F.A.R.

Reviewer: Finals

Pointers:
 Ending Inventory - is a balance sheet account because it’s the remaining, unsold assets in
your inventory account. Also, its balance gets carried over to the next period (like other
balance sheet accounts) as the new beginning inventory.
 Income Summary - it’s a normal credit account because in order to close it to capital later
on (during closing entries) it must be decreased by debiting.
 Inventory Beginning - is extended to the income statement and not the balance sheet
because it’s an addition to purchases (it’s lumped in) which means its balance will not be
carried to the next period.

Closing Entries:
 1. Close all revenue and expenses to income
summary.
2. Close income summary to capital.
3. Deduct drawings from capital.

Reversing Entries – not all adjustments are subjected to reversing entries, only those that can
increase an asset and liability account.
Deferrals:
 Prepaid Expense (Expense Method): because during the adjustment you will have to debit
prepaid expenses and credit the appropriate expense.
o Thus, you will increase an asset.
 Deferred Revenue (Income Method): because during the adjustment you will have to
debit revenue and credit deferred revenue.
o Thus, you will increase a liability.
Accruals:
 Accrued Income: because there’s an increase in accounts receivable, an asset.
 Accrued Expense: because there’s an increase in accounts payable, a liability.

Formulas To Remember
 Income – Expenses = Profit
 Profit + Expenses = Income
A Controlling Account (or Control Account) – is a group of accounts with a similar nature.
 The balance of the controlling account is shown in the general ledger.
 But the balances that comprise the controlling account are shown in the subsidiary ledger.
Transactions are normally identified from: Source Documents.
a) Sales Invoices – sale of goods.
b) Official Receipts – rendering of services.
c) Purchase Orders – issued by the buyer to a seller indicating quantities, types, etc.
d) Delivery Receipts – signed by the receiver of the shipment.
e) Bank Deposit Slips
f) Bank Statements – shows deposits and withdrawals during the period (monthly).
g) Checks
h) Statement of Account and the like – report that is sent to the customer containing:
payments or remaining balances and notices for billing.
Memo Entry: an entry that does not affect DEALER / (ALERE) but should still be described (not
recorded).
 Income Method vs. Liability Method
Example: Your business collected royalty income of 720,000 in advance on November 1, 20x1,
as of December 31 20x1, 560,000 of the advance collection is earned.
Income Method
Initial Recording:
Debit: Cash 720,000
Credit: Royalty Income 720,000
Adjustment:
Debit: Royalty Income 160,000
Credit: Unearned Royalty Income 160,000
Liability Method
Initial Recording:
Debit: Cash 720,000
Credit: Unearned Income 720,000
Adjustment:
Debit: Unearned Income 560,000
Credit: Royalty Income 560,000

Asset Method vs. Expense Method

Example: Your business paid one-year fire insurance 0f 360,000 on October 31, 20x1, what is
the initial and adjusting entry on December 31, 20x1.
Expense Method
Initial Recording:
Debit: Insurance Expense 360,000
Credit: Cash 360,000
Adjustment:
Debit: Prepaid Insurance 300,000
 Credit: Insurance Expense 300,000

Asset Method
Initial Recording:
Debit: Prepaid Insurance 360,000
Credit: Cash 360,000
Adjustment:
Debit: Insurance Expense
Credit: Prepaid Insurance

Statement of Changes in Equity

Name Here, Owner’s Equity 5/1/21 5,000

Add: Additional Investments 3,000

Profit 2,000 5,000

Total 10,000

Less: Withdrawals (2,000)

Name here, Owner’s Equity 5/31/19 8,000

Statement of COGS & Gross Profit

Sales 15,000

COGS
Beg. Inventory 5,000

Add: Net purchases 20,000

TGAS 25,000

(20,000) (5,000)
Less: End, Inventory
10,000
Gross Profit
A Transaction involves the transfer of something of value.
Types of Transactions:
a) Source of Assets – increase in an asset account and a liability account
a. Purchased equipment on account.
b) Exchange of Assets – one asset account increases and another decreases.
a. Bought supplies in cash.
c) Use of Assets – an asset account decreases a liability account decreases.
a. Paid accounts payables.
d) Exchange of Claims – one liability account increases another decreases.
a. Paid salaries payable using money obtained from a loan.

Concept of Duality – transactions have at least a two-fold effect.

Concept of Equilibrium – equal debits and credits.

 Single/Sole Proprietorship – Department of Trades and Industries.

 Partnership – Securities and Exchange Commission, created by contract.
 Corporation – Securities and Exchange Commission, created by operation of law.
o Incorporators are the founders.
 Cooperative – Cooperative Development Authority.