Emergency Remote Learning Module II Accounting Lessons

Emergency Remote Learning
Module II
SUMMER 2020
Prepared by:
Wee Lu Gee D. Amora, CPA

Accountancy Department
AE 101
FINANCIAL ACCOUNTING & REPORTING
COURSE PLAN
Module 1 Accounting Fundamentals

Lesson 1: Introduction to Accounting
Lesson 2: Accounting Concepts and Principles
Lesson 3: The Accounting Equation
Lesson 4: Types of Major Accounts
Module 2 Accounting for Service Business

Lesson 1: Books of Accounts and Double-Entry System
Lesson 2: Accounting Cycle: Analysis to Unadjusted Trial Balance
Lesson 3: Accounting Cycle: Adjustments to Reversing Entries
Module 3 Accounting for Merchandising Business

Lesson 1: Inventory Systems
Lesson 2: Special Journals
Lesson 3: Accounting Cycle
Midterm Examination
Module 4 Accounting for Partnership

Lesson 1: Formation
Lesson 2: Operations
Lesson 3: Dissolution
Lesson 4: Liquidation
Module 5 Accounting for Corporation

Lesson 1: Components of Equity
Lesson 2: Dividends
Final Examination
FACILITATOR/TUTOR AND TUTORIALS
You are free to work on each module at your convenient time, in your own pace. However,
you are expected to finish one Module each week. You need not worry because you are
not alone in your journey through this course. Your teacher will be available online to
guide and assist you from 2pm to 3pm, Tuesdays and Thursdays. Please make sure you
utilize this opportunity to raise questions so difficult concepts may be clarified. Just make
sure you have read the course materials very well so you will be able to identify the issues
that need to be sorted out with your teacher during the scheduled tutorial time.
MODULE 2
ACCOUNTING FOR SERVICE BUSINESS
Lesson 3: Adjustments to Reversing Entries
Adjusting Entries
Adjusting entries are entries made prior to the preparation of financial statements to
update certain accounts so that they reflect correct balances as of the designated time.
The purposes of adjusting entries are to take up unrecorded income and expense of the
period, and to split mixed accounts into their real and nominal elements.
2 Main Classifications of Adjusting Entry

1. Accruals 2. Deferrals
Accruals
In accounting, the term “accrual” (or ‘to accrue’) means to recognize an:
 Income when earned even if not yet collected; and
 Expense when incurred even if not yet paid.
Accruals give rise to both income and receivable, or both expense and payable.
Note!
1. All adjusting entries involve at least once balance sheet account and once income
statement account.
2. All adjusting entries affect the profit or loss for the period.
3. Adjusting entries do not involve “cash” account.
Illustration: Adjusting Entries – Accruals of Income and Expense

WERK Co. is preparing its financial statements for the period ended December 31, 2019.
Adjustments needed for the following:
CASE 1: Accrual of Income – Interest Income

WERK Co. received a 12%, P100,000, one-year, note receivable on April 1, 2019.
WERK uses a calendar year period. The principal and interest on the note are due on
April 1, 2020.
 Concepts:
a. Notes receivable give rise to interest income.
b. Interest income is earned due to passage of time.
 Analyses:
As of December 31, 2019 (end of the accounting period), interest income should have
been earned because there is already a passage of time (from April 1 to December 31),
although interest will only be collected in the next accounting period (April 1, 2020).
 Conclusion:
Interest income shall be accrued for the 9 months covering April 1 to December 31,
2019.
Formula: Interest is equal to the principal amount of the loan multiplied by the rate
multiplied by the expired time, or i = P x r x t. Therefore, accrued interest
income is P100,000 x 12% x (9months/12months) = P9,000. This is income for the
period ending December 31, 2019 although cash collection will happen on April 1, 2020.
Since this is income for the year, this must be recorded during the year. And since there
is no cash collection yet, a receivable will be recognized. Adjusting entry will be:
2019 Account Titles and Explanation P.R. Debit Credit

Dec. 31 Interest receivable P9,000
Interest income P9,000
To accrue interst income earned but not yet collected.
Note that the adjusting entry is dated at the end of the accounting period (i.e., December
31, 2019). The interest income recognized is for the expired period only (time passed(,
that is 9 months. Interest for the remaining 3 months (January 1-March 31) will be
recorded in the next accounting period, which is in year 2020. This is an application of
the time period concept.
In the next accounting period, the collection of the interest is recorded as follows:

Apr. 1 Cash P12,000
Interest receivable P9,000
Interest income 3,000
To record the collection of interest.
The cash collection pertains to the one-year total interest covering April 1, 2019 to March
31, 2020, computed as P100,000 x 12% x 12/12 = P12,000.
The credit to interest receivable pertains to the accrued interest on December 31, 2019
(see Adjusting entry above).
The credit to interest income pertains to the 3-month interest income covering January 1
– March 31, 2020, computed as P100,000 x 12% x 3/12 = P3,000.
P100,000 x 12% x 12/12 = P12,000
04/01/2019 12/31/19 04/01/2020
P100,000 x 12% x 9/12 P100,000 x 12% x 3/12

P9,000 P3,000
The presentation of adjusting entries is an application of the concepts of time period and
accrual basis of accounting (Recall discussion in Module 1).
CASE 2: Accrual of Income – Rent Income

WERK Co. rents out its building to a tenant for a monthly rent of P5,000. As of
December 31, 2019, the tenant has not yet paid the rent for the month of December.
Again, income is recognized when earned not when cash is collected. Therefore the rent
income for December 2019 will be recorded in 2019 although no cash payment has been
received. Adjusting entry will be:

Dec. 31 Rent receivable P5,000
Rent income P5,000
To accrue rent income.
When the rent is collected in the next accounting period, it will record:

Jan 31 Cash P5,000
Rent receivable P5,000
To record the collection of Dec. 2019 rent.
Observe that rent income is recognized in 2019 when it was earned rather than in 2020
when it was collected.
CASE 3: Accrual of Expenses – Interest Expense

WERK Co. issued a 12%, P100,000, one-year, note payable on October 1, 2019. The
principal and the interest are due on October 1, 2020.
 Concepts:
a. Notes payable give rise to interest expense.
b. Interest expense is incurred due to passage of time.
 Analyses:
As of December 31, 2019 (end of the accounting period), interest expense is incurred
because there is already a passage of time (from October 1 to December 31), although
interest will only be paid in the next accounting period (October 1, 2020).
 Conclusion:
Interest expense shall be accrued for the 3 months covering October 1 to December 31,
2019. Using the interest formula, accrued interest expense is P3,000, that is P100,000 x
12% x 3/12. Adjusting entry will be:
Dec. 31 Interest expense P3,000
Interest payable P3,000
To accrue interest expense incurred but not yet paid.
In 2019, interest expense is recognized only for the expired period (time passed) from
October 1 to December 31, 2019. Interest covering the remaining 9 months (January 1 to
September 30, 2019) will be recognized in the next accounting period.
Since interest is to be paid in the future (i.e., October 1, 2020), a payable account is
credited.
In the next accounting period, the payment of the interest is recorded as follows:

Oct. 1 Interest payable P3,000
Interest expense 9,000
Cash P12,000
To record the payment of interest.
The debit to interest payable pertains to the accrued interest on December 31, 2019 (see
adjusting entry above). The debit to interest expense pertains to the 9 months interest
expense from January 1 to October 1, 2020. The cash payment pertains to the total 1-year
interest from October 1, 2019 to October 1, 2020.
P100,000 x 12% x 12/12 = P12,000
10/01/2019 12/31/19 10/01/2020
P100,000 x 12% x 3/12 P100,000 x 12% x 9/12

P3,000 P9,000
CASE 4: Accrual of Expense – Salaries Expense
Employees earned total salaries of P100,000 in December 2019. However, the salaries
were paid only in January 2020.
Again, expense is recognized when incurred not when cash is paid. Therefore the salaries
expense for December 2019 will be recorded in 2019 although no cash payment has been
made. Adjusting entry will be:
Dec. 31 Salaries expense P100,000
Salaries payable P100,000
To accrue salaries expense.
In the next accounting period, the payment of the accrued salaries is recorded as follows:

January Salaries payable P100,000
Cash P100,000
To record the payment of salaries.
The Concept of Systematic and Rational Allocation

Under this concept, costs that provide economic benefits over several accounting periods
but cannot be directly associated with the earning of revenues are recognized as expense
over the periods where the economic benefits are consumed.
One application of this concept is the recognition of depreciation expense. The

expenditure to acquire equipment is initially recorded as asset. However, since this
expenditure cannot be directly associated with sales (as opposed to the cost of goods
sold), the expenditure is recognized as expense over the periods the equipment is used.
Illustration
CASE 1
On January 1, 2019, a business acquired equipment for P20,000. The business expects to
use it over the next 4 years. The entry to record the acquisition would be:

Jan. 1 Equipment P20,000
Cash P20,000
To record the acquisition of equipment.
The cost of the equipment is initially recorded as an asset (rather than an expense)
because it provides future economic benefits, i.e., the equipment will be used over the
next 4 years.
As the equipment is used, a portion of the cost is recognized as expense on a piecemeal

basis (or ‘little by little’). This portion is called depreciation. In accounting, depreciation
means the allocation of the cost of a depreciable asset over the period the asset is used.
On December 31, 2019, the equipment has already been used for 1 year out of its total
useful life of 4 years. Thus, one-fourth of the cost should be recognized as expense.
The annual depreciation expense is computed as:
Cost P 20,000
Divided by: Useful life 4
Annual depreciation expense P 5,000
A P5,000 depreciation expense shall be recorded at the end of each of the next four years
(i.e., every December 31) as adjusting entries.
P20,000
01/01/2019 12/31/2019 12/31/2020 12/31/2021 12/31/2022
Year 1 Year 2 Year 3 Year 4

P20,000 / 4 = P5,000 P20,000 / 4 = P5,000 P20,000 / 4 = P5,000 P20,000 / 4 = P5,000
The adjusting entry will be:

Dec. 31 Depreciation expense P5,000
Accumulated depreciation P5,000
To record the depreciation of the equipment.
The carrying amount of the equipment as of December 31, 2019 is determined as:
Cost P 20,000
Accumulated depreciation 5,000
Equipment – net (Carrying amount) P 15,000
Concept of Immediate Recognition

Under this concept, a cost that produces no future economic benefits or an asset that
ceases to provide future economic benefits is recognized immediately as an expense.
One application of this concept is the recognition of bad debts expense. A certain amount
of the accounts receivable is immediately charged as bad debt expense because it ceased
to provide future economic benefits, i.e., it becomes uncollectible.
Illustration: Recognition of Bad Debts Expense

A business has total accounts receivable of P2,000 on December 31, 2019 before any
adjustments. Of the total amount, it was estimated that P500 is doubtful of collection
(alanganin na makoleta). The adjusting journal entry will be:
Dec. 31 Bad debts expense P500
Allowance for bad debts P500
To record the bad debts expense for the period.
After recording the adjusting entry, the carrying amount of the receivable is brought
equal to the estimated collectible amount of P1,500.
Accounts receivable P 2,000
Allowance for bad debts 500
Accounts receivable – net (Carrying amount) P1,500
Summary of Expense Recognition Principles
Expense Recognition Description

Principle
1. Matching Costs that are directly associated with the earning of revenue
are recognized as expenses in the same period where the
related revenue is recognized.
Application: The cost of inventory is initially recognized as
asset and charged as expense (i.e., Cost of Goods Sold)
when the inventory is sold.
2. Systematic and Costs that are not directly associated with the earning of
rational allocation revenues are recognized as expenses over the periods the
economic benefits are consumed.
Application: the cost of equipment is initially recognized as
asset and charged as expense (i.e., depreciation) over the
periods the equipment is used.
3. Immediate Costs that do not provide future economic benefits or assets
recognition that cease to provide future economic benefits are
recognized immediately as expenses.
Application: An account receivable that becomes doubtful
of collection is immediately recognized as expense (i.e., bad
debts expense).
Real, Nominal and Mixed Accounts

1. Real accounts (permanent accounts) – are accounts which are not closed at the end of
the accounting period. These accounts include all the balance sheet accounts except
the “Owner’s Drawings” account.
2. Nominal accounts (temporary accounts) - are accounts which are closed at the end of
the accounting period. These accounts include all the income statement accounts,
clearing accounts, and suspense accounts.
 A clearing account is an account used temporarily to store amounts that will
eventually be transferred to another account. An example is the “Income Summary”
account which stores amounts of income and expenses during the period. The balance
of the Income Summary account represents the profit or loss during the period. This
account is closed to the “Owner’s Capital” account before the financial statements are
prepared.
 A suspense account is an account used temporarily to store discrepancies in the
accounts pending their analysis and permanent classification. An example is the
“Cash shortage or overage” account which is temporarily used to record cash
shortages or overages pending their investigation. Depending on the result of the
investigation, this account is closed to a receivable or loss account (for shortages) or a
payable or gain account (for overages).
3. Mixed accounts – accounts that have both real and nominal components. These
accounts are subject to adjustments. These accounts include unadjusted prepayment
(‘prepaid assets’) and deferrals (‘unearned income’) that have both expired and
unexpired components.
 The expired portion is the nominal account component while the unexpired portion is
the real account component.
 A the end of the period, adjusting entries are needed to separate these components
because the nominal account component is presented in the income statement while
the real account component is presented in the balance sheet.
Methods of Initial Recording of Income

1. Liability method – Cash receipts from items of income are initially credited to a
liability account. At the end of the period, the earned portion is recognized as income
while the unearned portion remains as liability.
2. Income method – Cash receipts from items of income are initially credited to an
income account. At the end of the period, the earned portion is recognized as liability
while the unearned portion remains as income.
Illustration
A business rents out its building to various tenants. On April 1, 2019, the business
receives a one-year rent in advance of P120,000 from one of its tenants. Rent per month
is P10,000. The receipt of the advance rent is recorded as follows:
Liability Method Income Method

April 1, 2019 April 1, 2019
Cash P120,000 Cash P120,000
Unearned rent P120,000 Rent income P120,000
To record the receipt of 1-year rent in advance. To record the receipt of 1-year rent in advance.
Observe that under the liability method, the rent received in advance is credited to a
liability account; while under the income method, the rent received is credited to an
income account.
Before any necessary year-end adjustments on December 31, 2019, both the “Unearned
rent” (liability method) and “Rent income” (income method) accounts are considered
mixed accounts. This is because both accounts contain earned and unearned portions. The
earned portion relates to the income statement account (nominal account) while the
unearned portion relates to the balance sheet account (real account).
One-year rent = P120,000 (MIXED account)
04/01/2019 12/31/19 04/01/2020
EARNED portion UNEARNED portion

P120,000 x 9months/12months P120,000 x 3/12
P90,000 P30,000
a. The earned portion pertains to the first 9 months of the 1-year rent in advance
covering the months of April to December, 2019. This earned portion is recognized
as income for the period (i.e., 2019).
b. The unearned portion pertains to the remaining 3 months from January to March,
2020. This unearned portion is recognized as liability for the period (i.e., 2019).
Adjusting entries are needed to separate the real and nominal accounts of a mixed
account.
Liability Method Income Method

April 1, 2019 December 31, 2019
Cash P90,000 Rent income P30,000
Unearned rent P90,000 Unearned rent P30,000
To recognize the earned portion of the 1-year To recognize the unearned portion of the 1-
rent in advance year rent in advance
Notes:
 Under the liability method, adjusting entry is needed to recognize the income or the
earned portion of a mixed account.
 Under the income method, adjusting entry is needed to recognize the liability or the
unearned portion of a mixed account.
Both the liability and income methods are acceptable. Regardless of the method used, the
adjusted amounts of rent income and unearned rent are the same. Using the T-account for
the analysis:
LIABILITY METHOD
Unearned rent Rent income

AJE - Dec. 31, 2019 P90,000 P120,000 April 1, 2019 P90,000 AJE - Dec. 31, 2019
P30,000 Ending balance P90,000 Ending balance
INCOME METHOD
Unearned rent Rent income

P30,000 AJE - Dec. 31, 2019 AJE - Dec. 31, 2019 P30,000 P120,000 April 1, 2019
P30,000 Ending balance P90,000 Ending balance
Methods of Initial Recording of Expense

1. Asset method – Cash disbursement for items of expenses are initially debited to an
asset account. At the end of the period, the incurred portion (‘used up’ or ‘expired’)
is recognized as expense while the unused portion remains as asset.
2. Expense method – Cash disbursement for items of expenses are initially debited to an
expense account. At the end of the period, the unused portion (‘not yet incurred’ or
‘not yet expired’) is recognized as asset while the incurred portion remains as
expense.
Illustration
A business prepays a one-year insurance for P120,000 on October 1, 2019. The
prepayment of insurance is recorded as follows:
Asset Method Expense Method

October 1, 2019 October 1, 2019
Prepaid insurance P120,000 Insurance expense P120,000
Cash P120,000 Cash P120,000
To record the prepayment of 1-year insurance. To record the prepayment of 1-year insurance.
Observe that under the asset method, the prepayment of insurance is debited to an asset
account; while under the expense method, the prepayment of insurance is debited to an
expense account.
Before any necessary year-end adjustments on December 31, 2019, both the “Prepaid
insurance” (asset method) and “Insurance expense” (expense method) accounts are
considered mixed accounts. This is because both accounts contain expired (incurred) and
the unexpired (not yet incurred) portions. The “expired” portion relates to the income
statement account (nominal account) while the “unexpired” portion relates to the balance
sheet account (real account).
One-year insurance = P120,000 (MIXED account)
10/01/2019 12/31/2019 10/01/2020
EXPIRED portion UNEXPIRED portion

P120,000 x 3/12 P120,000 x 9months/12months
P30,000 P90,000
a. The expired portion pertains to the first 3 months of the 1-year prepayment covering
the months of October to December, 2019. This expired portion is recognized as
expense for the period (i.e., 2019).
b. The unexpired portion pertains to the remaining 9 months from January to
September, 2020. This unexpired portion is recognized as asset for the period (i.e.,
2019).
Adjusting entries are needed to separate the real and nominal accounts of a mixed
account.
Asset Method Expense Method

Decmber 31, 2019 Decmber 31, 2019
Insurance expense P30,000 Prepaid insurance P90,000
Prepaid insurance P30,000 Insurance expense P90,000
To recognize the expired portion of the 1-year To recognize the unexpired portion of the 1-
insurance. year insurance.
Notes:
 Under the asset method, adjusting entry is needed to recognize the expense or the
expired portion of a mixed account.
 Under the expense method, adjusting entry is needed to recognize the asset or the
unexpired portion of a mixed account.
Both the asset and expense methods are acceptable. Regardless of the method used, the
adjusted amounts of prepaid insurance and insurance expense are the same. Using the T-
account for the analysis:
ASSET METHOD
Prepaid insurance Insurance expense

Oct, 1, 2019 P120,000 P30,000 AJE - Dec. 31, 2019 AJE - Dec. 31, 2019 P30,000
Ending balance P90,000 Ending balance P30,000
EXPENSE METHOD
Prepaid insurance Insurance expense

AJE - Dec. 31, 2019 P90,000 Oct. 1, 2019 P120,000 P90,000 AJE - Dec. 31, 2019
Deferral
The recording of items of income that were collected in advance and items of expense
that were paid in advance is referred to as deferrals. To defer means to postpone the
recognition. Thus:
 The unearned portion of an item of income that was collected in advance is
recognized as liability. This will be recognized as income only when earned.
 The unexpired portion of an item of expense that was paid in advance is recognized
as asset. This will be recognized as expense only when incurred.
Accrual vs. Deferral
Accrual Deferral
To recognize income that is already To postpone the income recognition of an
earned but not yet collected. advance collection. The advance collection is
treated as liability until earned.
To recognize expense that is already To postpone the expense recognition of a
incurred but not yet paid. prepayment. The prepayment is treated as
asset until incurred.
Drill 5
Using the same information in Drill 3, assume further that on March 31, 2020:
a. The photography equipment has a useful life of 5 years or 60 months. If an equipment
is bought on the first-half of the month, it is depreciated as if it was bought on the
first day of the month.
b. Supplies on hand is worth P15,200.
c. One employee was not included in the payroll list, hence, the P5,000 salary for the
week was not paid to him until April 2, 2020.
d. Bill from PLDT for the month of March was not paid until April 4, 2020, P1,200.
Required:
1. Prepare the necessary adjusting entries.
2. Provide for the computations of your answers.
3. Compute for the carrying amount of the equipment as of March 31, 2019.
Note: If there is (are) deferral(s) in the transaction, return to your journal entry and assess
whether you were using the asset or expense method, or liability or income method.
Date Account Titles and Explanation P.R. Debit Credit
STEP 6: Adjusted Trial Balance (and/or Worksheet)
The worksheet is an analytical device used to facilitate the gathering of data for
adjustments, the preparation of financial statements, and closing entries.
Although optional and not part of the formal accounting records, worksheets are usually
prepared because they greatly facilitate the orderly preparation of the financial
statements. In practice, worksheets are most commonly prepared using spreadsheet
application (e.g., Microsoft Excel). A worksheet is prepared as follows:
The heading of the worksheet

states the following: (1) Name of
the business; (2) Title of the report;
and (3) Date covered by the report.
KAS Salon
Worksheet
For the Period Ended December 31, 2019
Unadjusted Adjusted Income Balance
Trial Balance Adjustments Trial Balance Statement Sheet
# Accounts Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
The adjusted
The adjusted
The ending amounts of
The debits amounts of
The acounts balances of assets,
and credits of The adjusted income and
in the ledger the accounts liabilities and
the adjusting balances are expense
are listed in the general equity
entries are placed here. accounts are
here. ledger are accounts are
placed here. extended
listed here. extended
here.
here.
Illustration
Ms. Kees Ann Soh opened up a beauty salon, “KAS Salon,” on December 1, 2019. The
following were the transactions during the month:
a. Ms. Soh provided P200,000 cash as initial investment to the business in December 1,
2019.
b. Obtained a 12%, one-year, bank loan for P100,000 on December 1, 2019. Principal
and interest are due at maturity date.
c. Paid six months’ rents in advance on December 1, 2019. Rent per month is P10,000.
d. Acquired equipment for P180,000 cash on December 1, 2019. The equipment has a
useful life of 5 years.
e. Purchased supplies for P50,000 cash on December 9.
f. Rendered services worth P220,000 for cash on December 21.
g. Ms. Soh withdrew a total of P40,000 cash from the business on December 25.
Required: Prepare a worksheet for the period ending December 31, 2019. Assume that
KAS Salon uses the expense method in recording transactions.
Step 1: Analysis
Assess if the transaction is an accountable/economic event or not. Recall that only
economic events are recorded in the books.
Step 2: Journalizing
KAS Salon
General Journal Page 1
Date
Dec. 1 Cash P 200,000
Soh, Capital P 200,000
To record the owner's investement in the business.
1 Cash 100,000
Note payable 100,000
To record the bank loan.
1 Rent expense 60,000

Cash 60,000
To record the payment of rent.
1 Equipment 180,000
Cash 180,000
To record the acquisition of equipment.
9 Supplies expense 50,000

Cash 50,000
To record the purchase of supplies.
21 Cash 220,000
Service fees 220,000
To record service fees.
25 Soh, Drawings 40,000

Cash 40,000
To record the withdrawal of the owner.
Step 3: Posting
ASSETS
Cash Equipment
12/01/2019 P200,000 P60,000 12/01/2019 12/01/2019 P180,000
12/01/2019 100,000 180,000 12/01/2019 Ending balance P180,000
12/21/2019 220,000 50,000 12/09/2019
40,000 12/25/2019
Totals P520,000 P330,000
Ending balance P190,000
LIABILITY
Notes payable
P100,000 12/01/2019
P100,000 Ending balance
EQUITY
Soh, Capital Soh, Drawings

P200,000 12/01/2019 12/25/2019 P40,000
P200,000 Ending balance Ending balance P40,000
INCOME
Service fees
P220,000 12/21/2019
EXPENSES
Rent Expense Supplies expense

12/01/2019 P60,000 12/09/2019 P50,000
Step 4: Unadjusted Trial Balance
KAS Salon
Unadjusted Trial Balance
For the month ended December 31, 2019
Accounts Debit Credit

Cash P190,000
Equipment 180,000
Notes payable P100,000
Soh, Capital 200,000
Soh, Drawings 40,000
Service fees 220,000
Rent expense 60,000
Supplies expense 50,000
Totals P520,000 P520,000
Step 5: Adjusting Entries

Additional information: The following information are identified on December 31, 2019:
a. The water and electricity bills in December amounting to P3,000 are not yet paid.
b. The cost of the unused supplies is P20,000.
c. Employee salary of P9,500 is not yet paid.
Now let us begin with adjusting the accruals, then the deferrals. Let us recall that accruals
are “income earned but not yet collected,” or “expenses incurred but not yet paid.” On
the other hand, deferrals are “income collected but not yet earned,” or “expenses paid but
not yet incurred.”
KAS Salon
Adjusting Entries Page 1
Date
Dec. 31 Utilities expense P 3,000
Utilities payable P 3,000
To accrue utilities expense incurred but not yet paid.
31 Salaries expense 9,500

Salaries payable 9,500
To accrue salaries expense incurred but not yet paid.
31 Interest expense 1,000
Interest payable 1,000
To accrue interest expense incurred but not yet paid.
(P100,000 x 12% x 1month/12)
31 Depreciation expense 3,000

Accumulated depreciation-Equipment 3,000
To record depreciation expense for the period.
(P180,000 / 5 years x 1month/12)
or (P180,000 x 1month/60months)
31 Prepaid rent 50,000

Rent expense 50,000
To record the unused portion of the rent paid in advance.
(P10,000 x 5months)
31 Prepaid supplies 20,000

To record the unused supplies.
Step 6: Adjusted Trial Balance (Worksheet)

Amounts in the “Unadjusted Trial Balance” and “Adjustments” columns are combined to
come up with the adjusted balances of the accounts. These adjusted balances are then
placed in the “Adjusted Trial Balance” column. To combine amounts, rules are:
a. Debit in the “Unadjusted Trial Balance” column and debit in the “Adjustments”
column means add.
b. Credit in the “Unadjusted Trial Balance” column and credit in the “Adjustments”
column means add.
c. Debit in the “Unadjusted Trial Balance” column and credit in the “Adjustments”
column means deduct.
d. Credit in the “Unadjusted Trial Balance” column and debit in the “Adjustments”
column means deduct.
This process of adding or subtracting amounts horizontally is called cross-footing. The
process of adding or subtracting amounts vertically like how we usually get the totals of
the columns is called footing.
To complete the worksheet, the adjusted amounts of income and expense accounts in the
“Adjusted Trial Balance” column are the extended to the “Income Statement” column.
The adjusted amounts of assets, liabilities and equity accounts are likewise extended in
the “Balance Sheet” column.
KAS Salon
Worksheet
For the Period Ended December 31, 2019
Unadjusted Trial Adjusted Trial
Balance Adjustments Balance Income Statement Balance Sheet
# Accounts Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr. Dr. Cr.
Cash ₱190,000 ₱190,000 ₱190,000
Equipment 180,000 180,000 180,000
Notes payable ₱100,000 ₱100,000 ₱100,000
Soh, Capital 200,000 200,000 200,000
Soh, Drawings 40,000 40,000 40,000
Service fees 220,000 220,000 ₱220,000
Rent expense 60,000 ₱50,000 10,000 ₱10,000
Supplies expense 50,000 20000 30,000 30,000
Totals
Utilities expense ₱3,000 3,000 3,000
Utilities payable 3,000 3,000 3,000
Salaries expense 9,500 9,500 9,500
Salaries payable 9,500 9,500 9,500
Interest expense 1,000 1,000 1,000
Interest payable 1,000 1,000 1,000
Depreciation expense 3,000 3,000 3,000
Accumulated depreciation-Equipment 3,000 3,000 3,000
Prepaid rent 50,000 50,000 50,000
Prepaid supplies 20,000 20,000 20,000
Totals ₱520,000 ₱520,000 ₱86,500 ₱86,500 ₱536,500 ₱536,500 ₱56,500 ₱220,000 ₱480,000 ₱316,500
Profit 163,500 163,500
Grand Totals ₱220,000 ₱220,000 ₱480,000 ₱480,000
The two lines underneath an amount are After the amounts are extended to
called “double rule” ( ). In income statement and balance sheet
accounting, double rules are used to columns, the balancing figure is the
connote a total or the end of a computation. profit (or loss).
Step 7: Financial Statements
The set of financial statements is the end product of the accounting process. Information
from the journal and the ledger are meaningless to most users unless they are summarized
and communicated through the financial statements.
The complete set of financial statements comprises of five reports in this module, we will
only prepare the following financial statements:
1. Statement of Financial Position (or Balance Sheet) – shows information on assets,

liabilities and equity.
2. Statement of Profit or Loss (or Income Statement) – shows information on income
and expenses, and consequently, the profit or loss of the period.
3. Statement of Changes in Equity – shows the movements in the elements or
components of the owner’s equity.
The income statement and balance sheet columns are already completed as shown in the
worksheet above. In the income statement columns of the worksheet:
 If total credits exceed total debits, there is profit. This is because total credits in the
income statement column pertains to income while total debits pertain to expenses.
Therefore, if total credits exceed total debits in the income statement columns, the
balancing figure is on the debit side. This balancing figure is the profit. (See
‘P163,500’ in the worksheet above.)
 If total debits exceed total credits, there is loss. In this case, income is less than
expenses. The balancing figure is placed on the credit side.
In the balance sheet column of the worksheet:

 If total debits exceed total credits, there is profit. This is because the balancing figure
on the credit side will be added to equity when closing entries are made. (See
‘P163,500’ in the worksheet above.)
 If total credits exceed total debits, there is loss. The balancing figure on the debit side
will be deducted to equity when closing entries are made.
Of the three financial statements mentioned above, the Income Statement is prepared
first, then, the Statement of Changes in Equity, and finally, the Balance Sheet. This is so
because the amounts generated from the first statement will be carried or reflected in the
next and so on. Based on the worksheet above, let us prepare the financial statements.
Observe their relationship.
KAS Salon
Income Statement
Income
Service Fees ₱220,000
Expenses
Salaries expense ₱9,500
Rent expense 10,000
Utilities expense 3,000
Depreciation expense 3,000
Total Expenses ₱56,500
Profit ₱163,500
KAS Salon
Statement of Changes in Equity
Soh, Capital, 12/01/2019 ₱200,000

Add: Profit 163,500
Total ₱363,500
Less: Soh, Withdrawals 40,000
Soh, Capital, 12/31/2019 ₱323,500
OWNER'S EQUITY
Soh, Capital, 12/31/2019 323,500
Total Liabilities and Equity ₱437,000
(NOTE: See the whole report below!)
KAS Salon
Balance Sheet
As of December 31, 2019
ASSETS
Current Assets
Cash ₱190,000
Prepaid rent 50,000
Prepaid supplies 20,000
Total Current Assets ₱260,000
Non-current Asset (net)
Equipment ₱180,000
Accumulated depreciation-Equipment 3,000 177,000
Total Assets ₱437,000
LIABILITIES
Current Liabilities
Notes payable ₱100,000
Utilities payable 3,000
Total Liabilities ₱113,500
OWNER'S EQUITY
Soh, Capital, 12/31/2019 323,500
Total Liabilities and Equity ₱437,000
Observe how the amounts generated by each report relate to the next report (i.e., profit
from Income Statement form part in determining the ending capital shown in the
Statement of Changes in Equity, which consequently is shown in the Balance Sheet).
Step 8: Closing Entries

Nominal or temporary accounts include the income and expenses accounts. They are so
called “temporary” because at the end of the accounting period, their balances will be
equal to zero. To close means “to zero out” an account.
So where do their balances go? Remember that we offset (get the difference) the total
income and expenses so we could arrive at the profit or loss. After determining the profit
or loss, it will then be added (profit) or deducted (loss) to or from the owner’s equity.
Therefore, to answer the question as to where the balances of these temporary accounts
go? They go to the equity using the clearing account called the “Income Summary”
account.
Withdrawals of the owner is also closed to the owner’s equity account. Note that it is
directly closed to equity and NOT to Income Summary account because it is neither an
income nor an expense.
To close or to zero-out an account is simply to place the amounts on the opposite of their
normal balances:
1. Since the normal balance of income is credit, we need to debit it for it to be closed or
zeroed out.
2. Since the normal balance of expenses is debit, we need to credit it for it to be closed.
3. The balance of the income summary account which represents the profit or loss of the
period is closed to the equity account.
4. Since the normal balance of withdrawals is debit, we need to credit directly to the
equity account it for it to be closed.
Thus, KAS Salon’s closing entries would be:

Dec. 31 Service fees P220,000
Income ummary P220,000
To close the income accoun.
31 Income summary 56,500

Salaries expense 9,500
Rent expense 10,000
To close the expense accounts.
31 Soh, Capital 40,000

Soh, Drawings 40,000
To close the drawings account.

To close the income summary account to capital.
Observe in the last entry that the balance (net) of the income summary account that is
closed to the equity account is equal to the profit of the period. That profit increases the
capital account, thus, capital is credited to zero out the income summary account. The
ledger will be:
Income Summary
CE #2 P56,500 P220,000 CE #1
P163,500 net
CE #4 P163,500
P0 Balance
Alternatively, the first and second closing entries above could be compounded for
simplicity as follows. Observe that income summary to be closed to the capital account is
just the same as shown above:

Dec. 31 Service fees P220,000
Salaries expense P9,500
Rent expense 10,000
Income summary 163,500
To close the income and expense accounts to
the Income summary.

To close the income summary account to capital.
After journalizing the closing entries, the ledger of the nominal accounts (income and
expenses) and capital accounts would be:
EQUITY
Soh, Capital Soh, Drawings

CE #3 P40,000 P200,000 12/01/2019 12/25/2019 P40,000 P40,000 CE #3
163,500 CE #4 Ending balance P0
INCOME
Service fees
CE #1 P220,000 P220,000 12/21/2019
P0 Ending balance
EXPENSES
Salaries expense Rent Expense

AJE #2 P9,500 P9,500 CE #2 12/01/2019 P60,000 P50,000 AJE #5
Ending balance P0 10,000 CE #2
Supplies expense Utilities expense

12/09/2019 P50,000 P20,000 AJE #6 AJE #1 P3,000 P3,000 CE #2
30,000 CE #2 Ending balance P0
Ending balance P0
Interest expense Depreciation expense
AJE #3 P1,000 P1,000 CE #2 AJE #4 P3,000 P3,000 CE #2
Ending balance P0 Ending balance P0
After posting the closing entries, all the nominal accounts and the drawings account will
have a zero balance. The capital account, however, will have a balance equal to the
ending balance as shown in the Statement of Changes in Equity (See financial statement
above.)
Step 9: Post-Closing Trial Balance

Post-closing trial balance shows the real or permanent account after the closing entries
are recorded and posted. Simply, this is your balance sheet items except drawings
account.
KAS Salon
Post-Closing Trial Balance
December 31, 2019
Accounts Debit Credit

Cash ₱190,000
Prepaid rent 50,000
Equipment 180,000
Accumulated depreciation-Equipment ₱3,000
Notes payable 100,000
Utilities payable 3,000
Totals ₱440,000 ₱440,000
Step 10: Reversing Entries
Reversing entries are entries usually made on the first day of the next accounting period
to reverse certain adjusting entries made in the immediately preceding period. Reversing
entries are optional, however, businesses often use reversing entries to simplify the
recording process in the next accounting period. This entry is the opposite of adjusting
entries. From the term reverse, account debited in the adjusting entry will be credited,
and vice versa.
Not all adjusting entries may be reversed. Only the following:

1. Accruals for income and expense
2. Prepayments initially recorded using the expense method
3. Advanced collection initially recorded using the income method
Therefore, among the adjusting entries prepared on December 31, 2019, only the
following could be reversed:
Page 1
Date
Dec. 31 Utilities expense P 3,000
Accrual of
Utilities payable P 3,000
expense
To accrue utilities expense incurred but not yet paid.
31 Salaries expense 9,500

Accrual of
expense
To accrue salaries expense incurred but not yet paid.
31 Interest expense 1,000

Interest payable 1,000 Accrual of
To accrue interest expense incurred but not yet paid. expense
(P100,000 x 12% x 1month/12)
31 Depreciation expense 3,000

Accumulated depreciation-Equipment
To record depreciation expense for the period.
3,000
X
cannot be
(P180,000 / 5 years x 1month/12)
or (P180,000 x 1month/60months) reversed
31 Prepaid rent 50,000

Expense
Rent expense 50,000
method
To record the unused portion of the rent paid in advance.
(P10,000 x 5months)
31 Prepaid supplies 20,000

Expense
method
To record the unused supplies.
Therefore, the reversing entries on January 1, 2020 would be:
Reversing Entries
Date
2020 Ut Account Titles and Explanation P.R. Debit Credit
Jan. 1 Utilities payable P 3,000
Utilities expense P 3,000
To record the reversing entry.
1 Salaries payable 9,500

Salaries expense 9,500
1 Interest payable 1,000

1 Rent expense 50,000

Prepaid rent 50,000
1 Supplies expense 20,000

Now let us see how reversing entries simplify the recording in the next accounting
period.
With reversing entries Without reversing entries
01/01/2020 Utilities payable P3,000 None
Utilities expense P3,000
Upon Utilities expense 3,000 Utilities payable P3,000
payment Cash 3,000 Cash P3,000
on 2020
If no reversing entry is made, the bookkeeper needs to go back to the records to identify
the balance of the “utilities payable” account. This can be burdensome when there are so
many transactions to be recorded in the period. Then again, reversing entries are optional
but for larger companies, this is a very helpful step.
Review: Accounting Cycle

1. Identifying and analysing 4. Unadjusted trial balance
2. Journalizing 5. Adjusting entries
3. Posting
6. Adjusted trial balance (or worksheet 8. Closing entries
preparation) 9. Post-closing trial balance
7. Financial statements 10. Reversing entries
At this point, you have already learned the accounting cycle of a service business that
can fully aid you in understanding the succeeding topics. As a jumpstart, take the
concept-based assessment (Quiz 3 via flexiquiz.com) for this topic so you can be guided
as to the progress of your learning. Since the teacher will not be around to check on you,
remember to ALWAYS MAKE HONESTY YOUR PRIORITY.
Do not forget to write down your questions that you need to ask your teacher for further
explanation. Raise these questions during your scheduled online consultation.
Questions for Clarification:

________________________________________________________________________
________________________________________________________________________
________________________________________________________________________
Now that you have learned the accounting cycle of a service business, you are to apply this
learning in the Skill-Based Assessment to be administered via flexiquiz.
Now it’s time for you to put your learning into something. This is your final task, so put
all your effort to present your overall understanding on the fundamentals of accounting.
Create a PowerPoint presentation of your assigned topic (to be posted soon). For you
to be guided on the essentials of your presentation, consider the following guidelines:
 Slide 1 – Title, Presenter (complete name, program/course, year level)
 The succeeding slides must include the following at the minimum: definition
of terms; illustrative problems with solutions; drills; and references.
Remember to:
1. Be creative in your presentation.
2. Use pictures, graphs, and animations to emphasize important ideas.
3. Make your font size not less than 28pt and font style readable.
4. Use APA format in your citation and reference.
5. Submit on or before June 14, 2020, 12noon. Submit on time. Late submissions
will not be accepted. Submission portal may be via messenger or Gmail
(wlgamora0629@gmail.com).

Emergency Remote Learning Module II Accounting Lessons

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Emergency Remote Learning Module II Accounting Lessons

Uploaded by

Copyright:

Available Formats

Emergency Remote Learning

Wee Lu Gee D. Amora, CPA

Module 1 Accounting Fundamentals

Module 2 Accounting for Service Business

Module 3 Accounting for Merchandising Business

Module 4 Accounting for Partnership

Module 5 Accounting for Corporation

FACILITATOR/TUTOR AND TUTORIALS

2 Main Classifications of Adjusting Entry

Illustration: Adjusting Entries – Accruals of Income and Expense

CASE 1: Accrual of Income – Interest Income

2019 Account Titles and Explanation P.R. Debit Credit

2020 Account Titles and Explanation P.R. Debit Credit

P100,000 x 12% x 12/12 = P12,000

04/01/2019 12/31/19 04/01/2020

P100,000 x 12% x 9/12 P100,000 x 12% x 3/12

CASE 2: Accrual of Income – Rent Income

2019 Account Titles and Explanation P.R. Debit Credit

2020 Account Titles and Explanation P.R. Debit Credit

CASE 3: Accrual of Expenses – Interest Expense

2020 Account Titles and Explanation P.R. Debit Credit

P100,000 x 12% x 12/12 = P12,000

10/01/2019 12/31/19 10/01/2020

P100,000 x 12% x 3/12 P100,000 x 12% x 9/12

2020 Account Titles and Explanation P.R. Debit Credit

The Concept of Systematic and Rational Allocation

One application of this concept is the recognition of depreciation expense. The

2019 Account Titles and Explanation P.R. Debit Credit

As the equipment is used, a portion of the cost is recognized as expense on a piecemeal

01/01/2019 12/31/2019 12/31/2020 12/31/2021 12/31/2022

Year 1 Year 2 Year 3 Year 4

The adjusting entry will be:

2019 Account Titles and Explanation P.R. Debit Credit

Concept of Immediate Recognition

Illustration: Recognition of Bad Debts Expense

Summary of Expense Recognition Principles

Expense Recognition Description

Real, Nominal and Mixed Accounts

Methods of Initial Recording of Income

Liability Method Income Method

One-year rent = P120,000 (MIXED account)

04/01/2019 12/31/19 04/01/2020

EARNED portion UNEARNED portion

Liability Method Income Method

Unearned rent Rent income

Unearned rent Rent income

Methods of Initial Recording of Expense

Asset Method Expense Method

One-year insurance = P120,000 (MIXED account)

10/01/2019 12/31/2019 10/01/2020

EXPIRED portion UNEXPIRED portion

Asset Method Expense Method

Prepaid insurance Insurance expense

Prepaid insurance Insurance expense

The heading of the worksheet

1 Rent expense 60,000

9 Supplies expense 50,000

25 Soh, Drawings 40,000

Soh, Capital Soh, Drawings

Rent Expense Supplies expense

Accounts Debit Credit

Step 5: Adjusting Entries

31 Salaries expense 9,500