ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

Module 1
ACCOUNTING AND ITS ENVIRONMENT
Week 1

Introduction

Accounting has evolved, as in the case of medicine and law, in response to the social and
economic needs of society. As business and society become more complex, accounting develops
new concepts and techniques to meet the ever-increasing needs for financial information. Without
such information, many complex economic developments and social programs may never have
been undertaken.

In a market economy, information helps decision-makers make informed choices regarding the
allocation of scarce resources under their control. When decision-makers are able to make well-
informed decisions, resources are allocated in a way that better meets the needs and goals of
those within the market.

Accounting is relevant in all walks of life, and it is absolutely essential in the world of business.
Accounting is the system that measures business activities, processes that information into
reports and communicates the results to decision-makers. Accounting quantifies business
communication. For this reason, accounting is called the language of business. The task of
learning accounting is very similar to the task of learning a new language; thus, the need for this
book which teachers the Basics of Accounting in a very conceptual manner.

No business could operate very long without knowing how much it was earning and how much it
was spending. Accounting provides the business with this information and more. So, accountants
can be called the scorekeepers of business. Without accounting, a business couldn’t function
optimally; it wouldn’t know where it stands financially, whether it’s making a profit or not, and it
wouldn’t know its financial situation. Also, a sound understanding of this language will bring about
a better management of the financial aspects of living. Personal financial planning, education
expenses, car amortization, business loans, income taxes and investments are based on the
information system that we call accounting.

INTENDED LEARNING OUTCOMES

After studying this module, students should be able to:
1. Define accounting and explain its role in business.
2. Explain the fundamental business model and determine how it is applied to the various
types of businesses.
3. Differentiate the forms and activities of business organizations.
4. Determine the importance of the purpose and phases of accounting.
5. Explain the fundamental accounting concepts and principle.
6. Identify the career opportunities open to accountants.

DEFINITIONS OF ACCOUNTING

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Table 1 presents the definitions of accounting and their respective references.

Table 1 - Definitions of Accounting

Definition Reference

Accounting is a service activity. Its Statement of Financial Accounting Standards No.

function is to provide quantitative 1, “Basic Concepts and Accounting Principles
information primarily financial in Underlying Financial Statements of Business
nature, about economic entities that Enterprises” (Manila: Accounting Standards
is intended to be useful in making Council, 1983), par. 1
economic decisions

Accounting is an information Statement of Financial Accounting Concepts No. 1,

system that measures, processes “Objectives of Financial Reporting by Business
and communicates financial Enterprises” (Norwalk, Conn.: Financial Accounting
information about an economic entity Standards Board, 1978), par. 9

Accounting is the process of American Accounting Association, “A Statement of

identifying, measuring and Basic Accounting Theory” (Evanston, III.: American
communicating economic information Accounting Association, 1966), par. 1;
to permit informed judgments and
decisions by users of the information Accounting Principles Board, Statement No. 4,
“Basic Concepts and Accounting Principles
Underlying Financial Statements of Business
Enterprises”(New York: AICPA, 1970), par. 40

Accounting is the art of recording, American Institute of Certified Public Accountants,

classifying and summarizing in a “Review and Resume”, Accounting Terminology
significant manner and in terms of Bulletin No. 1 (New York: AICPA, 1953), par.9
money, transactions and events
which are, in part at least, of a
financial character, and interpreting
the results thereof

FUNDAMENTAL BUSINESS MODEL

● Developing a product or service that customers will pay and thus, will create a revenue
stream is necessary for a business to be successful.

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○ Such can be
■ a new product or service that meets specific needs.
■ a better product or service.
■ a product or service that offers a better value proposition.
● A business requires investments to enable it to pay for the infrastructure, equipment and
personnel. A skillful combination of these elements are necessary for a business to
generate a revenue stream.

Figure 1 illustrates how a business is structured to provide a customer proposition.

Figure 1 - Fundamental Business Model

Five activities on the Fundamental Business Model:

1. Investors provide the required capital for the business. The cash investment will then be
held in a bank account.
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2. The cash invested in the business can be:

● Converted into other type of assets that will be used in the business (e.g.
equipment) or sold (e.g. inventory); or
● Spent on operating costs such as salaries, supplies, rentals and utilities.

3. Combining the business resources provides the basis for producing the products or
services.

4. The sale of a product or service generates an asset called a receivable. Once collected this
asset will produce a cash inflow for the business.

5. If there’s an existing debt from banks, the cash inflow from collections will be used to pay the
debt providers with interest on their loans to the company. Remaining cash can be sent back to
the cycle by being converted into other assets or spent on operating costs (back to stage 2). In

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the normal course of business, this whole process will earn profits on which tax will have to be
paid. Any profit after tax can continue to be reinvested in the cycle or paid out to the owners as a
“return” on their investments (withdrawals or dividends).

The model outlines the way money flows around a business and provides the basis of accounting.
To manage a business effectively it is necessary to know how the cash has been spent and how
profitable the products or services have been to the business. The availability of this historical
information helps management to make informed judgments on how to improve the performance
of business.

TYPES OF BUSINESS

Despite the absence of variation in the fundamental business model, there are numerous ways
of applying this in providing the scope of products and services that comprise the business world.
However, the range of products and services can be synthesized into seven (7) types which are
listed below;

Table 1
Summary of Types of Business
Type Activity Structure Examples

Services Selling people’s Hiring skilled workers and selling Banking,

time their time Education
Accounting
Legal
Salon services
Trader Buying and Purchasing a range of raw Wholesaler
selling materials and finished goods, Retailer
commodities or consolidating them, enabling
products them to sell in locations within
the proximity of their customers
or for online delivery
Manufacture Designing Buying raw materials and Vehicle Assembly
products, combining equipments and labor Construction
combining parts to convert them into finished Engineering
and components products Electricity, Water,
and assembling Food and Drink
finished goods Chemicals
Media
Pharmaceuticals
Raw Growing or Commonly purchasing blocks of Farming
materials extracting raw land and using them to create or Mining
materials produce the raw materials Oil

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Infrastructure Selling the Purchasing and operating assets Transport (airport

utilization of (typically large assets); selling operator, airlines,
infrastructure occupancy or utilization often in trains, ferries, buses)
combination with services Hotels
Telecoms
Sports facilities
Property
management

Financial Receiving Accepting cash from depositors Banks

deposits, lending and paying them interest; using Microfinance
and investing the money to provide loans to institutions
money borrowers, charging them fees Investment house
and a higher rate of interest than
the depositors receive

Insurance Pooling Collecting cash from many Insurance companies

premiums of customers; investing the money
many to meet to pay the losses experienced by
claims of a few a few customers. By
understanding the risk accepted
and the likelihood of a claim,
more premium income can be
earned than claims paid.

FORMS OF BUSINESS ORGANIZATIONS

The types of businesses mentioned above may be performed by any of the forms of organization,
be it a single or sole proprietorship, a partnership or a corporation. The accounting procedures to
be followed will depend on the form of organization.

Sole Proprietorship

● It has a single owner known as the proprietor who usually is also the manager.
● This form tends to be small-service-type like those of physicians, lawyers and accountants
forming their own business and retail establishments.
● All profits go to the owner. However, the owner also absorbs all losses and the only one
responsible for all liabilities of the organization.
● This form of organization is distinct from its owner or proprietor in terms of accounting
viewpoint. In relation to this, their accounting records do not include the owner or
proprietor’s personal financial records.

Partnership

● As defined in Philippine Civil Code, Article 1767, it is a contract whereby two or more
persons bind themselves to contribute money, property, or industry to a common fund,
with the intention of dividing the profits among themselves.”

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● Partners in this form of organization are personally liable for any obligations incurred by
the partnership.
● Partnership is considered as a separate organization which is distinct from the personal
affairs of each partner in accounting point of view.

Corporation

● As defined in the Revised Corporation Code of the Philippines (RA 11232), it is “an artificial
being created by operation of law, having the rights of succession and the powers,
attributes and properties expressly authorized by law or incident to its existence.”
● A form of business organization owned by its shareholders.

Since the corporation is a separate legal entity, the stockholders are not personally liable for the
corporation’s obligations.

ACTIVITIES IN BUSINESS ORGANIZATIONS

The discussion that will follow focuses on the three types of organizational activities:

Financing Activities

● These are the methods an organization uses to obtain financial resources from financial
markets and how it manages these resources. These resources are needed to acquire
other resources used in producing goods and services.
● Primary sources of financing
○ Owners
○ Creditors like banks and suppliers
● The following are some of the financing activities:
○ Initial and additional investments
○ Repaying the creditors
○ Paying a return to the owners
● Financial resources derived from financing activities are utilized by the organization to
acquire other resources necessary in the transformation process, that is from one form to
a different form. It can serve the needs and demands of the customers. Having the right
mix of resources is essential to efficient and effective operations.

Investing Activities

● These activities involve the selection and management including disposal and
replacement of long-term resources that will be used to develop, produce, and sell goods
and services.
● Some of the activities involve are the following:
○ buying land, equipment, buildings and other resources that are needed in the
operation of the business, and
○ selling these resources when they are no longer needed.

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Operating Activities

● These activities involve the use of resources to design, produce, distribute, and market
goods and services.
● Specifically, the following are the common activities in this area:
○ research and development,
○ design and engineering,
○ purchasing,
○ human resources,
○ production,
○ distribution,
○ marketing and selling, and
○ servicing.
● Business organizations compete both in searching for the best suppliers and labor
providers as well as meeting the demand of their target markets.

PURPOSE AND PHASES OF ACCOUNTING

Accounting function handles not only the financial operations but also provides information and
advice to other departments of the organization. It does not operate in isolation. In fact, the
accounting function is just a part of the broader business system.

A significant function of accounting is to record historical events that affect the resources of the
organization. These historical events are the business transactions that represent the economic
activities of a business. Accounts are produced to aid management in planning, control and
decision-making and to comply with regulations.

● Recording is not the first step in accounting. Before recording the effects of transactions,
it must first be measured. Accounting information will be useful if such will be expressed
in terms of a common financial denominator - money. Money serves as both a measure
of value and a medium of exchange.
○ Several considerations need to be decided before measuring a business transaction
■ Recognition Issue - when the transaction occurred
■ Valuation Issue - what value to place on the transaction
■ Classification issue - how the components of the transaction should be classified

● To maximize the benefit out of the financial information, it is not enough to just simply
measure and record the transactions. It must be classified and summarized for such to be
useful in making decisions. The effects of numerous transactions are categorized into
useful groups or categories. This phase is known as classification.

● Summarization of financial data is achieved through financial statements preparation.

This phase summarizes the effects of all business transactions that occurred during a
particular period.

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● The last phase in accounting which is interpretation or analysis of financial information

will be performed after going through the summarization phases. The results are
interpreted or analyzed to evaluate the financial position and performance of the
organization through financial ratios such as liquidity, profitability and solvency. .
Accounting provides the decision-makers with information to make reasoned choices
among alternative uses of scarce resources in the conduct of business and economic
activities.

FUNDAMENTAL CONCEPTS
In recording business transactions, accountants should consider the following fundamental
concepts that underlie the accounting process.
Fundamental Explanation
Concept

Entity Concept ● An accounting entity is an organization or a section of an organization

that stands apart from other organizations and individuals as a
separate economic unit.
● This concept states that the transactions of different businesses or
entities should not be accounted for together. Even businesses of
one single proprietor need to be accounted for separately.
● Each entity should be evaluated separately.

Periodicity Concept ● This concept allows users to acquire timely information that will
serve as a basis on arriving at economic decisions about future
activities.
● An entity’s life can be meaningfully subdivident into equal time
intervals for reporting purposes. Waiting for the actual last day of
operations will not be necessary to perfectly measure the entity’s
profit.
● The common accounting period for the purpose of reporting
externally is one year.

Stable Monetary ● This concept is the basis for ignoring the effects of inflation in the
Unit Concept accounting records of the organization.
● A reasonable unit of measure that is considered in accounting is the
Philippine Peso. Its purchasing power is assumed to be relatively
stable meaning it allows accountants to add and subtract peso
amounts as though each peso has the same purchasing power as
any other peso at any time.

Going Concern ● This concept pertains to the preparation of financial statements

considering the assumption that the reporting entity is a going
concern and will continue in operation for the foreseeable future.
● With this concept, it is assumed that the entity has neither the
intention nor the need to enter liquidation or to cease operations.
● This concept underlies the depreciation of assets over their useful
lives.

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CRITERIA FOR GENERAL ACCEPTANCE OF AN ACCOUNTING PRINCIPLE

Certain guidelines need to be followed in accounting practice. Generally accepted accounting

principles (GAAP).encompass the conventions, rules and procedures necessary to define
accepted accounting practice at a particular time.

Accounting principles

● Established by humans
●
● Evolving, not eternal truths
● General acceptance usually depends on how well it meets three criteria
○ Relevance- extent to which the resulting information is meaningful and useful to
those who need to know something about a certain business.
○ Objectivity - extent to which the resulting information is not influenced by the
personal bias or judgment of those who furnish it. It connotes reliability and
trustworthiness. It also connotes verifiability, which pertains to determining
whether the information provided is correct.
○ Feasibility - extent to which it can be implemented without undue complexity or
cost. These criteria often conflict with one another. In some cases, the most
relevant solution may be the least objective and the least feasible.

BASIC PRINCIPLES

In order to generate information that is useful to the users of financial statements, accountants
rely upon the following principles:

Objectivity Principle

● Accounting records and statements are based on the most reliable data available so that
they will be as accurate and as useful as possible.
● Reliable data are verifiable when they can be confirmed by independent observers. Ideally,
accounting records are based on information that flows from activities documented by
objective evidence.
● Without this principle, accounting records would be based on whims and opinions and is
therefore subject to disputes.

Historical Cost

● This principle states that acquired assets should be recorded at their actual cost and not at
what management thinks they are worth as at reporting date.

Revenue Recognition Principle

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● Under this principle, revenue is to be recognized in the accounting period when goods are
delivered or services are rendered or performed. This is regardless of whether there is an
actual collection on the date of sale.

Expense Recognition Principle.

● Expenses should be recognized in the accounting period in which goods and services are
used up or incurred to produce revenue and not when the entity pays for those goods and
services.

Adequate Disclosure

● Under this principle, it requires all relevant information that would affect the user’s
understanding and assessment of the accounting entity to be disclosed in the financial
statement.

Materiality

● Under this principle, financial reporting is only concerned with information that is significant
enough to affect evaluations and decisions.
● Materiality depends on the size and nature of the item judged in the particular circumstances
of its omission.

Consistency Principle

● The firms should use the same accounting method from period to period to achieve
comparability over time within a single enterprise. However, changes are permitted if
justifiable and disclosed in the financial statements.

THE ACCOUNTANCY PROFESSION

Characteristics

Accountancy qualifies as a profession because it possesses the following attributes:

● All members of the accountancy profession are Certified Public Accountants, which means
that they have earned a Bachelor of Science in Accountancy degree and have passed the
CPA Licensure Examinations.
● CPAs have their own body of language. They use terminology peculiar to the profession
(e.g. debits and credits).
● CPAs adhere to a Code of Ethics. This code upholds the CPA’s responsibility to serve the
public with competence and integrity. The public, in return, expresses its confidence to
CPAs by relying on the financial statements they audit.
● Like other professions, CPAs are members of a national organization, the PICPA, whose
role is to ensure the continued improvement of the accountancy profession to meet the
demands of the times.

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Career Opportunities

The professional accountant is presented with diverse opportunities. The demand for accounting
services has increased with the increase in number, size, and complexity of business. The
accountant may be engaged in any of the following areas of competence:

Public Practice

● This pertains to those accountants who render services on a fee basis and staff
accountants employed by them.
● Public accountants, who practice individually or as members of public accounting firms,
should be certified public accountants (CPAs).
● Their work includes auditing, taxation and management advisory services.
● Firms vary greatly in size. Some are small proprietorship and others are large
partnerships. There are large global CPA firms with more than 1,000 partners.
● Largest accounting firms (in alphabetical order) in the United States:
○ Deloitte & Touche,
○ Ernst & Young,
○ KPMG, and
○ PriceWaterhouseCoopers.
○ Arthur Andersen & Co. is now history;
■ The firm used to be the biggest but succumbed to pressures brought about
by a lot of financial fiascos including that of Enron, Sunbeam, Waste
management and WorldCom.
■ These firms employ only about 12 percent of the CPAs in the United States
but they audit the financial statements of approximately 85 percent of the
top corporations.
● Biggest firms In the Philippines,
○ Sycip Gorres Velayo & Co. (SGV & Co. )
■ with over 1,800 professionals from various disciplines.
■ SGV & Co. is a member practice of Ernst & Young Global.
○ Punongbayan & Araullo,
○ Laya Mananghaya & Co.,
○ C.L. Manabat & Co.,
○ Isla, Lipana & Co. (Joaquin Cunanan & Co.),
○ Constantino, Guadalquiver & Co.,
○ Carlos J. Valdez & Co.,
○ Alba Romeo & Co.,
○ Diaz Murillo Dalupan & Co. and
○ Reyes Tacandong & Co. among others.
● The top partners in these large accounting firms earn about the same amount as the top
executives of other large businesses. Public accounting is the frequently traveled career
path because it offers excellent opportunities to gain multi-faceted business experience.
● Sample Entry level jobs:

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○ Audit staff
○ Tax Staff
○ Management Services/Consulting Manager
● Advanced positions:
○ Partner
○ Senior Partner
○ Senior Consultant/Financial Advisor.

Commerce and Industry

● Accountants employed in this area vary widely in their scope of activities and
responsibilities.
● Sample Entry-level jobs:
○ Financial Accounting and Financial Analyst,
Reporting Staff, ○ Budget Analyst,
○ Management Accounting Staff, ○ Credit Analyst,
○ Tax Accounting Staff, ○ Cost Accountant;
○ Internal Audit Staff,
● Middle-level positions:
○ Comptroller, ○ Senior Fraud Examiner,
○ Senior Information Systems ○ Senior Forensic Auditor
Auditor,
● Advanced positions:
○
○ Chief Financial Officer ○ Chief Information Officer.

Government Service
● Accountants may be hired by the following:
○ Congress of the Philippines,
○ Commission on Audit (COA),
○ Bureau of Internal Revenue (BIR),
○ Department of Finance,
○ Department of Budget and Management,
○ Bangko Sentral ng Pilipinas (BSP) and
○ the local government units (e.g. provincial, city or municipal governments).
● Sample Entry-level jobs
○ State Accounting Examiner Audit Examiner
○ State Accountant ○ Budget Analyst
○ LGU Accountant ○ Financial Services Specialist
○ Revenue Officer
● Middle-level positions
○ State Accountant V
○
○ Director III and Director IV, Government Accountancy and Audit
○ Financial Services Manager
○ Audit Services Manager
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○ Senior Auditor

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● Advanced positions
○ National Treasurer
○ Vice President for Finance/ CFO (for GOCC’s)
○ Commissioner
○ Associate Commissioner
○ Assistant Commissioner, (COA/ BIR, BOC).

Education/ Academe
● This area guarantees the continued development of the profession by endeavoring to
clarify and address emerging issues through research and sharing the results obtained
with their colleagues.
● Considered as modern day heroes, they make others understand the body of accounting
knowledge.
● In addition, they painstakingly prepare candidates for the tough CPA exams. With the
advent of information technology, this sector is being challenged to focus accounting
education from the “transfer of knowledge” approach to the more-effective “learning to
learn” approach.
● Sample Entry-level jobs
○ Junior Accounting Instructor
● Middle-level positions
○ Senior Faculty
○ Accounting Department Chair
● Advanced positions
○ Vice President for Academic Affairs
○ Dean.

BRANCHES OF ACCOUNTING

The main branches of accounting and their brief description are discussed as follows:

Auditing

● accountancy profession’s most significant service to the public.

○ An external audit
■ the independent examination that ensures the fairness and reliability of the
reports that management submits to users outside the business entity.
■ The result of the examinations is embodied in the independent auditor’s report.
■ Once the required financial statements have been prepared by management,
they have to be evaluated in order to ensure that they do not present a distorted
picture.
■ External auditors
● appointed from outside the organization.
● job is to protect the interests of the users of the financial statements.
○ Internal auditors

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■ By contrast to external auditors, they are employees of the company.

■ They are appointed by, and answer to the companies management though
they work independently of the accounting and other departments.
■ They ensure the accuracy of business records, uncover internal control
problems and identify operational difficulties.
○ To differentiate further, internal auditors perform routine tasks and undertake detailed
checking of the company’s accounting procedures, whereas external auditors are
likely to go in for much more selective testing.
○ Nonetheless, they usually work very closely together, although the distinction made
between them still remains important.

Bookkeeping

● a mechanical task involving the collection of basic financial data.

● The data are first entered in the accounting records of the books of accounts, and then
extracted, classified and summarized in the form of income statement, balance sheet and
cash flow statement.
○ An income statement shows whether the business has made a profit or loss
during the period, i.e. it measures how well the business has done.
○ A balance sheet lists what the entity owns (its assets), and what it owes (its
liabilities) as at the end of the period.
○ The cash flows statement presents the cash inflows and outflows of the business
during the period.
○ The bookkeeping procedures usually end when the basic data have been entered
in the books of accounts and the accuracy of each entry has been tested. At the
stage, the accounting function takes over.
● Accounting tends to be used as a generic term covering almost anything to do with the
collection and use of basic financial data.
● Bookkeeping is a routine operation, while accounting requires the ability to examine a
problem using both financial and non-financial data.

Cost Bookkeeping, Costing and Cost Accounting

Cost bookkeeping
● the process that involves the recording of cost data in books of accounts.
● similar to bookkeeping except that data are recorded in very much greater detail.
● Cost accounting makes use of those data once they have been extracted from the cost
books in providing information for managerial planning and control.

The difference between bookkeeping per se and cost bookkeeping is largely one of degree of
detail.

Cost accounting

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● cost accounting system contains a great deal more data, and thus once the data are
summarized there is much more information available to the management of the company.
● deals with the collection, allocation, and control of the cost of producing specific goods
and services. This accumulation and explanation of actual and prospective cost data is
important to control current operations and to plan for the future.
● one of the main sub-branches of management accounting.

Financial Accounting
● Focused on the recording of business transactions and the periodic preparation of reports
on financial position and results of operations.
● Financial accountants accord importance to generally accepted accounting principles.
● More specific term applied to the preparation and subsequent publication of highly
summarized financial information.
● The information supplied is usually for the benefit of the owners of an entity, but it can also
be used by management for planning and control purposes. It will also be of interest to
other parties, e.g., employees and creditors.

Financial Management
● a relatively new branch of accounting that has grown rapidly over the last 30 years.
● Financial managers
○ responsible for setting financial objectives, making plans based on those
objectives, obtaining the finance needed to achieve the plans, and generally
safeguarding all the financial resources of the entity.
○ much more heavily involved in the management of the entity than is generally the
case with either financial or management accountants
○ draws on a much wider range of disciplines and relies more extensively on non-
financial data than does the more traditional accountant.

Management Accounting
● Incorporates cost accounting data and adapts them for specific decisions which
management may be called upon to make
● A management accounting system incorporates all types of financial and non-financial
information from a wide range of sources.

Taxation
● includes the preparation of tax returns and the consideration of the tax consequences of
proposed business transactions or alternative courses of action.
● Accountants with this specialization aim to comply with existing tax statutes but are also
in constant legal search for ways to minimize tax payments.
● If tax experts attempt to reduce their clients’ tax liabilities strictly in accordance with the
law, this is known as “tax avoidance”.

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○ Tax avoidance is a perfectly legitimate exercise,

○ Tax evasion (the non-declaration of sources of income on which tax might be due)
is a very serious offense.

Government Accounting
● It is concerned with the identification of the sources and uses of resources consistent with
the provisions of city, municipal, provincial and national laws.
● The government collects and spends a huge amount of public funds annually so it is
necessary that there is proper custody and disposition of these funds.

Exercises and Activities

True or False

1. An audit is the independent examination that ensures the fairness and reliability of the
reports that management submits to users outside the business entity.
2. A business transaction is the occurrence of an event or of a condition that must be
recorded.
3. One characteristic of a corporation is that its owners are personally liable for any losses
incurred by the business.
4. The set of guidelines and procedures that constitute acceptable accounting practice at a
given time is GAAP, which stands for generally accepted accounting process.
5. Classification reduces the effects of numerous transactions into useful groups or
categories.
6. The liability of corporate stockholders is limited to the amount of their investment.
7. The terms bookkeeping and accounting are synonymous.
8. Most members of the accountancy profession are Certified Public Accountants.
9. A corporation is an economic unit that is legally separate from its owners.
10. The personal liability of a partner is limited to the amount of his investment.
11. Manufacturing companies buy raw materials, convert them into products and then sell
the products to other companies or to final consumers.
12. The entity concept states that the transactions of different entities should not be
accounted for together.
13. Accounting is often characterized as the “language of business”.
14. A partnership is a business owned and operated by two or more persons who bind
themselves to contribute money, property or industry to a common fund, with the
intention of dividing the profits among themselves.
15. The Philippine accountant considers peso as the common unit of measure for all
business transactions.
16. For accounting purposes, a business and its owner are considered one and the same.
17. Summarization reduces the effects of numerous transactions into useful groups or
categories.
18. A partnership is always owned by two individuals.

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19. For reporting purposes, the personal assets and debts of a business owner should be
combined with the assets and debts of the business.
20. Government accounting deals solely with the identification of the sources of resources
consistent with laws.
21. All members of the accountancy profession are Certified Public Accountants.
22. Accounting is a service activity whose function is to provide quantitative information
about economic activities that is intended to be useful in making economic decisions.
23. A corporation is a business owned by its stockholders.
24. A separate legal entity organized in accordance with codes and laws and in which
ownership is divided into shares of stock is referred to as a corporation.

Multiple Choice

1. Which of the following are true of partnerships?

1. The partners’ individual exposure to debt is limited.
2. Financial statements for the partnership by law must be produced and made
public.
3. A partnership is not a separate legal entity from the partners themselves.
a. 1 and 2 only
b. 2 only
c. 3 only
d. 1 and 3 only

2. Which accounting concept should be considered if the owner of a business takes goods
from inventory for his personal use?
a. The substance over form concept
b. The accrual concept
c. The going concern concept
d. The business entity concept

3. Which accounting concept states that omitting or misstating this information could
influence users of the financial statements?
a. The consistency concept
b. The accrual concept
c. The materiality concept
d. The going concern concept

4. Which of the following accounting concepts means that similar items should receive a
similar accounting treatment.
a. Going concern
b. Accrual
c. Substance over form
d. Consistency

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

5. Assets are usually valued under which basis?

a. Replacement cost
b. Historical cost
c. Net realizable value

6. Which of the following best explain the feature of consistency of presentation?

a. When preparing the accounts of a firm, one should normally account for similar
items in the same way from one accounting period to the next.
b. Firms in the same industry must account for similar items in the same way.
c. Firms must comply with accounting standards and regulations.
d. None of the above
.
7. Which of the following statements about accounting concepts and the characteristics of
financial reporting information is not correct?
(i) Entities may exclude information that is relevant in financial statements
because it is too difficult for the users to understand.
(ii) The historical cost concept means that only items capable of being measured
in monetary terms can be recognized in the financial statements.
(iii) Consistency in use of the same accounting policies for the same or similar
items from one period to the next is essential to enhance comparability among the
entities.

a. (i) and (ii)

b. (i) and (iii)
c. (ii) and (iii)
d. All of the above

8. Which type of business organization is owned by its stockholders?

a. Corporation
b. Partnership
c. Proprietorship
d. All the above are owned by stockholders

Multiple Choice

1. Which of the following is an appropriate definition of accounting?

a. The measurement, processing, and communication of financial information about
an identifiable economic entity.
b. A means of recording transactions and keeping records.
c. The interconnected network of subsystems necessary to operate a business
d. Electronic collection, organization, and communication of vast amount of
information

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

2. Accountants employed by a particular business firm or not-for-profit organization,

perhaps as chief accountant, controller, or financial vice president, are said to be
engaged in
a. General accounting.
b. Public accounting.
c. Practice in commerce and industry
d. Independent accounting

3. The entity concept means that

a. Because a firm is separate and distinct from its owner, those owners cannot have
access to its assets unless the firm ceases to trade.
b. Accounts must be prepared for every firm.
c. The financial affairs of a firm and its owner are always kept separate for the
purpose of preparing accounts.
d. None of the above.

4. The financial accounting process provides information about economic activities of an

enterprise for a specified accounting period that is shorter than the life of the enterprise.
a. Time period
b. Going concern
c. Measurement of economic resources and obligations
d. Measurement in terms of money

5. The consistency concept means that

a. When preparing the accounts of a firm, one should normally account for similar
items in the same way form one accounting period to the next.
b. Firms in the same industry must account for similar items in the same way.
c. Firms may never change the way in which they prepare their accounts.
d. None of the above.

6. The consistency standard of reporting required that

a. expenses be reported as charges against the period in which they are incurred.
b. the effect of changes in accounting upon income be propertly disclosed.
c. extraordinary gains and losses should not appear on the income statement.
d. accounting procedures be adopted which give a consistent rate of return

7. Which accounting process is the recognition or non-recognition of business activities as

accountable events?
a. Identifying
b. Communicating
c. Recording
d. Measuring

8. The basic purpose of accounting is

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

a. To provide the information that the managers of an economic entity need to

control its operations.
b. To provide information that the creditors of an economic entity can use deciding
whether to make additional loans to the entity
c. To measure the periodic income of the economic entity.
d. To provide quantitative financial information about a business enterprise that is
useful in making rational economic decision
.
9. During the lifetime of an entity, accountants produce financial statements at arbitrary
points in time in accordance with which basic accounting concept?
a. Objectivity
b. Periodicity
c. Conservatism
d. Matching
10. The skills needed to be developed by Filipino accountants include the following
a. Intellectual skills
b. Interpersonal skills
c. Communication skills
d. “a”and “c” only
e. “a”, “b” and “c”

11. Which of the following accounting concepts states that an accounting transaction should
be supported by sufficient evidence to allow two or more qualified individuals to arrive at
essentially similar conclusion?
a. Matching
b. Objectivity
c. Periodicity
d. Stable monetary unit

12. The financial statements should be stated in terms of a common financial denominator.
a. Accrual
b. Going concern
c. Time period
d. Stable monetary unit

13. Stating assets and liabilities and changes in them in terms of a common financial
denominator is a prerequisite in measuring financial position and periodic net income.
a. Unit of measure
b. Measurement of economic resources and obligations
c. Exchange price
d. Accrual

14. Carrying out professional responsibilities diligently and in accordance with applicable
technical and professional standards is descriptive of the principle of

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

a. Professional competence and due care

b. Objectivity
c. Independence
d. Integrity

15. A professional accountant should be straightforward and honest in all professional and
business relationships. This is in consonance with the fundamental principles of
a. Integrity
b. Objectivity
c. Confidentiality
d. Professional competence and due care

16. Proponents of historical costs maintain that in comparison with all other valuation
alternatives for general purpose financial reporting, statements prepared using historical
costs are more
a. Objective
b. Relevant
c. Indicative of the entity’s purchasing power
d. Conservative

17. The records of properties acquired and services availed of by a business are maintained
in accordance with the
a. Business entity concept
b. Cost principle
c. Proprietorship principle
d. Matching principle

18. This principle requires relevant information to form part of financial statements for
decision-making purposes
a. Objectivity
b. Materiality
c. Adequate disclosure
d. Accounting entity

19. The principle of objectivity includes the concept of

a. Summarization
b. Verifiability
c. Classification
d. Conservatism

20. The concept of matching is best demonstrated by

a. Not recognizing any expense unless some revenue is realized.
b. Recognizing prepaid rent received as revenue
c. Associating effort with accomplishment

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

d. Establishing an allowance for possible market decline in inventory account.

21. Accounting changes are often made and the monetary impact is reflected in the financial
statements of an entity even though, in theory, this may be a violation of the accounting
concept of
a. Materiality
b. Objectivity
c. Conservatism
d. Consistency

22. The measurement phase of accounting is accomplished by

a. Storing data
b. Reporting to decision makers
c. Recording data
d. Processing data

23. Which area of public accounting means the examination of financial statements by a
CPA for the purpose of expressing an opinion as to the fairness of the statements?
a. Management advisory services
b. Taxation
c. Internal auditing
d. External auditing

24. A person applying for examination shall establish the following requisites to the
satisfaction of the Board that he:
a. Is a Filipino citizen
b. Is of good moral character
c. Is a holder of degree of Bachelor of Science in Accountancy conferred by a
school, college, academy or institute duly recognized and/or accredited by the
Commission on Higher Education (CHED) or other authorized government
offices
d. Has not been convicted of any criminal offense involving moral turpitude
e. “A” and “c” only
f. “A”, “b” and “c”
g. All of the above

25. The main function is to establish and improve accounting standards that will be generally
accepted in the Philippines.
a. Financial Reporting Standards Council
b. Professional Regulation Commission
c. Philippine Institute of CPAs
d. Board of Accountancy

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

26. Which area of public accounting means the examination of financial statements by a
CPA for the purpose of expressing an opinion as to the fairness of the statements?
a. Management advisory services
b. Taxation
c. Internal audit
d. External audit

27. Accountants do not recognize that the value of the peso changes over time. This
concept is called the
a. Stable monetary unit concept
b. Going concern concept
c. Cost principle
d. Entity concept

28. The periodicity concept

a. Requires that all companies prepare monthly, quarterly and annual financial
statements.
b. Results from the Bureau of Internal Revenue requirement that taxable income be
reported on an annual basis
c. Requires all companies to use a fiscal year ending December 31
d. Involves dividing the life of a business entity into accounting periods of equal
length thus enabling the financial users to periodically evaluate the results of
business operations

29. They encompass the conventions,rules,and procedures necessary to define what is

accepted accounting practice
a. Accounting assumptions
b. Accounting concepts
c. Conceptual frameworks
d. Generally accepted accounting principles
30. The Filipino accountants should possess knowledge to enable them to compete
internationally, they are:
a. General knowledge
b. Organizational and Business Knowledge
c. Information Technology Knowledge
d. Accounting Knowledge
e. All of the above

31. Which of the following best describes the attributes of a partnership?

a. Limited ability to raise capital; unlimited personal liability of owners
b. Limited ability to raise capital; limited personal liability of owners
c. Ability raise large capital; unlimited personal liability of owners
d. Ability to raise large amounts of capital; limited personal liability of owners.

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

32. The concept of the accounting entity is applicable

a. Only to the legal aspects of business organizations
b. Only to the economic aspects of business organizations
c. Only to business organizations
d. Whenever accounting is involved.

Reference:

Ballada, Win and Ballada, Susan (2020). Basic Accounting Financial Accounting and Reporting.
Domdane Publishers & Made Easy Books. Sampaloc, Manila.

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ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

25
 Module 2
THE ACCOUNTING INFORMATION SYSTEM, ACCOUNTING EQUATION AND
DOUBLE-ENTRY BOOKKEEPING SYSTEM
Week 2 to 4

Introduction
The practice of accounting entails following accounting concepts, principles,
procedures and standards applied uniformly in the preparation of financial reports of all
types of businesses. In Module I, students were introduced to Accounting and its
environment. This module will expose students to the broader aspect of the accounting
information system, identify various accounting elements and how to analyze business
transactions using the accounting equation and acquire basic knowledge of the double-
entry system of bookkeeping.

Learning Objectives:

After studying this chapter, students should be able to:

1. describe the accounting information system in a broader perspective.
2. differentiate the types of accounting information system: manual system,
computer-based system and data-based system.
3. explain how the accounting information system generates timely and accurate
financial information through various stages, which helps the stakeholders in
making important decisions.
4. identify and understand the nature of the accounting elements and its uses.
5. recognize how the elements affect the accounting equation as applied to all
types of businesses.
6. analyze business transactions from source documents using the accounting
equation and financial transaction worksheet.
7. apply knowledge of the accounting equation to better understand the rules of
debits and credits for recording purposes.

ACCOUNTING INFORMATION SYSTEMS

● With the employment of technology brought about by business
globalization, providing and processing of financia⁰l information becomes a
“click of a finger”. Though the effectiveness of the system largely depends
on the nature, size of the business and volume of data to process, yet
accounting information systems made businesses cope up with the fast
demands of accounting information and transactions. While accounting
information involves planning, recording, analyzing and interpreting data, it
needs to gather and process it and then distributes this information to
interested end-users.

● Accounting information system is the planned process for the collection, storage
and processing of financial accounting data to provide reliable information that can
be used by the management and other stakeholders (Valencia 2016).
 ● It refers to a whole range of records and special accounting procedures use by the
business in achieving the objectives of financial accounting, preparation and
communication of financial reports (Valencia, 2016).
● A collection of people, procedures, software, hardware and data which work
together to provide information necessary to running an organization (Ballada,
2018)
● It is a device or an organization of planned procedures designed to transform
economic information and other data into meaningful reports (Valencia, 2016)

Figure 1.1 Accounting information Cycle Importance of

accounting information system

1. Business record-keeping is required by law.

For how long does a company have to store its accounting books and records?

Under RR 17-2013 and RR05-2014, all books, registers, records, vouchers and
other supporting papers and documents prescribed by the BIR must be kept by a
business for a period of 10 years, a sufficient time to maintain records for audit
examination and income tax purposes.

2. It helps prevent unnecessary cost.

A good accounting information in place means a company maintains proper
business records while a weak or poor accounting information system poses greater
risk to business.

3. It facilitates decision-making.
Accounting information system generally guides managers to facilitate in
providing financial information and reports in order to make sound economic
decisions.
 Figure 1. 2 Stages of Accounting Information System

The accounting information system comprises of three (3) stages as follows:

Stage 1 – Inputs
The collection of raw data, acquired from internal and external sources,
evidenced by source documents such as invoices, receipts, contracts,
etc.

Stage 2 – Process
Refers to data processing which includes sorting , classifying and
summarizing function into their respective files and
categories, storing them in their respective records.

Stage 3 - Outputs
The generation of financial reports and communication of the needed
information to the decision makers or end-users.

Types of accounting information system

1. Manual accounting system – utilize paper-based journals and ledgers, the
whole process is done manually. This is labor intensive and dependent on
human processing.

2. Computer-based system – uses modern information technology resources

and transactions are coded and can be quickly posted bypassing the
journalizing process. It replaced paper records with computer records.

3. Database system – it embeds accounting data within the business event data on
which they are based. It reduces inefficiencies and redundancies that often exist
in a transaction -based systems. The computer, with the use of accounting
software processes the inputs. This system recognizes and capture both
financial and non-financial data and store it in a data warehouse.

In many situations, manual systems are inferior to computerized systems in

terms of productivity, speed, accessibility, quality of output, incidence of errors and
volume of data.

ELEMENTS OF FINANCIAL STATEMENTS

There are hundreds or even thousands of transactions that a business

undertakes during the accounting period. These transactions and events are grouped
into broad classes according to economic characteristics or attributes in the financial
statements. The broad classification of business transactions in the financial
statements are called accounting elements.

As defined in March 2018 Conceptual Framework for Financial Reporting, these

elements of financial statements are:
1. Assets
2. Liabilities
3. Equity
4. Income
5. Expenses

Assets
● The term “assets” refers to the resources controlled by the entity as a result of
past events and from which future economic benefits are expected to flow to the
entity.
● In simple terms, assets are properties owned and controlled by the business.
● An economic resource is a right that has potential to produce economic benefits
for the entity which has the sole control or ability to prevent other parties to direct
the use of that economic resource.
 Examples: right to own land, building, equipment, machinery, furniture and
fixtures, etc., right to receive cash, right to receive goods or services

Liabilities
● The term “liabilities” refers to the present obligations of an entity arising from past
events, the settlement of which is expected to result in an outflow from the entity
of resources embodying economic benefits.
● Simply stated, liabilities are the debts incurred by the business for the transfer of
an economic resource as a result of past events.
● An obligation of the entity, owed to another party

Examples: unpaid expenses, unpaid salaries, purchases made on account, etc.

Equity
● The term “equity” refers to the residual interest in the assets of the entity after
deducting all its liabilities.
● Equity represents owner’s capital and what is left to the owner after deducting the
entity’s debts or obligation.
● It represents claim of the owner/s over the assets of the business in the form of
capital.

Examples: R & B Service Business has total assets of P1,000,000 and total
liabilities of P450,000, therefore, the equity of the owner is P550,000.

NOTE: Assets, liabilities and equity – relate to a reporting entity’s financial position
(shown in the Statement of Financial Position or Balance Sheet)

Income
● The term “income” refers to the increase in economic benefits during the
accounting period in the form of inflow or enhancement of assets or decrease of
liabilities resulting in an increase in equity other than those relating to equity
claims from equity participants or equity contributors.
● The basic accounting principle is that income increases the equity of the owners
while loss decreases the owner’s equity.

Examples: R & B Service Business profited from its business as a result of its
operating activities in the amount of P50,000. From the previous example, its
equity amount is P550,000 , but due to income generated, the equity amount of R
& B will now be P600,000. However, if it incurs a loss of P50,000, R & B’s owners’
equity will decrease to P500,000.

Expenses
● The term “expenses” refers to decreases in economic benefits during the
accounting period in the form of outflow or depletion of assets or incurrence of
liabilities that result in decreases in equity other than those relating to equity
claims from equity participants or equity contributors.
 ● The basic accounting principle is that expenses decrease the equity of the owners.

Examples: rent expense, salaries expense, supplies expense, etc.

NOTE: Income and expenses – relate to a reporting entity’s financial performance (shown
in the Statement of Comprehensive Income or Income Statement).

ACCOUNTING EQUATION

The most basic tool of accounting is the accounting equation. This equation
presents the resources controlled by the enterprise, the present obligation of the
enterprise, and the residual interest in the assets as shown in this model.

Figure 1.3 Basic Accounting Model

Account ● The basic summary device of accounting is

the account.
● It is an accounting record in
which the effects of similar
business transactions are
grouped or classified.
● It records the increases or
decreases of specific asset, liability,
owner’s equity, revenue and
expense.
● The account is separately labeled
with a specific name to identify
one element from the other.
● The name designated to the
account is called account title. Ex.
Cash, Accounts Receivable, Office
Supplies, Land, Accounts Payable,
Notes Payable, Service Income,
Salaries Expense, Rent Expense,
etc.
● The account titles used to record
accounting transactions for a
 particular business should be of several accounts which describe the
uniformly listed and arranged related transactions and events as
chronologically in a chart called Chart provided by the source
of Accounts. documents.
● Each accounting element is composed

Books of Accounts
The books of accounts commonly used in recording economic transactions and
events are as follows:
 General Journal – called as the “book of original entry”, is an accounting record
that is used to initially record business transactions known as journal entry.

General Ledger – called as the “book ⁰of final entry” where the accounts and their
related amounts previously recorded in the journal are posted and summarized
periodically.

DOUBLE-ENTRY SYSTEM

The double-entry system of accounting is based on the dual aspect concept

that for every transaction, there would always be a two-sided effect to the extent of the
same amount as recorded in the accounting books. It shows that for every “value
received”, there is a corresponding “value parted with”. In accounting, value received
is the debit and value parted with is the credit.

This system is the basis of modern accounting theory. It is known as the most
acceptable accounting system in recording accountable transactions due to the
following reasons:
1. It results in more accurate accounting records and financial reports.
2. It allows a more convenient means of recording business transactions and events.
3. It provides numerous ways to safeguard and check errors and
misstatements committed.

In analyzing transactions, the accounting equation is used where the rules of

debits and credits apply. Business transactions are recorded with a debit entry (value
received) and a credit entry (value parted with), to show the dual effects of each event.
The recording process requires that the value of debits must equal the value of credits
for each transaction entry or simply put, both debits and credits are in balance.

Debit (Dr.) The place of debit is the left-hand side of the accounting equation therefore an
account is debited when it is entered in the left side of the T-Account.
Credit (Cr.) The place of credit is on the right-hand side of the accounting equation
therefore the account is credited when it is entered on the right side.

To better understand the debits and credits, a T-Account is used. It is called such
because it resembles a big letter T, used to summarize and determine account
balances without the need for the formal ledger. The T-Account has three (3) parts: the
account title, the debit and the credit side.
 Figure 1.4 The T-Account

Rules of Debits and Credits

The rules of debits and credits depend on the account type and how increases or
decreases in it are recorded. This increase-decrease effect should be expressed
in the technical parlance of accounting which is to debit and to credit as it affects
all the accounting elements.

A. For the elements of financial position (Assets, Liabilities, Owner’s

Equity), the following rules apply:
● Increases in assets are recorded as debits (left side), while decreases
in assets are recorded as credits (right side).
● Increases in liabilities and owner’s equity are recorded as credits
(right side) decreases are entered as debits (left side)

B. For the elements of financial performance (Income and Expenses), the rules of
debits and credits are based on the relationship of these accounts to owner’s equity.
Income increases owner’s equity and expense decreases owner’s equity.
● Hence, increases in income are recorded as credits (right side) and
decreases are recorded as debits (left side).
● Increases in expenses are recorded as debits (left side) and
decreases are recorded as credits (right side)

Figure 1.5 summarizes the rules of debits and credits. It shows the effects of
transactions to the elements of financial statements in terms of increases and
decreases.
 Figure 1.5 Rules of Debits and Credits
Statement of Financial Position or Balance Sheet Accounts

The Normal Balance of an Account

The normal balance of an account refers to the side of the account, debit or credit, where
increases are recorded.
● Assets, Owner’s withdrawals and Expenses increases on the debit side
therefore the normal balance of these accounts is a debit.
● Liability, Owner’s Capital and Income accounts increases on the credit
side therefore the normal balance of these accounts is a credit.

Accounting Events and Transactions

 An accounting event is an economic occurrence that causes changes in an
entity’s assets, liabilities, and/or equity. It can be an internal event such as the use of
equipment for the production of goods or services or an external event such as the
purchase of raw materials from a supplier. A business transaction is a particular kind
of event that involves the transfer of something of value between two parties such as
purchasing and selling of goods or services and borrowing funds from creditors and that
it can be reliably recorded.
It is beneficial in the recording process that transactions are analyzed relative to
their effects to the different accounting elements rather than the recording involved. We
call this classification approach. All business transactions can be classified into one of
four types namely:

1. Source of Assets (SA). An asset account increases and a corresponding claim

(liabilities or owner’s equity) account increases.
● Examples: Purchase supplies on
account. Sold goods on cash on
delivery basis.

2. Exchange of Assets (EA). One asset account increase and another

asset account decrease.
Example: Acquired equipment for cash.

3. Use of Assets (UA). An asset account decreases and corresponding claims

(liabilities or equity) account decreases.
Examples: Settled accounts payable.
Paid salaries of employees.

4. Exchange of Claims (EC). One claim (liabilities or owner’s equity) account

increases and another claims (liabilities or owner’s equity) account decreases.
Examples: Received utilities bill but did not pay.

Financial Transaction Worksheet

It is a form used to analyze increases and decreases in the assets, liabilities and
owner’s equity. A financial transaction is listed in the worksheet using the appropriate
accounts.
 Table 1 Sample Financial Transaction Worksheet
ASSETS LIABILITIES OWNER’S EQUITY
TRANSACTION Cash Accts. Account Notes Owner’s Owner’s
Receivable s Payable Withdrawal Capital
(Dr) (Dr) Payable (Cr) (Dr) (Cr)
(Cr)
1. Owner invested P50,000 P50,000
P50,000 to the
business
2. Rendered P15,000 15,000
services on credit,
15,000
3.Received P3,000 (3,000)
Meralco bill,
P3,000
4. Borrowed money
from P50,000 P50,000
ACR Bank and
issued
promissory note
P50,000
5. Withdrew cash
for personal use, (30,000) P30,000
P30,000
P70,000 P15,000 P3,000 50,000 P30,000 P62,000
TOTAL P85,000 P53,000 P32,000

Assets P85,000 = Liabilities P53,000 + Owner’s Equity P32,000

Analysis:

Transaction No. 1. The owner invested cash to the business, Cash increases an asset
account and the equity of the business also increases.

Transaction No.2. When the entity renders services on credit, it creates an account
receivable which is an asset account and a revenue account which increases owner’s
equity.

Transaction No. 3. When an electric bill is received, an expense account is created, but
it was not paid, therefore, the incurrence of an expense decreases the owner’s equity
account and increases the liability account due to non – payment.

Transaction No. 4. Borrowings increase the asset account Cash and the Notes Payable
due to issuance of promissory note which is a liability account.

Transaction No.5. The owner withdraws cash for personal use, therefore asset cash
decreases and a withdrawal account is created which is a contra-equity account.
Owner’s equity account has a normal balance of “credit”, the withdrawal account is a
contra account and has a normal balance of “debit”.
TYPICAL ACCOUNT TITLES USED

Statement of Financial Position (briefly discuss)

Assets. As per revised Philippine Accounting Standards (PAS) No. 1, assets should be
classified only in two (2): Current and Non-Current Assets. Assets are considered
current when:

a. it expects to realize, consumes or intends to sell it within the normal operating

cycle of the business
b. it holds the asset primarily for the purpose of trading
c. it expects to realize the asset within twelve (12) months after the reporting period
d. the asset is cash or cash equivalent (as defined in PAS No.7), unless the asset is
restricted from being exchanged or used to settle a liability for at least twelve months
after the reporting period.

Operating Cycle is the time between the acquisition of assets for processing and
their realization in cash or cash equivalents. When the entity’s normal operating
cycle is not clearly identifiable, it is assumed to be twelve (12) months. The entity
uses an accounting period that covers certain accounting functions which can be
either a calendar or fiscal year.

Calendar year means the accounting operations of the business covers one year
from January and ends in December.

Fiscal year or period means any 12-month period covering the accounting
operations of the business.
Example: May 2019 to May 2020 is one fiscal period.

Current Assets
Cash. It refers to any medium of exchange that a bank will accept for deposit at face
value including coins, currency, checks, money orders, bank deposits and drafts.

Cash Equivalents. Per PAS No. 7, these are short-term , highly liquid investments that
are readily convertible to known amount of cash and which are subject to
insignificant risk of changes in value

Notes Receivable. A written pledge that the customer will pay the business a fixed
amount of money on a certain date.

Accounts Receivable. These are claims against customers arising from sale of
services or goods on credit. This type of receivable offers less security than a
promissory note.
Allowance for Uncollectible accounts /Bad debts. A contra-asst account which
provides for possible losses from uncollected accounts receivable. The amount
provided for this is only an estimate.

Inventories. Per PAS No. 2, these are assets (a) which are held for sale in the ordinary
course of business; (b) in the process of production for such sale; or (c) in the
form of materials or supplies to be consumed in the production process or in the
rendering of services.

Prepaid Expenses. These are expenses paid for by the business in advance. It is
classified as an asset because the business avoids having to pay cash in the
future for a specific expense.

Noncurrent Assets
Property, Plant & Equipment. Per PAS No. 16, these are tangible assets that are held
by an enterprise for use in the production or supply of goods or services, or for
rental to others, or for administrative purposes and which are expected to
be used during more than one period.
Examples: Land, Machinery, Equipment, furniture and fixtures.

Accumulated Depreciation. It is a contra-account that contains the sum of the periodic

depreciation charges. The balance from this account is deducted from th cost of
the related asset – equipment or building – to obtain book value.

Intangible Assets: Per PAS No. 38, these are identifiable non-monetary assets without
physical substance held for use in the production or supply of goods or services,
for rental to others, or for administrative purposes.
Examples: Goodwill, patents, copyrights, licenses, franchises, trademarks,
brand names, secret processes, subscription lists and on-competitive
agreements.

Liabilities
Current Liabilities. As per revised PAS No 1, an entity shall classify liability as current
when
a. it expects to settle the liability in its normal operating cycle.
b. it holds the liability primarily for the purpose of trading.
c. the liability is due to be settled within twelve (12) months after the reporting period.
d. the entity does not have an unconditional right to defer settlement of the
liability for at least twelve months after the reporting period.

Accounts Payable. It denotes obligations or debts of the business arising from services
received, merchandise, supplies or property, plant and equipment acquired on
account. It is an “open account” obligation because it is not supported by a
promissory note.
Notes Payable. The treatment is similar to accounts payable however, this account is
supported with a promissory note executed by the debtor in favor of the creditor.

Accrued liabilities. Amounts owed to others for unpaid expenses. This account
includes salaries payable, utilities payable, interest payable and taxes payable.

Unearned Revenues. The business entity receives payment before providing the
customers with goods or services, the amount received is reorder to unearned
revenue account. When the goods or services are provided to the customer, the
unearned revenue account is reduced and income is recognized.

Current Portion of Long-term Debt. These are portion of mortgage notes, bonds and
other long-term indebtedness which are to be paid within one year from the
balance sheet date.

Noncurrent liabilities
Mortgage Payable. This account is used to record long-term debt that is supported or
backed up by a collateral or has pledged certain assets as security to the
creditor.

Bonds Payable. Is a contract between the issuer and the lender specifying the terms
and conditions of repayment and the amount of interest to be charged. It is a
long-term obligation evidenced by certificate of indebtedness. Business obtain
funds to finance acquisition of equipment and other needed assets by issuing
bonds.

Equity. The equity represents what is left to the business after the liabilities are fully
paid.

Capital. This account is used to record the original and additional investments of the
owner of the business. It is increased by the amount of profit earned during the
year or decreased by a loss or by cash or other assets that the owner may
withdraw from the business. This account bears the name of the owner.
Example: if the owner of the business is Mr. Landicho, therefore, the
capital account of the business will be Landicho, Capital.

Withdrawals. When the owner of a business entity withdraws cash or other assets for
personal use, such is recorded in the withdrawal account rather than directly
reducing the owner’s equity account.

Income Summary. Is a temporary account used at the end of accounting period to

close income and expenses.This account shows the profit or loss for the period
before closing to the capital account.

Statement of Comprehensive Income

 Income. Increases in economic benefits during the accounting period in the form of
inflows and enhancement of assets. The definition of income encompasses both
revenue and gains. Though these terms are almost similar,, however, there is a distinct
technical difference between them.

Service Income. Revenues earned by performing services for a customer or client.

Example: accounting services by a CPA, laundry services by a laundry shop.

Sales. Revenues earned as a result of sale of merchandise.

Example: sale of hardware materials by a hardware company
sale of medicines by a pharmaceutical company

Expenses. A decrease in economic benefits during the accounting period as a result of

outflows or depletion of assets.

Cost of Sales. The cost incurred to purchase or produce the products sold to the
customers during the period. It is also known as the cost of goods sold.

Salaries and Wages Expense. All payments that arise from services from workers/
employees in an employee-employer relationship. It includes salaries and wages,
13 month pay, cost of living allowances and other related benefits.
th

Rent Expense. Expense for renting a space, equipment or other asset rental.

Supplies expense. Expense of using supplies like office supplies, in the conduct of
daily business.

Insurance Expense. Portion of premium paid on insurance coverage which has

expired.

Depreciation Expense. That portion of the cost of tangible asset (e.g. buildings and
equipment) allotted or charged to expense during the accounting period. All
tangible assets depreciate except Land.

Uncollectible Accounts or Bad Debts Expense. It is the amount of receivables

estimated to be doubtful of collection and charged to expense during the
accounting period.

The list of accounts mentioned and discussed are typical accounts used in introductory
accounting. As you move to higher accounting subjects, new account titles will be
introduced.

ASSESSMENTS

Exercise No.1
Understanding the Accounting Equation

Case Assets Liabilities Owner’s Equity

1 P ? P 990,000 P500,000
2 110,000 60,000 ?
3 5,180,000 ? 2,180,000
4 ? 225,000 (25%) ?
5 ? ? 560,000 (2/3)
6 671,200 ? 246,000
7 784,000 ? (1/2) ?

Required: Fill-in the amount of the missing element of the Statement of Financial Position

Exercise No. 2

Transaction Analysis

TRANSACTION ASSETS LIABILITIES OWNER’S CLASSIFICATION

EQUITY Of TRANSACTION
1. Purchased equipment on
account.
. Received water bill from
Prime water
. Owner invested cash to the
business
4. Purchased supplies for
cash
5. Paid rent for the month
. Received payment for
services rendered on
account
7. Paid advertising expense
8. Borrowed money from the
bank
9. Settled account in No. 1

10.Rendered services for cash service income

Cash.

Required: Indicate whether the transaction signifies increase (+), decrease (-) or no
effect (0) to the accounting elements and its classification as to source of asset (SA),
exchange of asset (EA), use of asset (UA) or exchange of claims (EC).

Exercise No. 3
Understanding the accounting elements and normal balance of an account
 ACCOUNT TITLE ELEMENT NORMAL BALANCE
1. Prepaid rent expense
2. Service revenue
3. Accrued Income
4. Signage
5. Tuition fee
6. Accrued expense
7. Notes Receivable
8. Unearned Income
9. Machinery
10. Accumulated Depreciation
11. X, Withdrawal
12. Allowance for bad debts

Required: Classify the account titles according to the elements of a financial statement
and indicate whether its normal balance is a debit or a credit.

2. ONLINE QUIZZES (after discussion of the topics)

3. MAJOR EXAMINATION USING GOOGLE CLASSROOM (short answered
questions , multiple choice, true or false)

REFERENCES

Ballada, W.L. (2018). Basic accounting: Made easy. Manila. Domdane Publishers

Aduana, N.L. (2015). Fundamentals of Accounting. Quezon City. C&E Publishing, Inc.

Valencia, E. G. et al (2016). Basic accounting: Concepts, principles, procedures and

applications. Baguio City. Valencia Educational Supply
 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

Module 3
THE ACCOUNTING CYCLE FOR A SERVICE BUSINESS
Week 5 to 8

Introduction
In the preceding module, we studied deeply and gained better understanding of the nature
of the different accounting elements that composed the financial statements. The five (5)
accounting elements where various account titles had been categorized are: assets, liabilities,
equity, income and expense. These accounting elements have relationship in the recording
process and in the preparation of financial statements. Better understanding of their basic
relationship and the underlying premise is a requirement for those who have great desire in
studying the field of accounting.
Basic rule to remember: Every business transaction affects two or more accounting elements.
This basic principle serves as the bedrock of the recording process. Studying Module 3, which is
the Accounting Cycle of a service type of business, we have to emphasize that in understanding
the relationship of the accounting elements, it is better to express it in the form of accounting
equation. The analysis should be made from the point of view of the business and not from the
point of view of the owner.

Learning Objectives:

After studying this module the students should be able to:

1. List and explain in brief the sequential steps in the accounting cycle.
2. Describe the use of the two books of accounts-General Journal and General Ledger and
what purposes it serve.
3. Outline the steps in analyzing transactions and the important role of the source
documents.
4. Develop chart of Accounts and distinguish between permanent or temporary accounts.
5. Analyze the impact of transactions on the accounting elements and specific accounts by
applying the rules of debits and credits.
6. Journalize transactions in proper form using the general journal.
7. Post entries from the general journal to the general ledger.
8. Prepare and explain the worksheet and the various financial reports derived from it.
9. Explain the importance of adjusting entries.
10. Perform the proper procedures in closing of the books.

THE ACCOUNTING CYCLE – SERVICE BUSINESS

Businesses handle voluminous transactions during the year. Some of the transactions are
simple while others appear complicated. In the recording process, transactions are analyzed and

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

recorded, regardless of their complexity, in accordance with the prescribed rules and guidelines,
the GAAP.

Generally Accepted Accounting Principles (GAAP). It refers to a common set of accounting

principles, standards, and procedures which aims to improve the clarity, consistency and
comparability of the communication of financial information. The accounting profession has
developed standards that are generally accepted and universally practiced. These standards
indicate how to report economic events.

Standard Setting Bodies:

Financial Accounting Standards Board (FASB)
Securities and Exchange Commission (SEC)
International Accounting Standards Board (IASB)

Selection of which principles to follow generally relates to trade-offs between relevance

and faithful representation. These are two primary qualities that make accounting information
useful for decision-making. This was clearly discussed in Module 1. The accounting process will
be discussed step by step in this module using accrual accounting.

ACCRUAL ACCOUNTING VERSUS CASH BASIS ACCOUNTING

Accrual Accounting.
 Means revenue and expenses are recognized and recorded when they occur, paid or
unpaid.
 It focuses on anticipated revenue and expenses.
 Revenue is accounted for when it is earned such that when a product or service is
delivered to a customer with future expectation that it will be paid.
 Expenses are recorded despite no cash is being paid out yet for those expenses.
 The accrual method is the most commonly used method of recognizing revenue and
expenses as it portrays a more accurate picture of a company’s health, particularly in the
long term by including accounts payable and accounts receivable.

Cash Basis Accounting.

 Revenue is reported on the income statement only when cash is received, and expenses
are only recorded when cash is paid out.
 Cash method is a more immediate recognition of revenue and expenses and is mostly
used by small businesses or for personal finances for its simplicity.
 Tracking the cash flow of a company is also easier, however it might overstate the health
of the company that is cash-rich but has large sums of accounts payable that could exceed
the cash on the books and the company’s current revenue stream.

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

 An investor might think that the company is making profit but in reality, the company is
losing money.

STEP 1. IDENTIFICATION OF EVENTS TO BE RECORDED

Aim: To analyze information from the source documents for proper recording and
transfer to their respective accounts.
The analyzing stage follows these four basic steps:
1. identify transactions from source documents
2. indicate the accounts affected by the transaction, either assets, liabilities, equity, income
or expenses.
3. ascertain whether each account is increased or decreased by the transaction.
4. using your knowledge of the rules of debits and credits, determine whether to debit or
credit the account to record the increase or decrease

It is also important to note that companies require that accounting records include only
transactions that can be expressed in terms of money and that activities of the entity be kept
separate and distinct from that of its owners and all other economic entities.

Source documents identify and describe transactions and events entering the accounting
process. It is the starting point in the accounting cycle. These original written evidences contain
information about the nature and the amounts of transactions. Common source documents are
sales invoices, cash register tapes, official receipts, bank deposit slips, bank statements, checks,
purchase orders, timecards and statements of account.

Illustration: Both documents were received by Accounting Department from Human Resource
Department.
Which of the two (2) documents is a valid accountable transaction that will merit a journal entry?

Analysis:

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

Source document A is not yet a recordable event since the basis is just a memo from HRD
informing the accounting department that three (3) new sales clerks will be working for the
store. There is no proof that the three newly hired people have actually rendered their services
even if their salary amount is clearly stated.

Source document B is a valid transaction evidenced by the payroll form with names, rate and
period covered of their actual services rendered.
Value received in this transaction is the creation of an expense account, Salaries
Expense; and Value parted with is the obligation of the company to pay the salary, Salaries
Payable.
EXPENSE = LIABILITY
The expense account is increased by P7,500 which is a debit and a corresponding increase of
P7,500 also in the liability account which is a credit.

STEP 2. TRANSACTIONS ARE RECORDED IN THE JOURNAL

Aim: To record the economic events that took place within the firm in a journal known as
“general journal” using the rules of debits and credits.

The General Journal. The journal is the simplest form of journal which reflects the
chronological record of the entity’s transaction in terms of debits and credits. Each transaction is
initially recorded in the journal rather than the ledger. The journal is considered the book of
original entry.

Format. The standard contents of the general journal are as follows:

1. Date. The year and month are not rewritten for every entry unless the year or month
changes or a new page of the book is needed.

2. Account titles and explanation. The account to be debited is entered at the extreme left
of the first line while the account to be credited is entered slightly indented on the next line. A
brief description of the transaction or explanation is usually made on the line below the credit
entry. Generally, SKIP a line after each entry.

3. P.R. (posting reference) The column for P.R. will be used when the entries are posted,
that is, until the amounts are transferred to the related leger accounts. The posting process will be
described later.

4. Debit. The debit amount for each account is entered into this column.

5. Credit. The credit amount for each account is entered into this column.

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

For our illustration in Step 1, the transaction is “to record payroll covering the period July 1-15
for Salesclerks A, B and C in the amount of P7,500.

Simple and Compound Entry

The example given above is a simple entry because only two accounts are affected-one account
is debited and one account is credited. However, there are transactions that will require the use of
more than two accounts. This is known as compound entry wherein one or more debit account or
one or more credit account is required.

Example of Compound Entry Transaction

On July 30, 2019, MJ Car Rental Agency, purchased a Machine from Hade Trading for
P150,000 on terms: 25% down payment and the balance payable after 30 days,

It is clearly stated in the example above that the transaction requires more than one
credits, therefore it is a compound entry. The entries follow the basic rule that total Debits =
total Credits. No matter how
many debits or how many credits a transaction has the amount of total debits must always equal
to the amount of total credits.

STEP 3. JOURNAL ENTRIES ARE POSTED TO THE LEDGER

Aim: To transfer the information from the journal to the ledger for classification.

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

The General Ledger. A grouping of accounts with corresponding account codes. It is the
reference book of the accounting system and is used to classify and summarize transactions, and
to prepare data for basic financial statements. All firms have general ledger as shown in the
sample below:

The accounts in the general ledger are classified into two general groups:
1. Balance Sheet accounts (assets, liabilities and owner’s equity) are classified as
permanent or real accounts.
2. Income Statement accounts (income and expenses) are classified as temporary or
nominal accounts and is used to gather information for a particular accounting period. At the
end of the period, the balances of these accounts are closed to Income Summary account whose
balance is transferred to a permanent owner’s equity, the capital account. Each account has its
own record in the ledger. Compared to a journal, a ledger organizes information by the
account.

Posting. The process of transferring the amounts from the general journal to the appropriate
accounts in the ledger. Debits in the journal are posted as debits in the ledger, and credits in the
journal as credits in the ledger as shown in this figure:

Figure 2.2 Posting Process

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

CHART OF ACCOUNTS

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

An entity has its own listing of accounts, follows its own format or coding,
however they are the same in respect to the organization of the elements of the financial
statements.
 It is an index of all financial accounts in the general ledger of a company.
 It is an organizational tool that provides a listing of the accounts used in business to
define each class of items for which money or its equivalent is spent or received.
 The caption or header are coded by an account type to permit indexing and cross-
referencing.
 The list is typically arranged in the order of the appearance of accounts in the financial
statements: assets, liabilities’ owner’s equity, income and expenses.
Figure 2.3

The chart of accounts depends on the nature or type of one’s business. It can differ and be
tailored to reflect a company’s operations however, it must always respect the guidelines set out
by FASB and GAAP. It is of crucial importance that the same chart of accounts are kept year to
year to ensure accurate comparison of the company’s finances.

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

STEP 4. PREPARATION OF THE TRIAL BALANCE

Aim: To prove the arithmetical accuracy of bookkeeping and the ledgers.

Trial Balance. Is a type of financial report that is generated at the end of an accounting period
prior to the creation of the company’s financial statements. It shows that the total balances of the
debit column is equal to the total balances of the credit column. It provides a good check on the
accuracy of the work done in preparing the ledger accounts but equality of both debits and
credits is not a guarantee of the absence of errors.

Example: A receipt of P5,000 Cash was erroneously recorded by the bookkeeper as a

debit to Accounts Receivable instead of using Cash account. To this effect, the Trial Balance
would still be equal because both have debit normal balances. This should be corrected since the
Cash account will be understated by such amount and Accounts Receivable will be overstated.

Below is a proper presentation of a Trial Balance done after accomplishing Step 1 to 3.

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

CONTRA-ACCOUNTS
An account with a balance that is the opposite of the normal balance for that account
classification. The use of contra account allows an entity to report the original amount and the
reduction to the account to arrive at the carrying value or net realizable value.

Examples of Common Contra Accounts:

1. Allowance for Uncollectible/Bad Debts/Doubtful Accounts- is a contra asset account related to
Accounts Receivable. The receivable is an asset with a debit normal balance, therefore the
contra-asset Allowance has
a credit normal balance.

2. Accumulated Depreciation- is a contra account related to any asset under property, plant and
equipment. All assets under this category are subject to depreciation except Land. Since the
normal balance of the related asset is debit, the normal balance of Accumulated Depreciation is
credit.

Depreciation. A reduction in value of an asset with the passage of time, due in particular
to wear and tear.

3. Withdrawal/ or Drawing Account-is a contra-equity account, a reduction in the capital

account. Equity has a normal balance of credit and Withdrawal’s normal balance is the opposite
which is debit.

Other contra-accounts not discussed here are merchandising business accounts.

STEP 5. PREPARATION OF THE WORKSHEET including ADJUSTING ENTRIES

Aim: To verify accuracy of the accounting information and adjust necessary accounts to
provide an up-to-date financial reports.

What is a Worksheet?
It is a multiple-column device or a computer spreadsheet, used for easy preparation of the
financial statements done in a systematic process. All necessary accounting information are
properly presented and structured in the worksheet. Preparation is being done at the end of
accounting period prior to preparation of financial statements. Necessary adjusting entries are
also reflected in the worksheet.

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

Figure 2.5 The Worksheet

MJ Car Rental Agency

Worksheet
December 31, 2018

Figure 2.5 is a sample worksheet prepared from the sample Trial Balance of MJ Car Rental
Agency. The columns for Adjustments and Adjusted Trial Balance is not yet filled-up. After
discussion of the topic Adjusting Entries, then students will be familiar with the format and the
extension of the accounts to their respective financial statements. The use of the worksheet
makes the preparation of financial reports easy for
accountants as it is prepared in a manner that all accounts are properly classified.

ADJUSTING ENTRIES
In adjusting the accounts, there are important dates to take into consideration, the date of
the transaction or the journal entry date and the end of accounting period of the business for
accurate computation of the amount to be adjusted.

Why is there a need for adjustments?

 Adjusting entries are adjustments used to bring the assets, liabilities, revenue and
expenses up-to date at the end of accounting period.

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

 Adjusting entry can never be equated with correcting entry because the journal entry
made before adjustment is correct, only at end of accounting period the balances may
have been affected because of the happening of some events thus the need for
adjustments. In correcting entry, there is a presumption that error has already been
committed at the time of journalizing.
 The need to provide timely and accurate information, the economic life of the business
are subdivided into artificial time periods known as periodicity concept. Business need
periodic reports to assess the financial condition of the entity and this is the best way to
achieve that without going through the process of liquidation. It interacts with recognition
and derecognition principles to underlie the use of accrual accounting.
 Adjusting entries assigned revenues to the period in which they are earned, and expenses
are assigned to the period in which they are incurred.
 Adjusting entries are needed to measure properly the profit for the period and to bring
related asset and liability accounts to correct balances for an accurate financial reporting
purpose.
 Without adjusting entries, the financial statements may not fairly show the liquidity and
solvency of the business in the statement of financial position, same with its profitability
as reflected in the statement of income.

What are the accounts for adjustments?

DEFERRALS AND ACCRUALS

Adjusting entry is the answer to those transactions that covers more than one accounting
period as a result of the use of accrual accounting. Each adjusting entry either affects a balance
sheet account and an income statement account.

Deferral. Is the postponement of the recognition of an expense already paid but not yet incurred,
or of revenue already collected but not yet earned. Deferrals are needed in two
cases:
1. Allocating assets to expense to reflect expenses incurred during
the accounting period.
Example: prepaid insurance expense, rent expense, supplies and depreciation.

2. Allocating revenues received in advance to revenue to reflect revenues earned during

the accounting period.
Example: subscription, unearned revenue

Accrual. Is the recognition of an expense already incurred but not yet paid, or revenue earned
but not yet collected. Accrual will be required in two cases:

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

1. Expenses to be accrued to reflect expenses incurred during the accounting period that are
unpaid and unrecorded.
2. Accruing revenues to reflect revenues earned during the accounting period that are
uncollected and unrecorded.

I. ADJUSTMENTS FOR DEFERRALS:

A. PREPAID EXPENSES
This includes expenses that are paid in advance of its use such in the case of prepaid
insurance prepaid supplies, prepaid rent, prepaid advertising, prepaid interest expense. In
adjusting this account two methods can be used, asset method or the expense method.

Illustration: On September 1, 2018, MJ Car Rental Agency paid office rent for one year
amounting to P120,000. The business follows the calendar year as the end of the accounting
period.

Analysis:
The payment of rent will take effect from Sept. 1, 2018 until Sept. 1, 2019 (one year) as
shown in this timeline:

Therefore, the portion of expense that has expired is only for four months (Sept 1 to Dec 1) or a
total amount of P40,000 ( P120,000/12 = 10,000 per mo. x 4 months)

Using Asset Method the adjustments would be:

Dec. 31, 2018 Rent Expense P40,000

Prepaid Rent Expense P40,000

Using Expense Method, the adjustments would be:

Dec. 31, 2018 Prepaid Rent Expense 80,000
Rent Expense 80,000

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

At the end of accounting period, the Prepaid Rent account balance have been adjusted to an
amount of P80,000 which represents the unused portion, which is the remaining 8 months (Jan 1
to Aug. 1) and Rent Expense of P40,000 was recognized, representing the used portion of 4
months (Sept 1 to Dec 1).

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

To be able to adjust, it is very important to know the original entry of the transaction. Same
adjusting process applies to Prepaid Insurance Expense.

B. SUPPLIES ADJUSTMENT
Analyzing transaction for supplies requires adjustments pertaining to consumption.

Illustration: On July 1, 2018, MJ Car Rental Agency purchased supplies amounting to P5,000
on credit. As of December 31, 2018, the end of accounting period, after actual inventory count of
supplies, it revealed a balance of P2,000.

Analysis:
The book balance of Supplies account decreased by P3,000. The original entry, when the
supplies were purchased was posted to the ledger as follows:

It means there is unrecorded consumption as the physical inventory count done at the
end of accounting period resulted to only P2,000.

Adjusting Entry

12/31/18 Supplies expense P3,000

Supplies P3,000

After posting the adjustment, ledger would now appear like this:

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

The asset account Supplies now reflect the adjusted amount of P2,000 which is the amount
derived from the actual count and the amount of supplies consumed during the accounting period
is reflected as P3,000 in the Supplies Expense account..

C. UNEARNED REVENUES
 Unearned revenues are advances made by the customers awaiting future services as in the
case of customers making advance payment for services.
 As of the date of receipt, the amount still remains unearned because the performance of
services have not been rendered yet.
 It is treated as liability account for the reason that the entity still owes from the customer
the services covered by the payment.
 Accounting principles dictates that only income realized during the period shall be
recognized hence unearned revenues is a pre-collected payment subject to realization of
services in the future.
 Two methods can be used to record unearned revenue transactions: Liability method and
Income method

Examples of Unearned Revenues:

Commission income collected in advance
Interest income collected in advance
Rent income collected in advance
Advertising income collected in advance

Illustration: On Oct. 15, 2018 MJ Car Rental Agency received P150,000 from Customer A as
rental payment for five (5) vans to be used by his foreign guests for five months starting next
month. The company uses a calendar period.

Analysis:
The transaction implies that the amount of P150,000 is an advance payment by Customer
A for the use of the MJ vans for a period of five months. This transaction gives rise to a liability
to provide Customer “A” with the needed vans which will take effect on November 1, 2018 and
ends on March 2019.

Nov Dec 2018 Jan 2019 Feb Mar

P30,000 P30,000 P30,000 P30,000 P30,000

Looking at the table, the amount of the contract or agreement is P150,000 for five months so
that means P30,000 per month (150,000/5mos =P30,000 per month). At the end of accounting
period December 31, two months income must already been realized.

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 ACC 101 FINANCIAL ACCOUNTING AND REPORTING 1

For adjustment purposes, a comparative original entry is created:

Date Liability Method Income Method

2018 Cash P150,000 Cash P150,000
Oct. 15 Unearned Rent Revenue 150,000 Rent Income 150,000

Adjusting Entry using both methods would be:

Date Liability Method Income Method

2018 Unearned Rent Income 60,000 Rent Income 90,000
Dec. 31 Rent Income 60,000 Unearned Rent 90,000

From the ledger, this is how we derived our balance:

After posting the adjusting entries, Rent Income account has a balance of P60,000 and the
Unearned rent Income account has an adjusted balance of P90,000.

D. PROVISION FOR DEPRECIATION

The concept of depreciation applies to assets or resources of the business that are tangible
and its useful life extends beyond one year. Most assets subject to depreciation are those
classified under property, plant and equipment whose value continuously decreases as they are
used in the day-to-day operation of the business. Depreciation does not apply to Land which in
most cases, the value increases as time passed by.

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Depreciation. Is a reduction in value of the asset because of the passage of time or due to wear
and tear. It is classified as Expense.

Example of common depreciable assets: Building, Machinery, Furniture and Fixtures,

Office Equipment and Store Equipment

THREE IMPORTANT ELEMENTS

Acquisition Cost. Refers to the purchase price of the asset or the cash paid to acquire it. It
includes all incidental expenses necessary for the acquisition and in making the asset ready for
use such as cost of test and trial run test, carrying costs, etc. added to the purchase price.

Salvage Value. Refers to the value of the asset at the point of disposal. It is the estimated amount
that the business will receive upon the disposal of the asset. Depreciable assets do not stay in
business forever, so when they are no longer productive, they are usually disposed. It is the
product of estimates based on professional judgement. Other terms used are trade-in value,
residual value, scrap value.

Estimated Useful Life. Refers to the period wherein depreciable assets are productive. The
useful life of depreciable assets is influenced by some factors such as technology, advancement,
obsolescence, number of units produced or number of service hours.

METHODS OF COMPUTING DEPRECIATION

There are various methods to compute depreciation such as:
 Straight-line
 Sum-of-year’s digit
 Declining balance
 Double declining balance
 Output method
 Retirement method
 Replacement method

For this module, we will only consider using the straight-line method. Other methods
will be discussed lengthily in higher accounting. The formula for straight-line is:

Cost – Salvage Value

Annual Depreciation =
Estimated Useful Life

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The pro-forma entry to record depreciation is

Depreciation Expense – fixed assets xxxx

Accumulated Depreciation – fixed assets xxxx

OTHER TERMS RELATED TO DEPRECIATION

Depreciable Cost. Is equal to the difference between cost and salvage value.

Accumulated depreciation.is the sum of depreciation in direct relation with the expired life of
the asset.

Book Value. The difference between cost and accumulated depreciation. It is sometimes called
the carrying value of the asset.

Illustration: Assuming MJ Car Rental Agency purchased set of computers for P95,000 on
terms, with salvage value of P5,000 on November 1, 2018. It is estimated to have a useful life of
6 years. Compute for the depreciation cost of the asset at the end of accounting period and
prepare the entry to adjust the books.

GIVEN: Cost P95,000

Salvage Value 5,000
Estimated useful life 6 years

Annual Depreciation = Cost – Salvage Value

Estimated Useful Life

= P95,000 – 5000
6 years
= P 90,000
6
= P15,000
Analysis

The amount of P15,000 is the annual depreciation rate which will remain the same every
year but the accumulated depreciation increases every time the life of the asset expires. From the
time the computers were purchased in November to the end of accounting period, the asset
already depreciates for two months. This amount will be charged to depreciation expense
computed as :

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Annual Depreciation = P15,000/12 months = P1250 per month

Depreciation Expense = P1,250 x 2 months =P2,500

Adjusting Entry

12/31/18 Depreciation Expense-Computers P2,500

Accumulated Depreciation-Computers P2,500

II. ADJUSTMENTS FOR ACCRUALS

Accruals
Adjustments help the entity avoid the impractical preparation of hourly or daily journal
entries just to accrue expenses. It updates the accounting values by recognizing expired
transactions that remained unrecorded.

A. ACCRUED EXPENSES
Accrued expenses are expenses already incurred before payment is made as of cut-off
date such as salaries, interest, utilities (electricity, water and telecommunications) and taxes.
According to expense recognition principle, expenses must be recognized in the books of
accounts at the time of its incurrence and not at the time of payment.

Pro-forma adjusting entry is

Expenses xxxx
Accrued Expense or Expense Payable xxxx

Illustration: On December 30, 2018, MJ Car Rental Agency hired a daily wage worker for the
maintenance of the office. MJ follows the calendar year as the accounting period. The daily wage
of the worker is P350 or a weekly salary of P2,100 for six days except Sunday. MJ salary scheme
is weekly and pays every Saturday. Assume that December 30, 2018 falls on Monday. This
would imply that December 31, 2018 falls on Tuesday which is the end of accounting period.

Analysis:
Starting December 30, 2018 salaries expense are incurred daily and the cut-off date of
accounting records is December 31, 2018 while payment of salary on a weekly basis is on
January 4, 2019. The unpaid salary expense is for two days as of end of accounting period
equivalent to P700. Though the scheduled payment is on January 4, 2019, the two days salary
expense should be recognized because it has been incurred already.

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Adjusting entry

12/31/2018 Salaries Expense P 700

Salaries Payable or Accrued Salaries P700

B. ACCRUED INCOME
Accrual of income is income already earned but not yet collected or received. The
business already done with services but payment of revenue is received in future date. Similar to
the recognition principle of expenses, income must also be recognized in the period earned and
not at the time of collection.

Pro-forma adjusting entry

Accrued Receivable or Accrued Income xxxx
Service Revenue xxxx

NOTE: The account titles for accrual and income should be clearly identified in the adjusting
entry.

Illustration:

On December 20, 2018 MJ Car Rental Agency received a contract for the exclusive use
of its two drivers to assist the foreign guests of a well-respected client for three months. MJ will
be paid P24,000 per month for a period of three months. The payment will be made every 20th of
the month.

Analysis:
The collection of rental payment of P24,000 will be every 20th of the month, it means the
first collection will be on January 20, 2019. As of Dec. 31, 2018, the cut-off date, MJ already
realized an income for 10 days. Income must be recognized at the time the income is earned paid
or unpaid, so an adjusting entry is needed to reflect this.

Adjusting entry:

12/31/2018 Accrued Rental Income P8,000

Rental Income P8,000
(P24,000/30 days x 10 days)

C. ACCRUAL FOR UNCOLLECTIBLES ACCOUNTS

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Businesses normally have credit policy in order to generate more revenues. This
policy allows customers to purchase goods or services on terms agreed upon. However, not all
of the credit sales are 100% collectibles within the reasonable period. Experience dictates that
credits are not totally collected due to the following reasons:
 Debtor losses his capacity to pay
 Customer is not willing to pay
 Customer cannot be located anymore
 Customer dies

In this case, the revenue that has been recognized earlier was already lost because of non-
payment. The service revenue should be adjusted by charging a small portion to doubtful
accounts or uncollectible accounts. Mostly the amount charged against doubtful or uncollectible
account is estimated based on the professional judgement of the management and business
experience.

Pro-forma entry

Doubtful Accounts or Uncollectible accounts xxxx

Allowance for Doubtful or Uncollectible accounts xxxx

Basis of Estimating Doubtful Accounts

Doubtful accounts are computed based on the following:
 Percent of credit sales
 Percent of receivable balance
 Based on aging of receivables

Illustration: Percent of Credit Sales or service income

MJ Car Rental Agency provided the following ledger accounts as of December 31, 2018:
Total Credit Sales or Service Income P3,500,000
Accounts Receivable 2,100,000
Allowance for uncollectible accounts per ledger 50,000

The business estimated that uncollectible accounts at the end of the current year are 5% of
credit service income.

Required: 1. Compute the doubtful account expense

2. Prepare the adjusting entry.

Credit service income P3,500,000

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Multiplied by uncollectible accounts rate 5%

Uncollectible account expense 175,000

Adjusting Entry

12/31/2018 Uncollectible Accounts Expense P175,000

Allowance for Uncollectible Accounts P175,000

Illustration: Percent of Accounts Receivable

The same information will be used to illustrate this concept:

MJ Car Rental Agency revealed the following information from its ledger accounts as at
December 31, 2018
as follows:

Credit sales or Service income P3,500,000

Accounts Receivable 2,100,000
Allowance for Uncollectible Accounts 50,000

The business estimated that uncollectible accounts at the end of the current year are 5% of
credit service income.

Required: 1. Compute the uncollectible accounts expense.

2. Prepare the adjusting entry.

Accounts Receivable P 2,100,000

Multiplied by Uncollectible accounts rate 5%
Required Allowance Uncollectible Account Expense 105,000
Less: Allowance per ledger 50,000
Uncollectible account expense 55,000

Adjusting Entry

12/31/2018 Uncollectible Accounts Expense P 55,000

Allowance for Uncollectible Accounts P55,000

Net Realizable Value. Refers to the value of receivable after deducting the allowance for
uncollectible accounts shown as:

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Accounts Receivable P2,100,000

Less: Allowance for doubtful accounts 105,000
Net Realizable value P1,995,000

The most common method to compute for allowance for uncollectible accounts are percent of
credit sales or percent of receivables, aging of receivables will be discussed in higher
accounting.

STEP 6. POSTING OF THE ADJUSTING ENTRIES TO THE LEDGER AND TO THE

WORKSHEET
Aim: To communicate to interested parties accounting information for decision-making.

Financial statements are the final product of the accounting process. It usually follows
after the worksheet process is complete. It is the very purpose of the accounting system.

The complete set of Financial Statements are:

1. Statement of Comprehensive Income
2. Statement of Financial Position
3. Statement of Changes in Equity
4. Statement of Cash Flows

In the preparation of the financial statements, the ultimate guide is the Worksheet. All the
accounting information from the worksheet are merely transferred to the Statement of
Comprehensive Income and Statement of Financial Position. The first three financial reports will
be discussed in this module while the Statement of Cash flows in Module 4.

The same worksheet of MJ Car Rental Agency will be used to produce a complete set of
financial statements. Additional data for adjustments will be provided for presentation purposes
and to complete the columns.

Figure 2.6 Worksheet with Adjustments

MJ Car Rental Agency Worksheet

December 31, 2018

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As of December 31, 2018, assume the following data for adjustments :

1. The actual count of Supplies on hand is P2,000 only.
2. Additional five (2) months of insurance has already expired.
3. Rent expense will be adjusted to P15,000.
4. Additional 2% will be charged as depreciation expense to Vehicles and Equipment
5. The estimated allowance for uncollectible accounts will be adjusted to 2% of accounts
receivable

Adjusting Entries as of December 31, 2018

1. Supplies Expense P 3,000

Supplies P3,000
To adjust supplies account to correct balance.

2. Insurance Expense 8,000

Prepaid Insurance 8,000
To adjust the insurance expense acct.
(P48,000/12= 4,000 per month)
3. Rent Expense 5,000
Prepaid rent 5,000
To adjust rent expense to P15,000

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4. Depreciation Expense-Vehicles 36,000

Accumulated depreciation-Vehicles 36,000
To adjust depreciation expense by 2%

Depreciation Expense -Equipment 1,600

Accumulated depreciation- Equipment 1,600

5. Uncollectible Accounts 1,000

Allowance for uncollectible accounts 1,000
(A/R = 225,000 x 2% = 4,500-3,500)
To adjust allowance for uncollectible
Accounts to 2% of A/R)

After posting the adjusting entries to the Worksheet, the next step is the preparation of Financial
Statements.

STEP 7. PREPARATION OF THE FINANCIAL STATEMENTS

A. THE STATEMENT OF COMPREHENSIVE INCOME

It is a statement showing the performance of the business for a given period of time. It
summarizes the revenues earned and expenses incurred for that period and communicates to the
users its profitability status for a one-year operation. If the revenue exceeds the expenses of the
business, then it is a Profit, vice-versa, then the result is a Loss for the business. A
comprehensive income statement includes other line items discussed only in higher accounting
subjects. For this module, our discussion will focus mainly on the results of operation of MJ Car
Rental Agency, whose data were taken from the accompanying worksheet.

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Figure 2.7 Statement of Comprehensive Income

MJ Car Rental Agency

Income Statement
For the year ended December 31, 2018

Revenues
Rental Revenue P360,000

Less: Operating Expenses P 12,000

Insurance 15,000
Expense 15,000
Gasoline & oil 3,000
Rent Expense 30,000
Repairs & maintenance 2,000
Salaries Expense 96,000
Miscellaneous Expense 11,600
Depreciation Exp- 4,500
Vehicles 18,000
Depreciation Exp-Equipment 3,000
Uncollectible Accounts 210,100
Utilities Expense
Supplies Expense P 149,900
Total Operating Expenses

Net Operating Income

The net operating income of MJ Car Rental Agency of P149,900 is tax inclusive. If the
applicable income tax (NIRC) rate will be deducted, then the next amount derived is the Net
Income.

B. THE STATEMENT OF FINANCIAL POSITION

It is a statement that measures the financial position of the business in terms of Assets,
Liabilities and Owner’s Equity. It shows the resources(Assets) employed by the business first,
followed by the claim of the creditors (Liabilities) against the assets, and then the claim of the
owner called Capital. The Statement of Financial Position otherwise known as “Balance Sheet”
indicates liquidity and solvency status of the business. The items in this statement are measured
and presented in conformity with the requirements of PAS and PFRS. It is also presented in two
formats: Report Form (vertical) or Account Form (horizontal). For our example we follow the
most commonly used format, the account format.

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Liquidity. Refers to the ability of the business to settle its currently maturing obligations.

Solvency. Refers to the ability of the business to pay its non-current liabilities and still remain
stable.

Figure 2.8 The Statement of Financial Position

C. THE STATEMENT OF CHANGES IN EQUITY

It presents the different elements that affect the equity of the owners during a particular
period. It also shows the changes in the equity structure of the entity as it increases when at a
profit and decreases when the business posted a loss, or when additional investments and
temporary withdrawals are made by the owners.

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Figure 2.9 Statement of Changes in Owner’s Equity

MJ Car Rental Agency

Statement of Changes in Owner’s Equity
For the Year Ended December 31, 2018

MJ, Capital Beginning P 1,000,000

Add: Additional Investment 300,000
Net Income 149,900

Total 1,449,900

Less: Withdrawal 30,000

MJ, Capital Ending P 1,419,900

STEP 8. CLOSING JOURNAL ENTRIES

Aim: To describe all the procedures in closing the books, close all temporary accounts
and transfer profit or loss to owner’s capital account.

Closing Entries. Are journal entries that close balances of nominal or temporary accounts using
Income Summary account. The income summary account is ultimately closed to a real account
which is the Capital. Closing entries make the balances of all temporary accounts equal to zero
in preparation for the next accounting period. To close means to debit all credits and credit all
debits. As we go on with the closing procedures, we will be closing the books of MJ Car Rental
Agency.

STEPS TO FOLLOW:

Step 1. Close the revenue or income

Rental Revenue P360,000

Income Summary P360,000

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Step 2. Close the cost and expense accounts

Income Summary 210,100

Insurance expense 12,000
Gasoline and Oil 15,000
Rent Expense 15,000
Repairs and Maintenance 3,000
Salaries Expense 30,000
Miscellaneous Expense 2,000
Depreciation Expense-Vehicles 96,000
Depreciation Expense-Equipment 11,600
Uncollectible Accounts 4,500
Utilities Expense 18,000
Supplies Expense 3,000

Step 3. Close the Income Summary to Capital Account

Income Summary 149,900

MJ, Capital 149,900

Step 4. Close the Drawing account to Capital account

MJ, Capital 30,000

MJ, Withdrawal 30,000

After the closing entries are correctly posted to their respective accounts in the ledger,
these accounts will have zero balances. Before moving on to the next step of the accounting
cycle, important guidelines must be remembered:
 Only temporary or nominal accounts are closed ; permanent or real
accounts are not.
 Closing entries are recorded in the general journal.
 Closing entries are posted to the general ledger.
 Closing entries are made at the end of accounting period only.

STEP 9. PREPARATION OF POST-CLOSING TRIAL BALANCE

Aim: To determine the accuracy of the adjusting and closing entries and to ensure that
the ledger balances for the next accounting period are equal.

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Post-closing Trial Balance. Is a trial balance after the preparation of the closing entries. It
contains the ending balances of all real or permanent accounts as reflected in the Statement of
Financial Position. It is also called a balance sheet in a trial balance form.

These balances will be the beginning balances of the ledger next accounting period.

STEP 10. REVERSING ENTRIES (OPTIONAL)

Aim: To facilitate the normal recording of transactions in the succeeding accounting
period.

Reversing Entries: are entries that reversed the adjusting entries. They are prepared at the
beginning of the next accounting period, the reason why reversing entries sometimes called the
first step in the next accounting cycle. They are the first entries recorded in the general journal of
the next accounting period. Although, reversing entries affect only adjusting entries, but not all
adjusting entries are reversed.

What adjusting entries are reversed?

1. Accrual of income

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2. Accrual of expenses
3. prepayment using expense method
4. unearned income using income method.

All remaining adjusting entries need not be reversed such as: prepayment using asset
method, unearned revenue using liability method, depreciation and uncollectible accounts.

Figure 2.11 Relationship of Adjusting and Reversing Entries

Nature of Adjustment Adjusting Entries Reversing Entries

Accrued Income Accrued Receivable xx Income account xx
Income account xx Accrued
Receivable xx
Accrued Expense Expense account xx Accrued exp./payable xx
Accrued exp or payable xx Expense
account xx
Prepayment-expense Prepaid expense xx Expense account xx
method Expense account xx Prepaid
expense xx
Unearned income-income Income account xx Unearned income xx
method Unearned income xx Income
account xx

All remaining adjusting entries need not be reversed such as: prepayment using asset
method, unearned revenue using liability method, depreciation and uncollectible accounts.

ASSESSMENTS:

I. Exercises
Exercise 1 . ANALYZING AND JOURNALIZING TRANSACTIONS:

Car Splash N’ Wash is a high-end car wash business owned by Jung Suk, a Filipino-Korean.

During the one month-period of its operation, the following transactions took place:

1. Jung Suk withdrew from his personal bank account P400,000 and deposited the money to
the account of Car Splash N’ Wash as initial investment.
2. Purchased spray equipment on account, P60,000.
3. Paid 5 months rent for the site of his business at P10,000 per month.
4. Bought one TV monitor worth P30,000 for the reception and waiting area of customers.

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5. Rendered full service for the luxury vehicles of three(3) celebrities and received
P12,000.
6. Partially settled account in No. 2, P30,000.
7. Received P75,000 and signed a contract agreement for a bus company for services to be
rendered in the future.
8. Paid half month salaries of his shop personnel at P20,000 per month.
9. Rendered services to a friend’s vehicles on account P6,000.
10. Brought to the business his personal furniture for use in the waiting area valued at
P35,000.
11. Received bill for utilities P5,000.
12. Cash collected from walk-in customers P15,000.
13. Purchased supplies for the shop, P10,000.
14. Received and paid advertising bill to advertise the opening of the business,P8,000.
15. Purchased one-year insurance for the business P24,000.

Required: 1. Prepare chart of accounts for Car Splash N’ Wash.

2. Prepare proper journal entry for each transaction.

Exercise 2. TRUE OR FALSE QUESTIONS

1. A cash acquisition of a computer for the business will cause total assets to increase and
should be recorded as a debit.
2. A debit entry always increases the balance of an account.
3. Cost is the exchange price associated with a business transaction at the time the
transaction is recognized.
4. Accounts that appear on the left side of the accounting equation usually have credit
balances.
5. Payment of a liability will not affect total assets but will cause total liabilities to
decrease.
6. Expenses cause a decrease in owner’s equity and are recorded as debits.
7. A debit entry has an unfavorable effect on an account.
8. A credit means an account has been increased.
9. When a company receives a product previously ordered, a recordable event has
occurred.
10. When revenue has been earned, no entry is recorded until the related cash has been
recorded.
11. Owner’s withdrawal is classified as a reduction of assets and therefore considered as
expense.
12. Depreciation is an expense account that involves cash.
13. Losses decreases the Capital account and are recorded as debits.

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14. All expenses represent cash paid for goods sold or services rendered in the process of
generating revenue.
15. The double-entry system is possible because all business transactions have two equal and
opposite aspects.

Exercise 3. MULTIPLE CHOICE QUESTIONS (ADJUSTMENTS)

1. Marie issued a P280,000 ,180-day note bearing an interest of 24% A on Oct. 1,
2007. Payment of the principal plus interest will be on maturity date. For the fiscal year
ending February, 2008, what will be the adjusting entry on the books of Marie?
a. Dr. Interest Receivable P28,000 Cr. Interest Income P 28,000
b. Dr. Interest Expense 28,000 Cr. Interest Payable 28,000
c. Dr. Interest Receivable 67,200 Cr. Interest Income 67,200
d. Dr. Interest Expense 67,200 Cr. Interest Payable 67,200

2. Kraft Co. paid a three-year insurance premium for 46,800 on February 15, 2002. The
bookkeeper uses an expense method to record this transaction. What will be the adjusting entry if
accounting period ends Sept. 30, 2002.
a. Dr. Insurance Expense 9,750 Cr. Prepaid Insurance 9,750
b. Dr. Prepaid Insurance 37,050 Cr. Insurance Exp 37,050
c. Dr. Insurance Expense 29,250 Cr. Prepaid Ins. 29,250
d. Dr. Prepaid Expense 46,800 Cr.Insurance Exp 46,800

3. Cinderella pays its weekly salary of P50,400 for a 6-day work-week ending on Saturday. The
company follows the calendar year ending on December 31. Assuming that December 31 falls
on a Thursday, how much is accrued salaries at the end of accounting period?
a. P33,600 c. P16,800
b. 8,400 d. 50,400

4. Unearned rent has a credit balance of P240,000 composed of the following:

**January 1 balance of P45,000 representing rent prepaid for 3 months, that is,
January-March
**A credit of P195,000 representing advance rental payment for 12 months
beginning April 1

The December 31 adjusting entry will require a debit to unearned rent and a credit to
revenue account of how much?

a. P195,000 c. P191,250
b. 240,000 d. 45,000

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5. Which of the following is not a closing entry?

a. Income Summary P5,000
Rent expense 5,000

b. Owner, Capital 50,000

Owner, Withdrawal 50,000

c. Accrued Utilities 10,000

Income Summary 10,000

d. Service Revenues 200,000

Income Summary 200,000

6. A one-year insurance policy was purchased in October 1, 2010 for 36,000. At the end of
accounting period December 31, 2010, how much insurance had expired?
a. P3,000 c. P 9,000
b. 36,000 d. 33,000

7. ABC Co. acquired a truck from TRI-STAR Trading in the amount of

P350,000 “on account” on June 21, 2016. The estimated useful life of the asset is 6
years with a salvage value of P50,000. The fiscal year ends October 31, 2016. The annual
depreciation of the truck would be
a. P25,000 c. P50,000
b. 60,000 d. 72,000

8. Same data in No.7,how much is the amount of depreciation expense for the period?
a. P18,082 c. P25,000
b. 16,667 d. 31,918

9. An accounting firm started the business in November with office supplies of P16,000. During
the month the entity purchased supplies of P29,000. On November 30, supplies on hand totaled
P21,000. Supplies expense for the period is
a. P24,000 c. P45,000
b. 29,000 d. 21,000

10. On September 31, 2018, the business purchased a delivery van for P350,000 with a trade-in
value of P70,000 and estimated useful life of 8 years. The enterprise follows a fiscal
accounting period which ends on February 28, 2019. At the end of accounting period,
how much is the depreciation expense to be recognized for the van?
a. P35,000 c. P14,583

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b. 8,750 d. 18,229

Exercise 4. COMPREHENSIVE ACCOUNTING PROBLEM

Hyun Bin opened his computer repair services shop on November 30, 2018. The following
transactions happened during the operations of the business since the opening of the shop. The
business uses a calendar accounting period.

Dec.
1 Hyun Bin deposited P500,000 to the account of the business as initial investment
2 Purchased various computer repair equipment for P250,000, with down payment of
P150,000 and the balance to be paid on terms.
3 Bought office supplies for P25,000. Expense method is used.
5 Billed various customers for services rendered, P80,000.
8 Paid rent for three months at P15,000 per month. Asset method is used.
10 Paid taxes and licenses, P8,000.
14 Received partial payment of billing on December 5, P50,000.
15 Paid half month salary of the staff receiving P36,000 on a monthly basis.
18 Rendered services to various customers: Cash basis P90,000 and On
20 account P70,000.
22 Paid advertising expenses for 6 months, P42,000. Expense method is used.
25 Withdrew P50,000 for personal use.
Received a 12%, 30-day note from customers as payment of the account on December
26 5, P30,000.
Received P25,000 for repair of 20 units of computer. Services will be provided on
28 December 30, 2018. Income method is used.
31 Paid the transportation of the staff, P4,000.
Purchased office furniture on account, P120,000.

Additional information:
1. The computer repair equipment and office furniture has estimated useful life of 5
years with out residual value.
2. Office supplies on hand per physical count, P3,000
3. Salaries of staff for the remaining half – month of December still unpaid.
4. Doubtful accounts is 5% of outstanding accounts receivable.
5. Unearned service income balance is 12,000.

Required:
1. Prepare Chart of Accounts with account codes.
2. Record the transactions in a two-column journal.

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3. Post the journal entries to the T-Accounts.

4. Prepare unadjusted Trial Balance.
5. Prepare adjusting entries in to-column journal
6. Prepare a 10-column worksheet.
7. Prepare closing entries in two-column journal.
8. Prepare Post-closing Trial Balance.
9. Prepare Statement of Comprehensive Income in good form.
10.Statement of Financial Position
11. Statement of Changes in Owner’s Equity.

II. Quizzes
III. Major exams

REFERENCES
Text books-
Ballada, W.L. (2018). Basic accounting: Made easy. Manila. Domdane Publishers
Aduana, N.L. (2015). Fundamentals of Accounting. Quezon City. C &E Publishing, Inc.
Valencia, E. G. et al (2016). Basic accounting: Concepts, principles, procedures and
applications. Baguio City. Valencia Educational Supply

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