CHAPTER 3

THE ACCOUNTING PROCESS

For SERVICE, MERCHANDISING AND MANUFACTURING BUSINESS

Learning Objective:

At the end of the chapter, the student shall be able to:

a. Identify and differentiate accountable and non-accountable events in business.

b. Name and explain the accounting cycle
c. Apply the concepts of debit and credit.
d. Prepare journal entries
e. Transfer data from journals to ledgers

ECONOMIC BUSINESS TRANSACTIONS

Economic event or condition that directly changes an entity’s financial condition or directly
affects its results of operations. It will affect the accounting elements but the equality of the
accounting equation will be maintained.
QUIZ 1
Show the effect of each transaction. Write the appropriate amount of increase( +), decrease(-) , or no effect (NE) to each
element of financial statements. Identify in the "Remarks" heading if the transaction is an Accountable Event (AE) or non-
accountable event (NAE).
ASSETS LIABILITIES EQUITY Remarks
Total net
Effect on
Income Expense Equity
Example:
Mary paid electicity bill P 12,000 for the month of
February -12,000 NE 12,000 -12,000 AE
On July 1 of the current year, Ben Ty started auto
repair and car wash business.
1. He invested P 60,000 in cash and repair
equipment costing P25,000.
2. Purchased for cash shop supplies costing P
5,000.
3. Brite brought repair equipment amounting to P
10,000 from Alson Enterprises on account.
4. Performed car repair work for the first two
weeks of July. Billed and received P17,000
5. Ben Ty made a partial payment of P 5,000 to
Alson.
6. Performed car repair work for customer #233 -
P 2,000. The customer did not pay but agreed to
pay within 30 days
7. Rental for the month of July was paid, P 6,000.
8. Collection received from customer #233.
9. Paid wages of assistant helper for the month of
July,Ben
10. P 4,000.00
Ty withdrew P 10,000 for his personal
use.
11. Ben hired an auto mechanical staff with daily
rate of P 350
12. Ben sign a contract of one-month radio
advertising for P30,000.

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THE ACCOUNT
An Account – is the basic summary device of accounting (accounting device) used to classify
and store information about increases and decreases in a particular item.

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The simplest form of account is known as “T account”.
Account Title

Left side Right Side

or Debit or Credit
Side Side

THE ACCOUNTING EQUATION

ASSETS = LIABILITIES + EQUITY

P 100,000 = P 20,000 + P 80,000

 Equality of accounting equation should be maintained for every transaction that is

recorded

ACCOUNTING EQUATION EXPANDED

Assets = Liabilities + Owner’s Equity

Cash + Accounts Accounts Owner’s Capital

Receivable + Payable + Loan – Owner’s
Supplies + Repair Payable + Drawing +
equipment Salaries Payable Revenues –
Expenses

1. The two sides of the equation should always be balanced.

2. The effect of every transaction is an increase or decrease in one or more of the
accounting equation elements.
3. The owner’s equity is increased by the amount invested by the owner ( owner’s initial
investment/additional investment ) and decrease by withdrawals. In addition, the owner’s
equity is increased by revenues and is decreased by expenses.
DOUBLE ENTRY SYSTEM
Every transactions affects at least two accounting accounts (items).
Double Entry Method of Bookkeeping- is a method of recording the business transactions in
terms of the dual effect on the accounting elements.
A debit side entry must have a corresponding credit side entry.
DIFFERENTIATING DEBIT AND CREDIT
Debit Credit
(Left side) (Right side)
ASSETS = LIABILITIES + EQUITY
P 100,000 = P 20,000 + P 80,000

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 (Normal balance) (Normal balance)

DEBIT – value received or paid for by the business

CREDIT – values given up or parted with by the business
Example: Anna invested P 200,000 cash to begin her tailoring shop business.

ASSETS = LIABILITIES + EQUITY

P 200,000 = 0 + P 200, 000
Cash Anna, capital
P 200, 000 debit for increase P 200, 000 Credit for increase

Rules of Debit and Credit

ASSETS = LIABILITIES + EQUITY

Debit for Owner’s capital

Debit for Credit for Credit for
Increase decrease Decrease increase
Debit for Credit for
Decrease increase

Owner’s drawing

Debit for Credit for

increase Decrease

Income Statement Accounts

INCOME EXPENSES

Debit for Credit for Debit for Credit for

Decrease increase Increase decrease

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30
TYPE OF ACCOUNTS
Real account (also known as permanent accounts) are those accounts reported in the balance
sheet, which is the summary of the assets, liabilities, and owners’ equities of a business at a
specific point in time.
Real refers to the continuous, permanent nature of this type of account. Real accounts
are active from the first day of business to the last day
Nominal accounts (also known as temporary accounts) are those reported in the income
statement, which is the summary of the revenue and expenses of a business for a period of
time.
Nominal (revenue and expense) accounts are closed at the end of the year.

TYPES OF BUSINESS
According to operation

Service Merchandising Manufacturing

Engage in Buying and Engage in
performing an selling of goods processing products
expert work for or commodities or conversion of raw
the customer materials to finished
product

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Accounting Cycle

Analysis of transactions – the study on how each transaction affects assets,

Identifying and liabilities and owner's equity of a business.
analyzing
business
documents or Journalizing - the process of recording business transactions in the general journal
transactions or special journals
Journalizing
Posting - the process of transferring the balances from journals to general ledgers

Posting
Unadjusted trial balance- list of accounts with their balances before adjusting
entries are made.
Preparation of
unadjusted trial Adjusting Entries -journal entries made to adjust or to bring the account up to
balance date for an account at the end of accounting period
Adjusting
Entries Adjusted trial balance- list of accounts with their balances after adjusting entries
are made.
Preparation of
adjusted trial Financial Statements- the accounting outputs or know as financial reports that
balance give formal record of the financial activities of a business, person, or other entity.
Preparation of
Financial Closing entries - entries made at the end of an accounting period to zero out all
Statements temporary accounts

Closing Entries Post-closing Trial Balance- list of accounts with their balances after closing entries
are made. Only balance sheet accounts can be seen in the trial balance.

Preparation of
post-closing Reversing entries - made at the beginning of an accounting period to cancel out
trial balance adjusting journal entries made at the end of the previous accounting period

Reversing
Entries

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Illustration: Source Documents/ Business Documents

Source Documents- the basis upon which a

business transactions are recorded

Official Receipt – issued by the seller as an evidence that he received cash as payment for the
services rendered or leasing properties
Sales Invoice – issued by the seller as an evidence on sale of goods or items, whether on cash
or on account, in an ordinary course of business.
Collection receipt – issued by the seller as acknowledgment on receipt of cash as collection
received from customer.
Bank deposit slips – a form on which a person writes the itemize amount of checks or cash
being deposited into a bank account
Bank withdrawal slips- a form on which a person writes the date, account number and amount
of money to withdraw from a bank.
Bills payment slip- a bank document on which a person writes
Cash/Check Vouchers – form used to have a check / cash made to pay an individual or an
organization
Promissory note – a written documents signed by the maker ( person in debted), to pay a
specified sum of amount to another ( payee) in the certain future time.
Check/ Cheque– a document signed by the person issuing it ( drawer) that orders a bank
(drawee) to pay a specific amount of money to the person( payee) whom it is payable.

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CHART OF ACCOUNTS – is a list of all account titles and their account (code) numbers used
for journalizing business transactions.

SAMPLE CHART OF ACCOUNTS

A standard chart of accounts is a numbered list of the accounts that comprise a

company’s general ledger. Furthermore, the company chart of accounts is basically a
filing system for categorizing all of a company’s accounts as well as classifying
all transactions according to the accounts they affect.

STATEMENT OF FINANCIAL POSITION ACCOUNTS

100-Assets

101 Cash
102 Accounts receivable
103 Allowance for Doubtful Accounts
104 Notes receivable
105 Interest Receivable
106 Unused office supplies
107 Vat Input Tax
108 Prepaid Rent
109 Prepaid Insurance
121 Delivery Equipment
122 Accumulated Depreciation-Delivery Equipment
200-Liabilities
201 Accounts Payable
202 Notes Payable
203 Loan Payable
204 Interest Payable
205 Salaries Payable
206 Vat output tax
207 Vat payable

300-Owner's Equity
301 Del Mundo, Capital
302 Del Mundo, Drawing
303 Income Summary

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 CHART OF ACCOUNTS FOR A SERVICE BUSINESS

BELLE SALON
CHART OF ACCOUNTS
ACCT NO. ACCOUNT TITLES
100 ASSETS
110 Cash
120 Accounts receivable
130 Allowance for doubtful accounts
140 Office Supplies
150 Store Supplies
160 Office Furniture and Fixtures
161 Accumulated Depreciation-Office Furniture
170 Computer Equipment
171 Accumulated Depreciation-Computer Equipment
180 Store Equipment
181 Accumulated Depreciation-Store Equipment
190 Building
191 Accumulated Depreciation-Building

200 LIABILITIES
210 Accounts payable
220 Bank Loans payable

300 OWNER’S EQUITY

310 Belle, capital
320 Belle, drawing

400 REVENUE
410 Service revenue

500 EXPENSES
510 Advertising
520 Delivery expense
530 Traveling Expenses
540 Store Supplies Expense
550 Office Supplies Expense
560 Salaries & Wages
570 Utilities Expense
580 Repair & Maintenance

590 Interest Expense

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SAMPLE CHART OF ACCOUNTS (MERCHANDISING BUSINESS)

100-Assets

101 Cash
102 Accounts receivable
103 Allowance for Doubtful Accounts
104 Notes receivable
105 Interest Receivable
106 Merchandise Inventory
107 Supplies Inventory
108 Prepaid Rent
109 Prepaid Insurance
121 Office Equipment
122 Accumulated Depreciation- office equipment
123 Store Equipment
124 Accumulated Depreciation-Store Equipment
125 Delivery Equipment
126 Accumulated Depreciation-Delivery Equipment

200-Liabilities
201 Accounts Payable
202 Notes Payable
203 Loan Payable
204 Interest Payable
205 Salaries Payable
206 Vat output tax
207 Vat payable

300-Owner's Equity
301 Gina Lopez, Capital
302 Gina Lopez, Drawing
303 Income Summary

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 After all the business documents are sorted, filed and analyzed, business transactions
should be recorded in chronological order in the “book of original entries” called general
journal. This process is called journalizing. Here is an example of a typical journal.

GENERAL JOURNAL
Page __
Date Particulars P.R. Debit Credit

Each Journal entry consists of:

 Transaction Date
 Debit entry –written in the left margin
 Credit entry – indented from the left margin
 Explanation – written below the last account title credited with indent (used own
wording )
*Leave a blank line after an explanation to distinguish one journal entry from
another
*P.R. (Posting Reference) found in journal- refers to account numbers of
account used to record the debits and credits.

Sample Problem:
Belle who finished her TESDA training on Beauty Care and wanted to open her
business in Virac. The following transactions occurred during this month of February,
2019.

February 1- Belle invested a P 50,000 cash to open her business.

February 1- Belle purchased various hair treatment and hair color supplies from Hair
Essence, P10, 000, for her business.

February 12 – Purchased units of beauty salon equipment on account amounting to P

35,000 on account.

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 February 20- Services rendered to customers for wedding celebration amounted to P
30,000 on account
February 24 – Collected from customers the amount of P 15,000 as payment for the
service rendered on a wedding occasion.
February 28- Paid the electricity and water consumed for the month of February
amounting to P 3,512.

February 28- Paid wages for her beautician, P 4,000

GENERAL JOURNAL
BELLE SALON Page _1_
Date Particulars P.R. Debit Credit
2019
Feb 0 1 Cash 110 P 5 0 0 0 0
Belle, capital 310 P 5 0 0 0 0
To record initial investment

0 1 Store supplies 150 1 0 0 0 0

Cash 110 1 0 0 0 0
To record purchased of
supplies

1 2 Store Equipment 180 3 5 0 0 0

Accounts Payable 210 3 5 0 0 0
To record purchased on
account

2 0 Accounts receivable 120 3 0 0 0 0

Service Revenue 410 3 0 0 0 0
To record service rendered

2 4 Cash 110 1 5 0 0 0
Accounts Receivable 120 1 5 0 0 0
To record collection

2 8 Utilities expense 570 3 5 1 2

Cash 110 3 5 1 2
To record payment of
electricity and water bill

2 8 Salaries and wages 560 4 0 0 0

Cash 110 4 0 0 0
To record payment of wages

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 Once transaction are journalized, balances will be transferred to general ledger accounts
so that changes in individual assets, liabilities, revenues and expenses items will be
accumulated. For computerized accounting it is automatically transferred.
GENERAL LEDGER –known as “book of final entry”. A record book that sets all of the past
transactions of a company by accounts.
There are two possible forms of general ledger that can be used.
FORMS OF GENERAL LEDGER
Standard Form / Two-amount column form
GENERAL LEDGER
Account no. ________

Date Particulars P.R. Debit Date Particulars P.R. Credit

Running Balance Form / Three-amount column form

GENERAL LEDGER
Account no. ____________

Date Particulars P.R. Debit Credit Balance

*P.R. - Posting reference – tells the source (page no. of general journal) of the debit or credit
being entered in the account.
Using the previous problem, posting in general ledger using the two form are shown.

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 GENERAL LEDGER

CASH Account no. 110

Date Particulars P.R. Debit Date Particulars P.R. Credit
2019 2019
Feb 1 Initial Investment GJ-1 P 5 0 0 0 0 Feb 1 Purchased of suppliesGJ-1 P 1 0 0 0 0
24 Collection GJ-1 1 5 0 0 0 28 Utilities GJ-1 3 5 1 2
28 Wages GJ-1 4 0 0 0
P 6 5 0 0 0 P 1 7 5 1 2

Balance P 4 7 4 8 8

ACCOUNT RECEIVABLE Account No. 120

Date Particulars P.R. Debit Date Particulars P.R. Credit
2019 2019
Feb 20 Wedding Service GJ-1 P 3 0 0 0 0 Feb 24 Collection GJ-1 P 1 5 0 0 0

Balance P 1 5 0 0 0

STORE SUPPLIES Account No. 150

Date Particulars P.R. Debit Date Particulars P.R. Credit
2019 2019
Feb 1 Purchased GJ-1 P 1 0 0 0 0

STORE EQUIPMENT Account No. 180

Date Particulars P.R. Debit Date Particulars P.R. Credit
2019 2019
Feb 1 Purchased GJ-1 P 3 5 0 0 0

ACCOUNTS PAYABLE Account No. 210

Date Particulars P.R. Debit Date Particulars P.R. Credit
2019 2019
Feb 12 Store Equipment GJ-1 P 3 5 0 0 0

BELLE, CAPITAL Account No. 310

Date Particulars P.R. Debit Date Particulars P.R. Credit
2019 2019
Feb 1 Initial Investment GJ-1 P 5 0 0 0 0

SERVICE REVENUE Account No. 410

Date Particulars P.R. Debit Date Particulars P.R. Credit
2019 2019
Feb Feb 20 Wedding services GJ-1 P 3 0 0 0 0

UTILITIES EXPENSE Account No. 570

Date Particulars P.R. Debit Date Particulars P.R. Credit
2019 2019
Feb 28 Electricity & water GJ-1 P 3 5 1 2

SALARIES AND WAGES Account No. 560

Date Particulars P.R. Debit Date Particulars P.R. Credit
2019 2019
Feb 28 Payment GJ-1 P 4 0 0 0

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Running Balance Form / Three-amount column form
GENERAL LEDGER

CASH Account no. 110

Date Particulars P.R. Debit Credit Balance
2019
Feb 1 Initial Investment GJ-1 P 5 0 0 0 0 P 5 0 0 0 0
1 Purchased of suppliesGJ-1 P 1 0 0 0 0 4 0 0 0 0
24 Collection GJ-1 1 5 0 0 0 5 5 0 0 0
28 Utilities GJ-1 3 5 1 2 5 1 4 8 8
28 Wages GJ-1 4 0 0 0 P 4 7 4 8 8

GENERAL LEDGER

ACCOUNT RECEIVABLE Account No. 120

Date Particulars P.R. Debit Credit Balance
2019
Feb 20 Wedding Service GJ-1 P 3 0 0 0 0 P 3 0 0 0 0
Collection GJ-1 P 1 5 0 0 0 P 1 5 0 0 0

GENERAL LEDGER

STORE SUPPLIES Account No. 150

Date Particulars P.R. Debit Credit Balance
2019
Feb 1 Purchased GJ-1 P 1 0 0 0 0 P 1 0 0 0 0

GENERAL LEDGER
STORE SUPPLIES Account No. 150
Date Particulars P.R. Debit Credit Balance
2019
Feb 1 Purchased GJ-1 P 1 0 0 0 0 P 1 0 0 0 0

GENERAL LEDGER
STORE EQUIPMENT Account No. 180
Date Particulars P.R. Debit Credit Balance
2019
Feb 1 Purchased GJ-1 P 3 5 0 0 0 P 3 5 0 0 0

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 GENERAL LEDGER
ACCOUNTS PAYABLE Account No. 210
Date Particulars P.R. Debit Credit Balance
2019
Feb 12 Store Equipment P 3 5 0 0 0 P 3 5 0 0 0

GENERAL LEDGER
BELLE, CAPITAL Account No. 310
Date Particulars P.R. Debit Credit Balance
2019
Feb 1 Initial Investment P 5 0 0 0 0 P 5 0 0 0 0

GENERAL LEDGER
SERVICE REVENUE Account No. 410
Date Particulars P.R. Debit Credit Balance
2019
Feb 20 Wedding services P 3 0 0 0 0 P 3 0 0 0 0

GENERAL LEDGER
UTILITIES EXPENSE Account No. 570
Date Particulars P.R. Debit Credit Balance
2019
Feb 28 Electricity & water GJ-1 P 3 5 1 2 P 3 5 1 2

GENERAL LEDGER
SALARIES AND WAGES Account No. 560
Date Particulars P.R. Debit Credit Balance
2019
Feb 28 Payment GJ-1 P 4 0 0 0 P 4 0 0 0

We have finished posting Belle transactions for the month of February. Now, let’s create
the unadjusted trial balance for the month of February. As you can see, those ending balances
for each account are carried forward to unadjusted trial balance.

UNADJUSTED TRIAL BALANCE

- Is the listing of general ledger account balances at the end of a reporting period, can be
monthly, quarterly, and yearly, before any adjusting entries are made to the balances to
create financial statements.

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 BELLE SALON
Unadjusted Trial Balance
For the month of February 28,2019

Cash P 47, 488

Accounts receivable 15, 000
Store supplies 10,000
Store equipment 35,000
Accounts Payable P 35,000
Belle, capital 50,000
Service revenue 30,000
Utilities Expense 3,512
Salaries and wages 4,000
Total P 115,000 P 115,000

After the unadjusted trial balance have been prepared, the next step is to adjust the books.

Could it be possible that your trial balance will still be in balance even there’s a
mistake or error made in recording?

Find out by going to this link.

[Link]

Also there are times where your trial balance may not balance.

To help identify the reasons why a trial balance may not balance, visit this link.
[Link]
basics/unbalanced-trial-balance/
Discover how to figure out the reason for unbalanced trial balance.

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Why do we need to adjust a certain accounts?
At the end of the accounting period, some income and expenses may have not been recorded,
taken up or updated; hence, there is a need to update the accounts.
ADJUSTING THE BOOKS
TYPE OF ADJUSTING ENTRIES
 Accrued Income
 Accrued Expenses
 Prepaid Expenses
 Unearned Income/ unearned revenues
 Depreciation Expense
 Bad debts Expense/ Doubtful Accounts expense
-An adjusting entry will always involve a revenue or an expense account and an asset or liability
account.

Let’s recall first the two basis of accounting!!

Accrual versus Cash Basis Accounting
Under accrual basis accounting, revenues are recognized/recorded when earned
rather than when cash is received and expenses are recorded when incurred
rather than when cash payment is made.
On the other hand, Cash Basis accounting records income and expenses when
the transactions involved cash receipt and payment.
1. Accrued Income- income already earned but have not been recorded or collected.

Pro-forma entry for Adjustment:

Date Particulars P.R. Debit Credit

201x Asset ( Receivable) x x X
Mo. x x Income x x x
Illustration:

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 To record accrued
income

Mar 31- Anna rendered laundry services at the end of the month of March and billed it at P
1,000 but still unrecorded.

Date Particulars P.R. Debit Credit

2019
March 3 1 Accounts Receivable P 1 0 0 0
Service revenue P 1 0 0 0
To record accrued
income

Mar 1- Anna received a note from her client stating that the services amounted to P
10,000, with 5% monthly interest will be paid after 2-month. Prepare adjusting entry for
the 1st Quarter of the 2019.

Date Particulars P.R. Debit Credit

2019
March 3 1 Interest Receivable P 5 0 0
Interest Income P 5 0 0
To record accrued
interest income

2. Accrued Expenses – expenses already incurred but not yet recorded or paid.
Pro-forma entry for Adjustment:
Date Particulars P.R. Debit Credit
201x
Mo x x Expense P x x x
Liability/Payable P x x x
To record accrued
expenses

Illustration:
Mar 1- Anna issued a P 15,000, 2% monthly interest, 4-month note to a supplier of laundry
detergents. Prepare adjusting entry for the 1st Quarter of 2019.

Date Particulars P.R. Debit Credit

2019
March 3 1 Interest Expense P 3 0 0
Interest payable P 3 0 0
To record accrued
interest income

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Mar 31- Anna pay its two helper on a 15-30 basis. Daily wage rate is P350. Because of meeting
some deadlines, Anna decided to release the payroll next month. Prepare the adjusting entry
for the 1st Quarter, 2019.
P.R
Date Particulars . Debit Credit
2019
March 3 1 Salaries Expense P 7 0 0 0
Salaries Payable P 7 0 0 0
To record accrued
interest income

Computation: (P 350 x 10 days x 2 helper) = P 7,000

3. Prepaid Expenses – expense already paid, but not yet incurred.

There are two Methods of Recording Prepaid Expenses
 Asset Method/Real Account Method
 Expense Method
In Asset Method, the advance payment for an expense is recorded as follows:

Date Particulars P.R. Debit Credit

201x
Mo x x Asset P x x x
Cash P x x x
To record prepaid
expenses

Pro-forma entry for Adjustment under Asset Method:

Date Particulars P.R. Debit Credit

201x
Mo x x Expense P x x x
Asset P x x x
To record prepaid
expenses

Illustration:
On January 2, Anna paid a one-year insurance to AXA amounting to P 120,000.

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 Date Particulars P.R Debit Credit
2019
Jan 2 Prepaid Insurance P 1 2 0 0 0 0
Cash P 1 2 0 0 0 0
To record prepaid
expenses

*Prepaid insurance is an asset

Anna will prepare adjusting entry for the 1st Quarter Financial Report.
Date Particulars P.R Debit Credit
2019
Mar 3 1 Insurance Expense P 3 0 0 0 0
Prepaid insurance P 3 0 0 0 0
To record
adjustment for
prepaid insurance

*Computation ( P 120,000 /12) x 3 = P 30,000

In Expense method, the advance payment for an expense is recorded as follows:

Date Particulars P.R. Debit Credit

201x
Mo x x Expense P x x x
Cash P x x x
To record prepaid
expenses

 Expense- e.g. Insurance Expense, Rent expense, Office Supplies Expense

Pro-forma entry for Adjustment under Expense Method:

Date Particulars P.R. Debit Credit

201x
Mo x x Asset P x x x
Expense P x x x
To record prepaid
expenses

*Asset- e.g. Prepaid Insurance, Prepaid rent, Office Supplies

Illustration:
On January 2, Anna paid a one-year insurance to AXA amounting to P 120,000.

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 Date Particulars P.R Debit Credit
2019
Jan 2 Insurance Expense P 1 2 0 0 0 0
Cash P 1 2 0 0 0 0
To record prepaid
expenses

Anna will prepare adjusting entry for the 1st Quarter Financial Report.
Date Particulars P.R Debit Credit
2019
Mar 3 1 Prepaid Insurance P 9 0 0 0 0
Insurance Expense P 9 0 0 0 0
To record
adjustment for prepaid
insurance

*Computation ( P 120,000 /12) x 3 = P 30,000 insurance expired

* P120, 000 – P30,000 = P 90,000 unexpired insurance

4. Unearned Income/Unearned Revenues – cash has been collected but not yet earned
(advance payment made by customer for the purchase of goods or for the service to be availed)
There are 2 Methods of Recording Unearned Income

 Liability Method -
 Income Method

In Liability Method, the advance payment received from customers are recorded as follow:

Date Particulars P.R. Debit Credit

201x
Mo x x Cash P x x x
Unearned Income* P x x x
To record unearned
income

*Unearned income or unearned service income – is a liability account

Pro forma for Adjustment:

Date Particulars P.R. Debit Credit

201x
Mo x x Unearned income P x x x

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 Income* P x x x
To record unearned
income

* Income or Service Income – is an income account

Illustration:
21 Broadway Rental Building received on May 1, 2019 P 72,000 for a year’s rent of small
unused space for storage from Tri-Star Trading.

P.R
Date Particulars . Debit Credit
2019
May 1 Cash P 7 2 0 0 0
Unearned Rent
Income P 7 2 0 0 0
To record unearned
income

At the end of the year 2019 (Accounting year) unearned rent income needs adjustment.
P.R
Date Particulars . Debit Credit
2019
Dec 3 1 Unearned rent income P 4 8 0 0 0
Rent Income P 4 8 0 0 0
To record earned
income

In Income Method, the advance payment received from customers are recorded as follow:

Date Particulars P.R. Debit Credit

201x
Mo x x Cash P x x x
Income P x x x
To record unearned
income

Pro forma for Adjustment:

Date Particulars P.R. Debit Credit

201x

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 Mo x x Income P x x x
Unearned Income P x x x
To record unearned
income

Illustration:
21 Broadway Rental Building received on May 1, 2019 P 72,000 for a year’s rent of small
unused space for storage from Tri-Star Trading.

P.R
Date Particulars . Debit Credit
201
9
May 1 Cash P 7 2 0 0 0
Rent Income P 7 2 0 0 0
To record advance
rental payment from client

At the end of the year 2019 (Accounting year) unearned rent income needs adjustment.
P.R
Date Particulars . Debit Credit
2019
Dec 3 1 Rent income P 2 4 0 0 0
Unearned Rent
Income P 2 4 0 0 0
To record unearned
income

5. Depreciation Expense
There are fixed assets that loses its ability to provide useful services (decrease in usefulness)
and it is called depreciation.
Pro forma for Adjustment of Depreciation of Fixed Assets/PPE:
P.R
Date Particulars . Debit Credit
201x
Mo x x Depreciation Expense P x x x
Accumulated
Depreciation P x x x
To record depreciation
expense

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METHODS FOR DEPRECIATION
1. Straight-Line Depreciation Method
Depreciation Expense = (Cost – Salvage Value) / Useful Life

2. Double Declining Balance Method

Periodic Depreciation Expense = Beginning Book Value X Rate Of NOTE:
Depreciation
Salvage value*
The Rate Of Depreciation (Rate) Is Calculated As Follows: is ignored in the
Expense = (100% / Useful Life Of Asset) X 2 computation of
Expense = (100% / 8) X 2 = 25%
depreciation
3. Units Of Production Depreciation Method- depreciates assets based expense
on the total number of hours used or the total number of units to be
produced over its useful life.

Formula:
Depreciation Expense = (Number Of Units Produced / Life In Number Of Units) X
(Cost – Salvage Value)
Or

Step 1: Calculate Depreciation per Unit:

Depreciation per unit = (Cost – Salvage) / expected # units over lifetime
Step 2: Calculate Depreciation Expense:
Depreciation Expense = Number of units produced this period x Depreciation per
unit

4. Sum-Of-The-Years-Digits Depreciation Method

Depreciation Expense = (Remaining Life / Sum Of The Years Digits) X (Cost – Salvage
Value)

Depreciation base = Cost – Salvage Value

SYD = depreciable life * (depreciable life + 1) / 2

*Salvage value (or scrap value, residual value) is the amount of money the company expects to recover,
less disposal costs, on the date a plant asset is scrapped, sold, or traded in.

Illustration:

Go Ching Office purchased a computer equipment amounting to P 35,000 cash on April 30,
2019. It was estimated that the computer’s salvage value after its useful life of five years will be
worth
P 5,000. The adjusting entry at December 31, 2019 is:

Straight-line depreciation

51
 Date Particulars P.R. Debit Credit
2019
Depreciation Expense-
Dec 3 1 computer equipment P 4 0 0 0
Accumulated
Depreciation-
computer
equipment P 4 0 0 0
To record
depreciation
expense

Double Declining Balance Method

YEAR 1

Date Particulars P.R. Debit Credit

2019
Dec 3 1 Depreciation Expense P 9 3 3 3
Accumulated
Depreciation-
computer
equipment P 9 3 3 3
To record
depreciation
expense

YEAR 2
P.R
Date Particulars . Debit Credit
2019
Dec 3 1 Depreciation Expense P 1 0 2 6 7
Accumulated
Depreciation-
computer
equipment P 1 0 2 6 7
To record
depreciation
expense
YEAR 3

Date Particulars P.R. Debit Credit

52
2019
Dec 3 1 Depreciation Expense P 6 1 6 0
Accumulated
Depreciation-
computer
equipment P 6 1 6 0
To record
depreciation
expense

YEAR 4

Date Particulars P.R. Debit Credit

2019
Dec 3 1 Depreciation Expense P 3 6 9 6
Accumulated
Depreciation-
computer
equipment P 3 6 9 6
To record
depreciation
expense

YEAR 5

Date Particulars P.R. Debit Credit

2019
Dec 3 1 Depreciation Expense P 5 4 4
Accumulated
Depreciation-
computer
equipment P 5 4 4
To record
depreciation
expense

53
Production Depreciation Method- applied in manufacturing businesses

SanSan company has a machine with a cost of P 550,000 and a useful life that is expected to
end after producing 260,000 units of a component part. Further, the machine's salvage value at
that point is assumed to be P30, 000.

Depreciation per unit produced = (P 550,000- P 30,000)/260,000 units = P 2/unit

In the first quarter of the year 2019, the machine produced 10,000 units.

P.R
Date Particulars . Debit Credit
2019
Marc
h 3 1 Depreciation Expense P 2 0 0 0 0
Accumulated
Depreciation P 2 0 0 0 0
To record
depreciation
expense

Sum-Of-The-Years-Digits Depreciation Method

Ty Arnaldo Office purchased a computer equipment amounting to P 35,000 cash on April 30,
2019. It was estimated that the computer’s salvage value after its useful life of five years will be
worth
P 5,000. The adjusting entry at December 31, 2019

Computation:

2019 – Computer was used for 8 months

YEAR Depreciable Remaining SYD Fraction Used Depreciation

Amount life expense
(a) (b) ( c) (d) (e) ( a* d*b)
2019 P 30, 000 5 15 5/15 8/12 P
6,667.00
2020 P 30, 000 4.333* 15 4.333/15 12/12 8, 667.00
2021 P 30, 000 3.333* 15 3.333/15 12/12 6, 667.00
2022 P 30, 000 2.333* 15 2.333/15 12/12 4,667.00
2023 P 30, 000 1.333* 15 1.333/15 12/12 2, 667.00
2024 P 30, 000 0 15 0 4/12 665.00*

Year 2020 = 5 yrs. x 12 mos. = 60 mos. – 8 mos. = 52 mos. remaining life / 4.333 yrs.
Year 2021= 52 mos. -12 mos. = 40 mos. / 3.333 yrs.
Year 2022 = 40 mos. – 12 mos. = 28 mos. / 2.333 yrs.

54
Year 2023= 28 mos. – 12 mos. = 16 mos. / 1.333 yrs.
Year 2024= P 30,000 – (P 6,667+8,667+6,667+4,667+2,667)

Recorded in the General Journal of Ty Arnaldo’s Book

Date Particulars P.R. Debit Credit

2019
Dec 3 1 Depreciation Expense P 6 6 6 7
Accumulated
Depreciation-
computer
equipment P 6 6 6 7
To record
depreciation
expense

Date Particulars P.R. Debit Credit

2020
Dec 3 1 Depreciation Expense P 8 6 6 7
Accumulated
Depreciation-
computer
equipment P 8 6 6 7
To record
depreciation
expense

Date Particulars P.R. Debit Credit

2021
Dec 3 1 Depreciation Expense P 6 6 6 7
Accumulated
Depreciation-
computer
equipment P 6 6 6 7
To record
depreciation
expense

Date Particulars P.R. Debit Credit

2022
Dec 3 1 Depreciation Expense P 4 6 6 7
Accumulated
Depreciation- P 4 6 6 7

55
 computer
equipment
To record
depreciation
expense

Date Particulars P.R. Debit Credit

2023
Dec 3 1 Depreciation Expense P 2 6 6 7
Accumulated
Depreciation-
computer
equipment P 2 6 6 7
To record
depreciation
expense

Date Particulars P.R. Debit Credit

2023
Dec 3 1 Depreciation Expense P 6 6 5
Accumulated
Depreciation-
computer
equipment P 6 6 5
To record
depreciation
expense

Illustration:
To continue the sample problem of Belle Salon:
Belle Salon uses Asset Method for its prepaid expenses. Its equipment has an estimated useful
life of 5 years and salvage value of P 4,000. Equipment that are actually purchased before the
15th day of the month is considered as if purchased on the first day while those purchased after
the 15th day of the month is considered purchased on the next month. The management opted
to use straight line method. Prepare the adjustments for the monthly report on February, 2019.

Date Particulars P.R. Debit Credit

2023
Dec 3 1 Store supplies Expense P 7 0 0 0
Store supplies P 7 0 0 0
To record
expense

56
PREPARATION OF ADJUSTED TRIAL BALANCE

Date Particulars P.R. Debit Credit

202

3
Depreciation Expense-
Dec 3 1 store equipment P 5 6 8 3
Accumulated
Depreciation-
store equipment P 5 6 8 3
To record
depreciation
expense

Adjusted Trial Balance

For the month of February 28,2019

Cash P 47, 488

Accounts receivable 15, 000
Store supplies 3,000
Store equipment 35,000
Accumulated Depreciation- P 517
Store equipment
Accounts Payable 35,000
Belle, capital 50,000
Service revenue 30,000
Utilities Expense 3,512
Depreciation Expense 517
Store Supplies expense 7,000
Salaries and wages 4,000
Total P 115,517 P 115,517

PREPARATION OF FINANCIAL STATEMENTS

Income Statement -

COMPANY NAME
Income Statement
For the year ended December 31,201x

57
Service Revenue P xxx
Less: Cost of Services xxx
Gross Profit P xxx

Less: Operating expenses

Advertising Expenses xxx
Rent Expenses xxx
Salaries Expenses xxx
Office Supplies Expense xxx
Total P xxx
Net Income( Loss) P xxx

COMPANY NAME
Statement of Changes in Owner's Equity
For the year ended December 31,201x

Juan, beginning capital P xxx

Add: Net Income xxx
Sub-total xxx
Less: Juan, drawing xxx
Juan, ending capital P xxx

COMPANY NAME
Statement of Financial Position
December 31, 201x

ASSETS

Current Assets
Cash P xxx
Accounts receivable xxx
Office Supplies xxx
Total Current Assets P xxx
Noncurrent Assets
Transportation Equipment xxx
Computer Equipment xxx
Total NonCurrent Assets xxx
TOTAL ASSETS P xxx

58
 LIABILITIES AND OWNER'S EQUITY

Current Liabilities
Accounts Payable P xxx
Loan Payable, short-term xxx
Total current liabilities P xxx
Noncurrent Liabilities
Notes Payable, long-term xxx
Loan Payabel, long-term xxx
Total Noncurrent liabilities xxx
TOTAL LIABILITIES P xxx

Owner's Equity
xxx
TOTAL LIABILITIES AND EQUITY P xxx

BELLE SALON
Income Statement
For the month ended February 28,2019

Service Revenue P 30,000.00

Less: Operating expenses
Depreciation Expense P 517
Salaries and wages 4,000

Store supplies expense 7,000

Utilities Expense 3,512

Total P 15,029
Net Income( Loss) P 14,971.00

BELLE SALON
Statement of Changes in Owner's Equity
For the month ended February 28, 2019

Juan, beginning capital P 0

Initial investment 50,000
Add: Net Income 14,971
Sub-total 64,971

59
 Less: Juan, drawing 0
Juan, ending capital P 64,971

Statement of Financial Position

February 28, 2019

ASSETS
Current Assets
Cash P 47,488
Accounts receivable 15,000
Store Supplies 3,000
Total Current Assets P 65,488
Noncurrent Assets
Store equipment 35,000
Accumulated depreciation (517)

Total Noncurrent Assets 34,483

TOTAL ASSETS P 99,971

LIABILITIES AND OWNER'S EQUITY

Current Liabilities

Accounts Payable P 35,000

TOTAL LIABILITIES 35,000

Owner's Equity 64,971

TOTAL LIABILITIES AND EQUITY P 99,971

CLOSING THE BOOKS

Why do we need to close the books?
After producing the required financial reports at year-end, books of Belle Salon should be closed
on the last day of the current accounting period to prepare the nominal accounts for recording
transactions for the next accounting period.

60
GENERAL LEDGER

CASH Account no. 110

Date Particulars P.R. Debit Date Particulars
2019 2019
Feb 1 Initial Investment GJ- P 5 0 0 0 0 Feb 1 Purchased of su
1
24 Collection GJ- 1 5 0 0 0 28 Utilities
1
28 Wages

P 6 5 0 0 0

Balance P 4 7 4 8 8

ACCOUNT RECEIVABLE Account No. 120

Date Particulars P.R. Debit Date Particulars
2019 2019
Feb 20 Wedding Service GJ- P 3 0 0 0 0 Feb 24 Collection
1

Balance P 1 5 0 0 0

STORE SUPPLIES Account No. 150

Date Particulars P.R. Debit Date Particulars
2019 2019
Feb 1 Purchased GJ- P 1 0 0 0 0
1

STORE EQUIPMENT Account No. 180

Date Particulars P.R. Debit Date Particulars
2019 2019
Feb 1 Purchased GJ- P 3 5 0 0 0
1

ACCOUNTS PAYABLE Account No. 210

Date Particulars P.R. Debit Date Particulars
2019 2019

61
 Feb 12 Store Equipment

BELLE, CAPITAL Account No. 310

Date Particulars P.R. Debit Date Particulars
2019 2019
Feb 1 Initial Investmen

SERVICE REVENUE Account No. 410

Date Particulars P.R. Debit Date Particulars
2019 2019
Feb Feb 20 Wedding service

UTILITIES EXPENSE Account No. 570

Date Particulars P.R. Debit Date Particulars
2019 2019
Feb 28 Electricity & water GJ- P 3 5 1 2
1

SALARIES AND WAGES Account No. 560

Date Particulars P.R. Debit Date Particulars
2019 2019
Feb 28 Payment GJ- P 4 0 0 0
1

62
 GENERAL JOURNAL
Page __
Date Particulars P.R. Debit Credit
2019
Dec 31 Income Summary P 1 5 0 2 9
Utilities Expense P 3 5 1 2
Depreciation Expense 5 1 7
Store Supplies expense 7 0 0 0
Salaries and wages 4 0 0 0
To record closing entry for expenses account

31 Service revenue 3 0 0 0 0
Income Summary 3 0 0 0 0
To record closing entry for income account

31 Income summary 1 4 9 7 1
Belle, capital 1 4 9 7 1
To close income summary account

POST-CLOSING TRIAL BALANCE

Belle Salon
Post-closing Trial Balance
For the month of February 28,2019

Cash P 47, 488

Accounts receivable 15, 000
Store supplies 3,000
Store equipment 35,000
Accumulated Depreciation- P 517
Store equipment
Accounts Payable 35,000
Belle, capital 64,971
Total P 100,488 P 100,488

REVERSING ENTRY

63
REFERENCE
Ballada, W. & Ballada, S. (2014). Basic Accounting.
Manalo, M.V. (2016). Learning to Succeed in Business with Accounting Vol. 1. Quezon, Ave.,
Quezon, City: The Phoenix Publishing House Inc.
Topnotch CAT Reviewers. Certified Accounting Technician, Part 1 Practical Accounting.
Reeve, J., Duchac, J. & Warren, C. ( 2012). Accounting Principles Using Excel for Success.
Singapore: Cengage Learning Asia Pte Ltd

Tracy, J. A. Distinguishing Real and Nominal Business Accounts. Retrieved from

[Link]
business-accounts/

64
Valix, C. T., Peralta, J. F., & Valix C.M. (2015). Financial Accounting Volume One. Manila,
Philippines: GIC Enterprises & Co., Inc.

65