FINANCIAL ACCOUNTING & REPORTING

Review of the Accounting Process

Definitions of Accounting
• Accounting is the art of recording, classifying and summarizing in a significant manner and in
terms of money, transactions and events which are, in part at least, of a financial character, and
interpreting the results thereof. [Accounting Terminology Bulletin No. 1, “Review and
Resume,”1953. (New York: American Institute of Certified Public Accountants), p. 9.]

• Accounting is a service activity. Its function is to provide quantitative information, primarily

financial in nature, about economic entities that are intended to be useful in making economic
decisions. [Statement of Financial Accounting Standards No. 1, “Basic Concepts and Accounting
Principles Underlying Financial Statements of Business Enterprises,” 1983 (Accounting
Standards Council), par. 1]

• Accounting is the process of identifying, measuring and communicating economic information to

permit informed judgment and decision by users of the information. (Statement of Basic
Accounting Theory. American Accounting Association.)

The important points made in these definitions are:

1. Accounting is about quantitative information
2. The information is likely to be financial and
3. The information should be useful in decision making.

The definition that has stood the test of time is the definition given by the American Accounting
Association. This definition states the very purpose of accounting, that is, to provide quantitative
information for the making of economic decisions. The definition also states that accounting has a
number of components, namely:

1. Identifying. This is the analytical component. This accounting process is the recognition or
nonrecognition of business activities as “accountable events.” An event is accountable or
quantifiable when it has an effect on assets, liabilities and equity. In other words, the subject
matter of accounting is economic activity or the measurement of economic resources and
 economic obligations. Only economic activities are emphasized and recognized in financial
accounting.

Economic activities of an enterprise are referred to as transactions which maybe classified as

external or internal.

External transactions or exchange transactions are those economic events involving one
enterprise and another enterprise.

Internal transactions are economic events involving the enterprise only. These are the
economic activities that take place entirely within the enterprise. Production and casualty loss
are examples of internal transactions.

Production is the process by which resources are transformed into products. Casualty is any
sudden and unanticipated loss from fire, flood, earthquake and other event ordinarily termed
as act of God.

2. Measuring. This is the technical component. This accounting process is the assigning of peso
amounts to the accountable economic transactions and events. The amounts used in
measuring financial transactions are historical cost, current replacement cost, current selling
price and present or discounted value.

3. Communicating. This is the formal component. This is the process of preparing and
distributing accounting reports to potential users of accounting information. It is for this
reason that accounting has been called the “language of business.”

Aspects of accounting implicit in the communication process:

a. Recording or journalizing- the process of systematically committing to writing business
transactions and events after they have been identified and measured , in books of
account in a systematic and chronological manner according to accounting rules and
regulation.

b. Classifying- is the sorting or grouping of similar and interrelated economic

transactions after they have been identified and measured. It is accomplished by
posting to the ledger. The ledger is a group of “accounts” which are systematically
categorized into asset accounts, liability accounts, equity accounts, revenue accounts
and expense accounts.

c. Summarizing- is the preparation of financial statements which include the Statement

of financial position, the statement of comprehensive income, the statement of cash
flows, the statement of changes in equity and the notes to financial statement.

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Basic Financial Statements
Financial statements are the means by which the information accumulated and processed in
financial accounting is periodically communicated to the users. In other words, the financial
statements are the end product or main output of the financial accounting process

The basic financial statements are:

1. Statement of Financial Position- a formal statement showing the financial position of an entity
as of a particular date. The balance sheet presents the three elements of financial position,
namely assets, liabilities and equity.

2. Income Statement/ Statement of Comprehensive Income- a formal statement showing the

performance of the entity for a given period of time. The performance of the entity is primarily
measured in terms of the level of income earned by the entity through the effective and
efficient utilization of its resources. This income performance used to be known as the results
of operations of the entity.

3. Statement of Changes in Equity- a required basic statement that shows the movements in the
elements or components of the shareholders’ equity

4. Cash Flow Statement -this statement explains the changes of cash and cash equivalents during
an accounting period.

5. Notes to Financial Statements- are used to report information that does not fit into the body of
the statements in order to enhance the understandability of the statements. They provide
additional information and help clarify the items presented in the financial statements.

Elements of Financial Statements

The elements of financial statements refer to the quantitative information shown in the
balance sheet and income statement. They are the means of identifying or classifying the items
affected by transactions and events. The elements directly related to the measurement of financial
position are assets, liabilities and equity. The elements directly related to the measurement of
performance are revenue and expenses.

1. Assets. Assets are economic resources owned by the business. They include properties and
other things of value the ownership title of which is in the name of the business. Assets can be
grouped into current assets and noncurrent assets.

a. Current assets are those assets which can be reasonably converted into cash within a
short period of time, usually within one accounting period or within the regular
operation of the business or normal operating cycle of business. Regular operation of

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 the business or normal operating cycle of the business is the period between the render
of service, incase of service concern, to the receipt of cash, and the period between
the acquisition of materials to their conversion into cash, in case of merchandising
and manufacturing concern. The following illustrations show this process;

Service Concern

Cash

Service rendered Accounts Receivable Cash

Notes Receivable Cash (upon maturity)

Merchandising Concern

Purchase or Selling of goods Cash

Acquisition of Selling of goods AR Cash

Goods or Merchandise Selling of goods NR Cash

Manufacturing Concern

Purchase or Acquisition Manufacturing

of Raw Materials Finished Goods

Selling of FG Cash

Finished Goods Selling of FG AR Cash

Selling of FG NR Cash

The above illustration shows that assets such as Accounts Receivable, Notes Receivable and
Merchandise are considered current assets because they are eventually converted into cash within
the normal operating cycle of the business. Current assets are also used to liquidate current liabilities.
Included here are cash, accounts receivable and notes receivable which are expected to be realized
into cash, merchandise inventory which are expected to be sold, and prepaid expenses which are
expected to be used or consumed.

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 a. Noncurrent assets are those assets which are permanent in nature. Permanent in such
a way that their useful life to the business exceeds beyond one year. These are used in
the operation of the business and not intended for sale. Examples are building,
equipment, furniture and fixtures.

2. Liabilities are debts or obligations of the business to a party other than its owner. There are
two classifications of liabilities: current and noncurrent liabilities.

a. Current liabilities are those which are due for payment within a short period of time or
within one year from the balance sheet date. These obligations require a current asset
for payment. Included here are accounts payable, notes payable, accrued expenses
and unearned income.

b. Noncurrent liabilities are those which mature beyond one year from the balance sheet
date. Examples are mortgage payable, bonds payable and notes payable due beyond
one year.

3. Equity is the “residual interest in the assets of the enterprise after deducting all its liabilities.”
Other terms which can be used synonymously are Capital and Proprietorship.

4. Revenue is the “gross inflow of economic benefit during the period arising in the course of
ordinary activities of an enterprise when those inflows result in increase in equity other than
those relating to contributions from owners.” Simply stated, revenues are inflows of future
economic benefits that increase equity, other than contributions or investments by owners.

5. Expenses are the “gross outflow of economic benefits during the period in the course of
ordinary activities when those outflows result in decreases in equity, other than those relating
to distribution to owners.” Simply stated, expenses are consumption or outflows of future
economic benefits that decrease equity, other than distributions or dividends paid to owners.

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 Analyzing Business Transactions

Introduction/Rationale

In accounting, the business is always assumed to be distinct and separate from its owner or
owners. Which means that the personal properties of the owner are different from the assets of the
business, liabilities of the business are different from his personal obligations, and the expense
incurred by the business are also different from his personal expenses. The transactions therefore
entered into by the owner in behalf of the business should be recorded in the books of the firm. The
data that we record in the accounting books are called transactions. As stated in Module I, not all
transactions are given accounting recognition. Only those transactions that are quantifiable or can be
stated in terms of money receive accounting recognition.

Specific Objectives

A t the end of the topic, the students should be able to:

• Interpret the transaction accounting equation and accounting equation.
• Identify, classify and analyze business transactions.
• Summarize routine transactions and prepare basic financial statements.

Business Transactions

The business operations give rise to business transactions. A business transaction is defined as an
exchange of values. One value is received in return for another value parted with. The term value, as
used in the definition, refers to a thing desirable with money’s worth. The thing of value maybe a form
of property (like land, building, a car, pencil, bond paper, ball pen, etc.) or a right and protection (such
as right to collect, franchise, copyright, etc.)

There are two values which must be considered in the analysis of a business transaction.
These two values reciprocate each other in terms of money measurement.

Summary of Service Transactions Analysis

1. Investment- transfer of anything personal to the business

Value received: Name of asset
Value given away: Right of ownership

2. Cash receipts- cash coming into the business

a. From a new client
Value received: Money
Value given away: Service rendered

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 b. From a client previously billed
Value received: Money
Value given away: Right to collect

3. Cash payment- cash going out of the business

a. For the purchase of an asset
Value received: Name of the asset
Value given away: Money

b. For various services

Value received: Name of service received
Value given away Money

c. Old bill previously received

Value received: Promise to pay, oral or verbal
Value given away Money

4. Sale of services
a. For cash
Value received: Money
Value given away Service rendered

b. On credit/ account
Value received: Right to collect
Value given away: Service rendered

5. Purchase of services/ asset

a. For cash
Value received: Name of asset/service
Value given away: Money

b. On credit/account
Value received: Name of asset/service
Value given away: Promise to pay, oral or verbal

6. Withdrawal- anything business taken out for personal reasons, including the rendition of free
services for personal reasons.
Value received: Right of ownership
Value given away Name of asset given away or service
rendered

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 ACCOUNTING EQUATION

Components of the Accounting Equation

The relationship among the accounting elements assets, liabilities and capital of an enterprise
is expressed in the following basic accounting equation:

Assets= Liabilities + Capital

The assets represent the things of value that a business owns. The liabilities and capital
represent the total claims against those assets. The liabilities are the claims of the creditors and the
capital is the claim of the owner. Whatever is not claimed by the creditors belongs to the owner. As a
result, the total claims against the assets are always equal to the total assets. The two sides of the
accounting equation must always be equal because the rights to all the assets of a business are
owned by someone.

Double- Entry Accounting System

Double- entry accounting is a universally accepted accounting system of recording business

transactions where at least two (double) accounts are affected and the equality of the accounting
equation is maintained. In fact it is named for the fact that at least two entries are required to record
every transaction. The double- entry system records transactions in terms of the accounting equation:

Assets= Liabilities + Capital

which states that at all times, total debits are equal total credits; that is, for every debit entry there is a
corresponding credit entry and vice versa.

Business Transactions and their Effects on the Fundamental Accounting Equation.

The accounting equation provides a basis for analyzing and recording business transactions.
Business transactions affect the elements in the accounting equation. Every transaction, no matter
how simple or complex, can be stated in terms of its effect on one or more of these three elements.

The most common effects of transactions and events on assets, liabilities and capital are as
follows:
1. increase in asset and increase in capital.
2. increase in asset and increase in liabilities.
3. increase in one form of asset and decrease in another form of asset.
4. decrease in asset and decrease in capital.

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 5. decrease in asset and decrease in liabilities
6. increase in one form of liability and decrease in another form of liability

From the preceding examples of analyses of transactions in relation to value received and value
parted with, the following effects in assets, liabilities and capital can be observed:
EFFECTS ON
Transaction Assets Liabilities Capital
1. Investment of cash by the owner increase increase
2. Purchase of office furniture for cash. increase
(furniture)
decrease
(cash)
3.Purchase of merchandise for cash increase
(merchandise)
decrease
(cash)
4. Purchase of merchandise on account. increase increase
5. Total payment of the account in # 4 decrease decrease
6. Assume that the payment in # 5 was only ½ of the
account. decrease decrease
7. Payment of salaries of employees. decrease decrease*
8. Purchase of office equipment on account. increase increase
9. Assume that in the purchase of equipment in #8, a decrease
promissory note was issued to the supplier. (accounts
payable)
increase
(notes
payable)
10. Payment of the promissory note in #9. decrease decrease
11. Payment of office rent. decrease decrease
12. Receipt of cash for services rendered. increase increase
13. Assume that cash was not received in #12 but
services were already rendered. increase increase
14. Co. increase
llection in cash for the receivable in #13. (cash)
decrease
(accounts
receivable)
15. Cash withdrawal of the owner to reduce his
capital. decrease decrease

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Exercises:

1. Some typical transactions of Lorraine’s Laundry Services are presented below. For each
transaction, indicate the effects: increase (+), the decrease (-) or no change(o) in the assets
(A), liabilities (L) and capital (C). More than one sign may have to be placed in the A, L, or C
column for a given transaction

Transaction A L C
a. A. Cruz invested P20,000 in the business.
b. Bought pieces of furniture from Regine Furniture on credit, P5,000.
c. Bought for cash repair supplies worth P900.
d. Paid the rent of the shop, P2,000.
e. Billed J. Rosales for repair services done on his car, P2,500.
f. Bought repair equipment from XYZ Trading on credit, P5,200.
g. Paid the wages of the shop helper, P4,500.
i. Received P3,000 cash for repairing the car of I. Raymundo.
j. Received P1,500 from J. Rosales as partial payment of his account.
k. Withdrew P1,900 cash from the business for personal use.

2 . MATCHING TYPE. Match Column A with Column B. Write the letter of the correct answer on
the space provided for each number.
COLUMN A
1. B. A Roa opened the business by investing P50,000 cash and repair equipment of
P10,000 into the business.
2. Paid advertising for the month, P500.
3. Purchased shop supplies for cash, P1,500.
4. Purchased tables and chairs from Gay on credit, P5,000.
5. Repaired the TV set of J. Vega and collected P2,500 for the service.
6. Paid ½ of the account due to Gay .
7. Repaired the TV set of Rosalinda, P5,500 on credit.
8. Paid the salary of the shop assistant, P3,000.
9. Bought a typewriter for cash, P7,000.
10. Issued a 20-day note to Gay in full settlement of the account in No. 4.
11. Received a 10-day note from Rosalinda in settlement her account.
12. Completed repair work for R. Roces, P6,000 on credit.
13. Received a bill from STV6 for advertising services , P800.
14. Collected the note in No. 11.
15. Withdrew P500 cash for personal use.
16. Collected ½ of the account of R. Roces.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 17. Billed Nora Aunor for repair services, P6,000. Collected P2,000 and the balance to be
collected after one month.
18. Bought additional shop supplies of P6,000. Paid ½ and the balance to be paid after 20
days.
19. Invested additional cash of P5,000 into the business.
20. Paid electric bill to NUVELCO , P850 and telephone bill to DIGITEL, P600.

COLUMN B
A. Increase in Assets = Increase in Capital
B. Decrease in Capital = Increase in Liabilities
C. Increase in Assets = Increase in Liabilities
D. Decrease in Assets = Decrease in Capital
E. Decrease in Assets = Decrease in Liabilities
F. Increase in One Asset = Decrease in One Asset
G. Decrease in One Liability = Increase in One Liability

3. Instructions:
a. Using the solution guide provided, analyze the transactions and write the transactions
amount under the columns affected by each. Decrease in an account should be
presented in parenthesis ( ) to signify deduction . Use the following accounts;

Cash Lorraine, Capital

Accounts Receivable Lorraine, Drawing
Notes Receivable Service Income
Supplies Advertising Expense
Equipment Salaries Expense
Furniture Utilities Expense
Accounts Payable
Notes Payable

Assume the following selected transactions of Lorraine TV Repair Shop for the month of
January, 2024;

Jan 1- Lorraine invested cash of P30,000 and furniture valued at P30,000.

2- Paid cash for advertising the shop, P500.
5- Sent a bill to Regine for services rendered to her, P3,000.
6- Cash received for services rendered, P 5,000.
7- Received P 2,000 from Regine in partial payment of her account
and received a 30-day note for the balance.
8- Lorraine made an additional investment of P20,000.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 9- Collected the note on March 7.
10- Purchased a typewriter for office use, P8,000. Terms: P 5,000
down and the balance on credit.
16- Received from NUVELCO electricity bill for the month, P 1,200.
20- Paid for salaries of employees, P 8,500.
21- The owner withdrew cash for personal use, P 1,000.
24- Issued a 60-day note in settlement of the account on March 10.
25- Paid telephone bill for the month.
27- Billed Alyssa for services rendered, P 2,000.
28- Cash received for services rendered to Mr. Tan, P2,500.
31- Bought repair supplies for cash, P 900.

b. After writing your answers , bring down balances for all columns.
c. Double rule final totals and prove the equality of the accounting equation.

4. The following transactions were completed by Hila Towing Services during its first month of
operations.

May 5 – The owner, Hilario Laya, invested P350,000 cash in the towing business.
6 – Purchased a tow truck for P250,000 paying P100,000 down, balance in
6 months.
7 – Paid rent for the garage and office space, P6,200.
8 – Paid business licenses and permits, P1,350.
9 – Received P950 cash for towing services for the day.
10- Paid gasoline and oil for the truck, P500.
11- Sent a bill to a client for towing services, P1,200.
12- Received a check for P500 from the client in May 11 in partial
settlement of account.
13- Paid water and electricity bill, P1,400.
14- Borrowed money from the bank issuing a promissory note for P12,000.
15- Paid the monthly salary of the driver and office assistant, P6,700.
16- Purchased papers and business forms to be used in the office, P900.
17- Returned business forms which were of the wrong specification and got
a cash refund, P120.
18- Paid the mechanic who did repair work on the tow truck, P1,100.
19- Hilario withdrew P1,000 cash for his personal use.
20- Purchased additional supplies on account, P1,400.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 Required:
1. Using a tabular format, set up column for the following accounts;
Cash Service Income
Accounts Receivable Rent Expense
Office Supplies Taxes and Licenses
Equipment Gasoline and Oil Used
Accounts Payable Utilities Expense
Notes payable Salary Expense
Laya, Capital Repair Expense
Laya, Drawing

2. Analyze the transactions and write the transaction amount under the columns
affected by each. Decreases in an account should be presented in parenthesis
( ) to signify deduction

3. After each entry line bring down balances for all columns

4. Double rule final totals.

5. Recording Transactions in T-accounts:

I. Diana Villanueva withdrew P250,000 from her personal savings account on June 1, 2024 and
deposited the cash in an account for her newly established company, Villanueva Carpet
Cleaning Service. During the month of June, the following transactions occurred;

June 1 – Paid monthly rent for office space, P25,000

2 – Acquired cleaning supplies on account, P45,000.
5 – Acquired a service vehicle for P500,000 by issuing a note payable in that
amount, which will be due on May 31, 2001.
6 – Received cash in the amount of P120,000 for carper cleaning services rendered
to the PNB building.
9 – Paid P15,000 for cleaning supplies acquired on June 2.
13 – Billed clients P325,000 for carpet cleaning services rendered.
15 – Paid utilities bill of P12,000.
16 – Paid salaries of P64,000.
20 – Received P215,000 cash from clients billed on June 13.
23 – Diana withdrew P75,000 from the business.

Required: With the aid of T-accounts, record the transactions listed above using the solution guide
provided.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 Cash Notes Payable

Accounts Payable

Accounts Receivable Villanueva, Capital

Notes Receivable Service Income

Cleaning Supplies Rent Expense

Service Equipment Salary Expense

Utilities Expense

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
II. During the month of September of the current year, the following transactions were completed by
Montano Dental Clinic.

a. Dr. R. Montano invested cash of P65,000 for his dental practice.

b. Paid P900 for rent of the clinic for the month.
c. Purchased medical equipment worth P40,000 by paying cash of P30,000 and the
balance on account.
d. Purchased supplies in cash costing P2,500.
e. Purchased additional medical equipment worth P1,000 in cash.
f. Received cash from patients for medical services rendered, P3,100.
g. Paid salaries of receptionist and attendants, P1,700.
h. Charged a patient P2,300 for medical services rendered on account.
i. Paid creditor, P5,700.
j. Withdrew cash of P2,800 for personal use.
k. Purchased additional supplies on account, P150.
l. Collected P2,000 from patient on account.
m. Paid P3,000 for utilities of the building.
n. Made an additional investment of P680 cash.
o. Paid salaries of receptionist and attendants, P1,500.

Required: Record the foregoing transactions in T-accounts provided below;

Cash Montano, Capital

Montano, Drawing

Professional Fees

Accounts Receivable Salary Expense

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 Supplies Rent Expense

Equipment Utilities Expense

Accounts Payable

Exercises for Financial Statements:

Problem I. Miss Bong Coo, operator and proprietress of Super Bowling Lanes had the following
account balances on September 30, 2024

Advertising Expense P 1,650

Salary and Commission 130,410
Light and Water Expense 2,550
Bowling Supplies Used 1,330
Rent Expense 12,800
Telephone and Telegraph 1,830
Taxes and Licenses 20,740
Maintenance and Repair 15,460
Miscellaneous Expense 1,050
Coo, Capital ?
Coo, Drawing 25,000
Accounts Payable 2,650
Notes Payable 1,870
Bonds Payable 312,400
Cash 34,310
Bowling Supplies on hand 4,840
Bowling Equipment 870,000
Office Furniture and Equipment 20,500
Bowling Income 330,480
Rental Income-Canteen 12,000
Rental Income- Shoes 4,960

Required:
1. A Trial Balance.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 2. Income Statement in good form
3. Statement in Financial Position in good form

FINANCIAL STATEMENT FORMAT:

ALYSSA REPAIR SHOP
Income Statement
For the Period Ended December 31, 2024

Service Income xxx

Interest income xxx
Total Revenues xxx
Less : Expenses
Salaries Expense xx
Rent Expense xx
Supplies Used xx
Doubtful Accounts xx
Depreciation- Building xx
Taxes xx
Interest Expense xx xxx
Profit before Income Tax xxx
Less: Income Tax xx
Profit (Loss) xxx

ALYSSA REPAIR SHOP

Statement of Financial Position
As of December 31, 2024

ASSETS
Current Assets:
Cash xx
Notes Receivable xx
Accounts Receivable xx
Supplies on Hand xx
Prepaid Rent xx , xxx
Noncurrent Assets:
Land xx
Buildings xx
Equipment xx , xxx
Total Assets xxx

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 LIABILITIES AND CAPITAL

Current Liabilities:
Accounts payable xx
Notes payable xx
Accrued Taxes payable xx
Unearned interest Income xx , xxx

Noncurrent Liabilities:
Bonds Payable xx
Mortgage Payable xx , xxx
Total Liabilities xxx

Capital:
Alyssa, Capital xx
Less: Alyssa, Drawing xx
Net Capital xx
Add(Less): Profit ( Loss ) xx , xxx
Total Liabilities & Capital xxx

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 ACCOUNTING CYCLE OF A SERVICE CONCERN

Chart of Accounts

A chart of accounts is a list of account titles used by the business. It serves as a guide to the
bookkeeper. Such accounts are divided into sections and each title has a given code number.

Accounting period and accounting cycle

Accounting period or fiscal period is each segment of time, usually a year, in which statements
are prepared in order to know the results of the business operation during that particular period of
time. The length of each accounting period depends on the nature of the business. An accounting
period maybe annual, semi-annual, quarterly or monthly. Usually, most firms use each period of time
when the business is slow as the end of their accounting period and the beginning of the next
accounting period.

Accounting cycle consists of successive steps starting with the recording of transactions in the
books of accounts and ending with a post-closing trial balance.

The following successive steps consist one accounting cycle;

1. Journalizing
2. Posting
3. Preparing the Trial Balance
4. Adjusting entries
5. Preparation of the Adjusted Trial Balance
6. Preparation of the financial statements
7. Closing entries
8. Preparation of the Post-Closing Trial Balance

Journalizing
Journalizing is the first step in the accounting cycle. It is the process of recording business
transactions in a journal.
A journal is a book of accounts wherein business transactions are recorded for the first time. It
is also called the book of original entry. There are two kinds of journals - the general journal and the
special journals.
The type of journal to be used depends on the size and need of the business. General journal is
the simplest form of journal wherein the two-column form may be used.
A journal entry is a record of business transactions in the journal. There are two types of
journal entry: the simple journal entry which contains only one debit and one credit account, and the
compound journal entry which contains either one debit and two or moiré credits; or two or more
debits and one credit; or two or more debits and two or more credits.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Need for a journal:
1. To provide in one place a complete record of each transaction. Such will link together the
debits and credits of the transactions.
2. The records make it possible to trace the debits and credits of the accounts when errors are
committed

Illustrative Problem:
Atty. Allison Villanueva, a young lawyer who owns Villanueva Law Firm, completed the following
transactions during October of the current year.

2024
Oct. 1- Began the practice of law by investing P 20,000 cash and a law library having a fair
value of P30,000.
2- Purchased P7,000 office equipment, paying P5,000 down and giving a promissory
note for the balance.
4- Purchased P1,200 office supplies and P 6,000 office equipment from Alyssa’s Trading
on credit.
5- Completed legal work and received P4,500 cash.
10- Paid P600 for insurance premium.
15- Completed legal work for R. Moore on credit and billed him P8,500.
18- Paid Alyssa’s Trading.
25- Received P 5,000 from R. Moore as partial settlement of his account.
28- Atty. Villanueva withdrew P 2,000 cash for personal use.
30- Billed R. Moore for additional legal services rendered, P 3,500.
31- Paid the salary of the secretary, P5,000.

Required:
1. Journalize the foregoing transactions in a general journal.
Villanueva Law Firm
Chart of Accounts
Assets Capital
11 Cash 31 Villanueva, Capital
12 Accounts Receivable 32 Villanueva, Drawing
13 Supplies 41 Service, Income
14 Law Library 51 Salaries Expense
15 Office Equipment 52 Insurance Expense

Liabilities
21 Accounts Payable
22 Notes Payable

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Posting
Posting is the process of transferring the records from the journal to the ledger. A ledger
constitutes a group of accounts. It is also called the book of final entry

Need for a ledger:

1. Items of similar nature are grouped together.
2. It is easier to locate the item if information about it is needed.

The simplest form of a ledger is the “T-account”, and the standard form of a ledger is shown
below;

Name of the Item Account No.

Date Explanation F Debit Credit Balance

Procedure in posting

1. Locate the corresponding account title in the ledger.

2. Transfer to the ledger the following information from the journal
a. Date
b. Explanation
c. Amount
Debit accounts from the journal are posted on the debit side of the ledger and credit accounts
are posted on the credit side of the ledger.
3. Place the page number of the journal in which the information was taken to the folio column
of the ledger.
4. Place in the folio column of the journal the page number of the ledger in which the
information was posted.

Inserting the account number in the journal folio column serves two purposes;
a. It serves as a cross-reference when it is desired to trace the amount from one record to
another.
b. Writing the account number in the journal indicates the posting is completed.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

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Using the problem above, post the journal entries made to the ledger using the solution guide
provided below:

Account Title: Cash Account No. 11

Date Items F Debit Credit Balance
Oct 1 J1 P 20,000 P20,000
2 J1 P5,000 15,000

Account Title: Accounts Receivable Account No. 12

Date Items F Debit Credit Balance

Account Title: Supplies Account No. 13

Date Items F Debit Credit Balance

Account Title: Law Library Account No. 14

Oct 1 J1 P30,000 P30,000

Account Title: Office Equipment Account No. 15

Oct 2 J1 P7,000 P7,000

Account Title: Accounts Payable Account No. 21

Account Title: Notes Payable Account No. 22

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Oct 2 P2,000 P2,000

Account Title: Villanueva, Capital Account No.31

Oct 1 J1 P50,000 P50,000

Account Title: Villanueva, Drawing Account No. 32

Account Title: Service Income Account No. 41

Account Title: Salaries Expense Account No. 51

Account Title: Insurance Expense Account No. 52

Trial Balance

A trial balance is a list of accounts with open balances in the general ledger. It proves the
equality of the debits and the credits in the general ledger.

There are two types of trial balance: the trial balance of balances and the trial balance of
totals. The trial balance of balances contains accounts with open balances . Accounts with open
balances either have a debit balance or a credit balance. An account is said to have a debit balance if
the debit total is more than the credit total and is said to have a credit balance if the credit total is
more than the debit total. If the debit side and credit side are equal, the account is a zero balance or
closed account.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Procedure in trial balance preparation
1. Write the heading of the trial balance. The heading of the trial balance includes the following;
a. The name of the business or the owner.
b. Title of the list or trial balance
c. Date of the trial balance.

2. Provide a column for the accounts and two money columns- a debit and a credit.

3. The accounts should be written in just one column arranged in the following sequence;
a. Assets
b. Liabilities
c. Capital
d. Income
e. Drawing
f. Expenses

4. Write the amounts opposite the corresponding accounts under the debit money column if the
account is a debit balance and under the credit money column if the account is a credit balance.

5. Foot the money columns. Double rule the totals.

Description of Account Titles

Account titles are identifications or brief descriptions of items that fall to same kind, class or
nature. In recording business transactions, the elements of financial statements which are better
known as “accounting elements” or accounting values” are to be assigned with their individual names
called “account titles”. In other words, it is a part of our study in accounting where we are to give or
assign names to various accounts. These accounts are classified as either real (permanent) accounts
or nominal (temporary) accounts.

Real accounts are those accounts that comprise the elements of the balance sheet – the assets,
liabilities and owner’s equity. These accounts are called real accounts because they are not closed
or not put to zero balance at the end of the accounting period.

Nominal accounts are those accounts that comprise the elements of the income statement- the
revenue and expense accounts. These accounts are called temporary accounts because they are
closed or put to zero balance at the end of the accounting period.

Here are the different account titles which we have classified into Balance Sheet (financial
position) and Income Statement (performance) accounts.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 Financial Position/Balance Sheet Accounts

ASSETS:
1. Current Assets:

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. When
cash is within the premise of the business, the account title is “Cash on Hand” and
“Cash in Bank” if deposited in the bank.

b. Petty Cash Fund- the account title for money placed and set aside for petty or small
expenses

c. Notes Receivable- this is a promissory note that is received by the business from the
customer arising from rendering of service, sale of merchandise, etc.

d. Loans Receivable- Claims from borrowers as a result of lending money.

e. Accounts Receivable- the account title for amounts collectible arising from services
rendered to a customer or client on credit or sale of goods to customers on account.
This constitutes an oral or verbal promise to pay by a customer or client.

f. Allowance for Doubtful Accounts- this is an amount estimated uncollectible or

receivable . It is credited to serve as a contra account for the related receivable. Other
terms used to describe this account are “Allowance for Bad Debts” and “Allowance for
Uncollectible Accounts.”

g. Accrued Interest Receivable- the amount of interest earned on note receivable but
not yet received in cash.

h. Advances to Employees- the account title for amounts collectible from employees for
allowing them to make cash advances which are deductible against their salaries or
wages.

i. Inventories- assets held for sale in the normal operation of the business, in the
process of production for such sale, or in the form of materials or supplies to be
consumed in the production process or in the rendering of services.

j. Prepaid Expenses- account title for expenses that are paid in advance but not yet
incurred or have not yet expired such as Prepaid Rental, Prepaid Insurance, Prepaid
Interest, Prepaid Advertising, etc.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 k. Unused Supplies- an account title for cost of stationery and other supplies purchased
for use but are left on hand and still unused.

2. Non-current Assets

a. Land- an account title for the site where the building used as office or store is
constructed.

b. Building- the structure owned by the business that is used in the operation of the
business.

c. Equipment - includes calculators, typewriters, adding machines, computers, steel

filing cabinets and the like. If these are used in the office, the account title is Office
Equipment and if used in the store, Store Equipment.

d. Furniture & Fixtures- includes chairs, tables, counters, display cases and the like. If
these are used in the office, the account title is Office Furniture & Fixtures and if these
are used in the store, the account title is Store Furniture & Fixtures.

e. Accumulated Depreciation- this is a contra- asset account . This is called a “Valuation

Account” which is shown as a deduction from the related asset.

f. Intangible Assets- long-lived assets that do not have physical substance and not held
for sale but are useful in the operation of a business. In most cases, intangible assets
provide their owners with privileges, rights or competitive advantages over other
firms. Examples are goodwill, trademark, copyright, patent and franchise.

g. Investment in Stock- ownership of shares of a corporation

h. Investment in Bonds- ownership of financial instruments evidencing an obligation of

another entity

LIABILITIES
1. Current Liabilities

a. Accounts Payable – is an obligation or debt to creditors for money borrowed or

merchandise and other assets bought on credit. Examples are obligations arising
from purchases on account.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 b. Notes Payable- a promissory note issued by the business to its creditors for money
borrowed or merchandise and other assets bought on credit.

c. Accrued Expenses- these are expenses incurred by the enterprise but are not yet
paid. This normally occurs when the accounting period ended such as rent, salaries,
interest, taxes payable, etc.

d. Current portion of Loans Payable- is the amount of money borrowed from a bank
or financial institution.

e. SSS Premium Payable- represents the amount of employee and employer

contribution to SSS which are not yet remitted to SSS.

f. Philhealth/Pag-ibig Contributions Payable represents the amount of employee

and employer contribution to Philhealth/Pag-ibig which are not yet remitted to
Philhealth/Pag-ibig

g. Withholding Tax Payable- the amount of income tax withheld from the salary of
employee in behalf of BIR that the employer has to remit to BIR on the specified due
date.

h. Precollected or Unearned Income- an account title for an income collected or

received in advance and are not yet considered “earned”.

2. Non-current Liabilities
a. Noncurrent portion of long-term debt- includes note payable, loans payable, etc.
b. Bonds Payable- a long-term debt, requiring interest and principal payment
according to contractual terms. This debt security is used when the corporation
wants to increase Additional funds but does not want to increase the number of
owners.

c. Mortgage Payable – a financial obligation of the enterprise to a lender, usually a

bank, for long-term borrowing wherein a land or building owned by the business is
used as a collateral.

OWNER’S EQUITY

1. Capital- this is the center of the owner’s concern because this may increase or decrease at
anytime as a result of business operation. In the normal course of operation, owner’s equity
will be increased by “income” and decreased by “expenses”.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 The owner’s capital investment is indicated by the use of the owner’s name with a
word “capital” written after the name which is separated by a “comma”. Thus, if the owner is
Alyssa Villanueva, the title for her capital account is,

Alyssa Villanueva, Capital

2. Withdrawal- the owner’s withdrawal is likewise indicated by the use of the owner’s name
with the word “Drawing” or “Personal” written after the name which is separated by a
“comma”. Thus, if the owner is Alyssa Villanueva who made withdrawal, the title of her
drawing account is:

Alyssa Villanueva, Drawing

or

Alyssa Villanueva, Personal

Income Statement Accounts

(Temporary Accounts of Owner’s Equity)

INCOME OR REVENUE

1. Sales – in general, this represents revenue derived from the sale of merchandise.

2. Service Income- in general, this is the account title used for all types of income derived from
rendering of services. Other specific account titles used are:

a. Professional Income- income earned from the practice of a profession by accountants,

lawyers, doctors, etc.
b. Rental Income- income earned on buildings, space or other properties owned and
rented out by the business as the main line of its activity.
c. Interest Income- income received by the business arising from an amount borrowed by
a customer and is usually covered by a promissory note.
d. Miscellaneous Income- income earned by the business which is not the main line of its
activity and could not be clearly classified.

3. Gain on sale of fixed assets- results when the price of a property is greater than the cost of
said property

4. Gain on sale of investment

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
COST & EXPENSES

1. Cost of Sales or Cost of Goods Sold- cost to produce and sell the goods.

2. Rent Expense- amount paid or incurred for use of property, usually premises.

3. Supplies Expense- the amount of supplies consumed or used by the business during the
period.

4. Salaries Expense- the amount paid or incurred for services rendered by the employees in the
operation of the business.

5. Repairs and Maintenance- expenses incurred in repairing or servicing the buildings,

machineries, vehicles, equipments, etc. which are owned by the business

6. Bad Debts- anticipated loss that the business may incur arising from uncollectible accounts.

7. Depreciation Expense- allocated expired portion of the cost of property and equipment or
fixed assets.

8. Taxes and Licenses- the cost of local as well as national taxes that are incurred and required
to be paid in connection with the conduct of the business. Examples are: cost to acquire
mayor’s permit, registration cost of the business, percentage tax on sales, etc.

9. Insurance Expense- the amount of insurance policy incurred during the current period.

10. Utilities Expense- the account title for telephone, light and water bills.

11. Bank charges- charges of the bank to the depositor for services rendered to them

12. Communication Expenses- cost of sending e-mail, telegrams, letters and other forms of
communication, such as telephone, and other utility services received from others.

13. Bonus and Allowances

14. Transportation and Travel

15. Representation Expenses

16. Interest Expense- Consideration paid by a borrower for using the money of a lender

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 17. Income Tax Expense- Share of the government in the profit that the business enterprise
earned during the year.

18. Commission Expense- Consideration paid by a principal for the performance of tasks
assigned to an agent.

19. Audit and Legal Fees Expense

20. Loss from Sale of Fixed Assets/ Investments- results when the cost of the property exceeds
the selling price of the said property

Exercise: The CAC Motor Shop was organized by Mr. Carlos Clara on May 1, 2024. The events
that transpired for that month were as follows;

May 1 – Carlos Clara received P500,000 cash from his former partners in CAR
Motor Shop from which he resigned. He deposited P300,000 cash in
the Philippine National Bank in the name of CAC Motor Shop.
Likewise, he invested the following in the business;
- Land with a fair value of P600,000. The land is presently mortgaged
with Progressive Bank for P200,000. The business is to assume
the said obligation by issuing a new promissory note for the said
balance.
- Tools worth, P90,000.
3 – Purchased from COS Machineries machinery and equipment
P90,000, 30% cash, balance payable in 15 days.
4 – Hired 3 mechanics at P5,000 per month.
5 - Received P5,000 from a customer for repair services rendered.
6 – Purchased supplies P3,000 cash.
8 – Billed Maria Carla, a customer for repair services performed, P 12,000.
10 – Received one half of the amount billed to Maria Carla.
13 – The business paid the personal liability of Carlos Clara for P5,000 with
the bank.
15 – Paid the mechanics one half of their salaries.
17 – Earned P15,000 from Noli Jose for services rendered of which P5,000
was collected in cash and the balance payable after 10 days.
18 – Settled in full the account with COS Machineries.
20 – Carlos Clara, from his personal checking account settled 10% of the
note issued to progressive Bank.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 24 – Received a bill from Meralco P500 and Nawasa P400.
26 – Received in full payment from Maria Clara.
27 – Received a 30-day non-interest bearing note from Noli Jose in
settlement of account.
30 – Carlos Clara withdrew P3,000 cash and P3,000 worth of tools for
personal use.

Required:
1. Prepare journal entries using the following account titles:
Acct. No Acct. No.
Cash 10 Accounts Payable 21
Accounts Receivable 11 Clara, Capital 30
Notes Receivable 12 Clara, Drawing 31
Supplies 13 Service Income 40
Land 14 Salary Expense 50
Tools 15 Utilities Expense 51
Machinery & Equipment 16
Notes payable 20

2. Post the entries to the ledger using the solution guide below:

Account Title: Cash Account No. 10

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Account Title: Accounts Receivable Account No. 11

Account Title: Notes Receivable Account No. 12

Account Title: Supplies Account No. 13

Account Title: Land Account No. 14

Account Title: Tools Account No. 15

Account Title: Machinery and Equipment Account No. 16

Account Title: Notes Payable Account No. 20

Account Title: Accountants Payable Account No. 21

Account Title: Clara, Capital Account No.30

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Account Title: Clara, Drawing Account No. 31

Account Title: Service Income Account No. 40

Account Title: Salaries Expense Account No. 50

Account Title: Utilities Expense Account No. 51

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 ADJUSTING ENTRIES

Throughout the accounting period, accounting information are recorded and classified, and
summarized in the form of financial statements at the end of the period to meet the varied needs of
users. Accounting data accumulated in the books serve as the basis for preparation of these financial
statements. To be able to present the results of operations and the financial condition of the business
fairly and accurately, the accounts should reflect complete information. However some accounts
need to be examined and adjusted for the following reasons;

1. Some income accounts already earned have not been recorded in the books.
2. Some expense accounts already incurred have not been recorded in the books.
3. Some income and expense accounts include portions that are still unearned or unexpired.
4. Some liability accounts include portions already earned
5. Some asset accounts include portions already expired.

The last two items are examples of mixed accounts- or accounts consisting two parts- income
statement accounts and balance sheet accounts.

Adjusting entries are journal entries made at the end of the accounting period to update the
balances of some accounts in order to present more fairly and more accurately the results of
operations and financial condition of the business.

A business may employ one of the two methods of keeping the books of accounts;
1. Cash basis- income is recorded only when cash is received and expense is recorded only when
paid.
2. Accrual basis- income is recorded at the time goods or services are rendered, whether or not
cash is received, and expense is recorded when incurred, whether cash is paid or not.

Different types of adjusting entries:

(1) Adjusting entries to take up provisions for bad debts

Bad debts- losses from uncollectible accounts receivable.

Entry: Bad Debts Expense xx

Allowance for Bad Debts xx

Treatments:
Bad Debts Expense - Operating Expense
Allowance for Bad Debts - Contra-asset account /Valuation account

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Methods of estimating bad debts:
a. A certain percent of Accounts Receivable

Accounts Receivable xx
x Rate of loss %
Required Allowance xx
Less: Recorded Allowance xx
Bad Debts Expense xx

b. A certain percent of Service Income

Service Income xx
x Rate of loss %
Bad Debts Expense xx

Exercise 1 - The following accounts appear in the ledger of Diana Repair Shop before adjustments
were made on December 31, 2018;

Accounts Receivable P 150,000

Allowance for Bad Debts P 2,000
Service Income 600,000

Required: Compute the bad debts expense and give the corresponding entry for each assumption
below;
a. It is estimated that the allowance be increased by 1% of Service Income.
b. It is estimated that the allowance should be increased to 3% of accounts receivable.
c. It is estimated that the allowance for bad debts is equal to 4% of outstanding
accounts receivable
d. It is estimated that ½ of 1 % of Service Income deemed uncollectible.

(2) Adjusting entry to take up provisions for depreciation

Depreciation- is the portion of the cost or other basic value of a tangible capital asset allocated or
charged as expense during an accounting period.

Factors of depreciation:
In order to properly compute the amount of depreciation to be charged as expense during an
accounting period, three factors are necessary, namely:
a. Depreciation base
b. Scrap value
c. Estimated useful life

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 The simplest and frequently used method of depreciation is called the straight line method.
The formula is;

Depreciation per year = Cost – Scrap Value

Estimated Life

Entry: Depreciation- Building xx

Accumulated Depreciation- Building xx

Treatments:
Depreciation- Operating Expense
Accumulated Depreciation- Contra-asset account/Valuation account

Exercise 2- For each case below, compute the depreciation expense for the year ending December 31,
2018 and give the corresponding adjusting entry;

a. Furnitures costing P24,000 were acquired on October 1, 2014. It has an estimated life of 5
years and a scrap value of P4,000
b. A building was constructed on January 1, 2015 at a cost of P260,000 with an estimated life of
20 years and a scrap value of P 20,000.
c. Equipment costing P90,000 with an estimated life of 10 years and a scrap value of P10,000
were acquired on October 1, 2018.

(3) Prepayment of expenses

Prepaid expense is an economic benefit that has been paid for in advance of its use. At the
time of payment, an asset is acquired that will expire or be used up and it becomes an expense.

Two methods that can be used:

a. Asset method. Under this method, the original entry made is charged to an asset account. At
the end of the period, the expense portion is set up.

b. Expense method. Under this method, expense account is charged when payment is made. At
the end of the period, the asset portion is set up.

TRANSACTION ASSET METHOD EXPENSE METHOD

1. Payment of expense Prepaid Expense xx Expense xx
Cash xx Cash xx
Payment of expense. Payment of expense.
2. Adjusting entry. Expense xx Prepaid Expense
Prepaid Expense xx Expense
Expense for the period Prepaid expense.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Exercise 3
a) For each of the following items indicate the Real amount and the Nominal amount on December
31, 2024.
TRANSACTIONS Nominal Real
Fraction Amount Fraction Amount
June. 15 – Office supplies bought, P9,000. 3/4 of this
was consumed on Dec. 31.
Jul. 1 – Insurance premiums for two years paid,
P9,000.
Aug. 1 – Paid 6-month rent, P24,000.

Sept. 1- Paid two-year advertising, P3,600.

Dec. 1 - Paid a 4-month interest on notes payable,

P240.

b) Record the transactions in Exercise 3 by the Nominal Account Method.

c) Make the adjusting entries on December 31.

Exercise 4. Alyssa Repair Shop had the following transactions, among other;
2024
Oct 1 - The business purchased a two-year fire insurance policy which took effect
today. The total premium paid amounted to P1,920. Use asset method.
Dec. 1 - Paid six months rent in advance totaling P6,000. Use expense method.

Required: For each of the above transactions, give entries to;

a) record the payment;
b) adjust the accounts on December 31, 2024.

Exercise 5. The following account balances were taken from the ledger of Lorraine Advertising Agency
on December 31, 2024 prior to adjustments;
Supplies on Hand 1,800
Prepaid Advertising 2,400
Rent Expense 12,000
Interest Expense 180

An investigation on December 31, 2024 revealed the following additional information:

a) Prepaid interest, P 80.
b) A physical count on December 31 showed that there are supplies used amounting to
P1,000.

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 c) The business entered into a 4-month advertising contract on December 1, 2018 which
required an advance payment of P2,400.
d) Rent expense, P 7,000.

Required: Give the adjusting entries on December 31, 2024.

(4) Precollections Of Income

Precollected/Unearned/Deferred Incomes - are items representing some cash or property received,
the earnings or realization of which covers a period extending the current or present period. These
are also called deferred credits.

Income collected in advance maybe recorded originally to a liability or real account, or to an

income or nominal account.

At the end of the accounting period, the precollected incomes are divided into their
component liability (real) and income(nominal) elements by means of adjusting entries. In the
adjusting process, the liability must be presented by a real account title and the income portion by a
nominal account title.

TRANSACTION Liability Method Income Method

a) Collection of income. Cash xx Cash xx
Liability Account xx Income Account xx
Cash receipts. Cash receipts.
b) Adjusting entry Liability Account xx Income Account xx
Income Account xx Liability Account xx
Income earned. Unearned income.

Exercise 6 – Determine the real portion and the nominal portion of the following transactions.
2024
Dec. 1 – The owner of a building receives rental from a tenant , P 4,500, corresponding
to three months rent.
Dec. 16- Collected the interest of a 60-day, 12% note from a customer. The face value
of the note is P9,000.

Required: Record the transactions above using the nominal account method and give the adjusting
entries on December 31, 2024.

Exercise 7 – The following account balances were taken from the ledger of Collette Repair Shop on
December 31, 2024 prior to adjustments;
Unearned Interest Income P 480
Unearned Rent Income 4,000

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Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 Commission income 720
Repair Income 9,000

Data for adjustments:

a) Interest Income, P 120
b) Unearned Rent income, P1,800.
c) The commission income is for three months starting December 1, 2018.
d) Of the repair income, 2/3 is unearned during the current year.

Exercise 8 – The following data were taken from the trial balance of Tan Dental Clinic on December
31, 2024;
Accounts Receivable P 35,000
Allowance for Doubtful Accounts P 250
Medical Supplies Inventory 1,200
Prepaid Rent 2,400
Delivery Truck 39,000
Precollected Interest Income 60
Rent Income 600
Interest Expense 180
Insurance Expense 1,000

Data for adjustments;

a) It is estimated that 3% of the accounts receivable may not be collected.
b) The delivery truck was acquired on October 1, 2024 and estimated to be useful for 5 years.
c) 1/3 of the medical supplies are on hand on December 31.
d) The prepaid rent is for 4 months starting November 30, 2024.
e) The interest expense is for 60 days starting November 28, 2024.
f) The rent income is for 3 months ending February 28, 2025.
g) The interest income is for 60 days, starting December 21, 2024.
h) The insurance expense represents premium payment on July 1, 2024 covering a 2-year period.

Required: Adjusting entries on December 31, 2024.

39

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
 ALYSSA REPAIR SHOP
Statement of Financial Position
As of December 31, 2024

ASSETS
Current Assets:
Cash xx
Notes Receivable xx
Accounts Receivable xx
Less: Allowance for Doubtful Accounts xx , xx
Accrued Income xx
Supplies on Hand xx
Prepaid Rent xx , xxx
Noncurrent Assets:
Land xx
Buildings xx
Less: Accumulated Depreciation xx , xx
Equipment xx
Less: Accumulated Depreciation xx , xx , xxx
Total Assets xxx

LIABILITIES AND CAPITAL

Current Liabilities:
Accounts payable xx
Notes payable xx
Accrued Taxes payable xx
Unearned interest Income xx , xxx
Noncurrent Liabilities:
Bonds Payable xx
Mortgage Payable xx , xxx
Total Liabilities xxx

Capital:
Alyssa, Capital xx
Less: Alyssa, Drawing xx
Net Capital xx
Add(Less): Profit ( Loss ) xx , xxx
Total Liabilities & Capital xxx

40

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Exercise 9 - The account debited or credited constituting one-half of an adjusting entry is given in each
of the numbered items below. In each case, give the account debited or credited, as the case maybe,
to complete the entry and state the purpose of each adjustment.
1. Interest Receivable is debited.
2. Supplies on Hand is credited.
3. Taxes Payable is credited.
4. Unearned Interest is debited.
5. Rent Income is debited.
6. Insurance is credited.
7. Allowance for Doubtful Accounts is credited.
8. Depreciation Expense is debited.
9. Unearned Commission is credited.
10. Prepaid Advertising is debited.

Exercise 10. The following information were taken from the books and records of Allison Shop on
December 31, 2024, the end of the accounting period.

1. The Unexpired Insurance account had a debit balance of P24,000 representing premium for a
one year insurance policy effective April 1 of the current year.

2. A 60-day, 21% note dated December 21 was issued to Alex Store amounting to P36,000.
Interest will be paid at maturity.

3. Commission Income account showed a credit balance of P24,000. Only one-fourth of this
amount had been earned during the current year.

4. On December 16, interest on a 60-day, 24% notes payable for P24,000 was paid in advance.
The note was dated December 16 and interest paid was debited to Interest Expense.

5. On hand is a 45-day, 21% note receivable dated December 16 for P36,000. No interest had
been collected on this.

6. Salaries of employees of P12,000 due for the last week of December will be due for payment
on January 3 next year.

7. Unearned Rental Income was credited when P108,000 was received on November 1
representing six months’ rent collected in advance.

8. Office supplies costing P4,000 were purchased on November 15 and debited to Supplies
Expense. About P 2,500 worth of supplies are still on hand on December 31.

41

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Required: Prepare the adjusting entries that caused the change in each account balance.

Exercise 11- The trial balance of DIANA Laundromat on July 31, 2024, the end of the current fiscal year,
and the data needed to determine year-end adjustments are as follows;

DIANA LAUNDROMAT
Trial Balance
July 31, 2024

Account Titles Debit Credit

Cash P 5,180
Laundry Supplies 3,850
Prepaid Insurance 1,200
Laundry Equipment 87,600
Accumulated Depreciation P 58,700
Accounts Payable 1,620
Diana, Capital 34,930
Diana, Drawing 10.600
Laundry Revenue 52,750
Wages Expense 17,900
Rent Expense 14,000
Utilities Expense 7,260
Miscellaneous Expense 410
Totals P148,000 P148,000

Adjustment data:
a. Inventory of laundry supplies at July 31………. P 240.
b. Insurance premiums expired during the year…… 360.
c. Depreciation on equipment during the year….. 6,400.
d. Wages accrued but not paid at July 31…………. 650.

Instructions:
1. Record the trial balance on a 10-column worksheet.
2. Complete the worksheet.
3. Prepare an income statement and a statement of financial position
4. Closing entries.
5. Post-closing trial balance.

42

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA
Exercise 12. A trial balance of Lorraine Storage at the end of its accounting period appeared as
follows;
LORRAINE STORAGE
Trial Balance
December 31, 2024
Account Tiles Debit Credit
Cash P 2,330
Accounts Receivable 970
Prepaid Insurance 1,450
Office Supplies 410
Office Equipment 2,500
Trucks 16,500
Accumulated Depreciation-Trucks P 1,500
Building 50,000
Land 20,000
Accounts Payable 1,050
Unearned Storage Fees 750
Mortgage Payable 13,500
Lorraine, Capital 57,720
Lorraine, Drawing 2,000
Storage Income 40,750
Office Salaries Expense 5,500
Truck Drivers’ Wages 10,600
Gas, Oil and Repairs 3,010
Total P115,270 P115,270

Adjustment data:
a) It is estimated that 10% of the accounts receivable is proven to be uncollectible.
b) An examination of insurance policies showed that P450 of insurance expired.
c) Actual count of office supplies showed a balance of P210.
d) Fixed assets are 10% depreciated annually.
e) Storage fees earned amounted to P250.
f) Accrued expenses: Office salaries, P2,000; truck drivers’ wages, P2,200.

Required:
1. A 10-column worksheet.
2. Income Statement.
3. Statement of Financial Position.
4. Closing Entries
5. Post-Closing Trial Balance
6. Reversing Entries

43

Prepared by: ELNORA V. ADALEM, CPA, MBA

Updated by: JOHN LINDY R. SORIANO, CPA, MSA