AQE REV.

1: BASIC ACCOUNTING JLAG

Part I- Preface to Accounting and Conceptual b) Neutrality- the information
Framework for Financial Reporting contained in the financial reports
should be free from bias.
Definition of Accounting c) Free from error- there are no errors
Accounting is the process of identifying, measuring and or omissions in the description of
communicating economic information to permit phenomenon or transactions.
informed judgement and decision by users of the II. Enhancing Qualitative Characteeristics (VCUT)
Information (American Accounting Association).  Verifiability- an information is verifiable
if it is supported by evidence that an
Forms of Business Organization accountant would look into and arrive
 Sole Proprietorship- operated by a single owner at the same conclusion.
 Partnership- operated by two or more persons  Comparability- enables users to identify
who bind themselves to contribute money, and understand similarities and
property or industry to a common fund with the differences among items.
intention of dividing the profits among  Understandability- financial
themselves. information should be presented in a
 Corporations- owned by stockholders. forms that users can understand.
 Timeliness- means having the
Fundamental Concepts information available to users in time to
 Entity Concept be capable of influencing their
 Periodicity Concept decisions.
 Stable Monetary Unit Concept
The Going Concern Assumption
Generally Accepted Accounting Principle (GAAP) - An enterprise will continue its operation for the
- Encompass the conventions, rules, and forseeable future.
procedures necessary to define accepted
accounting practice at a particular time. Elements of Financial Statements
 Asset- A present economic resource controlled
Basic Principles by the entity as a result of past events.
 Objectivity Principles  Liability- Present obligation of an entity to
 Historical Cost transfer an economic resource as a result of
 Revenue Recognition Principle past events.
 Expense Recognition Principle  Equity- The residual interest in the assets of an
 Adequate Disclosure entity after deducting all of the liabilities.
 Materiality  Income- defined as increases in assets or
 Consistency Principle decreases in liabilities that result in increases in
equity other than those relating to
contributions from owners.
The Accountancy Act of 2004
 Expense- defined as decreases in assets or
RA 9298 or the Philippine Accountancy Act of 2004
increases in liabilities that result in decreases in
signed by President Gloria Macapagal Arroyo on May
equity other than those relating to
13,2004.
contributions from owners.

Financial Reporting Standards Council (FRSC)- the

Part II- The Accounting Process
standard setting body in the Philippines.
Definition of Accounting Process
 This refers to the series of steps or activities
Qualitative Characteristics of Useful Financial
that involves collection and processing of
Information
financial data to produce financial statements
I. Fundamental Qualitative Characteristics
that will be used in communicating to
(1) Relevance- capacity of the information to
stakeholders.
affect a decision.
 It is known as the Accounting Cycle since the
(2) Faithful Representation- the descriptions
process is repeatedly being done in each
and figures presented in the financial
accounting process.
reports should match to what really existed
or happened. Its three characterists are;
Steps in the Accounting Cycle
a) Completeness- all information that
1. Identifying and analyzing business transactions
are necessary for a user to
2. Journalizing transactions in the journal
understand the phenomenon being
3. Posting the journal entries to the ledger
depicted must be included and
4. Preparation of the unadjusted trial balance
clearly stated in the reports.
AQE REV.1: BASIC ACCOUNTING JLAG
5. Preparation of the adjusting entries  Debit refers to an entry made on the left side
6. Preparation of the worksheet while Credit pertains to the entry made on the
7. Preparation of financial statements right side.
8. Preparation of closing entries Account Title
9. Preparation of Post-closing trial balance Debit Credit
10. Preparation of the reversing journal entries Left Side Right Side

STEP 1: Identifying and analyzing business transactions

Note: The T-account is the simplest tool used to analyze
 This step involves identifying business transactions
the changes in an account caused by a transaction.
and analyzing whether these transactions or
An account will increased either on the debit or credit
events affect the accounting elements (i.e,
side depending on its position in the accounting
asset,liability, or equity) or not.
equation
Assets= Liabilities + Owners Equity
Two types of events or transactions
(1) Accountable events- these are events or
Since assets are on the left side of the accounting
transactions that have an effect in the
equation, assets will increase on the debit side and
accounting elements. Hence, recorded in the
decrease on the credit side. On the other hand,
books of accpunts.
liabilities and owners equity are on the right side of the
(2) Non-Accountable events- these are events or
accounting equation, therefore liabilities and equity will
transactions that have no effect in the
increased on the credit side and decrease on the debit
accounting elements.Hence, not recorded in the
side.
books of accounts.
Note: Information about business transactions is
Based on the rules above, the following can be derived:
gathered through various source documents.
Source Documents- pertain to original source material Normal Increased Decreased
that contains the evidence of a business transaction Balance by by
occurrence such as receipts, vouchers and invoices. Assets Debit Debit Credit
Liabilities Credit Credit Debit
STEP 2: Journalizing transactions in the journal Capital Credit Credit Debit
 The process of recording transactions Income Credit Credit Debit
transactions in a chronological manner. Expense Debit Debit Credit
Journal Drawing Debit Debit Credit
 a business record of its daily transactions.
 Known as the book of original entry because it is STEP 3: Posting the journal entries to the ledger
where the transactions are first recorded.  Posting is the process of transferring journal
Parts of a Journal entries from journal to the ledger.
(1) Date
(2) Particulars Ledger is a book of account containing accounts to
(3) Posting reference which debits and credits are posted from journal.It is
(4) Debit Column called the book of final entry because this is the book
(5) Credit Column where all transactions or journal entries are finally
summarized.
Two types of journal Types of ledger
(1) General Journal- All transactions that cannot be (1) General ledger (or simply ledger)- known as the
recorded in any special journals are recorded in master (or controlling) account since it reflects
the general journal. the total balance of an account.
(2) Special Journal- transactions with designated (2) Subsidiary ledger- contains the supporting
purpose are recorded in their respective journals details or breakdown of the general ledger
such as Sales Journal, Purchase Journal, Cash accounts.
receipts journal and Cash disbursements journal.
Account
Journal Entry  The term used to describe the assigned
There are two types of journal entries: accounting devise to summarize the effect of
 Simple Journal Entry- A journal entry which business transactions on each asset, liabilities,
consists of one debit and one credit only. equit, income and expense.
 Compound Journal Entry- A journal entry that  All accounts used by the entity are found in
consists of more than one debit and/or credit. their chart of accounts which refers to their list
of accounts.
Debits and Credits
AQE REV.1: BASIC ACCOUNTING JLAG
Once all transactions are recorded and posted, the income statement account such as income and expense,
account balances are computed by getting the They are closed at the end of every accounting period.
difference between total debits and credits. Classifications of Adjusting Journal Entries
 Account balances- amounts that are reported in 1. Accruals
the financial statements of the company 2. Deferrals
3. Estimates
STEP 4: Preparation of the unadjusted trial balance 4. Setting up of ending inventory
A trial balance refers to a listing of accounts with open
balances. 1. Accruals
 It provides the equality of debits and credits in  These are adjustments for (1) expenses that have
the ledger at the end of each accounting period been incurred but are not yet recorded and (2)
or at any time the postings are updated. revenues that have been earned but are not yet
 All accounts from the general ledger will be recorded in the books.
transferred in the trial balance. Categories:
 Accrued expense- expense already incurred
Significance of the trial balance during a particular period but has not been paid
 It is used to check the accuracy of posting by yet and still unrecorded at year-end.
testing the equality of the debits and credits Adjusting entry:
 It aids in locating errors in posting Expense xxx
 It also serves as a basis in the preparation of the Payable xxx
financial statements.
 Accrued Income- income already earned during a
Errors that caused the trial balance to be unequal particular period but for which no cash has been
 Transplacement (or sliding) error- occurs in the collected or received yet and still unrecorded at
process of placing the decimal point, for year-end.
example a prepaid rent should amount to Adjusting entry:
150,000 but instead, the recorded amount was Receivable xxx
15,000. Income xxx
 Transposition error- occurs when digits are
interchanged, for example, correct amount is 2. Deferrals
1,200,000 but recorded as 1,020,000.  These are adjustments for (1) expenses that have
 Mixed error- a combination of transposition been paid but not yet incurred and (2) revenues
and transplacement error. that have been received but not yet earned.
 Misposting- occurs when an account that Categories:
should have been on a particular side was  Prepaid expense- represents advance payment for
placed on the opposite side. services to be received later or expense to be
 Omission error- occurs when a transaction that incurred in the future.
should have been recorded was not recorded.
There are two methods of recording prepaid expenses
STEP 5: Preparation of the adjusting entries namely, asset and expense method.
 Adjusting journal entries are journal entries  These methods are based on what account was
usually prepared at the end of the accounting debited at the time of transaction.
period to bring the accounts up to date on an  The adjusting entry at the end of the period would
accrual basis. depend upon the method used. The pro-forma
 An adjusting entry also serves as a way of entries under each method are;
allocating revenue and expense between Asset Method Expense Method
current and future period. Original Journal Entry
 An adjusting entry affects atleast one real Prepaid Expense xx Expense xx
account and one nominal account.
Cash xx Cash xx

Real Accounts- also known as permanent accounts or

Adjusting Journal Entry
balance sheet accounts since they can be found on the
Expense xx Prepaid Expense xx
balance sheet such as assets, liabilities and equiies. They
Prepaid Expense xx Expense xx
are carried forward from one accounting period to
Recognize the used up or Recognize the unused or
another.
expired portion unexpired portion

Nominal Accounts- also known as temporary or income

 Unearned Income- represents an advance
statement accounts since they can be found on the
collection for service to be rendered in the future.
 AQE REV.1: BASIC ACCOUNTING JLAG
This represents an obligation to render service for
cash already received.
Rules or guide in completing the worksheet:
There are two methods of recording unearned income Under the income statement column of worksheet:
namely liability and income method. IF: Total Debits > Total Credits = Net loss
 These methods are based on what account was Total Debits < Total Credits = Net Income
credited at the time of transaction.
 The adjusting entry at the end of the period Under the balance sheet column of worksheet
would depend on the method used. IF: Total Debits > Total Credits = Net Income
Total Debits < Total Credits = Net loss
The pro-forma entries under each method are;
Liability Method Income Method STEP 7: Preparation of the financial statements
Original Journal Entry Financial statements are a set of reports intended
Cash xx Cash xx to be communicated to interested users.
Unearned Income xx Income xx
Complete set of general-purpose financial
Adjusting Journal Entry statements
Unearned Income xx Income xx 1. Statement of Financial Position
Income xx Unearned Income xx o Traditionally known as the balance
Recognize the earned Recognize the unearned sheet
portion portion o A report that shows all the assets,
liabilities, and equities of an entity.
3. Estimates o All real or permanent accounts can be
a) Depreciation found in thos report.
Adjusting Entry: 2. Statement of Comprehensive Income
Depreciation Expense xx o A report that shows all income and
Accumulated Depreciation xx expenses of an entity.
o Sometimes known as the Statement of
formula in computing depreciation expense: Financial Performance since it involves
the profit or loss before adding the
Depreciation = Historical Cost – Salvage Value other comprehensive income.
3. Statement of Changes in Equity
Useful life
o Refers to the reconciliation of the
opening and closing balance of the
b) Doubtful accounts
equity. It also shows the summary of all
Adjusting Entry:
the transactions relative to the equity.
Doubtful accounts expense xx
4. Statement of Cash Flows
Allowance for doubtful accounts xx
o Refers to a report primarily reflects all
the cash inflows and outflows of an
4. Setting up of ending inventory
entity.
Adjusting entry:
5. Notes to Financial Statements
Merchandise Inventory xx
o The narrative description or
Cost of goods sold (or Income Summary) xx
disaggregation of items reported in the
financial statements, as well as
STEP 6: Preparation of the worksheet
information about things that do not
 The worksheet pertains to a multi-column sheet
qualify for recognition, are provided in
(specifically, a 10 column) used in compiling and
this report.
summarizing the infrmation necessary to
facilitate the process of adjusting and closing
STEP 8: Preparation of the closing entries
entries, including the preparation of of financial
 Closing entries are journal entries that bring
statements.
temporary accounts to zero balance and
 Although worksheet is not part of the formal
transfer their balances to the permanent capital
accounting records and only serves as a tool
account at the end of the accounting period.
used by an accountant.
Closing Procedures:
1. Close all income accounts
After the adjusting process, amounts are extended
Closing Journal Entry:
(or cross-foot) to the adjusted trial balance of the
Income xx
worksheet.
Income Summary xx
2. Close all expense accounts
AQE REV.1: BASIC ACCOUNTING JLAG
Closing Journal Entry:
Income Summary xx
Expense xx
3. Close the balance of the income summary
account to the drawing account. Comprehensive Problem for Illustrations
Guide: Roku has an upstart business, Roku Clean Laundry. Her trial
o If the income summary account has a balance shows the following information.
credit balanceafter closing the income
and expense accounts, the result is Roku Clean Laundry
profit. Trial Balance
o If the income summary account has a November 30,2022

debit balance after closing the income

Cash P 9,250
and expense accounts, the result is loss.
Accounts Receivable 2,320
Supplies 1,900
Closing Journal Entry Equipment 9,000
Accounts Payable P 5,500
If the operations If the operations Notes Payable 500
resulted to a profit: resulted to a loss: Unearned Service Revenue 800
Dolce, Capital 15,670
Income Summary xx Drawing xx TOTAL P 22,470 P 22,470
Drawing xx Income Summary xx
During the month of December, 2022, the following
transactions occurred.
4. Close the drawing account to an equity
Dec 5 Received cash from customers on account,
account
P 850.
6 Invested cash for the business worth 2,000
If the operations If the operations 7 Bought supplies on credit from Laundry
resulted to a profit: resulted to a loss: Store, P 350.
10 Performed services for 6,300 on credit
Drawing xx Capital xx 11 Borrowed 5,000 from Prudential Bank
Capital xx Drawing xx supported by a promissory note, which will
accrue 10% annual interest.
14 Paid 1,400 for Salaries of employees.
16 Performed services paid in advance last
STEP 9: Preparation of the post-closing trial balance
month, 600.
 The purpose is to check the equality of debits
20 Performed services for customers for 250,
and credits in the ledger after all the closing with 50 pesos downpayment and balance
entries are recorded and posted. on account.
 Only an optional step in the accounting process. 29 Paid 2,000 to creditors
 At this point, the only accounts with open 30 Withdrew 600 for personal use by the
balances are assets, liabilities, and equities owner.
which are real account. 30 Paid 900 for utilities

STEP 10: Preparation of the reversing journal entries Additional Information as of July 31,2022:
 Another optional step in the accounting cycle  An actual count of supplies showed a balance of
400
that is usually made at the beginning of the next
 An Equipment amounting to 3,000 were purchased
accounting period.
on June 16,2022 and it is expected to be useful for
 Generally, a reversing entry is made if an 5 meaningful years and could be sold for 500 once
adjustment previously entered increases a it reaches its useful lives.
statement of financial position account.  Accrual of expenses: Salaries- 2,500 and rent 500.
 The following adjusting entries are allowed to
be reversed: Required:
o Accrued Expense a. Prepare the Journal entries for the month of
o Accrued Income December 2022.
o Prepayments under the expense b. Post journal entries to a ledger (for the meantime
use a T-Account)
method
c. Prepare an Unadjusted Trial Balance
o Deferred Income under the income
d. Journalized the Adjusting entries
method. e. Prepare an Adjusted Trial Balance
f. Preapare a Statement of Financial Performance
g. Prepare a Statement of Financial Performance
h. Prepare a Statement of Changes in Equity
AQE REV.1: BASIC ACCOUNTING JLAG
i. Prepare a Statement of Cash Flows III. Equities increase whenever credited and
j. Prepare the Closing Entries decrease whenever debited.
k. Prepare a Post-Closing Trial Balance IV. Expenses increase whenever credited and
decrease whenever debited.
V. Income increase whenever credited and
MOCK QUALIFYING EXAMINATION
decrease whenever debited.
-BASIC ACCOUNTING
A. I,II,III,IV and V
Part 1: Theories B. I,II,III and V
Conceptual Framework C. I,II,III and IV
1. Qualitative Characteristics of useful financial information D. I,III,IV and V
A. are the qualities or attributes that make 8. Which of the following is not a possible combination of a
financial information useful to the users in journal entry?
making economic decisions. A. Increase in asset and Increase in liability
B. contribute to the decision-usefulness of financial B. Decrease in equity and increase in liability
information. C. Decrease in liability and decrease in asset
C. Are classified either as fundamental or D. Increase in asset and decrease in equity.
enhancing. 9. Numerous errors may exist even though the trial balance
D. All of the choices are accurate. columns agree. Which of the following is not one of these
errors?
2. Which qualitative characteristic of financial information
A. A transaction is not journalized
requires that information should not favor one party to
B. A journal entry is posted twice
the detriment of another party?
C. A transaction is recorded and posted at an incorrect
A. Comparability amount.
B. Neutrality D. Transposition error.
C. Free from Error 10. Which of the following statements best describes accrual
D. Reliability adjusting entries?
3. Which of the following statements best describes the A. Adjusting entries where cashflow and revenue or
term ‘’comparability’’ in the context of useful fiinancial expense recognition are simultaneous
information. B. Adjusting entries where cash flow precedes revenue
A. Information is measured and reported in a or expense recognition.
similar manner across entities. C. Adjusting entries where revenue or expense
B. Information is measured and reported in a recognition precedes cash flow.
similar manner across point in time. D. Adjusting entries where revenue or expenses are
C. Information is relevant recognized in the absence of cashflow evidence
D. Information is reliable.
11. If an advance payment was initially recorded as an asset,
4. The Conceptual Framework mentions only one
then the adjusting entry will involve.
assumption in the preparation of financial statements.
A. A debit to an asset account and a credit to expense
Which is it?
A. Accrual basis in the amount of unexpired cost.
B. Cash basis B. A debit to an asset account and a credit to expense
C. Going concern in the amount of expired cost.
D. Liquidating concern C. A debit to expense and a credit to an asset in the
5. Which of the following are the enhancing qualitative amount of the expired cost.
characteristics of useful financial information. D. A debit to an expense and a credit to an asset in the
I. Comparability amount of the unexpected cost.
II. Completeness 12. Jaica company received an advance payment from a
III. Understandability customer amounting to 50,000 on December 29, 2022
IV. Verifiability for goods that will be delivered on January 2, 2023. The
V. Timeliness entity credited a liability account in its books to record
VI. Consistency the said transaction. Which of the following is true if no
adjustment is made at the end of 2022?
A. I, II, III and IV
A. Income for 2022 will be understated.
B. I, III, IV and V
B. Income for 2022 will be overstated.
C. II, III, IV and V
C. Total assets balance at the end of the year is
D. III, IV, V and VI
overstated.
Accounting Process D. Balances of accounts are correctly stated.
13. In the preparation of the worksheet, if the total debits
6. The debit and credit analysis of a transaction normally
takes place at what point in the Accounting Process? are greater than total credit under the balance sheet
A. Prior to recording the transaction in a journal. column:
B. When the journal entry is posted to the ledger A. There is net income
C. When the trial balance is prepared B. There is net loss
D. At some point in the accounting cycle. C. Assets are overstated
7. Which of the following is/are true? D. Liabilities are understated.
I. Assets increase whenever debited and decrease 14. If the business operations of a sole proprietorship
whenever credited. resulted to a loss, the income summary account will be
II. Liabilities increase whenever credited and closed by;
decrease whenever debited A. Crediting income summary and debiting to Capital
account.
AQE REV.1: BASIC ACCOUNTING JLAG
B. Debiting income summary and crediting to Capital invoice cost contains 50,000 which was paid on
account. January 10,2022.
C. Debiting cash and crediting income summary.  Covered by the 800,000 balance is 40,000
D. Debiting income summary anf crediting cash. advertising from a newspaper for the promotional
15. A reversing entry should never be made for an adjusting campaign in January 2022.
entry that How much would be Arnel Company’s advertising
A. Accrues unrecorded expenses. expense for the year ended December 31,2021?
B. Accrues unrecorded revenue.
C. Adjusts expired costs from an asset account to an
expense account.
D. Adjusts unexpired costs from an expense account to Part 3: Procedural Application
an asset account.
Trias Repair Shop
Part 2: Problems Trial Balance
1. An entity has P 1,500 pesos of supplies on hand at September 30,2018
the end of 2018. During 2019, P 2,750 of supplies
were purchased. A count of supplies on hand at the 110 Cash P 9,000
end of 2019 found an inventory of 875. What was 120 Accounts Receivable 12,000
the amount of supplies expense for 2019?
140 Repair Tools 12,000
150 Repair Supplies 15,000
160 Furniture and Fixtures 65,000
2. Under Lirrah Vintage Clothing Services accounting
170 Service Truck 200,000
system all insurance premiums paid are debited to
220 Notes Payable P 32,500
Prepaid Insurance. For interim financial reporting
310 Trias, Capital 252,000
Lirrah makes monthly estimated charges to
320 Trias, Drawings 7,500
insurance expenses with credits to prepaid
410 Service Income 59,000
insurance. Additional information for the year ended
Dec. 31,2019 is as follows: 510 Advertising Expense 2,500
Prepaid Insurance at December 31,2018 110,000 520 Salaries Expense 9,000
Charges to insurance expense during 2019 530 Utilities Expense 1,500
(including a year-end adjustment of 10,500) 437,500 540 Rent Expense 10,000
Prepaid Insurance at Dec. 31,2019 120,500 Total P 343,500 P 343,500

What was the total insurance premiums paid by On December 31, end of the accounting period, the
Lirrah during 2019? following data were taken:
1. An actual count of Repair Supplies showed a
balance of 8,500.
3. Leo Real Estate owns an office building and leases 2. Repair Tools are depreciated at 10% per annum
the office under variety of rental agreements 3. Furniture and Fixtures are estimated to have a
involving rent paid in advance monthly or annually. useful life of 5 years, while the service truck has a
Not all tenants make timely payments of their rent. useful life of 10 years.
The balance sheet of Leo contained the following 4. A 10% interest has accrued on the notes payable.
data: 5. Of the income received, 9,000 is applicable to the
`` 2018 2019 next accounting period.
Rental Receivable 192,000 248,000 6. Accrual of expenses: Salaries- 2,500 and rent 5,000
Unearned Rentals 640,000 480,000 7. The balance of advertising expense account
represents payment for 5 months.
During 2019, Leo received 1,600,000 from tenants.
What amount of rental revenues should Leo received for Required:
2019? 1. Record the necessary adjusting journal entries
2. Adjusted Trial Balance
3. Statement of Financial Performance
4. Salaries Payable were 3,500 at the end of September 4. Statement of Changes in Equity
and 2,800 at the end of October. Salaries Expense for 5. Statement of Financial Position
October was 18,000. How much cash was paid for 6. Closing Entries
Salaries during October? 7. Post Closing Trial Balance

5. Arnel Company had a balance of 800,000 for its

advertising account before year-end of 2021. The
following items are for considerations:

 Radio Advertising timeslot during December 2021

were billed to Dianne on January 2,2022. The