NC III BOOKKEEPING REVIEWER

THE ACCOUNTING CYCLE

Accounting is the 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. It
is also defined as the Language of Business.

The important activities in the accounting process are identifying, measuring, recording, classifying, summarizing,
and communicating.
1. Identifying means the recognition or non-recognition of accountable events. An event is accountable or
quantifiable when it has an effect on Assets, Liability, and Equity.
2. Measuring is the process of determining the monetary amounts at which the elements of the financial
statements are to be recognized and carried in the balance sheet and income statement.
3. Recording or journalizing is the process of systematically maintaining a record of all economic business
transactions after they have been identified and measured.
4. Classifying is the sorting or grouping of similar and interrelated economic transactions into their
respective class. It is accomplished by posting to the ledger.
5. Summarizing is the preparation of financial statements.
6. Communicating is the process of preparing and distributing accounting reports to potential users of
accounting information.

The Accounting Equation

ASSETS = LIABILITIES + EQUITY

Assets include those economic resources, rights and property both tangible and intangible that are owned
and/or controlled by either a natural person or a legal entity. Some examples of generally accepted account titles
for assets are:
❏ Cash - money and other medium of exchange that is available for general disbursement.
❏ Accounts Receivable - claims from customers or clients arising from the sale of goods and
services, on a credit basis, in the ordinary course of business operations.
❏ Merchandise Inventory - goods and products that are acquired by a merchandising business for
purposes of reselling them to customers at a higher price.
❏ Prepaid Expenses - the right to receive benefits from expenses already paid for but are expected
to be consumed or used in the following period or periods. For example, unused office supplies.
❏ Property, Plant and Equipment - are tangible assets that are held by an entity for use in
production or supply of goods and services, for rental to others, or for administrative purposes
and are expected to be used during more than one period.

Liabilities represent the present economic obligations of an entity that would require some form of future
settlement. Examples follow:
❏ Accounts Payable - obligations of the business enterprise to the suppliers as a result of buying
goods and services, on a credit basis, in the ordinary course of the business operations.
❏ Notes Payable - obligations as a result of buying goods and/or services, on a credit basis, or as
a result of borrowing money, for which a promissory note is given by the business to the supplier
or lender.
❏ Loan Payable - obligations of the business to lenders as a result of borrowing money. Usually,
the settlement of loans payable requires the payment of interest.
❏ Unearned Revenues - obligations for revenues that are collected in the current reporting period
but are expected to be earned in the following period or periods.

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Equity represents the residual claim of the owner or owners over the business enterprise’s assets. In a single
proprietorship, the interest or equity of the owner is called the owner's equity. The equity comes from the original
investment that the owner or owners contributed towards the formation and operations of the business
enterprise. It decreases as a result of personal withdrawals or profit distribution, and the net loss incurred by the
business. Equity is computed as follows:

Original Investment + Additional Investment + Profit or (Loss) during the reporting period - Personal
Withdrawals or Profit Distribution = Equity as of the end of the reporting period.

Contra accounts:

Normal balance: Always opposite to the relevant normal account. The normal balance of a contra account can
be a debit balance or a credit balance

An example: Accounts receivable is an asset account that normally has a debit balance. The allowance for
doubtful accounts is a contra account to the accounts receivable and normally has a credit (opposite) balance.

Other examples of contra accounts include:

❏ accumulated depreciation account – a contra asset account

❏ sales returns and allowances account – a contra revenue account
❏ sales discount account – a contra revenue account
❏ drawings account – a contra equity account
❏ treasury stock account – a contra equity account
❏ bonds discount account – a contra liability account

As the normal balance of a contra account is always opposite to the normal balance of the relevant main
account, it causes a reduction in the reporting amount of the main account. For example, if the balance in
building account is P500,000 and the balance in accumulated depreciation – building account is P150,000,
the building would be reported at P350,000 (= P500,000 – P150,000) in the balance sheet.

Rule: If the normal balance of the contra account is debit, the increase will be recorded on the debit side and the
decrease will be recorded on the credit side. If, on the other hand, the normal balance of the contra account is
credit, the increase is recorded on the credit side and the decrease is recorded on the debit side.

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STEPS IN THE ACCOUNTING CYCLE

Step 1-2. Analyzing means that the accountant determines the impact of the transaction on the financial
position or balance sheet as represented by the basic equation “asset equals liabilities plus equity”.

Rules of Debit and Credit

Debits and credits are the opposing sides of an accounting journal entry. They are used to change the
ending balances in the general ledger accounts. The rules governing the use of debits and credits in a journal
entry are as follows:
A debit or debit entry is used to indicate:
● An increase in asset,
● A decrease in liability,
● A decrease in equity,
● An increase in an expense (or loss),
● A decrease in income (a revenue or gain).

A credit or credit entry is used to indicate:

● An increase in liability,
● A decrease in equity,
● A decrease in asset,
● A decrease in expense (or loss),
● An increase in income (a revenue or gain).

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A summary of the rules of debit and credit:

Practice Test: Identity the accounts involved in the following transactions and state the nature of each account.
Also mention how increases or decreases in accounts resulting from transactions should be recorded.

The following transactions are related to Small Traders:

1. Started business with cash P95,000.

2. Furniture purchased for cash to be used in business P8,000.
3. Purchased goods for cash P40,000.
4. Purchased goods on credit from Big Traders P57,000.
5. Sold goods for cash P5,000.
6. Purchased equipment for business P4,000.
7. Sold goods on credit to John Retailers P1,500.
8. Paid salary to employees P1,200.

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Books of Accounts
Business enterprises should keep certain financial records, called book of accounts, accounting books,
or simply books where the business transactions are recorded, classified, and summarized. The most commonly
kept books of accounts are grouped into two: the journal and the ledgers. These books are approved and
stamped by the BIR before any business transaction could be recorded therein.

Step 3. Journalizing

Journal
A business transaction, as evidenced by the source documents, is recorded or entered for the first time in
the book called a journal. It is sometimes referred to as the book of original entry. The process of recording or
entering a business transaction in a journal is called journalizing. This unique style of recording is done through
the preparation of journal entries. A journal entry has the following parts:
❏ The date when the transactions occurred
❏ The effects of the transaction as reflected by the account titles debited and account titles credited
❏ The monetary values (debit and credit values) assigned to each accounting element that is affected by
the transaction.
❏ A brief and clear explanation of the transaction
❏ The posting references showing the code of the destination ledger account.

These five parts are identified in the following simple journal entry that was prepared to record the initial
investment of Mr. Mondragon, a proprietor:

Date Account Title/Explanation PR Debit Credit

May 10, 2020 Cash 101 P100,000.00
Mr. Mondragon, Capital 130 P100,000.00
To record initial investment.

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Think about this 😊😊
❏ Whenever cash is received, the cash account is debited. Whenever cash is paid, cash account is credited.
❏ When the term of a sale or a purchase transaction is “on credit”, “on account”, or “charge”, that would mean that the
cash has not yet been collected or has not yet been paid at the time of the sale or the purchased. Therefore, the
seller debits the accounts receivable, while the buyer credits accounts payable.
❏ Expenses incurred tend to decrease the profit of a reporting period, ultimately decreasing the proprietor’s equity,
which is why expenses are normally recorded by making a debit entry. Income earned tends to increase the profit of
a reporting period. This ultimately increases the proprietor’s equity, and is the reason why income accounts are
normally credited.
❏ In accounting, the term expenses may include losses. On the other hand, both revenues and gains are under the
umbrella of income.

CASE PROBLEM:

June 01 Mr. Daniel started business with an initial capital of P45,000.

3 Purchased merchandise from Mr. Lebron on account, P29,500 terms 2/10, n/30 per invoice #215.
4 Purchased office supplies costing P1,000 on cash basis.
6 Paid P6,000 cash on the purchase of equipment.
7 Sold merchandise to Mr. Nate Lucas as per change invoice #401 at P18,000 terms 2/10, n/30. The
cost of merchandise sold is P15,000.
8 Paid P1,000 freight on the sale of merchandise to Mr. Nate Lucas.
10 Returned defective merchandise to Mr. Lebron worth P1,500.
11 Received cash from Mr. Nate Lucas in full settlement of his account.
12 Paid the account to Mr. Lebron supplier in full.
14 Borrowed money from Mr. Vasquez as evidence by promissory note amounting to P20,000.
16 Bought merchandise from Mr. Zanjoe for cash P20,000.
16 Paid wages to his employees for the first two weeks of June, P7,000.
18 Received refund from Mr. Zanjoe P1,000.
22 Sold merchandise to Mr. Ethan for P24,000 cash. The cost of merchandise sold is P20,000.
23 Purchased merchandise from Mr. Plaridel on account, P10,000 terms 2/10, n/30 per invoice #216.
No discount is allowed on partial payment.
24 Paid freight on June 23 purchases of P100.
25 Paid Mr. Plaridel P5,000.
28 Mr. Daniel withdrew P5,000 cash for personal use.
29 Made refund to Mr. Ethan for defective merchandise, P1,500.
29 Paid the following: Advertising, P1,500; Electricity, P500; and a Rent of P5,000.
30 Paid wages to his employees for the last two weeks of June, P7,000.
30 Sold merchandise to Mr. Ymar as per change invoice #402 for P3,600 terms 2/10, n/30. The cost of
the sold merchandise is P3,000.

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Mr. Daniel uses PERIODIC INVENTORY SYSTEM and the following account titles in recording the above
transactions:

CHART OF ACCOUNTS

Code ASSETS Code INCOME

101 Cash 401 Sales
102 Accounts Receivable 402 Sales Return and Allowances
103 Merchandise Inventory 403
104 Supplies
105 Equipment EXPENSES
106 Accumulated Depreciation - Equip. 501 Cost of Goods Sold
502 Purchases
LIABILITIES 503 Purchase Return and Allowances
201 Accounts Payable 504 Purchase Discount
202 Notes Payable 505 Freight In
506 Freight Out
EQUITY 507 Advertising Expense
301 Mr. Daniel, Capital 508 Rent Expenses
302 Mr. Daniel, Drawings 509 Utilities Expense
510 Salaries Expense
511 Supplies Expense

601 Income and Expenses Summary

GENERAL JOURNAL (GJ1)

DATE ACCOUNT TITLE/EXPLANATION PR DEBIT CREDIT

June 01 Cash 101 P45,000.00
Mr. Daniel, Capital 301 P45,000.00
To record initial investment.
03 Purchases 502 29,500.00
Accounts Payable 201 29,500.00
To record purchase of goods, terms 2/10, n/30.
04 Supplies 104 1,000.00
Cash 101 1,000.00
To record purchase of supplies.
06 Equipment 105 6,000.00
Cash 101 6,000.00
To record the purchase of equipment.
07 Accounts Receivable 102 18,000.00
Sales 401 18,000.00
To record sale of merchandise, term 2/10, n/30.
08 Freight Out 506 1,000.00
Cash 101 1,000.00
To record payment of freight on sales.
10 Accounts Payable 201 1,500.00
Purchase Return and Allowances 503 1,500.00
To record the return of merchandise to supplier.

102,000.00 102,000.00
GENERAL JOURNAL (GJ2)

11 Cash 101 17,640.00

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 Sales Discount 403 360.00
Accounts Receivable 102 18,000.00
To record collection on accounts, June 07.
12 Accounts Payable 201 28,000.00
Purchase Discount 504 560.00
Cash 101 27,440.00
To record payment of accounts payable, June 03.
14 Cash 101 P20,000.00
Notes Payable 102 P20,000.00
To record notes payable.
16 Purchases 502 20,000.00
Cash 101 20,000.00
To record purchase of merchandise.
16 Salaries Expense 510 7,000.00
Cash 101 7,000.00
To record payment of salaries.
18 Cash 101 1,000.00
Purchase Return and Allowances 503 1,000.00
To record the return of merchandise to supplier, June16.
22 Cash 101 24,000.00
Sales 401 24,000.00
To record sales of merchandise.
23 Purchases 502 10,000.00
Accounts Payable 201 10,000.00
To record purchase of goods, terms 2/10, n/30.
24 Freight In 505 100.00
Cash 101 100.00
To record payment of freight on purchased goods.
25 Accounts Payable 201 5,000.00
Cash 101 5,000.00
To record payment of accounts payable dated June 23. (No discount is allowed for partial payment)
28 Mr. Daniel, Drawings 302 5,000.00
Cash 101 5,000.00
To record personal withdrawal.
29 Sales Return and Allowances 402 1,500.00
Cash 101 1,500.00
To record the return of merchandise from customers, June 22 sales.
29 Advertising Expense 507 1,500.00
Utilities Expense 509 500.000
Rent Expense 508 5,000.00
Cash 101 7,000.00
To record payment of expenses.
30 Salaries Expense 510 7,000.00
Cash 101 7,000.00
To record payment of salaries.
30 Accounts Receivable 102 3,600.00
Sales 401 3,600.00
To record sale of merchandise, terms 2/10, n/30.

157,200.00 157,200.00

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Step 4. Post to the Ledger
The debits and credits in the journal entries are classified and summarized in the ledger accounts. The
process of transferring the data from the journal to the ledger account is called posting. The ledger may either be
a general ledger or subsidiary ledger, depending on the nature of accounts found therein. A general ledger
contains all the accounts – one for each asset, liability, equity, income, and expenses. Subsidiary ledger is used
when the volume of transactions become voluminous, maintaining one or more subsidiary ledger also called
special ledgers, may become necessary in order that the clerical workload can be distributed systematically
among several accounting employees.

The steps to follow in posting an entry from the journal to the T-Form of ledger accounts are:
1. Locate the appropriate account in the ledger where the debit entry would be
posted. This is called destination ledger account.
2. Write the date of the journal entry on the date column on the debit side of the
destination ledger account.
3. Write the source of the posting under the PR column on the debit side of the
destination ledger account.
4. Enter the value of money on the column of the destination ledger account.
5. Compute the up-to-date balance of ledger account; and
6. Go back to the source journal. Write the code of the destination ledger account
under the PR column.

Practice Test:

Balance
Date Item PR Debit Credit Debit Credit

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The ledger accounts shown below are derived from the journal entries of Mr. Daniel.

Account Title: Cash Account Number: 101 Account Title: Accounts Receivable Account Number: 102
Balance Balance
Date Item Post Debit Credit Debit Credit Date Item Post Debit Credit Debit Credit
Account
June 01Title: Merchandise
GJ 1 Inventory
45,000.00 Account Number: 103
45,000.00 Account Title: Supplies
June 07 GJ 1 18,000.00 Account Number: 104
18,000.00
04 GJ 1 1,000.00 44,000.00 11 GJ 2 18,000.00 -
06 GJ 1 6,000.00 38,000.00
Balance 30 GJ 2 3,600.00 3,600.00
Balance
08 GJ 1 1,000.00 Debit
37,000.00 Credit Debit Credit
Date Item Post Debit Credit Date Item Post Debit Credit
Account11 GJ 2 17,640.00 54,640.00
June 30Title: Equipment
GJ 3 19,000.00 Account
19,000.00Number: 105 Account
June 04Title: Accumulated
GJ 1 Depreciation
1,000.00 Account
1000.00Number: 106
12 GJ 2 27,440.00 27,200.00
14 GJ 2 20,000.00 47,200.00 30 GJ 4 200.00 800.00
Balance Balance
16 GJ 2 20,000.00 27,200.00
Account
Date16Title: Accounts
Item Post2 Payable
Debit Account
Credit7,000.00 Debit Number: 201
Credit Account Title:
Date Notes
Item Payable
Post Debit Credit Account
Debit Number: 202
Credit
GJ 20,200.00
June 06
18 GJ 21
GJ 1,000.006,000.00 6,000.00
21,200.00
Balance Balance
22 GJ 2 24,000.00 45,200.00
Debit Credit
Date24 Item Post2
GJ Debit Credit
100.00 45,100.00 DateTitle:Item Post Drawings
Debit Credit Debit Credit
Account
June 25
03Title: Mr. Daniel,
1 Capital
GJ 2 29,500.00Account Number: 301 Account Mr. Daniel, Account Number: 302
GJ 5,000.00 40,100.00 29,500.00 June 04 GJ 1 20,000.00 20,000.00
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28 GJ 2
GJ 1 1,500.00 5,000.00 35,100.00 28,000.00
12 GJ 2
2 28,000.00 Balance - Balance
29 GJ 1,500.00 33,600.00
23 GJ 2 10,000.00 Debit Credit Debit Credit
Date29 Item Post2
GJ Debit Credit
7,000.00 26,600.00 10,000.00 Date Item Post Debit Credit
23
June 30
01 GJ 2
GJ 2
1 5,000.00 45,000.00
7,000.00 5,000.00
19,600.0045,000.00 June 28 GJ 2 5,000.00 5,000.00
30 GJ 4 16,000.00 29,000.00 30 GJ 4 5,000.00 -
30 GJ 4 5,000.00 24,000.00

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Account Title: Sales Account Number: 401 Account Title: Purchases Account Number: 502

Balance Balance
Debit Credit Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit
Account
June 07Title: SalesGJReturn
1 and Allowances
18,000.00Account Number: 402
18,000.00 Account
June 03 Title: Sales
GJDiscount
1 29,500.00 Account Number: 403
29,500.00
22 GJ 1 24,000.00 42,000.00 16 GJ 2 20,000.00 49,500.00
Balance 23 GJ 2 10,000.00 59,500.00Balance
30 GJ 2 3,600.00 45,600.00
Date30 Item GJ
Post4 45,600.00
Debit Credit Debit Credit - 30
Date Item GJ 4Post Debit 59,500.00
Credit Debit
- Credit
Account Title:
June 29 Purchase
GJ 2 Return and
1,500.00 Allows. Account
1,500.00Number: 503 Account Title: Purchase
June 11 GJDiscount
2 360.00 Account360.00
Number: 504
30 GJ 4 1,500.00 - 30 GJ 4 360.00 -

Balance Balance
Debit Credit Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit
Account
June 10Title: FreightGJIn1 1,500.00 Account Number: 505
1,500.00 Account
JuneTitle:
12 Freight Out
GJ 2 560.00 Account Number: 506
560.00
18 GJ 2 1,000.00 2,500.00 30 GJ 4 560.00 -
Balance Balance
30 GJ 4 2,500.00 -
Debit Credit Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit
Account
June 24Title: Advertising
GJ 2 Expense
100.00 Account Number: 507
100.00 Account June 08 Rent Expense
Title: GJ 1 1,000.00 Account 1,000.00
Number: 508
30 GJ 4 100.00 - 30 GJ 4 1,000.00 -
Balance Balance
Debit Credit Date Title: Item PostExpenseDebit Credit Account Debit Credit
Date Title:Item
Account Post
Utilities Debit
Expense Credit Account Number: 509 Account Salaries’ Number: 508
June 29 GJ 2 1,500.00 1,500.00 June 29 GJ 2 5,000.00 5,000.00
30 GJ 4 1,500.00 - 30 GJ 4 5,000.00 -
Balance Balance
Date Item Post Debit Credit Debit Credit Date Item Post Debit Credit Debit Credit
Account Title: Supplies
June 29 GJ 2Expenses
500.00 Account Number: 511
500.00 AccountJune
Title:
16Income & GJ Expenses
2 Summary
7,000.00 Account Number: 601
7,000.00
30 GJ 4 500.00 - 30 GJ 4 7,000.00 14,000.00
Balance 30 GJ 4 14,000.00 Balance-
Debit Credit Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit
June 30 GJ 3 200.00 200.00 June 30 GJ 3 19,000.00 19,000.00
30 GJ 4 200.00 - GJ 4 43,740.00 62,740.00
GJ 4 56,540.00 6,200.00
GJ 4 22,200.00 16,000.00
GJ 4 16,000.00 -

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Step 5. Prepare a Trial Balance

Preliminary Trial Balance

A trial balance is a list of balances of ledger accounts of a business at a specific point of time usually at
the end of the period such as month, quarter or year.

Following is the preliminary trial balance prepared from the ledger accounts of Mr. Daniel.

DANIEL GAMBOA
Preliminary Trial Balance
As of June 30, 20XX

Code Account Title Debit Credit

101 Cash P19,600.00
102 Accounts Receivable 3,600.00
104 Supplies 1,000.00
105 Equipment 6,000.00
201 Accounts Payable P5,000.00
202 Notes Payable 20,000.00
301 Mr. Daniel, Capital 45,000.00
301 Mr. Daniel, Drawings 5,000.00
401 Sales 45,600.00
402 Sales Return and Allowances 1,500.00
403 Sales Discounts 360.00
502 Purchases 59,500.00
503 Purchase Return and Allowances 2,500.00
504 Purchase Discounts 560.00
505 Freight In 100.00
506 Freight Out 1,000.00
507 Advertising Expense 1,500.00
508 Rent Expense 5,000.00
509 Utilities Expense 500.00
510 Salaries Expense 14,000.00

TOTAL P188,660.00 P188,660.00

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Step 6. Prepare a Worksheet

Adjusting entries are used to adjust the ending balances in various general ledger accounts. These
journal entries are intended to bring the financial statements of the reporting entity into compliance with the
applicable accounting framework (such as GAAP or IFRS). There are three general types of adjusting
entries, which are as follows:
1. Accruals. An accrual entry is the most commonly-used adjusting entry. It is intended to record
revenues or expenses that have not yet been recorded through a standard accounting transaction.
For example, a company is constrained by a contractual arrangement with a government customer
to not bill for services work until the end of a contract period. In the interim, the company accrues
revenue, so that it can recognize some revenue from the contract, even though the contractual period
has not yet been completed. As another example, a company controller decides to accrue the
expense associated with a significant delivery of goods, and for which no supplier invoice has yet
arrived. The intent is to ensure that the cost of the goods is recorded in the financ ial statements for
the period in which the goods arrived.
2. Deferrals/Prepayments. A deferral entry is intended to defer the recognition of a revenue transaction
that has not been earned, or an expense transaction that has not yet been consumed. The outcome
is the shifting of revenue or expense recognition to a future period. For example, a customer pays in
advance for a services contract that will be performed in equal installments over the next four
months. A deferral adjusting entry can be used to shift 3/ 4 of the payment into the following three
periods, when they will be recognized. Similarly, a company pays the full -year P12,000 cost of a life
insurance policy in advance, and uses a deferral entry to shift the recognition of 11/12 of this amount
into the next 11 reporting periods.
3. Estimates. An estimation adjusting entry is used to adjust the balance in a reserve, such as the
allowance for doubtful accounts or the reserve for inventory obsolescence. This is done in order to
maintain adequate reserve levels that reasonably the reflect the amount of losses from existing
assets that can be expected in future periods.

Adjusting entries are a common part of the closing process for any business using accrual basis accounting.

Example:
This example is a continuation of the accounting cycle problem we have been working on. In the previous
steps we prepared an unadjusted trial balance.

Relevant information for the preparation of adjusting entries of Mr. Daniel:

 Office supplies having original cost of P800.00 were unused till the end of the period.
 At the end of the month, there are P19,000.00 worth of merchandise on hand.

GENERAL JOURNAL (GJ 3)

DATE ACCOUNT TITLE/EXPLANATION PR DEBIT CREDIT
June 30 Supplies Expense 511 P200.00
Supplies 104 P200.00
To record adjusting entry on supplies.

Merchandise Inventory 103 19,000.00

Income and Expense Summary 601 19,000.00
To record inventory end.

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 Step 7. Prepare Financial Statements

Financial statements are a collection of summary-level reports about an organization's financial results,
financial position, and cash flows. They are useful for the following reasons:

 To determine the ability of a business to generate cash, and the sources and uses of that cash.
 To determine whether a business has the capability to pay back its debts.
 To track financial results on a trend line to spot any looming profitability issues.
 To derive financial ratios from the statements that can indicate the condition of the business.
 To investigate the details of certain business transactions, as outlined in the disclosures that accompany
the statements.

A complete set of financial statements comprises:

1) Balance sheet. Shows the entity's assets, liabilities, and equity as of the report date. The two popular
forms of presenting the accounting elements in a classified balance sheet are the report form and
the account form.

2) Income statement. Profit, also called net income is frequently used as a measure of the
management’s performance in the operations of a business enterprise. It is important that the
accounting elements in the income statement are classified and sub- classified in a manner that is
useful for decision making. The presentation in the income statement involves a process of grouping
or segregating the income and expenses so that the report will be more relevant to the data-users.
In the process of classifying or segregating the income statement elements, the nature or type of
business of business operations of the enterprise is taken into consideration. Remember that what
is usual for one business or industry maybe unusual for another business or industry.
Proper classification or segregation helps the users of financial statem ents in understanding the
current performance of the enterprise, and also in making projections about its future performance.

3) Statement of changes in equity. It reports the transactions and events that caused the owners’ equity
to increase or decrease during a certain period of time.

4) Statement of cash flows. Many data-users find this statement as a useful tool for making financial
decisions. Management uses it to monitor and study the cash inflows and outflows of the business.
Creditors and the other data-users use this statement in assessing the ability of the business
enterprise to generate cash.
The statement of cash flows summarizes the sources and uses of cash in connection with the
operating, investing, and financing activities of a business enterprise.
Example of cash inflows and outflows that are related to the operating activities are: collections from
the customers, cash from sale of goods and services to customers, payment of operating expenses,
payment of trade obligation, etc.

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 The cash inflows and outflows that are related to the operating investing activities of the enterprise
include: proceeds from the sale of fixed assets, payments of the purchase of fixed assets, etc.
Some example of cash inflows and outflows that pertain to the financing activities of the enterprise
are: proceeds from borrowing, repayments of borrowings, and cash investment or cash withdrawals
of the owner/owners.

5) Supplementary notes. Includes explanations of various activities, additional detail on some accounts,
and other items as mandated by the applicable accounting framework, such as GAAP or IFRS.

If a business plans to issue financial statements to outside users (such as investors or lenders), the financial
statements should be formatted in accordance with one of the major accounting frameworks. These
frameworks allow for some leeway in how financial statements can be structured, so statements issued by
different firms even in the same industry are likely to have somewhat different appearances. Financial
statements that are being issued to outside parties may be audited to verify their accuracy and fairness of
presentation.

If financial statements are issued strictly for internal use, there are no guidelines, other than common usage,
for how the statements are to be presented.

At the most minimal level, a business is expected to issue an income statement and balance sheet t o
document its monthly results and ending financial condition. The full set of financial statements is expected
when a business is reporting the results for a full fiscal year, or when a publicly-held business is reporting
the results of its fiscal quarters.

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FINANCIAL STATEMENTS

DANIEL GAMBOA
Statement of Performance
For the period ended June 30, 20XX

Sales P45,600.00
Less: Sales Return and Allowances P1,500.00
Sales Discount 360.00 (1,860.00)
Net Sales 43,740.00
Less: Cost of Goods Sold
Merchandise Inventory, June 01 --
Purchases 59,500.00
Purchase Return and allowances (2,500.00)
Purchase Discount (560.00)
Freight In 100.00
Merchandise Inventory, June 30 (19,000.00) (37,540.00)
Gross Profit 6,200.00
Less: Operating Expenses
Freight Out 1,000.00
Advertising Expense 1,500.00
Rent Expense 5,000.00
Utilities Expense 500.00
Salaries Expense 14,000.00
Supplies Expense 200.00 (22,200.00)
Net Income/(Loss) (P16,000.00)

DANIEL GAMBOA
Statement of Changes in Equity
For the period ended June
30,20XX

Mr. Daniel, Capital Beginning --

Add: Initial Investment 45,000.00
Less: Daniel Drawings 5,000.00
Total 40,000.00
Net Profit/(Loss) (16,000.00)
Mr. Daniel, Capital End P24,000.00

16
 DANIEL GAMBOA
Statement of Financial Position
As of June 30,20XX

ASSETS
Current Assets
Cash P19,600.00
Accounts Receivable 3,600.00
Merchandise Inventory 19,000.00
Supplies 800.00
Total Current Assets 43,000.00
Non-Current Assets
Equipment 6,000.00

TOTAL ASSETS P49,000.00

LIABILITIES AND OWNER’S EQUITY

Current Liabilities
Accounts Payable P5,000.00
Non-Current Liabilities
Notes Payable 20,000.00
Total Liabilities 25,000.00

Owner’s Equity
Mr. Daniel, Capital 24,000.00

TOTAL LIABILITIES AND OWNER’S EQUITY P49,000.00

17
 DANIEL GAMBOA
Statement of Cash Flows
For the period ended June 30,20XX

Cash Flow from Operating Activities

Collection of cash sales P24,000.00
Collection of credit sales 17,640.00
Refund from purchases 1,000.00
Payment of goods bought (52,440.00)
Payment of supplies (1,000.00)
Refund to customers (1,500.00)
Payment of operating expenses (22,000.00)
Freight on purchases (100.00)
Net Cash Flow from Operating Activities (34,400.00)

Cash Flow from Investing Activities

Purchase of equipment (6,000.00)

Cash Flow from Financing Activities

Investment 45,000.00
Withdrawal (5,000.00)
Borrowings 20,000.00
Net Cash Flow from Financing Activities 60,000.00

Increase (Decrease) in Cash 19,600.00

Add: Cash, beginning --
Cash, End P19,600.00

Step 8. Journalize and Post closing Entries

During the period, there are three kinds of accounts in the general ledger of the enterprise – permanent,
temporary, and mixed accounts.

The permanent accounts are the assets, liabilities, equity and their affiliated accounts. These accounts are also
called real accounts. They contain the continuous chronological postings of the transactions or more than one
period.

The temporary accounts, also called nominal accounts include all accounts whose balances are closed and
transferred to capital at the end of each accounting period. At the end of each period, the balances of the
nominal accounts are reduced to zero and nothing is carried forward to the next period. Temporary account
includes:
1. Revenue, Income and Gains Accounts
2. Expense and Loss Accounts
3. Drawings or Withdrawals Account
4. Income and Expense Summary Account – a temporary account which facilitates the closing entries.

18
Mixed accounts have both permanent and temporary components in them. Adjusting entries are prepared before
the preparation of financial statements in order to break the mixed accounts. After the adjusting entries are
posted, there are no more mixed accounts in the general ledger.

The following example shows the closing entries of Mr. Daniel.

GENERAL JOURNAL (GJ4)

DATE ACCOUNT TITLE/ EXPLANATION PR DEBIT CREDIT
June 30 Sales 401 P45,600.00
Income and Expense Summary 601 P43,740.00
Sales Return and Allowances 402 1,500.00
Sales Discounts 403 360.00
To close income accounts.

Purchase Return and Allowances 503 2,500.00

Purchase Discounts 504 560.00
Income and Expense Summary 601 56,540.00
Purchases 502 59,500.00
Freight In 505 100.00
To close purchases accounts.

Income and Expense Summary 601 22,200.00

Freight Out 506 1,000.00
Advertising Expense 507 1,500.00
Rent Expense 508 5,000.00
Utilities Expense 509 500.00
Salaries Expense 510 14,000.00
Supplies Expense 511 200.00
To close expenses account.

Mr. Daniel, Capital 301 16,000.00

Income and Expense Summary 601 16,000.00
To close the loss for the period to capital account.

Mr. Daniel, Capital 301 5,000.00

Mr. Daniel, Drawings 302 5,000.00
To close the drawing to capital account.

148,400.00 148,400.00

19
Step 9. Prepare a Post-Closing trial Balance

A post-closing trial balance is a list of balances of ledger accounts prepared after closing entries have been
recorded and posted to the respective ledger accounts. The preparation of post-closing trial balance is the last
step of the accounting cycle and its purpose is to be sure that sum of debits equal sum of credits before the start
of new accounting period. It provides the openings balance for the ledger accounts of the new accounting
period.

The following post-closing trial balance was prepared after posting entries of Mr. Daniel to its general ledger and
calculating new account balances.

DANIEL GAMBOA
Post-Closing Trial Balance
As of June 30,20XX

Code Account Titles Debit Credit

101 Cash P19,600.00
102 Accounts Receivable 3,600.00
103 Merchandise Inventory 19,000.00
104 Supplies 800.00
105 Equipment 6,000.00
201 Accounts Payable P5,000.00
202 Notes Payable 20,000.00
301 Mr. Daniel, Capital 24,000.00

TOTAL P49,000.00 P49,000.00

20
Accounting for Merchandising Activities – PERPETUAL INVENTORY SYSTEM

A merchandising enterprise may use either the periodic system or the perpetual system in accounting for its
inventory. The perpetual system is an alternative to the periodic system. The manner of recording purchase and
sales transaction under the periodic system is addressed in previous example.

In a perpetual system, all transaction affecting the inventory balance are recorded as they occur, the system
acquired its name from the fact that the inventory records are continuously updated. The acquisition cost of
products purchased is recorded by debiting merchandise inventory or inventory account.

When merchandise is sold, two entries are prepared: first, to recognize the revenue from sales at selling price;
and second, to recognized the related cost of goods sold at cost. The second entry recognizes the decrease in
the balance of the merchandize inventory account as a result of the sales transaction.

CASE PROBLEM:

June 01 Mr. Daniel started business with an initial capital of P45,000.

3 Purchased merchandise from Mr. Lebron on account, P29,500 terms 2/10, n/30 per invoice #215.
4 Purchased office supplies costing P1,000 on cash basis.
6 Paid P6,000 cash on the purchase of equipment.
7 Sold merchandise to Mr. Nate Lucas as per change invoice #401 at P18,000 terms 2/10, n/30. The
cost of merchandise sold is P15,000.
8 Paid P1,000 freight on the sale of merchandise to Mr. Nate Lucas.
10 Returned defective merchandise to Mr. Lebron worth P1,500.
11 Received cash from Mr. Nate Lucas in full settlement of his account.
12 Paid the account to Mr. Lebron supplier in full.
14 Borrowed money from Mr. Vasquez as evidence by promissory note amounting to P20,000.
16 Bought merchandise from Mr. Zanjoe for cash P20,000.
16 Paid wages to his employees for the first two weeks of June, P7,000.
18 Received refund from Mr. Zanjoe P1,000.
22 Sold merchandise to Mr. Ethan for P24,000 cash. The cost of merchandise sold is P20,000.
23 Purchased merchandise from Mr. Plaridel on account, P10,000 terms 2/10, n/30 per invoice #216.
No discount is allowed on partial payment.
24 Paid freight on June 23 purchases of P100.
25 Paid Mr. Plaridel P5,000.
28 Mr. Daniel withdrew P5,000 cash for personal use.
29 Made refund to Mr. Ethan for defective merchandise, P1,500.
29 Paid the following: Advertising, P1,500; Electricity, P500; and a Rent of P5,000.
30 Paid wages to his employees for the last two weeks of June, P7,000.
30 Sold merchandise to Mr. Ymar as per change invoice #402 for P3,600 terms 2/10, n/30. The cost of
the sold merchandise is P3,000.

Assuming Mr. Daniel now uses PERPETUAL INVENTORY SYSTEM. The following would be the journal entries,
respective to accounts balances, preliminary trial balance, financial statements, and post-closing trial balance.

21
 GENERAL JOURNAL (GJ1)

DATE ACCOUNT TITLE/EXPLANATION PR DEBIT CREDIT

June 01 Cash 101 P45,000.00
Mr. Daniel, Capital 301 P45,000.00
To record initial investment.
03 Merchandise Inventory 103 29,500.00
Accounts Payable 201 29,500.00
To record purchase of goods, terms 2/10, n/30.
04 Supplies 104 1,000.00
Cash 101 1,000.00
To record purchase of supplies.
06 Equipment 105 6,000.00
Cash 101 6,000.00
To record the purchase of equipment.
07 Accounts Receivable 102 18,000.00
Sales 401 18,000.00
Cost of Goods Sold 501 15,000.00
Merchandise Inventory 103 15,000.00
To record sale of merchandise, term 2/10, n/30.
08 Freight Out 506 1,000.00
Cash 101 1,000.00
To record payment of freight on sales.
10 Accounts Payable 201 1,500.00
Purchase Return and Allowances 503 1,500.00
To record the return of merchandise to supplier.
11 Cash 101 17,640.00
Sales Discount 403 360.00
Accounts Receivable 102 18,000.00
To record collection on accounts, June 07.
12 Accounts Payable 201 28,000.00
Merchandise Inventory 103 560.00
Cash 101 27,440.00
To record payment of accounts payable, June 03.
14 Cash 101 20,000.00
Notes Payable 102 20,000.00
To record notes payable.
16 Merchandise Inventory 103 20,000.00
Cash 101 20,000.00
To record purchase of merchandise.
16 Salaries Expense 510 7,000.00
Cash 101 7,000.00
To record payment of salaries.
18 Cash 101 1,000.00
Merchandise Inventory 103 1,000.00
To record the return of merchandise to supplier, June16.
22 Cash 101 24,000.00
Sales 401 24,000.00
Cost of Goods Sold 501 20,000.00
Merchandise Inventory 103 20,000.00
To record sales of merchandise.
255,000.00 255,000.00

GENERAL JOURNAL (GJ2)

23 Merchandise Inventory 103 P10,000.00

22
 Accounts Payable 201 P10,000.00
To record purchase of goods, terms 2/10, n/30.
24 Merchandise Inventory 103 100.00
Cash 101 100.00
To record payment of freight on purchased goods.
25 Accounts Payable 201 5,000.00
Cash 101 5,000.00
To record payment of accounts payable dated June 23. (No discount is allowed for partial payment)
28 Mr. Daniel, Drawings 302 5,000.00
Cash 101 5,000.00
To record personal withdrawal.
29 Sales Return and Allowances 402 1,500.00
Cash 101 1,500.00
To record the return of merchandise from customers, June 22 sales.
29 Advertising Expense 507 1,500.00
Utilities Expense 509 500.000
Rent Expense 508 5,000.00
Cash 101 7,000.00
To record payment of expenses.
30 Salaries Expense 510 7,000.00
Cash 101 7,000.00
To record payment of salaries.
30 Accounts Receivable 102 3,600.00
Sales 401 3,600.00
Cost of Goods Sold 501 3,000.00
Merchandise Inventory 103 3,000.00
To record sale of merchandise, terms 2/10, n/30.

42,200.00 42,200.00

23
The ledger accounts shown below are derived from the journal entries of Mr. Daniel.

Account Title: Cash Account Number: 101 Account Title: Accounts Receivable Account Number: 102

Balance Balance
Date Item Post Debit Credit Debit Credit Date Item Post Debit Credit Debit Credit
June 01 GJ 1 45,000.00 45,000.00 June 07 GJ 1 18,000.00 18,000.00
04 GJ 1 1,000.00 44,000.00 11 GJ 1 18,000.00 --
06 GJ 1 6,000.00 38,000.00 30 GJ 2 3,600.00 3,600.00
08 GJ 1 1,000.00 37,000.00
11 GJ 1 17,640.00 54,640.00
12 GJ 1 27,440.00 27,200.00
14 GJ 1 20,000.00 47,200.00
16 GJ 1 20,000.00 27,200.00
16 GJ 1 7,000.00 20,200.00
18 GJ 1 1,000.00 21,200.00
22 GJ 1 24,000.00 45,200.00
24 GJ 2 100.00 45,100.00
25 GJ 2 5,000.00 40,100.00
28 GJ 2 5,000.00 35,100.00
29 GJ 2 1,500.00 33,600.00
29 GJ 2 7,000.00 26,600.00
30 GJ 2 7,000.00 19,600.00

Account Title: Merchandise Inventory Account Number: 103 Account Title: Supplies Account Number: 104
Balance Balance
Date Item Post Debit Credit Debit Credit Debit Credit
Date Item Post Debit Credit
June 03 GJ 1 29,500.00 29,500.00 June 04 GJ 1 1,000.00 1,000.00
07 GJ 1 15,000.00 14,500.00 30 GJ 2 200.00 800.00
10 GJ 1 1,500.00 13,000.00
12 GJ 1 560.00 12,440.00
16 GJ 1 20,000.00 32,440.00
18 GJ 1 1,000.00 31,440.00
22 GJ 1 20,000.00 11,440.00
23 GJ 2 10,000.00 21,440.00
24 GJ 2 100.00 51,540.00
30 GJ 2 3,000.00 18,540.00

Account Title: Equipment Account Number: 105 Account Title: Accumulated Depreciation Account Number: 106
Balance Balance
Debit Credit Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit
June 06 GJ 1 6,000.00 6,000.00

Account Title: Accounts Payable Account Number: 201 Account Title: Notes Payable Account Number: 202
Balance Balance
Debit Credit Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit
June 03 GJ 1 29,500.00 29,500.00 June 14 GJ 1 20,000.00 20,000.00
10 GJ 1 1,500.00 28,000.00
12 GJ 1 28,000.00 --
23 GJ 2 10,000.00 10,000.00
25 GJ 2 5,000.00 5,000.00

Account Title: Mr. Daniel, Capital Account Number: 301 Account Title: Mr. Daniel, Drawings Account Number: 302
Balance Balance
Date Item Post Debit Credit Debit Credit Debit Credit
Date Item Post Debit Credit
June 01 GJ 1 45,000.00 45,000.00 June 28 GJ 2 5,000.00 5,000.00
30 GJ 4 16,4600.00 28,540.00 30 GJ 4 5,000.00 --
30 GJ 4 5,000.00 23,540.00

24
Account Title: Sales Account Number: 401 Account Title: Sales Discount Account Number: 403
Balance Balance
Date Item Post Debit Credit Debit Credit Date Item Post Debit Credit Debit Credit
June 07
Account GJ 1 and Allowances 18,000.00
Title: Sales Return Account Number: 402 18,000.00 Account
June 11Title: Cost of GJ 1 Sold360.00
Goods 360.00501
Account Number:
22 GJ 1 24,000.00 42,000.00 30 GJ 4 360.00 --
30 GJ 2 3,600.00 Balance
45,600.00 Balance
30 GJ 4 45,600.00 -- Debit Credit
Account
DateTitle: Freight
Item OutPost Debit CreditAccount Debit
Number: 506Credit AccountDateTitle: Item PostExpense
Advertising Debit Credit
Account Number: 507
June 29 GJ 2 1,500.00 1,500.00 June 07 GJ 1 15,000.00 15,000.00
30 GJ 4 1,500.00 --
Balance 22 GJ 1 20,000.00 35,000.00
Balance
30 GJ 2 3,000.00 38,000.00
Account
DateTitle: Rent
Item Expense
Post Debit Debit
CreditAccount Number: 508 Credit Date
Account30 Item Post
Title: Utilities GJ
Expense
4 Debit Account Number:--509 Credit
Credit
38,000.00
Debit
June 08 GJ 1 1,000.00 1,000.00 June 29 GJ 2 1,500.00 1,500.00
30 GJ 4 1,000.00 Balance
-- 30 GJ 4 1,500.00 Balance
--
Debit Credit Date Item Post Debit Credit Debit Credit
Date Item Post Debit Credit
June Title:
Account 29 SalariesGJ 2
Expense 5,000.00 Account5,000.00
Number: 510 June 29
Account Title: SuppliesGJ 2
Expense 500.00 500.00511
Account Number:
30 GJ 4 5,000.00 -- 30 GJ 4 500.00 --
Balance Balance
Date Item Post Debit Credit Debit Credit Date Item Post Debit Credit Debit Credit
June 16 GJ 2 7,000.00 Account Title: Income
7,000.00
and Expense Summary June 30 Account Number: GJ 3 601200.00 200.00
30 GJ 2 7,000.00 14,000.00 30 GJ 4 200.00 --
30 GJ 4 14,000.00 -- Balance
Date Item Post Debit Credit Debit Credit
June 30 GJ 3 19,000.00 19,000.00
GJ 4 43,740.00 62,740.00
GJ 4 56,540.00 6,200.00
GJ 4 22,200.00 16,000.00
GJ 4 16,000.00 --

25
 DANIEL GAMBOA
Preliminary Trial Balance
As of June 30, 20XX

Code Account Title Debit Credit

101 Cash P19,600.00
102 Accounts Receivable 3,600.00
103 Merchandise Inventory 18,540.00
104 Supplies 1,000.00
105 Equipment 6,000.00
201 Accounts Payable P5,000.00
202 Notes Payable 20,000.00
301 Mr. Daniel, Capital 45,000.00
301 Mr. Daniel, Drawings 5,000.00
401 Sales 45,600.00
402 Sales Return and Allowances 1,500.00
403 Sales Discounts 360.00
501 Cost of Goods Sold 38,000.00
506 Freight Out 1,000.00
507 Advertising Expense 1,500.00
508 Rent Expense 5,000.00
509 Utilities Expense 500.00
510 Salaries Expense 14,000.00

TOTAL P115,600.00 P115,600.00

Adjusting Entries:

1) Office supplies having original cost of P800.00 were unused till the end of the period.

GENERAL JOURNAL (GJ 3)

DATE ACCOUNT TITLE/EXPLANATION PR DEBIT CREDIT
June 30 Supplies Expense 511 P200.00
Supplies 104 P200.00
To record adjusting entry on supplies.

200.00 200.00

26
FINANCIAL STATEMENTS

DANIEL GAMBOA
Statement of Performance
For the period ended June 30, 20XX

Sales P45,600.00
Less: Sales Return and Allowances P1,500.00
Sales Discount 360.00 (1,860.00)
Net Sales 43,740.00
Less: Cost of Goods Sold 38,000.00
Gross Profit 5,740.00
Less: Operating Expenses
Freight Out 1,000.00
Advertising Expense 1,500.00
Rent Expense 5,000.00
Utilities Expense 500.00
Salaries Expense 14,000.00
Supplies Expense 200.00 (22,200.00)
Net Income/(Loss) (P16,640.00)

DANIEL GAMBOA
Statement of Changes in Equity
For the period ended June
30,20XX

Mr. Daniel, Capital Beginning --

Add: Initial Investment 45,000.00
Less: Daniel Drawings 5,000.00
Total 40,000.00
Net Profit/(Loss) (16,460.00)
Mr. Daniel, Capital End P23,540.00

27
 DANIEL GAMBOA
Statement of Financial Position
As of June 30,20XX

ASSETS
Current Assets
Cash P19,600.00
Accounts Receivable 3,600.00
Merchandise Inventory 18,540.00
Supplies 800.00
Total Current Assets 42,540.00
Non-Current Assets
Equipment 6,000.00

TOTAL ASSETS P48,540.00

LIABILITIES AND OWNER’S EQUITY

Current Liabilities
Accounts Payable P5,000.00
Non-Current Liabilities
Notes Payable 20,000.00
Total Liabilities 25,000.00

Owner’s Equity
Mr. Daniel, Capital 23,540.00

TOTAL LIABILITIES AND OWNER’S EQUITY P48,540.00

28
 DANIEL GAMBOA
Statement of Cash Flows
For the period ended June 30,20XX

Cash Flow from Operating Activities

Collection of cash sales P24,000.00
Collection of credit sales 17,640.00
Refund from purchases 1,000.00
Payment of goods bought (52,440.00)
Payment of supplies (1,000.00)
Refund to customers (1,500.00)
Payment of operating expenses (22,000.00)
Freight on purchases (100.00)
Net Cash Flow from Operating Activities (34,400.00)

Cash Flow from Investing Activities

Purchase of equipment (6,000.00)

Cash Flow from Financing Activities

Investment 45,000.00
Withdrawal (5,000.00)
Borrowings 20,000.00
Net Cash Flow from Financing Activities 60,000.00

Increase (Decrease) in Cash 19,600.00

Add: Cash, beginning --
Cash, End P19,600.00

29
Closing Entries:

GENERAL JOURNAL (GJ4)

DATE ACCOUNT TITLE/ EXPLANATION PR DEBIT CREDIT
June 30 Sales 401 P45,600.00
Income and Expense Summary 601 P43,740.00
Sales Return and Allowances 402 1,500.00
Sales Discounts 403 360.00
To close income accounts.

Income and Expense Summary 601 60,200.00

Cost of Goods Sold 502 38,000.00
Freight Out 506 1,000.00
Advertising Expense 507 1,500.00
Rent Expense 508 5,000.00
Utilities Expense 509 500.00
Salaries Expense 510 14,000.00
Supplies Expense 511 200.00
To close expenses account.

Mr. Daniel, Capital 301 16,460.00

Income and Expense Summary 601 16,460.00
To close the loss for the period to capital account.

Mr. Daniel, Capital 301 5,000.00

Mr. Daniel, Drawings 302 5,000.00
To close the drawing to capital account.

127,260.00 127,260.00

30
 DANIEL GAMBOA
Post-Closing Trial Balance
As of June 30,20XX

Code Account Titles Debit Credit

101 Cash P19,600.00
102 Accounts Receivable 3,600.00
103 Merchandise Inventory 18,540.00
104 Supplies 800.00
105 Equipment 6,000.00
201 Accounts Payable P5,000.00
202 Notes Payable 20,000.00
301 Mr. Daniel, Capital 23,540.00

TOTAL P48,540.00 P48,540.00

31
CASE PROBLEM:

1) X Company lent a 12% P200,000.00 loan to Y Company on December 01, 2019. The principal and
interest thereon are expected to be collected on November 30, 2020. What would be adjusting entry of X
Company at the end of December 31, 2019?

Date Account Title/Explanation Debit Credit

Dec.31, 2019 Accrued Interest Receivable P2,000.00
Interest Income P2,000.00

2) X Company borrowed a 12% P200,000.00 loan from Y Company on December 01, 2019. The principal
and interest thereon are expected to be collected on November 30, 2020. What would be adjusting entry
of X Company at the end of December 31, 2019?

Date Account Title/Explanation Debit Credit

Dec.31, 2019 Interest Expense 2,000.00
Accrued Interest Payable 2,000.00

3) X Company received an annual insurance premium of P12,000.00 from Y Company beginning

November 01, 2018. Assuming X Company prepares monthly financial statements at the end of each
calendar month and it uses liability method in recording the annual insurance premium, what would be
the adjusting entry of X Company at the end of March 31, 2019?

Date Account Title/Explanation Debit Credit

March 31, 2019 Unearned Revenue 1,000.00
Insurance Revenue 1,000.00

4) X Company paid an annual insurance premium of P12,000.00 from Y Company beginning November
01, 2018. Assuming X Company prepares monthly financial statements at the end of each calendar
month and it uses asset method in recording the annual insurance premium, what would be the
adjusting entry of X Company at the end of March 31, 2019?

Date Account Title/Explanation Debit Credit

March 31, 2019 Insurance Expense 1,000.00
Prepaid Insurance 1,000.00

5) X Company’s store supplies debited to prepaid supplies account during the year, P30,000.00. as of
December 31, 2019; P17,000.00 is used. What would be the adjusting entry at the end of December 31,
2019?

Date Account Title/Explanation Debit Credit

Dec.31, 2019 Supplies Expense 17,000.00
Prepaid Supplies 17,000.00

6) X Company’s store supplies debited to supplies expense account during the year, P30,000.00. as of
December 31, 2019; P17,000.00 is used. What would be the adjusting entry at the end of December 31,
2019?
Date Account Title/Explanation Debit Credit
Dec.31, 2019 Prepaid Supplies 13,000.00
Supplies Expense 13,000.00

32