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Bookkeeping NCIII

The document provides an overview of business definitions, types of business ownership, and the accounting process. It outlines different business structures such as sole proprietorships, partnerships, and corporations, as well as the roles of accounting and bookkeeping in managing financial transactions. Additionally, it emphasizes the importance of compliance with legal requirements and the documentation necessary for recording business activities.

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jmike9th
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44 views42 pages

Bookkeeping NCIII

The document provides an overview of business definitions, types of business ownership, and the accounting process. It outlines different business structures such as sole proprietorships, partnerships, and corporations, as well as the roles of accounting and bookkeeping in managing financial transactions. Additionally, it emphasizes the importance of compliance with legal requirements and the documentation necessary for recording business activities.

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jmike9th
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Introduction Business ~ ‘A person_or_crganization Engage in the regular conduct of commercial, industrial or professional activities, whether for profit or not, in order to fulfill a purpose, goal, mission or couse. The @&Gular_condusP or pursuit of a commercial activity or an economic activity, including transactions incidental thereto, by any person regardless of whether or not the person is engaged therein is a non-stock, non-profit private organization or government entity. (Sec 105, NIRC) Business Person or organization —~ Regular conduct ~ Commercial, industrial or professional activities Lawful transactions ~ Whether for profit or not~ To fulfill a purpose, goal, mission or cause These are the basic forms of business ownership: ‘a business owned by anly one person usually adopted by small business entities ‘easy 1 set-up ond requires ow capital ‘owner faces unlimited liability not easy to transfer ownership ‘@ business owned by twa.or mare persans ‘the partners contribute resources into the entity the partners divide the profits among themselves, Ganerilpy al partners have unite Habllny In@llfed parinersBP2, creditors cannot go © Examples are: grocery stores, convenience stores, distributors, and other resellers. ‘3. Manufacturing Business ‘* a business that buys materials and converts them into a new product. © combines raw materials Iahor and overhead casts in its producti .cess_aand sells th manufactured goods to customers. 4. Mixed/Hybrid Business ‘© companies that can be classified in more than one type of business. ‘© example: A restaurant, combines ingredients in making a fine meal (manufacturing), sells ‘a cold bottle of wine (merchandising), and fills customer orders (service). Not considered engaged in business: Pure compensation employment (local or abroad, private or government) rags stb Directorship in « corporation Gratuitous transfer of properties by succession or donation Isolated or casval transactions by persons not engaged in frade or business '¢ Freelancers, agents and consultants © Broadcast media talents and artists ‘Deprcng on (ey) re bcs t must eer ih he folovng gorement genie: or 1. (GolelProprietOrShip- Department of Trade and Industry (Business Name Registration) 2. @artnership or Corporation Securities and Exchange Commission (Registration System) Sco ly (Registration System) ies, the business must secure its permits and licenses in the city or iness, Generally the following will be obtained: 1. (Business(Permitr Professional Tax Receipt trom the City or Municipal Government Unit 2. (ire:Safety Inspection Cerificate - from the Bureau of Fire Protection 3. (Barangay Clearance;and Community:Tax Certificate from the barangay where the business is operating. 4. Employer Registration - $5: DMF, PHIC, DOLE (if applicable) The business entity must also comply with the following requirements of the Bureau of Internal Revenue: Business registration Issuance of receipts and invoices sale expt ong cone prefab actives Keeping of tax and accounting records Withholding of taxes on certain payments Filing ond payment offexes roy tbe prota nd, dapat pt magni However profitable or noble the purpose of the business may be, the failure of the business entity to comply with any of these requirements might lead to penalties, fines, surcharges or, at worst, closure of the business. After the registration ond securing oll the necessary certificates and permits (#HSICOMmpanyIneeESI Accounting Definition of Accounting ‘Accounting is the @FDof recording classifying. and summarizing ing significant manner and in terns cof money, transactions and events which are, in part at least ofa financial character, and interpreting ihe results thereof (American Insfitute of Certified Public Accountants). itis called art kasi it requires creatives judgements and skills) “Aecounting is 0 <€rvice activi? 1s function is to_provide quantitative information primarily financial (Accounting Standards Council. “Accounting is the¢rocess >t Rit VINGIN AE TEEGITAATAS) expenses) ond 10 petmit informed judgment ond decision by users ofthe information (American Accounting Atsociation). “Recounting is an Gaformation syste that measures, processes and communicates financial information about an identifiable economic entity. service activity, a process 40 provide financial information ‘about economic entities for the use of interested users Purpose of Accounting _ economic decisions of the users of the information “Financial Statements _ Statement of Financial Position (Balance Sheet) Users of Accounting Information “Internal Users eatin the busines? organization) ‘Owners; Managers; Employees; Officers; Internal Auditors; and others “External Users «ouside the busin@s5prganization) ‘Customers; Suppliers; Creditors; Investors; External Auditors; Government Agencies; Industrial Organizations; and Public 1. GinanelaliAeeounting (production of reports for general purpose or public) 2. qManagementyAccounting (information for internal users) 3. eTax;Accounting (determination of right tax to be paid) 4. Buaiting (rendering of opinion or the quality of the information provided in their financial statements) Bookkeeping ‘Bookkeeping is the recording of financial transactions and is part of the process of accounting in business (ir is just recording inside the accounting, classification is also included in bookkeeping. in ‘conclusion is journalizing and posting) (Financial Accounting 2003, Weygandt; Kieso; Kimmel). It is largely concerned with the implementation of the accounting procedures manual and maintenance of the accounting records. Bookkeeping isthe procedural implementation of Accounting, Bookkeeping Bookkeeper is the@ersapwho keeps and maintains the books of accounts of the business oraanizotion, ‘The bookkeeper is responsible for recording the transactions of the business. “Functions of a Bookkeeper ‘General Accounting * Verify deposit of cash collections «Verify petty cash disbursements sons yan ap * Prepare bank reconciliation Matron chek sana «Record transactions in the journals oa ‘© Reconcile general and subsidiary ledgers «Prepare a draft of the Trial Bolance © Assist_the Accountant in the closing of the accounts and finalization of the financial ‘Statements. © Maintain proper filing and retrieval of accounting records _ "Accounts Receivable * Becotd sales invoices + Record cash receipts fram customers © Record sales returns, account adjustments and credit memos from suppliers ‘© Issue Statement of Accounts to customers «Reconcile accounts receivable ledaer balance with unpaid customer invoices. Maintain Accounts Receivable Subsidiary Ledger + Brepare Accounts Receivable reports “Accounts Payable Record purchase invoices © Record payments to suppliers Record purchase returns, account adjustments and debit memos from suppliers ‘© Receive Statement of Accounts from suppliers + Maintain Accounts Payable Subsidiary Ledger ‘© Prepare Accounts Payable reports “Inventory Accounting Record receipts of inventory from suppliers. Record release of inventory fo customers Record inventory returns and adjustments Prepare purchase requests and Inventory issuance slips Reconcile physical count of Inventory fo ledger balances Maintain inventory subsidiary ledgers Prepare Inventory reports _ The Bookkeeper may also be assigned to handle other functions, such as: Property control and manitaring Payroll preparation Remittance of statutory deductions and reports Tax bookkeeping Treasury and banking Audit assistance ‘Managerial and administrative functions. of the The scope and variety of functions business and other factors. Due to the importance of his or her functions, the Bookkeeper must possess the knowledge, abilities cand temperaments required to propery full his or har duties and Tunctons. One of he krowiedge. _ Fequirements would be the basic knowledge in Accounting. Accounting Cycle ere a Ea Tes ave ¥ | eh duit” | ¥ (ational) I ) eee) siotements ¥ ESei%o enmies | Recording - 1. __ Identification of Accountable Transactions. ausiness transactions or events are analyzed and identi 2 ‘The accountable transactions are recorded in the book of original entry known as the Gans ne Wonscone re fasees cescaacol lant the oman Sent ord am 3.___Posting. The transactions from the journal are classified in the book of final entry known as the edgenhe ledger CESSoe soa of fi ome ‘Summarizing | 4. Trial Balance. The summary of accounts balances from the ledger is prepared in the list of accounts known as the trial balance. This is the proof that the ledger debit balances and credit balances are equal and is in balance. 5. Adjusting Entries. Adjusting journal entries are made at the end of the accounting period to gssign revenues to the period in which they are earned and expenses to the period in which they are JRUTTEG, mutch the rome and exes 6 Financial Statements. The following financial statements are prearesStOeMeEntOPiNaneIaD _ Position, statement of financial performance, statement of changes in equity, statement of cash flows, (Gand the notes to: the: financial statements These financial statements provide useful information to interested parties for their decision-making, 2. Closing Entries. The temporany nominal accounts ore eliminated trom the accounts by recording and posting the closing entries. This wil prepare the accounting records for the next accounting period. 8. _fost-Clesing Trial Balance. after the closing e entries are posted, the nasticlasing tri naloncesis 1 pa yng opr ink wg ling be 9. Recording of Reversing Entries. At the beginning of the next accounting period, selected adjusting journal entries made at the previous accounting period are reversed to “normalize” the recording of the related actual transactions, Identifying Accountable Transactions Business transactions or events are @nalyzedwhetheritheyareidccountablelorinot, Only transactions which are identified to be accountable_transoctions are recorded in the accounting records. A It involves the business entity. It can be measured in terms of money, 11 occurred on a specific date or for a specific period. It affects the assets, liabilities or equity of the business. (revenues and expenses affects the _ either of the three) 5. tis supported by a document. (you should not enter into the book of accounts without proof ‘of documents) (every transaction has a proof basis of documents) 2es and had the following transactions for the month Jon 2 Investment of P100,000 capital funds by Mr. Pacioli into the business Pas etal 10000 Jon7 Receipt of a Charge Invoice from a supplier for the purchase of a desktop computer ‘amounting to P30,000. er ofce acumen 39.000 Senta pple 82.000 Jon? Purchase of supplies amounting to P8,000 in cash, de seples p00 eth sot Jon 15 Issuance of a Service Invoice for an amount of P40,000 to a customer for services rendered on account. 4. «oss sie s00W0 Sewer bev 4000 Jon 17 Receipt of P28,000 cash from customers in payment of their account. cath 28.000 Beant rsube 26000 Jon 22 Payment in cash and receipt of an official receipt from supplier for payment of accounts, 22,000. eeu pate 22.000 fr Cos bs Jon 31 Cash payment of P12,000 for the salary of an employee. Slane exgense 12000 cash aoe Jon 31 Mr. Pacioli withdrew P10,000 cash from the business. 4 rman, Pal 19000 Baer io _ Examples of non-accountable transactions: The owner of the business spent P80,0( The owner spent transportation and representation expenses amounting to P5,000. secretary was hired for P15,000 monthiy sala The company received from a customer @3gles ordePumounting to P100,000 worth of goods. The company issued to a supplier caurchase ordePamounting to P200,000 worth of inventory. The company entered into a contract to provide services for the next § years, at an amount of 500,000 per year. ‘s The company has been using the electricity for the first month of its operations but has not yet received the electri bill, ‘¢ The company has been recognized by the local government unit as the best service provider in the locality. It is foreseen To grow info-a P10 milion company in the next few years. “Business Documents The business documents forms serve as evidence to support the accountable transactions or events. These documents provide the dato concerning the porties involved. the exchange made, the date ond the money value of the exchange made, Some of the common business document include the fellowing: poy natn argmtatn 1. Ga@lesiAVeIce- document issued to customer for specific materials or supplies furnished or, services rendered. 11 is called Purchase Invoice from the point of view of the customer. 2. @eliveryiReceipr- document signifying delivery of goods and receipt of inventory. (dinala ang ‘goods from the seller fo the Buys) 3, (@fficialReceipt- document issued to acknowledge receipt of cash. (receipt na binibihay sa ‘usfomer ng company) —eo 4. @aposit Slip document used to deposit cash and cheques toa bank. 5. ‘Posting to the incorrect debit or credit of an account Teng — ss of gp cl of Incorrectly footing the account balance, or trial balance. romans and ercarding (hs Sek 88 ne ‘Forwarding the wrong amount from the ledger to the trial balance. Listing me account balance to the wrong side ofthe trial balance. The following errors will not be detected by the preparation of a trial balance, but on a careful review . Multiple recording and posting of a transaction or event. + Entries or posting to the wrong account. Reversed entries and posting, Recording and posting of amounts with transposition and trans-placement errors. pss 1234 to 1824 ts ae aca the wrong dia Shc Tomes ‘Types of Trial Balance 1. Unadjusted Trial Balance 2. Adjusted Triol Balance 3. Post-Closing Trial Balance G Lemspaation — uhen 2 digs are reversed of suid Note 3 tT 10Se of adjusting enfiGBis to match costs against revenues. The expenses incurred during the period, whether paid or not, are matched against the revenue earned for the same period, whether collected or not, for the correct determination of the profit for the period. ‘Adjusting entries are recorded at the end of an accounting period, ‘Most common transactions requiring adjusting entries: ‘9 Unused or unsold Inventory at the end of the period ‘Depreciation is the decrease in value of a property due to usage, passage of time, action of natural elements, or decay. As its difficult to measure the actual decrease in value of the property, the accounting of depreciation is done through a systematic basis, The cost of a deprecible asset systematically allocated aver its estimated useful life, The estimated scrap value at the end of the life of the asset isnot included in the amount expensed over the periods of depreciation, The simplest method of depreciation is the straight-line method. Under this method, the depreciation expense is calculated by allocating the depreciable amount equally over the estimated Useful life in years of the property. The formula for the computation of depreciation using the straight line method is as follows: Bepreciation Expense Depreciable value Estimated Useful Life The depreciable value of the asset is the difference between its cost and estimated residual value of he end of its useful fe, ThesgoshoP*hewusseh's the aroun! paid to purchase the asset, icing The incidental costs in ringing the onset tthe location and condition prended for is ase ‘heGMIMIMIMpsomctime called scrap or salvage value, isthe amount estimated fo be recovered at the end of the useful life of the property. The estimated useful life is the estimated length of time, normally in years, when the property is expected to be used. Exercises: Using the Straight-Line Method of Depreciation Exercise 1 ‘A machine was purchased by the company for P120,000. It is expected to be sold as scrap for P20,000 after its estimated useful life of 10 years, Present the journal entry to record the annual depreciation. Depreciation Expense 10,000 eprecisle vse = 120,000 ~ 20,000 = 10000 ‘stinated He ‘epreciation = 10,0007 10 = 10000 Accumulated Depreciation 10,000 Exercise 2. ‘A computer equipment was purchased for P65,000. The equipment will be sold for P5,000 after its Useful life of 5 years. Present the depreciation table forS years. Depreciation Expense 12,000 ‘Accumulated Depreciation 12,000 Exercise 3. Compute the depreciation of the following properties and present the journal entry to record the Asset cost Salvage Value Useful Life (yrs) 1 na Building 76,400,000 — Pt00000 = ~— 20 sows anzto Machinery 100,000 - 60000 = 10 po eat Equipment 480,000 o = 4 sasom / 2 _ 10000 rot saas0 Building ((6,400,000-100,000)/20) 15,000/12 = 26,250 Machinery ((1,500,000-60,000)/10) = 144,000/12 = 12,000 Equipment ((480,000-0)/4) = 120,000/12 = 10,000 Depreciation Expense 48,250 Accumulated Depreciation 48,250 Uncollectible Accounts 1. Direct write-off 2 ‘Allowance method 1. Percentof sales 2 Percent of receivables 3. Aging of accounts "Direct write-off When an account is proven to be uncollectible and worthless itis written-off. The write-off is recorded by crediting the receivables_and_—debitingan_expense account, such os bad debts expenses, uncollectible accounts expense, etc. The proforma entry to record the write-off is as follows: Bad Debts Expense 000 te, apg proven na wert ne mae ra expense 28 ‘Accounts Receivable 00 The allowance method of recognizing uncollectible accounts expenses is recommended for the better matching of costs against revenues. This method requires recording of the bad debts expense if the ‘accounts are doubtful of collection The proforma entry to record the recognition of bad debts is as follows: Sorter mantra css can sof fad Debts Expense ER or Allowance for Sod Debts oes Ss etn wa The “Allowance for Bad Debts” account is a deduction from the accounts receivable account. Ilustration: Jun 30, 2024 Sold on account to @ customer merchandise for P20,000. Sep 30, 2024 The customer paid P12,000. Nov 30, 2024 The account balance is considered doubtful of collection. Jan 31, 2025 The account balance is proved to be uncollectible. Journal entries: Direct Write-off Method: 2024 Jun 30 ‘Accounts Receivable 20,000 soles 20,000 sep 30 cosh 12,000 ‘Accounts Receivable 12,000 (No entry on Nov 30) 200 Jan 31 Bod Debts Expense 8,000 ‘Accounts Receivable 8,000 Allowance Method: 2024 Jun 30 ‘Accounts Receivable 20,000 Soles 20,000 sep 30 cosh 12,000 Accounts Receivable 12,000 Nov 30 Bod Debts Expense 8,000 Allowance for Bad Debts 8,000 2025 Jan 31 Allowance for Bad Debts 8,000 ‘Accounts Receivable 8,000 Exercises: Exercise 4 During its first year of operations, the company had sales of P6,000,000. Colle ‘amounted to P4,000,000. Wn from customers Required: Prepare the adjusting journal entries to provide for doubtful accounts under the each ofthe following independent assumptions: 1. The company believes one percent of sales may prove uncollectible. 2. The company policy is to maintain an allowance for doubtful accounts equal to 10% of the outstanding accounts receivable Bad debt expense 200,000 Allowance for bad debts 200,000 Allowance for bad debts 60,000 Accounts receivable 60,000 Exercise 5: At the beginning of the year, Outwork Everyone Company has an Accounts Receivable of P3 million and an Allowance for Uncollectible Accounts of P120,000. During January, it sold goods to customers amounting to P300,000 and collected P200,000. A receivable accounting amounting to P50,000 has proven to be uncollectible and was written off. During February, it sold goods to customers amounting to P900,000 and collected P300,000. A receivable previously written off amounting to P5,000 has been collected. The company estimates that 2% of Accounts Receivable is uncollectible. Required: Prepare the adjusting entries for January and February. Bad Debt expense 50,000 Accounts receivable 50,000 ‘Account receivable 5,000 Bad debt expense 5,000 Cash 5,000 Accounts receivable 5,000 Acerued and Prepaid Expenses “eAveruedExpenses) —raunt mo nero nde tae Accrued expenses are expenses already incurred but not yet paid, These expenses create an obligation to pay in the future. The proforma entry to record an accrued expense is as follows: & pene Ao pole o Aral Expense pablo Expense vo ‘Accounts Payable or rox ‘Accrued expense payable “Common examples of accrued expenses are salaries, utilities and interest expenses. Employee services thot have been rendered to the company baT nol pat paid are Gccrued TaleTes expenses Eleciriciy, water and telephone services that have been consumed but not yet paid are also accrued expenses. Mlustration: The company borrowed P300,000 from a bank. It issued a 90-day 10% promissory note on November 30, 2024, Journal entries related to the promissory note are as follows 2024 Nov 30 cash 300,000 Notes Payable 300,000 Dec 31 Interest Expense 2,500 Interest Payable 2,500 Jan 31 Interest Expense 2,500 Interest Payable 2,500 Feb 20 Interest Expense 2,500 Interest Payable 2,500 Notes Payable 300,000 Interest Payable 7500 cash 307,500 ctr ep tet wapeacmpncee SoS Nar Tae Prepoid expenses ore expenses dead gad but at et incurred, During the accounting period, the portion thar ready consumed Tecorded cr expense There are two methods in accounting prepaid expenses: the asset method and the expense method. sgt mood wing a exense omanay yng Tlustration: Sei re lao et (On October 31, 2024, a company paid P120,000 as rent payment for 3 months. The entries related to the rent payment are as follows: Asset Method: 2024 Oct31 Prepaid Rent 120,000 cash 120,000 To record the payment of rent for 3 months. Nov30 Rent Expense 40,000 Prepaid Rent 40,000 To record the expiration of the rent for 1 month. Dec31 —_—Rent Expense 40,000 Prepaid Rent 40,000 To record the expiration of the rent for 1 month. 2025 Jon 31 Rent Expense 40,000 Prepaid Rent 40,000 To record the expiration of the rent for 1 month. Expense Method: 2024 Oct31——_ Rent Expense 120,000 Cash 120,000 To record the payment of rent for 3 months. Dec31 Prepaid Rent 40,000 Rent Expense 40,000 To record the unexpired portion of rent. 2025 Jon 31 Rent Expense 40,000 Prepaid Rent 40,000 To record the expiration of the rent for 1 month, Exercises: Exercise 6: Believe You Can Corporation has the following information during the month of December: i off pgs 20000 oh aos A year-end physical Total purchases for office supplies during the year amounted to P240,000. count revecled that only 20,000 worth of supplies were on hand. sypie apm 20000 © cffe gles 220000 “Sohecuted tobe poid on (Qh dot he flowing month ‘On December 31, the company received the following utility bills which were paid on the following mont Liwanog Eletrie Company, P4000, Alt | ceoncite telecom, 2,000 cfu pes page 60 Clear Woter Distt P5000 Prepare the necessary acsting journal entries ice supplies 240,000 ashy 240,000 oie supplies expense 220000 office supplies 220,000 Security service expense 45,000 Accrued security services 45,000 Etectricy expenses 40,000 Telecommunication expenses 20,000 Water expenses 5,000 Accrued utility expenses 65,000 Exercise 7: Driven by the owner's drive and focus, Icandoit Corporation started its operations on July 1 of this year. As a protection, the company purchased an insurance plan for P60,000 per year. The company Paid the insurance premiums for 1 year at the start of its operations. Prepare the journal entries relevant to the insurance, Use the asset method. Prepaid insurance 60,000 Cash 60,000 Insurance expense 5,000 Prepaid insurance 5,000 Exercise & Driven by the owner's motivation, Relentless Company started its operations on April 1 of this year. He rented an office space for the company at P10,000 per month. The company paid its 12 months’ rent in advance at the start of its operations. Prepare the journal entries relevant to the rent payment. Use the expense method. Rent expense 120,000 Cash 120,000 Prepaid rent 30,000 Rent expense 30,000 Accrued and Unearned Revenues ‘Accrued Revenues. “Accrued revenues are revenues already earned but not yet collected. These require recognition of both the revenue and the receivable for the amount earned The proforma entry to record an accrued revenue is as follows: Accounts Receivable roo Soles or rox Sver Reere/ ered name sa Service Income or Accrued Revenue ‘Some examples are services already rendered to the client but have not yet been collected. Tlustration: The company was hired to provide consultancy services for two months from December 16, 2024 to February 15, 2025. The service contract amount is P200,000 and will be paid at the end of the contract. The journal entries relevant to the contract are as follows: 2024 Dec 31 Accounts Receivable 50,000 Service Revenue 50,000 2025 Jon 31 ‘Accounts Receivable 100,000 Service Revenue 100,000 Feb 15 ‘Accounts Receivable 50,000 Service Revenue $0,000 15 Cash 200,000 Accounts Receivable 200,000 ‘Unearned Revenues Unearned revenues are revenues already collected but not yet earned. During the accounting period, the portion that is already earned is recorded as income. There arecio methodin accounting deferred revenues: dhe liabiityimethiod’and the'revenueimethod? Mlustration: The company was hired to provide consultancy services for two months from December 16, 2024 10 February 15, 2025. The service contract amount is P200,000 and is paid on December 16, 2024. Liability Method 2024 Dec 16 Cash 200,000 Unearned Service Revenue 200,000 31 Unearned Service Revenue 50,000 Service Revenue 50,000 2028 Jon 31 Unearned Service Revenue 100,000 Service Revenue 100,000 Feb15 __Unearned Service Revenue 50,000 Service Revenue 50,000 Revenue Method 2024 Dec 16 Cosh 200,000 Service Revenue 200,000 31 Service Revenue 150,000 Unearned Service Revenue 150,000 Exercises Exercise Mr. Pasion owns Passionate Corporation providing grooming and beauty services to its clients. One of his clients, International Bilibid Prison, pays a fixed monthly fee of P$0,000. The fee is poid 5 days after the end of the month, Another client who was provided with beauty services in December, has an unrecorded unpaid balance of P10,000. Prepare the necessary journal entries to recognize the accrued revenues for the month of December. ‘AJR 10,000 Accrued service income 10,000 Exercise 10: Starlink Networks provide internet and communication services to its clients. On October 1, one of its clients paid P60,000 as a subscription for 6 months, The bookkeeper has recorded the collection into the Unearned Subscription Revenue account. Prepare the necessary adjusting entries. Cash 60,000 Unearned subscription revenue 60,000 Unearned service revenue 30,000 Service/Subscription revenue 30,000 Exercise 11; Get Tough Company is providing training and coaching services to aspiring young professionals. It collects services fees in advance as a policy to secure collections from clients. The monthly service fee is P10,000 per client, and each client pays 3 months of service fees in advance. The accountant books all the collections into the Service Revenue account. During its first months of operations, it had the following number of clients: October 30 November 40 December 50 Prepare the necessary adjusting entry on December 31. (Assume all of the collections were made at the start of the month.) Service revenue 1,400,000 Unearned service revenue 1,400,000 Adjusted Trio! Balance After recording the adjusting journal entries, the Adjusted Trial Balance is prepared. It will serve as the basis for the preparation of the financial statements. Exercise: Exercise 12: PACIOLI GENERAL SERVICES Unadjusted Trial Balance As of January 31, 2024 Code 101 a 1a 151 201 301 Bu 401 601 ‘Account Title Debit credit cash 76,000 ‘Accounts Receivable 12,000 supplies 8,000 Equipment 30,000 ‘Accounts Payable 8,000 Paciali, Capital 100,000 Pacioli, Drawing 10,000 Service Revenue 40,000 Salaries 12,000 TOTAL —Pi4ao00—P148,000 Additional information 1 The computer is estimated to have a useful life of § years and no serap value. Depreciation expense 500 Accumulated depreciation - equipment - 500 Unused supplies amounts to P7,000. Supplies expense 1,000 Supplies 1,000 Unbilled service fees amount to P10,000. Accounts receivable 10,000 Accrued service revenue 10,000 The electricity bill received on February 1 amounts to P2,500 Electricity expense 2,500 Accrued electricity payable 2,500 Prepare the Adjusted Trial Balance. Assignment. Adjusting Entries Your company losing its books on December 31, 2024. Analyze the following items and prepare the necessary adjusting journal entries: 1 (On December 30, 2024, your company performed P27,000 worth of service but did not bill the client until January 5, 2025. Accounts receivable 27,000 Accrued service revenue 27,000 (On November 1, 2024, your company purchased office supplies for P5,000 but did not make an adjusting entry to reflect the P1,500 unused at December 31, 2024. Office supplies expense 3,500 (asset method) Office supplies 3,500 Office supplies 1,500 (expense method) Office supplies expense 1,500 You did not record the MERALCO bill received on December 81, 2024 for P6,500, You have scheduled the payment on January 6, 2025. Utility expense 6,500 Accounts/Utilities payable 6,500 Your company purchased a new set of computer on August 1, 2024 for P30,000. The computer has an estimated useful life of 5 years with no salvage value. No depreciation was recorded on this equipment. Depreciation expense- computer 2,500 Accumulated depreci ion - computer 2,500 (On October 1, 2024, your company agreed to work on a new project and is paid PS0,000 in advance for 6 months contract starting December 1, 2024, Service Revenue was credited when the advance payment was received. Service revenue 41,667 Unearned service revenue 41,667 Your company’s weekly five-day payroll is paid every Friday. But December 31, falls on a Tuesday. The employees will not be paid until the following Friday. The weekly wages amount to P25,000. Salaries and wages expense 10,000 Accrued salaries payable 10,000 Requirement: Prepare the necessary adjusting entries, Financial Statements Purpose and Users of Financial Statements The financial statements are the financial reports of the business entity in order to provide information that is useful for the decision-making of its users. The users of the financial statements include the following: ‘Owners, investors and prospective investors Lenders and suppliers and prospective creditors Employees, customers Government agencies The general public As different groups of users will use the financial statements, iflshould be usefull Gnd? “understandable to someone who has o reasonable understanding of accounting and business and who _is willing to study and anaiyze the information presented. The financial statements must be relevant, ‘fellableandscomparable. Most of all, it must follow the applicable Philippine Financial Reporting Standards. The financial statements are prepared ot least once a year and can be presented as frequent gs monthly or quarterly. A complete set of Financial Statements comprises the following: “Income Statement The Income Statement, also called Statement of Financial Performance, presents the financial results of a business for a given period of time. The statement presents the amount of revenue generated and expenses incurred by the business during a reporting period, as well as the resulting net income or net loss. in economic benefits during the accounting period in the form ol enhancements of assets or decreases of liabilities (or a combination of both) from the delivery or production of goods, rendering of services, or other activities that constitute the entity's ongoing ‘malor or central operations. Examples of revenues are as follows: * Sales + Professional fees earned + Service revenues + Interest revenue + Dividend revenue + Rent income + Subscription revenue “expensesiareGecreasad in economic benefits durna the accounting period in he form a a sing up of assets or incurrences of abilities (or a combination of both) from the delivery or——~ production of goods, rendering of services, or other activities that constitute the entity's ongoing major or central operations. Examples of expenses are as follows: Cost of sales Depreciation expense Insurance expense Permits, taxes and licenses . Repair and maintenance : Representation expenses . Losses Exercise 1 Prepare the Income Statement based on the following information: PACIOLI GENERAL SERVICES Adjusted Trial Balance As of January 31, 2024 code ‘Account Title Debit credit 101 Cash 76,000 111 Accounts Receivable 22,000 121 Supplies 7,000 151 Equipment 30,000 152 Accumulated Depreciation - Equipment Ps00 201 Accounts Payable 10,500 301 100,000 -Pacioli, Capital 311 Pacioli, Drawing 10,000 401 Service Revenue 50,000 601 «GGG 12,000 Sere en 2500 es 2009 setae No 602 Depreciation 500 diy cote 2.500" Ualty tows 2.500 ‘nme 9609 603 GUPBIESERERE® 2,000 604 Utility Expense 2,500 TOTAL 161,000 161,000 Service revenue $0,000 Less: salaries 12,000 Dep ‘500 Supplies 1,000 utility 2,500 "Statement of Changes in Equity The statement of changes in equity presents a reconciliation of the beginning and ending balances in @ company’s equity during a reporting period. The statement starts with the beqinning equity balance, and then adds or subtracts such items as profits, capital investments or reductions, and dividend payments to arrive at the ending balane _ Changes in equity over an accounting period include the following elements: ‘© Net income or loss during the accounting period + Increase or decrease in capital * Capital withdrawals or dividend payments to shareholders Exercise 2: Prepare the Statement of Changes in Equity of Pacioli General Services (Exercise 1). Pacioli, Capital, beg. 100,000 Less: Paciol, drawing 10,000 Add: Net income 34,000 lend, 124,000 A Balance Sheet, also referred to as Statement of Financial Position, presents a company’s financial ‘position as of a given date, It shows the assets, liabilities ond equity of the business entity, ‘An@gssettis c resource controlled by the entity asa result of past events and from which future economic benefits are expected to flow to the entity (IASB Framework). Examples of assets include the following: Cash - includes coins, currencies, checks, bank deposits and other cash items ready for use in ‘he operations of the business. Accounts Receivable - amounts collectible from customers for goods provided and services rendered on credit Merchandise Inventory - unsold goods for sale to customers. repaid Expenses - expenses pold but not yet used, Investments - assets for the accretion of wealth through capital returns or capital appreciation or for other benefits to the business. Property, Plont and Equipment - tongible assets used in the production or supply of goods and services, o for business administration purposes Intangible Assets ~ includes identifiable, non-monetary properties without physical substance, like licenses, copyrights, patents, trademarks and others. Ailigbilitypis o present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the enterprise of resources embodying economic benefits (TASB Framework). Examples of liabilities include the following ‘Accounts Payable - obligations due to suppliers of goods and services purchased on credit. Notes Payable - obligations due to suppliers of goods and services evidenced by a promissory note. Loans Payable - obligations due to lenders as a result of borrowing of funds. Lease Payable - obligations due to lessors for property and equipment used for business ‘operations. Utilities Payable - obligations due to utility companies for services rendered. ‘Accrued liabilities - obligations due to others for expenses already incurred but not yet paid. Unearned Revenues - obligations due to customers for goods and services paid but not yet delivered, Equitypis the residual interest in the assets of the entity after deducting all the liabilities (TASB Framework). It represents the capital investments, net of the capital withdrawals of the owner in the entity, and the net income of loss in the operation of the business. Equity accounts include the following: Capital account ~the equity investment of the owner (in a single proprietorship) or for each partner (in a partnership), and the cumulative effect of the withdrawals of capital and business net profits and losses. Drawing - the equity withdrawals of the owner or for each partner. ‘Common Stock, Preferred Stock - the equity of the owners of a corporation Retained Earnings - the cumulative balance of the net income or losses of the corporation, investments of the owners, less the distribution to the owners. Exercise 3: Prepare the Balance Sheet of Pacioli General Services (Exercise 1). ‘Tinatamad akong gumawa, alam niyo na yan HAHAHAHA The Statement of Cash Flows shows the cosh receipts and cash payments from the business activities of the enterprise during the period. The business activities are Glassified into operating, investing ond) ‘Operating activities are the principal activities of the enterprise. They are the transactions and events thot enter into the determination of profit or loss. Operating Activities include the following: Cash receipts from sales of goods and rendering of services. Cash receipts from interests, royalties, commissions, fees and other sources. Cash payments to suppliers of goods and services. Cash payments to employees for salaries and other employee expenses. Cash payments for operating expenses such as advertising, supplies, uillties, taxes, and others, “Investing activities include the acquisition and disposal of non-current assets of the business. Examples of investing activities are ‘* Cash payments in purchasing land, constructing a building. buying furniture and equipment, acquiring intangible and other long-term assets. ‘© Cash receipts in selling property and equipment, intangible and other long-term assets. ‘© Cash payments in investing in equity and debt instruments of other companies. Cash receipts from selling investments in equity and debt instruments of other companies. ‘Financing activities include equity transaction of the business and the owners, as well as borrowing of funds from financial institutions. Examples are ‘* Investment and withdrawal of capital of the owners © Cash proceeds from bank loans and repayment of the loans. Exercise 4, Prepare the Statement of Cash Flows of Pacioli General Services (Exercise 1). Completing the Cycle Closing Entries — “Types of Accounts 1. Permanent or Real Accounts ‘A. Asset accounts B, Liability accounts | ase « Lsitty + cuts . Equity accounts Revenue accounts Expense accounts Gains and Losses accounts Equity drawing accounts ». “Income and Expense summary account 3. Mixed Accounts At the end of the accounting period. ahetemporaryrorsnominalyaccounts;are;closed The following entries are recorded and posted: 1. Revenue accounts are closed (debited) against the Income and Expense Summary account. 2. Cost of goods sold accounts cre closed (credited) against the Income and Expense Summary account 3. Expense accounts ore closed (credited) against the Income and Expense Summary account. 4. The resulting balance of the Income and Expense Summary account is closed to the Equity “account. Any drawing account is closed against the Equity account. Exercise 1 Based on the following Adjusted Trial Balance of Paci General Services, prepare the closing entries. PACIOLI GENERAL SERVICES. Adjusted Trial Balance As of January 31, 2024 code ‘Account Title Debit credit 101 Cash 76,000 111 Accounts Receivable 22,000 121 Supplies 7,000 151 Equipment 30,000 152 Accumuloted Depreciation - Equipment Ps00 201 Accounts Payable 10,500 301 Pacioli, Capital 100,000 311 Pacioli, Drawing 10,000 401 Service Revenue 50,000 601 Salaries, 12,000 4602 Depreciation 500 603 Supplies Expense 1,000 604 Utility Expense 2,500 TOTAL 164,000 —_—P161,000 _Post-Closing Trial Balance A Post-Closing Trial Balance is prepared after the recording and posting of the closing entries. The remaining Permanent/Real accounts of assets, abilities and equity are presented with their balances. This provides the starting balances for the next accounting period. Exercise 2. Prepare the post-closing trial balance of Pacioli General Services (Exercise 1) Service Business A service business provides services to clients for a fee. Typically, the business provides intangible products such as repairing beauty care health and recreation transportation ‘communication Services consutting professional medica, and other services. The accounting for a service business is simpler, in contrast to a merchandising business, because the i ‘not invol F invent In rendering services, the business earns revenues, which it eventually collects. The focus of the bookkeeping is on recording the revenues and collections. Sample Journal entries: Cash/Accounts Receivable vox Service Revenue 20K cash 20K ‘Accounts Receivable Expenses 00x Cash/Accounts Payable x ‘Accounts Payable 00K cash 0 Exercise Mr. Vicente Fabella established Fabella Bookkeeping Services and had the following transactions for the month of February: 4 Investment of P150,000 cash fund by Mr. Fabella into the business. Cash 150,000 Capital 150,000 7 Received a Charge Invoice from a supplier for the purchase of a desktop computer ‘amounting to P32,500. The computer is estimated to be useful for five years and have a “salvage value of F2,500 thereatter Equipment 32,500 A/P 32,500 9 Purchased supplies amounting to P18,000 in cash. ‘Supplies 18,000 Cash 18,000 15 Paid P6,000 insurance for six months. Prepaid insurance 6,000 Cash 6,000 18 Issued @ Service Invoice for an amount of P50,000 to a customer for services rendered on account. ‘A/R 50,000 Service revenue 50,000 9 Received P35,000 cash from customers in payment of their account. Cash 35,000 ‘A/R.35,000 20 Paid in cash and received an official receipt from the supplier for payment of accounts, 20,000. A/P 20,000 Cash a Rendered services to customers billed for P30,000. ‘A/R 30,000 Service revenue 30,000 28 Cash payment of P15,000 for the salary of an employee. Salaries expense 15,000 Cash 15,000 28 Mr. Fabella withdrew P12,000 cash from the business. Fabella, Drawings 12,000 Cash 12,000 28 Paid the telephone bill for February amounting to P3,000. Utilities expense 3,000 Cash 28 Supplies remaining on hand worth P15,000. Supplies expense 3,000 Supplies 3,000 Depreciation expense- equipment 500 Accumulated depreciation- equipment 500 Insurance expense 1,000 Prepaid insurance 1,000 Merchandising Business The focus of this chapter is bookkeeping for the transactions of merchandising businesses. The business purchases products from its suppliers which it sells to its customers for a profit. Businesses in this type includes the following: Sari-sari stores, groceries and market stalls Hardware Appliance store Gadgets and electronics store Fashion and dress shop Sports equipment store ‘Online product sellers In contrast to a service business, a_merchandising business is more complex due to the presence of inventory. The inventory items needed to be purchased, transported, kept and then sold to the customers. In purchasing merchandise inventory, the company pays for the purchase price of the goods, There could be an agreement for credit terms between the buyer and seller. The buyer might be offered discounts within a certain period to encourage early or prompt payments. This is also true in selling the merchandise inventory. The company might also offer credit terms and discounts to its customers, In buying and selling the merchandise inventory, there might be some returns of goods that needed to be accounted for: Also, in buying and selling, the inventory items need to be transported and thus, freight costs are incurred. These freights costs may be charged to the buyer or to the seller depending on their agreement. Purchasing and keeping merchandise inventory requires some internal control procedures in order to maintain the right quantity or level of goods on hand. One of the basic internal control is the recording and monitoring of the cost and quantity of merchandise inventory. Purchases should be properly recorded on a timely basis in the books of accounts. Also regular physical counting is done to match the recorded quantity and amount of inventory with the actual quantity and amount of inventory. This need for the proper recording and control of the movement of inventory that two systems of inventory were being commonly used: the periodic inventory system and the perpetual inventory system. We will study these inventory systems on this chapter. The study of this chapter is very important in your professional growth and development as on accountant. The topic is not complicated nor intricate, but requires a careful focus and attention so that you can comfortably include this in your competencies for your exams, in your work, in your public practice or in your own business, tems related to Purchases and Sales of Merchandise Inventory: Returns and Allowances Payment Terms Discounts Freight or Shipping Costs Value-Added Tax Inventory System “Freight Charges In purchasing ond selling, merchandise inventory needs to be shipped from the seller to the buyer. The costs of shipping the goods may be charged to the buyer or the seller depending on their agreement. 1 2 To easily understand these terms, just take note that this is the transfer of ownership to the goods: © In th Therefore, the buyer shoulders the freight charges. In FOB destination, th 1 ownership of the goods is being transferred from the seller to the buyer Se therefore qhesellersHouldersithe (Owner of the merchandiss uyer Freight should be paid by: Buyer £08 Destination: (Owner of the merchandise: eller Freight should be paid by: Seller Account to be used for freight chara Buyer: Freight in Seller: Freight out There are two methods of accounting for the inventory of merchandising businesses, namely (6FIGGIC _ inventory method and perpetual inventory method. The Periodic Inventory Method is generally used when th values. individual inventory items hove small peso Under this method, the business maintains temporary accounts like purchases, purchase returns, and sales returns. At the end of the accounting period, these temporary accounts are used to determine the ‘amount of inventory available for sale. The value of the ending balance of inventory is determining by conducting a physical count multiplied by the corresponding nit casts (Periodicllinventoryisystem Without such count, cost of sales (or cost of goods sold) cannot be determined therefore, businesses have to conduct this activity at least once a year or at every end of an accounting period. This inventory method is generally used when the individuol inventory items have relatively large values. This method requires the use and maintenance of stock cards. Under this method, the inventory account is continually updated for each inventory transaction. For every journal entry of sales, a corollary journal entry for the cost of inventory sold is also recorded. Purchases and returns are récorded in directly in the Merchandise Inventory account. Physical count of inventory is conducted to confirm the balances in the stock cards. PERIODIC INVENTORY SYSTEM Typical Journal Entries PURCHASES 3. To record purchase discount: ‘SALES 2.To record freight cost: Freight Our 200K 000 200K roo Cash soo 43. To record sales discount. Soles Discount 000 ‘Accounts Receivable ro00% 4,To record sales return: Soles Returns and Allowances 2000 Cash/Accounts Receivable 000 PERPETUAL INVENTORY SYSTEM Typical Journal Entries PURCHASES 1. To record purchase goods from e supplier: Cosh/Accounts Peyable 00 2. To record purchase freight costs: cosh 200% 53. To record purchase discount: ‘Accounts Payable oo 4-To record purchase return: ‘Accounts Payable voow SALES 1.To record soles to customer: ‘cash/Accounts Receivables 2000 soles seoxx 2.To record freight costs: Freight Out sexe cosh vox 5-To record soles discount: Soles Discount roo Accounts Receivable soe 4.To record sales return: Soles Returns ond Allowonces sexe ‘cosh/Accounts Receiveble vox Exercise, Periodic Inventory System (Salonga) Salonga Marketing is established by Mr. J. Salonga. He opted to use the periodic inventory system. The business had the following transactions for the month of Februar 3 Mr. Salonga invested P80,000 cash into the business. Cash 80,000 Salonga, capital 80,000 4 Bought computer equipment for P20,000 cash, Computer equipment 20,000 Cash 20,000 5 Bought merchandise on account from Mathew Trading Co. P30,800, terms 2/10, n/30. Merchandise inventory 30,800 Accounts payable 30,800 6 Bought office supplies on cash basis for P3,000. 10 u 2 3 15 Ww 18 Office supplies 3,000 cash 3,000 Sold merchandise on account PS8,500, FOB Destination, terms 2/10, n/30. Accounts receivable 58,500 Sales 58,500 Cost of goods sold 40,800 Merchandise inventory 30,800 Received credit from Mathew Trading Co. for merchandise returned P400. Accounts payable 400 Merchandise inventory 400 Paid Mathew Trading Co. Accounts payable 50,400 cash 29,792 Merchandise inventory 608 Collected from Feb 7 customers. cash 57,350 Sales discount 1,170 Accounts receivable $8,500 Bought merchandise on cash basis for P38,900. Merchandise inventory 38,900 cash 38,900 Salaries paid P7,000. Salaries expenses 7000 Cash 7.000 Borrowed money from Banko, signed a promissory note for P12,000. cash 12,000 Notes payable 12,000 Received refund from a supplier on cash purchase of March 13, P500. cash 500 Merchandise inventory 500 9 20 24 25 28 28 Paid freight on February 13 purchase, P60O. Freight in 800 cash 800 Sold merchandise for P51,600. cash 51,600 Sales 51,600 Cost of goods sold 51,600 Merchandise inventory 51,600 Mr. Salonga withdrew cash from the business, P12,000, Salonga, withdrawal 12,000 Cash 12,000 Gave refunds to cash customers for defective merchandise, P1,500. Sales returns and allowances 1,500 Cash 1,500 Merchandise inventory 1,500 Cost of goods sold 1,500, Paid the following: Us {ent P3,000; Salaries, P7,000. Urilties expense 1,138 Rent expense 3,000 Salaries expense 7,000 cash 11,138 Based on a physical count conducted, the value of inventory remaining is P17,200.

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