MODULE 6 - POSTING AND TRIAL BALANCE

Lesson 1: Ledger

LEDGER

Ledger (book of final entry) – is a systematic compilation of several accounts. The ledger is used as a tool to classify the
recorded transactions for the purpose of getting the final balance of each account.

General Ledger – contains all the accounts that are used in the journalizing process.

Subsidiary Ledger – this is a special ledger which shows in detail the transactions affecting the account of a customer or
supplier.

Posting – the process of transferring the data from journal to the ledger account.

The use of the ledger or ledger accounts offers the following advantages:

 Classifying or sorting of the numerous transactions is facilitated with the use of the ledger accounts.
 If posting is up-to-date, the ending balance of any account can easily be determined even before preparing the trial
balance.
 The upward and downward movements in balance of any specific account can be analyzed conveniently by looking at
one or two pages of the ledger.
 The task of auditing the accounting record becomes easier since the ledger accounts would show clearly which
transaction affected their balances.

A. Forms of Ledger Account

1. T-ACCOUNT FORM

2. RUNNING BALANCE FORM

CHART OF ACCOUNTS

 an organized and classified list of the account titles and codes that are used in the recording and classifying process.
 the accounts are normally listed in the order in which they appear in the financial statements.

Sample Chart of Accounts:

Posting

Steps in Posting (Journal to Ledger)

 Locate the appropriate account in the ledger where the debit entry would be posted. This is called the destination
ledger account.
 Write the date of the journal entry on the date column on the debit side of the destination of the ledger account.
 Write the source of the posting under the PR column on the debit side of the destination ledger account.
 Enter the debit value on the debit money column of the destination ledger account.
 Go back to the source journal. Write the code of the destination ledger account under the PR column.
 Repeat the above five steps for all the credit accounts and amounts in each journal entry, except that they should be
posted on the credit sides of the destination ledger accounts.
Trial Balance

TRIAL BALANCE is a built-in accounting device that is prepared as of a certain date usually at the end of a month, to test the
quality of the debit and credit balances of the ledger accounts after completing the journal entries and ledger posting.

Purpose:

a) to check the accuracy of posting by testing the equality of the debit and credit amounts
b) It aids in locating errors in posting.
c) It serves as a basis in the preparation of the financial statements.

Sample:
Trial Balance Errors
 MODULE 7 - ADJUSTING ENTRIES FOR SERVICE ENTITY

Lesson 1: Accrual and Cash Basis of Accounting

Accrual Basis Accounting

Under this, the effects of the activities and events are measured, recognized and reported in the period when they occur - not
necessarily when cash or its equivalent is received or paid out.

Cash Basis Accounting

Under this basis, activities and events are recognized and reported in the period when cash is actually received or paid out.

MATCHING CONCEPT

The profit of an enterprise could be properly measured if there is a proper matching of earned income and incurred expenses
within the reporting period.

Proper matching is attained only if there is proper measurement, recognition, and reporting of both the earned income
(revenues and gains) and the related incurred expenses and losses.

INCOME RECOGNITION

The general rule is the income is recognized when the earning process is complete or almost complete.

Income is recognized in the period when there is a measureable increase in future economic benefits, related to either an
increase in an asset or decrease in a liability.

Generally, income is recognized when services have been rendered (service concern) or when goods have been delivered
(trading/merchandising/manufacturing).

EXPENSE RECOGNITION

 Direct association – this involves the simultaneous recognition of the income and expenses that resulted directly from
the same transaction.
 Systematic and rational allocation – the procedure recognizes expenses during periods when the economic benefits
are used, expired or are divided.
 Immediate Recognition – occurs from the moment an item to have no future economic usefulness or when an item
ceases to produce future economic benefits

Lesson 2: Adjusting Entries

ADJUSTING ENTRIES are entries that are used to update the books

Purpose:

 To conform with the principle of “Matching Costs against Revenue” (matching concept) which will result in a more
accurate measurement of the net income;
 To arrive at the correct valuation of assets and liabilities;
 To arrive at the correct determination of the owner’s equity.
PERIODICITY CONCEPT
 Assumes that the operating life of the business may be divided into time-periods so that timely and regular financial
reports will be available for the use of decision-makers.
 As a result of the end-of-the-period cut-offs, measurement and recognition problems arise. The major problems revolve
around the determination of the amounts that pertain to an element’s year life.

ITEMS TO BE ADJUSTED

SUGGESTED STEPS IN MAKING ADJUSTING ENTRIES

1. Identify the type adjustment.

 Accrued income – income earned but not yet collected
 Accrued expense – expenses incurred but not yet paid
 Unearned income – income received in advance
 Prepaid Expense – expenses paid in advance
 Depreciation – allocation of cost over the life of the asset
 Doubtful accounts – provision for uncollectibility
 Merchandise inventory (for trading business) – unsold merchandise

2. Determine the method used, if any (by reference to the entry made during the original transaction or the account in the trial
balance).
 Unearned Income – Income Method or Liability Method
 Prepaid Expense – Asset Method or Expense Method

3. Prepare the pro-forma adjusting entry

4. Analyze the earned and unearned portion

5. Post the required portion

Accrued Income (Revenue)

ACCRUED INCOME/REVENUE arises if income is already earned but not yet collected as of the reporting date.

Case 1: A dentist renders professional services valued at P 4,500 to his patients from December 26 to 29, 20x1. As of December
31, 20x1, he has not billed the patients.

Analysis:
Since the dentist has already rendered professional services, the earning process is almost complete, and income is earned even
though cash has not been collected. The right to collect from the patients for the unbilled income must be recognized in the
records before the preparation of the financial statements.
Journal Entry:

Professional Fees Receivable 4, 500

Professional Fees 4, 500

Case 2: A 60-day, 12% loan for P 50,000 was granted by the proprietor to a business associate on December 1, 20-1. The
associate promised to pay the lender the amount of P 51,000 on January 30, 20x2.

Analysis:
For every day that passes, the lender earns interest income. As of December 31, interest income of P500 for 30 days (from
December 1 to 31), at 12% per annum, is considered earned. Since the earned interest income is not yet collected, an asset, in
the form of a receivable, is taken up in the records.

Journal Entry:

Interest Receivable 500

Interest Income 500

((P50,000 x 12%) x 30/360)

Case 3: The December rent for a store space has not been collected as of December 31, 20-1. Monthly rental is P12,000.

Analysis:
Certain income items, such as interest income and rent income, are considered as earned in proportion to the passage of time.
Since the rent for December 20-1 is already earned but not collected, a receivable account is recognized before the landlord or
lessor prepares his financial statements.

Journal Entry:

Rent Income Receivable 12,000

Rent Income 12,000

Accrued Expenses
ACCRUED EXPENSES are expenses already incurred but not yet paid.

Case 1: Unpaid wages for factory workers for services they rendered from Monday to Wednesday (December 29 to 31, 20-1),
amounted to P 7,500. Company policy is to pay wages every Saturday.

Analysis:
Businesses have different policies in paying the wages of their laborers. Amounts already earned by the laborers but not paid as
of the end of reporting period must be adjusted by a debit to an expense account and with a corresponding credit to a liability
account.
Journal Entry:

Wages Expense 7,500

Wages Payable 7,500

Case 2: Taxes on the sales of December 20-, to become payable in January 20-2, is computed at P 23, 576.

Analysis:
Some forms of taxes – such as property taxes and business permits – are paid to the government in advance. However, there
are taxes – such as sales taxes, income taxes, and transfer taxes – that are computed and paid only after certain activities or
events have occurred. Obligations for taxes based on transactions that have occurred in the year 20-1 must be recognized
before preparing the income statement.

Journal Entry:

Taxes Expense 23,576

Taxes Payable 23,576

Case 3: Electricity already consumed in December 20-1, but not yet billed by the utility company as of the end of the year, is
estimated at P 3,452.

Analysis:
These are usually paid and taken up in the records after a statement of account has been received from the service provider. If
at the end of the reporting period there are benefits already received but not yet paid to the service provider, adjustments
must be prepared to take up the expense and the corresponding liability.

Journal Entry:

Utilities Expense 3,452

Utilities Payable 3,452

Unearned Income
RECOGNIZED TRANSACTIONS IN THE CURRENT PERIOD THAT AFFECT THE FUTURE PERIODS

a) Income already collected but will be earned over the succeeding periods. This group is known as pre-collected income,
unearned income, pre-collected revenue or unearned revenue.
b) Expenses already paid for but will be incurred over the future periods. This group is known as prepaid expenses, unused
expenses, or unexpired expenses.
c) Long-term assets that are expected to be useful for several years. The cost of the fixed assets, whether tangible or
intangible, is allocated over the future periods benefited by the assets, in the form of depreciation or amortization.
d) Receivables and income that are already recognized, but which may not be realized. If part of the receivables becomes
doubtful of collection, doubtful accounts or uncollectible accounts expense must be taken up.
e) Goods to be resold that are already purchased. If some of the goods are unsold at the end of the period, they must be
segregated and treated as assets.
Case 1: On December 1, 20-1, Fame Realty collected P 75,000 representing the rent for 5 months, until April 30, 20-2.

Analysis:

Since the rent collected by the lessor Fame Realty, pertains to period that extends beyond the end f the current reporting
period, then the collection becomes part income and part liability. Out of five months, one month’s rent (pertaining to
December 20-1) is already earned in 20-1. Four months’ rent (pertaining to January to April 20-2) is unearned as of December
31, 20-1. At the end of the current reporting period, an adjusting entry is prepared to separate the income portion from the
liability portion.

Case 2: On November 1, 20-1 Atty. Anita Mijares received P 30,000 as her retainer fees for professional services to be
rendered until January 31, 20-2.

Analysis:

If retainer fees collected by a professional pertain to length of time that extends beyond the current reporting, then the
collection is part income and part liability. As December 31, 20-1, two months (Nov – Dec 20-1) of the retainer fees of Atty.
Mijares is already earned and P 20,000 is reported as income in 20-1. P 10,000 of the retainer fees that pertains to January 20-
2 is not yet earned and is reported as a liability as of the reporting date.

Case 3: Mina Creative Arts received P 150,000 from a customer representing advertising service fees for a period of 12 months
beginning October 1, 20-1.

Analysis:

Since the advertising service fee of P 150,000 is for a period of 12 months, only P 12,500 is earned per month. Of the total
amount received, P 37,500 (for the month Oct – Dec 20-1) is earned in 20-1, and P 112,500 (for the months Jan – Sept 20-2) is
unearned as of Dec 31, 20-1
Prepaid or Unexpired Expenses
Depreciation of Fixed Assets

Criteria for Fixed Assets

 They have relatively long life.

 They are acquired for use in the normal operations of the business, and
 They are not primarily intended for sale.

COMPUTING FOR DEPRECIATION EXPENSE:

Depreciation (straight-line method) = Cost of the fixed asset – Residual Value

Estimated useful life of the asset

Cost of the Fixed Asset – includes all the amounts incurred in its acquisition until the asset is ready for normal use in the
business operations.

Estimated Useful Life and Residual Value – an accountant may seek help of experts for estimating the useful life and residual
value.

Illustration:

Enterprise B purchased a machine for use in its shop for P 48,000 on July 1, 20-2. It is estimated that the machine will be
useful for 4 years, after which it is expected to be sold for P 8,000.

Answer:

Depreciation = P 48,000 – P 8,000 = P 10,000

(annual) 4 years

Journal Entries:

The adjusting entries to take up the deprecations of the machinery purchased by Enterprise B, for the 20-2 and 20-3, are as
follows:

12.31.-2 Depreciation - Machinery 5,000

Accumulated Depreciation - Machinery 5,000

12.31.-3 Depreciation - Machinery 10,000

Accumulated Depreciation - Machinery 10,000

The fixed asset, assuming it is a building, is presented in the balance sheet in the following manner:

Non-current assets:

Land P 100,000

Building P980,800

Less: Accum. Depreciation 210,450 770,350

Total P870,350

Uncollectible or Doubtful Account Receivables

1.) Recording and Reporting the Estimated Doubtful Account

Doubtful accounts/Bad Debts xx

Allowance for doubtful accounts or

Allowance for bad debts xx

2.) Worthless Accounts Receivable

Accounts become worthless if any or a combination of the following conditions exists:

 The customer cannot be located.

 The customer is declared dead, very ill or bankrupt.
 Legal efforts have been exerted, yet the customer refuses to pay his balance.

If the enterprise recognizes and adjusts the doubtful accounts regularly, the entry to record the write off is:

Allowance for Doubtful Accounts xx

Accounts Receivable – name of customer xx

If the enterprise does not estimate and adjust the doubtful accounts regularly, the entry to record the write off is:

Bad Debts Expense xx

Accounts Receivable – name of customer xx

Illustrative Problems

The following are adjustment data for the semi-annual period ended June 30, 2020:

1.) Physical count revealed that the office supplies on hand amounted to P2,500.
2.) The transportation equipment and the office furniture and equipment were estimated to have useful lives of 5 years with
no residual value. They were acquired when the business started on January 1, 2020.
3.) The business estimated that 90% of its accounts receivable will be collectible.
4.) The business acquired a mortgaged loan payable in 3 years at 9% per annum on January 1, 2020. Monthly interest is
payable on the 1st day of the succeeding month.
5.) Miscellaneous income represents a 5-month miscellaneous service from a client which took effect on March 1, 2020.
6.)
7.) Monthly rent expense is paid on the 5th day of the succeeding month.
8.) The business purchased an insurance policy for its transportation equipment which took effect on March 1, 2020. The
annual insurance premium was paid on the same day.
9.) The note on hand is a 60-day 12% promissory note from a client dated June 15, 2020.

ANSWER: