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ACCOUNTING FUNDAMENTAL ACCOUNTING FUNDAMENTAL BY: BY: Bayani D. Edlagan Bayani D. Edlagan Ma. Cecilia S. Mercado Ma. Cecilia S. Mercado
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Page 1: Accounting

ACCOUNTING ACCOUNTING FUNDAMENTALFUNDAMENTAL

BY:BY:Bayani D. EdlaganBayani D. Edlagan

Ma. Cecilia S. MercadoMa. Cecilia S. Mercado

Page 2: Accounting

INTRODUCTIONINTRODUCTIONThis presentation covers the concepts and practice of This presentation covers the concepts and practice of

accounting fundamental. From the concepts and information accounting fundamental. From the concepts and information about accounting up to the accounting cycle, which includes about accounting up to the accounting cycle, which includes journalizing, reversing and closing entries. Accounting is a journalizing, reversing and closing entries. Accounting is a profession similar to medicine and law. Such profession profession similar to medicine and law. Such profession continually evolve and change as society and the needs of continually evolve and change as society and the needs of society change.society change.

The objective of this presentation is to make people The objective of this presentation is to make people aware of how accounting works in relation to business and aware of how accounting works in relation to business and also how can it be helpful even in a simple way of living. also how can it be helpful even in a simple way of living. This also emphasized the importance of accounting in any This also emphasized the importance of accounting in any types of business. Little by little, you will be able to types of business. Little by little, you will be able to understand how accounting works and you will realize its understand how accounting works and you will realize its significance to our daily living.significance to our daily living.

This presentation is based on the book of Bayani D. This presentation is based on the book of Bayani D. Edlagan and Ma. Cecilia S. Mercado, “Accounting Edlagan and Ma. Cecilia S. Mercado, “Accounting Fundamental.”Fundamental.”

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CHAPTER 1CHAPTER 1Introduction to AccountingIntroduction to Accounting

Concepts and PracticeConcepts and Practice

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CHARACTERISTICS OF ACCOUNTING CHARACTERISTICS OF ACCOUNTING INFORMATIONINFORMATION

Accounting information is composed principally of Accounting information is composed principally of financial data about business transactions, expressed financial data about business transactions, expressed in terms of money. The mere records of in terms of money. The mere records of transactions are of little use in making “informed transactions are of little use in making “informed judgments and decisions.” The recorded data must judgments and decisions.” The recorded data must be sorted and summarized before significant reports be sorted and summarized before significant reports and analyses can be prepared. and analyses can be prepared.

The “basic raw materials” of accounting are The “basic raw materials” of accounting are composed of business transaction data. Its “primary composed of business transaction data. Its “primary end products” are composed of various summaries, end products” are composed of various summaries, analyses, and reports.analyses, and reports.

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USERS OF ACCOUNTING INFORMATIONUSERS OF ACCOUNTING INFORMATION

Accounting provides the techniques for accumulating Accounting provides the techniques for accumulating and the language for communicating economic data and the language for communicating economic data to various categories of individuals and institutions. to various categories of individuals and institutions. Investors in a business enterprise need information Investors in a business enterprise need information about its financial status and its future prospects. The about its financial status and its future prospects. The government agencies are concerned with the financial government agencies are concerned with the financial activities of business organizations for purposes of activities of business organizations for purposes of taxation and regulation.taxation and regulation.

The individuals most dependent upon and most The individuals most dependent upon and most involved with the end products of accounting are involved with the end products of accounting are those charged with the responsibility for directing the those charged with the responsibility for directing the operations of enterprises.operations of enterprises.

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USERS OF ACCOUNTING INFORMATIONUSERS OF ACCOUNTING INFORMATION

For example, in the conduct of day-to-day operations, For example, in the conduct of day-to-day operations, management relies upon accounting to provide the management relies upon accounting to provide the amount owed to each creditor and by each customer amount owed to each creditor and by each customer and the date each payment is due.and the date each payment is due.

The relevant information for one category of users The relevant information for one category of users may differ markedly from that needed by other users. may differ markedly from that needed by other users. Once the user groups are identified, however, and the Once the user groups are identified, however, and the nature of the relevant data determined, the accountant nature of the relevant data determined, the accountant is able to establish an information network to assist is able to establish an information network to assist each group in forming judgments and making each group in forming judgments and making decisions regarding future actions.decisions regarding future actions.

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RELATIONSHIP OF ACCOUNTING TO RELATIONSHIP OF ACCOUNTING TO OTHER FIELDSOTHER FIELDS

Everyone engaged in business activities, from the Everyone engaged in business activities, from the youngest employee to the manager and owner, comes youngest employee to the manager and owner, comes into contact with accounting. The higher the level of into contact with accounting. The higher the level of authority and responsibility, the greater is the need authority and responsibility, the greater is the need for an understanding of accounting concepts and for an understanding of accounting concepts and terminology.terminology.

The importance of understanding accounting is not The importance of understanding accounting is not limited to the business world. Many employees with limited to the business world. Many employees with specialized training in non-business areas also make specialized training in non-business areas also make use of accounting data and should understand use of accounting data and should understand accounting principles and terminology.accounting principles and terminology.

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PROFESSION OF ACCOUNTANCYPROFESSION OF ACCOUNTANCY

Accountancy is a profession with stature comparable to that of Accountancy is a profession with stature comparable to that of engineering or law. The rapid development of accounting engineering or law. The rapid development of accounting theory and technique during the current century has been theory and technique during the current century has been accompanied by an expansion of the career opportunities in accompanied by an expansion of the career opportunities in accounting and an increasing number of professionally trained accounting and an increasing number of professionally trained accountants. accountants.

Accountants who render accounting services on a fee basis, Accountants who render accounting services on a fee basis, and staff accountants employed by them, are said to be and staff accountants employed by them, are said to be engaged in engaged in public accountingpublic accounting. Accountants employed by a . Accountants employed by a particular business enterprise or not-for-profit organization, as particular business enterprise or not-for-profit organization, as chief accountant, controller, or financial vice-president, are chief accountant, controller, or financial vice-president, are said to be engaged in said to be engaged in private accounting.private accounting.

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PUBLIC ACCOUNTINGPUBLIC ACCOUNTING

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

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PUBLIC ACCOUNTINGPUBLIC ACCOUNTING In Section 10 of the Law, it is provided that: an applicant for the 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 CPA certificate must be a Filipino citizen (or a citizen of foreign country granting reciprocal privileges, by law, to Filipino with country granting reciprocal privileges, by law, to Filipino with respect to the practice of accountancy), of good moral character 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 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 degree of Bachelor of Science in Commerce or its equivalent from any college or university recognized by the government.from any college or university recognized by the government.

The CPA candidate is required to successfully pass a written The CPA candidate is required to successfully pass a written examination, given by the Board of Accountancy, covering examination, given by the Board of Accountancy, covering theory of accounts, business law, taxation, management advisory theory of accounts, business law, taxation, management advisory services, auditing theory, auditing theory, auditing problems, services, auditing theory, auditing theory, auditing problems, practical accounting problem1, problem 2. To practice public practical accounting problem1, problem 2. To practice public accountancy, CPAs and firms or partnerships, including partners accountancy, CPAs and firms or partnerships, including partners and staff members must register with the Professional Regulation and staff members must register with the Professional Regulation Commission, such registration to be made annually.Commission, such registration to be made annually.

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PRIVATE ACCOUNTINGPRIVATE ACCOUNTING

The scope of activities and duties of private accountants The scope of activities and duties of private accountants varies widely. Private accountants are frequently called varies widely. Private accountants are frequently called management accountants. If they are employed by a management accountants. If they are employed by a manufacturing concern, they may be call industrial or manufacturing concern, they may be call industrial or cost accountants. The chief accountant in a business may cost accountants. The chief accountant in a business may be call controller. Various governmental units and other be call controller. Various governmental units and other not-for-profit organizations also employ accountants.not-for-profit organizations also employ accountants.

Internal auditors are accountants who review the Internal auditors are accountants who review the accounting and operating procedures prescribed by their accounting and operating procedures prescribed by their companies. Accountants who specialize in internal companies. Accountants who specialize in internal auditing may be granted the auditing may be granted the Certified Internal Auditor Certified Internal Auditor (CIA) (CIA) certificate.certificate.

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For example, an engineer responsible for selecting For example, an engineer responsible for selecting the most desirable solution to a technical the most desirable solution to a technical manufacturing problem may consider cost accounting manufacturing problem may consider cost accounting data to be the decisive factor. Lawyers use accounting data to be the decisive factor. Lawyers use accounting data in tax cases and in lawsuits involving property data in tax cases and in lawsuits involving property ownership and damages from breach of contract. ownership and damages from breach of contract. Governmental agencies rely on accounting data in Governmental agencies rely on accounting data in evaluating the efficiency of government operations evaluating the efficiency of government operations and for appraising the feasibility of proposed taxation and for appraising the feasibility of proposed taxation and spending programs. Accounting plays an and spending programs. Accounting plays an important role in modern society and, broadly important role in modern society and, broadly speaking, all citizens are affected by accounting in speaking, all citizens are affected by accounting in some way.some way.

RELATIONSHIP OF ACCOUNTING TO RELATIONSHIP OF ACCOUNTING TO OTHER FIELDSOTHER FIELDS

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SPECIALIZED ACCOUNTING FIELDSPECIALIZED ACCOUNTING FIELD

FINANCIAL ACCOUNTINGFINANCIAL ACCOUNTINGIt is concerned with the recording of It is concerned with the recording of

transactions for a business enterprise or other transactions for a business enterprise or other economic unit and the periodic preparation of economic unit and the periodic preparation of various reports from such records. Corporate various reports from such records. Corporate enterprise must employ such principles in enterprise must employ such principles in preparing their annual reports on profitability preparing their annual reports on profitability and financial status for their stockholders and and financial status for their stockholders and the investing public.the investing public.

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SPECIALIZED ACCOUNTING FIELDSPECIALIZED ACCOUNTING FIELD

AUDITINGAUDITINGIt is a field of activity involving an independent review It is a field of activity involving an independent review

of the accounting records. In conducting an audit, public of the accounting records. In conducting an audit, public accountants examine the records supporting financial reports accountants examine the records supporting financial reports of an enterprise and express an opinion regarding their fairness of an enterprise and express an opinion regarding their fairness and reliability.and reliability.

COST ACCOUNTINGCOST ACCOUNTINGIt emphasizes the determination and control of costs. It It emphasizes the determination and control of costs. It

is concerned primarily with the costs of manufacturing is concerned primarily with the costs of manufacturing processes and of manufactured products, but increasing processes and of manufactured products, but increasing attention is being given to distribution costs. In addition, one attention is being given to distribution costs. In addition, one of the principal functions of cost accountants is to assemble of the principal functions of cost accountants is to assemble and interpret cost data, both actual and prospective for the use and interpret cost data, both actual and prospective for the use of management in controlling current operations and in of management in controlling current operations and in planning for the future.planning for the future.

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SPECIALIZED ACCOUNTING FIELDSPECIALIZED ACCOUNTING FIELD

MANAGEMENT ACCOUNTINGMANAGEMENT ACCOUNTING It employs both historical and estimated data in assisting It employs both historical and estimated data in assisting

management in daily operations and in planning future management in daily operations and in planning future operations. It deals with the specific problems that confront operations. It deals with the specific problems that confront enterprise managers at various organizational levels. The enterprise managers at various organizational levels. The management accountant is frequently concerned with identifying management accountant is frequently concerned with identifying alternative courses of action and in helping to select the best one.alternative courses of action and in helping to select the best one.

TAX ACCOUNTINGTAX ACCOUNTINGIt encompasses the preparation of tax returns and the It encompasses the preparation of tax returns and the

consideration of the tax consequences of proposed business consideration of the tax consequences of proposed business transactions or administrative courses of action. Accountants transactions or administrative courses of action. Accountants specializing in this field, particularly in the area of tax planning, specializing in this field, particularly in the area of tax planning, must be familiar with tax statutes affecting their employer or must be familiar with tax statutes affecting their employer or clients and also must keep up to date on administrative clients and also must keep up to date on administrative regulations and court decisions on tax cases.regulations and court decisions on tax cases.

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SPECIALIZED ACCOUNTING FIELDSPECIALIZED ACCOUNTING FIELD

ACCOUNTING SYSTEMACCOUNTING SYSTEM It is the special field concerned with the design and It is the special field concerned with the design and

implementation of procedures for the accumulation and implementation of procedures for the accumulation and reporting of financial data. The systems accountant must reporting of financial data. The systems accountant must devise appropriate “checks and balances” to safeguard devise appropriate “checks and balances” to safeguard business assets and provide for information flow that will be business assets and provide for information flow that will be efficient and helpful to management.efficient and helpful to management.

BUDGETARY ACCOUNTINGBUDGETARY ACCOUNTINGIt presents the plan of financial operations for a period It presents the plan of financial operations for a period

and, through records and summaries provides comparisons of and, through records and summaries provides comparisons of actual operations with the predetermined plans. A combination actual operations with the predetermined plans. A combination of planning and controlling future operations, it is sometimes of planning and controlling future operations, it is sometimes concerned to be a part of management accounting.concerned to be a part of management accounting.

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SPECIALIZED ACCOUNTING FIELDSPECIALIZED ACCOUNTING FIELD

INTERNATIONAL ACCOUNTINGINTERNATIONAL ACCOUNTINGIt is concerned with the special problems associated It is concerned with the special problems associated

with the international trade of multinational business with the international trade of multinational business organizations. Accountants specialized in this area must be organizations. Accountants specialized in this area must be familiar with the influences of customs law, and taxation of familiar with the influences of customs law, and taxation of various countries bear on international operations and various countries bear on international operations and accounting principles.accounting principles.

NOT-FOR-PROFIT ACCOUNTINGNOT-FOR-PROFIT ACCOUNTINGIt specializes in recording and reporting the It specializes in recording and reporting the

transactions of various governmental units and other not-for-transactions of various governmental units and other not-for-profit organizations such as church, charities, and educational profit organizations such as church, charities, and educational institutions. An essential element in an accounting system that institutions. An essential element in an accounting system that will insure strict adherence on the part of management to will insure strict adherence on the part of management to restrictions and other requirements imposed by law, by other restrictions and other requirements imposed by law, by other institutions, or by individual donors.institutions, or by individual donors.

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SPECIALIZED ACCOUNTING FIELDSPECIALIZED ACCOUNTING FIELD

SOCIAL ACCOUNTINGSOCIAL ACCOUNTING

It is the newest field of accounting and is the It is the newest field of accounting and is the most difficult to describe concisely. One of the most difficult to describe concisely. One of the engagement in this field involved measurement of engagement in this field involved measurement of traffic patterns in a densely populated section of the traffic patterns in a densely populated section of the nation (like Metro Manila) as part of a government nation (like Metro Manila) as part of a government study to determine the most efficient use of study to determine the most efficient use of transportation funds, not only in terms of facilitating transportation funds, not only in terms of facilitating trade but also of assuring a good environment for the trade but also of assuring a good environment for the area’s residents.area’s residents.

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BOOKKEEPING AND ACCOUNTINGBOOKKEEPING AND ACCOUNTING

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

ACCOUNTING is primarily concerned with the design of the ACCOUNTING is primarily concerned with the design of the system of records, the preparation of reports based on the system of records, the preparation of reports based on the recorded data, and the interpretation of the reports. recorded data, and the interpretation of the reports. Accountants often direct and review the work of bookkeeper. Accountants often direct and review the work of bookkeeper. In event, the accountant must possess a much higher level of In event, the accountant must possess a much higher level of knowledge, conceptual understanding, and analytical skill than knowledge, conceptual understanding, and analytical skill than is required of the bookkeeper.is required of the bookkeeper.

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BUSINESS ENTITY CONCEPTBUSINESS ENTITY CONCEPT

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

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BUSINESS ENTITY CONCEPTBUSINESS ENTITY CONCEPT

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

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ACTIVITIES PERFORMED BY BUSINESS ACTIVITIES PERFORMED BY BUSINESS ORGANIZATIONORGANIZATION

SERVICESERVICECompanies perform services for a fee.Companies perform services for a fee.Example: Accounting firms, law firms, and other service Example: Accounting firms, law firms, and other service establishmentsestablishments

MERCHANDISINGMERCHANDISINGCompanies purchase goods that are ready for sale and Companies purchase goods that are ready for sale and

then sell these goods to customers. then sell these goods to customers.

MANUFACTURINGMANUFACTURINGCompanies buy raw materials, convert them into Companies buy raw materials, convert them into

another form of products and the sell the products to other another form of products and the sell the products to other companies or to final consumers.companies or to final consumers.

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BUSINESS TRANSACTIONSBUSINESS TRANSACTIONS

A A business transactionbusiness transaction is the occurrence of is the occurrence of an event or of a condition that must be an event or of a condition that must be recorded. A particular business transaction recorded. A particular business transaction may lead to an event or condition that may lead to an event or condition that constitutes another transaction.constitutes another transaction.

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ASSETS, LIABILITIES, AND CAPITALASSETS, LIABILITIES, AND CAPITAL

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

Assets = EquitiesAssets = Equities

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ASSETS, LIABILITIES, AND CAPITALASSETS, LIABILITIES, AND CAPITAL

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

Assets = Liabilities + Capital (or Owner’s Equity)Assets = Liabilities + Capital (or Owner’s Equity)

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ASSETS, LIABILITIES, AND CAPITALASSETS, LIABILITIES, AND CAPITAL

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

Asset - Liabilities = CapitalAsset - Liabilities = Capital

Every business transaction affects the assets, liabilities Every business transaction affects the assets, liabilities and/or capital of the business. However, the changes in these and/or capital of the business. However, the changes in these items are such that the equality of two sides of the accounting items are such that the equality of two sides of the accounting equation is always maintained.equation is always maintained.

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RULES OF DEBIT AND CREDITRULES OF DEBIT AND CREDIT

Based on the positions of increases and Based on the positions of increases and decreases in an account for an asset, liability, or decreases in an account for an asset, liability, or capital item, the rules of debit and credit may be capital item, the rules of debit and credit may be stated as follows:stated as follows:

      

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TABLE 1.1TABLE 1.1

DEBIT CREDIT

1. Increase in Assets 1. Decrease in Assets

2. Decrease in Liabilities 2. Increase in Liabilities

3. Decrease in Capital 3. Increase in Capital a. Withdrawal by the

Owner a. Investment by the Owner

b. Increase in Expenses b. Decrease in Expenses

c. Decrease in Revenue c. Increase in Revenue

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TRANSACTIONS AND THE ACCOUNTING TRANSACTIONS AND THE ACCOUNTING EQUATIONEQUATION

All business transactions, from the simplest to the most All business transactions, from the simplest to the most complex, can be stated in terms of the resulting change in the complex, can be stated in terms of the resulting change in the three basic elements of the accounting equation. Before a three basic elements of the accounting equation. Before a transaction can be recorded in the book of accounts, it must be transaction can be recorded in the book of accounts, it must be analyzed into its debit and credit elements. The following analyzed into its debit and credit elements. The following questions will be helpful in analyzing a business transaction;questions will be helpful in analyzing a business transaction;

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

How is each item affected – it is increased or decreased?How is each item affected – it is increased or decreased? According to the rules of debit and credit, is the increase or the According to the rules of debit and credit, is the increase or the

decrease in the item to be debited or credited?decrease in the item to be debited or credited? What account titles should be used to record the debit or What account titles should be used to record the debit or

credit item?credit item?

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DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

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

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DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

The effect of these changes on the The effect of these changes on the accounting equation can be demonstrated by accounting equation can be demonstrated by studying some typical transactions using the studying some typical transactions using the analysis sheet as follows:analysis sheet as follows:

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Table 1.2Table 1.2

  ±ASSETS ±LIABILITIES ±CAPITAL

       

       

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As the basis of this illustration, assume As the basis of this illustration, assume that on September 1, 19xx Nick Requijo that on September 1, 19xx Nick Requijo establishes a sole proprietorship to be known establishes a sole proprietorship to be known as Requijo Taxi. Each transaction or group of as Requijo Taxi. Each transaction or group of similar transactions during the first month of similar transactions during the first month of operations is described followed by an operations is described followed by an illustration of its effect(s) on the accounting illustration of its effect(s) on the accounting equation and the corresponding two-column equation and the corresponding two-column journal entry and explanation of entry for each journal entry and explanation of entry for each give transaction.give transaction.

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

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TRANSACTION ONETRANSACTION ONENick Requijo deposited P500,000 in a Nick Requijo deposited P500,000 in a

bank account in the name of Requijo Taxi. The bank account in the name of Requijo Taxi. The effect of this transaction is to increase the asset effect of this transaction is to increase the asset cash by P500,000 and to increase capital, on cash by P500,000 and to increase capital, on the other side of the equation, by the same the other side of the equation, by the same amount. After the transaction, the equation for amount. After the transaction, the equation for Requijo Taxi will appear as follows:Requijo Taxi will appear as follows:

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

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Table 1.3Table 1.3

  ±ASSETS ±LIABILITIES ±CAPITAL

1 + Cash P500,000  

+Requijo, Capital P500,000

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DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

It should be noted that the equation It should be noted that the equation relates only to the business enterprise. Nick relates only to the business enterprise. Nick Requijo’s personal assets, such as his home, Requijo’s personal assets, such as his home, car, his personal bank account, and his car, his personal bank account, and his personal liabilities are excluded from personal liabilities are excluded from consideration. The business is treated as a consideration. The business is treated as a distinct entity, with cash of P500,000 and the distinct entity, with cash of P500,000 and the owner’s equity of P500,000.owner’s equity of P500,000.

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Table 1.4Table 1.4

Date DESCRIPTIONPost Ref.

Debit

Credit

Sept. 1 Cash  500,000  

    Nick Requijo, Capital    500,0

00

    To record investment of the owner      

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The explanation of each debit or credit The explanation of each debit or credit entry on the journal is based on the rules of entry on the journal is based on the rules of debit and credit. Cash was debited because of debit and credit. Cash was debited because of increase in asset while Capital was credited increase in asset while Capital was credited because of increase in capital due to because of increase in capital due to investment of the owner.investment of the owner.

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

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DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

TRANSACTION TWOTRANSACTION TWORequijo’s next transaction on September 5 is to Requijo’s next transaction on September 5 is to

purchase land as a future building site, for which purchase land as a future building site, for which P100,000 cash is paid. This transaction changes the P100,000 cash is paid. This transaction changes the composition of the assets but does not change the composition of the assets but does not change the total amount. The items in the equation prior to this total amount. The items in the equation prior to this transaction, the effects of this transaction, and the transaction, the effects of this transaction, and the new balance after the transaction are as follow:new balance after the transaction are as follow:

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Table 1.5Table 1.5

  ±ASSETS ±LIABILITIES ±CAPITAL

1.+ Cash P500,000  

+ Requijo, Capital P500,000

2.

- Cash P100,000

   

 

+ Land P100,000

   

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After the transaction, there is a land After the transaction, there is a land costing P100, 000 but the balance is reduced to costing P100, 000 but the balance is reduced to P400, 000. The total assets composed of cash P400, 000. The total assets composed of cash and land total to P500, 000. Notice that there is and land total to P500, 000. Notice that there is no change in the liability and capital items.no change in the liability and capital items.

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

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Table 1.6Table 1.6

Date DESCRIPTIONPost Ref. Debit Credit

Sept. 5 Land  100,00

0  

    Cash     100,000

    To record purchase of land for cash      

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DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

In the transaction recorded, there was a In the transaction recorded, there was a change in the asset element. Land was debited change in the asset element. Land was debited because of increase in assets while Cash was because of increase in assets while Cash was credited because of decrease in assets. The credited because of decrease in assets. The reason for the debit and credit comes from the reason for the debit and credit comes from the rules of debit and credit.rules of debit and credit.

Page 44: Accounting

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

TRANSACTION THREETRANSACTION THREERequijo’s current plans are to lease cars and other Requijo’s current plans are to lease cars and other

equipment from California Bus Company for several months equipment from California Bus Company for several months until he can arrange financing for the purchase of cars and until he can arrange financing for the purchase of cars and other equipment and for the construction of garage and storage other equipment and for the construction of garage and storage facilities.facilities.

On September 7 Requijo purchases P60, 000 of parts On September 7 Requijo purchases P60, 000 of parts and other supplies from various suppliers, agreeing to pay in and other supplies from various suppliers, agreeing to pay in the near future. This type of transaction is called the near future. This type of transaction is called purchase of purchase of supplies on accountsupplies on account and the liability created is termed and the liability created is termed accounts payableaccounts payable. Consumable commodities acquired, such . Consumable commodities acquired, such as supplies, are considered to be prepaid expenses.as supplies, are considered to be prepaid expenses. Prepaid Prepaid expenses are expenses paid in advance and are classified as expenses are expenses paid in advance and are classified as asset.asset.

Page 45: Accounting

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

In actual practice, each purchase would In actual practice, each purchase would be considered and recorded as it occurred and be considered and recorded as it occurred and a separated record would be maintained for a separated record would be maintained for each creditor. In this illustration, however, the each creditor. In this illustration, however, the purchases are recorded as a group. The effect purchases are recorded as a group. The effect is to increase the assets and liabilities by P600, is to increase the assets and liabilities by P600, 000, as indicated below:000, as indicated below:

Page 46: Accounting

Table 1.7Table 1.7

  ±ASSETS ±LIABILITIES ±CAPITAL

1. + Cash P500,000  

+ Requijo, Capital P500,000

2.

- Cash P100,000

   

 

+ Land P100,000

   

3. + Supplies P 60,000

+ Account Payable P60,000  

Page 47: Accounting

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

After this transaction, the total assets amount to After this transaction, the total assets amount to P560, 000 composed of Cash P400, 000, Land P100, P560, 000 composed of Cash P400, 000, Land P100, 000, and Supplies P60, 000. The total equity is also 000, and Supplies P60, 000. The total equity is also P560, 000 composed of Accounts Payable P60, 000 P560, 000 composed of Accounts Payable P60, 000 and Capital of P500, 000. The total of the two and Capital of P500, 000. The total of the two column, debit and credit, still balance.column, debit and credit, still balance.

Page 48: Accounting

Table 1.8Table 1.8

Date DESCRIPTIONPost Ref. Debit Credit

Sept. 7 Supplies  60,00

0  

    Accounts Payable     60,000

    To record purchase of supplies on account      

Page 49: Accounting

In the transaction recorded, Supplies (unused) was debited because of increase in assets while Accounts Payable is credited because of increase in liability.

Page 50: Accounting

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

TRANSACTION FOURTRANSACTION FOUR

On September 9, P10,000 is paid to On September 9, P10,000 is paid to creditors on account, thereby reducing both creditors on account, thereby reducing both assets and liabilities. The effect on the assets and liabilities. The effect on the equation is as follows:equation is as follows:

Page 51: Accounting

Table 1.9Table 1.9

  ±ASSETS ±LIABILITIES ±CAPITAL

1. + Cash P500,000  

+ Requijo, Capital P500,000

2.

- Cash P100,000

   

 

+ Land P100,000

   

3. + Supplies P 60,000

+Account Payable P60,000  

4. - Cash P 10,000

- Account Payable P10,000  

Page 52: Accounting

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

After this transaction, the total assets amount to After this transaction, the total assets amount to P550, 000 composed of Cash P390, 000, Land P100, P550, 000 composed of Cash P390, 000, Land P100, 000, and Supplies P60, 000. The total equity is also 000, and Supplies P60, 000. The total equity is also P550, 000 composed of Accounts Payable P50, 000 P550, 000 composed of Accounts Payable P50, 000 and Capital P500, 000. The equation is still balance.and Capital P500, 000. The equation is still balance.

Page 53: Accounting

Table 1.10Table 1.10

Date DESCRIPTIONPost Ref. Debit Credit

Sept. 9 Accounts Payable  10, 000  

    Cash     10,000

    To record payment of account      

Page 54: Accounting

In the transaction recorded, Accounts Payable was debited because of decrease in liability while cash was credited because of decrease in assets.

Page 55: Accounting

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

TRANSACTION FIVETRANSACTION FIVEThe principal objective of the owner of a business The principal objective of the owner of a business

enterprise is to increase capital through earnings. For Nick enterprise is to increase capital through earnings. For Nick Requijo, this means that the cash and other assets acquired Requijo, this means that the cash and other assets acquired through the sale of taxi services must be greater than the cost through the sale of taxi services must be greater than the cost of the gasoline and other supplies used, the wages of drivers, of the gasoline and other supplies used, the wages of drivers, the rent, and all of the other expenses of operating the the rent, and all of the other expenses of operating the business.business.

In general, the amount charged to customers for goods In general, the amount charged to customers for goods or services sold to them is called or services sold to them is called revenue. revenue. Alternative terms Alternative terms may be used for particular types of revenue, such as may be used for particular types of revenue, such as salessales for for the sale of merchandise or business services, the sale of merchandise or business services, fees earned fees earned for for charges by a physician to patients, charges by a physician to patients, rent revenue rent revenue for the use of for the use of real estate or other property, and real estate or other property, and fares earned fares earned for Requijo for Requijo Taxi.Taxi.

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DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

In a broad sense, the amount of assets consumed or In a broad sense, the amount of assets consumed or services used in the process of earning revenue is called services used in the process of earning revenue is called expense. Expenses would include supplies used, salaries and expense. Expenses would include supplies used, salaries and wages of employees, and other assets and services used in wages of employees, and other assets and services used in operating the business.operating the business.

The excess of the revenue over the expenses incurred The excess of the revenue over the expenses incurred in earning the revenue is called net income or net profit. If the in earning the revenue is called net income or net profit. If the expenses of the enterprise exceed the revenue, the excess is a expenses of the enterprise exceed the revenue, the excess is a net loss. Since it is ordinarily impossible to determine the net loss. Since it is ordinarily impossible to determine the exact amount of expense incurred in connection with each exact amount of expense incurred in connection with each revenue transactions, it is considered satisfactory to determine revenue transactions, it is considered satisfactory to determine the net income or the net loss for a specified period of time, 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 such as a month, or a quarter, a semester, or a year, rather than each of small group of sales.each of small group of sales.

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DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

During the first month of operations Requijo During the first month of operations Requijo Taxi earned fares of P150, 000, receiving the amount Taxi earned fares of P150, 000, receiving the amount in cash. The total effect of these transactions is to in cash. The total effect of these transactions is to increase cash by P150, 000 and to yield revenue in increase cash by P150, 000 and to yield revenue in the same amount. The revenue can be viewed as the same amount. The revenue can be viewed as though it affected a P150, 000 increases in capital.though it affected a P150, 000 increases in capital.

At the time expenses of the business are At the time expenses of the business are incurred, they are treated as offsets against revenue incurred, they are treated as offsets against revenue and hence as reduction in capital. In terms of the and hence as reduction in capital. In terms of the accounting equation, the effect of the receipt of cash accounting equation, the effect of the receipt of cash for services performed follows:for services performed follows:

Page 58: Accounting

Table 1.11Table 1.11

  ±ASSETS ±LIABILITIES ±CAPITAL

1. + Cash P500,000  

+ Requijo, Capital P500,000

2. - Cash P100,000

   

  + Land P100,000

   

3. + Supplies P 60,000

+Account Payable P60,000  

4. - Cash P 10,000

- Account Payable P10,000  

5. + Cash P150,000  

+ Fares Earned P150,000

Page 59: Accounting

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

After this transaction, the total assets amount to P700, 000 After this transaction, the total assets amount to P700, 000 composed of Cash P540, 000, Land P100, 000, and Supplies P60, 000. The 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 total equities are also P700, 000 composed of Accounts Payable P50, 000 and Capital of P650, 000 (including the fare earned).and Capital of P650, 000 (including the fare earned).

Instead of requiring payment of cash at the time goods or services Instead of requiring payment of cash at the time goods or services are sold or rendered, a business may make sales are sold or rendered, a business may make sales of goods or services on of goods or services on account,account, allowing customer to pay later. In such cases, the business allowing customer to pay later. In such cases, the business acquires a claim against the customer, called an account receivable. An 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 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 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 later date, when the money is collected, there is only an exchange of one asset for another, with cash increasing and accounts receivable decreasing.asset for another, with cash increasing and accounts receivable decreasing.

In the transaction recorded, Cash was debited because of increase in assets In the transaction recorded, Cash was debited because of increase in assets while Fares Earned was credited because of increase in capital due to while Fares Earned was credited because of increase in capital due to increase in revenue.increase in revenue.

Page 60: Accounting

Table 1.12Table 1.12

Date DESCRIPTIONPost Ref. Debit Credit

Sept. 30 Cash  150,0

00  

    Fares Earned    150,00

0

   To record receipt of revenue from various customer.      

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DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

TRANSACTION SIXTRANSACTION SIX

Various business expenses incurred and paid Various business expenses incurred and paid during the month were as follow: wages, P40, 000; during the month were as follow: wages, P40, 000; rent, P20, 000; gas and oil, P50, 000; miscellaneous rent, P20, 000; gas and oil, P50, 000; miscellaneous expenses, P10, 000. The effect of this group of expenses, P10, 000. The effect of this group of transaction is to reduce cash and to reduce capital, as transaction is to reduce cash and to reduce capital, as indicated in the following manner in the equation:indicated in the following manner in the equation:

Page 62: Accounting

Table 1.13Table 1.13  ±ASSETS ±LIABILITIES ±CAPITAL

1. + Cash P500,000   + Requijo, Capital P500,000

2. - Cash P100,000

   

  + Land P100,000    

3. + Supplies P 60,000

+Account Payable P60,000  

4. - Cash P 10,000- Account Payable P10,000  

5. + Cash P150,000  + Fares Earned P150,000

6. - Cash P120,000  - Wages Expense P 40,000

   - Rent Expense P 20,000

   - Gas & Oil P 50,000

     - Misc. Expense P 10,000

Page 63: Accounting

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

After this transaction, the total asset After this transaction, the total asset amount to P580, 000 composed of Cash P420, amount to P580, 000 composed of Cash P420, 000, Land P100, 000, and Supplies of P60, 000, Land P100, 000, and Supplies of P60, 000. The total equities are also P580, 000 000. The total equities are also P580, 000 composed of Accounts Payable P50, 000 and composed of Accounts Payable P50, 000 and Capital of P530, 000. It should be remembered Capital of P530, 000. It should be remembered thatthat revenue revenue and and expense expense accounts are accounts are temporary capital accounts; temporary capital accounts; these items are these items are closed to capital at the end of the accounting closed to capital at the end of the accounting period.period.

Page 64: Accounting

Table 1.14

Date DESCRIPTIONPost Ref. Debit Credit

Sept. 30 Wages Expense  40,00

0  

    Rent Expense  20,00

0

    Gas and Oil Expense  50,00

0  

    Miscellaneous Expense  10,00

0  

    Cash    120,00

0

    To record payment of expenses.      

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DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

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

Page 66: Accounting

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

TRANSACTION SEVENTRANSACTION SEVENAt the end of the month it is determined that the cost of 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, supplies on hand is P40, 000, the remainder of P20, 000 (P60, 000- P40, 000) have been used in the operations of the 000- P40, 000) have been used in the operations of the business. This deduction of P20, 000 in supplies and capital business. This deduction of P20, 000 in supplies and capital may be shown as follows:may be shown as follows:

After this transaction, the total assets amount to P560, After this transaction, the total assets amount to P560, 000 composed of Cash P420, 000, Land P100, 000, and 000 composed of Cash P420, 000, Land P100, 000, and Supplies of only P40, 000. The total equities are also P560, Supplies of only P40, 000. The total equities are also P560, 000 composed of Accounts Payable of P50, 000 and Capital of 000 composed of Accounts Payable of P50, 000 and Capital of P510, 000.P510, 000.

Page 67: Accounting

Table 1.15Table 1.15  ±ASSETS ±LIABILITIES ±CAPITAL

1. + Cash P500,000   + Requijo, Capital P500,000

2. - Cash P100,000    

  + Land P100,000    

3. + Supplies P 60,000 +Account Payable P60,000  

4. - Cash P 10,000 - Account Payable P10,000  

5. + Cash P150,000   + Fares Earned P150,000

6. - Cash P120,000   -Wages Expense P 40,000

    -Rent Expense P 20,000

    -Gas & Oil P 50,000

      -Misc. Expense P 10,000

7. - Supplies P20,000   -Supplies Expense P20,000

Page 68: Accounting

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

Table 1.16

Date Particulars Debit Credit

  Supplies Expense P20,000  

  Supplies   P20,000

 

To record part of the supplies used in the operation of the business    

Page 69: Accounting

Date DESCRIPTIONPost Ref. Debit Credit

Sept. 30 Supplies Expense   20,000  

    Supplies     20,000

   

To record part of supplies in the operation of the business      

Page 70: Accounting

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.

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DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

TRANSACTION EIGHTTRANSACTION EIGHTAt the end of the month, Nick Requijo withdraws from the At the end of the month, Nick Requijo withdraws from the

business P20, 000 in cash for his personnel use. This transaction, which 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 affects a decrease in cash and a decrease in capital, is the exact opposite of an investment in the business by the owner. an investment in the business by the owner. The withdrawal is not a The withdrawal is not a business expense, and it should be excluded from consideration in business expense, and it should be excluded from consideration in determining the net income from operations of the enterprise.determining the net income from operations of the enterprise. The The effect of the P20, 000 withdrawals on the equation is as follows:effect of the P20, 000 withdrawals on the equation is as follows:

After this transaction, the total assets amount to P540, 000 After this transaction, the total assets amount to P540, 000 composed of Cash P400, 000, Land P100, 000, and Supplies of P40, 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, The total equities are also P540, 000 composed of Accounts Payable P50, 000 and Capital P490, 000.000 and Capital P490, 000.

Page 72: Accounting

Table 1.17Table 1.17

  ±ASSETS ±LIABILITIES ±CAPITAL

1. + Cash P500,000   + Requijo, Capital P500,000

2. - Cash P100,000

   

  + Land P100,000    

3. + Supplies P 60,000 +Account Payable P60,000  

4. - Cash P 10,000 - Account Payable P10,000  

5. + Cash P150,000   + Fares Earned P150,000

6. - Cash P120,000   -Wages Expense P 40,000

      -Rent Expense P 20,000

    -Gas & Oil P 50,000

      -Misc. Expense P 10,000

7. - Supplies P20,000   -Supplies Expense P20,000

8. - Cash P20,000   -Requijo, Drawing P20,000

Page 73: Accounting

DOUBLE ENTRY BOOKKEEPINGDOUBLE ENTRY BOOKKEEPING

Table 1.18Table 1.18

..

Date DESCRIPTIONPost Ref. Debit Credit

Sept. 30 Requijo, Drawing   20,000      Cash     20,000

    To record withdrawal of owner.      

Page 74: Accounting

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

Page 75: Accounting

SUMMARYSUMMARY The business transactions of Requijo Taxi are summarized in The business transactions of Requijo Taxi are summarized in

tabular form below. The transactions are identified by tabular form below. The transactions are identified by transaction numbers and the balance of each item is shown transaction numbers and the balance of each item is shown after each transaction. The following observations, which after each transaction. The following observations, which apply to all types of businesses, should be noted:apply to all types of businesses, should be noted:

The effect of every transaction can be stated in terms of The effect of every transaction can be stated in terms of increases and/or decreases in one or more of the accounting increases and/or decreases in one or more of the accounting elements. elements.

The equality of the two sides o the accounting equation is The equality of the two sides o the accounting equation is always maintained.always maintained.

Page 76: Accounting

Table 1.19Table 1.19

Page 77: Accounting

ACCOUNTING STATEMENTSACCOUNTING STATEMENTS

BALANCE SHEETBALANCE SHEETA kind of financial statement that list the assets, liabilities, and 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 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. last day of a month or of a year. It is a kind of financial statement that It is a kind of financial statement that shows the financial position of the business entity as of a given date, shows the financial position of the business entity as of a given date, usually the end of the year.usually the end of the year.

The amount of Requio Taxi’s assets, liabilities, and capital at the The amount of Requio Taxi’s assets, liabilities, and capital at the end of the first month of operation appears on the last line of the summary 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 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 of a heading yield the balance sheet illustrated below. This form of balance sheet, with the liability and capital section presented below the asset sheet, with the liability and capital section presented below the asset section, is called the section, is called the report form. report form. Another arrangement in common use Another arrangement in common use lists the assets on the left and the liabilities and capital on the right. 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 Because of its similarity to the account, a basic accounting device described earlier in the chapter, it is referred to as the described earlier in the chapter, it is referred to as the account form account form of the of the balance sheet.balance sheet.

Page 78: Accounting

Requijo TaxiRequijo TaxiBalance SheetBalance Sheet

September 30, 19xxSeptember 30, 19xx

AssetsAssetsCashCash P400, 000P400, 000SuppliesSupplies 40, 000 40, 000LandLand 100, 000 100, 000Total AssetsTotal Assets P540, 000P540, 000LiabilitiesLiabilitiesAccounts PayableAccounts Payable P 50, 000P 50, 000CapitalCapitalCapitalCapital 490, 000 490, 000Total Liabilities and CapitalTotal Liabilities and Capital P540, 000P540, 000

Page 79: Accounting

It is customary to begin the asset section with cash, It is customary to begin the asset section with cash, which is followed by receivables, inventory (for trading which is followed by receivables, inventory (for trading business), supplies, prepaid expense items, and other assets business), supplies, prepaid expense items, and other assets that will be converted into cash or consumed in the near that will be converted into cash or consumed in the near future. The assets of a relatively permanent nature, such as future. The assets of a relatively permanent nature, such as land, buildings, and equipment, follow in that order. Note that land, buildings, and equipment, follow in that order. Note that in the balance sheet presented the total assets and the total of in the balance sheet presented the total assets and the total of liability and capital are equal.liability and capital are equal.

The balance sheet shows the liquidity (solvency) and The balance sheet shows the liquidity (solvency) and stability of as enterprise. Solvency refers to the ability of the stability of as enterprise. Solvency refers to the ability of the business to pay currently maturing liabilities while stability business to pay currently maturing liabilities while stability refers to the ability of the enterprise to pay maturing refers to the ability of the enterprise to pay maturing obligations and give return on the investment of the owner(s).obligations and give return on the investment of the owner(s).

Page 80: Accounting

In the liabilities and capital section of the In the liabilities and capital section of the balance sheet, it is customary to present the balance sheet, it is customary to present the liabilities first followed by capital. In the liabilities first followed by capital. In the illustration for Requijo Taxi the liabilities are illustration for Requijo Taxi the liabilities are composed entirely of accounts payable. When composed entirely of accounts payable. When there are two or more categories of liabilities, there are two or more categories of liabilities, each should be listed and the total amount of each should be listed and the total amount of liabilities presented in the following manner:liabilities presented in the following manner:

Page 81: Accounting

ACCOUNTING STATEMENTSACCOUNTING STATEMENTS

LiabilitiesLiabilities

Accounts PayableAccounts Payable P150, 000P150, 000

Notes PayableNotes Payable 50, 000 50, 000

Salaries PayableSalaries Payable 6, 000 6, 000

Total LiabilitiesTotal Liabilities P206, 000P206, 000

Page 82: Accounting

ACCOUNTING STATEMENTSACCOUNTING STATEMENTS

INCOME STATEMENTINCOME STATEMENTA kind of financial statement that shows the summary A kind of financial statement that shows the summary

of the revenue and the expenses of a business entity for a of the revenue and the expenses of a business entity for a specific period of time, such as a month or a year. specific period of time, such as a month or a year. It is a kind It is a kind of financial statement that shows result of business operations of financial statement that shows result of business operations for a period of time, usually a year.for a period of time, usually a year.

Revenue earned and expenses incurred during the Revenue earned and expenses incurred during the month were recorded in the equation as increases and month were recorded in the equation as increases and decreases in capital, respectively. The details together with net decreases in capital, respectively. The details together with net income in the amount of P10, 000, are reported in the income income in the amount of P10, 000, are reported in the income statement presented below.statement presented below.

Page 83: Accounting

Requio TaxiRequio TaxiIncome StatementIncome Statement

For the Month Ended September 30, 19xxFor the Month Ended September 30, 19xxFares EarnedFares Earned P150, 000P150, 000Operating ExpensesOperating ExpensesGas & Oil ExpenseGas & Oil Expense P 50, 000P 50, 000Wages ExpenseWages Expense 40, 000 40, 000Rent ExpenseRent Expense 20, 000 20, 000Supplies ExpenseSupplies Expense 20, 000 20, 000Miscellaneous ExpenseMiscellaneous Expense 10, 000 10, 000Total Operating ExpensesTotal Operating Expenses 140,000 140,000

Net IncomeNet Income P 10, 000P 10, 000

Page 84: Accounting

The order in which the operating expenses are The order in which the operating expenses are presented in the income statement varies among businesses. presented in the income statement varies among businesses. One of the arrangements commonly followed is to list them in One of the arrangements commonly followed is to list them in the order of size, beginning with the larger items. the order of size, beginning with the larger items. Miscellaneous expenses is usually shown as the last item Miscellaneous expenses is usually shown as the last item regardless of the amount.regardless of the amount.

In the income statement, users will know if the In the income statement, users will know if the operation of the business is profitable. operation of the business is profitable. ProfitabilityProfitability refers to refers to the ability of the business to increase owner’s capital. If the the ability of the business to increase owner’s capital. If the total net asset inflow is more than the net asset outflow, 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 resulting effect is net income. If the net asset outflow is more than the net asset inflow, it is a net loss.than the net asset inflow, it is a net loss.

Page 85: Accounting

ACCOUNTING STATEMENTSACCOUNTING STATEMENTS

CAPITAL STATEMENT (Statement of Owner’s Equity)CAPITAL STATEMENT (Statement of Owner’s Equity)It is a statement that shows the summary of the It is a statement that shows the summary of the

changes in capital of a business entity that have occurred changes in capital of a business entity that have occurred during a specific period of time, such a month or a year.during a specific period of time, such a month or a year.

Comparison of the original investment of P500, 000 at Comparison of the original investment of P500, 000 at the beginning of the month with the P490, 000 of capital the beginning of the month with the P490, 000 of capital reported in the balance sheet at the end of the month reveals a reported in the balance sheet at the end of the month reveals a decrease of P10, 000. This net decrease is composed of two decrease of P10, 000. This net decrease is composed of two significant changes in capital that occurred during the period: significant changes in capital that occurred during the period: (1) the net income of P10, 000, and (2) a withdrawal of P20, (1) the net income of P10, 000, and (2) a withdrawal of P20, 000 by the owner. This information is presented in the capital 000 by the owner. This information is presented in the capital statement, which serves as a connecting link between the statement, which serves as a connecting link between the balance sheet and the income statement.balance sheet and the income statement.

Page 86: Accounting

Requijo TaxiRequijo TaxiCapital StatementCapital Statement

For the Month Ended September 30, 19xxFor the Month Ended September 30, 19xx

Capital, September 1, 19xxCapital, September 1, 19xx P500, 000P500, 000 Net IncomeNet Income P10, 000P10, 000WithdrawalWithdrawal 20, 000 20, 000Decrease in CapitalDecrease in Capital 10, 000 10, 000Capital, September 30, 19xxCapital, September 30, 19xx P490, P490,

000000

Page 87: Accounting

Basically, there are two accounting Basically, there are two accounting period, the calendar year and the fiscal year. A period, the calendar year and the fiscal year. A calendar year calendar year is a twelve-month period that is a twelve-month period that ends on December 31 while the ends on December 31 while the fiscal year fiscal year is a is a twelve-month period that ends at the end of twelve-month period that ends at the end of any month other than December. In the any month other than December. In the Philippines, only partnership and corporation Philippines, only partnership and corporation are allowed to use fiscal year, are allowed to use fiscal year, single single proprietorshiproprietorship is allowed only to use p is allowed only to use calendar yearcalendar year..

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ACCOUNTING STATEMENTSACCOUNTING STATEMENTS

STATEMENT OF CASH FLOWSSTATEMENT OF CASH FLOWSThe statement of cash flows consists of three sections: The statement of cash flows consists of three sections:

(1) operating activities, (2) financing activities, and (3) (1) operating activities, (2) financing activities, and (3) investing activities. Each of these sections is described below:investing activities. Each of these sections is described below:

Cash Flows form Operating ActivitiesCash Flows form Operating ActivitiesThis section reports a summary of cash receipts and This section reports a summary of cash receipts and

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

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ACCOUNTING STATEMENTSACCOUNTING STATEMENTS

Cash Flows from Financing ActivitiesCash Flows from Financing ActivitiesThis section reports the cash transactions related to cash This section reports the cash transactions related to cash

investments by the owner, borrowing, and cash withdrawals by the investments by the owner, borrowing, and cash withdrawals by the owner.owner.

Cash Flow from Investing ActivitiesCash Flow from Investing Activities

This section reports the cash transactions for the acquisition and This section reports the cash transactions for the acquisition and sale of relatively long-term or permanent-type assets.sale of relatively long-term or permanent-type assets.

The preparation of the statement of cash flow is required by The preparation of the statement of cash flow is required by pronouncement, every year that the income statement is presented. pronouncement, every year that the income statement is presented. Preparing the statement of cash flows requires an understanding of Preparing the statement of cash flows requires an understanding of concepts that we will not discuss in the chapter. But a simple 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 illustration will be given to be able to illustrate how statement of cash flow is prepared.flow is prepared.

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Requijo TaxiRequijo TaxiStatement of Cash FlowsStatement of Cash Flows

For the Month Ended September 30, 19xxFor the Month Ended September 30, 19xxCash Flows from Operating Activities:Cash Flows from Operating Activities:Net IncomeNet Income P10, 000P10, 000Add: Increase in SuppliesAdd: Increase in Supplies 40, 000 40, 000TotalTotal P50, 000P50, 000Less: Increase in Accounts PayableLess: Increase in Accounts Payable 50, 000 50, 000

Cash from Operating ActivitiesCash from Operating Activities PP 00

Cash Flows from financing ActivitiesCash Flows from financing ActivitiesInvestment of OwnerInvestment of Owner 500, 000500, 000

Cash Flows from Investing ActivitiesCash Flows from Investing ActivitiesAcquisition of LandAcquisition of Land (100, 000)(100, 000)Increase in CashIncrease in Cash P400, 000P400, 000

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CHAPTER 2CHAPTER 2The Accounting CycleThe Accounting Cycle

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THE ACCOUNTING CYCLETHE ACCOUNTING CYCLE

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

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THE ACCOUNTING CYCLETHE ACCOUNTING CYCLE

The The stepssteps of the of the accounting cycleaccounting cycle are listed below: are listed below:

1. Gather documents and analyze transactions from source 1. Gather documents and analyze transactions from source documents.documents.

2. Record transactions in journals.2. Record transactions in journals.3. Post journal entries to general ledger accounts.3. Post journal entries to general ledger accounts.4. Prepare a trial balance.4. Prepare a trial balance.5. Prepare adjusting entries and adjust the general ledger 5. Prepare adjusting entries and adjust the general ledger

accounts.accounts.6. Prepare financial statements.6. Prepare financial statements.7. Journalize closing entries.7. Journalize closing entries.8. Prepare post-closing trial balance.8. Prepare post-closing trial balance.9. Journalize reversing entries.9. Journalize reversing entries.

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The annual period adopted by a business The annual period adopted by a business enterprise is known as enterprise is known as fiscal year. fiscal year. Business Business enterprises whose fiscal year ends in enterprises whose fiscal year ends in December are said to be on a December are said to be on a calendar-yearcalendar-year basis. Many enterprises prefer to have their basis. Many enterprises prefer to have their accounting year coincide with their accounting year coincide with their “natural” “natural” business yearbusiness year; that is, the fiscal year ends ; that is, the fiscal year ends when business is slow and inventory quantities when business is slow and inventory quantities are small and easy to count.are small and easy to count.

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STEP 1STEP 1ANALYZING TRANSACTIONS FROM SOURCE ANALYZING TRANSACTIONS FROM SOURCE

DOCUMENTSDOCUMENTS

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

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BUSINESS PAPERSBUSINESS PAPERS

All business transactions are evidenced All business transactions are evidenced supported by printed forms or documents, supported by printed forms or documents, called called business papers. business papers. These business papers These business papers furnish the information needed in recording furnish the information needed in recording business transactions. Without business business transactions. Without business papers, it would be difficult to keep accurate papers, it would be difficult to keep accurate record of business transactions. The following record of business transactions. The following are good example of business papers are good example of business papers commonly used in a business:commonly used in a business:

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BUSINESS PAPERSBUSINESS PAPERS

1. 1. Sales or Service InvoiceSales or Service Invoice – after the sale of goods of service – after the sale of goods of service has taken place, a business form called has taken place, a business form called invoiceinvoice is prepared. is prepared. The invoice shows the date of sale/service rendered, list of the The invoice shows the date of sale/service rendered, list of the articles sold or list of services rendered, and other information. articles sold or list of services rendered, and other information. Invoices are prenumbered and usually made out in triplicate or Invoices are prenumbered and usually made out in triplicate or quadruplicate depending upon the need of the business. The quadruplicate depending upon the need of the business. The original of the invoice is given to the buyer of goods or original of the invoice is given to the buyer of goods or services.services.

In a merchandising business, from the point of vies of the In a merchandising business, from the point of vies of the seller, the invoice is called seller, the invoice is called sales invoicesales invoice; from the point of ; from the point of view of the buyer, it is a view of the buyer, it is a purchase invoicepurchase invoice. The sample of an . The sample of an invoice is given below.invoice is given below.

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Table 2.1Table 2.1

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BUSINESS PAPERSBUSINESS PAPERS

2. 2. Official ReceiptOfficial Receipt – official receipt are issued every – official receipt are issued every time the business receives cash. The receipt shows time the business receives cash. The receipt shows the date on which the cash is received, the party from the date on which the cash is received, the party from whom the cash is received, the amount of cash whom the cash is received, the amount of cash received, the explanation of the transaction, and the received, the explanation of the transaction, and the signature of the personnel who issued the receipt.signature of the personnel who issued the receipt.

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Table 2.2Table 2.2

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BUSINESS PAPERSBUSINESS PAPERS

3. 3. Statement of Accounts Statement of Accounts – many business like – many business like Meralco, P.L.D.T., M.W.S.S., SMART Meralco, P.L.D.T., M.W.S.S., SMART Communication, Inc., and others send bills to their Communication, Inc., and others send bills to their customers to inform them of the amount they have to customers to inform them of the amount they have to pay. Thus, there are electric bills, light bills, water pay. Thus, there are electric bills, light bills, water bills, telephone bills, and many others. These bills bills, telephone bills, and many others. These bills sent by these companies are called sent by these companies are called Statement of Statement of Account.Account. A sample of statement of account is given A sample of statement of account is given below.below.

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Table 2.3Table 2.3

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BUSINESS PAPERSBUSINESS PAPERS

4. 4. Deposit SlipDeposit Slip – at present, many businesses have – at present, many businesses have current account or checking accounts with the banks. current account or checking accounts with the banks. They deposit their money in the bank and the They deposit their money in the bank and the payment from their deposit are made by means of payment from their deposit are made by means of issuing checks.issuing checks.

Deposit slip is filled up every time money is Deposit slip is filled up every time money is deposited in the bank. The deposit slip shows the date deposited in the bank. The deposit slip shows the date of the deposit , the name if the depositor, the account of the deposit , the name if the depositor, the account number of the depositor, the amount of cash number of the depositor, the amount of cash deposited, and the signature of the depositor.deposited, and the signature of the depositor.

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BUSINESS PAPERSBUSINESS PAPERS

5. 5. CheckCheck – a check is an order to the bank signed – a check is an order to the bank signed by the person issuing it (the depositor), to pay by the person issuing it (the depositor), to pay the bearer or order a certain sum of money. the bearer or order a certain sum of money. After the bank have paid the payee, the After the bank have paid the payee, the amount is deducted from the deposit of the amount is deducted from the deposit of the person who issued the check. person who issued the check.

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BUSINESS PAPERSBUSINESS PAPERS

6. 6. Cash Voucher Cash Voucher – the cash voucher is the document – the cash voucher is the document prepared every time payment of an obligation is prepared every time payment of an obligation is made. The voucher is a business’ preprinted form that made. The voucher is a business’ preprinted form that is prenumbered, and should include the following is prenumbered, and should include the following information; date of payment, name of the payee, information; date of payment, name of the payee, address of the payee, description of the obligation to address of the payee, description of the obligation to be paid, amount paid, approval of payment\, and be paid, amount paid, approval of payment\, and signature of the payee. A sample of cash voucher is signature of the payee. A sample of cash voucher is presented below. presented below.

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Table 2.4Table 2.4

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BUSINESS PAPERSBUSINESS PAPERS

7. Cash Register Slip7. Cash Register Slip – in many businesses, like in restaurants, cash registers – in many businesses, like in restaurants, cash registers are used. Strip of paper comes out as evidence of the money received by 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 the cashier. The slip shows the date, items ordered, amount paid, and other information.information.

8. Other Business papers8. Other Business papers – there are many other documents that are used by – there are many other documents that are used by accountant to obtain information regarding business transactions. When accountant to obtain information regarding business transactions. When buyer/customer is given allowance, returned the goods purchased, or buyer/customer is given allowance, returned the goods purchased, or discovered error in the invoice, the seller of the goods or services should be 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 notified. If the claim is valid, the seller of goods or services sends a credit credit memorandummemorandum which shows the amount by which account is reduced. which shows the amount by which account is reduced. When the depositor obtains a checkbook from the bank and the depositor When the depositor obtains a checkbook from the bank and the depositor did not pay it, the bank charges the depositor a did not pay it, the bank charges the depositor a debit memorandumdebit memorandum. . Promissory NotesPromissory Notes may be received by the business from its debtors, or the 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 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 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 to another. The note may or may not be interest bearing. The amount to be paid not including the interest, is called the paid not including the interest, is called the face of the noteface of the note. The amount to . The amount to be paid including the interest is called the be paid including the interest is called the maturity valuematurity value..

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STEP 2STEP 2JOURNALIZINGJOURNALIZING

Journalizing Journalizing is the process of recording is the process of recording business transactions to the business transactions to the book of original book of original entry entry called called journalsjournals. Journals, or records of . Journals, or records of original entry, are tabular records in which original entry, are tabular records in which business activities are analyzed in terms of business activities are analyzed in terms of debits and credits and debits and credits and recorded in recorded in chronological orderchronological order before they are entered in before they are entered in the general ledger. An accounting journal may the general ledger. An accounting journal may be one of a group of special journals, or it may be one of a group of special journals, or it may be a general journal.be a general journal.

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STEP 2STEP 2JOURNALIZINGJOURNALIZING

A A special journalspecial journal is designed to record a is designed to record a specific type of frequently occurring business specific type of frequently occurring business transactions. For example, a business with 100 transactions. For example, a business with 100 employees who are paid every two weeks would employees who are paid every two weeks would probably use a special journal for payrolls. Because probably use a special journal for payrolls. Because two paydays would normally occur in a month, at two paydays would normally occur in a month, at least 200 payroll transaction would be recorded. least 200 payroll transaction would be recorded. Special journals are used to facilitate the recording of Special journals are used to facilitate the recording of business transactions in the book of accounts. Other business transactions in the book of accounts. Other types of transactions that are often recorded in special types of transactions that are often recorded in special journals are cash receipts, cash disbursements, sales journals are cash receipts, cash disbursements, sales of goods or services, and purchases of goods or of goods or services, and purchases of goods or services. services.

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STEP 2STEP 2JOURNALIZINGJOURNALIZING

In contrast to the special journals, the In contrast to the special journals, the general journalsgeneral journals (two-column journal) is a (two-column journal) is a relatively simple record in which any type of relatively simple record in which any type of business transaction may be recorded. All business transaction may be recorded. All businesses, even those using many special businesses, even those using many special journals, have a general journal. journals, have a general journal. Transactions Transactions that do not occur often enough to warrant that do not occur often enough to warrant entry in a special journal are recorded in the entry in a special journal are recorded in the general journal.general journal.

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STEP 2STEP 2JOURNALIZINGJOURNALIZING

The procedure for recording entries in the general journal is as The procedure for recording entries in the general journal is as follows:follows:

Indicate the year, month, and date of the entry. Usually the year 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 and month are rewritten only at the top of each journal or at the point where they change.point where they change.

Enter titles of the accounts affected in the description column. Enter titles of the accounts affected in the description column. Accounts debited are entered close to the left-hand margin and Accounts debited are entered close to the left-hand margin and are traditionally recorded first. Accounts credited are then are traditionally recorded first. Accounts credited are then recorded, indented one-half inch to the right.recorded, indented one-half inch to the right.

Place the appropriate money amounts in the left-hand (debit) Place the appropriate money amounts in the left-hand (debit) and right (credit) money columns.and right (credit) money columns.

Write an explanation of the transaction below the account titles, Write an explanation of the transaction below the account titles, indented one-half inch from margin. The explanation should be indented one-half inch from margin. The explanation should be as brief as possible, disclosing the information necessary to as brief as possible, disclosing the information necessary to understand the event being recorded.understand the event being recorded.

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STEP 2STEP 2JOURNALIZINGJOURNALIZING

Each transaction entered in the journal should Each transaction entered in the journal should stated in terms of equal debits and credits. The stated in terms of equal debits and credits. The account titles cited in the description column should account titles cited in the description column should correspond to those used for the related general correspond to those used for the related general ledger accounts. To separate clearly the various ledger accounts. To separate clearly the various entries, we should leave a line blank between entries. entries, we should leave a line blank between entries. We will explain the use of the column headed “Post We will explain the use of the column headed “Post Ref.” (posting reference) later in step 3 of the Ref.” (posting reference) later in step 3 of the accounting cycle.accounting cycle.

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Table 2.5Table 2.5

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STEP 2STEP 2JOURNALIZINGJOURNALIZING

Compound Journal EntriesCompound Journal EntriesA journal entry that involves more than just A journal entry that involves more than just

two accounts is called a two accounts is called a compound entrycompound entry. The last . The last journal entry in Exhibit 1-2 is an example of journal entry in Exhibit 1-2 is an example of compound journal entry involving three accounts. compound journal entry involving three accounts. The debit of P9,600 to Test Equipment is offset by The debit of P9,600 to Test Equipment is offset by credits of P5,000 to Cash and P4,600 to Accounts credits of P5,000 to Cash and P4,600 to Accounts Payable. Any number of accounts may appear in a Payable. Any number of accounts may appear in a compound entry; but regardless of how many compound entry; but regardless of how many accounts are used, the total of the debit amounts must accounts are used, the total of the debit amounts must always equal the total of the credit amounts.always equal the total of the credit amounts.

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STEP 2STEP 2JOURNALIZINGJOURNALIZING

Correction of Journal ErrorsCorrection of Journal ErrorsCertain procedures should be followed when errors are Certain procedures should be followed when errors are

found in journal entries. found in journal entries. Errors should not be erased, because Errors should not be erased, because erasures completely remove the original recording.erasures completely remove the original recording. As you might As you might imagine, the acceptance of erasures might allow someone to falsify imagine, the acceptance of erasures might allow someone to falsify accounting records; consequently, other procedures are used.accounting records; consequently, other procedures are used.

If an error journal entry has not been transferred to the If an error journal entry has not been transferred to the general ledger, a single line is drawn through the erroneous amount general ledger, a single line is drawn through the erroneous amount or accounts title, and the correction is entered on the same line just or accounts title, and the correction is entered on the same line just above the error. Often the person correcting the entry must place above the error. Often the person correcting the entry must place his or her initials near the correction. This facilitated any further his or her initials near the correction. This facilitated any further inquiry about the nature of or reason for the correction. Once an inquiry about the nature of or reason for the correction. Once an erroneous journal entry has been transferred to the ledger accounts, erroneous journal entry has been transferred to the ledger accounts, both records contain error. The recommended procedures for both records contain error. The recommended procedures for correcting this situation are discussed in step 3 below.correcting this situation are discussed in step 3 below.

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STEP 3STEP 3POSTING TO THE LEDGERPOSTING TO THE LEDGER

After transactions have been journalized, the After transactions have been journalized, the next step in the accounting cycle is to transfer the next step in the accounting cycle is to transfer the debits and credits in each journal entry to the debits and credits in each journal entry to the appropriate general ledger accounts. Thus, data from appropriate general ledger accounts. Thus, data from the journal that stresses the total of particular the journal that stresses the total of particular transaction (such as collection of accounts receivable) transaction (such as collection of accounts receivable) are transcribed to a ledger that stresses the total effect are transcribed to a ledger that stresses the total effect of many business transactions on a particular business of many business transactions on a particular business variable (such as cash, accounts receivable, and so variable (such as cash, accounts receivable, and so on). This type of data is specifically needed for the on). This type of data is specifically needed for the preparation of financial statements.preparation of financial statements.

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STEP 3STEP 3POSTING TO THE LEDGERPOSTING TO THE LEDGER

Posting ReferencesPosting ReferencesIt is important to be able to trace any entry in a ledger It is important to be able to trace any entry in a ledger

account to the journal from which it was posted. account to the journal from which it was posted. Consequently, accounting records use a system of references. Consequently, accounting records use a system of references. Both journals and accounts have posting reference columns. Both journals and accounts have posting reference columns. Entries in the posting reference columns of journals Entries in the posting reference columns of journals indicate the account to which the related debit and credit indicate the account to which the related debit and credit has been posted. Posting references appearing in ledger has been posted. Posting references appearing in ledger accounts identify the journal from which the related entry accounts identify the journal from which the related entry was recorded. was recorded. The posting references in the journals and The posting references in the journals and ledger accounts are entered when the journal entries are posted ledger accounts are entered when the journal entries are posted to the ledger accounts.to the ledger accounts.

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STEP 3STEP 3POSTING TO THE LEDGERPOSTING TO THE LEDGER

Chart of AccountsChart of AccountsA chart of accounts is usually prepared in order to A chart of accounts is usually prepared in order to

facilitate the analysis of activities and the formulation of facilitate the analysis of activities and the formulation of journal entries. journal entries. The The chart of accountschart of accounts is a list of the titles and is a list of the titles and numbers of all accounts found in the general ledger. numbers of all accounts found in the general ledger. The The account titles should be grouped by, and in order of, the five account titles should be grouped by, and in order of, the five major sections of the general ledger (assets, liabilities, owner’s major sections of the general ledger (assets, liabilities, owner’s equity, revenue, and expenses). Exhibit 1-3 shows a chart of equity, revenue, and expenses). Exhibit 1-3 shows a chart of accounts for Dalay TV Service, indicating the account accounts for Dalay TV Service, indicating the account numbers that will now be used.numbers that will now be used.

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Table 2.6Table 2.6

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STEP 3STEP 3POSTING TO THE LEDGERPOSTING TO THE LEDGER

Illustration Of Posting. Illustration Of Posting. Exhibit 1-4 of Dalay TV Service’s December Exhibit 1-4 of Dalay TV Service’s December transactions from the general journal to the ledger accounts. Each debit transactions from the general journal to the ledger accounts. Each debit entry is posted as follows:entry is posted as follows:

The date (year, month, and day) is entered in the appropriate account. 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 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 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 only at the top of a new accounts page or at the point where they change.change.

The amount is entered in the account as a debit or a credit, as indicated The amount is entered in the account as a debit or a credit, as indicated in the journal’s money columns, and the new balance is calculated.in the journal’s money columns, and the new balance is calculated.

The posting reference from the journal (both symbol and page number) The posting reference from the journal (both symbol and page number) is placed in the posting reference column of the ledger account.is placed in the posting reference column of the ledger account.

The account number is placed in the posting reference column of the The account number is placed in the posting reference column of the journal.journal.

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STEP 3STEP 3POSTING TO THE LEDGERPOSTING TO THE LEDGER

Regardless of the type of journals or the number of entries Regardless of the type of journals or the number of entries involved, the total debit posted should equal the total credit involved, the total debit posted should equal the total credit posted. Exhibit 1-4 (see following pages) is a comprehensive posted. Exhibit 1-4 (see following pages) is a comprehensive illustration of the journalizing and posting of the December illustration of the journalizing and posting of the December transactions of Dalay TV Service. You should review each transactions of Dalay TV Service. You should review each transaction in the illustration form.transaction in the illustration form.

the nature of the transactionthe nature of the transaction the related journal entry, andthe related journal entry, and the subsequent postings.the subsequent postings.

Bear in mind that the account numbers in the posting Bear in mind that the account numbers in the posting reference of the journal are not entered when the journal entry reference of the journal are not entered when the journal entry in recorded; they are inserted when the entry is posted.in recorded; they are inserted when the entry is posted.

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Table 2.7Table 2.7

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STEP 3STEP 3POSTING TO THE LEDGERPOSTING TO THE LEDGER

The foregoing should have been noted in the The foregoing should have been noted in the illustration; in every entry in the journal the debit illustration; in every entry in the journal the debit amount equal the credit amount. Debit amount in the amount equal the credit amount. Debit amount in the journal are posted to the debit side of the journal are posted to the debit side of the corresponding accounts in the general ledger. In like corresponding accounts in the general ledger. In like manner, credit amounts in the journal are posted to manner, credit amounts in the journal are posted to the credit side of the corresponding accounts in the the credit side of the corresponding accounts in the general ledger. Therefore, it follows that the sum of general ledger. Therefore, it follows that the sum of the debit amounts and that of the credit amounts the debit amounts and that of the credit amounts would also be equal in the ledger.would also be equal in the ledger.

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STEP 3STEP 3POSTING TO THE LEDGERPOSTING TO THE LEDGER

Correction Erroneous PostingsCorrection Erroneous PostingsEven the most carefully kept accounts will Even the most carefully kept accounts will

occasionally contain posting errors. An error involving only occasionally contain posting errors. An error involving only the wrong amount being posted may be corrected by drawing a the wrong amount being posted may be corrected by drawing a line through the incorrect amount, entering the correct amount line through the incorrect amount, entering the correct amount above, and initialing the correction. When an amount has been above, and initialing the correction. When an amount has been posted to the wrong account, however, the correction should posted to the wrong account, however, the correction should be made with a journal entry. Some common errors are as be made with a journal entry. Some common errors are as follows:follows: transposition transposition (transfer of position) which means that (transfer of position) which means that there was a change in the position of numbers, e.g. 936 was there was a change in the position of numbers, e.g. 936 was written as 396; written as 396; slide slide (transplacement) which means that the (transplacement) which means that the decimal point was placed in wrong position, e.g. 10,000 was decimal point was placed in wrong position, e.g. 10,000 was written as 1,000 or 100,000. more detailed discussion on this written as 1,000 or 100,000. more detailed discussion on this matter is provided in the section of adjusting entry.matter is provided in the section of adjusting entry.

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STEP 4STEP 4PREPARATION OF A TRIAL BALANCEPREPARATION OF A TRIAL BALANCE

After the journal entries have been posted to the After the journal entries have been posted to the general ledger accounts, a trial balance is prepared from the general ledger accounts, a trial balance is prepared from the general ledger. Periodically, a test of the equality of the debit general ledger. Periodically, a test of the equality of the debit amounts and credit amounts in the general ledger is made. The amounts and credit amounts in the general ledger is made. The test is known as the test is known as the trial balancetrial balance. It is usually prepared at the . It is usually prepared at the end of a month, a quarter, a semester, or a year.end of a month, a quarter, a semester, or a year.

Preparatory to the setting of the trial balance, each general ledger Preparatory to the setting of the trial balance, each general ledger account with more than one entry on either side is account with more than one entry on either side is footed. footed. Pencil footing means that the temporary total of the amounts Pencil footing means that the temporary total of the amounts of each side of the account is taken. Each of the debit totals of each side of the account is taken. Each of the debit totals and credit totals of the accounts are written (in pencil) just and credit totals of the accounts are written (in pencil) just below the last entry on the particular side. This facilitate the below the last entry on the particular side. This facilitate the determination of the account balance after transactions have determination of the account balance after transactions have been posted. Accounts with only one entry on either side need been posted. Accounts with only one entry on either side need not be footed.not be footed.

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STEP 4STEP 4PREPARATION OF A TRIAL BALANCEPREPARATION OF A TRIAL BALANCE

Open and Closed AccountsOpen and Closed AccountsThe difference between a debit total and The difference between a debit total and

a credit total of an account is called a credit total of an account is called account account balancebalance. When the debit total and credit total . When the debit total and credit total of an account are not equal, the account is said of an account are not equal, the account is said to be an to be an open account open account (with balance). When (with balance). When the debit total and credit total of an account are the debit total and credit total of an account are equal, the account is said to be, equal, the account is said to be, closed closed accountaccount ( without balance). ( without balance).

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STEP 4STEP 4PREPARATION OF A TRIAL BALANCEPREPARATION OF A TRIAL BALANCE

Types of Trial BalanceTypes of Trial BalanceTrial balance could either be trial balance of totals or trial Trial balance could either be trial balance of totals or trial

balance of balances. The balance of balances. The trial balance of totalstrial balance of totals is a list of all is a list of all accounts (that have entry, whether open or closed) in the general accounts (that have entry, whether open or closed) in the general ledger with their total debit amounts and total credit amounts. For this ledger with their total debit amounts and total credit amounts. For this reason, it is called reason, it is called trial balance of totalstrial balance of totals. The . The trial balance of trial balance of balancesbalances is a list of the open accounts in the general ledger and their is a list of the open accounts in the general ledger and their balances. balances. Only open accounts are included when preparing trial Only open accounts are included when preparing trial balance of balances, closed accounts are excluded. balance of balances, closed accounts are excluded. The The conventional way is the preparation of trial balance of balances rather conventional way is the preparation of trial balance of balances rather than the trail balance of totals. This type of trial balance is commonly than the trail balance of totals. This type of trial balance is commonly used because it gives the detailed information needed in the other used because it gives the detailed information needed in the other steps of the accounting cycle.steps of the accounting cycle.

The preparation of the trial balance is more of a check on the The preparation of the trial balance is more of a check on the arithmetical accuracy of the accounting records rather than an arithmetical accuracy of the accounting records rather than an absolute guarantee that all generally accepted accounting principles, absolute guarantee that all generally accepted accounting principles, practices, and procedures have been complied accurately.practices, and procedures have been complied accurately.

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STEP 4STEP 4PREPARATION OF A TRIAL BALANCEPREPARATION OF A TRIAL BALANCE

Steps in Preparing Trial BalanceSteps in Preparing Trial Balance Prepare the trial balance in a two-column journal. Heading Prepare the trial balance in a two-column journal. Heading

should be written on top of the page. The heading shows the should be written on top of the page. The heading shows the name of the business on the first line. Trial balance on 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 second line, and the date on the third line. Each line of the heading must be centered on the page.heading must be centered on the page.

Write the title of each open account on the Account Titles Write the title of each open account on the Account Titles column. If the account has a debit balance, write the balance in 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, the debit column of the trial balance. If it has a credit balance, write the balance on the credit amount column. All the account write the balance on the credit amount column. All the account titles in the trial balance are written with the same margin from 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 the left side of the page, that is, credit account titles should not be indented.be indented.

Add each amount column to prove that the two totals are equal.Add each amount column to prove that the two totals are equal. If the two totals are equal, draw lines under the totals.If the two totals are equal, draw lines under the totals.

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STEP 4STEP 4PREPARATION OF A TRIAL BALANCEPREPARATION OF A TRIAL BALANCE

The trial balance of the Dalay TV Service at The trial balance of the Dalay TV Service at December 31 is shown in Exhibit 1-5. showing all the December 31 is shown in Exhibit 1-5. showing all the general ledger account balances in one report, as is general ledger account balances in one report, as is done in this trial balance, makes it easier to review done in this trial balance, makes it easier to review the accounts and determine which account balances the accounts and determine which account balances need to be adjusted before preparing the financial need to be adjusted before preparing the financial statements.statements.

Table 2.8

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CHAPTER 3CHAPTER 3Adjusting Entries and the Preparation of the Adjusting Entries and the Preparation of the

Financial StatementsFinancial Statements

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Adjusting Entries and the Preparation of the Adjusting Entries and the Preparation of the Financial StatementsFinancial Statements

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

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STEP 5: GATHERING DATA TO ADJUST THE STEP 5: GATHERING DATA TO ADJUST THE ACCOUNTS AND PREPARATION OF A ACCOUNTS AND PREPARATION OF A

WORKSHEETWORKSHEET

ADJUSTING ENTRIES UNDER THE ACCRUAL BASIS OF ADJUSTING ENTRIES UNDER THE ACCRUAL BASIS OF ACCOUNTINGACCOUNTING

The extent and nature of adjusting entries depend on The extent and nature of adjusting entries depend on the basis on which the books are kept by the enterprise. There the basis on which the books are kept by the enterprise. There are generally two methods of keeping accounting records; the are generally two methods of keeping accounting records; the cash basis and the accrual basis. Under the cash basis and the accrual basis. Under the cash basis of cash basis of accountingaccounting revenues are recognized as expense on the period revenues are recognized as expense on the period of payment. In the of payment. In the accrual basis of accountaccrual basis of account, revenues are , revenues are recognized are recognized as income on the period that recognized are recognized as income on the period that revenue is earned not in the period of collection, while revenue is earned not in the period of collection, while expenses are recognized as expense on the period that it was expenses are recognized as expense on the period that it was incurred not on the period of payment.incurred not on the period of payment.

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STEP 5: GATHERING DATA TO ADJUST THE STEP 5: GATHERING DATA TO ADJUST THE ACCOUNTS AND PREPARATION OF A ACCOUNTS AND PREPARATION OF A

WORKSHEETWORKSHEET

The application of the accrual basis of The application of the accrual basis of accounting necessitates adjusting entries for the accounting necessitates adjusting entries for the following seven items:following seven items:

Doubtful AccountsDoubtful Accounts DepreciationDepreciation Accrued ExpensesAccrued Expenses Accrued RevenueAccrued Revenue Prepaid ExpensesPrepaid Expenses Unearned Revenue (Deferred Revenue)Unearned Revenue (Deferred Revenue) Ending Merchandise InventoryEnding Merchandise Inventory

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DOUBTFUL ACCOUNTDOUBTFUL ACCOUNT

DOUBTFUL ACCOUNTSDOUBTFUL ACCOUNTSWhen a business allows customers to avail services When a business allows customers to avail services

on credit, it maybe inevitable that some of the receivables on credit, it maybe inevitable that some of the receivables will not be collected. The loss which is a result of worthless will not be collected. The loss which is a result of worthless or bad accounts is referred to as doubtful accounts expense. or bad accounts is referred to as doubtful accounts expense. For proper income measurement, it is important that a For proper income measurement, it is important that a provision for the uncollectible accounts be provided during provision for the uncollectible accounts be provided during the same period that the income from services is recognized. the same period that the income from services is recognized. This produces a better matching of revenues and expenses This produces a better matching of revenues and expenses and, therefore, a better income measurement procedure. and, therefore, a better income measurement procedure. Using this procedure, operations are charged with estimated Using this procedure, operations are charged with estimated expenses, and receivables are reduced by means of a contra expenses, and receivables are reduced by means of a contra asset account – Allowance for Doubtful Accounts.asset account – Allowance for Doubtful Accounts.

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DOUBTFUL ACCOUNTDOUBTFUL ACCOUNT

The provision for doubtful accounts is The provision for doubtful accounts is based on estimate and is computed usually as a based on estimate and is computed usually as a percentage of credit revenuespercentage of credit revenues or as a or as a percentage of percentage of outstanding accounts outstanding accounts receivablereceivable. The purposes of the adjustment . The purposes of the adjustment are: (1) to record the doubtful account expense are: (1) to record the doubtful account expense during the same period that the related revenue during the same period that the related revenue is recognized, and (2) to report the accounts is recognized, and (2) to report the accounts receivable at the approximate collectible receivable at the approximate collectible amount. amount.

Page 138: Accounting

DOUBTFUL ACCOUNTDOUBTFUL ACCOUNT

ADJUSTING ENTRY FOR DOUBTFUL ACCOUNTSADJUSTING ENTRY FOR DOUBTFUL ACCOUNTSThe pro-forma adjusting journal entry for the The pro-forma adjusting journal entry for the

estimated loss on uncollectible account is:estimated loss on uncollectible account is:

Table 3.1Table 3.1

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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

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DOUBTFUL ACCOUNTDOUBTFUL ACCOUNT

Percentage RevenuePercentage Revenue

Assume it was provided that the Assume it was provided that the expected uncollectible account during the year expected uncollectible account during the year would be equal to 1% of the Service Income would be equal to 1% of the Service Income earned during the period, the adjusting entry earned during the period, the adjusting entry for doubtful accounts would be:for doubtful accounts would be:

Page 141: Accounting

Table 3.3Table 3.3

Page 142: Accounting

DOUBTFUL ACCOUNTDOUBTFUL ACCOUNT

Percentage ReceivablePercentage ReceivableWhen the provision for doubtful accounts is When the provision for doubtful accounts is

based on percentage of receivable, it may based on based on percentage of receivable, it may based on the following estimates of computation: (1) allowance the following estimates of computation: (1) allowance for doubtful accounts increased (decreased)for doubtful accounts increased (decreased) by by percentage of outstanding receivable, or (2) percentage of outstanding receivable, or (2) allowance for doubtful accounts increased allowance for doubtful accounts increased (decreased) (decreased) toto percentage of outstanding receivable. percentage of outstanding receivable. It should be noted that the difference of the two It should be noted that the difference of the two methods is only the words methods is only the words byby and and toto, but it should be , but it should be remembered because it makes a lot of difference.remembered because it makes a lot of difference.

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DOUBTFUL ACCOUNTDOUBTFUL ACCOUNT

Allowance for Doubtful Accounts Increased BY percentage of receivableAllowance for Doubtful Accounts Increased BY percentage of receivableAssume that it was agreed that the allowance for doubtful accounts will be Assume that it was agreed that the allowance for doubtful accounts will be increased by 1% of the outstanding receivable. The adjusting journal entry increased by 1% of the outstanding receivable. The adjusting journal entry will be:will be:

Table 3.4Table 3.4

Page 144: Accounting

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.

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DOUBTFUL ACCOUNTDOUBTFUL ACCOUNT

Allowance for Doubtful Accounts Increase Allowance for Doubtful Accounts Increase TO percentage of receivableTO percentage of receivable

Assume that it was agreed that the Assume that it was agreed that the allowance for doubtful accounts will be allowance for doubtful accounts will be increased to 1% of the outstanding receivable. increased to 1% of the outstanding receivable. The adjusting journal entry will be:The adjusting journal entry will be:

Page 146: Accounting

Table 3.5

Page 147: Accounting

DOUBTFUL ACCOUNTDOUBTFUL ACCOUNT

Computation:Computation:Balance after adjustment (P50,000 x 1%)Balance after adjustment (P50,000 x 1%) P500P500Less: Balance before adjustmentLess: Balance before adjustment 200 200Amount of adjustment for Doubtful AccountsAmount of adjustment for Doubtful Accounts 300 300

Note that if the allowance for doubtful account will be Note that if the allowance for doubtful account will be increased increased to to percentage of receivable, the doubtful account percentage of receivable, the doubtful account expense is computed by multiplying the receivable by the expense is computed by multiplying the receivable by the given percentage to compute for the desired balance of the given percentage to compute for the desired balance of the allowance after adjustment, then the balance before the allowance after adjustment, then the balance before the adjustment is deducted from it to arrive at the amount of adjustment is deducted from it to arrive at the amount of doubtful accounts to be provided.doubtful accounts to be provided.

Page 148: Accounting

DEPRECIATIONDEPRECIATION

DEPRECIATIONDEPRECIATIONWhen the business entity acquired tangible fixed assets such as When the business entity acquired tangible fixed assets such as

delivery equipment, furniture, computer, machines, building, and other delivery equipment, furniture, computer, machines, building, and other long-life assets, it is basically paying in advance for the usefulness of long-life assets, it is basically paying in advance for the usefulness of such asset. These assets help generate revenue for the entity. Each such asset. These assets help generate revenue for the entity. Each accounting period in which such assets are used should share a portion accounting period in which such assets are used should share a portion of their cost as expense. Proper accounting requires the systematic of their cost as expense. Proper accounting requires the systematic allocation (assignment) of the cost of the assets over its estimated useful allocation (assignment) of the cost of the assets over its estimated useful life. life. Depreciation Depreciation is the assignment of part of the cost of the asset over 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 the period it was used to properly match the revenue and cost of that period.period.

The following three factors are considered in the computation of depreciation:The following three factors are considered in the computation of depreciation:Cost of the fixed assetCost of the fixed assetThe estimated useful lifeThe estimated useful lifeThe estimated scrap value of the assetThe estimated scrap value of the asset

Page 149: Accounting

Table 3.6

Date DESCRIPTIONPost Ref. Debit

Credit

19xx          

Dec. 31Depreciation Expense-Name of Asset   xxx  

    Accumulated Depreciation-Name of Asset     xxx

    To record depreciation for the period      

Adjusting Entry for Depreciation

Page 150: Accounting

DEPRECIATIONDEPRECIATION

The account Depreciation is an expense account while the The account Depreciation is an expense account while the account Accumulated Depreciation is a contra asset account which account Accumulated Depreciation is a contra asset account which is deducted from the appropriate fixed asset account when preparing is deducted from the appropriate fixed asset account when preparing a balance sheet.a balance sheet.

To illustrate, assume that an equipment was purchased on 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 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 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 of the year, before the financial statements are prepared, annual depreciation should be adjusted. The annual depreciation is depreciation should be adjusted. The annual depreciation is computed as follows:computed as follows:

Formula to Compute Annual Depreciation:Formula to Compute Annual Depreciation:Cost of Asset - Scrap ValueCost of Asset - Scrap Value

Estimated Useful LifeEstimated Useful Life

Page 151: Accounting

DEPRECIATIONDEPRECIATIONAt the end of the accounting period, the depreciation to be At the end of the accounting period, the depreciation to be

provided would amount to P90, 000 (P1,000,000 – P100, 000 ÷ 10 provided would amount to P90, 000 (P1,000,000 – P100, 000 ÷ 10 years ). Accordingly, the adjustment would be:years ). Accordingly, the adjustment would be:

Table 3.7Table 3.7

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Dec. 31Depreciation Expense-Equipment   90,000  

    Accumulated Depreciation-Equipment     90,000

    To record depreciation for the period      

Page 152: Accounting

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.

Page 153: Accounting

DEPRECIATIONDEPRECIATION

Depreciation expense Depreciation expense is the assigned portion of the cost of the is the assigned portion of the cost of the fixed asset to the periods during which it is used. fixed asset to the periods during which it is used. Accumulated Accumulated depreciationdepreciation is the total accumulated amount of depreciation that has been is the total accumulated amount of depreciation that has been recorded for the fixed asset. The difference between the cost of the fixed recorded for the fixed asset. The difference between the cost of the fixed asset and the accumulated depreciation is the asset and the accumulated depreciation is the book valuebook value of the asset. The of the asset. The book value represent the portion of the cost of the fixed asset that has not 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 yet been recorded as depreciation expense. In the illustration provided above, the equipment would be presented in the balance sheet as follows:above, the equipment would be presented in the balance sheet as follows:

EquipmentEquipment P1,000,000P1,000,000Less: Accumulated DepreciationLess: Accumulated Depreciation 90,000 90,000Book ValueBook Value P 910,000P 910,000

The accumulated depreciation account is known as the contra-The accumulated depreciation account is known as the contra-asset account, since it is presented as a deduction from the asset account.asset account, since it is presented as a deduction from the asset account.

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DEPRECIATIONDEPRECIATION

Fractional DepreciationFractional Depreciation

In the illustration given, it was assumed that In the illustration given, it was assumed that the asset is used for one year. Let us assume now that the asset is used for one year. Let us assume now that the equipment was acquired only July 1 (not January the equipment was acquired only July 1 (not January 1)1) and was used only for six months. How much and was used only for six months. How much depreciation should be provided as of December 31 depreciation should be provided as of December 31 of the year?of the year?

Formula to Compute Fractional DepreciationFormula to Compute Fractional DepreciationCost of Asset – Scrap ValueCost of Asset – Scrap Value x ½ = Fractional Depreciation x ½ = Fractional Depreciation

Estimated Useful LifeEstimated Useful Life

Page 155: Accounting

DEPRECIATIONDEPRECIATION

Following the given formula, the Following the given formula, the depreciation to be provided at the end of the depreciation to be provided at the end of the year would be P45, 000 (P1,000,000 – P100, year would be P45, 000 (P1,000,000 – P100, 000 ÷ 10 years x ½ ). The adjusting entry to 000 ÷ 10 years x ½ ). The adjusting entry to record the depreciation of the above record the depreciation of the above equipment would be:equipment would be:

Page 156: Accounting

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Dec.31

Depreciation Expense-Equipment  

45,000  

    Accumulated Depreciation-Equipment     45,000

   

To record depreciation for six months.      

Table 3.8

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ACCRUED EXPENSESACCRUED EXPENSES

3. ACCRUED EXPENSES3. ACCRUED EXPENSESAccrued ExpensesAccrued Expenses are expenses already incurred but not yet are expenses already incurred but not yet

paid. The business usually incurs expenses but may take time before it 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 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 the end of the period the expense is not yet paid, it may therefore still be unrecorded. unrecorded. This situation creates understatement of expenses on the This situation creates understatement of expenses on the income statement which will overstate the net income and understate income statement which will overstate the net income and understate liabilities in the balance sheet. liabilities in the balance sheet. Consequently, an adjustment is needed to Consequently, an adjustment is needed to up-date the accounts for proper financial statement presentation.up-date the accounts for proper financial statement presentation.

The accrued expenses are usually incurred on various continuing The accrued expenses are usually incurred on various continuing services provided to the business such as electricity, water, telephone, services provided to the business such as electricity, water, telephone, taxes, rental, interest, salaries and many others.taxes, rental, interest, salaries and many others.

Adjusting Entry for Accrued ExpensesAdjusting Entry for Accrued ExpensesThe pro-forma adjusting journal entry for accrued expense is:The pro-forma adjusting journal entry for accrued expense is:

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Table 3.9Table 3.9

Date DESCRIPTIONPost Ref. Debit Credit

19xx          Dec. 31 An Expense Account   20, 000  

    (Name of expense) Payable    

20, 000

    To record accrued expense for the period      

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ACCRUED EXPENSESACCRUED EXPENSES

Illustration. Illustration. Assume Nikko Jay Service Co. is renting Assume Nikko Jay Service Co. is renting a shop location at the rate of P20, 000 per month. Its lease a shop location at the rate of P20, 000 per month. Its lease agreement provides that payment of rental should be made on agreement provides that payment of rental should be made on or before the 5th day of every month for the month after the or before the 5th day of every month for the month after the facility was used. Meaning, October rental should be paid by facility was used. Meaning, October rental should be paid by November 5, November rental should be paid December 5, November 5, November rental should be paid December 5, and so on. At December 31, when the business will prepare and so on. At December 31, when the business will prepare the financial statements, the December rental is still unpaid the financial statements, the December rental is still unpaid although they have use the facility. Correspondingly, because although they have use the facility. Correspondingly, because rent expense is understated rent expense is understated and and liability is understated liability is understated too, too, an adjusting entry as follows is necessary:an adjusting entry as follows is necessary:

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Table 3.10Table 3.10

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Dec. 31 Rent Expense  20, 000  

    Rent Payable    20, 000

    To record accrued expense for the period      

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ACCRUED REVENUEACCRUED REVENUE

ACCRUED REVENUEACCRUED REVENUEAccrued revenues Accrued revenues are revenue already earned but collection are revenue already earned but collection

has not yet been received. Many kinds of revenues like revenue from has not yet been received. Many kinds of revenues like revenue from interest, revenue from commission, from rental on property, are interest, revenue from commission, from rental on property, are recorded only when received. It goes to say, therefore, that when no recorded only when received. It goes to say, therefore, that when no collection is received these revenues are not yet recorded. collection is received these revenues are not yet recorded. This results This results in the understatement of revenue account on the income statement in the understatement of revenue account on the income statement and subsequently understatement of receivable account in the and subsequently understatement of receivable account in the balance sheet. balance sheet. Consequently, an adjusting entry is necessary to up-date Consequently, an adjusting entry is necessary to up-date and correct the accounts to be able to present reliable financial and correct the accounts to be able to present reliable financial statements.statements.

Adjusting Entry for Accrued RevenueAdjusting Entry for Accrued RevenueThe pro-forma adjusting entry for accrued revenue is:The pro-forma adjusting entry for accrued revenue is:

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Table 3.11Table 3.11

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Dec. 31(Name of Income) Receivable   xxx  

    Revenue Account     xxx

    To record accrued revenue for the period      

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ACCRUED REVENUEACCRUED REVENUE

IllustrationIllustration: In the preceding illustration for : In the preceding illustration for Nikko Jay Co. above, was analyzed on the point of Nikko Jay Co. above, was analyzed on the point of view of the lessee. Let us now analyze it from the view of the lessee. Let us now analyze it from the point of view of the owner of the owner of the point of view of the owner of the owner of the property. If you were the owner of the property, at the property. If you were the owner of the property, at the end of December, you have already earned your rent end of December, you have already earned your rent revenue because they have already used the property revenue because they have already used the property but you have not received their payment. This is a but you have not received their payment. This is a good example of accrued revenue. For this good example of accrued revenue. For this illustration, the necessary adjusting entry is:illustration, the necessary adjusting entry is:

Page 164: Accounting

Table 3.12Table 3.12

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Dec.31 Rent Receivable   20,000  

    Rent Revenue     20,000

    To record accrued rent for December.      

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PREPAID EXPENSESPREPAID EXPENSES

PREPAID EXPENSESPREPAID EXPENSESPrepaid expenses Prepaid expenses are expenses already paid but not yet are expenses already paid but not yet

incurred. Expenses could be paid in advance. Some example of incurred. Expenses could be paid in advance. Some example of prepaid expenses are rent paid in advance, advertising paid in prepaid expenses are rent paid in advance, advertising paid in advance, interest on discounted notes, purchase of supplies, and advance, interest on discounted notes, purchase of supplies, and insurance premium paid on the beginning of the policy period. insurance premium paid on the beginning of the policy period. Prepaid expenses are assets, not expenses. Prepaid expenses are assets, not expenses. The terms prepaid, The terms prepaid, unexpired, unused, on hand, and inventory denotes assets. At the unexpired, unused, on hand, and inventory denotes assets. At the end of the accounting period, when the portion of these assets end of the accounting period, when the portion of these assets have been used or expired, they become expense that requires have been used or expired, they become expense that requires adjustment.adjustment.

Advance payment of expenses (Prepaid expense) could be Advance payment of expenses (Prepaid expense) could be recorded in the accounting records under any one of the two recorded in the accounting records under any one of the two methods: (1) the asset method, and (2) the expense method. methods: (1) the asset method, and (2) the expense method.

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PREPAID EXPENSESPREPAID EXPENSES

The Asset MethodThe Asset MethodThe asset method is the procedure of recording the advance The asset method is the procedure of recording the advance

payment of expenses by debiting an asset account. At the end of the payment of expenses by debiting an asset account. At the end of the accounting period, the asset recorded could have been partly used up, accounting period, the asset recorded could have been partly used up, rendering the asset account debited to be overstated while the expense rendering the asset account debited to be overstated while the expense account is understated. This situation requires the preparation of an account is understated. This situation requires the preparation of an adjusting entry to correct and up-date the accounts for proper financial adjusting entry to correct and up-date the accounts for proper financial statement presentation.statement presentation.

Entry for Prepaid Expenses using Asset MethodEntry for Prepaid Expenses using Asset MethodThe journal entry to record the payment of expenses using the The journal entry to record the payment of expenses using the

asset method is:asset method is:

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Table 3.13Table 3.13

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Sept. 1Asset Account (Prepaid, Unused, etc.)   xxx  

    Cash     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.

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PREPAID EXPENSESPREPAID EXPENSES

Adjusting Entry for Prepaid Expenses using Adjusting Entry for Prepaid Expenses using Asset MethodAsset Method

The pro-forma adjusting journal entry for The pro-forma adjusting journal entry for prepaid using the asset method is:prepaid using the asset method is:

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Table 3.14Table 3.14

Date DESCRIPTIONPost Ref. Debit

Credit

19xx          

Dec.31 Expense Account   xxx  

    Asset Account (Prepaid, Unused, etc.)     xxx

   

To record unexpired portion of an asset for the period.      

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PREPAID EXPENSESPREPAID EXPENSESIllustration. Illustration. Assume that on September 1 if the current year, Ma. Gina Trucking 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. 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:If the asset method of recording is used, then the entry on September 1 will be:

Table 3.15Table 3.15

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Sept. 1 Prepaid Advertising  120,0

00  

    Cash    120,00

0

    To record advance payment of advertising.      

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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.

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PREPAID EXPENSESPREPAID EXPENSESThe asset is overstated by P80, 000, the same amount of understatement of 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:the advertising expense account. At December 31, the adjusting entry should be:

Table 3.16Table 3.16

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Dec. 31 Advertising Expense  80, 000  

    Prepaid Advertising    80, 000

   

To record advertising expense incurred for the period      

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It should be noticed in the analysis, that the account It should be noticed in the analysis, that the account debited in the original entry (upon payment) is the debited in the original entry (upon payment) is the account credited on the adjustment. account credited on the adjustment. It is so because It is so because the account debited in the recording of the payment is the account debited in the recording of the payment is overstated at the end of the period.overstated at the end of the period.

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PREPAID EXPENSESPREPAID EXPENSES

The Expense MethodThe Expense MethodThe expense method is the procedure of recording the advance The expense method is the procedure of recording the advance

payment of expenses by debiting an expense account. At the end of the payment of expenses by debiting an expense account. At the end of the accounting period, the expense recorded could not have been used up, accounting period, the expense recorded could not have been used up, rendering the expense account debited to be overstated while the asset is rendering the expense account debited to be overstated while the asset is account understated. This situation requires the preparation of adjusting account understated. This situation requires the preparation of adjusting entry to correct and up-date the accounts for proper financial statement entry to correct and up-date the accounts for proper financial statement presentation.presentation.

Original Entry for Prepaid Expenses using Expense MethodOriginal Entry for Prepaid Expenses using Expense MethodThe journal entry to record the payment of expenses using the The journal entry to record the payment of expenses using the

expense method is:expense method is:

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Table 3.17Table 3.17

Date DESCRIPTIONPost Ref. Debit Credit

19xx          Sept. 1 Expense Account   xxx  

    Cash     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.

Page 176: Accounting

PREPAID EXPENSESPREPAID EXPENSES

Adjusting Entry for Prepaid Expenses using Adjusting Entry for Prepaid Expenses using Expense MethodExpense Method

The pro-forma adjusting journal entry for The pro-forma adjusting journal entry for prepaid expenses using the expense method is:prepaid expenses using the expense method is:

Table 3.18Table 3.18

Page 177: Accounting

Date DESCRIPTIONPost Ref. Debit

Credit

19xx          

Dec.31

Asset Account (Prepaid, Unused, etc.)   xxx  

    Expense Account     xxx

    To record Unexpired expense during the period      

Page 178: Accounting

PREPAID EXPENSESPREPAID EXPENSES

Illustration. Illustration. We will be using the same data for asset We will be using the same data for asset method, on the P120, 000 advertising paid by Ma. Gina method, on the P120, 000 advertising paid by Ma. Gina Trucking Service to Ace Advertiser Company for the period Trucking Service to Ace Advertiser Company for the period September 1 (current year) to February (next year). If the September 1 (current year) to February (next year). If the expense method of recording is used, then the entry for expense method of recording is used, then the entry for September 1 would be:September 1 would be:

Table 3.19Table 3.19

Page 179: Accounting

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Sept. 1 Advertising Expense  120,00

0  

    Cash    120,00

0

    To record advance payment of Advertising      

Page 180: Accounting

Analysis. Analysis. The analysis made using the asset The analysis made using the asset method is still valid. But, because the expense method is still valid. But, because the expense account was debited and the P120, 000 is not all account was debited and the P120, 000 is not all used up, the expense account is overstated by used up, the expense account is overstated by P40, 000, the portion applicable to the months of P40, 000, the portion applicable to the months of January and February (next year). It is the same January and February (next year). It is the same amount of understatement of the asset (prepaid) amount of understatement of the asset (prepaid) account.account.

Table 3.20Table 3.20

Page 181: Accounting

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Dec. 31  Prepaid Advertising  40,00

0  

    Advertising Expense     40,000

   

To record the amount of unexpired advertising at the end of the period.      

Page 182: Accounting

PREPAID EXPENSESPREPAID EXPENSES

It should be noticed in the analysis, that the It should be noticed in the analysis, that the account debited in the original entry (upon payment) account debited in the original entry (upon payment) is the account credited on the adjustment.is the account credited on the adjustment. It is so It is so because the account debited in the recording of the because the account debited in the recording of the payment is overstated at the end of the period.payment is overstated at the end of the period.

In the two analysis provided, both for the asset In the two analysis provided, both for the asset method and the expense method, it should be noted that method and the expense method, it should be noted that after the adjustment have been recorded in the accounts after the adjustment have been recorded in the accounts the resulting balance for both accounts will be the same, the resulting balance for both accounts will be the same, P80, 000 for Advertising Expense and P40, 000 for P80, 000 for Advertising Expense and P40, 000 for Prepaid Advertising. The amounts represent the correct Prepaid Advertising. The amounts represent the correct balances in our analysis.balances in our analysis.

Page 183: Accounting

UNEARNED REVENUE (Deferred Revenue)UNEARNED REVENUE (Deferred Revenue)

Unearned revenues Unearned revenues are revenues already received are revenues already received (collected) but not yet earned. Sometimes the business (collected) but not yet earned. Sometimes the business receives payment for the services (or goods) before service receives payment for the services (or goods) before service is actually rendered. When such revenues are received in is actually rendered. When such revenues are received in advance, the enterprise has an obligation to perform services advance, the enterprise has an obligation to perform services (or delivery of goods).(or delivery of goods). The liability is referred to as The liability is referred to as unearned revenue.unearned revenue.

Like in prepaid expenses, advance receipt of revenue Like in prepaid expenses, advance receipt of revenue (Unearned revenue) may be recorded in the accounting (Unearned revenue) may be recorded in the accounting records under any one of the two methods: records under any one of the two methods:

Liability MethodsLiability Methods Revenue MethodsRevenue Methods

Page 184: Accounting

UNEARNED REVENUE (Deferred Revenue)UNEARNED REVENUE (Deferred Revenue)

The Liability MethodThe Liability MethodThe liability method is the procedure of recording the advance The liability method is the procedure of recording the advance receipt of revenue by crediting a liability account. receipt of revenue by crediting a liability account. At the end of At the end of the accounting period, the liability recorded could have been the accounting period, the liability recorded could have been partially earned rendering the liability account credited to be partially earned rendering the liability account credited to be overstated and the revenue account understated. overstated and the revenue account understated. This This situation requires the preparation of adjusting entry to correct and situation requires the preparation of adjusting entry to correct and up-date the accounts for proper financial statement presentation.up-date the accounts for proper financial statement presentation.

Original Entry for Unearned Revenue using Liability MethodOriginal Entry for Unearned Revenue using Liability MethodThe journal entry to record the receipt of revenue in advance The journal entry to record the receipt of revenue in advance using the liability method is:using the liability method is:

Page 185: Accounting

Table 3.21Table 3.21

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Aug.1  Cash   xxx  

    Unearned (Name of Revenue) Account     xxx

    To record advance receipt of revenue      

Page 186: Accounting

UNEARNED REVENUE (Deferred Revenue)UNEARNED REVENUE (Deferred Revenue)

Adjusting Entry for Unearned Revenue Adjusting Entry for Unearned Revenue using Liability Methodusing Liability Method

The pro-forma adjusting journal entry for The pro-forma adjusting journal entry for unearned revenue using the liability method is:unearned revenue using the liability method is:

Table 3.22Table 3.22

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Table 3.22Table 3.22

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Dec. 31Liability (Unearned) Account   xxx  

    Revenue Account     xxx

    To record revenue earned for the period.      

Page 188: Accounting

UNEARNED REVENUE (Deferred Revenue)UNEARNED REVENUE (Deferred Revenue)

Illustration. Illustration. Assume that on August 1, the Assume that on August 1, the business received P72, 000 from a tenant, business received P72, 000 from a tenant, representing 6-month advance rental, covering representing 6-month advance rental, covering the period from August (current year) to the period from August (current year) to January (next year). If the liability method is January (next year). If the liability method is used, the entry on August 1 would be:used, the entry on August 1 would be:

Page 189: Accounting

Table 3.23Table 3.23

Date DESCRIPTIONPost Ref. Debit Credit

19xx          Aug. 1 Cash   72,000  

    Unearned Rent     72,000

    To record advance receipt of revenue.      

Page 190: Accounting

UNEARNED REVENUE (Deferred Revenue)UNEARNED REVENUE (Deferred Revenue)

Analysis. Analysis. The rate of the monthly rental is P12, 000 (P72, 000 ÷ 6). At 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 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 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 been earned while P12, 000 the rent applicable to the month of January (next year) remains unearned. At December 31, the recorded unearned rent (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, 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 000. The liability account is overstated by P60, 000, the same amount of understatement of the rent revenue account. At December 31, the adjusting understatement of the rent revenue account. At December 31, the adjusting entry should be:entry should be:

It should be noted in the analysis, that the account credited in the original 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 entry (upon receipt of revenue) is the account debited on the adjustment. adjustment. It is so because the account credited in the recording of the It is so because the account credited in the recording of the receipt of revenue is overstated at the end of the period.receipt of revenue is overstated at the end of the period.

Page 191: Accounting

Table 3.24Table 3.24

Date DESCRIPTIONPost Ref. Debit Credit

19xx          Dec. 31 Unearned Rent   60,000      Rent Revenue     60,000

    To record revenue earned during the period      

Page 192: Accounting

UNEARNED REVENUE (Deferred Revenue)UNEARNED REVENUE (Deferred Revenue)

The Revenue MethodThe Revenue MethodThe revenue method is the procedure of recording the The revenue method is the procedure of recording the

advance receipt of revenue by crediting a revenue account. advance receipt of revenue by crediting a revenue account. At At the end of the accounting period, the revenue recorded the end of the accounting period, the revenue recorded could not have been all earned, rendering the revenue could not have been all earned, rendering the revenue account credited to be overstated and the liability account account credited to be overstated and the liability account understated. understated. This situation requires the preparation of an This situation requires the preparation of an adjusting entry to correct and up-date the accounts for proper adjusting entry to correct and up-date the accounts for proper financial statement presentation.financial statement presentation.

Original Entry for Unearned Revenue using Revenue MethodOriginal Entry for Unearned Revenue using Revenue MethodThe journal entry to record the receipt of revenue in The journal entry to record the receipt of revenue in

advance using the revenue method is:advance using the revenue method is:

Page 193: Accounting

Table 3.25Table 3.25

Date DESCRIPTIONPost Ref. Debit Credit

19xx          Aug. 1 Cash   xxx  

    Revenue Account     xxx

    To record advance receipt of revenue.      

Page 194: Accounting

UNEARNED REVENUE (Deferred Revenue)UNEARNED REVENUE (Deferred Revenue)

Adjusting Entry for Unearned Revenue using Revenue Adjusting Entry for Unearned Revenue using Revenue MethodMethod

The pro-forma adjusting journal entry for unearned revenue The pro-forma adjusting journal entry for unearned revenue using the revenue method is:using the revenue method is:

Page 195: Accounting

Table 3.26Table 3.26

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Dec.31 Revenue Account   xxx  

    Unearned (Name of Revenue) Account     xxx

   

To record revenue unearned at the end of the period      

Page 196: Accounting

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 DESCRIPTIONPost Ref. Debit Credit

19xx          Dec. 31 Revenue Account   xxx  

    Unearned (Name of Revenue) Account     xxx

   

To record revenue unearned at the end of the period      

Page 197: Accounting

UNEARNED REVENUE (Deferred Revenue)UNEARNED REVENUE (Deferred Revenue)

Analysis. Analysis. The rate of the monthly rental is P12, 000 (P72, 000 The rate of the monthly rental is P12, 000 (P72, 000 ÷ 6). At December 31, the end of the accounting period, only ÷ 6). At December 31, the end of the accounting period, only P60, 000 (P12, 000 x 5 months) of the rent applicable for the P60, 000 (P12, 000 x 5 months) of the rent applicable for the months of August to December have been earned while P12, months of August to December have been earned while P12, 000 the rent applicable to the months of January (next year) 000 the rent applicable to the months of January (next year) remains unearned. At December 31, the recorded rent revenue remains unearned. At December 31, the recorded rent revenue before any adjustment is P72, 000, when it should only be before any adjustment is P72, 000, when it should only be P60, 000. The revenue account is overstated by P12, 000, the P60, 000. The revenue account is overstated by P12, 000, the same amount of understatement of the unearned rent account. same amount of understatement of the unearned rent account. At December 31, the adjusting entry should be:At December 31, the adjusting entry should be:

Page 198: Accounting

Table 3.28Table 3.28

Date DESCRIPTIONPost Ref. Debit Credit

19xx          

Dec.31 Rent Revenue  

12,000  

    Unearned Rent     12,000

   

To record revenue unearned at the end of the period      

Page 199: Accounting

UNEARNED REVENUE (Deferred Revenue)UNEARNED REVENUE (Deferred Revenue)

It should be noticed in the analysis, It should be noticed in the analysis, that the account credited in the original that the account credited in the original entry (upon receipt of revenue) is the entry (upon receipt of revenue) is the account debited on the adjustment. account debited on the adjustment. It is so It is so because the account credited in the recording because the account credited in the recording of the receipt of revenue is overstated at the of the receipt of revenue is overstated at the end of the period.end of the period.

Page 200: Accounting

PREPARATION OF THE WORK SHEETPREPARATION OF THE WORK SHEET

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

Compute adjustments and the adjusted balances of the Compute adjustments and the adjusted balances of the accounts.accounts.

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

Determine net income (or loss).Determine net income (or loss).

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PREPARATION OF THE WORK SHEETPREPARATION OF THE WORK SHEET

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

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PREPARATION OF THE WORK SHEETPREPARATION OF THE WORK SHEET

The following steps are followed when preparing the work sheet:The following steps are followed when preparing the work sheet: Place the heading at the center of the columnar form: Name of the Place the heading at the center of the columnar form: Name of the

Company, Work Sheet, and, the period covered.Company, Work Sheet, and, the period covered. Place the trial balance on the first section (first two column). List the 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 accounts as they appear in the general ledger. See to it that the debit and credit totals are balanced.and credit totals are balanced.

Enter all the adjustments in the next section (third and fourth Enter all the adjustments in the next section (third and fourth columns). Use numbers or letters to identify each entry. Prove columns). Use numbers or letters to identify each entry. Prove equality of the debit and credit amounts, double-rule if equal. New equality of the debit and credit amounts, double-rule if equal. New account titles are placed below, in the appropriate account title account titles are placed below, in the appropriate account title column.column.

Complete the next section (fifth and sixth columns), extend the Complete the next section (fifth and sixth columns), extend the adjusted balances of all accounts to the adjusted trial balance columns.adjusted balances of all accounts to the adjusted trial balance columns.

Page 203: Accounting

PREPARATION OF THE WORK SHEETPREPARATION OF THE WORK SHEET

Complete the statement sections, extend the fourth Complete the statement sections, extend the fourth section (seventh and eight columns) all income section (seventh and eight columns) all income statement accounts (nominal accounts), and to the statement accounts (nominal accounts), and to the fifth section (ninth and tenth columns) all balance fifth section (ninth and tenth columns) all balance sheet accounts (real accounts).sheet accounts (real accounts).

Determines the net income (or net loss) by Determines the net income (or net loss) by analyzing the column totals of the income statement analyzing the column totals of the income statement columns. If the credit column total exceed the debit columns. If the credit column total exceed the debit column total, it represent net income. If the debit column total, it represent net income. If the debit column total exceed the credit column total, it column total exceed the credit column total, it represent a net loss.represent a net loss.

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PREPARATION OF THE WORK SHEETPREPARATION OF THE WORK SHEET

Illustrative Problem – Illustrative Problem – Preparation of Work Preparation of Work Sheet. Sagum Laboratory began operation on Sheet. Sagum Laboratory began operation on January 1, 19xx, and provides various January 1, 19xx, and provides various diagnostic services for physicians and clinics. diagnostic services for physicians and clinics. Its accounting period ends December 31 and Its accounting period ends December 31 and the accounts are adjusted annually on this date. the accounts are adjusted annually on this date. Its unadjusted trial balance at December 31, Its unadjusted trial balance at December 31, 19xx, is as follows:19xx, is as follows:

Page 205: Accounting

Sagum LaboratorySagum LaboratoryTrial BalanceTrial Balance

December 31, 19xxDecember 31, 19xx

Account TitlesAccount Titles DebitDebitCreditCredit

CashCash 1, 0001, 000Accounts ReceivableAccounts Receivable 9, 200 9, 200Medical SuppliesMedical Supplies 31, 30031, 300Prepaid InsurancePrepaid Insurance 6, 000 6, 000Laboratory EquipmentLaboratory Equipment 270, 000 270, 000Accumulated Depreciation – LaboratoryAccumulated Depreciation – LaboratoryEquipmentEquipment 60, 000 60, 000Accounts PayableAccounts Payable 3, 0003, 000Unearned Diagnostic FeesUnearned Diagnostic Fees 4, 0004, 000Cecil Sagum, CapitalCecil Sagum, Capital 110, 000 110, 000Diagnostic FeesDiagnostic Fees 220, 000 220, 000Salaries and Wages ExpenseSalaries and Wages Expense 58, 00058, 000Rent ExpenseRent Expense ____________________________________TotalTotal 397, 500397, 500 397, 500397, 500

Page 206: Accounting

Table 3.29Table 3.29

Page 207: Accounting

STEP 6STEP 6PREPARATION OF FINANCIAL STATEMENTSPREPARATION OF FINANCIAL STATEMENTS

After the worksheet has been completed, the formal After the worksheet has been completed, the formal financial statements are prepared. The kind of financial financial statements are prepared. The kind of financial statements have been illustrated, the nature and form of the statements have been illustrated, the nature and form of the income statement and the balance sheet have been taken up in income statement and the balance sheet have been taken up in Chapter 1. The financial statement of Sagum Laboratory will Chapter 1. The financial statement of Sagum Laboratory will be prepared with the aid of a worksheet in this chapter.be prepared with the aid of a worksheet in this chapter.

Basically, there are two principal accounting Basically, there are two principal accounting statements for a sole proprietorship: the balance sheet and the statements for a sole proprietorship: the balance sheet and the income statement. The bincome statement. The balance sheet alance sheet is that kind of financial is that kind of financial statement that shows the financial position of the business as statement that shows the financial position of the business as of a given date, usually the end of the accounting period. The of a given date, usually the end of the accounting period. The income statementincome statement is the kind of financial statement that is the kind of financial statement that shows results of operations for a period of time, usually a year,shows results of operations for a period of time, usually a year,

Page 208: Accounting

STEP 6STEP 6PREPARATION OF FINANCIAL STATEMENTSPREPARATION OF FINANCIAL STATEMENTS

Kinds of Income StatementKinds of Income Statement Single-step form – Single-step form – in this type of income statement, in this type of income statement,

all revenues are grouped together in one section, and all revenues are grouped together in one section, and all expenses in another section. The net income or net all expenses in another section. The net income or net loss are determined by deducting the total expenses loss are determined by deducting the total expenses from the total revenue.from the total revenue.

Multi-step formMulti-step form

Forms of Balance Sheet Forms of Balance Sheet Report Form - Report Form - a balance sheet that presents the a balance sheet that presents the

assets on the top section and the liabilities and assets on the top section and the liabilities and owner’s equity at the bottom section of the report.owner’s equity at the bottom section of the report.

Page 209: Accounting

Sagum LaboratorySagum LaboratoryBalance SheetBalance Sheet

As of December 31, 19xxAs of December 31, 19xxASSETSASSETSCurrent AssetsCurrent Assets CashCash P 1,000 P 1,000 Accounts Receivable P 9,200Accounts Receivable P 9,200Less: Allowances for Doubtful Depreciation Less: Allowances for Doubtful Depreciation P 300P 300 P 8,900 P 8,900Medical Supplies P 6,300Medical Supplies P 6,300Prepaid Insurance Prepaid Insurance P 4,500 P 4,500 Total Current Assets Total Current Assets P 20,700 P 20,700Property, Plant, and EquipmentProperty, Plant, and Equipment Laboratory Equipment P 270,000 Laboratory Equipment P 270,000 Less: Accumulated Depreciation Less: Accumulated Depreciation P 90,000P 90,000Total Property, Plant, and Equipment Total Property, Plant, and Equipment 180,000180,000 Total Assets Total Assets P 200,700 P 200,700

LIABILITIESLIABILITIESCurrent LiabilitiesCurrent LiabilitiesAccounts Payable P 3,100Accounts Payable P 3,100Unearned Diagnostic Fees 1,000Unearned Diagnostic Fees 1,000Salaries Payable 600Salaries Payable 600 Rent Payable Rent Payable 2,000 2,000Total Current Liabilities Total Current Liabilities P 6,700 P 6,700

OWNER’S EQUITYOWNER’S EQUITYCecil Sagum, Capital (per Capital Statement) Cecil Sagum, Capital (per Capital Statement) 194,000 194,000 Total Liabilities and Owner’s Equity Total Liabilities and Owner’s Equity P 200,700P 200,700

Page 210: Accounting

Account Form – Account Form – the balance sheet that is presented in account form the balance sheet that is presented in account form presents the assets o the left side and the liabilities and owner’s presents the assets o the left side and the liabilities and owner’s equity on the right side of the statement.equity on the right side of the statement.

Name of CompanyName of CompanyBalance SheetBalance Sheet

As of December 31, 19xxAs of December 31, 19xx

ASSETS ASSETS LIABILITIES AND OWNER’S LIABILITIES AND OWNER’S EQUITYEQUITY

Total Current AssetsTotal Current Assets xxx xxx Total LiabilitiesTotal Liabilities xxxxxxTotal Property, Plant, and Equipment Total Property, Plant, and Equipment xxx xxx Owner’s EquityOwner’s Equity xxxxxxTotal AssetsTotal Assets xxx xxx Total Liabilities and owner’s Equity Total Liabilities and owner’s Equity xxxxxx

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STEP 6STEP 6PREPARATION OF FINANCIAL STATEMENTSPREPARATION OF FINANCIAL STATEMENTS

Other method of PresentationOther method of Presentation

There is a Form of balance sheet presentation There is a Form of balance sheet presentation that gives emphasis on the current working capital that gives emphasis on the current working capital position of the business, the position of the business, the financial positionfinancial position formform. . In the first section, the total current liabilities are In the first section, the total current liabilities are deducted from the total current assets to arrive at the deducted from the total current assets to arrive at the working capital. In the second section, the total of the working capital. In the second section, the total of the property and equipment is added to working capital property and equipment is added to working capital and the long-term liabilities are deducted to arrive at and the long-term liabilities are deducted to arrive at the net assets and owner’s equity.the net assets and owner’s equity.

Page 212: Accounting

STEP 6STEP 6PREPARATION OF FINANCIAL STATEMENTSPREPARATION OF FINANCIAL STATEMENTS

Classification of AssetsClassification of AssetsFor a service business, assets are normally classified in the balance sheet into the (1) For a service business, assets are normally classified in the balance sheet into the (1)

current, and (2) property and equipment.current, and (2) property and equipment.

Current Assets Current Assets includes cash and other assets that will be converted into cash or used includes cash and other assets that will be converted into cash or used up by the business , whichever is longer.up by the business , whichever is longer.

Cash Cash is any medium of exchange that the bank accepts at face value. It includes 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 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 on hand consisting of currency, undeposited checks, drafts, and money orders. These are items without restriction and available for current operations of the business.are items without restriction and available for current operations of the business.

Accounts Receivable Accounts Receivable is the amount owed to a business by customers (clients). It is is the amount owed to a business by customers (clients). It is evidenced by an oral promise to pay.evidenced by an oral promise to pay.

Notes Receivable Notes Receivable is same as account receivable except that the customer or client is same as account receivable except that the customer or client gives a promissory note to evidence its obligation.gives a promissory note to evidence its obligation.

Prepaid Expense Prepaid Expense is also known as Deferred Expenses which is the expenses paid in 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 advance. It is an asset awaiting assignment to expense. An example is prepaid insurance.insurance.

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STEP 6STEP 6PREPARATION OF FINANCIAL STATEMENTSPREPARATION OF FINANCIAL STATEMENTS

Property, plant and equipment Property, plant and equipment is an asset acquired for use in a is an asset acquired for use in a business rather than for resale; also called plant assets or business rather than for resale; also called plant assets or fixed assets.fixed assets.

Land Land is the ground on which the business buildings of the enterprise is the ground on which the business buildings of the enterprise are located. Land can also be used for outside storage space or a are located. Land can also be used for outside storage space or a parking lot. parking lot.

BuildingBuilding is an edifice or structures constructed on the land, such as is an edifice or structures constructed on the land, such as office building.office building.

Equipments Equipments are those items refer to the filing cabinet, calculator, are those items refer to the filing cabinet, calculator, adding machine, cash register, and computer used either in the adding machine, cash register, and computer used either in the office, store, or for delivery. office, store, or for delivery. Delivery Equipment Delivery Equipment refers to trucks, refers to trucks, cars, motorcycles, and other transportation vehicles used for delivery cars, motorcycles, and other transportation vehicles used for delivery purposes.purposes.

Furnitures and Fixtures Furnitures and Fixtures refers to the tables and chairs, cabinet, refers to the tables and chairs, cabinet, counter, and other fixtures used in the business.counter, and other fixtures used in the business.

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STEP 6STEP 6PREPARATION OF FINANCIAL STATEMENTSPREPARATION OF FINANCIAL STATEMENTS

Classifications of LiabilitiesClassifications of LiabilitiesCurrent Liabilities Current Liabilities are debts usually due within one year, the payment of are debts usually due within one year, the payment of

which normally will require the use of current assets.which normally will require the use of current assets. Accounts Payable Accounts Payable is the amount owed by the business to creditors for the is the amount owed by the business to creditors for the

items or services purchased from them.items or services purchased from them. Notes Payable Notes Payable are unconditional written promises by an enterprise to pay are unconditional written promises by an enterprise to pay

certain sum of money at a determinate future date.certain sum of money at a determinate future date. Salaries and Wages Payable Salaries and Wages Payable are amounts owed to employees for services are amounts owed to employees for services

rendered but for which payment has not been made at the balance sheet date.rendered but for which payment has not been made at the balance sheet date. Interest Payable Interest Payable arises when interest has been incurred but not yet paid at 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 the balance sheet date because the amount is not due on Notes Payable until later.later.

Unearned Revenue or Deferred Revenue Unearned Revenue or Deferred Revenue is payments for services or sale is payments for services or sale of goods that are received in advance from customer or client. of goods that are received in advance from customer or client.

Long-term Liabilities Long-term Liabilities are liabilities not due for a relatively long period of time, are liabilities not due for a relatively long period of time, usually more than one year.usually more than one year.

Page 215: Accounting

STEP 6STEP 6PREPARATION OF FINANCIAL STATEMENTSPREPARATION OF FINANCIAL STATEMENTS

Classification of Owner’s EquityClassification of Owner’s EquityOwner’s Equity Owner’s Equity is the claim of the owner over the asset of the is the claim of the owner over the asset of the

business. It is residual claim because it will only be satisfied business. It is residual claim because it will only be satisfied after the payment of the obligation of the business to its after the payment of the obligation of the business to its creditors.creditors.

Owner’s Capital Owner’s Capital is the investment of the owner of the business.is the investment of the owner of the business.Owner’s Drawing Owner’s Drawing is the withdrawals of the owner on the capital is the withdrawals of the owner on the capital

and earnings of the business.and earnings of the business.Income Summary Income Summary is an account used in the closing process for is an account used in the closing process for

transferring the revenue and expense account balances to the transferring the revenue and expense account balances to the owner’s capital account at the end of the period.owner’s capital account at the end of the period.

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STEP 6STEP 6PREPARATION OF FINANCIAL STATEMENTSPREPARATION OF FINANCIAL STATEMENTS

Classifications of RevenueClassifications of RevenueProfessional Fees Professional Fees is the income or remuneration is the income or remuneration

received by professionals from rendering services to received by professionals from rendering services to clients. The fee could be described depending upon clients. The fee could be described depending upon the line of professional like legal fee for lawyers, the line of professional like legal fee for lawyers, dental fee for dentist, medical fee for doctors, and dental fee for dentist, medical fee for doctors, and retainer’s fee or audit fee for CPAs.retainer’s fee or audit fee for CPAs.

Other Revenues Other Revenues are revenues derived from sources are revenues derived from sources other than the principal line of service rendered like other than the principal line of service rendered like interest, rent, and commission.interest, rent, and commission.

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STEP 6STEP 6PREPARATION OF FINANCIAL STATEMENTSPREPARATION OF FINANCIAL STATEMENTS

Classification of Operating ExpensesClassification of Operating ExpensesOperating Expense Operating Expense is the cost of the services that are used or consumed in is the cost of the services that are used or consumed in

the operation of the business or practice of profession like salaries and the operation of the business or practice of profession like salaries and wages, rent, supplies, utilities, taxes, insurance and others.wages, rent, supplies, utilities, taxes, insurance and others.

Salaries and Wages Expenses Salaries and Wages Expenses are payments made to employees for the are payments made to employees for the services they rendered to the business.services they rendered to the business.

Rent Expenses Rent Expenses are expenses incurred for the use of rented facility like are expenses incurred for the use of rented facility like building.building.

Supplies Expense Supplies Expense is the cost office stationery, envelopes, pencils, pens and is the cost office stationery, envelopes, pencils, pens and other necessary supplies used in the business.other necessary supplies used in the business.

Utilities Expense Utilities Expense refers to the various expenses incurred by the business on refers to the various expenses incurred by the business on water, electricity, telephone, and other means of communication to water, electricity, telephone, and other means of communication to customers or clients.customers or clients.

Insurance Expense Insurance Expense is payment made for the premium of an insurance policy.is payment made for the premium of an insurance policy.Advertising Expense Advertising Expense is payment made to the advertisement of the business or is payment made to the advertisement of the business or

practice of the profession.practice of the profession.

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CHAPTER 4CHAPTER 4

Completing the Accounting CycleCompleting the Accounting CycleThe Closing ProcessThe Closing Process

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COMPLETING THE ACCOUNTING CYCLECOMPLETING THE ACCOUNTING CYCLETHE CLOSING PROCESSTHE CLOSING PROCESS

Nature of closing processNature of closing processAt the end of the accounting period, the revenue and At the end of the accounting period, the revenue and

expense account balances are reported in the income expense account balances are reported in the income statement. The expenses are deducted from revenues to statement. The expenses are deducted from revenues to determine the net income or net loss during the period. Since determine the net income or net loss during the period. Since revenues and expenses are reported for each period, the revenues and expenses are reported for each period, the balances of these accounts should be zero at the beginning of balances of these accounts should be zero at the beginning of the next period. The zero balances allow the next period’s the next period. The zero balances allow the next period’s revenues and expenses to be recorded separately from the revenues and expenses to be recorded separately from the preceding period. Because the balances of revenue and preceding period. Because the balances of revenue and expense accounts are not carried forward, they are generally expense accounts are not carried forward, they are generally called called temporary accounts temporary accounts or or nominal accounts.nominal accounts. The The balances of the accounts reported in the balance sheet are balances of the accounts reported in the balance sheet are carried forward from year to year. Because of their permanent carried forward from year to year. Because of their permanent nature, balance sheet accounts are called nature, balance sheet accounts are called real accounts.real accounts.

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COMPLETING THE ACCOUNTING CYCLECOMPLETING THE ACCOUNTING CYCLETHE CLOSING PROCESSTHE CLOSING PROCESS

How are the end-of-period of balances of temporary accounts How are the end-of-period of balances of temporary accounts converted to zero? To begin, the revenue and expense account balances are converted to zero? To begin, the revenue and expense account balances are transferred to an account called transferred to an account called Income SummaryIncome Summary. The balance of Income . The balance of Income Summary is then transferred owner’ capital account and the balance of the Summary is then transferred owner’ capital account and the balance of the owner’s drawing account is transferred to owner’s capital accounts.owner’s drawing account is transferred to owner’s capital accounts.

At the end of an accounting period, the balance of the owner’s At the end of an accounting period, the balance of the owner’s drawing account is reported on the statement of owner’s capital (statement drawing account is reported on the statement of owner’s capital (statement of owner’s equity). The owner’s withdrawal are deducted from the net of owner’s equity). The owner’s withdrawal are deducted from the net income or added to the net loss for the period to determine the net increase 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 or decrease in owner’ equity. Since withdrawals are reported for each period, the balance of the owner’s drawing accounts should be zero at the period, the balance of the owner’s drawing accounts should be zero at the beginning of the next period. beginning of the next period. Thus the owner’s drawing account is also a Thus the owner’s drawing account is also a temporary accounttemporary account. . Its balance is transferred to the owner’s capita; Its balance is transferred to the owner’s capita; account at the end of the period.account at the end of the period.

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STEP 7STEP 7JOURNALIZING AND POSTING CLOSING JOURNALIZING AND POSTING CLOSING

ENTRIESENTRIESRevenue, expense, and drawing account balances are Revenue, expense, and drawing account balances are

transferred to the owner’s equity account by a series of entries called transferred to the owner’s equity account by a series of entries called closing entriesclosing entries. The transfer process is called . The transfer process is called closing processclosing process. Four . Four entries are required at the end of the period. For sole proprietorship, entries are required at the end of the period. For sole proprietorship, these entries are as follows:these entries are as follows:

Debiting all nominal accounts with credit balances (revenues) and Debiting all nominal accounts with credit balances (revenues) and crediting the total to Income Summary account.crediting the total to Income Summary account.

Crediting all nominal accounts with debit balances (expenses), and Crediting all nominal accounts with debit balances (expenses), and debiting the total to Income Summary.debiting the total to Income Summary.

the Net Income is transferred to the Capital account by debiting the the Net Income is transferred to the Capital account by debiting the Income Summary for the amount of its balance and the Capital account Income Summary for the amount of its balance and the Capital account is credited for the same amount. (The accounts debited and credited are is credited for the same amount. (The accounts debited and credited are reversed if there is a net loss).reversed if there is a net loss).

the drawing account is transferred to capital account by debiting the the drawing account is transferred to capital account by debiting the capital account and crediting the drawing account for the same amount.capital account and crediting the drawing account for the same amount.

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STEP 7STEP 7JOURNALIZING AND POSTING CLOSING JOURNALIZING AND POSTING CLOSING

ENTRIESENTRIESThe account titles and balances in preparing the closing The account titles and balances in preparing the closing

entries may be obtained from either the work sheet, the entries may be obtained from either the work sheet, the income statement, the statement of owner’s equity, and or income statement, the statement of owner’s equity, and or ledger. If a work sheet is used, the date for the first two entries ledger. If a work sheet is used, the date for the first two entries appeared in the Income Statement columns. The amount for appeared in the Income Statement columns. The amount for the third entry is the net income or net loss appearing at the the third entry is the net income or net loss appearing at the bottom of the work sheet. The drawing account balance bottom of the work sheet. The drawing account balance appears in the Balance Sheet debit column of the work sheet.appears in the Balance Sheet debit column of the work sheet.

The closing entries for Sagum Laboratory (See The closing entries for Sagum Laboratory (See

illustration on Chapter 3) is shown below:illustration on Chapter 3) is shown below:

Table 4.1

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Table 4.1Table 4.1

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STEP 7STEP 7JOURNALIZING AND POSTING CLOSING JOURNALIZING AND POSTING CLOSING

ENTRIESENTRIESAfter the closing entries have been posted to the ledger, the balance in the 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 owner’s capital account will agree with the amount reported on the statement of owner’s equity and the balance sheet. In addition, the revenue, expense, and drawing equity and the balance sheet. In addition, the revenue, expense, and drawing accounts will have zero balances.accounts will have zero balances.

It should be noted that Income Summary is used only at the end of the 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. 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 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 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 have no balance. Because income summary has the effect of clearing the revenue and expense accounts of their balances, it is sometimes called a and expense accounts of their balances, it is sometimes called a clearing account. clearing account. Other titles used for this account include Revenue and Expense Summary, Profit Other titles used for this account include Revenue and Expense Summary, Profit and Loss Summary, and Income and Expense Summary.and Loss Summary, and Income and Expense Summary.

Balancing and rulingBalancing and rulingAfter the closing process, a line should be inserted in both balance 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 columns opposite the final entry. If the books will still be used in the next accounting period, the next period’s transaction for the revenue, expense, and accounting period, the next period’s transaction for the revenue, expense, and drawing will be posted directly below the closing entry.drawing will be posted directly below the closing entry.

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STEP 8STEP 8POST-CLOSING TRIAL BALANCEPOST-CLOSING TRIAL BALANCE

The last accounting procedure for a period is to The last accounting procedure for a period is to prepare a trial balance after the closing entries have prepare a trial balance after the closing entries have been posted. The purpose of post-closing (after been posted. The purpose of post-closing (after closing) trial balance is to make sure that the ledger is closing) trial balance is to make sure that the ledger is in balance at the beginning of the next period. The in balance at the beginning of the next period. The accounts and amounts should agree exactly with the accounts and amounts should agree exactly with the accounts and amounts listed on the balance sheet at accounts and amounts listed on the balance sheet at the end of the period.the end of the period.

The post-closing trial balance of Sagum The post-closing trial balance of Sagum Laboratory is shown in Exhibit 4-1 below.Laboratory is shown in Exhibit 4-1 below.

Table 4.2

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Table 4.2Table 4.2

Page 227: Accounting

STEP 8STEP 8POST-CLOSING TRIAL BALANCEPOST-CLOSING TRIAL BALANCE

Instead of preparing a formal post-Instead of preparing a formal post-closing balance, it is possible to list the closing balance, it is possible to list the accounts directly from the ledger, using a accounts directly from the ledger, using a printing calculator or a computer. The printing calculator or a computer. The calculator tape or computer printout, becomes calculator tape or computer printout, becomes the post-closing trial balance. Without such the post-closing trial balance. Without such tape or printout, there are no efficient means of tape or printout, there are no efficient means of determining the cause of inequality.determining the cause of inequality.

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

Some of the adjusting entries recorded at the end of the Some of the adjusting entries recorded at the end of the accounting period have an important effect on otherwise routine accounting period have an important effect on otherwise routine transactions that occur in the following period. A typical example is 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 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 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 wages in the following period will include the accrual. In the absence of some special provision, Wages Payable must be debited for the amount 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 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, portion of the payroll that represents expense for the later period. However, an optional entry an optional entry --- the reversing entry ---- may be used to simplify the --- the reversing entry ---- may be used to simplify the analysis and recording of this first payroll entry in a period. As the tem analysis and recording of this first payroll entry in a period. As the tem implies, a implies, a reversing entryreversing entry is the exact reverse of the adjusting entry to is the exact reverse of the adjusting entry to which it relates. The amounts and accounts are the same as the adjusting which it relates. The amounts and accounts are the same as the adjusting entry; the debits and credits are reversed. entry; the debits and credits are reversed. Reversing entries are generally Reversing entries are generally made on the first day of the next accounting period.made on the first day of the next accounting period.

Adjustments that can be reversed are enumerated as follows.Adjustments that can be reversed are enumerated as follows. Accrued expensesAccrued expenses Accrued revenuesAccrued revenues Prepaid expenses, if expenses method is usedPrepaid expenses, if expenses method is used Unearned revenues, if the revenue method is usedUnearned revenues, if the revenue method is used

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

Reversing Entry For Accrued ExpensesReversing Entry For Accrued ExpensesAccrued Accrued expenses of the present period are usually pain in the expenses of the present period are usually pain in the

next period. If the adjusting entries for accrued expenses are not reversed, 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 the accrued expenses paid in the next period necessarily be debited to the accrued liability account. However, if there are reversing entries for these accrued liability account. However, if there are reversing entries for these items, all expenses pain in the future, whether accrued or not, can be items, all expenses pain in the future, whether accrued or not, can be consistently debited to the expense accounts.consistently debited to the expense accounts.

Illustration: Illustration: analysis of the adjusting entry, closing entry and reversing analysis of the adjusting entry, closing entry and reversing entry for accrued Expense. entry for accrued Expense. On December 31, the end of the accounting On December 31, the end of the accounting period, the business have issued a nine-percent, six-month note for 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). P20,000 dated accrued interest on this note is P300 (P20,000 x 9% x 2/12). The The adjusting entry adjusting entry for this is:for this is:

Table 4.3

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Table 4.3Table 4.3

Date DescriptionPost Ref. Debit Credit

19xx          

Dec.31 Interest Expense 515 300  

    Interest Payable 202   300

    To record accrued

interest for the period.      

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

The The closing entryclosing entry for the Interest Expense for the Interest Expense account at December 31 is:account at December 31 is:Table 4.4

Date DescriptionPost Ref. Debit Credit

19xx          Dec. 31 Income Summary 303 300  

    Interest Expense 515   300

    To close interest expense      

Page 232: Accounting

On January 1, the Reversing Entry for the accrued interest (expense) is:

Table 4.5

Date DescriptionPost Ref. Debit Credit

19xx          Dec. 31 Interest Payable 202 300  

    Interest Expense 515   300

 

To reverse the adjusting entry for accrued interest on Notes Payable      

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

After this entry, all interest paid, whether accrued or After this entry, all interest paid, whether accrued or not could be debited to Interest Expense. The credit to Interest not could be debited to Interest Expense. The credit to Interest Expense in the reversing entry will serve to adjust the account Expense in the reversing entry will serve to adjust the account balance to the amount of interest incurred in the current balance to the amount of interest incurred in the current period. The debit to Interest Payable in the reversing entry period. The debit to Interest Payable in the reversing entry closes the credit to the same account in the adjusting entry. closes the credit to the same account in the adjusting entry. Thus, the accounts Interest Expense and Interest payable after Thus, the accounts Interest Expense and Interest payable after the adjusting entry and reversing entries have been posted are the adjusting entry and reversing entries have been posted are as follows:as follows:

Page 234: Accounting

Table 4.6

   INTEREST PAYABLE  

account no. 202

Date Items Ref. Debit Date Items Ref. Credit19xx       19xx    Jan. 1 Revers

ingGJ

300Dec. 31

Adjusting

GJ300

                                             

Page 235: Accounting

Table 4.7

INTEREST EXPENSEDate Items Ref. Debit Date Items Ref. Credit

19xx     19xx      

Jan. 1Adjusting GJ 300

Dec. 31

Closing GJ 300

        Jan. 1 Reversing GJ 300

                              

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

At April 30, the date of maturity of the note, At April 30, the date of maturity of the note, the total interest to be paid in the note is P900 the total interest to be paid in the note is P900 (P20,000 x 9% x 6/12). Upon payment, an entry (P20,000 x 9% x 6/12). Upon payment, an entry debiting Interest Expense will be made and if the debiting Interest Expense will be made and if the entry is posted to the Interest Expense account, the entry is posted to the Interest Expense account, the account will appear as follows.account will appear as follows.Table 4.8

This shows that while the interest pain in April This shows that while the interest pain in April amounted to P900, only the balance of the account of amounted to P900, only the balance of the account of P600 (P900 – P300) is the expense incurred and paid P600 (P900 – P300) is the expense incurred and paid in April, and the P300 is payment of accrued interest.in April, and the P300 is payment of accrued interest.

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Table 4.8Table 4.8

INTEREST EXPENSEDate Items Ref. Debit Date Items Ref. Credit19xx     19xx    Dec. 31

Adjusting   300

Dec. 31

Closing   300

        Jan. 1      19xy     19xy    

Apr.30

Payment of Interest   900 Jan. 1

Reversing   300

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

Reversing Entry for Accrued RevenueReversing Entry for Accrued Revenue

Accrued revenue for the present period is Accrued revenue for the present period is usually collected in the next accounting period. If no usually collected in the next accounting period. If no reversing entry is made, this accrued revenue when reversing entry is made, this accrued revenue when received in the future must necessarily be credited to received in the future must necessarily be credited to the accrued revenue account. However, if there is a the accrued revenue account. However, if there is a reversing entry, all revenue in the future, whether reversing entry, all revenue in the future, whether accrued or not, can be uniformly credited to the accrued or not, can be uniformly credited to the revenue account.revenue account.

Page 239: Accounting

STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

Illustration: Illustration: analysis of the adjusting entry, closing entry and analysis of the adjusting entry, closing entry and reversing entry for accrued interest revenue. reversing entry for accrued interest revenue. Using the same Using the same illustrative example as above, let us now analyze it on the illustrative example as above, let us now analyze it on the point of view of the recipient of the note. On December 31, the point of view of the recipient of the note. On December 31, the end of the accounting period, the business received a none-end of the accounting period, the business received a none-percent, six-month note for P20,000 dated November 1 percent, six-month note for P20,000 dated November 1 (current year0 collectible April 30 (next year). At December (current year0 collectible April 30 (next year). At December 31, the accrued interest on this note is P300 (P20,000 x 9% x 31, the accrued interest on this note is P300 (P20,000 x 9% x 2/12).2/12).

The The adjusting entryadjusting entry for this is: for this is:

Table 4.9

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Table 4.9Table 4.9

Date DescriptionPost Ref. Debit Credit

19xx          Dec. 31 Interest Receivable 107 300      Interest Revenue 405   300

   

To record accrued interes revenue for the period      

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

The The closing entryclosing entry for the Interest for the Interest Income at December 31 is:Income at December 31 is:

Table 4.10

On January 1, the On January 1, the reversing entryreversing entry for for the accrued interest revenue is:the accrued interest revenue is:

Table 4.11

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Table 4.10Table 4.10

Date DescriptionPost Ref. Debit Credit

19xx          Dec. 31 Interest Revenue 405 300      Income Summary 303   300

    To close interest revenue      

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Table 4.11Table 4.11

Date DescriptionPost Ref. Debit Credit

19xx          Jan. 1 Interest Income 405 300      Interest Recevable 107   300

   

To reverse the adjusting entry for accrued interest on Notes Receivable      

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

After this entry, all interest collected, whether accrued After this entry, all interest collected, whether accrued or not could be credited to Interest Revenue. The debit to or not could be credited to Interest Revenue. The debit to Interest Revenue in the reversing entry will serve to adjust the Interest Revenue in the reversing entry will serve to adjust the account balance to the amount of interest earned in the current account balance to the amount of interest earned in the current period. The credit to Interest Receivable in the reversing entry period. The credit to Interest Receivable in the reversing entry closes the debit to the same account in the adjusting entry. closes the debit to the same account in the adjusting entry. Thus, the accounts Interest Revenue and Interest Receivable Thus, the accounts Interest Revenue and Interest Receivable after the adjusting entry and reversing entries have been after the adjusting entry and reversing entries have been posted are as follows:posted are as follows:

Table 4.12Table 4.13

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Table 4.12Table 4.12

INTEREST RECEIVABLE

Date ItemsRef

. Debit Date Items Ref.Credi

t

19xx     19xx  

Dec 31 Adjusting GJ 300 Jan 1 Reversing GJ 300

               

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Table 4.13Table 4.13

INTEREST REVENUE

Date Items Ref. Debit Date Items Ref.Credit

19xx     19xx  

Dec 31 Closing GJ 300Dec

1Adjust

ing GJ 300

Jan 1 Reversing GJ 300        

Page 247: Accounting

STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

At April 30, the date of maturity of the note, the total 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% interest to be collected on the note in P900 (20,000 x 9% 6/12). Upon collection, a P900 entry to credit Interest Revenue 6/12). Upon collection, a P900 entry to credit Interest Revenue account, the account will appear as follows:account, the account will appear as follows:

Table 4. 14

This shows that while the interest collected in April This shows that while the interest collected in April amounted to P900, only the balance of the account of P600 amounted to P900, only the balance of the account of P600 (P900 – P300) is the revenue earned and collected in April, (P900 – P300) is the revenue earned and collected in April, and the P300 is collection of accrued interest.and the P300 is collection of accrued interest.

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Table 4. 14Table 4. 14

INTEREST REVENUE

Date Items Ref. Debit Date Items Ref.Credit

19xx     19xx  

Dec 31 Closing GJ 300Dec-03

Adjusting GJ 300

19xx1      19xx1      

Jan 1Reversing GJ 300

Apr 30

Collection of Interest GJ 900

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

Reversing Entry for Prepaid ExpensesReversing Entry for Prepaid ExpensesAsset Method Asset Method is when an expense paid in advance is debited is when an expense paid in advance is debited to and Asset Account, the adjusting entry to record the to and Asset Account, the adjusting entry to record the expense incurred during the current period need not be expense incurred during the current period need not be reversed because there will be no inconsistency of recording reversed because there will be no inconsistency of recording that will occur in the next period.that will occur in the next period.

Expense Method Expense Method is when an expense is paid in advance is is when an expense is paid in advance is debited to an Expense Account, the adjusting entry to record debited to an Expense Account, the adjusting entry to record the asset (prepaid) portion of the expense should be reversed the asset (prepaid) portion of the expense should be reversed on the beginning of the next period, to ensure consistency of on the beginning of the next period, to ensure consistency of the method of recording being used and for proper recognition the method of recording being used and for proper recognition of the expense on the proper accounting period.of the expense on the proper accounting period.

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

Illustration. Analysis of the original entry, adjusting entry, Illustration. Analysis of the original entry, adjusting entry, closing entry and reversing entry on Prepaid Expenses, closing entry and reversing entry on Prepaid Expenses, when Expense Method is used. when Expense Method is used. On October 1, current year, On October 1, current year, the business paid P50,000 to Ace Realty, representing 5-month the business paid P50,000 to Ace Realty, representing 5-month rent covering the period October (current year) to February rent covering the period October (current year) to February (next year). At December 31, only P30,000 for three months (next year). At December 31, only P30,000 for three months (October to December) rental have been used up. The (October to December) rental have been used up. The remainder is applicable to the months of January and February remainder is applicable to the months of January and February next year.next year.

The The original entry original entry to record transaction, upon to record transaction, upon payment is:payment is:

Page 251: Accounting

Table 4.15Table 4.15

Date DescriptionPost Ref. Debit Credit

19xx          

Dec 1 Expense 508 50,000  

    Cash 101   50,000

    To record payment of rent in advance      

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

The The adjusting entry adjusting entry for the Prepaid Rent at for the Prepaid Rent at December 31 is:December 31 is:

Table 4.16

The The closing entry closing entry for the Rent Expense at for the Rent Expense at December 31 is as follows:December 31 is as follows:Table 4.17

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Table 4.16Table 4.16

Date DescriptionPost Ref. Debit Credit

19xx          Dec 31 Prepaid Rent 110 20,000      Rent Expense 508   20,000    To record Prepaid REnt      

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Table 4.17Table 4.17

Date DescriptionPost Ref. Debit Credit

19xx          Jan. 1 Rent Expense 508 20,000      Prepaid Rent 110   20,000

   

To reverse the adjusting entry for Prepaid Rent.      

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

After these entries are posted, the Prepaid Rent After these entries are posted, the Prepaid Rent account and the Rent Expense account will be account and the Rent Expense account will be as follows:as follows:Table 4.18Table 4.19

It should be noted that the Prepaid Rent has It should be noted that the Prepaid Rent has become a closed account and the Rent Expense become a closed account and the Rent Expense account has a debit balance of P20,000. Thus, in account has a debit balance of P20,000. Thus, in the next period, the adjustment under the expense the next period, the adjustment under the expense method can be used again.method can be used again.

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Table 4.18Table 4.18

PREPAID RENT

Date Items Ref. Debit Date Items Ref. Credi

t19xx Dec.31

Adjusting GJ

20,000

19xx Jan. 1

Reversing GJ

20,000

                              

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Table 4.19Table 4.19

Date Items Ref. Debit Date Items Ref. Credit19xx Oct.31

Payment of Rent GJ 50,000

19xx Dec. 1

Adjusting GJ 20,000

19xx1       19xx1      

Jan 1Reversin

g GJ 20,000 31Closin

g GJ 30,000

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

Reversing Entry for Unearned RevenuesReversing Entry for Unearned RevenuesLiability Method Liability Method is when a revenues received in advance is is when a revenues received in advance is credited to a Liability Account, the adjusting entry to record credited to a Liability Account, the adjusting entry to record the revenue earned during the current period need not be the revenue earned during the current period need not be reversed because there will be no inconsistency of recording reversed because there will be no inconsistency of recording that will occur in the next period.that will occur in the next period.Revenue Method Revenue Method is when a revenue received in advance is is when a revenue received in advance is credited to a Revenue Account, the adjusting entry to record credited to a Revenue Account, the adjusting entry to record the liability (Unearned) portion of the revenue should be the liability (Unearned) portion of the revenue should be reversed on the beginning of the next period, to ensure reversed on the beginning of the next period, to ensure consistency of the method of recording being used and for consistency of the method of recording being used and for proper recognition of the revenue on the proper accounting proper recognition of the revenue on the proper accounting period.period.

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

Illustration. Analysis of the original entry, adjusting entry, Illustration. Analysis of the original entry, adjusting entry, closing entry and reversing entry on Unearned Revenue, closing entry and reversing entry on Unearned Revenue, when Income Method is used. when Income Method is used. On September 1, current year, On September 1, current year, the business received P48,000 from a tenant, representing 6-the business received P48,000 from a tenant, representing 6-mont rent covering the period September (current year) to mont rent covering the period September (current year) to February (next year). At December 31, only P32,000 for four February (next year). At December 31, only P32,000 for four months (September to December) rental have been earned, the months (September to December) rental have been earned, the remainder of P16,000 applicable to the months of January and remainder of P16,000 applicable to the months of January and February next year is still unearned.February next year is still unearned.

The The original entry original entry to record the transaction, upon to record the transaction, upon collection is:collection is:

Table 4.20

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Table 4.20Table 4.20

Date DescriptionPost Ref. Debit Credit

19xx          

Sept. 1 Cash 101 48,000  

    Rent Revenue 404   48,000

    To record collection of rent in advance      

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

The The adjusting entry adjusting entry for the Unearned Rent at for the Unearned Rent at December 31 is:December 31 is:

Table 4.21

The The closing entry for the closing entry for the Rent Revenue at Rent Revenue at December 31is:December 31is:

Table 4.22

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Table 4.21Table 4.21

Date DescriptionPost Ref. Debit Credit

19xx          Dec. 31 Rent Revenue 404 16,000      Unearned Rent 207   16,000

    To record Unearned Rent      

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Table 4.22Table 4.22

Date DescriptionPost Ref. Debit Credit

19xx          Dec. 31 Rent Income 404 32,000      Income Summary 303   32,000

    To close Rent Revenue      

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

On January 1, the On January 1, the reversing entry reversing entry for the for the Unearned Rent is:Unearned Rent is:

Table 4.23

After these entries are posted, the Unearned After these entries are posted, the Unearned Rent account and the Rent Revenue account Rent account and the Rent Revenue account will be as follows:will be as follows:

Table 4.24

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Table 4.23Table 4.23

Date DescriptionPost Ref. Debit Credit

19xx          Jan. 1 Unearned Rent 207 16,000      Rent Revenue 404   16,000

   

To reverse the adjusting entry for Unearned Rent.      

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Table 4.24Table 4.24

UNEARNED RENT

Date Items Ref. Debit Date Items Ref. Credi

t

19xx Jan 1

Reversing GJ

16,000

19xx Dec. 31

Adjusting GJ

16,000

                              

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STEP 9STEP 9REVERSING ENTRIESREVERSING ENTRIES

It should be noted that the Unearned Rent has It should be noted that the Unearned Rent has become a closed account and the Rent Revenue become a closed account and the Rent Revenue account has a credit balance of P16,000. Thus, in the account has a credit balance of P16,000. Thus, in the next period, the adjustment under the revenue method next period, the adjustment under the revenue method can be used again.can be used again.

The following are the main purposes of The following are the main purposes of reversing entries that should be remembered: (1) reversing entries that should be remembered: (1) consistency in the use of method, and (2) recording of consistency in the use of method, and (2) recording of revenues and expenses in the proper accounting revenues and expenses in the proper accounting period.period.

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Thank you!Thank you!

PRESENTED BY:

Julie Anne P. JamoraNancy Bunag

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AcknowledgmentAcknowledgment

Special thanks to the writers of the book Special thanks to the writers of the book “Accounting Fundamental”, Bayani D. “Accounting Fundamental”, Bayani D. Edlagan and Ma. Cecilia S. Mercado, for Edlagan and Ma. Cecilia S. Mercado, for without them this presentation would not be without them this presentation would not be possible.possible.

Page 270: Accounting

Polytechnic University of the PhilippinesPolytechnic University of the PhilippinesTaguig CampusTaguig Campus

As partial requirement in the subject As partial requirement in the subject OS 341“Web Page Development ”, this OS 341“Web Page Development ”, this project is submitted by Julie Anne Jamora project is submitted by Julie Anne Jamora and Nancy Buñag to Prof. Angela David.and Nancy Buñag to Prof. Angela David.