ACGA 504/ HCGA 507

GENERAL ACCOUNTING
- PART 2

College of Business and Accountancy

College of Hospitality Management
Holy Trinity University
2nd Sem.,AY 2021-2022
MEASURING BUSINESS
INCOME

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 TOPICS
• Measuring Business Income
• Accrual vs. Cash Accounting
• Adjusting Process
• Basic Adjusting Entries
• Accruals
• Prepayments
• Pre-collections
• Depreciation
• Amortization
• Estimated Uncollectible Accounts
• Ending Inventory
• Bank Reconciliation
• Journalizing Adjusting Entries
• Posting of Adjustments
• Preparation of Adjusted Trial Balance
• Preparation of Financial Statements
MEASURING BUSINESS INCOME

• Main objective of business: To ascertain the results of operations whether the company
earned profit or suffered loss during an accounting period.
• Measurement of income is ffected by the method of accounting used, that is, accrual or
cash basis.
• Accrual basis of accounting recognizes transaction as they occur; thus income is
recognized when earned and expenses are recognized when incurred.
• Cash basis accounting recognizes income only when cash is received; and recognizes
expense when payment is made.
SUMMARY:
Items concerned Accrual Cash Basis

Revenue is recognized When earned When collected

Expense is recognized When incurred When paid

Accrued income, Recognized Not recognized

deferred income,
accrued expense and
prepaid expense
ACCOUNTING TREATMENTS OF ACCOUNTS
To be recognized for the
accounting period
Items concerned Accrual Basis components Cash Basis components

Revenue/ Sales Cash sales + sales on account Cash sales + collections of

trade receivables
Other income When item is earned When item is received
regardless when it was regardless when earned
received
Purchases Cash purchase + purchase on Cash purchase and payment
account to trade creditors
When incurred regardless When paid regardless when
Expenses in general when paid incurred
ACCOUNTING TREATMENTS OF ACCOUNTS
To be recognized for the
accounting period
Items concerned Accrual Basis components Cash Basis components

Bad debts Recognized when there is Not recognized because there

doubtful account (allowance is no trade receivables
method0
Depreciation Normal provision Normal provision
BASIC ADJUSTING ENTRIES
• Accruals
• Prepayments
• Pre-collections
• Depreciation and amortizations
• Estimated uncollectible accounts
• Ending inventory
• Bank reconciliation
ACCRUALS
Accrued revenues Accrued Expenses

Accruing revenues means Accruing expenses means that

recognizing income even if they the expense incurred is
are not received or collected yet. recognized though not paid yet.

Ex. Service rendered but not Ex. Electric bills, interest

billed or collected yet, interest expense due but not paid yet
income that is not received yet

General entry: General entry:

Dr. Accrued Receivable Account Dr. Expense Account

Cr. Income Account Cr. Accrued liability Account
ADJUSTING PROCESS

• This is made in order to comply with the generally accepted accounting principles
regarding revenue recognition and matching principle.

• Adjusting entries are adjustments used to bring the assets, liabilities, revenues and
expenses UP TO DATE at the end of the accounting period
 ILLUSTRATION:
On November 1, 2021, Sunflower Company issued to Monstera Firm a 6%. P120,000 note
due in one year for payment of seed and planting materials.

INITIAL ENTRIES
Sunflower Monstera

Purchases…….120,000 Notes Receivable…P120,000

Notes Payable…..120,000 Sales…………………………….P120,000
 ILLUSTRATION:
On November 1, 2021, Sunflower Company issued to Monstera Firm a 6%. P120,000 note
due in one year for payment of seed and planting materials.

ADJUSTING ENTRIES
Sunflower Monstera

Interest Expense ……….1,200 Accrued Interest Receivable…P1,200

Interest Payable …………...1,200 Accrued Interest Income………….P1,200

Principal 120,000.00
Interest rate/ yr 0.06
Annual Interest 7,200.00
no. of months 12
Interest per month 600.00
interest for Nov and Dec 1,200.00
PREPAYMENTS
- Advance payments of business expenses

- Ex. Advance rental, insurance for the whole year and paid at the start of the year

- Methods of recording:
- Asset method – takes up the prepayments as assets and diminished by adjustment or
recognition of the expired portion as expenses.
- Expense method – takes up the prepayments as expenses and adjusted for the
remaining portion at the end of the year as asset
 ILLUSTRATION:
On October 31, 2021, Roses Company paid in advance an insurance premium for P12,000
covering the period of one year.

INITIAL ENTRIES
Asset Method Expense Method

Prepaid Insurance …….P12,000 Insurance Expense……………..P12,000

Cash………………………P12,000 Cash……………………………….P12,000
 ILLUSTRATION:
On October 31, 2021, Roses Company paid in advance an insurance premium for P12,000
covering the period of one year.

ADJUSTING ENTRIES
Asset Method Expense Method

Insurance Expense………2,000 Prepaid Insurance………10,000

Ptreaid Insurance……………2,0000 Insurance Expense…………10,000

Premium 12,000
No. of months 12
Monthly expense P1,000
no. of months 2
Insurance Expense P2,000
(12 months – 2 months) x
Unexpired portion as of Dec 31, 2021 P1,000
EXERCISES
Ans. (1) d; (2) a; (3) d; (4) a; (5) c
Ans. (8) c; (9) d; (10) a; (11) a
Ans. (1) d; (2) a
Ans. (5) c; (6) b
Ans. (1) c; (2) d
Ans. (11) a; (12) d