1.

Communication of economic events is the part of the accounting process that involves
a. Identifying economic events.
b. Quantifying transactions into dollars and cents.
c. Preparing accounting reports.
d. Recording and classifying information.

Letter C. From the word “communication,” meaning you have to prepare the financial
statements para maibigay (mai’communicate) sa mga users ng financial statement.

2. The accounting process is correctly sequenced as

a. Identification, Communication, Recording.
b. Recording, Communication, Identification.
c. Identification, Recording, Communication.
d. Communication, Recording, Identification.

In the accounting process, you have to first, analyze (or identify) the financial transactions
like Asset ba ‘to? Liability? Anong account ito? Kailangan ba itong irecord or not? Then,
you record (or write) it. After mo gawin yung financial statements, you communicate (or
ibigay) it to the users.

3. The first stage of the accounting process is

a. Communicating.
b. Identifying economic events.
c. Processing.
d. Recording.

4. The use of computers in recording business events

a. Has made the recording process more efficient.
b. Does not use the same principles as manual accounting systems.
c. Has greatly impacted the identification stage of the accounting process.
d. Is economically only for large businesses.

5. Internal users of accounting information include all of the following except

a. Company officers.
b. Investors.
c. Marketing managers.
d. Production supervisors.

6. Which of these is an internal accounting data?

a. The CEO of a company.
b. Clerical staff of a company.
c. Salespersons of a company.
d. All of the options are correct.

7. Which of these is not an external user of accounting information?

a. Regulatory agencies.
b. Customers.
 c. Investors.
d. All of the options are correct.

Pag silent ang “investors”, it means “external” siya or external investors ang tinutukoy.

8. Bookkeeping, primarily involves which part of the accounting process?

a. Recording.
b. Communication.
c. Analysis.
d. Bookkeeping is equally involved in all parts of the accounting process.

Bookkeeping refers only to one phase of accounting, the recording phase. (Chapter 1:
The Development of Accounting Profession; from the book “The Intermediate Accounting
by Nenita S. Robles and Patricia M. Empleo)

9. The branch of accounting that provides economic and financial information for investors,
creditors, and other external users is
a. Financial Accounting.
b. Management Accounting.
c. Cost Accounting.
d. Budgeting.

Financial Accounting is the broadest branch of accounting, focusing on the needs of

external users. Management Accounting serves the information needs of the internal
users. Cost Accounting is concerned with the measurement and recognition of cost of
services provided or products manufactured. (Chapter 1: The Development of
Accounting Profession; from the book “The Intermediate Accounting by Nenita S. Robles
and Patricia M. Empleo)

10.Generally accepted accounting principles are

a. Income tax regulations of the Taxation Department.
b. Standards that indicate how to report economic events.
c. Theories that are based on physical laws.
d. Principles that have been proven correct by academic researchers.

11.GAAP stands for

a. Generally Accepted Auditing Procedures.
b. Generally Accepted Accounting Principles.
c. Generally Accepted Auditing Principles.
d. Generally Accepted Accounting Procedures.

12.The ACE Company has factories nationwide that cost $100 million in total. The current market
value of the factories is $180 million. Under the cost principle of the factories will be recorded
and reported as assets
a. $100 million.
b. $80 million.
c. $180 million.
 d. $280 million.

The cost principle means items need to be recorded as the actual price paid. The
factories of ACE Company costs $100 million (this is the actual price) in total. The current
market value is not the actual price of the factory. Therefore, Assets > Factories > $100
million.

13.The proprietorship form of business organization

a. Must have at least two owners.
b. Means that the owner is personally liable for business debts.
c. Has an indefinite life.
d. Is characterized by a legal distinction between the business as an economic unit and the
owner.

14.The partnership form of business organization

a. Is a separate legal entity.
b. Has limited liability.
c. Is a common form of organization for service – type businesses.
d. All of the options are correct.

15.Which of the following is not an advantage of the company form of business organization?
a. A lower level of tax compared to the highest personal tax rate.
b. Transferability of ownership.
c. Unlimited personal liability for shareholders.
d. Unlimited life.

One of the advantages of Corporations is limited personal liability for shareholders.

16.Which of these events cannot be quantified into dollars and cents and recorded as an
accounting transaction?
a. The appointment of a new accounting firm to perform an audit.
b. The purchase of a new computer.
c. The sale of store equipment.
d. Payment of income taxes.

Kase mag – aappoint ka pa lang. Wala namang sinabi sa accounting process (pat isa
cycle) na kailangang ilagay pati ang pag set ng appointment. Wala naman kaseng
nangyaring financial transaction.

17.Deb Smith is the proprietor of Smitty’s, a retailer of athletic apparel. When recording the
financial transactions of Smitty’s, Deb does not record an entry for a car she purchased for
personal use. Deb took out personal loan to pay for the car. What accounting concept guides
Deb’s behaviour in this situation?
a. Pay back concept.
b. Economic entity assumption.
c. Cash basis concept.
d. Monetary unit assumption.
 Business Entity Principle (or the economic entity assumption) states that the business is
considered distinct and separate from the owner(s) of the business. The personal
transactions of owners are not included in the records of the business. The business is
considered a separate accounting entity.

18.A problem with the monetary unit assumption is that

a. The dollar has not been stable over time.
b. The dollar is a common medium of exchange.
c. It is impossible to account for international transactions.
d. All of the options are correct.

19.The basic accounting equation may be expressed as

a. Assets = Equities
b. Assets – Liabilities = Owner’s Equity
c. Assets = Liabilities + Owner’s Equity
d. All of the options are correct.

Explanation:
Sa letter A, this is the explanation:
Basic Accounting Equation: Assets = Liability + Equity
If Liability is 0, and if assets as well as equity is 100:
A=L+E
100 = 0 + 100
100 = 100

This means that,

Assets = Equity

20.As of December 31, 2013, Anders Company has assets of $21,000 and owner’s equity of
$12,000. What are the liabilities for Anders Company as of December 31, 2013?
a. $9000
b. $6000
c. $15 000
d. $12 000

SOLUTION:
Using the Basic Accounting Equation: Assets = Liabilities + Owner’s Equity
Given:
Assets = $21,000
Owner’s Equity = $12,000
Liabilities = ?

Assets = Liabilities + Owner’s Equity

$ 21000 = Liabilities + $12000 *transpose 12000 to the left. Magiging negative si 12000*
$21000 – $12000 = Liabilities
$9000 = Liabilities
21.Liabilities
a. Are future economic benefits.
b. Are claims against assets.
c. Possess service potential.
d. Are amounts owed to the owner of the business.

22.Owner’s equity can also be referred to as

a. Second equity.
b. Leftovers.
c. Spoils.
d. Net assets.

Equity ay tinatawag din siyang net assets kase equity is actually the remaining (or
remains) when you deduct assets sa liabilities.

23.Revenue would not result from the

a. Sale of merchandise.
b. Initial investment of cash by the owner.
c. Performance of services.
d. Rental of property to customers.

Revenue are fees earned from providing services and the amounts of merchandise sold.
Revenue wourld not result from initial investment of cash by the owner kase nag – invest
ka pa lang. Hindi iyan revenue kase hindi ka pa kumikita or wala ka pang naibebenta or
hindi ka pa nagdedeliver ng service. Examples of revenue accounts include: Sales, Service
Revenues, Fees Earned, Interest Revenue, Interest Income.

24.If total liabilities increased by $4000, then

a. Assets must have decreased by $4000.
b. Owner’s equity must have increased by $4000.
c. Assets must have increased by $4000, or owner’s equity must have decreased
by $4000.
d. Assets and owner’s equity each increased by $2000.

Assets = Liabilities + Owner’s Equity

+ Assets – Owner’s Equity = Liabilities

25.An income statement

a. Summarized the changes in owner’s equity for a specific period of time.
b. Reports the changes in assets, liabilities, and owner’s equity over a period of time.
c. Reports the assets, liabilities, and owner’s equity at a specific date.
d. Presents the revenue and expenses for a specific period of time.

Letter A is Statement of Changes in Owner’s Equity. Letter C is Statement of Financial

Position. Elements of Income Statement: Revenue and Expenses.

26.Profit results when

 a. Assets > Liabilities.
b. Revenue > Expenses.
c. Revenue = Expenses.
d. Revenue < Expenses.

27.Morreale Beaver Company buys a $ 12 000 van on credit. The transaction will affect the
a. Income statement only.
b. Statement of financial position only.
c. Income Statement and Statement of Changes in Equity only.
d. Income Statement, Statement of Changes in Equity, and Statement of Financial Position.

SFP lang. Sa journal entry, it’ll be recorded like this:

Van 12,000
Accounts Payable 12,000

Van is an asset account and Accounts Payable is a Liability account. Assets lang at
Liabilities ang naapektuhan. Since, wala namang naapektuhan sa Income or Expenses
(Income Statement) kaya letter B tamang sagot.

28.A major employment area in the accounting profession is:

a. Public accounting.
b. Private sector accounting.
c. Not – for – profit accounting.
d. All of the options are correct.
Palaging in-demand ang accounting sa kahit anong employment area ng accounting
profession.

29.Keeping a systematic monetary account of economic events is the key element of which part
of the accounting cycle
a. Recording, Classifying, and Summarising information.
b. Identifying economic events.
c. Analysing and interpreting accounting information for users.
d. Preparing accounting reports.

Chapter 2: The Accounting

Process
 The accounting cycle refers to a series of sequential steps or procedures performed to
accomplish the accounting process.
  Step 1: Identification of Events to be Recorded (to gather info. About transactions or events
generally through the
source documents) – Analyzing Stage
 Step 2: Transactions are Recorded in the Journal (to record the economic impact of
transactions on the firm in a journal, which is a form that facilitates transfer to the account) –
Journalizing Stage/Recording Stage
 Step 3: Journal Entries are Posted to the Ledger (to transfer the info. from the journal to the
ledger) Posting Stage/Classification Stage
 Step 4: Preparation of a Trial Balance (to provide a listing to verify the equality of debits and
credits in the ledger)
 Step 5: Preparation of the Worksheet including Adjusting
Entries (to aid in the preparation of financial statements)
 Step 6: Adjusting Journal Entries are journalized and Posted (to record the accruals, expiration of
deferrals, estimations and other events from the worksheet)

 Step 7: Preparation of Financial Statements (to provide useful info. to decision makers)
 Step 8: Closing Journal Entries are Journalized and Posted (to close temporary accounts and
transfer profit or loss to owner’s equity)

 Step 9: Preparation of a Post-Closing Trial Balance (to check the equality of debits and credits
after the closing entries)

 Step 10: Reversing Journal Entries are Journalized and Posted (to simplify the recording of certain
regular transaction in the next accounting period)
Steps in the Accounting Process
 Accounting also defined as the art of analyzing, financial transactions and economic
events, recording them, classifying them as to accounts and summarizing them,
followed by reporting and interpreting the results. (LO1)

 Steps in the Accounting Process:

1. Analyzing

2. Recording
3. Classifying
4. Summarizing
5. Reporting
6. interpreting
Steps in the Accounting Process
 Analyzing
 Also called Transaction Analysis (transaction analysis approach)
  Is the looking over transactions entered into, economic events that have taken place,
and determining their effects on the business. These transactions and events are
generally supported by documentary evidence or proofs.
 In case a sale of service or sale of product is evidenced by sale invoice. This sale invoice
is further supported by a delivery receipt. In most cases, before delivery of service or
product is made, a purchase order is received from the customer.
Steps in the Accounting Process
 Analyzing is the identification of transactions or economic events to be recorded.

 Aim: To gather information about transactions and events generally through the source
documents.
 Transaction Analysis should follow these four basic procedures:

1. Identify the transaction from source documents.

2. Indicate the accounts either assets, liabilities, equity, income or expenses –
affected by the transaction.

3. Ascertain whether each account is increased or decreased by the transaction.

4. Using the rules of debit and credit, determine whether to debit or credit the
account to record its increase or decrease.
Identification of Transaction to be Recorded
 Account – is an individual accounting record of increases or decreases in a specific
assets, liability or equity item.

 Chart of Accounts – a list of account titles that serves as a guide to the accountant or
bookkeeper in recording business transactions. Such accounts are divided into
sections and each title has a given code number.
Accounting Equation
 Capital Theories
1. Entity Theory – the accounting objective is geared towards proper income
determination. Proper matching of cost against revenue is the ultimate ends. Thus,
the entity theory emphasizes the importance of the income statement.
ASSETS = LIABILITIES + CAPITAL

2. Proprietary Theory – the accounting objective is directed towards proper valuation

of assets. Thus, theory emphasizes the importance of balance sheet.
ASSETS – LIABILITIES = CAPITAL

3. Residual Equity Theory – proper valuation of assets, applicable if two classes of

share stocks (common and Preferred)
ASSETS – LIABILITIES – PREFERRED STOCK = COMMON STOCK
 4. Fund Theory – neither proper income determination nor valuation of assets but the
custody and administration of funds. (LO3)
Accounting Equation

 The elements of accounting equation are ASSETS,

LIABILITIES, and OWNER’S EQUITY

ASSETS = LIABILITIES + OWNER’S EQUITY

 Simply the Entity Theory

Double Entry System
 Accounting systems of an enterprise practically make use of the Double-Entry
Bookkeeping Method (Double Entry System) (LO2)

 Double-Entry Bookkeeping Method (Double Entry System) is based on the nature of

transaction. There are two values involved in a transaction, Value Received and the
Value Parted With

 There should also two parts to the recording of a transaction – Debit and Credit

 Debit the left side

 Credit the right side
Rules of Debit and Credit
 Normal Balance is the balance of the account that increases the account. (LO4)
 The Normal Balance of Assets account are DEBIT.
 The Normal Balance of Liabilities account are CREDIT.
 The Normal Balance of Equity account are CREDIT.
 The Normal Balance of Income are CREDIT.
 The Normal Balance of Expense are DEBIT.
 Summary:

Accounts Normal Balance Increase Decrease

ASSETS Debit Debit Credit

LIABILITIES Credit Credit Debit

Equity Credit Credit Debit

Income Credit Credit Debit

 Expenses Debit Debit Credit
Transaction Analysis Approach
Using the Transaction Analysis Approach analyze the following transactions:

A. Owner Mary Ligon invest P100,000 in ML Company.

B. The business borrowed P50,000 from Metrobank.
C. The business bought office equipment and paid P20,000 cash.
D. The business bought P25,000 furniture on credit.
E. Customer Peter Co paid P50,000 for car painting service.
F.The Machine Shop promised to pay P20,000 rent for the shop space rented from the
owner of the lot and building.

 Transaction Analysis Approach

 Transaction Analysis should follow these four basic procedures:

1. Identify the transaction from source documents.

2. Indicate the accounts either assets, liabilities, equity, income or expenses –
affected by the transaction.

3. Ascertain whether each account is increased or decreased by the transaction.

4. Using the rules of debit and credit, determine whether to debit or credit the
account to record its increase or decrease.
Suggested Answer:
 ASSETS LIABILITIES

Cash Office Furniture Accounts Rent Loan

Equipment Payable Payable Payable
A
B
C
D
E
F

Illustrative Problem: Transaction Analysis Approach

The following are transactions of Oliveros Company for the month of June 2019.

 June 1, Jeca Oliveros invested P500,000 in the business.

 June 2, Bought pieces of Furniture & Fixtures from Ore Corporation on credit, P1,000.

 June 3, Bought on cash, repair supplies amounting to P50,000.

 June 7, Paid the rent of the shop for the month, P5,000.

 June 10, Billed Ellery Mosquera for repair service done on her automobile, P4,000. half of the
amount due is paid in cash.

 June 12, Jeca Oliveros withdrew P7,500 cash to acquire a computer that will be used in the
business.

 June 13, Borrowed money from BDO to finance the business amounting to P20,000.

 June 19, Ellery Mosquera paid the remaining balance.

 June 27, Rendered service to Payapag Company in cash, P5,900.

 June 30, Bought repair supplies from Delgado Trading on credit, P12,000.
(Note: Oliveros Company chart of accounts are: Cash, Accounts Receivable,
Repair Supplies, Furniture & Fixtures, Computer, Accounts Payable, Loans
Payable, J. Oliveos, Capital, Service Revenue, Rent Expenses.)
Seatwork: Transaction Analysis Approach
 The following are transactions of Rene & Albert Salon for the month of May, 2019:
 May 1, Rene Bilinario invested P1,000,000 to establish the business.
 May 4, Bought salon supplies on cash, P10,000.
 May 6, Bought on credit, furniture & fixtures amounting to P30,000 from Yapit Company.
 May 9, Loaned money from BPI amounting to P40,000 as additional working capital.
 May 11, Rene Belinario withdrew P5,200 cash for personal use.
 May 13, Billed Celyn Flores for the service rendered, P3,000.
 May 21, Paid ¾ of the amount owed to Yapit Company.
 May 27, Paid telephone bill and wages of workers amounting to P600 and P5,000 respectively.
 May 28, Rendered service on cash amounting to P7,500.
 May 29, made additional investment amounting to P10,000. Paid the remaining balance to Yapit
Company. Acquired new set of salon supplies for P5,000.
 (Note: use the following list of account titles: Cash, Accounts Receivable, Salon Supplies, Furniture &
Fixtures, Accounts Payable, Loans Payable, R.
Belinario, Capital, R. Belinario, Drawings, Service Revenue, Telephone Bill Expense, Wages
Expense)
Accounting Cycle
 The accounting cycle refers to a series of sequential steps or procedures performed to accomplish
the accounting process.
 Step 1: Identification of Events to be Recorded (to gather info. About transactions or events
generally through the source
documents) – Analyzing Stage
 Step 2: Transactions are Recorded in the Journal (to record the economic impact of transactions
on the firm in a journal, which is a form that facilitates transfer to the account) – Journalizing
Stage/Recording Stage
 Step 3: Journal Entries are Posted to the Ledger (to transfer the info. from the journal to
the ledger) Posting Stage/Classification Stage
 Step 4: Preparation of a Trial Balance (to provide a listing to verify the equality of debits and
credits in the ledger)
 Step 5: Preparation of the Worksheet including Adjusting Entries (to aid in the preparation of
financial statements)

 Step 6: Adjusting Journal Entries are journalized and Posted (to record the accruals,
expiration of deferrals, estimations and other events from the worksheet)

 Step 7: Preparation of Financial Statements (to provide useful info. to decision makers)
 Step 8: Closing Journal Entries are Journalized and Posted (to close temporary accounts and
transfer profit or loss to owner’s equity)

 Step 9: Preparation of a Post-Closing Trial Balance (to check the equality of debits and credits
after the closing entries)
  Step 10: Reversing Journal Entries are Journalized and Posted (to simplify the recording of
certain regular transaction in the next accounting period)
Step 2: Transactions are Recorded in the Journal
 Journalizing or Recording Stage
 Recording involves writing the effects of the transactions and events that have been analyzed.
 This referred to as Bookkeeping. This defined as the systematic and chronological recording of
business transaction.

 Systematic because it follows prescribed rules and principles of accounting.

 Chronological because the recording is in the order of occurrence of dates of business
transactions.

 Journal – it is the accounting book where the business transactions and events are recorded for
the first time. It is called the Book of Original Entry.
Step 2: Transactions are Recorded in the Journal
 Journals are: (a) General Journal and (b) Special Journal  General Journal is the
simplest form or journal record:
 Date of the transaction.
 Particulars or Titles of the accounts involved.
 Amount of the transactions.
 The account no. in the ledger to which the entry is later transferred. (Posting Reference)
 An explanation in brief but concise and comprehensive statement.
 Special Journal are:
 Cash Receipts Book
 Cash Disbursement Book
 Sales Book
 Purchase Book
Example: Journal Entries

In the General Journal record or journalize the following transactions:

A. Owner Mary Ligon invest P100,000 in ML Company.

B. The business borrowed P50,000 from Metrobank.

C. The business bought office equipment and paid P20,000 cash.

D. The business bought P25,000 furniture on credit.

E. Customer Peter Co paid P50,000 for car painting service.

Date Particulars/Account Titles PR Debit
A

F.The Machine Shop promised to pay P20,000 rent for the shop space rented from the owner
of the lot and building.
 Seatwork: Journal Entries
 The following are transactions of Rene & Albert Salon for the month of May, 2019:
 May 1, Rene Bilinario invested P1,000,000 to establish the business.
 May 4, Bought salon supplies on cash, P10,000.
 May 6, Bought on credit, furniture & fixtures amounting to P30,000 from Yapit Company.
 May 9, Loaned money from BPI amounting to P40,000 as additional working capital.
 May 11, Rene Belinario withdrew P5,200 cash for personal use.
 May 13, Billed Celyn Flores for the service rendered, P3,000.
 May 21, Paid ¾ of the amount owed to Yapit Company.
 May 27, Paid telephone bill and wages of workers amounting to P600 and P5,000 respectively.
 May 28, Rendered service on cash amounting to P7,500.
 May 29, made additional investment amounting to P10,000. Paid the remaining balance to Yapit
Company. Acquired new set of salon supplies for P5,000.
 (Note: use the following list of account titles: Cash, Accounts Receivable, Salon Supplies, Furniture
& Fixtures, Accounts Payable, Loans Payable, R.
Belinario, Capital, R. Belinario, Drawings, Service Revenue, Telephone Bill Expense, Wages
Expense)
Illustrative Problem: Journal Entries
The following are transactions of Oliveros Company for the month of June 2019.
 June 1, Jeca Oliveros invested P500,000 in the business.
 June 2, Bought pieces of Furniture & Fixtures from Ore Corporation on credit, P1,000.
 June 3, Bought on cash, repair supplies amounting to P50,000.
 June 7, Paid the rent of the shop for the month, P5,000.
 June 10, Billed Ellery Mosquera for repair service done on her automobile, P4,000. half of the
amount due is paid in cash.
 June 12, Jeca Oliveros withdrew P7,500 cash to acquire a computer that will be used in the
business.
 June 13, Borrowed money from BDO to finance the business amounting to P20,000.
 June 19, Ellery Mosquera paid the remaining balance.
 June 27, Rendered service to Payapag Company in cash, P5,900.
 June 30, Bought repair supplies from Delgado Trading on credit, P12,000.
(Note: Oliveros Company chart of accounts are: Cash, Accounts Receivable,
Repair Supplies, Furniture & Fixtures, Computer, Accounts Payable, Loans
Payable, J. Oliveos, Capital, Service Revenue, Rent Expenses.)
Step 3: Journal Entries are Posted to the Ledger

 Since transactions are recorded in the journal according to their dates of occurrence, items of similar
nature are not grouped together. Information in the general journal is spread among various
transactions recorded. If information regarding an item is desired, say cash, for example, it is
necessary to gather information from the scattered pages of journal. Due to inconvenience, there
 is a need for another record in which data appearing in the journal may summarized to show the
status of each item. Each item represent by an account.

 The entire group of accounts maintained by a business is called Ledger.

Step 3: Journal Entries are Posted to the Ledger
 Ledger maybe General Ledger (Control Account) or Subsidiary Ledger
 Subsidiary Ledger are:
 Accounts Receivable Subsidiary Ledger
 Accounts Payable Subsidiary Ledger
 Posting means transferring the amount from the journal to the appropriate accounts in the ledger.
 Guide:
1. Transfer the date of the transaction from the journal to the ledger.
2. Transfer the page number from the journal to the journal reference (JR) column of the ledger.
3. Post the debit figure from the journal as a debit figure in the ledger and the credit figure from
the journal as a credit figure in the ledger.

4. Enter the account number in the posting reference column of the journal once the figure has
been posted to the ledger.
Step 4: Preparation of a Trial Balance

 In double entry bookkeeping, the recording and posting functions maintain the equality of the debits
and credits. The debit entries in the general journal are posted to debit side of the proper ledger
accounts and the credits entries are posted to the credit side of the proper ledger accounts.
 Trial Balance is a list of accounts with open balances in the general ledger.
 It is prepared to verify the equality of debits and credits in the ledger at the end of each accounting
period or any time the posting are updated.

 There are two (2) types of trial balance: (1) Trial Balance of Balances and (2) Trial Balance of Totals.
Step 4: Preparation of a Trial Balance
 The procedures in the preparation of a Trial Balance:

1. List the account title in a numerical order.

2. Obtain the account balance of each account from the ledger and enter the debit
balances in the debit column and credit balances in the credit column.

3. Add the debit and credit column.

4. Compare the totals.
  The trial balance is a control device that helps minimize accounting errors. When the totals are equal,
the trial balance is in balance.

 Locating Errors, these errors includes:

1. Error in posting a transaction to the ledger. 2. Error
in determining the account balances.
3. Error in preparing the trial balance.
Step 4: Preparation of a Trial Balance
 What is the most efficient approach in locating error? The following procedures when done in sequence
may save a considerable time and effort in locating errors:

1. Prove the addition of the trial balance column by adding these column in the opposite direction.
2. If the error does not lie in addition, determine the exact amount by which the trial balance is out of
balance. The amount of the discrepancy is often a clue to the source of error. If the discrepancy is
divisible by 9, this suggest either a transposition (reversing the order of numbers) or a slide
(moving of decimal point)

3. Compare the accounts and amount in the trial balance with that in the ledger. Be certain that no
account is omitted.

4. Recompute the balance of each ledger account.

5. Trace all posting from journal to ledger account.
Step 5: Preparation of Worksheet

 Accountant 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.
 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 financial statement.
 It is a summary device used by the accountant for his convenience.
Step 5: Preparation of Worksheet
 The steps in the preparation of a worksheet:

1. Enter the account balances in the unadjusted trial balance and total the amounts.
2. Enter the adjusting entries in the adjustments columns and total the amount.
3. Compute each account’s adjusted balance by combining the unadjusted trial balance and the
adjustments figures. Enter the adjusted amounts in the adjusted trial balance columns.
 4. Extend the assets, liability and owner’s equity amount from the adjusted trial balance
column to the balance sheet columns. Extend the income and expense amounts to the
income statement columns. Total the statement columns.

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.
Step 5: Adjusting Journal Entries
Accrual Basis Accounting:
 Under 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.
Cash Basis Accounting:
 The accountant does not record a transaction until cash is received or paid.
Step 5: Adjusting Journal Entries
 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 Period:
 The accounting period of fiscal period is one year or a period of twelve months.
 The one year period is traditionally the accounting period because usually, after a year that
government report is required.

 The accounting period may be a calendar year, fiscal year or natural business year.
Step 5: Adjusting Journal Entries

 Adjusting Journal Entries (AJE) is Required.

 The report should always include the balance sheet and income statement that reflect the
revenue realized and expenses incurred, and fairly measurement of assets, liabilities, and
owner’s equity.

 Purpose of Adjustments:
 To reflect the proper amount of income realized and expenses incurred during the
accounting period.
 To show fairly the measure of assets, liabilities and owner’s equity.
Step 5: Adjusting Journal Entries
 Income recognition principle:
 “Income shall be recognized when earned”
  Two (2) conditions must be present for the recognition of income, namely

1. It is probable that future economic benefits will flow to the entity as a result of an increase in an
assets or a decrease in a liability.

2. The economic benefits can measure reliably.

 Expense recognition principle:
 “Expenses are recognized when incurred”
 Two (2) conditions must be present for the recognition of expenses, namely:

1. It is probable that a decrease in future economic benefits has occurred as a result of a

decrease in an asset or an increase in a liability.

2. The decrease in economic benefits can be measured reliably.

Step 5: Adjusting Journal Entries

 Types of adjusting entries:

 Adjusting entries can be classified as either Prepayments or Accruals.

 Prepayments:

1. Prepaid expenses – Expenses paid in cash and recorded as assets before they are
consumed, expired or used. They are recorded as assets as they will provide future
economic benefits to the business as well as satisfy all other asset definition criteria.

2. Unearned revenue – Cash received and recorded as liabilities before revenue is earned.
It is recorded as liabilities because it will involve the business sacrificing future
economic benefits and because it satisfies all the other liability definition criteria.
Step 5: Adjusting Journal Entries

 Accruals:

1. Accrued revenue – Revenue earned but not yet received in cash or recorded. It is
recorded as assets because it will provide future economic benefits to the business
as well as satisfy all other asset definition criteria.

2. Accrued expenses – Expenses incurred but not yet paid in cash or recorded. It is
recorded as liabilities because it will involve the business sacrificing future
economic benefits and because it satisfies all the other liability definition criteria.
AJE: Prepayments
 Prepaid Expenses:
 Expenses paid in cash and recorded as assets before they are consumed, expired, and used.
 When cost is prepaid, an asset account is debited to show the service or benefit that will be received in
the future.
  Prepayments often occur in regard to insurance, supplies, advertising and rent.
 Prepaid expenses expire either with passage of time (rent and insurance) or through used and
consumption (supplies).
 The expiration of these costs does not require daily journal entries, which would be unnecessary and
impractical. Instead, it is customary to postpone recognising cost expirations until FS are prepared.

 AJE purpose are: (1) to record the expenses that apply to the current accounting period, and (2) to
show the unexpired cost in the asset account.
Illustration: Supplies, Prepaid Rent & Prepaid Insurance

 Supplies
 October 5, Pioneer Advertising Agency purchased advertising supplies costing P2,500.
 October 31, Reveals that P1,000 of advertising supplies are still on hand.

 Prepaid Rent
 December 1, Dora Enterprise paid P9,000 advance rental for three (3) months.
 December 31, At the end of the year, using calendar year, the 1-month period has elapsed.

 Prepaid Insurance
 October 4, TK Group paid P6,ooo for a 1-year fire insurance policy.
 December 31, At the end of the year, using calendar year, the 3-month period has elapsed.
Accounting for Depreciation
 When an entity acquires a long-lived assets such as buildings, service vehicles, computers or office
furniture, it is basically buying or prepaying for the usefulness of that assets. These assets helps
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 assets over its estimated useful life.
 Depreciation is a systematic allocation of the depreciable amount of an assets over its useful life.
 Kinds of depreciation are:

1. Physical Depreciation is related to the depreciable asset’s wear and tear and deterioration
over a period.

2. Functional or Economic Depreciation arises from obsolescence or inadequacy of the asset

to perform efficiently.
Accounting for Depreciation
 In order to properly compute the amount of depreciation to be charged as expense during an
accounting period, these factors are necessary, namely:
1. Historical costs or acquisition costs are cost when the asset acquired.
 2. Depreciable amount also known as depreciable cost is the historical costs less residual
value.

3. Residual value or salvage value is the expected worth of asset in present pesos at the end
of its useful life.

4. Useful life either the period over which an asset is expected to be available for use by the
entity, or the number of production or similar units expected to be obtained from the
asset by the entity
 Method of Depreciation
 There are several methods of depreciating asset; however, for the class discussion will deal
only with the Straight Line Method (SLM) the formula is Annual Depreciation is equal to
Cost less residual value over useful life.
Illustration: Accounting for Depreciation

 January 5, The XYZ Company acquire the service truck costing, P700,000 for cash. The truck
has an estimated useful life of ten (10) years with a residual value of P100,000 at the end of
ten (10) years.

 Requirements:

1. Record the transaction dated January 5.

2. Compute the annual depreciation of service truck.
3.What is the adjusting journal entries at the end of accounting period.
Illustrative Problems: Prepayments & Accounting for Depreciation
 The following transaction incurred:
 On May 1, AJ Inc., paid P8,000 for two (2) months rent in advance.
 May 2, AJ Inc., bought a service vehicle for cash, P420,000. The service will last for seven (7)
years and with a salvage value of P84,000.
 May 4, AJ Inc., acquired a one-year comprehensive insurance coverage on the service vehicle
and paid P14,400 premiums.
 May 8, AJ Inc., purchased supplies, P18,000 cash. At the end of May AJ makes a careful physical
inventory count of supplies. The supplies costing P15,000 are still on hand.

 Requirements:

1. Record each transaction (Journal Entries)

2. Adjusting Journal Entries for the month of May 31.
 3. Adjusted Balance after AJE
Seatwork: Prepayments & Accounting for Depreciation
 The following economic events occurred:
 April 2, Vektek Co., acquired a building for business purposes for P1,500,000 cash. The said asset
will be use for the next 15 years with salvage value of P250,000.
 April 4, Vektek Co., paid P50,000 in advance for six (6) months parking area.
 April 5, purchased supplies worth P35,000 on credit from Vigo Ltd., the company conduct the
physical count of supplies costing 12,500 is used.
 April 7, Vektek Co., insured the building in case of fortuitous event to Lloyds of London for
annual premium of P120,000 cash.

 Required:

1. Record the Business transaction (Journal Entries)

2. Adjusting Journal Entries for the month of April (w/ Solution) 3. Adjusted balance after
AJE
AJE: Prepayments
 Unearned revenue or Deferred revenue
 Cash received and recorded as liabilities before revenue is earned.
 It is a liabilities because the business will have to make sacrifices to earn the revenue.
 Such items as rent, magazine subscription, and customer deposits for future service may result
in unearned revenue.
 Unearned revenue is the opposite of prepaid expenses. Indeed, unearned revenue on the
books of one business is likely to be a prepaid on the books of the business that has
made the advance payment.
Illustration: Unearned revenue

1. October 2, ABC Co., received cash, P12,000 from XYZ Co., for advertising services expected
to be completed by December 31.

2. Ren is a wedding planner established Wedding “R” a wedding consultancy business. On May
15, the entity is earning additional revenue by referring consulting clients to friendly hotels
and caterers, received P15,000 advance fee for the three clients referred. On May 30 the
three couples referred has already taken their marriage vows.
 3. October 1, Health Way Clinic sublet a building to Mika Drugstore who paid P60,000 rent in
advance for four (4) months.
Required:

a. Record each transaction

b.Adjusting Journal Entries
c. Adjusted Balance after AJE.
Seatwork: Unearned revenue

1. Delta Company received cash P96,000 on April 1, 2019 for one (1) year’s rent in advance from
Easy Inc.,

2. November 2, Nero Publishing received advance payment for magazine subscription P60,000
from a client for three ( 3) month magazine issue.

3. Mr. Z provide air condition cleaning services, January 15, received P15,000 cash from Mr. X, but
the schedule of cleaning service will be on March 15.

Requirements:

a. Journal Entries
b.Adjusting Journal Entries
c. Adjusted Balances
AJE: Accruals
 Accrued revenue or Accrued income
 Revenue earned but not yet received in cash or recorded at the end of the
reporting or accounting period.
 Accrued revenue may accumulate (accrue) with the passing of time as in the
case of interest revenue and rent revenue, or it may result from services
that have been performed but are neither billed or collected, as in case of
commissions and fee.
 Unrecorded because the earning of interest and rent does not involve daily
transactions.
 Two (2) purposes:
1. To show the receivable that exists at the end of the reporting period.
 2. To record the revenue that has been earned during the period.
Illustration : Accrued revenue
 Ren a wedding planner and a wedding consultant agreed to arrange a rush but simple civil
wedding for madly-in-love couple in the afternoon of April 15. Ren intended to charge fee of
P5,500 for the services, which is earned but unbilled.

 Mr. Tan is a Taxation expert, he provide a taxation tutorial class every Monday. The tutorial class
composed of five (5) 4th year BSA students with a P1,000 per student per session. May 13, Mr.
Tan failed to billed and record the said session.

 Orange Corp., loaned P60,000 to another corporation on December 1, 2019 and received a Three
(3) month, 8% interest-bearing note with a face value of P60,000.
Required:
 Adjusting Journal Entries
AJE: Accrued Expenses
 Accrued Expenses
 Expenses incurred but not yet paid in cash or recorded at the end of accounting or
reporting period.
 Items like interest, rent, taxes and salaries can be accrued expenses.
 Accrued Interest
 Accrued salaries
 An accrued expenses on the books of one business is an accrued revenue to
another business.
 Two (2) purposes:
1. To record the obligations that exists at the end of the reporting
period.

2. To recognize the expenses that apply to the current accounting

period.
AJE: Accrued expenses
 Accrued Interest
 Interest is a cost of borrowing money that accumulates with the passage of time.
(Interest = P x r x t)
 Formula (Notes)
 Face Value of the Note x Annual interest rate x Time

 Accrued salaries
 Entities pay their employees at regular interval.
 It can be weekly, semi – monthly, or monthly.
 Weekly payrolls are usually made on Fridays (for a fiveday workweek) or
Saturdays (for a six-day workweek)
 Illustration: Accrued expenses
 Accrued Interest
 On May 2, Jaymee borrowed P210,000 from Metrobank. She issue a promissory
note that carried a 20% interest per annum. Both the interest and principal will be
payable in one year.
 On October 1, Nicola signed a P5,000, 3-month note payable at an annual rate
of 12%.
 On November 1, Cacho Company purchased equipment and gave 3-month, 9% note
with face value of P50,000.

Required:
 Journal Entries
 Adjusting Journal Entries
 Adjusted Balance
Illustration: Accrued expenses
 Accrued salaries
 The office assistant and the account executive were paid salaries May 13
and 27. Each of the employee’s salary rate is P7,800 per month or 300
per day. Month of May 2019

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
Required:
Adjusting Journal Entries
Illustration: Adjusting Entries
 The following information pertains to MO Machine Shop:
a. The company’s supplies account showed a beginning debit balance of P2,000 and supplies
purchased of P8,000; P3,000 of supplies were on hand at year-end.

b. Depreciation on building is at P50,000.

c. A one-year insurance policy was purchased for P20,000. three (3) months have passed
since the purchase.
 d. Accrued interest on note receivable amounted to P1,000.
e. The company received a P36,000 advance payment during the year on services still to be
performed. By the end of the year, one-fourth (1/4) of the services had been performed.

Required: Adjusting Journal Entries

1. Supplies
2. Depreciation
3. Insurance
4. Accrued interest
5. Service revenues
Accounting for Bad debts
 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 period, rather
than when specific account actually become uncollectible.

 Accruals for uncollectible accounts.

 Two (2) methods are followed in accounting for bad debts

1. Allowance Method requires recognition of bad debt if the accounts are doubtful of
collection.

2. Direct Write-off Method requires recognition of a bad debts only when the accounts
proved to be worthless or uncollectible.
Accounting for Bad debts
 Doubtful accounts are recognized when the loss is probable and the amount can be
estimates/measure reliably.

 The approach is parallel to the recognition of a “provision” which is both “probable

and measurable” in accordance with PAS 37.

 Methods of estimating doubtful accounts:

1. Aging of the accounts receivable

2. Percentage of accounts receivable
3. Percentage of sales
 Accounting for Bad debts

 Aging of accounts receivable or simply “Aging”

 Aging involves an analysis of the accounts where they are classified into not due or past due.
 Past due accounts are further classified in terms of the length of the period they are past due.
 The allowance is then determined by multiplying the total of each classification by the rate or
percent of loss experienced by the entity for each category.

 Percentage of accounts receivable

 A certain rate is multiplied by the open accounts at the end of the period in order to get the
required allowance balance.
 The rate used is usually determined from past experience of the entity.
 Percentage of sales
 The amount of sales for the year is multiplied by a certain rate to get the doubtful accounts
expense.
 The rate may be applied on credit sales or total sales
Illustration: Accounting for Bad debts
 Aging
 The following data are summarized in aging the accounts at the end of the period:

Balance Uncollectible % Required Allow

Not due P500,000 10% P50,000

1 to 30 days past due P400,000 1% P4,000

31 to 60 days past due P200,000 6% P12,000

61 to 180 days past due P100,000 30% P30,000

More than 1yr. past due P20,000 100% P20,000

Total P1,220,000 P116,000

 Note: allowance for doubtful accounts has credit balance of P50,000.
Illustration: Accounting for Bad debts
 Percentage of accounts receivable
 Assume accounts receivable of P400,500 and a credit balance in the allowance for doubtful
account of P10,000. Doubtful accounts are estimated to be 3% of accounts receivable.

 Percentage of sales
 The following accounts are gathered from the ledger:
 Accounts receivable balance P1,000,000
  Sales P5,000,000
 Sales return P100,000
 Allowance for doubtful accounts P20,000
The doubtful accounts are estimated to be 2% of net sales
Illustration: Accounting for Bad debts
 Alpha Company’s account balances at December 31, for accounts receivable and the
related allowance are P460,000 debit and P700 credit, respectively. From an aging
accounts receivable, it is estimated that P18,000 of the December 31 receivables
will be uncollected.

 Bravo Company’s account balances at December 31, for accounts receivable and the
related allowance are P640,000 debit and P1,200 credit, respectively. Sales during
the year were P1,800,000. It is estimated that 1% of sales will be uncollectible.

Required: Adjusting Journal Entries (w/ solution)

Republic Act No. 9298
 The Accountancy Act of 2004”
◦ Approved May 03, 2004
 Old law: Presidential Degree no. 692
◦ The Revised Accountancy Law
RA 9298, Article I, Section 4
 Article I
◦ Title, Declaration of Policy, Objective and Scope of practice.
 Section 4 – Scope of Practice
◦ Practice of Public Accountancy
◦ Practice in Commerce and Industry
◦ Practice in the Government
◦ Practice in Education/Academe
RA 9298, Article II, Section 5
 Article II
◦ Professional Regulatory Board of Accountancy
Board of Accountancy
 Section 5 – The Board and its Composition
1 Chairman 6 members
RA 9208, Article III
 Article III Examination, Registration, and Licensure

RA 9298, Article III, Section 13

 The Certified Public Accountant Examinations.
◦ All applicants for registration for licensure examination (2 times a year, every May and October)

RA 9298, Article III, Section 14

 Qualifications of Applicants for Examinations
Filipino, good moral, graduate, no criminal offense
RA 9298, Article III, Section 15
 Subject of the Examination
◦ Theory of Accounts
◦ Auditing Theory
◦ Management Services
◦ Auditing Problems
◦ Practical Accounting Problems 1
◦ Practical Accounting Problems 2
◦ Business Law and Taxation
RA 9298, Article III, Section 16
 Rating in the Licensure Examination
To be qualified as having PASSED 75% not lower 65% any in subject
RA 9298, Article III, Section 16
 Rating in the Licensure Examination
 Re-examination, within 2 years from the preceding examination.
RA 9298, Article III, Section 17
 Report of Ratings (within (10) calendar days after the examination)

Accounting - Is an information system that measures, processes

Primitive Accounting - The origin of keeping accounts has been traced as far back as 8500 B.C. clay tokens –
cones, disks, spheres and pellets – found in Mesopotamia (Iraq).
Code of Hammurabi - merchants trading goods to give buyers
Middle Ages (11th to 13th centuries) - Arabic numerals were being used as a result of trade, allowing column of
numbers to be added and subtracted
Quipu- used knotted cords of different lengths and colors to accounting records.
The Florentine Approach- France was evidenced by the bank ledger fragments of 1211 (transcribed in 1887 by
Peitro Santini)
Amatino Manucci - was the inventor of double – entry bookkeeping
The Method of Venice
Fra Luca Pacioli - Father of Double – Entry Accounting” (Summa de arithmetica, geometria, proportioni et
proportionlita” (Everything about arithmetic, geometry and proportion)
Financial Statement or FS – the documents that report financial information about an entity

- results of management’s stewardship.

Fairly presented to
 Generally Accepted Accounting Principles (GAAP)

 GAAP = US Accounting Standard

 PFRS/PAS = Philippine Financial Reporting Standard/Philippine Accounting Standard.

 Accounting policies - specific principles, bases, convention, rules, and practices

The users of financial Statements are:

Investors – whether to buy, hold or sell / INVESTEE
Employee – the stability and profitability of employers/ pay the salaries and fringe benefits.
Lenders – the ability of the borrowers to pay on time
Suppliers – the ability of the customer to pay debts/ remain as a continuing buyer.
Customers - the ability of the enterprise to be a continuing source of supply/ company to exist long period
Government Agencies – the capacity of the enterprise to pay taxes
Public – the activities of the enterprise
Management – the activities of the enterprise for planning

Underlying Assumption
Accrual basis of accounting means that the effects of transactions/ NOT when cash IS RECEIVED
Going concern assumption means that the business will continue in operation
The qualitative characteristics of financial statements are the qualities or attributes that make financial
accounting

Fundamental qualitative characteristics - relates to the content or substance

 Relevance- is the capacity of the information to influence a decision

- Materiality information is material if its omission or misstatement/ depends on the
size of the item or error judged
-
 Faithful representation- means that the actual effects of the transactions shall be properly accounted

- Completeness – an omission can cause information to be false/ adequate

disclosure standard
principle of full disclosure.

- Neutrality- free from bias.

- Free from error – means there are no errors or omissions
Substance over form – if information is to represent faithfully

- Prudence (conservatism) – is the inclusion of a degree of caution/ the alternative

which has the least effect
 Enhancing qualitative characteristics- relates to the presentation of form of financial information

- Comparability – the measurement and display of the financial effect/ CARRIED

OUT
- Understandability – users are assumed to have a reasonable knowledge
- Verifiability means that different knowledgeable and independent observers could
reach consensus
- Timeliness means that financial information must be available or communicated
early

The constraints on relevant and reliable information are;

- Timeliness (done)
- Balance between Benefit and Cost – BENEFIT> COST
- Balance between Qualitative Characteristics – the aim is to achieve an
appropriate balance

4. Fair Presentation True and Fair Value – The application of the principal qualitative
Elements of Financial Statements
1. Statement of Financial Position (Balance Sheet)
2. Statement of financial Performance, Statement of Comprehensive Income (Income Statement)
3. Statement of Retained Earnings
 4. Statement of Changes in Equity
5. Statement of Cash Flows

6. Notes to Financial Statement (notes, comprising a summary of significant accounting,

Basic Financial Statements

1. Statement of Financial Position (Balance Sheet)
2. Statement of financial Performance, Statement of Comprehensive Income, Statement of Profit or
Loss (Income Statement)
3. Statement of Changes in Equity
4. Statement of Cash Flows
5 .Notes to Financial Statement (notes, comprising a summary of significant accounting,

Statement Financial Position or Balance Sheet

 three (3) elements

1. Assets; - defined as a resource controlled by the enterprise

 Essential Characteristics of an assets are:

1. Controlled by the entity.

2. Result of past transaction or event
3. Provide future economic benefits
4. Cost of the asset can measured reliably

2 Liabilities - present obligation of the enterprise arising

3 Equity- the residual interest or remainder of the assets

Liquidity
Solvency