BASIC ACCOUNTING 1

INSTRUCTIONAL MATERIAL FOR

ACCO 20263

BASIC ACCOUNTING

Compiled by:

MELINDA S. BALBARINO
LEONARDO COQUILLA
MARIA TERESA M. CORRALES
MARIETTA M. DOQUENIA
JULIETA G. FONTE
FRANCIA PEÑAFLOR
EDITHA A. PERALTA
ANDREA ROSE E. RIMORIN
CATHERINE D. SOTTO

2020
2 BASIC ACCOUNTING
GENERAL INFORMATION ABOUT THE COURSE
Course Code and Title
Semester and Academic
Year
Course Credit
Pre-Requisite
Course Description
Course Outcomes
: ACCO 20263 – BASIC ACCOUNTING
: Second Semester, Academic Year 2020- 2021
: 3 Units
: None
: This course provides an introduction to accounting, within the
context of business and business decisions. Students obtain
basic understanding of the principles and concepts of accounting
as well as their applicability and relevance in the national context
and learn how to use various types of accounting information
found in financial statements and annual reports. Emphasis is
placed on understanding the reasons underlying basic accounting
concepts and providing students with an adequate background on
the recording, classification, and summarization functions of
accounting to enable them to appreciate the varied uses of
accounting data of a sole-proprietorship for service type of
business.
: Upon completion of the course, the students will be able to:
a. Have detailed knowledge and understanding of the
accounting process of a Single Proprietorship for service
business
b. Produce the required entries and financial records of a
Single Proprietorship
c. Competence and honesty in the performance of
accountancy service
d. Demonstrate the qualities of a future accountant
e. Skilled in the use of a calculator, computer and other
business equipment
 BASIC ACCOUNTING 3

GENERAL INSTRUCTIONS FOR STUDENTS

This instructional material is composed of five (5) modules that will introduce you to the
world of accounting and its reporting. Faculty members who prepared this instructional material
purposively chose only five (5) topics which are the most relevant topics when learning about
accounting.

FOR STUDENTS WITH INTERNET CONNECTIVITY, you are tasked to answer the
activities or performance tasks in accordance with the instruction of your instructor.

FOR STUDENTS WHO DO NOT HAVE INTERNET CONNECTIVITY AND RECEIVED

THIS INSTRUCTIONAL MATERIAL VIA COURIER SERVICES, you are tasked to accomplish
the activities or performance tasks at your own space. If the sheets provided are not enough,
use another sheet of paper for your answers. You may have your answers handwritten OR
computerized and printed.

House Rules

The following guides and house rules will help you further to be on track and to say at
the end of the module, “Yes! I conquered Accounting!”.

1. Schedule and manage your time to read and understand every part of the of the
module. Peruse it over until you decipher the undertakings.

2. Study how you can manage to do the activities of the course in consideration of
your modules from other courses. Be very conscious with the study schedule. Post
it on a conspicuous place so that you can always see. Do not ask you your course
facilitator about questions that are already answered in the guide.

3. Do not procrastinate. Remember, it is not others who will be short- changed if you
will do your work on time.

4. Before you start doing your tasks, read and understand the assessment tools
provided. Do not settle with the low standards, target the highest standards in
doing your assigned tasks. I know that you can! :)

5. You are free to browse and read the different materials even prior to doing the
tasks in each until the module. However, you need to ensure that you will not miss
any part of the module and you will submit course activities in the prescribed due
date.
4 BASIC ACCOUNTING

Table of Contents
Topic Pages

Module 1 – Introduction to Accounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5 – 29

Module 2 – The Accounting Equation And Analyzing Business Transactions. . . . .30 – 41

Module 3 – Recording and Posting the Business Transactions . . . . . . . . . . . 42 – 66

Module 4 – Adjusting Entries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 67 – 84

Module 5 – Completion of the Accounting Process . . . . . . . . . . . . . . . . . . . . . . 85 – 107

Long Examination 108 -111

 BASIC ACCOUNTING 5

Module I

INTRODUCTION TO ACCOUNTING

Overview:

Accounting is one of the key functions for almost any business. It may be handled by a
bookkeeper or an accountant at a small firm, or by sizable finance departments with dozens of
employees at larger companies. A bookkeeper can handle basic accounting needs, but a
Certified Public Accountant (CPA) should be utilized for larger or more advanced accounting
tasks.
The reports generated by various streams of accounting, such as cost accounting and
managerial accounting, are invaluable in helping management make informed business
decisions. Regardless of the size of a business, accounting is a necessary function for decision
making, cost planning, and measurement of economic performance measurement.
It is therefore important to know and understand the definition of accounting and its
branches, its history, principles and standards.

Learning Objectives:

1. The learner should be able to know the history of accounting, its origin and the people
who first use the system and how the system evolved into its present condition.
2. The Learners should be able to define Accounting and understand every word used in its
definition and relate these words with the ultimate purpose or purposes of accounting
information system and to identify the primary uses of the financial information.
3. The learner should understand the basic principles in accounting to be able to
understand how the system works and how the information should be recorded and
presented in the financial reports.
4. The learner should be able to understand the different types of business and the
different forms of business organization and should be able to identify each and
distinguish it from the others.
5. The learner should be able to understand the basic accounting equation and all the
elements in it as well as the account titles that would be used in recording the
transactions.

History of Accounting

The first name that might come to mind when referencing early accounting history is Fra
Luca Bartolomeo de Pacioli , an Italian mathematician, Franciscan friar, collaborator with
Leonardo da Vinci, who described double-entry bookkeeping in his “Summa de Arithmetica,
Geometria, Proportioni et Proportionalita” in 1494. While that may sound like a long time ago,
accounting may have roots that trace back even earlier. Accounting has been around for
centuries. It’s a critical part of the business, record-keeping, and life in general.

The earliest accounting records were found over 7,000 years ago among the ruins of
Ancient Mesopotamia. At the time, people relied on accounting to keep a record of crop and
herd growth. They used accounting techniques that are still used today to determine if there was
a surplus or shortage after crops were harvested each season. The first record of accounting
6 BASIC ACCOUNTING

that occurred thousands of years ago in Mesopotamia has evolved into the intricate element of
business and life that it is today.

Accounting History During the Roman Empire

During the reign of the Roman Empire, accounting continued to evolve much further.
“The Deeds of the Divine Augustus” is an account of Emperor Augustus’ financial dealings. It
listed such quantities as distributions to the people, grants of land, building of temples, money to
military veterans, religious offerings, and money spent on theatrical shows and gladiator events.
This discovery hints at the scope of accounting information available to the emperor, which he
then probably used for planning and decision-making purposes. Roman historians also recorded
public revenues, the amount of money in the state treasury, taxes, slaves, freedmen, and more.
Fra. Luca Pacioli’s Contribution to the Accounting Profession

In 1494, Pacioli wrote Summa de Arithmetica, Geometria, Proportioni et Proportionalita,

which included a twenty-seven-page treatise on bookkeeping titled, Particularis de Computis et
Scripturis (Details of Calculation and Recording) on the subjects of record keeping and double-
entry accounting. Pacioli’s book became the reference text and teaching tool on the subjects of
bookkeeping and accounting for the next several hundred years. This was the first time that
symbols for plus and minus appeared in a printed book. This book was the first known published
work on the topic of double-entry bookkeeping.

Accounting During the Middle Ages

During the Middle Ages, bartering was the primary form of money-changing, but when
Europe changed to a monetary economy is the 13th Century, merchants began relying on
bookkeeping to keep a record of multiple transactions. This is when double-entry bookkeeping
got its start, which is when a debit and credit value is entered for each transaction by the
accountant. Merchants at the time used accounting as a new recording system. It provided them
with constant information about their businesses that they could use in decision-making to grow
their business as they saw fit. This laid the foundation of how we use and understand
accounting today.

Accounting Systems in Today’s Generation

Nowadays, there are accounting standards, auditing regulations, and ethical standards
for accountants to follow. Along with this standard is the advancement in technology and
accounting has gone through many changes throughout the ages. Through all the changes,
accounting technology has always played a part in making the accountant’s job just a little
easier. As people’s knowledge of technology increased so has the accountant’s ability to
analyze statistical values. Technology advancements have enhanced the accountant’s ability to
interpret data efficiently and effectively. He/she now has the ability to interpret the language of
business with such ease that the accountant has become a business’ most trusted business
advisor.

Accountants were pushed towards acquiring new skills due to the advancements that
information technology has made on the accounting industry. Accountants now have to have a
high level of computer and technical skills. These skills have become part of the knowledge, and
abilities of the accounting professionals. In its report the American Institute of Certified Public
Accounts (AICPA) cites that, “The knowledge, skills and abilities necessary for the entry-level
accountant now include the application and integration of information technology into the
 BASIC ACCOUNTING 7

accounting process, as well as financial and managerial accounting principles” (Dillon, Kruck,
2004). From this research, not only does an accountant need to have a broad range of
accounting knowledge and a strong ability to apply accounting principles, government
regulations and interpret tax laws; they must also have strong skills in information technology, to
be able to merge accounting with information systems. These accountants will be in greater
demand by the profession (Dillon, et al, 2004).

Definition of Accounting

What Is Accounting?

Accounting is the process of recording financial transactions pertaining to a business.

The accounting process includes analyzing, recording, summarizing, financial transactions or
events over an accounting period, and reporting these transactions in the form of financial
statements (Income Statement, Balance Sheet, Capital Statement and Statement of Cash
Flows) to government’s regulatory, and tax collecting agencies.

In simple explanation, Accounting is how the business records, organizes, and

understands its financial information. Accounting can be thought of as a big machine where raw
financial information are put into, such as records of all business transactions, taxes, estimates
and allowance, etc., that then spits out an easy to understand reports or statements about the
financial state of the business. These financial statements tell its reader whether the business is
making a profit or not, where the cash came from and where it was put, what the current amount
of the assets and liabilities of the business and how much remained as capital of the business
owner or owners.

Technical definitions of accounting have been published by different accounting bodies.

The American Institute of Certified Public Accountants (AICPA) defines accounting as: "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 financial character, and interpreting the
results thereof."

The American Accounting Association on the other hand defines accounting as “the
process of identifying, measuring and communicating economic information to permit informed
judgment and decision by users of the information”.

According to the Accounting Standards Council, “accounting is a service activity. Its

function is to provide quantitative information, primarily financial in nature, about economic
entities, that is intended to be useful in making economic decisions, in making reasoned choices
among alternative courses of action.”

Branches of Accounting

As a result of economic, industrial, and technological developments, different specialized

fields in accounting have emerged. The most commonly known branches or types of accounting
include: financial accounting, cost accounting, auditing, managerial accounting, AIS ,taxation,
forensic, and fiduciary accounting.

1. Financial Accounting- Financial accounting involves recording and categorizing

transactions for business. This data is generally historical, meaning it’s from the past. It
also involves generating financial statements based on these transactions. All financial
8 BASIC ACCOUNTING

statements, such a balance sheet and income statement, must be prepared according to
the generally accepting accounting principles (GAAP). Financial accounting is performed
to conform to external regulations and requirements.

2. Cost Accounting - Cost accounting is considered a type of managerial accounting. Cost

accounting is most commonly used in the manufacturing industry, an industry that has a
lot of resources and costs to manage. It is a type of accounting used internally to assess
a company’s operations. Cost accounting concerns itself with recording and analyzing
manufacturing costs. It looks at a company’s fixed (unchanging and constant costs, like
rent) and variable costs (changing costs, like shipping charges) and how they affect a
business and how these costs can be better managed, according to Accounting Tools.

3. Auditing - There are two types of auditing: external and internal auditing. In external
auditing, an independent third party reviews a company’s financial statements to make
sure they are presented correctly and comply with GAAP and IFRS. Internal auditing
involves evaluating how a business divides up accounting duties, who is authorized to
do what accounting task and what procedures and policies are in place. Internal auditing
helps a business to zero in fraud, mismanagement and waste or identify and control any
potential weaknesses in its policies or procedures.

4. Managerial Accounting -Also known as management accounting, this type of accounting

provides data about a company’s operations to managers. The focus of managerial
accounting is to provide data that managers need to make decisions about a business’s
operations, not comply strictly with GAAP. Managerial accounting includes budgeting
and forecasting, cost analysis, financial analysis, reviewing past business decisions and
more. Cost accounting is a type of managerial accounting.

5. 5. Accounting Information Systems - Known as AIS for short, accounting information

systems concerns itself with everything to do with accounting systems and processes
and their construction, installation, application and observation. This can include
accounting software management and the management of bookkeeping and accounting
employees.

6. 6. Tax Accounting- Tax accounting involves planning for tax diminution, payment
scheme and the preparation of tax returns. This branch of accounting helps businesses
to comply with regulations of the Philippine Taxing Authorities, more particularly the
Local Government Units for the Mayor’s Permits, BIR for the Internal Taxes and Bureau
of Customs for taxes on importation and exportation. Tax accounting also helps
businesses figure out their income tax and other taxes and how to legally reduce their
amount of tax owing. Tax accounting also analyzes tax-related business decisions and
any other issues related to taxes.

7. Forensic Accounting -This specialized accounting service is trending in accounting and

is becoming increasingly popular. Forensic accounting focuses on legal affairs such as
inquiry into fraud, legal cases and dispute and claims resolution. Forensic accountants
need to reconstruct financial data when the records are incomplete. This could be to
decode fraudulent data or convert a cash accounting system to accrual accounting.
Forensic accountants are usually consultants who work on a project basis.

8. 8. Fiduciary Accounting - This branch of accounting centers around the management of

property for another person or business. The fiduciary accountant manages any account
 BASIC ACCOUNTING 9

and activities related to the administration and guardianship of property. Fiduciary

accounting covers estate accounting, trust accounting and receivership (the appointing
of a custodian of a business’s assets during events such as bankruptcy).

Purposes and Uses of Accounting Information

The purpose of accounting is to accumulate and report on financial information about the
performance, financial position, and cash flows of a business. Accounting provides people
interested in the business or company with various pieces of information regarding business
operations, this information is then used to reach decisions about how to manage the business,
or invest in it, or lend money to it.

Uses of Accounting Information

1. A common use of accounting information is measuring the performance of various

business operations. While financial statements are the classic accounting information
tool used to assess business operations, business owners may conduct a more
thorough analysis of this information when reviewing business operations. Financial
ratios use the accounting information reported on financial statements and break it down
into leading indicators. These indicators can be compared to other companies in the
business environment or an industry standard. This helps business owners understand
how well their companies operate compared to other established businesses.

2. Business owners often use accounting information to create budgets for their
companies. Historical financial accounting information provides business owners with a
detailed analysis of how their companies have spent money on certain business
functions. Business owners often take this accounting information and develop future
budgets to ensure they have a financial road map for their businesses. These budgets
can also be adjusted based on current accounting information to ensure a business
owner does not restrict spending on critical economic resources.

3. Accounting information is commonly used to make business decisions. For financial

management, an income statement and accounting of expenses provides an important
overview of the business. Decisions may include expanding current operations, using
different economic resources, purchasing new equipment or facilities, estimating future
sales or reviewing new business opportunities.

4. Accounting information usually provides business owners information about the cost of
various resources or business operations. These costs can be compared to the potential
income of new opportunities during the financial analysis process. This process helps
business owners understand how current business operations will be affected when
expanding or growing their businesses. Opportunities with low income potential and high
costs are often rejected by business owners.

5. External business stakeholders often use accounting information to make investment

decisions. Banks, lenders, venture capitalists or private investors often review a
company's accounting information to review its financial health and operational
10 BASIC ACCOUNTING

profitability. This provides information about whether or not a small business is a wise
investment decision. Many small businesses need external financing to start up or grow.
The inability to provide outside lenders or investors with accounting information can
severely limit financing opportunities for a small business.

ACCOUNTING PRINCIPLES

The phrase "generally accepted accounting principles" (or "GAAP") consists of three
important sets of rules: (1) the basic accounting principles and guidelines, (2) the detailed rules
and standards issued by FASB and its predecessor the Accounting Principles Board (APB), and
(3) the generally accepted industry practices.

If a company distributes its financial statements to the public, it is required to follow

generally accepted accounting principles in the preparation of those statements. Further, if a
company's stock is publicly traded, Philippine law requires the company's financial statements
be audited by independent public accountants. Both the company's management and the
independent accountants must certify that the financial statements and the related notes to the
financial statements have been prepared in accordance with GAAP.

Since GAAP is founded on the basic accounting principles and guidelines, we can better
understand GAAP if we understand those accounting principles.

The following is a list of the ten main accounting principles and guidelines with a highly
condensed explanation of each.

1. Economic Entity Assumption

The accountant keeps all of the business transactions of a sole proprietorship separate
from the business owner's personal transactions. For legal purposes, a sole proprietorship and
its owner are considered to be one entity, but for accounting purposes they are considered to be
two separate entities.

2. Monetary Unit Assumption

In the Philippines economic activity is measured in Philippine pesos, and only

transactions that can be expressed in Philippine pesos are recorded.
Because of this basic accounting principle, it is assumed that the peso's purchasing
power has not changed over time. As a result, accountants ignore the effect of inflation on
recorded amounts. For example, pesos from a 1960 transaction are combined (or shown) with
pesos from a 2019 transaction.

3. Time Period Assumption

This accounting principle assumes that it is possible to report the complex and ongoing
activities of a business in relatively short, distinct time intervals such as the five months ended
May 31, 2019, or the 5 weeks ended May 1, 2019. The shorter the time interval, the more likely
the need for the accountant to estimate amounts relevant to that period. For example, the
property tax bill is received on December 15 of each year. On the income statement for the year
ended December 31, 2018, the amount is known; but for the income statement for the three
months ended March 31, 2019, the amount was not known and an estimate had to be used.
 BASIC ACCOUNTING 11

It is imperative that the time interval (or period of time) be shown in the heading of each
income statement, statement of owner’s/stockholders' equity, and statement of cash flows.
Labeling one of these financial statements with "December 31" is not good enough–the reader
needs to know if the statement covers the one week ended December 31, 2019 the month
ended December 31, 2019 the three months ended December 31, 2019 or the year ended
December 31, 2019

4. Cost Principle

From an accountant's point of view, the term "cost" refers to the amount spent (cash or
the cash equivalent) when an item was originally obtained, whether that purchase happened
last year or thirty years ago. For this reason, the amounts shown on financial statements are
referred to as historical cost amounts.

Because of this accounting principle asset amounts are not adjusted upward for inflation.
In fact, as a general rule, asset amounts are not adjusted to reflect any type of increase in
value. Hence, an asset amount does not reflect the amount of money a company would receive
if it were to sell the asset at today's market value. (An exception is certain investments in stocks
and bonds that are actively traded on a stock exchange.) If you want to know the current value
of a company's long-term assets, you will not get this information from a company's financial
statements–you need to look elsewhere, perhaps to a third-party appraiser.

5. Full Disclosure Principle

If certain information is important to an investor or lender using the financial statements,

that information should be disclosed within the statement or in the notes to the statement. It is
because of this basic accounting principle that numerous pages of "footnotes" are often
attached to financial statements.

For example, the company is named in a lawsuit that demands a significant amount of
money. When the financial statements are prepared it is not clear whether the company will be
able to defend itself or whether it might lose the case. As a result of these conditions and
because of the full disclosure principle the lawsuit will be described in the notes to the financial
statements.

In compliance with this full disclosure principle, a business usually lists its significant
accounting policies as the first note to its financial statements.

6. Going Concern Principle

This accounting principle assumes that a business will continue to exist long enough to
carry out its objectives and commitments and will not liquidate in the foreseeable future. If the
business' financial situation is such that the accountant believes that it will not be able to
continue on, the accountant is required to disclose this assessment.

The going concern principle allows the business to defer some of its prepaid expenses
until future accounting periods.
12 BASIC ACCOUNTING

7. Matching Principle

This accounting principle requires companies to use the accrual basis of accounting.
The matching principle requires that expenses be matched with revenues. For example, sales
commissions expense should be reported in the period when the sales were made (and not
reported in the period when the commissions were paid). Wages to employees are reported as
an expense in the week when the employees worked and not in the week when the employees
are paid. If a company agrees to give its employees 1% of its 2019 revenues as a bonus on
January 15, 2020, the company should report the bonus as an expense in 2019 and the amount
unpaid at December 31, 2019 as a liability. The expense is recorded as the sales or revenue
are recorded.

8. Revenue Recognition Principle

Under the accrual basis of accounting (as opposed to the cash basis of accounting),
revenues are recognized as soon as a product has been sold or a service has been performed,
regardless of when the money is actually received. Under this basic accounting principle, a
company could earn and report P1,000,000 of revenue in its first month of operation but receive
P0 in actual cash in that month.

For example, if ABC Company completes its service at an agreed price of P50,000, ABC
should recognize P50,000 of revenue as soon as its work is done—it does not matter whether
the client pays the P50,000 immediately or in 30 days. Do not confuse revenue with a cash
receipt.

9. Materiality

Because of this basic accounting principle or guideline, an accountant might be allowed

to violate another accounting principle if an amount is insignificant. Professional judgement is
needed to decide whether an amount is insignificant or immaterial.

An example of an obviously immaterial item is the purchase of a 7,500 printer by a highly

profitable multi-million-peso company. Because the printer will be used for five years, the
matching principle directs the accountant to expense the cost over the five-year period. The
materiality guideline allows this company to violate the matching principle and to expense the
entire cost of 7,500 in the year it is purchased. The justification is that no one would consider it
misleading if 7,500 is expensed in the first year instead of 1,500 being expensed in each of the
five years that it is used.

Because of materiality, financial statements usually show amounts rounded to the

nearest hundred, to the nearest thousand, or to the nearest million pesos depending on the size
of the company.

10. Conservatism

If a situation arises where there are two acceptable alternatives for reporting an item,
conservatism directs the accountant to choose the alternative that will result in less net income
and/or less asset amount. Conservatism helps the accountant to "break a tie." It does not direct
accountants to be conservative. Accountants are expected to be unbiased and objective.
 BASIC ACCOUNTING 13

The basic accounting principle of conservatism leads accountants to anticipate or

disclose losses, but it does not allow a similar action for gains. For example, potential losses
from lawsuits will be reported on the financial statements or in the notes, but potential gains will
not be reported. Also, an accountant may write inventory down to an amount that is lower than
the original cost, but will not write inventory up to an amount higher than the original cost.
Accounting Standards in the World and in the Philippines

Financial statements have incredible importance for both internal and external
stakeholders. They basically are a report card for the company; hence, it is important that they
are regulated and do not report misleading information.

Accounting standards are exceedingly useful because they attempt to standardize and
regulate accounting definitions, assumptions, and methods. Because of generally accepted
accounting standards we are able to assume that there is consistency from year to year in the
methods used to prepare a company's financial statements. And although variations may exist,
we can make reasonably confident conclusions when comparing one company to another, or
comparing one company's financial statistics to the statistics for its industry. Over the years the
accounting standards have become more complex because financial transactions have become
more complex.

• The International Financial Reporting Standards (IFRS) Foundation is a not-for-profit

international organization responsible for developing a single set of high-quality, global
accounting standards, known as IFRS Standards. IFRS Standards are set by the IFRS
Foundation’s standard-setting body, the IASB.
• The Monitoring Board is a group of capital market authorities and provides formal link
between the Trustees and public authorities in order to enhance the public accountability
of the IFRS Foundation.
• The International Accounting Standards Board (IASB) is the independent standard-
setting body of IFRS Foundation responsible for the development and publication of
14 BASIC ACCOUNTING

IFRS and for approving Interpretations of IFRS as developed by the IFRS Interpretations
Committee.
• The Trustees of the IFRS Foundation are responsible for the governance and oversight
of the IASB, including the due process for the development of the accounting standards.
• The IFRS Advisory Council provides advice and counsel to the Trustees and the
Board, whilst the Board also consults extensively with a range of other standing advisory
bodies and consultative groups.
• The Accounting Standards Advisory Forum (ASAF) provides an advisory forum in
which members can constructively contribute towards the achievement of the IASB’s
goal of developing globally accepted high-quality accounting standards.
• The IFRS Interpretations Committee is the interpretative body of the International
Accounting Standards Board, which reviews implementation issues.

The first accounting standards used in the Philippines were the Generally Accepted
Accounting Principles of the US. However, with the convergence of reporting standards, the
Philippine Financial Reporting Standards (PFRS)/Philippine Accounting Standards (PAS) the
new set of accounting standards issued by the Accounting Standards Council (ASC) are
adopted to govern the preparation of financial statements. These standards are patterned after
the revised International Financial Reporting Standards (IFRS) and International Accounting
Standards (IAS) issued by the International Accounting Standards Board (IASB).

The IFRS is a set of accounting standards that are recognized by at least 120 countries
(including the Philippines) and provides a guide on how particular types of transactions and
other events should be reported in financial statements. The rationale for using the IFRS is to
ensure consistency in recording, recognizing and measuring financial transactions, which, if
followed properly, will ensure stability and transparency throughout the financial reporting
process of the company. These standards are not enforceable and compliance is voluntary.

The International Accounting Standards (IAS) were an older set of standards stating how
particular types of transactions and other events should be reflected in financial statements.

The PFRS, the Philippine version of the IFRS with some minor modifications, and the
Philippine Accounting Standards are issued by the PFRS Council (formerly the Accounting
Standards Council [ASC]), under the oversight of the Board of Accountancy (BOA).

The Bangko Sentral ng Pilipinas (BSP) pronounced its adoption of the PFRS/PAS
effective the annual financial statements beginning 1 January 2005 in its Memorandum to All
Banks and Other BSP Supervised Financial Institutions (BSFIs) dated 11 January 2005.

Forms of Business Organization

A business entity is a group of people organized for some profitable or charitable

purpose. The source of capital of the business determines the form of business organization.
Business entities include organizations such as corporations, partnerships, charities, trusts, and
other forms of organization. Business entities, just like individual persons, are subject to taxation
and must file a tax return.

In Philippines the most common forms of businesses are sole proprietorships,

partnerships and corporation.
 BASIC ACCOUNTING 15

1. Sole Proprietorship - Sole Proprietorship is a business entity owned by an individual who

has full control/authority of its business and owns all the assets, personally owes
answers to all liabilities or suffers all losses but enjoys all the profits to the exclusion of
others. A sole proprietorship must apply for a business name and be registered with the
Department of Trade and Industry (DTI) - National Capital Region (NCR). In the
provinces, application may be filed with the DTI regional/provincial offices.

2. Partnership - Under the Civil Code of the Philippines, a partnership is treated as juridical
person, having a separate legal personality from that of its members. Partnerships may
either be general partnerships, where the partners have unlimited liability for the debts
and obligation of the partnership, or limited partnerships, where one or more general
partners have unlimited liability and the limited partners have liability only up to the
amount of their capital contributions. It consists of two or more partners. A partnership
with more than Peso 3,000 capital must register with the Securities and Exchange
Commission (SEC).

3. Corporation - Corporation is composed of juridical persons established under the

Corporation Code and regulated by the SEC with a personality separate and distinct
from that of its stockholders. The liability of the shareholders of a corporation is limited to
the amount of their share capital. It consists of at least five to 15 incorporators, each of
whom must hold at least one share and must be registered with the SEC. Minimum paid
up capital is Peso 5,000. A corporation can either be stock or non-stock company
regardless of nationality. Such company, if 60% Filipino - 40% foreign-owned is
considered a Filipino corporation; if more than 40% foreign-owned, it is considered a
domestic foreign-owned corporation.
a. Stock Corporation- Stock Corporation is a corporation with capital stock divided into
shares and authorized to distribute to the holders of such share’s dividends or allotments
of the surplus profits on the basis of the shares held.
b. One Person Corporation- A One-Person Corporation (OPC) is a corporation with a
single stockholder, who can only be a natural person (who must be of legal age), trust or
estate. As an incorporator, the “trust” does not refer to a trust entity but rather pertains to
the subject being managed by a trustee.
c. Non-Stock Corporation- Non-Stock Corporation is a corporation organized principally
for public purposes such as charitable, educational, cultural, or similar purposes and
does not issue shares of stock to its members.

Types of Business Activity

A business entity is an organization that uses economic resources to provide goods or

services to customers in exchange for money or other goods and services.

There are three major types of businesses:

1. Service Business - A service type of business provides intangible products (products

with no physical form). Service type firms offer professional skills, expertise, advice, and
other similar products. Examples of service businesses are: salons, repair shops,
schools, banks, accounting firms, and law firms.
16 BASIC ACCOUNTING

2. Merchandising Business - This type of business buys products at wholesale price and
sells the same at retail price. They are known as "buy and sell" businesses. They make
profit by selling the products at prices higher than their purchase costs. A merchandising
business sells a product without changing its form. Examples are: grocery stores,
convenience stores, distributors, and other resellers.

3. Manufacturing Business - Unlike a merchandising business, a manufacturing business

buys products with the intention of using them as materials in making a new product.
Thus, there is a transformation of the products purchased. A manufacturing business
combines raw materials, labor, and overhead costs in its production process. The
manufactured goods will then be sold to customers.

Reports or Financial Statements Generated from the Accounting System

Financial statements are written reports prepared by business’ management to present

its financial affairs in a given period (monthly, quarterly, six monthly or yearly). These
statements include Balance Sheet, Income Statement, Cash Flows and Statement of Owner/s’
Equity (for sole proprietorship and partnership) or Shareholders’ Equity (in case of corporation).
Balance Sheet.

A balance sheet is a financial statement that reports a company's assets, liabilities and
shareholders' equity at a specific point in time, and provides a basis for computing rates of
return and evaluating its capital structure. It is a financial statement that provides a snapshot of
what a company owns and owes, as well as the amount invested by owner/s’ or shareholders.
The equation that you need to remember when you prepare a balance sheet is this –

Assets = Liabilities + Shareholders Equity.

Assets. The International Financial Reporting Standards (IFRS) framework defines an asset as
follows: “An asset is a resource controlled by the enterprise as a result of past events and from
which future economic benefits are expected to flow to the enterprise.”
Properties of an Asset
There are three key properties of an asset:
 Ownership: Assets represent ownership that can be eventually turned into cash and
cash equivalents
 Economic Value: Assets have economic value and can be exchanged or sold
 Resource: Assets are resources that can be used to generate future economic benefits
 BASIC ACCOUNTING 17

Classification of Assets

Importance of Asset Classification

Classifying assets is important to a business. For example, understanding which assets
are current assets and which are fixed assets is important in understanding the net working
capital of a company. In the scenario of a company in a high-risk industry, understanding which
assets are tangible and intangible helps to assess its solvency and risk. Determining which
assets are operating assets and which assets are non-operating assets is important to
understanding the contribution of revenue from each asset, as well as in determining what
percentage of a company’s revenues comes from its core business activities.
Assets are generally classified in three ways:
1. Convertibility: Classifying assets based on how easy it is to convert them into cash.
2. Physical Existence: Classifying assets based on their physical existence (in other words,
tangible vs. intangible assets).
3. Usage: Classifying assets based on their business operation usage/purpose.

1. Classification of asset as to Convertibility - If assets are classified based on their

convertibility into cash, assets are classified as either current assets or fixed assets. An
alternative expression of this concept is short-term vs. long-term assets.

a. Current Assets - Current assets are assets that can be easily converted into cash and
cash equivalents (typically within a year). Current assets are also termed liquid assets
and examples of such are:
o Cash
o Cash equivalents
o Short-term deposits
18 BASIC ACCOUNTING

o Stock
o Marketable securities
o Office supplies

b. Non-Current Assets or Fixed Assets - Non-current assets are assets that cannot be
easily and readily converted into cash and cash equivalents. Non-current assets are also
termed fixed assets, long-term assets, or hard assets. Examples of non-current or fixed
assets include:
o Land
o Building
o Machinery
o Equipment
o Patents
o Trademarks

2. Classification of asset as to Physical Existence - If assets are classified based on their

physical existence, assets are classified as either tangible assets or intangible assets.

a. Tangible Assets - Tangible assets are assets that have a physical existence (we can
touch, feel, and see them). Examples of tangible assets include:
o Land
o Building
o Machinery
o Equipment
o Cash
o Office supplies
o Stock
o Marketable securities

b. Intangible Assets - Intangible assets are assets that do not have a physical existence.
Examples of intangible assets include:
o Goodwill
o Patents
o Brand
o Copyrights
o Trademarks
o Trade secrets
o Permits
o Corporate intellectual property

3. Classification of assets as to Usage - If assets are classified based on their usage or

purpose, assets are classified as either operating assets or non-operating assets.

a. Operating Assets - Operating assets are assets that are required in the daily operation of
a business. In other words, operating assets are used to generate revenue from a
company’s core business activities. Examples of operating assets include:
 BASIC ACCOUNTING 19

o Cash
o Stock
o Building
o Machinery
o Equipment
o Patents
o Copyrights
o Goodwill

b. Non-Operating Assets - Non-operating assets are assets that are not required for daily
business operations but can still generate revenue. Examples of non-operating assets
include:
o Short-term investments
o Marketable securities
o Vacant land
o Interest income from a fixed or time deposit

Liabilities -Defined by the International Financial Reporting Standards (IFRS) Framework: “A liability is a
present obligation of the enterprise arising from past events, the settlement of which is expected to
result in an outflow from the enterprise of resources embodying economic benefits.”

Classification of Liabilities
These are the three main classifications of liabilities:
1. Current liabilities (short-term liabilities) are liabilities that are due and payable within one year.
2. Non-current liabilities (long-term liabilities) are liabilities that are due after a year or more.
3. Contingent liabilities are liabilities that may or may not arise, depending on a certain event.

1. Current Liabilities also known as short-term liabilities, are debts or obligations that need to be
paid within a year. Current liabilities should be closely watched by management to make sure
that the company possesses enough liquidity from current assets to guarantee that the debts or
obligations can be met.
Examples of current liabilities:
Accounts payable
Interest payable
Income taxes payable
Bills payable
Bank account overdrafts
Accrued expenses
Short-term loans

Current liabilities are used as a key component in several short-term liquidity measures. Below
are examples of metrics that management teams and investors look at when
performing financial analysis of a company.

Examples of key ratios that use current liabilities are:

 The current ratio: Current assets divided by current liabilities
 The quick ratio: Current assets, minus inventory, divided by current liabilities
20 BASIC ACCOUNTING

 The cash ratio: Cash and cash equivalents divided by current liabilities

2. Non-current liabilities, also known as long-term liabilities, are debts or obligations that are due
in over a year’s time. Long-term liabilities are an important part of a company’s long-term
financing. Companies take on long-term debt to acquire immediate capital to fund the purchase
of capital assets or invest in new capital projects.

Long-term liabilities are crucial in determining a company’s long-term solvency. If companies are
unable to repay their long-term liabilities as they become due, then the company will face a
solvency crisis.
List of non-current liabilities:
Bonds payable
Long-term notes payable
Deferred tax liabilities
Mortgage payable
Capital leases

3. Contingent Liabilities are liabilities that may occur, depending on the outcome of a future event.
Therefore, contingent liabilities are potential liabilities. For example, when a company is facing a
lawsuit of P100,000, the company will incur a liability if the lawsuit proves successful. However,
if the lawsuit is not successful, then no liability would arise.

In accounting standards, a contingent liability is only recorded if the liability is probable (defined
as more than 50% likely to happen) and the amount of the resulting liability can be reasonably
estimated.
Examples of contingent liabilities:
Lawsuits
Product warranties

Capital also known as net assets or equity; capital refers to what is left to the owners after all liabilities
are settled. Simply stated, capital is equal to total assets minus total liabilities. Capital is affected by the
following:
1. Initial and additional contributions of owner/s (investments),
2. Withdrawals made by owner/s (dividends for corporations),
3. Income, and
4. Expenses.

Owner contributions and income increase capital. Withdrawals and expenses decrease it. The terms
used to refer to a company's capital portion varies according to the form of ownership. In a sole
proprietorship business, the capital is called Owner's Equity or Owner's Capital; in partnerships, it is
called Partners' Equity or Partners' Capital; and in corporations, Stockholders' Equity.

In addition to the three elements mentioned above, Assets, Liabilities and Capital, there are two
items that are also considered as key elements in accounting equation. They are income and expenses;
these items are ultimately included as part of capital.
 BASIC ACCOUNTING 21

Income refers to an increase in economic benefit during the accounting period in the form of an
increase in asset or a decrease in liability that results in increase in equity, other than contribution from
owners. Income encompasses revenues and gains.

Revenues refer to the amounts earned from the company’s ordinary course of business such
as professional fees or service revenue for service companies and sales for merchandising and
manufacturing concerns.

Gains come from other activities, such as gain on sale of equipment, gain on sale of short-term
investments, and other gains.

Income is measured every period and is ultimately included in the capital account. Examples of
income accounts are: Service Revenue, Professional Fees, Rent Income, Commission Income, Interest
Income, Royalty Income, and Sales.

Expenses are decreases in economic benefit during the accounting period in the form of a decrease
in asset or an increase in liability that result in decrease in equity, other than distribution to owners.
Expenses include ordinary expenses such as Cost of Sales, Advertising Expense, Rent Expense, Salaries
Expense, Income Tax, Repairs Expense, etc.; and losses such as Loss from Fire, Typhoon Loss, and Loss
from Theft. Like income, expenses are also measured every period and then closed as part of capital.
Net income refers to all income minus all expenses.

Income Statement
The income statement is the next financial statement everyone should look at. It looks quite
different than the balance sheet. In the income statement, it’s about the revenue and the expenses.
It starts with the gross sales or revenue. Then we deduct any sales return or sales discount from the
gross sales to get the net sales. From net sales, we deduct the costs of goods sold, and we get the gross
profit. From gross profit, we deduct the operating expenses like the expenses required for daily
administrative and selling expenses. By deducting the operating expenses, we get the operating income.

From the operating income we add, if there is any, interest and other non-operating income
received during the period and deduct the interest charges paid and other non-operating losses
sustained during the period, by this we get the EBT, meaning Earnings Before Taxes. From EBT, we
deduct the income taxes for the period, and we get the Net Income or Net Profit, meaning profit after
tax.

Cash Flow Statement

Cash Flow Statement is the third most important statement every investor should look at. There are
three separate segments of a cash flow statement. These are cash flow from the operating activities,
cash flow from investing activities, and cash flow from finance activities.
1. Cash Flow from Operations is the cash generated from the core operations of the business.
2. Cash Flow from Investing Activities relates to the cash inflows and outflows related to
investment in the company like buying of property, plant, and equipment or other investments.
3. Cash Flow from Financing Activities relates to the cash inflows or outflows related to debt or
equity of the company. It includes raising of equity or capital, debt, loan repayments, buyback of
shares, and similar financing activities.
22 BASIC ACCOUNTING

Statement of Owner/Partners’ Equity (for sole proprietorship and partnership) or Statement of

Changes in Shareholders’ Equity (for corporation)
Statement of Owner/Partners’ Equity or Statement of Changes in Shareholders’ Equity is
a financial statement that provides a summary of changes in the owner/partners’ or
shareholders’ equity in a given period.

Illustration of Income Statement for the Different Forms of Business Organization:

Sole Proprietorship’s Income Statement
Terimacor Bicycle Rental Services
Statement of Owner's Equity
For the year ended December 31, 2019

Teresa Corrales, capital Jan. 1, 2019 90,000

Add: additional capital by Teresa Corrales
net income from Jan.1-Dec. 31, 2019
Total
Less: withdrawals or drawings from Jan. 1-92,000
Dec. 31, 2019
Teresa Corrales, capital Dec. 31, 2019 182,000

Partnership’s Income Statement

Terimacor Bicycle Rental Services Ltd.
Statement of Partner's Equity
For the year ended December 31, 2019
Teresa Anita Total
Balances Jan. 1, 2019 90,000 160,000 250,000
Add: additional capital by partners 82,000 10,000 92,000
net income from Jan.1-Dec. 31, 201928,000 28,000 56,000
Total 200,000 198,000 398,000
Less: withdrawals or drawings from Jan. 1- 18,000
Dec. 31, 2019
24,000 42,000
Capital balances Dec. 31, 2019 182,000 174,000 356,000
Elements of Statement of Changes in Owner/Partners’ Equity/Capital
Capital or investment- A capital or investment is a sum of cash acquired by a business to
pursue its objectives, such as continuing or growing operations. It also can refer to permanent
fixed assets such as property, plant, & equipment which ownership has been transferred to the
business.
Net income - For a business, net income equals is the amount remaining after subtracting all
costs and expenses from revenue. If the costs and expenses exceed revenue, it is called net
loss and this is subtracted from the capital or investment.
Drawings or withdrawals- represent an amount of cash or non-cash items removed by the
owner or partners from the business for personal use or expenditure.
 BASIC ACCOUNTING 23

Corporation’s Income Statement

Terimacor Bicycle Rental Services Co.
Statement of Stockholders' Equity
For the year ended December 31, 2019
Additional
Common paid-in Retained
Stock capital earnings
Balance Jan. 1, 2019 80,000 160,000 130,000
Issuance of Stock 20,000 65,000
Net income 69,000
Cash dvidends -21,000
Stock dividend- 8% 8,000 26,000 -34,000
Purchase of treasury stock
Sale of treasury stock 13,000
Balance Dec. 31, 2019 108,000 264,000 144,000

Elements of Statement of Changes in Stockholders’ Equity

Common Stock is the first and most important component of shareholders’ equity. Common
stockholders are the owners of the company, however there are corporations which issue
preference shares which holders are also owners of the company but with limited rights.
Additional Paid in Capital means when the company receives a premium on the shares.
Premium results when the shares of stock are issued above par value.
Retained earnings or losses are accumulated from the previous period. In simple terms,
retained earnings are the amount the company keeps after paying the dividend from net
income.
Treasury shares are the sum total of all the common shares that have been purchased back by
the company.
Dividend is the distribution of some of a company's earnings to a class of its shareholders, as
determined by the company's board of directors.

ACTIVITIES AND ASSESSMENT

A. Identifying the applicable Accounting Principle
1. The personal assets of the owner of a company will not appear on the company's balance
sheet because of which principle/guideline? _________________
2. Which principle/guideline requires a company's balance sheet to report its land at the amount
the company paid to acquire the land, even if the land could be sold today at a significantly
higher amount?_________________________
3. Which principle/guideline allows a company to ignore the change in the purchasing power of
the peso over time? __________________________________
4. Which principle/guideline requires the company's financial statements to have footnotes
containing information that is important to users of the financial statements?
__________________________________
5. Which principle/guideline justifies a company violating an accounting principle because the
amounts are immaterial? __________________________________
6. Which principle/guideline is associated with the assumption that the company will continue
on long enough to carry out its objectives and commitments?
24 BASIC ACCOUNTING

7. A very large corporation's financial statements have the peso amounts rounded to the
nearest P1,000. Which accounting principle/guideline justifies not reporting the amounts to the
penny?
8. Accountants might recognize losses but not gains in certain situations. For example, the
company might write-down the cost of inventory, but will not write-up the cost of inventory.
Which principle/guideline is associated with this action?
9. Which principle/guideline directs a company to show all the expenses related to its revenues
of a specified period even if the expenses were not paid in that period?
10. When the accountant has to choose between two acceptable alternatives, the accountant
should select the alternative that will report less profit, less asset amount, or a greater liability
amount. This is based upon which principle/guideline? ______________________________

B. Define or discuss the following:

1. Accounting
2. Generally Accepted Accounting Principles (GAPP)
3. International Accounting Standards (IAS)
4. International Financial Reporting Standards (IFRS)
5. Evolution of accounting standards in the Philippines

C. Enumerate and Discuss the following:

1. Forms of Business Organization
2. Types of Business Activity
3. 10 Generally Accepted Accounting Principles
4. Give some of the important uses of Accounting information
5. 8 Branches of Accounting
 BASIC ACCOUNTING 25

WRITE YOUR ANSWERS HERE:

EXERCISE 1-1- Instructions: For each of the business listed below indicate the type of the firm for
which each belongs. Write “X” on the line provided.

SERVICE MERCHANDISING MANUFACTURING

1. car assembler ________________ ________________ __________________

2. newsstand ________________ ________________ __________________
3. paper mills ________________ ________________ __________________
4. laundry shop ________________ ________________ __________________
26 BASIC ACCOUNTING

5. pharmaceutical ________________ ________________ __________________

6. dental clinic ________________ ________________ __________________
7. barber shop ________________ ________________ __________________
8. gift shop ________________ ________________ __________________
9. eal estate broker ________________ ________________ __________________
10. bookstore ________________ ________________ __________________
11. battery maker ________________ ________________ __________________
12. movie houses ________________ ________________ __________________
13. driving school ________________ ________________ __________________
14. hardware ________________ ________________ __________________
15. furniture maker ________________ ________________ __________________
16. law offices ________________ ________________ __________________
17. department store ________________ ________________ __________________
18. accounting firm ________________ ________________ __________________
19. boutique ________________ ________________ __________________
20. groceries ________________ ________________ __________________
21. supermarkets ________________ ________________ __________________
22. textiles ________________ ________________ __________________
23. shoe maker ________________ ________________ __________________
24. sari-sari store ________________ ________________ __________________
25. laundry shop ________________ ________________ __________________

EXERCISE1- 2- INSTRUCTION - After the statement given below, make a “check” on the line
Provided. Indicate the type of organization being referred to:

SOLE PARTNERSHIP CORPORATION

1. Easy to form __________ ___________ ___________
2. Life is continuous __________ ___________ ___________
3. More expensive
to organize. ____________ ______________ _____________
4. Better credit standing. __________ ___________ ___________
BASIC ACCOUNTING 27

5. Unlimited liability. __________ ___________ ___________

6. Few legal restrictions. __________ ___________ ___________
7. It is subject to more taxes. __________ ___________ ___________
8. Owner has more freedom __________ ___________ ___________
9. Owned by the government. __________ ___________ ___________
10. Centralized management. __________ ___________ ___________
11. Unlimited life __________ ___________ ___________
12. Easy to dissolve __________ ___________ ___________
13. Better credit standing
than sole proprietorship __________ ___________ ___________
14. Subject to governmental
Controls. __________ ___________ ___________
15. Large scale business
Undertakings. __________ ___________ ___________
16. Limited liability __________ ___________ ___________
17. Divided authority __________ ___________ ___________
18. Difficult of raising capital __________ ___________ ___________
19. Restricted transfer of
capital __________ ___________ ___________
20. Greater source of capital
than sole __________ ___________ ___________

PROBLEM 1-1
INSTRUCTIONS: On the space provided, indicate a CHECK MARK as to the Effect balances of
the following accounts:

INCREASED DECREASED
1. Notes payable was debited. _____________ ___________
2. Accounts receivable was credited. _____________ ___________
3. Cash was debited. _____________ ___________
28 BASIC ACCOUNTING

4. Salary expense was debited _____________ ___________

5. Service income was credited. _____________ ___________
6. Accounts payable was credited _____________ ___________
7. Owner’s equity was credited. _____________ ___________
8. Cash was credited. _____________ ___________
9. Prepaid rent was debited _____________ ___________
10. Accounts payable was debited. _____________ ___________
11. Notes receivable was debited _____________ ___________
12. Salaries payable was debited _____________ ___________
13. Service revenue was debited _____________ ___________
14. Capital was debited _____________ ___________
15. Rent expense was debited _____________ ___________
16. Supplies was credited _____________ ___________
17. Utilities expense was debited _____________ ___________
18. Equipment was debited _____________ ___________
19. Unearned commission was debited _____________ ___________
20. Marlon drawing was debited _____________ ___________

PROBLEM 1-2
INSTRUCTION: Compute the new balances of the following items. Consider each item
separately:

ORIGINAL NEW
BALANCE BALANCE

SAMPLE: Cash was debited by P300 P 1, 500 P 1,800

1. Irene, Capital was debited by P10, 000 50,000 __________
2. Prepaid rent was debited by P6, 000 12,000 __________
3. Notes receivable was debited by P 3,500 14,000 __________
4. Accounts payable was debited by P 5,000 26,000 __________
5. Service income was credited by P 9,000 34,000 __________
6. Salary expense was debited by P 8,200 22,000 __________
7. Notes payable was credited by P20, 000 5,000 __________
8. Accounts receivable was debited by P18, 000 3,000 __________
9. Irene, Drawing was debited by P 2,000 8,000 __________
10. Supplies Expense was debited by P2,200 --- __________
11. Accounts receivable was credited by ,P7,500 32,000 __________
12. Utilities expense was debited by P3,200 1,000 __________
BASIC ACCOUNTING 29

13. Cash was credited by P 21,000 46,000 __________

14. Mortgage payable was debited by P30,000 75,000 __________
15. Rental Income was credited by P 15,000 9,000 __________
16. Commission income was credited by P 25,000 4,000 __________
17. Interest receivable was credited by P800 2,800 __________
18. Taxes & licenses was debited by P3,000 5,200 __________
19. Furniture & fixtures was credited by P400 10,000 __________
20. Land was debited by P45, 000 60,000 __________
21. Interest expense was debited by P750 6,800 __________
22. Equipment was debited by P 6,900 3,700 __________
23. Interest receivable was debited by P650 1,300 __________
24. Tools was debited by P2, 000 4,000 __________
25. Wages expense was debited by P 14,000 15,000 __________
30 BASIC ACCOUNTING

Module 2

THE ACCOUNTING EQUATION AND ANALYZING BUSINESS TRANSACTIONS

Learning objectives
1. Discuss the basic accounting equation.
2. Understand the concept of increase/decrease in an amount.
3. Identify the effects of transactions on the accounting equation.
4. Analyze the effects of different business transactions to the accounting equation.

The purpose of accounting is to provide a means of recording, reporting, summarizing, and

interpreting economic data. At the end of the period, a trustworthy and competently financial reports
are prepared and provided on a regular basis. To do this, an accounting system must be designed.

Accounting information system is vital for keeping the data to become a document and later a
record. Once a system has been designed, reports can be issued, and decisions based upon these
reports are made for various departments and other users.

Occurrence of business transactions must be substantiated by the source documents like an

invoice, official receipts, purchase order, payroll and the like. Then it will be analyzed and processed
for recording aided by the accounting equation. The accounting equation represents the relationship
between assets, liabilities, and owner’s equity of a business. Finally, the summary of transactions in
the form of financial statements are provided to users.

What is the Accounting Equation Used for?

The basis of accounting is the principle of balance. To carry out economic activities, the
company needs funds and that these funds should be given to the company by owner/ sole
proprietor. The funds owned by the company are called assets. The total amount of funds
contributed by them is called capital. If the owner is the only one who contributed, then the
equation is

Assets = Owner’s Equity

BASIC ACCOUNTING 31

However, assets may be contributed by someone else who is not the owner. The debt of
the company for these assets is called liabilities. Therefore, now the equation will take the
following form:

Assets = Liabilities and Owner’s Equity.

The left and right sides of the equation must always be equal regardless of the
Number of business transactions.

Three Elements in the Accounting Equation

1. Assets are things of value owned by a business.
 Cash
 Accounts receivable
 Notes receivable
 Supplies
 Prepaid Insurance
 Prepaid Taxes
 Merchandise Inventory (for Merchandising business)
 Equipment
 Furniture & Fixtures
 Land
 Building
 Patents
 Copyrights
2. Liabilities. Obligations owed to other companies and people classified as current and
long-term liabilities.
 Accounts Payable
 Notes Payable
 Mortgage Payable
 Salaries Expense
 Taxes Payable
 Interest Payable
 Unearned revenue

3. Capital. Equity of the owner. These are the financial resources or assets owned by a
business that are useful in furthering development and generating income. It is the
residual interest in the assets after deducting the liabilities of the business. Capital is
affected by the following:

Effect in the Capital

Owner’s investment increase
Owner’s withdrawals decrease
Revenue /Income increase
Expenses decrease
32 BASIC ACCOUNTING

ANALYZING BUSINESS TRANSACTIONS

In order to generate financial reports, business transactions have to be analyzed,

recorded and summarized. In analyzing transactions, the suggested procedures are as
follows:

1) Determine the accounts affected or involved in the transaction. There

are two or more accounts involved in every transaction.

2) Determine the effect of the transaction on the accounts involved in terms of

increase or decrease.

The accounts affected or involved and the effects of the transactions on the said
account are illustrated as follows: (INC - Increase; DEC – Decrease; NC - No Change)

Transactions Asset Liabil Capit Analysis

s ities al
An entity is separate and distinct from
the owner. Cash investment will both
1 Owner invests cash INC NC INC increase asset and capital.
Purchased supplies on Supplies is an asset and it was bought
2 credit INC INC NC on credit, both asset and liabilities
increase.

Equipment is an asset and since this is

an investment by the owner, both asset
3 Owner invests equipment INC NC INC and capital correspondingly increase.
Land increases the assets of the
4 Buys land paying cash INC/D business but cash as an asset
EC NC NC correspondingly decrease for cash
purchase of the land.
Cash increases the assets of the
business because of borrowed cash.
Notes Payable increases the liabilities
5 Borrows cash with note INC INC NC of the business as it represents an
obligation to pay in the future date.
6 Rendered services for Cash received increases asset and it
cash. INC NC INC was also an increase in capital due to
revenue earned.
Cash payments represent cash outflow
7 Paid utilities expense DEC NC DEC decreases assets while expenses
decrease capital as it has opposite
effect on income
Asset increased because of supplies
8 Paid supplies purchased. DEC NC DEC purchased and another asset, Cash
decreased because of payment.
Assets increased by the amount of
9 Rendered services on accounts receivable expected to be
account. INC NC INC collected from the customer and capital
increased since rendering of services
represents revenue.
Asset increased as there was cash
inflow in the amount of the collection.
10 Collection of Accounts INC/D NC NC Another asset decreased in the amount
 BASIC ACCOUNTING 33

Receivable EC of accounts receivable collected.

Cash is an asset; a cash payment
12 Paid salaries of DEC NC DEC decreases asset. Correspondingly,
employees. salaries expense decreases income
and decrease in income is a decrease
in capital.
Asset decreased because of cash and
13 Cash withdrawal of the DEC NC DEC decreased in capital because of
owner for personal use. personal use.
Cash payment decreases asset and a
14 Payment of accounts DEC DEC NC decreased in liabilities because of
payable accounts payable.

Asset increased by the amount of tables

15 Purchased office tables
and office chairs. Paid
down payment and the
balance is due after
30days.
and chairs (classified as furniture and
INC/D INC NC fixtures), Asset decreased by the
EC amount of cash payment. Liabilities
increased by the amount of unpaid
balance (accounts payable)

Illustrative Problem

The following details will include the amount and the account affected in illustrating the effects on
the accounting equation. Notice that the accounting equation is always balanced in every transaction
such that assets are always equal to liabilities and capital.

The Diaz Dry and Fold Shop, owned by Mr. Diaz, engaged in a laundry business completed the following
transactions during the first month of its operations, January 2020:

1. Mr. Diaz organized a laundry shop business owned and managed by himself. He
invested cash of P600,000 and deposited in the account of his business named Diaz Dry
& Fold Shop.

2. Purchased supplies in the amount of P30,000 cash.

3. Bought 4 units of washing machine and 4 units of dryer on account with the total amount
of P400,000.

4. Purchased office chairs and tables amounting to P50,000.

5. Paid space rental for the month, P 25,000.

6. Paid partial amount of P250,000 for the washing machine and dryers purchased in no. 3.

7. Received P75,000 from cash customer for the laundry services.

8. Paid light and water bills for the month, P35,000.

9. Charged customer for the laundry contract of hotel linens and curtains,
P 150,000.
34 BASIC ACCOUNTING

10. Purchased additional supplies on account, P25,000.

11. Paid salary of laundry assistants, P40,000.

12. Mr. Diaz withdrew P10,000 cash for his personal use.

13. Collected 50% of laundry service charged in no. 9.

14. Purchased computer and printer, P40,000. Terms: Down payment of P10,000 and the
balance payable in two equal installments.

15. Paid local taxes to continue operate the business, P5,000.

Required: (1) Analyze the above transactions by using accounting equation tabulation and
indicate under the notation column why the capital of Diaz is affected.
(2) Prepare the financial statements for the month ended January 31, 2020.
ASSETS LIABILITIES CAPITAL

ACCOUNTS FURNITURE ACCOUNTS DIAZ, NOTATIONS

RECEIVABLE AND PAYABLE CAPITAL
CASH SUPPLIES EQUIP-
FIXTURES
MENT

1 600,000 600,000 Initial

investment

2 (30,000) 30,000
3 400,000 400,000
4 (50,000) 50,000
5 (25,000) (25,000) Rent Expense

6 (250,000) (250,000)
7 75,000 75,000 Service
Revenue

8 (35,000) (35,000) Utilities Exp.

9 150,000 150,000 Service

Revenue

10 25,000 25,000
11 (40,000) (40,000) Salaries Exp.

12 (10,000) (10,000) Diaz

withdrawal

13 75,000 (75,000)
14 (10,000) 40,000 30,000
15 (5,000) (5,000) Taxes Exp.

Bal. 295,000 75,000 55,000 50,000 440,000 205,000 710,000

 BASIC ACCOUNTING 35

To enhance the usefulness of the financial data and its balances from the tabulation, the following are the
summary of financial reports:

1) Statement of Income and Expenses

2) Statement of Owner’s Equity
3) Statement of Financial Position
4) Statement of Cash Flows

Diaz Dry and Fold Shop

Statement of Income and Expenses
For the Month Ended January 31, 2020

Service Revenue P225,000

Less: Operating Expenses
Salaries P 40,000
Utilities 35,000
Rent 25,000
Taxes 5,000
Total Operating Expenses 105,000

Net Income P120,000

Diaz Dry and Fold Shop

Statement of Owner’s Equity
For the Month Ended January 31, 2020

Diaz Capital, January 1, 2020 P600,000

Add: Net Income 120,000
Total 720,000
Less: Withdrawals 10,000
Diaz Capital, January 31, 2020 P710,000

Note: The capital balance at the beginning in the amount of P600,000 increased to
P710,000 at the end of the month because of the net increase in capital by
P110,000 due to greater amount of net income of P120,000 than withdrawals of
P10,000.
36 BASIC ACCOUNTING

Diaz Dry and Fold Shop

Statement of Financial Position
January 31, 2020

Assets Liabilities and Capital

Cash P295,000 Accounts Payable P205,000
Accounts Receivable 75,000 Diaz, Capital 710,000
Supplies 55,000
Furniture and Fixtures 50,000
Equipment 440,000
Total Assets P915,000 Total Liabilities and Capital P915,000

Diaz Dry and Fold Shop

Statement of Cash Financial Position
January 31, 2020

Cash Flows from Operations:

Service Revenues P75,000
Collection of Receivables 75,000
Purchased of Supplies (30,000)
Payments of Expenses:
Rent P25,000
Utilities 35,000
Salaries 40,000
Taxes 5,000 (105,000) P15,000

Cash Flows from Investment Activities:

Purchased of Equipment P(260,000)
Purchased of Furniture & Fixtures ( 50,000) (310,000)

Cash Flows from Financing Activities:

Investment of the Proprietor P 600,000
Withdrawals of the Proprietor ( 10,000) 590,000

Cash Balance, January 31, 2020 P295,000

Note: 1. Cash balance at the end of the Statement of Cash Flows must always be
equal to the cash indicated in the statement of Financial Position.
2. The statement of Cash Flows explained the sources and uses of cash.
 BASIC ACCOUNTING 37

Activities and Assessment

EXERCISE 2-1. INSTRUCTIONS: On the space provided, indicate whether the normal
balance of each of the given account is DEBIT or CREDIT:

1. Building __________ 11. Interest Payable ___________

2. Supplies __________ 12. Land __________
3. Accounts Payable _________ 13. Drawing __________
4. Allow. for doubtful accts. ________ 14. Rent Expense _________
5. Notes Receivable __________ 15. Prepaid Insurance ___________
6. Mortgage Payable __________ 16. Equipment ___________
7. Commission Income _________ 17. Furniture & Fixtures _________
8. Cash __________ 18. Professional Fees ___________
9. Accumulated Depreciation _______ 19. Sales Salary _______________
10. Capital ___________ 20. Unearned Income ___________

EXERCISE 2-2. Write “T” if the statement is true and “F” if the statement is false.

_____1. The fundamental accounting equation is Assets = Liabilities + Capital

_____2. Revenue increases owner’s equity.
_____3. Payment of an expense increases asset.
_____4. Expenses decreases owner’s equity.
_____5. Receipt of cash decreases asset.

EXERCISE 2-3. Show the effects on the accounting equation. Write + for increase, - for
decrease, and NC for No Change.

Asset Liability Capital

1. Owner invested cash in the business
2. Owner borrowed money from the
bank
3. Purchased filing cabinets for cash.
4. Owner purchased a printer on
account
5. Bought truck paying 10% down and
balance on account.
6. Paid account to creditors
7. Charged customer for the service
rendered.
38 BASIC ACCOUNTING

8. Collected an account receivable

9. Purchased reams of bond paper in cash
10. Paid utilities for the month
11. Owner withdrew cash for personal use
12. Rendered service for cash

Exercise 2-4

A medical practioner Dr. Nikolai opened his clinic with the following initial transactions:
1. Dr. Niko opened a medical clinic by investing P300,000 pesos.
2. Issued a promissory note for the P100,000 he borrowed from Banco De Uno.
3. Purchased a medical bed and its accessories worth ₱100,000
4. Bought from A Co. a table and cabinet worth ₱70,000.
5. Purchased medical supplies in the amount of ₱25,000 cash.
6. Withdrew ₱20,00 for personal use
7. Purchased chairs on account for ₱15,000.
8. Paid 50% of account to A co.
9. Bought from SM Furniture cabinet shelves worth of ₱20,000. Paid ₱5,000 cash and the
balance on account.
10. Received P75,000 from the group of patients as medical fees.
11. Paid power and water bills for the month, P8,000.
12. Paid medical assistant salary, P20,000.
13. Charged the patients for attending the medical care, P50,000.
14. Paid the balance in full to SM Furniture.
15. Collected 70% of medical fees charged to patients in no.13.
16. Paid communication bills, P3,500.
17. Paid P6,000 to Petron Station for the gasoline of Dr. Nokolai’s service vehicle.
18. Settled a partial payment of P70,000 to Banco De Uno ( refer to item no. 2)
19. Purchased additional medical equipment, P50,000. Terms: Paid P30,000 and the
balance after 30 days.
20. Returned defective medical supplies purchased in no. 5, worth P5,000.
21. By taking inventory at the end of the period, medical supplies consumed amounted to
P18,000.

Required:
1) Analyze and record the transaction using the given tabulation below:

A S S E T S LIABILITIES CAPITAL
Acct. Fur. & Accounts Mortgage Nikolai,
No. Cash Rec’ble Supplies Fixture Equipt. Payable Payable Capital Notations
 BASIC ACCOUNTING 39

2) Prepare the following financial reports for the month of January 2020:
a) Income Statement
b) Statement of Owner’s Equity
c) Statement of Financial Position
d) Statement of Cash Flows

WRITE YOUR ANSWERS HERE:

40 BASIC ACCOUNTING

WRITE YOUR ANSWERS HERE:

BASIC ACCOUNTING 41

WRITE YOUR ANSWERS HERE:

42 BASIC ACCOUNTING

Module 3

RECORDING AND POSTING THE BUSINESS TRANSACTIONS

After studying Module 3, the students should be able to:

1. Learn the 3 basic accounting values or elements

2. Distinguish between tangible assets and intangible assets.
3. State the accounting equation (in two ways) and explain the significance.
4. Know the difference between a debit and a credit.
5. Know the rules of addition and subtracticn by position
6. Know the other accounting values or elements which will affect the owner's equity.
7. Know how to compute the net profit or loss
8. Prepare a chart of accounts
9. Know the correct order of listing of the accounts in the chart of accounts.
10. Learn what, where, how and why business transactions are recorded.
11. Analyze the effects of a transaction in the accounting values.
12. Learn how to record formally in the general journal (journalizing)
13. Learn how to record formally in the general ledger (posting).
14. Learn how to prepare the different kinds of trial balance.

ANALYZING BUSINESS TRANSACTIONS

The source documents are analyzed before recording the transactions in the general journal.
The source documents include check, statement of account, official receipt, payroll, invoice, etc.
Analyzing business transaction is the first step in the accounting process.

The following are illustrated to analyze the business transactions:

Starting a business: On Feb. 1, 2020, Mr. Ramon Tan obtained the funds to start a business by
withdrawing P700,000 from his personal savings account. He deposited the money in a new bank current
account that he opened in the name of his business, RT General Services.

The financial transaction is analyzed as follows:

1. A separate and distinct entity from his personal financial affair is created. This is
an example of Business Entity Concept.

2. As a source document shown in the accounting records, you will find a deposit
slip evidencing the deposit in the current account of RT General Services in the
amount of P700,000 dated Feb. 1, 2020.

3. An economic resource which is Cash is invested in the business entity. The

source of this asset is the contribution made by the owner, which represents the
owner’s equity.

4. The dual nature of the transaction is that cash is invested and owner’s equity is
created. The effects of this transaction on the accounting equation are as
 BASIC ACCOUNTING 43

follows: increase in asset (Cash) from zero to P700,000 and increase in owner’s
equity from zero to P700,000.

5. At this point, the entity has no liability, and assets equal owner’s equity.
Purchasing Equipment on Account: On Feb 5, 2020, Mr. Ramon Tan bought cleaning machine from
Felix Trading at a cost P50,000. The supplier agreed to allow 60 days for the company to pay the bill.

The financial transaction is analyzed as follows:

1. The entity has established an account with a creditor. An obligation to be paid

within 60 days.

2. As a source document shown in the accounting records, you will find a sales
invoice with a term 60 days issued by Felix Trading.

3. An economic resource which is Machinery is purchased to be used in the

business entity. The source of this asset is the liability provided by the creditor,
which represents the liability.

4. The dual nature of the transaction is that machinery is invested and liability is
created. The effects of this transaction on the accounting equation are as
follows: increase in asset (Machinery) from zero to P50,000 and increase in
liability from zero to P50,000.

5. At this point, the entity has assets of P850,000 equal liability of P50,000 and
owner’s equity of P800,000.
Purchasing Supplies for Cash: On Feb. 10, 2020, Mr. Ramon Tan purchased supplies from Santos
Trading that had a total cost P3,000. He issued a check payable to Santos Trading.

The financial transaction is analyzed as follows:

1. The entity has maintained a checking account to monitor disbursement of funds.

2. As a source document shown in the accounting records, you will find a check
payable to Santos Trading and Official Receipt issued by Santos Trading
evidencing the payment of the supplies purchased.

3. An economic resource which is Supplies is purchased to be used in the business

entity. The source of this asset is another asset (Cash) provided by the owner by
issuing a check to Santos Trading.

4. The dual nature of the transaction is that Supplies is purchased and another
asset which is cash is used in exchange for the other asset. The effects of this
transaction on the accounting equation are as follows: increase in asset
(Supplies) from zero to P3,000 and decrease in another asset (Cash) from
P800,000 to P797,000.
44 BASIC ACCOUNTING

5. At this point, the entity has assets of P850,000 equal liability of P50,000 and
owner’s equity of P800,000.
Payment to a creditor: On Feb 20, 2020, Mr. Ramon Tan paid Santos Trading for the cleaning
machinery purchased on Feb. 5, 2020.

The financial transaction is analyzed as follows:

1. The entity has settled his account with a creditor.

2. As a source document shown in the accounting records, you will find a check
issued in the name of Santos Trading and an Official Receipt issued by Santos
Trading evidencing receipt of payment.

3. There is no economic resource but rather eliminated the liability of the entity.
The payment of the liability provided by the creditor has been paid.

4. The dual nature of the transaction is that machinery is invested and liability is
created. The effects of this transaction on the accounting equation are as
follows: increase in asset (Machinery) from zero to P50,000 and increase in
liability from zero to P50,000.

5. At this point, the entity has assets of P850,000 equal liability of P50,000 and
owner’s equity of P800,000.

THE RECORDING PROCESS

To be able to learn how to record formally the various business transactions in the general
journal, it is necessary to introduce fire the technical accounting terms that will be used and the effects of
each transaction. Familiarization of these terms will be understanding of the manner and procedure of
recording.

In this chapter, the focus is on the analysis and recording of transactions of a service business. It
should be emphasized however, that the discussions are based on the assumption that manual
bookkeeping system is used which good starting point in studying accounting. A computerized system will
drastically change the procedures and formats.

BASIC ACCOUNTING ELEMENTS OR VALUES

There are three basic accounting values or elements, which will be affected by the business
transactions or events to be recorded. They are as follows:

1. Assets – there are e properties or economic resources owned by the business. The most
common properties or assets of a business are. Cash, receivables, furniture and fixtures (such as tables,
cabineis, chairs, etc.), office equipment (such as calculators, computers, copying machines, fax machine,
etc.), machineries, delivery truck, land, building, among others. Before a property can be considered as
an asset, it is necessary that it has a value and it is owned by the business. Assets are classified as
current assets and non-current assets. Current assets are arranged according to liquidity. Non-current
assets are long-term assets and not intended to be converted to cash for a period of one year.
 BASIC ACCOUNTING 45

Examples of current assets are cash, receivables, supplies, prepaid expenses.

Examples of non-current assets are office equipment, land, building, truck, machineries.

2. Liabilities - These are amounts owed by the business. In simple terms, they are debts or legal
obligations of the business to individuals or other businesses. Liabilities are classified as current liabilities
and non-current liabilities. Current liabilities are arranged according to maturity for a period of one year or
less. Non-current liabilities are long-term debts and are to be paid beyond a period of more than one
year.

Examples of current liabilities are account payables, interest payable, taxes payable.

Examples of non-current liabilities are notes payable, mortgage payable, bonds payable.

3. Capital (Owner's Equity) - This is the owner's interest or claim assets of the business after subtracting
the interest of the creditors. It is the difference between the amount of assets and amount of liabilities.
The relationship of these 3 accounting values or elements can be expressed in the form of a simple
equation known as the Accounting Equation.

THE ACCOUNTING EQUATION

The fundamental accounting equation is shown below. All business transactions are recorded
within the framework of this accounting equation. This is the foundation of the modern double entry
method of bookkeeping. 16

Equation 1

ASSETS = LIABILITIES + CAPITAL*

P 500,000 = P200,00 + P300,000

(Creditors' Equity)+ (Owner’s Equity)

*Owner's Equity

The above equation signifies that there are two parties which have financial claim or interest in
the assets of the business. They are the creditors represented by the liabilities and the owner represented
by the capital or owner’s equity

Equation 2

ASSETS – LIABILITIES = CAPITAL

P 500,000 - P 200,000 = P 300,000

The above equation signifies that in the event of liquidation, the creditors have preference over
the assets of the business which means that the claim of the creditors must be satisfied first before there
can be a return of capital of the owner.
Also, the equality of the accounting equation (the peso amount of the assets and the peso
amounts of the liabilities and capital) will always be maintained for every transaction to be recorded.

THE DEBIT AND CREDIT

Traditionally, the left side of the accounting equation is called DEBIT abbreviated DR. (derived
from the word debtor) and the right side is called CREDIT abbreviated CR. (derived from the word
creditor)

DEBIT (DR.) = CREDIT (CR)

46 BASIC ACCOUNTING

Assets = Liabilities + Capital

Based on the above positions of the 3 accounting elements in the accounting equation, the
assets have normally debit balances (being on the left side) while the liabilities and owner's equity have
normally credit balances (being on the right side).

RULES OF ADDITION AND SUBTRACTION BY POSITION

After knowing the position of the different accounting elements, an increase in the amount should
be added on the same side and a decrease in the amount should be subtracted on the opposite side

To illustrate the "rules of addition and subtraction by position be used. What is a T ACCOUNT? It
is an accounting device that is the changes in the accounting elements. It is called T account because o
will be a convenient tool to analyze and record the effect of a transaction on the different accounting
elements.

Assets Liabilities Owner's Equity

Increase Decrease Decrease Increase Decrease Increase

Examples:

Assets____ Liabilities ___ Owner's Equity____

DR CR DR CR DR CR
P 20,000 P 5,000 P 10,000 P 40,000 P30,000 P100,000
P 15,000 P 30,000 P 70,000

Based on the above examples, the assets have a debit balance of P15,000 (P20,000 - P5,000),
the liabilities have a credit balance of P30,000 (P40,000 - P10 000) and the owner's equity has a balance
of P70,000 (P100,000-P30,000).
.
ADDITIONAL ACCOUNTING VALUES OR ELEMENTS

A business is operated to make profit, which is simply the difference between the revenues
earned and expenses incurred. Also, from time to time, the owner may withdraw money from the business
for personal use. To account for these revenues, expenses, and withdrawals, the following three
additional accounting elements or values will be introduced:

Drawing - is the withdrawal made by the owner is considered as a reduction of capital.

Revenues (Income) – is the inflows of assets resulting from the sale of goods or services.
Revenues increase the owner's equity. Example - In a repair shop, the amount charged to the
customer for repair service is the revenue or income.

Expenses – is the outflows of assets resulting from cash spent or liability incurred in order to
generate the revenue. Expenses decrease the owner's equity. Salaries of the employees, office
supplies used, rent of the office space are examples of expenses.

If the revenues earned are greater than the expenses incurred for a given accounting period,
there is a NET PROFIT or NET INCOME, which will be added to the owner's equity. Conversely,
if the expenses exceed the revenues, there is a NET LOSS which will be subtracted from the
owner's equity.
 BASIC ACCOUNTING 47

The accounting equation can be expanded as follows:

REVENUES
ASSETS = LIABILITIES + OWNER'S EQUITY EXPENSES
DRAWINGS

Revenues____ Expenses ____ Drawings_____

Decrease Increase Increase Decrease Increase Decrease

Because revenues will increase the owner's equity, which is on the credit side, increases in
revenues should be on the same side, (credit) and decreases should be on the opposite side (debit). For
expenses and drawings, because they will decrease the owner's equity, they should be placed on the
opposite side of the owner's equity (debit). Increases therefore in the expenses and drawing should be on
the same side (debit) and decreases will be on the opposite side (credit).

Examples:

Revenues Expenses ____ Drawings____

DR CR DR CR DR CR
P 11,000 P 22,000 P12,000

Based on the above examples, the revenues have a credit balance of P11,000 which is its normal
position, the expenses have a debit balance of P22,000 which is its normal position and the drawings
have a debit balance of P12,000, which is its normal position. In the journal entry, revenues are always
on the credit side, expenses are always on the debit side and drawings are on the debit side of the
accounting equation.

CHART OF ACCOUNTS

Considering that there are numerous items of assets, liabilities, revenues and expenses to be
accounted for by the business enterprise, it is necessary that similar items of these accounting elements
be grouped together and then assign a name to facilitate the recording process. Each grouping will be
called an account. What is an ACCOUNT? It is a grouping of similar items to reduce the number of items
to be provided for in the recording process. Each account will be assigned a name or a title as well as a
code number for easy reference A list of account titles to be used in the recording is called Chart of
Accounts. The accounts are normally listed in the order in which they appear in the financial statements.
The balance sheet accounts first, in the order of assets, liabilities and owner's equity. The income
statement accounts are then listed in the order of revenues and expenses.
48 BASIC ACCOUNTING

It is the accountant who prepares the chart of accounts to facilitate the recording by the
bookkeeper. An example of a chart of accounts of a typical servicing concern is shown below:

Chart of Accounts (Service Business)

100- Assets 400- Revenue

101- Cash 401- Repair Income
102- Accounts Receivable 402- Rental Income
103- Note Receivable 500- Expenses
104- Supplies 501- Office Supplies Expense
105- Furniture & Fixtures 502- Rent Expense
106- Office Equipment 503- Salaries Expense
107- Repair Equipment 504- Insurance Expense
200- Liabilities 505- Advertising Expense
201- Accounts Payable 506- Utilities Expense
202- Note Payable 507- Miscellaneous Expense
203- Loan Payable
204- Mortgage Payable
300- Owner's Equity
301- C. Cruz, Capital
302- C. Cruz, Drawing

Note: Accounts, which are not easily understandable yet and premature to include, are deliberately
omitted for the time being.

RECORDING THE BUSINESS TRANSACTIONS (BOOKKEEPING)

After the accounting terms to be used have been introduced, the recording process will be
understood and appreciated better if the following questions will be answered prior to the actual
recording:

1. What will be recorded? Only the business transactions and events affecting the business should be
recorded. This means that the personal transactions of the owner are to be separated from the business
transactions following the business entity concept.

Business Transaction - is an economic activity that directly changes a business enterprise's financial
condition or directly affects its result of operations. A transaction takes place when a business exchanges
a thing or things of value for another. In business transaction, there are two parties involved. Examples
are buyer and seller, lessor and lessee, borrower and lender, debtor and creditor, mortgagor and
mortgagee, etc.

It should be noted that the effects in the business of fortuitous events such as fire, flood and other
natural calamities are likewise to be recorded.

2. Where are the business transactions recorded?

The transactions are recorded in the Book of Accounts, the formal accounting books where the
business transactions are recorded. They consist of two books as follows:

Book of Original Entry - the accounting book where the business transactions are first recorded
hence the term "original entry". The book of original entry is called the JOURNAL. The process of
recording in the journal is called JOURNALIZING. There are two kinds of journals: the general journal
and the special journals.
 BASIC ACCOUNTING 49

Book of Final Entry- the accounting book where the business transactions are finally recorded
hence the term "final entry". The book of final entry is called the LEDGER. The process of recording in the
ledger is called POSTING. There are two kinds of ledger; the general ledger and the subsidiary ledger.

. It will be noted that all the business transactions are recorded first in the journal and the second is
the posting in the general ledger.

Sample of a General Journal Book

Shown below is how every page of the conventional general journal book looks like.
Page No.
Date Particular P/R DR CR

Sample of a General Ledger

Shown below is how every page of the conventional general ledger book looks like.

Account Name Account No.

Date Item P/R DR CR BALANCE

3. Who will do the recording? This is the function of the bookkeeper.

4. Why must the transactions be recorded? It is a requirement by the BIR.

5. How are the business transactions recorded? They are recorded first in the journal in a
chronological manner (according to dates) in terms of DEBIT and CREDIT entries. The entry as recorded
in the journal is called journal entry. The entry in the journal will then be transferred (recorded) in the
general ledger.

If the recordin g of the transactions is in terms of debit and credit, this is called the "Double
Entry Method of Bookkeeping" as opposed to a "Single Entry Method of Bookkeeping” where the
recording is done informally without a debit or credit entry.

RULES OF DEBIT AND CREDIT

Debit- the value received by the business or what the business paid for; and

Credit - the value parted with or given up by the business or the source of the value received by
the business.

The appropriate account title as listed in the chart of accounts is what is debited or credited. For
every business transaction, there will always be a two-fold effect on any of the accounting
elements (assets. liabilities, owner's equity, drawing, income, and expenses). There will always
be a debit entry and a credit entry in the journal hence the term "double entry method of
50 BASIC ACCOUNTING

bookkeeping". These accounting elements may either be increased or decreased by a transaction

but the equality of the accounting equation. ASSETS = LIABILITIES + OWNER'S EQUITY will
always be maintained. The rules of addition and subtraction by position will be applied when
making the journal entry.

To illustrate:

NORMAL BUSINESS TRANSACTIONS

DEBIT (DR.) CREDIT (CR.)
Value/s received Value/s given up
Transactions or paid for or source

1. Mr. Cruz invested P 200,000 to Cash C. Cruz, Capital

start an auto repair business. (value received) (source)

2. C. Cruz invested his computer costing Office Equipment C. Cruz, Capital

P 14,000 in the business. (value received) (source)

3. Bought supplies from ABC Trading Office Supplies Cash

Company for cash, P 20,000. (value received) (value given up)

4. Bought tables and chairs from Furniture & Fixtures Accounts Payable
Fix Furniture Co. on credit, P 12,000 (value received) (in lieu of cash)

5. Issued a promissory note for Repair Equipment Note Payable

repair equipment bought, P 45,000. (value received) (in lieu of cash)

6. Borrowed money from the bank, Cash Loan Payable

P 35.000. (value received) (source)

7. Received cash for repair service Cash Repair Income

rendered, P40.000. (value received) (source)

8. Billed Mr. Tan, a customer Accounts Receivable Repair Income

for repair service rendered, P 3,600. (right to collect (source)
in lieu of cash)

9. Received a promissory note, P 4,000 Note Receivable Repair Income

for repair service rendered. (value received in (source)
lieu of cash)

10. Bought office supplies Office Supplies Cash

for cash, P800. (value paid for) (value given up)

11. Paid rent for the office space. P 3,000. Rent Expense Cash
(value paid for) (value given up)

12. Paid the salaries of the employees Salaries Expense Cash

P 12,000. (value paid for) (value given up)

13. A portion of the office space is being Cash Rental Income

sub-leased to a tenant and received (value received) (source)
P 500 as payment of the rental.

14. The owner withdrew cash for his C. Cruz, Drawing Cash
personal use, P 2,500. (value paid for) (value given up)
 BASIC ACCOUNTING 51

15. Paid FIX Furniture partially, Accounts Payable Cash

P6,000 (see transaction 4). (value paid for) (value given up)

16. Paid the promissory note Note Payable Cash

(see transaction 5). (value paid for) (value given up)

17. Paid the loan in full Loan Payable Cash

(see transaction 6). (value paid for) (value given up)

18. Collected partially the account Cash Account Receivable

of Mr. Tan P 2,000. (value received) (source)
(see transaction 8).

Example of Journal Entries

Jan 1 – Bought supplies on account, P10,000

Supplies 10,000
Accounts payable 10,000
Purchased supplies on account.

1 – Paid rent for the months, P3,000.

Rent Expense 3,000

Cash 3,000
Paid rent.

2 – Returned P2,000 defective supplies

Accounts Payable 2,000

Supplies 2,000
Returned supplies.

5 – Made a partial payment on the purchased supplies, P3,000

Accounts Payable 3,000

Cash 3,000
Paid supplies purchased on account.

11 – Paid supplies in full.

Accounts Payable 5,000

Cash 5,000
Paid in full.

14 – Bought equipment on cash

Equipment 9,000
Cash 9,000
Purchased equipment.
52 BASIC ACCOUNTING

15- Bought equipment on account, P20,000

Equipment 17,000
Accounts Payable 17,000
Purchased equipment on account.

The journal entries are recorded in the General Journal. The first column is the Date,
followed by the particulars, posting reference, Debit Column and Credit Column. The first row
after the Date is to put the Year then the Month and Date. The Month is to be written once while
the date is to be written in every transaction. The month will be written upon the start of
another page or start of another month.

Example of Journal Entries written in a General Journal.

 BASIC ACCOUNTING 53

EXAMPLE 2

JAN

7 – Bought tables and chairs on account, P 40,000

Furniture & fixtures 40,000

Accounts payable 40,000
Purchased furniture on account.

7- Paid Meralco bills for the month, P 2,000

Utilities expense 2,000

Cash 2,000
Paid utility bill.

8- Returned P 3,000 worth of defective tables

Accounts payable 3,000

Furniture and fixtures 3,000
Returned defective furniture.

10 – Made a partial payment on the purchased table and chairs, P 20,000

Accounts payable 20,000

Cash 20,000
Paid furniture purchased on account.

17- Paid the tables and chairs in full

Accounts payable 17,000

Cash 17,000
Paid in full.

Example of a Ledger
54 BASIC ACCOUNTING

Example of a Trial Balance

Name of the Company

Trial Balance
Date

Account Title P/R DR CR

Cash 189,000
Accounts receivable 7,000
Computer Supplies 40,000
Computer equipment 100,000
Accounts Payable 50,000
Notes Payable 50,000
Lopez, Capital 300,000
Lopez, Drawing 25,000
Service Income 9,000
Salaries Expense 20,000
Rent Expense 5,000
Supplies Expense 3,000
Miscellaneous Expenses 20,000
Total 409.000 409,000
 BASIC ACCOUNTING 55

EXERCISE 3-1

INSTRUCTION: Listed here are series of accounts that are numbered for identification letters of
the accounts affected by the transactions described. The same account may be used in several
answers.

COLUMN I
NOS. TRANSACTIONS DEBIT CREDIT

1. The owner invested cash in the business. ______ ______

2. Paid rent for three months. ______ ______
3. Purchased supplies on account. ______ ______
4. Purchased three years insurance policy. ______ ______
5. Rendered services on cash basis. ______ ______
6. Purchased equipment for cash. ______ ______
7. Paid salaries of employees. ______ ______
8. Rendered services on credit. ______ ______
9. Paid creditors on account. ______ ______
10. Paid advertising expense to manila inquirer. ______ ______
11. The owner withdrew cash for personal use. ______ ______
12. Collected cash from customers on account. ______ ______
13. Paid the note to the bank. ______ ______
14. Paid telephone and electric bill. ______ ______
15. Paid miscellaneous expenses for the month. ______ ______

COLUMN II

A. Capital J. Accounts Payable

B. Cash K. Accounts Receivable
C. Equipment L. Notes Payable
D. Salary Expense M. Advertising Expense
E. Service income N. Salaries Payable
F. Rent Expense O. Utilities Expense
G. Supplies P. Misc. Expense
H. Prepaid Insurance Q. Taxes Expense
I. Prepaid Interest R. Drawing
56 BASIC ACCOUNTING

EXERCISE 3-2

INSTRUCTION: For each of the transactions below fill in the spaces to answer the questions.

a. Received P450,000 cash from clients for services rendered.

b. Paid P58,000 for salaries of employees.
c. Collected P90,000 from clients on account.
d. Billed clients P20,000 for services rendered.
e. Paid insurance expense for the year P6,000
f. The owner Cora Daza, a sole proprietorship, invested cash in business, P1,000,000.
g. Purchased P10,000 of supplies on account
h. Paid P30,000 to suppliers on account.
i. Paid rent for the month, P25,000.

TYPE OF INCREASE OR
NOS. ACCOUNTS AFFECTED DEBIT/CREDIT
ACCOUNT DECREASE
a. 1.
2.
b. 1.
2.
c. 1.
2.
d. 1.
2.
e. 1.
2.
f. 1.
2.
g. 1.
2.
h. 1.
2.
i. 1.
2.
 BASIC ACCOUNTING 57

PROBLEM 3-1 JOURNALIZATION

INSTRUCTION: The following are the transactions of WINSTON ENTERPRISES during its first
month of operations.

2020
January

2. Michael Winston invested P50,000 cash in the business.

4. Paid municipal taxes and licenses, P550
7. Bought supplies P6,000 cash basis.
8. Purchased furniture and fixture from Rhea Trading for P12,500
Terms: 10% down, balance on account.
9. Paid rent P45,000 in advance for three months.
10. Receipts for the week from various services rendered amounted to P18,000
15. Billed a customer the amount of P6,000 for services rendered.
16. Paid Rhea Trading Company in full.
18. Paid salaries of employees, P46,000.
20. Purchased equipment on account P14,000.
25. Paid miscellaneous expense, P2,400.
27. Michael Winston withdrew cash for personal use, P7,000.
29. Paid light telephone and water for the month, P12,600
31. Paid the salaries for the second half of the month, P38,000.

INSTRUCTIONS:

1. Analyze and journalize the above transactions

2. Use the following account titles;

Cash
Accounts Receivable
Supplies
Furniture & Fixtures
Equipment
Accounts Payable
Winston, Capital
Winston Drawing
Service Revenue
Rent Expense
Taxes and Licenses
Salary Expense
Utilities Expense
Miscellaneous Expense
58 BASIC ACCOUNTING

PROBLEM 3-2
On February 2020, Marlon Balista started his medical services in practice. During the
month the following transactions were completed:

FEBRUARY
1. Mr. Balista invested P150,000 in a new bank account in the name of Marlon Balista, M.D.
3. Purchased medical equipment costing P62.000, paying P20,000 cash and the balance on
notes payable.
4. Bought medical supplies for cash, P12,000.
7. Paid rent for the month, P6,000.
8. Received P15,000 for medical services rendered.
10. Acquired table & chairs on account, P8,500
13. Billed medical services to a client, P34,000
15. Paid salaries to employees, P26,400
17. Paid another doctor for preparing laboratory services on a patient, P3,000
20. Paid creditors on account, P2,500
22. Paid insurance premium for the quarter, P4,700.
23. Paid miscellaneous expenses, P2,200.
25. Received P34,000 from patient on account.
27. Paid salaries of medical technician and other employees, P58,50
28. Received cash from cash patients, P68,500

INSTRUCTIONS:
1. Prepare jojunal entries on the above transactions.
2. Post the entries to the ledger. Use the following account titles given: Cash, 11; Accounts
receivable, 12; Medical supplies, 13; Medical equipment, 14; Furniture & Fixtures, 15;
Notes payable, 21; accounts payable, 22;Balista, Capital, 31, Balista, Drawing, 32;
Medical revenues, 41; Salary expense, 51; Rent expense, 52; Laboratory expense, 53;
Utilities Expense, 54; Insurance expense, 55; and Miscellaneous expense, 58.
3. Prepare a TRIAL BALANCE for the month.
 BASIC ACCOUNTING 59

Name: __________________________________________________
Date:_______________________
Professor:________________________________________________

QUIZ 1

Test I. Write the letter of your choice corresponding to the effects of the following business transactions:

a. Increase in assets and increase in capital

b. Increase in assets and increase in liabilities
c. Increase in one asset and decrease in another assets.
d. Decrease in assets and decrease in capital
e. Decrease in assets and decrease in liabilities
f. Decrease in capital and increase in liabilities

1. The owner invested cash into the business.

2. Purchased supplies on account.
3. Paid office rent for the month.
4. Rendered service on account.
5. Borrowed funds from the bank.
6. Paid suppliers for the supplies purchased on account.
7. Withdrawn cash for personal use.
8. Paid bank loan.
9. Collected cash from customer on account.
10. Received bill from MERALCO due next month.
11. Purchased office equipment for cash.
12. Purchased delivery truck on installment basis.
13. Paid salaries of the employees.
14. Additional investment made by the owner.
15. Incurred advertising expense to be paid next month.
16. Paid the utility bill incurred last month.
17. Received cash for the services rendered from cash customer.
18. Purchased supplies for cash
19. Paid advertising expense incurred last month.
20. Returned defective supplies purchased on account.
60 BASIC ACCOUNTING

Test II. Problem Solving. The bookkeeper of MMK Service Company owned and operated by Aren
Ting, extracted the following debit and credit balances from the general ledger on December 31, 2016,
the end of the accounting period.

DEBITS
Cash P 12,800
Note Receivable 1,650
Accounts Receivable 21,600
Tools 10,000
Furniture & Fixtures 21,840
Office Equipment 38,900
Delivery Van 120,000
Photocopying Machine 50,000
Note Payable 3,400
Accounts Payable 4,000
A. Ting, Drawing 25,000
Salaries Expense 34,800
Utilities Expense 12,660
Rent Expense 18,000
Insurance Expense 16,000
Advertising Expense 20,000
Repairs & Maintenance Expense 11,000
Miscellaneous Expense 9,410
Interest Expense 128

CREDITS
Cash P 6,410
Note Receivable 650
Accounts Receivable 11,450
Note Payable 6,400
Accounts Payable 18,000
Loan Payable 20,000
A. Ting, Capital ?
Service Income 233,398
Rental income 12,000
Interest Income 20

REQUIRED: Prepare the trial balance as of December 31, 2016. The accounts must be
arranged in their proper order.
 BASIC ACCOUNTING 61

Test III. Problem Solving. The bookkeeper of Mr. Go, accounting the following balances from the
general ledger on December 31, 2019, the end of the accounting period.

REQUIRED: Prepare a trial balance in good form.

62 BASIC ACCOUNTING

Name: __________________________________________________
Date:_______________________
Professor:________________________________________________

QUIZ 1

Test II. The following business transactions of JIT CONSULTANCY SERVICE owned by Atty. Art Nabong
during the month of June, 2020 were presented below:

1 Transferred P500,000 from his personal savings account to a checking account opened in the name
of his company.
2 Paid cash of P15,000 to Aries Rentals for rent of office space.
3 The business uses rent expense account for the rent.
5 Purchased the law books for office library for P30,000 from National
7 Book Store paying cash of P15,000, signed a promissory note of P10,000 and the balance on
account
9 Purchased office supplies from National Book Store for cash, P1,500
10 Purchase office equipment from Nick Furniture, P25,000, paying cash of P5,000 and the balance
on terms for 30 days.
11 Completed legal and consultancy services for Abraham Company on credit, P65,000
13 Received cash of P35,000 from Philippine Lawyers Association for the legal services completed.
15 Purchased office machinery from Office Machine Factory on credit, P25,000
18 Paid for the law books purchased from National Book Store, P5,000.
20 Received cash of P10,000 to apply on account from Abraham Co.
22 Cash of P15,000 was received from Burnham Company for legal work completed.
23 Paid for the salaries and wages of office staff, P19,500.
28 Paid the two months rent in advance to Aries Rentals.
 BASIC ACCOUNTING 63

29 Atty. Nabong took P5,000 cash for personal expenses.

30 Billed A. Reyes for legal services rendered, P10,000.

Use the following chart of account:

100 Cash
101 Notes receivable
102 Accounts receivable
103 Office supplies
104 Law Library
105 Office Machinery
106 Office Equipment
200 Accounts payable
201 Notes payable
300 A. Nabong, Capital
301 A. Nabong, Drawing
400 Legal and Consultancy Income
500 Rent expense
501 Salaries and wages expense
502 Supplies expense
503 Taxes expense

Required: 1. Journalize the above transactions.

2. Post the journal entries in the general ledger.
3. Present a trial balance for the period ended June 30, 2020.
64 BASIC ACCOUNTING

WRITE YOUR ANSWERS HERE:

BASIC ACCOUNTING 65

WRITE YOUR ANSWERS HERE:

66 BASIC ACCOUNTING

WRITE YOUR ANSWERS HERE:

 BASIC ACCOUNTING 67

Module 4

ADJUSTING ENTRIES

The Need for Adjusting Entries

After the trial balance is completed, normally the financial statements cannot be
prepared yet. The reason is there are still some transactions of the business that are not yet
recorded. These transactions have to be recorded first in order to bring all the accounts up to
date at the end of the accounting period. The entries to record these transactions are called
adjusting entries.
All adjusting entries affect at least one income statement account and one balance sheet
account. Thus, an adjusting entry will always involve a revenue or an expense and an asset or
a liability account.

The entity’s life can be meaningfully subdivided into equal time periods for reporting
purposes. An accounting period can be monthly, quarterly, semi-annually or annually. This is
called the periodicity principle.
Applying this concept, a business adjusts and closes its books at the end of an accounting
period and then prepares the various financial statements at the end of each period. The most
basic accounting period is one year.

OBJECTIVES:

At the end of the lesson:

• the student will be able to differentiate cash basis and accrual basis of accounting; and
• the student will be able to recognize the different types of adjustments prepared at the end of
the accounting period.

Cash and Accrual Basis of Accounting

As mentioned earlier, the cash basis recognizes revenues and expenses only when they
are received and paid, respectively whereas the accrual basis recognizes revenues when
earned and expenses when incurred, regardless of when collected or paid.

Generally accepted accounting principles require that a business use the accrual basis
of accounting.

Types of Adjusting Entries

 Accrued Expenses – These are expenses incurred in one period but remain unrecorded
and unpaid as of the end of the period. They are also called accrued liabilities or
unrecorded expenses.

The pro-forma adjustment is:

Expense account xxxx

Liability account xxxx
68 BASIC ACCOUNTING

For example: A company’s accounting period is monthly, January 1-31, 2019. All
expenses incurred during the month of January must be recorded in January. Let us say, taxes
for the month of January amounting to P 5,000 will be paid on February 5, 2019, the adjusting
entry will be:

2019
Jan 31 Taxes Expense 5,000

Taxes Payable 5,000

So, since we are using the accrual basis of accounting, the question is when did the
company incur the expense? The answer of course is for the month of January, therefore we
will record the expense in January. And since this will still be paid in February, we will record a
liability in January.

Another example is, assume a small business is paying a total of P 10,000 for the
salaries of its employees for a 5-day work week. Payday is every Friday. Accounting period is
monthly. The Salaries Expense during the month of March is shown below:
Salaries Expense
Mar. 5 10,000
12 10,000
19 10,000
26 10,000

40,000

If March 26 is a Friday, then the last day of the month (March 31) falls on a Wednesday.
Therefore the adjusting entry to be made will be:

Mar. 31 Salaries Expense 6,000

Salaries Payable 6,000

If financial statements are prepared on March 31, the Salaries Expense to be shown in
the statement of comprehensive income totaled P 46,000 and the statement of financial position
will show Salaries Payable amounting to P 6,000.

 Accrued Revenues – These are revenues earned in one period but remain unrecorded and
not received as of the end of the period. They are also called accrued assets or unrecorded
revenues.

The pro-forma adjustment is:

Asset account xxxx

Revenue account xxxx

For example: ABC Company’s accounting period is monthly, August 1-31, 2019. All
revenues earned during the month of August must be recorded in August. If the company is in
 BASIC ACCOUNTING 69

the business of renting apartments and one of its tenants has not paid the August rent for P
8,000, then the adjusting entry of ABC Company will be:

2019
Aug. 31 Rent Receivable 8,000

Rent Revenue 8,000

 Prepaid Expenses – These are expenses paid by the business in advance; or these are
expenses already paid in cash by the business but the expenses are not yet incurred or only
a portion of the amount paid was used up as expense. Prepaid expenses are also termed
as deferred expenses.

There are two methods of accounting for prepaid expenses:

1. Asset method – if at the date of payment, the business debited an asset account,
say Prepaid Rent and credited Cash.

The pro-forma adjustment is:

Expense Account used or expense

Asset Account portion

2. Expense method – if at the date of payment, the business debited an expense

account, say Rent Expense and credited Cash.

The pro-forma adjustment is:

Asset Account unused or asset

Expense Account portion

To illustrate, assume that XYZ Company is using a monthly accounting period. On

January 1, 2019, the company paid P 45,000 representing 3-month rent beginning January 1,
2019. The company adjusts and closes its books every month. The entry to record the
prepayment and the adjusting entry at the end of the month will be:

Asset Method Expense Method

2019
Jan 1 Prepaid Rent 45,000 Rent Expense 45,000
Cash 45,000 Cash 45,000

2019
Jan Rent Expense 15,000 Prepaid Rent 30,000
31
Prepaid 15,000 Rent Expense 30,000
Rent
70 BASIC ACCOUNTING

Since P 45,000 is for 3 months, the monthly rent is P 15,000. For January, the used or
expense portion is one month or P 15,000; therefore the unused or asset portion will be two
months or P 30,000 as of January 31.

The effects of these entries are shown in the following T-accounts:

Asset Method

Prepaid Rent Rent Expense

2019 2019 2019
Jan. 1 Jan. 31 Jan. 31 15,000
45,000 15,000

30,000

Expense Method

Rent Expense Prepaid Rent

2019 2019 2019
Jan. 1 Jan. 31 Jan. 31 30,000
45,000 30,000

15,000

Regardless of which method a business used in any particular case, the amount
reported as expense in the statement of comprehensive income and the amount reported as
asset in the statement of financial position will be the same.

Both methods of accounting for prepayment are acceptable although most companies
employ the expense method due to its simplicity. A business must also use a method
consistently for a particular type of prepayment, say asset method for rent while expense
method for supplies.

 Unearned Revenues – These are revenues collected or received by the business in

advance; or these are revenues already collected in cash by the business but the revenues
are not yet earned or only a portion of the amount received was earned or became revenue.
Unearned revenues are also termed as deferred revenues.

There are two methods of accounting for unearned revenues:

1. Liability method – if at the date of collection, the business credited a liability

account, say Unearned Rent and debited Cash.

The pro-forma adjustment is:

Liability Account earned or income

 BASIC ACCOUNTING 71

Revenue Account portion

2. Revenue method – if at the date of collection, the business credited a revenue

account, say Rent Revenue and debited Cash.

The pro-forma adjustment is:

Revenue Account unearned or liability

Liability Account portion

To illustrate, assume that ABC Company is using a monthly accounting period. On

October 1, 2019, the company collected or received P 30,000 representing 3-month rent
beginning October 1, 2016. The company adjusts and closes its books every month. The entry
to record the advance collection and the adjusting entry at the end of the month will be:

Liability Method Revenue

Method
2019
Oct 1 Cash 30,000 Cash 30,000
Unearned 30,000 Rent Income 30,000
Rent

2019
Oct Unearned Rent 10,000 Rent Income 20,000
31
Rent Income 10,000 Unearned Rent 20,000

Since P 30,000 is for 3 months, the monthly rent is P 10,000. For October, the earned
or income portion is one month or P 10,000; therefore the unearned or liability portion will be
two months or P 20,000 as of October 31.

The effects of these entries are shown in the following T-accounts:

Liability Method

Unearned Rent Rent Income

2019 2019 2019
Oct 31 Oct. 1 Oct. 31
10,000 30,000 10,000

20,000

Revenue Method
72 BASIC ACCOUNTING

Rent Income Unearned Rent

2019 2019 2019
Oct. 31 Oct. 1 Oct. 31
20,000 30,000 20,000

10,000

Regardless of which method a business used in any particular case, the amount
reported as income in the statement of comprehensive income and the amount reported as
liability in the statement of financial position will be the same.

Both methods of accounting for unearned or deferred revenues are acceptable although
most companies employ the revenue or income method due to its simplicity. A business must
also use a method consistently for a particular type of unearned or deferred revenue, say
liability method for rent while income or revenue method for subscription.

 Depreciation of Property, Plant and Equipment

Physical resources that are owned and used by a business which are permanent in
nature or have a long useful life are called property plant and equipment. They are also called
fixed assets or plant assets. Examples are land, building, equipment, trucks, automobiles, a
computer, store fixtures, or office furniture. These assets help generate income for the
business. It is important and proper that a portion of the asset be recorded as expense in each
accounting period.

Property, plant and equipment are recorded at their acquisition cost, which comprises:

a. The purchase price;

b. Freight, insurance, installation and other related expenses in bringing the

assets for use; and

c. The initial estimate of the costs of dismantling and removing the item at the
end of its useful life.

Fixed assets, with the exception of land have limited useful lives and as such are subject
to depreciation.

Depreciation is the systematic allocation of the cost of the fixed asset over its useful life.
Depreciation is not a process of asset valuation.

There are three factors to be considered in computing depreciation:

 Cost of the asset.

 Residual value, or the estimated amount that the fixed asset can be sold at the
end of its useful life. Other terms used are salvage value, scrap value or trade-
in value.

 Useful life or the estimated number of years or number of units or hours that the
 BASIC ACCOUNTING 73

asset can be used during its life.

The pro-forma adjustment for depreciation is:

Depreciation Expense – Name of asset xxx

Accumulated Depreciation – Name of asset xxx

There are different methods of computing depreciation. We will discuss here only
the simplest and the most commonly used method which is the straight-line method. This
method will result into equal periodic charges for depreciation. Also take note that in the
adjusting entry for depreciation the account credited is the account Accumulated Depreciation.
This is a contra-asset account which will be deducted from the related fixed asset account in the
balance sheet. The credit is not made directly to the fixed asset account in order to preserve
the original cost of the fixed asset in the balance sheet.

To illustrate, assume that on January 1, 2019, Jug Company bought a delivery truck for
a total cost of P 500,000. Its estimated life is 10 years and the estimated residual value is
P 50,000. The company is using the straight-line method of computing depreciation and it is
using an annual accounting period. The entries of Jug Company for the above transactions are:

2019
Jan 1 Delivery Truck 500,000
Cash 500,000
To record the purchase of delivery
truck.

The adjusting entry on December 31, 2019:

2019
Dec 31 Depreciation Expense-Delivery Truck 45,000
Accumulated Depreciation-Delivery Truck 45,000

Computations will be:

Annual depreciation = Cost – Residual Value

Estimated Life

= P 500,000 – 50,000
10

= P 45,000
=======
74 BASIC ACCOUNTING

Other computation for straight-line method is:

Annual depreciation = (Cost – Residual Value) x

Depreciation rate

= (P 500,000 – 50,000) x 10%

= P 45,000
=======

The depreciation rate can be computed by getting the reciprocal of the life. Example:
10 years is equal to 1/10 or 10%.

The balance of the Depreciation Expense account is shown in the statement of

comprehensive income. In the statement of financial position as of December 31, 2019, the
carrying amount or the book value of the asset is P 455,000, as shown below:

Delivery Truck P
500,000
Less Accumulated Depreciation 45,000

Carrying amount or Book value P

455,000

The depreciation of the fixed asset will be recorded at the end of each year (for ten
years). The same adjusting entry will be recorded for 10 years. Assuming a statement will be
made on December 31, 2025:

Delivery Truck P
500,000
Less Accumulated Depreciation 270,000

Carrying amount or Book value P

230,000

At the end of ten years, the Accumulated Depreciation account will have a balance of P
450,000. At this point, the book value of the asset will be equal to the residual value of P
50,000.

The other types of adjustments, bad debts and merchandise inventory, will be taken up
in the discussion of merchandising business.
 BASIC ACCOUNTING 75

EXERCISES

Exercise 4-1

Quick Company paid P 25,920 premium on a three-year insurance policy on September 1,

2019. The effectivity of the policy begins on September 1, 2019.

1. Assuming the cash basis of accounting, how much of the premium will appear
as an expense on the annual statement of comprehensive income for year
2019? For 2020? For 2021? For 2022?

2. Assuming the cash basis, how much of the premium will appear as an asset on
each December 31 statement of financial position for the year 2019? For 2020?
For 2021? For 2022?

3. Assuming the accrual basis of accounting, how much of the premium will
appear as an expense on the annual statement of comprehensive income for
the year 2019? For 2020? For 2021? For 2022?

4. Assuming the accrual basis, how much of the premium will appear as an asset
on each December 31 statement of financial position for the year 2016? For
2017? For 2018? For 2019?

Use the following table. Use the space provided for the supporting computations in good form.

2019 2020 2021 2022

1.

2.

3.

4.

Exercise 4- 2

Determine the amounts indicated by question marks in the columns below. Consider each
column a separate problem. Make the adjusting entry for column (a) assuming supplies
purchased are debited to an asset account.

(a) (b) (c) (d)

Supplies on hand, August 1 P 264 P 434 P 196 ?

Supplies purchased during the month 52 ? 174 1,928
Supplies consumed during the month 194 972 ? 1,632
Supplies remaining on August 31 ? 436 56 1,188
76 BASIC ACCOUNTING

Exercise 4-3

Classify the following items as (a) deferred expense (prepaid expense), (b) deferred revenue
(unearned revenue), (c) accrued expense ( accrued liability), or (d) accrued revenue (accrued
asset). Use CAPITAL LETTERS.

____________ 1. A two-year premium paid on a fire insurance policy

____________ 2. Electric bill owed but not yet paid

____________ 3. Office Supplies on hand

____________ 4. Wages owed but not yet paid

____________ 5. Telephone bill owed but payable in the following period

____________ 6. Subscriptions collected in advance by a newspaper publisher

____________ 7. Service Revenue collected but not yet earned

____________ 8. Service Revenue already earned but not yet received

____________ 9. Interest paid in advance from a bank loan

____________ 10. Rent received in advance

____________ 11. Services rendered but not yet collected

____________ 12. Advertising contract paid in advance for one year

____________ 13. Income collected but not yet earned

____________ 14. Rent paid in advance

____________ 15. Interest collected in advance by the creditor

Exercise 4-4

The Supplies and Supplies Expense accounts at December 31, after adjusting entries have
been posted at the end of the first year of operations, are shown in the T-accounts below:

Supplies Supplies Expense

Bal. 2,090 Bal. 9,715

Determine the amount of supplies purchased during the year. ____________

 BASIC ACCOUNTING 77

Exercise 4-5

At the end of the current year, P 21,780 of fees had been earned but had not been billed to
clients.

a. Journalize the adjusting entry to record the accrued fees.

Post
Date Description Ref. Debit Credit

b. If the cash basis rather than the accrual basis had been used, would an
adjusting entry have been necessary? Explain.

Exercise 4-7

Prepare the adjusting entries on December 31, 2019, the end of the annual accounting period,
on the following independent data. Show your computations after each entry.

1. The Insurance Expense account had a debit balance on December 31, 2019 of
P 36,000 representing premium for a 2-year fire insurance policy effective
October 1, 2019.

2. Rent Income was credited for P 18,000 on November 1, 2019 representing nine
months rent collected in advance.

3. Equipment per general ledger on December 31, 2019 shows a balance of P

372,000. Equipment acquired during the year was P 52,000 on April 1, 2019.
All equipment is to be depreciated at the rate of 25% per annum.

4. As of December 31, 2019, commissions already earned but not yet collected
amounted to P 48,000.

5. Office Supplies costing P 9,000 bought during the period was debited to the
Office Supplies account. Of the amount, P 5,000 were consumed during the
year.

6. Unearned Service Fees account showed a credit balance of P 80,000 per

general ledger on December 31. Of this, 40% had been actually earned during
the period.

7. On December 31, 2019 a 90-day, 9% Notes Payable has a balance of P

120,000 per general ledger. The note was issued on December 5, 2019. No
interest has been taken on this note.

8. Unearned service revenue has a balance of P 400,000 of which 60% has been
earned.

9. Notes Receivable has a balance of P 100,000 received from a client in

78 BASIC ACCOUNTING

settlement of an open account on November 16, 2019. The note is a 90-day,

12% note. No interest has been taken on this note.

10. The Prepaid Insurance account has balance of P 210,000 on December 31,
2019. The balance represented two fire insurance policies acquired during
2019. The first policy, Policy I for P 120,000 was acquired on March 1,
2019 and the second policy, Policy II was acquired on August 1, 2019 for P
90,000. Policy I is payment for a 2-year plan while Policy II is for a one-year
plan.

EXERCISE 4-8 Classification of Adjusting Entries

INSTRUCTION: Classify the following transaction as:

a. Accrued revenue c. Prepaid expenses

b. Accrued expense d. Unearned revenue

1. Interest paid in advance at the time the note was discounted at the bank.
2. Property taxes paid in advance.
3. Commission income received in advance.
4. Rent received in advance in property owned.
5. Life insurance premiums received by an Insurance company.
6. Supplies on hand.
7. Unpaid salaries to employees.
8. Portion of fee earned by CPA but not due until completion of an audit.
9. Interest earned but not yet received.
10. Taxes owed but payable in the following month.
11. Subscription collected in advance by a publisher.
12. Receipts from sale of meal tickets by a restaurant.
13. Interest owed but not yet due.
14. A three-year premium paid on fire insurance policy.
15. Salary owed but not yet due.
16. Uncollected service income.
17. Accrued interest on notes payable.
18. Paid advertising expenses for the quarter.
19. Collected two months deposit and one month advance on rental of apartment.
20. Unrecorded interest on notes receivable.
 BASIC ACCOUNTING 79

EXERCISE 4-9 Preparation of Adjusting Entries

INSTRUCTION: Only one-half of each adjusting entry has been shown in a journal form.
Complete the journal entry.

2020
Nov.
1. Interest Income is credited.
2. Doubtful account expense is debited.
3. Commission income is debited.
4. Accumulated depreciation is credited.
5. Utilities expense is debited.
6. Service income is credited.
7. Prepaid rent is credited.
8. Rent receivable is debited.
9. Office supplies are debited.
10. Allowance for doubtful accounts is debited.
11. Salaries payable is credited.
12. Unearned rent is debited.
13. Depreciation expense is debited.
14. Wages expense is debited.
15. Prepaid insurance is credited.
16. Interest expense is debited.
17. Interest receivable is debited.
18. Unearned commission is credited.
19. Rent expense is credited.
20. Unearned interest is credited.
80 BASIC ACCOUNTING

PROBLEM 4-1. INSTRUCTION: 1. Prepare the necessary adjusting entries on December

31, 2020.

DOMINIC DE MESA MERCHANDISING follows the policy of recording

prepayments in REVENUE and EXPENSE accounts and reverses appropriate adjusting entries
at the beginning of the new accounting period. The records of the business show the following:

A. On Sept. 1, 2020, De Mesa borrowed P 200,000 cash from PNB by issuing a 14%
notes payable due in one year. The interest is payable upon maturity of the note.
B. De Mesa purchased a three-year insurance policy for P 90,000 on July 31, 2020.
C. On September 1, 2020, De Mesa paid P 60,000 representing rental for twelve
months beginning on this date.
D. Office supplies on hand on March 1, 2020, amounted to P 900. During the year,
office supplies of P 2,200 were purchased. On December 31, there are unused
supplies of P 1,800.
E. De Mesa pays all employees every Friday. The total payroll for a five-day workweek
ending on January 2, 2021 is P40,000.
F. De Mesa purchased an office equipment on Sept 1, 2020, for P45,000. On January
1, 2020, the office equipment has a balance of P20, 000. All assets of the company
have estimated useful life of 10 years with no salvage value.
G. Dominic reports accounts receivable of P 400,000 and Allowance for doubtful
accounts of P 1,000 (debit balance); 3% of the receivables are estimated to be
uncollectible.
 BASIC ACCOUNTING 81

PROBLEM 4-2 Preparation of adjusting entries

INSTRUCTIONS: 1. Prepare adjusting entries on December 31, 2020 on the following

transactions.
2. Show computation as your explanation.

The following information has been made available in connection with the closing
of the books of Minda Enterprises as of December 31 are as follows:

a. Salaries already due but not yet paid as of December 31, amounted to P 9,500.
b. The rent income has a balance of P 6,800. Of this amount, P 1,500 has already
been earned as of December 31.
c. The insurance expense account amounted to P 6,000. Of this amount, P 2,000
expired as of December 31.
d. The Subscription Income has a balance of P 9,800. Of this amount P 5,000 has
already been earned as of December 31.
e. Interest earned but not yet collected on notes receivable outstanding, p 2,400.
f. Interest due on notes payable outstanding, P 4,600.
g. Interest paid in advance on a bank loan was debited to interest expense account,
P980. The loan will run for a period of 90-day starting from December 1.
h. Interest collected and credited to interest income P 1,400. This represents interest
for a 45-day period effective December 18.
i. Store supplies debited to Store supplies expense, P 6,600. As of
December 31, P 2,250 store supplies are still unused.
j. Accounts receivable of P250,000 is only 94% is collectible.
k. Building of P300,000 have an estimated useful life of 20 years with scrap value of
P50,000 and was acquired on Jan 1.
82 BASIC ACCOUNTING

WRITE YOUR ANSWERS HERE:

BASIC ACCOUNTING 83

WRITE YOUR ANSWERS HERE:

84 BASIC ACCOUNTING

WRITE YOUR ANSWERS HERE:

 BASIC ACCOUNTING 85

Module 5

COMPLETING THE ACCOUNTING CYCLE OF A SERVICE BUSINESS

OVERVIEW

The completion of the accounting cycle of a service concern starts with the preparation
of a worksheet. This worksheet is used each time financial statements are prepared,
either monthly, quarterly, semi-annually, or annually. It is a columnar sheet of paper
used to facilitate the analysis of the effects of adjusting and closing entries on the
general ledger accounts. It is a tool by accountants to facilitate preparation of the
financial statements and is not part of the formal accounting record.

This module illustrates a ten-column work sheet that includes columns for trial balance,
adjustments, adjusted trial balance, income statement, and balance sheets. Each sheet
of the columns has a debit or credit column.

MODULE OBJECTIVES

After reading this chapter, the students should be able to:

a.) Enumerate the steps in the Accounting cycle.

b.) Prepare financial statements from the worksheet.
c.) Journalize and post adjusting and closing entries.
d.) Prepare post-closing trial balance and reversing entries.

COURSE MATERIALS

THE ACCOUNTING CYCLE

The accounting cycle is a series of steps accountants perform during an

accounting period relating to analyzing, recording, classifying, summarizing and
reporting useful financial information. Its purpose is to generate the financial statements.

The steps in the accounting cycle are:

1. The transactions are analyzed by examining source documents.

2. The transactions are journalized.
3. The journal entries are posted to the ledger.
4. A trial balance is prepared.
5. The data needed to adjust the accounts are assembled.
6. The work sheet is prepared.
7. The financial statement is prepared
8. The adjusting entries are journalized and posted to the ledger
9. The closing entries are journalized and posted to the ledger
86 BASIC ACCOUNTING

10. A post-closing trial balance is prepared.

11. The reversing entries are journalized and posted to the ledger

The first three steps comprise the recording phase of accounting. The summarizing
phase starts with the preparation of the trial balance up to the closing trial balance. The
last step is performed at the beginning of the new accounting period.

WORKSHEET

A worksheet is a columnar sheet of paper used to summarize information such as

adjusting and closing entries to facilitate preparation of the financial statements.

The steps in the preparation of the work sheet are as follows:

1. Enter the title and balances of ledger accounts in the trial balance columns.

2. Enter the adjustments in the adjustment column. Identify each adjustment with
letter.
3. Enter adjusted account balance in the adjusted trial balance columns.

4. Extend adjusted balances of revenue and expense accounts from the adjusted
trial balance columns to the income statement columns.

5. Extend adjusted balances of assets, liabilities and owner’s equity accounts from
the adjusted trial balance columns to the balance sheet column.

6. Determine the total of the income statement and the balance sheet columns. Enter
the net income or net loss as a balancing figure in both pairs of columns, and again
compute column trials.

1. TRIAL BALANCE COLUMNS

Copy the trial balance in the trial balance column of the work sheet. Enter the title
of each ledger account on the description column. Usually, only those accounts with
balances as the end of the accounting period is listed. Alternatively, all account titles in
the chart of accounts, even those with zero balances are listed.

To illustrate the preparation of a work sheet, assume the following trial balance for
Marianne Reyes Information Systems Company.
 BASIC ACCOUNTING 87

Marianne Reyes Information Systems Company

Trial Balance
December 31, 2020

Debits Credits

Cash P 64,000
Notes Receivable 350,000
Accounts Receivable 116,000
Supplies 42,000
Prepaid Insurance 12,000
Land 400,000
Building 590,000
Accumulated depreciation – Building P 177,000
Equipment 450,000
Accumulated depreciation – Equipment 270,000
Accounts Payable 413,000
Unearned Consulting revenues 204,000
M. Reyes, Capital 805,000
M. Reyes, Drawing 50,000
Consulting Revenues 1,108,000
Salaries Expense 770,000
Rent Expense 25,000
Repairs Expense 71,000
Miscellaneous Expense 37,000
________ __________
Total 2,977,000 2,977,000
====================

2. THE ADJUSTMENT COLUMNS

Adjusting entries bring the accounts up-to-date prior to preparing the financial
statements. Enter the adjustments in the adjustment column of the work sheet. If the
account is not included in the original trial balance, add the account title just after the
totals of trial balance. The amounts are written on the debits and credits sides of the
adjustment columns placing a reference letter to the left of each mount. This reference
letter facilitates the actual journalizing of the adjusting entries.

After entering all adjusting entries in the adjustment columns, add the two columns. The
total of the two columns should be equal if all debts and credits are entered properly.

The adjustments for Marianne Reyes Information System Company are as follows:

(a) Supplies on hand as of December 31 is P11,000

(b) One-third of the unearned revenues has been earned as at Dec 31.
(c) Depreciation for the year amounted to P59,000 for the building and P90,000 for the
equipment
(d) Salaries in the amount of P12,000 have accrued at year end
(e) The notes receivable were accepted for several customers. The notes were
issued on Sept 1, 2020 and will be settled together with a 12% interest on May 31, 2021.
88 BASIC ACCOUNTING

(f) A premium of P12,000 for a one-year insurance policy was paid in Dec 1.

A worksheet is prepared for Marianne Reyes Information System Company is

presented on page ______.

3. ADJUSTED TRIAL BALANCE COLUMNS

An adjusted trial balance is the original trial balance plus or minus the adjustments. If the
item appears as a debit in the trial balance, and there is a credit in the adjustment
column, subtract the two amounts and extend the difference on the adjusted trial balance
column on the side of the larger amount. If the item appears as a debit amount, add and
extend the total on the debit side of the adjusted trial balance. Add also the account with
the credit balance in the trial balance and credit amount in the adjustments.

Extend all accounts having balances to the adjusted trial balance columns. Note
that some account balances remain the same because no adjustment has affected them.
Simply extend this account balances to the Adjusted Trial Balance columns.

Add the adjusted trial balance debit and credit columns, the two totals must be
equal. If the trial balance column and the adjustments columns do not, a mathematical
error or an error in extension more likely causes the inequality.

4. INCOME STATEMENT COLUMNS

Extend all revenue and expense account balances from the adjusted trial balance
columns to the income statement columns. Since revenues carry credit balances, extend
them to the credit column; extend the expenses to the debit column. Then subtotal each
column. If the total revenues exceed the total expenses, the difference is the net income
that is added to the debit column total in order to bring the two columns into agreement.
On the other hand, if the total expenses exceed the total revenues, the result of business
operation is a net loss which is added to the credit column total.

Note that the amount of difference is being added on the column with a lower
totals.. Notice also that if the amount is on both ends of Income Statement(IS) and
Balance Sheet (BS) column (IS debit and BS credit), it is a net income, on the other hand,
if the difference is at the middle of the IS and BS column, it is a net loss (IS credit and BS
debit).

5. BALANCE SHEET COLUMNS

Extend the assets, liabilities, and owner’s equity accounts from the adjusted trial balance
sheet columns. Debit the assets and credit the liabilities and owner’s equity amounts.
Note that the beginning rather than the ending balance of the owner’s capital is carried
into the credit column because the closing entries are not yet prepared.

If the income statement and balance sheet columns do not agree on the first attempt,
work backward through the process used in preparing the worksheet. Specifically, the
following steps should be taken until the error is discovered:
 BASIC ACCOUNTING 89

1. Re-add the debit and credit columns to see if an error is made in addition. If the
column totals do not agree, check to see if some items are extended incorrectly from the
adjusted trial balance columns to the balance sheet and income statement.

2. Re-add the adjusted trial balance columns. If the totals agree, check whether if
item is transferred to the correct income statement and balance sheet columns. If the
totals do not agree, make sure that the each adjustment is properly added to or
subtracted from the related amount in the trial balance.

3. Re-add the adjustment columns.

4. Re-add the trial balance columns. If the totals do not agree, review the ledger
accounts to find the error.

Marianne Reyes Information Systems Company

Work Sheet
For the Year Ended December 31, 2020

Account Title Trial balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
debit credit debit credit Debit credit debit credit debit credit
Cash 64,000 64,000 64,000
Notes Receivable 350,000 350,000 350,000
Accounts Receivable 116,000 116,000 116,000
Supplies 42,000 a)11,000 31,000 31,000
Prepaid Insurance 12,000 f)1,000 11,000 11,000
Land 400,000 400,000 400,000
Building 590,000 590,000 590,000
Accumulated 177,000 c) 59,000 236,000 236,000
depreciation-Building
Equipment 450,000 450,000 450,000
Accumulated 270,000 c) 90,000 360,000 360,000
depreciation-Equipment
Accounts Payable 413,000 413,000 413,000
Unearned consulting 204,000 b)83,000 121,000 121,000
revenues
M.Reyes, Capital 805,000 805,000 805,000
M.Reyes, Drawing 50,000 50,000 50,000
Consulting Revenue 1,108,000 b)83,000 1,191,000 1,191,000
Salaries Expense 770,000 d)12,000 782,000 782,000
Rent Expense 25,000 25,000 25,000
Repairs Expense 71,000 71,000 71,000
Miscellaneous Expense 37,000 37,000 37,000
2,977,000 2,977,000
Supplies Expense (a)11,000 11,000 11,000
Depreciation expense- c)59,000 59,000 59,000
Building
Depreciation expense- c)90,000 90,000 90,000
equipment
Salaries Payable d)12,000 12,000 12,000
Interest receivable e)14,000 14,000 14,000
Interest Income e)14,000 14,000 14,000
Insurance Expense f)1,000 1,000 1,000
270,000 270,000 3,152,000 3,152,000 1,076,000 1,205,000 2,076,000 1,947,000
Net Income 129,000 129,000
1,205,000 1,205,000 2,076,000 2076,000
90 BASIC ACCOUNTING

PREPARING FINANCIAL STATEMENTS FROM THE WORK SHEET

After completing the worksheet, all information needed to prepare the income
statement, the statement of owner’s equity, the statement of financial position, and the
statement of cash flows can now be presented as follows.

THE INCOME STATEMENT

The information needed to prepare the income statement can be taken from the
income statement columns in the work sheet. The income statement for Marianne Reyes
Information Systems Company follows:

MARIANNE REYES INFORMATION SYSTEMS COMPANY

STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 2020

Consulting Revenue P 1,191,000

Less: Operating Expenses
Salaries Expense P 782,000
Depreciation expense-Equipment 90,000
Depreciation expense-Building 59,000
Repair Expense 71,000
Rent Expense 25,000
Supplies Expense 11,000
Insurance Expense 1,000
Miscellaneous Expense 37,000 1,076,000
_______ __________
Net Income P 129,000
==========

STATEMENT OF CHANGES IN OWNER’S EQUITY

The Statement of Owner’s Equity (also called Capital Statement) is a financial statement
that summarizes the activities that affects the capital account.

The four activities that affects the capital are: 1) additional investments (as addition), 2)
Revenue; 3) Expenses (The result of operations, the difference of Revenue and
Expenses, either Net income or Net loss is an addition or deduction, respectively) and 4)
the withdrawals (as deduction).

This statement is prepared by showing the beginning capital balance, adding the
additional investments and net income (or deducting net loss), and then subtracting the
owner’s withdrawal. The result is the ending capital balance that is forwarded to the
balance sheet.

Shown in the next page is the capital statement prepared for Marianne Reyes Information
Systems Company.
 BASIC ACCOUNTING 91

MARIANNE REYES INFORMATION SYSTEMS COMPANY

STATEMENT OF CHANGES IN OWNER’S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2020

Capital, January 1, 2020 P 805,000

Add: Additional investments P -0-
Net income 129,000
Total P 129,000
Less: Withdrawal 50,000
Increase in Capital 79,000
_________
Capital, December 31, 2020 P 884,000
========

THE BALANCE SHEET OR STATEMENT OF FINANCIAL POSITION

A classified statement of financial position subdivides the assets and liabilities in order
to provide more specific information for the users of financial statements. The assets are
classified into current assets and non-current assets. Liabilities are also classified either
as current or non-current (long term).

Current assets are cash and other assets that are converted into cash or used up
in a relatively short period of time, usually one year or less. Current assets commonly
used by a service-type enterprise include cash, accounts receivable, notes receivable,
and prepaid expenses. Normally, current assets are listed in the order of liquidity, or their
convertibility into cash.

Non-current assets are assets acquired for use in the business. This includes long
term investments, property, plant and equipment (Plant assets), intangible assets and
other assets. Property, plant and equipment are assets acquired for use in the business
rather than for sale. They are also called fixed assets because they are used for term-
term purposes.

Current liabilities are debts usually due within one year, the payment of which
normally requires the use of current assets. Current liabilities are usually listed in the
order of their maturity. The sooner a liability is to be paid, the earlier it is to be listed.
Examples include accounts payable, notes payable, unearned revenues, accrued
expenses and salaries payable.

Non-current liabilities are those debts that will be paid after a relatively long
period of time, usually more than one year. Normally, the ones with the earliest due dates
are listed first. Examples include notes payable, mortgage payable and bonds payable.
92 BASIC ACCOUNTING

MARIANNE REYES INFORMATION SYSTEMS COMPANY

BALANCE SHEET
DECEMBER 31, 2020

ASSETS
Current Assets
Cash P 64,000
Notes Receivable 350,000
Accounts Receivable 116,000
Interest Receivable 14,000
Supplies 31,000
Prepaid Insurance 11,000 P 586,000

Non-current Assets
Land P 400,000
Building P 590,000
Less: Accumulated Depreciation 236,000 354,000
Equipment P 450,000
Less: Accumulated Depreciation 360,000 90,000 844,000

TOTAL ASSETS P1,430,000

=========

LIABILITIES AND OWNER’S EQUITY

Current Liabilities
Accounts Payable P 413,000
Salaries Payable 12,000
Unearned Consulting Revenue 121,000 P 546,000

M. Reyes, Capital 884,000

TOTAL LIABILITIES AND OWNER’S EQUITY P1,430,000

=========

JOURNALIZING AND POSTING THE ADJUSTNG ENTRIES

The adjusting entries recorded in the worksheet are also recorded in the journal and
posted in the ledger. This is to prove that the balances of the accounts in the ledger
conform with the balances shown in the financial statements. These entries are also
posted to the general ledger in the usual manner, except that the word “Adjusting” is
written on the items column to differentiate it from other posted entries.

The preparation of the worksheet does not eliminate the need to journalize and post the
adjusting entries because the worksheet is only an accounting tool and is not part of the
formal accounting records.

The adjusting entries of Marianne Reyes Information Systems Company are journalized
as follows:
 BASIC ACCOUNTING 93

GENERAL JOURNAL PAGE 3

Date Description P/R Debit Credit

2020
Dec. 31 Supplies Expense 505 11,000
Supplies 105 11,000
To take up supplies used for the period..

31 Unearned Consulting Revenue 207 83,000

Consulting Revenue 401 83,000
To take up earned portion of consulting revenue.

31 Depreciation expense-Building 502 59,000

Depreciation expense-Equipment 503 90,000
Accumulated Depreciation – Building 108A 59,000
Accumulated Depreciation – Equipment 109A 90,000
To take up depreciation expense for the period.

31 Salaries Expense 501 12,000

Salaries Payable 203 12,000
To take up accrued salaries for the period.

31 Interest Receivable 104 14,000

Interest Income 402 14,000
To take up accrued interest income.
(350,000 x12%x4/12)

31 Insurance Expense 507 1,000

Prepaid Insurance 106 1,000
To take up expired portion of prepaid insurance.

THE CLOSING ENTRIES

The closing entries are entries prepared at the end of the accounting period to
bring the balances of the temporary or nominal account to zero, so that they will be ready
to receive data for the next accounting period. These accounts are closed at the end of
each period so that we may identify their balances by the year of their occurrence.
Hence, we say the sales of 2020 must not include the sales of 2021.

In the closing process, a temporary account or clearing account called “Income

Summary” is used. After all revenue and expense account balances are transferred to
income summary, its balance represents the results of the operations (net income or net
loss) for the period. The other terms that maybe used are Revenue and Expense
Summary or Profit and Loss Summary.
94 BASIC ACCOUNTING

The steps in the closing process are as follows:

1. Closing the revenue account(s). The balances in the revenue account are
transferred to the income summary account by debiting each revenue account for the
amount of its balance, and crediting the income summary account for the total revenue.

2. Closing the expense accounts. The balances in the expense account are
transferred to the income summary account by debiting the income summary account for
the total expense, and crediting each expense account for the amount of its balance.

3. Closing the income summary account. The balances in the income summary
account are transferred to the owner’s capital. A credit balance in the income summary
account represents net income and is closed by debiting income summary and crediting
the owner’s capital account. A debit balance in the income summary account represents
net loss and is closed by debiting the owner’s capital account, and crediting the income
summary account.

4. Closing the owner’s drawing account. The balance of the owner’s drawing
account is transferred to the owner’s capital account by debiting the capital account for
the amount of the withdrawals, and crediting the drawing account for its balance.

The Closing entries are recorded on the next available space in the journal right
after the adjusting entries. They are also posted in the usual manner except that the word
“Closing” is written on the items column to differentiate it from other posted entries.

GENERAL JOURNAL Page 5

Date Description Post Debit Credit

2020 Ref
Dec. 31 Consulting Revenue 401 1,191,000
Interest Income 402 14,000
Income Summary 303 1,205,000
To close the revenue account.
2020
Dec 31 Income Summary 303 1,076,000
Salaries Expenses 501 782,000
Rent Expense 503 25,000
Repairs Expense 502 71,000
Miscellaneous Expenses 509 37,000
Supplies Expense 505 11,000
Depreciation Expense - Building 502 59,000
Depreciation Expense - Equipment 503 90,000
Insurance Expense 507 1,000
To close the expense accounts
 BASIC ACCOUNTING 95

31 Income Summary 303 129,000

M. Reyes, Capital 301 129,000
To close the net income to capital.

31 M. Reyes, Capital 301 50,000

M. Reyes, Drawing 302 50,000
To close the owner’s drawing account

After closing, the nominal or temporary accounts in the ledger, such as service
revenue, all expense accounts and the drawing account will be zero balances, as shown
in the following T-accounts:

M. Reyes, Capital 301

Dec. 31 Closing 50,000 Jan. 1 805,000
Dec. 31 Closing 129,000
934,000
Bal.884,000

M. Reyes, Drawing 302

Jan. 1 50,000 Dec. 31 Closing 50,000

Income Summary 303

Dec. 31 Closing 1,076,000 Dec. 31 Closing 1,205,000
31 Closing 129,000
1,205,000

Consulting Revenue 401

Dec. 31 Closing 1,191,000 Jan. 7 1,108,000
Dec. 31 AJE 83,000
1,191,000

POST-CLOSING TRIAL BALANCE

After the nominal accounts (temporary accounts) have been closed, what remain
is the real accounts (permanent accounts). Thus, a post-closing trial balance is also
called a Statement of Financial Position (Balance Sheet) in a trial balance form, because
the items appearing are the elements of the Balance Sheet (Assets, Liabilities and
Owner’s Equity). The temporary accounts have been closed, so they are not included in
the post-closing trial balance. The Post-Closing Trial Balance will served as the
beginning balance of the next accounting period.
96 BASIC ACCOUNTING

The post-closing trial balance of Marianne Reyes Information Systems Company

as of December 31, 2020, is shown as follows:

MARIANNE REYES INFORMATION SYSTEMS COMPANY

Post-Closing Trial Balance
December 31, 2020
Account
Code Account Name Debit Credit_

101 Cash P 64,000

102 Notes Receivable 350,000
103 Accounts Receivable 116,000
104 Interest Receivable 14,000
105 Supplies 31,000
106 Prepaid Insurance 11,000
107 Land 400,000
108 Building 590,000
108A Accumulated Depreciation – Building P 236,000
109 Equipment 450,000
109A Accumulated Depreciation – Equip. 360,000
201 Accounts Payable 413,000
203 Salaries Payable 12,000
207 Unearned Consulting Revenue 121,000
301 M. Reyes, Capital 884,000
________________________
Total P 2,206,000 P 2,206,000
=======================

THE INTERIM STATEMENTS

Interim statements are financial statements prepared for a period of less than a
year. It is considered essential in providing the investors and stakeholders with timely
information as to the progress of the enterprise. This is why most companies prepare a
monthly, quarterly or semi-annually income statement. Adjustments must be considered
in rendering interim reports.

REVERSING ENTRIES

For certain types of adjusting entries, reversing entries are prepared on the first
day of the next accounting period. They are called reversing entries because they
reverse the effects of the adjusting entry to which they relate. The purpose of reversing
entry is to simplify the first entry relating to the same item in the next accounting period.

Recall the adjusting entry made by Marianne Reyes Information Systems

Company to recognized accrued salaries of P 12,000. This adjusting entry is made to
record salaries incurred but not yet paid as of December 31, 2020.
 BASIC ACCOUNTING 97

Illustrated below are the entries from December 31 through February 10, the next payday,
assuming (1) no reversing entry is prepared, and (2) reversing entry is prepared.

(1) (2)
Dec
31 Salaries Expense 12,000 Salaries Expense 12,000
Salaries Payable 12,000 Salaries Payable 12,000
To take up accrued To take up accrued
salaries salaries

Jan 1 No entry Salaries Payable 12,000

Salaries Expense 12,000
To reverse the adj. entry
on Jan. 31

Jan
10 Salaries Payable 12,000
Salaries Expense 3,000 Salaries Expense 15,000
Cash 15,000 Cash 15,000
Paid salaries of Paid salaries of
employees employees

The adjusting entries of December 31, 2020 are the same whether or not a reversing entry
is made. The reversing entry on January 1, is the exact reversed of the debit and credit
used in the adjusting entry. The use of the reversing entry simplifies the entry made on
payment date on January 10. There is no need to remember that the accrued salary of
P12,000 was already recorded. When the company paid the P15,000.00 salaries, the entry
is simply a debit to Salaries Expense and a credit to cash for P15,000.00.

The end result in the account is the same whether or not a reversing entry is used. The T-
accounts that follow will prove this. The beginning balance in Salaries Payable results
from the adjusting entry made on December 31.

(1) The T-account as they appear when no reversing entry is prepared.

Salaries Expense Salaries Payable

Feb. 10 3,000 Feb 10 12,000 Dec. 31 12,000

(2) The T-accounts as they appear when reversing entry is prepared.

Salaries Expense Salaries Payable
Feb.10 15,000 Jan 1 12,000 Jan 1 12,000 Dec. 12,000
98 BASIC ACCOUNTING

The four adjusting entries that may be reversed at the beginning of the next
accounting period are: 1) accrued expenses 2) accrued revenue 3) prepaid expenses
using expense method 4) unearned revenue using revenue method.

Not all adjusting entries are reversed on the first day of the next accounting
period. Entries for reversals are those relating to the situations where cash is paid or
received in an adjusting entry. Such items would include accrued expenses and accrued
revenues. We do not reverse adjustments for items that will not result in a subsequent
receipt or payment of cash, such as the adjustment for depreciation and allowance for
bad debts.

Adjusting entries for prepaid expenses recorded under the expense method and
unearned revenues recorded under the revenue method are reversed. Since the closing
entries made at the end of the period affects the revenue and expense account, reversing
entries are needed to revert back the original method used; namely, the expense method
for prepaid expense and the revenue method for unearned revenue. A general rule to
follow is that all adjusting entries that increase assets or liabilities are reversed.
Adjusting entries that decrease assets and liabilities are not reversed.

EXERCISES
1.The following trial balance of Marquez Equipment Rental, as of December 31, 2020,
contains the following account balances.

MARQUEZ EQUIPMENT RENTAL

Trial Balance
December 31, 2011

Debit Credit
Cash P 55,600
Accounts Receivable 32,500
Office Supplies 8,000
Prepaid Rent 58,500
Prepaid Insurance 11,760
Equipment 192,000
Accumulated Depreciation – Equipment
Accounts Payable P 31,150
E. Marquez, Capital 262,030
E. Marquez, Drawing 22,600
Rental Service Revenue 627,100
Salaries Expense 390,000
Utilities Expense 74,800
Travel Expense 58,720
Miscellaneous Expense 19,800

Total P 920,280 P 920,280

 BASIC ACCOUNTING 99

Adjustment data at December 31 are as follows:

(a) Rent expense for the year amounts to P4,875.

(b) Unexpired insurance at December 31, amounts P10,780.
(c) The equipment acquired on Sept. 1, is to be depreciated at P38,400 per year.
(d) Salaries incurred but unpaid at December 31, amounts to P7,500.
(e) Unused office supplies at December 31, P3200.
(f) Accrued Rental Service at December 31, P5,800.

Instructions: Prepare the following:

1) a 10-column worksheet;
2) Journalized the adjusting and closing entries
3) Income Statement; Capital Statement; and Balance Sheet
4) And Post-closing Trial Balance
5) Journalized the reversing entries

2. From the following selected accounts that Persevering Auto Repair Shop reported in
its June 30, FY end annual financial statements, prepare the entity’s closing entries.

Zeny Allen, capital 782,600 Interest expense 24,750

Service Revenue 280,500 Accounts receivable 282,000
Unearned service revenue 30,380 Salary payable 19,020
Salary expense 148,750 Depreciation expense 23,500
Accumulated Depreciation- Equip 87,500 Rent expense 22,750
Supplies Expense 3,230 Z. Allen, drawing 48,000
Interest Revenue 11,750 Supplies 20,750

GENERAL JOURNAL Page 3

Date Description P/R Debit Credit
100 BASIC ACCOUNTING

EXERCISE 5-1 Preparation of a Worksheet

The Trial Balance of PEDRO JOSE Advertising Agency before adjustments are shown below:

PEDRO JOSE ADVERTISING AGENCY

Trial Balance
October 31, 2020

ACCOUNT TITLES DEBIT CREDIT

Cash P 260,000
Accounts receivable 28,800
Prepaid rent 70,000
Prepaid insurance 50,000
Office supplies 19,200
Office equipment ` 96,000
Accumulated depreciation P 14,000
Notes payable 30,000
Accounts payable 120,000
Salaries payable 30,000
Interest payable 2,000
PJ Capital 200,000
PJ Drawing 32,000
Commission revenue 160,000
Total P 556,000 P 556,000

INSTRUCTIONS:
1. Prepare a worksheet.
2. Adjustment data on October 31, 2020, the end of the month:
(a) the uncollectible account is 5% of accounts receivable
(b) Prepaid rent is for six months beginning September 1.
(c) Expired insurance, P 36,000.
(d) Unearned commission, P 8,000.
(e) Unpaid salaries, P 24,000.
3. Prepare an Income Statement, Capital Statement and balance sheet.
 BASIC ACCOUNTING 101

EXERCISE 5-2
INSTRUCTION: Prepare Financial Statements, Closing entries, and Post-closing trial balance.

The adjusted trial balance of KAREN ADVERTISING AGENCY after posting of adjusting
entries is shown below:

KAREN ADVERTISING AGENCY

Adjusted Trial Balance
September 30, 2020

ACCOUNT TITLES DEBIT CREDIT

Cash P 270,000
Commission Receivable 7,200
Prepaid rent 84,000
Office supplies 12,600
Office equipment ` 36,000
Accumulated depreciation-office P 16,400
Furniture & Fixtures 18,800
Accumulated Depreciation – Fur & Fix 6,000
Notes payable 114,000
Accounts payable 30,000
Salaries payable 4,800
Interest payable 1,200
Unearned commission 24,000
Karen Capital 200,000
Karen Drawing 32,000
Commission Earned 175,200
Salaries expense 64,800
Rent expense 36,000
Office Supplies expense 6,600
Depreciation Expense – Office Equip 2,400
Depreciation Expense – Fur & Fix 1,000
Interest Expense 200 ___
Total P 571, 600 P 571, 600
102 BASIC ACCOUNTING

PROBLEM 5-1
The Trial Balance of MESTIOLA LAUNDROMAT at December 31, the end of the current
fiscal year, and data needed for year-end adjustments are presented below:

MESTIOLA LAUNDROMAT
TRIAL BALANCE
December 31, 2020
ACCOUNT TITLES DEBIT CREDIT
Cash P 8,250
Laundry Supplies 10,110
Prepaid Insurance 3,120
Laundry Equipment 58,000
Accumulated Depreciation P 20,000
Office Equipment 40,000
Accumulated Depreciation 14,000
Accounts Payable 1,550
Mestiola, Capital 34,950
Mestiola, Drawing 30,000
Laundry Revenue 125,200
Wages Expense 29,500
Rent Expense 8,200
Utilities Expense 5,100
Miscellaneous Expense 3,420________________
Total P195,700 P195,700
ADJUSTMENT DATA:
a. Laundry supplies on hand, P 2,850.
b. Insurance expired, P 2,500.
c. Depreciation – Laundry Equipment, P 20,000
d. Depreciation – Office Equipment P 16,000
e. Wages accrued are December 31, ) 18,000.
Instructions:
1. Complete worksheet.
2. Prepare an income statement, Capital statement and Balance Sheet. (Report form).
 BASIC ACCOUNTING 103

PROBLEM 5-2
INSTRUCTIONS: 1. Complete a Worksheet.
2. Prepare financial statements
3. Journalize adjusting, closing, reversing entries and Post-Closing Trial
Balance.

The account balances of YOLANDA REALTY at the end of the month April, 2020 are
presented below:
Cash P 17,420
Accounts Receivable 46,240
Prepaid Insurance 2,970
Office Supplies 850
Automobile 48,000
Accum. Depr. – Automobile P 9,650
Office Equipment 31,600
Accumulated Depreciation 7,000
Accounts Payable 1,480
Yolanda, Capital 56,070
Yolanda, Drawing 40,000
Revenue from Fees 269,120
Salary and Comm. Exp. 132,000
Rent Expense 12,000
Advertising Expense 7,650
Automobile Expense 2,830
Miscellaneous Expense 1,760_______________
Total P343,320 P343,320
DATA FOR ADJUSTMENT
a. The uncollectible account is 4%.
b. The unexpired insurance, P660.
c. Supplies used, ¼ of the amount.
d. Depreciation: automobile, P12,000; Equipment, P9,000.
e. Unpaid salary and commission, P60,000.
f. Unrecorded Revenue from fees, P85,200.
104 BASIC ACCOUNTING

WRITE YOUR ANSWERS HERE:

BASIC ACCOUNTING 105

WRITE YOUR ANSWERS HERE:

106 BASIC ACCOUNTING

WRITE YOUR ANSWERS HERE:

 BASIC ACCOUNTING 107

References:

https://studyfinance.com/journal-entries/
Ballada, Win and S. Ballada. Accounting Fundamentals, 5th edition. Manila: DomDane Publishers. 2019
HF 5635 P75 2013 Baguino, Armando D. et al (2013) Principles of Accounting

https://www.cpapracticeadvisor.com/home/article/10263076/the-evolution-of-technology-for-the-
accounting-profession
https://fremont.edu/history-of-accounting/
https://www.geemiz.com/accounting/theory-of-accounts/definition-of-accounting.html
https://smallbusiness.chron.com/general-uses-accounting-information-3951.html
https://www.fasb.org/jsp/FASB/Page/SectionPage&cid=1176156304264
http://www.picpa.com.ph/attachment/1302018111735724.pdf
https://www.accountingcoach.com/accounting-principles/explanation
http://www.tradechakra.com/economy/philippines/types-of-business-entities-in-240.php
` https://www.freshbooks.com/hub/accounting/8-branches-of-accounting
https://www.wallstreetmojo.com/financial-statements/
https://corporatefinanceinstitute.com/resources/knowledge/accounting/types-of-assets/
108 BASIC ACCOUNTING

LONG EXAMINATION
NAME _________________________________________________ SECTION _______________
DATE _______________________________ PROF. _________________

Part I. True or False. Write A if True and C if False

____ 1 Payment for the current Meralco bill will be debited to expenses, while that of the preceding
month will be debited to a Payable account.
____ 2. A list of all the accounts used by the company and its account titles are enumerated in the
Account Title Registry.
____ 3 Collections made for services to be provided in the future are Receivables of the company.
____ 4 Business operation is an event that has some effect on the resources of a firm or on the source
of the firm’s assets.
____ 5 The accounting equation states that Liabilities are equal to the sum of assets and liabilities.
____ 6 The report form of a Balance Sheet shows the Liabilities and Capital at the right side of the
Assets.
____ 7 Accounting information system is the combination of personnel, record and procedures that a
business uses to provide financial data.
____ 8 Prepaid expenses are expense paid in advance
____ 9 A statement of comprehensive income is a list of revenues and expenses as of a specific period
of time.
____ 10 Unearned revenue is an income collected by the business following the actual rendering of
services.
____ 11 An effective accounting system must have the following features such as: good cost/benefit
relationship, comparability, flexibility and restrictions.
____ 12 Financial statements are structured financial representation of the financial position of and the
transactions undertaken by an enterprise
____ 13 Business entity principle relates to the expense recognition principle which requires that costs
and expenses incurred in generating the revenue
____ 14 Net Income is the difference between an income and expenses, wherein the income has a
greater amount.
____ 15 Accounting is a service activity. Its function is to provide quantitative information primarily
financial in nature about economic entities that is to be useful in making economic decisions, in
making reasoned choices among alternative courses of action.
____ 16 A merchandising firm is an organization in which basic resources are assembled and processed
to provide goods and services to customers.
____ 17 Auditing is a specialized field of accounting whose function if to review the financial statements
prepared by the Financial accountant, then thereby express an opinion as to the fairness in its
reporting.
____ 18 The Unearned Professional Fees account is a Revenue account.
____ 19 Liabilities always come from Cash borrowed by the business.
____ 20 To be considered that the cost paid is an Expense, such payments are made for products or
services incurred in the normal course of business.
____ 21 A private company’s accountant should always be a Certified public Accountant.
____ 22 Under the business entity concept, a business is said to continue operations for an indefinite
period.
____ 23 SM group of malls, Robinsons and Ali Mall are companies that sell products processed and
produced by the same company.
____ 24 A company whose beginning capital balance has the same balance at the end of the period,
would therefore have withdrawal/s with the same amount as its net income (net loss) plus
 BASIC ACCOUNTING 109

investment.
____ 25 Total Assets +Expenses + Drawing – Liabilities – Revenues –Capital = 0
____ 26 The company has mistakenly omitted to withhold tax from the salaries of their employees. The
effect would be an overstatement on the Salaries and understatement on the liabilities.
____ 27 Various expenses paid by the company to be used for the owner’s private consumption shall not
be recorded in the company’s books
____ 28 The error transposition means that some digits are interchanged, such as P546 is reported as
P564.
____ 29 When the owner borrows P100,000 from a bank, then invest it his company, the entry would be
the same if the company he owns borrows P100,000 from a bank.
____ 30 PR in the journal and ledger means postal reference.

Part II. Multiple choice. Choose the best answer. Encircle the letter of your Answer.
1 Sunny provided Hawaiian lessons to 5 eight-year old kids at P200 per hour per child every Saturday. Every
session last for 2 hours. On the third Saturday, Sunny received P8,000. She will record this transaction as
a. Cash 8,000 c. Cash 8,000
Service Revenue 8,000 Service Revenue 6,000
Unearned Service Revenue 2,000

b. Cash 8,000 d. Cash 6,000

Accounts Receivable 8,000 Service Revenue 6,000

2 Hottie incurred a net loss of P 17,450. Her expenses included salaries of P21,000, rent of P25,000 and
utilities of P 29,250. Total Revenue would have been
a. P75,250 b. P62,000 c. P57,800 d. P92,700

3 On June 1, Shimmers company Assets totalled P720,000, 1/3 of which is the owner’s equity. At the end of
the month, the Assets remained the same but the capital increased by 10%. Liabilities at the end of June
would have been
a. P456,000 b. P480,000 c. P64,000 d. P24,000

4 On May 5, 2019, Spunky Co has rendered house painting services to Yu Family and received a check
amounting to P43,000. During the month, he also painted Sweet Bakery and will be paid P37,200 on the
first day of the following month. Because of Sweet Bakery’s recommendation, Spunky was also engaged
to paint the chapel for a total amount of P75,000. Spunky was immediately given a check amounting to
20% of the contract. As of the end of the month, Spunky would record a revenue of -
a. P155,200 b. P94,200 c. P58,000 d. P80,200

5 Using the information/ transactions from #4, Spunky Co’s total liabilities at the end of May 2019 would be
a. P75,000 b. P60,000 c. P37,200 d. P15,000

6 Using the information/transactions from #4, Spunky Co’s total assets would be
a. P95,200 b. 58,000 c. 15,000 d. 60,000

7 The bookkeeper of Starry Notes recorded purchases of office supplies amounting to P1,750 by debiting
Merchandise Inventory and crediting Cash for P1,700. Assuming that the purchase was on credit, the
correcting entry would be
a. Supplies 50 c. Cash 1,700
Accounts Payable 50 Merchandise Inventory 1700

b. Cash 1,700 d. Office supplies 50

Office Supplies 1,750 Cash 50
110 BASIC ACCOUNTING

Merchandise Inventory 1,700 Merchandise Inventory 50

Accounts Payable 1,750 Accounts Payable 50

8 The Shine Bakeshop had a net increase in Capital amounting to P71,200 for the month of February 2019.
During the month, company records show that cash paid for personal expenses amounted to P5,000, while
those for the company amounted to P84,000. Assuming that shine put in additional P20,000 cash in the
company, total revenue would have been?
a. P84,000 b. P56,200 c. P140,200 d. P15,000

9 Using the information from Shine Bakeshop, the Net income for the month of February 2019 would have
been
a. P84,000 b. P56,200 c. P140,200 d. P15,000

10 Using the information from Shine Bakeshop, assuming the beginning capital amounted to P50,000, the
ending capital would have been
a. P121,200 b. P69,000 c. P140,200 d. P70,000

11 Downy Enterprises has the following information for the month of January:
Accounts Receivable 21,050 Furniture & Fixtures 5,900
Accounts Payable 19,400 Unearned Service Revenue 10,050
Cash 43,000 Salaries Expense 7000
Prepaid Rent 30,000 Supplies Expense 600
Yap, Drawing 66,000 Office Supplies 2,750
Yap, Capital 6,700 Utilities Payable 2,500
Withholding Tax Payable 700 Service Revenue 18,350

Total Assets at the end of the month would be -

a. P102,700 b. P110,000 c. P99,950 d. P117,000

12 If a trial balance is prepared, Total debits would have been

a. P102,700 b. P110,000 c. P99,950 d. P117,000

13 Total Liabilities at the end of the month would be

a. P19,400 b. P32,650 c. P29,450 d. P22,600

14 Using the information of Downy Enterprise, net Income for the month would be
a. P25,050 b. P35,100 c. P5,100 d. P0

15 The following have normal debit balances

a. Rent Expense, Prepaid Rent, Accounts Receivable, Copyright
b. Unearned Rent, Notes Payable, Copyright, Capital
c. Cash, Accounts Receivable, Supplies Expense, Unearned Rent
d. Cash, Drawing, Notes Payable, Trademarks

16 The following transactions would increase Assets and increase Capital, except -
a. Investment of supplies and equipment in Capital
b. Rendered professional fees and sent invoices to clients
c. Received check for services to be rendered in the future
d. Rendered services and received partial payment, the balance to be collected in the near future.

17 Smiley Trading purchased supplies several times during the month. Nov 4, P2,000, Nov 8, P1,500 then Nov
16, P2,460. He returned damaged supplies amounting to P855. If at the end of the month, supplies
consumed is estimated to be two-thirds of the purchases, how much supplies is on hand?
 BASIC ACCOUNTING 111

a. P4,870 b. P2,720 c. P7,305 d. P2,435

18 The entry to record the supplies consumed would be

a. Supplies 4,870 c. Supplies Expense 4,870
Supplies Expense 4,870 Supplies 4,870
b. Supplies 5,440 d. Supplies Expense 5,440
Supplies Expense 5,440 Supplies 5,440

19 Collection from credit customers would

a. Increase the assets c. No effect on the asset
b. Decrease the assets d. Answer not given

20 Starlight Parlor paid its old Meralco bill. This transaction would affect the following, except
a. Assets b. Liabilities c. Capital d. No effect