Accounting Fundamentals For JAIIB

ACCOUNTING
FUNDAMENTAL
INTRODUCTION
This presentation covers the concepts and practice of
accounting fundamental. From the concepts and information
about accounting up to the accounting cycle, which includes
journalizing, reversing and closing entries. Accounting is a
profession similar to medicine and law. Such profession
continually evolve and change as society and the needs of
society change.
The objective of this presentation is to make people
aware of how accounting works in relation to business and
also how can it be helpful even in a simple way of living.
This also emphasized the importance of accounting in any
types of business. Little by little, you will be able to
understand how accounting works and you will realize its
significance to our daily living.
This presentation is based on the book of Bayani D.
Edlagan and Ma. Cecilia S. Mercado, Accounting
Fundamental.
CHAPTER 1
Introduction to Accounting
Concepts and Practice
CHARACTERISTICS OF ACCOUNTING
INFORMATION
Accounting information is composed principally of

financial data about business transactions, expressed
in terms of money. The mere records of transactions
are of little use in making informed judgments and
decisions. The recorded data must be sorted and
summarized before significant reports and analyses
can be prepared.
The basic raw materials of accounting are
composed of business transaction data. Its primary
end products are composed of various summaries,
analyses, and reports.
USERS OF ACCOUNTING INFORMATION
Accounting provides the techniques for accumulating

and the language for communicating economic data
to various categories of individuals and institutions.
Investors in a business enterprise need information
about its financial status and its future prospects. The
government agencies are concerned with the financial
activities of business organizations for purposes of
taxation and regulation.
The individuals most dependent upon and most
involved with the end products of accounting are
those charged with the responsibility for directing the
operations of enterprises.
USERS OF ACCOUNTING INFORMATION
For example, in the conduct of day-to-day operations,

management relies upon accounting to provide the
amount owed to each creditor and by each customer
and the date each payment is due.
The relevant information for one category of users
may differ markedly from that needed by other users.
Once the user groups are identified, however, and the
nature of the relevant data determined, the accountant
is able to establish an information network to assist
each group in forming judgments and making
decisions regarding future actions.
RELATIONSHIP OF ACCOUNTING TO
OTHER FIELDS
Everyone engaged in business activities, from the

youngest employee to the manager and owner, comes
into contact with accounting. The higher the level of
authority and responsibility, the greater is the need for
an understanding of accounting concepts and
terminology.
The importance of understanding accounting is not
limited to the business world. Many employees with
specialized training in non-business areas also make
use of accounting data and should understand
accounting principles and terminology.
PROFESSION OF ACCOUNTANCY
Accountancy is a profession with stature comparable to that of

engineering or law. The rapid development of accounting
theory and technique during the current century has been
accompanied by an expansion of the career opportunities in
accounting and an increasing number of professionally trained
accountants.
Accountants who render accounting services on a fee basis,
and staff accountants employed by them, are said to be
engaged in public accounting. Accountants employed by a
particular business enterprise or not-for-profit organization, as
chief accountant, controller, or financial vice-president, are
said to be engaged in private accounting.
PUBLIC ACCOUNTING
The practice of public accounting is generally restricted to

licensed CPAs. Recognizing the need for reliable professional
accounting service, the Philippine Legislature passed the
Accountancy Act in March 1923. This act created the Board of
Accountancy which was given the power among other, to issue
the certificate of Certified Public Accountant, abbreviated as
CPA. In May 1975, The revised Accountancy Law was
released which define the practice of accountancy to include
not only CPAs in public practice, but also those in private
accounting, in government services and in education, and
increased the contents and coverage of subjects in the CPA
examinations.
PUBLIC ACCOUNTING
In Section 10 of the Law, it is provided that: an applicant for the

CPA certificate must be a Filipino citizen (or a citizen of foreign
country granting reciprocal privileges, by law, to Filipino with
respect to the practice of accountancy), of good moral character
and at least twenty one year of age. He/she must be a holder of a
degree of Bachelor of Science in Commerce or its equivalent
from any college or university recognized by the government.
The CPA candidate is required to successfully pass a written
examination, given by the Board of Accountancy, covering
theory of accounts, business law, taxation, management advisory
services, auditing theory, auditing theory, auditing problems,
practical accounting problem1, problem 2. To practice public
accountancy, CPAs and firms or partnerships, including partners
and staff members must register with the Professional Regulation
Commission, such registration to be made annually.
PRIVATE ACCOUNTING
The scope of activities and duties of private accountants

varies widely. Private accountants are frequently called
management accountants. If they are employed by a
manufacturing concern, they may be call industrial or cost
accountants. The chief accountant in a business may be
call controller. Various governmental units and other notfor-profit organizations also employ accountants.
Internal auditors are accountants who review the
accounting and operating procedures prescribed by their
companies. Accountants who specialize in internal
auditing may be granted the Certified Internal Auditor
(CIA) certificate.
RELATIONSHIP OF ACCOUNTING TO
OTHER FIELDS
For example, an engineer responsible for selecting the

most desirable solution to a technical manufacturing
problem may consider cost accounting data to be the
decisive factor. Lawyers use accounting data in tax
cases and in lawsuits involving property ownership
and damages from breach of contract. Governmental
agencies rely on accounting data in evaluating the
efficiency of government operations and for appraising
the feasibility of proposed taxation and spending
programs. Accounting plays an important role in
modern society and, broadly speaking, all citizens are
affected by accounting in some way.
SPECIALIZED ACCOUNTING FIELD
FINANCIAL ACCOUNTING
It is concerned with the recording of
transactions for a business enterprise or other
economic unit and the periodic preparation of
various reports from such records. Corporate
enterprise must employ such principles in
preparing their annual reports on profitability
and financial status for their stockholders and
the investing public.
AUDITING
It is a field of activity involving an independent review of
the accounting records. In conducting an audit, public
accountants examine the records supporting financial reports
of an enterprise and express an opinion regarding their fairness
and reliability.
COST ACCOUNTING
It emphasizes the determination and control of costs. It is
concerned primarily with the costs of manufacturing processes
and of manufactured products, but increasing attention is being
given to distribution costs. In addition, one of the principal
functions of cost accountants is to assemble and interpret cost
data, both actual and prospective for the use of management in
controlling current operations and in planning for the future.
MANAGEMENT ACCOUNTING
It employs both historical and estimated data in assisting
management in daily operations and in planning future operations.
It deals with the specific problems that confront enterprise
managers at various organizational levels. The management
accountant is frequently concerned with identifying alternative
courses of action and in helping to select the best one.
TAX ACCOUNTING
It encompasses the preparation of tax returns and the consideration
of the tax consequences of proposed business transactions or
administrative courses of action. Accountants specializing in this
field, particularly in the area of tax planning, must be familiar with
tax statutes affecting their employer or clients and also must keep
up to date on administrative regulations and court decisions on tax
cases.
ACCOUNTING SYSTEM
It is the special field concerned with the design and
implementation of procedures for the accumulation and
reporting of financial data. The systems accountant must
devise appropriate checks and balances to safeguard
business assets and provide for information flow that will be
efficient and helpful to management.
BUDGETARY ACCOUNTING
It presents the plan of financial operations for a period
and, through records and summaries provides comparisons of
actual operations with the predetermined plans. A combination
of planning and controlling future operations, it is sometimes
concerned to be a part of management accounting.
INTERNATIONAL ACCOUNTING
It is concerned with the special problems associated with
the international trade of multinational business organizations.
Accountants specialized in this area must be familiar with the
influences of customs law, and taxation of various countries
bear on international operations and accounting principles.
NOT-FOR-PROFIT ACCOUNTING
It specializes in recording and reporting the transactions
of various governmental units and other not-for-profit
organizations such as church, charities, and educational
institutions. An essential element in an accounting system that
will insure strict adherence on the part of management to
restrictions and other requirements imposed by law, by other
institutions, or by individual donors.
SOCIAL ACCOUNTING
It is the newest field of accounting and is the
most difficult to describe concisely. One of the
engagement in this field involved measurement of
traffic patterns in a densely populated section of the
nation (like Metro Manila) as part of a government
study to determine the most efficient use of
transportation funds, not only in terms of facilitating
trade but also of assuring a good environment for the
areas residents.
BOOKKEEPING AND ACCOUNTING
BOOKKEEPING is the recording of business data in a prescribed

manner. A bookkeeper may be responsible for keeping all the
records of a business or only a minor segment, such portion of
customer accounts in department store. Much of the work of the
bookkeeper is critical in nature and increasingly being
accomplished through the use of mechanical and electronic
equipment.
ACCOUNTING is primarily concerned with the design of the

system of records, the preparation of reports based on the
recorded data, and the interpretation of the reports. Accountants
often direct and review the work of bookkeeper. In event, the
accountant must possess a much higher level of knowledge,
conceptual understanding, and analytical skill than is required of
the bookkeeper.
BUSINESS ENTITY CONCEPT
The business entity concept is based on identifying the

individual economic units for which economic data are
needed. Once the entity is identified, the accountant can
determine which economic data and activities should be
analyzed, recorded, and summarized in reports. The business
entity concept is based on the applicability of accounting to
individual economic units in society. These individual
economic units include all business enterprises organized for
profit, numerous governmental units, such as provinces,
cities, and towns, other bit-for-profit units like church and
clubs, and individual persons and family units. The basic
economic data for a unit must first be recorded, followed by
analysis and summarization, and finally by periodic reporting.
Thus, accounting applies to each separate economic unit.
BUSINESS ENTITY CONCEPT
This subject is concerned primarily with the

accounting principles and techniques applicable to
profit making businesses. Such businesses are
customarily organized as a sole proprietorship,
partnerships, or corporations. A sole proprietorship
is owned by one individual. And is owned by two or
more individual in accordance with a contractual
agreement. A corporation, organized in accordance
with the Corporation Law, is a separate legal entity in
which ownership is divided into shares of stock.
ACTIVITIES PERFORMED BY BUSINESS

ORGANIZATION
SERVICE
Companies perform services for a fee.
Example: Accounting firms, law firms, and other service
establishments
MERCHANDISING
Companies purchase goods that are ready for sale and then sell
these goods to customers.
MANUFACTURING
Companies buy raw materials, convert them into another form
of products and the sell the products to other companies or to
final consumers.
BUSINESS TRANSACTIONS
A business transaction is the occurrence of an

event or of a condition that must be recorded.
A particular business transaction may lead to
an event or condition that constitutes another
transaction.
ASSETS, LIABILITIES, AND CAPITAL

The properties owned by a business enterprise are
referred to as assets and the rights or claims to the
properties are referred to as equities. If the assets
owned by the business amount to P1,000,000, the
equities on the assets must also amount to
P1,000,000. The relation between the two may be
stated in the form of an equation, as follows:
Assets
= Equities

Equities may be subdivided into two types: the
right of creditors and the rights of owner. The equities
of creditors represents debts of the business and are
called liabilities. The equity of the owners is called
capital or owners equity. Expansion of the equation
to give recognition to the two basic types of equities
yields the following, which is known as the
accounting equation:
Assets
Liabilities
Capital (or Owners Equity)

It is customary to place Liabilities before Capital in
the accounting equation because creditors have preferential
rights to the assets. The residual claim of the owner or owners
is sometimes given greater emphasis by transposing liabilities
to the other side of the equation, yielding:
Asset
Liabilities
Capital
Every business transaction affects the assets, liabilities

and/or capital of the business. However, the changes in these
items are such that the equality of two sides of the accounting
equation is always maintained.
RULES OF DEBIT AND CREDIT

Based on the positions of increases and decreases
in an account for an asset, liability, or capital item,
the rules of debit and credit may be stated as
follows:
TABLE 1.1
DEBIT
CREDIT
1. Increase in Assets
1. Decrease in Assets
2. Decrease in Liabilities
2. Increase in Liabilities
3. Decrease in Capital
a. Withdrawal by the
Owner
3. Increase in Capital
a. Investment by the Owner
b. Increase in Expenses
b. Decrease in Expenses
c. Decrease in Revenue
c. Increase in Revenue
TRANSACTIONS AND THE ACCOUNTING

EQUATION
All business transactions, from the simplest to the most
complex, can be stated in terms of the resulting change in the
three basic elements of the accounting equation. Before a
transaction can be recorded in the book of accounts, it must be
analyzed into its debit and credit elements. The following
questions will be helpful in analyzing a business transaction;
Which item (items) is/are affected Assets, Liabilities, Capital?

How is each item affected it is increased or decreased?
According to the rules of debit and credit, is the increase or the
decrease in the item to be debited or credited?
What account titles should be used to record the debit or credit
item?
DOUBLE ENTRY BOOKKEEPING

Every business transaction has two-fold effect on the
assets, liabilities, and/or capital of the business. For
every debit element, there is a corresponding credit
element. The money values of these two elements are
equal. The manner of recording both the debit and
credit elements of each transaction is referred to as
double-entry bookkeeping. The double-entry
bookkeeping is preferred because it generally result in
more accurate accounting records and statements.
Moreover, it affords numerous checks and safeguard
which reduce to a minimum the chances of loss
through intentional r unintentional errors committed by
personnel.
The effect of these changes on the

accounting equation can be demonstrated by
studying some typical transactions using the
analysis sheet as follows:
Table 1.2
ASSETS
LIABILITIES
CAPITAL
As the basis of this illustration, assume that

on September 1, 19xx Nick Requijo
establishes a sole proprietorship to be known
as Requijo Taxi. Each transaction or group of
similar transactions during the first month of
operations is described followed by an
illustration of its effect(s) on the accounting
equation and the corresponding two-column
journal entry and explanation of entry for each
give transaction.
TRANSACTION ONE
Nick Requijo deposited P500,000 in a bank
account in the name of Requijo Taxi. The
effect of this transaction is to increase the asset
cash by P500,000 and to increase capital, on
the other side of the equation, by the same
amount. After the transaction, the equation for
Requijo Taxi will appear as follows:
Table 1.3
ASSETS
+ Cash
1 P500,000
LIABILITIES
CAPITAL
+Requijo,
Capital
P500,000
It should be noted that the equation relates

only to the business enterprise. Nick Requijos
personal assets, such as his home, car, his
personal bank account, and his personal
liabilities are excluded from consideration.
The business is treated as a distinct entity, with
cash of P500,000 and the owners equity of
P500,000.
Table 1.4
Date
DESCRIPTION
Post
Ref.
Debi Credi
t
t
500,
000
Sept. 1 Cash
Nick Requijo, Capital
To record investment
of the owner
500,0
00
The explanation of each debit or credit

entry on the journal is based on the rules of
debit and credit. Cash was debited because of
increase in asset while Capital was credited
because of increase in capital due to
investment of the owner.
TRANSACTION TWO
Requijos next transaction on September 5 is to
purchase land as a future building site, for which
P100,000 cash is paid. This transaction changes the
composition of the assets but does not change the
total amount. The items in the equation prior to this
transaction, the effects of this transaction, and the
new balance after the transaction are as follow:
Table 1.5
ASSETS
+ Cash
1. P500,000
- Cash
P100,000
2.
+ Land
P100,000
LIABILITIES
CAPITAL
+ Requijo, Capital
P500,000
After the transaction, there is a land costing

P100, 000 but the balance is reduced to P400,
000. The total assets composed of cash and
land total to P500, 000. Notice that there is no
change in the liability and capital items.
Table 1.6
Date
DESCRIPTION
Post
Ref.
Debit
Credit
100,00
0
Sept. 5 Land
Cash
To record purchase
of land for cash
100,000
In the transaction recorded, there was a

change in the asset element. Land was debited
because of increase in assets while Cash was
credited because of decrease in assets. The
reason for the debit and credit comes from the
rules of debit and credit.
TRANSACTION THREE
Requijos current plans are to lease cars and other
equipment from California Bus Company for several months
until he can arrange financing for the purchase of cars and
other equipment and for the construction of garage and storage
facilities.
On September 7 Requijo purchases P60, 000 of parts and
other supplies from various suppliers, agreeing to pay in the
near future. This type of transaction is called purchase of
supplies on account and the liability created is termed
accounts payable. Consumable commodities acquired, such
as supplies, are considered to be prepaid expenses. Prepaid
expenses are expenses paid in advance and are classified as
asset.
In actual practice, each purchase would be

considered and recorded as it occurred and a
separated record would be maintained for each
creditor. In this illustration, however, the
purchases are recorded as a group. The effect
is to increase the assets and liabilities by P600,
000, as indicated below:
Table 1.7
ASSETS
LIABILITIES
+ Cash
1. P500,000
- Cash
2. P100,000
+ Land
P100,000
+ Supplies P
3. 60,000
CAPITAL
+ Requijo, Capital
P500,000
+ Account Payable
P60,000

After this transaction, the total assets amount to
P560, 000 composed of Cash P400, 000, Land P100,
000, and Supplies P60, 000. The total equity is also
P560, 000 composed of Accounts Payable P60, 000
and Capital of P500, 000. The total of the two
column, debit and credit, still balance.
Table 1.8
Date
DESCRIPTION
Sept. 7 Supplies
Accounts Payable
To record purchase of
supplies on account
Post
Ref.
Debit Credit
60,00
0
60,000
In the transaction recorded, Supplies (unused) was

debited because of increase in assets while
Accounts Payable is credited because of increase
in liability.
TRANSACTION FOUR
On September 9, P10,000 is paid to
creditors on account, thereby reducing both
assets and liabilities. The effect on the
equation is as follows:
Table 1.9
ASSETS
LIABILITIES
+ Cash
1. P500,000
- Cash
P100,000
2.
+ Land
P100,000
CAPITAL
+ Requijo, Capital
P500,000
+ Supplies P
3. 60,000
+Account Payable
P60,000
- Cash
4. 10,000
- Account Payable
P10,000

After this transaction, the total assets amount to
P550, 000 composed of Cash P390, 000, Land P100,
000, and Supplies P60, 000. The total equity is also
P550, 000 composed of Accounts Payable P50, 000
and Capital P500, 000. The equation is still balance.
Table 1.10
Date
DESCRIPTION
Sept. 9 Accounts Payable
Cash
To record payment of
account
Post
Ref.
Debit Credit
10,
000
10,000
In the transaction recorded, Accounts Payable

was debited because of decrease in liability
while cash was credited because of decrease
in assets.

TRANSACTION FIVE
The principal objective of the owner of a business enterprise is
to increase capital through earnings. For Nick Requijo, this
means that the cash and other assets acquired through the sale of
taxi services must be greater than the cost of the gasoline and
other supplies used, the wages of drivers, the rent, and all of the
other expenses of operating the business.
In general, the amount charged to customers for goods or
services sold to them is called revenue. Alternative terms may
be used for particular types of revenue, such as sales for the sale
of merchandise or business services, fees earned for charges by
a physician to patients, rent revenue for the use of real estate or
other property, and fares earned for Requijo Taxi.

In a broad sense, the amount of assets consumed or services used
in the process of earning revenue is called expense. Expenses
would include supplies used, salaries and wages of employees,
and other assets and services used in operating the business.
The excess of the revenue over the expenses incurred in earning
the revenue is called net income or net profit. If the expenses of
the enterprise exceed the revenue, the excess is a net loss. Since
it is ordinarily impossible to determine the exact amount of
expense incurred in connection with each revenue transactions, it
is considered satisfactory to determine the net income or the net
loss for a specified period of time, such as a month, or a quarter,
a semester, or a year, rather than each of small group of sales.

During the first month of operations Requijo Taxi
earned fares of P150, 000, receiving the amount in
cash. The total effect of these transactions is to
increase cash by P150, 000 and to yield revenue in
the same amount. The revenue can be viewed as
though it affected a P150, 000 increases in capital.
At the time expenses of the business are incurred,
they are treated as offsets against revenue and hence
as reduction in capital. In terms of the accounting
equation, the effect of the receipt of cash for services
performed follows:
Table 1.11
1.
2.
3.
4.
ASSETS
+ Cash
P500,000
- Cash
P100,000
+ Land
P100,000
+ Supplies P
60,000
- Cash
P
10,000
+ Cash
5. P150,000
LIABILITIES
CAPITAL
+ Requijo, Capital
P500,000
+Account Payable
P60,000
- Account Payable
P10,000
+ Fares Earned
P150,000

After this transaction, the total assets amount to P700, 000 composed of
Cash P540, 000, Land P100, 000, and Supplies P60, 000. The total equities
are also P700, 000 composed of Accounts Payable P50, 000 and Capital of
P650, 000 (including the fare earned).
Instead of requiring payment of cash at the time goods or services are sold
or rendered, a business may make sales of goods or services on account,
allowing customer to pay later. In such cases, the business acquires a claim
against the customer, called an account receivable. An account receivable
is as much an asset as cash, and the revenue is realized in exactly the same
manner as if cash had been immediately received. At a later date, when the
money is collected, there is only an exchange of one asset for another, with
cash increasing and accounts receivable decreasing.
In the transaction recorded, Cash was debited because of increase in assets
while Fares Earned was credited because of increase in capital due to
increase in revenue.
Table 1.12
Date
DESCRIPTION
Sept. 30 Cash
Fares Earned
To record receipt of revenue

from various customer.
Post
Ref.
Debit Credit
150,0
00
150,00
0

TRANSACTION SIX
Various business expenses incurred and paid
during the month were as follow: wages, P40, 000;
rent, P20, 000; gas and oil, P50, 000; miscellaneous
expenses, P10, 000. The effect of this group of
transaction is to reduce cash and to reduce capital, as
indicated in the following manner in the equation:
Table 1.13
ASSETS
1.
+ Cash
- Cash
P500,000
P100,000
+ Land
P100,000
LIABILITIES
CAPITAL
+ Requijo, Capital
P500,000
2.
3.
4.
+ Supplies P 60,000 +Account Payable

P60,000
- Account Payable
- Cash
P 10,000 P10,000
5.
+ Cash
P150,000
6.
- Cash
P120,000
+ Fares Earned
P150,000
- Wages Expense P
40,000
- Rent Expense
P
20,000
- Gas & Oil
P
50,000
- Misc. Expense P
After this transaction, the total asset amount to

P580, 000 composed of Cash P420, 000, Land
P100, 000, and Supplies of P60, 000. The total
equities are also P580, 000 composed of
Accounts Payable P50, 000 and Capital of
P530, 000. It should be remembered that
revenue and expense accounts are temporary
capital accounts; these items are closed to
capital at the end of the accounting period.
Table 1.14
Date
DESCRIPTION
Sept. 30 Wages Expense

Rent Expense
Gas and Oil Expense
Miscellaneous Expense
Cash
expenses.
Post
Ref.
Debit Credit
40,00
0
20,00
0
50,00
0
10,00
0
120,00
0
In the transaction recorded, Wages

Expense, Rent Expense, Gas and Oil
Expense, Miscellaneous Expense were
debited because of decrease in capital due to
increase in expenses while cash was credited
because of decrease in assets.

TRANSACTION SEVEN
At the end of the month it is determined that the cost of
supplies on hand is P40, 000, the remainder of P20, 000 (P60,
000- P40, 000) have been used in the operations of the
business. This deduction of P20, 000 in supplies and capital
may be shown as follows:
After this transaction, the total assets amount to P560, 000
composed of Cash P420, 000, Land P100, 000, and Supplies of
only P40, 000. The total equities are also P560, 000 composed
of Accounts Payable of P50, 000 and Capital of P510, 000.
Table 1.15
ASSETS
1.
2.
+ Cash
- Cash
P500,000
P100,000
+ Land
P100,000
LIABILITIES
CAPITAL
+ Requijo, Capital P500,000
3.
+ Supplies P 60,000
+Account Payable
P60,000
4.
- Cash
P 10,000
- Account Payable
P10,000
5.
+ Cash
P150,000
+ Fares Earned
6.
- Cash
P120,000
-Wages Expense P 40,000
7.
- Supplies
P20,000
P150,000
-Rent Expense
P 20,000
-Gas & Oil
P 50,000
-Misc. Expense
P 10,000
-Supplies Expense P20,000
Table 1.16
Date
Particulars
Supplies Expense
Supplies
To record part of the
supplies used in the
operation of the business
Debit
Credit
P20,000
P20,000
Date
DESCRIPTION
Sept. 30 Supplies Expense

Supplies
To record part of
supplies in the operation of
the business
Post
Ref.
Debit
Credit
20,000
20,000
In the transaction recorded, Supplies Expense was

debited because of decrease in capital due to increase
in expenses while Supplies (Unused) was credited
because of decrease in assets. Note to Students The
terms unused, unexpired, inventory, and
prepaid denote asset.

TRANSACTION EIGHT
At the end of the month, Nick Requijo withdraws from the business
P20, 000 in cash for his personnel use. This transaction, which affects a
decrease in cash and a decrease in capital, is the exact opposite of an
investment in the business by the owner. The withdrawal is not a
business expense, and it should be excluded from consideration in
determining the net income from operations of the enterprise. The
effect of the P20, 000 withdrawals on the equation is as follows:
After this transaction, the total assets amount to P540, 000 composed
of Cash P400, 000, Land P100, 000, and Supplies of P40, 000. The total
equities are also P540, 000 composed of Accounts Payable P50, 000 and
Capital P490, 000.
Table 1.17
ASSETS
1.
+ Cash
- Cash
P500,000
P100,000
+ Land
P100,000
LIABILITIES
CAPITAL
+ Requijo, Capital P500,000
2.
3.
+ Supplies P 60,000
+Account Payable
P60,000
4.
- Cash
- Account Payable
P10,000
P 10,000
5.
+ Cash
P150,000
+ Fares Earned
P150,000
6.
- Cash
P120,000
-Wages Expense P 40,000
7.
8.
- Supplies
- Cash
P20,000
P20,000
-Rent Expense
P 20,000
-Gas & Oil
P 50,000
-Misc. Expense
P 10,000
-Supplies Expense P20,000

-Requijo, Drawing
P20,000

Table 1.18
.
Date
DESCRIPTION
Sept. 30 Requijo, Drawing
Cash
To record withdrawal of
owner.
Post
Ref.
Debit Credit
20,000
20,000
In the transaction recorded, Requijo, Drawing was

debited because of decrease of capital due to
withdrawal and cash was credited because of
decreases in assets
SUMMARY
The business transactions of Requijo Taxi are summarized in

tabular form below. The transactions are identified by
transaction numbers and the balance of each item is shown
after each transaction. The following observations, which
apply to all types of businesses, should be noted:
The effect of every transaction can be stated in terms of
increases and/or decreases in one or more of the accounting
elements.
The equality of the two sides o the accounting equation is
always maintained.
Table 1.19
ACCOUNTING STATEMENTS
BALANCE SHEET
A kind of financial statement that list the assets, liabilities, and capital
of a business entity as of a specific dated, usually at the close of the last
day of a month or of a year. It is a kind of financial statement that shows
the financial position of the business entity as of a given date, usually the
end of the year.
The amount of Requio Taxis assets, liabilities, and capital at the end
of the first month of operation appears on the last line of the summary in
the preceding page. Minor arrangements of these data and the addition of a
heading yield the balance sheet illustrated below. This form of balance
sheet, with the liability and capital section presented below the asset
section, is called the report form. Another arrangement in common use
lists the assets on the left and the liabilities and capital on the right.
Because of its similarity to the account, a basic accounting device
described earlier in the chapter, it is referred to as the account form of the
balance sheet.
Requijo Taxi
Balance Sheet
September 30, 19xx
Assets
Cash
Supplies
Land
Total Assets
Liabilities
Accounts Payable
Capital
Capital
Total Liabilities and Capital
P400, 000
40, 000
100, 000
P540, 000
P 50, 000
490, 000
P540, 000
It is customary to begin the asset section with cash, which

is followed by receivables, inventory (for trading business),
supplies, prepaid expense items, and other assets that will be
converted into cash or consumed in the near future. The assets
of a relatively permanent nature, such as land, buildings, and
equipment, follow in that order. Note that in the balance sheet
presented the total assets and the total of liability and capital
are equal.
The balance sheet shows the liquidity (solvency) and
stability of as enterprise. Solvency refers to the ability of the
business to pay currently maturing liabilities while stability
refers to the ability of the enterprise to pay maturing
obligations and give return on the investment of the owner(s).
In the liabilities and capital section of the

balance sheet, it is customary to present the
liabilities first followed by capital. In the
illustration for Requijo Taxi the liabilities are
composed entirely of accounts payable. When
there are two or more categories of liabilities,
each should be listed and the total amount of
liabilities presented in the following manner:
Liabilities
Accounts Payable
Notes Payable
Salaries Payable
Total Liabilities
P150, 000
50, 000
6, 000
P206, 000
INCOME STATEMENT
A kind of financial statement that shows the summary of
the revenue and the expenses of a business entity for a specific
period of time, such as a month or a year. It is a kind of
financial statement that shows result of business operations
for a period of time, usually a year.
Revenue earned and expenses incurred during the month
were recorded in the equation as increases and decreases in
capital, respectively. The details together with net income in
the amount of P10, 000, are reported in the income statement
presented below.
Requio Taxi
Income Statement
For the Month Ended September 30, 19xx
Fares Earned
Operating Expenses
Gas & Oil Expense
Wages Expense
Rent Expense
Supplies Expense
Miscellaneous Expense
Total Operating Expenses
P150, 000
Net Income
P 10, 000
P 50, 000
40, 000
20, 000
20, 000
10, 000
140,000
The order in which the operating expenses are presented

in the income statement varies among businesses. One of the
arrangements commonly followed is to list them in the order
of size, beginning with the larger items. Miscellaneous
expenses is usually shown as the last item regardless of the
amount.
In the income statement, users will know if the operation
of the business is profitable. Profitability refers to the ability
of the business to increase owners capital. If the total net asset
inflow is more than the net asset outflow, the resulting effect is
net income. If the net asset outflow is more than the net asset
inflow, it is a net loss.
CAPITAL STATEMENT (Statement of Owners Equity)
It is a statement that shows the summary of the changes in
capital of a business entity that have occurred during a specific
period of time, such a month or a year.
Comparison of the original investment of P500, 000 at the
beginning of the month with the P490, 000 of capital reported
in the balance sheet at the end of the month reveals a decrease
of P10, 000. This net decrease is composed of two significant
changes in capital that occurred during the period: (1) the net
income of P10, 000, and (2) a withdrawal of P20, 000 by the
owner. This information is presented in the capital statement,
which serves as a connecting link between the balance sheet
and the income statement.
Requijo Taxi
Capital Statement
Capital, September 1, 19xx

Net Income
Withdrawal
Decrease in Capital
Capital, September 30, 19xx
P500, 000
P10, 000
20, 000
10, 000
P490, 000
Basically, there are two accounting period, the

calendar year and the fiscal year. A calendar
year is a twelve-month period that ends on
December 31 while the fiscal year is a twelvemonth period that ends at the end of any month
other than December. In the Philippines, only
partnership and corporation are allowed to use
fiscal year, single proprietorship is allowed
only to use calendar year.
STATEMENT OF CASH FLOWS

The statement of cash flows consists of three sections: (1)
operating activities, (2) financing activities, and (3) investing
activities. Each of these sections is described below:
Cash Flows form Operating Activities

This section reports a summary of cash receipts and cash
payments from operations. The net cash flow from operating
activities will normally differ from the amount of net income
for the period. This difference occurs because revenues and
expenses may not be recorded at the same time that cash is
received from customers and cash is paid to creditors.
Cash Flows from Financing Activities

This section reports the cash transactions related to cash investments
by the owner, borrowing, and cash withdrawals by the owner.
Cash Flow from Investing Activities

This section reports the cash transactions for the acquisition and sale of
relatively long-term or permanent-type assets.
The preparation of the statement of cash flow is required by
pronouncement, every year that the income statement is presented.
Preparing the statement of cash flows requires an understanding of
concepts that we will not discuss in the chapter. But a simple
illustration will be given to be able to illustrate how statement of cash
flow is prepared.
Requijo Taxi
Statement of Cash Flows
Cash Flows from Operating Activities:
Net Income
Add: Increase in Supplies
Total
Less: Increase in Accounts Payable
P10, 000
40, 000
P50, 000
50, 000
Cash from Operating Activities
Cash Flows from financing Activities

Investment of Owner
500, 000
Cash Flows from Investing Activities

Acquisition of Land
Increase in Cash
(100, 000)
P400, 000
CHAPTER 2
The Accounting Cycle
THE ACCOUNTING CYCLE

The double entry accounting system provides
a basic framework for the analysis of business
activities. Now we wish to go into greater detail
about the accounting procedures used to account
for the operations of a business during a specific
period. The accounting procedures of most
businesses involve certain basic steps that are
accomplished in a given order. This sequence of
operations is known as the accounting cycle.
THE ACCOUNTING CYCLE

The steps of the accounting cycle are listed below:
1. Gather documents and analyze transactions from source
documents.
2. Record transactions in journals.
3. Post journal entries to general ledger accounts.
4. Prepare a trial balance.
5. Prepare adjusting entries and adjust the general ledger accounts.
6. Prepare financial statements.
7. Journalize closing entries.
8. Prepare post-closing trial balance.
9. Journalize reversing entries.
The annual period adopted by a business

enterprise is known as fiscal year. Business
enterprises whose fiscal year ends in
December are said to be on a calendar-year
basis. Many enterprises prefer to have their
accounting year coincide with their natural
business year; that is, the fiscal year ends
when business is slow and inventory quantities
are small and easy to count.
STEP 1
ANALYZING TRANSACTIONS FROM SOURCE
DOCUMENTS
Source documents are printed or written forms that

generate when the enterprise engages in business
transactions. Even a brief source document usually
specifies the peso amount involved, the date of
transaction, and possibly the party dealing with the
enterprise. Some examples of source documents are (1)
a purchase or sellers invoice showing evidence of a
purchase of merchandise (or supplies) on account, (2) a
bank check indicating the payment of obligation, (3) a
deposit slip showing the amount of funds turned over to
the bank, (4) a cash receipt indicating funds received
from a customer, and (5) a cash register tape listing a
days over-the-counter sales to customers.
BUSINESS PAPERS
All business transactions are evidenced

supported by printed forms or documents,
called business papers. These business papers
furnish the information needed in recording
business transactions. Without business papers,
it would be difficult to keep accurate record of
business transactions. The following are good
example of business papers commonly used in
a business:
BUSINESS PAPERS
1. Sales or Service Invoice after the sale of goods of service

has taken place, a business form called invoice is prepared.
The invoice shows the date of sale/service rendered, list of the
articles sold or list of services rendered, and other information.
Invoices are prenumbered and usually made out in triplicate or
quadruplicate depending upon the need of the business. The
original of the invoice is given to the buyer of goods or
services.
In a merchandising business, from the point of vies of the
seller, the invoice is called sales invoice; from the point of
view of the buyer, it is a purchase invoice. The sample of an
invoice is given below.
Table 2.1
BUSINESS PAPERS
2. Official Receipt official receipt are issued every
time the business receives cash. The receipt shows the
date on which the cash is received, the party from
whom the cash is received, the amount of cash
received, the explanation of the transaction, and the
signature of the personnel who issued the receipt.
Table 2.2
BUSINESS PAPERS
3. Statement of Accounts many business like
Meralco, P.L.D.T., M.W.S.S., SMART
Communication, Inc., and others send bills to their
customers to inform them of the amount they have to
pay. Thus, there are electric bills, light bills, water
bills, telephone bills, and many others. These bills
sent by these companies are called Statement of
Account. A sample of statement of account is given
below.
Table 2.3
BUSINESS PAPERS
4. Deposit Slip at present, many businesses have

current account or checking accounts with the banks.
They deposit their money in the bank and the
payment from their deposit are made by means of
issuing checks.
Deposit slip is filled up every time money is
deposited in the bank. The deposit slip shows the date
of the deposit , the name if the depositor, the account
number of the depositor, the amount of cash
deposited, and the signature of the depositor.
BUSINESS PAPERS
5. Check a check is an order to the bank signed
by the person issuing it (the depositor), to pay
the bearer or order a certain sum of money.
After the bank have paid the payee, the
amount is deducted from the deposit of the
person who issued the check.
BUSINESS PAPERS
6. Cash Voucher the cash voucher is the document
prepared every time payment of an obligation is
made. The voucher is a business preprinted form that
is prenumbered, and should include the following
information; date of payment, name of the payee,
address of the payee, description of the obligation to
be paid, amount paid, approval of payment\, and
signature of the payee. A sample of cash voucher is
presented below.
Table 2.4
BUSINESS PAPERS
7. Cash Register Slip in many businesses, like in restaurants, cash registers are
used. Strip of paper comes out as evidence of the money received by the
cashier. The slip shows the date, items ordered, amount paid, and other
information.
8. Other Business papers there are many other documents that are used by
accountant to obtain information regarding business transactions. When
buyer/customer is given allowance, returned the goods purchased, or
discovered error in the invoice, the seller of the goods or services should be
notified. If the claim is valid, the seller of goods or services sends a credit
memorandum which shows the amount by which account is reduced. When
the depositor obtains a checkbook from the bank and the depositor did not pay
it, the bank charges the depositor a debit memorandum. Promissory Notes
may be received by the business from its debtors, or the business may give it
to its creditors. A promissory note is a written promise to pay signed by one
party, called the maker, to pay a certain specified sum to another. The note
may or may not be interest bearing. The amount to be paid not including the
interest, is called the face of the note. The amount to be paid including the
interest is called the maturity value.
STEP 2
JOURNALIZING
Journalizing is the process of recording

business transactions to the book of original
entry called journals. Journals, or records of
original entry, are tabular records in which
business activities are analyzed in terms of
debits and credits and recorded in
chronological order before they are entered in
the general ledger. An accounting journal may
be one of a group of special journals, or it may
be a general journal.
STEP 2
JOURNALIZING
A special journal is designed to record a specific
type of frequently occurring business transactions.
For example, a business with 100 employees who are
paid every two weeks would probably use a special
journal for payrolls. Because two paydays would
normally occur in a month, at least 200 payroll
transaction would be recorded. Special journals are
used to facilitate the recording of business
transactions in the book of accounts. Other types of
transactions that are often recorded in special journals
are cash receipts, cash disbursements, sales of goods
or services, and purchases of goods or services.
STEP 2
JOURNALIZING
In contrast to the special journals, the
general journals (two-column journal) is a
relatively simple record in which any type of
business transaction may be recorded. All
businesses, even those using many special
journals, have a general journal. Transactions
that do not occur often enough to warrant
entry in a special journal are recorded in the
general journal.
STEP 2
JOURNALIZING
The procedure for recording entries in the general journal is as
follows:
Indicate the year, month, and date of the entry. Usually the year
and month are rewritten only at the top of each journal or at the
point where they change.
Enter titles of the accounts affected in the description column.

Accounts debited are entered close to the left-hand margin and
are traditionally recorded first. Accounts credited are then
recorded, indented one-half inch to the right.
Place the appropriate money amounts in the left-hand (debit) and

right (credit) money columns.
Write an explanation of the transaction below the account titles,

indented one-half inch from margin. The explanation should be as
brief as possible, disclosing the information necessary to
understand the event being recorded.
STEP 2
JOURNALIZING
Each transaction entered in the journal should
stated in terms of equal debits and credits. The
account titles cited in the description column should
correspond to those used for the related general
ledger accounts. To separate clearly the various
entries, we should leave a line blank between entries.
We will explain the use of the column headed Post
Ref. (posting reference) later in step 3 of the
accounting cycle.
Table 2.5
STEP 2
JOURNALIZING
Compound Journal Entries
A journal entry that involves more than just two
accounts is called a compound entry. The last
journal entry in Exhibit 1-2 is an example of
compound journal entry involving three accounts.
The debit of P9,600 to Test Equipment is offset by
credits of P5,000 to Cash and P4,600 to Accounts
Payable. Any number of accounts may appear in a
compound entry; but regardless of how many
accounts are used, the total of the debit amounts must
always equal the total of the credit amounts.
STEP 2
JOURNALIZING
Correction of Journal Errors
Certain procedures should be followed when errors are found in
journal entries. Errors should not be erased, because erasures
completely remove the original recording. As you might imagine,
the acceptance of erasures might allow someone to falsify
accounting records; consequently, other procedures are used.
If an error journal entry has not been transferred to the general
ledger, a single line is drawn through the erroneous amount or
accounts title, and the correction is entered on the same line just
above the error. Often the person correcting the entry must place
his or her initials near the correction. This facilitated any further
inquiry about the nature of or reason for the correction. Once an
erroneous journal entry has been transferred to the ledger accounts,
both records contain error. The recommended procedures for
correcting this situation are discussed in step 3 below.
STEP 3
POSTING TO THE LEDGER
After transactions have been journalized, the next
step in the accounting cycle is to transfer the debits
and credits in each journal entry to the appropriate
general ledger accounts. Thus, data from the journal
that stresses the total of particular transaction (such as
collection of accounts receivable) are transcribed to a
ledger that stresses the total effect of many business
transactions on a particular business variable (such as
cash, accounts receivable, and so on). This type of
data is specifically needed for the preparation of
financial statements.
STEP 3
Posting References
It is important to be able to trace any entry in a ledger
account to the journal from which it was posted. Consequently,
accounting records use a system of references. Both journals
and accounts have posting reference columns. Entries in the
posting reference columns of journals indicate the account
to which the related debit and credit has been posted.
Posting references appearing in ledger accounts identify
the journal from which the related entry was recorded. The
posting references in the journals and ledger accounts are
entered when the journal entries are posted to the ledger
accounts.
STEP 3
Chart of Accounts
A chart of accounts is usually prepared in order to
facilitate the analysis of activities and the formulation of
journal entries. The chart of accounts is a list of the titles and
numbers of all accounts found in the general ledger. The
account titles should be grouped by, and in order of, the five
major sections of the general ledger (assets, liabilities, owners
equity, revenue, and expenses). Exhibit 1-3 shows a chart of
accounts for Dalay TV Service, indicating the account
numbers that will now be used.
Table 2.6
STEP 3
Illustration Of Posting. Exhibit 1-4 of Dalay TV Services December
transactions from the general journal to the ledger accounts. Each debit
entry is posted as follows:
The date (year, month, and day) is entered in the appropriate account.
Note that this is the date of the journal entry, not necessarily the date of
the actual posting. As with journals, the year and month are restated
only at the top of a new accounts page or at the point where they
change.
The amount is entered in the account as a debit or a credit, as indicated
in the journals money columns, and the new balance is calculated.
The posting reference from the journal (both symbol and page number)
is placed in the posting reference column of the ledger account.
The account number is placed in the posting reference column of the
journal.
STEP 3
Regardless of the type of journals or the number of entries involved,
the total debit posted should equal the total credit posted. Exhibit 14 (see following pages) is a comprehensive illustration of the
journalizing and posting of the December transactions of Dalay TV
Service. You should review each transaction in the illustration form.
the nature of the transaction

the related journal entry, and
the subsequent postings.
Bear in mind that the account numbers in the posting reference of
the journal are not entered when the journal entry in recorded;
they are inserted when the entry is posted.
Table 2.7
STEP 3
The foregoing should have been noted in the
illustration; in every entry in the journal the debit
amount equal the credit amount. Debit amount in the
journal are posted to the debit side of the
corresponding accounts in the general ledger. In like
manner, credit amounts in the journal are posted to
the credit side of the corresponding accounts in the
general ledger. Therefore, it follows that the sum of
the debit amounts and that of the credit amounts
would also be equal in the ledger.
STEP 3
Correction Erroneous Postings
Even the most carefully kept accounts will occasionally
contain posting errors. An error involving only the wrong
amount being posted may be corrected by drawing a line
through the incorrect amount, entering the correct amount
above, and initialing the correction. When an amount has been
posted to the wrong account, however, the correction should
be made with a journal entry. Some common errors are as
follows: transposition (transfer of position) which means that
there was a change in the position of numbers, e.g. 936 was
written as 396; slide (transplacement) which means that the
decimal point was placed in wrong position, e.g. 10,000 was
written as 1,000 or 100,000. more detailed discussion on this
matter is provided in the section of adjusting entry.
STEP 4
PREPARATION OF A TRIAL BALANCE
After the journal entries have been posted to the general ledger
accounts, a trial balance is prepared from the general ledger.
Periodically, a test of the equality of the debit amounts and
credit amounts in the general ledger is made. The test is known
as the trial balance. It is usually prepared at the end of a month,
a quarter, a semester, or a year.
Preparatory to the setting of the trial balance, each general ledger
account with more than one entry on either side is footed.
Pencil footing means that the temporary total of the amounts of
each side of the account is taken. Each of the debit totals and
credit totals of the accounts are written (in pencil) just below the
last entry on the particular side. This facilitate the determination
of the account balance after transactions have been posted.
Accounts with only one entry on either side need not be footed.
STEP 4
Open and Closed Accounts
The difference between a debit total and a
credit total of an account is called account
balance. When the debit total and credit total
of an account are not equal, the account is said
to be an open account (with balance). When
the debit total and credit total of an account are
equal, the account is said to be, closed
account ( without balance).
STEP 4
Types of Trial Balance
Trial balance could either be trial balance of totals or trial balance of
balances. The trial balance of totals is a list of all accounts (that have
entry, whether open or closed) in the general ledger with their total
debit amounts and total credit amounts. For this reason, it is called
trial balance of totals. The trial balance of balances is a list of the
open accounts in the general ledger and their balances. Only open
accounts are included when preparing trial balance of balances,
closed accounts are excluded. The conventional way is the
preparation of trial balance of balances rather than the trail balance of
totals. This type of trial balance is commonly used because it gives the
detailed information needed in the other steps of the accounting cycle.
The preparation of the trial balance is more of a check on the
arithmetical accuracy of the accounting records rather than an absolute
guarantee that all generally accepted accounting principles, practices,
and procedures have been complied accurately.
STEP 4
Steps in Preparing Trial Balance
Prepare the trial balance in a two-column journal. Heading

should be written on top of the page. The heading shows the name
of the business on the first line. Trial balance on the second line,
and the date on the third line. Each line of the heading must be
centered on the page.
Write the title of each open account on the Account Titles column.
If the account has a debit balance, write the balance in the debit
column of the trial balance. If it has a credit balance, write the
balance on the credit amount column. All the account titles in the
trial balance are written with the same margin from the left side
of the page, that is, credit account titles should not be indented.
Add each amount column to prove that the two totals are equal.
If the two totals are equal, draw lines under the totals.
STEP 4
The trial balance of the Dalay TV Service at
December 31 is shown in Exhibit 1-5. showing all the
general ledger account balances in one report, as is
done in this trial balance, makes it easier to review
the accounts and determine which account balances
need to be adjusted before preparing the financial
statements.
Table 2.8
CHAPTER 3
Adjusting Entries and the Preparation of the
Financial Statements
Adjusting Entries and the Preparation of the

Financial Statements
Before the books of accounts are adjusted at the end of
the accounting period, the accounts may be classified
into real, nominal, and mixed. Real accounts are the
asset, liability, and the capital accounts. Nominal
accounts are the expense and income accounts. Mixed
accounts are those which contain both real and
nominal elements and which are adjusted at the end of
the period so that their balances become either purely
real or purely nominal. Thus, after the accounts have
been adjusted, only real and nominal accounts exist;
the real and nominal elements contained in the mixed
accounts have been recorded in separate accounts.
STEP 5: GATHERING DATA TO ADJUST THE

ACCOUNTS AND PREPARATION OF A
WORKSHEET
ADJUSTING ENTRIES UNDER THE ACCRUAL BASIS OF
ACCOUNTING
The extent and nature of adjusting entries depend on the
basis on which the books are kept by the enterprise. There are
generally two methods of keeping accounting records; the cash
basis and the accrual basis. Under the cash basis of
accounting revenues are recognized as expense on the period
of payment. In the accrual basis of account, revenues are
recognized are recognized as income on the period that
revenue is earned not in the period of collection, while
expenses are recognized as expense on the period that it was
incurred not on the period of payment.
STEP 5: GATHERING DATA TO ADJUST THE

ACCOUNTS AND PREPARATION OF A
WORKSHEET
The application of the accrual basis of accounting

necessitates adjusting entries for the following
seven items:
Doubtful Accounts
Depreciation
Accrued Expenses
Accrued Revenue
Prepaid Expenses
Unearned Revenue (Deferred Revenue)
Ending Merchandise Inventory
DOUBTFUL ACCOUNT
DOUBTFUL ACCOUNTS
When a business allows customers to avail services on
credit, it maybe inevitable that some of the receivables will
not be collected. The loss which is a result of worthless or
bad accounts is referred to as doubtful accounts expense.
For proper income measurement, it is important that a
provision for the uncollectible accounts be provided during
the same period that the income from services is recognized.
This produces a better matching of revenues and expenses
and, therefore, a better income measurement procedure.
Using this procedure, operations are charged with estimated
expenses, and receivables are reduced by means of a contra
asset account Allowance for Doubtful Accounts.
DOUBTFUL ACCOUNT
The provision for doubtful accounts is based

on estimate and is computed usually as a
percentage of credit revenues or as a
percentage of outstanding accounts
receivable. The purposes of the adjustment
are: (1) to record the doubtful account expense
during the same period that the related revenue
is recognized, and (2) to report the accounts
receivable at the approximate collectible
amount.
DOUBTFUL ACCOUNT
ADJUSTING ENTRY FOR DOUBTFUL ACCOUNTS
The pro-forma adjusting journal entry for the
estimated loss on uncollectible account is:
Table 3.1
To illustrate, let us assume the following data as part of the

trial balance of an enterprise rendering repair services for
home appliances:
Table 3.2
DOUBTFUL ACCOUNT
Percentage Revenue
Assume it was provided that the expected
uncollectible account during the year would be
equal to 1% of the Service Income earned
during the period, the adjusting entry for
doubtful accounts would be:
Table 3.3
DOUBTFUL ACCOUNT
Percentage Receivable
When the provision for doubtful accounts is
based on percentage of receivable, it may based on
the following estimates of computation: (1) allowance
for doubtful accounts increased (decreased) by
percentage of outstanding receivable, or (2)
allowance for doubtful accounts increased
(decreased) to percentage of outstanding receivable.
It should be noted that the difference of the two
methods is only the words by and to, but it should be
remembered because it makes a lot of difference.
DOUBTFUL ACCOUNT
Allowance for Doubtful Accounts Increased BY percentage of receivable
Assume that it was agreed that the allowance for doubtful accounts will be
increased by 1% of the outstanding receivable. The adjusting journal entry
will be:
Table 3.4
Note that if the allowance for doubtful accounts will be

increased by percentage of receivable, the doubtful
accounts expense is computed by multiplying the
receivable by the given percentage.
DOUBTFUL ACCOUNT
Allowance for Doubtful Accounts Increase TO

percentage of receivable
Assume that it was agreed that the
allowance for doubtful accounts will be
increased to 1% of the outstanding receivable.
The adjusting journal entry will be:
Table 3.5
DOUBTFUL ACCOUNT
Computation:
Balance after adjustment (P50,000 x 1%)
Less: Balance before adjustment
Amount of adjustment for Doubtful Accounts
P500
200
300
Note that if the allowance for doubtful account will be

increased to percentage of receivable, the doubtful account
expense is computed by multiplying the receivable by the
given percentage to compute for the desired balance of the
allowance after adjustment, then the balance before the
adjustment is deducted from it to arrive at the amount of
doubtful accounts to be provided.
DEPRECIATION
DEPRECIATION
When the business entity acquired tangible fixed assets such as
delivery equipment, furniture, computer, machines, building, and other
long-life assets, it is basically paying in advance for the usefulness of
such asset. These assets help generate revenue for the entity. Each
accounting period in which such assets are used should share a portion
of their cost as expense. Proper accounting requires the systematic
allocation (assignment) of the cost of the assets over its estimated useful
life. Depreciation is the assignment of part of the cost of the asset over
the period it was used to properly match the revenue and cost of that
period.
The following three factors are considered in the computation of depreciation:
Cost of the fixed asset
The estimated useful life
The estimated scrap value of the asset
Table 3.6
Adjusting Entry for Depreciation
Date
DESCRIPTION
Post
Ref.
Credi
Debit
t
19xx
Depreciation Expense-Name
Dec. 31 of Asset
Accumulated
Depreciation-Name of Asset
To record depreciation
for the period
xxx
xxx
DEPRECIATION
The account Depreciation is an expense account while the account
Accumulated Depreciation is a contra asset account which is
deducted from the appropriate fixed asset account when preparing a
balance sheet.
To illustrate, assume that an equipment was purchased on January 1
of the year for P1,000,000. It has an estimated life of 10 years and a
scrap value of P100, 000 after its useful life. At the end of the year,
before the financial statements are prepared, annual depreciation
should be adjusted. The annual depreciation is computed as follows:
Formula to Compute Annual Depreciation:
Cost of Asset - Scrap Value
Estimated Useful Life
DEPRECIATION
At the end of the accounting period, the depreciation to be
provided would amount to P90, 000 (P1,000,000 P100, 000 10
years ). Accordingly, the adjustment would be:
Table 3.7
Date
19xx
DESCRIPTION
Depreciation ExpenseDec. 31 Equipment

Accumulated
Depreciation-Equipment
for the period
Post
Ref.
Debit Credit
90,000
90,000
The method used in computing depreciation for the

equipment is the straight-line method. This is the
simplest and the most commonly used method in
computing depreciation.
DEPRECIATION
Depreciation expense is the assigned portion of the cost of the fixed
asset to the periods during which it is used. Accumulated depreciation is
the total accumulated amount of depreciation that has been recorded for the
fixed asset. The difference between the cost of the fixed asset and the
accumulated depreciation is the book value of the asset. The book value
represent the portion of the cost of the fixed asset that has not yet been
recorded as depreciation expense. In the illustration provided above, the
equipment would be presented in the balance sheet as follows:
Equipment
Less: Accumulated Depreciation
Book Value
P1,000,000
90,000
P 910,000
The accumulated depreciation account is known as the contra-asset

account, since it is presented as a deduction from the asset account.
DEPRECIATION
Fractional Depreciation
In the illustration given, it was assumed that the asset
is used for one year. Let us assume now that the
equipment was acquired only July 1 (not January 1)
and was used only for six months. How much
depreciation should be provided as of December 31 of
the year?
Formula to Compute Fractional Depreciation
Cost of Asset Scrap Value
Estimated Useful Life
= Fractional Depreciation
DEPRECIATION
Following the given formula, the

depreciation to be provided at the end of the
year would be P45, 000 (P1,000,000 P100,
000 10 years x ). The adjusting entry to
record the depreciation of the above equipment
would be:
Table 3.8
Date
DESCRIPTION
Post
Ref. Debit Credit
19xx
3 Depreciation ExpenseDec. 1 Equipment
Accumulated
Depreciation-Equipment
for six months.
45,00
0
45,000
ACCRUED EXPENSES
3. ACCRUED EXPENSES
Accrued Expenses are expenses already incurred but not yet paid.
The business usually incurs expenses but may take time before it could pay
them. Usually expenses is recorded when payment is made. If at the end of
the period the expense is not yet paid, it may therefore still be unrecorded.
This situation creates understatement of expenses on the income
statement which will overstate the net income and understate liabilities
in the balance sheet. Consequently, an adjustment is needed to up-date the
accounts for proper financial statement presentation.
The accrued expenses are usually incurred on various continuing
services provided to the business such as electricity, water, telephone,
taxes, rental, interest, salaries and many others.
Adjusting Entry for Accrued Expenses
The pro-forma adjusting journal entry for accrued expense is:
Table 3.9
Date
DESCRIPTION
19xx
Dec. 31 An Expense Account
(Name of expense)
Payable
To record accrued
expense for the period
Post
Ref.
Debit Credit
20, 000
20,
000
ACCRUED EXPENSES
Illustration. Assume Nikko Jay Service Co. is renting a shop
location at the rate of P20, 000 per month. Its lease agreement
provides that payment of rental should be made on or before the
5th day of every month for the month after the facility was
used. Meaning, October rental should be paid by November 5,
November rental should be paid December 5, and so on. At
December 31, when the business will prepare the financial
statements, the December rental is still unpaid although they
have use the facility. Correspondingly, because rent expense is
understated and liability is understated too, an adjusting
entry as follows is necessary:
Table 3.10
Date
19xx
DESCRIPTION
Dec. 31 Rent Expense

Rent Payable
To record accrued
expense for the period
Post
Ref.
Debit Credit
20,
000
20,
000
ACCRUED REVENUE
ACCRUED REVENUE
Accrued revenues are revenue already earned but collection has not
yet been received. Many kinds of revenues like revenue from interest,
revenue from commission, from rental on property, are recorded only
when received. It goes to say, therefore, that when no collection is
received these revenues are not yet recorded. This results in the
understatement of revenue account on the income statement and
subsequently understatement of receivable account in the balance
sheet. Consequently, an adjusting entry is necessary to up-date and
correct the accounts to be able to present reliable financial statements.
Adjusting Entry for Accrued Revenue
The pro-forma adjusting entry for accrued revenue is:
Table 3.11
Date
19xx
DESCRIPTION
(Name of Income)
Dec. 31 Receivable
Revenue Account
To record accrued
revenue for the period
Post
Ref.
Debit Credit
xxx
xxx
ACCRUED REVENUE
Illustration: In the preceding illustration for
Nikko Jay Co. above, was analyzed on the point of
view of the lessee. Let us now analyze it from the
point of view of the owner of the owner of the
property. If you were the owner of the property, at the
end of December, you have already earned your rent
revenue because they have already used the property
but you have not received their payment. This is a
good example of accrued revenue. For this
illustration, the necessary adjusting entry is:
Table 3.12
Date
19xx
DESCRIPTION
3
Dec. 1 Rent Receivable
Rent Revenue
To record accrued rent
for December.
Post
Ref.
Debit Credit
20,000
20,000
PREPAID EXPENSES
PREPAID EXPENSES
Prepaid expenses are expenses already paid but not yet
incurred. Expenses could be paid in advance. Some example of
prepaid expenses are rent paid in advance, advertising paid in
advance, interest on discounted notes, purchase of supplies, and
insurance premium paid on the beginning of the policy period.
Prepaid expenses are assets, not expenses. The terms prepaid,
unexpired, unused, on hand, and inventory denotes assets. At the
end of the accounting period, when the portion of these assets
have been used or expired, they become expense that requires
adjustment.
Advance payment of expenses (Prepaid expense) could be
recorded in the accounting records under any one of the two
methods: (1) the asset method, and (2) the expense method.
PREPAID EXPENSES
The Asset Method
The asset method is the procedure of recording the advance payment
of expenses by debiting an asset account. At the end of the accounting
period, the asset recorded could have been partly used up, rendering the
asset account debited to be overstated while the expense account is
understated. This situation requires the preparation of an adjusting entry to
correct and up-date the accounts for proper financial statement
presentation.
Entry for Prepaid Expenses using Asset Method
The journal entry to record the payment of expenses using the asset
method is:
Table 3.13
Date
DESCRIPTION
Post
Ref.
Debit Credit
19xx
Asset Account (Prepaid,
Sept. 1 Unused, etc.)
Cash
xxx
xxx
To record advance
payment of expenses.
Note that asset account is debited to record the

advance payment of expenses. For this reason, it is
called asset method.
PREPAID EXPENSES
Adjusting Entry for Prepaid Expenses using

Asset Method
The pro-forma adjusting journal entry for
prepaid using the asset method is:
Table 3.14
Date
DESCRIPTION
Post
Ref.
Credi
Debit
t
19xx
3
Dec. 1 Expense Account
Asset Account
(Prepaid, Unused, etc.)
To record unexpired
portion of an asset for the
period.
xxx
xxx
PREPAID EXPENSES
Illustration. Assume that on September 1 if the current year, Ma. Gina Trucking
Service paid six-month advertising amounting to P120, 000 to Ace Advertising Company.
If the asset method of recording is used, then the entry on September 1 will be:
Table 3.15
Date
19xx
DESCRIPTION
Sept. 1 Prepaid Advertising

Cash
To record advance
payment of advertising.
Post
Ref. Debit Credit
120,0
00
120,00
0
Analysis. The rate of advertising per month is P20, 000 (P120,

000 6). At December 31, the end of the accounting period,
P80, 000 (P20, 000 x 4 months) of the advertising applicable
to the months of September to December have expired while
P40, 000 (P20, 000 x 2 months) the portion applicable to the
months of January and February (next year) remains unused.
At December 31, the recorded prepaid advertising is P120,
000, when it should only be P40, 000.
PREPAID EXPENSES
The asset is overstated by P80, 000, the same amount of understatement of
the advertising expense account. At December 31, the adjusting entry should be:
Table 3.16
Date
19xx
DESCRIPTION
Dec. 31 Advertising Expense

Prepaid Advertising
To record advertising
expense incurred for the
period
Post
Ref.
Debit Credit
80,
000
80,
000
It should be noticed in the analysis, that the account

debited in the original entry (upon payment) is the
account credited on the adjustment. It is so because
the account debited in the recording of the payment is
overstated at the end of the period.
PREPAID EXPENSES
The Expense Method
The expense method is the procedure of recording the advance
payment of expenses by debiting an expense account. At the end of the
accounting period, the expense recorded could not have been used up,
rendering the expense account debited to be overstated while the asset is
account understated. This situation requires the preparation of adjusting
entry to correct and up-date the accounts for proper financial statement
presentation.
Original Entry for Prepaid Expenses using Expense Method
The journal entry to record the payment of expenses using the
expense method is:
Table 3.17
Date
DESCRIPTION
19xx
Sept. 1 Expense Account
Cash
Post
Ref.
Debit Credit
xxx
xxx
To record advance
payment of expenses
Note that expense account is debited to record the advance
payment of expenses. For this reason, it is call expense
method.
PREPAID EXPENSES
Adjusting Entry for Prepaid Expenses using

Expense Method
prepaid expenses using the expense method is:
Table 3.18
Date
19xx
Dec.
DESCRIPTION
3 Asset Account (Prepaid,
1 Unused, etc.)
Expense Account
To record Unexpired
expense during the period
Post
Ref.
Credi
Debit
t
xxx
xxx
PREPAID EXPENSES
Illustration. We will be using the same data for asset method, on
the P120, 000 advertising paid by Ma. Gina Trucking Service to
Ace Advertiser Company for the period September 1 (current
year) to February (next year). If the expense method of recording
is used, then the entry for September 1 would be:
Table 3.19
Date
19xx
DESCRIPTION
Sept. 1 Advertising Expense

Cash
To record advance
payment of Advertising
Post
Ref.
Debit Credit
120,00
0
120,00
0
Analysis. The analysis made using the asset

method is still valid. But, because the expense
account was debited and the P120, 000 is not all
used up, the expense account is overstated by
P40, 000, the portion applicable to the months of
January and February (next year). It is the same
amount of understatement of the asset (prepaid)
account.
Table 3.20
Date
19xx
DESCRIPTION
Dec. 31 Prepaid Advertising

Advertising
Expense
To record the
amount of unexpired
advertising at the end of
the period.
Post
Ref.
Debit Credit
40,00
0
40,000
PREPAID EXPENSES
It should be noticed in the analysis, that the account
debited in the original entry (upon payment) is the
account credited on the adjustment. It is so because the
account debited in the recording of the payment is
overstated at the end of the period.
In the two analysis provided, both for the asset method
and the expense method, it should be noted that after the
adjustment have been recorded in the accounts the
resulting balance for both accounts will be the same, P80,
000 for Advertising Expense and P40, 000 for Prepaid
Advertising. The amounts represent the correct balances in
our analysis.
UNEARNED REVENUE (Deferred Revenue)

Unearned revenues are revenues already received
(collected) but not yet earned. Sometimes the business
receives payment for the services (or goods) before service
is actually rendered. When such revenues are received in
advance, the enterprise has an obligation to perform services
(or delivery of goods). The liability is referred to as
unearned revenue.
Like in prepaid expenses, advance receipt of revenue
(Unearned revenue) may be recorded in the accounting
records under any one of the two methods:
Liability Methods
Revenue Methods

The Liability Method
The liability method is the procedure of recording the advance
receipt of revenue by crediting a liability account. At the end of
the accounting period, the liability recorded could have been
partially earned rendering the liability account credited to be
overstated and the revenue account understated. This situation
requires the preparation of adjusting entry to correct and up-date
the accounts for proper financial statement presentation.
Original Entry for Unearned Revenue using Liability Method
The journal entry to record the receipt of revenue in advance using
the liability method is:
Table 3.21
Date
19xx
DESCRIPTION
Post
Ref.
Debit Credit
1
Aug.
Cash
Unearned (Name of
Revenue) Account
To record advance
receipt of revenue
xxx
xxx
Adjusting Entry for Unearned Revenue

using Liability Method
unearned revenue using the liability method is:
Table 3.22
Table 3.22
Date
DESCRIPTION
Post
Ref.
Debit Credit
19xx
Liability (Unearned)
Dec. 31 Account
Revenue Account
To record revenue
earned for the period.
xxx
xxx
Illustration. Assume that on August 1, the

business received P72, 000 from a tenant,
representing 6-month advance rental, covering
the period from August (current year) to
January (next year). If the liability method is
used, the entry on August 1 would be:
Table 3.23
Date
DESCRIPTION
19xx
Aug. 1 Cash
Unearned Rent
To record advance
receipt of revenue.
Post
Ref.
Debit
Credit
72,000
72,000

Analysis. The rate of the monthly rental is P12, 000 (P72, 000 6). At
December 31, the end of the accounting period, P60, 000 (P12, 000 x 5
months) of the rent applicable to the months of August to December have
been earned while P12, 000 the rent applicable to the month of January
(next year) remains unearned. At December 31, the recorded unearned rent
per record before any adjustment is P72, 000, when it should only be P12,
000. The liability account is overstated by P60, 000, the same amount of
understatement of the rent revenue account. At December 31, the adjusting
entry should be:
It should be noted in the analysis, that the account credited in the original
entry (upon receipt of revenue) is the account debited on the
adjustment. It is so because the account credited in the recording of the
receipt of revenue is overstated at the end of the period.
Table 3.24
Date
DESCRIPTION
19xx
Dec. 31 Unearned Rent
Rent Revenue
To record revenue
earned during the period
Post
Ref.
Debit
Credit
60,000
60,000

The Revenue Method
The revenue method is the procedure of recording the
advance receipt of revenue by crediting a revenue account. At
the end of the accounting period, the revenue recorded
could not have been all earned, rendering the revenue
account credited to be overstated and the liability account
understated. This situation requires the preparation of an
adjusting entry to correct and up-date the accounts for proper
financial statement presentation.
Original Entry for Unearned Revenue using Revenue Method
The journal entry to record the receipt of revenue in
advance using the revenue method is:
Table 3.25
Date
DESCRIPTION
19xx
Aug. 1 Cash
Revenue Account
To record advance
receipt of revenue.
Post
Ref.
Debit Credit
xxx
xxx

Adjusting Entry for Unearned Revenue using Revenue
Method
The pro-forma adjusting journal entry for unearned revenue
using the revenue method is:
Table 3.26
Date
19xx
DESCRIPTION
3
Dec. 1 Revenue Account
Unearned (Name of
Revenue) Account
To record revenue
unearned at the end of the
period
Post
Ref. Debit Credit
xxx
xxx
Illustration. Applying the same example in the liability

method, that on August 1, the business received P72, 000
from a tenant, representing a 6-month advance rental
covering the period from August (current year) to
January (next year), if the revenue method is used, the
entry would be:
Table 3.27
Date
DESCRIPTION
19xx
Dec. 31 Revenue Account
Unearned (Name of
Revenue) Account
To record revenue
period
Post
Ref.
Debit Credit
xxx
xxx

Analysis. The rate of the monthly rental is P12, 000 (P72, 000
6). At December 31, the end of the accounting period, only
P60, 000 (P12, 000 x 5 months) of the rent applicable for the
months of August to December have been earned while P12,
000 the rent applicable to the months of January (next year)
remains unearned. At December 31, the recorded rent revenue
before any adjustment is P72, 000, when it should only be
P60, 000. The revenue account is overstated by P12, 000, the
same amount of understatement of the unearned rent account.
At December 31, the adjusting entry should be:
Table 3.28
Date
19xx
DESCRIPTION
3
Dec. 1 Rent Revenue
Unearned Rent
To record revenue
period
Post
Ref.
Debit Credit
12,00
0
12,000
It should be noticed in the analysis, that

the account credited in the original entry
(upon receipt of revenue) is the account
debited on the adjustment. It is so because
the account credited in the recording of the
receipt of revenue is overstated at the end of
the period.
PREPARATION OF THE WORK SHEET

The work sheet is also a tool used by the accountant to
facilitate the preparation of adjusting entries, closing entries,
and financial statements. It is a columnar paper which can
be used for the following purposes:
Compute adjustments and the adjusted balances of the

accounts.
Classify the accounts into income statement accounts
(nominal accounts) and balance sheet accounts (real
accounts) for financial statements preparation.
Determine net income (or loss).

Accountants often use work sheet to facilitate preparation
of financial statements. The financial statements maybe
prepared directly from the trial balance if the business has
relatively few accounts and if it shows the correct balances of
the accounts. If not, adjustments must therefore be posted to
the general ledger to bring the balances to correct amounts. To
facilitate such work, the trial balance may be prepared on a
work sheet (may be called analysis sheet), a multi-column
document which provides efficient way of summarizing
necessary data for the financial statements preparation. Using
the work sheet, the accountant is assured of the mathematical
accuracy of his work.

The following steps are followed when preparing the work sheet:
Place the heading at the center of the columnar form: Name of the
Company, Work Sheet, and, the period covered.
Place the trial balance on the first section (first two column). List the
accounts as they appear in the general ledger. See to it that the debit
and credit totals are balanced.
Enter all the adjustments in the next section (third and fourth
columns). Use numbers or letters to identify each entry. Prove equality
of the debit and credit amounts, double-rule if equal. New account
titles are placed below, in the appropriate account title column.
Complete the next section (fifth and sixth columns), extend the
adjusted balances of all accounts to the adjusted trial balance columns.
Complete the statement sections, extend the fourth

section (seventh and eight columns) all income
statement accounts (nominal accounts), and to the
fifth section (ninth and tenth columns) all balance
sheet accounts (real accounts).
Determines the net income (or net loss) by
analyzing the column totals of the income statement
columns. If the credit column total exceed the debit
column total, it represent net income. If the debit
column total exceed the credit column total, it
represent a net loss.
Illustrative Problem Preparation of Work

Sheet. Sagum Laboratory began operation on
January 1, 19xx, and provides various
diagnostic services for physicians and clinics.
Its accounting period ends December 31 and
the accounts are adjusted annually on this date.
Its unadjusted trial balance at December 31,
19xx, is as follows:
Sagum Laboratory
Trial Balance
December 31, 19xx
Account Titles
Credit
Cash
Accounts Receivable
Medical Supplies
Prepaid Insurance
Laboratory Equipment
Accumulated Depreciation Laboratory
Equipment
Accounts Payable
Unearned Diagnostic Fees
Cecil Sagum, Capital
Diagnostic Fees
Salaries and Wages Expense
Rent Expense
Total
Debit
1, 000
9, 200
31, 300
6, 000
270, 000
60, 000
3, 000
4, 000
110, 000
220, 000
58, 000
__________________
397, 500 397, 500
Table 3.29
STEP 6
PREPARATION OF FINANCIAL STATEMENTS
After the worksheet has been completed, the formal
financial statements are prepared. The kind of financial
statements have been illustrated, the nature and form of the
income statement and the balance sheet have been taken up in
Chapter 1. The financial statement of Sagum Laboratory will
be prepared with the aid of a worksheet in this chapter.
Basically, there are two principal accounting statements
for a sole proprietorship: the balance sheet and the income
statement. The balance sheet is that kind of financial
statement that shows the financial position of the business as
of a given date, usually the end of the accounting period. The
income statement is the kind of financial statement that
shows results of operations for a period of time, usually a year,
STEP 6
Kinds of Income Statement
Single-step form in this type of income statement,
all revenues are grouped together in one section, and
all expenses in another section. The net income or net
loss are determined by deducting the total expenses
from the total revenue.
Multi-step form
Forms of Balance Sheet
Report Form - a balance sheet that presents the
assets on the top section and the liabilities and
owners equity at the bottom section of the report.
Sagum Laboratory
Balance Sheet
As of December 31, 19xx
ASSETS
Current Assets
Cash
Accounts Receivable
Less: Allowances for Doubtful Depreciation
Medical Supplies
Prepaid Insurance
Total Current Assets
Property, Plant, and Equipment
Laboratory Equipment
Less: Accumulated Depreciation
Total Property, Plant, and Equipment
Total Assets
LIABILITIES
Current Liabilities
Accounts Payable
Unearned Diagnostic Fees
Salaries Payable
Rent Payable
Total Current Liabilities
OWNERS EQUITY
Cecil Sagum, Capital (per Capital Statement)
Total Liabilities and Owners Equity
P 1,000
P 9,200
P 300
P 8,900
P 6,300
P 4,500
P 20,700
P 270,000
P 90,000
180,000
P 200,700
P 3,100
1,000
600
2,000
P 6,700
194,000
P 200,700
Account Form the balance sheet that is presented in account form

presents the assets o the left side and the liabilities and owners
equity on the right side of the statement.
Name of Company
Balance Sheet
As of December 31, 19xx
ASSETS
Total Current Assets
Total Property, Plant, and Equipment
Total Assets
LIABILITIES AND OWNERS EQUITY

xxx
xxx
xxx
Total Liabilities
Owners Equity
Total Liabilities and owners Equity
xxx
xxx
xxx
STEP 6
Other method of Presentation
There is a Form of balance sheet presentation that
gives emphasis on the current working capital
position of the business, the financial position form.
In the first section, the total current liabilities are
deducted from the total current assets to arrive at the
working capital. In the second section, the total of the
property and equipment is added to working capital
and the long-term liabilities are deducted to arrive at
the net assets and owners equity.
STEP 6
Classification of Assets
For a service business, assets are normally classified in the balance sheet into the (1)
current, and (2) property and equipment.
Current Assets includes cash and other assets that will be converted into cash or used
up by the business , whichever is longer.
Cash is any medium of exchange that the bank accepts at face value. It includes
deposits in banks available for current operations at the balance sheet date, plus cash
on hand consisting of currency, undeposited checks, drafts, and money orders. These
are items without restriction and available for current operations of the business.
Accounts Receivable is the amount owed to a business by customers (clients). It is
evidenced by an oral promise to pay.
Notes Receivable is same as account receivable except that the customer or client
gives a promissory note to evidence its obligation.
Prepaid Expense is also known as Deferred Expenses which is the expenses paid in
advance. It is an asset awaiting assignment to expense. An example is prepaid
insurance.
STEP 6
Property, plant and equipment is an asset acquired for use in a
business rather than for resale; also called plant assets or
fixed assets.
Land is the ground on which the business buildings of the enterprise

are located. Land can also be used for outside storage space or a
parking lot.
Building is an edifice or structures constructed on the land, such as
office building.
Equipments are those items refer to the filing cabinet, calculator,
adding machine, cash register, and computer used either in the
office, store, or for delivery. Delivery Equipment refers to trucks,
cars, motorcycles, and other transportation vehicles used for delivery
purposes.
Furnitures and Fixtures refers to the tables and chairs, cabinet,
counter, and other fixtures used in the business.
STEP 6
Classifications of Liabilities
Current Liabilities are debts usually due within one year, the payment of
which normally will require the use of current assets.
Accounts Payable is the amount owed by the business to creditors for the
items or services purchased from them.
Notes Payable are unconditional written promises by an enterprise to pay
certain sum of money at a determinate future date.
Salaries and Wages Payable are amounts owed to employees for services
rendered but for which payment has not been made at the balance sheet date.
Interest Payable arises when interest has been incurred but not yet paid at
the balance sheet date because the amount is not due on Notes Payable until
later.
Unearned Revenue or Deferred Revenue is payments for services or sale
of goods that are received in advance from customer or client.
Long-term Liabilities are liabilities not due for a relatively long period of time,
usually more than one year.
STEP 6
Classification of Owners Equity
Owners Equity is the claim of the owner over the asset of the
business. It is residual claim because it will only be satisfied
after the payment of the obligation of the business to its
creditors.
Owners Capital is the investment of the owner of the business.
Owners Drawing is the withdrawals of the owner on the capital
and earnings of the business.
Income Summary is an account used in the closing process for
transferring the revenue and expense account balances to the
owners capital account at the end of the period.
STEP 6
Classifications of Revenue
Professional Fees is the income or remuneration
received by professionals from rendering services to
clients. The fee could be described depending upon
the line of professional like legal fee for lawyers,
dental fee for dentist, medical fee for doctors, and
retainers fee or audit fee for CPAs.
Other Revenues are revenues derived from sources
other than the principal line of service rendered like
interest, rent, and commission.
STEP 6
Classification of Operating Expenses
Operating Expense is the cost of the services that are used or consumed in
the operation of the business or practice of profession like salaries and
wages, rent, supplies, utilities, taxes, insurance and others.
Salaries and Wages Expenses are payments made to employees for the
services they rendered to the business.
Rent Expenses are expenses incurred for the use of rented facility like
building.
Supplies Expense is the cost office stationery, envelopes, pencils, pens and
other necessary supplies used in the business.
Utilities Expense refers to the various expenses incurred by the business on
water, electricity, telephone, and other means of communication to
customers or clients.
Insurance Expense is payment made for the premium of an insurance policy.
Advertising Expense is payment made to the advertisement of the business or
practice of the profession.
CHAPTER 4
Completing the Accounting Cycle
The Closing Process
COMPLETING THE ACCOUNTING CYCLE

THE CLOSING PROCESS
Nature of closing process
At the end of the accounting period, the revenue and expense
account balances are reported in the income statement. The
expenses are deducted from revenues to determine the net
income or net loss during the period. Since revenues and
expenses are reported for each period, the balances of these
accounts should be zero at the beginning of the next period. The
zero balances allow the next periods revenues and expenses to
be recorded separately from the preceding period. Because the
balances of revenue and expense accounts are not carried
forward, they are generally called temporary accounts or
nominal accounts. The balances of the accounts reported in the
balance sheet are carried forward from year to year. Because of
their permanent nature, balance sheet accounts are called real
accounts.
COMPLETING THE ACCOUNTING CYCLE

THE CLOSING PROCESS
How are the end-of-period of balances of temporary accounts
converted to zero? To begin, the revenue and expense account balances are
transferred to an account called Income Summary. The balance of Income
Summary is then transferred owner capital account and the balance of the
owners drawing account is transferred to owners capital accounts.
At the end of an accounting period, the balance of the owners
drawing account is reported on the statement of owners capital (statement
of owners equity). The owners withdrawal are deducted from the net
income or added to the net loss for the period to determine the net increase
or decrease in owner equity. Since withdrawals are reported for each
period, the balance of the owners drawing accounts should be zero at the
beginning of the next period. Thus the owners drawing account is also a
temporary account. Its balance is transferred to the owners capita;
account at the end of the period.
STEP 7
JOURNALIZING AND POSTING CLOSING
ENTRIES
Revenue, expense, and drawing account balances are transferred to
the owners equity account by a series of entries called closing entries.
The transfer process is called closing process. Four entries are required
at the end of the period. For sole proprietorship, these entries are as
follows:
Debiting all nominal accounts with credit balances (revenues) and

crediting the total to Income Summary account.
Crediting all nominal accounts with debit balances (expenses), and
debiting the total to Income Summary.
the Net Income is transferred to the Capital account by debiting the
Income Summary for the amount of its balance and the Capital account
is credited for the same amount. (The accounts debited and credited are
reversed if there is a net loss).
the drawing account is transferred to capital account by debiting the
capital account and crediting the drawing account for the same amount.
STEP 7
ENTRIES
The account titles and balances in preparing the closing
entries may be obtained from either the work sheet, the income
statement, the statement of owners equity, and or ledger. If a
work sheet is used, the date for the first two entries appeared
in the Income Statement columns. The amount for the third
entry is the net income or net loss appearing at the bottom of
the work sheet. The drawing account balance appears in the
Balance Sheet debit column of the work sheet.
The closing entries for Sagum Laboratory (See
illustration on Chapter 3) is shown below:
Table 4.1
Table 4.1
STEP 7
ENTRIES
After the closing entries have been posted to the ledger, the balance in the
capital account will agree with the amount reported on the statement of owners
equity and the balance sheet. In addition, the revenue, expense, and drawing
accounts will have zero balances.
It should be noted that Income Summary is used only at the end of the
period. At the beginning of the closing process, Income Summary has no balance.
During the closing process, Income Summary will be debited and credited for
various amounts. At the end of the closing process, Income Summary will again
have no balance. Because income summary has the effect of clearing the revenue
and expense accounts of their balances, it is sometimes called a clearing account.
Other titles used for this account include Revenue and Expense Summary, Profit
and Loss Summary, and Income and Expense Summary.
Balancing and ruling
After the closing process, a line should be inserted in both balance columns
opposite the final entry. If the books will still be used in the next accounting period,
the next periods transaction for the revenue, expense, and drawing will be posted
directly below the closing entry.
STEP 8
POST-CLOSING TRIAL BALANCE
The last accounting procedure for a period is to
prepare a trial balance after the closing entries have
been posted. The purpose of post-closing (after
closing) trial balance is to make sure that the ledger is
in balance at the beginning of the next period. The
accounts and amounts should agree exactly with the
accounts and amounts listed on the balance sheet at
the end of the period.
The post-closing trial balance of Sagum Laboratory is
shown in Exhibit 4-1 below.
Table 4.2
Table 4.2
STEP 8
POST-CLOSING TRIAL BALANCE
Instead of preparing a formal post-closing

balance, it is possible to list the accounts
directly from the ledger, using a printing
calculator or a computer. The calculator tape
or computer printout, becomes the post-closing
trial balance. Without such tape or printout,
there are no efficient means of determining the
cause of inequality.
STEP 9
REVERSING ENTRIES
Some of the adjusting entries recorded at the end of the accounting period
have an important effect on otherwise routine transactions that occur in the
following period. A typical example is accrued wages owed to employees at
the end of the period. If there has been an adjusting entry for accrued wages
expense, the first payment of wages in the following period will include the
accrual. In the absence of some special provision, Wages Payable must be
debited for the amount owed for the earlier period, and the Wages Expense
must be debited for the portion of the payroll that represents expense for the
later period. However, an optional entry --- the reversing entry ---- may be
used to simplify the analysis and recording of this first payroll entry in a
period. As the tem implies, a reversing entry is the exact reverse of the
adjusting entry to which it relates. The amounts and accounts are the same
as the adjusting entry; the debits and credits are reversed. Reversing entries
are generally made on the first day of the next accounting period.
Adjustments that can be reversed are enumerated as follows.
Accrued expenses
Accrued revenues
Prepaid expenses, if expenses method is used
Unearned revenues, if the revenue method is used
STEP 9
REVERSING ENTRIES
Reversing Entry For Accrued Expenses
Accrued expenses of the present period are usually pain in the next
period. If the adjusting entries for accrued expenses are not reversed, the
accrued expenses paid in the next period necessarily be debited to the
accrued liability account. However, if there are reversing entries for these
items, all expenses pain in the future, whether accrued or not, can be
consistently debited to the expense accounts.
Illustration: analysis of the adjusting entry, closing entry and reversing
entry for accrued Expense. On December 31, the end of the accounting
period, the business have issued a nine-percent, six-month note for
P20,000 dated accrued interest on this note is P300 (P20,000 x 9% x 2/12).
The adjusting entry for this is:
Table 4.3
Table 4.3
Date
19xx
Dec.
3
1
Description
Post
Ref.
Interest Expense
Interest Payable
515
202
To record accrued
interest for the period.
Debit
Credit
300
300
STEP 9
REVERSING ENTRIES
The closing entry for the Interest Expense
account at December 31 is:
Table 4.4
Date
Description
19xx
Dec. 31 Income Summary
Interest Expense
To close interest
expense
Post
Ref.
303
515
Debit Credit
300
300
On January 1, the Reversing Entry for the accrued

interest (expense) is:
Table 4.5
Date
Description
19xx
Dec. 31 Interest Payable
Interest Expense
To reverse the
adjusting entry for
accrued interest on
Notes Payable
Post
Ref.
202
515
Debit
Credit
300
300
STEP 9
REVERSING ENTRIES
After this entry, all interest paid, whether accrued or not
could be debited to Interest Expense. The credit to Interest
Expense in the reversing entry will serve to adjust the account
balance to the amount of interest incurred in the current
period. The debit to Interest Payable in the reversing entry
closes the credit to the same account in the adjusting entry.
Thus, the accounts Interest Expense and Interest payable after
the adjusting entry and reversing entries have been posted are
as follows:
Table 4.6
INTEREST
PAYABLE
Date Items Ref. Debit
19xx
Jan. 1 Revers GJ
ing
300
Date
19xx
Dec.
31
Items
account
no.
202
Ref.
Credit
Adjusti GJ
ng
300
Table 4.7
INTEREST EXPENSE
Date Items Ref. Debit Date Items Ref.
19xx
19xx
Adjust
Dec. Closin
Jan. 1 ing
GJ
300 31
g
GJ
Revers
Jan. 1 ing
GJ
Credit
300
300
STEP 9
REVERSING ENTRIES
At April 30, the date of maturity of the note, the total
interest to be paid in the note is P900 (P20,000 x 9% x
6/12). Upon payment, an entry debiting Interest
Expense will be made and if the entry is posted to the
Interest Expense account, the account will appear as
follows.
Table 4.8
This shows that while the interest pain in April
amounted to P900, only the balance of the account of
P600 (P900 P300) is the expense incurred and paid
in April, and the P300 is payment of accrued interest.
Table 4.8
INTEREST EXPENSE
Date Items
Ref. Debit Date Items Ref.
19xx
19xx
Dec. Adjustin
Dec. Closin
31
g
300 31
g
Jan. 1
19xy
19xy
Payment
of
Revers
Apr.30 Interest
900 Jan. 1 ing
Credit
300
300
STEP 9
REVERSING ENTRIES
Reversing Entry for Accrued Revenue
Accrued revenue for the present period is usually
collected in the next accounting period. If no
reversing entry is made, this accrued revenue when
received in the future must necessarily be credited to
the accrued revenue account. However, if there is a
reversing entry, all revenue in the future, whether
accrued or not, can be uniformly credited to the
revenue account.
STEP 9
REVERSING ENTRIES
Illustration: analysis of the adjusting entry, closing entry and
reversing entry for accrued interest revenue. Using the same
illustrative example as above, let us now analyze it on the
point of view of the recipient of the note. On December 31, the
end of the accounting period, the business received a nonepercent, six-month note for P20,000 dated November 1
(current year0 collectible April 30 (next year). At December
31, the accrued interest on this note is P300 (P20,000 x 9% x
2/12).
The adjusting entry for this is:
Table 4.9
Table 4.9
Date
Description
19xx
Dec.
31 Interest Receivable
Interest Revenue
To record accrued
interes revenue for the
period
Post
Ref.
107
405
Debit Credit
300
300
STEP 9
REVERSING ENTRIES
The closing entry for the Interest Income

at December 31 is:
Table 4.10
On January 1, the reversing entry for the
accrued interest revenue is:
Table 4.11
Table 4.10
Date
Description
19xx
Dec. 31 Interest Revenue
Income Summary
To close interest
revenue
Post
Ref.
405
303
Debit Credit
300
300
Table 4.11
Date
Description
19xx
Jan.
1 Interest Income
Interest Recevable
To reverse the
adjusting entry for
accrued interest on
Notes Receivable
Post
Ref.
405
107
Debit Credit
300
300
STEP 9
REVERSING ENTRIES
After this entry, all interest collected, whether accrued or
not could be credited to Interest Revenue. The debit to Interest
Revenue in the reversing entry will serve to adjust the account
balance to the amount of interest earned in the current period.
The credit to Interest Receivable in the reversing entry closes
the debit to the same account in the adjusting entry. Thus, the
accounts Interest Revenue and Interest Receivable after the
adjusting entry and reversing entries have been posted are as
follows:
Table 4.12
Table 4.13
Table 4.12
Date
INTEREST RECEIVABLE
Ref
Items
. Debit Date
Items
19xx
Dec 31 Adjusting
Credi
Ref.
t
19xx
GJ
300
Jan 1
Reversing
GJ
300
Table 4.13
INTEREST REVENUE
Date
Items
Cre
Ref. Debit Date Items Ref. dit
Closing
GJ
19xx
Dec Adjust
300
1
ing
GJ
Reversing
GJ
300
19xx
Dec 31
Jan 1
300
STEP 9
REVERSING ENTRIES
At April 30, the date of maturity of the note, the total
interest to be collected on the note in P900 (20,000 x 9%
6/12). Upon collection, a P900 entry to credit Interest Revenue
account, the account will appear as follows:
Table 4. 14
This shows that while the interest collected in April
amounted to P900, only the balance of the account of P600
(P900 P300) is the revenue earned and collected in April,
and the P300 is collection of accrued interest.
Table 4. 14
INTEREST REVENUE
Date
19xx
Items
Ref.
Dec 31
Closing
GJ
19xx1
Jan 1
Reversin
g
GJ
Debit
Cre
Items Ref. dit
Date
19xx
Dec- Adjusti
300
03
ng
GJ
19xx
1
Collecti
Apr on of
300
30 Interest GJ
300
900
STEP 9
REVERSING ENTRIES
Reversing Entry for Prepaid Expenses
Asset Method is when an expense paid in advance is debited
to and Asset Account, the adjusting entry to record the expense
incurred during the current period need not be reversed
because there will be no inconsistency of recording that will
occur in the next period.
Expense Method is when an expense is paid in advance is
debited to an Expense Account, the adjusting entry to record
the asset (prepaid) portion of the expense should be reversed
on the beginning of the next period, to ensure consistency of
the method of recording being used and for proper recognition
of the expense on the proper accounting period.
STEP 9
REVERSING ENTRIES
Illustration. Analysis of the original entry, adjusting entry,
closing entry and reversing entry on Prepaid Expenses,
when Expense Method is used. On October 1, current year,
the business paid P50,000 to Ace Realty, representing 5-month
rent covering the period October (current year) to February
(next year). At December 31, only P30,000 for three months
(October to December) rental have been used up. The
remainder is applicable to the months of January and February
next year.
The original entry to record transaction, upon payment
is:
Table 4.15
Date
Description
19xx
Dec
1 Expense
Cash
rent in advance
Post
Ref.
508
101
Debit
Credit
50,000
50,000
STEP 9
REVERSING ENTRIES
The adjusting entry for the Prepaid Rent at

December 31 is:
Table 4.16
The closing entry for the Rent Expense at
December 31 is as follows:
Table 4.17
Table 4.16
Date
Description
19xx
Dec
31 Prepaid Rent
Rent Expense
To record Prepaid REnt
Post
Ref.
110
508
Debit
Credit
20,000
20,000
Table 4.17
Date
Description
19xx
Jan.
1 Rent Expense
Prepaid Rent
To reverse the
adjusting entry for
Prepaid Rent.
Post
Ref.
508
110
Debit
Credit
20,000
20,000
STEP 9
REVERSING ENTRIES
After these entries are posted, the Prepaid Rent

account and the Rent Expense account will be
as follows:
Table 4.18
Table 4.19
It should be noted that the Prepaid Rent has
become a closed account and the Rent Expense
account has a debit balance of P20,000. Thus, in
the next period, the adjustment under the expense
method can be used again.
Table 4.18
PREPAID RENT
Date Items
19xx
Dec.3 Adjusti
1
ng
Ref. Debit Date

GJ
Items
20,00 19xx Reversi

0 Jan. 1
ng
Ref.
Credi
t
GJ
20,00
0
Table 4.19
Date Items
19xx Payment
19xx Adjust
Oct.31 of Rent
GJ 50,000 Dec. 1 ing
GJ
19xx1
19xx1
Reversin
Closin
Jan 1
g
GJ 20,000 31
g
GJ
Credit
20,000
30,000
STEP 9
REVERSING ENTRIES
Reversing Entry for Unearned Revenues
Liability Method is when a revenues received in advance is
credited to a Liability Account, the adjusting entry to record the
revenue earned during the current period need not be reversed
because there will be no inconsistency of recording that will
occur in the next period.
Revenue Method is when a revenue received in advance is
credited to a Revenue Account, the adjusting entry to record the
liability (Unearned) portion of the revenue should be reversed
on the beginning of the next period, to ensure consistency of
the method of recording being used and for proper recognition
of the revenue on the proper accounting period.
STEP 9
REVERSING ENTRIES
Illustration. Analysis of the original entry, adjusting entry,
closing entry and reversing entry on Unearned Revenue,
when Income Method is used. On September 1, current year,
the business received P48,000 from a tenant, representing 6mont rent covering the period September (current year) to
February (next year). At December 31, only P32,000 for four
months (September to December) rental have been earned, the
remainder of P16,000 applicable to the months of January and
February next year is still unearned.
The original entry to record the transaction, upon
collection is:
Table 4.20
Table 4.20
Date
Description
19xx
Sept.
1 Cash
Rent Revenue
To record collection
of rent in advance
Post
Ref.
101
404
Debit
Credit
48,000
48,000
STEP 9
REVERSING ENTRIES
The adjusting entry for the Unearned Rent at

December 31 is:
Table 4.21
The closing entry for the Rent Revenue at
December 31is:
Table 4.22
Table 4.21
Date
Description
19xx
Dec. 31 Rent Revenue
Unearned Rent
To record Unearned
Rent
Post
Ref.
404
207
Debit
Credit
16,000
16,000
Table 4.22
Date
Description
19xx
Dec. 31 Rent Income
Income Summary
To close Rent
Revenue
Post
Ref.
404
303
Debit
Credit
32,000
32,000
STEP 9
REVERSING ENTRIES
On January 1, the reversing entry for the

Unearned Rent is:
Table 4.23
After these entries are posted, the Unearned
Rent account and the Rent Revenue account
will be as follows:
Table 4.24
Table 4.23
Date
Description
19xx
Jan.
1 Unearned Rent
Rent Revenue
To reverse the
adjusting entry for
Unearned Rent.
Post
Ref.
207
404
Debit
Credit
16,000
16,000
Table 4.24
UNEARNED RENT
Date
Items

19xx
19xx Reversi
16,00 Dec. Adjus
Jan 1
ng
GJ
0 31
ting
GJ
Credi
t
16,00
0
STEP 9
REVERSING ENTRIES
It should be noted that the Unearned Rent has
become a closed account and the Rent Revenue
account has a credit balance of P16,000. Thus, in the
next period, the adjustment under the revenue method
can be used again.
The following are the main purposes of reversing
entries that should be remembered: (1) consistency in
the use of method, and (2) recording of revenues and
expenses in the proper accounting period.
Thank you!
PRESENTED BY:
Julie Anne P. Jamora
Nancy Bunag
Acknowledgment
Special thanks to the writers of the book
Accounting Fundamental, Bayani D.
Edlagan and Ma. Cecilia S. Mercado, for
without them this presentation would not be
possible.
Polytechnic University of the Philippines

Taguig Campus
As partial requirement in the subject OS

341Web Page Development , this project
is submitted by Julie Anne Jamora and
Nancy Buag to Prof. Angela David.

Accounting Fundamentals For JAIIB

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ACCOUNTING

Accounting information is composed principally of

USERS OF ACCOUNTING INFORMATION

Accounting provides the techniques for accumulating

USERS OF ACCOUNTING INFORMATION

For example, in the conduct of day-to-day operations,

Everyone engaged in business activities, from the

Accountancy is a profession with stature comparable to that of

The practice of public accounting is generally restricted to

In Section 10 of the Law, it is provided that: an applicant for the

The scope of activities and duties of private accountants

For example, an engineer responsible for selecting the

SPECIALIZED ACCOUNTING FIELD

SPECIALIZED ACCOUNTING FIELD

SPECIALIZED ACCOUNTING FIELD

SPECIALIZED ACCOUNTING FIELD

SPECIALIZED ACCOUNTING FIELD

SPECIALIZED ACCOUNTING FIELD

BOOKKEEPING AND ACCOUNTING

BOOKKEEPING is the recording of business data in a prescribed

ACCOUNTING is primarily concerned with the design of the

BUSINESS ENTITY CONCEPT

The business entity concept is based on identifying the

BUSINESS ENTITY CONCEPT

This subject is concerned primarily with the

ACTIVITIES PERFORMED BY BUSINESS

A business transaction is the occurrence of an

ASSETS, LIABILITIES, AND CAPITAL

ASSETS, LIABILITIES, AND CAPITAL

Capital (or Owners Equity)

ASSETS, LIABILITIES, AND CAPITAL

Every business transaction affects the assets, liabilities

RULES OF DEBIT AND CREDIT

TRANSACTIONS AND THE ACCOUNTING

Which item (items) is/are affected Assets, Liabilities, Capital?

DOUBLE ENTRY BOOKKEEPING

DOUBLE ENTRY BOOKKEEPING

The effect of these changes on the

DOUBLE ENTRY BOOKKEEPING

As the basis of this illustration, assume that

DOUBLE ENTRY BOOKKEEPING

DOUBLE ENTRY BOOKKEEPING

It should be noted that the equation relates

DOUBLE ENTRY BOOKKEEPING

The explanation of each debit or credit

DOUBLE ENTRY BOOKKEEPING

DOUBLE ENTRY BOOKKEEPING

After the transaction, there is a land costing

DOUBLE ENTRY BOOKKEEPING

In the transaction recorded, there was a

DOUBLE ENTRY BOOKKEEPING

DOUBLE ENTRY BOOKKEEPING

In actual practice, each purchase would be

DOUBLE ENTRY BOOKKEEPING

In the transaction recorded, Supplies (unused) was

DOUBLE ENTRY BOOKKEEPING

DOUBLE ENTRY BOOKKEEPING

Sept. 9 Accounts Payable

In the transaction recorded, Accounts Payable

DOUBLE ENTRY BOOKKEEPING

DOUBLE ENTRY BOOKKEEPING

DOUBLE ENTRY BOOKKEEPING

DOUBLE ENTRY BOOKKEEPING

To record receipt of revenue