Fundamentals of Accounting 1

ACCOUNTING
1
2015 EDITION
LEEMON LOPEZ ARAZA DYCI - COA AC101
FUNDAMENTAL OF
TABLE OF
CONTENTS
Session 1: Accounting Concepts and Its Consideration
Session 2: Basic Consideration on Financial Statements
Session 3: Preparation of Financial Statements
Session 4: Adjusting the Accounts
Session 5: Completing the Accounting Cycle
Fundamentals
of Accounting
1
SESSIO
N1
ACCOUNTING CONCEPTS AND ITS

CONSIDERATION
Desired Learning
Outcomes
• Understand and explain the definition, purpose,
nature, functions and objectives of accounting.
• Distinguish the branches of accounting, users of
accounting information.
• Understand the double entry bookkeeping concept
and how it differs from single entry bookkeeping.
• Appreciate the history of accounting, accounting
variations among countries
• Adopt the basic professional values and ethics
Instructor Leemon L. Araza 2015 Edition
Why Do We
Need
Accounting?
So why do we need accounting? Asking that question of an accountant is like asking a farmer why we
need rain. We need accounting because it’s the only way
for business to grow and flourish. Accounting is the
backbone of the business financial world. After all,
accounting was created in response to the development of
trade and commerce during the medieval times.
Accounting is the conscious of the business world. When handled with care and with respect, it
performs as expected. When abuse occurs, and the system
is circumvented or overridden because of dishonesty and
greed, it doesn’t work correctly. Accounting is much like all
other systems in place, they are only as good as the people
using them.
1 | AC101 SESSION 1
ACCOUNTING is a service activity. It’s function is to provide quantitative information, primarily financial in
nature, about economic entities that is intended to be useful in making economic decisions.
“Language of business”
Accounting as science and art
❖ Accounting is a social science with a body of knowledge which has been systematically gathered, classified, and
organized. It is influenced by, and interacts with, economic, social and political environments. ❖ Accounting is a
practical art which requires the use of creative skill
and judgment.
Accounting as an information system
❖ Accounting identifies and measures economic activities, processes information into financial reports and communicates
these reports to decision makers.
BASIC PURPOSE OF ACCOUNTING: To provide quantitative information about economic entities intended to
be useful in making economic decisions.
TYPES OF INFORMATION PROVIDED BY ACCOUNTING
1. Quantitative information – expressed in numbers, quantities or units. 2. Qualitative information – expressed
in words or descriptive form 3. Financial information – expressed in terms of money
Economic Activities and their classification
• Production – the process of converting economic resources into outputs of goods and services that are
intended to have greater utility than the required inputs.
• Exchange – the process of trading resources or obligations for other resources or obligation.
• Income distribution - the process of allocating rights to the use of output among individuals and groups in
society.
• Consumption – the process of using the final output of the production process.
• Investment – the process of using current inputs to increase the stock of resources available for output as
opposed to immediately consumable output.
• Savings – the process by which individuals and groups set aside rights to present consumption in exchange
for rights to future consumption.

2 | AC101 SESSION 1
Opinionated, flexible and subjective
Fixed, inflexible, organized and systematic
ECONOMIC ENTITY VS BUSINESS ENTITY
❖ Economic entity – is a separately identifiable combination of persons and property that uses or controls
economic or scarce resources to achieve certain goals or objectives. Scarce resources have no significant
characteristics.
o Not-for-profit or non-profit entity is one that carries out some socially desirable needs of the
community or its members whose activities are not directed towards making profit. o Business
entity is an entity that produces and distributes goods
or services primarily for profit.
FUNCTIONS OF
ACCOUNTING
❖ Identification. The accounting process of recognition or non- recognition of business activities as

accountable events or whether has accounting relevance.
❖ Measurement. The accounting process of assigning of peso amounts or numbers to the economic
transactions and events. The unit of measure of accounting is money, expressed in prices.
❖ Communication. The accounting process of preparing and distributing accounting reports to potential
users of accounting information and interpreting the significance of this processed information.
o Recording. the process of systematically committing to writing business transactions and

events after they have been identified and measured, in books of account in a systematic and
chronological manner according to accounting rules.
o Classifying. The grouping of similar and interrelated items into

their respective classes.
o Summarizing. Putting together or expressing in condensed or brief form the recorded and
classified statements in financial statements.
One that is quantifiable and has an effect on assets, liabilities and equity. This
also known as economic activity, which is the subject matter of accounting.
Criteria for accountable event

1. It must affect a financial element of accounting (increasing
or decreasing asset, liability or equity) 2. It is a result of a past
activity 3. Its cost can be measured reliably.
3 | AC101 SESSION 1
BRANCHES OF ACCOUNTING/AREA OF SPECIALIZATION
1. Financial Accounting. The recording of transactions, preparation of financial statements and

communication of financial information to external user groups. Focuses on general purpose reports.
2. Auditing. The examination of financial statements by independent certified public accountant for the
purpose of expressing an opinion on the fairness of presentation of financial statements.
3. 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.
4. Financial Management. Relatively new branch of accounting that has been grown rapidly over the last
35 years. Financial managers are 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.
5. Taxation / Tax accounting. Involves the preparation of tax returns and rendering of tax advice, such as
determination of tax consequences of certain proposed business endeavors.
6. Government Accounting. Accounting for the national government and its instrumentalities, focusing
attention on the custody of public funds and the purpose or purposes to which such funds are committed.
7. Fiduciary Accounting. Handling of accounts managed by a person entrusted with the custody and
management of property for the benefit of another.
8. Social Responsibility. Reporting of programs and projects that have to do with the upliftment of the
welfare of the people of a community or of the nation.
9. Environmental Accounting. The area of accounting that focuses on programs, activities and projects
that are focused care for Mother Earth.
10. Price-level Accounting. Otherwise known as Accounting for Hyperinflationary Economies – simply
defined, is accounting that recognizes in the financial statements changes in the purchasing power of
money.
One example of this is carbon accounting such as “Cap and
Scheme”, which is a process of encouraging reductions in
greenhouse gas emissions.
4 | AC101 SESSION 1
USERS OF ACCOUNTING INFORMATION
• Internal Users are those who make decisions directly affecting the internal operations of the business.
o Managers are directly involved in operation of the business. They need accounting data to
improve the efficiency and effective of the organization.
o Employees use financial data to assess whether they are receiving the right compensation and
to check if they bargain for higher remuneration, retirement benefits and employment
opportunities.
o Officers, also called as the company executives who are interested to know if the company is
doing well in its operation so they can plan for possible expansion or branching out to widen its
geographical and demographic market.
o Internal Auditors, there role is to protect and safeguard the making people believe
resources of the company against fraud or irregularities.
the act of making money by something which is not true.
• External users are individuals or enterprises that have financial interest in the business but they are not
involved in the day activities of the organization. These are:
o Investors (The providers of risk capital) are interested in information which enables them to
assess the ability of the enterprise to pay dividends. They need information on whether they
should buy, hold or sell their shares in.
o Lenders are interested in information that enables them to determine whether their loans, and
their interest attaching to them will be paid when due.
o Suppliers and other trade creditors are interested in information that enables them to
determine whether amount owing to them will be paid when due.
o Customers are interested in the quality of goods and services

that they are getting from the entity.
o Government and their agencies require information in order to regulate the activities of the
enterprise, determine taxation policies and as a basis for national income and similar activities,
5 | AC101 SESSION 1
o Public are assisted by information through Financial statements about the trend and recent
developments in the prosperity of the enterprise and the range of its activities.
FUNDAMENTAL
CONCEPTS
Entity Concept
The most basic concept in accounting is the 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. Simply put, the transactions of different entities should not be accounted for together. Each entity should
be evaluated separately.
Periodicity Concept
An entity’s life can be meaningfully subdivided into equal time periods for reporting purposes.
For the purpose of reporting to outsiders, one year is the usual accounting period. Luca Pacioli, the
first author of an accounting text, wrote in 1494: “Books should be closed each year, especially in a
partnership, because frequent accounting makes for long friendship.”
Stable Monetary Unit Concept

The Philippine Peso is a reasonable unit of measure and that its a greater increase in the supply of
purchasing power is relatively stable. This is the basis for ignoring the effects money or credit than in the
of inflation in the accounting records. production of goods and services,
resulting in higher prices and a fall
in the purchasing power of money.

BASIC PRINCIPLES
Accounting practices follow certain guidelines. The set of guidelines and procedures that constitute acceptable
accounting practice at a given time is GAAP, which stands for generally accepted accounting 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.
Historical Cost. This principle states that acquired asset should be recorded at their the total cost of
actual cost and not at what management thinks they are worth as at reporting date. producing or buying an
item, which may include,
Calendar Year – starts in January and ends in December.
e.g., its price plus the
– starts in any month and ends after 12 months. cost of delivery or
storage.
6 | AC101 SESSION 1
Revenue Recognition Principle. Revenue is to be recognized in the accounting period when goods are
delivered or services are rendered or performed.
Expense Recognition Principle. Expenses should be recognized in the accounting period in which goods and
services are used up to produce revenue and not when the entity pays for those goods and services.
Adequate Disclosure. Requires that all relevant information that would affect the user’s understanding and
assessment of the accounting entity be disclosed in the financial statements.
Materiality. 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.
UNDERLYING
ASSUMPTIONS
Accrual Basis
Financial Statements are prepared on the accrual on the accrual basis of accounting and not as cash
or its equivalent is received or paid. Under this assumption, the effects of transactions and other events are
recognized when they occur and they are recorded in the accounting records and reported in the financial
statements of the periods to why they relate.
In short, transactions are recognized when “Revenue as they earned, even not yet
received and; Expenses as they incurred, even not yet paid.
In cash basis accounting, however, does not record a transaction until cash
is received or paid. Generally, cash receipts are treated as revenues and cash payments
as expenses.
Going Concern
Financial statements are normally prepared on the assumption that an enterprise is a going concern
and will continue in operation for a foreseeable future. It is assumed therefore that the enterprise has neither
the intention nor the need to liquidate its operations.
7 | AC101 SESSION 1
BUSINESS ORGANIZATION
FORMS OF BUSINESS ORGANIZATIONS
▪ Sole Proprietorship. This business organization has a single owner called the proprietor who generally
is also manager. It tends to be small service-type (e.g. physicians, lawyers and accountants) business and
retail establishments. The owner receives all profits, absorbs all losses and is solely responsible for all
debts of the business. From the accounting viewpoint, the sole proprietorship is distinct from its proprietor.
Thus, the accounting records do not include proprietor’s personal financial records.
▪ Partnership. 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.
Each partner is personally liable for any debt incurred by the partnership, except limited partner.
▪ Corporation. A business owned by its stockholders. 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. The stockholders are not personally liable for the corporation’s debt.
PURPOSE OF BUSINESS ORGANIZATIONS
▪ Service companies perform services for a fee (e.g. law firms, accounting and law firms, stock brokerage,
beauty salons and recruitment agencies)
▪ Merchandising companies purchase goods that are ready for sale and then sell these to customers (e.g.
car dealers, clothing stores and supermarkets)
▪ Manufacturing companies buy raw materials, convert them into products and then sell the products to
other companies or to final consumers (e.g. paper mills, steel mills, car manufacturers and drug
manufacturers)
MICRO, SMALL AND MEDIUM ENTERPRISES (MSME)
▪ Micro Enterprises are those with assets, before financing of P 3 million or less and employ not more
than nine (9) workers.
▪ Small Enterprises are those with assets, before financing of above P 3 million to P 15 million and
employ 10 to 99 workers.
8 | AC101 SESSION 1
▪ Medium Enterprises are those with assets, before financing of above P15 million to P100 million and
employ 100 to 199 workers.
ACTIVITIES IN BUSINESS ORGANIZATIONS
▪ Operating Activities are the principal activities of the enterprise. They are the transactions and events
that enter into the determination of profit and loss. E.g.: o Sale of services o Purchase of supplies o
Payment of various expenses like salaries and other benefits to employees, utilities, taxes and repairs and
maintenance, insurance, transportation and gasoline expense.
▪ Investing Activities are the acquisition and disposal of long-term assets and other investments. E.g.:
o Purchase of equipment, furniture, automobile and land o Cost of developing
and constructing office or building o Sale of used fixed assets o Loans and
advances to other parties o Investments in equity or debt instruments
▪ Financing Activities are activities that result in charges in the size and composition of the contributed
equity and borrowings of the enterprise. E.g.:
o Cash proceeds from issuing shares of stocks by a corporation o Cash proceeds and repayment
of bank loans and other long-term
barrowings.
**End of Session 1**
References: Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14th Edition.
Manila: Domdane Publishers and Made Easy Books. Ledesma, Ester L.(2014).Financial Accounting Theory
Review Booklets. Manila: CRC-Ace
The Professional CPA Review School. Rante, Gloria Aradaniel.(2013). Accounting for Service Entities.
Mandaluyong City:
Millenium Books, Inc.
9 | AC101 SESSION 1
NAME: YR.&SEC. COURSE: DATE
ACTIVITY NO. 1
Multiple Choice
1. Accounting is a service activity. Its function is to provide
a. Quantitative information b. Qualitative information c. Quantitative
and qualitative information d. None of the above 2. The basic purpose
of accounting is
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 in 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. 3. 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 to raise large capital; unlimited personal liability of
owners. d. Ability to raise large amounts of capital; limited personal
liability of owners. 4. Which of the following is
true?
a. Stockholders are personally liable for the liabilities of the
corporation if the company us unable to pay. b. Normally, stockholders can only sell their ownership
interests
when the corporation terminates. c. Partners are personally liable for the liabilities of the
partnership if the partnership is unable to pay. d. Partners can normally transfer their partnership interests
with
ease. 5. Which accounting process is the recognition or non-recognition of
business activities as accountable events?
a. Identifying b. Communicating c. Recording d. Measuring 6. 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
10 | AC101 SESSION 1
7. The entity concept means that
a. Because a firm is separate and distinct from its owners, 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 8. Accountants do not recognize that
the value of the peso changes over
the time. This concept is called the
a. Stable money unit concept b. Going concern concept c. Cost principle d.
Entity concept 9. The principle of objectivity includes the concept of
a. Summarization b. Verifiability c. Classification d. Conservatism 10. Which of the following is not a user of
internal accounting
information?
a. Store Manager b. Chief executive officer c. Creditor d. Chief financial officer 11. An event that affects the
financial position of an organization and
requires recording is called:
a. Transaction b. Account c. Business documents d. Operating activities 12. All of the following are
external users of accounting information
except:
a. Creditors, lenders and suppliers b. Present and potential
investors c. Government regulatory bodies d. Managers and
employees 13. It is the simplest of business organization
a. Service Entity b. Merchandising Entity c. Partnership d. Sole Proprietorship 14.
The following are examples of service business except:
a. SM Supermarket b. Amana Hotel and Resorts c. Cebu Pacific d. Manila Water Inc. 15. The
following are examples of manufacturing business, except:
a. Toyota Motors, Inc.
b. Sony Philippines c. Red Ribbon Bakeshop d. Rolex Watch Repair Shop 16. All of the following are
qualitative characteristics of financial
statements except:
a. Understandability b. Relevance c. Materiality d. Going Concern 17. Financial information must possess
this characteristic in order for the users to easily understand the contents of the financial statements.
a. Reliability b. Completeness c. Relevance d. Understandability 18. The
measurement phase of accounting is accomplished by
a. Storing data b. Reporting to decision makers c. Recording data d. Processing data
19. The communication phase of accounting is accomplished by
a. Storing data b. Reporting to decision makers c. Recording data d. Processing data 20. A professional
accountant should be straightforward and honest in all professional and business relationships. This is in
consonance with the fundamental principle of
a. Integrity b. Objectivity c. Confidentiality d.
Professional competence and care
Fundamentals
of Accounting
1
SESSIO
N2
BASIC CONSIDERATION ON FINANCIAL

STATEMENTS
Desired Learning
Outcomes
• Understand and explain the objective and
qualitative characteristics of financial statements.
• Distinguish the elements of financial statements, its
recognition and measurements.
• Learn and apply the principle of Accounting
Equation, the rule of debits and credits.
• Understand Accounting events and transactions,
types and effects of transactions
FINANCIAL
STATEMENTS
OBJECTIVE
S
Provide information about the financial position, performance and changes in financial position of an
entity that is useful to a wide range of users in making economic decisions.
Financial statements prepared for this purpose:
▪ Meet the common needs of most users
▪ Also show the results of the stewardship* of management, or accountability of management for
the resources entrusted to it.
▪ Do not, however, provide all the information that users may need to make decisions since they
largely portray the financial effects of past events and do not necessarily provide non- financial
information.
*e.g. in prev. times, it is the one employed by a large household or estate to manage domestic concerns such
as supervision of servants, collection of rents and keeping of accounts.
QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS
A. Fundamental qualitative characteristics

a. Relevance b. Faithful
Representation
B. Enhancing Qualitative characteristics

a. Comparability b.
Verifiability c. Timeliness d.
Understandability
RELEVANC
E
Relevant financial information is capable of making a difference in the decision made by users,
influences the economic decisions of users by helping them to evaluate, past, present, or future events or
confirming, or correcting, their past evaluations.
a. Predictive value. Financial information has predictive value if it can be used as input to processes
employed by users to predict future outcomes. For e.g. information about financial position and past
performance is frequently used in predicting wages payments, and the ability of the entity to meet maturing
obligations.
b. Confirmatory value (or feedback). Financial information has confirmatory value if it provides feedback
about (confirms or changes) previous evaluation. Information with feedback value enables users to confirm
or correct expectations.
FAITHFUL REPRESENTATION
To be useful, financial information must not only represent relevant phenomena, but it must also
faithfully represent the phenomena that it purports to represent.
a. Completeness. A complete depiction includes all information necessary for a user to understand the
event or information being presented, including all necessary descriptions and explanations.
b. Neutrality. A neutral presentation is one without bias.
c. Freedom from error. Means there are no errors or omissions in the description of the phenomenon, and
the process used to produce the reported information has been selected and applied with no errors in the
process.
ENHANCING QUALITATIVE CHARACTERISTICS
a. Comparability. It enables the users to identify and understand similarities in, and differences among,
items. Consistency, although related to comparability, is not the same.
“Comparability is the goal; consistency helps to achieve that goal.”
b. Verifiability. Means that different knowledgeable and independent observers could reach consensus,
although not necessarily complete agreement, that a particular depiction is a faithful representation.
c. Timeliness. Means having information available to decision-makers in

time to be capable of influencing their decisions. d. Understandability. Means classifying, characterizing,
and presenting
information clearly and concisely.
THE ELEMENTS OF FINANCIAL STATEMENTS
The financial statements portray the financial effects of transactions and other events by grouping
them into broad classes according to their economic characteristics. These termed the elements of financial
statements. Elements directly related to measurement of financial position are:
Elements directly related to measurement of financial position are:

▪ Assets
▪ Liabilities
▪ Equity Elements directly related to measurement of performance are:
▪ Income
▪ Expense
RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS
Recognition is the process of incorporating in the balance sheet or income statement an
item that meets the definition of an element and satisfies the criteria for recognition. An item that meets the
definition of an element should be recognized if:
▪ It is probable that any future economic benefit associated with the item will flow to or from the enterprise;
and
▪ The item has a cost or value that can be measured with reliability.
MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS
Measurement is the process of determining the monetary amounts at which the elements of financial
statements are to be recognized and carried in the balance sheet and income statement. This involves the
selection of a particular basis of measurement. A number of these are used to different degrees and in varying
combinations in financial statements. They include the following:
HISTORICAL COST. Assets are recorded at the amount of cash or cash equivalents paid or the fair value of
the consideration given to acquire them at the time their acquisition.
CURRENT COST. Assets are carried at the amount of cash or cash equivalents that would have to be paid if
the same or an equivalent asset was acquired currently.
“Liabilities are carried at the discounted amount of cash and cash equivalents that would be required to settle
the obligation currently.”
RELIAZABLE (SETTLEMENT) VALUE
Reliazable value. Assets are carried at the amount of cash or cash equivalents that could currently be
obtained by selling an asset in an orderly disposal.
Settlement value. Liabilities are carried at the undiscounted amounts of cash or cash equivalents
expected to be paid to satisfy the liabilities in the normal course of business.
Present Value. Assets/liabilities are carried at present discounted value of the future net cash inflows/outflows
that the item is expected to generate/settle in the normal course of business.
GUIDELINES IN THE PRESENTATION OF FINANCIAL STATEMENTS
Philippine Accounting Standard 1 (PAS) gives us the following guidelines in the presentation of
financial statements.
(1) Each component of the financial statements shall be clearly identified and the following information
shall be emphasized for a proper understanding of the information presented:
i. The name of the reporting entity; ii. Whether the financial statements cover the individual
entity or a group of entities. (2) The period covered by the financial statement shall be specified.
Note: For Balance Sheet, use As of (date). For Income Statement, Statement of
Changes in Owner’s Equity and Statement of Cash flows, use For the month/year
ended (date).
FINANCIAL POSITION
The financial position of an enterprise is affected by the economic resources it controls, its financial
structure, it liquidity and solvency, and its capacity to adapt to changes in the environment in which it operates.
This is primarily provided in the Statement of Financial Position or Balance Sheet.
It answers the following questions:
▪ What assets does entity own?
▪ What does it owe?
▪ What are the residual equity interests in the entity’s net assets?
Other important information provided by the statement of financial position is as follows:
▪ Financial structure – is the source of financing for the assets of the enterprise. It indicates what
amount of assets has been financed by creditors, which is borrowed capital, and what amount of
assets has been financed by owners, which is invested capital.
Significance:
(1) Useful in predicting future borrowing needs and how future profits and cash flows
will be distributed among those with an interest in the enterprise. (2) Useful in
predicting how successful the enterprise is
likely to be raising further finance.
▪ Liquidity – refers to the availability of cash in the near future after taking account of financial
commitments over this period.
Significance:
(1) Useful in predicting the ability of the enterprise to meet its short-term financial
commitments as they fall due.
▪ Solvency – refers to the availability of cash over the longer term to meet financial commitments as
they fall due.
Significance:
(1) Useful in predicting the ability of the enterprise to meet its long-term financial
commitments as they fall due.
▪ Capacity for adaption – the ability of the enterprise to use its available cash for unexpected
requirements and investment opportunities. This is also known as financial flexibility.
(1) Information about the economic resources controlled by the enterprise and its
capacity for adaptation is useful in predicting the ability of the enterprise to generate
cash and cash equivalents in the future.
COMPOSITION OF A STATEMENT IN FINANCIAL POSITION
Assets
These are resources controlled by the enterprise * as a result of past events** and from which future
economic benefits*** are expected to flow to the enterprise.
For example, an asset may be:

• Used singly or in combination with other assets in the production of goods or services to be sold
by the enterprise;
• Exchanged for other assets;
• Used to settle a liability;
• Distributed to the owners of the enterprise.
Assets are should be classified only in two: current assets and non- current assets. 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 months.
*Controlled by the enterprise – control is the ability to obtain the economic benefits and to
restrict the access of others (e.g. an entity being the sole user of its plants and equipment or
by selling idle assets) **Past events – The event must be past before an asset can rise. (E.g.
equipment will only become an asset when there is the right to demand delivery or access to
the asset’s potential. Dependent on the terms of the contract, this may be on acceptance of
the order or on delivery. ***Future economic benefits – These are evidenced by the
prospective receipt of cash. This could be cash itself, an account receivable or any item which
may be sold. Although, for example, a factory may not be sold for it houses the manufacturing
facility for the goods. When these goods are sold, the economic benefit resulting from the use
of the factory is realized as cash.
Current Assets
An entity shall classify assets as current when:

a. It expects to realize the asset, or intends to sell or consume
it, in its normal operating cycle; b. It holds the asset primarily for the purpose of trading; c. It expects to
realize the asset within twelve months after the
reporting period; d. The asset is cash or cash equivalent unless the asset is restricted from being
exchanged or used to settle a liability for at least months after the reporting period.
1. Cash any medium of exchange that a bank will accept for deposit at face value. It includes coins,
currency, checks, money orders, bank deposits and drafts.
*Money orders is a document which can be bought as a way of sending money
through the post.
2. Cash Equivalents these are short-term, highly liquid investments that are readily convertible to known
amounts of cash and which are subject to an insignificant risk of changes in value.
3. Accounts Receivable These are claims against customers arising from sale of services or goods on
credits. This type of receivable offers less security than a promissory note.
4. Notes Receivable A note receivable is a written pledge that the customer will pay the business a fixed
amount of money on a certain date.
5. Inventory or Merchandise Inventory these are assets which are (a) held for sale by the company, (b)
in the process of production for such sale, (c) in the form of materials (raw materials) or supplies to be
consumed in the production.
6. Supplies this may be office supplies like bond papers, paper clips and the like or can be also store
supplies like boxes, bags, packaging tapes and other related materials.
7. Prepaid Expenses These are expenses paid for by the business in advance. It is an asset because the
business avoids, having to pay cash in the future for a specific expense. This includes insurance and
rent.
Non-current Assets
All other assets not classified or does not fall under the criteria of current assets are called non-current
assets.
1. Property, Plant and Equipment (PPE) these are tangible assets that are held by an enterprise for use in
the production or supply of goods or in rendering services, or for rental to other, or for administrative purposes
and which are expected to be used during more than one period. These are: a. Land b. Building c. Office
Equipment d. Furniture and Fixtures
e. Delivery Equipment f. Store Equipment g. Service Vehicle
2. Accumulated Depreciation applies to property, plant and equipment except land as a contra account that
contains the sum of periodic depreciation charges. The reflected amount is deducted from the cost of the
related asset to obtain book value.
To illustrate: The Company has an office equipment worth P500,000 with a useful life of 10 years acquired last
June 1, 2013.
Office Equipment P 500,000 Accumulated Depreciation – O/E (100,000) Net book value P 400,000
Formula: Annual Depreciation = Cost of the PPE – salvage value* (if any) Life (n)
Accumulated Depreciation = Annual depreciation x age of the PPE *Salvage value is the value of an asset if
sold for scrap and also called as Residual or scrap value.
To compute:
= 500,000 = 50,000 annual depreciation
10 = 50,000 x 2 years = 100,000 Accu. Dep.
(from june 1 2013 to june 1 2015)
3. Intangible These are identifiable, nonmonetary assets without physical substance held for use in the
production or supply of goods or services, for rentals to others or for administrative purposes. These are: a.
Goodwill
b. Patents c. Copyrights d. Licenses
e. Franchises f. Trademarks g. Brand names
7
LIABILITIES
A 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 can be measured benefits.
*Obligation – These maybe legal or not. A duty to do something or a debt. * Transfer

economic benefits - This could be a transfer of cash, or another property, the provision of a
service or the refraining from activities which would otherwise be profitable.
The settlement of a present obligation involving outflow of resources may take the form of:
a. Payment of cash b. Transfer of other assets c. Provision for services d. Replacement of
the present obligation with another obligation e. Conversion of the obligation to equity
Current Liabilities
An entity shall classify a 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 months after the
reporting period; or d. The entity does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting period.
1. Accounts payable This account represents the reverse relationship of the accounts receivable. Due to
suppliers of goods and other assets purchased on credit.
2. Notes Payable A note payable is like a note receivable but in a reverse sense. The business entity is
the maker of the note; that is, the entity is the party who promises to pay in a specified amount of money
on specified future date.
3. Accrued Liabilities Amounts owed to others for unpaid expenses. This

account includes:
a. Salaries payable b. c. Interest payable d.
Utilities payable Taxes payable
4. Unearned Revenues When the business entity receives payment before providing its customers with
goods or services, the amounts received are recorded in the unearned revenue account (liability method).
When the goods or services are provided to the customer, the unearned revenue is reduced and income is
recognized.
8
5. Current portion of Long-term debt These are portions of long-term liabilities which are to be paid
within one year from the balance sheet date.
Non-current liabilities
All other liabilities not classified or does not fall under the criteria of current liabilities are called non-current
liabilities.
1. Mortgage payable This account records long-term debt of the business entity for which the entity has
pledged certain assets as security to the creditor.
2. Bonds payable is an obligation in connection with the bond, a contract between the issuer and the
lender specifying the terms of repayment and the interest to be charged. OWNER’S EQUITY
Equity is defined as the residual interest in the asset of an entity that remains after deducting all its liabilities.
1. Capital this account is used to record original and additional investment of the owner of the business
entity. In partnership, Partners’ Capital is use as its capital account while in corporation is Shareholders’
Equity.
2. Withdrawals When the owner of a business entity withdraws cash or other assets, such are recorded in
the drawing or withdrawal account rather than directly reducing the owner’s equity account.
3. Income Summary It is a temporary account used at the end of the accounting period to close the
income and expenses. This account shows the profit or loss for the period before closing to the capital
account.
FINANCIAL PERFORMANCE reflected by accrual accounting*
Performance of an enterprise – comprise its revenue, expenses, net income or loss for a period of time. It is
the level of income earned by the enterprise through efficient and effective use of its resources. Information
about performance is primarily provided in an Income Statement or Statement of Financial Performance or
Statement of Comprehensive Income or Statement of Income and Expenses.
*Accrual Accounting recognizes transactions and other events of a reporting entity in the periods in which
those effects occur, even if the resulting cash receipts and payments occur in a different period.
COMPOSITION OF STATEMENT OF FINANCIAL PERFORMANCE
REVENUE OR
INCOME
These are increases in economic benefits during the accounting period in the form of inflows or
enhancements of assets or decrease of liabilities from delivery or production of goods, rendering of services, or
other activities that constitute the enterprise’s major operations.
1. Service Income Revenues earned by performing services for a customer or client, for e.g. accounting
services by a CPA firm, laundry services by a laundry shop.
2. Sales Revenues earned as a result of sale of merchandise; for e.g. sale

of merchandise by General Merchandise Store.
EXPENSE
S
These are decrease in economic benefits during the period in the form of outflows or using up of
assets or incurrence of liabilities that result in decreases in equity, other than relating to distributions to equity
participants.
1. Cost of Sales The cost incurred to purchase or to produce the products

sold to customers during the period; also called as cost of goods sold.
2. Salaries and Wages Expense includes all payments as a result of an employer-employee relationship
such as salaries and wages, 13th month pay, cost if living allowances, other related benefits.
3. Utilities Expense expenses related to use of telecommunications

facilities, consumptions of electricity, fuel and water.
4. Rent Expense expense for space, equipment or other asset rentals.
5. Supplies Expense expense of using supplies in the conduct of daily

business.
6. Insurance Expense portion of premiums paid on insurance coverage which

has expired.
7. Depreciation Expense portion of the cost of a tangible asset allocated

or charged as expense during an accounting period.
8. Uncollectible Accounts Expense the amount of receivables estimated to be doubtful of collection and
charged as expense during an accounting period.
1
0
9. Interest Expense An expense related to use of borrowed funds.
CHANGES IN FINANCIAL POSITION
It refers to the changes in the economic resources and obligation of an enterprise. In constructing a statement
of changes in Owner’s Equity, funds can be defined in various ways, such as all financial revenues, working
capital, liquid assets or cash.
THE ACCOUNT
The basic summary device of accounting is the account. A separate account is maintained for each element
that appears in the balance sheet (assets, liabilities, and equity) and in the income statement (income and
expense). Thus, an account may be defined as a detailed record of the increases, decrease and balance of
each element that appears in an entity’s financial statements.
The simplest form of the account is known as the “T” account because of its similarity to the letter T. the
account has three parts as shown on the next page.
Account Title Left side or Debit side
Right side or credit side
THE ACCOUNTING EQUATION and DEBITS AND CREDITS-THE DOUBLE ENTRY SYSTEM
=+
Balance
The basic tool of accounting is the accounting equation. The left side of the equation shows how much the
business owns, and the right side of the equation shows how much resources do the outside creditor and
owner supplied to the business.
The logic of debiting and crediting is related to the accounting equation. Transactions may require addition to
both sides (left or sides),
Assets
Liabilities
Equity
11
subtractions from both sides (left and right sides), or an addition and subtraction on the same side (left or right
sides). But in all cases the equality must be maintained as shown above.
Accounting is based on a double-entry system which means that the dual effects of business are
recorded. A debit side entry must have a corresponding credit side entry. For every transaction, there must
be one or more accounts debited and one or more accounts credited and must be equal both sides. Each
transaction affects at least two accounts.
The rules of debit and credit in accounts.
ACCOUNT DEBIT CREDIT Assets + - Liabilities - + Capital or Equity - +

Revenue or Income - + Expenses + -
(+) increase; (-) decrease
ACCOUNTING EVENTS AND

TRANSACTIONS
An accounting event is an economic occurrence that causes changes in an enterprise’s assets,

liabilities, and/or equity. A transaction is a particular kind of event that involves the transfer of something of
value between two entities.
Accountants observe many events that they identify and measure in financial terms. A business
transaction is the occurrence of an event or a condition that affects financial position and can be reliably
recorded.
Financial transaction worksheet
Every financial transaction can be analyzed or expressed in terms of its effects on the accounting equation.
The financial transactions will be analyzed by means of a financial transaction worksheet which is a form used
to analyze increases and decreases in the assets, liabilities or owner’s equity of a business entity.
When a specific asset, liability or owner’s equity item is created by a financial transaction, it is listed in the
financial transaction worksheet using the appropriate accounts.
1
2
To illustrate:
Mr. Wagmalito Kayayan wants to open an accounting firm this year. The following transactions are made
during the month.
May 1. Mr. W. Kayayan invested P100,000 to start an accounting office.
W. Kayayan Accounting Firm Financial Transaction Worksheet Month of May 2015
May 2015
ASSET = LIABILITIES + OWNER’S EQUITY Cash Accounts
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital 1 100,000 100,000
The financial transaction is analyzed as follows:
• An entity separate and distinct from Kayayan’s personal financial affairs is created.
• An economic resource – cash of P 100,000 is invested in the business entity. The source of this asset is the
contribution made by the owner, which represents owner’s equity. The owner’s equity account is W. Kayayan,
Capital.
• The dual nature of the transaction is that cash is invested and owner’s equity created. The effects of this
transaction on the accounting equation are as follows: increase in asset – cash from zero to P 250,000 and
increase in owner’s equity from zero to P 250,000.
May 3. Purchased office supplies worth P20,000 on account.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 100,000 100,000
3 20,000 20,000 Bal. 100,000 0 20,000 0 = 20,000 0 + 100,000
120,000 = 120,000
The effect of transaction is increase in asset and increase in liabilities. Take note that the equality of the two
sides of the equation is maintained.
May 5. Purchased additional office supplies for cash, P10,000.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 100,000 0 20,000 0 = 20,000 0 + 100,000
13
5 (10,000) 10,000 Bal. 90,000 0 30,000 0 = 20,000 0 + 100,000
120,000 = 120,000
The effect of transaction is increase in asset and decrease in another asset form of asset. After posting the
transaction, total asset amounts to P120,000 and total liabilities and capital amount to P120,000.
May 6. Paid the accounts payable in full.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 90,000 0 30,000 0 = 20,000 0 + 100,000
6 (20,000) (20,000) Bal. 70,000 0 30,000 0 = 0 0 + 100,000
100,000 = 100,000
Transaction reduces both sides of the equation by P20,000 resulting to the equality of the equation after
posting.
May 8. Purchased 2 units of computer with printer for P50,000, 30 days.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 100,000 100,000
8 50,000 50,000 Bal. 70,000 0 30,000 50,000 = 50,000 0 + 100,000
150,000 = 150,000
May 10. Rendered accounting services for cash, P25,000.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 70,000 0 30,000 50,000 = 50,000 0 + 100,000
10 25,000 25,000 Prof.fee Bal. 95,000 0 30,000 50,000 = 50,000 0 + 125,000
175,000 = 175,000
May 15 Rendered accounting services on account, P 30,000.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 95,000 0 30,000 50,000 = 50,000 0 + 125,000
14
15 30,000 30,000 Prof.fee Bal. 95,000 30,000 30,000 50,000 = 50,000 0 + 155,000
205,000 = 205,000
May 15 Paid Meralco bills, P 3,500.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 95,000 30,000 30,000 50,000 = 50,000 0 + 155,000
15 (3,500) (3,500)Utility
Exp. Bal. 91,500 30,000 30,000 50,000 = 50,000 0 + 151,500
201,500 = 201,500
May 15 Paid salaries for the period, P15,000.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 91,500 30,000 30,000 50,000 = 50,000 0 + 151,500
15 (15,00) (15,000)Salaries
Exp. Bal. 76,500 30,000 30,000 50,000 = 50,000 0 + 136,500
186,500 = 186,500
May 20 Collected P10,000 from customer.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 76,500 30,000 30,000 50,000 = 50,000 0 + 136,500
20 10,000 (10,000) Bal. 86,500 20,000 30,000 50,000 = 50,000 0 + 136,500
186,500 = 186,500
May 22 A Short term loan from a local bank was granted in the amount of P50,000, less P5,000 financing
charges. Mr. W. Kayayan issued 1 year promissory note.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 86,500 20,000 30,000 50,000 = 50,000 0 + 136,500 22 45,000 50,000 (5,000)
Interest Expense Bal. 131,500 20,000 30,000 50,000 = 50,000 50,000 + 131,500
231,500 = 231,500
15
May 25 Paid telephone bill amounting to P 6,000.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 131,500 20,000 30,000 50,000 = 50,000 50,000 + 131,500
25 ( 6,000) (6,000) Comm.
Expense Bal. 125,500 20,000 30,000 50,000 = 50,000 50,000 + 125,500
225,500 = 225,500
May 27 Mr. Kayayan withdrew P20,000 for personal use.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 125,500 20,000 30,000 50,000 = 50,000 50,000 + 125,500
27 (20,000) (20,000)Kayayan,
Withdrawals Bal. 105,500 20,000 30,000 50,000 = 50,000 50,000 + 105,500
205,500 = 205,500
May 30 At the end of the month, physical count of the office supplies
revealed that P 5,000 had been consumed.
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital Bal. 105,500 20,000 30,000 50,000 = 50,000 50,000 + 105,500
30 ( 5,000) (5,000)Supplies
Expense Bal. 105,500 20,000 25,000 50,000 = 50,000 50,000 + 100,500
200,500 = 200,500
16
Summary of W. Kayayan in tabular Form
W. Kayayan Accounting Firm Financial Transaction Worksheet Month of May 2015
May 2015
Receivable
Office Supplies
Office Equipment
= Accounts
Payable
Notes Payable
+ W. Kayayan
Capital 1 100,000 100,000 3 20,000 20,000 5 (10,000) 10,000 6 (20,000) (20,000) 8 50,000 50,000 10 25,000
25,000 Prof.fee 15 30,000 30,000 Prof.fee 15 (3,500) (3,500)Utility
Exp. 15 (15,00) (15,000)Salaries
Exp. 20 10,000 (10,000) 22 45,000 50,000 (5,000) Interest
Expense 25 ( 6,000) (6,000) Comm.
Expense 27 (20,000) (20,000)Kayayan,
Withdrawals 30 ( 5,000) (5,000)Supplies
Expense Bal. 105,500 20,000 25,000 50,000 = 50,000 50,000 + 100,500
200,500 = 200,500
USE OF T-ACCOUNTS
Analyzing and recording transactions using the accounting equation is useful in conveying a basic
understanding of how transactions affect the business. However, it is not an efficient approach once the
number of accounts involved increases. Double-entry system provides a formal system of classification and
recording business transactions.
May 1. Mr. W. Kayayan invested P100,000 to start an accounting office.
Cash W. Kayayan, Capital 5/1 100,000 100,000 5/1
May 3. Purchased office supplies worth P20,000 on account.
Office Supplies Accounts Payable 5/3 20,000 20,000 5/3
17
May 5. Purchased additional office supplies for cash, P 10,000.
Office Supplies Cash 5/3 20,000 5/5 10,000
5/1 100,000 10,000 5/5
May 6. Paid the accounts payable in full, P20,000
Accounts Payable Cash 5/6 20,000 20,000 5/3 5/1 100,000 10,000 5/5 20,000 5/6
May 8. Purchased 2 units of computer with printer for P50,000, 30 days.
Accounts Payable Office Equipment 5/6 20,000 20,000 5/3 50,000 5/8
5/8 50,000
May 10. Rendered accounting services for cash, P25,000.
Cash Professional Fees 5/6 20,000 5/10 25,000
25,000 5/10
May 15. Rendered accounting services on account, P30,000.
Accounts Receivable Professional Fees 5/15 30,000 25,000 5/10 30,000 5/15
May 15. Paid Meralco bills, P3,500.
Cash Utilities Expense 5/6 20,000 5/10 25,000
20,000 5/3 50,000 5/8
5/15 3,500
May 15. Paid salary of office staffs,P15,000
Cash Salaries Expense 5/6 20,000 5/10 25,000
20,000 5/3 50,000 5/8 3,500 5/15
5/15 15,000
May 20. Collected P 10,000 from customer.
Cash Accounts Receivable 5/6 20,000 5/10 25,000 5/20 10,000
20,000 5/3 50,000 5/8 3,500 5/15 15,000 5/15
20,000 5/3 50,000 5/8 3,500 5/15 15,000 5/15
5/15 30,000 10,000 5/20
May 22. A short term loan from a local bank was granted in the amount of P50,000, less P5,000 finance
charges. W. Kayayan issued 1 year promissory note.
18
Cash Notes Payable 5/6 20,000 5/10 25,000 5/20 10,000 5/22 45,000
50,000 5/22
Interest Expense
5,000 5/22
May 25. Paid telephone bill amounting to P6,000.
Cash Telephone Expense 5/6 20,000 5/10 25,000 5/20 10,000 5/22 45,000
20,000 5/3 50,000 5/8 3,500 5/15 15,000 5/15
5/25 6,000
May 27. W. Kayayan withdrew cash P20,000 for her personal use.
Cash W. Kayayan drawing 5/6 20,000 5/10 25,000 5/20 10,000 5/22 45,000
20,000 5/3 50,000 5/8 3,500 5/15 15,000 5/15 6,000 5/25
5/27 20,000
May 30. At the end of the month, physical count of the office supplies
revealed that P5,000 had been consumed.
Office Supplies Supplies Expense 5/3 20,000 5/5 10,000
20,000 5/3 50,000 5/8 3,500 5/15 15,000 5/15 6,000 5/25 20,000 5/27
5,000 5/30 5/30 5,000
References: Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14 th
Edition. Manila: Domdane Publishers and Made Easy Books. Ledesma, Ester L.(2014).Financial Accounting
Theory Review Booklets. Manila:
CRC-Ace The Professional CPA Review School. Rante, Gloria Aradaniel.(2013). Accounting for Service
Entities. Mandaluyong
City: Millenium Books, Inc.
19
ACTIVITY NO. 1
MULTIPLE CHOICE
1. If a business is not being sold or closed, the amounts reported in the accounts for assets used in the
business operations are based on the cost of assets. This practice is justified by
a. Accrual b. Time period c. Going concern d. Accounting entity 2. It is the capacity of information to make
a difference in decision by helping users evaluate past, present and future events, or confirming, or
correcting their past evaluations.
a. Relevance b. Reliability c. Understandability d. Comparability 3.
The attributes of relevance include all except
a. Neutrality b. Materiality c. Predictive value d. Feedback value 4. It is the quality of information that
assures readers that the information is free from bias or error and faithfully represents what it purports to
show.
a. Relevance b. Reliability c. Understandability d. Comparability 5. The financial accounting information is
directed toward the common needs of users and is independent of presumptions about particular needs
and desires of specific.
a. Neutrality b. Relevance c. Completeness d. Verifiability 6. It is the result of the
standard of adequate disclosure
a. Completeness b. Neutrality c. Faithful Representation d. Substance over form 7. The financial
information must be comprehensible or intelligible if it
is to be useful.
a. Comparability b.
Understandability
2
0
c. Relevance d. Reliability 8. It is the ability to bring together for the purpose of noting
similarities and dissimilarities
a. Relevance b. Reliability c. Comparability d. Understandability 9. Financial reporting is concerned only
with information that is
significant enough to affect evaluation or decision.
a. Materiality b. Timeliness c. Comparability d. Cost and benefit
10. The purchase of an asset on account will
a. Increase total liabilities and decrease total assets b. Have no effect on total assets or
total liabilities c. Increase total assets and increase total liabilities d. Increase total
assets and decrease owner’s equity 11. Amounts owed by a business are referred to as
a. Assets b. Equities c. Liabilities d. Capital 12. Which of the following equations is the fundamental
accounting
equation?
a. Assets – Liabilities = Owner’s Equity b. Assets = Liabilities + Owner’s Equity c. Assets – Owner’s Equity
= Liabilities d. Assets – Owner’s Equity = Liabilities 13. When an owner deposits cash in an account in the
name of the business,
it is an increase to
a. Cash and Accounts receivable b. Cash and withdrawals c. Cash and capital d.
Cash and expenses 14. Which of the following is not considered an account?
a. Equipment b. Revenues c. Accounts Payable d. Cash e. Accounts Receivable 15. If an owner invests
her computer and printer in the business, there is
an increase to
a. Cash and capital b. Computer Equipment and
withdrawals c. Cash and withdrawals d. Computer
equipment and capital
2
1
16. The owner invested P50,000 in the business. What are the effects on
the fundamental accounting equation?
a. Assets increase P50,000; liabilities no effect; owner’s equity
increase P50,000 b. Assets increase P50,000; liabilities decrease P50,000; owner’s
equity increase P50,000 c. Assets increase P50,000; liabilities increase P50,000; owner’s
equity no effect d. Assets increase P50,000; liabilities no effect; owner’s equity
decrease P50,000 17. The purchase of an asset for cash will
a. Increase total assets and decrease total liabilities b. Have no effect on total assets or
total liabilities c. Increase total assets and increase total liabilities d. Increase total assets
and increase total owner’s equity 18. When the rent for the business is paid with a check
a. Cash is decreased and rent expense is decreased b. Cash is decreased and rent
income is increased c. Cash is decreased and rent expense is increased d. Cash is
decreased and accounts payable is decreased 19. The purchase of supplies for cash
will
a. Increase supplies and decrease cash b. Increase supplies expense and decrease cash c. Decrease
cash and increase accounts payable d. Decrease cash and increase capital 20. Which of the following
transactions does not include an increase to
expense?
a. Received and paid the phone bill b. Bought office
supplies on account c. Received cash for services
performed d. Paid the week’s salaries
2
2
ACTIVITY NO. 2
PROBLEM
#1
Assets Liabilities Onwner’s Equity 1 760,000 360,000 2 860,000 592,000 3

108,000 760,000 4 626,600 376,240 5 800,000 (100,000) 6 600,000 450,000 7
530,000 410,000 8 473,000 153,700 9 147,000 236,500 10 624,000 237,000
❖ Fill the amount of the missing element of the financial position.
PROBEM
#2
Income Expense Profit (Loss) 1 840,000 360,000 2 2,400,000 540,000 3

1,300,000 860,000 4 2,000,000 720,000 5 1,800,000 (400,00) 6 750,000
500,000 7 500,000 600,000 8 700,000 150,000 9 600,000 (150,000) 10
900,000 900,000
❖ Fill the amount of the missing element of the financial performance.
PROBEM
#3
1. At the beginning of the year, the assets of Luke Services were P360,000 and its owner’s equity was P200,000.
During the year, assets increased by P120,00 and liabilities increased by P20,000. What was the owner’s equity at the
end of the year? 2. The liabilities of Neechee Company equal one-third of the total assets, and the owner’s equity is
P240,000. What is the amount of the liabilities? 3. At the beginning of the year, Cora Station had liabilities of
P100,000 and owner’s equity of P96,000. If assets increased by P40,000 and liabilities decreased by P30,000. What
was the owner’s equity at the end of the yaer? ❖ Use the accounting equation to answer each of the questions
above.
2
3
ACTIVITY NO. 3
PROBLEM #1
Instruction: Indicate on the space provided,(1)(X)on the element where the account belong (2) BS if the
account is Balance Sheet account and IS if the account is income statement account; Dr (debit) or Cr (credit) to
identify the normal balance of the account.
OWNER’S
Accounts ASSET LIABILITES
BS or IS Dr or Cr
EQUITY 1. Repairs and Maintenance
Expense 2. Salaries and Wages
Expense 3. Notes Payable 4. Notes Receivable 5. Service Vehicle 6. Mortgage Payable 7. Utilities Expense 8.
Furniture and Fixtures 9. Communication Expense 10. Employees’ benefits
payable 11. Office Equipment 12. Prepaid Insurance 13. Owner’s Withdrawal 14. Professional fees
earned 15. Accounts Receivable 16. Representation Expense 17. Salaries Payable 18. Office Supplies
Expense 19. Office Supplies 20. Accounts payable 21. Cash 22. Inventory 23. Land 24. Accumulated
Depreciation 25. Miscellaneous Expense 26. Prepaid Rent 27. Rent Expense 28. Juan, Capital 29. Insurance
Expense 30. Depreciation Expense
24
ACTIVITY NO. 4
PROBLEM #1 Identifying the effects of a transaction
Instruction: Indicate the following sign in the appropriate column; (+) for increases, (-) for decreases, and (+/-)
for both increase and decrease.
Owner’s
Assets Liabilities
Equity 1. Cash payment by the owner (investment) 2. Payment for taxes and licenses expense 3. Repair and
maintenance of office 4. payment of rent expense 5. Purchase of office supplies on account 6. Purchase of
office supplies for cash 7. Payment of accounts payable 8. Provide services for cash 9. Purchase of equipment
and furniture for cash 10. Purchase of equipment and furniture giving a 30day promissory note 11. Payment of
salaries of employees 12. Personal transaction like withdrawal of the owner 13. Provide services on account
14. Provide services for cash 15. Collection of account from a customer 16. Payment of utility bills 17. Provide
services receiving a 30day promissory note 18. Payment for other expenses 19. Bought supplies paying 50%
on cash, and the remaining on account. 20. Rendered service receiving partial payment on cash and the
remaining on account.
25
ACTIVITY NO. 5
PROBLEM #1 Transactions in a Completed Worksheet
Kaya Paba, to be able to guide the business administration students in their pursuits to pass the accounting
subject they enrolled, established the KP Tutorial Services. On May 1, 2015, she contributed P70,000 as
investment to start the business. During the month, she entered into several transactions. Note that she made
no withdrawals during the month. The following is the transactions worksheet prepared by her student-
assistant:
CASH + ACCOUTS
RECEIVABLE
+ OFFICE
EQUIPMENT
= ACCOUNT PAYABLE
+ NOTES
PAYABLE
+ K. PABA,
CAPITAL 1 70,000 70,000 2 (45,000) 45,000 3 30,000 10,000 20,000 4 18,000 18,000 5 (5,000) (5,000) 6
7,000 7,000 7 (10,000) (10,000) 8 15,000) (15,000) 9 (7,000) (7,000)
❖ Describe each of the above transactions. ❖ If these transactions represent the operations of KP Tutorial Services during
month of May, what was the amount of profit or loss before depreciation?
26
ACTIVITY NO. 6
PROBLEM #1 Recording Transactions in a Financial Transaction Worksheet
Emerita Modesto established her own business called Modesto’s Self-storage. The account leadings are
presented below. Transactions completed during the moth follow.
a. Deposited P120,000 in a bank account in the name of the business. b. Bought office equipment on account
from PHINMA Company, P31,000. c. Paid rent for the month, P24,000. d. Bought supplies for cash, P4,500. e.
Paid salaries, P9,800. f. Received cash for storage services, P36,000. g. Received and paid the utility bill,
P2,520. h. Paid Errol Umerez Graphics for advertising, P4,280. (The bill was not
previously recorded.) i. Paid for a one-year liability insurance policy, P8,350. j. Billed customers for storage
services on account, P33,700. k. Received cash for storage services, P23,000. l. Paid salaries, P9,900. m.
Paid PHINMA Company P11,000 as part payment on the office equipment
bought in transaction b. n. Modesto withdrew P12,000 for personal use.
Required:
1. Record the transactions in columnar form, write plus and minus signs, and show the balance after each
transaction to be sure the equation remains in balance. 2. Write the proof of totals at the bottom to show that
one side of the
equations equals the other side.
ASSETS = LIABILITIES OWNER’S EQUITY
Cash Receivable
Accounts
Prepaid Insurance
= Accounts
Office Equipment Payable
Modesto,
Revenue Expenses
Capital a 120,000 120,000 Bal. 120,000 0 0 0 0 120,000 0 0
27
ACTIVITY NO. 7
Nelson Daganta formed the Liceo Sign Company on Oct. 1, 2009. He deposited P250,000 in GE Money Bank
under the name of the new business entity. During the month of October 2009, the following transactions
occurred.
Oct. 2 Acquired a service vehicle in the amount of P195,000 on account.

3 Acquired supplies for cash, P57,000. 9 Received P87,500 cash for signs painted. 10 Paid the
month’s event, P25,000. 11 Painted signs for Cagayan Company on account, P170,000 12 Paid
P55,000 on account from Oct. 2. 16 Withdrew P25,000 for personal use. 23 Collected P35,000
from Cagayan Company. 27 Paid salaries of P57,000 for the month. 30 Paid Bayan Tel P7,500
for communication services for the month. 31 Paid a bill from Ad Asia for P5,500 of advertising
for the month.
Required Establish the following accounts in a financial transactions worksheet: Cash; Accounts Receivable;
Supplies; Service Vehicle; Accounts Payable; and Daganta, Capital. Record in the worksheet the transactions
listed above.
2
8
ACTIVITY NO. 8
On Dec. 1, 2014, Ramil Sarabia opened a videotape rental store, Kalibo Video, by investing P250,000 cash
from his personal savings account. During the month of December, the following transactions took place.
Dec. 1 Acquired supplies on account, P67,000.

4 Acquired videotape costing P235,000, on account. 5 Paid P85,000 to creditors.
8 Received P78,000 cash from ACA Video for rental fees. 11 Billed video city for
video rentals, P105,000. 16 Paid salaries, P65,000. 17 Collected P77,000 from
video city. 23 Sarabia withdrew P47,000 from the business. 24 Paid rent for the
month, P41,500. 30 Paid utilities bill for the month, P17,500.
Required:
Record the transactions for the month of December 2014 using a financial transaction worksheet. Use the
following accounts: Cash; Accounts Receivable; Supplies; Videotape; Accounts Payable; and Sarabia, Capital.
Determine the balances of the T-account.
2
9
ACTIVITY NO. 9
Presented below is the balance sheet for the Leopoldo Medina Nursing Home:
Leopoldo Medina Nursing Home

Balance Sheet Dec. 31, 2014
ASSET
S
Current Assets
Cash P 16,000 Accounts Receivable 165,000 Supplies 21,000 P 202,000 Non-current
Assets
Land 90,000 Nursing Home 350,000 Nursing Equipment 160,000 600,000 Total Assets P
802,000
LIABILITIES AND OWNER’S EQUITY Liabilities Accounts Payable 47,000 Notes

Payable 350,000 Total Liabilities 397,000
Owner’s Equity Medina, Capital 405,000 Total Liabilities and

Owner’s Equity P 802,000
During the month of January 2015, the following transactions tool place: Jan. 2 Acquired supplies on
account, P17,500.
6 Collected P82,000 from patients for services provided in 2014. 10 Acquired nursing
equipment on account, P35,000. 11 Billed patients P167,000 for nursing fees. 12 Paid P31,000
on accounts payable. 17 Paid nursing salaries, P24,000. 20 Paid utilities expense, P 9,000. 25
Medina withdrew P10,000 from the business. 27 Received a bill from the Ryan Morales Ad
Company for P12,500 for
advertising expense incurred during the month. 31 Paid P15,000 of the
notes payable.
Required: (1) Enter the Dec. 31, 2014 balances in a financial transaction
worksheet. (2) Record the transactions for the month of January 2010. (3) Determine the balances of
accounts using T-account.
3
0
Fundamentals
of Accounting
1
SESSIO
N3
PREPARATION OF FINANCIAL
STATEMENTS
Desired Learning
Outcomes
• Understand the different source documents
evidencing a transaction.
• Understand and apply the accounting cycle in
day-to-day business transactions.
• Familiarize with General Journal, Ledger and
Trial Balance.
• Deeper understand the debit and credit.

AC101 Session 3 1
BUSINESS
TRANSACTIONS
A business transaction is any event that affects the financial position of the business and can be
recorded reliably. It involves exchange of values. There are transactions within the organization like
recognizing the used portion of supplies as expense, or with outside entities or persons like purchasing
supplies either for cash or on account.
SOURCE
DOCUMENTS
Transactions and events are the starting points in the accounting cycle. By relying on source
documents, transactions and events can be analyzed as to how they will affect performance and financial
position. Source documents identify and describe transactions and events entering the accounting
process. These original written evidences contain information about the nature and the amounts of the
transactions. Some of the more source documents are:
• Sales invoice • Purchase orders
• Cash register tapes • Time cards
• Official receipts • Statement of accounts
• Bank deposit slips
• Bank statements
• Checks TRANSACTION
ANALYSIS
The analysis of transactions should follow these four basic steps:

1. Identify the transaction from source documents 2. Indicate the accounts – assets, liabilities, equity,
income or expenses
– affected by the transaction. 3. Ascertain whether each account is increased or decreased by the
transaction. 4. Using the rules of debit or credit, determine whether to debit or
credit the account to record its increase or decrease.
ACCOUNTING
CYCLE
Step 1 Documentation. Analyzing business documents which serve as a

basis of recording transactions. Step 2 Journalizing. Recording business transactions in the journal to
have chronological records of economic activities. Step 3 Posting. The information in the general journal
is transferred to
the General Ledger to create a record of classified accounts. Step 4 Preparation of Trial Balance. A trial
balance is prepared to
prove the equality of debits and credits in the general ledger. Step 5 Adjusting entries. Making end of
period adjustments before financial statements are prepared so that the income and expense in the
income statement are reported at their correct amounts. Step 6 Worksheet. Work sheet is prepared to
facilitate the preparation
of financial statements.
AC101 Session 3 2
Step 7 Financial Statement. The basic financial statements are prepared
after making the necessary adjustments.
a. Income Statement b. Balance Sheet c. Statement of Cash Flows d. Statement of Changes in Equity e.
Notes to financial statement Step 8 Journalizing and posting closing entries. The objective of closing
entry is to transfer the revenue, expense and drawing accounts to the capital account. Step 9
Preparation of a Post-closing trial balance Step 10 Reversing journal entries (made at the start of
the next period)
CHART OF
ACCOUNTS
It is a list of Assets, Liabilities, Revenue, Expense and Capital Accounts applicable to the business
enterprise. It normally includes brief description of the nature of transaction, identification number or
account number. Presented below is the chart of accounts for the illustration.
W. KAYAYAN ACCOUNTING FIRM CHART OF ACCOUNTS Balance Sheet

Accounts Income Statement Accounts
ASSETS REVENUE 110 Cash 410 Service Revenue 120 Accounts Receivable 130
Notes Receivable EXPENSES 140 Office Supplies 510 Office Supplies Expense 150
Land 520 Utilities Expense 160 Office Equipment 530 Salaries Expense 165
Accumulated Dep. O/E 540 Telephone Expense 170 Furniture & Fixtures 550 Interest
Expense 175 Accumulated Dep. F/F 560 Rent Expense
570 Depreciation Expense –O/E LIABILITIES 580
Depreciation Expense –F/F 210 Accounts Payable 590 Miscellaneous Expense 220
Notes Payable 230 Utilities Payable 240 Salaries Payable 250 Interest Payable 260
Unearned Revenue
EQUITY 310 W. Kayayan, Capital

320 W. Kayayan, Withdrawals 330
Income Summary
AC101 Session 3 3
JOURNALIZIN
G
THE
JOURNAL
The journal is a chronological record of the entity’s transactions. It is called the book of original entry. A
journal entry shows all the effects of a business transaction in terms of debits and credits. Each
transaction is initially recorded in a journal rather than directly in the ledger. The general journal is the
simplest journal.
Simple and Compound Entry In a simple entry, only two accounts are affected – one account is debited
and the other account is credited. However, some transactions require the use of more than two
accounts. When three or more accounts are required in a journal entry, the entry is referred to as a
compound entry.
Format
Date: The year and month are not written for every written entry unless
the year or month changes or a new page is needed. Account Titles and Explanation:
The first line of an entry shows the account debited and the second line is the account credited. The
account credited is indented to the right. For each entry, a brief explanation is required enough to
understand the nature of the transaction. Posting Reference: This column is filled up only when the entry
is transferred to the next book of accounts, the ledger. Posting reference column is where the account
number of each account is written. Debit: The debit amount for each account is entered in this column.
Credit: The credit amount for each account is entered in this column.
ILLUSTRATIO
N
Once again, let us review the transactions of the newly organized accounting firm of Mr. Kayayan.
May 1. Mr. W. Kayayan invested P100,000 to start an accounting office. May 3. Purchased
office supplies worth P20,000 on account. May 5. Purchased additional office supplies for cash,
P10,000. May 6. Paid the accounts payable in full. May 8. Purchased 2 units of computer with
printer for P50,000, 30 days. May 10. Rendered accounting services for cash, P25,000. May 15
Rendered accounting services on account, P 30,000. May 15 Paid Meralco bills, P 3,500. May
15 Paid salaries for the period, P15,000. May 20 Collected P10,000 from customer.
AC101 Session 3 4
May 22 A Short term loan from a local bank was granted in the amount of P50,000, less P5,000 financing
charges. Mr. W. Kayayan issued 1 year promissory note. May 25 Paid telephone bill amounting to P
6,000. May 27 Mr. Kayayan withdrew P20,000 for personal use. May 30 At the end of the month, physical
count of the office supplies
revealed that P 5,000 had been consumed.
GENERAL JOURNAL PAGE No. 1

1 Cash 110 1 0 0 0 0 0
Date Account Titles and Explanation PR Debit Credit 2014 May
3 Office Supplies 140 2 0 0 0 0
5 Office Supplies 140 1 0 0 0 0
6 Accounts Payable 210 2 0 0 0 0
8 Office Equipment 160 5 0 0 0 0
10 Cash 110 2 5 0 0 0
15 Accounts Receivable 220 3 0 0 0 0
15 Utilities Expense 520 3 5 0 0

W. Kayayan, Capital 310 1 0 0 0 0 0
Accounts Payable 210 2 0 0 0 0
Cash 110 1 0 0 0 0
Accounts Payable 210 5 0 0 0 0
Service Revenue 410 2 5 0 0 0
Service revenue 410 3 0 0 0 0
Cash 110 3 5 0 0
Cash 110 2 0 0 0 0
Initial investment of the
owner
Office supplies purchased on

account.
Full payment of
account.
Computer units
purchased
Service revenue
rendered.
Service revenue rendered on
account.
Paid meralco
bill.
Office Supplies
purchased.
AC101 Session 3 5
15 Salaries Expense 530 1 5 0 0 0
2014 May
Take note that the post reference of the general journal is not filled up yet in the process of recording.
This will filled in the posting process.
POSTIN
G
THE
LEDGER
A grouping of the entity’s accounts is referred to as a ledger. Although some firms may use various ledger
to accumulate certain detailed information, all firms have a general ledger. A general ledger is the
reference book of the accounting system and is used to classify and summarize transactions, and to
prepare data for basic financial statements.
The accounts in the general ledger are classified into two general groups:
• Permanent/Real accounts –balance sheet accounts
• Temporary/Nominal accounts –income statement accounts
20 Cash 110 1 0 0 0 0
22 Cash 110 4 5 0 0 0
25 Telephone Expense 540 6 0 0 0
27 W. Kayayan, Withdrawals 320 2 0 0 0 0
30 Office Supplies Expense 510 5 0 0 0

Interest Expense 550 5 0 0 0
Cash 110 1 5 0 0 0
Accounts Receivable 120 1 0 0 0 0

Notes Payable 220 5 0 0 0 0
Cash 110 6 0 0 0
Cash 110 2 0 0 0 0
Office Supplies 140 5 0 0 0

Paid Salary of office
staffs
Proceeds of
loan.
Paid telephone
bill.
Withdrawal by the
owner.
Office Supplies
consumed.
Collection of
account
AC101 Session 3 6
Posting means transferring the amounts from the journal to the appropriate accounts in the ledger. The
steps are illustrated as follows:
1. Transfer the date of the transaction from the journal to the ledger. 2. Transfer the page number
from the journal to the journal reference. 3. Post the debit figure from the journal as a debit figure in
the ledger
and the credit figure from the ledger as a credit figure in the ledger. 4. Enter the account number in
the posting reference column of the journal
once the figure has been posted to the ledger.
Illustration:
Account: Cash Account No.: 110

Date Explanation J.R. Debit Credit Balance 2009 May 1 Initial Investment J-1
100,000.00 100,000.00 3 Office Supplies purchased J-1 10,000.00 90,000.00
Account: W. Kayayan, Capital Account No.: 310

Date Explanation J.R. Debit Credit Balance 2009 May 1 Initial Investment J-1
100,000.00 100,000.00
Account: Office Supplies Account No.: 140
Date Explanation J.R. Debit Credit Balance 2009 May 3 Office Supplies purchased J-1
10,000.00 10,000.00
LEDGER ACCOUNTS
POSTING
At the end of the accounting period, the debit and credit balance of each account must be determined to
enable us to come up with a trial balance.
• Each account balance is determine by footing (adding) all the debits and credits.
• If the sum of an account’s debit is greater than the sum of its credits, that account has a debit
balance.
• If the sum of its credits is greater, that account has a credit balance.
In the discussion of basic accounting, T-accounts is often use rather than the actual ledger to facilitate the
posting step in the accounting cycle.
AC101 Session 3 7
TRIAL
BALANCE
It is a list of all accounts with their respective debit or credit balances. It is prepared to verify the equality
of debits and credits in the ledger at the end of each accounting period or at any time the postings are
updated. Illustration:
W. Kayayan Accounting Firm Trial
Balance May 31, 2015
Cash 105,500 Accounts Receivable 20,000 Office Supplies 25,000 Office

Equipment 50,000 Accounts Payable 50,000 Notes Payable 50,000 W. Kayayan,
Capital 100,000 W. Kayayan, Withdrawals 20,000 Service Revenue 55,000 Office
Supplies Expense 5,000 Utilities Expense 3,500 Salaries Expense 15,000
Telephone Expense 6,000 Interest Expense 5,000 Total P 255,000 P 255,000
The trial balance is a control device that helps minimize accounting errors. When totals are equal, the trial
balance is in balance. It only proves the equality of debit and credit totals but not the following errors:
1. Failure to record or post a transaction. 2. Recording the same transaction more than once. 3.
Recording an entry but with the same erroneous debit and credit
amounts. 4. Posting a part of a transaction correctly as a debit or credit but to
the wrong account.
INEQUALITY OF TOTALS DUE TO ERRORS These might arise

from the following circumstances:
1. Failing to post part of a journal entry 2. Posting a debit as a credit, or vice versa. 3. Incorrectly
determining the balance of an account. 4. Recording the balance of an account incorrectly in the trial
balance. 5. Omitting an account from the trial balance. 6. Incorrectly determining the totals of the two
columns of the trial
balance. 7. Listing a debit balance of an account in the credit column.
AC101 Session 3 8
PREPARATION OF FINANCIAL
STATEMENTS
All accounting reports require a heading which is written on the first three lines at the center of the report
being prepared.
1st line – name of the Company 2nd line – title of the report
or statement 3rd line – Date of the report
For income statement and Statement of Changes in Equity, the date is written as: For the month ended
for the year ended u or for the six months ended .
For the balance sheet, the date is written as: As of or just the date itself.
W. Kayayan Accounting Firm Income
Statement For the month ended May, 31,
2014
Service Revenue P 55,000 Less: Expenses

Office Supplies Expense P 5,000 Salaries Expense 15,000 Utilities Expense 3,500
Telephone Expense 6,000 Interest Expense 5,000 34,500 Net Profit P 20,500
W. Kayayan Accounting Firm Statement of

Changes in Capital For the month ended
May 31, 2014
W. Kayayan, Capital Beg. P 100,000 Add: Net profit 20,500 Total 120,500
Less: W. Kayayan withdrawals 20,000 W. Kayayan, Capital End. P 100,500
AC101 Session 3 9
REPORT
FORM
W. Kayayan Accounting Firm
Balance Sheet May 31, 2014
Assets
Current Assets
Cash P 100,500 Accounts Receivable 20,000 Office Supplies 25,000 Total Current Assets P 150,000
Non-current Assets
Office Equipment P 50,000 Total Assets P 200,500
Liabilities and Owner’s Equity Current

Liabilities
Accounts Payable P 50,000 Notes Payable 50,000 Total Liabilities P100,000 Capital
W. Kayayan, Capital 100,500 Total Liabilities and Owner’s Equity P200,500
ACCOUNT
FORM
W. Kayayan Accounting Firm
Balance Sheet May 31, 2014
Assets Liabilities and Owner’s Equity
Current Assets Current Liabilities

Cash P 100,500 Accounts Receivable Accounts Payable P 50,000 Notes Payable
20,000 Office Supplies 25,000 Total Current 50,000 Total Liabilities P100,000
Assets P 150,000
Capital
Non-current Assets W. Kayayan, Capital 100,500 Total
Office Equipment P 50,000 Total Assets Liabilities and Owner’s Equity P200,500
P 200,500
References: Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14th
Edition. Manila: Domdane Publishers and Made Easy Books. Rante, Gloria Aradaniel.(2013). Accounting
for Service Entities. Mandaluyong
AC101 Session 3 10
ACTIVITY NO. 1
MULTIPLE
CHOICE
1. The normal balance of an account is on the
a. Plus side b. Left side c. Debit side d. Credit side 2. When a T-account has several items on both
sides, the balance of the
account is written
a. On the side with the greatest number of items. b. On the side with the
least number of items. c. On the side with the larger total. d. On the side
with the similar total. 3. A debit may signify a decrease in
a. A liability account b. A revenue account c. A liability
and a revenue account d. An asset and a revenue
account 4. A debit may result in
a. An increase in an expense account b. An increase in an asset account c. A
decrease in a liability account d. A decrease in a revenue account 5. A
purchase is recognized in the accounting records when
a. Payment is made for the item purchased b. The purchase requisition is sent to the
purchasing department c. The buyer receives the seller’s bill d. Title transfer from the seller to
the buyer 6. Which of the following accounts will not affect owner’s equity?
a. Owner’s withdrawals b. Land c. Advertising Expense d. Revenues 7. Which of the following errors
will not cause the debit and credit
columns of a trial balance to be unequal?
a. Only part of a journal entry was posted b. A debit was posted to an account as a credit c. A journal
entry was accidentally posted twice d. The trial balance was incorrectly summed. 8. Which of the
following errors will cause a trial balance to be out of
balance?
a. The bookkeeper forgot to journalize a transaction b. The bookkeeper forgot to post
a journal entry to the ledger. c. A journal entry was accidentally posted twice. d. A
credit was posted to an account as a debit.
AC101 Session 3 11
9. The general journal does not have a column titled
a. Description b. Posting reference c. Account balance d. Date 10. To find explanation
for a transaction, one should look at the
a. Journal b. Ledger c. Chart of accounts d. Trial balance 11. An entry with more
than one debit or credit is called a
a. Double entry b. Compound entry c. Dual
entry d. Multiple entry 12. The term footing
refers to the
a. Addition of a column of figures b. Process of obtaining the top number in an
account c. Process of obtaining the bottom number in an account d. Process of
posting 13. Balance sheet accounts are
a. Temporary accounts b. Accounts with debit balances only c. Adjusting accounts d.
Permanent accounts 14. Posting is the process of transferring information from the
a. Journal to the trial balance b. Ledger to the financial
statements c. Ledger to the trial balance d. Journal to the ledger
15. Typically, the chart of accounts begins with
a. Asset accounts b. Liability accounts c. Revenue accounts d. Expense accounts 16.
All of the following are examples of source documents except
a. Check b. Sales invoice c. Statement of account d. General journal 17. The equality of debits and
credits in the ledger should be verified at
the end of each accounting period by preparing
a. An accounting statement b. An account verification report c. A trial balance 18. A balance report Of
the following errors, the one that will cause an
inequality in the trial balance totals is
a. Incorrectly computing an account balance b. Failure to
record a transaction
AC101 Session 3 12
c. Recording the same transaction more than once d. Posting a transaction to the wrong
account with the same normal
balance. 19. An entity’s trial balance
a. Shows a financial position b. Establishes whether its accounting records are correct c. List
of all of the entries in its double-entry accounting records d. Is a list of all of the accounts with
their respective debit or
credit balances 20. If a P4,700 cash purchase of supplies is recorded as a P5,700 debit to
supplies expense and a P5,700 credit to cash, the result will be that
a. The trial balance will be out of balance b. The supplies expense account will be understated c. The
cash account will be overstated d. Supplies expense will be overstated and cash will be understated
21. If Accounts receivable has debit postings of P580,000, credit postings of P440,000, and a normal
ending balance of P480,000, which of the following was its beginning.
a. P620,000 cr b. P620,000 dr c. P340,000 cr d. P340,000 dr 22. If account payable has debit
postings of P170,000, credit postings of P140,000, and a normal balance ending balance of P60,000,
which of the following was its beginning balance?
a. P30,000 dr b. P90,000 cr c. P90,000 dr d. P30,000 cr 23. A P800 credit item is accidentally posted
as a debit. The trial
balance column totals will therefore differ by
a. P0 b. P400 c. P800 d. P1,600 24. If Accounts Payable has debit postings of P85,000, credit
postings of P70,000, and a normal ending balance of P30,000. What was its beginning balance?
a. P45,000 cr b. P15,000 dr c. P45,000 dr d. P15,000 cr 25. If accounts receivable has debit postings
of P290,000, credit postings of P220,000 and a normal ending balance of P240,000, which of the
following was its beginning?
a. P170,000 dr b.
P310,000 cr c.
P170,000 cr d.
P310,000 dr
AC101 Session 3 13
Use of the following information to answer the questions below. The following is the trial balance for
Manabat Company.
Manabat Company
Trial Balance Jan.
31, 2014
Cash P30,000 Accounts Receivable 20,000 Art Supplies 30,000 Office

Supplies 50,000 Prepaid rent 70,000 Prepaid insurance 50,000 Art
Equipment 50,000 Office Equipment 30,000 Accounts Payable P 50,000 V.
Manabat, Capital 150,000 V. Manabat, withdrawals ? Advertising revenues ?
Wages Expense ? Utilities Expense 50,000 Telephone Expense 30,000 Total
PAPB
26. If the balance of the Manabat, withdrawals balance of 70,000 in the Manabat, withdrawals
account were P120,000 and the balance of the account and a balance of P50,000 in the
Wages Expense account were P50,000, what Wages Expense account, what would be the
would be the amount of B? amount of Advertising revenues for the period?
a. P180,000 b. P580,000 c. P370,000 d. a. P330,000 b.
P380,000 27. If the trial balance showed a P480,000 c.
P180,000 d. a balance of P350,000 in the Advertising
P430,000 Revenue, what would be the amount of A?
28. In the trial balance, total a. P500,000 b.
assets equal P550,000 c.
a. P330,000 b. P230,000 c. P430,000 d. P450,000 d.
P410,000 29. If the total debits equals to P600,000
490,000, what would be the balance of
Advertising revenue?
a. P290,000 b. P330,000 c. P190,000 d.
P690,000 30. If the trial balance showed a
balance of P80,000 in the wages expense and
ACTIVITY NO. 2
PROBLEM
#1
The following accounts were taken from the General Ledger of Kapit Tuko Law Office at the end of its
1st year of operation, December 31, 2014.
Cash P 85,000 Accounts Receivable 60,000 Office

Supplies 5,000 Office Equipment 100,000 Office Furniture
40,000 Service Vehicle 400,000 Accounts Payable 25,000
WHT Payable 8,000 SSS Payable 10,000 Philhealth
Payable 2,000 K. Tuko, Capital 500,000 K. Tuko,
withdrawals 20,000 Professional fees earned 959,000
Salaries and Wages 350,000 Rent Expense 240,000
Advertising Expense 12,000 Supplies Expense 10,000
Light and Water Expense 24,000 Gas and Oil Expense
75,000 Repairs and Maintenance 6,000 Telephone
Expense 36,000 Representation Expense 30,000
Insurance Expense 6,000 Taxes and Licenses 5,000
Required:
Prepare a Trial Balance.
AC101 Session 3 15
ACTIVITY NO. 3
PROBLEM
#1
El Granado established the EG Data Encoders on May 15, 2014. The following transactions occurred
during the month.
a. El Granado invested P157,000 cash to establish the business b. Bought office desks and filing
cabinet for cash, P15,150. c. El Granado invested in the business her personal computer with a fair
value of P57,500. d. Bought computer software for use in the business from Dela Torre Computer
Center for P39,000 paying P15,000 down; the balance is due in thirty days. e. Paid rent for the month,
P5,300. f. Received cash for services rendered, P5,160. g. Ordered a panaflex sign for P9,000 from
Royal Bright Enterprises, with
P5,000 as down payment and the balance due when installed. h. Received bill for advertising
from Buy and Sell newspaper, P3,320. i. Bought print paper and stationary on account,
P2,290. j. Received and paid electric bill, P1,240. k. Paid bill for advertising recorded
previously in transaction (h). l. Received cash for services rendered, P10,900. m. Paid
salaries to employees, P8,400. n. El Granado withdrew cash for personal use, P4,500.
Required:
1. Journalize each transactions 2. Establish the
following T-accounts:
▪ Cash ▪ Utilities Expense
▪ Accounts Receivable ▪ Miscellaneous Expense
▪ Supplies
▪ Office Equipment 3. Prepare Trial Balance 4. Prepare
Financial Statements
▪ Compute Software
▪ Income Statements
▪ Signage
▪ Statement of Changes in Capital
▪ Accounts Payable
▪ Balance Sheet
▪ El Granado, Capital
▪ El Granado, withdrawals
▪ Service Revenues
▪ Salaries Expense
▪ Advertising Expense
▪ Rent Expense
ACTIVITY NO. 4

PROBLEM
#1
Marichu Fornolles Guardians completed the following transactions during October 2014.
Oct. 1 Fornolles transferred cash from a personal account to an account

to be used for the business, P243,000. 3 Fornolles invested in the business personal weapons
having a fair
market value of P34,000. 4 Bought communication equipment on account from Pesa Electronics,
P13,740. 5 Paid rent for the month, P7,650. 6 Bought a used service vehicle car for P93,000,
paying P45,000
down, with the balance due in thirty days. 9 Received invoice and paid insurance premium to
Cacawa Fidelity
company for bonding employees, P7,710. 12 Performed security services for Loreta Galleries.
Billed Loreta
for services rendered, P8,250. 16 Received bill from Marcos Printers for office stationary, P1,757.
17 Billed Pascua Construction for services rendered, P14,790. 22 Paid Regal Shell Service for
gasoline for service vehicle, P720. 24 Performed security services at a fashion jewelry fair, Billed
organizers for services rendered, P17,500. 27 Paid Pesa Electronics P4,500 to apply on
account. 29 Received P8,250 from Loreta Galleries in full payment of account. 30 Billed
Merchant Bank for services rendered, P21,600. 31 Receive and paid telephone bill, P1,030. 31
Paid salaries to employees, P31,500. 31 Fornolles withdrew cash for personal use, P18,000.
Required:
1. Prepare the journal entries for the October Transactions. 2. Set up the following ledger accounts
using T-account and post all the journal entries: Cash; Accounts Receivabe; Prepaid Insurance; Arms
and Communications Equipment; Service Vehicle; Accounts Payable; Fornolles, Capital; Fornolles,
Withdrawals; Service Revenue; Salaries Expense; Rent Expense; Supplies Expense; gasoline
Expense; and Utilities Expense. 3. Prepare a trial balance 4. Prepare the income statement,
statement of changes in capital and
balance sheet.
AC101 Session 3 17
ACTIVITY NO. 6
PROBLEM #1 After several years with a large accounting firm. Virgie Dal decided to establish her own
accounting practice. The following transactions were completed during May 2014.
May 2 Transferred P92,500 from a personal savings account to a checking

account. Virgie Dal, CPA. 3 Acquired office equipment on account from Gican Furniture,
P36,800. 4 Acquired office supplies on account from Lorenzo office supply
Company, P17,100. 6 Performed accounting services for Cayao Computer Company and submitted
a bill of P29,200 for those services. 7 Paid for accounting and tax books for use in the practice,
P19,500. 8 Paid Lorenzo Office Supply Company, P4,100 on account. 10 Acquired a condominium
unit for the accounting practice, P265,000. A down payment of 38,000 was made and issued a
note payable for the remaining P227,000. 12 Paid salaries, P14,200. 13 Received P9,750 from
Cayaco Computer Company, billed on May 6. 16 Paid telephone expense, P650. 19 Received
cash in the amount of P14,600 from Ponferada Book Company for
accounting services rendered for the month. 22 Acquired office supplies on account from
Lorenzo Office Supply
Company, P4,650. 23 Withdrew P8,150 for personal use. 25 Paid salaries, P10,300. 26 Billed
Bosante Exporters P31,600 for accounting services rendered. 27 Paid PICPA-Tacloban
P5,500 for professional dues. 28 Paid P3,250 rent on an office-copying machine.
Required: ▪ Prepare the journal entries for the May transactions

▪ Post the entries to the ledger accounts using T-account. The following accounts will
be needed:
❖Cash Expense
❖Accounts ❖Rent Expense
Receivable ❖Office Supplies ❖Office ❖Telephone Expense
Condominium ❖Office ❖Professional dues
Equipment ❖Accounting ❖Rent Expense
Library ❖Telephone Expense
❖Notes Payable ❖Professional dues
❖Accounts Payable ❖Rent Expense
❖Dal, Capital ❖Dal, ❖Telephone Expense
Withdrawals ❖Professional dues
❖Accounting Expense
Revenues ❖Salaries Expense
▪ Prepare a trial balance, income statement, statement of changes in capital and balance
sheet.
AC101 Session 3 18
ACTIVITY NO. 5
PROBLEM #1 Correcting a Trial Balance

Below is the trial balance of Matilde Gascon Repair Service, which does not balance.
Gascon Repair Service Trial

Balance Jan. 31, 2014
Cash P 110,400 Accounts Receivable 284,600 Supplies 66,400 Prepaid

Insurance 40,000 Office Equipment 526,800 Notes Payable P 130,000
Accounts Payable 195,400 Gascon, Capital 297,200 Gascon, Withdrawals
100,000 Repair Revenues 821,400 Salaries Expense 348,700 Advertising
Expense 12,200 Totals P1,389,100 P1,544,000
The following information is obtained from a review of the record keeping process.
a. An account receivable for P19,600 was incorrectly added as P 16,900
when computing the balance of the Accounts Receivable account. b. A debit posting from
the journal for P5,200 is missing from the
Advertising Expense account. c. A credit posting of P15,000 to Notes Payable should have been
made to
Accounts payable. d. A debit posting of P34,000 to Supplies was incorrectly posted as
P3,400. e. Credits to the ledger Accounts Payable account were under-footed by
P60,000. f. Revenues are overstated in the ledger account by P40,000. g. A credit posting for
Repair Revenues from the journal in the amount of
P63,600 is missing. h. Supplies acquired in the amount of P17,400 have been incorrectly posted
to the Office Equipment account.
Required: Prepare a corrected trial balance.
AC101 Session 3 19
Fundamentals
of Accounting
1
SESSIO
N4
ADJUSTING THE
ACCOUNTS
Desired Learning
Outcomes
The Effects of not making the necessary

adjusting entries to financial statements.

Understand the Accounting period.
Differentiate Accrual to Cash Accounting.
Appreciate the importance of Adjusting entries in
the preparation of financial statements.
Items that needed Adjustments.
AC101 Session 4 1
THE ACCOUNTING PERIOD
The activities of an enterprise can be divided into specific periods such as a month, a quarter, a semester, or a
year. The accounting period is usually s span of 12 months. It may be a calendar year or fiscal year. Calendar
year is the normal year which ends December 31 of each year. Fiscal year is an accounting year of 12
consecutive months that may or may not coincide with the calendar yaer.
ACCRUAL VERSUS CASH

ACCOUNTING
Accrual Accounting requires that all revenue earned whether payment is received or not should be
recognized in the period the goods or services are delivered re rendered and that all related costs to deliver the
goods or to render the whether paid or not should be recognized as expense to match the revenue.
Cash-basis Accounting requires that all revenue is recognized only when cash is received while expenses
are recognized only when cash is paid.
IMPORTANCE OF ADJUSTING ENTRIES
Adjusting Entries are entries made at the end of the period to assign revenues to the period in which they are
earned and expenses to the period in which they are incurred.
Many accounts need adjustments to reflect the current conditions as of time of reporting in order for the
statements to be meaningful. There may be financial data not previously recognized that need to be recorded
to make the books of accounts up to date like the expenses already incurred but no payment until sometime in
the subsequent period, and revenues already earned but no cash is collected yet.
ITEMS THAT NEED ADJUSTMENTS
PREPAID
EXPENSES
Prepaid Expenses are expenditures paid for goods that are not yet consumed like supplies, insurance and rent.
METHODS OF RECORDING
PREPAYMENTS
Asset Method
1. Example for Supplies

a. Purchase of supplies worth P 5,000 is recorded as
Supplies 5,000
Cash 5,000
AC101 Session 4 2
b. At the end of a period, physical count of unused supplies showed a total of P3,500. This shows that
if P 3,500 is unused, then P 1,500 worth of supplies is used or consumed.
Supplies Expense 1,500
Supplies 1,500
2. Example for Insurance

a. On October 1, 2013, a company paid P12,000 as insurance premium for one year. The entry to
record the payment under the asset method is:
Prepaid Insurance 12,000
Cash 12,000
b. With the passage of time, the prepaid insurance gradually expires, that’s why on Dec. 31, an
adjusting entry is required to recognize the expired portion of the insurance premium as expense.
Insurance Expense 3,000

Prepaid Insurance 3,000
3. Example for Rent

a. On Dec. 1, the company paid P18,000 as rent for one year. The
entry to record the payment under the asset method is:
Prepaid Rent 18,000
Cash 18,000
b. On Dec. 31, the entry will be (18,000/12 mons.)x 1 mons.=1,500.00

Rent Expense 1,500
Prepaid Rent 1,500
EXPENSE METHOD This method of recording prepayments requires an entry debiting an expense account
upon payment.
1. Example for supplies

a. In the previous example, if the supplies purchased were recorded,
the entry would be:
Cash 5,000 b. The adjusting entry required to reflect the unused portion would
be
Supplies 3,500
2. Example for Insurance

a. If the Expense Method is used to record the prepayment, the entry
made upon payment is:
Insurance expense 12,000
Cash 12,000
AC101 Session 4 3
b. The adjusting entry on Dec. 31, would be: Prepaid

Insurance 9,000
Insurance Expense 9,000
3. Example for Rent

a. If the Expense Method is used to record the prepayment, the entry
made upon payment is:
Rent expense 18,000
Cash 18,000
b. The adjusting entry on Dec. 31, would be:

Prepaid Rent 16,500
Rent Expense 16,500
ACCRUED EXPENSES These are items already recorded as expenses but not yet paid, thus creating an
obligations to make payments in the future. The most common examples are salaries of employees and utilities
expenses like bills from Meralco and Manila Waters.
On June 15, when the company pays the salaries of employees, the payment will be recorded as:
Salaries Expense P xxx

Cash P xxx
No accrual for salary payment on June 15 because this date is a regular working day. The salary for the 2 nd half
of the month which is due June 30 will not be paid on that day because it is a non-working day. So the salary of
the employees will be paid the following Monday, July 2. The bookkeeper will recognize the expense on June
30 with the following entry:
Salaries Expense P xxx

Accrued Salaries or Salaries Payable P xxx
ACCRUED INTEREST ON NOTES RECEIVABLE
A company issued a 90-day 10% note on Dec. 1 for P100,000. The notes payable is due 90 days from date of
issue including interest earned for 90 days. If financial statements are prepared on Dec. 31, which are normally
the case, then the company must record the interest for 30 days as:
Interest Expense 833.33
Accrued Interest 833.33
ACCRUED
REVENUE
These are revenues already earned but no payment is received yet.
AC101 Session 4 4
Interest Receivable P xxx
Interest Revenue P xxx
DEFERRED REVENUE OR UNEARNED

REVENUES
This is the exact opposite of accrued revenues. In this case, payment is received in advance prior to delivery of
services, or delivery of goods, thus, creating a liability for the amount collected in advanced; however, as the
company renders the service, the unearned revenue becomes earned revenue.
Revenue method For example, on Aug. 1, a tenant paid its rent for one year in advance in the amount of P
24,000. At the time cash is received, the entry is:
Cash 24,000
Rent Revenue 24,000
When financial statement is prepared on Dec. 31, an adjustment is necessary to reflect the unearned portion of
the rent that corresponds to the period Jan. 1 2013 – July 31, 2014. The adjusting entry would be:
Rent Revenue (7/12 x 24,000) 14,000

Unearned Rent 14,000
Liability Method If the liability method is used to record the receipt of P24,000, the entry upon receipt would
be:
Cash 24,000
Unearned Rent 24,000
On Dec. 31, the amount earned must be recognized as revenue through an adjusting entry.
Unearned rent 10,000

Rent Revenue 10,000
UNCOLLECTIBLE ACCOUNT EXPENSE OR DOUBTFUL

ACCOUNTS
In any enterprise selling on account to its customers, experience show that some customers will not be able to
pay their accounts as they fall due. Uncollectible accounts or bad debts are accounts of customers who do not
pay what they have promised to pay. The enterprise should provide allowance for uncollectible accounts and
recognize an expense or loss from these accounts. Other terms for uncollectible accounts are Bad Debts and
Doubtful accounts.
a. Based on Percentage of Sales on Account or service revenue on account

For example, the company estimates that 2% of sales on account are proven to be uncollectible. The
entry would be:
AC101 Session 4 5
Uncollectible account expense xxx
Allowance for uncollectible accounts xxx
The allowance for doubtful accounts is a contra account which is deducted from the accounts receivable in
the balance sheet to arrive at its net realizable value.
b. Based on Accounts Receivable Balance
Example 1: The following balances are available from the records of Manila Premier Hotel at
December 31, 2013:
Accounts Receivable, 12/31 P 800,000 Allowance for uncollectible

accounts,1/1 12,000 Cr. Service Revenue on account 2,500,000
The company’s estimate for uncollectible accounts is 2% of accounts receivable.
The adjusting entry required to reflect the expense for the year is:
Uncollectible account expense 4,000

Allowance for uncollectible accounts 4,000
Example 2: Assume the following balances:

Accounts Receivable, 12/31 800,000 Allowance for uncollectible accounts
22,000 Cr. Service revenue on account 2,500,000
Since the required allowance is only P16,000, and the balance of the allowance account is P22,000,
the allowance for uncollectible accounts should be reduced by P 6,000. The adjusting entry would be:
Allowance for uncollectible accounts 6,000

Uncollectible accounts expense 6,000
DEPRECIATION
Depreciation is the systematic means of allocating the cost of long lived asset over its estimated
economic life. Depreciation does not necessarily measure the decline in the value of an asset but it
shows only the portion of the cost of the asset that has expired due to using up the asset. The assets
that are subject to depreciation are called depreciable assets. The formula:
Depreciation Expense = Cost of Asset – Scrap value/residual value/salvage value

Estimated economic life
AC101 Session 4 6
Cost of asset is the amount of company paid to purchase the asset. It includes the invoice price plus
transportation charges and installation fees. Scrap value is the amount expected to be recovered at
the end of an asset’s useful life. It is also called residual value or salvage value. Estimated economic
life is the same as the estimated useful life of an asset. Depreciation cost or value is the difference
between the cost of an asset and its scrap value.
Example: A delivery equipment was purchased on Jan. 3, 2013 for P600,000. It is estimated that the
vehicle’s salvage value at the end of 10 yrs. Is P50,000.
Dep. Expense = 600,000 – 50,000 = 55,000/yr.

10 yrs.
The adjusting entry on Dec. 31, 2013 will be:
Depreciation Expense 55,000

Accumulated Depreciation-D/E 55,000
Accumulated Depreciation is a contra account, which is reported as a deduction from the related
asset account.
The presentation of the asset and its related accumulated depreciation in the balance follows:
Delivery Equipment P 600,000 Less: Accumulated Depreciation

55,000 Book value P 545,000
Book value is the part of the cost of the asset that is not yet allocated to an expense account.
References: Ballada, Win and Susan Ballada. (2009). Basic Accounting Made Easy 14th
Edition. Manila: Domdane Publishers and Made Easy Books. Rante, Gloria Aradaniel.(2013). Accounting for
Service Entities. Mandaluyong
AC101 Session 4 7
EXERCISE
S
DBS Accounting firm, started operation only on April 1, 2014 and it provides accounting and tax services to big
establishments in Metro Manila. Its accounting period ends Dec. 31, and on this date, adjusting entries are
prepared. The trial balance of DBS Accounting Firm at Dec. 31, 2014 follows:
DBS Accounting Firm Trial

Balance December 31,
2014
Cash 120,000 Accounts Receivable 60,000 Office Supplies 50,000 Prepaid Insurance
24,000 Office Equipment 240,000 Furniture and Fixtures 40,000 Land 800,000 Building
1,300,000 Accounts Payable 168,000 Loans Payable 500,000 DBS, Capital 1,800,000
Professional fees 540,000 Salaries Expense 250,000 Advertising Expense 36,000
Transportation Expense 10,000 Utilities Expense 70,000 Miscellaneous Expense 8,000 Total
P 3,008,000 P 3,008,000
Additional Information
1. An inventory of office supplies on December 31, 2014 showed supplies on
hand totaled P 38,000. 2. The prepaid insurance represents a one-year insurance policy on the
building purchased on May 1, 2013. 3. The Office Equipment is estimated to have a 5 year life with
salvage
value of P 40,000 starting from April 1, 2013. 4. The furniture and fixtures is estimated to last for 10
years with no
salvage value. 5. The estimated useful life of the building is 20 yrs. with estimated
salvage value of P 100,000. 6. The Professional fees include P 40,000 of advances made by one client
for services still be rendered in the last week of December amounting to P 5,000 is schedule for
payment on the first week of January 2015. 7. The company’s estimate as allowance for uncollectible
accounts is very
minimal because it has not experienced defaulted accounts yet. The estimate for uncollectible
accounts is 2% of Accounts Receivable.
REQUIRED: Prepare the following

a. Adjusting Entries b. Adjusted Trial Balance c. Income Statement, Statement of Changes in
Equity and Balance Sheet
AC101 Session 4 8
ACTIVITY NO. 1
MATCHING
TYPE
Below are terms pertinent to adjusting entries. Match each definition with its related term. There are two
answers for each term.
Terms 1. Accrued Expense 2.

Deferred Expense 3.
Accrued Revenue 4. Terms
Deferred Revenue Definitions
Definitions
1. Deferred Revenue
a. Revenue not yet earned; collected in a. At the end of the year, salaries payable of P3,600 had not
advance. b. Office supplies on hand; been recorded or paid. b. Supplies for office use were
used next purchased during the year for P500, and P100 of the office
accounting period. c. Rent revenue supplies remained on hand (unused) at year-end. c. Interest
collected; not yet earned. d. Rent not yet collected; already of P250 on a note receivable was earned at year-end,
earned. e. An expense incurred; not yet paid or although collection of the interest is not due until the following
year.
recorded. f. Revenue earned; not yet collected. d. At
g. An the endnot
expense of yet
the incurred;
year, service
paid revenues
in of P2,000
was
advance. h. Property taxes incurred; not yet paid. collected in cash but was not yet earned.
Match each transaction with its related term:
ACTIVITY NO. 2
Journal Entries
Prepare Adjusting Entries required on December 31 for each item with your supporting computations after each
entry.
a. On March 1, 2013, XYZ Company paid P54,000 for 2 year insurance premium on property. The
bookkeeper debited Prepaid Insurance account at the time of payment. b. On December 1, 2013, ABC
Company received P120,000 as advance payment for professional services to be rendered starting 1 st
quarter of 2014. Unearned revenue account was credited at the time of deposit. c. Miscellaneous office
supplies were purchased in the last quarter of 2014 amounting to P6,500. On December 31, inventories
showed that P3,200 were on hand. The purchase was debited to Office Supplies account. d. The
company’s office equipment costing P100,000 is expected to have 10 years economic life with no salvage
value. This was purchased by the company on Aug. 1, 2013. e. ZTE company owes a bank a 10%, 90-day
note for P 150,000 dated Nov. 1,
2013.
Use the journal provided on the other page for your answer.
AC101 Session 4 10
Fundamentals
of Accounting
1
SESSIO
N5
COMPLETING THE ACCOUNTING

CYCLE
Desired Learning
Outcomes
• Understand and apply the remaining steps in
completing cycle; closing entries, post-closing entries
and reversing entries.
• Deeper understanding the reasons and importance
of the remaining steps.

AC101 Session 4 1
CLOSING ENTRIES
Closing entries are usually prepared at the end of an accounting period like adjusting entries. Not all accounts
are closed. Only the nominal accounts, often called temporary accounts and the drawing account are
closed at the end of the accounting period. Nominal accounts are the accounts that appear in the income
statement like revenue and expense accounts.
A temporary account is said to be closed when an entry is made such that its balance becomes zero. Closing
simply transfers the balance of one account to another account. In this case, the balances of the temporary
accounts are transferred to the capital account. A summary account – Income and Expense Summary is
used to close the income and expense accounts.
1. Close the income accounts

Income accounts have credit balances before the closing entries are posted. For this reason, an entry
debiting each revenue account in the amount of its balance is needed to close the account.
Dec 31 Revenues 67,700.00

Income & Expense Summary 67,700.00
2. Close the expense accounts

Expense accounts have debit balances before the closing entries are posted. For this reason, a
compound entry is needed crediting each expense account for its balance and debiting the income
and expense summary for the total.
Dec 31 Income & Expense Summary 36,700.00

Salaries Expense 15,600.00 Supplies Expense 3,000.00 Rent Expense
4,000.00 Insurance Expense 1,200.00 Utilities Expense 4,400.00
Depreciation Expense-S.V. 4,000.00 Depreciation Expense-Off.Equp.
1,000.00 Interest Expense 3,500.00
3. Closing the income and expense summary

After closing entries involving the income and expense accounts, the balance of the income summary
account will be equal to the profit or loss for the period. A profit is indicated by a credit balance and a
loss by a debit balance.
Dec 31 Income & Expense Summary 35,000.00

XYZ, Capital 35,000.00
AC101 Session 4 2
4. Close the withdrawal account
The withdrawal account shows the amount by which capital is reduced during the period by
withdrawals of cash or other assets of the business by the owner for personal use.
Dec. 31 XYZ, Capital 14,000.00
XYZ, withdrawals 14,000.00
POST-CLOSING TRIAL BALANCE
After posting the closing entries to the general ledger another trial balance is prepared. This time, the accounts
left with balances are all balance sheet accounts or permanent accounts because all nominal accounts
including the drawing accounts have zero balances. This post-closing trial balance is prepared to check the
equality of the accounting equation before the balances of the assets; liabilities and capital are forwarded to the
next accounting period. This is the end of the accounting period.
XYZ Company Post-closing Trial

Balance Dec. 31,2014
Cash 22,200 Accounts Receivable 17,300 Supplies 15,000 Prepaid Rent

4,000 Prepaid Insurance 13,200 Service Vehicle 420,000 Accumulated
Depreciation-S.V. 4,000 Office Equipment 60,000 Accumulated
Depreciation-O.E. 1,000 Notes Payable 210,000 Accounts Payable 53,000
Salaries Payable
AC101 Session 4 3

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ACCOUNTING

Session 1: Accounting Concepts and Its Consideration

Session 2: Basic Consideration on Financial Statements

Session 3: Preparation of Financial Statements

Session 4: Adjusting the Accounts

Session 5: Completing the Accounting Cycle

ACCOUNTING CONCEPTS AND ITS

Instructor Leemon L. Araza 2015 Edition

for rights to future consumption.

Fixed, inflexible, organized and systematic

ECONOMIC ENTITY VS BUSINESS ENTITY

❖ Identification. The accounting process of recognition or non- recognition of business activities as

o Recording. the process of systematically committing to writing business transactions and

o Classifying. The grouping of similar and interrelated items into

Criteria for accountable event

activity 3. Its cost can be measured reliably.

BRANCHES OF ACCOUNTING/AREA OF SPECIALIZATION

1. Financial Accounting. The recording of transactions, preparation of financial statements and

greenhouse gas emissions.

USERS OF ACCOUNTING INFORMATION

o Customers are interested in the quality of goods and services

Stable Monetary Unit Concept

in the purchasing power of money.

received and; Expenses as they incurred, even not yet paid.

FORMS OF BUSINESS ORGANIZATIONS

PURPOSE OF BUSINESS ORGANIZATIONS

MICRO, SMALL AND MEDIUM ENTERPRISES (MSME)

ACTIVITIES IN BUSINESS ORGANIZATIONS

**End of Session 1**

BASIC CONSIDERATION ON FINANCIAL

Instructor Leemon L. Araza 2015 Edition

QUALITATIVE CHARACTERISTICS OF FINANCIAL STATEMENTS

A. Fundamental qualitative characteristics

B. Enhancing Qualitative characteristics

b. Neutrality. A neutral presentation is one without bias.

ENHANCING QUALITATIVE CHARACTERISTICS

c. Timeliness. Means having information available to decision-makers in

THE ELEMENTS OF FINANCIAL STATEMENTS

Elements directly related to measurement of financial position are:

RECOGNITION OF THE ELEMENTS OF FINANCIAL STATEMENTS

Recognition is the process of incorporating in the balance sheet or income statement an

MEASUREMENT OF THE ELEMENTS OF FINANCIAL STATEMENTS

RELIAZABLE (SETTLEMENT) VALUE

GUIDELINES IN THE PRESENTATION OF FINANCIAL STATEMENTS

Other important information provided by the statement of financial position is as follows:

For example, an asset may be:

An entity shall classify assets as current when:

*Obligation – These maybe legal or not. A duty to do something or a debt. * Transfer

An entity shall classify a liability as current when:

3. Accrued Liabilities Amounts owed to others for unpaid expenses. This

FINANCIAL PERFORMANCE reflected by accrual accounting*

COMPOSITION OF STATEMENT OF FINANCIAL PERFORMANCE

2. Sales Revenues earned as a result of sale of merchandise; for e.g. sale

1. Cost of Sales The cost incurred to purchase or to produce the products

3. Utilities Expense expenses related to use of telecommunications

4. Rent Expense expense for space, equipment or other asset rentals.

5. Supplies Expense expense of using supplies in the conduct of daily

6. Insurance Expense portion of premiums paid on insurance coverage which

End of Session 1

Obligation – These maybe legal or not. A duty to do something or a debt. Transfer