Revised Fall 2012

Key Terms and Concepts to Know

Chapter 1 – Accounting in Business
 Accounting equation and its three basic elements: assets, liabilities and owners
equity
 How business transactions affect the three basic elements in the accounting
equation.
 Income Statement:
o The types of accounts used
o Prepare an income statement
o Calculate net income without preparing an income statement using the
accounting equation
 Retained Earnings Statement:
o The types of accounts used
o Prepare a retained earnings statement
o Retained Earnings Statement links the income statement and dividends to
the balance sheet
 Balance Sheet
o The types of accounts used
o Prepare a balance sheet

Chapter 2 – Accounting for Transactions

 Journal and Ledger
o A journal and what it is used for.
o A ledger and what it is used for.
o Why both a journal and a ledger are necessary
o A chart of accounts and what it is used for.
 The rules of Debit and Credit:
o Debit is the left side of an account and Credit is the right side of an account
o Normal balances of accounts and how debits and credits increase or decrease
account balances
Normal Balance Increase Decrease
Balance Sheet Accounts
Assets Debit Debit Credit
Liabilities Credit Credit Debit
Owners’ Equity Credit Credit Debit
Capital Stock Credit Credit Debit
Retained Earnings Credit Credit Debit
Dividends Credit Credit Debit
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Income Statement Accounts
Revenue Credit Credit Debit
Expenses Debit Debit Credit

 Analyzing a general ledger account (T-account)

o Use the general equation:
beginning balance + inflows – outflows = ending balance.
o Remember that the inflows and outflows are renamed for the types of activity
in each specific account and that the equation manipulated be used to solve
for an unknown as any one of the four terms.
 Journalize transactions for the various types of transactions.
 Post transactions from the journal to the general ledger
 Prepare a trial balance; identify the types of errors a trial balance can and
cannot help to locate and how to correct the errors.

Chapter 3 – Preparing Financial Statements

 Matching Principle and how it relates to accrual accounting
 Deferred Expenses (prepaid expenses)
 Deferred Revenues (unearned revenues)
 Accrued Expenses (accrued liabilities)
 Accrued Revenues (accrued assets)
Journalizing adjusting entries for accruals and deferrals which always use at least
one income statement account (revenue or expense) and one balance sheet
account (asset or liability). Adjusting entries are never recorded for cash,
dividends, capital stock or retained earnings.
 The effects on the financial statements will be if adjusting entries are omitted.
 Journalizing the four closing entries utilizing the Income Summary account.
 The basic steps in the accounting cycle.
 Prepare a post-closing trial balance, which accounts should and should not appear
on it and why it is a necessary step in the accounting cycle.

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Problems

Problem 1 - Accounting Equation

James Morley is the sole stockholder and operator of Dynamic Business Solutions, Inc. a
management consulting firm organized as a professional corporation. At the end of its
accounting period, December 31, 2021, Dynamic Business Solutions has assets of
₱100,000 and liabilities of ₱75,000.

Determine:
a) What is owner's equity at December 31, 2021?
b) What is owner's equity as of December 31, 2021, assuming that
assets increased by ₱25,000 and liabilities increased by ₱15,000
during 2021?
c) What is the increase or (decrease) in owner's equity for the year
2021?
d) What is the net income (or net loss) for the year 2021 assuming
there were no additional investments in 2021 and dividends of
₱15,000 were paid in 2021.

What is owner's equity at December 31, 2021?

What is owner's equity as of December 31, 2021, assuming that assets increased by
₱25,000 and liabilities increased by ₱15,000 during 2021?
What is the increase or (decrease) in owner's equity for the year 2021?
What is the net income (or net loss) for the year 2021 assuming there were no
additional investments in 2021 and dividends of ₱15,000 were paid in 2021.

Problem 2 - Changes in owner's equity

Determine the net income (or net loss) for the year, assuming that additional capital
stock of ₱25,000 was issued, and that no dividends were paid.

Total Assets Total Liabilities

Beginning of the year ₱500,000 ₱200,000
End of the year ₱625,000 ₱250,000

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Problem 3 - Changes in owner's equity
Determine the net income (or net loss) for the year, assuming that capital stock of
₱70,000 was issued, and dividends of ₱45,000 were paid.

Total Assets Total Liabilities

Beginning of the year ₱425,000 ₱165,000
End of the year ₱440,000 ₱185,000

Problem 4 - Business transactions

Indicate the effect of each of the below transactions on the accounting equation and
determine whether the transaction is:

1. an increase in an asset and an increase in a liability

2. an increase in a asset and an increase in owner's equity
3. an increase in an asset and a decrease in another asset
4. a decrease in an asset and a decrease in a liability
5. a decrease in an asset and a decrease in owner's equity

Transactions:
a) Received cash for common stock
b) Purchased supplies for cash
c) Purchased equipment on account
d) Billed customers for services on account
e) Paid creditor on account
f) Received cash from customers billed on account
g) Paid rent for the month
h) Received payment for services from cash customers
i) Paid cash dividends

Problem 5 – Financial Statements

Complete the following financial statements from the account balances of the Oakley
Corporation for the month ended December 30, 2021, the first month of business. All account
balances are normal balances.

Accounts Payable ₱500

Rent Expense 1,000
Cash 10,025
Fees earned 16,500
Auto expense 1,350
Accounts receivable 5,350
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Salaries expense 2,500
Supplies 1,275
Capital stock 10,000
Miscellaneous expense 150
Dividends 5,000
Supplies expense 350

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Oakley Corporation
Income Statement
Month Ended December 30, 2021

Fees Earned ₱
Operating Expenses:
Auto expense ₱
Salaries expense
Supplies expense
Rent expense
Miscellaneous expense
Total Operating Expenses

Net Income ₱

Oakley Corporation
Statement of Retained Earnings
Month Ended December 30, 2021

Net Income for December ₱

less: Dividends
Retained Earnings December 30, 2008 ₱

Oakley Corporation
Balance Sheet
December 30, 2021
Assets Liabilities
Cash ₱ Accounts Payable ₱
Accounts Receivable
Supplies Stockholders’ Equity
Capital Stock
Retained Earnings
Total Liabilities and
Total Assets ₱ Stockholders’ Equity ₱

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Problem 6 - Retained Earnings

As of January 1, 2021 the retained earnings account had a credit balance of ₱100,500.
During the year, the Corporation had net income of ₱58,500 and paid dividends of
₱32,000. What is the balance of the retained earnings account at December 31, 2021?

Problem 7 – Journal Entries

In recording the following transactions, what account is debited, what account is credited?
a) Issuance of common stock to a shareholder for cash.
b) Payment of rent for the current month.
c) Purchase of supplies on account.
d) Payment to a creditor on account.
e) Fees earned and billed to customers.
f) Receipt of cash from customers previously billed on account.
g) Payment of cash dividends to stockholders.
h) Payment for a 3-year insurance policy.
i) Incurred utilities expenses.
j) Receipt of cash for services to be provided in the future.

Problem 8 - Adjusting entry for Supplies

The balance of the Supplies account before adjustment at the end of the year, is
₱2,730. Journalize the adjusting entry required if the amount of supplies on hand at the
end of the year is ₱260.

Problem 9 - Adjusting entry for Unearned Fees

The balance of the Unearned Fees account before adjustment is ₱7,300.

a. Journalize the adjusting entry required if the amount of unearned fees at the end
of the year is ₱1,700.
b. If the adjusting entry for unearned fees was not made, which items on the
income statement and/or the balance sheet will be overstated or understated?

Problem 10 - Adjusting entry for Accrued Wages

Doctor Smith pays his staff weekly every Friday. The weekly wages average ₱3,000.
Journal the adjusting entry required if the accounting period ends on Wednesday.

Problem 11 - Effect of Omitting Adjusting entry for Accrued Wages

Doctor Jones, a professional corporation, owed his staff ₱3,500 for wages earned but
not yet paid on December 31. Which items on the income statement and/or the balance
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sheet will be overstated or understated?

Problem 12 - Adjusting entry for Depreciation

Bill Jorgenson, a landscape contractor, purchased a new truck on January 1, 2021 for
₱25,000. The depreciation for 2021 is ₱5,000.

a) Journalize the adjusting entry to record the depreciation for

2021.
b) What is the book value of the truck on December 31, 2021?
c) If the adjusting entry for depreciation was not made, which
items on the income statement and/or the balance sheet will be
overstated or understated?

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Problem 13 - Adjusting entries

Selected account balances at December 31, before year-end adjustments, were:

Debits Credits
Cash 12,780
Accounts Receivable 11,250
Supplies 4,750
Prepaid Insurance 2,700
Office Equipment 42,500
Accumulated Depreciation 8,250
Salaries and Wages Payable
Unearned Fees 6,250
Fees Earned 89,750
Salaries and Wages Expense 29.420
Depreciation Expense
Supplies Expense
Insurance Expense

Data needed for year-end adjustments are as follows:

1. Unbilled fees at December 31 ₱3,650
2. Supplies on hand at December 31 ₱1,275
3. Insurance expired during the year ₱2,400
4. Depreciation of office equipment for the year ₱2,750
5. Unearned fees at December 31 ₱1,250
6. Salaries and wages earned but not paid at December 31 ₱1,150

Journalize the adjusting entries required.

Problem 14 - Closing entries

The following is the trial balance of Arnold Corporation at December 31, 2021 after the
year-end adjustments were made. Journalize the necessary closing entries

Debits Credits
Cash 13,750
Accounts Receivable 10,250
Supplies 1,250
Prepaid Insurance 700
Office Equipment 42,500
Accumulated Depreciation 8,250
Accounts Payable 3,250
Salaries and Wages Payable 1,150
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Unearned Fees 1,250
Capital Stock 25,000
Retained Earnings 27,050
Dividends 20,000
Fees Earned 92,250
Salaries And Wages Expense 31,420
Rent Expense 24,000
Depreciation Expense 2,750
Supplies Expense 3,475
Insurance Expense 2,400
Telephone Expense 2,700
Utilities Expense 2,600
Miscellaneous Expense 405

Problem 15 - Permanent and Temporary Accounts

Identify the accounts listed below that are temporary and would be closed at the end of
the accounting period.
Accounts Payable Fees earned
Accumulated Depreciation-Building Land
Capital Stock Retained
Earnings Depreciation Expense-Building Salaries
Expense Dividends Salaries Payable
Equipment Unearned Fees
Supplies Expense Supplies
Interest Receivable Prepaid Insurance

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Solutions
Problem 1 - Accounting Equation
Assets - liabilities = Owner's Equity

a) Owner's equity at December 31, 2021 is ₱25,000 (100,000 - 75,000 = 25,000)

b) Owner's equity at December 31, 2021 is ₱35,000

December 31, 2020: 100,000 - 75,000 = 25,000
Change during 2021: +25,000 - 15.000 = 10,000
December 31, 2021: 125,000 - 90,000 = 35,000

c) The increase in owner's equity is ₱10,000 (35,000 -25,000 = 10,000)

d) Net income for 2021 was ₱25,000.

Net Income - Dividends = Increase in Owner's Equity
Net Income - ₱15,000 = ₱10,000
Net Income = ₱25,000

Problem 2 - Changes in owner's equity

Assets - Liabilities = Owner's Equity

Beginning of the year ₱500,000 ₱200,000 ₱300,000
End of the year 625,000 250,000 375,000
Increase in Owner' Equity ₱ 75,000

Increase in owners’ equity ₱75,000

Stock issued 25,000
Dividends 0
Net Income ₱50,000

Problem 3 - Changes in owner's equity

Assets - Liabilities = Owner's

Equity
Beginning of the year ₱425,000 - ₱165,000 = ₱260,000
End of the year ₱440,000 - ₱185,000 = ₱255,000
Decrease in Owner' Equity ₱ (5,000)

Net Income (net loss) + Additional Investment - Dividends = Change in Owner's Equity
Net Income (net loss) + ₱70,000 - ₱45,000 = (₱5,000)
Net Loss = ₱30,000
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Problem 4 - Business transactions

a) Received cash for common stock 2. increase in an asset and

increase in owner's equity
b) Purchased supplies for cash 3. increase in an asset and
decrease in another asset
c) Purchased equipment on account 1. increase in an asset and
increase in a liability
d) Billed customers for services on 2. increase in a asset and
account increase in owner's equity
e) Paid creditor on account 4. decrease in an asset and
decrease in a liability
f) Received cash from customers on 3. increase in an asset and
account decrease in another asset
g) Paid rent for the month 5. decrease in an asset and
decrease in owner's equity
h) Received payment for services from 2. increase in an asset and
cash customers increase in owner's equity
i) Paid cash dividends 5. decrease in an asset and
decrease in owner's equity
j) Purchased supplies for cash 3. increase in an asset and
decrease in another asset
k) Purchased equipment on account 1. increase in an asset and
increase in a liability
l) Billed customers for services on 2. increase in a asset and
account increase in owner's equity
m) Paid creditor on account 4. decrease in an asset and
decrease in a liability
n) Received cash from customers on 3. increase in an asset and
account decrease in another asset
o) Paid rent for the month 5. decrease in an asset and
decrease in owner's equity
p) Received payment for services from 2. increase in an asset and increase in owner's
cash customers equity

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q) Paid cash dividends 5. decrease in an asset and
decrease in owner's equity

Problem 5 - Financial statements

Oakley Corporation
Income Statement
Month Ended December 30, 2021

Fees Earned ₱16,500

Operating Expenses:
Auto expense ₱1,350
Salaries expense 2,500
Supplies expense 350
Rent expense 1,000
Miscellaneous expense 150
Total Operating Expenses 5,350

Net Income ₱11,150

Oakley Corporation
Statement of Retained Earnings
Month Ended December 30, 2021

Net Income for December ₱11,150

less: Dividends 5,000
Retained Earnings December 30, 2021 ₱6,150

Oakley Corporation
Balance Sheet
December 30, 2021
Assets Liabilities
Cash ₱10,025 Accounts Payable ₱500
Accounts Receivable 5,350
Supplies 1,275 Stockholders’ Equity
Capital Stock 10,000
Retained Earnings 6,150
Total Liabilities and
Total Assets ₱16,650 Stockholders’ Equity ₱16,650

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Problem 6 - Retained Earnings

The balance of the retained earnings account at December 31, 2021 is ₱127,000.

Balance January 1, 2021 ₱100,500

Net Income 58,500
Dividends 32,000
Balance December 31, 2021 ₱127,000

Problem 7 - Journal Entries

In recording the following transactions, what account is debited, what account is
credited?

a. Cash Debit
Common Stock Credit

b. Rent Expense Debit

Cash Credit

c. Supplies Debit
Accounts Payable Credit

d. Accounts Payable Debit

Cash Credit

e. Accounts Receivable Debit

Fees Earned Credit

f. Cash Debit
Accounts Receivable Credit

g. Dividends Debit
Cash Credit

h. Prepaid Insurance Debit

Cash Credit

i. Utilities Expense Debit

A/P Credit

j. Cash Debit
Unearned Fees Credit

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Problem 8 - Adjusting entry for Supplies

Supplies expense 2,470

Supplies 2,470

Problem 9 - Adjusting entry for Unearned Fees

a. Adjusting entry required:

Unearned fees 5,600

Fees earned 5,600

b. If the above adjusting entry was not made

 revenue and net income on the income statement will be understated
 on the balance sheet, liabilities will be overstated and both retained earnings and
owner's equity will be understated.

Problem 10 - Adjusting entry for Accrued Wages

Wages expense 1,800

Wages payable 1,800

Problem 11 - Effect of Omitting Adjusting entry for Accrued Wages

If the adjusting entry for accrued wages was not made:
 Wages expense will be understated and net income will be overstated on the
income statement
 Liabilities will be understated and both retained earnings and owner's equity will
be overstated on the balance sheet.

Problem 12 - Adjusting entry for Depreciation

a) The adjusting entry to record the depreciation for 2021:

Depreciation expense 5,000

Accumulated depreciation 5,000

b) The book value of the truck on December 31, 2021 is ₱20,000 (25,000 - 5,000)
c) If the adjusting entry for depreciation was not made:
 Depreciation expense will be understated and net income will be overstated on
the income statement
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 Assets will be overstated and owner's equity will be overstated on the balance
sheet.

Problem 13 - Adjusting entries

Adjusting entries required:

a. Accounts Receivable 3,650

Fees earned 3,650

b. Supplies Expense 3,475

Supplies 3,475

c. Insurance Expense 2,400

Prepaid Insurance 2,400

d. Depreciation Expense 2,750

Accumulated Depreciation 2,750

e. Unearned Fees 5,000

Fees Earned 5,000

f. Salaries and Wages Expense 1,150

Salaries and Wages Expense 1,150

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Problem 14 - Closing entries

Fees Earned 92,250
Income Summary 92,250

Income Summary 69,750

Salaries and Wages Expense 31,420
Rent Expense 24,000
Depreciation Expense 2,750
Supplies Expense 3,475
Insurance Expense 2,400
Telephone Expense 2,700
Utilities Expense 2,600
Miscellaneous Expense 405

Income Summary 22,500

Retained Earnings 22,500

Retained Earnings 20,000

Dividends 20,000

Problem 15 - Permanent and Temporary Accounts

The following accounts are temporary and would be closed:

Depreciation Expense-Building
Dividends
Supplies Expense
Fees Earned
Salaries Expense

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