LECTURE NOTES:

4. The trial balance of Mistake Company shown below

STEPS IN THE ACCOUNTING PROCESS (CYCLE) does not balance. Your review of the ledger reveals
the following: (a) Each account had a normal balance.
1. Analy ze busine ss d ocume nt s
(b) The debit footings in Prepaid Insurance, Accounts
2. Journalize transactions P a y a b le , a n d P r o p e r t y T a x E x p e n s e w e r e e a c h
3. Post to ledger accounts understated by P100. (c) A transposition error was
4. Prepare a trial balance made in Accounts Receivable; the correct balances for
5. Prepare adjusting entries Accounts Receivable and Service Revenue are P2,750
6. Prepare financial statements (using a work sheet or a n d P 6 , 6 9 0 , r e s p e c t iv e ly . ( d ) A D e b it p o s t in g t o
from the adjusted individual accounts)
7 Close the nominal accounts Adv ert is ing Ex pe n se o f P3 0 0 w a s om itt ed, (e) A
P1,500 cash drawing by the owner was debited to
8. Pr ep are a p o st - c lo s ing tr ia l b a lan c e ( opt io na l)
Mistake Capital, and credited to Cash.
9. Prepare reversing entries (optional)
Mistake Company
The accounting process can be described as a set of Trial Balance
procedures used in identifying, recording, classifying, and December 31
interpreting information related to the transactions and
Debit Credit
other events of a business enterprise.

Cash P4,800
1. Comparison of the balance sheet of OUTREACH at the Accounts Receivable 2,570
end of 2019 with its balance sheet at the end of 2015 Prepaid Insurance 700
showed a decrease in total assets of P69,000 and Equipment P-8,000
owners' equity by P15,000. The change in liabilities Accounts Payable 4,500
during the year was Property Tax Payable 560
a. Increase of P84,000 c. Decrease of P54,000 Mistake, Capital 11,200
b . D e c r e a s e of P 8 4 , 0 0 0 d. Increase of P54,000 Service Revenue 6,960
Salaries Expense 4,200
Advertising Expense 1,100
2. Tung Company had total assets of P20,000,000 and Property Tax Expense 880
shareholders' equity of P15,000,000 on January 1. P20,890 24,500
During the year, assets increased by P3,000,000 and
liabilities decreased by P1,000,000. Tung Company
should report what amount of shareholders' equity on The corrected trial balance of the company should
December 31? show total debits of
a. P18,000,000 c. P19,000,000 a. P24, 350 c. P 2 2, 8 5 0
b. P17,000,000 d. P16,000,000 b. P23, 070 d. P 2 1, 5 7 0

3. The following transactions and events relate to Booty Use the following information for the next two questions.
Company for the current accounting period.
a) S old me r cha n d ise cost ing P 450, 000 for For each situation, reconstruct the adjusting entry that
P100,000 cash and P700,000 on open account. A was made to arrive at the ending balance. Assume that
perpetual inventory system is used. the entity prepares statements and adjusting entries only
b) Pur ch as ed land f or P 1, 00 0, 00 0 ca sh a nd a once each year.
P3,000,000 mortgage.
c) Received payment on account, P120,000. 5. Prepaid Insurance:
d) Estimated that utilities expense for the _coming
Balance beginning of year 5,600
six months will total P80,000.
Balance end of year 6,400
e) Declared a cash dividend totaling P100,000.
The dividend will be paid in six weeks. During the year, an additional business insurance
policy was purchased. A 2-year premium of P2,500
The foregoing transactions and events increased was paid and charged to Prepaid Insurance.
a. Total assets by P4,920,000
b. Total liabilities by P3,000,000 a. Deb it I ns u ra n ce Exp en s e a nd cr ed it Pr ep a id
c. Total equity by P700,000 Insurance, P1,700.
d. Net Assets by P250,000 b. Debit Prepaid Insurance and credit Insurance
Expense, P1,700.
c. Debit Prepaid Insurance and credit Insurance
Expense, P800.
d. Debit Prepaid Insurance and credit Insurance
Expense, P6,400,

6. Unearned Rent:
Balance beginning of year P11,000
Balance end of year 15,000
 SUGGESTED ANSWER

1. C
2. C
3. D
4. A
5. A
 Ware ho use q uart er ly ren t r ece ive d in adva nc e is 3. P r e p aid e xp e n se s — r e c or d ed c a s h p a y me n t s f o r
P18,000. During the year, equipment was rented to benefits not yet received or only partially so.
another company at an annual rent of P9,000. The
4. Unearned income—recorded cash receipts for services
quarterly rent payments were credited to Re nt
to be rendered in the future or only partially rendered
Income; the annual equipment rental was credited to
at the balance sheet date.
Unearned Rent.
5. Asset depreciation —a systematic allocation of an
a. Debit Rent Income and credit Unearned Rent, asset's cost to expense and a reduction, using a contra
P4,000 (or offset) account, in carrying value for a period
b. Debit Unearned Rent and credit Rent Income, during which the asset is used in operations.
P4,000
c. Debit Rent Income and credit Unearned Rent, 6. Doubtful accounts—estimated amount of uncollectible
P5,000 accounts receivable charged to current period's income
d. Debit Unearned Rent and credit Rent Income, as bad debt expense.
P5,000 7. Adj u st ing th e in ve nt or y a c co u n t.

LECTURE NOTES: a. Periodic system. Under the "adjusting method,"

Debit/credit Inventory for the increase/decrease
Adjusting entries from t he beg inn ing of the per iod, t hen make
appropriate entries to transfer the balances in
Purchases and related accounts to Cost of Goods
All relevant information that has not been recorded must Sold.
be determined, recorded, and posted so that accounts are
updated prior to preparing financial statements. b. Perpet ual syst em. No adj ust me nt is neede d,
except for unrecorded spoilage, theft losses, or
Typical items for adjustment: other "shrinkage" (as evidenced by a difference in
1. Accrued expenses—expenses incurred, but not to be paid the balance of the inventory account with the
until a following period. appropriate balance as determined according to a
2. Accrued income—income earned, but not to be "physical" inventory).
received in cash until a following period.

Summary of the typical adjusting entries and the effect or pro ft, assets, liabilities and equity of the failure to prepare t he
necessary adjusting entry:
Effect on
Nature of adjustment Adjusting journal entry Profit Assets Liabilities Equity
1. Ac c ru ed e xpe n se Expense xx Over NE Under Over
Payable xx
2. Ac c ru ed inc o me Receivable xx Under Under NE Under
Income xx
3. Prepaid expense Prepaid expense xx Under Under NE Under
(expense method) Expense xx

4. Prepaid expense Expense xx Over Over NE Over

(asset method) Prepaid expense xx

5. Unearned income Income xx Over NE Under Over

(income method) Unearned income xx

6. Unearned income Unearned income xx Under NE Over Under

(liability method) Income xx

7. D e p r e c ia t io n Depreciation expense xx Over Over NE Over

Accumulated Dep. xx _
8. Doubtful accounts Doubtful accounts exp. xx Over Over NE Over
Allow. For D/A xx

7. The accountant of Review Company made the following If annual rent is received in advance every March 1.
adjusting entry on December 31. the original transaction entry made was
Prepaid Rent P1,800 a. Debit Cash and credit Unearned Rent Income,
Rent Expense P1,800 P900.
b. Debit Cash and credit Rent Income, P1,080.
If annual rent is paid in advance every October 1, the c. Debit Cash and credit Rent Income, P5,400.
original transaction entry made was d. Debit Rent Income and credit Cash, P5,400.
a. Debit Prepaid Rent and credit Cash, P1,800.
b. Debit Rent Expense and credit Cash, P1,800. 9. Caddis Co. had these unadjusted account balances on
c. Debit Rent Expense and credit Cash, P2,400. December 31:
d. Debit Rent Expense and credit Cash, P7,200. Inventory, January 1 P188,250
Purchases 142,700
8. The accountant of Mutya Company made the following Freight-In 12,880
adjusting entry on December 31. Purchase Discounts 2,140
Rent Income P 900 Purchase Returns 26,710
Unearned Rent Income P 900
SUGGESTED ANSWER

6. D
7. C
8. C
 P2,400

Assuming that the ending inventory is P97,900, the d. Cash P2,400

entry to adjust the inventory accounts would include Interest Income
a. A de b it t o I nve nt o ry o f P 90 ,3 5 0.
b. A debit to Cost of Goods S old of P 217,080. LECTURE NOTES:
c. A cred it to Purc hase Disc ounts o f P 2,14 0.
d. A credit to Purchases Returns of P2 6,710. Reversing entries
Interest Income
10, A company receives interest on a P30,000, 8%, 5-year A reversing entry is made at the beginning of the next
note receivable each April 1. At December 31, 2019, a c c o u n t in g p e r io d a n d is t h e e x a c t o p p o s it e o f t h e
the proper adjusting entry was made to accrue interest adjusting entry made in the previous period,
receivable. Assuming that the company does not use
reversing entries, what entry should be made on April The entries subject to reversal are:
1, 2020 when the annual interest payment is received?  A c c r u a l o f in c o m e
 Accrual of expense
a. Cash P 600  Pr ep ay me nt ( u s ing ex pe n se me th o d ), an d
 Unearned inc ome (us ing in co me met hod).
Interest Income P 600

b. Cash P1,800
Interest Receivable
P1,800
c. Cash
P2,400
Interest Receivable P1,800
Interest Income 600
DRILL DRILL
1. The beginning-of-the-year total equity for a firm was c . Debit insur ance expense for P6 7,50 0 a nd c redit
P40,000. During the year, the firm issued ordinary prepaid insurance for P67,500.
shares for a total proceeds of P20,000, earned P20,000 d. Debit insurance expense for P23,100 and credit
net in come, and pa id P 5,00 0 in cash div idends . If prepaid insurance for P23,100.
ending total liabilities are P100,000, what is ending
total assets? 5. Daguioman Company received P9,600 on April 1, 2019
a. P165,000 c. P1 75,0 00 f o r o n e ye a r ' s re n t in ad v a n ce a n d r e c o rd ed th e
b P 45,000 d. P 1 0 0, 0 00 transaction with a credit to a nominal account. The
December 31, 2019 adjusting entry is
a. de bit Re nt I nc o me and cred it Un ear ned R ent,
2. Moon Company purchased equipment on November 1, P2,400.
2019, by giving its supplier a 12-month, 9 percent b . d e b it R e n t I n c o m e a n d c r e d it U n e a r n e d R e n t ,
note with a face value of P48,000. The December 31, P7, 200.
2019, adjusting entry is r , a e b it U n e a r n e d R e n t a n d c r e d it R e n t I n c o m e ,
a. debit Interest Expense and credit Cash, P720. P2,400.
b. debit Interest Expense and credit Interest d . de b it U n ea r n ed R e n t a n d c re d it Re n t I n c o m e,
Payable, P720. P7,200.
c. debit Interest Expense and credit Interest
Payable, P1,080. 6. Dunlap Company sublet a portion of its warehouse for
d. debit Interest Expense and credit Interest 5-years at an annual rental of P15,000, beginning on
Payable, P4,320. March 1. The tenant paid 1 year's rent in advance,
which Dunlap recorded as a credit to unearned rental
3. Rice Corporation loaned P60, 000 to a nother income. Dunlap reports on a calendar-year basis. The
corporation on December 1, 2019 and received a '3- adjustment on December 31, of the first year should
month, 8% interest-bearing note with a face value of be
P60,000. What adjusting entry should Rice make on a. No entry.
December 31, 2019? b. Unearned rental income P2,500
a. Debit Interest Re ceivab le and credit I nterest
Rental income P2,500
Income, P1,200. c. Rental income P2,500
b. Debit Cash and credit Interest Income, P400. Unearned rental income P2, 500
c. Debit Interest Re ceivab le and credit I nterest d. Unearned rental income P12,500
Income, P400. Rental income P12,500
d. Debit Cash and credit Interest Receivable: P1,200.

4, Gehrig Corporation renewed an insurance policy for 3 7. A 3-year insurance policy was purchased on October 1
f o r P 6 , 0 0 0 , a n d p r e p a id in s u r a n c e w a s d e b it e d .
years beginning July 1, 2019 and recorded the P81,000
As s u m in g a De ce mb er 3 1, ye ar -e nd , w ha t is t he
p r e m i u m i n t h e p r e p a id in s u r a n c e a c c o u n t . T h e
reversing entry at the beginning of the next period?
P81,000 premium represents an increase of P23,400
a. None is required.
fro m t he P 5 7,6 0 0 pre m iu m c har ged 3 yea rs a go.
b. Prepaid insurance P5,500
Assuming Gehrig's records its insurance adjustments
Prepaid insurance P5,500
only at the end of the calendar year, the adjusting
entry required to reflect the proper balances in the c. Prepaid insurance P500
insurance accounts at December 31, 2019, Gehrig's Insurance expense P500
year-end is to d. Insurance expense P500
a. Debit insurance expense for P13,500 and credit Prepaid insurance P500
prepaid insurance for P13,500.
'b. Debit prepaid insurance for P13,500 and credit
insurance expense for P13,500
SUGGESTED ANSWER

9. B
10. C

DRILL

1. C
2. B
3. C
4. D
5. A
6. D
7. A
1. Which among the following is the last step in the accounting cycle?
A. Preparation of reversing entries
B. Preparation of financial statements
C. Journalizing and posting of closing entries
D. Preparation of the post-closing trial balance

2. Arrange the following steps in their correct order:

I. Financial statements are prepared.
II. Adjusting entries are recorded.
III. Nominal accounts are closed.
A. I, II and III B. II, I and III C. III, II and I D. II, III, I

3. Adjusting entries are needed because an entity

A. Uses the accrual basis of accounting
B. Has earned revenue during the period by selling products from its central operations
C. Has expenses
D. Uses the cash basis of accounting rather than the accrual basis

4. Adjusting entries involve

A. Only real accounts C. Only capital accounts
B. Only nominal accounts D. At least one real and one nominal account

5. Which of the following least resembles a typical adjusting entry?

A. Debit asset, credit revenue C. Debit revenue, credit liability
B. Debit expense, credit liability D. Debit asset, credit liability

6. Accruals are
A. Adjusting entries where cash flow precedes revenue or expense recognition
B. Adjusting entries where revenue or expense recognition precedes cash flow
C. Adjusting entries where cash flow and revenue or expense recognition are
simultaneous
D. Adjusting entries where revenue or expenses are recognized in the absence of cash
flow evidence

7. Which of the following is an example of an adjusting entry?

A. Recording the purchase of supplies on account
B. Recording depreciation of a truck
C. Recording the billing of customers for services rendered
D. Recording the payment of wages to employees

8. An unearned revenue can be best be described as an amount

A. Collected and currently matched with expense
B. Collected and not currently matched with expense
C. Not collected and currently matched with expense
D. Not collected and not currently matched with expense
9. Total net income over the life of an entity is
A. Higher under the cash basis than under the accrual basis
B. Lower under the cash basis than under the accrual basis
C. The same under the cash basis as under the accrual basis
D. Not susceptible to measurement

10. Closing entries

A. Are optional
B. Affect only the real accounts
C. Permit an entity to analyze routine and repetitive transactions the same way all the
time
D. Remove the balances from the entity’s temporary accounts

11. After the accounts have been closed

A. All the accounts have zero balances
B. The asset, liability, and stockholder’s equity accounts have zero balances
C. The revenue, expenses, income summary, and retained earnings have zero balances
D. The revenue, expenses, and income summary accounts have zero balances

12. Income summary is a

A. Mixed account B. Nominal account C. Capital account D. Real account

13. The manufacturing summary account

A. Summarizes all revenues and expenses
B. Is a substitute for the income summary
C. Summarizes all accounts that enter into the computation of cost of goods
manufactured
D. Summarizes all accounts that enter into the computation of cost of goods sold

14. Reversing entries apply to

A. All adjusting entries B. All deferrals C. All accruals D. All closing
entries

15. Adjusting entries that are reversed include those for prepaid or unearned items that
A. Create an asset or a liability account
B. Were originally entered in a revenue or expense account
C. Were originally entered in an asset or liability account
D. Create an asset or a liability account and were originally entered in a revenue or
expense account

16. An entity initially records prepayment in real accounts and makes reversing entries when
appropriate. Which of the following year-end adjusting entries should be reversed?
A. The entry to record depreciation expense for the period
B. The entry to record the portion of service fees received in advance that is earned by
year-end
 C. The entry to record supplies used during the period
D. The entry to record service fees earned by year-end but not billed

17. An entity initially records prepayment in nominal accounts. Which of the following year-
end adjusting entries may be reversed?
A. The entry to record inventory at year-end
B. The entry to record the portion of rental received in advance that is unearned at
year-end
C. The entry to record the portion of supplies previously acquired that is consumed as of
year-end
D. The entry to record the portion of interest paid in advance that expired at year-end

18. Which of the following is not true of a worksheet?

A. The worksheet is included as part of the published financial statements
B. The worksheet provides a place where adjusting entries can be made informally
before they are journalized and posted
C. The worksheet provides a balancing mechanism that helps to uncover accounting
errors
D. The worksheet helps facilitate the preparation of financial statements

19. In preparing a 10-column worksheet

A. The beginning inventory is extended as a credit in the income statement columns
B. The beginning inventory is extended as a credit in the statement of financial position
columns
C. The ending inventory is extended as a debit in the income statement columns and as a
credit in the statement of financial position columns
D. The ending inventory is extended as a credit in the income statement columns and as
a debit in the statement of financial position columns

20. The balancing figure in the worksheet is net loss of

A. The total of the credits exceeds the total debits in the income statement columns
B. In the statement of financial position columns, the total of the debits exceeds the total
of the credits
C. The total of the credits is the same as the total of the debits in the income statement
columns
D. In the statement of financial position columns, the total of the credits exceeds the total
of the debits

21. In preparing a worksheet and the entity is profitable in the current period, the total of the
statement of financial position credit column will be
A. Larger than the total of the statement of financial position debit column
B. Smaller than the total of the statement of financial position debit column
C. Larger than the total of the income statement debit column
D. Larger than the total of the income statement credit column
22. Which of the following is a “source document” and which source document requires an
entity in the books?
A. Chart of accounts B. General Journal C. Purchase order D. Sales invoice

23. Which among the rules on debit and credit below is not correct?
A. The normal balance of any account appears on the side for recording increases.
B. Assets and expenses are debited when increased, and liabilities, revenues and equity
are credited when increased.
C. The debit is always on the left side of the accounting double entry.
D. Debit means increase, and credit means decrease.

24. Debits
A. Increase assets and decrease expenses, liabilities, revenue, and equity
B. Increase assets and expenses and decrease liabilities, revenue and equity
C. Increase assets and equity and decrease liabilities, expenses and revenue
D. Decrease assets and expenses and increase liabilities, revenue and equity

25. Which of the choices that follow is not a “book of original entry”?
A. Sales journal B. Voucher register C. General Journal D. General ledger

26. Journalizing is performed in what phase of the accounting process?

A. Reporting B. Recording C. Classifying D. Summarizing

27. General ledger serves what phase of the accounting process?

A. Reporting B. Recording C. Classifying D. Summarizing

28. An accounting record into which the essential facts and figures in connection with all
transactions are initially recorded and in chronological order is called
A. Account B. Trial balance C. Ledger D. Journal

29. Which of the following accounting tool exemplifies the ledger?

A. T-account B. General journal C. Trial balance D. Voucher

30. It helps localize accounting errors within a period of time.

A. Account B. Trial balance C. Ledger D. Journal

31. Which statement about the trial balance is incorrect?

A. A trial balance determines the equality between the total debits and credits.
B. A trial balance lists all open accounts in the general ledger as of a time period.
C. A trial balance proves that all amounts have been posted to the correct amounts.
D. A trial balance is required in the accounting process.

32. It measure economic flow over a period of time

A. Real account
B. Nominal account
C. Mixed account
 D. Contra account

33. An example of a nominal and a contra account is

A. Sales return
B. Allowance for bad debts
C. Freight-out
D. Freight-in

34. Premium in bonds payable is an example of

A. Nominal and adjunct account
B. Real and adjunct account
C. Nominal and contra account
D. Real and contra account

35. Which is not correct on the use of special journals?

A. Merchandise sales on account are recorded in the sales journal. Merchandise cash
sales are recorded in the cash receipts journal.
B. Merchandise and other purchases are recorded in the purchases journal. All cash
outlays are recorded in the cash disbursements journal.
C. Transactions that cannot be appropriately recorded in a special journal are recorded in
the general journal.
D. Only cash purchases are recorded in the cash disbursements journal.
Suggested answers
1. D
2. B
3. A
4. D
5. D
6. B
7. B
8. B
9. C
10. D
11. D
12. B
13. C
14. C
15. D
16. D
17. B
18. A
19. D
20. D
21. B
22. D
23. D
24. B
25. D
26. B
27. C
28. D
29. A
30. B
31. C
32. B
33. A
34. B
35. D