1.

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

2. USERS OF ACCOUNTING INFORMATION

EXTERNAL USERS INTERNAL USERS

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

3. BASIC ACCOUNTING CONCEPTS AND PRINCIPLES

a. Generally Accepted Accounting Principles (GAAP)
-Set of guidelines and procedures that constitute acceptable accounting practice at a
given time.
-Aims to make information relevant (affect users decision-making), reliable (Trusted by
users), and comparable (Contrasting organizations).
b. Principles
1. Measurement/Cost Principle/Historical Cost – Acquired assets should be recorded at
their actual cost.
2. Revenue recognition principle – Revenue is to be recognized in the accounting period
when goods are delivered or services are rendered or performed, not when cash is
collected.
3. Expense recognition principle/Matching principle - Expenses should be recognized in
the accounting period in which goods and services are used up to produce revenue not
when the entity pays for the goods or services.
4. Full disclosure- Requires that all relevant (not all) information that would affect the
user’s understanding be disclosed in the financial statements.
5. Other principles:
Objectivity principle – Accounting records and statements are based on the most reliable
data available. Accounting records are based on information that flows from activities
documented by objective evidence.
Consistency principle - Firms should use the same accounting method from period to
period to achieve comparability.
 c. Assumptions
1. Going concern – Accounting information reflects presumption that the business will
continue operating instead of being closed or sold.
2. Monetary unit – We can express transactions and events in monetary units.
3. Time period – Life of a company can be divided into time periods, e.g. monthly,
annually.
4. Business entity – A business is accounted for separately from other business,
including its owner.
d. Constraints
1. Materiality – prescribes that only information that influences decisions need be
disclosed.
2. Benefit exceeds cost – prescribes that only information with benefits of disclosure
greater than the costs of providing it need be disclosed.

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

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

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

NON-CURRENT ASSETS:
PROPERTY PLANT AND EQUIPMENT (Land, Equipment, Machineries)
INTANGIBLE ASSETS
b. LIABILITY – Present obligation of the enterprise to outside parties arising from past events,
settlement of which is expected to result to an outflow from the enterprise.
-Claims of the creditors from the assets of the company.

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

NON-CURRENT LIABILITIES:
MORTGAGE PAYABLE
BONDS PAYABLE

c. CAPITAL/OWNER’S EQUITY/NET ASSETS – Residual interest in the assets of the

enterprise after deducting all its liabilities.
-Claims of the owners from the assets of the company

a. REVENUES – Sales, Service Revenue/Fees

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

CHART OF ACCOUNTS – A listing of all the accounts and their account numbers in the ledger.
6. ACCOUNTING EQUATION
Assets=Liabilities + Capital
Liabilities= Assets – Capital
Capital= Assets – Liabilities
7. DOUBLE-ENTRY SYSTEM
-For every transaction, there must be at least 2 accounts affected
-Debit and Credit should be equal
RULES OF DEBIT AND CREDIT:
-Debit (DR) is found on the left side of the T-account (Ledger); left most side of the journal entry
-Credit (CR) is found on the right side of the T-account (Ledger); indented part of the journal
entry
-Debit is the normal balance (to record increase) of ASSETS
-Credit is the normal balance (to record increase) of LIABILITIES AND CAPITAL
-To decrease the balance of ASSETS, LIABILITIES AND CAPITAL, just use the opposite of the
its normal balance

NORMAL BALANCE/TO RECORD INCREASE

DR CR CR
ASSETS = LIABILITIES + *CAPITAL
OPPOSITE BALANCE /TO RECORD DECREASE
CR DR DR

*CAPITAL COMPOSITION:

NORMAL ANALYSIS
CAPITAL BALANCE
COMPOSITION (INCREASE)
ASSETS LIABILITIES CAPITAL
Revenue increases
REVENUES (+) (INVESTMENT)
CR capital
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
Expenses decreases
EXPENSES
(+) (-)(-) DR(-) (+) capital (-) (+)
increas decreas
OWNER’S decreas increasDrawing decreases
decreas increas
e
DRAWING e
(-) DRe e capital e e
Investment increases
INVESTMENT (+)
CR capital
OWNER'S
REVENUES EXPENSES DRAWING
DEBIT CREDIT DEBIT CREDIT DEBIT CREDIT
(-) (+) (+) (-) (+) (-)
decreas increas increas decreas increas decreas
e e e e e e

8. ACCOUNTING CYCLE
1. IDENTIFY BUSINESS EVENTS TO BE RECORDED (Gather information through source
documents)
2. ANALYZE THE GIVEN TRANSACTION (Increase or decrease in an account)
3. JOURNALIZE THE TRANSACTIONS in the General Journal (Book of Original entry)
 4. POSTING THE JOURNAL ENTRIES in the General Ledger/T-account (Book of Final
entry)
5. PREPARATION OF UNADJUSTED TRIAL BALANCE to verify the equality of debits and
credits
SIMULATION OF THE ACCOUNTING CYCLE
TRANSACTION: PURCHASE OFFICE EQUIPMENT ON CASH

1 Identify business events

Identified from Purchase order, official receipts

2 Analyze given transaction

Increase in office equipment, decrease in cash

3 Journalize the transaction using General journal

OFFICE EQUIPMENT 500
CASH 500

4 Post the journal entry to General ledger

OFFICE EQUIPMENT CASH

CREDI
DEBIT CREDIT DEBIT T
500 500

5 Preparation of trial balance

DR CR
ASSETS:
OFFICE EQUIPMENT 500
CASH 500
LIABILITIES
CAPITAL
OWNER'S DRAWING
REVENUES
CAPITAL
TOTAL 500 500

Note: Find other examples of transactions

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

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

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

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

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

1. TERMS OF TRANSACTIONS
Credit period - Merchandise may be purchased and sold either on cash or on credit terms.
When goods are sold on account, a credit period is allowed for payment.
n/30 – Invoice is due within 30 days (credit period)
n/eom – Invoice is due at the end of the month
Cash discounts – Encourages prompt payment. Purchase discount for the buyer’s
perspective, Sales discount for the seller’s perspective. It decreases the cash
payment/collection.
-Computed based on the Gross invoice price
-Recorded on the book (Required a journal entry)
2/10 – Customer can avail 2% discount if paid for within 10 days (discount period)
Trade discounts – Encourages buyers to purchase products because of the markdown from the
list price.
-Computed based on the list price
-Not recorded on the book (Do not require a journal entry)
Ex. Merchandise inventory with a list price of 100,000 terms of 3/10, n/eom and trade discounts
of 10%, 15%
100,00
LIST PRICE
0
TRADE
DISCOUNTS:
-10,000
100,000x10%
90,000x15% -13,500
GROSS INVOICE PRICE 76,500
(100,000x90%x85%)

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

SALES – Revenue arising from the sale of merchandise inventory

SALES DISCOUNT - Cash discount on the seller’s perspective, decreases cash collection.
Contra-account to sales.
SALES RETURNS -Return of Merchandise inventory on Seller’s perspective, Decreases
accounts receivable (If initially sold on account/credit) or decreases cash (if initially sold for
cash). Contra account to sales.
COST OF GOODS SOLD –Major expense of a merchandising business. Cost of the inventory
sold to customers.
PURCHASES – Temporary account for merchandise purchased for resale.
PURCHASE DISCOUNTS - Cash discount on the buyer’s perspective, decreases cash
collection. Contra-account to Purchases.
PURCHASE RETURNS - Return of Merchandise inventory on Buyer’s perspective, Decreases
accounts payable (If initially purchased on account/credit) or increases cash (if initially
purchased for cash). Contra account to Purchases.
2. TRANSPORTATION COSTS / FREIGHT – Cost of shipping goods from one place to
another
FOB Shipping Point (Origin/Seller)
 Freight-In account is debited by the buyer
 The buyer should pay the forwarder
FOB Destination (Buyer)
 Freight-Out is recorded by the seller
 It is the seller who should pay the forwarder.

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

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

JOURNAL ENTRIES

FOB SHIPPING, COLLECT

BUYER SELLER
Freight-In No entry
Cash

FOB SHIPPING, PREPAID

Freight-In Accounts Receivable
Accounts Payable Cash

FOB DESTINATION, COLLECT

Accounts Payable Freight-Out

Cash Accounts Receivable

FOB DESTINATION, PREPAID

No entry Freight-Out
Cas
3. NORMAL BALANCES

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

4. INVENTORY SYSTEMS – systems available (Perpetual or Periodic) to merchandising

entities to record events related to merchandise inventory.

DESCRIPTION PERPETUAL PERIODIC

CONTINUOU PERIODICALL
UPDATING OF RECORDS S Y
VOLUME OF
INVENTORIES LOW HIGH
PRICE OF INVENTORIES HIGH LOW

5. JOURNAL ENTRIES (PERIODIC AND PERPETUAL)

Sold merchandise on account costing P8,000 for P10,000; terms of

1 2/10,n/30
Customer returned Merchandise costing P400 that had been sold
2 on account for P500
Received payment from customer for merchandise sold on account (within
3 discount period)
Purchased on account Merchandise for resale for P6,000; terms
4 were 2/10, n/30
Returned merchandise inventory purchased on account costing
5 P300
Paid for the mechandise purchased on account (within discount
6 period)
 PERIODIC PERPETUAL

Accounts
1 Accounts receivable 10,000.00 receivable 10,000.00
10,000.0
Sales 10,000.00 Sales 0

Cost of goods
sold 8,000.00
Inventory 8,000.00

Sales returns and Sales returns and

2 allowances 500 allowances 500
Accounts receivable 500 Accounts receivable 500

Inventory 400
Cost of goods sold 400

3 Cash 9,310.00 Cash 9,310.00

Sales discount 190 Sales discount 190
Accounts receivable 9,500.00 Accounts receivable 9,500.00
Discount (10,000- Discount (10,000-
500x.02) 500x.02)

4 Purchases 6000 Inventory 6000

Accounts payable 6000 Accounts payable 6000

5 Accounts payable 300 Accounts payable 300

Purchase returns 300 Inventory 300

6 Accounts payable 5700 Accounts payable 5700

Purchase discounts 114 Inventory 114
Cash 5586 Cash 5586
Discount (6,000-
Discount (6,000-300x.02) 300x.02)
6. SPECIAL JOURNALS – used to record and post similar type of transactions for efficiency
and division of labor.

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

2. CASH RECEIPTS JOURNAL – used to record all receipts of cash (all transactions with
debit cash)
-Purchase returns on cash
-Collections of accounts
3. PURCHASES JOURNAL – used to record all purchases on account/credit.
4. CASH DISBURSEMENTS JOURNAL – used to record all cash payments (all
transactions with credit cash)
-Sales returns on cash
-Payment of accounts
GENERAL JOURNAL – used to record all transactions not found in the special journals (e.g.
adjusting, closing, correcting entries, Sales returns on account and Purchase returns on
account)
SUBSIDIARY LEDGERS – a list of individual accounts with common characteristics. Contains
detailed information on specific accounts on general ledger.
Examples:
Accounts receivable ledger – stores transaction data of individual customers
Accounts payable ledger – stores transaction data of individual suppliers
SAMPLE QUESTIONS:

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

2. It encompasses the process of analyzing, classifying, summarizing and communicating all

transactions involving the receipt and disposition of government funds and property and
interpreting the results thereof
A. Private accounting
B. Public Accounting
C. Government accounting
D. Managerial accounting
ANSWER: C

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

4. What is the purpose of accounting standards?

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

5. An accountant, should treat an entity as continuing in operation indefinitely in the absence of

evidence to the contrary. This accounting assumption is
A. Monetary unit
B. Time period
C. Accounting entity
D. Going concern
ANSWER: D

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

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

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

8. Withdrawals by owners are treated as

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

9. Which of the following is incorrect?

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

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

11. Which of the following is to be credited?

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

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

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

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

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

15. Accrual principle states that

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

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

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

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

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

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

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

20. Financial statements include a statement of financial position, a statement of comprehensive

income, a statement of changes in equity and a statement of cash flows. Which of the following
is also included as a component of financial statements?
A. A statement of retained earnings
B. Accounting policies
C. An auditor’s report
D. A director’s report
ANSWER: B

21. Which accounting principle is being observed when an accountant charges to expense a
cost that contributed to revenue during a period?
A. Revenue realization
B. Matching
C. Monetary unit
D. Conservatism
ANSWER: B

22. Which of the following does not apply to the recognition of revenue for transactions involving
the rendering of services
A. The amount of revenue and the costs incurred and costs to complete can be measured
reliably
B. It is probable that payment for the services shall be received by the entity
C. The significant risks and rewards of ownership have been transferred to the buyer
D. The stage of completion of the transaction at the end of reporting period can be measured
reliably
ANSWER: C
23. An expense is recognized immediately in the income statement
I. When an expenditure produces no future economic benefits
II. When cost incurred ceases to qualify for recognition as an asset in the statement of financial
position
A. I only
B. II only
C. Either I or II
D. Neither I nor II
ANSWER: C

24. An income is recognized when

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

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

26. Financial information exhibits consistency when

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

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

28. Double entry system means

A. Only two accounts are affected by each transaction recording
B. A transaction is recorded twice, once in the journal and the other in the ledger
C. For every asset increased, a revenue or liability must also be increased
D. At least two accounts are affected by each transaction recording
ANSWER: D
29. Which of the following is not a possible combination of a journal entry?
A. increase in asset and increase in liability
B. Decrease in equity and increase in liability
C. Decrease in liability and decrease in asset
D. Increase in asset and decrease in equity
ANSWER: D

30. The ledger account shows the following

Accounts receivable P250, 000
Accounts Payable P200, 000
Capital P100, 000
Cash ?
Expenses P350, 000
Revenues P500, 000
What is the balance of cash?
A. P150, 000
B. P250, 000
C. P200, 000
D. P450, 000
ANSWER: C
31. The following are accounts taken from the books of Tiger Advertising Agency.
Cash P725, 000
Accounts receivable P40, 000
Notes receivable P10, 000
Prepaid rent P24, 000
Office Equipment P44, 000
Furniture and Fixtures P34, 000
Supplies P4, 200
Accounts Payable P263, 000
Notes payable P17, 000

How much is the current asset of the company?

A. P779, 200
B. P793, 200
C. P799, 000
D. P803, 200
ANSWER: D
32. First statement: If total assets decreased by P40, 000 during a specific period and owner’s
equity decreased by P45, 000 during the same period the period’s change in total liabilities was
an P85, 000 increase.
Second statement: If net income for a business was P175, 000, withdrawals were P40, 000 in
cash, and the owner made no investment, and the owner’s equity increased P215, 000
A. First statement is true, second is false
B. First statement is false, second is true
C. Both statements are true
D. Both statements are false
ANSWER: D

33. Transposition is an
A. Error of interchanging the figures
B. Error of placing the decimal point
C. Error of not recording the transaction
D. Error, which if not detected, is automatically compensated or corrected in the next accounting
period
ANSWER: A
34. A new business has the following transactions:
(1) The owner invested P50, 000
(2) P30, 000 of supplies were purchased. Half is for cash and the other half on account
(3) P43, 000 was received for payment for services rendered by the business.
(4) A salary of P17, 000 was paid to an employee
(5) P40, 000 was borrowed from the bank.
(6) The supplies purchased from number 2 transaction is already one fourth used

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

36. The following financial information is known about five unrelated businesses:
COMPANY
A B C D E
12/31/2012
Assets P350, 000 P390, 000 P460, 000 P290, 000 P630, 000
Liabilities P270, 000 P300, 000 P300, 000 P200, 000 ?
12/31/2013
Assets P370, 000 P480, 000 P750, 000 ? P880, 000
Liabilities P238, 000 ? P360, 000 P270, 000 P400, 000
During 2013
Addl P46, 000 P70, 000 ? P230, 000 0
investment
Net income ? P60, 000 P200, 000 P100, 000 P230, 000
Drawings P20, 000 P26, 000 P40, 000 P50, 000 P70, 000
What would be the correct amount of net income of Company A for the year 2013?
A. P80, 000
B. P132, 000
C. P241, 000
D. P26, 000
ANSWER: D

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

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

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

C. Machineries P1, 350, 000

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

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

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

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

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

44. Available data pertaining to single step income statement

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

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

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

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

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

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

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

51. The ledger account shows the following

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

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

53. Referring the data in number 52, what would be the increase in owner’s equity as of April 30
assuming that the requested service has already been rendered in April 29?
a. P135, 000
b. P75, 000
c. P60, 000
d. No increase
ANSWER: A
54. The information below is taken from the records of the Lanister Enterprise:
Salary Expense P175, 000 Lanister, Drawings P45, 000
Rent Expense P50, 000 Utilities Expense P85, 000
Consulting fees P505, 000 Prepaid Supplies P55, 000
What is the correct amount of the net income?
A. P195, 000
B. P140, 000
C. P95, 000
D. P280, 000
ANSWER: A

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Merchandising Business_A_M
4. How much is the Cost of Goods Sold?
a. P23,280 c. P22,375
b. P25,000 d. P27,800