FUNDAMENTALS OF ACCOUNTANCY,

BUSINESS AND MANAGEMENT 1

Accounting Cycle Applied to a
Service Business (Part 2)
Module 1
Quarter 4, Week 1-2
Fundamentals of Accountancy, Business and Management 1
Senior High School
Locally-Developed Module
Quarter 4-Module 1: Accounting Cycle applied to a Service Business
(Part 2)
First Edition, 2021

All rights reserved. No part of this module may be reproduced or

transmitted to any form or by any means, electronic or mechanical,
including photocopying, recording, or by any information storage and
retrieval system without written permission from the publisher and
authors.
Published by the Schools Division Office (SDO) Dagupan City
OIC, Schools Division Superintendent: Aguedo C. Fernandez
OIC, Asst Schools Division Superintendent: Ma. Criselda G. Ocang

Development Team of the Module

Writer: Jacqueline G. Melendez
Editor: Pina T. Cochangco
Language Evaluators: Princess Grace M. Kim
Mildred A. Balanza
Reviewers: Reynante R. Carrera
Renato R. Santillan

Management Team: Venus Maria SM. Estonilo

Maria Linda R. Ventenilla
Renata G. Rovillos

Department of Education-SDO Dagupan City

Office Address: Burgos Street, Poblacion Oeste, Dagupan City
Telefax: (075) 515-6009
E-mail Address: [email protected]
 The Accounting Cycle applied to a Service Business II
Cabrera, M.E.B. (2016). Fundamentals of Accountancy, Business
and Management 1 for Senior High School ABM Curriculum. GIC This module was written for you to accomplish at home for
Enterprises & Co., Inc. C.M. Recto Avenue, Manila Week 1. It was carefully designed so that you can work at your
own pace and allow self-discovery of the concept through activities
Reyno, F.Z. et.al. (2019). Financial Accounting and Reporting 1
that you will perform. Activities were also selected to allow inde-
Fundamentals of Accounting. Reyno Publishing House. Perez
pendent learning which also aims to develop students’ reading com-
Boulevard, Dagupan City
prehension skills through understanding written texts.
In this module you will learn to:
1. Prepare adjusting entries. ABM_FABM11- IVa-d -33; and
To further understand the lessons kindly visit:
2. Complete the accounting cycle. ABM_FABM11- IVa-d -33
https://www.youtube.com/playlist?list=PLGxEv9ADBII1GQs-
abQLD5rgsMuuwVHgD

In doing this module, please follow

these reminders…
1. Take the pretest before working
or answering the module.
2. Perform the activities as
PREPARED BY: suggested.
3. Answer all the exercises.
4. Check your answers against the
JACQUELINE G. MELENDEZ Key to Correction.
Teacher III 5. Take the Post Test.

Dagupan City National High School, Senior High School

32 1
 10. D 9. B 8. D 6. D 7. A
Choose the best answer for each of the following questions. 5. D 4. A 3. A 1. C 2. D
1. A portion of plant asset cost is allocated as an expense for the PRETEST
period.
A. Consumption
10. B 9. C 8. B 6. C 7. A
B. Determination
5. C 4. D 3. B 1. A 2. B
C. Depreciation REVIEW
D. Allocation 10. True 9. True 8. False 6. True 7. True
2. Cash received that represents services to be rendered in the 5. False 4. False 3. True 1. False 2. True
future. Activity #1
A. Accrued expense
B. Accrued revenue
C. Prepaid expense
D. Unearned revenue
3. It represents services to the enterprise for which payment will
be made in the future.
A. Accrued expenses
B. Accrued revenue
C. Unearned revenue
D. Prepaid expense
4. The accumulated depreciation is reported in the ____.
A. Balance sheet
B. Income statement
C. Statement of cash flows
D. Statement of owner’s equity
5. A journal entry to record accrued expense results in a debit to
____.
A. Asset account
B. Liability account
C. Revenue account
D. Expense account
10. D 9. B 8. C 6. A 7. D
6. A worksheet is ____.
5. B 4. A 3. B 1. B 2. D
A. Formal document required by creditors POSTTEST
B. Formal document shown with a company’s annual report
C. Formal document required by the Bureau of Internal
Revenue
D. A multi-column document used by accountant to aid in the
preparation of the financial statements
2 31
7. Which of the following are all temporary accounts? 7. All of the following are listed on a worksheet except ____.
A. Liabilities, revenues and expenses A. A debit and credit column for a statement of owner’s equity
B. Revenues, expenses and capital B. A debit and credit column for an income statement
C. Assets, revenues and withdrawals C. A debit and credit column for a balance sheet
D. Revenues, expenses and withdrawals D. A debit and credit column for adjustments
8. Net income for LV Company is ₱25,000 for the current year. 8. Which of the following appears in the balance sheet debit column
The owner withdrew ₱3,000 per month for personal living of a worksheet?
expenses. The owner’s capital account will show a net of ____. A. Service revenue
A. Decrease of ₱25,000 B. Income summary
B. Increase of ₱61,000 C. Accounts payable
C. Decrease of ₱11,000 D. Owner withdrawals
D. Increase of ₱23,,000 9. The income summary account is closed to the ____.
9. Given the following totals for the financial statement columns on A. Cash account
the worksheet, determine the net income or loss for the period. B. Capital account
C. Withdrawal account
Income Statement Balance Sheet
D. Service revenue account
Debit Credit Debit Credit 10. The accounts which appear on a post-closing trial balance are:
₱ 6,800 ₱9,500 ₱7,400 ₱4,700 A. Assets, liabilities, withdrawals and revenues
B. Revenues, expenses and capital
A. ₱4,700 net income C. Assets, liabilities and expenses
B. ₱2,700 net income D. Assets, liabilities and capital
C. ₱2,700 net loss
D. ₱4,700 net loss

10. Given the following totals for the financial statement columns on
the worksheet, determine the net income or loss for the period.
Income Statement Balance Sheet
Debit Credit Debit Credit
₱ 8,500 ₱6,750 ₱4,300 ₱6,050

A. ₱8,500 net loss

B. ₱1,750 net income
C. ₱4,300 net income
D. ₱1,750 net loss

30 3
Choose the best answer for each of the following questions. Choose the letter corresponding to the correct answer for each of
the questions provided below.
1. An account has two sides called the ____.
A. Debit and credit 1. Journal entries made at the end if the accounting period to bring
B. Asset and liability the accounts up to date and ensure the proper matching of
C. Revenue and expense revenues and expenses.
D. Journal and ledger A. Matching entries
2. An increase in liabilities is recorded by ____. B. Adjusting entries
A. Debit C. Contra entries
B. Credit D. Correcting entries
3. Why do accountants record transactions in the journal? 2. The adjusting entry to accrue salaries expense.
A. To ensure that all transactions are posted to the ledger A. Debit salaries expense credit cash
B. To have a chronological record of all transactions B. Debit salaries payable and credit cash
C. To help prepare the financial statements C. Debit salaries expense and credit salaries
D. To ensure that total debits total credits D. Debit salaries expense and credit accrued salaries payable
4. Posting is the process of transferring information from the ____. 3. Which is an incorrect adjusting entry?
A. Ledger to the financial statements A. Debit salaries and credit accrued salaries payable
B. Journal to the trial balance B. Debit accumulated depreciation and credit depreciation
C. Ledger to the trial balance C. Debit depreciation and credit accumulated depreciation
D. Journal to the ledger D. Debit uncollectible accounts and credit allowance for
5. The purchase of land for cash is recorded by a ____. uncollectible accounts
A. Debit to Cash and a credit to Land 4. Which of the following is an example of an adjusting entry?
B. Debit to Cash and a debit to Land A. Recording the depreciation expense
C. Debit to Land and a credit to Cash B. Recording payment of wages to employees
D. Credit to Cash and a credit to Land C. Recording the purchase of supplies on account
6. The purpose of the trial balance is to ____. D. Recording receipts of cash for services rendered
A. Speed the collection for cash receipts from the customers 5. If a ₱20,000 adjustment for depreciation is not recorded, which
B. Ensure that all transaction has been recorded of the following financial statement errors will occur?
C. List all the accounts with their balances A. Assets understated
D. Increases assets and owner’s equity B. Expenses overstated
7. What is the normal balance of the Accounts Receivables, Office C. Income understated
Supplies and Rent Expense accounts? D. Owner’s equity overstated
A. Debit 6. Net loss entered into which column/s of a worksheet?
B. Credit A. Income statement credit and balance sheet debit
B. Income statement debit and balance sheet credit
C. Income statement credit and balance sheet credit
D. Adjusted trial balance credit and income statement credit

4 29
 Activity #3 8. A business has Cash of ₱3,000.00, Notes Payable of
₱2,500.00, Accounts payable of ₱4,300.00, Service Revenue of
The unadjusted trial balance of Derek Aquino Law Office as of ₱7,000.00, and Rent Expense of ₱1,800.00. On the basis of
December 31, 2020 given as follows: these data, how much are its total liabilities?
A. ₱5,500.00
Derek Aquino Law Office B. ₱6,800.00
Unadjusted Trial Balance C. ₱9,800.00
December 31, 2020 D. ₱13,800.00
9. Fern Company earned revenue on account. The journal entry to
Debit Credit record this transaction is_____.
Cash ₱135,000 A. Debit to Cash and a credit to Revenue
Accounts Receivable 78,750 B. Debit to Accounts Payable and a credit to Revenue
Office Supplies 9,000 C. Debit to Accounts Receivable and a credit to Revenue
D. Debit to Revenue and a credit to Accounts Receivable
Prepaid Insurance 12,600
10. The account credited for a receipt of cash on accounts is ____.
Computer Equipment 245,700 A. Cash
Accounts Payable ₱103,950 B. Service Revenue
Derek Aquino, Capital 252,000 C. Accounts Payable
Derek Aquino, Drawing 25,200 D. Accounts Receivable
Service Revenue 360,000
Rent Expense 54,000
Wages Expense 126,000
Telephone Expense 9,900
Utilities Expense 19,800
Total ₱715,950 ₱715,950

Requirements:
1. Prepare the necessary adjusting entries
2. Prepare a ten-column worksheet
3. Prepare the financial statements
4. Prepare the closing entries
5. Prepare the post-closing trial balance

28 5
 Activity #2
I. The following accounts appear in the adjusted trial balance
columns of a worksheet. State the column that each account
balance is extended to, choosing from the following columns:
The Accounting Cycle applied to a Service Business (Part II) a. Income statement Debit
b. Balance sheet Debit
c. Income statement Credit
THE ACCOUNTING CYCLE OF A SERVICE BUSINESS d. Balance sheet credit
The accounting cycle refers to a series of chronological steps __ 1. Service Revenue __ 6. Supplies
or procedures performed to accomplish the accounting process. The
__ 2. Note Payable __ 7. Accumulated Depreciation
phases in the accounting cycle include the following:
__ 3. Land __ 8. Equipment
__ 4. Rent Expense __ 9. Owner’s Capital
__ 5. Supplies Expense __ 10. Owner’s Withdrawal

II. The worksheet's Income Statement and Balance Sheet

The first four previously discussed steps in the accounting columns are presented below. "Indicate the particular column/s
of the Income Statement or Balance Sheet with a " / " in which
cycle are the following: the sum transferred from the columns of the Adjusted Trial
 Step 1 – Collecting and verifying source documents and Balance should be placed.
identifying and analyzing transactions or events to be recorded.
 Step 2 – Recording business transactions in a journal.
Income Statement Balance Sheet
 Step 3 – Posting of journal entries to general ledgers. Account Title
Debit Credit Debit Credit
 Step 4 – Preparing the unadjusted trial balance

1. Assets
E. Preparing the Worksheet (Step 5 of the Accounting Cycle) 2. Contra Asset
This phase is simply about plotting the items in the 3. Liabilities
unadjusted trial balance on the worksheet. A worksheet I a 4. Owner, Capital
multi-columned documents to help move data from the trial balance 5. Owner, Drawing
to the financial statements. The worksheet provides an orderly way
to summarize the data for the financial statements. The most 6. Revenue
important function of the worksheet is to allow the accountant to find 7. Expense
and correct errors before the financial statement are prepared. It also 8. Net Income
aids the closing process by listing the adjusted balances for all
9. Net Loss
accounts.
6 27
 There are five pairs of money columns in the body of the worksheet.
A worksheet sample is outlined below:
The Ten-Column Worksheet
Activity #1
Write TRUE if the statement is correct, FALSE is the statement is
incorrect.

_______ 1. Adjusting entries affect only the owner’s equity

accounts.
_______ 2. A contra-asset is deducted from the related asset The following are the steps in the preparation of the worksheet.
on the balance sheet.
_______ 3. The expiration of usefulness of equipment during an 1. Prepare the Trial Balance
accounting period is depreciation  Write the heading, account titles, and the debit and credit
_______ 4. Accumulated depreciation appears on the income amounts from the general ledger.
statement.  Single rule the Trial Balance columns and total the debit and
_______ 5. As equipment is depreciated, the book value credit columns.
increases and its accumulated depreciation  Double rule the columns to show that they are equal
increases. 2. Prepare the Adjustments
_______ 6. A contra-asset has a debit balance.  Record the adjustments.
 Add new accounts that did not have balances before
_______ 7. Failure to record the adjusting entry for depreciation adjusting.
will overstate assets on the balance sheets  Single rule the adjustments columns and total the debits and
_______ 8. The ending balance in the supplies asset accounts credit columns.
is the amount the company has used during the  Double rule the columns to show equality.
accounting period. 3. Prepare the Adjusted Trial balance
_______ 9. The adjusting entry for depreciation will decrease  Extend those debits and credits that are not adjusted, directly
the accumulated depreciation account. to the appropriate Adjusted Trial balance column.
_______ 10. The adjusting entry for expires or used insurance  Enter the adjusted balances in the appropriate Adjusted Trial
will increase the Insurance expense account. Balance columns (including accounts that were added).
 Single rule the Adjusted Trial Balance columns.
 Total the debit and credit columns and double rule columns to
show equality.
4. Extend adjusted balance to the Income Statement and
Balance Sheet columns
 Extend all revenue and expense accounts to the Income
Statement columns.
 Extend the assets and drawing accounts to the Balance
Sheet debit column.
 Extend the liabilities and owner’s capital accounts to the
Balance Credit column
26 7
5. Complete the worksheet Adjusting Entries five categories:
 Rule and total the Income Statement and Balance Sheet 1. Accrued
 expenses.
 These
 are
 expenses
 that
 have
 been












columns. incurred
but
not
yet
paid
in
cash.
 Calculate the difference between the Income Statement Debit 2. Accrued
revenues.
These
are
revenues
that
have
been
earned

and Credit columns. Calculate the difference between the but
not
yet
received
in
cash.
Balance Sheet Debit and Credit columns. 3. Prepaid
 expenses.
 These
 are
 expenses
 that
 have
 been
 paid

Note: If the Income Statement Credit column is larger than but
will
typically
expire
or
get
used
up
in
the
near
future.
the Income Statement Debit column, a net income has 4. Unearned
revenues.
These
are
revenues
collected
in
advance

occurred, otherwise a net loss has occurred. A net income from
 customers
 but
 corresponding
 service
 or
 product
 to
 be

occurs on the Balance Sheet Credit side.
provided
in
the
future
Note: The difference between the Balance Sheet columns
and the difference between the Income Statement columns 5. Depreciation
of
property
and
equipment.
This
is
the
expense

should be the same. associated
with
allocating
the
cost
of
property
and
equipment

 Add the net income to the Income Statement Debit column over
their
useful
life.
or add the net loss to the Income Statement Credit column.
Add the net income to the Balance Sheet Credit column or The Ten-Column Worksheet sections:
the net loss to the Balance Sheet Debit column. 1. Trial Balance (Dr./Cr.)
 Total and rule the columns. 2. Adjustments (Dr./Cr.)
3. Adjusted Trial Balance (Dr./Cr.)
Recall the illustrative transactions for Diane Reyes Law Firm on the 4. Income Statement (Dr./Cr.)
previous module, the unadjusted trial balance was: 5. Balance Sheet (Dr./Cr.)

The following are the steps in the preparation of the

worksheet:
1. Prepare the Trial Balance
2. Prepare the Adjustments
3. Prepare the Adjusted Trial Balance
4. Extend adjusted balances to the Income Statement and
Balance Sheet columns
5. Complete the Worksheet

Basic Financial Statements

1. Income Statement
2. Statement of Changes in Owner’s Equity
3. Statement of Financial Position or Balance Sheet
a.Report Form
This now reflects the first two money columns in the worksheet. b.Account Form
4. Statement of Cash Flows

8 25
 F. Preparing the Adjusting Entries (Step 6 of the Accounting
Cycle)
Adjusting entries are entries made at the end of the accounting
The phases in the accounting cycle: period to assign revenues to the period in which they are earned
and expense to the period in which they are incurred. Adjusting
Step 1 – Collecting and verifying source documents and identifying entries help measure the period’s income and bring the related
and analyzing transactions or events to be recorded. asset and liability accounts to correct balances to the financial
Step 2 – Recording business transactions in a journal. statements.
Step 3 – Posting of journal entries to general ledgers.
Step 4 – Preparing the unadjusted trial balance Adjusting entries are therefore made for the following reasons:
Step
5
– Preparing the Worksheet 1. To report all revenues earned during the accounting period;
Step 6 – Preparing the Adjusting Entries 2. To report all expenses incurred to produce the revenues during
Step 7 – Preparing the Financial Statements the accounting period;
Step 8 – Closing the Books 3. To accurately report the assets on the balance sheet date.
Some may have been used up during the accounting period;
and
Accrual-Basis Accounting vs. Cash-Basis Accounting 4. To accurately report the liabilities on the balance sheet date.
Expenses may have been incurred but not yet paid.
In
Accrual-basis
accounting,
an
accountant
recognizes
the
impact
of

a
business
event
as
it
occurs.
In
 Cash-basis
 accounting,
 the
 accountant
 does
 not
 record
 a


















transaction
until
cash
is
received
or
paid General Categories of Adjusting Entries
Adjusting entries can be generally divided into five categories:
Adjusting
entries
are
made
for
the
following
reasons: 1. Accrued Expenses. These are expenses that have been
1. To report all revenues earned during the accounting period; incurred but not yet paid in cash.
2. To report all expenses incurred to produce the revenues during The term accrued expense payable refers to a liability that
the accounting period; arises from an expense that the business has incurred but has
3. To accurately report the assets on the balance sheet date. Some not yet paid.
may have been used up during the accounting period; and Consider utility expenses (electricity and telephone). A
4. To accurately report the liabilities on the balance sheet date. business gets the benefits of using the facilities provided by
Expenses may have been incurred but not yet paid. Meralco and PLDT first before they are billed and paid.
Therefore, if at the end of the period, it is determined that the
business entity has accrued expense, the adjusting entry will be
to debit the expense and to credit liability.
Depreciation
Straight-line
method
formula:

Utilities expense xxx
Accrued expense payable xxx
To accrue utilities expense

24 9
2. Accrued Revenues. These are revenues that have been For Diane Reyes Law Firm, the Post-closing Trial Balance as
earned but not yet received in cash. of December 31, 2020 follows:
A revenue that has been earned but has not been received in
cash creates an asset called accrued revenue receivable.
For example, interest income on bank deposits earned at the
end of the month might be known or posted only in the following
month. the adjusting entry at the end of the month will be:
Accrued interest receivable xxx
Interest income xxx
To accrue interest income
3. Prepaid Expenses. These are expenses that have been paid
but will typically expire or get used up in the near future.
For example, some supplies purchased during the month may
remain unused at the end of the month. If the accountant
debited Supplies Expense at the time the supplies were
purchased, the adjusting entry to record the unused portion will
be:
Unused supplies xxx
Supplies Expense xxx
To record supplies inventory The Post-closing Trial Balance resembles the Balance Sheet. It
If however, the accountant debited Unused supplies (asset) at contains the ending balances of the permanent accounts: assets,
the time the items were purchased, the adjusting entry to take liabilities, and capital. No temporary accounts such as the
up the used portion will be: revenues, expenses or withdrawal accounts are included because
Supplies expense xxx their balances have been closed. The ledger is up to date and
Unused supplies xxx ready for the next period’s transactions.
To record the used portion of supplies
4. Unearned Revenues. These are revenues collected in
advance from customers but corresponding service or product
to be provided in the future.
Doing so, creates a liability called unearned revenue, which is
an obligation arising from receiving cash in advance of providing
a product or a service. It is only when the job or service is
completed will the business have earned the revenue.

To illustrate: Supposing a law firm has been hired on January 15

to provide legal services to a client and an advance payment of
₱50,000.00 is made.

10 23
For Diane Reyes Law Firm, the closing entries are as follows: Scenario 1:
As of January 31, no service by the law firm has yet been
provided and no billing statement has been prepared and sent to
the client.
a. If the accountant credit Service Revenue at the time the
advance payment is received, the adjusting entry at the end of
January will:
Service revenue 50,000
Unearned service revenue 50,000
To set up liability for unearned revenue

b. If the accountant credited Unearned Service Revenue at the

time the advance payment is received, there will be NO
adjusting entry at the end of January since none of the advance
collection has been earned and the total amount received
remains as a liability.

Scenario 2:
Supposing that ₱20,000.00 of the ₱50,000.00 received in
advance has earned for the service that has been rendered as of
January 31, what adjusting entry should be prepared?
a. If the accountant credited Service Revenue for ₱50,000.00 at
the time the advance payment is received, the adjusting entry at
After posting the closing journal entries to the general ledger the end of January will be:
accounts affected, all revenue, expense and withdrawal accounts
Service revenue 30,000
will have ZERO balance
Unearned service revenue 30,000
The accounting cycle ends with the Post-closing Trial Balance. To set up liability for unearned revenue
The Post-closing Trial Balance is the final check on the validity of b. If the accountant credited Unearned Service Revenue for
the change and closing entries being journalized and posted. The ₱50,000.00 at the time the advance payment is received, the
report is a list of the ledger’s accounts and balances after the adjusting entry at the end of January will be:
closing entries have been made and is dated as of the end of the Unearned service revenue 20,000
period in which the statements have been prepared. This phase Service revenue 20,000
ensures that the ledger is in balance for the beginning of the next To set up liability for unearned revenue
cycle of accounting.

22 11
5. Depreciation Expense. This is the expense associated with H. Closing the Books (Step 8 of the Accounting Cycle)
allocating or spreading the cost of property and equipment over
their useful life. Closing the accounts is the step in the accounting cycle at
Property and equipment are long-lived tangible assets used in the end of the period that prepares the accounts for recording the
the operation of the business. Generally, all property and transactions of the next period. Closing the accounts consists of
equipment except land, decline in usefulness as they age.
journalizing and posting the closing entries to set the balances of
This decline is an expense to the business. Accountants
systematically spread the cost of each property and equipment revenue, expense and owner withdrawal accounts to zero.
except land, over the years of its useful life. This process of Closing entries are entries that transfer revenue, expense and
allocating cost to expense is called depreciation.
In accrual-basis accounting, an asset is recorded when the owner withdrawal balances from these respective accounts to the
furniture is acquired. Then a portion of the asset’s cost is capital account. As an intermediate step, the revenues and the
transferred from the asset account to Depreciation Expense expenses are transferred first to an account entitled Income
each period that the asset is used. This method matches the Summary, which collects the total debit for the amount of all
asset’s expense to the revenue of the period, which is an expenses and the total credit for the sum of all the period's
application of the matching principle.
revenues in one location.
For example, on January 1, 2021, Rico Padilla purchased The Income Summary is a temporary account that is used only in
furniture on account for ₱165,000.00 for his accounting firm. the closing process and the balance is then transferred to a capital.
The furniture will remain useful for five years and will be virtually
worthless at the end of its life. The steps in closing the accounts are as follows:
Using the straight-line method, depreciation for one month is
computed as follows: 1. Debit each revenue account for the amount of its credit
balance. Credit Income Summary for the amount of all
revenues. This entry transfers the sum of the revenues to the
credit side of the Income Summary.
Thus: Depreciation expense for one month will be: 2. Credit the amount of the debit balance to each expense
account. Debit Income Summary for the amount of the
expenses. This entry transfers the amount of the expenses to
the debit side of the Income Summary.
Depreciation expense for January is recorded as follows: 3. Debit Income Summary for the amount of its credit balance
(revenues minus expenses), and credit the Capital account. If
Depreciation expense – furniture 2,750 Income Summary has a debit balance, then credit Income
Accumulated depreciation – furniture 2,750 summary for this amount, and debit Capital. This entry
To record depreciation for January transfers to the Capital Account the net gain or loss from the
Accumulated depreciation account is used to show the Income Summary.
4. Credit the Withdrawals account for the sum of its debit
cumulative sum of all depreciation expense from the date of balance. Debit the Capital Account of the proprietor. This entry
acquiring the asset. Accumulated depreciation is contra-asset moves the withdrawal number to the Capital Account debit
account which means an asset account with a normal credit side. Withdrawals are not expenses and do not affect net
balance. For financial statement presentation purposes, the account income or net loss.
balance is subtracted from the balance of the Asset account
12 21
Illustration #4 Illustrative Comprehensive Case I continued…
The unadjusted trial balance for Diane Reyes Law Firm is
reproduced below as well the additional information that may
require adjusting entries.

Adjustment data at December 31, 2020:

1. Accrued interest income, ₱10,000.00
2. Office supplies on hand, ₱1,000.00
3. Accrued Salary Expense, ₱5,000.00
4. Depreciation on
5. Computer equipment, ₱10,000.00
6. Condominium unit, ₱20,000.00
Required: Prepare the adjusting entries as of December 31, 2020.

20 13
For Diane Reyes Law Firm, the Adjusting Journal Entries as at Illustration #2
December 31, 2020 are as follows:

Diane Reyes Law Firm

General Journal

Adjusting Entries

Date Description Post Debit Credit

Dec 31 Interest Receivable 10,000
Interest Income 10,000
To record accrued interest
31 Office Supplies Expense 4,000
Office Supplies 4,000 Illustration #3
To record used supplies
31 Salary Expense 5,000
Salary Payable 5,000
To record accrued salary

31 Depreciation Expense – 10,000

Computer Equipment
Depreciation Expense – 20,000
Condominium Unit
Accum. Depreciation – 10,000
Computer Equipment
Accum. Depreciation – 20,000
Condominium Unit
To record depreciation

After the adjustment entries are posted to the affected general

ledger accounts, all general ledger accounts will reflect the adjusted
balances.
For Diane Reyes Law Firm, the completed is shown on the next
page.

14 19
4. Statement of Cash Flows
The Statement of Cash Flows reports the amount of cash
coming in – cash receipts – and the amount of cash going out
– cash payment or disbursements – during a period. Business
activities result in a net cash inflow (receipts greater than
payment) or a net cash outflow (payment greater than
receipts). The Statement of Cash Flows shows the net
increase or decrease in cash during the period and the cash
balance at the end of the period.

The Financial Statements for Diane Reyes Law Firm, are the
shown in the following:
Illustration #1

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G. Preparing the Financial Statements (Step 7 of the The operating cycle is the span of time during which:
Accounting Cycle) 1. Cash is used to acquire goods and services; and
2. These goods and services are sold to customers who in turn
The basic financial statements are the: pay for their purchases with cash.
1. Income Statement Non-current Assets are all assets other than current
The Income Statement gives a summary of the revenues and
expenses of an entity for a specific period of time, such as a assets. They are uses to operate the business and are not held
month of a year. It is also called the Statement of Earnings or for sale. One category of non-current is labeled as Property
Statement of Operations, is like a video of the entity’s and Equipment.
operations. The income statement holds perhaps the most Current liabilities are debts that are due to be paid within
important single piece of information about a business – its net one year or within the entity’s operating cycle if longer than a
income, revenue minus expenses. A net loss occurs for the year.
period if expenses exceed revenues.
Non-current liabilities are all liabilities that are not current
2. Statement of Changes in Owner’s Equity or those that are not due or payable within one year or within
The Statement of Changes in Owner’s Equity presents a the entity’s operating cycle.
summary of the changes that occurred in the owner’s equity of
the entity during a specific time period, such as a month or a
year. The increases in owner’s equity are the result of the The Statement of Financial Position or Balance sheet may be
investments by the owner and from net income earned during prepared using either the:
the period. Decreases occur from the owner's withdrawals and a.Report Form. This format lists the assets at the top and
from a net loss for the period. Directly from the Income the liabilities and owner’s equity below
Statement comes net income or net loss. The capital b.Account Form. This format lists the assets at the left and
transactions between the company and its owner are the liabilities and the owner’s equity at the right.
investments and withdrawals by the owner, so they do not
affect the income statement. Report Form Account Form

3. Statement of Financial Position or Balance Sheet

The Statement of Financial Position or Balance Sheet lists all
the assets, liabilities and owner’s equity of an entity at a
specific date, usually the end of the month or a year. The
balance sheet is like a snapshot of the business.
On the Statement of Financial Position or Balance Sheet,
assets and liabilities are classified as either current or
non-current (long-term) to indicate their relative liquidity.
Liquidity is a measure of how quickly an item can be con-
verted to cash.
Current assets are assets that are intended to be turned
into cash, sold or used during the next 12 months or within the
business’s normal operating cycle if longer than a year.
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