Financial Accounting and Reporting Part 1 5

MODULE 1

REVIEW OF THE ACCOUNTING PROCESS

Overview

The module gives us a review of the accounting process for single proprietorship both in
service and merchandising business.

Module Objectives

At the end of this module, the students should be able to:

1. Understand the definition of accounting and identify the users of accounting information.
2. Identify and explain the steps in the accounting process
3. Prepare adjusting entries and understand the rationale for their preparation.
4. Prepares closing and reversing entries and understand the rationale for their
preparation.
5. Prepare a financial statement for service and merchandising business.

ACCOUNTING DEFINED

Accounting 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 decisions, in making reasoned choices among alternative courses of action. This
definition stipulates the nature and purpose of accounting. An accountant provides services
and furnishes quantitative information expressed in terms of money that is useful to the users of
the accounting information. The information are outlined into reports called financial statements
and served as a basis for making important economic decisions.

The users of the accounting information are categorized as either internal or external
users. External users are decision makers who have no direct access to the information
provided by the operations of the company. Internal users represent the managers or the
decision makers of an entity and they need the accounting information for the continued
operation of their business.

Examples of users and their need for accounting information as the basis for their
decision making are:

a. Investors are influenced with the returns from their investments and to decide whether
to make additional investments, hold or sell their shares of stocks.

b. Creditors/Suppliers/Lenders need accounting information to help in their decision

whether to extend credit or loans being applied by businesses.

c. Government and their agencies need to know if an entity is abiding the implemented
government rules and regulations.
6 Financial Accounting and Reporting Part 1

d. Employees/Labor unions are interested in the stability and profitability of the company
they are working with and for the assurance of their security of tenure.

e. General Public and Customers need to know if the company would provide them
continuity of their services and updates on improvements of their products and
services.

BRANCHES OF ACCOUNTING

There are two main branches of accounting: Financial Accounting and Management
Accounting.

Financial Accounting is designed in providing accounting information for all parties

external to the operating responsibility of the company. It is the process of preparing accounting
reports known as financial statements that show the company‟s financial performance and
position to people outside the company like creditors and customers.

Management or Managerial Accounting is designed in providing accounting information

and operational needs for use by the internal users, the management. It involves financial
analysis, budgeting and forecasting, cost analysis, and evaluation of business decisions.

AREAS OF ACCOUNTING

Accounting is commonly misinterpreted and understood as just the recording of business

transactions, known as bookkeeping. However, bookkeeping is only one of the functions of
accounting while accounting is a diversified profession. Accountants can be employed in four
broad or specialized areas:

Public Accounting

Public accounting offers accounting and related services to its clients on a fee basis.
Some of the services being offered include preparation, review and audit of the company‟s
financial statements, tax services, and consultation involving accounting systems, mergers and
acquisitions. Accountants practicing public accounting are licensed professionals known as
Certified Public Accountants

Private Accounting

Private accounting offers accounting services for a specific company and is an important
part to the success of any organization. Private accountants offer a higher level of services
through familiarity with the full workings of the company‟s business interests. They are
concerned with the collection and analysis of financial data within a specific company. They are
also involved with strategic planning and developing new products and services.

Government Accounting

Under Section 109, of the PD No. 1445, Government Accounting is defined as one that
encompasses the process of analyzing, classifying, summarizing and communicating all
transactions that are involved in the receipt and disbursement of all government funds and
properties, and interpreting the results thereof. Its objectives were set to include several areas
 Financial Accounting and Reporting Part 1 7

in government operations. The accounting data should show how government funds were
used and should indicate the outflow and inflow of funds and the need for a study of fund
management and control, if necessary.

Accounting Education

Accounting Education is an area of accounting that covers the upgrading, researching

and teaching accounting knowledge to students, aspiring accountants or accounting
professionals seeking continuous education and updates. This area is composed of
accountants (Certified Public Accountants) who are into teaching, training and development,
including research. Accountants in education pursue a career as a faculty member in a
school, an author of an accounting book, a researcher, a trainer, or a reviewer.

FORMS OF BUSINESS ORGANIZATION

The most common forms of business organization are the following:

Sole Proprietorship

Sole or Single Proprietorship is organized and owned by only one person. It is easy to
form and offers complete control to the owner. However, he is also personally liable for all
financial obligations and debts of his business.

Partnership

A partnership is formed by two or more individuals who agreed to carry on a trade or

business. Each individual contributes money, property, labor or skill, and expects to share in
the profits of the business.

Corporation

A Corporation is a more complex form of business organization as differentiated from a

sole proprietorship and a partnership. It is a separate legal entity whose ownership is divided
into shares of stocks. Its owners are known as shareholders. It is also subject to more legal
requirements and government regulations.

TYPES OF BUSINESS ACTIVITIES

A business is an organization that uses basic resources (inputs) like materials and labor
to provide goods or services to customers or clients. There are three major types of business:

Service Business

A service type of business provides services rather than products to customers or clients
for a fee. Examples are salons, repair shops, hotels and restaurants, and professional firms like
law and accounting.

Merchandising Business
8 Financial Accounting and Reporting Part 1

This type of business is also called a trading business. Merchandising companies buy
goods in salable form and sell them to their customers at a higher cost to make a profit.
Examples are department stores, bookstores, appliance stores and other resellers.

Manufacturing Business

This type of business buys raw materials with the intention of using them in making a
new product. Manufacturing companies converts these raw materials into finished products
before selling them to their customers.

GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP)

Generally accepted accounting principles are a common set of accounting principles,

standards and procedures that must be followed when preparing financial statements.

Because it is important that all who will receive accounting reports be able to interpret
them, a set of practices were developed that will provide guidelines for financial accounting.
The term used to describe these practices is generally accepted accounting principles
(GAAP).

Generally accepted accounting principles encompass the conventions, rules, and

procedures necessary to define accepted accounting practice at a particular time. These
“principles” are not like the unchangeable laws of nature found in chemistry or physics. They
are developed by accountants and businesses to serve the needs of decision makers, and they
can be changed or altered as better methods are developed or as circumstances change.

A few examples of these generally accepted accounting principles are:

1. Business Entity Concept

Under the business entity concept, the activities of a business are recorded separately from the
activities of the owner or owners. This concept is important because it limits the economic data
in the accounting system to data related directly to the activities of the business. Thus, the
accountant for a business with one owner (a proprietorship) would record the activities of the
business only, not the personal activities, property, or debts of the owner.

2. Going Concern or Continuity Assumption

To prepare financial statements for an accounting period, the accountant must make an
assumption about the ability of the business to continue. Specifically, the accountant assumes
that unless there is evidence to the contrary, the business entity will continue to operate for an
indefinite period. This method of dealing with the issue is called the going concern or continuity
assumption. The justification for all the techniques of income measurement rests on this
assumption of continuity.

3. Time Period Assumption

The operating results of any business cannot be known with certainty until the company
has completed its life span and ceased doing business. But financial reports covering shorter
time periods are needed because external decision makers require timely accounting
 Financial Accounting and Reporting Part 1 9

information to satisfy their analytical needs. Because of this, businesses have imposed the
time-period assumption, requiring that changes in a business‟s financial position be reported
over a series of shorter time periods like annually, semi-annually, quarterly or monthly. An
annual accounting period is the most common which can be a calendar year or a fiscal year.
Example: January 1, 2017 to December 31, 2017 is a calendar year; July 1, 2017 to June 30,
2018 is a fiscal year.

4. Unit-of-Measure Assumption

The unit-of-measure assumption specifies that accounting should measure and report
the results of a business‟s economic activities in terms of a monetary unit such as the Philippine
peso. The assumption recognizes that the use of a standard monetary unit throughout all
financial statements is an effective means for aggregating and communicating accounting
information. It is a standard practice to ignore changes in the purchasing power of a peso.

ACCRUAL BASIS AND CASH BASIS OF ACCOUNTING

The difference between accrual basis and cash basis of accounting lies in the timing of
when is revenues and expenses are recognized and incurred when recorded in the books.

Under the cash basis of accounting, revenues are recognized and recorded when cash
is received or collected and expenses when cash is paid. No adjusting entries are needed in
this method of accounting.

Under the accrual basis of accounting, revenues are recognized and recorded when
earned regardless of when cash is received or collected. Expenses incurred are recorded
whether or not cash is paid. Adjusting entries are needed under this method to update the
account balances at the end of the accounting period.

THE ACCOUNTING CYCLE

The accounting cycle, also known as the accounting process, refers to a series of steps
accountants perform during an accounting period for the orderly accumulation, reporting and
interpretation of data pertaining to the financial operations of the business. The functions of
accounting can be summarized as the recording, classifying, summarizing and interpreting of
business data. The first three functions represent the process by which accounting information
is developed. These steps are applied in accordance with generally accepted accounting
principles and practices developed by the accounting profession. The interpreting function
involves the use of analytical techniques and procedures as a base for management decisions.

The steps in the accounting cycle include the following:

1. Documentation
2. Journalizing
3. Posting
4. Preparation of the trial balance
5. Compilation of data needed for adjustments
6. Preparation of the worksheet
7. Preparation of the Financial Statements
8. Adjusting entries are journalized and posted to the ledger
9. Closing entries are journalized and posted to the ledger
10 Financial Accounting and Reporting Part 1

10. Preparation of the post-closing trial balance

11. Reversing entries are journalized and posted to the ledger

The first three steps constitute the recording phase of accounting. The summarizing
phase begins with the trial balance preparation up to the post-closing trial balance. Reversing
entries prepared on the first day of the next accounting period is considered to be an optional
step.

RECORDING PHASE

Accounting is based on a double entry system which means that a business transaction
has a dual effect when recorded. Business transactions are recorded in at least two accounts.
Documents are needed to serve as a basis for recording the transactions. The two books of
accounts where transactions are recorded are the journal and the ledger. The double-entry
accounting system has specific rules of debit and credit for recording the transactions in the
accounts. Debit is the left side of an account while credit is the right side.

To summarize the rules of debit and credit:

Debit: Credit:


Increases in assets  Decreases in assets

Decreases in liabilities  Increases in liabilities

Decreases in equity/capital  Increases in equity/capital
 drawings  investments
 decrease in revenue  increase in revenue
 increase in expense  decrease in expense

Applying the rules of debit and credit, transactions are first recorded in the book of
original entry called the general journal and the process is known as journalizing. The chart of
accounts should show the elements of the financial statements which shall be used in recording
the transactions. Special journals are sometimes used by businesses that are designed for
recording a single type of transaction that occurs frequently. The format and the number of
special journals used will depend on the nature of the business. The most common special
journals include the cash payments journal, cash receipts journal, revenue/sales journal and the
purchases journal. The general journal will be used for entries that cannot be recorded in the
special journals such as adjusting and closing entries.

The information from the journal is then transferred to the book of final entry called the
general ledger and the process is called posting. The ledger is a complete listing of all the
accounts as found in the chart of accounts of a business. The purpose of this process is to
classify the effects of transactions on the elements of the financial statements. Businesses may
have control accounts and subsidiary ledgers that will show their balances are the same.
Subsidiary ledger is a group of related accounts showing the details of the balance in the control
account. Examples of control accounts are Accounts receivable and Accounts payable
accounts.
 Financial Accounting and Reporting Part 1 11

SUMMARIZING PHASE

After all the transactions are posted in the ledger, the account balances are then
computed and must show the normal balances of each individual account. The preparation of
the trial balance will mathematically prove the equality of the debit and credit balances of each
account but will not give the assurance that no errors have been made during the journalizing
and posting process in case the total debit and credit amounts are shown as equal. Inequality
in the debit and credit totals would automatically prove the presence of an error. The most
common examples of errors showing inequality of total debit and credit amounts are
transposition and slide.

Transposition is the erroneous rearrangement of writing an amount like P 1,250 written

as P 1,520. Slide is an error in which the whole amount is moved one or more spaces to the
right or the left, like P 1,000 written as P 100 or P 10,000.

At the end of the accounting period, some of the account balances presented in the trial
balance are not yet updated and may require adjustments before financial statements are
prepared. Data for adjustments are then compiled for such updating. The types of
accounts that require adjustment are as follows:

1. Prepaid Expenses – These are expenses paid by the business in advance; or these are
expenses already paid in cash by the business but the expenses are not yet incurred or
only a portion of the amount paid was used up as expense. Prepaid expenses are also
termed as deferred expenses.

There are two methods of accounting for prepaid expenses:

a. Asset method – if at the date of payment, the business debited an asset account.

The pro-forma adjustment is:

Expense Account xxx Compute used or expense

Asset Account xxx portion

b. Expense method – if at the date of payment, the business debited an expense

account.

The pro-forma adjustment is:

Asset Account xxx Compute unused or asset

Expense Account xxx portion

To illustrate, assume that Lakers Company is using a monthly accounting period. On

January 1, 2017, the company paid P 30,000 representing 3-month rent beginning January 1,
2017. The company adjusts and closes its books every month. The entry to record the
prepayment and the adjusting entry at the end of the month will be:

Asset MethodExpense Method

2017
12 Financial Accounting and Reporting Part 1

Jan 1 Prepaid Rent 30,000 Rent Expense 30,000

Cash 30,000 Cash 30,000

31 Rent Expense 10,000 Prepaid Rent 20,000

Prepaid Rent 10,000 Rent Expense 20,000

Since P 30,000 is for 3 months, the monthly rent is P 10,000. For January, the used or
expense portion is one month or P 10,000; therefore the unused or asset portion will be two
months or P 20,000 as of January 31.

Regardless of which method a business used in any particular case, the amount
reported as expense in the income statement and the amount reported as asset in the balance
sheet will be the same.

Both methods of accounting for prepayment are acceptable although most companies
employ the expense method due to its simplicity. A business must also use a method
consistently for a particular type of prepayment, say asset method for rent while expense
method for supplies.

2. Unearned Revenues – These are revenues collected or received by the business in

advance; or these are revenues already collected in cash by the business but the
revenues are not yet earned or only a portion of the amount received was earned or
became revenue. Unearned revenues are also termed as deferred revenues.

There are two methods of accounting for unearned revenues:

Liability method – if at the date of collection, the business credited a liability

a. account.

The pro-forma adjustment is:

Liability Account xxx Compute earned or income

Revenue Account xxx portion

b. Revenue method – if at the date of collection, the business credited a revenue

account.

The pro-forma adjustment is:

Revenue Account xxx Compute unearned or liability

Liability Account xxx portion

To illustrate, assume that Miami Company is using a monthly accounting period. On

January 1, 2017, the company collected or received P 30,000 representing 3-month rent
beginning January 1, 2017. The company adjusts and closes its books every month. The entry
to record the advance collection and the adjusting entry at the end of the month will be:
 Financial Accounting and Reporting Part 1 13

Liability MethodRevenue Method

2017
Jan 1 Cash 30,000 Cash 30,000
Unearned Rent 30,000 Rent Income 30,000

31 Unearned Rent 10,000 Rent Income 20,000

Rent Income 10,000 Unearned Rent 20,000

Since P 30,000 is for 3 months, the monthly rent is P 10,000. For January, the earned
or income portion is one month or P 10,000; therefore the unearned or liability portion will be
two months or P 20,000 as of January 31.

Regardless of which method a business used in any particular case, the amount
reported as income in the income statement and the amount reported as liability in the balance
sheet will be the same.

Both methods of accounting for unearned or deferred revenues are acceptable although
most companies employ the revenue or income method due to its simplicity. A business must
also use a method consistently for a particular type of unearned or deferred revenue, say
liability method for rent while income or revenue method for subscription.

3. Accrued Expenses – These are expenses incurred in one period but remain
unrecorded and unpaid as of the end of the period. They are also called accrued
liabilities or unrecorded expenses.

The pro-forma adjustment is:

Expense account xxx

Liability account xxx

For example: A company‟s accounting period is monthly, January 1-31, 2017. All
expenses incurred during the month of January must be recorded in January. Let us say,
telephone bill for the month of January amounting to P 5,000 will be paid on February 5, 2017,
the adjusting entry will be:

2017
Jan 31 Utilities Expense 5,000
Utilities Payable 5,000

So, since we are using the accrual basis of accounting, the question is when did the
company incur the expense? The answer of course is for the month of January, therefore we
will record the expense in January. And since this will still be paid in February, we will record a
liability in January.

Another example is, assume a small business is paying a total of P 10,000 for the wages
of its employees for a 5-day work week. Payday is every Friday. Accounting period is monthly.
The Wages Expense during the month of March is shown below:
14 Financial Accounting and Reporting Part 1

Wages Expense
Mar. 5 10,000
12 10,000
19 10,000
26 10,000

40,000

If March 26 is a Friday, then the last day of the month (March 31) falls on a Wednesday.
Therefore the adjusting entry to be made will be:

Mar. 31 Wages Expense 6,000

Wages Payable 6,000

If financial statements are prepared on March 31, the Wages Expense to be shown in
the income statement totaled P 46,000 and the balance sheet will show Wages Payable
amounting to P 6,000.

4. Accrued Revenues – These are revenues earned in one period but remain unrecorded
and not received as of the end of the period. They are also called accrued assets or
unrecorded revenues.

The pro-forma adjustment is:

Asset account xxx

Revenue account xxx

For example: ABC Company‟s accounting period is monthly, August 1-31, 2017. All
revenues earned during the month of August must be recorded in August. If the company is in
the business of renting apartments and one of its tenants has not paid the August rent for
P 8,000, then the adjusting entry of ABC Company will be:

2017
Aug. 31 Rent Receivable 8,000
Rent Revenue 8,000

5. Depreciation of Property, Plant and Equipment

Physical resources that are owned and used by a business which are permanent in
nature or have a long useful life are called fixed assets or plant assets. Examples are land,
building, equipment, trucks, automobiles, a computer, store fixtures, or office furniture. These
assets help generate income for the business. Therefore it is important and proper that a
portion of the asset be recorded as expense in each accounting period.

Fixed assets, with the exception of land have limited useful lives and as such are subject
to depreciation.

Depreciation is the systematic allocation of the cost of the fixed asset over its useful life.
Depreciation is not a process of asset valuation.
 Financial Accounting and Reporting Part 1 15

The pro-forma adjustment for depreciation is:

Depreciation Expense – Name of asset xxx

Accumulated Depreciation – Name of asset xxx

There are different methods of computing depreciation. We will discuss here only the
simplest and the most commonly used method which is the straight-line method. This method
will result into equal periodic charges for depreciation. Also take note that in the adjusting entry
for depreciation, the account credited is the account Accumulated Depreciation. This is a
contra-asset account which will be deducted from the related fixed asset account in the balance
sheet. The credit is not made directly to the fixed asset account in order to preserve the original
cost of the fixed asset in the balance sheet.

To illustrate, assume that on January 1, 2017, Knicks Company bought a delivery truck
for a total cost of P 500,000. Its estimated life is 10 years and the estimated residual value is
P 50,000. The company is using the straight-line method of computing depreciation and it is
using an annual accounting period. The entries of Knicks Company for the above transactions
are:

2017
Jan 1 Delivery Truck 500,000
Cash 500,000
To record the purchase of delivery truck

The adjusting entry on December 31, 2017:

2017
Dec 31 Depreciation Expense-Delivery Truck 45,000
Accumulated Depreciation-Delivery Truck 45,000

Computations will be:

Annual depreciation = Cost – Residual Value

Estimated Life

= P 500,000 – 50,000
10

= P 45,000
===========

Other computation for straight-line method is:

Annual depreciation = (Cost – Residual Value) x Depreciation Rate

= (P 500,000 – 50,000) x 10%

= P 45,000
==========
16 Financial Accounting and Reporting Part 1

The depreciation rate can be computed by getting the reciprocal of the life. Example:
10 years is equal to 1/10 or 10%.

The balance of the Depreciation Expense account is shown in the income statement. In
the balance sheet as of December 31, 2017, the carrying amount or the book value of the asset
is P 455,000, as shown below:

Delivery Truck P 500,000

Less Accumulated Depreciation 45,000

Carrying amount or Book value P 455,000

The depreciation of the fixed asset will be recorded at the end of each year (for ten
years). The same adjusting entry will be recorded for 10 years. Assuming a balance sheet will
be made on December 31, 2022:

Delivery Truck P 500,000

Less Accumulated Depreciation 270,000

Carrying amount or Book value P 230,000

At the end of ten years, the Accumulated Depreciation account will have a balance of
P 450,000. At this point, the book value of the asset will be equal to the residual value of
P 50,000.

6. Uncollectible accounts – these are estimated amounts due from customers that may
no longer be collected and are considered to be as bad debts. The allowance method
estimates the amount of uncollectible accounts receivable and will be recorded as an
adjusting entry at the end of the accounting period and follows the matching principle.

The pro-forma adjustment is:

Doubtful Accounts Expense xxx

Allowance for Doubtful Accounts xxx

Since the loss is an estimate only and the specific customer cannot be identified at this
point, the Accounts Receivable may not be credited. Instead a contra asset account, Allowance
for Doubtful Accounts, is credited. The Doubtful Accounts Expense is also called Bad Debts
Expense or Uncollectible Accounts Expense. The Allowance for Doubtful Accounts is also
called Allowance for Bad Debts or Allowance for Uncollectible Accounts.

The estimate of uncollectible amount at the end of the accounting period is based on
past experience and forecasts of the future. This is computed based on the Accounts
Receivable balance wherein:

a. Single rate is applied to outstanding accounts receivable or

 Financial Accounting and Reporting Part 1 17

b. Aging of accounts receivable where accounts are classified according to how long
they remain outstanding

The computation for the estimated Doubtful Accounts Expense is shown as:

Required ending balance of Allowance for Doubtful P xxx

Accounts
Allowance for Doubtful Accounts before adjustment
*add if debit balance/deduct if credit balance) xxx
Doubtful Accounts Expense for the period P xxx
==========

As an example, the following accounts were found in the ledger of Cavs Red Enterprises
on December 31 of the current year:

Debit Credit
Accounts Receivable 187,520
Allowance for Doubtful Accounts 10,680
Net Sales 4,272,000

The estimated doubtful accounts at the end of the current year is 10% of the outstanding
Accounts Receivable. The adjusting entry on December 31 is as follows:

Doubtful Accounts Expense 8,072

Allowance for Doubtful Accounts 8,072

Required ending balance of Allowance for Doubtful Accounts P18,752

(10% x P 187,520)
Less credit balance of allowance before adjustment 10,680
Doubtful Accounts Expense for the period P 8,072
==============

7. Merchandise Inventory– these represents good on hand and available for sale in the
ordinary course of the business. If the company is using the periodic inventory system,
adjusting entries are required to replace or remove the beginning balance of the
merchandise inventory with the balance at the end of the accounting period. The
adjusting entries to record the replacement of the beginning merchandise inventory
balance and to enter the ending inventory balance would be:

Income Summary xxx

Merchandise Inventory xxx
To close the beginning inventory

Merchandise inventory xxx

Income Summary xxx
To record the ending inventory
18 Financial Accounting and Reporting Part 1

Under the perpetual inventory method, purchases and sale of goods are recorded in the
merchandise inventory account and the cost of goods sold account. As a result, the balances of
the merchandise inventory and the cost of goods accounts are always updated.

After all the adjustments are compiled, the next step is the preparation of the
worksheet. This is an optional step in the accounting cycle. However, it is useful in showing
the flow of the accounting information from the unadjusted trial balance to the adjusted trial
balance and in analyzing the impact of such adjustments on the financial statements. A
worksheet is a working paper prepared by an accountant to facilitate the preparation of the
financial statements.

After the completion of the worksheet, financial statements are prepared and serve as
the primary means of communicating important accounting information to users. These are
accounting reports that quantify the financial strength, performance and liquidity of a business.
Financial statements represent the final output in the work of an accountant. They include
Statement of Comprehensive Income, Statement of Changes in Equity, Statement of Financial
Position, the Cash Flow Statement and Notes to the Financial Statements.

The Statement of Comprehensive Income, also known as the Profit and Loss Statement,
presents the income, expenses and the operating result (profit or loss) during an accounting
period.

The Statement of Changes in Equity shows the summary of changes (increases or

decreases) affecting the equity of the owner/s during an accounting period.

The Statement of Financial Position, also known as the Balance Sheet, shows the
financial condition of the business as of a specific date. It helps the users in assessing the
financial soundness of business in terms of liquidity risk, financial risk, credit risk and business
risk.

The Cash flow Statement presents the movement of cash (input and output) over a
period and is classified as either under operating, financing or investing activities.

The Notes to the Financial Statements are an integral part of an entity‟s financial
statements. They are for complying with the full disclosure principle.

The adjusting and closing entries are entries prepared and posted in the ledger at the
end of the accounting period. The adjusting entries are prepared after the data for adjustments
are compiled and presented in the worksheet. Accounts in the ledger are classified as nominal
or temporary accounts and real or permanent accounts. Nominal accounts include revenue,
expense, owner‟s drawing and income summary accounts. Real or permanent accounts include
the assets, liability and the owner‟s equity (capital) accounts.

Closing entries are prepared to reduce the nominal account balances to zero on the
general ledger. The revenue and expense account balances are transferred to the Income
Summary account. The Income Summary balance is then transferred to the owner‟s equity or
capital account. A credit balance in the Income Summary indicates the profit while a debit
balance indicates a net loss. The owner‟s drawing account is also transferred in the owner‟s
capital account. The following entries show how the closing process is made:
 Financial Accounting and Reporting Part 1 19

1. Revenue xxx
Income Summary xxx
To close revenue accounts

2. Income Summary xxx

Expenses xxx
To close expense accounts

*3. Income Summary with a credit balance:

Income Summary xxx

Owner‟s Capital xxx
To close income summary account

*Income Summary with a debit balance:

Owner‟s Capital xxx

Income Summary xxx
To close income summary
account

4. Owner‟s Capital xxx

Owner‟s Drawing xxx
To close drawing account

The post-closing trial balance is a list of accounts and their balances after the closing
entries have been journalized and posted to the ledger. It includes all the real accounts since
the nominal account balances have been reduced to zero. The purpose of the post-closing trial
balance is to verify that all nominal accounts have been closed properly and the total debits and
credits in the accounting system are equal after the closing process.

Reversing entries are journal entries prepared on the first day of the next accounting
period which reverses certain types of adjusting entries immediately made in the preceding
period. The adjusting entries that may be reversed include the accruals, prepaid expense using
the expense method and unearned revenue using the revenue method. This step is an optional
procedure and is useful to simplify record keeping in the next accounting period. The rule to
follow is all adjusting entries that increase an asset or liability will be reversed. Whether
reversing entries are made or not, the same result is achieved. The following show reversing
entries that are made on the first day of the next accounting period:

1. Prepaid expense using expense method

Expense xxx
Prepaid xxx
Expense/Asset

2. Unearned revenue using revenue method

Unearned revenue xxx
Revenue xxx
20 Financial Accounting and Reporting Part 1

3. Accrued expense
Payable xxx
Expense xxx

4. Accrued Revenue
Revenue xxx
Receivable xxx

THE ACCOUNTING PROCESS

Business
Transactions
Reversing Documentatio
entries n

Journalizing
Post- closing - General
trial balance journal
preparation - Special
journals

Posting
Journalizing
- General
and posting of
ledger
adjusting and
closing entries - Subsidiary
ledgers

Financial
Trial Balance
statements
preparation
preparation

Work sheet
Adjustments
preparation
 Financial Accounting and Reporting Part 1 21

MERCHANDISING BUSINESS

The activities of a service business differ from that of a merchandising business. A

service business earns revenue by rendering services to customers or clients. The revenue
activities of a merchandising business involve the buying and selling of goods or merchandise to
its customers. However, except for the merchandise related accounts, the accounting cycle for
both types of business activities are the same. Because of the differences in their revenue
activities, the general format of the condensed statements of comprehensive income of service
and merchandising companies are illustrated below:

Service Business Merchandising Business

Service Revenue P xxx Sales P xxx
Less Operating Expenses xxx Less Cost of Merchandise Sold xxx
Gross Profit P xxx
Net Income P xxx
Less Operating Expenses xxx
Net Income P xxx

INVENTORY SYSTEMS

The two main types of inventory systems are the periodic inventory system and the
perpetual inventory system. Companies that sell goods of low unit value or inexpensive items
use the periodic inventory system. The periodic system relies upon the physical count of the
inventory to determine the ending inventory balance. Merchandise bought intended for sale are
recorded in the Purchases account. The balance in the Purchases account is then added to the
beginning balance of the inventory account to arrive at the cost of merchandise available for
sale. When a physical inventory count is done, the amount of the ending inventory balance will
then be deducted from the cost of merchandise available for sale to arrive at the cost of
merchandise sold. Sale of merchandise is recorded in a revenue account, Sales. However, the
cost is not recorded.

Under the perpetual inventory system, purchases and sale of merchandise is recorded in
the Merchandise Inventory account and the Cost of the Merchandise Sold account. This system
is used by companies that sell goods of high unit value like automobiles, jewelry, and other
large home appliances. The business keeps track of its cost of merchandise sold on a
continuous basis, thus, at any given time, there is an estimate of the company‟s inventory level.
At the end of the accounting period, an actual count is taken on the number of units still on hand
and is compared with the records showing the ending inventory balance.

Trade Discounts

Merchandisers offer their goods to customers using a catalog where the goods are listed
with their prices. The prices are called catalog or list prices. A trade discount, which is a
percentage reduction from a published list price, may be granted to certain customers such as
dealers or wholesalers for buying frequently and in large quantities. Since a trade discount is
granted at the point of sale, this is immediately deducted from the list price and the difference
which is called the gross invoice price will be the basis for invoicing and recording.
22 Financial Accounting and Reporting Part 1

Both the buyer and seller do not record the list prices and the trade discounts in their
books of accounts. The buyer records purchases and the seller records sales net of trade
discounts.

To illustrate: Assume that S Company sold merchandise with a list price of

P100,000 and a trade discount of 15% and 10%. Sales price or invoice price is computed as
follows:

List price P 100,000

Less: First trade discount
(15% x P 100,000) 15,000
Balance after discount P 85,000
Less: Second trade discount
(10% x P 85,000) 8,500
Net sales price P 76,500

Alternative way of computing the invoice price is to multiply the list price by the
complements of the trade discounts allowed. The computation is shown below:

Invoice Price = (P 100,000 x 85% x 90%)

= P 76,500

The complement of 15% is 85%, and the complement of 10% is 90%.

VALUE ADDED TAX

Value Added Tax (VAT) is a type of sales tax which is levied on the consumption on the
sale of goods, services or properties, as well as goods imported in the Philippines.

A 12% value added tax rate is levied on goods and is recorded as a separate account in
recording the sale and purchase transactions. It is an indirect tax that is passed on to the buyer
and is added to the selling price. The amount paid by the customer, known as the invoice price,
will include the selling price and the 12% value added tax.
Output Vat refers to the value added tax the seller passed on to the buyer and is
classified as a liability account. Input Vat refers to the value added tax the buyer paid on the
purchase. The excess of output tax over input tax is the Value added tax due and payable to
the Bureau of Internal Revenue and is to be remitted by the company within 25 days of the
following month.

The following transactions illustrate the accounting for value added tax using the periodic
system:

Mar 5 A Company sold merchandise to B Company for cash, P 22,400 vat inclusive.

A Company B Company
Cash 22,400 Purchases 20,000
Sales 20,000 Input tax 2,400
Output tax 2,400 Cash 22,400

Mar 6 A Company sold merchandise on account to X Company, P 28,000 vat inclusive.

 Financial Accounting and Reporting Part 1 23

A Company X Company
Accounts Receivable 28,000 Purchases 25,000
Sales 25,000 Input tax 3,000
Output tax 3,000 Accounts Payable 28,000

Mar 9 A Company issued a credit memorandum to X Company for defective merchandise

returned sold on March 6, invoice price P 2,800

A Company X Company
Sales returns and allowances 2,500 Accounts Payable 2,800
Output tax 300 Purchase returns and allowances 2,500
Accounts Receivable 2,800 Input tax 300

Mar 15 A Company collected amount due from X Company

A Company X Company
Cash 25,200 Accounts Payable 25,200
Accounts Receivable 25,200 Cash 25,200

SPECIAL JOURNALS

We have used the general journal to record all types of business transactions. However,
as the transactions of a company increase, there is a need to change to a more efficient and
timesaving manner. Accountants have developed an accounting system for an orderly and
effective processing of data. They have developed special journals. Each special journal
records one particular type of transaction that occurs frequently, such as sales on account, cash
receipts, purchases on account, or cash disbursements.

The special journals are designed to systematize the original recording of major recurring types
of transactions. The number and format of the special journals actually used in a company
depend primarily on the nature of the company‟s business transactions. The special journals
commonly used by merchandising companies include the sales, cash receipts, purchases, cash
disbursements journals.

 The Sales Journal is used to record all sales of merchandise on account (on credit).
 The Cash Receipts Journal is used to record all inflows or receipts of cash into the
business.
 The Purchases Journal is used to record all purchases of merchandise and other items
on account (on credit).
 The Cash Payments Journal is used to record all payments (or outflows) of cash by the
business.

Although all these four special journals are being used, the General Journal is still needed.
The General Journal is used to record all transactions that cannot be recorded in any one of
the special journals. All five of these journals are books of original entry. If a transaction is
recorded in the journal, it is posted to the ledger and made part of the accounting records.
Therefore, if a transaction is recorded in a special journal, it should not be recorded in the
general journal because this would record the transaction twice.
24 Financial Accounting and Reporting Part 1

Since the journal entries are posted to the ledger accounts, the posting reference column in
the ledger should indicate the source of the posting. The following abbreviations are used for
the five journals:

Journal Transactions Abbreviation

Sales Journal Merchandise sold on account S
Cash Receipts Journal Cash receipts from all sources CR
Purchases Journal Merchandise and other items purchased on account P
Cash Payments Journal Cash payments for various purposes CD
General Journal Any transaction that is not included in the special G
journals.

CONTROL ACCOUNTS AND SUBSIDIARY LEDGERS

A control account is an account in the general ledger that shows the total balance of all
the subsidiary accounts related to it. An example of a control account is the general ledger
Accounts Receivable account, which summarizes all of the amounts owed to the company.

The subsidiary ledger accounts show the details supporting the related general ledger
control account balance. The company may use subsidiary accounts for receivables to send out
customer statements. They may use the subsidiary accounts for payables to determine the
amount payable to each supplier. These accounts are normally arranged alphabetically by the
name of the customer or supplier. The sum of the subsidiary accounts in a subsidiary ledger
should agree with the balance in the related general ledger control account when the company
prepares the financial statements.

A subsidiary ledger, then, is a group of related accounts showing the details of the
balance of a general ledger control account. The subsidiary ledger is separated from the
general ledger in order to relieve the general ledger of a mass of details and thereby shorten the
general ledger trial balance. Also, having separate ledger promotes a division of labor.

SCHEDULE OF ACCOUNTS PAYABLE

A schedule of accounts payable is prepared to make certain that the total of the
balances in the subsidiary ledger accounts agrees with the control account.

SCHEDULE OF ACCOUNTS RECEIVABLE

A schedule of accounts receivable is prepared to ensure that the total of the balances
in the subsidiary ledger account agrees with the control account. This schedule is merely a
listing of open account balances.

Readings

 Chapter 1, Accounting for Partnership and Corporation, 2011 Edition, Gloria J.

Tolentino- Baysa and Ma. Concepcion Yamat Lupisan
 Financial Accounting and Reporting Part 1 25

REVIEW QUESTIONS

1. What is Accounting?
2. Give the purpose, nature and functions of Accounting.
3. Differentiate the following:
 Accounting and Bookkeeping
 Financial Accounting and Management accounting
 The forms of business organizations
 The types of business activities
 Accrual basis and cash basis of accounting
 Perpetual and periodic inventory system
4. Explain the different areas of Accounting.
5. Define generally accepted accounting principles (GAAP)? Give and explain
examples of GAAP.
6. What is double - entry accounting system?
7. What are the rules of debit and credit?
8. What is the accounting cycle?
9. What are steps in the accounting cycle? Describe each step.
10. What is transposition? Slide?
11. What are adjusting entries?
12. Give the importance of adjusting entries.
13. After the trial balance is completed, why are financial statements not prepared yet?
14. Why is it important to prepare the financial statements at the end of an accounting
period?
15. What are the basic types of adjusting entries? Explain each.
16. What are the two methods of accounting for prepayments?
17. What adjusting entries are made assuming the business records prepayment
under the asset method? Under the expense method?
18. What are the two methods of accounting for unearned revenue?
19. What adjusting entries are made assuming the business records unearned
revenue under the liability method? Under the income method?
20. What is the pro-forma adjustment for accrued expense? Accrued revenue?
21. What is the pro-forma adjustment for depreciation?
22. What is the difference between an adjusting entry and a correcting entry?
23. What are the financial statements prepared at the end of the accounting period?
Describe each.
24. What is value added tax and how does it affect revenue?
25. What are special journals? Give the types of special journals and its purpose.
 26

LEPTOWS MERCHANDISING
WORKSHEET
FOR THE YEAR ENDED DECEMBER 31, 2016
TRIAL BALANCE ADJUSTMENTS ADJUSTED TRIAL BALANCE INCOME STATEMENT BALANCE SHEET
debit credit debit credit debit credit debit credit debit credit
Instructions:

Cash 56,030.00
Assessment

Accounts Receivable 110,400.00

Allowance for Bad Debts 9,384.00
Office Supplies 9,300.00
Store Supplies 8,231.00
Merchandise Inventory, beg 98,500.00
Prepaid Insurance 6,083.00
Prepaid Rent 25,200.00
Office Equipment 142,300.00
2. Complete the worksheet

Accumulated Depreciation - Office Equipment 13,730.00

1. Give the adjusting entries.

Store Equipment 204,100.00

Accumulated Depreciation - Store Equipment 40,820.00
Accounts Payable 32,100.00
3. Prepare the financial statements

Notes Payable 250,000.00

Salaries Payable
Utilities Payable
Interest Payable
Baha, Capital 167,475.00
Baha, Drawing 7,500.00
Purchases 155,240.00
Freight-In 23,286.00
Purchases Returns & Allowances 2,300.00
Purchase Discount 5,434.00
Sales 451,530.00
Sales Returns and Allowances 4,063.00
Sales Discount 8,540.00
Store Supplies Expense
Office Supplies Expense
Store Salaries Expense 53,000.00
Office Salaries Expense 61,000.00
Rent Expense - Store
Depreciation Expense - office
Depreciation Expense - Store
Utilities Expense - Office
Bad debts Expese
Insurance Expense
Interest Expense
972,773.00 972,773.00
Financial Accounting and Reporting Part 1
Financial Accounting and Reporting Part 1 27

NAME ______________________________________ SECTION _________________

GENERAL JOURNAL Page 1

Date Description PR debit credit
28 Financial Accounting and Reporting Part 1

GENERAL JOURNAL Page 2

Date Description PR debit credit

Data for Adjusments

1 Merchandise inventory at the end of the year, P84,400

2 Office Supplies used amounted to P3,450

Unused store supplies amounted to P6,000

3 25% of the Prepaid Rent is used as of the end of the year

Half of the Prepaid Insurance has expired

4 Office Equipment were depreciated at 10% per year

Store Equipment has a useful life of 5 years

5 Accrued Expenses
Utilities P4,320; Store Salaries, P3,500; Interest P16,250

6 Allowance of Uncollectible accounts is to be 10% of Receivables

Financial Accounting and Reporting Part 1 29

NAME _________________________________________ SECTION _________________

DATE ______________ PROF. M. DOQUENIA

LEPTOWS MERCHANDISING
WORKSHEET
FOR THE YEAR ENDED DECEMBER 31, 2017

Sales xxx
Sales Returns and Allowances xxx
Sales Discount xxx xxx
Net Sales xxx

Less: Cost of Goods Sold

Merchandise Inventory, beg xxx
Add: Purchases xxx
Add: Freight-In xxx
Total xxx
Less: Purchases Returns & Allowances xxx
Purchase Discount xxx xxx
Net Purchases xxx
Merchandise (Goods) Available for sale xxx
Less: Merchandise Inventory, end xxx
Cost of Goods Sold xxx
Gross Profit xxx
Less: Operating Expenses
Selling Expenses
Store Supplies Expense xxx
Store Salaries Expense xxx
Rent Expense - Store xxx
Depreciation Expense - Store Equipment xxx xxx
Administrative (General) Expense
Office Supplies Expense xxx
Office Salaries Expense xxx
Depreciation Expense - office equipment xxx
Utilities Expense - Office xxx
Bad debts Expese xxx
Insurance Expense xxx xxx
Other Expenses
Interest Expense xxx
Total Expenses xxx
Net Income xxx
30 Financial Accounting and Reporting Part 1

1-2 Listed below are examples of ledger accounts: Complete the following table indicating with two Xs
for each account its classification and its normal balance.

a. Cash n. Prepaid Advertising

b. Accounts Receivable o. Rent Expense
c. Domingo, Capital p. Professional Fees
d. Domingo, Withdrawals q. Office Supplies
e. Service Income r. Unearned Subscription Fees
f. Prepaid Insurance s. Allowance for Bad debts
g. Notes Payable t. Notes Receivable
h. Investment in Stocks u. Interest Expense
i. Mortgage Payable v. Salaries Payable
j. Building w. Interest Receivable
k. Insurance Expense x. Land
l. Merchandise Inventory y. Sales
m. Bad Debts Expense z. Accumulated Depreciation

Normal Balance
Owner’s
Item Asset Liability Capital Revenue Expense Debit Credit
a. X X
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
n.
o.
p.
q.
r.
s.
t.
u.
v.
w.
x.
y.
z.
 Financial Accounting and Reporting Part 1 31

1-3 On December 31, 2019, Lakers Company had total assets of P 320,000 and total liabilities of
P 90,000. During 2020, the company had total revenues of P 280,000 and total expenses of
P 230,000. Also during 2020, the owner withdrew P 30,000. On December 31, 2020, total
assets were P 420,000.

_________________ 1. Compute the owner’s equity on December 31, 2019

_________________ 2. Compute the net income for the year 2020.
_________________ 3. Compute the total liabilities on December 31, 2020.
_________________ 4. Compute the owner’s equity on December 31, 2020

1-4 On March 1, 2020, Kobe Bryant started his business, Kobe Laundry Services, by investing cash of
P280,000. During the month, he earned service revenue on account, P 200,000. He also paid utilities
expenses amounting to P 14,000; wages of P 40,000 and rent expense for the month of P 24,000. He
later collected partially the account of customers amounting to P 60,000. At the end of the month, he
received a bill for advertising for the month of March payable in April, amounting to P 20,000.

_________________ 5. Compute the owner’s equity on March 31, 2020

_________________ 6. Compute the total assets on March 31, 2020
_________________ 7. Compute the total liabilities on March 31, 2020.
_________________ 8. Compute the net income for the month of March 2020

1-5 Given are the following selected data of Thunder Repair Service Company
Revenue from professional services rendered for cash P 490,000
Revenue from professional services rendered on account 160,000
Additional investment by the owner 104,000
Cash collected from account customers 230,000
Operating expenses incurred on account 48,000
Operating expenses incurred for cash 140,000
Cash withdrawn by the owner 76,000

Compute for the net income of the company.

1-6 You are given the following data:

December 31, 2016 December 31, 2017

Assets P 520,000 P 670,000
Liabilities ? 300,000

During 2017: Net loss, P 20,000; Additional investment, P 35,000; Drawings, P 60,000

Compute for the beginning balance of liabilities.

32 Financial Accounting and Reporting Part 1

1-7 Classify the following items as (a) deferred expense (prepaid expense), (b) deferred
revenue (unearned revenue), (c) accrued expense ( accrued liability), or (d) accrued
revenue (accrued asset). Use CAPITAL LETTERS.

________ 1. A three-year premium paid on a fire insurance policy

________ 2. Utilities owed but not yet paid

________ 3. Supplies on hand

________ 4. Salary owed but not yet paid

________ 5. Interest owed but payable in the following period

________ 6. Subscriptions received in advance by a newspaper publisher

________ 7. Professional Fees received but not yet earned

________ 8. Professional Fees earned but not yet received

________ 9. Interest paid in advance from a bank loan

_______ 10. Rent collected in advance

_______ 11. Services rendered but uncollected

_______ 12. Advertising paid in advance for 3 months

_______ 13. Income collected but not yet earned

_______ 14. Rent paid in advance

_______ 15. Interest collected in advance by the creditor

1-8 Knicks Service Company prepares adjusting entries at year end. Assuming the following data
were not properly recorded at year end, indicate the effect of each unrecorded adjustment
data on the major elements of the financial statements. Use the following symbols for your
answer: (+) increase; (-) decrease; (NE) no effect.
Assets Liabilities Capital Revenue Expense Net Income
1. Accrued Expense _____ _____ _____ _____ _____ _____
2. Accrued revenue _____ _____ _____ _____ _____ _____
3. Depreciation _____ _____ _____ _____ _____ _____
4. Prepaid Expense (asset method) _____ _____ _____ _____ _____ _____
5. Unearned income (revenue method) _____ _____ _____ _____ _____ _____
6. Prepaid Expense (expense method) _____ _____ _____ _____ _____ _____
7. Unearned income (liability method) _____ _____ _____ _____ _____ _____
8. Unrecorded electric bill received _____ _____ _____ _____ _____ _____
9. Accrued interest on Notes payable _____ _____ _____ _____ _____ _____
10. Accrued interest on Notes Receivable _____ _____ _____ _____ _____ _____
 Financial Accounting and Reporting Part 1 33

1-9 Prepare the adjusting entries on December 31, 2020, the end of the annual accounting
period, on the following independent data. Show your computations after each entry.

1. The Insurance Expense account had a debit balance on December 31, 2020 of P 72,000
representing premium for a 2-year fire insurance policy effective October 1, 2020.

2. Rent Income was credited for P 58,500 on November 1, 2020 representing 9 months rent
collected in advance.

3. Machinery per general ledger on December 31, 2020 shows a balance of P 558,000.
Machinery acquired during the year was P 78,000 on March 1, 2020. All machinery is to be
depreciated at the rate of 25% per annum.

4. As of December 31, 2020, commissions already earned but not yet collected amounted to P
18,000.

5. Supplies costing P 18,000 bought during the period was debited to the Supplies account. Of
the amount, P 8,000 were consumed during the year.

6. Unearned Subscriptions account showed a credit balance of P 76,000 per general ledger on
December 31. Of this, 40% had been actually earned during the period.

7. On December 31, 2020 a 60-day, 9% Notes Payable has a balance of P 360,000 per general
ledger. The note was issued on December 5, 2020. No interest has been taken on this note.

8. Fees Collected in Advance has a balance of P 600,000 of which 60% has been earned.

9. Notes Receivable has a balance of P 300,000 received from a customer in settlement of an

open account on November 16, 2020. The note is a 90-day, 12% note. No interest has been
taken on this note.

10. The Prepaid Insurance account has balance of P 105,000 on December 31, 2020. The balance
represented two fire insurance policies acquired during 2020. The first policy, Policy I for P
60,000 was acquired on March 1, 2020 and the second policy, Policy II was acquired on
August 1, 2020 for P45,000. Policy I is payment for a 2-year plan while Policy II is for a one-
year plan.

1-10 The following accounts were found in the ledger of Blondie Company on December 31,
2020:

Debit Credit
Accounts receivable P 178,400
Allowance for bad debts 4,380
Cash Sales P 456,900
Credit Sales 925,500
34 Financial Accounting and Reporting Part 1

Instructions:

1.) Prepare the adjusting entry to take up the provision for bad debts account on the books of
Blondie Company under each of the following independent assumptions:

a) Analysis indicates that 5%of the outstanding accounts receivable will not be collected.
b) Accounts receivable of P 20,000 will become uncollectible.
c) Accounts receivable of P 5,000 is to be written off, and that the allowance for bad debts is to
be adjusted to 10% of the outstanding accounts receivable.

2.) Show how the Accounts Receivable and the Allowance for Bad Debts would appear on the
December 31, 2020 Statement of Financial Position.

1-11. The unadjusted trial balance of Cavaliers Company for on March 31, 2020, is as follows:

CAVALIERS COMPANY
Trial Balance
March 31, 2020

Account Titles Debit Credit

Cash on hand and in bank 320,340
Accounts receivable 147,830
Allowance for Bad Debts 10,325
Merchandise inventory 103,710
Store supplies 4,450
Office supplies 1,680
Prepaid insurance 7,140
Store equipment 350,600
Accumulated depreciation-store equipment 7,200
Office equipment 275,000
Accumulated depreciation-office equipment 4,450
Accounts payable 257,680
Output Vat 39,000
Notes Payable 200,000
James, Capital 604,165
James, Drawing 50,000
Sales 1,125,000
Sales returns and allowances 15,980
Purchases 800,000
Purchases returns and allowances 23,840
Transportation- in 8,850
Sales salaries expense 79,050
Rent expense-selling 20,000
Office salaries expense 83,800
Rent expense-general 10,000
Interest income 6,770
------------------ -----------------
Total ??? ???
=========== ==========
 Financial Accounting and Reporting Part 1 35

The company prepares its financial statements monthly. Additional data as of March 31, 2020:

a) Ending merchandise inventory, P 107,670.

b) Ending store supplies inventory, P 1,030.
c) Ending office supplies inventory, P 550.
d) Expired insurance, P 5,910.
e) Estimated life of the store equipment is 8 years with a residual value of P 5,000.
f) Depreciation rate on the office equipment is 10% and has a P 8,000 residual value .
g) Accrued sales salaries, P 970 and accrued office salaries, P 550
h) Accrued utilities, P 8,650.
i) It is estimated that 10% of the outstanding accounts receivable will be uncollectible.
j) The Notes Payable has an interest rate of 9% dated March 1, 2020. (use 360 days)

Instructions:

1. Prepare an 8-column worksheet for the month ended March 31, 2020.
2. Prepare the adjusting entries needed for March 31, 2020.
3. Prepare a Multiple step Statement of Comprehensive Income
4. Prepare a Statement of Changes in Owner’s Equity
5. Prepare a classified Statement of Financial Position
6. Prepare the closing entries.
7. Prepare the Post-Closing Trial balance
8. Prepare reversing entries.