MANAGEMENT ACCOUNTING

San Isidro, Northern Samar MMEM M, N / MMPA F, G

PCU Graduate School of Business & Management

INTRODUCTION TO BASIC ACCOUNTING & BOOKKEEPING SYSTEM

ACCOUNTING RECORDS and SYSTEM
SAVE-MART
Chart of Accounts

Current Asets – 101 to 105

101 Cash
102 Accounts Receivable
102.1 Allowance for Bad Debts
102.2 Referral Fee Receivable
103 Merchandise Inventory
104 Supplies Inventory
105 Prepaid Insurance
Non-Current Assets – 201 to 202
201 Store Equipment
201.1 Accumulated Depreciation – Store Equipment
202 Delivery Equipment
202.1 Accumulated Depreciation – Delivery Equipment

Current Liabilities – 301 to 304

301 Accounts Payable
302 Salaries Payable
303 Loans Payable
304 Utilities Payable
305 Unearned Rent Income
306 Interest Payable
Non-Current Liabilities – 401 to 402
401 Notes Payable
402 Mortgage Payable

Equity – 501 to 502

501 Common Stock
502 Retained Earnings

Revenue
601 Gross Sales
601.1 Sales Discount
601.2 Sales Returns and Allowances
602 Rent Income
603 Referral Fee Income

Expenses
701 Cost of Goods Sold
702 Selling Expense
703 Salaries Expense
704 Miscellaneous General Expense
705 Insurance Expense
706 Bad Debts Expense
707 Depreciation Expense
708 Supplies Expense
709 Bank Service Charges
710 Interest Expense

Page 1 of 10 pages
STEPS IN THE ACCOUNTING PROCESS

1. Gather the documents.

2. Analyze and record the transactions in the General Journal.

NORMAL BALANCES
DEBIT CREDIT
Assets Contra-Assets
  Liabilities
  Equity
Sales Discount Sales or Revenue
Sales Returns & Allowances Other Income
Cost of Goods Sold Income & Expense Summary Account
Expenses  

3. Post the transactions from the General Journal to the General Ledger.

4. Prepare the Unadjusted Trial Balance.

Save-Mart was a retail store. Its account balances on December 31, 2017 (the end of its
calendar year), before adjustments, were as shown below:

Save-Mart
Unadjusted Trial Balance
December 31,2017
Account Titles Debit Credit
Cash 95,140  
Accounts Receivable 127,430  
Merchandise Inventory 903,130  
Store Equipment 75,973  
Supplies Inventory 17,480  
Prepaid Insurance 8,550  
Selling Expense 10,880  
Salaries Expense 47,140  
Misc General Expense 18,930  
Sales Discounts 3,340  
Interest Expense 7,100  
Tax Expense 3,400  
Accum Dep- Store Equip 11,420
Notes Payable 88,500
Accounts Payable 93,973
Unearned Rent Income 2,400
Common Stock 100,000
Retained Earnings 33,500
Sales   988,700
Totals 1,318,493 1,318,493

5. Prepare a worksheet for adjusting entries.

Page 2 of 10 pages
6. Journalize and post the adjusting entries.
ADJUSTING ENTRIES

Some revenues and expenses transcend one accounting period. Some transactions that
affect the accounts are not evidenced by the obvious documents associated with the original
entries.
Adjusting entries are entries needed at year-end in order to update or modify some accounts
to fairly reflect the situation as of the end of the accounting period.
The data for the adjustments for Save-Mart for the year ended December 31, 20017 include:
a. Accrued Income – income earned from a sale or service rendered to customers, but
not yet collected by the firm.
Ex: On February 3, 2017, Save-Mart referred a customer directly to the Supplier of Nike
Shoes for purchase of wholesale apparels. Save-Mart earned a referral fee income of
$3,500 from the Supplier of Nike Shoes. Adjusting entries at year-end would be:
2017 Dec. 31 Referral fee receivable 3,500
Referral Income 3,500

Assuming the above referral fee receivable would be collected on the next accounting
period,

2018 April 5 Cash 3,500

Referral fee receivable 3,500

b. Accrued expense – a current liability from services received, but not yet paid by the
firm.

Ex. Salaries not yet paid to administrative staff employees, $1,250 for the payroll period Dec.
16-31, 2017. Adjusting entries at the end of the accounting period will be:

2017 Dec. 31 Salaries expense 1,250

Salaries payable 1,250

Assuming the above salaries for employees shall be paid on the next payroll period, journal
entries on the next accounting period will be:

2018 Jan. 15 Salaries payable 1,250

Cash 1,250

c. Deferred income/ Deferred Revenue –Cash is collected from a customer to whom

a sale or a service is yet to be rendered. This is a Current Liability

Ex. On October 1, 2017, ABC Pharma rents a stall space along the Save-Mart vicinity. Save-
Mart receives from ABC $2,400 annual rental fee in advance.

2017 Oct. 1 Cash/ Cash in Bank 2,400

Unearned Rent Income 2,400

Page 4 of 10 pages
At the end of the year, adjusting entries to take up the expired portion of the Unearned Rent
Income:

2017 Dec. 31 Unearned Rent Income 600

Rent Income 600
d. Prepaid expense – an advanced payment made by a firm for service or for an
expense to be incurred in the future. This is a Current Asset.

Ex. Save-Mart paid for a one year insurance for its building with an annual premium of
$8,550 on March 1.

2017 March 1 Prepaid Insurance 8,550

Cash/ Cash in Bank 8,550

Adjusting entries on December 31, 2017 will be:

2017 Dec. 31 Insurance expense 7,125

Prepaid Insurance 7,125

e. Bad debts or Doubtful accounts–Accounts receivable that a firm assumes as

uncollectible. This is a Contra Asset Account.

Ex. At the end of the year, one customer of Save-Mart became insolvent. Accounts
receivable due from this customer is $1,000. Adjusting entries to take up the uncollectible
AR will be:

2017 Dec. 31 Bad Debts Expense 1,000

Allowance for Bad Debts 1,000

f. Depreciation – an allocation of the cost of a property, plant or equipment in

recognition of the exhaustion of its life every accounting period. This is a Contra
Asset Account.

Depreciation (Straight Line Method) = Cost - Residual Value

Useful Life

Ex. Store equipment that was bought on November 15, 2015 with a cost of $75,973, salvage
value of $5,000, and useful life of 7 years. Year-end adjustment for the depreciation for
2017 will be:
2017 Dec. 31 Depreciation expense 10,139
Accumulated Depreciation 10,139

Page 5 of 10 pages
Other adjusting entries to be taken up at the end of the year include:

g. Cost of goods sold during the year, $604,783

2017 Dec. 31 Cost of Goods Sold 604,783

Merchandise Inventory 604,783

h. At year-end, supplies inventory on hand amounted to $3,877. Purchases of supplies

during March 10, 2017 amounting to $17,480 was debited to Supplies Inventory
account.

2017 Mar. 10 Supplies Inventory 17,480

Accounts Payable 17,480

Adjusting entry on Dec 31:

2017 Dec. 31 Supplies expense 13,603
Supplies Inventory 13,603

Supplies inventory, $17,480, less inventory on hand at year-end, $3,877 = $13,603

supplies used during the year

i. The $88,500 note payable was at interest rate of 9% payable monthly. It had been
outstanding throughout the year.

Interest expense: $88,500 x 9% $7,965

Interest expense, unadjusted trial balance: $7,100
Adjustment, 12/31/17 865

2017 Dec. 31 Interest expense 865

Interest payable 865

j. The statement sent by the bank, for cash balance, showed a balance of $94,390.
The difference represents bank service charges.

Cash, unadjusted trial balance : $95,140

Cash balance on Bank Statement : 94,390
Adjustment, 12/31/17 $ 750

2017 Dec. 31 Bank Service Charges 750

Cash 750

Page 6 of 10 pages
 7. Journalize and post the closing entries.

Temporary Accounts are closed at the end of each period to the Income Summary Account/
Profit & Loss Account/ Expense & Revenue Summary. The net amount after deducting Total
Expenses and Cost of Goods Sold from Total Revenue is the PROFIT or LOSS for the
period, which will appear in the Income Statement. The Net Icome or Net Loss is in turn
closed to Retained Earnings Account to complete the process. Retained Earnings Account
will appear under the Equity Portion of the Balance Sheet.

Dec.
31 Income and Expense Summary Account 730,305  
    Selling Expense   10,880
    Salaries Expense   48,390
    Misc General Expense   18,930
    Sales Discounts   3,340
    Interest Expense   7,965
    Tax Expense   3,400
    Cost of Goods Sold   604,783
    Insurance Expense   7,125
    Bad Debts Expense   1,000
    Depreciation Expense   10,139
    Supplies Expense   13,603
    Bank Service Charges   750
       
  Sales 988,700  
    Income and Expense Summary Account   988,700
       
  Referral Income 3,500  
  Rent Income 600  
    Income and Expense Summary Account   4,100
       
  Income and Expense Summary Account 262,495  
    Retained Earnings   262,495
 Page 8 of 10 pages
8. Prepare Financial Statements

Save-Mart
Income Statement
For the Year Ended December 31, 2017

Gross sales 988,700

Less: Sales discount 3,340
Net sales 985,360
Less: Cost of Goods Sold 604,783
Gross margin 380,577
Less: Operating expenses
Selling expense 10,880
Salaries expense 48,390
Misc. general expense 18,930
Insurance expense 7,125
Bad Debts expense 1,000
Depreciation expense 10,139
Supplies expense 13,603
Bank service charges 750 110,817
Operating Income 269,760
Less: Interest expense 7,965
Add: Referral Income 3,500
Rent Income 600 4,100
Income Before Tax   265,895
Tax expense 3,400
Net Income 262,495
 Page 9 of 10 pages
Save-Mart
Balance Sheet
As of December 31, 2017

Assets
Current Assets
Cash 94,390
Accounts Receivable 127,430
Allowance for Bad Debts (1,000) 126,430
Referral Fee Receivable 3,500
Merchandise Inventory 298,347
Supplies Inventory 3,877
Prepaid Insurance 1,425
Total Current Assets 527,969
Non-Current Assets
Store Equipment 75,973
Accumulated Depreciation - SE (21,559) 54,414
Total Assets   582,383

Liabilities and Equity

Current Liabilities
Accounts Payable 93,973
Unearned Rent Income 1,800
Salaries Payable 1,250
Interest Payable 865
Total Current Liabilities 97,888
Non-Current Liabilities
Notes Payable 88,500
Total Liabilities 186,388
Equity
Common Stock 100,000
Retained Earnings 295,995
Total Equity 395,995
Total Liabilities and Equity 582,383
Page 10 of 10 pages