Chapter 1: Overview of Accounting

INTRODUCTION:
Accounting is part of any organization be it profit or non-profit. An
understanding of a business, its form of organization and type of operation may
minimize the risks of managing it. What is the basis of management in making
decisions? Accounting provides management with information essential to the
efficient conduct and evaluation of its activities. It gathers data which are financial in
nature, identifies what data are relevant to decisions to be made, process and
analyze these data and transforming it into reports that can be used in making sound
decisions.
This module introduces the meaning and importance of accounting, the rules
and principles, the business environment, the motives of doing business and the
users of financial information.

LEARNING OUTCOMES:
After studying this module, you should be able to:
1. Define accounting.
2. Define business and explain its various motives and role.
3. Identify the sources of fund of the business.
4. Describe the form of business organizations and type of operations.
5. Explain Generally Accepted Accounting Principles (GAAP) and identify its
underlying assumptions or concepts.
6. Discuss the elements of financial statements.
7. Identify the users and explain why they depend on accounting information.
8. Explain the process of providing information.

Lesson 1: Definition and Nature of Accounting

Accounting is defined as:
1. It is a service activity. Its function is to provide quantitative information
primarily financial in nature, about economic entities that is intended to be
useful in making economic decision. (Accounting Standard Council)
2. It is a process of identifying, measuring and communicating economic
information to permit informed judgment and decision by users of the
information. (American Accounting Association)
3. It is an art of recording, classifying and summarizing in a significant manner
and in terms of money, transactions and events which are in part at least in

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 financial character and interpreting the results thereof. (American Institute of
Certified Public Accountant)

To summarize, the essential characteristics of accounting based on the above

definition:
1. Quantitative in nature
2. Provide financial information
3. To be used in making economic or financial decision

Lesson 2: Business: Its Nature, Types and Role in the Society

Business is an economic unit that controls resources and engages in buying
and selling goods or services.
A major concern of a business is how to best use the resources – what
machines are needed, what labor skills are required, how many men to employ,
how much fixed capital and working capital are needed, what raw materials to
use – all with the end of view of earning profit.
In business endeavor, success is possible when money, machines, men and
materials are used efficiently at the least possible cost. Most often success in
business is measured in terms of profit and increase in funds.
Profit generates more resources of funds for the business. With more funds,
there is a need for business to expand.

 Sources of Capital
The main source of capital of the business is its investor or owner.
With a successful business, investor succeeds not only in getting back
what was invested (return of capital) but receives more than the amount he or she
has invested (return on capital).
If the owner does not have enough cash to finance the activities of his
business, he can borrow funds from relatives, friends or financing institutions such as
banks and cooperatives.

 Role of Accounting in Business

The main goal of the business is to earn a profit. To determine whether the
business is earning a profit or incurring a loss, it is important that the owner keeps

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track the events or transactions that occur in his business. Hence, the use of
accounting is important.
Accounting is also called the “language of business”. It helps the owner to
generate information on what is happening in his business and such information will
be helpful to make economic decision necessary in carrying out the operation of the
business. Accounting gives an excellent gauge of how well the business is going. It
also provides financial information throughout the year so you can test the success of
your business strategies and make course corrections to ensure that you reach your
year-end profit goals.

 Nature of Business
1. Manufacturing Business – this involves converting raw materials into finish
products.
E.g. manufacturing of furniture and fixtures, cars, etc.
2. Service-concern Business – this involves rendering of services for a fee.
E.g. Barber Shops, Hotel, Consultancy, etc.
3. Merchandising Business – this involves buying and selling of products.
E.g. Groceries, Department Stores, Sari-sari Stores, etc.
4. Agri-Business – this involves cultivating and selling of agricultural products.
5. Hybrid Business – this involves the combination of other types of business
mentioned above.

 Types of Business Organizations

1. Sole Proprietorship – it is owned by one individual.
Advantages
Jorge’s
a. Ease in organizing
b. Low cost of organizing
Disadvantages
a. Limited source of financial resources
b. Owner shoulders all the losses incurred
c. Unlimited liability

2. Partnership – it is owned by two or more individual to combine their money,

property and services to a common fund and to divide the profits among
themselves.
Advantages
Jorge and
Jorge
a. More financial resources than a proprietorship Marsha
Marsha

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 b. Additional management skills
Disadvantages
a. Unlimited liability

3. Corporation – it is an artificial being owned by five but not more than 15

individuals called incorporator.
Advantages
J & M, INC.
a. The ability to obtain large amounts of resources
by issuing shares of stocks
J & M, Inc.
b. Limited liability
Disadvantages
a. Double taxation

4. Cooperative – the same as corporation but most of its profit not to be distributed
to the owners or members but it is used for the operation of the business.
Advantage
Large amount of resources by contribution of its members

Disadvantages
Not being taxed

 How business organizations obtains Profit

In a service business, money is received for the cost of service rendered.
Example:
Service Business Customer Profit
Cost of processing of Pays P1,500 Service revenue P1,500
visa and passport by the Cost of service 1,000
travel agency P1,000 Profit P500

In a merchandising business, money is received from the cost of

merchandise given.
Example:
Merchandising Business Customer Profit
Cost of a pair of shoes Pays P250 Sales revenue P 250
P150. Cost of sales 150
Profit P100

In a manufacturing business, raw material such as leather is bought and

manufactured into bags and shoes before they can finally be sold to customers.

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 Example:
Manufacturing Business Customer Profit
Cost of leather P50 Pays P150 Sales revenue P 150
Wages of worker P 25 Cost of sales 90
Manufacturing overhead P 15 Profit P60
Cost of a pair of shoes P 90

Lesson 3: Accounting Principles and Assumptions

 Generally Accepted Accounting Principles (GAAP)
GAAP are set of accounting rules, procedures, practices and standards that
are followed in preparing the financial statements. They served as the ground rules
that guide accounting practitioners in recording (identifying, analyzing, and
measuring) and reporting financial information of a business entity.
Some of the Generally Accepted Accounting Principles are the following:
1. Cost Principle – this principle requires that assets should be
recorded at original or acquisition cost.
2. Objectivity Principle – this principle requires that accounting
records should be based on reliable and verifiable data as evidence
of transactions.
3. Materiality Principle – this principle dictates practicability to rule
over theory in determining the valuation of an item. It is matter of
professional judgment of the auditor to determine the materiality of
an item.
4. Matching Principle – this is the combined concept of Revenue
Recognition and Expense Recognition Principles. Revenue should
be recognized when earned and corresponding expenses should be
recognized when incurred during the same period as revenue was
earned.
5. Consistency principle – this principle requires that accounting
methods and procedures should be applied on a uniform basis from
period to period to achieve comparability in the financial statements
6. Adequate Disclosure Principle – this principle requires that
financial statement should be free from any material misstatement;
that if there is any, proper disclosure should be made.

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 Basic Accounting Assumptions or Concepts:
1. Going concern – the business will continue in operational existence
for the foreseeable future. The business is viewed to have a continuity
of existence.

2. Business entity concept – owner and the business are separate and
distinct of each other.

3. Monetary value – all transaction must be stated in terms of unit of

measure. Since we are in the Philippines, it must be stated in Peso.

4. Time period – the life of an entity is subdivided into time periods

which are of equal length for the purpose of making financial reports.
E.g. monthly, quarterly, semiannually, annually.

5. Accrual Basis – this assumes that recording of income and expenses

follow the accrual basis of accounting. That is, income is recognized
when earned regardless of when received and expense is recognized
when incurred regardless of when paid.

Lesson 4: Financial Information for Decision-Making

 Elements of Financial Statements
There are five elements of Financial Statements:
1. Assets Assets, Liabilities and Owner’s Equity are also
known as “accounting elements” or
2. Liabilities
“accounting values”. They comprise the
3. Owner’s Equity or Capital Statement of Financial Position.

4. Revenue or Income Revenue and Expenses are temporary

accounts of Owner’s Equity. They
5. Expenses comprise the Income Statement or
Statement of Financial Performance.

 The Financial Statements

The objective of Financial Statements is to provide information about the
financial position, performance and cash flows of an enterprise that is vital in
making a sound economic decisions.
There are five basic financial statements, namely:
1. Statement of Financial Position or Balance Sheet

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 2. Income Statement
3. Statement of Changes in Equity
4. Statement of Cash Flows
5. Accounting Policies and Notes to Financial Statements

Statement of Financial Position – consist of three sections, Assets,

Liabilities and Equity. This statement measures and evaluates the
business liquidity (the ability of the business to meet currently maturing
obligations), solvency (the availability of cash over the longer term to meet
maturing obligations), financial structure (the source of financing for the
assets of the business) and capacity for adaptation (financial flexibility of the
business to use the available cash for unexpected requirements and investment
opportunities).

Income Statement – this shows the financial performance of the

business for a given period of time. These consist of the revenue,
expenses and operating results which could either be a profit or loss.

Statement of Cash Flows – provides information about cash inflows

(receipts) and cash outflows (payments) of an entity for a given period of
time which are being classified as:
a. Operating activities – inflows and outflows of cash from the normal operating
activities of the business.
b. Investing activities – inflows and outflows of cash from the sale or purchase of
assets other than inventory.
c. Financing activities – inflows and outflows of cash from the owners or creditors.

Accounting Policies and Notes to Financial Statements – this is an

integral part of the financial statement. This presents significant
accounting policies and schedules of computations and disclosures of
some events and other information essential to understanding the
company’s accounts.

 Stakeholders as users and decision makers

1. Stakeholders – a person or entity who has an interest in the economic
performance of a business. Examples are: managers, lenders,
suppliers, employees, government and customers. Stakeholders are

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 classified as external users except for management who is an
internal user.
2. Owner or investor – one who puts capital (such as money or property)
in a business venture with the objective of receiving a return on capital
from the profits earned by the business.
3. Manager – one responsible for organizing, planning, directing and
controlling the operation of the business. He must be a good steward;
protecting the business resource and helping it grow in value.
4. Lender – assesses the ability of the borrower to pay to pay the
principal debt and the additional charge called the interest.
5. Supplier – offers goods or merchandise on cash or on credit term
depending on the paying ability of the customer.
6. Government – uses the accounting reports as tax collector, as a
regulatory body and as a customer.
7. Employee – are interested in information which enables them to
assess the stability and profitability of the enterprise.
8. Customer – asses the company’s ability to continuously supply the
goods they need at the right price and quality.

 The Process of Providing Information

1. Identify stakeholders

Business stakeholders are person or entity having an interest in the

economic performance of the business. It could either be internal
stakeholders such as owners, managers, employees or external
stakeholders such as customers, creditors, government, and the public.

2. Assess stakeholders’ informational needs

Stakeholders have different information needs. It is needed to assess the

information needs of the stakeholders in order to prepare reports for their
intended needs.

3. Design the accounting information system to meet the stakeholders’

needs.

The business should decide a mechanism tool in order to generate

information needs. It could be done manually or electronically generated.

4. Record economic data about business activities and events

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 This is to input business events and transaction to the respective books of
entry.

5. Prepare accounting reports for stakeholders.

The end process is to the preparation of financial statements.

ACCOUNTING INFORMATION SYSTEM

Statement Users Financial Information Decisions Supported

Investors Profitability Investment decisions
Lenders Financial Position Financing decisions
Managers Liquidity Performance evaluation
Suppliers Solvency Cash and credit strategies
Customers Cash flows Labor relations
Employees Adequacy Allocation of resources
Government Timing Tax plans

The figure above describes accounting as a service activity which provides financial information to
statement users in support of various economic decisions.

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 Review Questions and Exercises

Review Questions:
1. What is accounting, and why is accounting important?
2. Explain why business plays an important role in the economy of the country.
3. What are the two main sources of capital?
4. What is profit and, how is it earned and what is its effect on business?
5. Why is accounting also called the “language of business”?
6. What is the main difference between a merchandising business and a
manufacturing business?
7. When is revenue recognized by a service provider? By a merchandiser? By a
manufacturer?
8. What is Generally Accepted Accounting Principle? Discuss its relevance in
the preparation of financial statements.
9. Define and explain the basic accounting concept.
10. Discuss the process of providing information needs.

Exercises:
Based on the situations given below, are the accounting practices in conformity
with the generally accepted accounting principles? Answer with a yes or no and
cite the applicable GAAP.

1. World travel Agency purchased land and paid P850,000 cash on

December 31, 2018. At December 31, 2019, although the land has
increased in value to P950,000 it was still reported in the financial
statement at P850,000.
2. Proctoso has some properties amounting to P1,000,000. One half of
this was invested in “Procto Shoe Shop” and the other half in another
business called “Procto Video Shop”. Two sets of financial
statements were prepared.

3. the owner-manager of Belo’s Health Spa took home some beauty

supplies amounting to P2,500 which the accountant did not record.

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4. Rental amounting to P36,000 for the store space occupied by the
business was paid in advance for the years 2018 and 2019. The
whole amount was recorded as expense for 2018.

5. The company recorded service income of P10,000 after the customer

signed a contract for the repair of the delivery van.

6. A set of computer and printer was purchased for P60,000 which the
accountant immediately recorded as expense for the business.

7. The owner-manager bought a computer for P25,000. The invoice was

recorded given to the accountant who recorded it as an asset of the
business but the computer was for personal use.

8. The statement of financial position of J&F Play Center included paly

equipment purchased from Japan and stated in 350,000 yen. It was
reported at the same amount in the balance sheet. All other assets
were reported in Philippine Peso.

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 Chapter 2: IDENTIFYING BUSINESS TRANSACTIONS

INTRODUCTION:
Accounting concepts and principles are relevant to financial reporting, understanding
how these are applied enables you to make a proper assessment of the financial
information that will lend to sound economic decisions.
This module will demonstrate the

LEARNING OUTCOMES:
After studying this module, you should be able to:
1. Define business transaction.
2. Identify account titles according to the accounting elements
3. Discuss the rules of debit and credit and the normal balances of each
account.
4. Analyze transaction in T accounts using debit and credit
5. Use the accounting equation to analyze business transactions.

Lesson 1: Business Transactions or Events

A business transaction is an economic event or condition that directly affect
an entity’s assets, liabilities or owner’s equity (called as accounting elements).
Example of business transactions:
1. Investment of the owner
2. Purchase of goods
3. Sale of goods
4. Payment of expenses

Take note that only those transactions or events related to the

business should be accounted and recorded.
Business events are the occasional occurrence in the life of the business like
loss due to fire, decline in market value, etc.
Business transactions are exchanges of equal monetary values. This
definition implies the following concept of understanding:
1. For every value received, another value is given away in exchange
( this is the dual effect of transaction that give rise to the DOUBLE
ENTRY BOOKKEEPING or the VENETIAN MODEL)

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 2. These values are measured in terms of pesos which are presumed to
be equal.

 The Account and Account Titles

To make the information understandable to the stakeholders, all business

transactions must be recorded by using an “account or account titles”.

The Account is a device used to record the changes in (increase or

decrease) in the accounting elements.

E.g. Asset accounts, Liability accounts, Equity accounts, Revenue/Income account

and Expenses account.

Account titles are special or particular name of an account.

For example, Asset account, its account titles are cash, accounts receivable,
inventory, etc.

Account and account titles are summarized in the Chart of Account.

Lesson 2: Chart of Accounts

Chart of Account is a list of names of the accounts that a company has identified
and made available for recording transactions in its general ledger.

 Account Classification
1. Asset account – these are resources controlled and owned by the business.
Example:
a. Cash – the account title to describe money, either in paper or in coins
and money substitutes like check, postal money orders, bank drafts
and treasury warrants.
b. Accounts receivable – account title for amounts collectible arising
from services rendered to customers on credit or sale of goods to
customers on accounts.
c. Inventory- assets which held for sale in the ordinary course of
business and in the process of production for such sale; or in the form

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 of material or supplies to be consumed in the production process or in
the rendering of services.
d. Prepaid Expenses – expenses that are paid in advance but are not
yet incurred or have not yet expired such as prepaid rental, prepaid
insurance, prepaid interest etc.
e. Unused Supplies- an account title for cost of stationery and other
supplies purchased for use but are left on hand and still unused.
f. Land- account title for the site where the building used as office or
store was contracted.
g. Building – finished construction owned by the business where
operations and transaction took place.
h. Furniture and Fixtures – includes chairs, tables, counters, display
cases and the like.
i. Machinery and equipment – tangible assets which are held by an
enterprise for use in the production or supply of goods and services.
j. Investments

2. Liability account – these are obligation or debts of the business

Example:
a. Accounts payable – a financial obligation of the business that
constitutes an oral or verbal promise to pay.
b. Accrued expense payable – these are expenses incurred by the
business but are not yet paid.
c. Loan payable – obligation by the business which is normally long
term in nature made through financial institutions such as banks etc.
d. Bonds payable - obligation by the business which is normally long
term in nature and is evidence by the issuance of bonds.
e. Notes payable- obligation by the business which is normally long
term in nature and is evidence by the issuance of a note.
3. Equity account – this is a residual interest of the business after deducting all
its liabilities from the assets.
Example:
a. Owner’s Equity – this is for sole proprietorship type of business
organization
b. Partner’s Equity – this is for partnership type of business
organization

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 c. Shareholder’s Equity – this is for corporation type of business
organization

4. Revenue/Income account – this pertains to the income or sale of goods or

rendering of services
Example:
a. Sales revenue/income – revenue from merchandising and
manufacturing business
b. Service revenue/income – revenue from service concern type of
business
c. Interest income
d. Commission income
e. Fees earned
f. Other income

5. Expense account – these are cost incurred by the business whether paid or
unpaid
Example:
a. Salaries Expense
b. Utilities Expense
c. Rent Expense
d. Cost of Sales
e. Repair and Maintenance
f. Interest Expense

Lesson 3: Basic Accounting Equation

The accounting values (elements) are affected by the business transactions or
economic activities occurring daily in a business.

ASSETS = LIABILITIES + EQUITY

The resources owned The rights of the creditors, The rights of the
which represent debts of
by a business owners
the business

General Rule: ASSETS SHOULD ALWAYS BE EQUAL TO LIABILITIES AND

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 EQUITY

 Expanded Accounting Equation

REVENUE/
ASSETS = LIABILITIES + EQUITY + INCOME - EXPENSES
ILLUSTRATION:
To illustrate the effects of the transaction in the accounting elements, let us assume
the following:

Assets invested by owner.

March 1 Margaret Claire opened a tour and travel service by investing cash and
of P50,000. She has three cars but decided to invest only two cars
costing P750,000.
Analysis: The assets of the business will increase in the form of cash
P50,000 and cars P750,000 with a corresponding increase
in owner’s equity.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash P 50,000 MC, Capital P 800,000
Cars 750,000 _______
P 800,000 P 800,000

Both sides of the equation were affected by the transaction.

Notice also that both have equal balances.

Cash borrowed from the bank.

March 3 Margaret Claire borrowed P100,000 cash from Metro Bank for use in her
business.
Analysis: The assets of the business will increase again in cash
P100,000 with a corresponding increase in liability.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash P 150,000 Loans payable P100,000 MC, Capital P 800,000
Cars 750,000 ________ _______
P 900,000 P100,000 P 800,000

The cash had increased by P100,000 bringing the balance to P150,000 with
corresponding increase in liabilities – loans payable.

Both Sides have equal balances of P900,000.

Asset purchased for cash

March 7 Bought table and chairs from Blims and paid cash of P45,000
Analysis: The assets of the business will increase in the form of

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 furniture and fixtures and decrease in asset cash

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash P 105,000 Loans payable P100,000 MC, Capital P 800,000
Cars 750,000
Furniture 45,000 ________ ________
P 900,000 P100,000 P 800,000

Asset purchased on account.

March 15 Various equipment were purchased on account from Des marketing for
P55,000
Analysis: The assets of the business will increase in the form of
equipment with a corresponding increase in liability.
Total assets are still the same since there was
ASSETS = LIABILITIES
only a change in its form.. + OWNER’S EQUITY
Cash P 105,000 Loans payable P 100,000 MC, Capital P 800,000
Cars 750,000 Accounts Payable 55,000
Furniture 45,000
Equipment 55,000 ________ ________
P 955,000 P 155,000 P 800,000

Cash Withdrawn by owner

March 18 Margaret Clair made a cash withdrawal of P5,000 for personal use.
Analysis: The assets of the business will decrease in the form of cash
with a corresponding decrease in owner’s equity.

ASSETS = LIABILITIES + OWNER’S EQUITY

Cash P 100,000 Loans payable P 100,000 MC, Capital P 800,000
Cars 750,000 Accounts Payable 55,000 MC, Drawing (5,000)
Furniture 45,000
Equipment 55,000 ________ ________
P 950,000 P155,000 P 795,000

Payment of Liability
March 20 The account due to Des Marketing was paid in cash.
Analysis: The assets of the business will decrease in the form of cash
with a corresponding decrease in liabilities.
The transaction decreases equity because the
ASSETS owner recovered part of her investment
= LIABILITIES by
+ OWNER’S EQUITY
Cash P 45,000 Loans payable withdrawing cash.
P 100,000 MC, Capital P 800,000
Cars 750,000 MC, Drawing (5,000)
Furniture 45,000
Equipment 55,000 ________ ________
P 895,000 P100,000 P 795,000

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 Note that the accounting equation was maintained all throughout the
transactions. This is because of the dual effect of the transaction in the
accounting elements. Recall that this Double-Entry System or Venetian Model,
requires that for every value received there is an equal value parted with.

The following table summarizes the effects of the transactions on the accounting
equation. Balances are given after each transaction.
Date ASSETS = LIABILITIES + OWNER’S EQUITY
Loans Accounts MC, MC,
March Cash Cars Equipment Furniture Payable Payable Capital Drawing
1 50,000 750,000 800,000
3 +100,000 +100,0000

Balances 150,000 750,000 100,000 800,000

7 -45,000 +45,000
Balances 105,000 750,000 45,000 100,000 800,000
15 +55,000 +55,000
Balances 105,000 750,000 55,000 45,000 100,000 55,000 800,000
18 -5,000 -5,000
Balances 100,000 750,000 55,000 45,000 100,000 55,000 800,000 -5,000
20 -55,000 -55,000
Balances 45,000 750,000 55,000 45,000 100,000 0 800,000 -5,000

895,000 = 100,000 + 795,000

 An interim statement of financial position can be prepared for Margaret Clair

Travel and Tours as of March 20:
Margaret Clair Travel and Tours
Statement of Financial Position
March 20, 2019

ASSETS: LIABILITIES AND OWNER’S EQUITY

Cash P 45,000 Loans Payable P 100,000
Cars 750,000 MC, Capital 795,000
Equipment 55,000
Furniture and Fixtures 45,000 _______
Total P 895,000 Total P 895,000

Note that the Owner’s Equity was presented already net of drawings (P800,000 –
P5,000)
 The T- Account and the Rules of Debit and Credit

Each account can be drawn to resemble the letter T called “T-account”.

Lesson 4: The T-Account and Normal Balance of Accounts

A “T- account” is the skeleton version of a ledger which is discussed more on Module
4.

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The “T account” has a title, usually the name of the account; it has two sides, the left
side which is also called “Debit” and the right side which is also called
“Credit”.
ACCOUNT TITLE

LEFT SIDE RIGHT SIDE

DEBIT CREDIT

Value Value Parted

Received With

Debit side is also called the “Value Received” and Credit is also called the
“Value Parted With”

Value Received or Debit is anything that the business received.

Value Parted With or Credit is anything that the business has given to
receive something in return.

For example:
The business acquired office equipment and paid in cash.
Value Received or Debit – Office Equipment
Value Parted With or Credit – Cash

 Normal Balance of Accounts

Normal balance of an account represents the side to which such

accounts increases.

The normal balances of each account differ according to its

classification.

The normal balance of all Assets and Expense account is on the Debit Side

ASSET ACCOUNT EXPENSE ACCOUNT

DEBIT CREDIT DEBIT CREDIT
(+) (-) (+) (-)
Increase Decrease Increase Decrease
Side Side Side Side
Normal Normal
Balance Balance
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 The normal balance of all Liability, Equity and Revenue/Income account is
on the Credit Side.

EQUITY ACCOUNT LIABILITIES ACCOUNT REVENUE ACCOUNT

DEBIT
Factor that will CREDIT DEBIT CREDIT DEBIT CREDIT
(-)
cause the (+)
“owner’s (-) (+) (-) (+)
equity” to decrease
Decrease Increase
are: Decrease Increase Decrease Increase
1. Withdrawal
Side Side Side Side Side Side
  by owner.
Normal Normal   Normal
 
  2. Expense.
Balance   Balance   Balance

Factor that will cause the

“owner’s equity” to increase are:
1. Investment by owner.
2. Revenue.

To summarize, the following rules of debit and credit should be observed:

We Debit to We Credit to:

Rule 1 Increase in Asset Decrease and Asset
Rule 2 Decrease a Liability Increase a Liability
Rule 3 Decrease an Owner’s Increase an Owner’s
Equity Equity

Temporary Accounts
Rule 4 Increase in Drawing Decrease in Drawing
Rule 5 Decrease an Income Increase in Income
Rule 6 Increase and Expense Decrease an Expense

ILLUSTRATION:
The following transactions are given to illustrate the application of the rules of debit
and credit through “side positioning”. This is an example of a service concern type of
organization.
Date Transaction
March 1 OLIVIA MARIE Ruiz opened a Travel and Tour service
business by investing cash of P50,000 and two cars worth
P750,000.
Analysis: Increase in assets cash P50,000 and cars
P750,000, and increase in owner’s equity, Ruiz

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 Capital P800,000.
Entry: Debit Cash P50,000, Debit Cars P750,000 and
Credit Ruiz,Capital P800,000

CASH RUIZ, CAPITAL

March 1 50,000
  March 1 800,000

CARS Note how the entries were

March 1 750,000 entered on the
corresponding increase or
debit/credit side of each
account.

Date Transaction
March 3 Borrowed P100,000 from China Bank for business use.
CASH LOANS PAYABLE
Analysis: Increase in assets cash and increase in
March 1 50,000   March 3 100,000
3 100,000liabilities Loans payable P100,000
Entry: Debit Cash P100,000, Credit Loans Payable
Note that CASH
P100,000 Account has now two
Date Transaction
March 7 entriesSL Luiz. Paid cash of
Bought tables and chairs from
P45,000.
Analysis: Increase in assets furniture and fixture and
decrease in assets cash P45,000
Entry: Debit Furniture P45,000, Credit Cash P45,000

CASH
March 1 50,000 March 7 45,000
3 100,000
FURNITURE & FIXTURES
March 7 45,000

Date Transaction
March 10 Purchase from Emcor two aircon units for P50,000, and an
electric fan for P5,000, all on account.
Analysis: Increase in assets equipment and increase in
liabilities Accounts payable P55,000
Entry: Debit Equipment P55,000, Credit Accounts Payable
P45,000

EQUIPMENT ACCOUNTS PAYABLE

March 10 55,000
  March 10 55,000
Page 21
Date Transaction
March 18 Ruiz made a cash withdrawal of P5,000 for personal use.
Analysis: Decrease in assets cash and cars decrease in
owner’s equity, Drawing P5,000.
Entry: Debit Ruiz, drawing P5,000, Credit Ruiz, Drawing
P5,000
CASH RUIZ, DRAWING
March 1 50,000 March 7 45,000 March 18 5,000
3 100,000 18 5,000

Take note that as you go

on, data are accumulated in
their respective either on
the debit or credit side.
Date Transaction
March 20 Paid the account due to Emcor.
Analysis: Decrease in assets cash and decrease in
liabilities accounts payable P55,000
Entry: Debit Accounts Payable P55,000,and Credit Cash P55,000

CASH
March 1 50,000 March 7 45,000
3 100,000 18 5,000
  20 55,000
ACCOUNTS PAYABLE
March 20 55,000 March 10 55,000

Date Transaction
March 21 P15,000 was received from a tourist for a tour package for
three persons in Bagiuo.
Analysis: Increase in assets cash and increase in owner’s
equity service income by P15,000
Entry: Debit Cash P15,000,and Credit Service Income
P15,000

Page 22
CASH
March 1 50,000 March 7 45,000
3 100,000 18 5,000
21 15,000 20 55,000
SERVICE INCOME
  March 21 15,000

Date Transaction
March 22 Paid for gas and oil P500 and repair of car P1,000.
Analysis: Decrease in assets cash P1,500 and decrease
in owner’s equity gas and oil expense P500 and
repair expense P1,000
Entry: Debit Gas and Oil Expense P500, Debit Repair
Expense P1,000 and Credit Cash P1,500

CASH
March 1 50,000 March 7 45,000
3 100,000 18 5,000
21 15,000 20 55,000
  22 1,500
GAS AND OIL EXPENSE
March 22 500

REPAIR EXPENSE
March 22 1,000

Date Transaction
March 24 Mr. San hired the services of the agency for his visitors and
promised to pay P16,000 on March 31.
Analysis: Increase in assets accounts receivable P16,000 and
Increase in owner’s equity Service Income P16,000
Entry: Debit Accounts Receivable P16,000 Credit Service
Income P16,500

ACCOUNTS RECEIVABLE
March 24 16,000
SERVICE INCOME
  March 21 15,000
  24 16,000

Page 23
Date Transaction
March 25 Paid for PLDT for telephone service P500.
Analysis: Decrease in assets cash P500 and decrease in
owner’s equity utilities expense P500.
Entry: Debit Utilities Expense P500, Credit Cash P500

CASH UTILITIES EXPENSE

March 1 50,000 March 7 45,000 March 25 500
3 100,000 18 5,000
21 15,000 20 55,000
  22 1,500
  25 500

Date Transaction
March 27 Billed CBMA faculty club P20,000 for a tour of Metro
Manila.
Analysis: Increase in assets Accounts Receivable and
Increase in owner’s equity Service Income
P20,000.
Entry: Debit Accounts Receivable P20,00, Credit
Service Income P20,000

ACCOUNTS RECEIVABLE SERVICE INCOME

 
March 24 16,000 March 21 15,000
  27 20,000 24 16,000
  27 20,000
Date Transaction
March 30 Collected P8,000 from the customer Mr. San.
Analysis: Increase in assets Cash and decrease in assets
Accounts Receivable P8,000.
Entry: Debit Cash P8,000, Credit Accounts Receivable P8,000

CASH
March 1 50,000 March 7 45,000
3 100,000 18 5,000
21 15,000 20 55,000
30 8,000 22 1,500
  25 500
ACCOUNTS RECEIVABLE
March 24 16,000 March 30 8,000

Page 24
 27 20,000

Date Transaction
March 31 Paid for office rent P10,000 and salaries of workers
P9,000.
Analysis: Decrease in assets Cash P19,000 and
decrease in owner’s equity Rent Expense
P10,000 and Salaries Expense P9,000.
Entry: Debit Rent Expense P 10,000 and Debit
Salaries Expense P9,000, Credit Cash
P19,000

CASH RENT EXPENSE

March 30 10,000
March 1 50,000 March 7 45,000

3 100,000 18 5,000

21 15,000 20 55,000

30 8,000 22 1,500

  25 500

  30 19,000

SALARIES EXPENSE

March 30 9,000

Review Questions and Exercises

Review Questions:
1. What is a business transaction?
2. What is an account? An account title?
3. What is the use of an account?
4. What are the different classifications of an account? Give at least 3 examples.
5. The term debit means increase and credit means decrease? Do you agree with
this statement?

Page 25
 Exercises:
I. Identify what type of account are the following.

Account Title Account Classification

1. Cash ________________________
_
2. Calumpiano, Equity _________________________
3. Salaries Expense _________________________
4. Accounts Receivable _________________________
5. Accounts Payable _________________________
6. Utilities Expense _________________________
7. Building _________________________
8. Mortgage Payable _________________________
9. Sales _________________________
10. Notes Receivable _________________________

II. Write the normal balances of the following account.

Account Title Normal Balance

1. Cash ________________________
_
2. Calumpiano, Equity _________________________
3. Salaries Expense _________________________
4. Accounts Receivable _________________________
5. Accounts Payable _________________________
6. Utilities Expense _________________________
7. Building _________________________
8. Mortgage Payable _________________________
9. Sales _________________________
10. Notes Receivable _________________________
11. Service Income ________________________
_
12. Inventory _________________________
13. Rent Expense _________________________
14. Permit and Licenses _________________________
15. Supplies _________________________

III. Indicate the VALUE RECEIVED or DEBIT and VALUE PARTED WITH or
CREDIT columns for the accounting values that are affected by the following
transactions: (Item No. 1 is answered for your guide).
Value Value
Receive Parted
Transactions d with
( DEBIT (Credit
) )
Rent
1. Payment of rental Expens Cash
e

Page 26
 2. Initial investment by S. Ty
3. Bought a car on account
4. Rendered professional service on account.
5. Cash withdrawal by S. Ty
6. Collection from client’s account
7. Rendered professional service for cash
8. Issued a note for borrowed money.
9. Additional investment by S. Ty
10. Sold an old car for cash
11. Received a promissory note from a client
12. Payment of account to a supplier
13. Received a promissory note in exchange for
a client’s account
14. Give a promissory note in exchange for a
suppliers account.
15. The owner invested an IT computer
16. Paid the note issued to the bank
17. Investment in marketable securities
18. Payment of 2-year insurance premium

IV. Solve the following using the Basic Accounting Equation and the Expanded
Accounting Equation.

1. At the end of the year, the entity has reported total assets of P 600,000
and total liabilities of P 250,000. How much is the equity?

2. The company incurred a debt of P 500,000. At the end of the year, the
residual interest of the company totaled P 1,050,000. How much is the
total assets of the company?

3. During the year, the entity reported total liabilities of P 800,000 and equity
of P 350,000. At the end of the year, the entity earned income of P
1,200,000 and incurred expenses of P 750,000. How much is the total
asset of the company?

4. Asset totaled P 2,500,000; Liabilities totaled P 225,000; Income totaled P

1,575,000; Expenses totaled P 925,000. How much is the equity?

5. Asset totaled P 1,500,000; Equity totaled P 825,000; Income totaled P

1,000,000 and Expenses totaled P 825,000. How is the total liability?

I. Post the following transaction using T-account. Assume that the transactions are
in chronological order.

1. Purchased equipment for P 50,000.

2. Purchased merchandise to be used in the business for P 100,000.
3. Made cash investment, P 500,000
4. Purchased merchandise to be used in the business on account, P 150,000.
5. Paid electricity and water, P 2,500.
6. Sold merchandise for P 10,000.

Page 27
7. Sold merchandise on account, P 25,000.
8. Borrowed money from the bank, P 350,000.
9. Paid salaries for P 135,000.
10. Collected the merchandise sold on account in number 7.
11. Paid purchase on account in number 4.
12. Made partial payment on the loan from the bank, P 100,000.
13. Sold merchandise on account evidenced by a promissory note, P 50,000
14. Withdrew cash from the business, P 10,000.
15. Payment of supplies on account, P 5,000.

Page 28
 Chapter 3: THE ACCOUNTING CYCLE

INTRODUCTION:
The accounting information system describes the gathering and processing
data to produce meaningful reports which are communicated to the statement users.
Accounting cycle consists of series of steps or procedures to be performed
within one accounting period. Accountants call it a cycle since they repeat the steps
every accounting period.
This module discusses the steps of the accounting cycle.

Learning Outcomes:
After studying this module, you should be able to:
1. Identify the steps of the accounting cycle.
2. Discuss each step of the accounting cycle.

Accounting Cycle
Accounting cycle is a series of chronological steps in accounting and
preparing financial reports.

Steps in the Accounting Cycle

1. Identify and analyze business transaction.
In this step, you are to identify and analyze transactions whether
are it is accountable or not. Only those transactions that relates to the
business are to be recorded and analyzed.

2. Journalizing
This is simply recording all identified transaction in a journal.

3. Posting to the ledger

This step is to classify each account into their respective ledgers.

4. Prepare trial balance

This is to summarize all accounts posted in the ledger.

5. Record adjustments to the ledger

Page 29
 This is to record transactions that were not recorded during the
accounting period, correction of errors and recording of accruals and
deferrals.

6. Prepare worksheet
This step is optional. In this step, you prepare a 10-column or 12-
column worksheet to present the summary of all accounts and its
adjustments.

7. Prepare financial statements

After it has been summarized in the worksheet, you prepare
financial statements in good form. 8. Prepare closing entries In this step,
you eliminate or close all the temporary or nominal accounts. Temporary
or nominal accounts are revenue/income and expense account. This are
called temporary or nominal account because it is only incurred for the
current period and cannot be carried-forward to the next accounting
period.

8. Prepare post-closing trial balance

This step is similar to a trial balance but only the permanent or real
accounts are being recorded. Permanent or real accounts are assets,
liabilities and equity accounts. They are termed as permanent or real
accounts because it is to be carried-forward to the next accounting period.

9. Record reversing entries

In this step, you prepare entries to reverse the adjusting entries
made to all accruals and deferrals.

Review Questions:

1. What is accounting cycle?

2. Discuss the steps of the accounting cycle.

Page 30
Chapter 4: JOURNALIZING TRANSACTIONS, POSTING TO THE LEDGER
and TRIAL BALANCE

INTRODUCTION:
Accounting is a tool used in recording transactions up until the
preparation of financial reports.
Journalizing is the process of recording transactions in one of book of
accounts called Journal. Posting on the other hand is the process of
transferring and classifying the accounts to its respective ledger account
Imagine a business without record keeping activity; it would be very
difficult to trace activities that occur considering the volume of transactions
that occur each day. With the use of journals and ledgers, business owners
and managers can easily look back to any transactions at a glance, if proper
journal and posting procedures are prepared.
In this module, you will learn the usefulness and purpose of using the
book of accounts: the Journals and Ledgers.

Learning Outcomes:

After studying this module, you should be able to:

1. Journalize transactions using the general journal.
2. Post the journal entries to the general ledger and the subsidiary ledgers.
3. Prepare the Trial Balance

Lesson 1: Books of Accounts

1. Journal – it is also called as “Book of Original Entry”. It is where

transactions are recorded for the first time.

a. General Journal –used to record all kinds of accountable events

b. Special Journal – used to record only for a particular transaction
i. Sales journal – used to record for sales on account or credit
ii. Purchase journal – used to record for purchases on account or
credit
iii. Cash receipts journal – used to record all cash received
iv. Cash disbursement journal – used to record all cash payments

Page 31
 2. Ledger – it is also called as “Book of Final Entry”. It is where all accounts are
classified and grouped according to its nature, kind or class.
a. General Ledger – used to post all accounts
b. Subsidiary Ledger – ledger of a particular account; used as a
supporting book for a general ledger

Lesson 2: Journalizing
After the transactions have been analyzed as accountable events, it is then
recorded in the books, called journal, of the entity in a chronological manner.
The process of recording accountable events in the books is called
Journalizing. It is simply jotting down what the business received and what has
parted with to receive something.
The double entry system is used in journalizing accountable events. It is
based on the concept that each party in a business transaction will receive
something and give something in return.
In accounting, what is received is a Debit and what is given is a Credit.

Each journal entry contains the following items:

1. Date
2. The account title and the amount to be debited
3. The account title and the amount to be credited
4. Explanation.

Recall our transactions on OLIVIA MARIE TRAVEL and TOUR (module 3), an
illustration on how to record transactions using the general journal entry follows

GENERAL JOURNAL
 
Date Accounts and Debit Credit
2019 Explanation F
 Marc 00 
1
h  1 Cash     5 0 0  0  0             
2 00 
     Cars   7 5 0 0  0  0             
3 00 
      Ruiz, Capital          8 0  0  0  0  0 
  Investments of Ruiz to open
4
    the business.                    
5                          
6 00 
   3 Cash    1 0 0 0  0  0             
7 00 
      Loans Payable          1 0  0  0  0  0 
8       Cash loan from Chinabank.                    
9                          
10 00 
   7 Furniture and Fixtures    4 5  0  0              

Page 32
 0
  00 
11
      Cash           4  5  0 0   0
  Bought furniture and fixture
12
    from SL Luiz.                    
13                    
  00 
14
   10 Equipment    5 5  0  0 0            
  00 
15
      Accounts Payable           5  5  0 0   0
  Bought equipment from Emcor
16
    on account.                    
17                          
18 00 
   18  Ruiz, Drawings   5 0  0  0             
19 00 
      Cash             5  0  0  0 
20       Cash withdrawal by Ruiz                    
21                          
  00 
22
   20  Accounts Payable   5 5  0  0 0            
    00 
23
      Cash           5  5  0 0  0
24       Paid account due to Emcor.                    
25                          
26 00 
   21  Cash   1 5 0   0 0             
  00 
27
      Service Income           1 5  0  0  0 
  Cash receive from Baguio
28
    tour                    

  00 
29
 22  Gas and oil Expense    5  0 0            
  00 
30
     Repair Expense   1  0  0 0            
31 00
Cash 1 5 0 0
32 Payment for expenses.
33
34 00
24 Accounts Receivable 1 6 0 0 0
35 00
Service Income 1 6 0 0 0
36 Billed Mr. San for tour.
37
38 00
25 Utilities Expense 5 0 0
39 00
Cash 5 0 0
40 Paid PLDT Bill
Date

2019 Accounts and Explanation F Debit Credit

1 00
March 27 Accounts Receivable 2 0 0 0 0
2 00
Service Income 2 0 0 0 0
Billed CBMA faculty club for
3
Manila tour.
4
5 00
30 Cash 8 0 0 0
6 00
Accounts Receivable 8 0 0 0
7 Collected from Mr. San
8
9 00
31 Rent Expense 1 0 0 0 0
10 00
Salaries Expense 9 0 0 0

Page 33
11 00
Cash 1 9 0 0 0
12 Payment for expense

The following rules should be observed per page:

1. Enter the column headings: date, accounts and explanation, F, debit and
credit.
2. Enter on the date column, the year and the amount. The month is only written
only once until you move to the next month. Enter the date on the smaller
column beside the month.
3. Enter the debit account on the accounts and explanation column and the
amount on the debit column.
4. Enter the credit account on the accounts and explanation but indent it so it
will not fall on the debit account margin. Enter the amount on the credit
money column.
5. Enter a brief explanation on the accounts and explanations column. Indent it
further so it will not fall on debit or credit column. This is made for easy
reading.
6. The money column consist of eight spaces where, starting from the right, the
centavos, tens, hundreds, thousands, and ten thousands are placed. There is
no need to place a comma separating the hundreds from the thousands or a
decimal point separating the tens from the centavos.
7. If a complete journal entry cannot be accommodated at the bottom of the
page, then transfer all data to the next page. A journal entry must be
completely recorded in one place for easy reading and analysis.
8. A line or space is provided in between the entries to clearly separate one from
the other.
9. If an error is committed either in figure or word, cross out the error with one
horizontal line and write the correct figure or word above it.
1000 car
100 or cash

For example:

A journal entry with one debit and one credit is called simple
journal entry.

An entry with more than one debit or more than one credit is called
a compound journal entry.

Page 34
 Lesson 3: Posting to the ledger
From the entries on the journal entry described previously, can you determine
immediately the balances of cash or service income? To make this possible, the
debits and credit of a particular account, such as cash, should be summarized on
one place, the cash ledger, and these ledgers are filed in a book called general
ledger which is also called the book of final entry.
One ledger is to one account. For example, if there are 20 accounts, then you
will need to 20 ledgers to be compiled in the general ledger.
The process of transferring the debits and credits from the journal to the
ledger is called posting.
Example: The posting procedure for Olivia Marie Travel and Tours.

GENERAL JOURNAL Page 1

Date
  Description Debit Credit
2019
F
 Marc Cash    10 00 
1
h  1 1 5 0 0  0  0             
2 00 
     Cars   7 5 0 0  0  0             
  00 
3
      Ruiz, Capital         8 0  0  0  0  0 
  Investments of Ruiz to open
4
    the business.                    

GENERAL LEDGER
CASH No. 101
Date Explanation F Debit Date Explanatio F Credit
2019 n
March 1 J 50 000 00
1

The following rules should be observed:

A. Based on the first debit entry in the journal, look for the account in the
general ledger.
B. On the debit side date column, copy the date.
C. Copy the amount in the debit column.
D. Insert the journal page number in the folio column or posting reference
column of the ledger.

Page 35
 E. Insert the ledger account number in the folio column or posting reference to
the journal.
F. The next account to be posted is the Cars account. Repeat steps A to E. the
third account to be posted is the capital account and so on until all accounts
have been posted or transferred from the journal to the ledger.
The Cash ledger of Olivia Marie Travel and Tours appear below
CASH
Date Date
2019 Explanation F Debit 2019 Explanation F Credit
March 1 J1 50 000 00 March 7 J1 45 000 00
3 J1 100 000 00 18 J1 5 000 00
21 J1 15 000 00 20 J1 55 000 00
30 47 000 00 J2 8 000 00 22 J1 1 500 00
173 000 00 25 J1 500 00
31 J2 19 000 00
126 000 00

Debit Balance Footings

Ledger Balances:
Balances of each account in the general ledger should be determined at least
at the end of each month. Observe the following rules:
1. Total the debit column and record it in small figures in pencil directly underneath
the last debit amount. This is called pencil footing. It is done in pencil and in
small figure only to distinguish it from the regular entry and to permit erasures if
the figure is not correct. Do the same for the credit column.
2. Extract the balance: if a debit balance, place it in the explanation column debit
side in line with the last debit posting; and if a credit balance, place it in in the
explanation column credit side in line with the last credit posting.
3. You need not to pencil foot if there is a single debit or credit amount only. You
need not extract the balance nor place it in the explanation column if the postings
are one side only.

SUBSIDIARY LEDGERS:
If a business has a number of customers and creditors, the use of subsidiary
ledgers will help to track down the amount owed by each customer (receivable
account) and the amount owed by the business to its creditors (payable account).
The use of subsidiary ledger does not eliminate the ledger account of
Accounts Receivable and Accounts Payable but instead this account becomes the
control account.

Page 36
 A schedule of Accounts Receivable or Accounts Payable is prepared and the
total of which is compared with the balance of the control account in the general
ledger to see if the balances reconcile.

JOURNAL
Accounts and
Date Explanation F Debit Credit
March
Accounts Receivable 16 000
24 102
Service Income 16 000
102 20 000
27 Accounts Receivable
Service Income 20 000
30 Cash 8 000
Accounts Receivable 102 8 000
SUBSIDIARY LEDGER

NAME: Mr. San

ADDRESS: 123 Real St. Songco, Borongan
Date Terms F Debit Credit Balance
March
24 SA No. 1 J1 16 000 16 000
30 OR No. 81 J2 8 000 8 000

GENERAL LEDGER
ACCOUNTS RECEIVABLE
Date Particulars F Debit Date Particulars F Credit
March March
J
24 1 16 000 30 J2 8 000
J
27 2 20 000
NAME: CBMA faculty club
ADDRESS: CBMA Essu Borongan
Date Terms F Debit Credit Balance
March
27 SA No. 2 J2 20 000 20 000

OLIVIA MARIE TRAVEL AND TOURPostings from the

SCHEDULE OF ACCOUNTS RECEIVABLE
Journal to the Ledger
The control account
March 31, 2019 of Accounts
Mr. San P 8,000 receivable should
reconcile with the
CBMA Faculty Club 20,000 total in the schedule.
Total 28,000

Page 37
Lesson 4: Trial Balance
The purpose of a trial balance is to prove the equality of the debit and credit
of all accounts in the General Ledger.
The trial balance does not assure the correctness and accurateness of the
balances of accounts in the General Ledger. It only shows the debits and credits of
the accounts are balanced. Meaning, the debit and credit are equal.

The trial balance is said to be “in balance” if the debit and credit are equal.
However, it is said as “out of balance” if it is not equal. If the trial balance is “out of
balance”, it could mean that there are some errors or omission occurred in the
previous steps.
Some of the errors or omission might result but not limited to the following:
1. Failure to record transaction or to post a transaction.
2. Recording the same erroneous amount for both the debit and the credit parts
of a transaction.
3. Recording the same transaction more than once.
4. Posting a part of a transaction correctly as a debit or credit but to the wrong
account.
Procedure in Preparing the Trial Balance
1. A trial balance has the following headings:
a. Name of the business
b. Title of report (Trial Balance)
b. Period covered by the report
2. Account Titles are arranged in the order as: Assets, Liabilities, Capital,
Revenue and Expenses.
3. Only accounts with balances appear in the trial balance.
4. The peso sign is placed only in the first debit amount, first credit amount and
on the totals.
5. The totals are ruled (one horizontal line drawn under the last amount of debit
and credit columns) and double ruled (two horizontal lines are drawn under
the total figures).
6. If the total debits do not equal total credits, then error(s) must have been
committed which should be located before ruling and double ruling the totals.
It is advisable that the totals should be in pencil figures first and if found
correct then write in ink.

Page 38
 Using the ledger balances of Olivia Marie Travel and Tours, the Trial balance
will appear as follows: (Note: ledger balances of the account of Cars up to Utilities
Expense were not illustrated, the instructor left this for you to work with and verify the
balances).

OLIVIA MARIE TRAVEL AND TOUR

TRIAL BALANCE
MARCH 31, 2019
Acct.
No. Account Titles Debit Credit
101 Cash P 47 000
102 Accounts Receivable 28 000
201 Cars 750 000
202 Equipment 55 000
203 Furniture and Fixtures 45 000
302 Loans Payable P 100 000
501 Ruiz, Capital 800 000
502 Ruiz, Drawing 5 000
601 Service Income 51 000
701 Gas and Oil Expense 500
702 Rent Expense 10 000
703 Repair Expense 1 000
704 Salaries Expense 9 000
705 Utilities Expense 500
TOTALS P 951 000 P 951 000

EXERCISES:

I. Journalize the following transactions using a General Journal below:

March 1 Mrs. Lanie Mercado invested P150,000 cash on her business “Mercado All Around
Services”
3 Rendered Service to a client on account, P4,000.
4 Bought computer on account from Emcor, P40,000
10 Mrs. Mercado withdrew cash of P5,000.
12 Paid office rental for the month, P1,000.
15 Mrs. Mercado made a partial payment of her account at Emcor, P3,000.
16 Mrs. Mercado invested office table worth P10,000.
19 Mrs. Mercado has made partial collection of a client’s account. P2,000.
20 Borrowed money from Metrobank and issued a note, P10,000
21 Mrs. Mercado made a partial payment of her account at Emcor, P2,000
22 Paid taxes and licenses and other assessments, P1,000.
25 Received cash for services rendered, P3,000
28 Bought office supplies at CS Trading on account, P5,000.
30 Made a partial payment of P1,000 to CS trading
30 Paid Metrobank for borrowed money.
Post
  Date Description Debit Credit
Ref .

Page 39
1                                    
2                                    
3                                    
4                                    
5                                    
6                                    
7                                    
8                                    
9                                    
10                                    
11                                    
12                                    
13                                    
14                                    
15                                    
16                                    
17                                    
18                                    
19                                    
20                                    
21                                    
22                                    
23                                    
24                                    
25                                    
26                                    
27                                    
28                                    
29                                    
30                                    
31
32
33
34
35
36
37
38
39
40
41
42
43
GENERAL JOURNAL

Page 40
 II. From your Journal entries in Requirement No. 1, Post the accounts to their respective Ledgers that follow.

Account Title:
CASH

Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    
4                       4                                    
5                       5                                    
6                       6                                    
7                       7                                    
8                       8                                    
9                       9                                    
10                       10                                    
11                       11                                    
12                       12                                    
13                       13                                    
14                       14                                    
ACCOUNTS RECEIVABLE
Account Title:
Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

Account Title: OFFICE SUPPLIES

Page 41
 Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

OFFICE EQUIPMENT
Account Title:
Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

ACCOUNTS PAYABLE
Account Title:
Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

Page 42
 NOTE PAYABLE
Account Title:
Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

MERCADO, EQUITY
Account Title:
Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

MERCADO, DRAWING
Account Title:
Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

SERVICE INCOME
Account Title:

Page 43
 Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

RENT EXPENSE
Account Title:
Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

TAXES AND LICENSES

EXPENSE
Account Title:
Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

Page 44
Account Title:
Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

Account Title:
Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

Account Title:
Post Post
  Date Description Debit   Date Description Credit Balance
Ref . Ref .
1                       1                                    
2                       2                                    
3                       3                                    

Page 45
 A Proprietor Business
TRIAL BALANCE
For the period March 31, 2020
Pos
t
  Account Titles Debit Credit
Ref
.
1                                
2                                
3                                
4                                
5                                
6                                
7                                
8                                
9                                
10                                
11                                
12                                
13                                
14                                
15                                
16                                
17                                
18                                
19                                
20                                
21                                
22                                
23                                
24                                
25                                
26                                
27                                
28                                
29                                
30                                
III. Extract the ledger balances from requirement No. 2 and prepare the Trial Balance

Page 46
 Chapter 5: COMPLETING THE ACCOUNTING CYCLE
(SERVICE CONCERN)

INTRODUCTION:
The accounting cycle is a series of steps used to process and collect and
process financial information before financial statements can be prepared.
Users of the financial statement: external or internal, need accurate
information to assess the financial performance and condition of the business. It is
therefore important that the financial statement be accurately prepared. Ledger
balances should show accurately the revenues earned, expenses incurred, assets
owned and liabilities owed by the entity, hence the need for any adjustments.
This module explains the next three steps after the trial balance preparation:
gathering the adjusting entries, preparing the worksheet, recording adjustments and
preparing the trial balance.

Learning Outcomes:
After studying this module, you should be able to:
1. Define adjustments.
2. Identify types of adjusting entries.
3. Define worksheet
4. Discuss and procedures in preparing the purpose of a worksheet.
.

Lesson 1: Adjustments and Adjusting Entries

Adjustment or adjusting entries are journal entries which are to be recorded in

the General Journal but are prepared at the end of the accounting period.
Transactions to be recorded as adjustments are transactions that will occur
mostly at the end of the period that if without adjusting the book of accounts these
entries could not be recorded and will result to misleading financial statements.
Adjustments are prepared to be bring the records or balances of the accounts
updated and to properly match revenue against expenses during the period.

 Types of Adjusting entries

1. Accrual – it follows the concept of Accrual Basis of accounting. Accrual
basis of accounting means that revenues are reported when earned

Page 47
 regardless of when collected and expenses are reported when incurred
regardless of when paid.
a. Accrued Income – these are income that is already earned but not yet
collected.
To illustrate:
The business received a P100,000 6%, 60 day note from a
customer dated December 2, 2019

Upon receipt of the note on December 2, 2019, the journal entry made
was:
Notes Receivable P100 000
Cash P100 000
Received a P100,000 6%, 60 day note.

Since the note is interest bearing, interest is computed by using the

simple interest formula as follows:

Interest = Principal x Rate of Interest x Time

= P100,000 x 6%/year x 60
360
= P1,000

Analysis: Counting from December 2, 2019 to complete 60 days, the

maturity value of the note will be P101,000 ( Principal – P100,000 +
P1,000 Interest) which will be due for collection on January 30, 2020.
Since the accounting period end December 31, 2019, a portion of the
Interest income representing December 2 to December 31, 2019 of P500
should be recognized in 2019 and the other portion of P500 will be
recognized in 2020.
ADJUSTING ENTRY:
2019
Dec. 31 Accrued Interest Income P 500
Interest Income P500
To record interest earned from the
period Dec. 2 to 31, 2019.

b. Accrued Expenses – these are expenses that are already incurred but not
yet paid.

Page 48
 To illustrate:

The business is renting a space of the building for P15,000 per month,
payable every first day of the following month. The rental for the month of
December was not paid when the accounting period ended on December
31, 2019. The business intends to pay the rental on January 1, 2020.

Analysis: The rent expense should be recorded and reported in 2019, the
period where the rent expense was incurred and not in 2020, the
period where the rent expense will be paid.
The adjusting entry that should be prepared On December 31, 2019
records the Rent Expense incurred and recognizes the corresponding
liability account.

ADJUSTING ENTRY:
2019
Dec. 31 Rent Expense P 15 000
Accrued Rent Expense P15 000
To set-up unpaid rental for
the month of December 2019.

Take note of the following pro-forma adjusting entry for accruals: (just fill-in the
blanks of what account that have been accrued)
The term “Accrued”
when associated with
an income account
1. Accrued Income connotes “receivable”
Accrued _________ Income xx which means an asset.
_________ Income xx

The term “Accrued” when

2. Accrued Expense associated with an
__________ Expense xx expense account
x connotes “payable” which
means an liability.
Accrued _______ Expense x

2. Deferrals – these are income or expenses already received or paid in

advance but not yet rendered or used.

Page 49
a. Pre-collection of Income – these represents advance collection of from
clients or customers but services have not yet been rendered. There are
two methods in recording pre-collection these are: Liability and Income
Method.
When the advance collection was credited to an income account, the method
used is Income Method and if the advance collection was credited to a liability
account, the method used is the Liability method.

To illustrate:
On October 1, 2019, the business collected P120,000 from a tenant
representing an advance collection from building rental for one year. The
accounting period ends December 31, 2019.

A comparative journal entry showing both Income and Liability Method for
recording the advance collection is presented below:
COMPARATIVE JOURNAL ENTRIES
Income Method Liability Method
Upon
Cash P120,000 Cash P120,000
receipt
of cash Rent Income P120,000 Unearned Rent Income P120,000
on Oct. To record collection of To record collection of
1, 2019 advance rental for the period advance rental for the period
from Oct. 1, 2019 to Oct 1, from Oct. 1, 2019 to Oct 1,
2020 2020

Under the Income Method, Rent Income account has been credited upon
receipt of collection on Oct. 1, 2019, which means charging to income the
whole amount of P120,000.

Under the Liability Method, the advance collection was credited to

Unearned Rent Income account which means charging to liability the
whole amount of P120,000.

The adjusting entries as at December 31 should be:

Income Method
ADJUSTING ENTRY:
2019
Dec. 31 Rent Income P 90 000
Unearned Rent Income P90 000
To record the unearned (liability)
portion rental collected in advance

Page 50
 Liability Method
ADJUSTING ENTRY:
2019
Dec. 31 Unearned Rent Income P 30 000
Rent Income P30 000
To record the earned(income) portion
rental collected in advance

Supporting computations follow:

Income or Earned Portion

computed as follows:

P30,00
P120,000 = P10,000 x 3months = 0

12 months (Oct 1 to Dec. 31, 2019)

Liability or Unearned Portion

computed as follows:

P90,00
P120,000 = P10,000 x 9months = 0
(Jan. 1 to Oct. 1,
12 months 2020)

If adjustments have not been made on December 31, 2019, using the
Income Method, the Income and equity accounts will be overstated and
liability understated.

If adjustments have not been made on December 31, 2019, using the
Liability Method, the liability will be overstated, and income and owners
equity accounts will be understated.

The respective general account before and after adjustments are presented
below:
Under Income Method Under Liability Method
Before Adjustment Before Adjustment
           
Rent Income     Unearned Rent Income
 Oct. 1 120,000      Oct. 1 120,000
  Original Entry)      (Original Entry)
           
           
After Adjustment     After Adjustment
           
Rent Income     Unearned Rent Income

Page 51
Dec. 31 90 000  Oct. 1 120,000   Dec. 31 30,000  Oct. 1 120,000
AJE (Original Entry)     AJE  (Original Entry)
    Balance P90,000
 Balance P30,000          
           
Unearned Rent Income     Rent Income
  Dec. 31 90 000     Dec 31 30 000
  AJE     AJE

b. Prepay

Take note that after the adjustments have been made, both the Income and
Liability Methods showed the same results:
Rent Income P 30,000
Unearned Rent Income 90,000
Total P 120,000

c. Prepayment of expenses
This represents advance payment for service to be received (expenses to
be incurred in the future). There are two methods in recording prepayments,
these are Asset Method and Expense Method.

When the advance payment is debited to a prepaid expense account,

the method used is Asset Method, and if the advance payment is debited to
an expense account, the method used is the Expense Method.

To illustrate:

Assume that Mercury Drugstore issued a check on November 1 for

P90,000 as payment for six month’s store rental.

Using the Asset Method, the journal entry on November 1 would be:
JOURNAL ENTRY:
2019
Nov. 1 Prepaid Rent Expense P 90 000
Cash P90 000
To record payment of rent in advance
for 6 months.

On December 31, 2019, the Asset – Prepaid rent account will show a
balance of P90,000 and will cause overstatement of the account,
understatement of rent expense account, overstatement of net income and

Page 52
 owner’s equity, that is if no adjustment is made. Since the store space have
already been used for two months (November and December), the prepaid
account should be decreased by P30,000 that is equal to 2 months of rent
already expired (P90,000÷6 months = P15,000 rent per month x 2 months =
P30,000).
So the journal entry as at December 31 to adjust the prepaid rent account
would be:
ADJUSTING ENTRY:
2019
Dec. 31 Rent Expense P 30 000
Prepaid Rent Expense P30 000
To record the expired portion of the
rent paid in advance

Using the Expense Method, the journal entry on November 1 would be

JOURNAL ENTRY:
2019
Nov. 1 Rent Expense P 90 000
Cash P90 000
To record the unexpired portion of the
rent paid in advance

On December 31, 2019, the account Rent Expense will show a balance of
P90,000 which if not adjusted will cause overstatement of the account,
understating net income and owner’s equity. Since only two month have
expired, the rent expense account should only have a balance of P30,000.

So the journal entry as at December 31 to adjust the rent expense

account would be:
ADJUSTING ENTRY:
2019
Dec. 31 Prepaid Rent Expense P 60 000
Rent Expense P60 000
To adjust for four months unexpired rent.
Under Expense Method Under Asset Method
The respective general account before and after adjustments are presented below:
Before Adjustment Before Adjustment
           
Rent Expense     Prepaid Rent Expense
Nov. 1 90 000       Nov. 1 90 000  
(Original Entry)       (Original Entry)  
           
           
After Adjustment     After Adjustment
           
Rent Expense     Prepaid Rent Expense
Nov. 1 90 000 Dec. 31 60,000   Nov. 1 90 000 Dec. 31. 30 000
(Original Entry) AJE     (Original Entry) AJE

Page 53
Balance 30 000       Balance 60,000
           
           
Prepaid Rent Expense     Rent Expense
Dec. 31 60 000       Dec 31 30 000  
AJE       AJE  

Take note that after the adjustments have been made, both the Asset and
Expense Methods showed the same results:
Rent Expense P 30,000
Prepaid Rent Expense 60,000
Total P 90,000

3. Provision for Estimated Uncollectible Accounts (Bad Debts) – this is to record

any receivable that is yet or doubtful to be collected.
Accounts Receivable (AR) should be values at estimated realizable
value which is derived by deducting the Allowance for Uncollectible Accounts
from the AR and this usually occurs in trade receivables.
Because of uncertainty of collection, some of the customers’ accounts
are considered doubtful and hopeless of collection. The estimated loss that
the company may incur arising from these doubtful and hopeless accounts is
known as bad debts expense, doubtful accounts expense or uncollectible
accounts expense.
There are two methods in recognizing bad debts:
1. Allowance method (for general purpose reporting)
Bad debts expense is being recognized in anticipation that “what if
not the whole amount of receivable can be collected?” Because of
this, the company estimates a certain percent of the AR as
estimated uncollectible account.

To illustrate:
The business has an outstanding accounts receivable from various
customers in the amount of P200,000. At the end of its accounting
period, it is estimated that 5% of this is doubtful of collection.
ADJUSTING ENTRY:
2019
Dec. 31 Bad debts P 10 000
Allowance for doubtful accounts P10 000
To set up provision for doubtful
accounts, 5% of outstanding accounts

Page 54
 recievable.

If bad debts expense is not recorded:

Income Statement : Expense is understated and profit will be
overstated.
Balance Sheet: the valuation account (allowance for doubtful
account) is understated, so Accounts Receivable is overstated.

Financial Statement presentation:

Accounts Receivable P 200,000
Less: Allowance for Doubtful 10,000
Account
Estimated Realizable Value P 190,000

2. Direct Write-off method (for income tax purposes)

Under this method, the business adopts a policy of directly
charging to bad debts expense the account of a customer whom it
believed could not pay its balance anymore without providing for
“Allowance for bad Debts”.

To Illustrate: (continuing the example from the allowance method).

Mr. Carlo Katig, one of your customer, has left abroad leaving an
unpaid balance of P8,000.
ADJUSTING ENTRY:
2019
Dec. 31 Bad debts P 8 000
Accounts Receivable P8 000
To write-off the account of Mr. Katig.

With the direct write-off, the balance of the Accounts Receivable

account will automatically be reduced to P192,000 (P200,000 –
8,000).
Below are comparative entries showing Allowance and the Direct-
Write-off Method.
COMPARATIVE ENTRIES:
Transaction Data Allowance Method Direct Write-off Method
1. Total sales on account is Accounts Receivable P200,000
P200,000 Sales P200,000 Same entry
(Original Entry) To record sales on account
2. Estimated to be doubtful Bad Debts P10,000
of collection is 5% Allowance for bad Debts P10,000
No entry
To set up provision for doubtful
accounts.
3. Amount ascertained to be Allowance for bad Debts P8,000 Bad Debts P8,000

Page 55
 worthless is P8,000. Accounts Receivable P8,000 Accounts Receivable P8,000
To record bad debts written off. To record bad debts written off.
5. Provision for Depreciation of Fixed Asset – all fixed asset are subject to
depreciation except for land. The need to depreciate is to record the decrease of
value of the fixed asset due to obsolescence, wear and tear, etc.

The simplest and frequently used method of depreciation is called the straight line
method. The formula is:
Cost - Salvage Value, if any = Depreciation
Useful life in no. of year

To Illustrate:
On July 1, 2019, the business acquired an Office Equipment costing P75,000 with
an estimated life of 5 years and a salvage of P5,000 after its useful life.

Cost - Salvage Value, if any = Depreciation

Useful life in no. of year

75,000 – 5,000 = 14,000

5 years
Since the office is acquired on July 1, 2019 and the accounting period ends
December 31, 2019, the depreciation to be recorded shall be equal to six months
only (July – December), So from the P14,000 depreciation, we will only get a
fraction which is 6/12months or P7,000.
ADJUSTING ENTRY:
2019
Dec. 31 Depreciation Expense P 7 000
Accumulated Depreciation P7 000
To record depreciation expense from
July 1 to December 31, 2019.

Lesson 2: Preparation of the Worksheet

It connects the trial balance and financial statement. It is usually
prepared at the end of the accounting period. The preparation of a worksheet
is optional. It is used as a primary step in preparing for the financial
statements.
The use of a worksheet is mostly a working paper used by the
preparers for internal purposes only and to reduce the risk of errors when
producing financial statements. It uses all of the accounts contained in the

Page 56
 company’s accounting records, records adjusting entries and calculates the
final numbers to enter on the financial statements.

It is divided into section: Unadjusted Trial Balance, Adjustments,

Adjusted Trial Balance, Statement of Comprehensive Income and Statement
of Financial Position.
Each section is subdivided into debit and credit columns. The totals of
the debit and credit column of each section must be equal to determine the
accuracy and corrections of the record-keeping process.

 Procedures in Preparing the Worksheet

1. In a columnar paper, either a 10-column or 12-column, copy as is the content of
the trial balance in the 1st Column of the worksheet.
2. 2nd Column of the worksheet is for the Adjustment. Write the adjusting entry
transaction amounts under the columns. If the transaction amount was a
debit, then write the amount in the debit column. If the transaction amount
was a credit, then write the amount in the credit column. Add the total debit
and credit. Amounts should be balanced or equal.
3. 3rd Column of the worksheet is for the Adjusted Trial Balance. The adjusted
balance is calculated by taking the amount from the Trial balance column by
adding or deducting the adjustments from the Adjustments column. A debit
balance is increased by a debit adjustment. A debit balance is decreased by a
credit adjustment. If a debit balance is decreased to less than zero, it
becomes a credit. The same philosophy applies to credit balances. If the
adjusted balance is a debit balance, write the balance in the left column. If the
adjusted balance is a credit balance, write the balance in the right column.
Add the total of debits and credits at the bottom. The totals should be equal.
4. 4th Column of the worksheet is for the Statement of Comprehensive Income or
Income Statement. Revenue and expense accounts are the written in this
column. The balances from these accounts should be carried over from the
Adjusted Trial Balance columns. If it was a debit balance, it should remain a
debit balance. Add the total of debits and
credits at the bottom. The column will not be equal. This difference is the net
income, and it should be added to the column at the bottom to make the two
columns equal. If credit column is greater than the debit column, the
difference is net income. However, if the debit column is greater than the
credit column, the difference is a net loss.

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5.5th Column of the worksheet is the Statement of Financial Position or Balance
Sheet. Asset, Liabilities and Equity accounts are written in this column. The
balances from these accounts should be carried over from the Adjusted Trial
Balance columns. If it was a debit balance, it will remain a debit balance. Add the
total debit and credit at the bottom. The columns will not be equal. This difference
matches the difference from the Statement of Comprehensive Income Columns
and is the net income or net loss. It should be added to the column at the bottom
to make the two columns equal.

To illustrate the preparation of Worksheet:

A trial balance and additional information for adjustments appear below for
Emloys Auto Repair Shop after one year of operation:
EMLOYS AUTO REPAIR SHOP
TRIAL BALANCE
December 31, 2019
Debit Credit
Cash on Hand P 25,000
Cash in Bank 45,000
Accounts Receivable 49,000
Notes Receivable 30,000
Prepaid Insurance 15,000
Machinery and Equipment 150,000
Furniture and Fixtures 25,000
Accounts Payable P 26,000
Notes Payable 50,000
Cabrera, Capital 132,850
Cabrera, Drawings 5,000
Repair Income 275,000
Referral Income 15,000
Salaries Expense 45,000
Supplies Expense 600
Rent Expense 55,000
Taxes and License Expense 7,250
Utilities Expense 46,750
Interest Expense 250
Totals P 498,850 P 498,850
Other Information follows:
1. 10% of the accounts receivable should be recognized as doubtful of
collection.
2. Insurance premium recorded as Prepaid Insurance was for six months
starting Sept. 1, 2019.
3. Supplies still on hand, P200.
4. The note receivable represents a 60-day 12% note received from the
customer on Nov. 16, 2019.

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 5. Machinery and equipment were acquired April 1, 2019 with an estimated
useful life of 10 years and scrap value of P2,500.
6. The furniture and fixtures were acquired January 1, 2019 with an
estimated life of 10 years and a scrap value of P2,500.
7. The notes payable is for 60 days at 18% due JGC Financing dated
December 1, 2019.
8. December gross receipts is one third of gross revenue of P13,000
subject to 3% percentage tax.

Adjusting Entries recorded in the GENERAL JOURNAL.

Date Particulars F Debit Credit
2019 Adjusting Entries:
Dec. 31 1) Bad Debts 607 4 900
Allowance for Doubtful Accounts 103 4 900
To record for the doubtful accounts.

2) Insurance Expense 608 10 000

Prepaid Insurance 107 10 000
To adjust for the expired insurance

3) Prepaid Supplies 108 200

Supplies Expense 602 200
To adjust for supplies still on hand.

4) Interest Receivable (Accrued Interest Income) 106 450

Interest Income 503 450
To accrue interest on notes.

5) Depreciation Expense - Machinery and Equipment 609 7 500

Accumulated Depreciation - Machinery and 202 7 500
Equipment
To take up depreciation for machinery and
Equipment

6) Depreciation Expense - Furniture and Fixture 610 2 250

Accumulated Depreciation - Furniture and Fixture 204 2 250
To take up depreciation for furniture and fixture

7) Interest Expense 606 750

Interest Payable 303 750
To accrue interest on notes due to JGC.

8) Taxes and Licenses 603 130

Taxes Payable ( Accrued Taxes Payable) 304 130
To record accrued taxes.
Explanation continues after the worksheet on the next page

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 EMLOY AUTO REPAIR SHOP
WORKSHEET
For the year ended December 31, 2019
Trial Balance Adjustments Adjusted Trial Balance Income Statement Balance Sheet
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash on Hand 25 000 25 000 25 000
Cash in Bank 45 000 45 000 45 000
Accounts Receivable 49 000 49 000 49 000
Notes Receivable 30 000 30 000 30 000
Prepaid Insurance 15 000 2) 10 000 5 000 5 000
Machinery and Equipment 150 000 150 000 150 000
Furniture and Fixtures 25 000 25 000 25 000
Accounts Payable 26 000 26 000 26 000
Notes Payable 50 000 50 000 50 000
Cabrera, Capital 132 850 132 850 132 850
Cabrera, Drawings 5 000 5 000 5 000
Repair Income 275 000 275 000 275 000
Referral Income 15 000 15 000 15 000
Salaries Expense 45 000 45 000 45 000
Supplies Expense 600 3) 200 400 400
Taxes and Licenses 7 250 8) 130 7 380 7 380
Rent Expense 55 000 55 000 55 000
Utilities Expense 46 750 46 750 46 750
Interest Expense 250   7) 750 1 000 1 000
498 850 498 850
ADJUSTMENTS:
Bad Debts 1) 4 900 4 900 4 900
Allowance for Doubtful Accounts 1) 4 900 4 900 4 900
Insurance Expense 2) 10 000 10 000 10 000
Prepaid Supplies 3) 200 200 200
Interest Receivable 4) 450 450 450
Interest Income 4) 450 450 450
Depr'n - Mach and Equip. 5) 7 500 7 500 7 500
Accum. Depr'n - Mach and Equip 5) 7 500 7 500 7 500
Depr'n - Furniture and Fixtures 6) 2 250 2 250 2 250
Accum. Depr'n - Furnitires and Fix. 6) 2 250 2 250 2 250
Interest Payable 7) 750 750 750
Taxes Payable   8) 130   130       130
Total 26 180 26 180 514 830 514 830 180 180 290 450 334 650 224 380
Net Income 110 270     110 270
Totals: 290 450 290 450  334 650 334 650

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Page 61
…continuation: Adjusting Entries recorded in the GENERAL JOURNAL.
a. The date on the adjusting entries is the end of the accounting period, December 31. After the adjustments are recorded in the
general journal, the next step is to post it to the general ledger to arrive at the adjusted balances of the accounts.
b. To illustrate the posting of the first two adjusting entries will appear as:
No.
BAD DEBTS 607 ALLOWANCE FOR DOUTFUL ACCOUNTS No. 104

Date Particulars F Debit Date Particulars F Credit Date Particulars F Debit Date Particulars F Credit
2019                       2019      
Dec. 31   AJE 1 4 900                 Dec. 31   AJE 1 4 900

PREPAID INSURANCE No. 106

INSURANCE EXPENSE No. 608
Date Particulars F Debit Date Particulars F Credit
 2019       2019       Date Particulars F Debit Date Particulars F Credit
 Sept. 1 5 000   GJ9 15 000  Dec. 31   AJE 2 10 000 2019      
Dec.
31     AJE 1  10 000

Note that the folio (F) column identifies the adjusting journal entries (AJE) with reference numbers copied from the
worksheet. After posting all entries, adjusted balances are taken and placed in the Particulars column. Ledger balances
will reflect same balances ash shown in the Adjusted Trial Balance of the Worksheet.

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Lesson 3: Adjusted Trial Balance

Presented below is the adjusted trial balance of Emloy Auto Repair Shop.
This adjusted trial balance serves as an entry point to the preparation of the last
four steps of the accounting cycle.

EMLOY AUTO REPAIR SHOP

ADJUSTED TRIAL BALANCE
December 31, 2019
Debit Credit
Cash on Hand P 25,000
Cash in Bank 45,000
Accounts Receivable 49,000
Allowance for Doubful Accounts P 4,900
Notes Receivable 30,000
Interest Receivable 450
Prepaid Insurance 5,000
Prepaid Supplies 200
Machinery and Equipment 150,000
Accum. Depr'n - Mach and Equip 7,500
Furniture and Fixtures 25,000
Accum. Depr'n - Furnitires and Fix. 2,250
Accounts Payable 26,000
Notes Payable 50,000
Interest Payable 750
Taxes Payable 130
Cabrera, Capital 132,850
Cabrera, Drawings 5,000
Repair Income 275,000
Referral Income 15,000
Interest Income 450
Salaries Expense 45,000
Supplies Expense 400
Taxes and Licenses 7,380
Rent Expense 55,000
Utilities Expense 46,750
Interest Expense 1,000
Bad Debts 4,900
Insurance Expense 10,000
Depr'n - Mach and Equip. 7,500
Depr'n - Furniture and Fixtures 2,250
Total P 514,830 P 514,830

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 Review Questions and Exercises

Review Questions:
1. What is the purpose of adjusting entries? When are these prepared?
2. What is a trial balance? Why can the trial balance not be used in preparing
financial statements?
3. What is a worksheet? Why is it a useful tool in accounting?

EXERCISES:
I. Using the Trial Balance in Module 4, prepare the following:
a. Copy the Trial Balance you prepared in Module 4 in the columnar below.
b. Post the following adjusting entries in the Adjustment Column of the
worksheet.

1. Supplies Expense 1,000

Office Supplies 1,000

2. Depreciation Expense 500

Accumulated Depreciation 500

3. Doubtful Expense 500

Estimated Uncollectible Accounts 500

4. Utilities Expense 2,500

Accrued Utilities Expense Payable 2,500

5. Merchandise Inventory, end 10,000

Income Summary 10,000

c. Complete the extension from Adjusted Trial Balance to the Statement of

Comprehensive Income and Statement of Financial Position observing
the debit and credit rules.

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 UNADJUSTED TRIAL BALANCE ADJUSTMENTS
  Account Titles
Debit Credit Debit Credit
1                                                          
2                                                          
3                                                          
4                                                          
5                                                          
6                                                          
7                                                          
8                                                          
9                                                          
1
                                                         
0
1
                                                         
1
1
                                                         
2
1
                                                         
3
1
                                                         
4
1
                                                         
5
1
                                                         
6
1
                                                         
7
1
                                                         
8
1                                                          

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9
2
                                                         
0
2
                                                         
1
2
                                                         
2
2
                                                         
3
2
                                                         
4
ADJUSTED TRIAL BALANCE STATEMENT OF COMPREHENSIVE INCOME
Account Titles
Debit Credit Debit Credit
1
2
3
4
5
6
7
8
9
1
0
1
1
1
2
1
3

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1
4
1
5
1
6
1
7
1
8
1
9
2
0
2
1
2
2
2
3
2
4
STATEMENT OF FINANCIAL POSITION
Account Titles
Debit Credit

Page 67
4

9
1
0
1
1
1
2
1
3
1
4
1
5
1
6
1
7
1
8
1
9

Page 68
2
0
2
1
2
2

Page 69
 Module 6: FINANCIAL STATEMENT PRESENTATION and THE CLOSING THE
BOOKS OF THE ENTERPRISE

INTRODUCTION:
This module will discuss the preparation of the financial statements taking into
consideration its content, classification and format.

Learning Outcomes:
After studying this module, you should be able to:
1. Define financial statements.
2. Describe the elements of financial statement.
3. Prepare financial statements

Lesson 1: The Financial Statement

Financial Statement is the end product of the accounting process.
General Purpose financial statements are those intended to meet the need of
all users. Its objective is to provide information about the financial position, financial
performance and changes in the financial position of an enterprise as well as its cash
flows. (PFRS 1-8)

 Elements of Financial Statements

1. Statement of Financial Position – shows the financial condition of the business.
It shows the Asset, Liabilities and Equity accounts.
a. Assets – resources that are owned and controlled by the business.
b. Liabilities – obligation of the business
c. Equity – residual interest after deducting liabilities from assets

2. Statement of Comprehensive Income – shows the performance or the result of

operation of the business. It shows the Revenue/Income and Expense accounts.
a. Revenue/Income – increases the cash inflow of the business
b. Expenses – decreases the cash outflow of the business.

3. Statement of Changes in Owner’s Equity – shows the changes in the equity

portion of the statement of financial position

4. Statement of Cash Flows – shows the business’ inflows and outflow of cash. 5.
Notes to Financial Statements – shows the qualitative information of the

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 business. Information that is not to be recorded in the four other financial
statements.

Lesson 2: Procedures in Preparing a Financial Statement

1. All information is to be lifted from the worksheet.
2. For the statement of comprehensive income, it is dated “for the period ended
__________”. Copy all the accounts in the Statement of Comprehensive
Income Column of the worksheet.
3. For the statement of financial position, it is dated “as of the period ended
_________’. Copy all the accounts in the Statement of Financial Position
Column of the worksheet.

To illustrate, let’s use the adjusted trial balance of Emloy Auto Repair Shop to help us
go on with the last four steps of our accounting cycle.
EMLOY AUTO REPAIR SHOP
ADJUSTED TRIAL BALANCE
December 31, 2019
Debit Credit
Cash on Hand P 25,000
Cash in Bank 45,000
Accounts Receivable 49,000
Allowance for Doubful Accounts P 4,900
Notes Receivable 30,000
Interest Receivable 450
Prepaid Insurance 5,000
Prepaid Supplies 200
Machinery and Equipment 150,000
Accum. Depr'n - Mach and Equip 7,500
Furniture and Fixtures 25,000
Accum. Depr'n - Furnitires and Fix. 2,250
Accounts Payable 26,000
Notes Payable 50,000
Interest Payable 750
Taxes Payable 130
Cabrera, Capital 132,850
Cabrera, Drawings 5,000
Repair Income 275,000
Referral Income 15,000
Interest Income 450
Salaries Expense 45,000
Supplies Expense 400
Taxes and Licenses 7,380
Rent Expense 55,000
Utilities Expense 46,750

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 Interest Expense 1,000
Bad Debts 4,900
Insurance Expense 10,000
Depr'n - Mach and Equip. 7,500
Depr'n - Furniture and Fixtures 2,250
Total P 514,830 P 514,830

Income Statement
The income statement is usually presented first because it determines the
profit to be presented in the capital statement which is also presented in the
statement of financial position.
There are two forms in presenting the income statement:
1) Nature of expense method
2) Function of expense
The Income Statement of Emloy is presented below using the Nature of Expense
method.
EMLOY AUTO REPAIR SHOP
INCOME STATEMENT
For the year ended December 31, 2019

Revenue:
Repair Income P 275,000
(note
Other Operating Income 1) 15,450
Less: Expenses:
Salaries Expense 45,000
(note
Depreciation Expense 2) 9,750
(note 124,43
Other Expense 3) 0 179,180
Interest Expense 1,000
Profit for the year P 110, 270

Note 1: Other Income

Referral Income P 15, 000
Interest Income 450
Total P 15, 450

Note 2: Depreciation Expense

Depreciation - Machinery and
Equipment P 7,500
Depreciation - Furniture and
Equipment 2,250

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 Total P 9,750
Note 3: Other Expenses
Rent Expense P 55,000
Utilities Expense 46,750
Taxes and Licenses 7,380
Bad Debts Expense 4,900
Supplies Expense 400
Total P 124,430

The Function of Expense method presents the expenses according to

function; cost of sales, selling expenses, administrative expenses, and financial
expenses that is more applicable for a merchandiser and a manufacturer.

Statement of Changes in Equity

Changes in the owner’s capital or owner’s equity are summarized in
this statement.
EMLOY AUTO REPAIR SHOP
STATEMENT OF CHANGES IN OWNER'S EQUITY
For the year ended December 31, 2019

Cabrera, Capital, January 1 P 100,000

Additional Investment 32,850
Add: Profit 110,270
Total 243, 120
Less: Withdrawals 5,000
Cabrera, Capital, December 31 P238, 120

Statement of Financial Position

There are two forms of this statement: Account Form and Report Form.
The Account Form follows the accounting equation where assets are listed on the left
hand column of the report with liabilities and owner’s equity listed on the right hand
column. The report form shows in one straight column the assets followed by the
liabilities and owner’s equity.

Presented below is the properly classified financial Position of Emloy using the report
format

EMLOY AUTO REPAIR SHOP

Page 73
 Statement of Financial Position
December 31, 2019

ASSETS:
Current Assets:
Cash (Note 1) P 70,000
Trade and Other Receivable (Note 2) 74,550
Prepaid Expenses (Note 3) 5,200
Total 149,750
Non-Current Assets:
Property and Equipment (Note 4) 165,250
Total Assets: P 315,000

LIABILITIES AND OWNER'S EQUITY

Current Liabilities:
Trade and Other Payables (Note 5) P 76,880
Owner's Equity
Cabrera, Capital 238,120
Total Liabilities and Owner's Equity P 315,000

Note 1: Cash On Hand P25,000

Cash In Bank 45,000
Total P70,000
Note 2: Accounts Receivable P49,000
Less: Allowance for Bad Debts 4,900 44,100
Notes Receivable 30,000
Interest Receivable 450
Total P74,550
Note 3: Prepaid Insurance P 5,000
Prepaid Supplies 200
Total P 5,200
Note 4: Machinery and Equipment P150,000
Less: Accumulated Depreciation 7,500 P142,500
Funiture and Equipement P25,000
Less: Accumulated Depreciation 2,250 22,750
Total P165,250

Note 5: Accounts Payable P26,000

Notes Payable 50,000
Interest Payable 750
Total P76,750

Current and Non-Current Classification

Assets are classified into current and non-current assets. Current assets
include cash and non-cash equivalents which are not restricted in use, as well as

Page 74
other assets expected to be realized into cash, or sold or consumed within the
normal operating cycle of the business or one year, whichever is longer.
The following are the current assets:
1. Cash (on hand and in bank)
2. Marketable securities
3. Receivables ( Accounts receivable or note receivable)
4. Other receivables (Interest receivable, rent receivable, dividends
receivable etc.)
5. Merchandise Inventory
6. Prepaid Expenses (Prepaid Supplies, Prepaid Insurance, Prepaid Rent,
etc.)
7. Deductions from current assets are called CONTRA ASSET Accounts like
Allowance for doubtful account)

Non-current Assets are those assets not included as current assets

such as the property, plant and equipment (PPE). PPE or fixed assets are
assets needed to support the operation of the business over a long period of
time and are not intended for sale.
1. Land
2. Building
3. Equipment
4. Furniture and Fixtures
5. Leasehold or Lease Right
6. Accumulated Depreciation (contra asset or off-set account representing
expired cost of the PPE)
Current Liabilities:
1. Accounts Payable
2. Utilities Payable
3. Other Payable
Non-current Liabilities:
1. Note Payable
2. Mortgage Payable
3. Bond Payable

Statement of Cash Flows:

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 The statement of cash flow will aid on how cash is being managed. A
business should generate positive net cash flow especially from operation so that
obligations may be paid including payment of loans and withdrawal of owners.
Cash flow is either an inflow or an outflow and are classified as: operating
activities, investing activities and financing activities.

EMLOY AUTO REPAIR SHOP

Statement of Cash Flows
December 31, 2019

Cash Flows from operating activities:

Collections from customers schedule 1 P196,000
collections for referrals made 15,000
Payment for rent (55000)
Payment for utilities (46750)
Payment for salaries (45000)
Payment for Insurance schedule 2 (15000)
Payment for taxes schedule 3 (7250)
Payment for supplies schedule 4 (600)
Payment for interest expense schedule 5 (250)
Net cash Inflows from operating activites: P 41,150
Cash Flows from investing activities:
Purchase of machinery and equipment schedule 6 P(124,000)
Acquisition of furniture (25,000)
Net cash outflows from investing activities (149,000)
Cash Flows from financing activities:
Investment by the owner P32,850
cash withdrawals (5,000)
Loan from JGC Financing 50,000 77,850
Increase in cash (30,000)
Cash, January 1 100,000
Cash, December 31 P70,000

Schedule 1 Repair Income P275,000

Accounts Receivable, Dec 31. (49,000)
Notes Receivable, Dec 31. (30,000)
Collections from customer P79,000
Schedule 2 Insurance Expense P10,000
Prepaid Insurance, Dec. 31 5,000
Insurance Paid P15,000
Schedule 3 Taxes and Licenses Expense P7,380
taxes Payable (130)
Taxes and Licenses Paid P7,250
Schedule 4: Supplies expense P400

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 Prepaid supplies 200
Supplies paid P600

Schedule 5: Interest Expense P1,000

Interest Payable (250)
Interest paid P750
Schedule 6: Machinery and Equipment P150,000
Accounts Payable (26,000)
Payment for machinery P124,000

REVIEW QUESTIONS AND EXERCISES:

1. What is a financial statement?

2. What are the elements of the financial statements?
3. Describe the elements of the financial statement.

4. Using the Worksheet in Module 5, prepare the following:

a. Statement of Comprehensive Income
b. Statement of Changes in Equity
c. Statement of Financial Position

A Proprietor Business
STATEMENT OF COMPREHENSIVE INCOME
For the period ended March 31, 2020

Income:

Less: Cost of Goods Sold

Beginning, Inventory
Add: Purchases
Goods Available for Sale
Less: Ending, Inventory
Cost of Goods Sold

Gross Profit:

Less: Expenses:

Page 77
Net Income (Loss)

A Proprietor Business
STATEMENT OF CHANGES IN EQUITY
As of March 31, 2020

Owner’s Equity, Beginning

Add: Additional Investment
Net Income
Total
Less: Owner’s Equity, Withdrawals
Owner’s Equity, Ending

A Proprietor Business
STATEMENT OF FINANCIAL POSITION
As of March 31, 2020

ASSETS:

TOTAL ASSETS:

LIABILITIES:

Page 78
Total Liabilities:

EQUITY

Owner’s Equity, end

TOTAL LIABILITIES AND EQUITY

Page 79