WHAT IS ACCOUNTING?

ACCOUNTING IS 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, IN MAKING REASONED CHOICES
AMONG ALTERNATIVE COURSES OF ACTION.
USERS OF FINANCIAL INFORMATION
•INVESTORS •CUSTOMERS
•LENDERS •GOVERNMENTS AND AGENCIES
•SUPPLIERS AND OTHER TRADE •PUBLIC
CREDITORS
•EMPLOYEES
TWO MAIN BRANCHES OF ACCOUNTING

1. FINANCIAL ACCOUNTING
2. MANAGEMENT ACCOUNTING
TYPES OF USERS
EXTERNAL USERS

INTERNAL USERS
AREAS OF ACCOUNTING
•PUBLIC ACCOUNTING
•PRIVATE ACCOUNTING
•GOVERNMENT ACCOUNTING
•ACCOUNTING EDUCATION
TYPES OF BUSINESS ACTIVITIES

• SERVICE BUSINESS
• MERCHANDISING BUSINESS
• MANUFACTURING BUSINESS
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
SET OF ACCOUNTING PRINCIPLES, STANDARDS AND
PROCEDURES THAT MUST BE FOLLOWED WHEN
PREPARING FINANCIAL STATEMENTS.
GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES (GAAP)
• BUSINESS ENTITY CONCEPT
• GOING CONCERN
• TIME PERIOD ASSUMPTION
• ETC.
BASIS OF ACCOUNTING

• CASH BASIS
• ACCRUAL BASIS
 DOCUMENTATION
REVERSING JOURNALIZING
ACCOUNTS

PREPARING POST
CLOSING TRIAL POSTING
BALANCE

ACCOUNTING
CLOSING THE BOOKS CYCLE PREPARING TRIAL
BALANCE

ADJUSTING COMPILING
ACCOUNTS ADJUSTING DATA

PREPARING
PREPARING
FINANCIAL
WORKSHEET
STATEMENTS
ACCOUNTING CYCLE
RECORDING PHASE:
1. DOCUMENTATION
2. JOURNALIZING
3. POSTING
ACCOUNTING CYCLE
SUMMARIZING PHASE:
4. PREPARATION OF TRIAL BALANCE
5. COMPILATION OF DATA NEEDED FOR ADJUSTMENTS
6. PREPARATION OF WORKSHEETS
7. PREPARATION OF THE FINANCIAL STATEMENTS
ACCOUNTING CYCLE
SUMMARIZING PHASE:
8. ADJUSTING ENTRIES ARE JOURNALIZED AND POSTED TO THE
LEDGER
9. CLOSING ENTRIES ARE JOURNALIZED AND POSTED TO THE LEDGER
10. PREPARATION OF THE POST-CLOSING TRIAL BALANCE
ACCOUNTING CYCLE

OPTIONAL STEP:
11. REVERSING ENTRIES ARE JOURNALIZED AND POSTED TO THE
LEDGER
ACCOUNTING EQUATION

A = L + E
ASSETS = LIABILITIES + EQUITY
RULES OF DEBIT AND CREDIT
DEBIT CREDIT
+ ASSET – ASSET
– LIABILITY + LIABILITY
– EQUITY + EQUITY
Withdrawal by owner/s Additional investment by owner/s
– INCOME + INCOME
+ EXPENSE – EXPENSE
1. DOCUMENTATION
THIS IS THE PROCESS OF PREPARING OR
RECEIVING APPROPRIATE BUSINESS
DOCUMENTS OR ORIGINAL SOURCE
MATERIALS WHICH SERVE AS EVIDENCE OF
TRANSACTIONS.
SOURCE DOCUMENTS
EXAMPLES:
•OFFICIAL RECEIPTS •CREDIT MEMORANDA
•SALES INVOICES •DEBIT MEMORANDA
•PURCHASE INVOICES
2. JOURNALIZING
THIS IS THE PROCESS OF RECORDING
TRANSACTIONS FOR THE FIRST TIME IN
THE ACCOUNTING BOOKS CALLED
JOURNALS.
JOURNALS
•GENERAL JOURNAL
•SPECIAL JOURNALS:
•SALES JOURNAL •PURCHASES JOURNAL
•CASH RECEIPTS JOURNAL •CASH DISBURSEMENT
JOURNAL
PROBLEM #1

ROCKY INVESTED P100,000 CASH TO HIS

BUSINESS YROCK ACCOUNTING FIRM. RECORD
THE JOURNAL ENTRY. ANSWER
PROBLEM #1

CASH 100,000
ROCKY, CAPITAL 100,000
PROBLEM #2

PURCHASE AN EQUIPMENT WORTH P5,000 ON

ACCOUNT. RECORD THE JOURNAL ENTRY.
ANSWER
PROBLEM #2

EQUIPMENT 5,000
ACCOUNTS PAYABLE 5,000
3. POSTING
THIS IS THE PROCESS OF
TRANSFERRING THE RECORDED
TRANSACTIONS IN THE JOURNAL TO
THE ACCOUNTS IN THE LEDGER.
3. POSTING

•GENERAL LEDGER
•SUBSIDIARY LEDGER
GENERAL LEDGER
ACCOUNT #1 CASH PAGE #1
Date Items Ref Debit Date Items Ref Credit

Dec. 1 Sales 12,000 Dec. 3 Purchases 8,000

Balance 4,000
4. PREPARING A TRIAL BALANCE
THIS IS THE PROCESS OF
PREPARING A SUMMARY OF
THE BALANCES OF THE
ACCOUNTS IN THE GENERAL
LEDGER.
5. COMPILING ADJUSTING DATA
THIS IS THE PROCESS OF GATHERING AND PUTTING
TOGETHER VARIOUS DATA NECESSARY TO UPDATE
THE BALANCES OF CERTAIN ACCOUNTS IN THE BOOKS
OF THE COMPANY.
A. ACCRUED EXPENSE
THIS IS AN EXPENSE INCURRED BUT
NOT YET PAID AS OF THE STATEMENT
OF FINANCIAL POSITION (BALANCE
SHEET) DATE.
A. ACCRUED EXPENSE
ADJUSTMENT FOR ACCRUED EXPENSE IS RECORDED
AS FOLLOWS:
EXPENSE XXX
PAYABLE XXX
PROBLEM #3
YROCK FIRM PAYS SALARIES EVERY FRIDAY, THE END OF A
FIVE-DAY WORK WEEK. THE TOTAL SALARIES FOR THE WEEK
ENDING JANUARY 2, 2020 IS P100,000. PREPARE THE
ADJUSTING ENTRY FOR THE PERIOD ENDED DECEMBER 31,
2019. ANSWER
PROBLEM #3

SALARIES EXPENSE 60,000

SALARIES PAYABLE 60,000
P100,000 X 3/5 = P60,000
PROBLEM #4
YROCK FIRM HAS AN OUTSTANDING 90-DAY, 12% NOTE PAYABLE
DATED DECEMBER 1, 2019 AMOUNTING TO P100,000. THE
INTEREST IS PAYABLE UPON MATURITY OF THE NOTE. INTEREST FOR
30 DAYS HAS ACCRUED ON THE NOTE AS OF DECEMBER 31, 2019.
PREPARE THE ADJUSTING ENTRY FOR THE PERIOD ENDED
DECEMBER 31, 2019. ANSWER
PROBLEM #4

INTEREST PAYABLE 1,000

INTEREST PAYABLE 1,000
P100,000 X 12% X 30/360 = P1,000
B. ACCRUED INCOME
THIS IS INCOME EARNED BUT NOT YET
RECEIVED OR COLLECTED AS OF THE
STATEMENT OF FINANCIAL POSITION
(BALANCE SHEET) DATE.
B. ACCRUED INCOME
ADJUSTMENT FOR ACCRUED INCOME IS RECORDED
AS FOLLOWS:
RECEIVABLE XXX
INCOME XXX
PROBLEM #5
YROCK COMPANY RECEIVED A 3-MONTH, 12% NOTE DATED
DECEMBER 1, 2019 AMOUNTING 150,000. INTEREST IS RECEIVABLE
UPON MATURITY OF THE NOTE. AS OF DECEMBER 31, 2019
INTEREST FOR ONE MONTH IS ALREADY EARNED BUT NOT YET
COLLECTED. PREPARE THE ADJUSTING ENTRY. ANSWER
PROBLEM #5

INTEREST RECEIVABLE 1,500

INTEREST INCOME 1,500
P150,000 X 12% X 1/12 = P1,500
C. PREPAID EXPENSE
THIS IS AN EXPENSE PAID OR
ACQUIRED IN ADVANCE.
•ASSET METHOD
•EXPENSE METHOD
C. PREPAID EXPENSE
TO RECORD INITIAL PAYMENT OF EXPENSE:
ASSET METHOD
PREPAID EXPENSE XXX
CASH XXX
C. PREPAID EXPENSE
TO RECORD ADJUSTMENT AT THE END OF THE ACCOUNTING PERIOD:

ASSET METHOD
EXPENSE XXX
PREPAID EXPENSE XXX
C. PREPAID EXPENSE
TO RECORD INITIAL PAYMENT OF EXPENSE:
EXPENSE METHOD
EXPENSE XXX
CASH XXX
C. PREPAID EXPENSE
TO RECORD ADJUSTMENT AT THE END OF THE ACCOUNTING PERIOD:

EXPENSE METHOD
PREPAID EXPENSE XXX
EXPENSE XXX
PROBLEM #6
ON JUNE 1, 2019, YROCK COMPANY ACQUIRED AN INSURANCE
PREMIUM WORTH P24,000 VALID FOR ONE YEAR. PREPARE
THE INITIAL ENTRY AND THE ADJUSTING ENTRY ON
DECEMBER 31, 2019 FOR BOTH METHOD. ASSET/EXPENSE
PROBLEM #6
ASSET METHOD:
JUN 1 PREPAID INSURANCE 24,000
CASH 24,000
DEC 31 INSURANCE EXPENSE 14,000
PREPAID INSURANCE 14,000
P24,000 X 7/12 = P12,000
PROBLEM #6
EXPENSE METHOD:
JUN 1 INSURANCE EXPENSE 24,000
CASH 24,000
DEC 31 PREPAID INSURANCE 10,000
INSURANCE EXPENSE 10,000
P24,000 X 5/12 = P12,000
D. UNEARNED INCOME
THIS IS INCOME ALREADY COLLECTED BUT
NOT YET EARNED AS OF THE STATEMENT OF
FINANCIAL POSITION (BALANCE SHEET) DATE.
•ASSET METHOD
•EXPENSE METHOD
D. UNEARNED INCOME
TO RECORD INITIAL RECEIPT OF CASH:
LIABILITY METHOD
CASH XXX
UNEARNED INCOME XXX
D. UNEARNED INCOME
TO RECORD ADJUSTMENT AT THE END OF THE ACCOUNTING PERIOD:

LIABILITY METHOD
UNEARNED INCOME XXX
INCOME XXX
D. UNEARNED INCOME
TO RECORD INITIAL RECEIPT OF CASH:
INCOME METHOD
CASH XXX
INCOME XXX
D. UNEARNED INCOME
TO RECORD ADJUSTMENT AT THE END OF THE ACCOUNTING PERIOD:

INCOME METHOD
INCOME XXX
UNEARNED INCOME XXX
PROBLEM #7
ON SEPTEMBER 1, 2019, YROCK COMPANY RECEIVED
P240,000 REPRESENTING RENTAL OF AN OFFICE SPACE FOR
ONE YEAR BEGINNING ON THIS DATE. PREPARE THE INITIAL
AND ADJUSTING ENTRY AT THE END OF ACCOUNTING
PERIOD. LIABILITY/INCOME
PROBLEM #7
LIABILITY METHOD:
SEP 1 CASH 240,000
UNEARNED RENT 240,000
DEC 31 UNEARNED RENT 80,000
RENT INCOME 80,000
P240,000 X 4/12 = P80,000
PROBLEM #7
INCOME METHOD:
SEP 1 CASH 240,000
RENT INCOME 240,000
DEC 31 RENT INCOME 160,000
UNEARNED INCOME 160,000
P240,000 X 8/12 = P,000
E. DEPRECIATION

THE SYSTEMATIC ALLOCATION OF THE

DEPRECIABLE AMOUNT OF AN ITEM OF
PROPERTY, PLANT AND EQUIPMENT OVER
ITS USEFUL LIFE.
E. DEPRECIATION

THE ENTRY TO RECORD DEPRECIATION EXPENSE IS AS FOLLOWS:

DEPRECIATION EXPENSE XXX
ACCUMULATED DEPRECIATION XXX
E. DEPRECIATION

•STRAIGHT-LINE METHOD
•DIMINISHING METHODS
•UNITS OF PRODUCTION METHOD
STRAIGHT-LINE METHOD

COST – RESIDUAL VALUE

DEPRECIATION EXPENSE/YEAR =
ESTIMATED USEFUL LIFE (IN YEARS)
PROBLEM #8
THE COMPANY ACQUIRED AN OFFICE EQUIPMENT ON
OCTOBER 1, 2019 FOR P65,000. THE ASSET HAS AN
ESTIMATED USEFUL LIFE OF 5 YEARS AND AN ESTIMATED
RESIDUAL VALUE OF P5,000. PREPARE THE JOURNAL
ENTRIES AT THE END OF THE YEAR. ANSWER
PROBLEM #8
2019
DEC 31 RENT INCOME 15,000
UNEARNED INCOME 15,000
(P65,000- 5,000) X 3/12 = P15,000
F. UNCOLLECTIBLE ACCOUNTS

THESE REPRESENT CUSTOMERS'

ACCOUNTS THAT MAY NO LONGER BE
COLLECTED OR THAT MAY POSSIBLY
BECOME BAD DEBTS.
 F. UNCOLLECTIBLE ACCOUNTS
THE ENTRY TO RECORD ESTIMATED UNCOLLECTIBLE ACCOUNTS IS AS
FOLLOWS:
UNCOLLECTIBLE ACCOUNTS EXPENSE XXX
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS XXX
F. UNCOLLECTIBLE ACCOUNTS
The amount of uncollectible accounts expense that will be reported in
the income statement is computed as follows:

Required allowance balance P xxx

Allowance balance before adjustment
(+ debit balance/ - credit balance) xxx
Uncollectible accounts expense for the period P xxx
PROBLEM #9
THE COMPANY'S TRIAL BALANCE DATED DECEMBER 31, 2019, CONTAINS
THE FOLLOWING INFORMATION:
ACCOUNTS RECEIVABLE P 200,000 DEBIT
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS 2,000 CREDIT
SALES 1,750,000 CREDIT
ESTIMATED UNCOLLECTIBLE ACCOUNTS AMOUNTED TO P5,000.
PREPARE THE JOURNAL ENTRY TO RECORD UNCOLLECTIBLE ACCOUNTS. ANSWER
PROBLEM #9
UNCOLLECTIBLE ACCOUNTS EXPENSE 3,000
ALLOWANCE FOR UNCOLLECTIBLE ACCOUNTS 3,000

Required allowance balance P 5,000

Allowance balance before adjustment (credit balance) (2,000)
Uncollectible accounts expense for the period P 3,000
G. INVENTORY ADJUSTMENT
INVENTORY ADJUSTMENT FOR
INVENTORY IS NECESSARY IF THE
PERIODIC INVENTORY SYSTEM IS
USED.
 G. INVENTORY ADJUSTMENT
THE FIRST METHOD:
1. TRANSFER BEGINNING INVENTORY BALANCE TO INCOME SUMMARY
INCOME SUMMARY XXX
INVENTORY (OR MERCHANDISE INVENTORY) XXX

2. RECORD ENDING INVENTORY BALANCE

INVENTORY (OR MERCHANDISE INVENTORY) XXX
INCOME SUMMARY XXX
 G. INVENTORY ADJUSTMENT
UNDER THE SECOND APPROACH, A SEPARATE COST OF GOODS SOLD ACCOUNT IS SET UP AND THE ENTRY TO
RECORD THE ADJUSTMENT IS AS FOLLOWS:
INVENTORY (OR MERCHANDISE INVENTORY), END XXX
PURCHASES RETURNS AND ALLOWANCES XXX
PURCHASES DISCOUNTS XXX
COST OF GOODS SOLD XXX
INVENTORY (OR MERCHANDISE INVENTORY), BEG. XXX
PURCHASES XXX
FREIGHT-IN XXX
PROBLEM #10
THE FOLLOWING ARE THE BEGINNING AND ENDING BALANCES OF THE
COMPANY’S INVENTORY ACCOUNTS.
INVENTORY, JAN. 1 25,000
INVENTORY, DEC. 31 20,000
PURCHASES 10,000
PREPARE THE ADJUSTING ENTRIES ASSUMING A PERIODIC INVENTORY
SYSTEM. ANSWER
PROBLEM #10
INVENTORY, DEC 31 20,000
COST OF GOODS SOLD 15,000
INVENTORY, JAN 1 25,000
PURCHASES 10,000
6. PREPARING A WORKSHEET
7. PREPARING FINANCIAL STATEMENTS
PAS I PROVIDES THAT A COMPLETE SET OF FINANCIAL STATEMENTS SHALL CONSIST OF
THE FOLLOWING:
1. STATEMENT OF FINANCIAL POSITION (BALANCE SHEET)
2. STATEMENT OF COMPREHENSIVE INCOME
3. STATEMENT OF CASH FLOWS
4. STATEMENT OF CHANGES IN OWNERS' EQUITY
5. NOTES
STATEMENT OF FINANCIAL POSITION
STATEMENT OF COMPREHENSIVE INCOME
STATEMENT OF CASH FLOWS
STATEMENT OF CHANGES IN EQUITY
NOTES TO FINANCIAL STATEMENTS
8-9. ADJUSTING AND CLOSING THE BOOKS
THE ADJUSTMENTS THAT WERE RECORDED IN
THE WORK SHEET ARE NOW FORMALLY
RECORDED IN THE GENERAL JOURNAL AND
POSTED TO THE ACCOUNTS IN THE GENERAL
LEDGER. ALL NOMINAL ACCOUNTS WILL BE
CLOSED TO ZERO BALANCES.
 9. ADJUSTING AND CLOSING THE BOOKS
FOLLOWING ARE THE PRO-FORMA CLOSING ENTRIES PREPARED AT THE END OF THE
ACCOUNTING PERIOD:
1. TO CLOSE THE BALANCES OF INCOME ACCOUNTS
REVENUE/ INCOME XXX
INCOME SUMMARY XXX

2. TO CLOSE THE BALANCE OF EXPENSE ACCOUNTS

INCOME SUMMARY XXX
EXPENSES XXX
 9. ADJUSTING AND CLOSING THE BOOKS
3. TO CLOSE THE BALANCE OF INCOME SUMMARY ACCOUNT (CREDIT BALANCE)
INCOME SUMMARY XXX
CAPITAL XXX

TO CLOSE THE BALANCE OF INCOME SUMMARY ACCOUNT (DEBIT BALANCE)

CAPITAL XXX
INCOME SUMMARY XXX

4. TO CLOSE THE BALANCE OF THE DRAWING ACCOUNT

CAPITAL XXX
DRAWING XXX
10. PREPARING POST-CLOSING TRIAL BALANCE
11. REVERSING THE ACCOUNTS
THE ADJUSTMENTS THAT WILL BE REVERSED IF REVERSING ENTRIES
ARE PREPARED AND THE PRO-FORMA REVERSING ENTRIES PREPARED
AT THE BEGINNING OF A NEW ACCOUNTING PERIOD ARE AS FOLLOWS:
1. ACCRUED EXPENSE
PAYABLE XXX
EXPENSE XXX
11. REVERSING THE ACCOUNTS
2. ACCRUED INCOME
INCOME XXX
RECEIVABLE XXX

3. PREPAID EXPENSE - EXPENSE METHOD

EXPENSE XXX
PREPAID EXPENSE XXX

4. DEFERRED REVENUE OR INCOME - REVENUE METHOD

UNEARNED INCOME XXX
INCOME XXX
PROBLEM #3.1
YROCK FIRM PAYS SALARIES EVERY FRIDAY, THE END OF A
FIVE-DAY WORK WEEK. THE TOTAL SALARIES FOR THE WEEK
ENDING JANUARY 2, 2020 IS P100,000. PREPARE THE
REVERSING ENTRY AT THE BEGINNING OF THE YEAR 2020.
ANSWER
PROBLEM #3.1
ADJUSTING ENTRY:
SALARIES EXPENSE 60,000
SALARIES PAYABLE 60,000
P100,000 X 3/5 = P60,000
REVERSING ENTRY:
SALARIES PAYABLE 60,000
SALARIES EXPENSE 60,000