Fundamentals of

Accountancy,
Business and
Management 1
 Lord, we praise and glorify
Your Holy name. Forgive us from
our sins that separate us from your
love. Thank You for the gift of life,
family, health and security. Help
us to keep in our minds and hearts
the lessons in this SLP. Bless our
families and our homes. All this
we pray in the name of Jesus
Christ our Savior. Amen.
Learning Objectives:
 prepare adjusting entries
 complete the accounting cycle
 reflect on a Bible text on how the Lord helps us
with adjustments in life
Review
Adjusting Entries
• Accruals of income and expenses
• Recognition of depreciation expense
and bad debts expense
• Deferrals of income and expenses
(splitting of mixed accounts)
Illustration 1.1: Accruals of Income
• income items that have been earned but
have not been recorded and paid by the
customer
• receivables of the business
 Case 1: Accrual of interest income
FABM 1 Services received a 10%, ₱150,000,
one-year notes receivable on June 1, 2020.
FABM 1 Services uses calendar year period.
The principal and interest on the notes
receivable are due on June 1, 2021.
Concepts:
• Notes receivable gives rise to interest income.
• Interest income is earned due to passage of time.
Analysis: As of December 31, 2020 (end of
accounting period), interest income would have been
earned because there is already a passage of time
(from June 1, 2020 to December 31, 2020) although
interest will only be collected in the next accounting
period (June 1, 2021).
Conclusion: Interest income shall be accrued for the
7 months covering June 1, 2020 to December 31,
2020.
Solution: The interest income is accrued as follows:
i = Prt
i = (150,000 x 10% x 7/12) = 8,750

General Journal
Date Account Titles Debit Credit
12/31/20 Interest receivable ₱ 8,750      
  Interest income     ₱ 8,750  
   
to accrue interest income earned but not yet
  collected    
 Case 2: Accrual of rent income
FABM 1 Services rents out its building to a
tenant for a monthly rent of ₱45,000. As of
December 31, 2020, the tenant has not yet
paid the rent for the month of December.
Concepts: Income is recognized when earned, rather
than when collected (accrual basis concept).
Conclusion: Rent income for the month of December
shall be accrued on December 31, 2020.

Date Account Titles Debit Credit

12/31/20 Rent receivable 45,000      
  Rent income     45,000  
  to accrue rent income        
Illustration 1.2: Accrual of Expenses
• items of expenses that have been incurred
but have not been recorded and paid
Case 3: Accrual of interest expense
FABM 1 Services issued a 5%, ₱50,000,
one-year notes payable on August 1, 2020.
The principal and interest are due on August
1, 2021.
Concepts:
• Notes payable gives rise to interest expense.
• Interest expense is incurred due to passage of time.
Analysis: As of December 31, 2020, interest expense
is incurred because there is already a passage of time
(August 1 to December 31, 2020) although interest
will only be paid in the next accounting period.
Conclusion: Interest income shall be accrued for the
5 months covering August 1, 2020 to December 31,
2020.
Solution: The interest income is accrued as follows:
i = Prt
i = (50,000 x 5% x 5/12) = 1,042

General Journal
Date Account Titles Debit Credit
12/31/20 Interest expense ₱ 1,042      
  Interest payable     ₱ 1,042  
   
to accrue interest expense incurred but not yet
  paid    
Case 4: Accrual of utilities expense
The cost of electricity used for the month of
December 2020 is ₱3,500. The electricity bill
was received and paid in January 2021.
Concepts: Expense is recognized when incurred or
used rather than when paid.
Conclusion: Utilities expense shall be accrued in
December 2020.
Date Account Titles Debit Credit
12/31/20 Utilities expense 3,500      
  Utilities payable     3,500  
  to accrue unpaid utilities        
Illustration 2: Depreciation and Bad
Debts
 Case 5: Depreciation expense
• a method of allocating the cost of an asset
to an expense over the accounting periods
that make up the asset’s useful life
• the decrease in the usefulness of these
types of assets
 Case 5: Depreciation expense
On January 1, 2020, a business acquired
equipment for ₱15,000. The business expects
to use the equipment over the next 5 years.
On December 31, 2020, the equipment has been used
for 1 year out of its total useful life of 5 years. Thus,
1/5 of the cost should be recognized as expense.
Solution: The annual depreciation expense is
computed as:
Cost / Useful life = ₱15,000 / 5 = ₱3,000

Date Account Titles Debit Credit

12/31/20 Depreciation expense 3,000      
  Accumulated depreciation     3,000  
   
to record the depreciation expense for the
  period    
 Case 6: Bad debts expense
A business has a total accounts receivable of
₱5,000 on December 31, 2020. Of the total
amount, it was estimated that ₱250 is
doubtful of collection (malabong makolekta).

Date Account Titles Debit Credit

12/31/20 Bad debts expense 250      
  Allowance for bad debts     250  
  to record the bad debts expense for the period        
 Illustration 3.1: Deferred Expense
vs. Prepaid Expense
• items that have been initially recorded as
assets but are expected to become
expenses over time
• asset method or expense method
 Case 7: Asset method vs. Expense
method – Insurance
A business paid a one-year insurance for
₱69,000 on November 1, 2020.
 Date Account Titles Debit Credit
11/1/20 Prepaid insurance 69,000      
  Cash     69,000  
  to record the prepayment of 1-year insurance        

Date Account Titles Debit Credit

11/1/20 Insurance expense 69,000      
  Cash     69,000  
  to record the prepayment of 1-year insurance        
Incurred portion (used up or expired) pertains to the
first 2 months of the 1-year prepaid insurance
covering the months of November 1 to December 31,
2020. This portion is computed as:
69,000 x 2 months/12 months = 11,500
The incurred portion is recognized as expense for the
period.
Date Account Titles Debit Credit
12/31/20 Insurance expense 11,500      
  Prepaid insurance     11,500  
   
to recognize the expired portion of the 1-year
  insurance    
Not yet incurred portion (unused up or unexpired) pertains
to the remaining 10 months of the 1-year prepaid insurance
covering the months of January 1 to October 31, 2020. This
portion is computed as:
69,000 x 10 months/12 months = 57,500
The not yet incurred portion is recognized as asset as of
December 31, 2020. It will only be recognized as expense in
the next accounting period.
Date Account Titles Debit Credit
12/31/20 Prepaid insurance 57,500     
  Insurance expense     57,500  
  to recognize the unexpired portion of the 1-
year insurance
      
Illustration 3.2: Deferred Income vs.
Unearned Income
• items that have been initially recorded as
liabilities but are expected to become
income over time
• recorded using either liability method or
income method
Case 8: Liability method vs. Income
method – Rent
A business rents out its building to different
tenants. On August 1, 2020, the business
received one-year rent in advance of
₱132,000 from one of its tenants. Rent per
month is ₱11,000.
 Date Account Titles Debit Credit
08/01/20 Cash 132,000      
  Unearned rent     132,000  
  to record the receipt of 1-year rent in advance        

Date Account Titles Debit Credit

08/01/20 Cash 132,000      
  Rent income     132,000  
  to record the receipt of 1-year rent in advance        
Earned portion (used up) pertains to the first 5 months of
the 1-year rent in advance in covering the months from
August 1 to December 31, 2020. This portion is computed
as:
11,000 rent per month x 5 months = 55,000; or
132,000 x 5 months / 12 months = 55,000
The earned portion is recognized as income for the period.

Date Account Titles Debit Credit

12/31/20 Unearned rent 55,000     
  Rent income     55,000  
  to recognize the earned portion of the 1-year
rent in advance
      
Unearned portion (unused) pertains to the remaining 7 months of
the 1-year prepaid insurance covering the months of January 1 to
July 31, 2021. This portion is computed as:
11,000 rent per monthx 7 months = 77,000; or
132,000 x 7 months / 12 months = 77,000
The unearned portion is recognized as liability as of December 31,
2020. It will only be recognized as income in the next accounting
period.
Date Account Titles Debit Credit
12/31/20 Rent income 77,000     
  Unearned rent     77,000  
  to recognize the unearned portion of the 1-
year rent in advance
      
Adjusted Trial
Balance
• A worksheet is an analytical device
used to facilitate the gathering of data
for adjustments, the preparation of
financial statements and closing
entries.
 FABM 1 Services
Unadjusted Trial Balance
December 31, 2020
Accounts Debit Credit
Cash ₱ 175,000  
Accounts receivable 5,000  
Prepaid insurance 69,000  
Notes receivable 150,000  
Equipment 15,000  
Notes payable   ₱ 50,000
Owner’s capital   257,500
Owner’s drawing 5,000  
Service income   150,000
Utilities expense 38,500  
Totals ₱ 457,500 ₱ 457,500
 FABM 1 Services
Worksheet
For the period ended December 31, 2020
Accounts Unadjusted Trial Balance Adjustments Adjusted Trial Balance
  Dr. Cr. Dr. Cr. Dr. Cr.
Cash 175,000       175,000  
Accounts receivable 5,000       5,000  
Prepaid insurance 69,000     11,500 57,500  
Notes receivable 150,000       150,000  
Equipment 15,000       15,000  
Notes payable   50,000       50,000
Owner’s capital   257,500       257,500
Owner’s drawing 5,000       5,000  
Service income   150,000       150,000
Utilities expense 38,500   3,500   42,000  
Totals ₱ 457,500 ₱ 457,500        
             
Allowance for bad debts       250   250
Interest receivable     8,750   8,750  
Rent receivable     45,000   45,000  
Accumulated depreciation       3,000   3,000
Interest payable       1,042   1,042
Utilities payable       3,500   3,500
Unearned rent     55,000   55,000  
Interest income       8,750   8,750
Rent income       100,000   100,000
Interest expense     1,042   1,042  
Depreciation expense     3,000   3,000  
Bad debts expense     250   250  
Insurance expense     11,500   11,500  
Totals     ₱ 128,042 ₱ 128,042 ₱ 574,042 ₱ 574,042
Notes in preparing the worksheet:
• Account titles used in the adjusting
entries but were not previously
included in the unadjusted trial
balance are placed at the bottom part
of the Accounts.
Notes in preparing the worksheet:
• The debits and credits of the
adjusting entries are placed on the
Adjustments column.
Notes in preparing the worksheet:
• Amounts in the Unadjusted trial balance
and Adjustments columns are combined to
come up with the adjusted balances of the
accounts.
• Debit and debit – add
• Credit and credit – add
• Debit and credit, or vice versa – subtract
Notes in preparing the worksheet:
• Observe that the total debit and
credits are equal.
• The two lines underneath the total
amounts are called “double rule”. In
accounting, double rules are used to
connote a total or the end of a
computation.
 Financial
Statements
• end product of the accounting
process
• Statement of financial position (Balance
sheet) showing the information on assets,
liabilities and equity
• Statement of profit or loss (Income
statement) showing the information on
income and expenses and the profit or loss for
the period
• All income and expense accounts in
the adjusted trial balance are
extended to the income statement.
• All asset, liability and equity
accounts are extended to the balance
sheet.
 FABM 1 Services
Worksheet
For the period ended December 31, 2020

Accounts Adjusted Trial Balance Income Statement Balance Sheet

  Dr. Cr. Dr. Cr. Dr. Cr.
Cash 175,000       175,000  
Accounts receivable 5,000       5,000  
Prepaid insurance 57,500       57,500  
Notes receivable 150,000       150,000  
Equipment 15,000       15,000  
Notes payable   50,000       50,000
Owner’s capital   257,500       257,500
Owner’s drawing 5,000       5,000  
Service income   150,000   150,000    
Utilities expense 42,000   42,000      
Totals            
             
Allowance for bad debts   250       250
Interest receivable 8,750       8,750  
Rent receivable 45,000       45,000  
Accumulated depreciation   3,000       3,000
Interest payable   1,042       1,042
Utilities payable   3,500       3,500
Unearned rent 55,000       55,000  
Interest income   8,750   8,750    
Rent income   100,000   100,000    
Interest expense 1,042   1,042      
Depreciation expense 3,000   3,000      
Bad debts expense 250   250      
Insurance expense 11,500   11,500      

Totals ₱ 574,042 ₱ 574,042 ₱ 57,792 ₱ 258,750 ₱ 516,250 ₱ 315,292

      *200,958     *200,958

      ₱ 258,750 ₱ 258,750 ₱ 516,250 ₱ 516,250

Notes in preparing the income statement:
• If the total credits exceed total debits,
there is profit because total credits column
pertain to income while total debits
pertain to expenses.
• If the total debits exceed total credits,
there is loss.
Notes in preparing the balance sheet:
• If the total debits exceed total credits,
there is profit because the balancing figure
on the credit side will be added to equity
when closing entries are made.
• If the total debits are less than total
credits, there is loss because the balancing
figure will be deducted from equity when
closing entries are made.
Closing Entries
• entries prepared at the end of the
accounting period to “zero out” all
nominal accounts in the ledger
• done so that the transactions during
the period will not blend with the
transactions in the next period.
• “closing the books”
Notes in closing the books:
• All income accounts are debited and all
expense accounts are credited. The resulting
balance is recorded in a clearing account
called “Income summary”.
• The balance of “Income summary” is closed
to the “Owner’s capital” account.
• Any balance in the “Owner’s drawing”
account is closed to the “Owner’s capital”
account.
Closing Entry 1: Income Summary
The amount in the income summary is the
balancing figure in the closing entry. This
amount represents the profit (or loss) for the
period and is also the balancing figure in the
worksheet. If the “Income summary” account
has a credit balance, there is profit, and vice
versa.
 Date Account Titles Debit Credit
12/31/20 Service income 150,000      
  Interest income 8,750      
  Rent income 100,000      
  Utilities expense     42,000  
  Interest expense     1,042  
  Depreciation expense     3,000  
  Bad debts expense     250  
  Insurance expense     11,500  
  Income summary     200,958  
to close income and expense accounts to
  income summary
       
Closing Entry 2: Income Summary closed to
Equity
If the “Income summary” is debited when
closing to equity, there is profit. If the “Income
summary” is credited when closing to equity,
there is loss. Profit increases equity and loss
decreases equity.
Date Account Titles Debit Credit
12/31/20 Income summary 200,958      
  Owner’s capital     200,958  
  to close income summary to equity        
Closing Entry 3: Drawings account closed to
Equity
Drawings account is closed directly to the
“Owner’s equity” account rather than through
“Income summary” account because the
drawings account is neither an income nor an
expense account but rather a contra-equity
account.
Date Account Titles Debit Credit
12/31/20 Owner’s capital 5,000      
  Owner’s drawings     5,000  
  to close drawings account        
 Date Account Titles Debit Credit
12/31/20 Owner’s capital 5,000      
  Owner’s drawings     5,000  
  to close drawings account        
Post-closing Trial
Balance
• Closing Entries. The debits and credits in
the closing entries are placed here.
• Post-closing Trial Balance. The amounts
in the Adjusted Trial Balance are cross-
footed with the amounts in the in the
Closing Entries column. The resulting
amounts are placed in the Post-closing
Trial Balance column.
 FABM 1 Services
Worksheet
For the period ended December 31, 2020
Post-closing Trial
Accounts Adjusted Trial Balance Closing Entries
Balance
  Dr. Cr. Dr. Cr. Dr. Cr.
Cash 175,000       175,000  
Accounts receivable 5,000       5,000  
Prepaid insurance 57,500       57,500  
Notes receivable 150,000       150,000  
Equipment 15,000       15,000  
Notes payable   50,000       50,000
Owner’s capital   257,500 5,000 200,958   453,458
Owner’s drawing 5,000     5,000    
Service income   150,000 150,000      
Utilities expense 42,000     42,000    
Totals            
             
Allowance for bad debts   250       250
Interest receivable 8,750       8,750  
Rent receivable 45,000       45,000  
Accumulated depreciation   3,000       3,000
Interest payable   1,042       1,042
Utilities payable   3,500       3,500
Unearned rent 55,000       55,000  
Interest income   8,750 8,750      
Rent income   100,000 100,000      
Interest expense 1,042     1,042    
Depreciation expense 3,000     3,000    
Bad debts expense 250     250    
Insurance expense 11,500     11,500    
Totals ₱ 574,042 ₱ 574,042 ₱263,750 ₱263,750 ₱ 511,250 ₱ 511,250
Reversing Entries
• made on the first day of the next
accounting period to reverse certain
adjusting entries in the immediately
preceding period
1. Accruals for income or expense
2. Prepayments initially recorded using the
expense method
3. Advanced collections initially recorded
using the income method
 Date Account Titles Debit Credit
01/01/21 Interest income ₱ 8,750      
  Interest receivable     ₱ 8,750  
01/01/21 Rent income 45,000      
  Rent receivable     45,000  
01/01/21 Interest payable 1,042      
  Interest expense     1,042  
01/01/21 Utilities payable 3,500      
  Utilities expense     3,500  
01/01/21 Insurance expense 57,500      
  Prepaid insurance     57,500  
01/01/21 Unearned rent 77,000      
  Rent income     77,000  
Mary Mother of the Good Shepherd
Pray for us.

Jesus, You are my Lord

My happiness lies in You alone.