CHAPTER 1: INTRODUCTION TO Accounting as information system

ACCOUNTING - consists of input, process, and

output
Accounting - identifying, recording, & - recording, classifying, and
communicating economic information summarizing.
that is useful in making economic
decisions. Bookkeeping Vs Accounting

Essential elements of the definition  Bookkeeping - part of accounting;

of Accounting process of recording the accounts
of an entity; normally ends with a
1. Identifying - identify whether the preparation of trial balance.
transaction is an accountable event  Accounting - covers the whole
(affect assets, liab., equity, income, and process of identifying, recording,
exp.) or non-accountable events (not and communicating
recorded).
2. Recording - recognizes identified Functions of Accounting in Business
accountable events: journalizing. Then, - language of business
classifies the effects on accounts: 1. External users - provide information
posting. useful in making investment, etc.
 Account - basic storage of info 2. Internal users - provide info useful in
in accounting making decisions in managing the
3. Communicating - summarizes the business
info processed in order to produce
meaningful reports. Important because Users of Acct. Info
info processed is useless unless it’s
communicated. Acct. Info is 1. Internal users - directly involved in
communicated to interested users managing the business. Ex.: bus.
through financial statements Owners, board of directors, etc.
2. External users - not directly involved
Nature of accounting in business. Ex.:potential investors,
- providing information about lenders, government, etc.
economic activities that is useful in
making economic decisions. Types of accounting information
classified as to users’ needs
Types of accounting information
1. General purpose acct. Info. -
1. Quantitative information - numbers, designed to meet common needs of
units, quantities. most statement users. Provided by
2. Qualitative information - words, financial accounting, prepared primarily
descriptive form. Found in notes of for external
financial statements. 2. Special purpose acct. Info -
3. Financial information - expressed in designed to specific needs of particular
money. Also a quanti info since it’s statement users. Provided by
expressed in numbers management acct., prepared primarily
for internal
Accounting as science and art
History of acct.
1. Social science - acct. is body of  Began since prehistoric times
knowledge (10,000 years ago)
2. Practical art - use of creative skills  8,500 b.c. - archaeologists found
and judgement clay token in Mesopotamia. Tokens
corresponded to sheep, clothing, or
bread. Used in Middle West in
keeping records. Tokens are
 replaced by wet clay, start of the art 3. Government acct. - acct. For
of writing. government and its instrumentality,
 Civilizations that kept acct. Records: custody of public funds.
Babylonia (4500 b.c.), Egypt 4. Auditing - inspection of entity’s FS
(2250 b.c.), China, and Greece. 5. Tax acct. - preparation of tax returns
 Middle ages (13th and 15th and rendering of tax advice
centuries) - trade in Florence, 6. Cost acct. - systematic recording and
Venice, and Genoa. Brought analysis of the costs of materials, labor,
advancements in acct. methods. etc. to the production or rendering of
 1211 a.d. - Florentine banker kept services
one of acct. systems. Was primitive 7. Accounting education - teaching
since it lacked concept of equality acct and acct.-related subjects
 1340 a.d. Genoa - Double entry 8. Accounting research - careful
system analysis of economic events
 1494 - double entry recording
system was formulated by Fra. Forms of Bus. Org.
Luca Pacioli (Father of Modern - business is an activity where goods
Accounting), Franciscan monk and and services are exchanged for money
mathematician. It was included in
Pacioli’s book Summa di 1. Sole or single proprietorship -
Arithmetica Geometria owned by only one individual. Most
Proportioni and Proportionista common and simplest. Owner is called
published in Nov. 10, 1494 in “sole proprietor”. Registered with DTI.
Venice. 2. Partnership - owned by two or more
 The concept of double entry individual through contract, and divide
recording system is used up to this earnings. Owners are called “partners”.
day. Registered with Securities and
Exchange Commission (SEC)
Common branches of Acct. 3. Corporation - also owned by two or
more individual. But created by
1. Financial acct. - focuses on general operation of law. Ownership is
purpose financial statements. Governed represented through “shares of stocks”.
by Philippine Financial Reporting Owners are called “stockholders” or
Standards (PFRS). Scope of this book “shareholders”.
(FAR) - artificial being, in the
 Financial reporting vs. Fin. eyes of law, corporation is like a person,
Acct. - both focus on general separate from its owners
purpose FS, FR promotes - founders shall not be
principles that are also useful to more than 15
other FR. - Registered through
 Financial statements vs. SEC
Financial report 4. Cooperative - also owned by more
 Financial statement - than one individual. Formed in
structured representation accordance with The Philippine
of an entity’s financial Cooperative Code of 2008. Owners are
position and results of its called “members”.
operation - an association of indiv.
 Financial report - includes who joined to contribute capital and
FS and other info achieve certain goals. Must patronize
2. Management acct. - communication coop’s products
of info for use of internal users. Offshoot - shall not have less than
is management advisory services: 15 members
services to clients in matters of acct. - Registered through
Cooperative Development Authority
(CDA)
Types of Business According to
Activities

Hybrid business - more than one

business activity

1. Service bus. - offers services. Offers

professional skills, expertise, advise, etc.
2. Merchandising bus. - trading
business. Buys and sells product
without changing their physical form
3. Manufacturing bus. - buys raw
materials and processes them into final
products
 CHAPTER 2: ACCOUNTING  Interim period - shorter than
CONCEPTS AND PRINCIPLES 12 months.
8. Stable monetary unit - accounts are
- set of logical ideas and procedures stated in terms of a common unit of
that guide accountants in recording and measure, in which is the peso in the
communicating economic information Philippines
- provide assurance that the info is 9. Materiality concept - item is
communicated in a proper way. considered material if its omission could
influence economic decisions.
Basic Accounting Concepts Accounting principles do not specify
- sourced from PFRS, Conceptual specific amount, it is a matter of
Framework for Financial Reporting, or professional judgement
generally acceptance due to long use. 10. Cost-benefit (Cost constraint) -
- Accounting is constantly changing and cost of processing and communicating
new concepts are continuously info should not exceed the benefits to
be derived from the info’s use.
1. Separate entity concept - business 11. Full disclosure principle - info
is viewed as a separate person, distinct communicated to users are a series of
from its owners. Only business judgemental trade-offs that strive for :
transactions are recorded; personal a) Sufficient details to disclose
transactions are not recorded. matters
- application is important. b) “ condensation to make info
Financial position and financial understandable, keeping in
performance can be measured. mind the costs of preparing it
2. Historical cost concept (cost 12. Consistency concept - bus. Apply
principle) - assets are initially recorded acct. Policies consistently, and present
at their acquisition cost info consistently, from one period to
3. Going concern assumption - another. Shall be the same used last
business is assumed to continue to exist year
for an indefinite period of time. Opposite
is liquidating concern, business intends Accounting Standards - either explicit
to end its operation and has no other or implicit.
choice but to do so.  Explicit - specifically
4. Matching (association of cause mentioned in the PFRS
and effect) - costs are initially  Implicit - not specifically
recognized as assets and charged as mentioned
expense only when related revenue is
recognized. Philippine Financial Reporting
5. Accrual basis of accounting - Standard
events are recorded in the period they - standards adopted by the Financial
occurred, rather than at the point it and Sustainability Reporting Standards
affected cash Council (FSRSC), the official accounting
6. Prudence (or Conservatism) - setting body in the Philippines, from the
assets are understated, liabilities are International Financial Reporting
overstated Standards (IFRSs).
7. Time period (Periodicity, - PFRS are patterned from the IFRSs.
Accounting period, or Reporting
period) - life of business is divided into The term “generally acceptable”
series of reporting periods means either:
 Reporting period - 12 months a) Standards has been established by
 Calendar year period - Jan. an authoritative accounting
1, 2024 - Dec. 31, 2024 standard-setting body
 Fiscal year period - starts b) Principle gained general
on date other than Jan. 1 acceptance due to practice over
time
 ii. Neutrality - presented
Accountants worldwide must agree with without bias
a standard before it is implemented. iii. Free from error - does not
mean acct info are
Relevant regulatory bodies perfectly presented, rather
there are no errors in the
1. Securities and Exchange description
Commission (SEC) - tasked with 2. Enhancing QC - characteristics that
regulating corporations, partnerships, supports fundamental characteristics.
Requires them to file audited financial Enhance the usefulness of info
statements a) Comparability - help users
2. Bureau of Internal Revenue (BIR) - identify similarities and
tasked in collecting national taxes and differences between diff sets of
administering the provisions of Tax info
Codes b) Verifiability - diff users can
3. Bangko Sentral ng Pilipinas (BSP) reach an agreement as to what
- regulating banks and other entities info intends to represent
performing bank functions c) Timeliness - available to users
4. Cooperative Development in time
Authority (CDA) - tasked in regulating d) Understandability - presented
cooperatives in a clear and concise manner

Conceptual Framework for Financial

Reporting
- like standards, CFFR also prescribes
acct concepts. But, Conceptual
Framework is not a standard. It’s a
general frame of reference in
developing the standards

Qualitative Characteristics of useful

financial information
- traits that determine whether the info is
useful to users

1. Fundamental QC - characteristics
that make info useful to users
a) Relevance - it can affect the
decisions of user
i. Predictive value - help
users make predictions
about future outcomes
ii. Confirmatory value (or
Feedback value) - help
users confirm past
predictions
iii. Materiality - entity-specific
relevance
b) Faithful representation -
factual; represents actual
effects of events
i. Completeness - users have
complete understanding of
FS
 CHAPTER 3: THE ACCOUNTING
EQUATION

The Basic Accounting Equation

Assets = Liability + Equity

 Assets - economic resources you

control that have resulted from past
events and provide economic
benefits
 Liabilities - present obligations that
have resulted from past events and
required to give up economic
resources
 Equity - assets minus liabilities.
Capital, net assets, etc.

The accounting equation remains

balanced.

The Expanded Acct Equation

Assets = Liabilities + Equity + Income

- Expense

 Income - increase in economic

benefits in the form of increase in
assets and equity, and decrease in
liabilities. Added in the equation
 Expense - decrease in economic
benefits in the form of decrease in
assets and equity, and increase in
liability. Deducted in the equation

Profit = Income > Expense

Loss = Income < Expense

Squeezed - equation is reversed

 CHAPTER 4: TYPES OF MAJOR Classification of the 5 Major
ACCOUNTS Accounts

The Account BALANCE INCOME

- basic storage of info in acct SHEET STATEMENT
- may be depicted through T-accounts 1. ASSETS 1. INCOME
Parts of T-accounts: 2. LIABILITIES 3. EXPENSES
1. Account title - 4. EQUITY
describe the specific item
2. Debit side - left side,  Balance sheet - statement of
value received financial position
3. Credit side - right side,  Income statement - statement of
value parted with comprehensive income

The Five Major Accounts Charts of Account

- elements of financial statements - list of all accounts used by a business
- a business shall use titles that conform
1. Assets - economic resources you to the PFRS and industry practices
control that have resulted from past
events and provide economic benefits 1. First digit - refers to major types of
2. Liabilities - present obligations that acct
have resulted from past events and Major type of Assigned number
required to give up economic resources acct
3. Equity - asset minus liability Assets 1
4. Income - increase in economic Liabilities 2
benefits in the form of increase in Equity 3
assets and equity, and decrease in Income 4
liabilities. Added in the equation. Expense 5
a) Revenue - arises in the
ordinary activities
2. Second digit refers to the account
b) Gains - may or may not arise
title and how they are sequenced in the
in the course of ordinary
charts of accounts
business
3. Third digit if not zero, signifies if it is
5. Expenses - decrease in economic
a contra or adjunct acct
benefits in the form of decrease in
 Contra - odd number
assets and equity, and increase in
 Adjunct - even number
liability. Deducted in the equation.
a) Expenses - arises in the
Common Account Titles
ordinary activities
b) Losses - may or may not arise
1. Balance Sheet Accts
in the course of ordinary
 Assets
business
 Cash - money or its equivalent
 Accts receivable - oral or
Gain = selling price > carrying
informal promises to pay
amount
 Allowance for bad debts -
Loss = selling price < carrying
estimated losses from
amount
uncollectible AR, “allowance for
doubtful accounts”
 Notes Rec. - written or formal
promises to pay
 Inventory - goods that are held
for sale
 Prepaid supplies - cost of
unused supplies
  Prepaid rent - rent paid in  Expenses
advance  Cost of sales (or Cost of
 Prepaid insurance - insurance Goods Sold) - value of
paid in advance inventories that have been sold
 Land - the lot which the  Freight-out - sellers’ cost of
business has been constructed delivering goods to sellers.
or vacant lot which is to be  Salaries expense - salaries
used in the future. Land is not earned by the employees
depreciable  Rent expense - rentals that
 Building - structured owned by have been used up
business  Utilities expense - cost of
 Accumulated depreciation - utilities used
building - total amount of  Supplies expense - cost of
depreciation expense supplies that have been used
 Equipment - machinery,  Bad debt expense - estimated
transportation equipment, losses from uncollectible acct
furniture and fixtures, etc. rec
 Accumulated depreciation -  Depreciation expense -
equipment - total amount of portion of the cost of a
depreciation expense depreciable asset
 Liabilities  Advertising expense - cost of
 Accounts payable - promotional marketing activities
obligations supported by oral or  Insurance expense - cost of
informal promises to pay to insurance
debtor  Taxes and licenses - cost of
 Notes payable - obligations business and local taxes
supported by written or formal required by the government for
promises to pay to debtor the conduct of the business
 Interest payable - interest  Transportation and travel
incurred but not yet paid expense
 Salaries payable - already a) Transportation expense -
earned by employees but not necessary and ordinary
yet paid cost of employees from
 Utilities payable - utilities one workplace to another,
already used but not yet paid which is reimbursable
 Unearned income - income b) Travel expense - costs
collected but not yet earned incurred when travelling on
 Equity business trips, e.g. out of
 Owner’s capital (or Owner’s town seminars
equity) - residual amount after  Interest expense - cost of
deducting asste from liability borrowing money.
 Owner’s drawings - temporary  Miscellaneous expense -
withdrawals of the owner during various small expenditures
the period  Losses - may or may not arise
2. Income Statement Accounts from the ordinary cost of
 Income business. May arise from:
 Service fee - earned from a) Sales of assets, at a sale
rendering services price that is less than the
 Sales - earned from the sale of carrying amount
goods b) Decrease in the value of
 Interest income - earned from assetss due to destruction
interest-bearing receivables
 Gains - income earned from
the sale of assets
CHAPTER 5: BOOKS OF ACCOUNTS Controlling account - group of
AND DOUBLE-ENTRY SYSTEM accounts with similar nature

The Books of Accounts Format of the Books of Accounts

1. Journal - book of original entries, Naa sa libro, kapoy type giatay.

acct record where business transactions Page 141-14
are first recorded. Recording process is
called journalizing. Double-entry system
- each transaction are recorded into two
Types of Journals parts: debit and credit. This is in order
for the accounting equation to be
1) Special journal - record balanced at all times. If its is not
transactions with similar nature. balanced, there is an error. Dr.= left;
SJ simplify the recording Cr.=right.
process, thus providing an
efficient way to record. Concepts of Duality and Equilibrium
Examples:
a) Sales journal - record sales a. Concept of duality - two-fold effect.
on account A value received and a value parted
b) Purchase journal - record with.
purchases of inventory on b. Concept of equilibrium - each
account transaction is recorded om terms of
c) Cash receipts journal - all equal debit and credit. For every
transactions involving peso debited, there is a peso
receipts of cash credited.
d) Cash disbursements
journal - all transactions Expanded basic accounting equation
involving payment of cash
Asset = Liabilities + Equity + Income
2) General journal - all other - Expenses
transactions that cannot be
recorded in the special journal Normal balance
are recorded here. (ex.:
adjusting journals, correcting Debit Credit
entries) Asset + Expenses = Liability + Equity
- If there is no special journal, all + Income
transactions will be recorded here.
Rules of Debits and Credits
2. Ledger - systematic compilation of a - debit with normal debit balance =
group of accounts. Used to classify the increase; credit with normal debit
effects of transactions in the accounts. balance = decrease
Also called “book of secondary entries” - credit with normal credit balance =
or “book of final entries”. Process is increase; debit with normal credit
called posting. balance = decrease.

Kinds of ledgers Type of Normal Debit Credit

account balance
1) General ledger - all accounts Asset Debit Increase Decrease
Liability Credit Decrease Increase
appearing in the trial balance Equity Credit Decrease Increase
2) Subsidiary ledger - Income Credit Decrease Increase
breakdown of the balances of Expense Debit Increase Decrease
controlling accounts.
 An account takes the form of “T-
accounts”. Left side = debit, right
side = credit

Ending balance of an account

 Debits to asset and expense
account should be greater than or
equal to credits. Same goes to
credits.
 The difference between the total
debit and credit represents the
ending balance of that account.
Zero is the minimum ending
balance.
 If an asset or expense results to
an ending balance with credit, it is
abnormal. It means an error has
been committed.

Contra and Adjunct Accounts

 Contra accounts - deduction to

related accounts (ex.: accumulated
depreciation, allowance for bad
debts)
 Adjunct accounts - addition to
related accounts
 CHAPTER 6: BUSINESS 10. Reversing entries - usually made
TRANSACTIONS AND THEIR at the beginning of the next accounting
ANALYSIS period to simplify recording of certain
transactions in that period

Identifying and analyzing

The Accounting Cycle transactions and events
- steps used to record transactions and - Accountable events - transaction that
prepare financial statements. Identifying, has an effect on the accounts
recording, and communicating - normally identified from source
documents
Steps in Accounting cycle
Source documents come in various
1. Identifying and analyzing - forms which include, but not limited,
accountant gathers information from to the following:
source document and determines effect
of the transactions a) Sales invoice - used for sales of
goods
2. Journalizing - identified events are b) Official receipts - used for
recorded in the journals. rendering services
c) Purchase order - document issued
3. Posting - info from the journal are indicating the types, quantities, and
transferred to the ledger agreed prices for products and
services buyer intends to purchase.
4. Unadjusted trial balance - balances d) Delivery receipt - document signed
of the general ledger accounts are by the receiver acknowledging the
proved to be equal debit and credit. receipt of goods
Serve as basis for adjusting entries e) Bank deposit slip - evidences a
deposit to a bank account
5. Adjusting entries - accounts are f) Bank statement - report issued by
updated as of the reporting date on an the bank (on monthly basis) that
accrual basis by recording accruals, and shows deposits and withdrawals
other events often not signaled by new during the period.
documents g) Statement of account - report
business sends to its customer
6. Adjusted trial balance (worksheet listing the transactions with the
preparation) - equality of debits and customer during the period; notice
credits are rechecked after adjustments of billing.
are made. Basis for preparation of
financial statements Types of events

7. Financial statements - the 1. External events - involve the

information processed is communicated business and another external party
to users 2. Internal events - do not involve an
external party.
8. Closing entries - journalizing and
posting closing entries and ruling the Journalizing
ledger. Temporary accounts are closed - second step is to record it in the
and the resulting profit or loss is journal by means of a journal entry
transferred to an equity account
Journal entry
9. Post-closing trial balance - equality Accounts to be debited ₱
of debits and credits are rechecked after Date Accounts to be Cr. ₱
closing entries Short description
Parts of a journal entry

1. Date - journal entries are recorded

chronologically

2. Account titles and amounts to be

debited and credited - double-entry
system

3. Short description of the

transaction - provided for future
reference

Simple and compound journal entries

a. Simple journal entry - contains a

single debit and single credit

b. Compound journal entry -

contains two or more debits or
credits
 CHAPTER 7: POSTING TO LEDGER - can reveal errors that caused total
debits and total credits to be unequal.
 Transplacement error (slide error) -
Posting committed when number of digits in
- third step in accounting cycle; process an amount is incorrectly increased
of transferring data from the journal to or decreased (ex.: 1,000 was
the appropriate accounts in the ledger. recorded as 10,000)
 Purpose - to classify effects of  Transposition error - when digits in
transactions on specific A, L, E, I, an amount are interchanged (ex.:
and EX in order to provide more 12,345 is recorded as 13,245)
meaningful information
Errors NOT revealed by trial balance
Step 2: Journal entry - cannot reveal errors that does not
Mar. 1, Salaries exp. 30k cause the total dr and cr to be unequal
20x21 Cash 30k (ex.: using wrong accounts with the
To record salaries same normal balance as the correct
expense one).
Step 3: Posting
Jisoo Laundry Shop
Unadjusted Trial Balance
Cash January 3, 20x1
Dr. Cr.
30k Mar. Accounts Debit Credit
1 Cash ₱192,500
Acc. Rec. 10,000
Salaries expense Pre. Supplies 20,000
. Dr. Cr. Equip. - 200,000
Mar. 1 30k Washing
Jisoo, Capital 100,000
Service fees ₱500,000
Preparing the Unadjusted Trial Salaries exp. 25,000
Balance Totals ₱525,000 ₱525,000

Trial Balance - list of general ledger

accounts and their balances. Prepared Normal Balances
to check the equality of total debits and
total credits. ASSET, EXPENSE = DEBIT
LIABILITY, EQUITY, INCOME =
Types of Trial Balance CREDIT

a. Unadjusted trial balance - Order of Account titles in trial

prepared before adjusting entries balance
are made. Adjusting entries cannot
be prepared if debits and credits in ALEIE
unadjusted are not equal.
b. Adjusted trial balance - prepared 1. Asset
after adjusting entries but before 2. Liabilty
FSs are prepared. 3. Equity
c. Post-closing trial balance - 4. Income
prepared after the closing process. 5. Expense

Errors revealed by trial balance

 CHAPTER 8: ADJUSTING ENTRIES Case #2: Accrual of income - Rent
income
Adjusting entries
- entries made to prior to the preparation KJS Co. Rents out its building monthly
of FS to update certain accounts for ₱50,000. As of Dec. 31, 20x1, the
tenant has not yet paid for the month of
Purpose of adjusting entries December
1. Take up unrecorded income and
expenses of the period AJE:
2. Split mixed accounts into real and
nominal accounts Dec. Rent receivable 50k
31, Rent income 50k
Accrual of Income and Expenses 20x1 To accrue rent income

Accrual / accrue - recognize an income Case #3: Accrual of expense -

that is already earned but not yet Interest expense
collected; expense that is already
incurred but not yet paid. KJS Co issued a 12% ₱100,000 one-
year notes payable on Oct. 1, 2021.
Case #1: Accrual of Income and Due on Oct. 1, 2022.
Expenses
Use interest income (expense)
KJS Co. Received a 12%, ₱100,000, accrued formula (Case #1)
one-year note receivable on Apr. 1,
20x1. Note is due on Apr. 1, 20x2. Interest expense = 3,000

Interest income accrued formula: AJE:

I = P x r x t (divided by 12 months) Dec. 31, Interest expense 3k

2021 Interest payable 3k
I = interest = 12% To accrue interest expense
P = principal = 100,000
T = time period = 9 months (Apr. - Case #4: Accrual of expense -
Dec.) / 12 months Utilities expense

Interest = 9,000 The cost electricity used for the month

of Dec 2021 is ₱4,000. The bill was
Adjusting journal entry: received and paid Jan. 2022.

Dec. Interest receivable 9k AJE:

31, Interest income Dec. 31, Utilities expense 4k
20x1 To record interest received 9k 2021 Utilities payable 4k
over the period
To accrue unpaid utilities
Case #5: Accrual of expense -
Salaries expense The Concept of Immediate
Recognition
Employees earned total of ₱100,000 in
Dec 2021. However, salaries were paid - cost that does not have future
in Jan 2022. economic benefits are immediately
recognized as an expense.
AJE:
Expense recognition principles
Dec. Salaries expense 100k
31, Salaries 100k 1. Matching - costs that are directly
2021 payable associated with the earning of revenue
To accrue interest expense are recognized as expenses in the
same period.
Recognition of Depreciation expense - Application - cost inventory is initially
recognized as asset and charged as
The Concept of Systematic and expense (ex: COGS) when inventory is
rational allocation - costs that provide sold.
economic benefits over several
accounting periods but cannot be 2. Systematic & rational allocation -
directly associated with earning revenue costs that are not directly associated
are recognized as expense with the earning are recognized as
expense over the periods the benefits
Case #1: Depreciation expense are consumed
- Application - Cost of equipment is
On Jan 1, 2021, KJS Co acquired initially recognized as asset and
equipment for ₱20,000. Equipment is charged as expense (ex.: Depreciation)
expected to be used for 4 years. over the periods the equipment is used.

Accumulated depreciation expense 3. Immediate recognition - costs that

formula: do not provide future economic benefits
are immediately recognized as
Cost (20,000) ÷ Useful life (4 years) = expenses.
5,000 Annual depreciation expense - Application - account receivable that
becomes doubtful of collection is
AJE: immediately recognized as expense.
Dec. Depreciation expense 5k
31, Accumulated 5k Real, Nominal, and Mixed Accounts
2021 depreciation
To record the dep expense over the
period
1. Real accounts (permanent
accounts) - not closed at the end of the
Recognition of Bad Expense accounting period. Included in balance
sheet accounts, except drawings.
Case #1: Adjusting entries - Bad
2. Nominal accounts (temporary
debts expense
accounts) - closed at the end of the
KJS Co has total accounts receivable of accounting period. Included in income
statement accounts including drawing,
₱2,000 on Dec 31, 2021. Estimated of
₱500 is doubtful accounts clearing, and suspense accounts.
 Clearing accounts - used to
temporarily store amounts that will
Dec. Bad debts expense 500
be eventually be transferred to
31, Allowance for bad 500
another account
2021 debts
To record the bad debts for the period  Suspense accounts - used to
temporarily store discrepancies in
 the accounts pending their analysis 2. Expense method - prepayments are
and permanent classification. initially debited to expense accounts.
Unused portion is recognized as asset,
3. Mixed accounts - both real and while the incurred remains expense.
nominal. Subject to adjustments.
Illustration: Asset VS Expense
Methods of Initial Recording of KJS Co prepays one-year insurance for
Income and Expenses ₱120,000 on Oct. 1, 2021.

 Income a. Incurred portion - the used portion

(Oct - Dec = 3 months)
1. Liability method - advanced
collection of income are initially credited (120,000 x 3 months) ÷ 12 months =
to a liability method. Earned portion is 30,000
income, unearned portion is liability.
2. Income method - collection of b. Not yet incurred portion - remaining
income is are initially recorded to an months (Jan - Oct 2022 = 9 months)
income account. Unearned portion is
recorded as liability, while earned 120,000 - 30,000 = 90,000 or (120,000
portion remains as income. x 9 months) ÷ 12 months

Illustration: Liability vs Income AJE:

ASSET METHOD
KJS Co rents it building. On Apr. 1,2021, Dec. Insurance expense 30k
business receives one-year rent in 31, Prepaid insurance 30k
advance of ₱120,000 from one of its 2021 To recognize expired portion
tenants. Rent per month is ₱10,000.
EXPENSE METHOD
a. Earned portion - recognized as Dec. Prepaid insurance 30k
income = 9 months (Apr - Dec) x 31, Insurance expense 30k
10,000 monthly rent = 90,000 2021 To recognize used portion
b. Unearned portion - recognized as
liability = 120,000 (rent paid
advance) - 90,000 (used portion) =
30,000

AJE:
LIABILITY METHOD
Dec. Unearned rent 90k
31, Rent income 90k
2021 To recognize used portion of the rent

INCOME METHOD
Dec. Rent income 90k
31, Unearned rent 90k
2021 To recognize unearned portion of the
rent

 Expense

1. Asset method - prepayments of

expenses are initially debited to asset
accounts. The incurred (used-up)
portion is expense, while the unused
remains as asset.