BASIC ACCOUNTING for BSIT

Accounting is defined as 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, in making reasoned choices among alternative courses of action”.

It is also defined as the art of recording, classifying and summarizing, in a significant manner and in terms
of money, transactions and events which are in part at least of a financial character and interpreting the
results thereof.

The first definition states the purpose of accounting, that is, to provide quantitative information about a
business for the basis of economic decisions and resolutions.

The second definition states the phases performed in the accounting process. These are the recording,
classifying and the summarizing aspects of accounting. Recording or Bookkeeping is the process of
systematically maintaining a record of all business transactions. The recording of transactions either
manually or electronically is usually done in chronological order or according to the date of occurrence.
Classifying is the sorting or grouping of similar and interrelated transactions in their respective class.
Summarizing is the preparation of financial statements which include the Statement of financial Position
(Balance Sheet), Statement of Comprehensive Income, Statement of cash Flows, and Statement of
Changes in Owner’s Equity.

Accounting is an information system that measures business activities, processes information into reports
and communicates the reports to decision makers. It is for this reason that accounting has been called
the “Language of business”, because it serves as a communication link between the business entity and
the users of financial information.

FORMS OF BUSINESS ORGANIZATIONS

The three forms of business organizations are:

1. Single or sole proprietorship. Is a business owned by only an individual called the proprietor.
2. Partnership. Is an association of 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.
3. Corporation. A corporation is an artificial being created by operation of law having the rights of
succession and the powers and attributes expressly authorized by law or incident to its existence.

TYPES OF BUSINESS

Business entities may engage in any of the following types of business. These are:
1. Service business. This business renders services to customers or clients for a fee.
2. Merchandising or trading. This kind of business buy goods or commodities and sells
them at a profit.
3. Manufacturing business. This type makes finished goods from raw materials or
unassembled parts. A manufacturing business produces the goods that it sells.

The three types of businesses discussed which are the service business, merchandising and manufacturing
business may be either a sole proprietorship a partnership or a corporation.

THE BASIC FINANCIAL STATEMENTS OF BUSINESS ORGANIZATIONS

Financial Statements are the end product of the accounting process. They are the means by which
financial information about an economic entity is communicated to the various users of financial
information. Year-end financial statements must be prepared, although interim statements of less than
one year may be prepared for internal purposes. Most companies prepare monthly financial statements
for management use.

The five basic financial statements are the following:

1. Statement of Comprehensive Income or simply Income Statement. Is the financial statement that
shows the summary of the company’s revenues and expenses for a given period. The result of a
company’s business operation is reported in this financial statement.

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2. Statement of Financial Position or Balance Sheet. Is the financial statement which shows the list of a
company’s asset, liabilities and owner’s equity as of a specific date, usually at the close of the last day
of a month or a year. It shows the financial position or condition of an enterprise as of a particular
date.

Shown in the Balance Sheet are the list and the amount f properties owned by the business, its financial
obligation and the equity of the owner/s on the properties of the business.

3. Statement of Changes in Owner’s Equity or simply the Capital Statement is the summary of changes in
the owner’s equity that have occurred during a specific period of time, such as a month or a year.

4. Statement of Cash Flows. Is the financial statement that provides information about the cash receipts
and cash payments of an entity for a given period of time. Reported in the cash flow statement are the
sources of cash and the uses or disbursements made by the company.

5. Notes to the financial statements. To make the financial statements more useful and meaningful to
those who might have an interest in the business, the notes to the financial statements are added as
one of the basic financial statement companies are required to prepare. This statement presents in
narrative form the significant accounting policies and other related explanatory notes that have
affected the preparation of the financial statements.

Example of a note to the financial statement is a disclosure regarding a lawsuit for which the company
is the defendant. Other relevant information which cannot be shown in the face of the financial
statements is reported in the Notes to the Financial Statements.

USERS OF FINANCIAL INFORMATION

Accounting serves people both inside and outside the business for various purposes. Hence, the users of
accounting information are classified into: Internal and External users.

The users of financial information and their information needs are as follows:

• Management for planning and controlling the operation of the business

• Creditors and suppliers in order to evaluate a borrower’s ability to pay and in
deciding whether to extend credit to a debtor.

• Owner/s of the firm need to know if the business is operating at a profit or loss.

• Investors to determine if their investment is profitable and safe and in deciding

whether to invest in the business or not. Also, whether they should buy, hold or
sell their shares of stocks.

• Government and their Agencies These users require financial information to

regulate the activities of the enterprise, determine taxation policies and as basis
for national income statistics. Examples of government agencies that require
companies to submit financial statements to them are: Bureau of Internal
Revenue (BIR), Securities and Exchange Commission (SEC).

• Customers Use financial statements as basis for evaluating the possibility of

price changes and identifying other sources of cheaper services and
commodities.

• Financial Analysts and Advisors Use financial information as basis in evaluating

the position of the business in the industry and render an opinion on the business’
potentials regarding profitability risks and opportunities.

• Trade Associations Use financial data to report industry statistics; industry

comparisons and analysis in order that firms belonging to the same industry can
make relevant economic decisions.

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ELEMENTS OF FINANCIAL STATEMENTS
The elements of financial statements also known as the five (5) basic classifications of accounts are as
follows:

1. ASSETS- the resources controlled by the enterprise as a result of past transactions and events and
from which future economic benefits are expected to flow to the entity. In layman’s language, assets
are the properties owned by the business. Examples of asset accounts are:

Cash Office Supplies Office Equipment

Accounts Receivable Prepaid Rent Store Equipment
Notes Receivable Prepaid Insurance Machineries
Merchandise Inventory Furniture & Fixtures Land
Store Supplies Automobiles Building
Intangible Assets (like Franchise, Copyright, Patent, Trademarks).

2. LIABILITIES- are the present obligations of an enterprise arising from past transactions or events, the
settlement of which is expected to result in an outflow of resources. In simple terms, liabilities are
the financial obligation or debts of the business. It is also described as the claim or equity of the
creditors on the assets of the enterprise. Liability accounts include:

Accounts Payable Taxes Payable

Notes Payable Utilities Payable
Salaries Payable Mortgage Payable
Interest Payable Unearned Revenue

3. CAPITAL-The equity or claim of the owner on the assets of the business. It is the residual interest in
the assets of the business after deducting all its liabilities. Capital accounts of a sole proprietorship
consists of:

Owner’s Capital
Owner’s Drawing

Examples of capital accounts of a corporation are:

Preference Share Subscribed Preference share

Ordinary Share Subscribed Ordinary share
Additional paid in capital Donated Capital
Revaluation Surplus Retained Earnings

4. REVENUE OR INCOME-The gross inflow of economic benefits during the period in the form of inflows
or enhancements on assets or decrease in liabilities that result in increase in equity, other than those
relating to contributions from the owner/s.
Commonly used revenue accounts are:

Sales Interest Income

Service Revenue Fees Earned
Professional Fees Subscription Revenue
Rent Income Commissions Earned

The use of appropriate revenue account title depends upon the source of the revenue. For example,
if the revenue relates to rental the appropriate revenue account to use is rental income, if it relates to
interest, then interest income. The account sales is the commonly used revenue account by
merchandising companies.

5. EXPENSES- Are outflows or other “using-up” of assets or incurring of liabilities during a period as a
result of delivering or producing goods and/ or rendering services. In simple terms, expenses are costs
incurred to produce revenue. Expense accounts may include the following:

Salaries & Wages Expense Transportation Expense

Taxes and Licenses Expense Supplies Expense
Rent Expense Utilities Expense

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 Advertising Expense Repair &Maintenance
Insurance Expense Uncollectible accounts expense
Depreciation Expense or Bad debts expense
Miscellaneous Expense

THE ACCOUNTING PROCESS

The accounting process or the accounting cycle involves a series of steps accountants perform during an
accounting period relating to analyzing, recording, classifying, and summarizing the business transactions
of an entity. Its purpose is to generate the financial statements which will be used, to report to the various
users financial information about the entity.

The steps in the accounting process are:

1. Analyzing business transactions by examining the source documents.
2. Journalizing
3. Posting
4. Preparing the trial balance.
5. Preparing a worksheet.
6. Preparing the financial statements.
7. Journalizing and posting the adjusting entries.
8. Journalizing and posting the closing entries.
9. Preparing the post-closing trial balance.
10. Preparing the reversing entries.

ANALYZING BUSINESS TRANSACTIONS

In analyzing business transactions, the suggested procedures are as follows:

a. With the source documents, determine the particular accounts affected or involved in the
transaction. There are always two or more accounts involved in a transaction.

b. Determine the effect of the transaction on the accounts involved in terms of increase or
decrease. The accounts affected may either increase or decrease. One account may increase,
and the other decrease. Or the accounts involved may all increase or may all decrease. (Pls.
see examples below).

c. Determine the account or accounts to be debited and credited by applying the rules of debit
and credit.

THE RULES OF DEBIT AND CREDIT

The account or accounts to be debited and credited can be determined easily by applying the rules of
debit and credit.
Debit signifies: Credit signifies:
a. Increase in Assets Decrease in Assets
b. Decrease in Liabilities Increase in Liabilities
c. Decrease in Capital Increase in Capital
d. Increase in Drawing Decrease in Drawing
e. Decrease in Revenue Increase in Revenue
f. Increase in Expense Decrease in Expense

Interpretation of the rules of debit and credit:

a. Debit the asset account if it is to be increased, and credit if to be decreased.

b. Debit the liability account if it is to be decreased, and credit if to be increased.
c. Debit the capital account if to be decreased, and credit if to be increased,
d. Debit the drawing account if to be increased, and credit if to be decreased.
e. Debit the revenue account if to be decreased, and credit if to be increased.
f. Debit the expense account if to be increased, and credit if to be decreased.

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 When an account is debited, it does not mean that such account is increased, because debit may increase
or decrease the balance of an account. Likewise, when an account is credited it does not mean that such
account is decreased, because credit may also increase or decrease the balance of an account.

Note: In mathematics, the plus (+) sign is used to add and the minus (-) sign to subtract, in accounting,
increase and decrease in an account is being made by means of debiting and crediting the account.

Thus, if an amount of P100,000 is to be added to the account cash, then cash is to be debited for
P100,000. If an amount is to be deducted from the account cash, then cash has to be credited for the
said amount.
Analysis of business transactions and the application of the rules of debit and credit in determining the
account or accounts to be debited and credited are illustrated in the following examples.

1. The company purchased office equipment worth P65,000. Paid a down payment of P15,000 and
the balance on account.

Analysis:
Accounts affected Type of account Effect on the account
Office Equipment Asset increase
Cash Asset decrease
Accounts Payable liability increase

Account to be debited Accounts to be credited

Office Equipment Cash and Accounts Payable

The company purchased office equipment, so the account office equipment will have to be increased
by P65,000 in the record. Applying the rules of debit and credit, increase in asset is recorded by
debiting such asset. Thus, office equipment is to be debited. By paying cash, cash of the company
will decrease. Decrease in asset is recorded by a credit entry. That is why, cash is to be credited for
the amount of P15,000.

The other account involved is Accounts Payable. The company incurs a liability of P50,000 for the
unpaid balance. Increase in liability is recorded by crediting a liability account.

Stated differently, debit the value received and credit the value parted with. In the above example,
the value received is office supplies so it is the account to be debited. The value parted with is cash
so cash is to be credited.

If there are only two accounts involved in a transaction, one account is to be debited and the other
is to be credited. The two accounts cannot be both debited nor both credited.

2. A law firm received P8,000 cash from a customer for legal services rendered.

Analysis:

Accounts affected Type of account Effect on the account

Cash Asset increase
Professional Fees Revenue Increase

Account to be debited Account to be credited

Cash Professional Fees

In the second example, the asset cash increase so it is to be debited. The revenue account
Professional fees also increase. Increase in revenue is recorded by a credit entry. Thus, professional
fees is to be credited.

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 B. The company paid a liability amounting to P 9,000.

Analysis:

Accounts affected Type of account Effect on the account

Cash Asset decrease
Accounts Payable Liability decrease

Account to be debited Account to be credited

Accounts Payable Cash

Accounts Payable is to be debited because decrease in a liability account is recorded by a debit

entry.

The The application of the rules of debit and credit are summarized as follows:

Business transactions Debit Credit

a. The owner invests cash in the business
(a) Cash Owner’s Capital
(b) The owner withdrew cash from the
b.
business for personal use. Owner’s Drawing Cash
c. Purchased office supplies for cash (c) Office Supplies Cash
d. Purchased office supplies on account
(d) Office Supplies (e) Accounts Payable
(f) Returned some office supplies (g)
e. Office Supplies
previously purchased on account. (h) Accounts Payable

(j) Accounts Payable

f. Purchased equipment on account (i) Equipment

(k) Issued check in payment for the

g. Accounts Payable Cash
Equipment purchased on account.
Received cash from customers for
h. (l) Cash Service Revenue
services rendered.
(m) Rendered services to customers on(n)
i.
account. (o) Accounts Receivable Service Revenue
(p) Received payment from customers(q)
j.
on account. (r) Cash Accounts Receivable
(s)k. Paid employees’ salaries. (t) Salaries Expense
Cash C Cash

NOTE: For easier understanding of the debit and credit, the following additional hints are given:

1. If there are only two accounts affected in the transaction, one is to be debited and the other one is to
be credited. The two accounts cannot be both debited or credited.

2. Apply the concept of value received and value given away.

In the transaction, purchased office supplies for cash, the value received is Office Supplies, so it is the
account to be debited. The value given away is Cash, so it is the account to be credited.

JOURNALIZING
Journalizing is the process of recording business transactions in the book of original entry called JOURNAL.
Business transactions are recorded following the double-entry bookkeeping. Double-entry bookkeeping
is a method of recording business transactions which recognizes the dual effect of a transaction. This
means that, for every value received there is a corresponding value parted with or given up. In double-
entry bookkeeping, each transaction is recorded by debiting and crediting accounts. For every debit entry
there is a corresponding credit entry with equal amount.

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THE DOUBLE-ENTRY BOOKKEEPING
Double-entry bookkeeping is a method of recording business transactions which
recognizes the dual effect of a transaction. This means that, for every value received there is a
corresponding value parted with or given up. In double-entry bookkeeping, each transaction is
recorded by debiting and crediting accounts. For every debit entry there is a corresponding credit
entry with equal amount.

Since business transactions are recorded following the double-entry bookkeeping system,
the next important lesson that must be learned is determining the account or accounts that will
be debited and credited in the journal entry.

WHAT IS AN ACCOUNT?
An account is a record of each asset, liability, owner’s equity, revenue and expense items
in which the effects of business transactions are recorded. Each element of the financial
statements is given specific account title.

THE T-ACCOUNT

A T-account is a very useful tool that is used for illustrations, analyzing transactions and
in problem solving. It is called T-account because it resembles big letter T. It appears as follows:

Title of the account

Debit Credit
(left side) (right side)

WHAT IS DEBIT? CREDIT?

The words debit and credit came from the Latin words debere (meaning “to owe”) and
credere (meaning “to trust or believe”). Debit is abbreviated as Dr. and credit as Cr. In
accounting, the increase or decrease in an account is being made by means of debit and credit.

When an account is debited, it does not mean that such account is increased, because
debit may increase or decrease the balance of an account. Likewise, when an account is credited
it does not mean that such account is decreased, because credit may also increase or decrease
the balance of an account.

ILLUSTRATIONS:

Atty. Alex Flores, decided to start his practice of law by establishing his own law office.
Following are the transactions of the law firm during June, its first month of operation:

The accounts affected and whether it is to be debited or credited are as follows:

June 1 – Cash of P 200,000 was received from Atty. Flores, the owner as
his initial investment in his law firm.
Debit - Cash
Credit - Alex Flores, Capital

The receipt of cash by the company will increase its asset cash, therefore, cash is to be
debited. Alex Flores, Capital is to be credited to record the increase in the capital
account of the business.

2 – Purchased office supplies for cash, P 5,000.

Debit - Office Supplies
Credit - Cash

The purchase of office supplies will increase the asset office supplies, so it is to be
debited. Cash is to be credited because the payment will cause cash to decrease.

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 3 –Purchased office equipment worth P 50,000. Paid P 10,000 cash as down payment and
signed a promissory note for the balance.
Debit - Office Equipment
Credit - Cash and Notes Payable

The asset office equipment will increase so it has to be debited. The office equipment
was not paid in full so the company will have a liability for the unpaid balance. Since
the liability is supported by a promissory note, the account to be credited is Notes
Payable. Cash is also to be credited because the down payment will cause cash to
decrease.

4 – Issued check in payment for the promissory note issued, P 40,000

Debit - Notes Payable
Credit - Cash

The payment of a liability will cause liability to decrease. So, the liability account,
Notes Payable is to be debited. Every time the company pay or disburse cash, the
account Cash is credited to reflect the decrease in cash

5 – Received P 50,000 cash from clients for services rendered for cash.
Debit - Cash
Credit - Professional Fees

The receipt of cash by the business is always recorded by debiting the account cash,
whereas, the earning of revenue is always recorded by crediting the revenue account.

6 - Billed a client for services rendered on account, P 30,000.

Debit - Accounts Receivable
Credit - Professional Fees

The company will have a receivable from the client to whom services were rendered
on account. Therefore, Accounts Receivable is to be debited. Again, for a service
business, revenue is considered earned or realized once services have been rendered
whether for cash or on account. That’s why, the revenue account Professional Fees is
to be credited.

7 – Received payment from the client to whom services were previously rendered on
account.
Debit - Cash
Credit - Accounts Receivable

The collection of a receivable will decrease the receivable account, so it is to be

credited.

8 – The owner withdrew P 10,000 cash from the business for personal
use.
Debit - Alex Flores, Drawing
Credit - Cash

Cash taken by the owner for personal use is to be charged to the account owner’s
drawing.

HOW TO RECORD BUSINESS TRANSACTIONS IN THE GENERAL JOURNAL

P/
Date Particulars R Debit Credit
June 1 Cash 2 0 0 0 0 0 -
Alex Flores, Capital 2 0 0 0 0 0 0 -
Cash investment by the
owner.

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 2 Office Supplies 5 0 0 0 -
Cash 5 0 0 0 -
Purchased office supplies
for cash.

3 Office Equipment 5 0 0 0 0 -
Cash 1 0 0 0 0 -
Notes Payable 4 0 0 0 0 -
Purchase office equipment.
Paid a down payment and
Issued a promissory note for
the balance.

POSTING
Posting is the process of transferring the entries from the journal (the book of original entry) to the
accounts in the LEDGER (the book of final entry). This is the classifying phase of the accounting process

PREPARING THE TRIAL BALANCE

A trial balance is a summary listing of the account titles and the balance of each account. The account
balances contained in the trial balance are taken from the ledger.

Trial balance is prepared to test the equality of the debit and credit balances of the accounts in the ledger.
However, even if the trial balance is equal, it does not provide a complete proof of the accuracy of the
accounting records because there are errors which do not affect the equality of the trial balance.

Examples of errors which do not affect the equality of the trial balance are:
Failure to record a transaction, recording a transaction twice, using incorrect account in journalizing or
posting (e.g. supplies purchased was debited and posted to equipment).

But then, if the trial balance does not balance it is an indication that error has been committed.

PREPARING THE ADJUSTING ENTRIES

After preparing the trial balance, the financial statements cannot be prepared yet. Because there are
transactions of the business that are not yet recorded, hence there is a need for adjusting entries.

Adjusting Entries are entries prepared at the end of an accounting period to update or adjust the balances
of accounts, and to split mixed accounts. (the unadjusted balance of prepaid expense is an example of a
mixed account.) It is very important that adjustments be recorded correctly so that the company’s profit
for the period be measured properly and its related assets and liabilities be brought to correct balances.

All adjusting entries affect at least one income statement account and one balance sheet account. Thus,
an adjusting entry will always involve a revenue or an expense account and an asset or a liability account.
Adjusting entries ensure the application of the accrual basis of accounting and the matching principle.

TYPES OF ADJUSTING ENTRIES

1. Adjusting entries to take up accrued expenses
2. Adjusting entries to take up accrued revenue
3. Adjusting entries to take up depreciation of property, plant, and equipment
4. Adjusting entries for prepaid expenses
5. Adjusting entries for unearned revenue
6. Adjusting entries to take up provision for uncollectible accounts or bad debts
7. Adjusting entry for Merchandise Inventory

Accrued Expenses (a liability account) – are expenses already incurred but not yet paid. Examples of
accrued expenses are:
Unpaid salaries of employees Unpaid Rent
Unpaid utility bills Unpaid interest on notes payable

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The adjusting entry for accrued expense involves a debit to an expense account and a credit to a liability
account.

ILLUSTRATIONS:
1. ADJUSTING ENTRIES FOR ACCRUED EXPENSES

a. On Dec.31, 2022, ABC Company has unpaid rental of P10,000. The adjusting entry is:

Rent Expense 10,000

Rent Payable 10,000

b. LG Company pays an average of P30,000 every Saturday to its 10 employees, for a 6-day work
week. If Dec 31, 2022, is Tuesday, the company has accrued salaries of P10,000 at Dec. 31, 2022.
The days accrued is Monday and Tuesday since the last payday was Saturday.

The adjusting entry on Dec. 31 is:

Salaries Expense 10,000
Salaries Payable 10,000

The computation of the unpaid salaries of P10,000 is:

Average weekly salary P30,000
Divide by number of work days 6
Average daily salary of the 10 employees P 5,000
Multiply by Nos. of days accrued 2
Accrued salaries at Dec. 31,2022 P10,000

2. ADJUSTING ENTRIES FOR ACCRUED REVENUE

Accrued Revenue, is revenue already earned but not yet received. The adjusting entry for accrued
revenue involves a debit to a receivable account and a credit to a revenue account. Example of an
accrued revenue is, accrued interest on notes receivable.

ILLUSTRATION:
At December 31, 2022, X Company has accrued interest on notes receivable of P1,000

The adjusting entry on December 31, 2022, to take up accrued interest on notes receivable is:

Interest Receivable 1,000

Interest Revenue 1,000

3. ADJUSTING ENTRIES TO TAKE UP DEPRECIATION OF PROPERTY, PLANT, AND EQUIPMENT

The adjusting entry to take up depreciation of Property, Plant, and Equipment is

Depreciation expense xxx
Accumulated Depreciation xxx

METHODS OF COMPUTING DEPRECIATION

The common methods of computing depreciation are:
1. Straight-line method
2. Double-declining balance method
4. Sum-of-the years digit method
5. Units of production method

Illustrations:
1. Alpha Company acquired an equipment on January1,2022, for a total cost of P160,000. The
estimated useful life of the equipment is 5 years, at the end of which it is estimated to be sold
for P4,000.

The computation of depreciation expense, accumulated depreciation, and book value under
each of the above methods are shown below:

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 A. STRAIGHT-LINE METHOD

Cost of Equipment--------------- P160,000

Less: Estimated scrap value---- 4,000
Depreciable Cost----------------- P156,000
Divide by estimated useful life 5 years
Annual depreciation P 31,200

The depreciable cost or depreciation base is the amount that will be charged to depreciation expense
over the years the asset will be used.

Table of Depreciation- Straight-line Method

Accumulated
Depreciation Depreciation Book Value Computation of
year Expense (end of year) (end of year) book value
2022 P 31,200 P 31,200 P 128,800 (P160,000-31,200)
Cost less Accumulated Depreciation = book value or carrying value

PARTIAL YEAR DEPRECIATION

Assume that the equipment was purchased on June 1, 2022, instead of January 1, 2022. The depreciation
expense for years 2022 to 2027 are shown in the following depreciation table:

A. STRAIGHT-LINE METHOD (160,000-4,000=156,000/5 yrs.= P31,200 annual depreciation)

Table of Depreciation- Straight-line Method

Accumulated
Depreciation Book Value
year Depreciation Expense (end of year (end of year)
2022 P 31,200 x 7/12=P18,200 P 18,200 P 141,800
2023 31,200 49,400 110,600
2024 31,200 80,600 79,400
2025 31,200 111,800 48,200
2026 31,200 143,000 17,000
2027 P 31,200 x 5/12=P13,000 156,000 4,000

ADJUSTING ENTRIES FOR PREPAID EXPENSES

Prepaid Expenses, are expenses already paid but not yet used or consumed. Examples are: Prepaid
Rent, Prepaid Insurance, Office Supplies

The adjusting entries for prepaid expenses depends upon the method used in recording the
prepayment.

The two methods of recording prepaid expenses are:

1. Asset method –The account debited upon payment is an asset. That’s

why it is called asset method.

2. Expense method - The account debited upon payment is an expense

account.

The company may use either method as they are both acceptable. But then consistency must be
observed.

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Illustrations:

On May 1,2022, Malakas Company paid P120,000 to maganda Company. The amount is for one year
rental of the office space Malakas is occupying. The rent begins month of May.

The entries to record the payment on May 1, and the adjusting entries on December 31, 2022 under the
asset method and expense method are as follows:

Asset Method Expense Method

May 1 Prepaid Rent 120,000 Rent Expense 120,000
Cash 120,000 Cash 120,000

Dec. 31 Rent Expense 80,000 Prepaid Rent 40,000

Prepaid Rent 80,000 Rent Expense 40,000

Computations:

Amount of rent paid in advance P 120,000

Divide by period covered 12 mos.
Monthly rent P10,000
Multiply by nos. of months from May 1 to Dec. 31 8
Amount of rent expense for year 2022 P 80,000

Amount of rent paid in advance P 120,000

Less: Rent Expense for year 2022 80,000
Prepaid Rent to be reported at December 31,2022 P 40,000

Philippine Financial Reporting Standards (PFRS) requires that expenses paid in advance be taken up as
asset. So, if the company used expense method upon prepayment, prepaid rent must have to be debited
in the adjusting entry to take up the unused portion of the rent.

Whereas, if the company used the asset method, adjusting entry must be prepared at the end of the
accounting period, to take up the expense portion of the rent. Thus, rent expense has to be debited.

ADJUSTING ENTRIES FOR UNEARNED REVENUE

Unearned revenue, are revenue received in advance. (PFRS) requires that revenue received in advance
be reported as liability.

The adjusting entry for unearned revenue depends upon the method used when the revenue was received
in advance.

The two methods of recording unearned revenue are:

1. Liability method -The account credited upon receipt of cash is a liability
account.

2. Revenue method - The account credited upon receipt of cash is a

revenue account.

Illustration:

On May 1,2022, Maganda Company received P120,000 from MalakasCompany. The amount is for one
year rental of the office space Malakas is occupying. The rent begins month of May.

The entries to record the receipt of payment on May 1, and the adjusting entries on December 31, 2022
under the liability method and revenue method are as follows:

Liability Method Revenue Method

May
1 Cash----------------120,000 Cash 120,000
Unearned rent revenue 120,000 Rent revenue 120,000

Unearned rent revenue--80,000 Rent revenue 40,000

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 Dec. Rent revenue 80,000 Unearned rent revenue 40,000
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To take up the earned portion To take up the unearned
of the rent received in advance. portion of the rent received in
advance.

At December 31, 2022 the earned portion and unearned portion of the revenue received in advance is
computed as follows:

Amount received on May 1 P 120,000

Divide by period covered 12 mos.
Rent per month P 10,000
Multiply by number of months(from May 1 to Dec. 31) 8
Earned portion (to be taken up as rent revenue) P 80,000

Amount received on May 1 P 120,000

Less: Earned portion 80,000
Unearned portion at Dec. 31, 2022 (to be taken up as P 40,000
liability)

Under the liability method, the account credited upon the receipt of advance payment is a liability account
unearned rent revenue. Adjusting entry at the end of the accounting period must be prepared to take up
the revenue portion which is P80,000 (rent from May 1 to December 31).

Under the revenue method, the receipt of the advance payment from customer is recorded by a credit to
a revenue account. In the above illustration, Rent revenue was credited on May 1. Adjusting entry should
be prepared to adjust the balance of the rent revenue account and to take up the unearned portion of
the revenue received in advance.

ADJUSTING ENTRIES TO TAKE UP UNCOLLECTIBLE ACCOUNTS

Since not all receivables are collected, companies record those uncollectible accounts by a charge to
Uncollectible accounts expense. The other accounts used are Bad debts expense or Doubtful accounts
expense.

In preparing the adjusting entry for uncollectible accounts, the company must have to make an estimate
of the amount that will be charged to uncollectible accounts expense. The estimated amount of the
accounts receivable that might become uncollectible may be based on the following:

1. By making an analysis of the outstanding accounts receivable by aging the accounts receivable.
An estimate of accounts that might not be collected is based on how long an account has been
overdue.
2. Percentage of the outstanding accounts receivable

The adjusting entry to take up provision for uncollectible accounts is:

Uncollectible accounts expense 13,500
Allowance for Uncollectible accounts 13,500

PREPARING A WORKSHEET

The worksheet is a columnar sheet of paper used to organize the data needed to prepare the financial
statements. It is not part of the formal accounting records. In fact it is optional. A worksheet is only a tool
used to summarize information needed to facilitate the preparation of financial statements.

A ten-column work sheet has the following column headings: unadjusted trial balance, adjustments,
adjusted trial balance, income statement and balance sheet with a debit and a credit column.
To illustrate the preparation of a 10-column worksheet, the trial balance of Mango Printing Services at
June 30,2023, is presented on the next page:

13
 Mango Printing Services
Trial Balance
June 30, 2023

Debit Credit
Cash 400,150
Accounts Receivable 73,000
Allowance for bad debts 2,500
Supplies 91,700
Prepaid Rent 56,000
Prepaid Insurance 33,850
Automobile 785,000
Accumulated Depreciation – Auto. 170,000
Equipment 288,000
Accumulated Depreciation – Equip. 148,800
Accounts Payable 42,300
Notes Payable (due June 30, 2025) 300,000
Ali Mango, Capital 783,750
Ali Mango, Drawing 25,000
Printing Revenue 383,800
Salaries Expense 58,000
Utilities Expense 15,250
Miscellaneous Expense 5,200
Total 1,831,150 1,831,150

The adjustment data at June 30, were:

a. The estimated uncollectible accounts at June 30 is P 7,500.
b. Supplies inventory amounts to P 38,700.
c. The prepaid rent applicable to future periods is P 44,000
d. Expired insurance premiums P4,600
e. Accrued salaries P 9,900
f. Accrued interest on notes payable P10,500
g. Depreciation of the Automobile and Equipment were P10,000
and P8,800 respectively.

The adjusting entries for Mango Printing Services were:

a. Uncollectible accounts expense 5,000

Allowance for uncollectible accounts 5,000
Computation:
Estimated uncollectible accounts- P 7,500
Less: Allowance balance before adjustment- 2,500
Uncollectible accounts expense – P 5,000

b. Supplies Expense 53,000

Supplies 53,000
Computation:
Unadjusted balance of Supplies - P91,700
Less: Supplies inventory – 38,700
Supplies used to be charged to expense– P 53,000

c. Rent Expense 12,000

Prepaid Rent 12,000
Computation:
Unadjusted balance of Prepaid rent – P 56,000
Less: balance of prepaid rent at June 30, – 44,000
Expired Rent to be charged to expense– P 12,000
d. Insurance Expense 4,600
Prepaid Insurance 4,600
(there is no need to compute for the amount of insurance
expense. Its amount is given in the adjustment data).

14
 e. Salaries Expense 9,900
Salaries Payable 9,900
f. Interest Expense 10,500
Interest Payable 10,500

g. Depreciation Expense 18,800

Accumulated depreciation-Auto. 10,000
Accumulated depreciation-Equip. 8,800

The presence of the accounts prepaid rent and prepaid insurance in the unadjusted trial balance, indicates
that the company is using the asset method.

A 10-column worksheet prepared for Mango Printing Services is presented on the next page.

15
 Mango Printing Services
Worksheet
For Month Ended June 30, 2023
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Accounts
debit credit debit credit debit credit debit credit debit credit
Cash 400,150 400,150 400,150
Accounts Receivable 73,000 73,000 73,000
Allowance for bad debts 2,500 a. 5,000 7,500 7,500
Supplies 91,700 b. 53,000 38,700 38,700
Prepaid Rent 56,000 c. 12,000 44,000 44,000
Prepaid Insurance 33,850 d. 4,600 29,250 29,250
Automobile 785,000 785,000 785,000
Accum. depreciation - auto 170,000 g. 10,000 180,000 180,000
Equipment 288,000 288,000 288,000
Accum. depreciation . equip. 148,800 g. 8,800 157,600 157,600
Accounts Payable 42,300 42,300 42,300
Notes Payable 300,000 300,000 300,000
Ali Mango, Capital 783,750 783,750 783,750
Ali Mango, Drawing 25,000 25,000 25,000
Printing Revenue 383,800 383,800 383,800
Salaries Expense 58,000 e. 9,900 67,900 67,900
Utilities Expense 15,250 15,250 15,250
Miscellaneous Expense 5,200 5,200 5,200
a. Total 1,831,150 1,831,150b.
Uncollectible accounts expense c. a. 5,000 5,000 5,000
d. Supplies Expense b. 53,000 53,000 53,000
Rent Expense c. 12,000 12,000 12,000
Insurance Expense d. 4,600 e. 4,600 4,600
Salaries Payable e. 9,900 9,900 9,900
Interest Expense f. 10,500 10,500 10,500
Interest Payable f. 10,500 10,500 10,500
Depreciation Expense g. 18,800 18,800 18,800
113,800 113,800 1,875,350 1,875,350 192,250 383,800 1,683,100 1,491,550
NET INCOME 191,550 191,550
Totals 383,800 383,800 1,683,100 1,683,100

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PREPARING THE FINANCIAL STATEMENTS:

Financial Statements are the end product of the accounting Process. They are the means used to communicate
to the various interested parties, financial information about an economic entity.

After completing the work sheet, all information needed to prepare the financial statements are already
available.

The following data taken from the adjusted trial balance column of the worksheet of Mango Printing Services,
will be used to illustrate the preparation of Income Statement, Capital Statement, and Balance Sheet.

Debit Credit
Cash 400,150
Accounts Receivable 73,000
Allowance for bad debts 7,500
Supplies 38,700
Prepaid Rent 44,000
Prepaid Insurance 29,250
Automobile 785,000
Accumulated depreciation – Auto. 180,000
Equipment 288,000
Accumulated depreciation – Equip. 157,600
Accounts Payable 42,300
Notes Payable (due June 30, 2025) 300,000
Salaries Payable 9,900
Interest Payable 10,500
Ali Mango, Capital 783,750
Ali Mango, Drawing 25,000
Printing Revenue 383,800
Salaries Expense 67,900
Rent Expense 12,000
Supplies Expense 53,000
Utilities Expense 15,250
Depreciation Expense 18,800
Insurance Expense 4,600
Interest Expense 10,500
Uncollectible accounts expense 5,000
Miscellaneous Expense 5,200
Total 1,875,350 1,875,350

THE INCOME STATEMENT

The Income Statement reports the revenues and expenses of a company, and finally the amount of net income
or loss. Most companies prepare an income statement monthly, quarterly, semi-annually and annually. The data
needed to prepare the income statement can be taken from the income statement columns of the work sheet.

Mango Printing Services

Income Statement
For Month Ended June 30, 2023

Printing Revenue P 383,800

Less: Operating Expenses
Salaries Expense P 67,900
Supplies Expense 53,000
Depreciation Expense 18,800
Utilities Expense 15,250
Rent Expense 12,000
Interest Expense 10,500
Insurance Expense 4,600
Uncollectible accounts expense 5,000
Miscellaneous Expense 5,200
Total operating expenses 192,250
Net Income P 191,550

In the above income statement, total revenue is higher than total operating expenses. Thus, the result of
business operation is net income.

17
If the total operating expenses is higher than the total revenue, the difference is labelled net loss.

Income statement is dated for a given period of time. The shortest period an income statement is prepared is
for one month. The longest is for a period of one year.

THE CAPITAL STATEMENT

The capital statement (also called statement of owner’s equity) is a financial statement that summarizes the
transactions affecting the owner’s equity. This statement is prepared by showing the beginning capital balance,
plus additional investment if there’s any, adding net income (or deducting net loss), and then subtracting the
owner’s withdrawals.

The capital statement prepared for Mango Printing Services is as follows:

Mango Printing Services

Capital Statement
For Month Ended June 30, 2023

Ali Mango, Capital - June 1, 2023 P 783,750

Add: Additional Investment -0-
Net income for the month of June P 191,550
Total P 975,300
Less: Drawing (25,000)
Ali Mango, Capital - June 30, 2023 P 950,300

The capital balance at June 30, which is P950,300 is the amount forwarded to the balance sheet.

Assuming that the amount of P259,450 is a net loss, The capital statement
will look like as follows:

Ali Mango, Capital - June 1, 2023 P 783,750

Less: Net loss (259,450)
Drawing ( 25,000)
Ali Mango, Capital - June 30, 2023 P 499,300

Additional investment by the owner and net income increases capital. Whereas, net loss and drawing
decreases capital.

THE BALANCE SHEET

The Balance Sheet also referred to as the Statement of Financial Position provides information about the nature
and amounts of the company’s resources (Assets), financial obligations (Liabilities), and the equity of the owner
in the business as of a specific date. The balance sheet provides a basis for computing rates of return and
evaluating the capital structure of the enterprise. Analyst use this statement to assess a company’s liquidity,
solvency, and financial flexibility.

Assets are classified into current assets and non-current assets.

Current assets, includes cash and other assets that are converted into cash or used up in a relatively short period
of time, usually one year or less. The current assets common to a service company are: cash, accounts receivable,
notes receivables, supplies and other prepaid expenses. Current assets are listed in the order of liquidity, or their
convertibility into cash.

Non-current assets, include Long-Term Investments, Property, Plant and Equipment, Intangible assets and Other
assets. Property, Plant, and Equipment are assets acquired for use in a business rather than for sale. They are
also called fixed assets because they are used for long-term purposes.

Liabilities are also classified as current and non-current (long-term).

Current liabilities are debts which are due and payable within one year. The payment of which normally will
require the use of current assets. Current liabilities are usually listed in the order of their maturity. Examples of
current liabilities are: Accounts Payable, Notes Payable (short-term), Salaries Payable, Utilities Payable,
Unearned Revenue, and other accrued expenses.

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Non-current liabilities (long-term liabilities) are those debts that will be paid after a relatively long period of time,
usually more than one year. Examples are: Notes Payable (long term), Mortgage Notes Payable, and Bonds
Payable.

The Balance Sheet of Mango Printing Services is presented below:

Mango Printing Services

Balance Sheet
June 30, 2023

ASSETS
Current Assets:
Cash P 400,150
Accounts Receivable P 73,000
Less: Allowance for bad debts 7,500 65,500
Supplies 38,700
Prepaid Rent 44,000
Prepaid Insurance 29,250
Total current assets P 577,600

Property and Equipment:

Automobile P 785,000
Less: Accumulated Depreciation – Auto. 180,000 605,000
Equipment P 288,000
Less: Accumulated Depreciation – Equip. 157,600 130,400
Total Assets P 1,313,000

LIABILITIES
Current Liabilities:
Accounts Payable P 42,300
Salaries Payable 9,900
Interest Payable 10,500
Total current liabilities P 62,700
Long-term liability:
Notes Payable (due June 30, 2025) 300,000
Total Liabilities P 362,700

CAPITAL
Ali Mango, Capital 950,300
Total Liabilities and Capital P 1,313,000

JOURNALIZING AND POSTING THE ADJUSTING ENTRIES

The adjusting entries, which are first recorded in the work sheet, are recorded in the journal and posted in the
ledger. The adjusting entries are recorded on the next available space in the journal which are dated end of the
accounting period.

JOURNALIZING AND POSTING THE CLOSING ENTRIES

Closing entries are entries prepared at the end of an accounting period to reduce the balances of nominal
accounts to zero. The purpose is to clear the record of these nominal accounts of the preceding period’s entries,
in preparation for the next accounting period.

Only the amount of nominal or temporary accounts are closed. The balances of real accounts are not closed
because their balances are carried forward to the next accounting period. The accounts closed are: revenue
accounts, expense accounts, net income, and the owner’s drawing.

The first closing entry is to close all revenue accounts, by debiting the revenue accounts and by crediting the
account Income Summary.

The 2nd, closing entry is to close all expense accounts, by debiting Income Summary (for the total amount of
expenses) and by crediting all the expense accounts.

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The 3rd closing entry is to close the amount of net income or net loss to capital. Net income is closed to capital
by debiting income summary and crediting capital.

The closing entries for Mango Printing Services are as follows:

a. To close revenue accounts

Printing Revenue 383,800
Income Summary 383,800

b. To close expense accounts

Income Summary 192,250
Salaries Expense 67,900
Supplies Expense 53,000
Depreciation Expense 18,800
Utilities Expense 15,250
Rent Expense 12,000
Interest Expense 10,500
Insurance Expense 4,600
Uncollectible accounts expense 5,000
Miscellaneous Expense 5,200
c. To close the amount of net income
Income Summary 191,550
Ali Mango, Capital 191,550
d. To close the owner’s drawing account
Ali Mango, Capital 25,000
Ali Mango, Drawing 25,000

The T-account of Income summary is shown below:

INCOME SUMMARY
amount of expenses - 192,250 383,500 amount of revenue

191,550 net income

After closing the revenue and expense accounts to income summary, the balance of the income summary
account represents the amount of net income or net loss.

If the balance of income summary is a credit balance, the balance represents the amount of net income. It is the
difference between the amount posted in the credit side (the amount of revenue) and posted in the debit side
(which is the total expense).

If the total expense is greater than the total revenue, the income summary account will show a debit balance. It
means that the result of business operation is net loss.

The entry to close net loss to capital is:

Owner’s Capital xx
Income Summary xx

Income Summary is also a nominal account. After closing the amount of net income or loss to capital, the balance
of income summary will be zero.

PREPARING THE REVERSING ENTRIES:

Reversing entries, are entries prepared at the beginning of the next accounting period to reverse some of the
adjusting entries that was prepared in the preceding period. Reversing entry is the exact reverse of the adjusting
entry.

Only the following adjusting entries are reverse.

1. Adjusting entries for accruals. These are the adjusting entries for,
accrued expenses and accrued revenues.

20
 2. Adjusting entries for deferrals. These are the adjusting entries for, prepaid expenses (only if the company
used the expense method). And adjusting entries for unearned revenue. (only if the company used the
revenue method).

If the asset method is used for prepaid items, the adjusting entry is not reversed.
Likewise, if the liability method is used for unearned revenue, the adjusting entry is not reverse.

The reversing entries for Mango Printing Services are:

Date
July 1 Salaries Payable 9,900
Salaries Expense 9,900
to reverse the adjusting entry for accrued salaries of
employees.

1 Interest Payable 10,500

Interest Expense 10,500
to reverse the adjusting entry for accrued interest.

The adjusting entries for prepaid rent and prepaid insurance were not reversed because the company uses
the asset method. The presence of the account Prepaid Rent and Prepaid Insurance in the unadjusted trial
balance indicates that the Asset Method is the method being used.

ANALYSIS OF BUSINESS TRANSACTIONS

EXERCISES

A. For each of the following transactions, state the account/s to be debited and the account/s to be credited.

Business transactions Debit Credit

a. Received cash for services rendered.

b. Received cash investment from Leah Reyes, the owner
of the firm.
c. Paid cash for advertising start of the business.
d. Bought office supplies for cash.
e. Billed clients for services rendered on account.
f. Purchased equipment on account.
g. Paid the assistant’s salary.
h. Received a check from a customer on account.
i. Paid creditors on account.
j. The owner withdrew cash for personal use.
k. Paid office rent for the month.
l. Purchased additional office supplies on account.
m. Returned portion of office supplies purchased in (l).
n. Borrowed money from a finance company
issuing a promissory note.
o. The owner transferred her personal computer
(equipment) for office use.
p. Issued check in payment for the promissory note
issued.

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B. Yellow Ribbon Company has the following accounts in its ledger:

Cash; Accounts Receivable; Notes Receivable; Office Supplies; Office Equipment; Accounts
Payable; Angel Reyes, Capital; Angel Reyes, Drawing; Fees Earned; Salaries Expense; Rent
Expense; Advertising Expense; Utilities Expense; Repair Expense; Miscellaneous Expense.

The following are selected transactions of the company during the month of April of the current year:

April 1 Paid rent for the month, P 5,000

2 Paid P 2,400 for office supplies purchased for cash.
5 Purchased office equipment on account, P 10,000,
8 Fees earned and billed to customers for the month, P 23,600.
10 Paid advertising expense, P 1,200.
12 The owner made additional cash investment of P 100,000.
15 Received cash from customers on account, 7,500.
16 Received cash from customers for services rendered, P 12,470.
19 Paid creditor on account, P 7,000.
20 Purchase additional office supplies on account, 3,500.
21 Return P 800 worth of office supplies purchased on April
20, because of defects.
23 Withdrew cash for personal use, P 4,500.
27 Paid P 650 for the repair of office equipment.
29 Paid telephone bill for the month, P 3,750.
30 Paid salaries of employees, P 12,000.
30 Received a promissory note for services rendered, P 10,000.

Required:
By analyzing the above transactions, determine the account/s to be debited and the account/s
to be credited.

C. Quicky Repair Shop started business in May of the current year and
had the following transactions during the month as follows:

May 2 - Mr. Michael Dy, the owner invests P 100,000 cash in the business.
2 - Paid taxes and licenses, P 1,450.
3 - Paid the current month’s rent, P 4,000.
4 - Purchased repair equipment, P 35,000. Paid a down payment of
P 15,000 and the balance on account.
5 - Purchased repair supplies for cash, P 3,700.
6 - Received cash from customers for repair services rendered to them, P 25,000.
9 - Rendered repair services on credit, P 18,000.
10 - Purchased additional repair supplies on credit, P 6,350.
11 - Returned P 1,250 worth of repair supplies purchased on May 10.
12 - Received payment from customers for repairs completed, 20,000.
15 - Received payment from customers on account, P 10,000.
15 - Paid employees’ salaries, P 18,500.
20 - Mr. Dy, withdrew P 7,000 cash from the business for his personal use.
25 - Issued check in payment for the repair supplies purchased on account
on May 10, less the return made on May 11.
31- Received electric bill for the month amounting to P 8,790 to be paid next month.
31- Paid employees salaries, P 18,500. The gross payroll amount to
P 20,500. The Employees payroll deductions were: Withholding tax,
P 1,200; SSS Contributions, P 500; PhilHealth Contributions, P 300.
Payroll deductions of the company are made every end of the month.

Required:
By analyzing the above transactions, determine the account/s to be debited and the account/s
to be credited.

22
PLEASE ANSWER THE FOLLOWING :

Multiple Choice. Theory (Encircle the letter of your answer)

1. A service activity. Its function is to provide quantitative information, primarily financial in

nature, about economic entities.
a. Auditing c. Bookkeeping
b. Accounting d. Posting

2. The financial statement which reports the financial position of a company as of a specific
date is the
a. income statement c. statement of owner’s equity
b. balance sheet d. statement of cash flows

3. The economic resources that a business owns and expects to be useful to the enterprise are
called
a. owner’s equity c. revenue
b. liabilities d. assets
4. The recording of business transactions in the ledger is called
a. journalizing c. adjusting
b. posting d. reversing
5. Equities are legal and economic claims to the assets of a business. The owner’s claims on
the business assets are also known as
a. accounts payable c. outsider claims
b. liabilities d. capital
6. The statement of financial position reports the following, except
a. assets c. owner’s equity
b. liabilities d. revenue
7. A tool used by accountants to organize the data needed to prepare the financial statements
a. journal c. trial balance
b. ledger d. worksheet

8. All of the following are assets except

a. Accounts Receivable c. Sales
b. Merchandise Inventory d. Prepaid Expense

9. A debit entry to the Cash account indicates:

a. The payment of an expense
b. The withdrawal of funds from the business by the owner
c. The borrowing of money from the bank
d. The billing to a client for services rendered on account.

10. A debit to a liability account indicates

a. The receipt of payment from customers

b. The incurrence of additional debt
c. Payment to creditors
d. Payment for supplies purchased for cash

11. The receipt of money due on account by a business would be recorded by

a. A debit to cash and credit to capital
b. A debit to cash and credit to service revenue
c. A debit to cash and credit to accounts receivable
d. A debit to accounts receivable and credit to service revenue

12. Entries prepared to update the balances of accounts

a. opening entries c. closing entries
b. adjusting entries d. reversing entries

13. Which of the following statements pertains to journalizing

23
 a. Recording of transactions in the journal
b. Updating the balances of accounts
c. A chronological record of all the transactions of the company
d. Summarizing all the transactions of the firm

14. The normal balance of an account is on the

a. Debit side of an account
b. Credit side of an account
c. Side represented by increase in the account
d. Side represented by decrease in the account

15. Adjusting entries are necessary in order to

a. Prove the equality of the debits and credits
b. Detect and correct an erroneous entry
c. Correctly state the balances of accounts
d. Facilitate the preparation of financial statements

16. Accrued revenue can be best described as an amount

a. collected and currently matched with expenses
b. collected and not currently matched with expenses
c. not collected and currently matched with expenses
d. not collected and not currently matched with expenses

17. A bill from Meralco was received by the company. The bookkeeper recorded it as an
expense even though no payment was made. This is an example of
a. accrued revenue c. prepaid expense
b. accrued expense d. unearned revenue

18. If Income Summary has a P450,000 credit balance before it is closed to the Capital account,
it means that:
a. the owner invested additional P450,000 in the business
b. expenses exceeded revenues by P450,000
a. the company had a profit of P450,000
b. the company had a net loss of P450,000

Upon
19. Upon purchase of an insurance policy for 2-year period, the company recorded the
transaction by debiting Insurance Expense. At year-end, the adjusting entry for the said
transaction will include:
a. A debit to an expense account for the expired portion
b. A credit to an asset account for the unexpired portion
c. A credit to expense account for the expired portion
d. A debit to asset account for the expired portion

20. The cash payment of an expense results in:

a. A decrease in the balance of the expense account
b. An increase in the balance of the expense account
c. An increase in the capital account
d. An increase in the balance of cash

PROBLEM 1. Accounting for Prepaid Expense

On On August 1, 2024, Gym Paredes Fitness Center paid an advance rental on a space of a building it is
occupying in the amount of P 120,000. The amount is for one year rent paid in advance beginning month of
August.

Under the Asset Method

a. The entry on August 1, 2024 to record the advance payment of rental is:

b. How much of the P 120,000 advance rental will expire at the end of each month?
c. How many months will cover the expense portion at December 31, 2024?

24
 d. How much of the P 120,000 will be considered as Expense on December 31, 2024?
e. How much of the P 120,000 will be considered as asset on December 31, 2024?

The adjusting entry on December 31, 2024 would be:

Under the Expense Method

a. The entry on August 1, 2023 to record the advance payment of rental is:

The adjusting entry on December 31, 2023 would be:

PROBLEM 2.
On October 1, 2024, TM Company paid P 24,000. The amount represent one year insurance
premium beginning month of October.

Under the Expense Method

a. The entry to record the advance payment of Insurance premium on October 1, 2024 is:

b. The adjusting entry on December 31, 2024 is:

Under the Asset Method

a. The entry to record the advance payment of Insurance premium on October 1, 2024 is:

b.The adjusting entry on December 31, 2024 is:

PROBLEM 3

Yellow Cab Transport Services purchased office supplies amounting to P 35,000 on January 3, 2023.

a. Prepare the entry to record the above transaction under:

Asset Method Expense Method
_________________________ ___________________________
_________________________ ___________________________
_________________________ ___________________________

b. Assuming the office supplies used during the year 2023 amounts to P 30,000,
the adjusting entry under both methods are:
Asset Method Expense Method
__________________________ __________________________
__________________________ __________________________
__________________________ __________________________

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PROBLEM 4

On September 1, 2023, Manila Apartelle received P 120,000 from a tenant. The amount represent one-
year rental beginning month of September. Prepare the entries to be prepared on Sept. 1 and the
adjusting entry on Dec. 31, 2023, under both the liability method and the revenue method.

Sept. 1, entry:

Liability Method Revenue Method

__________________________ __________________________
__________________________ __________________________
__________________________ __________________________

December 31, Adjusting entry:

Liability Method Revenue Method

__________________________ __________________________
__________________________ __________________________
__________________________ __________________________

PROBLEM 5

At December 31, 2023, the account Rent Income showed unadjusted balance of P 60,000, the amount
was received from a tenant to cover six-month rent beginning Nov. 1, 2023.

Required: Prepare the adjusting entry on Dec. 31, 2023

________________________________________________________
________________________________________________________
________________________________________________________

PROBLEM 6

Based from the following adjustment data, prepare the adjusting entries on December 31,2023, the end
of the company’s annual accounting period.

1. The Insurance Expense account had a debit balance on December 31,2023 of P72,000 representing
premium for a 2-year fire insurance policy effective October 1, 2023.

2. Rent Income was credited for P 36,000 on November 1, 2023, representing nine months rental collected
in advance.

3. Depreciation of the office equipment for the year amounts to P24,000

4. Estimated uncollectible accounts P15,000.

5. Supplies costing P 18,000 bought during the period was debited to the Supplies account. Of the amount,
P 10,000 were consumed during the year.

6. Unearned professional fees account showed a credit balance of P 56,000 per general ledger on December
31. 60% of this had been actually earned during the period.

7. On December 31, 2023 a 60-day, 9% Notes Payable has a balance of P 240,000 per general ledger. The
note was issued on December 1, 2023. No interest has been taken on this note.

8. Notes Receivable has a balance of P 120,000 received from a customer in settlement of an open account
on November 16, 2023. It is a 90-day, 12% note. No interest has been taken on this note.

9. Accrued employees’ salaries at Dec. 31, amounts to P10,000.

10. Professional services rendered towards the end of 2023, P 27,000. These are expected to be collected in
2024.

PROBLEM 7

LAST PROBLEM

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 Villas Realty had the following trial balance dated June 30, 2023:

VILLAS REALTY
Trial Balance
June 30, 2023

Debit Credit

Cash 650,000
Accounts Receivable 100,000
Prepaid Rent 108,000
Prepaid Insurance on Automobile 28,800
Supplies on Hand 9,000
Office Equipment 90,000
Accumulated depreciation Office Equip. 21,600
Automobile 240,000
Accumulated depreciation – Auto. 60,000
Accounts Payable 10,800
Notes Payable 150,000
Unearned Management Fees 46,800
M. Villas, Capital 1,337,400
M. Villas, Drawing 705,000
Sales Commissions 900,000
Management Service Revenue 72,000
Salaries Expense 599,400
Advertising Expense 9,000
Automobile Expense 53,400
Miscellaneous Expense 6,000
Total P 2,598,600 P 2,598,600

Instructions:

1. Prepare a ten – column work sheet for the year ended June 30, 2023, using the following data for
adjustment:

a. Insurance expense on automobile for the year is P 14,400.

b. Rent expense for the year amounts to P 72,000.
c. Depreciation expense are: Office Equipment, P10,800; Automobile, P48,000.
d. Salaries incurred but unpaid as of June 30 amounts to P 9,990.
e. Supplies inventory on June 30, P 3,000.
f. The unearned management fees were received and recorded on April 1, 2023. The advance
payment covered six month’s management of an apartment building.
g. Accrued interest on notes payable, P 15,000.

2. From the data on your worksheet, prepare the following financial statements:
a. Statement of Income
b. Statement of Owner’s Equity
c. Statement of Financial Position

c. Prepare the Adjusting entries

d. Prepare the closing entries

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