Midterm Exam (Reviewer)

Topic A.
Basic Accounting Concepts, Standards and

Principles Investing Activities. These activities involve the
selection and management including disposal and
Definition of Accounting replacement of long term resources that will be used to
Accounting is a service activity. Its function is to develop, produce, and sell goods and services.
provide quantitative information, primarily, financial in
nature, about economic entities that is intended to be Operating Activities. These involve the use of resources
useful in making economic decisions. to design, produce, distribute, and market goods and
services
According to American Accounting Association
(AAA): Three (3) Processes in Accounting
Accounting is the process of identifying, measuring, and 1. Identifying
communicating economic information to permit 2. Measuring
informed judgments and decisions by users of the 3. Communicating
information.
The Accounting Process
According to American Institute of Certified Public
Accountants (AICPA): 1. Gathering of Data
2. Transforming Data to Reliable Information
Accounting is the art of recording, classifying and 3. Communicating Information to Stakeholders
summarizing in a significant manner and in terms of
money, transactions and events which are, in part at Users of Financial Information
least, of a financial character, and interpreting the results
Primary Users
thereof.
1. Investors/Owners
According to Organization:
2. Lenders
3. Creditors
Sole/Single proprietorship. A small service-type (e.g.
physicians, lawyers, accountants) business owned by Other Users
single owner called the proprietor.
4. Employees
Partnership. A business owned and operated by two or 5. Customers
more persons who bind themselves to contribute money, 6. Government and other agencies
property, or industry to a common fund with the 7. Public
intention of dividing the profits among themselves.
ACCOUNTANCY ACT OF 2004
Corporation. A business owned by shareholders. It is an RA 9298 known as the Philippine Accountancy Act of
artificial being created by operation of law, having the 2004.
rights of succession and the powers, attributes and
properties expressly authorized by law or incident to its Scope of Practice (Sec. 4)
existence. Practice of Public Accountancy. Shall constitute in a
person in individual capacity, or as a partner or as a staff
FORMS OF BUSINESS member in an accounting or auditing firm, skilled in the
According to Operation: knowledge, science and practice of accounting, and as a
qualified person to render professional service as a
o Service. Selling people’s time. certified public accountant (CPA) or offering or
o Merchandising. Buying and selling products. rendering, or both, to more than one client on a fee basis.
o Manufacturing. Converting acquired materials
Practice in Commerce and Industry. Shall constitute in a
into finished goods.
person involved in decision making requiring
professional knowledge in the science of accounting, or
PHASES OF ACCOUNTING
when such employment or position requires that the
o Recording. Recognizing the transaction in a
holder thereof must be a CPA.
book called journal.
o Classifying. Numerous transactions are grouped Practice in Education/Academe. Shall constitute in a
or categorized and posted to the ledger. person in an educational institution which involve
o Summarizing. Preparation of financial teaching of accounting, auditing, management advisory
statements. services, fiancé, business law, taxation, and other
o Analyzing/Interpreting. To evaluate the technically related subjects.
liquidity, solvency and profitability of the
Practice in Government. Shall constitute in a person who
business organization.
holds, or is appointed to, a position in an accounting
professional group in government or in a government-
ACTIVITIES IN BUSINESS ORGANIZATIONS
owned and/or controlled corporation, where decision
making requires professional knowledge in the science
Financing Activities. These are the methods an
of accounting or where a civil service eligibility as a
organization uses to obtain financial resources from
CPA is a prerequisite.
financial markets and how it manages these resources.
Primary sources: owners, creditors (banks, suppliers).
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Financial Reporting Standards Council (FRSC)
(Replaces the Accounting Standards Council) Management Accounting. It incorporates cost
accounting and financial accounting data that
Composition (15): management adapts for specific decisions decision
Chairman 1 making. Management accounting system incorporates all
Representatives: types of financial and non-financial information from a
Board of Accountancy (BOA) 1 wide range of sources.
Securities and Exchange Commission (SEC) 1
Bangko Sentral ng Pilipinas (BSP) 1 Taxation. Tax accounting includes the preparation of tax
Bureau of Internal Revenue (BIR) 1 returns and the considerations of the tax consequences of
Commission on Audit (COA) 1 proposed business transactions or alternative courses of
Financial Executives Institute of the Philippines (FINEX) 1 action.
Public Practice 2
Commerce and Industry 2 Government Accounting. It is concerned with the
Education/Academe 2 identification of sources and uses of funds consistent
Government 2 with the provisions of the local or national laws.
CODE OF ETHICS FOR PROFESSIONAL Financial Management. This is relatively a new branch
ACCOUNTANTS IN THE PHILIPPINES of accounting that has grown rapidly over the last 30
years. Financial managers are responsible for setting
Integrity. A professional accountant should be financial objectives, making plans based on those
straightforward and honest in all professional and objectives, obtaining the finance needed to achieve the
business relationships. Integrity also implies fair dealing plans, and generally safeguarding all the financial
and truthfulness. resources of the entity.
Objectivity. A professional accountant should not allow

bias, conflict of interest or undue influence of others to FRAMEWORK FOR THE PREPARATION AND
override professional or business judgments. PRESENTATION OF FINANCIAL STATEMENTS
GENERALLY ACCEPTED ACCOUNTING
Professional Competence and Due Care. A professional PRINCIPLES
accountant has a continuing duty to maintain
professional knowledge and skill at the level required to The generally accepted accounting principles set
ensure that a client or employer receives competent guidelines, practices, and standard that are observed in
professional service based on current developments in the preparation and presentation of financial statements.
practice, legislations, and techniques. In providing They are necessary to define what is accepted
professional services, a professional accountant should accounting practice. These principles are develop on the
act diligently and in accordance with applicable basis of experience, custom, culture, grounds, usage and
technical and professional standards from the following: practical necessity. They are needed in order to generate
information useful to shareholders. GAAP are like laws
Confidentiality. A professional accountant should that must be followed in financial reporting.
respect the confidentiality of information acquired as a
In the Philippines, the development of Generally
result of professional and business relationships and
Accepted Accounting Principles was formalized initially
should not disclose any such information to third parties
through the creation of the Accounting Standard
without proper and specific authority under here is a
Council. The accounting standards are commanding
legal or professional right or duty to disclose.
statement that constitute the Generally Accepted
Accounting Principles in the Philippines. Currently, the
Professional Behavior. A professional account should
Accounting Standard Council’s Statement of Financial
comply with relevant laws and regulations and should
Accounting Standards were re-named as Philippine
avoid any action that discredits the profession.
Accounting Standards (PAS) and Philippine Financial
Reporting Standards (PFRS).
BRANCHES OF ACCOUNTING
CONCEPTUAL FRAMEWORK FOR FINANCIAL
Auditing. An external audit is the independent REPORTING
examination that ensures the fairness and reliability of
the reports that management submits to users outside the The new Conceptual Framework for Financial Reporting
business entity. The result of the examination is has replaced the old Framework for the Preparation and
embodied in the independent auditor’s report. Presentation of Financial Statements. It is a complete,
comprehensive and single document which was
Cost Accounting. It deals with the accumulation, promulgated by the International Accounting Standards
allocation and control of the cost of a certain Board.
product/goods, service or activity intended for The Conceptual Framework contains a summary of
managerial planning and control. terms and concepts that underlie the preparation and
presentation of financial statement for external users. It
Financial Accounting. It is focused on recording of is an attempt to provide an overall theoretical foundation
transactions and the periodic preparation of reports on for accounting for the purpose of guiding standard-
financial position, performance and cash flows of the setters, preparers and users of financial information in
enterprise. the preparation and presentation of statements. Also, it is
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concerned with general-purpose financial statements
which include consolidated financial statements. These A) Fundamental Qualitative Characteristics
financial statements are prepared at least annually and
are directed to address the common needs of a wide There are two fundamental qualitative characteristics.
range of users. These include relevance and faithful representation.
Information must be both relevant and faithfully
The purpose of the Conceptual Framework includes: represented to achieve usefulness.
1. To assist the FRSC in developing accounting Relevance
standards that will represent Philippine GAAP.
2. To assist prepares of financial statements in Information to be useful must be relevant to the
applying accounting standards and in dealing decision-making needs of the users. Information has the
with issues not yet covered by GAAP. quality of relevance when it influences the economic
3. To assist the FRSC in its review and adoption of decisions of users. It requires that the financial
International Financial Reporting Standards. information should be related to the economic decision
4. To assist the user of financial statements in to be made. Information that does not bear on an
interpreting the information contained in the economic decision is useless.
financial statements. The main characteristics of relevance are the Predictive
5. To assist auditor in forming an opinion as to value and confirmatory value of financial information.
whether financial statements conform to
Philippine GAAP. The predictive value takes place when information is
6. To provide information to those interested in the used to foresee future expectations or outcomes.
work of the FRSC in the formulation of PFRS Information on past and present accomplishments in
performances aids user in predicting future performance
It is to be noted that there is nothing in the Conceptual and in anticipating possible opportunities.
Framework overrides any specific Philippine Financial
Reporting Standard. In case where there is conflict, the The confirmatory value is best illustrated when
requirements of the Philippine Financial Reporting information is used to evaluate management
Standards shall prevail over the Conceptual Framework. performance by looking at its accomplishment and
comparing it with desired targets and outcomes.
SCOPE OF CONCEPTUAL FRAMEWORK Information is used to confirm or to correct expectations
The conceptual framework has the following scope: relative to business operations.
1. Objective of financial reporting Most of the times, information has both predictive and
2. Qualitative characteristics of useful financial feedback value. Their roles of information are
information interrelated.
3. Definition, recognition, and measurement of the Faithful Representation
elements from which financial statements are
constructed. Information to be useful must also be faithfully
4. Concept of capital and capital maintenance represented. Information has to be free from material
error and bias and can be depended upon by user to
represent faithfully that which it either purports to
Objective of Financial Reporting represent or could reasonably be expected to represent.
The objective of financial reporting is to provide The description and figure show what really existed or
financial information about the reporting entity that is happened. Also, the actual effects of the transactions
useful to existing and potential investors, lenders and shall be properly accounted for and reported in the
other creditors in making sound economic decisions financial statement.
about providing resources to the entity. The following are the characteristics of Faithful
Specifically, the following are the specific objectives of Representation
financial reporting: 1. Completeness
1. To provide information useful in making 2. Neutrality
decisions about providing resources to the 3. Free from error
entity. Completeness
2. To provide information useful in assessing
the prospects of future net cash flows to the In preparing financial statement, relevant financial
entity. information must be complete within the bounds of
3. To provide information about entity materiality and cost since omission can cause false or
resources, claims and changes in resources misleading information and therefore, unreliable and
and claims. deficient in terms of its relevance. Completeness is the
result of the adequate disclosure standard or the principle
QUALITATIVE CHARACTERISTICS of full disclosure.
The attributes that make the information in the financial Adequate disclosure or full disclosure principle means
statements useful to the users are the qualitative that all significant information leading to the preparation
characteristics of financial statements. These of the financial statement shall be properly reported. The
characteristics are grouped into two: fundamental rule is that the accountant shall disclose a material fact
qualitative characteristics and enhancing qualitative known to him which that the statement would not be
characteristics. misleading.
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preparation, and presentation of financial statement is of
utmost importance for comparability.
Neutrality
However, an exception to this concept is when a change
Information is neutral when it is fair or free from bias. would present a better or fairer presentation of economic
Therefore, the financial information contained in the activity. The change and the reason for the change and
financial statement shall be objective as possible without the impact on the entity as a whole shall be fully
favoring one party to the detriment of another party. The disclosed in the financial statements
information provided shall be for the common needs of
all interested parties. This characteristic of accounting Understandability
reports is by itself an application of the “principle of
fairness”. To be neutral is to be fair. An essential quality of the information provided in
financial statement is that it is readily understandable by
Free from Error user. Information is to be classified, characterized and
presented clearly and concisely. It is assumed that user
This means that there are not errors or omissions in the have a reasonable knowledge of accounting, business
description of the phenomenon, and the process used to and its economic activities. Users are also expected to
generate the information in the financial reports has been have the willingness to study the information with
applied with no errors in the process. reasonable diligence. However, information about
Substance over Form complex matter that should be included in the financial
statement because of its importance and relevance to the
Since legal and economic effects of accountable events economic decision-making needs of users should not be
are both considered in recording financial transactions, it excluded merely on the grounds that it may be too
is necessary that they are accounted in accordance with difficult for certain users to understand.
their substance and reality and not merely their legal
form. The economic substance of transactions and event Verifiability
are emphasized when an apparent conflict exists Verifiability involves consensus. Information reported in
between the economic substance and legal form of a the financial statements is verifiable if it is supported by
business transactions. evidence so that an accountant that would look into the
B) Enhancing Qualitative Characteristics same evidence would arrive at the same economic
decision or conclusion. Verifiable reports provide result
The enhancing qualitative characteristics pertain to the that would be substantially duplicated by measurers
presentation or form of the financial information. These using the same measurement methods.
characteristics are intended to amplify the usefulness of
the financial information that is relevant faithfully Verification maybe direct or indirect. Verifying
represented. information through direct observation refers to direct
verification. On the other hand, checking the inputs to a
The enhancing qualitative characteristics are: model, formula or other technique and computing the
inputs to a model, formula or other technique and
1. Comparability
computing the inputs using the same methodology refers
2. Understandability
to indirect verification.
3. Verifiability
4. Timeliness Timeliness
Comparability Timeliness requires that the accounting information must
be available or communicated early enough when a
This characteristic refers to the ability to bring together
decision is to be made, otherwise relevant information
for the purpose of determining points of similarities and
will become irrelevant or of no value. Relevant and
differences.
faithfully represented financial information would
User must be able to compare the financial statements of become useless if communicated after a decision is to be
a business or an entity over time to be able to identify made.
trends in its financial performance and financial position.
ELEMENTS OF FINANCIAL STATEMENTS
This is what we call comparability within an entity. This
also known as horizontal comparability or The elements of each financial statement are the board
intracomparability. classes of items comprising it. Financial statements
(discussed in Chapter I) and their elements include the
User must also be able to compare the financial
following:
statement of different business entities to be able to
evaluate or assess their relative financial position, o Statement of Financial Position (Balance Sheet)
performance and changes in financial position to make 1. Asset
reasonable and sound economic decisions. This 2. Liabilities
comparability is also known as vertical comparability or 3. Equity
intercomparability
o Statement of Comprehensive Income ( Income
Implicit in the characteristic of comparability is the
principle of consistency. The principle of consistency Statement)
requires that “the accounting methods and practices 1. Income
should be applied on a uniform basis from period to 2. Expenses
period” Thus, consistency in the accounting method,
o Statement of Changes in Equity
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1. The investment by owners a) Asset recognition principle
2. Distribution to owners b) Liability recognition principle
c) Income recognition principle
d) Expense recognition principle
o Statement of Cash Flow Asset Recognition
1. Operating cash flow
2. Investing cash flow Assets are things of value. They are the property owned
3. Financing cash flow by the business. Asset is recognized in the statement of
financial position when it is probable that future
Assets are resources controlled by the entity as a result economic benefits will flow to the enterprise and the
of past transactions or events and from which future asset has a cost or value that can be measured reliably.
economic benefits are expected to flow to the entity.
Hence, to qualify as asset, Inherent in asset recognition is the Cost Principle. This
principle requires that asset should be recorded initially
Resources must: at original acquisition cost. In cash transactions, cost is
A) Be controlled by the entity equivalent to the cash payment. However, in non-cash
B) Result from past transactions or events transactions, the cost equal to absence of fair value, and
C) Be expected to provide future economic the cost is equal the fair value of the asset given up or
benefits received, whichever is clearly evident. In the absence of
fair value, the cost is equal to the book value of the asset
given.
Liabilities represent the obligations of the entity arising
from past transactions or events the settlement of which Liability Recognition
future economic benefits are expected to flow to the Liability represents present obligation of the entity
entity of resources, embodying economic benefits. arising from past transactions or events the settlement of
Hence to qualify as liabilities, the obligation must: which is expected to result in an outflow from the entity
A) Result from past transaction or event of resource embodying economic benefits.
B) Be settled through the outflow of resources A liability is recognized in the statement of financial
embodying future economic benefits position when it is probable that an outflow or resources
C) Be a present obligation of the entity. embodying economic benefit will result from the
Owner/s Equity is the residual interest in the assets of settlement of a present obligation and the amount at
the entity after deducting all of its which the settlement will take place can be measured
reliably.
Income represent an increase in economic benefit during
the accounting period in the form of inflow or increase Income Recognition
in asset or decrease in liability that results in increase in Income is recognized when earned from sale of goods or
equity, other than contribution from equity participants. from rendering services. Accordingly, income is
Revenue arises in the course of the ordinary regular recognized when it is probable that an increase in future
activities of an entity and not from incidental or economic benefits related to an increase in an asset or a
investment transactions. decrease in a liability has arisen and that the increase in
economic benefits can be measured reliably. It
Expense is a decrease in economic benefit during the encompasses both revenues and gains.
accounting period in the form of an outflow or decrease
in asset or increase in liability that results in decrease in Revenue arises in the course of the ordinary regular
equity, other than distribution to equity participants. activities of an entity and not from incidental or
investment transactions.
RECOGNITION OF ELEMENT OF FINANCIAL
STATEMENTS Gains represent increase in equity resulting from
incidental transactions not associated with the ordinary
Recognition is the process of incorporating in the regular activities of an entity.
statement of financial position (balance sheet) or
statement of comprehensive income (income statement), Expenses Recognition
an item that meets the definition of an element and Expenses are recognized when incurred, when services
satisfies the following criteria for recognition or benefits have been receive.
a) It is probable that any future economic benefits Expenses are recognized in the statement of
associated with the item will flow to or from the comprehensive income when it is probable that a
entity. decrease in future economic benefit related to a decrease
b) The item has a cost or value that can be measured in an asset or an increase in a liability has arisen and that
with reliability. the decrease in economic benefits can be measured
c) The information is faithfully represented, verifiable reliably.
and neutral.
d) The information about it is capable of making a Expenses encompass losses as well as those expenses
difference in user decisions. that arise in the ordinary course of ordinary course of
business operations.
There are four main recognition principles to be
followed in the preparation and presentation of financial
statements namely:
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Losses are decrease to equity resulting from incidental accounting are periodically communicated to the users.
transactions not associated in the course of ordinary In other words, financial statements serve as the means
regular activities of the entity. of communication between the business and the
stakeholders. Businesses use the financial statements as
Matching Principle tool to communicate to the different interested parties.
It is a principle which requires that those costs and Based on PAS 1, there are five (5) principal financial
expenses incurred in earning revenues shall be reported statements which are the end products of accounting
in the same period. This means that expenses and process namely:
revenues resulting from the same transactions or event a) Statement of financial position (Balance Sheet)
should be recognized at the same time Thus, the expense b) Income statement
recognition principle is the application of the matching c) Statement of comprehensive income
principle d) Statement of changes in equity
MEASUREMENT OF THE ELEMENTS OF e) Statement of cash flow
FINANCIAL STATEMENTS f) Notes, comprising a summary of significant
accounting policies and other explanatory notes.
Measurement is the process of determining the monetary
amounts at which the elements of the financial OBJECTIVE OF FINANCIAL STATEMENTS
statements are to be recognized and carried in the The very objective of financial statements is to provide
statement of financial position and statement of information about the financial position, financial
comprehensive income. This involves the use of a performance and cash flows of an entity as a basis for
particular basis of measurement. the different users in making sound economic decisions.
The bases of measurement are: Accordingly, to attain the stated objective, financial
statements shall provide the following:
a) Historical Cost
a) Assets
Asset are recorded at the amount of cash or cash b) Liabilities
equivalent paid or the fair value of the consideration c) Equity
given to acquire them at the time of their acquisition. d) Income, expenses, gains and losses
e) Cash flows
Liabilities are recorded at the amount of proceeds
f) Contribution by and distributions to owners in their
received in exchange for the obligations, or in some
capacity as owners
circumstances (for example, income taxes), at the
normal course of business FREQUENCY OF REPORTING
b) Current Cost Periodicity Concept
Assets are carried at the amount of cash or cash Financial statements are prepared and communicated to
equivalent that would have to be paid if the same or an the different interested parties periodically. The life of
equivalent asset was acquired currently. the business can be subdivided into equal time periods,
in which every end of the period, financial statements
Liabilities are carried at the undiscounted amount of
are prepared. These periods are referred to as
cash or cash equivalent expected that would be required
Accounting Periods.
to settle the obligations currently.
An accounting period can be a period covering a month
c) Realizable (Settlement) Value
or a couple of months, a year or more than one year,
Assets are carried (realizable value) at the amount of depending on the need and demand of different users for
cash or cash equivalents that could currently be obtained financial information because users of financial
by selling the asset in an orderly disposal. information need to make decisions at different points in
the life of the business. Hence, when a financial
Liabilities are carried at their (settlement value) statement is prepared, it is of paramount importance to
undiscounted amount of cash or cash equivalents indicate the date when it was prepared and the time
expected to be paid to satisfy the liabilities in the normal period it covers.
course of business.
Most of the times, however, one year is the usual
d) Present Value accounting period adopted; therefore financial
Assets are carried at the present discounted value of the statements shall be presented at least annually. In case
future net cash inflows that the item is expected to financial statements are presented for a period longer or
generate in the normal course of business. shorter than one year, the business shall disclose the
following:
Liabilities are carried at the present discounted value of
future net cash outflow that are expected to be required 1. The period covered by the financial statements
to settle the liabilities in the normal course of business. 2. The reason for using such period
3. The fact that the amounts presented in the financial
COMMUNICATIONS THROUGH FINANCIAL statements are not entirely comparable.
STATEMENTS
Accordingly, there are three (3) reporting periods to
FINANCIAL STATEMENTS choose from as far as periodic reporting of financial
statements in concerned, namely:
Financial Statements are the means by which the
information accumulated and processed in financial 1. Calendar
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2. Fiscal year Paragraph 66 of revised Philippine Accounting Standard
3. Interim period (PAS) 1 provided that an entity shall classify an asset as
current when:
Calendar Year
a) The asset is cash or cash equivalent unless the asset is
A calendar year is a twelve-month period which starts restricted from being exchanged or used to settle a
on January 1 and ends on December 31 of the year. liability for at least twelve months after the reporting
This is the most common annual accounting period that period.
business adopts. b) The entity holds the asset primarily for the purpose of
trading
c) The entity expects to realize the asset within twelve
Fiscal Year months
d) The entity expects to realize the asset or intends to
A fiscal period is also a twelve-month period, but it
sell or consume it within the entity’s normal
starts from any month other than January. Accordingly,
operating cycle.
fiscal year does not end on December 31 of the
accounting period. Current Assets are usually listed in the order of liquidity.
The line items in the current assets sections are:
Interim Period
a) Cash and Cash Equivalents
An interim period covers a period shorter than one year.
b) Financial assets, such as trading securities and other
(E.g. weekly, monthly, quarterly or semi—annual).
marketable assets
STATEMENT OF FINANCIAL POSITION c) Trade and other receivables
(Balance sheet) d) Inventories
e) Prepaid expenses
The statement of financial position is a statement
showing the financial position or condition of a business Cash is any medium of exchange that a bank will accept
comprising the assets, liabilities and equity as of a given for the deposit at face value. It includes currency, coins,
time. This statement is also called balance sheet. checks, bank drafts and many orders.
Users of financial statements and analyze this statement Cash equivalents PAS 7 defines cash equivalent as
to evaluate the condition the condition of the business as short-term and highly liquid investments that are readily
to liquidity, solvency and stability. Liquidity refers to convertible into cash and which are subject to an
the capability of the business to generate cash to settle its insignificant risk of changes in value.
short term maturing obligations. Solvency on the other
Trade Receivables refer to claims arising from sale of
hand, refers to the availability of cash sufficient to meet
merchandise or services in the ordinary course of
long term financial commitments as they fall due.
business, the usual types are accounts receivable and
The Statement of Financial Position can be presented in notes receivables.
either the Report Form or the Account Form.
Accounts Receivable are open accounts not supported
In the Report Form of a statement of financial position, by promissory notes.
assets are shown first and followed by liabilities and
Notes Receivable are those supported by formal
owners’ equity in a vertical order. The Account form of
promises to pay in the form of note.
a statement of financial position is patterned after the
accounting equation where assets are shown on the left Non-trade Receivables represent claims arising from
side and liabilities and owner’s equity on the right side. sources other than the sale of merchandise or services in
The accounting elements are arranged in horizontal the ordinary course of business.
order. Either format for the statement of financial
position is acceptable. Inventory as per PAS 2, are assets which are held for
sale in the ordinary course of business, in the process of
TYPICAL ACCOUNTS TITLES USED production for such sale or in the form of materials or
supplies to be consumed in the production process or in
Statement of Financial Position
the rendering of services.
Assets are resources controlled by the entity as a result
Prepaid Expenses are expenses paid in advance.
of past transaction or events and from which future
economic benefits are expected to flow to the entity. Non-Current Assets
Hence to qualify as assets, resources must:
Non-current assets are all other assets not classified as
a) Be controlled by the entity current assets. It includes the following:
b) Result from the past transactions or events
c) Be expected to provide future economic benefit a) Property, plant and equipment
b) Long-term investment
Classifications of Assets c) Intangible assets
d) Other non-current assets
Assets are classified into two, namely current assets
and non-current assets. Property, plant and equipment. PAS 16 defines
property, plant and equipment as tangible assets which
Current Assets
are held by an entity for use in production or supply of
goods and services, for rental to others, or for
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administrative purposes, and are expected to be used Natural presentation also known as nature of expense
during more than one period. method, classifies expenses according to their nature and
not allocated among the various functions within the
Long-term investments. International Standards entity.
Committee (ISC) defines investments as assets held by
an entity for the accretion of wealth through capital TYPICAL ACCOUNT TITLES USED in the INCOME
distribution, such as interest, royalties, dividends and STATEMENT
rentals, for capital appreciation of for other benefits to
the investing entity such as those obtained through Income represents increases in economic benefit during
trading relationship. the accounting period in the form of inflow or increase
in asset or decrease in liability that results in increase in
Intangible Assets. PAS 38 defines intangible assets are equity, other than contribution from equity participants.
identifiable, non-monetary assets without physical It encompasses both revenue and gains.
substance held for use in the production or supply of
goods and services, for rental to others, or for Revenue arises in the course of the ordinary regular
administrative purposes. activities of an entity and not from incidental or
investment transactions.
Liabilities represent present obligations of the entity
arising from past transactions or events the settlement of Gains represent increases to equity resulting from
which is expected to result in an outflow from the entity incidental transactions not associated with the ordinary
of resources embodying economic benefits. Hence to regular activities of an entity.
qualify as liabilities, an obligation must: Sources of Income:
a) Result from the past transactions or events a) Sales. Revenues earned from sale of merchandise
b) Be settled through the outflow of resources having b) Service revenues. These are items of income earned
future economic benefits from rendering of services to customers or clients.
c) Be a present obligation of the entity E.g. professional’s fees, tuition fees, commission
Liabilities are classified into two namely, current and fees, admission fees and others.
non-current. c) Use of entity’s resources. This includes interest,
rent, loyalty and dividend income
As per revised PAS 1, an entity shall classify a liability d) Disposal of resources other than products – Any
as current when: gain resulting from the disposal of entity’s resources
e.g. gain from sale of plant and equipment.
a) It expects to settle the liability in its normal operating
cycle; Expense represents decreases in economic benefits
b) It holds the liability primarily for the purpose of during the accounting period in the form of an outflow
trading or decrease in asset or increase in liability that result in
c) The liability is due to be settled within twelve months decrease in equity, other than distribution to equity
after reporting period; or participants.
d) The entity does not have an unconditional right to
defer settlement of the liability for at least twelve Losses are decreases in equity resulting from incidental
months after the reporting period. transactions not associated with the course of ordinary
regular activities of the entity.
Non-current Liabilities All liabilities that are not
classified as current Components of Expense
Owner/s Equity is the residual interest in the assets of a) Cost of Sales. The cost incurred in producing or
the entity after deducting all of its liabilities. It is also purchasing a product being sold to customers. It is
known as net assets. also called cost of goods sold.
b) Distribution cost or selling expenses. These are
Capital represents the owner’s financial interest in the costs incurred related to selling, advertising and
business. It is used to record the original investments of delivery of goods to customers e.g. sales salaries,
owner/s and increases resulting from additional sales commission, advertising expenses,
investments by the owner/s and by the profit realized by depreciation of store equipment and store building.
the entity as well as decreases arising from losses c) Administrative expenses. These are costs incurred
incurred by the entity and y the personal withdrawals in administering the business in general. It includes
made by the owner/s. all operating expenses which are not related to
selling of goods e.g. office salaries. Office supplies,
INCOME STATEMENT depreciation of office building and office equipment.
An Income Statement is a statement showing the d) Other expenses. These are costs incurred which are
financial performance or the results of operation of an not directly related to selling and administrative
entity for a given period of time. Financial performance tasks e.g. Loss on sale of resources of an entity other
is also known as the results of operations of the entity. than goods or product for sale, interest related to
barrowed funds.
Income statement may be presented in two ways, namely e) Income Tax. An income tax is a tax levied on the
functional and natural presentation. income of an individual or business (corporations or
other legal entities).
Functional presentation classifies expenses according
to their function as part of cost of sales, distribution STATEMENT OF COMPREHENSIVE INCOME
costs, administrative activities and other activities. It is
also known as cost of sales method.
Page 8 of 84
Comprehensive Income is the change in equity during a
period resulting from transactions and other events, other There are three classifications of cash flows, namely,
than changes resulting from transaction with owners in operating activities, investing activities and financing
their capacity as owners. Meaning, it includes profit and activities.
loss and other comprehensive income from operations.
The statement of comprehensive income starts with the
profit or loss as shown in the income statement plus or
minus the components of other comprehensive income
which includes the following:
1. Unrealized gain or loss on investment in equity
instruments measured at fair value through other
comprehensive income.
2. Gain or loss from translation of the financial
statements of a foreign operation.
3. Changes in revaluation surplus.
4. Unrealized gain or loss from derivative contracts
designated as cash flows hedge.
5. Actuarial gain or loss on defined benefit plan fully
recognized through other comprehensive income.
The aforementioned components of the comprehensive
income are to be discussed in higher accounting
subjects. For basic accounting purposes, only the
Statement of Financial Position, Income Statement and
Statement of Changes in Owner’s Equity shall be taken
up comprehensively.
STATEMENT OF CHANGES IN OWNER’S

EQUITY
The statement of changes in equity is a basic statement
that shows the progress or changes in the elements or
components of the owner’s equity (if the entity is a sole
proprietorship).
TYPICAL ACCOUNT TITLES USED
Capital is an account that represents the owner’s

financial interest in the business. The transactions that
increase this accounts are:
a) Primary purpose is to provide relevant information
about the entity’s cash receipt and cash payments
during the accounting period;
b) Provides information to enable users evaluate the
changes in net assets of an entity, its financial
structure, liquidity and solvency;
c) Provides information regarding company’s ability to
generate positive future net cash flows; and
d) Enhances the comparability of operating
performance by different entities.
The statement of cash flows may be reported using

either direct method or indirect method.
Direct Method. This method encourages the reporting

major classes of cash receipts and cash payments and the
net cash flow from operating activities. Accordingly, it
resembles the cash basis income statement.
Indirect Method. The net income or loss is adjusted for

the effect of transactions of non-cash nature, any
deferrals or accruals of past or future operating cash
receipts and payments, and items of income or expenses
associated with investing and financing activities. In
other words, this method reports the same amount of net
cash flow from operating activities indirectly by
adjusting net income to reconcile it to net cash flow from
operating activities.
Page 9 of 84
COMPLETE ILLUSTRATION OF STATEMENT OF FINANCIAL POSITION, STATEMENT OF
COMPREHENSIVE INCOME, STATEMENT OF CHANGES IN OWNER’S EQUITY and NOTES TO
FINANCIAL STATEMENTS (For illustration purposes, Financial Statements of a Service, Single Proprietorship
Business will be presented in this chapter
Example of a Statement of Financial Position using the Report Form (Balance Sheet)
Go Transport Lines
As of December 31, 2020
ASSETS
Current Assets: Notes

Cash and Cash Equivalents 3 360,000
Trade and Other Receivables 4 103,350
Prepayments 5 101,000
Total Current Assets 564,350
Non-current Assets:
Property and Equipment, net 6 2,574,000
TOTAL ASSETS _______

3,138,350
LIABILITIES AND OWNER’S EQUITY
Current Liabilities:
Trade and Other Payables 7 118,000
Non-current Liabilities:
Loans Payable, due 2024 150,000
Total Liabilities 268,500
Bong Go, Capital 2,869,850
TOTAL LIABILITIES AND OWNER’S EQUITY 3,138,350
Page 10 of 84
Take note that Loans Payable is presented alone and does not have any supporting schedule because there is only one
account number non-current liabilities. When there is only one account, it should be presented on the face of the
financial statement and does not require any supporting note.
Example of a Statement of Comprehensive Income (Natural Presentation) (Income Statement)
Go Transport Lines
Income Statement
For the year ended December 31, 2020
Notes
Revenues 8 1,102,000
Less Operating Expenses 9 430,700
Operating Income 671,300
Less Interest Expense 2,450
Net Income 668,850
Example of a Statement of Changes in Owner’s Equity
Go Transport Lines
Statement of Changes in Owner’s Equity
Bong Go, Capital – January 1, 2020 2,216,000

Add: Net Income 668,850
Total 2,884,850
Less: Bong Go, Drawings 15,000
Bong Go, Capital – December 31, 2020 2,869,850
Page 11 of 84
NOTES TO FINANCIAL STATEMENTS
Note 1 Business Profile or Business Information
This includes the business name, date and number of registration to appropriate government agency, business
address, and the primary purpose or operation of the business.
Note 2 Accounting Policies and Principal used in the Preparation of the Financial Statements
This note includes a listing and description of different accounting policies and principles used as basis in
preparing and presenting the financial statements.
Note 3 Cash and Cash Equivalents
Cash in Banks 350,000
Petty Cash Fund 10,000
Total 360,000
Note 4 Trade and Other Receivables
Account Receivable 55,000

Allowance for Doubtful Accounts (3,000)
Notes Receivable 50,000
Interest Receivable 1,350
Total 103,350
Note 5 Prepayments
Supplies on Hand 75,000

Prepaid Insurance 12,000
Prepaid Rent 14,000
Total 101,000
Note 6 Property and Equipment, net

Cost Accumulated Book
Depreciation Value
Transport Buses 2,500,000 (250,000) 2,250,000
Equipment 250,000 (25,000) 225,000
Furniture and Fixtures 80,000 (16,000) 64,000
Tools 35,000
Total 2,574,000
Note 7 Trade and Other Payables
Accounts Payable 65,000

Salaries Payable 30,000
Interest Payable 3,500
Notes Payable, due 2011 20,000
Total 118,000
Note 8 Revenues Earned
Passenger Fares 800,000

Cargo Fares 300,000
Interest Income 2,000
Total 1,102,000
Note 9 Operating Expenses

Salaries Expense 84,000
Rent Expense 36,000
Insurance Expense 24,000
Page 12 of 84
Supplies Expense 32,000
Utilities Expense 7,500
Depreciation Expense 145,500
Repairs and Maintenance Expense 26,000
Fuel and Oil Expense 60,000
Tools Expense 14,700
Doubtful Accounts Expense 1,000
Total 430,000
Page 13 of 84
Topic B. Analyzing and Recording of Business Transaction – Service Business
ANALYSIS OF BUSINESS TRANSACTIONS AND THE ACCOUNTING EQUATION
Learning objectives:
 Identify business transactions

 Enumerate the accounting elements
 Explain the use of chart of accounts
 Explain the accounting equation A=L+OE/C
 Identify business transactions
 Analyze the effects of transactions the accounting equation
 Analyze and record the effects of transactions using financial transaction worksheet and “T” account
BUSINESS TRANSACTIONS DEFINED

When a barber shop renders service to a customer, a business transaction takes place.
When a computer shop buys computer units needed for the business from a supplier, a business transaction takes
place.
A business transaction is defined as an exchange of goods or services between two parties for a certain sum of money.
EXCHANGE
RENDERS SERVICE
BUSINESS CLIENT
PAYS A FEE
DELIVERS EQUIPMENT
BUSINESS SUPPLIER
PAYS FOR THE PRICE OF EQUIPMENT
ACCOUNTING ELEMENTS
The accounting elements or accounting values are the major grouping or classifications of the different items used in
analyzing business transactions. Their recognition and measurement are presented in this topic.
The basic accounting elements are:
Assets are resources controlled by the entity as a result of past transactions or events and from which future economic
benefits are expected to flow to the entity. Hence to qualify as assets, resources must:
a) be controlled by the entity
b) result from past transactions or events
c) be expected to provide future economic benefit
Page 14 of 84
Liabilities are obligations of the entity arising from the past transactions or events the settlement of which is expected
to result in an outflow from the entity of resources embodying economic benefits. Hence to qualify as liabilities,
obligation must:
a) result from past transactions or events
b) be settled through the outflow of resources having future economic benefits
c) be a present obligations of a particular entity
Owner/s Equity is the residual interest in the assets of the entity after deducting all of its liabilities. It is also known
as net assets or net worth.
THE CHART OF ACCOUNTS
Analysis of business transactions involves evaluating changes in the accounting elements - Assets, Liabilities and
Owner’s Equity. These accounting elements are further broken down into different account titles that are used in
analyzing business transactions.
The Chart of accounts is the list of all account titles used by a particular business. The accounts are normally listed in
the order in which they appear in the financial statements. Normally, asset accounts are listed first, followed by
liability accounts and finally, owner’s equity accounts. It is designed to meet the information needs of the different
users of financial statements. The common account titles that are used are:
A. Asset 5. Loan Payable
Current Assets
1. Cash in Banks
Non-Current Liabilities
2. Cash on Hand
1. Mortgage Payable
3. Petty Cash Fund
4. Accounts Receivable B. Owner’s Equity
5. Allowance for Doubtful Accounts 1. Owner’s Capital Investment/Additional
6. Note Receivable Investment
7. Loan Receivable 2. Owner’s Drawing/Personal/Withdrawal
8. Inventories
9. Supplies C. Revenues
1. Service Revenue
Non-Current assets 2. Commission Income
1. Land 3. Professional Fees
2. Buildings
3. Equipment D. Expenses
4. Furniture and Fixtures 1. Rent Expense
5. Accumulated Depreciation 2. Salaries and Wages
3. Utilities Expense
A. Liabilities 4. Supplies Expense
5. Transportation Expense
Current Liabilities
1. Accounts Payable 6. Insurance
2. Salaries Payable 7. Bad Debts Expense/Doubtful Accounts
3. Utilities Payable Expense
4. Notes Payable 8. Depreciation Expense
9. Miscellaneous Expense
Since that chart of accounts is designed to meet the information needs of stakeholders, new accounts may be added,
and likewise old accounts may be eliminated as needed.
THE ACCOUNTING EQUATION
Page 15 of 84
The relationship of the accounting elements is expressed in the basic accounting equation:
ASSETS = LIABILITIES + OWNER’S EQUITY
Alternatively, the equation may also be presented as follows:
ASSETS ̶ LIABILITIES = OWNER’S EQUITY
Since business transactions affects the assets, liabilities, and owner’s equity of the business, the accounting equation
can be further explained through the following statements:
 Business assets come from two sources: from creditors (liabilities) and from owner’s investments after
considering withdrawals and result of business operation (income/loss).
 Assets are generated from borrowings (liabilities) and from investments and results of business operation
(owner’s equity).
 The equality of the equation is always maintained in as much as every business transaction has a two-fold
effect on the assets, liabilities and equity of the business.
Accounting equation is the most basic tool of accounting. It presents the resources of the business and the sources of
or claims to these resources. Assets appear on the left-hand side of the equation, while liabilities, which represent the
economic claim of creditors, and owner’s equity, representing economic claim of owner’s, appear on the right-hand
side of the equation. Further, liabilities are presented first and followed by the owner’s equity since in the event of
liquidation; outside claims are prioritized over claims within the business. This is in accordance with the concept that
the owner’s interest in the business is just residual in nature.
THE EXPANDED ACCOUNTING EQUATION
The basic accounting equation provides only information regarding the financial position of the business, thus, only
the statement of financial position elements are presented. The equation does not provide information about the
profitability or the results of operation of the business. The income and expense accounts as elements of the statement
of comprehensive income are not illustrated since they are usually closed to the capital account at the end of
accounting period. Using the same framework, transactions involving income and expenses can be further analyzed by
expanding the owner’s equity as follows
ASSETS= LIABILITIES + INVESTMENTS + INCOME ̶ EXPENSES ̶ WITHDRAWALS
ANALYSIS OF BUSINESS TRANSACTIONS
In order to transform data into useful information, business transactions must be carefully analyzed as to their affects
to the assets, liabilities and equity.
The following guidelines could be useful:
1) There is an EXCHANGE that takes place in every business transaction.
2) Business transactions results to either increase or decrease in the elements of the accounting equation.
3) The quality of the accounting equation is always maintained.
4) Proper account titles are used.
5) Accounting principles and assumptions are considered.
6) Business transaction is always analyzed on the point of view of the business.
EXAMPLES
Page 16 of 84
Business Transaction 1
June 2 - The owner, Mr. Gupit, invested cash of P65,000 in establishing a barber shop.
Cash on Hand
BUSINESS Capital (Right of Ownership) OWNER
MR. GUPIT CAPITAL
Analysis:
1) An exchange has taken place: The business received cash in exchange for the right of ownership to the owner.
2) Effects on Assets and Increase in Assets (Cash On Hand)
Equity : Increase in Equity (Gupit, Capital)
3) Equality of the Accounting Equation and the use of proper account titles
ASSETS = LIABILITIES + EQUITY
ASSETS = LIABILITIES+ OWNER’S EQUITY

D Cash Gupit, Capital
a
t
e
June 2 65,000 65,000
Total 65,000 - - - 65,000 -
Business Transaction 2:
June 3 – A barber chair amounting to P3,500 was bought for cash from Quality Store.
Equipment (Barber Chair)
Cash on Hand QUALITY

BUSINESS
STORE
Analysis:
1. An exchange has taken place: The business received the barber chair in exchange for the cash paid for it.
2. Effects on Assets: Increase in Asset (Equipment)
Decrease in Asset (Cash on Hand)
3. Equality of the Accounting Equation and the use of proper account titles:

D Cash Equipment Gupit, Capital
a
t
e
June 2 65,000 65,000
June3 (3,500) 3,500
Total 61,500 3,500 - - 65,000 -
Page 17 of 84
June 5- Bottles of lotion and powder were bought from BANGO for P2,000, paying P500 down payment, balance on
account.
Supplies (Lotion & Powder)
Cash on Hand
BUSINESS Accounts Payable (Promise to pay) BANGO
Analysis:
1) An exchange has taken place: The business received bottles of lotion and powder in exchange for the cash and
promise to pay the balance on a future date.
2) Effects on Assets: Increase in Asset (Supplies)
Decrease in Asset (Cash) Increase in Liabilities (Accounts Payable)

3) Equality of the Accounting Equation and the use of proper account titles:

D Cash Equipment Supplies Accounts Payable Gupit, Capital
a
t
e
June 2 65,000 65,000
June3 (3,500) 3,500
June 5 (500) 2,000 1,500
Total 61,000 3,500 2,000 1,500 65,000 -
June 7- The Business rendered service to customers for cash, P1,500.
Cash
Service CUSTOME
BUSINESS
R
(Service Income)
Analysis:
1) An exchange has taken place: The business received cash in exchange for services rendered to the customer
2) Effects on Assets: Increase in Asset (Cash on Hand) and Increase in Equity (Service Income)
3) Equality of the Accounting Equation and the use of proper account titles:

D Cash Equipment Supplies Accounts Payable Gupit, Capital Service
Page 18 of 84
a Income
t
e
June 2 65,000 65,000
June3 (3,500) 3,500
June 5 (500) 2,000 1,500
June 7 1,500 1,500
Total 62,500 3,500 2,000 1,500 65,000 1,500
June 9 – The business rendered services to SKYHIGH Company for P5,000 for which cash of P3,000 was received,
balance of P2,000 on account.
CASH
PROMISE TO PAY
(Accounts Receivable) SKYHIGH
BUSINESS
COMPANY
SERVICE
(Service Income)
Analysis:
1) An exchange has taken place: The business received cash and the customer’s promise to pay in exchange for
the services rendered to the customer.
2) Effects on Assets: Increase in Asset (Cash on Hand and Accounts Receivable), Increase in Equity (Service
Income).
3) Equality of the Accounting Equation and use of proper account titles:
ASSETS ̶ LIABILITIES+ OWNER’S EQUITY

D Cash Equipment Supplies Accounts Rec. Accounts Payable Gupit, Capital Service
a Income
t
e
June 2 65,000 65,000
June3 (3,500) 3,500
June 5 (500) 2,000 1,500
June 7 1,500 1,500
June 9 3,000 2,000 5,000
Total 65,500 3,500 2,000 2,000 1,500 65,000 6,500
Page 19 of 84
COMPREHENSIVE ILLUSTRATION ON ANALYSIS OF BUSINESS TRANSACTIONS USING A
WORKSHEET
Business Transactions:
July 1 Mr. Genius invested the following in the EXPERT Computer Shop:
Cash P50, 000
Computer Units P125, 000
July 2 Paid for mayor’s permit and other licenses, P2,500

July 4 Bought pens, papers and diskettes from Stationary on account, P1,750.
July 5 Paid for advertising, P2,000
July 6 Receipts for the day for services rendered, P3,500
July 8 Sent a bill to SURE Company for the computer services rendered to their company, P5,500
July 9 Paid the account to Stationary
July 12 Air conditioning units were bought from MICRO Company paying P10,000 balance of P7,500
payables in 30 days.
July 14 Computer fees for the services rendered consisted of cash of P15,000 and promissory note amounting
to P6,500
July 15 Salaries of P5,000 were paid to employees
July 17 SURE Company paid its account.
July 20 Mr. A paid P2,000 and promised to pay the P1,000 after 15 days for computer services rendered to bin
store
July 25 Collected P1,500 of the promissory note dated July 14
July 27 The owner withdrew P7,500 cash for personal use.
July 30 Paid for the following expenses:
Light and Water P6,500
Salaries 4,500
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ANALYSIS OF BUSINESS TRANSACTION
USING A WORKSHEET
DATE ASSETS LIABILITIES E QUITY

Cash Accounts Notes Office Equipment Accounts Genius, Particulars
Rec. Rec. Supplies Payable Capital
July 1 50,000 125,000 175,000 Investment

2 (2,500) (2,500) Taxes and Licenses exp
4 1,750 1,750
5 (2,000) (2,000) Advertising expense
6 3,500 3,500 Service Income
8 5,500 5,500 Service Income
9 (1,750) (1,750)
12 (10,000) 17,500 7,500
14 15,000 6,500 21,500 Service Income
15 (5,000) (5,000) Salaries exp
17 5,500 (5,500)
20 2,000 1,000 3,000 Service Income
25 1,500 (1,500)
27 (7,500) (7,500) Drawing
30 (11,000) (6,500) Light and water exp
(4,500) Salaries exp
37,750 1,000 5,000 1,750 142,500 7,500 180,500
Assets P188,000 = Liabilities P7,500 + Capital P180,500

P188,000 = P188,00
Page 21 of 84
ANALYSIS OF BUSINESS TRANSACTION USING T-ACCOUNT
Since business transactions cause an increase or decrease in the accounting value, these changes should be recorded
through the use of accounts. An account, in accounting balance, is the basic device that summarizes the increases and
decreases in assets, liabilities and owner’s equity. A separate account is maintained for each element that appears in
the statement of financial position, and in the statement of comprehensive income.
The account has two sides. The left side of any account is called the Debit side, while the right side is called the
Credit side. Each transaction affects at least two accounts.
A simple form of account is called “T” account; it has a left side and right side, it appears as follows:
Name of an Account
Left Side Right Side
To debit is to enter the amount on the left side of a T account and to credit is to enter it on the right side of a T
account. Since assets are on the left side of the accounting equation, increases in the asset account are placed on the
left or debit side of the asset accounts, and decreases in assets on the right or credit side. However, since liabilities and
owner’s equity are on the right side of the accounting equation, increases in the liability and owner’s equity accounts
are placed on the right or credit side of the accounts and decreases on the left or debit side.
Since income and expenses accounts affect owner’s equity, the analysis of the transactions involving the same through
the use of a T account shall be made based on their effects on the equity. Accordingly, since income items increase
equity, increases in income shall be provided on the credit side while decreases shall be entered on the left side of the
account. Increase in expense items shall be entered on the left side while decreases shall be provided on the right side
of the account since expenses have the effect of decreasing equity.
The following are the T accounts for the various accounts showing the sides where the accounts are increased or
decreased.
Assets Liabilities
Increase Decrease Decrease Increase
Owner’s Equity Revenue

Decrease Increase Decrease Increase
Expenses
Increase Decrease
Transactions dated July 1 and July 2 are analyzed below using T accounts based on the preceding discussions.
Cash Equipment Genius, Capital
a. 50,000 b. 2,500 a. 125,000 a. 175,000
Taxes and Licenses

b. 2,500
Analysis: Transaction labeled letter “a”

1. The asset accounts, cash and equipment, increased as a result of the investment made by the owner.
Accordingly, the amounts were provided on the left side (debit) of the accounts to indicate the increase. The
owner’s equity account likewise increased because of the interest attributed to the owner in the business due
to his investment. The amount was indicated on the right side (credit) of the account to signify the increase in
the amount.
2. Increases in assets are entered on the left or debit side while increases the capital are entered on the right or
credit side of the related accounts.
Analysis: Transaction letter “b”

1. The asset account cash decreased as a result of the payment made by the business to the government
representing permits and increases. Accordingly, the amount was provided on the right side (credit) of the
account to indicate the decrease. Taxes and licenses expense was incurred by the business thereby causing a
decrease in the owner’s equity account. The amount was indicated on the left side (debit) of the account to
signify the decrease in the account.
2. Decreases in assets are entered on the right or credit side and decreases in capital are entered on the left or
debit side of the related account.
The Accounting equation at this point will appear as follows:
ASSETS= LIABILITIES+ OWNER’S EQUITY

Cash Equipment Genius, Capital Remarks
50,000 125,000 175,000 Investment
(2,500) (2,500) Taxes and Licenses
47,500 125,000 172,500
172,500 = 172,500
RECORDING BUSINESS TRANSACTION OF A SERVICE BUSINESS

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Learning Objectives:
 Explain the accounting cycle
 Identify, measure and record business transaction in the General Journal
 Post journal entries from the General Journal to the General Ledger/T-account
 Prepare a Trial Balance
 Locate errors in the Trial Balance
Page 24 of 84
RECORDING BUSINESS TRANSACTIONS OF A SERVICE BUSINESS
ACCOUNTING CYCLE
The accounting process transforms data into more useful information that serves as a basis for economic decisions of
stakeholders. This accounting process is further broken into series of steps that are intended to produce reliable
information. This series of steps comprise the ACCOUNTING CYCLE.
The accounting cycle consists of the following steps:
JOURNALIZING NO
POSTING
End of
Accounting
PREPARATION OF TRIAL BALANCE period?
PREPARATION OF WORKING PAPERS WITH

ADJUSTMENTS YES
PREPARATION OF FINANCIAL STATEMENTS
JOURNALIZING & POSTING OF ADJUSTING

ENTRIES
JOURNALIZING & POSTING OF CLOSING

ENTRIES
PREPARATION OF POST-CLOSING TRIAL BALANCE
JOURNALIZING AND POSTING OF

REVERSING ENTRIES
The topic discusses the analysis of business transactions, journalizing, posting and the preparation of trial balance.
Page 25 of 84
Business transactions are analyzed from business documents, which serve as evidences of business transactions.
Business documents serve as sources of accounting data that are intended to be transformed into more useful and
reliable information.
The process of analyzing accounting transactions begins with:
a) Identifying the transaction from source document,

b) Determining the accounting elements affected and their effects in the accounting equation,
c) Establishing the appropriate account title to be used,
d) Determining whether they are to be entered as debit or credit, and
e) Ascertaining the amount to be recorded for each account.
Some of the common business source documents are:
Official Receipt – Is a document evidencing the receipt of cash.
Page 26 of 84
Sales Invoice – A document sent to a customer with a list of products or services they have bought and their prices.
Check Voucher – Is a document evidencing cash payment.
Page 27 of 84
Petty Cash Voucher – Is a document evidencing cash payment from the petty cash fund.
Journalizing
This is the recording of business transactions in chronological order in the book of accounts known as JOURNAL.
The Journal is also known as the book of original entry because it is where business transactions are initially recorded.
There are two kinds of journal; the General Journal and the Special Journals. General Journal is the simplest form
of journal which is composed of two (2) money columns, the debit and the credit.
Illustrative example of a two-column journal:
General Journal Page No.

Date Particulars F Debit Credit
July 1 Cash 50,000
Equipment 125,000
Genius, Capital 175,000
A general journal contains the following:
Date - The column where the date of the transaction that transpired is indicated.
Particulars - The column where the debited and credited accounts and a brief explanation of the entries are indicated.
However, the brief explanation of the entries may be omitted.
Folio - The column that is used to specify the posting reference number or the number of the account that was posted
in the general ledger. This column is to be filled out only after posting the entries to the general ledger.
Debit - The column where the amount of the account debited is entered.
Credit - The column where the amount of the account credited is entered.
THE PRINCIPLES OF DEBIT AND CREDIT
In journalizing business transactions, one has to remember the guiding principles in analyzing business transactions.
The same principle will be used in journalizing transactions. These are:
1. An exchange takes place in every business transaction.
Page 28 of 84
2. Business transactions have a two-fold effect on the Assets, Liabilities and Equity elements of the Accounting
equation. The two-fold effect of business transactions gives rise to the DOUBLE Entry Bookkeeping
System. Business transactions will either cause an increase; decrease or even both, in the accounting
elements.
3. Proper account titles must be used in journalizing business transactions.
4. The basic accounting principles and assumptions are applied in journalizing.
5. Journalizing involves analyzing business transaction on the point of view of the business.
6. The equality of debit and credit sides must always be maintained.
Applying the guiding principles mentioned above, one has to understand the principles of DEBIT and CREDIT. The
principles of Debit and Credit are summarized using the same device used in analyzing business transactions - the “T”
account.
Debit Credit - The left side of the “T” account is the DEBIT side.
- The right side of the “T” account is the CREDIT side.
ASSETS
Debit Credit - When assets increase, the appropriate asset account DEBITED
Increase Decrease - When assets decrease, the appropriate asset account CREDITED
LIABILITIES
Debit Credit -When liabilities increase, the appropriate liability account is CREDITED
Decrease Increase - When liabilities decrease, the appropriate liability account is DEBITED
EQUITY
Debited Credited -When equity increase, the appropriate equity account is CREDITED
Decrease Increase - When equity decrease, the appropriate equity account is DEBITED
The principles of Debit and Credit maintain the equality of the accounting equation.
ASSETS = LIABILITIES + EQUITY
Debit: Increase Debit: Decrease Debit: Decrease

Credit: Decrease Credit: Increase Credit: Increase
The table below presents, in tabular form, the rules of debit and credit.
DEBIT CREDIT
Assets Increase(+) Decrease(-)
Liabilities Decrease(-) Increase(+)
Expanded Owner’s Equity Accounts
Owner’s Capital Decrease(-) Increase(+)
Owner’s Drawing Increase(+) Decrease(-)
Revenue/Income Decrease(-) Increase(+)
Expenses Increase(+) Decrease(-)
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RECORDING BUSINESS TRANSACTIONS
The following transaction transpired during the month of July for SUPER Barber shop.
July 2 - Mr. Nath opened SUPER Barber shop with the following investments: Cash P75,000 and powder, lotion and
alcohol valued at P2,500.
Analysis
Increase in Assets DEBIT Cash 75,000
DEBIT Supplies 2,500
Increase in Equity CREDIT Nath, Capital 77,500
July 3 - Mr. Nath also invested an air conditioning unit valued at P 12,500, of which P 5,000 is still owed to ABC
Appliances. The liability is to be assumed by the barber shop.
Analysis
Increase in Assets DEBIT Equipment 12,500
Increase in Liabilities CREDIT Accounts Payable 5,000
Increase in Equity CREDIT Nath, Capital 7,500
July 4 - Bought a mirror for cash, P3,500
Analysis
Decrease in Assets CREDIT Cash 3,500
July 5 - A barber chair was bought for P 6,500 from DEF store by paying P4,500 cash and the balance on account.
Analysis
Increase in Liabilities CREDIT Accounts Payable 2,000
July 6 - Rendered services to clients for cash, P2,750.
Analysis
Increase in Equity CREDIT Service Income 2,750
July 7 - Paid the account due to ABC Appliances dated July 3
Analysis
Decrease in Liabilities DEBIT Accounts Payable 5,000
July 8 - Sent a bill to MNN Company for services rendered to its employees, P5,000.
Analysis
Increase in Assets DEBIT Accounts Receivable 5,000
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July 9 - MNN Company made a partial payment of 3,000.
Analysis
Decrease in Assets CREDIT Account Receivable 3,000
July 10 - The owner, Mr. Nath, withdrew P1,000 cash for his personal use.
Analysis
Decrease in Equity DEBIT Nath, Drawing 1,000
July 11 - Receipts for the day, P4,000.
Analysis
July 15 - Paid salaries, P2,000.
Analysis
Decrease in Equity DEBIT Salaries 2,000
JOURNAL ENTRIES OF SUPER BARBER SHOP

Journalizing is the chronological recording of business transactions into the debits and credits of appropriate accounts
using the general journal. The recorded transactions are called the JOURNAL ENTRIES.
The following are the journal entries of SUPER BARBER SHOP for the month of July.
GENERAL JOURNAL OF SUPER BARBER SHOP
DATE PARTICULARS F DEBIT CREDIT

July 2 Cash 75,000
Supplies 2,500
Nath, Capital 77,500
3 Equipment 12,500
Nath, Capital 7,500
4 Equipment 3,500
Cash 3,500
5 Equipment 6,500
Cash 4,500
6 Cash 2,750
Service Income 2,750
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7 Accounts Payable 5,000
Cash 5,000
8 Accounts Receivable 5,000

9 Cash 3,000
Accounts Receivable 3,000
10 Nath, Drawing 1,000

Cash 1,000
11 Cash 4,000
Service Incom 4,000
15 Salaries Expense 2,000

Cash 2,000
The following observations should be noted after closely examining the general journal of SUPER
BARRBER SHOP.
a) The journal entries consist of the:

 Date of the transaction
 Account titles to be debited and credited
 Amount or peso value of the transactions
b) There is a space after each journal entry.
c) The journal entries with one debit and one credit are called SIMPLE JOURNAL entries.
d) The journal entries with more than debit and more than one credit (July 2 & 3 transactions)
are called COMPOUND JOURNAL ENTRIES.
POSTING THE JOURNAL ENTRIES
Posting is the transferring of journal entries from the JOURNAL to the GENERAL LEDGER. A
General Ledger is used to classify transactions affecting a common account. It is also known as
the “book of financial entry”. Posting serves the purpose of grouping together similar accounts.
Typical general ledgers of selected accounts are presented next.
Account Name: CASH IN BANK Account No.
100
Date Particulars F DEBIT DATE Particulars F CREDIT
Account Name: ACCOUNTS RECEIVABLE Account No.

110
Account Name: ACCOUNTS PAYABLE Account No.

200
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Another format of the General Ledger is presented in the following discussions. This format is
widely used in actual practice because of its simplicity. This format is to be used for illustrations
and exercises in this text.
Account Name: CASH IN BANK Account No. 100
Date Particulars F DEBIT CREDIT BALANCE
Account Name: ACCOUNTS RECEIVABLE Account No. 110


200
Prior to the posting of journal entries to the general ledger, the General Ledger should be open first.
Opening the General Ledger means copying the account numbers and account titles from the chart
of accounts and writing them in their respective ledgers.
STEPS IN POSTING
Below is an illustration of the posting of the journal entry affecting the cash account to the general
ledger for CASH.
General Journal
Date Particulars F DEBIT CREDIT
July 1 Cash 10 10,000
0
Owner’s, Capital 10,000
General Ledger
Account Name: CASH Account No. 100
July 1 GJ1 10,000 10,000
1. Write the date in the date column of the ledger. The date should be similar to the date of the
journal entry.
2. Fill out the “F” (folio or reference) column of the ledger, “GJI” means General Journal
page 1. This will indicate that the posting came from page 1 of the general journal. If the
posting came from page two, it should be GJ2.
3. Copy the amount from the journal and write it in the general ledger. If the amount was
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taken from the debit side of the journal, the same should be posted to the debit side of the
ledger. If the amount to be posted came from the credit side of the journal, then it should be
posted to the credit side of the ledger.
4. Compute for the amount to be extended to the balance column of the ledger. To compute
for the balance, for accounts with normal debit balances, debit postings will increase the
balance and credit postings will decrease the balance. For accounts with normal credit
balances, debit postings will decrease the balance and credit postings will increase the
balance.
5. Fill out the “F” (folio or reference) column of the general journal adjacent to the account
posted to the general ledger. The account number of the account posted is to be written in
the “F” column. In the illustration, “100” is the account number of General Ledger for
Cash.
Repeat the steps above until all journal entries from the general journal have been posted to the
general ledger.
Presented below are the completed postings of the journal entries of Super Barber Shop to the
General Ledgers:
Account Name: CASH ON HAND Account No. 100
July 2 GJ1 75,000 75,000
4 GJ1 3,000 71,500
5 GJ1 4,500 67,000
6 GJ1 2,750 69,750
7 GJ1 5,000 64,750
9 GJ1 3,000 67,750
1 GJ1 1,000 66,750
0
1 GJ1 4,000 70,750
1
1 GJ1 2,000 68,750
5
Account Name: ACCOUNTS RECEIVABLE Account No. 101

July 8 GJ1 5,000 5,000
9 GJ1 3,000 2,000
Account Name: SUPPLIES ON HAND Account No. 102

July 2 GJ 2,500 2,500
1
Account Name: EQUIPMENT Account No.

200
July 3 GJ 12,500 12,500
1
4 GJ 3,500 16,000
1
5 GJ 6,500 22,500
1
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300
July 3 GJ 5,000 5,000
1
5 GJ 2,000 7,000
1
7 GJ 5,000 2,000
1
Account Name: NATH, CAPITAL Account No.

400
July 2 GJ 77,500 77,500
1
3 GJ 7,500 85,000
1
Account Name: NATH, DRAWING Account No.

401
July 10 GJ1 1,000 1,000
Account Name: SERVICE INCOME Account No.

500
July 6 GJ 2,750 2,750
1
8 GJ 5,000 7,750
1
11 GJ 4,000 11,750
1
Account Name: SALARIES EXPENSE Account No.

300
July 15 GJ1 2,000 2,000
At the end of the accounting period, after all the postings have been made, the debit or credit
balances of each account should be determined to facilitate the preparation of a trial balance. A
Trial Balance presents a list of accounts in the general ledger with balances. The accounts with
balances are called OPEN ACCOUNTS.
The trial balance proves the equality of debit and credit of the different accounts in the general
ledger.
STEPS IN PREPARING A TRIAL BALANCE

Step 1 Write the heading at the top. The heading of the trial balance includes the following:
Name of the Business
TRIAL BLANCE
Date of the Trial Balance
Step 2 Provide for the following columns:

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Account Titles Debit Credit
Step 3 Determine all the open accounts in the general ledger and write the title of each open
account in the account titles column of the trial balance in the order of their account numbers. All
account titles are written with the same margin from the left side of the page. If the account has a
debit balance, write the balance in the debit amount column opposite the corresponding account,
otherwise write it on the credit amount column.
Step 4 Foot the debit and credit money column.
Step 5 Compare the totals and double rule the totals.
Trial balance of Super Barber Shop:
SUPER BARBER SHOP

Trial Balance
July 31, 2020
ACCOUNT TITLE DEBIT CREDIT

Cash on Hand 68,750
Supplies on Hand 2,500
Equipment 22,500
Nath, Capital 85,000
Nath, Drawing 1,000
Totals 98,750 98,750
Take note that when the debit and credit totals are equal, the trial balance is in balance,
however, this only proves that the debit and credit in the ledger are equal in amount, but this is not
an assurance on the correctness of the records. Therefore, an error committed by debiting and
crediting the wrong account in either the journal or ledger will not be detected in the trial balance.
Failure to record an entire transaction will not affect the equality of the balances in the trial balance.
On the other hand, if the trial balance totals are not equal, the trial balance is said to be out-of-
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balance and this signify the presence of an error. The possible causes of the errors are the
following:
1. Posting an item on the wrong side of an account.
2. Posting the same account twice.
3. Erroneous amount was posted to the account.
4. Omission of the posting of either a debit or a credit.
5. Incorrect addition or subtraction in determining the balances of an account.
6. Incorrect addition on one or both of the money columns of the trial balance.
HINTS FOR LOCATING ERRORS
The following procedures may facilitate the convenient locating of errors
Check the trial balance by following the steps below:
1. Add the debit and credit money column all over again.
2. If the error is not due to wrong addition, determine the exact amount of difference. If the
difference is divisible by 9, this indicates either transposition, meaning the order of figures
is reversed (e.g. 65 is written 56 or 78 is written as 89 etc.) or it indicates a side or
misplacement of decimal point (e.g. 1,000 is written as 100 or 2,500 is written as 25,000
etc.)
3. A discrepancy divisible by 2 suggest an error in posting to the wrong column of the trial
balance, as when a debit balance of an account is posted to the credit column of the trial
balance or vice versa. (e.g. an asset account balance of 20,000 is erroneously listed in the
credit column of the trial balance, this will cause a discrepancy of 40,000 (2 x 20,000) in
the trial balance of totals.
Check the amount in the general ledger:
1. Compare the accounts and amounts in the trial balance with those in the general ledger to
make sure that the no account and amount is omitted.
2. Verify the footings and the balance of each account.
3. Check postings from the journal to the general ledger to determine errors made in posting
such as unposted items, errors in amount, debits entered as credits, or vice versa, etc.
TRANSACTIONS INVOLVING THE USE OF PROMISORRY NOTE
Credit may be granted either through open accounts (Accounts Receivable) or through written
promise to pay on a specific date (Promissory Note). Promissory note may also be issued if an open
account is already due and the issuer does not have enough funds to pay its maturing obligation. A
promissory note is a written promise to pay a definite amount of money on demand or at some
specified future date to the holder of the note. It can be an interest-bearing or non-interest bearing
note.
Interest-Bearing Note
In this note, the maker will pay upon maturity of the note, the principal or the face value of the note
plus the corresponding interest from the issuance date to the due date of the note. Interest is
computed as follows:
I=PxRxT
Where: I – interest
P – principal or the face value of the note
R – rate of interest
T – period from the issuance date up to the maturity date of the note
An example of an interest-bearing note:
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Tarlac City, Philippines
February 01, 2020
P100,000
The following For value received, I promise to pay Pasyonista, the Sum of One
information Hundred Thousand Pesos (P100,000) sixty days after date, with interest of 12%
based on the per annum.
promissory
(Sgd.) Mr. Kimura
note will be
the basis of
the entries:
 There are 2 parties involved, Mr. Kimura the owner of Mura Lang Department Store
(Maker) agrees to pay Pasyonista (Payee) the principal amount of the note, P100,000 plus
an interest at twelve percent (12%) interest per annum.
 The term of the note is 60 days
 Maturity or due date is April 02, 2020, which 60 days from the issuance date of the note,
which is February 01, 2020.
 Interest is computed as follows:
I=PxRxT
= P100,000 x .12 x 60
360
= P2,000
 The maturity value of the note is P100,000 + 2,000 = P102,000
 The formula for the computation of interest and maturity value is the same for both the
debtor and creditor.
Entries on the part of the Maker:
Debit Credit
1-Feb-20 Cash P100,000
Notes Payable P100,000
2-April-20 Interest Expense 2,000

Notes Payable 100,000
Cash P102,000
Entries on the part of Payee:

Debit Credit
1-Feb-20 Notes Receivable P100,000
Cash P100,000
2-April-20 Cash P102,000

Notes Receivable P100,000
Non-Interest Bearing Note

It is a note where the principal or face value is equal to its maturity value. The same information as
previously discussed for an interest-bearing note must be present except for the rate of the interest.
Additional Illustration:
October 1
Dr. Nap Mallari owns a medical clinic. He received a 30-day 12% note for P25,000 from RGP Co.
for medical services rendered to its employees.
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Dr. Mallari’s Books RGP Co.’s Books
Particulars Debit Credit Particulars Debit Credit
Notes Receivable 25,000 Medical Expenses 25,000
Medical Income 25,000 Notes Payable 25,000
October 31
RGP Co. paid the note including the interest.
Cash 25,250 Notes Payable 25,000
Notes Receivable 25,000 Interest Expense 250
Interest Income 250 Cash 25,250
Computation of interest:
Interest = Principal x Rate x Time
= P25,000 x 12% x 30/360
= P250
If the above note is non-interest bearing, the entries for the issuance/receipt and eventual
payment/collection of the note will be as follows:
October 1
Notes Receivable 25,000 Medical Expense 25,000
Medical Income 25,000 Notes Payable 25,000
October 31
Cash 25,000 Notes Payable 25,000
Notes Receivable 25,000 Cash 25,000
TOPIC C. ADJUSTMENTS FOR SERVICE BUSINESS
Adjustments for Service Business – The Need for Adjustments

One of the optimum objectives of a business is to earn enough profit in order to sustain its development through the use of
its scarce resources. It is of utmost importance for the stakeholders that information is accurate and timely for them to make
sound economic decisions. Accordingly, to continuously assess the financial condition and performance of the business,
they should prepare financial statement at the end of each accounting period or at regular intervals, (time period concept), to
provide timely and valuable financial information. Consequently, if the business consistently earns sufficient profit, this will
continuously add value not only to the business but, to the different stakeholders as well.
For the reasons mentioned, business transactions are recorded with the guiding principles of the Generally Accepted
Accounting Principles (GAAP) and the underlying assumption to guide the measurement of profit in a fair manner. Hence,
financial statements are prepared and presented based on the conceptual framework for the preparation and presentation of
financial statements.
The proper determination of periodic net income and the accurate presentation of assets and liabilities would be achieved if
there is a proper matching of revenues and expenses. The proper matching can be done if accrual method of accounting is
employed.
The adjustments process therefore, relies on the revenue and expenses recognition principles, which states that revenue
should be recognized in the accounting period when it is earned, regardless of when it is collected. Likewise, expenses
should be recognized in the accounting period when they are incurred, regardless of when they are paid.
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Hence, adjusting entries are prepared to update the (to record or to correct) ledger balances. They are prepared to reflect the
correct amount of revenues realized and expenses incurred during a period to provide reliable and fair information on the
financial position and performance of the business.
Adjusting Entries
Adjusting Entries are prepared to bring the assets, liabilities, revenues and expenses up-to date at the end of the accounting
period. They are usually made at the end of the accounting period in order for revenues to be recognized within the period
they were earned, and for expenses to be recognized within the period they were incurred.
Take note that each adjusting entry affects a statement of financial position account (asset or liability account) and a
statement of comprehensive income account (Income or expense account).
Account To Be Adjusted
The account that need to be adjusted at the end of each accounting period depend upon the nature of the entity’s business
activities. However, basic adjusting entries are usually made at the end of each accounting period on the following accounts:
1. Accruals
2. Deferrals/Prepayments
3. Depreciation
4. Estimated Uncollectible Accounts
5. Ending Inventory (Merchandising and Manufacturing business)
Accruals
Accrual in accounting means recognizing revenue when earned regardless of collection and recognizing expenses when
incurred regardless of payment.
Therefore:
Accrued Revenues/Income are income earned for the period but not yet collected as of financial statement date. In order to
avoid understatement of income and asset accounts, an adjusting entry is prepared at the end of the period. The entry to
adjust accrual of income is to debit the asset (receivable) account and credit the income account.
To illustrate, assume that on May 10, 2019, the company deposited P500,000 on a 90 day time deposit account bearing an
interest of 12% per annum. Both the interest and principal will be payable after one year. On December 31, 2019, the
reporting date, the interest is computed as follows:
Interest = Principle x Rate x Time

= P500,000 x 12% x 8/12
= P40,000
Analysis: Asset in the form of interest receivable increased and income in the form of interest income likewise increased.
Increased in interest receivable is recorded on the debit side while increase in interest income is recorded on the credit side.
December 31, 2019 Debit: Interest Receivable P40,000

Credit: Interest Income P40,000
Accrued Expenses are expenses incurred but not yet paid at the end of the period services were received but no payment
have been made yet. If accrued expenses will not be adjusted, it will cause understatement to both liability and expense
accounts.
To illustrate, assume that the company regularly pays its employees on the 5 th and 20th day of the month. The salaries they
receive on the 5th day represents salaries for the services which they have rendered from 16 th to 30th of the previous month,
while the salaries they received on the 20th represent salaries for the services that they rendered from 1 st to 15th day of the
current month. At the end of the business year on December 31, 2019, P45,600 of salaries had been earned by the workers
representing their salaries from December 16 to 31 2019 but payment of which is to be made on the 5 th of the next business
year.
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Analysis: The unpaid salaries are already incurred; therefore, the expense account should be increased by debiting the
salaries expense account. Since the amount is unpaid as at Dec. 31 2019, the company has an obligation to pay the
employees, thus, liabilities should be increased by way of crediting the salaries payable account.
Thus, the adjusting entry record the accrued salaries is as follows:
Dec. 31, 2019 Debit: Salaries Expense P45,600

Credit: Salaries Payable P45,600
Prepayments
Expenses that are paid in advance are called prepaid expenses. Prepaid expenses initially are treated as assets and not as
expenses. (e.g. rent, insurance, supplies and advertisements.) However, at the end of the accounting period, a portion of
these prepayment may have expired and become expenses due to passage of time or through the normal operation of the
business. In such a case, an adjustment is necessary to segregate the expired portion from unexpired to avoid misstatements
in the financial statement.
The adjusting entry for prepaid expenses depends on the accounting method adopted at the time it was paid. These two
methods are the asset method and the expense method.
Asset Method
Under the asset method, the advance payment made is debited to prepaid expenses account. Therefore, if the expired portion
has not been adjusted, the prepaid expenses account is overstated thereby, overstating the assets.
Expenses for the period, on the other hand, are understand. To adjust the books, the expired portion is debited to an expense
account and the prepaid expense account is credited. The balance of prepaid expenses account is an asset that will become
part of expenses in the future.
To illustrate, assume Mr. Kimura issued a check on November 01, for P12,000 as payment for advertising for six months.
Entry:

2019
Nov. 01 Prepaid Advertising 12,000
Cash In Bank 12,000
Based on the above entry, before adjustment, the balance of prepaid advertising is P12,000, P2,000 per month from
November to April the following year. On December 31, the advance payment for two months has already been used up.
Thus, the amount of P4,000 should be transferred to advertising expense account; otherwise the prepaid advertising account
will be overstated. Thus:

2019
Dec. 31 Advertising Expenses 4,000
Prepaid advertising 4,000
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After the adjustment, the balance of prepaid advertising is P8,000, Representing advertising for the next four months,
January to April. The expired portion amounting to P4,000 is transferred to advertising expense account. The related ledger
account will appear as follows:
Advertising Expense Prepaid Advertising

Dec. 31. 4,000 Nov. 01 Dec. 31 4,000
12,000
Expense Method
An alternative method is to record the advance payment immediately as an expense. This method is called Expense Method.
Using the above illustration, the journal entry on the date of payment is as follows:
Entry:

2019
Nov. 01 Advertising Expenses 12,000
Cash in Bank 12,000
Based on the preceding entry, the advertising expense is debited for P12,000. Thus, on December 31 before adjustment, the
expense account is overstated and the asset account is understated. Therefore, the unexpired portion is to be adjusted to
correct the related expense and asset accounts.
Adjusting Entry:

2019
Dec. 31 Prepaid Advertising 8,000
Advertising Expenses 8,000
After the adjustment, the unexpired portion, which is P8,000, is transferred from an expense account to an asset account.
The advertising expense is adjusted to P4,000 representing the used portion. Entries posted in T accounts appear as follows:
Advertising Expense Prepaid Advertising
Nov. 01 Dec. 31 8,000 Dec. 31 8,000
12,000
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Again, after the adjustment was made, the balances are the same regardless of the method used. It only proves that
adjustments change the balances of the expenses and prepaid expenses to correct amounts, hence, the financial statement
will likewise show the correct balances of these accounts.
Deferred Income
Businesses sometimes require their customers to pay in advance for the services to be rendered in the future. This is
considered a liability of the business since the cash is received in advanced while the related services are yet to be rendered.
The advance collection is credited to liability account called Deferred or Unearned Income. As the services are rendered, the
liability is cancelled and income is recognized.
Just like prepayment, the adjusting entry to be made on pre-collection of income depends on what method has been used
upon receipt of cash. Advance collection of income maybe accounted for under the Income Method or Liability Method.
Income Method
Under the income method, the method collected in advance is credited to an income account. The income account at the end
of accounting period may not represent the correct amount of income earned during the period. It is possible that the
business, at the end of the period, still has an outstanding obligation to render services in the future due to cash received in
advance. In this case, the income is overstated and the liability is understated. Thus, the books should be adjusted to transfer
an amount from income to liability.
To illustrate, assume that on December 01, 2019, PaoUpa decided to rent out an unused office space. On that date,
AngTibay rented the space for P5,000 a month. AngTibay issued a check in the account of P20,000 for rental payments
covering the period December 2019 to March 2020.
Entry:
2019 Debit Credit

1-December Cash P20,000
Rent Income P20,000
Based on the entry made above, the income of the entity is overstated and the liability is understated since the service is not
yet rendered. At the end of the period, an adjustment is necessary to establish the proper balances of the related accounts.
On Dec. 31, 2019, one-month rent has already been earned (P5,000). The required adjusting entry is as follows:
2019 Debit Credit

31-December Rent Income P15,000
Unearned Rent P15,000
The effect of the adjusting entries on the ledger accounts after posting is shown below:
Unearned Income Rent Income
Dec. 31 Dec. 01 Dec. 31
15,000 15,000 20,000
Liability Method
Under this method, the amount collected in advance is recorded in a liability account (unearned account) representing an
obligation of the company since the service is not yet rendered. The initial entry will be:
2019 Debit Credit

Page 43 of 84
01-December Cash P20,000
Unearned Rent P20,000
The preceding journal entry shows that the balance of unearned rent liability account is misstated in the amount of P20,000.
As of December 31, 2019, a certain portion of the liability was earned, thus, it should be transferred from liability to income
to present accurate financial statements. The adjusting entry on December 31, 2019 is presented below:
2019 Debit Credit

31-December Unearned Rent P5,000
Rent Income P5,000
After the adjustment, the unearned account will show a balance of P15,000 which represents the liability portion, since the
service for the remaining three months is yet to be extended. The income earned is presented as P5,000.
Unearned Income Rent Income
Dec. 31 Dec. 01 Dec. 31 5,000
15,000 20,000
Take note that the effect of the adjustments on the ledger accounts after posting is the same regardless of the method used in
recording the pre-collection of income.
Depreciation
Depreciation represent the used or expired portion of the cost of the fixed assets. Fixed assets are expenditures that will
benefit the business over a period of several years. The cost of which shall be allocated in a rational and systematic manner
over its estimated useful life. The estimated amount allocated in each period is called Depreciation Expense.
The following factors are to be considered in computing depreciation expense.
1. Acquisition Cost – It refers to the amount paid by the entity to acquire the depreciable asset. It includes acquisition
cost and other incidental cost related to its acquisition.
2. Salvage Value – It is the estimated amount for which the asset could be probably sold for at the end of its
estimated useful life.
3. Estimated Useful Life – It is the number periods of years that an entity can make use of the asset.
There are different methods formulated in computing depreciation expense, however, for basic accounting, the straight line
method will be used.
The formula to compute for depreciation under this method is:
Depreciation Expense = Cost of the Asset – Salvage Value
Estimated Useful Life
The pro-forma entry to provide depreciation expense for the period is as follows:
Debit: Depreciation Expense xx

Credit: Accumulated Depreciation xx
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The entry to record depreciation expense does not directly reduce the asset account; instead, a contra asset account called
Accumulated Depreciation is used. A contra asset account is an account which is deducted from the related asset to show
the carrying amount of such asset.
To illustrate: On July 2, an equipment was acquired with a cost of P75,000, a scrap value of P5,000 and an estimated useful
life of 5 years. Prepare the adjusting entry for the depreciation on December 31 of the same year.
Depreciation expense = P75,000 – P5,000
(6 months) 5 years
(July 1 – Dec. 1) = P 14,000/year x 6/12

= P7,000
Depreciation expense is part of the statement of comprehensive income and is deducted from revenues.
Accumulated depreciation is part of the statement of financial position and is deducted from the cost of the related
depreciable asset account.
Equipment P75,000
Less: Accumulated Depreciation 7,000
Net Book Value P68,000
Net Book Value (carrying amount) is the excess of the depreciable asset’s acquisition cost after deducting the accumulated
depreciation
Adjusting Entry:
December 31 Debit: Depreciation Expense P 7,000

Credit: Accumulated Depreciation P7,000
Uncollectible Accounts
Due to competitive business environment, business entities formulate different strategies to attract and retain customers.
One of the common strategies is the practice of extending credit terms to some valuable customers. In some cases, granting
credit terms to customers is inherent in their regular day to day business activities, like banks and other financial
institutions. However, it cannot be avoided that some of the customers cannot settle their financial obligations due to
different reasons. Therefore, the business should provide for such losses for non-collection of credits. This loss from
uncollectible accounts is called bad debts, doubtful accounts, or uncollectible accounts. Doubtful Accounts are nominal
accounts which must be shown in the statement of comprehensive income or income statement at the end of accounting
period.
There are two methods that may be followed by a business in accounting for doubtful accounts:
1. Allowance Method
2. Direct Write-Off
Allowance Method
The allowance method records bad debts loss if the account are doubtful of collection or in other words, when it is possible
that the account will not be collected. Generally Accepted Accounting Principles or (GAAP) require the use of the
allowance method because it conforms to the matching principle. Accordingly, account receivable will be shown at its net
realizable value.
The entry to adjust for doubtful accounts is as follows:
Debit: Doubtful Accounts xx

Credit: Allowance for Doubtful Accounts xx
Page 45 of 84
Doubtful Accounts account is debited resulting to an increase in expenses. It is a nominal account and presented among the
operating expenses in the statement of comprehensive income or income statement. On the other hand, the allowance for
doubtful accounts, a contra asset account, is credited and is deducted from the total accounts receivable in the statement of
financial position to arrive at its realizable value. Net realizable value is total accounts receivable less allowance for
doubtful accounts.
To Illustrate:
Account Receivable P xxx
Less: Allowance for Doubtful Accounts P xxx
Net Realizable Value P xxx
However, if the doubtful accounts are subsequently found to be worthless or uncollectible, they are to be written off as
follows:
Debit: Allowance for Doubtful Accounts xx

Credit: Accounts Receivable xx
In some cases, previously written off accounts may be subsequently recovered by the business. The procedure is to re-
establish the accounts receivable and allowance accounts and to record the collection of the same.
The entries are:
Debit: Account Receivable xx

Credit: Allowance for Doubtful Account xx
Debit: Cash xx
Credit: Account Receivable xx
Direct Write Off Method
This method recognizes bad debts loss when the accounts are proven worthless or uncollectible. Stated differently, there is
certainty that account receivable would become worthless. However, this method violates the matching principle since the
bad debts loss is often recognized in later accounting period than the period in which the related revenue is recognized.
The entry to write-off the account is:
Debit: Bad Debts xx

Credit: Account Receivable xx
Methods of Estimating Doubtful Accounts:
1. Aging of Accounts Receivable or Balance Sheet Approach
The aging of accounts receivable requires the classification of accounts into current and past due. Past due account are
further classified to indicate the length of time the accounts are outstanding. The older the account, the higher will be the
corresponding rate of uncollectibility which will be multiplied against the amount to determine the required for doubtful
accounts.
Illustration:
Biyahero services has P100,000 accounts receivable outstanding as at year and. The aging of the account revealed the
following classification and doubtful accounts computation:
Page 46 of 84
Required Allowance For
Age Amount Rate of Uncollectibility
Doubtful Accounts
Current 20,000 - -
20 days past due 20,000 1% 200
40 days past due 20,000 3% 600
60 days past due 40,000 5% 2,000
100,000 P2,800
2. Percent of Accounts Receivable
This approach applies a single rate of uncollectibility, derived from the entity’s past experiences, on the total amount of
Account Receivable. The result after multiplying the rate by the Account Receivable balance is called the Required
Allowance. The method favors the statement of financial position since it readily provides for the net realizable value of the
Account Receivable. On the other hand, this method does not favor the statement of comprehensive income since it violates
the proper matching of revenues and expenses.
3. Percent of Sales or Revenues
This method applies single rate of uncollectibility, derived from the entity’s past experiences, on the revenues generated
during the period. The resulting figure after multiplying the rate by the revenue base is the doubtful accounts expense for
the period. This approach favors the statement of comprehensive income since it matches the doubtful accounts with the
revenues earned the current period.
Illustration: The following unadjusted balances of Super Linis Laundry Services were provided at the end of the accounting
period as follows:
Account Receivables P100,000

Allowance for Doubtful Account 5,000
Determine the adjusting entry to record the provision for doubtful accounts under each of the following cases:
Case 1 Assume that 10% of the account receivable are estimated to be uncollectible.
Analysis: The allowance for doubtful accounts is 10% of P100,000 or 10,000. However, P5,000 has been recognized
previously, as shown in the allowance for doubtful account balance, hence, the amount to be adjusted is P10,000 – P5,000
or P5,000
Adjusting Entry:
Debit: Doubtful Accounts P5,000

Credit: Allowance for Doubtful Accounts P5,000
Statement of Financial Position Presentation:
Account Receivable P10,000

Less: Allowance for Doubtful account 10,000
Net Realizable Value P90,000
Case 2. Assume that the allowance for doubtful accounts is to be increased by 10% of the accounts receivable.
Analysis: The allowance has already a credit balance of P5,000, and the required adjustment is to increase the allowance by
10% of P100,000 or P10,000, hence the adjusted allowance will be P15,000.
Adjusting Entry:
Page 47 of 84
Debit: Doubtful Account P10,000

Case 3. Assume that the Allowance for Doubtful Accounts is to be set up at 10% of the Accounts Receivable balance.
Assume further that the Allowance for Doubtful Accounts has an unadjusted debit balance of P5,000 due to write off of past
uncollectible accounts.
Analysis: The amount of P10,000 or (100,000x10%) should be setup, and since the allowance has a debit balance of P5,000,
there is therefore a need to record P15,000 (10,000 + P5,000) as a doubtful account in order to eliminate the debit balance of
P5,000 and provide the required credit balance of P10,000 at the end of the period.
Adjusting entry:

Case 4 Assume that the company provides doubtful accounts at 1% of Service Income.
Analysis: Doubtful accounts expense for the period will be provided in the amount of P7,000 (1% X P700,000). The
allowance for Doubtful Accounts will be presented in the amount of P12,000 (P5,000 + P7,000).
Entry:

Case 5 The aging of Accounts Receivable indicated that the allowance for doubtful Accounts should be equal to P9,000.
Analysis: The amount resulting from the aging of Accounts Receivable represents the required allowance at the end of the
year. Accordingly, the doubtful account expense for the year will amount to P4,000 (P9,000 – P5,000).
Entry:

Page 48 of 84
Case 6 Assume that, out of the estimated uncollectible, the actual amount ascertained to be worthless was P4,000.
Entry:
Debit: Allowance for Doubtful Accounts P4,000
Credit: Accounts Receivable P4,000
The account debited was allowance for doubtful account since it was previously estimated as uncollectible, however, if no
journal entry was made when the amount was estimated to be uncollectible, then the entry would be:
Entry:
Debit: Doubtful Accounts P4,000
Case 7 Assume that the amount written off in Case 6 was subsequently recovered and collected.
Analysis: Recovery of a previously written off account will require the following procedures:
1. Reestablishment of the account and the allowance (reversal of the entry to write off); and
2. Collection of the account.
Entries:
Debit: Accounts Receivable P4,000

Debit: Cash P4,000

(Collect)
Topic D. COMPLETING THE ACCOUNTING CYCLE
Learning Objectives:
Page 49 of 84
 Prepare a worksheet with adjustments
 Prepare properly classified financial statements
 Journalize and post adjusting journal entries
 Journalize and post-closing entries
 Prepare a post-closing trial balance
 Identify adjusting entries to be reversed
 Journalize and post reversing entries
COMPLETING THE ACCOUNTING CYCLE
The Accounting Cycle
The step by step procedures that produce the financial statements is the accounting cycle discussed in Topic B. it is a series
of accounting activities from the beginning to the end of a given accounting period.
Below is a review of the series of step by step procedures of an accounting cycle:
STEP 1
Analysis of business transactions from source
documents
- Official Receipts
-Vouchers/Invoices
STEP 2
Recording of business transactions
- General Journal (two column Journal)
STEP 3
Posting a Journal Entries
- General Ledger
STEP 4
Preparation of Trial Balance
- Getting the balance from the General Ledger
STEP 5
Preparation of working papers/Worksheets with
Adjustments
- Worksheet
Page 50 of 84
A
STEP 6
Preparation of Financial Statements
- Statement of Financial Position
- Statement of Comrehensive Income
- Statement of changes in Equity
- Statement of Cash flow
STEP 7
Journalizing and Posting of Adjusting
Entries
- General Journal
- General Ledger
STEP 8
Journalizing and Posting Closing Entries
- General Journal
- General Ledger
STEP 9
Preparation of Post-Closing Trial Balance
- Balance from General Ledger
STEP 10
Journalizing and Posting of Reversing
Entries
- General Journal
The cycle does not stop in step 10, as it goes back to step number 1, the process being cycle. Financial statement are the
end-products of the accounting cycle that are used as a basis for making economic decisions.
Preparation of Working Paper/Worksheet with Adjustments
A working paper or worksheet is a device used to organize accounting data to facilitate the preparation financial
statement. It aids in the checking of accounting records and in the preparation of adjusting and closing entries. It serves the
role of a “bridge” between the unadjusted Trial Balance to the financial statements. However, it should be noted that a
worksheet is neither a part of the ledger nor a part of a journal.
Page 51 of 84
Illustration:
The following is the trial balance of EXPERT COMPUTER SERVICES.
Expert Computer Services

Trial Balance
December 31, 2019
Cash on hand P25,000

Cash in Bank 75,000
Note Receivable 5,000
Office Supplies 3,000
Equipment 250,000
Furniture 70,000
Accounts Payable P200,000
Expert, Capital 190,000
Expert, Personal 12,000
Computer Fees 205,000
Other fees 25,000
Rent Expense 75,000
Transportation 2,000
Miscellaneous 3,000
Total P635,000 P635,000

Adjustments at the end of the year:
1. The equipment has a scrap value of P 25,000 and an estimated useful life of 10 years
2. The furniture has a scrap value of P 5,000 and an estimated useful life of 10 years. These were bought on April 1 of
the same year.
3. Unpaid salaries – P 2,000
4. Unpaid utilities – P 1,500
5. Uncollected other fees – P 15,000
6. 10% of accounts receivable is uncollectible
Steps to be followed in the preparation of a worksheet:
1. Write the worksheet heading by following the format below:
Name of the Business

Worksheet
Period Covered
2. Write the column heading by following the format below:
Adjusted Trial Comprehensive Financial

Trial Balance Adjustments
Account Titles Balance Income Position
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Page 52 of 84
3. Copy the Trial Balance in the first two money columns. Prove the trial balance by footing again. Rule and double
rule the totals.
4. Write the adjustments in the next two money columns. If the account to be adjusted exists in the initial trial
balance, write the amount alongside the account. If no account exist in the initial trial balance, create the account
title below the initial trial balance. Identify each adjustment by using key letters or numbers for easy reference.
Prove the equality of the debit and credit of the adjustments column by footing, then rule and double rule.
5. Write the adjusted balances of all accounts in the adjusted trial balance column. Accounts with no adjustments are
extended using their original balances.
5.1 Debit adjustments for all accounts with normal debit balances are added to their initial balance to get their
adjusted balances to be written in the adjusted trial balance column.
5.2 Credit adjustments for all accounts with normal debit balances are deducted from their initial balances in the
trial balance to get their adjusted balances to be written in the adjusted trial balance column.
5.3 Credit adjustments for all accounts with normal credit balances are added to their initial balances in the trial
balance to get their adjusted balances to be written in the adjusted trial balance column.
5.4 Credit adjustments for all accounts with normal debit balances are deducted from their initial balances in the
trial balance to get their adjusted balances to be written in the adjusted trial balance column.
5.5 All new accounts below the trial balance are extended directly to their appropriate money columns in the
adjusted trial balance.
6. From the adjusted trial balance, extend all income and expense accounts to the statement of comprehensive income
column. Foot the debit and credit column. If the credit total is more than the debit total, the difference represents
the net income for the period and should be placed on the debit side of the statement of comprehensive income and
credit side of the financial position. If the debit total is more than the credit total, the difference represents the net
loss for the period and should be placed on the credit side of the statement of comprehensive income and debit side
of the statement of financial position.
7. Extend all assets, Liabilities, capital and drawing accounts to the statement of financial position column. Foot the
debit and credit columns. The net income, as mentioned in number 6, should be added to the credit column and the
net loss should be added to the debit column.
Adjustments:
1.) Depreciation of = 250,000 – 25,000

Equipment/1year 10 years
= P22,500
Depreciation Expense – Equipment 22,000

Accumulated Depreciation – Equipment 22,500
2.) Depreciation of
Furniture/9 months = 70,000 – 5,000
(April 1 to Dec. 31) 10 years
Page 53 of 84
= P 6,500/years x 9/12
= P 4,875
Depreciation Expense – Furniture 4, 875

Accumulated Depreciation – Furniture 4, 875
3.) Accrued Salaries Expense – P 2,000

Salaries Payable 2.000
4.) Accrued Utilities Expense – P 1,500

Utilities Payable 1,500
5.) Accrued Other Fees (Income) – P 15,000
Other Fees Receivable 15,000

Other Fees 15,000
6.) Bad Debts = P 40,000 x .10

= P 4,000
Doubtful Account Expense 4, 000

Allowance for Doubtful Accounts 4,000
Page 54 of 84
EXPERT COMPUTER SERVICES
WORKSHEET
For the Year ended December 31, 2019
Trial Balance Adjustments Adjusted Trial Balance Comprehensive Income Financial Position
Account Title
Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit
Cash on Hand 25, 000 25, 000 25, 000
Cash in Bank 75, 000 75, 000 75, 000
Account Receivable 40, 000 40, 000 40, 000
Notes Receivable 5, 000 5, 000 5, 000
Office Supplies 3, 000 3, 000 3, 000
Equipment 250, 000 250, 000 250, 000
Furniture 70, 000 70, 000 70, 000
Accounts Payable 200,000 200, 00 200,000
Notes Payable 15, 000 15, 000 15, 000
Expert, Capital 190, 000 190, 000 190, 000
Expert, Personal 12, 000 12, 000 12, 000
Computer Fees 205, 000 205, 000 205, 000
Other Fees 25, 000 5) 15, 000 40, 000 40, 000
Salaries 60, 000 3) 2, 000 62, 000 62, 000
Rent 75, 000 75, 000 75, 000
Utilities 15, 000 4) 1,500 16, 500 16, 5000
Transportation 2, 000 2, 000 2, 000
Miscellaneous 3, 000 3, 000 3, 000
Totals 635, 000 635, 000
Depreciation Expense - Equipment 1) 22,500 22, 500 22, 500
Accumulated Depreciation - Equipment 1) 22,500 22, 500 22, 500
Depreciation Expense - Furniture 2) 4,875 4, 875 4, 875
Accumulated Depreciation - Furniture 2) 4, 875 4, 875 4, 875
Salaries Payable 3) 2, 000 2, 000 2, 000
Utilities Payable 4) 1, 500 1, 500 1, 500
Other Fees Receivables 5) 15, 000 15, 000 15, 000
Doubtful Accounts Expense 6) 4, 000 4, 000 4, 000
Allowance for Doubtful Accounts 6) 4, 000 4, 000 4, 000
TOTALS 49, 875 49, 875 684, 875 684, 875 189, 875 245, 000 495, 000 439, 875
NET INCOME 55,125 55,125
TOTALS 245, 000 245, 000 495, 000 495, 000
Income
Expenses
Asset
Liability
Equity
Drawing
Contra-asset account of AR and Asset
Page 56 of 84
Preparation of Financial Statements
1. Statement of Financial Position

2. Statement of Comprehensive Income
3. Statement of Changes in Owner’s Equity
Financial Statements are easily prepared with reference to the Worksheet made.
EXPERT COMPUTER SERVICE

ASSETS
Current Assets
Cash and Cash Equivalents (Note 3) Php 100, 000
Trade and Other Receivables (Note 4) 56, 000
Office Supplies 3, 000
Total Current Assets 159, 000
Non-Current Assets
Property and Equipment, Net (Note 5) 292,625
TOTAL ASSETS 451, 625
LIABILITIES AND OWNER'S EQUITY

Current Liabilities
Trade and Other Payables (Note 6) 218, 500
Total Liabilities 218, 500
Owner's Equity
Expert, Capital 233, 125

TOTAL LIABILITIES & OWNER'S EQUITY 451, 625

INCOME STATEMENT
Revenues (Note 7) Php 245, 000

Less Operating Expense (Note 8) 189, 875

NET INCOME Php 55, 125

Page 57 of 84
Expert, Capital - January 1 Php 190, 000
Add: Net Income 55, 125

Total Php 245, 125
Less: Expert, Drawings 12, 000

Expert, Capital Php 233, 125
NOTES TO FINANCIAL STATEMENTS
Note 1 Business Profile
Note 2 Basis of Preparation of the Financial Statement
Note 3 Cash and Cash equivalents

Cash on Hand 25, 000
Cash in Bank 75, 000
Total 100, 000
Note 4 Trade and Other Receivables
Accounts Receivable 40, 000

Allowance for Doubtful Accounts (4,000)
Notes Receivables 5, 000
Other fees Receivables 15, 000
Total 56, 000
Note 5 Property And Equivalent

Cost Accumulated Book
Depreciation Value
Equipment 250, 000 (22, 500) 227, 500
Furniture and Fixtures 70, 000 (4, 875) 65, 125
Total 292, 625
Note 6 Trade and Other Payables
Accounts Payable 200, 000

Notes Payable 15, 000
Page 58 of 84
Salaries Payable 2, 000
Utilities Payable 1, 500
Total 218, 500
Note 7 Revenues
Computer Fees 205, 000

Other Fees 40, 000
Total 245, 000
Note 8 Operating Expenses

Salaries 62, 000
Rent 75, 000
Utilities 16, 500
Transportation 2, 000
Depreciation 27, 375
Doubtful Accounts 4, 000
Miscellaneous 3, 000
Total 189, 875
Journalizing and Posting of Adjusting Entries
Page 59 of 84
Adjusting entries are journalized in the General Journal and individually posted in the General Ledger. Using the
illustration, the following are the adjusting entries.
General Journal
Adjusting Entries

December Depreciation Expense 22, 500
31 Accumulated Depreciation – Equipment 22, 500
Depreciation Expense 4, 875
Accumulated Depreciation – Furniture 4, 875
Salaries Expense 2, 000
Utilities Expense 1, 500
Other Fees Receivable 15, 000
Other Fees 15, 000
Doubtful Account Expense 4, 000
Allowance for Doubtful Accounts 4, 000
The Journal Entries are then posted in the General Ledger.
In the Previous discussion (Topic B), the format of a General Ledger take the features of a “T” account.
Account Name: Accounts Receivable
Date Items F Debit Date F Items F Credit

Jan. 5 GJ1 10, 000 Jan 8 GJ1 8, 000
GJ1 15, 000 GJ1 12, 000
GJ1 20, 000 GJ1 5, 000
20, 000 45, 000 25, 000

In actual practice, the General Ledger can also use the following format:
Page 60 of 84
Account Name Account Number
Date Particulars F Debit Credit Balance
Jan. 5 Ms. A GJ1 10, 000 10, 000
8 Collections, Ms. A GJ1 8, 000 2, 000
10 Mr. B GJ1 15, 000 17, 000
15 Collections GJ1 12, 000 5, 000
25 Mr. C GJ1 20, 000 25, 000
31 Collections GJ2 5, 000 20, 000

In either way, the account in the General Ledger Services the purpose of grouping similar items and monitoring ledger balances.
Closing Entries
Closing entries are prepared to close the temporary accounts in the General Ledger. Temporary accounts are closed or are put to
zero balance in order to account for the revenue and expenses in the next accounting period. Temporary accounts are the
nominal accounts or the income and revenue account. They are called temporary accounts because they are used to accumulate
income earned and expenses incurred for a certain accounting period. This enables the business or entity to measure income or
performance from period to period. At the end each year, the balances of these temporary accounts are transferred to the capital
account, thus these accounts are closed.
Steps in closing nominal accounts:
1.) Revenues or income accounts with ledger balances are debited while their total is credited to a temporary account
called income and Expense Summary.
Example:
Debit : Computer Fees P205, 000
Other fees 40, 000
Credit: Income Summary P245, 000
Analysis: At this point, the balances of revenue/income account were brought to zero, and their total was transferred to the side
of the income and expense summary account
2.) Expense account with ledger balances are credited while their total is debited to the Income and Expense Summary
Account.
Example:
Debit : Income Summary P189, 875
Credit: Salaries Expense P62, 000
Rent Expense 75, 000
Utilities 16, 500
Depreciation Expense-Equipment 22, 500
Depreciation Expense-Furniture 4, 875
Bad Debts Expense 4, 000
Page 61 of 84
Analysis: This entry would bring the expenses accounts to zero, and would transfer the total of the account balances to the debit
side of the income and expense summary.
3.) Find the difference between the credit and debit balance of income Summary.
Example:
Income Summary
Credit Balance P245, 000 (Revenues)

Debit Balance 189, 875 (Expenses)
Credit Balance P 55, 125 (Income)
4.) Close the income and Expenses Summary account against the capital account. Credit balance in income summary
account represents a net income, while a debit balance represents a net loss. Based on the given example above, the
income summary account will be closed to the capital account as follows:
Debit : Income Summary P55, 125

Credit: Expert, Capital P55, 125
If net loss:
Debit : Expert, Capital P55, 125

Credit: Income Summary P55, 125
Analysis: The entry brought the income and expense summary account to zero balance and increased the capital account by
P55, 125.
5.) Close the owner’s withdrawal or drawing account to the capital account. The debit balance of the owner’s
withdrawal/personal is credited as the same is debited to capital. The closing entry will be as follows:
Debit: Expert, Capital P12, 000

Credit: Expert, Drawing P12, 000
Analysis: The entry brought the drawing account to zero balance and decreased the capital account by P12, 000.
Note further that after all the closing entries have been posted, all nominal accounts were brought to zero balances. The debit
and credit balances are double ruled to signify the end of an accounting period.
Using the Expert Computer Services, the closing entries are:
General Journal
Closing Entries
December 31, 2019
Date Particulars F Dr Cr
December 31 Computer Fees 205, 000
Other Fees 40, 000
Income Summary 245, 000

Salaries 62, 000
Rent 75, 000
Page 62 of 84
Utilities 16, 500
Depreciation 27, 375
Bad debts 4, 000

Expert Capital 55, 125

Expert Drawing 12, 000
Preparation of Post-Closing Trial Balance
Since nominal accounts are already closed, only real accounts (Assets, Liabilities and Capital) are left open. Post-closing Trial
Balance contains real account balances. It serves the purpose of ensuring equality of balances for the next accounting period.
More than that, the real account balances are used as beginning balances for the next accounting period where new transaction
are accumulated.
All titles located in the balance sheet is ought to be input here. Difference: Separated into debit and credit.
Expert Computer Service

Post-Closing Trial Balance
December 31, 2019
Cash on Hand P 25, 000

Cash in Bank 75, 000
Account Receivables 40, 000
Allowance for Doubtful Accounts P 4, 000
Notes Receivables 5, 000
Other Fees Receivables 15, 000
Office Supplies 3, 000
Equipment 250, 000
Accumulated Depreciation - Equipment 22, 500
Furniture 70, 000
Accumulated Depreciation - Furniture 4,875
Accounts Payable 200, 000
Notes Payable 15, 000
TOTAL P 483, 000 P 483, 000
Reversing Entries
Page 63 of 84
Reversing entries are entries made at the beginning of the next accounting period and are precisely the reverse of some of the
adjusting entries.
Reversing entries have the following characteristics:
1. These are recorded to simplify the recording of regular transaction in the next accounting period.
2. These are prepared either at the end of the accounting period or on the first day of next accounting period.
3. Their preparation is optional.
4. Only the following previously discussed items for adjustments are required to be reversed:
o Accrued Expenses
o Accrued Revenues/Income
o Prepayment Accounted For Under The Expense Method
o Deferrals or Pre-Collections Accounted For Under The Income Method
The preparation of reversing entries is optional since the accountant has the option to adopt strategies on how to journalize the
regular transaction on the next accounting period.
Illustration:
Month-end salaries are paid on the 5th of the following month. On June 30, salaries for the month amounting P25, 000 remain
unpaid. Thus, adjusting entry is:
Jan 30 Salaries Expense P 25, 000

Salaries Payable P 25, 000
On July 5 when salaries are to be paid, the regular journal entry if the adjusting entry WAS NOT REVERSED is:
July 5 Salaries Payable P 25, 000

Cash P 25,000
While if the adjusting entry was reversed, the entry is:
June 30 Salaries Payable P 25, 000

Salaries Expense P 25, 000
The ledger balances then will show the following:
Salaries Expense

June 30 Adjusting Entry GJ1 25, 000 25, 000
Closing Entry GJ1 25, 000 0
30 Reversing Entry 25, 000 25, 000
Salaries Payable
June 30 Adjusting Entries GJ1 25,000 25,000
30 Reversing Entry 25,000 0
Thus, after the journalizing and posting of the reversing entry, the ledger balances of salaries payable is zero. To record the
payment of salaries on July 5, the entry will be as follows:
Debit: Salaries Expense P25,000
Page 64 of 84
Credit: Cash in Bank P25,000
To continue with the ledger balances:
Salaries Expense
June 30 Adjusting Entries GJ2 25,000 25,000
Closing Entry GJ3 25,000 0
July 1 Reversing Entry 25,000 25,000

5 Payment of Salaries GJ4 25,000 0
The salaries expense is brought to ZERO balance to show that the salaries expenses was INCURRED on June 30, thus, should
form part of the expenses for June. It was paid on July 5, but NO EXPENSE is recorded since the ledger balance is brought to
ZERO. Only the CASH use to pay the salaries is recorded on July transaction since the expenses component of the transaction
was ready taken up in June.
For EXPERT computer services, the following reversing entries are prepared:

December 31 Salaries Payable 2,000

Other Fees
Other Fees Receivables 15,000
15,000
Page 65 of 84
ACCRUALS
Accrued Revenues/Income – Income earned but not yet collected. The formula is I = Prt.

Interest Receivable 0
Interest Income 0
Accrued Expenses – Expenses incurred but not yet paid.

Salaries Expense 0
Salaries Payable 0
PREPAYMENTS – Expenses that are paid in advance.
Asset Method – Record the expense.

Advertising Expense 0
Prepaid Advertising 0
Expense Method – Record the left balance.

Prepaid Advertising 0
Advertising Expense 0
DEFERRED INCOME – Customers paid in advance for the services to be rendered in the future.
Income Method – Record the unearned amount.

Rent Income 0
Unearned Rent Income 0
Liability Method – Record the earned amount.

Unearned Rent Income 0
Rent Income 0
DEPRECIATION – The used or expired portion of the cost of fixed assets. The formula is D =
Cost of the Assset−Salvage Value
Useful Life
Depreciation Expense 0
Accumulated Depreciation 0
Net Book Value = Equipment – Accumulated Depreciation
Page 66 of 84
UNCOLLECTIBLE ACCOUNTS – Loss from uncollectible accounts (Bad Debts, Doubtful Accounts, Uncollectible
Accounts).
Allowance Method

Doubtful Accounts 0
Allowance for Doubtful Accounts 0
Direct Write Off Method

Bad Debts 0
Accounts Receivable 0
If proven to be worthless:

If suddenly replenished:

Cash 0
Methods of Estimating Doubtful Accounts
1. Aging of Accounts Receivable

2. Percent of Accounts Receivable
3. Percent of Sales or Revenues
Notes
o “Unadjusted Debit Balance” – Add it to the Allowance for Doubtful Accounts.

o Aging and Percent of AR – Subtract the Allowance for Doubtful Accounts for each entry.
o Deferred Income – The given account title is placed on the debit side.
o Prepayments – The given account title is placed on the credit side.
o Depreciation – Must specify the particular depreciated asset.
o Unearned – Liability – Normal Balance is Credit
Page 67 of 84
Worthless
If there is a previous record…

Doubtful Accounts 0
The following entry should be…

If there is no previous record…

Doubtful Accounts 0
Page 68 of 84
MAGALING REPAIR SERVICES
1. Prepare the Financial Statements. (15 points)
Income Statement

Income Statement
For The Year Ended December 31, 2019
Repair Revenues 475,000

Commission Income 12,000
Total 490,200
Less: Operating Expenses

Salaries and Wages Expense 90,000
Supplies Expenses 4,000
Depreciation – Building 75,000
Depreciation – Equipment 7,500
Depreciation – Furniture and Fixtures 5,000 242,000
Operating Income 248,200
Interest Expense (2,200)
Net Income 246,000

Kayako, Capital – Beginning 1,607,500

Net Income 246,000
Total 1,853,500
Kayako, Personal 25,000
Kayako, Capital – Ending 1,828,500
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Financial Position

Assets
Current Assets
Cash in Bank 500,000
Cash on Hand 25,000
Allowance for Doubtful Accounts (4,500) 195,500
Unused Supplies 8,000
Noncurrent Assets
Building 1,500,000
Accumulated Depreciation –Building (450,000) 1,050,000
Equipment 75,000
Accumulated Depreciation – Equipment (15,000) 60,000
Furniture and Fixtures 50,000
Accumulated Depreciation – Furniture and Fixtures (10,000) 40,000
Tools 20,000
Total Noncurrent Assets 1,170,000
Total Assets 1,972,500
Liabilities and Owner’s Equity

Kayako, Capital 1,828,500
Total Liabilities and Owner’s Equity 1,972,500
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2. Journalize the year-end Closing Entries. (8 points)
1 Repair Revenues 475,000

Commission Income 12,000
Income Summary 490,200
To close the income accounts
2 Income Summary 244,200

Depreciation – Building 75,000
Depreciation – Equipment 7,500
Depreciation – Furniture and Fixtures 5,000
Interest Expense 2,200
To close the expense accounts

Kayako, Capital 246,000
To close the operation to capital
4 Kayako, Capital 25,000

Kayako, Personal 25,000
To close the drawings to capital
3. Prepare the Post Closing Trial Balance. (5 points)
MAGALING Repair Services

Post–Closing Trial Balance
December 31, 2019

Cash on Hand 25,000
Building 1,500,000
Accumulated Depreciation –Building 450,000
Equipment 75,000
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Accumulated Depreciation – Equipment 15,000
Accumulated Depreciation – Furniture and Fixtures 10,000
Tools 20,000
Kayako, Capital 1,828,500
Total 2,452,000 2,452,000
XPERT CONSULTANCY
1. Prepare the Financial Statements. (15 points)
Income Statement
XPERT CONSULTANCY
Income Statement
Consulting Fees 378,000
Less: Operating Expenses

Depreciation–Furnitures and Fixtures 7,000
Depreciation–Office Equipment 8,000
Travel and Transportation 15,000
Miscellaneous Expense 2,200
Utilities Expense 55,000 146,700
Net Income 231,300
XPERT CONSULTANCY
Sulsultant, Capital – Beginning 130,700

Net Income 231,300
Total 362,000
Sulsultant, Drawings 25,000
Page 72 of 84
Sulsultant, Capital – Ending 337,000
Financial Position
XPERT CONSULTANCY
Assets
Current Assets
Cash on Hand 12,000
Allowance for Doubtful Accounts (8,000) 67,000
Noncurrent Assets
Accumulated Depreciation –Furniture and Fixtures (14,000) 56,000
Office Equipment 80,000
Accumulated Depreciation – Office Equipment (16,000) 64,000
Total Noncurrent Assets 120,000
Total Assets 365,000
Liabilities and Owner’s Equity

Sulsultant, Capital 337,000
Total Liabilities and Owner’s Equity 365,000
Page 73 of 84
2. Journalize the year-end Closing Entries. (8 points)
1 Consulting Fees 378,000

Income Summary 378,000
To close the income accounts

Depreciation–Furnitures and Fixtures 7,000
Depreciation–Office Equipment 8,000
Travel and Transportation 15,000
Miscellaneous Expense 2,200
To close the expense accounts

To close the operation to capital
4 Sulsultant, Capital 25,000

Sulsultant, Drawings 25,000
To close the drawings to capital
3. Prepare the Post Closing Trial Balance. (5 points)
XPERT CONSULTANCY
Post–Closing Trial Balance
December 31, 2019

Cash on Hand 12,000
Accumulated Depreciation –Furniture and Fixtures 14,000
Office Equipment 80,000
Accumulated Depreciation – Office Equipment 16,000
Page 74 of 84
Total 403,000 403,000
Assignment #1
General Instruction: Put all your answers in the answer sheet provided below.
I. Identification. Identify what is described in each item.
1. A service activity that provides quantitative information as basis for making economic decisions.
2. A business operation that buys finished products and sell them to customers.
3. A business organization with at least 5 investors as required during its incorporation.
4. The owners of a corporation.
5. The simplest type of business organization.
6. Business activities that produce revenues for the business.
7. Philippine Accountancy Act of 2004.
8. National organization of all CPAS in the Philippines
9. Various parties interested in the affairs of the business.
10. It is the language of business.
11. Financial statement that details the business properties, debts and owner’s equity.
12. Business operation that buys raw materials, process them to finished products and sells them to customers.
13. Accounting area that focuses on the preparation and presentation of General Purpose Financial Statements.
14. Accounting area that involves independent examination of financial statements for the purpose of expressing an
opinion on the fairness of presentation.
15. Ethical standard that calls for an accountant to be unbiased.
16. An economic unit that produces goods and services for a fee.
17. Accounting phase that involves grouping of similar items.
18. A financial statement that details how cash is generated and used by the business.
19. Stakeholder who is interested to know the return on his/her investments.
20. Simplest type of business operation.
21. Investors/owners of a corporation.
22. Business organizations owned by two or more persons.
23. Excess of generated revenues over expenses.
24. Financial statement that presents results of operation.
25. Government agency that takes care of the licensing professions in the Philippines.
26. Known as fund accounting.
27. Supervises the registration, licensure, and practice of the accountancy in the Philippines.
28. Accounting area that deals with cost determination and cost control.
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29. Takes care of the continuous improvement of the accounting standards in the Philippines.
30. Requires that an accountant be straight forward and honest at all times.
31. They serve as the means by which the information accumulated and processed in financial accounting and periodically
communicated to the users.
32. It can be a period covering a month or a couple of months, a year or more than one year, depends on the need and
demand of different users for financial information because users of financial information need to make decision at many
point in the life of the business.
33. An accounting period which is composed of a twelve-month period which starts on January 1 and ends on December
31 of the year.
34. An accounting period which is also composed of twelve-month period, but it starts from any month other than January
1 and ends other than December 31.
35. It is a business period at any date within an accounting period (e.g weely, monthly, quarterly or semi-annual)
36. In this form of statement of financial position, assets are shown first and followed by liabilities and owner’s equity in a
vertical order.
37. These are resources controlled by the entity as a result of past transactions or events and from which future economic
benefits are expected to flow to the entity.
38. It is any medium of change that a bank will accept for deposit at face value.
39. Refers to claims arising from sale of merchandise or services in the ordinary course of business, the usual types are
accounts receivable and notes receivables.
40. These are open customers’ accounts not supported by promissory notes.
41. These are expenses paid in advance.
42. These are tangible assets which are held by an entity for use in production or supply of goods and services, for rental
to others, or for administrative purposes, and are expected to be used during more than one period.
43. These are present obligations of the entity arising from past transactions or events the settlement of which is expected
to result in an outflow of entity resources embodying economic benefits.
44. This is the residual interest in the assets of the entity after deducting all of its liabilities. It is also known as net assets.
45. It represents the owner’s financial interest in the business.
46. Represents increase in economic benefits during the accounting period in the form of inflow or increase in asset or
decrease in liability that result in increase in equity, other than contribution from equity participants.
47. Represents decrease in economic benefit during the accounting period in the form of an outflow or decrease in asset or
increase in liability that result in decrease in equity, other than distribution to equity participants.
48. These are costs incurred in administering the business in general. It includes all operating expenses which are not
related to selling of goods e.g. office salaries, office supplies, depreciation of office building and office equipment.
49. It is a temporary account used to accumulate the owner’s drawings.
50. It is a statement that provides information about cash inflows and outflows during an accounting period as well as the
net change in cash from the operating, investing and financing activities in a manner that reconciles the beginning and
ending balances.
51. Underlying assumption that assumes an indefinite life a business entity.
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52. Characteristic of financial statements that influences the economic decisions of users by helping them evaluate past,
present, and future events, on confirming or correcting, their past evaluation.
53. The process of incorporating in the financial statements an item that meets certain significant criteria.
54. These are things of value or resources that are expected to generate future benefits for the business.
55. These are items to be recognized when incurred or used.
56. It is synonymous with net assets or equity of the business.
57. An accounting principle that promotes verifiability of recorded transactions.
58. These are individuals or group of people to whom financial statements are primarily directed.
59. It is an accounting principle that promotes comparability of the same accounting method from period to period.
60. It is a characteristic of financial statements that enable users to identify trends.
II. True or False. Write True if the statement is correct and False if otherwise.
1. Manufacturing business buys and sells goods for profit.
2. Statement of cash flows detail how cash is generated and used by the business.
3. The Board of Accountancy takes care of the licensing of professionals in the Philippines.
4. Financial Accounting is also known as Fund Accounting.
5. Basic Accounting focuses on the preparation and presentation of general purpose financial statements.
6. A business is an economic unit that produces goods and services for profit and contributes to economic development.
7. Classifying phase of accounting refers to grouping or sorting of similar items.
8. Shareholders are individuals or group of people who have interest in the business.
9. Corporation is a business organization owned by at least 5 persons.
10. Profit is the excess of expenses over generated revenues.
11. Investments are resources and efforts that are put up together to lay the foundation of a business undertaking.
12. A business is not mandated and efforts that are put up together to lay the foundation of a business undertaking.
13. Recording involves proving meaningful and useful data to the different stakeholders.
14. Bookkeeping is basically procedural that includes the process of analyzing business documents, recoding business
transactions, classifying and summarizing them.
15. Government accounting is also known as Tax Accounting because it involves determination of tax to be paid to the
government.
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I. Identification
4
1 Accounting 1 Prepaid Expense
4
2 Merchandising 2 Property, Plant, and Equipment
4
3 Corporation 3 Liabilities
4
4 Shareholders 4 Owner’s Equity
4
5 Sole Proprietorship 5 Capital
4
6 Operating Activities 6 Income
4
7 Republic Act No. 9298 7 Expense
4
8 Philippine Institute of Certified Public Accountants (PICPA) 8 Administrative Expense
4
9 Stakeholders 9 Withdrawal
1 5
0 Accounting 0 Statement of Cash Flows
1 5
1 Statement of Financial Position 1 Going Concern Assumption
1 5
2 Manufacturing 2 Relevance
1 5
3 Financial Accounting 3 Recognition
1 5
4 Auditing 4 Assets
1 5
5 Objectivity 5 Expenses
1 5
6 Business 6 Owner’s Equity
1 5
7 Classifying 7 Verifiability
1 5
8 Statement of Cash Flow 8 Primary Users
1 5
9 Investor 9 Principle of Consistency
2 6
0 Service Business 0 Comparability
2
1 Shareholders or Stockholders II. True or False
2
2 Partnership 1 False
2
3 Income 2 True
2
4 Income Statement 3 False
2
5 Professional Regulation Commission (PRC) 4 False
2
6 Government Accounting 5 False
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2
7 Board of Accountancy (BOA) 6 True
2
8 Cost Accounting 7 True
2
9 Financial Reporting Standards Council (FRSC) 8 False
3
0 Integrity 9 True
3 1
1 Financial Statements 0 False
3 1
2 Accounting Periods 1 True
3 1
3 Calendar Year 2 False
3 1
4 Fiscal Year 3 False
3 1
5 Interim Period 4 True
3 1
6 Report Form 5 False
3
7 Assets
3
8 Cash
3
9 Trade Receivables
4
0 Accounts Receivables
Quiz #1
General Instruction: Write all your final answers on the answer sheet provided.
I. Multiple Choice. Choose the letter of the correct answer (1 point each)
1. An economic unit that brings together resources and efforts for the purpose of producing goods and services to satisfy
the needs of the consumers.
A. Accounting C. Stakeholders
B. Business D. Manufacturing business
2. These are various parties interested in the affairs of the business.

A. Professional Regulation Commission
B. Stakeholders
C. Board of Accountancy
D. International Accounting Standards Board
3. This is done through the assignment of peso amounts to the economic activities.
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A. Identifying C. Measuring
B. Communicating D. Interpreting
4. They need information on the ability of the business to continuously supply them with quality products and a price
acceptable to them.
A. Suppliers C. Government
B. Customers D. Investors
5. In this phase, recorded business transactions are sorted and grouped according to nature and similarity.
A. Journalizing C. Classifying
B. Summarizing D. Interpreting
6. These are activities that involve both obtaining or providing resources and returning resources to providers in the course
of day-to-day operations.
A. Investing C. Financing
B. Operating D. Classifying
7. It is tasked to prescribe and accept the rules and regulations necessary for carrying out the provisions of the Philippine
Accountancy Act of 2004.
A. BOA C. PICPA
B. IASB D. PRC
8. The area of accounting that involves analytical work of independent examination of the financial statements for the
purpose of expressing an opinion as to the fairness of their presentations.
A. Basic Accounting C. Taxation
B. Auditing D. Financial Accounting
9. This area of accounting deals with cost determination and cost control particularly those cost in producing goods and
services.
A. Auditing C. Cost Accounting
B. Taxation D. Bookkeeping
10. It is a business that buys goods from suppliers and sells them to the customers with a mark-up.
A. Service C. Merchandising
B. Manufacturing D. Partnership
11. In this type of business operation, the owner enjoys all the income earned by the business
A. Sole Proprietor C. Partnership
B. Corporation D. Cooperative
12. This ethical standard requires that a professional accountant should be unbiased and should not allow conflict of
interest and/or any influence of others to override sound judgments.
A. Independence C. Objectivity
B. Confidentiality D. Integrity
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13. The new conceptual framework for financial reporting specifically mentions two users of financial information,
namely
A. Internal and External Users
B. Internal and Other Users
C. Primary and Other Users
D. External and Other Users
14. The accrual basis of accounting is based primarily on

A. Conservatism and Revenue Realization
B. Conservatism and Matching
C. Consistency and Matching
D. Revenue Realization and Matching
15. The financial statements that are prepared for the business are separate and distinct from the owners according to the
A. Going Concern Principle
B. Matching Principle
C. Business Entity Assumption
D. Accounting Period Assumption
16. Which underlying concept serves as the basis for preparing financial statements at regular intervals?
A. Business Entity
B. Going Concern
C. Accounting Period
D. Stable Monetary Unit
17. The financial statements should be stated in terms of a common financial denominator.
A. Accrual
B. Going Concern
C. Time Period
D. Monetary Unit
18. Continuation of an accounting entity in the absence of evidence to the contrary is an example of the basic concept of
A. Business Entity
B. Time Period
C. Going Concern
D. Accrual
19. This accounting concept justifies the usage of accruals and deferrals?
A. Going Concern
B. Materiality
C. Consistency
D. Stable Monetary Unit
20. Which characteristics relate to the content of financial statements?

A. Relevance and Faithful Representation
B. Understandability and Comparability
C. Relevance and Understandability
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D. Reliability and Comparability
21. The following characteristics relate to the presentation of financial statements, except
A. Comparability
B. Verifiability
C. Timeliness
D. Accrual
22. The ingredients of faithful representation include all of the following, except
A. Completeness
B. Neutrality
C. Timeliness
D. Free from error
23. The ingredients of relevance are

A. Faithful Representation and Prudence
B. Substance over Form and Completeness
C. Timeliness and Materiality
D. Predictive value and Confirmatory Value
24. It is the quality of information that assures readers that the information is free from bias or error and faithfully
represents what it purports to show.
A. Understandability
B. Relevance
C. Neutrality
D. Comparability
25. The financial information must be comprehensible or intelligible if it is to be useful.

A. Relevance
B. Reliability
C. Understandability
D. Comparability
26. It is the ability to bring together for the purpose of noting similarities and dissimilarities.
A. Relevance
B. Reliability
C. Understandability
D. Comparability
27. The elements directly related to the measurement of financial position are
A. Assets, liabilities, equity , income and expenses
B. Assets, liabilities and equity
C. Income and expenses
D. Assets and liabilities
28. It refers to the uniform application of accounting method from period to period within an entity
A. Comparability
B. Understandability
C. Reliability
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D. Consistency
29. These are recognized when it is probable that future economic benefits will flow to the entity and that they have a
value or cost that can be measured reliably.
A. Income
B. Gains
C. Assets
D. Liabilities
30. These are recognized when it is probable that a decrease in the future economic benefit related to decrease in an asset
or an increase in liability has occurred and that the decrease in economic benefit can be measured.
A. Income
B. Assets
C. Gains
D. Expenses
31. This is the final figure in the income statement when expenses exceed revenue.
A. Net income
B. Ending capital
C. Net loss
D. Beginning capital
32. A balance sheet or statement of financial position in which the sections of the liabilities and owner’s equity are listed
below the section of assets is
A. Account form balance sheet
B. Report form balance sheet
C. Common balance sheet
D. None of the above
33. Reports which summarize the financial position and results of operations of a business.
A. Financial Statements
B. Interim Reports
C. Report to Securities and Exchange Commission
34. This shows the financial position of a firm as of a given date.

A. Statement of Owner’s Equity
B. Income Statement
C. Statement of Financial Position
D. All of the above
35. The total assets of the company are equal to its

A. Liabilities minus capital
B. Capital minus liabilities
C. Liabilities plus capital
36. The capital account of the owner of a sole proprietorship comprises of the following
A. His original investment
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B. His additional investment
C. His withdrawal
D. The results of operations
E. All of the above
37. What increases owner’s equity?

A. Withdrawals and net loss
B. Investments and net income
C. Donations to charitable institutions
38. A statement of financial position or balance sheet in which the sections of the liabilities and the owner’s equity are
listed on the right of the assets section is
A. Account form balance sheet
B. Report form balance sheet
C. Common balance sheet
39. The amount of assets consumed or services used in the process of earning a revenue
A. Income
B. Assets
C. Expenses
D. Liabilities
40. Obligations that must be paid within twelve months or in the normal course of the business’operating cycle.
A. Current liabilities
B. Non-current liabilities
C. Other liabilities
Page 84 of 84

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Topic A.

Basic Accounting Concepts, Standards and

Objectivity. A professional accountant should not allow

STATEMENT OF CHANGES IN OWNER’S

TYPICAL ACCOUNT TITLES USED

Capital is an account that represents the owner’s

The statement of cash flows may be reported using

Direct Method. This method encourages the reporting

Indirect Method. The net income or loss is adjusted for

Current Assets: Notes

TOTAL ASSETS _______

LIABILITIES AND OWNER’S EQUITY

Total Liabilities 268,500

Bong Go, Capital 2,869,850

TOTAL LIABILITIES AND OWNER’S EQUITY 3,138,350

Example of a Statement of Comprehensive Income (Natural Presentation) (Income Statement)

Example of a Statement of Changes in Owner’s Equity

Bong Go, Capital – January 1, 2020 2,216,000

Note 4 Trade and Other Receivables

Account Receivable 55,000

Supplies on Hand 75,000

Note 6 Property and Equipment, net

Note 7 Trade and Other Payables

Accounts Payable 65,000

Note 8 Revenues Earned

Passenger Fares 800,000

Note 9 Operating Expenses

 Identify business transactions

BUSINESS TRANSACTIONS DEFINED

BUSINESS Capital (Right of Ownership) OWNER

MR. GUPIT CAPITAL

ASSETS = LIABILITIES + EQUITY

ASSETS = LIABILITIES+ OWNER’S EQUITY

Cash on Hand QUALITY

ASSETS = LIABILITIES+ OWNER’S EQUITY

Decrease in Asset (Cash) Increase in Liabilities (Accounts Payable)

ASSETS = LIABILITIES+ OWNER’S EQUITY

ASSETS = LIABILITIES+ OWNER’S EQUITY

ASSETS ̶ LIABILITIES+ OWNER’S EQUITY

July 2 Paid for mayor’s permit and other licenses, P2,500

DATE ASSETS LIABILITIES E QUITY

July 1 50,000 125,000 175,000 Investment

Assets P188,000 = Liabilities P7,500 + Capital P180,500

Increase Decrease Decrease Increase

Owner’s Equity Revenue

Taxes and Licenses

Analysis: Transaction labeled letter “a”

Analysis: Transaction letter “b”

The Accounting equation at this point will appear as follows:

ASSETS= LIABILITIES+ OWNER’S EQUITY

RECORDING BUSINESS TRANSACTION OF A SERVICE BUSINESS

The accounting cycle consists of the following steps:

ANALYSIS OF BUSINESS TRANSACTIONS

PREPARATION OF WORKING PAPERS WITH

PREPARATION OF FINANCIAL STATEMENTS

JOURNALIZING & POSTING OF ADJUSTING

JOURNALIZING & POSTING OF CLOSING

PREPARATION OF POST-CLOSING TRIAL BALANCE

JOURNALIZING AND POSTING OF

The process of analyzing accounting transactions begins with: