’s additional investment of P3, 000
What would be the effect of the above omissions in the net income of the company?
A. Overstatement by P180
B. Overstatement by P3, 000
C. Understatement by P1, 020
D. Overstatement by P1, 020
ANSWER: C

47. If the debit and credit totals of a trial balance were P95, 000 and an additional entry for the purchase of office supplies for
cash worth P4, 000 was recorded and posted, what would be the new debit and credit totals of the trial balance after this entry is
made?
A. P91, 000
B. P99, 000
C. P87, 000
D. P95, 000
ANSWER: D

48. The statement of financial position of Humps Company shows a capital balance of P360, 000 which is equal to 1/3 of its total
assets. How much is the total liabilities?
A. P720, 000
B. P120, 000
C. P480, 000
D. P1, 080, 000
ANSWER: A

49. At the beginning of the year, the total assets of Beetle Computer Shop is P220, 000 and total capital of P180, 000. During the
year, Beetle Computer Shop recorded total revenues of P300, 000; paid expenses of P180, 000; purchase additional computers for
cash P25, 000; paid accounts to suppliers P30, 000 but purchased additional set of computer on account before year-end for P40,
000. What are the balances of Assets, Liabilities and Capital at the end of the year?
Assets Liabilities Capital
A. P350, 000 P50, 000 P300, 000
B. P340, 000 P40, 000 P300, 000
C. P230, 000 P10, 000 P220, 000
D. P350, 000 P10, 000 P340, 000
ANSWER: A

50. Mars, owner of the Pint Company, rendered professional service to a client at a total fee of P75, 000. He received cash of
P25, 000 and a 45-day promissory note for the balance. What would be the effect of this transaction in the owner’s capital and
liability account?
A. Increase capital by P75, 000; increase liability by P50, 000
B. Increase capital by P25, 000; increase liability by P50, 000
C. Increase capital by P25, 000; no effect in liability
D. Increase capital by P75, 000; no effect in liability
ANSWER: D

51. The ledger account shows the following

Accounts receivable P250, 000
Accounts Payable P200, 000
Capital P100, 000
Cash ?
Expenses P350, 000
Revenues P500, 000
What is the balance of cash?
A. P150, 000
B. P250, 000
C. P200, 000
D. P450, 000
ANSWER: C

52. Sercsi Company rendered service to a customer on April 5, 2014 for a total amount of P75, 000. On April 28, 2014, a
customer inquired and ask if Sercsi Company can render another service on April 29, 2014 for a total amount of P60, 000. What
would be the entry for April 28 transaction?
A. Accounts Receivable P60, 000
Cash P60, 000
B. Accounts Receivable P60, 000
Service Income P60, 000
C. Accounts Receivable P75, 000
Service income P75, 000
d. No entry
ANSWER: D

53. Referring the data in number 52, what would be the increase in owner’s equity as of April 30 assuming that the requested
service has already been rendered in April 29?
a. P135, 000
b. P75, 000
c. P60, 000
d. No increase
ANSWER: A

54. The information below is taken from the records of the Lanister Enterprise:
Salary Expense P175, 000 Lanister, Drawings P45, 000
Rent Expense P50, 000 Utilities Expense P85, 000
Consulting fees P505, 000 Prepaid Supplies P55, 000
What is the correct amount of the net income?
A. P195, 000
B. P140, 000
C. P95, 000
D. P280, 000
ANSWER: A

55. If the residual interest of Grand Service Company is P180, 000 which is 2/3 of the total economic resources, what would be
the amount of its economic obligation?
A. P270, 000
B. P90, 000
C. P450, 000
D. P180, 000
ANSWER: B

56. The information below is taken from the books of Mr. Joey Lao for the year ended December 31, 2015.
January 1 December 31
Assets P200, 000 P300, 000
Liabilities P80, 000 P120, 000
Joey Lao made an additional investment of P40, 000 during the year. Net income and expenses during the year amounted to
P180, 000 and P80, 000 respectively. Determine the amount of withdrawals during the year.
A. P180, 000
B. P120, 000
C. P80, 000
D. P160, 000
ANSWER: D

57. The following are accounts taken from the books of Tiger Advertising Agency.
Cash P725, 000
Accounts receivable P40, 000
Notes receivable P10, 000
Prepaid rent P24, 000
Office Equipment P44, 000
Furniture and Fixtures P34, 000
Supplies P4, 200
Accounts Payable P263, 000
Notes payable P17, 000
How much is the current asset of the company?
A. P779, 200
B. P793, 200
C. P799, 000
D. P803, 200
ANSWER: D

58. Based on the data from number 57, how much is the owner's equity of the company?
A. P577, 200
B. P1, 161, 200
C. P501, 200
D. P601, 200
ANSWER: D

59. Jimmy's Car Repair Shop started the year with total assets of P90, 000 and total liabilities of P60, 000. During the year, the
business recorded P150, 000 in car repair revenue, P85, 000 in expenses, and Jimmy withdrew P15, 000. Jimmy's capital balance
at the end of the year was
A. P80, 000
B. P75, 000
C. P95, 000
D. P65, 000
ANSWER: A

60. Use the data from number 59. The profit reported by Jimmy's Car Repair Shop for the year was
A. P50, 000
B. P65, 000
C. P30, 000
D. P135, 000
ANSWER: B

61. Use data from number 59. Jimmy's capital balance changed by what amount from the beginning of the year to the end of the
year?
A. P15, 000
B. P65, 000
C. P30, 000
D. P50, 000
ANSWER: D

62. If total liabilities increased by P4,000, then

A. assets must have decreased by P4,000.
B. owner's equity must have increased by P4,000.
C. assets must have increased by P4,000, or owner's equity must have decreased by P4,000.
D. assets and owner's equity each increased by P2,000.
ANSWER: C

63. Noland Company purchases equipment for P1,200 and supplies for P400 from Sanders Co for P1,600 cash. The entry for this
transaction will include a
A. debit to Equipment P1,200 and a debit to Supplies Expense P400 for Sanders.
B. credit to Cash for Sanders.
C. credit to Accounts Payable for Noland.
D. debit to Equipment P1,200 and a debit to Supplies (asset) P400 for Noland.
ANSWER: D

64. If capital is 4 times as much as total liabilities which is in turn 20% of assets totaling P520, 000, how much is capital?
A. P416, 000
B. P420, 000
C. P140, 000
D. P520, 000
ANSWER: A

65. Assets at the beginning of the year amounted to P72, 000 while liabilities were on 1/3 of this figure. By the end of the year,
assets increased to 150% while liabilities decreased by 25%. If the owner made withdrawals of P9, 000, additional investments of
P20, 000 while revenues generated totaled P75, 000. What was the amount of total expenses incurred by the business during the
year?
A. P54, 000
B. P64, 000
C. P44, 000
D. P34, 000
ANSWER: C

66.First statement: If total assets decreased by P40, 000 during a specific period and owner’s equity decreased by P45, 000 during
the same period the period’s change in total liabilities was an P85, 000 increase.
Second statement: If net income for a business was P175, 000, withdrawals were P40, 000 in cash, and the owner made no
investment, and the owner’s equity increased P215, 000
A. First statement is true, second is false
B. First statement is false, second is true
C. Both statements are true
D. Both statements are false
ANSWER: D

67. Aloe Vera Company has P5, 000, 000 in total assets as of the beginning of the year. At the time, creditors have a 70% claim
on the total assets of the company. By the end of the year, liabilities have increased by P100, 000 and creditors only had a 60%
claim on total assets. Assuming that there were no additional investments and withdrawals made by the owners, how much was
Aloe Vera’s net income / (net loss) for the year?
A. P(350, 000)
B. P900, 000
C. P500, 000
D. P1, 000, 000
ANSWER: B

68. Refer to number 33, how much was Aloe Vera’s total assets as of the end of the year?
A. P1, 750, 000
B. P3, 500, 000
C. P2, 400, 000
D. P6, 000, 000
ANSWER: D

69. Refer to number 33, how much was total equity as of the beginning of the year?
A. P1, 400, 000
B. P1, 000, 000
C. P600, 000
D. P1, 500, 000
ANSWER: D

70. Small Co. buys appliances and resale it at a profit and uses periodic inventory. At the beginning of the operation, Small
bought 50 units of electric fans at P1,250 each and received a trade discount of 3% and 4%. Small credited cash for the full
amount of purchased. At a subsequent date of purchase, Small returned 5 defective units to the seller and received a cash refund
for the original cost. Small sold 20 units of electric fan for a total gross profit of P2,350.

Merchandising Business_A_M
1. Small Co. should record in its book a trade discount of ___________.
a. P4,375 c. P2,500
b. P4,300 d. P0

Merchandising Business_A_M
2. Small Co. should debit Purchases of how much?
a. P58,125 c. P62,500
b. P58,200 d. P65,000

Merchandising Business_A_M
3. How much cash refund did Small receive?
a. P6,250 c. P11,750
b. P5,820 d. P0

Merchandising Business_A_M

4. How much is the Cost of Goods Sold?

a. P23,280 c. P22,375
b. P25,000 d. P27,800