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COURSE FAR0 - Financial Accounting and Reporting with Conceptual

Framework and Accounting Standards
DEVELOPER AND HIS Rhene Gomez Payabyab is a Certified Public Accountant and a Licensed
BACKGROUND Real – Estate Broker. He is an Associate Professor at the TSU – College of
Business and Accountancy and is currently the Managing Partner of Pascual,
Feliciano & Co., CPAs, one of the premiere professional accounting firms in
the region. He has more than 2 decades of experience in the education and
public practice fields of the accountancy profession.
COURSE DESCRIPTION This course involves an in-depth study of the principles related to the
definition, recognition, measurement, classification and presentation of
current assets accounts and related transactions. It covers basic and special
topics related to the accounting for cash, receivables and inventory pursuant
to pertinent financial reporting standards and interpretations. It also covers a
review of the accounting cycle and a brief discussion of the new conceptual
framework for financial reporting and relevant GAAPs involving the
accounting for cash, receivables and inventory.
COURSE OUTLINE 1. Review of the Accounting Cycle
2. New Conceptual Framework for Financial Reporting
3. Cash and Cash Equivalents
4. Bank Reconciliation
5. Accounts Receivable
6. Notes Receivable
7. Loans Receivable
8. Receivable Financing
9. Inventories – General Concepts
10. Inventory Costing
11. Lower of Cost and Net Realizable Value
12. Inventory Estimation
CHAPTER # 1
TITLE Review of the Accounting Cycle
RATIONALE This chapter intends to revisit the steps in the accounting cycle and pertinent
rules and principles related to the preparation and presentation of financial
statements. This is expected to assist the students to better comprehend a
more detailed discussions of the line items and accounts that comprise the
financial statements.
INSTRUCTION TO THE The User of this Module is expected to:
USERS 1. Take the pretest to gauge his initial understanding of the topic.
2. Understand the learning objectives of the chapter in relation to the topic.
3. Read and understand the concepts and illustrations covered in this
chapter module.
4. Apply the concepts learned by answering the exercises provided under
the “closure activities” section of this module.
5. Read the summary of principles provided under the “synthesis/
generalization” section of this module.
6. Answer the questions under the “evaluation” section of this module to
check your understanding and appreciation of the topics covered under
this chapter module.
7. Take note of the reading assignments for the immediately succeeding
topic to be covered.
8. Use the reference materials for further exercises and enrichment of
theoretical foundation on the topics covered under this chapter module.

PRE-TEST Answer the following questions:

1. Define the concept of business and identify the different forms of
organizations and types of business operations.
2. Define Accounting.

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3. Explain the need for Generally Accepted Accounting Principles.

4. What are the steps in the accounting cycle?
5. Define a transaction.
6. When is an event considered accountable?
7. What is a journal? Enumerate and explain the types of journals.
8. What are the rules of debit and credit?
9. What is a ledger? Enumerate and explain the types of ledgers.
10. What is a trial balance?
11. What are year-end adjusting entries? Explain and illustrate each type of
adjustment.
12. What is a working paper?
13. What comprises the basic set of financial statements?
14. What are closing entries?
15. Which accounts are covered by the preparation of closing entries?
16. What is a post-closing trial balance
17. What are reversing entries?
18. Which adjustments are covered by reversing entries?
19. Which among the steps in the accounting cycle are mandatory?
20. Which step in the accounting cycle is considered optional?

LEARNING OBJECTIVES 1. Understand the concept of a business undertaking and be able to identify
the forms of organizations and types of business operations.
2. Know the definition of accounting and appreciate its relevance to the
decision – making function of the management.
3. Understand the concept and importance of the Generally Accepted
Accounting Principles.
4. Understand the complete accounting cycle.
5. Demonstrate mastery of the concepts and principles related to the steps
in the accounting cycle as applied to independent problems and
comprehensive cases.

CONTENT PREPARATORY ACTIVITIES

Definition of Business
The term "business" refers to the organized efforts and activities of individuals to produce and sell goods and
services either to generate a profit, fulfill a charitable mission or further a social cause.- investopedia.com
(modified definition)

Forms of Business Organizations

Sole Proprietorship – a form of business organization that is owned and “usually managed” by an individual
known as the “Sole Proprietor”

Partnership – a contract between two or more persons who bind themselves to contribute money, property, or
industry to a common fund, with the intention of dividing the profits among themselves.

Corporation - an artificial being created by operation of law, having the right of succession and the powers,
attributes, and properties expressly authorized by law or incidental to its existence

Types of Business Operations

Service – offers services (professional or non-professional) to clients in exchange for a fee

Merchandising – buys and resells goods without changing its substance

Manufacturing – buys raw materials and converts them, through the application of labor and incurrence of
overhead, into finished products for sale

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Notable Definitions of Accounting

ACCOUNTING is a SERVICE ACTIVITY. Its function is to provide QUANTITATIVE INFORMATION,

primarily financial in nature, about ECONOMIC ENTITIES, that is intended to be useful in making
ECONOMIC DECISIONS.

- Accounting Standards Council (ASC)

ACCOUNTING is the ART of RECORDING, CLASSIFYING, and SUMMARIZING in a significant manner

and IN TERMS OF MONEY, TRANSACTIONS and EVENTS which are in and part at least of a FINANCIAL
character INTERPRETING the results thereof.

- American Institute of Certified Public Accountants (AICPA)

ACCOUNTING is the PROCESS of IDENTIFYING, MEASURING and COMMUNICATING economic

INFORMATION to permit INFORMED JUDGMENT and DECISIONS by USERS of the information.

- American Accounting Association (AAA)

ACCOUNTING is the LANGUAGE of BUSINESS.

- Warren Buffet (Chairman/CEO of Berkshire Hathaway)

Practice Fields/ Areas of the Accountancy Profession

Private Accounting
Government Accounting
Public Accounting
Education/ Academe

Generally Accepted Accounting Principles (GAAPs)

GAAPS represent rules, procedures, practice and standards followed in the preparation and presentation of
financial statements

PHILIPPINE FINANCIAL REPORTING STANDARDS (GAAP in the Philippines) include:

1. Philippine Financial Reporting Standards (PFRS) / International Financial Reporting Standards (IFRS)
2. Philippine Accounting Standards (PAS) / International Accounting Standards (IAS)
3. Philippine Interpretations based on the interpretations made by the International Financial Reporting
Interpretations Committee (IFRIC) and Standing Interpretations Committee (SIC)

Business Transactions
A transaction is an exchange of values (money, goods, services) between two (2) or more parties expressed in
terms of money.

When is an event ACCOUNTABLE?

- If it has an effect on assets, liabilities and equity

The Accounting Cycle

1. Analysis of business transactions
2. Journalizing
3. Posting
4. Preparation of the trial balance
5. Preparation of the working paper with adjustments
6. Preparation of the financial statements
7. Journalizing and posting of adjusting journal entries
8. Preparation and posting of closing journal entries
9. Preparation of the post – closing trial balance
10. Journalizing and posting of reversing journal entries

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(Step No. 1) ANALYSIS OF BUSINESS TRANSACTIONS

Business documents
a. Official receipts – evidence of collection/ sale of service
b. Sales invoice – evidence of sale of goods
c. Check vouchers – authorization for the preparation and eventual payment of checks
d. Checks – evidence of payment

Dual – effect of every transaction

Value received and value given

Effects on the accounting elements

The Basic Accounting Equation (BAE)

The Financial Transaction Worksheet

Effects on Remarks on Transactions
Transactions
Assets Liabilities Capital Affecting Capital
Cash investment by the owner + NE + Investment
Noncash investment by the owner + NE + Investment
Purchase of noncash asset using the cash of the business + (-) NE NE
Purchase of noncash asset using the personal cash of the owner + NE + Investment
Purchase of noncash asset on account + + NE
Payment of business liabilities using the cash of the business - - NE
Payment of business liabilities using the personal cash of the owner NE - + Investment
Payment of business liabilities through the creation of another business liability NE + (-) NE
Payment of personal liabilities using the cash of the business - NE - Withdrawal
Withdrawal of business assets for personal use by the owner - NE - Withdrawal
Rendered services to clients for cash + NE + Income/revenues
Rendered services to clients on account + NE + Income/revenues
Collection of customers' account + (-) NE NE
Incurrence of expense for cash - NE - Expenses
Incurrence of expense on account NE + - Expenses
Payment of suppliers' account - - NE

(Step No. 2) JOURNALIZING

– chronological recording of transactions

Journal – book of original entry

Types of Journal
GENERAL JOURNAL - 2 column (debit and credit) journal
SPECIAL JOURNAL
Cash receipts journal – collections
Cash disbursements journal - disbursements
Sales journal – sales on account (AR)

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Purchases journal – purchase on account (AP)

*All other transactions shall be recorded in the General Journal (e.g. sales and purchases supported by a
promissory note; sales and purchase returns; noncash investment of the owner; adjusting entries, closing entries
and reversing entries

General Journal
DATE PARTICULARS PR DEBIT CREDIT
08.18.2020 Cash P 100,000
Payabyab, Capital P 100,000

Rules of DEBIT and CREDIT

Accounting Element Normal Side Debit Credit
ASSETS Debit INC DEC
LIABILITIES Credit DEC INC
CAPITAL Credit DEC INC
DRAWINGS/PERSONAL Debit INC DEC
INCOME Credit DEC INC
EXPENSE Debit INC DEC

(Step No. 3) POSTING

– classifying/ grouping of journal entries

Ledger – book of final entry

Types of Journal
GENERAL LEDGER – ledger for control accounts
SUBSIDIARY LEDGER – ledger for sub-accounts supporting the control accounts (Accounts receivable
subsidiary ledgers; Accounts payable subsidiary ledgers)

Illustration: Posting of the effects of entries in the journal to the affected general ledgers.

Illustration: Posting of the effects of entries in the journal to the affected general ledgers and subsidiary
ledgers.

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(Step No. 4) PREPARATION OF THE UNADJUSTED TRIAL BALANCE

- List of ledger accounts with open balances
- To check the equality of debits and credits
- Ledger accounts with open balances are listed in the following order:
Assets (including contra-assets)
Liabilities
Capital
Drawing/ Personal
Income
Expense

(Step No. 5) PREPARATION OF THE WORKING PAPER WITH ADJUSTMENTS

The WORKING PAPER is a financial tool that facilitates the preparation of financial statements.

Types of Adjustments
1. Accruals (Accrued income/ Accrued expenses)
2. Prepayments (Asset Method / Expense Method)
3. Unearned Income (Liability Method/ Income Method
4. Doubtful Accounts
5. Depreciation
6. Ending inventories (for merchandising and manufacturing concerns)

ACCRUALS
Accrued income – items already earned but remain uncollected as at end of the accounting period

Ex. (1) Uncollected fees on services already rendered; (2) Uncollected accounts from customers on goods already
delivered; (3) Uncollected rent on premises or assets already occupied or used by the lessee

Pro-forma journal entry:

Dr. Receivable (Asset) xx
Cr. Income xx

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Explanation:
1. A receivable account is debited since the item remain uncollected as at end of the accounting period.
2. An income account is credited since the item has already been earned (service has been rendered/ goods have
been delivered)

Illustration No. 1 – As at end of the accounting period, BILANG Accounting Services, owned by Mrs. Bi Lang,
CPA, has an uncollected account from a client amounting to P 100,000 for services rendered during the period.
No entry was taken up at the time the service was rendered.

Adjusting journal entry:

Accounts receivable P 100,000
Professional fees P 100,000

Illustration No. 2 – Gawa-Lunes-Sira-Martes Repair Shop, owned by Mr. Bu Ting- Ting, billed Ms. Sheera Hin
for services previously rendered amounting to P 50,000. No entry was made at the time the service was rendered.

Adjusting journal entry:

Accounts receivable P 50,000
Service income P 50,000

Illustration No. 3 – As at end of the period, Bentah Company has an outstanding uncollected account on goods
sold to Ms. Sasa Lee amounting to P 50,000. No entry was made at the time of sale.

Adjusting journal entry:

Accounts receivable P 50,000
Sales P 50,000

Illustration No. 4 – As at end of the period, NAGPAPA-OPPA Company has an outstanding uncollected rent of
P 20,000 from UMO-OPPA Company which already occupied the premises during the period.

Adjusting journal entry:

Rent receivable P 20,000
Rent income P 20,000

Accrued expense – items already incurred (used) but remain unpaid as at end of the accounting period

Examples: (1) Unpaid fees on services already incurred by the business; (2) Unpaid salaries of employees (3)
Unpaid rent on premises or assets already occupied or used by the lessee

Pro-forma journal entry:

Dr. Expense xx
Cr. Payable (Liability) xx

Explanation:
1. An expense account is debited since the item has already been incurred during the accounting period.
2. A payable account is credited since the item remains unpaid as at the end of the accounting period.

Illustration No. 1 – The business has unpaid salaries amounting to P 75,000 as at end of the period for service
already provided by the employees during the accounting period.

Adjusting journal entry:

Salaries expense P 75,000
Salaries payable P 75,000

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Illustration No. 2 – The business has unpaid rent amounting to P 15,000 as at end of the period for the building
space it occupied during the period.

Adjusting journal entry:

Rent expense P 15,000
Rent payable P 15,000

Illustration No. 3 – The business has unpaid electricity costs amounting to P 10,000 as at end of the period for the
electric consumption during the period.

Adjusting journal entry:

Utilities expense P 10,000
Utilities payable P 10,000

Illustration No. 4 – The business has unpaid interest of P 5,000 as at end of the period on the outstanding note
payable which it issued to its creditors during the period.

Adjusting journal entry:

Interest expense P 5,000
Interest payable P 5,000

PREPAYMENTS (PREPAID EXPENSE) – items already paid but not yet incurred as at end of the period
Examples. (1) Unused supplies; (2) Prepaid rent; (3) Prepaid advertising

METHODS OF ACCOUNTING FOR PREPAYMENTS

1. Expense Method
2. Asset Method

PREPAYMENTS – Expense Method of Accounting

Under this method, an EXPENSE account is debited at the time of payment.

Pro-forma Journal Entries:

Entry to record the prepayment at the time of payment:
Expense xx
Cash xx

Entry to adjust for the unused/ unexpired portion of the prepayment as at end of the period:
Asset (prepaid or unused account) xx
Expense xx

Illustration: On October 01, 2020, the business paid rentals of P 120,000 covering 1 – year rent which runs from
October 01, 2020 to October 01, 2021. The accounting year of the business ends every December 31.

Entry made by the business on October 01, 2020 (for illustration purposes only, not part of the actual adjusting
entry at year-end):
Rent expense P 120,000
Cash P 120,000

Adjusting journal entry as at December 31, 2020

Prepaid rent P 90,000
Rent expense P 90,000

Explanation of the adjustment:

Prior to the preparation of the adjusting entry, the amount of rent expense for the year 2020 is overstated since the
entire P 120,000 was recorded by the business as RENT EXPENSE on October 01, 2020 (time of payment). But
as at cut-off date for reporting (December 31, 2020), only 3 months of rent have been incurred by the business,

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hence, the RENT EXPENSE should only amount to P30,000 for the period ended December 31, 2020 (P120,000
x 3/12).

Accordingly, RENT EXPENSE for the year must be reduced by P 90,000 and a PREPAID RENT (asset) account
must be established equal to P 90,000, the unused portion of the prepayment as at year – end.

NOTE:
1. The adjusting entry involving prepayments accounted for under the EXPENSE METHOD includes a DEBIT
to an ASSET account and a CREDIT to an EXPENSE account equal to the UNEXPIRED (UNUSED) portion of
the prepayment.

2. Note also that the adjustment involves only two accounts, ASSET and EXPENSE accounts. The DEBIT in the
adjusting entry is always opposite the method. Hence, if the method used is EXPENSE method, the DEBIT in the
entry is always an ASSET account. Needless to say, the CREDIT is the same as the method (EXPENSE account)
used.

PREPAYMENTS – Asset Method of Accounting

Under this method, an ASSET account is debited at the time of payment.

Pro-forma Journal Entries:

Entry to record the prepayment at the time of payment:
Asset (prepaid or unused account) xx
Cash xx
Entry to adjust for the used/ expired portion of the prepayment as at end of the period:
Expense xx
Asset (prepaid or unused account) xx
Illustration: On October 01, 2020, the business paid rentals of P 120,000 covering 1 – year rent which runs from
October 01, 2020 to October 01, 2021. The accounting year of the business ends every December 31.

Entry made by the business on October 01, 2020 (for illustration purposes only, not part of the actual adjusting
entry at year-end):
Prepaid rent P 120,000
Cash P 120,000

Adjusting journal entry as at December 31, 2020

Rent expense P 30,000
Prepaid rent P 30,000

Explanation of the adjustment:

Prior to the preparation of the adjusting entry, the amount of Prepaid rent (asset) for the year 2020 is overstated
since the entire P120,000 was recorded by the business as PREPAID RENT on October 01, 2020 (time of
payment). But as at cut-off date for reporting (December 31, 2020), 3 months of rent have already been incurred
by the business, hence, RENT EXPENSE equal to P30,000 for the period ended December 31, 2020 (P120,000 x
3/12) must be recognized.

Accordingly, PREPAID RENT as at year-end must be reduced by P30,000 and a RENT EXPENSE account must
be established equal to P30,000, the used portion of the prepayment as at year – end.

NOTE:
1. The adjusting entry involving prepayments accounted for under the ASSET METHOD includes a DEBIT to an
EXPENSE account and a CREDIT to an ASSET (prepaid/unused) account equal to the EXPIRED (USED) portion
of the prepayment.

2. Note also that the adjustment involves only two accounts, ASSET and EXPENSE accounts. The DEBIT in the
adjusting entry is always opposite the method. Hence, if the method used is ASSET method, the DEBIT in the
entry is always an EXPENSE account. Needless to say, the CREDIT is the same as the method (ASSET account)
used.

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UNEARNED INCOME (DEFERRED INCOME) – items already COLLECTED but remain UNEARNED as
at end of the period

Examples: (1) Unearned rent income; (2) Unearned interest income; (3) Advance collections from customers for
the future delivery of goods or services

METHODS OF ACCOUNTING FOR UNEARNED INCOME

1. Income Method
2. Liability Method

UNEARNED INCOME – Income Method of Accounting

Under this method, an INCOME account is credited at the time of collection.

Pro-forma Journal Entries:

Entry to record the advance collection:
Cash xx
Income xx
Entry to adjust for the unearned portion of the advance collection as at end of the period:
Income xx
Liability (Unearned income) xx

Illustration: On October 01, 2020, the business received rentals of P 120,000 covering 1 – year rent which runs
from October 01, 2020 to October 01, 2021. The accounting year of the business ends every December 31.

Entry made by the business on October 01, 2020 (for illustration purposes only, not part of the actual adjusting
entry at year-end):
Cash P 120,000
Rent income P 120,000

Adjusting journal entry as at December 31, 2020

Rent income P 90,000
Unearned rent P 90,000

Explanation of the adjustment:

Prior to the preparation of the adjusting entry, the amount of RENT INCOME for the year 2020 is overstated since
the entire P 120,000 was recorded by the business as RENT INCOME on October 01, 2020 (time of payment).
But as at cut-off date for reporting (December 31, 2020), only 3 months of rent have been EARNED by the
business, hence, the RENT INCOME should only amount to P30,000 for the period ended December 31, 2020
(P120,000 x 3/12).

Accordingly, RENT INCOME for the year must be reduced by P90,000 and an UNEARNED RENT (liability)
account must be established equal to the P90,000, the UNEARNED portion of the advance collection as at year –
end.

NOTE:
1. The adjusting entry involving unearned income accounted for under the INCOME METHOD includes a DEBIT
to an INCOME account and a CREDIT to a LIABILITY (unearned income) account equal to the UNEARNED
portion of the advance collection.

2. Note also that the adjustment involves only two accounts, LIABILITY and INCOME accounts. The DEBIT in
the adjusting entry is always the same as the method. Hence, if the method used is INCOME method, the DEBIT
in the entry is always an INCOME account. Needless to say, the CREDIT is the opposite of the method
(LIABILITY account) used.

UNEARNED INCOME – Liability Method of Accounting

Under this method, a LIABILITY account is credited at the time of collection.

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Pro-forma Journal Entries:

Entry to record the advance collection:
Cash xx
Liability (Unearned income) xx
Entry to adjust for the earned portion of the advance collection as at end of the period:
Liability (Unearned income) xx
Income xx

Illustration: On October 01, 2020, the business received rentals of P 120,000 covering 1 – year rent which runs
from October 01, 2020 to October 01, 2021. The accounting year of the business ends every December 31.

Entry made by the business on October 01, 2020 (for illustration purposes only, not part of the actual adjusting
entry at year-end):
Cash P 120,000
Unearned rent P 120,000
Adjusting journal entry as at December 31, 2020
Unearned rent P 30,000
Rent income P 30,000

Explanation of the adjustment:

Prior to the preparation of the adjusting entry, the amount of UNEARNED RENT (liability) for the year 2020 is
overstated since the entire P120,000 was recorded by the business as UNEARNED RENT on October 01, 2020
(time of payment). But as at cut-off date for reporting (December 31, 2020), 3 months of rent have already been
EARNED by the business, hence, RENT INCOME of P30,000 for the period ended December 31, 2020 (P120,000
x 3/12) must be recognized.
Accordingly, UNEARNED RENT (liability) must be reduced by P30,000 and a RENT INCOME account must
be established equal to the P30,000, the EARNED portion of the advance collection as at year – end.

NOTE:
1. The adjusting entry involving unearned income accounted for under the LIABILITY METHOD includes a
DEBIT to a LIABILITY (unearned) account and a CREDIT to an INCOME account equal to the EARNED portion
of the advance collection.

2. Note also that the adjustment involves only two accounts, LIABILITY and INCOME accounts. The DEBIT in
the adjusting entry is always the same as the method. Hence, if the method used is LIABILITY method, the DEBIT
in the entry is always a LIABILITY (unearned) account. Needless to say, the CREDIT is the opposite of the
method (INCOME account) used.

DOUBTFUL ACCOUNTS
- refer to accounts that are estimated to be uncollectible as at the end of the accounting period

Methods of accounting for doubtful accounts

1. Allowance method (GAAP)
2. Direct write – off method (BIR Approach)

Methods of estimating doubtful accounts

1. % of Income method
2. % of Accounts Receivable method
3. Aging of Accounts Receivable method

Methods of Accounting for Doubtful Accounts

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Methods of Estimating Doubtful Accounts

1. % of Income method
Provision for doubtful accounts is estimated as a certain per cent of the income generated during the accounting
period.

Pro-forma computations:
Income base (e.g. total service income, service income on account) xx
X rate of application (based on the experience of the Company) x
Doubtful accounts expense xx
Allowance for doubtful accounts, unadjusted (start of the year) xx
Doubtful accounts expense for the year xx
Recoveries of previously written off accounts xx
Accounts written off during the year (xx)
Allowance for doubtful accounts, adjusted xx

Accounts receivable as at end of the accounting period xx

Allowance for doubtful accounts, adjusted (xx)
Net realizable value of accounts receivable xx

Illustrative Problem: As at end of the year, the following balances were provided by the Company:
Accounts receivable balance, December 31 100,000
Service income for the year 1,000,000
Allowance for doubtful accounts, January 01 6,000
Provision rate for doubtful accounts – 1% of service income
Accounts written off as worthless during the year 4,000
Recoveries of accounts previously written off 2,500

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Required:
1. Doubtful accounts expense for the year
2. Allowance for doubtful accounts, adjusted as at end of the year
3. Net realizable value of accounts receivable as at end of the year
4. Entry to record the accounts written off during the year
5. Entry to record the accounts recovered during the year
6. Journal entry to record the provision for doubtful accounts

2. % of Accounts Receivable (AR) method

The allowance for doubtful accounts is estimated as a certain per cent of the outstanding balance of accounts
receivable as at end of the accounting period.

Pro-forma computations:
Accounts receivable balance as at end of the period xx
X rate of application (based on the experience of the Company) x
Allowance for doubtful accounts, adjusted xx
Allowance for doubtful accounts, adjusted xx
Accounts written off during the year xx
Recoveries of previously written off accounts (xx)
Allowance for doubtful accounts, unadjusted (start of the year) (xx)
Doubtful accounts expense for the year xx

Accounts receivable as at end of the accounting period xx

Allowance for doubtful accounts, adjusted (xx)
Net realizable value of accounts receivable xx

Illustrative Problem: As at end of the year, the following balances were provided by the Company:
Accounts receivable balance, December 31 100,000
Service income for the year 1,000,000
Allowance for doubtful accounts, January 01 6,000
Estimated rate of uncollectibility – 10% of service income
Accounts written off as worthless during the year 4,000
Recoveries of accounts previously written off 2,500

Required:

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1. Allowance for doubtful accounts, adjusted as at end of the year

2. Doubtful accounts expense for the year
3. Net realizable value of accounts receivable as at end of the year
4. Entry to record the accounts written off during the year
5. Entry to record the accounts recovered during the year
6. Journal entry to record the provision for doubtful accounts

3. Aging of Accounts Receivable (AR) method

The allowance for doubtful accounts (AFDA) is estimated based on the age of the accounts comprising the
outstanding balance of accounts receivable as at end of the accounting period.

Pro-forma computations:
Age of AR Balance Rate Required AFDA
0-30 days xx x xx
31-60 days xx x xx
61-90 days xx x xx
Above 90 days xx x xx
Total xx xx

Allowance for doubtful accounts, adjusted xx

Accounts written off during the year xx
Recoveries of previously written off accounts (xx)
Allowance for doubtful accounts, unadjusted (start of the year) (xx)
Doubtful accounts expense for the year xx

Accounts receivable as at end of the accounting period xx

Allowance for doubtful accounts, adjusted (xx)
Net realizable value of accounts receivable xx

Illustrative Problem: As at end of the year, the following balances were provided by the Company:
Accounts receivable balance, December 31 100,000
Allowance for doubtful accounts, January 01 6,000
Accounts written off as worthless during the year 4,000

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Recoveries of accounts previously written off 2,500

Aging of AR as at year-end:
Age Balance Rate of Uncollectibility
0-30 days 30,000 0
31-60 days 30,000 10%
Above 60 days 40,000 15%

Required:
1. Allowance for doubtful accounts, adjusted as at end of the year
2. Doubtful accounts expense for the year
3. Net realizable value of accounts receivable as at end of the year
4. Entry to record the accounts written off during the year
5. Entry to record the accounts recovered during the year
6. Journal entry to record the provision for doubtful accounts

DEPRECIATION
- refers to the systematic and rational allocation of the cost of a depreciable asset over the periods benefitted by
its intended use

Elements of Depreciation
Cost – pertains to the cost of acquisition of the depreciable asset which includes the cost of purchase or
construction (fair value at the time of receipt is acquisition is by way of donation or grant) plus all incidental costs
necessary in bringing the asset to its present location and in preparing the same for its intended use

Residual value – refers to the amount expected to be recovered or salvaged from the asset at the end of its
estimated useful life

Estimated useful life – the estimated period where benefits from the use of the depreciable asset are expected to
flow to the Company

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Depreciable cost – the amount that is left after deducting the residual value from the cost of the asset. It is the
portion of the cost that is subjected to depreciation

Methods of computing for depreciation

1. Straight line method (covered under Basic Accounting courses)
2. Other methods (covered under Intermediate Accounting courses)
2.1 Other uniform methods
a. Composite method
b. Group method
2.2 Variable methods
a. Output method
b. Production/ machine hours method
2.3 Accelerated method
a. Sum-of-year’s digits method
b. Declining balance method

Straight line method of depreciation

Basic formula:

Pro-forma adjusting entry:

Depreciation expense xx
Accumulated depreciation xx

Illustration: The Company provided the following information relative to the year-end adjustment for
depreciation as at and for the year ended December 31, 2020:
Cost of equipment P 500,000
Residual value 50,000
Useful life 10 years

REQUIRED (for each of the following independent cases):

1. Depreciation expense for 2020
2. Adjusting entry for depreciation
3. Accumulated depreciation as of December 31, 2020

Case 1: The equipment was acquired on January 01, 2020 and was ready for its intended use on the same date.
Case 2: The equipment was acquired on October 01, 2020 and was ready for its intended use on the same date.
Case 3: The equipment was acquired on July 01, 2019 and was ready for its intended use on the same date.
Case 4: The equipment was acquired on January 01, 2020 and was made ready for its intended use on April 01,
2020.

Case 1: The equipment was acquired on January 01, 2020 and was ready for its intended use on the same date.

Case 2: The equipment was acquired on October 01, 2020 and was ready for its intended use on the same date.

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CASE 2
1 Depreciation expense [ ( P500,000 - P50,000) / 10 ] x 3/12 11,250.00

2 Depreciation expense 11,250.00

Accumulated depreciation 11,250.00

3 Accumulated depreciation - January 01, 2020 -

Add: Depreciation for the year 2020 11,250.00
Accumulated depreciation - December 31, 2020 11,250.00

Case 3: The equipment was acquired on July 01, 2019 and was ready for its intended use on the same date.

Case 4: The equipment was acquired on January 01, 2020 and was made ready for its intended use on April 01,

ENDING INVENTORY
- pertains to the cost of unsold goods as at the end of the accounting period.
- adjustment to set up the ending inventory as at end of the period is applicable only to merchandising
and manufacturing businesses.

Pro-forma journal entry:

Inventories – end xx
Income & expense summary xx

Illustration:
BENTAH Co., a merchandising company owned by Mr. Ben Tah, provided the following information as at and
for the year ended December 31, 2020:
Sales 1,000,000
Inventories, January 01, 2020 100,000
Purchases 800,000
Freight - in 50,000
Purchase returns and allowances 20,000
Purchase discounts 5,000

Unsold goods as at December 31, 2020 amounted to P 200,000.

REQUIRED:
1. Journal entry to set up the cost of unsold goods at the end of the year.
2. Cost of goods sold for the year 2020
3. Gross income for the year 2020

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(Step No. 6) PREPARATION OF THE FINANCIAL STATEMENTS

The Financial Statements are the means by which financial information is communicated to the decision – makers.

The objective of Financial Statements is to provide financial information about the reporting entity’s assets,
liabilities, equity, income and expenses that is useful to users of financial statements in assessing the prospects
for future net cash inflows to the reporting entity and in assessing management’s stewardship of the entity’s
economic resources.

BASIC SET OF FINANCIAL STATEMENTS

1. Statement of Financial Position
2. Statement of Financial Performance (Income Statement)
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Notes to Financial Statements

(Step No. 7) JOURNALIZING AND POSTING OF ADJUSTING ENTRIES

The Adjusting Entries entered in the worksheet are not yet formally recorded in the books of accounts of the
business. The same were informally entered in the worksheet to effect the adjustments of assets, liabilities, income
and expenses prior to the preparation of the Financial Statements which must be prepared based on adjusted
balances.

Immediately after the preparation of the Financial Statements, the adjustments are formally journalized and the
effects posted to the respective ledgers of the affected accounts (assets, liabilities, income and expenses).

(Step No. 8) JOURNALIZING AND POSTING OF CLOSING ENTRIES

Closing entries are prepared at the end of the year to bring the balances of nominal accounts to zero (“to close the
balance”).

NOMINAL ACCOUNTS (temporary accounts) include income, expenses, income & expense summary, and
personal (drawing) accounts. Assets, liabilities and capital accounts whose balances are not closed at year end
and are carried forward from one accounting period to the next are called REAL ACCOUNTS (permanent
accounts). An account is closed by recording an amount equal to its adjusted balance opposite its normal side
(e.g. income account, whose normal side is on the credit is closed by a debit entry).

Pro-forma closing journal entries:

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Illustration:
The following accounts and adjusted balances were provided by Tak Acctg Services before the preparation of
closing entries at year-end, December 31, 2020:

Service income 1,000,000 Office supplies expense 12,000

Salaries expense 500,000 Gas and oil expense 15,000
Rent expense 120,000 Depreciation expense 80,000
Utilities expense 48,000 Mau Tak, Personal 200,000

REQUIRED:
1. Prepare the closing entries (CE)
2. Mau Tak, Capital as at December 31, 2020 (Assume that the capital as at January 01, 2020 was P 340,000.

ANSWERS:
CE No. 1
Service income 1,000,000
Income & expense summary 1,000,000

CE No. 2
Income & expense summary 775,000
Salaries expense 500,000
Rent expense 120,000
Utilities expense 48,000
Office supplies expense 12,000
Gas and oil expense 15,000
Depreciation expense 80,000

CE No. 3
Income & expense summary 225,000
Mau Tak, Capital 225,000

CE No. 4
Mau Tak, Capital 200,000
Mau Tak, Personal 200,000

Mau Tak, Capital – January 01, 2020 P 340,000

Add: Profit for the year 225,000
Total 565,000
Less: Mau Tak, Personal 200,000
Mau Tak, Capital – December 31, 2020 P 365,000

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(Step No. 9) PREPARATION OF THE POST-CLOSING TRIAL BALANCE

A post-closing trial balance is prepared immediately after posting the closing entries. Since closing entries have
the effect of closing out nominal accounts, the post-closing trial balance contains only REAL ACCOUNTS
(assets, including contra assets, liabilities and adjusted capital).

(Step No. 10) JOURNALIZING AND POSTING OF REVERSING ENTRIES

The preparation of reversing entries is the only step in the accounting cycle that is not mandatory.

Reversing entries are based on adjusting entries and are usually prepared at the start of the immediately succeeding
period in order to:
1. Eliminate the accounts that resulted from the preparation of adjusting entries (e.g. accrued income/
accrued expense; prepaid expense; unearned income); and

2. Facilitate the usual recording of transactions (debit expense for payments and credit income for
collections)

Reversing entries cover the following adjustments (if the entity opts to prepare reversing entries):
1. Reversing entry for the adjustment for accrued income
2. Reversing entry for the adjustment for accrued expense
3. Reversing entry for the adjustment for prepaid expense, accounted for under the expense method
4. Reversing entry for the adjustment for advance collections accounted for under the income method

Reversing entries include the following:

1. Reversing entry for the adjustment for accrued income
Income xx
Receivable xx

2. Reversing entry for the adjustment for accrued expense

Payable xx
Expenses xx

3. Reversing entry for the adjustment for prepaid expense, accounted for under the expense method
Expense xx
Prepaid Expense (Asset) xx

4. Reversing entry for the adjustment for advance collections accounted for under the income method
Unearned income (Liability) xx
Income xx

Illustration and Explanation - Preparation of Reversing Entries

Before the preparation of adjusting entries, Salaries Expense incurred and paid by the business during the year
2020 amounted to P 250,000. However, as at December 31, 2020, it was noted that the business had incurred
additional salaries of P 10,000 which remained unpaid as at end of the year.

Adjusting journal entry for the accrued salaries at year – end:

Salaries expense P 10,000
Salaries payable P 10,000

After posting the adjusting entry, the Salaries Expense is adjusted to P 260,000 and a Salaries payable account is
recognized. Hence,

Salaries expense before adjustment P 250,000

Accrued salaries (increase in expense) 10,000
Salaries expense after adjustment - 2020 P 260,000

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The closing entry for the salaries expense (adjusted balance) as at end of the year 2020 will be as follows (emphasis
on the salaries expense account only for illustration purposes):

Income & expense summary P 260,000

Salaries expense P 260,000

Assume that the salaries payable was paid on January 03, 2021. The entry to record the payment, if the Company
did not choose to prepare reversing entries, is:

Salaries payable P1 0,000

Cash in bank P 10,000

Note that the debit should be to Salaries Payable” and not to “Salaries Expense” anymore since the expense was
incurred in 2020, though paid in 2021. If Salaries Expense was erroneously debited, the same will cause a double
recording of the expense, in 2020 when it was incurred and in 2021 when it was paid.

Should the Company decide to prepare reversing entries, the relevant entries for January 2021 are:
Jan 01, 2021 Salaries payable P 10,000
Salaries expense P 10,000

Jan 03, 2021 Salaries expense 10,000

Cash in bank 10,000

After posting the preceding entries, the ledger for Salaries Expense and Salaries Payable accounts for 2021 (new
accounting period) will appear as follows:

Note that the salaries expense account had no beginning balance since the adjusted balance was closed as at end
of 2020. Note also that the reversing entry eliminated the balance of the salaries payable account and resulted to
a credit balance in salaries expense whose balance was also brought to zero upon payment, during which, a debit
was made in the salaries expense account. This is to prevent the double recording of salaries expense in 2020 and
2021.
Comprehensive Problem on the Review of the Accounting Cycle:

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Ms. Ma U. T ak, CPA, decided to venture into the public practice of her profession and established her own
accounting firm in the City of T arlac with the business name, “MAUT AK, Accounting Services”. T he following
transactions transpired during the month of December 2017:

December 01
Invested Php 100,000 cash and computer sets originally costing Php 80,000 which Ms. T ak previously acquired on
account. Ms. T ak still owes Php 25,000 to the supplier of the computers. T he computer sets had a fair value of Php
50,000 at the time of investment. T he liability related to the computer sets is to be assumed by the business.(OR 001;
JV 001)

IMPORTANT NOTES: The fair value at the time of investment is used in measuring the noncash investment.
The assumption of the liability attached to the invested asset automatically converts the same from being a
personal liability to a business liability which consequently reduces the capital credit for the owner.

December 02
Established a petty cash fund with an imprest balance of Php 2,000. (CV 001; CK 001)
Hired 2 accounting and audit staff to be paid a monthly salary of Php 20,000 each.
Signed engagement contracts with Mr. Nego Syo, Ms. Biz Ness and Mr. Mada Yah.

IMPORTANT NOTES: The hiring of the 2 accounting and audit staff and the signing of engagement contracts
with clients do not qualify as accountable events (no exchange of values yet between the concerned parties).
Hence, no formal entry is prepared for those 2 events. The establishment of the PCF will be accompanied by the
update of the Petty Cash Book as show below:

December 03
Paid Php 20,000 to the lessor of the office space representing rental security deposit, refundable at the end of the
lease contract, and Php 30,000 representing advance rentals for the months of December 2017, January 2018 and
February 2018. T he business uses the expense method in recording prepayments. (CV 002; CK No. 002)

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IMPORTANT NOTES: The Rental Security Deposit represents the amount deposited by the Lessee to the Lessor
that is intended to cover possible damages that may be inflicted to the leased asset or to answer for utilities and
other commitments left unpaid by the lessee at the end of the lease term. The amount is refundable in the absence
of the aforementioned cases.

The advance rentals paid are intended to be applied against future incurrence of rent and are accounted for using
the expense method, hence, the amount was debited in full to an EXPENSE account at the time of payment.

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IMPORTANT NOTES: The cost of repairs, a BUSINESS EXPENSE, was paid from the PERSONAL CASH
of the owner without the intent of having it reimbursed. Accordingly, the amount is treated as an additional
investment by the owner.

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IMPORTANT NOTES: The cost of the tuition fee of the owner’s son, a PERSONAL EXPENSE, was paid from
the CASH OF THE BUSINESS without the intent of paying back the business. Accordingly, the amount is treated
as a withdrawal by the owner.

IMPORTANT NOTES: The premiums withheld by the business from the salaries of the employees will be
remitted (along with the share of the employer) in the immediately succeeding month. Pending remittance, the
contributions are reported as current liabilities. The employer’s share on the benefits of the employees shall be
treated as an expense of the business.

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IMPORTANT NOTES: Since the promissory note received from the customer is interest bearing, the collection
on the maturity date will include the principal plus the interest earned on the note. The interest is computed as
follows:
Interest = P 40,000 x 12% x 10/360
= P 133

IMPORTANT NOTES: Under the Imprest Fund System of accounting for PCF, no formal journal entry is
required when the fund is charged. Each charge against the PCF must be supported by a Petty Cash Voucher
(PCV) which serves as authorization for the disbursement from the PCF. The charge against the PCF will be
recorded, informally, in the Petty Cash Book which is used to monitor the PCF balance.

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IMPORTANT NOTES: The transaction pertains to advance collections from a customer where the related
service will be rendered on a future date. Since the income method is used in accounting for the advance
collection, an income account “Professional fees” is credited at the time of collection. This amount shall be
adjusted should there be an outstanding unearned portion (related service has not been rendered yet) as at the end
of the year.

IMPORTANT NOTES: The term BILLED indicates the act of sending a statement of account to the concerned
customer for whom service was already rendered. Hence, the right to collect (Accounts receivable) must be
established.

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IMPORTANT NOTES: Under the Imprest Fund System of accounting for PCF, no formal journal entry is
required when the fund is charged. Each charge against the PCF must be supported by a Petty Cash Voucher
(PCV) which serves as authorization for the disbursement from the PCF. The charge against the PCF will be
recorded, informally, in the Petty Cash Book which is used to monitor the PCF balance.

IMPORTANT NOTES: The premiums withheld by the business from the salaries of the employees will be
remitted (along with the share of the employer) in the immediately succeeding month. Pending remittance, the
contributions are reported as current liabilities. The employer’s share on the benefits of the employees shall be
treated as an expense of the business.

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IMPORTANT NOTES: Under the Imprest Fund System of accounting for PCF, charges against the fund and
any resulting overage or shortage are recorded through a formal journal entry upon replenishment of the fund.
Replenishment means to bring back to fund balance to its imprest balance (originally established or subsequently
adjusted balance).

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IMPORTANT NOTES: No depreciation was provided on the office equipment acquired on Dec 27 since it was
acquired after the middle of the month (assumed to have been acquired at the end of the month)

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IMPORTANT NOTES: The adjustment for a prepayment accounted for under the Expense Method includes a
debit to an ASSET account (opposite the method) and a credit to an EXPENSE account at the UNEXPIRED
portion of the prepayment.

IMPORTANT NOTES: The note received from Ms. Kuh Pitt for P 30,000 is interest bearing and is outstanding
as at year-end. As at end of the year, 11 days of interest (Dec 31 – Dec 20) has already ACCRUED (already
earned but remain uncollected) to the benefit of the business. Hence, accrued interest income is recognized at year
end based on the following computation: Interest receivable (P 30,000 x 12% x 11/360) = P110

IMPORTANT NOTES: The note issued to Du Tong for P 30,000 is interest bearing and is outstanding as at
year-end. As at end of the year, 26 days of interest (Dec 31 – Dec 5) has already ACCRUED (already incurred
but remain unpaid) to the benefit of the supplier. Hence, accrued interest expense is recognized at year end based
on the following computation: Interest payable (P 30,000 x 10% x 26/360) = P217

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IMPORTANT NOTES: The adjustment for advance collections accounted for under the Income Method
includes a debit to an INCOME account (the same as the method) and a credit to a LIABILITY account at the
UNEARNED portion of the advance collections.

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IMPORTANT NOTES: The adjustment for a prepayment accounted for under the Expense Method includes a
debit to an ASSET account (opposite the method) and a credit to an EXPENSE account at the UNEXPIRED
portion of the prepayment.

IMPORTANT NOTES: The employer’s share on the benefits of the employees shall be treated as an expense of
the business. The premiums withheld by the business from the salaries of the employees will be remitted (along
with the share of the employer) in the immediately succeeding month. Pending remittance, the contributions are
reported as current liabilities.

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CLOSURE ACTIVITIES

Exercise No. 1
PART I (Theory of Accounts): Encircle the letter choice that corresponds to your answer. Erasures on letter
choices shall render your answers invalid.
1. The accountant of ABC Co. failed to recognize the unearned portion of a pre-collection from a customer
accounted for under the income method as at end of the year. Which of the following statements is true
concerning this omission? [A] Total assets as at year-end is overstated. [B] Total liabilities as at end of year
is understated. [C] Profit for the year is understated. [D] Total liabilities as at end of the year is overstated.

2. The business is said to be sustainable if most of its cash inflows are provided by which activities? (A)
operating (B) investing (C) financing (D) none of the foregoing activities

3. Which of the following would most likely be depicted by the basic accounting equation? (A) level of income
generated by the entity (B) the sources and uses of the entity’s cash (C) the claims of the creditors and the
owner in the assets of the business (D) the changes in the capital of the business

4. The following statements are incorrect in relation to the qualitative characteristics of useful financial
information except [A] Faithful representation requires the reported information to be 100% accurate. [B]
Comparability of information allows the change of accounting policy if a new one is expected to provide a
more reliable financial information and whose effect is properly disclosed in the notes to financial statements.
[C] Information is material if its financial effect would be at least One Thousand Pesos (Php 1,000.00) [D]
Neutrality of financial information is violated if the financial information is directed towards the information
needs of existing and potential investors, lenders and other creditors.

5. Which of the following is true concerning the accounting and estimation of doubtful accounts? [A] The
allowance method of accounting for doubtful accounts recognizes the expense related to uncollectible
accounts when the same are proven actually worthless. [B] The aging of accounts receivable classifies the
accounts according to age and applies a higher rate of uncollectibility to the age bracket with the highest peso
amount of receivables. [C] Under the direct write-off method of accounting for uncollectible accounts, no
expense is recorded when the accounts become doubtful of collection. [D] The subsequent write-off of an
account, previously recognized as doubtful under the allowance method, will require a debit to an expense
account.

6. Which of the following statements is /are true?

1st All increases in equity, regardless of nature and source, are considered income.
2nd Distributions given to owners, both cash and noncash, qualify as expenses.
3rd Decreases in equity other than distributions to owners, which result to decreases in assets and decrease in
liabilities, are recognized as expenses.
[A] I & II [B] II & III [C] II only [D] III only

7. The Company accounts for its prepayments under the expense method of accounting. At year end, the
accountant failed to recognize the unexpired portion of a certain prepayment paid during the year. How are

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the accounts affected by this error? [A] assets are overstated [B] profit is understated [C] expenses are
understated [D] capital is overstated

8. The following statements are true in relation to the preparation of closing entries except [A] a debit balance
in the Profit/Loss Summary account indicates a profit which must be credited to the capital account when the
former is closed at year end. [B] Real accounts are not closed at year-end but are carried forward to the next
accounting period. [C] Immediately after journalizing and posting the year-end closing entries, the balances
of the nominal accounts are brought to zero. [D] The recording of closing entries and its subsequent posting
to the appropriate ledgers are mandatory steps in the accounting cycle.

9. The reversing entry for the adjustment of prepaid expense accounted for under the expense method will
include a debit to [A] an asset account [B] an expense account [C] a liability account [D] none of the foregoing
options

10. ABC Co., a company which has been reporting good financial performance for the past 5 years of its
operations, acquired an asset which it recorded at the price for which it can be currently sold. Which of the
following accounting concept would most likely be violated by this recognition? [A] accrual concept [B]
going concern assumption [C] materiality concept [D] substance over form concept

PART II (Problems): SYO Repair Shop provided the following selected UNADJUSTED balances as at December
31, 2018.

Accounts receivable 150,000 Nego, Syo, personal 15,000

Allowance for doubtful accounts 1,000 Service income 500,000
Notes receivable 30,000 Commission income 10,000
Supplies on hand 20,000 Salaries expense 180,000
Office furniture & equipment 200,000 Rent expense 120,000
Accumulated depreciation – OFE 5,000 Utilities expense 22,500
01/01/2018
Nego Syo, capital 250,000 Miscellaneous expense 1,500

Data for adjustments:

1. 20% of the accounts receivable balance is past due while the remaining 80% is considered current. As at
year-end, past due accounts are estimated to be 5% uncollectible while the current accounts are estimated to
be 99% collectible.
2. The notes were received on November 01, 2018, bearing an interest rate of 10% and are scheduled to mature
on January 30, 2019. No interest was collected on these notes as at year end.
3. 60% of the supplies on hand were used during the year.
4. The Rent expense in the unadjusted trial balance pertains to 1-year advance rentals paid on January 01, 2018.
The actual lease commenced on the date of payment.
5. Half of the office furniture & equipment was acquired on July 1, 2018 while the other half was acquired on
September 30, 2017. The assets are being depreciated over an estimated useful life of 5 years with no salvage
value.
6. 95% of the service income was earned during 2018.
7. 20% of the commission income remained unearned as at end of 2018.
8. Unpaid salaries as at year end is equal to 10% of the unadjusted balance.
9. Utilities expense unpaid as at year end amounted to Php 2,500.00

REQUIREMENT:
A. Prepare the adjusting entries as at December 31 2018 and reversing entries on January 01, 2019.

B. Determine the adjusted balances for the following accounts and balances as of and for the year ended
December 31, 2018:

(1) Net realizable value of AR (4) Carrying amount of OFE (7) Salaries expense
(2) Supplies on hand (5) Service income (8) Utilities expense
(3) Prepaid rent (6) Commission income (9) Profit for the year

C. Prepare the closing entries as at December 31, 2018.

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Exercise No. 2
The following Unadjusted Trial Balance was provided by GAWA LUNES - SIRA MARTES Repair Shop as at
and for the year ended December 31, 2022:

Particulars Debit Credit

Cash 100,000
Accounts receivable 200,000
Note receivable 150,000
Prepaid rent 60,000
Equipment 500,000
Accumulated depreciation 45,000
Accounts payable 120,000
Note payable 80,000
Sira, capital 300,000
Sira, personal 10,000
Service income 659,000
Salaries expense 120,000
Taxes and licenses 5,000
Supplies expense 12,000
Utilities expense 44,000
Miscellaneous expense 3,000
1,204,000 1,204,000

Additional information:
A. 10% of the Accounts Receivable balance as at year-end is estimated to be uncollectible.

B. The Note Receivable pertains to a 1-year, 12% promissory note received from a customer on October 01, 2022.

C. The Prepaid Rent pertains to the advance rentals for a 1-year lease contract which were paid on May 1, 2022. The lease
commenced on June 1, 2022.

D. The Equipment was acquired on July 1, 2021. It was assigned a salvage value of 10% of cost and EUL of 5 years.

E. 10% of the Service Income is unearned as at year-end.

F. 70% of the Supplies Expense balance has been used up as at year-end.

G. Unpaid utilities at year-end amounted to Php 4,000.

Required:
1. Adjusting journal entries as at December 31, 2022.
2. Adjusted trial balance as at December 31, 2022
3. Working paper as at and for the year ended December 31, 2022.
4. Financial Statements as at and for the year ended December 31, 2022.
5. Closing journal entries as at December 31, 2022.
6. Post-closing trial balance as at December 31, 2022.
7. Reversing entries

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Exercise No. 3

Prepare the required adjusting journal entry and determine the required adjusted balance for each of the following
independent cases:

 Half of the notes receivable represents a 60-day, 12% promissory note which was received from a customer
on November 16, 2014.
1. Prepare the entry to recognize the accrued interest as at the end of the year.
2. Determine the amount of interest income to be recognized for the year ended December 31, 2014.

 2% of the accounts receivable balance is deemed uncollectible.

3. Prepare the entry to adjust the Allowance for Doubtful Accounts as at the end of the year.
4. Determine the net realizable value of accounts receivable as at December 31, 2014.

 Physical count of supplies at the end of the year showed a balance of P 2,500. At the start of the fiscal year,
supplies on hand showed a balance of P 3,000.
5. Prepare the entry to adjust the Supplies on Hand account as at the end of the year.
6. Determine the amount of supplies expense to be recognized during the current year.

 The book value of the Furniture and Fixtures as of the end of the current year should be P 42,500. The
accumulated depreciation indicated above represents the balance as at the beginning of the current year.
7. Prepare the entry to adjust the depreciation on Furniture and Fixtures for the year 2014.
8. Determine the balance of the Accumulated Depreciation – Furniture & Fixtures account as at the end of
the year.

 P 35,000 of the equipment was acquired on September 30, 2014 while the balance was acquired as at the start
of the current year. They are estimated to be useful for 10 years with no residual value.
9. Prepare the entry to adjust the depreciation on Equipment for the year 2014.
10. Determine the book value of the Equipment as at the end of the year.
 25% of the Notes Payable balance represents a 90-day, 12% promissory note which was issued to a supplier
on November 1, 2014.
11. Prepare the entry to recognize the accrued interest as at the end of the year.
12. Determine the amount of interest expense to be recognized for the year ended December 31, 2014.
 U Can Do It General Services collected P 40,000 on September 30, 2014 from a customer for services to be
rendered during the months of October 2014 to January 2015.
13. Prepare the entry to recognize the unearned service income as at the end of the year.
14. Determine the amount of service income to be recognized for the year ended December 31, 2014.

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 Salaries have remained unpaid for 3 working days to 8 employees. Five of the employees are paid P 400 per
day and the rest are paid P 300 per day.
15. Prepare the entry to adjust the salaries expense for the year 2014.
16. Determine the adjusted salaries expense to be recognized for the year ended December 31, 2014.

 The advertising expense indicated on the trial balance pertains to a five-month advertising contract which
was paid on August 31, 2014. The advertising services commenced on October 1, 2014.
17. Prepare the entry to adjust the advertising expense for the year 2014.
18. Determine the adjusted balance of the Prepaid Advertising account as at December 31, 2014.

 The rent expense indicated on the trial balance pertains to a 1 year advertising contract which was paid on
February 1, 2014.
19. Prepare the entry to adjust the rent expense for the year 2014.
20. Determine the adjusted rent expense to be recognized for the year ended December 31, 2014.

SYNTHESIS / Businesses require the pooling together of resources in order to achieve their
GENERALIZATION objectives - to earn profit for profit-oriented entities or to ensure the furtherance of
their activities for non-profit oriented entities. Regardless of the form, type of
operation and objective, all businesses rely on accounting to provide reliable
financial information necessary in making informed economic decisions.

The Accounting Cycle involves a series of steps that ensure the reliability of
reported financial information in the financial statements. The steps include the
analysis of the effects of the transactions as captured in the source documents, the
chronological recording of its effects in the journal, the classification and posting
of the entries from the journals to the ledgers, the preparation of the trial balance,
the preparation of the working paper with adjustments, the preparation of the
financial statements, the journalizing and posting of the adjusting entries, the
journalizing and posting of the closing entries, the preparation of the post-closing
trial balance, and the lone optional step in the accounting cycle – the journalizing
and posting of reversing entries.

A comprehensive understanding of the steps in the accounting cycle is a basic

requisite to ensure a deeper appreciation of the more detailed discussions in
advanced intermediate accounting courses.

EVALUATION Answer the following questions:

1. Define the concept of business and identify the different forms of
organizations and types of business operations.
2. Define Accounting.
3. Explain the need for Generally Accepted Accounting Principles.
4. What are the steps in the accounting cycle?
5. Define a transaction.
6. When is an event considered accountable?
7. What is a journal? Enumerate and explain the types of journals.
8. What are the rules of debit and credit?
9. What is a ledger? Enumerate and explain the types of ledgers.
10. What is a trial balance?
11. What are year-end adjusting entries? Explain and illustrate each type of
adjustment.
12. What is a working paper?
13. What comprises the basic set of financial statements?
14. What are closing entries?
15. Which accounts are covered by the preparation of closing entries?
16. What is a post-closing trial balance
17. What are reversing entries?

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18. Which adjustments are covered by reversing entries?

19. Which among the steps in the accounting cycle are mandatory?
20. Which step in the accounting cycle is considered optional?
ASSIGNMENT / Reading Assignment: Cash and Cash Equivalents
AGREEMENT Intermediate Accounting 2020 Edition by CT Valix, JF Peralta, CA Valix
Practical Accounting Problems
Supplementary Review Materials.
SUGGESTED READINGS Fundamentals of Accounting, Mallari, Catacutan, Gabriel
Basic Accounting Made Easy, Win Ballada

FAR0 Module_Chap1_Review of the Accounting Cycle