Module 4

Module 4 – The Accounting Cycle – 2
The module is the continuation of the accounting cycle numbers 5 to 10:

Preparation of the Worksheet including Adjusting Entries, Preparation of the
Financial Statements, Adjusting Journal Entries are Journalized and Posted,
Closing Journal Entries are Journalized and Posted, Preparation of Post-
Closing Trial Balance and Reversing Journal Entries are Journalized and
Posted.
Learning Outcomes:
After studying this module, the students should be able to:

1. Explain accrual and deferral accounting;
2. Describe the five basic financial statements;
3. Solve and prepare problems on Accounting Cycle Numbers 5 to 10;
Lesson 1
Adjusting the Accounts
I. Learning Outcomes:
After studying this chapter, you should be able to:

1. explain accrual accounting and state how it improves financial
statements;
2. explain the importance of periodic reporting and time period
assumption;
3. explain the recognition and derecognition process;
4. identify the types of adjustments and their purposes;
5. prepare and explain the adjusting entries;
6. interpret the effects of omitting adjustments on the financial
statements;
7. prepare an adjusted trial balance; and
8. explain the alternative methods of recording deferrals.
II. Pre-Assessment
Name: _____________________________________ Time: _______________________
Instructions: Encircle the corresponding number if the statement is TRUE

and mark X to the number which contains FALSE statement.
1. Failure to record the adjusting entry for accrued salaries results in

the current year’s profit being overstated.
2. An adjusting entry includes at least one balance sheet account and at
least one income statement account.
3. Failure to record the adjusting entry for depreciation will overstate
assets on the balance sheet.
4. Applying accrual accounting results in a more accurate measurement of
profit for the period than the cash basis of accounting.
5. Not all increases to cash represent revenues.
6. Recording incurred but unpaid expenses is an example of an accrual.
7. As equipment is depreciated, its book value increases and its
accumulated depreciation increases.
8. The adjusting entry to recognize earned revenues which was received in
advance will cause total liabilities to decrease.
9. All decreases in owner’s equity are a result of expenses.
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10. The owner’s personal withdrawals for the year cause a decrease in
profit.
11. Adjusting entries affect cash flows in the current period.
12. Acquiring a computer for cash is just exchanging one asset for another
and will not result in an expense even in future periods.
13. A fiscal period must begin on January 1.
14. Revenue results from collection of accounts receivable.
15. The adjusting entry to allocate part of the cost of a one-year fire
insurance policy to expense will cause total assets to increase.
III. Lesson Map
Adjusting Entries
Accrual Deferral
Deferred Expenses Deferred Income

Accrued Revenues Accrued Expenses (Prepaid Depreciation (Unearned
Expenses) Revenues)
Asset Method Expense Method Liability Method Income Method
The different types of adjustments and its purposes are discussed in this
lesson.
IV. Core Content
ENGAGE
Name: _____________________________________ Time: _______________________
Instructions: Below are terms pertinent to adjusting entries. Match each

definition with its related term. Write your answer on the space provided.
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Terms Definitions/Transactions
1 Accrued Expense a. Revenues not yet earned, collected in advance.
2 Deferred Expense b. Office supplies on hand, used next accounting period.
3 Accrued Revenue c. Rent revenue collected, not yet earned.
4 Deferred Revenue d. Rent not yet collected, already earned.
e. An expense incurred, not yet paid or recorded.
f. Revenue earned, not yer collected.
g. An expense not yet incurred, paid in advance.
h. Property taxes incurred, not yet paid.
i. At the end of the year, slaries payable of P3,600 had not been recorded or
paid.
j. Supplies for office use were purchased during the year for P500, and P100
of the office supplies remained on hand (unused) at year-end.
k. Interest of P250 on a note receivable was earned at year-end, although
collection of the interest is not due until the following year.
l. At the end of the year, service revenues of P2,000 was collected in cash
but was not yet earned.
m. An expense that is unpaid and unrecorded.
EXPLORE
Name: _____________________________________ Time: _______________________
Instructions: Determine the adjusting entries that were made. Write your
answers on the general journal pwovided.
The unadjusted and adjusted December 31, 2018 Trial Ba;ances for the A. T. Design are presented below:
A. T. Design
Trial Balance
December 31, 2018
Unadjusted Adjusted
Cash 72,000 72,000
Accounts Receivable 331,000 331,000
Prepaid Insurance 48,000 36,000
Supplies 125,000 72,000
Land 170,000 170,000
Building 850,000 850,000
Accumulated Depreciation-Building 230,000 245,000
Computer Equipment 620,000 620,000
Accumulated Depreciation-Computer Equipment 106,000 124,000
Notes Payable 550,000 550,000
Accounts Payable 143,000 143,000
Salaries Payable 34,000
Interest Payable 77,000
M ortgage Payable 470,000 470,000
Tejero, Capital 310,000 310,000
Tejero, Withdrawals 250,000 250,000
Computer-Aided Design Service Revenues 1,470,000 1,470,000
Salaries Expense 813,000 847,000
Insurance Expense 12,000
Supplies Expense 53,000
Depreciation Expense-Building 15,000
Depreciation Depreciation-Computer Equipment 18,000
Interest Expense 77,000
Total 3,279,000 3,279,000 3,423,000 3,423,000
Required: Determine the adjustments that were made.
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EXPLAIN
ACCRUAL BASIS
The financial statements, except for the cash flow statement, are prepared
on the accrual basis of accounting in order to meet their objectives. Under
the accrual basis, the effects of transactions and other events are
recognized when they occur and not as cash is received or paid. This means
that the accountant records revenues as they are earned and expenses as
they are incurred. The timing of cash flows is relatively immaterial for
determining when to recognize revenues and expenses.
Financial statements prepared on the accrual basis inform users not only of
past transactions involving the payment and receipt of cash, but also of
obligations to pay cash in the future, and of resources that represent cash
to be received in the future. Generally accepted accounting principles
require that a business use the accrual basis.
In cash basis accounting, however, the accountant does not record a

transaction until cash is received or paid. Generally, cash receipts are
treated as revenues and cash payments as expenses. Cash basis income is the
difference between operating cash receipts and disbursements. These cash
flows necessarily exclude investments by and distributions to the owner in
the computation of income.
Illustration. A client paid the Sea Wind Resort in Boracay Island P7,000 on
April 8, 2018 for a one-day super deluxe accommodation on May 13, 2018.
Under accrual basis of accounting the receipt of P7,000 will be considered
as revenues when the business has rendered its services on May 13.
In contrast, if cash basis is used, the hotel will recognize revenues on

April 8. Expenses related to this revenue transaction will be incurred on
May 13. Suppose a financial report is prepared at the end of April, under
accrual basis, no revenue or expense will be reported; under cash basis,
revenues of P7,000 will be reported but the related expenses will be
recognized when incurred on May 13. Observe that the accrual basis provided
a better measure of the results of transactions.
PERIODICITY CONCEPT
The only way to know how successfully a business has operated is to close
its doors, sell all its assets, pay the liabilities and return any excess
cash to the owners. This process of going out of business is called
liquidation. This, however, is not a practical way of measuring business
performance.
Accounting information is valued when it is communicated early enough to be

used for economic decision-making. To provide timely information,
accountants have divided the economic life of a business into artificial
time periods. This assumption is referred to as the periodicity concept.
Accounting periods are generally a month, a quarter or a year. The most

basic accounting period is one year. Entities differ in their choice of the
accounting year- fiscal, calendar or natural. A fiscal year is a period of
any twelve consecutive months. A calendar year is an annual period ending
on December 31. A natural business year is a twelve-month period that ends
when business activities are at their lowest level of the annual cycle. A
period of less than a year is an interim period. Some even adopt an annual
reporting period of 52 weeks.
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Businesses need periodic reports to assess their financial condition and
performance. The periodicity concept ensures that accounting information is
reported at regular intervals. It interacts with the recognition and
derecognition principles to underlie the use of accruals. To measure profit
in a fair manner, entities update the income and expense accounts
immediately before the end of the period.
RECOGNITION AND DERECOGNITION
Per 2018 Conceptual Framework, recognition is the process of capturing for

inclusion in the statement of financial position or the statement(s) of
financial performance an item that meets the definition of an asset, a
liability, equity, income or expenses. The amount at which an asset, a
liability or equity is recognized in the statement of financial position is
referred to as its "carrying amount".
The statement of financial position and statement(s) of financial

performance depict an entity's recognized assets, liabilities, equity,
income and expenses in structured summaries that are designed to make
financial information comparable and understandable.
Recognition links the elements, the statement of financial position and the
statement(s) of financial performance. The statements are linked because
the recognition of one item (or a change in its carrying amount) requires
the recognition or derecognition of one or more other items (or changes in
the carrying amount of one or more other items). For example:
(a) the recognition of income occurs at the same time as:

i. the initial recognition of an asset, or an increase in the
carrying amount of an asset; or
ii. the derecognition of a liability, or a decrease in the
carrying amount of a liability.
(b) the recognition of expenses occurs at the same time as:
i. the initial recognition of a liability, or an increase in the
carrying amount of a liability; or
ii. the derecognition of an asset, or a decrease in the carrying
amount of an asset.
The initial recognition of assets or liabilities arising from transactions

or other events may result in the simultaneous recognition of both income
and related expenses. For example, the sale of goods for cash results in
the recognition of both income (from the recognition of one asset-the cash)
and an expense (from the derecognition of another asset-the goods sold).
The simultaneous recognition of income and related expenses is sometimes
referred to as the matching of costs with income.
Recognition is appropriate if it results in both relevant information about

assets, liabilities, equity, income and expenses and a faithful
representation of those items, because the aim is to provide information
that is useful to investors, lenders and other creditors.
Derecognition is the removal of all or part of a recognized asset or

liability from an entity's statement of financial position. Derecognition
normally occurs when that item no longer meets the definition of an asset
or of a liability:
(a) for an asset, derecognition normally occurs when the entity loses
control of all or part of the recognized asset; and
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(b) for a liability, derecognition normally occurs when the entity no
longer has a present obligation for all or part of the recognized
liability.
THE NEED FOR ADJUSTMENTS
Accountants make adjusting entries to reflect in the accounts information

on economic activities that have occurred but have not yet been recorded.
Adjusting entries assign revenues to the period in which they are earned,
and expenses to the period in which they are incurred. These entries are
needed to measure properly the profit for the period, and to bring related
asset and liability accounts to correct balances for the financial
statements.
In short, adjustments are needed to ensure that the recognition and

derecognition principles are followed thus resulting to financial
statements reporting the effects of all transactions at the end of the
period.
Adjusting entries involve changing account balances at the end of the

period from what is the current balance of the account to what is the
correct balance for proper financial reporting. Without adjusting entries,
financial statements may not fairly show the solvency of the entity in the
balance sheet and the profitability in the income statement.
DEFERRALS AND ACCRUALS
Accountants use adjusting entries to apply accrual accounting to

transactions that cover more than one accounting period. There are two
general types of adjustments made at the end of the accounting period-
deferrals and accruals.
Each adjusting entry affects a balance sheet account (an asset or a

liability account) and an income statement account (income or expense
account).
Deferral is the postponement of the recognition of "an expense already paid

but not yet incurred," or of "revenue already collected but not yet
earned". This adjustment deals with an amount already recorded in a balance
sheet account; the entry, in effect, decreases the balance sheet account
and increases an income statement account. Deferrals would be needed in two
cases:
1. Allocating assets to expense to reflect expenses incurred during the

accounting period (e.g. prepaid insurance, supplies and depreciation).
2. Allocating revenues received in advance to revenue to reflect revenues
earned during the accounting period (e.g. subscriptions).
Accrual is the recognition of "an expense already incurred but unpaid", or

"revenue 6. earned but uncollected". This adjustment deals with an amount
unrecorded in any account; the entry, in effect, increases both a balance
sheet and an income statement account. Accruals would be required in two
cases:
1. Accruing expenses to reflect expenses incurred during the accounting

period that are unpaid and unrecorded.
2. Accruing revenues to reflect revenues earned during the accounting
period that are uncollected and unrecorded.
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The Weddings “R” Us case is continued to illustrate the adjustment process.
The letters A, L, OE, OE:I and OE:E are still used to ensure a better
understanding of the nature of the accounts affected.
ADJUSTMENTS FOR DEFERRALS (Step 5)
Allocating Assets to Expenses
Entities often make expenditures that benefit more than one period. These
expenditures are generally debited to an asset account. At the end of each
accounting period, the estimated amount that has expired during the period
or that has benefited the period is transferred from the asset account to
an expense account. Two of the more important kinds of adjustments are
prepaid expenses, and depreciation of property and equipment.
Prepaid Expenses
Some expenses are customarily paid in advance. These expenditures (e.g.

supplies, rent and insurance) are called prepaid expenses. Prepaid expenses
are assets, not expenses. At the end of an accounting period, a portion or
all of these prepayments may have expired. The portion of an asset that has
expired becomes an expense. Prepaid expenses expire either with the passage
of time or through use and consumption. The flow of costs from the balance
sheet to the income statement is illustrated below:
Cost of As insurance
insurance Balance Sheet policies expire and Income Statement
policies and supplies used
supplies Assets Revenues
that will benefit Prepaid Insurance Expenses
future Supplies Insurance Expense
periods Supplies Expense
If adjustments for prepaid expenses are not made at the end of the period,
both the balance sheet and the income statement will be misstated. First,
the assets of the entity will be overstated; second, the expenses of the
company will be understated. For this reason, owner's equity in the balance
sheet and profit in the income statement will both be overstated. Besides
prepaid rent, Weddings “R” Us has prepaid expenses for supplies and
insurance, both accounts need adjusting entries.
Prepaid Rent (Adjustment a). On May 1, Weddings "R" Us paid P8,000 for two
months' rent in advance. This expenditure resulted to an asset consisting
of the right to occupy the office for two months. A portion of the asset
expires and becomes an expense each day. By May 31, one-half of the asset
had expired, and should be treated as an expense. The analysis of this
economic event is shown below:
Transaction Expiration of one month's rent.
Analysis Assets decreased. Owner's equity decreased.
Rules Decreases in assets are recorded by credits. Decreases in

owner's equity are recorded by debits.
8
Entries Decrease in owner's equity is recorded by a debit to rent
expense. Decrease in assets is recorded by a credit to
prepaid rent.
Dr. Rent Expense (OE:E) 4,000

Cr. Prepaid Rent (A) 4,000
After adjustments, the prepaid rent account has a balance of P4,000 (May 1
prepayment of P8,000 less the P4,000 expired portion); the rent expense
account reflects the P4,000 expense for the month.
Prepaid Insurance (Adj. b). Weddings “R” Us acquired a one-year

comprehensive insurance coverage on the service vehicle and paid P14,400
premiums. In a manner similar to prepaid rent, prepaid insurance offers
protection that expires daily. The adjustment is analyzed and recorded as
shown below:
Transaction Expiration of one month's insurance.

Entries Decrease in owner's equity is recorded by a debit to

insurance expense; decrease in assets as a credit to
prepaid insurance.
Dr. Insurance Expense (OE:E) 1,200

Cr. 1,200 Prepaid Insurance (A) 1,200
The prepaid insurance account has a balance of P13,200 (May 4 prepayment of

P14,400 less P1,200) and insurance expense reflects the expired cost of
P1,200 for the month. As a matter of company policy, the period May 4 to 31
is considered a month.
Supplies (Adjustment c). On May 8, Weddings "R" Us purchased supplies,

P18,00 During the month, the entity used supplies in the process of
performing services for clients. There is no need to account for these
supplies every day since the financial statements will not be prepared
until the end of the month. At the end of the accounting period, Perez-
Manalo makes a careful physical inventory of the supplies. The inventory
count showed that supplies costing P15,000 are still on hand. This
transaction is analyzed and recorded as follows:
Transaction Consumption of supplies.


supplies expense. Decrease in assets is recorded by a
credit to supplies.
Dr. Supplies Expense (OE:E) 3,000

Cr. Supplies (A) 3,000
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The asset account supplies now reflect the adjusted amount of P15,000
(P18,000 less P3,OOO). In addition, the amount of supplies expensed during
the accounting period is reflected as P3, OOO.
Depreciation of Property and Equipment
When an entity acquires long-lived assets such as buildings, service

vehicles, computers or office furniture, it is basically buying or
prepaying for the usefulness of that asset. These assets help generate
income for the entity. Therefore, a portion of the cost of the assets
should be reported as expense -in each accounting period. Proper accounting
requires the allocation of the cost of the asset over its estimated useful
life. The estimated amount allocated to any, one accounting period is
called depreciation or depreciation expense. Three factors are involved in
computing depreciation expense:
1. Asset cost is the amount an entity paid to acquire the depreciable

asset.
2. Estimated salvage value is the amount that the asset can probably be
sold for at the end of its estimated useful life.
3. Estimated useful life is the estimated number of periods that an entity

can make use of the asset. Useful life is an estimate, not an exact
measurement.
As the asset's
Balance Sheet useful life Income Statement
Cost of a expires
depreciable Assets Revenues
asset Service Vehicle Expenses
Office Equipment Depreciation
Accountants estimate periodic depreciation. They have developed a number of

methods for estimating depreciation. The simplest procedure is called the
straight-line method. The formula for determining the amount of
depreciation expense for each period using this method is:
Asset Cost xx
Less: Estimated salvage value xx
Depreciable cost xx
Divided by: Estimated useful life xx
Depreciation Expense for each time period xx
The asset account is not directly reduced when recording depreciation

expense. Instead, the reduction is recorded in a contra account called
accumulated depreciation. A contra account is used to record reductions in
a related account and its normal balance is opposite that of the related
account. Use of the contra account— accumulated depreciation—allows the
disclosure of the original cost of the related asset in the balance sheet.
The balance of the contra account is deducted from the cost to obtain the
book value of the property and equipment.
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Service Vehicle and Office Equipment (Adjs. d and e). Suppose that Weddings
"R" Us estimated that the service vehicle, which was bought on May 4, will
last for seven years (eighty-four months) and with a salvage value of
P84,000. The office equipment that was acquired on May 5 will have a useful
life of five years (sixty months) and will be worthless at that time.
Substitution of the pertinent amounts into the basic formula will yield
depreciation for service vehicle and office equipment for the month as
P4,000 [(P420,OOO — P84,000)/84 months] and P1,OOO (P60,000/60 months),
respectively. These amounts represent the cost allocated to the month, thus
reducing the asset accounts and increasing the expense accounts. As a
matter of company policy, the period May 4 to 31 is considered a month. The
analysis follows:
Transaction Recording depreciation expense.

Entries Owner's equity decreased by debits to depreciation

expense-service vehicle and depreciation expense-office
equipment. Assets are decreased by credits to contra-
asset accounts accumulated depreciation-service vehicle
and accumulated depreciation-office equipment.
Dr. Depreciation Expense-Service Vehicle (OE:E) 4,000

Cr. Accumulated Depreciation-Service Vehicle (A) 4,000
Dr. Depreciation Expense-Office Equipment (OE:E) 1,000

Cr. Accumulated Depreciation-Office Equipment (A) 1,000
After adjustments, the property and equipment section of the balance sheet
for Weddings "R" Us will be:
Weddings "R" Us
Partial Balance Sheet
May 31, 2018
Property and Equipment (Net):

Service Vehicle P420,000
Less: Accumulated Depreciation 4,000 P416,000
Office Equipment P 60,000

Less: Accumulated Depreciation 1,000 59,000
P475,000
Allocating Revenues Received in Advance to Revenues
There are times when an entity receives cash for services or goods even
before service is rendered or goods are delivered. When such is received in
advance, the entity has an obligation to perform services or deliver goods.
The liability referred to is unearned revenues.
For example, publishing companies usually receive payments for magazine

subscriptions in advance. These payments must be recorded in a liability
account. If the company fails to deliver the magazines for the subscription
period, subscribers are entitled to a refund. As the company delivers each
issue of the magazine, it earns a part of the advance payments. This earned
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portion must be transferred from the unearned subscription revenues account
to the subscription revenues account.
Value of As the goods

goods or Balance Sheet or services Income Statement
services are provided
to be Liabilities Revenues
provided in Unearned Revenues Revenues from ______
future periods
Unearned Referral Revenues (Adj. f). On May 15, Weddings "R" Us received
P1O,OOO as an advance payment for referrals made. Assume that by the end of
the month, one of the three couples referred has already taken their
marriage vows and as a result the amount of P4000 pertaining to the
referred event has been realized. This transaction is analyzed as follows:
Transaction Recognition of income where cash is received in advance.
Analysis Liabilities decreased. Owner's equity increased.
Rules Decreases in liabilities are recorded by debits.

Increases in owner's equity are recorded by credits.
Entries Decrease in liabilities is recorded by a debit to

unearned referral revenues. Increase in owner's equity is
recorded by a credit to referral revenues.
Dr. Unearned Referral Revenues(L) 4,000

Cr. Referral Revenues (OE:I) 4,000
The liability account unearned referral revenues reflects the referral

revenues still to be earned, P6,000. The referral revenues account reflects
the amount of, referrals already completed and considered as revenues
during the month, P4,OOO.
ADJUSTMENTS FOR ACCRUALS (Step 5)
Accrued Expenses
An entity often incurs expenses before paying for them. Cash payments are
usually made at regular intervals of time such as weekly, monthly,
quarterly or annually. If the accounting period ends on a date that does
not coincide with the scheduled cash payment date, an adjusting entry is
needed to reflect the expense incurred since the last payment. This
adjustment helps the entity avoid the impractical preparation of hourly or
daily journal entries just to accrue expenses. Salaries, interest,
utilities (e.g., electricity, telecommunications and water) and taxes are
examples of expenses that are incurred before payment is made.
Accrued Salaries (Adj. g). Entities pay their employees at regular

intervals. It can be weekly, semi-monthly or monthly. Weekly payrolls are
usually made on Fridays (for a five-day workweek) or Saturdays (for a six-
day workweek). Weddings "R" Us pays salaries every two Saturdays. Assume
that the calendar for May appears as follows:
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May
Su M T W Th F Sa
1 2 3 4 5 6
7 8 9 10 11 12 13
14 15 16 17 18 19 20
21 22 23 24 25 26 27
28 29 30 31
The office assistant and the account executive were paid salaries on May 13
and 27. At month-end, the employees have worked for three days (May 29, 30
and 31) beyond the last pay period. The employees have earned the salary
for these days, but it is not due to be paid until the regular payday in
April. The salary for these three days is rightfully an expense for May,
and the liabilities should reflect that the entity owes the employees’
salaries for those days.
Each of the employee's salary rate is P7,800 per month or P300 per day
(P7,800/26 working days). The expense to be accrued is P1,800 (P300 x 3
days x 2 employees). This accrued expense can be analyzed as shown:
Transaction Accrual of unrecorded expense.
Analysis Liabilities increased. Owner's equity decreased.
Rules Increases in liabilities are recorded by credits.

Decreases in owner's equity are recorded by debits.

salaries expense. Increase in liabilities is recorded by
a credit to salaries payable.
Dr. Salaries Expense (OE:E) 1,800

Cr. Salaries Payable (L) 1,800
The liability of PI,800 is now correctly reflected in the salaries payable

account. The actual expense incurred for salaries during the month is
P15,600.
Accrued Interest (Adj. h). On May 2, Perez-Manalo borrowed P210,000 from

Metrobank. She issued a promissory note that carried a 20% interest per
annum. Both the interest and principal will be payable in one year. The
note issued to the bank accrues interest at 20% annually. At the end of
May, Perez-Manalo owed the bank P3,5ÖO (see computation below) for interest
in addition to the P210,000 loan. Interest is a charge for the use of money
over time. Interest expense is matched to a particular period during which
the benefit—the use of borrowed money—is received. The interest is a fixed
obligation and accrues regardless of the results of the entity's
operations.
Interest rates are expressed at annual rates, so if interest is being

calculated for less than a year, the calculation must express time as a
portion of a year. Thus, the interest expense (simple) incurred on this
note during the month is determined by the following formula:
Interest = Principal x Interest Rate x Length of Time

= P210,OOO x 20% per year x 1/12 of a year
= P210,OOO x .20 x 1/12
= P3,500
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The adjusting entry to record the interest expense incurred in May is as
follows:
Transaction Accrual of unrecorded expense.
Analysis Liabilities increased. Owner's equity decreased.
Rules Increases in liabilities are recorded by credits.

Decreases in owner's equity are recorded by debits.

interest expense; increase in liabilities as credit to
interest payable.
Dr. Interest Expense (OE:E) 3,500

Cr. Interest Payable (L) 3,500
Accrued Revenues
An entity may provide services during the period that are neither paid for
by clients nor billed at the end of the period. The value of these services
represents revenue earned by the entity. Any revenue that has been earned
but not recorded during the accounting period calls for an adjusting entry
that debits an asset account and credits an income account.
Accrued Consulting Revenues (Adj. i). Suppose that Weddings "R" Us agreed
to arrange a rush but simple civil wedding for a madly-in-love couple in
the afternoon of May 31. The entity intended to charge fees of P5,300 for
the services, which is earned but unbilled. This should be recorded as
shown below:
Transaction Accrual of unrecorded revenue.
Analysis Assets increased. Owner's equity increased.
Rules Increases in assets are recorded by debits. Increases in

owner's equity are recorded by credits.
Entries Increase in assets is recorded by a debit to accounts

receivable. Increase in owner's equity as a credit to
consulting revenues.
Dr. Accounts Receivable (A) 5,300

Cr. Consulting Revenues (OE:I) 5,300
A total of P67,700 in consulting revenues was earned by the entity during

the month.
The Weddings "R" Us illustration did not tackle entries related to

uncollectible accounts. Hence, the ensuing discussion on the accrual of
uncollectible accounts is not in any Way related to the Weddings "R" Us
illustration. This is to complete the illustrations on adjustments for
accruals.
ACCRUAL FOR UNCOLLECTIBLE ACCOUNTS
Entities often allow clients to purchase goods or avail of services on

credit. Some of these accounts will never be collected; hence, there.is a
need to reflect these as charges against income. In practice, an expense is
recognized for the estimated Uncollectible accounts in the current period,
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rather than when specific accounts actually become uncollectible. This
practice produces a better matching of income and expenses. Estimates of
uncollectible accounts may be based on credit sales for the period or on
the accounts receivable balance.
Assume that an entity made credit sales of P1,100,000 in 2018 and prior
experience indicates an expected 1% average uncollectible accounts rate
based on credit sales. The contra account—Allowance for Uncollectible
Accounts has a normal credit balance and is shown in the balance sheet as a
deduction from Accounts Receivable. The allowance, account need to be
increased by P11,OOO (P1,100,000 x 1%) because accounts receivable in that
amount is doubtful of collection. The adjustment will be:
Dr. Uncollectible Accounts Expense (OE:E) 11,000

Cr. Allowance for Uncollectible Accounts (A) 11,000
Throughout the accounting period, when there is positive evidence that a

specific account is definitely uncollectible, the appropriate amount is
written off against the contra account. For example, if a P1,500 receivable
were considered uncollectible, that amount would be written off as follows:
Dr. Allowance for Uncollectible Accounts (A) 1,500

Cr. Accounts Receivable(A) 1,500
No entry is made to Uncollectible Accounts Expense, since the adjusting

entry has already provided for an estimated expense based on previous
experience for all receivables. A more detailed discussion of this topic
is found in Part Four of this book.
EFFECTS OF OMITTING ADJUSTMENTS
When an accountant failed to include the proper adjustment entries, the

resulting financial statements will not accurately reflect the financial
position and the performance of the entity. Inaccuracies in one accounting
period can cause further inaccuracies in the statements of subsequent
periods.
Illustration. On July 1, 2018, Cabuyao Manpower Services owned by Warlito

Blanche borrowed of P100,000 by signing an 18-mointh note at 16% interest
per annum. The principal and interest are to be repaid when the note
matures on December 31, 2019.
As at December 31, 2018, the entity has incurred interest expense of P8,000
(P100,000 x 16% x 6/12). The accountant did not record the adjustment for
the accrued interest. The entry should have been a debit to Interest
Expense and a credit to Interest Payable for P8,000.
The effects of the omission in the 2018 financial statements are as

follows:
 In the 2018 income statement, interest expense is understated by P8,000

and, therefore, profit is overstated by P8,000.
 In the December 31, 2018 balance sheet, owner’s equity is overstated by

P8,000 because of the overstatement in profit. Total liabilities is
understated because of the omission of the P8,000 interest payable.
On December 31, 2019, the maturity date, the note is paid together with
interest. Since there was no adjusting entry made to accrue interest in
2018, the entire interest of P24,000 (P100,000 x 16% x 18/12) was
15
erroneously charged against 2019 profit. The correct interest expense for
2019 should have been P16,000 (P100,000 x 16% x 12/12).
The effects of the omissions in the 2019 financial statements are as

follows:
 In the 2019 income statement, interest expense is overstated by P8,000

and, therefore, profit is understated by P8,000.
 The December 31,2019 balance sheet is correctly stated since the note
along with its interest has been settled by year-end. The effect of the
omission has counterbalance by the end of the second (next) accounting
period.
In summary, the omission has produced two erroneous income statements and
one erroneous balance sheet. If the entry should have reported a correct
profit of P500,000 in the 2018 and 2019 income statements. As a result of
the omission, the proprietorship’s profit in 2018 is P508,000 and 2019,
P492,000.
ANALYSIS USING T-ACCOUNTS
To recapitulate, each adjusting entry affects a balance sheet account (an

asset or a liability account) and an income statement account (an income or
an expense account). Almost every revenue or expense account on the income
statement has one or more related accounts on the statement of financial
position. For instance, rent expense is related to prepaid rent, supplies
expense to supplies, service revenues to unearned service revenues and
salaries expense to salaries payable.
Having been appraised of these relationships, transactions affecting

particular accounts can now be analyzed using T-accounts. This learning
will be of use in reconstructing accounts to derive details like cash
inflows, cash outflows, revenues recognized for the period or expenses
charged for the period.
To illustrate, Eco-Tours, established by Galicano Del Mundo at the start of

the month, reported at month-end the following related accounts and account
balances: supplies, P36,000 and Supplies Expense, P15,400.
Looking at the foregoing, Del Mundo wants to know how much cash was paid
out to purchase supplies. Start by placing the relevant information in a T-
account. Input the beginning balance on the normal balance of the account.
In this case, Supplies is debit. There is not beginning balance since the
company just started operations this month. As a technique, the ending
balance of an account, here, Supplies for P36,600, is placed opposite its
normal balance. In adjusting for supplies expense, the entry made was
debit Supplies Expense, P15,400 and credit Supplies, P15,400. Total both
debit and credit sides. The cash paid out for supplies can now be derived;
it’s P52,000 (P52,000 – O), the plug figure. If there was a beginning
balance of O2,000, then cash paid out would have been P50,000 (P52,000 –
P2,000).
16
Supplies
Debit Credit
(+) (-)
Beginning Balance 0 15,400 Expense for the M onth
Cash Paid for Supplies Plug figure 36,600 Ending Balance
Total 52,000 52,000 Total
Assume instead that the P36,600 ending balance for Supplies and the P52,000
cash paid for supplies were given, using the T-Account, Supplies Expense is
P15,400 (P52,000-P36,600):
Supplies
Debit Credit
(+) (-)
Beginning Balance 0 Plug figure Expense for the M onth
Cash Paid for Supplies 52,000 36,600 Ending Balance
To illustrate further, a company reported at month-end the following

related accounts and account balances: Prepaid Insurance, End, P67,000;
Insurance Expense, P12,000 and Prepaid Insurance, beginning, P48,000. How
much cash was used to pay for insurance this period? Answer: P31,000.
Prepaid Insurance
Debit Credit
(+) (-)
Beginning Balance 48,000 12,000 Expense for the M onth
Cash Paid for Insurance Plug figure 67,000 Ending Balance
To have an ending balance of P67,000, there must have been a P31,000 debit
to the Prepaid Insurance account. Since a debit to this account is
normally offset by a credit to Cash, the analysis confirms that cash
outflows for insurance was P31,000.
17
SUMMARY OF ADJUSTING ENTRIES
Account Balances Before Adjustment Adjusting Entry

Type of Adjustment Balance Sheet Income Statement Account Account
Account Account Debited Credited
Prepaid Expenses:
Asset M ethod Assets Overstated Expenses Understated Expense Prepaid Expense (A)
Expense M ethod Assets Understated Expenses Overstated Prepaid Expense (A) Expense
Depreciation Assets Overstated Expenses Understated Expense Contra-Asset
Unearned Revenues:
Liability M ethod Liabilities Overstated Income Understated Unearned Revenues (L) Revenues
Income M ethod Liabilities Understated Revenues Overstated Revenues Unearned Revenues (L)
Accrued Expenses Liabilities Understated Expenses Understated Expense Payable (L)
Accrued Revenues Assets Understated Income Understated Receivable (A) Revenues
ALTERNATIVE METHODS OF RECORDING DEFERRALS
In the discussions, all the transactions that required adjustments are

initially recorded in balance sheet accounts. A prepaid expense is
initially recorded in a prepaid asset account. Likewise, revenue received
in advance is initially recorded in a liability account-unearned revenues.
In the case of a prepaid expense, an adjusting entry is made at the end of
the period to transfer the portion of the expired asset to an expense
account. Similarly, an adjusting entry is made to transfer earned revenues
from the liability account to an income account.
Entities may initially account for deferrals using income and expense
accounts. The alternative approach is illustrated here.
Prepaid Expenses
On Oct. 1, 2018, Calaguas Company acquired a 3-year insurance policy for

P36,000 paid in advance. Calaguas may record this transaction depending on
which of the two accounting policies it follows. The P36,000 payment may
initially be recorded either as an asset or as an expense.
Initial entry is recorded as:
1. An asset
2018
Oct. 10 Prepaid Insurance (A) 36,000
Cash (A) 36,000
2. An expense
2018
Oct. 10 Insurance Expense (OE:E) 36,000
Cash (A) 36,000
At the end of the year, an adjusting entry is needed to establish the

proper balances in the prepaid insurance and insurance expense accounts. On
18
December 31, 2018, three months' insurance has been consumed, or insurance
expense is equal to P3,000 (P36,000/36 months x 3 months). Prepaid
insurance equivalent to P33,000 (P36,000 - P3,000) remain. The appropriate
adjustment depends on how the initial transaction was recorded.
Adjusting entry required if initial entry is recorded as:
1. An asset
2018
Dec. 31 Insurance Expense (OE:E) 3,000
Prepaid Insurance (A) 3,000
2. An expense
2018
Dec. 31 Prepaid Insurance (A) 33,000
Insurance Expense (OE:E) 33,000
The effect of the adjusting entries on the ledger accounts after posting is
the same regardless of the initial debits as shown below:
As an Asset As an Expense
Dec. 31 balances: Dec. 31 balances:

Prepaid Insurance 33,000 debit Prepaid Insurance 33,000 debit
Insurance Expense 3,000 debit Insurance Expense 3,000 debit
Unearned Revenues
On July 1, 2018, Marasigan Company received a P48,000 check for 2 years'

rent paid in advance. On this date, Marasigan may record a credit in that
amount either as unearned rental revenue or rental revenue, depending on
its accounting policy.
Initial entry is recorded as:
1. A liability
2018 July 1 Cash (A) 48,000

Unearned Rent Revenues (L) 48,000
2. A revenue
2018 July 1 Cash (A) 48,000

Rent Revenues (OE:I) 48,000
At the end of the year, an adjusting entry is needed to establish the

proper balances in the rent revenue and unearned rent revenue accounts. On
Dec 31, 2018, six months' rent has been earned, or rent revenue is equal to
P12,000 (P48,000/24 months x 6 months). Unearned rent revenues equivalent
to P36,000 (P48,000 – P12,000) remain. The appropriate adjustment depends
on how the initial transaction was recorded.
Adjusting entry required if initial entry is recorded as:
1. A liability
2018 Dec 31 Unearned Rent Revenues (L) 12,000

Rent Revenues (OE:) 12,000
19
2. A revenue
2018 Dec 31 Rent Revenues (OE:I) 36,000

Unearned Rent Revenues (L) 36,000
The effect of the adjusting entries on the ledger accounts after posting is
the same regardless of the initial credits as shown below:
As a Liability As an Income
Dec. 31 balances: Dec. 31 balances:

Unearned Rent Revenues 36,000 credit Unearned Rent Revenues 36,000credit
Rent Revenues 12,000 credit Rent Revenues 12,000credit
Video Reference:
https://www.youtube.com/watch?v=xq-RPrpw9ro
https://www.youtube.com/watch?v=WfqStMsLwis
https://www.youtube.com/watch?v=cHPihaQrUTc
https://www.youtube.com/watch?v=Zjnn1HH8YIo
https://www.youtube.com/watch?v=KpKaOYvwzQc
https://www.youtube.com/watch?v=_0hygwwQJis&list=PLl-
IwImaCVm7KHHk48hecfI2JbShcEQTd
Another Example for Adjusting Journal Entries:
On June 30, 2018, the end of fiscal year, the following information is
available to Noel Hungria’s accountants for making adjusting entries:
a. Among the liabilities of the entity is a P2,400,000 mortgage payable.

On June 30 the accrued interest on this mortgage amounted to P120,000.
AJE:
June 30 Salaries Expense 120,000
no solution required. The adjusting entry amount is given for P120,000.
b. Assume that on July 2, a Friday, the entity, which is on a five-day

workweek and pays employees weekly, paid its regular employees P192,000.
20
AJE:
June 30 Salaries Expense 115,200
Solution:
M T W Th F
June 27 June 29 June 30 July 1 July 2
Pay Period
for the week
Accrued Salaries for fiscal year Expense for the month of

end June 30, 2018. july
The accrued salaries is equivalent for

three (3) days.
Accrued Salaries = P192,000 x 3/5

= 115,200
c. On June 29, the entity completed negotiations and signed a contract to

provide services to a new client at an annual rate of P36,000.
AJE:
June 30 No Adjusting Journal Entry
No entry because the transaction only narrates that it

hass signed a contract to be perfomed next year and no cash was
paid in advance.
d. The Supplies account showed a beginning balance of P16,150 and purchases

during the year of P37,660. The year-end inventory revealed supplies on
hand of P11,860.
AJE:
June 30 Supplies Expense 41,950
Supplies 41,950
Solution:
Beginning Balance of Supplies 16,150
Add: Purchases of Supplies 37,660
Total Amount of Supplies Available for Use This Year 53,810
Less: Supplies on Hand (Not Used for the year) 11,860
Amount of Supplies Used or Expensed 41,950
e. The prepaid Insurance account showed the following entries on June 30.
Beginning Balance 15,300
21
January 1 29,000
May 1 33,660
The beginning balance represents the unexpired portion of a one-year

policy purchased in April of the previous year. The January 1 entry
represented a new one-year policy, and the May 1 entry is the additional
coverage of a three-year policy.
AJE:
June 30 Insurance Expense 31,585
Prepaid Insurance 31,585
Solution:
Beginning Balance 15,300 x 9/12 11,475.00
January 1 29,000 x 6/12 14,500.00
M ay 1 33,660 x 2/12 5,610.00
31,585.00
The Beginning Balance insurance policy was acquired in April 1, 2017. M eaning out of
the one-year policy 3 months (From April 1 to June 30, 2017) was already recognized as an expense in
June 30, 2017 and for this year 9 months (July 1, 2017 to April 1, 2018) should be recognized as
expense.
For the January 1 insurance policy, the expired portion is 6 months (from January 1 to June 30, 2018)
As for the M ay 1 insurance policy, the expired portion is 2 months (from M ay 1 to June 30, 2018)
f. The following table contains the cost and annual depreciation for
building and equipment, all of which were purchased before the year:
Account Cost Annual Depreciation

Buildings 1,850,000 73,000
Equipment 2,180,000 218,000
AJE:
June 30 Depreciation Expense - Buildings 73,000
Accumulated Depreciation - Buildings 73,000
Depreciation Expense - Equipment 218,000

Accumulated Depreciation - Equipment 218,000
or you may prepare a Comound Entry
June 30 Depreciation Expense - Buildings 73,000

Depreciation Expense - Equipment 218,000
Accumulated Depreciation - Buildings 73,000
Accumulated Depreciation - Equipment 218,000
no solution required. The adjusting entry amount is given
22
g. OnJune 1, the entity completed negotiations with another client and
accepted an advance of P210,000 for services to be performed in the next
year. The 210,000 was credited to Unearned Service Revenues.
AJE:
June 30 No Adjusting Journal Entry
No Adjusting Journal Entry is required in this transaction. Though received

in advance, but the contract will be performed for next year. So no income
to be recorded in 2018.
h. The entity calculates that as at June 30, it had earned P35,000 on

P75,000 contract that will be completed and billed in August.
AJE:
June 30 Unearned Contract Revenue 35,000
Contract Revenue 35,000
no solution required. The adjusting entry amount is given.
V. Topic Summary
 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.
 Adjusting entries normally involve the following: Accruals of Income and
Expenses, Recognition of depreciation expense and uncollectible
accounts, and Deferrals of Income and Expenses (splitting of mixed
accounts)
 The three expense recognition principles are: Matching, Systematic and
Rational Allocation, and Immediate Recognition.
 Accounts are also classified into the following: Real Accounts or
Permanent Accounts, Nominal Accounts or Temporary Accounts, and Mixed
Accounts.
 Advance collections of income may be recorded using either the Liability
Method or Income Method.
 Prepayments may be recorded using either the Asset Method or Expense
Method.
 Businesses adopts Liability Method for advance collections and Asset
Method for prepayments.
 Accrued Expenses are expenses already incurred but not yet paid as at
the end of an accounting period.
 Accrued Income are incomes already earned but not yet collected as at
the end of an accounting period.
23
VI. References
Ballada, Win and Susan Ballada. (2018). Basic Accounting Made Easy 21st
Edition. Manila: Domdane Publishers and Made Easy Books.
Ballada, Win and Susan Ballada. (2019). Accounting Fundamentals Made East 2019
Issue- 5th Edition. Manila: Domdane Publishers and Made Easy Books.
Lopez, Rafael M. Jr. (2008). Fundamentals of Accounting Millennial Edition. Davao
City: MS Lopez Printing and Publishing.
Ledesma, Ester L. (2014). Financial Accounting Theory Review Booklets. Manila: CRC-
Ace The Professional CPA Review School.
Rante, Gloria Aradaniel. (2013). Accounting for Service Entities. Mandaluyong
City: Millenium Books, Inc.
Ferrer, Rodiel C. and Millan, Zeus Vernon B. (2017). Fundamentals of Accountancy,
Business and Management Part 1. Baguio City: Bandolin Enterprise.
24
Lesson 2
The Worksheet and Financial Statements
Learning Outcomes:
After studying this chapter, the students should be able to:

1. describe the flow of accounting information from the unadjusted trial
balance into the adjusted trial balance and finally, into the income
statement and balance sheet columns of the worksheet;
2. prepare accurately and in good form a ten-column worksheet;
3. understand and appreciate the usefulness of financial statements;
4. develop skills in the preparation of financial statements; and
5. explain how the financial statements are interrelated;
I. Pre-Assessment
Name: _____________________________________ Time: _______________________

1. The balance sheet is also known as the statement of financial

position.
2. The statement of changes in equity discloses the withdrawals during
the period.
3. The worksheet is a type of an accountant’s working paper.
4. The purchase of land is an example of an investing activity.
5. The adjusted Trial Balance columns of the worksheet are prepared by
combining the Trial Balance and Adjustments columns of the worksheet.
6. Financial statements cannot be prepared correctly until all the
accounts have been adjusted.
7. The worksheet is prepared after the formal adjusting and closing
entries.
8. The purchase of equipment is an example of a financing activity.
9. When adjusting entries are entered onto a worksheet, it is not
necessary to record them in the general journal.
10. The account Wages Payable would appear on the income statement.
11. A service business is one that offers goods as its main product.
12. Unadjusted trial balance is prepared after adjusting entries but
before the financial statements are prepared.
13. Information about a business Selling prices is disclosed in the income
statement.
14. The trial balance column of the worksheet shows the profit of the
business.
15. Profit is earned when expenses exceeds income.
16. The statement of changes in equity shows, capital balances,
withdrawals, revenues and expenses.
17. Obtaining a bank loan will decrease assets.
18. Selling the land owned by a business is an example of an operating
activity.
19. Payment to settle notes payable is an operating activity.
20. The 5th accounting cycle is the preparation of financial statements.
21. A general ledger is not a reference book of the accounting system.
22. An expense will not be recognized and recorded in the books if no cash
outlay has been made.
23. A trial balance may balance and is always correct.
24. Additional investment of a proprietor decreased assets.
25. The capital balance of the previous year is not required to determine
the capital of the current year.
25
II. Lesson Map
Statement of Income or
Income Statement
Worksheet
Statement of Changes in
Equity of Statement of
Equity
Statement of Cash Flows
Statement of Financial
Position or Balance Sheet
Notes to Financial
Statements
The worksheet is prepared when it is time to adjust the accounts and

prepare financial statements at the end of an accounting period.
III. Core Content
ENGAGE
Name: _____________________________________ Time: _______________________
Instructions: Classify the accounts listed bellows as permanent or

temporary, and indicate whether or not each account is closed. Also,
indicate the financial statement in which each account will appear.
Closed Balance Income

Account Title Permanent Temporary
Yes No Sheet Statement
Example: Building x x x
Rent Expense
Prepaid Insurance
Accounts Receivable
Supplies Expense
Accumulated Depreciation
Depreciation Expese
Interest Payable
Service Revenues
Notes Payable
Accrued Salaries
M iscellaneous Income
Utilities Expense
Besario, Withdrawals
M ortgage Payable
Land
26
EXPLORE
Name: _____________________________________ Time: _______________________
Instructions: Based on the following data needed for cash flows

preparation, 1) indicate whether each item enumerated is an inflow or and
an outflow (outflows are enclosed in parenthesis) in operating, investing
and financing activity; 2) compute net cash provided by (used in) operating
activities.
Items Operating Investing Financing

Ex. Acquisition of Land 200,000 -200,000
Initial investment by proprietor 300,000 300,000
1 Payment of rental 120,000

2 Cash received from services rendered 50,000
3 Investment by owner 25,000
4 Payment of utilities expense 65,000
5 Collection from customer's accounts 90,000
6 Proceeds from sale of equipment 100,000
7 Remittance of withholding tax 2,500
8 Withdrawal by owner 15,000
9 Purchase of equipment 5,000
10 Proceeds from a bank loan 100,000
11 Purchase of supplies 25,000
12 Payment of taxes and licenses 10,000
13 Remittance of SSS and Philhealth premiums
and contributions 4,500
14 Payment of accounts to suppliers 28,200
15 Additional investment by the owner 200,000
Net Cash Provided by (Used in)
Note: the - values are supposed to be enclosed in parenthesis. I don't have such
character in my computer.
EXPLAIN
THE WORKSHEET
Accountants often use a worksheet to help transfer data from the unadjusted
trial balance to the financial statements. This multi-column document
provides an efficient way to summarize the data for financial statements.
The accountant generally prepares a worksheet when it is time to adjust the
accounts and prepare financial statements. Note, however, that it is
possible to prepare financial statements directly from the adjusted trial
balance at the end of the accounting period if the business has relatively
few accounts.
The worksheet simplifies the adjusting and closing process. It can also
reveal errors. The worksheet is not part of the ledger or the journal, nor
is it a financial statement. It is a summary device used by the accountant
for his convenience. The basic structure of the worksheet is presented in
Exhibit 5-1.
27
Weddings "R" Us
Worksheet
For the Month Ended May 31, 2018
Acct Account Title Trial Balance Adjustments Adjusted Trial Balance Statement of Income Statement of Financial Position
Code Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
- - - - - - - - - -
Exhibit 5-0 Worksheet with Heading and Column Titles
PREPARING THE WORKSHEET (Step 5)
The steps in the preparation of a worksheet will be illustrated using the

Weddings "R" Us case:
1. Copy the account titles and its balances from the Trial Balance to the
unadjusted trial balance column (debit and credit) and total the debit
and credit columns.
The numbers, titles and balances of the accounts as at May 31 are lifted
directly from the ledger before the adjusting entries are prepared. The
accounts are listed in the worksheet in the order they appear in the
ledger. Total debits must equal total credits, as shown in Exhibit 5-1.
Accounts with zero balances (e... salaries payable interest payable,
etc.) are also presented. Listing all the accounts with their balances
helps identify the accounts that need adjustments. This practice will
help ensure the achievement of completeness and accuracy in the
adjustment process.
28
Acct Account Title Trial Balance
Code Debit Credit
110 Cash 22,200
120 Accounts Receivable 12,000
130 Supplies 18,000
140 Prepaid Rent 8,000
150 Prepaid Insurance 14,400
160 Service Vehicle 420,000
165 Accumulated Depreciation-Service Vehicle
170 Office Equipment 60,000
175 Accumulated Depreciation-Office Equipment
210 Notes Payable 210,000
220 Accounts Payable 53,000
230 Salaries Payable
240 Utilities Payable 1,400
250 Interest Payable
260 Unearned Referral Revenues 10,000
310 Perez-M analo, Capital 250,000
320 Perez-M analo, Withdrawals 14,000
330 Income Summary
410 Consulting Revenues 62,400
420 Referral Revenues
510 Salaries Expense 13,800
520 Supplies Expense
530 Rent Expense
540 Insurance Expense
550 Utilities Expense 4,400
560 Depreciation Expense-Service Vehicle
570 Depreciation Expense-Office Equipment
580 M iscellaneous Expenses
590 Interest Expense
586,800 586,800
Exhibit 5-1 Unadjusted Trial Balance
2. Enter the adjusting entries (the account titles and amounts) to the
adjustments columns and total the debit and credit columns.
When a worksheet is used, all adjustments are first entered in the

worksheet. The required adjustments for Weddings "R" Us were explained
in the previous chapter. The same adjustments are entered in the
adjustments columns of the worksheet in Exhibit 5-2. As each adjustment
is entered, a letter is used to identify the debit entry and the
corresponding credit entry. Note that the adjustments are not
journalized until after the worksheet is completed and the financial
statements prepared.
29
Weddings "R" Us
Worksheet
For the M onth Ended M ay 31, 201
Acct Trial Balance Adjustments

Account Title
Code Debit Credit Debit Credit
110 Cash 22,200
120 Accounts Receivable 12,000 i 5,300
130 Supplies 18,000 c 3,000
140 Prepaid Rent 8,000 a 4,000
150 Prepaid Insurance 14,400 b 1,200
160 Service Vehicle 420,000
165 Accumulated Depreciation-Service Vehicle d 4,000
170 Office Equipment 60,000
175 Accumulated Depreciation-Office Equipment e 1,000
210 Notes Payable 210,000
220 Accounts Payable 53,000
230 Salaries Payable g 1,800
240 Utilities Payable 1,400
250 Interest Payable h 3,500
260 Unearned Referral Revenues 10,000 f 4,000
310 Perez-M analo, Capital 250,000
320 Perez-M analo, Withdrawals 14,000
330 Income Summary
410 Consulting Revenues 62,400 i 5,300
420 Referral Revenues f 4,000
510 Salaries Expense 13,800 g 1,800
520 Supplies Expense c 3,000
530 Rent Expense a 4,000
540 Insurance Expense b 1,200
550 Utilities Expense 4,400
560 Depreciation Expense-Service Vehicle d 4,000
570 Depreciation Expense-Office Equipment e 1,000
580 M iscellaneous Expenses
590 Interest Expense h 3,500
586,800 586,800 27,800 27,800
Exhibit 5-2 Adjustments
3. Compute each account's adjusted balance by combining the unadjusted

trial balance and the adjustment figures. Enter the adjusted amounts in
the adjusted trial balance columns.
Exhibit 5-3 exhibited the adjusted trial balance prepared by combining

horizontally, line by line, the amount of each account in the unadjusted
trial balance columns with the corresponding amounts in the adjustment
columns. This procedure is called cross-footing. To illustrate, the
first line showed cash with a debit amount of P22,200 in the unadjusted
trial balance. There is no adjustment to the cash account so that the
P22,200 is entered in the debit column of the adjusted trial balance. On
the second line is accounts receivable with a P12,000 balance in the
unadjusted trial balance; a debit of P5,300 is entered in the
30
adjustments columns. The resulting balance is a P17,300 debit in the
adjusted trial balance.
Supplies, on the third line, showed a debit of P18,000 in the unadjusted

trial balance columns and a credit of P3,000 in the adjustments columns.
The P3,000 credit is subtracted from the P18,000 debit; the result is a
P15,000 debit in the adjusted trial balance. Consulting revenues, on the
nineteenth line, reported a P62,400 credit in the unadjusted trial
balance and a P5,300 credit in the adjustments columns. These two credit
amounts are added, and the P67,700 sum is entered in the credit column
of the adjusted trial balance. This process is followed through all the
accounts. The adjusted trial balance columns are then totalled to check
the accuracy of the cross- footing.
A simple convention to observe when extending amounts from the trial

balance to the adjusted trial balance follows:
 Add when the type of adjustment (debit or credit) is the same as the
unadjusted balance unadjusted balance.
 Subtract when the type of adjustment (debit or credit) is different
from the unadjusted balances.
Weddings "R" Us
Worksheet
For the M onth Ended M ay 31, 2018
Acct Trial Balance Adjustments Adjusted Trial Balance

Account Title
Code Debit Credit Debit Credit Debit Credit
110 Cash 22,200 22,200
120 Accounts Receivable 12,000 i 5,300 17,300
130 Supplies 18,000 c 3,000 15,000
140 Prepaid Rent 8,000 a 4,000 4,000
150 Prepaid Insurance 14,400 b 1,200 13,200
160 Service Vehicle 420,000 420,000
165 Accumulated Depreciation-Service Vehicle d 4,000 4,000
170 Office Equipment 60,000 60,000
175 Accumulated Depreciation-Office Equipment e 1,000 1,000
210 Notes Payable 210,000 210,000
220 Accounts Payable 53,000 53,000
230 Salaries Payable g 1,800 1,800
240 Utilities Payable 1,400 1,400
250 Interest Payable h 3,500 3,500
260 Unearned Referral Revenues 10,000 f 4,000 6,000
310 Perez-M analo, Capital 250,000 250,000
320 Perez-M analo, Withdrawals 14,000 14,000
330 Income Summary
410 Consulting Revenues 62,400 i 5,300 67,700
420 Referral Revenues f 4,000 4,000
510 Salaries Expense 13,800 g 1,800 15,600
520 Supplies Expense c 3,000 3,000
530 Rent Expense a 4,000 4,000
540 Insurance Expense b 1,200 1,200
550 Utilities Expense 4,400 4,400
560 Depreciation Expense-Service Vehicle d 4,000 4,000
570 Depreciation Expense-Office Equipment e 1,000 1,000
580 M iscellaneous Expenses -
590 Interest Expense h 3,500 3,500
586,800 586,800 27,800 27,800 602,400 602,400
Exhibit 5-3 Adjusted Trial Balance
31
4. Extend the asset, liability and owner's equity amounts from the adjusted
trial balance columns to the balance sheet columns. Extend the income
and expense amounts to the income statement columns. Total the statement
columns.
Every account is either a balance sheet account or an income statement

account. Asset, liability, capital and withdrawal accounts are extended
to the balance sheet columns. Income and expense accounts are moved to
the income statement columns. Debits in the adjusted trial balance
remain as debits in the statement columns while credits as credits. Each
account's adjusted balance should appear in only one statement column as
shown in Exhibit 5-4. At this stage, the initial totals of the income
statement and balance sheet columns are not equal.
Weddings "R" Us
Worksheet
Acct Trial Balance Adjustments Adjusted Trial Balance Statement of Income

Account Title
Code Debit Credit Debit Credit Debit Credit Debit Credit
110 Cash 22,200 22,200
120 Accounts Receivable 12,000 i 5,300 17,300
130 Supplies 18,000 c 3,000 15,000
140 Prepaid Rent 8,000 a 4,000 4,000
150 Prepaid Insurance 14,400 b 1,200 13,200
160 Service Vehicle 420,000 420,000
165 Accumulated Depreciation-Service Vehicle d 4,000 4,000
170 Office Equipment 60,000 60,000
175 Accumulated Depreciation-Office Equipment e 1,000 1,000
210 Notes Payable 210,000 210,000
220 Accounts Payable 53,000 53,000
230 Salaries Payable g 1,800 1,800
240 Utilities Payable 1,400 1,400
250 Interest Payable h 3,500 3,500
260 Unearned Referral Revenues 10,000 f 4,000 6,000
310 Perez-Manalo, Capital 250,000 250,000
320 Perez-Manalo, Withdrawals 14,000 14,000
330 Income Summary 35,000
410 Consulting Revenues 62,400 i 5,300 67,700 67,700
420 Referral Revenues f 4,000 4,000 4,000
510 Salaries Expense 13,800 g 1,800 15,600 15,600
520 Supplies Expense c 3,000 3,000 3,000
530 Rent Expense a 4,000 4,000 4,000
540 Insurance Expense b 1,200 1,200 1,200
550 Utilities Expense 4,400 4,400 4,400
560 Depreciation Expense-Service Vehicle d 4,000 4,000 4,000
570 Depreciation Expense-Office Equipment e 1,000 1,000 1,000
580 Miscellaneous Expenses - -
590 Interest Expense h 3,500 3,500 3,500
586,800 586,800 27,800 27,800 602,400 602,400 71,700 71,700
Exhibit 5-4 Statement of Income
32
Weddings "R" Us
Worksheet
Acct Trial Balance Adjustments Adjusted Trial Balance Statement of Income Statement of Financial Position
Account Title
Code Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
110 Cash 22,200 22,200 22,200
120 Accounts Receivable 12,000 i 5,300 17,300 17,300
130 Supplies 18,000 c 3,000 15,000 15,000
140 Prepaid Rent 8,000 a 4,000 4,000 4,000
150 Prepaid Insurance 14,400 b 1,200 13,200 13,200
160 Service Vehicle 420,000 420,000 420,000
165 Accumulated Depreciation-Service Vehicle d 4,000 4,000 - 4,000
170 Office Equipment 60,000 60,000 60,000
175 Accumulated Depreciation-Office Equipment e 1,000 1,000 1,000
210 Notes Payable 210,000 210,000 210,000
220 Accounts Payable 53,000 53,000 53,000
230 Salaries Payable g 1,800 1,800 1,800
240 Utilities Payable 1,400 1,400 1,400
250 Interest Payable h 3,500 3,500 3,500
260 Unearned Referral Revenues 10,000 f 4,000 6,000 6,000
310 Perez-Manalo, Capital 250,000 250,000 250,000
320 Perez-Manalo, Withdrawals 14,000 14,000 14,000
330 Income Summary 35,000 35,000
410 Consulting Revenues 62,400 i 5,300 67,700 67,700
420 Referral Revenues f 4,000 4,000 4,000
510 Salaries Expense 13,800 g 1,800 15,600 15,600
520 Supplies Expense c 3,000 3,000 3,000
530 Rent Expense a 4,000 4,000 4,000
540 Insurance Expense b 1,200 1,200 1,200
550 Utilities Expense 4,400 4,400 4,400
560 Depreciation Expense-Service Vehicle d 4,000 4,000 4,000
570 Depreciation Expense-Office Equipment e 1,000 1,000 1,000
580 Miscellaneous Expenses - -
590 Interest Expense h 3,500 3,500 3,500
586,800 586,800 27,800 27,800 602,400 602,400 71,700 71,700 565,700 565,700
Exhibit 5-5 Statement of Financial Position
5. Compute profit or loss as the difference between total revenues and

total expenses in the income statement. Enter profit or loss as a
balancing amount in the income statement and in the balance sheet, and
compute the final column totals.
Profit or loss is equal to the difference between the debit and credit
columns of the income statement.
Revenues (Income Statement credit column total) P71,700

Expenses (Income Statement debit column total) 36,700
Profit P35,000
The profit or loss should always be the amount by which the debit and
credit columns for income statement, and the debit and credit columns
for balance sheet differ. The profit figure of P35,000 is entered in the
debit column of the income statement and the credit column of the
balance sheet. After completion, total debits and total credits in the
income statement and balance sheet columns must equal.
The profit figure is extended to the credit column of the balance sheet
because profit increases owner's equity and increases in owner's equity
are recorded as credits: Observe that the capital account amount of
33
P250,000 shown in the worksheet reflects the beginning rather than the
ending balance. Profit must be added and withdrawals subtracted to
arrive at the ending capital balance; this is done when the statement of
changes in equity is prepared.
Video Reference:
https://www.youtube.com/watch?v=WBo3aH1sHUM
https://www.youtube.com/watch?v=xCuwDq80mKQ
ESSENCE OF FINANCIAL STATEMENTS
There are questions that the owner of a business periodically asks--How

much did the business entity earn What is the financial condition of the
business? How much is the owner's interest in the entity today? What
happened to the cash receipts? Where did cash go? Investors, creditors,
taxing authorities and other users have their own questions about the
business which need to be answered.
The financial statements are the means by which the information accumulated
and processed in financial accounting is periodically communicated to the
users. Without accounting information embodied in the financial statements,
users may not be able to arrive at sound economic decisions.
Per March 2018 Conceptual Framework for Financial Reporting (2018

Conceptual Framework), the objective of financial statements is to provide
financial information about the reporting entity's assets, liabilities,
equity, income and expenses that is useful to users of financial statements
in assessing the prospects for future net cash inflows to the reporting
entity and in assessing management's stewardship of the entity's economic
resources.
COMPLETE SET OF FINANCIAL STATEMENTS
Per revised PAS No. 1, a complete set of financial statements comprises:
1. 1 A statement of financial position as at the end of the period;

2. A statement of financial performance for the period;
3. A statement of changes in equity for the period;
4. A statement of cash flows for the period;
5. Notes, comprising a summary of significant accounting policies and other
explanatory information, and
6. A statement of financial position as at the beginning of the earliest
comparative period when an entity applies an accounting policy
retrospectively or makes a retrospective restatement of items in its
financial statements or when it reclassifies items in its financial
statements.
In a'nutshell, the statement financial position (or balance sheet) lists

all the assets, liabilities and equity of an entity as at a specific date.
The statement of financial performance (or income statement) presents a
summary of the revenues and expenses of an entity for a specific period.
The statement of changes in equity presents a summary of the changes in
capital such as investments, profit or loss, and withdrawals during a
specific period. The statement of cash flows reports the amount of cash
34
received and disbursed during the period. Accounting policies are the
specific principles, bases, conventions, rules and practices adopted by an
enterprise in preparing and presenting financial statements. Notes to
financial statements provide narrative descriptions or disaggregation of
items presented in the statements and information about items that do not
qualify for recognition in the statements.
PREPARING THE FINANCIAL STATEMENTS (Step 6)
Once the worksheet is completed, it is easy to prepare the financial

statements for the account balances have been extended to the appropriate
income statement and balance sheet columns. Most of the information needed
to prepare the income statement, statement of changes in equity and balance
sheet are available from the worksheet. The statements presented are those
of Weddings "R" Us. Note that financial statements shall be presented at
least annually (per revised PAS No. 1).
Statement of Financial Performance/Statement of Income
An entity can present all items of income and expense recognized in a

period: in a single statement of comprehensive income, or in two
statements: a statement displaying components of profit or loss (separate
income statement) and a second statement beginning with profit or loss and
displaying components of other comprehensive income. However, the 2018
Conceptual Framework does not specify whether the statement(s) of financial
performance comprises) a single statement or two statements.
In this module, the discussion will zero in on the separate income

statement portion because the other line items comprising the statement of
comprehensive income will be tackled only in higher accounting because of
their complexity. In summary, in the separate income statement, to obtain
the profit or loss for the period, the net effects of discontinued
operations (if any) will be considered after obtaining the profit or loss
from continuing operations for the period. Then, to be able to finally
establish the total comprehensive income, each component of other
comprehensive income classified by nature, and share of the other
comprehensive income of associates and joint ventures accounted for using
the equity method are required to be presented.
The income statement is a statement showing the performance of the

enterprise for a given period of time. It summarizes the revenues earned
and expenses incurred for that period of time. The income statement for
Weddings "R" Us (refer to Exhibit 5-5) is prepared directly from the income
statement columns of the worksheet in Exhibit 5-4.
35
Weddings "R" Us
Statement of Income
Revenues
Consulting Revenues P 67,700
Referral Revenues 4,000
Total P 71,700
Expenses
Salaries Expense 15,600
Utilities Expense 4,400
Rent Expense 4,000
Depreciation Expense-Service Vehicle 4,000
Depreciation Expense-Office Equipment 1,000
Total 36,700
Profit P 35,000
Exhibit 5-5 Statement of Income
Information about the performance of an enterprise, in particular its

profitability, is required in order to assess potential changes in the
economic resources that it is likely to control in the future. It is also
useful in predicting the capacity of the enterprise to generate cash flows
from its existing resource base.
Video Reference:
https://www.youtube.com/watch?v=myNAkXT9XgY
Statement of Changes in Equity
The statement of changes in equity summarizes the changes that occurred in

owner's equity. This statement is now a required statement (per revised
Philippine Accounting Standards (PAS) No. 1). Changes in an enterprise's
equity between two balance sheet dates reflect the increase or decrease in
its net assets during the period.
In the case of sole proprietorships, increases in owner's equity arise from

additional investments by the owner and profit during the period. Decreases
result from withdrawals by the owner and from loss for the period. The
beginning balance and additional investments are taken from the owner's
capital account in the general ledger. The profit or loss figure comes
directly from the income statement while the withdrawals from the balance
sheet columns in the worksheet.
36
Weddings "R" Us
Perez-Manalo, Owner's Equity, 5/1/2018 P 250,000

Add: Additional Investment by Perez-Manalo P -
Profit 35,000 35,000
Total 285,000
Less: Withrawals 14,000
Perez-Manalo, Owner's Equity, 5/31/2018 P 271,000
Exhibit 5-6 Statement of Changes in Equity
Video Reference:
https://www.youtube.com/watch?v=bOqI21rNNow
Statement of Financial Position
The statement of financial position is a statement that shows the financial

position or condition of an entity by listing the assets, liabilities and
owner's equity as at a specific date. The information needed for this
statement are the net balances at the end of the period, rather than the
total for the period as in the income statement. This statement is also
called the balance sheet.
Users of financial statements analyze the balance sheet to evaluate an

entity's liquidity, its financial flexibility, and its ability to generate
profits, and its solvency Liquidity refers to the availability of cash in
the near future after taking account of the financial commitments over this
period. Financial flexibility is the ability to take effective actions to
alter the amounts and timings of cash flows so that it can respond to
unexpected needs and opportunities. This includes the ability to raise new
capital or tap into unused lines of credit. Solvency refers to the
availability of cash over the longer term to meet financial commitments as
they fall due.
In preparing the balance sheet, it may not be necessary to make any further
analysis of the data. The needed data-that is, the balances of the asset,
liability, and owner's equity accounts-are already available from the
balance sheet columns of the worksheet. However, the interim balance for
owner's equity must be revised to include profit or loss and owner's
withdrawals for the accounting period. The adjusted amount for ending
owner's equity is shown in the statement of changes in equity.
Format
The balance sheet can be presented in either the report format or the
account format. The report format simply lists the assets, followed by the
liabilities then by the owner's equity in vertical sequence. The account
format lists the assets on the left and the liabilities and owner's equity
on the right. Either balance sheet format is acceptable.
37
Classification
The revised PAS No. 1 does not prescribe the order or format in which an
entity presents items in the statement of financial position; what is
required is the current and non-current distinction for assets and
liabilities. Assets can be presented current then non-current, or vice
versa. Liabilities and equity can be presented current liabilities then
non-current liabilities then equity, or vice versa.
It is proper to present a classified balance sheet; that is, the assets and
liabilities are Separated into various categories. Assets are sub-
classified as current assets and noncurrent assets; while liabilities as
current liabilities and non-current liabilities. At this point, it is
advisable to review the definitions of the foregoing (refer to Chapter 2).
Classifying a balance sheet aids in the analysis of financial statement
data.
When presentation based on liquidity provides accounting information that

is reliable and more relevant to decision-makers then an entity shall
present all assets and liabilities in order of liquidity. For example,
 Assets are classified and presented in decreasing order of liquidity.

Cash is the most liquid. Assets that are least likely to be converted to
cash are listed last.
 Liabilities are generally classified and presented based on time of

maturity such that obligations which are currently due are listed first.
It can be observed in Exhibit 5-7 that the total assets of P546,700 in the
balance sheet does not tally with the total debits of P565,700 in the
balance sheet columns of the worksheet in Exhibit 5-4. Likewise, the total
liabilities and owner's equity do not equal the total credits in the same
exhibit. The reason for these differences is that accumulated depreciation
and withdrawals are subtracted from their related accounts in the balance
sheet but added in their respective columns in the worksheet. The
classified balance sheet of Weddings "R"Us in report format is:
38
Weddings "R" Us
May 31, 2018
Assets
Current Assets
Cash P 22,200
Accounts Receivable 17,300
Supplies 15,000
Prepaid Rent 4,000
Total Current Assets P 71,700
Noncurrent Assets
Service Vehicles P 420,000
Office Equipment P 60,000
Total Property and Equipment 475,000
Total Assets P 546,700
Liabilities
Current Liabilities
Notes Payable P 210,000
Accounts Payable 53,000
Utilities Payable 1,400
Unearned Referral Revenues 6,000
Total Current Liabilities P 275,700
Owner's Equity
Perez-Manalo, Capital, 5/31/2018 271,000
Total Liabilities and Owner's Equity P 546,700
Exhibit 5-7 Statement of Financial Position
Video Reference:
https://www.youtube.com/watch?v=xvaLRjGlKqI
https://www.youtube.com/watch?v=KLuJDY9RASw
The statement of cash flows provides information about the cash receipts
and cash payments of an entity during a period. It is a formal statement
that classifies cash receipts (inflows) and cash payments (outflows) into
operating, investing and financing activities. This statement shows the net
increase or decrease in cash during the period and the cash balance at the
end of the period; it also helps project the future net cash flows of the
entity. The discussion below gives an overview of some important concepts
involved in the preparation of the cash flow statement.
39
Cash Flows from Operating Activities
Operating activities generally involve providing services, and producing

and delivering goods. Cash flows from operating activities are generally
the cash effects of transactions and other events that enter into the
determination of profit or loss. This cash flow can be presented using
either the direct or the indirect method.
Using the direct method, the entity's net cash provided by (used in)
operating activities is obtained by adding the individual operating cash
inflows and then subtracting the individual operating cash outflows.
The indirect method derives the net cash provided by (used in) operating
activities by adjusting profit for income and expense items not resulting
from cash transactions. The adjustment begins with profit followed by the
addition of expenses and charges (e.g. depreciation) that did not entail
cash payments. Then, increases in current assets and decreases in current
liabilities involved in the determination of profit but which did not
actually increase or decrease cash, are subtracted from profit. Finally,
decreases in current assets and increases in current liabilities are added
to profit to obtain net cash provided by (used in) operating activities.
Profit P XXXXX
Adjustments for:
Non-Cash Expenses (e.g. Depreciation) XXXXX
Increases in Current Asset Accounts (XXXXX)
Decreases in Current Liability Accounts (XXXXX)
Decreases in Current Asset Accounts XXXXX
Increases in Current Liability Accounts XXXXX
Cash Flows from Operating Activities XXXXX
For example, increases in accounts receivable from sale of services or

goods represented an increase in profit without the corresponding increase
in cash--for it is still a receivable. Since these revenues are already
included in the computation of profit, the increase in accounts receivable
should be deducted from the profit figure. To illustrate further, assume
that salaries payable increased. Increases in salaries payable meant that
the entity did not pay the full amount of salaries expense for the period.
The expense in the income statement, for cash flow purposes, is overstated
by the amount of unpaid salaries. If expense is overstated, then profit is
understated by the same amount; hence, the increase in current liability is
added to profit.
Per Philippine Accounting Standards (PAS) No. 7, enterprises are encouraged

to report cash flows from operating activities using the direct method but
the indirect method is acceptable. Only the direct method is illustrated
here. The following are the major classes of operating cash flows using the
direct method:
Cash Flows from Operating Activities
Cash Inflows
 receipts from sale of goods and performance of services
 receipts from royalties, fees, commissions and other revenues
Cash Outflows
 payments to suppliers of goods and services
 payments to employees
 payments for taxes
 payments for interest expense
40
 payments for other operating expenses
Cash Flows from Investing Activities
Investing activities include making and collecting loans; acquiring and

disposing of investments in debt or equity securities; and obtaining and
selling of property and equipment and other productive assets.
Cash Inflows
 receipts from sale of property and equipment
 receipts from sale of investments in debt or equity securities
 receipts from collections on notes receivable
Cash Outflows
 payments to acquire property and equipment
 payments to acquire debt or equity securities
 payments to make loans to others generally in the form of 'notes
receivable
Cash Flows from Financing Activities
Financing activities include obtaining resources from owners and creditors.
Cash Inflows
 receipts from investments by owners
 receipts from issuance of notes payable
Cash Outflows
 payments to owners in the form of withdrawals
 payments to settle notes payable
41
Weddings "R" Us
Cash Flows from Operating Activities:

Cash received from clients P 60,400
Payments to suppliers - 10,000
{ayments to employees - 13,800
Payments for office rent - 8,000
Payments for insurance - 14,400
Payments for utilities - 3,000
Net cash provided by (used in) operating Activities P 11,200
Cash Flows from Investing Activities:
Payments to acquire service vehichle P - 420,000
Payments to acquire office equipment - 15,000
Net cash provided by (used in) investing Activities - 435,000
Cash Flows from Financing Activities:
Cash received as investments by owner P 250,000
Cash received from borrowings 210,000
Payments for withdrawals by owner - 14,000
Net cash provided by (used in) financing Activities 446,000
Net Increase (Decrease) in Cash 22,200
Cash balance at the beginning of the period -
Cash balance at the end of the period P 22,200
Exhibit 5-8 Statement of Cash Flows
Video Reference
https://www.youtube.com/watch?v=vfehsJMMIgc
RELATIONSHIPS AMONG THE FINANCIAL STATEMENTS
The financial statements are based on the same underlying data and are
fundamentally The following shows the basic interrelationships among the
financial related. statements:
Date at the Beginning of Period Date at the End of Period
Statement of Financial Position Statement of Financial Position
Statement of Income
1. The income statement reports all income and expenses during the period.
The profit or loss is the final figure in this statement.
42
2. The statement of changes in equity considers the profit or loss figure
from the income statement as one of the determining factors that
explains the change in owner's equity.
3. The statement of financial position reports the ending owner's equity,

taken directly from the statement of changes in equity.
4. The statement of cash flows reports the net increase or decrease in cash
during the period and ends with the cash balance reported in the balance
sheet.
V. Topic Summary
 A worksheet is an analytical device used to facilitate the gathering of

data for adjustments, the preparation of financial statements, and
closing entries.
 The financial statements are the means by which information accumulated
and processed in financial accounting is periodically communicated to
the users. The financial statements are the end products of the
accounting process.
 The statement of financial position or balance sheet shows the assets,
liabilities and equity of a business as at a specific period.
 The statement of income or income statement shows the income and
expenses and consequently, the profit or loss of a business at the end
of an accounting period.
 The statement of changes in equity or statement of equity presents a
summary of the changes in capital such as investments, profit or loss,
and withdrawals during a specific period.
 The statement of cash flows reports the amount of cash received and
disbursed during the period.
 Notes to Financial Statements provide narrative descriptions or
disaggregation of items presented in the financial statements and
information about items that do not qualify for recognition in the
statements.
 Accounting policies are the specific principles, bases, conventions,
rules and practices adopted by an enterprise in preparing and presenting
financial statements.
VI. References
43
Lesson 3
Completing the Accounting Cycle
Learning Outcomes:
After studying this chapter, you should be able to:

1. explain why temporary accounts are closed each period;
2. recognize the need for a post-closing trial balance and reversing
entries in particular instances;
3. prepare and post adjusting entries, closing entries and reversing
entries; and
4. prepare a post-closing trial balance.
I. Pre-Assessment
Name: _____________________________________ Time: _______________________

1. If the post-closing trial balance does not balance, then the error(s)
definitely occurred at some point during the closing process.
2. All nominal accounts must be closed before the Income Summary account
can be closed.
3. The post-closing trial balance will have fewer accounts than the
adjusted trial balance.
4. The balances of all the accounts that appear on a balance sheet are
the same on the adjusted trial balance as they are on a post-closing
trial balance.
5. The post-closing trial balance will contain only real accounts.
6. The post-closing trial balance contains asset, liability, withdrawal
and capital accounts.
7. A reversing entry is a journal entry which is the exact opposite of a
related adjusting entry made at the end of the period.
8. Post-closing trial balance tests the equality of the accounts after
the adjustments and the closing entries are posted.
9. Supplies Expense is a temporary account.
10. During the closing process, revenues are transferred to the credit
side of the Income Summary account.
11. The income summary account is used to close the income and expense
accounts.
12. The balance of the owner's capital account represents the cumulative
net result of income, expense and withdrawal transactions.
13. Closing entries clear income and expense accounts at the end of the
period.
14. In the accounting cycle, information from source documents is
initially recorded in the journal.
15. Nominal account balances are reduced to zero by closing entries.
16. The only accounts that are closed are income statement accounts.
17. Closing entries result in the transfer of profit or loss into the
owner's Capital account.
18. After all closing entries have been entered and posted, the balance of
the Income Summary account will be zero.
19. Depreciation Expense-Building is a temporary account.
20. Withdrawals is a temporary account.
44
II. Lesson Map
• Adjusting Journal Entries are Journalized and

Step 7 Posted to the General Ledger.
• Closing Journal Entries are Journalized and

• Preparation of Post-Closing Trial Balance.

Step 9
• Reversing Journal Entries are Journalized and

The 10 Accounting Cycle is completed in this Lesson. In Step 7, the formal

preparation of the Adjusting Journal Entries is done here, but the detailed
discussion is presented in Lesson 1 on this module. Notice that all journal
entries are always recorded in the general ledger to keep the books updated
and the account balances should be reflective of the amounts shown in the
financial statements.
III. Core Content
ENGAGE
Name: _____________________________________ Time: _______________________
Instructions: Encircle the number of your choice. (2pts each)
1. Which of the following accounts could appear in an adjusting entry,

closing entry and reversing entry?
a. Interest Income
b. Salaries Payable
c. Depreciation Expense-Buildings
d. Accumulated Depreciation-Buildings
2. When an entity has earned a profit, the profit amount is entered on

the work sheet
a. debit side of the Income Statement columns and the credit side of
the Balance Sheet columns.
b. credit side of the Income Statement columns and the debit side of
c. debit side of both the Income Statement and the Balance Sheet
columns.
d. credit side of both the Income Statement and the Balance Sheet
columns.
45
3. Probably the last account to be listed on a post-closing trial
balance would be
a. Salaries Payable.
b. Salaries Expense.
c. Owner's Capital
d. Income Summary.
4. When there is a loss, the entry to close the Income Summary account
is
a. debit Loss and credit Income Summary.
b. debit Owner's Capital and credit Income Summary.
c. debit Income Summary and credit Loss.
d. debit Income Summary and credit Owner's Capital
5. On the completed work sheet, which set of columns usually should be

out of balance after the initial footing?
a. Balance Sheet columns only
b. Adjusted Trial Balance columns only
c. Income Statement columns only
d. Both Income Statement and Balance Sheet columns
6. The post-closing trial balance contains

a. real accounts only.
b. nominal accounts only.
c. both real accounts and nominal accounts.
d. neither real accounts nor nominal accounts.
7. In which financial statement does Income Summary appear?

a. Income statement
b. Statement of changes in equity
c. Balance sheet
d. It does not appear in any financial statement.
8. When an entity has suffered a loss, the loss amount is entered on the
work sheet on the
a. debit side of the Income Statement columns and the credit side of
b. credit side of the Income Statement columns and the debit side of
c. debit side of both the income Statement and the Balance Sheet
columns.
d. credit side of both the income Statement and the Balance Sheet
columns.
9. An important purpose of closing entries is to

a. adjust the accounts in the ledger
b. set nominal account balances to zero at the start of the next
period.
c. set real account balances to zero at the start of the next period.
d. help in preparing financial statements.
10. Which of the following sequences of documents or records describes

the proper sequence in the accounting cycle?
a. Source documents, ledger, journal, financial statements
b. Journal, source documents, ledger, financial statements
c. Source documents, journal, ledger, financial statements
d. Ledger, source documents, journal, financial statements
11. Closing entries will

a. increase the Owner's Capital balance.
b. decrease the Owner's Capital balance.
46
c. not affect the Owner's Capital balance.
d. either increase or decrease the Owner's Capital balance.
12. Which of the following accounting cycle steps comes before the
others?
a. The financial statements are prepared.
b. Closing entries are recorded and posted.
c. Source documents are analyzed.
d. Adjusting entries are recorded and posted.
13. Closing entries ultimately will affect

a. total liabilities
b. the Cash account
c. total assets.
d. the Owner's Capital account.
14. If no adjustments are needed for a particular entity, its

a. post-closing trial balance will be identical to its trial balance.
b. adjusted trial balance will be identical to its post-closing trial
balance.
c. trial balance will be identical to its adjusted trial balance.
d. trial balance, adjusted trial balance, and post-closing trial
balance will be identical
15. Which of the following accounts is not closed during the closing
process?
a. Income Summary
b. Owner's Capital
c. Commissions Revenues
d. Owner's Withdrawals
16. Which of the following could not possibly be a closing entry?

a. Debit Income Summary and credit Owner's Capital
b. Debit Owner's Capital and credit Owner's Withdrawals
c. Debit Income Summary and credit Owner's Withdrawals
d. Debit Owner's Capital and credit Income Summary
17. In preparing closing entries, which of the following columns of the

work sheet are the most helpful?
a. Adjustments columns
b. Adjusted Trial Balance columns
c. Income Statement columns
d. Balance Sheet columns
18. The primary objective of reversing entries is to

a. correct errors.
b. simplify the bookkeeping associated with accruals from the prior
period.
c. transfer the balance of the expense accounts to the Owner's
Capital account and set the accounts equal to zero.
d. place the expenses for the current period in the proper accounts.
19. Which of the following comes last in the accounting process?

a. Preparation of a post-closing trial balance
b. Preparation of an adjusted trial balance
c. Worksheet preparation
d. Journalizing external transactions
20. Which of the following accounts will appear on the post-closing

trial balance?
a. Building
47
b. Depreciation expense – building
c. Owner’s withdrawals
d. Service revenues
EXPLORE
Name: _____________________________________ Time: _______________________
Instructions: Prepare the following: 1) Closing Journal Entries; 2) Post-

Closing Trial Balance; 3) Statement of Income; 4) Statement of Changes in
Equity; and 5) Statement of Financial Position. Write your answers to
numbers 3, 4, and 5 in a yellow paper and for numbers 1 and 2 should be
written on the attached journal paper. (100 Pts)
Mr. Edgar Mortiz, Jr. CPA is the accountant of Dapital Parts and
stevedoring Services, owned and managed by Mr. Rey Tuozo, has prepared the
following account balances in November 2019:
Real Accounts: Nominal Accounts:
Cash in Bank 340,000 Service Income 525,630

Petty Cash Fund 1,500 Salaries and Wages 190,000
Accounts Receivable 85,000 Taxes and Licenses 7,050
Porklift Equipment 1,200,000 Interest Expense 87,000
Accounts Payable 6,300 Wharfage Expense 51,270
Notes Payable 250,000 Fuel and Oil 65,565
SSS Premiums Payable 4,713 Utilities Expense 41,257
Philhealth Premium Payable 1,129 SSS Contributions 1,333
Tuozo, Capital 1,297,765 Philhealth Contributions 562
Tuozo, Withdrawals 15,000
1) Closing Journal Entries:

Page 1

1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
19 19
20 20
48
2) Post-Closing Trial Balance:
1 1
2 2
3 3
4 4
5 5
6 6
7 7
8 8
9 9
10 10
11 11
12 12
13 13
14 14
15 15
16 16
17 17
18 18
19 19
20 20
21 21
22 22
23 23
24 24
25 25
26 26
27 27
28 28
29 29
30 30
31 31
32 32
33 33
34 34
35 35
36 36
37 37
38 38
39 39
40 40
41 41
42 42
43 43
44 44
45 45
46 46
47 47
48 48
49 49
50 50
49
EXPLAIN
ADJUSTMENTS ARE JOURNALIZED AND POSTED (Step 7)
The adjustment process is a key element of accrual basis accounting. The

worksheet helps in the identification of the accounts that need
adjustments. The adjusting entries are directly entered in the worksheet.
Most accountants prepare the financial statements immediately after
completing the worksheet. The adjustments are journalized and posted as the
closing entries are made. This step in the accounting cycle brings the
ledger into agreement with the data reported in the financial statements.
Illustration. The adjustments pertinent to the Weddings “R” Us illustration

follow:
Page 1

1 2018 1
2 May 31 Rent Expense 530 4 0 0 0 2
3 Prepaid Rent 140 4 0 0 0 3
4 4
5 31 Insurance Expense 540 1 2 0 0 5
6 Prepaid Insurance 150 1 2 0 0 6
7 7
8 31 Supplies Expense 520 3 0 0 0 8
9 Supplies 130 3 0 0 0 9
10 10
11 31 Depreciation Expense - Service Vehicle 560 4 0 0 0 11
12 Accumulated Depreciation - Service Vehicle 165 4 0 0 0 12
13 13
14 31 Depreciation Expense - Office Equipment 570 1 0 0 0 14
15 Accumulated Depreciation - Office Equipment 175 1 0 0 0 15
16 16
17 31 Unearned Referral Revenues 260 4 0 0 0 17
18 Referral Revenues 420 4 0 0 0 18
19 19
20 31 Salaries Expense 510 1 8 0 0 20
21 Salaries Payable 230 1 8 0 0 21
22 22
23 31 Interest Expense 590 3 5 0 0 23
24 Interest Payable 250 3 5 0 0 24
25 25
26 31 Accounts Receivable 120 5 3 0 0 26
27 Consulting Revenues 410 5 3 0 0 27
28 28
CLOSING ENTRIES ARE JOURNALIZED AND POSTED (Step 8)
Income, expense and withdrawal accounts are temporary accounts that

accumulate information related to a specific accounting period. These
temporary accounts facilitate income statement preparation. At the end of
each year, the balances of these temporary accounts are transferred to the
capital account. Thus, the balance of the owner's capital account
represents the cumulative net result of income, expense, and withdrawal
transactions. This phase of the cycle is called the closing procedure.
50
A temporary account is said to be closed when an entry is made such that
its balance becomes zero. Closing simply transfers the balance of one
account to another account In this case, the balances of the temporary
accounts are transferred to the capital account. A summary account-Income
Summary is used to close the income and expense accounts. The steps in
closing the accounts of an entity will be illustrated using the Weddings
"R" Us case.
1. Close the income accounts
Income accounts have credit balances before the closing entries are
posted. For this reason, an entry debiting each revenue account in the
amount of its balance is needed to close the account. The credit is made
to the income summary account. The entry to close the income accounts
for the Weddings "R" Us is as follows:
1 2018 1
2 May 31 Consulting Revenues 410 6 7 7 0 0 2
3 Referral Revenues 420 4 0 0 0 3
4 Income Summary 330 7 1 7 0 0 4
5 5
The dual effect of the entry is to make the balances of the income
accounts equal to zero, and to transfer the balances in total to the
credit side of the income summary account. Note that the data for
closing the income accounts can be found in the credit side of the
income statement columns of the worksheet in Exhibit 5-4.
2. Close the expense accounts
Expense accounts have debit balances before the closing entries are
posted. For this reason, a compound entry is needed crediting each
expense account for its balance and debiting the income summary for the
total. These data can be found in the debit side of the income statement
columns of the worksheet.
5 2018 5
6 May 31 Income Summary 330 3 6 7 0 0 6
7 Salaries Expense 510 1 5 6 0 0 7
8 Supplies Expense 520 3 0 0 0 8
9 Rent Expense 530 4 0 0 0 9
10 Insurance Expense 540 1 2 0 0 10
11 Utilities Expense 550 4 4 0 0 11
12 Depreciation Expense-Service Vehicle 560 4 0 0 0 12
13 Depreciation Expense-Office Equipment 570 1 0 0 0 13
14 Interest Expense 590 3 5 0 0 14
15 15
The effect of posting the closing entry is to reduce the expense account
balances to zero and to transfer the total of the account balances to
the debit side of the income summary account.
3. Close the income summary account
After posting the closing entries involving the income and expense
accounts, the balance of the income summary account will be equal to the
51
profit or loss for the period. A profit is indicated by a credit balance
and a loss by a debit balance. The income summary account, regardless of
the nature of its balance, must be closed to the capital account. For
the Weddings "R" Us, the entry is as follows:
16 2018 16
17 May 31 Income Summary 330 3 5 0 0 0 17
18 Perez-Manalo, Capital 310 3 5 0 0 0 18
19 19
The effect of posting this closing entry is to close the income summary
account balance and to transfer the balance to Perez-Manalo's capital
account for the profit.
4. Close the withdrawal account
The withdrawal account shows the amount by which capital is reduced

during the period by withdrawals of cash or other assets of the business
by the owner for personal use. For this reason, the debit balance of the
withdrawal account must be closed to the capital account as follows:
20 2018 20
21 May 31 Perez-Manalo, Capital 310 1 4 0 0 0 21
22 Perez-Manalo, Withdrawals 320 1 4 0 0 0 22
23 23
The effect of posting this closing entry is to close the withdrawal

account and to transfer the balance to the capital account.
Video Reference:
https://www.youtube.com/watch?v=we8xi60y6H0
PREPARATION OF A POST-CLOSING TRIAL BALANCE (Step 9)
It is possible to commit an error in posting the adjustments and closing

entries to the ledger accounts; thus, it is necessary to test the equality
of the accounts by preparing a new trial balance. This final trial balance
is called a post-closing trial balance.
 The post-closing trial balance verifies that all the debits equal the
credits in the trial balance.
 The trial balance contains only balance sheet items such as assets,
liabilities, and ending capital because all income and expense accounts,
as well as the withdrawal account, have zero balances.
Notice that only the balance sheet accounts have balances because at this
point, all the income statement accounts have been closed.
52
Weddings "R" Us
Post-Closing Trial Balance

1 May 31, 2018 1
2 2
3 3
4 Cash 2 2 2 0 0 4
5 Accounts Receivable 1 7 3 0 0 5
6 Supplies 1 5 0 0 0 6
7 Prepaid Rent 4 0 0 0 7
8 Prepaid Insurance 1 3 2 0 0 8
9 Service Vehicle 4 2 0 0 0 0 9
10 Accumulated Depreciation-Service Vehicle 4 0 0 0 10
11 Office Equipment 6 0 0 0 0 11
12 Accumulated Depreciation-Office Equipmnet 1 0 0 0 12
13 Notes Payable 2 1 0 0 0 0 13
14 Accounts Payable 5 3 0 0 0 14
15 Salaries Payable 1 8 0 0 15
16 Utilities Payable 1 4 0 0 16
17 Interest Payable 3 5 0 0 17
18 Unearned Referral Revenues 6 0 0 0 18
19 Perez-Manalo, Capital 2 7 1 0 0 0 19
20 Totals 5 5 1 7 0 0 5 5 1 7 0 0 20
21 21
Video Reference:
https://www.youtube.com/watch?v=ohMXtnEEtNc
REVERSING ENTRIES (Step 10)
Preparing the post-closing trial balance may not be the last step in the
accounting cycle. Some entities elect to reverse certain end-of-period
adjustments on the first day of the new period. A reversing entry is a
journal entry which is the exact opposite of a related adjusting entry made
at the end of the period. It is basically a bookkeeping technique made to
simplify the recording of regular transactions in the next accounting
period.
It should be emphasized that reversing entries are optional. Also, the act
of reversing a previously recorded adjusting entry should not lead us to
the conclusion that the entries reversed are unnecessary or inaccurate.
Even when an entity follows the policy of making reversing entries, not all
adjusting entries should be reversed. Generally, a reversing entry should
be made for any adjusting entry that increased an asset or a liability
account. Therefore, all accruals are reversed but only deferrals initially
recorded in income statement-income or expense-accounts are reversed.
Using the summary of adjusting entries in Chapter 5, the veracity of the

general rule stated in the previous paragraph can be proven. For example,
in the case of a prepaid expense initially recorded in an expense account,
the adjusting entry debited an asset- prepaid expense. An asset increased;
hence, applying the general rule, this adjustment can be reversed.
53
After analyzing the rest of the adjusting entries, the adjustments that can
be reversed are as follows: prepaid expenses (expense method), unearned
revenues (income method), accrued expenses and accrued revenues.
Illustration. To show how reversing entries can be helpful, consider the

adjusting entry made in the records of Weddings "R" Us to accrue salaries
expense:
23 2018 23
24 May 31 Salaries Expense 1 8 0 0 24
25 Salaries Payable 1 8 0 0 25
26 26
When the employees are paid on the next regular payday, the entry would be:
2018 27
June 10 Salaries Payable 1 8 0 0 28
Salaries Expense 5 4 0 0 29
Cash 7 2 0 0 30
31
Note that when the payment is made, without a prior reversing entry, the
accountant must look into the records to find out how much of the P7,200
applies to the current accounting period and how much was accrued at the
beginning of the period.
This step may appear easy in this simple case, but think of the problems
that may arise if the company has many employees, especially if some of
them are paid on different time schedules such as weekly or monthly. A
reversing entry is an accounting procedure that helps to solve this
difficult problem. As noted above, a reversing entry is exactly what its
name implies. It is a reversal of the adjusting entry made. For example,
observe the following sequence of transactions and their effects on the
ledger account-salaries expense:
1. Adjusting Entry
2018 32
May 31 Salaries Expense 1 8 0 0 33
Salaries Payable 1 8 0 0 34
35
2. Closing Entry
2018 36
May 31 Income Summary 1 5 6 0 0 37
Salaries Expense 1 5 6 0 0 38
39
3. Reversing Entry
2018 40
June 1 Salaries Payable 1 8 0 0 41
Salaries Expense 1 8 0 0 42
43
54
4. Payment Entry
2018 44
June 10 Salaries Expense 7 2 0 0 45
Cash 7 2 0 0 46
47
These transactions had the following effects on salaries expense:
a. Adjusted salaries expense to accrue P1,800 in the proper accounting

period.
b. Closed the P15,600 in total salaries expense for May to income summary.
c. Established a credit balance of P1,800 on June 1 in salaries expense

equal to the expense recognized through the adjusting entry on May 31.
The liability account salaries payable was reduced to a zero balance.
d. Recorded the P7,200 payment of two weeks' salaries in the usual manner.
The reversing entry has the effect of leaving a balance of P5,400
(P7,200 - P1,800) in the salaries expense account. This P5,400 balance
represented the salaries expense for the nine workdays in June.
Making the payment entry was simplified by the reversing entry. Reversing
entries apply to all accrued expenses or revenues.
Video Reference:
https://www.youtube.com/watch?v=8H9LXXLIf_E
Sample Problem of Dr. Nick Marasigan (Continuation):
55
The Adjusting Journal Entries:
ADJUSTING JOURNAL ENTRIES (General Journal Page 3)
a Oct 31 Insurance Expense 1,667

To recognize the expired portion of the
account for the period.
b 31 Supplies Expense 35,000

Medical Supplies 35,000
To recognize the amount of supplies used
for the period.
c 31 Depreciation Expense - Medical Building 5,000

Accumulated Depreciation-Medical Building 5,000
To recognize the depreciation charges for the
period.
31 Derpeciation Expense - Medical Equipment 9,000

Accumulated Depreciation - Medical Equipment 9,000
To recognize the depreciation charges for the
period.
d 31 Unearned Research Revenues 30,000

Research Revenues 30,000
To recognize the earned portion of the account
for the period.
e 31 Salaries Expense 51,000

To recognize the accrued salaries for the
period.
f 31 Interest Expense 28,000

To recognize the accrued interest for the
period.
56
Worksheet:
Harvard Medical Center

Worksheet
For the Year Ended October 31, 2019
Trial Balance Adjustments Adjusted Trial Balance Income Statementtatement of Financial Positi
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash 134,000 134,000 134,000
Accounts Receivables 204,000 204,000 204,000
Medical Supplies 56,000 b 35,000 21,000 21,000
Prepaid Insurance 20,000 a 1,667 18,333 18,333
Land 250,000 250,000 250,000
Medical Building 1,000,000 1,000,000 1,000,000
Accumulated Depreciation - Medical Building c 5,000 5,000 5,000
Medical Equipment 465,000 465,000 465,000
Accumulated Depreciation - Medical Equipment c 9,000 9,000 9,000
24% Notes Payable 400,000 400,000 400,000
20% Notes Payable 1,200,000 1,200,000 1,200,000
Accounts Payable 69,000 69,000 69,000
Salaries Payable e 51,000 51,000 51,000
Interest Payable f 28,000 28,000 28,000
Unearned Research Revenues 90,000 d 30,000 60,000 60,000
Marasigan, Capital 250,000 250,000 250,000
Marasigan, Withdrawals 200,000 200,000 200,000
Income Summary 220,333 220,333
Medical Revenues 434,000 434,000 434,000
Research Revenues d 30,000 30,000 30,000
Salaries Expense 73,000 e 51,000 124,000 124,000
Insurance Expense a 1,667 1,667 1,667
Repairs Expense 23,000 23,000 23,000
Supplies Expense b 35,000 35,000 35,000
Association Dues Expense 15,000 15,000 15,000
Telephone Expense 3,000 3,000 3,000
Depreciation Expense - Medical Building c 5,000 5,000 5,000
Depreciation Expense - Medical Equipment c 9,000 9,000 9,000
Interest Expense f 28,000 28,000 28,000
Totals 2,443,000 2,443,000 159,667 159,667 2,536,000 2,536,000 464,000 464,000 2,292,333 2,292,333
57
The Basic Financial Statements:

Statement of Income
Revenues
Medical Revenues P 434,000
Total Revenues P 464,000
Less Operating Expenses:
Repairs Expense 23,000
Association Dues Expense 15,000
Telephone Expense 3,000
Depreciation Expense - Medical Building 5,000
Depreciation Expense - Medical Equipment 9,000
Total Operating Expenses 243,667
NET INCOME P 220,333

Marasigan, Capital Beginning P -

Add: Initial Investment P 250,000
Net Income 220,333 470,333
Total 470,333
Less: Withdrawals 200,000
Marasigan, Capital End P 270,333
58
For the Month Ended October 31, 2019
Cash Flows from Operating Activities:

Net Income P 220,333
Adjustments to reconcile net income to net cash operating activities:
Changes in operating assets and liabilities:
Increase in accounts receivable (204,000)
Increase in medical supplies (21,000)
Increase in prepaid insurance (18,333)
Increase in 24% notes payable 400,000
Increase in accounts payable 69,000
Increase in salaries payable 51,000
Increase in interest payable 28,000
Increase in unearned research revenues 60,000
Net cash provided by (used in) operating activities 599,000
Cash Flows from Investing Activities:
Acquisition of Land (250,000)
Acquisition of medical building (1,000,000)
Acquisition of medical equipment (465,000)
Net cash provided by (used in) investing activities (1,715,000)
Cash Flows from Financing Activities:
24% notes payable secured 1,200,000
Initial investment of Nick Marasigan 250,000
Withdrawal of Nick Marasigan (200,000)
Net cash provided by (used in) financing activities 1,250,000
Net increase (decrease) in cash 134,000
Add: Cash, Beginning
Cash, October 31, 2019 P 134,000
59
As of October 31, 2019
ASSETS
Current Assets
Cash P 134,000
Accounts Receivables 204,000
Total Current Assets P 377,333
Noncurrent Assets
Land 250,000
Medical Building P 1,000,000
Medical Equipment 465,000
Total Noncurrent Assets 1,701,000
TOTAL ASSETS P 2,078,333
LIABILITIES AND CAPITAL
Current Liabilities
24% Notes Payable P 400,000
Unearned Research Revenues 60,000
Total Current Liabilities P 608,000
Noncurrent Liabilities
24% Notes Payable 1,200,000
Total Noncurrent Liabilities 1,200,000
TOTAL LIABILITIES P 1,808,000
Owner's Equity
Marasigan, Capital 270,333
TOTAL LIABILITIES AND CAPITAL P 2,078,333
60
CLOSING JOURNAL ENTRIES (General Journal Page 4)
1. To close income/revenues account to income summary account

1 Oct 31 Medical Revenues 434,000
Income Summary 464,000
2. To close expense accounts to income summary account

2 Oct 31 Income Summary 243,667
Repairs Expense 23,000
Association Dues Expense 15,000
Telephone Expense 3,000
3. to close income summary account to capital account

3 Oct 31 Income Summary 220,333
4. To close withdrawal account to capital account

4 Oct 31 Marasigan, Capital 200,000
Marasigan, Withdrawals 200,000
61
Post-Closing Trial Balance
Account Titles Debit Credit

Cash 134,000
Accounts Receivables 204,000
Land 250,000
Medical Building 1,000,000
Accumulated Depreciation - Medical Building 5,000
Medical Equipment 465,000
Accumulated Depreciation - Medical Equipment 9,000
24% Notes Payable 400,000
20% Notes Payable 1,200,000
Unearned Research Revenues 60,000
Totals 2,092,333 2,092,333
REVERSING JOURNAL ENTRIES (General Journal Page 5)

2019
a Nov 1 Salaries Payable 51,000
b Nov 1 Interest Payable 28,000

62
110 Cash Page 1
Date Particulars P. R. Debit Credit Balance
1 Balacnce Forwarded 1
2 Oct 1 GJ1 250000 2 5 0 0 0 0 2
3 1 GJ1 50000 2 0 0 0 0 0 3
4 1 GJ1 59000 1 4 1 0 0 0 4
5 4 GJ1 117000 2 5 8 0 0 0 5
6 10 GJ1 73000 1 8 5 0 0 0 6
7 12 GJ1 90000 2 7 5 0 0 0 7
8 21 GJ2 23000 2 5 2 0 0 0 8
9 23 GJ2 3000 2 4 9 0 0 0 9
10 25 GJ2 113000 3 6 2 0 0 0 10
11 27 GJ2 13000 3 4 9 0 0 0 11
12 30 GJ2 200000 1 4 9 0 0 0 12
13 30 GJ2 15000 1 3 4 0 0 0 13
120 Accounts Receivable Page 10

2 Oct 18 GJ1 317000 317000 2
3 25 GJ2 113000 204000 3
4 4
130 Medical Supplies Page 16

2 Oct 1 GJ1 39000 39000 2
3 7 GJ1 17000 56000 3
4 31 AJE GJ3 35000 21000 4
140 Prepaid Insurance Page 18

2 Oct 2 GJ1 20000 20000 2
3 31 AJE GJ3 1667 18333 3
150 Land Page 18

2 Oct 1 GJ1 250000 250000 2
3 3
160 Medical Building Page 19

2 Oct 1 GJ1 1000000 1000000 2
3 3
63
165 Accumulated Depreciation - Medical Building Page 20
2 Oct 31 AJE GJ3 5 0 0 0 5 0 0 0 2
170 Medical Equipment Page 21

Date Account Titles and Explanation P. R. Debit Credit Credit
2 Oct 1 GJ1 4 2 0 0 0 0 4 2 0 0 0 0 2
3 24 GJ2 4 5 0 0 0 4 6 5 0 0 0 3
4 4
175 Accumulated Depreciation - Medical Equipment Page 22

2 Oct 31 AJE GJ3 9 0 0 0 9 0 0 0 2
210 24% Notes Payable Page 23

2 Oct 1 GJ1 4 0 0 0 0 0 4 0 0 0 0 0 2
3 3
220 20% Notes Payable Page 24

2 Oct 1 GJ1 1 2 0 0 0 0 0 1 2 0 0 0 0 0 2
3 3
230 Accounts Payable Page 25

2 Oct 2 GJ1 2 0 0 0 0 2 0 0 0 0 2
3 7 GJ1 1 7 0 0 0 3 7 0 0 0 3
4 24 GJ2 4 5 0 0 0 8 2 0 0 0 4
5 27 GJ2 1 3 0 0 0 6 9 0 0 0 5
240 Salaries Payable Page 30

2 31 AJE GJ3 5 1 0 0 0 5 1 0 0 0 2
250 Interest Payable Page 33

2 31 AJE GJ3 2 8 0 0 0 2 8 0 0 0 2
260 Unearned Research Revenues Page 35

2 Oct 12 9 0 0 0 0 9 0 0 0 0 2
3 31 AJE GJ3 3 0 0 0 0 6 0 0 0 0 3
64
310 Marasigan, Capital Page 36
2 Oct 1 GJ1 2 5 0 0 0 0 2 5 0 0 0 0 2
Oct 31 CJE GJ4 2 2 0 3 3 3 4 7 0 3 3 3
Oct 31 CJE GJ4 2 0 0 0 0 0 2 7 0 3 3 3
320 Marasigan,Withdrawals Page 37

2 Oct 30 GJ2 2 0 0 0 0 0 2 0 0 0 0 0 2
3 Oct 31 CJE GJ4 2 0 0 0 0 0 0 3
330 Income Summary Page 38

2 Oct 31 CJE GJ4 4 6 4 0 0 0 4 6 4 0 0 0 2
Oct 31 CJE GJ4 2 4 3 6 6 7 2 2 0 3 3 3
Oct 31 CJE GJ4 2 2 0 3 3 3 0
410 Medical Revenues Page 39

Date Account Titles and Explanation P. R. Debit Credit Credit
2 Oct 4 GJ1 1 1 7 0 0 0 1 1 7 0 0 0 2
3 18 GJ1 3 1 7 0 0 0 4 3 4 0 0 0 3
4 31 CJE GJ4 4 3 4 0 0 0 0 4
420 Research Revenues Page 45

2 31 AJE GJ3 3 0 0 0 0 3 0 0 0 0 2
31 CJE GJ4 3 0 0 0 0 0
510 Salaries Expense Page 46

2 Oct 10 GJ1 7 3 0 0 0 7 3 0 0 0 2
3 31 AJE GJ3 5 1 0 0 0 1 2 4 0 0 0 3
31 CJE GJ4 1 2 4 0 0 0 0
520 Insurance Expense Page 47

2 Oct 31 AJE GJ3 1 6 6 7 1 6 6 7 2
31 CJE GJ4 1 6 6 7 0
530 Repairs Expense Page 48

2 Oct 21 GJ2 2 3 0 0 0 2 3 0 0 0 2
3 31 CJE GJ4 2 3 0 0 0 0 3
65
540 Supplies Expense Page 49
2 Oct 31 AJE GJ3 3 5 0 0 0 3 5 0 0 0 2
31 CJE GJ4 3 5 0 0 0 0
550 Association Dues Expense Page 50

2 Oct 30 GJ2 1 5 0 0 0 1 5 0 0 0 2
3 31 CJE GJ4 1 5 0 0 0 0 3
560 Telephone Expense Page 51

Date Account Titles and Explanation P. R. Debit Credit
2 Oct 23 GJ2 3 0 0 0 3 0 0 0 2
3 31 CJE GJ4 3 0 0 0 0 3
570 Depreciation Expense - Medical Building Page 52

2 Oct 31 AJE GJ3 5 0 0 0 5 0 0 0 2
31 CJE GJ4 5 0 0 0 0
580 Depreciation Expense - Medical Equipment Page 53

2 Oct 31 AJE GJ3 9 0 0 0 9 0 0 0 2
31 CJE GJ4 9 0 0 0 0
590 Interest Expense Page 54

2 31 AJE GJ3 2 8 0 0 0 2 8 0 0 0 2
31 CJE GJ4 2 8 0 0 0 0
V. Topic Summary
 The post-closing trial balance is prepared to check the equality of

debits and credits in the general ledger after closing entries are made.
 The post-closing contains only real accounts or permanent account. These
accounts and their balances appear on the balance sheet or the statement
of financial position.
 The post-closing trial balance is a balance sheet in a trial balance
form.
 Reversing entries are entries usually made on the first day of the next
accounting period. This process is optional for a business to apply.
 Only the adjusting journal entries made for the following may be
reversed: 1) Accruals for income or expense; 2) Prepayments recorded
using the expense method; 3) Advance collections recorded using the
income method.
 Only nominal or temporary accounts or income statement accounts are
closed at the end of an accounting period.
 Income and Expense accounts are closed to Income Summary account.
66
 Withdrawals account is closed to capital account at the end of an
accounting period.
 Income Summary account are closed to capital account.
 Income Summary account with debit balance is closed by debiting capital
account.
 Income Summary account with credit balance is closed by crediting
capital account.
VI. References
67

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Module 4

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Module 4 – The Accounting Cycle – 2

The module is the continuation of the accounting cycle numbers 5 to 10:

After studying this module, the students should be able to:

After studying this chapter, you should be able to:

Instructions: Encircle the corresponding number if the statement is TRUE

1. Failure to record the adjusting entry for accrued salaries results in

III. Lesson Map

Deferred Expenses Deferred Income

Asset Method Expense Method Liability Method Income Method

IV. Core Content

Instructions: Below are terms pertinent to adjusting entries. Match each

Name: _____________________________________ Time: _______________________

Required: Determine the adjustments that were made.

Date Account titles and Explanation P .R. Debit Credit

In cash basis accounting, however, the accountant does not record a

In contrast, if cash basis is used, the hotel will recognize revenues on

Accounting information is valued when it is communicated early enough to be

Accounting periods are generally a month, a quarter or a year. The most

RECOGNITION AND DERECOGNITION

Per 2018 Conceptual Framework, recognition is the process of capturing for

The statement of financial position and statement(s) of financial

(a) the recognition of income occurs at the same time as:

The initial recognition of assets or liabilities arising from transactions

Recognition is appropriate if it results in both relevant information about

Derecognition is the removal of all or part of a recognized asset or

THE NEED FOR ADJUSTMENTS

Accountants make adjusting entries to reflect in the accounts information

In short, adjustments are needed to ensure that the recognition and

Adjusting entries involve changing account balances at the end of the

DEFERRALS AND ACCRUALS

Accountants use adjusting entries to apply accrual accounting to

Each adjusting entry affects a balance sheet account (an asset or a

Deferral is the postponement of the recognition of "an expense already paid

1. Allocating assets to expense to reflect expenses incurred during the

Accrual is the recognition of "an expense already incurred but unpaid", or

1. Accruing expenses to reflect expenses incurred during the accounting

ADJUSTMENTS FOR DEFERRALS (Step 5)

Allocating Assets to Expenses

Some expenses are customarily paid in advance. These expenditures (e.g.

Transaction Expiration of one month's rent.

Analysis Assets decreased. Owner's equity decreased.

Rules Decreases in assets are recorded by credits. Decreases in

Dr. Rent Expense (OE:E) 4,000

Prepaid Insurance (Adj. b). Weddings “R” Us acquired a one-year

Transaction Expiration of one month's insurance.

Analysis Assets decreased. Owner's equity decreased.

Rules Decreases in assets are recorded by credits. Decreases in

Entries Decrease in owner's equity is recorded by a debit to

Dr. Insurance Expense (OE:E) 1,200

The prepaid insurance account has a balance of P13,200 (May 4 prepayment of

Supplies (Adjustment c). On May 8, Weddings "R" Us purchased supplies,

Transaction Consumption of supplies.

Analysis Assets decreased. Owner's equity decreased.

Rules Decreases in assets are recorded by credits. Decreases in

Entries Decrease in owner's equity is recorded by a debit to

Dr. Supplies Expense (OE:E) 3,000

Depreciation of Property and Equipment

When an entity acquires long-lived assets such as buildings, service

1. Asset cost is the amount an entity paid to acquire the depreciable

3. Estimated useful life is the estimated number of periods that an entity

Accountants estimate periodic depreciation. They have developed a number of

The asset account is not directly reduced when recording depreciation

Name: _______________ Time: _